News Brief No. 02/127

News Brief: IMF Completes First Review Under Cape Verde's PRGF Arrangement and Approves US$1.65 Million Disbursement

December 16, 2002

The Executive Board of the International Monetary Fund (IMF) today completed the first review of Cape Verde's performance under an economic program supported by the Poverty Reduction and Growth Facility (PRGF). As a result, Cape Verde will be able to draw up to SDR 1.23 million (about US$1.65 million) immediately.

The Executive Board also waived Cape Verde's non-observance of performance criteria pertaining to nonconcessional debt, the accumulation of domestic arrears, and the implementation of an automatic retail pricing mechanism for petroleum products.

Cape Verde's three-year arrangement was approved on April 10, 2002 for SDR 8.64 million (about US$11.6 million) (see Press Release No. 02/18). So far, Cape Verde has drawn SDR 1.23 million (about US$1.65 million) under the arrangement.

The PRGF is the IMF's concessional facility for low income countries. It is intended that PRGF-supported programs are based on country-owned poverty reduction strategies adopted in a participatory process involving civil society and development partners and articulated in a Poverty Reduction Strategy Paper (PRSP). This is intended to ensure that PRGF-supported programs are consistent with a comprehensive framework for macroeconomic, structural, and social policies to foster growth and reduce poverty. PRGF loans carry an annual interest rate of 0.5 percent and are repayable over 10 years with a 5 ½-year grace period on principal payments.

After the Executive Board's discussion on Cape Verde, Mr. Eduardo Aninat, Deputy Managing Director and Acting chair, stated:

"The Cape Verde authorities are to be commended for having achieved significant progress in stabilizing public finances, regularizing domestic and external arrears, rebuilding international reserves, and continuing their structural reform agenda. Economic growth in 2002 is better than originally projected, inflation is lower, and most performance criteria for end-June were met, with fiscal performance and the accumulation of international reserves exceeding the targets by substantial margins.

"The authorities' plan to gradually reduce domestic interest rates to spur private sector investment is appropriate. It will, however, need to be implemented cautiously, consistent with a further strengthening of the level of international reserves, and be supported by sufficiently tight fiscal policies.

"Notable achievements in the structural area include the new central bank law, the liquidation of two loss-making public enterprises, and the impending implementation of an automatic adjustment mechanism for domestic petroleum prices. The timely introduction of a value-added tax and new customs tariffs will be essential to ensure a buoyant fiscal revenue base and enhance export competitiveness.

"Given favorable developments in tourism and in Cape Verde's trade environment, the outlook for 2003 remains good, and an economic growth rate of about 5 percent appears within reach. Prudent monetary and fiscal policies, continued donor support, and the steadfast implementation of structural reforms to enhance productivity, will be key to underpin the prospects for sustained high growth and poverty reduction," Mr. Aninat said.