Press Release No. 02/18

Press Release: IMF Approves In Principle Three-Year, US$11 Million PRGF Arrangement for Cape Verde

April 4, 2002

The Executive Board of the International Monetary Fund (IMF) today approved in principle a three-year arrangement under the Poverty Reduction and Growth Facility (PRGF) for Cape Verde for SDR 8.64 million (about US$11 million). The IMF Board's decision will become effective after the World Bank Executive Board's review of Cape Verde's Interim Poverty Reduction Strategy Paper (I-PRSP) which is currently scheduled for April 9, 2002. Upon effectiveness of the IMF Board's decision, Cape Verde will be able to draw up to SDR 1.23 million (about US$1.5 million) under the arrangement.

The PRGF is the IMF's concessional facility for low income countries. It is intended that PRGF-supported programs will in time be 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 each PRGF-supported program is 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, Eduardo Aninat, Deputy Managing Director and Acting Chairman, stated:

"The Fund welcomes Cape Verde's effective implementation of the staff-monitored program in 2001, which has resulted in a substantial improvement in the macroeconomic situation, as reflected in the sizable reduction in the fiscal deficit and strong increase in international reserves. The positive fiscal outturn obeyed to a substantial increase in government revenue as well as expenditure restraint.

"The Fund endorses the medium-term strategy proposed by the government, and welcomes its emphasis on poverty reduction. The new PRGF-supported program aims at consolidating the fiscal position, correcting the unsustainable domestic debt situation and encouraging private sector-led growth, and should allow for sustainable growth and the improved delivery of social services.

"Key structural measures to help the authorities achieve their fiscal objectives include the preparation for the introduction of the VAT and a new external tariff regime, and the introduction of an automatic and transparent pricing mechanism for retail petroleum products.

"The financial program for 2002 is appropriately tight to support macroeconomic stability and protect the exchange rate peg. The Fund strongly endorses the authorities' intention to introduce a new central bank organic law by midyear, which will establish an independent central bank with price stability as its primary objective.

"The authorities have moved quickly to accelerate the implementation of their poverty reduction agenda by completing an interim PRSP, and their efforts to increase ownership by involving a wide range of groups in civil society, including the poor directly, are commendable. They are encouraged to maintain their timetable for the completion of a fully participatory PRSP, which is expected to be used to guide the allocation of public resources," Mr. Aninat said.

ANNEX

Recent Economic Developments

Following a period of strong economic growth and accelerated implementation of structural reforms in Cape Verde, the macroeconomic situation deteriorated considerably and the reform agenda stalled in the run-up to the elections in early 2001. To address the mounting internal and external imbalances, the newly elected government that took office in February 2001 implemented during the second half of 2001 a near-term macroeconomic stabilization and adjustment program, which was monitored informally by Fund staff.

Performance under the staff-monitored program (SMP) was satisfactory. The economy is estimated to have grown by 3.0 percent in 2001, modestly lower than projections, partly because of the impact of the events of September 11, 2001 and the slowdown in the world economy. Consumer prices rose by 4 percent on average in 2001, largely reflecting the impact of the sizable increase in the administered price of retail petroleum products in March and August. The overall fiscal deficit (including grants) declined from 19 percent of GDP in 2000 to 3 percent in 2001, primarily reflecting the non-reoccurrence of commercial bank restructuring costs in 2000, as well as the implementation of a number of revenue-enhancing and expenditure-reducing measures. Gross international reserves rose significantly, from 1.1 months of imports in 2000 to 1.6 months of imports in 2001.

To consolidate this effort and achieve a sustainable reduction in poverty, the authorities have launched a medium-term program covering the period 2002-04.

Program Summary

The proposed economic program for 2002-04 has three pillars: (i) further improvement in the financial position of government, including reducing the unsustainable level of domestic public debt, so as to ensure macroeconomic stability and the viability of the exchange rate peg; (ii) further development of an enabling environment conducive to increasing private sector-led growth; and (iii) a stronger focus on reducing poverty, including improving social services across all the country's islands.

Economic growth is expected to increase to 4½-5 percent by 2004 from 3 percent in 2001 and the annual rate of inflation to decline to 2-2 1/2 by 2004 from 4 percent in 2001. It is anticipated that the growth target will be achieved through an increase in domestic investment (particularly in the areas of tourism, infrastructure and housing) to 22-22 ½ percent in 2004 from 20 percent of GDP in 2001, financed to a large degree by increased public savings. Gross international reserves are expected to increase to 2.2 months of imports of goods and services in 2004 from 1.6 months in 2001.

Given the unsustainable domestic debt situation, fiscal policy focuses on consolidating the government's financial position, virtually eliminating the overall fiscal deficit (including grants) by 2004. The medium-term fiscal program is oriented toward a further reduction in primary current expenditure of 2 percentage points of GDP, reflecting the elimination of consumer petroleum subsidies, constrained support for student scholarships, and reduced transfers to institutions and public enterprises. On the revenue front, after increasing substantially in 2001, total revenue (excluding grants) is expected to increase by ½ of 1 percentage point of GDP over the program period, rising to 22½ percent in 2004. Monetary policy during the program period will aim to further stabilize the macroeconomic situation and support the exchange rate peg,

To ensure the stability of the exchange rate regime and improve the sustainability of the external debt situation, external sector policies will be geared toward achieving a marked reduction in the current account deficit (excluding grants) over the medium term. This will be accomplished through policies designed to encourage an increase in tourism, intermediate exports, as well as to maintain high levels of official transfers. It is expected that the current account deficit, amortization costs, and reserve buildup will be financed by continued strong foreign private investment, private capital inflows, and new highly concessional disbursements from official creditors.

Structural measures over the medium term will focus on fiscal sustainability, improving the efficiency of government operations, and trade liberalization. In this regard, the government intends to introduce a VAT, liberalize the external tariff regime, increase the statutory independence of the central bank, and introduce an automatic and transparent pricing mechanism for retail petroleum products.

The Poverty Reduction Process

The authorities have prepared an interim PRSP in close consultation with civil society, including directly with the poor, to address their concerns over the still serious level of poverty in the country. The I-PRSP discusses both broad principles and specific strategies for reducing poverty and promoting growth, as well as the process of refining these strategies for the preparation of the PRSP in the coming year.

Cape Verde joined the IMF on November 20, 1978. Its quota ¹ is SDR 9.6 million (about US$12 million), and it had no outstanding use of IMF resources as of March 31, 2002.