Press Release No. 03/97

Press Release: IMF Completes Second Review Under Cape Verde's PRGF Arrangement and Approves US$1.7 Million Disbursement

June 26, 2003

The Executive Board of the International Monetary Fund (IMF) has completed its second review of Cape Verde's economic performance under a SDR 8.64 million (about US$12 million) Poverty Reduction and Growth Facility (PRGF) arrangement (see Press Release No. 02/18). This opens the way for release of a further SDR 1.23 million (about US$1.7 million), bringing the total amount drawn under the arrangement to SDR 3.7 million (about US$5.2 million).

The PRGF is the IMF's concessional facility for low income countries. 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, Shigemitsu Sugisaki, Deputy Managing Director and Acting chair, stated:

"Cape Verde's economy has performed well under the first year of the PRGF-supported program. Substantial progress was made in restoring macroeconomic stability through the application of appropriate fiscal and monetary policies, which have established the basis for high rates of economic growth in the future. Economic growth picked up in 2002, inflation fell, and international reserves increased. Fiscal revenues were stronger and the fiscal deficit was lower than expected. The increase in the external current account deficit in 2002 reflected strong growth in imports of capital goods financed by official and private capital flows, indicating a rebound in investment; the overall balance of payments registered a surplus for the second consecutive year. Continued structural reforms to improve the climate for private investment and to enhance external competitiveness will be critical to achieving long-term sustainability of the balance of payments.

"The authorities have made considerable progress in several key structural areas. An automatic price adjustment mechanism for domestic petroleum products was implemented, and two loss-making public enterprises were liquidated. The adverse social impact of the liquidations was mitigated by donor-funded retrenchment payments to affected workers. In other areas, introduction of the value-added tax has been delayed until January 2004, but the authorities are encouraged to move as quickly as possible with the few remaining preparatory steps. The authorities will need to take measures to redress financial losses of the water and power utility and the national airline, including improvements in utility regulation, at the same time maintaining the smooth operation of key social services.

"Preparations for the full PRSP are proceeding well, and it should be completed by the end of this year. The PRSP will help bring cohesion to the authorities' development objectives, ensure consistency between poverty reduction and macroeconomic stability, and provide a framework to mobilize the donor support necessary to achieve the Millennium Development Goals," Mr. Sugisaki stated.