Economic studies
Cape Verde

Cape Verde

Population 0.6 million
GDP per capita 3,602 US$
C
Country risk assessment
B
Business Climate
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Synthesis

major macro economic indicators

  2018 2019 2020 (e) 2021 (f)
GDP growth (%) 4.5 5.7 -10.0 4.0
Inflation (yearly average, %) 1.3 1.0 1.0 1.2
Budget balance (% GDP)* -2.8 -1.5 -9.0 -6.8
Current account balance (% GDP)** -5.1 0.3 -15.1 -10.0
Public debt (% GDP) 124.5 124.2 136.8 137.6

(e): Estimate (f): Forecast *Including grants **Including official transfers

STRENGTHS

  • Growth in tourism activity (in normal times)
  • Fishery reserves
  • Efficient banking and telecommunications services
  • Stable political institutions
  • Exchange rate cooperation agreement with Portugal, guaranteeing convertibility and a fixed rate with the euro, and a credit facility

WEAKNESSES

  • Very high level of public debt
  • Heavily dependent on economic performance of Eurozone countries
  • Severely impacted by the COVID-19 crisis
  • Poor infrastructure quality; lack of maintenance
  • Food and energy wholly imported
  • Vulnerable to external shocks and dependent on international aid, the diaspora and tourism
  • Exposed to climate change, volcanic and earthquake events, and cyclones

Risk assessment

Economic growth to recover in 2021

Cabo Verde suffered only slightly from the COVID-19 crisis health wise, but its economy was severely impacted. A rebound is expected for 2021, but economic growth will remain below pre-crisis levels. The drop in activity recorded in 2020 was mainly due to the decline in tourism (37% of GDP and 39% of employment). Travel restrictions introduced because of the health crisis and the suspension of flights from the hardest hit European countries severely impacted tourism revenues (51% of total exports). A slow recovery is expected in 2021, despite the gradual lifting of restrictions. The maritime fishing sector (31% of exports) was also affected by disruptions in global supply chains and weakened external demand. In 2021, the situation is expected to return to normal, allowing the fishing sector to recover.
Remittances from expatriates also declined in 2020, affecting the consumption and incomes of the households that depend on them. They are expected to pick up again in 2021, stimulating domestic demand, especially household consumption.

FDI, which comes mainly from Western Europe (United Kingdom, Portugal, Italy and Spain), contracted in 2020, as these countries were rocked by the crisis. This will lead to investment delays in key sectors such as tourism, transport and ICT. Despite a resumption in FDI in 2021, the delays built up in 2020 will impact these sectors.

 

The public and current account deficits are widening

The current account deficit widened dramatically in 2020 and is not expected to narrow much in 2021. It reflects the massive trade deficit (31% of GDP in 2019) arising from the archipelago's dependence on food and manufactured goods. Tourism revenues and expatriate remittances usually offset the deficit. However, they have been strongly impacted by the health crisis, which explains why the current account deficit has become so high. They should gradually recover in 2021. Exports are also expected to pick up, notably due to the government's desire to diversify the economy away from tourism. However, imports are also poised to start rising again, especially food (70% of total imports), which will continue to pull the current account deficit down. This deficit is traditionally financed by concessional loans from international partners and FDI. The role of partners has increased amid the health crisis: the IMF approved a USD 32 million disbursement through its Rapid Credit Facility to help Cabo Verde finance its large current account deficit.

The Cape Verdean government adopted a stimulus plan in March 2020 to support the economy and the most vulnerable households. The plan includes an increase in the budget for medical equipment, testing and medical staff wages. The government also postponed the payment of taxes until December 2020 and is guaranteeing EUR 36 million in loans to private companies. In addition, social assistance measures are planned, including EUR 2.7 million for 30,000 informal sector workers, food aid for 22,500 families and enhanced welfare for the elderly. The government also introduced a moratorium on insurance premium payments and loan repayments for households, companies and non-profit associations until December 2020. Government measures and the crisis-fuelled revenue decline caused the deficit to explode, necessitating increased borrowing from foreign partners.

 

Confirmed political stability

Cabo Verde is one of the top-ranked countries in Sub-Saharan Africa according to World Bank governance indicators, particularly in the fight against corruption. It also has one of the best business climates in the region, but still suffers from a lack of infrastructure and the absence of regulations governing insolvency.

The Movimiento para la Democracia (MPD) won an absolute majority in the March 2016 parliamentary elections and its candidate, Jorge Carlos Fonseca, was re-elected for a second term in the October 2016 presidential elections. During his term, the MPD enjoyed strong public support, enabling it to pursue growth-friendly policies, such as promoting local businesses and stimulating inclusive growth. The government is pursuing the objectives of the Strategic Plan for Sustainable Development (2017/2021), which include developing air and maritime transport, diversifying the economy and improving access to basic public services. Having dealt well with the COVID-19 pandemic, the MPD looks strongly placed to win the next parliamentary and presidential elections to be held in March and October 2021 respectively.

As far as foreign policy is concerned, the country remains closely linked to Western Europe, which is a major source of tourists and FDI. It will also continue to foster its ties with China, whose investment in the territory is constantly increasing and is expected to be concentrated in the tourism sector, infrastructure and the construction of a special economic zone.

 

Last updated: March 2021

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