World Bank Document

ReportNo. 5446-CY Cape Verde EconomicSituation and Prospects (In Three Volumes) Volume 1:Main Volume Public Disclosure Authorized

January30, 1985 Western Africa RegionalOffice FOR OFFICIAL USE ONLY Public Disclosure Authorized Public Disclosure Authorized

Documentof the World Bank Public Disclosure Authorized This report has a restricteddistribution and may be used by recipients only in the performanceof their official duties. Its contents may not otherwise be disclosed without World Bankauthorization. CURRENCY EQUIVALENTS

(as of August 1, 1984)

Currency Unit = Cape Verdean Escudo (CV Esc.) US$1.00 = CV Esc. 80 CV Esc. 1,000 = US$ 12.5

WEIGHTSAND MEASURES

1 meter (m) = 3.28 feet (ft) 1 kilometer (km) 2 = 0.62 mile (mi) 1 square kilometer (km') = 0.386 square mile (sq. mi.) 1 metric ton (m ton) = 2,204 pounds (lb) I hectare (ha) 2.47 acres I cubic meter (m') = 1.308 cubic yards

FISCAL YEAR

January I - December 31 FOR OFFICIALUSE ONLY

LIST OF ACRONYMS

BADEA - Arab Bank for Economic Development in Africa BCV - Bank of Cape Verde CABNAVE - EstaleirosNavais de Cabo Verde (ShipyardCompany) CNA - National Handicraft Center DGIE - General Directorateof Industry and Energy DGP - General Directorateof Planning ECOWAS - Economic Community of West African States ELECTRA - Power Generationand Water DesalinationUtility EMEC - State ConstructionEnterprise EMPA - Empresa Puiblicade Abastecimaento(Commercial Network Company) ENACOL - National Enterprisefor Fuels and Lubricants ENAPOR - National Ports AdministrationAgency ENAVI - National AgriculturalCompany FAMA - Pasta Factory FAP - Fomento Agro-Pecuario (CommercialAgricultural Goods Company) GDP - Gross Domestic Product GNP - Gross National Product ICS - Cape Verdean Solidarity Institute IMF - International Monetary Fund INC - National CooperativesInstitute INIT - National TechnologicalResearch Institute INTERBASE - Cape Verdean Enterprisefor Fishing Infrastructure MAC - Public ConstructionMaterials Enterprise mHor - Ministry of Housing and Public Works MOAVE - Mill Company MORABEZA - Garment Factory NDF - National Development Kind OECD - Organizationfor Econom.c Cooperationand Development OPEC - Organizationof Petroleum Exporting Countries PAICV - African Party for the Independenceof Cape Verde PAIGC - African Party for the Independenceof Guinea-Bissau& Cape Verde SCAPA - Company for Marketing and Support for Artisanal Fishing SIDA - Swedish InternationalDevelopment Authority SOCAL - Shoe Factory TACV - Cape Verde Airline Company UNDr - United Nations DevelopmentProgramme USAID - United States Agency for InternationalDevelopment

This document has a restricted distribution and maybe used by recipients only in the performance of 1 their official duties. Its contents may not otherwise be discksed without World Bank authorization. PREFACE

This report is based on the findingsof an economicmission that visitedCape Verde in July 1983. The missionwas composedof the followingmembers:

StahisPanagides, Consultant (Mission Chief, Agriculture) Mark Woodward,Consultant (Industry, Fisheries, Tourism, Historical Background) SergioDiaz-Briquets, Consultant (Demography, Social Sectors) Rui Coutinho,Consultant (Macroeconomic Analysis) Jose Marques,Economist (Energy, Transportation, External Sector)

Follow-upwork to the main mission was requiredduring 1984 in order to revise projectionsand estimatesderived from a weak data base. This first comprehensive study of the economy of Cape Verde also includes, in Volume II, an examinationof demographic,health and social issues, which the Governmeut specificallyasked us to address. This report is the final version of the draft which -wasrevised by Rui Coutinhoand supervisedby Richa-:dWestebbe and discussedwith the Governmentby a mission which visited Cape Verde in August 1984.* Milton de Assis updated the report followingthe mission. The report includesthree volumes:

Volume I: Cape Verde: EconomicSituation and Prospects Volume II: The SocialSector Volume III: StatisticalAnnex

* The mission consistedof Robert Skillings (Chief),Peter Gil (Loan Officer),Milton de Assis (CountryEconomist), Rui Coutinho (Economist) and SergioDiaz-Briquets (Consultant). COUNrRYDATA - CAPE VERDE

AREA POPULATION DENSITY 4,000 sq km 296,093 (1980) 1/ 74.2 per sq km (1980) Rate of growth: .9% (1978-80)

POPULATIONCHARACTERISTICS (1980) HEALTH(1980) Crude Birth Rate (per 1,000) 37.4 Population per physician 5805 Crude Death Rate (per 1,000) 7.5 Population per hospital bed 496 Infant Mortality (per 1,000) 78.1 Life Expectancy at Birth (years) 61.1

EDUCArION(1980/81) ACCESSTO SAFE IWATER(1980) Adult literacy rate: 2/ 37% % of population - urban: 32% Primary school enrollment: 83% - rural: 13.5%

GNP PER CAPITA IN 1983 3/ US$317

GROSS DOMESTICPRODUCT IN 1983 4/ ANNUALRATE OF GR(W1H (Current Dollar Prices)

USSMiln % 1979-b3 GDP at Market Prices 81.1 100.0 9.2 Gross Doi;nestic Investment 64.9 80.0 12.9 Gross Domestic Expenditures 142.6 175.9 4.2 Exports of Goods, nfs 35.4 43.7 32.3 Imports of Goods, nfs 97.0 119.6 6.3 Current Account Balance -33.4 -41.2 23.5

OUTPUT EMPLOYMENTAND PRODUCTIVITY IN 1982:

Value Added Labor Force Value Added per Worker USSMIn % *000 USS Primary Production 16.9 21.7 43 47.4 393.0 45.4 Secondary Production 21.8 28.0 9 10.5 2422.2 279.8 Services 39.2 50.3 38 42.1 1031.6 119.1 Total 5/ Average 77.9 100.0 90 100.0 865.6 100.0

GOVEtNMENTFINANCE

CENTRALGOVERNMENT CV Escudos Million % of GDP 1983 1983 1979-82 Current Revenues 1623.7 27.9 31.5 Current Expenditures 1623.4 27.9 31.1 Current Surplus 0.3 - 0.4 Capital Expenditures 4295.0 73.9 61.9 OveraLl Deficit 4294.7 73.9 61.5 External Borrowing and Grants 4180.3 71.9 58.7

1/ Population Census 2/ Ages 14 and over 3/ At current exchange rate 4/ Conversions to dollars in the table are at the average exchange rate prevailing during the period covered. 5/ GDP at factor costs. COUNTRYDATA - CAPE VERDE (continued)

HONEY. CREDIT ANDPPICES

1978 1979 1980 1981 1982 1983 (In iTllionsof Cape Verde Escudos outstandingend year)

Money Supply (moneyand quasi-money) 1709 2014 2658 3180 3989 415. 1/ Claims on Central Government 11 77 34 452 347 486 1/ Claims on the Private Sector 1/ 531 712 684 937 1032 807 1/

(Percentageor index numbers)

Money as % of GDP 61.9 65.1 61.2 65.7 66.9 59.8 1/ Consumer Price Index 146 168 192 232 280 340

Annual Growth Rates General Price Index 17.7 L5.1 14.3 20.8 20.7 21.4 1/ Net Claims on Government 109.7 600.0 -54.1 1229.4 -23.2 40.1 1/ Claims on the Privtte Sector 34.6 34.1 -3.9 37.0 10.1 -21.8 I/

BALANCE OF PAYMENTS (in USS millions) EXTERNAL DEBT. DECEMBER 1982 (USS million) 1980 1981 1982 1983 Export of goods, nfs 19 24 32 36 Public debt incl. guaranteed 60.5 Imports of goods, nfs 88 103 101 97 Non-guaranteed private debt --- Resource gap (deficit- -)-69 -79 -69 -61 Total oustanding and disbursed 60.5 Private Transfers 40 36 32 33 Net Factor Services 3 - -3 -5 NET DEBT SERVICE RATIO FOR 1982 2/

Balance current account -26 -43 -40 -33 Public debt incl. guaranteed 4.9 Non-guaranteed private debt --- Official Flows Total outstandingand disbursed 4.9 Transfers 29 21 27 19 Borrowing (net) 2 19 19 14 IBRD/IDALENDING (December31, 1983) (USS '000) iiRD IDA Other items, errors and omissions 1 4 6 4 Outstandingand disbursed -- 209 Increase in reserves t) 6 1 12 4 Undisbursed -- 6805 Outstandingincl. undisb. -- 7014 Net reserves (end year) 44 37 43 34 1/ Equivalentmonths imports 6.0 4.3 5.1 4.2 RATES OF EXCHANGE(year average)

Year US51 - CV Esc

1975 25.6 1976 30.1 1977 34.1 1978 35.5 1979 37.4 1980 40.1 1981 48.7 1982 58.3 1983 71.7 1984 84.7

1V Does not include financialinstitutions other than the Bank of Cape Verde. 2/ Debt service as a percentage of exports of goods and non-factor services. .. Non-available VOLUME I

CAPE VERDE:ECONOMIC SITUATION AND PROSPECTS

Table of Contents

Page No.

SUMKARY AND CONCLUSIONS

A. Background ...... I B. Economic Management ...... 2 C. Development Strategy ...... 4 D. Social Sectors ...... 7 E. Outlook ...... 8

I. ECONOMIC AND POLITICAL SITUATION (not contained in Portuguese version).. 10

II. RECENT ECONOMIC PERFORMANCE. 14 A. Structure of the Economy . .14 B. Structure of National Expenditures . .16 C. Public Finance ...... ,.20 1. Introduction ...... 20 2. Trends ...... 21 3. Government Revenues ...... 23 4. Covernment Expenditures ...... 25 5. Issues and Recommendations ...... 26 D. Money and Credit ...... 27 1. Introduction ...... 27 2. Trends ...... 28 3. Distribution of Credit By Sector .31 4. Interest Rates .32 5. Further Developments.32 6. Issues and Recommendations .--.-.----.--.-- 33 E. External Sector .. 35 1. Introduction.35 2. Exchange Rate .38 3. Issues and Recommendations. 39 F. Employment, Wages and Prices . .39 1. Introduction.39 2. Wages .40 3. Prices ...... 41 4. Issues and Recommendations.43

III. THE FIRST NATIONAL DEVELOPMENT PLAN . . .45 A. Introduction...... 45 B. Overview .... 45 C. Methodology .... 48 D. Financing.... 50 E. Implementation ...... 51 F. Summary and Conclusions ...... 52

IV. AGRICULTURE ...... 53 A. Background ...... 53 B. Land Use and Livestock ...... 53 C. Institutional Framework ...... 55 D. Food Policy and Marketing ...... 55 E. Ongoing Projects ...... 56 F. Land Tenure and Agrarian Reform ...... 56 C. Government Objectives ...... 57 H. Water ...... 58 I. Issues and Recommendations ...... 59

V. FISHERIES...... 62 A. Background ...... 62 B. Artisanal Fisheries ...... 62 C. Industrial Fisheries ...... 63 D. Investment Projects ...... 64 E. Issues ...... 64

VI. INDUSTRY ...... 66 A. Background ...... 66 B. Structure ...... 66 C. Institutional Framework ...... 67 D. Government Policies and Constraints ...... 68 E. Issues ...... 69

VII. ENERGY ...... 71 A. Background ...... 71 B. Institutional Framework ...... 71 C. Petroleum ...... 71 D. Electricity and Water . . 72 E. Pricing ... 72 F. Other Sources ...... I.... a... ,. 73 G. Issues... 74

VIII. TRANSPORTATION AND CONSTRUCTION .... 76 A. Ports and Maritime Transport ... 76 B. Air Transport ...... 77 C. Construction and Building Materials ...... 77

IX. TOURISM ...... 78 A. Background ...... 78 B. Issues ...... a ...... 79

K. PROSPECTS ...... 81 TEXT TABLES Page No.

Table 2.1 CAPE VERDE: Value Added by Sectors,1982 ...... 15 Table 2.2 CAPE VERDE: Expenditures of Available Resources, 1982-83 ...... 17 Table 2.3 CAPE VERDE: Central Government Summary, 1977-83 22 Table 2.4 CAPE VERDE: Central Government Ordinary Revenue, 1979-83 ...... 24 Table 2.5 CAPE VERDE: Summary Accounts of Financial System, 1977-83 ...... 30 Table 2.6 CAPE VEEDE: Net Claims on General Government 30 Table 2.7 CAPE VERDE: Balance of Payments Summary, 1975-83 ...... 35 Table 2.8 CAPE VERDE: Composition of Exports and Imports .. 36

Table 3.1 CAPE'VERDE: Plan Projections by Sector ...... 46 Table 3.2 CAPE VERDE: Plan Expenditure Projections ...... 47

Table 10.1 CAPE VERDE: GDP Projections, 1981-90 ...... 82 Table 10.2 CAPE VERDE: UlationalExpenditure Projections, 1981-90 ...... 83 Table 10.3 CAPI VERDE: Public Finance Projections, 1981-90 84 Table 10.4 CAPE VERDE: Balance of Payments Projections 85 SUMMARYAND CONCLUSIONS

1. Cape Verde has a limited endowment of productive land and natural resources, a high population growth rate and a location which, while favorable for fishing and international sea and air transport, also restricts the flow of trade. The dispersion of the country among several islands inhibits internal communication and reduces the possibilities of economies of scale. The economy of Cape Verde is also highly dependent on imports, with a domestic consumption level in excess of CDP, and is accordingly unusually vulnerable to external shocks such as the oil price rise of 1979, and recurrent episodes of severe drought.

2. Prudent economic management, together with a large flow of emigrant remittances and foreign aid, have enabled a modest economic growth rate to be maintained. Realization of the country's reasonably promising growth potential will depend on the adoption of appropriate policies for resource use and population growth, and establishment of incentives for domestic entrepreneurs and the repatriation of remittances from abroad.

A. BACKGROUND

3. The Republic of Cape Verde became independent in 1975. It consists of nine inhabited islands located approximately 650 kms off the West Coast of Africa. Cape Verde has a total land area of 4.033 km2, and a total population of some 300,000, of which approximately one half live on Santiago, where Praia, the capital, is located.

4. At the time of their discovery by Portugal in 1460, the islands were uninhabited. Settlement started soon thereafter, as the islands provided a convenient trading post free of tropical disease along the major shipping routes. As the fortunes of the Portuguese empire diminishe'd,the islands lost some of their former importance. In part, their economic (leclinewas reversed in the nineteenth century with the establishment of a British coal depot at Mindelo. Recurrent droughts, some of which in the nineteenth centurv were believed to have accounted for a 40X reduction in the population, and the proximity of contacts associated with external trade, particularly in fishing, led to large emigration movements from the islands. By the end of the ninetecnth century, the American whaling fleet was largely run by Cape Verdeans, whose descendants today make up much of che Cape Verdean community in New England of between 200,000 and 300.000 persons. Drought continucs to reoccur periodically; the most recent began in 1968 and is still affecting the islands. In sum, drought, emigration and changes in the economic importance of the location of the islands have been the main factors influencing the country's economy.

5. After independence, Cape Verde and Guinea-Bissau were ruled by the PAIGC (African Party for the Independence of Guinea-Bissau and Cape Verde). In 1981, the PAIGC was divided into two parties with the creation of the PAICV (African Party for the Independence of Cape Verde). The Government of Cape Verde enjoys considerable prestige in the international community as a result of the historial influence of Amilcar Cabral on the liberation movements of Lusophonc Africa and the pragmatic and moderate politics displayed by current leaders. Cape Verde's President, Aristides Pereira, _s taking an active role in seeking a solution for the differences between Angola and South Africa. - 2 -

6. The country is relativelypoor by worldwidestandards, with an estimated per capitaGD1' of only $267 in 1983. No informationis availableyet for 1983 on output by se.tor. For 1982, about 222 of the value added was contributed by the primary sector,28% by the secondarysector (of which 24% ls in construction), and iOZ by services. The fact that agriculture represented only 17X of domestic output in 1982 is, above all, a consequence of the persistent drought. Approximately 47% of the labor force is in the primary sector. 11% in the secondary scctor, and the remaining 42% in services (of which 152 is in administration and a large part of the remainder in informal sector activities). In the absencc of official national accounts, it is difficult to measure growth of CDP. According to preliminarv estimates, the average annual rate of growth of CDP between 1977 and 1982. in constant dollars. was 2.61 per year. or 1.7% in per capita terms.

7. Public and private consumption, taken together, exceeded CDP for tile 1977-1982 period, but was smaller in 1983, for the first time. From 1977 to 1982. estimated private consumption alone was higher than domestic output. and the resource gap was higher than CDP; since 1SR2, however, this trend has been reversed. Gross investment averaged 80! of CDP for the 1977-83 period. The large flows of external aid and emigrant remittances have allowed the mainten- once of such high levels of consumption and investment. In 1983, grant aid was 392 of CDP. and remittances plus grant aid were equivalent to 54. of imports of goods and services. GNP, defined as GDP plus net factor income including remittances, was US$317 per capita in 1983, one fifth higher than GDP.

B. ECONOMIC MANAGCMENT

8. Macroeconomic management is particularly important in Cape Verde, because Government spending equals GDP, and the overall Government deficit usually exceeds half of CDP. Financing this deficit, as well as the needs of the large public enterprise sector, poses major tssues for financial resourcc mobilization and monetary policy. Further, domest±c demand manaigement is constrained by the need to maintain a high, stable and distortion free real cxchangc rate that will encourage the steady flow of remittances and discourage excessive demand for Imports. Finally, economic management encompasses the critical question of resource allocation either directly by the authorities or through price and i.lcentivesystems.

9. Public finances have by and large been carefully managed. Between 1980 and 1982. the ordinary (current) budget produced small surpluses. Up to 1980, the large capital expenditures were financed by external resources, which consisted almost entirely of grants until 1980. Between 1981 and 1982, the Government borrowed abroad on concessionary terms to finance the airport and shipyard projects. It also borrowed heavily from the lentral Bank in 1981. In addition public enterprise sector finances are not well integrated into overall financial planning. Capital expenditures for these enterprises are being financed with banking system credit.

10. The quality of information available for public finance decision-making is deficient; and a global accounting framework for the entire public sector, including the public enterprises, is needed. The maintenance of high levels of public capital expenditures will. in part, depend on the capacity of the Goverment to generate an increasing volume of public savings. Additional revenues could be obtained through changes from specific to ad-valorem duties. - 3 -

adjustment of water charges, and increased duties on some luxury imports. On the expenditure side, it will be necessary to continue to restrain public sector wages and to elininatecostly transfersto public utilities. Capital ex- pendituresshould not exceed the amount of external financing. The capacity of the public sector to prepare well designed and high priority projects shouldbe substantiallyimproved.

11. The Bank of Cape Verde is the principalfinancial ii.stitution perform- ing the role of a central,commercial and developmentbank. Monetarypolicy is exercisedthrough a systcm of creditceilings based on the l.evelof foreign rcservesand the financingrequirements of the economy. Monetary expansion, while rather rapid, does not appear to have been excessive. Most of the effects of the expansion of credit have fallcn on foreign exchange reserves rather than prices, as excess domestic demand has spilled over into imports. The need to maintain a reasonablelevel of reserveson the one hand, and to satisfy creditdemarnds on the other, has led to fluctuationsin credit expansion and in somc cases. has probablyled to the crowdingout of some sectors of the economy. A credit policy is needed that, within acceptablelimits of credit expansion,provides for an optimal distributionof the credit available. To meet thi.;need, the creationof a branch within the central bank lnked to long-term financing could be an important step. It is also necessary to clarify the monetarv structureby improvingthe Bank of Cape Verde's control over the few other financial inscitutionsin the country. The BCV recognizesthat interest rates are too low and intends to raise them soon. Nominal rates have been constant at negative real levels since independence, with consequent adverse effects on savings and resource allocation. In particular, interest rate levels for resident accounts should be raised enough to eliminate or substantiallyreduce the differentialcompared with the new specialhigh-interest emigrant accounts. Otherwise,disincentive effects on domestic savings will be crcated. Finally. monetary and fiscal policy need to be better inregrated and planned so that the disruptive effects of government spending on large projects, or external shocks, can be minimized.

12. Cnpc %'crde'n trade account shows a large and growing deficit. In 1983 merchandise exports represented only 2X of Imports. The main exports were bananas .ntr fish products. which accounted for more than 60% of the total. Food products are the singlc largest Import. Recently, as a cons-quence of bunkering activites;, principally at Sal Airport, exports of goods and nonfactor services covered 372 of imports of goods and nonfactor services in 1983. The cbronic deficit of the resource account. which illustrates the countrv's external dcpendence. has been offset bv private transfers. official capital and grants. As a result. the overall balance of pavments has registered surpluses.leading to a reasonablelevel of forcign exchangereserves. Because of the highlv concessionary terms at which external debt has been contracted, the interest burden has been very low. The ratio of debt service to exports of goods and non-factor services was approximately 8B in 1983. The Cape Verde escudo is pegged to a basket of nine currencies. which in broad terms, is appropriate to Cape Verde's circumstances. The escudo exchange rate has been adjusted to maintain a stable real exchange rate during the last several years. - 4 -

13. ln the absence of an official price index, it is difficult to estimate with precision the trends of domestic prices. The domestic rate of inflation was estimated at approximately 18-20Z for 1983. A substantial amount of food aid is marketed at official prices, which have been adjusted periodically. It is important that these adjustments be continued so that domestic prices of imported products received through food aid (i.e., corn) reflect international prices.

C. DEVELOPMENT STRATEGY

14. The country's development strategy is well elaborated in its First Development Plan (1982-1985). The document constitutes a coordinating mechanism for use of internal and external resources and facilitation of a dialogue with international donors. It identifies the industrial sector and services linked to the country's geographic position as the main sources of future growth. Although the authorities were successful in obtaining financing for iany of the projects included in the Plan, it is not clear that the project mix is conducive to achievement of the goals of the Plan. Further, the success of future planning efforts will in part be influenced by improvements in the level of local expertise in project related tasks.

15. The fact that the Government delayed preparing a first Plan until seven years after independence is an indicator of the prudence with which it approaches the problems of development, given the country's human resources, institutions and physical resource limits. The constraints to development can best be assessed in a sectoral context, ir which the role of policies, institutional change, and investments can be examined.

16. Two constraints significantly influence development of the agricultural sector: scarcity of both water and arable land. Agricultural production has been adversely affected by the prolonged drought, with the result that only a very small share, approximately 10%, of food consumption is met by domestic production. On rainfed land, corn and beans are grown using rudimen- tary methods. On the irrigated acreage, sugar cane is the principal crop; bananas, and to a lesser extent, fruit and vegetables are also cultivated. To reduce vulnerability to drought and increase production, the government is undertaking watershed, reforestation, and soil conservation projects, most of which are funded through external sources. The major issue with respect to water is pricing. Water prices are currently subsidized by the Government. Water pricing should be used to encourage users to practice conservation for both consumption and production uses. For example, there would be little point to growing sugar cane on irrigated land, with (unsubsidized)production costs exceeding world market price levels, if fruits, vegetables or export crops were more economic. It would also be advantageous to create incentives to substitute more drought-resistant cereals, such as millet and sorghum, for corn. Even if optimal agricultural production patterns are achieved, serious storage and marketing problems will have to be resolved.

17. Fisheries is a sector with significant potential for expansion, most of which has yet to be realized. Artisanal fisheries account for the largest share of fish landings, and virtually all of the artisanal catch is consumed locally. Although the importance of industrial fisheries is currently rela- - 5 -

tively small, it is expected to increase with the enlargementof the local fishing fleet and the expansionof storagecapacity.

18. Several difficultiesconfront fisheries,as reflectedin the lags in implementationof the investmentplan for this sector relativeto other sectors. One issue in the fisheriessector is the apparentpoor organizationof the officialsupport to artisanalfisheries, where economicsuccess should be possible, in that there are adequate resources and experiencedlabor, and risks are fewer. There is a need to reformulateand better define the role and pricingpolicies of SCAPA, the public enterprisewhich has the responsibi- lity of promoting artisanal fisheries. The agency needs to improve its administrationand financialmanagement, provide suitabletechl:cal assistance to fishermen,and reevaluateits pricingpolicy. Port 'acilitiesare generally inadequate,especially those in Mindelo. Expansionof industrialfisheries will be limitedunless these facilitiesare modernized.

19. The industrialsector is characterizedby small informal units and medium-scale enterprise. Small-scale,artisanal activities are the most importantin terms of employmentand number of units. MY.stindustrial production is provided by a small group of public and mixed enterprises. In- dustry is capable of becoming one of the primary moving forces in the country's development.

20. Among the externally oriented projects is the shipyard, CABNAVE, which is contributingsignificantly to the expansionof industrialoutput. Projects directed towards the domesticmarket include constructionmaterials. a brewery, and a paint and soap plant. A central issue in this sector is the apparently greater emphasis that has been placed -- medium- as opposed to small- scale industry. Small-scaleindustry has considerablepotential for expansion, but its realizationwill require institutionalsupport to overcome seriousproblems of entrepreneurialtalent, marketing, and credit.

21. A second issue is the need to improve existinginstitutional capability for project preparation,implementation and evaluation,especially for the smaller artisanal sector. Inadequatemarketing is another problem that adverselyaffects exports of some industrialproducts. A final issue is the need for an investmentcode to clarify the respectiveroles of private domestic and foreign investment,and to encouragesuck n-vrestment.

22. Cape Verde'senergy balanceis characterizedby a completereliance on imported petroleum products to meet the requirementsof the main economic sectors. Approximately40% of householdenergy needs are met throughimported oil; and the remaining 60% through firewood and other biomass. Operating efficiencyof the country'spower plants is low, and despite some improvement in recentyears, distributionlosses are currentlyestimated to be as high as 40%. Similarproblems of plant inefficiencyand lossescharacterize desalination of water operations,which is the country'smost energy intensive industry. A relativelyinexpensive program of rehabilitationand modernization in the electricpower sector could improve its efficiency,and substantially reduce the need fo i'mportedfuel. The widespreaduse of firewood as fuel, combiaedwith the effectsof droughtand overgrazing,has exerteda great deal - 6 -

of pressure on the country's scarce vegetation and created a critical deforestation problem.

23. Issues facing the energy sector are: (i) the need to review and adjust the pricing of different forms of energy use, especially for water desalination, to reflect total costs; (ii) the need to increase the efficiency of household energy use, and to accelerate reforestation efforts; (iii) the need to increase energy savings either through a more efficient use of energy in general, or by a reduction in losses.

24. With respect to transportation, foreign and inter-island trade depend almost entirely on maritime transport. Port facilities are generally deficient and deteriorating, although the government is attempting to reverse this trend by rebuilding the port at Praia and improving domestic shipping services. The country's road network serves its needs reasonably well, and road construction, using locally-availablebasalt paving blocks, provides a large number of jobs. Issues to be addressed in this subsector are (i) the need to retain policy-making in the national agency for road projects, but to decen- tralize some responsibilities and; (ii) the need to resolve road construction funding problems, specifically fund transfer arrangements.

25. With respect to air transport, the Sal Island International Airport is Cape Verde's major air link with the world, and earns considerable foreign exchange. Given the uncertainties associated with future demand for airport services, investment in this area should be cautiously evaluated. One issue in this subsector is the need to reevaluate the fares charged by the nationAl air company, which are low by international standards, and do not cover operating costs.

26. Since 1980, the construction and building materials subsector has been the most dynamic sector of the economy, accounting for about one fourth of GDP and one fifth of employment. Several natural resources are available for the development of this subsector: pozzolana, limestone, and gypsum. Despite the increased activity in construction, there is still a great need for both housing and sanitation systems. The inadequacy and high costs of transportation are issues that need to be addressed before there can be greater utiliza- tion of this sector's resources. An additional issue is the need to study the feasibility of more fully exploiting the constructionmaterials that exist on the islands (for example, increased use of pozzolana).

27. Tourism has considerable potential; but, in 1980, income from tourism accounted for less than 2% of GDP. Factors that impede this sector's development include the lack of sufficient accommodations, and the demands that an increase in tourism would impose on the existing water and energy, telecom- munications, and transportatiolLsystem. Further, the net gain from an expansion of tourism may be minimal because of the need to import a large portion of the non-labor inputs (e.g., food, beverages, ctc.).

28. The government's approach to development of tourism has been cautious; it has emphasized coordination with development of other sectors. During the Plan period, efforts include increasing lodging accommodations, passage of tourist legislation, and the creation of a tourist agency. Although a -7-

cautiousapproach is appropriate,tourism could be more activelypromoted now, within the existing infrastructure;this could be done by increasing the frequency of small group visits, by promoting tourism among emigrantgroups residing abroad, and by developing linkages with the domestic economy, particularlyhandicrafts.

D. SOCIAL SECTORS

29. The Cape Verdean authoritiesare deeply committedto the improvement of the country'shealth standards. Their efforts have been hampered by the deficient health and sanitary infrastructure,the dispersionof the population, the inadequatetransportation system, and a lack of trainedpersonnel. Up to this point, the results of the health policies are encouraging;the countryis doing relativelywell by West African standards. In 1980, the life expectancyat birth was estimatedas 58.8 years, and the infantmortality rate had declined from 128 per thousandlive births in 1977, to 60 in 1980. The principal causes of infant mortality are diarrhea, congenital disorders, malnutrition,and severalinfectious diseases, which can be controlledtoday. Although the islands are reasonablywell covered in terms of physiciansand nurses, some of whom are expatriates,there is an acute shortageof hospital beds.

30. Major health problemsarise because the majorityof the populationhas inadequateaccess to water. Piped water and sewage facilitiesare limitedto the two main cities of Praia and Mindelo and to Sal Island;and even in those places, water supply is frequently interrupted. Only 8.4% of the urban and 6.0% of the rural populationhave access to septic tanks or other modern sanitary facilities. The deficienciesin sanitary serviceshave contributed to the high incidenceof diarrhea and other infectiousdiseases, and impede furtherimprovements in health standards.

31. Currently,70% of the populationis illiterate,but this percentageis expected to decline rapidly as the range of the educationalsystem expands. Enrollmentrates are up, as evidencedby reportsthat 80% of childreneligible by age were attending the first level of elementaryschool. Overcrowdingin elementaryschools is a serious problem that contributesto a high rate of repetition.

32. Problems are more severe at the secondarylevel because of the inadequate infrastructureand limited numbers of teachers,which result in many studentspursuing secondary studies abroad. High school level facilitieswill need to be expandedand improvedto reduce the alreadyexisting disequilibrium between the numbers of students in professionalfields and those with mid- level educations. The low productivityof nationalschools and the generally inadequatequality of the educationalsystem limit efforts to reduce adult illiteracyrates and increaseeducational levels.

33. Natural population increase is estimated at 3% per year. However, actualpopulation growth rates are substantiallylower, less than 1% annually, because of emigration. The country's demographic structure is somewhat unique. The base of the pyramid is very large, reflectingthe high fertility - 8 -

rate and rapid decline in infant mortality. A large indentationin the pyramid between the ages of 30 and 39 is associatedwith the 1940 famine, which caused decline in fertilityand high mortality. Finally, working-age males are underrepresented,due to emigration. Dependencyratios are among the highestin Africa.

34. Unemploymentis high; and given demographictrends, prospects are not very encouraging. According to the 1980 census, 31% of the economically activepopulation were permanentlyemployed, 40% temporarilyemployed, and 29% unemplcyed. As a consequenceof drought and differingeconomic opportunities among the islands, internal migration toward the two main urban centers of Praia and Mindelohas occurred. Rural developmentprojects, financed by food aid proceeds,are intendedto stabilizerural populationlevels.

35. Becauseof the currentpopulation structure, the demand for education and a first job will increasein the near future. Improvementsin health conditions,including the reductionin mortalityrates, will exacerbatethe problems of populationpressure and unemployment,and put strains on infrastructure (e.g., health facilitiesand housing). Given the limited resourcesof the country,a viable developmentstrategy will requirea pragmaticpopulation policy. The governmentis aware of the demographicprospects, and is studying a populationpolicy to be incorporatedin the next developmentplan. The policy should address family planning and provide for a private or public organization,to administerthe program.

36. An emigrationpolicy is also needed. Until now, emigrationhas been the principalmeans by which populationpressure has been reduced. It is estimatedthat between 1970 and 1980, the net demographicoutflow attributable to emigration corresponded to 15% of the population. The Cape Verdean community abroad is roughly equivalent in size to that of the country's resident population. For the foreseeablefuture, emigrationwill serve two important purposes: to provide revenue through remittances,and to lessen population pressure. Emigration strategy should be coordinatedwithin an overall populationpolicy. As a part of an emigrationstrategy, authorities need to identifythose countriesin which temporaryjob opportunitiesexist, and with which agreements can be reached that will protect the welfare of emigrants.

37. To attract additionalremittances, interest rate policy should be reviewed and special savings incentivescreated, possibly along the lines already proposedby the Bank of Cape Verde. Promisinginvestment possibilities could be offeredto returningemigrants in those areas for which the emigrants' skillsare particularlyrelevant, such as tourism.

E. OUTLOOK

38. Cape Verde is an unusual case among developingcountries. It is a small economy with a poor resource base, experiencinga prolonged drought, with large deficits in the overall budget and resource accounts. However, largelydue to the substantialinflows of emigrantremittances and foreignaid in the form of either grantsor concessionaryloans, the countryhas been able to maintaina positivereal growth rate, a surplusin the balanceof payments, and a reasonablelevel of foreignreserves. Economicmanagement has succeeded in preservinga fragile external equilibrium, while an overall strategy of economicand socialdevelopment is pursued.

39. An optimisticand high scenariofor the period 1981-90would result in a real GDP growth rate of 7% per annum versus 4% accordingto a low scenario. Growth in both of these scenarios would exceed the expected 2% per annum populationgrowth rate. The high scenariois based on normal rainfall,the implementationof soil conservationand improved farming methods, and real investmentdeclining less rapidly than in the low case. The high scenario assumes higher production growth rates mainly from the Maio Project, ship repairs and increased productivityin agricultureand in small and medium scale industry. Both scenariosrequire restraining public and private domestic consumptionwhich in turn will depend on successfullyimplementing incomes and savings po'licies,particularly concerning workers remittances. The relativelyhigh levels of foreign aid projectedin both scenarios (US$64and 106 million per annum in the low and high case, respectively)are based on the expected response of donors to improve economic management and policies includinginvestment programming. In the light of the capital flows required the debt service ratio would be 24% in the high scenarioby 1990 and 16X in the low case.

40. The Cape Verdeanauthorities are well aware of the country'slimited capacityto accommodatea greater externaldebt burden. The flow of external aid will significantlyinfluence future economicgrowth, as will world developments that affect the demand for Cape Verde's internationalservices, emigration trends,and the flow of remittances. The Cape Verdean authorities' control over these factors is limited. However, populationand water policies, which can have substantialdevelopment impact, are within the reach of Cape Verdean authorities. So is the continuedpursuit of pragmaticeconomic policiesthat will contributeto the maintenanceof externalresource flows. - 10 -

I. ECONOMIC AND POLITICAL HISTORY

1.01 The economic history of Cape Verde has been largely determined by the country's geographic location. Prior to the 15th century, the great period of Portuguese naval exploration, the islands remained largely outside the Old World trade routes. West Africa looked inward to the Sahel, and North to the Maghreb; the principal trade routes were trans-Saharan. Although the islands were probably uninhabited, Africans did occasionally visit to gather salt, an important commodity in West African trade. In the 15th century, Portuguese exploration reshaped the world economy by opening trade routes around the African coast, and eventually to the Americas. Cape Verde took on new importance for two reasons. First, due to the pattern of winds in the North Atlantic, Cape Verde lies at the intersection of the shipping routes from Europe to the Cape of Good Hope, from Europe to the West Indies and Brazil, and from Africa to the West Indies. Second, at some 650 kms from the West African coast (Table A.1), the islands formed a convenient, safe, and sanitary entrep6t for trade with the Upper Guinea Coast (present day Senegal to Sierra Leone.)

1.02 The Portuguese discovered the islands of Cape Verde in 1460. Settle- ment started between 1461 and 1462, and by the early 16th century all major islands were occupied. Using slave labor, the islands produced cloth, dyes. hides, and livestock, which were exported principally to the Guinea Coast. These products were exchanged for slaves, both for use on the islands and for reexport initially to Europe and later to the Americas. Soon, Portuguese and their island descendants (often mulattos), known as langados, had established themselves on the Guinea Coast, where they were to play a crucial role in trade with Europe and the Americas, and among African ethnic groups. The Cape Verdean presence on the Guinea Coast began an emigrant tradition that remains important to this day.

1.03 In the 17th century, as the lanCados and their descendants increasingly dominated Cuinean trade, Portuguese mercantilism encouraged smuggling. However, as Portuguese hegemony on the Guinea coast was broken by British, Dutch, and French competition, Cape Verde lost its central role in trade, and the islands entered a prolonged period of economic crisis from which they never fully emerged. The loss of the entrep6t role was partially mitigated by the development of two other activities: textile production and the servicing of ships. In this period, Cape Verde became a major producer of textiles. Cape Verdean cloth, the pano, is basically West African (particularly Man- dinga) in origin; but the Cape Verdeans developed new styles, influenced by European and Arabic designs, that were more highly esteemed in West Africa than textiles produced locally, in Europe, or in India. Panos became an essential component in the mix of commodities demanded in exchange for slaves in West Africa. In many regions, including Cape Verde itself, they were used as a form of money. Although weaving ceased to be an important activity by the end of the 19th century, panos are still made by a small number of artisans. The growth of the ship servicing industry was a natural product of the islands' geographical location. While ships took on progressively fewer African goods at the islands, they continued to stop to buy food supplies and beverages, and to make minor repairs. In particular, an industry of salted - 11 -

goat meat developed; at times this product was even exported to the New World. Ships also stopped at Maio to procure salt. For example, the English codfish fleet, as early as the 1620s, would regularly take on salt from Maio on its way to the Newfoundland fishing grounds.

1.04 Whaling in Cape Verdean waters began in the 17th century, and became an important economic activity in the 18th and 19th centuries, when foreign- ers, principally American, started hunting whales around the islands. Whaling never contributed much directly to the Cape Verdean economy; rather, its importance was in providing a source of employment and a means of migration for the Cape Verdean population. The Americans quickly discovered that the Cape Verdeans made well disciplined crew members. By the end of the 19th century, the American whaling fleet was largely run by Cape Verdeans. It was these seamen who formed the nucleus of the Cape Verdean community in New England, currently the largest Cape Verdean community abroad.

1.05 The 19th and early 20th centuries were Cape Verde's heyday as a supply center for At] ntic shipping. In 1838, the British established a small coal deposit at Mindelo to provide fuel for shipping around the horn of Africa. By the 1850s, several British coaling companies were established in Mindelo, and soon, hundreds of ships per year were calling to take on coal. In 1912 the coaling trade reached its peak when some 1.707 ships called in Mindelo; but, with the high tariffs demanded by the Portuguese, the substitution of oil for coal, and the development of the ports of Las Palmas (Canary Islands) and Dakar (Senegal), this source of income went into decline. Oil was made available at Mindelo, and the port saw a resurgence in activity during the Portuguese colonial wars, when it was used to service the Portuguese. Today, the port has lost its former importance. In 1980, only 270 ships called at Mindelo. (This level of activity is comparablc to thc period immediately following the opening of the Suez Canal in 1869, when Mindelo lost the East India Traffic, or to years with heavy shipping activity in the late 17th century--Table A.2). The development of Mindelo as an international fishing and shipping base seeks to recapture some of this historic contribution.

1.06 While exports and ship services have dominated the islands' economy. the majority of the population has traditionally derived its living from agriculture. In the 15th and 16th centuries, most cultivated land was divided into morgados--inalienable, indivisible, hereditary properties of varying sizes, worked by slave labor. This system started to break down in the 17th century, when the islands entered into economic decline and many morgados (landholders) became impoverished. Slaves often escaped to the interior of the islands to practice subsistence agriculture. A number of slaves also earned their freedom. By the 18th century, the slave system had been largely replaced by a mixture of small, individual properties in the interior, and large, neo-feudal properties in irrigated areas. In the 19th century, many of the small plots in the interior were consolidated into large holdings through purchase from farmers impoverished by drought, and expropriation of small properties from their titleless occupants, often descendants of runaway slaves. The new owners of these lands were largely traders and civil servants in the towns, and returned emigrants. Thus was established the system of absentee landholdings farmed by sharecroppers or renters, together with small- scale subsistence farming, and some large estates. Although several large - 12 -

landholdingshave since become state farms and an agrarian reform is in progress,this agrarianstructure largely continues today (ChapterIV).

1.07 Cape Verde has also profited historicallyfrom its human resources. Under colonialrule, Cape Verdeanswere consideredassimilados, a statuswhich was acquired wv:th difficulty in the other Portuguesecolonies, and which entitled the Cape Verdeansto the rights of citizenship,including access to Portuguese state education. As a result, the Cape Verdeans tended to be better educatedthan the people of other colonies,and were relied upon by the Portuguesefor publicadministration throughout Lusophone Africa. It has been estimatedthat between 1920 and 1940 some 70% of the governmentofficials in Portuguese Guinea were Cape Verdean or of Cape Verdean descent. Because educated Cape Verdeans continued to find employmentin the colonialbureau- cracy up to independence,the Cape Verdeanswere often perceivedas colonisers both in PortugueseGuinea and in other colonies.

1.08 The revolutionfor the independenceof Cape Verde was fought almost entirely in PortugueseGuinea. The African Party for the Independenceof Guinea and Cape Verde (PAIGC)was foundedin Bissau in 1956 by AmilcarCabral and a few other intellectuals,many of whom were Cape Verdean or of Cape Verdean descent. Cabral,himself, although born in Guinea,had a Cape Verdean father,and attendedhigh school in Slo Vicente. Throughoutthe revolutionary war, a significantproportion of the PAIGC leadershipwas Cape Verdean,while most of the guerillatroops were Guinean. At that time, the PAIGC emphasized as one goal the eventualunion of Guineaand Cape Verde.

1.09 There was relativelylittle politicalactivity in the islandsuntil the Caetano regime was overthrown in Portugal. At this point several rival groups emergedin competitionwith the PAIGC,but lackingthe latter'scommit- ment and reputationfor defeating Portuguese colonialismin Guinea, these groups rapidlydisappeared from the scene. On July 5, 1975,Cape Verde became independent.The PAIGC won 92% of the vote for the new NationalAssembly.

1.10 For the next five years, Cape Verde and Guinea-Bissauwere ruled by the PAIGC,with Cape Verde's PresidentAristides Pereira as SecretaryGeneral, and the Presidentof Guinea-Bissau,Luis Cabral (Amilcar'sbrother), as Deputy SecretaryGeneral. In November, 1980, a coup led by Guinea-Bissau'sPrime Minister,Joao BernardoVieira, overthrewthe governmentof Luis Cabral.

1.11 The governmentof Cape Verde opposed the coup, and recognizingthat the PAIGC was in effect now two separateparties, created the African Party for the Independenceof Cape Verde (PAICV),which remains today the ruling party in the islands. Relationsbetween the two countriesdeteriorated until January, 1982, when Luis Cabralwas allowed to fly to exile in Cuba. Diplo- matic relationswere reestablishedin June, 1982. Normal state to state relationsculrrently exist between the two countries. The project of unifica- tion has, however,been put aside for the foreseeablefuture.

1.12 PAICV rule appearsquite stable. AristidesPereira has been President since independence,and the PAICV is the direct continuationof the PAIGC in Cape Verde. PAICV rule has not been entirelywithout dissent,however. In 1981, the Union for Independentand DemocraticCape Verde (UCID),a rightwing - 13 -

opposition group active principallyin Cape Verdean emigrant communities, aligned itselfwith farmersopposed to the proposedagrarian reform. After a clash in which two farmerswere killed, oppositionleaders were arrested,the army was instructedto use less violent means, and an importantinformation campaignwas waged to explainthe proposedreform to the farmers.

1.13 The Government of Cape Verde enjoys considerableprestige in the internationalcommunity due to the historicalinfluence of Amilcar Cabral on the liberationmovements in LusophoneAfrica, the moderate and conciliatory politics displayed by PAICV leaders, and the Government'spragmatism. In Africa, Cape Verde has often played the role of mediator. In 1982, Pereira was instrumentalin bringingabout a reconciliationbetween Angola and Sene- gal. Cape Verde has also promoted direct talks between Angola and South Africa,which have taken place on the island of Sal. Furthermore,Cape Verde is active in the InterstateCommittee to Combat Drought in the Sahel (CILSS). In East-Westrelations, Cape Verde has taken a neutralrole and has repeatedly refused Soviet requests for permissionto build a naval base on the islands. Cape Verde maintains amicable relationswith and receives aid from the OECD countries,the Soviet bloc, and China. The U.S. is the most importantfood donor. - 14 -

II. RECENT ECONOMICPERFORMANCE

A. STRUCTUREOF THE ECONOMY

2.01 The availabilityand quality of statisticalinformation on the Cape Verdean economy are very limited. There are no officialnational accounts or price indices, and external trade statisticsare published in an incomplete form only after long delays. The national accounts estimates presented in this report were derived from official sources through 1981, updated with 1982-83data, and suppliedby the Cape Verde authoritiesto the mission. Due to these limitations,the iggregatedata presentedbelow shouldbe regardedas rough estimates.

2.02 For 1983, Cape Verde GDP is estimated at CV esc 5812 million, or approximatelyUS$81 million. Per capitaGDP was approximatelyUS$267 in 1983, 65Z higher than in 1977. For the 1977-1983period, the averageannual growth rate of GDP was 10% in current dollars. In constant dollars, for the same period, average growthrate was 2.5% per year, or 1.5% in per capitaterms.

2.03 The distributionof output by sector in 1982 is presented in Table 2.1, and for the period 1977-82in Tables A.3 and A.4. The contributionof agricultureto GDP averaged less than 202 between 1980 and 1982 (TableA.4). When comparedwith other African countries,this value is rather low, and is largely a reflection of the country's low agriculturalpotential and the drought that has been affecting the islands since the late sixties. Food productionfalls considerablybelow that requiredto meet domesticconsumption needs. For example,corn and beans, the major food crops,are grown on most of the rainfedfarmland. However,only 102 of total corn consumptionand 50% of bean consumption are met by domestic production (such shares are highly influenced by rainfall, and hence are quite variable). The existing gap between domestic food consumptionand productionis partiallyfilled by food aid.

2.04 Fisheries'contribution to GDP remainedbetween 5 and 6Z during 1977- 1982. Fish products (freshand frozen fish, shellfishand canned fish) were traditionallythe country'smain export, comprising,between 1978 and 1980, almost one half of exports. Since 1980, however, exports of fish products have declined in both absolute and relative terms (since 1981, bananas have been the main export product). There is some potentialfor the expansionof the fisheries sector,but it has yet to be realized. It is estimated that more than 30,000 tons of fish per year could be obtained in the waters sur- roundingthe archipelago,three times the currentannual catch. .he acquisition of twelve new large boats in 1983/1984is expectedto increasethe output of the fishina industry. Mineral production has been restrictedin recent years to salt, which is producedby evaporationon salt flats, principallyon Sal Island. The contributionof mineral productionto GDP was only 0.3% in 1981,but representeda substantiallylarger share of exports (12%). - 15 -

Table 2.1 CAPE VERDE:Value Added by Sector

CV esc millions % of total

Agriculture,Livestock and Forestry 749 16.5 Fisheries 227 5.0 Mining 11 .2 Manufacturing 182 4.0 Construction 1091 24.0 Commerceand Transportation 1602 35.3 Public Services 683 15.0

GDP 4545 100.0

Source: TablesA.3 and A.4.

2.05 In the secondarysector, the contributionof manufacturinghas been small and relativelyconstant. Manufacturingwas estimatedat 4X of GDP in 1982. Manufacturingactivities consist mainly of the productionof cigar- ettes, aguardente (rum), clothing, shoes and other activities of lesser importance. Most industrialproduction by value originatesfrom eight public and four mixed enterprises. Most employment,however, is by small artisanal enterprises. The manufacturingsector is expected to grow rapidly in the futurebecause of severallarge investmentprojects that are in variousstages of planningor implementation.An analysisof these projectsis presentedin ChapterIII. Initiationof some of these large projectsalso caused construction output to increasethreefold, in current prices,from 1980 to 1982. The constructionsector increasedfrom 14% of GDP in 1979-1980,to 21% in 1981, and 24% in 1982. (TableA.4).

2.06 The tertiary (services)sector is the largestwith approximately50% of GDP during the 1980-82period. Within the sector, commerceand transportation alone constitute approximatelyone third of domestic output, and includea wide range of activities,such as servicesto internationalaircraft and ships. The expansionof services to internationalcarriers at the Sal Airportaccounts for most of the recentgrowth in commerceand transportation. Central Governmentservices are the other major componentof the tertiary sector. The Government'sshare of GDP from 1980 to 1982 averaged 16%. The Governmentis the single largestemployer, with approximately6,300 permanent employeesin 1983. In summary,most of the growth of GDP from 1980 to 1983 occurredin the constructionsector throughseveral large investmentprojects, and in the commerce sector, primarily in services to international aircraft. A more detailed review of the productive sectors begins with Chapter IV. - 16 -

B. STRUCTUREOF NATIONALEXPENDITURES

2.07 !wo main features of the Cape Verdean economy should be emphasized when analyzing the structure of national expenditures. The first is that domesticconsumption exceeded GDP for the 1977-1982period as a whole, but was smaller in 1983. Secondly,the countryhas been dependenton foreignaid and worker remittancesto meet the large resourcegap. which exceededCDP in 1980 and 1961, but was less than GDP since then (Tnble 2.2). Total grant aid, which includes food, equipmentand cash aid, was equivalentto 397 of CDP in 1983, while worker remittanceswere equivalentto 25% of GDP (Table A.6). Another way to gauge the importance of external factors in the Cape Verdean economy is to compare GDP and GNP. GNP, broadly defined as GDP plus net factor income including remittances,was approximatelyUS$317 per capita in 1983. This value is almost 200 higher th.anper capita CDP. Domesticsavings are positive only if CNP is used as an indicator of domestic disposable income. Extensive grant aid and remittanceshave allowed the country to maintain a high level of consumptionand investment relative to domestic output.

2.08 The aggregate expendituredata shown in Table 2.2 were based on data providedby the Cape Verdeanauthorities. Governmentconsumption and investment data came from the Ministrvof Economyand Finances. Export and import data were obtained from the balance of payments statisticscompiled by the Bank of Cape Verde (BCV). The estimatesof privateconsumption were derived as a residual,and are quite rough. Subject to these limitations,some broad trends in domestic consumptioncan be observed. First, private consumption exceeded CDP in some years. Second, the pattern of consumptionexpenditure growth has correspondedclosely to variationsin remittancelevels. In 1980, as remittancesincreased by almost 80%, private consumptionexpanoed 33.7%. This sharp increase was associated with the return of large numbers of emigrantscoming to celebratethe anniversaryof their country'sindependence. In subsequentyears, remittancesdeclined approximately to their earlierlevel in real terms. After reachinga high of US$40 million in 1980, remittances dropped in 1983 to US$20.5 million, below the 1979 level of US$24 million. Correspondingly,annual increases in private consumptionwere only 8.4% in 1982 and 9.0% in 1983. Given the estimatedinflation rate of 15-20% for this period, consumption actually declined in real terms relative to 1980. Governmentconsumption expenditures averaged 30% of CDP from 1980 to 1983. - 17 -

Table 2.2 CAPE VERDE: Expenditureaof Available Resources, 1980-83 (Current Prices)

1980 1981 198? 1983

CV euCc of CDP CV esc %af CDP CV osc % of CDP C'i c % of CDP millions millions millions millions

ConsuMption 3873 149.1 4394 134.0 4912 108.1 5571 95.9 Privatc 3010 l15.9 3341 101.9 3622 79.7 3948 b8.0 Public 863 33.2 1053 32.1 1290 28.4 1623 27.9

Gross Domestic Investment 1463 56.4 2750 33.9 3691 81.2 4655 80.1 PublIc 1102 42.5 '290 69.9 3300 72.6 4295 73.9 Private 334 12.9 430 13.1 360 7.9 320 5.5 Change In stocks 27 1.0 30 .9 31 .7 40 0.?

Total Domestic Fxpenditures 5336 205.5 7144 217.9 8603 189.3 10226 175.9

Provided by CDP 2596 100.0 3278 100.0 4545 100.0 5812 100.0

Resource Cap -2740 105.5 -3866 117.9 -4058 89.3 -4414 75.9 Exports C and NFS 713 79.8 1155 35.2 1816 39.9 2540 43.7 Imports G and NFS -3513 135.3 -5021 1.53.1 -5874 129.2 6954 119.6

Net Investment Income 1/ 1746 67.3 1565 47.7 1415 31.1 1129 19.4

cGP 4342 167.3 4843 147.7 5960 131.1 6941 119.44

./ Includes remittances Source: Table A.5 - 18 -

2.09 Investmentin Cape Verde has always representedan unusually large share of domesticexpenditures; between 1977 and 1980, it averaged64% of GDP. With the beginning of two large projects, the Sal Airport and a shipyard repair facilityat S. Vicente,a major change in both the size and coimposition of investmentoccurred in 1981. As public investmentdoubled, total investment expendituresincreased by 882. As a consequence, total investment represented84% of GDP in 1981. The total cost of the airport project is estimated to be US$14 million, largely spent in 1981. The shipyard repair project was completedin late 1983 at an estimatedcost of US$38 million; it was the largest project ever undertakenin the country. It was financedby medium term loans from a Portuguese commercialbank (US$12 million), the African DevelopmentBank (US$13million), the EuropeanInvestment Bank (US$5 million), and the Bank of Cape Verde (US$8 million).

2.10 These two projects substantiallyaltered the structure of domestic investment. While in 1980 investmentin industryamounted to only 36 million CV esc, it increasedto 418 million CV esc in 1981. Investmentin the transportation sector, which was 215 million CV esc in 1980, increased about threefold to 613 million in 1981. These two sectors togetherrepresented 41% of total investmentin 1981, and will together remain at the same relative size throughout the period covered by the First National DevelopmentPlan (1982-1985). Investmentin the transportationsector is projectedto decline over the course of the Plan period as the improvementsin the Sal airportare completed. Investment in rural development projects remained important throughoutthe 1978-81period, accountingon average for 28% of total investment. These projects are highly labor intensive. They are being financed from the proceeds of the domestic sale of foreign food aid. In 1983, total iavestment respresented80% of GDP. More than 60% of total investmentwas concentratedin three sectors: rural development,18%; industry, 302; and transportation,15% (TableA.34). In summary the bulk of investmenthas been in infrastructureprojects. The major change after 1981 was the increased share of the industrialsector. A more detailedanalysis of public investment and the First NationalDevelopment Plan is presentedin ChapterIII.

2.11 Exportsof goods and servicesincreased rapidly between 1979 and 1983, from US$12.4 million, or 30% of GDP, to US$35.4 million or 44% of GDP. The expansion of the nonfactor services component largely accounts for this increase. Merchandise exports, which had been increasing,declined from US$9.1 million in 1980, to US$1.9 million in 1983. The decline in exportsof fish products, partially offset by an increase in banana exports, largely accounts for the decline (See Chapter II.E). During this period, the transport revenue componentof the c-;rrentaccount increased from US$6.9 millionin 1979, to US$27.2million in 1983, a fourfoldincrease. The increasein total exports is, therefore,a consequenceof the expansionof services,which are provided primarilyat the Sal airport and the Mindelo port. However, their respectivetrends have been quite different.

2.12 In fact, all of the growth shown in services has been in aviation services, as shippingservices have been declining. The traditionalrole of Mindelo as a ship bunkeringpoint has been decliningover the last 25-30 years because of changes in patterns of world trade, vessel technology,and tight competitionfrom West African ports, notably those of the Canary Islands and - 19 -

Dakar. Around 700 thousand tons of bunker oil were supplied in 1954; bLt only 90 thousand and 40 thousand tons were supplied in 1979 and 1982, respectively. Bunkering is increasingly limited to vessels making commercial calls at the port, rather than to those ships in transit. The improvements in the Port and the shipyard are expected to increase the number of vessels calling at the port, and to enhance the foreign exchange revenues from Hindelo. At Sal airport, the trend in services rendered has been upward. Jet fuel supplied increased from 87 to 111.3 thousand tons between 1979 and 1982 (Table A.49). Together, the Sal airport and the Mindelo port are undeniably very ixportaat to the Cape Verdean economy. The dissimilar trends experienced in the last several years point to the long run uncertainty associated with service sectors such as these. Future growth in the airport r^venues, in particular, may be influenced by improvements in aircraft technology, and by events in Southern Africa.

2.13 Imports cover a much wider range of products than exports. Food and beverages constitute the single most important of these. Recently, imports of machinery, cement and petroleum have increased due t.~ the investment projects and expansion of services at Sal airport (Table A.21). Total imports increased steadily to US$103 million in 1981, and then declined slightly to US$101 million in 1982 and US$90 million in 1983. The export/import coverage ratio has increased dramatically from 5% in 1977, to 16.2% in 1979, 22.2% in 1981, 31% in 1982, and 37% in 1983. Recent increases in the ratio reflect both a large expansion orn the export side (36.2% in 1982 and 13% in 1983, in dollar terms) and slight declines in imports cf goods and services (2.2% in 1982 and 3.1% in 1983). The above estimates were obtainiedfrom preliminary balance of payments data supplied by the Bank of Cape Verde. Because of lags between actual trade operations and balance of payments accounting, a cross- check between these two sources was not possible. The latest trade data refer only to the first quarter of 1982. It is possible that some of the 1983 imports will be accounted fcr in earl. 1984. However, the decline in the expansion of imports would be consistent with an estimated slowdown in the expansion of private consumption. - 20 -

C. PUBLICFINANCE

1. Introduction

2.14 The public sector in Cape Verde is composedof three main entities: the Central Goverment, the municipalities,and several public and mixed enterprises. With respectto the Central Government,the Ministryof Economy and Finance has the formal responsibilityof budgetarypolicy, coordinating the current expendituresof the individual ministries,and collectingand allocatingrevenues. The governmentbudget is divided between an "ordinary" or current budget, containingmostly recurrentitems, and an "extraordinary" or capital budget, composed of investment items although the distinction between the two categoriesis in some cases somewhat artificial. Prior to 1979, there was an emergencyprog-rns which covered drought relief expenditures. The budget and fiscal systems are still largelybased on the Portu- guese legacy, and the forecasts of the differentbudget componentsare ob- tainedmainly from the outcomesof previousyears.

2.15 Includedin the Governmentbudget are a number of special funds that come under the title of Contas de Ordem, constitutedas autonomousfinancial bodies under the jurisdictionof the appropriateministry. The importanceof this category of autonomous funds in the budget has fluctuatedgreatly in recent years as some funds have been converted into public enterprisesand have been withdrawnfrom the governmentbudget. Examples include the Inter- national Airport (1984), the Post Office (1981) and the Cape Verde Airline Company (1981). Although no data reflectingeach of the funds' actual expendituresand revenues are available,budget estimatesprovide an approxi- mation of their importance. In 1982, they collectivelyconstituted one fourth of the estimatedtotal governmentcurrent expenditures,including Contas de Ordem, of 2,200 million CV esc.

2.16 Of these funds, the NationalDevelopment Fund (NDF) and (formerly)the Sal Airport were the most importent,collectively comprising 97% of budgeted expendituresunder Contas de Ordem. The NDF alone, which is the largest autonomousbody, has a budget of 300 million CV esc, and accounts for more than 50% of the total amountbudgeted under Contas de Ordem. It is under the supervisorycontrol of the Ministryof Economyand Finance,which appointsits board. The revenuesof NDF are obtainedfrom the proceedsof the sale of food aid, and are used maiuly to finance the local costs of rural development projects. In sum, NDF's main role is to serve as an intermediaryin the allocationof the monetarycounterpart of food aid.

2.17 Sal Airport,which was the other importantautonomous fund, became a public enterprisein 1984 under the jurisdictionof the Ministryof Transport. Its revenuesare derivedmainly from servicetaxes on passengersand traffic. The 1983 budget estimateindicated that these taxes amounitedto 215 million CV esc or 90% of the airport's total revenues. The remaining revenues are obtainedfrom the rentalof installationsand other services. On the expenditures side of the Airport's finances,the main componentsare personal and recurrent expenditures,47% of the total; debt payments, 41%; and capital expenditures,12X. Both the airport and NDF have earmarkedrevenues and are - 21 -

self-financed. The remaining funds, the Caixa de Credito, the Fundo de Fomento Social, and the Caixa de Habitacao, are all of negligible importance. Including the funds represented under Contas de Ordem in intertemporal com- parisons of government expenditures creates significant difficulties because of the conversion of some of the funds into public enterprises during the relevant period. Therefore, in the following analysis they are consistently considered as public enterprises and excluded from the Central Government Accounts.

2.18 For the remainder of the public sector, i.e., municipalities and public enterprises, available information is very deficient. Beginning in 1981, the municipalities received some budgetary autonomy as well as 5X of central government tax receipts. Additional amounts of revenue are collected from local taxes and fees, but overall, their economic importance is small. As a consequence of the 1981 reform, municipalities received transfer payments from the Ministry of Economy and Finance totalling 58 million CV esc in the 1983 budget. In general, the pubic enterprises are self-sufficient, although the central government may contribute to their investment expenditures. With the exception of ELECTRA (an electricity and water desalination company), they do not receive government subsidies. Lack of available data prevents a global analysis of this component of the public sector. A description of the role of the main public enterprises appears in the sectoral analysis of the Cape Verde economy (Chapters IV to IX). Because public enterprises make up a very large part of the economy's "modern component", their role is unquestionably important, and a future global accounting framework for the public sector needs to incorporate their contribution. The following analysis covers only the Central Government component of the public sector.

2. Trends

2.19 Since independence the government sector has played a dominant role in Cape Verde's economy. Government expenditures and the size of the government deficit are both quite large relative to GDP. For example, in the 1981-83 period, government expenditures, including consumption and investment outlays, were roughly equivalent to GDP (Table A.7). Of these expenditures, two thirds represented outlays in the investment programs. As a consequence of this large volume of expenditures the overall government deficit from 1980 to 1983 was equivalent to 41%, 69%, 72%, and 74%, of GDP respectively (Table A.8). Central government revenues and expenditures from 1977 to 1983 are presented in Table 2.3. It is important to understand the distinction between the ordinary and extraordinary budget, and the manner in which the deficit has been financed over time. As the data in Table 2.3 indicate, the ordinary budgets, in broad terms, have been in equilibrium, showing small surpluses over the last four years. The central government deficit has resulted from the large outlays in the public investment program. While current government expenditures have been approximately equal to current revenues, capital expenditures have been financed through external sources. - 22 -

Table 2.3 CAPEVERDE: Central Government Sunuary, 1977-83 MiflIxiosof C.V. Escudos)

1977 1978 1979 1980 1981 1982 1983

Ordinary Budget Qirrent Revemue 396.6 50B.0 617.3 907.3 1087.2 L322.2 1 623.7 Oarrent expenditure 549.0 575.8 657.4 862.7 1052.8 1290.2 1 623.4

Deficit -152.4 -67.8 -40.1 444.6 +34.4 +32.0 40.3

Capital revenue - 1.4 .6 - - .6 -

Ei ctraodlnry cEkp. -919.0 -845.1 -1343.5 -1101.9 -2290.0 -3300.0 -4295.0

OveraIl deficit -1071.4 -911.5 -1383.0 -1057.3 -2255.6 -3267.4 -4294.7

Foreign Finacing 1029.3 785.1 1315.6 1102.2 1853.0 3383.7 4180.3

Grants 951.6 744.9 1250.0 1056.4 930.3 1770.0 2269.9

Loans 77.7 40.2 65.6 45.8 922.7 1613.7 1910.4

3bmestic financing 42.1 126.4 67.4 -44.9 402.6 -116.3 114.4

B.C.V. 42.1 126.4 67.4 -44.9 402.6 -116.3 114.4

Operationalaccounts -55.6 36.2 49.1 -42.1 391.5 -75.7 Credit 3.9 - 30.0 35.2 391.5 .4

Deposits -59.5 36.2 19.1 -77.3 .4 -75.3

Earmirked accoumts 97.7 90.2 18.3 -2.8 11.1 -40.6

Source:Cape Verde Autborities and missiion estimates. - 23 -

2.20 External resources,including both grants and loans, have been the major sourceof deficitfinancing. In 1979 and 1980, foreigngrants financed 90% and 100% of the deficit respectively. The remainingportion of the 1979 deficitwas financedin almost equal parts by foreign loans and Bank of Cape Verde credit. Despite the externalaid, the overall deficitminus grants in 1979 was only 6.2% of GDP (TableA.8). In 1981, however, the overall deficit approximatelydoubled in size to 2256 million CV esc, or 69% of GDP. Further, breaking with the early pattern of financing,almost one half of foreign financing from 1981 to 1983 was provided in the form of loans rather than grants. For these three years, the overalldeficit minus grants represented, respectively,40%, 33%, and 35% of GDP. The Bank of Cape Verde's role has generallybeen negligiblein the financingof the overall governmentdeficit, with the exceptionof financingthe government'sshare of the shipyardproject in 1981.

2.21 The sharp increase in investmentoutlays in 1981 resulted from the implementationof the airport and shipyard projects. Together, these two projectsaccounted for approximatelyone half of extraordinaryexpenditures in 1981. In 1982, with the beginning of the First National DevelopmentPlan (ChapterIII), investmentoutlays increased by 44% in currentprices.

3. GoivernmentRevenues

2.22 During the 1979-1983period, governmentrevenues increased rapidly at an average annual rate of 28%, keeping pace with governmentcurrent expenditures. However, the structure of these revenues experiencedsome changes. While capital revenues remained essentiallyconstant and overall insignifi- cant, the share of tax revenuesin total revenueincreased from 76% in 1979 to 86% in 1982, and then declinedto 82% in 1983 (Table2.4). Approximatelyone half of non-tax revenuesare derivedfrom the transferof part of the surplus of public enterprisesto the governmentin its status of shareholder. The determinationof the amount of the public enterprisesurplus allocated to the governmentbudget is dictatedby currentbudget needs, or in other words, by the expected gap between current expendituresand revenues. The remaining surplusis used for investmentpurposes.

2.23 The main developmentin the structureof governmentcurrent receipts was the rapid increasein direct tax revenues. Althoughindirect taxes remain the main sourceof revenue,their share in total revenuesdeclined from 56% in 1979 to 46% in 1983. During the same time span, the contributionof direct taxes increased from 20% to 36%. The increased share of direct taxes is attributableto two main factors:a revisionof the tax laws in 1980 and an increase in the revenuesfrom the Petroleumand PetroleumProducts Tax, which is imposed on the profits obtainedfrom the commercializationof these products. The main changes in the tax law were: the adoption of a broader base and a more progressivetax schedule for the tax on salaries and income of self-employedprofessionals (Imposto Profissional); an increase in the tax rate on taxablebusiness profits from 10 to 16% (ContribucioIndustrial); and an enlargementof the base of the complementaryincome tax (ImpostoComplemen- tar). The latter is a tax on the annual income of individualsand firms that are liable to the ImpostoProfissional, a tax on capitalincome, and a tax on interestincome. For individuals,the tax is assessedon aggregatehousehold - 24 -

Table 2.4 CAPEVE_ E: Qmtml Gbwermit Orinary Revenue 1979-83 (as percent of total revenue)

Item 1979 1980 1981 1982 196?' 198?' 1983

Total Favenue 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Qirrent Revenle 99.9 100.0 100.0 100.0 100.0 100.0 100.0

Tax Revenue 76.5 76.5 80.4 85.6 83.2 82.8 81.6 Direct laxes 20.1 23.1 28.4 37.3 34.2 34.9 35.6 Inoame& Prmfits 18.3 21.6 27.1 36.2 33.0 33.8 34.6 Property 1.3 1.1 1.0 0.8 0.8 0.7 0.7 Other 0.6 0.4 0.4 0.3 0.4 0.3 0.3

IndirectTaxes 56.4 53.4 52.0 48.3 49.0 47.9 46.0 biports 49.1 47.0 46.5 42.9 44.5 43.4 41.4 STports 0.2 0.3 0.2 0.1 0.2 0.0 0.0 Stanp Tax 6.7 6.0 5.2 5.1 4.2 4.3 4.4 Other 0.3 0.2 0.2 0.2 0.2 0.2 0.2

Non-Tax Revenues 23.4 23.5 19.6 14.4 16.8 17.2 18.4 (Profits of Public Ehterprises) 13.8 12.2 10.5 6.1 10.7 9.7 9.9

Capital Reenue 0.1 - - 0.0 - - -

Note: a/ budget estit=es Swrce: Statistical Appendix, Table A.9 - 25 -

income,with a deductionfor each family member. The 1980 changesin the tax laws were a major modificationof a tax code that is based largely on the PortugueseTax Code.

2.24 The second factorthat explainsthe relativeexpansion of direct taxes is the growth in revenuesfrom the PetroleumTax. (Petroleumoperations are discussedin ChapterVII). Althoughthe tax rate has remainedunchanged since 1977 (a flat rate of 35Z), revenuesincreased with the expansionof services to internationalaircraft. Petroleum and Petroleum Products Tax revenues increasedfrom 60.3 million CV esc in 1980 to 201.4 tillion CV Esc in 1983, a threefold increase. While in 1980 these revenues represented6.6% of total revenues,in 1983 they accountedfor 12.4Z of governmentrevenues.

2.25 As a consequenceof the tax changesand the increasein revenuesfrom the petroleumtax, the ratio of direct taxes to GDP, which was .058 in 1979, increasedto .094 in 1981, and .099 in 1983. On the other hand, the indirect ratio of taxes to GDP ratio declinedfrom .162 in 1979 to .13 in 1983. This decline can be explainedby the decline in import growth in 1982 and 1983. the increase in capital goods imports (which are exempt from import taxes), and the fact that some taxes on importsare specific rather than ad valorem, and therefore not responsive to changes in import value. In general, taxes directly related to internationaltrade are the major source of revenue for Cape Verde. All indirect tax revenues except the stamp tax are linked to internationaltrade and when combinedwith (direct)petroleum tax revenues, the total resulting revenues associated with internationaltrade averaged approximately55% of currentrevenue from 1980 to 1983 (TableA.11).

4. GovernmentExpenditures

2.26 Currentgovernment expenditures increased at an averageannual rate of 23% between 1978 and 1983. Current expendituresremained relatively constant in relationto GDP; for the 1980-1983period, they representedan average of 30% of GDP. In terms of their relativeshare of expenditures,the two most importantministries during the 1978-1983period were the Ministry of Economy and Finance and the Ministry of Education (Table A.12). In 1983. they accounted for 25% and 15%, respectively,of ordinaryexpenditures. The Health Ministry and the Foreign AffairsMinistry accounted for 8.5% and 11%, respectively of total ordinaryexpenditures in 1983.

2.27 The unusuallylarge zhare of the expendituresallotted to the Ministry of Economy and Finance can be explainedby the wide variety of expenditures that are under the Ministry'scontrol. The 1983 budget estimate (thereare no figures for actual outlays by category) for the Ministry of Economy and Finance is 408 million CV ebe, or one fourth of total government expenditures. Included in this amount are transfers (182 million CV esc) and public debt payments (95 million CV esc), which represent,respectively, 45% and 23% of the total. Budgetedtransfers include a subsidyto municipalities(58 million CV esc), a subsidy to ELECTRA of 60 million CV esc, and transfersto several local organizations,such as the Women's Organizationof Cape Verde (OMCV), the National CooperativesInstitute (INC), and youth organizations. Other than the subsidy to ELECTRA, no other transfers to public enterprisesare - 26 -

budgeted. The subsidyto ELECTRAwas approximately80 millionCV esc in 1983, 20 millionCV esc above the budgetedamount.

2.28 ln the 1983 budget,personnel expenditures amounted to 43% of budgeted currentexpenditures, a lower proportionthan budgetedin 1981 (56Z) and 1982, (47%) due largely to unchanged government salary scales. However, because there was a 21% increase in wages for the government sector in the last quarter of 1983, personnelexpenditures increased as a proportionof total expenditures. Debt payments represented1.1% and 5.3% of estimatedexpenditures for 1982 and 1983, respectively.For the same period,transfer payments accounted for 18.3% and 18.9% of estimatedexpenditures. The largest share (70%) of transfers came under the Ministry of Economy and Finance. The remainderwere in the budgets of the President (13%), Prime Minister (11%), and Health Ministry (3%). Recipientsincluded the local informationagency, the main newspaper,and various social and educationalagencies. While the 1983 budget forecast a current deficit of 297 million CV esc, the actual outcomewas a surplusof 0.3 million CV esc. Similarly,in the 1982 budget a deficitof 166 million CV esc was estimated;however, a surplusof 32 million CV esc was actuallyachieved. The discrepanciesare explainedby the conservative revenue estimatesused by the Ministry of Economy and Finar.ce,and by the requirementthat only 95% of budgetedcurrent expenditures can be spent.

5. Issuesand Recommendations

2.29 Several public finance issues merit discussion. First, the overall central governmentbudget deficit is large by usual standards;and with the initiationof large investmentprojects during the last two years, a much larger share of the central government deficit has been financed through external borrowing. Even though the external debt has been obtained at concessionaryterms, its burden is expectedto increaserapidly in the future (ChapterII.E). To insure that the debt stays within manageablelimits, it is important that (i) internal savingsbe created to finance the deficit, and (ii) that projectsproposed for externalfinancing be analyzedcarefully.

2.30 Because the potential for increased tax revenues seems limited, efforts should be made to create savings from the ordinary budget through containment of government expenditures. Bringing ordinary revenues and expendituresin balancewithout using the government'sshare of public enterprise profitswould enable the latter to be used to financeinvestments. Some savings could be achieved through reevaluationof expenditures,such as transfersto public enterprises;others, by carefulevaluation of the feasible expdnsionof personnelexpenditures. As recognizedin the Plan, it is essential that public sector wage increases do not jeopardize the precarious internal/externalequilibrium. In particular,transfers to ELECTRA should be analyzedcarefully, and a pricingpolicy developedthat would avoid the use of governmentrevenues to finance the current operationsof this enterprise. A first step could be separate accounting for electricityand desalination operations(Chapter VII).

2.31 All projects in the capital budget need to be carefully evaluated. First, projects submitted for external financing need to be monitored carefully through a detailed process of project preparationand evaluation. - 27 -

Domestic capacity to prepare and evaluate loan proposalsmust be enhanced. Projects should be presented for possible external financingonly after a carefulevaluation of their economicviability and macroeconomicimplications. Secondly, projects financed through external grants need to be carefully monitoredso that their future recurrentcosts not coveredby externalaid do not become an economicburden.

2.32 A second issue is the extent to which taxes can be increasedto help finance the deficit. Because tax revenues already constitutea relatively large portion of GDP, a generalincrease in the tax burden could have negative effects on growth by lowering the rate of return to production factors. However,additional revenues can be obtained from less sweepingmeasures such as, (i) a change from specificto ad valorem import taxes (ChapterII.E), (ii) adjustmentsin water charges, and (iii) increases in the tariffs on some importedluxury goods.

2.33 A third issue is the need for better economicinformation at both the macro and micro levels. Possiblywith externaltechnical assistance, efforts should be made to prepare indicativenational accounts, reliable price indices, more complete trade statistics,and more detailed balance of payments data. These data would prove extremelyuseful in the preparationof development plans and as a basis for policy decisions. In the meantime, efforts should be made to prepare a global public sector accountingframework that includes the central government,municipalities and public enterprises. A standard accountingframework for public enterprises,currently being imple- mented, will be a first step in that direction.Private sector accounting should also be standardized.

2.34 A final issue is the role of fiscal policy in the country'sdevelop- ment strategy. A global review of the tax systemshould be undertaken,after more informationis available about both the macro and micro aspects of the Cape Verdean economy. Such a study could be used as a basis for a tax reform directed toward improvementsin the "quality"of the tax system in terms of its effectson resourceallocation, equity, and the supplyof the main factors of production. The informationcould also be used to prepare an investment code that (i) delineatesthe role of private and foreign investmentand (ii) provides special incentivesto investmentin areas consideredimportant for long term growth. Includedwithin the overall strategy could be incentives that would increaseemigrant remittances and direct their use toward financing domesticinvestment.

D. MONEY AND CREDIT

1. Introduction

2.35 Prior to Cape Verde's independence,two main financialinstitutions existed in the country. One was a branch of the Banco NacionalUltramarino, which issued currencyand functionedas a commercialbank. At the time, the countrywas a member of the escudo area, and its currencywas pegged to the Portugueseescudo at par. The other main financialinstitution was a branch of Portugal'sBanco de Fomento in Mindelothat operatedas a developmentbank. - 28 -

2.36 Followingindependence, the Bank of Cape Verde was establishedin June 1976 with the functionsof a centralbank, i.e., to issue currency and act as the government'sbanker. The BCV was formed by consolidationof the local branclhesof the Banco Ultramarinoand the Banco de Fomento. In addition,the BCV has since performed the roles of a commercial and developmentbank as well. The Bank's centraloffice is in Praia, two main branchesare locatedin Mindelo and Sal, and branches exist on the other islands. The remaining state-ownedfinancial institution still operatingin the country is the Caixa Econ6mica Postal, a postal savings institutionunder the control of the Ministry of Transport and Communication. Its nain function is to attract small scale deposits from private sources through the postal service network and to make personal loans and mortgages to civil servants. The Caixa de Credito, a minor savings and credit institution,was abolishedin April, 1984.

2.37 Because the BCV is by far the most importantfinancial institution, the monetary system actuallyresembles a single bank system. Since independence, monetary policy has emphasized the maintenanceof a strong foreign reserve position. Given that credit expansionwill translatelargely into an increaseddemand for imports and a consequentdecline in foreign reserves, credit policies have been formulatedwithin the context of the open economy, narrow financialmarkets, and the limitednumber of policy instrumentsavail- able to the monetaryauthorities.

2.38 The BCV operatesunder an informal system of global credit ceilings based on the level of foreign reserves and the credit requirementsof the economy. Under the BCV's charter,credit to the governmentis limited to 15% of the previousyear's revenue. A special clause that allows extra credit to be made available to the government for special developmentprojects has seldom been used. For loans to the private sectorand to public enterprises, the BCV typicallyrequests comprehensiveand detailed informationabout the creditworthinessof the borrower and the proposeduse of the loan, so as to leave no room for discretionaryuse of funds. All foreignexchange transac- tions are under the Bank's control. With the exceptionof very small trans- actions, all imports and exports are subject to licensing. Licenses for imports of essential consumer goods are issued in coordinationwith the Secretariatof Commerce. For other types of goods, decisionsare made by the BCV on a case by case basis,with preferencegiven to importsof capitalgoods related to developmentprojects. Also, payments for tourism require prior authorization.

2. Trends

2.39 The discussionof trends in this section does not include final findingsfor 1983, due to lack of informationon financialinstitutions other than the BCV. The influenceof these other institutionsover monetarymove- ments, however, is rather small relative to that of the BCV. During the 1979-1982period, net domesticassets expandedrapidly at an average rate of 34.4% (BCV assets increased212 in 1983). Credit to public enterpriseswas the main source of this growth, increasingsevenfold to 1,049 million CV esc in 1982. (BCV creditwas 1.193 millionCV esc in 1983;see Table 2.5). Largely due to the timingof the financingof certaininvestment projects, the rate of expansionof domesticassets has fluctuatedgreatly. After reachinga level - 29 -

of 48% in 1980. it declinedto 34% in 1981 and 22% in 1982 (TableA.15). Even more pronounced are fluctuationsin total credit which is defined as net claims on government plus credit to public and private enterprises,and excludes the interbranchfloat ("other iteas" in Table 2.5). Total credit expandedat a rate of approximately40% in both 1979 and 1980.by 65% in 1981, but only by 10.6% in 1982. (BCV creditgrew 13% in 1983). The 1980 expansion was largelycaused by loans to TACV for purchaseof aircraft;to ARCAVERDEfor purchaseof boats;and to Hotel Mar for the completionof hotel installations. The rapid growth of credit to public enterprisesreflects the expansion of this sector and the relatedincrease in working capitalrequirements; but even more so, it reflectsa shift toward financingof fixed capitalneeds through the banking system. Most of the growth in credit after 1980 was due to governmentborrowing to finance the shipyardproject. Credit to the central governmentincreased from 26.3 millionCV esc in 1980 to 429 million CV esacin 1981 (Table2.6). In 1982 the decline in the growth rate of creditwas mainly due to an expansionof governmentdeposits and a slowdownin the expansionof credit to the private sector. But in 1983 BCV credit increasedby 41%, reachingthe 1981 level. The other (non-BCV)financial institutions, played an insignificantrole overall,providing virtually all of their credit to the private sector. The credit providedby these institutionscorresponded to an average of 24% of total credit to the private sector between 1980 and 1982 (TableA.17!.

2.40 The net inflationaryconsequence of this credit expansionwas relatively small. Because a large part of the credit was for the purchase of importedequipment and other goods, 'ts main impact fell instead on foreign reserves. Therefore,as the overall governmentdeficit was financedalmost totally by grants and foreign borrowing (except in 1981), the change in foreign assets can be largely traced to changes in credit granted to the private sector and public enterprises,and to variations in the flow of transfers. As a consequenceof the credit swings, net foreign assets which had expandedrapidly in 1979 and 1980 (220 and 230 millionCV esc, respectively), increasedby only 28 million CV esc in 1981, and then increaseddrama- ticallyby 671 million CV esc (37%) in 1982. BCV foreignassets declined by 37 million CV esc in 1983. From 1980 to 1982, gross reservesequalled, respectively,7.3, 5.0 and 6.6 months of importsother than food and equipmentaid, and 6.2, 4.6 and 5.5 months of total imports. The decline of this ratio in 1981 may explain the subsequent tighteningof credit relative to previous trends. For 1983, the foreignreserves in the BCV were sufficientto finance 5 months of total imports. - 30 -

MIble 2.5 CAPEVFRDE: SumUY Accounts of Finnncial System 1977-83 (mLlliais Cape Verde Facudos)

Item 1977 1978 1979 1980 1981 1982 1982* 1983*

Net Foreign Assets 1,420.9 1,333.5 1.553.5 1,783.7 1,811.4 2,482.4 2,482.1 2,445.2

Net Dwstic ASsetB 403.3 891.1 1,183.5 1,755.5 2,351.7 2,865.9 2,730.5 3.303.8

Net claics of Cen. Govt. -115.5 11.3 76.9 34.3 452.4 347.7 344.2 486.1 CLaini of Nm-finrnrial public enterprises 6.6 131.1 147.7 591.1 773.8 1,048.5 1,093.2 1,193.2 CLaMy of Private Sector 394.9 531.6 712.3 684.5 937.6 1,032.8 757.0 807.2 Other Items (Net) 117.3 217.1 246.6 445.8 187.8 436.9 536.1 817.3

M!4neyand Qiasi-Mxey 1,467.1 1,709.6 2,014.0 2.658.5 3,180.7 3,989.6 3,853.9 4,151.0

Qzrrency Cutside &mks 537.2 638.3 736.4 872.2 1,040.5 1,281.9 1,281.0 1,231.8 Dwand Deposits 835.3 930.3 1,035.5 1,408.4 1,495.6 1,924.1 1,946.8 2,316.1 Thze & Savings Deposirs 94.6 141.0 242.1 377.9 644.6 783.6 626.1 603.1

Capital Accmmts 357.1 515.0 723.0 880.9 982.3 1,358.7 1,358.7 1,598.0

Source: Statistical Apperxlix Tables A. 13 and A. 14 ' Does not include Financial institutlos other tihan the Bank of Cape Verde

Table 2.6 CAPEVERDE: Net Cnlais on General Covrzuer t QIlis of Cape Verde Fa )

l177 1978 1979 1980 1981 1982 1982* 1983* Net CJaiZI on general Cov'ernmet (net) -115.5 11.3 76.9 34.3 452.4 347.7 34.2 480.1

Central Govrrmnent -112.6 3.8 71.2 26.3 428.9 312.6 312.6 452.7

Claims 92.0 92.0 122.0 157.2 548.3 547.9 547.7 624.4 Deposits -214.6 -R8.2 -50.8 -130.9 -119.4 -235.3 -235.3 -171.7

Local Gaverumit 7.1 7.5 5.7 8.) 23.5 35.1 31.8 33.4

Dbes rOLincluD flnmclal instituions other than the bank of Cape Verde. Souroes: Statistical AppebKx Tables A. 13 and A. 14. - 31 -

2.41 Time and savingsdeposit data for 1983 were unavailablefor financial institutionsother than the BCV. Therefore,although MI can be estimatedfor 1983,M2 is availableonly through 1982. The general trend in money supply has been a decline in the share of demand depositsand currency in favor of time deposlts (TableA.18). This trend rcflectsan expansionof the banking sector and a gradualmonetization of the economy. As Table A.15 shows,growth of H2 was somewhat uneven between 1977 and 1982. increasingby 16.52 ann.17.8% in 1978 and 1979. respectively.32% in 1980, 19.2% in 1981, and 25.4% in 1982. The 1980 Increase in the money supply was accompaniedby changes in its structure. Demand depositsrose by 36Z, and time depositsincreased 56%. The explanationfor these changeslies in the 80% increase in the flow of remittances in 1980 relative to the previous year's value. Expressedas a percentageof GDP, remittancesincreased from 42% in 1979. to 62% in 1980. As a conbequet1c.demand and time depositsincreased rapidly as these remittances were convertedinto domesticcurrency, although some sterilizationoccurred to the extent that credits mentioned above were used. The sharp increase in remittancesexplains how the large 1980 credit expansionwas compatiblewith the substantial increase (15%) in reserves of the BCV. In 1981,while demand deposits expanded bv only 6%. time deposits expanded by 712 as some lines of credit were drawn, and private and public enterpriseportfolios were shifted toward intcrest-bearingtime deposits. In 1983, currency decreased 3.9%, while demand deposits increasedby 18.5%. As a result,MI increasedby only 9.62, comparedwith much higher increasesin previousyears.

2.42 Because th' country'sbalance of payments is unusuallydependent on external flows of aid and remittanceswhose fluctuationsare beyor.dthe control of monetary authorities, a high level of reserves is necessarv to cushion the domestic economy against unpredictablechanges in these external flows. Because the monetarypolicy goals primarilyemphasize a strong reserve position,whenever the actual stock of reserves falls short of the desiru1 level,whlich is linked to the level of imports,there is a slowdownIn credit expansion. Fluctuationsin credit expansion are essentiallvunavoidable, given some degree of indivisibilityin the size of project to be financed. The effect of creditpolicy is that whenevercredit contracts,some sectorso' the economy can be crowded out, as seems to have been the case in 198()whet. credit to public enterprisesincreased fourfold, and credit to the private sectordeclined 4!. The actual consequencesof crowdingout largelydepend o0a how the CentralBank allocatesavailable credit among the competingsectors.

3. Distributionof Creditby Sector

2.43 Some detailed informationwas available regarding distributionof credit to the private sector and the non-financialpublic enterprisesbetween 1979 and 1982 (TableA.19). The data should be lookedat ca-_t1ouslyin that, (I) there is a large residualvalue and, (ii) credit to the commerce sector (retailand wholesale),which encompassesthe main share of total credit,was included within the credit to consumptionand imports in 1980 and 1981. Credit to agricultureand fisheriesand to industryaccounts collectively for a very small share of total credit. In 1982. agricultureand fisheries received only 5.7Z of total credit, and industry received 3.32. After a tenfold increase In 1981, expansionof credit for constructionslowed down significantlvin i982. increasing only 18%. Credit to public enterprises - 32 -

represented in 1982 more than 57.7% of total credit in 1982, compared with only 20% in 1979. The large increase in this category occurred in 1980, when credit to public enterprises increased fourfold. BCV credit totalled 2,939 million CV esc in 1983, which was distributed to government (24%), public enterprises (46%) and private enterprises (30%). 54% of total credit was in long-term loans (Table A.6). More definite conclusions about the distribution of credit by sector would require a more reliable data base.

4. Interest Rates

2.44 The level of interest rates has remained unchanged since independence in 1975, although they are expected to be changed soon by the BCV. For time deposits, the interest rate is 6.5% annually; the basic rate for short-term loans is also 6.5%. Medium-term loans bear interest of between 7 and 9%, whi:e the rate for long-term loans varies between 8 and 9.5%. Although the information on domestic price trends is very incomplete, the available data suggest that for the period 1975-1981 the annual growth rate of consumer prices ranged between 7 and 15% (Chapter II.F). Consumer prices rose 18% in 1982 and 20% in 1983. As a consequence, real interest rates have been negative, with possible adverse effects on domestic savings and worker remittances. Even with negative real interest rates, the expansion of demand and time deposits should not be surprising. The latter constitute the only available interest-bearing asset, and have the advantage of liquidity over other forms of savings like land or housing.

5. Further Developments

2.45 The BCV is considering establishing a specialized branch within the Bank that would have the functions of a development bank (Chapter II.E).. The BCV has also begun offering special types of accounts to Cape Verdeans residing abroad with the intent of encouraging further remittances that may be used for selected domestic investment purposes, e.g., housing. This form of remittance inducement is similar to one currently in use, with some success, in Portugal. Three main types of accounts were evaluated. The first type is a simple demand or time deposit account in domestic currency. Deposits are made through transfers from abroad, and the interest paid on these deposits, yet to be determined, will be higher than that paid on the accounts held by domestic residents. The second type is a time deposit account, denominated in specified foreign currcncies, which can receive remittances from abroad, and from which funds are freely transferable overseas. A minimum deposit of approximately US$100 is needed. The interest rate, yet to be determined, would be adjusted periodically by the BCV. The third type is a savings accounts in domestic currency (Conta Poupanca CredCLto)similar to the first type of account, but which allows the holder to obtain credit under favorable conditions. Based on the balance of the account, the BCV will grant credit, mainly for housing, up to 15 years, and at a lower rate than that currently charged for similar domestic operations. The credit cannot exceed twice the balance of the account. As a further incentive iTa housing investment, Cape Verde emigrants would be exempt from the property tax (ContribuicAo Predial) and the transfer tax on the property deed (Sisa). Finally, no taxes are charged on interest income from time deposits. - 33 -

6. Issues and Recommendations

2.46 Currently, the BCV functions as a central bank, commercial bank and development bank. The accumulation of these functions in one bank puts pressure on both the staff and resources of the bank. With the continuation of the investment program, the demand for long-term financing will increase; and it will be more difficult for the BCV to satisfy that demand, due to the Bank's limited resources, both long-term (savings) and stable (capital and government deposits). In many countries, the role of financing long-term projects belongs to special financial institutions, generally development banks. Structured with balanced assets and liabilities, these banks have resources at their disposal that are adapted to their goals. In the case of Cape Verde, the creation of a separate development bank in the near future does not seem desirable, given the BCV's staff constraints. Further such a move could lead to duplication of banking branches, unnecessary costs, and fragmentation of savings.

2.47 A long-term financing division inside the central bank, established possibly with external technical assistance, would avoid some of the above difficulties, and could provide a more stable flow of long-term credit. To optimize the functioning of this unit, the following issues should first be clarified: (i) the volume and nature of the resources to be made available to the unit (i.e., government or private, national or international) and (i.) the unit's responsibilities and relationship with other BCV divisions, including its legal status, and the extent of its independence in accounting and loan operations.

2.48 As a second issue, it is important to clarify the structure of Cape Verde's monetary system. Historically linked to the Post Office, the Caixa Econ6mica Postal is under the supervisory control of the Ministry of Transport and Communication. Given its relative importance in granting credit to the private sector, the role of the Caixa Postal should be expanded; and perhaps it should be transformed into a commercial bank. The existing network of branches could then be used to collect local savings and provide credit for housing and personal consumption, reducing the burden on the BCV. Prior to any expansion of its role, however, this institution should be brought under the supervision of the BCV.

2.49 The third issue is the rapid expansion of credit to non-financial public enterprises. Any expansion of such credit should be monitored carefully to ensure that: (i) there is no "crowding out" effect on the private sector, given the limited resources of the BCV, and (ii) domestic inflationary pressures and larger current account deficits are avoided. The promotion of private sector initiative is primarily dependent on stable sources of credit in both the long and short run; and the creation of a development division within the BCV that is specifically directed towards long-term credit would contribute to such stability. A part of the short-term credit needs of the private sector could be obtained from an expanded role of the Caixa Econ6mica Postal.

2.50 The fourth issue relates to the manner in which the new deposit accounts for Cape Verdeans residing abroad will be integrated into the overall - 34 -

conduct of monetary policy. Although the elasticity of remittanceswith respectto the interestrate is unknown,these accountsare potentiallya good instrumentto increasethe flow and stabilityof remittances.A more flexible interest rate policy, the present exchange rate policy, and the creationof additionalfinancial assets are importanttools for an overallsavings policy. However, the creation of the new accounts needs to be combinedwith an increase in domestic interest rates to reduce the disincentiveeffects on domestic savings that could result from a large rate differentialbetween residentvs. non-residentdeposits.

2.51 In sum, with respect to the non-residentaccounts, the followingneed furtherstudy: (i) any exchangerate risk for the BCV that would be associated with these accounts, particularlyaccounts in foreign currency; (ii) methods for developmentof new domestic financial assets to attract new remittancesor to stimulatetheir purchasewith funds from these accounts;and (iii) the relationshipthat would exist between the rates paid on these depositsand internationaland domesticinterest rates.

2.52 Finally, attention must be paid to the interest rate levels themselves, independentof their relationshipwith the non-residentaccounts. It is recommendedthat domesticnominal interest rates be increased,so that real rates move toward positive levels, and that a more flexible interest rate policybe adopted. An initialrise in nominal rates, say 2Z, might attenuate any possible disincentiveeffects on domesticsavings. Furtheractions could be undertakenafter the resultsof this move are analyzed.

2.53 Because money in general, and interest-bearingtime deposits in particular,are the only financial assets available,it will be primarily through an increasein the time deposit rate that, in the short run, savings and demand for money will be influenced. A rise in the rate offered on time deposits does not necessarilyinfluence the demand for money insofar as the increase in time deposits comes from currency or demand deposits, in which case, only the compositionof the demand for money will change. But even in the case that savings remain unchanged, if time deposits increase at the expense of demand depositsand currency,this change in the structureof the liabilitiesof the monetary system toward a more stable compositionwill contributeto a more stablecredit policy.

2.54 Only when there is an increase in savings derived from disposable income is the demand for money affected. How much domestic savings would increase,however, is an empiricalquestion not easily answeredat the moment, due to the country'slack of prior experiencewith movementsin the interest rate. Given the low domesticincome level,it is possiblethat the effectsof a rise in interest rates on savings derived from domestic income will be small,and that only througheffects on residentsreceiving remittances can an increasein interestrates significantlyraise the level of nationalsavings.

2.55 The consequencesof any rise in the loan interest rate should be evaluated with respect to the effects that it might have on the domestic economy, particularlythe private sector. Changes in the rate should take into account the low marginalproductivity of capitaland the possibilityof psychologicaleffects on small entrepreneursand artisans,who constitutean - 35 -

importantcomponent of the local economy. Becauseof limitedprior experience with monetary and banking institutions,these groups might be deterred from seeking financial assistance. On the other hand, if credit rationing is significant,a rise in the interest rate, by increasing Lbestic savings, would allow a largervolume of credit.

E. EXTERNALSECTOR

1. Introduction

2.56 The external dependenceof the Cape Vardean economy is shown by the chronicdeficit in the resourceaccount. This deficit is more than offset by emigrants'remittances, official capital, and grants from abroad (Table2.7). As a result, the overall balance of payments has registered surpluses,and there is a reasonable level of foreign exchange reserves. Thus far, the burden of the external debt has been nominal, because of the highly concessionary terms at which the debt has been contracted.

Table2.7 CAPEMMDE: Balance of Payments5ummry, 1975-83

Item 1975 1976 1977 1978 1979 1980 1981 1982 1983

RPsourceBalance -626.3-1,106.7 -1,586.5 -1,942.2 -2,408.5 -2,739.5 -3,865.9 -3,998.1 -4,44.6

(Exportsof G & NES)(234.0)(173.0) (77.0) (277.6)(464.5) (773.2) (1,155.0) (1,875.9) (2,539.6) (Inportsof G &NES)(860.3) (1,279.7) (1,663.5) (2,219.8 (2,873.0) (3,512.7) (5,020.9) (5,874.0) (6,954.2) FactorSer7ices, Net -2.3 7.3 33.7 22.6 48.4 136.2 25.5 -205.1 -344.3 PrivateTransfers 176.7 506.5 797.8 866.5 955.2 1,596.4 1,759.61,866.5 2,367.2

CurrentAccoxnt -451.9 -592.9 -755.1-1,053.1 1,404.9 1,006.9 2,080.8-2,396.7 -2,391.7

Official Transfers 354.6 443.8 951.6 744.9 1,369.4 1,182.6 1,029.9 1,596.1 1,375.2 OfficialCapital 130.2 354.2 143.6 55.3 23.6 93.6 907.9 1,053.4 1,011.7 OtherCapital 1/ 87.5 311.1 64.1 165.5 231.9 -39.2 170.7 418.1 289.6

iange in Foreign Assets -120.4 -526.2 -404.2 87.4 -220.0 -230.1 -27.7 -670.9 -294.8

1/ Inludes errors and amcdss -. Soure: Statistical AppendixTable A. 19.

2.57 The trade accountshows a Large deficit that results from a level of imports that, in most years, has been more than ten times the level of exports. In 1983, for instance,exports and imports amounted to CV esc 139 million (US$ 1.9 million) and CV esc 6,079.4 million (US$ 84.8 million), respectively. Export earnings increasedrapidly from 1975 through 1980 but - 36 -

have since declinedas a consequenceof a decreasein export volumes, par- ticularlyof fish products.

2.58 Imports, in contrast,have increased continuouslyand largely surpassed export growth; between 1975 and 1982, exports increased twofold, and imports increasedsevenfold. Exportsare increasinglyconcentrated in a few products:bananas, fish, shellfish,and salt provided virtuallyall export earnings in 1981 (Table 2.8). In contrast, imports cover a wide range of goods. (TableA.24). Food and beveragesconstitute the bulk of imports,with imports required for 90% of the country's food needs. About 40% of food imports are in the form of food aid. This correspondsto 20% of total imports, and results in considerableforeign exchange savings. Recently, machineryand equipmenthave assumeda relativelygreater importance, because of the constructionof the new shipyardat Mindelo. Due to volume and price increases,the oil bill has increasedfrom 3% of total importsin 1970 to 11% in 1981. However,a large share of oil imports (85%) is reexported. On the other hand, intermediategoods importsstill are of little importancebecause of the small size of the domesticmanufacturing sector (less than 4% of GDP).

Table 2.8 CAPE VERDE: Compositionof Exportsand Imports (as percentageof total)

Item 1975 1978 1981

Exports 1/ 100.0 100.0 100.0

Banana - 14.5 59.5 Fish Products 79.5 50.7 27.7 Salt 8.8 27.2 12.3 Other 11.7 7.6 0.5

Imports 100.0 100.0 100.0

Food & Beverages 55.5 51.4 23.9 PetroleumProducts 7.0 5.0 10.9 Textiles& Shoes 9.5 5.5 5.6 TransportMaterial 2.2 9.8 6.7 Other 25.8 28.3 52.9

1/ Excludesre-exports Source: NationalDirectorates of Statistics

2.59 Cape Verde's terms of trade have moved to its advantage,with a gain of about 250% in the 1975-1982period (Table A.25). The benefit of this improvementremains small, however, due to the low value of exports. Unit prices of bananas, canned fish, fresh fish, and salt more than doubled in the 1978-1981period, while shellfishprices increased sixfold during the same period. Exportvolumes, in contrast,showed a mixed picture in the 1978-1981 period: bananasnearly tripledto 1960 MT, fish meal increasedtwelve-fold to - 37 -

204 MT, but the remaining exports declined substantially (Table A.22). This was especially the case for the two largest exports in 1980, fresh fish and calned fish, which declined in volume between 1980 and 1981 from 731 MT to 104 MT, and from 33 MT to 9 MT, respectively. As a result, receipts from the export of fish products declined from CV esc 82 million in 1980 to CV esc 25.1 million in 1981.

2.60 Portugal is Cape Verde's major trading partner, accounting for about 2-5. of total exports and imports in 1982. Nonetheless, there has been a decline in trade with Portugal since independence as Cape Verde has tried to diversify its import markets. On the export side, the other major trading partners are Angola, Zaire (salt exports) and Guinea-Bissau, and more recently, Algeria and Spain. Tuna is exported to the U.S. and Europe. On the import side, the major trading partners are Portugal, the Netherlands, the United States, the United Kingdom, and more recently, France, West Germany, and Spain. (Table A.23).

2.61 The external resource gap of Cape Verde has surpassed GDP in most years. The large trade deficit has beeu offset in part by services rendered to air carriers at Sal and to ships at Mindelo (Table A.20); earnings from these services were about five times those from the export of goods in 1982, and have approximately doubled each year since 1978. In 1980 private transfers increased by about 70% over the previous year as many Cape Verdeans living abroad visited the country to celebrate the country's independence. Private transfers, largely remittances from emigrants, were about nine times the earnings from exports of goods in 1982. Investment income has been derived mainly from the interest on the country's foreign reserves abroad; but in 1982, it turned negative as Shell transferred abroad CV esc 273 million of accumulated earnings. Imports for the shipyard construction in Mindelo resulted in a significant drain on foreign exchange in 1981 as well.

2.62 Official transfers and official capital have more than offset the current account deficit, and a reasonable level of resources has been accumulated (the level of gross reserves has been equivalent to about six months of imports). In 1983, official grants were CV esc 1,375 million (US$19.2 million), while official capital was CV esc 1,012 million (US$14.1 million).

2.63 After a small increase between 1978 and 1980, external debt expanded rapidly in 1981, 1982 and 1983, but the debt still does not pose a serious economic burden. Disbursed debt amounted to US$14.8 million at the end of 1978 and US$20.2 million by the end of 1980 (Table A.30). With the financing of the airport and shipyard projects, however, disbursed debt increased threefold to US$59.3 million in 1982, and further to US$67.2 million by the end of 1983, or 83% of GDP. By the end of 1983, external public debt and publicly guaranteed debt amounted to US$133 million (disbursed and undisbursed). The debt service is quite low: US$2.9 million in 1983. The ratio of debt service to exports was approximately 8% in 1983, which is also low. As the grace periods of some of the loans expire, the debt service is expected to increase in US$5.9 million by the end of 1984 and to US$9.3 million by the end cf the decade, still a fairly manageable amount. For the total debt outstand- ing at the end of 1983, the major creditors include the African Development Bank/fund (26%), BADEA (17%), China (11), Portugal (10%), and the OPEC - 38 -

Special Fund (6%). Some of these loans, specifically those from China, will probably be converted into grants. Part of the debt to Portugal is related to .ndependencesettlements for the creation of a pension fund.

2. Exchange Rate

2.64 After independence, the Cape Verde escudo was pegged to the Portuguese currency. In March, 1977, the Cape Verdean authorities abandoned the Portu- guese escudo peg in favor of a basket of eleven currencies of the country's major trading partners. This move was prompted by large devaluations of the Portuguese currency, which the Cape Verdean authorities considered a major cav.seof the increases in domestic consumer prices and project costs. In January, i980, the size of the basket was reduced from eleven to nine currencies, with each country's weight determined by its relative share in Cape Verdean trade. These changes were aimed at maintaining a more stable exchange rate for the CV escudo.

2.65 The domestic currency does not appear to be overvalued, as confirmed by the absence of black markets for foreign currencies. Since 1975, the CV escudo has depreciated vs. the British pound, tre U.S. dollar and the Nether- lands guilder. Against the Portuguese escudo, however, the CV escudo appre- ciated by 25% from 1975 to 1982, and by aiiadditional 12% in 1983. Against the U.S. dollar, the CV escudo depreciated at au average annual rate of 12.7% between 1975 and 1982, and depreciated further by 23% in 1983.

2.06 The effective exchange rate of the CV escudo (defined as a weighted average of the bilateral exchange rates with respect to the major trading partners), depreciated 20% between 1975 and 1982, or an average annual rate of 2.7%. For the 1980-1982 period, the average annual rate of depreciation of the CV escudo was 4.0%. Taking into consideration the inflarion differential, the real exchange rate has remained constant for the lasc three years. The move from a single currency peg to a basket peg was successful in stabilizing the value of the real exchange rate in a period of instability.

2.67 The role of exchange rate policy in Cape Verde for export promotion purposes is limited, at least in the short run. Given the limited range of goods exports, which presumably will remain unchanged in the short run, and their low demand price elasticity, it is doubtful that exchange rate policy can have an important role in this area. Not much is known about the price elasticity,of services; however, it seems realistic to assume that elements other than price, such as the availability and reliability of services, and political stability, will significantly influence the demand for services. By keeping a rather stable real exchange rate, the authorities can avoid sharp fluctuations in the internal terms of trade, guarantee some competitiveness in the export sector, and keep in check any excess demand for imports. The other important role of exchange rate policy is its effects on the flow of remittances. By avoiding sharp changes ip the nominal exchange rate and by keeping a stable real exchange rate, the Cape Verdean authorities will discourage speculation over any impending devaluation, and will help to maintain a steady flow of remittances. - 39 -

3. Issuesand Recommendations

2.68 The burden of the externaLdebt is increasing.The authoritiesshould continue to exercise prudence in relation to the rate of indebtedness, especiallyin light of the ambitiousplanned investmentprogram, which will have to be funded almost entirely from external sources. (See Chapter X, Prospects).

2.69 The government'sdecision to change specific tariffs to ad valorem tariffsis correct. The level of some import duties on non-essentialconsumer goods might also be increased. For instance,the duty on beveragesis only CV esc 4.5 per liter;and on cigars,only CV esc 75.0 per kilogram. Furthermore, tariff exemptionscurrently given to several public enterprisese.g., SOCAL (Shoe Factory), MORABEZA (Clothing Factory), FAP (AgriculturalProducts), shouldbe reviewed. The governmentintends to eliminateexport taxes which iave a small and decliningfiscal significance(CV esc 1.5 million in 1983). Efforts to increaseand diversifyexports on a bilateralbasis, as well as to exploit the African market through the CEDEAO (West African Common Market), shouldalso be supported.

2.70 The foreignexchange risk from externalloans to public enterprisesis borne by the Central Bank. No estimatesof the costs incurredby the Central Bank for this account were made available,but they are said to be substantial. This cost should be estimatedwith the ultimateobjective of having the borrowersbear the exchangerisk.

2.71 Statisticalcoverage of the externalsector, with the exceptionof the externaldebt, is weak. Trade statisticsare publishedwith a more than two- year delay. Closer coordinationbetween the StatisticalOffice and Customs is needed. External debt statistics are quite well organized, but further technicalassistance is necessaryto implementdebt accountingand monitoring systems.

F. EMPLOYMENT,WAGES AND PRICES

1. Introduction

2.72 Unemploymentand underemploymentare a persistentproblem; and prospects for an early solutionare noL particularlygood, in vie-wof the poor resourcebase and the high projectedrate of populationgrowth. Accordingto the 1980 census,the economicallyactive population,which constitutes54% of the populationover 15 years of age, had an unemploymentrate of approximately 29% in 1980. In rural areas, unemploymencwas 30% of the economicallyactive population;in urban areas, 27%. Only 31% of the economicallyactive population had permanentemployment; the remaining40% had only temporaryemployment during certainperiods of the year. Between40 and 45% of the potentiallabor force (the population of working age, including some economicallyinactive persons, who would seek paid employment if it were available, plus those involvedin non-wage subsistenceactivities) is underemployed:60% in rural areas, and almost 20% in urban areas. - 40 -

2.73 Withoutemigration of large numbersof Cape Verdeans,the unemployment situationwould be worse still. As analyzed in detail in Volume II, emigration has largely contributedto reducing the country'spopulation pressures. The low populatLongrowth for the 1970-1980period, less than 12 per year, is the result of heavy emigration. During this period, the net demographicloss associatedwith migration was approximately42,000 persons, or 15% of the average total populationduring the intercensalperiod.

2.74 The largest share of the population derives its employment from primary sector activities. Based on provisionalresults of the 1980 census, 47.4% of the economicallyactive population is employed in agriculture, fisheries or mining activities. Manufacturing,construction, and other secondaryactivities are estimatedto employ 10.5% of the economicallvactive population,while services employ the remaining42.1%, many of whom are in informaltypes of activities. As in other developingcountries, the distribution of skillsamong the permanentlyemployed indicates a scarcityof trained personnel. Among the permanentlyemployed, 40% are consideredunskilled, and only 4% are classifiedas cadres or technicians.

2.75 The limited potential of agriculture and the persistent drought conditionsduring the last two decades,have encouragedthe rural population to emigrate to urban centers. Although total populationin Cape Verde increased by an average of only 0.9% annually from 1970 to 1980, the average annual populationincrease of S. Vicente (mainlyMindelo) was 3.0%, and that of the city of Praia, the capital,was 5.2%. On the other hand, the population of the Island of Santiago, where half of the population resides and the capital is located,increased by only 1.3% annually. During the last decade, four islands(Boa Vista, Brava, Santo Antio, and Sao Nicolau)lost population, because of both internaland internationalmigration. The migrationpressures are partiallyattenuated through the work programs financedby the National DevelopmentFund. According to the Plan, these programs employ 20,000-25,000 workers,mostly in rural areas (84%).

2. Wages

2.76 Althoughwages in the privatesector .. ' 4 n n-blic enterprisesare not set directly by the government,in practice gvvernmentwage policy exerts considerableinfluence over the level of domesticwages because of the relative importanceof the governmentsector. Since 1976, there have been three increasesin public sectorwages (TableA.26). The first increaseoccurred in July, 1979,as a cost of livingadjustment that was incorporatedinto the wage scale effective January, 1980. The second adjustment,a 15% increase in wages, was made in July, 1981. The most recent increase took place in the fall of 1983. The average public sector wage increasedfrom 6,470 CV ese per month in 1979, to 7,031 CV esc in 1981, to 7,734CV esc in 1982,and to 9,386 CV esc in 1983. The 1982 increase resulted from the upgrading of public workers to higher grades of the wage scale. The 1983 increase resultedfrom upgrading,increases for each level, and creationof three new levels at the top of tkiescale. Because consumerprices increasedby more than 50% between 1979 and 1982, real wages in the public sector actually declined during this period. The limited informationavailable for private sector wages is - 41 -

presented in Table A.28. Further collection of these wage data was discontinuedby the StatisticalDirectorate in 1982.

2.77 Consideringthe high levelsof unemploymentand underemploymentin the country, one would expect the shadow wage rate to be lover than the market wage rate for unskilledworkers. A rough estimatefrom the limitedavailable data is that the marginal productivityof the rural worker in 1981 was equivalentto between one-fifthand one-fourththe wage of a worker in the rural developmentprograms. The latter was considereda satisfactoryproxy for the wage of an unskilledworker. The details of these computationsare presentedin AppendixII.

3. Prices

2.78 When analyzingCape Verde price trends,we are faced with a problemof measurement. Although the StatisticalDirectorate collects quarterly data on the prices of some food products,Cape Verde does not as yet have an official price index. There are, however,two rough estimates:one, that is based on a system of weights worked out by the IMF staff in collaborationwith local authorities;the other, an index preparedby the Bank of Cape Verde. Both are for prices in the city of Praia. As shown in Table A.27, the inflationrate implicit in the BCV index is generallyhigher than that associatedwith the IMF index. In some years, such as 1976 and 1981, there are large discrepan- cies between the implicit inflation rates. Both indices indicate a slight increase in domestic inflation for the latter years of the period under consideration. In the BCV index, there is an increasein the inflationrate from an average of 15% between 1978 and 1980 to almost 21% for the last two years. This trend, however, does not emerge clearly in the IMF index. Because we di not know the weighting system underlying the BCV index, dif- ferencesbetwL-n the indicescan be explainedonly partially. One possibility is that the indicesaccord differentweights to food and beverages. That is food and beveragesaccount for nearly 80% of total expendituresin the Fund's weighting system, but likely were accordeda lower weight in the BCV index. In the IMF index, two basic staples,corn (.164)and rice (.148),account for nearly one-thirdof total expenditures. A comparative'ylow inflationrate index could result from the stabilizingprice effectsof the marketingof the food aid. The Directorateof Statisticsis reportedlypreparing an official price index. Preliminaryresults of a consumersurvey indicatethat food and beveragesvary between 64 and 67% of total expendituresfor coasumption. Of the remainingexpenditures, the most importantis housing,with an 18% share of total consumerexpenditures. With a reducedweight for food expenditures as compared to the existing index, the new index could indicate a higher inflation rate. In general, domestic price trends have been largely influencedby price trends in Portugal,the country'smain tradingpartner.

2.79 In an economy as open as Cape Verde's, price, marketing and import policy are all related. Importpolicy and licensingare under the controlof the Secretariatof Commerce and Tourism, which sets an overall exchange budget, administeredby the BCV. The exchange budget is essentiallythe amount of foreign currency that is available to be used for imports. The amount initiallybudgeted is dividedbetween public and private enterprises, vith the allocationamong firms based on past trendo. Usually, the exchange - 42 -

budget is more detailed for public enterprises. The private sector traders receivea yearly allocation,usually divided into quarterlyshares. They have reasonablediscretion to import within general categories.Any extra import request is dealt with on a case-by-casebasis, with a certain degree of preferentialtreatment for essential imports. In general, the system seems sufficientlyflexible; and as the foreignexchange constraint does not appear to be very restrictive,no complaintsagainst the system were voiced by the private sector.

2.80 Importsof some productsconsidered essential, such as cereals,edible oils, pharmaceuticalproducts and constructionmaterials, are controlledby public enterprises,the most importantof which is EMPA (kmpresaPGblica de Abastecimento).EMPA is, in practice,the sole importerof essentialstaple foods, i.e, maize, rice, beans, sugar and edible oils (a large share of which are received through food aid), because the prices are administratively determinedwith a small profitmargin over importcosts. For the same reason, EMPA controls the importationof constructionmaterials. These productsare sold either through EMPA's distributionchain or through rrivate commercial networks. EMPA's revenues from domestic sale of foreign food aid are allocated to the National DevelopmentFund to finance labor intensiveprojects. Governmentpolicy restrictsthe distributionof free food aid to special cases of the truly needy. A part of food aid, generally 10-15% (though highly variable and dependent on agriculturalproduction), is distributedfree of charge to needy individuals:the aged, malnourishedchildren, pregnant women, and familieswith a female head of household. These groups are supportedby the Ministry of Health and Social Affairs. The monitoring of free food distributionis conductedby the Ministry, in conjunctionwith EMPA and the Secretariatof Cooperationand Planning. The importing of pharmaceutical products is the monopolyof EMPROFAC. The final price of goods importedby public enterprisesis the sum of the import cost and a fixed margin for marketing,usually 10-15%.

2.81 The final price of products imported and sold through the private sector is usually the import cost plus a 10-15%margin. There are no price ceilings for locally producedgoods. Farmers sell their surplus products to intermediaries,usually women (rabidantes),who transport and sell them in local markets, the price being determinedby market conditions. There are also a few cooperativesthat sell produttsobtained principally from EMPA.

2.82 Storagecapability in Cape Verde is very limited;therefore, there is a marked seasonalityin the availabilityof some products,which is reflected in their market prices. Seasonalityeffects are somewhat attenuatedthrough the distributionof importedproducts by EMPA. The scale of the distribution networkvaries from islandto island. On S. Vicente,where most productscome from S. Antao by sea, the distributions.etwork operates on a large scale to cover transportationcosts. On the other hand, in Santiago, the rabidante networkoperates on a very small scale. This type of distributionnetwork is an adaptationto the droughtconditions. The developmentof a larger agricultural surpluswould requirea better storageand distributioncapacity.

2.83 The Secretariatof Commerceand Tourismis responsiblefor settingthe wholesale and retail prices of imported commoditiesthat are subject to - 43 -

officialpricing. Changes in the price of corn also have to be clearedwith the Council of Ministers. Although EMPA operates as a business enterprise, the governmentmakes its pricing decisionson the basis of social considera- tions. Officially set prices are comparable throughout the archipelago; therefore,the residentsof the main islands somewhat subsidizethe prices charged on the outlying islands. Prices are adjustedperiodically to reflect internationalprice changes.

2.84 Pricing policy involvesa system of subsidyand surcharge.Subsidies for corn have been balancedby overchargingfor rice and sugar. The marketing of corn, which is the main staple,is a delicateand complexoperation involv- ing severaltypes of corn sold at differentprices. The bulk of the supply is provided by the United States through food aid (approximatelyone-third of domesticconsumption). The Cape Verdeanprice of U.S. corn has been adjusted co reflect world price trends. In July, 1981, the price of U.S. corn was increasedby 21x. In 1982, the price was increasedagain, as the government announcedits intentionof removingthe subsidy,which was done by the end of 1982. Cape Verdean consumersshow a strong preferencefor either domesticor Argentiniancorn over U.S. corn; and therefore,the price of domesticcorn is above the price of importedcorn. An increasein the price of corn received through food aid would not have a significanteffect on domesticproduction, which is effectivelylimited by the availabilityof water.

4. Issuesand Recommendations

2.85 A long-run population policy is needed to address the persistent underemploymentand unemployment,one of the country's major problems. As illustratedin the population projectionspresented in Volume II of this report,population pressures are not expected to subside in the near future. Consideringthe limitedpossibilities for the creationof permanentjobs, the outlookfor the labor market is not an optimisticone. Two exogenousfactors beyond the government'scontrol could influencethe unemploymentsituation. A return of pre-1968 rainfall patternswould allow the agriculturalsector to absorb a large volume of labor. A secondinfluential factor is the patternof emigration. Both of these factors,however are surroundedby uncertainty.As indicatedin the Plan, the Governmentis fully aware of the problem,and it is studying different alternatives. Volume II presents a detailed review of possiblesolutions.

2.86 Another issue is the need for a regionalpolicy. As the census data indicate,during the last decadepopulation trends varied remarkablyamong the several islands, explainedby the differenteffects of the drought on each island and the alternativeemployment possibilities available. The trend has buen internal migration toward the two main urban centers: Praia, where governmentservices are located, and Mindelo, where industrialand service employmentopportunities potentiallv exist. The use of food aid to finance temporary jobs in rural areas has been an imaginativeshort-run solution. Although the location of several main projects either completed or planned (e.g., shipyard, airport, cement plant) is not subject to choice, other employmentcreation opportunities could be exploredthrough regionaldevelop- ment of artisanal fisheries,small scale industriesand tourism.The second - 44 -

developmentplan could become an important instrumentfor regionaldevelop- ment.

2.87 Given the country'sexLernal dependence on grants and remittancesand the uncertaintyassociated with these flows, the present foreign exchange allocationsystem seems appropriate. The foreignexchange constraint does not seem to be too binding,largely due to food aid. The purpose of this system thus appears to be to control importsof certaingoods, such as luxury goods, or to constitute,in the event of foreign exchangc shortages,a safeguard mechanismthat would avoid recourseto short-termbalance of paymentsfinanc- ing. Alternatively,the control of imports of non-essentialgoods could be achievedthrough larger import dutieson luxurygoods.

2.88 With respectto prices and wages, there is an urgentneed to developa consumerprice index,and to broaden the scope of availablewage data. Since the statistic&ldirectorate discontinued the collectionof privatesector wage data, apparentlybecause of the lack of data reliability,only governmentwage scales have been available. The comprehensivenessof the existing consumer survey is unknown. Collectionof price data needs to be broadenedto include more types of goods and services,and the lag between collectionand publica- tion shortened. The directorateof statistics,faced with shortagesof equip- ment and personnel,urgently needs technicalassistance in this area. - 45 -

THE FIRST NATTONAL DEVELOPMENT PLAN

A. INTRODUCTION

3.01 The economy of Cape Verde is dominated by a number of adverse geo- economic factors. These are: (1) a limited domestic market, in terms of both size and purchasing power; (ii) a wide geographic dispersion of the islands whiclh leads to increased transportation costs, communication problems, and redticedpossibilities for economics of scale; (iii) a weak agricultural base, hampered bv exceptionally adverse climate, terrain and soil conditions; (iv) a limitud supply of natural resources; and (v) an extreme dependence on external aid1and emigrant remittances.

3.02 Positive features for economic development include the country's geographic position, maritime resources non-mineral resources, and human potentiail. Taken together, these factors constitute the background against which the First National Development Plan of Cape Verde should be viewed.

B. OVERVIEW'

3.0)3 The First National Development Plan. 1982-1985, is intended to provide the tnfrastructure. both physical and human. for the future development of the country. Accordingly, a large share of the Plan's investment program is to be allocated to the rural, transport and communications sectors. The development of human resources, considered one of the principal assets of Cape Verde, receives special attention in the Plan. The pressing social issues of unemplovment, health and education are addressed by assigning considerable resourccs to the latter two sectors and, by paying special attention to the emoloyment effects of projects, a detailed analysis of which is presented in Volume II of this report. The Plan identifies the industrial and services sector as the main sources of future growth. Agriculture is not seen all a source of significant future growth, because of the climatic uncertainty and resource constraints that limit agricultural development.

3.04 The Plan was published at the end of 1982. seven years after independence. It is based on a realistic assessmcnt of the Cape Verdean economy, and having been accorded political legitimacy through its endorsement by the National Assembly, it constitutes the basic framework for the country's deviclopment. Progress in the implementation of the Plan was discussed at length in the Second Congress of the PAICV in June of 1983. The delay in publishing the first Plan is an indicator of the government's prudence, as well as the institutional and technical difficulties encountered in formu- lating a comprehensive development plan.

3.05 The Plan presented a global economic framework upon which simplified forecasts of the main economic aggregates were based. Two main difficulties hampered these efforts: (1) an inadequate statistical base, resulting from the country's lack of a svstem of national accounts, and (ii) the uncertainties inherent in planning, significantly augmented in an economy that is open and dependent on external resources. The achievement of investment targets and - 46 -

output goals will largely depend on the influence of future international political and economic developments on the flow of aid, transfers and loans.

3.06 According to the Plan's projections (Table 3.1), GDP will increase at an average annual rate of 12X between 1980 and 1985 (1980 was the date of the latest available estimate of GDP). To attain this target, the Plan projects a large investment effort. For the 1982-1985 per'od, average annual investment in real terms is forecast to increase almost threefold over the period 1978- 1981 (Table A.3). Public investment represents the main instrument for this growth, and is projected to grow at an annual rate of 23.3% in real terms. Consequently, gross investment is projected to increase from 70% to 94.6% of GDP between 1980 and 1985 (Table 3.2). Actual outlays for gross domestic investment were 84% of GDP in 1981 and 81% in 1982.

Table 3.1 CAPE VERDE: Plan Projections by Sector (Millions of 1982 CV Escudos)

Sector 1980 % of GDP 1985 % of GDP 1980-85 Average Rate of Growth

Agriculture & Fisheries 940 22.3 1180 15.9 4.7

Industry 150 3.6 810 11.0 40.1

Construction 740 17.6 1680 22.7 17.8

Commerce & Transportation 1700 40.5 2600 35.1 8.9

Other Services 670 16.0 1130 15.3 11.0

GDP 420U 100.0 7400 100.0 12.0

Source: First National Development Plan. - 47 -

Table 3.2 CAPE VERDE: Plan Expenditure Projections (Millions of 1982 CV Escudos)

Sector 1980 % of GDP 1985 % of GDP 1980-85 Average Rate of Growth

Consumption 4690 111.6 6500 87.8 6.7 Private 3630 86.4 5100 68.9 7.0 Public 1060 25.2 1400 18.' 5.7

Investment 2940 70.0 7000 94.6 18.9 Public 1980 47.1 5650 76.4 23.3 Private 960 22.9 1350 18.2 7.0

Resource Balance -3430 -81.6 -6100 -82.4 12.2 Exports 970 23.1 2100 28.4 16.7 Imports -4400 -104.7 -8200 -110.8 13.2

GDP 4200 100.0 7400 100.0 12.0

Investment income 170 4.0 -580 -7.8 --

Remittances 2000 47.6 2330 31.5 3.1

GNP 6370 151.6 9150 123.7 7.5

Source: First National Development Plan.

3.07 For the 1982-1985 period, an increase in investment was planned for all sectors, particularly in industry and education (which show almost an eightfold and fivefold increase, respectively, relative to 1978-1981 levels). Three sectors - agriculture, industry, and transportation - each account for approximately 20% of total investment during the Plan period (Table .-31). The sectoral distribution of projected investment is expected to significantly affect the contribution of the different sectors to GDP. The industrial. sector, with an estimated growth rate of 40% per year, will increase from 42 of GDP in 1980 to 11% in 1985. The construction and public works sector, with an estimated 18% growth rate, will also increase from 17.8% of GDP in 1980 to 22.2% in 1985. The agriculture and commerce sectors are projected to grow substantially but to decline in relative terms from 22% to 16%, and from 41% to 35X of GDP, respectively, between 1980 and 1985, due to the faster assumed growth in the industrial and construction sectors (Table 3.1). The relative size of the public services sector is estimated to remain stable at approximately 15% of GDP. The remainder of this chapter evaluates the Plan's methodology, financing and implemeutation. - 48 -

C. METHODOLOGY

3.08 Forecasts of output by sector were subjected to internal and external equilibrium constraints. The internal equilibrium constraint is defined as the requirement that ordinary revenues and expenditures be balanced. The external equilibrium or foreign reserves constraint includes the effects of the current account, external borrowing, and the flow of external aid. Collectively these two constraints act to determine the methodology, proposed goals, and policy options associated with the Plan.

3.09 In the first phase of the planning exercise, a list of possible projects was presented by the different ministries. Cost/benefit analysis was conducted to determine which projects were economically viable. Among those considered viable, selection was made primarily on the basis of: (i) financing constraints, (ii) domestic capacity for project implementation, and (iii) project compatibility with the Plan's main goals. Based on this final list of projects, output by sector and GDP were estimated. In the second phase, total "possible" imports were estimated using: (i) the requirement of an external balance, and (ii) estimates of exports (obtained partly from the list of projects selected and past trends), external aid, external borrowing, and worker remittances. Government revenues were estimated based on GDP trends; expenditures were estimated using estimates for government revenues and the requiremex.t of internal equilibrium (balanced budget). Finally, total consumption was calculated as a residual of the estimated values of GDP, i-nvestment, exports, public expenditures, and imports. Instead it will probably be translated into domestic inflationary pressures. The government has sizeable leverage on the price of basic food products, because it se'lls the considerable amount of food it receives as aid at predetermined prices through a network of public and private centers. For other goods, many of which are imported, such control will not easily be attained, and a devaluation of the domestic currency may be necessary to protect the level of reserves.

3.12 Provided that '-h projects ircluded in the Plan are fully imple- mented, GDP estimates do not seem overly optimistic. Because the Plan does not present annual estimates of GDP, it is impossible to correlate the time pattern of output growth with the scheduled completion of the different projects. A rough calculation using GDP and investment estimates for 1980 and 1985 yields an implicit Incremental Capital Output Ratio (ICOR) of approximately six. This is consistent with the estimates of the actual ICOR for the 1980-1982 period, which ranged from 5.5 to 9.0. Such high values can be expected in an economy like Cape Verde's. in which the infrastructure base is poor, agriculture represents a low share of the domestic product, and services account for a high percentage of GDP. Variations in agricultural output due to weather fluctuations can also have a large influence over the value and varia- bility of the coefficient, as can the type of investment undertaken. When a large part of the investment program is in infrastructure type projects, from which short run benefits will not be achieved, the ICOR will be high. The absence of data required to conduct a sectoral analysis prevents more defini- tive conclusions regarding the attainability of the Plan's GDP growth rate projections. - 49 -

3.13 The achievementof the investmentobjectives depends on both the government'scapacity to obtain adequate financingfor the several projects and on the domesticcapacity for carryingout these projects. The Plan indicates that 80% of the financingfor the various projects is secured.However, the domestic capacity to implementprojects, is still unsatisfactory.(See Chapter III.E.)

3.14 To determinethe actual growth rate of domestic output, it is more useful to analyze projectsthat are undertakenand completedthan those that are postponedor fall behind schedule. Accordingto the Plan, the industrial sector will be one of the main sources of growth. The followingparagraphs pay special attentionto the two main industrialprojects, because they have the greatestpotential to increaseshort run output.

3.15 The achievementof the Plan's investmentgoals will largelydepend on the outcome of the Maio project. This is the largest project in the Plan, accountingfor approximately42% of indu.trialinvestment and 8.2% of total investment. Its main componentsare a cementplant, with an estimatedcost of approximatelyUS$27 million,and a harbor costingUS$7 million,which will be used to export cement and salt (approximately50 MT), and for interisland trade. In 1981, importsof cement amounted to 44 MT. Cement importsare expected to increasein the futureas the infrastructuralprojects continue and local housing constructionexpands. Using local raw materials,the proposed cement plant is designedto produce 60 MT of cement for local consumption. A review of the project by a Bank mission in mid-1983 concludedthat the decision to producecement locallywould pussiblyresult in a substantialincrease in the cost of cement to Cape Verde relativeto the present cost. Investment per ton of cementproduced by the projectwould be US$400,versus US$200 for a typical cement plant. The mission recommendedinstead the constructionof a silo and baggingplant that would receivecement in bulk to be bagged in Cape Verde.

3.16 The other large project in the Plan is the completionof the shipyard in Mindelo, which was initiated in 1981, and completed late in 1983. The total cost is estimated to be approximatelyUS$40 million, financed from several internaland externalsources (ChapterII.B.). The shipyardis owned by CABMAR,a quasipublicenterprise under the controlof the Ministryof Eco- nomy and Finance. The general director,the deputy directorand other board members are nominatedby the Ministerof Economyand Financeand confirmedby CABMAR'sBoard. The shipyardis operatedby CABNAVE,a mixed enterprisewhich is owned by CABMAR (33%), LISNAVE/NAVELINK(33%), a Portuguese shipyard, SCHEFPSWERFDE WAAL (33%), a Netherlandsshipyard, and a local entrepreneur (1%). The yard is designed to receive ships between 80-110 m in length,and will employ approximately600 persons. It uses a natural port,Mildelo, which historicallyhas been the major element in the country'sforeign trade. The port will be linked to the local economy throughthe establishmentof industries directly related to the project such as metal constructionand paint industries,the developmentof cold storagecapacity and the expansionof industrial fisheriesthrough INTERBASE (ChapterV). The project appraisalby the European Investment Bank and the African Development Bank, two main sources of financing,calculated an internalfinancial rate of return of 12% and an economic rate of return of 17%. The lack of sufficientCape Verde - 50 -

experience in such types of industry is compensated by the experience of the two partners. Althoughthe market for repair servicesfor fishingvessels and related small merchant vessels is served partiallyby some West African ship- yards and by facilitiesin the home countriesof these fleets, the experience and reputationof the Portugueseand Dutch enterprises,coupled with an aggre- ssive marketing policy, can lead to a rapid increasein the market share of the Mindelo shipyard. The developmentof a local fishing fleet that would exploit the rich maritime resourcesof the archipelagowould help to ensure full use of the facilities.The shipyard has already obtaineda significant number of repair contracts.

3.17 In summary, futureGDP and investmenttrends for the Plan periodwill partly depend on the outcomeof the Maio prolect,and on the rate of growth of market share for repair of vessels. Futher, the overallcompatibility of the Plan's goals requiresthat the growth rate for consumptionbe reducedrelative to the rate for GNP. Some reduction in consumption seems to have been achieved for 1982, but continuationof this trend will require the implementationof an income policy or savings inducementpolicies, as mentionedin the Plan.

D. FINANCING

3.18 Of the overall investmentplanned for the 1982-1985period, totalling 22,100 million CV escudos in 1982 prices, (or US$450 million)90% is expected to be financedfrom externalsources (42% by externalgrants, 11% through the proceedsof the sale of food aid, and 37% throughexternal loans), 7% through internalfinancing or treasurysources, and 3% by the Bank of Cape Verde. The governmenthas successfullyavoided the use of internationalcommercial bank loans to finance developmentprojects, and is unwilling to use commercial loans in the future.

3.19 At an aggregate level, the government estimates that 62% of the financingof the InvestmentPlan has been obtained. The financingof an additional 22% has a high probabilityof being secured. Althoughpreliminary contacts with potential donors have been made, the probabilityof obtaining financingfor the remaining16% of the InvestmentPlan falls into an "unknown" category. Progress in financing some sectors is more advanced than for others. Of the industrialsector's planned investment,66% falls in either the "probable" (56X) or "unknown" (10%) category. For example,negotiations for the financingof the Maio Cement Project had not been completedat the time of the Plan's preparation. With the exception of tourism (56%) and health (55%),more than 65% of investmentfinancing for the remainingsectors has been secared.

3.20 The division of financing between internal and external sources varies considerablyby sector. An estimated86% of rural developmentproject financingwill come from externalgrants (TableA.32). Industry and tourism are expected to receive 85% and 67%, respectively,of their financing from externalloans. The other sectorswill derive a substantialportion of their fundingfrom externalgrants. - 51 -

E. IMPLEMENTATION 3.21 The large increase in investmentexpenditures contemplated for the 1982-1985 period will undoubtedly test domestic capacity to prepare and implement investmentprojects, and to absorb large amounts of external aid. Becausemuch of the aid is to come from multilateralsources, the coordination and complementarityof such aid assumes particularimportance. In comparison with previousyears, during 1982, the first year of the Plan, there was an improvementin project implementation.Table A.33 presents the planned and actual investmentby sector from 1981 to 1983. The ratio of actual to planned investmentexpenditures in 1982 uas around 0.91, comparedwith a ratio of 0.66 for the previous year. Excluding the industrialsector, however, where an error was committed in the forecastingof the planned expenditure (with respect to the CABNAVE Project), the implementationratio was 0.79. The implementationratio was higher in 1982 than in 1981 for all sectors except construction.The ratio for fisheriesfor both years is very low, 9% in 1981, and 33% in 1982. In 1983, the overall implementationratio was 0.73. Some words of cautionare appropriatewhen lookingat the resultspresented in the Table. First, the comparisonof actual and plannedexpenditures for a project provides only a rough estimateof the project'simplementation. Second, the values presentedin the Table are in currentprices. Comparisonsof forecast and actual investment expendituresare sensitive to differencesbetween expectedand actual exchangerates and prices.

3.22 Based on investmentperformance in 1982 and developmentsaffecting project financingnegotiations in 1983, the Planning Directoratecompiled a revised schedulingof investmentexpenditures for the plan period (TableA.35 and A.36) A slight increaseof 5% in expendituresis planned;but more important, the pattern of expendituresover the years was altered. Instead of initial rapid increasesin expendituresin 1983 and 1984, to be followedby a decline thereafter,as was the case with the originalplan (TableA.37), expendituresare now expected to increasegradually over the entire period.For 1983, investmentexpenditures were reduced by 1817 million CV esc (or 23%), while plannedexpenditures for 1984 and 1985 were increasedby 11.4 and 33.3% respectively.

3.23 These changesderive from the postponementuntil the end of the plan period of (i) a large part of the industrialsector investmentexpenditures connectedwith the Maio CementProject, and (ii) of investmentexpenditures in the Transport.tionand Communicationssector. The major changesin the latter sector include (i) the postponementuntil 1984-1985 of the bulk of the expendituresin the infrastructureof the Fogo and Brava ports, and (ii) a delay in the purchasingof a ferry boat (postponedfrom 1983 to 1984). In addition,major expendituresat Sal Airportwere rescheduledtoward the end of the plan period.

3.24 For 1983, the revisedPlan forecastsinvestment expenditures of 6130 million CV esc, an increaseof 55% over 1982. For 1983, 85% of the financing of the InvestmentPlan will come from externalsources (51% externalgrants, 29% external loans, and 6% uncovmittedexternal sources). The rural, industrial, and transportand communicationssectors constitute58Z of scheduled - 52 -

investment expenditures. In the industrial sector, 83% of planned investment is expected to be financed through external loans (CABNAVE Project, 803 million CV esc), while in the rural sector almost 90% of the financing will come from external grants. In the transport and communications sector, approximately 44% of investment outlays will be obtained from external grants, and 39% from external loans. The wage share of investment expenditures constitutes only 152 of total expenditures. The Plan predicts an average monthly employment of 28,000 workers, 58% of whom will work in rural development projects, and 20% in the transport and communications sector. The temporary job creation impact of rural development projects is important, because these projects, though only 19% of planned investment for 1983, account for 48% of total wage expenditures and 58% of total labor employment generated by development projects.

F. SUMMARY AND CONCLUSIONS

3.25 The preceding review of Cape Verde's First National Development Plan confirms its importance as an instrument of development policy. It is a well articulated expression of the country's priorities, and a realistic assessment of existing economic conditions. Moreover, the Plan represents a mechanism for coordinating the use of internal and external resources, and facilitating dialogue with international donors. There are some methodological shortcomings in the Plan, specifically the absence of consistency tests, and the lack of yearly estimates for the main aggregates, which are needed in view of the country's lack of experience in planning and the deficient statistical base. The Plan's targets appear optimistic, as confirmed by the 1983 revision of investment expenditures for the remainder of the Plan period. Although the authorities successfully obtained financing for a large number of the projects included in the Plan, the postponement of some key projects will compromise the achievement of investment level goals, particularly in the industrial sector.

3.26 To assure continuity in planning, the following are recommended: i) development of a statistical base; (ii) improvement in the level of expertise, especially at the ministerial level, with respect to the preparation, evaluation, and implementation of projects; and (iii) development of a planning framework to facilitate yearly projections of the main economic variables for consistency checks, and to interrelate the monetary and real side of the economy. Technical assistance, in the form of policy studies and project related activities, is necessary. Success in obtaining financing for future projects will depend partially on improvement of domestic capacity to undertake such tasks. - 53 -

IV. AGRICULTURE

A. BACKGROUND

4.01 Arable land in Cape Verde is a scarce resource. Estimates of the total land area suitable for farming vary from 35,000 to 60,000 ha, or from 8 to 14% of the country's area. Only 1,800 ha are irrigated; the remainder is rainfed. Since 1968, the first year of the current drought, the amount of cultivated land has been reduced by as much as 40% of the total. Due to the steep terrain, most of the water from the few torrential rains is lost to the sea, contributing not only to the destruction of top soil and irrigated bottom land, but to inadequate replenishment of underground aquifers.

4.02 Domestic production has always fallen significantly short of consumption needs; but this pattern has been aggravated in recent years by fifteen consecutive years of drought conditions. In 1967, the last year of good rainfall, 70% of food needs were satisfied from domestic production. This share dropped to 3.5% in 1977, and has becn around 10% since that time. Some cereals with high domestic demand, rice and wheat, cannot be produced internally. The gap between domestic needs and production has been filled largely by food aid.

4.03 Agricultural output as a share of GDP has fluctuated from 17 to 25% in the last five years; it was 17% of GDP in 1982. Agriculture accounted for 28% of total investment between 1978 and 1981, and is expected to represent 20% during the plan period. Although total self-sufficiency in meeting food requirements must be regarded as unattainable, development of the country's resources, land and water, must be optimized to reduce external dependence and improve the dietary and living conditions of Cape Verdeans. In this regard, a variety of improvements are feasible.

B. LAND USE' AND LIVESTOCK

4.04 Rainfed agricultural land is used almost exclusively for the cultivation of corn and beans. Although corn varieties with improved drought resistant features are gradually becoming available, their yields and resistance to insects arc low. Without well-distributed rainfall, yields are only 400 kg/ha. Corn, which is the main staple and covers the largest area of farmed land, is planted by dib!1ing sticks and crude short handled hoes. Usually, no fertilizers are used because oi the high drought risk. Planting takes place during the "rainy season" between June and October. Typically, beans are cultivated as a companion crop with corn in the plots. After harvest, corn stalks are cut or pulled by the roots and used as fuel or animal forage. (Corn and bean production data are presented in Table A.38).

4.05 Given the vulnerability of corn to drought and Cape Verde's climatic conditions, reliance upon this cereal alone must be regarded as risky. Using companion crops of corn and beans, however, farmers can assure themselves a minimum yield. Several types of beans, such as the Congo Bean, appear especially suited to the dry rainfed land, because they require only a minimal amount of water. The Congo bean can be used as forage for animals, fuel for - 54 -

cooking and as a pa:.tof soil conservatione.forts, because it grows as a bush. Other crops, grown in smaller quantiti-s, include sweet potatoes, cassava,and peanuts.

4.06 Less than half of the irrigatedland has a reliablewater supply.The largest irrigatedcrop is sugar cane, with 60% of the total irrigated area. Yields are low, approximately14 tons/ha,compared with yields of as much as 300 tons/ha that are obtained in major sugar producingcountries. Because of the dense shade createdby sugar cane plants, companioncrops are tot feasible. Domesticsugar cane productionis used in the manufactureof aguardente (rum). Once suppliedto local distilleries,the stalks are ground to produce caldo, which is fermented three to four days ai.dthen distilled,while tops are fed to animals. Cape Verde imports sugar for domestic consumption.The sugar aguardente is the largest cash crop, and unlike other crops (i.e., bananas), is not subject to spoilage.Most sugar is grown on the island of Santo Antao.Due to the limitedavailability of irrigatedland, the government prohibitedthe expansion of sugar cane productionon newly irrigatedlands. Effective in 1979, land already used for sugar productionis taxed at 7,500 escudos per ha; a fivefold increase. Because of the dispersionof sugar fields, the possibilitiesof economiesof scale during the refiningprocess are limited.

4.07 The second most importantcrop grown on irrigatedland is bananas, which, in 1981, were the country'slargest export product. Approximately50Z of the banana productionis consumed locally and the other half exported to Portugal.Banana cultivationoccupies appro-imately 10% of all irrigatedland (180 ha). Yields are low: approximately35 tons/ha.Economies of scale would require an almost doubling of acreage cultivated.Increased production would requireimproved marketing both internallyand externally.

4.08 Vegetablesand other fruits are also produced on irrigated land. Among these are sweet potatoes, onions, tomatoes, cucumbers,and carrots. Prospectsfor the increasedproduction of domestic fruits and vegetablesare promising. Creater self-sufficiencywould require increased allocation of irrigatedland to fruits and vegetables,some of which would presumablycome from displacedsugar cane land and from improvedstorage and transportationof produce to reduce the spoilage loss, which has been estimatedat between 30 and 40%.

4.09 Livestockproduction includes goats, chicken,pigs and, in much fewer numbers, cows (beef rather than dairy). The most important constraintsto increasedlivestock production are inadequatesupplies of water and food. In this regard, goats are a special case. They are adapted to the rocky terrain and provide a vitally needed source of protein (goat's milk). Goats contribute,however, to the depletion of natural vegetation and deserti- fication when unrestrictedgrazing is allowed. With mixed results, the governmenthas prohibitedgrazing on recently reforestedlands. (Livestock quantitydata are presentedin Table A.40).

4.10 For 1980-1982, food aid provided one third of the domestic consumptionof corn and almost all of the domesticLonsumption of wheat and - 55 -

rice (Table A.44). The United States and the EEC are the major food donors (TableA.45).

C. INSTITUTIONALFRAMEWORK

4.11 In Cape Verde, the Ministry of Rural Developmentsupervises the agriculture, livestock and forestry areas. The Ministry is divided into several directorates.One is in charge of the conservationof natural resources;i.e., rural works, soil and water conservation,and exploitationof undergroundwater. The other directoratescover the areas of rural extension services,production, and state farms. Extensionservices are still in a very preliminarystage. One of the principalobstacles encountered in the creation of an extensionservice is that more agriculturalresearch is neededbefore an extensionprogram can be effectivelydeveloped. In Cape Verde's context the common tropical crops cannot be grown successfully.Therefore, research is needed to determinethe crop species that are most suited to Cape Verde. The state farms, establishedprimarily for large scale cultivation,are also used for testing and demonstrationof new crop varieties.The Center of Agrarian Studiesin Santiago,which is the researchdepartment of the Ministry,pursues primary agriculturalresearch, and operates as a technicaltraining center. The center is receivingfinancial assistance from many externalsources, and currentlyis conductingstudies on soil composition,irrigation, and animal husbandry,among other areas. Under the supervisionof the Center is a Train- ing Center. All traineeshave obtainedat least a ninth grade education.

4.12 The government is also involved in improving the marketing infrastructure.FAP (Empresade FomentoAgro-Pecu.rio) is responsiblefor the distributionof agriculturaland livestockimports, and for the purchasingof farm output at equitableprices. The Center for LivestockDevelopment (Centro de DesenvolvimentoPecu5rio) was createdin 1981 as an extensionservice primarily for the livestocksubsector. ENAVI, a national agriculturalcompany, was establishedin 1981 to administerseveral poultry farms.

D. FOOD POLICYAND MARKETING

4.13 In rural areas the most common dish is cachupa,a corn based dish. The exact cnntr'ntsof the meal vary accordingto income level, but traditionally it consistsof corn, water, salt and some lard. When possible,beans and fish are added to improve food value and taste; and in coastal areas, some fish is added. Families that can add manioc, pork meat, bananas,and greater quantitiesof beans relative to corn. It is consumedthree times daily, and provideslow qualityprotein, not quite enough calories(2,100 calories versus 2,800 calories required) for an adequate intake. Malnutritionaffects the populationas a whole in at least one nutritionalcomponent (i.e., vitamin and/orprotein-calorie malnutrition).

4.14 To assure a reliable and sufficient food supply, including the coordinationof food aid, a public enterprise (EMPA)has responsibilityfor the storage,wholesaling and retailingof some food staples.Officially, the intent of governmentprice policy is to insure that low income families can afford the basic staples,especially corn. Therefore,prices of food staples - 56 -

consideredessential are regulated.The marketingof export products(bananas, coffee and some agricultural products) is carried out by EMPA as well. Domes- tic produce is marketed by intermediaries(rabidantes) who buy from state farms or local farmers,and transportthe produceto local marketswhere it is sold. Consumerprices reflect the costs of transportplus a margin of profit influencedby prevailingmarket conditions. (Chapter II.F. discusses food pricing in more detail).

E. ONGOINGPROJECTS

4.15 Approximatelyfifty projectsare listed in the Plan, thirtyof which are ongoirg.Most of the projectsare related to soil and water conservation and/or irrigation.Approximately 86% of the financingfor the projectswill come from external grants. Cape Vcrdc's agriculturalsector has recelved assistancefrom many countriesand internationalorganizations and there has been an informalallocation of individualislands among the differentdonors. For example,projects on Fogo and Brava receiveGerman assistance, projects on SAo Nicolau receive French assistance,and projects on Santo Antio and Maio receive funds from the Netherlandsand Switzerland,respectively. The dispersion of the islands and their allocationamong dLfferentdonors has created problems of coordinationfor the Cape Verdean authorities,especially with respect to the exchange of information.Two main projects are the Tarrafal Water ResourcesProject and the Cape Verde WatershedManagement Project, both of which have receivedUS AID fundingand are locatedon Santiago.The first project includesthe drilling of 50 test wells (the most productiveof which were to be used for irrigation),exploration of 10 gallery sites, dam constructiontesting and design,and other technicalassistance. The Watershed Project (US$6.3million) consists of the constructionof dams, walls and other works intendedto prevent soil erosionand increasewater retention.Finally. funds from P.L. 480 (US food aid) are being used in the constructionof facilitiesat the Centerfor AgrarianStudies at S. Jorge (US$3.7million).

F. LAND TENUREAND AGRARIANREFORM

4.16 Cape Verde has a somewhatcomplicated land tenuresystem that is made more complexby the lack of propertymaps. cadastralsurvey, and the manner in which land in rural areas is measured--thenumber of liters of corn required to plant a given field. Land ownershippatterns vary from island to island, but typicallyfall into the categoriesof state farms (formerlvPortuguese- owned propertiesthat vere nationalized),owner-operated, and rentedproperty arrangements,and a decliningnumber of sharecroppedproperties (sharecropping has been officiallyprohibited since 1975). The 1980 Santiago Agricultural census indicatedthat 22% of the island farm parcelsare sharecropped,28Z are owner operated.and 50% are rented. On sharecroppedlands, the share of the harvestpaid to the owner has declinedfrom one-halfto one-third.Nationally. 39% of the farmersdo not own land. This patternvaries from island to island. reaching 51% in Santiago and 19% in S&o Nicolauand Brava. Of the remaining 61% percent of the farmersthat do own land, nearly half also rent additional land.

4.17 Cape Verde suffers from the problem of inefficient, scattered land holdings, resulting from the density of the rural population, iEland - 57 -

topography.and the history of fragmentedinheritances of land. According to the Santiago Agricultural Census, the average fauily (six persons) cultivates 1.4 ha of rainfed land spread over 2.2. parcels and .03 ha of irrigatedland. To have an adequate diet, a family of six would need approximately 2 ha of land, of which 1.6 ha are rainfedand .4 ha are irrigated.Given actualyields and consumptionof beans and corn, the average familycould be self-sufficient in beans, but not in corn production.A main conclusionis that there is not enough arable land to meet the needs of the population.

4.18 The government has promulgatednew land tenure legislationto increase agriculturalproduction and advance social goals. Agrarian Reform Legislationpassed in March, 1982 may be characterizedin general terms as embodyingland transfernnd land use arrangementsthat are to maximizeuse of the country's limitedarea of arable land. First, the right of ownershipof all directly owner-cultivatedprivate holdings, regardless of size, is af- firmed. Division of directly owner-cultivatedland is viewed as likely to interferewith efficientcultivation. To encouragecultivation of all arable lands, lands held by "absentee" owners will be subject to specified land transferarrangements. An absentec owner is an owner who does not cultLvate his land, either directly or indirectly(through lawful lease-holdarrange- ments). Emigrants who cultivate the land either directly (through family operations),or indirectly(through lease arrangements),are not consideredto be absentee owners. Absentee owners who have left their land idle over one year may lose possessionof the land. Land cultivatedindirectly that exceeds a "limit of Intervention"in area is to be transferred,in part, to the current tenant (or "direct tiller").The amount transferredis subjectto a maximum size. The remaining area can be transferredto the state. Parcels in excess of 1 ha of irrigatedor 5 ha of rainfed land may be transferred.A variety of exceptions,allowances, and other provisionsare included in the law. The legislationapplies only to arable land; forestand pastureareas are excluded.Transfer of churchowned land is subject to negotiations.

C. GOVERNMENTOBJECTIVES

4.19 After independence.in the course of the severe drought, the first priority of the Cape Verdcan authoritieswas to provide enough food for the population. Such needs were satisfied largely by food aid. As the food situation stabilized througlhthe establishmentof multi-year agreements concerningfood aid, the authoritiesenlarged the scope of their effort. The first objective remains increased food production. The achievement of productiongoals for the plan period will largely depend on the pattern of rainfall.The Plan estimatesthat, dependingon rainfall, 1985 productionof corn will be between 5,000 and 20,000 tons; for beans, between 1,000 and 10.000tons (TableA.41). Assuminga domesticconsumption level of 45,000tons of corn and 10.000tons of beans, domesticproduction will satisfy442 of -rn and 50% of bean consumption,for the high rainfall scenario. In the low rainfallscenario, it will cover on]y 11Z of corn and 102 of bean consumption needs, respectively.The range of f'uctuationis much smaller for the irrigated crops (TableA.41). During the period of the Plan, no major changesare contemplatedfor the livestocksector. - 58 -

4.20 The Plan's other major goals include: (i) implementing the agrarian reform (with the creation initially of the data required for its implementation); (ii) developing the agricultural institutions, including provisions for agricultural research; (iii) establishing support programs for farmers including an extension program; (iv) enlarging the irrigated area, with a long-term goal of 3.200 - 3,800 ha to encourage food crop production in those areas; and (v) to implement a program of reforestation and soil conservation in order to increase water and firewood resources. Given the country's resource endowments, this approach seems sensible. However, the attainment of these goals will require large investments both In physical and human resources, and may yield relatively small benefits in the short-run. The watershed projects, critically important to the development of the country's agriculture, will absorb considerablc resources. Because of this, some marginal projects should be evaluated with respect to any other investment alternatives.

11.WATER

4.21 Lack of water unquestionably limits the development of Cape Verde's agriculture. Due to the steep terrain. approximately 802 of the water from the few torrential rains that occur is lost to the sea. Analysis of long-run rainfall trends confirms the cyclical nature of drought, although this particular drought has persisted longer than most. Conservative estimates put the "usual" annual volume of recoverablc water at 50 million m3. which would be sufficient to meet the country's needs and even allow ?',iexpmnsion of irrigation. In fact, prior to the current drought, approximately 2,300 ha of land were being irrigated.

4.22 The potential of underground water reserves has not been reliably estimated. In the absence of normnl rainfall, which would allow the replenishment of reservoirs, the continuous pumping of water for human and agricultural purposes can have serious consequences. According to preliminary results of geological surveys, pumping of water has reduced the local hydrostatic pressure and caused the elevation of salt water, leading to the contamination of some wells. The development of reservoirs for runoff water is being studied, and financing is being sought for a reservoir of 6.5 million m3 in the area of Poilao in Ribeira Seca. The EEC financed two sma'l reservoirs in Santiago (Canico and S. Martinho).

4.23 Estimates of water consumption are also very tentative. According to a 1981 Frcnch study, the total consumption of water vas between 54,000 and 75.000 m3/day, of which onlv 4,000 to 5,000 m3/day was potable water. Irriga- tion, the main user of water, is largely based on underground water, which is pumped and then transported through small channels (levadas). Flooding is the most common method of irrigation. The volume of water per hectare varies from area to area. The method of irrigation also varies, depending on the type of crop (Table A.43). Due to the drought, the interval between successive irriga- tions has increased. In Santo Antao, the interval has varied from two or three months to as long as a year in some cases. The amount lost during transportation depends on the manner in which the levadas are maintained. Losses are reported to reach as high as 50%. - 59 -

4.24 The sellingprice of water varies from islandto island,and on each island, from area to area. Followingtradition and customs,the use of underground water is often free. When sold, its price can vary from .07 csc/m3 in Santiago,to 5 esc/m3 in SAo Nicolau,and 23 esc/m3 in Fogo. Potablewater is sold at differentprices dependingon its source. For the countryas a whole, its price is between 7 to 85 encl/O for metered water. 0 to 140 esc/m3 for standpipos.and 1,000 esc/m3 for water distributedby water tanks (1981 prices). The wide differencesin price suggest that irrigatedwater is being subsidized,particularly in Santiago.The 1981 French study has reportedsuch a finding.A similarcase can be made for desalinatedwater (see ChapterVII). A main conclusionis that water pricesneed to be reevaluated.The subsidizing of irrigationwater does not encouragefarmers to selectthe most water saving proceduresnor the n.iostappropriate crops.

1. ISSVES AN) RECOMMENDATIONS

4.25 Development of the agricultural sector faces scveral difficult problems, which collectively put agricultural self-sufficiency out of reach. Foremost among these is the lack of water. Another obstacle is the rhortage of arabie land. Problems of transportntion and marketing adversely affect the country's ability to meet consumption needs. The land tenure system. characterized by small scattered plots, limits economies of scale and the introduction of more efficient cultivation practices. Reducing vulnerability to the drought cycle, a realistic goal, is the central agricultural objective of the Cape Verdean Govcrnment. Large investments are projected or underway in watershed management and water resource development that are intended to increase the share of domestic consumption met by domestic production. However, the long-run success of these policies will depcnd in large measure on rainfall and population trends.

4.26 In general terms. the government's approach with respect to the developmenw of the agricultural sector hbs been sensible. There are, however, several issues that need to be addressed so that Cape Verde's agricultural policy will be more comprehensive and viable. Some of these issues arc the need to (i) promote applied research that is relevant to Cape Verde's conditions and reflects the country's absorptive capacity; (ii) develop extension services that promote promising farm practices when they become available; (iii) better coordinate foreign aid; and (iv) study creation of credit facilities for the agriculture sector.

4.27 An additional issue is the use of the irrigated area. Given the uncertainty over the country's underground water reserves. a review of existing land use needs to be undertaken prior to any expansion. Increased agricultural production can be achieved for the same area by using improved seed varieties and cultivation practices, such as the use of fertilizers and pesticides. Approximately 60 to 70Z of the irrigated area is being used for sugar cane and banana production, both of which require optimal humidity conditions throughout the year. Yields of these two crops could be improved by decreasing the intervals between irrigation and by increasing the use of fertilizers. It has been estimated that such procedures would result in a 70 to 802 increase in banana yields, and an almost fourfold increased in sugar cane yields. The area used for sugar cane could thus be reduced, and the newly - 60 -

available land could be diverted to other crops. High value crops such as fruits and vegetables could be grown on currently irrigatedlands to supply the domestic market and, possibly, to obtain additional export revenues. Government'sawareness of these problems is reflectedin the limitationsnow imposedon the use of newly irrigatedareas for sugar cane production.

4.28 The types of crops grown on rainfed land should also receive close attention,particularly those that are adapted to a droughtprone environment. Because of the variabilityof rainfall,the creationof incentivesthat would lead to the substitutionof corn for more drought resistant cereals such as millet and sorghum shouLd be explored.However, because of the deeply rooted dietaryhabits of the population,such changewill not be accomplishedeasily. Other staples that help prevent soil erosion and improve water retention should be consideredas well. Improvementsin yields on rainfed lands can be achieved through use of superior seed varieties, and more suitable farmiiag methods.

4.29 Reforestation efforts are required to rebuild veget'tive cover depletedby the drought,demand for firewood,overgrazing, and t. effects of the infrequenttorrential rains. Because of the currentshortage of firewood, it is estimatedthat one member of each familymust spend every day collecting leavesand animal dung. Throughreforestation programs, the governmentintends to increase the firewood available to households (see Chapter VII) and to improve soil conditions.Obstacles to the success of the program are the unrestrictedgrazing of goats and the labor shorcageassociated with the need to plant both seedlingsand agriculturalproducts during the very short rainy season. Currently, goats are being restricted from newly planted areas. To compensate for the labor shortage, the governmenthas attempted to prepare lands for planting in the dry season and to utilize ILLan work forces during the rainy season to undertakethe seeding.

4.30 The marketing system and storage distributionnetwork need to be improved. Cape Verde's system is adapted to a drought situationwith a low agriculturalsurplus. Even in these circumstances,losses are reportedlyhigh; and this undoubtedlyinfluences the farmer'schoice of crops (e.g.,the extent to which a crop is vulnerableto spoilage).To be of real benefit with respect to both the domestic and export markets, any future agriculturalsurplus, attained either through increased rainfall or improved farming practices, would require better storage facilities and transportation/communication links.

4.31 A final issue is the country'spreeminent need for a comprehensive water policy. Although the Plan recognizesthe importanceof the water issue, it fails to address several important aspects of water policy. Given the scarcity of this resource, policy must address how the available water is allocatedamong householdvs. industrialand agriculturalusers. Water prices are a mechanism by which policy makers may influence such allocation,and should be thoroughly reviewed. The price of water used for irrigation,in particular, should be increased to further encourage farmers to conserve. Technologiesused to desalinatesea water and to distribute and transport water should be made efficient and minimally vulnerable to losses. Water conservation must include continued i-mprovementof watersheds and water - 61 -

recovery methods.As a part of agriculturalpolicy, crops that contributeto the reductionof soil erosionand that increasewater retentionneed to be encouraged. Technicalassistance is needed to provide better estimatesof the country's water supply, as well as to assist in the preparation and implementationof water policy. The delegationof the responsibilityfor water to the Ministryof Rural Developmentin July, 1983 has providedan opportunity to formulatean adequatewater policy and to coordinatethe many sources of externalassistance. - 62 -

V. FISHERIES

A. BACKGROUND

5.01 Cape Verde lies near two major internationalfishing grounds, one off the coast of Africa between Senegaland Sierra Leone, and the other southwest of the islands.A Norwegianstudy in collaborationwith UNDP/FAO,found that Cape Verde's fisheries potential is substantialbut not exploited to its fullest.Excluding such large pelagic fish as tuna, the total fish biomass is estimated at 100,000tons per year. The Plan estimatesa catch potentialfor all fish, includingshellfish, of 35,000- 40,000tons per year. The Norwegian study confirmedthe absencebetween islandsof an extensivecontinental shelf, thereforemaking impossibleany extensivetrawling of the underwatersurface for fish. However, between Mai. and Boa Vista a relativelysmall shelf has been found. The Maio-BoaVista-Sal shelf holds approximately75% of the fish biomass near the Cape Verde islands,and is consequentlyregarded as the most promising area for developing industrial fisheries.Despite the potential, only 10,381 tons of fish and shellfishwere caught in 1982 (Table A.46), accounting for 5% of GDP. Nonetheless,fisheries constitute an important component of export revenue, averaging 28% of total merchandiseexports in 1981. Fisheriesare also importantfor the domesticeconomy, providing employment and an importantsource of protein in the national diet. With an annual per capita consumptionof approximately25 kilos, fish contributesmore than 80% of animal proteinintake.

B. ARTISANALFISHERIES

5.02 The State Secretariatof Fisherieshas responsibilityfor the overall coordinationand developmentof Cape Verdean fisheries,and is subordinateto the Ministry of Economyand Finance.Operations are divided between artisanal fishery and industrial,export-oriented fisheries. Artisanal fishery provides more employmentand a larger total catch each year than industrialfisheries. Artisanal fishermen who live in villages dispersed throughout the islands account for over 80% of all fish landings.In 1982,artisanal fishing employed 3,444 fishermen,75% of whom had no other occupation(Table A.47). The majority of boats are plank rowboats, 3.5 to 5.5 meters long, and carry 2 to 5 fishermen.All artisanalfishing is carried otutby the private sector. Over 90% of the artisanal catch is estimated to be consumed fresh in the local market.

5.03 A state enterprise,SCAPI. -.apany for Marketing and Support for Artisanal Fishing) was founded in 1977 with the function, among others, of providing marketing, technicdl assistance,and other support to artisanal fishermen.One of SCAPA's roles is to provide a guaranteedminimum price to fishermen. In practice, however, SCAPA's minimal price, which is constant throughoutthe islands,cannot competewhere demandfor fish exceedsartisanal supply. On the more populatedislands and during certainmonths of the year, fishermenmore often sell to intermediarieswho are willing to pay more than SCAPA. Consequently,SCAPA is able to buy only about 10% of the artisanal catch. SCAPAis more viable on sparsely populated islands. Additionally, SCAPA has several fishing boats, many of which are inoperative,and runs two - 63 -

canneries which are outmoded and operate well below capacity. The boats, with 30 ton capacity, are meant to supply the canneries with raw material on a steady basis. The canning factory in Santiago is in urgent need of rehabilitation and modernization.

5.04 According to 1982 data furnished by the Directorate of Fisheries, only 256 boats of a total of 1,051 were motorized. Non-motorized boats have a limited range of operations, and consequently cannot reach the best fishing grounds, such as the Boa Vista-Sal-Maio shelf. They are also practically useless when bad sea conditions prevail, typically between February and April. PROMOTOR, a new agency, was established in 1982 to distribute and sell out- board motors donated by the Japanese government to artisanal fishermen. Approximately half of the 600 motors donated were distributed in 1983. Al- though motorization is estimated to increase the productivity of small boats by about 25%, the extra revenues do not appear great enough to offset the cost of fuel. Further, the motors are prone to breakdown and difficult to maintain.

C. INDUSTRIAL FISHERIES

5.05 Cape Verde's offshore economic zone is exploited by a small industrial fishing fleet, as well as by a small number of Spanish boats allowed access by agreement. In return, the Spanish fishermen pay license fees (US$75 per ton in 1981). and are required to train Cape Verdean fishermen. Portuguese fishing boats are expected to start fishing in the area in the near future under similar terms. Cape Verde's industrial fishing fleet consisted of 29 vessels in 1982 (Table A.49). Most fishermen catch tuna, which is sold frozen or is canned for export. Two fish for lobster.

5.06 A public enterprise, INTERBASE (Cape Verdean Enterprise for Fishing Infrastructure) is the principal actor in industrial fishing. In addition to its own catches, INTERBASE buys tuna and lobster destined for the export market from private fishermen, INTERBASE exporting the tuna from Mindelo, and the lobster from Sal Island by air. Two private fishing companies also exist: EMPREITEL, which sells its catch to INTERBASE; and FRIGORIFICO, which exports its own catch but is not allowed to buy from others. In effect, INTERBASE has a near monopoly on frozen fish exports. INTERBASE has three 39m tuna clippers, which are too large and expensive for efficient operation under local conditions. However, twelve new 14m and 18m boats are scheduled for delivery in 1984 and are expected to considerably increase the catch. At least one of the three tuna clippers will be retained to serve as a mother ship to freeze the tuna catch and otherwise support the smaller vessels. It is expected that these additions will increase INTERBASE's tuna catch from some 1,400 tons to 2,060 tons per year. These new boats will also be used for lobster fishing.

5.07 Deep water lobsters are currently being caught by industrial fishing boats. Industrial fishing for lobster is largely limited to Sal Island, because of a lack of facilities elsewhere to store and transport lobster. INTERBASE plans to build new facilities to mitigate this problem. It would also be possible to produce other shellfish such as shrimp through aquaculture. Shallow water varieties of lobster are caught principally by artisanal fishermen for local consumption. - 64 -

5.08 INTERBASEoperates more than 95% of the 9,950 tons of freezercapa- city for fish storage in Cape Verde. The principalstorage installationsare in Mindelo,where a 3,000 ton facilityhas been refurbishedand a 6,000 ton facilityhas been newly built with Dutch financingto better exploitthe tuna catch potential.The older facility was rebuilt to be divided later into a series of small units for installationthroughout the islands.The new facility is intendedprimarily for use by foreign fishing vessels. At present it operates at perhaps 25% capacity,but is expected to reach full capacityas Mindelo is developedinto an internationalfishing base. A main constraintto the full use of the new storagefacility is the inadequacyof port facilities.

5.09 During the off-season,Cape Verde has been sending the large tuna trawlers to fish by agreement in Angolan waters. Catches made during these trips have augmentedthe total industrialcatch by approximately35% in each of the last three years (approximately470 tons per year). Cape Verde is exploring the possibilityof fishing in other alternativefishing grounds during the off-season.

D. INVESTMENTPROJECTS

5.10 Planned investments in the fisheries sector are relatively modest. Excluding the developmentof Mindelo as an internationalfishing base (which is includedur'er industry),fisheries account for approximately4X of total investmentpzogrammed in the Plan. From 1981 to 1983, implementationof the Investment Plan for the fishing sector lagged substantiallybehind plan implementationfor most of the other sectors (See ChapterIII.E.). During the period of the Plan, the principalprojects for the industrialsubsector are the expansionof INTERBASE'sfleet and the completionof a fishingbase on Sal Island. For the artisanalsubsector, reinforcement of institutionalsupport. rehabilitationof canneries,and a fishing project in the Sotaventoislands, to be financedby USAID,are planned.Industrial fishing projects are far more advanced than those for artisanal fishing; the 12 new fishingboats and the Sal Island fishingbase shouldbe completedin 1984.

E. ISSUES

5.11 A principalissue in the fisheriessector is the apparentneglect of artisanalfishing. Despite the emphasisgiven to both large- and small-scale fishing in the Plan, the bulk of the institutionaland financialsupport to fishing is concentratedin industrial fishing. Although projects aimed at artisanalfishermen have not yet been successful,small-scale fisheries is one area where economic success should be likely, because resources and experiencedlabor are available.Furthermore, because artisanal fishing supplies a major source of protein,its developmentwill have a significantnutritional. impact. In particular,credit facilitiesneed to be made availableto artisanal fishermen,especially in view of currentgovernment policy to equip as many boats as possiblewith motors. Equipmentand spare parts are inaccessible to fishermenwithout the use of credit facilities.

5.12 More effectivesupport of artisanalfisheries requires a reformula- tion of the role of SCAPA which suffersfrom finaicialand managerialdiffi- culties, and is further hampered in achieving its objectives by the wide - 65 -

dispersionof islands and the poor transportationand communicationinfra- structure. The organizationneeds technical assistance in administration, financialmanagement and extensionservices. SCAPA'sobjectives also need to be clarified. Additional technical support to fishermen is necessary. For example,productivity is adverselyaffected by the inadequateamount of bait supplied by SCAPA. SCAPA's pricing policy should also be reevaluated.The Governmenthas indicatedthat it would look favorablyupon projectsto rehabilitate SCAPA.

5.13 Inadequateport facilitieslimit the economicbenefits of the expansion of the local fishingfleet and the Mindelo storage capacity.In particular, the new storage facility seems to be used below capacity because of shortage of berth space, which precludes its use by large vessels. The possibility of expanding the berth for the INTERBASEcold storage facility is under study. - 66 -

V. INDUSTRY

A. BACKGROUND

6.01 The industrial sector's contributionto GDP has been relatively small. In 1980, industryaccounted for only 5% of GDP and 2% of public investment. The Plan places great emphasison the diversificationof the economy to decreasedependence and providegreater employmentopportunities. The share of public investmentgoing to industrialprojects has been greatlyincreased. The first step in this processwas the CABNAVEproject. Although, the industrial sector'scontribution to GDP was only 42 in 1981 and 1982, industryreceived 17% of public investmentin 1981 and 24% in 1982. The Plan estimatesthat the industrial sector will receive approximately-onefifth of total investment during the 1982-1985period, and that industryand energy will constitutellZ of GDP by 1985, and 17% by the year 2000.

B. STRUCTURE

6.02 The industrialsector in Cape Verde is characterizedby small informal units and larger (medium-scale)industry. Small-scale, artisanal enterprisesare the most numerous and provide most employment.In many in- stances, these units consist of a single individualworking with one or two assistants, employing simple hand tools, and producing small quantities, usually on order. Typical activitiesinclude carpentry,clothing manufacture, automobile repair, food production (e.g., sausages, bread, cheese, aguardente),blacksmithing and tinsmithing,and handicraftproduction (principally weaving, ceramics,and carvings).A 1982 UNiID0study estimatesthe number of such enterprisesat more than 1,200 and employmentat 6,700 persons.Of these, 1,400 are in agro-industrialactivities, 1,000 in constructionmaterials, 2,200 in leather and textiles, 1,000 in wood processing and 1100 in other activities. (Industrialproduction data by product from 1974 to 1982 are presentedin Table A.48).

6.03 The largestshare of industrialproduction is obtainedfrom a group of public and mixed enterprises,the most importantof which will be analyzed below. The fact that the largestof them does not employmore than 200 persons at full capacitygives a preliminaryindication of the meaning of "large scale industry"in Cape Verde's contoxt. Much of the existingindustry is found in Mindelo, where a technologicaltradition exists from the days when its port was an importantcoaling station.

6.04 The principal state enterprisesin industry are MAC, EMPROFAC and ONAVE. ONAVE is an old, small ship repair yard in Mindelo. The plan proposes that ONAVE be rehabilitatedto function as a complement to CABNAVE. The projectproposal calls for the installationof a new system of drydockingthat would allow simultaneouslyrepair of up to fov.rboats under 25m in length. This would enable repairof the fishing fleet and small inter-islandtransport ships without encumberingCABNAVE. A separate project proposes to renovate ONAVE's foundry, to produce parts for both CABNAVE and ONAVE, as well as articles for use in civil construction(e.g., plumbing). ONAVE also has a fiberglass production unit, which could supply such domestic articles as - 67 -

chairs,sinks, and bathtubs.The possibilityof separatingand renovatingthis unit is under consideration.Since 1982, EMPROFAChas had a monopoly on such imports,distributing them throughtwo state pharmacies,three state medical posts, and private pharmacies. In April, 1983, the enterprise started to produce pharmaceuticalswhich it hopes to export eventuallyto African countries. MAC is a constructionmaterial enterprise,although its principal currentactivity is constructionitself. (ChapterVIII).

6.05 Morabeza, SOCAL and MOAVEare the main mixed enterprisesin the industrialsector. Morabeza is a factory in Mindelo that produces men's and women's clothing.Although it has on occasion exportedsome of its products, Morabezahas been unable to develop dependableoutlets abroad, and is consequently producingbelow capacity.Domestically, however, Morabeza's products are both competitiveand well liked. In contrast,SOCAL, a shoe factory in Mindelo,has not been able to developa local market. SOCALsuffers from the competitionof better quality imported shoes, and has been selling shoes at unprofitablelow prices.MOAVE is a mill, also in Mindelo,that producesflour from grain provided as food aid. At prescnt,the flour byproducts,which are used as animal feed, are in greaterdemand than the flour itself.MOAVE holds a 25% share of FAMA, the pasta factory that is to be opened in 1984. The private shareholdersin these mixed enterprisesare Cape Verdeans, typically either local aierchantsor emigrantswho seek profitableinvestments in Cape Verde. In the private sector, medium-scaleindustry is largely limited to bakeries producing bread and biscuits, a cigarette factory, and carpentry shops. Artisanaldistillation of aguardentefrom domesticallyproduced sugar- cane is an importantindustrial activity, although not much is known about its economics.

C. INSTITUTIONAL FRAMEWORK

6.06 Institutionalsupport to the industrialsector is providedto medium- scale industryby the General Directorateof Industrvand Energy (ECIE),and to cooperativesby the National CooperativesInstitute (IEC' and the Cape Verdean SolidarityInstitute (ICS). There ore currentlyno channelsof institutionalsupport to individualsmall producers.The functionof the DGIE is to formulate industrialpolicy and supervise its implementation. Because the DGIE is understaffedand its projectpreparation and evaluationcapability is rather weak, it has been able to do little more than study isolatedproject possibilities.In practice the DGIE has performed the role of line ministry for the state enterprises.Future industrialexpansion will depend largelyon the strenghtheningof this department through restructuringiL> role and developingthe skills of its staff.

6.07 The role of the INC is to promote the cooperativesector, which receivesparticular exaphasis in the Plan. There are some 32 cooperativesand precooperativesin Cape Verde, of which 13 are consumercooperatives. Of the producercooperatives. 9 are in agriculture,2 in fishing,1 in construction and 7 in other industries (principallycarpentry). These cooperativesare small, employing 7 to 15 working members. The role of the INC has been to create, organizeand sometimesmanage these cooperatives.It also coordinates and distributesequipment received through external aid. The impact of the INC in the developmentof small industrial enterpriseshas been limited. The - 68 -

NationalHandicraft Center (CNA),whose main concern has been to conserveand promote handicrafttraditions, has also provided some assistanceto cooperatives.

6.08 The main center for vocational training is the industrialand commercialschool at Mindelo,which offers 3-year courses in basic technical and commercialcourses. In 1982/83,its enrollmentnumbered 720 students.A similar institutionwill be be established in Praia in the near future. Severalnew curriculumareas such as managementtraining may be includedin a plannedmodernization of the Mindelo school. ICS has startedtraining courses in carpentry,and will soon offer trainingin locksmithing.

D. GOVERNMENTPOLICIES AND CONSTRAINTS

6.09 The planned exparsionof the industrialsector is to be based on (i) creatinga set of industriesdirectly targeted on exports,and, (ii)meeting a large share of domesticneeds through domesticproduction. Projects oriented toward the first objectiveinclude the CABNAVEproject, the relatedrehabili- tation of ONAVE. and the Maio project,which includesan export orientedsalt extractionfacility. To better meet domesticconsumption needs, the government intends to create a supportbasis for small scale industry,largely artisanal in nature, and to undertake several investmentprojects in areas where some local resources (i.e., constructionmaterials) are available;or where the requiredscale of the project is compatiblewith the domesticmarket. Projects of the latter type that are in the preparptionstage include a brewery, a plant that will produce soap, paints and varnishes,the modernizationof a printing plant, and other small scale projects. It is cxpected that some additional industrialactivities can be created in the short run through linkages with the developmentof industrial fisheries, such as the tuna canneries.Construction material projects includeprinLipally the Maio Cement plant and the pozzolanaproject on the islandof SantoAntAo.

6.110 As analyzed in Chapter III, it appears doubtfulthat the targets for the industrialsector, a sevenfoldincrease in average annual investmentand an annual rate of growth for the sector of 40%. can be achieved.The limited capacity for project implementationand the difficultiesencountered in obtainingfinancing for some projects have already resulted in the postponement of some projects.

6.11 An industrializationpolicy for Cape Verde needs to take into consideration several factors.Given the limited domesticmarket, most industrial projects have to include externalmarkets. Because of the country'sresource endowment,an industrializationpolicy shouldpursue activitieswith low water use and low energy and transportationcosts. Finally, the long run successof Cape Verde's industrializationpolicy will depend on the competitivenessof labor, the country'smost abundantresource, with other countriesat a similar developmentlevel. Although there is no reliableinformation on labor productivity and cost, nominal wage increaseshave been moderate to date (Chapter tI.F.),and the governmentis aware of the need to maintain such a trend in the future. - 69 -

6.12 Enlargementof the country's industrialbase will help reduce its dependenceon externalaid. Covernmentpolicy has been realisticabout industrial developmentpossibilities and has abstained from projects that, though politicallyprestigious, are not economicallyviable. Given the country's resourcebase, an industrializationpolicy involvesrisks, or in the Plan's word, "a gamble".The probabilityof successof such a gamble can be enhanced if individualprojects are thoroughlyanalyzed beforehand. Projects l 4.ke the cement plant, and possibly the brewery, should be carefully reevaluated. Second, more attention needs to be given to the promotion of small- and medium-scale industries,including cooperatives.Promotion of the smaller scale industrieswould address the unemploymentproblem, without necessarily conflictingwith the establishmentof export oriented industries.The potential importanceof small-scaleindustries has been recognizedin a series of reportsprepared by UNIDO and IAPHEI - a Portugueseinstitute of support for small- and medium-scaleindustry. Viable candidate industriesinclude construction materials, agro and fish processing sectors, and metal and wood workingprojects.

E. ISSUES

6.13 The first issue is the apparentgreater emphasis placed on large and medium scale as opposed to sm;ull-scaleindustry. Some of the advantages associatedwith the developmentof small-scalcindustry are (i) the subsector alreadyexists, is labor intensive,and would more likely benefit from remittances,which most often move through family channels; (ii) fewer risks are entailed; and (iii) significantpossibilities exist for linkage with the agriculture and construction sectors. Further, small-scale industry has potentialfor expansion,particularly wood productq,metalwork and to a lesser extent, handicrafts. Small-scaleindustries, however, unless organized as cooperatives,have no institutionalsupport; and serious problemsof marketing, credit and supply of raw materials confront this subsector.The Plan acknowledgesthese difficulties,and includesa proposal to create a center for the promotionand supportof small industries.

6.14 Medium and large scale industryare practicallynon-existent in Cape Verde. Confrontedwith the high risks associatedwith pursuit of larger scale industry, the Governmenthas demonstratedcaution in the promotion of such projects. No large-scaleprojects other than those already underway (i.e., CABNAVE) have been subjected to comprehensiveeconomic analysis. Before launchingadditional medium- or larger-scaleindustrial projects, the opportunities for small-scale development should be fully explored. Linkages between small- and medium-scaleindustry should also be exploredso that the productivityof both subsectorsmay be improved.

6.15 A second issue is the existinglevel of institutionalmanagement and support.Institutional capability for project preparation,implementation and evaluation is weak. There are various institutionscharged with promoting industrialdevelopment. A UNDP technicalassistance project is being prepared to supportthe technicaland institutionaldevelopment of DGIE, in particular, and the industrialsector, in general. - 70 -

6.16 Marketingproblems arc a third issue relevant to the developmentof industry. Due to Cape VeT.rde'ssmall domestic market. projects requiring economiesof scale must reYy to some extent on exports.Unfortunately, inter- nationalmarketing know-how lb lackingin Cape Verde, as well as the necessary communicationand financial infrastructure.This has caused problems, for example,with the country'sclothing factory which has been unable to sustain export demand for its productsdespite their apparentgood quality and compe- titive pricing. Technical assistance is needed to help establish local productsin severalpotential markets, including Portugal, Portuguese-speaking countriesand the countriescomprising the EconomicCommunity of West African States (ECOWAS).Cape Vcrde's diplomaticmissions and emigrant communities could assist in improvinginternational marketing through commercial attaches, promotionseminars, and selectiveparticipation in trade fairs.Aggravated by the distancesbetween islands, marketingof goods internallyis sometimesa problem as well. Communicationane storage capacity are often deficient. Handicraftproduction, for example, is limitedby a lack of both marketing channelsand qualitystandardization.

6.17 Another issue is the need to improve the instrumentsof industrial policy. (Creditpolicy is discussedin Chapter II.D.). There is also a need for an investmentcode. Governmentdecisions on incentivesand protectionhave been made on a case by case basis. Governmentintervention, either through public or mixed enterprises,seems to be determinedmore by shortages of entrepreneurshipthan by ideologicalconsiderations. Although foreign investment is not ruled out, some Cape Verdean participationis preferred.An investmentcode would clarifysuch points, as for example,the role of foreign and private investment,the areas in which governmentaccords priority,and the incentivesgranted to attract investmentin those areas.

6.18 Finally, a number of industrialprojects receiving high priority depend on importedraw materials,have limitedemployment potential and a low value added. Projectsmaking use of local resourcesapparently are being given lower priority.For example,light metal engineering,paint and soap projects (which rely almost entirelyon imported inputs)appear to be receivingmore attention.and are in more advanced stages of preparationthan projects for the productionof fish meal, clay bricks, cut and polished stone and other constructionmaterials. The Plan, however calls for greater emphasis to be place in industrialdevelopment that takes advantageof local resources,such as in the fishingand constructionmaterial subsectors. - 71 -

VII. ENERGY

A. BACKGROUND

7.01 Cape Verde's energy balance is characterizedby a completereliance on imported petroleum products to meet the energy requirementsof the main economicsectors, transport and industry. Approximatelyone-third of household cr.ergyneeds is satisfiedthrough importedoil. The remainderis suppliedby tirewood and biomass.

7.02 Becauseof the wide range in estimatesof firewoodconsumption, it is difficult to estimate energy consumptionby source reliably. According to a recent World Bank energy assessment.approximately 602 of the country'stotal energy consumptlonis satisfiedby firewoodand other biomass,and the remaining 40% by petroleum products. Firewood is used for domestic cooking purposes, and is also used bv bakeries,lime and ceramickilns, and artisanalrum distilleries. The large demand for firewoodhas created serious problemsof deforestation.which have been aggravatedfurther by the drought. Nonconven- tional sources of cncrgy (geothermal.eolic, solar, bingas) are still in an embryonicstate of development.

B. INSTITUTIONALFRAMEWORK

7.03 The Directorateof Industryand Energy,under the Ministryof Economy and Finance,is the main governmentagency in this sector. It has the role of planning the supply and distributionsystem for petroleumproducts, electricity, and water desalination; it also formulates energy pricing policy. The Ministry of Rural Developmentincludes the Forestry Service and a division charged with promoting the use of renewable resources in rural areas. In addition,the NationalInstitute for TechnologicalResearch studies new forms of energy (eolic, solar, geothermal)and the transferand adaptationof new technologiesto the country's needs. The supply of commercial energy is divided among several companies that are regulated by the Directorateof Industryand Energy: (i) ENACOL,a public enterprisesupplying approximately 38% of the domesticpetroleum market and 72 of the reexportmarket; (ii) Shell Cape Verde, a private company supplying the remainder of the domestic and reexport petroleummarkets; and (iii) ELECTRA, a public enterpriseoperating the major power plants in Praia, Mindelo and Sal and the desalinationplants in Mindelo and Sal. There are also twelve rural pc :r plants, most of which are owned and operated by local councils,and two other power plants in Sal that are linkedwith a hotel and the airport.

C. PETROLEUM

7.04 A particular feature of Cape Verde's petroleummarket is the large volume of reexports.In I982 imports of petroleumproducts were 184 thousand MT, of which 149 thousandMT, or 81%. were reexported.As Table A.49 indicates, between 1979 and 1982 there was a 15% decline in the total volume of reexports,which reflects a decrease in fuel oil reexportsand no change in jet fuel reexports. - 72 -

7.05 Annual domestic consumptionof petroleum products expanded 6% on average during the 1979-1982period. The major increaseshave been in the consumptionof gas oil and jet fuel. Preliminaryestimates provided by the energy survey indicate that transportation(33%) and water desalinationand power generation together (28%) are the major domestic users of petroleum products.

D. ELECTRICITYAND WATER

7.06 The Cape Verde ElectricityCompany (ELECTRA)has responsibilityfor the generationand distributionof electricity,and for the operationof the desalinationplants on SAo Vicenteand Sal islands.Electricity consumption is approximately11 million kwh. The consumptiongrowth in the last few years has averagedabout 16% annually.ELECTRA's power plants and distributionnetwork are old and in need of rehabilitation.Operating efficiency of the plants is low, and despite some improvementin thc last ten years, distributionlosses are currentlyestimated to be as high as 40%. ELECTRArealizes a large deficLt in its desalinationoperations, but apparently is in balance in its other operations.(ELECTRA's balance shect and operating accounts are not available). The electricitytariff structure for industrialconsumers follows a formula that has a fixed componentplus a variablc componentdependent on consumptionlevel. For domestic consumption,there are two fixed tariffs, dependingupon consumptionlevel. Both tariffshave been adjustedperiodically, with increases of about 9% in each of the last two years.

7.07 Desalinationof water is the country'smost energy intensiveindus- try. Two islands.SAo Vicente,where most industrialactivities are located, and Sal are overwhelminglvdependent on on desalinatedwater to meet their water needs. The main user of desalinatedwater is S&o Vicentewith approximately 98% of the total. Becauseof frequentruptures and numerous leaks in the system,water losses are reportedto be as high as 42Z of total production. Water tariffsfrom the desalinationplants arc extremelylow in comparison with production costs, witlhthe governmentsubsidizing the difference. Cost of productionin Mindelo is estimatedat 330 CV esc/m3,while tariffs range from 60 to 120 CV esc/m3. ELECTRA'ssubsidy in 1982 correspondedto 90 millionCV esc, or 7% of governmentcurrent expenditures.

E. PRICING

7.08 Domesticprices of conventionalfuels have been adjustedto keep pace with changes in world prices. The government'sstated policy is to pass on to consumersincreases in the price of importedoil. The two companiesoperating in Cape Verde - Shell and state-owned ENACOL - charge the CIF price plus a fixed margin (recentlyreduced from 10 to 8%). The taxes on fuel products representa combinationof specificand ad valorem taxes.Gasoline and gasoil importand consumptiontaxes correspondto 16 and 6% of the CIF price, respectively. ELECTRAand aircraft callingat Sal are exempt from import and consumptiontaxes, while the fishingfleet is exempt from the 8% margin charg.ed by the oil companies.

7.09 Governmentprice policy, enforcedthrough the Directorateof Energy, does not involve any explicit subsidies to the energy sector, with the - 73 -

exception of desalinated water. Prices are not to cover total operating costs. Without balance sheets of the operatingutilities and oil companies,however, it is difficultto assesswhether the price policy covers capitaldepreciation and other fixed costs. Nor is thaer sufficient informationto dc!ermine whether specific Importedoil products are subsidized.As the results of the energy mission confirm, oil used for power generationmay be subsidized to some extent. Separating the electricityand water components of ELECTRA's account is a prerequisiteto furtherevaluation of energy price policy. F. OTHIERSOURCES

7.10 Firewoodand ocgherbiomass fuels constitutea major source of domestic energy. Becaumc t"pproximately70% of the populationcannot afford othei fuel (kerosenc,butane), a great pressure is exertedon the country'salready scarce vegetation.About one half of the country's firewood requirementis being satisfied bv other biomass fucis such as agriculturalwastes, animal dung, and grasses.Firewood's efficiencyas an energy source is limitedby the lack of appropriateovens. The replacementof the traditionalthree stone fires by more fuel cfficientstoves could result In energy savings of up to 50% and reduce pressureon the country'ssparse vegetative cover.

7.11 The long-runnccds for firewood can be met only through an affores- tation policy. The 3f forestationof the country would provide soil cover, Increase watcr infiltrationand retention,and provide firewood and forage. Several difficultiesare encountered,however, in the implementationof such policy. The first is the need to use species that are sufficientlyresistant to the drought.Some acacia varietiesappear to offer good prospects.Second, the short rainv season, whichiis the best time for planting trees, also coincideswith the plantingof agriculturalplanting seeds. The short periods of rain are difficul.tto predict.making schedulingdifficult. The government has attempted to overcome these obstacles through the voluntarymobilization of all levels of the population during the rainy period. The government reforestation program has achieved successful results. Between 1978 and 1982. between 13,000and 14.000ha were planted,402 of which are in Santiago.

7.12 The developmentof other sources of energy is still at a preliminary stage. Eolic (wind) energv has a longer traditionin Cape Verde than other non-conventionalsources. Continuoustradewinds favor this source. A program under the Ministry of Agriculture,with Dutch and US technicaland financial assistance,is building a workshop that will construct windmills. A pilot windmill irrigationproject was recently inaugurated;but its technicaland cost performar.cerelative to the windmills traditionallyused in Cape Verde. Demster (US) and Southern Cross (Australia),have not yet been evaluated. Aerowatt (France)is experimentingwith the use of eolic energy for electricity generation on Santiago and Sio Nicolau islands. Solar energy, including solar salt ponds, is the responsibilityof the National Institutefor Techno- logicalResearch (INIT).Solar energyhas been used in salt production,drying of fish. and water distillation.Programs to develop other applicationsare still being studied. Geothermal energy is being developed with technical assistancefrom SIDA (SAREC),which is evaluatingthe potentialof this energy sourceon the Islandof Fogo. INIT is also coordinatingthis program. - 74 -

G. ISSUES

7.13 The first issue is the need to increaseenergy savingseither through more efficientuses of energy or by a reductionin losses.The governmenthas an ambitiousinvestment plan for the energysector, which includesan increase in the supply and improvementsin the distributionof conventionalforms of energy,and the developmentof alternativemethods. In the short-run,however, alternativesfor increasing energy supply, without recourse to increased imports of oil products, include reduction of distribot'onlosses between generationand sale, and improvementof the efficiencyoZ Dower generation. Projects that rehabilitate the power system are of utiost importance. Similarly,a reductionof water distributionlosses shouldbe given immediate priority. Water distributionthrough tanks or bottles could contribute to short-runsavings.

7.14 Due to the importanceof wood in local energy consumptionand the seriouly adverse effects of deforestation,priority should also be given to increasingthe efficiencyof wood energy use (throughmore efticientstoves, ar substituticaof other sources of energy for cooking such as biogas),and acceleratingthe reforestationprogram. In particular,the Jatropha Curcas L, plant, known locally as purgueira,is well adapted to the climate of Cape Verde and has energy and other applications;its introductionto Cape Verde shouldbe considered.

7.15 The pricing of different forms of energy should continueto receive close attention.Prices of desalinizedwater particularlyin Mindelo shouldbe revised to reflectproduction costs, while at the same time an effort should be made to increase the efficiency of the plants. A revision of ELECTRA's accounting system is an important step in that direction. Finally, import duties on petroleum products need to be changed from specific to ad valorem.

7.16 Institutional development and coordination of foreign assistance in the energy field is urgentlyneeded. At present,the Directorateof Energy and Desalination(Ministry of Economy and Finance),the Departmentfor Renewable Sources of Energy (Ministryof Agriculture),ELECTRA and INIT, are all involved in the sector. Severaldonors are also providingtechnical assistance and/or grants. The need is clear for the developmentof a national energy program that assigns clear responsibilitiesto each agency and grants general supervisionresponsibilities to a national energy commissston.Rural power plants must be integratedwithin such a program.The authoritiesappear to be aware of the need for a comprehensiveenergy policy and coordination;the NationalPlan calls for the creation of a "Scheme of Coordination"for energy policy.

7.17 To achieve long-termimprovement in the forestry sector, the country's institutionsneed to be strengthenedand supported.Aid pro-gramsfor developmentof forestresources have been fragmented.Coordination of separate aid efforts is made more difficultby the country'slimited human and financial resources.To this end, the forestry servicesshould be strengthenedand a comprehensiveplan prepared for the forestry sector that would coordinate the eff:_tsof donors. - 75 -

7.18 Currently,fuel is transportedbetween islandsby two ships adapted to fuel transportthat do not meet insurancespecifications. Reportedly, the acquisition of a 600 ton tanker is under co-siderationto alleviate the present distributionproblem. Further improvementsin inter-islandenergy distributionwould requirebuilding appropriate port facilities.

7.19 Given the scarcity of most of the conventionalsources of energy, some alternativepossibilities should be explored. Sun, wind and geothermal energy may offer Cape Verde some potentialfor furtherdevelopment. Available technologies should be reviewed and evaluated with respect to their adaptability to Cape Verde's conditions. Local research on this subject should be conductedwith external technicalassistance. - 76 -

VIII. TRANSPORTATION AND CONSTRUCTION

A. PORTS AND MARITIME TRANSPORT

8.01 Cape Verde'sforeign and inter-islandtrade depend almost entirelyon maritime transport.Porto Grande on Sao Vicente and Praia on Santiagoare the c-untry'smajor internationalports. The other islandshave minor port facilities. ENAPOR is the national agency in charge of port administration.Shell operates a port facility in Sal, through which most of the jet fuel for reexportenters the country. Port facilitiesin Cape Verde are deficientand deteriorating.The Governmenthas embarked on a major effort to reverse this trend. With support from the World Bank, Portugaland BADEA, the port at Praia is being rebuilt. Services to shipping at Mindelo are also being upgraded through the CABNAVE project. The USSR is supportingthe upgrading of small ports on the other islands, including the construct5onof Palmeira port on Sal.

8.02 The national shippingcompany, Arca Verde, carriesapproximately one- third of Cape Verde's foreign trade, and provides virtuallyall inter-island services. Arca Verde's fleet, appropriatefor the needs of the country, is composedof 7 freighters,2 ferries and one adapted tanker on lease to Shell. Internationalconnections are carried out by three private vessels and one Arca Verde ship. To reinforceinter-island transportation, the purchase of a ferry boat is projectedin the Plan.

8.03 A major problem facingENAPOR and Arca Verde is the lack of qualified staff. Managementimprovements, particularly in financialmatters, are urgently needed. Both public enterprisesseem to lack a realisticpolicy of capital amortization.There is a need for middle level qualified cadres, which is being addressedby the technicalschool at Mindelo-

8.04 Caoe Verde is well served by its road network.There are some 760 km of roads, of which some 300 km are of cobblestone.Roads are especially importanton the mountainislands of Santiagoand Santo Antao. The Ministryof Housing and Public Works (MHOP)is responsiblefor the planningand execution of road projects. Road constructionprovides a large number of temporary jobs, financedby the NationalDevelopment Fuiid. Some equipmentis available for heavy earth 4sbs, but the remaining work is done by labor intensive methods. The use of cobblestonesfor road constructionreduces the need for asphalt.In general, the constructionand maintenanr2methods are appropriate to the country'sresources. There is some lack of spare parts, causing equip- ment to remain idle for long periods. Some of the heavy equipmentis reaching the end of its expectedlife.

8.05 There is an urgent need to restructurethis subsector.The implementation responsibilitiesshould be decentralizedto different entities,while policy formulationshould be centralizedin MHOP. The national road plan, written in 1960, is being updatedwith external technicalassistance. The plan update efforts should also address institutionalissues and the need to increase support for local administrativesecretaries in charge of road construction. - 77 -

8.06 Another issue is the funding of the road program. Although the transfer of funds to the Ministry from the National DevelopmentFund is irregular,MHOP's cash needs are almostcontinuous. Often workersor suppliers are not paid promptly,with obvious negative consequences.The Ministry *f Economy and Finance has recentlyattempted to regularizepayments for road construction.One option under study is the creationof a revolvingfund i;1 the BCV.

B. AIR TRANSPORT

8.07 The internationalairport on Sal, the major Cape Verdean air link with the outsideworld, is also a major foreignexchange earner, (approximately US$5 million/yearon landing rightsalone). Recently,it has been upgraded via a project, with a first phasc cost of US$14 million, to resurfacethe runway and improvethe lightingsystem, access roads, and utilities.The Plan includesfurther improvements in the airport'spassenger and cargo access,as well as in main buildings. The estimated cost is US$17 million. Praia's airport is the second most importantin the country;its runwayhas recently been extendedand upgradedto accommodatenight landings.There are also small airfields on each of the other islands,with the exception of Brava. The public programincludes investment projects to improvethe smallerairfields.

8.08 Cape Verde'sair company (TACV)has a fleet of 2 HS 748's (48 seats), 2 twin Otters (20 seats),and 3 smaller Islanders (8 seats). The company is consideringthe purchase of a Boeing 737, so that it may compete on the internationalmarket, mainly in the Cape Verde-Europeroutes, although the economicviability of this projecthas not yet been established.There is also the need to improvethe utilizationof the presentfleet by better programming of flights,and in the near future, to increase the fleet for inter-island transport,possibly of merchandise.

8.09 TACV must improve its fiiancialmanagement. The policy of capital amortizationis not clear. In add;cion,TACV fares are low by international standards.Whereas the minimum competitiveprice per hour of flight is approximately CV esc 3,200, TACV is chargingless than CV esc 1,500. In 1981, the reportedlosses amounted to 50 millionCV escudos.

C. CONSTRUCTIONAND BUILDING MATERIALS

8.10 Constructionand building materialsare an industryfor which Cape Verde has ample resources.Substantial deposits of basalt, pozzolana,limestone, gypsum, and clay are found on the islands.Currently, the extractive industry is largely limited to pozzolana and salt; stone and gypsum are exploitedartisanally. Cape Verde has large reservesof active pozzolana,a volcanicrock which can be used as an additivein the manufactureof hydraulic cement,or when mixed with lime, producesa hydraulicbinder which can largely replace imported cement. Current production is used ertirely for local consumptionfor which it is mixed at a rate of 30% with Portland cement.A pozzolanagrinding plant was built on Santo Antao that can produce 5,000 tons per year and is scheduled to be expanded in 1985. Stone, the traditional buildingmaterial on the islands,has largelybeen replacedby cement blocks in urban areas. Because of the disorganized,artisanal nature of stone - 78 -

production,the high cost of transport,and the need for greater quantitiesof mortar, constructionwith stone is more expensivethan with cement blocks.

8.11 Since 1980, constructionhas been the most dynamic sector of the economy,providing one-fourth of GDP and one-fifthof employment.The CABNAVE project in Mindelo and the Sal airport improvementshave been partially responsible for this performance.At the same time, however, Cape Verde continues to face a substantialhousing deficit. The governmentestimates a housing deficit of 1,500 units.Of the existingunits, 47X do not meet minimum standards.There is also a..enormous and widespreadneed for improvementsin basic sanitation.

8.12 Housing constructionis undertakenby both the public and private sector. Most small houses are either built collectivelyby the owner and members of the communityor by mestres de obra, small contractorshired to superviseconstruction. There are four enterprisesinvolved In the construction of large buildings: EMPREITEL, a private enterprise;Construglo, a cooperative;EMEC, the State ConstructionEnterprise under the Ministry of Public Works; and MAC, the Public ConstructionMaterials Enterprise, under the Ministry of Economy and Finance. MAC's official function is to produce constructionmaterials; however, its principalactivity at present is construction itself.MAC also produces concreteblocks and roof tiles, and is responsible for pozzolanaproduction operations on Santo Antao.

8.13 Given the island's resources, real possibilitiesexist in this subsector; however, certain problems have prevented greater utilizationof these resources.Transportation is one critical problem. Port facilitieson Maio and Santo Antao are limited, and could act as bottlenecksfor expanded production.Both inter- and intra-islandtransport are expensive.The high cost of transporting stone is one of the reasons why cement block construction is so common in the cities. Poor organizationof artisanal productionalso raises the price of such productsas stonesand sand-plasterblocks.

8.14 The constructionmaterials subsector is an area emphasized in the Plan, and is one for which Cape Verde has some potential.In terms of actual projects, the explorationof constructionmaterial possibilitiesis being pursued principally through the Maio projects and the pozzolana grinding plant. Since the economicviability of the cement plant is still questionable, alternatives,such as pozzolana (as a cement substitute)clay, and basalt should be activelyinvestigated.

IX. TOURISM

A. BACKGROUND

9.01 Cape Verde has considerablepotential for tourism. The islands possess a rugged beauty, with magnificentcoasts and beaches, and offer a healthy climate. The averege temperaturefluctuates between 28°C (July-Octo- ber) and 25'C (November-June),with low levels of humidity. Despite these conditions,the tourism sec:or'seconomic importanceis rather small. Accord- ing to official estimates,income from tourismaccounted for less than 2Z of - 79 -

GDP in 1980. Of the approximately20,000 foreignvisitors to the islands per year, only about 3,000 are tourists. Generally,tourists consist of small tour groups (4 to 15 people) from France and Italy, Cape Verdeans living abroad,and occasional"world travelers".

9.02 Developmentof this sector faces several difficulties,one of which is the lack of countrywide infrastructure.Tourist infrastructureis mostly limited to hotels in Praia,Mindelo and Sal. The three hotels in Praia cater principallyto officialvisitors and technicalassistance personnel; there is, however, some excess capacity which can be used for tourism. The recent expansionof hotel facilitiesin Mindelo has createdadditional capacity for tourists.Nonetheless, in both cities,hotel capacitywill need to be expanded furtherif tourism is to increasesubstantially. On Sal, where the two existing hotels are occupied entirelyby internationalairline crews, there is an urgent need for more rooms, both to lodge tourists and to attract other airlines to the internationalairport. With the exceptionof Fogo, where a small hotel exists, the other islands are devoid of tourist infrastructure. Overall, it is estimatedthat with existing infrastructureCape Verde could accommodatetwice the currentnumber of tourists.

9.03 A large expansion of the tourism sector would create additional demand for already scarce water resources.Beyond certain limits, the expansion of tourismwould require large investmentsin infrastructuresupporting activities, such as the water and energy systems, the telecommunication network, and inter-islandtransportation. Although the employmenteffects of tourism expansion could be significant,the potential net gain in foreign exchangeseem a priori somewhatlimited. Because a large part of the required inputs (e.g., food and beverages) would have to be imported, the foreign exchangeleakages would be large and the value added small.

9.04 The government recognizesthe potential of tourism as a source of foreign exchange and employment, but is also concerned that tourism could have an adverse impact on Cape Verdean society and culture. Consequently, the role of tourism in national developmenthas not been fully defined. The Plan is cautious in discussing tourism, emphasizingthat it must be developed in conjunctionwith other sectors. During the Plan period, increased hotel capacity,is planned for Mindeloto supportits developmentas an international fishingbase, and on Sal, to enable the internationalairport to handle othier airlines.Construction of a 90-roomhotel on Sal has alreadybegun. The Plan also provides for the creationof a network of pousadas (inns) on the other islands to provide lodging primarily for visiting government officials and technicalassistance personnel. The Plan also calls for the passageof tourist legislationand the creationof a tourist agency,brochures, maps, and post- cards. As yet, none of these objectiveshas been realized,although tourist legislationwas to have been ready by the end of 1983, and the touristagency formedsometime in 1984.

B. ISSUES

9.05 Consideringthe limited infrastructureand material resources, a cautiousapproach to tourism Is appropriate,both to preventbottlenecks and - 80 -

to avoid excess capacity and overinvestment.On the other hand, there is little reason to fear an adverse impact of tourism on Cape Verdean society (given a reasonablycautious approach), in that considerablecontacts with other societiesalready exist by virtue of migration,sale of services,and the presenceof technicalassistants. More could be done withinthe guidelines of the Plan to promotetourism, even with the existinginfrastructure.

9.06 An initial developmentof tourism could be based on the following framework.Cape Verde currentlyreceives occasionalvisits by small tourist groups. An increasein the frequencyof visits by these groupswould providea continuityof demandsufficient to justifythe creationof auxiliaryservices, such as local tours, and sale of handicrafts.Second, the governmentshould activelypromote tourismamong emigrantgroups, vho have a minimallyadvcrse impact on Cape Verdeansociety. These communitiesalready provide an important part of the present touristdemand. It should be possible to promote emigrant tourism through Cape Verde's embassiesabroad. Third, creationof a tourist agency should be expedited,as well as the publicationof promotionallitera- ture, brochures.and maps. Tourism literatureshould be distributedabroad, to attract tourists,and on the islands,to inform touristsof potentialactivi- ties. Finally, contactswith internationaltravel agencies could lead to the creationof specialtravel packages.

9.07 Linkageswith the domesticeconomy could be developedthrough the use of hotels to supporthandicraft production. The handicraftindustry currently lacks outletsfor its products.Although the Hotel Praia-Mhar(Praia) does sell handicrafts,most other hotels do not; moreover,the handicraftsavailable at the Hotel Praia-Marare not representativeof handicraftsof good quality, particularlytextiles and ceramics,are produced in Cape Verde. There is an opportunityto improve the services available to tourists and promote increasedproduction. The revenuesobtained from an inereasednumber of tourists could also financeimprovements in and maintenanceof the existinginfrastructure. With appropriateincentives, the developmentof the tourismsector could attract emigrantcapital and managerialskills. - 81 -

X. PROSPECTS

10.1 The followingsection assesses the outlook for Cape Verde's economy through 1990, based on optimisticassumptions concerning climatic conditions and the availabilityof foreignaid. The lack of adequatehistorical data and the difficultyof assessing the impact of projects limit the reliabilityof economicforecasts. In the scenariosdescribed below, 1981 was chosen as the base year, because disaggregateddata are not available for the external sector in 1982. As a representativebase year, however. 1981 is not totally satisfactory,in that investmentexpenditures were unusuallyhigh relativeto GDP, because of two large projects.

10.2 Two scenariosare discussed,designated as "high" and "low", reflecting differentiallyoptimistic growth assumptions.The high scenario assumes the return of normal rainfallpatterns, and the successfulimplementation of soil conservationpractices, farming methods and irrigatedland use. The high scenarioalso assumes thac, as a result of planned investmentsand improved efficiency,industrial fishing output will increase.An overallprimary sector annual growth rate of 4% is projected in the high scenario.A more conservative projectionof 2% is assumedin the low scenario.

10.3 For the secondary sector, a slower pace of expansion is projected th., achieved in the past. Industrialgrowth, on the other hand, is expected to acceleratedue to the Cabnave Shipyardproject. For the sectoras a whole, a growth rate of 4% is projectedin the low scenario,and 7.5% in the high, the differencedue to differentialinvestment assumptions. For the services sector, it is difficult to estimate the large residual component associated with the informalsector. A 5% growth rate is projectedin the low scenario, which assumes that governmentexpenditures will keep pace with GDP and that internationalservices will continue to expand. More optimisticassumptions producean 8Z growth rate for servicesin the high scenario (see Table 10.1). - 82 -

Table10.1 CAPEVERDE: GDP Projectiaxs, 1981-90 (millionC.V. Esc.1981 prics)

1990 Am_al Growth Rate 1980 % of GP Low % GP Hi %ofGDP Low RI

Primry Production 785 23.9 927 19.8 1104 18.3 2.0 4.0

SecodaryProduction 815 24.9 1160 24.7 1563 26.0 4.0 7.5

Services 1678 51.2 2603 55.5 3354 55.7 5.0 8.0

GDP 3278 100.0 4690 100.0 6021 100.0 4.1 7.0

Population 300 359 359 2.0 2.0 (tbousmds)

Percapita GDP(US$) 224 268 344 2.0 4.9

10.4 For the decade 1981-1990,an overall annualCDP growth rate of 4.1% in constant prices is projected in the low scenario. With population assumed to grow at 2% a year, GDP pet capitawould rise from $224 in 1981 to $268 in 1990. In the high scenario,GDP would increaseat an annual rate of 7Z, and GDP per capitawould rise to $344 in 1990. In both scenarios,the serviceand secondarysectors would increasetheir sharesof GDP, while the primarysector would decline in relative terms. The projectionsassume a continued high incrementalcapital output ratio in view of the large share of infrastructure projectsin total investments.

10.5 The expectedpattern of nationalexpenditures is shown in Table 10.2. As explained earlier, the inordinatelyhigh share of investmentexpenditures is unlikely to be maintainedin the future. In the low scenario,real investment is assumed to decline from 84% of GDP in 1981 to approximately36% of GDP by 1990. In the high growth case, although increasingin real terms, investment expenditureswill decline to 582 of GDP in 1990. In the low scenario,as a result of the decline in investmentexpenditures and an assumed 5% annual growth in remittances,private consumptionis projectedto expandat an annual rate of 4.5%. In the high scenario,consumption would expand at 4.9% per year. In both scenarios,it was assuned that public consumptionexpenditures would es-entiallyremain constant relative to output at 32% of GDP. Based on the piospects for increases in agriculturaland fisheries output, merchandise exports are assumed to grow at an annual rate of 3% in the low scenario and 5% in the high scenario,reversing the previousdownward trend. Exportsof goods and services are expected to increase at an annual rate of 6.1% in the low -83 -

scenario, and 7.8% in the high scenario, most of the expansion occurring in international services. Import growth is projected as a function of the growth of the productive sectors, investment and private consumption. Private consumption, in particular, is closely related to workers remittances, which are expected to grow at 5% annually, based on the introduction of the special high interest accounts for non-residents.

Table10.2 CAPEVERDE: Natioml cpendituresProjections. 1981-90 (MiItximCV. Esc. 1981Prices)

1990 AnnualGrowth Rate 1981 % GDP Law % GDP Hlgh X GDP Low HE&

GCx2swtion 4394 134.0 6532 139.2 70:8 117.2 4.5 5.4

Private 3341 101.9 5033 107.2 5122 85.1 4.6 4.9

Public 1053 32.1 1499 32.0 1936 32.1 4.0 7.0 investment 2750 83.9 1668 35.6 3518 58.4 - 2.8

EqwrtsG & NFS 1155 35.3 190 41.9 2252 37.4 6.1 7.8

IuportsG & NFS -5021 -153.2 -5477 -116.7 -6807 -113.0 1.0 3.4

3P 3278 100.0 4693 100.0 6021 100.0 4.1 7.0

10.6 The public finance scenarios are shown in Table 10.3. In both scenarios, it was assumed that current expenditures (excluding debt service) would increase at the same rate as GDP, and that government investment would constitute 70% of total investment. Investment is assumed to have an elasticity of 1.5 with respect to GDP. In both scenarios, d surplus in the current budget is projected, excluding debt service. The more rapid expansion of revenues in the high scenario will produce a slightly lower current deficit. With debt service, a deficit of 5.6Z of GDP is projected in the low scenario, and 9.1Z of GDP in the higher. The amount of grants received was assumee to be the same in real terms in the two scenarios, reflecting an annual average increase of 2Z over the decade. - 84 -

Table 10.3 CAPE VERDE: Public FinanceProjections, 1981-90 (Millionof CV. Esc. 1981 prices)

1981 1990 Low M&h

OrdinaryBudget

CurrentRevenues 1087 1860 2670

CurrentExpenditures 1053 2147 2914

CurrentSurplus/Deficit 34 -287 -244

ExtraordinaryExpenditures 2290 1168 2463

Deficit 2256 1455 2707

Foreign Financing 2256 1455 2707

Grants 1853 1455 2707

Loans 923 325 1577

10.7 The public finance implicationsof forecastsare particularlyimpor- tant, as they concernone of the main areas in which public policy may play a key role. A rise in the current butdgetarysurplus is projectedbased on an assumption that governmentwill be ab'Leto restrain the growth of current expenditures.The public finance projectionsalso imply continuingneed for foreignaid to financedevelopment projects and debt service.

10.8 A criticalarea concerningthe consistencyof the projectionis the balance of payments (see Table 10.4). Based on projectionsfor exports and imports,the trade balance deficit would increasefrom US$80 million in 1981 to US$119 million (low scenario)or US$57 million (high scenario)in 1990. The estimated resource gap would reach US$100 million in the low scenario and US$135 million in the high scenario. The estimatesfor debt servicepayments were derived from outstandingdebt and non-committeddebt in 1981. The flow of foreign aid was assumed to rise moderatelyin real terms relativeto 1981 levels. Based on the assumptionconcerning worker remittances,the current accountdeficit is projectedto increaseto US$55 million in the low scenario, and US$94 million in the high scenario. The capital flows re.quiredare US$64 million in the low scenarioand US$106miliion in the high scenario,of which US$23 millionwould be grants. The ratio of debt servicepayments to exports of goods and serviceswould be 16.1% in the low scenarioand 24X in the high. - 85 -

Table 10.4 CAPE VERDE:Balance of PaymentaProjections (MillionsUSS currentprices)

1981 1990 Low High Trade Balances -79.5 -119.2 -156.5 Exports 6.3 8.7 10.4 Imports 85.8 127.9 166.9

Factor ServicesNet .3 18.5 20.8 Exports 17.5 51.4 58.3 Imports 17.2 32.9 37.5

ResourceBalance -79.2 -100.7 -135.7

Net Factor Income 36.1 46.2 42.1 of which: worker remittances 37.4 58.0 60.6

H and LT Interest .8 9.7 16.5

CurrentBalance -43.1 -54.5 -93.6

Debt Service -43.1 -54.5 -93.6

Capitalflows 49.7 63.8 105.8 cf which grants (21.2) (23.2) (23.2)

Debt ServiceRatio 16.1 22.2

10.9 The considerableattention that Cape Verde has received from the internationalcommunity in the short time since independenceis due in part to the difficultconditions it has faced since then, particularlythe drought. Small volumes of foreignaid have a relativelysignificant impact, given the country's small population. Many other countries compete for available foreignfunds; aid flows will thus depend *,nconvincing foreign donors of the merits of Cape Verde's case. The rela;ivelyhigh levels of foreign aid projectedin both scenariosare based ir.large part on expected improvements in economicmanagemer.t policies and inv'-stmentprogramming, including project preparationand implementation.These factors should also heavily influence the availabilityof foreign loans, which will determinethe maximum size of the investmentprogram, and thus the feasibilityof the high scenario. The need for continuedaid is especiallyimportant, not only to financeimmediate- ly p'oductiveinvestments and associatedrecurrent costs, but also investment in the social sectors (health,education) and the developmentof infrastructure, which have longerterm payoffs.