Cape Verde 2012 www.africaneconomicoutlook.org Cape Verde In 2011 Cape Verde suffered from the financial crisis in the euro area. Economic growth slowed from 5.4% in 2010 to 5.0% in 2011. It is expected to stabilise around 5.1% in 2012 and 2013. The country has performed in an exemplary manner in terms of public sector governance. Substantive reforms have reduced corruption and improved the quality of business transactions, but weaknesses in infrastructure impose increasing constraints on sustainable economic growth. Cape Verde is one of a handful of countries in Africa likely to attain all eight Millennium Development Goals (MDGs), including that of reducing poverty by a half between 1995 and 2015. Its social protection system covers old age, disability and death. However, the country faces a relatively high unemployment rate, particularly among the young. Overview Cape Verde, a small island state, is a lower middle-income country (MIC) under the African Development Bank’s (AfDB) credit policy. [1] Cape Verde’s Gross National Income (GNI) per capita in 2010 was about USD 3 270, exceeding the MIC classification threshold of USD 1 175 GNI per capita by a large margin. However, in spite of significant progress over the past two decades, Cape Verde continues to be confronted by a number of fundamental constraints and challenges to its development. Apart from its insularity, Cape Verde is facing problems in the form of its fragmented territory (there are ten islands), small population (fewer than 500 000 people) limiting its internal market, a dry Sahel climate, and scarce natural resources. To address the flagging economic activity resulting from the international economic crisis, and in particular from the euro area debt crisis, the government adopted a countercyclical public investment programme (PIP) for the two years 2010-11. As a result, gross domestic product (GDP) growth accelerated to 5.4% in 2010, though it slowed to 5% in 2011. The fiscal stimulus compensated for the contraction of private sector investment and maintained an adequate level of infrastructure development. Although tourism continued to recover in 2011 the external current account deteriorated again in 2011, primarily because of higher imports of capital goods, reflecting the government’s fiscal stimulus. For 2012-13, the authorities’ base scenario assumes tightened fiscal policy and prudent monetary policies. Real GDP growth is expected to be around 5%, allowing foreign reserves to remain above three months of imports to safeguard the peg with the euro. Inflation during 2012-13 is expected to be around 3%, down from 4.5% in 2011. Cape Verde’s medium-term development strategy aims to transform the economy by diversifying its productive base. A major effort is under way to develop clusters for “sea” services (maritime services and fisheries), financial and information technology (IT) services, and air transportation services. In this endeavour, Cape Verde has to overcome a number of fundamental challenges: its insularity, fragmented territory, and small population limit its internal market; its infrastructure is of insufficient quality, impeding competitiveness; and its business environment needs further reform. The country is also dependent on external financial resources, including development aid and transfers from its diaspora, and is vulnerable to external shocks. In addition, it faces a relatively high unemployment rate, particularly among the young (who collectively represent over 50% of the labour force). [1] Cape Verde was a Category B (blend status, eligible for both African Development Fund (ADF) and African Development Bank (AfDB) resources during 2009-11. Since 2011, it has been considered a Category C country (ADB-only), in compliance with the criteria laid out in the Bank’s Credit Policy. African Economic Outlook 2012 2 | © AfDB, OECD, UNDP, UNECA Figure 1: Real GDP growth (Western) 12.5% 10% 7.5% 5% Real Real GDP Growth (%) 2.5% 0% 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Real GDP growth (%) Western Africa - Real GDP growth (%) Africa - Real GDP growth (%) Figures for 2010 are estimates; for 2011 and later are projections. http://dx.doi.org10.1787/888932618633 Table 1: Macroeconomic Indicators 2010 2011 2012 2013 Real GDP growth 5.4 5 5.1 5.2 Real GDP per capita growth 4.5 4.1 4.1 4.2 CPI inflation 2.1 4.5 3.3 2.5 Budget balance % GDP -10.8 -10.7 -10.1 -10.5 Current account % GDP -12.4 -15 -12.3 -10.2 Figures for 2010 are estimates; for 2011 and later are projections. http://dx.doi.org/10.1787/888932602008 African Economic Outlook 2012 3 | © AfDB, OECD, UNDP, UNECA Recent Developments & Prospects Table 2: GDP by Sector (percentage of GDP) 2006 2011 Agriculture, forestry, fishing & hunting 9.4 8.2 Agriculture, livestock, forestry and fisheries -- of which agriculture -- Mining and quarrying 3.5 3.5 of which oil -- Manufacturing 3.7 3.4 Electricity, gas and water 0.4 0.2 Electricity, water and sewerage -- Construction 10.5 10.7 Wholesale and retail trade, hotels and restaurants 23.7 26 of which hotels and restaurants -- Transport, storage and communication 23.8 23.6 Transport and storage, information and communication -- Finance, real estate and business services 7.6 7.2 Financial intermediation, real estate services, business and other service activities -- General government services 14.5 13.9 Public administration & defence; social security, education, health & social work -- Public administration, education, health -- Public administration, education, health & other social & personal services -- Other community, social & personal service activities -- Other services 2.9 3.3 Gross domestic product at basic prices / factor cost 100 100 Wholesale and retail trade, hotels and restaurants -- Figures for 2010 are estimates; for 2011 and later are projections. http://dx.doi.org10.1787/888932620609 Cape Verde’s small, open economy, with an estimated GDP of USD 1.9 billion (current USD)[1] in 2011, is structurally vulnerable, given its high degree of openness and dependence on foreign financial assistance, including aid for support of the peg of the Cape Verdean escudo to the euro. Lacking natural resources and economies of scale to sustain a significant manufacturing base, the economy is concentrated in services, which accounted for 80% of GDP in 2010.[2] Over the past decade, the economy has become specialised in tourism, which dominates the tertiary sector, contributing 80% to it, and is the driving force of the economy, accounting for about 26% of GDP. It attracts most of the foreign direct investment (FDI) flowing into the country, contributing to growth in the construction and real estate sectors. Industry is limited to light manufacturing and accounts for only some 3.4% African Economic Outlook 2012 4 | © AfDB, OECD, UNDP, UNECA of GDP. The primary sector likewise contributes only some 6% to GDP, in spite of providing employment to nearly 40% of the population. The country’s poor natural endowments, in particular limited arable land and a drought-stricken arid climate, diminish the prospect that agriculture will ever be able to feed the country or provide much additional employment: the country imports nearly 90% of its food needs and virtually everything else it consumes, including 97% of its energy needs. Imports, therefore, account for over 60% of GDP, and the country’s balance of payments is chronically in deficit. In spite of the enormous potential of its marine resources and extensive exclusive economic zone, fisheries remain small scale and artisanal. A recent positive trend in the primary sector has been the rapid growth of drip irrigation which has spawned a vibrant commercially focused production of fruit and vegetables.[3] In 2011 Cape Verde was confronted by a more difficult external environment. In spite of the growth of tourism, fish exports and private remittances, the rise in capital imports, linked to the government’s fiscal stimulus, led to a sizeable widening of the current account deficit. At the same time, the 2011 fiscal deficit was lower than budgeted. Tax revenues held up well, and shortfalls in non-tax revenue were offset by controlling expenditures. Nonetheless, the near-term outlook is subject to risks from the increased possibility of recession in the euro area. In anticipation, the authorities need to contain credit expansion and minimise domestic borrowing to finance the budget. Under such a scenario, import growth would slow and the balance of payments would improve. Enhanced monetary and fiscal policy co-ordination would help in finding the right balance between fiscal restraint and interest rate increases to contain credit growth, while ensuring that reserves are built up over the medium term above the current three months of import coverage. If the euro area slowdown turns out to be protracted, foreign investment and growth in Cape Verde are likely to be muted over the medium term. On the production side, the medium-term scenario assumes continued weakness in the tourism sector, mainly reflecting conditions abroad, that translate into a real GDP growth rate hovering just above 5% in 2012-13. Furthermore, weaknesses in infrastructure pose increasing constraints to sustainable economic growth. In particular, investment in the transport and power generation sectors is required to avoid bottlenecks for private sector activity, where current levels meet present demand but need to be expanded to accommodate future demand. Barring any unusual weather patterns, agriculture will continue to grow at the rates of recent years. On the demand side, Cape Verde’s growth prospects are being supported by increases in private sector activities. On average in 2012-13, private sector gross capital formation (GCF) is projected to be boosted by FDI at a time when public sector GCF is contracting, and private sector consumption is accelerating again compared to 2008‑10. These growth prospects need to be encouraged by intensifying the envisaged reforms of the business environment.