Recent Developments & Prospects
Economic Cooperation, Regional Integration & Trade
Economic & Political Governance
Public Sector Management, Institutions & Reform
Natural Resource Management & Environment
Thematic analysis: Structural transformation and natural resources
Authors: Adalbert Nshimyumuremyi, Heloisa Marone
- Economic growth has been slowing over recent years and Cabo Verde has been less resilient to the euro area crisis than previously thought.
- In order to reduce the budget deficit and curb the high indebtedness trend, the government is shifting the focus from accelerated capital accumulation to improvements in the quality and efficiency of public infrastructure.
- Cabo Verde is on track to reach most of the Millennium Development Goals but significant challenges remain, particularly high unemployment and persistent inequality.
Since 2012, the economy has been hit by the weak international economic situation. GDP growth dropped from 4% in 2011 to 2.5% in 2012 and to 1% in 2013. Business and consumer confidence indicators have deteriorated while foreign direct investment (FDI) flows have pursued their declining trend in the balance of payments. However, public sector demand continued to provide support to the economy. Growth is likely to be around 3.1% in 2014 if the current recovery of the euro area, Cabo Verde’s major trading partner, is sustained. If the slowdown in tourism revenue persists, however, this would dampen the main engine of growth.
As a result of the increase in the public sector’s borrowing requirements to finance large investments in infrastructure, the total nominal government debt has increased from 69% of GDP in 2009 to an estimated 93% in 2013. In 2014, the government will focus on medium-term fiscal consolidation to rebuild policy buffers and lower debt related risks, but some temporary fiscal and monetary easing may be considered in line with the economic cycle if weakness persists. In this context, it will be critical to accelerate reforms in the business environment to improve competitiveness, particularly in the labour market. In parallel, returns to the impressive investments in infrastructure will need to be raised by strengthening the management of the public capital stock. In the financial sector, credit to the economy is likely to remain limited as banks have grown increasingly cautious given high levels of nonperforming loans and the need to build provisions, limiting the potential for growth.
Cabo Verde limited production base connects to global value chains mainly through the services sector: tourism and people working abroad. The sector of tourism is the most engaged in global value chains, having become an important engine of growth in the Cabo Verdean economy after 2005. The large diaspora connects the country to global value chains through their work abroad. Exports of sea products, which are mostly canned and frozen seafood, also engages the country in value chains abroad, albeit the impact on GDP is very modest. Going forward Cabo Verde is seeking strategies that can position the country at higher-value stages of the global value chains by stimulating new exports of goods and services and expanding existing ones, especially around the creative sector.
Table 1: Macroeconomic indicators
|Real GDP growth||2.5||1||3.1||3.3|
|Real GDP per capita growth||1.7||0.1||2.2||2.4|
|Budget balance % GDP||-9.8||-7.9||-7.7||-8|
|Current account balance % GDP||-11.7||-5.7||-10.1||-10|
Source: Data from domestic authorities; estimates (e) and projections (p) based on authors’ calculations.