Cape Verde Economic Outlook
- 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.
Cape Verde, a small island state, is a lower middle-income country (MIC) under the African Development Bank’s (AfDB) credit policy. 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).
