_ape veraeDpening up a Small Economy\n Agenda for the 1 990s.ne 11, 1993

,frica Regionahelian Departmentountry Operations Division

MICROFICHE COPY

Report No. :10594-CV Type: (ECO)Title: UPDATING ECONOMIC NOTF : OPENIAuthor: MBI, EExt .:34953 Room:J9087 Dept.:AF5CO

ocument of the World Bank

iis document has a restricted distribution and may be used by recipientsIly in the performance of their official duties. Its contents may not otherwisedisclosed without World Bank authorization.

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Currency Eauivalents

Currency Unit - Cape Verdean Escudo (CVEsc.)CVEsc 1 million - US$13,420

US$1.00 = CVEsc. 74.5(May 1993)

SYSTEM OF WEIGHTS AND MEASURES

Metric System

ABBREVIATIONS AND ACRONYMS

AFDB African Development BankBADEA The Arab Bank for Economic DevelopmentBCV Bank of Cape VerdeCECV Caixa Economica de Cabo VerdeCUBCA Cape Verdean Business and Commerce AssociationGDS General Directorate of StatisticsEIB European Investment BankEPZ Export Processing ZoneGDP General Directorate of PlanningGDP Gross Domestic ProductGPA General Program for AIDSIMF International Monetary FundISPS Instituto de Seguros e Providencia SocialMFP Ministry of Finance and PlanningMpD Movement for DemocracyNGOs Non-government OrganizationsOPEC Organization of Petroleum CountriesPPGD P-ablic and Publicly Guaranteed DebtODA Official Development AssistanceSAA South African AirwaysUSAID United States Agency for International DevelopmentWHO World Health Organization

FISCAL YEAR

January 1 - December 31

FOR OMCAL USE ONLY

TAL Or CONTEFNTS

ABBREVIATIONS AND ACRONYMS . ............... . ....

SOCIAL INDICATORSS OF DLOPMENT . . . . . ....... ..........

COUNTRY DATA - CAPE VERDE . . . . . . . . . . ..............

EXECUTIVE SUMMARY . . . . . . . . ... . .. . . . . .i. .. . . . . . . i-v

I. THE PASTs LEGACY OF AN INWARD-LOOKING ECONOMY (1975-88) . . . . . . . 1

A. Country Background 1

B. Inward-Looking Development Strategy . . . 2C. Economic Performance and Macro-Economlc Management . . . . . . 2

II. THE RECENT PAST: ECONOMIC SITUATION AND ISSUES (1989-91) . . . . . . 5

A. Deterioration in Economic Performance . . . . . . . . . . . . . 5

B. Causes of DeterLoration in Economic Performance . . . & . . . 9C. Structural Deficiencies and Other Constraints . . . . . . . . 10D. Constraints on Private Sector Development . . .. . . . . . . . 11

E. Attempting to Open Up the Economy. . . ....... ... . 12

:III PREPARING TO FACE THE FUTURS: TRANSITION TO AN OUTWARD-LOOKINGECONOMY (1991-92) . . . . . . . . . . . . . . . . . . . . . . . . . 13

Ai Shift in the Government's Role in the Economy . . . . 133. Economic StabLlization and Structural Reforms . . . . . 17C. Investing tn Human Resource Development . . . . . . 22

IV. FACING THE FUTURE: MEDIUM TERM DEVELOPMENT PROSPECTS AND AGENDAFOR THE 1990S . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

A. Sources and Prospects for Economic Growth . . . . . . . . . . . 26

B. Large Investment-Savings Cap ................. 27

C. External Debt Management .................. . 29

0. Public Investment Plannlng and Aid-Coordination . . . . . . . . 30E. Need to Improve Statistics and Data Bse . . 32F. Long-Term Issues 33

END NOTES . . ....... .................................... 36

STATISTICAL ANNEX . . . . . . . . . . . . . . . . . . . . . . . . .. . . 38

MAP - IBRD 15079R1

List of Tables

TABLE 1: indicators of Economic Performance, 1987-91 . . . 5TABLE 2: Indicators of Internal Imbalances, 1986-91 . . .. . . . . . . 6TABLE 3: External Financing Requirements ard Resources, 1986-91 . . . . 7TABLE 4: Central Government Revenues, 1988-92 . .. '... .. . . . . . . 19

TABLE St Economic ClassificatLon of Central Government CurrentExpenditure, 1988-92 ............ , ........ o. 19

TABLE 6: Some Basic Information on the Status of Women, 1990 . . . * * . 2STABLE 7: External FinancLng Requirements and Resources, 1991-95 . . . . 28TABLE 8s Public Investment Allocations ln 1991/92 . -......... 31

This document has a festricted distribution and may be used by recipients only in the perfiormnanceof their oMNcial duties Its contents may not otherwise be discosed without World Bank authorizFtion.

(continuad)

LIST 0OF0OXE

BOl o Gaps ln the AnalytLcal Base. . ....... ....... .. 480X 2* ServL.e-saud sconoy . . ............. . . ..... 9BOX 3: Institutional Structure of Investrent Promotlon . . . . . . . . . . 17BOX 4: Improving AdmLnLitratLve Procedures . . . . . . . . . . . . . . . 21SOX 5S OpenLng-Up the Economy -- Some Strengths and Weaknesses . . . . . . 27BOX 6s Consumption Levels ln Cape Verde 34

Previous Economic Reportt Cape Vries a Country Ueonomc wora erdus, Report No.5446-CV, February 5 29'S.

PREFACE

This report reviews Cape Verdem' economlc hlitory ilnce independenceand assesses current development etvategy, macro-economic polLcies, andprospects for economic growth ln the medLum term. The report is based ona World Bank economLe/operational mLssion to Cape Verde in February/March1992. Emmanuel Mbl, Prlncipal Country Officer (AF5CO), led the miLsion.Gradimir Radisic, EconomLit (AFTEF), assisted him in the. 'design of thetask and the coordinatlon of the mission. The princlpal author of thisreport is Gradimir RadLiLc under the supervLiLon atid guldance of EmmanuelMbi. Contr!-butLons to the -vport were provlded by Michel Loir (AFSIN)wlth regard to 1nfrautructu-e; R#n& Vaure (AFSPH) and Joseph Bredie(AFTPN) on social sectore; Jostoin Aarrested (AFTEN) on envlronmentalissues; Loup Drefort (AFTIM) on the public enterprise sector; Ara MarlaLeal and Carlos Proenga (consultants) made contributLns on nationalaccounts and social indlcators. Bmmanuel Mbi, Willem Van Zeghen (PeerRevlewer), Joseph Bredle, and Jean-Loula Barblb (Chlef, AFSCO) providedsubstantLve suggestLons and comments ln the lnltial phases of the reportpreparatlon. Patricia Fiore-Kasey, Myrlna Harrls, and Hazem Baghdadi(AF5CO) provided assiLtance in producing the report.

The report is the product of close collaboratlon between the Bankand Cape Verdean government staff. The draft report was discussed with thegovernment in July 1992 and comments received are lncorporated lnto thereport. The draft report was also shared wlth key donors; thelr commentshave been Lncorporated lnto the report. The government used the report lnthe preparation of the fLrst phase of the Donors' Roundtable Meetlng heldin Geneva ln Occober 1992. At the meetlng, whlch focussed on policy andstrategy Lssues, the report was used as a background document on theeconomy. The report was subsequently revlied and expanded followlng thatmeeting and ln light of the evolution of government's economic reformprogram.

SOCIAL INDICMORS OF DEVELOPMENT - CAPZ VERDE

| q (q ) 4,035.S Amble hi (sq 426

g~~~~~~~~~~~~~~~~~~~~~~~ckva f Clblen 92.0%

| D= lpa bX W$86.4 DemWy pew saqhn of mbb ld am

P qpubdo UnM Heab (1990) Unik

Po lan (1990) (Paemom) 34,353 Puatnpt phyan (p_on) 11.478

of whib kw Own 14 yes old (S of pop.) 44.8 Poato pt bhp bed (pono) 633

of whikh Omerosa 6S yas (S of pop.) 5.1 bPs (pe ) 433

Natoal bwith nu (19090) (unnail S) 2.70 an San Vicsoe (pe_uom) 328

Growth raw . fot amipsiloo,(198040) (an-ual S) 1.53 Anad blah (1X ofce) 54.4

of which uba (annuaS) 3.93

of which nwl (_a %) 0.35 Ass. t. SoWb r and BSlaliy 1M) '

Sfe war

Cradebilth no (1938) (per 1.000) 36.4 uban huhdoi (S of "p.) 83.0

Crudedahae (1938) (pe 1.000 0.2 ur housholds (S of pop.) 50.0

Jnfantmotai (1989) bawcbolswithbathsuow (S of pop.) 25.0

a than I y ald (per 1,000 Ihr 55.0 heushbolds whb phaabkg (S or pop.) 15.9

. m dhan 5 yea ald (pet 1,000ve 61.7 BElauIck househols (S d po.) 25.8

! i! xuncyet blah (1931590) WMen) 63.0

Featiy nu pwWot (1M99) (bit per wom 6.4ge IS to 49)

Activepopuion(1990 Educa"on (1990) (peonage)

Aciv popudlon(s 15.64) ( of labor ore) 65.2 Lhq rawn (aoeh egV of 1I) 48

men 90.0 Pabmqa achosovellmats (aP a57*12)

Wom_ 45.0 PWWeSa b m.r) 32

Unamnloymmafta (S of labor forc) 23.1 Qiaslile teahen (prly) 19.4

H iNmeboM Eaeme Per Cap (199)I onIfitbla (ic CV S4) 47.300

anpooruibhnd (in CV SW) 26.100

COUNTRY DATA - CAPS VERDE

0mm N.loa P odadw covilm 1O O 21"l90 UW

CGo Domwdi PIoduo pw map 759 (to 1100 ) Amu GmUh * g. GWD

Ussmi5 (Coosa 910 PAW)

190 Pdwm X (3DP 196.90 296 1989 1990 1991

ODP aS mutes pilm 275.11 100.0 5.5 7.6 5.6 2.2 3.3

Gao doernaicsuaM 60.1 29.1 9a . .9.2 .10.7 3.7 -5.9

o (omlgaavhw 80.1 29.5 .5.4 .4.9 2.1 7.5 -15.2

Cumsewtm=behnc. (axl. 6mm) .32.9 .12.0 .14.9 9.6 *24.2 *15.6 0.2

Eapo of ONFS 63.7 23.3 3.5 .*.9 52.6 *13.2 46.

bo otONFS . 52.6 55.7 *2.3 9.4 10.6 1.0 .10.4

Outlast. kp2oyumm. and P_duby (1990)

Vala Added LAW Pam Vai Mdded pot

wo*s pt moo&

USSWMI £ of Toa Nsmbw S otToI US$ o Avg.

Primay eO" 56.9 13.5 24,609 30.4 12S 44.4

Soouduy _ser 49.8 18.2 23.44 29.0 177 62.6of wblb oomsiacdo 27.9 10.2 1t390 22.1 IS0 46.2

Taoy nwor 164.6 60.1 52,911 40.7 416 147.7

of which maci mvlso mod .1. 59.t 21.6 I5.509 19.1 521 114.1

Toealavmosg 275.8 200.0 61.056 200.0 282 100.0

Governm eel m Pha.CYb MILSI S o'GDP

1990 2966 1916 1990

Cuxma ei5.7961 21.9 20.9 19.6

Curaseah 585.3.2 21.5 20.6 20.1

Oovormmtviua .44.4 0.4 03 40.2

Ciph uzPmdifam 2,1100.0 59.5 22.1 14.6

WOM . Cuui. a Pi

I Ig",~~~~~~~~~~~~~~~t lsn I§" 1 t

(m d CAP Veas Bmdm)

^ mwb* (Amw -a qm. ) 74 Uf 9,571 19) 32.77

Oak a to ph. -M 2,242 21251 1.512 534D

Bakuo_ b PIuMm 2.39l 1 Sim 404 4,91

p" dO Dl "A 41.1 35.9 324

c_nin p- z 011-300) 5 123 " 16.7 Me4.4 1479 Ia

Cm_ . -w b PU" 30. 4. 5. 5.5 380

auk m tophiam now.9 ILI 7. 28. amueohwptebm 4) low2J 2. 22.5 32.4

U.S. ddhr $ Cap Viu mdi 3.20 2 7n.9 ei 12.41 I

c Vp vieb mdo pUr l bb W0.02 80A4 v.04 020 I< IU14

COUNTRY DATA - CAPE VERDE

kbbm mE ftwook, MGM 40bIII d INS

Eqwm of GN 3.2 47.0 as 57.1 5.

Iwara E GNFU .55 -fill .3.. .31.3 .5_.2

PRwof "- ) .43 145.51 77.3 ." .03

_daNFJ #a 47.4 44 ..4A .2* -. I

_ daNFu WQ) 0.A 1.2 U 44L

Mela .ns 34" 3U 3 4.3J.2

54.. .4dd Im. d.2 47.2 3. 27* 25S

b. - .d s m 3.7 W3.? 0A4 44 4,1

M _i - bmIp b.um OA 44 4I

N. IL? h.m..s d 9 4 .2. 2.2 3

V6.huMM 211.91 32.2 4.9 9. 2*

AwD _ _ 04* .7.4 .7.2 .74 4.2

3am _1 _163 44 2 44 499

O 0u h1 23 11.7 * l3 .11.1

ram_bs 43 *11.7 l*a 41 11.1

_ ms_n (-5* 4i .3*A .L5 44 4.2

G~ -nn ta parfol Su 7S3 as a" MA

Gum m ha dm05413 7. U 9A 7.? 7.2

ad.sM to Mk 11,daGmP lmu 3m

3WAMid 3.5 SO.7 %M ad k9" Gw~w

cowa 0~ 54 OA 5 1 xGmN ad 1 bs OA 0

rMI. De.plm P.9 3LJ S XNU rn.5. 240_sbo 11A 4ui@ 0

TOM DeiIft b*A 2104A nu0III.2 R lA Ladh elob 33.303)

ID m

Ms. n.w (Ae 306MG)F_ usM3.N

vowd ofOPA ad dhSuuu 54

411MNI d U11) Tat tAVAImIc 6

9kb 2,75.4 5.2

-wm 30.7I $4

_M_e ad 3os. 43* 7.9

Glhw~ 96 1 , 7 _I

Told 8,437 JA

EXECUTZVE SUMMARY

Preparing to Face the Futures Shift to an Outward-Looking Econoay

1. Cape Verde is a country in transition. It has taken on a worthy andambitious challenget to refurbish ita economy in a dynamic, outward-looking andcompetitive mode. The determination to integrate Cape Verde into the worldeconomy and to cooperate more actively at the regional level holds the promiseof a viable development path in the long term. If successful, it will developan economic base that can bring about sustainable growth, create new jobs, andimprove export earning capacity, reducing, in turn, the high dependence onfore.gn savings. Cape Verde embarks on this program with some quite speclalattributes (para. 8) and problems. These include: a successful politicaltransition; the legacy of a heavily state-dominated strategy in the post-independence period; a strong base of human resource development programs andpoverty alleviation effortsl an environmental challenge of Malthusian dlmensions,and a blend of isolation and tight links with the rest of the world; a smallisland economyt paucity cf natural resourceas inadequate infrastructure; shortageof skilled people; and a change in mind sots towards entrepreneurship. success*xill require a combination of prudence and determination, and these have been thecountry's hallmarks in the past. The constraints are many. But endurance inpursuing appropriate policies could help replicate the success stories ofMauritius, some Caribbean countries, Malta, or perhaps even the Asian *tigers".

2. At independence in 1975, the government of Cape Verde opted to enlargethe traditional strong state role ln the economy, acting as entrepreneur inagriculture, induatty and services. Cape Verde's experience with this modelproved relatively successful, at least on the surface, through the mid 1980s,because of prudent management, and strong external support. By 1988, however,the government concluded that a major change in direction should be undertaken.in fact the shift to opening up the economy was prectpitated by gloomy prospectsfor economic growth, which were signaled first by declining economic performanceand the emergence of internal and external imbalances in the late 1980.Thirteen years of pursuing a heavily state-dominated economic developmentstrategy resulted in structural deficiencies such as limlted competition, publicsector monopolies in productive activities, an undeveloped and timid privatesector, labor market rigidities, and an inadequate financial sector. It becameobvious that such development policy could not continue indefinLtely or producesustainable growth. Thus, the need for economic reforms became urgent in thelate 19800.

3. In 1988, the post-independence government adopted an outward-lookingstrategy. It began a complex process of revamping the policy and regulatoryframework and privatizing public enterprises. But it failed to follow throughwith the tmplementation of most of the reforms. It was reluctant to pursue theprivatization of the largely inefficient public enterprise sector and to morefully liberalize the economy, fearing to compound unemployment, whlch was alreadyhigh. Besides, the government became concerned with its survival when politicalreforms allowed for multi-party democracy, shortly after the adoption of anoutward-looking strategy. In the end, the fallure to dellver on economlc reformsproved to be the government's undoing. The opposition party, Movement forDemocracy (MpD) won the election and took office in AprLi 1991. Its electioncampaign platform promised brighter economic prospects and the implementation ofwide-ranging economic reforms in line with the framework of the outward-lookingstrategy of its predecessor, which it adopted in full.

4. in response to declining economic performance, internal and externalimbalances, and structural deficiencies, the new government has stepped up thepace of reforms. These reforms appear, so far, to enjoy broad-based support asevidenced by the MpD's convincing victory in municipal and regional electionsheld in December 1991. Changing the government's role in tne economy so that theprivate sector could emerge and generate future sustainable growth is the thrustof the policy reforms being implemented. Changes are to come from: (1)streamlining public administration, (1i) reforming the public enterprLse system(reducing the government's portfolio by restructuring, privatization, and

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liquidation), (iii) promoting the role of the private sector and exports, (iv)deve)loping the government's policy-making and analytical capacity; and (v)limiting government's investment larg-,ly to developing basic infrastructure andbasic social services.

5. In attempting to fulfill its role of policy maker, the government Intendsto strengthen its organization, analytical/technical capacity and base. Plansare being drawn up to restructure and streamline the country's administration tomake it more responsive and efficient. In strengthening policy capabilities, twoissues pose a considerable challenge: the quality and coordination of technicalassistance, and over-estimated national accounts. The government has receivedtechnical assistance to support institutional and skills development, and macro-economic management, but the results leave much to be desired. Supply-driventechnical assistanca has not always focussed on training counterparts or onproposing measures to develop indigenous capacity. The quality and terms ofreference of future technical assistance will need to be designed taking accountof the leosons of experience.

6. Cape Verde is perceived as having a high level of GNP per capita: thismisconcep.. on should be dispelled, as some creditors have begun to harden theirlending terms. In the context of preparing the Updating Economic Note, anevaluation of national accounts found that the official estimates of GDP for1980-90 were significantly over-estimated (Box 1). These estimates were reviseddownward based on the preliminary results of private consumption in the 1988-89Household Survey. The revised estimates of GDP, equivalent to 74 percent of theofficial estimates, are preliminary and need to be further refined. To do so,the government intends to reorganize and strengthen the National AccountingSystem. It will do so in the context of a proposed Public Sector Reform andcapacity Building Project.

Facing the Ftture: Developing an International Service Center

7. The objectives of the ongoing policy reforms are to increase output throughhigher efficiency, sustain high growth, create new jobs, focus public investmenton the development of infrastructure and social services, and encourage privateinvestment in productive activities. The challenge is to develop Cape Verde intoan attractive international service center, strategically located at a croosroadsbetween North America and Europe. In the medium to the long term, privatebusiness ventures could emerge in export-oriented services in which Cape Verdecan either improve or develop comparative advantages in areas such as: dataprocessing and teleports, transhipment, maritime and air traffic sorvices,offshore banking, or flag of convenience registration. In addition, Cape Verdehas considerable potential for the development of fisheries, tourism, and exportprocessing zones (EPZ). However, before prospective investors make the decisionto invest, they need to gain confidence that t7:a government will sustain thepolicy reforms aimed at maintaining macro-eco'.omic stability and creating aconducive business environment. Foreign investors and Cape Verdean 6migr6s arebeing encouraged to invest directly or set up joint ventures with the domesticprivate sector.

8. Cape Verde has obvious strengths. They include: a tradition in services;largely unexploited tourist and fisheries potentials; a convenient geographicallocation and a maritime-related service tradition; relatively low wage rates anda trainable labor force with a good basic literacy rate (48 percent and highprimary school enrollment); stable exchange rate and sound external policies;negligible export barriers to other countries potential for the mobilization ofemigrant and domestic savings, provided the financial sector is strengthened;improved foreign investment laws; political and social stability; the strengthof the social system and its accomplishments; the readiness of donors to assistdevelopment; and the loyalty of Cape Verdean 6migr6s (expressed in remittances).

9. In the medium term (1992-95), economic policy will be focused on laying thefoundations for an export-oriented, private sector-led economy. This will entailprimarily maintaining internal and external stability, implementing policy

- iII -

reforms aimed at creating a conducive business envirorment lncluding furtherimprovements in investment and labor laws and streamlining administrativeregulations and procedures, developing infrastructure and social servicefacilities, capacity building, and improving the quality and off icioncy of basicsocial services. In the medium term real economic growth li projected to averageS.5 percent and it will come from: (i) demand related to public lnvestment ininfrastructure (ports, airports, and roads rehabilLtation and maLntenance),modernization of telecommunications and social service facilitLes; (Li) privateLnvestment in tisheries and tourism, other services, and export processLng; (III)an increase in agricultural output; (iv) continuov't growth in private in4estmentin housing; (v) continuous growth in commerce; add (vi) growth in services tointernational air and maritime transport. Now private sector lnvestment :sexpected to have only a moderate lmpact on economlc growth ln these inltial yearwgiven its present low base. Once well established, the export-orLented, privatesector-led economy could be the engine of growth and employment in the long term.

Agenda for the 1990.

10. opening up the economy will take tlme. The ultimate test of success willbe private sector response to the improved policy framework. On the part ofgovernment, this will requires (i) careful policy sequencLng and lmplementation;(ii) institution and capacity buLldLng; (iLi) the development of adequateinfrastructure; (iv) the improvceznt of public investment planning and effoctlveaid coordination; (v) the improvement of the quality and efficlency of socialservicesi (vi) poverty alleviation; and (vLL) adequate envLronmental polLcies.

11. Policy Sequencing and Implementation. Approprlate policy sequenclng willhave a significant effect on attalning lnternal and external balances andcreating a conducive business envlronment. Although lt is too soon to expect thefull results of the wide-ranging policy reforms which have been Implement:ed since1991, the importance of restoring government savings and monetary dlecipline isalready reflected in restrictive policy targets for 1992 (text paragraphs 49-53).On-going stabilization measures include limitlng credit to public enterprises,movlng to a positive interest rate policy, discontLnuing external borrowing onbehalf of public enterprises, clearLng internal and external arrears, andmaintaining positive exchange rate policy. The maintenance of internal andexternal stability hinges on the successful Implementation of ongoing taxreforms, improvements in public expenditure management, publlc enterprise sectorreform, and public administration reform, which, in turn, will determine privatesector response. Finally, prompt and comprehenaLve fLnancial sector reform is amajor precondition of success.

12. The government is committed to the reform agenda. Its continuedLmplementation also depends on two major factors: the transparency of reformobjectLves and their Lmplications, and developing local capaelty. Thus, thegovernment needs to nurture broad-based p iaic support by ensurlng transparencyso the public can understand the rationale _or the reforms. This is partioularlyimportant with regard to eliminatlng certain benefits and prLvileges assocLatedwith the prevlous policies, but whose costs are no longer affordable. Althoughthe government is committed to continue the implementation of reforms, it faceslimitations on planning, analytlcal, managemnt, and admlnistratlve capaeitiesas well as on that of developing projects and programs. Unless adequatelyaddressed, implementation issues may constraLn progress.

13. capacity lullding. Future economic and soclal development ln Cape Verdewill be very much determined by the devolopment of human capaolty, the country'smost valuable asset. Labor is the only abundant factor of productLon. Facedwlth llmited job opportunLtLes at home, Cape Verdeans have traditionally soughtemployment around the world. Opening up the economy and creatlng a responsiveand effective administration as poliey maker and provlder of quallty socialservLces hinge on building local capacity. DespLte high unemployment, theshortage of skilled and managerial labor is acute. The government's objectLveis to deolgn a strategy and allocate public resources to organize adequateprofessional and vocational tralning required by the transforming economy. In

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this quest, the government % its to improve the relevance and efficiency of theexisting technlcal, admLnLitratLve and specLalLzsd tralning programs. It l rlsointerested Ln organizLng a concerted actlon wlth lnterested nationalassociations, NGOs, the private sector, and donors to mobillze both human andflnancial resources to implement the natlonal strategy at local levels.

14. Infrastructure DevelopAent. The irtegratlon of Cape Verde lnto the worldeconomy au an internatlonal servlce center requLres the development of anadequate transport and telecommunications Lnfrastructure, as well as a reliablealr and maritime transport. Reglonal integration and internatLonal cooperationalso assume better national, lnter-lsland transport and telecommunicatLons. Thee2csting Lnfrastructure needs rehabilltatlon and expansLon to provide betteraccess and quallty services at lower cost, which, in turn, could induce andfacilitate private sector Lnvestment ln productive actlvitLes, especlally forexports. Infrastructure requLrements include ports, airports, roads, and updatlngobsolete and saturated telecommunicatLons. The development of energy, water andsewerage facllLtLes along wlth adequate priLcng policLes ln these subsectors arealso crucial. Pollcy design, publlc lnvestment plannlng, and implementatLoncapacity are some of the constraLnts which need to be addressed.

15. Public Investment and Aid Coordinatlon. -!uture publ2 - lnvestment lnlnfrastructure and socLal servLces need to be more efficient. Public investmentrequirements (mostly for lnfrastructure and social services) are projected atover 30 percent of GDP ln the 1990a and will be almost fully flnanced by externalasositance, glven modest projected government savLngs. At present, the plannlng,implementing, and monltoring of public investment are one of the weakest aspectsof economlc management. Here the challenge L to establlsh a multl-year publlcinvestment program, introduce economic and fLnancial selectLon criteria for largeprojects, and develop lnstitutLonal and human capacity.

16. The improvement of ald coordination among the large number of donors inCape Verde Ls pivotal Ln ensurLng adequate levels, quality, and effective use ofald. Project and technical assLtance ald will continue to have an importantrole in the development of Lnfrastructure and Lnstitutional and capacity buildingin Cape Verde ln the 19908. Two aspects of aid coordlnatlon are Lmportant:introducing a multl-year PIP (para. 15); and modlfylng and broadenlng currentpractices in aid coordinatLon. At present, Round Table meetings organLzed by theUNDP, about every 18 to 24 months, are a formal forum for consultations on pollcyand sectoral issues, and publlc investment requirements between the governmentand donors' communlty. It will be also useful to establlsh regular lnformalconsultatlons and exchange of information between the government and partners lndevelopment, including NGOe, in additLon to the present practice of bilateraldealings with donors. Both the government and donors are calllng on the Bank toplay a more promlnent role ln ald coordlnatlon and a number of donors haveexpressed interest ln cofinancing lnvestment projects wlth the Bank.

17. Better Social Services. ProvLsion of better quality and efficlent basicsoclal servlces wlll have a posLtive impact on improving the quallty of life,labor productlvlty, and poverty alleviation in Cape Verde. In this quest, ltwill be essential to build on the satLefactory results and experlence of the pastseventeen years. Good results have been achLeved, as exempllfled by socLalindicators: llfe expectancy at birth (65 years), primary school enrollmaent (85percent at the age between 7 and 12), the llteracy rate (48 percent of thepopulation over 18). These accomplishments are attrlbuted to concerted effortsand substantial resources allocated to these services by government, varlousnational associatLons of women, youth and farmers, NGOs, and donors. Goodresults notwithstanding, some problems require further attentlons hlgh naturalpopulation growth, not yet broadly accepted family plannlng programs, a shortageof trained teachers and health workers, a lack of essential supplies, less thanan adequate primary school curricula, lnadequate infrastructure, andaffordabillty of servLces. Moreover, to imprcve the quality of servlce dellvery,the challenge lles with targetLng soclal services more effectlvely to the poorand disadvantaged groups; equipping municlpalities with the capaclty andkasources to provlde baslc social servLcesl stimulatlng the private sector

provision of certain servicesl and developing policies and mechanisms for costrecovery.

18. Poverty Alleviation. Opening up the economy and private sector developmentwill be the most effective way to reduce poverty in the long run. Cape Verde hasa good record on poverty alleviation so far. Although there are differences inlevels of consumption among the islands, poverty is not as prevalent and strikingas elsewhere in Africa. This is attributed to the allocation of substantialpublic resources to social services, generally sound social programs, a concertedaction by local communities, NGOs, and donors in poverty alleviation programs,significant food aid, and private transfers in the 1980a. They all made itposstble for Cape Verdeans to consume more than what they produced. PovertyLasues in Cape Verde are, however related to difficult living conditions in ruraland urban areas, limited employment opportunities, increasing demand for socialservices because of high natural population growth. The government is interestedin improving the content and coverage, as well as the quality and efficiency ofsocial programs, and ro target them to disadvantaged groups. To this end,government intends to analyze further the complexity of poverty issues, toimprove data e-lection on secial indicators, to elaborate a strategy and actionprogram, and to improve its own capacity ani instruments to deal with povertyalleviation more effectively. It has started this work with the support of theBank and other donors.

19. The Environment. Environmental issues are so dominant in Cape Verde'shistory and current reality that they are present in the government's strategyand approach in an unusually intricate form. Failure of rain brought famine inthe earliest times. Destruction of land, with deforestation and severe erosionwere reported as early as the 15th century, and Cape Verdeans began to emigrateas early as the 18th century. The objective of better managing Cape Verde'sfragile environment is compatible with restoring high sustained economic growthand opening up the economy. The present fragility of the environment is relatedto poor climatic conditions and to an acute shortage of fresh water. This leadsto a continuous decline of soil fertility (the predominantly barren surface isexposed to wind and water erosion) and to deteriorating living conditions inurban areas. Long term poverty alleviation aimed at improving living conditionsin rural and urban areas is likely to make Cape Verde a more attractivedestination for private investment in export-oriented services and tourism.Significant results have been achieved in addressing severe environmentalproblems, and provide a strong basis for further action. Environmental problemsare in general well identified and recognized, and the government has beenaddressing some of them through reforestation efforts, an increase in developmentbudget for improving urban areas, and programs launched to raise public awarenessof the environment among the school children and farmers. Yet, the challenge forthe government is to define a strategy, a policy and a legislative package toensure that future economic policies and development contribute to theimprovement and better management of the fragile environment and prevent possibleharm.

I. THE PAST: LEGACY OF AN INWARD-LOOKING ECONOMY (1975-88)

A. Country Background

1. Cape Verde is a special country in many respects. It is a smallarch.ipelago, where fresh water is the most preclous commodity. The rain and thePope are always welcome, since the people believe that the former likes thecompany of the latter (following a lengthy drought, it rained heavily the day thePope first arrived in Cape Verde in 1987). Famine, still fresh in the minds ofthe people, resulted from long periods of drought and was costly in terms ofhuman lives lost, and induced emigration. Cape Verde is a country that againstall odds, hLs made extraordinary stridess life expectancy is 65 years; primaryschool enrollment is over 85 percent; and the literacy rate is 52 percent, toname just a few. The country relies on private and official transfers to keep theeconomy buoyant. Transfers accounted for over 36 percent of GDP in the secondhalf of the 1980s. Cape Verde has long had a reputation for prudent managementand low risk-taking, but not for promoting private business ventures. It hasconsistently maintained high external reserves and has not undertaken anyexternally supported or induced stabilization and adjustment of its economy.Cape Verde Ls known to environmentalists for extensive reforestation efforts andfor a great variety of turtle species. It has been traditionally known for goodsailors and skippers, but locally it is hard to get them to navigate the obsoletestate-owned fishing fleet. And while Cape Verde may not be an exotic touristdestination (para. 2), those who like wind-surfing, sailing, and extensiveunpolluted and quiet beaches rave about it. Anyone looking for locally producedartifacts as souvenirs will be disappointed, but virtually any product legallytraded in the world can be found in the big, informal sector market, Sukopira,in Praia.

2. Cape Verde consists of ten islands located 650 kilometers off the coast ofSenegal, with a land area of about 4,035.5 square kilometers. The islands arethe formation of violent volcanic activities. At present, only the island ofFogo has an active volcano, although there are still occasional earth tremors onthe neighboring island of Brava, a reminder of a relatively recent volcanicactivity. The mountainous island surfaces, except for the islands of Sal, BoaVista, and Maio, are of predominantly red and black soils, cracked and scarredwith paths of lava flows. There are virtually no natural mineral resources withthe exception of pozzelana (a type of cement base), orchil and indigo, sourcesof red and blue dye. The climate is Sahelian. The average altitude is 800 meters.in the good rain years (the last one was recorded in 1968) the country canproduce only up to 60 percent of its food requirements. Nine of the ten islandsare populated, and half of the resident populatLon of about 344,000 (based on the1990 Population Census) live on the island of Santiago, about half of them in thecapital Praia. During the 1980s, the natural population growth rate averaged 2.7percent, but was only 1.5 percent adjusted for emigration (para. 3).

3. Cape Verde faces severe and what may appear insurmountable developmentconstraints, particularly a poor natural resource base, unfavorable climaticconditions with prolonged cycles of drought, small domestic markets, costlyinternal communications owing to the scattered nature of the islands, and weakcommunication links to the outside world. The history of Cape Verde isinextricably linked to the problems of drought and famines which have necessarilyconditioned the country's outlook and policy choices. Official records ofnumerous severe droughts in the 19th century testify about devastating losses oflives. For example, the 1830 famine wiped out about one third of the population.Droughts of the twer"'th century have been even longer and more frequent. Theeight-year long drought of the 1940. was followed by another in 1952 and 1959.Prolonged droughts characterized the 1960s and 1970s. A seven-year long droughtthat started in 1968 also had devastating effects on human lives. Sinceindependence in 1975, generous food aid has helped cushion the effects of thesephenomena. Austere living conditions, devastating droughts and limited employmentopportunities have traditionally induced emigration. Official records showsignificant emigration from Cape Verde as early as the beginning of theeighteenth century. There are over twice as many Cape Verdeans abroad as thereare resident in the country, although successive generations maintain very close

2

ties with the homeland. Cape Verdean 6migr6s enjoy a reputation as hard anddisciplined workers, and some of them are good entrepreneurs in their hostcountries.

4. Post-independence (1975) Cape Verde has enjoyed prestige in theinternational communlty as a result of the pragmatlc polLtLcs and the hlstorlcalLnfluence of Amilcar Cabral on the liberation movements of lusophone Africa. In1991, Cape Verdeans made a peaceful transltion to multl-party democracy. Thegovernment is already earning high marks from the donor communlty for its policyreforms deslgned to open up the economy to fuller partLcLpation by the emerglngprlvate sector. The government has demonstrated courage in starting to overcomethe legacy of a longetandlng public sector-based development pollcy that may havemade sense ln the past, due partly to Cape Verde's partlcular circumstances(geographlcal and hlstorical), but which currently hinders growth prospects.

B. Inward-Looking Development Strategy

5. From independence in 1975 untll 1988, the government's policy called forthe state to play the predomLnant role ln development. At independence, theobjectLves were to develop a modern economy (servLces and manufacturing), todevelop an Lnfrastructure base while creating employment, to develop thecountry's human resources, and to reduce poverty. Faced wlth a growlngpopulatlon, poor natural resources, and a small (largely lnslgnlflcant) privatesector, the government undertook to perform the entrepreneur's role ln productivesectors mostly for the small domestLc markets. In a hLstorical perspective,there was nothlng unusual about this choice. At the time, lt was a fairly commondevelopment path followed by a number of lndependent states. Even if thegovernment had lntended or wlshed to count on the domestic private sector, thelatter was too small and underdeveloped to fulflll much of a role. Reliance onforelgn lnvestors could have been onvLaged, but in the post-independence world,sovereignty" drove almost every action. BesLdes, what investors would have beeninterested in Cape Verde give'n its backward infrastructure (no airport and portfacliLtLes) and the more attractive investment opportunitLes ln the Far East withbetter infrastructure and lese polltical uncertalnty?

6. Consequently, the government sought official development assistance (ODA)for the development of key sectors and publlc enterprises.' Productlon for thesmall domestlc markets reduced the publlc enterprLse sector's effLcLency andcompetLtiveness. After an lnltial period of profitabillty helped by lack ofcompetltion (domestic and lnternational), the number of publlc enterprLses wlthmeager fLnancial results and even losses began to increase in the late 19809.

7. The government implemented macro-economic policies and regulations topromote the public enterprise sector. Measures lncluded trade restrictLons(quantitative restrictions), price controls, admLnLetratlve allocation of forelgnexchange, extensLve public spending in support of development of the enterprises,credlt provLoLon and allocation wlth prlorlty on publlc enterprLses, flxedinterest rates, hlgh job securlty, and so forth.

C. Economlc Performance and Nacro-Economlc Management

8. Cape Verde's economy grew by 2.7 percent a year on average ln real termsin the late 1970. and by about 6 percent on average in the 1980-1988 period. Themain sources of economLc growth were services and a hlgh level of publlcinvestment ln Lnfrastructure, social sectors (educatlon, health and housLng), andproductive sectors (fisheries, transport, and manufacturing) (Box 2). Theanalyses of economlc performance and t.he structure of the economy (1980-91) inthis report are based on the revision of the official national accounts by theBank economlc mission that vislted Cape Verde in February 1992. Problemsregarding gaps in the analytlcal base and dLffLculties encountered ln revisLonsof national accounts are discussed ln Box 1.

3

9. Until 1988, Cape Verde maLntaLned lnternal and external balancest prudentpublic financial management wlth a low reliance on borrowing from the domestlcbanklng eyetem (about 1.6 percent of GDP on average until 1988); monetaryexpansion rarely exceeding nominal GDP growth, resultlng ln generally lowLnflation; balance of payments surpluses with a hlgh level of external reserves(above 7 months of lmports, reachlng a peak of 9.4 months of lmports ln 1988);and a well-managed real effectlve exchange rate. The donor community, providedgenerous aseletance (ODA) over the years, whlch enabled the level of investmentto rlse well above negative domestic savlngs (Lnvestment-savings gap was over 40percent of GDP prior to 1986, and about 25 percent between 1986 and 1990).Offlcial transfers (approximately 24 percent of GDP until 1988), lncluding foodald, were used to lmprove lnfrastructure (road network under the *food-for-work"programs for unemployed people), to develop the public sector in productiveactlvlties, to flght desertLfLcation, to develop the educatLon and healthsystems, and to allevlate poverty. Prudent financial management and soundeconomlc growth did not give rLse to questlons about whether the development ofthe economy, dominated by public enterprLses in productlve actlvltles, was themost efficient use of resources in Cape Verde. Cape Verdeans llving abroadtransferred (and continue to transfer) sLgnLficant funds to thelr relative. athome (equivalent to 19 percent of GDP between 1986 and 1990), supportlng privateconsumption and housing constructlon.

10. The Cape Verde Escudo has been well managed. The real effective exchangerate depreciated on average 2.3 percent during 1986-90. The Escudo is pegged toa welghted basket of currencles reflectlng the country's nlne major tradingpartners. In 1990, major trade partners were Portugal, The Netherlands, France,Sweden, Spaln, Switzerland, the Unlted Klngdom, Germany, and Denmark. The basketwelghts represent predominantly import shares and, to a small extent, the sharesof prLvate transfers and workers remlttances orlginatLng from the same tradingpartners. Glven that private transfers come tradLtLonally from countrLes withlow inflation, such as the Unlted States, The Netherlands, and France, theirhlgher lmportance ln the structure of weLghts (for details see the IMF report -Cape Verdes Recent Economic Developments, SM/91/245) will beneflt the exchangerate system. There was no noticeable evldence of a parallel market for foreignexchange despite its past practlce of admLnLstrative allocation to licensedimporters. The growlng demand for lmported past practlce of consumer goods doesnot seem to have resulted in a parallel market for foreign exchange either. Theimported goods supplled by the lnformal sector com either through unregLsteredprivate transfers in klnd brought in by numerous vlsltlng 6migr6s, or fromimports flnanced predominantly by family members living abroad.

4

.. ... ... t.. C the Anh ttcaU j

->ii >The srt ats~ts inon e oa "natioa acons 'pres i es,co extern etr,; Sn disremGenrts

4fW' ofiiltaafr s*te' of por ult i lie snfican saps Th fi i ntoa

cotl.mtsave been prepared fo the ears t h. .r.gag..... 9 biRectto ttics ,''S'

.'..oiilSt*ts@§Uthe tr of F cef a f ami,.:i 'N ~ based oi thetatiatfd. ............ .. ... .. a...b

,tpeto,v' stechncal min:i,tr,,ies'MXS an ', the San of,r, Cap Ve , "rd,e,', (SCV)r P roc,,,,,ngt.i,t '*;', 'ttitcl', t

~ff. lite porgress has been made iU in g thez 1W..wa$ anpacy 4nec .es't$' a 'Cth ha,$ The work has beei - Xft7ied otmanly on::¢ tha 'JeO ten"tca assistant,the Director General

hamadiffer: nilwif, n tqfr nato f lstaff roecetl' asgd by the 'apf.ta.e t m.i,ance

...aiq.th .ve..9SC.u to enha219ne'ehre i;o':th ca urren-t 'Qp lc0l addt)nse of :aterI The:trasoucestt:l o~~~~~ ~~~~~~~~~~~~~~~~~~~ ....; .ne .' tt<.... ..... ;>,..

.f '$.The:fst veconomic mison aeers@'i-ti endW OS itf m'd m ''4foit to Idetify th 1a' 1et

'ndtv *55eIle S1nfor5tetiOnto 111 themv .'0.'fter teowi the 'o'f" dl rt ath d e #lit of the b '...

tta.4s'tftstia lnformti'onrs.iandth bs yaar'aftoInimwistsof r va .tm ade a athercao .tn,tie 8.eank mlsaon5'

>Rs.",,tho 'l,o "4f,.v0lw .4q .. . ..! ...ri. S i.h .. .... ..h . .' o' .... .. ... ....>', , .t ...

'f*ogInlUded that fo I. ...srct t.i . ;d Ri - I

Th s.Utewt *tstmtare a p'rvis..onu t.a.d rev... .in, b.abou ..6 .t . fth-.f:.stiste . Thvey 're~ aan tdnf by, the use: om,nay ovesu.tsofpi i - vte"

,S.omraet lndex inmrats tbsd,r,the .19 ,983 Mousebold Surwvy) :for.:fameto,.os percnt 8.e1111 thet eoa,stcldinatesaricut1990 ,', i s t o.$ the. uvluIton ture of.'.SD 370tmaslion oficill 'es' mte, ,o:,udj'in pe.r cipittehrmsjl'u

.. emorandi. (en nporoet 'np. %444*C)datedanuar 18n the *vlu timnaetq&pf CUPr for .the. '..'Br.isutua period Ms*n'.-.din f98r si"lfo anl 'sourcthe officesiastimate... torexa~e groa'rdithe 1980i.'Ppeicapirrthe estiman'the :..>:dthe,9s CbeN a p lout 219 for..fared eo tfo the .urnot officilnt 'esctimate tofises 50.. he lar2et varian.e...-rrg utort vau,,de in in-sed rvics In rtn.al e.. com:r: -'.p':i -cu -'x

, s,;:,, , : - . ~~~. .. ...... -gm,,s S-- ; M

; -'-the overestimtef'isud o ff thil CU idts attribute totreetaopr*t:o.iaU cusn'ofD the off bidondt

. ndathe btransfers int the' value ... o f c... .P... re. the use o ..goe matdcst .ter price Indeiou as,;~. sihstntute for corre ctl0 'val.oru.e addedeflv o in the seors; b l tthechnge tthe evss uaton:

methiodologyt valu *IDd*red Inz aiuture in1985 * and t civ) the we tof programui-v¢ed syteit. elt.-.xpndithorouht rathergodt thonata ouex endite~i qaddition, thte,ouvervaled bse yarcat.nnd:te.e6 snowall

.agicuture,heads to thte evaluaton,of OPbased onl'dehee we .of ud atter tfhag'rietNn theconiexalocoefficients in roduction. he chamnge in theo re.a'uati methJod olpogy of the'arPutuopro6d uctiond:Spoa prdction Rfor fia ond Captondes nt ta Buidnt.Po acot it................. ..osses reae t. .if. .-t

... . .. . .. ..........

.. d the basI f t heonm m 'sris sn i a e t t rs

consIdere provision...fo0r,:te iO eig ivn. thS oube,iieinso h assfrt

meiios it saloaredthttetai statisticalti:tonbtee%h "dforuation t.sholuridt be reie ssuatielen horughl wih, rgar to he rourc fn t ualtyo the e evat nfratonad hebseyer

Strengthening the analyti aL bste is' con ade ed asamatr fhihproit i the cotx of:

leproving acro-econoic managemnt in dCap Verde. itk ist a marcompnn ftePrpsdPIISectror Reormt a 'nd Capaci sty nduilin poroet.. .. ......

5

U. THE RECENT PAST: ECONOMIC SITUATION AND ISSUES (1989-91)

A. Deterioration In Econoinlc Perforwance

11. Following years of very good economic growth and prudent macro-economicmanagement, economic performance deteriorated in 1989-91 (see Table 1). Economicgrowth slowed and lnternal and external Lmbalances emerged. What hAppened to thelongstanding standards of jood macro-economlc performance in 1989-91?

12. slackenLng Economic growth. Economic growth slowed in 1989-91 to 3.7percent per year on average from 6 percent ln 1980-88. Thli deterioration ispartly attrlbutable to a decllne ln demand related to public Lnvestment ininfrastructure (ports, roads and alrports), drought that affected agrlculturaloutput, and a decline ln demand for servLces rendered to lnternational maritimeand air trafflc. In 1991, however, prelLminary results place real GDP growth at3.3 percent compared wlth 2.2 percent ln 1990. Improved economLc growth wasattributed to an lncrease ln public Lnvestment and ln demand for air-traffLc'AbrvLces at the Sal internatlonal alrport because of resumptLon of South AfrlcanAlrways fllghts to the Unlted States and Western Europe.

TABLE 1: laldkm of SmoEmc P_fovwa. 1917.91

C-Uewai.i3pw)-w

9S71 1983 199 19 1991

ODP (D 7.6 7.6 5.6 2.3 3.3

GDP (amomd 13.5 14.0 15.4 10.0 13.0

On_ Dome&* Inv_og -18.7 -9.2 -10.7 3.7 -5.3

S_ Bak sbff edi_.

13. Internal and External Imbalances. Internal and external lmbalances emergedin 1989-91, mostly because of the poor economlc and financlal performance ofpublic enterprlses Lnvolved ln manufacturlng, flsherles, and non-social servlces(commerce, maritlme, and air trafflc servLces).

14. In the area of public financea, although the overall deficlt (afterofflclal transfers) decreased from 9.6 percent of GDP ln 1986 to about 5 percenton average ln 1989-90, domestLc borrowlng from the Bank of Cape Verde (BCV) andLnternal and external debt arrears lncreased as external borrowlng declined. Thedecrease ln the overall budget deficLt is explalned by the reductlon in publiclnvestment expendLture. after completlon of some major projects and thepostponement or cancellatlon of new ones. The government budget hastraditionally had large overall deficLts because of development expenditures,predomlnantly financed by ODA. In addltlon, the emerglng flnanclal difficultiesof a number of public enterprises affected adversely government revenue. as aresult of lower tax and non-tax contrlbutions and the failure to transferadequate funds to the government to servlce external debt obligations. In theabsence of appropriate offsettLng monetary pollcles, these developments lncreasedlnflatlonary pressures and reduced the availability of credlt for the emerglngprLvate sector.

6

TAM 2.tmd1.ou of IUal lmublamot, 19691

_1t96 398? 1981 3989 1990 1991

a mba,of GDP

Cur"" -10ft (a) 21.9 22.0 20.9 20.3 19.8 39.0

Curme_a1podi 21.S 22.3 20.6 20.3 20.0 20.1

Go"ft=4vsMp 0.4 0.3 0.3 0.09 -0.2 1.1

O0=O budggdaflok

MMlcu offilca bUn_fa 39.1 32.2 22.0 17.7 14.8 13.8

Aut ofllkic tUrn (cm. bal) 9.6 6.0 3.0 4.9 5.3 10.2

A*ar offca ilAfta (c bob) C.S 6.0 1.3 5.6 3.9 10.2

po1g fhimeing 8.3 3.5 0.7 2.3 2.1 7.7

Domas Ific 0.2 2.5 1.1 3.3 1.7 2.5

ODP ddlt 16.2 5.5 5.9 9.3 7.5 9.2

CMFI 0.5 4.5 3.5 5.3 10.6 8.7

Dnkalkitopubla -0.5 .0.5 7.8 21.8 39.6 a

Bm aa'dk to privaectov 24.5 24.5 16.1 21.5 13.6 a

(a) lIbioM caphi _a!.r (mm public mAupdm.

3oub Cap Vadem autbhddan W. a. Dak muff _au

iS. Between 1987 and 1990, inflation (measured as changes in the CPI in Praia)increased gradually from 4.5 percent to 10.6 percent (Table 2), mostly due to anincrease in the use of bank credit by the government and the public enterprisesector, lower agricultural output because of inadequate rainfall, and higher costof imported goods (imports accounted for about 49 percent of GDP in the 1986-90period). Although the 8cV generally targets annual increases in money supply andcredit in line with expected nominal GDP growth, in recent years the former hasexceeded the latter. For example, money supply grew by 18.S percent in 1989, andexceeded significantly the BCV's target of 11 percent. Credit to publLcenterprLses and the government alone exceeded monetary targets. Credit to theprlvate sector was also high, malnly for housing constructlon.

16. In the external sector (Table 3), the overall balance of payments waspositive through 1988, resultLng in the build-up of external reserves equivalentto 9.4 months of imports by the end of that year. The external posltion turnednegative in 1989 and 1990 as a result of higher Lmports for consumptlon and debtservice obligations, as well as lower overall availabllity of external resourcesincluding stagnation of export earnings. This was explained by a decline in theindustrial fLh catch by public enterprlees, which resulted in lower exportvolume, and a decrease Ln the demand for international air-traffic services atthe Sal alrport. The deficLts were financed partly by a reduction in externalreserves, which dropped to 7.2 months of imports at the end of 1990, and partlyby accumulation of additional external arrears of about US$4 million in 1990. Estlmates for 1991 show a modest surplus in the balance of payments, the resultof higher disbursements of official grants and concessional loans and a slightlncrease ln export earnings from higher volume of international air trafficservLces.

17. Cape Verde's balance of payments (Table 3) is characterized by structural

7

imbalance on the trade account, substantial surplus on the servLce account,sizable net private transfers, and considarable net ODA inflows. Forelgn tradeis characterized by modest merchandloe export earnLngs, slgnificant servlceexports, and high merchandiee Lmports. The merchandlse export base Le very smallln value and dLversity. Export earnlngs come predominantly from exports of flshand bananas. Non-traditlonal exports have marginal importance. TraditlonallyCape Verde's most substantial export earnlng. have come from non-factor servicesto Lnternational marLtime transport, whlch have been increased recently as aresult of rlilng services to lnternatlonal air trafflc. The economy in highlydependent on lmports of food, capital and intermediary goods. Net factorservices were negatlve until 198!' because of increasLng Lnterest obligatlons onpubllc and publlcly guaranteed loans. Slnce 1989, not factor Lncome has beenposLtLve because of substantlal Lnterest earnlngs on external reserves. Privatetransfers have increased substantlally ln recent years and have become the singlemost lmportant source of foreign exchange sLnce 1988 (see Table 3).

TABLE 3: Extcu Fmmcb Raqzmhb sad R_mun. 1986.91

1986 197 198U 1989 1990 1991

(a im of CV mau_o.)

RaquIumita -10.53 10.5 -9.45 -11.06 -1O." -12.0S

impowt (f.o.b.) 6.89 6.73 7.34 8.33 8.39 5.82

No-f"nsevil 1.24 1.36 1.34 1.96 1.77 1.36

Dek mivioo obl4atow .0.72 40.64 40.68 *0.59 .0.79 *0.93

Clzans is hmrvm .0.13 -0.36 .0.11 *0.42 .1.00 *0.20

Odw (a) -1.31 -0.69 0.17 -0.42 *0.69

Rawmor 210.52 10.5 9.45 11.06 10.84 12.05

Expo*l (f.o.b.) 0.32 0.56 0.23 0.53 0.40 0.44

Noo-efaouviou 2.79 3.13 3.24 4.46 4.38 4.68

Pdvvale rmaa 2.29 2.46 2.35 3.37 3.65 3.76

Official buuo 3.38 3.40 2.79 2.15 1.79 2.30

L1. dbn_amb 1.74 0.72 0.29 0.54 0.61 0.78

Dlr fortiplnvruwm 0.00 0.22 0.04 0.01 0.02 0.09

(as _s of ODP)

Riamqg u_ -43.0 -33.2 .34.4 -30.4 -28.1 *28.7

Buwoa1svia 63.5 $1.2 39.5 36.1 32.7 32.0

of which private naews 19.7 1U.6 13.9 19.3 19.0 17.4

of wicofRical auu 29.0 25.7 11.5 12.3 9.3 10.6

(a) Inbchla camaal osniasioms.

3oaw.: Dwa protvidd by .Cap Vada wheam; md P, D.d Bank N.ihaatim for 1991.

18. Unchanged Structure of the Bconomy. There were few changes in the

8

structure of the Cape Verde's economy in the 1980s, a symptom of inward-lookingpolicies (Box 2 and Statlatical Annex page 2). Public investment in somesubsectors increased their individual contributions over the period, althoughthese sectors did not expand ignLficantly because of a lack of competition andaccess to international markets. For example, promotion of public enterprisesin transport and transport-related services resulted in a higher share in valueadded from about 9 percent in 1980 to about 12 percent in 1990. However, thiswas a decline from 15 percent in 1985, as a result of a deterioration in theperformance of public enterprises providing domestic transport and a reductlonin the demand for international air and maritime transport. Public investmentin manufacturing for domestic markets resulted in an increase in value added fromabout 4 percent in 1980 to 8 percent in 1990. However, the presenu importsubstitution-based manufacturing has bleak prospects to expand further in viewof the limited domestic market. The relative contribution to value added bycommunications rose from one percent in 1980 to about 3.4 percent in 1990, onaverage by 2.7 percent over the period. This was due mostly to increasedprofitability of the state monopoly enterprLse despite it. structuraldifficulties. Previously high rates were recently reduced and volumeconsequently increased. A decllne in public investment in the second half of the1980s, despite buoyant private housing construction, is reflected in a declinein construction in total value added from about 13 percent in 1980 to 11.5percent over the period, and 10 percent in 1990. Although commerce maintainedits highest contribution to value added in the 1980s, limited competition in thissubsector until recently and public investment in support of the above mentionedsubsectors, resulted in its relative decline from about 27 percent in 1980 to 20percent in 1990.

9

1:=.~~~~~~~~~~3POX _

Cap Vard.=eacoo~ty baa beatmd D~baaa1oa sMote. The aset.aotora~0ow1te4foeabow0pu,..........

... .C ........ Ver Vuits A n 8 o. 1980.90

19. Was the deterloratlon ln econom$c performance, partleularly the slowdownof economlc growth $n 1989-91, unavcidable or did lt have deep-rooted causes?The single-track economic pollc$es of wholesale promotion of publlc enterprlsecin product$ve sectors and lack of export promot$on measures have resulted in aninadequate and weak econom$c bass. Theo sconomy proved $nflexible to avert thedeterloratLon in sconomic performance caused by *ndogenous and exogonouo factors.

20. Theo*ndogenous factors were a dlroct consequence of the lnward-looklngpolicy. They were manlfeeted by a 9.3 percent average annual real d-clln- lnLnvootment expenditures between 1986 and 1990, ln partlcular a drop ln publicinvestment caused by completlon of some major projects and the postponement or

10

cancellation of new ones, and a decline ln the value added generated by a numberof public enterprle.s since 1987. The prevlous publlc investment program,determined to a great extent by promotion of public enterprises, and investmentin social sectors, ran out of steam by 1989-90. Public investment, which hadbeen one of the main sources of economic growth for years, dropped from 40percent of GDP in 1986 to about 15 percent in 1990, which affected the slowdownin economic growth. In addition, the deteriorating performance of publicenterprises revealed drawbacks to the domestic market orientation, manifested byan inability to compete and to seek export marketz tc generate economic growth.On the one hand, public enterprises' contribution to government revenuesdecreased significantly, while on the other, they claimed scarce and costlydomestic and external resources that crowded out the private sector.

21. Exogenous factors were the decline in the real agriculture output - by onepercent in 1989 and 6 percent in 1990, because of prolonged periods of drought,and the decline in demand for services for international maritime and airtraffic. The fragile agricultural production in Cape Verde is susceptible toirregular rainfall. Services to international air and maritime transport in the1980. were mostly provided to South African Airways (SAA) and to Soviet and Cubanalrcraft and ships during the war in Angola. With the introduction of economicsanctions on South Afrlca and the prospect of peace ln Angola, demand for air andmaritime traffic services dwindled in the late 1980. The resumption of the SAAflights to the United States and Western Europe rekindled demand for air trafficin the last quarter of 1991, although demand for maritime services remaineddepressed. Unless these services can be diversifLed, their growth prospectsremain highly susceptible to both political and technological changes in theworld.

C. Structural Deficlenclos and Other Conatralnt8

22. Economic policies aimed at promoting the public sector's role in theeconomy and a lack of export promotion resulted ins limited competition, anunderdeveloped private sector, a growing informal sector, and an inadequatefinancial system. This, in turn, made the economy Lnflexible to adjust to andto overcome the difficulties whlch emerged in the late 1980.

23. Market Structure. As mentioned earlier, the public sector dominated themarket structure ln virtually all sectors of the economy: fisheries, transport,communications, energy and water supply, financial services, imports anddistribution, tourism, and manufacturing. Until 1989, competition in thedomestic markets was limited to agricultural and fish products other than staplefoods, some consumer goods, intercity road transport, and services such asrestaurants, car rentals, and repalrs. Competition ln exports of goods waslimLted to bananas and other agricultural products. The public enterprisesresponsible for maritime services and fisheries were exposed to internationalcompetition from neighboring countries. Import restrictions and theadmLnistrative allocation of foreign exchange restrained further competition inthe domestic markets.

24. Underdeveloped Modern Private Sector. The modern private sector in CapeVerde is rather small and underdeveloped. It consists prlmarily of localentrepreneurs in commerce, constructLon, and, to a loeser extent, shipping. Thepredominance of the public sector has restrained private sector growth overyears. With the adoption of an outward-looking strategy in 1988, the privatesector began to expand. Furthermore, with the consistent implementation ofliberalization measures, which began in 1991, the pace of expansion is likely toaccelerate as administrative bottlenecks are removed and activities prevLouslymanaged by the public sector are privatized. At present. the modern privatesector lacks sufficient investment and operating funds, and has limited ordelayed access to bank credit. Skillhd labor, partLcularly at the managerial andmarketing levels, is in short supply and experience in export marketing isvlrtually non-existent.

11

25. growing Inforual Sector. The informal sector has mushroomed aince the late1980s, to meet interruptions Ln the supply of consumer goods and constructionmaterials. It has been playing an lmportant role supplying agrLcultural productsand other consumer goods from the surplus to deficit Lilands and within theislands. Women are the main entrepreneurs lr these activities. High levels ofprivate transfere have provided the sector wlth seed capital and kept lt buoyant.The Lnformal sector has been playing an important role in mLtLgating hlghunemployment, and the government has been tolerant toward its expansLon. In mostcases, the lnformal sector pays taxes to munlclpalltles, though rarely to thecentral government.

26. Inadequate Fluanctal System. As ln the perlod through 1988, the formalfinancial sector continues to be state-dominated and administratively managed.It provides financial intermediation predominantly to the public sector.Financial services to the private sector are limited, with the result that theexisting system is considered inadequate to officiently and effectively satisfythe private sector's needs for credit. This is one of the main constraints onprivate sector development. Until the end of 1991, the financial sectorcomprised three government-owned lnstitutlons: (i) a monobank (BCV) performingthe combined services of central, commercial, and investment banking; (Li) asavings bank (the Caixa Economica de Cabo Verde (CECV)) providing consumer andmortgage finance mostly to civil servants; and (iLi) an insurance and socialsecurity company (the Instituto de Seguros e ProvLdencia Social (ISPS)). In late1991, the reform of the flnanclal sector began when the first prlvate lnsurancecompany was set up (para. 60).

D. Constraints on Prlvate Sector Development

27. Limited Productivo Job Creation and Lack of Skilled Labor. The lnward-lookLng approach with reliance on the public sector to developLng a small economyfailed to create productive employment. Furthermore, with the slowdown lneconomic growth, the economy lacked the flexibility to absorb the large numberof unemployed. This encouraged a now round of attempts to emlgrate. At the sametime, emigration possibillties appear to have been decreasing because ofimmigration restrictions in the United States and Europe, continued uncertaintLesLn Angola and Mozambique and economlc difficultles in Senegal. Based on thepreliminary results of the 1990 Population Census, with some adjustments by theeconomic mission in February 1992, the rate of unemployment at the end 1990 isestimated at 23 percent of the active population between the ages of 15 and 64.In this public-sector-dominated economy the government became the single biggestemployer over the past seventeen years. Jobs were artificially created in publicenterprises to reduce public anxiety about rising unemployment. Employment inthe public enterprise sector grew by almost 10 percent between 1985 and 1989,from 5,867 to 6,436. This also coincided with the period in which theprofitabillty of the wholly-owned state enterprises decreased by 238 percent.Unemployment, concentrated mainly in urban areas, is exacerbated by unemployedpoople from rural areas who have been immigrating to urban areas in hope offinding job opportunLties either in the public sector or in the informal sector.The unemployed are predominantly unaklled, which reduces their employability.This, coupled with the current economlc structure and slackening economic growth,makes prospects for rapid employment creation in the medlum term gloomy at beat.

28. Concern about unemployment permeates thinking on policy reforms, thegovernment's changing role ln the economy, and development prospects. It liwidely accepted that employment creation hinges on developing the private sector,although the prospects of significantly reducing unemployment in the short termthrough the prlvate sector are limited. Anticipated increases in public worksthrough implementation of the public investment program may alleviate the problemsomewhat. A more significant Lncrease and creation of productlve employment isonly likely to result in the long term from new investment in key growth sectors(fisheries, tourism, export-manufacturlng, and services), and accompanylngsupport activities (small and medium-scale services meeting demand expected fromLnvestment in the key sectors).

12

29. Labor Market Riqidities. The government has been the single blggestemployer (the central government and the public enterprise sector employed about18,000 persons in 1990), and the publlc sector'. employment and wage policieshave been exposed only to weak internal competition. As a result of weakcompetition, labor costs for lower paid workers (USS 0.69 per hour) areconsidered high compared to productivity. Labor mobility has been low becauseof high job security, and there has been a shortage of managers and skilled laborfor the emerging private sector. With tht recient increases in internalcompetition, the private sector has started to attract scarce managerial andskilled labor from the public sector in spite of lower job security. Opening upthe economy will help to determine the actual labor costs once the economy startsfacing international competition. Although there is no minimum wage and laborlegislation allows for flexibility in hiring and firing, administrativeprocedures for their enforcement are a major constraint to the labor market. Therole of employment centers is weak; they lack the capacity to assist and guidethose seeking employment.

30. Infrastructure and Teleoommunications Constraints. Cape Verde hasinadequate transport, telecommunications, water supply, and electricityinfrastructure. The transport sector was the subject of a Bank study in 1989,which has recently been updated in the context of the Transport andInfrastructure Project which was approved by the Bank Board in March 1993. Amaster-plan for energy has been in preparation since late 1991 with Bankassistance. Limited port and airnort facilities, and infrequent and costly airand maritime transport are serious constraints to the development of acompetitive outward-looking economy. For an archipelago such as Cape Verde, theexisting network of ports is inadequate to accommodate inter-island andinternational maritime transport. The lack of basic port facilities on theislands of Fogo, Brava, Boav'eta and Maio hinders better exploitation ofresources and the development of new activities. It also adversely affects jobopportunities and income. The existing port facilities in Mindelo, theindustrial city, need to be modernized to provide better and less expensivbservices. The telecommunications system is saturated and sub-standard, and lackof international line capacity is a serious hindrance to developing export-oriented activities, including tourism. Fresh water is in short supply, groundwater is scarce, and there has been a severe drought since 1987. Desalinationplants provide fresh water to some islands.' The government is studying withsome donors different technical solutions for less costly desalination systems.The cost of desalination, using current technologies, is four times higher thanthe exploitation of ground water resources. Consequently, the government istargeting, in order of priority, industries with minimal water requirements inits export-promotion drive because water is a scarce commodity and crucial forenvironmental conservation.

S. Attemfpting to Open Up the Economy

31. As early as 1986, the previous government began to rethink its economicdevelopment policies. After two years of study, it adopted an outward-lookingdevelopment strategy in 1988. But with the exception of a partial promotion ofthe private sector (para. 32) and primary education refcrm in 1989 (assisted byIDA Credit 1853-CV), this strategy was not translated into a comprehensive reformprogram. There were no specific action plans other than limited privatizationof mixed companies. In late 1988, the government prepared five separate statutesdesigned to attract foreign private investment and to promote export-orientedmanufacturing. They were (i) Offshore Banking Law; (Li) Customs Regulations firEntrepots; (iii) Foreign Investment Law; (Lv) Industrial Development Law; and (v)Industrial Statute.5 Although all five statutes were passed by the legislaturein late 1988 and early 1989, their impact on attracting new investments wasnegligible. The administrative procedures that would make possible theapplication of this legislatLve package were not adequately altered.

13

32. The government 'e reluctance to undertake full fledged prLvatLzatLon stemmedfrom its concern about limlted management capacity ln the country andunemployment. As a result, the government prLvatized only SOCAL (uhoomanufacturing) and it liquLdated two public enterprLeos (EMEC -- civil works, andSCAPA -- artlsanal fishlng) ln 1988. Its pollcy of developlng the domestliprlvate sector was limited to promoting artlianal productlon and amall andmedium-scale enterprLses.

33. Shortly after adoptLng the now outward-looklng strategy, the governmentalso put in place polltlcal reforms, allowlng for a multl-party democraticsystem. The press was liberalized, and open and unlnhiblted debate on the iseuesto became a key feature of public llfe. Electlons were scheduled for early 1991,and politlcal campalgns began ln earnest ln 1990. The government's preoccupatlonshLfted to po3itLcal actlvltles rather than dellverlng on promLied economicreforms.

34. in early 1991, the people of Cape Verde elected the oppooltlon party,Movement for Democracy (MpD), to offlce. MpD won ln peaceful and democraticpresidential and legielatlve electlons, the flrst sance Independence ln 1975,w"hlch were hardly noticed, sLnce the rest of the world was more concerned wlththe dramatlc politLcal changes taklng place in Eastern Europe and elsewhdre inAfrica. MpD ran on a platform of change (A Nudanga) and promLes of brightereconomic prospects. In the electlon campaign, MpD promLoed economlc reforms toboost economic growth, create more jobs, and overcome lnternal and externalimbalances that had undermined the country'o longstandlng economlc growth andprudent macro-economlc management. In practLce, MpD adopted the outward-looklngstrategy of lts predecessor's last years, partlcularly dLversLfLcatLon of theeconomy and promotlon of private sector Lnv*etment ln export-oriented actLvities.Thie strategy focused on fisherles, servlces (such as teleports, transhlpment,offshore bankLng), tourlim, LndustrLal entr-pots, and export processong zones(EPZs). Municipal and reglonal elections followed in December 1991, wlth the MpDstill wlnnlng a majority.

III. PREPARING TO FACE THE FUTURE: TRANSITION TO AN OUTWARD-LOOKINGECONOMY (1991-92)

35. Opening up and developlng the prlvate sector-led economy pose consLderablechallenge and will take time. The success of openLng up will be determlned bythe prLvate sector response. The government's commitment to maintaining internaland external balances is a prerequLaite for buildlng prospective investors'confldence and creatlng a conduclve buslness envlronment. In this quest, thegovernment has been implementLng a wlde range of genulnely homegrown polLcyreforms since 1991. The maintenance of Lnternal and external stablity hingesvery much on a successful lmplementatlon of monetary disclpline, the ongoing taxreforms, publlc expendlture management, public enterprise sector, and publicadministration reforms. The success of trade and flnancial sector reformsrequires the maintenance of fiscal and monetary dliclplines.

A. Sh1ft ln the Government's Role In the 8conomy

36. The now government adopted the objectLve of mLnimLzLng the government'srole in the economy by phasLng out lts portfollo ln productive activitles. Itis commltted to playlng the role of effectlve polLcy maker and provLder of basicsoclal servLces. However, the government faces the dlfflcult challenges oftrylng to reverse fifteen years of largely lnward-looklng economlc polLcLes,maklng an ingrained bureaucracy responaLve, and attractLng actual prLvatelnvestment. The government hopes to achLeve lts objective of shlftlng lts roleln the economy throught (l) streamlLnLng public admLnLstratLon (restructurLng,clvll service reform and ratLonalLzatLon, and decentralization)g (LL) reformlngthe public enterprise sector (reduce government participation ln the sector

14

through restructuring, privatization, and liquidation); (iii) promoting the roleof the private sector in the economy (including ensuring competition andestablishing appropriate institutional structures); (iv) developing thegovernment's policy-making and analytical capability; and (v) limiting governmentinvestment to developing basic infrastructure to facilitate the expansion ofprivate sector activities and basic social services. The reforms have beendesigned or refined to help achieve these objectives. The implementation of anumber of reforms has already begun, as will be discussed in paragraphs 37 to 60.

37. Public Administration Reform. Plans are being drawn up to restructure andstreamline the country's large administration to make it more responsive andefficient, and to reflect the government's limited role in the economy. Thepubllc adminLitration is large by any standard (about 11,200 permanent employeesfor a populatlon of less than 400,000). Large as this bureaucracy Ls, there isan acute shortage of adequately tralned professional staff to implement thepollcy reforms and to monitor and analyze the effects of these reforms. Thisshortage is often complicated by a lack of clear career plans for civil servantsas well as ill-defined roles for them. Below the level of the directors, who areusually very competent, the shortage is acute. On the other hand, adminiotratlveand auxlliary personnel make up over one-third of the civil servants. If wcrkersclassified as temporary (but who have been on the government payroll for manyyears) are included, such personnel make up over 45 percent of theadminietration.

38. Analyses are currently being undertaken or havs recently been completedregardingt (i) new structures for various ministries; (Li) human resourceamanagement (including career development, performance evaluation and salaryLisues); (LiL) training; (iv) streamlining of administrative procedures; and (v)a plan for departure/retraining/re-deployment of some civil servants. Thisanalytical work, which takes into account budgetary implications and constraints,is being carried out jolntly by the Ministry of Public Administration andPortuguese and Brazilian experts. Prellmlnary results suggest a move to fewer,more responsive staff who are technically competent and better remunerated.7 Inthe area of human resource management, a freeze on new recruitment is envisagedin some ministries and some categories of staff. The higher internal mobility ofprofessional staff among different mLnistries is also envieaged. Privatizationof services such as messengers, janitors, and printing ia also foreseen. Avoluntary departure program and early retirement, in llne wlth budget targets andpolicies, are being considered. Professional training needs for civil servantshave been assessed over a three year period. Streamlinlng administrativeprocedures will lnclude developlng management information systems and improvingcommunLcations among different governmental agencies and municipalities.Following this analytical work, a detalled action plan will be needed to providea timetable and quantltative objectives more clearly linked to the government'srole ln of the economy.

39. Capacity to Design Economic Reforms, Analyse and Kake Policy. Although thegovernment has assumed an active role ln economic reforms, its efforts and thespeed with which it can carry out the reforms are hampered by a weak humanresource capacity, poor coordination across mLnistries, and a weak analyticalbase (See Box 1). The government has received technical assistance to supportinstitutlonal and human capacity development, as well as macro-economicmanagement and policy analysis, but the results leave much to be desired. Partof the problem lies with the less-than-satLifactory coordination among donorsproviding such assistance. Another part of the problem lies in the choice oftechnical assistance, deoign of the terms of reference, and so on. Technicalassistance has not focussed on tralning counterparts or on proposing measures todevelop the capacity of Cape Verdean agencies. The government's preliminaryassessments of the present provision of technical assistance point to a supply-driven approach, which has not resulted in satisfactory capacity building. TwoexceptLons to thli dismal record are the IMF-sponsored fiscal reform technicalassistance provided to the Ministry of Finance and Planning (MFP) and USAIDtechnical assistance for private sector promotion and public sector reform.

15

40. One of the most severe handicaps to the government to fulfill its role ofpollcy maker is the low quality, and diepersed nature of its statistics. Thepresent situation can be summarized as follows: different technical ministriescollect relatively detailed statistical information but few process theinformation because they lack the capacity. Even where it is processed, theinformation is rarely used for a policy design and performance analyses.Information collected and processed by the different ministries and agencies isoften not shared with the General Directorate of Statistics (Box 1). A mechanismto ensure consistent information flow is lacking.9

41. The government's shifting role in the economy was reflected also in the1992 recurrent budget (this was the first budget proposed by the new government).It allocated about 31 percent to human resources. This was an increase inabsolute and relative terms over budget allocations in previous years, which wereless than 24 percent on average (Statistical Annex, page 11). The higherallocation is particularly notable in education which is now receiving about 18.3percent, compared to 13 percent in 1986 and 16 percent in 1990. On the otherhand, budgetary allocations for administrative purposes were somewhat lower in1992 compared to previous years, in particular for the National Assembly, thePresidency, and the Ministry of Foreign Affairs. The most dramatic reduction inthe budgetary allocations affected national defense, with a 4 percent allocation,compared to about 12 percent in 1986-90. On a related issue, the government hasalmost completed converting some military buildings (dating from the colonialdays) on the island of Sal into a hotel facility that will be phased out of thegovernment's portfolio.

42. DecentralimatLon. The procees of transferring some elements of centralpower to the local governments has already begun and is expected to be gradual.10

Municipal and regional assemblies, elected in December 1991, now have certainpowers to legislate and raise revenues. Some expenditure responsibilities (forexample, licensing of small commerce and vending, and social services) have beendecentralized to municipalities to match their revenue raising powers.Nevertheless, much work remains. Areas to be addressed include: (i) furtherdefining the scope of powers to be transferred, (ii) building up theinstitutional and human capacity of municipalities, (iii) further defining fiscalinstruments and expenditure responsibilities of municipalities, and (iv)determining the allocation and revenue-sharing system for the municipalities.This is a tall order but the government is preparing to tackle the issues underthe Proposed Public Sector Reform and capacity Building Project.

43. Public Enterprise Sector Reform and Private Sector Development. The publicenterprise sector consists of 22 wholly-owned public enterprises and 12 mixedcompanies. It employs about 6,400 people, accounting for slightly over 20percent of GDP, and benefits significantly from domestic and external resources,including loans." After the initial years of good financial performance,public enterprises experienced financial difficulties: a decline inprofitability, an increase in borrowing from the government and the BCV, and arise in internal and external arrears. The wholly-owned public enterprises madea consolidated lose of CV Ese 310 million in 1990 -- a decline in profitabilityof 285 percent compared to the consolidated profit of CV Esc 163 million in 1985.The financial results of the mixed companies improved, from a consolidated loseof CV Esc 24 million in 1985 to a consolidated profit of CV Esc 58 million in1990. Deteriorating profitability is significant for some strategic enterprisesin the economy: fishing, air and maritime transport, petroleum and agro-industry.Public enterprise sector contributions to government revenues have droppedsignificantly since 1987.

44. The main issues in the public enterprise sector are a lack of economicautonomy in decision making about investment, labor issues and, to a lesserextent, prices; an inadequate institutional framework (government and publicenterprise relations); and weak internal management. Internal management is weakbecause of a lack of performance incentives, overstaffing, shortage of qualifiedpersonnel in key areas, inadequate cost control, and high financing leverage.

16

45. In May 1991, the government prepared a policy program for rationalizing thepublic enterprise sector and promoting the prLvate sector as the main vehicle foreconomic development. This received parliamentary approvL I in August 1991. Theprogram calls fort

strengthening the government's capacity to conduct public enterprisesector reform and divestiture and to monitor the performance of publicenterpriseel

*training government staff responsible for monLtoring public enterpriseperformance;

*designing and implementing a comprehensive privatization and liquidationstrategy and action program;

*conductlng vlability assessments of all public enterprises in order todetermine whether they are to be restructured, privatized, orliquidated;

*deslgning and implementing a restructuring and performance improvementprogram for enterprises that are to be retained within the public sector(generally those that contribute to public welfare and do not interestthe private sector);

$improving the legal and institutional arrangements governing therelations between the government and public enterprises;

, training public enterprise executives ani other senior staff in suchareas as corporate planning, setting and monitoring of performanceobjectives and contracts, financial management, audit and cont --l,management information systems, marketing, personnel, andadministration;

• helping ilth the redeployment of public enterprise staff throughretraininjq to enhance their employability by the private sector;

*desLgning or refining the legal, instltutional and regulatory frameworkrequired to open up new sectcrs to private sector initiative (drugimport and distribution, teleports and other forms oftelecommunications, off-shore banking, and international maritimeregistration); and

*promoting private sector development in areas such as fishing, non-traditional, labor intensive, high value added light manufacturing andcottage industries, and accounting and auditing services that offer thebest prospects for growth and potential for exports.

46. Public enterprise reform, particularly the privatization process, is notgoing to be easy glven the high level of unemployment and limited jobopportunities, and the nature and financial condition of most public enterprises.Measures to improve the financial performance of some enterprises and to improvethe government'e policy program have already been undertaken.'2 Building on theinitial diagnostic work carried out by the government and USAID, IDA has recentlyworked with the government to design a project that will help to build capacityto design actions and implement the wide-ranging public enterprise policy reformprogram. Specifically, this project, which became effective late in 1992, ishelping the government to (i) clarify its role in the public enterprise sector,(ii) carry out its policies in public enterprise reform, (iiL) increase theoverall efficiency of the economy by divesting those enterprises that can beprivatized, improving the operational performance and profitability of viableenterprises, and liquidating nonviable ones, (iv) identify and promotedevelopment of new private investment, and (v) develop the national capacity todesign, implement, and monitor such reforms.

17

47. In its policy program, the government has assigned high priority to thedevelopment of a competitLve private sector. This policy is to limit thegovernment's role to that of developing and providing infrastructure andservices, helping with the development of human resources that the private sectorneeds, and ensuring that adequate rules and regulations exist to enable free andfair competition. The government has been enacting a series of regulations tomake these possible, as well as streamlining administrative procedures,simplifying the tax code, and so on (Box 4). The government also intends todesign policies to enable the resourceful and dynamic informal sector to enterthe modern private sector.

a s Sji.{;..; :....i . iS s < i S ;. ~ ~ ~ ~ ... s: ::.... .. .X ..*...ss lOsS .v.X 3*;: ituttnt Strcture For tnvestm.,t Promtti o

2..'5;. ><In. 1<s991. with USMID. estance. the g0vneotv establishe the Cenee for the Pomtion of.tn.tci nEx"p" or..ts (PR m.E, 'e maor tin tng pr vate sector evnt. The ultiate

Qb.e.t..is t.oesteM...PROMSXareIlone.stop.shap for assisting investor to identify opportLmlties,obtain investment approvals ep ' .IdentJfy ers inJoint .ventures, and obta in any other-assistance .requlredg..:These activities are currentty.dispersed throughout the goverreent bureeucracy,:uoakin' atnVe6in.tor:-feel i.ke'Ssyphus. ::.for PROMIEX to wndertakeWthe responsibillitles Inptfed In the

npl>stop.shbpw des1t~ wI1e.'npd to strengthen lts own-capacity ts 4trketw investment prospects in.Cape .*.,Verde,8-show some-success in helptng- inestors. who have hitherto.expressed ntestwIn actually

* investing,, ,.,.,n.gal,n.,,t,he Confidenceo.:fo the. privatee.i:etor-'(section of whichhve been- surprised .'.that* 8requesits:.made by PROMEX have..reseirbted.request, Sof e bueaecracy):,:end reach. .out..to.all lewvels of.

nves.t.or'rather than' th'e o thre way arod.e:..

, At pesent, there is no chaeber of comerce in Cape Verde The Cape Vordean susiness and.Casciat Assciation (CVBCA) h::has.been. .:ke:. private...sector inter.locutor. wi.th aovernment. The.

.. e?vernuent, consisternt with i5ts policy of non-Interference'In private sector matters, does notintend

.>to'tike the-ini'titve w'to establish a Chintdr 'of:comuerce: .I...t prefers that-this decision:come from theprIvate sector.T,heC CVBCA-coud,evolve into the; haaber of.Comerce.

48. The development of the modern domevstic private sector into an export-oriented, competitive one is a formidable challenge. The Cape Verdean privatesector still has to be better organized and will require substantial assistancein identifying export markets. Joint ventures with foreign investors could makepossible more effective development of the domestic private sector. It couldbuild up its competitiveness by learning from experienced and reputable foreignpartners. The private sector in Cape Verde is as fragile as Cape Verde'seconomy. It is unlikely that it can sustain dramatic surprises and blows ifunprepared for world market competition. The government and PROMEX (Box 3) havebeen approached by potential foreign investors who might respond promptly to theprivatization of some public enterprises and to new investment in tourism,fisheries, transport, banking, and the EPZ.

B. Economic Stabilization and Structural Reforms

49. Stabilization measures to control rising inflation and budget deficits havebeen implemented ar.d are beginning to yield results. In October 1991, duringregular Article IV consultations, the IMF suggested tighter monetary policy,started in 1992. The measures being implemented include limiting credit to whichpublic enterprises, changing interest rate policy, improving and simplifying thetax system to increase tax and related revenues, and controlling currentexpenditures in the budget.

50. Limiting Credits to Public Enterprises. Preliminary 1992 results show thatthe money supply grew by 15 percent, a decline from the 34 percent expansion in1991. This allowed for an increase in credit to the private sector whilelimiting credit expansion to public enterprises. Money supply growth in 1992

18

exceeded nominal GDP growth rate estimated at 10 percent. To remedy this, theBCV'e policy is now to limit and eventually phase out credits to the publicenterprioes in arrearu to the BCV and the government. The government is also notguaranteelng further loans to such enterprLsoe. These measures, which are nowbelng implemented, will boost credlt avallable to the prlvate sector. SustaLningthese measures will be one of the real tests of the shift ln policy regardingpublic enterprises.

51. Changes in Interest Rates Pollcy. The BCV lntends to adopt a positive realinterest rate policy as part of its effort to compensate for the recent erosionof the deposit and lending rates caused by rising inflation and fixed interestrates (Statistical Annex, page 14). Interest rates were fixed in 1975-84 and1985-91. In 1990, inflation averaged about 11 percent although this has nowdropped, to just over 6 percent in 1992. Deposit rates and lending rates up to1 year were, and still are, 8. 5 and about 11 percent, respectLvely. The ultimateobjective li the adoption of a market determlned lnterest rate policy, as one ofthe lnstruments for effective monetary policy. The policy will begin to takeeffect after separation of the BCV, which li expected to be completed in the nextsix months (para. 60).

52. Tax Reform and Tax Revenues. IncreasLng government revenues is a hlghpriority in attaining flscal discipline. Some measures have been undertaken toraise tax revenues without increasing the burden on current tax payers. InAugust 1991, Lmport tariffs were streamlined. The previously cumoersome system(Lncluding over 80 rates with speclflc tarLffs) was replaced by 10 ad valoremrates (the hlghest rate is 50 percent and the lowest li 5 percent). As a resultof streamlining of import tariffe and improvements in customs duty collectlon,indLrect tax receipts grow by about 12 percent, accountlng for about 70 percentof the total tax revenues ln 1992. Wlth technical assietance from the IHF, thedirect tax reforms have as thelr thrust: (l) enlargLng the flical base bytracking down economlc agents that are currently evadlng tax payments, (ii)reducing the average level of lncome taxes, (liL) streamlinlng the income taxsystem over a three year perlod by a gradual transltion to a general tax (thereare currently seven dlfferent lncome taxes), better reglstratlon of tax payers(computerLzation of the data base), and reorganlzatlon of tax collectlon bureaus,and (iv) introduclng the VAT system. Dlrect taxes grew by about 8 percent, andare estimated to account for about 20 percent of the tax revenues in 1992 (Table4). In addition, an increase in taxes on buslness proflts and on proflts fromcommercializatlon of petroleum products was also recorded ln 1992. Thlecompensated conslderably for the shortfall in contributLons to governmentrevenues by public enterprlses experienclng severe flnancial difficulties. GivencapacLty limitations ln Cape Verde, it ie essentlal that technical asslstance beavailable over the three year perlod envLiaged for reform. The IMF technicalasesitance is for one year. The government has requested the maintenance andextenslon of the technical assistance beyond the period presently envlsaged.

19

TABlE 4: Cembal Govur-Ream. 198.92

1988 1989 19 1991 Ea (a) 992 Bdg. (b)

anounl growth

Dbed ams 4.3 7.8 10.4 5.0 8.4

Indbleat 11.1 19.5 13.7 9.8 11.6

Notax reveau .14.9 15.0 37.5 -11.4 45.4

TOTAL 2.8 15.4 17.8 3.6 17.8

es obuf GDP

GavQnunrevemue 20.9 20.3 19.8 19.0 19.4

Died taxe 5.0 5.4 6.0 6.2 6.8

odibt taxes 9.6 10.0 10.3 10.0 10.1

(a) IatdIes offth smobilized revnues node by BeP stiff .in Cape Vade an udrthore.

(b) Prjoecte 19M rvenue by Cape Veedean authorities.

Suwe Dat proved by h Cape Vede aori e.

53. Controlling government Expondltures. Measures to control currentexpenditures are aimed at attaining flocal discipline. The government's currentapproach to expenditure control is reflected in the 1992 budget (Table 5). Theincrease of about 10 percent over 1991 was in line with the projected nominalgrowth of GDP. This 10 percent expenditure increase--a substantial slowdown fromthe 15 percent current expenditure increase in 1991--covered the wage bill (5percent growth), increased penelon payments obligations, and transfers to localgovernments, which reflected partly the budgetary coat of the decentralizationproceos (about 43 percent over 1991). Reductions in other budgetary expendituresreflected the government's commitment to curb aggregate demand. Expenditures forsome political activities, a feature of paet budgets, were significantly reduced,as were outright subsidies to ELECTRA (electricity and water supply companies).

TABLES: Eooeoic Chasificosf Cn aGovemaCwr pdiue s1988.92

(perat. anual growt)

1988 1989 3990 191" 1992

Aca Actud I Bu d (a.

C _hwexpadlue 5.0 13.8 8.7 15.1 9.7

Was4 ad mI" 0.6 28.1 7.2 53.4 5.2

Goods ad arvices 7.3 30.7 4.3 58.4 -2.7

botred mpublk dab .15.3 19.6 t8.2 -10.7 .29.1

Subsidies and trfae

./wpablcapti 7.1 12.8 -19.2 *25.0 .66.7

bcw loed gveumena 7.0 12.8 37.3 -23.1 43.1

@1w othe ntitie 6.9 12.8 .13.S 129.4 -12.7

Otw expalitum 19.8 .15.8 18.7 -55.4 52.3

(a) Budgety aopriaifor t199"092.

Soureu; Deat prided by de Cap Veidean auhode.

20

54. Slnce 1991, the government has been implementLng a number of structuralreformm that should contrLbute to a more conduclve busLness environment. Theselnclude trade liberallzatlon and removal of the state monopoly ln commerce, pr'.celiberalization, legal and regulatory framework reforms, and adminLstratLve andtransactlon procedures. However, the approach to these reforms has beenpiecemeal, and a number of gaps in adminLetratLve and lmplementation proceduresand lntersectoral linkages still need to be addressed.

55. Trade Liberalisation. The process of external trade liberallzatLon was setln motion in August 1991 and li belng undertaken in phases. In the firet phase,Lmports were liberalized gradually, in view of overall availabillty of foreignexchange and the need to ensure uninterrupted supplies of consumer goods andother materials. Imports below a value of CV Zoc 100,000 are exempted fromlmport licenses. The state stlll maintalne a monopoly on lmports of some staples-- malze, rice, sugar and cooking oll--, cement and fuel-oll.13 QuantitativerestrLctLons on "non-liberalized" imports (such as coffee, margarine and soforth) were removed ln January 1992. Thle lLberallzatLon covered a number ofconsumer goods and constructLon materials, whlch accounted for about 33 percentof the average value of lmports of goods over the past two or three years. Theresults of the fLrat phase are belng assessed. Prellmlnary results of thleassessment are favorable. Encouraged by these results, the second phase was putln motion at the beglnnlng of the second semester of 1992. Thle second phaselncludes a broader range of goods, lncluding cement Lmports which have now beenpartlally liberalized. The list of goods being liberalized is determlned joLntlyby the Generale Dlrectorate of Commerce, licensed importers, and the 8CV.

56. PrLce Controls. Prlce controls have been virtually abollshed. All thatremains of the prLce control system is a requlrement for prlor approval of theprofit margln (as a percentage of c.l.f. lmport prices) for four baslc staplefood products and imported petroleum products. Prlces of locally manufacturedproducts are market determined. Prlces of lnter-liland marLtime passengertransport servleos are still subject to government control as an instrument ofsocial policy to ensure affordable traffic among the lslands.

57. Legal and Regulatory Framework. The legislatLve package is favorable topromotion of lnvestment ln export-orLented actlvltles, lncluding EPZs. Thelegislatlon covers flical incentlves, import tax exemptions, project approval,entrepot law, and labor lisues. Nevertheless, most of the individual statutesconcentrate on manufacturlng and related servlces. Key service industrles suchas touriem are mentloned in the Forelgn Inveotment Law, but there are no speciflcregulatLons for the wide range of issues involved ln promotion of tourism. Thlimay have been a reflection of the previous amblvalence toward the development oftourLsm.

58. In 1991, the government reviewed this package of statutes, confirmed ltsimportance, and began to implement it. It also began to make some refinementsto some of the statutes. one illustration is the investment code, entltled"Foreign Investment Law." The very tltle implLes a bias in favor of forelgnLnvestors, a reviow of the law confirms thio. This bias created a certain amountof dlisatlsfactlon among prospectLve local and emigrant Cape Verdean investors,who felt lt amounted to discrlmination against them. The law will need to berevised to ensure the equal treatment of all Lnvestore -- foreign, local, andCape Verde's 6migr6s. These lmprovements could be lncluded in an enhancement ofthe exleting package rather than a wholesale rewriting (with riske of delays anduncertainties) of statutes. Modlfications have already been made to theIndustrial statute to correct a weakness that overprotected local industry (dutyexemption when selling on the domestic market). Specific regulations have nowbeen drawn up on tourism dealing with lssues such as tax incentives andpromotion. These proposals, based on lnternatlonal and reglonal studies oftourism markets, are expected to be approved by Parllament shortly. Labor lawsare belng streamlined.

21

59. Admlnistrative and Transaction Procedurem. Cumbersome admLniLtrativeprocedures constLtute a weak llnk between otherwlse well-defLned structuralpollcy reforms and thelr implementatlon. Thli La partly due to a largebureaucracy that is only slowly adapting to a loss of lts prerogatLves and partlydue to excesslve caution on the part of those responelble for lmplementlng pollcyreforms. As reforms progressed ln 1991, pollcy makers became lncreaelngly awareof these shortcomLngs and made major improvements Ln the project approvalprocess, foreign exchange transactions, and customs and port clearances (seeBox 4).

.~~~~~~~~~~~~~~~~~~~~~~~~~.... ..- ,

nWg.-,.,<.,S,.>.a.v~~~~~~~V I.Ii .......

.~~~~~~~~~:OM Ahe CnnNx ano

takes less ttian 35 days whenz proper douments are p4esented. Approval Is give. in less time when aing has

¢ X hve becii ~ we* gdxi+Sg havg;;|X:.r

sch.. were oducod'tnensupropt emumet action io prcessingreqests or ivestment.'Teyc. 4.uid;!.e .fuhe shorened, forexmpeby alows PROMEXitXac o :X'beharf''pcetZisl bivestors.

mtlitii-<<iiwshg+~~kws-="W

*: RSnt<zv>.tg ¶ luSi biv bee stramlne"d to make pouuiht ldividz4 (orelgn exch age transaotona by exporterstinide the : oI ̂ ;c- Industria Statute.. Exporters.can open oreip¢currenc accounts with tli. ShCY aiid

;s.aeil ..n' o' sccess t- fo'egn ftx:.fan''ge- Ptsor anttd ustms clearnce ntgoods tykicaly took anywhee *om Iwo to svraldwees Pr oedurs have

.eety~ siplfied- ,A,ss jt3f clerneowtke IXthzW*|ift pEw2;4 bOUt 03 busy days, loC on not60s.y dLayTcLaietes Reimprom Thus of the srvicaLw imprvdand bropoamnheo n of th fprmivaeusc or,an plILed enterprLsrformhicslclecton. Shont tremL ahe fr LnanLal se ator ratomsof t ae l bustom.;cmmearcng getLwasinvtodmen and khe numb.ofeeanprogss wa c.limitd an adcrxc ohse o lement

b aveLn anedy commtrcLatdltLnigestmonthl bankong aurelbLg eaated.ivs~a Tonuie bisthfirest

60. Financial Sector Reform The succese of the pravatization program,promotion of the private sector, and public enterprise reform hnge on reformsein the financial sector. Separation of the BCV into a central bank and acommercial/investment bank is in progress. Accounts and records on centralbanking and commercial/investment banking are being separated. This is the firststep in financial sector reform (for which the IM4F and the World Bank areproviding assistance). Professional training for about 60 staff is envisagedover a three year perlod. The Bank of Portugal is provlding technical assistancefor retraining, as well as for studies ln central banklng functlons. A new legaland regulatory framework will promote financial efficLency by making poseiblecompetition among financlal lnstltutions, includlng insurance companies andmarket-oriented flnancial instruments and lncentives. The first privatelnsurance company, a joint-venture wlth a forelgn partner, was established inCape Verde ln December 1991. This is the correct move toward privatization inthe financlal sector, and the fLrst reaults are encouraging. The state monopolyhas been ended, and competitlon has resulted in lower fees and premiums, betterservLces, transfer of know-how, and better professional training opportunitiesfor local staff.

22

C. Investing in Human Resource Development

61. Cape Verde has an LmpresLve record ln developLng soclal sector servlceswhlch dates back to independence in 1975. Pursult of sector polLcies andprograms has significantly improved the quality of life. In terms of Lncicators,in 1990, life expectancy at birth was 65 years, primary school enrollment was 85percent (7 and 12 years age group), and llteraey rate was 48 percent (over age18). Overall Lndicators for levels of education, family planning, health andnutrltion are particularly high compared to Africa averages, although theindicatore mask consLderable differences between the social services provlded tothe urban and rural areas. These accomplishments are the result of concertedefforts of and substantial resources allocated by the government, variousnational associations of women, youth, and farmers, non-government organizations(NGOu), and donors. Education and health, for example, accounted for 27 percentof the 1992 budget, a trend which is expected to continue. The budget allocationnotwithetandlng, the government needs to address the iesue of efficLent resourceallocation wlthln sectors and management. Future investment needs to concentrateon improving the quality and efficiency of social sector services and meeting therapidly growing demand for them. This is especially true for educatlon andhealth because of high populatlon growth and the large proportion of youngpeople. Sixty-four percent of the population is under 25.

62. Social services administration is highly centralized. Efforts todecentralize to local governments and hive off certain services to the privatesector require revised policies and a regulatory framework for the sector. Theanalysis to develop new policies, set priorities and identlfy ways to improveefficiency would need to be undertaken in the near future. Issues to beaddressed ln a new policy framework include targeting social services moreeffectively to the poor and disadvantaged groups, equipping local governmentswith the capacity and resources to provide basic social services, stimulatingprivate sector provision of certain services, and developing coherent policiesand mechanisms for cost recovery. Local governments are challenged to play amore prominent role in providing effective and efficient soclal services at locallevels within a framework of well-defined national policies. The ma'ncontribution of local governments will be in improving the coverage and t',equality of social services without exceeding budget appropriations. Thischallenge calls for actions which will clearly define the responsibilitiesbetween the central government and local governments in providlng social servicesand, accordingly, the allocation of public resources.

63. Population Programs and Policies. The population natural growth rateie high in Cape Verde. In the 1980s, it was estimated at 2.7 percent. Since theearly 1980s, Cape Verde has embarked on programs for family planning and .aternaLand child health care with assietance from donor agencies and NGOs. About 86percent of women are familiar with family planning programu although only 17percent acknowledge using family planning techniques acco;:ding to a 1988 survey.Total fertility rates (the average number of children born to women over theirreproductive life - 15 to 49 years of age) were 6.4 anong rural women and 5.3among urban women in 1988 (compared to 6.5 and 5.9 in 1980 and 1985respectively.) The influen a of education on fertility is striking: in 1988fertllity rates for women wih no formal education were 7.2 and 3.5 for womenwith secondary education. However, family plannlng md maternal and child healthcare programs' coverage and the effectiven so rn0ad co be substantially improved.A review of lessons learned to-dŽ*- from r:_ograms can help to identify the causesof the programs, ineffectLveness, and provide recommendatlons for improvement.Analytical work needs to focus on the following two issues: the effectivenessof basic social services; and the influence of religion, illiteracy, localtraditions, vislting emLgrants and touriets, and the media on the acceptance offamily planning techniques. The analysie will help the government to formulatea comprehenslve populatlon policy, currently belng prepared with the help ofUNFPA. A national famlly planning policy would also help to unify approachestaken in the donor-asesited population and health activities and could lead toimproved efficiency of government-supported family planning and maternal andchlld health care programs.

23

64. Education and Training. Cape Verde has achieved about 85 percentenrollment in primary schools and about 48 percent ln secondary schools. Havingno university of its own, Cape Verde relies prlmarily on overseas fellowships todevelop capacity in a large number of specializations. Although budgetallocations for edu.cation and training are relatively hlgh, the quality andefficiency of the formal education system need to be improved. Programdevelopment and teacher training, maintenance of facilities and furniture,provision of books and instructlonal materials are inadequate because ofinadequate expenditure." A project aimed at improving the quality andefficiency of primary education is currently being implemented with World Bankassistance (Primary Education Up;rading Project, Cr. 1853-CV).

65. The government's emphasis and efforts need to stay concentrated onprovLding better -- and universal -- primary and secondary education. Thegovernment needs to develop cost-effective ways to train people with higher-leveltechnical and professional skills for public and private sector management andfor strategic sectors, such as agriculture, fisheries, and tourism. Thegovermnent runs three small technical schools and donor agencies offer differentshort-term vocational training programs mostly in support of agriculture, socialand infrastructure projects. In addition to the limitations and inefficiency ofthe system, there are the issues of inadequate planning and coordination betweenthe government and donor agencies. As a result the skill levels of theeconomlcally active populatlon is low. In 1990, unskilled labor accounted for54 percent while middle and senior managers for only one and two percent,respectively, of the labor force. At the request of the government, the Bank andother donor agencies along with the government are preparing a professionaleducation project to assist the government to address systematically the demandfor technical and professional skills in the public and private sectors.

66. Health and Nutrition. Health indicators of the population are good L-international standards. Infant mortality was estimated at 46 per 1,000 birthsin 1991 (average: 53 per 1,000 in lower and middle-income countries). Lifeexpectancy was estimated at 66 years for men and 65 years for women. Theseprimarily result from programs for preventive medicine, especially emphasized onfree vaccinations, the provision of essential drugs, and the maternal and childhealth program. General nutrition levels are good, although nutritionaldeficiencies remain in isolated villages and poor families. However, the demandfor health services is growing rapidly as a result of the fast-growingpopulation. Cape Verde's two hospitals are unable to cope with an increasingdemand. Rural health services are poor, with few doctors in the rural areas(Cape Verde has lost doctors and trained nurses who have not returned fromoverseas fellowships or who have emigrated). The main issues to be addressed areto improve: the efficiency of the hospitals, the use of rural health posts, andthe working conditions and wages of physiclans and nurses. To maintain thecurrent health status of the population, there is a need to secure access tohealth services for the most vulnerable -- the poor, women and children. Thedemand for more diversified and sophisticated services should be met by privateclinics.

67. DIV Sero Prevalence. Although HIV sero prevalence in Cape Verde isrelatively low, public awareness of it has risen. Scanty data based on the USBureau of Census compiled from the 1990 WHO statistics, suggest a low prevalenceof HIV-2 (0.82 and 0.26 in urban and rural areas, respectively in 1990) and evena lower HIV-1 sero prevalence (0.05 and 0.03 in urban and rural areas,respectively). A relatively hlgh incidence of sexually transmitted diseases(STD), between 10 and 20 percent, and a high level of migration to and from theislands suggest a significant risk of an HlV/AIDS epidemic. This risk might bea-oentuated with the antieLpated development of tourism and lnternational aLr andmaritime traffic, unless preventive programs are promoted. The previousgovernment propared a medium term AIDS prevention program with the help of WHOin May 1990, and moblilzed external funding for it in July 1990. The newgovernment is actively promoting public awareness of the disease through primaryhealth care facilities and the media.

24

68. Gender Issues. Gender equality is guaranteed by the ConstLtution of 1983(Article. 22-24). The law li expliclt that men and women ln Cape Verde have toenjoy the same condltlon. ln the famlly, ln public actlvltles, and at work:equal pay for equal work. This was a major breakthrough ln the legal system ofthe soclety where, for a long tlme, women's rlghts were routlnely lgnored and theprimacy of men ln all spheres of llfe was tradltionally assumed. At present,other than some differences between common practlce and legal codes attrlbutedto the traditlonal cultural and socLal attitudes and rellgious bellefe, therehave not been political lmpedlments to promoting women's role in economicdevelopment. Women accounted for about 53 percent of the resldent population ln1990, mainly because of emlgration which Ls more prevalent among men. Althoughthere is no obvlous gender dLscrLmLnatLon in employment opportunLties, only 45percent of all women between the ages of 15 and 64 are considered as part of theactive populatlon (or 38 percent of the total active population) compared to 90percent of all men. In the Cape Verdean society women still play a key role asthe heads of household without belng conaLdered part of the actlve population.In 1990, about 48 percent of all women between che age of 15 and 64 wereregistered as heads of households. Women are employed ln all sectors, and havethe highest presence in the primary and tortiary sectors. They domlnate commerceand social services, public administration (53 percent) and the informal sector.Unemployment among women was estimated at about 23 percent ln 1990. Women'sdynamiem and resourcefulness are shown ln mushroomLng lnformal sector actLvities.Legally women have rights to own land. They play an important role in soilerosion protectlon, and forestry development projects. Table 6 provldes basicinformation on women ln Cape Verde.

25

TABLE 6: Some Sadic Informtlon an the Status of Women, 1990

Toscl Women

Percentage of population 100.0 52.7 '

Less than 25 years 64.5 61.3

Older thn 60 yarn 8.5 9.2

Life exptancy at birth (years) 65 65

Percentago of population enrolled in school

Primary (between the ages of 7-12) 85 85

Secondary (betweon tho ages of 13-15) 48 48

Percentage of population with

PrimQY school certificate 42.4 35.5

Secondary school certificate 13.8 14.3

Univesity degree 0.8 0.7

Adult Ulitercy rate (pacent) 51.6 51.2

Unemployment (percnt) 23.1 22.9

among those who were formally employed 6.3 5.2

among those who wore never employed 16.8 17.7

Total - of which women

Active population by sectors (percent) 100.0 38.0

Primary sictor 23.9 40.0

Manufacturing 4.8 27.0

Contruction 19.7 20.0

Commerce, rem rants and botel 11.0 62.0

Financial sector 0.7 43.0

Social sevices and adminisation 15.3 S3.0

Unclasified (m) 17.9 40.0

(a) Prcentage of total population only. Following line refect porcent40 of all wonoo.

(b) Active population, but unclasified by secton.

Source:e 1990 Populaon Cnlus preiminay wlt.

69. As a result of equality in access to formal education, there was nodlfference in gender enro'.lment in the prLmary and secondary schools Ln 1990.About 85 percent between the ages of 7 and 12, and about 48 percent between theages of 13 to 15 went to school. However, the percentage of glrls who obtainedthe primary school certificate was 35.5 percent, somewhat lower than the average

26

42.4 percent because of a higher drop-out among girls. About the same proportionof boys and girls graduated from the secondary schools (1 percent) anduniversities (0.7 percent) in 1990. The rate of illiteracy S.. almost the samefor men and women, 1.e. about 51 percent. One of the main concerns of thegovernment is to ensure public resources for social servLoes to lmprove women'scapacity to manage child health, nutrition and family plunnLng.

70. A better understandLng and handling of gender Lisues wlll require furtheranalysis based on data broken down by gender on dLfferent aspects of soclo-economlc llfe. The government wlll need to take a more actlve role to overcomethe discrepancLes between common practlce and legal codes Ln gender treatment,and polltlcal commltment wlll be needed to senaLtize communlty and religLousleaders, NGOs, and the general public to the Lmportance of having open dialoguesand increaelng the awareness of women's role ln economlc development and socletyas a whole.

IV. FACING THE FUTURE: MEDIUM TERM DEVELOPMENT PROSPE2TS AND AGENDAFOR THE 1990S

A. Sources and Prospocts for Economwl Growth

71. Cape Verde is at a crossroads. Faced wlth development constraints of asmall island economy dominated by the public sector, the government has recentlyembarked upon a new course. It li openlng up and creatlng a prlvate-sector-ledeconomy drawlng on the country's strengths (Box 5). This bold lnltlatlve libased on sound homegrown economic and sectoral pollcy reforms aimed at attalnlngmacro-economic stabillty and creating market conditlons. Its objective is tobuild a strong economic base which can brlng about sustainable growth, new jobs,increased export-earning capacity, and, in turn, reduce a hlgh dependence onforelgn savlngs. The donor community has strongly supported development off-rts,the fight against famLne, the social programs. Donor support for wlde-ranglngstructural reforms to transform the economy li Lmportant lneurance that CapeVerde can count on. To attain the medlum and the long-term development agendathere li a need to improve coordination of external asesitance. Cape Verde'smedium-term development agenda necessarily comprises the followings employmentand human resource development; infrastructure development; private sector andfLnanclal sector development; management and administration improvements; publicsector (public enterprise and public administratLon) restructuring; developoentof a poverty reduction strategy and action plan; and development of capacity tomanage the envlronment. Foreign investors and Cape Vordean 6migres are beingencouraged to invest directly or to set up joint ventures with the domesticprivate sector. The choice to integrate Cape Verde into the world economy whilemaintaining macro-economic stabillty and implementing structural reforms holdsthe promise of replicating the success storLes of Mauritius, Malta, someCaribbean countries, or even Singapore in the long run.

72. Rate and Sources of Growth. In the medium term (1992-95), given thatopening-up will take time, economic growth ie likely to con_inue to come mostlyfrom increasing efficLency in the exieting domestic and export services andactivities following an increase ln Lnvestment. Real vconomLc growth isprojected to average 5.5 percent a year, assumlng that lnternal and externalbalances are maintained and the 'mplementatlon of policy reforms is continued.Growth is expected to result from: (i) demand related to public investment lninfrastructure (ports, airports, roads rehabilitation, and maintenance) andmodernization of telecommunications; (iL) private investment in fiaheries,tourism, services (including banklng), and export processing (lightmanufacturing): (LLL) an increase ln agricultural output wlth better use oflrrlgated land; (iv) steady growth ln private investment in housing; (v)continued growth of commerceo and (vi) growth ln services to international airand maritime transport.

27

-WWXP'* tx 5 Qoeiv -qopthe Pooom -. Ca stenthoa filgh'1fhal_~~~~~~~~~~~~~~~~~~~~t 1. I _t.

.~~~~~~~~~~~uoa, iii.... :,.cpt. Yard. haY severa:: l streths tha t-u k ' t:h : ' e i ' ::unefixploi'ted.. .to'urst. ahd:tieh$n-o'' te,'t:taL;''.:.eogrplcel- positlo ri the'- mmetlt'I":''' tted '' vic.

endstailty f he Kca~g rt.;ngiil ps arest te conris otenilfo h* iuobll{iAatlenof mi, gr.ant ynd drodtic uavir c' rently re by t e '' t.e f,na1'ialsec,tor; prvedforv,gn nestet las;potical and socialE tability; thestret O

Verdean eiros A(eIxpresse tnraatanc ' roto)

t~~~~~~~~~~~~~~~.... W ... .. ....pri-Jv,ate,,sec,"ztt'r: Inaeqte bankin syotta.n financie Intimimnts; shortage Lof"skl.tled labo.r. (mit.lddl(,.', ard: .h!.i.g-levetechn.l$%ns irid v amnagere); :large 'pubt Jo nterprise sector.;. a.,l.l do.. ttic ..

73. Over time, a better established and dynamlc export-oriented economy led bythe private sector is expected to be the engine of growth and employmentcreation. Private sector investment is likely to increase in fisheries, tourism,export processing zones, shipping, and other services (i.e., banking,international data processing, transhipment, and so on) in response to structuralreforms, macro-economic stability, a conducive business environment, publicinvestment in infrastructure and human resourcee, and politlcal stability. Atpresent, fisheries and tourism have low shares in total value added (see Box 2)and a marginal contribution to economic growth because of low efficiency ofpublic enterprises. However, their contributions to overall growth are projectedto increase significantly as private sector investment increases over time. Thevolume growth for 1992-95 period is projected to be as followsa fieheries andfish processing from 4 percent in 1992 to 11 percent by 1995, tourism 8 percentin 1992 to 13 percent in 1995, manufacturing for exports from 4.4 percent in 1992to 7.5 percent in 1995 (for detailed projections see Statistical Annex, page 15).

74. Prospects for 3xport growth. In the medium term, export receipts areexpected to grow malnly from services. The export volume of goods is projectedto grow 12 percent annually on average in the medium term from the current lowbase. Growth will also come from a higher output in fisheries, manufacturlirgenerated by new private investment, and higher exports of agricultural products(bananas and vegetables) as a result of better use of irrlgated land andprivatization of state-owned farms. Higher proceeds from exports of services areexpected to come from services rendered to international air traffic and apotential increase in maritime transport. The increase will come from theresumption of South African Airways flights and the increasing interest of someother internatlonal airlines in establishing passenger and cargo services viaCape Verde to other destinations in Africa or Latin America. There should be amoderate increase in international telecommunications and banking services towardthe end of the period as a result of the anticipated development of dataprocessing facilitieo and offshore banking.

B. Large Znvestment-Savings Gap

75. The medium term growth projections imply a significant investment-savings(I-S) gap -- approximately 30 percent of GDP in 1991-95 -- becauos of higherpublic and private investment, which will be financed predominately by foreignsavings and partly by projected positive domestic savings by 1995. However,given the country's current negative domestic savLngs (they averagedapproximately -3.5 percent of GDP in 1986-90), Cape Verde will have to continueto rely on ODA and private transfers. Thus, the existing structure of externalfinancing is not expected to change significantly in the medium term (Table 7).

28

TABIE 7. iterxnal Fiancing RqnmaU and Rinos, 3991-95

1991 1992 1993 1994 1995

SO < -- vprojecdw .- >

billions of CV eacudos

Rcquiran 12.05 13.44 14.62 15.96 17.17

Inmpo (fo.b.) 8.82 10.10 10.90 11.99 12.83

Nom-factor cvlm 1.86 2.16 2.22 2.31 2.45

Facor aevicnk (excL btor) 0.14 0.16 0.18 0.21 0.22

Debt cvlsoblgaton 0.93 0.86 1.09 1.15 1.23

in scarv 0.20 0.06 0.11 0.18 0.30

Resourc 12.05 13.44 14.62 15.96 17.17

Expo (f.o.b.) 0.44 0.49 0.56 0.65 0.75

Soyicc 4.68 5.03 5.29 5.80 6.37

.rvat Uwd f ta 3.76 3.91 4.07 4.23 4.29

Official tamfe 2.30 2.66 3.03 3.33 3.73

Lan dibunem 0.78 1.23 1.50 1.74 1.76

Dinrecforipn ivm ,aa 0.09 0.12 0.17 0.21 0.27

aba, of UDP

Md.mo ita

Reac gap -25.7 -28.4 .28.3 .28.2 -26.6

Extenal &&vWs 31.6 32.8 33.5 33.4 31.9

of wich pivat unfean 17.4 16.5 15.8 15.2 14.0

of whicb offlcialWt fea 10.6 11.2 11.8 12.0 12.2

Sowu B"a saff ctinal.

76. Continued Reliance on ODA. Development in Cape Verde continues to rely onsignificant amounts of ODA in support of public investment projects in economicand social infrastructure, bilateral donors and multilateral creditors haveprovided sizable ODA, with the fight against famine (food aid), and technicalassistance. To-date, a high grant element (97 pevcent for the 1985-89 period).The need for continued reliance on ODA with such u high grant element stems fromthe country's weak export-earning capacity and the level of GNP per capita (seeBox 1). Grants are projected to contlnue to dominate ODA gross disbursements(about 70 percent in 1992-95) while the share of concessional loan disbursementsfrom multilateral creditors (IDA, AfDB, EIB, BADEA, and others) will increaaesignificantly. Donor food aid will continue in view of the reality nf droughtin Cape Verde, although its relative share will decrease in light of increasingrequirements for project-related ODA, program aid, and technical assistance. Inrecent years, some donors. notably Sweden, have chosen to provide quick-disbursing untied aid, used mostly for development budget expenditureo. Therehas not been a ned for balance of payments quick-disbursing aid in Cape Verde.Although availability of program ald and food aid sales-proceeds provide thegoverinment wlth substantial counterpart funds for development expenditures and

I. I I I 'I I111 -q Ii* ,.,

29

flexibility in their disposition, the pressing need to secure adequate flnancingfor development priorities from all resources, requires an effective coordinationwith donor-administered aid in the context of multi-year public investmentprograms.

77. Need for Higher Domestic Savings. Current domestic savings are negative.The control of aggregate demand hy budgetary and monetary policies will help togenerate domestic savings by the government and the private sector. An increasein domestic resource mobilization (through new financial instruments and creationof capital markets) is projected to contribute to narrowing the I-S gap.Financial oector reform and positive real interest rate policy are aimed atmaking possible the mobilization of domestic resources.

78. Continuous Inflow of Private Transfers. Private transfers are expected toremain unchanged in real termo,reflecting still strong family ties andcommitments and enhanced confidence in political and economic changes in CapeVerde.13 However, continued heavy reliance on generous official and privatetransfors over the long term could work against the development of the country'sown export-earning capacity. The shift to an outward-looking prlvat, sector-ledeconomy should help Cape Verde to reduce this reliance eventually. Fading familyties of Cape Verde's 6migr6s and immigration restrictions in West Europe and theUnited States may also reduce the inflow of private transfers in the future.

79. Direct Foreign Investment and Xxport-Xaraing Capacity. Modest directforeign investment (DFI) is expected in the medium term, with prospects ofincreasing in the long term. Expected investment by foreign investors and CapeVerde's 6migres will also create more jobs and increase income. DFI is alsoexpected to induce new investment opportunities for small-scale activities inresponse to an increasing demand for services. These developments might alsoaffect emigration trends if attractive job opportunities are created at home.

C. External Debt Management

30. Stock of External Debt. The stock and profile of most public and publiclyguaranteed debt (PPGD) reflect prudent debt managementt external resources havebeen in the form of grants and concessional loans. External debt information isonly available for PPGD which was US$152 milllon as of December 31, 1990, ofwhich some 70% is on concessional terms. The government provided guarantees forpublic enterprises' external borrowing, which accounted for 52 percent of thestock of PPGD and about 70 percent of the stock of non-concessional PPGD in1990.16

81. The stock of PPGD is projected to rise in line with an increase in projectfinancing by multilateral creditors (for example, IDA, AFDB, EIB, BADEA).Although the stock of PPGD is projected to rise, there will not be an immediatedebt servicing problem given extended repayment and grace periods. Alsoappropriate use of these funds is expected to contribute to developlng thecountry's export-earning capacity. Some lenders have recently hardened theirlending terms in view of the officially over-estimated GDP per capita (aboutUS$1,083 in 1990). In the light of the revised estimates of GDP (Box 1), it ishighly recommended that such terms be reviewed. Borrowing by public enterpriseswill need to be further restricted in the light of public enterpriLs reform.Public guarantees for joint ventures by the domestic private sector and potentialforeign investors need to be evaluated for their credit worthiness.

82. Debt Servicing. Cape Verde serviced its external debt without interruptlonuntil recently. External arrears accumulated in 1989 and 1990. This was partlya result of uncompleted negotiations on rescheduling debt servlce obligations toBADEA and OPEC Fund and partly because of the unserviced debt obligations of somepublic enterprises. Arrears have now been rescheduled and repayments are onschedule. USAID contributed some USS 1 million in 1991 to help clear some of theexternal arrears, in recognition and support of democratization in Cape Verde.The debt service ratio (DSR), measured as a share of exports of goods, non-factor

30

services, and prlvate transfors averaged about 11 percent during the 1986-90period. Net of prlvate transfers, DSR was about 20 percent. The DSR for themedlum term is projected to remain unchanged because of a high share ofconcessional loans. In the long run, the development of the export-earning baseshould enhance the country's ability to sustain debt service obligation.irrespective of the future trends ln private transfers.

D. Public Investment Planning and Aid-Coordination

83. Public Investment Program (PIP). The programming and monitoring of publicinvestment expenditures are weak aspects of economic management in Cape Verde.The problems do not lie with the content of the PIP per so (this reflects thegovernment's new role in the economy generally -- Table 8) but with the criteriafor selecting projects, priorLtization, monitoring of program implementation andits rate of execution (in 1991, it was estimated at less than 60 percents in1992, it was 75 percent). The adoption of a multi-year rolling investmentprogram would be a stop toward addressing the problems encountered, and shouldbe undertaken as a matter of priority. A multi-year perspective would bring morerealism into the design of the investment perspective. The current annual systemha shown sevore shortcomLngs. Fox example, undisbursed balances for someongoing projects are programmed for the year in question rather than over theremaining project life. Consequently, results reflect low disbursement rates.The PIP can be made into an effective instrument for public resource managementand aid coordination as discussed later (paras. 85-86).

31

TA= at Pv blcI.gu AUeam 1911 (a)

1991 t992~~~~~i UChag im

CV eac. Sham of eV me. She of 1992

wilmiam TOW cwi TOe)

TOd ailaca S.765 100.0 6.129 100.0 6

P rbaz meow 1.250 21.7 1,073 17.5 -14

Agrcullb 1,155 20.0 865 14.1 -25

FTbeie 96 1.7 208 3.4 I16

SOdycr 1.622 28.1 1.007 16.4 -3S

Indutry 134 2.3 122 2.0 .6

Cambsacto 843 14.6 630 13.6 -I

loer 645 11.2 54 0.9 -92

Tatiuyaeclor 2.893 50.2 4.049 66.1 40

Tourim 18 0.3 44 0.7 144

Trao"t and

Ca.m-mIcaaiam 2.118 38.0 2.200 35.9 1

Haming 92 1.6 449 7.3 391

Health 9 0.2 III 1.8 1103

Eduntia 363 6.3 955 15.6 163

PubOcadministrtio 164 3.2 160 2.6 -13

Social proINI 39 0.7 130 2.1 232

(a) Exchde domor.mliuidgbu and agavarmmtWfu. In 1991. dooorn-dminddguanb and public zaprm fi acoud for 218paeataof tl public mnv_si

Sae: Das provided by d MWinisy of Fance ad Plannin in Cap Verde.

84. The 1992 investment budget (Table 8) ref lectc government developmentpriorities -- lnfrastructure (36 percent), social services (27 percent) andagriculture and reforestation (14 percent).17 However, two externally financedprojects for rehabilitation of public enterprLes in manufacturing and fisherieswere not consistent with government's public enterprise reform program. Thisreflects the donors' practice of project selection based on geographical andsectoral preferences, which may not necessarily meet development objectives andsound economic investment criteria. The government has also expressed concernabout some donors, approach in project selection. To overcome disadvantages ofthe paot donors' practice it would be useful for all donors to select projectsbased on national development priorities and economic return criteria. In thisquest, developing a multi-year public investment program which will include allinvestment projects selected on these criteria and which should be periodicallyreviewed by partners-in-development, can help to increase the effectiveness ofpublic investment. Monitoring project execution needs to be improved.

32

Monitoring the execution of projects financed by donor-administered grants ispartliularly weak. The programming and monitoring of public developmentexpendlturee could be Lmproved by establiehlng mandatory economlc and flnanclalrates of return selectlon crLteria for large projects, by $mproving projectmanagement, and by developlng the instltutlonal and human capacity to program andmonLtor public Lnvestment program implementatLon.

85. Naed for Better Aid CoordinatLon. The presence of donors ln Cape Verde hasbeen prominent, yet coordlnatlon of thelr ald could be substantlally improvedto maximLze the beneflts to the economy. VLrtually everyone ln the developmentbuolness is involved ln Cape Verde. IndivLdual donors have compartmentalizedthelr aseLstance with little attempt to coordlnate lt. The bllateral donorpollcy of asesLting partlcular lslands (the only exceptions are Sweden and theUSA) has also contrlbuted to lnadequate ald coordlnation. The prevlousgovernment did not encourage aid coordLnatLon; lnetead it pursued bilateraldealings wlth indLvLdual donors and ensured substantial ODA for projects evenwhen some did not use aid ln the best way. Within the government itself, theongolng bllateral negotlatlons wlth a number of LndLvidual donors/creditors onmedlum term ODA commltments could be much better coordlnated. Among donors, noteveryone li fully aware of who is dolng what ln development in Cape Verde.Inadequate ald coordlnatlon at this cruclal juncture rlsks substantial externalald belng allocated to lower prlorlty development objectives which will not bringabout deslred development results.

86. The improvement of aid coordination will be pivotal ln ensuring adequatelevels, qualLty, and effective use of ODA ln support of an outward-lookingeconomy. It wLll be very lmportant to establish regular lnformal consultatLonsand exchange of information between the government and the partners indevelopment, lncluding NGO5, and to asesgn full aid coordinatlon responsibilltyto the Minietry of Flnance and Planning. It wlll be useful to organlze frequentformal government-partners-in-development dLalogues, lncluding Round Tables, asa forum for revlewlng the progress in reform programs and allocation ofuncommitted aid in support of new development prloritles. The Round Table in thesecond half of 1992 has emphaeszed the importance the government attaches toproper aid coordinatlon, rather than simply to raise funds which it cannot useefficiently.

E. Need to Lmprove Statistics and Data Base

87. Suilding NatLonal Statistical Capacity. Weakness ln statisticallnformatlon emerged as a major lmpediment to policy reforms deslgn. PrLority hasbeen aselgned to building up national statietical capacity. In this quest, inthe context of the proposed Public Sector Reform and Capacity Building Project,the government is coneldering transformlng the ODS Lnto a National Institute cfStatistLcs (INE). The INE would have broader responsibillties and autonomy andwould formalize Lnteractlon between the statLetical staff of various technicalministries and agencies. It would also coordinate training for those staff. Theterms of reference of the INE, modalities for lts operations, staffing issues,training, and reporting requirements have not yet been defined.

88. In order to strengthen statistlce management it will be necessary toconsider: (i) deflning a statistlcal action program based on the minlmumstatistical requirements for each lLne/mLnietry; (iL) strengthening planningunits Ln line minlitries in charge of preparing and analyzlng statietice; (LLL)strengthenlng the capaclty and the role of GDS ln coordLnating the preparatlonand analysie of data (thle strengthening could make possible the eventualestablishment and functLoning of the INE); (Lv) providlng technical aseLetancewith clear terms of reference, provLsions for quallty control and supervLisont(v) Lmprovlng hardware and software for data processLng; and (vL) lmprovingcommunications among etatsetLcal producers and users.

33

P. Long-Term Issues

89. Poverty Alleviation. Openlng-up the economy wlth sustainable economicgrowth and job creatlon will be the most effective Lnstrument for tacklingpoverty in Cape Verde Ln the long-run. Cape Verde has a good record on povertyallevlation. Although, there are dlfferences ln the levels of consumption amongthe Lslands, poverty is neither prevalent nor strlking. Thls is attrLbuted topositive economlc growth per caplta, generally sound social programs, a concertedaction of local communities, NGOs and donors in poverty allevlation programs, asignificant external food ald and private transfers in the 19806, which made ltposslble for Cape Verdeans to consume more than' what they have produced. Povertyissues in Cape Verde are, however, related to difficult living conditions inrural and urban areas, limited employment opportunlties, population growth, andfamily planning. Livlng condltions in rural areas have been aggravated furtherin the course of the past few years by the prolonged perlods of drought whichhave reduced employment in agriculture and animal husbandry and the availabilityof locally grown food, prompted mlgratlon to urban areas and abroad, and affectedadversely the shortage of fresh water. worsening livlng conditions in urban areascharacterized by chaotic growth of houslng, and by inadequate water supply andsewerage to accommodate a high inflow of the rural population in search for jobopportunities, are posing a serlous concern about increasing urban poverty.

90. A traditlon of free state provision of basic social services hascontributed significantly to poverty reduction. The government has beenmitigating poverty through rellable food security programs. Food aid is sold atworld prices. Inter-island transport costs are subsidized with the objective ofensuring food supplies to remote lslands with the lowest income per capita.Sales proceeds of food aid have been linked for many years to food-for-workprograms to ensure minimal nutrition to unemployed and underemployed rural men,women and other disadvantaged groups. At times, these programs have providedmlnimal employment and nutritlonal support to as many as 20,000 persons duringnon-agricultural seasons.

91. Drawing on the strong sense of community, past and present Cape Verdeangovernments have mobilized people through national associatlons for women andyouth, and cooperatives for farmers and rural workers in promoting self-helpschemes for dlsadvantaged groups. The three major local NGOs provide soclalservices (for example, for orphans and asesitance to poor familles) and manydonor agencies provide financlal and technical support to local associations,cooperatives and NGOs. In addition, access to health services and the familyplanning and maternal and child health care programs have contributed to reducingthe incidence of poverty.

92. The government wants to improve the content and coverage, the quality andefficiency, and coordinatlon of soclal programs organized jointly with variousnational assocLations, local communities, NGos, and donors so as to target andhelp dlsadvantaged groups. In thLs quest, the government has begun jointly withIDA to analyze further the complex poverty issues. This work will lead to theelaboration of a global poverty strategy and action programs, and definition ofactions to improve government's own capacity and instruments, to deal withpoverty alleviation more effectlvely. The government presented the terms ofreference for this work to the Donors' Roundtable Meeting held in Praia inNovember 1992. The government is commltted to addressing the links betweenpoverty (minimal consumptlon levels -- Box 6) and population growth and familyplanning programs, and between r,oerty and education. It L, however, necessaryto begln to coordinate informrcion about soclal indicators. This information iscurrently dispersed among ministries, donors, and local agencles. Analyses canthen be made of the social groups and geographic areas for which the socialproblems are most pressing, and the most effective locally designed and managedprograms drawn up to address these problems. Education, health, income, andemployment generation are essen ial elements of such program. but they need tobe supported by a conducive incentive and policy environment.

34

-ral " s?f The 18'198 ohold Survey fow' wde differe a"constion levels wen1il

an urba reas, iand-e,tOi dcatina opportimit'ies. ?, C:onsur>tron tevetr in .sie

slsand. (for exae'te, .Foga, firava and St Antoe) here there sre fevecr:'eupto)¶eatopportunities,f+ewer schools nd. a'reater ncidence-'of ingle parent fstilies because of ml gratton, are lower than-'e!lsewhaere. SAverage final sonimption per capitawa-s estimated.at CV Eso 38,000 peW-year(boutux-S550), but.percent of the'popWation (more then 100,000 persons) hst' pe,r capita onsuptIonof CV,Eec -12000 and another 20 pcnt on(y W Esc 9,000. Thee differences are usuall y lInked' to..9 .eogadtcaL cot an'" the eVla)ment and educat'ional -stt* Di head. of household. gous'ehotds

head show e'peor capita 'onsuWt1on of CV Eec 40,000 coq,redto'CV Esc 28,000 for.i a:jifttan :t.nployed heed or forlihitl. parent hdaolde. In th* latter c uase ustaned?;

Ox. eo~wUq:n*eiaarer partly apletaned by private' transfers trim abrod. Edicational attamen.nt., ia ignlfcant. ::Houeeholda 1ith heeds who have:secondary e'ducetfon or above have consuption tevelts:

- :?of CV 1st2E,000 coepared t aCV Ec .25,000 whetr the head of hseholtd:.I Illteratet ally,famIt?ll:y *it.i. 1s o:'tgntficant.-Hoaholda with oneor tworchitdren hove consPtin't levels of CV

,:c .s89,¢000 whereas jthos with ore than:'five hve oewption levels of 'cV Eac ;25.000-.-;**S

93. Environmental Issues. The Cape Verde environment is austere, but thepeople deal with it bravely. Some of the issues are outllned below. Theenvironment is fragile, given the exposure of its predominantly barren surfaceto wind and water erosion adversely affecting soil fertility, and the fast growthof urban areas attracting more job seekers. The decline in soil fertility isfurther endangered by prolonged droughts reducing the already insufficient freshwater supply on many islands. In addition to poor climatic conditions, decliningsoil fertility is seriously endangered by high population density on arable land(about 808 persons per eq km)." The previous government promoted and financedreforestation and other soil improvement programs jointly with a number of donorsby bullding up terraces on hill slopes to prevent further water erosion. Someremarkable results have been accomplished, for example on the island of Santiago.

94. Urban environment problems are more recent phenomena and are quite alarminggiven the acute shortage of fresh water. Inadequate fresh water supply and lackof sanitation and a satisfactory system for collecting hazardous and solid wastepose immediate health riske to the fast growing population in the urban areas(almost 4 percent in the 1980.). These problems are particularly acute in Praiaand Mindelo which had an annual population growth of 5.2 and 2.6 percentrespectively in the 1980s. There has been no research to identify environmentalissues in thre marine environment and coastal areas, including the country's vastexclusive economic zone. The only research done has been in beach areas.

95. Environmental problems are well identified and recognized by thegovernment. The government has actively addressed some aspects of theenvironment (for example, lt has allocated increaslng development budgetary fundsto improve urban living and continuous reforestation efforts, and established aninter-agency, National Council on the Environment to coordinate Cape Verde'spresentation to the Earth Summit in Rio, in July 1992). But it has not yetdesigned a strategy -- policy measures coherent with other policy reforms -- ora legislative package and institutional framework to deal with this problem ona more comprehensive basis. A program to raise public awareness aboutenvironmental matters, particularly among school children, is being promoted bytha Ministry of Education. hs an interim solution to the institutionalframework, the government established a unit in the Ministry of Fisheries -idAgricultural and Rural Animation that will be responsible for coordinatingintegrated and more permanent work on the environment is under consideration.It is important that the government define a strategy, and a policy andlegislative package to ensure that future economic policies do not harm thefragile environment.

35

96. Regional Cooperation. Cape Verde has not been lnvolved in reglonalcooperatlon, apart from membershLp ln SCOWAS and bllateral arrangements wlth somecountries Ln the region (Senegal, Maurltanla, and Guinea Blesau). The developmentof the inward-looking economy with a high dependence on lmports has oriented CapeVerde to exte:nal trade wlth Western Europe, partlcularly Portugal. Wlth theshift to an outward-looklng economy, accessLng new markets will be essential lnattractlng new investment In Cape Verde. Taklng the lead ln the development ofan lnternatlonal servlce center off the west coast of Africa wlll glve Cape Verdea comparatlve advantage ln thi, area and the country could beneflt from reglonalcooperatlon. Wlth the prospects of emerging contributlon ln sectors such astranshLpment, offshore banklng, and teleports in the regLon, Cape Verde can keepup lts lead by puttlng more emphasis on lmprovements ln infrastructure andprofesslonal tralnlng ln the function of further speclalization. Regionalcooperation wlll be also useful in developing flsherles and touriem by enlarglngthe potential for exploitatlon, as well as by ensurlng the protectlon of the vastExclueLve Economic Zone of 630,000 square kilometers from unauthorLzed flshlng.

97. Xnstitutional Development and Capacity Suilding. The transformation ofCape Verde's economy and soclety, as has been dlicussed ln Chapter III, calls forchanges ln the exLiting lnadequate institutional and human capacity. Despitesome mlnor reorganLzatLon of mLnLitrLes, they stlll reflect the legacy of thelongstandlng promotlon of the state's key role ln the economy and society:public admlnlitration is highly centralLzed and monopollzes people with skillsand traLnLng, who are scarce in Cape Verde. AdmLnietratLve reform is belngprepared, as part of the package of reforms, to ensure that government is moreresponsLve to the needs of promotlng an open economy. The decentralizatLon ofsome central government responaLbilltLes to local government also calls forstrengthenLng sultable lnstitutlons at local level to formulate objectLves,prLorLties, polLcLes and action plans consistent wlth the natlonal ones and toimplement them. One of the hlgh prlorltles should be to assLit ln establlohingnon-government instLtutLons to help to promote the prlvate sector, for example,by providLng advlce and assistance on setting up companLes and on organization,technology, management and marketing. These services should also benefit jointventures and exports. The fLrst step in thls dlrectlon was the creatlon ofPROMEX ln late 1991 (Box 3). The medlum and long term objectLve should be toestablish demand-drlven domestlc and joLnt-venture consultlng firms that canprovlde such servlces.

98. As has been dlscussed earlier, a shortage of skilled and managerial laborle acute ln Cape Verde and the success in transforming the economy, includingprlvate sector development, hLnges on capaclty building and retentlon.Commltment to improvlng the relevance and efficiency of the exlsting technical,admlnlitrative and speclallzed education programs Li evldent. Also evldent iethe commltment to flnding ways to develop and provlde cost-effectlve speclallzedand professLonal educatlon programs for prlvate sector development and for skillsdevelopment for lmportant sectors such as tourlsm, flihery, telecommunlcatlonsand data procesoLng, and transport. The government has subsequently requestedBank aosLitance in defLning a strategy, objectLves and an action program lncapaclty bulldlng and work ln thli area li well advanced.

36

1. During the period of the First National Devolopment Plan (1982-85), the goverment channeled significantexternal savings Into agricultural production, social services and physical Infrastructure. In the secondphase, coinciding with the Second National Development Plan (1986-90), the government continued to pursueobjective estabtished fn the first phase.

2. The stock of arrears, whch emounted to about US$8 million by the end of 1990, was owed mostly to the ArabBank for Econowic Developnant In Africa (BADEA), ard the Organization of Petroleum Exporting Countries (OPEC)ard other creditors by saoe pubtic enterprises. These arrears were settled In 1991 ad 1992.

3. The results of the 1990 Population Census are not yet official. Given the recent slow-down In economicactivity, uinemployment i8 likely to be higher. Taklig into account underemployment, unemploynment Is estimatedat over 35 percent.

4. The Islands of Sao Vicente and Sal are entirely dependent on desalinated water. Groundwater reserves onthe Island of Santiago are expected to be fully exhausted in the next two years.

5. The Foreign Investment Code and the Industrial Development Law provided the framework of foreign Investmentnd industrial development and were biased in favor of foreign investors.

6. Preliminary results of this work are now available. Further ref inements are being made with national debateto follow. The govermnent hopes that Implementation of the reforms and further work can be supported by theSank as a part of the proposed Pubic Sector Reform and Capacity Building Project (FY94).

T. The Council of Ministers has already agreed to reduce urnecessary admitdistrative layers dnd to centralizeand standardize procurement procedures for office technology.

S. The technical assistance for financial sector reform and privatization of the pubtic enterprise sectorprovided by the Bank Is aimed at helping the goverrnent to develop Institutional and human capacity, a legaland regulatory framework, policies design and an action program to ensure policy implementation.

9. The lank's economic mission experienced difficulties in collecting basic statistical Information onaployment, budget execution, Investment budget execution, disbursements of external resources, and industrialproduction.

10. The timetable and agenda were established at the time of the 1991 prosidential end parliamentary elections.

1. In 1990, the pubtif enterprise sector Including mfxed companles received over 50 percent of the totalcredit extended to the economy, and the stock of external debt contracted by the pubLic enterprises was 52percent.

12. For example, limiting the state monopoly of EMPA. Furthermore, the government is selling Its shares inNORABEZA (garment manufacturing) and has completed same preliminary studies for prfvatization of three wholly-ownd pubLic enterprises in agro-business sector (FAP, Enavi and Justino Lopez).

13. The goverment's Intention was to liberalize these too, but the Cape Verdean Association of Traders - asiibstitute for a Chamber of Commerce - did not think that the private sector could ensure uninterruptedsupplies of vital basic commodities at this point, and asked the govermnent to maintain the monopoly.

16. As in many countries, large portion of the allocations are for salary and related costs.

15. Current economic difficulties in the United States and European economies where most of the Cape Vordeanemigrants live are not expected to affect the level of private transfers over the medium term. There Is a riskof uncertainty in the long term because of immigration restrictions for Cape Verdean emigrants in thetraditional host countries.

16. Borrowing by public enterprises has Increased In recent years as a result of a shortfall in internallygenerated funds for investments.

17. Donor-administered grants were not Included in the 1992 Investment budget at the time of the budgetproposal (February 1992).

37

18. Same preliminary estimates on declining solt fertilIty suggest that recent prolonged drought periods causedlosses of almost 30 tons/ha per ann In the arid zone, with 300 am of rainfell per annmu, and more than 100tons/he per year In the sbhumd zone, with 400**600 m of rainfell per onnm.

38M

STATISTICAL ANNEX

Cape Verde

Updating Economic Note

Cape Verde: R.,i.e tbtmtm.es of Volvo Adde byp secure. 166041

(milltie Sf CV Eseedee)

19m ia im am 119934 3 196 1i7 199 l" 119 190i 1990

"IMARY SECTI m oil sit 778 9 12184 1,48 1,106 2,209 ,"I 2,561 2,672

Agri.ieuIte., fet_- 425 446 an 486 3 749 96 1,46 1'8 1,722 1,34 1,36ttry ead itesteaFlubl. in 136 in 204 238 274 273 m 37 m 679

SEiCtAR lSEC 2 92 1,011.264 1,404 1,'0M 2,10 2.504 2,7 8,2n 8,452 8,9S

Indusr Om Sw3 1n 189 6 864 402 572 786 1,00 1,06 1,438 1,526 1,6 W

c..t..ti.. 56 722 749 9 1,064 1,116 1,84 1604 1,70 1,UO 1,96 2,206

n31T*3 SECT= 2,49 8,100 4,024 4,960 6,22 6,071 706 7,716 6,741 10,659 11,85 18,139

Ct _aro. 1,178 1,418 1,7 1,1 2,066 2,210 2,469 2,652 3,096 8,475 8,35 4,486fletle,Restwaet 87 46 e5 1 1l 1s I"6 164 289 296 258 2m 817Teaprt 218 261 881 439 547 66 nfo 625 394 99 1,127 1,503Servi.. lo treep_rt 102 266 447 6on 784 u1 741 743 799 1,080 1,104 1,032

UNMlestione so 61 102 11O 170 in 80 40C Sca 62 40 OJ?Bok ad Insurance so Ss 7n 2 04 91 72 51 21 149 149 168Hobueia 260 s19 402 49 Su 6o5 s12 378 1,047 1,201 1,446 1,741Pubils Serving 520 U30 744 67 1.036 1,224 1,671 1,734 1,26 2,867 2,587 81029Otb.r 5.ri 85 41 57 Ss so a 128 141 16n 1e 208 288 x

Import Texas 400 652 U1 715 U4 In4 1,111 1,19 1,278 15s29 1,748 1,79

a D P St serwt Priem 4,219 5,161 0,268 7,02 0,708 9,779 11,072 18,258 15,104 17,428 19,104 21,045

Seercot Oeek *etf estim *od mee daring tio Febrpyry 199 Ecoemic elegle lo C., Verde.

Ce. Verdes Volv. Ada by Sectwr so Share of UP, 13601

1960 161 1962 10 1904 1965 196 17 10 1969 190 1961 S-90

FUIMo 51CIUR 18.63 12.1 9.01 10.23 10.151 11.63 11.7 14.4X 14.63 18.01 18.51 18.21 12.63

Aricie.ltar., for- 9.6 0.71 6.41 0.4 6.531 7.6x 3.81 11.21 11.51 9.91 9.61 3.2x 9.23*try a" livestockfisbhin 2.61 2.63 2.33 2.71 2.73 2. 2.4X 2.4X 2.4X 2.81 2.71 8.1S 2.63

SECOBDARY SEClUR 17.81 17.11 16.911 16.t 16.61 17.33 10.63 19.61 19.01 10.61 13.2X 17.61 10.03

Industry end serwy 4.41 8.1x 4.2X 4.03 4.6X 5.6X 0.8A 7.6X 7.2X 3.23 6.05 7.43 6.53 XConstructi.. 12.91 14.03 12.05 12.13 12.23 11.41 11.71 11.8X 11.91 10.63 10.21 10.2X 11.51

IEUTARE SECTEOR 6.1X 00.23 64.83 08.53 08.43 62.11 WA.S U.2X $7.9 59.41 69.83 60.91 00.21

C _ern 27.43 27.43 20.43 2.961 28.7X 22.61 21.21 20.0X 20.4X 19.9X 20.11 20.5X 22.11Hetels,1RstaurantO 0.05 0.9X 1.43 1. OX 1.83 1.71 1.6X 1.6X 2.0X 1.5X 1.4X 1.5X 1.0XTransport $5.X 5.11X 5.83 v.6 8 .1X 6.81 7.OX 6.21 59X 5.1X 6.9X 6.96 6.OXService In transrt 8.6X 5.23 7.13 8.6X 6.4X 6.8X 6.3X 5.ox 5.81 5.9X 5.0X 5.01 6.8XCm_mnlcthnso 0.96 1.2 1 1.63 1.6x 2.05 1.61 2.63 *.0X 8.81 8.61 3.4X *.2X 2.71Baok and Insrance 1.43 1.11 1.7S 1.13 1.0X 0.96 0.63 0.43 0.1X 0.91 0.x 0.91X 0.6XHousian 0.01 6.21 4.41 6.4S 6.M 6.11 7.0X 6.0x 6.61 7.4 7 T7.X 0.O1 6.9SPublic Servics 12.11 12.21 11.61 11.7X 12.01 12.0 18.51 18.M1 12.83 18.ex 18.21 14.01 12.9XOther Servies, 0.61 0.61 O 0.6 0 0.61 1.1X 1.11 1.11 1.11 1.1X 1.13 1.1X 1.01

Import T7ase 10.91 10.71 9.6x 9.43 9.63 9.01 9.6X 3.S1 3.SX 0.61 9.11 3.81 9.21S

O0 P at maret Price 100.01 100.01 100.01 100.01 100.01 100.0X 100.01 100.011 100.03 100.0X 100.0X 100.01 100..OX ( m

___agBsk"ftetitm es alo heFbray MEcales____I_op_ere__ K

Sources Sank eff estimtsmd during Ui Fobryry 199 Econemic mimion 1. Cope V..*.c

CaPe Voets evimWe Estimates of Value Addd by Sectors at ConoAnt 19M0 Priam(m1IUlono of CV Esecdo.)

1960 1931 1062 193 104 15 lw 1? 1906 199 190

"iMn SECTOR so6 6e1 486 439 18 an on 60 0"9 ge 949

Agrielculters. for.- 425 410 820 805 31 450 49 6 715 Too 720stry and livestockFlshlog 12E 122 121 1" 181 140 IU6 152 148 14 i49

SECONDARY SECTOR 742 3926 3 970 097 1,112 1,152 1,264 1,815 1,880 1,848

Idustry end nergy lt 159 21U 260 263 871 879 444 837 47 422Constructlon 518 670 627 708 704 741 77n 340 979 982 921

TERtiRy SECTOR 2,493 2,744 3,018 8,266 3,467 8,562 8,650 3,757 4,057 4,864 4,470

Cemorco 1,178 1,230 1,807 1,846 1,869 1,876 1,864 1,817 1,455 1,554 1,60lloteIs,Rfteturnts 87 89 as 79 32 04 92 109 127 102 101Transport 218 235 280 883 849 *61 86e 8M5 U69 407 404Service In transport 102 231 247 080 328 290 245 237 248 263 276Cmunicatlones 89 So l6 107 148 160 170 202 214 243 260sonk and Inenramee so 52 57 C1 45 s0 a1 20 a 20 19Hoesino 256 27S '"0 814 385 a"0 33 40a 464 526 sacPubl)c Services *20 CC4 a2" 99 772 36 02C I,Cm 1,182 1,166 1,249other Sevicese 85 41 44 46 49 51 60 6s 71 74 7J

Import Twese 40 470 58 682 89 709 079 608 0S1 736 39

0aD P et market prIce 4,269 4,004 4,654 5,8" 5,5606 ,028 6,177 6,545 0,976 7,415 7,601

et-- 9- e- taft otimate made durlng the Febryary 1992 Ecomic mlislon In Cape Verde.

42

AnnexPage 4 of 17

Cop Vordes Revised Estiates of Expenditurs. f Available Resouuc se 1066-91

196 LO7T 1906 1989 990 091

(mllilons of CV Ecu4doo)

Consumption 12,065 13,433 16,520 10,148 20,422 22,269Public 2,606 2,900 8,106 8,635 8,848 4,564PrIvate 9,579 10,473 12,412 14,807 10,579 17,906

Investment 0,09J 5,209 5,010 4,6M9 5,454 6,606Public 4,616 4,239 8,93o 8,097 2,600 8,197Private 1,474 070 1,670 1,792 2,65 2,209

Total *x_pelture 16,176 16,542 20,580 28,2U 25,676 27,606

GOP at market prie. 11,672 13,251 15,104 17,42 10,164 21,645

Resource balanoo -4506 -5369 -5426 -6306 -6712 -6220EAports of GMF 2,900 8,400 3,100 4,650 4,200 4,460Imports of NSIS 1 -9406 -8789 -8528 -10305 -10912 -10660

Net Investment Income -314 -160 -of 144 162 144

CKP 11,856 18,075 15,070 17,572 10,34 11,769

DometlC svings -418 -190 -416 -906 -1219 -414Public 49 -42 46 9 -44 -44P!Ivote -864 -222 -170 -907 -1308 -656

Foreign savings 6,506 5,169 6,426 6,605 6,712 6,220National sWings 0,09J 5,209 5,010 4,939 5,454 5,606Transfer* 6,660 5,667 5,065 6,521 5,4J1 6,059

of which privete /2 2,140 2,208 2,609 8,136 8,246 8,700Factor services -314.1 -179.7 -14.5 144 162 144.1

(as shars of GOP)

Consum tIon 103.5 101.4X 102.06 105.11 106.61 102.3S?ubilC 21.6X 22.81 20.61 20.JX 20.11 20.1XPrivate 62.11 70.06 82.25 65.0S 6.51 62.7X

Investment 52.2 . 80.31 88.2 2t.11 26.5X 25.01Public 09.5X 12.01 22.11 17.6X 14.61 15.71Private 12.71 1.lX 11.1X 10.31 11.6 10.2X

Total expeaditure 155.71 140.71 115.9S 13.1 1SM.0S 126.7S

Net investment lncom -2.73 -1.41 -0.2X 0.61 0.61 0.7x

CN 97.JX 96.G6 r. 1 100.611 100.61 100.73

Domstic savings -1.5X -1.41 -2.6X -5.1X -4.61 -2.6XPublic 0.41 -0.31 o.1x o.o -0.2x -0.5XPrivate -1.1X -1.7X -2.51 -5.2X -4.61 -8.0

Foreign savings 55.7X 40.X 35.9 88.JX 15.01 20.7JNational savings 52.25 89.1 88.25 26.11 26.51 25.MTransfore 46.71 44.8S 87.81 81.75 26.11 26.01

of ohich private /2 16.81 17.1X 17.01 16.01 16.69 17.41Factor sevice -2.73 -1.41 -0.5x 0.61 0.91 O.7

Sources The Bank staff eotimatNotest /1 Include unaccounted requirements Indlcated In Sr as errors and omisolons.

/2 Workers eittences are Included In prlvate transfers because they are mademostly by resldents who live abroad longer then a year and Cape Vordean emigrants.

43

AnnexCape Verde: b0 lan .1 Payment.. 1966-01 Page 5 of 17

196 S1967 10o8 1960 1090 1961get.

(billions of CV Lacud".)

Resource So lnc. -5.28 -4.70 -t.67 -5.64 -5.97 -4.22

Export of ONPS 2.00 8.89 8.10 4.4t 4.19 4.46Import. of fiFS -4.18 -6.09 4.47 -10.29 -10.16 -10.64

Not factor lncom -0.81 -0.19 -0.04 0.14 0.16 0.14Private transfer S." 2.44 . 2.L3 .87 8.05 8.76

Officatl transfers 8.56 8.40 2.70 2.15 1.70 2.80

Current account balanceefere oeff cel transfere -8.25 -2.41 -2.76 -2.84 -2.14 -2.81

Atter official transfer 0.14 0.99 0.0 -0.10 -0." -0.02

Capital account 1.86 0.70 -0.08 0.41 0.21 0.22

Dtrect foretgn Invostments 0.00 0.20 0.04 0.01 0.02 0.00Medium- long-term capital 1.51 0.60 -0.07 0.40 0.2? 0.18

Contral gvernment 0.97 0.47 0.10 O." 0.52 0.29Drawings 1.11 0.67 0.82 0.77 o." 0.60Ameortiation -0.14 -0.19 -0.22 -0.10 -0.26 -0.82

Public enterprise. 0.41 0.02 -4.17 -0.13 -0.06 -0.15Drawings 0.6 0.21 0.04 .. 0.26 0.16AmortiaCtion -0.24 -0.16 -0.21 -0.16 -0.81 -0.88

Private aecer (net) /1 -1.88 -0.66 0.12 -O.46 -0.08 0.00

Change In Net Freigp Asset. 0.16 0.64 0.11 -0.48 -1.00 0.20

memeranume Items:

aP 11.67 18.21 15.10 17.48 10.16 21.66areas reeerves (In Billions of CV eec.) 4.40 5.48 6.99 6.46 6.06 .80(in sonth. of lspefrt) 7.20 6.00 9.40 7.70 7.20 6.70

Current account deficit(befer grant. as S of GOP -27.96 -19.17 -18.29 -18.41 -11.15 -10.71(;fter greats as * of UP) 1.18 7.46 0.19 -1.09 -1.38 -0.09

Debt service ratloXCNFX -24.30 -16.34 -22.06 -18.16 -18.96 -20.91XCNFS and private transfers -18."6 -10.91 -11.30 -7.49 -10.00 -11.56

Note: I/ Includes error* and oelslons.Source: Data provided by the Cape Verd"n eutheritlee, and IF and Sank staff estimate.

44AnnexPage 6 of 17

Cape Verde: External RequirOOMtal and Source of Financing, 1986-91

19# 196 19U 199 1990 1991Est.

(billions of CV Escudos)

RoquI resnts 10.52 10.50 9.46 11.06 10.64 12.04Imports f.o.b. 0.89 6.78 T7.4 3.88 *.39 3.82Non-factor service 1.24 1.96 1.54 1.96 1.77 1.06Factor srvic. (eucl. Intecret) 0.19 0.22 0.16 0.13 0.20 0.28Debt service obligations 0.72 0.64 0'." 0.50 0.79 0.98Change In roervee 0.17 0.66 0.11 -0.42 -1.00 0.20Other /1 1.51 0.09 -0.17 0.42 0.69

Souresa 1O.5 10.50 9.45 11.06 10.94 12.05Exporte f.o.b. 0.52 o.co 0.25 O. 0.40 0.44S ewc I a"2.79 5.15 8.24 4.44 4.56 4.9OPrivat. transfers 2.29 2.44 2.O5 5.87 5."O 8.76Official transfors 8.5 8.40 2.79 2.15 1.79 2.50Loan disbursement. 1.74 0.72 0.29 0.54 0.61 0.70Direct foreign liveetente 0.00 0.22 0.04 0.01 0.02 0.09

External financing gap 0.0 0.0 0.0 0.0 0.0 0.0

memo I tow

Resource gap -5.0 -4.4 -5.2 -5.h -5.4 -5.6External ssvins 7.4 0.7 6.0 0.S 6.5 6.0

of which prIvate transfers 2.7 2.5 2.6 1.4 h.0 1.9

(as a share of oP)

Requiresent 90.1 79.2 02.6 60.5 50.6 0 5.0Isperta f.o.b. 59.0 50.3 40.0 47.8 48.3 40.7Non-factr service 10.6 10.$ 6.9 11.2 9.2 3.6Debt service obligations 1.0 1.7 1.1 1.0 1.0 1.1Chang- In reerves 0.2 4.8 4.5 5.4 4.1 4.5Other /1 1.5 6.5 0.7 -2.4 -5.2 0.9

Soures 90.2 79.2 02.0 68.4 "500 5.7Exports f.o.b. 2.7 4.2 1.5 5.0 2.1 2.0Non-factr service 25.9 25.0 21.5 25.6 22.9 21.6Private transfers 19.7 13.0 16.9 19.5 19.1 17.4Official transfors 29.0 25.7 13.5 12.8 9.S 10.6Loan disbursmeonte 14.9 5.4 1.9 *.1 5.2 *.0

External financing gap 0.0 0.0 0.0 0.0 0.0 0.0

emo Items:

Resource gap -42.3 -38.2 -U4.4 -50.4 -26.2 -25.9Extornal *awings 05.5 $0.6 59.5 8.1 82.? 1.4

of which privete transfers 19.7 14.0 16.9 19.5 19.0 17.4

Note: /1 Includes errors and omissions.Sources Data providW by the Cape Verden autherltles. and IM staff *otimates for 1991.

45Ann.,ePage 7 of 17

Cap. Verdet Pubile and Pubiely Guarantee Debt Service Paymnts, 1M-90(millions of CV Escudo.)

lo 1067 10 109 100 1960

Debt Service Paymnts 716 6a9 706 C46 527 ,13"Amoti stlon g61 377 460 we $79 1,966:ntesrt 335 262 245 178 148 1,108

Central Covernmnt 170 221 247 23g 166 1,080Aootliatlon 137 191 218 1U7 171 906Interest 38 to 20 t9 as 124

Public Enterprises 44 416 456 340 341 2,108Amoti ation 244 134 242 U16 206 1,059Interest 302 234 216 159 I1 1,044

(as share of total)

Centrol Covernmnt 24 5 U as of asAmotization so 51 47 51 45 46Intereet 10 11 12 11 10 11

Public Enterpises 76 5 6 62 G IAmotization 64 49 a 49 U4Interest 90 *9 so s9 90 so

Source: Data providW by the Bank of Cop. Verde.

46Annex

Cape Vordes Central Cov-rneent Rovenue, 1987-92 Page 8 of 17

19o? 1983 1989 * 1990 1901 1991 1902Buda. Prow. Buda.

(million of Cape Verde Escudos)

Direct taxes eds.1 756.0 314.6 690.9 956.1 943.0 1,022.6Taxos on builnees profits 246.8 301.2 $13.1 340.6 376.0 362.1 380.0Tax on rentals 80.7 37.1 42.7 45.6 51.0 50.9 00.0Tax on salorls and Inee. of 112.2 124.6 163.1 1t4.6 206.0 213.2 240.0

eoltf-aployod profesmeonaisComplementary tax 206.5 211.5 229.9 263.7 260.0 234.9 260.0Tax on capital *nd profit. from 109.0 60.4 $3.2 33.6 41.3 41.0 46.2

comercial. of petrol. productoOther (property and use of goods 21.4 21.0 22.6- 31.0 83.3 40.9 44.0

and propertle.)

Indireet taxee 1,310.0 1,465.2 1,739.6 1,977.3 2,126.9 2,172.4 2,42J.4Taxe on Imports 1,468.3 1,313.0 1,630.0 1,760.7 1,906.9 1,964.6 2,203.4Iaport dutiee 528.6 021.4 671.1 7U6.0 360.0 865.8 960.0Consumption taxoe $84.9 424.9 520.9 639.0 630.0 666.7 760.0Conoumption aervic.. tax 249.7 269.3 3:6.6 855.2 z75.0 400.2 490.0Other 5.6 1.3 1.4 1.5 1.9 2.4 8.4Stamp tax 141.2 137.3 209.6 217.1 220.0 217.3 220.0

Nontas revenue 677.0 576.9 663.4 912.2 1,065.1 303.5 1,175.9Licenco., aiecellaneous foee 76.1 78.0 93.7 39.0 97.6 106.7 131.4Property Income 430.6 375.2 U32.5 $83.3 705.0 398.9 619.2Capital transfere 33.4 42.9 109.4 126.0 145.5 186.7 233.0Sale, of tixed assets and services 32.7 35.3 97.3 114.4 107.0 117.2 192.2

TOTAL 2,712.9 2,733.0 3,217.6 3,783.9 4,133.1 3,924.3 4,622.0

/I /2 /I

(annual percentage chsnge)

Direct taxe 4.3 7.0 10.4 6.4 6.0 9.4Taxe. on buisnose profit. 22.8 4.0 8.7 10.1 6.4 4.9Tax on rentals 20.3 15.2 O.t 11.7 11.4 18.0Tam on salaries and Income ef 11.2 22.6 20.6 11.0 15.5 12.6

self-employed protoesionalsComplementary tax 2.4 3.7 14.7 -5.2 -10.9 6.4Tax on capital and profits from -44.6 -11.3 -36.9 24.4 24.4 12.0

commercall. of petrol. product.Other (property and us of goods -1.5 7.6 37.0 7.5 32.0 12.5

end properties)

Zndirect tax" 11.1 19.5 13.7 7.6 9.8 11.6Taxes on Import 12.3 16.1 15.1 3.3 11.0 12.7Import duties 17.6 3.0 14.1 11.0 13.0 10.3Consumption tax" 10.4 22.6 22.5 6.6 7.6 9.2Consumption servicss tax 3.1 24.7 5.5 5.6 12.7 22.5Other -63.4 -20.6 6.3 26.4 53.2 40.9Stamp tax -2.8 52.7 3.6 1.3 0.3 1.0

Nontax revenue -14.9 16.0 37.5 16.7 -11.4 45.4Lieencos, misecelloneus fteo -4.1 28.4 -5.0 9.6 19.9 23.1Property income -12.9 -3.4 61.1 20.3 -31.7 $5.2Capital transfers -51.5 155.1 14.3 16.4 43.5 25.5Sales of fixed assets and servicee 3.7 14.0 17.0 4.5 2.5 64.0

TOTAL 2.8 15.4 17.8 9.2 3.6 17.9

Memo Ittos

Total government revone ams a share of GOP 13.5 13.5 19.3 19.1 13.1 19.4Direct tame as share of GOP 5.0 5.4 6.0 6.3 6.2 6.3Indirect taxme as share of GOM 9.6 10.0 10.8 9.3 10.0 10.1

GOP (in m*lleone of CV Ese.) 13,263 15,104 17,426 19,164 21,U45 21,645 23,937

Notes: 1/ Represent. the ratio bet*een budgeted In 1991 to executed In 1990.2/ Reprecsnts the ratio of executed In 1991 to mecuted In 1900.4/ Represent. tho ratio of budgeted In 1M to exmcuted In 1991.

Sources Data provided by tU Cape Verdmn authorities.

47

AnnexCape VadaS Ee.onec Claesictin of Contral O A Page 9 ot U1

Current Ependitur., 190-92

1OU 1007 son it" 1064 1Un i(- PAel. - /1

(tlillon of Cape Verde beudoc)

Currnt .xpsdituree 2,50 2,060 3,106 8,55 5,342 4,424 4,358Woa. and al.ries 1,20? 1,208 1,271 1,020 1,745 2,017 2,316Goods and erv cA 167 190 204 207 270 440 420Interest en public deb 210 205 225 265 246 220 15sSubsidies and tranfore

o/j public enterprises 82 41 44 C0 40 S0 10o/w loal govornatos 591 496 us sn9 702 540 772*/v other enttles so 75 S1 Si 70 0SO 157

Other expenditures 489 020 ?5 684 752 US 518

(as asae of total)

Worm and sal4ries 43 48 41 44 45 C1 sooods and servics 7 6 7 9 7 10 0

Interest an publie debt I 0 7 3 6 C aSubeidlee and tronferes 0 0 0 a 0 0 0

o/w publicenterprlee 1 1 1 1 1 1 0s/v local govornasot 16 17 17 l7 1s 12 10o/W oth.e *ntiti. 2 8 * a 2 4 8

Otherexp.nltur"e 1 21 24 10 20 0 11

(annual perchantage chcnge)

Current expenditures 68.0 16.1 5.0 18.3 3.7 15.1 0.7Wago end ealeris 29.0 4.7 0.6 2.1 7.2 U.4 *.2

oods andso "rve 2.0 18.9 7.8 80.7 4.8 56.4 -2.7Interest on public debt . 20.2 -15.8 19.8 4.2 -10.7 -29.1Subsidies and transfers

s/W public enterprie .. 26. 7.1 12.8 -10.2 -25.0 46.7*/1 loCl governmet .. 26.3 7.0 12.6 17.$ -2X.1 48.1o/v other ntltel .. 26.3 .0 12.3 -18.5 120.4 -12.?

Other xpenditures .. 48.4 19. -15.0 1.7 -55.4 52.0

(as percetage of GOP)

Current expenditure 21 22 21 20 20 20 20Wageend aal_ries 10 10 I 0 0 12 12Goods and sorvec 1 1 1 2 1 2 2Intereston puiblic de 2 2 1 2 1 1 aSubsidies and traneot.. 0 0 0 0 0 0 0

o/w public ent.rprls. a 0 0 0 0 0 0o/u loca lgoveroawet a 4 4 a 4 2 8o/w other entities 1 1 1 1 0 1 1

Other oxpenditures 4 5 5 4 4 2 2

cOP (millions of CV Escudos) 11,672 18,253 15,104 17,428 19,164 21,645 2 8,73

Note: 1/ ludgetary appropriations for 1990-92.Source: Date provided by the Cape Verd n authoriti".

48

AunnexPage 10 of 17

Cape Verdet Central Government Budget, I1N1-91

19s 196 199 19119 1990 1991

Prov. Sudg Prow. /S

(silions of Cape Verde Eacudoo)

Total revenue and grants 6,001 0,3I" 5,C90 ,m? 6,625 7,716 6,239Tot I revenue 2,655 2,916 3,154 ,545 8,799 4,869 3,990

Taxes 1,99 2,01 2,212 2,564 2,861 S,00S 3,10Other C00 so1 942 2"5 923 1,0 U,10

Grants 3.44 6,461 2,342 2,282 1,626 8,8n0 2,29

Total expenditure 7,121 7,139 6,446 6,628 6,648 9,927 6,960Rocurrent expenditure 2,506 2,9eo 8,108 8,58 *,648 4,654 4,002Capital xpendtlure 4,615 4,289 5,889 8,097 2,600 5,898 2,964

Overall deficit (co ltmet boel)before grant -468 -4211 -3294 8066 -2846 -C552 -2990

of which current operations 49 -42 40 9 -44 -140 -12After grant. -1116 -799 -452 -.67 .1016 -2209 697

tIternal rrer 121 6 164 -116 277 ... -168 /1Pritelpal 51 85 9 -45 220laterest 70 -2? I6 -72 .7

Overall deficit (cash bawls) -996 -791 -266 -974 -742 -2209 -660

Financlai

Forelon finneing 969 466 101 401 409 1,670 818PDroing* 1,106 67 81 759 640 2,191 7U4Amortlastion -127 -211 -216 -UT -488 -622 -471

Oom etle financlng 26 825 167 678 884 5J9 547Banking syste m1 104 114 172 294 868other -a88 221 U8 401 /2 40 15 .6

Meo I tcms: (a perentae9 of GOP)

Total revenue and grants £1.4 46.8 89.7 88.1 29.4 85.7 29.1Total revenue 21.9 22.0 20.9 20.8 19.6 20,8 16.4Grants 29.5 26.6 15.9 12.6 9.6 15.4 10.6

Total expenditure 61.0 54.4 42.7 58.1 84.7 45.9 52.8Recurrent *xpenditure 21.5 22.8 20.6 20.5 20.1 20.9 18.5Capital expenditure 89.5 82.0 22.1 17.6 14.6 24.9 18.6

Overall deficit (comitimont basis)Before grants -39.1 -32.8 -21.6 -17.7 -14.9 -25.6 -13.6

ot which current operations 0.4 -0.8 0.8 0.0 -0.2 -0.7 -0.1After grant. -9.6 -6.0 -8.0 -4.9 -C.5 -10.2 -4.2

External arrere 1.0 0.1 1.2 -0.7 1.4 0.0 -0.0Principal 0.4 O.8 0.7 -0.3 1.1 0.0 0.0Interest 0.6 -0.2 0.6 -0.4 0.8 0.0 0.0

Overall deficit (ehb beals) -6.5 4.0 -1.6 -C.6 -4.9 -10.2 -4.0Forelon financing 6.8 3.5 0.7 2.5 2.1 7.? 1.4Dometic ftinaning 0.2 2.5 1.1 *8. 1.7 2.5 2.5

1/ Baed on the government policy to clear outatanding external arrears before end-1992.2/ Includs arrears refinancing ( Cape Verde escudos 153.8 tIlIlon In 1919).8/ Provilional estimtes of the 1991 budget realization.

Soureo: Date provided by the Cape Vord en authorities, and IlF *taff estimtes.

49

AnnexPage 11 of 17

Cape Verde: Control Oevernmnt Current Ependitures by Minitrioes, 1904-92

13t0 1997 106 1969 1990 left 1902

Prov. Oudg. Budg.

(mllitons of Cape Vorde Ecedoe)

Nations loseably 30.0 45.0 40.9 47.5 64.1 75.0 *0.0Prosider 179.3 161.0 : 98.9 166.7 241.4 55.0 68.7Office o e o Prim Minister 70.0 04.5 7.60 C4.2 90.0 153.4 609.5Planning 17.6 22.3 26.9 82.J 83.2 . .Finance (and Plan/Planning u nce 1991/192) (1) 566.3 809.0 386.9 643.5 3".1 1,06O.U 1,765.1Justice (and Labor sines 1991) 74. 6 3.0 75.8 01.5 91.7 197.7 192.1Forsign Affairs 284.1 293.5 801.2 $36.9 U80.2 $9.3 421.0Transportation, Comoree and Tourim ,S.9 66.3 115.0 97.8 111.3 .Dofense and Security 357.1 U0.4 386.1 480.1 463.0 261.6 242.1Rural Development and Flheries 138.0 153.2 177.5 209.4 219.0 276.0 279.1Education 322.2 424.5 419.6 577.0 611.5 0J0.6 1,000.4nformation, Culture and Sports 71.0 39.9 124.2 130.3 136.9 . .Local Governmnt and Urbanls 49.2 53.1 52.5 61.1 568. Nealth, Labor and Social Affaier 236.2 286.6 273.6 337.4 389.5 477.8 408.5Industry and Energy 23.2 23.9 30.5 33.7 3l.4 .Publlc Works 3J.0 48.2 41.3 51.2 47. 94.5 Economy, Transport and Comunioatlono ... ... ... ... ... 211.5Othor (2) ... ... ... ... ... 347.9Tourism, Comerce and Indusetry (since 1,92) ... ... ... ... ... ... 76.0Transportation and InfrastructUrso (sinco 1992) ... ... ... ... ... ... 207.3Culture and Co muniections (since 1992) ... ... ... ... ... 148.7

Totel 2,506.9 2,969.9 8,106.1 8,536.1 3,796.4 4,534.1 5,464.1

Cas percent of total)

Nntional Asseobly 1.2 1.5 1.6 1.$ 1.7 1.7 1.5Prosidency 7.22 6.1 8.0 4.9 6.4 1.2 1.1Office of the Pri- Minister 2.3 2.2 2.4 2.4 2.4 8.4 90.Planning 0.7 0.3 0.9 0.9 0.9 0.0 0.0Finaneo (and Plan/Planning since 191/19M9) (1) 22.2 27.8 26.5 24.0 23.7 22.9 32.8Justics (and Labor since 1901) 8.0 2.1 2.4 2.6 2.5 4.4 3.8Forelgn Affairs 11.3 909 9.3 9.5 9.5 *.6 7.7Transportation, Co me rce and Tourism 2.8 2.2 8.7 2.3 2.9 0.0 0.0Defense and Security 14.8 12.2 11.? 12.2 11.9 5.6 4.4Rural Development and Fisheries 5.5 5.3 5.7 5.9 5.3 6.1 6.1Education 12. 14.3 13.5 16.8 16.1 20.0 16.8Information, Culture and Sport. 2.9 3.0 4.0 8.7 3.6 0.0 0.0Local Government and Urbaniou 2.0 1.3 1.7 1.7 1.5 0.0 0.0Health, Labor and Social Affairs 9.4 9.7 3.6 9.5 6.9 10.5 9.0Industry and Energy 0.9 1.0 1.0 1.0 1.0 0.0 0.0Public Works 1.5 1.5 1.8 1.4 1.3 2.1 0.0Economy, Transport and Coinunications ... ... ... ... ... 4.7 0.0Other (2) ... ... ... ... ... 8.6 0.0Tourim, Comerce and Industry (since 192) .4Transportation and Intfrstructures (since 19M2) 8.Culture and Comuniestions (since 1992) 2.7

Tot I 100.0 100.0 100.0 100.0 100.0 100.0 100.0

(1) Excluding amortization paymnta.(2) Includes Secretary of State for Intornal AdeInistrotion and Secretary

of State for Youth and Sports.Soure-s: Data provided by the Cape Vorden authorities, and IMF and Bank staff estimates.

50

AnnexPage 12 of 17

Cape Verdes Public Imveeteeemt Expenditure, 1005-86( illions of Cape Vent slcuade)

1935 low 1? 1000 1030

Total eaxpediture 0,243 0,77 6,447 0,174 5,"0

Primry metor 1,450 1,740 1,423 1,2 1,499AGIClesl" 1,101 I,"& I'm 1,24t I'$0

PSelaert.. 2" 170 187 401 100

econedry e**e 348 94W 1,278 1,002 310Industry 101 281 " 847 200Construction 5n 415 406 809 45r"w 171 802 200 u 2U5

Tertiary setor 8,0"5 81,O 8,74 ,U4 8,260Comres, 171 s 6 29 i1Toue4ar 819 10? to 70 U7Transport and

Conaleatio 109 1,6 1,142 on 015Housing 529 8a0 412 878 286HaIth 306 43? 642 600 36uotoe a" 604 766 752 "6

Public adIniaetratios 648 400 70 63 8 5

Seorr.s Dots providW by the Cap. Verdea auterities and IF taff aesee t.

51Annex .

Cape Vorde, .Sisry of the Financial 8j.te. I lsue-ft ( Page 13 0l' 11

1990 10961006 1067 1963 10,

Mar, June Sept. Dec. Mar.

(In .IIIIeno of Cape Vede Ecaudos; eWd of peorod eto0k)

Foregln asset. (not) 4,382 5,264 5,6U9 5,160 1,101 3,072 4,470 5,004 4,010

Domestic aae" (not) 8,082 2,975 8,502 *,724 6,191 0,700 7,M6 775 3,36Claim on Covornmnt (net) (2) 648 743 62 1084 1,002 1,482 1,626 1,820 1,361Claim an nonfinoncial

pubilc onterprisee (8) 1,517 1,404 1,456 1,799 1,7U 1,049 2,164 2,612 2,516Claim on prlvate sector (4) 2,319 8,609 4,074 4,091 5,1S9 3,359 5,l51 5,628 1,371Other it (net) -1927 -2665 -2890 -2050 -130 -1081 -1800 -1767 -1670

Money and quasi-money 7,896 6,259 9,371 11,0" 11,231 11,760 12,86 12,7"7 18,176money 5,167 5,454 5,421 0,006 5,n2 5,o05 6,0on 6,434 ,500

Currency outslde banks 1,919 1,944 2,203 2,465 2,314 2,465 2,58 2,629 2,357Omand depoalWt 8,U0 8,503 8,218 8,541 8,369 5,424 8,5S1 8,5 8,644

Qua* oIl_ney 2,197 2,605 8,950 5,067 5,5o 5,7n 6,0 6,24 O,6fl

(prcent change)

Foreign ase"t (net) 7.5 22.0 11.1 4.5 -12.1 -16.8 -11.4 4.8 -9.5

Domestic asoet. (not) S2.1 -2.6 17.7 8.5 54.6 67.7 85.1 5.6 S 81.5Claim on Go"ernment (net) (2) 127.9 16.2 15.8 1909 26.8 44.1 51.8 26.4 60.6Claim on nonfinancial

public ntCerprises (8) 2.2 -7.5 8.7 22.9 40.2 82.0 10.5 46.0 48.8Claim on privete s eor (4) 16.2 24.5 16.1 21.5 1t.6 13 15.1 18.6 14.2Other Ite (net) -10.1 89.8 7.6 -29.1 -26.5 -88.7 -29.2 -12.9 -7.0

Money and quasi-money 22.8 U1. 18.5 19.4 15.2 17.1 18.4 15.2 16.8Money 14.0 5.1 -0.6 10.6 8.2 10.4 2.8 6.0 18.6Currceny outside bhake 11.7 6.9 18.6 11.7 4.4 5.5 4.4 14.7 23.4Demand depoelts 16.6 4.2 -4.4 10.2 2.8 11.6 O.6 9.2 7.2

QueiI-money 44.6 27.7 40.6 2.9. 80.7 24.7 26.7 23.7 19.9

(percnt change over *oney supply) (3)

forelgn aseeeJ (net) t.0 12.9 7.1 -5.S -7.2 -9.3 -5.4 -3.8 -4.8

Domeetlc asset. (net) 17.8 -1.1 6.4 28.7 22.3 2 9 1.96 16t. 21.1Claim on Govornasnt (net) (2) 6.0 1.4 1.4 1.0 2.8 4.4 5.1 2.6 6.7Clalem on nonfinancial

public enterpel (3) O.J -1.5 0,0 8.6 5.1 4.6 1.0 7.4 6.7Claim on privt. s*etor (4) 7.2 9.8 6.6 0.4 6.2 *.5 6.6 6.1 6.5Other Item (net) 8.6 -10.3 -2.5 9.0 6.6 0.6 5.2 2.4 1.1

Money and qusel-oney 22.8 11.6 181. 16.4 15.2 17.1 16.4 15.2 1.8.Money 11.1 8.6 -0.4 6.2 1.3 *51 1.2 4.8 7.0

Currency outlde banks 8.2 1.7 8.2 2.7 1.0 1.9 1.0 2.8 4.6Demand deposits 7.9 1.9 -5.6 8.5 0.6 8.6 0.8 1.0 2.2

Quasi-mneny 11.2 6.2 18.9 12.1 18.4 11.6 12.2 10.9 9.6

Memerendum Ites

Veloelty (6) 2.8 2.8 2.8 2.8 ... ... ... 2.2

Sources: Bank of Cape YVrde; Calxo Economies de Cabo Verde; end IV setaff estiate .

(1) Includes Bank of Cape Verde and Cairt Econeomic de Cab. Verde.(2) Includes credit to Central Government and locsl governmnt.(3) Slnce Decembe 190, dOat. adjusted for debit. due to pyments abroad by the Bank of Cape Verde.'4) Include mixed enterprise.5) Percentage change during preceding 12 eonthe as pereent of b-o^d money at the beginning of period.

(6) COP/broad money stock, calculeted ueing average emney and quasi-money stock.

52AnnexPage 14 of 17

Cape Vordes Internlt Rate Struetur., 1974-91

From January 1974to from

DOcembr 194 Jonuery 1, 1095

(in percent)Landing ertes

Basie rate .0 ...Short -tern

Up to 90 days 6.5 10.0From 91 days up to 130 days .. 10.5Fro. 11 days up to 1 year too 11.0

Mediu and long-termsd1urn-torAgriculture

Lass then 7 years 7.0Up to 2 years ... 70From 2 to e yrs °.0

Other sectoereLoos than 7 yearIndustry 6.5Housing 9.0

Fro. 1 year up to C year ... 11.5Long-torn

AgricultureMore than 7 years 6.0More than I years .t. 10.0

Other sectoroMore than 7 yearsIndustry .0 Nousing 9.0 0.

More than 5 year 12.5Emigrant ... 6.0

Deposit *atesTise deposit 6.5

Short-ternUp to 90 day. ... 4.0From 91 to 160 days ... 5.5From 161 to 1 year .t* 6.5

Medi u-ond long-ternmore then 1 year ... 10.0

Emigrants' account.Demand deposits . 4.0

6 months 1 yearTies doposit. - -

In notional currency 10.5 12.0In forelgn exchange (1)

U.S. dollar ... 6.2 6.7French frane ... 7.0 7.6Deutsche mrk ... 4.0 4.5Dutch guilder .t. 4.5 t .0

Source: Date provided by the Cape Verdsen authorlbles.

(1) As of April 27.1909. Rates are base on Euroarket rates.

53Annex

Cape Verdes Volv Added by Seator, 1991-96 rage 0 or II

1091 1092 198 100w 1905

(sllilona of CV Escudos)

PRIMARY SeCTOR 2,967 8,036 8,247 8,400 8,77?Agricultures, for*- 1,97 2,107 2,2"6 2,849 2,463stry and liveetckFishing 679 727 no 024 1,0

SECONDARY SECTOR 8,304 4,164 4,66k 5,251 5,350Industry and electricity 1,59 1,7m 1,652 2,086 2,251Constructlon 2,206 2,415 2,306 8,218 8,600

TERTSARY SECTOR 18,180 14,n71 16,09 17,734 19,60Coerce 4,486 4,390 5,868 5,941 6, U0Hatels,RletaurnntJ 817 854 406 474 564Trnanport 1,501 1,675 1,350 2,050 2,22aTranaport Services 1,082 1,809 1,471 1,658 1,357Co4unicotlen 687 7098 991 991 1,108Bank and Zosureno 16" 12 200 249 821Housing 1,741 1,'4 2,086 2,221 2,429Public Services 802 8,897 8,604 8,096 4,21JOther Service 288 252 277 s0 843

Import Taxes 1,796 1,960 2,181 2,815 2,516

OP at market prlet 21,645 28,673 26,187 23,680 81,321

GOP real growth rate 8.X 4.95 5.65 S6 .8 .2GOP deflator 90.8 5.25 8.65 8.8x $.as

(annual vo growth)

PRIMARY SECTOR -8.61 2.85 4.45 6.18 *.2XAgriculture, fore- -5.01 2.05 8.01 $.0l 8.0sstry and liveetockFishing 0.01 4.01 0.01 11.01 11.01

SECONDARY SECTOR 4.28 5.91 6.8 6.8x 7.351Industry and electricity $.85 4.45 5.35 7.1X 7?.SConstruction 8.01 7.0X 10.011 10.05 G.0

TERTIARY SECTOR 4.65 5.2 G.2s 6.01 6.2Comer" 6.01 6.01 6.05 7.01 7.01Hotele,Restourannts 8.01 6.01 10.0 18.OX 18.011Transport 9.2X 5.75 6.O 7.JX 7.8XTransport Servilc -2.01 10.011 6.01 7.0 7.01tComunicatiene 6.OX 10.0111 6.x .0x 6.Oslonk and Insurance 0.011 7.3 3.0 19.43 24.85Housing 10.0 801 5.OJ 5.011 5.01Public Services 2.0s 2.01 2.01 2.01 2.01Other Service 5.01 4.01 6.01 7.01 7.01

Import Taxe. 8.O1 4.01 5.ox 5.OX 5.01

COP at mrket prie. 8.8X 4.91 $5.65 6.85 6.8

Source; Bank staff eetlmates.

54

AnnexPage 16 of 17.

capo Weds: J8alane of Parymnat 1991-05

1991 12 19 0 190 1996Eat. (-< lProJotions

(billions of CV Ecculoo)

Roeerec Ualanc. -4.2 -7.4 -4.0 4.7 -0.1

Export of ONFS 4.5 4.9 5.1 3.6 6.2Orpot. of IWS -10.7 -12.8 -18 1 -14.8 -15 .

fact.. ""Ices (net) 0.1 0.2 0.2 0.2 0.2Privato transfoer .$6 8.0 4.1 4.2 4.J

OfflIalI transfers 2.8 2.7 8.0 1.8 8.7

Current account balanceBefore official transfoer -2.8 -8.S -8.6 -4.8 -4.6After official transfers 0.0 -0.7 -0.6 -1.0 -0.6

Capital accunt 0.2 0.C 0.9 1.2 1.2Officael (not) 0.1 0.7 0.6 1.0 0.0Other capital 0.1 0.1 0.2 0.2 0.8

Chango In Net Foreign Assta 0.2 0.1 0.1 0.2 0.8

smorandim tsts:

or 21.6 28.6 25.7 27.6 80.7Current accosnt defict

(befor grant. so X of SW) -10.7X -14.S -143 S -16.53 -15.2(after grants as X of OP) -0. 1 -8.15 -8.15 -8.65 -8.0o

sources lako st-ff estlestas.

55

AnnexCape VerPds External Flnneslng R4q,ireaanta and *ource. . 19.S Page 17 of 17

1001 1 0 92 10 104 1906______________ -. et. < - Projections -.-- >-

(blIlong ot CV Eacuos)

Roquir I nt 12.04 18.44 14.61 16.96 17. 17Lmorts (f.o.b.) 6.82 10.10 10.00 11.0" 12.68Nan-ffcter *ervicow 1.96 2.16 2.22 2.81 2.45Factr * rvi.w 0.2 0.26 0.29 0.82 O.a"Debt service abllgation 0.90 O." 1.00 '1.1s 1.28Chane In resrvno 0.20 0.06 0.11 0.18 0.80Other 0.00 0.00 0.00 0.00 0.00

Resouroe 12.06 18.44 14.02 18.9t 17.17Exports Cf.o.b.) 0.44 @,49 0. U 0.08 0.75Services 4.0S Vr.0 .29 5.00 6.87Private transfe 8.760 8.01 4.07 4.28 4.29Offlilil transfers 2.80 2.0 S.08 8.88 .78Loan disburesent. 0.?9 1.28 1.50 2.74 1.76Direct foreign lInvestest n 0.0 0.12 0.17 0.21 0.27

Eaexrnal flneneing sap 0.00 0.0 0.0 0.0 0.0

Meso I tem:

Resoureo balance (0.S gap) -5.6 -6.7 P.8 -7. -4.2External sawings 66 7.68 3.6 90. 90.

of shich pri vts tranferse 8.6 8.0 4.1 4.2 4.8

Cos share of GP)

Requl remte 55.6 .6 6.0 57.8 55.0Imports (f.o.b.) 40.7 42.5 42.4 48.1 41.8Non-factor servicoe (debit) J.6 0.1 *.6 0.8 6.0Facto oerv*ele 1.1 1.1 1.1 1.1 1.2Res4rves 4.8 g.6 4.2 4.1 4.0Other 0.0 o0l 0.4 0.0 2.0

Soures 55.7 6.6 U.. 57.8 5.Export (f.o.b.) 2.0 2.1 2.2 2.8 2.4Won-factor servies 21.0 21.2 20.6 20.0 20.6Private transfoers 17.4 16.5 15.6 15.2 14.0Officlal transfers 20.0 11.2 11.6 12.0 12.2Loan disborseeeta 8.6 5.2 5.* 6.8 5.7Direct foreign Inveetasot 0.4 0.5 0.7 0.8 0.0

External financing gap 0.0 0.0 0.0 0.0 0.0

Resource balance (5-- gap) -25.0 -20.2 -20.4 -23.4 -26.7External saving 81.4 82.8 U8.5 88.4 81.9

of *hlch privat tronsfere 17.4 16.4 36.0 15.1 14.0

Sources Sonk staff otimates.

MAP SECTION

-~~~~~~~~~~~~~

ANT O AN4TAC CAPE VERDE,,.4. g prtAo N DU CAP VERr

~esRrlr$ -, SAO VICENTE

fl?4J~ ' ~-: ~-~- S ANTA LUZIA

54O NICOLAL) '$'" AL

<_ 9 ] ~ ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~BA TA J..e F.-FxwdaUR

k.Wa fer 900~s-

tirarao sihom to.,ao t2av s- -*- VI,9 d.ttsce scX 7

pt. - 6tpl f trmy. tee, 11001Er,oe) stt

AO~orn R r _Sel U

Afro. part

Toflr WMa l 2s s0 A

f-atL tOp 50 t - st,otahrtss r F 20 itt SO.501,0P6tQs d dllfr- AVW WANRtr4UF/Z00M ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~F~ h9

J I/a tAt oi tO 0 3 d

craf Ammates7

0-500 ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ de Mere cAS.re MAIG~~~~~~~~~~~~~~~~~ v wm .

Steim 5. Poma ½- ~~c Psats rai-t

AI es *ties4trtssm

OttOtOSt>ept cotbc, Noe GrtesFTismlttela' reeto.s 1 4i}"N\

seksel (o tm seter

- tjnm rooe2

s' '0e7ni rocitaS t booo Sm

's ,Aor / PJ'Fd startSeR °. 9l

IFrm:ftOrI&r,

* ' ~ 5i4/A 0 'Ome l.s.m foeeyt. 70 *o or

EW(#/S ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~~~~~~~~~~~~~~~~~~~~~~~~~~~A 19"PRa