Economic analysis
Cape Verde

Cape Verde

Population 0.6 million
GDP per capita 3,065 US$
C
Country risk assessment
B
Business Climate
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Synthesis

major macro economic indicators

  2019 2020 2021 (e) 2022 (f)
GDP growth (%) 5.7 -14.8 4.0 5.0
Inflation (yearly average, %) 1.3 0.6 1.2 1.5
Budget balance (% GDP)* -2.8 -9.1 -8.0 -5.0
Current account balance (% GDP)** -5.1 -16.0 -14.0 -11.0
Public debt (% GDP) 124.5 137.5 134.0 132.0

(e): Estimate (f): Forecast *Including grants **Including official transfers

STRENGTHS

  • Fishery reserves
  • Efficient banking and telecommunications services
  • Stable political institutions
  • Exchange rate cooperation agreement with Portugal, guaranteeing convertibility and a fixed rate with the euro, and a credit facility
  • 20% of the country's energy consumption currently comes from solar panels and wind turbines, with a target of 50% by 2030

WEAKNESSES

  • Weak diversification of the economy and dependence on tourism
  • Very high level of public debt
  • Heavily dependent on economic performance of Eurozone countries
  • Ageing, poor-quality infrastructure
  • Island location: dependent on food imports (70% of total imports) and energy products
  • Exposed to climate change, volcanic and earthquake events, and hurricanes

Risk assessment

The pick-up in activity will depend on tourism’s recovery

In 2022, Cabo Verde will continue the economic recovery started in 2021. Heavily dependent on the tourism sector (more than 50% of total export earnings and 38% of GDP before the COVID-19 pandemic), growth is expected to gain momentum as travel restrictions ease and COVID-19 vaccination rates improve domestically and also in Europe, which is where the majority of tourists come from. Although the sector is not expected to return to its pre-pandemic level of activity, the upturn in tourism export earnings will support the net contribution of trade to growth in 2022. While tourist arrivals are likely to rebound, the emergence of new COVID-19 variants and the changing health situation locally and in Europe will continue to threaten the sector's recovery. The uncertain outlook for this sector will limit growth in private investment, which is traditionally driven by the hotel sector. The authorities, with their emphasis on sustainable development projects and economic diversification, will offer tax breaks to encourage private projects that promote the use of green energy. Public investment will also target the development of projects in the transport and logistics sectors, but the contribution of public investment and consumption will be constrained as the country’s fiscal space is limited by high public debt. The other key sectors of the economy, namely fisheries (mainly tuna, 5% of GDP), agriculture, energy, construction and transport, will also see renewed growth, thanks to the recovery of external and domestic consumption. Remittances, which reached a record high in June 2021 (over 15% of GDP), coupled with the easing of domestic mobility restrictions and a relatively successful vaccination campaign (45% of the population was fully vaccinated by the end of 2021), should support the recovery in household spending. 

 

Twin deficits are still large 

The current account deficit should improve thanks to the rebound in tourism revenues. However, it will remain substantial due to a structurally high trade deficit, with the country's insularity generating a dependence on imports. This deficit is exacerbated by that of the primary income account (3% of GDP in 2021), which reflects the repatriation of profits from investments made by foreign companies. While remittances help to generate a secondary income surplus, they will not be enough to offset this deficit. The current account deficit will continue to be financed by grants and concessional loans, and will benefit from the recovery of FDI flows. The collapse in tourism revenues resulted in a fall in foreign exchange reserves (6.5 months of the following year’s imports in 2021, against 9 in 2019), which nevertheless remain high. The peg to the euro does not seem to be under threat.

 

Lower tax revenues due to the pandemic and higher spending to support the economy caused the budget deficit to worsen. After being reduced in 2021, and while remaining large in 2022, the deficit is expected to narrow as the government pursues fiscal consolidation efforts. The reversal of measures taken during the pandemic and better management of the risks linked to state-owned enterprises will help contain spending, while tax revenues should benefit from efforts to improve domestic revenue mobilisation. Fiscal consolidation is expected to constrain capital spending, despite the authorities' ambitions. Although public debt is expected to continue on its downward trajectory, it will remain at a very high level. External debt (75% of public debt), held by multilateral (46.2%) and bilateral (24.2%) donors, is largely on concessional terms, tempering the high risk of default. The authorities' reforms aimed at ensuring the sustainability of public finances and debt are being supported by the IMF in the framework of a (non-financial) programme of policy coordination instruments.

 

Power-sharing in the wake of the 2021 elections 

José Maria Neves, a member of the left-wing African Party for the Independence of Cabo Verde (PAICV) and prime minister between 2001 and 2016, was elected president in the first round (51.7% of the vote) of the October 2021 elections. He succeeded Jorge Carlos Fonseca, from the centre-right Movement for Democracy (MpD) party, who had reached the constitutional limit of two consecutive terms. Following his victory, and in accordance with Cabo Verde’s semi-parliamentary system, Mr Neves entered into a power-sharing arrangement with Prime Minister Ulisses Correia e Silva (MpD), who has been in office since 2016 and was handed a new term in office in April 2021 after the MpD held onto its absolute majority in the legislative elections (38 seats out of 72), ahead of the PAICV (30 seats). Mr Neves has promised to work with the MpD government. Previous power-sharing episodes have not traditionally generated major political tensions, including between 2011 and 2016 when Mr Neves led a PAICV government under the presidency of Jorge Carlos Fonseca. Internationally, the country remains closely linked to Europe (mainly Portugal and the UK), which is an important source of tourists and FDI. It will also continue to develop its links with China, whose investments in the archipelago are on the increase, focusing on the tourism and infrastructure sectors, as well as the construction of a special economic zone.

 

Last updated: February 2022

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