AFRICAN DEVELOPMENT BANK
CABO VERDE
PRIVATE SECTOR COMPETITIVENESS AND LOCAL ECONOMIC DEVELOPMENT
PROGRAMME PHASE I
(PSC-LED - I)
ECGF DEPARTMENT
July 2018
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TABLE OF CONTENTS
ABBREVIATIONS AND ACRONYMS ................................................................................................................ ii
LOAN INFORMATION ........................................................................................................................................ iii
PROGRAMME SUMMARY ................................................................................................................................... v
I. INTRODUCTION: THE PROPOSAL ............................................................................................................ 1
II. COUNTRY CONTEXT .................................................................................................................................. 2 2.1 Political Situation and Governance Context ........................................................................................... 2 2.2 Recent Socioeconomic and Budgetary Trends ............................................. Erreur ! Signet non défini. 2.3 Competitiveness of the Economy ................................................................. Erreur ! Signet non défini. 2.4 Public Finance Management ........................................................................ Erreur ! Signet non défini. 2.5 Inclusive, Growth, Poverty Situation and Social Context ....................................................................... 7
III. GOVERNMENT DEVELOPMENT PROGRAMME .................................................................................... 8 3.1. Government’s Overall Development Strategy and Medium-Term Reform Priorities ............................ 8 3.2. Challenges in Implementing the National Development Programme ..................................................... 9 3.3. Consultation and Participation Processes ................................................................................................ 9
IV. BANK SUPPORT FOR THE GOVERNMENT’S STRATEGY .................................................................. 10 4.1. Linkage with Bank Strategy .................................................................................................................. 10 4.2. Compliance with Eligibility Criteria ..................................................................................................... 10 4.3. Collaboration and Coordination with other Partners ............................................................................. 10 4.4. Linkage with Other Bank Operations ................................................................................................... 11 4.5. Analytical Underpinnings of this Operation ......................................................................................... 12
V. PROPOSED PROGRAMME ........................................................................................................................ 12 5.1. Programme Goal and Objective ............................................................................................................ 12 5.2. Programme Components ....................................................................................................................... 13 5.3. Policy Dialogue ..................................................................................................................................... 18 5.4. Loan Conditions .................................................................................................................................... 19 5.5. Application of Best Practice Principles on Conditionality .................................................................... 20 5.6. Financing Needs and Arrangements ..................................................................................................... 21 5.7. Application of Bank Group Policy on Debt Accumulation................................................................... 21
VI. IMPLEMENTATION, MONITORING AND EVALUATION .................................................................... 21 6.1 Programme Beneficiaries ...................................................................................................................... 21 6.2 Impact on Gender Issues, the Poor and Vulnerable Groups .................................................................. 21 6.3 Environmental Impact and Climate Change ......................................................................................... 22 6.4 Implementation, Monitoring and Evaluation ........................................................................................ 22 6.5. Financial Management and Disbursement ............................................................................................ 22
VII. LEGAL INSTRUMENT AND AUTHORITY .............................................................................................. 23 7.1 Legal Instrument ................................................................................................................................... 23 7.2 Conditions Associated with Bank Intervention ..................................................................................... 23 7.3 Compliance with Bank Group Policies ................................................................................................. 23
VIII. RISK MANAGEMENT ................................................................................................................................ 23
IX. RECOMMENDATION ................................................................................................................................. 23
Annex 1 : Government’s Letter of Economic Policy
Annex 2 : PSC-LED Reform Matrix
Annex 3 : Outcomes Achieved under Previous Budget Support Operations
Annex 4 : Note on Relations with the IMF
LIST OF TABLES
Table 1 : Macroeconomic indicators
Table 2 : Lessons from Previous Bank Operations
Table 3 : Measures Precedent to PSC-LED-I, and PSC-LED-II Triggers
Table 4 : Financing Gap
Table 5 : Risks and Mitigation Measures
LIST OF GRAPHS AND BOXES
Graph 1 : Real GDP Growth (%)
Graph 2 : Fiscal balance (% GDP)
Graph 3 : 2017 Doing business ranking
Graph 4 : Contributions of Labor, Capital and Total Factor Productivity (TFP) in the average
growth in the total Value Added
Box 1 : Promoting Economic Growth while Insuring Debt Sustainability
Box 2 : Overcoming the Middle Income Trap
Box 3 : Decentralization and local development in Cabo Verde
i
CURRENCY EQUIVALENTS May 2018
Currency = Escudos (ECV) UA 1 = ECV 131.28 EUR 1 = ECV 110.27 USD 1 = ECV 91.29
FISCAL YEAR 1 January - 31 December
WEIGHTS AND MEASURES
1 tonne = 2 204 pounds (lbs.) 1 kilogramme (kg) = 2.200 lbs. 1 metre (m) = 3.28 feet (ft.) 1 millimetre (mm) = 0.03937 inch (“) 1 kilometre (km) = 0.62 mile 1 hectare (ha) = 2.471 acres
ii
ABBREVIATIONS AND ACRONYMS
AEO African Economic Outlook
AfDB African Development Bank
AMNCV Cabo Verde Municipality Association
BSG Budget Support Group
CFRA Country Fiduciary Risk Assessment
PSC-LED Private Sector Competitiveness and Local Economic Development Programme
CM Council of Ministers
COSN Senegal Country Office
CPIA Country Policy and Institution Assessment
CSP Country Strategy Paper
CVE Cabo Verdean Escudo
DB Doing Business Report
DNP National Planning Directorate
ELECTRA National Electricity Company
EU European Union
FDI Foreign Direct Investment
GAP II Governance Operational Framework and 2013-2017 Action Plan
GCI Global Competitiveness Index
GDP Gross Domestic Product
GoCV Government of Cabo Verde
GPRSP III Growth and poverty reduction strategy paper III
HDI Human Development Index
ICT Information and Communication Technologies
IEFP Institute for Training and Employment
IIAG Mo Ibrahim Index of African Governance
IFH Imobiliária Fundiária e Habitat
IMF International Monetary Fund
INE National Statistics Institute
JICA Japanese International Cooperation Agency
MoF Ministry of Finance
MIC Middle-Income Country
MPD Movement for Democracy
MSME Micro-, Small- and Medium-sized Enterprises
PACE Economic Growth Support Programme
PAGEPPI Public Corporate Governance and Investment Promotion Support Programme
PAICV African Party for the Independence of Cabo Verde
PBO Policy Based Operation
PEDS Economic Plan for Sustainable Development
PEFA Public Expenditure and Financial Accountability
PFM Public Financial Management
PIEFE Integrated Policy for Education, Training and Employment
PPP Public-Private Partnership
REMPE Special Regime for Micro and Small Enterprises
RBF Results Based Financing
SCADA Supervisory Control And Data Acquisition
SIGOF Integrated Financial and Budget Management System
SAIDI System Average Interruption Duration Index
SAIFI System Average Interruption Frequency Index
SIM Municipality Information System
SME Small- and Medium-size Enterprise
SOE State-Owned Enterprise
TACV Transportes Aéreos de Cabo Verde (Cabo Verde Air Transport Company)
TFP Technical and Financial Partner
UNDP United Nations Development Programme
UNIDO United Nations Industrial Development Organisation
WB World Bank
iii
LOAN INFORMATION
Client Information
BENEFICIARY : Republic of Cabo Verde
SECTOR : Economic and Financial Governance
EXECUTING AGENCY : Ministry of Finance
AMOUNT : EUR 20 million
2018 Financing Plan for 2018-2019 Budget Support
Source Total Amount (2018
– 2019) Amount (2018)
Amount (2019) -
Commitment
AfDB EUR 40 million EUR 20 million EUR 20 million
World Bank ≥ USD 20 million USD 20 million To be confirmed
Luxembourg EUR 4 million EUR 2 million EUR 2 million
European Union EUR 18 million Up to EUR 9 million Up to EUR 9 million
Portugal EUR 1 million EUR 0.5 million EUR 0.5 million
Information on AfDB Financing
Loan Currency: Euros (EUR) [or any other acceptable currency]
Loan type: Fully flexible loan
Maturity: To be determined (up to maximum 25 years)
Grace period: To be determined (up to maximum 8 years)
Weighted average
maturity**: To be determined (depending on amortization profile)
Reimbursements: Half-yearly instalments at the end of the grace period
Interest rate: Base rate + Margin on financing cost + Loan margin +
Maturity premium
This interest rate must be greater than or equal to zero.
Base rate : Floating (6 Months EURIBOR revised on February 1st
and August 1st or any other acceptable rate)
A free option is offered to set the base rate
Margin on financing cost:
Margin on the Bank’s financing cost revised on January
1st and July 1st and applied on February 1st and August
1st with the base rate.
Loan margin: 80 base points (0.8%)
Maturity premium: To be determined :
0% if the weighted average maturity <= 12.75
years
0.10% if 12.75 <the weighted average maturity <=
15
0.20% if the weighted average maturity> 15 years
Opening Commission: 0.25% of the loan amount
Commitment fee:
0.25% per annum of the undisbursed amount. It begins to
run 60 days after the date of signature of the loan
agreement and is payable on the interest payment dates.
iv
Option to convert base
rate * :
Besides the free option to set the base rate, the possibility
is offered to the borrower to return to the floating rate or
to re-fix on all or part of the disbursed amount of his loan.
Transaction fees are payable
Option of rate ceiling or
tunnel * :
The possibility is offered to the borrower to put a ceiling
or a tunnel on the base rate for all or part of the disbursed
amount of his loan.
Transaction fees are payable
Currency conversion
option *:
The possibility is offered to the borrower to change the
currency of all or part of his loan, whether disbursed or
not, into another loan currency of the Bank.
Transaction fees are payable
* The conversion options and related transactions costs are governed by the Guidelines for conversion of loan
terms available on the Bank’s website
** Calculation of the weighted average maturity is available on the Bank’s website
Implementation Schedule – Key Milestones (Expected)
Activities Dates
Appraisal March 2018
Negotiation May 2018
Approval July 2018
Effectiveness August 2018
Disbursement August 2018
Supervision November 2018
Closing December 2019
v
PROGRAMME SUMMARY
Programme
Overview
Programme Name: Private Sector Competitiveness and Local Economic Development
Programme (PSC-LED) – Phase I. General Schedule: 2018/2019. Financing: EUR 20 million.
Operational Instrument: General budget support. Sector: Multisector.
Programme
Outcomes
The Government of Cabo Verde (GoCV) is entering the implementation phase of its new
Economic Plan for Sustainable Development 2018-2021 (PEDS) with ambitious targets in terms
of growth and improvement in the quality of life of its citizens. For the PEDS to be effectively
rolled-out, the authorities are putting great emphasis on (1) a model of economic growth based
on private investment, on complementing a social and shared economy and on social and
territorial inclusion and (2) on a major focus on local and regional development via greater
decentralisation (annex1). Considering the constraints faced by the overall indebtedness level,
the low multiplier effects of public spending, and decreasing total factor productivity, the
authorities must further stimulate competitiveness to achieve its goals. The PEDS underpins this
approach and is geared for a medium term economic diversification, with particular attention
given to the domestic private sector, leveraging on comparative advantages held by each island
and ensuring spatial distribution of economic opportunities. In addition to macroeconomic
stability, achieving this goal requires improving the quality of public spending, most notably on
education and training to minimize the skill mismatch in the labor market, reduce the regulatory
burden on firms, improve access to finance by small and medium-sized enterprises and create the
enabling environment to facilitate structural transformation. Against this background, the PSC-
LED intends to support the authorities’ objective geared towards a move to private sector led
growth and local economic development via a first component focusing on (i) Promoting
competitiveness and local private sector development and a second set to (ii) promote local
economic development and local governance. The overall impact sought by the PSC-LED is to
back the increased contribution from the private sector and local entities to growth and
employment. This is to be achieved through the following outcomes: (a) enhancement of the
ease of doing business and competitiveness measured through (i) improvements in reaching the
Doing Business frontier from 56.24 pts in 2018 to 60pts in 2020, (ii) increase in the credit to the
private sector to 70% in 2020, (iii) increase in the labor contribution to total value added growth
in the economy from 1.1% in the 2007-2014 period to 2% in 2017-2020, (iv) increase the number
of training centres developing PPPs by 20%; (b) Enhanced local economic development and
decentralisation contribution to growth measured through (i) decreased dependency ratios of
municipalities on government transfers from 80% in the 6 most dependent municipalities, (with
14 municipalities with more than 60%) in 2017 to 3 municipalities with more than 80% (and 10
with more than 60%) in 2020, and (ii) an increase in participatory local economic plan
implementation from zero in 2017 to 9 locally developed plans framed in the regionalized PEDS
in 2020.
Alignment
with Bank
Priorities
The program is aligned with the Country Strategy Paper (CSP) priority “strengthening economic
governance in the public and private sectors”. In particular, it is consistent with the orientations
of the authorities for the disengagement of the State in favor of partnership with the private sector
and decentralized communities as highlighted in the CSP’s mid-term review. In addition, the
PSC-LED’s strategic orientation reflects priorities of the Bank’s GAP II (2014-2018) as set in its
third pillar “investment and business climate”. It is also aligned with the Bank’s gender strategy
through its foci on land issues, access to finance and skills development which tend to
disproportionately impact women. Lastly, it is aligned with the “Improving the quality of life for
Africans” High 5 priority through private sector development and its focus on spatial (economic)
inequalities. PSC-LED is also aligned with the “Industrialise Africa” priority through measures
supporting industrial policy development and the reduction in costs for factors of production.
Needs
Assessment
and
Justification
Cabo Verde faces key binding constraints to future growth such as the indebtedness level, the
low multiplier effects of public spending, and low/decreasing productivity. Against this
background, fiscal policy cannot be a growth driver, and monetary policy is somewhat limited
considering the peg to the Euro and weak monetary transmission mechanisms. Growth must
emanate from the private sector, taking advantage of all available potential sources across the
territory. To overcome these, the government is working to place the private sector at the centre
of economic growth and is initiating key structural reforms to improve productivity and economic
diversification. This encompasses competitiveness enhancement through reforms linked to access
to credit, firm-related regulation, skills matching to market demand, factors of production (land,
electricity etc.) and spatial planning. Private sector led growth will in part provide an answer to
the fiscal and debt constraint, and will enable improvements in citizen’s revenues and decrease
unemployment. Over the past, much reform emphasis has been put on FDI and the external sector
vi
as growth sources. However, this approach can lead to territorial pockets of growth and
productivity, which in turn leads to spatial inequalities and internal migration pressures. Growth
must thus also be domestically sourced, i.e. through a more productive local private sector (in
particular MSMEs), and be equitably distributed across the islands so as to ensure inclusivity
through the promotion of economic opportunities. To this end, the promotion of decentralisation
is key.
Harmonisation
Since 2006, Cabo Verde's main bilateral and multilateral donors have harmonized their budget
support to the country based on a mutually agreed matrix. The budget support instrument, which
has become increasingly predominant in recent years in relation to project loans, is being used to
promote collaboration with other development partners in the country's public finance
management and sector support. Harmonisation takes place within the Budget Support Group
(BSG) which meets in Praia twice a year. The Bank took over the group’s presidency in 2017.
Bank’s Value
Added
The Bank has financed several budget support operations in Cabo Verde over the past few years.
The completion reports of previous programmes concluded that Cabo Verde’s performance was
satisfactory in the area of implementation and in terms of ownership by the authorities of the
structural reforms agreed upon with the Bank. In this regard, the Bank has acquired valuable
experience in accompanying the country’s reform programme in general. Its current position as
the chair of the Budget Support Group gives it further resonance in policy dialogue. In addition,
the Bank has been slowly shifting focus on its budget support, from more traditional public
financial management, towards competitiveness and private sector development and youth
employment in alignment with the needs of a middle-income country (MIC). This has given the
Bank a comparative advantage in a MIC whose challenges are linked to its capacity to generate
and maintain the necessary growth levels so as to escape the middle-income trap.
Contribution
to Gender
Equality and
Women’s
Empowerment
In order to mainstream gender in the operation, the 2017 Bank-produced gender profile was used
as a basis. PSC-LED seeks to produce a favourable impact on gender through the measures
targeting improved factor efficiency and transparency such as land. Indeed, beyond the
importance of land rights for private sector investment, land issues are a key binding constraint
for women’s empowerment as highlighted in the 2017 gender profile. Similarly, measures aimed
at access to finance will specifically impact women considering that the lack of access to funds
inhibits growth and productivity of their business efforts. In addition, through the skills for
competitiveness measures in the PSC-LED, women are particularly targeted with specific results-
based indicators. Lastly, regarding local economic development in general, the Bank will use the
PSC-LED as a dialogue platform to ensure that local planning is undertaken with a full-on
integration of the gender dimension.
Policy
Dialogue and
Related
Technical
Assistance
During PSC-LED’ implementation, dialogue with Cabo Verdean authorities will focus mainly on
the following areas: (i) support for the promotion of private sector development, in general, and
for the improvement of the business environment in particular (improved understanding of
differences in business environment constraints faced by men and women entrepreneurs); (ii)
accompaniment of decentralisation policies and local economic development planning, and (iii)
support for the implementation of an inclusive and market-responsive skills development
roadmap. As the chair of the budget support group, the Bank will ensure continuous dialogue on
fiscal and debt policy to ensure macroeconomic stability. It will also initiate discussions on the
monitoring and evaluation of public policies to set a framework for evaluating reforms, including
those supported by partners.
vii
Results-Based Logical Framework
Country and program name: Cabo Verde – Private sector competitiveness and local economic development programme (PSC-LED) Phase I
Purpose of the program : Support the National Development Plan’s objective geared towards a move to private sector led growth and local economic
development
RESULTS CHAIN PERFORMANCE INDICATORS
MOV RISKS/MITIGATI
ON MEASURES Indicator (including CSI*) Baseline Target
IMP
AC
T
Increase
contribution to
growth and
employment from
the private sector
and local entities
Global Competitiveness Index
Financial market
development (2017):
3.4
Higher education and
training (2017): 4.1
Financial market development
(2020): 3.7
Higher education and training
(2020): 4.4
GCI,
MoF,
INE,
AfDB
(AEO)
Risk 1: An
unfavourable
macroeconomic
environment and
exogenous shocks.
Mitigation
Measures: This type
of risk is the subject
of an on-going
dialogue with the
authorities, and is
monitored regularly
within the context of
the BSG that brings
together partners
involved in
programme support
operations. It is also
mitigated by the
ongoing reforms for
economic
diversification and
broadening of the
tax-base supported by
partners, including
the Bank.
Risk 2: The capacity
of government
services, although
above the regional
average, is limited.
This could slow down
or even halt the
implementation of
programme reforms.
Mitigation
Measures: The
Government is
committed, at the
highest level
(Presidency, Prime
Minister’s Office,
Ministry of finance,
and line ministries),
to a process of
structural reforms as
per the PEDS.
Moreover, delivery
capacity on reforms
is the subject of
regular monitoring by
partners, particularly
in the context of the
BSG which holds
biannual joint review
missions.
Real GDP growth 4% (2017) 5% (2020)
Unemployment rate
15% overall (2016)
17.4% women (2016)
41% youth (2016)
10% overall (2020)
14% women (2020)
35% youth (2020)
OU
TC
OM
E
Outcome A.1
Ease of doing
business and
competitiveness
enhanced
Doing business indicators
improvements
Distance to frontier is
56.24 pts (DB 2018)
Distance to frontier is 60 pts (DB
2020) WB
Credit to the private sector
(%GDP) 63% (2016) 70% (2020) MoF
Labor contribution to value
added growth
1,1% (2007-2014
period) 2% (2017-2020 period) AfDB
Increase the number of training
center developing PPP 0 4 (2020)
Outcome A.2
Local economic
development and
decentralisation
enhanced
Dependency ratio on
government transfers (% of
revenues from direct central
government transfers)
80% in the 6 most
dependent municipalities,
and 14 municipalities
with more than 60%
(2017)
3 municipalities with more than
80% and 10 with more than 60%
(2020)
MoF
Increased participatory
economic planning at
municipality level
No local participatory
planning
9 locally developed participatory
development plans framed in the
regionalized PEDS (2019)
MoF,
UNDP
OU
PU
TS
A.1 Promoting competitiveness and private sector development
A.1.1 Improved
legal framework
and systems for
business
competitiveness
and investment
1.1.1 Effective set-up of the
competitiveness reform
coordination unit.
1.1.2 Revision of the code for
commercial companies (codigo
das sociedades commercias)
1.1.3 Approval of secondary
legislation for insolvency
1.1.4 Approval of the industrial
policy and related action plan
1.1.5 Approval of the strategy
and action plan for the
transition from the informal to
the formal sector.
Unit composed of 3
staff and narrowly
focusing on Doing
Business reforms.
Previous code in place
Insolvency law existing
but secondary
legislation for
insolvency
administrators not in
place (2017)
Strategy finalized but
not adopted (2017)
Strategy finalized but
not adopted (2017)
Unit structure approved (2018
– prior action), head of unit in
place and 50% of the staff
mentioned in the approved
organigram recruited (2019)
New code approved by CM
(2019)
Approval of the statutes,
guidelines, and regulatory
practice for judicial insolvency
administrators (2018)
The strategy and its action plan
are adopted (2018/19)
The committee on the
transition from the informal to
the formal sector formed
(2018– prior action) and a
strategy adopted (2019)
A.1.2 Skills
development
anchored in private
sector needs
1.2.1 Develop a Roadmap for
PPPs in vocational training
1.2.2 Increase private sector
participation to TVET through
the elaboration of
apprenticeship training
program.
No action plan, lack of
participation of private
sector to TVET system
(2017)
No apprenticeship
training program in
place (2017)
The Roadmap has been
developed and adopted to put
in place PPP in TVET (2019)
TVET Law enforcement
decree passed to
institutionalize the
apprenticeship training
program , and a first cohort of
60 youth trained through the
apprenticeship training (30%
women) (2019)
viii
A.1.3 Improved
factor efficiency in
support of MSME
development
1.3.1 Guarantee registry
established up and running
1.3.2 Completion of land
mapping and digitization, for
the municipalities on Sal, Maio,
Boa Vista, and Sao Vicente
(except Mindelo), and launch of
the process in Santiago (at least
one municipality)
System not in full use
(2017)
Land mapping 80%
completed (2017)
Fund manager for the
guarantee scheme selected
(2019)
Land mapping 100%
completed for the
municipalities on Sal, Maio,
Boa Vista, and Sao Vicente
(except Mindelo), and launch
of the process in at least one
municipality of Santiago
(2018)
A.2 Promoting local economic development and local governance
A.2.1 Improved
local government
support for
enterprise
development
2.2.1 Effective implementation
of contract programs between
municipalities and technical &
vocational institutions
2.2.3 Interface between housing
registry and municipalities for
the issuance of property tax
certificate (certidião matricial)
14 contract programs
signed in 2017 - No
training for youth
unemployed undertaken
Interface between
housing registry and
municipalities not
functional (2017)
60 training activities
undertaken for at least 600
youth and adults (of which
40% women) (2018)
Interface up and running
(2019)
MoF,
AMNCV
, IEFP
A.2.2 Updated
legislative
framework for local
economic
development and
decentralization
2.2.1 New law on the status of
municipalities
2.2.2 New law on municipal
financing
Law on the statutes of
municipalities in place
2005 law on local
municipality financing
in place (2017)
New law on the statutes of
municipalities submitted to
parliament (2019)
New law on local municipality
financing submitted to
parliament (2019)
A.2.3 Improved
local economic
development
planning
2.3.1 Endorsement of the
regionalized PEDS
2.3.2 Effective set-up of the
Local Economic Development
structure integrated with
planning
Regionalized PEDS not
endorsed (2017)
Unit de-linked with
planning directorate
and only staffed by a
coordinator (2017)
Regionalized PEDS endorsed
by authorities (2018 – prior
action)
Prerogatives for local
economic development linked
with Planning directorate, unit
coordinator confirmed/
nominated (2018 – prior
action), and recruitment
process (concourso publico)
for at least 50% of the staff
defined in the organigram
launched (2019)
MoF
Funding in million EUR 20 for phase I and EUR 20 million for phase II- AfDB
1
I. INTRODUCTION: THE PROPOSAL
1.1. Management hereby submits the following proposal and recommendation to grant a loan
of EUR 20 million to the Republic of Cabo Verde to finance the Private Sector Competitiveness
and Local Economic Development Programme - Phase I (PSC-LED-I). PSC-LED-I is the first phase
of a programme-based budget support operation covering fiscal years 2018 and 2019, with an overall
indicative financing of EUR 40 million. PSC-LED-I presents the multi-annual framework of the
programme and provides a list of reform measures considered as indicative triggers for the second phase
(PSC-LED-II). The programme-based approach helps improve aid predictability and facilitates
alignment with the country's development policies, thus creating conditions for sustained, sustainable
and inclusive growth.
1.2. The programme interlocks seamlessly with the Economic Plan for Sustainable
Development (PEDS) 2017-2021, while leveraging on previous budget support operations whose
results helped improve not only the public finance management system, but also public corporate
governance and the promotion of private investment. Previous operations, including the 2013-2014
Public Corporate Governance and Investment Promotion Support Programme Phases I and II
(PAGEPPI and II), and the 2015-2017 Economic Growth Support Programme Phase I and II (PACE-I
and II), helped create conditions for inclusive economic development. The reforms supported by these
programmes have led to: (i) improved transparency of public procurement; (ii) improved public
corporate governance through the signing of performance contracts between the State and public
enterprises; (iii) better promotion of investment through the operationalization of the one-stop shop and
the establishment of a PPP Unit, (iv) strengthening of business supporting entities through the effective
set-up of incubators, (v) improvements in the business environment via the application of key laws (e.g.
microfinance law, insolvency law, MSME law) (vi) reductions in import/export delays (from 20 to 6
days). Such achievements and commitment to reforms helped growth resumption, a positive investment
trend and increased economic confidence (annex 3).
1.3. In spite of such major achievements, Cabo Verde still faces structural challenges. The
authorities’ pursuit of increase growth levels are underpinned by the willingness not to fall in the
“middle income trap”1 and a drive to substantially improve the life of citizens. There are however key
binding constraints such as the indebtedness level, the low multiplier effects of public spending, and
low/decreasing productivity. To overcome these, the government is working to place the private sector
at the centre of economic growth and is initiating key structural reforms to improve productivity and
economic diversification. Private sector led growth will in part provide an answer to the fiscal and debt
constraint through growth, and will enable improvements in citizen’s revenues and decrease
unemployment. To do so and ensure that growth is spatially inclusive, it must be domestically sourced
leveraging on the diverse comparative advantages held across the 9 inhabited islands. In other words,
Cabo Verde’s challenges are twofold: firm-up and move forward with the change in growth paradigm
in favour of the private sector, and ensure that growth is inclusive across the territory and strata of
society.
1.4. To address these issues, PSC-LED aims to (i) consolidate the gains from previous
operations, and support Cabo Verde's efforts to tackle the above challenges through reforms to
improve overall competitiveness, while also (ii) seeking to set the basis for local economic
development. Its objective is to support the National Development Plan’s objective geared towards a
move to private sector led growth and local economic development. PSC-LED is not only concerned
with the pace of growth (i.e. growth levels), but its pattern (i.e. sources of growth and spatial
distribution)2. To do so, PSC-LED is intended to support GoCV’s efforts through 6 operational
1 In the literature, the "middle income trap" is a situation where a country moves from “low” to “middle income” status but is unable to
move to the next stage due to a lack of differentiation, specialization or incremental productivity gains. 2 For the AfDB, inclusive growth is a key development objective, conceptualized it in terms of four dimensions: economic, social, spatial
and political inclusion (AfDB (2016), Measuring Inclusive Growth: From Theory to Applications in North Africa, Working Paper). The
importance of inclusive growth with regards to job creation and spatial inequalities has been delved upon in the 2015 AEO with a focus
2
objectives, namely: (i) Improved legal framework and systems for business competitiveness and
investment, (ii) Skills development anchored in private sector needs, (iii) Improved factor efficiency in
support of MSME development, (iv) Improved local government support for enterprise development,
(v) Updated legislative framework for local economic development and decentralization and (vi)
Improved local economic development planning.
II. COUNTRY CONTEXT
2.1 Political Situation and Governance Context
2.1.1. Cabo Verde is widely recognized amongst African countries for its good governance.
According to the Mo Ibrahim Index of African Governance (IIAG), in 2017, the country scored 72.2
out of 100, ranking fourth out of 54 African countries. The country has used the media and the networks
of social and civil partners to carry out an extensive awareness campaign for participatory citizenship
in the country's development process. This approach has enabled the involvement and participation of
all civil society actors in national and international fora aimed at promoting the culture of peace,
improving security, and encouraging responsible citizenship and participation. The country has been
also effective in combating corruption. In Transparency International’s Corruption Perceptions Index
2017, Cabo Verde, which ranked 48th out of 175 countries, was the third least corrupt African country
at par with Rwanda.
2.1.2. The political and institutional environment is characterized by a multi-party system and
smooth political governance. Cabo Verde has a semi-presidential regime. Executive power is held by
the Prime Minister and Head of Government, who is designated by the party or group of parties with a
majority in the National Assembly. In 2018, Freedom House granted a rating of 1 to Cabo Verde due to
a wide range of civil liberties (including freedoms of expression, assembly, association, education, and
religion) and political rights (including free and fair elections) enjoyed by the population. Cabo Verde
ranks 27th out of countries in the 2017 World Press Freedom Index. The March 2016 legislative elections
led to a change in the parliamentary majority with the victory of the Movement for Democracy (MpD).
That change came about 15 years following governments led by the African Party for the Independence
of Cabo Verde (PAICV). In September 2016, the MpD won the municipal elections (19 municipal
councillors out of 22).
2.2.1. Although the Cabo Verde economy shows signs
of recovering after a period of decline due mostly to the
global financial crisis of 2008 and the debt crisis in
Europe, it remains susceptible to structural risks. The
country went into recession in 2009 before growth
resumed back to positive territory averaging barely 1.3%
between 2010 and 2015. It was only in 2016 that a real
recovery began, with an estimated 3.8% growth rate,
thanks to an improvement in tourism, public
administration and agriculture. In 2017, the economy is
estimated to have expanded by 4% supported by the double
digit-growth in tourist arrivals, the recovery in credit to the
private sector, and stronger consumer and business
confidence. Overall, the short-term outlook appears
positive, yet it is still subject to major challenges, including
improving factor productivity (currently trending
downward), diversifying the economy, increasing
resilience to exogenous shocks (climate, dependence on trade with Europe, etc.), and achieving
on territorial development and spatial inclusion, in the 2016 AEO with regards to the role of urban centers and structural transformation.
The Bank is responding to the challenge of supporting inclusive growth by focusing on five priority areas, referred to as the High 5s.
Table 1: Macroeconomic indicators
2016 2017(e) 2018(p) 2019(p)
Real GDP growth 3.8 4.0 4.1 4.1 Real GDP p.c. growth 2.0 2.5 2.9 2.9
CPI inflation -1.4 1.1 1.4 2.0
Budget balance %
GDP -3.3 -4.1 -4.4 -3.9
Current acc. % GDP -5.4 -7.2 -7.3 -7.3 Source: Data from domestic authorities; estimates (e) and projections (p) based on
authors' calculations, AEO.
Graph 1: Real GDP Growth (%)
0
2
4
6
8
10
2010 2011 2012 2013 2014 2015 2016 2017 2018
Cabo Verde West Africa
3
successfully the ongoing restructuring of public enterprises. The outlook for the first half of 2018 is
positive, as are confidence indicators (technical annex 8), and expectations for the tourism industry.
GDP growth should reach 4.1% in 2018 and 2019 respectively3.
2.2.2. Since 2013, the Banco de Cabo Verde (BCV) has adopted a monetary policy stance to
ensure money supply, in line with the goals of price stability and preservation of the value of the
national currency. Monetary policy is constrained by the need to maintain fixed parity between the
Capverdian escudo (CVE) and the euro. Due to tighter monetary conditions and the slowdown in
economic activity, inflation fell from 4.5% in 2011 to -1.4% in 2016. Inflation is estimated at 1.1% in
2017 and is projected to rise to 1.4% in 2018. This low inflation
rate provides the BCV with space to soften its monetary policy for
growth. The policy rate was lowered to 3.5% in February 2015 and
has remained unchanged since then. In the same month, reserve
requirements were reduced to 15% from 18% in order to stimulate
economic growth and support the resumption of bank loans to the
private sector. The response to those measures was modest, with a
slight uptake in loans to the private sector in 2016, despite the
general decrease in interest rates. In June 2017, BCV adopted
measures to strengthen the monetary transmission mechanism.
Plans to adopt a new foreign exchange law and a new BCV organic law are underway. Consolidating
the existing foreign exchange legislation and liberalizing the already de facto open capital and financial
accounts will support efforts to further integrate Cabo Verde in the global economy.
2.2.3. Following the 2008/2009 crisis, the authorities launched a counter-cyclical policy to
stimulate the country’s growth which led to a rapid deterioration of the budget deficit and an
increase in public debt levels. Debt increased from 71.9% of GDP in 2010 to 129.6% in 2016. With
this in mind, the authorities have made a commitment to strengthen budget consolidation. In 2015, the
public deficit stood at -4.1% of GDP, and at -3.3% in 2016, less than the rates of -7.5% and -8.9%
recorded in 2014 and 2013, respectively. In 2017 it is expected to stand at -4.1% and at -4.4% in 2018.
The efforts compared to the pre-2014 situation (graph 2) stems primarily from achievements on the
revenue side, with a significant increase in revenue accruing following the expansion of the tax base.
On the expenditure side, compression of the public investment program also contributed to deficit
reduction. Moreover, efforts are under way to address the fiscal risks related to poor-performing public
enterprises. Over the past year, important efforts have been made to stop the running liabilities of Cabo
Verde Air Transport Company (TACV)4, circumscribe those of the housing scheme ‘IFH’, and decrease
government funding dependence of the electricity company ELECTRA. In addition, a privatization
program of other State-Owned Enterprises is underway, with AfDB and World Bank support, to
disengage the State and reduce contingent liabilities.
3 These figures reflect AfDB projections. Government forecasts between 4.5% and 5% in 2018 and 5% to 6% in 2019. Differences reside
most importantly on the outcomes of fiscal consolidation, the success of the privatization program and the contribution of FDI. 4 Running a monthly deficit of nearly EUR 3m/month, TACV local and regional operations were dismantled and the market filled by a
private operator (Binter). The international part of TACV has been taken over by Icelandair through a 1 year management contract in
anticipation of privatization. The government still has a EUR 100 million liability (~6.5% of GDP) which it seeks to reduce through
negotiations. The cost of TACV’s retrenchment and winding-down is expected to cost about 2.2% of GDP in 2017-2018 (IMF 2018).
Graph 2: Fiscal balance (% GDP)
-12
-10
-8
-6
-4
-2
0
2010 2011 2012 2013 2014 2015 2016 2017 2018
Cabo Verde West Africa
4
2.2.4. Tackling the debt situation requires a multi-layered approach (Technical annex 7).
Economic theory suggests three core variables for a sustainable debt path: growth, primary fiscal
balance and interest rates. To the extent that growth is superior to borrowing rates, debt levels will fall.
Similarly, a primary budget surplus causes the debt stock to fall, by allowing the government to pay off
some of the existing debt. Ongoing fiscal consolidation efforts are one part of the equation as they
directly impact the fiscal balance (Box 1). However, it is important that such efforts are not detrimental
to future growth. This was the premise under which the previous PACE budget support operation
accompanied Cabo Verde to improve its public investment selection criteria and system. Regarding
interest rates, Cabo Verde’s choice to turn towards development partners as opposed to untested and
still expensive (as per its debt profile) international markets ensures that they are contained. The last
key variable and core challenge is boosting growth levels which authorities aim to tackle through
reforms aimed at unleashing private sector activity.
2.2.5. Sustaining and accelerating the growth momentum requires that the government address
the various bottlenecks in the economy, which requires implementing measures to improve its
human capital base, raising government effectiveness, improving the environment for private
sector participation in the economy, and boosting local economic development. Lacking natural
resources and economies of scale to sustain a significant manufacturing base, the economy is
concentrated in the services sector. In 2015, the tertiary sector represented about 69.9% of GDP and
was dominated by tourism, and foreign direct investment (FDI) in the tourism sector. Structural reforms
– such as a better organization of local production of goods and services, or improvements in the inter-
island transportation systems – are necessary to boost tourism so that it generates more substantial
economic benefits. This in turn requires a further strengthening of the local private sector and capacity
to generate development across islands relying on diverse sources of income5. Due to poor natural
conditions, agriculture is not developed and accounts for less than 10% of GDP. Nevertheless, it remains
a critical sector for inclusive growth, poverty reduction, promotion of green growth, and resilience to
climate change. The industrial sector, which accounts for 8% of GDP, is marginally developed and is
highly concentrated in export-oriented fishing activities (see technical annex 11 on sector-based
activities in relation to the High 5s, including on industry). According to the 2015 employment survey,
the strongest job-creating sectors are agriculture/fishery/livestock farming (with 19% of jobs), trade and
automobile repair (18%), the public service (13%) and industry (10%).
5 While some islands such as Sal of Boa Vista are mostly relying on tourism, others also lean on other incomes sources such as industry
(Santiago), Agriculture (Sao Nicolau) or fishing (Santo Antao or Sao Vicente).
Box 1: Promoting Economic Growth while Insuring Debt Sustainability
As a result of high public investment spending, low growth rates, declining prices as well as the appreciation of the USD against the
ECV, public debt level increased drastically, from 71.9% of GDP in 2010 to 129.6% in 2016. In 2017, public debt stock has declined to
126.5% of GDP, the first decline in a decade. External government debt represents 77% of the total public debt. While external public
debt is high, it is overwhelmingly concessional with long maturity profile and low average interest rates. Multilateral institutions are the
main external creditors. Domestic public debt structure and maturity remain favorable. Treasury bonds make up about 96% of domestic
debt. Despite the impressive fiscal consolidation in recent years, reducing public debt burden remains a challenge. There are two reasons
for this situation. Firstly, the State granted loans to public enterprises. In 2016, TACV and IFH maturing bonds equivalent to 3% of GDP
were redeemed by the Government. Given that the TACV and IFH are unable to cover the repayment of such bonds, the central
Government may be required to cover the debt of public enterprise to the tune of up to 12% of GDP. A second factor is the appreciation
of the dollar against the euro. At first glance, only 5% of the debt is denominated in USD, but the actual ratio rises to 21% since the debt
is exposed to the USD via Special Drawing Rights.
The government is challenged to accelerate efforts to rationalize public investments and contain contingent liabilities in the country’s
public bodies without impeding the recent growth momentum. Gross financing needs are increasing, limiting the ability of the
government to use fiscal policy to absorb shocks. Fiscal consolidation is needed to create a sustainable debt path. To reduce the risk of
debt distress, emphasis should be placed on streamlining expenditure rather than adopting austerity measures. Tackling transfers to public
enterprises and reducing contingent liabilities is crucial for debt sustainability.
5
2.2.6. The productivity and economic diversification
challenges call for the stimulation of the private sector.
Cabo Verde’s exposure to exogenous shocks remains a major
concern. The impact of past exogenous crises on growth has
papered over a major structural weakness, namely the low
productivity of the economy. Indeed, data analysis undertaken
by the Bank (Technical annex 4) shows that total factor
productivity (the share of growth not attributable to capital or
labor) has been negative for the 2007-2014 period, while labor
and capital contributions have somewhat declined. This
suggests that other things being equal, growth levels should
decrease over the long term. Hence, apart from diversification
of sources of growth, structural reforms aimed at increasing
productivity and private sector profile are necessary. As per
the country’s national development plan (PEDS), authorities intend to engage in this path through a new
private-sector focused model of economic growth, and a new State model underpinned by higher
efficiency of service delivery and locally induced development through a decentralization policy. This
change of paradigm may help, from a structural standpoint, to avoid the “middle-income trap” (Box 2).
2.2.7. Local economic development is an important challenge to ensure spatial distribution of
economic opportunities according to island specific comparative advantages. Decentralization
efforts (box 3) are based on the premises that decision making on areas of service delivery is best done
at local level as sub-national governments are better informed of on the ground needs6. Being an
archipelago with diverse islands both geographically and economically, the government intends to
invigorated local economic development as per the PEDS (Box 3). Doing so will not only contribute to
higher growth, but also respond to considerations such as (i) reducing inter-islands inequalities, (ii)
easing pressure on inter-island migration (2015 AEO) and (iii) assist secondary cities across islands in
leading the way on structural transformation (2016 AEO). Country specific analysis undertaken in the
2015 African Economic Outlook (AEO) focusing on territorial development and spatial inclusion
suggests that territorial imbalances in Cabo Verde are not only based on social service delivery, but also
on economic opportunities, leading to internal migration pressures. Similarly, the 2016 AEO focuses
6 Tiebout (1961) argued that the decentralization of public goods provision allowed governments to better respond to individual needs
(Brueckner 2000). Similarly, Oates (1972) theorized about the inefficiencies stemming from a uniform spatial provision of public goods
and services. Decentralisation efforts embedded in policy making are sourced from these works. In this case, decentralization is part of a
broader state reform aimed at improving service delivery and accountability. This “New Public Management” approach posits that by
being closer to the users, efficiency gains are obtained.
BOX 3: Decentralization and local development in Cabo Verde
Cape Verde is formed by 10 islands, in which 9 are inhabited. The decentralization process of public administration in Cabo Verde has gone
a long way since independence with 14 municipalities in 1975 to 22 in 2005. The island of Santiago, most populated, has 9 municipalities,
Santo Antão 3, Fogo 3 and São Nicolau 2. The remaining 5 are in the islands of São Vicente, Maio, Brava, Sal and Boa Vista, each with one
municipality. In addition to the growing number of municipalities, recent data from the National Institute of Statistic (INE) shows that the
national population has increased during the years: in 1990 there were 341,491 residents in the archipelago, and 531,239 in 2016. In addition
to the increased population, a shift in the trend of the rural population was also verified: in 1990 56% of the population was living in rural
areas and 35.7% in 2016.
The legal framework for decentralization in Cabo Verde is enshrined in the Constitution and defined in the Law nº 134/IV/95 which underlines
administrative autonomy (Article 2) and financial autonomy (Article 3). The current legislation regarding financial autonomy was upgraded
and approved into law in 2005 (Law of Local finance nº 79/VI/2005). This law defines the general and specific rules, as well as how each
municipality can manage their revenues, accumulate debts and receive transferences from the central government. In order to deepen the
decentralization process, in 2010 the government approved the Decentralization Framework Law nº69/VII/2010. Municipalities have thus
been given the power to control their social/economic development policies, taking into account their rights and duties. They also hold the
power among other things, to elaborate their own development plans, approve and implement their budgets and projects, and create
partnerships close to international entities in order to boost local development.
On a developmental level, the country still faces social and economic obstacles linked to its territorial configuration: there are socio-economic
discrepancies between the touristic islands (Sal, Boa Vista, Santiago and Sao Vicente) in relation to the others islands. These differences are
also be found at local level where recent data from municipalities indicates that in some cases the global poverty incidence is higher than
50%. Due to unbalanced socio-economic developments across the country, the current government’s policy emphasises that specific efforts
must be made towards strengthening democracy at regional level as a key element to support decentralization especially as the country’s
fragmented market imposes several constraints related to equal/equitable development.
BOX 2: Overcoming the Middle Income Trap
To overcome stagnation at middle-income levels
structural characteristics of the economy are
important, as is infrastructure level, financial breadth
and depth and labor market characteristics. Factor
productivity is crucial in this regard. To this end,
“macroeconomic stability and trade openness are
necessary for productivity growth, they are not
sufficient. Small MICs need to improve the quality of
their public spending, most notably on education to
minimize the skill mismatch in the labor market,
reduce the regulatory burden on firms, improve
access to finance by SMEs and create the enabling
environment to facilitate structural transformation in
these economies”.
Source: Abdychev et al. (2014), Increasing Productivity Growth
in Middle Income Countries, IMF Working Paper WP/15/2.
6
on sustainable cities and structural transformation, suggesting that the country’s urban renewal
(including based on economic opportunities) can be an important driver of structural transformation.
2.3.1. Cabo Verde’s recent reforms to improve its
business environment have been positive, but mask a
large degree of variation in performance across key
indicators. As shown in graph 3, the country performs well
on some Doing Business (DB) indicators such as contract
enforcement or licensing, but lags in issues regarding to
investor protection or closing businesses (including
insolvency). Recent business environment improvement
measures – some of which were supported by the previous
PACE budget support – have included the streamlining of
administrative procedures for entrepreneurs with the
opening of a one-stop shop, the adoption of the revised Tax
Code on tax benefits for investments, the operationalization of the online business tax return filing
system, or the adoption of a new legislation on insolvency. To date, Cabo Verde is ranked 129th out of
190 economies in the 2017 DB report.
2.3.2. According to the Global Competitiveness Report 2017-
2018, which presents the Global Competitiveness Index (GCI)
with 12 pillars ranging from institutions and infrastructure to the
macroeconomic environment and goods market efficiency,
Cabo Verde ranks 110th out of 144 countries, with a score of
3.76 out of 7. This performance is a slight improvement over the
last five years with a move from 122nd out of 148 countries, with
a score of 3.5 out of 7 in 2013-2014. It would appear from the
report that the main obstacles to the competitiveness of Cabo
Verde's economy is not only the limited size of the domestic
market, but also the difficulty of obtaining credit due to the
interest rates (extremely high despite the excess liquidity of
commercial banks), the lack of basic infrastructure and labor-
market mismatches. This is compounded by the level of informality in the economy. The informal
economy represents 12.1% of GDP (INE 2015). Indeed, economic activity in Cabo Verde is mostly
conducted by small, mostly informal, firms. In 2015, the business sector was comprised of 9,357 formal
firms providing 52,783 jobs and approximately 33,000 informal firms providing close to 40,000 jobs
(World Bank 2017). Developing private sector competitiveness should include actions to support Micro,
Medium and Small Enterprises (MSMEs). The need to simplify the process to register MSMEs is
highlighted in the draft government strategy for the transition from the informal to the formal sector.
2.3.3. Factor productivity is a key constraint for improved competitiveness. As previously noted,
a growth accounting analysis indicates that the reduction in the rate of growth verified over the period
2007-2014 is partly due to the negative growth of total factor productivity (technical annex 4), and a
slowing contribution of labor. Technology absorption, training and education are crucial to boost total
factor productivity. Improved information and communication technology (ICT) penetration, better
inter-island transportation, and R&D activities are key determinants. In this regard, progress on some
Bank funded projects such as the Praia Technological Park or the port of Maio is key. Equally important
are market “misallocations” such as gender discrimination7 which should be addressed through active
policies aimed at women’s economic participation. Similarly, reducing skills mismatch relative to
private sector needs is a key factor to increase competitiveness and promote youth employment.
According the last World Bank Enterprise Surveys, 49% of firms in Cabo Verde have identified an
7 According to a recent study, closing the gap between men and women in the work force could increase the country’s GDP by 12.2%.
See Marone, Heloisa (2016), Demographic Dividends, Gender Equality, and Economic Growth: The Case of Cabo Verde, IMF Working
Paper WP/16/169, Washington D.C.: International Monetary Fund.
Graph 3: 2017 Doing business ranking
-10
40
90
140
190
Ease of Doing
Business
Starting a
business
Dealing with
licenses
Registering
property
Getting credit
Protecting
investors
Paying taxes
Trading across
borders
Enforcing
contracts
Closing a
business
Graph 4: Contributions of Labor, Capital and
Total Factor Productivity (TFP) in the average
growth in the total Value Added
-4%
-2%
0%
2%
4%
6%
8%
10%
1980 - 1987 1987-1997 1997-2007 2007-2014
TFP Labor capital Physical Capital
7
inadequately educated workforce as a major constraint of business environment (average sub-Saharan
Africans 19.4%). In addition, the absence of core strategies such as one for industrial development or
the blue economy are also limiting factors.
2.3.4. Moving the competitiveness agenda forward requires both leadership and reforms
coordination. An analysis of Cabo Verde’s performance in terms of Doing Business reforms over the
past years reveals that the lack of coordination between agencies on the reform agenda is currently a
significant constraint. To date, involved stakeholders tend to work with little or no coordination. A
coordination unit exists within the Prime Minister’s office but is virtually staff-free, without a strong
mandate, and narrowly focused on Doing Business indicators rather that the competitiveness agenda at
large. This leads to slow implementation and missed opportunities to streamline actions. According to
the World Bank, a review of factors which allowed some countries around the world to achieve great
leaps in competitiveness indicators brings out two important factors: (i) leadership and (ii) a solid
coordination unit.
2.4.1. The last public finance review notably the 2015 Public Expenditure and Financial
Accountability (PEFA) assessment, the IMF 2017 mission, and the Bank’s 2018 review indicate
that Cabo Verde’s public finance management (PFM) system has made significant strides
(Technical annex 2). The 2015 PEFA assessment concluded that the performance of the country's PFM
system was satisfactory, with 24 indicators out of 28 having a PEFA score of C+ or above (8 A, 9 B or
B+ and 7 C+). Over the past few years, the authorities have taken several structural reform initiatives
to further improve the public finance management system. Hence, progress has been achieved with
respect to completeness, transparency and supervision, particularly through the introduction of
programme-based classification, Treasury management reforms, and the deployment of an Integrated
Financial and Budget Management System (SIGOF) in all ministries. Regarding SIGOF, work remains
to be done for its integration with the Municipality information System (SIM), which would itself first
require harmonisation and upgrade. This would ensure proper accounting of Municipal finances with
that of central government. In addition, to further strengthen public financial management, it would be
necessary to accelerate the State’s property inventory, while also complementing internal control’s
capacity to oversee public private partnerships.
2.4.2. As regards to external control, the February 2018 law expanding the Court of Auditors remit is
a positive move forward. This law will reinforce and enlarge the oversight and audit mandate of the
Court of Auditors namely by increasing the scope of entities subject to external control, the adoption of
performance audit and the possibility of carrying out concomitant audit. The posting on the Ministry of
Finance website of the draft Budget Framework Bill and the draft Public Debt Bill for public
consultation enabled increased transparency. The revisions of both Bills have been approved by the
council of Ministers and are deemed to be fundamental steps in the consolidation of the PFM legal
architecture and PFM reform which will contribute to the modernization of financial management and
control processes. Lastly, there is a need to accelerate efforts to reinforce a performance and evaluation
culture in the public sector. In a context of increasing modernization of the economy, it becomes
increasingly crucial to provide sufficient quantitative and qualitative means to properly ensure the
enforcement of 'checks and balances' and to preserve the overall good functioning of the administration.
2.5 Inclusive, Growth, Poverty Situation and Social Context
2.5.1 While overall poverty declined sharply since the 1990-2007 period, spatial (inter-island)
and gender inequalities remain important. National poverty rates dropped sharply from 49% in 1990
to 26.6% in 2007 and 24.2% in 2015. There are still strong gender- and community-based disparities:
33% of women-headed households are poor, compared to 21% of male-headed households (INE, 2015).
Therefore, poverty remains widespread among women-headed households, which represent almost half
(46%) of all households (INE, 2017). The poverty rate was 15% in urban areas, compared to 40.9% in
rural areas. Similarly, poverty rates on islands with better tourism infrastructure, notably Sal and Boa
Vista, are less than half of the national average. Hence, a more equitable development between islands,
between rural and urban areas and between women and men is key for inclusive growth in the country.
8
2.5.2 The structure of the Caboverdian labour market is characterized by regional disparities
and vulnerability of young people to unemployment. While counter-cyclical spending initially
helped reduce unemployment - bringing the rate from 13.1% in 2009 to 10.7 % in 2010 – it however
rose again to 12.2% in 2011 and reached 15% in 2016. The increase in national unemployment rate is
aligned with the steep rise in unemployment among women, which rose from 11.2% in 2015 to 17.4%
in 2016, whereas unemployment among men dropped from 15% to 12.9% over the same period. There
are also regional disparities, with unemployment hitting certain regions particularly hard: 15.9% in
Boavista; 15.7% in Praia; and 14.5% in Sao Vicente. Unemployment among young people, who
represent half of the working population, is a source of concern as the unemployment rate for the age
cohort 15-24 is 41%. The unemployed population is mainly constituted by youth looking for their first
job (74.3%). This situation underlines a mismatch in the labor market: the economy does not produce
enough jobs to absorb the number of newly active youth. Promoting an enabling environment for
competitiveness of private sector, boosting the local economy and supporting youth entrepreneurship is
key to response to such challenges. There are also issues pertaining to the quality of jobs for women
and for people in rural areas. The rate of underemployment is 26.1% overall, while people in rural areas
(46.3%) and women (28.2%) are mostly affected. Furthermore, a significant number of workers do not
have access to social protection and decent job. Workers without written contracts amount to 50% and
only 36% of them have been registered in the social prevention institute in 2015 (INE 2015).
2.5.3 Despite the progress made in the education system, a qualitative mismatch is observed in
the labor market: the skills provided by the education system are not aligned with the needs of
the private sector. Basic education is satisfactory overall. The literacy rate is 85% for women and 93%
for men; in rural areas, it is stands at 74% for women and 87% for men. Parity between boys and girls
has been achieved at the primary school level and the literacy rate is at 98% for both genders in the 15-
24 age group. At the secondary school level, the enrolment rate is 98.3% for boys and 87.7% for girls.
At the same time the unemployment rate of secondary school graduate is very high (55%). Improving
the quality of education and its relevance for the needs of the economy remains a challenge. In 2014,
the Government approved the Integrated Policy for Education, Training and Employment (PIEFE),
which focuses on youth employability.
2.5.4 With life expectancy at 72 years for men and 80 years for women, the quality of life of the
people of Cabo Verde is higher than the continental average (60 years). The main health sector
indicators are much higher than those of most African countries. The Human Development Index (HDI)
stood at 0.646 in 2014, slightly above the average of 0.630 for MICs. With regard to infant mortality,
the rate fell from 22 per 1 000 in 2013 to 21 per 1 000 in 2015. However, there are major disparities in
terms of access to and quality of health services across islands.
2.5.5 Although the performance in terms of gender equality are positive, certain challenges
remain (Technical annex 10). Women enjoy the same legal rights as men, including rights under family
law, property law, and in the judicial system. According to the Bank’s gender equality index, Cabo
Verde ranks 9th on the continent. Despite this performance, women in Cabo Verde, especially the 36%
of them living in rural areas, continue to face gender-based disparities, notably with regard to access to
decent income and participation in political life. Even when they obtain basic infrastructure for greater
productivity or to improve their productivity on a small scale in agriculture, fisheries and trade, they are
more vulnerable than men, especially in rural areas. Gender disparities in unemployment rates,
particularly between young men and women, indicate an uneven access to resources.
III. GOVERNMENT DEVELOPMENT PROGRAMME
3.1. Government’s Overall Development Strategy and Medium-Term Reform Priorities
3.1.1 Cabo Verde's development strategy is enshrined in the Economic Plan for Sustainable
Development (PEDS) 2017-2021. The authorities set a global orientation in the IXth legislature’s
government programme published in 2016. They are opting for divestiture of the State from the
economy, to make the private sector the real driver of growth in a manner that considers the priority
needs of the people and improvements of their living conditions and lifestyles. This vision is laid out
9
and detailed in the 2017-2021 PEDS which contains three strategic thrusts. The first thrust focuses on
establishing a new economic growth model, having as sub-components economic diversification,
structural reforms, and development of the islands as economic units. The second thrust targets the
delivery of social services by the State, human capital, quality of life and fight against inequality. The
third thrust concerns a new State model, with a focus on such issues as security, justice, defence and
making optimal use of the Diaspora.
3.1.2 PSC-LED-I will support the implementation of Cabo Verde’s overall development
strategy. More specifically, it will support the National Development Plan’s objective geared
towards a move to private sector led growth and local economic development. As noted in the
policy development letter (annex 1), “for a proper and efficient execution of the PEDS, it requires : (1)
a model of economic growth based on private investment, on complementing a social and shared
economy and on social and territorial inclusion; (2) a major focus on local and regional development
via greater decentralisation”. This policy based operation, whose objective is to build on the gains of
previous operations as well as continue support for new efforts by the GoCV to make the economy more
competitive and inclusive, is thus consistent with GoCV's matrix of programme reforms. Support for
key structural reforms aimed at improving the competitiveness, and spurring local economic
development will help to achieve the goals laid out in the PEDS. With regards to the former, PSC-LED
will support the shift in growth paradigm through reforms aimed at furthering competitiveness by lifting
binding constraints for businesses. With regards to the latter, PSC-LED takes into account the drive for
a new State model underpinned by higher efficiency of service delivery and locally induced
development through decentralization. Being an archipelago with geographically and economically
diverse islands, PSC-LED intends to invigorate local economic development as per the PEDS.
3.2. Challenges in Implementing the National Development Programme
2.5.6 Cabo Verde faces several challenges that could hamper its economic growth in the
medium term. In the first instance, the country faces a series of structural constraints relating to the
small size of its domestic market, the fragmentation of the country into several islands, and the lack of
natural resources over which the authorities have little or no control. In addition to these structural
challenges due to nature, there are others that the authorities should address to ensure sustained growth
in the years ahead, among which: (i) control of debt levels by seeking other sources of financing,
especially private sources, and by improving the management of public enterprises and major public
investment projects to ensure better achievement of the desired effects in terms of economic growth;
and (ii) diversification of the economy by creating conditions conducive to private sector development.
Being limited in size and in view of infrastructural problems related to the country’s insularity, the said
sector faces a number of difficulties stemming from the cost of factors of production (electricity and
transport), the poor quality of labour, bureaucracy and the weakness of the supervisory structure put in
place to support the development of small- and micro-sized enterprises (SMEs). The issue of financial
inclusion of SMEs needs to be resolved, in view of the fact that the difficulty which project owners have
in finding project guarantees/guarantors, or simply the lack of “bankable” projects, severely restrains
the transition of SMEs to medium-sized competitive enterprises.
3.3. Consultation and Participation Processes
3.1.1 Cabo Verdean authorities conducted extensive consultations with all stakeholders to
ensure broad-based ownership of the country's overall development strategy. The consultations
were held both at the national level and on each island. The authorities held talks with Members of
Parliament, local elected officials, representatives of civil society and the private sector, the media and
technical and financial partners. A series of institutional mechanisms (Steering Committee comprising
thematic groups) guided the preparation of the PEDS to ensure a broad understanding and involvement
of all stakeholders.
3.1.2 The design of PSC-LED-I was also preceded by extensive consultations to ensure
ownership by entities involved in the various reforms supported by this operation. The
consultations involved authorities responsible for promoting the effectiveness of public investment in
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the Ministry of Finance, representative structures of the private sector and professional associations
(Chambers of Commerce, Banks, Insurance companies), and TFPs (the World Bank, the European
Union, IMF, etc.). These consultations afforded an opportunity to assess the progress achieved in
implementing the reforms supported by previous programmes (PACE I & II) and to discuss with
beneficiaries the challenges that should be addressed in order to improve the governance of public
enterprises and promote private investment in Cabo Verde. Participants in the consultations put forward
suggestions which were taken up by the Bank for discussion with authorities and allowed the Bank to
have a comprehensive view of reforms to be supported. It should be noted that in order to ensure
accountability to lower-level beneficiaries, the Bank will initiate discussions with authorities on the
monitoring and evaluation of public policies to ensure feedback to the population.
IV. BANK SUPPORT FOR THE GOVERNMENT’S STRATEGY
4.1. Linkage with Bank Strategy
4.1.1 The Policy-Based Operation (PBO) is fully aligned with the GoCV Development Strategy
(PEDS) which it intends to accompany. The program’s goal is to support the National Development
Plan’s objective geared towards a move to private sector led growth and local economic development.
It is thus by definition aligned to the PEDS covering the 2017-2021 period. The program is also aligned
with the CSP priority of strengthening economic governance in the public and private sectors. In
particular, it is consistent with the orientations of the authorities for the disengagement of the State in
favor of partnership with the private sector and decentralized communities as highlighted in the CSP’s
mid-term review. In addition, the PSC-LED’s strategic orientation reflects priorities of the Bank’s GAP
II (2014-2018) as set in its third pillar “investment and business climate”. Lastly, it is aligned with the
“Improving the quality of life for Africans” High 5 priority through private sector development and its
focus on spatial (economic) inequalities. PSC-LED is also aligned with the “Industrialise Africa”
priority through measures supporting industrial policy development and the reduction in costs for factors
of production necessary for industrial development.
4.2. Compliance with Eligibility Criteria
4.2.1 Cabo Verde fulfils the eligibility criteria for general budget support operations defined
in the Bank’s Policy on Programme-Based Operations, adopted in March 2014 (ADB/BD/IF/2014/40). The detailed analysis of these criteria is attached as Technical Annex 1. With
regard to GoCV’s commitment to reducing poverty, it is worth noting that by properly implementing
the previous national development plan (GPRSP III), the country succeeded in improving the living
conditions of the population by slashing the poverty rate from 49% in 1989 to about 24.2% in 2015.
The current PEDS sets clear targets for poverty and social inequality reduction. Concerning macro-
economic stability, the latest IMF report and the November 2017 Budget Support Group (BSG) mission
concluded that the country’s macroeconomic framework was stable. Cabo Verde’s debt distress risk
remains moderate and medium-term prospects are on the upside, thanks mainly to the performance of
the tourism sector and the expected rebound in Eurozone economies. Regarding political stability, Cabo
Verde is one of the most politically stable countries in Africa. In terms of the fiduciary review, thanks
to efforts aimed at improving the fiduciary framework, the Bank’s review concluded that the risk was
moderate and that the public finance management system fulfilled Bank requirements for budget support
operations. Lastly, efforts are being made to further strengthen harmonisation between the Bank and
other TFPs, especially the World Bank, the European Union, Luxemburg, Portugal and Spain – all part
of the Budget Support Group.
4.3. Collaboration and Coordination with other Partners
4.3.1 The Bank is active within the Cabo Verde Budget Support Group (BSG). It participates in
the deliberations of the BSG (Multilateral: the Bank, the World Bank and the European Union; Bilateral:
Portugal and Luxemburg) which meets twice yearly - in May and November. For a two-year period
starting in November 2017, the Bank is presiding the BSG. While there is no common matrix for
monitoring the reforms supported by the various TFPs of the BSG in their respective budget support
operations, the measures targeted by this programme were previously discussed with the TFPs of the
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BSG and selected based on the comparative advantages and value added of each participant, with a view
to harmonization, in accordance with the Paris Declaration. However, under the Bank’s leadership a
common matrix is being drawn to integrate and streamline all BSG reform indicators. This matrix
should be used from the 2018 BSG meetings onwards. During the preparation of the PSC-LED, the
Bank undertook a mission in parallel with the World Bank. In addition, extensive stakeholder
consultations were held with private sector representatives as well as central and sub-national
government entities. BSG members operate a complementary division of labour: as the Bank is
concerned with growth and competitiveness, the World Bank lays emphasis mainly on fiscal matters,
public enterprises and debt management, while the European Union focuses on public financial
management. Luxembourg is concerned with employment and employability while Portugal on security
issues. In addition, the Bank led consultation and partnerships with UNDP (on local economic
planning), ILO (on firm formalisation) and UNIDO (on industrial strategy). PSC-LED has been
designed in a manner whereby the engagement of each of these institutions through technical assistance
is leveraged at the policy level.
4.4. Linkage with Other Bank Operations
4.4.1 On 31 April 2018, the Bank’s portfolio in Cabo Verde comprised 11 operations for a total
commitment of UA 81.03 million. The portfolio comprises one private sector operation namely
Cabeolica Wind project which amounted EUR 15 million and has been fully disbursed. The sectoral
breakdown of the portfolio is as follow: information and communication technology (ICT) (32.7%),
transport (29.7%), governance (22.7%), energy (10.4%), social (1.6%), and water and sanitation (0.8%).
The performance of the Bank’s portfolio in Cabo Verde is deemed satisfactory with a score of 3 on a
scale of 1 to 4. The main indicators of that performance are: (i) the average effectiveness timeframe
dropped from 9.7 months in 2013 to 6 months in 2017; (ii) the average timeframe between approval and
initial disbursement dropped from 16.3 months in 2013 to 9.5 months in 2017; (iii) the average portfolio
age was 3.4 years in 2018; (iv) 54% of projects are managed by the AfDB Office in Senegal (COSN);
(v) the disbursement rate was 52.7% in April 2018; (vi) the portfolio does not include any problematic
project (PP) or potentially problematic project (PPP) categories. The Government and the Bank have
made a commitment to actively implement the provisions of Presidential Directive No. 02/2015
concerning the design, implementation and cancellation of Bank Group sovereign operations.
4.4.2 The PBO has links with other Bank projects. It builds on the achievements of PACE by
taking a step further in reforms related to private sector development. While the PACE focused both on
the domestic private sector as well as foreign investment, the PSC-LED focuses on endogenous and
local development. The Bank is providing technical assistance projects finance through MIC and FAPA
Grants in support of MSME development and towards establishing a PPP framework. As the PSC-LED
will support local economic development, the Bank is working towards a new Results-Based-Financing
(RBF) operation for 2019 on the issue to complement and deepen its engagement.
4.4.3 In designing this programme-based operation the lessons from previous Bank operations
in Cabo Verde were taken into account. The Bank has financed several budget support operations in
Cabo Verde over the past few years. The Public Corporate Governance and Investment Promotion
Support Programme, Phases I and II, approved in 2013 and 2014 respectively, and the Economic
Growth Support Programme Phase I and II (PACE-I & II) approved in 2015 and 2017 enabled, among
others: (i) the improvement of public finance management and macro-economic stability through better
budgetary and financial management, tighter control of public expenditure, and greater transparency in
the public procurement system; (ii) improvements in the formalisation of SME access to credit; (iii) the
improvement of public corporate governance by strengthening the regulatory framework of economic
activity and redefining relations between the State and public enterprises; and (iv) the improvement of
private investment promotion through a more attractive investment climate and better management of
pro-PPP public investments. The completion reports of previous programmes concluded that Cabo
Verde’s performance was satisfactory in the area of implementation and in terms of ownership by the
authorities of the structural reforms agreed upon with the Bank. The great strides made by these
programmes (see Annex 3) are all the more reason for continuing to support the reform efforts of GoCV,
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in conjunction with other development partners. Thus, in designing PSC-LED-I based on a programme-
based approach spanning two years (2018 and 2019), account was taken of the key lessons from these
operations, summarized in Table 2 below.
Table 2: Lessons from Previous Bank Operations
4.5. Analytical Underpinnings of this Operation
4.5.1 The PBO is underpinned by a wide range of analytical work. Two background papers were
elaborated by the Bank to inform the operation. They include (i) a paper on Local Economic
Development and Decentralization (technical annex 6) and (ii) a paper on total factor productivity
(technical annex 4). Both are being considered for publication under the Bank’s knowledge products
and will become part of the dialogue tools in the context of the PSC-LED. Other Bank driven analytical
underpinnings include (iii) the 2017 gender profile, (iv) the 2018 African Economic Outlook country
note and its macroeconomic analysis, (v) the 2015 African Economic Outlook focusing on territorial
development and spatial inclusion, (vi) the 2016 African Economic Outlook focusing on the role of
urban centers beyond capital cities and structural transformation, (v) the draft PCR of PACE I and II,
(vii) the 2016 updated Financial Risk Assessment, (viii) the Bank’s Country Policy and Institution
Assessment (CPIA), and (ix) the Bank’s CSP 2014-2018 and its mid-term review. IMF reports, the
World Bank’s Doing Business report and the WEF Competitiveness Report were also used. In addition,
the PBO leaned on analysis and diagnostics undertaken by the UNDP (through their local economic
development project), on UNIDO for the development of the industrial strategy and ILO on the
formalization of informal enterprises and on their diagnostic for the Special Regime for Micro and Small
Enterprises (REMP).
5 PROPOSED PROGRAMME
5.1 Programme Goal and Objective
5.1.1 PSC-LED intends to support the authorities’ medium-term goal for inclusive growth and
economic diversification, with particular attention given to the domestic private sector and local
actors given their potential contribution to the economy. It will support the National Development
Plan’s objective geared towards a move to private sector led growth and local economic development.
While the previous PACE budget support focus was on the private sector at large, including the
attraction of FDI, the PSC-LED narrows its focus on the domestic private sector, its competitiveness
and local economic development across islands. Noting that substantial progress has been made towards
regulatory simplification under PACE, maintaining the momentum and completing the reform agenda
will be critical, adding to it (i) a local development dimension, (ii) a productivity dimension.
5.1.2 In this context, the program’s proposed development objective is to promote inclusive and
sustainable economic development. It will support PEDS’s objective geared towards a move to private
sector led growth and local economic development. It will address key constraints for (i) private sector
development and competitiveness and (ii) local economic development and governance. Both elements
are complementary since efficient local economic structures are needed to provide the necessary
environment for MSME to develop across all islands. The inclusiveness of the operation is guaranteed
to the extent that the PSC-LED will seek to respond to spatial inequalities by promoting local economic
development according to each island’s comparative advantage.
Key Lessons Reflection in PSC-LED-I
Budget support operations must be carried
out in parallel with institutional support
projects targeting the same priority sectors.
A MIC grant on professional training is currently underway and will help
materialise some of the measures in PSC-LED. In addition, projects financed with
MIC grants should be developed depending on funding availability to target fiscal
decentralisation.
Disbursement conditions must be realistic
and reflect the country’s capacity.
Meetings between technical directorates during preparation and appraisal helped to
ensure that measures proposed in PSC-LED-I were feasible. Its design follows a
programme-based approach (2 single-tranche operations) which leaves room for
flexibility on reform measures precedent to Board presentation and for maintaining
dialogue on reforms to ensure their effective implementation.
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5.2 Programme Components
5.2.1 PSC-LED-I is structured around two complementary components. Designed using an
complementary approach with the operations of other TFPs while ensuring full ownership by Cabo
Verdean authorities and taking into account the country’s challenges, PSC-LED-I is based on two
components:
(1) Promotion of competitiveness and private sector development. Particular attention will be given
to (i) improved legal framework and systems for business competitiveness and investment, (ii)
skills development anchored in private sector needs and (iii) improved factor efficiency in
support of MSME development. These areas reflect key dimensions of competitiveness, which
is defined here as “a set of institutions, policies and factors that determine the level of
productivity of a country” (WEF definition). Measures that take into account institutions and
policies are proposed in the PSC-LED (through legislative enhancement and administrative
organization), as well as reforms to boost factor effectiveness and efficiency. That includes the
improved understanding of differences in business environment constraints faced by men and
women entrepreneurs. (2) Promotion of local economic development and local governance. Particular attention will be
given to (i) improved local government support for enterprise development, (ii) updated
legislative framework for local economic development and decentralization and (iii) improved
local economic development planning. This component is in line with the authorities shift from
planning at an aggregate level towards planning at a sub-national level to ensure that growth
potential from each particular part of the country is unearthed. The overall policy matrix is
presented in annex 2.
Component I – Promoting competitiveness and private sector development
5.2.2 While recent reforms have considerably contributed towards establishing the foundations for
improved competitiveness, both international rankings on the business environment and data on factor
productivity suggest there is still much to do. The PSC-LED will ensure that the reforms initiated and
supported under the last budget support operation (PACE) related to business enabling environment,
are taken forward, while also supporting further priority actions.
a) Context, challenges and recent government actions
5.2.3 Many of the indicators available (WEF Competitiveness indicators, Doing Business report, etc.)
highlight several categories of challenges for Cabo Verde which include (i) access to finance, (ii)
bureaucracy and the completeness and usefulness of the legal arsenal for businesses, (iii) skills and
labour markets, (iv) factor efficiency including land or inputs such as electricity. While a number of
critical policies and legislative frameworks have been approved, institutions and IT-systems established,
two issues are currently coming up. First, not all are all fully effective. Important gaps remain such as
for instance in the case of tax expenditure incentives, or the functioning of access to finance schemes.
Second, much of the reforms targeting the private sector had a stronger focus on the attraction of foreign
investment (investment code reforms, tax exemptions for FDI). This leaves gaps for the domestic private
sector which continues to suffer from important constraints linked to skills, access to finance and
bureaucracy.
5.2.4 Competitiveness reform coordination: As previously noted, an analysis of Cabo Verde’s
performance in competitiveness reforms over the past years reveals a lack of coordination between
agencies on the reform agenda. According to the World Bank, a review of factors which allowed some
countries around the world to achieve great leaps in their Doing business ranking brings out two
important factors: (i) leadership and (ii) a solid coordination unit. More than 30 economies around the
world have established units dedicated to the competitiveness and business environment agenda. More
often than not, they are composed of a steering committee with high level political leadership and an
operational secretariat.
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Key PSC-LED measures: (1) Setting a well-functioning reforms coordination infrastructure will be
determinant in the PSC-LED’ success and will as such constitute “action precedent to PSC-LED-I”.
5.2.5 Access to finance: Usage and availability of financial services is a core constraint for MSMEs
in Cabo Verde. Lending tends to focus on real estate and construction activities, while the banking
system in general is characterized by a persistent situation of excess liquidity. Cabo Verde recently
improved its credit information system by adopting in 2014 a new law providing for the establishment
of private credit bureaus8. This could enable better risk management by banks and smoother lending
processes for people under coverage by the bureaus. Although the Central Bank has a credit information
system, it cannot (by law) cover some elements that private bureaus can, such as history on utility bill
payments or fiscal information. However, the establishment of a private bureau faces institutional and
regulatory issues and is yet to be opened. Concurrently, the authorities launched in 2010 CV-Garante,
a credit guarantee scheme. The objective of this fund was for banks to increase access to finance to
MSMEs. The guarantee fund would work as a partial credit guarantee where banks take a share of the
risk with a counter-guarantee from a public fund. Its set-up and operationalization has however been
ineffective. An assessment of the system conducted by the World Bank in 2016 found that its
governance, institutional structure, and design had rendered it unattractive for banks as a risk-sharing
mechanism and as such did not meet many of the principles for Public Credit Guarantee (PCG) schemes.
For instance, its approval processes were deemed complex and cumbersome, and bring no value-added
compared to the risk reviews conducted by banks. In 2018, the government launched a new USD 10
million guarantee fund. The fund is expected to be managed by a private entity (the Fund Manager) who
will be chosen on a competitive basis. The Fund Manager will develop risk measures and exercise
control on operations.
Key PSC-LED measures: (2) Effective operationalization of the risk-sharing facility (credit guarantee),
which will constitute “action precedent to PSC-LED-I”. This is in continuation of the PACE which
supported measures to establish the Fund that is currently being structured with World Bank assistance. The
establishment of the guarantee registry will accompany this measure for effectiveness reasons. PSC-LED
will also seek to accompany the operationalization of credit bureaus. Although the legal framework is in
place for it to operate, PSC-LED will support the set-up of a working commission including the Central
Bank, CreditInfo, the chamber of commerce and Ministry of Economy to address pending issues (annex 2).
This approach will strengthen focus on gender equitable access to financial services.
5.2.6 Legal framework for competitiveness: In 2016, the National Assembly approved the Recovery
and Insolvency Code (Law 116/VIII/2016 of September 1st). The code came to bridge a key legislative
gap noting that previous provisions on insolvency were anchored in legislation dating from 1962, i.e.
before independence. This legislation is important to the extent that the lack of clear insolvency
procedures implies that losses in the event of bankruptcy are likely to be greater for all parties. This is
mainly due to the fact that as legal challenges on assets of insolvent firms can for instance bear a cost
to all parties, including the insolvents firm’s remaining resources. The approved code is broadly up-to-
date with international practice. Still, there remains key secondary legislation which needs to be passed
for completeness. The law provides for new professions such as that of insolvency mediator, or judicial
insolvency administrator. However, the statutes, guidelines, and regulatory practices for these
administrators is yet to be drafted. In addition to dealing with insolvency issues, Cabo Verde is to update
its corporate code (codigo das sociedades comercias). The current code dates from 1999. At the time,
it was based on the premises of a changing economy that takes into account entrepreneurs and
cooperatives – two entities which were not properly delineated in previous legislation. It however
presents some shortcomings, most notably in relation to the protection of minority investors. According
to the 2018 Doing Business report, Cabo Verde ranks 164th out of 190 countries, falling behind Guinea-
Bissau (138th) or Angola (81st).
8 Private credit bureaus in Africa tend to perform in terms of softening of financial constraints as shown in Triki, T. and O. Gadjigo (2012),
Credit Bureaus and Registries and Access to Finance: New Evidence from 42 African Countries, African Development Bank, WP 154.
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Key PSC-LED measures: (3) the revision of the code for commercial companies (codigo das empresas
comerciais) to include harmonized procedures for business registrations, and provisions for protection of
minority investors is a key measure in order to facilitate enterprise creation and reduce bureaucracy. (4) In
the same vein the statutes, guidelines, and regulatory practice for judicial insolvency administrators will
form another key measure supported by the operation.
5.2.7 Promoting firm formalization and development: The informal sector in Cabo Verde plays an
important role in the economy (with a contribution of about 25% of GDP) and in terms of social
development (70% of jobs). The potentialities of this sector should be supported by Government through
a strategy of transition from informal to formal sector. Reforms and measures are crucial to improving
its productivity, provide decent jobs and promote the growth of MSMEs. Indeed, of the more than 33
000 individual production units (IPU) that were on record in 2015, approximately 85% operate in the
informal sector9. Of this number, almost 63% were created or belonged to women. Against this
background, Law No. 70 / VIII / 2014 of 26 August created the Special Regime for Micro and Small
Enterprises – (REMPE). The REMPE entails simplified taxation measures for Micro and small
enterprises (MSEs), as well as positive discrimination in public procurement (25% of public
procurements and 10% of the value of the public works contract must be outsourced to MSEs). The
implementation of the REMPE has however encountered difficulties which include the absence or delay
in the publication of the regulations, the lack of financial resources for implementation, or instability as
it has undergone 3 revisions over the past two years.
Key PSC-LED measures: (5) set-up of an inter-institutional committee on the transition from the informal
to the formal sector which will constitute an “action precedent to PSC-LED-I”. The approval of the strategy
from the informal to the formal sector as well as the social security mechanisms in partnership with ILO and
in a participatory process as recommended by the Gender profile will constitute the second level objective
to be pursued by the committee. The PSC-LED will also endeavour to support the update of the Special
Regime for Micro and Small Enterprises (REMP) together with ILO (annex 2).
5.2.8 Skills development: On skills development to strengthen local MSME competitiveness, the
main challenge is to better anchor the technical and vocational education and training (TVET) system
to private sector requirements. The PEDS identified dynamic sectors through which the country can
boost its economic growth through agriculture, industrial transformation, tourism, transport/logistic,
new technology. Vocational training should prepare qualified human resources to take opportunities in
these sectors and promote youth entrepreneurship. Conversely, youth are more exposed to
unemployment. New data for 2016 from the National Statistics Institute (INE) show the lack of jobs:
the unemployment rate for the age cohort 15-24 is 41%, which means that almost half of youth who are
in the labor market seeking work do not find jobs, and amongst youth workers, 31% are under-employed
suggesting a low level of labor productivity.
5.2.9 Against this background, a roadmap to develop the Public-Private Partnership in the TVET
system is key to improving competitiveness and youth employment. The involvement of the private
sector is key in the TVET system. Presently, the training centers have not created strong links with the
private sector and professional associations. This link can be developed gradually from ‘skills
anticipation’ studies, the participation in the governance of training centers, involvement in the
implementation of training, or the evaluation of the external returns of training systems. The
development of apprenticeship programs is one way of developing this partnership between firms and
training centers. This training modality can provide an alternative model of education anchored in the
productive system. Traditionally, in Cabo Verde several young people acquire technical skills in the
informal sector. Such learning practices are not recognized by the education system and remain
unstructured. Professional apprenticeship is planned in the TVET Law adopted in 2014 but has not been
implemented and the related law decrees have not been adopted.
9 A.B. Lopes and J.J. Borges de Oliveira (2018). Régime Spécial des Micro et Petites Entreprises: Diagnostic sur l’Etat d’Avancement
de la Mise en Œuvre, Praia : Organisation International du Travail.
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Key PSC-LED measures: (6) the development of a roadmap for PPPs in vocational training and support
the establishment of the new program of apprenticeship in the TVET system that should facilitate the link
between schools and jobs, change gender-biased employment expectations of parents, teachers and students.
It will also support the approval of the country’s industrial strategy and related action plan in collaboration
with UNIDO.
5.2.10 Factor efficiency: According to the 2017 Doing Business survey, Cabo Verde ranks 142nd out
of 190 on the ease of getting electricity indicator. Doing Business uses the system average interruption
duration index (SAIDI) and the system average interruption frequency index (SAIFI) to measure the
duration and frequency of power outages in the largest business city of an economy. Despite significant
improvements in recent years, the reliability of electricity supply remains an issue since the SAIDI and
SAIFI indexes have struggled to fall below values that would qualify for a positive score under the
Doing Business methodology. Cabo Verde’s electricity utility company ELECTRA has undergone
significant institutional and operational restructuring with support of the Bank amongst others such as
the World Bank and JICA. The SCADA software (Supervisory Control and Data Acquisition) is a
necessity in order to measure outages, but also allows for a more efficient control of the grid, thus
allowing for speedier resolutions of technical issues, and thus a reduction in outage time and technical
losses which can directly impact businesses. An ambitious urban and rural land reform is ongoing and
involves major changes at the legal and institutional level, with the establishment of a new integrated
national cadastral information system. This initiative will impact land management with improved
transparency and increased legal and operational security for economic actors.
Key PSC-LED measures: The PSC-LED will support the effective roll-out of the SCADA software which
will allow ELECTRA to detect network issues and drastically reduce power shortages for firms. Further
transparency in proceedings related to land will also be supported by the PSC-LED. This includes the
publication of (i) land transfer statistics on the “Porton di Nos Ilhas” government portal and (ii) the
publication of services standards for the documents required for Cadastre, as well as the completion of land
mapping and digitization for Sal, Maio, Boa Vista, and Sao Vicente (except Mindelo), and launch of the
process in Santiago (in at least one municipality).
5.2.11 Expected Outcomes: The effective implementation of these reforms will lead to improved
competitiveness through notably a positive review of the following indicators: (i) improvement in the
distance to frontier of the Doing Business Report from 56.24 points in the 2018 report to 60 points in
the 2020 report; (ii) increase in credit to the private sector from 63% in 2016 to 70% of GDP in 2020;
(iii) the increase from 0 to 4 in the number of training centres developing partnership with private sector
and the first cohort of 100 youth trained through professional apprenticeship in the pilot phase; (iv) and
improvement in labor contribution to value added growth from 1.1% registered over the 2017-2014
period to 2% in 2017-2020.
Component II - Promoting local economic development and local governance
5.2.12 Local economic development is a new objective laid out in the PEDS for which structuring
reforms are needed. Local economic development is intrinsically linked to the attributes of each island,
their geographic and economic features. In this regard, subnational governments are well positioned to
provide support to the endogenous private sector. The PEDS seeks to promote a “regionalization”
approach, through improved municipal infrastructures and capacities to deliver on local economic
programs. Against this background, the PSC-LED will support key reforms that will frame the context
in which local economic development can occur. This will be done in three key areas: (i) updated
legislative framework for local economic development and decentralization, (ii) improved local
government support for enterprise development (and youth employment) and (iii) improved local
economic development planning. Similarly, to component I, effective coordination of reforms touching
upon local economic development is crucial.
a) Context, Challenges and Recent Government Actions
5.2.13 Legislative framework for local economic development and decentralization: the legal
framework for decentralization in Cabo Verde is defined in Law nº 134/IV/95 which lays out a set of
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items including administrative autonomy (Article 2) and financial autonomy (Article 3). The current
legislation regarding financial autonomy was upgraded and approved into law in 2005 (Law of Local
finance nº 79/VI/2005). This law defines general and specific rules, as well as how each municipality
can manage their revenues, accumulate debts and receive transferences from central government. In
order to deepen the decentralization process, in 2010 the government approved the Decentralization
Framework Law nº69/VII/2010. This legislative corpus should however be re-crafted in the face of the
new approach to local economic development and regionalization set in the PEDS. A law on
regionalization is being finalized and will introduce a new layer (regions) in between central
government and municipalities. Against this background new sets of laws on the status of municipalities
and on municipal financing need to be crafted. The law on municipal financing is key for the PEDS’
local economic development and the regionalization objectives.
5.2.14 In addition to efforts that should be undertaken to enlarge the municipal tax basis, challenges
are found in the financial dependency in relation to government transfers which impose several bounds
on the ways each municipality can implement its local socio-economic development plan (technical
annex 6). The new law on municipal financing should ensure that the change in the methodology of
budgeting adopted at central level based on budgetary management by objectives and results, is now
declined to municipalities. It should clarify the allocation of public resources between the State and
Municipalities, refine the criteria for allocating the Municipal Fund between Municipalities, and
improve their revenue frameworks. The new proposed Law on the statutes of Municipalities will come
after the new law on Regionalisation and alongside a Law on Municipal financing, and is a necessity in
view of the 2020 autarkic/local elections.
Key PSC-LED measures: PSC-LED will support update of the legislative framework for local economic
development and decentralization to better fit with the objectives of the PEDS. This will include the (1)
revision of the 2005 law on local municipality financing, and of the law on the (2) Statutes of Municipalities.
Clarifying and updating the way municipalities are financed as well as their competencies and prerogatives
vis-à-vis the citizens and the private sector is a condition sine qua non for local development.
5.2.15 Improved local government support for enterprise development (and youth
employability): the access for youth to training opportunities and support to entrepreneurship program
is unequally distributed across the country. This situation partly explains inter-island migration (mainly
youth) and is a reflection of regional socio-economic disparities. The share of Santo Antao’s population
out of the country’s overall population decreased from 19% to 6.6% between 1940 to 2016. Conversely,
the population of South Santiago increased from 10% to 34.9% over the same period. To restore regional
equalization and stabilize youth in their territory, the Employment and Training Institute (IEFP) signed
program contract with 14 municipalities where there is no TVET Centers to provide training and
employability support.
5.2.16 Regarding Cabo Verde’s challenge to create enough jobs to absorb youth, the solution lies in
the development of enterprise spirit and initiative to promote youth employment. It is with this in mind
the previous PACE budget support operation supported the creation of incubators. The Bank is working
with authorities to support youth entrepreneurship at the local level through the launch of a business
plan competition organized in training centers. Moreover, youth entrepreneurs have limited access to
finance. Among young entrepreneurs trained and supported by ADEI in 2014 (PROEMPRESA in 2017)
only 13.3% had access to finance. This initiative will award young graduates from TVET programs with
innovative and bankable business plans through a grant (made of an equipment kit to start business and
benefit from non-financial support).
Key PSC-LED measures: The operation will support the (3) effective implementation of the 14 program
contracts signed between IEFP and Municipalities to train at least 600 youth (40% women) in dynamics
sectors (2019). In addition it will oversee a business plan competition organized by IEFP to support youth
entrepreneurs through a grant of kit of equipment targeting 130 youth (annex 2).
18
5.2.17 Improved local economic development planning: The new law on Municipal status and
Municipal financing should specifically target the issue of policy-making autonomy of sub-national
entities. According to the PEDS, the policy objective sought is one of greater autonomy through the
devolution (rather than delegation) of key functions. In this regard Municipalities are to become
responsible for the planning and roll-out of local economic development plans, nested in the overall
framework set by the regionalized PEDS. Currently 8 municipalities have completed diagnostics and
are starting the drafting of participatory economic plans with UNDP support. Other municipalities and
islands are working on sector specific plans, such as Maio and Boa Vista which are preparing tourism
strategies. Noting the bottom-up planning underway, a key challenge to face is paradoxically a
strengthening of the central planning oversight to ensure that local/municipal initiatives fit within the
PEDS. In rolling out decentralization reforms in support of local economic development, it is important
that appropriate coordination is in place in order to oversee the cross-thematic issues required for
effective local economic development planning. To date, a unit exists at the level of the Prime Minister’s
office. The unit is however understaffed and not fully effective. A move of the team’s prerogatives
within the planning directorate is advisable to ensure closer coordination.
Key PSC-LED measures: (4) integrating the current prerogatives of the local development unit with those
of the planning directorate will constitute an “action precedent to PSC-LED-I”. A team should be set-up to
coordinate inputs from line ministries, oversee and monitor the regionalization of the PEDS and oversee the
support to local administration in areas such as financial management, support to enterprises, local
development plans. PSC-LED will also support the approval for the (5) regionalization of the PEDS (action
precedent to PSC-LED-I), and build upon efforts made by the UNDP which is assisting municipalities in
drafting local development plans, as well on the finalization of an island specific mater tourism plan on a
pilot basis (annex 2). Ideally, these plans will be subjected to a specific RBF operation going forward.
5.2.18 At the level of municipalities, it is necessary to introduce a set of reforms and equip them with
management tools that (i) are focused on the local development vision and align with the country's
development options and (ii) align with the reform of the State aiming at introducing mechanisms that
promote greater effectiveness, quality, celerity, rigor, transparency, and efficiency and effectiveness in
the relationship with citizens and, in particular, with the business community. Municipalities are thus
challenged to improve the existing information system in municipalities SIM (Municipal Information
System), modernizing it and endowing it with new capabilities as per the new competencies being
bestowed upon them. The existing SIM is currently not set in a stable inter-municipal network, does not
including planning or monitoring and evaluation modules, is not linked to the central financial
management system SIGOF, nor does it have key functionalities such as the ability to insert and manage
cadastral information (e.g. alteration of buildings, matrix value, environmental plans, municipal
signage, etc.). As noted in annex 2, PSC-LED will follow through with the harmonization and update
of SIM and its link to SIGOF. In doing so, it will ensure that the development of these systems include
(i) gender-markers in SIM to allow for the inclusion of gender targets at municipality level through
budget and via the monitoring of local economic development plans, and (ii) a gender-marker in SIGOF.
Doing so will allow gender streamlining in the PEDS (via the budget) to be measurable based on
financial resources actually applied to projects that integrate gender at different levels and dimensions.
5.2.19 Expected Outcomes: The effective implementation of these reforms will lead to improved
competitiveness through notably a positive review of the following indicators: (i) a decrease of
dependency ratio on government transfers from 80% in the 6 most dependent municipalities, and 60%
+ in 14 municipalities (2017) to 3 municipalities with more than 80% and 10 with more than 60% in
2020, (ii) Increased participatory economic planning at municipality level from no such planning at
municipal level in 2017 to 9 locally developed participatory development plans framed in the
regionalized PEDS in 2019.
5.3 Policy Dialogue
5.3.1 During PSC-LED’ implementation, dialogue with Cabo Verdean authorities will focus mainly
on the following areas: (i) support for the promotion of private sector development, in general, and for
the improvement of the business environment; (ii) accompaniment of decentralisation policies and local
19
economic development planning in particular, and (iii) support for the implementation of an inclusive
and market-responsive skills development roadmap. As the chair of the budget support group, the Bank
will ensure continuous dialogue on fiscal, monetary and debt policy to ensure macroeconomic stability
and the creation an environment that facilitates access to credit for SMEs. It will also initiate discussions
on the monitoring and evaluation of public policies to set a framework for evaluating reforms, including
through supported by partners.
5.4 Loan Conditions
5.4.1 PSC-LED-I is the first of a two-phased programme-based budget support operation. This first
phase is subject to measures precedent to presentation of the programme to the Board. The preparation
of Phase II will be subject to a series of reforms serving as triggers to be assessed by July 2019.
5.4.2 Measures precedent and triggers: Following the dialogue with authorities, the measures
precedent to Board presentation of PSC-LED-I and PSC-LED-II triggers are summarized in Table 3
below.
Table 3: Measures Precedent to PSC-LED-I, and PSC-LED-II Triggers
Measures Precedent to PSC-LED-I PSC-LED-II Indicative Triggers
General condition precedents:
(i) For Phase I and II: Maintain a stable macroeconomic framework, as reflected by the reports or appraisals respectively produced or conducted by
the IMF or the PTF Budget Support Group. Evidence: Copy of the IMF press release on the findings of the last mission or a copy of the Budget
Support Group's report on the macroeconomic framework.
(ii) For Phase II: Satisfactory review of phase I reforms under the policy matrix (annex 2). Evidence: Aide-mémoire of supervision mission.
Component I – Promoting competitiveness and local private sector development
Prior Action 1: Effective set-up of the competitiveness reforms
coordination unit
Status: Achieved
Evidence: Publication in official bulletin of the decree approving
the unit structure or of organic decree-law of ministry of Finance
approving the unit structure
Trigger 1: Effective set-up of the competitiveness reforms coordination
unit
Evidence: Secretary executive of the Unit nominated and 50% of the staff
mentioned in the approved organigram recruited.
Trigger 2: Revision of the code for commercial companies (codigo das
sociedades commercias)
Evidence: Certified copy of the legislative decree or the decision from CM
approving the new code with harmonized procedures for business
registrations, provisions for protection of minority investors.
Trigger 3: Approval of secondary legislation for insolvency
Evidence: Copy of the approval of the statutes, guidelines, and regulatory
practice for judicial insolvency administrators
Prior Action 2: Set-up of the inter-institutional committee on the
transition from the informal to the formal sector
Status: Achieved
Evidence: Certified copy of the resolution from the CM creating the
committee
Trigger 4: Approval of the strategy and action plan for the transition from
informal to formal sector
Evidence: Certified copy of the resolution from the CM
Prior Action 3: Decree -law on the set-up of the credit guarantee
scheme approved by the CM
Status: Achieved
Evidence: Certified copy of the CM’s approval
Trigger 5: Operationalization of the credit guarantee scheme Evidence: Contract with Fund manager signed.
20
Trigger 6: Develop a Roadmap to develop PPP in vocational training
Evidence: Letter confirming the approval of the roadmap by the Minister of
Finance and copy of the roadmap.
Component II – Promoting local economic development and local governance
Trigger 7: New law on the status of municipalities
Evidence: Copy of the CM’s approval
Trigger 8: New law on municipal financing
Evidence: Copy of the CM’s approval
Prior Action 4: Effective integration of the Local Economic
Development Unit in the Ministry of Finance
Status: Achieved
Evidence: Publication in the official bulletin of the decree approving
the unit/service structure or of the organic decree-law of ministry of
Finance mentioning the inclusion of core competencies on local
economic development planning and coordination
Prior Action 5: Endorsement of the “Regionalised PEDS” document
Status: Achieved
Evidence: Despacho or commitment letter from the Minister of
Finance
Trigger 9: Approval of the “Regionalised PEDS” document
Status: Achieved
Evidence: Certified copy of the CM’s approval
Trigger 10: Implementation of 14 contract programs between
municipalities and technical & vocational institutions.
Evidence: Report attesting that training activities were undertaken for at
least 600 youth and adults (of which 40% women).
5.5 Application of Best Practice Principles on Conditionality
5.5.1 In accordance with the Bank's policy on programme-based support operations, PSC-
LED-I’s design took into account the five best practice principles on conditionality. The
programme-based approach adopted for this new operation is intended to create a flexible and inclusive
framework for dialogue to ensure better predictability of budget resources and the successful
implementation of major structural economic reforms. Thus, to better support Cabo Verdean authorities
in this programme, best practice principles were followed: (i) GoCV took ownership of the programme,
given that it was designed with the active collaboration of State entities (Directorates of Planning, the
Treasury, Public Finance Reforms and Revenue, and the Central Bank), private sector (Chamber of
Commerce, commercial banks, etc.); (ii) the efforts of development partners were coordinated for better
complementarity of interventions in support of the country's policies through the BSG; (iii) the
programme is fully in line with Cabo Verde's national policies and helps to support this country’s
remarkable efforts to create sustainable and inclusive policies for strong economic growth; (iv) the
conditions precedent to Board presentation and the triggers for the second phase of the programme are
deemed realistic and achievable, and were accepted by Cabo Verdean authorities at appraisal.
Furthermore, (v) PSC-LED-I is aligned with the country's budget cycle, thus allowing GoCV to include
it in its 2018 and 2019 budgets.
21
5.6 Financing Needs and
Arrangements
5.6.1 This budget support operation
is an integral part of the external
financing sources that will help to
bridge the financing gap for 2018 and
2019. For 2018, the financing needs stand
at CVE 5.7 billion and CVE. To meet this
need, the GoCV still relies on grant-based
budget supports as part of its income as
well as loan-based budget supports as part
of gap financing to the tune of CVE 2.7
billion. The Bank will provide budget
support equivalent to CVE 2.2 billion,
equivalent to 1.4% of GDP (table 4).
5.7 Application of Bank Group
Policy on Debt Accumulation
5.7.1 PSC-LED-I complies with the
principles of Bank Group Policy on Non-concessional Debt. According to the Bank’s classification,
Cabo Verde is a middle-income country and therefore eligible for African Development Bank window
resources. The latest debt sustainability analysis conducted in 2016 concluded that the debt was
sustainable with a high risk of debt distress. Although external public debt seems high (77% of the total
public debt), it remains predominantly concessional and debt service indicators show that the country
will be in a comfortable position to retire this debt in the future.
6 IMPLEMENTATION, MONITORING AND EVALUATION
6.1 Programme Beneficiaries
6.1.1 PSC-LED-I will benefit the entire Cabo Verde population. The results from sound
management of public investments and a more developed private sector will improve the population’s
living conditions. Good public corporate governance will lead to the improvement of the quality of
public services provided to users. Efforts to facilitate access to financing, on the one hand, and the
provision of training aimed at supporting the establishment and development of MSEs, on the other,
will make the private sector more dynamic and responsive to increased opportunities from the massive
public investment projects. These positive effects will spur economic growth in the country for the good
of the people.
6.2 Impact on Gender Issues, the Poor and Vulnerable Groups
6.2.1 The implementation of the programme reforms will help to improve the living conditions
of the poor and vulnerable groups. The essence of local economic development is that it can better
respond to needs as well as comparative advantages of local communities. A better integration of
planning at the local level, enhanced means for sub-national entities to conduct and develop projects as
well as capacity to accompany local firms will provide responses to groups often left out of broader
economic planning. In essence, poverty will be addressed through a more specific deployment of means
across the territory to provide economic opportunities. For instance, the approval of the regional PEDS
and the support to local economic development plans will help the development of municipalities such
as São Salvador do Mundo or Santa Cruz whose income is three time less than Boa Vista, and poverty
rates above 50%.
6.2.2 PSC-LED-I is designed to specifically take into account the gender dimension as per key
recommendations made under the 2017 country gender profile (technical annex 10). Gender Category
for the project is GEN II according to the Bank’s Gender Marker System. Reforms under the skills focus
are expected to directly impact women through an increased number of women beneficiating from
Table 4: Financing gap
2018
(CVE
million)
2018
(%
GDP)
2019
(CVE
million)
2019
(%
GDP)
A - Total income 55,558 34.7% 56,543 29.1%
Of which grants
E.U (budget support grant) 988 0.6% 988 0.5%
Portugal (budget support grant) 55 0.0% 55 0.03%
Luxembourg (budget support grant) 110 0.1% 110 0.06%
Other grants 851 0.5% 1,478 0.8%
B - Total expenditures, including 61,255 38.2% 62,116 31.9%
Current expenditures 44,627 27.8% 46,035 23.7%
Investment expenditures 16,628 10.4% 16,081 8.3%
C - Overall deficit (A-B) -5,697 -3.6% -5,573 -2.9%
D – Financing (E+F+G+H) 5,696 3.6% 5,573 2.9%
E - Domestic financing -6,639 -4.1% -1,811 -0.9%
Assets -10,175 -6.3% -5,145 -2.7%
Liabilities 4,076 2.5% 3,334 1.7%
F - Foreign financing, of which: 8,678 5.8% 7,384 3.8%
African Development Bank (budget
support loan) 2,195 1.4% 2,205 1.1%
World Bank (budget support loan) 1,004 0.6% 1,000 0.5%
Project borrowing 6,020 3.8% 6,101 3.1%
G – On-lending (project loans) 6,964 4.3% 2,289 1.2%
H - Amortization -3,847 -2.4% -4,212 -2.2%
I - FINANCING GAP (C-D) 0 0.0% 0 0.0%
22
training programmes. What is more, PSC-LED focuses on professional training in areas/municipalities
not covered by training centres, thus extending opportunities to women in spatially remote areas. At
least 600 youth and adults, of which 40% women are expected to receive training. Women will also be
positively impacted by the development of a roadmap develop PPP in vocational training which will in
its content include a strong gender dimension. PSC-LED is intended to produce a favourable impact on
gender through the measures targeting improved factor efficiency and transparency such as land. Indeed,
beyond the importance of land rights for private sector investment, land issues are a key binding
constraint for women’s empowerment as highlighted in the 2017 gender profile. Similarly, measures
aimed at access to finance will specifically impact women considering that the lack of access to funds
inhibits growth and productivity of their business efforts. Lastly, in accompanying the harmonization
and update of SIM and its link to SIGOF, PSC-LED will ensure that the development of these systems
include specific markers to allow gender streamlining based on financial resources actually applied to
projects that integrate gender at different levels.
6.3 Environmental Impact and Climate Change
6.3.1 Since the programme is a general budget support operation to sustain reforms, and has no
impact on the environment and climate change, it is classified in Category III.
6.4 Implementation, Monitoring and Evaluation
6.4.1 Overall responsibility for PSC-LED’ implementation rests on the Ministry of Finance
and Planning (MFP). MFP satisfactorily managed and coordinated previous operations funded by the
Bank and other TFPs. It will rely on the National Directorate of Planning (DNP) for day-to-day
programme management and monitoring. However, in the interest of participatory implementation, all
stakeholders will be involved in programme implementation.
6.5. Financial Management and Disbursement
6.5.1 Country Fiduciary Risk Analysis (CFRA): The fiduciary framework assessment conducted
by the Bank in 2016 and updated in 2018 concluded that the fiduciary risk was moderate and that
the public finance management system fulfilled the Bank requirements for budget support
operations. Overall, Cabo Verde’s public finance management system, which was deemed strong and
reliable in the PEFA 2015 report. In accordance with the Paris Declaration and the Accra Forum on Aid
Effectiveness, the Bank will continue to support reforms aimed at strengthening public finance
management, procurement and audit systems. The Bank recommends the use public finance
management systems in their entirety for implementing programme-based support operations, such as
PSC-LED-I. Technical Annex 2 presents a detailed country risk analysis, with proposed measures for
mitigating the country fiduciary risk.
6.5.2 Mechanism for financial management, audit, procurement and disbursement: In
compliance with the fiduciary strategy defined for the 2014 -2018 CSP period, PSC-LED will be
entirely managed within the national public finance management system. Disbursement projections
for the 2018 and 2019 fiscal years should be clearly shown in the Budget Act. The general compliance
report prepared by the Court of Auditors on 2018 and 2019 accounts will serve as the programme’s
audit report. Each fiscal year, the compliance report should be forwarded to the Bank at the same time
that it is submitted to the National Assembly. In line with the programme-based approach, the loan will
be disbursed in a single tranche of EUR 20 million to finance the 2018 budget implementation. Once
the loan becomes effective and the conditions precedent to loan disbursement are fulfilled (see § 7.2.2),
the single tranche will be disbursed pursuant to the terms of the Loan Agreement. At the Borrower’s
request, the Bank will release funds into a special account denominated in Euro, opened with the Central
Bank of Cabo Verde. With regard to procurement, the loan will be in the form of general budget support.
Consequently, its implementation does not raise direct issues of procurement of goods and services.
The evaluation of the national procurement system, conducted by the Bank concluded that Cabo Verde’s
procurement regulations are largely compliant with the Bank’s procurement policy standards, except
for a few discrepancies that are being discussed by the Bank and the country’s authorities (technical
annex 2).
23
7 LEGAL INSTRUMENT AND AUTHORITY
7.1 Legal Instrument
The legal instrument that will be used for this Programme is the Loan Agreement between the Republic
of Cabo Verde (the Borrower) and the African Development Bank (the Bank).
7.2 Conditions Associated with Bank Intervention
7.2.1 Conditions precedent to effectiveness: Effectiveness of the Loan Agreement shall be subject
to fulfilment, by the Borrower, of the conditions set out in Section 12.01 of the General Conditions
Applicable to Bank Loan and Guarantee Agreements.
7.2.2 Conditions precedent to disbursement of resources for the first phase of PSC-LED-I
programme-based operation in 2015. In addition to the conditions precedent set out in 7.2.1 above,
disbursement of the loan resources totalling EUR 20 million shall be subject to the following condition:
Provide the Bank with the references of the Treasury bank account opened at the Bank of Cape Verde
in Praia in which the loan resources will be will transferred.
7.2.3 A simplified appraisal report will be prepared for PSC-LED Phase II in 2019 and presented to
the Boards for approval. This report will mainly indicate the relevant measures precedent taken by Cabo
Verdean authorities prior to Board submission. A separate loan agreement will be prepared for phase
II.
7.3 Compliance with Bank Group Policies
7.3.1. PSC-LED-I complies with Bank Group policies and guidelines on programme-based support
operations. It is consistent with the operational priorities of the Bank's Ten-Year Strategy for 2013-2022
and the CSP 2014-2018. For this operation, no exception has been requested in respect of Bank
Guidelines.
8 RISK MANAGEMENT
8.1. Table 5 below presents potential risks and mitigation measures:
Table 5: Risks and Mitigation Measures Risks Mitigation Measures
Macroeconomic risk: An unfavourable macroeconomic situation
and exogenous shocks could affect programme implementation.
Level: High
This type of risk is the subject of an on-going dialogue with the
authorities and is monitored regularly as part of activities of the
BSG which meets twice a year (May and November) and the
IMF under Article IV. The latest BSG and IMF analyses point
to the achievement of macroeconomic stability in the country in
the medium term. Moreover, there is need to step up
macroeconomic consolidation efforts, especially on debt
reduction and economic diversification.
Risk related to human capacity: The capacity of government
services, although above the regional average, is limited. This
could slow down or even halt the implementation of programme
reforms. Level: Average
The Government is committed, at the highest level (Presidency,
Prime Minister’s Office, Ministry of finance, and line
ministries), to a process of structural reforms as per the PEDS.
Moreover, delivery capacity on reforms is the subject of regular
monitoring by partners, particularly in the context of the BSG
which holds biannual joint review missions.
9 RECOMMENDATION
It is recommended that the Board approve a loan of EUR 20 million in the form of programme-based
general budget support for the Republic of Cabo Verde to finance the Private Sector Competitiveness
and Local Economic Development Programme (PSC-LED – I).
I
Annex 1: Government’s Letter of Economic Policy
II
III
IV
V
VI
Annex 2: PSC-LED Reform Matrix
Policy area Area of
intervention Measure Baseline 2018 2019
Promoting
competitiveness
and endogenous
private sector
development
Financial
infrastructure to
improve
transparency for
greater access to
credit
Partial credit risk guarantee fund in
place and operational Scheme not in place (2017)
Decree -law on the set-up of the
scheme approved by the CM
Entity in charge of running the scheme is
selected and operational (Trigger)
Operationalisation of the private credit
bureau system Credit bureau not operational
Set-up of a working commission
including the Central Bank,
CreditInfo, Chamber of commerce,
Ministry of Economy
Improved legal
framework and
systems for business
competitiveness and
investment
Effective set-up of the competitiveness
reforms coordination unit Unit not effectively set-up (2017)
Decree approving the unit structure
published in official bulletin (Prior
action)
Head of the Unit nominated and 50% of the
staff mentioned in the approved
organigramme recruited. (Trigger)
Revision of the code for commercial
companies (codigo das sociedades
commercias)
Previous code in place
New code with harmonized procedures for
business registrations, provisions for
protection of minority investors approved by
CM (Trigger)
Approval of secondary legislation for
Insolvency Secondary legislation not in place
Statutes, guidelines, and regulatory practice
for judicial insolvency administrators in place
(Trigger)
Approval of the strategy of transition
from informal to formal sector
Strategy developed but not officially
approved
The intersectorial committee on the
transition from the informal to the
formal sector is set-up (Prior
action)
The strategy is approved by the CM (Trigger)
Approval of the industrial policy and
related action plan
Industrial policy and related action
plan not approved The strategy is approved by the CM
Update of the Special Regime for Micro
and Small Enterprises (REMP) Regime existing but not applicable New draft REMP law approved by CM
Skills development
anchored in the
private sector needs
Develop a Roadmap to develop PPP in
vocational training
No action plan, lack of participation
of private sector to TVET system
The Roadmap has been developed and
adopted to put in place PPP in TVET
(Trigger)
Increase private sector participation to
TVET through the elaboration of
apprenticeship training program.
No apprenticeship training program
in place
TVET Law enforcement decree to
institutionalize the Apprenticeship training
program
Improved factor
efficiency in support
of MSME
development
Implementation of the SCADA
software at the national electricity
company (ELECTRA)
SCADA software not in place (2017) SCADA Software operational
Completion of land mapping and
digitization in Sal, Maio, Boa Vista, and
Sao Vicente (except Mindelo), and
launch of the process in Santiago (at
Land mapping incomplete
Sal, Maio, Boa Vista, and Sao Vicente (except
Mindelo), and launch of the process in
Santiago (2019)
VII
least one municipality)
Web publication of (i) land transfer
statistics on the “Porton di Nos Ilhas”
government portal and (ii) of services
standards for the documents required
for Cadastre
No land transfer statistics and no
service standards for cadaster
available online
Land transfer statistics and services
standards for the documents
required for Cadastre available
online
Policy area Area of
intervention Measure Baseline 2018 2019
Promoting local
economic
development
Improved local
government support
for enterprise
development and
youth employment
Implement the 14 contract programs
between municipalities and technical &
vocational institutions
14 contract programs signed in 2017
- No training for youth unemployed
undertaken
14 contract programmes implemented with
training activities undertaken for at least 600
youth and adults (of which 40% women)
(Trigger)
Interface between housing registry and
municipalities for the issuance of
property tax certificate (certidião
matricial)
Interface between housing registry
and municipalities not functional Interface up and running
Business plan competition organized in
training centers to support youth
entrepreneurship through the kit of
equipment.
No youth received the kit of insertion
in 2017
130 youth receive the kit of equipment to start
a business (30% of women)
Updated legislative
framework for local
economic
development and
decentralization
New law on the status of municipalities Law on the statutes of municipalities
in place
New law on the statutes of municipalities
submitted to parliament (Trigger)
New law on municipal financing
(including a % dedicated to support
youth employability and
entrepreneurship)
2005 law in place New on municipal financing law submitted to
parliament (Trigger)
Link between the municipality
information system (SIM) and SIGOF No link between systems
SIM system harmonised and SIGOF linkage
completed (end 2019)
Improved local
economic
development
planning
Local development plans developed by
Municipalities (which also include
employment objectives)
0 local development plans developed 9 development plans approved by the
respective municipal councils
Launch of island specific tourism
master plans No master plan available
Approval of master plan by the Central
Tourism Authority
Effective set-up of the Local Economic
Development Unit Unit not effectively set-up (2017)
New organigram published in
official bulletin (Prior action)
Unit director (or head) nominated, and
recruitment process (concourso publico) for at
least 50% of the staff defined in the
organigram launched.
Regionalisation of the PEDS (including
regional plateform for employment
coordination)
Regionalised version of the PEDS
not existing (2017)
Regionalised PEDS endorsed by
authorities (Prior action)
Adoption of the regionalized PEDS (Trigger)
and of local development plans articulated
with the regional PEDS.
VIII
Annexe 3: Outcomes of Previous Budget Support Operations in Cabo Verde
Public Finance Management and Private Sector Recovery Support Programme (PAGF-
RSP): 2011-2012
Improvement of Public Finance Management and Macroeconomic Stability
Bank support helped to: (i) reduce government arrears stock from 16% in 2009 to 0% in 2011 and
2012; (ii) reduce the timeframe for submission to the National Assembly of the General State Account
(CGE) and the Notice of Compliance issued by the Court of Auditors (CoA) from 24 months on
average before 2010 to 12 months in 2012; (iii) increase the number of services covered by the
General State Inspectorate (IGF) from 32 in 2010 to over 46 in 2012; (iv) reduce the average
procurement timeframe from eight months in 2010 to less than three months in 2012; and (v) increase
the cases of dispute handled by the Public Procurement Regulatory Agency (ARAP) according to the
new legislation in force from 50% in 2010 to 100% in 2012. The various reforms introduced are: (i)
availability of a medium-term strategy 2012-2015 for State debt management; (ii) availability of 2009
and 2010 reports on the State’s contingent commitments and liabilities; (iii) availability of the public
finance management system reform programme that emanated from PEMFAR recommendations; (iv)
effective appointment of the remaining members of the Board of the Public Procurement Regulatory
Agency (ARAP) and members of the Dispute Settlement Commission; and (v) availability of ARAP’s
audit report on public procurement contracts awarded in 2010.
Creation of an Enabling Environment for the Revival of the Private Sector
Bank support helped to: (i) improve Cabo Verde’s ranking in the Doing Business report on company
bankruptcy from 183rd out of 183 countries in 2010 to 178th out of 183 countries in 2012; (ii) increase
the number of SMEs registered in the Citizen’s House Network from 913 in 2010 to 1197 in 2012;
and (iii) improve Cabo Verde’s ranking in the Doing Business indicator on getting credit from 152nd
out of 183 countries in 2010 to 97th out of 183 countries in 2012. The various reforms introduced are:
(i) availability and adoption by the Council of Ministers of the new Investment Code; (ii) availability
and adoption by the Council of Ministers of a Tax Incentives Code, compliant with WTO rules; (iii)
introduction of new windows for the Citizen’s House; and (iv) setting up of two new incubators.
Public Corporate Governance and Investment Promotion Support Programme
Phases I and II (PAGEPPI I and II): 2013 - 2014
Improvement of Public Corporate Governance
Structural reforms in the area of corporate governance helped improve the performance of public
enterprises. The Cabo Verde Air Transport Company (TACV) is on track to post a profit this year
(2015). All major public enterprises have signed performance contracts with the State to guarantee
that they will be properly managed. The main achievements are: (i) adoption of statutory instruments
operationalizing the 2009 law on public enterprises, provided for under Section 52 (1) of that law (Lei
No. 47 /VII/2009); (ii) evaluation of the regulatory authorities, preparation and adoption by the
Government of an action plan to review their articles of association for the purpose of reforming these
regulatory bodies, as provided for by Law No. 14/VIII/2012; (iii) production by MF and availability
in 2014 of the annual report on the liabilities of public enterprises for 2013; and (iv) signing of three
additional performance contracts in 2014 between the State and other major public enterprises (ASA,
ENAPOR and EMPROFAC).
Investment Promotion
Credit to the private sector is increasing, despite relative stagnation. The main achievements include:
(i) adoption by the Council of Ministers of legislative decrees to operationalize the law relating to the
General Investment Code in order to facilitate the establishment of a one-stop shop for investors; (ii)
adoption of the decree to establish and operationalize the PPP Privatization and Promotion Unit; and
(iii) production in 2013 and 2014 of a report containing criteria for assessing priority investments and
prospective PPP projects.
Economic Growth Support Programme (PACE)
Phases I and II: 2015-2017
Improvement Of Public Investment Effectiveness
IX
Reforms supported by the PACE helped improve public enterprise management, reduce SOE related
fiscal risks, set up a system to better prioritise future investments, and better frame PPPs. Main
achievements include: (i) Operationalisation of the Investment Periodisation System (SNIP) to be
used in the 2018 and 2019 budgets, (ii) approval of the framework law on public enterprise
governance, (iii) preparation and publication of SOE contingent liabilities reports, (iv) creation of a
dedicated unit (UASE) to monitor State participation in enterprises and accompany the State’s
privatisation agenda (supported in parallel via a Bank-funded MIC grant), (v) elaboration of a PPP
policy and related manual, and (vi) the construction of a pipeline for privatisation.
Support for the Promotion of Private Sector Development
Reforms supported by the PACE led to achievements both on business environment and on
entrepreneurship. Main achievements include: (i) Operationalization of the on-line tax reporting
system for businesses (e-tax), (ii) adoption by the CM of the draft law on insolvency and recovery of
enterprises, (iii) adoption by the CM of the three decrees of application of the Law on the legal regime
of Micro and Small Enterprises, (iv) Creation and operationalization of five incubators (2 tourism, 1
ICT, 2 agro-business). Two tourism incubators were created in Sal and Boa Vista, one ICT incubator
in Praia, two agro-business incubators (one in Santiago and one São Antão). Another "Mix" incubator
was created in São Vicente; (v) adoption of the application decrees on the law related to microfinance
institutions.
X
Annex 4: NOTE ON RELATIONS WITH THE IMF
PRESS RELEASE: Executive Board Concludes 2018 Article IV Discussions with Cabo Verde
April 18, 2018
On March 26, 2018, the Executive Board of the International Monetary Fund (IMF) concluded the
2018 Article IV consultation with Cabo Verde.
The economic recovery is gaining momentum, reflecting a more favorable external environment
and the payoff of ongoing economic reforms. In 2017, the economy is estimated to have expanded
by 4 percent supported by the double digit-growth in tourist arrivals, the recovery in credit to the
private sector, and stronger consumer and business confidence. These factors are expected to boost
growth further to 4.3 percent in 2018. Over the medium term, real GDP growth is projected to
stabilize at around 4 percent. Average inflation turned positive (0.8 percent) in 2017, reflecting the
increase in energy prices. The current account deficit is estimated to have widened to 8.8 percent of
GDP as the higher tourism receipts were more than offset by the rapid increase of imports, partly
owing to higher oil prices, and a decline in remittances; and was mostly financed by FDI.
Cabo Verde achieved an impressive fiscal consolidation in recent years. In 2017, the budget deficit
is estimated to have narrowed to 3 percent of GDP from 3.1 percent in 2016, and public debt to
have declined to 126 percent of GDP from 129.5 percent, the first decline in a decade. The 2018
budget targets a deficit target of 3.1 percent of GDP.
Citing the absence of price pressures and adequate reserve levels, the Banco de Cabo Verde’s (BCV)
cut its policy rate by 200 basis points to 1.5 percent in June, 2017. The response of credit to the
economy to the monetary stimulus has been sluggish but it is now recovering, reaching 5.3 percent
annual growth in November, 2017. Financial stability indicators have improved but the level of non-
performing loans (NPLs) remains elevated.
Executive Board Assessment
Executive Directors agreed with the thrust of the staff appraisal. They welcomed Cabo Verde’s
ongoing economic recovery, reflecting a more favorable external environment and the payoff of
recent economic reforms. They agreed that the medium-term outlook is broadly stable, conditional
on a decisive implementation of the authorities’ reform agenda. They stressed that the current
favorable external conditions present an opportunity to accelerate reforms to address vulnerabilities
and make progress toward the goal of promoting higher and inclusive growth.
Directors commended the substantial fiscal consolidation of recent years. They encouraged the
authorities to sustain and deepen the adjustment efforts through a combination of revenue and
expenditure measures to reduce the high level of public debt. This will help lower the risk of external
debt distress, safeguard macroeconomic and financial stability, and support economic growth in the
medium term. Directors also called for accelerating the restructuring of loss-making state-owned
enterprises to eliminate their need for government support, and for strengthening fiscal institutions.
Directors agreed that the monetary policy stance of the Banco de Cabo Verde (BCV) has been
appropriate in the absence of pressures on inflation or reserves, and consistent with the objective of
protecting the currency peg. Nonetheless, they urged the BCV to remain vigilant as economic
conditions evolve. They welcomed the measures adopted to strengthen the monetary policy
transmission mechanism, and encouraged the BCV to step up efforts to enhance its liquidity
management capacity and reduce the high level of excess liquidity in the banking system.
XI
Directors welcomed the improvement in financial stability indicators. Nonetheless, they urged the
authorities to give priority to the resolution of the high level of legacy nonperforming loans.
Directors agreed that fostering financial intermediation is important to strengthen the role of the
private sector as the engine of growth. They recommended focusing reforms on strengthening
collateral repossession and improving the credit information system.
Director agreed that the loss of correspondent banking relationships represents a vulnerability, given
Cabo Verde’s reliance on migrant remittances and deposits. They urged the authorities to continue
to strengthen the AML/CFT framework in line with international standards and to cooperate
effectively with other jurisdictions on tax issues.
Directors welcomed the authorities’ Strategic Plan for Sustainable Development to improve the
business environment and build on the progress in improving governance and fighting corruption.
They underscored that steady implementation of structural reforms is critical to boost potential
output growth and reduce poverty. To increase productivity and address the high levels of youth
and female unemployment, priority should be given to improving the efficiency and flexibility of
the labor market, as well as the quality and relevance of education. Strengthening and better
targeting social protection programs would also be important.
It is expected that the next Article IV consultation with Cabo Verde will be held on the standard 12-
month cycle.
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