Document of The World Bank FOR OFFICIAL USE ONLY Report No: 17206CV MEMORANDUMOF THE PRESIDENTOF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A COUNTRY ASSISTANCESTRATEGY OF THE WORLD BANK GROUP FOR THE REPUBLIC OF CAPE VERDE December 1, 1997 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized
Transcript
Document of
The World Bank
FOR OFFICIAL USE ONLY
Report No: 17206CV
MEMORANDUM OF THE PRESIDENT OF
THE INTERNATIONAL DEVELOPMENT ASSOCIATION
TO THE EXECUTIVE DIRECTORS
ON A COUNTRY ASSISTANCE STRATEGY
OF THE WORLD BANK GROUP
FOR
THE REPUBLIC OF CAPE VERDE
December 1, 1997
This document has a restricted distribution and may be used by recipients only in theperformance of their official duties. Its contents may not otherwise be disclosed withoutWorld Bank authorization.
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CURRENCY EQUIVALENTS
Currency Unit = Cape Verde Escudo (CVE)US$1 92.425 CVE (as of Oct. 31, 1997)
WEIGHTS AND MEASURES
Metric system
ABBREVIATIONS AND ACRONYMS
AEF IFC's Africa Enterprise FundAfDB African Development BankAPDF IFC's Africa Project Development FacilityBET Basic Education and Training ProjectCAS Country Assistance StrategyCBPSP Capacity Building for Private Sector Promotion ProjectCPPR Country Portfolio Performance ReviewERSO Economic Reforms Support OperationESW Economic and Sector WorkEU European UnionFIAS IFC's Foreign Investment Advisory ServiceGDP Gross Domestic ProductIDA International Development AssociationIDF Institutional Development FundIFC International Finance CorporationIMF International Monetary FundMIGA Multilateral Investment Guarantee AgencyMIS Management Information SystemsMpD Movimento para DemocrdiciaNDP National Development PlanNLTPS National Long-Term Perspective StudyNPAP National Poverty Alleviation ProgramODA Official Development AssistancePER Public Expenditure ReviewPIP Public Investment ProgramPPGD Public and Publicly Guaranteed DebtPSRCB Public Sector Reform and Capacity Building ProjectSEF IFC's Extended Research FacilitySIP Sector Investment ProgramSQE State Owned EnterpriseSSA Sub-Saharan AfricaTA Technical AssistanceTIP Transport and Infrastructure ProjectUNFP United Nations Fund for PopulationVDP Voluntary Departure Program
Vice President Jean-Louis SarbibCountry Director Mahmood A. AyubSector Manager Emmnanuel AkpaTask Team Leader Gradimir RadisicLead Specialist Jose B. Sokol
FOR OFFICIAL USE ONLY
THE REPUBLIC OF CAPE VERDECOUNTRY ASSISTANCE STRATEGY
TABLE OF CONTENTS
Page No.
EXECUTIVE SUMMARY ........................................................ iI. INTRODUCTION ........................................................ 1II. RECENT ECONOMIC AND SOCIAL DEVELOPMENTS ............................... ......................... 3III. EXTERNAL ENVIRONMENT ....................................................... 5
IV. CAPE VERDE'S DEVELOPMENT AGENDA ........................................................ 7
A. KEY ELEMENTS OF THE GOVERNMENT'S STRATEGY ................................. .................................. 7B. ASSESSMENT OF THE DEVELOPMENT STRATEGY ................................................................... 8C. SOURCES OF GROWTH AND CHALLENGES AHEAD ......................... .......................................... 9
V. THE BANK GROUP'S COUNTRY ASSISTANCE STRATEGY ........................................................ 9
A. ASSESSMENT OF THE IMPLEMENTATION OF THE PREVIOus CAS ............................................................... 9B. PORTFOLIO PERFORMANCE AND MANAGEMENT .................................................................. 10C. PROPOSED STRATEGY AND ASSISTANCE PROGRAM .................................................................. 11D. LENDING SCENARIOS .................................................................. 14E. IFC AND MIGA .................................................................. 15F. COLLABORATION WITH THE IMF .................................................................. 16G. AID COORDINATION .................................................................. 16
H. RISKS TO THE PROPOSED STRATEGY .................................................................. 16
BOXES
Box 1 Cape Verde - A SnapshotBox 2 CAS Participatory ProcessBox 3 Donor Coordination
TABLES
Table 1 Key Economic Indicators, 1987-96Table 2 Social IndicatorsTable 3 Triggers for the Lending Program
ANNEXES
ANNEX A2 Cape Verde at a glanceANNEX B2 Selected Indicators of Bank Portfolio Performance and ManagementANNEX B3 Bank Group Program SummaryANNEX B4 Summary of Nonlending ServicesANNEX B5 Poverty and Social Development IndicatorsANNEX B6 Key Economic IndicatorsANNEX B7 Key Exposure IndicatorsANNEX B8 Status of Bank Group OperationsANNEX B9 CAS Program MatrixANNEX BIO CAS Summary of Development Priorities
This document has a restricted distribution and may be used by recipients only in theperformance of their official duties. Its contents may not otherwise be disclosed withoutWorld Bank authorization.
EXECUTIVE SUMMARY
i. Cape Verde has the makings of a success story. Since becoming independent in 1975, it hasemerged as one of the top performers of Sub-Saharan Africa (SSA) on several fronts. The smooth andpeaceful manner of Government changes, and the ability of the majority and opposition parties to workconstructively within an agreed upon political framework augers well for the political future of thecountry. In the face of seemingly insurmountable physical and infrastructural constraints and limitednatural resources, the country has nonetheless managed to achieve a growth rate of around 4.5 percentover the past decade. Thanks to the Government's strong commitment to human resource development,Cape Verde also has attained some of the best social indicators in SSA (see Table 2). Finally, thecountry's management of the Bank's portfolio of ongoing projects over the past four years has beenoutstanding.
ii. And yet it will be premature to declare victory. The economy is highly susceptible to externalshocks and is confronted with a difficult physical environment and underdeveloped infrastructure. It alsoremains highly dependent on remittances (over 20 percent of GDP) and donor flows (about 19 percent ofGDP). Moreover, the implementation of the Government's ambitious development agenda has led to anincreasing level of domestic borrowing to secure resources for fully domestically-financed projects and thelocal counterpart funds for externally-financed projects. Domestic debt increased from about 19 percentof GDP in 1992 to about 46 percent in 1996. Furthermore, there are preliminary indications that theservicing of the rapidly rising stock of domestic debt is currently constraining a needed increase inallocations to social sectors. This is why, despite its 1996 GNP per capita of US$1,090, the country is notcreditworthy for IBRD terms and remains eligible for IDA resources under the small island economyexception provided for in the IDAl 1 Agreement (for details on Cape Verde's creditworthiness, see para.25).
iii, The Government is cognizant of the challenges it faces. Economic reforms undertaken sincethe early 1990s have started to open up the economy and promote private sector development, in contrastto the inward-looking policies of the 1970s and 1980s. Fiscal reform has resulted in a more streamlinedincome tax system that has led to rising revenues. In the financial sector, interest rates have beenliberalized, and the mono-bank financial structure has been eliminated with the break-up of the formerBank of Cape Verde into a central bank and two commercial banks, and its supervisory and regulatoryfunctions have been strengthened. The legal and regulatory system governing private investment has beenstrengthened, several public enterprises have been restructured and privatized, and a process ofmodernization and decentralization of the public administration is underway. Addressing the domesticdebt issue and strengthening fiscal management have emerged as the key issues on the macroeconomicfront. Thus the next three years will be crucial for introducing financial management reforms and sharplyreducing the stock of domestic debt.
iv. The above reforms are building blocks for the Government's vision of where Cape Verdeought to be 25 years from today. That vision was articulated in the new National Development Plan,which was approved by Parliament in February 1997 and endorsed by the donor community at aRoundtable Meeting in Brussels in July 1997. The vision is built around rapid and sustained, export ledand private sector-based growth driven by tourism, offshore services (such as shipping and air transport,corporate and financial, transshipment and free-trade zones) and manufactured exports taking advantageof Cape Verde's geographical proxirnity to Europe and West Africa and of its potential for establishing
ii
itself into a connecting destination with the Americas. The country's goal is also to match the livingstandards of successful island economies such as Barbados, Canary Islands, Malta and The Bahamas.
v. The Bank Group's role in Cape Verde is to support efforts to translate this vision intoreality in the following ways:
. by supporting the Government's development agenda, through lending, non-lending andportfolio management, to achieve macroeconomic stability, encourage private sectordevelopment and emphasize the social development of the population, especially of womenand children. The base case lending proposal of about US$63 million for the period FY98-2000 includes an adjustment operation (accompanying this CAS), and introduces the use ofIDA supplements for selected successful ongoing operations, to reduce preparation time andcosts.
* by a more proactive involvement of IFC and MIGA in the areas of manufacturing for exports,the development of Cape Verde's tourism potential, privatization and advisory services.
* by exercising selectivity in the areas of our intervention, through even better coordination withdevelopment partners. Cape Verde is an example of excellent coordination among keydonors, and the challenge for the Bank will be to lead the effort in some areas (macroeconomicframework, jointly with the IMF; private sector development; improvement of public sectormanagement; and selected aspects of social development), while following the lead of otherdevelopment partners in other areas (for example the European Union, IFAD and FAO in theareas of rural development and nutrition).
vi. There are risks involved in the above strategy. Apart from exogenous factors such as adverseclimatic outcomes and shortfalls in donor assistance to buttress the Government's program, the key risk isinadequate or delayed fiscal adjustment and implementation of financial management reforms. Inadequatereform implementation will trigger the low case lending scenario. Given the strong commitment andownership of the reform program by the authorities, and the fact that the next elections are not scheduleduntil the year 2000, the probability of this scenario is low. On the other hand, sustained and timelyachievements in macroeconomic stability and performance beyond the targets under the structural reformprogram will activate the high case lending scenario. Details on the triggers and levels under variouslending scenarios are provided in paras. 59-62.
vii; The next three years will be a crucial period of transition for Cape Verde from fiscaldifficulties to fiscal sustainability. The base case scenario of this CAS assumes success through thecreation of government savings on a sustainable basis and the unshackling of private sector initiative.Without success in these areas, Cape Verde's vision will remain an unfulfilled objective.
viii. The Board may wish to discuss the following issues:
* are the overall thrust, priorities and instruments proposed by the CAS appropriate?
* do Cape Verde's reform efforts and economic prospects justify a proposed base case lendinglevel of about US$63 million over the FY98-2000 period?
* does the CAS adequately reflect the challenges and risks to implementing the proposedstrategy?
MEMORANDUM OF THE PRESIDENT OF THEINTERNATIONAL DEVELOPMENT ASSOCIATION
TO THE EXECUTIVE DIRECTORS ON A COUNTRY ASSISTANCE STRATEGYOF THE WORLD BANK GROUP FOR THE REPUBLIC OF CAPE VERDE
I. INTRODUCTION
1. Cape Verde has developed a good track record in human resources development, aid managementand IDA portfolio performance. Since independence in 1975, all Cape Verdean governments have madestrides toward reducing poverty by allocating significant public resources to the social sectors. As aresult, Cape Verde has achieved better social indicators than most countries in Sub-Saharan Africa (SSA).Good management of aid resources, food aid in particular, and achievements in human resourcedevelopment have ensured increased donor support since 1992. Cape Verde has also demonstrated itsability to effectively use IDA resources and attain its development and implementation objectives. As aresult, the country has ranked as one of top performers in SSA for the past four years, with an excellentoverall track record on policy reforms in all sectors. Cape Verde has also developed a good track recordin designing and implementing home-grown reform policies, for which it has not requested donorassistance in the past.
2. Background. Cape Verde is an archipelagocomprised of ten arid islands in the Atlantic Ocean, some 1i 1: Ca V .. S....:o445 kilometers off the coast of Senegal and the homeland of .veroi O,f tenisland of fvaridCesaria Evora, a world renowned singer of morna, a soft tr w t n a 4,9 km.The Seiai climnate with poogdprososong that is to Cape Verde what the blues are to the USA. . a marked shrtge of fte'h waterIt is the sound of her steady and beautiful music that gives a p tlies, d a hih pti rowth ofsoft touch to what is a genuinely harsh living reality. The .- 2.7.,ercent'com'ine to'prodc n,t'ler-bl
pressure .o6n th-e country's fragie aiculturalpoor natural resource base, fragile natural environment, base.scarce supply of fresh water, inadequate rainfall and .t Capi: US1,090 (1996) :prolonged periods of drought have, for centuries, led to high . aoof 0,0 abitts 1996) rates of emigration, driven even higher in times of wh:ich 54. per.cet'is urb. Emigrao"n' is thedevastating droughts. Emigration has been traditionally a pressue relse va r key means to escape poverty. As a result, twice as many . econoy,awella akey sofe fo
poverty...Cape Verdeans live abroad than on its islands. - eco is hl d e o doo. cn~r pend hFly.ent.n- nor.-
3. Faced with limited natural resources and a non- rem:ittnces from abroad (21.5 o - iviable economic base following independence, Cape .1996). Se.rie '-accou for iabot 71 peren of:
GDP, mainIy pad. arotsvces. FoodVerde's then socialist government pursued the role of a met about.70 cen si food
entrepreneur in the economy. However, its strategy of r.i-.tallocating official development assistance (ODA) to public ^ A goo -''', record i h . esurcenterprises in order to supply the limited domestic market d.e.velopment, with .n.ral .. r schoolreached its limits by the late 1980s. By 1990-91, given the lt, 7e eeconomy's low operating efficiency, expansionary fiscal .. haepolicies and narrow export base, growth plummeted, dermiatim' by the oern and donors.unemployment remained high, and intemal and externalimbalances emerged.
2 Cape Verde CAS
4. Cape Verde is currently well poised to achieve sustained growth and poverty alleviation as a resultof staying the course of home-grown policy reforms, introduced since the early 1990s. Since late 1991,the new Government of Cape Verde, MpD (Movimento para Democraicia) -- reelected in December 1995-- has been steadily reducing its role in the economy while promoting that of the private sector. Newlegislation governing foreign investment, liberalization of domestic and foreign trade and prices,privatization of public enterprises, reform of the financial system and development of the economicinfrastructure has already given rise to new investment, primarily foreign, in light manufacturing forexports (garments and shoes), comnunications, tourism, international maritime transport, and fisheries.The changing nature of the economy stands in stark contrast to that of the 1970s and 1980s.
5. Poverty. About 30 percent of the population lives in poverty, with 14 percent considered to beliving in extreme poverty. Poverty is a structural phenomenon, aggravated by a lack of job opportunities,limited natural resources and arable land, inadequate rainfall and prolonged periods of drought. About 68percent of the poor live in rural areas. In the wake of increasing uncertainty over rainfall and decliningagricultural productivity, urban poverty has been on the rise, aggravated by a 4 percent urban populationgrowth rate'. Further, urban poverty is adversely affected by an inadequate supply of fresh water, lack ofsanitation services and unsatisfactory solid waste disposal systems. The unemployment rate is high, about26 percent of the active population, and is 70 percent for those seeking their first job. Unemployment isalso highly correlated with poverty: 44 percent of households with unemployed heads are poor. Theincidence of poverty is highest among households with illiterate heads. Moreover, women dominate allcategories of the poor; the unemployed, the disadvantaged and those employed in public labor-intensivework programs. Since independence, all Cape Verdean governments have made strides toward reducingpoverty by: (i) developing the country's human resources; (ii) undertaking labor intensive welfareprograms; and (iii) allocating significant budgetary resources to social services. This has producedpositive results. Compared to other countries in SSA (see Table 2), Cape Verde has achieved better socialindicators: (i) life expectancy of 65 years; (ii) universal primary school enrollment; (iii) adult literacy rateof 72 percent; (iv) fertility rate of 4.3 percent; and (v) infant mortality of 46 per thousand. In addition tosocial services, private remittances sent to 60-70 percent of Cape Verdean families have also contributedto poverty alleviation.
6. Role of Women. Women constitute about 55 percent of the population due to traditionalemigration practices. As a result, about 41 percent of households are female-headed. About 77 percent offamilies benefiting from the welfare program are headed by women. While recent primary schoolenrollment rates are fairly equal by gender, the illiteracy rate is higher for women than for men. Womenalso occupy more lower-skilled, lower-paying jobs than men, and their unemployment rates are alsohigher. Rural women are important users of natural resources and resource constraints have strongadverse effects on their daily lives, as most have to walk long distances to get water or gather firewood.About 36 percent of farms are run by women, but most are not profitable given that 41 percent of thefarms are dry and only 23 percent are irrigated.
7. Children. A recent cause of concern has been the growing number of minors in especiallydifficult circumstances, including abandoned children, working minors involved in prostitution and drugs,and pregnant teenagers. This phenomenon has direct poverty links, with such minors being likely tooriginate from large families headed by single unemployed mothers.
Source: Poverty in Cape Verde: A Summary Assessment and a Strategy for its Alleviation; World Bank, 1994.
Cape Verde CAS 3
8. The Environment. Scarcity of fresh water is attributed to low average precipitation, which isonly 227 mm annually on average. About 67 percent of the very precious rainfall evaporates, with 20percent run-off as surface water. Only 13 percent of rainfall remains to replenish underground aquifers.Since independence, the Govemment has been implementing reforestation and soil protection programswith great success. Reforested areas, particularly on the island of Santiago, are used as demonstrationsites by the donor community to inspire similar efforts in other Sahelian countries. Approximately 20million trees have been planted under "food-for-work" welfare programs on 63,000 hectares. Since 1992,a national water and conservation policy has been in place to prevent soil erosion, reduce water run-off andincrease water reserves. However, increasingly rare arable land, of which 67 percent is hilly, is intensivelycultivated and is leading to land degradation and soil infertility.
II. RECENT ECONOMIC AND SOCIAL DEVELOPMENTS
9. Political Developments. Cape Verde is a practicing democracy. Having emerged out of a oneparty political system, the country held its first peaceful and democratic elections in 1991. Politicalreforms undertaken since 1991 include: (i) the approval of a new Constitution in 1992, which guaranteespolitical pluralism, free elections and the smooth transfer of power, market-oriented economy, localgovernments, and human and citizen's rights; (ii) disbanding of the political police; and (iii) effectivedepolitization of the armed forces. The second parliamentary and presidential elections were carried out inDecember 1995 and February 1996. The incumbent MpD Government won parliamentary elections by alandslide. A functioning democracy, improvements in the judiciary and active media have allowed forpolicy reforms and the rule of law. Although this environment has allowed for a significantly increasedlevel of transparency and accountability in building a national consensus and greater openness in thedevelopment agenda, the process has required more time for decision making and has also increasedspending pressures.
10. Macroeconomic Developments. Table 1. Key Ebi iiorsd987-96Macroeconoric performance has improved .197- 1993 19.94 9 i 1599|since 1992 in response to policy reforms Real Gr-wth Rates.:
GCDP. At market rices 4.4. :4.2 .. 3. 47 4.3and renewed inflows of foreign aid Gces Pr C.a .pGDP Pet Capi2.1 .61.1 2.0 ' 1.6
compared to those in 1990-91, when Export GNFS .:6 11.5 2 :.7 18.4 25.economic growth slowed, inflation surged, Imports G:NFS_ . 9 .0 5.6 1i .6 -.1aid flows dropped and indecision on policy % of GDP:reforms prevailed. Growth rebounded to Gross ometi .vi o 9. -4 -: - 4 -14.5 -rosNational Savi'ngs 31.6 2732 .0 20.3 25.o6about 4 percent per year on average since 'GrossDomestic Inveset. mn 38.1: .- 35.5- 41.S 34.8 33.51992, compared to about 1 percent of GDP Resual Fiscal Gap c- -.3.6 -5.3 -.10.7: .6.8 4.7.
LEXPOrt GNFS ~~~~~:16.5 1. 1.519.8 27during 1990-91, as a result of sharp .GS . .16 . 9.1 64 increases in public investment, Curent Acount Balance, d -. : --159 -19.5 . 4-277 -20improvements in the operation of xel DOD s %of GDP 48.9 45..1...9 54.551:3.
restructured and privatized public - 4 180. : 229.1Extera DOD 'in UsS millions 13311:::4.1::.l 4291enterprises, and a slowly emerging private Excterna Dbt. Service Ratioe: 8.8 4.6 4.4 3.2A 9.
sector. Inflation declined as a result of CPI (a l avg O change) 6.2 .8 :3.5 4 6trade and price liberalization. However, a. Period aveagemfiscal performance was mixed, and while bJEstiat.revenues continued to rise, overall public c ossionalass and i proceed.expenditures reached unattainable levels. % of exports of GSt factorreeipts And worker -rmittance:
4 Cape Verde CAS
11. Since 1993, the Government has been carrying-out an ambitious development agenda whichincluded: (i) rehabilitation and construction of economic and social infrastructure; (ii) a massive publicworks program to mitigate high unemployment; and (iii) fully financed "food-for-work" programs whenfood aid has been in short supply. Implementation of this agenda led to an increasing level of domesticborrowing in order to secure resources for fully domestically-financed projects and the local counterpartfunds for externally-financed projects. No government savings were generated.
12. This, in turn, led to an unsustainable level of public expenditure that reached alarming magnitudes(the residual fiscal gap after concessional financing and privatization proceeds reached about 11 percentand 7 percent of GDP in 1994 and 1995, respectively), primarily financed through recourse to domesticborrowing. The increasing reliance on domestic financing led to a rapid increase in Cape Verde'sdomestic debt from about 19 percent of GDP in 1992 to about 46 percent of GDP in 1996. As of June1997, the stock of domestic debt stood at about US$180 million. Moreover, the need to service therapidly rising stock of domestic debt is currently constraining a rise in allocations to social sectors.
13. Following the implementation of LMF recommendations in the context of the 1996 Article IVconsultations, revenue collection continued to improve and overall expenditure growth slowed down.However, fiscal discipline was not restored, thereby leaving the macroeconomic situation fragile. Inflationfell to about 6 percent on an annual average basis. As a result of a restrictive monetary policy stance,money growth was contained at about 10 percent. However, growth in credit to the private sector wasconstrained by the Government's continued borrowing from domestic sources. Exports of goods and non-factor services increased by about 25 percent, sustaining the robust growth exhibited since 1994, albeitfrom a small base. With a substantial decline in imports, the trade balance improved.
14. Structural Reforms to Date. Public sector reforms aimed at opening-up the economy andpromoting the role of the private sector have spear-headed the Government's home-grown economicreform program. In contrast with the inward-looking policies of the 1970s and 1980s, the thrust of theGovernment's reform program has been in the following areas: (i) import and price liberalization; (ii)elimination of foreign exchange controls; (iii) tax policy and tax administration reforms (current revenuesincreased to about 25 percent of GDP in 1995 and 26 percent in 1996 compared to about 16.5 percent ofGDP in 1991); (iv) restructuring and privatization of public enterprises; (v) financial sector reform; (vi)strearmlining of the legal and regulatory system governing private investment, particularly foreign; (vii)modernization and decentralization of the public administration; (viii) development of economic and socialinfrastructure in support of private sector development and poverty alleviation; (ix) reform of theeducation sector aimed at improving quality and increasing mandatory basic education from 4 to 6 years;and (x) expansion of professional and vocational training to improve the quality of the labor force.
15. Private Sector Development. The economic reform program is yielding positive results. Since1994, direct private investment has totaled about US$100 million (including privatization), particularly inthe areas of light manufacturing for exports, fisheries, tourism, communications and maritime transport.Although the economy remains highly dependent on sizable external savings in the form of officialdevelopment assistance and private remittances, an export base has begun to emerge: non-traditionalexports alone rose sharply from only US$5 rnillion in 1994 to US$12.6 million in 1996 while tourismarrivals increased from 30,000 to about 37,000 during the same period.
Cape Verde CAS 5
16. Social Development. Cape Verde has Table 2. Social Indicators (1995)achieved some of the best social indicators in SSA . : : c ap"SSAl(see Table 2). The Government's strong Veade:commitment to human resource development ha... M t a bis) 46 92been reflected in continuing high allocations of Under-5 Mortity (per '000 births) 60 157public resources to social sectors and their L br ) 65share in the budget since 1988. (8 &f oer ao rpp) 66 54increasing sh re in the budget since 1988. tA ssa.o.S e Water (% of populaton) ' ' 52 47
Ruml~ :-: 34- -17. Following a sharp improvement in the a 34
Educaitioin~ 1970s and 1980s, some health and nutrtion Literacy er % opopuation 15+) 7 57indicators have, however, deteriorated in the 1990s. Fe..le 64. 64 46-
Gross Primary Enroli lment(%o age gru) 131, 72The infant mortality rate increased from about 44 to Female 130. 65about 46 per thousand births, and that for infants GrosrsSeconay Enrollment(% ofage group) 26 18under 5 from 52 in 1993 to 60 in 1995, attributed to Female 26 14stomach parasite infections and the 1994-96 cholera epidemic. These diseases are closely related tomalnutrition, and inadequate access and quality of water supply, basic sanitation, and housing, particularlyin rural areas. Although the calorie intake is double the level prevalent in the 1960s, infant nutritionremains inadequate in terms of minerals and vitamins, with 20 percent of the children under 5 chronicallymalnourished in rural areas in 1994. The general mortality rate has also deteriorated in the 1990s, peakingat 9.1 per 1,000 in 1995, compared to 8 per 1,000 in 1992. This has been linked, to a large extent, to a1994-96 cholera epidemic, an increase in the incidence of typhoid and hepatitis, and a rise in the incidenceof tuberculosis (14 per 10,000 in 1995, with only 35 percent of patients being treated on a regular basis).The Government, cognizant of these problems, allocated about 4.2 percent of GDP of public resources tohealth expenditures in 1995, compared to 3 percent of GDP in 1992.
18. Unfinished Reform Agenda. Cape Verde is at a crossroads. While the countiy is beginning toshow some successes in attracting foreign investment, the macroeconomic situation remains fragile.Restoring the viability and stability of the macroeconomic framework is a critical prerequisite forsustaining export-led, broad-based growth and private sector confidence, as well as alleviating poverty.The Government has assigned the highest priority to the consolidation and broadening of the ongoingreforms. The emphasis is on adjusting public expenditures to a sustainable level by addressing the causesof excessive spending. In parallel, it intends to accelerate the second phase of its privatization program,complete the liberalization of the economy while promoting more actively private investment in export-ledactivities, including tourism. Cape Verde also intends to proceed with the pending legal and other localgovernment decentralization reforms, and develop capacity in introducing better financial systems, with aparticular focus on the implementation of a multi-year rolling Public Investment Program (PIP) and viablefinancing plan in line with a sound macroeconomic framework.
III. EXTERNAL ENVIRONMENT
19. This small and relatively open economy is particularly susceptible to fluctuations in the extemalenvironment. Of those, the most significant are: (i) climatic constraints; (ii) extemal sector constraints;(iii) high dependence on ODA and private transfers.
20. Climatic Constraints. Cape Verde suffers from severe and extended droughts, during whichlittle or no rain falls for years at a time. This produces an adverse impact on agricultural production, foodsecurity, unemployment and poverty. The two most recent droughts (1994 and 1996) put further heavypressure on existing resources by intensifying cultivation of marginal rainfed and remote lands. Without
6 Cape Verde CAS
drought, arable land is already scarce. The most severe impact has been on unemployment, with negativeresource implications for expenditures needed to finance jobs for the adversely affected rural population.
21. Food security is directly correlated to agricultural production. Historically, food security has beena key issue for survival in Cape Verde. As a consequence of the structural production deficiency, thedomestic supply of basic food-stuffs normally only meets about 10-15 percent of total nationalrequirements. Frequent droughts and related famine have left devastating traces on the population andhave naturally prompted emigration. Following the 1994 drought, domestic cereal production barely met8 percent of national requirements.
22. About 70 percent of total food requirements are financed by food aid. This aid is vital not only forbalance of payments purposes, but also counterpart funds from the sale of foodstuffs provide support tovulnerable groups and contribute to finance the budget. In response to recent droughts, the EU and itsmember countries have taken the lead in ensuring multi-year food aid, to be provided predominantly asbalance of payments and budget support from 1998. The USA has also renewed its food aid programuntil 1999, conditioning the use of proceeds on private sector development.
23. External Sector Constraints. Cape Verde's balance of payments is characterized by structuralimbalances on trade and by sizable private and official transfers. Although Cape Verde has thus farbenefited from moderate international inflation, the high import content of its expenditures and narrowexport base render the economy highly vulnerable to external price shocks. The promotion of exports andrelated private investment has been the main strategy in expanding the country's narrow export earningbase. Progress made so far contributed to increase overall export earnings to about 24 percent of GDP in1996, compared to about 15 percent in 1993.
24. High Dependence on ODA and Private Transfers. Cape Verde is highly dependent on ODAinflows and private transfers. The efficient utilization of inflows of grants and private transfers, togetherwith the implementation of the Government's home-grown economic refonns programs, have beeninstrumental in maintaining stability of the Cape Verde escudo. Between 60 percent and 70 percent ofCape Verdean families receive remittances from family members abroad. These transfers have increasedfrom 16.6 percent of GDP in 1991 to 21.5 percent of GDP in 1996. Achievements in social indicators,poverty alleviation, and reforestation and water preservation efforts have been largely facilitated bybilateral and multilateral aid support. Although Cape Verde has been successful thus far in mobilizingand utilizing well higher aid inflows in a changing aid environment, continued good performance in thesocial sectors, policy reforms and improvements in macroeconomic management will be prerequisites forsustaining aid inflows. At the July 1997 Roundtable consultation, the donor community providedindications of continued aid support predicated on further government actions in these areas.
25. Creditworthiness. Although Cape Verde's per capita income is now above the operational cut-off for IDA eligibility, it is not considered creditworthy for IBRD terms. Cape Verde will, therefore,remain eligible to use IDA resources under the small island economy exception provided for in the IDA 1IAgreement. The Bank's assessment of the country's creditworthiness reflects, inter alia, its weak externalposition and vulnerability to external shocks, its dependence on workers' remittances and donor flows, andits large savings-investment gap.
26. External Debt Management. The stock of external public and publicly-guaranteed debt andshort-term increased from US$142 million at the end of 1992 to US$229 million at the end of 1996. CapeVerde's external debt is projected to increase to about US$351 nillion by the year 2000, all onconcessional terms.
Cape Verde CAS 7
IV. CAPE VERDE'S DEVELOPMENT AGENDA
A. Key Elements of the Government's Strategy
27. The Government views its economic reform efforts as critical building blocks to achieving itsvision of where Cape Verde should be 25 years from today. That vision is built around a rapid andsustained export-led, and private sector-based growth that increasingly integrates the country into theworld economy. Cape Verde's goal is to match the standard of living and GNP per capita of successfulisland economies such as Barbados, Canary Islands, Malta and The Bahamas. A key ingredient in thisvision is the attainment of full literacy of the Cape Verdean population, and of life expectancy, health andeducation indicators similar to those of developed countries. Such a vision is based on the development ofa small but robust economy driven by tourism, offshore services (e.g., shipping and air transport,corporate and financial, transshipment and free-trade zones, etc.) and manufactured exports takingadvantage of Cape Verde's geographical location, particularly its relative proximity to Europe and WestAfrica and its potential for establishing itself into a connecting destination with the Western Hemisphere.
28. The country's development agenda is outlined in the National Development Plan (NDP) for 1997-2000. Preparation of the NDP involved consultations at the municipal level to link national developmentobjectives and strategies with regional ones. The Main Options document of the NDP was approved bythe Parliament in March 1997, and formed the basis for Bank/Government consultations on the CASduring that month.
29. The NDP introduces the planning by programming approach in Cape Verde. It successivelyoutlines in each program and sub-program: objectives, targets, policies, institutional arrangements imcharge of implementation and the estimated cost of investment programs. Performance indicators set forsub-programs include three priorities: (i) sustained, buoyant economic growth and the maintenance ofmacroeconomic stability; (ii) consolidation of policy reforms in support of private sector development; and(iii) human resource development and poverty alleviation.
30. Restoring Macroeconomic Stability. Macroeconomic stability and sound public resourcemanagement are key elements of the government strategy for sustaining growth. Given the currentlyfragile macroeconomic environment, the Government is cognizant that it urgently needs to restore fiscaldiscipline with a view to sustaining ongoing efforts in promoting private sector export-led growth,boosting investor confidence and alleviating poverty. Macroeconomic objectives aim at maintaining anaverage annual real GDP growth rate of about 5 percent, further reducing inflation below 4 percent,elimiiiating the domestically financed budget deficit and restoring the level of external reserves to at least 5months of import coverage. To fend off inflationary pressures and preserve the value of the Cape Verdeescudo, the Government intends to closely coordinate fiscal, monetary and exchange rate policies.
31. The thrust of the Government's public resource management policy for the next three years will beto substantially improve fiscal performance. Hence, the focus will be on reducing the currentlyunsustainable level of public expenditure, e.g., reducing current expenditure and eliminating from the PIPall projects financed solely from domestic resources, and implementing budget and financial managementreforms to eliminate sources of excessive public expenditure. Given its recent strong revenueperformance, the Government is committed to further improving tax administration so as to remain closeto its current level of revenue collection. With improvements in public expenditure managementbeginning in 1998, the budget deficit after external financing is projected to become zero, thus eliminatingrecourse to domestic borrowing.
8 Cape Verde CAS
32. Private Sector Development. Although not yet complete, the macroeconomic reform programhas thus far yielded positive results. Hence, the Government has given a high priority to broadening therole of the private sector in the NDP. Further actions to attain a conducive environment for private sectordevelopment call for a second phase of the privatization program to further reduce the role of theGovernment in the productive sectors. To accelerate the pace of privatization, the Government intends to:complete the remaining divestitures, including the privatization of the financial sector; and strengthen itsregulatory capacity in the areas of civil aviation, maritime transport, electricity and water,telecommunications, pharnaceuticals, and quality control and product standards. It also intends to furtherliberalize the economy in order to ensure the adequate functioning of markets, including legal reforms,further trade reforms and completing the liberalization of the price system.
33. Building on positive results from the development of basic economic and social infrastructure, theGovernment's objective is to complete the upgrade of transport infrastructure and accelerate thedevelopment of reliable and affordable energy and water services. The Government also plans to allocatehigher aid resources in support of professional and vocational training with a view to further increasing themarketability and productivity of the labor force.
34. Human Resource Development and Poverty Alleviation. The thrust of its poverty alleviationstrategy is reflected in the Government's commitment to sustain growth, promote private sectordevelopment, reduce unemployment, and improve macroeconomic management. Furthermore, to improvethe quality of life of Cape Verde's population, its development objectives are focused on further humanresources development and preservation of high budgetary allocations to this sector, in addition to basicsocial infrastructure, provision of reliable and affordable energy, water and sanitation systems, socialhousing, and an intensified fight against desertification. These objectives are formulated in the NationalPoverty Alleviation Program (NPAP) -- an integral part of the broader NDP -- which focuses on keyissues concerning the bottom 30 percent of the poor, particularly the extremely poor. The main objectivesof the NPAP are to: (i) create economic opportunities for the poor; (ii) improve their living conditions; (iii)mobilize domestic and external resources to reduce poverty; and (iv) strengthen capacity at all levels of thesociety in support of poverty alleviation.
B. Assessment of the Development Strategy
35. The NDP emphasizes the option of self-sustained development based on dynamic integration ofCape Verde into the regional and world economies. A country with limited natural resources but with agood geo-strategic location and non-negligible advances in human resource development merits thisvision, which has yielded results for other small island economies, such as Malta, Mauritius and someEastern Caribbean islands. However, we have two reservations on the development strategy outlined inthe NDP: (i) the level of public investment. The NDP calls for maintaining the historically high level ofpublic investment. This objective has to be reconciled with that of attaining macroeconomic stability,particularly required for securing adequate extemal concessional financing and for achieving governmentsavings to finance the necessary counterpart funds for priority projects. In this regard, difficult choiceshave to be made regarding reduced public expenditure levels on fully financed development priorities.Such choices imply an initially lower growth rate than that envisaged by the Government; and (ii) thepublic/private partnership issue. Although the NDP unequivocally calls for a reduced role of the State inthe economy, this is not the case with its proposed role in the development of the fisheries sub-sector. TheBank has strongly suggested that the Government revisit its role in this sector, promote a genuineprivate/public partnership, and accordingly reduce the high investment levels proposed. Current plansenvisage investment in the development of both infrastructure and equipment, areas which can best be
Cape Verde CAS 9
addressed by the private sector. These issues will be addressed through envisaged improvements inoperating a multi-year PIP as a planning and budgeting instrument.
C. Sources of Growth and Challenges Ahead
36. Over the medium-term, the Government projects economic growth to average about 5.0 percentper annum in real terms. In the short-run, public investment related activities will continue to be the mainsource of growth. Over time, a better established and dynamic private sector-led, export-orientedeconomy is expected to become the engine of growth and job creation. Specifically, economic growth willoriginate from investment in port, airport and road infrastructure, modernization of telecommunications,and development of electricity, water and sanitation supply and distribution systems; private investment infisheries, export processing activities, tourism, telecommunications, and the financial sector, activities inprivatized enterprises and new investment in international air and maritime transport services; andcontinued growth of domestic trade.
37. The challenge ahead is to improve public financial management and to support private sectordevelopment. To improve public resource management and contribute to the generation of governmentsavings, it is crucial to: (i) improve public financial management, with a particular focus on theestablishment and implementation of a multi-year PIP and sound financing plan in line with a stable andviable macroeconomic framework; and (ii) proceed with the pending legal reforms for local governmentfinancing to reflect the transfer of responsibilities from the central government to municipalities, and civilservice reforms. To meet the challenge of integration into the world and regional economies, Cape Verdewill need to continue developing modern infrastructure, improve labor force skills, and provide investorswith attractive incentives and a streamlined legal and regulatory environment in which to conductbusiness.
V. THE BANK GROUP'S COUNTRY ASSISTANCE STRATEGY
A. Assessment of the Implementation of the Previous CAS
38. The last CAS for Cape Verde was presented to the Board in February 1993, following thecountry's first democratic elections held in March 1991. The thrust of the CAS was to support the long-term objective of opening up the economy and creating a conducive environment for private sectordevelopment by carrying out policy reforms, local capacity building, human resources development andimprovements in social and economic infrastructure. In support of the 1993 CAS objectives, the followingIDA operations were prepared: (i) Technical Assistance for Privatization (Privatization TA in FY92); (ii)Transport and Infrastructure Project (TIP in FY93); (iii) Public Sector Reform and Capacity BuildingProject (PSRCB in FY94); (iv) Basic Education and Training Project (BET in FY95) and (v) CapacityBuilding for Private Sector Promotion (CBPSP in FY96).
39. What worked? On the whole, the results in achieving the stated objectives of the previous CASwere satisfactory. Strong government ownership in project preparation, implementation and managementwere key to the satisfactory results. A close and constructive relationship between the Government andthe Bank has also been instrumental in good performance on IDA projects. Both sides view therelationship since late 1991 as a genuine partnership based on a high level of commitment and mutualtrust. Although IDA is not the largest development partner in Cape Verde (it contributes about 8 percent
10 Cape Verde CAS
of total ODA disbursements), its importance is viewed in terms of being a key development partner insupport of policy reforms, capacity building, development of sector policies and donor coordination.
40. What could have worked better? The main failings in the implementation of the 1993 CASwere: (i) the absence of a viable medium-term macroeconomic framework; (ii) lack of an operationalmulti-year PIP and viable financing plan; (iii) lack of government savings to finance investment; and (iv)delays in carrying out a public expenditure review (PER). The Government did not seek adjustmentlending in support of its home-grown policy reforms given its strong ownership and confidence in carryingout its reform program. Bank and EMF support was perceived, at the time, as a political liability for thenewly elected government. The Government, however, did not anticipate the adverse impact of assumingdebt liabilities of restructured and privatized public enterprises, along with an unrealistic level ofdevelopment expenditures given the lack of savings. The Bank was also optimistic that the Governmentwould be able to exercise caution with development.
41. Key lessons leamed from the previous CAS, which are incorporated in our proposed program, are:
. Support of policy reforms solely through investment operations has proven to besatisfactory for capacity building, but has strained the balance of payments and the budget;
. New operations should be prepared based on the positive experience under investmentoperations by developing sector investment approach to ensure a framework for better useof public resources and aid coordination;
. Simple and focused project designs should be developed for new operations, includingintroduction of flexible instruments, i.e., supplements for selected successful performingprojects;
* Project coordination at both government and task manager levels should be furtherimproved given the complementarity of projects; and
* IFC and MIGA will need to be more active in the future in support of private sectordevelopment.
B. Portfolio Performance and Management
42. By October 31, 1997, the Board had approved 9 IDA credits for Cape Verde, totaling US$64.36million, of which about US$20.86 million remained undisbursed. All resources were committed forinvestment and technical assistance operations. Of total commitments, about 34 percent were forinfrastructure; 24 percent for education; and 19 percent and 23 percent for public and private sectordevelopment, respectively.
43. The management of the Bank's portfolio during the past four years has been outstanding. Itcomprises five problem-free projects whose Development Objectives (DO) have been generally met andoverall Implementation Progress (IP) has been generally satisfactory. At no point in time have any of theprojects been rated less than satisfactory by either DO or IP. Disbursements improved in FY97 to US$8.9million, compared to US$6.4 million in FY96, and US$4.7 million in FY95. As a result, the disbursementlag decreased to about 12 percent in FY97, compared to 15 percent in FY96. The disbursement ratioincreased from 20.3 percent in FY96 to 26.1 percent in FY97. Both the Government and the Bank havestrengthened efforts to monitor project implementation. The procurement process adheres to Bankguidelines, and the documentation for project accounts is well maintained. The quality of audit reports hasbeen satisfactory.
Cape Verde CAS 11
44. A Country Portfolio Performance Review (CPPR) was carried out with the Government,beneficiaries and other donors in March 1997 to analyze IDA's portfolio performance and constraints.The CPPR was conducted prior to the CAS consultations so as to draw on lessons from the experience ofongoing projects, build upon their strengths, and eliminate components that did not work. It was agreedthat further improvements would be essential in: (i) sustaining macroeconomic stability as the prerequisitefor healthy project implementation; (ii) generating government savings as a sole source of financingcounterpart funds; (iii) improving the sequencing of policy reforns; and (iv) strengthening further theGovernment's capacity to coordinate IDA projects.
45. To further improve performance under the ongoing projects, a time-bound action plan was agreedupon, including: (i) reallocation of IDA/cofinancier funds to resolve the problem of cost overrun on theMindelo port component of the TIP; (ii) Cabinet approval of a law-decree to implement a pilot VoluntaryDeparture Program (VDP); and (iii) the implementation of a plan to compensate for delays in classroomrehabilitation and securing counterpart funding under the BET Project. Implementation ofrecommendations outlined in the action plan is already providing positive results, with the Governmentnow focusing on the macroeconomic framework and PIP as effective policy management instruments.
46. To support effective implementation of ongoing projects, the Government proposed that the Bankconsider supplementary IDA resources for the Privatization TA and BET Projects. Given the relativelysmall size of IDA projects in Cape Verde, good performance results, limited number of lendinginstruments available and the cost of preparing full-fledged operations, this option provides a mechanismto respond rapidly and effectively to the clients' requirements.
C. Proposed Strategy and Assistance Program
47. The Bank Group's proposed strategy for Cape Verde for 1998-2000 has been formulated basedon: (i) key development objectives outlined in the NDP; (ii) recommendations of the March 1997 CASconsultations; and (iii) lessons learned from the ongoing operations. In the context of the March 1997consultation, the Government requested IDA's support in the following areas: (i) macroeconomicmanagement and domestic debt reduction; (ii) consolidation of policy reforms in support of private sectordevelopment, underpinned with a more prominent involvement of the IFC and MIGA; and (iii) humanresource development and poverty reduction.
48. Annex B9 summarizes the key elements of the proposed CAS in matrix form. The key principlesof the proposed strategy are: (i) consolidation of achievements; (ii) addressing areas that did not work wellin the previous CAS; (iii) broadening the choice of instruments available: an adjustment operation as a keyinstrument, underpinning macroeconomic stability and consolidation of policy reforms, investmentprojects with a sector approach and IDA supplements for selected, well-performing ongoing IDA projects;(iv) including ESW in the context of projects to contribute to capacity building; and (v) building localcapacity for supervision in the cost estimates of new projects.
49. Achievement of a Viable and Stable Macroeconomic Framework. The key features of IDA'sassistance are the following: (i) support efforts to adjust public expenditures to a sustainable level byaddressing the causes of excessive spending; (ii) assist in reducing the unsustainable level of domesticdebt and in maintaining prudent extemal debt management; (iii) assist in carrying out the first PER anddesign of a medium-term public expenditure framework (MTEF); and (iv) support local capacity buildingfor policy analysis and macroeconomic modeling as a basis for continuing policy dialogue.
12 Cape Verde CAS
B- 2 -. CAS P i Po ce .s
Ovrvew OJn Mrc 2th MAnd2s, 19,teMinitro EWnMic Coodintio (MECi collaborto with ftheBn,hlN0io Wosot licit u frthepreaon f utr sag ne. The worksho thh.eld oht togt_Govenmntafil.snd ank reprsentativs wiith i-vi oieyand privtesetor repesenatve t oddiscuss danddebate kWey medium-0 .l
.n adition to the fiBank: country team,; over100 priciansrereetingrgoernment intttons, NOs,CBO, uninslocaly.i .ttelected officials, andth prvtesetor attended the tw da consltaion The obtve: of te: okso ws to idntf the key0
constrint aing d v l p e tin a e V r et d y, p op estrategies to ad rsst e an e o m d ac rsto i plementth,e,
l Methdolog:g Te mehdlg Ea ppled tofachieve tis ;obetv was- te followinLEfggE:SEg:g! ;f;;S00SS;j if
l Buckg row.dII tlformaIio Th fllirtdy gple nary sessions se th4fe stagefor smll, group0 d 'csin duin the second dayTh M00::00000400eEC: provideda. ,brief overv ,iew fterecenl prea red 'NDP. .In addit-io, bref presenaioswere made ;by the Bankoutl.000in00ing DA actitiies andimpactto dat in Cap Ved,a ela oeadiprtneo u atcptr prahSmallt Group;*.00 Diwom: Prtcanswer diied into furbrad themat''ic grops (prvat seco,siasetrinfrastructurEe/trasport, and public secor) and dscussed themes trela.tetO te'broad teme suc as, prvtzto withi
J.iO)::: the private sector group.c Participants in each group considered issues to. be fom a variety of perspectives. Each group hadc a'' .pra O on-'''selectemodatorswelloasnote-tker whogr Upon clion of; te st di.C0;f-;;;;;-scussio,ns, patcpnsreund t,o the plenrytosae terfids
F ..dings Te fol ........... l......g 4.teswere.i. dt by ote,as themotpsg ioa .- fo futu
l 00tfti) mprovin--g thlbor markt an th eduf0wlcato ystem; 0-1Z 00
-'::':0:'ii) ..- 0socal:secor th:e accelertinof teprga on the fih agint pVerty,0t04Xtt :0000:000ii) infratpructi en sport:prmtion o btt i trt (oration, mtea,policies, prces,
e'-i0 g ip _9 4'0- t e ,g;iig ........ . ... n ....... .. t -.. " .' .....
. d.ev.elopment.f .wa.ter .an .sait systems; -,S .-v). . . ... publc sc. .to,r.;:.co solidtion of .publi and better et o f. isca resources.
50. The medium-term macroeconomic objectives for 1998-200 include: (i) attainiing an average GDPgrowth rate of 4.0 percent or about 1.3 percent per capita; (ii) stabilizing inflation at about 4 percent; (iii)eliminating the domestically-financed budget deficit; (iv) generating government savings to financecounterpart funds for public investment; and (v) increasing the central bank's foreign exchange reservecover to about 3 months of imports. The projected GDP growth rate is slightly lower than that projectedby the Government (5.0 percent) because of the fiscal adjustment to be introduced in line with itseconomic reform program. -Implementation of policy reforms aimed at reducing excessive publicspending and the stock of domestic debt will eliminate the residual fiscal gap (after concessionalfinancing) in the period 1998-2000. Growth is projected to originate from public investment activities inbasic and social infrastructure, further increases in manufactured goods exports, fisheries and tourism,maritime and air transport services, communications and financial services, and from the incrementalvalue added of privatized enterprises. The aggregate investment to GDP ratio is projected to decline toabout 31 percent of GDP by the year 2000, from about 34 percent of GDP in 1996. Achievement of thismedium-term outlook is predicated on the implementation of tight fiscal and monetary policies whileconsolidating the ongoing reforms.
51. In terms of lending operations, the ongoing PSRCB will be instrumental in further support ofcapacity building efforts for public resource management. To ensure effective capacity building at thelevel of the central and local governmnents, beyond the current life of the PSRCB, we propose to providesupplemental resources for macroeconomic management. The PSRCB will continue to provide support ofcapacity building in central and local government financial management reforms, PIP, public debtmanagement and national statistics. Building on the results of the PSRCB, a policy based EconomicReforms Support Operation (ERSO) is being presented to the Board with this CAS. The proposed ERSO
Cape Verde CAS 13
would provide balance of payments financing in support of the Government's adjustment program topromote private sector development, to achieve sustainable budget surpluses and eliminate domesticborrowing.. Specifically, the proposed project has three main components: (i) the accelerated privatizationprogram which has two parts - the Government's divestiture of 28 small, medium and large state-ownedenterprises, and regulatory capacity building; (ii) the economic liberalization component is in three parts:introduction of legal reforms to improve the functioning of markets, furthering trade reform andcompletion of the liberalization of the price system and (iii) the macroeconomic reform component focuseson ensuring fiscal and monetary discipline.
52. This is a first and one-time adjustment operation accounting for about half of the proposed basecase lending scenario. Cape Verde has been an excellent performer and deserves a higher allocation givenits growth performance, serious commitment to social development and good social indicators, well-performing portfolio and large burden-sharing by other development partners.
53. Several non-lending activities will support this strategy. In close collaboration with the IMF and inthe context of enhanced annual Article IV monitoring arrangements, the policy dialogue onmacroeconomic issues will continue. Guidance and quality control of the first PER to be carried out bythe Government under the PSRCB will be provided. In the context of the Partnership for CapacityBuilding Initiative, an assessment of the capacity building efforts of decentralization and IDA-financedprojects will be carried out (FY98). Finally, two IDF grants would be used to: provide support in capacitybuilding for the development of a MTEF (FY99) and in capacity building for VAT (FY00). These twoexercises will be crucial analytical instruments to the fiscal consolidation objective.
54. Private Sector Development IDA's strategy in this area will: (i) support the consolidation ofpolicy reforms; (ii) support ongoing capacity building efforts; (iii) further assist the development oftransport infrastructure; (iv) increase the operational efficiency of the power and water supply; and (v)continue support to professional and vocational training. The real challenge for Bank Group support willbe to ensure a more active and prominent role for IFC and MIGA and the use of IBRD/IDA guarantees inthe context of developing of enclave projects. One such guarantee (possibly in conjunction with IFC andMIGA) is currently envisaged for an enclave maritime infrastructure facility.
55. In terms of lending operations, the existing portfolio supports this strategy. The CBPSP, inparticular, will continue to support the ongoing financial sector reforms and capacity building activities forexport promotion activities, including tourism. In addition, the CBPSP will continue to supportingcapacity building for private sector development, particularly with regard to the promotion of exports,direct foreign investment and local entrepreneurs through assistance extended by the Chamber ofCommerce and the financial system, including the central bank. In support of this strategy, the proposedEnergy and Water Project (FY99) would provide the lead in utility infrastructure through support of thesector strategy and integrated programs for the development of electricity, water and sanitation systems.A supplement for the Privatization Technical Assistance Project (FY98) to ensure effectiveimplementation of the accelerated privatization program and capacity building for development of theregulatory function is also foreseen. Non-lending support would include ESW for a growth prospectsstudy (FY99/00) with focus on policies to further develop Cape Verde's economic potential needed toachieve the country's long-term vision.
56. Poverty Reduction and Social Sector Development. IDA's strategy in this area will support:(i) reforms and institutional strengthening of the existing welfare system; (ii) skills development of thepoor, particularly of women; (iii) child development through improvements in the existing school-feeding
14 Cape Verde CAS
program; (iv) improvements in the quality of education; and (v) improvement of living standards throughreliable and affordable supply of water and sanitation.
57. We propose an IDA supplement (FY99) for the very well performing BET to ensure theconstruction of classroom infrastructure in remote and poor rural areas and satisfactory pilot results insupporting efforts in professional training. Securing these additional IDA resources would also diminishthe pressure on the Government's own financing, which is not likely to be available from savings. In viewof the need to take a broad sector approach and coordinate with other donors, two sector investmentoperations are envisaged: Energy and Water (FY99) and Social Sectors (FYOO). The Energy and Wateroperation would support sound management of water resources and renewable energy, and improvementsof the urban environment through development of reliable sanitation systems. The Social Sectorsoperation would support achievement of NPAP's objectives. The two operations will be closelycoordinated at the community level and among several donors.
58. Non-lending activities would include the Bank's advisory support for the PER (FY99) and theEducation Sector Strategy Note (FY99), aimed, inter alia, at identifying sector priorities, relatedinvestment program and budget implications, as well as the public-private partnership in the sector. Thisstrategy note will be the basis for preparing an Education SIP in FYO1. Taking into account the overallobjective of local capacity building, ESW will be added to the Social Sectors operation and will include ahousehold survey and an update of the poverty assessment (FYOO).
D. Lending Scenarios
59. IDA's strategy as described in Section C corresponds to the base case scenario. However, thisstrategy will be adjusted in the light of: (i) progress in macroeconomic performance; (ii) progress withimplementation of structural reforms; and (iii) country performance under the ongoing portfolio. Table 3provides the triggers for three scenarios (base, high and low case) and Annexes B3 and B4 summarizelending and non-lending activities.
Table 3. Triggers for the Lending Program
1. Macroecononic Framework. Satisfactory Macroeconomic 1998 in compliance over-performing non-agreement
Performance, such as evidenced byIMF Standby Program
. Cease domestic borrowing 1998-2000 no borrowing no borrowing moderate borrowing
2. Structural Reforms. Divestiture of public enterprises 1998-99 24 divestiture actions more than 24 divestiture failure to meet base case
actions. Legal reforms for improving the 1998-99 as per ERSO, within as per ERSO, within failure to meet base case
functioning of markets next 18 months next 12 months. Multi-year PIP 1998-99 as per ERSO, within as per ERSO, within failure to meet base case
next 12 months next 9 months. Financial management reforms 1998-99 as per ERSO, within as per ERSO, within failure to meet base case
next 24 months next 18 months
3. Portfolio Performance* Problem projects none none more than 20%. Disbursement lag 10 to 20% less than 10% more than 20%
60. Base Case. The base case scenario assumes that the Government will: (i) sustain satisfactoryperformance of the ongoing IDA portfolio; (ii) adhere to policy reforms; and (iii) improve macroeconomicmanagement a Standby arrangement with the IMF is imminent (see para. 66). A timely and effective
Cape Verde CAS 15
implementation of the ERSO (FY98), amounting to US$30 mnillion, the centerpiece of the proposedstrategy, will be needed to ensure a conducive macroeconomic framework and policy environment asprerequisites to ongoing and new investment operations. In addition, two investment operations would beprepared for a total amount of US$23.2 million, comprising Energy and Water (FY99) and Social Sectors(FY00). Two supplements for ongoing IDA operations will be prepared, i.e., the Privatization TA Project(FY98) and BET Project (FY99), amounting to about US$7 million and US$3 million, respectively.Under the base case scenario, the lending program would amount to about US$63.2 million.
61. High Case. The higher IDA allocation under this scenario assumes sustainable and timelyachievements in macroeconomic stability and performiing beyond the targets under the structural reforms.A follow-up adjustment operation will be prepared (FY00) to facilitate a further reduction in the stock ofdomestic debt should it prove necessary. Also, the third IDA supplement would be prepared for thePSRCB (FY99), accounting to US$3 million, and a new Education Project would be moved forward toFY00. In the high case scenario, the lending program would increase to US$80 million.
62. Low Case. Triggers for moving to the low case scenario would be: (i) macroeconomicmanagement does not improve sufficiently for sustained stabilization (and IMF arrangement not on track);(ii) a marked slow-down in the pace of structural reforms; and (iii) deterioration of the quality of the IDAportfolio. In this case, IDA would withhold remaining disbursements under the ERSO and thesupplement to the BET project, and the lending program (without ERSO and BET supplement) would beUS$30.2 million.
E. IFC and MIGA
63. IFC's involvement in Cape Verde consists of four approved investment projects during the pastfive years, for a total of US$1.96 million. These investments covered shoe manufacturing for export,tourism, building material and pharmaceutical sectors, through its Africa Enterprise Fund (AEF). Two ofthese projects involve companies that had been privatized as part of the Govenmment's first round ofprivatizations. On the advisory side, lFC's Foreign Investment Advisorv Service (FIAS) helped reviewthe foundation of PROMEX, and IFC's Africa Project Development Facility (APDF) has also been activein technical assistance, including a feasibility study on the establishment of a leasing company.
64. IFC's work in Cape Verde is expected to become more proactive, helped by the opening of itsnew field office in Dakar. The focus will be on the following areas: (i) support to viable export-orientedand labor-intensive projects, including the tourism sector; (ii) proactive approach to the privatizations inthe financial area as well as to the broadening of the financial sector through the development ofspecialized financial institutions and the capital markets; and (iii) financing privatized viable projects withstrong sponsors.
65. Cape Verde joined MIGA in May 1993. No guarantees have been issued to date. Officials fromCape Verde attended a MIGA workshop on "Doing Business with Foreign Partners" and participated inMNGA's Asian Outbound Investment Trade and Financing Strategies Symposium in Malaysia. MIGAalso organized an investment mission for Cape Verde officials to Southeast Asia to promote South-Southinvestment. Representatives of Cape Verde's diplomatic services have participated in investmentpromotion workshops in Ottawa and Washington, D.C. The Center for Promotion of Investment andExports is an active user of MIGA's Investment Promotion Network (IPAnet) facility.
16 Cape Verde CAS
F. Collaboration with the IMF
66. The current IMF relationship with Cape Verde is based on annual Article IV consultations. TheBank and the IMF cooperate closely, in the context of these consultations and, with IMF technicalassistance, in the context of capacity building in budget management and statistics. The Government isabout to finalize an agreement with the IMF on a Standby arrangement, which would essentially parallelthe ERSO. The authorities have confirmed their intention not to draw on this IMF arrangement. ThisStandby is currently expected to take effect in January 1998.
G. Aid Coordination
67. Donor coordination has improved significantly 13on3. DonorCoordinationm Cape Verde. Particularly important progress has E.tra supr t Ce Verdei nvolve. .a multitud .obeen made in the context of several Bank projects. pers a anativroe ctThe Government has requested the Bank to take the unia uilaate t& donorus .are:the EuroeanUnionlead in coordinating donors in the context of: private (EU), AB, OPEC, , andFseveral of the agenciesi::n he
United NationSY -te. The ao bilatea oosare-sector development, public sector reforms, F Git e Auti Po a Swdeinfrastructure development and education. The Bank -Switzerland, Kuwait,TheN Nerlands, BelgIum,will work closely with the 1MF and the EU in Luxem and te US.b Interatioal NOs..direty or...providing the lead support for improving l asiation, aplay a vey active role inmacroeconomic management and reducing the stock of aural Develooment 4nd envintIDE, Foed anddomestic debt, cofinanced by the AfDB and a number Agnricultural Or!gania-io offthe United Nations AG),of bilateral donors. Box 3 summarizes the main areas Aaelgium, Gray Austria, apan, Kuwait, Tlheof involvement of various development partners. thelns and Switland.
n ita lNtructureand Trao Taido: FAId, jOPECEUl,68. The Bank will not directly support rural .IDA,. Kuwait, andTheNe..r.ans Po..rtu .gal rnce
development and health, nutrition and population mr:Prwate SeAfor Devlovmet and Industrg': IA, ) AIEprograms, given a broad involvement and a good track Austria, FFre .Portu gat .ad K it irecord of other donors and the Bank's comparative Watieran A -Ener:v: IDA, EU, A a Belgium, France,
advantage in a selective approach. The EU, FAO, and .... P Ire a. nd Kai-IWecomuicafionM: PC AusrA, aa n uat1FAD play a key role in sector strategies, institutional Eufo AfDB, EU, OPEC, IDA, UN agencies, and
capacity building and aid coordination. Counterpart Swi.erland. ..funds of monetized food aid have been used im Health: mUNagenies, LUxembou, T&Portugal ant.mdFranefinancing labor intensive programs for reforestation osMacroenmcaement EU, I: D Unitetionsand soil preservation. To improve performance and pe P m y Theffectiveness of the health sector, the Government has Nethds, Portua nd Switzerland.FoodAid:OPEC WorldFoo Prgrm German, Austriamobilized support from a number of donors, notably Franfce,theUS, Japan,The Netherland,SwitzerlLuxembourg, France, the EU, HO, Japan, Portugal, Ptu .....d .EU..:UNICEF, UNFP, and other donors through its social Ba . fPawens So: Swe e. .. ....sectors and energy and water projects.
H. Risks to the Proposed Strategy
69. The next three years will be a crucial period of transition for Cape Verde -- from fiscal difficultiesto fiscal sustainability. The base case scenario assumes success through the creation of governnentsavings on a sustainable basis, without which Cape Verde will be caught into a vicious cycle of increasingdomestic debt in order to finance domestic counterpart funds for its investment program. This, in turn,would lead to crowding out the private sector, risk high inflation and an unsustainable exchange rate.
Cape Verde CAS 17
70. The main risks of implementing the proposed strategy are: (i) adverse climatic conditions; (ii)inadequate or delayed fiscal adjustment and implementation of financial management reforms (due to apolicy reversal or inadequate technical capacity to implement); and (iii) a shortfall in donor assistance.The risk of inadequate rainfall and a drought year is likely to increase budgetary pressures to finance the"food-for-work" welfare program. This risk is likely to be lessened only if the Government limits thefinancing of the welfare program, which can only be accomplished with timely food aid. To address thisrisk, the Government has entered into a multi-year food aid arrangement with the EU and a number of itsmember countries, as well as with the USA and Japan. To strengthen its capacity to manage itsinvestment planning and management, the Government has prepared a three-year rolling PIP under theaegis of the ongoing PSRCB. The financial management component under the ERSO, together with thatprovided by the IMF and Portuguese technical assistance, will support the implementation of budget andfinancial management reforms to address the second issue. The implementation of the program andcapacity building will also be supported by the Portuguese Bilateral Cooperation in the context of thepreparations for establishing a framework for the prospective convertibility of the CVE to the Portugueseescudo.
James D. WolfensohnPresident
by Sven Sandstrom
Attachments
Washington, D.C.December 1, 1997
ANNEX A2Page I of 2
Cape Verde at a glance 1VV97
Sub- Lower-POVERTY and SOCIAL Cape Saharan middle- i
Verde Africa Income Development diamond*
Population mid-1996 (millions) 0.4 B00 1,125GNP per capita 1996 (US$) 1,090 490 1,750 Life expectancyGNP 1996 (billions US$) 04 294 1,967
Average annual growth, 1990-96
Population (%) 2.7 2.7 1.4Labor force (%) 2.9 2.6 1.8 GNP /1 , Gross
Most recent estimate (latest year available since 1989) pe, primarycapita enrollmentPoverty: headcount index (% of population) .. .. .Urban population (X of total population) 54 31 56Life expectancy at birth (years) 65 52 67Infant mortality (per 1,000 live births) 46 92 41Child malnutrition (% of children under 5) .. .. .. Access to safe waterAocess to safe water (% of population) 52 47 iIlliteracy (% of population age 15+) 28 43Gross primary enrollment (% of school-age population) 131 72 104 I - Cape Verde
Male 132 78 105 Lower-rnkdle-income groupFemale 130 65 101
KEY ECONOMIC RATIOS and LONG-TERM TRENDS
1975 1985 1995 1996
GDP (billions US$) 0.1 0.1 0.4 0.4 EcnomlcralosGross domestic investmentfGDP 21.3 54.2 34.8 33.5Exports of goods and servicesfGDP 14.5 29.0 19.8 23.7 Openness of economyGross domestic savings/GDP -16.5 -5.8 -14.5 -7.0 IGross national savings/GDP -21.0 11.2 20.3 25.6
Current account balance/GDP .. -32.9 -14.5 -7.9Interest payments/GDP 0.0 2.4 0.5 0.5 i InvestmentTotal debtVGDP 0.7 91.3 51.5 53.8 Sangs -`nTotal debt service/exports .. 16.0 3.2 5.1Present value of debtGDP .. . 31.9Present value of debVexports .. .. 73.4 ..
Indebtedness1975-85 1986-96 1995 1996 199745
(average annual growth)GDP 10.8 6.4 4.7 4.3 4.8 - Cape VerdeGNP per capita 10.8 3.9 1.7 1.2 2.1 Lower-middle-income groupExports of goods and services 16.0 5.1 18.4 25.0 12.9 1
STRUCTURE of the ECONOMY
1975 1985 1995 1996 Growt rates of output and Investment flS(5; of GDP)Agriculture 8.5 11.6 7.4 7.5 4 0
Industry 18.2 17.3 19.2 17.6 I2ol/0Manufacturing .. .. 0.6 0.6
Services 73.3 71.1 73.4 74.9
Private consumpton 107.8 96.9 82.8 77.4 40
General government consumption 8.6 9.0 31.7 29.5 1Imports of goods and services 52.2 89.0 69.1 64.2 -GDI GDP
1975-85 1986-96 1995 1996 Growth rates of exports and Imports (%J(average annual growth)Agriculture 10.9 -3.5 1.4 1.5 3
Note: 1996 data are preliminary estimates.The diamonds show four key indicators in the country (in bold) compared with its income-group average. If data are missing, the diamond willbe incomplete.
ANNEX A2Page 2 of 2
Cape Verde
PRICES and GOVERNMENT FINANCE
1975 1985 1996 1996 Infationf%)Domestic prices(% change) 12Consumer prices 5.4 8.4 6.2 10Implicit GDP deflator 7.5 4.2 8.4 44 s
Commitments 0 4 12 1 1 A . IBRD E -BilateralDisbursements 0 2 6 9 B - IDA D - Other multilateral F - PrivatePrincipal repayments 0 0 0 0 C -IMF G - Short-termNet flows 0 2 6 9Interest payments 0 0 0 0Net transfers 0 2 6 9
Development Economics 12t2197
ANNEX B2Page 1 of 1
Cape Verde - Selected Indicators ofBank Portfolio Performance and Management
Indicator 1995 1996 1997 1998
Portfolio Assessment
Number of Projects under implementationa 5 5 5 5Average implementation period (years)b 2.96 2.26 3.26 3.66Percent of problem projects"C
by number 0.00 0.00 0.00 0.00by amount 0.00 0.00 0.00 0.00
Percent of projects at risk d
by number 0.00 0.00 0.00 0.00by amount 0.00 0.00 0.00 0.00
Disbursement ratio (%)' 20.86 20.31 26.08 12.49
Portfolio Management
CPPR during the year (yes/no) YES (3/97)Supervision resources (total US$ thousands) 266.12 295.11 398.01 122.39Average Supervision (US$/project) 53.22 59.02 79.60 24.48
Memorandum item Since FY80 Last Five FYs
Projects evaluated by OEDby number 4 3by amount (US$ millions) 20 13
Percent rated U or HUby number 0 0by amount 0.0 0.0
a. As shown in the Annual Report on Portfolio Performance (except for current FY)b. Average age of projects in the Bank`s country portfolio.c. Percent of projects rated U or HU on development objectives (DO) and/or implementation progress (IP).d. As defined under the Portfolio Improvement Program.e. Ratio of disbursements during the year to the undisbursed balance of the Bank's portfolio at the beginning of the
year: investment projects only.
ANNEX B3Page 1 of3
Cape Verde - Bank Group Program Summary, FY 1998-2000
1998 ECO. REFORMS SUPPORT 30.0 H MPRIVATIZATION TA 7.0 H M
Subtotal 37.0
1999 BASIC EDUCATION AND TRAINING. 3.0 H LENERGY/WATER PROJECT 10.0 H L
Subtotal 13.0
2000 SOCIAL SECTOR DEVT 13.2 H LSubtotal 13.2
Total, FY 1998-2000 63.2
a. This table presents the proposed program for the next three fiscal years.b. For each project, indicate whether the strategic rewards and implementation risks are expected to be high (H),
moderate (M), or low (L).
ANNEX B3Page 2 of 3
Cape Verde - IBRD/IDA Lending Program
Past Current Planned'Category 1995 1996 1997 1998 1999 2000 2001
a Ranges that reflect the base-case (i.e., most likely) Scenario. for IDA countries, planned commnitments are not presented by FY but as athree-year-total range; the figures are shown in brackets. A footnote indicates if the pattern of IDA lending has unusual characteristics(e.g., a high degree of frontloading, backloading, or lumpiness). For blend countries, planned IBRD and IDA commitments are presentedfor each year as a combined total.
b For future lending, rounded to the nearest 0 or 5%. To convey the thrust of country strategy more clearly, staff may aggregate sectors.Structural adjustment loans, sector adjustment loans, and debt service reduction loans.
Note:Disbursement data is updated at the end of the first week of the month.
Country Assistance Strategy 98 18.0 Bank, Govenunent, Donors, Knowledge generation, problem solving.Public dissimination public debate
Donor Roundtable Meeting 98 15.0 Bank, Government, Donors Knowledge generation, public debateAnnual IMF Article IV Consultations 98 6.3 IMF, Bank and Govemment Knowledge generation, problem solvingCountry Dialogue/General Economic Work 98 58.9 Bank, Government, Donors Knowledge generation, problem solving,
policy dialoguePlanned in FY99
Annual IMF Article IV Consultations 99 7.0 IMF, Bank and Government Knowledge generation, problem solvingCountry Dialogue/General Economic Work 99 60.0 Bank, Government, Donors Knowledge generation, problem solving,
policy dialogueIDF for Capacity Building for Medium- 99 8.0 Bank, Government Knowledge generation, problem solvingTerm Expenditure FrameworkAdvisory Support to PER 99 7.0 Bank, Government, Donors Knowledge generation, problem solvingAdvisory Support for Education Strategy 99 15.0 Bank, Government, Donors Knowledge generation, problem solving,Note policy dialogueGrowth Prospects Study 99 70.0 Bank and Government Knowledge generation, problem solving
Planned in FY00
Annual IMF Article IV Consultations 00 7.5 IMF, Bank and Government Knowledge generation, problem solvingCountry Dialogue/General Economic Work 00 63.0 Bank, Government, Donors Knowledge generation, problem solving,
policy dialogueIDF for Capacity Building for VAT 00 15.0 Bank, Government Knowledge generation, problem solvingExpenditure FrameworkIDF for Capacity Building for Medium- 00 8.0 Bank, Government Knowledge generation, problem solving,Term Expenditure Framework policy dialogueAdvisory Support to PER 00 7.0 Bank, Government, Donors Knowledge generation, problem solvingGrowth Prospects Study 00 70.0 Bank, Government Knowledge generation, problem solvingAdvisory Service to Poverty Assessment 00 20.0 Bank, Government, Donors Knowledge generation, problem solving,Update public debate
a. Government, donor, Bank, public dissemination.b. Knowledge generation, public debate, problem-solving.
ANNEX B5Page 1 of 2
Cape Verde - Poverty and Social Development Indicators
Most Same regionticome group NeatLatestsingleayr recent Sub_ higher
Unit of estimete Saharan Low- incomeIndicatr measure 1970-75 1980-85 1989-94 Africa income grow
Priority Poverty Indicators
POVERTYUpper poverty line local curr. - - 26,000 - - -
Headcountindex %ofpop. - - 44- - -Lower poverty line local curr. - - 18,000 - - -
Headcount index % of pop. - - 30 - - -
GNPpercapita USS 240 350 910 500 1,670 4,710
SHORT TERM INCOME INDICATORSUnskilled urban wages local curr. - - - - -Unskilled mrual wagesRural terms of trade
Consumerprice index 1987=100 - 87 144Lower incomeFood
UrbanRural
SOCIAL INDICATORSPublic expenditure on basic social services % of GDP - - 16.0 - - -Gross enrollment rationsPnmary %schoolagepop. 145 117 114 71 104 107
Total years 57 60 65 52 67 69Female advantage 3.0 2.0 2.0 3.5 6.4 5.8
Ttal fertility rate birts per woman 7.0 6.3 4.1 5.9 2.7 2.8Maternal mortality rate per 100,000 live births - 134 - - - -
Supplementary Poverty IndicatorsExpenditures on social security % of total gov't exp. -Social security coverage % econ. aetive pop. - - - - -Access to safe water total % of pop. - 62.4 52.0 - - 86.2
UrbanFixed investment: housing % of GDP - - 4.4Fuel and power % of GDP - - 1.8 - - -Energy consumption per capita kg of oil equiv. 791 342 306 251 1,602 1,618Households with electricity
Urban %ofhouseholds - - - - - -Rural
Transport and conununication % ofGDP - - 9.2 - - -Fixed investment: transport equipment 3.8 - - -Total road length thou. km I - - -
INVESTMENT IN HUMAN CAPITALHealthPopulation per physician persons 12,136 5,000 4,289 - 3,064 -Population per nurse - 4,091 706 1,641 - - -Population per hospital bed - 710 457 633 1,316 592 402Oral rehydration therapy (under-5) % of cases - _ 5 37 - 51EducationGross enrollment ratiosSecondary %ofschoolagepop. 8 13 8 24 63 59
a. GDP components are estimated at factor cost.b. "GNFS" denotes "goods and nonfactor services."c. Includes net unrequited transfers excluding official capital grants.d. Includes use of IMF resources.e. Should indicate the level of the government to which the data refer.f. "LCU" denotes "local currency units." An increase in USS/LCU denotes appreciation.g. Excludes Interest Payments on domestic debt from 1998 onward paid out of TF
a. Includes public and publicly guaranteed debt, private nonguaranteed, use of IMF credits and net short-
term capital.b, "XGS" denotes exports of goods and services, including workers' remittances.
c. Includes equity and quasi-equity types of both loan and equity instruments.
ANNEX B8Page 1 of 2
Status of Bank Group Operations in Cape VerdeIBRD Loans and IDA Credits in the Operations Portfolio
(as of October 31, 1997)
Difference Between
Ori4nal AmnountinUS$ Millions and actual La ARPPLoan or Fiscal disbursements a Supervision Rating b/
Project ID Credit No. Year Borrower PurposeIBRD IDA Cancellations Undisbursed Orig Ffrn Rev'd Dev Obj Inp Prog
Number of Closed Loans/credits: 4
Active LoansCV-PE-436 IDA23770 1992 GOVT OF CAPE VERDE PRIVATIZATION P.E. 0.00 4.20 0.00 .34 .07 .08 S SCV-PE-435 IDA24660 1993 GOVT, ENAPOR, ASA TRANSPORT INFRASTR. 0.00 12.50 0.00 5.63 5.56 0.00 S SCV-PE-437 IDA25660 1994 GOVT OF CAPE VERDE PUB SEC REFORM & CAP 0.00 8.10 0.00 3.02 2.99 2.96 HS SCV-PE426 IDA26750 1995 MIN EDUC & SPORTS/LABOR, BASIC EDUCATION AND 0.00 11.50 0.00 4.11 4.64 0.00 S SCV-PE-438 IDA28640 1996 GOVT OF CAPE VERDE PRIVATE/FINANCIAL SE 0.00 11.40 0.00 7.76 8.24 0.00 HS HS
Total 0.00 47.70 0.00 20.86 21.50 3.04
Active Loans Closed Loans TotalTotal Disbursed (IBRD and IDA): 26.16 19.06 45.22
of i4ich has been repaid: 0.00 .45 .45Total now held by IBRD and IDA: 47.70 16.66 64.36Amount sold : 0.00 0.00 0.00
Of which repaid 0.00 0.00 0.00Total Undisbursed : 20.86 0.00 20.86
a. Intended disbursements to date minus actual disbursements to date as projected at appraisal.b. Following the FY94 Annual Review of Portfolio performance (ARPP), a letter based system was introduced (HS = highly Satisfactory, S = satisfactory, U unsatisfactory, HU = highly
unsatisfactory): see proposed Improvements in Project and Portfolio Performance Rating Methodology (SecM94-901), August 23, 1994.
Note:Disbursement data is updated at the end of the first week of the month.
ANNEX B8Page 2 of 2
Cape Verde - Statement of IFC'sCommitted and Disbursed Portfolio
Strong revenue collection effort . Enforce capital transfers from . Maintain current revenue efforts * IDF for capacity buildingpublic enterprises and prepare close to 25% of GDP for VAT (FY00)proposal for introducing VAT . Build capacity for implementing
VAT by 2000. Rationalize import tariffs
An ambitious development agenda * Base public investment on a viable . No domestic borrowing for budget Portfoliohas led to increased domestic financing plan in the context of a financing, have in place an . PSRCB (FY94) SPNborrowing to finance counterpart sound macroeconomic framework operational three-year rolling PIPfunds, worsening the domestic . Strengthen aid coordination and . Reduce capital expenditures todebt situation secure multi-year food aid about 23% of GDP by 2000
financing in the form of budgetsupport
The vulnerability of the economy . Implement financial management . Reduce current expenditures to Lendins! . Annual IMF Article IVis reflected by an unsustainable reforms to reduce public about 22% of GDP by 2000 . ERSO (FY98) consultationslevel of expenditure; the absence consumption and increase savings . Attain a balanced budget in 1998 . PSRCB Supplement . Government PER (FY99)of government savings; low level . Use govermment savings as the and a budget surplus from 1999 on; (FY99) . IDF for capacity buildingof international reserves and large sole source of financing . Sharply reduce the stock of for Medium-Termstock of domestic debt coluterpart finds domestic debt by the year 2000 Expenditure Framework
counterpart funds ~~~~~~~~~~~~~~(FY99)
I. Private Sector Development
A. Privazation Program
Reduced the role of government in . Accelerate the remaining . Complete 26 ongoing divestitures Portfoliothe economy divestitures, including financial by 1999 . Privatization TA (FY92) . Growth Prospects Study
institutions . TIP (FY93) SPN (FY99/00). CBPSP (FY96) SPN
.Strengthen regulatory capacity in * Adopt and start implementation of a JdLsJndiFthe areas of civil aviation, regulatory capacity building . Privatization TAmaritime transport, electricity and programn in 1998 Supplement (FY98)water, telecommunications, * Energy and Water (FY99)pharmaceuticals, and qualitycontrol and product standards
a Futher Libera,izagion of the Economy
Procurement of food aid . Speed-up liberalization of the * Liberalize the procurement of food Portfolio . Annual IMF Article IVcommodities is still under state economy through legal reforms for aid by 1999 * PSRCB (FY94) SPN consultationsmonopoly, and some quantitative the functioning of markets, further . Eliminate the mechanism ofimport restrictions remain trade reforms and complete price temporary quantitative import Lendhe
system liberalization restrictions * ERSO (FY98). Maintain the market based * PSRCB Supplemeni
exchange rate system (FY99). Modify the Conmmercial Code, the
Labor Code, and Registry andNotary Legislation to suit betterneeds of business
C. Improve Economic Infrasructure
Progress underway in . Develop port and airport facilities . Complete extension of the port of Portfoliodevelopment/modernization of for each island, upgrade the Mindelo by 1998 * TIP (FY93) SPNmaritime and air transport national network of roads and . Restructure ENAPOR and * CBPSP (FY96) SPNfacilities and a national network of support strengthening of port lease/concession its facilitiesroads and their management with management . Liquidate ARCA VERDEa view to improve international . Implement a personnel incentive . Rehabilitate/upgrade 24km of roadscompetitiveness system and decentralize and improve road safety on 128ktnsInadequate road administration maintenance of roads to of roadsand management capacity municipalities; develop . Revised incentive framework in
management procedures for Road place by the end of 1997Fund . Establish procedures for Road Fund
Energy and water supply are * Increase the efficiency in the . Privatize ELECTRA and implement Lendineinadequate and unreliable, with power and water sectors through the regulatory polices and . Energy and Water (FY99)inadequate sector regulation private sector participation in frameworks for power and water
investment and managernent supply. Improve pricing, cost recovery, * Develop dephotovoltaic systems for
and management for industrial, the public sectordomestic and irrigation water . Adopt a new tariff structure, based
on analysis of ability to pay.Reduce the water supply deficit in
Praia by the year 2000
D. Capacity BuldingThe labor force needs to increase . Implement macroeconomic . Develop a strategy for the Portfolioits productivity and labor market policies aimed at job creation professional and vocational training . BET (FY95) SPN . Advisory support toinformation is weak . Raise the level of education, make * Introduce apprenticeship training Lending preparation of the
professional training demand- for secondary school students . BET Supplement (FY99) Educational Sectordriven and job-related . Strengthen financing of the National . Education t (FY01) Strategy Note (FY99)
. Mobilize increased resources and Tramng Fund, including pnvate .Education Project (FY01)private sector contributions in sector participationsupport of vocational and . Complete the network ofprofessional training employment centers by the year
. Improve labor market information 2000trough a network of employmentcenters
llL Poverty Reduction and Social Sector Development
Persistence of a high level of . Implement reforms & strengthen - Ensure that ex-FAIMO female Portfoliounemployment and related poverty institutional capacity of the workers receive technical training . PSRCB (FY94) SPN . Poverty Assessment
existing welfare system in order to . CBPSP (FY96) SPN Update (FY 00)promote self-employment
* Develop skills for the poor . Ensure that poor women headed Lending. Increase targeted interventions to households have access to safe . Social Sectors (FYOO) . Assessment of capacity
the poor water and basic sanitation, . Energy and Water (FY99) building efforts under theeducation and health center facilities . PSRCB Supplement Partnership for Capacity
* Build capacity at conununity . Continued support to child (FY99) Building Inititiativelevels to implement the NPAP and development through improvements (FY98)to improve information on poverty in school-feeding programsincidence . Establish and monitor key poverty
indicators in the context of theNPAP
Good progress in improving . Maintain adequate budget . Sustain universal enrollment Portfolioquality and increasing mandatory allocations to education sector . Prepare an education sector strategy . BET (FY95) SPN * Advisory Support to PERbasic education from 4 to 6 years. * Continue building classrooms with . Strengthen capacity for planning (FY99)However, infrastructure still sanitation facilities and budgeting in the Ministry of Lending . Advisory Support toinadequate to sustain those gains Education . BET Supplement (FY99) preparation of Educationand allow for expending the basic * Continue to strengthen technical . Complete the construction of the . Education Project (FYO1) Sector Strategy Noteeducation system to 8 years support to teachers and improve envisaged basic school classroom (FY99)
management skills of principals infrastructure* Introduce cost recovery on an
incremental basis and increaseprivate sector's participation
Inadequate and unreliable water * Improve living standards through . Develop a sanitation master plan Lendingand sanitation facilities affecting development of reliable and . Develop sanitation systems in Praia . Energy and Water (FY99)the quality of life, and generating a affordable water supply and and Assomada . Renewable Energy GEFhigh incidence of stomach diseases sanitation * Rehabilitate/develop water supply (FY98)
* Promote sound management of systems in primary urban centers:water resources and develop Praia, Mindelo AND Assomadarenewable energy sources . Develop water supply and sanitation
systems in secondary urban areas.Increase renewable energy capacity
ANNEX B10Page 1 of 1
Cape Verde - Summary of Development Priorities
Network area Country Major issueb Country Bank ReconciliationperformanceM pnontfY priont y Bank and
Bank priorities'
Poverty Reduction & Economic Management* Poverty reduction Very Good Structural phenomenon, aggravated by High High
lack of job opportunities andinadequate rainfall
* Economic policy Fair to Good Domestic borrowing to finance public High Highinvestment and ensuing large domesticdebt overhang
* Public sector Good Ongoing capacity building and High Highdecentralization efforts
* Gender Good Lack of skills leads to low paying High Moderate Other donoreconomic opportunities to High involvement
Human Development Department* Education Very Good Sustainability of ongoing reforms High High
H Health, nutrition & population Fair to Good Stomach parasite infections High Moderate Other donorto High involvement
- Social protection Very Good Inprove targeting of the "food-for- High Highwork" mechanism
Environmentally & Socially Sustainable Development
3 Rural development Good Broaden coverage of drip irrigation; High Moderate Other donoragriculture credit involvement
* Enviromnent Very Good Lack of basic sanitation and water High High Other donorsupply involvement
* Social development Very Good Continued utilization of food aid to High High Other donorsupport social sectors involvement
Finance, Private Sector & Infrastructure- Financial sector Very Good Restructuring of financial sector; High High
increase savings; development ofcapital markets
* Private sector Very Good Accelerating the ongoing privatization; High Highprogram, crowding out credit to privatesector
* Energy & mining Good Private sector participation in the High Highsectors
* Infrastructure Good Ongoing rehabilitation and mangement High Highrestructuring; facilitating private sectorinvestment
a. Use "excellent" "good", "fairf or "poor".b. Indicate principal country-specific problems (e.g., for poverty reduction, "rural poverty"; for education, "female secondary
completion"; for environment, "urban air pollution").c. To indicate priority, use "low", "moderate" or "high."d. Give explanation, if priorities do not agree; for example, another MDB may have the lead on the issue, or there may be
