An economic recovery subject to the European economy

Cabo Verde's economy remains heavily dependent on tourism: before the COVID-19 pandemic, it accounted for over 50% of total export earnings, 25% of GDP - around 40% with its spin-offs. As the vast majority of visitors come from Western Europe, the pace of recovery in activity since the collapse caused by COVID-19 in 2020 is therefore subject to the vagaries of Europe and the world through the evolution of commodity prices and the health situation. While tourism is not yet expected to return to its pre-pandemic level in 2022, despite easing restrictions on international travel, the continued recovery in revenue generation will increase the net contribution of trade to growth. However, the fallout from the war in Ukraine is fuelling inflationary pressures in Cabo Verde (8.2% in June 2022), which imports most of its food (85%) and energy. As the escudo is officially pegged to the euro, it has also depreciated against the US dollar, reinforcing the tensions weighing on household consumption. Given the ECB's tightening of monetary policy, the Bank of Cabo Verde is expected to follow suit, further dampening domestic demand. Thus, while the deterioration of external conditions following the war in Ukraine will weaken the economic recovery, the increase in exports, the resumption of FDI (mainly related to tourism), and remittances (10% of GDP) added to the three-year Extended Credit Facility (ECF) concluded with the IMF in June 2022, will limit the slowdown in growth in 2022. The other critical sectors of the economy, namely fisheries (mainly tuna, 5% of GDP), agriculture, energy, construction, and transport, have also recovered, thanks to the recovery in external and domestic demand. Nevertheless, the country is facing the consequences of climate change with a persistent drought that has threatened the agricultural sector for several years. 

Deficits are still large but to be put into perspective by multilateral support 

The decline in tax revenues, the fiscal response, and the loss of tourists due to the pandemic had already led to an explosion of the fiscal and current account deficits in 2020. Despite the increase in tourism revenues since the easing of travel restrictions, the economic fallout from the Russia-Ukraine war is expected to lead to a further significant widening of the current account deficit after an improvement in 2021. This prompted the government to declare a social and economic emergency in June 2022 to obtain more support from the international community to help finance measures to protect families and businesses. Indeed, the IMF has approved a program with a three-year Extended Credit Facility of USD 60 million (about 3% of GDP), with an immediate disbursement of USD 15 million, which should also facilitate additional bilateral and multilateral funding. The African Development Bank thus provided a USD 10 million grant in July 2022. Although the pandemic and the Ukrainian conflict have weakened the momentum for structural reforms, including the restructuring and privatization of state-owned enterprises, the government intends to carry out most of these in 2022-23 with the support of multilateral organizations. These will improve the business environment, attract private investment and increase competitiveness, ultimately supporting growth and improving debt sustainability. The budget deficit is expected to narrow gradually as economic activity continues to recover, reforms are implemented, and fiscal consolidation is pursued. Nevertheless, a high risk of over-indebtedness remains, with external public debt estimated at 103.6% of GDP in 2022, but mostly contracted with multilateral and bilateral organizations and serviced at only 9% of GDP annually. The need for external financing will remain high due to the persistence of public and external deficits, but multilateral support will be ensured. 

Political stability maintained despite the establishment of a coalition

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