Growth driven by the European economy
After accelerating sharply in 2022 thanks to the recovery in tourism, Cape Verde's growth will moderate in 2023 and 2024 as the expansion of tourism normalises. The economy remains heavily dependent on the tourism sector, which accounted for 25% of GDP and over 50% of total export earnings before its collapse in 2020 as a result of the Covid pandemic. Although positive, the outlook for growth is subject to the economic situation in Europe, with the majority of visitors coming from Western Europe. Nevertheless, the country will have to cope with the consequences of climate change and a persistent drought that has been affecting the agricultural sector for several years: in 2022, maize production was 80% down on the 2012-2016 period. In addition, the consequences of the Russian-Ukrainian conflict fuelled inflation in Cape Verde in 2022, driving up food and fuel prices, while the country imports the majority of its food (85% of its needs) and energy. However, with the escudo pegged to the euro, inflationary pressures in the Cape Verdean economy have remained relatively moderate. After peaking at 8% in February 2023, inflation gradually eased but was still high five months later (6.3%). While energy and food prices in 2024 should remain below the peaks seen in 2022, inflation will ease gradually as price rises have become more widespread – core inflation stood at 3.8% in July 2023. After holding its key rate to 0.25% for a long period despite the tightening of monetary policy by the European Central Bank (ECB), the Bank of Cape Verde (BCV) finally raised its key rate to 1% in May 2023. Although the ECB is likely to keep its rates unchanged at least until the second half of 2024, the BCV could be forced to raise its key rate again in order to reduce the rate differential and thus limit the risk of capital outflows.
Durably significant twin deficits
The budgetary improvement that began in 2021 continued in 2022 thanks to higher tax revenues, in line with the economic recovery. In 2023, this improvement is expected to have slowed due to the slowdown in activity and the rise in capital expenditure. The government wants to implement the reforms delayed by the pandemic, and invest in education, health and road infrastructure. The budget deficit is subsequently expected to narrow in 2024, thanks in part to the expected increase in tax revenues from the digitisation of tax collection currently under way, and in part to fiscal consolidation measures, i.e., the reduction in personnel costs. In 2023 and 2024, the country will continue to benefit from disbursements under the 36-month Extended Credit Facility (ECF) granted by the IMF in June 2022. Out of a total of up to USD 60 million (3% of GDP) over the period, the government had already received USD 36 million by June 2023.
In addition, the current account deficit is expected to have widened again in 2023 as a result of the slowdown in services exports and durably buoyant imports. Although public debt should fall in 2024, it will remain very high. However, external public debt (70% of total debt) is mainly held by multilateral creditors (40%) and bilateral creditors (14%). The sustainability of this debt is also helped by the fact that interest rates are largely fixed and that the escudo is pegged to the euro. The need for external financing will remain high due to persistently wide deficits – both public and external – but multilateral support will be assured.
Political stability maintained despite cohabitation
José Maria Neves, a member of the left-leaning African Party for the Independence of Cape Verde (PAICV) and Prime Minister between 2001 and 2016, was elected president in the first round with 51.7% of the vote in the October 2021 elections. He succeeded Jorge Carlos Fonseca from the centre-right Movement for Democracy (MPD) party, who had reached the constitutional limit of two consecutive terms in office. In this semi-parliamentary system, his victory means that Fonseca will have to cohabit with Prime Minister Ulisses Correia e Silva (MPD), who has been in office since 2016. The latter's term of office was renewed in April 2021 after the MPD retained its absolute majority in the legislative elections (winning 38 seats out of 72), ahead of the PAICV (with 30 seats).Despite the cohabitation situation, the government was able to push through reforms in the Assembly as the presidential minority lacked enough weight to block the legislative process. Nevertheless, in July 2023, the PAICV tabled a no confidence motion against the government, which was rejected by 38 votes to 32. The motion denounced a lack of transparency in the management of public resources. Internationally, Europe (mainly Portugal and the UK) will remain a major partner and source of tourists and FDI (mainly in the tourism sector). China will also remain a strategic partner for Cape Verde, with continued investment in the health and tourism sectors, as well as in the development of a special economic zone focused on the maritime economy.