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Country Commercial Guides for FY 2000:
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CHAPTER II: Economic Trends and Outlook
Major Trends and Outlook
Despite all the difficulties Cape Verde faces, a great effort has been made over the past eight years in the promotion of a market-oriented economic model aimed at the promotion of private sector development, foreign investment and integration of Cape Verde into the global economy. Financial and economic legislation has been revised and the government's role in the economy has shifted from that of a direct economic agent to one of a major promoter and regulator of the economic activity. Its policies have been endorsed and supported by the World Bank, the IMF and many multilateral and bilateral donors, including the U.S.
In 1997, the government laid out a four-year economic development plan whose centerpiece is Cape Verde's integration into the world economy, viewed as an option for self-sustained economic and social development. The National Development Plan (NDP) established a set of targets and policies for economic reforms aimed at assuring the sustainability of public finances and balance of payments, as well as creating conditions for an accelerated self-sustainable growth based on the market, private initiative, external capital, exports and the convertibility and international acceptance of the national currency.
Within the framework of the NDP, the government agreed with the World Bank on an Economic Reform Program which aims mostly at putting in place the reforms necessary for restoring Cape Verde's major macro-economic balances. In recent years (98/99), carrying out the priorities defined by the NDP, the government of Cape Verde accelerated the implementation of the economic reforms launched in 1991, especially the privatization of state-owned enterprises.
Furthermore, several aggressive steps were taken, namely the signing of two major agreements - a stand-by agreement with the IMF to underpin a donor-supported domestic debt relief program calling for the creation of an offshore trust fund, and a foreign exchange cooperation accord with Portugal linking the Cape Verdean Escudo to the Portuguese Escudo at a fixed exchange rate and designed to pave the way for the convertibility of the Cape Verdean escudo (CVE); the establishment of an offshore Trust Fund to hold and manage domestic debt deposits; the approval of the Budget Law, prohibiting internal credit to the government beyond 3 percent of GDP and 60 percent of GDP ceiling for short and medium term public loan; and the creation of a stock market.
In spite of some delays, as a result of the policies adopted, the economy has been marked by substantial progress reflected in the positive behavior of some macro-economic variables. Thus, a 5.6 percent GDP growth rate was achieved in 1998 derived from the strong positive trends in public and private investments, namely from foreign direct investments and the increase of the country's basic exports. Private investments in 1998 reached 28.3 percent of GDP against the projected value of 23.1. Inflation has dropped in a sustained manner since December 1997 going from 6.0 to 4.3 percent in December 1998.
The services sector continues to be the backbone of Cape Verde's economy accounting for about 65 percent of GDP. The secondary sector accounts for approximately 22.3 percent and the primary 12.7 percent.
Principal Growth Sectors
In the medium term, economic growth is likely to continue to come mostly from increasing efficiency in the services sector and from investment. Growth is expected to result from:
- public investment in infrastructure (ports, airports, roads rehabilitation and maintenance) as well as modernization of telecommunications;
- private investment in tourism, fisheries, services (including banking) and export processing (light manufacturing);
- an increase in agricultural output with better use of irrigated land and new agricultural technologies, especially drip irrigation;
- steady growth in private investment in housing;
- continued growth of commerce; and
- growth in services to international air and maritime transport.
Tourism
With an array of fine beaches, a warm and sunny climate, plus a population well known for their hospitality, tourism is one of Cape Verde's most important natural resources. Potentially a major source of foreign exchange earnings and a prime sector of foreign investment, the 1997-2000 development plan defines it as one of the country's strategic sectors. Despite the still small importance of tourism in the Cape Verdean economy (2 percent share of the 1994 GDP), its average annual growth rate in 1991-94 was approximately 31 percent.
In 1998, in a total volume of $233 million in foreign investment projects approved, 74 percent was in tourism, corresponding to about $173 million. The government continues committed to attracting foreign investment in the sector and it has placed the construction of tourism-related infrastructure at the top of it priorities. So far, the Italians lead foreign investment in the sector with three hotel complexes built on three different islands (Sal, Boavista and Sao Vicente). The 560-bed hotel resort opened in 1996 is operating at full capacity with charter groups from Italy arriving weekly. In negotiation with a Spanish group is an approximately $60 million tourism project for the island of Boavista.
Fisheries
Cape Verde's exclusive economic zone covers approximately 734,265 square kilometers of the Atlantic which explains why fisheries has been considered a strategic sector for the country's economic development. With a resource potential estimated at 43,000 to 50,000 tons/year, only approximately one third is now exploited due to the lack of adequate technology for deep water fishing and the need to modernize the fleet and the methodology used.
Fish processing is made in industrial units that use only part of the production capacity, and there is a great potential in industrial fisheries which must be activated through private investment, both national and foreign.
The government's main priorities for the sector include modernization of the fleet, promotion of a strong and dynamic business community, development of infrastructure in fishing communities, and promotion of aquaculture projects and the processing industry.
Light Manufacturing
The government of Cape Verde provides attractive incentives to the establishment of labor intensive industries oriented towards the export market.
Only after 1993 did industry begin making any significant contribution to the country's GDP, mainly as a result of foreign investments in garment and shoe production units. These units are export-oriented and represent 52 percent of total foreign investment in Cape Verde.
PROMEX, the official entity in charge of tourism and investment promotion, has carried out investment promotion campaigns in Portugal, Hong Kong, China, South Korea and South Africa, calling for the location in Cape Verde of traditional industries such as textiles, garment and shoe manufacture. The campaign in Portugal was focused on footwear while the one in the Far East focused on light manufacturing and tourism. The U.S. market is targeted for the near future.
Over time, a better established and dynamic export-oriented economy led by the private sector is expected to be the engine of growth and employment creation.
Budget Priorities and Privatization
In December 1998, Cape Verde's new budget was approved by the National Assembly. Having attained the 1998 budget's major goals of reducing inflation and observing the European Union convergence criteria, the 1999 budget is viewed as a key instrument to safeguard the stability and predictability of the country's economy.
Approximately 44 percent of the total budget of $229 million is allocated to public investment projects which focus on i) economic reforms; ii) development of natural resources; ii) development of economic and transport infrastructure; and iv) promotion of human and social development.
Infrastructure takes the largest share of public investment (57 percent), followed by social development (37.4 percent) with education receiving the largest share in this sector.
Privatization
In 1997, the Cape Verdean government quickened the pace of privatization which was part of a five year World Bank-funded program. The first stage of the program came to a closure in December 1997. In June 1998, the World Bank agreed to assist the second stage of accelerated privatization with a $ 9 million fund from the International Development Association (IDA).
Several state-owned enterprises have been privatized, including three hotels, the national telecommunications company, Cabo Verde Telecom and the oil distribution company, Enacol. They were both sold to foreign companies. Bids are now open for the sale of two commercial banks, an insurance company and the power supply company. The Cape Verdean port authority is also slated for privatization in the near future.
Balance of Payments
Cape Verde's balance of payments is characterized by a very large structural imbalance in the trade account, substantial surplus in the services account, significant net private transfers, and considerable net overseas development assistance. Foreign trade is characterized by modest merchandise export earnings, significant service exports, and high merchandise imports.
Traditionally Cape Verde's most substantial export earnings have come from non-factor services to international maritime transport. These earnings have increased recently as a result of rising services to international air traffic.
In recent years there has been a positive trend in exports, mainly as a result of foreign investment, particularly in free-zone enterprises. While in 1992, banana, lobster, fresh and frozen fish represented 91.63 percent of Cape Verde's exports, with bananas in the leading position (50.36 percent of total exports), in 1995 shoe parts, shoes, lobster, garments and frozen fish represented 91.18 percent of exports, with shoe parts ranking first (37.5 percent of total exports). Banana exports fell to tenth position with a 0.49 percent share of total exports.
Despite this improvement in exports, the trade balance is still an important economic problem due to the continuous increase in imports. Exports cover only 3-5 percent of the value of imports. The average import growth rate in the period 1990-1995 is 14.22 percent, much higher than the average GDP growth rate of 4 percent.
Infrastructure Situation
Given the country's geographic location at the crossroads of three continents, transport and related services can be an important source of development activity.
However, limited port and airport facilities, and infrequent and costly air and maritime transport have been serious constraints to the development of an outward-looking economy.
In an attempt to overcome those constraints, the transport sector was the subject of a World Bank study which has been updated in the context of an $87 million transport and infrastructure project promoted and co-financed by the World Bank.
Ports
There are two deep waters ports - Porto Grande, in Mindelo, Sao Vicente and the Port of Praia, in the capital city - serving international traffic. Distribution of imported commodities throughout the islands is made from these ports.
In 1997, two new ports were built on the islands of Maio and Boavista, and modernization and expansion of Porto Grande was completed. Meanwhile, rehabilitation, and expansion projects are underway on other islands.
Airports
The largest airport is on the island of Sal, which is able to accommodate even the largest intercontinental aircraft. A new and longer runway is being built in Praia and will be able to accommodate Boeing 757s and other mid-sized aircraft. There is also a modernization project under consideration for Sao Vicente's airport. Other islands too are having their airport facilities upgraded.
Telecommunications
The telecommunications system which was saturated and substandard, is also being upgraded. In one of the recent measures taken, the government divested sixty five (65) of its shares in the state-owned telecommunications company, including forty (40) percent sold to a Portuguese company through international bidding.
A USD 7 million fiber optic project was recently implemented connecting all the islands, and the country has been connected to Internet through Cabo Verde Telecom. New telecommunications services made available recently, include mobile telephone and video-conferencing services. Paging, and video-text will be offered soon.
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[end of document] Note* International Copyright, United States Government, 1998 (or other year of first publication). All rights under foreign copyright laws are reserved. All portions of this publication are protected against any type or form of reproduction, communications to the public and the preparation of adaptations, arrangement and alterations outside the United States. U. S. copyright is not asserted under the U.S. Copyright Law, Title17, United States Code.
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