OREANDA-NEWS. September 22, 2016. End-of-Mission press releases include statements of IMF staff teams that convey preliminary findings after a visit to a country. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMFs Executive Board. Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF's Executive Board for discussion and decision.

An International Monetary Fund (IMF) mission, led by Mr. Ulrich Jacoby, visited Cabo Verde during September 8-21, 2016, to conduct discussions on the 2016 Article IV Consultation.

At the conclusion of the mission, Mr. Jacoby issued the following statement:

The mission had constructive discussions with the new government which came into office in April 2016 on its comprehensive agenda which includes fiscal consolidation to reduce public debt, resolving financial difficulties related to state owned enterprises (SOEs), and crowding in the private sector through improving the business environment.

Starting in 2016, Cabo Verdes economy is expected to resume a higher growth trajectory driven mainly by tourism, foreign direct investment and a recovery in domestic demand. While the impact of the global financial crisis and in particular the euro crisis slowed growth markedly in 2012-15, spillovers from these crises have now subsided. Rising external demand in particular in the tourism sector, a very strong FDI pipeline and the gradual recovery of private sector credit indicate a marked acceleration of growth in 2016.

The mission commends the Banco de Cabo Verde for maintaining an appropriately accommodative monetary policy stance and efforts to facilitate the resolution of non-performing loans, while ensuring the stability of the financial sector through heightened supervision. For 2016-17, the mission anticipates continued benign inflation and robust international reserves, leaving room for monetary policy to remain accommodative for some time. The exchange rate peg to the euro remains an appropriate monetary policy anchor.

Over the last eight years, Cabo Verde has expanded concessionally financed public investment to improve infrastructure and bolster long-term growth, but exogenous factors have clouded the outlook for public debt. Cabo Verde's public debt is highly concessional and debt service indicators show that the country will remain in a comfortable position servicing its debt in the future. However, the debt stock relative to the size of the economy has risen more than planned due to lower nominal growth since 2012 and the more recent strong appreciation of the U.S. dollar, indicating an increase in debt risks. The mission commends the authorities for their commitment to mitigate these risks without delay by containing spending, in particular externally financed public investment over the next few years, prioritizing projects with the highest impact on growth and employment over the nearer term and delaying others. The authorities are working on the specifics of an appropriate response which is expected to be finalized by early October. The mission notes that the debt situation severely constrains fiscal space and that domestic resource mobilization will be crucial to expanding it.

The mission welcomes the continuing efforts to improve the performance of SOEs which deliver essential infrastructure services to the economy. The introduction of mandatory performance contracts in all of the six strategic SOEs has produced encouraging results in most of them, improving their operational performance which remains critical to restoring their financial health and reducing contingent fiscal liabilities. However, developments in two SOEs are further constraining fiscal space and creating increasing risks to the budget. The longstanding difficulties of the national airline Transportes A?reos de Cabo Verde (TACV) and continued deterioration of its financial situation is draining scarce resources from the budget and expanding contingent liabilities. Similarly, the situation of the public housing company Imobili?ria Fundi?ria e Habitat (IFH) has further deteriorated related to risks from its largest housing project (Casa Para Todos). The mission welcomes the authorities determination to swiftly address these risks and stop the drainage of budget resources, in consultation with the World Bank which can draw on its expertise to provide support in these areas.

In addition to raising public sector efficiency, Cabo Verdes long-term growth depends on bolstering productivity. The mission welcomes the authorities strong emphasis on reforms in that regard, in particular focusing on the business environment, labor market flexibility, access to financing, and education and training to further reduce the skill mismatch. This would support job creation and inclusive growth in tourism and related local businesses, and economic diversification. The new labor code which will become effective in October is an important step in that regard. Measures to close the gender gapwhich is most pronounced for young and rural womencould also help raise economic growth. With reduced room for public investment, the private sector increasingly will need to become the engine of growth and employment, making use of the considerable expansion on infrastructure in recent years.

The Article IV consultation report of the mission is expected to be discussed by the IMF Executive Board in late November 2016.

The mission met with Prime Minister Ulisses Correia e Silva, Minister of Finance Olavo Correia, Minister of Economy and Employment Jos? Gon?alves, Minister of Justice and Labor Janine L?lis, Central Bank Governor Joao Serra, other government officials, parliamentarians, representatives of civil society, development partners, and the private sector. The mission thanks the authorities for their excellent cooperation and cordial hospitality.