Economic performance and outlook
In 2018, real GDP growth of 3.9%, slightly lower than 4.0% in 2017, was underpinned by strong growth in the electricity and water (22.8%), manufacturing (14.2%), tourism and hotels (14.9%), fishing (9.4%), retail trade (8.1%) and financial intermediation (8.1%) sectors.

Fiscal consolidation will enable the budget deficit to be reduced to around -2.4% in 2018, compared with -3.1% in 2017, with a gradual decline to -1.9% in 2019. However, public debt remains above the threshold of 126% of GDP in 2017.

In June 2017, Cape Verde's central bank lowered its key rate by 200 basis points to 1.5%, leading to a fall in the average commercial bank credit interest rate from 6.5% to 4.5% at the end of 2018. Credit to the economy therefore increased by 7.5%. Consumer Price Index inflation remains low, rising by 1% in 2018 compared with 0.8% in 2017 due to the expected increase in food and energy prices. Foreign exchange reserves cover around 5.9 months of imports of goods and services and are sufficient to maintain the unilateral pegging of the exchange rate to the euro.

The current account deficit widened from -7.6% in 2017 to -8.5% in 2018, with growth in spending on imports outstripping that on exports (particularly tourism), against a backdrop of falling remittances. The main other exports are fishing and manufactured goods (clothing and footwear). The main imports - fuel, equipment, machinery and consumer goods - come mainly from Spain and Portugal, the country's main trading partners.

The economy is expected to maintain real GDP growth of 4.1% in 2019 and 4.8% in 2020, driven by remittances, manufacturing, continued growth in tourism, and increased spending on public infrastructure. Private investment supported by favourable domestic credit conditions will also contribute to growth.

Outlook: positive and negative invoices
Emerging global trade tensions between China, Europe and the United States (the island economy's main trading partners) could adversely affect exports. Cape Verde, an archipelago state that is very fragile and vulnerable to climate change, needs additional resources to increase its resilience. The unilateral pegging of the exchange rate to the euro requires sufficient fiscal protection to withstand future shocks.

Cape Verde's economic development model depends on remittances, external transfers and development aid, making the country vulnerable to external shocks. The Strategic Plan for Sustainable Development (2017-2021), adopted by the government, identifies priority sectors for economic diversification, such as tourism, agriculture, infrastructure and light industry.

The budget deficit is financed by concessional loans obtained from bilateral and multilateral donors (around 75% of total public debt) and treasury bills issued to commercial banks and other private creditors. Reducing the high level of public debt (126% of GDP in 2017) and the risk of debt distress requires a sustained effort. Fiscal consolidation, notably through the privatisation of poorly performing public companies and the creation of public-private partnerships for large investment projects, could reduce debt-related vulnerabilities.

Income inequality and social exclusion remain critical. In order to increase productivity and combat high unemployment among young people and women, the government is supporting micro-businesses and SMEs through subsidies, incubators and pilot projects aimed at employability.

Source: African Economic Outlook (AEO) 2019