AFRICAN DEVELOPMENT BANK

CABO VERDE

ECONOMIC GROWTH SUPPORT PROGRAMME - PHASE II (PACE - II)

APPRAISAL REPORT

Translated Document

ECGF/PGCL

October 2017

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TABLE OF CONTENTS

ACRONYMS AND ABBREVIATIONS .................................................................................................................. i

LOAN INFORMATION ......................................................................................................................................... ii

I. INTRODUCTION: THE PROPOSAL ............................................................................................................ 1

II. UPDATE ON THE COUNTRY’S ELIGIBILITY .......................................................................................... 2 2.1. Criterion 1 – Government’s Commitment to Reducing Poverty .................................................... 2

2.2. Criterion 2 – Political Stability ....................................................................................................... 2

2.3. Criterion 3 – Macroeconomic Stability .......................................................................................... 3

2.4. Criterion 4 –Fiduciary Risk Assessment ........................................................................................ 4

2.5. Criterion 5 – Harmonization .......................................................................................................... 4

III. PROGRAMME for 2016/2017 – PACE-II ...................................................................................................... 5 3.1 Programme Goal and Objective ..................................................................................................... 5

3.2 Programme Components ................................................................................................................ 5

3.3. Programme Outputs and Expected Outcomes ................................................................................ 6

3.4. Progress Towards Fulfilling Conditions Precedent to PACE-II (list of PACE-II triggers defined

under PACE-I) ............................................................................................................................... 9

3.5. Public Policy Dialogue ................................................................................................................. 10

3.6. Loan Conditions – Actions Precedent .......................................................................................... 10

3.7. Application of Best Practice Principles on Conditionality .................................................................... 11

3.8. Financing Needs ........................................................................................................................... 12

IV. PROGRAMME IMPLEMENTATION ......................................................................................................... 12 4.1. Programme Beneficiaries ............................................................................................................. 12

4.2. Implementation, Monitoring and Evaluation ............................................................................... 13

4.3. Financial Management, and Disbursement and Reporting Arrangements ................................... 13

4.4. Procurement ................................................................................................................................. 13

V. LEGAL FRAMEWORK ............................................................................................................................... 13 5.1. Legal Instrument .......................................................................................................................... 13

5.2. Conditions for Bank Intervention ................................................................................................. 14

5.3. Compliance with Bank Group Policies ........................................................................................ 14

VI. RISK MANAGEMENT ................................................................................................................................ 14

VII. RECOMMENDATION ................................................................................................................................. 14

Annex 1 : Government’s Letter of Economic Policy

Annex 2 : Programme Reforms Matrix

Annex 3 : Outcomes of Previous Budget Support Operations in Cabo Verde

Annex 4 : Note on Relations with the International Monetary Fund

LIST OF TABLES

Table 1 : Macroeconomic Indicators

Table 2 : Progress Towards Achieving Logical Framework Output Targets

Table 3 : Progress Towards Achieving Logical Framework Outcome Targets

Table 4 : List of Actions Precedent

Table 5 : Financing Needs

Table 6 : Risks and Mitigation Measures

CURRENCY EQUIVALENTS

September 2017

Currency = Escudo (CVE)

UA 1 = CVE 132.372

EUR 1 = CVE 110.747

USD 1 = CVE 93.656

FISCAL YEAR

1 January - 31 December

WEIGHTS AND MEASURES

1 tonne = 2 204 pounds (lbs)

1 kilogramme (kg) = 2.200 lbs

1 metre (m) = 3.28 feet (ft)

1 millimetre (mm) = 0.03937 inches (”)

1 kilometre (km) = 0.62 mile

1 hectare (ha) = 2.471 acres

i

ACRONYMS AND ABBREVIATIONS

AEO African Economic Outlook

AfDB African Development Bank

BCA Banco Comercial do Atlântico

BSG Budget Support Group

CFRA Country Fiduciary Risk Assessment

CM Council of Ministers

CSP Country Strategy Paper

CVE Cabo Verdean Escudo

DSA Debt Sustainability Analysis

ELECTRA National Electricity Company

ENACOL Empresa Nacional de Combustiveis (National Fuel Company)

FDI Foreign Direct Investment

GAP II Governance Operational Framework and 2013-2017 Action Plan

GDP Gross Domestic Product

GoCV Government of Cabo Verde

GPRSP Growth and Poverty Reduction Strategy Paper

HDI Human Development Index

ICIEG Cabo Verdean Institute for Gender Equality

ICT Information and Communication Technology

IIAG Mo Ibrahim Index of African Governance

IFH Imobiliária Fundiária e Habitat

IMF International Monetary Fund

MF Ministry of Finance

MIC Middle-Income Country

MIC-TAF Middle-Income Countries Technical Assistance Fund

MORABI Cabo Verdean Association for the Empowerment of Women

MPD Movement for Democracy

MSME Micro-, Small- and Medium-sized Enterprises

PAGEPPI Public Corporate Governance and Investment Promotion Support Programme

PAGFP-RSP Public Finance Management and Private Sector Recovery Support Programme

PAICV African Party for the Independence of Cabo Verde

PE Public Enterprise

PEDS Economic Plan for Sustainable Development

PEFA Public Expenditure and Financial Accountability

PEMFAR Public Expenditure Management and Financial Accountability Review

PIP Public Investment Plan

PPP Public-Private Partnership

PPPU Public-Private Partnership Unit

SME Small- and Medium-size Enterprise

SNIP National Public Investment System

STE Economic Transformation Strategy

TACV Transportes Aéreos de Cabo Verde (Cabo Verde Air Transport Company)

TFP Technical and Financial Partner

UASE State Investment Support Unit

WTO World Trade Organisation

ii

LOAN INFORMATION

Client Information

BENEFICIARY : Republic of Cabo Verde

SECTOR : Economic and Financial Governance

EXECUTING AGENCY : Ministry of Finance (MF)

AMOUNT : EUR 20 million

2017 Financing Plan for Budget Support Operations

Source of Financing Amount

AfDB EUR 20 Million

World Bank Not available

Luxembourg EUR 2 Million

European Union EUR 9 Million (programmed)

EUR 7 Million (not programmed)

Portugal EUR 0.5 Million

AfDB Financing Information

Loan Currency: Euros (EUR) [or any other acceptable currency]

Loan type: Total flexibility loan

Maturity: To be determined (up to maximum 25 years)

Grace period: To be determined (up to maximum 8 years)

Weighted average

maturity**: To be determined (depending on amortization profile)

Reimbursments: Half-yearly installments at the end of the grace period

Interest rate: Base rate + Margin on financing cost + Loan margin +

Maturity premium

This interest rate must be greater than or equal to zero.

Base rate : Floating (6 Months EURIBOR revised on February 1st

and August 1st or any other acceptable rate)

A free option is offered to set the base rate

Margin on financing cost:

Margin on the Bank’s financing cost revised on January

1st and July 1st and applied on February 1st and August

1st with the base rate.

Loan margin: 80 base points (0.8%)

Maturity premium: To be determined :

0% if the weighted average maturity <= 12.75

years

0.10% if 12.75 <the weighted average maturity

<= 15

0.20% if the weighted average maturity> 15

years

Opening Commission: 0.25% of the loan amount

Commitment fee:

0.25% per annum of the undisbursed amount. It begins to

run 60 days after the date of signature of the loan

agreement and is payable on the interest payment dates.

Option to convert base

rate * :

Besides the free option to set the base rate, the possibility

is offered to the borrower to return to the floating rate or

to re-fix on all or part of the disbursed amount of his

loan.

Transaction fees are payable

iii

Option of rate ceiling or

tunnel * :

The possibility is offered to the borrower to put a ceiling

or a tunnel on the base rate for all or part of the disbursed

amount of his loan.

Transaction fees are payable

Currency conversion

option *:

The possibility is offered to the borrower to change the

currency of all or part of his loan, whether disbursed or

not, into another loan currency of the Bank.

Transaction fees are payable

Timeframe – Main Milestones (expected)

Activities Dates

Appraisal June 2017

Negotiation September 2017

Approval October 2017

Effectiveness November 2017

Disbursement November 2017

Supervision April 2018

Completion Report November 2018

iv

PROGRAMME SUMMARY

General overview

of the programme

Programme Name: Economic Growth Support Programme - Phase II (PACE-II).

General Schedule: 2017-2018. Financing: EUR 20 million. Operation Instrument:

General Budget Support. Sector: Economic Governance. Goal and objective of the

programme: PACE-II is the second phase of a two programme-based budget support

operations. It aims to consolidate the gains of PACE-I and contribute to sustained

economic growth. The first component of PACE-II focuses on the enhancement of

the effectiveness of public investment through two sub-components, namely: (a)

improvement of public corporate governance and the public investment institutional

and regulatory framework; and (b) modernization of the institutional and regulatory

framework of public-private partnerships. As for the second component, the support

to promote private sector development will focus on: (c) improving the business

environment; and (d) supporting entrepreneurship and the formalization of informal

activities. Expected results : Achieving these operational objectives will: (i) improve

PEFA indicator PI 11 on public investment management (new indicator) to C in 2018;

(ii) improve PEFA indicator PI 12 on public asset management (new indicator) to C

in 2018; (iii) increase the number of signed and on-going PPP projects from 1 in 2012

to 3 in 2017; (iv) increase private sector credit from 5.1% of broad money supply

(M2) in 2014 to over 6% in 2017; (v) improve the average export and import time

from 20 days in 2014 to less than 15 days in 2017; and (vi) increase the number of

new businesses established from about 100 (30% established by women) in 2014 to

more than 200 (30% women-owned) in 2017.

Overview of

country context

Cabo Verde faces several challenges that could hamper its economic growth in the medium term. In the first instance, the country faces a series of structural constraints relating to the small size of its domestic market, the country’s fragmentation (several islands), and the dearth of natural resources over which the authorities have little or no control. In addition to these structural challenges due to nature, there are others that should be addressed by the authorities to ensure sustained growth in the years ahead, namely: (i) control of the debt level by seeking other sources of financing, especially private, and by improving the management of public enterprises and major public investment projects to ensure better achievement of the desired effects in terms of economic growth; (ii) diversification of the economy by creating conditions conducive to the promotion of the private sector. Cabo Verde’s economy has experienced a low level of growth in recent years despite an expansionary fiscal policy through an extensive public investment programme. The deterioration of the international economic environment resulting from the 2008 financial crisis on the one hand, and the 2009 euro crisis, on the other, had a strong negative impact on the country’s economy. After a period of strong growth of 6.6% on average between 2000 and 2008, the country experienced a year of recession in 2009 before returning to an average growth rate of 1.3% between 2010 and 2015. It was only in 2016 that recovery began to gain momentum with a growth rate of about 3.2%. On the whole, the short-term outlook is positive, despite looming major challenges that will impact growth and development in the long term. GDP growth is expected to reach 3.7% in 2017 and 4.1% in 2018.

Lessons learned

With regards to key lessons learned, the following are put forward: (i) the need to strengthen policy dialogue for an enhanced roll-out of structural reforms, (ii) the need to continue rolling out institutional support projects which focus on the same priority issues as budget support and (iii) the need to maintain the common policy reform matrix set-up with partners, and in cooperation with authorities.

Conditions for

continuous

support

Cabo Verde meets all necessary conditions for a Bank engagement through budget support. Regards poverty reduction, the drafting of the new Sustainable Plan for Economic Development (PEDS) is a strong commitment. On the political front, Cabo Verde is one of the most politically stable countries in Africa. The country enjoys good political stability, which has been steadily consolidated over the years thanks to the quality of its democratic system. The macroeconomic criterion is also fulfilled. The country’s macroeconomic framework is subject to regular reviews by the IMF

v

and the Budget Support Group (BSG) which gathers all partners involved in programme support. The latest BSG mission was conducted in June 2017. Macroeconomic stability was confirmed by the IMF and the BSG. Regarding risk, the fiduciary framework assessment conducted by the Bank in Octobre 2016 concluded that the fiduciary risk was moderate and that the public finance management system fulfilled the Bank requirements for budget support operations. Lastly on harmonization, Cabo Verde has made significant progress in implementing the Paris Declaration Principles, thus strengthening aid effectiveness. Aid to Cabo Verde is aligned with national priorities. Since 2006, Cabo Verde’s major bilateral and multilateral donors have harmonized their budget support around a mutually agreed policy matrix. The budget support instrument, which is increasingly taking precedence over project lending in recent years, is used to leverage collaboration with other development partners in the country’s public finance management and sector support.

Policy dialogue

During PACE-II implementation, dialogue with Cabo Verdean authorities will focus on the following areas: (i) improvement of public investment efficiency with emphasis on the continued improvement of public corporate governance and the public investment framework and the PPP modernization framework; and (ii) support for the promotion of private sector development, in general, and for the improvement of the business environment to boost entrepreneurship, in particular. This dialogue will be technically supported by the various institutional support projects currently underway in the PPP and public finance sectors.

vi

Results-Based Logical Framework

Country and Programme Name: Cabo Verde – Economic Growth Support Programme (PACE-II)

Programme Goal: Contribute to creating conditions for sustained economic growth by improving the efficiency of public investment and promoting

private sector development

RESULTS CHAIN

PERFORMANCE INDICATORS MEANS OF

VERIFICATION

RISKS/

MITIGATION

MEASURES Indicators (including CSI) Baseline Target

IMP

AC

T

Improved conditions

for sustained, inclusive

and sustainable

economic growth

GDP growth in real terms 0.6% in 2014 4% of GDP in

2017

PEFA/MF/IMF

Country’s global

competitiveness index 3.7 points (2014) 4 points in 2017

OU

TC

OM

ES

Outcome 1:

Improved public

investment efficiency

PEFA Indicator – PI 11 –

Public investment

management (new PEFA

indicator not previously

assessed)

Not yet assessed

(2014) C (2018)

Risk 1: An

unfavourable

macroeconomic

environment and

exogenous

shocks.

Mitigation

Measures: This

type of risk is the

subject of an on-

going dialogue

with the

authorities, and is

monitored

regularly within

the context of the

BSG that brings

together the TFPs

involved in

programme

support

operations.

Risk 2: The

human capacity of

government

services, although

above the regional

average, is

limited. If this

situation persists,

it could slow

down or even halt

the

implementation of

programme

reforms.

Mitigation

Measures: The

Government is

committed, at the

highest level

(Presidency,

Prime Minister’s

Office, Ministry

of finance, and

PEFA Indicator – PI 12 –

Public asset management (new

PEFA indicator not previously

assessed)

Not yet assessed

(2014) C (2018)

Number of PPP projects

signed by the Government and

under implementation

1 (2012) 3 (2017)

Outcome 2:

Enhanced private

sector development

Credit to the private sector (%

broad money supply – M2)

(CSI)

5.1% of broad

money supply

(M2) (2014)

6.2% of broad

money supply

(M2) (2017)

Import and export timeframe

(days)

20 days to import

and export goods,

respectively

(2014)

Less than 15 days

to import and

export,

respectively

(2017)

Number of new MSMEs

established (% owned by

women)

About 100 new

MSMEs

established and

30% of them

women-owned

(2014)

More than 200

new MSMEs

established and

30% of them

women-owned

(2017)

COMPONENT I – IMPROVEMENT OF PUBLIC INVESTMENT EFFECTIVENESS

OU

TP

UT

S

I.1 – Improvement of Public Corporate Governance and the Public Investment Framework

Development and

operationalization of

the National

Computerized System

for the Prioritization

and Monitoring of

Public Investment

(SNIP)

National Computerized

System for the Prioritization

and Monitoring of Public

Investment (SNIP)

No computerized

system is set up in

2014

SNIP is

operational in

2017

MF

Adoption by the

Council of Ministers

(CM) of the decree on

the use of SNIP

Decree on the use of SNIP

The manual on

project selection

criteria is

available in 2014

The decree on the

use of SNIP is

issued in 2017

Adoption by the CM of

the bill on public

corporate governance

and its implementing

decrees

Bill on public corporate

governance and its

implementing decrees

The 2009 Law on

public enterprises

The bill on public

corporate

governance is

adopted by the

CM in 2015/ the

implementing

decrees are

adopted in 2016

vii

Preparation and

publication of the 2014

and 2015 reports on

the contingent

liabilities of public

enterprises

2014, 2015 and 2016 reports

on the contingent liabilities of

public enterprises

Not yet published

in in 2014

The 2014 report

on the contingent

liabilities of public

enterprises is

available in 2015

and published in

2016. The one for

2015 is available

and published in

2016.

line ministries), to

a process of

structural reforms

which are,

moreover, the

subject of regular

monitoring by

TFPs, particularly

in the context of

the BSG which

holds biannual

joint review

missions.

Risk 3 is political

in nature and

relates to the 2016

elections

Mitigation

Measures: The

Government is

committed, at the

highest level

(Presidency,

Prime Minister’s

Office, Ministry

of finance, and

line ministries), to

a process of

structural reforms

in agreement with

TFPs.

Operationalization of

the public enterprise

monitoring and

evaluation system

(including the six

major enterprises)

Public enterprise monitoring

and evaluation system

(including the six major

enterprises)

Non-existent in

2014

The progress

report on the

operationalization

of the public

enterprise

monitoring and

evaluation system

is available in

2017

I.2 – Modernization of the Public-Private Partnership Framework

Adoption by the CM of

the PPP legislative

decree (replacing the

2005 instrument)

PPP legislative decree

(replacing the 2005

instrument)

Legislative decree

of 2005

The PPP

legislative decree

is adopted by the

CM in 2015

Preparation of the PPP

policy and manual PPP policy and manual

Non-existent in

2014

The PPP policy

and manual are

available in 2016

Setting up of the

pipeline of PPP

operations with at least

3 projects ready for bid

invitations.

Pipeline of PPP operations

with at least 3 projects ready

for bid invitations

Non-existent in

2014

The pipeline of

PPP operations is

set up in 2016

COMPONENT II – SUPPORT FOR THE PROMOTION OF PRIVATE SECTOR DEVELOPMENT

II.1 – Improvement of the Business Environment

Adoption by the CM of

the legislative decree

relating to the General

Regulations of the

Investment Code.

Legislative decree relating to

the General Regulations of the

Investment Code

Non-existent in

2014

The legislative

decree relating to

the General

Regulations of the

Investment Code

is adopted by the

CM in 2016

Revision and adoption

by the CM of the

Investment Tax

Benefit Code

Investment Tax Benefit Code Old Code existing

in 2015

The Investment

Tax Benefit Code

is revised and

adopted in 2016

Operationalization of

the “After Care”

monitoring and

evaluation system for

private investments.

“After Care” monitoring and

evaluation system for private

investments

Non-existent in

2014

The progress

report on the

“After Care”

system for private

investments is

available in 2017

Operationalization of

the external trade one-

stop shop

The external trade one-stop

shop

Non-existent in

2014

The progress

report on the

external trade one-

stop shop is

available in 2017

Operationalization of

the online business tax

return filing system (e-

tax)

Online business tax return

filing system (e-tax)

The system is

operational for the

VAT in 2015

The progress

report on the

operationalization

of the system is

available in 2016

viii

Issuance by the

Ministry of finance

(MF) of the order

relating to the

operation of the State’s

Counter-Guarantee

Fund and the

replenishment of the

Fund to cover the Cabo

Verde Guarantee

scheme.

Order issued by the Ministry

of finance (MF) relating to the

operation of the State’s

Counter-Guarantee Fund and

the replenishment of the Fund

to cover the Cabo Verde

Guarantee scheme.

The Cabo Verde

Guarantee scheme

is set up in 2014

The MF Order is

issued in 2015

Adoption by the CM of

the bill on insolvency

and the revival of

enterprises

Bill on insolvency and the

revival of enterprises

Non-existent in

2015

The bill is adopted

by the CM in 2016

II.2 – Support for Entrepreneurship and Formalization of Informal Activities

Adoption by the CM of

the three

implementing decrees

of the law on the legal

regime of micro- and

small-sized enterprises

(MSEs): (i) decree on

taxation; (ii)

certification; (iii)

conduct of business

activities

Implementing decrees of the

law on the legal regime of

micro- and small-size

enterprises (MSEs)

Non-existent in

2014

The two decrees

(i) and (ii) are

adopted by the

CM in 2015; the

decree on the

conduct of

business activities

is adopted by the

CM in 2016

Establishment and

operationalization of

five incubators (2

tourism, 1 ITC, and 2

agribusiness)

Number of incubators Non-existent in

2014

The five

incubators are

operational in in

2016

Adoption by the CM of

the implementing

decrees of the law on

microfinance

institutions

The implementing decrees of

the law on microfinance

institutions

The law on

microfinance

institutions is

enacted in 2015

The implementing

decrees are

adopted by the

CM in 2016

Financing: AfDB – EUR 20 million

1

I. INTRODUCTION: THE PROPOSAL

1.1.1 Management hereby submits the following proposal and recommendation to grant a

EUR 20 million African Development Bank loan to the Republic of Cabo Verde to finance the

Economic Growth Support Programme – Phase II (PACE-II). PACE-I presented the multi-annual

framework of the programme and provided a list of reform measures considered as indicative triggers

for the second phase (PACE-II). The programme-based approach selected helps to improve aid

predictability and facilitate alignment with the country’s development policies, thus creating conditions

for sustained, sustainable and inclusive growth.

1.1.2 Cabo Verde was adversely impacted by the 2008 global financial crisis followed by the

European debt crisis which caused a steep fall in foreign direct investments (FDIs) and tourism exports

– the country’s major sources of growth – as well as in remittances. After a period of strong growth of

6.6% on average between 2000 and 2008, the country experienced a year of recession in 2009 before

returning to an average growth rate of 1.3% between 2010 and 2015. It was only in 2016 that recovery

began to gain momentum with a growth rate estimated at 3.8% by the IMF, owing to the revival of

tourism and public administration as well as the agricultural sector due to abundant rainfall. The

sluggish growth period from which the country seems to be emerging was accompanied by a rapid

accumulation of public debt. Given that the country is undergoing transition with its traditional donors

and no longer has access to concessional financing, but also in a bid to implement a counter-cyclical

fiscal policy1, the authorities intensified the use of concessional loans to finance infrastructure projects

and other public investments. Thus, debt rose from 71.9% of GDP in 2010 to 125.9% in 2016.

1.1.3 Economic diversification is essential for long-term growth. Lacking natural resources and

economies of scale to sustain a significant manufacturing base, the economy is concentrated in the

services sector. The authorities’ commitment to diversification is reflected in a clear policy to change

the growth paradigm by placing the private sector, which is a source of employment, at the centre of the

economy, as well as economic infrastructure development and management. Cabo Verde still faces a

twofold challenge: (i) reviving economic growth in order to crane itself to the ranks of upper middle-

income countries (MICs) and provide greater opportunities to its population, especially young people

and women; and (ii) maintaining debt sustainability so as to facilitate access to international financial

markets at a lower cost for the continued financing of its development programmes. To address this

twofold challenge, the Government (GoCV) is focusing its efforts on three areas: firstly, streamline the

management of public enterprises whose recurrent deficits required budget subsidies from the

government – a situation detrimental to the balance of public finances; secondly, boost the efficiency

of investments by introducing a National Public Investment System (SNIP) to ensure that projects come

to full maturity, and to streamline the selection of projects to be financed from the public investment

budget under the PPP arrangement; lastly, create conditions conducive to the emergence of a more

buoyant and competitive private sector, particularly by strengthening inclusive entrepreneurship.

1.1.4 PACE aims to support Government’s efforts through operational objectives to change

the economic paradigm. Concretely, this implies improving public corporate governance and the

public investment framework; modernizing the public-private partnership (PPP) framework; improving

the business environment; and promoting entrepreneurship and formalizing informal sector activities

on the basis of the National Strategy for the Transition from Informality to Formality elaborated by the

government with assistance from partners. Though PACE-I was implemented in 2015, PACE-II

implementation was deferred to 2017 due to delays in completing some key indicators. The triggers not

completed in time for presentation to the Board in 2016 were considered to be important given the

macroeconomic situation and the objectives of PACE-II. They concerned public enterprises and

investments identified as key elements for better budgetary consolidation, and ultimately closely related

to the debt issue. The triggers were completed in 2017, thus achieving PACE objectives.

1 Though significant, this effect is not too pronounced insofar as 90% of the investment programme is composed of imports, thus producing a low

multiplier effect.

2

II. UPDATE ON THE COUNTRY’S ELIGIBILITY

2.1. Criterion 1 – Government’s Commitment to Reducing Poverty

2.1.1 PACE’s programme-based support aligns with two national strategic documents. Until end-

2016, Cabo Verde’s development strategy was detailed in its third-generation Growth and Poverty

Reduction Strategy Paper (GPRSP III) 2012-2016. Approved in May 2013, the GPRSP III was the

reference framework for donor operations, and was based on the principles of the country’s long-term

national vision for development expressed in the Economic Transformation Strategy (ETS) since 2003.

The ETS hinges on the use of Cabo Verde’s geo-strategic position to make the country an international

platform/hub for high value-added services and to expand its productive base. The country’s vision is

to build a competitive, highly diversified and viable economy through the development of seven key

areas, namely: (i) tourism; (ii) maritime economy; (iii) air transport; (iv) information technology; (v)

finance; (vi) creative economy; and (vii) agribusiness. For its part, the GPRSP III defines the following

five thrust areas: (1) infrastructure; (2) human capital development; (3) good governance; (4) private

sector support; and (v) global partnership development. It is within this framework that the Bank’s 2014-

2018 Strategy was developed.

2.1.2 In 2017, Cabo Verde embarked on the development of a new strategy, namely the Economic

Plan for Sustainable Development (PEDS). This plan comprises three strategic thrusts. First, it focuses

on the design of a new economic growth model having as sub-components economic diversification,

structural reforms, and the development of islands as economic units. The second thrust relates to the

provision of social services by the State, human capital, the quality of life and the fight against

inequalities. Lastly, the third thrust concerns a new State model focusing on security, justice, defence

and leveraging diaspora. Though the PEDS has not yet been validated, it has reached an advanced stage

and will be approved by end-2017.

2.1.3 The country’s economic performance has contributed, in an inclusive manner, to

improving the population’s living standards. Improvement in the living conditions of the population

over the past decade has resulted in a significant decrease in the poverty rate in recent decades.

According to the latest Household Consumption Survey (2015), 35% of the population lives below the

poverty line and 10.6% in extreme poverty. However, progress has not been uniform, particularly

among the islands and between urban and rural areas. Poverty rates in islands with the best tourist

infrastructure, notably Sal and Boa Vista, are less than half the national average. Significant progress

has been made in education in recent years. However, the challenge facing the educational system is to

address its mismatch with labour market needs. Generally, basic education is efficient (for instance, in

2015, the literacy rate was more than 80%; the girl/boy parity index was balanced in terms of net

enrolment rates, etc.). However, the challenge is to improve its quality and relevance to the needs of the

economy. Almost half of the country’s private enterprises interviewed in 2009 through a World Bank

survey indicated that the poor quality of the labour force impeded their competitiveness, compared with

less than a quarter on average in Africa. Concerning health, with a life expectancy of 75 years, the

quality of life of Cabo Verdeans is higher than the continental average of 60 years. The main health

sector indicators are much higher than those of most African countries. The Human Development Index

(HDI) stood at 0.646 in 2014, slightly above the average of the so-called middle-income countries which

was 0.630. The infant mortality rate dropped from 22 per 1 000 in 2013 to 21 per 1 000 in 2014 and was

estimated to be about 21 per 1 000 in 2015. However, there are wide disparities in access to and quality

of health services. The country’s geographical isolation makes this equation difficult to solve.

2.2. Criterion 2 – Political Stability

2.2.1. Cabo Verde is one of the most politically stable countries in Africa. It is a model of

democracy on the continent. The country enjoys good political stability, which has been steadily

consolidated over the years thanks to the quality of its democratic system established in 1991 and

strengthened over time. In 2016, the country organized three major elections, namely legislative,

presidential and local elections. These elections were won by the Movement for Democracy (MPD)

3

against the African Party for the Independence of Cabo Verde (PAICV). Cabo Verde scored 7.81 out

of 10 on The Economist Intelligence Unit’s Democracy Index in 2015, ranking 32nd out of 167 countries

in the world and 3rd in Africa after Mauritius (18th globally and 1st in Africa) and Botswana (28th globally

and 2nd in Africa). Cabo Verde’s performance is mainly as a result of the quality of its electoral process

(rated 9.17 over 10) and the high level of civil liberties (9.12 over 10). Cabo Verde is widely recognized

among African countries for its good governance. According to the Mo Ibrahim Index of African

Governance (IIAG), in 2016, the country ranked third out of 52 African countries in terms of governance

performance.

2.3. Criterion 3 – Macroeconomic Stability

2.3.1. Cabo Verde’s economy has

experienced a low level of growth in recent

years despite an expansionary fiscal policy

through an extensive public investment

programme. The deterioration of the

international economic environment resulting

from the 2008 financial crisis on the one hand,

and the 2009 euro crisis, on the other, had a

negative impact on the country’s economy.

After a period of strong growth of 6.6% on average between 2000 and 2008, the country experienced a

year of recession in 2009 before returning to an average growth rate of 1.3% between 2010 and 2015.

It was only in 2016 that recovery began to gain momentum with a growth rate of about 3.2%.

2.3.2 The main objective of the Public Investment Programme (PIP), launched in 2008 and

financed by concessional loans, was to stimulate the country’s growth in order to cope with the

global financial crisis. These substantial public investments coupled with the low level of economic

growth and the tightening of global financial conditions (appreciation of the US dollar) which coincided

with the fall in commodity prices, exacerbated the budget deficit and increased public debt. Thus, debt

increased from 71.9% of GDP in 2010 to 125.9% in 2016. Consequently, the country is now facing

difficult conditions due to the high pressure exerted on public finance, worsened by an uncertain external

environment2.

2.3.3. Faced with the high risk of debt distress, despite comfortable levels of debt service

indicators that are below critical thresholds, the new authorities have embarked on a major fiscal

consolidation policy. To address debt pressure, the authorities have undertaken to consolidate public

finance. In 2015, the public deficit was reduced to 4.1% of GDP, compared with 7.9% set in the initial

budget, and to 3.3% in 2016. This level is much lower than the rates of 7.5% and 8.9% respectively in

2014 and 2013. This reduction is due mainly to the efforts made on the revenue side, with a significant

increase in revenue owing to the broadening of the tax base. On the expenditure side, the slimming

down of the public investment programme also contributed to reducing the deficit. Furthermore, efforts

are being made to reduce the fiscal risks associated with inefficient public enterprises. The authorities

are grappling with the challenges posed by some of these cash-strapped enterprises such as the Cabo

Verde Air Transport Company (TACV) and the Real Estate Company (IFH) whose liabilities stand at

about 20% of GDP. As a result, the authorities resolved to restructure TACV, whose monthly deficit

borne by the taxpayer was almost EUR 3 million, by concluding agreements with private companies to

ensure territorial coverage. Indeed, without the privatisation programme, the accumulation of debts

linked to PEs could add-up to the national debt stock leading it to over 140% of GDP in 2018 rather

than allowing it to take a diminishing trend as currently envisaged (Technical Annex 4).

2 The first set of uncertainties is due to the close link between the domestic economy and Europe, particularly the timid recovery of European economies

and uncertainty about the impact of Brexit.

Table 1: Macroeconomic Indicators

2015 2016(e

) 2017(p)

2018(p

)

Real GDP (Growth) 1.5 3.2 3.7 4.1

Real GDP per Capita (Growth) 0.2 2.0 2.5 2.9

Inflation 0.1 -1.6 0.8 1.6

Overall Balance % GDP -4.1 -3.3 -3.0 -1.9

Current Account Balance %

GDP -4.3 -7.2 -8.8 -8.4

Source: AEO 2017

4

2.3.4. On the whole, the short-term outlook is positive, despite looming major challenges that

will impact growth and development in the long term. GDP growth is expected to reach 3.7% in 2017

and 4.1% in 2018. During the first half of 2017, sector developments, changes in confidence indicators,

prospects in the tourism industry and credit to the private sector have been positive. In 2016, credit to

the private sector rose by 2.1%, though still low. Similarly, a reverse trend has been noted in economic

confidence indicators. However, such changes are largely cyclical. Over the past ten years, total factor

productivity in Cabo Verde has decreased, suggesting a reduction in growth levels in the long term.

There is need to implement structural reforms to improve productivity and the private sector profile.

This is in line with the position adopted by the new Government to create a new growth paradigm driven

by the private sector.

2.3.5. The macroeconomic framework is monitored regularly by the IMF and the Budget Support

Group (BSG) which brings together the TFPs involved in programme-based support operations. The

latest BSG review mission was in June 2017. The IMF and BSG confirmed the stability of the

macroeconomic framework, but underscored the need to address the aforementioned challenges. The

IMF mission’s findings emphasize the need to carry on efforts to improve the performance of public

enterprises and significantly accelerate growth in 2017. The debt sustainability analysis (DSA)

conducted by the World Bank and the International Monetary Fund (IMF) in 2016 indicate that external

debt service ratios are comfortable though the stock of debt represents a high risk.

2.4. Criterion 4 –Fiduciary Risk Assessment

2.4.1. The fiduciary framework assessment conducted by the Bank in Octpber 2016 concluded

that the fiduciary risk was moderate and that the public finance management system fulfilled the

Bank requirements for budget support operations. Overall, Cabo Verde’s public finance

management system, which was deemed strong and reliable in the 2008 PEFA report, has further

improved with the implementation of the 2012 PEMFAR recommendations. The consolidation of the

public finance management system was reflected in the latest PEFA using the 2011 methodology

released in May 2015, with an improvement in the scores of 13 indicators, the maintenance of the scores

of 12 indicators and a drop in the scores of 5 indicators. The new Government formed after the 2016

general (local, legislative and presidential) elections has the necessary tools to develop and manage a

new public finance consolidation strategy for 2017-2020. In accordance with the Paris Declaration and

the Accra Forum on Aid Effectiveness, the Bank will continue to support reforms aimed at strengthening

public finance management, procurement and audit systems. To improve the components whose

weaknesses have been highlighted above, the 2013-2017 Fiduciary Strategy recommends the use of

public finance management systems in their entirety to implement programme-based support operations

such as the Economic Growth Support Programme.

2.5. Criterion 5 – Harmonization

2.5.1. Cabo Verde has made significant progress in implementing the Paris Declaration Principles,

thus strengthening aid effectiveness. Aid to Cabo Verde is aligned with national priorities. Since 2006,

Cabo Verde’s major bilateral and multilateral donors have harmonized their budget support around a

mutually agreed policy matrix. The budget support instrument, which is increasingly taking precedence

over project lending in recent years, is used to leverage collaboration with other development partners

in the country’s public finance management and sector support. The BSG members conduct joint

reviews twice a year, which reduces transaction costs and promotes the harmonization of partners’

procedures and processes. Since the start of CSP implementation, the Bank has taken part in all BSG

meetings and is planning to intensify its contributions, especially once the PEFA action plan becomes

the basis for the BSG common matrix. It should be noted that the Bank will chair the BSG as from

November 2017 for a two-year period.

5

III. PROGRAMME for 2016/2017 – PACE-II

3.1 Programme Goal and Objective

3.1.1 Like PACE-I, the main objective of PACE-II is to contribute to creating the conditions

for strong, inclusive and sustainable economic growth in Cabo Verde. This second phase pursues

the same operational objectives as PACE-I, namely: (i) improve public corporate governance and the

public investment institutional and regulatory framework; (ii) modernize the public-private partnership

institutional and regulatory framework; (iii) improve the business environment; and (iv) promote

entrepreneurship and the formalization of informal activities. Achieving these operational objectives

will help to address the major challenges and constraints that Cabo Verde continues to face, namely: (i)

reviving economic growth in order to hoist itself to the ranks of upper middle-income countries (MICs)

and provide greater opportunities to its population, especially young people and women; and (ii)

maintaining debt sustainability so as to facilitate access to international financial markets at a lower cost

for the continued financing of its development programmes.

3.2 Programme Components

3.2.1 PACE-II is a continuation of PACE as it is structured around the same components,

namely: (i) improvement of public investment effectiveness in order to create conditions for sustained

economic growth whose fruits will benefit a greater proportion of Cabo Verde’s population; and (ii)

support for the promotion of private sector development to stimulate the domestic production of goods

and services. These two components are complementary and mutually reinforcing.

Component I: Improvement of Public Investment Effectiveness and the Public Investment

Regulatory Framework

3.2.2. As outlined in PACE-I, this PACE-II component is meant to support reforms aimed at

improving the institutional and regulatory framework of public investments and public corporate

governance, and modernizing the public-private partnership framework as a source of public investment

financing and equity participation in public enterprises.

3.2.3. Context: efficient management of public investments for better control of the country’s debt

level is a key objective for the new authorities. Over the past few years, Cabo Verde has been

implementing an expansionary policy with concessional financing of structuring public infrastructure

investments to improve the country’s growth level. Although these investments have undoubtedly

increased public debt, they are expected to have a positive impact on the economy’s competitiveness

and, hence, foster growth. However, owing to mostly exogenous concurrent shocks, the expected

outcomes have not been commensurate with the level of investments. Financial difficulties faced by the

national carrier (TACV) and the public real estate corporation (IFH) have negatively affected the

budget, thereby increasing the level of contingent liabilities (the contingent liabilities of the two public

enterprises account for about 20% of GDP). To address this situation, the authorities have embarked not

only on progressive budget consolidation to restore the macroeconomic stability required for sustainable

and inclusive growth and employment, but also on prioritizing the implementation of public investment

projects with strong impacts on growth and employment, and accelerating the process of reorganizing

public enterprises with a view to their future privatization (Technical Annex 4).

3.2.4. Implementation of PACE-I: the implementation of PACE-I in 2015 helped to improve public

investment efficiency through the effectiveness of the following actions precedent: (i) adoption of the

bill on public corporate governance; (ii) preparation of the report on the contingent liabilities of public

enterprises for 2014; and (iii) adoption of the legislative decree on public-private partnership (PPP). In

the same vein, GoCV in December 2015 launched the development of a national system project for

prioritizing and monitoring investments. These key actions have contributed to improving public

corporate governance and modernizing the institutional and regulatory framework of PPPs.

6

3.2.5. Reforms supported by PACE-II: the reforms under PACE-I will be deepened by PACE-II

through the implementation of the following: (i) development and operationalization of a national

system for prioritizing and monitoring public investments (SNIP); (ii) preparation of a public investment

manual and adoption of the decree on the effective use of SNIP; (iii) adoption of implementing decrees

of the law on public corporate governance; (iv) publication of the report on contingent liabilities of

public enterprises for 2015 and 2016; (v) development and operationalization of a public enterprise

monitoring and evaluation system covering the six major enterprises; (vi) formulation and preparation

of a PPP policy and manual to make it easier for UPPP staff to understand and manage PPP financing;

and (vii) setting up of a pipeline of PPP operations with at least three projects that are ready for bid

invitations.

Component II: Support for the Promotion of Private Sector Development

3.2.6. As outlined in PACE-I, this PACE-II component is designed to support reforms aimed at

greater promotion of private sector development by improving the business climate and developing

entrepreneurship.

3.2.7. Context: the new authorities have made private sector development the key element of their

development programme. Concerning the business climate, the country has experienced a downturn due

to the stagnation of reforms, ranked 129th out of 190 countries in Doing Business 2017, against 125th

out of 189 countries in 2016. To address this slowdown in reforms, the authorities embarked on changing

the status of Cabo Verde Invest which led to the creation of Cabo Verde Trade Invest in 2016 with

greater emphasis on investment promotion and facilitation.

3.2.8. Implementation of PACE I: the following reforms were implemented under PACE-I: (i)

adoption of the draft legislative decree on the General Regulations of the Investment Code; (ii) issuance

of an order relating to the operation of the State Counter-Guarantee Fund and its replenishment to cover

the Cabo Verde Guarantee scheme; (iii) adoption of the implementing instruments of the law on the

legal regime of micro- and small-sized enterprises, particularly the decree on taxation and the decree on

certification in 2015; (iv) adoption of a tax package (general tax code, tax enforcement code, tax

procedures code, corporate tax code, revision of VAT, etc.); and (v) adoption of the decree on the Public

Procurement Dispute Settlement Commission.

3.2.9. Reforms supported by PACE-II: PACE-II will support the following reforms: (i) adoption of

the revised Investment Tax Benefit Code to lower the threshold of the fiscal framework agreements; (ii)

operationalization of the private investment monitoring and evaluation system (After-Care); (iii)

operationalization of the online business tax return filing system; (iv) operationalization of the one-stop

shop for external trade; (v) adoption of the bill on insolvency and revival of ailing enterprises; (vi)

adoption of the implementing instruments of the law on the legal regime of micro- and small-sized

enterprises, particularly the decree relating to the conduct of business activities; (vii) the establishment

and operationalization of five incubators, two of them in tourism, one in information technology and

two in agribusiness to encourage private initiative; and (viii) adoption of the implementing decrees of

the 2015 law on microfinance institutions to improve access to micro-credit by SMEs.

3.3. Programme Outputs and Expected Outcomes

3.3.1. The implementation of the first phase of the programme (PACE-I) contributed to mitigating

the negative impacts of the global economic slowdown. The effective implementation of PACE-I

reforms helped to create conditions for greater private sector contribution to the country’s growth and

development process. PACE-II reforms mainly seek to consolidate these achievements with a view to

their effective operationalization.

7

Table 2: Progress Towards Achieving the Output Targets Set in the Logical Framework

Outputs - Reforms Achievements

Component I – Improvement of Public Investment Effectiveness

Output I.1 – Improvement of public corporate governance and the public investment framework

Development and operationalization of

the national public investment

prioritization and monitoring system

(SNIP) in 2016/adoption by the Council

of Ministers (CM) of the decree on the

use of SNIP in 2016

Achieved: the preparation of the system started in January 2015. It was not

operationalized in 2016 because the utilization manual was not completed and

the implementing decrees were not approved. These elements were finalized in

2017. The system is being used to prepare the 2018 budget.

Adoption by the CM of the bill on

public corporate governance in 2015

and the implementing decrees in 2016

Achieved: the bill on public corporate governance was adopted by the Council

of Ministers in 2015. The various implementing decrees were approved in

2016.

Preparation and publication of reports

on the contingent liabilities of public

enterprises for 2014 and 2015

Achieved: the reports on the contingent liabilities of public enterprises for 2014

and 2015 were prepared and published in 2016

Operationalization of the public

enterprise monitoring and evaluation

system (comprising the six major

enterprises) in 2017

Achieved: the first contract signed with a consulting firm for the preparation of

this monitoring system was cancelled due to the firm’s poor performance. The

process of recruiting another firm is on-going. The system could only be ready

in the second half of 2017. Given this situation, an alternative trigger was

discussed. The objective of this trigger is to improve the monitoring of State

participation in public enterprises. In November 2016, the Government

established a Public Enterprise Support Unit (Unidade de Acompanhamento do

Sector Empresarial do Estado “UASE” – through Legislative Decree No.

57/2016). UASE is a special unit responsible for providing support to the

Minister in playing the role of State shareholder and intervening in subsidiaries

of State corporations, as well as in the management and coordination of

privatization and public-private partnership (PPP) processes. It is directly

answerable to the Minister of Finance. Based on the legislative decree and the

powers of UASE, this unit fundamentally has the same objectives as the initial

trigger. Thus, the effective establishment and operationalization of UASE were

adopted as the equivalent alternative trigger. The de facto operationalization of

the unit as well as the following evidence have been checked,: (i) approval, by

the Minister of Finance, of USAE’s Action Plan (by a despacho); (ii) approval,

by the Minister of Finance, of USAE’s structure (by a despacho); (iii) approval,

by the Council of Ministers, of USAE’s pipeline of operations (minutes of the

Council of Ministers); and (iv) presentation of the organization chart approved

by the current experts or those being recruited.

Output I.2 - Modernization of the public-private partnership framework

Adoption by the CM of the legislative

decree on PPPs in 2015 (in replacement

of the 2005 instrument)

Achieved: the legislative decree on PPPs was adopted by the CM in 2015.

Formulation and preparation of the PPP

policy and manual in 2016

Achieved: the PPP policy and manual were formulated and prepared in 2016

Establishment of the pipeline of PPP

operations with at least 3 projects that

are ready for bid invitations in 2016

Achieved: a pipeline of operations with more than 3 PPP projects was

established in 2016

Component II – Support for the Promotion of Private Sector Development

Output II.1 – Improvement of the business environment

Adoption by the CM of the legislative

decree on the General Regulations of

the Investments Code in 2015

Achieved: the legislative decree on the General Regulations of the Investment

Code was adopted in 2015.

Revision and adoption by the CM of the

Investment Tax Benefit Code in 2016

Achieved: the Investment Tax Benefit Code was revised in 2016.

Operationalization of the private

investment monitoring and evaluation

system "After-Care"

Achieved: this reform should be steered by CV-Invest which is facing an

internal organization problem. The attachment and the name of CV– Invest

have changed with focus on promotion and facilitation. An “After-Care”

system project has been prepared and approved by CV-Trade Invest’s Board of

Directors. The After-Care system comprises two components. The first is

composed of an interface accessible to investors to provide them with

assistance in the procedures they are required to follow. This aspect has been

finalized. The second component comprises an interface for monitoring

investors’ obligations relating notably to concessions granted by the State. This

interface has not yet been established. While the finalization of the first

8

Table 2: Progress Towards Achieving the Output Targets Set in the Logical Framework

Outputs - Reforms Achievements

component can be considered as 50% achievement of this trigger, an equivalent

alternative trigger was proposed for the second component by focusing on the

database which will feed the computer platform once it is finalized and relying

on the following evidence: (i) presentation of the database on all the investment

projects implemented since 2014, (ii) finalization of the database with

exonerations granted to investors for investments made over the last three

years; and (iii) sharing of the finalized prototype of the platform.

Operationalization of the online

business tax return filing system (e-tax)

in 2016

Achieved: the online business tax return filing system is operational in 2016

Operationalization of the one-stop shop

for external trade

Achieved: to achieve this indicator according to the initial proposal, the

Government must first adopt the World Trade Organization’s trade facilitation

agreements. Article 10 of these agreements deals with the establishment of the

one-stop shop. This element was not accomplished in the first quarter of 2017.

Pending effective ratification, it was decided that emphasis should be laid on

the establishment of the legal and operational structure for the one-stop shop

for external trade that will enable the effectiveness of the one-stop shop once

the legal process is finalized. Thus, this indicator has been achieved and

checked through the (i) submission to Parliament of the request for ratification

of the WTO Agreement on Trade Facilitation, and (ii) the effective

establishment of the National Trade Commission (Resolution of the Council of

Ministers - Regulamentação).

Issuance in 2015 by the Ministry of

finance (MF) of the order relating to the

operation of the State Counter-

Guarantee Fund and its replenishment

to cover the Cabo Verde Guarantee

scheme

Achieved: the Ministry of finance issued the order relating to the operation of

the Fund in 2015.

Adoption by the CM of the bill on the

insolvency and revival of ailing

enterprises in 2016

Achieved: the bill on the insolvency and revival of ailing enterprises was

adopted in 2016.

Output II.2 – Support for entrepreneurship and the formalization of informal activities

Adoption by the CM of three

implementing decrees of the law on the

legal regime of micro- and small-sized

enterprises (MSEs): (i) decree on

taxation in 2015; (ii) certification in

2015; and (iii) conduct of business

activity in 2016.

Achieved: all the implementing decrees of the law on the legal regime of micro-

and small-sized enterprises were adopted between 2015 and 2016.

Establishment and operationalization of

five incubators (2 in tourism, 1 in ICT

and 2 in agribusiness) in 2016

Achieved: more than five incubators were established and operationalized in

2016.

Adoption by the CM of the

implementing decrees of the law on

microfinance institutions in 2016

Achieved: the implementing decrees were adopted in 2016.

Table 3: Progress Towards Achieving the Output Targets Set in the Logical Framework

Indicators Target Achievements/Remarks

Outcome 1 – Improved public investment effectiveness

PEFA indicator– PI 11 – Public investment

management (new PEFA indicator not

previously assessed)

C (2018) Being achieved: considering the

establishment of the public investment

management unit.

PEFA indicator – PI 12 – Public asset

management (new PEFA indicator not

previously assessed)

C (2018) Being achieved: considering the

establishment of the public investment

management unit.

Number of PPP projects signed by the

Government and being implemented

3 (2017) Achieved : Three privatization transactions

were carried out in 2015 (Garantia, BCA and

ENACOL)

Outcome 2 – Enhanced private sector development

Credit to the private sector (% broad money

supply – M2) (CSI)

6.2% of M2 (2016) Achieved: in 2016, credit to the private

sector represented 9.3% of M2

9

Import and export timeframe (days) Less than 15 days to

import and export

respectively (2016)

Achieved: less than 9 to import and 2.3 days

to export in 2016

Number of new MSMEs established (%

owned by women)

More than 200 new

MSMEs established and

30% of them owned by

women (2016)

Achieved: about 2469 MSMEs established

between 2015 and 2016, 46% of them

owned by women between 2015 and 2016

3.4. Progress Towards Fulfilling Conditions Precedent to PACE-II (list of PACE-II triggers

defined under PACE-I)

3.4.1. The evaluation of PACE-I implementation underscored the effective implementation of

the reforms envisaged in 2015 and the significant progress in the implementation of PACE-II

triggers (possible conditions precedent to PACE-II), as agreed in the initial appraisal report. PACE-

I identified 13 triggers for PACE-II: 9 triggers as initially defined were completely implemented in

2016, 1 trigger was implemented late in 2017 and 3 triggers were revised and implemented in 2017.

3.4.2. Concerning Component I, all the 5 planned triggers were satisfactorily implemented.

However, one trigger was implemented late, while another was revisited due to the technical

problems related to its implementation. Firstly, concerning the operational objective of improving

public corporate governance and the public investment framework, GoCV implemented two out of

the four planned triggers on time and the other two were implemented late. The trigger relating to the

development and operationalization of the national public investment prioritization and monitoring

system (SNIP) was not implemented in 2016 owing to delays in developing these electronic tools (§

Table 3). However, it was completed in 2017. The trigger on the operationalization of the public

enterprise monitoring and evaluation system (covering the six major enterprises) was delayed because

the first contract signed with a consulting firm for the preparation of this monitoring and evaluation

system was cancelled as a result of the consulting firm’s poor performance. Given that the objective of

this trigger is to improve the monitoring of State participation in public enterprises, the Bank teams

have initiated a dialogue with the authorities on this point to find an equivalent alternative trigger that

will produce the same or better outcome. In November 2016, the Government established the Public

Enterprise Support Unit (Unidade de Acompanhamento do SectorEmpresarial do Estado “UASE” –

through Legislative Decree No. 57/2016). UASE is a special unit responsible for providing support to

the Minister in playing the role of State shareholder and intervening in subsidiaries of State corporations,

as well as in the management and coordination of privatization and public-private partnership (PPP)

processes. It is directly answerable to the Minister of Finance. UASE replaces the monitoring system in

the sense that it is the institutional framework and provides the human resources required to ensure the

performance of any monitoring system. Based on the legislative decree and the powers of UASE, this

unit fundamentally has the same objectives as the initial trigger. Thus, the effective establishment and

operationalization of UASE constituted an equivalent alternative trigger. Secondly, concerning the

modernization of the public-private partnership framework, the only trigger provided for was

implemented satisfactorily.

3.4.3. Concerning Component II, 6 out of 8 planned triggers were implemented satisfactorily and on

time, while 2 were readjusted to better achieve the set objectives, and implemented. Firstly, concerning

the improvement of the business environment and support for investment promotion and private

sector development, 3 out of 5 planned triggers were implemented on time. The trigger relating to the

operationalization of “After-Care” was partially implemented (50%) at end- 2016 and concerned the

establishment of an interface accessible to investors in order to provide them with assistance in the

processes they are required to follow. The second component of After-Care comprises an interface for

monitoring investors’ obligations relating notably to concessions granted by the State. It was not

implemented. However, it will only be useable once the database on enterprises benefiting from State

counterpart contribution is established (given that the computer tool is only an interface for data use and

monitoring). Thus, it was proposed that focus should be on the database that will feed the computer

platform once it is finalized. Lastly, concerning the trigger relating to the one-stop shop for external

10

trade, the Government must first adopt the World Trade Organization’s trade facilitation agreements.

Article 10 of these agreements deals with the establishment of the one-stop shop. This element was not

accomplished in the first quarter of 2017. Pending effective ratification, it was decided that emphasis

should be laid on the establishment of the legal and operational structure for the one-stop shop for

external trade which was checked through the (i) submission to Parliament of the request for ratification

of the WTO Agreement on Trade Facilitation, and (ii) the effective establishment of the National Trade

Commission (Resolution of the Council of Ministers - Regulamentação). Secondly, concerning support

for entrepreneurship and the formalization of informal activities, all the planned triggers were

completely and satisfactorily implemented.

3.5. Public Policy Dialogue

3.5.1. PACE is a programme-based operation. It aims to consolidate the gains under previous

operations and support the authorities in implementing key structural reforms which, in addition

to previous reforms, will help to create conditions for sustained and inclusive growth. Thus, during

PACE implementation, dialogue with the Cabo Verdean authorities will focus on the following areas:

(i) enhancing public investment effectiveness through emphasis on the continued improvement of public

corporate governance and the public investment framework as well as modernizing the PPP framework;

and (ii) supporting the promotion of private sector development, in general, and the improvement of the

business environment and entrepreneurship, in particular. The dialogue will be sustained technically by

various on-going institutional support projects in the areas of public-private partnership (PPP) and

public finance. Bank engagement in dialogue will be bilateral and through the Budget Support Group

(BSG). Moreover, the Bank will chair the BSG from November 2017 to November 2020. Lastly, it

should be noted that the Bank has held continuous dialogue with the authorities, especially on the

implementation of triggers agreed beforehand and the use of equivalent alternative triggers in a bid to:

(i) address contingencies in terms of implementing public policy actions; and (ii) adjust actions in order

to maximize the expected outcomes. Three triggers were so reviewed.

3.6. Loan Conditions – Actions Precedent

3.6.1. The presentation of this second phase of the budget support operation to the Fund’s Board of

Directors is subject to the implementation of measures precedent. After consultation with the new Cabo

Verdean authorities, 9 out of a total of 13 triggers (potential actions precedent) were selected as actions

precedent to PACE-II. However, some actions precedent where updated in agreement with the

authorities. Indeed, given the time lag in this second phase for 2017, the authorities have exceeded the

expectations of certain preconditions. If, for example, some evidence were based on the presentation of

draft legislation to the Council of Ministers by 2016, they now take the form of laws approved by

Parliament, thus fully meeting the objectives of the program. Others were updated considering delays

experienced following the changes in legislature and government in 2016. Table 4 summarizes PACE-

II measures precedent and the corresponding evidence.

Table 4: List of Actions Precedent Evidence update

General condition precedent - Maintain a stable macroeconomic framework, as reflected by IMF

or TFP Budget Support Group reports or appraisals. Evidence: certified copy of the press release on

the findings of the last IMF mission or a copy of Budget Support Group’s report on the

macroeconomic framework

Trigger confirmed as action

precedent

n/a

Operational Objectives PACE-II Triggers Defined under

PACE-I Actions Precedent to PACE-II

Component I – Improvement of Public Investment Effectiveness

Improvement of public

corporate governance

and the public

investment framework

Adoption by the CM of the

implementing decrees of the law

on public corporate governance

Evidence: certified copy of the

CM statement on the adoption of

the decrees

Trigger confirmed as action

precedent

Copy of the law on the

governance of state

enterprises

Posting of the report on the

contingent liabilities of PEs for

2014 on MF’s website.

Evidence: certified copy of the

Internet page on which the report

on the contingent liabilities of

PEs for 2014 is posted

Trigger confirmed as action

precedent

n/a

11

Modernization of the

public-private

partnership framework

Formulation of the PPP policy and

preparation of the PPP

manual/establishment of the

pipeline of PPP operations with at

least 3 projects ready for bid

invitations

Evidence: certified copy of the

PPP policy and manual/list of the

pipeline of PPP operations with

the confirmation that at least 3

projects are ready for bid

invitations

Trigger confirmed as action

precedent

n/a

Component II – Support for the Promotion of Private Sector Development

Improvement of the

business environment

Revision and adoption by the CM

of the Investment Tax Benefit

Code to lower the investment

threshold eligible for the fiscal

framework agreement

Evidence: certified copy of the

CM statement on the adoption of

the code

Trigger confirmed as action

precedent

Copy of the law approving the

code.

Operationalization of the online

business tax return filing system

(e-tax).

Evidence: progress report on the

operationalization of the system

for the first half of 2016

Trigger confirmed as action

precedent

Copy of the “e-tax” web page

Adoption by the CM of the bill on

the insolvency and revival of ailing

enterprises

Evidence: certified copy of the

CM statement on the adoption of

the bill

Trigger confirmed as action

precedent

Copy of the law on the

insolvency and revival of

ailing enterprises

Support for

entrepreneurship and

the formalization of

informal activities

Adoption by the CM of the

implementing decree of the law on

the legal regime of micro- and

small-sized enterprises (MSEs):

Conduct of business activity

Evidence: certified copy of the

CM statement on the adoption of

the decree

Trigger confirmed as action

precedent

Copy of the law on the fiscal

regime for micro and small

enterprises.

Establishment and

operationalization of five

incubators (2 in tourism, 1 in ICT

and 2 in agribusiness)

Evidence: progress report on the

operationalization of the five

incubators for the first half of

2016

Trigger confirmed as action

precedent

Operationalisation certificate

from the Cabo Verdia

authorities and ADEI’s 2016

report.

Adoption by the CM of the

implementing decrees of the law

on microfinance institutions

Evidence: certified copy of the

CM statement on the adoption of

the decrees

Trigger confirmed as action

precedent

Copy of the law regarding

micro-finance institutions.

3.7. Application of Best Practice Principles on Conditionality

3.7.1. In accordance with the Bank’s policy on programme-based operations3, PACE-II design

took into account the five best practice principles on conditionality. The best practice principles on

conditionality were followed. The activities of development partners were coordinated for better

complementarity of operations in support of the country’s policies through Budget Support Group

reviews conducted in July and November 2016. The programme is fully in line with Cabo Verde’s

national policies and helps to support the country’s remarkable efforts to create sustainable and inclusive

conditions for strong economic growth. The actions precedent selected relate primarily to major

structural reforms aimed not only at consolidating the gains of previous programmes, but also at

significantly contributing to improving public investment effectiveness and promoting a more buoyant

private sector. Furthermore, PACE-II is aligned with the country’s budgetary cycle, thus allowing

GoCV to include it in its 2017 budget.

3 See Ref: ADF/BD/WP/2011/38/Rev.3/Approval of 29 February 2012.

12

3.8. Financing Needs

3.8.1. This programme-based budget support operation

is an integral part of the external financing sources that

will help to bridge the financing gap for the 2017 financial

year. Initially planned for 2016, the operation was supposed to

contribute to addressing a financing need in 2016. Due to its

postponement to 2017, the country had to resort to a higher

(and also more costly) domestic financing of CVE 1.6 billion.

For 2017, the financing needs stand at CVE 28.3 billion,

notably due to immediate costs incurred by the restructuring of

TACV. However, this restructuring is expected, in the medium

term, to enable the State to make substantial savings. As a

result, these needs are higher than originally foreseen (about

CVE 27 billion), mainly due to lower non-fiscal revenues and

an increase in net liabilities. It is within this framework that the

Bank's initial contribution of EUR 15 million has been

increased to EUR 20 million. To meet its need, GoCV resorted

to domestic financing to the tune of CVE 9.4 billion and

external financing of CVE 18.3 billion. Budget support

contribution stands at CVE 7.7 billion in the form of external financing. Thus, the Bank will provide

CVE 2.2 billion. Other partners of the Budget Support Group and the financial market will provide the

rest of the external financing in the form of budget support.

IV. PROGRAMME IMPLEMENTATION

4.1. Programme Beneficiaries

4.1.1. As explained in PACE-I, PACE-II will benefit the entire Cabo Verde population. The

outcomes of sound public investment management and a more developed private sector will improve

the population’s living conditions. Good public corporate governance will lead to the improvement of

the quality of public services provided to users. Efforts to facilitate access to financing and training

aimed at supporting the establishment and development of MSEs will make the private sector more

dynamic and responsive to increased opportunities resulting from the implementation of major public

investment projects. These positive impacts will boost the country’s economic growth for the good of

the entire population. Enhanced structuring of public investment management will not only create

conditions for sustained economic growth, but also contribute to improving the country’s competiveness

and capacity to attract private domestic and foreign investments.

4.1.2. PACE design mainstreamed the gender dimension during consultations with stakeholders,

including the Cabo Verdean Association for the Empowerment of Women (MORABI) and the Cabo

Verdean Institute for Gender Equality and Equity (ICIEG). It emerged from these consultations that

while Cabo Verde ranks high in the World Economic Forum's gender equality index in general, it is

only 115th out of 144 countries in terms of participation and economic opportunities for women.

Economically active women are mainly concentrated in the trade sector (about 1/3rd), 13% as domestic

workers, and 8% in agriculture. All these sectors are characterized by a high rate of informal activities.

Women run about 38% of firms, but only 18% of those with formal accounting. According to

UNWOMEN, policies to promote the private sector do not address substantive issues. Moreover, both

the means and advocacy capacities are insufficient. It is on this basis that PACE intends to have a

positive impact on gender issues, in general, and the status of women, in particular, notably through

major structural reforms that sustain the promotion of entrepreneurship through the operationalization

of incubators in the tourism and agribusiness sectors where women are most active.

Table 5: Financing needs (CVE millions)

2017

A - Total revenues (exc. Grants) 43,156

Fiscal revenue 35,534

Other 7,622

B - Total expenditure 55,487

C- Overall deficit (A-B) -12,331

D - Other net liabilities -7,104

E - Depreciation -8,875

F - Financing needs (C+D+E) -28,309

G - Financing, of which 27,651

Domestic financing 9,318

External Financing, of which 18,333

- Project Loans 10,621

- Partner Development Budget Support 7,713

African Development Bank (loan) 2,205

European Union (grant) 1,764

Portugal (grant) 55

Luxembourg (grant) 220

Others (loans) 3,467

FINANCING GAP -658

Source : GdCV/FMI/BAD

13

4.2. Implementation, Monitoring and Evaluation

4.2.1. The Ministry of finance (MF) will implement PACE. Overall responsibility for the

implementation of the Programme rests with MF which has already satisfactorily managed and

coordinated previous programmes funded by the Bank and other TFPs. It will rely on the National

Directorate of Planning (DNP) for the day-to-day programme management and monitoring. However,

it should be underscored that to ensure a participatory implementation process, all stakeholders will be

involved in programme implementation.

4.3. Financial Management, and Disbursement and Reporting Arrangements

4.3.1. Country Fiduciary Risk Assessment (CFRA): the fiduciary framework assessment

conducted by the Bank in October 2016 concluded that the fiduciary risk was moderate and that

the public finance management system fulfilled Bank requirements for budget support

operations. On the whole, Cabo Verde’s public finance management system, which was deemed strong

and reliable in the 2008 PEFA report, has further improved with the implementation of the

recommendations of PEMFAR 2012. This consolidation of the public finance management system was

highlighted in the last PEFA conducted using the 2011 methodology and published in May 2015, with

an improved score for 13 indicators, the same score for 12 indicators and a drop in the score of 5

indicators. The new Government that emerged from the 2016 general elections (local, legislative and

presidential) has the tools to develop and manage a new public finance consolidation strategy for 2017

– 2020. In accordance with the Paris Declaration and the Accra Forum on Aid Effectiveness, the Bank

will continue to support reforms aimed at strengthening public finance management, procurement and

audit systems. To improve the components whose weaknesses have been highlighted above, the

fiduciary strategy for 2013-2017 recommends the use of public finance management systems in their

entirety for implementing programme-based support operations, such as the Economic Growth Support

Programme (PACE).

4.3.2. Financial management, audit and disbursement mechanism: in compliance with the

fiduciary strategy defined for the 2014 -2018 CSP period, PACE will be entirely managed within

the national public finance management system. Disbursement projections for 2017 are included in the

2017 Appropriation Act. The general compliance report prepared by the Audit Bench on the accounts

of the 2015, 2016 and 2017 financial years will serve as the programme’s audit report. In line with the

programme-based approach, the loan will be disbursed in a single tranche of EUR 20 million to finance

the implementation of the 2017 budget. Once the loan becomes effective and the conditions precedent

to loan disbursement are fulfilled, the single tranche will be disbursed pursuant to the terms of the Loan

Agreement. At the Borrower’s request, the Bank will release funds into a special account denominated

in Euro opened with the Central Bank of Cabo Verde.

4.4. Procurement

Bank financing through an AfDB loan will be in the form of general budget support.

Consequently, its implementation does not raise direct issues of procurement of goods, works and

services. The evaluation of the national procurement system, which is governed by Law No. 88/VIII/2015

of 14 April 2015 on the Public Procurement Code, conducted by the Bank in November 2011, concluded

that Cabo Verde’s procurement regulations are largely compliant with the Bank’s procurement policy

standards, except for a few discrepancies that will be discussed by the Bank and the authorities of Cabo

Verde as part of the evaluation of the Borrower’s procurement system.

V. LEGAL FRAMEWORK

5.1. Legal Instrument

5.1.1. The legal instrument that will be used for this Programme is the Loan Agreement between the

Republic of Cabo Verde (the Borrower) and the African Development Bank (the Bank).

14

5.2. Conditions for Bank Intervention

5.2.1. Conditions precedent to effectiveness: effectiveness of the Loan Agreement shall be subject to

fulfilment, by the Borrower, of the conditions set out in Section 12.01 of the General Conditions Applicable

to Bank Loan and Guarantee Agreements.

5.2.2. Conditions precedent to disbursement of resources for the second phase of the PACE

programme-based operation. In addition to the conditions precedent set out in 5.2.1 above,

disbursement of the loan resources totalling EUR 20 million shall be subject to the following condition:

Provide the Bank with the references of the Treasury bank account opened at the Bank of Cabo Verde

in Praia into which the loan resources will be transferred.

5.3. Compliance with Bank Group Policies

5.3.1. This operation is consistent with two operational priorities of the Bank’s Ten-Year Strategy,

namely: strengthening private sector governance and private sector development. It is also in line with

the Bank’s ‘High 5s’, particularly “improve the quality of life for the people of Africa”. PACE-II, which

is in keeping with the Bank’s CSP 2014-2018, is consistent with the CSP’s Pillar 2 relating to the

strengthening of economic governance in the public and private sectors. PACE is also aligned with the

Bank’s Private Sector Development Policy 2013-2017, especially its Pillar 1 which relates to the

improvement of the business and investment climate. The Programme is also in line with Pillar 2 of the

Bank’s Gender Strategy 2014-2018 on women’s economic empowerment. The reforms supported are

consistent with Pillar 1: "Public Sector Management and Economic Management" and Pillar 3:

"Investment and Business Climate" of the Governance Action Plan 2014-2018 (GAP II). For this

operation, no waiver has been requested in respect of Bank Guidelines.

VI. RISK MANAGEMENT

Table 6 below presents the potential risks and mitigation measures.

Table 6 : Risks and Mitigation Measures

Risks Mitigation Measures

Macroeconomic risk: An unfavourable macroeconomic

situation and exogenous shocks could affect programme

implementation. This situation is even more worrying due

to the high vulnerability of Cabo Verde vis-à-vis the Euro

Zone where recovery seems slightly timid. Level: High

This type of risk is the subject of an ongoing dialogue with

the authorities and is monitored regularly as part of the

activities of the BSG which meets twice a year (May and

November) and the IMF under Article IV. The latest BSG

and IMF analyses point to the achievement of

macroeconomic stability in the country in the medium

term. Moreover, there is need to step up macroeconomic

consolidation efforts, especially on debt reduction and

economic diversification.

Risk related to human capacity: although above the

regional average, the human capacity of government

services is limited. If allowed to persist, this situation could

slow down or even halt the implementation of the reform

programme. Level: Average

To encourage ownership of the reforms to be promoted,

this programme will be accompanied by a number of

technical assistance and capacity building projects,

particularly in the areas of public investment management,

public-private partnerships and the business climate.

VII. RECOMMENDATION

It is recommended that the Board of Directors approve a loan of EUR 20 million in the form of

programme-based general budget support for the Republic of Cabo Verde to finance the Economic

Growth Support Programme-Phase II (PACE-II).

I

Annex 1: Government’s Economic Policy Letter

II

III

IV

V

VI

VII

VIII

IX

X

Annex 2

CABO VERDE – Economic Growth Support Programme

Matrix of Programme Reforms

Objectives Reforms Indicators

Operational Objectives Intermediate

Objectives 2015 Reforms 2016 Reforms Output Indicators Outcome Indicators

Component I –Improvement of Public Investment Effectiveness

Improvement of public

corporate governance

and the public

investment framework

Modernization of

the public

investment

management

system

Signing of a contract for

the development of the

national public

investment

prioritization and

monitoring system

(SNIP)

Development and

operationalization of the

national public investment

prioritization and

monitoring system (SNIP)

[Trigger1]

The consultancy contract

for the development of

SNIP is signed before

end-2015; and SNIP is

operational before end-

July 2016. .

PEFA Indicator PI 11 on

public investment

management (new PEFA

indicator not previously

assessed):

Tar

Adoption by the Council of

Ministers of the decree

relating to the use of SNIP

The decree on the use of

SNIP is adopted before

end-July 2016

Preparation of a public

investment manual

The manual is prepared

by end-July 2016

Strengthening of

public corporate

governance

The implementing

decrees are adopted

before July 2016

PEFA Indicator PI 12

"Public Assets

Management" :

Publication of the report on

the contingent liabilities of

The report on the

contingent liabilities of

XI

Objectives Reforms Indicators

Operational Objectives Intermediate

Objectives 2015 Reforms 2016 Reforms Output Indicators Outcome Indicators

public enterprises (PEs) for

2014 [Trigger 3]

public enterprises (PEs)

for 2014 is posted on the

MF website before end-

July 2016

Operationalization of the

public enterprise monitoring

and evaluation system

(including the six major

enterprises)

[Trigger 4]

The PE monitoring and

evaluation system is

operational before end-

July 2016

Modernization of the

framework governing

public-private

partnerships

Modernization of

the PPP

framework

Adoption by the Council

of Ministers of the

legislative decree on

PPP (replacing the 2005

instrument)

[Action precedent 3]

Preparation of the PPP

Policy and PPP Manual

[Trigger 5]

The CM adopts the

legislative decree on

PPPs before end-

October 2015; The PPP Policy and

Manual are available

before end-July 2016

Number of PPP projects

signed by the Government

Setting up of the pipeline of

PPP operations with at least

3 projects ready for bid

invitation

[Trigger 5]

The pipeline of PPP

operations is set up

before end-July 2016

Component II – Support for the Promotion of Private Sector Development

Adoption of the

legislative decree on

General Regulations of the Investment Code by

the Council of Ministers

The legislative decree

of General Regulations

on investments is

adopted by the CM

before end-October

The overall Country

Competitiveness Index:

XII

Objectives Reforms Indicators

Operational Objectives Intermediate

Objectives 2015 Reforms 2016 Reforms Output Indicators Outcome Indicators

Improvement of the

business environment

Improvement of

the transparency

and

attractiveness of

the investment

framework

[Action precedent 4] 2015]

Adoption by the CM of

a tax package (General

Tax Code, Tax

Enforcement Code,

Tax Procedure Code,

Corporate Tax Code,

VAT revision),

allowing for better

ownership of the tax

environment by private

enterprises

Revision and adoption of the

Investment Tax Benefit

Code to lower the

investment threshold eligible

for the fiscal framework

agreement [Trigger 6]

The CM adopts the tax

package before end-

October 2015

The Tax Benefit Code

is revised and adopted

by the Council of

Ministers before end-

July 2016

Operationalization of the

After Care system for the

monitoring and evaluation of

private investments

[Trigger7]

The After Care system

for private investments

is operational before

end-July 2016

Facilitation of

administrative

and commercial

procedures

Adoption by the

National Trade

Commission of the

Trade Action Plan for

facilitating trade

procedures

Operationalization of the

external trade one-stop shop

[Trigger 8]

The Action Plan is

adopted before end-

2015;

The one-stop shop is

operational before

end-July 2016

Doing Business Indicator:

Time to import or export

(days)

(2016)

Operationalization of the

online business tax return

filing system (e-tax) (given

that the VAT is already

electronic) [Trigger 9]

The online business tax

return filing system is

operational before end-

July 2016

XIII

Objectives Reforms Indicators

Operational Objectives Intermediate

Objectives 2015 Reforms 2016 Reforms Output Indicators Outcome Indicators

Improvement of

access to

financing and

business legal

procedures

Issuance of the order

relating to the operation

of the State Counter-

Guarantee Fund and its

replenishment to cover

the Cabo Verde

Guarantee scheme

[Action precedent 5]

The order of the

Minister of Finance and

Planning relating to the

operation of the State

Counter-Guarantee

Fund covering the Cabo

Verde Guarantee

scheme is issued before

end-October 2015 Credit to the private sector

(% broad money supply –

M2)

of M2

(2014);

broad money supply (2016)

Adoption by the Council

of Ministers of the

decree relating to the

Public Procurement

Dispute Settlement

Commission

The decree relating to

the Public Procurement

Dispute Settlement

Commission is adopted

by the CM before end-

2015

Adoption by the Council of

Ministers of the bill on the

insolvency and revival of

enterprises

[Trigger 10]

The bill on the

insolvency and revival

of enterprises is adopted

by the CM before end-

July 2016

Support for

entrepreneurship and

formalization of

informal activities

Broadening the

base of

entrepreneurship

and improving

access to micro-

credit

Adoption of two

implementing decrees

of the law on the legal

regime of micro- and

small-sized enterprises

(MSEs) (i) Decree on

taxation (2015); (ii)

Certification (2015)

[Action precedent 6]

Adoption of the

implementing decree of the

law on the legal regime of

micro- and small-sized

enterprises (MSEs): conduct

of business activity [Trigger

11]

The two decrees are

adopted by the CM

before end-October

2015;

The last decree is

adopted before end-July

2016

Number of new MSMEs set

up (% by women):

0 new

enterprises (30% of them

women-owned)

enterprises established

under MSE regime (30% of

them women-owned)

before end-2016

XIV

Objectives Reforms Indicators

Operational Objectives Intermediate

Objectives 2015 Reforms 2016 Reforms Output Indicators Outcome Indicators

Establishment and

operationalization of five

incubators (2 tourism, 1 ICT,

2 agribusiness)

[Trigger 12]

Five incubators are

operational before end-

July 2016

Adoption of implementing

decrees of the law on

microfinance institutions

[Trigger 13]

The implementing

decrees are adopted by

the Ministry of Youth

Affairs before end-July

2016

XV

Annex 3

Outcomes of Previous Budget Support Operations in Cabo Verde

Public Finance Management and Private Sector Recovery Support Programme (PAGF-

RSP): 2011-2012

Improvement of Public Finance Management and Macroeconomic Stability

Bank support helped to: (i) reduce government arrears stock from 16% in 2009 to 0% in 2011 and

2012; (ii) reduce the timeframe for submission to the National Assembly of the General State Account

(CGE) and the Notice of Compliance issued by the Court of Auditors (CoA) from 24 months on

average before 2010 to 12 months in 2012; (iii) increase the number of services covered by the

General State Inspectorate (IGF) from 32 in 2010 to over 46 in 2012; (iv) reduce the average

procurement timeframe from eight months in 2010 to less than three months in 2012; and (v) increase

the cases of dispute handled by the Public Procurement Regulatory Agency (ARAP) according to the

new legislation in force from 50% in 2010 to 100% in 2012. The various reforms introduced are: (i)

availability of a medium-term strategy 2012-2015 for State debt management; (ii) availability of 2009

and 2010 reports on the State’s contingent commitments and liabilities; (iii) availability of the public

finance management system reform programme that emanated from PEMFAR recommendations; (iv)

effective appointment of the remaining members of the Board of the Public Procurement Regulatory

Agency (ARAP) and members of the Dispute Settlement Commission; and (v) availability of ARAP’s

audit report on public procurement contracts awarded in 2010.

Creation of an Enabling Environment for the Revival of the Private Sector

Bank support helped to: (i) improve Cabo Verde’s ranking in the Doing Business report on company

bankruptcy from 183rd out of 183 countries in 2010 to 178th out of 183 countries in 2012; (ii) increase

the number of SMEs registered in the Citizen’s House Network from 913 in 2010 to 1197 in 2012;

and (iii) improve Cabo Verde’s ranking in the Doing Business indicator on getting credit from 152nd

out of 183 countries in 2010 to 97th out of 183 countries in 2012. The various reforms introduced are:

(i) availability and adoption by the Council of Ministers of the new Investment Code; (ii) availability

and adoption by the Council of Ministers of a Tax Incentives Code, compliant with WTO rules; (iii)

introduction of new windows for the Citizen’s House; and (iv) setting up of two new incubators.

Public Corporate Governance and Investment Promotion Support Programme

Phases I and II (PAGEPPI I and II): 2013 - 2014 Improvement of Public Corporate Governance

Structural reforms in the area of corporate governance helped improve the performance of public

enterprises. The Cabo Verde Air Transport Company (TACV) is on track to post a profit this year

(2015). All major public enterprises have signed performance contracts with the State to guarantee

that they will be properly managed. The main achievements are: (i) adoption of statutory instruments

operationalizing the 2009 law on public enterprises, provided for under Section 52 (1) of that law (Lei

No. 47 /VII/2009); (ii) evaluation of the regulatory authorities, preparation and adoption by the

Government of an action plan to review their articles of association for the purpose of reforming these

regulatory bodies, as provided for by Law No. 14/VIII/2012; (iii) production by MF and availability

in 2014 of the annual report on the liabilities of public enterprises for 2013; and (iv) signing of three

additional performance contracts in 2014 between the State and other major public enterprises (ASA,

ENAPOR and EMPROFAC).

Investment Promotion Credit to the private sector is increasing, despite relative stagnation. The main achievements include:

(i) adoption by the Council of Ministers of legislative decrees to operationalize the law relating to the

General Investment Code in order to facilitate the establishment of a one-stop shop for investors; (ii)

adoption of the decree to establish and operationalize the PPP Privatization and Promotion Unit; and

(iii) production in 2013 and 2014 of a report containing criteria for assessing priority investments and

prospective PPP projects.

XVI

Annex 4

NOTE ON RELATIONS WITH THE INTERNATIONAL MONETARY FUND

On November 18, 2016, the Executive Board of the International Monetary Fund (IMF)

concluded the 2016 Article IV consultation with Cabo Verde. A staff visit took place in June

2017. Its conclusions are still to be published.

According to the latest article IV report, Cabo Verde appears to be at the threshold of a recovery

from the growth slowdown of 2012-15. However, the economy remains vulnerable to external

shocks notably from Europe, the main source of tourism revenue, FDI and remittances. The

Public Investment Program, while addressing key infrastructure gaps, has contributed to a

marked rise in public debt (125.8 percent of GDP in 2015). The Debt Sustainability Analysis

indicates that debt risks are high on account of the elevated stock of debt, while debt service

indicators remain comfortable.

Going forward, the IMF is of the opinion that policies should focus on sustaining the growth

momentum while curbing public debt. This would include revaluating the public investment

pipeline with a view to reducing externally financed capital spending, and encouraging the

private sector to take on a larger role in investment and growth. Over the medium term,

continued implementation of the ambitious structural reform agenda is critical to help the

country reap the benefits of the infrastructure investment scaling up.

IMF staffs’ opinion is that Cabo Verde is at a crucial stage in its economic development where

the private sector will need to take over as driver of growth as public investment will gradually

decline. Given the high public debt and several major investment projects at or near completion,

the authorities have decided to gradually phase out the PIP. Private investment needs to take

over as the main growth engine in order to take advantage of the improved infrastructure and

ensure sustained long-term growth. To that end, accelerating the privatization program is an

important step in the right direction. In addition, the authorities need to continue improving the

business climate, enhancing the efficiency of the financial sector, and ensuring private sector

compliance with the new labour code.

Staff forecast an acceleration of the recovery, but vulnerabilities remain. Staff expect growth to

continue to pick up speed and reach about 4 percent in the medium term, powered by tourism

and trade, and supported by FDI, remittances and private sector credit growth. Accelerated

progress on structural reforms could help growth reach an even higher trajectory. However,

vulnerabilities remain. Remittances and tourism growth could be thwarted by the implications

of Brexit on both the UK and the euro area, and credit to the private sector could be held back

by a slow resolution of NPLs.

XVII

XVIII

XIX