Report No. 5446-CY

Cape VerdeEconomic Situation and Prospects(In Three Volumes) Volume 1: Main Volume

January 30, 1985

Western Africa Regional Office

FOR OFFICIAL USE ONLY

Document of the World Bank

This report has a restricted distribution and may be used by recipientsonly in the performance of their official duties. Its contents may not otherwisebe disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS

(as of August 1, 1984)

Currency Unit = Cape Verdean Escudo (CV Esc.)US$1.00 = CV Esc. 80CV Esc. 1,000 = US$ 12.5

WEIGHTS AND MEASURES

1 meter (m) = 3.28 feet (ft)1 kilometer (km) 2 = 0.62 mile (mi)1 square kilometer (km') = 0.386 square mile (sq. mi.)1 metric ton (m ton) = 2,204 pounds (lb)I hectare (ha) 2.47 acresI cubic meter (m') = 1.308 cubic yards

FISCAL YEAR

January I - December 31

FOR OFFICIAL USE ONLY

LIST OF ACRONYMS

BADEA - Arab Bank for Economic Development in AfricaBCV - Bank of Cape VerdeCABNAVE - Estaleiros Navais de Cabo Verde (Shipyard Company)CNA - National Handicraft CenterDGIE - General Directorate of Industry and EnergyDGP - General Directorate of PlanningECOWAS - Economic Community of West African StatesELECTRA - Power Generation and Water Desalination UtilityEMEC - State Construction EnterpriseEMPA - Empresa Puiblica de Abastecimaento (Commercial Network Company)ENACOL - National Enterprise for Fuels and LubricantsENAPOR - National Ports Administration AgencyENAVI - National Agricultural CompanyFAMA - Pasta FactoryFAP - Fomento Agro-Pecuario (Commercial Agricultural Goods Company)GDP - Gross Domestic ProductGNP - Gross National ProductICS - Cape Verdean Solidarity InstituteIMF - International Monetary FundINC - National Cooperatives InstituteINIT - National Technological Research InstituteINTERBASE - Cape Verdean Enterprise for Fishing InfrastructureMAC - Public Construction Materials EnterprisemHor - Ministry of Housing and Public WorksMOAVE - Mill CompanyMORABEZA - Garment FactoryNDF - National Development KindOECD - Organization for Econom.c Cooperation and DevelopmentOPEC - Organization of Petroleum Exporting CountriesPAICV - African Party for the Independence of Cape VerdePAIGC - African Party for the Independence of Guinea-Bissau &

Cape VerdeSCAPA - Company for Marketing and Support for Artisanal FishingSIDA - Swedish International Development AuthoritySOCAL - Shoe FactoryTACV - Cape Verde Airline CompanyUNDr - United Nations Development ProgrammeUSAID - United States Agency for International Development

This document has a restricted distribution and may be used by recipients only in the performance of 1their official duties. Its contents may not otherwise be discksed without World Bank authorization.

PREFACE

This report is based on the findings of an economic mission that visited CapeVerde in July 1983. The mission was composed of the following members:

Stahis Panagides, Consultant (Mission Chief, Agriculture)Mark Woodward, Consultant (Industry, Fisheries, Tourism, Historical

Background)Sergio Diaz-Briquets, Consultant (Demography, Social Sectors)Rui Coutinho, Consultant (Macroeconomic Analysis)Jose Marques, Economist (Energy, Transportation, External Sector)

Follow-up work to the main mission was required during 1984 in order to reviseprojections and estimates derived from a weak data base. This first compre-hensive study of the economy of Cape Verde also includes, in Volume II, anexamination of demographic, health and social issues, which the Governmeutspecifically asked us to address. This report is the final version of thedraft which -was revised by Rui Coutinho and supervised by Richa-:d Westebbe anddiscussed with the Government by a mission which visited Cape Verde in August1984.* Milton de Assis updated the report following the mission. The reportincludes three volumes:

Volume I: Cape Verde: Economic Situation and ProspectsVolume II: The Social SectorVolume III: Statistical Annex

*The mission consisted of Robert Skillings (Chief), Peter Gil (LoanOfficer), Milton de Assis (Country Economist), Rui Coutinho (Economist)and Sergio Diaz-Briquets (Consultant).

COUNrRY DATA - CAPE VERDE

AREA POPULATION DENSITY

4,000 sq km 296,093 (1980) 1/ 74.2 per sq km (1980)Rate of growth: .9% (1978-80)

POPULATION CHARACTERISTICS (1980) HEALTH (1980)Crude Birth Rate (per 1,000) 37.4 Population per physician 5805Crude Death Rate (per 1,000) 7.5 Population per hospital bed 496Infant Mortality (per 1,000) 78.1Life Expectancy at Birth (years) 61.1

EDUCArION (1980/81) ACCESS TO SAFE IWATER (1980)Adult literacy rate: 2/ 37% % of population - urban: 32%

Primary school enrollment: 83% - rural: 13.5%

GNP PER CAPITA IN 1983 3/ US$317

GROSS DOMESTIC PRODUCT IN 1983 4/ ANNUAL RATE OF GR(W1H(Current Dollar Prices)

USSMiln % 1979-b3GDP at Market Prices 81.1 100.0 9.2Gross Doi;nestic Investment 64.9 80.0 12.9Gross Domestic Expenditures 142.6 175.9 4.2Exports of Goods, nfs 35.4 43.7 32.3Imports of Goods, nfs 97.0 119.6 6.3Current Account Balance -33.4 -41.2 23.5

OUTPUT EMPLOYMENT AND PRODUCTIVITY IN 1982:

Value Added Labor Force Value Added perWorker

USSMIn % *000 USS Primary Production 16.9 21.7 43 47.4 393.0 45.4Secondary Production 21.8 28.0 9 10.5 2422.2 279.8Services 39.2 50.3 38 42.1 1031.6 119.1

Total 5/ Average 77.9 100.0 90 100.0 865.6 100.0

GOVEtNMENT FINANCE

CENTRAL GOVERNMENTCV Escudos Million % of GDP

1983 1983 1979-82Current Revenues 1623.7 27.9 31.5Current Expenditures 1623.4 27.9 31.1Current Surplus 0.3 - 0.4

Capital Expenditures 4295.0 73.9 61.9OveraLl Deficit 4294.7 73.9 61.5External Borrowing and Grants 4180.3 71.9 58.7

1/ Population Census2/ Ages 14 and over3/ At current exchange rate

4/ Conversions to dollars in the table are at the average exchange rateprevailing during the period covered.

5/ GDP at factor costs.

COUNTRY DATA - CAPE VERDE (continued)

HONEY. CREDIT AND PPICES

1978 1979 1980 1981 1982 1983

(In iTllions of Cape Verde Escudos outstanding end year)

Money Supply (money and quasi-money) 1709 2014 2658 3180 3989 415. 1/

Claims on Central Government 11 77 34 452 347 486 1/

Claims on the Private Sector 1/ 531 712 684 937 1032 807 1/

(Percentage or index numbers)

Money as % of GDP 61.9 65.1 61.2 65.7 66.9 59.8 1/

Consumer Price Index 146 168 192 232 280 340

Annual Growth Rates

General Price Index 17.7 L5.1 14.3 20.8 20.7 21.4 1/Net Claims on Government 109.7 600.0 -54.1 1229.4 -23.2 40.1 1/Claims on the Privtte Sector 34.6 34.1 -3.9 37.0 10.1 -21.8 I/

BALANCE OF PAYMENTS (in USS millions) EXTERNAL DEBT. DECEMBER 1982 (USS million)

1980 1981 1982 1983

Export of goods, nfs 19 24 32 36 Public debt incl. guaranteed 60.5

Imports of goods, nfs 88 103 101 97 Non-guaranteed private debt ---

Resource gap (deficit- -)-69 -79 -69 -61 Total oustanding and disbursed 60.5Private Transfers 40 36 32 33Net Factor Services 3 - -3 -5 NET DEBT SERVICE RATIO FOR 1982 2/

Balance current account -26 -43 -40 -33 Public debt incl. guaranteed 4.9Non-guaranteed private debt ---

Official Flows Total outstanding and disbursed 4.9

Transfers 29 21 27 19Borrowing (net) 2 19 19 14 IBRD/IDA LENDING (December 31, 1983) (USS '000)

iiRD IDA

Other items, errors andomissions 1 4 6 4 Outstanding and disbursed -- 209

Increase in reserves t) 6 1 12 4 Undisbursed -- 6805Outstanding incl. undisb. -- 7014

Net reserves (end year) 44 37 43 34 1/

Equivalent months imports 6.0 4.3 5.1 4.2 RATES OF EXCHANGE (year average)

Year US51 - CV Esc

1975 25.6

1976 30.11977 34.1

1978 35.51979 37.4

1980 40.1

1981 48.7

1982 58.3

1983 71.7

1984 84.7

1V Does not include financial institutions other than the Bank of Cape Verde.2/ Debt service as a percentage of exports of goods and non-factor services.

.. Non-available

VOLUME I

CAPE VERDE:ECONOMIC SITUATION AND PROSPECTS

Table of Contents

Page No.

SUMKARY AND CONCLUSIONS

A. Background ......................................... IB. Economic Management . ................................ 2C. Development Strategy .................. 4D. Social Sectors ................................. 7E. Outlook ......................................... 8

I. ECONOMIC AND POLITICAL SITUATION(not contained in Portuguese version).. 10

II. RECENT ECONOMIC PERFORMANCE. 14A. Structure of the Economy . .14B. Structure of National Expenditures . .16C. Public Finance .. .................................,.20

1. Introduction .................................. 202. Trends ................................... 213. Government Revenues .............................. 234. Covernment Expenditures ......................... 255. Issues and Recommendations . ..................... 26

D. Money and Credit .................................. 271. Introduction .................................. 272. Trends ....................... 283. Distribution of Credit By Sector .314. Interest Rates .325. Further Developments .326. Issues and Recommendations .--.-.----.--.-- 33

E. External Sector .. 351. Introduction .352. Exchange Rate .383. Issues and Recommendations. 39

F. Employment, Wages and Prices . .391. Introduction .392. Wages .403. Prices ...................... 414. Issues and Recommendations .43

III. THE FIRST NATIONAL DEVELOPMENT PLAN . . .45A. Introduction. . ... .......... 45B. Overview .... 45C. Methodology .... 48D. Financing.... 50

E. Implementation ..................................... 51F. Summary and Conclusions .......... .................. 52

IV. AGRICULTURE ........................................ 53A. Background ........................................ 53B. Land Use and Livestock ............................. 53C. Institutional Framework ............................ 55D. Food Policy and Marketing .......... .......... 55E. Ongoing Projects ................................... 56F. Land Tenure and Agrarian Reform ...... .............. 56C. Government Objectives .............................. 57H. Water ........................................ 58I. Issues and Recommendations . ........................ 59

V. FISHERIES.............................................. 62A. Background ........................................ 62B. Artisanal Fisheries ................................ 62C. Industrial Fisheries .. ..................................... 63D. Investment Projects ................................ 64E. Issues ........................................ 64

VI. INDUSTRY .................................. 66A. Background ......................................... 66B. Structure ........................................ 66C. Institutional Framework ............................ 67D. Government Policies and Constraints ....... ......... 68E. Issues ........................................ 69

VII. ENERGY .. ...................................... 71A. Background ......................................... 71B. Institutional Framework ............................ 71C. Petroleum ........................................ 71D. Electricity and Water . . 72E. Pricing ... 72F. Other Sources ..... .......... .. ....... I.... a... ,. 73G. Issues... 74

VIII. TRANSPORTATION AND CONSTRUCTION .... 76A. Ports and Maritime Transport ... 76B. Air Transport ........ ....... 77C. Construction and Building Materials ............... . 77

IX. TOURISM ................................................ 78A. Background ......................................... 78B. Issues ............ a .............................. 79

K. PROSPECTS .................. ... .... ................. 81

TEXT TABLES Page No.

Table 2.1 CAPE VERDE: Value Added by Sectors,1982 ....... 15Table 2.2 CAPE VERDE: Expenditures of Available Resources,

1982-83 ........................... 17Table 2.3 CAPE VERDE: Central Government Summary, 1977-83 22Table 2.4 CAPE VERDE: Central Government Ordinary Revenue,

1979-83 ........................... 24Table 2.5 CAPE VERDE: Summary Accounts of Financial System,

1977-83 ........................ 30Table 2.6 CAPE VEEDE: Net Claims on General Government 30Table 2.7 CAPE VERDE: Balance of Payments Summary,

1975-83 ............................. 35Table 2.8 CAPE VERDE: Composition of Exports and Imports .. 36

Table 3.1 CAPE' VERDE: Plan Projections by Sector .......... 46Table 3.2 CAPE VERDE: Plan Expenditure Projections ........ 47

Table 10.1 CAPE VERDE: GDP Projections, 1981-90 ........... . 82Table 10.2 CAPE VERDE: Ulational Expenditure Projections,

1981-90 ............................ 83Table 10.3 CAPI VERDE: Public Finance Projections, 1981-90 84Table 10.4 CAPE VERDE: Balance of Payments Projections 85

SUMMARY AND CONCLUSIONS

1. Cape Verde has a limited endowment of productive land and naturalresources, a high population growth rate and a location which, while favorablefor fishing and international sea and air transport, also restricts the flowof trade. The dispersion of the country among several islands inhibitsinternal communication and reduces the possibilities of economies of scale.The economy of Cape Verde is also highly dependent on imports, with a domesticconsumption level in excess of CDP, and is accordingly unusually vulnerable toexternal shocks such as the oil price rise of 1979, and recurrent episodes ofsevere drought.

2. Prudent economic management, together with a large flow of emigrantremittances and foreign aid, have enabled a modest economic growth rate to bemaintained. Realization of the country's reasonably promising growth poten-tial will depend on the adoption of appropriate policies for resource use andpopulation growth, and establishment of incentives for domestic entrepreneursand the repatriation of remittances from abroad.

A. BACKGROUND

3. The Republic of Cape Verde became independent in 1975. It consists ofnine inhabited islands located approximately 650 kms off the West Coast ofAfrica. Cape Verde has a total land area of 4.033 km2, and a total populationof some 300,000, of which approximately one half live on Santiago, wherePraia, the capital, is located.

4. At the time of their discovery by Portugal in 1460, the islands wereuninhabited. Settlement started soon thereafter, as the islands provided aconvenient trading post free of tropical disease along the major shippingroutes. As the fortunes of the Portuguese empire diminishe'd, the islands lostsome of their former importance. In part, their economic (lecline was reversedin the nineteenth century with the establishment of a British coal depot atMindelo. Recurrent droughts, some of which in the nineteenth centurv werebelieved to have accounted for a 40X reduction in the population, and theproximity of contacts associated with external trade, particularly in fishing,led to large emigration movements from the islands. By the end of theninetecnth century, the American whaling fleet was largely run by CapeVerdeans, whose descendants today make up much of che Cape Verdean communityin New England of between 200,000 and 300.000 persons. Drought continucs toreoccur periodically; the most recent began in 1968 and is still affecting theislands. In sum, drought, emigration and changes in the economic importanceof the location of the islands have been the main factors influencing thecountry's economy.

5. After independence, Cape Verde and Guinea-Bissau were ruled by thePAIGC (African Party for the Independence of Guinea-Bissau and Cape Verde).In 1981, the PAIGC was divided into two parties with the creation of the PAICV(African Party for the Independence of Cape Verde). The Government of CapeVerde enjoys considerable prestige in the international community as a resultof the historial influence of Amilcar Cabral on the liberation movements ofLusophonc Africa and the pragmatic and moderate politics displayed by currentleaders. Cape Verde's President, Aristides Pereira, _s taking an active rolein seeking a solution for the differences between Angola and South Africa.

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6. The country is relatively poor by worldwide standards, with an esti-mated per capita GD1' of only $267 in 1983. No information is available yet for1983 on output by se.tor. For 1982, about 222 of the value added was contri-buted by the primary sector, 28% by the secondary sector (of which 24% ls inconstruction), and iOZ by services. The fact that agriculture representedonly 17X of domestic output in 1982 is, above all, a consequence of thepersistent drought. Approximately 47% of the labor force is in the primarysector. 11% in the secondary scctor, and the remaining 42% in services (ofwhich 152 is in administration and a large part of the remainder in informalsector activities). In the absencc of official national accounts, it isdifficult to measure growth of CDP. According to preliminarv estimates, theaverage annual rate of growth of CDP between 1977 and 1982. in constantdollars. was 2.61 per year. or 1.7% in per capita terms.

7. Public and private consumption, taken together, exceeded CDP for tile1977-1982 period, but was smaller in 1983, for the first time. From 1977 to1982. estimated private consumption alone was higher than domestic output. andthe resource gap was higher than CDP; since 1SR2, however, this trend has beenreversed. Gross investment averaged 80! of CDP for the 1977-83 period. Thelarge flows of external aid and emigrant remittances have allowed the mainten-once of such high levels of consumption and investment. In 1983, grant aidwas 392 of CDP. and remittances plus grant aid were equivalent to 54. ofimports of goods and services. GNP, defined as GDP plus net factor incomeincluding remittances, was US$317 per capita in 1983, one fifth higher thanGDP.

B. ECONOMIC MANAGCMENT

8. Macroeconomic management is particularly important in Cape Verde,because Government spending equals GDP, and the overall Government deficitusually exceeds half of CDP. Financing this deficit, as well as the needs ofthe large public enterprise sector, poses major tssues for financial resourccmobilization and monetary policy. Further, domest±c demand manaigement isconstrained by the need to maintain a high, stable and distortion free realcxchangc rate that will encourage the steady flow of remittances and discour-age excessive demand for Imports. Finally, economic management encompassesthe critical question of resource allocation either directly by the authori-ties or through price and i.lcentive systems.

9. Public finances have by and large been carefully managed. Between1980 and 1982. the ordinary (current) budget produced small surpluses. Up to1980, the large capital expenditures were financed by external resources,which consisted almost entirely of grants until 1980. Between 1981 and 1982,the Government borrowed abroad on concessionary terms to finance the airportand shipyard projects. It also borrowed heavily from the lentral Bank in1981. In addition public enterprise sector finances are not well integratedinto overall financial planning. Capital expenditures for these enterprisesare being financed with banking system credit.

10. The quality of information available for public finance decision-mak-ing is deficient; and a global accounting framework for the entire public sec-tor, including the public enterprises, is needed. The maintenance of highlevels of public capital expenditures will. in part, depend on the capacity ofthe Goverment to generate an increasing volume of public savings. Additionalrevenues could be obtained through changes from specific to ad-valorem duties.

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adjustment of water charges, and increased duties on some luxury imports. Onthe expenditure side, it will be necessary to continue to restrain public sec-tor wages and to elininate costly transfers to public utilities. Capital ex-penditures should not exceed the amount of external financing. The capacityof the public sector to prepare well designed and high priority projectsshould be substantially improved.

11. The Bank of Cape Verde is the principal financial ii.stitution perform-ing the role of a central, commercial and development bank. Monetary policyis exercised through a systcm of credit ceilings based on the l.evel of foreignrcserves and the financing requirements of the economy. Monetary expansion,while rather rapid, does not appear to have been excessive. Most of the ef-fects of the expansion of credit have fallcn on foreign exchange reservesrather than prices, as excess domestic demand has spilled over into imports.The need to maintain a reasonable level of reserves on the one hand, and tosatisfy credit demarnds on the other, has led to fluctuations in credit expan-sion and in somc cases. has probably led to the crowding out of some sectorsof the economy. A credit policy is needed that, within acceptable limits ofcredit expansion, provides for an optimal distribution of the credit avail-able. To meet thi.; need, the creation of a branch within the central banklnked to long-term financing could be an important step. It is also neces-sary to clarify the monetarv structure by improving the Bank of Cape Verde'scontrol over the few other financial inscitutions in the country. The BCVrecognizes that interest rates are too low and intends to raise them soon.Nominal rates have been constant at negative real levels since independence,with consequent adverse effects on savings and resource allocation. In par-ticular, interest rate levels for resident accounts should be raised enough toeliminate or substantially reduce the differential compared with the newspecial high-interest emigrant accounts. Otherwise, disincentive effects ondomestic savings will be crcated. Finally. monetary and fiscal policy need tobe better inregrated and planned so that the disruptive effects of governmentspending on large projects, or external shocks, can be minimized.

12. Cnpc %'crde'n trade account shows a large and growing deficit. In 1983merchandise exports represented only 2X of Imports. The main exports werebananas .ntr fish products. which accounted for more than 60% of the total.Food products are the singlc largest Import. Recently, as a cons-quence ofbunkering activites;, principally at Sal Airport, exports of goods and non-factor services covered 372 of imports of goods and nonfactor services in1983. The cbronic deficit of the resource account. which illustrates thecountrv's external dcpendence. has been offset bv private transfers. officialcapital and grants. As a result. the overall balance of pavments has regis-tered surpluses. leading to a reasonable level of forcign exchange reserves.Because of the highlv concessionary terms at which external debt has beencontracted, the interest burden has been very low. The ratio of debt serviceto exports of goods and non-factor services was approximately 8B in 1983. TheCape Verde escudo is pegged to a basket of nine currencies. which in broadterms, is appropriate to Cape Verde's circumstances. The escudo exchange ratehas been adjusted to maintain a stable real exchange rate during the lastseveral years.

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13. ln the absence of an official price index, it is difficult to estimatewith precision the trends of domestic prices. The domestic rate of inflationwas estimated at approximately 18-20Z for 1983. A substantial amount of foodaid is marketed at official prices, which have been adjusted periodically. Itis important that these adjustments be continued so that domestic prices ofimported products received through food aid (i.e., corn) reflect internationalprices.

C. DEVELOPMENT STRATEGY

14. The country's development strategy is well elaborated in its FirstDevelopment Plan (1982-1985). The document constitutes a coordinating mecha-nism for use of internal and external resources and facilitation of a dialoguewith international donors. It identifies the industrial sector and serviceslinked to the country's geographic position as the main sources of futuregrowth. Although the authorities were successful in obtaining financing foriany of the projects included in the Plan, it is not clear that the projectmix is conducive to achievement of the goals of the Plan. Further, thesuccess of future planning efforts will in part be influenced by improvementsin the level of local expertise in project related tasks.

15. The fact that the Government delayed preparing a first Plan untilseven years after independence is an indicator of the prudence with which itapproaches the problems of development, given the country's human resources,institutions and physical resource limits. The constraints to development canbest be assessed in a sectoral context, ir which the role of policies, insti-tutional change, and investments can be examined.

16. Two constraints significantly influence development of the agricul-tural sector: scarcity of both water and arable land. Agricultural productionhas been adversely affected by the prolonged drought, with the result thatonly a very small share, approximately 10%, of food consumption is met bydomestic production. On rainfed land, corn and beans are grown using rudimen-tary methods. On the irrigated acreage, sugar cane is the principal crop;bananas, and to a lesser extent, fruit and vegetables are also cultivated. Toreduce vulnerability to drought and increase production, the government isundertaking watershed, reforestation, and soil conservation projects, most ofwhich are funded through external sources. The major issue with respect towater is pricing. Water prices are currently subsidized by the Government.Water pricing should be used to encourage users to practice conservation forboth consumption and production uses. For example, there would be littlepoint to growing sugar cane on irrigated land, with (unsubsidized) productioncosts exceeding world market price levels, if fruits, vegetables or exportcrops were more economic. It would also be advantageous to create incentivesto substitute more drought-resistant cereals, such as millet and sorghum, forcorn. Even if optimal agricultural production patterns are achieved, seriousstorage and marketing problems will have to be resolved.

17. Fisheries is a sector with significant potential for expansion, mostof which has yet to be realized. Artisanal fisheries account for the largestshare of fish landings, and virtually all of the artisanal catch is consumedlocally. Although the importance of industrial fisheries is currently rela-

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tively small, it is expected to increase with the enlargement of the localfishing fleet and the expansion of storage capacity.

18. Several difficulties confront fisheries, as reflected in the lags inimplementation of the investment plan for this sector relative to other sec-tors. One issue in the fisheries sector is the apparent poor organization ofthe official support to artisanal fisheries, where economic success should bepossible, in that there are adequate resources and experienced labor, andrisks are fewer. There is a need to reformulate and better define the roleand pricing policies of SCAPA, the public enterprise which has the responsibi-lity of promoting artisanal fisheries. The agency needs to improve itsadministration and financial management, provide suitable techl:cal assistanceto fishermen, and reevaluate its pricing policy. Port 'acilities are general-ly inadequate, especially those in Mindelo. Expansion of industrial fisherieswill be limited unless these facilities are modernized.

19. The industrial sector is characterized by small informal units andmedium-scale enterprise. Small-scale, artisanal activities are the mostimportant in terms of employment and number of units. MY.st industrial pro-duction is provided by a small group of public and mixed enterprises. In-dustry is capable of becoming one of the primary moving forces in the coun-try's development.

20. Among the externally oriented projects is the shipyard, CABNAVE, whichis contributing significantly to the expansion of industrial output. Projectsdirected towards the domestic market include construction materials. a brew-ery, and a paint and soap plant. A central issue in this sector is the appa-rently greater emphasis that has been placed -- medium- as opposed to small-scale industry. Small-scale industry has considerable potential for expan-sion, but its realization will require institutional support to overcomeserious problems of entrepreneurial talent, marketing, and credit.

21. A second issue is the need to improve existing institutional capabi-lity for project preparation, implementation and evaluation, especially forthe smaller artisanal sector. Inadequate marketing is another problem thatadversely affects exports of some industrial products. A final issue is theneed for an investment code to clarify the respective roles of private domes-tic and foreign investment, and to encourage suck n-vrestment.

22. Cape Verde's energy balance is characterized by a complete reliance onimported petroleum products to meet the requirements of the main economicsectors. Approximately 40% of household energy needs are met through importedoil; and the remaining 60% through firewood and other biomass. Operatingefficiency of the country's power plants is low, and despite some improvementin recent years, distribution losses are currently estimated to be as high as40%. Similar problems of plant inefficiency and losses characterize desalina-tion of water operations, which is the country's most energy intensive in-dustry. A relatively inexpensive program of rehabilitation and modernizationin the electric power sector could improve its efficiency, and substantiallyreduce the need fo i'mported fuel. The widespread use of firewood as fuel,combiaed with the effects of drought and overgrazing, has exerted a great deal

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of pressure on the country's scarce vegetation and created a critical defores-tation problem.

23. Issues facing the energy sector are: (i) the need to review and adjustthe pricing of different forms of energy use, especially for water desalina-tion, to reflect total costs; (ii) the need to increase the efficiency ofhousehold energy use, and to accelerate reforestation efforts; (iii) the needto increase energy savings either through a more efficient use of energy ingeneral, or by a reduction in losses.

24. With respect to transportation, foreign and inter-island trade dependalmost entirely on maritime transport. Port facilities are generally defi-cient and deteriorating, although the government is attempting to reverse thistrend by rebuilding the port at Praia and improving domestic shipping ser-vices. The country's road network serves its needs reasonably well, and roadconstruction, using locally-available basalt paving blocks, provides a largenumber of jobs. Issues to be addressed in this subsector are (i) the need toretain policy-making in the national agency for road projects, but to decen-tralize some responsibilities and; (ii) the need to resolve road constructionfunding problems, specifically fund transfer arrangements.

25. With respect to air transport, the Sal Island International Airport isCape Verde's major air link with the world, and earns considerable foreignexchange. Given the uncertainties associated with future demand for airportservices, investment in this area should be cautiously evaluated. One issuein this subsector is the need to reevaluate the fares charged by the nationAlair company, which are low by international standards, and do not coveroperating costs.

26. Since 1980, the construction and building materials subsector has beenthe most dynamic sector of the economy, accounting for about one fourth of GDPand one fifth of employment. Several natural resources are available for thedevelopment of this subsector: pozzolana, limestone, and gypsum. Despite theincreased activity in construction, there is still a great need for bothhousing and sanitation systems. The inadequacy and high costs of transporta-tion are issues that need to be addressed before there can be greater utiliza-tion of this sector's resources. An additional issue is the need to studythe feasibility of more fully exploiting the construction materials that existon the islands (for example, increased use of pozzolana).

27. Tourism has considerable potential; but, in 1980, income from tourismaccounted for less than 2% of GDP. Factors that impede this sector's develop-ment include the lack of sufficient accommodations, and the demands that anincrease in tourism would impose on the existing water and energy, telecom-munications, and transportatiolL system. Further, the net gain from an expan-sion of tourism may be minimal because of the need to import a large portionof the non-labor inputs (e.g., food, beverages, ctc.).

28. The government's approach to development of tourism has been cautious;it has emphasized coordination with development of other sectors. During thePlan period, efforts include increasing lodging accommodations, passage oftourist legislation, and the creation of a tourist agency. Although a

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cautious approach is appropriate, tourism could be more actively promoted now,within the existing infrastructure; this could be done by increasing thefrequency of small group visits, by promoting tourism among emigrant groupsresiding abroad, and by developing linkages with the domestic economy,particularly handicrafts.

D. SOCIAL SECTORS

29. The Cape Verdean authorities are deeply committed to the improvementof the country's health standards. Their efforts have been hampered by thedeficient health and sanitary infrastructure, the dispersion of the popula-tion, the inadequate transportation system, and a lack of trained personnel.Up to this point, the results of the health policies are encouraging; thecountry is doing relatively well by West African standards. In 1980, the lifeexpectancy at birth was estimated as 58.8 years, and the infant mortality ratehad declined from 128 per thousand live births in 1977, to 60 in 1980. Theprincipal causes of infant mortality are diarrhea, congenital disorders,malnutrition, and several infectious diseases, which can be controlled today.Although the islands are reasonably well covered in terms of physicians andnurses, some of whom are expatriates, there is an acute shortage of hospitalbeds.

30. Major health problems arise because the majority of the population hasinadequate access to water. Piped water and sewage facilities are limited tothe two main cities of Praia and Mindelo and to Sal Island; and even in thoseplaces, water supply is frequently interrupted. Only 8.4% of the urban and6.0% of the rural population have access to septic tanks or other modernsanitary facilities. The deficiencies in sanitary services have contributedto the high incidence of diarrhea and other infectious diseases, and impedefurther improvements in health standards.

31. Currently, 70% of the population is illiterate, but this percentage isexpected to decline rapidly as the range of the educational system expands.Enrollment rates are up, as evidenced by reports that 80% of children eligibleby age were attending the first level of elementary school. Overcrowding inelementary schools is a serious problem that contributes to a high rate ofrepetition.

32. Problems are more severe at the secondary level because of the inade-quate infrastructure and limited numbers of teachers, which result in manystudents pursuing secondary studies abroad. High school level facilities willneed to be expanded and improved to reduce the already existing disequilibriumbetween the numbers of students in professional fields and those with mid-level educations. The low productivity of national schools and the generallyinadequate quality of the educational system limit efforts to reduce adultilliteracy rates and increase educational levels.

33. Natural population increase is estimated at 3% per year. However,actual population growth rates are substantially lower, less than 1% annually,because of emigration. The country's demographic structure is somewhatunique. The base of the pyramid is very large, reflecting the high fertility

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rate and rapid decline in infant mortality. A large indentation in thepyramid between the ages of 30 and 39 is associated with the 1940 famine,which caused decline in fertility and high mortality. Finally, working-agemales are underrepresented, due to emigration. Dependency ratios are amongthe highest in Africa.

34. Unemployment is high; and given demographic trends, prospects are notvery encouraging. According to the 1980 census, 31% of the economicallyactive population were permanently employed, 40% temporarily employed, and 29%unemplcyed. As a consequence of drought and differing economic opportunitiesamong the islands, internal migration toward the two main urban centers ofPraia and Mindelo has occurred. Rural development projects, financed by foodaid proceeds, are intended to stabilize rural population levels.

35. Because of the current population structure, the demand for educationand a first job will increase in the near future. Improvements in health con-ditions, including the reduction in mortality rates, will exacerbate the prob-lems of population pressure and unemployment, and put strains on infrastruc-ture (e.g., health facilities and housing). Given the limited resources ofthe country, a viable development strategy will require a pragmatic populationpolicy. The government is aware of the demographic prospects, and is studyinga population policy to be incorporated in the next development plan. Thepolicy should address family planning and provide for a private or publicorganization, to administer the program.

36. An emigration policy is also needed. Until now, emigration has beenthe principal means by which population pressure has been reduced. It isestimated that between 1970 and 1980, the net demographic outflow attributableto emigration corresponded to 15% of the population. The Cape Verdeancommunity abroad is roughly equivalent in size to that of the country'sresident population. For the foreseeable future, emigration will serve twoimportant purposes: to provide revenue through remittances, and to lessenpopulation pressure. Emigration strategy should be coordinated within anoverall population policy. As a part of an emigration strategy, authoritiesneed to identify those countries in which temporary job opportunities exist,and with which agreements can be reached that will protect the welfare ofemigrants.

37. To attract additional remittances, interest rate policy should bereviewed and special savings incentives created, possibly along the linesalready proposed by the Bank of Cape Verde. Promising investment possibili-ties could be offered to returning emigrants in those areas for which the emi-grants' skills are particularly relevant, such as tourism.

E. OUTLOOK

38. Cape Verde is an unusual case among developing countries. It is asmall economy with a poor resource base, experiencing a prolonged drought,with large deficits in the overall budget and resource accounts. However,largely due to the substantial inflows of emigrant remittances and foreign aidin the form of either grants or concessionary loans, the country has been ableto maintain a positive real growth rate, a surplus in the balance of payments,

and a reasonable level of foreign reserves. Economic management has succeededin preserving a fragile external equilibrium, while an overall strategy ofeconomic and social development is pursued.

39. An optimistic and high scenario for the period 1981-90 would result ina real GDP growth rate of 7% per annum versus 4% according to a low scenario.Growth in both of these scenarios would exceed the expected 2% per annumpopulation growth rate. The high scenario is based on normal rainfall, theimplementation of soil conservation and improved farming methods, and realinvestment declining less rapidly than in the low case. The high scenarioassumes higher production growth rates mainly from the Maio Project, shiprepairs and increased productivity in agriculture and in small and mediumscale industry. Both scenarios require restraining public and private domes-tic consumption which in turn will depend on successfully implementing incomesand savings po'licies, particularly concerning workers remittances. Therelatively high levels of foreign aid projected in both scenarios (US$64 and106 million per annum in the low and high case, respectively) are based on theexpected response of donors to improve economic management and policiesincluding investment programming. In the light of the capital flows requiredthe debt service ratio would be 24% in the high scenario by 1990 and 16X inthe low case.

40. The Cape Verdean authorities are well aware of the country's limitedcapacity to accommodate a greater external debt burden. The flow of externalaid will significantly influence future economic growth, as will world devel-opments that affect the demand for Cape Verde's international services, emi-gration trends, and the flow of remittances. The Cape Verdean authorities'control over these factors is limited. However, population and water poli-cies, which can have substantial development impact, are within the reach ofCape Verdean authorities. So is the continued pursuit of pragmatic economicpolicies that will contribute to the maintenance of external resource flows.

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I. ECONOMIC AND POLITICAL HISTORY

1.01 The economic history of Cape Verde has been largely determined by thecountry's geographic location. Prior to the 15th century, the great period ofPortuguese naval exploration, the islands remained largely outside the OldWorld trade routes. West Africa looked inward to the Sahel, and North to theMaghreb; the principal trade routes were trans-Saharan. Although the islandswere probably uninhabited, Africans did occasionally visit to gather salt, animportant commodity in West African trade. In the 15th century, Portugueseexploration reshaped the world economy by opening trade routes around theAfrican coast, and eventually to the Americas. Cape Verde took on newimportance for two reasons. First, due to the pattern of winds in the NorthAtlantic, Cape Verde lies at the intersection of the shipping routes fromEurope to the Cape of Good Hope, from Europe to the West Indies and Brazil,and from Africa to the West Indies. Second, at some 650 kms from the WestAfrican coast (Table A.1), the islands formed a convenient, safe, and sanitaryentrep6t for trade with the Upper Guinea Coast (present day Senegal to SierraLeone.)

1.02 The Portuguese discovered the islands of Cape Verde in 1460. Settle-ment started between 1461 and 1462, and by the early 16th century all majorislands were occupied. Using slave labor, the islands produced cloth, dyes.hides, and livestock, which were exported principally to the Guinea Coast.These products were exchanged for slaves, both for use on the islands and forreexport initially to Europe and later to the Americas. Soon, Portuguese andtheir island descendants (often mulattos), known as langados, had establishedthemselves on the Guinea Coast, where they were to play a crucial role intrade with Europe and the Americas, and among African ethnic groups. The CapeVerdean presence on the Guinea Coast began an emigrant tradition that remainsimportant to this day.

1.03 In the 17th century, as the lanCados and their descendants increasing-ly dominated Cuinean trade, Portuguese mercantilism encouraged smuggling.However, as Portuguese hegemony on the Guinea coast was broken by British,Dutch, and French competition, Cape Verde lost its central role in trade, andthe islands entered a prolonged period of economic crisis from which theynever fully emerged. The loss of the entrep6t role was partially mitigated bythe development of two other activities: textile production and the servicingof ships. In this period, Cape Verde became a major producer of textiles.Cape Verdean cloth, the pano, is basically West African (particularly Man-dinga) in origin; but the Cape Verdeans developed new styles, influenced byEuropean and Arabic designs, that were more highly esteemed in West Africathan textiles produced locally, in Europe, or in India. Panos became anessential component in the mix of commodities demanded in exchange for slavesin West Africa. In many regions, including Cape Verde itself, they were usedas a form of money. Although weaving ceased to be an important activity bythe end of the 19th century, panos are still made by a small number of ar-tisans. The growth of the ship servicing industry was a natural product ofthe islands' geographical location. While ships took on progressively fewerAfrican goods at the islands, they continued to stop to buy food supplies andbeverages, and to make minor repairs. In particular, an industry of salted

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goat meat developed; at times this product was even exported to the New World.Ships also stopped at Maio to procure salt. For example, the English codfishfleet, as early as the 1620s, would regularly take on salt from Maio on itsway to the Newfoundland fishing grounds.

1.04 Whaling in Cape Verdean waters began in the 17th century, and becamean important economic activity in the 18th and 19th centuries, when foreign-ers, principally American, started hunting whales around the islands. Whalingnever contributed much directly to the Cape Verdean economy; rather, itsimportance was in providing a source of employment and a means of migrationfor the Cape Verdean population. The Americans quickly discovered that theCape Verdeans made well disciplined crew members. By the end of the 19thcentury, the American whaling fleet was largely run by Cape Verdeans. It wasthese seamen who formed the nucleus of the Cape Verdean community in NewEngland, currently the largest Cape Verdean community abroad.

1.05 The 19th and early 20th centuries were Cape Verde's heyday as a supplycenter for At] ntic shipping. In 1838, the British established a small coaldeposit at Mindelo to provide fuel for shipping around the horn of Africa. Bythe 1850s, several British coaling companies were established in Mindelo, andsoon, hundreds of ships per year were calling to take on coal. In 1912 thecoaling trade reached its peak when some 1.707 ships called in Mindelo; but,with the high tariffs demanded by the Portuguese, the substitution of oil forcoal, and the development of the ports of Las Palmas (Canary Islands) andDakar (Senegal), this source of income went into decline. Oil was madeavailable at Mindelo, and the port saw a resurgence in activity during thePortuguese colonial wars, when it was used to service the Portuguese. Today,the port has lost its former importance. In 1980, only 270 ships called atMindelo. (This level of activity is comparablc to thc period immediatelyfollowing the opening of the Suez Canal in 1869, when Mindelo lost the EastIndia Traffic, or to years with heavy shipping activity in the late 17thcentury--Table A.2). The development of Mindelo as an international fishingand shipping base seeks to recapture some of this historic contribution.

1.06 While exports and ship services have dominated the islands' economy.the majority of the population has traditionally derived its living fromagriculture. In the 15th and 16th centuries, most cultivated land was dividedinto morgados--inalienable, indivisible, hereditary properties of varyingsizes, worked by slave labor. This system started to break down in the 17thcentury, when the islands entered into economic decline and many morgados(landholders) became impoverished. Slaves often escaped to the interior ofthe islands to practice subsistence agriculture. A number of slaves alsoearned their freedom. By the 18th century, the slave system had been largelyreplaced by a mixture of small, individual properties in the interior, andlarge, neo-feudal properties in irrigated areas. In the 19th century, many ofthe small plots in the interior were consolidated into large holdings throughpurchase from farmers impoverished by drought, and expropriation of smallproperties from their titleless occupants, often descendants of runawayslaves. The new owners of these lands were largely traders and civil servantsin the towns, and returned emigrants. Thus was established the system ofabsentee landholdings farmed by sharecroppers or renters, together with small-scale subsistence farming, and some large estates. Although several large

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landholdings have since become state farms and an agrarian reform is inprogress, this agrarian structure largely continues today (Chapter IV).

1.07 Cape Verde has also profited historically from its human resources.Under colonial rule, Cape Verdeans were considered assimilados, a status whichwas acquired wv:th difficulty in the other Portuguese colonies, and whichentitled the Cape Verdeans to the rights of citizenship, including access toPortuguese state education. As a result, the Cape Verdeans tended to bebetter educated than the people of other colonies, and were relied upon by thePortuguese for public administration throughout Lusophone Africa. It has beenestimated that between 1920 and 1940 some 70% of the government officials inPortuguese Guinea were Cape Verdean or of Cape Verdean descent. Becauseeducated Cape Verdeans continued to find employment in the colonial bureau-cracy up to independence, the Cape Verdeans were often perceived as colonisersboth in Portuguese Guinea and in other colonies.

1.08 The revolution for the independence of Cape Verde was fought almostentirely in Portuguese Guinea. The African Party for the Independence ofGuinea and Cape Verde (PAIGC) was founded in Bissau in 1956 by Amilcar Cabraland a few other intellectuals, many of whom were Cape Verdean or of CapeVerdean descent. Cabral, himself, although born in Guinea, had a Cape Verdeanfather, and attended high school in Slo Vicente. Throughout the revolutionarywar, a significant proportion of the PAIGC leadership was Cape Verdean, whilemost of the guerilla troops were Guinean. At that time, the PAIGC emphasizedas one goal the eventual union of Guinea and Cape Verde.

1.09 There was relatively little political activity in the islands untilthe Caetano regime was overthrown in Portugal. At this point several rivalgroups emerged in competition with the PAIGC, but lacking the latter's commit-ment and reputation for defeating Portuguese colonialism in Guinea, thesegroups rapidly disappeared from the scene. On July 5, 1975, Cape Verde becameindependent. The PAIGC won 92% of the vote for the new National Assembly.

1.10 For the next five years, Cape Verde and Guinea-Bissau were ruled bythe PAIGC, with Cape Verde's President Aristides Pereira as Secretary General,and the President of Guinea-Bissau, Luis Cabral (Amilcar's brother), as DeputySecretary General. In November, 1980, a coup led by Guinea-Bissau's PrimeMinister, Joao Bernardo Vieira, overthrew the government of Luis Cabral.

1.11 The government of Cape Verde opposed the coup, and recognizing thatthe PAIGC was in effect now two separate parties, created the African Partyfor the Independence of Cape Verde (PAICV), which remains today the rulingparty in the islands. Relations between the two countries deteriorated untilJanuary, 1982, when Luis Cabral was allowed to fly to exile in Cuba. Diplo-matic relations were reestablished in June, 1982. Normal state to staterelations culrrently exist between the two countries. The project of unifica-tion has, however, been put aside for the foreseeable future.

1.12 PAICV rule appears quite stable. Aristides Pereira has been Presidentsince independence, and the PAICV is the direct continuation of the PAIGC inCape Verde. PAICV rule has not been entirely without dissent, however. In1981, the Union for Independent and Democratic Cape Verde (UCID), a right wing

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opposition group active principally in Cape Verdean emigrant communities,aligned itself with farmers opposed to the proposed agrarian reform. After aclash in which two farmers were killed, opposition leaders were arrested, thearmy was instructed to use less violent means, and an important informationcampaign was waged to explain the proposed reform to the farmers.

1.13 The Government of Cape Verde enjoys considerable prestige in theinternational community due to the historical influence of Amilcar Cabral onthe liberation movements in Lusophone Africa, the moderate and conciliatorypolitics displayed by PAICV leaders, and the Government's pragmatism. InAfrica, Cape Verde has often played the role of mediator. In 1982, Pereirawas instrumental in bringing about a reconciliation between Angola and Sene-gal. Cape Verde has also promoted direct talks between Angola and SouthAfrica, which have taken place on the island of Sal. Furthermore, Cape Verdeis active in the Interstate Committee to Combat Drought in the Sahel (CILSS).In East-West relations, Cape Verde has taken a neutral role and has repeatedlyrefused Soviet requests for permission to build a naval base on the islands.Cape Verde maintains amicable relations with and receives aid from the OECDcountries, the Soviet bloc, and China. The U.S. is the most important fooddonor.

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II. RECENT ECONOMIC PERFORMANCE

A. STRUCTURE OF THE ECONOMY

2.01 The availability and quality of statistical information on the CapeVerdean economy are very limited. There are no official national accounts orprice indices, and external trade statistics are published in an incompleteform only after long delays. The national accounts estimates presented inthis report were derived from official sources through 1981, updated with1982-83 data, and supplied by the Cape Verde authorities to the mission. Dueto these limitations, the iggregate data presented below should be regarded asrough estimates.

2.02 For 1983, Cape Verde GDP is estimated at CV esc 5812 million, orapproximately US$81 million. Per capita GDP was approximately US$267 in 1983,65Z higher than in 1977. For the 1977-1983 period, the average annual growthrate of GDP was 10% in current dollars. In constant dollars, for the sameperiod, average growth rate was 2.5% per year, or 1.5% in per capita terms.

2.03 The distribution of output by sector in 1982 is presented in Table2.1, and for the period 1977-82 in Tables A.3 and A.4. The contribution ofagriculture to GDP averaged less than 202 between 1980 and 1982 (Table A.4).When compared with other African countries, this value is rather low, and islargely a reflection of the country's low agricultural potential and thedrought that has been affecting the islands since the late sixties. Foodproduction falls considerably below that required to meet domestic consumptionneeds. For example, corn and beans, the major food crops, are grown on most ofthe rainfed farmland. However, only 102 of total corn consumption and 50% ofbean consumption are met by domestic production (such shares are highlyinfluenced by rainfall, and hence are quite variable). The existing gapbetween domestic food consumption and production is partially filled by foodaid.

2.04 Fisheries' contribution to GDP remained between 5 and 6Z during 1977-1982. Fish products (fresh and frozen fish, shellfish and canned fish) weretraditionally the country's main export, comprising, between 1978 and 1980,almost one half of exports. Since 1980, however, exports of fish productshave declined in both absolute and relative terms (since 1981, bananas havebeen the main export product). There is some potential for the expansion ofthe fisheries sector, but it has yet to be realized. It is estimated thatmore than 30,000 tons of fish per year could be obtained in the waters sur-rounding the archipelago, three times the current annual catch. .he acquisi-tion of twelve new large boats in 1983/1984 is expected to increase the outputof the fishina industry. Mineral production has been restricted in recentyears to salt, which is produced by evaporation on salt flats, principally onSal Island. The contribution of mineral production to GDP was only 0.3% in1981, but represented a substantially larger share of exports (12%).

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Table 2.1CAPE VERDE: Value Added by Sector

CV esc millions % of total

Agriculture, Livestockand Forestry 749 16.5

Fisheries 227 5.0Mining 11 .2Manufacturing 182 4.0Construction 1091 24.0Commerce and Transportation 1602 35.3Public Services 683 15.0

GDP 4545 100.0

Source: Tables A.3 and A.4.

2.05 In the secondary sector, the contribution of manufacturing has beensmall and relatively constant. Manufacturing was estimated at 4X of GDP in1982. Manufacturing activities consist mainly of the production of cigar-ettes, aguardente (rum), clothing, shoes and other activities of lesserimportance. Most industrial production by value originates from eight publicand four mixed enterprises. Most employment, however, is by small artisanalenterprises. The manufacturing sector is expected to grow rapidly in thefuture because of several large investment projects that are in various stagesof planning or implementation. An analysis of these projects is presented inChapter III. Initiation of some of these large projects also caused construc-tion output to increase threefold, in current prices, from 1980 to 1982. Theconstruction sector increased from 14% of GDP in 1979-1980, to 21% in 1981,and 24% in 1982. (Table A.4).

2.06 The tertiary (services) sector is the largest with approximately 50%of GDP during the 1980-82 period. Within the sector, commerce and transpor-tation alone constitute approximately one third of domestic output, andinclude a wide range of activities, such as services to international aircraftand ships. The expansion of services to international carriers at the SalAirport accounts for most of the recent growth in commerce and transportation.Central Government services are the other major component of the tertiarysector. The Government's share of GDP from 1980 to 1982 averaged 16%. TheGovernment is the single largest employer, with approximately 6,300 permanentemployees in 1983. In summary, most of the growth of GDP from 1980 to 1983occurred in the construction sector through several large investment projects,and in the commerce sector, primarily in services to international aircraft.A more detailed review of the productive sectors begins with Chapter IV.

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B. STRUCTURE OF NATIONAL EXPENDITURES

2.07 !wo main features of the Cape Verdean economy should be emphasizedwhen analyzing the structure of national expenditures. The first is thatdomestic consumption exceeded GDP for the 1977-1982 period as a whole, but wassmaller in 1983. Secondly, the country has been dependent on foreign aid andworker remittances to meet the large resource gap. which exceeded CDP in 1980and 1961, but was less than GDP since then (Tnble 2.2). Total grant aid,which includes food, equipment and cash aid, was equivalent to 397 of CDP in1983, while worker remittances were equivalent to 25% of GDP (Table A.6).Another way to gauge the importance of external factors in the Cape Verdeaneconomy is to compare GDP and GNP. GNP, broadly defined as GDP plus netfactor income including remittances, was approximately US$317 per capita in1983. This value is almost 200 higher th.an per capita CDP. Domestic savingsare positive only if CNP is used as an indicator of domestic disposableincome. Extensive grant aid and remittances have allowed the country tomaintain a high level of consumption and investment relative to domesticoutput.

2.08 The aggregate expenditure data shown in Table 2.2 were based on dataprovided by the Cape Verdean authorities. Government consumption and invest-ment data came from the Ministrv of Economy and Finances. Export and importdata were obtained from the balance of payments statistics compiled by theBank of Cape Verde (BCV). The estimates of private consumption were derivedas a residual, and are quite rough. Subject to these limitations, some broadtrends in domestic consumption can be observed. First, private consumptionexceeded CDP in some years. Second, the pattern of consumption expendituregrowth has corresponded closely to variations in remittance levels. In 1980,as remittances increased by almost 80%, private consumption expanoed 33.7%.This sharp increase was associated with the return of large numbers ofemigrants coming to celebrate the anniversary of their country's independence.In subsequent years, remittances declined approximately to their earlier levelin real terms. After reaching a high of US$40 million in 1980, remittancesdropped in 1983 to US$20.5 million, below the 1979 level of US$24 million.Correspondingly, annual increases in private consumption were only 8.4% in1982 and 9.0% in 1983. Given the estimated inflation rate of 15-20% for thisperiod, consumption actually declined in real terms relative to 1980.Government consumption expenditures averaged 30% of CDP from 1980 to 1983.

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Table 2.2CAPE VERDE: Expenditurea of Available Resources, 1980-83

(Current Prices)

1980 1981 198? 1983

CV euC c of CDP CV esc %af CDP CV osc % of CDP C'i c % of CDPmillions millions millions millions

ConsuMption 3873 149.1 4394 134.0 4912 108.1 5571 95.9

Privatc 3010 l15.9 3341 101.9 3622 79.7 3948 b8.0Public 863 33.2 1053 32.1 1290 28.4 1623 27.9

Gross Domestic

Investment 1463 56.4 2750 33.9 3691 81.2 4655 80.1

PublIc 1102 42.5 '290 69.9 3300 72.6 4295 73.9Private 334 12.9 430 13.1 360 7.9 320 5.5Change In

stocks 27 1.0 30 .9 31 .7 40 0.?

Total Domestic

Fxpenditures 5336 205.5 7144 217.9 8603 189.3 10226 175.9

Provided by

CDP 2596 100.0 3278 100.0 4545 100.0 5812 100.0

Resource Cap -2740 105.5 -3866 117.9 -4058 89.3 -4414 75.9Exports C

and NFS 713 79.8 1155 35.2 1816 39.9 2540 43.7Imports G

and NFS -3513 135.3 -5021 1.53.1 -5874 129.2 6954 119.6

Net Investment

Income 1/ 1746 67.3 1565 47.7 1415 31.1 1129 19.4

cGP 4342 167.3 4843 147.7 5960 131.1 6941 119.44

./ Includes remittances

Source: Table A.5

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2.09 Investment in Cape Verde has always represented an unusually largeshare of domestic expenditures; between 1977 and 1980, it averaged 64% of GDP.With the beginning of two large projects, the Sal Airport and a shipyardrepair facility at S. Vicente, a major change in both the size and coimpositionof investment occurred in 1981. As public investment doubled, total invest-ment expenditures increased by 882. As a consequence, total investmentrepresented 84% of GDP in 1981. The total cost of the airport project isestimated to be US$14 million, largely spent in 1981. The shipyard repairproject was completed in late 1983 at an estimated cost of US$38 million; itwas the largest project ever undertaken in the country. It was financed bymedium term loans from a Portuguese commercial bank (US$12 million), theAfrican Development Bank (US$13 million), the European Investment Bank (US$5million), and the Bank of Cape Verde (US$8 million).

2.10 These two projects substantially altered the structure of domesticinvestment. While in 1980 investment in industry amounted to only 36 millionCV esc, it increased to 418 million CV esc in 1981. Investment in the trans-portation sector, which was 215 million CV esc in 1980, increased aboutthreefold to 613 million in 1981. These two sectors together represented 41%of total investment in 1981, and will together remain at the same relativesize throughout the period covered by the First National Development Plan(1982-1985). Investment in the transportation sector is projected to declineover the course of the Plan period as the improvements in the Sal airport arecompleted. Investment in rural development projects remained importantthroughout the 1978-81 period, accounting on average for 28% of total invest-ment. These projects are highly labor intensive. They are being financedfrom the proceeds of the domestic sale of foreign food aid. In 1983, totaliavestment respresented 80% of GDP. More than 60% of total investment wasconcentrated in three sectors: rural development, 18%; industry, 302; andtransportation, 15% (Table A.34). In summary the bulk of investment has beenin infrastructure projects. The major change after 1981 was the increasedshare of the industrial sector. A more detailed analysis of public investmentand the First National Development Plan is presented in Chapter III.

2.11 Exports of goods and services increased rapidly between 1979 and 1983,from US$12.4 million, or 30% of GDP, to US$35.4 million or 44% of GDP. Theexpansion of the nonfactor services component largely accounts for thisincrease. Merchandise exports, which had been increasing, declined fromUS$9.1 million in 1980, to US$1.9 million in 1983. The decline in exports offish products, partially offset by an increase in banana exports, largelyaccounts for the decline (See Chapter II.E). During this period, the trans-port revenue component of the c-;rrent account increased from US$6.9 million in1979, to US$27.2 million in 1983, a fourfold increase. The increase in totalexports is, therefore, a consequence of the expansion of services, which areprovided primarily at the Sal airport and the Mindelo port. However, theirrespective trends have been quite different.

2.12 In fact, all of the growth shown in services has been in aviationservices, as shipping services have been declining. The traditional role ofMindelo as a ship bunkering point has been declining over the last 25-30 yearsbecause of changes in patterns of world trade, vessel technology, and tightcompetition from West African ports, notably those of the Canary Islands and

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Dakar. Around 700 thousand tons of bunker oil were supplied in 1954; bLt only90 thousand and 40 thousand tons were supplied in 1979 and 1982, respectively.Bunkering is increasingly limited to vessels making commercial calls at theport, rather than to those ships in transit. The improvements in the Port andthe shipyard are expected to increase the number of vessels calling at theport, and to enhance the foreign exchange revenues from Hindelo. At Salairport, the trend in services rendered has been upward. Jet fuel suppliedincreased from 87 to 111.3 thousand tons between 1979 and 1982 (Table A.49).Together, the Sal airport and the Mindelo port are undeniably very ixportaatto the Cape Verdean economy. The dissimilar trends experienced in the lastseveral years point to the long run uncertainty associated with servicesectors such as these. Future growth in the airport r^venues, in particular,may be influenced by improvements in aircraft technology, and by events inSouthern Africa.

2.13 Imports cover a much wider range of products than exports. Food andbeverages constitute the single most important of these. Recently, imports ofmachinery, cement and petroleum have increased due t.~ the investment projectsand expansion of services at Sal airport (Table A.21). Total imports in-creased steadily to US$103 million in 1981, and then declined slightly toUS$101 million in 1982 and US$90 million in 1983. The export/import coverageratio has increased dramatically from 5% in 1977, to 16.2% in 1979, 22.2% in1981, 31% in 1982, and 37% in 1983. Recent increases in the ratio reflectboth a large expansion orn the export side (36.2% in 1982 and 13% in 1983, indollar terms) and slight declines in imports cf goods and services (2.2% in1982 and 3.1% in 1983). The above estimates were obtainied from preliminarybalance of payments data supplied by the Bank of Cape Verde. Because of lagsbetween actual trade operations and balance of payments accounting, a cross-check between these two sources was not possible. The latest trade data referonly to the first quarter of 1982. It is possible that some of the 1983imports will be accounted fcr in earl. 1984. However, the decline in theexpansion of imports would be consistent with an estimated slowdown in theexpansion of private consumption.

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C. PUBLIC FINANCE

1. Introduction

2.14 The public sector in Cape Verde is composed of three main entities:the Central Goverment, the municipalities, and several public and mixedenterprises. With respect to the Central Government, the Ministry of Economyand Finance has the formal responsibility of budgetary policy, coordinatingthe current expenditures of the individual ministries, and collecting andallocating revenues. The government budget is divided between an "ordinary"or current budget, containing mostly recurrent items, and an "extraordinary"or capital budget, composed of investment items although the distinctionbetween the two categories is in some cases somewhat artificial. Prior to1979, there was an emergency prog-rns which covered drought relief expendi-tures. The budget and fiscal systems are still largely based on the Portu-guese legacy, and the forecasts of the different budget components are ob-tained mainly from the outcomes of previous years.

2. 15 Included in the Government budget are a number of special funds thatcome under the title of Contas de Ordem, constituted as autonomous financialbodies under the jurisdiction of the appropriate ministry. The importance ofthis category of autonomous funds in the budget has fluctuated greatly inrecent years as some funds have been converted into public enterprises andhave been withdrawn from the government budget. Examples include the Inter-national Airport (1984), the Post Office (1981) and the Cape Verde AirlineCompany (1981). Although no data reflecting each of the funds' actual ex-penditures and revenues are available, budget estimates provide an approxi-mation of their importance. In 1982, they collectively constituted one fourthof the estimated total government current expenditures, including Contas deOrdem, of 2,200 million CV esc.

2.16 Of these funds, the National Development Fund (NDF) and (formerly) theSal Airport were the most importent, collectively comprising 97% of budgetedexpenditures under Contas de Ordem. The NDF alone, which is the largestautonomous body, has a budget of 300 million CV esc, and accounts for morethan 50% of the total amount budgeted under Contas de Ordem. It is under thesupervisory control of the Ministry of Economy and Finance, which appoints itsboard. The revenues of NDF are obtained from the proceeds of the sale of foodaid, and are used maiuly to finance the local costs of rural developmentprojects. In sum, NDF's main role is to serve as an intermediary in theallocation of the monetary counterpart of food aid.

2.17 Sal Airport, which was the other important autonomous fund, became apublic enterprise in 1984 under the jurisdiction of the Ministry of Transport.Its revenues are derived mainly from service taxes on passengers and traffic.The 1983 budget estimate indicated that these taxes amounited to 215 million CVesc or 90% of the airport's total revenues. The remaining revenues areobtained from the rental of installations and other services. On the expendi-tures side of the Airport's finances, the main components are personal andrecurrent expenditures, 47% of the total; debt payments, 41%; and capitalexpenditures, 12X. Both the airport and NDF have earmarked revenues and are

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self-financed. The remaining funds, the Caixa de Credito, the Fundo deFomento Social, and the Caixa de Habitacao, are all of negligible importance.Including the funds represented under Contas de Ordem in intertemporal com-parisons of government expenditures creates significant difficulties becauseof the conversion of some of the funds into public enterprises during therelevant period. Therefore, in the following analysis they are consistentlyconsidered as public enterprises and excluded from the Central GovernmentAccounts.

2.18 For the remainder of the public sector, i.e., municipalities andpublic enterprises, available information is very deficient. Beginning in1981, the municipalities received some budgetary autonomy as well as 5X ofcentral government tax receipts. Additional amounts of revenue are collectedfrom local taxes and fees, but overall, their economic importance is small.As a consequence of the 1981 reform, municipalities received transfer paymentsfrom the Ministry of Economy and Finance totalling 58 million CV esc in the1983 budget. In general, the pubic enterprises are self-sufficient, althoughthe central government may contribute to their investment expenditures. Withthe exception of ELECTRA (an electricity and water desalination company), theydo not receive government subsidies. Lack of available data prevents a globalanalysis of this component of the public sector. A description of the role ofthe main public enterprises appears in the sectoral analysis of the Cape Verdeeconomy (Chapters IV to IX). Because public enterprises make up a very largepart of the economy's "modern component", their role is unquestionably impor-tant, and a future global accounting framework for the public sector needs toincorporate their contribution. The following analysis covers only theCentral Government component of the public sector.

2. Trends

2.19 Since independence the government sector has played a dominant role inCape Verde's economy. Government expenditures and the size of the governmentdeficit are both quite large relative to GDP. For example, in the 1981-83period, government expenditures, including consumption and investment outlays,were roughly equivalent to GDP (Table A.7). Of these expenditures, two thirdsrepresented outlays in the investment programs. As a consequence of thislarge volume of expenditures the overall government deficit from 1980 to 1983was equivalent to 41%, 69%, 72%, and 74%, of GDP respectively (Table A.8).Central government revenues and expenditures from 1977 to 1983 are presentedin Table 2.3. It is important to understand the distinction between theordinary and extraordinary budget, and the manner in which the deficit hasbeen financed over time. As the data in Table 2.3 indicate, the ordinarybudgets, in broad terms, have been in equilibrium, showing small surplusesover the last four years. The central government deficit has resulted fromthe large outlays in the public investment program. While current governmentexpenditures have been approximately equal to current revenues, capitalexpenditures have been financed through external sources.

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Table 2.3CAPE VERDE: Central Government Sunuary, 1977-83

MiflIxios of C.V. Escudos)

1977 1978 1979 1980 1981 1982 1983

Ordinary BudgetQirrent Revemue 396.6 50B.0 617.3 907.3 1087.2 L322.2 1 623.7Oarrent expenditure 549.0 575.8 657.4 862.7 1052.8 1290.2 1 623.4

Deficit -152.4 -67.8 -40.1 444.6 +34.4 +32.0 40.3

Capital revenue - 1.4 .6 - - .6 -

Ei ctraodlnry cEkp. -919.0 -845.1 -1343.5 -1101.9 -2290.0 -3300.0 -4295.0

OveraIl deficit -1071.4 -911.5 -1383.0 -1057.3 -2255.6 -3267.4 -4294.7

Foreign Finacing 1029.3 785.1 1315.6 1102.2 1853.0 3383.7 4180.3

Grants 951.6 744.9 1250.0 1056.4 930.3 1770.0 2269.9

Loans 77.7 40.2 65.6 45.8 922.7 1613.7 1910.4

3bmestic financing 42.1 126.4 67.4 -44.9 402.6 -116.3 114.4

B.C.V. 42.1 126.4 67.4 -44.9 402.6 -116.3 114.4

Operational accounts -55.6 36.2 49.1 -42.1 391.5 -75.7Credit 3.9 - 30.0 35.2 391.5 .4

Deposits -59.5 36.2 19.1 -77.3 .4 -75.3

Earmirked accoumts 97.7 90.2 18.3 -2.8 11.1 -40.6

Source: Cape Verde Autborities and missiion estimates.

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2.20 External resources, including both grants and loans, have been themajor source of deficit financing. In 1979 and 1980, foreign grants financed90% and 100% of the deficit respectively. The remaining portion of the 1979deficit was financed in almost equal parts by foreign loans and Bank of CapeVerde credit. Despite the external aid, the overall deficit minus grants in1979 was only 6.2% of GDP (Table A.8). In 1981, however, the overall deficitapproximately doubled in size to 2256 million CV esc, or 69% of GDP. Further,breaking with the early pattern of financing, almost one half of foreignfinancing from 1981 to 1983 was provided in the form of loans rather thangrants. For these three years, the overall deficit minus grants represented,respectively, 40%, 33%, and 35% of GDP. The Bank of Cape Verde's role hasgenerally been negligible in the financing of the overall government deficit,with the exception of financing the government's share of the shipyard projectin 1981.

2.21 The sharp increase in investment outlays in 1981 resulted from theimplementation of the airport and shipyard projects. Together, these twoprojects accounted for approximately one half of extraordinary expenditures in1981. In 1982, with the beginning of the First National Development Plan(Chapter III), investment outlays increased by 44% in current prices.

3. Goivernment Revenues

2.22 During the 1979-1983 period, government revenues increased rapidly atan average annual rate of 28%, keeping pace with government current expendi-tures. However, the structure of these revenues experienced some changes.While capital revenues remained essentially constant and overall insignifi-cant, the share of tax revenues in total revenue increased from 76% in 1979 to86% in 1982, and then declined to 82% in 1983 (Table 2.4). Approximately onehalf of non-tax revenues are derived from the transfer of part of the surplusof public enterprises to the government in its status of shareholder. Thedetermination of the amount of the public enterprise surplus allocated to thegovernment budget is dictated by current budget needs, or in other words, bythe expected gap between current expenditures and revenues. The remainingsurplus is used for investment purposes.

2.23 The main development in the structure of government current receiptswas the rapid increase in direct tax revenues. Although indirect taxes remainthe main source of revenue, their share in total revenues declined from 56% in1979 to 46% in 1983. During the same time span, the contribution of directtaxes increased from 20% to 36%. The increased share of direct taxes isattributable to two main factors: a revision of the tax laws in 1980 and anincrease in the revenues from the Petroleum and Petroleum Products Tax, whichis imposed on the profits obtained from the commercialization of these prod-ucts. The main changes in the tax law were: the adoption of a broader baseand a more progressive tax schedule for the tax on salaries and income ofself-employed professionals (Imposto Profissional); an increase in the taxrate on taxable business profits from 10 to 16% (Contribucio Industrial); andan enlargement of the base of the complementary income tax (Imposto Complemen-tar). The latter is a tax on the annual income of individuals and firms thatare liable to the Imposto Profissional, a tax on capital income, and a tax oninterest income. For individuals, the tax is assessed on aggregate household

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Table 2.4CAPE VE_ E: Qmtml Gbwermit Orinary Revenue 1979-83

(as percent of total revenue)

Item 1979 1980 1981 1982 196?' 198?' 1983

Total Favenue 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Qirrent Revenle 99.9 100.0 100.0 100.0 100.0 100.0 100.0

Tax Revenue 76.5 76.5 80.4 85.6 83.2 82.8 81.6Direct laxes 20.1 23.1 28.4 37.3 34.2 34.9 35.6Inoame & Prmfits 18.3 21.6 27.1 36.2 33.0 33.8 34.6Property 1.3 1.1 1.0 0.8 0.8 0.7 0.7Other 0.6 0.4 0.4 0.3 0.4 0.3 0.3

Indirect Taxes 56.4 53.4 52.0 48.3 49.0 47.9 46.0biports 49.1 47.0 46.5 42.9 44.5 43.4 41.4STports 0.2 0.3 0.2 0.1 0.2 0.0 0.0Stanp Tax 6.7 6.0 5.2 5.1 4.2 4.3 4.4Other 0.3 0.2 0.2 0.2 0.2 0.2 0.2

Non-Tax Revenues 23.4 23.5 19.6 14.4 16.8 17.2 18.4(Profits ofPublic Ehterprises) 13.8 12.2 10.5 6.1 10.7 9.7 9.9

Capital Reenue 0.1 - - 0.0 - - -

Note: a/ budget estit=esSwrce: Statistical Appendix, Table A.9

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income, with a deduction for each family member. The 1980 changes in the taxlaws were a major modification of a tax code that is based largely on thePortuguese Tax Code.

2.24 The second factor that explains the relative expansion of direct taxesis the growth in revenues from the Petroleum Tax. (Petroleum operations arediscussed in Chapter VII). Although the tax rate has remained unchanged since1977 (a flat rate of 35Z), revenues increased with the expansion of servicesto international aircraft. Petroleum and Petroleum Products Tax revenuesincreased from 60.3 million CV esc in 1980 to 201.4 tillion CV Esc in 1983, athreefold increase. While in 1980 these revenues represented 6.6% of totalrevenues, in 1983 they accounted for 12.4Z of government revenues.

2.25 As a consequence of the tax changes and the increase in revenues fromthe petroleum tax, the ratio of direct taxes to GDP, which was .058 in 1979,increased to .094 in 1981, and .099 in 1983. On the other hand, the indirectratio of taxes to GDP ratio declined from .162 in 1979 to .13 in 1983. Thisdecline can be explained by the decline in import growth in 1982 and 1983. theincrease in capital goods imports (which are exempt from import taxes), andthe fact that some taxes on imports are specific rather than ad valorem, andtherefore not responsive to changes in import value. In general, taxesdirectly related to international trade are the major source of revenue forCape Verde. All indirect tax revenues except the stamp tax are linked tointernational trade and when combined with (direct) petroleum tax revenues,the total resulting revenues associated with international trade averagedapproximately 55% of current revenue from 1980 to 1983 (Table A.11).

4. Government Expenditures

2.26 Current government expenditures increased at an average annual rate of23% between 1978 and 1983. Current expenditures remained relatively constantin relation to GDP; for the 1980-1983 period, they represented an average of30% of GDP. In terms of their relative share of expenditures, the two mostimportant ministries during the 1978-1983 period were the Ministry of Economyand Finance and the Ministry of Education (Table A.12). In 1983. they ac-counted for 25% and 15%, respectively, of ordinary expenditures. The HealthMinistry and the Foreign Affairs Ministry accounted for 8.5% and 11%, respec-tively of total ordinary expenditures in 1983.

2.27 The unusually large zhare of the expenditures allotted to the Ministryof Economy and Finance can be explained by the wide variety of expendituresthat are under the Ministry's control. The 1983 budget estimate (there are nofigures for actual outlays by category) for the Ministry of Economy andFinance is 408 million CV ebe, or one fourth of total government expenditures.Included in this amount are transfers (182 million CV esc) and public debtpayments (95 million CV esc), which represent, respectively, 45% and 23% ofthe total. Budgeted transfers include a subsidy to municipalities (58 millionCV esc), a subsidy to ELECTRA of 60 million CV esc, and transfers to severallocal organizations, such as the Women's Organization of Cape Verde (OMCV),the National Cooperatives Institute (INC), and youth organizations. Otherthan the subsidy to ELECTRA, no other transfers to public enterprises are

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budgeted. The subsidy to ELECTRA was approximately 80 million CV esc in 1983,20 million CV esc above the budgeted amount.

2.28 ln the 1983 budget, personnel expenditures amounted to 43% of budgetedcurrent expenditures, a lower proportion than budgeted in 1981 (56Z) and 1982,(47%) due largely to unchanged government salary scales. However, becausethere was a 21% increase in wages for the government sector in the lastquarter of 1983, personnel expenditures increased as a proportion of totalexpenditures. Debt payments represented 1.1% and 5.3% of estimated expendi-tures for 1982 and 1983, respectively. For the same period, transfer paymentsaccounted for 18.3% and 18.9% of estimated expenditures. The largest share(70%) of transfers came under the Ministry of Economy and Finance. Theremainder were in the budgets of the President (13%), Prime Minister (11%),and Health Ministry (3%). Recipients included the local information agency,the main newspaper, and various social and educational agencies. While the1983 budget forecast a current deficit of 297 million CV esc, the actualoutcome was a surplus of 0.3 million CV esc. Similarly, in the 1982 budget adeficit of 166 million CV esc was estimated; however, a surplus of 32 millionCV esc was actually achieved. The discrepancies are explained by the conser-vative revenue estimates used by the Ministry of Economy and Finar.ce, and bythe requirement that only 95% of budgeted current expenditures can be spent.

5. Issues and Recommendations

2.29 Several public finance issues merit discussion. First, the overallcentral government budget deficit is large by usual standards; and with theinitiation of large investment projects during the last two years, a muchlarger share of the central government deficit has been financed throughexternal borrowing. Even though the external debt has been obtained atconcessionary terms, its burden is expected to increase rapidly in the future(Chapter II.E). To insure that the debt stays within manageable limits, it isimportant that (i) internal savings be created to finance the deficit, and(ii) that projects proposed for external financing be analyzed carefully.

2.30 Because the potential for increased tax revenues seems limited,efforts should be made to create savings from the ordinary budget throughcontainment of government expenditures. Bringing ordinary revenues andexpenditures in balance without using the government's share of public enter-prise profits would enable the latter to be used to finance investments. Somesavings could be achieved through reevaluation of expenditures, such astransfers to public enterprises; others, by careful evaluation of the feasibleexpdnsion of personnel expenditures. As recognized in the Plan, it is essen-tial that public sector wage increases do not jeopardize the precariousinternal/external equilibrium. In particular, transfers to ELECTRA should beanalyzed carefully, and a pricing policy developed that would avoid the use ofgovernment revenues to finance the current operations of this enterprise. Afirst step could be separate accounting for electricity and desalinationoperations (Chapter VII).

2.31 All projects in the capital budget need to be carefully evaluated.First, projects submitted for external financing need to be monitoredcarefully through a detailed process of project preparation and evaluation.

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Domestic capacity to prepare and evaluate loan proposals must be enhanced.Projects should be presented for possible external financing only after acareful evaluation of their economic viability and macroeconomic implications.Secondly, projects financed through external grants need to be carefullymonitored so that their future recurrent costs not covered by external aid donot become an economic burden.

2.32 A second issue is the extent to which taxes can be increased to helpfinance the deficit. Because tax revenues already constitute a relativelylarge portion of GDP, a general increase in the tax burden could have negativeeffects on growth by lowering the rate of return to production factors.However, additional revenues can be obtained from less sweeping measures suchas, (i) a change from specific to ad valorem import taxes (Chapter II.E), (ii)adjustments in water charges, and (iii) increases in the tariffs on someimported luxury goods.

2.33 A third issue is the need for better economic information at both themacro and micro levels. Possibly with external technical assistance, effortsshould be made to prepare indicative national accounts, reliable price indi-ces, more complete trade statistics, and more detailed balance of paymentsdata. These data would prove extremely useful in the preparation of develop-ment plans and as a basis for policy decisions. In the meantime, effortsshould be made to prepare a global public sector accounting framework thatincludes the central government, municipalities and public enterprises. Astandard accounting framework for public enterprises, currently being imple-mented, will be a first step in that direction. Private sector accountingshould also be standardized.

2.34 A final issue is the role of fiscal policy in the country's develop-ment strategy. A global review of the tax system should be undertaken, aftermore information is available about both the macro and micro aspects of theCape Verdean economy. Such a study could be used as a basis for a tax reformdirected toward improvements in the "quality" of the tax system in terms ofits effects on resource allocation, equity, and the supply of the main factorsof production. The information could also be used to prepare an investmentcode that (i) delineates the role of private and foreign investment and (ii)provides special incentives to investment in areas considered important forlong term growth. Included within the overall strategy could be incentivesthat would increase emigrant remittances and direct their use toward financingdomestic investment.

D. MONEY AND CREDIT

1. Introduction

2.35 Prior to Cape Verde's independence, two main financial institutionsexisted in the country. One was a branch of the Banco Nacional Ultramarino,which issued currency and functioned as a commercial bank. At the time, thecountry was a member of the escudo area, and its currency was pegged to thePortuguese escudo at par. The other main financial institution was a branchof Portugal's Banco de Fomento in Mindelo that operated as a development bank.

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2.36 Following independence, the Bank of Cape Verde was established in June1976 with the functions of a central bank, i.e., to issue currency and act asthe government's banker. The BCV was formed by consolidation of the localbranclhes of the Banco Ultramarino and the Banco de Fomento. In addition, theBCV has since performed the roles of a commercial and development bank aswell. The Bank's central office is in Praia, two main branches are located inMindelo and Sal, and branches exist on the other islands. The remainingstate-owned financial institution still operating in the country is the CaixaEcon6mica Postal, a postal savings institution under the control of theMinistry of Transport and Communication. Its nain function is to attractsmall scale deposits from private sources through the postal service networkand to make personal loans and mortgages to civil servants. The Caixa deCredito, a minor savings and credit institution, was abolished in April, 1984.

2.37 Because the BCV is by far the most important financial institution,the monetary system actually resembles a single bank system. Since independ-ence, monetary policy has emphasized the maintenance of a strong foreignreserve position. Given that credit expansion will translate largely into anincreased demand for imports and a consequent decline in foreign reserves,credit policies have been formulated within the context of the open economy,narrow financial markets, and the limited number of policy instruments avail-able to the monetary authorities.

2.38 The BCV operates under an informal system of global credit ceilingsbased on the level of foreign reserves and the credit requirements of theeconomy. Under the BCV's charter, credit to the government is limited to 15%of the previous year's revenue. A special clause that allows extra credit tobe made available to the government for special development projects hasseldom been used. For loans to the private sector and to public enterprises,the BCV typically requests comprehensive and detailed information about thecreditworthiness of the borrower and the proposed use of the loan, so as toleave no room for discretionary use of funds. All foreign exchange transac-tions are under the Bank's control. With the exception of very small trans-actions, all imports and exports are subject to licensing. Licenses forimports of essential consumer goods are issued in coordination with theSecretariat of Commerce. For other types of goods, decisions are made by theBCV on a case by case basis, with preference given to imports of capital goodsrelated to development projects. Also, payments for tourism require priorauthorization.

2. Trends

2.39 The discussion of trends in this section does not include finalfindings for 1983, due to lack of information on financial institutions otherthan the BCV. The influence of these other institutions over monetary move-ments, however, is rather small relative to that of the BCV. During the1979-1982 period, net domestic assets expanded rapidly at an average rate of34.4% (BCV assets increased 212 in 1983). Credit to public enterprises wasthe main source of this growth, increasing sevenfold to 1,049 million CV escin 1982. (BCV credit was 1.193 million CV esc in 1983; see Table 2.5). Largelydue to the timing of the financing of certain investment projects, the rate ofexpansion of domestic assets has fluctuated greatly. After reaching a level

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of 48% in 1980. it declined to 34% in 1981 and 22% in 1982 (Table A.15). Evenmore pronounced are fluctuations in total credit which is defined as netclaims on government plus credit to public and private enterprises, andexcludes the interbranch float ("other iteas" in Table 2.5). Total creditexpanded at a rate of approximately 40% in both 1979 and 1980. by 65% in 1981,but only by 10.6% in 1982. (BCV credit grew 13% in 1983). The 1980 expansionwas largely caused by loans to TACV for purchase of aircraft; to ARCAVERDE forpurchase of boats; and to Hotel Mar for the completion of hotel installations.The rapid growth of credit to public enterprises reflects the expansion ofthis sector and the related increase in working capital requirements; but evenmore so, it reflects a shift toward financing of fixed capital needs throughthe banking system. Most of the growth in credit after 1980 was due togovernment borrowing to finance the shipyard project. Credit to the centralgovernment increased from 26.3 million CV esc in 1980 to 429 million CV esac in1981 (Table 2.6). In 1982 the decline in the growth rate of credit was mainlydue to an expansion of government deposits and a slowdown in the expansion ofcredit to the private sector. But in 1983 BCV credit increased by 41%,reaching the 1981 level. The other (non-BCV) financial institutions, playedan insignificant role overall, providing virtually all of their credit to theprivate sector. The credit provided by these institutions corresponded to anaverage of 24% of total credit to the private sector between 1980 and 1982(Table A.17!.

2.40 The net inflationary consequence of this credit expansion was rela-tively small. Because a large part of the credit was for the purchase ofimported equipment and other goods, 'ts main impact fell instead on foreignreserves. Therefore, as the overall government deficit was financed almosttotally by grants and foreign borrowing (except in 1981), the change inforeign assets can be largely traced to changes in credit granted to theprivate sector and public enterprises, and to variations in the flow oftransfers. As a consequence of the credit swings, net foreign assets whichhad expanded rapidly in 1979 and 1980 (220 and 230 million CV esc, respective-ly), increased by only 28 million CV esc in 1981, and then increased drama-tically by 671 million CV esc (37%) in 1982. BCV foreign assets declined by 37million CV esc in 1983. From 1980 to 1982, gross reserves equalled, respec-tively, 7.3, 5.0 and 6.6 months of imports other than food and equipment aid,and 6.2, 4.6 and 5.5 months of total imports. The decline of this ratio in1981 may explain the subsequent tightening of credit relative to previoustrends. For 1983, the foreign reserves in the BCV were sufficient to finance5 months of total imports.

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MIble 2.5CAPE VFRDE: SumUY Accounts of Finnncial System 1977-83

(mLlliais Cape Verde Facudos)

Item 1977 1978 1979 1980 1981 1982 1982* 1983*

Net Foreign Assets 1,420.9 1,333.5 1.553.5 1,783.7 1,811.4 2,482.4 2,482.1 2,445.2

Net Dwstic ASsetB 403.3 891.1 1,183.5 1,755.5 2,351.7 2,865.9 2,730.5 3.303.8

Net claics of Cen.Govt. -115.5 11.3 76.9 34.3 452.4 347.7 344.2 486.1

CLaini of Nm-finrnrialpublic enterprises 6.6 131.1 147.7 591.1 773.8 1,048.5 1,093.2 1,193.2

CLaMy of Private Sector 394.9 531.6 712.3 684.5 937.6 1,032.8 757.0 807.2Other Items (Net) 117.3 217.1 246.6 445.8 187.8 436.9 536.1 817.3

M!4ney and Qiasi-Mxey 1,467.1 1,709.6 2,014.0 2.658.5 3,180.7 3,989.6 3,853.9 4,151.0

Qzrrency Cutside &mks 537.2 638.3 736.4 872.2 1,040.5 1,281.9 1,281.0 1,231.8Dwand Deposits 835.3 930.3 1,035.5 1,408.4 1,495.6 1,924.1 1,946.8 2,316.1Thze & Savings Deposirs 94.6 141.0 242.1 377.9 644.6 783.6 626.1 603.1

Capital Accmmts 357.1 515.0 723.0 880.9 982.3 1,358.7 1,358.7 1,598.0

Source: Statistical Apperxlix Tables A. 13 and A. 14' Does not include Financial institutlos other tihan the Bank of Cape Verde

Table 2.6CAPE VERDE: Net Cnlais on General Covrzuer t

QIlis of Cape Verde Fa )

l177 1978 1979 1980 1981 1982 1982* 1983*Net CJaiZI on generalCov'ernmet (net) -115.5 11.3 76.9 34.3 452.4 347.7 34.2 480.1

Central Govrrmnent -112.6 3.8 71.2 26.3 428.9 312.6 312.6 452.7

Claims 92.0 92.0 122.0 157.2 548.3 547.9 547.7 624.4Deposits -214.6 -R8.2 -50.8 -130.9 -119.4 -235.3 -235.3 -171.7

Local Gaverumit 7.1 7.5 5.7 8.) 23.5 35.1 31.8 33.4

Dbes rOL incluD flnmclal instituions other than the bank of Cape Verde.Souroes: Statistical AppebKx Tables A. 13 and A. 14.

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2.41 Time and savings deposit data for 1983 were unavailable for financialinstitutions other than the BCV. Therefore, although MI can be estimated for1983, M2 is available only through 1982. The general trend in money supply hasbeen a decline in the share of demand deposits and currency in favor of timedeposlts (Table A.18). This trend rcflects an expansion of the banking sectorand a gradual monetization of the economy. As Table A.15 shows, growth of H2was somewhat uneven between 1977 and 1982. increasing by 16.52 ann. 17.8% in1978 and 1979. respectively. 32% in 1980, 19.2% in 1981, and 25.4% in 1982.The 1980 Increase in the money supply was accompanied by changes in itsstructure. Demand deposits rose by 36Z, and time deposits increased 56%. Theexplanation for these changes lies in the 80% increase in the flow of remit-tances in 1980 relative to the previous year's value. Expressed as a per-centage of GDP, remittances increased from 42% in 1979. to 62% in 1980. As aconbequet1c. demand and time deposits increased rapidly as these remittanceswere converted into domestic currency, although some sterilization occurred tothe extent that credits mentioned above were used. The sharp increase inremittances explains how the large 1980 credit expansion was compatible withthe substantial increase (15%) in reserves of the BCV. In 1981, while demanddeposits expanded bv only 6%. time deposits expanded by 712 as some lines ofcredit were drawn, and private and public enterprise portfolios were shiftedtoward intcrest-bearing time deposits. In 1983, currency decreased 3.9%,while demand deposits increased by 18.5%. As a result, MI increased by only9.62, compared with much higher increases in previous years.

2.42 Because th' country's balance of payments is unusually dependent onexternal flows of aid and remittances whose fluctuations are beyor.d thecontrol of monetary authorities, a high level of reserves is necessarv tocushion the domestic economy against unpredictable changes in these externalflows. Because the monetary policy goals primarily emphasize a strong reserveposition, whenever the actual stock of reserves falls short of the desiru1level, whlich is linked to the level of imports, there is a slowdown In creditexpansion. Fluctuations in credit expansion are essentiallv unavoidable,given some degree of indivisibility in the size of project to be financed.The effect of credit policy is that whenever credit contracts, some sectors o'the economy can be crowded out, as seems to have been the case in 198() whet.credit to public enterprises increased fourfold, and credit to the privatesector declined 4!. The actual consequences of crowding out largely depend o0ahow the Central Bank allocates available credit among the competing sectors.

3. Distribution of Credit by Sector

2.43 Some detailed information was available regarding distribution ofcredit to the private sector and the non-financial public enterprises between1979 and 1982 (Table A.19). The data should be looked at ca-_t1ously in that,(I) there is a large residual value and, (ii) credit to the commerce sector(retail and wholesale), which encompasses the main share of total credit, wasincluded within the credit to consumption and imports in 1980 and 1981.Credit to agriculture and fisheries and to industry accounts collectively fora very small share of total credit. In 1982. agriculture and fisheriesreceived only 5.7Z of total credit, and industry received 3.32. After atenfold increase In 1981, expansion of credit for construction slowed downsignificantlv in i982. increasing only 18%. Credit to public enterprises

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represented in 1982 more than 57.7% of total credit in 1982, compared withonly 20% in 1979. The large increase in this category occurred in 1980, whencredit to public enterprises increased fourfold. BCV credit totalled 2,939million CV esc in 1983, which was distributed to government (24%), publicenterprises (46%) and private enterprises (30%). 54% of total credit was inlong-term loans (Table A.6). More definite conclusions about the distributionof credit by sector would require a more reliable data base.

4. Interest Rates

2.44 The level of interest rates has remained unchanged since independencein 1975, although they are expected to be changed soon by the BCV. For timedeposits, the interest rate is 6.5% annually; the basic rate for short-termloans is also 6.5%. Medium-term loans bear interest of between 7 and 9%,whi:e the rate for long-term loans varies between 8 and 9.5%. Although theinformation on domestic price trends is very incomplete, the available datasuggest that for the period 1975-1981 the annual growth rate of consumerprices ranged between 7 and 15% (Chapter II.F). Consumer prices rose 18% in1982 and 20% in 1983. As a consequence, real interest rates have been nega-tive, with possible adverse effects on domestic savings and worker remit-tances. Even with negative real interest rates, the expansion of demand andtime deposits should not be surprising. The latter constitute the onlyavailable interest-bearing asset, and have the advantage of liquidity overother forms of savings like land or housing.

5. Further Developments

2.45 The BCV is considering establishing a specialized branch within theBank that would have the functions of a development bank (Chapter II.E).. TheBCV has also begun offering special types of accounts to Cape Verdeans resid-ing abroad with the intent of encouraging further remittances that may be usedfor selected domestic investment purposes, e.g., housing. This form ofremittance inducement is similar to one currently in use, with some success,in Portugal. Three main types of accounts were evaluated. The first type isa simple demand or time deposit account in domestic currency. Deposits aremade through transfers from abroad, and the interest paid on these deposits,yet to be determined, will be higher than that paid on the accounts held bydomestic residents. The second type is a time deposit account, denominated inspecified foreign currcncies, which can receive remittances from abroad, andfrom which funds are freely transferable overseas. A minimum deposit ofapproximately US$100 is needed. The interest rate, yet to be determined,would be adjusted periodically by the BCV. The third type is a savingsaccounts in domestic currency (Conta Poupanca CredCLto) similar to the firsttype of account, but which allows the holder to obtain credit under favorableconditions. Based on the balance of the account, the BCV will grant credit,mainly for housing, up to 15 years, and at a lower rate than that currentlycharged for similar domestic operations. The credit cannot exceed twice thebalance of the account. As a further incentive iTa housing investment, CapeVerde emigrants would be exempt from the property tax (ContribuicAo Predial)and the transfer tax on the property deed (Sisa). Finally, no taxes arecharged on interest income from time deposits.

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6. Issues and Recommendations

2.46 Currently, the BCV functions as a central bank, commercial bank anddevelopment bank. The accumulation of these functions in one bank putspressure on both the staff and resources of the bank. With the continuationof the investment program, the demand for long-term financing will increase;and it will be more difficult for the BCV to satisfy that demand, due to theBank's limited resources, both long-term (savings) and stable (capital andgovernment deposits). In many countries, the role of financing long-termprojects belongs to special financial institutions, generally developmentbanks. Structured with balanced assets and liabilities, these banks haveresources at their disposal that are adapted to their goals. In the case ofCape Verde, the creation of a separate development bank in the near futuredoes not seem desirable, given the BCV's staff constraints. Further such amove could lead to duplication of banking branches, unnecessary costs, andfragmentation of savings.

2.47 A long-term financing division inside the central bank, establishedpossibly with external technical assistance, would avoid some of the abovedifficulties, and could provide a more stable flow of long-term credit. Tooptimize the functioning of this unit, the following issues should first beclarified: (i) the volume and nature of the resources to be made available tothe unit (i.e., government or private, national or international) and (i.) theunit's responsibilities and relationship with other BCV divisions, includingits legal status, and the extent of its independence in accounting and loanoperations.

2.48 As a second issue, it is important to clarify the structure of CapeVerde's monetary system. Historically linked to the Post Office, the CaixaEcon6mica Postal is under the supervisory control of the Ministry of Transportand Communication. Given its relative importance in granting credit to theprivate sector, the role of the Caixa Postal should be expanded; and perhapsit should be transformed into a commercial bank. The existing network ofbranches could then be used to collect local savings and provide credit forhousing and personal consumption, reducing the burden on the BCV. Prior to anyexpansion of its role, however, this institution should be brought under thesupervision of the BCV.

2.49 The third issue is the rapid expansion of credit to non-financialpublic enterprises. Any expansion of such credit should be monitored careful-ly to ensure that: (i) there is no "crowding out" effect on the privatesector, given the limited resources of the BCV, and (ii) domestic inflationarypressures and larger current account deficits are avoided. The promotion ofprivate sector initiative is primarily dependent on stable sources of creditin both the long and short run; and the creation of a development divisionwithin the BCV that is specifically directed towards long-term credit wouldcontribute to such stability. A part of the short-term credit needs of theprivate sector could be obtained from an expanded role of the Caixa Econ6micaPostal.

2.50 The fourth issue relates to the manner in which the new depositaccounts for Cape Verdeans residing abroad will be integrated into the overall

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conduct of monetary policy. Although the elasticity of remittances withrespect to the interest rate is unknown, these accounts are potentially a goodinstrument to increase the flow and stability of remittances. A more flexibleinterest rate policy, the present exchange rate policy, and the creation ofadditional financial assets are important tools for an overall savings policy.However, the creation of the new accounts needs to be combined with an in-crease in domestic interest rates to reduce the disincentive effects ondomestic savings that could result from a large rate differential betweenresident vs. non-resident deposits.

2.51 In sum, with respect to the non-resident accounts, the following needfurther study: (i) any exchange rate risk for the BCV that would be associ-ated with these accounts, particularly accounts in foreign currency; (ii)methods for development of new domestic financial assets to attract newremittances or to stimulate their purchase with funds from these accounts; and(iii) the relationship that would exist between the rates paid on thesedeposits and international and domestic interest rates.

2.52 Finally, attention must be paid to the interest rate levels them-selves, independent of their relationship with the non-resident accounts. Itis recommended that domestic nominal interest rates be increased, so that realrates move toward positive levels, and that a more flexible interest ratepolicy be adopted. An initial rise in nominal rates, say 2Z, might attenuateany possible disincentive effects on domestic savings. Further actions couldbe undertaken after the results of this move are analyzed.

2.53 Because money in general, and interest-bearing time deposits inparticular, are the only financial assets available, it will be primarilythrough an increase in the time deposit rate that, in the short run, savingsand demand for money will be influenced. A rise in the rate offered on timedeposits does not necessarily influence the demand for money insofar as theincrease in time deposits comes from currency or demand deposits, in whichcase, only the composition of the demand for money will change. But even inthe case that savings remain unchanged, if time deposits increase at theexpense of demand deposits and currency, this change in the structure of theliabilities of the monetary system toward a more stable composition willcontribute to a more stable credit policy.

2.54 Only when there is an increase in savings derived from disposableincome is the demand for money affected. How much domestic savings wouldincrease, however, is an empirical question not easily answered at the moment,due to the country's lack of prior experience with movements in the interestrate. Given the low domestic income level, it is possible that the effects ofa rise in interest rates on savings derived from domestic income will besmall, and that only through effects on residents receiving remittances can anincrease in interest rates significantly raise the level of national savings.

2.55 The consequences of any rise in the loan interest rate should beevaluated with respect to the effects that it might have on the domesticeconomy, particularly the private sector. Changes in the rate should takeinto account the low marginal productivity of capital and the possibility ofpsychological effects on small entrepreneurs and artisans, who constitute an

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important component of the local economy. Because of limited prior experiencewith monetary and banking institutions, these groups might be deterred fromseeking financial assistance. On the other hand, if credit rationing issignificant, a rise in the interest rate, by increasing Lbestic savings,would allow a larger volume of credit.

E. EXTERNAL SECTOR

1. Introduction

2.56 The external dependence of the Cape Vardean economy is shown by thechronic deficit in the resource account. This deficit is more than offset byemigrants' remittances, official capital, and grants from abroad (Table 2.7).As a result, the overall balance of payments has registered surpluses, andthere is a reasonable level of foreign exchange reserves. Thus far, theburden of the external debt has been nominal, because of the highly conces-sionary terms at which the debt has been contracted.

Table 2.7CAPE MMDE: Balance of Payments 5ummry, 1975-83

Item 1975 1976 1977 1978 1979 1980 1981 1982 1983

RPsource Balance -626.3 -1,106.7 -1,586.5 -1,942.2 -2,408.5 -2,739.5 -3,865.9 -3,998.1 -4,44.6

(Exports of G & NES)(234.0) (173.0) (77.0) (277.6) (464.5) (773.2) (1,155.0) (1,875.9) (2,539.6)(Inports of G & NES)(860.3) (1,279.7) (1,663.5) (2,219.8 (2,873.0) (3,512.7) (5,020.9) (5,874.0) (6,954.2)Factor Ser7ices, Net -2.3 7.3 33.7 22.6 48.4 136.2 25.5 -205.1 -344.3Private Transfers 176.7 506.5 797.8 866.5 955.2 1,596.4 1,759.6 1,866.5 2,367.2

Current Accoxnt -451.9 -592.9 -755.1 -1,053.1 1,404.9 1,006.9 2,080.8 -2,396.7 -2,391.7

Official Transfers 354.6 443.8 951.6 744.9 1,369.4 1,182.6 1,029.9 1,596.1 1,375.2Official Capital 130.2 354.2 143.6 55.3 23.6 93.6 907.9 1,053.4 1,011.7Other Capital 1/ 87.5 311.1 64.1 165.5 231.9 -39.2 170.7 418.1 289.6

iange in ForeignAssets -120.4 -526.2 -404.2 87.4 -220.0 -230.1 -27.7 -670.9 -294.8

1/ Inludes errors and amcdss -.Soure: Statistical Appendix Table A. 19.

2.57 The trade account shows a Large deficit that results from a level ofimports that, in most years, has been more than ten times the level ofexports. In 1983, for instance, exports and imports amounted to CV esc 139million (US$ 1.9 million) and CV esc 6,079.4 million (US$ 84.8 million),respectively. Export earnings increased rapidly from 1975 through 1980 but

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have since declined as a consequence of a decrease in export volumes, par-ticularly of fish products.

2.58 Imports, in contrast, have increased continuously and largely sur-passed export growth; between 1975 and 1982, exports increased twofold, andimports increased sevenfold. Exports are increasingly concentrated in a fewproducts: bananas, fish, shellfish, and salt provided virtually all exportearnings in 1981 (Table 2.8). In contrast, imports cover a wide range ofgoods. (Table A.24). Food and beverages constitute the bulk of imports, withimports required for 90% of the country's food needs. About 40% of foodimports are in the form of food aid. This corresponds to 20% of totalimports, and results in considerable foreign exchange savings. Recently,machinery and equipment have assumed a relatively greater importance, becauseof the construction of the new shipyard at Mindelo. Due to volume and priceincreases, the oil bill has increased from 3% of total imports in 1970 to 11%in 1981. However, a large share of oil imports (85%) is reexported. On theother hand, intermediate goods imports still are of little importance becauseof the small size of the domestic manufacturing sector (less than 4% of GDP).

Table 2.8CAPE VERDE: Composition of Exports and Imports

(as percentage of total)

Item 1975 1978 1981

Exports 1/ 100.0 100.0 100.0

Banana - 14.5 59.5Fish Products 79.5 50.7 27.7Salt 8.8 27.2 12.3Other 11.7 7.6 0.5

Imports 100.0 100.0 100.0

Food & Beverages 55.5 51.4 23.9Petroleum Products 7.0 5.0 10.9Textiles & Shoes 9.5 5.5 5.6Transport Material 2.2 9.8 6.7Other 25.8 28.3 52.9

1/ Excludes re-exportsSource: National Directorates of Statistics

2.59 Cape Verde's terms of trade have moved to its advantage, with a gainof about 250% in the 1975-1982 period (Table A.25). The benefit of thisimprovement remains small, however, due to the low value of exports. Unitprices of bananas, canned fish, fresh fish, and salt more than doubled in the1978-1981 period, while shellfish prices increased sixfold during the sameperiod. Export volumes, in contrast, showed a mixed picture in the 1978-1981period: bananas nearly tripled to 1960 MT, fish meal increased twelve-fold to

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204 MT, but the remaining exports declined substantially (Table A.22). Thiswas especially the case for the two largest exports in 1980, fresh fish andcalned fish, which declined in volume between 1980 and 1981 from 731 MT to 104MT, and from 33 MT to 9 MT, respectively. As a result, receipts from theexport of fish products declined from CV esc 82 million in 1980 to CV esc 25.1million in 1981.

2.60 Portugal is Cape Verde's major trading partner, accounting for about2-5. of total exports and imports in 1982. Nonetheless, there has been adecline in trade with Portugal since independence as Cape Verde has tried todiversify its import markets. On the export side, the other major tradingpartners are Angola, Zaire (salt exports) and Guinea-Bissau, and more recent-ly, Algeria and Spain. Tuna is exported to the U.S. and Europe. On theimport side, the major trading partners are Portugal, the Netherlands, theUnited States, the United Kingdom, and more recently, France, West Germany,and Spain. (Table A.23).

2.61 The external resource gap of Cape Verde has surpassed GDP in mostyears. The large trade deficit has beeu offset in part by services renderedto air carriers at Sal and to ships at Mindelo (Table A.20); earnings fromthese services were about five times those from the export of goods in 1982,and have approximately doubled each year since 1978. In 1980 private trans-fers increased by about 70% over the previous year as many Cape Verdeansliving abroad visited the country to celebrate the country's independence.Private transfers, largely remittances from emigrants, were about nine timesthe earnings from exports of goods in 1982. Investment income has beenderived mainly from the interest on the country's foreign reserves abroad; butin 1982, it turned negative as Shell transferred abroad CV esc 273 million ofaccumulated earnings. Imports for the shipyard construction in Mindeloresulted in a significant drain on foreign exchange in 1981 as well.

2.62 Official transfers and official capital have more than offset thecurrent account deficit, and a reasonable level of resources has been accumu-lated (the level of gross reserves has been equivalent to about six months ofimports). In 1983, official grants were CV esc 1,375 million (US$19.2 mil-lion), while official capital was CV esc 1,012 million (US$14.1 million).

2.63 After a small increase between 1978 and 1980, external debt expandedrapidly in 1981, 1982 and 1983, but the debt still does not pose a seriouseconomic burden. Disbursed debt amounted to US$14.8 million at the end of1978 and US$20.2 million by the end of 1980 (Table A.30). With the financingof the airport and shipyard projects, however, disbursed debt increasedthreefold to US$59.3 million in 1982, and further to US$67.2 million by theend of 1983, or 83% of GDP. By the end of 1983, external public debt andpublicly guaranteed debt amounted to US$133 million (disbursed and undis-bursed). The debt service is quite low: US$2.9 million in 1983. The ratio ofdebt service to exports was approximately 8% in 1983, which is also low. Asthe grace periods of some of the loans expire, the debt service is expected toincrease in US$5.9 million by the end of 1984 and to US$9.3 million by the endcf the decade, still a fairly manageable amount. For the total debt outstand-ing at the end of 1983, the major creditors include the African DevelopmentBank/fund (26%), BADEA (17%), China (11), Portugal (10%), and the OPEC

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Special Fund (6%). Some of these loans, specifically those from China, willprobably be converted into grants. Part of the debt to Portugal is related to.ndependence settlements for the creation of a pension fund.

2. Exchange Rate

2.64 After independence, the Cape Verde escudo was pegged to the Portuguesecurrency. In March, 1977, the Cape Verdean authorities abandoned the Portu-guese escudo peg in favor of a basket of eleven currencies of the country'smajor trading partners. This move was prompted by large devaluations of thePortuguese currency, which the Cape Verdean authorities considered a majorcav.se of the increases in domestic consumer prices and project costs. InJanuary, i980, the size of the basket was reduced from eleven to nine curren-cies, with each country's weight determined by its relative share in CapeVerdean trade. These changes were aimed at maintaining a more stable exchangerate for the CV escudo.

2.65 The domestic currency does not appear to be overvalued, as confirmedby the absence of black markets for foreign currencies. Since 1975, the CVescudo has depreciated vs. the British pound, tre U.S. dollar and the Nether-lands guilder. Against the Portuguese escudo, however, the CV escudo appre-ciated by 25% from 1975 to 1982, and by aii additional 12% in 1983. Againstthe U.S. dollar, the CV escudo depreciated at au average annual rate of 12.7%between 1975 and 1982, and depreciated further by 23% in 1983.

2.06 The effective exchange rate of the CV escudo (defined as a weightedaverage of the bilateral exchange rates with respect to the major tradingpartners), depreciated 20% between 1975 and 1982, or an average annual rate of2.7%. For the 1980-1982 period, the average annual rate of depreciation ofthe CV escudo was 4.0%. Taking into consideration the inflarion differential,the real exchange rate has remained constant for the lasc three years. Themove from a single currency peg to a basket peg was successful in stabilizingthe value of the real exchange rate in a period of instability.

2.67 The role of exchange rate policy in Cape Verde for export promotionpurposes is limited, at least in the short run. Given the limited range ofgoods exports, which presumably will remain unchanged in the short run, andtheir low demand price elasticity, it is doubtful that exchange rate policycan have an important role in this area. Not much is known about the priceelasticity, of services; however, it seems realistic to assume that elementsother than price, such as the availability and reliability of services, andpolitical stability, will significantly influence the demand for services. Bykeeping a rather stable real exchange rate, the authorities can avoid sharpfluctuations in the internal terms of trade, guarantee some competitiveness inthe export sector, and keep in check any excess demand for imports. The otherimportant role of exchange rate policy is its effects on the flow of remit-tances. By avoiding sharp changes ip the nominal exchange rate and by keepinga stable real exchange rate, the Cape Verdean authorities will discouragespeculation over any impending devaluation, and will help to maintain a steadyflow of remittances.

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3. Issues and Recommendations

2.68 The burden of the externaL debt is increasing. The authorities shouldcontinue to exercise prudence in relation to the rate of indebtedness,especially in light of the ambitious planned investment program, which willhave to be funded almost entirely from external sources. (See Chapter X,Prospects).

2.69 The government's decision to change specific tariffs to ad valoremtariffs is correct. The level of some import duties on non-essential consumergoods might also be increased. For instance, the duty on beverages is only CVesc 4.5 per liter; and on cigars, only CV esc 75.0 per kilogram. Furthermore,tariff exemptions currently given to several public enterprises e.g., SOCAL(Shoe Factory), MORABEZA (Clothing Factory), FAP (Agricultural Products),should be reviewed. The government intends to eliminate export taxes whichiave a small and declining fiscal significance (CV esc 1.5 million in 1983).Efforts to increase and diversify exports on a bilateral basis, as well as toexploit the African market through the CEDEAO (West African Common Market),should also be supported.

2.70 The foreign exchange risk from external loans to public enterprises isborne by the Central Bank. No estimates of the costs incurred by the CentralBank for this account were made available, but they are said to be substan-tial. This cost should be estimated with the ultimate objective of having theborrowers bear the exchange risk.

2.71 Statistical coverage of the external sector, with the exception of theexternal debt, is weak. Trade statistics are published with a more than two-year delay. Closer coordination between the Statistical Office and Customs isneeded. External debt statistics are quite well organized, but furthertechnical assistance is necessary to implement debt accounting and monitoringsystems.

F. EMPLOYMENT, WAGES AND PRICES

1. Introduction

2.72 Unemployment and underemployment are a persistent problem; and pros-pects for an early solution are noL particularly good, in vie-w of the poorresource base and the high projected rate of population growth. According tothe 1980 census, the economically active population, which constitutes 54% ofthe population over 15 years of age, had an unemployment rate of approximately29% in 1980. In rural areas, unemploymenc was 30% of the economically activepopulation; in urban areas, 27%. Only 31% of the economically active popula-tion had permanent employment; the remaining 40% had only temporary employmentduring certain periods of the year. Between 40 and 45% of the potential laborforce (the population of working age, including some economically inactivepersons, who would seek paid employment if it were available, plus thoseinvolved in non-wage subsistence activities) is underemployed: 60% in ruralareas, and almost 20% in urban areas.

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2.73 Without emigration of large numbers of Cape Verdeans, the unemploymentsituation would be worse still. As analyzed in detail in Volume II, emigra-tion has largely contributed to reducing the country's population pressures.The low populatLon growth for the 1970-1980 period, less than 12 per year, isthe result of heavy emigration. During this period, the net demographic lossassociated with migration was approximately 42,000 persons, or 15% of theaverage total population during the intercensal period.

2.74 The largest share of the population derives its employment fromprimary sector activities. Based on provisional results of the 1980 census,47.4% of the economically active population is employed in agriculture,fisheries or mining activities. Manufacturing, construction, and othersecondary activities are estimated to employ 10.5% of the economicallv activepopulation, while services employ the remaining 42.1%, many of whom are ininformal types of activities. As in other developing countries, the distribu-tion of skills among the permanently employed indicates a scarcity of trainedpersonnel. Among the permanently employed, 40% are considered unskilled, andonly 4% are classified as cadres or technicians.

2.75 The limited potential of agriculture and the persistent droughtconditions during the last two decades, have encouraged the rural populationto emigrate to urban centers. Although total population in Cape Verde in-creased by an average of only 0.9% annually from 1970 to 1980, the averageannual population increase of S. Vicente (mainly Mindelo) was 3.0%, and thatof the city of Praia, the capital, was 5.2%. On the other hand, the populationof the Island of Santiago, where half of the population resides and thecapital is located, increased by only 1.3% annually. During the last decade,four islands (Boa Vista, Brava, Santo Antio, and Sao Nicolau) lost population,because of both internal and international migration. The migration pressuresare partially attenuated through the work programs financed by the NationalDevelopment Fund. According to the Plan, these programs employ 20,000-25,000workers, mostly in rural areas (84%).

2. Wages

2.76 Although wages in the private sector ..' 4 n n-blic enterprises are notset directly by the government, in practice gvvernment wage policy exertsconsiderable influence over the level of domestic wages because of the rela-tive importance of the government sector. Since 1976, there have been threeincreases in public sector wages (Table A.26). The first increase occurred inJuly, 1979, as a cost of living adjustment that was incorporated into the wagescale effective January, 1980. The second adjustment, a 15% increase inwages, was made in July, 1981. The most recent increase took place in thefall of 1983. The average public sector wage increased from 6,470 CV ese permonth in 1979, to 7,031 CV esc in 1981, to 7,734 CV esc in 1982, and to 9,386CV esc in 1983. The 1982 increase resulted from the upgrading of publicworkers to higher grades of the wage scale. The 1983 increase resulted fromupgrading, increases for each level, and creation of three new levels at thetop of tkie scale. Because consumer prices increased by more than 50% between1979 and 1982, real wages in the public sector actually declined during thisperiod. The limited information available for private sector wages is

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presented in Table A.28. Further collection of these wage data wasdiscontinued by the Statistical Directorate in 1982.

2.77 Considering the high levels of unemployment and underemployment in thecountry, one would expect the shadow wage rate to be lover than the marketwage rate for unskilled workers. A rough estimate from the limited availabledata is that the marginal productivity of the rural worker in 1981 wasequivalent to between one-fifth and one-fourth the wage of a worker in therural development programs. The latter was considered a satisfactory proxyfor the wage of an unskilled worker. The details of these computations arepresented in Appendix II.

3. Prices

2.78 When analyzing Cape Verde price trends, we are faced with a problem ofmeasurement. Although the Statistical Directorate collects quarterly data onthe prices of some food products, Cape Verde does not as yet have an officialprice index. There are, however, two rough estimates: one, that is based on asystem of weights worked out by the IMF staff in collaboration with localauthorities; the other, an index prepared by the Bank of Cape Verde. Both arefor prices in the city of Praia. As shown in Table A.27, the inflation rateimplicit in the BCV index is generally higher than that associated with theIMF index. In some years, such as 1976 and 1981, there are large discrepan-cies between the implicit inflation rates. Both indices indicate a slightincrease in domestic inflation for the latter years of the period underconsideration. In the BCV index, there is an increase in the inflation ratefrom an average of 15% between 1978 and 1980 to almost 21% for the last twoyears. This trend, however, does not emerge clearly in the IMF index.Because we di not know the weighting system underlying the BCV index, dif-ferences betwL-n the indices can be explained only partially. One possibilityis that the indices accord different weights to food and beverages. That isfood and beverages account for nearly 80% of total expenditures in the Fund'sweighting system, but likely were accorded a lower weight in the BCV index.In the IMF index, two basic staples, corn (.164) and rice (.148), account fornearly one-third of total expenditures. A comparative'y low inflation rateindex could result from the stabilizing price effects of the marketing of thefood aid. The Directorate of Statistics is reportedly preparing an officialprice index. Preliminary results of a consumer survey indicate that food andbeverages vary between 64 and 67% of total expenditures for coasumption. Ofthe remaining expenditures, the most important is housing, with an 18% shareof total consumer expenditures. With a reduced weight for food expendituresas compared to the existing index, the new index could indicate a higherinflation rate. In general, domestic price trends have been largely in-fluenced by price trends in Portugal, the country's main trading partner.

2.79 In an economy as open as Cape Verde's, price, marketing and importpolicy are all related. Import policy and licensing are under the control ofthe Secretariat of Commerce and Tourism, which sets an overall exchangebudget, administered by the BCV. The exchange budget is essentially theamount of foreign currency that is available to be used for imports. Theamount initially budgeted is divided between public and private enterprises,vith the allocation among firms based on past trendo. Usually, the exchange

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budget is more detailed for public enterprises. The private sector tradersreceive a yearly allocation, usually divided into quarterly shares. They havereasonable discretion to import within general categories. Any extra importrequest is dealt with on a case-by-case basis, with a certain degree ofpreferential treatment for essential imports. In general, the system seemssufficiently flexible; and as the foreign exchange constraint does not appearto be very restrictive, no complaints against the system were voiced by theprivate sector.

2.80 Imports of some products considered essential, such as cereals, edibleoils, pharmaceutical products and construction materials, are controlled bypublic enterprises, the most important of which is EMPA (kmpresa PGblica deAbastecimento). EMPA is, in practice, the sole importer of essential staplefoods, i.e, maize, rice, beans, sugar and edible oils (a large share of whichare received through food aid), because the prices are administrativelydetermined with a small profit margin over import costs. For the same reason,EMPA controls the importation of construction materials. These products aresold either through EMPA's distribution chain or through rrivate commercialnetworks. EMPA's revenues from domestic sale of foreign food aid are allo-cated to the National Development Fund to finance labor intensive projects.Government policy restricts the distribution of free food aid to special casesof the truly needy. A part of food aid, generally 10-15% (though highlyvariable and dependent on agricultural production), is distributed free ofcharge to needy individuals: the aged, malnourished children, pregnant women,and families with a female head of household. These groups are supported bythe Ministry of Health and Social Affairs. The monitoring of free fooddistribution is conducted by the Ministry, in conjunction with EMPA and theSecretariat of Cooperation and Planning. The importing of pharmaceuticalproducts is the monopoly of EMPROFAC. The final price of goods imported bypublic enterprises is the sum of the import cost and a fixed margin formarketing, usually 10-15%.

2.81 The final price of products imported and sold through the privatesector is usually the import cost plus a 10-15% margin. There are no priceceilings for locally produced goods. Farmers sell their surplus products tointermediaries, usually women (rabidantes), who transport and sell them inlocal markets, the price being determined by market conditions. There arealso a few cooperatives that sell produtts obtained principally from EMPA.

2.82 Storage capability in Cape Verde is very limited; therefore, there isa marked seasonality in the availability of some products, which is reflectedin their market prices. Seasonality effects are somewhat attenuated throughthe distribution of imported products by EMPA. The scale of the distributionnetwork varies from island to island. On S. Vicente, where most products comefrom S. Antao by sea, the distribution s.etwork operates on a large scale tocover transportation costs. On the other hand, in Santiago, the rabidantenetwork operates on a very small scale. This type of distribution network isan adaptation to the drought conditions. The development of a larger agricul-tural surplus would require a better storage and distribution capacity.

2.83 The Secretariat of Commerce and Tourism is responsible for setting thewholesale and retail prices of imported commodities that are subject to

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official pricing. Changes in the price of corn also have to be cleared withthe Council of Ministers. Although EMPA operates as a business enterprise,the government makes its pricing decisions on the basis of social considera-tions. Officially set prices are comparable throughout the archipelago;therefore, the residents of the main islands somewhat subsidize the pricescharged on the outlying islands. Prices are adjusted periodically to reflectinternational price changes.

2.84 Pricing policy involves a system of subsidy and surcharge. Subsidiesfor corn have been balanced by overcharging for rice and sugar. The marketingof corn, which is the main staple, is a delicate and complex operation involv-ing several types of corn sold at different prices. The bulk of the supply isprovided by the United States through food aid (approximately one-third ofdomestic consumption). The Cape Verdean price of U.S. corn has been adjustedco reflect world price trends. In July, 1981, the price of U.S. corn wasincreased by 21x. In 1982, the price was increased again, as the governmentannounced its intention of removing the subsidy, which was done by the end of1982. Cape Verdean consumers show a strong preference for either domestic orArgentinian corn over U.S. corn; and therefore, the price of domestic corn isabove the price of imported corn. An increase in the price of corn receivedthrough food aid would not have a significant effect on domestic production,which is effectively limited by the availability of water.

4. Issues and Recommendations

2.85 A long-run population policy is needed to address the persistentunderemployment and unemployment, one of the country's major problems. Asillustrated in the population projections presented in Volume II of thisreport, population pressures are not expected to subside in the near future.Considering the limited possibilities for the creation of permanent jobs, theoutlook for the labor market is not an optimistic one. Two exogenous factorsbeyond the government's control could influence the unemployment situation. Areturn of pre-1968 rainfall patterns would allow the agricultural sector toabsorb a large volume of labor. A second influential factor is the pattern ofemigration. Both of these factors, however are surrounded by uncertainty. Asindicated in the Plan, the Government is fully aware of the problem, and it isstudying different alternatives. Volume II presents a detailed review ofpossible solutions.

2.86 Another issue is the need for a regional policy. As the census dataindicate, during the last decade population trends varied remarkably among theseveral islands, explained by the different effects of the drought on eachisland and the alternative employment possibilities available. The trend hasbuen internal migration toward the two main urban centers: Praia, wheregovernment services are located, and Mindelo, where industrial and serviceemployment opportunities potentiallv exist. The use of food aid to financetemporary jobs in rural areas has been an imaginative short-run solution.Although the location of several main projects either completed or planned(e.g., shipyard, airport, cement plant) is not subject to choice, otheremployment creation opportunities could be explored through regional develop-ment of artisanal fisheries, small scale industries and tourism. The second

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development plan could become an important instrument for regional develop-ment.

2.87 Given the country's exLernal dependence on grants and remittances andthe uncertainty associated with these flows, the present foreign exchangeallocation system seems appropriate. The foreign exchange constraint does notseem to be too binding, largely due to food aid. The purpose of this systemthus appears to be to control imports of certain goods, such as luxury goods,or to constitute, in the event of foreign exchangc shortages, a safeguardmechanism that would avoid recourse to short-term balance of payments financ-ing. Alternatively, the control of imports of non-essential goods could beachieved through larger import duties on luxury goods.

2.88 With respect to prices and wages, there is an urgent need to develop aconsumer price index, and to broaden the scope of available wage data. Sincethe statistic&l directorate discontinued the collection of private sector wagedata, apparently because of the lack of data reliability, only government wagescales have been available. The comprehensiveness of the existing consumersurvey is unknown. Collection of price data needs to be broadened to includemore types of goods and services, and the lag between collection and publica-tion shortened. The directorate of statistics, faced with shortages of equip-ment and personnel, urgently needs technical assistance in this area.

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THE FIRST NATTONAL DEVELOPMENT PLAN

A. INTRODUCTION

3.01 The economy of Cape Verde is dominated by a number of adverse geo-economic factors. These are: (1) a limited domestic market, in terms of bothsize and purchasing power; (ii) a wide geographic dispersion of the islandswhiclh leads to increased transportation costs, communication problems, andredticed possibilities for economics of scale; (iii) a weak agricultural base,hampered bv exceptionally adverse climate, terrain and soil conditions; (iv) alimitud supply of natural resources; and (v) an extreme dependence on externalaid1 and emigrant remittances.

3.02 Positive features for economic development include the country'sgeographic position, maritime resources non-mineral resources, and humanpotentiail. Taken together, these factors constitute the background againstwhich the First National Development Plan of Cape Verde should be viewed.

B. OVERVIEW'

3.0)3 The First National Development Plan. 1982-1985, is intended toprovide the tnfrastructure. both physical and human. for the future develop-ment of the country. Accordingly, a large share of the Plan's investmentprogram is to be allocated to the rural, transport and communications sectors.The development of human resources, considered one of the principal assets ofCape Verde, receives special attention in the Plan. The pressing social issuesof unemplovment, health and education are addressed by assigning considerableresourccs to the latter two sectors and, by paying special attention to theemoloyment effects of projects, a detailed analysis of which is presented inVolume II of this report. The Plan identifies the industrial and servicessector as the main sources of future growth. Agriculture is not seen all asource of significant future growth, because of the climatic uncertainty andresource constraints that limit agricultural development.

3.04 The Plan was published at the end of 1982. seven years afterindependence. It is based on a realistic assessmcnt of the Cape Verdeaneconomy, and having been accorded political legitimacy through its endorsementby the National Assembly, it constitutes the basic framework for the country'sdeviclopment. Progress in the implementation of the Plan was discussed atlength in the Second Congress of the PAICV in June of 1983. The delay inpublishing the first Plan is an indicator of the government's prudence, aswell as the institutional and technical difficulties encountered in formu-lating a comprehensive development plan.

3.05 The Plan presented a global economic framework upon which simplifiedforecasts of the main economic aggregates were based. Two main difficultieshampered these efforts: (1) an inadequate statistical base, resulting from thecountry's lack of a svstem of national accounts, and (ii) the uncertaintiesinherent in planning, significantly augmented in an economy that is open anddependent on external resources. The achievement of investment targets and

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output goals will largely depend on the influence of future internationalpolitical and economic developments on the flow of aid, transfers and loans.

3.06 According to the Plan's projections (Table 3.1), GDP will increase atan average annual rate of 12X between 1980 and 1985 (1980 was the date of thelatest available estimate of GDP). To attain this target, the Plan projects alarge investment effort. For the 1982-1985 per'od, average annual investmentin real terms is forecast to increase almost threefold over the period 1978-1981 (Table A.3). Public investment represents the main instrument for thisgrowth, and is projected to grow at an annual rate of 23.3% in real terms.Consequently, gross investment is projected to increase from 70% to 94.6% ofGDP between 1980 and 1985 (Table 3.2). Actual outlays for gross domesticinvestment were 84% of GDP in 1981 and 81% in 1982.

Table 3.1CAPE VERDE: Plan Projections by Sector

(Millions of 1982 CV Escudos)

Sector 1980 % of GDP 1985 % of GDP 1980-85 AverageRate of Growth

Agriculture &Fisheries 940 22.3 1180 15.9 4.7

Industry 150 3.6 810 11.0 40.1

Construction 740 17.6 1680 22.7 17.8

Commerce &Transportation 1700 40.5 2600 35.1 8.9

Other Services 670 16.0 1130 15.3 11.0

GDP 420U 100.0 7400 100.0 12.0

Source: First National Development Plan.

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Table 3.2CAPE VERDE: Plan Expenditure Projections

(Millions of 1982 CV Escudos)

Sector 1980 % of GDP 1985 % of GDP 1980-85 AverageRate of Growth

Consumption 4690 111.6 6500 87.8 6.7Private 3630 86.4 5100 68.9 7.0Public 1060 25.2 1400 18.' 5.7

Investment 2940 70.0 7000 94.6 18.9Public 1980 47.1 5650 76.4 23.3Private 960 22.9 1350 18.2 7.0

Resource Balance -3430 -81.6 -6100 -82.4 12.2Exports 970 23.1 2100 28.4 16.7Imports -4400 -104.7 -8200 -110.8 13.2

GDP 4200 100.0 7400 100.0 12.0

Investment income 170 4.0 -580 -7.8 --

Remittances 2000 47.6 2330 31.5 3.1

GNP 6370 151.6 9150 123.7 7.5

Source: First National Development Plan.

3.07 For the 1982-1985 period, an increase in investment was planned forall sectors, particularly in industry and education (which show almost aneightfold and fivefold increase, respectively, relative to 1978-1981 levels).Three sectors - agriculture, industry, and transportation - each account forapproximately 20% of total investment during the Plan period (Table .-31).The sectoral distribution of projected investment is expected to significantlyaffect the contribution of the different sectors to GDP. The industrial.sector, with an estimated growth rate of 40% per year, will increase from 42of GDP in 1980 to 11% in 1985. The construction and public works sector, withan estimated 18% growth rate, will also increase from 17.8% of GDP in 1980 to22.2% in 1985. The agriculture and commerce sectors are projected to growsubstantially but to decline in relative terms from 22% to 16%, and from 41%to 35X of GDP, respectively, between 1980 and 1985, due to the faster assumedgrowth in the industrial and construction sectors (Table 3.1). The relativesize of the public services sector is estimated to remain stable at approxi-mately 15% of GDP. The remainder of this chapter evaluates the Plan'smethodology, financing and implemeutation.

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C. METHODOLOGY

3.08 Forecasts of output by sector were subjected to internal and externalequilibrium constraints. The internal equilibrium constraint is defined as therequirement that ordinary revenues and expenditures be balanced. The externalequilibrium or foreign reserves constraint includes the effects of the currentaccount, external borrowing, and the flow of external aid. Collectively thesetwo constraints act to determine the methodology, proposed goals, and policyoptions associated with the Plan.

3.09 In the first phase of the planning exercise, a list of possibleprojects was presented by the different ministries. Cost/benefit analysis wasconducted to determine which projects were economically viable. Among thoseconsidered viable, selection was made primarily on the basis of: (i) financingconstraints, (ii) domestic capacity for project implementation, and (iii)project compatibility with the Plan's main goals. Based on this final list ofprojects, output by sector and GDP were estimated. In the second phase, total"possible" imports were estimated using: (i) the requirement of an externalbalance, and (ii) estimates of exports (obtained partly from the list ofprojects selected and past trends), external aid, external borrowing, andworker remittances. Government revenues were estimated based on GDP trends;expenditures were estimated using estimates for government revenues and therequiremex.t of internal equilibrium (balanced budget). Finally, totalconsumption was calculated as a residual of the estimated values of GDP,i-nvestment, exports, public expenditures, and imports. Instead it willprobably be translated into domestic inflationary pressures. The governmenthas sizeable leverage on the price of basic food products, because it se'llsthe considerable amount of food it receives as aid at predetermined pricesthrough a network of public and private centers. For other goods, many ofwhich are imported, such control will not easily be attained, and adevaluation of the domestic currency may be necessary to protect the level ofreserves.

3.12 Provided that '-h projects ircluded in the Plan are fully imple-mented, GDP estimates do not seem overly optimistic. Because the Plan doesnot present annual estimates of GDP, it is impossible to correlate the timepattern of output growth with the scheduled completion of the different pro-jects. A rough calculation using GDP and investment estimates for 1980 and1985 yields an implicit Incremental Capital Output Ratio (ICOR) of approxi-mately six. This is consistent with the estimates of the actual ICOR for the1980-1982 period, which ranged from 5.5 to 9.0. Such high values can be ex-pected in an economy like Cape Verde's. in which the infrastructure base ispoor, agriculture represents a low share of the domestic product, and servicesaccount for a high percentage of GDP. Variations in agricultural output due toweather fluctuations can also have a large influence over the value and varia-bility of the coefficient, as can the type of investment undertaken. When alarge part of the investment program is in infrastructure type projects, fromwhich short run benefits will not be achieved, the ICOR will be high. Theabsence of data required to conduct a sectoral analysis prevents more defini-tive conclusions regarding the attainability of the Plan's GDP growth rateprojections.

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3.13 The achievement of the investment objectives depends on both thegovernment's capacity to obtain adequate financing for the several projectsand on the domestic capacity for carrying out these projects. The Plan indi-cates that 80% of the financing for the various projects is secured. However,the domestic capacity to implement projects, is still unsatisfactory. (SeeChapter III.E.)

3.14 To determine the actual growth rate of domestic output, it is moreuseful to analyze projects that are undertaken and completed than those thatare postponed or fall behind schedule. According to the Plan, the industrialsector will be one of the main sources of growth. The following paragraphspay special attention to the two main industrial projects, because they havethe greatest potential to increase short run output.

3.15 The achievement of the Plan's investment goals will largely depend onthe outcome of the Maio project. This is the largest project in the Plan,accounting for approximately 42% of indu.trial investment and 8.2% of totalinvestment. Its main components are a cement plant, with an estimated cost ofapproximately US$27 million, and a harbor costing US$7 million, which will beused to export cement and salt (approximately 50 MT), and for interislandtrade. In 1981, imports of cement amounted to 44 MT. Cement imports are ex-pected to increase in the future as the infrastructural projects continue andlocal housing construction expands. Using local raw materials, the proposedcement plant is designed to produce 60 MT of cement for local consumption. Areview of the project by a Bank mission in mid-1983 concluded that the deci-sion to produce cement locally would pussibly result in a substantial increasein the cost of cement to Cape Verde relative to the present cost. Investmentper ton of cement produced by the project would be US$400, versus US$200 for atypical cement plant. The mission recommended instead the construction of asilo and bagging plant that would receive cement in bulk to be bagged in CapeVerde.

3.16 The other large project in the Plan is the completion of the shipyardin Mindelo, which was initiated in 1981, and completed late in 1983. Thetotal cost is estimated to be approximately US$40 million, financed fromseveral internal and external sources (Chapter II.B.). The shipyard is ownedby CABMAR, a quasipublic enterprise under the control of the Ministry of Eco-nomy and Finance. The general director, the deputy director and other boardmembers are nominated by the Minister of Economy and Finance and confirmed byCABMAR's Board. The shipyard is operated by CABNAVE, a mixed enterprise whichis owned by CABMAR (33%), LISNAVE/NAVELINK (33%), a Portuguese shipyard,SCHEFPSWERF DE WAAL (33%), a Netherlands shipyard, and a local entrepreneur(1%). The yard is designed to receive ships between 80-110 m in length, andwill employ approximately 600 persons. It uses a natural port, Mildelo, whichhistorically has been the major element in the country's foreign trade. Theport will be linked to the local economy through the establishment of indus-tries directly related to the project such as metal construction and paintindustries, the development of cold storage capacity and the expansion of in-dustrial fisheries through INTERBASE (Chapter V). The project appraisal bythe European Investment Bank and the African Development Bank, two mainsources of financing, calculated an internal financial rate of return of 12%and an economic rate of return of 17%. The lack of sufficient Cape Verde

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experience in such types of industry is compensated by the experience of thetwo partners. Although the market for repair services for fishing vessels andrelated small merchant vessels is served partially by some West African ship-yards and by facilities in the home countries of these fleets, the experienceand reputation of the Portuguese and Dutch enterprises, coupled with an aggre-ssive marketing policy, can lead to a rapid increase in the market share ofthe Mindelo shipyard. The development of a local fishing fleet that wouldexploit the rich maritime resources of the archipelago would help to ensurefull use of the facilities. The shipyard has already obtained a significantnumber of repair contracts.

3.17 In summary, future GDP and investment trends for the Plan period willpartly depend on the outcome of the Maio prolect, and on the rate of growth ofmarket share for repair of vessels. Futher, the overall compatibility of thePlan's goals requires that the growth rate for consumption be reduced relativeto the rate for GNP. Some reduction in consumption seems to have beenachieved for 1982, but continuation of this trend will require the imple-mentation of an income policy or savings inducement policies, as mentioned inthe Plan.

D. FINANCING

3.18 Of the overall investment planned for the 1982-1985 period, totalling22,100 million CV escudos in 1982 prices, (or US$450 million) 90% is expectedto be financed from external sources (42% by external grants, 11% through theproceeds of the sale of food aid, and 37% through external loans), 7% throughinternal financing or treasury sources, and 3% by the Bank of Cape Verde. Thegovernment has successfully avoided the use of international commercial bankloans to finance development projects, and is unwilling to use commercialloans in the future.

3.19 At an aggregate level, the government estimates that 62% of thefinancing of the Investment Plan has been obtained. The financing of an addi-tional 22% has a high probability of being secured. Although preliminary con-tacts with potential donors have been made, the probability of obtainingfinancing for the remaining 16% of the Investment Plan falls into an "unknown"category. Progress in financing some sectors is more advanced than forothers. Of the industrial sector's planned investment, 66% falls in eitherthe "probable" (56X) or "unknown" (10%) category. For example, negotiationsfor the financing of the Maio Cement Project had not been completed at thetime of the Plan's preparation. With the exception of tourism (56%) andhealth (55%), more than 65% of investment financing for the remaining sectorshas been secared.

3.20 The division of financing between internal and external sourcesvaries considerably by sector. An estimated 86% of rural development projectfinancing will come from external grants (Table A.32). Industry and tourismare expected to receive 85% and 67%, respectively, of their financing fromexternal loans. The other sectors will derive a substantial portion of theirfunding from external grants.

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E. IMPLEMENTATION

3.21 The large increase in investment expenditures contemplated for the1982-1985 period will undoubtedly test domestic capacity to prepare andimplement investment projects, and to absorb large amounts of external aid.Because much of the aid is to come from multilateral sources, the coordinationand complementarity of such aid assumes particular importance. In comparisonwith previous years, during 1982, the first year of the Plan, there was animprovement in project implementation. Table A.33 presents the planned andactual investment by sector from 1981 to 1983. The ratio of actual to plannedinvestment expenditures in 1982 uas around 0.91, compared with a ratio of 0.66for the previous year. Excluding the industrial sector, however, where anerror was committed in the forecasting of the planned expenditure (withrespect to the CABNAVE Project), the implementation ratio was 0.79. Theimplementation ratio was higher in 1982 than in 1981 for all sectors exceptconstruction. The ratio for fisheries for both years is very low, 9% in 1981,and 33% in 1982. In 1983, the overall implementation ratio was 0.73. Somewords of caution are appropriate when looking at the results presented in theTable. First, the comparison of actual and planned expenditures for a projectprovides only a rough estimate of the project's implementation. Second, thevalues presented in the Table are in current prices. Comparisons of forecastand actual investment expenditures are sensitive to differences betweenexpected and actual exchange rates and prices.

3.22 Based on investment performance in 1982 and developments affectingproject financing negotiations in 1983, the Planning Directorate compiled arevised scheduling of investment expenditures for the plan period (Table A.35and A.36) A slight increase of 5% in expenditures is planned; but more im-portant, the pattern of expenditures over the years was altered. Instead ofinitial rapid increases in expenditures in 1983 and 1984, to be followed by adecline thereafter, as was the case with the original plan (Table A.37), ex-penditures are now expected to increase gradually over the entire period. For1983, investment expenditures were reduced by 1817 million CV esc (or 23%),while planned expenditures for 1984 and 1985 were increased by 11.4 and 33.3%respectively.

3.23 These changes derive from the postponement until the end of the planperiod of (i) a large part of the industrial sector investment expendituresconnected with the Maio Cement Project, and (ii) of investment expenditures inthe Transport.tion and Communications sector. The major changes in the lattersector include (i) the postponement until 1984-1985 of the bulk of theexpenditures in the infrastructure of the Fogo and Brava ports, and (ii) adelay in the purchasing of a ferry boat (postponed from 1983 to 1984). Inaddition, major expenditures at Sal Airport were rescheduled toward the end ofthe plan period.

3.24 For 1983, the revised Plan forecasts investment expenditures of 6130million CV esc, an increase of 55% over 1982. For 1983, 85% of the financingof the Investment Plan will come from external sources (51% external grants,29% external loans, and 6% uncovmitted external sources). The rural, indus-trial, and transport and communications sectors constitute 58Z of scheduled

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investment expenditures. In the industrial sector, 83% of planned investmentis expected to be financed through external loans (CABNAVE Project, 803 mil-lion CV esc), while in the rural sector almost 90% of the financing will comefrom external grants. In the transport and communications sector, approxi-mately 44% of investment outlays will be obtained from external grants, and39% from external loans. The wage share of investment expenditures consti-tutes only 152 of total expenditures. The Plan predicts an average monthlyemployment of 28,000 workers, 58% of whom will work in rural development pro-jects, and 20% in the transport and communications sector. The temporary jobcreation impact of rural development projects is important, because theseprojects, though only 19% of planned investment for 1983, account for 48% oftotal wage expenditures and 58% of total labor employment generated by devel-opment projects.

F. SUMMARY AND CONCLUSIONS

3.25 The preceding review of Cape Verde's First National Development Planconfirms its importance as an instrument of development policy. It is a wellarticulated expression of the country's priorities, and a realistic assessmentof existing economic conditions. Moreover, the Plan represents a mechanism forcoordinating the use of internal and external resources, and facilitating dia-logue with international donors. There are some methodological shortcomings inthe Plan, specifically the absence of consistency tests, and the lack ofyearly estimates for the main aggregates, which are needed in view of thecountry's lack of experience in planning and the deficient statistical base.The Plan's targets appear optimistic, as confirmed by the 1983 revision ofinvestment expenditures for the remainder of the Plan period. Although theauthorities successfully obtained financing for a large number of the projectsincluded in the Plan, the postponement of some key projects will compromisethe achievement of investment level goals, particularly in the industrialsector.

3.26 To assure continuity in planning, the following are recommended: i)development of a statistical base; (ii) improvement in the level of expertise,especially at the ministerial level, with respect to the preparation, evalua-tion, and implementation of projects; and (iii) development of a planningframework to facilitate yearly projections of the main economic variables forconsistency checks, and to interrelate the monetary and real side of the eco-nomy. Technical assistance, in the form of policy studies and project relatedactivities, is necessary. Success in obtaining financing for future projectswill depend partially on improvement of domestic capacity to undertake suchtasks.

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IV. AGRICULTURE

A. BACKGROUND

4.01 Arable land in Cape Verde is a scarce resource. Estimates of thetotal land area suitable for farming vary from 35,000 to 60,000 ha, or from 8to 14% of the country's area. Only 1,800 ha are irrigated; the remainder israinfed. Since 1968, the first year of the current drought, the amount ofcultivated land has been reduced by as much as 40% of the total. Due to thesteep terrain, most of the water from the few torrential rains is lost to thesea, contributing not only to the destruction of top soil and irrigated bottomland, but to inadequate replenishment of underground aquifers.

4.02 Domestic production has always fallen significantly short ofconsumption needs; but this pattern has been aggravated in recent years byfifteen consecutive years of drought conditions. In 1967, the last year ofgood rainfall, 70% of food needs were satisfied from domestic production. Thisshare dropped to 3.5% in 1977, and has becn around 10% since that time. Somecereals with high domestic demand, rice and wheat, cannot be producedinternally. The gap between domestic needs and production has been filledlargely by food aid.

4.03 Agricultural output as a share of GDP has fluctuated from 17 to 25%in the last five years; it was 17% of GDP in 1982. Agriculture accounted for28% of total investment between 1978 and 1981, and is expected to represent20% during the plan period. Although total self-sufficiency in meeting foodrequirements must be regarded as unattainable, development of the country'sresources, land and water, must be optimized to reduce external dependence andimprove the dietary and living conditions of Cape Verdeans. In this regard, avariety of improvements are feasible.

B. LAND USE' AND LIVESTOCK

4.04 Rainfed agricultural land is used almost exclusively for thecultivation of corn and beans. Although corn varieties with improved droughtresistant features are gradually becoming available, their yields andresistance to insects arc low. Without well-distributed rainfall, yields areonly 400 kg/ha. Corn, which is the main staple and covers the largest area offarmed land, is planted by dib!1ing sticks and crude short handled hoes.Usually, no fertilizers are used because oi the high drought risk. Plantingtakes place during the "rainy season" between June and October. Typically,beans are cultivated as a companion crop with corn in the plots. Afterharvest, corn stalks are cut or pulled by the roots and used as fuel or animalforage. (Corn and bean production data are presented in Table A.38).

4.05 Given the vulnerability of corn to drought and Cape Verde's climaticconditions, reliance upon this cereal alone must be regarded as risky. Usingcompanion crops of corn and beans, however, farmers can assure themselves aminimum yield. Several types of beans, such as the Congo Bean, appearespecially suited to the dry rainfed land, because they require only a minimalamount of water. The Congo bean can be used as forage for animals, fuel for

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cooking and as a pa:.t of soil conservation e.forts, because it grows as abush. Other crops, grown in smaller quantiti-s, include sweet potatoes,cassava, and peanuts.

4.06 Less than half of the irrigated land has a reliable water supply. Thelargest irrigated crop is sugar cane, with 60% of the total irrigated area.Yields are low, approximately 14 tons/ha, compared with yields of as much as300 tons/ha that are obtained in major sugar producing countries. Because ofthe dense shade created by sugar cane plants, companion crops are tot feasi-ble. Domestic sugar cane production is used in the manufacture of aguardente(rum). Once supplied to local distilleries, the stalks are ground to producecaldo, which is fermented three to four days ai.d then distilled, while topsare fed to animals. Cape Verde imports sugar for domestic consumption. Thesugar aguardente is the largest cash crop, and unlike other crops (i.e.,bananas), is not subject to spoilage. Most sugar is grown on the island ofSanto Antao. Due to the limited availability of irrigated land, the governmentprohibited the expansion of sugar cane production on newly irrigated lands.Effective in 1979, land already used for sugar production is taxed at 7,500escudos per ha; a fivefold increase. Because of the dispersion of sugarfields, the possibilities of economies of scale during the refining processare limited.

4.07 The second most important crop grown on irrigated land is bananas,which, in 1981, were the country's largest export product. Approximately 50Zof the banana production is consumed locally and the other half exported toPortugal. Banana cultivation occupies appro-imately 10% of all irrigated land(180 ha). Yields are low: approximately 35 tons/ha. Economies of scale wouldrequire an almost doubling of acreage cultivated. Increased production wouldrequire improved marketing both internally and externally.

4.08 Vegetables and other fruits are also produced on irrigated land.Among these are sweet potatoes, onions, tomatoes, cucumbers, and carrots.Prospects for the increased production of domestic fruits and vegetables arepromising. Creater self-sufficiency would require increased allocation ofirrigated land to fruits and vegetables, some of which would presumably comefrom displaced sugar cane land and from improved storage and transportation ofproduce to reduce the spoilage loss, which has been estimated at between 30and 40%.

4.09 Livestock production includes goats, chicken, pigs and, in much fewernumbers, cows (beef rather than dairy). The most important constraints toincreased livestock production are inadequate supplies of water and food. Inthis regard, goats are a special case. They are adapted to the rocky terrainand provide a vitally needed source of protein (goat's milk). Goatscontribute, however, to the depletion of natural vegetation and deserti-fication when unrestricted grazing is allowed. With mixed results, thegovernment has prohibited grazing on recently reforested lands. (Livestockquantity data are presented in Table A.40).

4.10 For 1980-1982, food aid provided one third of the domesticconsumption of corn and almost all of the domestic Lonsumption of wheat and

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rice (Table A.44). The United States and the EEC are the major food donors(Table A.45).

C. INSTITUTIONAL FRAMEWORK

4.11 In Cape Verde, the Ministry of Rural Development supervises theagriculture, livestock and forestry areas. The Ministry is divided intoseveral directorates. One is in charge of the conservation of natural re-sources; i.e., rural works, soil and water conservation, and exploitation ofunderground water. The other directorates cover the areas of rural extensionservices, production, and state farms. Extension services are still in a verypreliminary stage. One of the principal obstacles encountered in the creationof an extension service is that more agricultural research is needed before anextension program can be effectively developed. In Cape Verde's context thecommon tropical crops cannot be grown successfully. Therefore, research isneeded to determine the crop species that are most suited to Cape Verde. Thestate farms, established primarily for large scale cultivation, are also usedfor testing and demonstration of new crop varieties. The Center of AgrarianStudies in Santiago, which is the research department of the Ministry, pursuesprimary agricultural research, and operates as a technical training center.The center is receiving financial assistance from many external sources, andcurrently is conducting studies on soil composition, irrigation, and animalhusbandry, among other areas. Under the supervision of the Center is a Train-ing Center. All trainees have obtained at least a ninth grade education.

4.12 The government is also involved in improving the marketinginfrastructure. FAP (Empresa de Fomento Agro-Pecu.rio) is responsible for thedistribution of agricultural and livestock imports, and for the purchasing offarm output at equitable prices. The Center for Livestock Development (Centrode Desenvolvimento Pecu5rio) was created in 1981 as an extension service pri-marily for the livestock subsector. ENAVI, a national agricultural company,was established in 1981 to administer several poultry farms.

D. FOOD POLICY AND MARKETING

4.13 In rural areas the most common dish is cachupa, a corn based dish.The exact cnntr'nts of the meal vary according to income level, but tradition-ally it consists of corn, water, salt and some lard. When possible, beans andfish are added to improve food value and taste; and in coastal areas, somefish is added. Families that can add manioc, pork meat, bananas, and greaterquantities of beans relative to corn. It is consumed three times daily, andprovides low quality protein, not quite enough calories (2,100 calories versus2,800 calories required) for an adequate intake. Malnutrition affects thepopulation as a whole in at least one nutritional component (i.e., vitaminand/or protein-calorie malnutrition).

4.14 To assure a reliable and sufficient food supply, including thecoordination of food aid, a public enterprise (EMPA) has responsibility forthe storage, wholesaling and retailing of some food staples. Officially, theintent of government price policy is to insure that low income families canafford the basic staples, especially corn. Therefore, prices of food staples

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considered essential are regulated. The marketing of export products (bananas,coffee and some agricultural products) is carried out by EMPA as well. Domes-tic produce is marketed by intermediaries (rabidantes) who buy from statefarms or local farmers, and transport the produce to local markets where it issold. Consumer prices reflect the costs of transport plus a margin of profitinfluenced by prevailing market conditions. (Chapter II.F. discusses foodpricing in more detail).

E. ONGOING PROJECTS

4.15 Approximately fifty projects are listed in the Plan, thirty of whichare ongoirg. Most of the projects are related to soil and water conservationand/or irrigation. Approximately 86% of the financing for the projects willcome from external grants. Cape Vcrdc's agricultural sector has recelvedassistance from many countries and international organizations and there hasbeen an informal allocation of individual islands among the different donors.For example, projects on Fogo and Brava receive German assistance, projects onSAo Nicolau receive French assistance, and projects on Santo Antio and Maioreceive funds from the Netherlands and Switzerland, respectively. The disper-sion of the islands and their allocation among dLfferent donors has createdproblems of coordination for the Cape Verdean authorities, especially withrespect to the exchange of information. Two main projects are the TarrafalWater Resources Project and the Cape Verde Watershed Management Project, bothof which have received US AID funding and are located on Santiago. The firstproject includes the drilling of 50 test wells (the most productive of whichwere to be used for irrigation), exploration of 10 gallery sites, damconstruction testing and design, and other technical assistance. The WatershedProject (US$6.3 million) consists of the construction of dams, walls and otherworks intended to prevent soil erosion and increase water retention. Finally.funds from P.L. 480 (US food aid) are being used in the construction offacilities at the Center for Agrarian Studies at S. Jorge (US$3.7 million).

F. LAND TENURE AND AGRARIAN REFORM

4.16 Cape Verde has a somewhat complicated land tenure system that is mademore complex by the lack of property maps. cadastral survey, and the manner inwhich land in rural areas is measured--the number of liters of corn requiredto plant a given field. Land ownership patterns vary from island to island,but typically fall into the categories of state farms (formerlv Portuguese-owned properties that vere nationalized), owner-operated, and rented propertyarrangements, and a declining number of sharecropped properties (sharecroppinghas been officially prohibited since 1975). The 1980 Santiago Agriculturalcensus indicated that 22% of the island farm parcels are sharecropped, 28Z areowner operated. and 50% are rented. On sharecropped lands, the share of theharvest paid to the owner has declined from one-half to one-third. Nationally.39% of the farmers do not own land. This pattern varies from island to island.reaching 51% in Santiago and 19% in S&o Nicolau and Brava. Of the remaining61% percent of the farmers that do own land, nearly half also rent additionalland.

4.17 Cape Verde suffers from the problem of inefficient, scattered landholdings, resulting from the density of the rural population, iEland

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topography. and the history of fragmented inheritances of land. According tothe Santiago Agricultural Census, the average fauily (six persons) cultivates1.4 ha of rainfed land spread over 2.2. parcels and .03 ha of irrigated land.To have an adequate diet, a family of six would need approximately 2 ha ofland, of which 1.6 ha are rainfed and .4 ha are irrigated. Given actual yieldsand consumption of beans and corn, the average family could be self-sufficientin beans, but not in corn production. A main conclusion is that there is notenough arable land to meet the needs of the population.

4.18 The government has promulgated new land tenure legislation to in-crease agricultural production and advance social goals. Agrarian ReformLegislation passed in March, 1982 may be characterized in general terms asembodying land transfer nnd land use arrangements that are to maximize use ofthe country's limited area of arable land. First, the right of ownership ofall directly owner-cultivated private holdings, regardless of size, is af-firmed. Division of directly owner-cultivated land is viewed as likely tointerfere with efficient cultivation. To encourage cultivation of all arablelands, lands held by "absentee" owners will be subject to specified landtransfer arrangements. An absentec owner is an owner who does not cultLvatehis land, either directly or indirectly (through lawful lease-hold arrange-ments). Emigrants who cultivate the land either directly (through familyoperations), or indirectly (through lease arrangements), are not considered tobe absentee owners. Absentee owners who have left their land idle over oneyear may lose possession of the land. Land cultivated indirectly that exceedsa "limit of Intervention" in area is to be transferred, in part, to the cur-rent tenant (or "direct tiller"). The amount transferred is subject to a maxi-mum size. The remaining area can be transferred to the state. Parcels inexcess of 1 ha of irrigated or 5 ha of rainfed land may be transferred. Avariety of exceptions, allowances, and other provisions are included in thelaw. The legislation applies only to arable land; forest and pasture areas areexcluded. Transfer of church owned land is subject to negotiations.

C. GOVERNMENT OBJECTIVES

4.19 After independence. in the course of the severe drought, the firstpriority of the Cape Verdcan authorities was to provide enough food for thepopulation. Such needs were satisfied largely by food aid. As the foodsituation stabilized througlh the establishment of multi-year agreementsconcerning food aid, the authorities enlarged the scope of their effort. Thefirst objective remains increased food production. The achievement ofproduction goals for the plan period will largely depend on the pattern ofrainfall. The Plan estimates that, depending on rainfall, 1985 production ofcorn will be between 5,000 and 20,000 tons; for beans, between 1,000 and10.000 tons (Table A.41). Assuming a domestic consumption level of 45,000 tonsof corn and 10.000 tons of beans, domestic production will satisfy 442 of -rnand 50% of bean consumption, for the high rainfall scenario. In the lowrainfall scenario, it will cover on]y 11Z of corn and 102 of bean consumptionneeds, respectively. The range of f'uctuation is much smaller for the irri-gated crops (Table A.41). During the period of the Plan, no major changes arecontemplated for the livestock sector.

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4.20 The Plan's other major goals include: (i) implementing the agrarianreform (with the creation initially of the data required for its implementa-tion); (ii) developing the agricultural institutions, including provisionsfor agricultural research; (iii) establishing support programs for farmersincluding an extension program; (iv) enlarging the irrigated area, with along-term goal of 3.200 - 3,800 ha to encourage food crop production in thoseareas; and (v) to implement a program of reforestation and soil conservationin order to increase water and firewood resources. Given the country's re-source endowments, this approach seems sensible. However, the attainment ofthese goals will require large investments both In physical and human re-sources, and may yield relatively small benefits in the short-run. The water-shed projects, critically important to the development of the country's agri-culture, will absorb considerablc resources. Because of this, some marginalprojects should be evaluated with respect to any other investment alterna-tives.

11. WATER

4.21 Lack of water unquestionably limits the development of Cape Verde'sagriculture. Due to the steep terrain. approximately 802 of the water from thefew torrential rains that occur is lost to the sea. Analysis of long-runrainfall trends confirms the cyclical nature of drought, although thisparticular drought has persisted longer than most. Conservative estimates putthe "usual" annual volume of recoverablc water at 50 million m3. which wouldbe sufficient to meet the country's needs and even allow ?',i expmnsion ofirrigation. In fact, prior to the current drought, approximately 2,300 ha ofland were being irrigated.

4.22 The potential of underground water reserves has not been reliablyestimated. In the absence of normnl rainfall, which would allow thereplenishment of reservoirs, the continuous pumping of water for human andagricultural purposes can have serious consequences. According to preliminaryresults of geological surveys, pumping of water has reduced the localhydrostatic pressure and caused the elevation of salt water, leading to thecontamination of some wells. The development of reservoirs for runoff water isbeing studied, and financing is being sought for a reservoir of 6.5 million m3in the area of Poilao in Ribeira Seca. The EEC financed two sma'l reservoirsin Santiago (Canico and S. Martinho).

4.23 Estimates of water consumption are also very tentative. According toa 1981 Frcnch study, the total consumption of water vas between 54,000 and75.000 m3/day, of which onlv 4,000 to 5,000 m3/day was potable water. Irriga-tion, the main user of water, is largely based on underground water, which ispumped and then transported through small channels (levadas). Flooding is themost common method of irrigation. The volume of water per hectare varies fromarea to area. The method of irrigation also varies, depending on the type ofcrop (Table A.43). Due to the drought, the interval between successive irriga-tions has increased. In Santo Antao, the interval has varied from two or threemonths to as long as a year in some cases. The amount lost during transporta-tion depends on the manner in which the levadas are maintained. Losses arereported to reach as high as 50%.

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4.24 The selling price of water varies from island to island, and on eachisland, from area to area. Following tradition and customs, the use of under-ground water is often free. When sold, its price can vary from .07 csc/m3 inSantiago, to 5 esc/m3 in SAo Nicolau, and 23 esc/m3 in Fogo. Potable water issold at different prices depending on its source. For the country as a whole,its price is between 7 to 85 encl/O for metered water. 0 to 140 esc/m3 forstandpipos. and 1,000 esc/m3 for water distributed by water tanks (1981prices). The wide differences in price suggest that irrigated water is beingsubsidized, particularly in Santiago. The 1981 French study has reported sucha finding. A similar case can be made for desalinated water (see Chapter VII).A main conclusion is that water prices need to be reevaluated. The subsidizingof irrigation water does not encourage farmers to select the most water savingprocedures nor the n.iost appropriate crops.

1. ISSVES AN) RECOMMENDATIONS

4.25 Development of the agricultural sector faces scveral difficultproblems, which collectively put agricultural self-sufficiency out of reach.Foremost among these is the lack of water. Another obstacle is the rhortage ofarabie land. Problems of transportntion and marketing adversely affect thecountry's ability to meet consumption needs. The land tenure system.characterized by small scattered plots, limits economies of scale and theintroduction of more efficient cultivation practices. Reducing vulnerabilityto the drought cycle, a realistic goal, is the central agricultural objectiveof the Cape Verdean Govcrnment. Large investments are projected or underway inwatershed management and water resource development that are intended toincrease the share of domestic consumption met by domestic production.However, the long-run success of these policies will depcnd in large measureon rainfall and population trends.

4.26 In general terms. the government's approach with respect to thedevelopmenw of the agricultural sector hbs been sensible. There are, however,several issues that need to be addressed so that Cape Verde's agriculturalpolicy will be more comprehensive and viable. Some of these issues arc theneed to (i) promote applied research that is relevant to Cape Verde's condi-tions and reflects the country's absorptive capacity; (ii) develop extensionservices that promote promising farm practices when they become available;(iii) better coordinate foreign aid; and (iv) study creation of credit facili-ties for the agriculture sector.

4.27 An additional issue is the use of the irrigated area. Given theuncertainty over the country's underground water reserves. a review ofexisting land use needs to be undertaken prior to any expansion. Increasedagricultural production can be achieved for the same area by using improvedseed varieties and cultivation practices, such as the use of fertilizers andpesticides. Approximately 60 to 70Z of the irrigated area is being used forsugar cane and banana production, both of which require optimal humidityconditions throughout the year. Yields of these two crops could be improved bydecreasing the intervals between irrigation and by increasing the use offertilizers. It has been estimated that such procedures would result in a 70to 802 increase in banana yields, and an almost fourfold increased in sugarcane yields. The area used for sugar cane could thus be reduced, and the newly

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available land could be diverted to other crops. High value crops such asfruits and vegetables could be grown on currently irrigated lands to supplythe domestic market and, possibly, to obtain additional export revenues.Government's awareness of these problems is reflected in the limitations nowimposed on the use of newly irrigated areas for sugar cane production.

4.28 The types of crops grown on rainfed land should also receive closeattention, particularly those that are adapted to a drought prone environment.Because of the variability of rainfall, the creation of incentives that wouldlead to the substitution of corn for more drought resistant cereals such asmillet and sorghum shouLd be explored. However, because of the deeply rooteddietary habits of the population, such change will not be accomplished easily.Other staples that help prevent soil erosion and improve water retentionshould be considered as well. Improvements in yields on rainfed lands can beachieved through use of superior seed varieties, and more suitable farmiiagmethods.

4.29 Reforestation efforts are required to rebuild veget'tive coverdepleted by the drought, demand for firewood, overgrazing, and t. effects ofthe infrequent torrential rains. Because of the current shortage of firewood,it is estimated that one member of each family must spend every day collectingleaves and animal dung. Through reforestation programs, the government intendsto increase the firewood available to households (see Chapter VII) and toimprove soil conditions. Obstacles to the success of the program are theunrestricted grazing of goats and the labor shorcage associated with the needto plant both seedlings and agricultural products during the very short rainyseason. Currently, goats are being restricted from newly planted areas. Tocompensate for the labor shortage, the government has attempted to preparelands for planting in the dry season and to utilize ILLan work forces duringthe rainy season to undertake the seeding.

4.30 The marketing system and storage distribution network need to beimproved. Cape Verde's system is adapted to a drought situation with a lowagricultural surplus. Even in these circumstances, losses are reportedly high;and this undoubtedly influences the farmer's choice of crops (e.g., the extentto which a crop is vulnerable to spoilage). To be of real benefit with respectto both the domestic and export markets, any future agricultural surplus,attained either through increased rainfall or improved farming practices,would require better storage facilities and transportation/communicationlinks.

4.31 A final issue is the country's preeminent need for a comprehensivewater policy. Although the Plan recognizes the importance of the water issue,it fails to address several important aspects of water policy. Given thescarcity of this resource, policy must address how the available water isallocated among household vs. industrial and agricultural users. Water pricesare a mechanism by which policy makers may influence such allocation, andshould be thoroughly reviewed. The price of water used for irrigation, inparticular, should be increased to further encourage farmers to conserve.Technologies used to desalinate sea water and to distribute and transportwater should be made efficient and minimally vulnerable to losses. Waterconservation must include continued i-mprovement of watersheds and water

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recovery methods. As a part of agricultural policy, crops that contribute tothe reduction of soil erosion and that increase water retention need to be en-couraged. Technical assistance is needed to provide better estimates of thecountry's water supply, as well as to assist in the preparation andimplementation of water policy. The delegation of the responsibility for waterto the Ministry of Rural Development in July, 1983 has provided an opportunityto formulate an adequate water policy and to coordinate the many sources ofexternal assistance.

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V. FISHERIES

A. BACKGROUND

5.01 Cape Verde lies near two major international fishing grounds, one offthe coast of Africa between Senegal and Sierra Leone, and the other southwestof the islands. A Norwegian study in collaboration with UNDP/FAO, found thatCape Verde's fisheries potential is substantial but not exploited to itsfullest. Excluding such large pelagic fish as tuna, the total fish biomass isestimated at 100,000 tons per year. The Plan estimates a catch potential forall fish, including shellfish, of 35,000 - 40,000 tons per year. The Norwegianstudy confirmed the absence between islands of an extensive continental shelf,therefore making impossible any extensive trawling of the underwater surfacefor fish. However, between Mai. and Boa Vista a relatively small shelf hasbeen found. The Maio-Boa Vista-Sal shelf holds approximately 75% of the fishbiomass near the Cape Verde islands, and is consequently regarded as the mostpromising area for developing industrial fisheries. Despite the potential,only 10,381 tons of fish and shellfish were caught in 1982 (Table A.46),accounting for 5% of GDP. Nonetheless, fisheries constitute an importantcomponent of export revenue, averaging 28% of total merchandise exports in1981. Fisheries are also important for the domestic economy, providing employ-ment and an important source of protein in the national diet. With an annualper capita consumption of approximately 25 kilos, fish contributes more than80% of animal protein intake.

B. ARTISANAL FISHERIES

5.02 The State Secretariat of Fisheries has responsibility for the overallcoordination and development of Cape Verdean fisheries, and is subordinate tothe Ministry of Economy and Finance. Operations are divided between artisanalfishery and industrial, export-oriented fisheries. Artisanal fishery providesmore employment and a larger total catch each year than industrial fisheries.Artisanal fishermen who live in villages dispersed throughout the islandsaccount for over 80% of all fish landings. In 1982, artisanal fishing employed3,444 fishermen, 75% of whom had no other occupation (Table A.47). The majori-ty of boats are plank rowboats, 3.5 to 5.5 meters long, and carry 2 to 5fishermen. All artisanal fishing is carried otut by the private sector. Over90% of the artisanal catch is estimated to be consumed fresh in the localmarket.

5.03 A state enterprise, SCAPI. -.apany for Marketing and Support forArtisanal Fishing) was founded in 1977 with the function, among others, ofproviding marketing, technicdl assistance, and other support to artisanalfishermen. One of SCAPA's roles is to provide a guaranteed minimum price tofishermen. In practice, however, SCAPA's minimal price, which is constantthroughout the islands, cannot compete where demand for fish exceeds artisanalsupply. On the more populated islands and during certain months of the year,fishermen more often sell to intermediaries who are willing to pay more thanSCAPA. Consequently, SCAPA is able to buy only about 10% of the artisanalcatch. SCAPA is more viable on sparsely populated islands. Additionally, SCAPAhas several fishing boats, many of which are inoperative, and runs two

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canneries which are outmoded and operate well below capacity. The boats, with30 ton capacity, are meant to supply the canneries with raw material on asteady basis. The canning factory in Santiago is in urgent need ofrehabilitation and modernization.

5.04 According to 1982 data furnished by the Directorate of Fisheries,only 256 boats of a total of 1,051 were motorized. Non-motorized boats have alimited range of operations, and consequently cannot reach the best fishinggrounds, such as the Boa Vista-Sal-Maio shelf. They are also practicallyuseless when bad sea conditions prevail, typically between February and April.PROMOTOR, a new agency, was established in 1982 to distribute and sell out-board motors donated by the Japanese government to artisanal fishermen.Approximately half of the 600 motors donated were distributed in 1983. Al-though motorization is estimated to increase the productivity of small boatsby about 25%, the extra revenues do not appear great enough to offset the costof fuel. Further, the motors are prone to breakdown and difficult to maintain.

C. INDUSTRIAL FISHERIES

5.05 Cape Verde's offshore economic zone is exploited by a small indus-trial fishing fleet, as well as by a small number of Spanish boats allowedaccess by agreement. In return, the Spanish fishermen pay license fees (US$75per ton in 1981). and are required to train Cape Verdean fishermen. Portuguesefishing boats are expected to start fishing in the area in the near futureunder similar terms. Cape Verde's industrial fishing fleet consisted of 29vessels in 1982 (Table A.49). Most fishermen catch tuna, which is sold frozenor is canned for export. Two fish for lobster.

5.06 A public enterprise, INTERBASE (Cape Verdean Enterprise for FishingInfrastructure) is the principal actor in industrial fishing. In addition toits own catches, INTERBASE buys tuna and lobster destined for the exportmarket from private fishermen, INTERBASE exporting the tuna from Mindelo, andthe lobster from Sal Island by air. Two private fishing companies also exist:EMPREITEL, which sells its catch to INTERBASE; and FRIGORIFICO, which exportsits own catch but is not allowed to buy from others. In effect, INTERBASE hasa near monopoly on frozen fish exports. INTERBASE has three 39m tuna clippers,which are too large and expensive for efficient operation under local condi-tions. However, twelve new 14m and 18m boats are scheduled for delivery in1984 and are expected to considerably increase the catch. At least one of thethree tuna clippers will be retained to serve as a mother ship to freeze thetuna catch and otherwise support the smaller vessels. It is expected thatthese additions will increase INTERBASE's tuna catch from some 1,400 tons to2,060 tons per year. These new boats will also be used for lobster fishing.

5.07 Deep water lobsters are currently being caught by industrial fishingboats. Industrial fishing for lobster is largely limited to Sal Island,because of a lack of facilities elsewhere to store and transport lobster.INTERBASE plans to build new facilities to mitigate this problem. It wouldalso be possible to produce other shellfish such as shrimp throughaquaculture. Shallow water varieties of lobster are caught principally byartisanal fishermen for local consumption.

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5.08 INTERBASE operates more than 95% of the 9,950 tons of freezer capa-city for fish storage in Cape Verde. The principal storage installations arein Mindelo, where a 3,000 ton facility has been refurbished and a 6,000 tonfacility has been newly built with Dutch financing to better exploit the tunacatch potential. The older facility was rebuilt to be divided later into aseries of small units for installation throughout the islands. The new facili-ty is intended primarily for use by foreign fishing vessels. At present itoperates at perhaps 25% capacity, but is expected to reach full capacity asMindelo is developed into an international fishing base. A main constraint tothe full use of the new storage facility is the inadequacy of port facilities.

5.09 During the off-season, Cape Verde has been sending the large tunatrawlers to fish by agreement in Angolan waters. Catches made during thesetrips have augmented the total industrial catch by approximately 35% in eachof the last three years (approximately 470 tons per year). Cape Verde isexploring the possibility of fishing in other alternative fishing groundsduring the off-season.

D. INVESTMENT PROJECTS

5.10 Planned investments in the fisheries sector are relatively modest.Excluding the development of Mindelo as an international fishing base (whichis included ur'er industry), fisheries account for approximately 4X of totalinvestment pzogrammed in the Plan. From 1981 to 1983, implementation of theInvestment Plan for the fishing sector lagged substantially behind planimplementation for most of the other sectors (See Chapter III.E.). During theperiod of the Plan, the principal projects for the industrial subsector arethe expansion of INTERBASE's fleet and the completion of a fishing base on SalIsland. For the artisanal subsector, reinforcement of institutional support.rehabilitation of canneries, and a fishing project in the Sotavento islands,to be financed by USAID, are planned. Industrial fishing projects are far moreadvanced than those for artisanal fishing; the 12 new fishing boats and theSal Island fishing base should be completed in 1984.

E. ISSUES

5.11 A principal issue in the fisheries sector is the apparent neglect ofartisanal fishing. Despite the emphasis given to both large- and small-scalefishing in the Plan, the bulk of the institutional and financial support tofishing is concentrated in industrial fishing. Although projects aimed atartisanal fishermen have not yet been successful, small-scale fisheries is onearea where economic success should be likely, because resources and expe-rienced labor are available. Furthermore, because artisanal fishing supplies amajor source of protein, its development will have a significant nutritional.impact. In particular, credit facilities need to be made available to arti-sanal fishermen, especially in view of current government policy to equip asmany boats as possible with motors. Equipment and spare parts are inaccessibleto fishermen without the use of credit facilities.

5.12 More effective support of artisanal fisheries requires a reformula-tion of the role of SCAPA which suffers from finaicial and managerial diffi-culties, and is further hampered in achieving its objectives by the wide

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dispersion of islands and the poor transportation and communication infra-structure. The organization needs technical assistance in administration,financial management and extension services. SCAPA's objectives also need tobe clarified. Additional technical support to fishermen is necessary. Forexample, productivity is adversely affected by the inadequate amount of baitsupplied by SCAPA. SCAPA's pricing policy should also be reevaluated. TheGovernment has indicated that it would look favorably upon projects to rehabi-litate SCAPA.

5.13 Inadequate port facilities limit the economic benefits of the expan-sion of the local fishing fleet and the Mindelo storage capacity. In particu-lar, the new storage facility seems to be used below capacity because ofshortage of berth space, which precludes its use by large vessels. The pos-sibility of expanding the berth for the INTERBASE cold storage facility isunder study.

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V. INDUSTRY

A. BACKGROUND

6.01 The industrial sector's contribution to GDP has been relativelysmall. In 1980, industry accounted for only 5% of GDP and 2% of public invest-ment. The Plan places great emphasis on the diversification of the economy todecrease dependence and provide greater employment opportunities. The share ofpublic investment going to industrial projects has been greatly increased. Thefirst step in this process was the CABNAVE project. Although, the industrialsector's contribution to GDP was only 42 in 1981 and 1982, industry received17% of public investment in 1981 and 24% in 1982. The Plan estimates that theindustrial sector will receive approximately-one fifth of total investmentduring the 1982-1985 period, and that industry and energy will constitute llZof GDP by 1985, and 17% by the year 2000.

B. STRUCTURE

6.02 The industrial sector in Cape Verde is characterized by small in-formal units and larger (medium-scale) industry. Small-scale, artisanalenterprises are the most numerous and provide most employment. In many in-stances, these units consist of a single individual working with one or twoassistants, employing simple hand tools, and producing small quantities,usually on order. Typical activities include carpentry, clothing manufacture,automobile repair, food production (e.g., sausages, bread, cheese, aguar-dente), blacksmithing and tinsmithing, and handicraft production (principallyweaving, ceramics, and carvings). A 1982 UNiID0 study estimates the number ofsuch enterprises at more than 1,200 and employment at 6,700 persons. Of these,1,400 are in agro-industrial activities, 1,000 in construction materials,2,200 in leather and textiles, 1,000 in wood processing and 1100 in otheractivities. (Industrial production data by product from 1974 to 1982 arepresented in Table A.48).

6.03 The largest share of industrial production is obtained from a groupof public and mixed enterprises, the most important of which will be analyzedbelow. The fact that the largest of them does not employ more than 200 personsat full capacity gives a preliminary indication of the meaning of "large scaleindustry" in Cape Verde's contoxt. Much of the existing industry is found inMindelo, where a technological tradition exists from the days when its portwas an important coaling station.

6.04 The principal state enterprises in industry are MAC, EMPROFAC andONAVE. ONAVE is an old, small ship repair yard in Mindelo. The plan proposesthat ONAVE be rehabilitated to function as a complement to CABNAVE. Theproject proposal calls for the installation of a new system of drydocking thatwould allow simultaneously repair of up to fov.r boats under 25m in length.This would enable repair of the fishing fleet and small inter-island transportships without encumbering CABNAVE. A separate project proposes to renovateONAVE's foundry, to produce parts for both CABNAVE and ONAVE, as well asarticles for use in civil construction (e.g., plumbing). ONAVE also has afiberglass production unit, which could supply such domestic articles as

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chairs, sinks, and bathtubs. The possibility of separating and renovating thisunit is under consideration. Since 1982, EMPROFAC has had a monopoly on suchimports, distributing them through two state pharmacies, three state medicalposts, and private pharmacies. In April, 1983, the enterprise started toproduce pharmaceuticals which it hopes to export eventually to African coun-tries. MAC is a construction material enterprise, although its principalcurrent activity is construction itself. (Chapter VIII).

6.05 Morabeza, SOCAL and MOAVE are the main mixed enterprises in theindustrial sector. Morabeza is a factory in Mindelo that produces men's andwomen's clothing. Although it has on occasion exported some of its products,Morabeza has been unable to develop dependable outlets abroad, and is conse-quently producing below capacity. Domestically, however, Morabeza's productsare both competitive and well liked. In contrast, SOCAL, a shoe factory inMindelo, has not been able to develop a local market. SOCAL suffers from thecompetition of better quality imported shoes, and has been selling shoes atunprofitable low prices. MOAVE is a mill, also in Mindelo, that produces flourfrom grain provided as food aid. At prescnt, the flour byproducts, which areused as animal feed, are in greater demand than the flour itself. MOAVE holdsa 25% share of FAMA, the pasta factory that is to be opened in 1984. Theprivate shareholders in these mixed enterprises are Cape Verdeans, typicallyeither local aierchants or emigrants who seek profitable investments in CapeVerde. In the private sector, medium-scale industry is largely limited tobakeries producing bread and biscuits, a cigarette factory, and carpentryshops. Artisanal distillation of aguardente from domestically produced sugar-cane is an important industrial activity, although not much is known about itseconomics.

C. INSTITUTIONAL FRAMEWORK

6.06 Institutional support to the industrial sector is provided to medium-scale industry by the General Directorate of Industrv and Energy (ECIE), andto cooperatives by the National Cooperatives Institute (IEC' and the CapeVerdean Solidarity Institute (ICS). There ore currently no channels of insti-tutional support to individual small producers. The function of the DGIE is toformulate industrial policy and supervise its implementation. Because theDGIE is understaffed and its project preparation and evaluation capability israther weak, it has been able to do little more than study isolated projectpossibilities. In practice the DGIE has performed the role of line ministryfor the state enterprises. Future industrial expansion will depend largely onthe strenghthening of this department through restructuring iL> role anddeveloping the skills of its staff.

6.07 The role of the INC is to promote the cooperative sector, whichreceives particular exaphasis in the Plan. There are some 32 cooperatives andprecooperatives in Cape Verde, of which 13 are consumer cooperatives. Of theproducer cooperatives. 9 are in agriculture, 2 in fishing, 1 in constructionand 7 in other industries (principally carpentry). These cooperatives aresmall, employing 7 to 15 working members. The role of the INC has been tocreate, organize and sometimes manage these cooperatives. It also coordinatesand distributes equipment received through external aid. The impact of the INCin the development of small industrial enterprises has been limited. The

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National Handicraft Center (CNA), whose main concern has been to conserve andpromote handicraft traditions, has also provided some assistance to coopera-tives.

6.08 The main center for vocational training is the industrial andcommercial school at Mindelo, which offers 3-year courses in basic technicaland commercial courses. In 1982/83, its enrollment numbered 720 students. Asimilar institution will be be established in Praia in the near future.Several new curriculum areas such as management training may be included in aplanned modernization of the Mindelo school. ICS has started training coursesin carpentry, and will soon offer training in locksmithing.

D. GOVERNMENT POLICIES AND CONSTRAINTS

6.09 The planned exparsion of the industrial sector is to be based on (i)creating a set of industries directly targeted on exports, and, (ii) meeting alarge share of domestic needs through domestic production. Projects orientedtoward the first objective include the CABNAVE project, the related rehabili-tation of ONAVE. and the Maio project, which includes an export oriented saltextraction facility. To better meet domestic consumption needs, the governmentintends to create a support basis for small scale industry, largely artisanalin nature, and to undertake several investment projects in areas where somelocal resources (i.e., construction materials) are available; or where therequired scale of the project is compatible with the domestic market. Projectsof the latter type that are in the preparption stage include a brewery, aplant that will produce soap, paints and varnishes, the modernization of aprinting plant, and other small scale projects. It is cxpected that someadditional industrial activities can be created in the short run throughlinkages with the development of industrial fisheries, such as the tunacanneries. Construction material projects include prinLipally the Maio Cementplant and the pozzolana project on the island of Santo AntAo.

6.110 As analyzed in Chapter III, it appears doubtful that the targets forthe industrial sector, a sevenfold increase in average annual investment andan annual rate of growth for the sector of 40%. can be achieved. The limitedcapacity for project implementation and the difficulties encountered inobtaining financing for some projects have already resulted in the postpone-ment of some projects.

6.11 An industrialization policy for Cape Verde needs to take into consid-eration several factors. Given the limited domestic market, most industrialprojects have to include external markets. Because of the country's resourceendowment, an industrialization policy should pursue activities with low wateruse and low energy and transportation costs. Finally, the long run success ofCape Verde's industrialization policy will depend on the competitiveness oflabor, the country's most abundant resource, with other countries at a similardevelopment level. Although there is no reliable information on labor produc-tivity and cost, nominal wage increases have been moderate to date (ChaptertI.F.), and the government is aware of the need to maintain such a trend inthe future.

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6.12 Enlargement of the country's industrial base will help reduce itsdependence on external aid. Covernment policy has been realistic about indus-trial development possibilities and has abstained from projects that, thoughpolitically prestigious, are not economically viable. Given the country'sresource base, an industrialization policy involves risks, or in the Plan'sword, "a gamble". The probability of success of such a gamble can be enhancedif individual projects are thoroughly analyzed beforehand. Projects l4.ke thecement plant, and possibly the brewery, should be carefully reevaluated.Second, more attention needs to be given to the promotion of small- andmedium-scale industries, including cooperatives. Promotion of the smallerscale industries would address the unemployment problem, without necessarilyconflicting with the establishment of export oriented industries. The poten-tial importance of small-scale industries has been recognized in a series ofreports prepared by UNIDO and IAPHEI - a Portuguese institute of support forsmall- and medium-scale industry. Viable candidate industries include con-struction materials, agro and fish processing sectors, and metal and woodworking projects.

E. ISSUES

6.13 The first issue is the apparent greater emphasis placed on large andmedium scale as opposed to sm;ull-scale industry. Some of the advantagesassociated with the development of small-scalc industry are (i) the subsectoralready exists, is labor intensive, and would more likely benefit from remit-tances, which most often move through family channels; (ii) fewer risks areentailed; and (iii) significant possibilities exist for linkage with theagriculture and construction sectors. Further, small-scale industry haspotential for expansion, particularly wood productq, metalwork and to a lesserextent, handicrafts. Small-scale industries, however, unless organized ascooperatives, have no institutional support; and serious problems of market-ing, credit and supply of raw materials confront this subsector. The Planacknowledges these difficulties, and includes a proposal to create a centerfor the promotion and support of small industries.

6.14 Medium and large scale industry are practically non-existent in CapeVerde. Confronted with the high risks associated with pursuit of larger scaleindustry, the Government has demonstrated caution in the promotion of suchprojects. No large-scale projects other than those already underway (i.e.,CABNAVE) have been subjected to comprehensive economic analysis. Beforelaunching additional medium- or larger-scale industrial projects, the oppor-tunities for small-scale development should be fully explored. Linkagesbetween small- and medium-scale industry should also be explored so that theproductivity of both subsectors may be improved.

6.15 A second issue is the existing level of institutional management andsupport. Institutional capability for project preparation, implementation andevaluation is weak. There are various institutions charged with promotingindustrial development. A UNDP technical assistance project is being preparedto support the technical and institutional development of DGIE, in particular,and the industrial sector, in general.

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6. 16 Marketing problems arc a third issue relevant to the development ofindustry. Due to Cape VeT.rde's small domestic market. projects requiringeconomies of scale must reYy to some extent on exports. Unfortunately, inter-national marketing know-how lb lacking in Cape Verde, as well as the necessarycommunication and financial infrastructure. This has caused problems, forexample, with the country's clothing factory which has been unable to sustainexport demand for its products despite their apparent good quality and compe-titive pricing. Technical assistance is needed to help establish localproducts in several potential markets, including Portugal, Portuguese-speakingcountries and the countries comprising the Economic Community of West AfricanStates (ECOWAS). Cape Vcrde's diplomatic missions and emigrant communitiescould assist in improving international marketing through commercial attaches,promotion seminars, and selective participation in trade fairs. Aggravated bythe distances between islands, marketing of goods internally is sometimes aproblem as well. Communication ane storage capacity are often deficient.Handicraft production, for example, is limited by a lack of both marketingchannels and quality standardization.

6.17 Another issue is the need to improve the instruments of industrialpolicy. (Credit policy is discussed in Chapter II.D.). There is also a needfor an investment code. Government decisions on incentives and protection havebeen made on a case by case basis. Government intervention, either throughpublic or mixed enterprises, seems to be determined more by shortages ofentrepreneurship than by ideological considerations. Although foreign invest-ment is not ruled out, some Cape Verdean participation is preferred. Aninvestment code would clarify such points, as for example, the role of foreignand private investment, the areas in which government accords priority, andthe incentives granted to attract investment in those areas.

6.18 Finally, a number of industrial projects receiving high prioritydepend on imported raw materials, have limited employment potential and a lowvalue added. Projects making use of local resources apparently are being givenlower priority. For example, light metal engineering, paint and soap projects(which rely almost entirely on imported inputs) appear to be receiving moreattention. and are in more advanced stages of preparation than projects forthe production of fish meal, clay bricks, cut and polished stone and otherconstruction materials. The Plan, however calls for greater emphasis to beplace in industrial development that takes advantage of local resources, suchas in the fishing and construction material subsectors.

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VII. ENERGY

A. BACKGROUND

7.01 Cape Verde's energy balance is characterized by a complete relianceon imported petroleum products to meet the energy requirements of the maineconomic sectors, transport and industry. Approximately one-third of householdcr.ergy needs is satisfied through imported oil. The remainder is supplied bytirewood and biomass.

7.02 Because of the wide range in estimates of firewood consumption, it isdifficult to estimate energy consumption by source reliably. According to arecent World Bank energy assessment. approximately 602 of the country's totalenergy consumptlon is satisfied by firewood and other biomass, and the remain-ing 40% by petroleum products. Firewood is used for domestic cooking pur-poses, and is also used bv bakeries, lime and ceramic kilns, and artisanal rumdistilleries. The large demand for firewood has created serious problems ofdeforestation. which have been aggravated further by the drought. Nonconven-tional sources of cncrgy (geothermal. eolic, solar, bingas) are still in anembryonic state of development.

B. INSTITUTIONAL FRAMEWORK

7.03 The Directorate of Industry and Energy, under the Ministry of Economyand Finance, is the main government agency in this sector. It has the role ofplanning the supply and distribution system for petroleum products, electri-city, and water desalination; it also formulates energy pricing policy. TheMinistry of Rural Development includes the Forestry Service and a divisioncharged with promoting the use of renewable resources in rural areas. Inaddition, the National Institute for Technological Research studies new formsof energy (eolic, solar, geothermal) and the transfer and adaptation of newtechnologies to the country's needs. The supply of commercial energy isdivided among several companies that are regulated by the Directorate ofIndustry and Energy: (i) ENACOL, a public enterprise supplying approximately38% of the domestic petroleum market and 72 of the reexport market; (ii) ShellCape Verde, a private company supplying the remainder of the domestic andreexport petroleum markets; and (iii) ELECTRA, a public enterprise operatingthe major power plants in Praia, Mindelo and Sal and the desalination plantsin Mindelo and Sal. There are also twelve rural pc :r plants, most of whichare owned and operated by local councils, and two other power plants in Salthat are linked with a hotel and the airport.

C. PETROLEUM

7.04 A particular feature of Cape Verde's petroleum market is the largevolume of reexports. In I982 imports of petroleum products were 184 thousandMT, of which 149 thousand MT, or 81%. were reexported. As Table A.49 indi-cates, between 1979 and 1982 there was a 15% decline in the total volume ofreexports, which reflects a decrease in fuel oil reexports and no change injet fuel reexports.

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7.05 Annual domestic consumption of petroleum products expanded 6% onaverage during the 1979-1982 period. The major increases have been in theconsumption of gas oil and jet fuel. Preliminary estimates provided by theenergy survey indicate that transportation (33%) and water desalination andpower generation together (28%) are the major domestic users of petroleumproducts.

D. ELECTRICITY AND WATER

7.06 The Cape Verde Electricity Company (ELECTRA) has responsibility forthe generation and distribution of electricity, and for the operation of thedesalination plants on SAo Vicente and Sal islands. Electricity consumption isapproximately 11 million kwh. The consumption growth in the last few years hasaveraged about 16% annually. ELECTRA's power plants and distribution networkare old and in need of rehabilitation. Operating efficiency of the plants islow, and despite some improvement in thc last ten years, distribution lossesare currently estimated to be as high as 40%. ELECTRA realizes a large deficLtin its desalination operations, but apparently is in balance in its otheroperations. (ELECTRA's balance shect and operating accounts are not avail-able). The electricity tariff structure for industrial consumers follows aformula that has a fixed component plus a variablc component dependent onconsumption level. For domestic consumption, there are two fixed tariffs,depending upon consumption level. Both tariffs have been adjusted periodical-ly, with increases of about 9% in each of the last two years.

7.07 Desalination of water is the country's most energy intensive indus-try. Two islands. SAo Vicente, where most industrial activities are located,and Sal are overwhelminglv dependent on on desalinated water to meet theirwater needs. The main user of desalinated water is S&o Vicente with approxi-mately 98% of the total. Because of frequent ruptures and numerous leaks inthe system, water losses are reported to be as high as 42Z of total produc-tion. Water tariffs from the desalination plants arc extremely low in compari-son with production costs, witlh the government subsidizing the difference.Cost of production in Mindelo is estimated at 330 CV esc/m3, while tariffsrange from 60 to 120 CV esc/m3. ELECTRA's subsidy in 1982 corresponded to 90million CV esc, or 7% of government current expenditures.

E. PRICING

7.08 Domestic prices of conventional fuels have been adjusted to keep pacewith changes in world prices. The government's stated policy is to pass on toconsumers increases in the price of imported oil. The two companies operatingin Cape Verde - Shell and state-owned ENACOL - charge the CIF price plus afixed margin (recently reduced from 10 to 8%). The taxes on fuel productsrepresent a combination of specific and ad valorem taxes. Gasoline and gasoilimport and consumption taxes correspond to 16 and 6% of the CIF price, respec-tively. ELECTRA and aircraft calling at Sal are exempt from import and con-sumption taxes, while the fishing fleet is exempt from the 8% margin charg.edby the oil companies.

7.09 Government price policy, enforced through the Directorate of Energy,does not involve any explicit subsidies to the energy sector, with the

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exception of desalinated water. Prices are not to cover total operating costs.Without balance sheets of the operating utilities and oil companies, however,it is difficult to assess whether the price policy covers capital depreciationand other fixed costs. Nor is thaer sufficient information to dc!erminewhether specific Imported oil products are subsidized. As the results of theenergy mission confirm, oil used for power generation may be subsidized tosome extent. Separating the electricity and water components of ELECTRA'saccount is a prerequisite to further evaluation of energy price policy.

F. OTHIER SOURCES

7.10 Firewood and ocgher biomass fuels constitute a major source of domes-tic energy. Becaumc t"pproximately 70% of the population cannot afford otheifuel (kerosenc, butane), a great pressure is exerted on the country's alreadyscarce vegetation. About one half of the country's firewood requirement isbeing satisfied bv other biomass fucis such as agricultural wastes, animaldung, and grasses. Firewood's efficiency as an energy source is limited by thelack of appropriate ovens. The replacement of the traditional three stonefires by more fuel cfficient stoves could result In energy savings of up to50% and reduce pressure on the country's sparse vegetative cover.

7.11 The long-run nccds for firewood can be met only through an affores-tation policy. The 3f forestation of the country would provide soil cover,Increase watcr infiltration and retention, and provide firewood and forage.Several difficulties are encountered, however, in the implementation of suchpolicy. The first is the need to use species that are sufficiently resistantto the drought. Some acacia varieties appear to offer good prospects. Second,the short rainv season, whichi is the best time for planting trees, alsocoincides with the planting of agricultural planting seeds. The short periodsof rain are difficul.t to predict. making scheduling difficult. The governmenthas attempted to overcome these obstacles through the voluntary mobilizationof all levels of the population during the rainy period. The governmentreforestation program has achieved successful results. Between 1978 and 1982.between 13,000 and 14.000 ha were planted, 402 of which are in Santiago.

7.12 The development of other sources of energy is still at a preliminarystage. Eolic (wind) energv has a longer tradition in Cape Verde than othernon-conventional sources. Continuous tradewinds favor this source. A programunder the Ministry of Agriculture, with Dutch and US technical and financialassistance, is building a workshop that will construct windmills. A pilotwindmill irrigation project was recently inaugurated; but its technical andcost performar.ce relative to the windmills traditionally used in Cape Verde.Demster (US) and Southern Cross (Australia), have not yet been evaluated.Aerowatt (France) is experimenting with the use of eolic energy for electri-city generation on Santiago and Sio Nicolau islands. Solar energy, includingsolar salt ponds, is the responsibility of the National Institute for Techno-logical Research (INIT). Solar energy has been used in salt production, dryingof fish. and water distillation. Programs to develop other applications arestill being studied. Geothermal energy is being developed with technicalassistance from SIDA (SAREC), which is evaluating the potential of this energysource on the Island of Fogo. INIT is also coordinating this program.

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G. ISSUES

7.13 The first issue is the need to increase energy savings either throughmore efficient uses of energy or by a reduction in losses. The government hasan ambitious investment plan for the energy sector, which includes an increasein the supply and improvements in the distribution of conventional forms ofenergy, and the development of alternative methods. In the short-run, however,alternatives for increasing energy supply, without recourse to increasedimports of oil products, include reduction of distribot'on losses betweengeneration and sale, and improvement of the efficiency oZ Dower generation.Projects that rehabilitate the power system are of utiost importance.Similarly, a reduction of water distribution losses should be given immediatepriority. Water distribution through tanks or bottles could contribute toshort-run savings.

7.14 Due to the importance of wood in local energy consumption and theseriouly adverse effects of deforestation, priority should also be given toincreasing the efficiency of wood energy use (through more efticient stoves,ar substitutica of other sources of energy for cooking such as biogas), andaccelerating the reforestation program. In particular, the Jatropha Curcas L,plant, known locally as purgueira, is well adapted to the climate of CapeVerde and has energy and other applications; its introduction to Cape Verdeshould be considered.

7.15 The pricing of different forms of energy should continue to receiveclose attention. Prices of desalinized water particularly in Mindelo should berevised to reflect production costs, while at the same time an effort shouldbe made to increase the efficiency of the plants. A revision of ELECTRA'saccounting system is an important step in that direction. Finally, importduties on petroleum products need to be changed from specific to ad valorem.

7.16 Institutional development and coordination of foreign assistance inthe energy field is urgently needed. At present, the Directorate of Energy andDesalination (Ministry of Economy and Finance), the Department for RenewableSources of Energy (Ministry of Agriculture), ELECTRA and INIT, are all in-volved in the sector. Several donors are also providing technical assistanceand/or grants. The need is clear for the development of a national energyprogram that assigns clear responsibilities to each agency and grants generalsupervision responsibilities to a national energy commissston. Rural powerplants must be integrated within such a program. The authorities appear to beaware of the need for a comprehensive energy policy and coordination; theNational Plan calls for the creation of a "Scheme of Coordination" for energypolicy.

7.17 To achieve long-term improvement in the forestry sector, the coun-try's institutions need to be strengthened and supported. Aid pro-grams fordevelopment of forest resources have been fragmented. Coordination of separateaid efforts is made more difficult by the country's limited human and finan-cial resources. To this end, the forestry services should be strengthened anda comprehensive plan prepared for the forestry sector that would coordinatethe eff:_ts of donors.

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7.18 Currently, fuel is transported between islands by two ships adaptedto fuel transport that do not meet insurance specifications. Reportedly, theacquisition of a 600 ton tanker is under co-sideration to alleviate thepresent distribution problem. Further improvements in inter-island energydistribution would require building appropriate port facilities.

7.19 Given the scarcity of most of the conventional sources of energy,some alternative possibilities should be explored. Sun, wind and geothermalenergy may offer Cape Verde some potential for further development. Availabletechnologies should be reviewed and evaluated with respect to theiradaptability to Cape Verde's conditions. Local research on this subjectshould be conducted with external technical assistance.

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VIII. TRANSPORTATION AND CONSTRUCTION

A. PORTS AND MARITIME TRANSPORT

8.01 Cape Verde's foreign and inter-island trade depend almost entirely onmaritime transport. Porto Grande on Sao Vicente and Praia on Santiago are thec-untry's major international ports. The other islands have minor port facili-ties. ENAPOR is the national agency in charge of port administration. Shelloperates a port facility in Sal, through which most of the jet fuel forreexport enters the country. Port facilities in Cape Verde are deficient anddeteriorating. The Government has embarked on a major effort to reverse thistrend. With support from the World Bank, Portugal and BADEA, the port at Praiais being rebuilt. Services to shipping at Mindelo are also being upgradedthrough the CABNAVE project. The USSR is supporting the upgrading of smallports on the other islands, including the construct5on of Palmeira port onSal.

8.02 The national shipping company, Arca Verde, carries approximately one-third of Cape Verde's foreign trade, and provides virtually all inter-islandservices. Arca Verde's fleet, appropriate for the needs of the country, iscomposed of 7 freighters, 2 ferries and one adapted tanker on lease to Shell.International connections are carried out by three private vessels and oneArca Verde ship. To reinforce inter-island transportation, the purchase of aferry boat is projected in the Plan.

8.03 A major problem facing ENAPOR and Arca Verde is the lack of qualifiedstaff. Management improvements, particularly in financial matters, are urgent-ly needed. Both public enterprises seem to lack a realistic policy of capitalamortization. There is a need for middle level qualified cadres, which isbeing addressed by the technical school at Mindelo-

8.04 Caoe Verde is well served by its road network. There are some 760 kmof roads, of which some 300 km are of cobblestone. Roads are especiallyimportant on the mountain islands of Santiago and Santo Antao. The Ministry ofHousing and Public Works (MHOP) is responsible for the planning and executionof road projects. Road construction provides a large number of temporaryjobs, financed by the National Development Fuiid. Some equipment is availablefor heavy earth 4sbs, but the remaining work is done by labor intensivemethods. The use of cobblestones for road construction reduces the need forasphalt. In general, the construction and maintenanr2 methods are appropriateto the country's resources. There is some lack of spare parts, causing equip-ment to remain idle for long periods. Some of the heavy equipment is reachingthe end of its expected life.

8.05 There is an urgent need to restructure this subsector. The implemen-tation responsibilities should be decentralized to different entities, whilepolicy formulation should be centralized in MHOP. The national road plan,written in 1960, is being updated with external technical assistance. The planupdate efforts should also address institutional issues and the need toincrease support for local administrative secretaries in charge of roadconstruction.

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8.06 Another issue is the funding of the road program. Although thetransfer of funds to the Ministry from the National Development Fund isirregular, MHOP's cash needs are almost continuous. Often workers or suppliersare not paid promptly, with obvious negative consequences. The Ministry *fEconomy and Finance has recently attempted to regularize payments for roadconstruction. One option under study is the creation of a revolving fund i;1the BCV.

B. AIR TRANSPORT

8.07 The international airport on Sal, the major Cape Verdean air linkwith the outside world, is also a major foreign exchange earner, (approximate-ly US$5 million/year on landing rights alone). Recently, it has been upgradedvia a project, with a first phasc cost of US$14 million, to resurface therunway and improve the lighting system, access roads, and utilities. The Planincludes further improvements in the airport's passenger and cargo access, aswell as in main buildings. The estimated cost is US$17 million. Praia'sairport is the second most important in the country; its runway has recentlybeen extended and upgraded to accommodate night landings. There are also smallairfields on each of the other islands, with the exception of Brava. Thepublic program includes investment projects to improve the smaller airfields.

8.08 Cape Verde's air company (TACV) has a fleet of 2 HS 748's (48 seats),2 twin Otters (20 seats), and 3 smaller Islanders (8 seats). The company isconsidering the purchase of a Boeing 737, so that it may compete on theinternational market, mainly in the Cape Verde-Europe routes, although theeconomic viability of this project has not yet been established. There is alsothe need to improve the utilization of the present fleet by better programmingof flights, and in the near future, to increase the fleet for inter-islandtransport, possibly of merchandise.

8.09 TACV must improve its fiiancial management. The policy of capitalamortization is not clear. In add;cion, TACV fares are low by internationalstandards. Whereas the minimum competitive price per hour of flight is approx-imately CV esc 3,200, TACV is charging less than CV esc 1,500. In 1981, thereported losses amounted to 50 million CV escudos.

C. CONSTRUCTION AND BUILDING MATERIALS

8.10 Construction and building materials are an industry for which CapeVerde has ample resources. Substantial deposits of basalt, pozzolana, lime-stone, gypsum, and clay are found on the islands. Currently, the extractiveindustry is largely limited to pozzolana and salt; stone and gypsum areexploited artisanally. Cape Verde has large reserves of active pozzolana, avolcanic rock which can be used as an additive in the manufacture of hydrauliccement, or when mixed with lime, produces a hydraulic binder which can largelyreplace imported cement. Current production is used ertirely for localconsumption for which it is mixed at a rate of 30% with Portland cement. Apozzolana grinding plant was built on Santo Antao that can produce 5,000 tonsper year and is scheduled to be expanded in 1985. Stone, the traditionalbuilding material on the islands, has largely been replaced by cement blocksin urban areas. Because of the disorganized, artisanal nature of stone

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production, the high cost of transport, and the need for greater quantities ofmortar, construction with stone is more expensive than with cement blocks.

8.11 Since 1980, construction has been the most dynamic sector of theeconomy, providing one-fourth of GDP and one-fifth of employment. The CABNAVEproject in Mindelo and the Sal airport improvements have been partiallyresponsible for this performance. At the same time, however, Cape Verdecontinues to face a substantial housing deficit. The government estimates ahousing deficit of 1,500 units. Of the existing units, 47X do not meet minimumstandards. There is also a.. enormous and widespread need for improvements inbasic sanitation.

8.12 Housing construction is undertaken by both the public and privatesector. Most small houses are either built collectively by the owner andmembers of the community or by mestres de obra, small contractors hired tosupervise construction. There are four enterprises involved In the construc-tion of large buildings: EMPREITEL, a private enterprise; Construglo, acooperative; EMEC, the State Construction Enterprise under the Ministry ofPublic Works; and MAC, the Public Construction Materials Enterprise, under theMinistry of Economy and Finance. MAC's official function is to produce con-struction materials; however, its principal activity at present is construc-tion itself. MAC also produces concrete blocks and roof tiles, and is respon-sible for pozzolana production operations on Santo Antao.

8.13 Given the island's resources, real possibilities exist in thissubsector; however, certain problems have prevented greater utilization ofthese resources. Transportation is one critical problem. Port facilities onMaio and Santo Antao are limited, and could act as bottlenecks for expandedproduction. Both inter- and intra-island transport are expensive. The highcost of transporting stone is one of the reasons why cement block constructionis so common in the cities. Poor organization of artisanal production alsoraises the price of such products as stones and sand-plaster blocks.

8.14 The construction materials subsector is an area emphasized in thePlan, and is one for which Cape Verde has some potential. In terms of actualprojects, the exploration of construction material possibilities is beingpursued principally through the Maio projects and the pozzolana grindingplant. Since the economic viability of the cement plant is still questionable,alternatives, such as pozzolana (as a cement substitute) clay, and basaltshould be actively investigated.

IX. TOURISM

A. BACKGROUND

9.01 Cape Verde has considerable potential for tourism. The islandspossess a rugged beauty, with magnificent coasts and beaches, and offer ahealthy climate. The averege temperature fluctuates between 28°C (July-Octo-ber) and 25'C (November-June), with low levels of humidity. Despite theseconditions, the tourism sec:or's economic importance is rather small. Accord-ing to official estimates, income from tourism accounted for less than 2Z of

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GDP in 1980. Of the approximately 20,000 foreign visitors to the islands peryear, only about 3,000 are tourists. Generally, tourists consist of smalltour groups (4 to 15 people) from France and Italy, Cape Verdeans livingabroad, and occasional "world travelers".

9.02 Development of this sector faces several difficulties, one of whichis the lack of country wide infrastructure. Tourist infrastructure is mostlylimited to hotels in Praia, Mindelo and Sal. The three hotels in Praia caterprincipally to official visitors and technical assistance personnel; there is,however, some excess capacity which can be used for tourism. The recentexpansion of hotel facilities in Mindelo has created additional capacity fortourists. Nonetheless, in both cities, hotel capacity will need to be expandedfurther if tourism is to increase substantially. On Sal, where the two exist-ing hotels are occupied entirely by international airline crews, there is anurgent need for more rooms, both to lodge tourists and to attract otherairlines to the international airport. With the exception of Fogo, where asmall hotel exists, the other islands are devoid of tourist infrastructure.Overall, it is estimated that with existing infrastructure Cape Verde couldaccommodate twice the current number of tourists.

9.03 A large expansion of the tourism sector would create additionaldemand for already scarce water resources. Beyond certain limits, the expan-sion of tourism would require large investments in infrastructure supportingactivities, such as the water and energy systems, the telecommunicationnetwork, and inter-island transportation. Although the employment effects oftourism expansion could be significant, the potential net gain in foreignexchange seem a priori somewhat limited. Because a large part of the requiredinputs (e.g., food and beverages) would have to be imported, the foreignexchange leakages would be large and the value added small.

9.04 The government recognizes the potential of tourism as a source offoreign exchange and employment, but is also concerned that tourism could havean adverse impact on Cape Verdean society and culture. Consequently, the roleof tourism in national development has not been fully defined. The Plan iscautious in discussing tourism, emphasizing that it must be developed inconjunction with other sectors. During the Plan period, increased hotelcapacity, is planned for Mindelo to support its development as an internationalfishing base, and on Sal, to enable the international airport to handle othierairlines. Construction of a 90-room hotel on Sal has already begun. The Planalso provides for the creation of a network of pousadas (inns) on the otherislands to provide lodging primarily for visiting government officials andtechnical assistance personnel. The Plan also calls for the passage of touristlegislation and the creation of a tourist agency, brochures, maps, and post-cards. As yet, none of these objectives has been realized, although touristlegislation was to have been ready by the end of 1983, and the tourist agencyformed sometime in 1984.

B. ISSUES

9.05 Considering the limited infrastructure and material resources, acautious approach to tourism Is appropriate, both to prevent bottlenecks and

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to avoid excess capacity and overinvestment. On the other hand, there islittle reason to fear an adverse impact of tourism on Cape Verdean society(given a reasonably cautious approach), in that considerable contacts withother societies already exist by virtue of migration, sale of services, andthe presence of technical assistants. More could be done within the guidelinesof the Plan to promote tourism, even with the existing infrastructure.

9.06 An initial development of tourism could be based on the followingframework. Cape Verde currently receives occasional visits by small touristgroups. An increase in the frequency of visits by these groups would provide acontinuity of demand sufficient to justify the creation of auxiliary services,such as local tours, and sale of handicrafts. Second, the government shouldactively promote tourism among emigrant groups, vho have a minimally advcrseimpact on Cape Verdean society. These communities already provide an importantpart of the present tourist demand. It should be possible to promote emigranttourism through Cape Verde's embassies abroad. Third, creation of a touristagency should be expedited, as well as the publication of promotional litera-ture, brochures. and maps. Tourism literature should be distributed abroad, toattract tourists, and on the islands, to inform tourists of potential activi-ties. Finally, contacts with international travel agencies could lead to thecreation of special travel packages.

9.07 Linkages with the domestic economy could be developed through the useof hotels to support handicraft production. The handicraft industry currentlylacks outlets for its products. Although the Hotel Praia-Mhar (Praia) does sellhandicrafts, most other hotels do not; moreover, the handicrafts available atthe Hotel Praia-Mar are not representative of handicrafts of good quality,particularly textiles and ceramics, are produced in Cape Verde. There is anopportunity to improve the services available to tourists and promote in-creased production. The revenues obtained from an inereased number of touristscould also finance improvements in and maintenance of the existing infrastruc-ture. With appropriate incentives, the development of the tourism sector couldattract emigrant capital and managerial skills.

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X. PROSPECTS

10.1 The following section assesses the outlook for Cape Verde's economythrough 1990, based on optimistic assumptions concerning climatic conditionsand the availability of foreign aid. The lack of adequate historical data andthe difficulty of assessing the impact of projects limit the reliability ofeconomic forecasts. In the scenarios described below, 1981 was chosen as thebase year, because disaggregated data are not available for the externalsector in 1982. As a representative base year, however. 1981 is not totallysatisfactory, in that investment expenditures were unusually high relative toGDP, because of two large projects.

10.2 Two scenarios are discussed, designated as "high" and "low", reflect-ing differentially optimistic growth assumptions. The high scenario assumesthe return of normal rainfall patterns, and the successful implementation ofsoil conservation practices, farming methods and irrigated land use. The highscenario also assumes thac, as a result of planned investments and improvedefficiency, industrial fishing output will increase. An overall primary sectorannual growth rate of 4% is projected in the high scenario. A more conserva-tive projection of 2% is assumed in the low scenario.

10.3 For the secondary sector, a slower pace of expansion is projectedth., achieved in the past. Industrial growth, on the other hand, is expectedto accelerate due to the Cabnave Shipyard project. For the sector as a whole,a growth rate of 4% is projected in the low scenario, and 7.5% in the high,the difference due to differential investment assumptions. For the servicessector, it is difficult to estimate the large residual component associatedwith the informal sector. A 5% growth rate is projected in the low scenario,which assumes that government expenditures will keep pace with GDP and thatinternational services will continue to expand. More optimistic assumptionsproduce an 8Z growth rate for services in the high scenario (see Table 10.1).

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Table 10.1CAPE VERDE: GDP Projectiaxs, 1981-90(million C.V. Esc. 1981 prics)

1990 Am_al GrowthRate

1980 % of GP Low % GP Hi %of GDP Low RI

Primry Production 785 23.9 927 19.8 1104 18.3 2.0 4.0

Secodary Production 815 24.9 1160 24.7 1563 26.0 4.0 7.5

Services 1678 51.2 2603 55.5 3354 55.7 5.0 8.0

GDP 3278 100.0 4690 100.0 6021 100.0 4.1 7.0

Population 300 359 359 2.0 2.0(tbousmds)

Per capita GDP (US$) 224 268 344 2.0 4.9

10.4 For the decade 1981-1990, an overall annual CDP growth rate of 4.1%in constant prices is projected in the low scenario. With population assumedto grow at 2% a year, GDP pet capita would rise from $224 in 1981 to $268 in1990. In the high scenario, GDP would increase at an annual rate of 7Z, andGDP per capita would rise to $344 in 1990. In both scenarios, the service andsecondary sectors would increase their shares of GDP, while the primary sectorwould decline in relative terms. The projections assume a continued highincremental capital output ratio in view of the large share of infrastructureprojects in total investments.

10.5 The expected pattern of national expenditures is shown in Table 10.2.As explained earlier, the inordinately high share of investment expendituresis unlikely to be maintained in the future. In the low scenario, real invest-ment is assumed to decline from 84% of GDP in 1981 to approximately 36% of GDPby 1990. In the high growth case, although increasing in real terms, invest-ment expenditures will decline to 582 of GDP in 1990. In the low scenario, asa result of the decline in investment expenditures and an assumed 5% annualgrowth in remittances, private consumption is projected to expand at an annualrate of 4.5%. In the high scenario, consumption would expand at 4.9% per year.In both scenarios, it was assuned that public consumption expenditures wouldes-entially remain constant relative to output at 32% of GDP. Based on thepiospects for increases in agricultural and fisheries output, merchandiseexports are assumed to grow at an annual rate of 3% in the low scenario and 5%in the high scenario, reversing the previous downward trend. Exports of goodsand services are expected to increase at an annual rate of 6. 1% in the low

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scenario, and 7.8% in the high scenario, most of the expansion occurring ininternational services. Import growth is projected as a function of the growthof the productive sectors, investment and private consumption. Privateconsumption, in particular, is closely related to workers remittances, whichare expected to grow at 5% annually, based on the introduction of the specialhigh interest accounts for non-residents.

Table 10.2CAPE VERDE: Natioml cpenditures Projections. 1981-90

(MiItxim CV. Esc. 1981 Prices)

1990 Annual Growth Rate1981 % GDP Law % GDP Hlgh X GDP Low HE&

GCx2swtion 4394 134.0 6532 139.2 70:8 117.2 4.5 5.4

Private 3341 101.9 5033 107.2 5122 85.1 4.6 4.9

Public 1053 32.1 1499 32.0 1936 32.1 4.0 7.0

investment 2750 83.9 1668 35.6 3518 58.4 - 2.8

Eqwrts G & NFS 1155 35.3 190 41.9 2252 37.4 6.1 7.8

Iuports G & NFS -5021 -153.2 -5477 -116.7 -6807 -113.0 1.0 3.4

3P 3278 100.0 4693 100.0 6021 100.0 4.1 7.0

10.6 The public finance scenarios are shown in Table 10.3. In both sce-narios, it was assumed that current expenditures (excluding debt service)would increase at the same rate as GDP, and that government investment wouldconstitute 70% of total investment. Investment is assumed to have an elasti-city of 1.5 with respect to GDP. In both scenarios, d surplus in the currentbudget is projected, excluding debt service. The more rapid expansion ofrevenues in the high scenario will produce a slightly lower current deficit.With debt service, a deficit of 5.6Z of GDP is projected in the low scenario,and 9.1Z of GDP in the higher. The amount of grants received was assumee tobe the same in real terms in the two scenarios, reflecting an annual averageincrease of 2Z over the decade.

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Table 10.3CAPE VERDE: Public Finance Projections, 1981-90

(Million of CV. Esc. 1981 prices)

1981 1990Low M&h

Ordinary Budget

Current Revenues 1087 1860 2670

Current Expenditures 1053 2147 2914

Current Surplus/Deficit 34 -287 -244

Extraordinary Expenditures 2290 1168 2463

Deficit 2256 1455 2707

Foreign Financing 2256 1455 2707

Grants 1853 1455 2707

Loans 923 325 1577

10.7 The public finance implications of forecasts are particularly impor-tant, as they concern one of the main areas in which public policy may play akey role. A rise in the current butdgetary surplus is projected based on anassumption that government will be ab'Le to restrain the growth of currentexpenditures. The public finance projections also imply continuing need forforeign aid to finance development projects and debt service.

10.8 A critical area concerning the consistency of the projection is thebalance of payments (see Table 10.4). Based on projections for exports andimports, the trade balance deficit would increase from US$80 million in 1981to US$119 million (low scenario) or US$57 million (high scenario) in 1990. Theestimated resource gap would reach US$100 million in the low scenario andUS$135 million in the high scenario. The estimates for debt service paymentswere derived from outstanding debt and non-committed debt in 1981. The flowof foreign aid was assumed to rise moderately in real terms relative to 1981levels. Based on the assumption concerning worker remittances, the currentaccount deficit is projected to increase to US$55 million in the low scenario,and US$94 million in the high scenario. The capital flows re.quired are US$64million in the low scenario and US$106 miliion in the high scenario, of whichUS$23 million would be grants. The ratio of debt service payments to exportsof goods and services would be 16.1% in the low scenario and 24X in the high.

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Table 10.4CAPE VERDE: Balance of Paymenta Projections

(Millions USS current prices)

1981 1990Low High

Trade Balances -79.5 -119.2 -156.5Exports 6.3 8.7 10.4Imports 85.8 127.9 166.9

Factor Services Net .3 18.5 20.8Exports 17.5 51.4 58.3Imports 17.2 32.9 37.5

Resource Balance -79.2 -100.7 -135.7

Net Factor Income 36.1 46.2 42.1of which: worker remittances 37.4 58.0 60.6

H and LT Interest .8 9.7 16.5

Current Balance -43.1 -54.5 -93.6

Debt Service -43.1 -54.5 -93.6

Capital flows 49.7 63.8 105.8cf which grants (21.2) (23.2) (23.2)

Debt Service Ratio 16.1 22.2

10.9 The considerable attention that Cape Verde has received from theinternational community in the short time since independence is due in part tothe difficult conditions it has faced since then, particularly the drought.Small volumes of foreign aid have a relatively significant impact, given thecountry's small population. Many other countries compete for availableforeign funds; aid flows will thus depend *,n convincing foreign donors of themerits of Cape Verde's case. The rela;ively high levels of foreign aidprojected in both scenarios are based ir. large part on expected improvementsin economic managemer.t policies and inv'-stment programming, including projectpreparation and implementation. These factors should also heavily influencethe availability of foreign loans, which will determine the maximum size ofthe investment program, and thus the feasibility of the high scenario. Theneed for continued aid is especially important, not only to finance immediate-ly p'oductive investments and associated recurrent costs, but also investmentin the social sectors (health, education) and the development of infrastruc-ture, which have longer term payoffs.

ES