Document o f The World Bank

Report No. 38773-CV

INTERNATIONAL DEVELOPMENT ASSOCIATION

PROGRAM DOCUMENT

FOR A

PROPOSED THIRD POVERTY REDUCTION SUPPORT CREDIT

IN THE AMOUNT OF SDR 6.8 MILLION

(US$lO MILLION EQUIVALENT)

TO THE

REPUBLIC OF CAPE VERDE

February 14,2007

Human Development Group 2 (AFTH2) Public Sector Reform and Capacity Building (AFTPR) Africa Poverty Reduction and Economic Management, Poverty Reduction and Economic Management (AFTP4) Country Department 14 Africa Region

This document has a restricted distribution and may be used by recipients only in the performance o f their official duties. I t s contents may not otherwise be disclosed without World Bank authorization.

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

CURRENCY EQUIVALENT Currency unit = Escudo (CVE)

US$1 = CVE 86.73

ADB ADR ARE B C V BDEO B S G CAS C F A A CPAR CPIA DGAM DGCI DGP DPR ESW EU F M S GCP GDP GNI GNP GNFS GOP GPRSP

HIV/AIDS IBRD IEFP IDA IFAD IGF ILO IMF INE INPS IT MCA MDGs MFA MIGA MIT

FISCAL YEAR January 1 - December 31

ABBREVIATIONS AND ACRONYMS

Afr ican Development Bank Alternative Dispute Resolution Ag2ncia Reguladora Economica (Economic Regulatory Agency) Banco de Cab0 Verde (Bank o f Cape Verde) Base de Dados Estatisticos e Uperacionais (Statistical Data Base) Budget Support Group Country Assistance Strategy Country Financial Accountability Assessment Country Procurement Assessment Review Country Policy and Institutional Assessment General Directorate for Asset Management at the MOFP General Directorate for Income Tax General Directorate for Planning Development Policy Review Economic and Sector Work European Un ion Financial Management System Growth and Competitiveness Project Gross Domestic Product Gross National Income Gross National Product Goods and Non-Factor Services Grandes Upq6es do Plano (Major Planning Options) Growth and Poverty Reduction Strategy Paper (Documento de Estratdgia de Crescimento e de Reduqio da Pobreza) Human Immune-deficiency Virus/Acquired Immune Deficient Syndrome International Bank for Reconstruction and Development Professional Training and Employment Institute International Development Association International Fund for Agricultural Development Inspecqio Geral das Finanqas (General Inspectorate for Finances) International Labor Office International Monetary Fund Instituto Nacional de Estatisticas (National Statistics Institute) Instituto Nacional da PrevidCncia Social (National Institute for Social Protection) Information Technology Mi l lennium Challenge Account Mi l lennium Development Goals Ministry of Foreign Affairs Multi lateral Investment Guarantee Agency Ministry o f Infrastructure and Transport

11

MOFP MOE MOH MREAP MTEF M T S NGO NOS1

OPCS PA PANA PCCS P E M PER P l U PRCBWE PRGF PRSC PRSPS PSI P S M PTAP SAC SDR SMP SSDP S T A D

TdC UCRE UNDP VAT WBI WTO

FOR OFFICIAL USE ONLY Ministry o f Finance and Planning Ministry o f Education Ministry o f Health Ministry for State Reform and Public Administration Medium-Term Expenditure Framework Ministry o f Labor and Solidarity N o n Governmental Organization Nticleo Operacional da Sociedade da InformapTo (Operational Nucleus for Information Systems) Operational Policies and Country Services Poverty Assessment Programa de Acqio Nacional para o Ambiente (National Environmental Act ion Plan) Plano dos Cargos, Carreiras e Salbrios (Career and Salary System) Public Expenditure Management Public Expenditure Review Project Implementation Unit Privatization and Regulatory Capacity Building and Water and Energy Poverty Reduction and Growth Facil ity Poverty Reduction Support Credit Programa - Reformar o Sistema para Promover a Satide (Health Reform Strategy) Policy Suport Instrument Pens80 Social Minima (Minimum Social Pension) Privatization Technical Assistance Project Structural Adjustment Credit Special Drawing Rights Statistical Master Plan Social Sector Development Project Secretariado Te'cnico de Apoio ao Desenvolvimento (Technical Secretariat for Development Assistance) Tribunal de Contas (Independent General Audit Office) Unidade de Coordenapio das Reformas Estaduais (State Reform Coordination Unit) United Nations Development Program Value Added Tax Wor ld Bank Institute Wor ld Trade Organization

Act ing Vice President Har twig Schafer Country Director Madani M. Tal l

Sector Director Y a w Ansu Sector Manager

Task Team Leaders

Robert Blake (AFTP4); Helga W. Mul ler (AFTPR), Eva Jarawan (AFTH2) Manuela Francisco (AFTP4) HClkne Grandvoinnet (AFTPR) Maurizia Tovo (AFTH2)

This document has a restricted distribution and may be used by recipients only in the performance o f their off icial duties. I t s contents may not be otherwise disclosed without Wor ld Bank authorization.

... 111

THE REPUBLIC OF CAPE VERDE

THIRD POVERTY REDUCTION SUPPORT CREDIT

TABLE OF CONTENTS’

Credit and Program Summary ....................................................................................... vi 1 . INTRODUCTION ....................................................................................................... 7 2 . COUNTRY CONTEXT .............................................................................................. 7

B . Macroeconomic Outlook and Debt Sustainability .......................................................... 8 C . THE GOVERNMENT’S PROGRAM: CAPE VERDE’S POVERTY

3 . BANK SUPPORT TO THE GOVERNMENT’S PROGRAM ............................. 13 A.Links to Country Assistance Strategy ........................................................................... 13 B . Coordination with the IMF and Other Donors .............................................................. 13 CRelationship to Other Bank Operations ........................................................................ 14 D.Lessons Learned ............................................................................................................ 14 E . K e y Analytical Underpinnings ..................................................................................... 15 4 . THE PROPOSED OPERATION ............................................................................ 15 A.Overal1 Description ....................................................................................................... 15 B . Policy Area 1 : Promote Good Governance, Reinforcing Effectiveness and

Guaranteeing Equity ..................................................................................................... 17

A.Country Overview ........................................................................................................... 7

REDUCTION STRATEGY (2005-07) .................................................................... 11

A . 1 Public Expenditure Management Reforms .................................................... 19 A.2 C iv i l Service, Decentralization and Legal and Judicial Reform .................... 23

C.Policy Area 2: Develop and Upgrade Human Resources ............................................. 26 B . 1 . Education and Professional Training ............................................................. 27 B.2 Health Sector .................................................................................................. 29

D.Policy Area 3: Improve the Effectiveness and Sustainability o f the Social Protection System ........................................................................................................................... 31

E . Monitoring and Evaluation ........................................................................................... 34 F . financial framework ...................................................................................................... 36 5 . OPERATION IMPLEMENTATION ..................................................................... 36 A.Poverty and Social Impact ............................................................................................ 36 B . Implementation ............................................................................................................. 39 C.Fiduciary Aspects .......................................................................................................... 40 D.Disbursement and Auditing .......................................................................................... 41

. .

’ The PRSC team was co-led by Manuela Francisco (AFTP4 co.TTL). H t l h e Grandvoinnet (AFTPR co- TTL). and Maurizia Tovo (AFTH2 co.TTL). and comprised o f Gerald0 Martins (AFTH2). Soukeyna Kane. Fily Sissoko (AFTFM). Ghislaine Delaine (AFTQK). Bourama Diaite (AFTPC). Sttphane Legros (WBIHD). Luz Meza-Bartrina (LEGAF). Suzane M o m s (LOAG2) . PRSC Peer Reviewers were: Catherine Laurent (MNSED) and Rachidi Radji (MNSHD); Francisco Carneiro (AFTP1) . Judite Fernandes (AFTP4) and Adriana Cunha Costa (AFTH2) provided valuable assistance .

iv

E . Environmental Aspects ................................................................................................. 42 F . Capacity Building ......................................................................................................... 42 G.Risks and risk mitigation .............................................................................................. 43

L i s t o f Tables:

Table 2.1 : Basic Macroeconomic Indicators .......................................................................... 11 Table 3.1 : Status o f Key Analytical Underpinnings .................................................................. 15 Table 4.1 : Summary PRSC-3 Prior Actions. GPRSP Pillar #1 ................................................. 19 Table 4.2: Administrative Classification of Executed Expenditures - selected Ministr ies. 2000- 2005 (Percentage o f Total Expenditures) ................................................................................... 21 Table 4.3 : Summary o f PRSC-3 Prior Actions. GPRSP Pillar #3 ............................................. 26 Table 4.4: Summary o f PRSC-3 Prior Actions. GPRSP Pillar #5 ............................................. 32 Table 4.5: Financing requirements 2005-07 (in % GDP) .......................................................... 36 Table 5.1 : Cape Verde's Progress Toward the MDGs ............................................................... 38

List o f Figures:

Figure 4.1 : Management Information System for Monitoring and Evaluation o f Cape Verde's Social and Economic Development ........................................................................................... 35

Annexes:

Annex 1: Joint General Budget Support Matrix for the Government of the Republic of Cape Verde (2005-2007) ....................................................................... 44

Annex 2: Letter of Development Policy ....................................................................... 49 Annex 3: Cape Verde at a Glance ................................................................................ 61 Annex 4: IMF Relations Note ....................................................................................... 63 MAP ................................................................................................................................. 66

V

THE REPUBLIC OF CAPE VERDE

THIRD POVERTY REDUCTION SUPPORT CREDIT

CREDIT AND PROGRAM SUMMARY

Borrower: The Republic o f Cape Verde

Amount: SDR 6.8 million (US$lO mi l l ion equivalent)

Terms: Standard IDA terms: 40-year maturity with a 10-year grace period

Description: The proposed Credit would continue IDA support for the implementation o f Cape Verde’s Growth and Poverty Reduction Strategy (GPRSP). This one-tranche operation would be the third in a series o f three annual PRSCs and wil l further narrow the gap between the cost o f implementing key elements o f the GPRSP and resources available f rom the Government’s domestic revenues and other donor support. The pol icy dialogue and results-based framework under this PRSC focus o n the following pillars o f the GPRSP: (i) promote good governance; (ii) develop human capital in the areas o f education and health; (iii) improve the effectiveness and sustainability o f the social protection system and (iv) monitoring and evaluation.

Benefits:

Risks:

In terms o f benefits, the value added o f PRSC-3 lies in both the nature o f the instrument and the results that are expected: (i) improved hnct ioning o f national budget systems; (ii) reduced transaction costs and distortions due to international assistance; (iii) better linkages between sectors and cross-cutting issues; (iv) improved service delivery for the poor; and (v) improved well-being o f the population.

The main risks associated with PRSC-3 are: (i) limited number o f technical staff in some ministries; (ii) decline in external concessional support at faster pace than expected, (iii) fiscal r isks (including accumulation o f contingent liabilities and mandatory expenditure programs that could cause fiscal slippages and stall implementation o f the more sensitive pol icy reforms, and possibly delays in general Government’s strategy implementation, and (iv) sustainability, if there i s no PRSC 4.

Estimated Disbursements: SDR 6.8 mi l l ion (US$lO mi l l ion equivalent) wil l be disbursed upon Credit

effectiveness.

Project ID Number: P100807

vi

INTERNATIONAL DEVELOPMENT ASSOCIATION PROGRAM DOCUMENT FOR

A PROPOSED

TO THE REPUBLIC OF CAPE VERDE THIRD POVERTY REDUCTION SUPPORT CREDIT (PRSC-3)

1. INTRODUCTION

1.1 The proposed Third Poverty Reduction Support Credit (PRSC-3) to the Republic o f Cape Verde (the Recipient) for SDR 6.8 mi l l ion (US$lO mi l l ion equivalent) on standard International Development Association (IDA) terms supports the implementation o f the Recipient’s Poverty Reduction Strategy, as presented in the Growth and Poverty Reduction Strategy Paper (GPRSP). PRSC-3 is the third and last in a series o f annual single-tranche operations and supports a reform program that i s at the core o f IDA’S Country Assistance Strategy (CAS).

1.2 The proposed operation would continue to engage the Bank in policy and technical dialogue in four o f the five pillars o f the GPRSP, based on the division o f labor with other IDA and donor projects and the comparative advantage o f this lending instrument:

(a) promote good governance -especially effectiveness and equity- through reforms in public

(b) develop human capital, with a focus on health and education; (c) strengthen the effectiveness and sustainability o f the social protection system, and (d) monitoring and evaluation.

expenditure management, c iv i l service, the judiciary and decentralization;

1.3 Continuing the approach o f the two previous PRSCs, this third operation i s prepared in close coordination with other budget support partners, following a Memorandum o f Understanding signed with the Government. This third operation sees a larger budget support group, including our two previous partners, the Dutch Cooperation and the European Union (EU), as wel l as the African Development Bank and the Spanish and Austrian Cooperations.

2. COUNTRY CONTEXT

A. COUNTRY OVERVIEW

2.1 Cape Verde, despite i t s small size (population 472,000) and remote archipelago formation, continues to post strong gains in social and economic advancement. Cape Verde’s growth performance since the late 80s has raised it to the ranks o f lower middle income countries, with a GNI per capita o f US$ 2,040 in 2005. Recent economic growth o f around 2.5 percent per capita has been sustained through public and private investment based on high levels o f donor support, strong private capital flows and remittances. Thanks to this growth, poverty has declined by one- fourth over the last decade, while the human development index has increased from 0.63 in 1990 to 0.72 in 2003. Adult literacy rates are high (approximately 76 percent in 2002) and l i f e expectancy at birth (69) i s the third highest in Africa. Political openness has accompanied this economic and social progress. Since the adoption o f a multi-party system in 1991, there have been three national elections and two orderly changes in government. A free press and media further

7

support the building o f an open society. The last presidential and legislative elections took place in early 2006. I

2.2 But challenges remain. As a small, open economy, Cape Verde’s vulnerability to external shocks i s high. The country relies heavily on remittances and foreign aid, but the latter might be negatively impacted by the country’s graduation in 2008 to middle income country. This foreign assistance poses a severe risk o f distortions in public administration if it is not properly channeled through government systems and may overwhelm the capacity o f the islands’ small group o f technical cadres. The progressive harmonization o f donor support under a common approach to budgetary support through the PRSC series represents an important step toward mitigating this risk. Unemployment remains high even though most o f i t i s short-lived, and it i s a main determinant o f poverty. Income inequality has risen and is generally worse than in countries o f comparable income levels, creating a potential drag on growth. Geographical dispersion drives internal inequities and raises the cost o f services. As rural populations flee entrenched poverty, urbanization i s putting pressure on basic services. Overall, the capacity o f the environment to support large-scale expansion in tourism, industry and construction may be at r isk if not adequately managed.

B. MACROECONOMIC OUTLOOK AND DEBT SUSTAINABILITY

Cape Verde continues ex eriencing robust growth with real GDP growth averaging 5.1 2.3 percent during the period 2002-05 . Following a slowdown in 2004 (GDP growth stood at 4.4 percent) as a result o f a less favorable agricultural year and l o w levels o f public investment, growth in 2005 i s estimated to have reached approximately 5.8 percent. Forecasts for 2006 indicate that, despite difficulties with electric supply and recent shortages in some construction sector inputs, 2006 GDP growth remains high standing at approximately 5.8 percent. This growth has been supported by strong public and private investment (driven by significant foreign direct investment), directed largely toward infrastructure development and tourism. Prospects for 2007 are good with growth rate projected at 6.5 percent, reflecting a strong agricultural output (as a result o f an abundant rainfall in the winter o f 2006) and the carry-over o f foreign direct investment inflows during 2006.

I:

2.4 Bolstered by the firm monetary pol icy and the exchange rate peg to the Euro, consumer inflation has been subdued in the past years (-1.9 and 0.4 percent respectively in 2004 and 2005). In 2006, inflation i s estimated to reach approximately 4.9 percent, reflecting a rapid increase in prices in the first semester due to the impact o f high international o i l prices on domestic energy and water prices and the effect o f temporary shortages for some food items. These tendencies reversed during the second semester. Excluding food, energy and water, inflation in 2006 stands at approximately 1 percent. Modest increases in private sector and c iv i l service wages have helped contain inflationary pressures. Inf lat ion over the medium term is expected to stabilize at around 2- 3 percent, in line with the Euro area, the Euro being the anchor currency.

2.5 Fiscal pol icy has been consistent with macroeconomic stability and debt sustainability. The fiscal deficit (including grants) averaged 3.4 percent o f GDP during the period 2002-04 as a result o f improvements in both tax collection and expenditure control. In 2005, despite strong

IMF, First Review Under the Policy Support Instrument, January 2007.

8

revenues and prudent spending, the fiscal deficit reached 6.3 percent o f the GDP, mainly reflecting an increase in the provision o f concessional external loans and a delay in the disbursement o f budget grants. In 2006, the deficit i s expected to stand at 1.7 o f the GDP reflecting strong revenue performance o f both VAT and customs collections as wel l as greater control on expenditures. Hiring and promotions have been frozen until the revision o f the Career and Salary System Plan (expected for 2007) and petroleum products subsidies were eliminated in April 2006. Furthermore, the government i s implementing a number o f structural reforms to improve revenue performance and reduce fiscal risks. These measures include (i) creating a macroeconomic pol icy unit, with the mandate o f strengthening the formulation o f fiscal pol icy in the context o f the overall macroeconomic pol icy objectives; (ii) creating a resource mobilization3 unit with the mandate of identifying potential financial resources for approved projects, and ensuring that projects are subject to sound cost-benefit analyses and that their financing is consistent with overall debt sustainability considerations; (iii) creating a sub-unit (under the Treasury unit) to follow-up state participations in companies; (iv) revising the income tax code; (v) preparing draft legislation to streamline tax incentives and exemption^.^ In addition, the 2007 Budget law suggests that fiscal pol icy stance wil l be firm with recurrent spending declining as a share o f GDP due to a reduction (as percentage o f GDP) o f wages and salaries, and goods and services.

2.6 Monetary pol icy has focused on strengthening the sustainability o f the exchange rate peg to the Euro by building up reserves and ensuring price stability, hence helping to foster an environment conducive to increased private investment, inf lows o f remittances and accumulation o f emigrant deposits. These factors, coupled with a strong performance o f exports (estimated to have grown 32 percent in 2006), have led to a steady increase o f international reserves at the Bank o f Cape Verde (BCV). They reached 3.4 months o f prospective imports by end December 2006 compared to 2.8 months at the end o f December 2005. The external current account deficit has continued narrowing, falling from 14 percent o f GDP in 2004 to 4.6 percent in 2005 (projected to stand at 4.8 percent in 2006). Broad money and credit to the economy have been growing at a rate that supports the overall increase in economic activity (approximately 18 percent on average over the period 2001-05). More recently, mostly in 2005, large unsterilized inflows o f capital have led to an excess o f liquidity and to acceleration in broad money growth. Since 2006, the B C V has intervened more actively (started selling bank securities) to prevent capital inflows leading to inflationary pressures and deterioration o f foreign reserves. Authorities are closely monitoring interest rate differentials with the Euro area and U S to prevent outflow o f emigrant deposits.

2.7 Cape Verde’s strong economic performance and good governance has supported poverty reduction leading to graduation to middle income country status in 2008. Hence, the country has received sizable inflows o f external finance for investment and development. I t has signed a compact with the Mil lennium Challenge Corporation, which will provide grant financing o f around US$1 10 mi l l ion spread over the next five years, and i t has also been selected to apply for funding from the US Millennium Challenge Account (MCC) for 2007 as part o f a new lower middle income category o f eligible countries. Yet, the economy remains vulnerable to external shocks as a result o f i t s narrow export base and dependence on external concessional financing and remittances. Furthermore, pressures on access to concessional external financing may arise with

Both uni ts are at the Ministry o f Finance and Public Administration. They are expected to be h l l y staffed and

Legislation concerning measures (iv) and (v) i s expected to be submitted to Parliament by end-June 2007.

3

operational by end-March 2007. 4

9

graduation to middle income status. The country should create fiscal space to manage potential pressures so as to avoid disruption in i t s development process.

2.8 In July 2006 the IMF approved the request o f the government for a three-year Pol icy Support Instrument (PSI). The PSI i s designed to support the government’s economic objectives and pol icy framework for 2006-2009. This program focuses o n measures to reduce macroeconomic risks, provide a margin o f safety against exogenous shocks and address the prospects o f a longer-term decline in highly concessional external support. The f i rs t review took place in January 2007. Macro policies for 2007 were found to be in line with the PSI program.

2.9 The national airline (TACV) has a new management team (since November 2006) whose mandate i s to restructure it and prepare i t for privatization. The telecommunications market is expected to become f i l ly liberalized in January 2007, following the recent agreements between the Government and Cab0 Verde Telecom. Furthermore, a bidding conference for the port management authority (ENAPOR) i s scheduled for February 2007. With regard to ELECTRA, the power company, the Government has recently re-acquired the majority o f its ownership and thus is in charge o f the management. The new management team is committed to run the company on f i l ly commercial terms. The government recognizes the urgency o f improving the technical and financial position o f the company and to that end is seeking financing for the most needed investments and i s strengthening regulation. The Economic Regulatory Agency (ARE) has recently approved the implementation o f the adjustment mechanism for electricity and water, and i t is revising the application o f the petroleum products mechanism in order to improve i t s transparency and automation. ARE has also just completed analyses needed for the adjustment in tariffs that wil l fully compensate for the elimination o f subsidies as o f April 2006.5

Structural reforms are moving forward but with some delays.

2.10 A study on the sustainability o f Cape Verde’s public debt carried out in June 2006 concluded that, in spite o f the gradual reduction in access to concessional loans, Cape Verde’s debt stock and f low indicators under the baseline scenario remain below their policy-dependent thresholds throughout the projection period. Pertaining to fiscal sustainability, results illustrate that, under a scenario o f fiscal consolidation and sizeable debt reduction in domestic debt as share o f GDP (16 percent o f GDP by 2026) and domestic public revenues constant at 24 percent o f GDP over the long term, the NPV o f debt-to GDP ratio wil l decline to 50 percent in 2026 (from 60 percent in 2006). Under the baseline scenario debt service wil l increase from 10 to 20 percent o f revenues by 2026 as a result o f the worsening o f the borrowing terms. Overall, the analysis concludes that despite the rising debt service burden the sustainability indicators remain below the thresholds over the forecast horizon.

Following the elimination o f the petroleum products (including the direct subsidy to ELECTRA) a frst adjustment o f tariffs took place in June. ARE agreed with ELECTRA to make a later adjustment to fully compensate for the elimination o f the subsidies.

10

Table 2.1: Basic Macroeconomic Indicators

2002 2003 2004 2005 2006p 2007p

Real GDP growth (annual percentage 5.3 4.7 4.4 5.8 5.8 6.5 change)

Overall fiscal balance, including grants (% -2.9 -3.5 -3.8 -6.3 -1.7 -4.2 GDP Export growth (annual percentage) 14.1 6.1 5.2 24.3 32.8 13.8 Current account balance, excluding o f i c ia l -1 1.4 -1 1.1 -14.4 -3.4 -4.7 -9.9 transfers (% GDP) Reserve coverage (months o f prospective 2.8 3.4 3.5 imports and services) CPI average (annual percentage change) 1.9 1.2 -1.9 0.4 4.9 0.2

Source: Ministry o f Finance and Public Administration, IMF and Staff estimates

Box 1 : The Poverty Impact of the Elimination of Subsidies

2008p 2009p

7.0 7.2

-2.9 -1.8

13.0 11.9 -12.0 -13.2

3.6 3.7

1.9 2.5

Cape, Verde used to have two types o f direct subsidies related to petroleum products: (i) the subsidies payable to o i l companies o n account o f subsidized fuel prices (butane in small bottles, kerosene, and fuel oil) set be low the real cost; and (ii) subsidies pa id to ELECTRA to cover the difference between the gas o i l purchase price f r o m the o i l companies and CVE 37.1Aiter. On April 27, 2006, these subsidies were eliminated and a f i rs t price adjustment took place o n June 1, 2006. The adjustment in the prices o f fue l s resulted in price increases o f 36 to 143 percent. Given that fuel costs are the single most important determinant o f ELECTRA’s costs, the consequences for electricity and water tariffs were dramatic. Therefore, o n the same day, ARE announced price increases o f 13.3 percent for water and 25.4 percent for electricity, applied across the board o n a l l tar i f f categories.

T o assess the impact o f subsidy elimination o n the poor, a targeting indicator (Omega, developed by Angel-Urdinola and Wodon in 2006) was applied to household survey data. Results suggest that publ ic transfers related to primary education, social assistance, social pensions and health are quite pro-poor. All other publ ic transfers (secondary education, Public Study Fund, electricity and water subsidies, re form pensions, and tertiary education) are less we l l targeted, and water and electricity tariffs were among the worst performers. In particular, very l i t t le o f the large subsidies for electricity reached the poor, not only because the poor tend to have l o w access to electricity but also because those who do have access consume much less than the non-poor. Also, none o f the subsidies applied to butane were we l l targeted. On the other hand, elimination o f the kerosene subsidy is expected to have a negative impact on the poor. The sharp increase in kerosene prices (66 percent) will therefore have a significant impact o n the households that use kerosene for i l lumination and cooking. About 1 percent o f the population surveyed use kerosene for cooking, and one may expect that many will s h i f t to fuel wood. The environmental impact o f such pol icy should be considered. In conclusion, estimates o f the change in the poverty headcount suggest that the impact o f the recent elimination o f subsidies wil l have a l imited effect o n poverty, as the total increase in poverty i s estimated to be 0.5 percent.

C. THE GOVERNMENT’S PROGRAM: CAPE VERDE’S POVERTY REDUCTION STRATEGY (2005-07)

2.1 1 The final version o f the GPRSP (2005-07), received a positive assessment through a joint IMF/IDA Staff Advisory Note (April 22,2005). I t builds on a well-articulated set o f strategies and priorities that address Cape Verde’s main development challenges and rests on an updated analysis

11

o f poverty based o n the 2002 national survey on household income and expenditures. The GPRSP acknowledges that growth i s central to the alleviation o f poverty, and therefore complements its proposals for sector strategies with a direct impact on poverty (e.g., health, education, social protection) with strategies promoting private sector development (e.g., infrastructure and financial sector). The GPRSP underscores the importance o f a modernized and effective administration to implement programs. The priorities o f the Government are presented along five “pillars”:

(a) good governance and reform o f the State, which aims at improving governance by modernizing procedures and institutions and by increasing government interface with citizens;

(b) private sector development, which aims at improving labor market conditions, addressing market failures in micro-enterprise financing, disseminating drip irrigation technology, modernizing infrastructure in the fisheries sector, and enhancing tourism marketing and basic infiastructure;

(c) human development, which seeks to improve the education and health status o f the population through expanded access and increased quality while containing costs;

(d) infrastructure development for the integration o f the archipelago, which aims at expanding utility networks through public/private partnerships, improving transportation, and developing environmental protection and conservation measures; and

(e) social security and solidarity, which seeks to: (i) move from a focus on ex-post assistance to increased attention to risk mitigation and prevention measures; and (ii) decentralize and contract out service delivery in line with the broader reforms underway.

2.12 Overall coordination i s overseen by a GPRSP Steering Committee comprised o f representatives from ministries, municipal governments, the central bank, the National Statistics Institute, the private sector and NGOs. Consultative commissions at the decentralized level are headed by mayors. The Technical Secretariat to Support Development (STAD) under the General Direction o f Planning has day-to-day responsibilities to provide technical guidance, monitor performance, and inform internal and external partners o f progress.

2.13 The GPRSP has provided an opportunity for Cape Verde to develop a national integrated approach to monitoring and evaluation, control, statistics and information. The main features o f the approach are: (a) integration o f the budget and financial management system with the technical aspects o f programs and service delivery; (b) development o f a unified technological platform through the Operational Nucleus for Information Systems (NOSI); (c) open access to the main data warehouses on national statistics, policies and projects; and (d) the restructuring and strengthening o f sectoral units within the ministries. Whi le ambitious, the proposed approach builds on existing systems and information technology (IT) platforms that are wel l advanced and technical assistance is at hand.

2.14 The Annual Progress Report (July 2006) provided an update on the implementation o n the GPRSP. Overall, the implementation o f the GPRSP i s progressing well, with significant progress in several areas. As stated in the JSAN, i t i s recommended that the authorities focus o n (i) progressing hrther with the implementation o f the MTEF; (ii) strengthening auditing systems; (iii) pushing ahead with reforms to improve human capital; (iv) fbrther enhancing human resource

12

management and capacities in the public sector; (v) fully implementing the tar i f f adjustment mechanism; and (vi) improving monitoring and evaluation o f progress toward the GPRSP objectives. The GPRSP-2 i s currently under preparation.

3. BANK SUPPORT TO THE GOVERNMENT’S PROGRAM

A. LINKS TO COUNTRY ASSISTANCE STRATEGY

3.1 The thrust o f the Bank’s FY05-08 assistance strategy for Cape Verde i s to: (a) assist the country in implementing i t s poverty reduction strategy; and (b) improve aid effectiveness by shifting the form o f assistance towards programmatic support and sharpening focus o n results. The PRSC series is central to the CAS, accounting for about 60 percent o f proposed new IDA lending over four years (the share o f the PRSC is to remain constant in the base case or high case scenario, as PRSC lending would increase in a high case scenario). This emphasis o n programmatic lending i s consistent with Cape Verde’s performance in implementing the previous CAS, its level o f institutional, economic and political development, i t s strong and sustained performance in recent years, and the recommendations o f core diagnostic work (PER, CFAA, CPAR). The CAS deems the PRSC to be the preferred lending instrument to (a) provide predictable resource flows, particularly important given Cape Verde’s reliance on donor financing; (b) strengthen public administration and public expenditure management systems, with spill-over benefits to non-IDA resources; and (c) harmonize donors and reduce the potential distortions and transaction costs o f external assistance. IDA’S assistance strategy i s also in l ine with the GPRSP priorities.

B. COORDINATION WITH THE IMF AND OTHER DONORS

3.2 Budget support in Cape Verde has been catalytic for donor harmonization around key policy measures and results. Six donors are now part o f the Budget Support Group, and signed with the Government a Memorandum o f Understanding entitled “Partnership Framework between Budget Support Partners and the Government o f Cape Verde for the provision o f Budget Support”. The Group consists o f IDA, the Netherlands, the European Union (EU), the Afr ica Development Bank, the Austrian Cooperation and the Spanish Cooperation. These donors conduct jo int reviews twice a year, which allow for consensus-building and lower the transaction costs for the Government. To facilitate and strengthen coordination, the Government and the donors have now developed a joint, streamlined matrix, which i s used as a basis for discussions and disbursement in the donor’s respective documents. All Bank triggers are part o f the jo int matrix document (see Annex 1).

3.3 The PRSC has been prepared in parallel with the IMF’s Article I V Consultations and PSI preparation. The PSI wil l focus, inter alia, on supporting the exchange rate peg, creating fiscal space, strengthening public sector management addressing r isks to the fiscal position. The f i rs t review o f the PSI took place in January 2007. In a number o f areas where the PSI and this operation overlap, the work i s being closely coordinated to ensure that consistent advice is provided to the authorities.

13

c. RELATIONSHIP TO OTHER BANK OPERATIONS

3.4 The PRSC series allows IDA to consolidate its lending operations and engage in policy and technical dialogue in three o f the five GPRSP pillars, o n governance, human development, and social protection. This choice o f pillars matches IDA'S comparative advantage and division o f labor with investment operations in the portfolio, which presently include projects in energy, transport, private sector development and HN/AIDS,

3.5 I t should be noted that al l investment operations have benefited and wil l continue to benefit from PRSC support to improved governance. In addition, the PRSC series complements work financed by grants from the Institutional Development Fund and Japanese Social Development Fund in support o f different legal and judicial reform activities, as wel l as the reform o f the pension system envisaged under the Growth and Competitiveness Project.

D. LESSONS LEARNED

3.6 have been taken into account in preparing the third operation.

The following lessons are drawn from the experience o f the two previous PRSCs, and

(a) Broaden and deepen donor coordination using budget support as a driver. As a small country with many donors, Cape Verde's public sector can be overwhelmed with coordination demands and its staffing patterns disrupted through the creation o f multiple project units. PRSCs have been instrumental in improving donor harmonization and coordination, reducing the burden o f multiple monitoring systems. The MoU signed between the six donors providing budget support, the scheduling o f jo int missions, and the use o f a joint matrix have resulted in reduced transaction costs and distortions o f international assistance.

(b) Better link sectoral and cross-cutting issues. In shifting from a sectoral investment project focus to the PRSC, the ability to embed sector pol icy within cross-cutting issues - -including decentralization, improved expenditure management, and c iv i l service reform- - can increase the sustainability and impact o f service delivery.

(c) Find ways to provide technical assistance at short notice for capacity building. The shift to budget support means that there is limited access to short-term consultancies or technical assistance from the Bank side during credit preparation because administrative procedures for the traditional Bank preparation trust fund (PHRD) are too slow in light o f the short span o f a PRSC preparation cycle. Yet, achieving the results expected from the PRSC series requires strengthening counterpart capacity. The Wor ld Bank, at the request o f the Government, wil l remain closely involved in capacity building through three main channels: (a) technical advice from members o f the core PRSC team; (b) financial support through relevant TA components o f existing projects; and (c) a new PRSP Trust Fund, which became effective in December 2006. Another positive outcome o f the creation o f the Budget Support Group i s that i t allows for coordinated technical assistance; for instance, the European Union i s financing long-term technical assistance requested during the missions. Hence, complementary analytical work or financial support from other donors i s also coordinated with the Bank activities.

14

E. KEY ANALYTICAL UNDERPINNINGS

3.7 The analytical foundations o f the PRSC seek to assess whether government policies and institutions target poverty reduction adequately, and whether the systems and procedures for channeling resources to support these strategies are effective. IDA is relying on core ESW, including two PERs, CFAA, CPAR, DPR and Poverty Assessment as wel l as a study on the role o f the State. The main conclusions o f this analytical work were the basis for the design o f the program. To take one example, the public expenditures agenda was designed on the basis o f the high priority actions identified in the C F A A action plan. Besides the core assessment that informed the design o f the PRSC series, other analytical pieces - prepared by IDA, the Government or other donors - continue to inform the program, such as the study o n fue l subsidies conducted as part o f the 2006 PER, or the analysis o f the likelihood o f achieving the MDGs prepared by the Government with assistance from the UNDP. Table 1 presents the current status o f these key analytical underpinnings.

Table 3.1: Status of Key Analytical Underpinnings

4. THE PROPOSED OPERATION

A. OVERALL DESCRIPTION

4.1 The objectives o f the PRSC series are to:

(a) support the policies and reforms set forth in the Government’s GPRSP in order to achieve sustained improvements in the well-being o f the population;

(b) develop an improved form o f external assistance that reduces distortions and transaction costs associated with project-based aid (particularly acute given Cape Verde’s small size) and increases Government capacity to plan, execute and monitor i t s efforts to address poverty;

(c) harmonize donor support around the GPRSP; (d) provide predictable support to the budget cycle to consolidate and smooth resource

transfers; and

15

(e) improve access to and quality o f key social services.

4.2 When preparing the f i rst PRSC, the possibility o f gradually expanding the coverage o f subsequent PRSCs was left open, depending on IDA’S (and the PRSC’s) comparative advantage and availability o f resources. During the preparation process o f the second PRSC, reviewers and commentators, including OPCS and peer reviewers, cautioned against increasing the scope and coverage o f the PRSC at that time.

4.3 Looking back at achievements over the past years o f PRSC implementation, i t appears that the program i s on-track to fulfill its ini t ial objectives; even though in some cases there have been delays. Certainly, budgetary support has turned out to be a powerful instrument to coalesce donor assistance around a core set o f pol icy actions, as illustrated by the jo int pol icy matrix to which six donors subscribe (see Annex l), and the Government has expressed i t s appreciation for such harmonized and predictable support o n several occasions, thanking the Bank for the catalytic role played. Among the most important pol icy results obtained so far i s worth mentioning the following:

(a) Functioning IFMIS and clearance of the backlog on the State accounts: The IT-based Financial Management System (FMS) i s now connecting al l Ministries, allowing them to monitor their accounts in real-time. The Government has made impressive progress in clearing i t s heavy backlog on the State accounts (when PRSC 1 was initiated, the 1998 accounts were s t i l l pending). To date, previous years accounts are finalized within months o f closing o f the fiscal year, and quarterly accounts are prepared timely and have been submitted to Parliament on a regular basis since 2004.

(b) Decentralization: The revision o f the Local Finance Law has substantially increased the amount o f resources transferred to Government on a basis o f a formula - increase o f 60 percent from 2005 to 2006 - which i s positive as such, but also because formula-based transfers are the least prone to political interference and ensure some predictability of the proceeds.

(c) Civil Service Reform: Cape Verde’s administration has now completed the integration o f the recently updated personnel database with the payroll, which i s a tremendous achievement that wil l ensure data consistency and monthly reconciliation o f processes. The easily accessible updated data are currently used as the basis to elaborate c iv i l service reform options, thus directly contributing to this important reform.

(d) Education: Two years o f a three-year teacher training program have been successfully implemented, resulting in a reduction o f the percentage o f teachers without pedagogical qualification, from 25 percent in 2003 to 17 percent in 2006.

(e) Health: The reform o f the contributory social security system, long-delayed because i t s sensitive nature, i s well under-way with new insurance regimes established, coverage increased and financial solvency greatly improved.

(0 Social Protection: The non-contributory pension system has been completely overhauled, harmonizing and unifying programs, modernizing data management and expanding coverage. The establishment o f a National Pension Centers, prior action for PRSC-3, represents the completion o f three years o f effort and sets Cape Verde as a model for Africa.

(g) Monitoring and Evaluation: The concerted pressure o f budgetary support partners have succeeded in convincing the Government to pay more attention to this issue. A household

16

survey was carried out, a training program i s under implementation and the technical unit coordinating M&E has now sufficient skilled staff to carry out i t s mandate.

4.4 Like i t s predecessors, PRSC-3 supports a small and strategic subset o f the GPRSP policy and reform agenda (three o f the five GPRSP pillars) -- good governance, human development and social protection. Building upon the success o f the previous PRSCs, this operation has the same overall objectives, and it i s designed to deepen, not broaden, support to the reform agenda. Based on experience over the past two years, it proposes a matrix updated along the following principles: (i) simplification (fewer triggers, fewer activities); (ii) harmonization (a core common matrix i s shared by partner donors); (iii) clarification (reformulation o f some triggers in order to clarify expected outputs and outcomes); and (iv) modifications induced by changing circumstances.

4.5 programmatic area, and are presented in greater detail in the fol lowing sections:

The main pol icy changes to be supported by this PRSC are summarized below, by

(a) Promote good governance to reinforce effectiveness and guarantee equity: focusing on i) Public expenditure management reforms, to ensure budget support to priority sectors and progressively solve the arrears and contingent liabilities issue, improve budget planning (use o f MTEF), deconcentrate expenditure commitment and liquidation, rationalize public debt management, strengthen internal and external controls, codify procurement; and (ii) Civ i l service, decentralization and legal and judicial reform, to promote decentralized service delivery and strengthen municipalities, modernize c iv i l service and public sector management, and facilitate access to justice for underprivileged citizens.

(b) Develop and upgrade human resources: focusing on (i) Education and professional training,

(c>

4.6

to improve quality and efficiency o f basic education including pre-school, expand and diversify supply o f secondary education both general and technical, expand and diversify professional training services; (ii) Health sector, to strengthen capacity to deal with non- communicable diseases, improve management o f health human resources, and increase financial sustainability o f health services with special attention to contributory schemes. Improve the effectiveness and sustainability o f the social protection system: focusing on decentralizing and rationalizing service delivery, improve management and coverage o f social pensions, promote and support community-driven initiatives, modernize the legal and institutional framework for child protection, expand services to minors in difficult circumstances, improve the framework for preventing and managing food crises.

In addition, given the importance o f monitoring and evaluation (M&E) and the relative neglect o f these issues by the Government, this third PRSC includes a prior action related to M&E.

B. POLICY AREA 1 : PROMOTE GOOD GOVERNANCE, REINFORCING EFFECTIVENESS AND GUARANTEEING EQUITY

4.7 With respect to governance, the country receives high marks for political stability, ru le o f law, and voice and accountability, while further efforts are needed in other areas, such as Government effectiveness and quality o f the regulatory regime. Analysis by WB16 shows that the control o f corruption in Cape Verde i s about twice as high as other sub-Saharan countries, and

Governance Research Indicator Country Snapshot, 1996-04.

17

converging towards European norms. This perception o f l ow corruption i s supported by budget execution figures that are close to original allocations, l i t t le divergence between the State’s accounts, i t s log o f treasury operations, and the record o f transactions o n i t s account at the Central Bank, and general information gathered from private and public sector operators. The public finance reforms proposed will further reinforce transparency, and concentrate on improving planning, strategic allocation and control systems.

4.8 Recent analysis (2003 CFAA, 2006 PER7 and CPAR) confirms the general soundness o f public expenditure management and a move towards greater transparency and fiscal discipline. However, improvements are s t i l l needed in key areas. These include: (a) greater integration o f investment and expenditure budgets; (b) a stronger relation between MTEF and budget preparation; (c) reinforced financial controls, including more timely audits; (d) more effective tax administration through improved information management; (e) development o f adequate procurement legislation; (e) control o f contingent liabilities; (f) development o f software to facilitate treasury planning; and (g) development o f software to manage domestic and external debt

4.9 The central Government generally has a strong record o f delivering a good m i x o f quality and quantity o f public services. W h i l e the need for decentralization in a population o f 472,000 may not be immediately obvious, the island structure o f Cape Verde, calls for moving decision- making and monitoring o f service provision to the local level. Current proposals for increasing decentralization to the municipalities underscore the intended goal to further improve pol icy responsiveness and implementation, as wel l as increase citizen access to information in order to increase local accountability.

’ 2006 PER has been conducted jointly with a review o f the implementation o f the 2003 CFAA action plan.

18

Table 4.1: Summary PRSC-3 Prior Actions, GPRSP Pillar #1 GPRSP Pillar # 1: Promote Good Governance, Reinforce Effectiveness and Guarantee Equity

PRSC-3 Trigger at PRSC 2 stage

Executed 2006 budget consistent with approved 2006 budget

2007 budget Law takes into account adequate funding of GPRSP priorities

Fiscal policy: Plan for settlement o f the contingent liabilities and debt approved by MFPA

Budget Planning and Preparation: Prepare MTEF. Unified budget classification used for 2006 budget and approval of the Framework law on Budget and the Planning Law by the Council of Ministers

Improve controls: 2000-02 State General Accounts submitted to Parliament

Decentralization: Promulgation of Basic Law on Decentralization once approved by Parliament Unified CSR and payroll database used for processing c iv i l servants payments Interministerial working group on c iv i l service reform operational, and PCCS draft discussed with key stakeholders

Proposed PRSC 3 Prior Actions

Executed 2006 budget consistent with approved 2006 budget

2007 budget Law i s in accordance with the benchmarks for social sectors (health and education) stated in the GPRSP)

Implementation of recommendations of the plan has started: - clearance of 33% of total of

arrears to domestic suppliers and municipalities in 2006

- adjustment of the utility tariffs to reflect the recent (April 27. elimination of fuel subsidies)

- implementation of the utilities tariff adjustment mechanism

2004-2005 State General Accounts submitted to Parliament

Draft Law and regulating decrees on reorganization and competencies of TdC approved by the Council of Ministers and transmitted to Parliament

Draft o f the National Procurement Code approved by Council of Minister and transmitted to Parliament. Promulgation of Basic Law on Decentralization once approved by Parliament Human resources database integrated with payroll Civil Service Framework Law presented to Council of Ministers

Comments

No change

Reformulated for clarity.

No substantial change. Specification on the implementation was added in order to be in l ine with the sector’s and IMF dialogue

Dropped. The preparation of MTEF has started and both laws were submitted to the Parliament.

2003 accounts have already been submitted to the Parliament. Thus the change to 2004-2005 accounts.

Law and regulating decrees on reorganization and competencies of TdC were included because they are key for the improvement o f the auditing system. No change

Dropped - see explanation in A.2 below Reformulated.

Status

Met

Met

Met

Met

Met

Met

Met

Met

Met.

4.1 Public Expenditure Management Reforms

4.10 The government reform agenda i s based on the assessments o f the 2003 CFAA, 2006 PER and CPAR. Together, these analytical pieces provide a comprehensive overview o f the critical weaknesses in the public expenditure management system. Fol lowing the 2004 CFAA, an

19

action plan focusing on comprehensiveness and transparency o f budget and financial accountability i s being implemented by a C F A A Unit with the support o f the Netherlands, EU and the Bank

Key Issues

4.1 1 Comprehensiveness and transparency of budget: Revenues foregone due to tax exemptions and incentives represent around 24 percent o f the potential revenue.* A piece o f legislation that aims to streamline tax incentives and exemptions i s expected to be submitted to Parliament in 2007. Until 2006 there was only one tax collector (BCA) that retained 1 percent o f the taxes collected. During the f i rst semester o f 2006 agreements were signed with four other institutions whereby a flat rate o f 150 to 250 E C V per collection was defined as the remuneration for their services. Since July 2006, B C A also receives a flat rate even though the agreement has not yet been signed. A macroeconomic modeling tool has been developed locally to improve revenue forecasting. However, revenues forecasted at the DGA, as wel l as the DGCI, are st i l l based on figures from the last three fiscal years.

4.12 The recurrent and investment budgets are now elaborated together by the DGP, the DGO, the DGT and the sector ministries. The principle for consolidation i s being put into practice. Revenues o f external financing, as well as the corresponding expenditure, are included in the budget. The budget o f autonomous institutes i s prepared by the institutes themselves and then included in the State budget.

4.13 The linkage between GPRSP and MTEF i s s t i l l weak. Preparation o f the two started at about the same time, and therefore the GPRSP i s not derived from the MTEF. Also, the implementation o f the MTEF has not been properly conducted, undermining the effectiveness o f this instrument. For example, sectoral MTEFs do not observe ceilings set by the global MTEF, making it necessary to revise the global M T E F ex-post. Finally, lack o f information regarding the execution o f externally financed projects makes planning more difficult and a framework should be established to make sure that donor-financed projects are properly recorded in the budget. Technical assistance i s being provided by donors to develop global and sectoral MTEF.

4.14 Budget execution and reporting: A new public accounting system has been designed and approved, but not yet implemented. The new chart o f accounts should be finalized by January 2007 and wil l be used not only for the State budget, but also for the autonomous institutes and the municipalities. The new accounting system will allow the Ministry o f Finance and Public Administration to produce consolidated annual Government statements including information on revenues, expenditures and financial assetsAiabilities. Quarterly accounts are prepared timely and have been submitted to Parliament on a regular basis since 2004.

4.15 Budget execution is in line with the benchmarks for social sectors (health and education) stated in the GPRSP - see attached table -, and amounts even surpassed the benchmarks for both sectors (for education, the benchmarks were 20 percent and 22 percent o f the national budget respectively for 2004 and 2005, and for health 6.3 percent and 6.5 percent).

2006 PER.

20

Table 4.2: Administrative Classification of Executed Expenditures - selected Ministries,

(Percentage of Total Expenditures) 2000-2005

2002 2003 2004' 2005' Min. o f Finance and Public Administration 44.79 42.14 41.12 44.95 Min. of Defense 2.79 2.84 0.28 0.26 Min. of Agriculture and Fisheries 2.14 2.49 1.38 1.24 Min. of Education and Sports 20.02 22.46 30.68 28.56 Min. of Health 7.30 7.10 8.10 8.25 Min. of Infrastructure and Transport 0.96 1.42 1.47 1.23 Min. o f Reform o f the State, Public Administration and Local Authority 5.09 4.93 0.19 0.16 Min. of Labor and Solidarity 0.91 0.92 0.95 0.85 Min. of Economy, Growth, and Competitiveness 0.45 0.36

1/ Projections Source: Ministry o f Finance and Public Administration and IMF.

4.16 Debt and cash management: The treasury i s managed on a daily basis. Yearly, quarterly and weekly plan are s t i l l weak, thus limiting the ability o f the Treasury to program payments. Technical assistance has been provided to strengthen treasury management. Notable progress has been made in centralizing operations from autonomous entities in an account opened at DGCP. External debt i s properly monitored by the software CS-DRMS linked to SIGOF. A workshop on debt management was held in February 2007 to provide training o n how to prepare debt sustainability analysis and debt restructuring. The risk o f the contingent liabilities needs to be monitored according to the recommendation o f the Plan for the settlement o f arrears and contingent liabilities, particularly given the financial situation o f public and semi-public enterprises such as T A C V and ELECTRA.

4.17 Internal and external controls: Resources allocated to IGF have improved significantly but remain insufficient. The C F A A Unit has provided to IGF modern IT equipment and connection to the Sistema Integrado de Gest6o OrCamental e Financeira (SIGOF) to fol low up budget execution on real time. Since 2003, seven inspectors have been hired and an inspector specialized in information systems will be hired soon, to ensure the internal management o f computers and the interface with the NOSI. The Court o f Auditors (TDC) has insufficient capacity to fulfill appropriately its mandate. The strengthening o f the T D C mandate depends on the approval o f the new framework law, for which a draft has been ready since the end o f 2004. As the legal framework is crucial to improve external auditing, a prior action to this effect has been added in the PRSC-3. These pieces o f legislation were sent to the Parliament at the end o f February.

4.18 Procurement: Cape Verde does not have a consolidated legal and regulatory framework for a l l public sector procurement, even though there i s a text regulating the procurement process in the infrastructure sector. A draft National Procurement Code was discussed and sent to Parliament early February.

Expected Results of PRSC Program

4.19 By the end o f the PRSC period (three years), the Government expects to have attained the following outcomes:

21

(a) Improved fiscal management and budget allocations - contingent liabilities are controlled and a plan for clearing arrears i s being implemented;

(b) Improved budget planning and preparation as reflected in fbrther integration o f the investment and recurrent budgets, the adoption o f budgets that respect MTEF ceilings and sector allocations in l ine with the priorities o f the GPRSP;

(c) Improved management and control o f tax proceeds resulting in an increase in the number o f contributors and amounts collected, as well as number o f audits;

(d) Improved budget execution v ia the introduction o f financial controllers and deconcentration o f expenditure responsibilities to at least six ministries;

(e) Improved monitoring o f public resources as evidenced in a decrease in the supplementary budget period and better coverage o f autonomous institutes;

( f ) Better controls o f municipalities and autonomous entities; (g) Reinforced internal and external audits, with (i) timely review by T D C and submission

to Parliament o f reliable state accounts, (ii) appropriate legal framework for external audit, and (iii) improved impact o f the IGF;

(h) Improved procurement systems through updating and consolidating laws, regulations and processes, which wil l result in greater transparency, reduced unit costs o f government purchases and better stimulus o f the private sector.

Results Achieved since the Inception of the PRSC Program

(a) Budget Planning and Preparation: Two draft laws have been sent to Parliament (i) budget framework law and (ii) budget planning law. The new laws take into account al l the new reform options (progress towards MTEF and program budgeting). Capacity in preparing global and sectoral MTEFs has progressively been built across ministries (with international technical assistance). Sectoral MTEFs are being prepared even though at different paces because uneven capacity levels in the ministries. The Ministry o f Education, the Ministry o f Agriculture, Fisheries and Environment, and the Ministry o f Labor and Solidarity have preliminary drafts o f sectoral MTEFs, while the draft MTEF for the health sector i s s t i l l under preparation.

that took place in 2004 identified C V E 5.9 bi l l ion o f net debt o f the central government. This study was revised in 2005 (with regard to the central government debt) and a plan was prepared, whereby the government agreed to settle C V E 4.8 bi l l ion (approximately 5.5 percent o f the GDP) through a three-year plan, beginning in 2006. A third o f the 2005 stock arrears was cleared in 2006. With the completion o f this plan (end o f 2008) al l recognized arrears will be cleared with the exception o f the tari f f deficit to Electra," and no new arrears wil l have been created. Furthermore, to prevent accumulation o f arrears (usually related to contingent liabilities) several actions have been undertaken: (i) implementation o f the adjustment mechanism for water and electricity (ii) creation o f a sub-unit under the Treasury unit to follow-up state participations in companies (iii) inter-connection between autonomous Institutes and Ministr ies (and some municipalities) through SIGOF enabling the Budget and Treasury units to fol low their budget execution and take measure if necessary in order to prevent liabilities from autonomous institutes from being passed on to the central government.

(b) Contingent liabilities: A cross-debt study

I t analyzed the debt between Central Government, municipalities, autonomous institutes, and para-statal. lo The payment o f the tariff deficit started in 2006 and it is expected to be completed in 2010..

22

(c) Management and Control o f Tax Proceeds: The identification o f the income tax payers i s completed. The attribution o f a single identification number and o f an updated Nzimero de IdentiJicupYo Fiscal (NIF) i s ongoing.

(d) Budget Execution and Control: The IT-based Financial Management System (FMS) i s now connecting al l Ministries, allowing them to monitor their accounts in real-time -- a very impressive achievement.

(e) Improve Internal and External Audits: The Government has taken appropriate measures to finalize the 1998-2005 state general accounts, while preparing and submitting on time current accounts. Four laws on organization, financial autonomy and systems o f controls public expenditure are being prepared in order to support the internal audit institution, the IGF. The IGF framework law has been approved by the Council o f Ministers. The TdC, the supreme audit institution, i s in the process o f recruiting staff to enhance its capacity. The legal framework regulating the TdC i s being reviewed, with the preparation o f laws on reorganization and competences o f the TdC. The laws o n reorganization and competences were submitted to Parliament at the end o f February 2007.

PRSC-3 Prior Actions and Proposed PRSC-3 Triggers

4.20 PRSC-3 potential triggers pertaining to fiscal pol icy are the following:

(a) Executed 2006 budget consistent with approved 2006 budget and 2007 budget Law i s in accordance with the benchmarks for social sectors (health and education) stated in the GPRSP).

(b) Implementation o f the plan for settlement o f the contingent liabilities has started and includes: clearance o f 33 percent o f total o f arrears in 2006; adjustment o f the utility tariffs to reflect the recent (April 27, 2006) elimination o f fue l subsidies; and implementation o f the utilities tari f f adjustment mechanism.

(c) 2004 and 2005 State General Accounts submitted to Parliament. (d) Law and regulating decrees on reorganization and competencies o f TdC approved by the

(e) National Procurement Code approved by Council o f Ministers and submitted to Council o f Ministers and transmitted to Parliament.

Parliament.

A.2 Civil Service, Decentralization and Legal and Judicial Reform

Key Issues

4.21 Cape Verde's public administration has been able to deliver quality and quantity services for several decades. Still, in a country setting where insularity adds specific challenges to responsive service delivery, citizens continue to perceive public administration as inefficient. Moreover, sustainability i s at stake in a context where the overall wage bil l represents around 12 percent o f GDP".

4.22 L ike in many other countries, public sector reform i s characterized by uneven progress, with various initiatives being championed without an integrated strategic framework andor

" PER, 2006.

23

appropriate structures to coordinate them. C iv i l service reform has been at the forefront o f the government’s agenda for years, without much progress. In l ieu o f a comprehensive c iv i l service reform, ad hoc solutions have been introduced by individual ministries or individual units within a ministry, with the adoption o f specific schemes o f services (“quadros”). This led to large variations o f salaries between ministries or between central and local governments. This agenda i s now being given the necessary attention, with studies underway to rationalize the administration and to review the configuration o f the c iv i l service statute and specific schemes in order to attract and retain skilled staff, and ensure their performance.

4.23 One o f the main successes o f public sector reform in Cape Verde l ies with the embrace o f IT by the country’s public administration. The e-government initiative, under the auspices o f the NOS1 (Operational Nucleus for Information System), i s responsible for many initiatives with a direct impact on citizens and business. Success include a functioning integrated financial management and information system (IFMIS), integrated human resources database and payroll, financial management systems installed in the largest municipalities which boosted revenues, revamping o f the tax registry, and reengineering o f various administrative processes to create a single-window for the most used services.

4.24 Decentralization o f responsibilities and resources to the municipalities i s one o f the key vehicles chosen by the Government to improve service delivery. Local governance in Cape Verde has proven dynamic, with hotly contested municipal elections and numerous local development initiatives - many o f them though decentralized cooperation arrangements. However, discrepancies in size and revenue potential o f municipalities are very high, and probably increased with the 2005 creation o f 5 new. municipalities, which raised the number o f municipalities to 22. The limitations o f the overall legal and regulatory decentralization framework have been highlighted, and ongoing efforts are addressing the issue o f municipal responsibilities and finances. A weakness remains the absence o f functioning mechanisms to better coordinate municipal, central and deconcentrated government activities.

4.25 Vulnerabilities created by lack o f legal knowledge and difficulties in accessing judicial services are weighing on the most vulnerable populations (including female single-headed households, a large vulnerable group in a country with a high rate o f emigration). To that effect, various programs have been launched in order to raise awareness o f legal remedies while increasing availability o f legal services (arbitration, mediation), with a positive impact expected for the business environment as well.

PRSC Focus and Expected Results

4.26 Following the GPRSP priorities, the PRSC focuses on key medium-term objectives, namely: (a) improve and integrate public sector reform management; (b) clarify respective mandates o f central and deconcentrated administration and municipalities and improve the financing o f municipalities; (c) improve human resource management and capacity; d) improve easy access to core services, and (e) enhance legal and judicial knowledge and efficiency, and promote access to justice.

4.27 the following outcomes:

By the end o f the PRSC period, the Government o f Cape Verde expects to have attained

24

(a) An overall framework for reform coordination i s operational. (b) Overall decentralization framework i s more conducive to progress in service delivery

outcomes, with clear repartition o f fbnctions and improved financial flows, including timeliness and volume o f transfers;

(c) Adequate tools for human resource management are developed and operational, and various stakeholders are briefed on possible options for the reform o f the c iv i l service, in order to forge consensus on a strategy to promote a qualified, motivated and accountable c iv i l service;

(d) Local capacity for training is improved and professional training institutionalized; (e) Some o f the most demanded services are more easily accessed by citizens; and (0 Knowledge o f the law and access to justice are broadened especially for the most

vulnerable groups.

Results Achieved since the Inception of the PRSC Program

4.28 By the end o f the PRSC period, the Government o f Cape Verde i s expected to have attained various outcomes, which are reviewed below. Most o f the activities identified at the inception o f the program are on-track to provide expected outcomes, even though some o f them have not progressed as smoothly as anticipated.

4.29 Reform coordination: With the creation o f a Ministry for the Chairmanship o f the Council o f Ministers, State Reform and Defense (following the 2006 legislative elections), the Government i s sending a strong signal in favor o f reform coordination. The new Unit for the Coordination o f the Reform (UCRE) includes representatives from cross-cutting ministries and units, and wil l prepare a Reform Agenda. This Ministry i s also chairing the Commission for the Rationalization o f the Central State (CRE), created by the Council o f Ministers. The commission i s conducting institutional assessments for the central administration in a participatory manner.

4.30 Decentralization: The adoption o f a “Basic law for decentralization” has been delayed. Some o f the objectives o f the law were to clarify the process to be followed for transferring responsibilities to the municipalities (including coordination and rules for financial transfers), as well as clarifying the rules for the creation o f new local governments (in order to avoid problems o f financial viability). The current debate, however, is centered o n whether or not to create a regional administrative and/or local government level. Given the political nature o f the debate, the BSG partners have decided not to use the adoption o f this law as a prior action. The promulgation o f the Local Finances Law (a PRSC-2 trigger) raised the formula-based transfer to municipalities by 60 percent from 2005 to 2006.

4.3 1 Human resources management and civi l service reform: A major achievement brought about under the PRSC series i s the full validation o f the c iv i l servants database, and i t s integration with payroll. The revision o f the Career and Salary System (known as the PCCS), underway, i s based on the analysis o f these data. A report i s already available and includes various proposals on human resources management (e.g., rationalized system o f promotions, evaluation system) as well as financial projections. I t will also include a comprehensive assessment o f the various specific schemes (“quadros”) and proposals for their rationalization. A draft Framework L a w on C iv i l Service i s setting the stage for performance-based management, and i s being discussed with key stakeholders.

25

4.32 Training: Activities have concentrated on establishing o f a new training course for “public administrators” (Le., high-level c iv i l servants) offered by the National Institute for Public Administration. This wil l make the career path o f c iv i l servants more attractive and contribute to providing a stable pool o f qualified professionals for the administration. The first 20 candidates, selected through a transparent process, wil l be trained in 2007.

GPRSP Pillar #3: Develop and Upgrade Human Capital Potential PRSC-3 Triggers at Proposed PRSC-3 Prior Comments PRSC-2 Stage Actions Second year o f teacher training No change action plan for basic education implemented implemented Reform o f INPS continued: Reform of INPS continued: No change expansion o f coverage achieved and special regimes established

Second year of teacher training action plan for basic education

expansion o f coverage achieved and special regimes established

4.33 Easier access to key administrative services: The “Citizen House” project aims to simplify access to administrative services for ordinary citizens. It i s designed to be accessed in three ways: web, call center and in person (the f i rst Citizen House will soon be opened in Praia). The I T solutions have progressed at a rapid pace and key services should be available online by M a y 2007 (e.g., creation o f a firm in 24 hours, certificates, single car document).

I t has been implemented

On track, expansion of coverage i s

4.34 Access to justice: Cape Verde has promulgated both a decree-law on mediation and a law on arbitration, and twenty-three persons were successfully trained in mediation and in providing training for mediation. These new alternative dispute resolution mechanisms will provide quicker solutions to legal claims o f both private citizens and businesses, thus lessening the burden o f the country’s court system. Cape Verde has also taken actions to ensure the operationalisation o f a Judicial Aid Fund.

PRSC-3 Prior Actions

4.35 The proposed prior action for PRSC-3 is “Human resources database integrated with payroll, and C iv i l Service Framework Law presented to the Council o f Ministers”. This trigger is the logical continuation o f the PRSC emphasis on addressing a much-needed c iv i l service reform. The completion o f the operational tool for human resources management has provided a sound basis for elaborating reform options, which are being prepared and discussed. The draft Law on C iv i l service i s addressing the needs o f modem human resources management.

4.36 The init ial ly proposed decentralization trigger - Promulgation o f Basic L a w on Decentralization once approved by Parliament - was dropped, since the debate in the country about i t s purpose and content has not reached a consensual point (see above).

c. P O L I C Y AREA 2: DEVELOP AND UPGRADE HUMAN RESOURCES

I being done

26

B.1. Education and Professional Training

Key Issues

4.37 Cape Verde education achievements rank among the top o f Sub-Saharan African countries and countries at the lower middle income level. With a completion rate in primary education estimated at 95 percent, the country i s close to reaching the Millennium Development Goal o f universalizing primary school completion by 2015. The country i s also showing solid progress in expanding enrollment in secondary education. A s new school infrastructures are created, an increasing number o f young people are having access to secondary education, particularly in under-served areas. Tertiary education i s emerging gradually with the creation of a private university (Institute Jean Piaget) and, more recently, o f the public University o f Cape Verde. The sub-sector o f vocational training i s increasingly occupying a privileged place in the government pol icy agenda, as Cape Verde i s progressively positioning i tself as an emerging economy whose principal asset i s its human resources.

4.38 But challenges remain. As the country starts to enjoy the h i t s o f recent reforms in primary and secondary education, the Government is facing a growing pressure to strengthen the efficiency o f the entire education system and to be more closely in step with evolving labor market needs. Several issues have been identified:

(a) Expansion in coverage o f early childhood education i s becoming a pressing need, as only 62 percent o f the 3-5 year olds benefit from early childhood education, and regional and socio-economic disparities in access to pre-school are strong;

(b) The quality o f education remains an issue. The repetition rate is relatively high across the whole education system (e.g., 14 percent in the primary cycle) with a negative impact on efficiency. Despite the recognized progress in increasing the number and share o f qualified primary education teachers, 17 percent o f teachers s t i l l lack the appropriate qualification to teach the six grades o f primary education;

(c) Teachers’ time on task i s relatively low. Currently, students spend on average 4.5 hours per day in the classroom. Cape Verde wil l need to pursue reforms in order to consolidate recent gains in primary and secondary education while favoring a strong link between universal basic education and vocational training;

(d) The vocational training system should be better structured to respond to social demands and to meet the needs o f the labor market. Currently, access to vocational training and apprenticeship programs for primary graduates remains restricted and few providers are certified. Sector rules and responsibilities also need to be streamlined.

(e) The teaching wage bill wil l need to be controlled, as salaries consistently absorb about 90 percent o f recurrent expenditures. While for primary school teachers the average salary relative to GDP i s close to the regional average, the level for secondary education i s much higher - and this i s where system expansion will be concentrated.

PRSC Focus and Expected Results

4.39 The Education Ministry contribution to the PRSC policy matrix prioritizes four main medium-term objectives: (a) improve the quality and efficiency o f education; (b) expand and

27

diversify general and technical secondary education supply; (c) expand and better orient professional training service delivery; and (d) restructure higher education.

4.40 following educational outcomes:

By the end o f the PRSC period (three years), the Government expects to have attained the

(a) Improvements in the quality o f basic education, as evidenced by a significant increase in the percentage o f teachers who have academic qualifications, a decrease in the repetition rate, a system to test academic achievement designed and piloted, and a higher share o f students completing primary school;

(b) Greater efficiency o f the education system, as evidenced by reduced drop-out and repetition rates;

(c) Expanded opportunities for children to get an earlier start in education as shown by an increase in the share o f 3-5 years old enrolled in early childhood programs;

(d) Expanded and diversified general and technical secondary education supply resulting in an increase in children completing eight years o f schooling, a greater share o f students enrolled in technical secondary education, and a higher proportion o f poor students benefiting from support;

(e) Better preparation for labor market needs through increased numbers o f students enrolled in professional training and apprenticeship programs, accompanied by an increase in the number o f accredited professional training providers; and

( f ) A tertiary education sector that allows for higher enrollment and less reliance on study abroad within a limited public finance envelope.

Results Achieved since the Inception of the PRSC Program

4.41 Teacher training priorities in basic education have been identified and a three-year action plan developed. Key objectives include: (a) improving the professional qualification o f existing teachers (in-service training) rather than training and recruiting new teachers (pre-service training); and (b) ensuring that deployment o f primary teachers i s not biased against remote rural areas. Implementation o f the f i rst two years o f the teacher training plan has resulted in a reduction o f the percentage o f teachers without pedagogical qualification, f rom 25 in 2003 to 17 percent in 2006, with expected gains on quality o f basic education.

4.42 A Vocational Training Assessment was also completed and a Strategic Plan for Vocational Training approved by the Government in December 2005. The implementation o f the Strategic Plan i s now being prepared. A round table on vocational training will be convened in Cape Verde in 2007 to mobilize donor support to the implementation o f the Plan. These pol icy reforms are being supported by the development o f a new legal and regulatory framework for vocational training.

4.43 Other achievements since PRSC-1 include:

(a) Revision o f the basic education curriculum (in progress); (b) Expansion o f early childhood education, from 57 percent in 2003 to 62 percent in 2006,

as a result o f the increased number o f trained teachers, which has allowed the opening o f new early childhood development centers;

28

(c) Progress toward the expansion o f secondary schools, as the Ministry o f Education identified priori ty sites for constructions, and launched a construction plan to build 9 secondary schools by 2007;

(d) Improvement o f secondary technical education through several on-going programs supported by the Luxemburg and the Portuguese Cooperation; and

(e) Implementation o f the f i rst year o f the teacher training action plan for basic education targeting 605 primary teachers.

PRSC-3 Prior Actions

4.44 The prior action o f PRSC-3 i s continuing implementation o f the teacher training action plan for basic education, as this i s crucial for improving educational quality and increasing the efficiency o f the basic education system. Results expected during the PRSC-3 period include progress on curriculum revision and the implementation o f achievement tests to underpin and monitor improvements in education quality, a further expansion o f early chi ld education, the development o f a targeting system for the scholarship program for secondary students from poor households, as well as securing financing and finalizing implementation details for the Strategic Plan for Vocational Training.

B.2 Health Sector

Key Issues

4.45 Compared to other countries in Africa, Cape Verde’s coverage o f health services is good and the country i s on track to achieve the MDGs. However, these good indicators mask significant regional disparities and are based on an unsustainable financial framework. Several studies have been completed by the Bank and others that identify the following main issues:

(a) Inequities in health outcomes and access to health services persist. Access is limited primarily by distance, while costly medical evacuations remain numerous;

(b) Problems with human resources limit the effectiveness o f the health system. These include: (i) an insufficient number o f doctors; (ii) poor distribution o f staff; (iii) lack of incentives to maximize efficiency or focus on the poor; and (iv) a growing number o f public sector doctors working in an unregulated private sector;

(c) Management o f the system, including monitoring and evaluation, i s hampered by the lack o f a functioning health information system;

(d) There i s no organized approach to non-communicable diseases, which are rapidly becoming a major concern because o f Cape Verde’s epidemiologic transition;

(e) Health financing i s facing important challenges, even though total government health spending i s high (around US$70 per capita, o f which about US$10 provided by donors). The main causes are: a weak allocative efficiency o f national health budget entailing inequities among islands and programs, a very high and rapidly increasing rate o f expenditures o n pharmaceuticals, and increases in demand as incomes improve and the population ages; and

( f ) Issues outside the control o f the MOH, l ike inadequate and unsafe water, poor nutrition, and lack o f transport, contribute to poor health outcomes. For example, only 11 percent

29

o f the poor have access to public water supplies compared with 51 percent o f the non- poor.

PRSC Focus and Expected Results

4.46 The PRSC policy matrix, which has been prepared by the Ministry o f Health in collaboration with i t s main partners, reflects the priority issues described above. The main objectives are to reduce the inequities in health outcomes and ensure financial protection for the poor. Specific results include:

Better access to quality health services for the poor by (i) expanding health infrastructure, particularly in remote rural areas; (ii) training and deploying health personnel to these areas, and (iii) prioritizing the financing and provision o f services for those diseases that have the most impact on the poor. Special emphasis is to be put o n increasing attended deliveries. Improved financial access and sustainability o f health services by controlling expenditures. Introduction o f health prevention and promotion programs is l ikely to have the largest impact on health expenditures in the future, particularly for the poor who are least able to afford treatment. Reforms to the social security system should also result in reduced expenditures on health. Improvements in health protection for the poor to be financed by the introduction o f user fees. A system o f exemptions and expansion o f the existing social insurance program, INPS, are among the several options considered for covering the poor.

Results Achieved since the Inception of the PRSC Program

4.47 Cape Verde has made considerable progress in most o f the priori ty areas identified in the PRSC. Perhaps most importantly, the financing provided for priori ty programs in the 2005 and 2006 budgets i s the same as that estimated in the GPRSP action plan. Other achievements to date include development o f two new key national policies on the Health Information System and Human Resources for Health. Implementation o f the national infrastructure plan i s on track with significant support from donors. Finally, important reforms to reduce the current subsidy from pensions to health in the INPS have been introduced. Progress in specific areas o f the reform program include:

(a) Priority health programs12 have been provided with sufficient financing in the annual national budget. The MOH anticipates the main constraint to implementing the priority programs wil l be insufficient availability o f personnel.

(b) The M O H completed a situation analysis o f the Health Information System-and finalized a national pol icy in April 2005. A report o f 2004 health statistics was published, followed in August 2006 by the 2005 report and i t should now continue regularly on a yearly basis. This would provide accurate data upon which to build the specific technical reforms needed in the sector as wel l as facilitate monitoring o f GPRSPPRSC implementation.

~~~~ ~ ~

'' Priority programs include HIV/AIDS, TB, malaria, the Expanded Program for Immunization, and Integrated Management o f Childhood Infections.

30

(c) The analysis o f the human resource situation was completed as a PRSC-1 prior action, and i t revealed shortages in al l types o f health care staff as wel l as an inequitable geographical distribution. Implementation o f the ensuing recommendations has begun with the start o f a new training course for nurses.

(d) Taking as a starting point the facilities map completed in 1999, strategic plans for improving access to health facilities are currently under elaboration, including Santiago North, urban Praia, and the island o f SHo Vicente.

(e) A public expenditures review i s underway to gain a better understanding o f health sector financing with a view to strengthen allocative and technical efficiency. The preliminary results were presented to the government in October. Updated health tar i f fs and fees were recently approved by the government; i t should improve the efficiency o f the recovery cost system.

(f) The INPS i s implementing its medium-term strategy with success, incorporating 14,000 c iv i l servants under i t s health insurance scheme, expanding i t s coverage through creation o f special coverage systems (regimes especiais), controlling pharmaceutical costs, reducing reimbursement for certain medical specialties, monitoring membership of beneficiaries, and revising payments to the public sector. As a result, i t s health debt has been cleared in 2005 with a E C V 36 mi l l ion positive balance and a similar trend i s foreseen for 2006.

PRSC-3 Prior Actions

4.48 PRSC-3 would continue to prioritize reforms that wil l ensure the financial sustainability o f INPS. To this end, the prior action selected i s the expansion o f coverage achieved and the establishment o f new special regimes. Other progress expected under PRSC-3 includes continued availability o f up-to-date health statistics, implementation through a multi-annual action plan o f the 2005-2014 strategic plan for human resources, the analysis o f non communicable diseases (NCD) situation along with a national mid-term strategy, continued progress in priority health programs leading to a vaccination rate o f 85 percent for under one year olds, as wel l as greater accessibility o f trained health personnel.

D. POLICY AREA 3: IMPROVE THE EFFECTIVENESS AND SUSTAINABILITY OF THE SOCIAL PROTECTION SYSTEM

Key Issues

4.49 Cape Verde has a relatively wel l developed social protection system for Africa, so the basic issues have mostly to do with reforms o f existing programs to increase efficiency, equity and coverage as well as fill in specific gaps. Since the beginning o f the PRSC series, considerable progress has been made in this sense, particularly concerning social security. A series o f reforms has managed to harmonize and unify the non-contributory pension system, while reforms are well underway to rationalize contributory social security schemes -- the AP for c iv i l servants and the INPS for private f i r m s -- increasing long-term financial sustainability and expanding coverage (see also health section). The main additional issues to be addressed are highlighted below.

31

(a) Social protection services have been enjoying a certain level o f deconcentration for some time, but a clear legal framework for decentralized services is needed to improve efficiency and clarify accountability at the municipal level. Unfortunately, the Ministry’s efforts in this sense have been frustrated by delays in approving the Framework Law on Decentralization, which should provide the context within which municipal protocols would be signed.

(b) Central and municipal governments often contract with local associations and NGOs for the day-to-day management and operation o f community development activities, nursery schools, training programs and other social assistance services. The challenge is to create better systems for monitoring performance and impacts o f these sub-contracted services.

(c) The legal and institutional framework for chi ld protection needs updating and strengthening, and a participatory process toward this goal in underway. With the adoption o f a new Code or Statute for minors, i t is hoped that service provision to children and youth at risk will improve. An effort to decentralize services and give municipalities a greater role i s also starting to bear fruit.

(d) Food security continues to be a concern despite overall welfare improvements. Some 10,000 mostly rural households are s t i l l considered at nutritional risk and malnutrition rates have remained basically the same for the past ten years. Efforts to protect food insecure households are hampered by lack o f coordination among the various bodies called to play a role.

PRSC-3 Prior Actions

National Pension Centre functioning

Table 4.4: Summary of PRSC-3 Prior Actions, GPRSP Pillar #5

Comments

Rephrased to be more specific

Dropped to limit number o f prior actions and also because action contingent on the framework law on decentralization

I GPRSP Pillar #5: Improve the effectiveness and sustainability of the social protection system I Potential PRSC-3 Triggers at PRSC-2 Stage Implementation o f approved recommendations to reform the non-contributory pension system with a view to sustainability Approval and implementation o f revised protocol agreements for decentralized social services in all municipalities

The center has been officially established and i s operational Draft protocol agreements are ready but can only be finalized and implemented after the approval o f the framework law on decentralization

PRSC Focus and Expected Results

4.50 Under the coordination o f the Ministry o f Labor and Solidarity (MTS), the Government has prepared a pol icy matrix in consultation with other ministries, autonomous agencies and NGOs. The matrix prioritizes: (a) ‘Protection, Integration and Social Insertion’, to redefine the regulatory framework for decentralized service delivery, improve planning and management instruments, improve management and coverage o f non-contributory pensions, increase access o f at-risk groups to education and professional training, health services, and nutritional support, and promotion and support for local community development initiatives; (b) ‘Protection o f

32

Children’s Rights’ , to strengthen institutional mechanisms and reinforce the technical capacity o f NGOs involved in youth and chi ld protection issues; and (c) ‘Food Security’, to prevent and manage food crises and strengthen the institutional framework o f food security issues.

4.51 social protection outcomes (these targets are ambitious but are anchored in existing programs):

By the end o f the PRSC period, the Government expects to have attained the following

(a) Improved ability to plan and monitor social assistance services as evidenced by complete and up-to-date information on coverage and utilization;

(b) A greater share and better geographical distribution o f social services targeted to low- income and vulnerable groups through contracts with local governments and NGOs;

(c) Expanded coverage and better targeting o f the non-contributory pensions schemes, as seen in increased participation rates by the poor, with expenditures within the MTEF;

(d) An improved legal framework for children and adolescents at risk, and increased coverage and quality o f programs for this target group; and

(e) Less utilization o f emergency coping strategies for food security through better prevention and management o f food crises.

Results Achieved since the Inception of the PRSC Program

4.52 The technical dialogue involving improvements to the social protection system focuses on three broad areas mirroring the agreed pol icy matrix: (a) protection, integration and social insertion; (b) protection o f children’s rights, and (c) food security. The drafting and discussion o f the country’s Social Protection Strategy, approved in December 2005, helped better define overall pol icy direction. Progress since the inception o f the PRSC program has been considerable, especially in the f i rst focus area (protection, integration and social insertion), although there have also been delays. Overall, results have been very encouraging concerning social security but somewhat disappointing in food security. Such uneven outcomes are attributable at least in part to the institutional framework, as reforms in food security involve a large number o f actors and are therefore slower to implement. Under PRSC-1, significant progress was made on the first component, including completion o f a Social Services Map (Carta Social) with information on al l existing 609 social service centers (e.g., day-care centers, multi-use community centers, shelters, centers for youth, disabled, elderly). This was a critical f i rst step in identifying gaps and rationalizing the use o f infrastructure, as wel l as developing service norms.

4.53 Results obtained under the PRSC program include:

(a) A Social Services Map (Carta Social) has been completed. It i s accessible through the web, with information o n al l existing 609 social service centers (e.g., day-care centers, multi-use community centers, shelters, centers for youth, disabled, elderly), thus providing complete and up-to-date information on coverage and utilization as well as representing a critical f i rs t step toward the development o f service norms.

(b) Collaboration with NGOs has been strengthened as a way to improve the geographical distribution o f social services targeted to low-income and vulnerable groups, with 10 service agreements signed in 2005 and 15 in 2006. In the same vein, the redefinition o f the regulatory framework for decentralized service delivery i s underway, and updated

33

framework agreements (protocols) between the M T S and municipalities for the provision o f decentralized social promotion services have been drafted. Further progress i s contingent on the adoption o f the Framework Law on Decentralization, which has been delayed. To improve the quality o f services, the M T S offered training to NGOs and local government personnel, and carried out participatory evaluations.

(c) The harmonization, modernization and unification o f the two non-contributory pension systems have been completed. A unified M I S database i s active, new digital ID cards have been issued, the revised poverty map was used to allocate additional pensions by municipality, and a National Pension Center is operational. The rationalization o f the system has made i t possible to increase the number o f beneficiaries from 14,446 in 2005 to 18,462 in 2007.

(d) A National Commission for Legal and Institutional Reform has been established in the area o f Children and Adolescents through a resolution o f the Council o f Ministers, laws and regulations concerning minors have been revised, and an overarching Statute for Children and Adolescents has been drafted (its adoption is expected in June 2007). The Cape Verdean Institute for Minors has become the Cape Verdean Institute for Children and Adolescents (ICCA) to signal the change in paradigm from children and adolescents seen as objects to their becoming subjects.

(e) Entities for the defense o f children rights in al l municipalities have been established, and a stronger collaboration with NGOs through sub-contacting and training by I C C A is underway.

( f ) A food security survey was carried out in 2005 and wil l provide the baseline for monitoring at the municipal level, as envisaged in the Food Security Strategy approved in 2004. A National Council for Food Security was created in August 2005, representing an important step toward a more coordinated approach, although it is not yet operational. A National Food Security Program 2007-1 1 was recently approved.

PRSC-3 Prior Actions

4.54 The prior action proposed for the social protection area is the completion o f the reform o f the non-contributory pensions system, through the establishment and operationalization o f a National Pension Center. The prior action concerning the consolidation o f the revised framework for delivery o f decentralized social promotion services through municipal governments was dropped. In fact, although a proposal for the revision o f protocols for decentralized social protection services has been ready for some time, further progress has not been possible because this process needs to be coordinated with the new Framework Law on decentralization, which has not yet been approved (see section on decentralization).

E. MONITORING AND EVALUATION

4.55 Over the course o f the two previous PRSC, budget support partners repeatedly stressed the value o f an effective monitoring and evaluation (M&E) system for GPRSP implementation in general and for PRSC implementation in particular. To signal the importance given to these activities, i t was decided to include an M&E prior action in the PRSC-3.

4.56 The M&E program for the PRSC rests on an integrated national M&E system, which i s being developed. W h i l e some progress has been made, the government recognizes that more

34

attention has to be given to M&E and the pace o f implementation has to accelerate. For example, the establishment o f a national projects database has been greatly delayed, while staffing o f the Technical Secretariat for Development Assistant (known as STAD), the entity in charge o f coordinating M&E activities, i s only now being completed. Donor finding, particularly from the EU, UNDP and the Netherlands cooperation, i s available to support government efforts.

4.57 The specific monitoring and evaluation activities under the PRSC are based on, and reinforce, the system proposed for the M&E o f the GPRSP. They include: (a) annual GPRSP progress reports; (b) periodic reporting on achievement o f M D G s (supported by UNDP); (c) overall annual budget monitoring through public expenditure reviews; (d) annual sectoral budget execution and service delivery targets prepared by line ministries; (e) periodic follow-up household surveys to track poverty and access to services carried out by the National Statistics Institute (INE); and (f) sectoral studies. Overall PRSC monitoring is the responsibility o f the STAD o f the Directorate for Planning.

Figure 4.1 : Management Information System for Monitoring and Evaluation of Cape Verde's Social and Economic Development

Results Achieved since the Inception of the PRSC Program

4.58 Progress during the PRSC implementation period includes:

(a) Putting in place the main institutional framework for the M&E system o f the GPRPS, including publication o f the Decree establishing the STAD, as wel l as the National and Regional Poverty Reduction Commissions.

(b) Creating sectoral databases at the Ministry o f Agriculture and the Ministry o f Education. (c) Completing a disaggregated poverty map, with technical support from the World Bank. (d) Carrying out a pi lot household survey o f core welfare indicators (QUIBB) to track

(e) A comprehensive Statistical Agenda was prepared and validated nationally, and i s

(f) The first two phases for the establishment o f the national data bank for off icial statistics

poverty.

serving as the basis for a financing strategy.

have been completed.

PRSC-3 Prior Actions

4.59 To emphasize the responsibility o f the Government for implementing i t s ambitious M&E framework, the prior action for PRSC-3 i s the satisfactory implementation o f the 2006 STAD Activi ty Program, as evidenced by three crucial steps: (a) analyzing the data o f the recently completed QUIBB survey, (b) completing STAD staffing by hiring three key technical staff including a Coordinator, and (c) starting implementation o f the training program detailed in the Statistical Agenda (Agenda Estatistica).

35

F. FINANCIAL FRAMEWORK

4.60 The proposed PRSC-3 will provide US$10 mi l l ion to the Government’s 2007 budget o f about US$350 mi l l ion (GPRSP). PRSC-3 financing i s equivalent to 23 percent o f the proposed GPRSP expenditures in the three pillars o f PRSC focus in 2007, or about 10.3 percent o f the unidentified financing requirements. I t i s worth noting that the financial requirements presented do not take in consideration the investment needs that emerged from the recent development o n ELECTRA capital shares. There is no earmarking o f activities to be financed, giving the Government flexibility in orienting resources in line with GPRSP priorities. With the support o f the PRSC, the Government will be able to provide financing for various activities that can be tracked through l ine items in the budget including teachers and materials for basic education, broader coverage o f the non-contributory pension schemes, and more even coverage o f health services across the islands.

Table 4.5: Financing requirements 2005-07 (in YO GDP)

Overall balance including grants (excluding capital grants) inancing

Foreign (net) Dom estic(net)

PRSC2 Proposed Operation - PRSC3 Capital Grants Memo item:

Residual financing gap (zero in historical data)

GDP at current marketprices @illion LCU) I Source: World Bank and IMF staff estimates

2005 2006 2007 Proj. Proj.

-12.7 -8.7 -11.9

3.1 2.6 2.8 0.8 0.3 1.5 0.0 0.0 0.0

0.9 -- -- 0.8

6.4 7.0 7.6

88.6 100.6 109.4

5. OPERATION IMPLEMENTATION

A. POVERTY AND SOCIAL IMPACT

5.1 With a strong record o f economic growth and social investment, Cape Verde i s on target to reach most MDGs by 2015 (Table 5.1). If GDP continues to grow at the same rate, poverty may be reduced by hal f in 2016. However, the remaining poverty i s likely to be more entrenched and growth alone may be insufficient. MDG education targets have already largely been met, and health indicators are on track, with the exception o f immunization rates where more efforts are needed. Meeting the provision o f water and sanitation wil l entail significant investment, but urbanization will ease meeting this goal. In al l cases, however, overall national progress conceals important geographic variations, with the rural areas generally lagging behind global averages.

36

5.2 The share o f the population with consumption under the poverty l ine has fallen by one- fourth in the 1990s from 49 to 37 percent, with the population in extreme poverty now estimated at about 21 percent. The share o f total household consumption devoted to food was reduced from 50 to 35 percent, reflecting a reduction in the number o f poor people vulnerable to basic food insecurity. However, while poverty was reduced, inequality has increased. The Gini index for per capita expenditure rose from to 0.50 in 1988 to 0.53 in 2002, exacerbating the already high concentration o f consumption among the richest. In addition, food insecurity i s a persistent problem, with malnutrition rates for children under five at 22 percent, compared to 21 percent in 1994.

5.3 About ha l f o f the rural population i s poor and about one-quarter o f urban dwellers are below the poverty line. The most rural islands, l ike Santo Antilo, Fog0 and Brava, have significantly higher poverty rates. They are also the most isolated islands, with especially high transport costs and, for Brava, no regular air or sea l i nks . Limited access to quality education and health care, isolation due to bad roads, and low agricultural productivity contribute to the entrenched nature o f rural poverty. At the household level, the main determinants o f poverty are size o f household, education levels, employment, gender and lack o f access to migrant remittances.

5.4 W h i l e the PRSC series does not have a special focus on rural poverty, i t supports many measures that wil l be particularly beneficial to the rural poor. For example, by bringing government services closer to citizens, the decentralization process wil l especially benefit those who would ordinarily have difficult access to such services, that is, rural dwellers. Similarly, efforts to improve the delivery o f social services (see below) wil l focus on traditionally under- served areas, which tend to be rural and in the case o f food security the vast majority o f beneficiaries wil l be rural. The activities supported by the PRSC also complement other interventions to reduce rural poverty, such as the US-financed Mi l lenium Challenge Compact (US$110 million) and the Bank-financed transport project, both o f which finance rural infrastructure.

5.5 poverty:

The series o f three PRSCs operations i s expected to have the following benefits o n

(a) Improved sewice delivery for the poor: The PRSC would provide incremental resources to finance GPRSP priorities, which should translate into improved services to the poor. Specifically, the PRSC wil l help support better schools (through teacher training, educational materials, and classroom improvements), health promotion services (by equipping and rehabilitating health centers in poor areas, and better distribution o f health personnel), better targeted social pensions, and an increase in the quality and supply o f social services l ike daycare centers and programs for the elderly at the municipal level.

(b) Improved well-being of the population: Better service delivery should translate into improved outcome indicators over time, such as higher secondary enrollment rates, better health status, and increased public satisfaction with services. Given the characteristics o f poverty, the wellbeing o f the rural population should be particularly improved.

5.6 Women are more l ikely to be poor than men in Cape Verde. Despite impressive gains for women in basic education and falling fertility rates, almost hal f o f adult women in rural areas

37

cannot read, and domestic violence i s an issue. Women are more l ikely to be unemployed, and when employed to earn less than men, even at similar levels o f education and experience. Gender issues are mainstreamed throughout the PRSC , and gender disaggregated performance indicators wil l be tracked in al l relevant sectors.

5.7 Given the overall thrust o f the PRSC series, no negative impacts on vulnerable groups are envisaged. To the contrary, al l the measures considered wil l result either in improved overall well-being because o f better governance and more efficient and equitable government services, or in specific gains for the poorest and most vulnerable members o f society because o f efforts to reach those with difficult access to basic services, including social protection and safety nets. In this sense, rural dwellers, and in particular those living in the most remote areas, stand to benefit disproportionately from the PRSC series, as they have been traditionally those with the most difficult access to public services.

Table 5.1: Cape Verde's Progress Toward the MDGs

38

5.8 The Government has gone to considerable lengths to ensure that i t s actions are the true expression o f the collective will, and has consistently and actively involved specific stakeholders and citizens at large throughout the process leading to and accompanying the PRSC series. For example: the GPRSP, which provides the framework for this operation, was the result o f an intensive consultation process and has been widely disseminated; the household survey that provides much o f the baseline information to monitor results benefited from an information campaign considered as best practice; two beneficiary assessments were carried out to help assess the impact o f initial poverty reduction interventions (in 2003 and 2005); sectoral strategies are the product o f consultations and open debate with national and international stakeholders; c iv i l society is often included in specialized bodies (e.g., the GPRSP Coordinating Commission).

B. IMPLEMENTATION

5.9 The PRSC i s overseen by the country GPRSP Steering Committee. Under the umbrella o f the Ministry o f Finance and Public Administration, al l ministries involved in the three GPRSP pillars supported by the PRSC are involved in PRSC design, implementation and monitoring (Le., State Secretariat for Public Administration, Justice, Education, Health, Labor and Solidarity).

5.10 Since the preparation o f PRSC-1, the Bank team has worked in close collaboration with Government and budget support partners to ensure a high level o f accountability for the success o f the PRSC series. The B o x below specifies how the five principles on conditionality were complied with.

Box 2: Good Practice Principles on Conditionality

Principle 1: Reinforce Ownership

Cape Verde has a strong track record o f commitment to a development agenda (the country in on track for the MDGs and already reached some o f them), as well as a strong tradition o f openness and consensus-building around key refonix. The PRSC series was built on the PRSP document prepared in a participatory manner and i t s e l f fully aligned with the Great Planning Options adopted by the Government o f Cape Verde in 2002. I t benefited from the consensus built around the dissemination o f solid analytical work - prepared by IDA, other

39

donors, as we l l as the Government - o n key reform issues. In particular, analytical work o n public finances and studies o n poverty and social impact o f key reforms - fuel subsidies - were done in a t imely manner so as to i n fo rm the program.

Principle 2: Agree up front with the government and otherfinancialpartners on a coordinated accountability framework

The move to budget support has been catalytic in harmonizing a id in Cape Verde. The Budget Support Group n o w counts six participants besides the Government. Budget support donors have signed a Memorandum o f Understanding with Government detailing their commitment to a id coordination: i) a jo in t matr ix highlighting ma in pol icy and result indicators supported by budget support, 2) reviews missions - twice a year- conducted jointly, and iii) the preparation and discussion o f j o in t A ide Memoires.

Principle 3: Customize the accountability framework and modalities of Bank support to country circumstances

The PRSC series has been developed in close coordination with the Government and the sectors concerned. Al l pol icy actions draw o n a solid set o f analytical work, and are discussed and fine-tuned to adequately reflect country priorit ies and rhythm o f implementation. Budget support seems particularly adapted to the country: the value added o f the PRSC lies in both the nature o f the instrument and the results that are expected, since it reduces transaction costs and distortions due to international assistance -particularly acute in a small size country - whilst improving the functioning o f national budget systems.

Principle 4: Choose only actions critical for achieving results as conditions for disbursement

The proposed conditions for disbursement represent crit ical steps for program implementation and span f r o m adoption o f laws, selected implementation o f activities drawn f i o m already adopted action plans, and concrete outcomes o f policies when measurable. The number o f disbursement conditions does not exceed 10. However, the Bank PRSC matrix contains more than 20 benchmarks, chosen at the onset o f the program. The relatively high number o f benchmarks reflects the fact that the PRSC operation spans many sectors and that, for some o f them, the team chose to be specific and detailed to better monitor progress o n a range o f issues. However, the newly adopted j o in t donor matrix has been substantially streamlined and i s proposed as the main reference instrument for follow-up operations.

Principle 5: Conduct transparent progress reviews conducive to predictable andperformance-basedfinancial support

Full program reviews take place twice a year o n an agreed schedule with a l l budget support donors. The PRSC i s not fully aligned yet with the budget cycle: the misalignment started with PRSC 1, and 2006 elections have prevented catching up o n the calendar. The Bank support volume, however, was announced at the beginning o f the three year PRSC cycle, and the Government included it in i t s yearly budget preparation.

The Cape Verde PRSC matrix was the f i r s t matr ix t o systematically include result indicators closely l inked to the supported pol icy actions. Program reviews pay particular attention to results, through close monitoring o f indicators.

C. FIDUCIARY ASPECTS

5.1 1 Fiduciary aspects, and strengthening o f the Government’s own systems, are at the core o f this operation. The 2003 C F A A and 2006 PER have addressed the main challenges o f Cape Verde’s public expenditure management and financial accountability systems. An action plan focusing on comprehensiveness and transparency o f budget and financial accountability i s being implemented with the support o f the Netherlands, EU and the Bank. A follow-up o f the implementation o f the CFAA’s action plan has been part o f the 2006 PER, PRSC supervision

40

and preparation. Public financial management has been improving steadily, with the exception o f external controls, an issue followed closely by the donors and addressed seriously by Government. The public financial management system i s reasonably adequate to support the PRSC.

5.12 IMF’s most recent assessment o f the Central Bank (BCV) was carried out in December 2002. It indicated that the control environment o f the Central Bank was not satisfactory and the Government o f Cape Verde agreed on remedial actions. The Central Bank has implemented al l safeguards assessment recommendations. According to the IMF, B C V has made progress in building i t s capacity for management and supervision. In particular, the IMF supports BCV’s ongoing plans to improve liquidity and reserve management, and to strengthen banking and financial sector supervision. In addition, the IMF mission has welcomed the BCV’s commitment to adopt international Financial Reporting Standards and supported its request for technical assistance from the Fund for this reform13. Therefore, the Bank i s not taking further action in this area.14

D. DISBURSEMENT AND AUDITING

5.13 A single tranche credit o f SDR 6.8 mi l l ion ( U S 1 0 mi l l ion equivalent) would be made available to the Republic o f Cape Verde upon credit effectiveness, anticipated for August 2007. The closing date o f the operation would be December 3 1,2007.

5.14 The credit would follow the Bank’s disbursement procedures for development pol icy lending. The untied balance o f paymentshudget support would be disbursed against satisfactory implementation o f the development pol icy program and not tied to any specific purchases and no procurement requirements wil l be needed. Once the credit becomes effective, the Government o f Cape Verde would submit a withdrawal application to IDA requesting that the proceeds o f the credit be deposited in the Central Bank (BCV) into an account that forms part o f the country’s official foreign exchange reserves. The Borrower would ensure that upon the deposit o f the credit into said account, an equivalent amount i s credited in the Borrower’s budget management system, in a manner acceptable to the Bank and to finance management expenditures. The Borrower would report to the Bank on the amounts deposited in the foreign currency account and credited to the budget management system. If the proceeds o f the credit are used for the ineligible purposes as defined in the Development Credit Agreement, IDA would require the Borrower to refund an amount equal to the amount o f said payment to IDA promptly upon notice from IDA. Amounts refunded to the Bank upon such request would be cancelled.

5.15 Through the Ministry o f Finance, the borrower would (a) report the exact sum received into the deposit account; (b) ensure that al l withdrawals from the deposit account are for budgeted public expenditures, except for purposes such as mil i tary expenditures or for other items on IDA’S negative l ist; (c) provide to IDA evidence that the E C V equivalent o f the Credit proceeds were credited to the Consolidated Fund account and disbursements from that account

l3 IMF Staff Report for the 2005 Article IV Consultation, Sixth Review Under the Poverty Reduction and Growth Facility, and Request for Waiver o f Performance Criterion (May 2005). l4 IMF Staff Report for the 2005 Art icle IV Consultation, Sixth Review Under the Poverty Reduction and Growth Facility, and Request for Waiver o f Performance Criterion (May 2005)

41

were for budgeted public expenditures. I t i s expected that the TdC (Tribunal de Contas) will provide IDA with its annual report on the public accounts to Parliament by the end o f the year following the execution o f the budget.

E. ENVIRONMENTAL ASPECTS

5.16 Climatic vulnerability, erratic rainfall, limited fresh water supplies, and reliance on tourism as an engine o f development put sustainable use o f resources and protection o f the environment as central to poverty reduction. The Government, with support from the Netherlands cooperation and UNDP, has developed a National Environmental Plan (PANA, 2004-14) that identifies policies, investments and result indicators to promote the rational use o f natural resources and the sustainable management o f economic activities. The Plah identifies three main environmental issues that match the MDGs in the areas o f water supply, sanitation; and marine and terrestrial biodiversity.

5.17 Within the fourth GPRSP pillar, “Develop basic infrastructure, promote rational land use and safeguard the environment”, the Government reiterates i t s commitment to PANA implementation. The Government o f the Netherlands is currently providing budget support to the environmental sector, aimed at financing national structures and policies as well as municipal environmental action plans. Critical prior actions and a set o f monitorable result indicators have been identified. As a budget support partner, IDA is informed o f on-going progress.

5.18 In accordance with the new D P L guidelines, the PRSC team needs to assess the expected impact o f PRSC-supported policies on the environment and, in case o f an expected negative impact, assess the mitigation measures proposed by the Government. None o f the activities supported by PRSC-3 i s expected to have an impact on the environment. As for the overall budgetary support program, the Dutch Budget Support team has produced an environmental policy matrix that addresses al l main issues.

F. CAPACITY BUILDING

5.19 As discussed in the Lessons Learned section, achieving the results expected from the PRSC series requires strengthening the capacity o f several o f the Government agencies and ministries involved in i t s implementation. The Government i tself financed a number o f technical assistance and capacity building efforts in preparation for PRSC-1 and 2, including strategy and development o f instruments in the social protection system, implementation o f critical C F A A recommendations and studies, and institutionalization and analysis o f the c iv i l service database, al l o f which wil l strengthen the capacity o f government agencies to carry out the PRSC. Besides this very welcome development, the World Bank, at the request o f the Government, wil l remain closely involved in capacity building through three main channels: (a) technical advice from members o f the core PRSC team, through the pol icy dialogue in the context o f the PRSC or through background analytical work; (b) financial support through relevant TA components o f existing projects, and a new PRSP Trust Fund o f up to US$500,000;’* and (c) complementary

’’ Activities to be financed by the PSW TF aim at supporting government efforts in updating, sharpening and implementing the PRSP by addressing the shortcomings identified during the fnst year and a half o f implementation, and can be grouped as follows: (a) monitoring o f key PRSP indicators by assisting government services in the design and implementation o f appropriate M&E tools; (b) capacity building for strategic planning in health

42

analytical work or financial support from other donors. In the context o f one o f the most effective collaborations, the Netherlands have committed Euro 2 mi l l ion for the implementation o f the C F A A and CPAR action plans. The EU has also earmarked over Euro 1 mi l l ion for TA in the context o f the upcoming FED program.

G. R I S K S AND RISK MITIGATION

5.20 The following r isks and risk mitigation strategies have been identified:

(a) Capacitv. Implici t in the shift to budget support and reliance on national systems and c iv i l servants for implementation i s the issue o f capacity. The limited number o f technical staff in several core ministries poses a problem. Medium-term c iv i l service reform strategies should help to build a better trained and stable cadre o f staff, However, to address this risk in the short term, the PRSC budget support partners have made available over US$3.5 mi l l ion to finance a combination o f capacity building and technical support, and close coordination, including joint missions, wil l minimize the risk o f an inefficient use of funds. The Bank team in particular has obtained a PRSP TF with the specific purpose o f mitigating this risk.

(b) Decline in external concessional support at faster Dace than expected: Cape Verde will graduate to middle-income status in January 2008 and as a result a decline in foreign concessional support i s expected. A task force under the Ministry o f Foreign affairs is leading discussion with the main partners to assure a smooth transition. However, if the donors withdraw from the country before the expected date or terms o f concessional lending worsen more than previously foreseen, reforms can slow down or stall or move ahead with domestic resources. If financed by domestic resources there is a risk o f fiscal slippages or rise in borrowing levels. Through the series o f PRSC the Bank has played a catalytic role towards helping the harmonization and securization o f resources.

(c) Fiscal Risks: Accumulation o f contingent liabilities that could emerge if public or semi- public companies (such as T A C V and ELECTRA) are not run on commercial terms. The PRSC has been one o f the basis that supported our dialogue in terms o f contingent liabilities. Several actions were taken since the inception o f the program as referred above. To summarize a few: study on contingent liabilities; plan for the settlement o f arrears and prevention o f contingent liabilities; and implementation o f the adjustment mechanism for water and electricity.

(d) Sustainabilitv: uncertainty about the possibility o f having further PRSC series, and about i t s timing should i t be prepared, may lead to a halting o f the dialogue on the key issues covered by this series o f PRSCs after completion o f PRSC 3. This may have an adverse effect on the sustainability/follow-up to some activities.

financing, education testing and social protection; (c) improved governance through a more strategic use o f human resources in civ i l service and targeted assistance to the Court o f Accounts.

43

$. 9 c

......................................... ... .. . """ "_ ." I

;e P! -

4: z

I,

5

c c

............................................ f .......................................................

! y j l a 6 g L E :EE, :woe<' ! .& ,o z ' k 2 2 E I - W < a I ..... " " ... " 4 .......................................................

T1 E

N N

p 2." v1 cz .i- c - N

~ " _ l . . " . l ...........................................

..........

N f m v? i i ?

W 5

" "

N

" I" "

t-4

C

-49 -

Annex 2: Letter o f Development Policy

REPUBLICA DE CABO VERDE

Mf NlSTCRiO DAS FINANGAS E ADMINISTRA~AO POBUCA GASlNETE DA MINISlRA

Ref. No. Praia, February 12, 2007

Paul Wolfowitz,President, The World Bank, 1818 Street, N.W. Washington, 0.C. 20433. U,S.A.

SUBJECT: Letter of Develooment Policv for Povertv Reduction SUDDOI? Credit IEREGZl

Purpose

1. On behalf of the Government of Cape Verde I am requesting a credit in the amount of US$ 10 million from the International Development Association, to continue supporting the Government of Cape Verde’s structural reform program.

provides a summary of our Growth and Poverty Reduction Strategy Paper (GPRSP). At the same time, it reinforces the commitment of the Government of Cape Verde with the program of objectives, policies and measures spelled out in its structural reform program.

3. The aforementioned credit will help to meet financing requirements that Cape Verde faces to implement its GPRS.

2. This Letter of Development Policy (LDP)

4. The GPRS initiative is expected to run from 2005-2007 and will be a continuation of the earlier programs documented in IPRSP. These are the Grand Options Plan (GOP) 2002-2005, which emphasized growth, and

- 50 -

8 This gain in the growth of the real GDF per capita is manifested by improvements of the Human Development Index (HDI). HDI rose from 0.587 to 0.722 in the years 1990 and 2004, respectively. At present, life expectancy is 68 years and 76 years for women and men accordingly (2004). In addition, Human Poverty Rate (HPR), which reflects deficiencies in terms of life expectancy, income, education, literacy and other areas improved from 28.8% in 1990 to 18.7% in 2005,

9. Cape Verde's economic growth of the last decade resulted in an increase in the inequality of income distribution as shown by the Gini coefficient, which rose to 0.57 (2002), compared to 0.51 in the late 1980s. The excessive concentration of wealth is illustrated by the fact that 10% of the very poor population has only 1% of total income. The first seven deciles (70% of the households) represent only 28% of per capita expenditure, while the last decile (the wealthiest looh) account for 47Ok of total expenditures.

10.The island of SBo Vicente has the highest Concentration of wealth, with a 0.60 Gini coefficient, whereas the national average is 0.57. Next on the list are the islands of Santo Antiio, SBo Nicolau, and Santlago, with 0.56.

11.The economic acceleration was accompanied by deep structural change in the economy, with services coming out on tap. Thls situation had an important impact in terms of resource allocation among the sectors and on factor output, and, thus, on income and wealth distribution, on a national level, as well as within each island. On the other hand, the strong expansion in income in sectors such as tourism and other services worsened the imbalances in income distribution. Increasing demographic pressure, combined with erosion of agricultural soils, led to a negative trnpact on rural per capita incomes, thus also contributing to increase inequalities in income distribution.

12.Causes of poverty relate essentially to living conditions in rural areas and to the low employability of the poor. The combination of the nature of Cape Verdean agriculture, the high population growth rate, and the random nature of the ciimate, explain the rural stagnation and low incomes. In fact, this process may aggravate soil erosion, which reduces their productivity and availability.

13.To overcome the lack of resources in Cape Verde, the poor turn to migration and to the informal sector. At first, migration led Cape Verdeans abroad, but later, facing increasing difficulties in the host countries, they also started moving to the urban areas within the country. A clear evidence of this IS the increase in population recorded in the city of Praia, with resulting pressure on sanitation, housing, education, and health facilities.

14.The FAIMO have become the main safety net in rural areas. Subsistence animal husbandry also plays a key role in rural areas, as it represents a security factor against the crises that follow draught periods. I n urban areas, informal activities are the main way out for many families, as

- 5 1 -

indicated by the surge in the informal economy. Women play a key role in this area, leading t o a reduction in female p o v e q during the 1990s.

15.The fiscal deficit (including grants) averaged 2.6 percent of GDP during the period 2002-2005 as a result of improvements in both tax collection and expenditure control. I n 2006 the fiscal deflcit reached 3.5 percent of the GDP, , reflecting a strong revenue performance (VAT and customs collections) and prudent spending I n addition, domestic debt increased in early 2000s reflecting the government's assumption of the debt of some large public enterprises as part of their privatization, fiscal slippages, and, more recently, increased recognition of domestic arrears. The peak was reached in 2004 wlth net domestic debt at 34.3 percent of GDP. Since then it has decreased steadily. I n December 2005 it stood at 33 percent of GOP and is estimated to be 27 percent at the end of 2006. External debt Service (in percent of exports of goods and nonfactor sewices) has remained stable, around 10 percent and around 14 percent of domestic revenues from 2003-2005. Moreover, external financing support to GOCV has steadily decreased from 13,4 percent of the GDP in 2001 to 7.6 percent in 2003.

16. Consumer inflation was higher that the average of the past three years and resulted mainly from the impact of higher international oil prices on domestic energy and water prices, and from temporary supply shortages in a few food items that are now being reversed. The annual inflation in 2006 reached 5.4 percent and is expected to drop sharply in 2007, lying between [0 and 11 percent intewal by the end of December 2007. Inflation over the medium term is expected to stabilize a t around 2-3 percent, in line with the Eum area, the Euro being the anchor currency.

Program ovewiew

17.Cape Verde is a small country geographically as well as economically. Findings from Household Income and Expenditure Survey (HIES)/ Household Living Conditions Survey (HLCS) conducted in 2001-2002 reveals that 37% of the population is considered poor, with 62% living in rural areas. Further, about 54% af the total poor population is considered to be extremely poor, while in terms of gender, about 51% of the poor are women.

1S.The Government's Growth and Poverty Reduction Strategy (GPRS), is outlined in the Poverty Reduction Strategy Document (PRSP) 2004-2007, which was prepared with support from the World Bank. I t s main objective IS a substantial reduction in the levels of absolute poverty in Cape Verde through the adoption of an all-around poverty reduction policy, covering macro-economic policies, public management policies, as well as sectoral and microeconomic policies targeting the poor.

19.The GPRS IS part of a broader strategic planning exercise that has been under way in Cape Verde and has as main components the Grand Options

- 52 -

of the Plan 2002-2005 (GOP) and the National Development Plan (NDP2002-2005). The link between the NDP and the GPRS ensures global coherence of the planning instruments, thus facilitating management and monitoring of the vanous programs, and avolding duplication of efforts and procedures. On the other hand, both the NDP and the GPRS include the same sectoral programs, thus guaranteeing coherence between the global growth and poverty reduction goals on one hand, and the sectoral policies, on the other.

2O.The overall aim of the GPRS is to further reduce poverty by implementing a series of basic policies that include consolidating macroeconomic stability, decentralizing public decision-making and service provision, and promoting employment by developing agriculture and other productive sectors with a multiplier effect on employment, Additional basic policies include income distribution and social protection, and environmental protection,

2 1.From the above policies, the Government derived five strategic pillars setting forth the various forms of public intervention at the central and local level, using a combination of programs and policy measures. The five pillars are: (i) Promote good governance, reinforcing effectiveness and guaranteeing equity; (ii) promote competitiveness to foster economic growth and employment creation; (iii) develop and upgrade human capital; (iv) improve and develop basic infrastructure, promote land use management, and protect the environment; and (v) improve the effectiveness and sustainability of the social protection system. The 2007 budget law reflects adequate funding for these flve pillars.

Promote good governance, reinforcing effectiveness and guaranteeing equity

22.The GOCV realizes that the success of GPRS initiative will depend on good governance that focuses on the effectiveness of the economic policies especially the pro-poor policies. Under this program the GOCV aims to reform the public administration at first place by introducing capacity building programs for the civil servants and enhancing manpower management skills. Particular emphasize will be in the area of Information systems, communications technologies and human development planning. The government initiated the construction of a civil servant data base in 2004 and has just completed it.

23.Secondly, the objective is to reform and to strengthen the judicial system by implementing several measures, among others, the strict enforcement of the rule of law; the enhancement of knowledge of basic citizens rights; the provision of funds for legal assistance to vulnerable populations; and the creation of centers for the promotion of alternative dispute resolution mechanisms The GOCV has entrusted the Ministry of Justice to

A

- 53 -

coordinate all the neccesary actions among the pertinent Cape Verdean public institutions, such as the National Human Rights Committee; the Constitutional Tribunal; the Justice Promoter; the Office of the Attorney- General ;and the Cape Verdean Bar Association, to achieve the above mentioned goais.

24.Thirdly, the GOCV plans to continue with the reform of the State's financial management systems under transparent and participatory approach. The Country's Financial Accountability Assessment (CFAA), Public Expenditure Review (PER) and the Country Procurement Assessment Review (CPAR) undergo implementation. Said reform Is directed into Budget Programming and Preparation, Management and Control of State Revenues, Management of the State's Treasury and the Public Debt, Conditions of Budget Execution, Management of Municipal Finances, Capacities of the General Inspectorate for Finances, Management of State Assets, Food Aid Management and Financial Reporting and finally to introduce the Public Procurement Code. The CPAR action plan has already been adopted and the GOCV is taking all necessary measures for its implementation. MCA and other development partners are providing their support and technical assistance. I n addition, in 2006, the government has preparated the state general accounts For the years 2003 thmugh 2005 and has already submitted them to Parliament, hence concluding the clearance of the backlog. Finally, the GOCV has started the implementation of the plan for the settlement of the liabilities was prepared, which envisages the clerance of arreas in the three five years and the building-up of further arrears.

ZEi.Fourthly, and concerning the fiscal reform we register the introduction of the expenditure-based Value Added Tax (VAT) in January 2004 as well as the streamlining of custom tariffs. The objective of these reforms was to increase resources availability for poverty reduction programs. VAT comes to streamline the fiscal system and it is promoting collection OF additional revenues.

26.Fifth, the GOCV plans to enhance decentralization program that seeks to shlft the decision making power to the local stnrcktm, specifically the poor. This will ensure a more equitable distribution of resource by establishing the Flnancial Equitibrlum Fund. Proceeds generated by the Fund has increased. The plan also seeks to coordinate smoothly the operation of Civll Society Organizations ( S O ) and that of Non- Governmental Organizations (NGO) in improving the municipalities' capabilities in the provision of heatth, education, environment, land use planning and service delivery.

Promote competitiveness to foster economic growth and employment creation

,

- 5 4 -

27.The GOCV continues with its efforts of advancing market economy by encouraging the establishment of domestic large, medium and micro enterprises, as well as promotion of partnerships with foreign investors. Publlc / private partnerships have been introduced. In view of this, the government has launched a competition policy that advocates the creation and enhancement of instttutional conditions for the entrance of new businesses and firms in all the sectors of the economy.

28.In order to ensure efficiency in the provision of goods and services the GOCV will continue implementing the privatization program. This is expected to reduce the government deficits by eliminating subsidies, increases the government resources in the form of tax revenues and sale proceeds of the privatized structures. Moreover, the process will fulfill the government's ambition of providing the poor with more varieties of goods and services a t affordable prices.

Develop and upgrade human capital

2Q.Despite the fact that Cape Verde will graduate to middle income country in 2008, unemployment still poses a threat especially to the poor. In the year 2001/02 unemployment rate stood at 22% for the whole nation. About 33% of the labor force is poor based on the HLCS of 2001/02. Indeed, 20% of the total poor population has been unemployed for more than 12 months while only 10% of the non-poor population has been unemployed over the period under investigation. This implies that, unemployment greatly affects the poor population. I n sum, the unemployment rate of the poor population is 33% whlle that of non-poor is about 16%.

3O.To look into the situation the GOCV has successfully initiated an employment policy that is expected to create more jobs and generate incomes to the poor. Attention has been directed towards programs such as Frentes de Alta Intensidade de M3o-de-Obra (FAIMO) that offers temporary employments at a lower pay in infrastructure projects: such as road construction, soil and water conservation structures and reforestation programs.

31.At the same time the GOCV under the Ministries of Labor (MOL) and Education (MOE) is coordinating various skills development programs to assist the poor in securing more jobs and increase their pays. This has led to the Initiation of the employment and the professional training policies under the two ministries respectively. Particular attention is directed at strenghtenlng the organlzational structure of civil society organlzations in order to supplant FAIMO.

32.Aside, the G O N is supporting the reform of the land tenure and ownership system to encourage agricultural sector employment that provides a livelihood for the largest part of the population. Furthermore,

- 55 -

the Government is committed to provide technical assistance through the Ministry of agriculture to such scheme. Moreover, strategic. expansion of the tourist industry is expected to increase employment and incomes of the poor especially in the islands of Sal, Boa Vista and Maio.

33.The development of human capital depends on two important ingredients namely: education and health. The track record is impressive but much remains to be done, particularly with regards to gender disparities between rural and urban areas. For instance, Cape Verde has attained the goal of universal primary education. However, it is necessary to improve the quality of the education system. Teacher training priorities is indentified and action plan developed. In addition, students are to be encouraged to complete secondary or professional education in order to improve their chances of successfully entering the labor market. In this regard, a white paper diagnosing professional training is prepared. Literacy rates improved significantly during the past ten years and more will be done over the coming years in this regard.

34.Another aspect of good health is the reduction of child mortality as well as infant mortality. However, the country's high health risk vulnerability calls for constant preventive and curative measures including routine vaccination and improvement of birth conditions in maternities. The goal of reducing child mortality by two thirds by the year 2015 may be achieved if past policies that led to the current results are strengthened. I n this regard, the GOCV has already completed the analysis of health human resources and drafted and approved a strategy to increase the ratio of health professionals per inhabitant (this is already happening at the rural areas following infrastructure development). The challenges still ahead are: The especialization of health professionals as the country undergoes epidemiological transition. Furthermore, the Government is committed to strengthen the reforms in order to convey sustainability to the services renderred.

35.The fight against HIV/AIDS increases health costs to the households and individuals. The GOCV realizes that there is a need to advocate behaviour changes based on the current prevalence rate. There is a considerable decline in the reported cases of tuberculosis and the associated deaths between 1989 and 2002. Further, good results have also been achieved in treating this disease and malaria is under control, except during rainy season.

Improve and develop basic infrastructure, promote land use management, and protect the environment

36.The GOCV recognizes the importance of basic infrustructure development that includes sanitation, water provision, and road construction and maintenance. In terms of sanitation, the government plan is to enhance the collection and treatment of residual water in the cities of Praia and

Mindelo and extend this to the other cities pending fund availability. There IS a serious problem on drainage system that threats the hygienic conditions of the poor and forms a major source of pollution especially of the domestic water.

37.Given the current outdated land use policies the government Is underway t o implement a comprehensive modern Municipal Urban PIans that will replace the obsolete Land Use Plans. Thus the GOCV plans to reform the current basic cartography and cadastral systems to allow for property rights enforcement and municipal boundaries useful for other infrastructure development and property tax collections.

38.The most common environmental calamities such as soil erosion, coastline degradation, water and air pollutions, landslides, loss of biodiversity, waste accumulation and dispersion are ubiquitous to the GOCV. To correct for the situation the GOCV has commissioned the second National Environmental Action Plan that outlines the policy implications and management framework to mitigate the situation.

39.0ther infrastructure development policies include road services, maritime transportation facilities and airport infrastructures. Inter-urban road transportation has been totaily liberalized; the open policy for the maritime transportation policy led to the liquidation of the state-owned maritime company "Arca Verde"; and the air code stlpulates the regulations pertaining to the principles, rules and procedures to participate in international civil aviation industry and has led to the signing of some international air freight cooperation agreements.

40.This shows that the GOCV is highly committed to introduce reforms and restructure the transportation industry that is key to cost reduction and ensures effective delivery of goods and services to the poor.

Improve the effectiveness and sustainability of the soda1 protection system

41.The current system of social protection under GOCV continues to suffer from weak targeting of the poor sections of the population. This has callled for a systematic strategy that fnvoives protection and support mechanisms to the household members in a situation of need, risk vulnerability and social exclusion.

42.To counter this, efforts are already underway to implement a financially sustainable pension scheme and reform the social secure system. Nevertheless, there is a need to ensure that social protection transfers need to be well targeted to the poorest strata of the population if they are to have their desired impact on reducing poverty. Definitive data tables has been submitted to Bank Data.

43.More specifically, the GOCV is commited to advance with the unification of the existing systems that provides employment such as the redefinition of

- 57 -

the FAIMO workers' benefits system and the reinforcement of the capacity of the National Social Security Institute (INPS).

44.Altematively, the government provides credit to support the poor and allow them to contribute into the production process. However, the Government acknowledge that there is a need to broad and better focus the targeted population. The aim is to promote self-employment via access to micro-credit that forms Important sources of financial capital, which empowers the poor as an income generating activities. This has been extended to the establishment of the financial intermediation so as to guarantee greater coverage of the poorest zones and the neediest famities.

45.With the same spirit the GOCV encourages sustainable agricultural development where the core of the initiative rests on the integrated enhancement of the agrarian resources and in the generalization of the micro-im'gation schemes.

46.In the area of food security, the GOCV pmvides guarantee of food availability and stability in the supply of the central and periphery markets, assuring the normal operation of the food markets and a management that involves the private commercial management in supplying the market.

Policy guidelines and expected outcome

47.The GPRS will be implemented in a context of macroeconomic stability. The reference scenario used to design macroeconomic policies for the coming three years assumes a 6.5% average growth rate per year. Projected growth will be driven essentially by private and public investment, and exports. Supply side sectors expected to be more dynamic are hotels, industry, energy, fisheries and construction.

48.Fiscal performance will be guided by prudence, in line with the overall policy of macroeconomic stability, sustainable growth and poverty reduction. As a result, the primary current balance wilt record a Surplus for every year of the period, and average 3.8% of GDP for the period as a whole.

49.Monetary targets are in line with the goals of pilce stability and credibility of the exchange rate regime reflected in the upward trend in reserves relatively to imports of goods and services. It is also consistent wlth the principle of making internal resources available to finance the development effort. In this regard, credit to the economy as percentage of total credit IS projected to expand.

SO.The current account balance, including official transfers, is expected to evolve favorably in relative terms, leading to a significant reduction in the deficit, as a result of a relative stabilization of imports and an increase in

- 5 8 -

exports during the period. The current account balance is expected to consolidate below double digits, reaching an average of -7.1% of GDP during the period. Gross international reserves are projected to reach 2.5 months of imports of goods and services.

Program implementation

S1.The CPRS will be implemented within the public planning and budget systems, which are currently undergoing reforms. fmplementation will be guided by strong participation of community-based organizatlons, decentralized entities, and private sector representatives.

52.To support the process, the Government ha5 decided to establish, starting with the 2005 national budget, a Medium Term Expenditure Framework (MTEF) and a number of Medium Term Sectoral Expenditure Frameworks (MTSEF) within key line Ministries (Education, Health, AgricuIture/Environment and Social Protection). It is expected that such a set-up will improve: i) prioritizing programs and projects that directly contribute towards the GPRS objectives and the sectoral objectives; ii) budgeting of programs and projects according to resources that can be mobilized; iii) medium term (three years) budget allocation according to priorities in order to reach the established development targets.

53.To implement these guidelines, the Government has begun a number of reforms to make the public management system more efficient, more reliable and more transparent. I n this regard, a number of measures are being designed to implement the recommendations from the PER, CFAA and CPAR exercises.

54.The institutional framework for implementing the GPRS will consist O f the existing administrative apparatus, after the necessary functional changes in structure are introduced. The Natlonai Poverty Reduction Board is an advisory body that includes the main stakeholders, drawn from public administration, the private sector, and civil society. At the central level, the General Directorate of Planning, supported by a Technical Secretariat, wil l be responsible for coordination and technical support. At the Sectoral level, the Studies and Piannlng Offices within each line Ministry will prepare, monitor and evaluate priority programs and projects included in the strategy. A t the local level, there will be Regional Poverty Reduction Boards, advisory bodies that will secure the input from local stakeholderr.

Program monitoring and evaluation

55.The GOCV has set up a monitoring and evaluation system for the GPRS to guide the actions of the various actors involved in promoting gmwth and poverty reduction. In addition to governmental departments, the system include organizations from civil society, as well as the development partners.

- 59 -

56.The Government intends to ensure the fooRowlng functions in the context of the monitoring and evaluation system: (i) monitoring and analysis of trends in growth, poverty, vulnerability and inequality; (ii) monitoring the execution of programs and projects that contribute to improved growth and poverty reduction; (iii) evaluation of the impact of policies and programs related to growth and poverty reduction.

57.This system will be based on a network that is currently constructed by NOS1 (Information Technology Operational Unit). The system will include three core componenki and two support cctmponents. The core components wil l be (i) a monitoring and trend analysis component, (ii) an execution component, and (iii) an impact evaluation component. The support components lnvolve (i) creation of a physical, technical institutional and human environment that is conducive to better circulation of data, infomation and outputs between producers and users, and (ii) improving information dissemination, aimlng et a participated policy dialogue among the vairous stakeholders and, eventually, better design and execution of public policy.

58,To guarantee smooth and efficient functioning of this monitoring and evaluation system, the Government has decided to set up the following three-tiered instftutional framework for monltoring and evaluation of the GPRS:

(a) National Poverty R eduction Board (NPRB): a broad-based entity responsible for manitoring and supporting political decisions in the areas of growth and poverty reduction. NPRB will be chaired by the cabinet member in charge of Planning and will include 17 member institutions from line ministries, civil society institutions, NGOs, private sector representatives, and labor unions.

(bl Q!xwvatow and A nalvt ical S v s t a ( O M ) : made up of two sub- systems (The National Statistical System and the National Planning System), the OAS will guarantee rhe necessary observation and analysis, and supply the National Poverty Reduction Board the inputs (namely studies) for monitoring and drafting growth and poverty reduction policies.

(c) Bpaional Povertv R&u &ion Board s (RPRBS): The RPRBS play an advisory role that essentially covers, at first, approving activity proposals for the GPRS and validation of the annual GPRS progress report. They will include, in each case, the Municipality and the municipal offices of relevant line ministrks as well as the regional or local stakeholders board

Conclusion

-60 -

The Government remains committed to its overall objective of poverty reduction through sustainable economic growth, as set forth in its GPRSP. To this end, the Government Intends to energize the reform process, in a manner that is technically and administratively feasible and consistent wi th the proposed overall objective. In this matter, a switch from project aid to budget aid is desirable, at both the global and sectoral levels. It is therefore the Government's hope that IDA will grant the requested credit to assist in implementation of envisaged reform program to reduce poverty through implementation of the Growth and Poverty Reduction Strategy.

With highest consideration and esteem,

-61 -

Annex 3: Cape Verde at a Glance

CaDe Verde at a dance 2/28/07

POVERTY and SOCIAL

200s Popuintbn, mid-par (mlUbns) GNI per caplte lAt/lrs method, USSJ GNI (&/as mrulcd> US$ bllllona)

Avenae annum1 arow(h, 199905 Population M) Labor form f%) MOL wnl 1eLlnu11 (Iatrt war avallabb, 199045) Povony 1% ofmpulatlon blow nefbnel wveW //mi urban PopUlaM (% oflotd pOPu/eliar) Llh expeclancy at birth (years) Infant m M H y (par i ,MO//ve Mmr) child malnvtrition f% of chUdran under 6) A ~ w s 8 lo an Improved water wm 1% OlpopUlaflonJ Lileracf (96 olpopUafkm age is+) Gross primary enrollment f% olschoo/-age populaffon)

Mak Female

FZY ECONOMIC RATIOS and LONO-TERM TRENDS 108s

GDP ( U S blllhms) 0.11 Gmss Capild formaIbWGDP 54.2 Expor(6 cf end mrvicsdGDP 19.0 Omas domesUc 6avlngNGDP 3.8 Gross national savinpdGDP 11.2 Curmnt BCmunt balandGDP -36.7 Intmat WymntdGDP Tdal debVGDP Told debt wvk%!axporIa ’

Present valua of deWexpods

19OS9S 199545 fawnge annuslgmMh) GDP 4.2 5.7 GDP psr oaplt. 2.0 3.3 E m d poodr and M N ~ ~ I -1.4 13.4

Present valw of doWGDP

0.48 2.080

1.0

2.1 3.8

58 69 26

80

121 124 118

199s 0.49 42.4 18.1 2.4

29.8 -10.3

2004

4.4 2.5 5.2

741 745 5 s

2.3 2.3

3; 46

100 2s 56

83 88 87

2004 0.92 37.4 14.9 -1.5 23.1

-14A 0.7

53.3 7.5

200s

5.8 3.8

24,3

2,475 1.918 4.747

1 .o 1.4

49 70 33 12 82 89

114 115 113

2005 1.00 37.3 17.1 4.4

33.9 -3.4 t .I

53.7 5.6

200599

4.5 2.6

16.7

I h v a b m d l u n o n f f

190s 1095 20M, 2005

11.8 13.6 9.7 9.2 17.3 18.5 15.2 18.8

Manifadurlng 10.0 7.2 7.8 S0M006 7t.y 88.9 62.0 80.3 Hwaehold flnal mnsumption eawnditun 96.9 77.7 80.9 7 5 1 General govl flnal mMumplbn expenditure 9.0 19.8 20.8 20.4 ImpoRI of we06 and 8ervice6 89.0 59.1 53.8 50.1

190545 199S41 2004 (average annual gmwih) Agrlarlture indu6W 5.1

SOW1006 5.8 8.1 0.5 3.4 H w d d d flna mn8umptbn expenditura 0.9 8.1 0.1 4 .1 General govl flnsl mnrumption sxpsnditure 3.2 -1.4 3.7 3.2 Or-8 U P l u i (ormation 3.9 0.9 9.2 16.7 -Elpod. - 9 ’ 1 -

Manufaoturlng -1.5 3.0 12.2

Impma of o h and saNlce6 1.1 8.9 8.5 0.5

Note: 2006 data are preliminary a6UinalO6.

* The diamonds ahw four key IndlCatOn In Vu, muntw (In W) minpared with b I n m - a r o u p ay~rage. If date are mirrlng. the diamond will be Inmmplete.

- 62 -

Cape Verde

PRICES and GOVERNMENT F INNCE

DomWk M e a

Consumer price8 lmpl i l l GDP deflator ~ O W n l l l l M ~ nnW7CO (% Of GDP, include8 cumni m t s l Curnnt rowwe Curmnt budcat balanm overail surpiuddencit

TRADE

(US$ mllilons) Total exports (rob)

Bananas Fish Manufac(ura8

Total lmpons lcin Food Fuel and enemy capita1 good8

(96 C h g o )

Exporl prim Index (ZW(h7W) lmwd pdca index (ZWO=lW) T e n s of trade (2000.7WJ

BALANCE of PAWENTS

(US$ mi7lions) Expats Of &S and Serv'bS lmwns OfQocds and servimi Resource bslarm Nel lnmme Net cumnt tnmfen Current ataunt belance Flnandnp itema (net) Changes in net mewe8 Memo: Rawrws lmluding pdd (US$ million$) Convenlon rate (DEC, ICcaWSI)

EXTERNAL DEBT and RESOURCE FLOWS

, (US$ mil/lansJ Total debt outstanding and dlrbuned

IBRD IDA

Total debt 8 m m IBRD IDA

1086

5.4

21 .s

1986

11

E4

1085

36 03

6 7

-5 23

-38

63 -14

55 91.8

1985

0 3

0 0

37 17

0 0

4 2 0 2 0 2

1996

4.8 4.0

20.0 1.4

-21.3

1895

24 0 1

218 70 10

121 81

1995

88 272

.I84

-5 138

.50

4t 9

65 76.9

1995

0 33

0 0

74 15

20 0

12 6 0 6 0 6

2004

-1.0 8.2

32.1 11.3 -3.8

2004

57

438

82 80

102

2004

295 643

-348 -18 233

.133

162 30

127 88.8

2oM

493 0

106

31 0 2

Bo 16 0

38

21 14 1

13 1

12

2006

0.4 -3.8

30.2 12.0 -8.3

2005

88

438

85 86

101

2005

387 647

.2b0

-34 ne a4

67 35

181 88.7

2005

538 0

214

29 0

18 0

41

0 0

0

-GDPddlwx -9 -CPI I

Curnnt #cwunl bohm to GDP (?4) I

ComposRlOn o(1006 debt ( U S mill.)

F.14 G ' O

- 63 -

Annex 4: IMF Relations Note IMF Executive Board Reviews the Quality and Consistency of Assessment Reports for Anti-Money Laundering and Combating the Financing of Terrorism and the Effectiveness of Coordination Public Information Notice (PIN) No. 06/72

INS are issued after of developments at the longer-term program

unless otherwise decided by

On May 10, 2006, the Executive Board of the International Monetary Fund (IMF) discussed the staff paper Anti-Monev Launderina and Combatina the Financina of Terrorism (AMVCFT): Review of the Ouality and Consistencv of Assessment ReDOrtS and the Effectiveness of Coordination jointly prepared by the IMF and the World Bank. The Executive Board reiterated the importance of AML/CFT to strengthening the integrity of financial systems and deterring financial abuse, and confirmed the collaborative arrangements presently in place with the Financial Action Task Force (FATF) and FATF-style Regional bodies (FSRBs) for assessing AML/CFT regimes in the context of the IMF's financial sector work. The Board also endorsed the efforts underway to strengthen the quality and consistency of assessments prepared by all assessor bodies, and adopted measures for enhancing cooperation with the FATF and the FSRBs.

As part of the review, the Executive Board examined the findings of an expert panel which analyzed a sample of AML/CFT assessments reports prepared by different assessor bodies (namely, the IMF, the World bank, the FATF and a number of the FSRBs). The panel found a high degree of variability in the quality and consistency of the various reports among assessor groups as well as within particular assessor bodies. The Executive Board noted that a number of initiatives had been taken or are underway to improve the quality and consistency of assessments by all assessor bodies, including the standardization of documentation, the strengthening of peerhnternal reviews, and the intensification of assessor training. The Executive Board called on IMF staff to provide technical assistance to, and cooperate more closely with, the FSRBs with a view to improving their capacity to produce qua I ity assess men ts.

The Executive Board also agreed that every assessment or update under the Financial Sector Assessment Program (FSAP) or Offshore Financial Center (OFC) should include a full AML/CFT assessment using the most recent methodology. Full AML/CFT assessments should be conducted approximately every five years. The Executive Board also agreed on measures to facilitate coordination of assessments with the other assessor bodies, and reaffirmed the current policy on burden sharing of assessment work and of conducting assessments across the full range of IMF membership, including FATF and FSRB members.

Background

I n July and August 2002 respectively, the IMF and the World Bank Executive Boards endorsed a 12- month pilot program of AML/CFT assessments using two approaches to assessments: (1) assessments led by IMF and World Bank staff; and (2) assessments conducted by the FATF and FSRBs. The Boards agreed that assessments conducted by the FATF and FSRBs would result in Reports on the Observance of Standards and Codes (ROSCs) subject to a pro forma review by IMF and World Bank staff.

As AML/CFT ROSCs are the only ROSCs that are prepared by bodies other than the IMF and the World Bank, Executive Directors requested a comprehensive review at the end of the pilot program

- 64 - that would inter alia focus on the quality and consistency of assessments and ROSCs within and among the FATF and FSRBs as well as on the effectiveness of coordination among assessor bodies. I n the March 2004 report on the review of the pilot program, Twelve-Month Pilot Proaram of Anti- Money Launderina and Combatina the Financina of Terrorism Assessments-Joint Report on the Review of the Pilot Proaram, staff noted that not all FSRBs had completed the requisite number of AML/CFT assessments to allow for a meaningful review. As such, the Executive Board of the IMF agreed with the staff proposal that the arrangements under the pilot program should continue pending completion of a substantive review of the quality and consistency of FATF and FSRB assessments and ROSCs in 18-months time (see Public Information Notice No. 04/33).

The independent panel of experts referred to above evaluated the quality and consistency of AML/CFT assessment reports prepared by the FATF and FSRBs, as well as the IMF and the World Bank, under the pilot program of assessments and proposed a way forward to address any identified issues. They also assessed the effectiveness of coordination with the FATF and FSRBs, as well as the integration of AML/CFT assessments in the FSAP and OFC programs. Their report was discussed by the Executive Board as part of the present review.

The review found: (1) a high degree of variability in the quality and consistency of reports prepared by the different assessor bodies as well as within particular assessor bodies; and (2) while a large majority of reports were of high or medium quality with respect to key components of the assessments, the treatment of ratings gave rise to a number of issues. I n addition, experience in coordination with the FATF and FSRBs and the integration of AML/CFT assessments in the FSAP and OFC programs gave rise to two issues concerning: (1) the difficulties of coordinating FATF and FSRB mutual evaluations with FSAP assessments and updates and OFC assessments; and (2) the inclusion of AML/CFT assessments in all FSAP and OFC assessments in the light of Executive Board discussions on streamlining of FSAP and OFC assessments and on updates of these assessments.

Executive Board Assessment

Executive Directors reiterated the importance of anti-money laundering and combating the financing of terrorism (AML/CFT) to strengthening the integrity of financial systems and deterring financial abuse. They welcomed the opportunity to discuss the review of the quality and consistency of assessment reports and the effectiveness of coordination of AML/CFT assessments. Directors noted that the Financial Action Task Force (FATF) standard is unique in that i t is the only standard for which the Fund accepts assessments prepared by assessor bodies other than the Fund and the World Bank for the purposes of the Reports on the Observance of Standards and Codes (ROSCs), the Financial Sector Assessment Program (FSAP), and the Offshore Financial Center (OFC) initiative. This review was thus important and timely.

Directors noted the findings of the report of the independent panel that reviewed the quality and consistency of assessment reports and the effectiveness of coordination. They welcomed the clarification that the independent review panel had found the Fund to be one of the two assessor groups that tended to perform consistently above average, while noting that some of the factors affecting the quality and consistency of other groups' reports were found to be relevant to Fund reports as well. Directors were encouraged that staff has already taken steps to strengthen internal quality control to address the remaining issues in Fund reports.

Directors expressed concern over the poorer quality of reports prepared by some other assessor bodies and the variability in quality across reports generally. It was acknowledged that, given the current budgetary environment, the Fund would need to continue to rely on other assessor bodies to prepare AML/CFT assessments. Directors welcomed the initiatives identified in the staff paper to strengthen the quality and consistency of assessments of all assessor bodies. In that context, they encouraged all assessor bodies to strengthen internal review procedures. They also called on staff to continue to provide technical assistance to, and cooperate more closely with, FSRBs with a view

- 6 5 -

to improving their capacity to produce quality assessments. Most Directors agreed that the quality and consistency of assessments should be reviewed again in five years.

Directors noted that the April 2006 IMFC Communique called for "continued actions by all countries to develop strong programs on anti-money laundering and combating the financing of terrorism, and continued support for comprehensive assessments of these programs within the context of the Financial Sector Assessment Program." Most Directors agreed that every FSAP and OFC assessment (including updates) should continue to incorporate a full AML/CFT assessment using the most recent methodology, unless one has already been conducted using that methodology. I n exceptional cases where a scheduling conflict with another assessor exists and an AML/CFT assessment cannot be completed within 18 months of an FSAP or OFC mission, the AML/CFT assessment can be submitted later as a supplemental document.

Directors agreed that full assessments should be conducted approximately every five years. They agreed that such assessments (including reassessments) should, to the extent possible, be conducted within 18 months before or after the relevant FSAP or OFC assessment mission. Directors acknowledged, however, that there may be circumstances owing to scheduling conflicts with another assessor body in which an AML/CFT assessment will not be completed in time to be included in the FSAP and OFC documentation. I n these cases, the schedule of the AML/CFT assessments would normally not be brought forward, and the AML/CFT assessment documentation would be submitted later as supplemental documents, the timing of which would be noted in the FSAP and OFC documentation. I n cases of reassessments, the FSAP or OFC documentation would not include an update of AML/CFT developments since the last assessment. However, in circumstances where an FSAP or OFC is scheduled for a member where there has been a significant deterioration of the AML/CFT environment since it was last assessed, it would be expected that Fund staff, the FATF or the relevant FSRB, and the country concerned would seek to reach agreement to either bring forward the AML/CFT reassessment to be conducted by another assessor body, or to have the Fund conduct the assessment itself. I n any case, i t is expected that the Fund would continue to monitor significant financial sector problems arising from money laundering or terrorism financing activities through other vehicles, such as assessments of other financial sector standards, Article IV consultations, and participation in FATF and regional fora.

To encourage greater synchronization of the schedules for FSAP, FSAP updates, and OFC assessments, on the one hand, and AML/CFT assessments, on the other hand, Fund staff, the FATF, FSRBs, and the country authorities in question should engage at an earlier stage in the planning process.

Directors reaffirmed the current policy on burden sharing of assessment work and encouraged staff to continue to conduct 6-7 assessments per year across the full range of Fund membership, including FATF and FSRB members. It is understood that the burden sharing framework should continue to ensure that all FSAP and OFC assessments would incorporate timely AML/CFT assessments and reassessments.

IMF EXTERNAL RELATIONS DEPARTMENT Public Affairs Media Relations

Phone 202-623-7300 Phone: 202-623-7100

Fax: 202-623-6278 Fax: 202-623-6772

- 6 6 -

MAP SECTION

SSãão Domingoo Domingo

Santa CatarinaSanta Catarina

Santa MariaSanta Maria

EspargosEspargos

NorNortete

Riberia BravaRiberia Brava

PovocPovocãão Vo Velhaelha

LajesLajes(1803 m)(1803 m)

Mt. FogoMt. Fogo(2,829 m)(2,829 m)

BOA VISTA

BRAVA

MAIO

MOSTEIROS

PAÚL

PORTONOVO

PRAIA

TARRAFAL

SAL

SANTACATARINA

SANTACRUZ

SÃODOMINGOS

SÃO FILIPE

SÃO NICOLAU

SÃO VINCENTE

RIBEIRAGRANDE

Ribeira da Cruz

Ribeira GrandeVila das Pombas

Porto Novo

MadeiralCalhau

Tarrafal

Sal-Rei

Tarrafal

Santa CruzVila do Maio

São Domingo

Santa Catarina

SãoFilipe

Furna

Mosteiros Igreja

Santa Maria

Espargos

Norte

Riberia Brava

Mindelo

São Pedro

Preguica

Povocão Velha

PRAIA

AT L A N T I C O C E A N

W I N D WA R D I S L A N D S

L E E WA R D I S L A N D S

Santo Antão

São Vicente

Ilhéu BrancoIlhéu Raso

Santa Luzia

São Nicolau

Sal

Boa Vista

MaioSão Tiago

Fogo

Brava

Ilhéus DoRombo

Lajes(1803 m)

Mt. Fogo(2,829 m)

17°N

16°N

17°N

16°N

15°N

23°W24°W25°W

23°W24°W25°W

CAPEVERDE

This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other informationshown on this map do not imply, on the part of The World BankGroup, any judgment on the legal status of any territory, or anyendorsement or acceptance of such boundaries.

0 10 20

0 10 20 30 Miles

30 Kilometers IBRD 33383

DEC

EMBER 2004

CAPE VERDESELECTED CITIES AND TOWNS

NATIONAL CAPITAL

RIVERS

MAIN ROADS

COUNTY (CONCELHO) BOUNDARIES

INTERNATIONAL BOUNDARIES