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Cape Verde: Cape Verde Economy Profile 2012

2012/02/28

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Cape Verde Economy Profile 2012

 
...........................................ANALYSIS...........................................

was adversely impacted by the global financial crisis with its gross domestic product (GDP) growth rate contracting to 3.9% in 2009 from 5.9% in 2008. Growth decreased owing to the fall in tourism, construction, and foreign direct investment (FDI), but by late 2009 both tourism and construction had started to recover and FDI flows stabilised. Remittances remained fairly constant and even rose by 1.7% in 2009.

To counter the impact of the crisis, the government expanded its public investment programme (PIP) by 45.5%. Private and public investments are expected to increase in 2010-11, with the economy recovering to 2008 GDP growth rates. Inflation decreased substantially in 2009 to 2.2%, down from 6.8% in 2008, but is expected to increase slightly in 2010-11 because of the rise in international prices, and in imports, with the pick-up in tourism.
The overall fiscal balance widened considerably from 1.1% of GDP in 2008 to 6% in 2009, and is expected to remain high in 2010, though within the International Monetary Fund (IMF)’s Policy Support Instrument (PSI) target. International reserves remained above the PSI target, since the deficit was fully financed by external borrowing, mostly concessional. Cape Verde also received a Special Drawing Rights (SDR) allocation. Donor budget support continued to be high – 8.5% of the budget in 2009.
In 2008, Cape Verde graduated from Least Developed Country (LDC) status on the United Nations' (UN) scale to Middle Income Country (MIC). The African Development Bank (AfDB) adopted this decision in 2009 since it uses the same classification. This change in status prompts Cape Verde to transform donor-beneficiary relationships with traditional foreign partners into a framework of economic co-operation and to diversify its partnerships, in particular with other developing economies. The short-term outlook on financing is positive. In December 2009, the IMF completed the 7th PSI review approving the country’s policies: an important signal for donors, development banks and markets. It reached an agreement for many concessional loans in 2009, being no longer eligible after 2013.
The transition from LDC to MIC presents challenges because Cape Verde is highly dependent on official development assistance (ODA) and concessional loans. Becoming a sustainable economy will require significant structural reforms and investments. Cape Verde aims at becoming an international hub in different areas. In particular, in transport services given its strategic position between America, Europe and Africa and its air connections between Senegal and Guinea Bissau; in financial services and Information and Communication Technologies (ICT) for off-shoring; maritime services through its ports and fish processing; culture, with its music, theatre festival, traditional dance, and the historical heritage of Cidade Velha, which was inscribed in UNESCO’s World Heritage List in June 2009. The government is engaged in a medium term aggressive PIP with a budget increase in the 2008–11 Growth and Poverty Reduction Strategy Paper (GPRSP-II) from 16 billion Cape Verde escudos (CVE) in 2008 to CVE 24 billion in 2009 and CVE 31 billion in 2010.
 
The government of Cape Verde is promoting the private sector by easing the process of starting a business and paying taxes. It has reduced direct tax rates for firms and is implementing a reduction of tax rates on imports starting in 2010. They will gradually decline to zero by 2018 in compliance with World Trade Organization (WTO) guidelines. The country strongly supports an innovative e-government system and is diversifying energy production, turning to renewable sources of energy to reduce its oil dependence.
Poor infrastructure between and within islands remains the major constraint for the development of Cape Verde’s economy even though the country has made progress on road and ports expansion, maritime transportation and electricity distribution.
The political and social contexts remain positive in Cape Verde. A large number of the UN Millennium Development Goals (MDGs) have been achieved: the percentage of poor people was almost halved between 1990 and 2007. Efforts to develop co-ordinated plans for education, employment and professional training seek to match job skills with job vacancies and thus decrease unemployment, which is 17.8%. Among young people, the rate is a worrying 31%.

 

Recent Economic Developments and Prospects

In 2009, real GDP exhibited a growth rate of 3.9% compared with 5.9% in 2008, after peaking at 10.8% in 2006. Growth rates in 2009 were adversely affected by the global financial crisis through its impact on tourism, construction and associated FDI inflows. But the decline was also due, in part, to lower-than-expected public investment execution in 2007 and high food and fuel prices in 2007 and 2008. However, the 45.5% expansion in the PIP limited the decline in 2009.

Agricultural production in 2009 was favoured by abundant rainfall. A third of national food needs were covered, while the rest was imported. Indeed, only 10% of the land in Cape Verde is arable, 48 000 hectares, most of which is already exploited for corn, cereals, fruits and horticulture. The agricultural sector contributes less than 10% of GDP. The government has proposed to raise productivity by developing intensive production, adopting greenhouse technologies and cultivating more land in the mountainous interior of islands. The 2004–14 National Plan for the Environment (PANA II), implemented with substantial funds donated by the government of the Netherlands, seeks to promote agriculture by fostering the desalinisation of water and the reforestation of areas at risk of desertification.

On 12 November 2009 Cape Verde signed the Regional Pact on Agriculture Policies in the Economic Community of West African States (ECOWAS). The main objective of this 900 million US dollar (USD) pact is to design and implement food security strategies to attain the first goal of the MDGs, by which poverty should be halved by 2015. This is important for Cape Verde, a country suffering from food deficit. Before the pact, there was no structural programme on food security, only punctual budget allocations.

Fishery has strong potential in Cape Verde, but is held back by its small-scale and out-dated processing techniques that make it uncompetitive with foreign competitors working in its maritime area. In addition, Cape Verde can barely control volumes of extraction by foreign companies. As a result, it is developing subsistence fishery. The contribution of this sector to GDP remains about 1%.

Cape Verde was in negotiations with the Spanish government in late 2008 to rebuild the state-owned cold storage, Interbase, on the island of Sao Vicente with a 14 million euro (EUR) grant but no agreement has yet been reached. The city of Mindelo in São Vicente has a small-scale fish processing plant, Cabnave, which could benefit from Chinese investments to transform the plant into a hub for Chinese fleets in the Atlantic. The sector may also benefit from the support of Spanish companies to develop fish preservation. Investment efforts in the sector have already raised fish exports threefold in 2008.

Cape Verde is a service economy with construction, commerce, transport and communications, financial and public service sectors accounting for 80.6% of GDP in 2008. Among services, tourism is by far the leading sector and attracts most FDI inflows. However, tourism in 2009 contracted by 13%, after 7.8% growth in 2008. The island of Sal was the worst hit but also the first to show signs of recovery by late 2009. Construction, which is closely linked to tourism, started to recover in the country as well by late 2009.

Over the next ten years, the World Travel and Tourism Council (WTTC) expects revenues from tourism to grow at annual rates of 7.9% and to account for 5.3% in employment. But the sector faces considerable challenges. Tourism remains concentrated in large resorts and consumer goods are largely imported. Spillover effects to the entire population are constrained by poor infrastructure.

Tourism in Cape Verde strongly depends on European economic conditions. To reduce the inherent risks, the government encourages the diversification of countries of origin. It is also promoting tourism of high quality, with the support of Spanish companies from the Canary Islands while limiting development to avoid the mass tourism that characterises the island of Sal. The government wants to foster eco-tourism in Fogo, São Antonio and São Tiago islands.

The lower growth rate in 2009 is explained by the contraction in external and domestic demand. Private investment and exports shrank in 2009, pushing down GDP growth. The government counteracted the slowdown in growth by increasing public investment to the tune of 45.5% and public consumption by 8 %. Public investment is also expected to experience a 20% growth rate in 2010.

Private consumption started to recover in 2009, rebounding close to the 2007 level. This is explained by lower inflation and improvements in the labour market and access to credit, together with the expansion of the public investment programme. Other contributing factors to growth in private consumption were the stabilisation of FDI and the resumption of several construction projects thanks to the recovery of tourism. Private investment is expected to follow an upward trend in 2010.

Real growth in the export of services contracted sharply in 2009 due to worldwide economic conditions. It is expected to recover in 2010, reaching higher growth rates than in 2008 though lower than in 2007. Import growth increased over the year owing to the resumption of tourism in the last quarter and hence of demand – a positive trend expected to continue in 2010.

Macroeconomic Policy

Fiscal Policy
The Medium Term Expenditure Framework (MTEF) for 2008-10 is set according to priorities identified in the 2008–11 GPRSP-II and supported by the IMF’s 2006-09 PSI that was extended to 2010. In 2010, the government will negotiate a new PSI for 2011-13.
 
The crisis had a substantial impact on fiscal revenues in 2009 owing to the contraction of FDI flows. Taxation revenues decreased by 2%, following the contraction in firms’ profits and in land sales. As a result, some government expenditures such as the hiring of personnel were temporarily reduced or suspended. But the government still followed an expansionary policy, raising total expenditures by 15.5% in 2009.
The population had been severely affected by the surge in food and fuel prices in 2008. While fuel was adjusted in line with import prices, the government temporarily subsidised electricity and water (about 0.2% of GDP in 2008) to cushion the most vulnerable people with a well targeted electricity and water price structure. Other measures that increased spending in 2009 were intended to improve the purchasing power of families. The value added tax (VAT) on cereals, for example, was eliminated and the minimum pension raised by more than a fourth in 2009. In the same year, the government also supported firms’ competitiveness by reducing import tax rates and direct tax rates by 10 percentage points.
 
The fiscal deficit is expected to increase in 2010, before the legislative elections in January 2011 and the presidential elections in February 2011. In particular, capital expenditure is expected to increase largely in order to expand port capacity, power generation and road building in Brava, Boa Vista and Santiago, and in order to build three dams. On the other hand, current expenditure is expected to fall because of falling spending on public sector salaries and the freezing of public sector recruitment. In addition, revenues are expected to decrease in 2010 with moderate cuts in taxes. In 2011, the fiscal deficit will slightly moderate with a slowdown in government spending.
The large deficits in 2009-10 are fully financed by external borrowing which limits the impact on reserves. Budget execution in 2009 was very high at 99%, surpassing the 2008 execution rate of 93%. The government engaged in an aggressive PIP increasing the GPRSP II budget from CVE 16 billion in 2008 to CVE 24 billion in 2009 and CVE 31 billion in 2010.
Cape Verde’s total debt growth in 2009 increased to 4.7% of GDP, which can be attributed to a substantial increase in domestic debt used to finance the growing fiscal deficit. Because the government had been prudent in managing finances, there was fiscal space to accommodate this increase without harming the country’s creditworthiness. In 2010, the prospect of 2011 elections may put additional pressure on fiscal spending.
 
Monetary Policy
It is expected that the Banco de Cabo Verde (BCV) will maintain the escudo’s peg to the euro. The drop in FDI and tourism in 2009 lowered reserves and placed the escudo’s peg to the euro under strain. The drop in reserves was nevertheless covered by an IMF SDR allocation in mid-2009. Already in late 2008, the BCV increased its interest rate to attract a larger share of deposits from the diaspora. The increase in the interest rate maintained the necessary differential with Euribor. The BCV intends to keep interest rates relatively high in 2010 until the economy recovers.
Most loans in Cape Verde’s portfolio are in dollars and the depreciation of the dollar between 2006 and 2008 reduced debt service by CVE 2 million. The government is negotiating with different partners to reduce exchange rate risk associated with debt service. Loans in dollars will end in 2013.
The inflation rate for 2009 was 2.3% – down from 6.7% in 2008 – owing to the decrease in food and fuel prices and tourism. Good rainfall and a substantial increase in irrigated areas also contributed. Inflation is expected to rise slightly in 2010-11 because of the increase in commodity and fuel prices and because of more robust economic activity.

External Position
The current account balance in Cape Verde is structurally negative because of the heavy reliance on imported manufacture goods and food. Other reasons for it widening slightly in 2009 are the drop in tourism and FDI as well as high levels of public investment in infrastructure. The drop has been offset by a substantial increase in grants and remittances. Indeed, remittances, which account for approximately 9% of GDP, rose by 1.7% by the third quarter of 2009. Most of the remittances come from Portugal, France and the US, where most of the estimated 1 million-strong diaspora live – that is double the number of current residents.
 
The current account will improve in 2010-11 because of the pick-up of tourism and the increase in exports. This increase in exports will be associated with the re-export of fuel. Fish, clothing and shoes continue to dominate exports – fish exports increased by a factor of 3 in 2007-2008 to reach 60% of exports. That being said, exports of goods contribute marginally to the current account, a mere 2.7% of GDP in 2009.
 
Trade links with the EU, Cape Verde’s main trading partner, have been improving. Exports to the EU zone accounted for 88.5% of total exports while imports from the EU accounted for 80.6% of total imports in 2008. Portugal remains the most important trading partner accounting for 43.3% of exports and 45.6% of imports in 2008. Trade with other African countries remains low, accounting for only 8.7% of exports and 2.7% of imports in 2008.
 
International reserves rose by 8.5% to EUR 278.5 million in 2008, which is equivalent to 4.1 months of imports. In 2009, however, reserves contracted in the first half of the year to the equivalent of three months of imports. Because of a SDR allocation, reserves then rose in late 2009 and are expected to remain stable at 3.5 - 4 months until 2012.
 
Cape Verde was still dependent on ODA flows in 2009. Grants rose from USD 69.2 million in 2007 to USD 84.5 million in 2008 and to USD 94.5 million in 2009. Grants are expected to decrease to USD 69.6 million in 2010. The largest multilateral creditors are the World Bank and the AfDB with stocks of debt in 2009 equal to USD 331.8 million and USD 151.1 million, respectively. In terms of bilateral creditors, Portugal is by far the largest one with a debt stock owed equal to USD 89.3 million in 2009.
The change to MIC status is motivating the country aggressively to seek concessional loans since Cape Verde will no longer have access to these types of loans by 2013. The country signed several concessional loans in 2009 with the AfDB (USD 10 million), Portugal (USD 8 million), China (USD 9.1 million) and Japan (USD 1.49 million). Cape Verde is also seeking to diversify its economic partners by fostering South-South co-operation with India, Egypt, Morocco and Argentina.
Total debt to GDP remained fairly constant at 56.5% in 2009, compared with 57.2% in 2008, and following a downward trend from 71.2% in 2001 and 62.3% in 2007. External debt to GDP also remained constant at 38% in 2009, compared with 38.1% in 2008.
 
Despite the crisis, the government continued to meet its debt service obligations on schedule. External debt is mostly long-term, with an average maturity of 26 years and an average interest rate of 1.82%. The volume of commercial loans in the portfolio of the government is very low, 2%, and mainly with Portuguese banks such as Banco Espíritu Santos and Caixa Géral Depósito. The stock of debt with private companies in 2009 was USD 11.9 million, down from USD 14.8 million in 2008.
As a result of the credit crunch in international markets, foreign direct investment flows declined substantially in 2008 – growing at 4% compared with 33% in 2007. In 2009, the decline in FDI flows was a dramatic –44%, which is primarily due to the decline in construction. Almost all projects stopped, except for a large-scale resort held by RIO group in Boa Vista. By late 2009, FDI flows stabilised and there were signs of recovery in construction.
 
Cape Verde became the WTO's 153rd member on 23rd July 2008. On May 12th 2009, the World Trade Organization (WTO) Council on Trade in Goods approved a request from Cape Verde for a waiver to delay implementation of its tariff liberalising commitments until 1 January 2010, because of the impact of the global economic crisis on tariff revenues. WTO membership does not open significant commercial opportunities since Cape Verde mainly exports services. Cape Verde already has preferential access to US and European markets through the African Growth and Opportunity Act and the Cotonou agreement.
 
Cape Verde signed a 2007-12 fisheries partnership agreement with the EU with a contribution of EUR 385 000 to support its fisheries. This agreement allows community vessels mainly from Spain, Portugal and France to fish in Cape Verde waters and is part of the tuna agreements in West Africa.
After interim agreements with Ghana and Côte d’Ivoire, negotiations towards a regional Economic Partnership Agreement (EPA) between the EU and ECOWAS were pursued in 2008 and 2009 but not concluded. The elaboration of a regional list of sensitive products and rules of origin proved challenging but progressed in the talks of 4-5 August 2008 in Dakar and 8-11 July 2009 in Cotonou, respectively. Issues to be addressed include the adoption of an ECOWAS common external tariff and trade in services.
 
Cape Verde is keen to have services included in the EPA since the country is service-oriented. The common tariff level is particularly challenging for Cape Verde since it would result in significant budgetary shortfalls. Cape Verde would face a 0.5% levy on all goods and services imported from non-ECOWAS countries.
The ECOWAS region is in the process of elaborating an EPA development programme (PAPED) to address development needs arising from this agreement. PAPED seeks to analyse how to compensate the losses in revenues by implementing alternative customs mechanisms, adapting VAT, and developing infrastructure.

Structural Issues

Private Sector Development
According to the World Bank’s 2010 Doing Business report, the business environment in Cape Verde remains stable at the 146th position. While starting a business and paying taxes have become quicker and easier, thanks to initiatives in e-government by the Núcleo Operacional de la Sociedad de la Información (NOSI, operational nucleus of the information society), other aspects of doing business are a concern. In particular, Cape Verde ranked in the 183rd and last position in closing a business (the 183rd position is shared with 26 other countries for which there is no information or effective bankruptcy legislation). Moreover, the prosecution of ongoing efforts to ease land access is crucial to favour private sector development.
 
The Agência para o Desenvolvimento Empresarial e Inovação (ADEI, agency for entrepreneurial development and innovation), established in May 2009, aims at helping small entrepreneurs to prepare sound business plans and make their access to credit easier. A new bank, Novo Banco, and a mutual aid financing institution will be set up in 2010 to ease access to finance. Microfinance has significant potential, but remains underdeveloped (75.5% of unemployed people are not aware of microfinance institutions and the sector has currently only 50 000 clients).
Cape Verde’s financial system is resilient to the international crisis thanks to its limited integration with international capital markets and its prudential regulations. The low level of liquidity of its stock markets constrained the use of innovative financial instruments, which also isolated the country from the crisis. The construction sector, hit hard by the crisis in 2009, is not typically financed by local banks in Cape Verde.
 
Long term financing is mainly provided through FDI and pre-sales, especially for real estate. Indeed, local banks cannot finance a project beyond 25% of their own capital. However, this legal constraint will become less binding since the two most important banks increased their capital through the stock market in 2009. Cape Verde’s stock market is growing steadily and raises 94% of private credit. The International Financial Reporting Standards has been in force since January 2010.

Other Recent Developments
The Agenda for State Reform promotes an integrated approach for all administration departments with the aim of consolidating democracy, strengthening citizens’ rights, modernising and decentralising public administration, improving the state’s performance and increasing transparency. In 2009, 8.58% of the national budget was allocated to the implementation of this reform agenda.
 
The centralisation of information and decentralisation of governance is making impressive progress thanks to NOSI’s initiatives. Through a single front office, firms and households are able to manage all aspects of their relationship with the state, including registrations, certificates, taxes, licences, elections, health, education and social security. This front office is accessible not only at the Casa do Cidadão (citizens’ house), but also via mobile phones and a web platform (about 25 000 registered accounts).
 
A Chinese concessional loan is financing an e-governance development project to strengthen and extend connectivity to all islands and to foster e-education and e-health. The first phase consists of USD 17 million, some of which pays for the participation of HUAWEI, a Chinese networking and telecommunications equipment supplier. A second phase of USD 13 million is under discussion.
 
In addition to modernising government administration, Cape Verde invested 47% of its 2009 budget in infrastructure. Improving roads and electricity distribution is an ongoing effort and the modernisation of ports and maritime transportation is at the centre of the 2010 public investment programme. The subsidised transportation of passengers and merchandise between islands is still slow and unreliable, but a new Cabo Verde Fast Ferry company is expected to start operating in June 2010.
 
While oil price caps have been in effect since August 2009, the oligopolistic structure of the market makes price co-ordination easy and hence oil prices did not decrease. The country’s efforts to strengthen its energy production follow a strategy of centralising production at island level with a unique thermal plant in each island and increasing the reliability of access to electricity. A restructuring programme to improve efficiency and limit losses of the national company ELECTRA is under study with the support of the World Bank, aiming, eventually, at privatisation. The capital city of Praia should benefit from two new power plants with 10-megawatt capacity each by the end 2011, adding to the current four that produce a total of 26 MW.
 
A credit line of EUR 100 million from Portugal is targeted at reducing energy dependence on oil. A photovoltaic 5-megawatt plant with thermal energy backup is expected to come into operation in the islands of São Tiago and Sal by mid 2010. Moreover, a new wind farm is expected to produce 28 MW by the end of 2010, adding to the 27 MW already produced by three existing wind farms. In Praia, renewable energy should account for 25% of energy by 2011 and 50% by 2015.
 
The national energy grid has been renovated and expanded resulting in lower technical losses and theft of power. Access to electricity considerably increased from 49.5% of households in 2000 to 73.6% in 2007, especially in urban areas (89.8%). A EUR 5 million programme of rural electrification to reach 10 000 more people (28.6% of the rural population uses candles for lighting) is under implementation and aims at increasing the penetration rate to 95% by the end of 2010. The construction of a high voltage 60-kilowatt grid in Praia was long delayed, but is now underway and a system of pre-paid electricity is under experimentation.
 
The telecommunication sector is rapidly evolving. Cape Verde aims, by 2011, to be linked to the international system through two cables, Atlantis 2 and WACS, to diversify the risk of accidental cuts of submarine fibre optic cables. The penetration rate of fixed lines increased slightly from 13.8% to 15% in 2009, while the penetration rate of mobile lines reached 65%. Investments in optic fibre, 3G, and WiMAX network infrastructure are expected in 2011 or 2012. Access to Internet already improved, but could be boosted further with the expected inclusion of broadband Internet access in the universal service legislation.
 
Water availability is a persistent problem in Cape Verde, especially in the island of São Tiago. Since May 2009 two desalinators have been providing 7 400 m3 of water per day for consumption in the capital. This does not yet meet the minimum 50 litres per person requirement established by the World Health Organization (WHO), but an additional desalinator should produce 5 000 m3 by the end of 2010, bringing the supply to 80 litres per person. Underground water will then be used for irrigation purposes only.
Programmes to modernise and encourage entrepreneurship in the agricultural sector, part of the government’s effort to diversify the economy, accounted for 6.61% of the 2009 budget. For instance, access to credit for farmers who invest in drip irrigation systems was eased. Fishery also has potential, but mainly represents a subsistence activity and only 0.90% of the 2009 budget was invested in that sector.
 
Tourism accounted for only 0.80% of 2009 budget. It financed projects that included: a tourism observatory, an information system for collecting data on establishments and activities; the development of a tourism brand for the country; and other efforts to diversify and improve tourism.

Public Resource Mobilisation

Tax revenues have been rising in the last ten years. Direct tax revenues more than doubled, while 2009 indirect tax revenues were about six times higher than in 2000. Indirect tax revenues alone accounted for almost half of total tax revenues in 2009, although they decreased with respect to 2008, probably as a result of firms’ attempts to retain liquidity as long as possible and delay VAT payments.
 
Trade tax revenues have increased by 30% over the last ten years. In 2004 specifically, trade tax revenues decreased dramatically. This was due to the substitution of various kinds of trade taxes with VAT that year. Taking into account all kinds of tax revenues, however, there was no loss, since the gains from VAT that year were higher than the loss on trade tax revenues.
 
Overall non-tax revenues more than doubled in absolute terms with respect to 2000, though they did not follow an increasing trend throughout the period. They used to represent about 30% of total revenues and were traditionally dominated by grants. However, with Cape Verde’s MIC graduation, grants are expected to decrease and become a minority part of non-tax revenues starting from 2010.
 
The current tax code dates back to 1996 and needs a two-thirds parliamentary majority to be modified. The two main parties agree that a simple majority should be enough so that reforms could pass more easily. With IMF support, a new tax law in compliance with the national standard accounting system was prepared. It rationalises fiscal incentives and reforms basic procedural, judicial, personal and corporate tax codes. In particular it includes the reduction of import tax rates and the possibility for the tax administration to access bank account information. It was to be approved in June 2009 but the parliamentary vote was postponed.
 
Direct tax rates on large firms were first decreased from 35% to 30% and further to 25%, retroactively, for 2008. For small and medium firms, the reduction was 10 percentage points, from 25% to 15%. Tax rates on income used to peak at 45%, but since January 2009 the highest rate has been reduced to 35% while both income brackets and deductible expenditures were reformed. The government is committed to further decreasing fiscal pressure on households in 2010. The income tax of the self-employed corresponds to their declared revenues or, in absence of a declaration, is calculated on the basis of standardised tables.
 
A new stamp code has been in force since January 2009, to avoid double taxation with VAT. Stamps exist now only for financial institutions, enterprise creation, real estate transactions and judicial procedures.
Trade taxes are imposed on most imported goods (food and construction material are in general exempt), while exports have not been taxed since the 1980s. As a member of the WTO, tax rates on imports are scheduled to decrease gradually, starting in 2010 and by 2018.
 
The import taxation process has grown simpler over time but is still laborious. The 80 odd agents that are officially authorised to effect customs clearance can declare imported goods online, but still have to go to customs to pay. A controversial measure adopted in 2009 was that money collected by customs is transferred before final clearance to the Treasury. Then adjustments have to be paid back with customs’ daily takings.
A special consumption tax concerns luxury or polluting goods (alcohol for instance is taxed at 50%). Finally, municipalities collect a property tax of 3% on land, housing and cars.
 
Securities enjoy in general very favourable tax rates in Cape Verde. Dividends, units of participation, and profits made in over one year, as well as treasury bonds and bills, are tax exempt. Profits made in less than one year are taxed at 15%, and corporate bonds and credit are taxed at 5%. The increase of the latter rate to 20% is however under discussion. Companies listed in the stock exchange have an income tax reduction of 50% during the first three years. Bank deposit gains are taxed at 20%, while Cape Verdeans living abroad enjoy exemptions and higher remunerations of bank deposits than residents, as a fiscal incentive to remittances. Finally, ad valorem rates for real estate and capital transactions have been reduced in 2010 and could become flat in the future.
 
Customs employs 250 workers, while the other tax administration and collection departments have 241 employees. Both the quantity and quality of human resources are an issue. A few years ago, the IMF recommended a 20% increase. Only one fourth of personnel have a bachelor’s degree. The undertaking of inspections and the complexity of issues such as double taxation require more and specialised workers. Workers in all tax departments enjoy higher salaries than other public administration employees, but they only earn about half of private sector wages, with few performance incentives.
 
Cape Verde introduced e-taxation in 2008. Only 13% of households in the capital city of Praia, and 15% of firms, used e-taxation in 2009, but the percentage is expected to grow as trust increases and Internet access improves. Firms are also provided with incentives, such as priority reimbursement, to register with the electronic system. The fact that Cape Verde uses e-taxation and is integrating data from various systems (tax system, customs, treasury, and licences) fosters compliance. It is expected to increase indirect tax revenues substantially, particularly from VAT.
 
The interlinking of e-taxation data is expected to encourage the formalisation of some informal activities in a country where more than half of the economy is estimated to be informal and even large enterprises often engage in some informal activity. Since 2010, deductions were introduced for employers declaring domestic workers. Reduced fiscal pressure may also promote formalisation. In 2009, a campaign was conducted to promote the practice of drawing receipted bills.
 
 

Social Context and Human Resource Development

 
Cape Verde's UN Human Development Index (HDI) rose steadily from 0.589 in 1990 to 0.708 in 2007, ranking 121st out of 182 countries despite periods of slow growth and reversals.
Cape Verde is one of the few countries in Africa likely to achieve the Millennium Development Goals (MDGs). The first target of the first MDG, halving the proportion of poor people between 1990 and 2015, is already almost accomplished. Indeed, the poverty rate decreased from 49% in 1990 to 26.6% in 2007.
Budgetary allocation to anti-poverty efforts accounted for 3.84% of the 2009 budget. Developing the tourism industry is viewed as a potential instrument for creating opportunities for the poor through the delocalisation of tourist activities towards the interior of the islands, development of local establishments, handicrafts and agro-alimentary products.
Poor residents who are over 60 years old (about 23 000 people) are covered by a non-contributory system and receive monthly social pensions, which in 2009 increased from CVE 3 500 to 4 500, and in 2010 to CVE 5 000. Since 2009, the contributory system provides pension and health coverage to 38% of the population. It may be chosen by workers declaring to earn at least 80% of public servant wage (about CVE 11 000) and paying 19% in contributions.
The second target of the first MDG, achieving full employment for all, is a challenge. In 2008, the unemployment rate was 17.8% as a result of rigidities in the labour market. Unemployment affects urban (22.7%) more than rural areas (13.1%), women (22%) more than men (13.8%), and is particularly frequent among 15-24 year-olds (31%). Even though men are more often employed than women, the male unemployment rate grew from 11.1% in 2000 to 13.8% in 2008, while the female unemployment rate decreased from 23.8% to 22%. Among the large number of unemployed with secondary school education, 53% are men and 45% women. Widespread unemployment is a threat to poverty reduction, as 17% of the poor are unemployed. Prime Minister José Maria Neves announced that a legal minimum wage of CVE 16 000 (except for domestic workers and retail workers) will be introduced by the end of 2010. Another labour market challenge pertains to the prevalence of child labour with more than 16 000 children working, mostly in the interior of São Tiago Island.
The second and third MDGs are almost achieved. Indeed, the average net primary school enrolment rate is about 88% for boys and 89% for girls in urban areas, and 90% for boys and 87% for girls in rural ones. Enrolment rates are also relatively high in pre-school (60%) and in secondary school (82% for boys and 89% for girls in urban areas, and 77% for boys and 81% for girls in rural ones). Some 8 000 students are enrolled in Cape Verdean universities (3 000 in the public university), while 6 000 are studying abroad, in part because some fields, such as medicine, are not taught in local universities.
Dropout rates are low in primary school (about 2%) and reach 8% in secondary school, while repetition rates for primary and secondary schools are about 10% and 25%, respectively. Literacy was 79.6% in 2007 but significantly lower for women than for men; among young people ages 15-24, literacy is 96% without significant differences based on gender or location.
Challenges for the education system in Cape Verde concern especially quality in pre-schooling and primary schooling. Only 20% of teachers are adequately trained in the former and 13% lack specific training in the latter. In tertiary schooling, the main challenge is to increase capacity. Since September 2009, French and English are both taught in all primary schools. Some primary and secondary schools are also experimenting with revised curricula and an evaluation of learning quality. The programme Mundo Novo (new world) aims to foster e-learning, and to assure Internet connectivity for all university and secondary school students, and for the majority of primary school pupils.
A considerable and stable share of GDP, about 7%, is devoted to education, mostly in primary schooling. There have been efforts to develop co-ordinated plans for education (accounting for 5.87% of the 2009 budget), employment and professional training (4.24%, financed by the Netherlands and Luxembourg) in order to address the mismatch between job skills and jobs vacancies and thereby increase employment. The first step consists of standardising diplomas and turning competences to account with a system of exams that certify practical skills. New programmes aim at addressing the lack of intermediate qualified workers by strengthening secondary education with professional training in hotel, banking, and renewable energy sectors.
Cape Verde has already achieved the reduction of child mortality MDG. The under-five mortality rate decreased from 56 per thousand in 1990 to 25.7 per thousand in 2007. Moreover, vaccinated children between 0-11 months were 73.2% in 2007 and are expected to be 85% in 2010. There is almost universal access to reproductive health (97.5% coverage of pregnant women), but the maternal mortality ratio is currently higher than MDG target of not more than 17.3 per 100 000 by 2015.
As of 2007, 2 329 cases of HIV/AIDS had been reported with 319 new cases that year (0.8% prevalence rate), but it is estimated that this represents only half of overall cases. Screening tests for HIV increased considerably from 3 069 in 2003 to 8 159 in 2005.
Malaria has low endemicity in Cape Verde (3.7 per 100 000 people was the prevalence rate in 2007), while 294 new cases of tuberculosis were registered in 2007 (51.9 per 100 000 prevalence rate).
Epidemics of German measles and dengue broke out in 2009. The latter was the first ever registered in Cape Verde and peaked at 1 000 new cases per day on 4 November 2009. Overall, about 20 000 suspected cases of dengue were registered in late 2009. An effective national mobilisation to reduce vectors of transmission and the prompt reaction of the national health system with the support of international doctors made it possible to overcome the emergency. Moreover, the system of e-medicine and connectivity across hospitals allowed a proper monitoring of the epidemics.
Medical care is free in general, except for a fixed cost that depends on revenue and ranges from a minimum of CVE 50 to a maximum of CVE 1 000. Health represented 4.31% of the 2009 budget, mostly allocated to improve human resources and infrastructures for primary health care, including immunisation, prevention, sensitisation and rehabilitation. Even though about 60% of the population is under 25 years, the steady improvement in life expectancy (estimated at 72.7 years in 2009) implies an increase in the incidence of age-related diseases, which highlights the insufficiency of specialised doctors in the country.
The seventh MDG target – halving the proportion of the population without sustainable access to safe drinking water and basic sanitation – has been achieved in part. The population with access to drinking water increased from 42% in 1990 to 89.5% in 2007. Local inequalities persist, however, with 98.6% access in urban areas against only 75.8% in rural ones.
At the same time, in 2007 only 40.8% of households (57.4% urban and 15.9% rural) had access to septic tanks or sewer network. Moreover, 53.3% of rural and 22.7% of urban households did not have water closets or latrines in 2007. In the same year, about 63% of households had access to some form of solid residual collecting, but with wide differences between urban and rural areas (88.5% versus 24.3%). Sanitation accounted for 3.93% of the 2009 budget (while water accounted for 3.38%), but developing a national strategy for basic sanitation remains a challenge.
 

 
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