Publication site: Coface for trade
Date of publication: March 2021
Type of publication: Article
Economic growth to recover in 2021
Cabo Verde suffered only slightly from the COVID-19 crisis health wise, but its economy was severely impacted. A rebound is expected for 2021, but economic growth will remain below pre-crisis levels. The drop in activity recorded in 2020 was mainly due to the decline in tourism (37% of GDP and 39% of employment). Travel restrictions introduced because of the health crisis and the suspension of flights from the hardest hit European countries severely impacted tourism revenues (51% of total exports). A slow recovery is expected in 2021, despite the gradual lifting of restrictions. The maritime fishing sector (31% of exports) was also affected by disruptions in global supply chains and weakened external demand. In 2021, the situation is expected to return to normal, allowing the fishing sector to recover.
Remittances from expatriates also declined in 2020, affecting the consumption and incomes of the households that depend on them. They are expected to pick up again in 2021, stimulating domestic demand, especially household consumption.
FDI, which comes mainly from Western Europe (United Kingdom, Portugal, Italy and Spain), contracted in 2020, as these countries were rocked by the crisis. This will lead to investment delays in key sectors such as tourism, transport and ICT. Despite a resumption in FDI in 2021, the delays built up in 2020 will impact these sectors.
The public and current account deficits are widening
The current account deficit widened dramatically in 2020 and is not expected to narrow much in 2021. It reflects the massive trade deficit (31% of GDP in 2019) arising from the archipelago’s dependence on food and manufactured goods. Tourism revenues and expatriate remittances usually offset the deficit. However, they have been strongly impacted by the health crisis, which explains why the current account deficit has become so high. They should gradually recover in 2021. Exports are also expected to pick up, notably due to the government’s desire to diversify the economy away from tourism. However, imports are also poised to start rising again, especially food (70% of total imports), which will continue to pull the current account deficit down. This deficit is traditionally financed by concessional loans from international partners and FDI. The role of partners has increased amid the health crisis: the IMF approved a USD 32 million disbursement through its Rapid Credit Facility to help Cabo Verde finance its large current account deficit.
The Cape Verdean government adopted a stimulus plan in March 2020 to support the economy and the most vulnerable households. The plan includes an increase in the budget for medical equipment, testing and medical staff wages. The government also postponed the payment of taxes until December 2020 and is guaranteeing EUR 36 million in loans to private companies. In addition, social assistance measures are planned, including EUR 2.7 million for 30,000 informal sector workers, food aid for 22,500 families and enhanced welfare for the elderly. The government also introduced a moratorium on insurance premium payments and loan repayments for households, companies and non-profit associations until December 2020. Government measures and the crisis-fuelled revenue decline caused the deficit to explode, necessitating increased borrowing from foreign partners.
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