Cabo Verde

Cabo Verde is a small open economy depending on foreign aid and emigrants’ remittances. After independence in 1975 it initially continued to fix its exchange rate to the Portuguese escudo, then shifted the peg to a currency basket, and later (via a brief return to the Portuguese escudo) to the euro in 1999. Over time there has been significant evolution in the aims and instruments of monetary policy, but financial markets remain shallow and the scope for monetary policy necessarily limited.

YearsTargets and attainmentClassification
1975-2017independence 1975; Cabo Verde escudo, initially at par with Portuguese escudo, repegged 1977 to currency basket (later revised) in which Portuguese escudo has largest weight; one central/commercial/development bank set up, takes over assets and liabilities of the two existing banks, and starts operating mid-1976, together with state-owned savings institution; small, very open economy, with long-standing role in services to international transport, but subject to near-permanent drought, and dependent on remittances from large diaspora and on foreign aid; price, trade and exchange controls; colonial credit ceilings maintained but raised; lending becomes more active and development-oriented; interest rates changed early 1985, for first time; foreign grants and loans fund most capital expenditures while current spending is financed by tax revenues; central bank is subject to limits in its lending to government but tends to accommodate (many) parastatals; exchange rate policy focused on stability of real effective rate (where currency of Portugal, most important trading partner, is depreciating against other major currencies, especially USD); monetary policy aims to promote growth while avoiding external imbalances and inflationary pressures, but monetary growth not always in line with intentions; wider political reform and economic liberalisation from late 1980s; 1991 plan for two-tier banking system and its opening up to private sector; 1993 monobank’s commercial activities spun off into separate universal bank, savings institution also reorganised into universal bank; central bank relies mainly on credit ceilings, plus reserve requirements and setting of bank interest rates and fees; government bonds from 1993; 1995 plan to shift from credit ceilings and interest rate controls towards indirect instruments in form of rediscount window and treasury bill issues; 1996 interest rates liberalised, but limited competition means not much effect; early 1996 devaluation in small steps; 1996, 1998 two foreign banks start operating, payments system improved; devaluation early 1998, peg switched from basket to Portuguese escudo mid-1998 and (after forex liberalisation 1998) to euro 1999, with credit facility provided by Portugal; domestic debt conversion 1999; privatisation of two state-owned banks 1999; 1999-2000 fiscal slippages endanger euro peg, but 2001 new government implements stabilising fiscal and monetary policies and adopts new law increasing central bank independence; central bank can in principle now do OMOs (including repos), but interbank and secondary markets limited; from mid-2000s no fiscal dominance, monetary policy (given peg to euro and concern with emigrant deposits) largely passive, but recurring excess liquidity in banks; statistical data initially very poor, but gradual and major improvements over timeaugmented exchange rate fix AERF

Selected IMF references: RED 1979 pp26-29, 37-40; RED 1980 pp41, 45-7; RED 1985 pp 43, 52; RED 1986 pp29-31; SR 1988 pp12a, 16, 17; SR 1990 pp6-8, 12, 14; RED 1991 pp6-10; RED 1993 p10; BISU 1994 pp1-3, 19, 21-3; RED 1996 pp11-13, 16-18; SR 1996 pp6-8; SR 1998 pp13-14; RED 1999 pp26-8; SR 1999 pp9, 10, 40; SR 2001 pp20; SR 2002 pp6-9, 15; SISA 2005 pp31-2; SR 2006 p19; SR 2008 pp7-8; SR 2010 pp10-11, 12-13; SR 2014 pp15-16; SR 2018 pp11-12.

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