The fixed exchange rate regime adopted by Cape Verde in 1998, establishing a fixed parity with the Euro, essentially aims to ensure convertibility of the Cape Verdean escudo and to create conditions for price stability. This thus protects the value of the national currency and serves as a credible, nominal anchor for the monetary policy.
By adopting the pegged exchange rate system with the Euro, Cape Verde, as a small open economy, has deepened economic ties with Portugal and with Europe as a whole. It has also ensured favorable conditions for the implementation of structural reforms, with the aim of adjusting and transforming the national economy.
The use of this exchange rate system has proven to be appropriate for the country's economic development. Thus, BCV has strived to maintain conditions for sustainability of the pegged exchange rate system and the financial system, along with a balanced budget policy after a slightly turbulent early period, which characterized the first phase of the Foreign Exchange Agreement (1998 -2000).
The adoption of such an exchange rate regime presupposes a theoretical loss of monetary sovereignty, insofar as the economic policy and, particularly, the monetary and fiscal policies, are subordinate to the objective of maintaining exchange rate stability. That is, to the protection of the currency peg.