Banco de Cabo Verde
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Monetary Policy Report 2018

The overall benign performance of the external environment favored the remarkable dynamics of the national economy, which grew by 4.7 percent year-over-year in the first half-year.

 

The economy also benefited from the contained growth of inflationary pressures, as well as stronger confidence of economic agents, which favored demand and the (internal) conditions for financing the economy. The benign performance of some fields of activity and exports contributed to ease the current account and, consequently, to improve the external accounts.  

 

Banco de Cabo Verde expects a 4.5 percent economic growth and a 1.3 percent average annual inflation for the year’s end. Based on the expected benign developments in the external environment and the absence of infrastructural and commercial constraints on domestic production and the external financing of investments in the country, the baseline scenario for the central bank's projections for 2019 suggests a slight increase in the growth rate of the economy and inflation, compared to 2018.

 

The recent dynamics of the economy is an opportunity to strengthen the country’s productive capacity, through the implementation of policy measures (also of a microeconomic nature), reduce its vulnerability to external shocks, and reduce the country risk premium, which increases the cost of investments financed with external capital.

 

In Cabo Verde, economic activity is expected to continue to show signs of recovery in 2018. After growing close to four percent in the last two years (the fastest pace since 2011), Banco de Cabo Verde expects real gross domestic product growth to be in the 3.5 - 4.5 percent closed range in 2018.

The lagged effects of a higher than anticipated increase in credit to the economy in 2017 and the better than expected performance of the external environment in September 2017 justify an upward revision of the economic growth expectations for 2018. The latter also factor in a significant recovery in foreign direct investment and a more rapid increase in budgetary expenditure.
 
Gross fixed capital formation is expected to largely support growth in 2018, reflecting the anticipated faster growth in both private and public investment.
 
Public consumption is expected to grow at a faster rate, supported by the increase in the wage bill and by the prospects for increased purchases of goods and services from third parties.

After growing at the fastest pace in the last 18 years in 2017,  private consumption is expected to slow down in 2018, also due to the prospects for continued reduction in migrants' remittances and increased inflationary pressures.
 
Goods and services exports are expected to grow at a slower pace in 2018, reflecting the base effect of the significant increase seen in 2017. However, there are positive expectations regarding the dynamics of air transportation exports.
 
Reflecting the dynamics of domestic demand, goods and services imports are expected to grow at a slower pace in 2018.

The Cabo Verdean economy is expected to continue to show financing needs in 2018, due to the prospect for increased current account deficit. However, the increase in the financial account deficit, largely reflecting the prospects for increased foreign direct investment and public external debt disbursements, is expected to more than offset the economy's financing needs in 2018, resulting in a 12 million Euro increase in the country's net international reserves. The latter are expected to cover 5.6 months of the goods and services imports projected for 2018.
 
Consumer prices are expected to grow at a faster pace in 2018, with annual average inflation falling in the 1.75 - 2.75 percent range, after having accelerated by 2.2 percentage points in 2017, the year in which they stood at 0.8 percent.
 
With the strengthening of the economy, considering the recent performance of and risks to the developments in migrants' remittances and deposits, which are banks' main funding, the monetary authority is expected to be guided by a prudent and neutral policy in 2018, in the expectation that inflationary pressures and the pressures on net international reserves will remain contained.


The aforementioned projections fall within the scope of Banco de Cabo Verde's Monetary Policy Report (RPM) of April 2018.
 
Note that, according to article 18, paragraph 3 of BCV's Organic Law, every six months the Central Bank shall submit an action plan to the Government and publish it in a form that it deems appropriate. Such action plan shall include a description and explanation of the reasons for the monetary policy to be followed in the next six months, a description of the principles to be followed by the Bank when adopting and implementing the monetary policy the following year or another period of time determined by the Bank, and a review and evaluation of the Bank's policy implemented during the period corresponding to the last half-year.

 

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