Macroeconomic impacts of COVID-19 and implications for debt sustainability in Cabo Verde
The study provides a critical assessment of the implications of COVID-19 pandemic on the country’s fiscal consolidation path and identify alternative policy options for mitigating the high risk of debt distress. The study customizes the Middle Income Countries Debt Sustainability Analysis (MIC DSA) model by the International Monetary Fund (IMF) and the World Bank (WB), and adjusted it to the specific context of Cabo Verde (an insular economy which is highly dependent on tourism). Structural impacts of the COVID-19 pandemic and natural disasters shocks were performed on the projected baseline debt levels for Cabo Verde. Prospects for Cabo Verde’s public debt sustainability are assessed in three scenarios, under different assumptions concerning economic performance and fiscal policy. The baseline scenario, and fiscal adjustment scenario, and the fiscal adjustment plus reforms scenario. Sustainability gap analysis indicates that achieving a debt target of 100% of GDP by 2025 requires a fiscal adjustment of 9 percentage points of GDP per year, on average, between 2022 and 2025—relative to the baseline scenario’s fiscal path. The required fiscal adjustment to achieve the debt target is significant and thus reinforces the case for pursuing comprehensive budget consolidation, SOE reforms, and debt reprofiling, and strengthening domestic resource mobilization and deepening local capital markets.
