Cabo Verde: First Fiscal Space and Sustainable Growth DPF

The objective of the First Fiscal Space and Sustainable Growth Development Policy Financing Project is to (i) rebuild fiscal space, enhance climate resilience of public investments, and improve state-owned enterprise (SOE) performance, and (ii) promote sustainable growth through the green and blue economy, and inclusive economic participation. The operation consists of an International Development Association (IDA) credit in the amount of SDR 19.2 million (US25 million dollars equivalent) and is the first of three single-tranche DPF operations in a programmatic series. It supports reforms to advance fiscal consolidation and place public debt on a decisive downward path while promoting a transition to the green and blue economy. The DPF also focuses on advancing fiscal consolidation while building fiscal space, including for climate resilient investments. Elevated fiscal deficits, due to higher expenditures in 2020 and 2021, increased public debt from 108.5 percent of GDP in 2019 to 152 percent of GDP in 2021, financed through domestic and external debt. While strong growth and an improvement in the primary balance decreased public debt to 126.5 percent of GDP in 2022, concessional IDA resources remain important given lack of access to international capital markets and costly domestic debt. Furthermore, high vulnerability to climate change will demand additional fiscal resources in the short term. Over the last decade, economic losses from disaster and climate-related shocks have increased, with annual average losses estimated at 1 percent of GDP, mainly due to climate-related events. With a third of the population engaged in activities potentially affected by climate change, increased weather variability poses a major threat to the sustainability of poverty reduction efforts.