Public investment drives economic growth in Cape Verde during financial crisis

29 June 2009

Praia, Cape Verde, 29 June – “Strong” public investment in large infrastructures, particularly roads and ports, will drive economic growth in Cape Verde during the current period of crisis, according to Cape Verde’s Central Bank.

The scenario is outlined in the central bank’s report to the government, dated May, in which prospects for economic growth for 2009 are substantially revised downwards, from 7 percent to between 4.7 and 5.7 percent, based “on an anti-cyclical policy based on strong public investment.”

“With the liquidity crisis in the financial markets affecting the evolution of foreign investment, public investment will be the principal lever for economic growth,” says the document.

At stake, it adds, are the large infrastructures proposed in Cape Verde’s State Budget, particularly in the areas of road construction and port expansion.

As a result of a policy of budgetary consolidation over recent years, the government has a “budgetary cushion” which “softens” the adverse effects of the external climate.

The average growth rate of public investment over the year should be between 7.8 and 8.1 percent, making up for a subdued private sector.

“Private investment is conditioned by prospects for market evolution, whether internal or external, when there is a fall in the expectations of economic agents and the persistence of unfavourable economic conditions, in spite of the fall in interest rates,” it adds.

The construction materials sector is shown to be the main culprit in the slowdown in private investment growth rate, felt since January.

Private foreign investment in the first quarter fell to 2.013 billion Cape Verdean escudos (US$25.67 million) compared to 5.496 billion (US$70.09 million) for the same period last year.

“The liquidity crisis in the global financial markets continues to affect the evolution of Direct Foreign Investment, given the increase in risk aversion,” said the Central Bank.

It stressed that the weight of investment in the Cape Verdean GDP had increased – from around 45 percent in 2006 to 51 percent in 2008 – “mainly” due to public sector investments in the construction of public works.

Data provided by the Central Bank also point to a drop in consumption by Cape Verdean families, due to “greater constraints on the granting of credit, the unfavourable evolution of the labour market and the forecast of a drop in foreign remittance.”

Import growth rate is slowing and adding to the bleak picture for internal demand, though exports should also fall in 2009, according to the central bank’s forecasts.

“The evolution of external demand will be affected by the way exports behave, particularly in the predicted slowdown in the export of services,” added the report.

However, it points out that “levels of uncertainty” continue to be “particularly high, especially as regards the scale and persistence of the global economic fall, as well as the impact of government measures.”

On the positive side, the crisis appears only to have caused a slowdown in inflationary pressure, bringing down the established average annual inflation rate of between 1 and 2 percent, in line with the behaviour of international prices. (macauhub)