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CABOVERDE ENHANCINGFISCALSUSTAINABILITYINTHEFACEOFSHOCKS PublicDisclosureAuthorized PublicDisclosureAuthorized PublicDisclosureAuthorized TableofContents AbbreviationsandAcronymsVAcknowledgementsVIIExecutiveSummaryVIII 01.UnderstandingTheMacro-FiscalContext19 1.1.RecentMacro-FiscalDevelopments21 1.2.Macro-FiscalChallengesAndRisks25 1.3.FiscalPolicy:PastAndPresent35 1.4.PolicyRecommendations46 02.ImprovingDomesticRevenueMobilizationInCaboVerde50 2.1.RevenueTrends,PotentialAndEffort52 2.2.TheEfficiencyOfCaboVerde’sTaxSystem56 2.3.IsThereScopeToSimplifyTheTaxSystem?68 2.4.IsCaboVerde’sTaxRegimeEffectiveAtCorrectingForExternalities?83 2.5.PolicyRecommendations93 03.RecalibratingTowards Growth-EnhancingExpenditure98 3.1.ExpenditureTrendsAndBudgetRigidity100 3.2.EffortsTowardsGrowth-EnhancingPublicSpending117 3.3.PolicyRecommendations134 04.AcceleratingTheSOEReformAgendaToReduceFiscalRisks138 4.1.TheSOELandscapeInCaboVerde140 4.2.CorporateGovernanceAndAccountabilityMechanisms147 4.3.StateFootprintAndEffectsOnMarkets152 4.4.AssessmentOfFiscalCostsAndRisksFromTheSOESector155 4.5.PolicyRecommendations177 Annexes FIGURE1.1. FIGURE1.2. FIGURE1.3. FIGURE1.4. FIGURE1.5. FIGURE1.6. FIGURE1.7. FIGURE1.8. FIGURE1.9. FIGURE1.10. FIGURE1.11. FIGURE1.12. FIGURE1.13. FIGURE1.14. FIGURE1.15. FIGURE1.16. FIGURE1.17. FIGURE1.18. FIGURE1.19. FIGURE1.20. FIGURE1.21. FIGURE1.22. FIGURE1.23. FIGURE2.1. FIGURE2.2. FIGURE2.3. FIGURE2.4. FIGURE2.5. Economicgrowthdeceleratedaftertheglobalfinancialcrisis...23 ...andhasbeenmorevolatilethaninmostpeercountries(2000−2022)23 Recoveryhasbeenmostlydrivenbyserviceexportsandprivateconsumption24 Deficitsinthecurrentaccountandfiscalbalancehavenarrowed24 CaboVerdetrailspeersonsomeeconomic,climateandsocialdevelopmentindicators27 Althoughimproving,gendergapsinlaborforceparticipationpersist27 One-offrevenues,thewagebillfreeze,andlowcapitalspendingreducedthefiscaldeficit29 CaboVerdehaslimitedfiscalspace...29 ...andpublicdebtremainselevated30 Publicdebtisconcessionalwithfavorableconditions…30 ...thoughdebtservicingpressuresareconsiderableforthemedium-term31 Growthremainskeyforpublicdebtreduction31 FiscalrisksfromSOEshavebeenincreasing34 CaboVerdeishighlyvulnerabletoclimatechange34 Capitalexpenditureshavebornethebruntoftheexpenditureadjustmentinthelastdecade…37 ...andaresignificantlylowerthanforpeers37 Governmentcapitalexpenditurehasnegativelycontributedtogrowth38 Incometaxproductivityislowerthaninpeercountries38 CaboVerde’smostrecentfiscalconsolidationoccurredfrom2014−201740 Fiscalpolicyhasgenerallybeenprocyclicalinthelastdecade42 Expenditurehasgenerallyaccompaniedthecycle42 Expenditureprocyclicalityhasbeenamongthehighestofpeers(2000−2023)...43 ...andwasevenstrongeruntilthepandemic(2000−2019)43 Totaltaxrevenuesareincreasing,butareyettomatchlevelsofaspirationalpeers54 Theshareoftaxrevenuesintotalrevenuesiscomparablewithregionalandaspirationalpeers54 Taxcollectionlevelsarestagnant55 DespiteCaboVerde’staxcollectionlevels,thereisscopetoimproveitstaxeffort55 PITrevenuesareindecline59 FIGURE2.6. CaboVerde’sPITproductivitycouldbehigher 60 FIGURE2.7. Revenuesarehighlydependentonindirecttaxes–highlightingconcernsaboutprogressivity 60 FIGURE2.8 VATrevenuehasbeenvolatile 62 FIGURE2.9 TheefficiencyoftheVATsystemisaboveaverage 62 FIGURE2.10 CITrevenueshavebeendeclining 65 FIGURE2.11 CITproductivityiswellbelowaverage 65 FIGURE2.12 CaboVerde’sforegonetaxrevenuessurpassallcomparators 69 FIGURE2.13 Taxexpenditureshavebeendecliningrecently 70 FIGURE2.14 VATexemptionscomprisethelargestshareoftaxexpenditures 71 FIGURE2.15 VAT-exemptedessentialgoodscontributedtotaxexpendituresworthnearly3%ofGDP 71 FIGURE2.16 InvestmenttaxcreditsaccountforalargeshareofDGCI’sCITexpenditures 72 FIGURE2.17 Mostinvestmenttaxcreditsoccurinthetourismsector 72 FIGURE2.18 ExemptionsonimportdutyandVATmakeupthelargestshareofDGA’staxexpenditures 73 FIGURE2.19 ThelargesttaxexpendituresbyDGAarelinkedtoexemptionsinthetouristsector 74 FIGURE2.20 VAT-linkedexemptionsmakeupalargeshareofrevenueforegone 75 FIGURE2.21 Alargeshareofpoorerhouseholds’consumptionbasketbenefitsfromexemptionsorreducedrates… 76 FIGURE2.22 …butpoorerhouseholdshaveahigherlevelofconsumptioninformality 76 FIGURE2.23 EliminatingVATexemptionswouldhavewelfareimplicationsifnotaccompaniedbymitigationactions 78 FIGURE2.24 Firmsbenefitingfromcontractualincentives,onaverage,createlow-payingjobs 82 FIGURE2.25 Mortalityandmorbidityduetoalcohol,tobaccoandSSBsarerisinginCaboVerde 84 FIGURE2.26 IncreasingtaxeshavemadeCaboVerde’smost-soldbrandofcigaretteslessaffordable 85 FIGURE2.27 Alcoholtaxescontributethemosttorevenue 86 FIGURE2.28 Carbonpricesvarybyfueltype 89 FIGURE2.29 Residentialandpowersectorshavelowercarbonpricesthantransportandindustry 89 FIGURE2.30 Thereisalargegapbetweenfuelimportduties/excisetaxesandanefficientcarbonpriceofCVE10,500 91 FIGURE3.1 PublicexpenditureinCaboVerdeisdecliningandislowerthanpeers 103 FIGURE3.2 Highlyrigidcomponentshaveaccountedforalargershareofspending 104 FIGURE3.3 Budget