Striking an Appropriate Balance Among Public Investment, Growth, and Debt Sustainability in Cape Verde
Despite relatively fast economic growth over the past few years, Cape Verde’s public debt to GDP ratio has risenrapidly. Achieving an appropriate balance among public investment, growth, and debt sustainability has become a priority for the Cape Verdean authorities. The IMF-World Bank debt sustainability analysis (DSA) framework has helped the authorities monitor the risks of debt stress. However, the DSA has a number of limitations. This paper intends to complement the DSA by addressing aspects currently not covered by the DSA. The paper evaluates public investment scaling-up strategies in Cape Verde by customizing the Buffie and others (2012) model for Cape Verde and conducting various scenario and sensitivity analysis. The paper assesses Cape Verde’s public debt risks, taking into account the link between public investment and growth. The paper concludes that the size of scaling-up and aspects of the economic structure have significant impact on the outcome of the public investment. A very large surge in public investment may lead to a debt to GDP ratio that reaches dangerous levels based on the usual DSA criteria. A more moderate scaling-up of public investment may contribute better to stable and sustained growth over the medium and long run. In addition, it is critical that the authorities ensure the quality of public investment.
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1.5 percent 30 percent absorptive capacity adjustment cost parameter adverse shocks assume assumptions Buffie Cape Verde Cape Verde’s economy consumption taxes debt in percent debt is projected debt risk premium debt sustainability depreciation rate domestic debt domestic financing efficiency of public elasticity of substitution Equation exchange rate regime external commercial borrowing fees for infrastructure following parameters Grants-to-GDP ratio higher IMF DSA indirect tax infrastructure investment Initial public external Initial real interest intertemporal elasticity loans and grants lower public investment medium term non-traded sector parameter is set pegged exchange rate percent of GDP pessimistic scenario private capital public capital Public debt risk public investment scaling-up Public Investment Scenario rate of infrastructure real interest rate recurrent costs return on infrastructure scale up public Scenario and Base Section sensitivity analysis share in value structure of Cape Text Table transfers transitional window user fee value added vulnerabilities to adverse