Cape Verde's economy is limited by the difficulties of accessing the islands, the nation's small size in terms of both population and geographical area, the absence of any mineral resources apart from some salt deposits, and a chronic shortage of rainfall. The rocky terrain and lack of rainfall hamper agricultural production. Most employment is in the services sector, which is sustained by remittances from Cape Verdeans living overseas (amounting to 16 percent of gross domestic product [GDP], in 1998), economic aid (mainly from Portugal and 29 percent of the GDP in 1998), and some tourism (3 percent of GDP in 1996).
However, in comparison to other African nations, Cape Verde is one of the more financially stable countries. It is considered to be on the margin between low-income and lower-middle income status. Nevertheless, living standards are still very low by comparison to the industrialized countries of the West. Per capita GNP measured by the exchange rate conversion, was $1,060 in 1998. The purchasing power parity conversion (which makes allowances for the low price of many basic commodities in Cape Verde) estimates per capita income at $1,700 in 2000. This amount can be compared with an average per capita income of $36,200 in the United States in the same year.
Insufficient food production and the lack of resources have resulted in a high dependence on imports, foreign investment, and aid. Since 1988 the government has tried to diversify and liberalize the economy in the hope that foreign investors might expand small-scale industry and develop the fishing and tourism sectors. Foreign investment and the development of local entrepreneurs are seen as the key to future growth.
The government has also started a program of privatization . Twenty-six parastatals were privatized by 1998, and a further 23 should be privatized by 2002, including utilities and financial institutions. The program of privatization has earned $80 million for the government and was expected to boost foreign investment to $11 million by 1999. The budget deficit grew from 6 percent of GDP in 1991 to 14 percent in 1994 due to expansion in public investment, stimulated by a massive boost in external aid. Although 32 percent of public revenue comes from external grants, the government has increased domestic revenue by higher tariffs and better taxation. Combined with a range of austerity measures, the budget deficit has now fallen to sustainable levels (4 percent in 1998).
Under the budget for 2000, expenditures were expected to grow by only 0.4 percent to $232 million. This estimate still indicates that government spending was much higher than expected (51 percent of GDP in 2000), due to the fact that expenditures grew by 17 percent in 1999. In accordance with the government's current National Development Plan (NDP), social expenditures were expected to be the largest expenditure item in the budget.
In 1998 the government started to implement its fourth NDP, which runs until 2001. As the main aim of the NDP is to alleviate poverty, it has the support of international donors. Under the NDP, powers are to be devolved to local councils to control spending, taxes, and investment at a local level. The NDP also aims to develop the private sector , provide vocational training programs, reform the education and health care systems, cut public spending, and reduce imports.
Since the pegging of the Cape Verde escudo to the Portuguese escudo, the government has committed itself to greater fiscal discipline and has sought to meet European Monetary Union (EMU) targets. These goals include a general government deficit of less than 3 percent of the GDP, public debt of less than or equal to 60 percent of the GDP, and an inflation rate that is less than 1.5 percent higher than those of the 3 EMU member states with the lowest inflation rates that year.
Despite its handicaps, the economy has grown steadily since independence in 1975 due to favorable loans and remittances from expatriates. World Bank figures indicate that the GDP grew by 8 percent per year from 1974 to 1985 and 4 percent per year from 1986 to 1992, comfortably faster than the population growth rate. Since 1994 the GDP growth rate has been 5.7 percent per year, and this has led to a per capita GNP that is among the highest in the West African region.
Unemployment is one of the biggest problems in Cape Verde with 25 percent of the labor force unable to find formal work. Although public investment in productive, export-oriented sectors is likely to increase, it will not grow quickly enough to absorb the expanding workforce. Therefore, many seek work in foreign countries, despite increasing U.S. and European barriers to immigration .
The government has abolished some price controls , while retaining a food aid distribution network. Average consumer inflation has fluctuated since 1989, averaging 6.5 percent between 1995 and 1999. Despite erratic inflation, interest rates remained stable.