Cabo Verde - external economy

 External Economy: Cabo Verde and the World

Cabo Verde is what economists call a "small open island economy." This means the country is deeply integrated into the global market, not by choice, but by necessity. Because the archipelago has limited natural resources and a small domestic market, it cannot produce everything it needs to survive. Consequently, its economic health depends entirely on its relationship with the rest of the world—what it buys, what it sells, and who comes to visit.

Imports vs. Exports: The Great Imbalance

The most defining feature of Cabo Verde's external economy is a structural trade deficit. Put simply, the country buys (imports) far more goods than it sells (exports).

• What Cabo Verde Imports: The country relies on the outside world for the essentials of life. It imports approximately 80% to 90% of its food and nearly 100% of its fossil fuels for energy and transport,,. Additionally, it imports construction materials, machinery, and consumer goods.
• What Cabo Verde Exports: The export base for goods is very narrow. The primary merchandise export is fish (specifically canned tuna and mackerel), which accounts for roughly 70-80% of goods exports,,. Other smaller exports include clothing and footwear.
• The Gap: Because the value of imported fuel and food is so much higher than the value of exported tuna and shoes, there is a massive gap in the balance of trade. For example, in 2022, the trade balance was negative by approximately 15.8% of GDP.

Tourism Revenues: The "Service Export" Savior

If Cabo Verde buys so much more than it sells, how does it pay for everything? The answer lies in service exports, specifically tourism.

In economics, when a tourist from the UK or Portugal flies to Sal and spends Euros in a hotel, it counts as an "export" for Cabo Verde.

• The Engine: Tourism is the undisputed engine of the external sector. It contributes approximately 25% of GDP directly and drives roughly 40% of all economic activity,.
• Paying the Bills: The revenue generated by tourism (along with remittances from the diaspora) provides the foreign currency needed to pay for the imported food and fuel,.
• Recent Trends: After a total collapse during the pandemic, the sector has rebounded strongly. By 2023, the country welcomed a record 1 million tourists.

Vulnerability to Global Shocks

Because Cabo Verde relies so heavily on the outside world for supplies (imports) and income (tourism), it is exceptionally vulnerable to global events. When the world sneezes, Cabo Verde catches a cold.

• The COVID-19 Shock (The "Sudden Stop"): The pandemic illustrated the danger of relying on a single engine. In 2020, as global travel froze, tourism revenues dropped by nearly 78%. Without this income, the economy contracted by 14.8% to 19.3%, the largest drop on record and one of the most severe in Sub-Saharan Africa,,. This exposed the fragility of a development model dependent on the movement of people.

• The Energy and War Shock (Imported Inflation): The war in Ukraine (starting in 2022) exposed the other side of vulnerability: import dependence. As global oil and grain prices spiked, Cabo Verde imported that inflation directly. Energy inflation hit 23.8% and food inflation peaked at 15.7% in 2022,. Because the country produces so little of its own energy or food, it had no buffer against these global price hikes.

• The Euro Peg: To stabilize this volatility, the Cabo Verdean Escudo (CVE) is pegged to the Euro. This provides stability for trade with Europe (the main partner for tourism and imports),. However, it also means Cabo Verde must follow the monetary policies of the European Central Bank, sometimes limiting its ability to adjust its own economy during crises.

summary:

Cabo Verde's external economy is a high-wire act. It survives by using tourism revenues and diaspora remittances to finance essential imports of food and energy,. While this model has driven growth and graduated the country to "Middle-Income" status, the shocks of 2020-2022 have accelerated the government's push to diversify into the "Blue Economy" (fisheries/logistics) and renewable energy to reduce reliance on imported fuels,.