Cabo Verde manufacturing challenges
Why Cabo Verde Can't Manufacture Much of Anything
Cabo Verde has some of the highest electricity prices in Africa—around 35 cents per kilowatt-hour. Water costs between €4 and €7 per cubic metre, among the most expensive rates in the world. For a pharmaceutical company operating on the islands, water and electricity alone consume roughly 10 per cent of total sales revenue.
These aren't temporary price spikes. They're permanent features of an economy that imports 80 to 90 per cent of everything it consumes, including the fuel to generate electricity and the materials to build water desalination plants.
For manufacturing, this creates an impossible equation. You need scale to spread fixed costs across enough units to compete on price. But Cabo Verde's entire population is only 556,000 people, spread across nine inhabited islands with unreliable transport between them. You can't achieve scale. And without scale, you can't absorb the crippling cost of basic utilities.
The result: manufacturing contributes a tiny fraction of the economy and shows no signs of growing.
The Electricity Problem
Cabo Verde had an average residential electricity tariff of 34.5 cents per kilowatt-hour in 2022. Commercial and industrial rates are similar or higher. Hotels report that energy expenses account for up to 50 per cent of operating costs.
Compare that with South Africa, where industrial electricity costs around 10 cents per kilowatt-hour. Or Portugal, where rates hover around 15 to 20 cents. Cabo Verde's manufacturers pay double or triple what their competitors elsewhere pay for the same energy.
Why so expensive? The country imports roughly 80 per cent of its energy needs, mostly diesel fuel to run generators. Global oil prices are set in dollars. The Cabo Verdean escudo is pegged to the euro. When the dollar strengthens against the euro, fuel becomes more expensive. The electricity company passes that cost straight through to consumers and businesses.
There's no alternative grid to switch to. Power outages are common. Infrastructure bottlenecks persist. Smart meter rollouts lag. Firms can't even count on consistent supply, never mind affordable supply.
The Water Crisis
Water scarcity is worse. Over 80 per cent of drinking water comes from diesel-powered desalination plants. Turning seawater into fresh water requires enormous amounts of energy. Electricity costs represent 40 per cent of total water production costs.
Water tariffs were $4.43 per cubic metre in 2012. Hoteliers now report paying between €4 and €7 per cubic metre. That's roughly 10 times what businesses in mainland Europe pay.
Seventy per cent of the population depends on desalinated water. There's no alternative source at scale. Rainfall is minimal and irregular. Groundwater is limited. The country either desalinates or goes thirsty.
For manufacturers, this means every process requiring water—washing, cooling, mixing, cleaning—costs a fortune. For farmers, irrigation becomes prohibitively expensive. For fish processors, maintaining hygiene standards burns through cash.
The Import Dependency Trap
It's nearly impossible to find a product made in Cabo Verde that doesn't include at least one imported component. Manufacturing firms import about 62 per cent of their material inputs and supplies, either directly or indirectly.
The country imports 80 to 90 per cent of food, nearly all construction materials, all machinery, and most consumer goods. When you're manufacturing locally, your raw materials arrive by ship from overseas, your energy comes from imported diesel, your equipment is imported, and even your packaging is probably imported.
Every one of those imported inputs adds cost. Shipping to a small island market is expensive. Containers often return empty because Cabo Verde exports little, which means freight companies charge more. Customs duties and value-added tax apply to most imports, adding another layer of expense.
You're trying to compete with manufacturers in countries that produce inputs locally or import them at lower cost because they buy in bulk. You can't.
The Scale Problem Nobody Can Solve
Cabo Verde's entire domestic market is 556,000 people. That's smaller than a mid-sized European city. For most manufactured goods, it's impossible to achieve economies of scale serving such a small market.
Economies of scale work like this: you have fixed costs—factory setup, machinery, overhead. The more units you produce, the lower the fixed cost per unit. If you produce 10,000 units, each one carries a small fraction of the fixed cost. If you produce 100 units, each one carries a massive burden.
In a market of half a million people, demand for most products tops out quickly. You can't produce millions of units of anything because nobody will buy them. So your per-unit costs stay high. And because your costs are high, your prices must be high. And because your prices are high, imported goods—made at scale elsewhere—undercut you.
Geographic Fragmentation Makes It Worse
The 556,000 people aren't even in one place. They're scattered across nine islands separated by ocean. The producing islands—Santiago, Santo Antão, Fogo—aren't the consuming islands. The main tourist markets are Sal and Boa Vista.
Inter-island maritime transport is unreliable. There's insufficient cold storage capacity. Moving perishable goods or finished products between islands costs a fortune and results in losses. Local producers trying to supply tourist hotels on different islands lose their competitive advantage to imported goods shipped directly to those islands.
The archipelago's geography prevents a unified domestic market from forming. Each island is partially isolated. You can't spread fixed costs across the whole country because logistics break down before you reach the whole market.
What This Means for Manufacturing
The manufacturing sector has less dynamic potential than services. It's hindered by unreliable infrastructure, high costs, and inability to achieve scale. Local production can't compete with imports from countries with production advantages.
The small market size doesn't attract large investors. Without large investors, there's insufficient competition. Without competition, consumers get stuck paying high prices for limited choice.
One example illustrates the problem perfectly. Locally produced fresh vegetables can't reliably supply hotels, even though hotels are desperate for local sourcing. Why? About 30 per cent of locally produced fresh products get rejected due to quality issues. Post-harvest losses run around 40 per cent. Poor logistics, insufficient cold storage, and inconsistent supply chains mean that even when local production exists, it can't meet the standards large buyers require.
So hotels import vegetables from Europe. It's more expensive in theory, but it's reliable. The vegetables arrive on time, meet quality standards, and don't spoil before reaching the kitchen. Local producers can't offer that guarantee.
The Few Things That Work
Manufacturing isn't completely dead. But the viable sectors have specific characteristics that overcome structural disadvantages.
Renewable energy equipment: Solar and wind don't require imported fuel. Independent solar projects achieve generation costs between €31 and €52 per megawatt-hour, compared with the regulated tariff of €255 per megawatt-hour. That's five times cheaper. Companies investing in their own solar capacity can dramatically cut electricity costs and make production viable.
Niche export products: High-value items like Fogo coffee, artisanal rum (grogue), and specialty cheeses can compete through differentiation and quality rather than price. The diaspora—Cabo Verdeans living abroad—provides a ready market willing to pay premium prices for products with emotional or cultural value. Small-scale production becomes an advantage because you're selling exclusivity, not volume.
Fish processing for export: Cabo Verde exported processed fish products worth 72 per cent of total exports in 2021. These target West African and European markets, not the domestic market. Export orientation bypasses the scale problem. But even here, challenges persist. One major processing facility, Frescomar, imports over 85 per cent of its raw material because local fishing can't supply consistent quality and quantity.
Digital services: The Technological Special Economic Zone offers a 2.5 per cent corporate income tax rate—one of the lowest in the world. Digital services bypass physical logistics entirely. You're not shipping goods between islands or importing raw materials. The product is information, delivered electronically. This works.
Government Tries to Fix the Unfixable
The government knows the constraints and offers aggressive incentives to offset them.
Investors in agriculture, livestock and fishing get a tax credit equal to 30 per cent of eligible investment. Companies focused exclusively on these sectors using organised accounting get a 50 per cent exemption on taxable profits.
Import duties and VAT are waived on renewable energy equipment—solar panels, wind generators, batteries. There's also 50 per cent interest rate support on loans for micro-production equipment for small enterprises.
Exemptions apply to raw materials, consumables and semi-finished materials imported for manufacturing. Customs duties and VAT disappear for machinery, drip irrigation equipment, greenhouses, and specialised food transport containers.
The incentives are generous because the problems are severe. The government is essentially saying: "We know production here is uncompetitive. We'll eliminate every cost we control. But we can't make electricity cheap, water plentiful, or the market bigger."
Why This Won't Change
The constraints are structural, not policy failures. You can't manufacture water out of thin air. You can't make the islands closer together. You can't quadruple the population overnight.
Desalination will always require energy. Energy will always require imported fuel unless renewable capacity expands massively. Even then, building and maintaining solar and wind infrastructure requires imported equipment and expertise.
The market will remain small. Even optimistic population projections don't suggest Cabo Verde will support scale manufacturing anytime soon. Tourism brings visitors, but tourists don't buy manufactured goods in quantity—they consume services and leave.
Geographic fragmentation is permanent. Better ferry services and cold chain infrastructure can help. But you can't eliminate the ocean between islands or make transport as cheap as moving goods within a continental country.
What Investors Should Know
Manufacturing in Cabo Verde makes sense only under specific conditions:
- You're targeting export markets, not domestic consumption
- Your product commands premium prices that absorb high production costs
- You can generate your own electricity through renewables
- Your production doesn't require large volumes of water
- You can operate profitably at small scale
- You have sufficient capital to cover high upfront costs without relying on local bank financing
If any of those conditions don't apply, manufacturing is probably unviable. The structural constraints will eat your margins. Imported competitors will undercut your prices. You'll struggle to achieve break-even.
The country isn't hiding these problems. The incentives exist precisely because everyone knows production here is difficult. The government is trying to attract investment by reducing every cost it can control.
But it can't control the fundamental economics. High import dependency plus expensive utilities plus small fragmented market equals manufacturing that can't compete. That's not going to change.
Cabo Verde will remain a service economy—tourism, finance, digital services—with niche manufacturing in carefully selected areas where unique advantages or external markets overcome structural disadvantages. For everything else, imports will continue to dominate. Because they're cheaper, more reliable, and often better quality than anything the islands can produce themselves.