Investing in Cabo Verde

The Three Constraints Every Cabo Verde Investor Must Understand

If you're considering investing in Cabo Verde, forget the glossy tourism brochures for a moment. Three structural factors will determine whether your investment succeeds or fails: market size, operating costs, and access to financing.

These aren't temporary problems that better management or more capital can fix. They're permanent features of a tiny archipelago economy spread across nine islands in the mid-Atlantic. Understanding them is the difference between profit and loss.

Here's what each constraint means in practice, and where opportunities exist despite them.

Constraint One: Market Size and Fragmentation

The Problem:

Cabo Verde has roughly 556,000 people. That's smaller than a mid-sized city. For most products and services, you simply cannot achieve the economies of scale necessary to compete on price.

But it's worse than just being small. The population is fragmented across nine inhabited islands separated by ocean. There's no unified domestic market because moving goods and people between islands is expensive, unreliable, and slow.

Inter-island transport costs are comparatively high by international standards. A container from Praia (the capital, on Santiago) to Sal costs €1,000. Shipping the same container from Lisbon to Sal costs €2,000—only twice as much to cross an ocean as to move between islands 200 kilometres apart.

Maritime services are unreliable, with delays of three to six hours common. On Sal, marine traffic uses one small jetty with basic equipment. Ships sometimes wait up to two weeks to unload.

For businesses, this means:

• You can't produce at scale for the domestic market
• You can't easily distribute across all islands
• Local production costs are higher than imports
• Large investors find the market too small to bother with

The Opportunities:

The solution is to bypass the local market entirely. Successful businesses in Cabo Verde don't serve Cabo Verde—they serve the world.

Export-oriented sectors work:

• Fish processing targeting West African and European markets (processed fish accounted for 72% of exports in 2021)
• Digital services that can be delivered anywhere (the Technological Special Economic Zone offers 2.5% corporate income tax)
• Niche agricultural products for diaspora markets (Fogo coffee, artisanal rum)

Tourism acts as a captive export market: The one million tourists visiting annually represent a large, ready-made market willing to pay premium prices. They're essentially "exporting" Cabo Verde's sun, beaches, and services. Tourism generates 25% of GDP precisely because it bypasses the scale constraint—the customers come to you.

Hotels and resorts import 80% of their food and beverages, spending more than €60 million annually. Local producers who can meet quality and consistency standards have access to this market without needing to achieve massive scale.

Strategic location matters: Cabo Verde sits midway between West Africa, Europe, and the Americas. For logistics, maritime services, and digital connectivity serving Africa, this geographic position is an advantage. The country aims to be a digital hub and Atlantic gateway to Africa.

Digital services escape geography entirely: Online businesses, remote work services, software development, and back-office operations don't care about inter-island transport. The country has robust fibre-optic submarine cables and 65% internet penetration. The government's digital nomad visa (CaboWork) offers income tax exemptions on foreign earnings.

Bottom line on market size: Don't invest to serve the local market unless you're targeting tourism or have a genuine monopoly. Build export businesses or digital services that treat Cabo Verde as a base, not a market.

Constraint Two: High Operating Costs

The Problem:

Operating a business in Cabo Verde is expensive. Three cost drivers stand out: energy, water, and imports.

Energy: Cabo Verde has some of the highest electricity tariffs in Africa—34.5 cents per kilowatt-hour for residential customers in 2022, with commercial rates at 40 cents or higher. Compare that with 10 cents in South Africa or 15-20 cents in Portugal.

The country imports roughly 80% of its energy needs, mostly diesel fuel. When global oil prices rise, electricity costs rise. Hotels report energy expenses consuming up to 50% of operating costs.

Power cuts are frequent, particularly on Sal. The state utility recorded commercial losses of 24.4% of electricity generated in 2022—meaning nearly a quarter of power was lost to theft, inefficiency, or non-payment.

Water: Over 80% of drinking water comes from diesel-powered desalination plants. Turning seawater into fresh water is energy-intensive. Electricity costs represent 40% of total water production costs.

Water tariffs run between €4 and €7 per cubic metre—roughly 10 times what businesses in mainland Europe pay. Tourists on Sal use five times more water than locals, and tourism accounts for 51% of total energy use on that island.

Import dependency: Local manufacturers import about 62% of their material inputs and supplies. Construction materials, machinery, consumer goods—nearly everything arrives by ship from overseas. This exposes businesses to:

• Global commodity price volatility
• Shipping costs and delays
• Customs duties and VAT on imports
• Currency risk (commodities priced in dollars, escudo pegged to euro)

When you manufacture in Cabo Verde, your raw materials are imported, your energy comes from imported diesel, your equipment is imported, and probably your packaging too. Every layer adds cost and risk.

The Opportunities:

High costs create investment opportunities in solutions that eliminate or reduce those costs.

Renewable energy is the biggest opportunity: The government targets 54% of electricity generation from renewables by 2030. Independent solar projects achieve generation costs between €31 and €52 per megawatt-hour, compared with the regulated grid tariff of €255 per megawatt-hour.

That's five times cheaper. Any hotel, resort, manufacturer, or agricultural operation can justify solar or wind installation. The payback period is short, and the government offers exemptions from VAT and import duties on renewable energy equipment, plus 50% interest rate support on loans for micro-production equipment.

Investing in your own renewable generation doesn't just cut costs—it makes operations viable that would otherwise be uncompetitive.

Special Economic Zones offset other costs: Infrastructure development and Special Economic Zones on Sal and elsewhere are designed to create more efficient operating environments. These zones offer tax breaks, reduced customs fees, and pre-built infrastructure to offset operational costs.

The Technological Special Economic Zone (ZEET) offers 2.5% corporate income tax—one of the lowest rates globally—specifically to attract technology companies despite high internet costs (Cabo Verde has expensive internet despite good infrastructure).

Import substitution for tourism: Hotels import 80% of inputs. That's a €60+ million annual market for anyone who can supply locally at acceptable quality. The government offers targeted incentives: exemptions from customs duties and VAT on raw materials, consumables, and semi-finished materials incorporated into manufactured products.

For agriculture, there are exemptions on seeds, fertilisers, irrigation equipment, greenhouse materials, and specialised transport containers. Water and electricity for certified farmers are exempt from VAT. Companies exclusively focused on agriculture, livestock, or fisheries get 50% exemption on taxable profits.

These incentives exist precisely because operating costs are high. The government is trying to offset what it can't control—energy prices, import costs, water scarcity—by eliminating taxes and duties.

Bottom line on operating costs: Factor in electricity at 35-40 cents per kilowatt-hour and water at €4-7 per cubic metre when building financial models. Invest in renewables from day one. Focus on sectors where government incentives directly offset high costs, particularly renewable energy, agriculture for tourism, and technology services.

Constraint Three: Access to Financing

The Problem:

Access to finance is identified as the main constraint for local companies' development. It's cited by businesses as one of the most problematic factors for doing business.

The banking sector is solid, well-regulated, and has excess liquidity. But it won't lend to most businesses.

Why banks won't lend:

• Non-performing loans (NPLs) were 8.1% in 2021, rising to 10.5% by June 2024—high compared with similar economies
• Banks are cautious after being burned by defaults when Covid-19 credit moratoriums ended
• They demand real estate collateral for most loans
• Two banks control 70% of total lending, creating concentration and limited competition
• Bank loan portfolios are heavily concentrated in tourism and real estate (42% of total loans), making them reluctant to finance other sectors

The cost of credit is prohibitive:

• Foreign buyers seeking property finance face interest rates of 8-12%
• Small business loans can carry monthly rates of 3-4% (36-48% annually)
• SMEs complain of crippling deficiencies in accessing credit and inability to meet high guarantee requirements

Local banks prefer lending to the government. They hold 56.2% of total internal public debt. Lending to the state is safe and predictable. Lending to private businesses is riskier.

The capital market offers no alternative. There are few listed companies and low trading volumes. Equity capital is virtually unavailable domestically.

The Opportunities:

If you need local bank financing for a substantial project, you're probably in the wrong market. But alternatives exist.

Bring your own capital: Foreign investors with their own capital have a significant advantage. You avoid local banks entirely, control your timeline, and aren't subject to collateral requirements designed for local borrowers.

Diaspora investors—Cabo Verdeans living abroad—have an additional edge. They receive full exemption from corporate income tax on dividends and profits from authorised external investments. This isn't just tax efficiency; it's recognition that diaspora capital is more patient and committed.

Use international financial institutions: For large projects in energy, infrastructure, or blue economy sectors, structure deals to involve International Financial Institutions (IFIs) like the World Bank, African Development Bank, or European Investment Bank.

These institutions have dedicated funding. The Global Gateway initiative allocated €240 million for energy transition and blue economy projects. The World Bank's Resilient Tourism and Blue Economy Development Project reached $75 million—the largest World Bank project in Cabo Verde's history.

IFIs provide patient capital, concessional terms, and risk mitigation that local banks can't match.

Leverage government financial mechanisms: The government established three institutions specifically to address financing gaps:

Pró-Garante: A partial credit guarantee fund for SMEs. By end-2022, it had mobilised nearly 75 million escudos in loans for just over 2,000 companies. The fund received €17 million in reinforcement. It guarantees a portion of loans, reducing bank risk and making credit more accessible.

Pró-Capital: A public venture capital company that invests equity in eligible SMEs in strategic sectors. This provides actual ownership capital, not debt.

Pro Impacto Fund (PIF): A $10 million private equity impact growth fund targeting SMEs in critical sectors—agribusiness, transport, logistics, clean energy, technology. It's managed by Investment Capital Partners and supervised by the central bank.

These are modest in scale relative to overall credit needs, but they exist and are accessible for projects aligned with government priorities.

Explore innovative financing instruments: Cabo Verde is actively pursuing green bonds, blue bonds, debt-for-climate swaps, and blended financing instruments. These are aimed at sectors like renewable energy, sustainable agriculture, and ocean economy projects.

If your project fits climate or blue economy priorities, complex financing structures involving grants, concessional loans, and private capital can be assembled with government and international partner support.

Remittances provide alternative capital: Remittances equal 10.5% of GDP—a massive flow of foreign currency. The government wants to channel these toward investment through better-remunerated financial products and tax incentives.

If you can structure investments attractive to diaspora, you tap into a capital source outside the banking system.

Bottom line on financing: Don't count on local banks for project finance. Bring own capital, structure deals with IFIs for large projects, use government guarantee funds for SME-scale operations, or tap diaspora capital. Local bank financing exists in theory but is constrained in practice.

How the Three Constraints Interact

These factors don't operate independently—they compound each other.

Small market size means you can't achieve scale. Without scale, your per-unit costs are high. High operating costs (energy, water, imports) make you even less competitive. You need financing to invest in renewables or efficiency improvements that could reduce costs. But you can't get financing because banks see a small, high-cost operation in a tiny market.

This is why so many businesses struggle. The constraints reinforce each other, creating a negative feedback loop.

But the same logic works in reverse for the right projects:

Export-oriented digital service:

• Market size constraint: eliminated (serving global market)
• Operating costs: low (no physical goods, minimal energy use, 2.5% tax rate in ZEET)
• Financing: modest needs, can bootstrap or use own capital
• Result: highly viable

Solar-powered fish processing for export:

• Market size constraint: eliminated (targeting West African markets)
• Operating costs: reduced (own solar generation eliminates expensive grid power)
• Financing: structured with IFI support given blue economy priority
• Result: feasible if quality and consistency can be maintained

High-end eco-resort with own renewables:

• Market size constraint: eliminated (tourists are the market)
• Operating costs: managed (solar/wind for power, water storage and treatment, waste management system)
• Financing: combination of own capital and IFI project finance
• Result: premium pricing justifies higher upfront investment

Investment Strategy: What Works

Based on these constraints, certain investment profiles succeed in Cabo Verde:

✓ Export-oriented businesses that bypass the local market entirely (fish processing, digital services, niche agricultural products)

✓ Tourism businesses that treat international visitors as the market (hotels, tour operators, yacht services)

✓ Renewable energy projects that solve the energy cost problem for themselves and potentially others

✓ Import substitution for the tourism sector in food, beverages, and services where hotels currently import everything

✓ Digital services and remote work infrastructure that escapes geography entirely

✓ Niche, high-value products for diaspora markets willing to pay premiums (specialty coffee, artisanal rum, cultural products)

What doesn't work:

✗ Manufacturing for domestic consumption without export component (can't achieve scale or compete with imports)

✗ Projects requiring regular inter-island logistics of perishable goods (infrastructure doesn't support it reliably)

✗ Capital-intensive projects dependent on local bank financing (won't get funded)

✗ Commodity products competing on price (operating costs make you uncompetitive)

✗ Businesses serving only local market in non-essential goods/services (market too small, purchasing power too low)

The Bottom Line for Investors

Cabo Verde offers political stability, currency stability (escudo pegged to euro), rule of law, and strategic Atlantic location. These are genuine advantages that many frontier markets lack.

But it's a small, fragmented, high-cost operating environment with limited local financing. Success requires strategy specifically designed around these constraints:

1. Target export markets or tourism, not domestic consumption
2. Invest in your own renewable energy from day one
3. Bring your own capital or structure deals with IFIs; don't depend on local banks
4. Leverage government incentives aggressively—they exist to offset structural disadvantages
5. Focus on high-value niches where quality and differentiation matter more than scale and price

If your business model requires a large local market, cheap utilities, or easy bank financing, Cabo Verde isn't for you. If you can build around these constraints—or better yet, profit from solving them—genuine opportunities exist.

The country isn't hiding its problems. The three constraints are obvious to anyone who spends time there. What matters is whether your investment strategy turns these constraints into competitive moats that others can't overcome, or whether they simply crush your margins until you give up.

That's the choice every Cabo Verde investor faces. Choose wisely.