Cabo Verde - Macroeconomic outlook for 2025-2030

Cabo Verde is executing an fiscal consolidation programme that aims to slash its public debt ratio from a pandemic peak of 147 per cent of GDP in 2021 to below 95 per cent by 2027. The government is simultaneously targeting inflation of around 2 per cent through 2030, anchored by the Cape Verdean escudo's fixed peg to the euro.

The twin objectives—price stability and debt reduction—form the core of the country's macroeconomic strategy for 2025-2030. Success would restore fiscal space to a nation where debt servicing has historically consumed more than a third of government revenues.

The inflation trajectory

Inflation has fallen sharply. The consumer price index rose just 1.0 per cent in 2024, down from 3.7 per cent in 2023 and a post-pandemic high of 7.9 per cent in 2022. Easing global food and fuel prices drove the decline.

Projections show inflation stabilising around 2 per cent through the medium term. The World Bank forecasts 1.8 per cent for 2025, while the Central Bank of Cabo Verde projects 2.4 per cent. By 2027, the central bank expects inflation to fall back to 1.0 per cent before settling near 2 per cent through 2028-2030.

Observed inflation in mid-2025 tracked close to forecasts. The annual rate reached 1.9 per cent in July 2025 and 2.1 per cent in October 2025. The central bank's strategic agreement with the government caps inflation at 3 per cent through 2026.

The monetary anchor is the currency peg. The escudo has been fixed to the euro at CVE110.265 per €1 since 1998. This arrangement constrains domestic monetary policy but provides a credible nominal anchor that contains inflation expectations.

The Central Bank of Cabo Verde has reinforced the peg through contractive monetary policy. It raised its reference rate three times during 2024, bringing the policy rate to 2.25 per cent by December. The increases narrowed the interest rate differential with the eurozone, supporting the peg and dampening inflation.

The debt reduction path

Public debt has declined steeply from its 2021 peak. The ratio fell to 110.9 per cent of GDP in 2024, according to World Bank estimates. That represents a 36 percentage point decline in three years.

The government's medium-term fiscal framework projects continued reduction. Debt should fall to 104.9 per cent of GDP in 2025, then to 100.5 per cent in 2026 and 93.9 per cent by 2027. Some scenarios show debt dropping below 70 per cent by 2030, though this depends on sustained growth and fiscal discipline.

The official consolidation target is to bring debt below 110 per cent of GDP by 2026. Current projections suggest this threshold will be breached a year early. Central government debt, including guarantees to state-owned enterprises, stood at 117.7 per cent of GDP in early 2024 but is projected to fall to 107.7 per cent by end-2025.

External debt comprises the majority of total liabilities and is largely concessional, with long maturities and low interest rates. This structure reduces refinancing risk but limits the government's ability to respond to shocks. The external debtor position reached 122.6 per cent of GDP at end-2024.

Drivers of consolidation

Three factors are pushing debt down. First, robust real GDP growth. The economy expanded 7.3 per cent in 2024, driven by tourism and services. Growth is forecast at 5.2 per cent for 2025 and 4.8 per cent for 2026, raising the denominator in the debt-to-GDP ratio.

Second, fiscal restraint. The government has committed to reducing the primary deficit through revenue mobilisation and expenditure control. Fiscal gains from state-owned enterprise restructuring and privatisation are projected to contribute 0.6 per cent of GDP in 2024 and 2.1 per cent in 2025.

Third, low domestic borrowing. The authorities are maintaining minimal domestic debt issuance to support monetary policy and protect the currency peg. This strategy prioritises macroeconomic stability over short-term financing flexibility.

Market validation

Credit rating agency S&P Global revised Cabo Verde's outlook from stable to positive in August 2025, while affirming its 'B/B' sovereign rating. The upgrade reflects confidence in the government's fiscal trajectory and growth prospects.

The debt reduction has been faster than many observers expected. The ratio fell from 146.9 per cent in 2021 to 110.9 per cent in 2024—a decline of 36 percentage points in three years. If the government meets its 2027 target of 93.9 per cent, that would represent a 53 percentage point reduction in just six years.

The fiscal arithmetic

The consolidation path is arithmetically straightforward but politically difficult. It requires the government to maintain primary surpluses while GDP grows faster than the nominal interest rate on debt. The fixed exchange rate eliminates currency devaluation as a tool, forcing adjustment through real variables.

Tourism provides the growth engine. The sector generates 20-25 per cent of GDP and has recovered strongly post-pandemic. International passenger traffic exceeded 2019 levels in 2023, climbing from 1.95 million to 2.03 million. Tourist arrivals topped one million annually for the first time in 2023.

Remittances supply additional support. Flows from the Cape Verdean diaspora—estimated at more than 500,000 people abroad—equal roughly 13.5 per cent of GDP. These transfers stabilise household consumption and support the current account, even as they don't directly reduce government debt.

Risks to the outlook

The consolidation strategy faces several vulnerabilities. First, tourism dependence. The sector's volatility creates fiscal risk; the pandemic demonstrated how quickly revenues can collapse when visitors stop arriving. Any prolonged European recession would hit arrivals and tax receipts.

Second, state-owned enterprise liabilities. The debt projections assume successful SOE reform and privatisation. Delays or failures would add contingent liabilities to the government's balance sheet. The electricity utility Electra alone requires substantial restructuring.

Third, external shocks. Cabo Verde imports 80 per cent of its energy and 75 per cent of its food. Commodity price spikes from geopolitical tensions—oil supply disruptions, food export restrictions—could reignite inflation and force the central bank to tighten policy further, slowing growth.

Fourth, climate vulnerability. The archipelago faces drought, water scarcity and rising sea levels. Climate adaptation investments are necessary but fiscally expensive. The government must balance infrastructure spending against debt reduction goals.

Fifth, implementation capacity. Fiscal consolidation requires not just targets but consistent execution across budget cycles and political transitions. Cabo Verde's democratic stability is an asset, but maintaining discipline through multiple election cycles tests any government.

The credibility question

The targets are ambitious but not implausible. Cabo Verde achieved middle-income status in 2007 and upper-middle-income status in 2025, demonstrating sustained development progress. The currency peg has held for 27 years, providing monetary credibility.

The government's track record on debt reduction since 2021 lends weight to its medium-term projections. A 36 percentage point decline in three years shows capacity for fiscal adjustment. The S&P outlook revision suggests external validation.

Yet the path from 110 per cent debt to 95 per cent is steeper than the path from 147 per cent to 110 per cent. The first phase benefited from post-pandemic growth rebounds; the second phase requires sustained structural fiscal effort. Revenue mobilisation, expenditure restraint and SOE reform must all deliver.

The strategic logic

The macroeconomic strategy seeks a reinforcing cycle. Low inflation, maintained by the euro peg and tight monetary policy, preserves purchasing power and supports business confidence. Strong economic growth, driven by tourism and emerging sectors, raises GDP and reduces the debt ratio. Fiscal consolidation creates space for future public investment without destabilising debt dynamics.

This approach reflects conventional Washington Consensus economics: sound money, fiscal discipline, structural reform. It has worked for small island economies from Mauritius to Seychelles, though implementation is never linear.

For investors, the outlook matters because it determines risk premiums and policy predictability. A government spending 35 per cent of revenues on debt service has little room for counter-cyclical policy or strategic investment. A government with debt below 95 per cent and stable inflation can respond to shocks and fund infrastructure.

The timeline ahead

The critical test arrives in 2026-2027. By end-2026, debt should fall below 100 per cent of GDP for the first time since the pandemic. By end-2027, it should reach 93.9 per cent. Missing these targets would undermine credibility and potentially trigger credit rating downgrades.

The government has staked its economic programme on hitting these numbers. Success would validate Cabo Verde's development model and attract investment. Failure would raise questions about fiscal sustainability and growth prospects.

For now, the trajectory is positive. Inflation is controlled, debt is falling, and growth remains robust. The next three years will determine whether Cabo Verde's macroeconomic discipline is durable or merely cyclical. The early evidence suggests discipline, but emerging markets have disappointed optimistic forecasts before.

The numbers tell a story of aggressive adjustment. Whether that story ends in restored fiscal health or renewed crisis depends on execution, external conditions, and political will. Cabo Verde has the plan. The question is whether it can deliver.