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Striking an Appropriate Balance Among Public Investment, Growth, and Debt Sustainability in Cape Verde

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  • Yibin Mu
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    Abstract

    Despite relatively fast economic growth over the past few years, Cape Verde’s public debt to GDP ratio has risenrapidly. Achieving an appropriate balance among public investment, growth, and debt sustainability has become a priority for the Cape Verdean authorities. The IMF-World Bank debt sustainability analysis (DSA) framework has helped the authorities monitor the risks of debt stress. However, the DSA has a number of limitations. This paper intends to complement the DSA by addressing aspects currently not covered by the DSA. The paper evaluates public investment scaling-up strategies in Cape Verde by customizing the Buffie and others (2012) model for Cape Verde and conducting various scenario and sensitivity analysis. The paper assesses Cape Verde’s public debt risks, taking into account the link between public investment and growth. The paper concludes that the size of scaling-up and aspects of the economic structure have significant impact on the outcome of the public investment. A very large surge in public investment may lead to a debt to GDP ratio that reaches dangerous levels based on the usual DSA criteria. A more moderate scaling-up of public investment may contribute better to stable and sustained growth over the medium and long run. In addition, it is critical that the authorities ensure the quality of public investment.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 12/280.

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    Length: 34
    Date of creation: 30 Nov 2012
    Date of revision:
    Handle: RePEc:imf:imfwpa:12/280

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    Related research

    Keywords: Public investment; Cape Verde; Economic growth; Public debt; Debt sustainability; Economic models; Fiscal Policy; Developing Countries; commercial borrowing; domestic debt; external debt; current account; commercial debt; private external debt; domestic financing; domestic borrowing; debt sustainability analysis; current expenditure; government budget constraint; external financing; current account deficits; concessional debt; private debt; debt service; debt terms; foreign debt; public investment program; public investment programs; public sector debt; fiscal gap; excessive borrowing; government expenditure; debt crisis; debt dynamics;

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    1. Charles Wyplosz, 2007. "Debt Sustainability Assessment: The IMF Approach and Alternatives," IHEID Working Papers 03-2007, Economics Section, The Graduate Institute of International Studies.
    2. Peter Hjertholm, 2003. "Theoretical and empirical foundations of HIPC debt sustainability targets," Journal of Development Studies, Taylor & Francis Journals, vol. 39(6), pages 67-100.
    3. Antonio David & Luis-Felipe Zanna & Raphael A. Espinoza & Michal Andrle & Marshall Mills, 2012. "As You sow so Shall You Reap," IMF Working Papers 12/127, International Monetary Fund.
    4. Jeffrey D. Sachs, 2002. "Resolving the Debt Crisis of Low-Income Countries," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 33(1), pages 257-286.
    5. Charles R. Hulten, 1996. "Infrastructure Capital and Economic Growth: How Well You Use It May Be More Important Than How Much You Have," NBER Working Papers 5847, National Bureau of Economic Research, Inc.
    6. Andrew Berg & Rafael Portillo & Edward F. Buffie & Catherine A. Pattillo & Luis-Felipe Zanna, 2012. "Public Investment, Growth, and Debt Sustainability," IMF Working Papers 12/144, International Monetary Fund.
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