IMF proposals for VAT reform in Cape Verde suggest that a review or elimination of exemptions could generate enough fiscal space to fund increased public investment and reduce poverty.
“Simplifying VAT exemptions generates fiscal space of around 1.2% of GDP, keeping VAT rates unchanged,” under a “realistic” scenario, according to the IMF study.
“The fiscal space generated by eliminating exemptions would be sufficient to fund expanded public investment” in “infrastructure and education,” increase “production potential” and “support the gradual creation of formal sector jobs, despite the modest short-term consumption adjustment,” the document reads.
That adjustment — caused by the end of exemptions — could be offset in the medium and long term through direct subsidies to the population (cash transfers) sustained by the additional revenue from “productivity gains.”
“Inequality and poverty would decrease significantly, with the Gini coefficient falling to 0.378 and the number of inhabitants in poverty [down from 14.6% in 2015] to below 2%,” the IMF document projects. Targeted cash transfers “are essential to protect income during adjustment periods,” the study adds.
Overall, “the analysis of three scenarios studied indicates that the long-term distributive benefits outweigh the short- and medium-term concerns associated with broadening the tax base.” “In the long run, revenue gains are widespread,” it concludes.
The IMF document is part of the technical assistance provided to Cape Verde, a country with which the fund also has ongoing financial support programmes, whose implementation has generally received positive assessments.
Read more: Cape Verde and UN sign €17 million plan across multiple areas, including blue economy
Cape Verde has an estimated population of around 500,000. According to the latest official data, the absolute poverty rate fell from 35.5% in 2015 to 24.75% in 2023. Extreme poverty was halved over the same period, falling from 4.56% in 2015 to 2.28% in 2023, using the international threshold of $2.15 per day per person.
Absolute poverty refers to those without resources to meet basic needs — food, clothing, shelter and healthcare — using universal criteria, while relative poverty applies to those with fewer resources compared to others in the same society. Extreme poverty is a more severe form of absolute poverty.
The Cape Verdean government has committed to “eradicating extreme poverty by 2026, within the framework of the UN’s 2030 Agenda to leave no one behind.”
