Investment Climate in Cape Verde

(2007 - Report by the US State Department)

Since 1989, the economy of Cape Verde has become increasingly open. The government is committed to integrating the country into the global economy primarily through foreign investment in export-oriented activities. Cape Verde offers foreign investors substantial advantages in areas such as light manufacturing, tourism, fisheries, transportation, and communications. In light manufacturing, for instance, foreign investors can benefit from Cape Verde's market access and underutilized quotas for Cape Verdean products sent to the European and the U.S. markets. Furthermore, Cape Verde enjoys remarkably peaceful stability based on its democratic political system and market-based economic development policies, as well as the absence of ethnic divisions.

Since the mid-1990s, the government of Cape Verde has implemented a series of reforms that have led to a dramatic transformation from a centrally planned economy into a market economy. From 40 in the early 1990s, the number of publicly-owned enterprises has been reduced to six, either through sales to the private sector or through liquidation. The two main utility companies, Electra (electricity and water) and Cape Verde Telecom, the country's three banks, and the main state-owned entities in the tourism sector have all been sold off. The 2004 decision by the United Nations to "graduate" Cape Verde to Middle Income Country status, with the decision taking effect in three years, means that the next three years will be an important period of economic transition for this country. Efforts to accelerate growth and integrate more effectively with the international economy will therefore take on even greater importance.

In 2006, Cape Verde was considered by the Wall Street Journal and the Heritage Foundation one of the countries with the most economic freedom in Africa, after Botswana, and it ranks among the top 50 in the world. Real economic growth in Cape Verde has been an average of six percent over the past few years. The political stability of the country, the absence of exchange-rate risk (CVE pegged to the Euro), coupled with successful fiscal reforms – in particular the implementation of a VAT system - led to excellent results in the last two years. Strong economic growth is also the result of Cape Verde's impressive economic reforms, which began in the mid-1990s, when the country embarked on a vast privatization program that included utilities companies and the entire banking system.

The country has been able to develop a successful economy based on tourism, transport, and other services and, to a lesser extent, on light manufacturing industries.

Cape Verde Openness To Foreign Investment

Cape Verde's government looks to private investment as the engine for the country's future economic growth. It seeks to attract investment that will modernize the country's economic structure and stimulate all appropriate business activities. The greatest emphasis is placed on tourism and export-oriented industries.

Foreign investment in the ongoing privatization of state-owned enterprises has been a major objective of the privatization effort. The majority of public companies privatized to date has been acquired by Portuguese investors. In some instances, however, the Government of Cape Verde reserves shares for Cape Verdean investors. The government encourages joint ventures with local investors. The interest in tourism has attracted the largest portion of foreign investment especially from Italy, Spain, England, and China.

Cape Verde's economic performance remains strong. The tourism sector is developing rapidly, driven by significant growth in foreign direct investment (FDI) in hotels and other tourism-related construction: through the third quarter of 2006, tourism exports almost doubled and FDI increased by roughly 60 percent compared to the same period of 2005. Further support has come from public investment in infrastructure and better external transportation links. Moreover, business confidence—in the tourism area and in the economy in general—is high. While economic activity in 2006 may have been held back by difficulties with electricity supply during the summer and recent shortages in some construction sector inputs, the overall outlook for the year remains favourable: the growth projection has been revised up from 5.5 to 5.8 percent.

Conversion and Transfer Policies in Cape Verde

The government gives foreign investors important guarantees such as privately managed foreign currency accounts that can be credited only in foreign currency from abroad or from other foreign accounts in Cape Verde. In addition, it allows unrestricted repatriation of dividends, profits, and capital from foreign investment operations.

The regulatory legislation specifies that for the initial five years of operation, dividends may be freely expatriated without tax and that for the next 15 years dividends may be expatriated with a flat tax of 10 percent. Incentives for outward investment in developing countries are not included in legislation but have been provided on an ad hoc basis.

Current law permits a foreign investor to request the Bank of Cape Verde to transfer loan repayments, revenue/profits, and capital gains overseas within 30, 60, and 90 days, respectively. The Bank of Cape Verde will pay interest on all transfers with waiting periods of more than 30 days, starting on the 31st day. Timely transfers may not always be possible when requests cover large sums and affect Cape Verde's balance of payments; in such instances, the government will order that the transfer be made in instalments, generally every three months over a period of no longer than two years.

The de facto exchange rate arrangement of Cape Verde is a conventional fixed peg. The Cape Verde escudo has been pegged to the euro at a rate of CVE 110.3 per EUR 1 since January 4, 1999. Cape Verde accepted the obligations under Article VIII of the Articles of Agreement effective July 1, 2004. Cape Verde maintains an exchange system that is free of restrictions on the making of payments and transfers for current international transactions. Significant devaluation is not likely to occur over the next year.

Expropriation and Compensation in Cape Verde

In the event of expropriation, or acquisition of privately owned property by the government for the public interest, the government will compensate the owner fairly on the basis of prevailing market prices or the actual market value of the property on the day of expropriation. Compensation will be prompt and may be repatriated at the exchange rate in effect on the day of expropriation.

Dispute Settlement in Cape Verde

Disputes between foreign investors and the government may be settled either by recourse to a single referee or an arbitration commission. Referees may be foreigners. If so, they may not have the same nationality as the parties involved in the dispute. Should there be difficulty in reaching an agreement on referees, referees may be appointed by a recognized national body or international organization, with the ultimate authority being the International Centre for Settlement of Investment Disputes (ICSID). Generally, the arbitration will be carried out in Cape Verde and in Portuguese unless the parties agree on another site and language. The decision of the single referee or the arbitration committee is final.

Cape Verde has a functioning judiciary that appears to operate independently and free of outside influence.

Performance Requirements/Incentives of Cape Verde

The government offers local and foreign investors the same incentives that are described below. The incentives do not carry performance requirements. Instead, the government favours investments that are either export oriented or diversify geographically and technologically the country's industrial base.

Through existing international agreements, exporters have preferential access to the markets of Europe, West Africa, and the United States. Incentives to firms that export their entire output (free-zone enterprises) are the most generous, but all foreign firms investing in Cape Verde, regardless of the location of their markets, can benefit from the following incentives:

-- a 100 percent tax exemption on all dividends during the first five years of operation (after five years the tax rate is 10 percent); tax exemption on dividends and income when reinvested; and tax exemption on amortization and interest.

In addition, all foreign investments benefit from the following guarantees:

-- protection of investor's rights and property; free expatriation of dividends and income; and direct operation of foreign currency account.

Enterprises producing goods and services exclusively for export (free-zone/export processing enterprises) also benefit from:

-- total exemption from corporate income tax during the first 10 years of operation (after ten years, the combined tax rate will be no more than 15 percent); tax exemption on dividends and profits paid to shareholders for the first 10 years of operation (after 10 years, the maximum rate will be 15 percent); exemption from indirect taxes; duty-free imports; and no export taxes.

Export incentives apply to export and re-export operations. They do not apply to fuel or export of free-zone enterprise activities. They include:

-- deduction of income tax during the first five years (this period my be extended up to 10 years, as long as the enterprise begins producing 50 percent of its exports or re-exports in Cape Verde by the fifth year of export operations); duty free imports; and no export taxes.

The following sectoral incentives apply to enterprises, except free-zone enterprises, involved in a specific sector:

Industry: exemption from income tax for three years; tax deduction on income reinvested; and duty free imports.

Tourism: duty free imports; exemption from income tax for five years; exemption from property transfer taxes; interest subsidy, loans and guarantees.

Fisheries: duty free imports; interest subsidy, loans and guarantees; subsidy for training.

Cape Verde has recently signed a treaty with Portugal to eliminate double taxation.

Right To Private Ownership and Establishment in Cape Verde

The right to private ownership and establishment is guaranteed under the constitution.

Protection of Property Rights in Cape Verde

Property rights are recognized and guaranteed in several Cape Verdean laws, as well as by the constitution. There is a legal entity that records secured interests in property, both chattel and real. There is also a legal system that protects and facilitates acquisition and disposition of all property rights. Since 1990 Cape Verde has had copyright laws, although it has not yet ratified international agreements on intellectual property rights. It has recently signed several treaties that provide protection for intellectual property rights.

Transparency of The Regulatory System in Cape Verde

The current Cape Verdean government has taken a number of steps to improve the climate for foreign investment and to encourage a more transparent and competitive economic environment. The basic Cape Verdean legislation affecting foreign investment is contained in the External Investment Law and the Law of Industrial Development. These laws establish the principle of equal treatment for foreign investment and affirm the government's commitment to a dynamic business environment. The industrial development statute regulates the granting of incentives and simplifies the investment approval process.

Recently approved laws on the promotion of exports, on incentives to exports and on free-zone enterprises stress the commitment of the government to encourage investment in export-oriented industries.

Regulatory procedures have been simplified in a number of cases. The investment approval process has been expedited with the revision of the external investment code. The Centre for Investment and Export Promotion, Cabo Verde Investimentos (CVI), has become a one-stop shop for external investors who still complain of the services provided. In general, external investment operations are subject to prior authorization from the minister in charge of economic affairs. An investor should get a reply within 30 days after application is submitted to CVI. If a response is not forthcoming within 30 days, approval is automatic.

In order to benefit from incentives regarding capital transfers, external investment operations must be registered at the Bank of Cape Verde.

Efficiency Of Capital Markets and Portfolio Investment in Cape Verde

The Cape Verdean banking system was liberalized in the late 1990s and is now generally sound. There are four banks operating in the country, and the two largest, Banco Commercial do Atlantico (BCA) and Caixa Economica de Cabo Verde, have been privatized (although the government retains a limited number of shares), and are now controlled by Portuguese banks. The remaining share of the market is held by Banco Inter-Atlantico, also controlled by the same Portuguese bank that controls BCA, and Banco Caboverdiano de Negocios, formerly Banco Totta e Açores, which was acquired by local investors in 2005 and is now the only domestically controlled bank. There are five offshore banks whose activities are still at a very early stage, and two insurance companies operating in Cape Verde.

 Although interest rates have been falling since 2004, banks in Cape Verde have become over-liquidated as a result of the growing inflows of non-resident deposits, mostly from emigrants, in the past two years with emigrant deposits offering attractive rates.

Bank credit is available to foreign investors under the same conditions as national investors. The private sector has access to some credit instruments such as loans, letters of credit and lines of credit. Portfolio investment in Cape Verde is still limited and depends on the capacity of the Bank of Cape Verde.

Political Violence In Cape Verde

One of Cape Verde strengths is its political and social stability. In recent years there have been some cases in which labour unions opposing the ruling party have undertaken strikes, but these labour actions have been peaceful.

Corruption in Cape Verde

Cape Verde has a range of laws and regulations to combat corruption. Giving or accepting a bribe is a criminal act for which conviction could result in eight years imprisonment.

To combat corruption effectively, the Cape Verdean government established the High Authority against Corruption. Other institutions active in combating corruption include the Judiciary Police, the Prosecutor, and the courts.

There is no indication that corruption has a significant impact on Cape Verde's economy.

Bilateral Investment Agreements with Cape Verde

Cape Verde has bilateral investment agreements with Austria, Germany, the Netherlands, Portugal, Switzerland, Italy, China, and Angola.

OPIC and other Investment Insurance Programs in Cape Verde

Cape Verde benefits from the loan guarantee program of the Overseas Private Investment Corporation (OPIC) and is a member of the Multilateral Investment Guarantee Agency (MIGA). Other Washington-based agencies offering financing and insurance programs include the International Finance Corporation (IFC), the Export-Import Bank of the United States (Eximbank) and the U.S. Small Business Administration (SBA).

LABOR. Restrictive labour laws and relatively high salaries have led to a structurally high unemployment rate (around 24%). This is not easy to reduce, given the high percentage of young people in the population, and as the European boarders adopt stricter immigration policies. Domestic job creation has therefore become one of the government's top priorities.

Over the years, Cape Verde has maintained good interactions with the ILO.

Foreign‑Trade Zones/Free Ports

Taken together the External Investment Law, the Industrial Development Law, the Industrial Statute, the Entrepot Law, and the Law of Free-Enterprises constitute a package of free zone legislation. They create a strong package of incentives for export oriented industrial firms which permit broad flexibility of location of their plants. The free-zone enterprise law introduces a new status for enterprises that produce goods and services exclusively for export or for sale to other free-zone enterprises in Cape Verde.

Foreign Direct Investment into Cape Verde

Foreign direct investment (FDI) in Cape Verde has been increasing steadily. Since economic reforms began in 1993, the government has licensed nearly 109 investment projects with a total capital of $416 million. Most foreign direct investment has been in tourism (54 percent) followed by manufacturing (15.5 percent). Italy, Portugal, Spain (Canary Islands), and Hong Kong are the main sources of current investment.

In 1998, foreign direct investment rose sharply to $233 million, from $59 million in 1997. Seventy-four percent of those projects were in tourism. In 1999, some 18 projects totalling approximately $66 million were approved. Of this, 11 percent was directed towards industry and 89 percent to tourism-related projects.

Major Foreign Investors into Cape Verde

Most important foreign investors have come from Portugal and other European countries, especially the United Kingdom, Italy, and Spain. Asian investors from Hong Kong / Macau are also present, and they have been one of the major targets of the Cape Verdean Foreign Investment Promotion Agency. Italian investors are the leaders in the tourism sector, while the Portuguese dominate light manufacturing.

Investment Climate in Cape Verde -- last updated June 2008