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Dynamics of Public Debt and Fiscal Policy Stance in Cape Verde: Is there Evidence of Pro-Cyclical Bias?
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Dynamics of Public Debt and Fiscal Policy Stance in Cape Verde: Is there Evidence of Pro-Cyclical Bias?
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Journal Article
Dynamics of Public Debt and Fiscal Policy Stance in Cape Verde: Is there Evidence of Pro-Cyclical Bias?
2024
Overview
In contrast to sub-Saharan Africa, Cape Verde’s public debt increased sharply following the 2008-09 crisis. This paper evaluates whether there was a pro-cyclical bias in the recent debt dynamics of Cape Verde. Using data between 2001 and 2019, we construct detailed records on the dynamics of public debt and its composition and then compute primary structural public deficits by estimating cyclical elasticities of the budget balance to assess the fiscal policy stance. Further, by comparing the estimated fiscal stance with the cycle phase, this study assesses whether fiscal policy evidences pro-cyclical bias. The study concludes that structural primary deficits, adequately counter-cyclical, were the main determinants of Cape Verde’s recent public debt increase. Expansionary pro-cyclical fiscal policy was only implemented in 2006, 2008, and 2019, and the most crucial episode, in 2008, strongly resulted from public investment efforts. Thus, debt correction may be easy to perform since deficit bias is, apparently, not political-cycle driven.
