?2023InternationalMonetaryFund

IMFCountryReportNo.23/374

CABOVERDE

November2023

TECHNICALASSISTANCEREPORT—CONSUMERPRICEINDEX

ThisTechnicalAssistancereportonCaboVerdewaspreparedbyastaffteamofthe

InternationalMonetaryFund.ItisbasedontheinformationavailableatthetimeitwascompletedonJuly2023.

Copiesofthisreportareavailabletothepublicfrom

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InternationalMonetaryFund

Washington,D.C.

TECHNICALASSISTANCE

REPORT

CABOVERDE

ConsumerPriceIndex

JULY2023

PreparedBy

BrianGraf

MEMBERS

CaboVerde,Ghana,Liberia,Nigeria,SierraLeone,TheGambia

PARTNERS

Germany,EuropeanUnion,UnitedKingdom,China,Switzerland,EuropeanInvestmentBank,InternationalMonetary

Fund

DISCLAIMER

“ThecontentsofthisreportconstitutetechnicaladviceprovidedbythestaffoftheInternationalMonetaryFund(IMF)totheauthoritiesoftheInstitutoNacionaldeEstatísticaCaboVerde(the"CDrecipient")in

responsetotheirrequestfortechnicalassistance.Thisreport(inwholeorinpart)orsummariesthereof

maybedisclosedbytheIMFtoIMFExecutiveDirectorforCaboVerde,tootherIMFExecutiveDirectorsandmembersoftheirstaff,aswellastootheragenciesorinstrumentalitiesoftheCDrecipient,andupontheirrequest,toWorldBankstaff,andothertechnicalassistanceprovidersanddonorswithlegitimate

interestmembersoftheSteeringCommitteeofAFRITACWest2,unlesstheCDrecipientspecifically

objectstosuchdisclosure(see

OperationalGuidancefortheDisseminationofCapacityDevelopment

Information)

.PublicationorDisclosureofthisreport(inwholeorinpart)topartiesoutsidetheIMFother

thanagenciesorinstrumentalitiesoftheCDrecipient,WorldBankstaff,othertechnicalassistance

providersanddonorswithlegitimateinterestmembersoftheSteeringCommitteeofAFRITACWest2,shallrequiretheexplicitconsentoftheCDrecipientandtheIMF’sStatisticsdepartment.”

MEMBERS

CaboVerde

TheGambia

Ghana

Liberia

Nigeria

SierraLeone

PARTNERS

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TableofContents

Glossary 4

SummaryofMissionOutcomeandPriorityRecommendations 5

MainFindingsandRecommendations 7

A.ConsumerPriceIndex 7

.

Weights 7

.

ItemandVarietySamples 7

.

IndexCalculation 8

.

TemporarilyMissingPrices 8

.

PriceReferencePeriod 8

.

RentSurvey 9

.

HeadlineInflationRate 10

.

TechnicalAssistanceNeeds 10

AnnexI.OfficialsMetDuringtheMission 11

AnnexII.DetailedWorkPlan 12

A.ProjectObjectives 12

B.ProjectOutcomes 12

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Glossary

AFW2

AFRITACWest2RegionalTechnicalAssistanceCenter

COICOP

ClassificationofIndividualConsumptionAccordingtoPurpose

CPI

ConsumerPriceIndex

HIES

HouseholdIncomeandExpenditureSurvey

INECV

InstitutoNacionaldeEstatísticaCaboVerde

INEPT

InstitutoNacionaldeEstatísticaPortugal

TA

TechnicalAssistance

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SummaryofMissionOutcomeandPriority

Recommendations

1.AspartoftheworkprogramforthesecondRegionalTechnicalAssistanceCenterfor

WestAfrica(AW2)andinresponsetoarequestfromInstitutoNacionaldeEstatísticaCaboVerde(INECV),aconsumerpriceindex(CPI)technicalassistance(TA)missionvisitedPraiaduringJuly17–21,2023.

2.TheprimaryobjectiveofthemissionwastoassisttheINECVwithimprovingandupdatingtheCPI.Keymissionoutcomesinclude:(i)reviewandassessCPIcompilationmethods;(ii)discussthe

recentCPIcalculationissue;and(iii)developandagreewithINECVonaworkplantoguidetheauthoritiesonthewayforwardwithupdatingtheCPI.

3.CurrentCPIweightsarebasedonexpendituredatacollectedduringthe2015householdincomeandexpendituresurvey(HIES).ThesedataareoutofdateandthereisurgentneedtoupdateCPIweights.DatacollectionforanewHIESbeganinJanuary2023andwillcontinuethroughDecember2023.ThesedatawillbeusedtoupdatetheCPI.PreliminaryexpendituredataforQ1willbemade

availabletoCPIstafftobeginidentifyingnewitemsandclassifyingthedataaccordingtotheCPI

classificationsystem(ClassificationofIndividualConsumptionAccordingtoPurpose(COICOP),2018).

4.Overall,themethodsusedtocompiletheCPIforCaboVerdelargelyreflectinternationalstandardsandbestpractices;however,thereisscopeforimprovement.ManyofthemethodsusedreflectEuropeanpractices,thoughthesepracticesarenotappropriateforCaboVerdebecauseINECVdoesnothavethedatatosupportannualupdatesoftheCPI.Practices,suchasupdatingtheprice

referenceperiodeveryDecember,shouldbediscontinued.Updatingthepricereferenceperiodannuallycoincideswithupdatingtheweightsonanannualbasis(asisthecaseinEurope),butINECVupdates

CPIweightsapproximatelyevery5yearsandthepricereferenceperiodshouldbeupdatedaspartoftheinfrequentweightupdates.

5.Indexcalculationmethodsshouldbebasedonthemodifiedorshort-termformula.This

indexcalculationformula,recommendedinthe2020CPIManual,ismoreflexibleandallowstheoutletandvarietysamplestoremainrepresentativeandfacilitatestheintroductionofnewitems.Other

recommendationsforimprovementincludediscontinuingtheuseofthecarry-forwardmethod(repeatingthelastavailableprice)forthetreatmentofmissingseasonalandnon-seasonalitems;removingvariety-levelweights;andimprovingandaugmentingtherentsurvey.

6.INECVhasdefinedtherolling12-monthaverageastheheadlineorofficialindex.

The12-monthrollingaveragesmoothsthedata.Theheadlineindex(officialinflationrate)shouldnotbeadjustedorsmoothed.ItwasrecommendedthatINECVbeginusingtheannual(12-month)changeastheheadlineorofficialinflationrateforCaboVerde.

7.INECVidentifiedacalculationissuewiththeJanuary2023index.TheissueresultedfromacodingerrorrelatedtotheprocessofupdatingthepricereferenceperiodeachDecember.Because

INECVdoesnothaveaccesstothecalculationsystem,thedataweresenttotheInstitutoNacionaldeEstatísticaPortugal(INEPT)andtheissuewascorrected.Thecalculationerrordidnotaffectthe

disseminateddataforJanuary2023.

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8.Tosupportprogressintheaboveworkareas,theINECVagreedtocompletethefollowingpriorityrecommendation:

TABLE1.PriorityRecommendations

TargetDatePriorityRecommendationResponsibleInstitutions

December2023

Reviewandconfirmtheexistingvarietysample.

INECV

December2023

UsingpreliminaryHIESdataattheitemlevel,identifynewitems.

INECV

January2024

Defineheadlineinflationastheannual(12-month)rateofchange

INECV

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MainFindingsandRecommendations

A.CONSUMERPRICEINDEX

Weights

9.CPIweightsarebasedonexpendituredatacollectedduringthe2015HouseholdIncomeandExpenditureSurvey(HIES).Thesedataarenowoutdatedandshouldbeupdated.Outdated

weightscanintroduceabiasintotheindex.AnewHIESbeganinJanuary2023andwillcontinuethroughDecember2023.ThesedatawillbeusedtoupdateCPIweights.ItisplannedthatanupdatedCPIcanbeintroducedbyJanuary2025.

10.PreliminaryexpendituredataattheitemlevelshouldbemadeavailabletoCPIstaff.The

primarypurposeofreceivingthesedataisnottofinalizeweights,buttobeginidentifyingnewitemsthatwillbeincludedintheCPIbasketandtoclassifytheitemsaccordingtotheClassificationofIndividual

ConsumptionAccordingtoPurpose(COICOP)2018.Assoonasnewitemsareidentified,staffcanselectvarietiesforthoseitemsandbegincollectingprices.Thepriceswillbeusedtocompilereferencepricesforthenewitems.Thiswillcompressthetimescheduleforthereleaseofthenewindexandensurea

timelyrelease.

11.Currently,INECVusesCOICOP1999fortheclassificationofitemsintheCPI.Withthe

updateCPI,COICOP2018willbeimplemented.TherearesignificantchangesbetweenthetwoversionsofCOICOPandearlyaccesstoexpendituredataattheitemlevelwillallowstafftobegintheprocessofimplementingthenewerversionofCOICOP.

12.CPIstafflackexperienceandcapacitywithupdatingCPIweights.Forthe2015andpreviousCPIupdates,INEPTprovidedsupportandassistedwithupdatingindexweights.Fileswereprocessed

anduploadedintotheindexcalculationsystembyINEPTstaffinLisbon.INECVrequirestechnicalassistancetobuildcapacitytoensuresustainabilityandencourageINECVownershipoftheCPI.

13.Anelementaryindexisdefinedasthelowestlevelwithanexpenditureweight.This

generallycoincideswiththeitemlevel.INECVhasincludedweightsforairlineroutes.Eachairlinerouteisconsideredavariety.Varietiesdefinethepricecollected.Airlineroutesshouldnotbeweighted.Fixing

weightsforairlineroutesmakesitimpossibletoreplaceroutesthatdisappearandtoincludenewroutesthatmaybeintroduced.

ItemandVarietySamples

14.Whenanitemdisappears,thedatacollectorshouldconfirmwhetheritismissing

permanentlyortemporarily.Ifavarietyistemporarilymissing,itshouldbeimputed.Seasonalvarietiesthataretemporarilymissingshouldbeimputedineachmonththatthevarietyismissing.Forexample,ifmangoscollectedinagivenmarketaremissingduetoseasonalavailability,thepriceshouldbeimputedineachmonthuntilthemangoreturnstothemarket.Ifthemangoismissingforeightmonthsand

availableforpricinginfourmonths,pricesarecollectedforfourmonthsandimputedforeightmonths.

15.Forthosevarietiesnotsubjecttoseasonalavailability,itisexpectedthatthesenon-

seasonalvarietiesshouldbeavailableforpricecollectioneachmonth.Varietiesareoftenmissingduetoanumberoffactors,suchasstockshortages,etc.Fornon-seasonalvarieties,INECVshould

defineandadheretoamaximumnumberofmonthsthevarietycanbeconsideredastemporarily

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missing.Ifthevarietycontinuestobemissingattheendofthethresholdperiod,datacollectorsare

instructedtoidentifyareplacementvariety.INECVcurrentlyhasathree-monththreshold;however,thisisnotfollowedbecauseitdoesnotreflectrealityinCaboVerde.Itisconsiderednormalforitemstobe

missinguptosixmonths.INECVshouldallowitemstobemissinguptosixmonths.

16.INECVusesseasonalwindowsforthecollectionofseasonalitems.Seasonalwindows

definetheperiodsthattheitemsareconsidered“inseason.”Pricesareacceptedinthesystemonly

duringthedefinedperiods.Seasonalpatternscontinuetovaryfromoneyeartothenext.INECVshouldeliminatetheseseasonalwindowsandcollectpricesforseasonalitemsassoonastheybecome

availableinsampledoutlets.

IndexCalculation

17.The2020CPIManualgivespreferencetotheYoungindex.Manycountriesdescribetheir

indexcalculationformulaasLaspeyres;however,inpractice,nocountrycompilesaLaspeyresindex.

CountrieseithercompileaLoweoraYoungindex.Whenexpendituredataareupdatedfortherelative

changeinpricebetweenthepriceandweightreferenceperiods,thisresultsinaLoweindex.Whentheexpendituresharesarefixedintheweightreferenceperiod,thisresultsinaYoungindex.TheYoungispreferredbecausetheprocessofpriceupdatingweightscanleadtoadistortionoftheweights,especiallyduringperiodswhenrelativechangesinpricebetweenitemsishigh.Takingchickenandbeefasan

example,ifthepriceofbeefincreases100percent,iftheexpenditurevaluesarepriceupdated,the

weightforbeefdoubles.Priceupdatingfixestheimplicitquantities.Theassumptionisthatthesame

quantityofanitem,suchasbeef,isconsumedregardlessofhowmuchthepricehasincreased.Thisisnotarealisticassumptionasconsumerswillswitchtothoseitemsthatarerelativelylessexpensivesuchaschicken.TheLoweindexdoesnotaccountforsubstitutionbetweenthepriceandweightreference

periods;whereastheYoungindexassumesthattherehasbeensubstitutionbetweenthesetwoperiods.CPIstaffwerenotawareifexpenditurevalueswerepriceupdatedornot.Goingforward,theYoungindexshouldbeusedtocalculatetheCPI.

18.ThemodifiedversionoftheYoungindexisrecommendedandreflectsbestpractice.WiththemodifiedYoungformula,longtermpricechangeiscalculatedbychainingtogethershort-termpricechanges.MathematicallytheYoung(direct,orlong-termformula)andthemodifiedYoungareidenticalandyieldthesameresults.ThemodifiedYoungisrecommendedbecauseitismoreflexibleandallowsforthereplacementofvarieties,outlets,andevenitems.ThemodifiedYoungalsomoreeasilyfacilitatesthetreatmentofmissingpricesandqualityadjustment.

TemporarilyMissingPrices

19.Forthemostpart,INECVusesrecommendedimputationmethodswhenpricesare

temporarilymissing;however,thepracticeofcarryingforward,orrepeating,thelastavailable

priceisused.Thecarryforwardmethodintroducesadownwardbiasintheindexandshouldbe

discontinued.Onlycontrolledorregulatedpricesshouldbecarriedforwardbecausethegovernment

announcesinadvancewhenacontrolledpricewillbechanged.Alltemporarilymissingprices,includingseasonalprices,shouldbeimputed.

PriceReferencePeriod

20.TheindexcalculationsystemupdatesthepricereferenceperiodeachDecember.Eachyear,thepricereferenceisupdatedandtheratesofchangeinJanuaryarelinkedontotheDecemberindex.Generally,thepricereferenceperiodisupdatedwhentheweightsareupdated.INECVdoesnot

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havethedatatoupdateweightsannually.Weightsareupdatedinfrequently.ThispracticeofupdatingthepricereferenceperiodannuallybeganwiththelastCPIupdateandshouldbediscontinued.

21.TheimplementationoftheModifiedYoungindexeliminatestheneedforfrequentupdatesofthepricereferenceperiod.INECVplanstoimplementtheModifiedYoungformulaforthecalculationoftheupdatedCPIandthegoingforwardthepricereferenceshouldonlybeupdatedwhentheweightsareupdated.

RentSurvey

22.INECVcollectsrentpaiddirectlyfromasampleofrentalunits.AreasforimprovementwerediscussedandthereisneedforadditionalTAtosupportimprovingtherentindex.Therecommended

approachtocollectingrentisapanelsurveythatisrotatedonanannualbasis.Withapanelsurvey,a

representativesampleofrentalunitsissub-dividedintopanels.Eachpanelisbroadlyrepresentativeofthewhole.Whilethenumberofpanelsdoesvary,itismostcommontohavesixpanels.Pricesare

collectedfromonepaneleachmonth.Forexample,pricesarecollectedfrompanel1inJanuaryandJuly

ofeachyear;panel2inFebruaryandAugust,etc.Withannualrotationadefinedpercentage(20or25percent)ofthetotalsampleisrotatedeachyear.

23.Thepanelapproachhasafewadvantages.First,ingeneralrentchangesonceperyear,

althoughinCaboVerdeitisnormalforrenttoremainthesameforseveralyears.Becauseofthis,itisnotnecessarytocollectrentfromallsampledunitseachmonth.Thepanelapproachreducestheburdenonrespondents.Second,whencombinedwithannualrotations,thepanelapproachbettercapturesrent

increasesthatoccurwhentenantschange.Finally,samplerotationallowsthesampleofrentalunitsto

incorporatenewrentalunitsinatimelymanner.ThereissignificantconstructionofapartmentbuildingsinPraiaandotherareas.Annualrotationallowsthesenewunitstobeincorporatedintothesamplemore

quickly.

24.INECVlooselyfollowsaquarterlypanelapproach;however,itisnotstrictlyfollowed.A

moreformalapproachtothepanelsurveyshouldbefollowedandannualrotationshouldbeintroduced.GiventhenatureofrentinCaboVerde,thesampleshouldbedividedinto6panelsasitisnotnecessarytocollectrentfromsampledunits4timesperyearwhichwouldbethecaseifaquarterlypanelisused.

25.Whenusingthepanelapproach,therentcollectedfromonepaneliscomparedtotherentpricereportedbythatsamepanelsixmonthsearlier.Thisensureslikeiscomparedwithlike;

however,itresultsinasix-monthchange.TheCPIrequiresaone-monthchange,notasix-month

change.Toconvertthesix-monthchangeintoaone-monthchange,thesixthrootofthechangeis

calculatedandthenmultipliedbythepreviousperiodindexlevel.INECVwasnotsurehowthecurrentsystemcalculatestherentindex.TheauthoritieswillconfirmthiswhentheyvisitINEPTin

September2023.Changeswillbemadetoensurethepanelapproachiscorrectlyimplemented.

26.Currently,onlymarketrentsarecollected.Whilemarketrentsrepresentmostoftherentpaid,thegovernmentdoessubsidizerentforthosehouseholdsthatmeetcertaincriteria.Subsidizedrent

shouldbeincludedinrentsurvey.Ideally,thereshouldbeweightsforsubsidizedversusmarketrent,butthesedataarecurrentlynotavailable.Alternatively,thepricescollectedwouldreflecttheproportionofmarketversussubsidizedrent.Forexample,if85percentofrentpaidismarketrent,then85percentofthepricescollectedwouldbemarketrentpricesand15percentwouldbesubsidizedrent.

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HeadlineInflationRate

27.Theheadline,orofficial,inflationrateforCaboVerdeisdefinedasthechangeinthe

12-monthrollingaverageindex.Underthispractice,eachmontharollingaverageofthelast12monthsiscalculatedandcomparedtotheaverageacrossthesameperiodinthepreviousyear.Thisrolling

averagesmoothsthedata.Aheadlineindexshouldnotbesmoothedoradjusted.Itisnotappropriateorrecommendedtousethe12-monthrollingaverageastheheadlineinflationmeasure.The12-month

rollingaverageindexisconsideredananalyticalindex,notanofficialmeasureofinflation.

28.Headlineinflationshouldbebasedonthe12-monthchange(comparingthecurrentmonthwiththesamemonthinthepreviousyear).Theheadlineinflationrateshouldfullyreflecttheprice

changesacrossthe12-monthperiodandnotbesmoothed.Monetarypolicydecisions,indexation,andtheofficialmeasureofinflationshouldbebasedonthe12-monthchange.Thepracticeofusingthe

12-monthrollingaverageshouldbediscontinuedassoonaspossible.

TechnicalAssistanceNeeds

29.INECVhasreliedheavilyonthesupportandassistanceofINEPT.Thissupportand

assistancewillendin2024.SeniormanagementandstaffnotedtheneedtobuildcapacityandassistwithupdatingtheCPI.INECVrequestedafollow-upmissiononcefinalexpendituredataareavailabletobegindevelopingtheweights.

RecommendedActions:

.Lowestlevelofweightshouldbetheitem(elementaryindexlevel).Varietiesshouldnothaveweights.

.Definetheannual(12-month)changeastheheadlineorofficialinflationrateforCaboVerde.

.ReturntousingafixedreferenceperiodanddiscontinuethepracticeofupdatingthepricereferenceeachDecember(annualchaining).

.ImplementtheModifiedYoungindexcalculationformula.

.Discontinuethepracticeofrepeatingthelastcollectedprice(carry-forward)forthetreatmentofseasonalandnon-seasonalmissingprices.

.Adjustthethresholdformissingnon-seasonalitems.

.Seasonalproducts–discontinuetheuseofseasonalwindows.

.Augmentthesampleofrentalunits–includingbothmarketandsubsidizedrent.

.Reviewhowrentiscalculatedbytheindexcalculationsystem.

.Implementthepanelapproach,withannualrotation,fortherentsurvey(moreformalizedthancurrentpractice).

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AnnexI.OfficialsMetDuringtheMission

NameInstitutionE-mailAddress

JoaoCardoso

INECV

Joao.Cardoso@.cv

FernandoRocha

INECV

Fernando.Rocha@.cv

OlgaCruz

INECV

Olga.Cruz@.cvv

NatanielBarros

INECV

nataniel.l.barros@.cv

PauloPires

INECV

Paulo.Pires@.cv

AmeliaPina

INECV

Amelia.Pina@.cv

OtilioDuarte

INECV

Otilio.Duarte@.cv

JaquelineTavares

INECV

Jaq