This paper estimates the exchange rate pass-through to consumer price inflation in Angola
and Nigeria, with particular emphasis on the changes of the pass-through over time. Even
though the two countries share smilar dependence on oil exports, this paper reveals different
results. For Angola, the long-run exchange rate pass-through to prices is high, though it has
weakened in recent years reflecting the de-dollarization of the economy. In Nigeria, there is
no stable long-run relationship between the exchange rate and prices, and changes in the
exchange rate do not have a significant pass-through effect on inflation. However, the passthrough
effect on core inflation is significant.
KEY ISSUESContext and outlook: Angola’s recent economic developments have been positive, but softening oil revenue and limited proven oil reserves highlight the need to contain emerging fiscal deficits, preserve policy buffers, and continue diversifying the economy.Focus of consultation: Discussions focused on mitigating the main risks to the macroeconomic framework and, inter alia, policies to return to structural fiscal surpluses over the medium term, and to support economic diversification and inclusive growth, the modernization of the monetary policy framework, and financial stability.Key policy recommendations:• Return to structural fiscal surpluses in line with the objective set forth in Angola’s Sovereign Wealth Fund, by mobilizing additional nonoil tax revenue, improving the efficiency of public investment, and reducing current spending, including by phasing out the costly and regressive fuel subsidies—while mitigating the impact on the poor through well-targeted social assistance.• Adopt an improved medium-term fiscal framework, focusing on the structural fiscal balance to limit the impact of the oil sector on the nonoil economy.• Develop a coherent asset-liability management framework, including awell-designed stabilization fund to shield the budget from oil revenue fluctuations.• Further improve public financial management systems to avoid, inter alia, a recurrence in the future of domestic payments arrears.• Continue improving the business climate to boost economic development, diversification, and competitiveness.• In transitioning over the medium-term toward an inflation targeting regime, enhance the central bank’s capacity to collect and analyze high-frequency economic data, and continue de-dollarizing the economy.• Further strengthen the financial system, by continuing to improve the transparency and accountability of banks, and enhancing bank supervision.• Manage public guarantees transparently and with a view to minimize fiscal costs, as envisaged in the recently-approved law on public guarantees.
In recent years, the decline in inflation in Angola has stalled and further steps may be needed to attain the authorities' medium term goal of meeting the Southern African Development Community (SADC) convergence criteria of a low single digit inflation rate. A Vector Error Correction (VEC) model, which analyzes the factors that affect the inflationary process in Angola, suggests that the inflation path has been largely affected by exchange rate movements. This implies that greater exchange rate flexibility that facilitates a gradual appreciation would be instrumental to moderate price growth through reducing the price of imports and limiting liquidity injection by the National Bank of Angola (BNA). Additionally, the analysis shows that excess liquidity, which is measured by positive deviations of M2 from its equilibrium level, adds to demand pressures, and contributes to inflation with a lag. This underlines the importance of closely monitoring the growth of monetary aggregates as well as improving liquidity management.