Statement by Peter J. Ngumbullu, Executive Director for Angola and Gualberto Lima Campos, Senior Advisor to Executive Director

This 2004 Article IV Consultation highlights that Angola’s GDP grew by 11 percent in 2004, following a slowdown in growth in 2003, largely reflecting the profile of oil production, which now accounts for one-half of GDP. The economy outside the extractive sector is currently estimated to be growing by about 9 percent. Despite extensive landmines and devastated infrastructure, agricultural production has recently begun to recover. Progress on structural reform and the implementation of policies to deal systematically with poverty reduction has been limited. The state continues to exercise a heavy influence in many sectors.

Abstract

This 2004 Article IV Consultation highlights that Angola’s GDP grew by 11 percent in 2004, following a slowdown in growth in 2003, largely reflecting the profile of oil production, which now accounts for one-half of GDP. The economy outside the extractive sector is currently estimated to be growing by about 9 percent. Despite extensive landmines and devastated infrastructure, agricultural production has recently begun to recover. Progress on structural reform and the implementation of policies to deal systematically with poverty reduction has been limited. The state continues to exercise a heavy influence in many sectors.

March 4, 2005

Introduction

1. On behalf of the Angolan authorities, we would like to express gratitude to staff for their work in conducting the Article IV consultation and for their ongoing constructive engagement in Angola. The discussions have provided a valuable opportunity for the authorities to take a critical look at their own macroeconomic policy framework and the recommendations left by staff are helping the authorities in their efforts to address the challenges facing the economy. The authorities would also like to express their appreciation to Management for their commitment to Angola, as they view Mr. Kato’s recent visit to the country, as a major step in the improvement of the dialogue with the Fund.

Background

2. During the last four years, Angola has experienced a meaningful transformation of its political, social and economic life, as the peace process has firmly consolidated, democracy has decisively entrenched and the economy is vigorously recovering and expanding. The government and UNITA, the former rebel party, have with commitment, successfully implemented the Luena peace agreement of April 2002, whereby all 86,000 former rebel combatants were either demobilized or incorporated into the national army and that UNITA surrendered all weapons to the government. With peace effectively ingrained, the Angolan government has, therefore, accomplished an ambitious humanitarian program of resettling about 4,000,000 internally displaced people and around 450,000 refugees. UNITA is today fully transformed into a civil political party for the happiness of the Angolan people who can now enjoy the virtues and benefits of democracy. A national consensus has also emerged regarding the holding of general elections in September 2006. The authorities’ attention is now fully concentrated in the challenging tasks of improving the living standards of the Angolan people and reconstructing and rehabilitating the destroyed and decayed infrastructure.

Recent Economic and Social Developments

3. Real GDP grew by an estimated 11 percent in 2004, mainly on account of increased oil and diamond production and reconstruction activities. In the last four years real GDP has experienced an average growth of 8 percent a year. Nevertheless, it is encouraging to observe that in same period non-mining sector’s growth has been stronger than the mining sector averaging almost 9 percent a year. Agriculture, commerce and construction have been the most dynamic sectors representing the bulk of growth in the non-mining sector. The share of the non-mining sectors in the GDP has, however, declined over time, and it is estimated today to represent 43 percent, while the oil sector accounts for 52 percent and the diamond sector represents 5 percent. As a result of the good economic performance, Angola’s GDP per capita more than doubled since 2000 to about $1,000, and the country has, as a matter of fact, emerged as the third economy in Sub-Saharan Africa in terms of global GDP.

Monetary and Fiscal Policy

4. In September 2003 the authorities started implementing a new macroeconomic program aimed at reducing inflation and stabilizing the economy. The results were quite impressive, as for the first time in more than ten years annual inflation was below 70 percent and was in accordance with the authorities’ initial projections. As at end-December 2004, the 12-month rate of inflation had declined to 31 percent and in January 2005 it had further fallen below 30 percent. In addition, the nominal exchange rate had largely stabilized, as it depreciated only by 9 percent during 2004 as compared to 35 percent in 2003 and 85 percent in 2002. Nevertheless, dollarization continues to be high, as Angola continues to be considered the highest dollarized economy in Africa and is among the most dollarized economies in the world. However, signs of increased confidence in the national currency are visible, as deposits in national currency, as a percentage of total deposits, have in 2004 increased to 44 from 34 and 26 respectively in 2003 and 2002, while symmetrically the part of deposits in foreign currency have in 2004 decreased to 56 from 66 and 74 respectively in 2003 in 2002.

5. Monetary developments were in line with the objectives of macroeconomic stabilization, as growth of monetary aggregates decelerate mainly reflecting reduced reliance on the banking sector to finance the public sector. In this connection, the authorities cleared arrears of about $650 million to domestic suppliers through securitization and introduced short and long-term treasury bills for open market operations. In addition, gross reserves, that were substantially low in December 2002 increased more than 5 fold in December 2004, representing three months of non-oil imports.

6. Fiscal developments in 2004 were particularly characterized by increased spending on social sectors in absolute and relative terms. In 2004 expenditure on social sectors represented 20 percent of total expenditure as compared to 12 percent in 2003. In this connection, the authorities’ efforts to rapidly extend primary school to the whole territory were quite satisfactory as more than 30,000 new teachers were recruited and trained and more than 1.5 million new pupils were enrolled. Other interventions conducted in the social sector included the rehabilitation of numerous basic health services facilities and the implementation of nationwide campaigns against malaria, measles and HIV/AIDS. In addition, the authorities continued to firmly support the peace process and resettlement of displaced people, through specific actions in favor of ex-UNITA combatants and their families, and by intensifying landmine removal operations and bringing home most of the refugees in neighboring countries. They have also initiated a variety of reconstruction and rehabilitation activities including repair of bridges, roads, railways, power plants and urban water systems.

7. The overall fiscal deficit to GDP declined in 2004 to 4 percent from 7.1 percent and 9.4 percent respectively in 2003 and 2002. Although increased oil revenue derived from higher prices and production has helped in reducing the fiscal deficit, the declining deficit reflects the authorities’ determination to stabilize the economy and improved fiscal discipline and reduction of price subsidies. Indeed, fiscal discipline has considerably improved following the approval in 2003 of new budget legislation requiring all state revenues and expenditures to be declared in the national budget. As a result, all quasi-fiscal operations previously carried out by Sonangol and other expenditures executed outside the budget, particularly those associated with the military sector, were terminated and are now fully integrated in the national budget.

8. Revenues continued to be dominated by oil taxes, which in 2004 represented about 30 percent of GDP and accounted for about 75 percent of total revenue. However, and despite a dramatic boost in oil production in the last four years, the government’s share of total oil receipts has declined from 52 percent to an estimated 43 percent in the same period, reflecting mainly higher amortization costs in deep-water fields where the new production is being extracted.

Structural Reforms

9. In the last two years, the authorities have taken bold steps to improve fiscal transparency and accountability. In this connection, they have already published the oil diagnostic study and are committed to the implementation of the main recommendations of the study. The authorities have also unified the budget and established a single treasury account at the central bank and created an Auditing Court (Tribunal de Contas). Other reforms include the conduct of external audits of the financial statements of the central bank and Sonangol, and the strengthening of the external debt unit and the compilation of comprehensive data on external debt. However, progress in implementing other structural reforms remained limited by the continuous focus given by the authorities to the consolidation of the peace process and by serious constrains in human and institutional capacity. In 2003 and 2004 the authorities approved the new investment law, establishing the principle of equal treatment between national and foreign investors and simplifying administrative procedures for investment and profit repatriation, the law of tax incentives for private investment and the creation of a Private Investment Agency. The authorities have also approved a new land law, largely eliminated export tariffs, restructured import tariffs, continued implementation of the customs modernization program, and prepared a draft law requiring foreign oil companies to use the national banking system for the financial transactions regarding their exports.

Economic Outlook for 2005 and the Medium Term

10. The authorities are fully committed to stabilize the economy, accelerate the rebuilding of the country and create conditions for sustainable growth and meaningful poverty reduction. Based on these objectives, they have prepared a program for 2005–2006, which targets a realistic reduction in inflation to 15 percent in 2005 and to 10 percent in 2006 and encompasses appropriate fiscal, monetary and exchange rate policies in line with the inflation target.

11. It is estimated that the fiscal deficit could reach 9 percent of GDP in 2005 due essentially to the pressing need to restore the country’s infrastructure and improve social services. In this connection, the 2005 budget encompasses a significant rise in capital expenditure, which will increase to 13 percent of GDP from 5.8 percent in the previous year. Social sector spending is also projected to increase to 23 percent of total spending, reflecting in large part additional recruitment and training of education and health workers. In addition, the authorities believe that they can not abruptly trim spending in administrative and military sectors to compensate for the increase in other sectors as suggested by staff, as this would contribute to increase unemployment and affect particularly the peace process, as the army had to absorb part of UNITA combatants. Furthermore, the army has recently been called to help the police to protect the borders, as large cohorts of illegal immigrants have been entering the country with the objective of digging diamonds and the situation is gaining alarming dimensions. Also, the authorities are of the view that training and other alternative programs for non-essential military and administrative personnel need to be carefully set up before laying them off.

12. Nevertheless, even under these circumstances the authorities are committed to improve fiscal management and expenditure control. In this regard, they intend to implement most recommendations of the World Bank’s Public Expenditure Management and Financial Review and have already started to gradually increase retail prices of oil derivatives to a level that will be sufficient to cover production costs with the view of eliminating price subsidies of fuel and utilities, which in 2004 accounted for 4.5 percent of GDP. They have also prepared the budget based on a very conservative oil price (US$26.5 per barrel), which can certainly help in reducing the projected fiscal deficit, as oil prices tend to stabilize at above $40 per barrel.

13. In the next three years, GDP is projected to grow at an average of 18 percent a year, fueled by large increases of oil and diamond production. As a result, GDP per capita is expected to double again by 2007 to about $2,000. However, the authorities are aware of the challenges associated with the efficient and transparent management of the natural-resource wealth, which calls for the need to create responsible mechanisms to manage these resources. In this regard, they are committed to continue to take bold steps to improve transparency and efficiency of the oil and diamond sectors and intend to implement in the medium-term the main recommendations of the oil diagnostic study, particularly the separation of commercial and concessionaire functions and the establishment of a oil revenue management unit, for which the authorities are in the process of contracting technical assistance.

14. The authorities are also aware that the perverse effects of the Dutch disease have particularly in the last ten years, plagued the economy. They acknowledge that the economy is becoming increasingly dependent on the oil sector and that production of tradable goods particularly in the agricultural and manufacturing sectors is becoming uncompetitive. Against this background, the authorities are aware that they need to pursue structural reform measures and implement appropriate actions aimed at improving competitiveness and fostering economic diversification and they believe that significant and appropriate investment in human resources and infrastructure are key to achieve those objectives.

15. Looking forward, the authorities are committed in pursuing the structural reform agenda with the view of enhancing economic efficiency and competitiveness and improving the business environment for private sector development. In this connection, they acknowledge the need to streamline bureaucracy, reduce corruption and privileged access to markets and enhance competition. They have recently set up a technical commission in charge of reviewing and updating the economic legislation. The authorities intend also to reinvigorate and speed up the privatization agenda, for which they plan to create an independent Privatization Agency, and to approve the legal framework for setting up a stock exchange market. They are also committed to strengthen governance and transparency in the fiscal area particularly through the implementation of recommendations of the oil diagnostic study and by start reviewing diamond sector practices. The authorities have recently announced their interest in participating in the Extractive Industry Transparency Imitative.

16. Financial needs to consolidate the peace process and reconstruct and rehabilitate the war-ravaged country are enormous. However, the authorities continue to be constrained by their inability to access sufficient concessional borrowing and virtually have no other alternative than continue to secure oil-backed loans to meet these huge demands. They are aware of the risks and unsustainability of such a policy, which considerably contributes to increasing the stock of short-term debt, arising from short-term loans for financing of projects of a long-term nature and are willing to phase out such a policy. They, meanwhile, believe that such an effort would require the support of the donor community, including the Fund and the World Bank. In these circumstances, and because reconstruction and rehabilitation of infrastructure and improvement of social services can not be delayed, the authorities have decided to negotiate on bilateral basis oil-backed credit lines with some governments, with much better terms and conditions than previous commercial oil-backed loans.

Concluding remarks

17. Despite the increasing GDP per capita, the authorities are particularly concerned with the high levels of poverty and inequality prevailing in the country. They acknowledge that the three-decade armed conflict has considerably contributed to the continuous deterioration of social indicators placing today Angola among the most vulnerable countries in terms of human development index. Against this background, the authorities believe that the most effective policy to fight poverty and inequality and achieve the Millennium Development Goals is to provide more and better social services to the poor and invest on human capital and social infrastructure. They are also persuaded that the PRSP is indeed a key instrument for designing appropriate policies and defining priorities regarding poverty reduction. The authorities have demonstrated full ownership during its preparation process and intend to complete the document in 2005 for integration into the budgetary process.

18. The process of reforming a post-conflict economy is long and the tasks ahead are arduous and the capacities are limited. The authorities have already taken important steps to consolidate the peace and stabilize the economy, and need support from the international community to reconstruct the country’s infrastructure and to reform the economy to promote growth, alleviate poverty and achieve the Millennium Development Goals. Only through sustained international support, including from the Bretton Woods Institutions, the economic opportunities, which Angola can offer to its people, can effectively begin to be realized soon. To this end, the authorities would like to request the Fund to initiate, as soon as possible, negotiations of a Staff Monitored Program that could lead to use of Fund resources and donor financial assistance, including debt rescheduling. Finally, the authorities are of the view that the policy and reform monitoring process in Angola needs to be bolstered by adequate technical assistance from the Fund and the rest of the international community. We request the Board to support these endeavors.