This paper discusses a request from Angola for a Stand-By-Arrangement (SBA). The requested SBA aims to support orderly policy adjustments to restore macroeconomic balances and rebuild international reserves. This program also includes a focused reform agenda aimed at medium-term structural issues on which long-term non-oil sector growth will ultimately depend. IMF staff and the authorities have agreed that, while the policy mix should consider all possible instruments geared toward achieving these objectives, fiscal policy should play the lead role in the policy package.

Abstract

This paper discusses a request from Angola for a Stand-By-Arrangement (SBA). The requested SBA aims to support orderly policy adjustments to restore macroeconomic balances and rebuild international reserves. This program also includes a focused reform agenda aimed at medium-term structural issues on which long-term non-oil sector growth will ultimately depend. IMF staff and the authorities have agreed that, while the policy mix should consider all possible instruments geared toward achieving these objectives, fiscal policy should play the lead role in the policy package.

I. Context for Program Request

1. Pre-crisis economic setting: Prior to the onset of the global economic crisis, Angola had recorded an extended period of rapid expansion, fueled by strong growth of oil revenues. Notwithstanding a heavily managed exchange rate with respect to the U.S. dollar, inflation had persisted at low double-digit levels, reflecting the strong pace of output expansion, significant inflation inertia, and continued supply bottlenecks. Fiscal policy had been strongly pro-cyclical, with the non-oil fiscal deficit increasing from 50 percent of non-oil GDP in 2006 to about 70 percent by 2008. Monetary and credit aggregates were expanding at an exceptionally rapid pace, with broad money growing by more than 90 percent in 2008 while bank credit expanded by about 70 percent. The economy was thus significantly exposed when oil exports suddenly plunged.

2. Nature of the shock: The global economic crisis and the resulting sharp drop of commodity prices have severely affected Angola’s economy. The spot price for crude oil fell from an average of US$97 a barrel in 2008 to US$44 in the first quarter of 2009, while OPEC cut its oil production quotas in response, reducing Angola’s quota by about 20 percent. Diamond prices also fell substantially (Angola is the world’s fourth largest producer).

Figure 1 -
Figure 1 -

Angola: Usable international reserves and the oil exports receipts

Citation: IMF Staff Country Reports 2009, 320; 10.5089/9781451800579.002.A001

3. Resulting macroeconomic imbalances: With the sharp drop in oil prices and revenues, the economy has slowed sharply, fiscal and external positions have weakened considerably, the exchange rate has depreciated, and inflation has risen slightly:

  • Real GDP is projected to be broadly flat in 2009, reflecting a sizeable drop in oil production (-6 percent) and a sharp slowdown in the pace of non-oil growth (to 6 ¾ percent, down from 19 percent its average during 2005–08). Non-oil sector growth decelerated to 3 percent in the first half of 2009, largely reflecting a contraction of 8 percent of the oil-linked services sector and a zero growth of the manufacturing sector.2 Agriculture continues to register robust growth.3

  • The plunge in oil revenues in the first half of 2009 has shifted the fiscal and external surpluses to substantial deficits. As a result, through June 2009, usable reserves fell by US$6 billion to US$10 billion (2¾ months of imports or a ratio of 1 to short-term liabilities), partly reflecting the National Bank of Angola’s (BNA) efforts to stabilize the exchange rate and the government’s drawdown of its foreign currency deposits at the BNA as deficit financing became difficult.

  • The official exchange rate has depreciated in two distinct stages (by 4 percent during the second quarter and then again by 10 percent in recent weeks, following the restoration of the foreign exchange auction), while the parallel rate has depreciated sharply, reaching a peak 25 percent premium vis-à-vis the official rate by end-September, although it has narrowed to about 12 percent in recent weeks.

  • Inflation has picked up to 14 percent in the 12 months through August, from an average level of 12.5 percent in 2008, despite the economic slowdown.

uA01fig01

Spread Between Official and Parallel Market Exchange Rates

(in percent)

Citation: IMF Staff Country Reports 2009, 320; 10.5089/9781451800579.002.A001

Source: National Bank of Angola.
uA01fig02

Sales and Purchases of Foreign Exchange by the BNA

(in millions of $US)

Citation: IMF Staff Country Reports 2009, 320; 10.5089/9781451800579.002.A001

Source: IMF, International Financial Statistics Statistics (IFS); and country authorities.
uA01fig03

Real and Nominal Effective Exchange Rates, January 2005-August 2009

Citation: IMF Staff Country Reports 2009, 320; 10.5089/9781451800579.002.A001

Source: IMF, Information Notice System, (INS).

4. Authorities’ policy response: The authorities have responded to the collapse in oil revenues in an adaptive manner, relying first on the rundown of the government’s foreign currency deposits to finance the fiscal deficit and foreign exchange market intervention to maintain a stable exchange rate before moving to more activist responses as fiscal and balance of payments pressures intensified.

  • Fiscal policy was tightened considerably with the adoption of the 2009 supplementary budget in July 2009. The supplementary budget mandated a spending cut of 17 percent, mostly in capital expenditures. A moratorium was put on all new projects that had been included in the original 2009 capital budget, with the exception of energy and water projects in the rural areas.

  • Monetary policy was also tightened aggressively. The BNA raised reserve requirements for banks from 15 percent to 30 percent and increased its rediscount rate from 20 percent to 25 percent.

  • The BNA also shifted away from the foreign currency auction system to rationing, at a level that was substantially below the market demand. The loss of confidence in the kwanza led to increased currency substitution.

5. Remaining challenges: This piecemeal response to the macroeconomic imbalances, while containing important measures, did not restore market confidence in economic policies, as reflected in the large and widening spread between the official and parallel exchange rates and further pressure on reserves through September 2009. Although the fiscal deficit was contained through the supplementary budget, financing it domestically remained a challenge given the low demand for treasury bonds at prevailing interest rates. As a result, the government accumulated US$2½ billion of domestic arrears (3.6 percent of GDP) by September 2009. Moreover, while a tighter monetary stance has led to a significant moderation of credit growth, bank capital buffers remain vulnerable to deterioration in credit quality from slowdown in economic activity and the drop in the exchange rate.4

6. Program goal: The requested Stand-By Arrangement (SBA) aims to support orderly policy adjustments to restore macroeconomic balances and rebuild international reserves. While the immediate goal is to mitigate the repercussions of the adverse terms of trade shocks, this program also includes a focused reform agenda aimed at medium-term structural issues on which long-term non-oil sector growth will ultimately depend.

II. Program Discussions

7. Staff and the authorities agreed that, absent a comprehensive adjustment program, there is an imminent risk of a balance of payments crisis. While the authorities see Angola’s current financing needs as largely transitory given its richness in natural resources, the ongoing pressures on the balance of payments could soon produce a disruptive exchange rate devaluation and further erosion of market confidence. Without addressing the underlying economic imbalances, even with the recent recovery in oil prices, inflation is likely to pick up sharply as the kwanza continues to depreciate in the parallel market and inflationary expectations build. Growth would inevitably suffer against a backdrop of increasing macroeconomic turbulence.

8. Outlook and key program objectives: The program aims to avoid this disorderly adjustment and envisages a modest recovery in non-oil GDP growth in 2010 as the impact of improvement in market confidence on aggregate demand (both investment and consumption) will more than offset that of policy tightening on economic activity. The projected improvement in oil revenues will return the current account to a surplus and, together with the normalization of conditions in the foreign exchange market, should reduce speculative-demand for foreign currency and contribute to reserve accumulation. 5 Inflation is expected to slightly increase in 2010 due to the exchange rate depreciation, but renew its declining path to a single digit level by the end of the program period (Table 1) reflecting continued fiscal tightening and the expected appreciation of the kwanza as the external position improves. The proposed policy mix aims to rebuild usable reserves to 3.2 months of imports in 2010 and to 3.8 months in 2011, with usable reserves in percent of short-term liabilities projected to return to 1.5 by 2010 (Table 5).

Table 1.

Angola: Selected Economic and Financial Indicators, 2006–14

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Sources: Angolan authorities, and IMF staff estimates and projections.

End of period. A positive sign denotes appreciation.

As percentage of beginning-of-period M3.

Percent of exports of goods and services.

Includes government deposits in overseas accounts and less liquid assets.

Table 2a.

Angola: Summary of Government Operations, 2006–11

(Billions of kwanzas; unless otherwise indicated)

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Sources: Angolan authorities and IMFstaff estimates and projections.

The 2009 projection is based on the supplemetary budget, which was adopted in July 2009.

The 2009 projection for non-bank financing reflects the government's inability to rollover treasury bonds.

Table 2b.

Angola: Summary of Government Operations, 2006–11

(Percent of GDP; unless otherwise indicated)

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Sources: Angolan authorities, and IMF staff estimates and projections.

The 2009 projection is based on the supplemetary budget, which was adopted in July 2009.

The 2009 projection for non-bank financing reflects the government's inability to rollover treasury bonds.

Table 3.

Angola: Monetary Survey, 2006–11

(Billions of kwanzas; unless otherwise indicated)

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Sources: National Bank of Angola (BNA) and IMF staff estimates and projections.
Table 4.

Angola: Monetary Authorities, 2006–11

(Billions of kwanzas; unless otherwise indicated)

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Sources: National Bank of Angola (BNA) and IMF staff estimates and projections.
Table 5.

Angola: Balance of Payments, 2006–11

(millions of USD)

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Sources: National Bank of Angola; and IMF staff estimates and projections.

Includes arrears accumulation by the state-owned oil company Sonangol to commercial banks.

In months of next year's imports.

9. Highlights of the discussion: It was agreed that, while the policy mix should consider all possible instruments geared towards rebuilding reserves, fiscal policy should play the lead role in the policy package. Specifically, actions would be based on three pillars:

  • A determined fiscal effort embodied in a strong 2010 budget that provides adequate resources for social spending and vital infrastructure projects;

  • An orderly exchange rate adjustment backed by tight monetary policy to normalize conditions in the foreign exchange market; and

  • Measures to safeguard the financial sector.

Fiscal policy:

10. The authorities are committed to making another forceful fiscal adjustment in 2010, augmenting the policy tightening in the 2009 supplementary budget. The fiscal program for 2010 envisages a return to a small surplus (1.5 percent of GDP) based on a recovery in oil revenues and a reduction of the non-oil primary fiscal deficit (program’s fiscal anchor) by 6 percentage points of non-oil GDP.

Text Table 1.

Angola: Selected Fiscal Indicators

(as a percent of GDP; Unless otherwise indicated)

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  • On the revenue side, oil revenues are expected to increase by nearly 20 percent in 2010 as a result of higher oil production and more favorable prices.

  • Expenditure restraint will be the cornerstone of the fiscal adjustment in 2010, with spending set to decline by 6 percentage points of GDP relative to 2009, reflecting a significant decline in current spending on goods and services (which has grown by an average of 18 percent in real terms during 2006-2008). 6 Social spending, (an indicative target under the program), will be kept at 30 percent of total expenditures, its average level in recent years. The wage bill will increase by 4 percent in real terms to accommodate employment increases in education, health, and other social sectors. The capital budget is set to remain constant in real terms with capital spending targeted mainly at infrastructure development. The budget provides for a gradual clearance of domestic arrears of US$2 ½ billion mostly to local suppliers.7 The authorities would need to conduct a mid-year review of budget performance and take corrective actions should there be significant deviations from the budget assumptions. Staff stressed that further fiscal consolidation will be needed in 2011 as part of an effort to put the non-oil primary balance on a sustainable trajectory.

    see MEFP ¶9

  • On financing, the authorities are committed to observing the program’s nonconcessional borrowing limit of US$2 billion (2.4 percent of GDP).8 However, they noted that the ceiling may need to be recalibrated during program reviews if concessional funds to finance infrastructure projects falls below their expectations. Staff emphasized that Angola’s risk of debt distress remain moderate and while steady progress is being made, there is room to further improve the capacity to manage public resources (debt management and public financial management-PFM) under the program. 9 Thus, further flexibility on the ceiling will take into account the progress made on debt management and PFM in line with the Fund’s new guidelines on debt limits.

    see MEFP ¶10

11. From a medium-term perspective, further steps are needed to improve fiscal management by de-linking the fiscal stance from the volatile oil revenues and reforming the tax system.

  • To put a decisive break with past boom-bust fiscal cycles related to international oil price fluctuations and facilitate the convergence toward a sustainable fiscal position,10 the authorities agreed to develop an institutional framework that de-links the fiscal stance from short-term oil revenues, focusing instead on the non-oil primary fiscal balance, and ensures that greater proportion of windfall oil revenues is saved. In this context, the authorities have set up a task force to look into the modalities of a sovereign wealth fund (SWF)/oil fund which will serve both stabilization and savings purposes. The fund would be fully integrated into the budget process and its return would finance future non-oil fiscal deficits along the lines of the Norwegian oil fund. The action plan to set up the SWF will be initially sent to the cabinet for discussion and then implementation steps will be included in the program during SBA reviews.

    see MEFP ¶11

  • Given the current distortions in the tax system,11 the authorities acknowledged the need to launch a major tax reform to lay a solid foundation for expanding the non-oil tax revenues. Their proposed tax reform strategy, which was reviewed by the Fund, is geared toward moving to a consumption-based tax system; it also envisages substantial simplification of the tax system to improve efficiency and reduce tax evasion. The strategy includes setting up an autonomous revenue authority and strengthening tax administration including by streamlining the generous tax exemptions so as to boost non-oil revenues. While the reform package identifies the major shortcomings of the tax system, and the strategy is appropriate, the proposals are very ambitious and are likely to be resource demanding and time consuming. The authorities will soon formally request Fund technical assistance to help flesh out further details of the reform package, with the aim of moving it through the government’s review process into a formally adopted policy.

12. The authorities continue to make steady progress in revamping their public financial management system (Table 10). They have recently decentralized budget execution to local governments, expanded the budget execution system (SIGFE), and for the first time produced the General Accounts of the state. Staff reiterated that these measures need to be complemented with reinforcement of internal controls, closer coordination of the current and capital budgets, and improvement of line ministry budgeting capacity, consistent with the recommendations of the 2006 fiscal ROSC.

see MEFP ¶12

Table 6.

Angola: Banking System Financial Soundness Indicators 2003–09

(Percent at end of period)

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Source: BNA's Banking Supervision Directorate, and Fund staff estimates.
Table 7.

Angola: External Financing Requirements and Sources, 2009–11

(Millions of U.S. dollars)

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Sources: Angolan authorities; and IMFstaff projections.

The current account is projected to return to small surpluses in 2010 and 2011, yet as in the past, part of these surpluses is projected to be re-invested abroad by the oil companies.

Includes all other net financial flows, and errors and omissions.

The net external borrowing in 2010–11 is related to the public sector.

Table 8.

Angola: Indicators of Capacity to Repay the Fund, 2009–16

(Million of SDRs, unless otherwise indicated)

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Source: IMF staff estimates.
Table 9.

Angola Reviews and Disbursements under the Proposed 27-month Stand-By-Arrangement

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Table 10.

Angola: Progress on Public Finance Management and Fiscal Transparency

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Ongoing/moderate progress in the table generally means that while policy action has been initiated and some progress is being made, in some cases capacity constraints may be contributing to lack of full implementation of the recommendation.