Introduction

1. On behalf of my Angolan authorities, I want to thank management for the constructive engagement and support, and appreciate staff’s collaboration, and policy dialogue that is based on a shared understanding of the difficult challenges facing Angola. They, therefore, remain confident that the impacts of the external shocks that have dampened economic growth and worsened the fiscal and balance of payments positions will be reversed in the medium-term as appropriate measures are implemented and the external environment improves. To meet the short-term balance of payments needs, Angola is requesting a Stand-By Arrangement (SBA). The SBA will also allow the authorities to implement medium- to long-term macroeconomic and structural measures aimed at achieving a sustainable and more solid development. I would like to convey my authorities’ appreciation of staff s diligence and high professional standards.

2. As stated last March during the Executive Board discussion on the 2008 Article IV consultations, the global economic crisis has weakened Angola’s near-term growth prospects. The crisis has affected the economy through many channels including the fall of commodity prices (oil and diamonds) and OPEC cuts in oil production quotas, which influence both the fiscal and the external positions, placing downward pressure on the exchange rate and increasing inflation relative to that at end-December 2008. Nevertheless, my authorities have been able to respond to the extremely adverse international environment and strong external shocks by adjusting fiscal, monetary and the exchange rate policies to preserve macroeconomic stability. However, challenges remain, despite the authorities’ perseverance in undertaking prudent macroeconomic policies and embarking in structural reforms. In this regard, Fund’s support would help strengthen market confidence and focus the reform agenda towards restoring macroeconomic balances.

Outlook and policies

3. Real GDP growth is expected to contract in 2009 as oil output falls and non-oil sector growth remains modest. This would give rise to cutbacks in public investment and a fall in private consumption. For 2010, output is expected to rebound as the price and output of oil recovers. At the same time, agricultural output is also projected to increase as cereal and cash crop projects come to fruition. The key policy challenge for the authorities is to maintain macroeconomic stability and sustain public investment, particularly infrastructure rehabilitation, in the face of falling oil production and revenue.

4. The authorities are aware of the medium-term challenges facing the economy and will continue to take appropriate measures. In this context, the authorities are persevering with the reform effort and initiating additional key reforms, namely: (i) the strengthening of the public finances; (ii) adopting structural measures to improve the growth potential of the non-oil sector; and, (iii) strengthening the legal and institutional framework for effective public administration and the inter-generational use of natural resource endowments of the country.

Fiscal policy

5. The authorities are working towards a multi-year fiscal framework that prioritizes sustainable medium-term spending that benchmarks the non-oil primary fiscal deficit as the fiscal anchor under the SBA. The policy thrust towards a sustainable fiscal position places significant emphasis on the quality of spending both on current and capital expenditures as the first priority. To sustain improvements in the living standards, my authorities are committed to focus on employment creation in the non-oil sectors of the economy, as well as targeting social spending to protect vulnerable groups in the society. To that end, they are revising both current and capital expenditures to accommodate these priorities and other internal and external demands while being mindful of the targets in the multi-year fiscal framework and the need to avoid excessive fiscal contraction.

6. The second priority is that PFM reforms will remain high in the authorities’ reform agenda. The production of the first General Accounts of the state is a landmark achievement in improving transparency and accountability in the use of public resources. This would also ensure improved audits and controls, while enhancing public discussion of the government’s fiscal policy and achievements. The third priority is improving the efficiency of the tax system and the authorities agree with staff that more needs to be done to this end. The authorities place improving the functioning of state-owned enterprises (SOEs) as their fourth priority and have established a public entity to oversee the restructuring SOEs. Finally, the authorities’ commitment to fiscal transparency, in particular in the use of natural resources, is clearly captured in the proposed set of structural benchmarks for this year and up to June 2010.

Monetary and exchange rate policies

7. In recent years, the Banco Nacional de Angola (BNA) has reduced inflation significantly, largely through intervening in the foreign exchange markets to keep the domestic currency stable, and keeping down the cost of imports. Despite success in curbing inflation, it has remained in the lower double-digits for the last three years, and will remain the focus of BNA’s inflation policy framework. Inflation has picked up this year compared with previous year, being driven by rising food prices and infrastructure bottlenecks in the country’s import system. The recent depreciation of the exchange rate has revived inflationary pressures, but the authorities expect it will remain broadly stable at the current levels.

8. Despite the recovery in oil revenues and inflows of foreign direct investment in recent months, the BNA’s ability to support the currency through market intervention will be restrained by stable but low international reserves, which remain vulnerable to a drop in international oil prices. However, should the drawdown of foreign-exchange reserves accelerate further, the BNA stands ready to take appropriate measures. Going forward, international reserves are set to rise, together with the improvement in the capacity of BNA to use a combination of policy measures and instruments, including those to tackle demand in the economy and growth of money supply through appropriate control of reserve requirements and use of Treasury securities. The resulting market confidence is expected to have positive effects on inflation and the exchange rate.

Financial sector

9. The authorities are in agreement with staff that maintaining confidence in the financial system is a key priority. At the same time, the extensive dollarization in the economy due to lack of monetary instruments and the shallow markets exerts additional challenges in this area. In this regard, the authorities are determined to put in place a comprehensive strategy to strengthen the financial sector, in particular on prudential regulations, loan classification, provisioning standards, and supervision and oversight of the financial sector. The authorities also remain vigilant about risks, in particular, those that can affect banks’ credit quality due to foreign currency lending and potential mismatches in case of volatility of the exchange rate and protracted slowdown of economic activity. They appreciate the importance of effective coordination of monetary and fiscal policies and the prudent management of foreign reserves in the context of protecting the stability of the financial sector in the long run.

10. The structural benchmarks included in the program for March 2010 are important to support the authorities’ efforts to preserve and strengthen the financial sector and improve supervision of and compliance by the banking sector in line with international best practices. The authorities also are looking forward to the FSAP that will take place in the first half of 2010 and Fund TA to help strengthen the financial sector.

Conclusion

11. Angola is experiencing particular challenges due to the effects of the current international economic and financial crisis. These developments have renewed the focus on macroeconomic stabilization and economic development. The economic performance in past years has been strong because of enhanced reforms, although the prospects for 2009 are on the down side. In this context, the authorities value the close engagement, dialogue, and frequent exchange of views with the Fund as a way to provide opportunities to strengthen policy design, implementation, and monitoring of the economy. The request for the SBA will further enhance this dialogue and the authorities remain committed to strengthening it. As clearly stated in the MEFP, Angola will benefit from the Fund’s expertise and the different TA missions, and in particular from the Fund’s cross-country experience. These are important elements that will support macroeconomic policies with implications for the future development of the country and the improvement of the well-being of Angolan citizens. Although Angola has significant natural resources, it needs the support of the Fund and other international partners to weather the shocks of the current global economic and financial crisis and lay a strong basis for long-term economic growth and development.