Abstract
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.
1. Introduction
Angola has witnessed a robust improvement in economic conditions over the past five years, after being hard hit by the global financial crisis, the adverse effects of commodity price shocks and a subsequent sluggish recovery in the world economy. The government’s commitment to strengthen macroeconomic stability and maintain peace and security provided the necessary impetus to foster broad-based growth, accelerate the pace of diversification and structural transformation, and spur productivity, particularly in nonoil sectors.
The authorities are appreciative of the Fund’s continued engagement and value the candid discussions and exchange of views with staff during the recent Article IV consultation mission.
2. Recent Economic Developments and the Outlook for 2014
Angola’s economic agenda in the coming years, as stated in its National Development Plan (PND) for the period 2013-2017, is to unleash its growth potential through economic diversification and transformation. While rents from extraction of oil resources will play a pivotal role in boosting domestic resources to expand the provision of infrastructure and basic social services, reliance on oil revenues remains a major source of fiscal vulnerability given the volatility of world oil prices. Policy priorities to minimize risks induced by commodity price volatility include spurring productivity in agriculture and manufacturing sectors, including building up human capital and creating an enabling environment for job creation and doing business.
Economic growth is projected to reach 3.9 percent in 2014, a decline from 6.8 percent in 2013 and 5.2 percent in 2012, due to temporary disruptions in oil production and deceleration in output growth in the agriculture sector due to drought. Robust growth in the nonoil sector (7.3 percent), driven primarily by ongoing investments in the agriculture, manufacturing, electricity and services sectors is expected to off-set the transitory decline in the oil sector (3.5 percent).
Inflationary expectations in 2014 are expected to remain in the lower side and aligned with the Banco Nacional de Angola (BNA) medium term target of 7-9 percent, due mostly to benign environment marked by declining international food prices, increase in agricultural production and a stable exchange rate. Gross international reserves declined to $32.1 billion in May 2014, from a high historic level of $ 36.6 billion reached in September 2013, mainly due to a transfer of $ 5 billion from the Oil for Infrastructure Fund to Angola’s Sovereign Wealth Fund. Nonetheless, the level of coverage of international reserves for 2014 (7.1 months of import cover) is still adequate to cushion external shocks.
The Angolan authorities remain committed to strengthening the fiscal buffer. After running a surplus over the last four years, the authorities expect an overall fiscal deficit of around 4 percent of GDP in 2014, reflecting a 10 percent decline in oil revenue during the first quarter of 2014. While this is unlikely to be a permanent phenomenon, significant steps have been taken in nonoil tax reform under the recently approved fiscal legislation aimed at diversifying the sources of nonoil revenues.
3. Structural Reforms in 2014
The Angolan authorities have embarked on a wide range of structural reforms to increase the sources of nonoil revenues, improve public financial management and strengthen the financial sector. As part of the authorities’ efforts to reduce the budget reliance on oil revenues, the National Assembly approved in July 2014 a legislative package comprising three codes: the general tax code, the tax procedure code, and the tax collection code. In addition, changes to personal and corporate income taxes were introduced to boost consumption and investment.
Public financial management reforms continue to be implemented. More importantly, the authorities have taken steps to prevent the accumulation and proliferation of arrears with the inclusion in the budget framework law of a clear definition of arrears that is consistent with international best practices. Furthermore, a new control procedure has been effected requiring the confirmation by the Ministry of Finance of all contracts above $ 1.5 million.
To prevent the proliferation of non-performing loans (NPLs), the BNA has initiated the process of issuing new regulations on the definitions and classification on NPLs. This new regulation will improve the comparability of the performance of banks by investors and depositors, and provide proper incentives for banks to improve their lending practices.
4. Medium Term Outlook and Policy Priorities
Angola’s main challenge like most resource rich countries is to translate economic growth into improvements in the living standards of its populace. The growth path over the medium term is expected to remain robust, sustained by a recovery in the oil sector with the commissioning of seven new fields. In addition, large investments in the nonoil sector, particularly in agriculture, infrastructure, manufacturing and social services are expected to create the necessary conditions to spur the much needed economic diversification and job creation. In this regard, prioritizing public resources to expand the accumulation of capital and enhance productivity in the non tradable sector, to reduce the dependence on imports, is one of the center pieces in the implementation of the National Development Strategy.
Fiscal Policy
To cope with the projected slow down in oil revenue, the authorities will continue to build fiscal buffers by gradually increasing savings from current oil wealth to the Sovereign Wealth Fund. Furthermore, to mitigate the downside risks stemming from commodity price volatility including the decline in oil reserves and a reversal of recent gains in domestic arrears, the authorities remain committed to adopt revenue enhancing measures. Most importantly, the authorities shall continue the implementation of nonoil tax reform and strengthen public financial management, through containment of recurrent expenditure, particularly the wage bill, gradually phasing out fuel subsidies, improving efficiency in capital spending and adoption of effective safety net programs, much in line with staff’s advice. These measures are vital to maintain the public finances in a sustainable path.
Monetary and Exchange Rate Policies
The authorities’ monetary stance for the near term will continue to focus on anchoring inflationary expectations, improving liquidity management and strengthening financial surveillance. To improve the effectiveness of their conduct of monetary policy and transition towards an inflation targeting regime, the authorities will focus on three core areas. First, to foster the de-dollarization process, the authorities will strive to eliminate the currency mismatch in bank’s balance sheets, and permit, over time, more flexibility in the exchange rate. Second, in order to increase financial deepening and strengthen the interest rate channel, the authorities are taking measures to establish market-based interest rate determination. Third, the BNA and the National Institute of Statistics will collaborate in developing high frequency indicators to provide policy makers with timely information to inform their decisions.
To strengthen the domestic banking system, the BNA has introduced new regulations concerning corporate governance, risk management and internal control as well as external audit procedures. The authorities are also committed to implement the appropriate fiscal and monetary policy mix to maintain inflation within the BNA’s medium term target of 7-9 percent.
Financial Sector Policies
Fostering financial deepening and inclusion is one the major challenges to create more opportunities and support private sector development and job creation. To this end, the authorities have launched a number of initiatives to improve credit access by small and medium sized enterprises, such as the Facilitating Credit Program (FCP). Measures under the implementation of the FCP include inter alia, simplification of the registration of property rights, legalization of land rights and creation of a public registry for credit guarantees. Other measures include: improve processes and simplify the legal requirements to execute a guarantee; improve and expand the use of Credit Risk Information Center at the BNA; promote the development of agricultural insurances; and expand financial education.
5. Concluding Remarks
The Angolan authorities reiterate their commitment to the implementation of sound policies and structural reforms that foster macroeconomic stability, enhance broad-based growth, and reduce poverty and inequality. To this end, the authorities will continue to implement nonoil tax reforms, improve efficiency in investment spending, and strengthen fiscal buffers. The modernization of the monetary policy framework, including the adoption of measures to allow more flexible exchange rate and a gradual transitioning to an inflation targeting regime, will continue to be the cornerstones in strengthening the effectiveness of monetary policy. On behalf of my authorities I wish to thank the Fund for the continuing support and advice to promote economic development and shared prosperity in Angola.