IMF Executive Board Concludes 2016 Article IV Consultation with Angola

The oil price shock that started in mid-2014 has substantially reduced fiscal revenue and exports, with growth coming to a halt and inflation accelerating sharply. This has brought to the forefront the need to address more forcefully vulnerabilities and dependence on oil, and to diversify the economy. The authorities have taken steps to mitigate the impact of the external shock: an 18 percent of GDP improvement in the non-oil primary fiscal balance over 2015-16, mainly through spending cuts including the removal of fuel subsidies, has been implemented; and the kwanza has been devalued against the U.S. dollar by over 40 percent since September 2014, with international reserves being used to smooth the depreciation. However, the exchange rate has been re-pegged since April 2016 leading to an appreciation of the kwanza in real terms, and further policy actions are needed to continue adjusting the economy to the ‘new normal' in the oil market and to return growth to a level consistent with poverty reduction.

Abstract

The oil price shock that started in mid-2014 has substantially reduced fiscal revenue and exports, with growth coming to a halt and inflation accelerating sharply. This has brought to the forefront the need to address more forcefully vulnerabilities and dependence on oil, and to diversify the economy. The authorities have taken steps to mitigate the impact of the external shock: an 18 percent of GDP improvement in the non-oil primary fiscal balance over 2015-16, mainly through spending cuts including the removal of fuel subsidies, has been implemented; and the kwanza has been devalued against the U.S. dollar by over 40 percent since September 2014, with international reserves being used to smooth the depreciation. However, the exchange rate has been re-pegged since April 2016 leading to an appreciation of the kwanza in real terms, and further policy actions are needed to continue adjusting the economy to the ‘new normal' in the oil market and to return growth to a level consistent with poverty reduction.

On January 23, 2017, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with Angola.

The oil price shock that started in mid-2014 has substantially reduced fiscal revenue and exports. Growth was estimated to come to a halt in 2016, with the non-oil sector contracting by ½ percent dragged down by the industrial, construction, and services sectors; industrial production, despite the potential for import substitution, was constrained by shortages of imported inputs due to limited availability of foreign exchange. Annual inflation was estimated to reach 45 percent by end 2016—the highest rate in over a decade—reflecting higher domestic fuel prices, a weaker kwanza, and the lagged effects of loose monetary conditions until the first half of the year. Non-oil primary balance in 2015-16 showed an improvement of 18 percent of GDP mainly through spending rationalization. The current account deficit, which peaked at 10 percent of GDP in 2015, is projected to be halved in 2016-17, as imports continue adjusting to limited availability of foreign exchange. International reserves are declining but remain relatively comfortable. Meanwhile, a wide spread between the parallel and primary market exchange rates remains, pointing to a significant imbalance in the foreign exchange market.

Executive Board Assessment2

Executive Directors noted that the oil price shock that started in 2014 has substantially reduced fiscal revenue and exports, while growth has stopped and inflation has accelerated. Directors commended the authorities for taking steps to mitigate the impact of the shock, but urged further measures to stabilize macroeconomic conditions and address more forcefully the dependence on oil and diversify the economy.

Directors welcomed the significant non-oil primary fiscal consolidation to date, but stressed that continued fiscal adjustment will be needed going forward to put public debt on a clear downward path while supporting economic growth over the medium term. Directors urged concerted efforts to contain the growth of the wage bill, improve the quality of public investment, continue streamlining subsidies while expanding well-targeted social assistance for the poor, and strengthen nonoil revenue, including by implementing a VAT in due course. They also emphasized the need to clear domestic payments arrears and welcomed plans to restructure state-owned enterprises. Directors noted that adopting a medium-term fiscal framework would help reduce the pro-cyclicality of public spending and improve investment planning.

Directors underscored that monetary and exchange rate policies should play a central role in rebalancing the foreign exchange market. They welcomed the recent measures taken by the central bank to tighten liquidity conditions, but saw a need to enhance the monetary policy framework to better anchor inflation expectations and facilitate a transition to greater exchange rate flexibility. Directors underscored that a more flexible exchange rate coupled with supportive monetary and fiscal policies will be crucial in addressing foreign exchange market imbalances while containing inflation. Directors urged the phased elimination of the exchange restrictions and multiple currency practices.

Directors emphasized the need to preserve the health of the banking sector. They supported the authorities’ efforts to strengthen the bank supervision and resolution frameworks. Directors recommended conducting rigorous asset quality reviews, and welcomed the authorities’ actions to ensure that weaker banks are recapitalized. They noted that the plan to restructure and recapitalize the systemically-important state-owned BPC bank is an important step.

Directors stressed the need to address the effects of the loss of U.S. dollar correspondent banking relationships (CBRs). They welcomed the high-level dialogue the authorities have been pursuing with the home authorities of global correspondent banks to better understand regulatory expectations around CBRs. At the same time, Directors noted that the central bank should step up its data collection and analysis; develop contingency plans to mitigate the risks from, and address the drivers of, the loss of CBRs; and further strengthen the prudential and AML/CFT frameworks.

Directors welcomed the authorities’ reform agenda to tackle the constraints to economic diversification including through infrastructure and human capital development. They emphasized that these measures should be complemented by enhancing the business environment and strengthening governance, including efforts to address corruption-related risks, to foster private investment and inclusive growth.

Directors encouraged the authorities to address remaining gaps in the production of economic data.

Angola: Main Economic Indicators, 2010–17

(Baseline Scenario)

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Sources: Angolan authorities and IMF staff estimates and projections.

Includes debt for the state-oil company, Sonangol, that is not directly guaranteed by the government.

Projected as of November 3, 2016.

1

Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

2

At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country’s authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.