2018 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Angola
2018 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Angola
Angola has made great strides in tackling its post-conflict development challenges over the past decade. Sustained economic reform efforts propelled socio-economic development, improved macroeconomic conditions, and strengthened institutional capacity. Nevertheless, the economy continues to face risks due to uncertainty in oil prices, gaps in basic infrastructure, and limited human capital development. In this context, reaping the benefits from the oil sector to support priority public investments required to accelerate economic diversification, while promoting a private sector-led growth model, remains the most pressing challenge facing the country going forward.
To address the challenge, the authorities recently launched the Macroeconomic Stabilization Plan (MSP) and the second National Development Plan (NDP 2018–2022) in January and April 2018, respectively. The MSP envisages addressing macroeconomic imbalances, insulating the fiscal position from volatile oil revenues, and accelerating external adjustment through greater exchange rate flexibility. On the other hand, the NDP seeks to restore macroeconomic stability, foster sustainable inclusive growth, boost competitiveness in the non-oil sector, stabilize public debt, and improve governance and institutions. In this respect, the authorities broadly concur with the staff appraisal and policy recommendations, and appreciate the Fund’s candid engagement during the 2018 Article IV Consultation.
2. Recent Economic Developments and Outlook
The Angolan economy continues to gradually adjust since the onset of the oil price shock in mid-2014. The pace of adjustment has, however, recently slowed down due to limited fiscal space that has constrained implementation of priority infrastructure investments required to boost non-oil GDP growth.
Real GDP growth recovered moderately to 1.0 percent in 2017 from 0.1 percent in 2016, owing to a rebound in the non-oil sector, increased public spending, renewed business confidence, and improved foreign exchange market conditions. Looking ahead, growth is projected to edge up to 2.2 percent in 2018, driven by a faster recovery of the oil and non-oil sectors, and a general improvement in macroeconomic fundamentals.
Inflation declined sharply from an average of 41.2 percent in 2016 (y-o-y) to 26.3 percent in 2017, owing to a moderation in food prices, greater availability of foreign exchange, and a tighter monetary policy stance. Average inflation is forecast to further decline to 23 percent in 2018. To further dampen inflationary pressures, the Banco Nacional de Angola (BNA) raised its policy rate by 200 basis points, to 18 percent, at the end of November 2017, the first increase since mid-2016. Similarly, in early 2018, the BNA abandoned the exchange rate peg to the U.S. dollar, and introduced a more flexible exchange rate regime.
The current account deficit narrowed from 10.0 percent of GDP in 2015 to 4.5 percent of GDP in 2017, following a rebound of oil exports, supported by improved terms of trade. Owing to the need to clear the longstanding backlog of foreign exchange purchase orders in the market, presently estimated at US $2.5 billion, gross international reserves are projected to decline from 6 months to 5.2 months of import cover at the end of 2017.
The medium-term growth outlook for Angola remains positive owing to firming oil prices, improved global financial conditions, and renewed business confidence. Nonetheless, uncertainty in oil price developments remain the main source of risks to the country’s prospects of a faster recovery.
3. Fiscal Policy and Debt Management
Following considerable fiscal adjustment efforts made in 2016, the fiscal stance was loosened in 2017, mostly reflecting expenditure pressures in the run-up to the August 2017 elections. Consequently, the non-oil primary fiscal deficit edged up from 10.2 percent of GDP in 2016 to 10.8 percent in 2017. Similarly, public and publicly guaranteed debt reached 64 percent of GDP in 2017, partly reflecting a buildup of payments arrears, currently estimated at 4 percent of GDP.
The authorities’ medium term fiscal strategy seeks to foster fiscal consolidation while preserving fiscal space for development needs and social outlays. To this end, the 2018 budget approved by the National Assembly in February 2018 contemplates a set of measures aimed at scaling back public spending, intensifying non-oil revenue mobilization efforts, and boosting public expenditure efficiency. The implementation of these measures is expected to yield a targeted reduction of the non-oil primary deficit, equivalent to 2 percentage points of GDP in 2018, broadly in line with the MSP objective of lowering the public debt-to-GDP ratio to nearly 60 percent over the medium term. Furthermore, the authorities are committed to use windfall oil revenues to clear domestic arrears and reduce public debt.
To create additional fiscal space and insulate the fiscal position from oil price volatility, the authorities intend to intensify reforms aimed at diversifying the sources of non-oil revenues. This will be achieved through implementation of measures to widen the tax base and enhance tax compliance, mostly through introducing a VAT on January 1, 2019; improving tax inspections; enforcing real estate taxation; and creating incentives to unlock tax potential from the informal sector. Regarding VAT, a set of preparatory actions are being implemented, including drafting legislation, defining tax parameters, and putting in place appropriate systems and IT infrastructure with the support of Fund Technical Assistance (TA).
On the expenditure side, policy priorities remain focused on rebalancing expenditures towards productivity-lifting sectors and streamlining recurrent expenditures, notably the wage bill as well as goods and services. In addition, the 2018 budget provides for the elimination of subsidies in the energy and water sectors. Other reform priorities include strengthening the capacity for improved public investment efficiency and enhanced oversight of fiscal risks emanating from state-owned enterprises (SOEs), coupled with efforts to fully implement a medium-term fiscal framework (MTFF) by 2019 to reduce pro-cyclicality of spending.
4. Monetary, Exchange Rate, and Financial Sector Policies
The BNA is firmly committed to sustaining efforts to maintain price stability, rebalance the foreign exchange market, enhance the monetary policy framework, and preserve financial sector stability. In November 2017, the BNA adopted base money as the new monetary policy anchor to better stem inflationary pressures. This was complemented by adoption of a flexible exchange rate regime in January 2018, which resulted in depreciations of 30 and 42 percent of the kwanza against the U.S. dollar and the Euro, respectively. Consequently, the spread between the parallel and the official exchange rates narrowed from 150 percent in 2017 to nearly 85 percent in April 2018.
Going forward, policy priorities will focus on upgrading the monetary policy framework and strengthening oversight of the banking system. More specifically, these include fully rebalancing the foreign exchange market and increasing reliance on the exchange rate flexibility as a shock absorber; strengthening capacity for liquidity forecasting and management, as well as inflation modeling and forecasting; and developing strategies to eliminate exchange restrictions and multiple currency practices. Other priority actions comprise upgrading macro-prudential regulations; strengthening the AML/CFT framework and financial sector resilience to mitigate the loss of correspondent banking relationships (CBRs); and shifting to risk-based supervision. Further, the authorities submitted to the National Assembly a billon repatriation of illegal capital, and redoubled efforts aimed at addressing the high NPLs and rebuilding balance sheets of state-owned banks.
The authorities will continue to improve financial sector resilience, including through accelerating the process of recapitalization of the Banco de Poupança e Crédito (BPC). In this regard, the 2018 budget envisages injecting a third tranche of the recapitalization funds, while Recredit will continue to acquire the NPLs of BPC and other banks. Further, they will continue to step up efforts to mitigate the loss of CBRs. In this connection, BNA has actively participated in international fora and continued to engage authorities from international jurisdictions to better understand the expectations and required improvements in the supervisory framework to lessen the impact of the loss of CBRs. Similarly, the authorities intend to maintain an open dialogue with local private institutions on measures underway to strengthening macro-prudential regulations and enhancing the country’s AML/CFT framework.
5. Structural Reforms
Addressing the longstanding competitiveness challenges remains paramount to achieving better economic outcomes, curbing the incidence of poverty and inequality, and incentivizing private sector development. Against this background, the authorities are prioritizing the mobilization of the non-oil revenues for infrastructure investments needed to accelerate economic diversification, while creating an adequate set of incentives and institutions to promote a friendly business environment, improve governance and fight corruption. In this connection, the National Assembly approved a Competition Law and anew Private Investment Law in April and May 2018, respectively. These legislative steps are expected to greatly improve the country’s investment appeal. Similarly, the authorities have launched a program for export diversification and import substitution (PRODESI). The program is intended to bring about improvements in the business environment by simplifying procedures for business licensing, property registration, and enforcement of contracts. In addition, procedures for facilitating export processing and the capacity of investment-promotion agencies will be enhanced.
Additional steps to improve the business climate include expediting visa procedures for citizens of 61 countries and providing visa exemptions for 5 others. These measures will also boost tourism and facilitate foreign direct investment.
Furthermore, the new administration is firmly committed to strengthening governance and fighting corruption. In this regard, a series of investigations into possible mismanagement of public affairs have been launched in several public entities, accompanied by several dismissals of high level officials. In addition, a specialized anti-corruption unit with the overall mandate to fight corruption was established in March 2018.
The authorities attach great importance to strengthening institutional capacity for policy design, monitoring, and implementation. In this regard, they are making efforts to improve the timeliness and quality of data, including through enhanced recording of debt statistics and coverage of non-financial corporations in monetary statistics.
6. Concluding Remarks
The Angolan authorities remain committed to advancing far-reaching structural reforms to achieve durable macroeconomic stability, tackle longstanding structural challenges to broad-based growth, and improve institutions. The new administration is determined to achieve these goals through sustained implementation of reform measures articulated in the MSP and the NDP (2018–2022). The Fund’s continued engagement and policy advice remains essential to support the authorities’ reform agenda going forward.