Since the end of violent conflict in April 2002, about 4 million displaced Angolans have returned to their communities, supported by a government-led initiative to provide emergency food aid and humanitarian assistance. Much remains to be done, however, to tackle widespread poverty, improve social and health conditions, and restore and update the physical infrastructure. In addition, the civil conflict has left the country with a sizable debt, a swollen public sector payroll, and largely unaccountable state institutions that dominate critical areas of the economy.

Abstract

Since the end of violent conflict in April 2002, about 4 million displaced Angolans have returned to their communities, supported by a government-led initiative to provide emergency food aid and humanitarian assistance. Much remains to be done, however, to tackle widespread poverty, improve social and health conditions, and restore and update the physical infrastructure. In addition, the civil conflict has left the country with a sizable debt, a swollen public sector payroll, and largely unaccountable state institutions that dominate critical areas of the economy.

Since the end of violent conflict in April 2002, about 4 million displaced Angolans have returned to their communities, supported by a government-led initiative to provide emergency food aid and humanitarian assistance. Much remains to be done, however, to tackle widespread poverty, improve social and health conditions, and restore and update the physical infrastructure. In addition, the civil conflict has left the country with a sizable debt, a swollen public sector payroll, and largely unaccountable state institutions that dominate critical areas of the economy.

Recent economic developments have been favorable, mainly reflecting rising oil production, which accounts for half of GDP, and high oil prices. GDP grew by 11 percent in 2004. Outside the extractive sector, the economy grew by about 9 percent. Inflation and the fiscal deficit declined substantially in 2004 and the external current account moved into a significant surplus.

Owing to continued public sector borrowing, however, the country’s external debt was still equivalent to around half of GDP at end-2004.

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Unless otherwise indicated.

On a commitment basis, excluding grants; in percent of GDP

Ratio in percent of exports net of oil-related expenses.

Data: Angolan authorities and IMF staff estimates.

Discussing the staff’s annual economic review in March, the IMF Executive Board commended the authorities for their successful postwar humanitarian and resettlement program; their decisive break from large fiscal deficits, money creation, and high inflation; and their initial steps to improve transparency. Looking ahead, it agreed that Angola can raise average income levels if it carefully husbands the wealth from its abundant oil and other resources, including by adopting a formalized medium-term fiscal framework, improving spending control, and forcefully strengthening governance.

On the fiscal front, the Board supported increasing public spending on infrastructure and social services, with some Directors recommending a reallocation of spending from the large government administrative and military payrolls. The Board welcomed the authorities’ intention to eliminate fuel subsidies but stressed the importance of accompanying these measures with steps to protect low-income households. It also emphasized the need for structural reform measures to improve competition and develop the non-oil private sector, including streamlining bureaucracy and enhancing contract enforcement mechanisms. Finally, to help support poverty reduction efforts, it called for a clearly articulated and effective poverty reduction strategy.