Press Release No. 18/88

IMF Staff Completes 2018 Article IV Consultation Mission to Angola

March 16, 2018

• The Angolan economy is experiencing a mild economic recovery.
• The new administration is rightly focused on restoring macroeconomic stability and improving governance.
• Improving the business climate is critical to tackle impediments to economic diversification and growth.

An International Monetary Fund (IMF) team led by Ricardo Velloso visited Luanda from March 1-15, 2018, to conduct discussions for the 2018 Article IV consultation. At the conclusion of the mission, Mr. Velloso issued the following statement:

“The Angolan economy is experiencing a mild economic recovery. The new administration is rightly focused on restoring macroeconomic stability and improving governance. Also, the more benign outlook for oil prices opens a window of opportunity to strengthen macroeconomic policies and give new impetus to structural reforms, allowing Angola to realize its full potential.

“In 2018, output growth is projected to accelerate to 2¼ percent, compared to 1 percent last year, driven by a more efficient foreign exchange allocation system and additional availability of foreign exchange due to higher oil prices; LNG production inching up to full capacity; and improved business sentiment. Annual inflation is projected to remain high, reaching 24¾ percent by end-year reflecting, inter alia, the effect of the kwanza depreciation. Over the medium term, the outlook is for a continued gradual recovery in economic activity, but there are risks, including a decline in oil prices and slippages in the implementation of the needed structural reforms to promote economic diversification.

“Fiscal policy was loosened last year, and the overall fiscal deficit widened to about 6 percent of GDP in 2017, while public debt, including the debt of Sonangol and TAAG, reached 64 percent of GDP. The recently-approved budget for 2018 appropriately aims at a significant fiscal retrenchment, reducing the deficit to 3½ percent of GDP under a conservative oil price assumption. Higher oil prices than envisaged in the budget would result in a revenue windfall that should be used to clear domestic payments arrears faster and/or retire public debt. Gross financing needs in 2018 are substantial, but appear manageable in the current favorable external environment. Gradual fiscal consolidation over the medium term will be needed to put public debt, as a share of GDP, on a clear downward path.

“The authorities’ objective of lowering public debt to under 60 percent of GDP over the medium term provides an adequate fiscal anchor. This objective would be consistent with a non-oil primary fiscal consolidation path averaging ¾ percent of GDP annually until 2023. This fiscal effort would be achieved by ongoing efforts to enlarge the tax base, including by introducing a VAT on January 1, 2019, as planned; and rationalizing public spending. These fiscal consolidation efforts should be complemented by containing contingent liability risks; improving the quality of public investment; adjusting domestic fuel prices to reflect changes in international fuel prices and the exchange rate; expanding well-targeted social programs to protect the most vulnerable and reduce poverty; and implementing a medium-term fiscal framework, focusing on a well-designed fiscal stabilization fund to reduce procyclicality of spending.

“Downsizing the public corporate sector in important to reduce their burden on the Treasury and increase economic efficiency. Insolvent state-owned enterprises should be closed; and economically viable but inefficient SOEs should be restructured and/or privatized. In this connection, Sonangol’s restructuring should make it leaner, more efficient, and focused on its core businesses.

“The National Bank of Angola (BNA) has appropriately tightened monetary policy to support the new exchange rate regime and, so far, the pass-through of the depreciation to inflation appears to have been contained. The parallel-official exchange rate spread has been significantly reduced, but remains wide reflecting short-term pressures in the foreign exchange market as a backlog of foreign exchange purchase orders is gradually eliminated. Completing the transition to a fully functioning foreign exchange market will require further reforms to the foreign exchange allocation mechanism, including phasing out direct sales.

“The banks’ balance sheets need to be strengthened to help with economic recovery and foster inclusive growth. Central to this objective is raising the efficiency of the state-owned banks, by fully implementing their restructuring plans. In the case of BPC, restructuring efforts should be accelerated, and further recapitalization should be made conditional on demonstrable actions that the restructuring plan approved in early 2017 is on track.

“Implementation of structural reforms is critical to tackle impediments to economic diversification and growth. Achieving these objectives requires addressing: (i) the weak insolvency processes, protection of minority shareholders, and contract enforcement; (ii) the still limited access to finance; (iii) the large footprint of the State in the economy; and (iv) governance issues. The Law on Competition and the Private Investment Law under consideration in the National Assembly are welcome steps in the right direction of improving the business climate and fostering the private sector.

“The mission met with Minister of State for Economic and Social Development Manuel Nunes Júnior, Finance Minister Archer Mangueira, Economy and Planning Minister Pedro da Fonseca, Commerce Minister Joffre Van-Dúnem Júnior, Public Administration and Social Security Minister Jesus Faria Maiato, National Bank of Angola (BNA) Governor José Massano, and other senior officials of the executive branch. The mission also held discussions with members of the Economic and Finance Committee of the National Assembly, and representatives from the financial sector, the non-financial private sector, the state-owned oil company Sonangol, the sovereign wealth fund, the diplomatic and IFI community, and non-governmental organizations.

“We thank the authorities for their hospitality and constructive dialogue.”

The IMF Executive Board is expected to discuss the 2018 Article IV Consultation in May 2018.