Press Release No. 15/487

Press Release: IMF Executive Board Concludes 2015 Article IV Consultation with Angola

October 29, 2015

On October 28, the Executive Board of the International Monetary Fund (IMF) concluded the 2015 Article IV consultation¹ with Angola.

The oil price shock is adversely impacting the economy. Angola’s oil basket is projected to average US$53 per bbl in 2015, from slightly over US$100 per bbl in 2014, leading to large declines in fiscal revenue and exports. While oil production has recovered following the completion of maintenance work, non-oil GDP growth is expected to decelerate to 2.1 percent in 2015. The industrial, construction and services sectors are adjusting to the decline in private consumption and public investment and lingering difficulties to obtain foreign currency. Inflation is projected to reach close to 14 percent by end-2015, exceeding the National Bank of Angola (BNA)’s 7–9 percent objective. The 2015 budget will allow the central government deficit to fall to 3.5 percent of GDP, compared to 6.4 percent last year. Public debt, however, is projected to increase significantly to 57.4 percent of GDP, of which 14.7 percent of GDP corresponds to the state-owned oil company Sonangol, by end-2015. The external current account deficit is expected to reach 7.6 percent of GDP in 2015; and international reserves to drop to US$22.3 billion (about 7 months of 2016 imports) by end-2015. Meanwhile, a wide spread emerged between the parallel and primary market exchange rates, pointing to an imbalance in the foreign exchange market.

The economic situation in 2016 is likely to remain challenging as international oil prices are not expected to recover and risks are on the downside. Growth is projected to remain stable at 3.5 percent in 2016, with the oil sector growing by about 4 percent. The non-oil sector is expected to show a small improvement, growing by 3.4 percent year-on-year, driven mainly by a stronger recovery in agriculture. Inflation is projected to slow to 13 percent at end-2016, as the effect of the recent monetary tightening is expected to be felt more clearly in the second half of 2016.

Executive Board Assessment²

Executive Directors commended the authorities for the timely policy actions in response to the decline in oil prices. Although the outlook for growth is stable, persistent low international oil prices and the uncertain global environment pose considerable risks. Directors stressed that continued commitment to sound policies and undertaking ambitious structural reforms is critical to safeguard macroeconomic stability and debt sustainability, address protracted imbalances in the foreign exchange market, and promote strong and inclusive growth.

Directors welcomed the tightened fiscal stance to shield the economy against the vulnerabilities arising from the oil price shock and agreed that continued adjustment will be needed going forward. They encouraged the authorities to gradually restore fiscal buffers and ensure that part of Angola’s oil wealth is saved for future generations under a sound and transparent governance structure by pursuing over time a structural fiscal surplus. They also emphasized the importance of clearing arrears, and unwinding the significant increase in the public debt-to-GDP ratio projected for 2015. Directors encouraged the authorities to prepare the budget for 2016 based on a cautious oil price assumption and a prudent level of spending while protecting social assistance and critical infrastructure outlays.

Directors emphasized the need for expenditure rationalization and increasing non-oil revenue. They called for concerted efforts to contain the growth of the wage bill, reform revenue administration, streamline tax incentives, improve the quality of public investment, and eliminate fuel subsidies while expanding well-targeted social assistance for the poor. Directors also noted that careful implementation of a VAT could provide a more stable source of fiscal revenue. An improved medium-term fiscal framework with the adoption of a fiscal rule and stabilization fund would help reduce pro-cyclicality of spending and fiscal revenue volatility.

Directors underscored that monetary and exchange rate policies should play a central role in rebalancing the foreign exchange market. They welcomed the move toward greater exchange rate flexibility and measures taken to tighten liquidity conditions, including by increasing the central bank’s policy rate and banks’ mandatory reserve requirements, and encouraged the authorities to take further steps to address the remaining foreign exchange imbalances. A clear monetary policy anchor, supported by improved inflation forecasting and liquidity management would be helpful.

Directors welcomed the progress made on implementing the 2012 FSAP recommendations, including recent steps to foster financial deepening and inclusion. They supported the efforts to strengthen bank supervision and emphasized the importance of implementing plans to restructure and accelerate the recapitalization of weaker banks.

Directors welcomed the authorities’ structural reform agenda and stressed that its sustained implementation will be critical to reducing fiscal risks, promoting economic diversification, and supporting competitiveness and growth. Priority should be given to making the labor market more flexible, promoting private investment, improving the business environment, especially by reducing bureaucracy, streamlining the companies’ incorporation process, and strengthening the rule of law, and improving physical infrastructure and human capital.