Press Release No. 16/510

IMF Staff Completes 2016 Article IV Consultation to Angola

November 16, 2016

• Additional policy actions are needed to continue adjusting to the new reality in international oil markets
• Implementation of structural reforms is critical to diversify the economy, boost growth, and reduce poverty
• The banking system needs to be strengthened to help with economic recovery and foster inclusive growth

An International Monetary Fund (IMF) team led by Ricardo Velloso visited Luanda from November 3-16, 2016, to conduct discussions for the 2016 Article IV consultation. At the conclusion of the mission, Mr. Velloso issued the following statement:

“The Angolan economy has been severely affected by the sharp and long-lasting decline in oil prices that started in 2014. Fiscal revenue and exports fell substantially, economic growth came to a halt, and inflation accelerated sharply to levels not seen in over a decade. This has brought to the forefront the need to address more forcefully the dependence on oil, diversify the economy, and reduce vulnerabilities.

“The authorities have taken steps to mitigate the impact of the decline in oil prices, including a significant improvement in the non-oil primary fiscal balance and devaluation of the kwanza vis-à-vis the U.S. dollar. However, additional policy actions are needed to continue adjusting to the new reality in international oil markets. Delaying such actions will increase the cost of adjustment in the future and defer its benefits.

“In 2017, output growth is projected to pick up to 1.25 percent, compared to no growth this year, reflecting a recovery in the non-oil sector due to a planned increase in public spending and improved terms-of-trade. Annual inflation is projected to reach 45 percent by year-end before declining to 20 percent next year, with tight monetary conditions and a stable kwanza supporting disinflation. Over the medium term, the outlook is for a gradual recovery in economic activity, but there are risks, including a further decline in oil prices and delays in implementing the needed structural reforms to promote economic diversification.

“The government’s actions to control public spending have partially offset the impact of lower oil prices on the fiscal accounts, and the overall fiscal deficit is expected to reach about 4 percent of GDP in 2016. Public debt, however, is projected to exceed 70 percent of GDP by end-2016, reflecting the depreciation of the exchange rate in addition to the fiscal deficit. An overall fiscal deficit of the magnitude envisaged in the draft budget for 2017 would leave the economy vulnerable to lower-than-projected oil prices and heightened concerns about public debt sustainability. In our view, the government should target an overall fiscal deficit of no more than 2.25 percent of GDP in 2017, consistent with a moderate improvement in the non-oil primary fiscal balance and continued gradual adjustment over the medium term to put public debt on a clear downward path.

“Over the medium term, fiscal policy should aim at offsetting the permanently lower oil revenues through expenditure rationalization and higher non-oil revenues. Also, fiscal institutions will need to be strengthened to properly manage oil revenue volatility. Policies to achieve these objectives include: strengthening the ongoing efforts to enlarge the tax base, including by introducing a VAT in 2019; continuing to reduce the burden of the public sector wage bill by streamlining and refocusing the administration on the efficient provision of public goods; preventing fuel subsidies from re-emerging by regularly adjusting prices to reflect fluctuations in international prices and the exchange rate; and improving the quality of public investment by strengthening the processes to evaluate, select, and monitor projects.

“The National Bank of Angola (BNA) has tightened liquidity conditions since last June, and monthly inflation is starting to subside. Also, larger sales of foreign exchange by the BNA have eased some pressures on the foreign exchange market. However, the wide and volatile spread between the parallel and primary market exchange rates and the backlog of foreign exchange buying orders in commercial banks are indications that a major imbalance still exists. Addressing this imbalance, including through greater exchange rate flexibility with supportive macroeconomic policies, will be essential to maintain the official exchange rate as the basis for price formation and inflation expectations, prevent a misallocation of resources in the economy, and accelerate growth.

“The banking system needs to be strengthened to help with economic recovery and foster inclusive growth. The BNA’s efforts to strengthen bank regulation and supervision are welcome. In addition, the initial steps being taken to restructure and recapitalize the state-owned BPC bank are positive.

“The BNA should maintain its efforts to mitigate the drivers and risks arising from the loss of correspondent banking relations, which is a challenge also affecting many other countries. The BNA’s actions should focus on enhancing the dialogue with home regulators of foreign correspondent banks; strengthening the framework, and its implementation, to combat money laundering; and developing contingency plans, in coordination with stakeholders, to prepare for the potential loss of correspondent banking relations.

“Implementation of structural reforms is critical to diversify the economy, boost growth, and reduce poverty. Achieving these objectives requires reducing costs in the non-oil sector and dealing with physical and human capital bottlenecks. These efforts should be complemented by more forcefully addressing Angola’s severe impediments to doing business. In addition, the private sector should have a larger role in the economy, including in the development of infrastructure through a robust system of public-private partnerships and concessions.

“The mission met with Vice-President Manuel Vicente, Finance Minister Archer Mangueira, Planning and Territorial Development Minister Job Graça, Economy Minister Abrahão Gourgel, Construction Minister Artur Fortunato, Petroleum Minister Botelho Vasconcelos, Energy and Water Minister João Baptista Borges, Commerce Minister Fiel Domingos Constantino, BNA Governor Valter Filipe Duarte da Silva, as well as other senior officials of the executive branch. The mission also met with members of the Economic and Finance Commission of the National Assembly, and representatives from the state-owned oil company Sonangol, the financial sector, the non-financial private sector, non-governmental organizations, and the diplomatic community. Together with the BNA, the mission hosted a roundtable with representatives of the banking sector on the issue of correspondent banking relations.

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

The IMF Executive Board is expected to discuss the 2016 Article IV consultation in January 2017.