IMF Executive Board Approves US$1.4 Billion Stand-By Arrangement with AngolaPress Release No. 09/425
November 23, 2009
The Executive Board of the International Monetary Fund (IMF) today approved a 27-month Stand-By Arrangement (SBA) with Angola in the amount of SDR 858.9 million (about US$1.4 billion) to help the country cope with the effects of the global economic crisis.
The IMF-supported economic program approved aims to restore macroeconomic balances and rebuild international reserves. While the immediate goal is to mitigate the repercussions of the adverse terms of trade shocks linked to the global crisis, the program also includes a reform agenda aimed at medium-term structural issues to foster the non-oil sector growth.
The key pillars of the program are: i) a determined fiscal effort that aims to reduce the non-oil primary fiscal deficit significantly in 2010 and that still provides adequate resources for social spending and vital infrastructure projects; ii) an orderly exchange rate adjustment backed by tight monetary policy to normalize conditions in the foreign exchange market; and iii) measures to safeguard the financial sector.
Preserving an adequate level of social spending and infrastructure investment was a key concern of the authorities in designing their program objectives. The SBA provides space for 30% of total central government expenditures on social issues over the duration of the program. In terms of capital spending, the authorities’ fiscal program also provides adequate resources for vital infrastructure projects in 2010.
Angola has suffered a significant terms of trade shock because of the sharp drop in oil prices. The global crisis hit the country during a period of rapid expansion and strong pro-cyclical policies, fueled by oil revenues. The subsequent large drop in oil revenues caused a sharp slowdown in the economy, weakening of fiscal and external positions, depreciation of the exchange rate, and a rise in inflation.
Following the Executive Board’s approval of the arrangement with Angola, Mr. Takatoshi Kato, Deputy Managing Director and Acting Chair, issued the following statement:
“The Angolan authorities are to be commended for their strong commitment to a comprehensive reform program that addresses the macroeconomic imbalances which emerged in the face of the global economic crisis.
“The program includes a determined effort to restrain public expenditures, while providing adequate resources for social spending and vital infrastructure projects. To ensure adherence to the fiscal program, the authorities are advised to conduct a mid-year review of budget developments and make adjustments if necessary. A cautious external borrowing strategy is also important to ensure that the debt burden remains at manageable levels. The authorities’ intention to enhance fiscal transparency, especially in the oil sector, is welcome.
“The authorities are committed to take further steps to improve fiscal management over the medium-term, increase non-oil revenues by reforming the tax system, and de-link the fiscal stance from short-term movements in oil revenues. In this regard, their plan to establish a Sovereign Wealth Fund is welcome.
“The resumption of foreign exchange auctions by the National Bank of Angola (BNA) has already contributed to normalize conditions in the foreign exchange market. It is essential to maintain the auction system, backed by tight monetary conditions, and to accept further movements of the exchange rate.
“Angola’s financial soundness indicators appear to be at comfortable levels. Nevertheless, continued vigilance is needed, and measures will be taken to strengthen further the regulatory and supervisory framework,” Mr. Kato said.
Recent Economic Developments
Prior to the onset of the global economic crisis, Angola had recorded an extended period of rapid expansion, fueled by strong growth of oil revenues. However, inflation had persisted at low double-digit levels, and fiscal policy had been strongly pro-cyclical, with the non-oil fiscal deficit increasing from 50 percent of non-oil GDP in 2006 to about 70 percent by 2008. By the time the crisis hit, expansionary fiscal and monetary policies, and more recently an overvalued exchange rate, had left Angola vulnerable. With oil revenues plunging, investor confidence declining, and heavy intervention by the National Bank of Angola to sustain a tightly managed exchange rate, official reserves fell by one-third in the first half of 2009.
The global economic crisis and the resulting sharp drop of commodity prices have severely affected Angola’s economy. The spot price for crude oil fell from an average of US$97 a barrel in 2008 to US$44 in the first quarter of 2009, while OPEC cut its oil production quotas in response, reducing Angola’s quota by about 20 percent. Prices for diamonds, of which Angola is the world’s fourth largest producer, also fell substantially. With the sharp drop in oil prices and revenues, the economy has slowed sharply, fiscal and external positions have weakened considerably, the exchange rate has depreciated, and inflation has risen slightly:
• Real GDP is projected to be broadly flat in 2009, reflecting a sizeable drop in oil production (-6 percent) and a sharp slowdown in the pace of non-oil growth (to 6 ¾ percent, down from 19 percent its average during 2005–08).
• The plunge in oil revenues in the first half of 2009 has shifted the fiscal and external surpluses to substantial deficits. As a result, through June 2009, usable reserves fell by US$6 billion to US$10 billion (2¾ months of imports or a ratio of 1 to short-term liabilities).
• The official exchange rate has depreciated in two distinct stages (by 4 percent during the second quarter and then again by 10 percent in recent weeks, following the restoration of the foreign exchange auction), while the parallel rate has depreciated sharply, reaching a peak 25 percent premium vis-à-vis the official rate by end-September.
• Inflation has picked up to 14 percent in the 12 months through August, from an average level of 12.5 percent in 2008, despite the economic slowdown.
Angola, which joined the IMF in September 19, 1989, has a Fund quota of SDR 286.3 million.
Angola: Selected Economic and Financial Indicators,