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Transcript of a Conference Call on Angola with Sean Nolan, Senior Advisor in the African Department, and Lamin Leigh, Angola Mission Chief
November 25, 2009
MR. NOLAN: Good morning, everybody. And thank you for joining us this morning.
As you may be aware, Angola made an approach to the IMF back in July, seeking financial support for their efforts to stabilize the economy. The context for this request was quite simple: the sharp drop in oil prices, which had been the key generator of foreign exchange for the Angolan economy during its rapid growth from 2002 through 2008, The drying up of oil revenues created difficulties on the fiscal side, on the balance of payments side, and meant that a comprehensive adjustment package was needed.
The IMF sent missions, at the request of the Angolans, to Luanda twice, at the end of early August, and again in September. There are Press Releases from both these missions on the Angola IMF web page. I’m glad to say that finally the standby arrangement, which is the final set of policy understandings between the IMF and Angola, was approved by our Executive Board on Monday.
It’s a 27-month arrangement, meaning money is disbursed over a 27-month time period in specific tranches. It’s in the amount of about 860 million SDRs, which is about $1.4 billion.
There’s a Press Release, which we put out on Monday, which describes in some detail the main elements of the program, and I won't repeat them here, although I recommend that you take a look -- also, there’s a piece on recent economic developments and the background to the Angolan authorities’ request.
So that’s where we are.
QUESTIONER: My question is: what are the conditions that the IMF has put on the Angolan government for this loan to go forth? And I’d specifically like to know whether there are any conditions regarding transparency in Angola?
MR. LEIGH: Okay. Good morning, ladies and gentlemen. Thank you. My name is Lamin Leigh. I’m the Mission Chief on Angola.
To answer your question specifically, the key pillars of the program are basically three parts. One, of course, is a fiscal effort that aims to reduce the non-oil primary fiscal deficit in 2010 while providing adequate resources for social spending and vital infrastructure projects.
The second pillar of the program is essentially to lay the groundwork for normalizing conditions in the foreign exchange market, you know, backed by tight monetary policy.
And the third part is essentially to look at certain measures in the financial sector with the aim of safeguarding the financial sector due to the economic slowdown.
In terms of your specific question about fiscal transparency, fiscal transparency is a key part of the program. At this point in time, the Authorities have already given their consent in terms of publishing the Staff Report and the associated program documents.
So we are working on that in terms of putting them on the web page, and as soon as that comes out, you should be able to see the specific conditions attached to enhancing fiscal transparency.
QUESTIONER: Thank you. It’s just because the Angolan government has repeatedly said there are no strings attached to this loan, and that’s why I was asking also that question.
MR. NOLAN: Let me be clear on how IMF programs work: they don’t come with strings attached. They are a series of understandings about economic policy. There’s a series of targets, and there’s a series of policy commitments, and the policy commitments would include things like what would be the level of the budget deficit during a quarter, how much money the government would borrow from the central bank or from the banking system during a quarter-—the kinds of numerical parameters that guide the program.
I wouldn't call them strings attached – we we call them performance criteria or indicative targets, and it is the meeting of these targets that is what justifies the continuation of the program over the full 27 month period of the stand-by arrangement. In the case of the Angola stand-by arrangement, there will be about eight disbursements of financial support over the program as a whole. The first disbursement will be now, but there will be another in three or four months; another in three or four months after that.
And those disbursements would be conditioned upon meeting the understandings reached between the two parties in the Letter of Intent and in the Memorandum of Policy.
So that’s how we would see “strings attached” -- these are the understandings that have been reached in the program.
QUESTIONER: Hello. This first part may just be a follow-up. Could you describe how much information you were able to get, and how closely you looked at Sonangol, the state oil company, because there's been a lot of complaints that it’s not all that transparent. If an audit was just completed, I just wonder what role they played in the decision-making, and also if you could say little bit more about the sovereign wealth fund that you’re praising so much in the press release, what you anticipated doing, and what’s meant by these regulatory and supervisory reforms of the financial sector?
MR. LEIGH: Thank you. You know, as I mentioned fiscal transparency, especially with regards to the activities of state-owned enterprises, is a key part of the program. And we were able to reach agreement on certain measures in terms of enhancing that broader goal of fiscal transparency.
That, of course, includes Sonangol, and in the context of the negotiations, Sonangol participated fairly well in all the discussions. And so I think the broad thrust of the program in terms of enhancing fiscal transparency, including in the activities of Sonangol is fairly well established in the program.
With regards to the sovereign wealth fund, the authorities actually started to work on this even before the commencement of program negotiations. As you may recall, in the context of previous Article IV consultations with Angola, the issue was in the context of the oil fund, and now they have broadened the scope of that work to a sovereign wealth fund.
Now in the context of the program negotiations one of the things that the Authorities have asked is for us to use the expertise at the IMF to help them to put this framework together in terms of the design of the sovereign wealth fund.
And at the same time, they were also pursuing their own efforts in terms of looking at sovereign wealth funds in other countries. So that’s really the basis behind the reference to it in our documents.
QUESTIONER: I mean, because there are people that say that Sonangol, largely its accounts are in offshore financial centers, and even tax havens. This is why I guess I’m wondering the degree to which you relied on it as a basis for the lending and whether you kind of got to the bottom of those accounts, which some people say is not otherwise possible?
MR. LEIGH: In terms of the things that you mentioned was with regard to the audit of Sonangol’s accounts, this was one of the aspects that we looked at in the context of the program. But at the same time the government, in the wider context of normalizing or regularizing some aspects of this, has also made policy commitments in the program to phase out quasi-fiscal operations related to Sonangol.
And so those are some of the things that the program had focused on. And they’ve also made a policy commitment in terms of taking steps towards a more general area of resource revenue transparency. And so that is also another aspect of the program that we put emphasis on.
MR. NOLAN: There’s one issue that was posed by one of the questioners that has not actually been answered, and that was the question of “What about the financial sector?”. The issue in the financial sector, as in other economies, is you’ve got two significant shocks going on -- a sharp slowdown in economic activity, and secondly, a significant, not large, but significant movement in the exchange rate and the effect that may be having on borrowers.
The IMF team did a fair bit of work in examining the impact of these changes on the financial position of the banks and found the story generally reassuring. But the central bank will need to remain quite active -- as in other countries, not uniquely in Angola -- in terms of monitoring activities of the banks and their financial health on a more proactive and engaged basis than under normal conditions.
So that’s the financial sector component I think should be emphasized.
I also wanted to add, on the sovereign wealth fund, it's important to remember what the logic for Angola of a savings fund--of a sovereign wealth fund—is. In an oil-based economy such as Angola, there are large amounts of monies coming in during the good times, and you’re spending it, and then suddenly, in the bad times, the money dries up and so does the ability of the government to spend.
So you're getting extreme pro-cyclicality of fiscal policies, and what we saw as essential in the negotiations -- and this is a key element in them -- is to try to de-link the positioning of fiscal policy from year to year, to de-link that from the flow of revenues coming in from year to year. That we see as essential to producing a stable growth for the Angolan economy over time, rather than a kind of stop-go model where growth is exceptionally rapid when oil revenues are high, and but turns into a crunching slow-down when oil revenues are low.
So that’s why we put a lot of emphasis on it in our discussions with the Angolan Authorities. Thank you.
QUESTIONER: Hi. The government of Angola is very key in terms of driving development, in driving growth and their economy … In terms of the conditions that you have given them or [have been agreed] with the IMF, have you put any conditions about guarantees from the sovereign?
MR. NOLAN: In any IMF program, there's usually a limit, an agreed limit, on the amount of external debt that can be either contracted or guaranteed by the sovereign. And the Angola program is no different from other IMF programs in that regard.
There is indeed a limit on amounts of non-concessional borrowing that the government will undertake. The details and all that will be in the documents when they are released -- hopefully, very soon.
But there is such a ceiling -- anything but unusual, it’s an absolutely standard feature of an IMF program. And its logic is really simple: there’s no point in having reserve targets if a government can continue to then go out and borrow money and meet the reserve target. So there have to be joint controls on reserve targets and also on borrowing limits. So that’s the logic of why such borrowing limits are almost always part of an IMF program.
QUESTIONER: Thanks a lot. I just wanted to know, there had been these reports of the government seeking to do something like a $4 billion bond sale maybe as early as next month. Is that something that you all took into account in making this announcement at this time? And do you have the credit rating on the country?
MR. NOLAN: We also have heard the announcements. As part of our understanding on the economic program, the government envisages a fund-raising effort in the coming several months. The exact timing of it is not specifically laid out in the program.
We have urged the Authorities to proceed judiciously in handling what will be their first big bond issue, with the aim of minimizing the cost of funding to the country. The savings from handling the bond issue well could be quite substantial over the term of the entire loan. The authorities have appointed reputable international financial and legal advisors to represent them on the transaction.
We have some knowledge, but we did not reach specific understandings on the precise timing of how they, the Authorities, would manage their borrowing program.
We have agreed on the overall limit, but not on exactly the precise timing. We don't micromanage to that extent.
QUESTIONER: Sure. Is $4 billion a limit?
MR. NOLAN: Four billion dollars is a number that's been floated around as a possible upper bound, a statement we have heard. The precise limits, as I said, will be clear in the documents. The Angolan Authorities have emphasized that the limits that they will be able to stick to will depend quite closely on the amount of concessional borrowing they get -- the loans they get from development partners, from countries with a record of financial support for Angola. If money is forthcoming from these sources, as hopefully will be the case, then the borrowing need in the commercial markets will be correspondingly significantly smaller. If those amounts don’t come through, then the would need to rely a little bit more on the market.
QUESTIONER: Did they give you any idea of possible concessional borrowing from China—what the size might be?
MR. NOLAN: That’s hasn’t figured in our discussions.
QUESTIONER: Okay. Thanks.
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