Typical street scene in Santa Ana, El Salvador. (Photo: iStock)
September 8, 2014
Lower oil production is set to cut Angola’s economic growth in 2014, before a rebound in the oil industry boosts growth next year.
Dock in Luanda, Angola: major African oil producer has started to save part of its oil wealth for future generations (photo: Mike Hutchings/Reuters/Newscom)
ECONOMIC HEALTH CHECK
In its regular assessment of the southern African nation’s economy, IMF staff said the authorities had restored macroeconomic stability after the country was hit hard by the global economic crisis.
Inflation is at historic lows, international reserves are adequate, and the country has started to save part of its oil wealth for future generations through Angola’s Sovereign Wealth Fund. But emerging fiscal deficits (see Chart 1) should be addressed to preserve space for the authorities’ objectives of rebuilding infrastructure and reducing poverty and inequality while continuing to save part of the oil revenues, the IMF staff report said.
IMF staff projected that Angola’s economic growth would slow to 3.9 percent in 2014, and then rally to 5.9 percent in 2015. Oil production fell in the first half of 2014, reflecting unscheduled maintenance and repair work in some fields. But the drop in oil output was offset by robust growth in the nonoil economy, supported by the agricultural sector and the manufacturing and services sectors.
Slow decline in poverty
Despite Angola’s significant oil wealth—the country is sub-Saharan Africa’s second-largest oil producer—income inequality remains high and poverty has been declining only slowly, the IMF staff report said. Angola has been successful in capturing a large share of the rents from its oil resources (see Chart 2) and generating robust economic growth, but this has yet to translate into significant improvements in its welfare indicators such as poverty, life expectancy, and educational attainment.
To accelerate the reduction in poverty and inequality, Angola could benefit from the experience of other countries in sub-Saharan Africa and other regions that have implemented well-targeted safety nets for the poor, including conditional cash transfer programs, the IMF staff report said. Evidence shows that such programs are
• Highly efficient—almost all the expenditure reaches the poor;
• Affordable and sustainable—their costs as a share of national income are modest; and
• Among the most progressive forms of public expenditure—they cut out as beneficiaries become wealthier.
The IMF staff report urged the authorities to phase out costly and regressive fuel subsidies, while mitigating the impact on the poor through well-targeted social assistance. Noting that Angola is one of the world’s largest fuel price subsidizers, IMF staff stressed that the fiscal cost of the country’s fuel subsidies has been increasing in recent years due to higher international fuel prices.
Fuel subsidies should be reviewed and gradually reduced. International experience indicates that a public campaign and open consultations with key stakeholders to explain the move can ease the process.
The analysis in the IMF staff report also showed that there is significant room to improve the efficiency of public capital spending. An increase in efficiency could help to increase the amount of infrastructure available without the need to allocate additional resources to capital spending.
Favorable growth prospects
Angola’s medium-term economic growth prospects are favorable, the IMF staff report said, projecting that the oil sector will grow by more than 2 percent each year on average over the next five years. Declining production in some oil fields would be more than compensated by the commissioning of new fields.
Large investments in the nonoil sector as well as the authorities’ policies to improve the business environment are expected to generate much-needed diversification and job creation, mainly in agriculture but also in electricity, manufacturing, and services.
The report said that economic diversification is not only imperative to reduce oil dependency, but also to increase employment and reduce poverty. A sustainable reduction in poverty should be achieved through job creation, mainly by developing small and medium-sized enterprises in the nonoil sector that provide the bulk of national employment.
The report cautioned, however, that the country’s medium-term fiscal outlook is challenging, as oil revenues are expected to decline as a share of GDP while there is high demand for increased spending on infrastructure and poverty alleviation. Efforts to improve the fiscal position could start already this year, IMF staff said, by moderating growth in the wage bill and spending on goods and services.
