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Making the Most of Opportunities
September 19, 2014
Honorable Minister Manuel, ladies and gentlemen. Good afternoon. Boa tarde. And thank you for the kind introduction. It is a great pleasure to be here today in Luanda.
In my remarks today, I will first discuss the outlook for the global economy, and then review the prospects and main policy priorities for sub-Saharan Africa and Angola. My message is that there has been considerable progress over the past decade. And with the right policies, Angola can build on its achievements and turn difficult challenges into continued economic success.
The Global Outlook
Allow me to begin with the global economy. We have come a long way from the crisis and recession of 2009. So our latest projections see global growth at about 3½ percent this year and 4 percent in 2015, although global growth moderated more than expected in the first quarter of 2014—we are updating these projections to be published in our World Economic Outlook in October. But the global recovery remains uneven and is proving weaker than expected in some regions.
Growth in the advanced economies is projected to reach about 2 percent, with the strongest growth in the United States. The fiscal consolidation of recent years is being reduced, except in Japan, and monetary policy remains accommodative. However, the euro area has faltered: the countries on the periphery of Europe face high debt and financial sector difficulties, and growth has faltered in the core economies.
More than two-thirds of global growth is coming from emerging and developing economies, with growth of about 4½ percent in 2014 expected to surpass 5 percent in 2015. These economies are being helped by stronger import demand from the advanced economies, but tighter financial conditions are dampening domestic demand. In China, growth is projected to remain at about 7½ percent in 2014 and expected to slow to about 7 percent in 2015 as the government reins in credit and moves to achieve a more balanced growth path.
But significant downside risks remain.
Let me briefly mention a matter of concern to this audience. Oil prices have been relatively high, reflecting the geopolitical tensions. Barring any further deterioration, we expect oil prices to soften by year end and to fall 6 percent next year. The longer term prognosis is for oil prices to soften more as new oil and gas resources are exploited, most notably in the U.S. By the end of the decade the IMF expects oil prices to fall below 90 dollars a barrel.
Sub-Saharan Africa
Let me now turn to the outlook for sub-Saharan Africa.
Like the rest of the world, we are deeply concerned about the Ebola epidemic in western Africa—especially Guinea, Liberia, and Sierra Leone. The epidemic is larger than previous outbreaks, and by some estimates could take six to nine months to bring under control with significant loss of life and severe disruption to economic activity in these countries. The IMF is working closely with the affected countries to assess the economic impact, and our Executive Board will shortly discuss additional financial support.
Despite the Ebola crisis, there is an increasing recognition that Africa is rising. This was the theme of an IMF and Government of Mozambique conference held in Maputo earlier this year. The region’s growth has been strong for nearly two decades, and showed remarkable resilience during the global crisis. We expect growth to be around 5½ percent in 2014, edging toward 6 percent in 2015.
While demand for Africa’s natural resources, especially from emerging economies, has helped spur this growth, Africa’s progress is not just due to a commodities boom. Other factors are at work.
Most important is political stability. This has enabled countries to use their resources to build the institutions needed to address challenges and enable their people to plan and invest in their futures. Out of this have come two important trends:
The first is policies to restore macroeconomic stability and support sustained growth. By the middle of the last decade, many countries had made considerable progress: cutting fiscal deficits and public debt, reducing inflation to single digits, and building foreign exchange reserves. So when the global crisis hit, they had the policy room—“policy buffers”—to respond. They could undertake expansionary policies, for example by maintaining, or even increasing the social spending that provided a safety net for the most vulnerable.
The second trend is the recognition that market forces have to play a larger role in development. This has been a difficult challenge, requiring an environment friendly to business. It has produced an overhaul of legal, regulatory and administrative frameworks, and some vested interests have been addressed. As a result, Africa is attracting more investments from advanced and emerging economies—with a record $80 billion expected this year.
I just said that Africa is rising. But risks are increasing, from both domestic and external conditions. These include the threat of Ebola spreading; a further deterioration of the security situation in some African countries; tighter global financial conditions; and a significant slowdown of emerging market growth. These challenges may need to be addressed and, in some countries, policy buffers have been depleted, so the policy response will be more difficult.
There are several longer term challenges.
First is infrastructure. Investment in this area is essential for growth. But there is a huge financing gap; projects are large and scope for inefficiency is equally big. Projects need to be carefully selected and implemented. And countries need to be wary of financing these investments with debt that could prove unsustainable.
The second is to build institutions to effectively manage natural resource revenues. Africa has perhaps one-third of the world’s known mineral reserves. These enormous, but finite, resources can benefit current and future generations—if managed properly. They cannot be wasted, nor used to benefit the few. Strong governance, transparency, and accountability are crucial. But there is also a need for a medium-term fiscal framework to guide decisions about current spending, investments to boost productive capacity, and savings for the future. This fiscal framework needs to be part of a strong public financial management system, so that spending goes where it is needed and can have the greatest impact.
Third and perhaps most important, Africa needs to develop its people. By 2040, the region’s labor force will probably be larger than China’s and India’s combined. But realizing Africa’s potential requires a labor force that is educated, healthy and employed. So growth must be inclusive. Poverty has declined in recent years, but it remains high. A concerted effort is required.
Angola
Let me now turn to Angola.
Growth since the end of the civil war has been extraordinary. Over the last decade, output in real terms has more than doubled, and output per capita has increased more than half.
Angola’s recovery from the global crisis was also impressive. The country faced a balance of payments crisis when oil prices collapsed in 2009. But it soon returned to strong growth with support from an IMF program and higher oil prices. A stable exchange rate helped bring inflation down to historically low single digits, and foreign reserves are adequate. Non-oil sector growth has averaged over 8 percent a year since 2009.
Economic prospects remain positive. While oil will shape Angola’s future, the Government’s medium-term development plan has shifted the focus toward a large program of public investment in infrastructure, which is expected to support non-oil sector growth of around 7½ percent and overall growth at about 6 percent.
That said, many challenges remain, many mirroring those facing the region. Let me highlight what I think are the most pressing issues.
The first is to develop the framework and institutions to manage oil wealth. Key steps have been taken, but more can be done.
Angola needs to make important decisions over the allocation of oil revenues similar to those I described for Africa’s resource producers. These need to be guided by a medium-term macroeconomic framework anchored on structural fiscal surpluses—by which I mean that when oil prices at a “normal level” then the budget should be in surplus—to save some of the oil wealth for future generations while still allowing space for priority spending. This framework should be supported by a stabilization fund based on clear rules for transfers from the fund to the annual budget when oil prices are lower than projected, and vice-versa.
Such an institutional arrangement is employed in many other resource-rich economies as a way of insulating the budget and current year expenditures for short-term fluctuations in commodity prices. This framework proved successful in allowing those countries to respond to the global financial crisis of 2008-09, with limited exposure of the fiscal accounts and a moderate adverse impact on growth. Angola can follow this good practice, and I know discussions are ongoing in this area.
The second challenge is to make growth more inclusive.
Angola’s impressive growth has not been as inclusive as it could be. Poverty remains high, and income inequality is a visible problem. The country’s stability and long-term development require the benefits of growth to be shared more evenly. More public spending should be directed toward the poor. One option is to gradually phase out the costly and regressive fuel subsidies and replacing them with, for example, well-targeted conditional cash transfers to the needy.
Angola is one of the largest fuel price subsidizers in the world. The gasoline (pump) price in Angola is about US$2.35 per gallon, situating it amongst the lowest decile of the distribution of gasoline world prices. Currently, spending on fuel subsidies amounts to 4 percent of GDP. This represents half of the spending in health and education, one-third of the spending in public investment, or 16 times the sum of all spending in the country’s social safety net programs. Rationalizing fuel subsidies would not only generate resources to expand the social safety net, but could also help to strengthen the fiscal position over the medium term
The third challenge is to continue diversifying the economy.
Infrastructure investments will help with diversification in the medium term, and rebuilding human capital will take longer. But a difficult business environment is hampering efforts in this area. Angola ranked 179 out of 189 economies in 2014 in the World Bank’s “Ease of Doing Business” Index. Other indicators, such as the World Economic Forum’s Global Competitiveness Index, show broadly the same result.
The Government’s reform agenda tackles a number of critical constraints for doing business in Angola, including improving access to credit and training, and streamlining of licensing procedures and reducing their cost. Implementation of these initiatives, together with infrastructure improvements, is critical to improve competitiveness. But more needs to be done, including in the areas of improving the framework for enforcing contracts, resolving controversies, starting new businesses, and facilitating cross-border trade.
The final challenge is to improve governance.
There is still much that Angola and other African countries can do to improve governance—a situation that is detrimental to development. This generation needs to build strong institutions capable of formulating and implementing policies that address this problem.
When we talk about good governance we refer to a process of policy making and implementation that has clear and transparent rules. This would then enable the public to actively participate in the decisions that affect their daily lives, and to monitor the implementation of policies. Good governance matters because, without it, vested interest groups are able to influence and distort public policies and their implementation for their own private benefit and at the expense of the public at large.
In this connection, the recent increases in import tariffs aimed to promote production in the nonoil sector should be kept under periodic review and should be removed within a specified timeframe, before these systems become inefficient.
In facing all of these challenges, one priority will be to maintain policy buffers so that the government can respond to shocks without derailing its agenda. Angola felt the effects of the global crisis partly because it lacked sufficient policy space to respond. Some of the buffers have since been rebuilt, but fiscal space has been eroded. This year the budget is expected to move into a deficit equivalent to about 4 percent of GDP, and deficits of this magnitude are projected through the medium term. This needs to be gradually reversed to protect Angola against another shock—domestic or external. To achieve this will require mobilizing additional nonoil tax revenue, improving the efficiency of public investment, and reducing current spending, including by phasing out the costly and regressive fuel subsidies—while mitigating the impact on the poor through well-targeted social assistance.
Conclusion
All considered, this is a challenging reform agenda. But other countries are addressing similar problems.
The IMF works with each of its 188 member countries to deal with exactly these kinds of challenges in order to help them achieve strong, sustainable and inclusive growth. One way we do this is by providing technical assistance and training in many of the areas I have discussed today. We attach great importance to our relationship with Angola, and we appreciate the cooperation that we have received from President José Eduardo dos Santos and his government. The IMF is ready to work with Angola to turn these challenges into opportunities to achieve prosperity.
Thank you. Muito obrigado.
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