An International Monetary Fund (IMF) mission led by Ricardo Velloso, visited Luanda from August 12-25, 2015, to conduct discussions for the 2015 Article IV consultation.
The mission met with Vice-President Manuel Vicente, Finance Minister Armando Manuel, Planning and Territorial Development Minister Job Graça, Economy Minister Abrahão Gourgel, Construction Minister Waldemar Pires Alexandre, Petroleum Minister Botelho Vasconcelos, Public Administration, Labor, and Social Security Minister Pitra Neto, Commerce Minister Rosa Pacavira, Banco Nacional de Angola (BNA) Governor José Pedro de Morais Júnior, 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 financial sector, the non-financial private sector, and the state-owned oil company Sonangol, religious and non-governmental organizations, and the diplomatic community. At the conclusion of the mission, Mr. Velloso issued the following statement:
“The Angolan economy has been severely affected by the sharp decline in oil prices in the last year. A comfortable level of international reserves has allowed the economy to weather better the consequences of the fall in oil prices than in 2008-09. However, with oil accounting for over 95 percent of exports and about 75 percent of fiscal revenue, recent developments underscore the importance of promoting the diversification of the economy by preserving macroeconomic stability and moving forward an ambitious structural reform agenda.
“Economic activity is projected to slowdown as the industrial, construction and services sectors adjust to cuts in private consumption and public investment amid a reduced availability of foreign exchange. In 2015-16, output growth is projected to average 3½ percent a year. Inflation is accelerating, reflecting the depreciation of the kwanza and, in the first half of the year, loose monetary conditions, and is expected to peak by end-2015, before declining gradually over time. The external accounts are weakening as a result of the sharp decline in oil exports and the limited room for import substitution in the near term. The outlook is for a recovery starting in 2017 but there are downside risks, including a further decline in oil prices.
“The government’s timely reaction to the decline in oil prices by revising the 2015 budget will allow the central government deficit to fall to 3½ percent of GDP, compared to 6½ percent last year. Public debt, however, is projected to increase significantly to around 57 percent of GDP, of which 14 percent of GDP corresponds to Sonangol, by end-2015. The 2016 budget should be predicated on a conservative oil price assumption and be aimed at protecting expenditures on social assistance and critical infrastructure while preserving fiscal discipline given that a recovery in oil prices in the near term is unlikely. It will be critical to bring the public sector wage bill, as a share of GDP, more in line with the new revenue reality of the budget.
“Over the medium term, fiscal policy should aim at restoring fiscal buffers by setting public debt on a declining path and achieving fiscal consolidation through structural fiscal reforms. Increasing the non-oil revenue base by rationalizing tax incentives and strengthening the newly created tax administration agency (AGT) is a priority. With a view to do more and better in the context of lower revenues, the quality of capital spending can be improved by strengthening the processes to evaluate, select, and monitor projects in the public investment program.
“Monetary and exchange rate policies need to be focused on containing inflation while preserving an adequate level of international reserves. The BNA has adequately tightened liquidity conditions by increasing its policy rate and banks’ mandatory reserve requirements. Interventions in the foreign exchange market have allowed for an orderly depreciation of the kwanza. However, the wide and volatile spread between the parallel and primary market exchange rates as well as the backlog of foreign exchange buying orders in commercial banks are indications that an imbalance still exists in the market. Addressing it is essential to maintain the official exchange rate as the basis for price formation and inflation expectations, and to prevent a misallocation of resources in the economy.
“Preserving the health of the banking sector is essential to allow the economy to recover from the current slowdown. The BNA’s rightly focused efforts to strengthen bank supervision are welcome. Efforts should not be spared in ensuring that all banks meet regulatory requirements, especially regarding capitalization and liquidity.
“Accelerating the structural reform agenda is more important than ever to boost potential growth and reduce poverty. The National Development Plan aims appropriately at creating the conditions for the diversification of the economy by increasing investment, productivity, and competitiveness. In order to achieve these goals, special attention needs to be paid to improving the business environment, physical infrastructure, and human capital development. The recent approval of new labor and private investment laws are important steps in the right direction.
“We thank the authorities for the candid and constructive dialogue.”
The IMF Executive Board is expected to discuss the 2015 Article IV consultation in October, 2015.