On August, 29, 2014, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with Angola.
After a strong growth in 2013 estimated at 6.8 percent, economic growth in 2014 is projected at 3.9 percent despite a decline in oil output. Robust growth in the nonoil economy, mainly driven by a very good performance in the agricultural sector, is expected to offset a temporary but considerable drop in oil production.2 Ongoing investments in agriculture are expected to pay off with an increase in agriculture production by about 11½ percent in 2014. Other sectors such as manufacturing, electricity and services, are also expected to contribute. Inflation projected to reach 7½ percent by end-2014 is well within the Banco Nacional de Angola (BNA)’s objective. The overall fiscal balance, which was in surplus in the last four years, is expected to deteriorate substantially in 2014, reaching a deficit of around 4 percent of GDP. Oil revenue fell by 14 percent during January-May 2014, mainly due to a 10 percent decline in oil production related to unscheduled maintenance and repair work in some oil fields. International reserves at the BNA remain adequate at an equivalent of 7¾ months of imports.
Notwithstanding strong economic growth over the past decade, poverty and income inequality remain a challenge. The 2009 household expenditure survey, released in 2011, shows that Angola’s income distribution is among the most unequal in sub-Saharan Africa, with the top 10 percent of income earners concentrating one-third of total income, and puts the relative poverty headcount ratio in Angola at 37 percent (60 percent in rural areas).
Progress in structural reforms has been strong. The long-awaited non-oil tax reform was approved by the National Assembly on July 4, 2014, which is a crucial step toward reducing the budget’s heavy reliance on oil revenue. Public financial management (PFM) reforms also made headways with the introduction of two critical measures to control the proliferation of domestic expenditure arrears: (i) the budget framework law now includes a clear definition of arrears consistent with international best practice; and (ii) a new control procedure requires the confirmation by the Finance Ministry of all contracts above US$1.5 million. The Economy Ministry has also continued with the implementation of a number of measures aimed at improving the business environment, including the Angola Invest program.
The medium-term economic growth prospects remain favorable. The oil sector is expected to recover and grow by 2¼ percent on average over the next five years, as the decline in production in some oil fields is more than compensated by the commissioning of seven new fields, including a first phase of a pre-salt oil field expected to start operating in 2017. Large investments in the nonoil sector are expected to generate much needed diversification and job creation, mainly in the agricultural sector, but also in electricity, manufacturing, and services. The projected strong growth in the nonoil sector of about 7¾ percent on average over the next five years is also expected to increase domestic competition, thus contributing to reducing inflation further. Growth prospects over the longer term, however, are uncertain but should be firmed up during 2015, as ongoing pre-salt prospection should help to determine the amount of commercially viable oil reserves.
Executive Directors agreed with the thrust of the staff appraisal and commended the authorities for the progress made toward macroeconomic stability, having reached a historically low level of inflation and an adequate level of international reserves. Directors welcomed the improved economic outlook, but noted that risks require additional efforts to strengthen policies. In the long run, reducing the dependence on oil is key to containing external vulnerabilities and achieving sustainable and inclusive growth.
Directors concurred on the need to preserve space for rebuilding infrastructure and reducing poverty and inequality, while saving part of the oil wealth for future generations. This requires addressing emerging fiscal deficits and returning to fiscal surpluses over the medium term, including by strengthening nonoil revenue administration, modernizing public sector wage policy, and gradually eliminating costly and regressive fuel subsidies while expanding well targeted social safety nets. Taking note of the recent partial tax amnesty, Directors encouraged the authorities to strictly enforce tax liabilities going forward to avoid any negative impact on tax collection.
Directors emphasized the need for a coherent asset liability management framework, including a fiscal stabilization fund that could improve the management of Angola’s natural resource wealth and protect annual budgets against volatile oil revenue. They noted the very low efficiency of public investment and saw merit in developing a system of public investment management that would help meet Angola’s infrastructure needs at a lower cost. They welcomed the recent measures to strengthen public financial management and end domestic payment arrears, and looked forward to their steadfast implementation.
Directors supported the authorities’ efforts to de dollarize the economy and strengthen financial stability, and underscored that effective and evenhanded implementation of prudential norms is necessary to foster trust in the banking system. In this regard, they welcomed the extraordinary measures taken to address the problems at Banco Espírito Santo Angola and the new legislation clarifying procedures for the granting of public guarantees, and encouraged actions to address the outstanding weaknesses in the Anti-Money Laundering/Combating Financing of Terrorism framework.
Directors saw the current conditions of relative stability and low inflation as an opportunity to introduce some exchange rate flexibility, which would help reduce dollarization and develop more effective monetary instruments. They noted that reserve levels are currently adequate and should be maintained to provide an appropriate buffer against external shocks.
Directors stressed that a sustainable reduction in poverty is best achieved through the development of small and medium size enterprises in the private, nonoil sector. They were encouraged by the authorities’ efforts to diversify the economy and improve the business environment and competiveness. They were concerned, however, by the increasing use of trade protection, and recommended a periodic review of the recently introduced import tariff schedule with a view to lowering tariffs within a specific timeframe.
Directors welcomed progress on the compilation and dissemination of economic statistics, and encouraged the authorities to address the remaining gaps in the production of more detailed and timely fiscal accounts and in the coverage of the balance of payments.