People power in Angola

What is the IMF’s perspective on the economic performance of Angola in 2017?
The outlook for the Angolan economy has improved in recent months as a result of the strength of the world economy and the increase in oil prices. We estimate that the economy will grow 1.5% in 2017 after having contracted in 2016, and annual inflation will fall to 26% after having peaked at 42% in December 2016.
Despite these positive signals, oil prices remain well below the pre-crisis levels and for Angola to make the most of the improved external environment, it is important to address the existing macroeconomic imbalances that built up in the last three years. There is still a disequilibrium in the foreign exchange market that manifests in the form of a wide spread between the parallel market and the official exchange rates, and the backlog of foreign exchange requests at commercial banks. This, despite the BNA’s [National Bank of Angola] additional sales of foreign exchange in 2017 that led to a decline in international reserves to USD 14.5 billion from USD 21 billion at the end of 2016.
The new government is fully aware of the challenges, and there are great expectations about the reforms the government plans to implement in order to turn around the situation.

How would you assess the actions taken by Angola to combat its economic problems?
The last few years have been challenging for Angola. An extraordinary adjustment was needed to adapt to the new reality of lower oil prices, and the government acted accordingly. The fiscal adjustment in 2015-16, when public spending was cut by 17 percentage points of GDP, was especially remarkable. We do not have detailed information at the moment about 2017 but given the political cycle, the fiscal adjustment likely slowed down and the deficit widened. Having said that, expenditure decisions on some items with a long-lasting fiscal impact was prudent. For example, public sector wages were increased by 12% in June, a modest adjustment compared to the level of inflation.
There has been more reluctance to allow the foreign exchange market to adjust. Initially, the BNA policy decisions were in line with standard advice on how to react to this kind of economic shocks. The BNA allowed the currency to depreciate, sold some reserves to cushion the decline, and tightened monetary policy by increasing the policy rate and reserve requirements. Although these adjustments were in the right direction, the magnitude was less than needed and, as mentioned above, inflation increased and the disequilibrium in the foreign exchange market built up.
The decision to fix the exchange rate in April 2016 led to a rapid appreciation in the real exchange rate. The real exchange rate is a measurement of how much you can buy effectively with a unit of foreign exchange, let’s say the US dollar. When the real exchange rate appreciates, it means that the country becomes more expensive. As everyone knows, Luanda is again considered the most expensive city in the world! The consequence of this is that Angola lost competitiveness vis-à-vis other countries, and that makes the process of economic diversification more difficult.
There is consensus that Angola’s biggest challenge is to diversify its production and exports. Achieving this objective requires several things: structural policies to reduce the costs of producing in Angola, building infrastructure, and educating and training the population. However, even if a country does all these things, the objective of diversifying the economy will be elusive if the currency is overvalued.

What were the conclusions of the IMF staff visit in November 2017?
The IMF staff visit was an opportunity for us to get acquainted with economic policies that the new government plans to implement. As noted above, there are great expectations about the policies and reforms that the new government will implement and were outlined in the MPLA’s political manifesto for the elections and the president’s inauguration and state of the union speeches. In October [2017], the government approved the Plano Intercalar [interim plan] fleshing out the economic policies of the new administration more. A new national development plan for the next five years will be published in March.
After the staff visit our impression is that the new government is committed to fiscal consolidation and improving the efficiency of public spending, exchange rate flexibility, economic diversification and the business environment. There is consistency in the policy and it seems to be moving in the right direction. Going forward we need to see how these policy intentions materialise in concrete actions. The very next thing we will be analysing is the 2018 budget that will be submitted to parliament on December 15. It is important that the budget is based on a realistic macro framework and that it targets a deficit reduction that puts public debt on a declining path.

Do you think there needs to be a higher oil price in order for Angola to earn the necessary funds for investment?
Angola needs to diversify regardless of what the oil price is. Oil is going to be exhausted eventually and new productive sectors need to be developed. In principle, more resources should facilitate diversification. Angola did this during the high oil price years. Much infrastructure was built, including highway networks and ports. The downside of higher oil prices and having more resources available is a political economy one; complacency tends to settle in. Then efforts to diversify dwindle.

Do you think Angola was living in a bubble before the collapse?
One can always have 20/20 vision in hindsight. I think they were investing during the high oil price years. They invested in many infrastructure projects. It can be argued that more could have been done, but they certainly made significant progress in building new infrastructure and recovering the ones that were destroyed during the war. In my opinion more could have been done in the social area. One of the key pillars to develop any economy is human capital. You need to work seriously on health and education.

Does the drive to invest and develop Angola require a better education system to encourage Angolans?
More and better education, as well as health, are essential to develop Angola. Beyond basic education the education system should aim at promoting entrepreneurship. The Angolan people are already very entrepreneurial. You see them are carrying fruits and selling things, selling trinkets. They are not getting subsidies or anything, they do it themselves. Maybe you need to create the conditions for this spirit to flourish in a more organised way, so they have access to financing in addition to education.
In the formal economy, it is important to create conditions for knowledge transfer from the foreign investors and workers to the Angolans. Some policies are already in place requiring foreign investors to hire a minimum number of Angolan employees. There are some success stories of companies that today have an Angolan CEO who started from the bottom. However, there is room to improve the policies in place. There are situations in which Angolans are hired and receive a salary but they are in practical terms not working. In those cases, the requirement to hire Angolans functions much like a tax that discourages investment but, more importantly, does not achieve the objective of transferring knowledge to the Angolan employee.
I believe that this can be structured better so there is some accountability. The ultimate goal of requesting a foreign company hire Angolan employees is not to give free money to some lucky people, but to help them learn. The real objective is the development of human capital. This legislation and these requirements lack mechanisms to enforce knowledge transfer.

What is your outlook for Angola in the medium term?
I believe Angola has a lot of potential. Angola has a huge amount of resources besides oil. It can be a very rich country if the government focuses on the right economic policies that ensure macroeconomic stability, open the market to private investment on a levelled playing field, and prioritise public spending on quality infrastructure and human capital development. Oil will remain the main economic sector in the nearest future but in the absence of major discoveries it will be a marginal sector in 20 years.

For more information on the Angolan market, including upstream investment opportunities and the government’s call for downstream partners, see our business intelligence platform, TOGYiN.
TOGYiN features profiles on companies and institutions active in Angola’s oil and gas industry, and provides access to all our coverage and content, including our interviews with key players and industry leaders.
TOGY’s teams enjoy unparalleled boardroom access in 35 markets worldwide. TOGYiN members benefit from full access to that network, where they can directly connect with thousands of their peers.
Business intelligence and networking for executives: TOGYiN