Why is Angola seeking an IMF loan now?

Why is Angola seeking an IMF loan now?

Angola’s government recently reached out to the IMF for talks on a loan deal in exchange for more structural reforms. Angola is Africa’s third-largest economy and the continent’s second largest oil-exporter. The economy was badly hit by the plunge in oil prices after 2014.

President João Lourenço was elected last year, taking over from José Eduardo Dos Santos who had ruled the country with an iron fist for nearly 40 years. President Lourenço has attempted to revive the faltering economy with reforms that have included devaluing the currency by over half against the U.S. dollar and promising to root out government and state corruption. Nonetheless, the economy is still plagued by foreign currency shortages and rising bad loans in banks. The country is also suffering from declining oil production from it’s aging offshore oil rigs.

Angola first reached out to the IMF last year for technical assistance for its reforms, although it was without a financial component. The government is now seeking a loan from the IMF and the Fund stated that it, “stands ready to help the authorities address Angola’s economic challenges by supporting their economic policies and reforms.”

 

The Angolan government’s decision to seek a loan now from the IMF came amid the further erosion of fiscal and external buffers and against the backdrop of worse-than-expected economic growth, which has been hard hit by the unsustainable fiscal policies favored in the run-up to last year’s elections. As it stands, debt repayments constitute nearly half of the state budget and have eaten into public spending. Moreover, the devaluation of the currency has yet to deliver in terms of shoring up foreign reserves, while the continued decline in oil production has eroded gains from higher prices and contributed to dollar shortages.

The IMF loan appears intended to provide the new government greater political cover as it pursues a more aggressive reform agenda, although it has already taken several important steps in cracking down on corruption and laying the groundwork for structural changes. Patronage politics remains deep-rooted among Angola’s political elite, and a notable priority of the new administration has been to remove relatives of the former president from positions of power. Moreover, in an effort to bolster foreign reserves, the government scrapped the kwanza’s peg to the dollar earlier this year—although the currency still remains significantly overvalued. Meanwhile, the Central Bank has also been in the process of revamping its monetary policy framework to focus on base-money targeting.

 

Even if progress has been rather slow thus far, diversification of the oil-dependent economy appears to be underway. New competition laws have been signed, as have new rules to foster foreign investment. Moreover, the government introduced a new export-substitution program and it can be gathered from Lourenço’s appeal to the IMF—especially during a period of rising oil prices—that the new president hopes for even further-reaching economic reforms and plans to use the conditions of any loan as justification for the much-needed changes. The IMF loan will provide cover to the government’s plans, leaving the door open for much wider-sweeping changes than could be expected without one.

The Angolan economy is seen returning to growth this year, on the back of favorable global oil prices, which bodes well for the external sector of Sub-Saharan Africa’s second-largest oil exporter. Meanwhile, over the longer term, economic activity should benefit from fiscal consolidation measures, moderating public debt and the transition away from a pegged exchange rate—the key pillars of the President João Lourenço’s economic reforms. FocusEconomics panel of 11 Angola analysts projects GDP to expand 1.9% in 2018, which is unchanged from last month’s forecast, and 2.3% in 2019.


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Author: Almanas Stanapedis, Economist

Date: September 17, 2018


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