Angola: IMF loan request underscores government's commitment to structural reforms
September 17, 2018
On 20 August, the Angolan government announced that it was seeking financial support from the IMF after receiving several months’ worth of technical assistance, and that it had asked to initiate discussions on an economic program supported by the Extended Fund Facility (EFF). The decision to pursue a loan came on the heels of a two-year recession and worse-than-expected economic growth at the outset of the year. Amid eroding fiscal and external buffers, rather than pursue a full bailout of the public finances, new President João Lourenço stressed that he was hoping to secure longer-than-usual repayment terms in exchange for structural reforms. As such, the sought-after loan appears intended to provide the government with greater political cover as it pursues a more aggressive economic-reform agenda and doubles down on its promise to eradicate deep-rooted corruption.
An IMF loan would lend greater legitimacy to the government’s anticipated reforms, leaving the door open for far wider-sweeping changes than could be expected without one. Although diversification of the oil-dependent economy appears to be underway, progress has been sluggish. New competition laws, as well as new rules to foster foreign investment and a new export-substitution program, have done little to meaningfully improve the public finances. That said, Lourenço has taken several important steps in cracking down on corruption and laying the groundwork for change. In an effort to bolster foreign reserves, the new government scrapped the kwanza’s peg to the dollar in January. Moreover, among its more notable priorities, the new administration removed relatives of former President José Eduardo dos Santos from positions of power, including heads of the state-owned oil group and sovereign wealth fund, as well as the Central Bank governor.
Highlighting the new president’s commitment to reform, Vânia Patrícia Duarte, an economist at Banco BPI, noted:
“[Lourenço] seems to have a strong commitment [to] reforms; in fact, he [has been implementing] important measures since the elections, which reflect his intention to change the current economic and financial situation in Angola. Considering this, we think that [his] reform agenda is not a temporary commitment [and] should continue even with the recovery of oil prices. And the proposed cooperation with the IMF is just another signal of the government’s commitment [to] this process.”
Cooperating with the IMF would also serve to reduce Angola’s borrowing costs in debt markets and, importantly, provide some relief from its reliance on Chinese financing. Angola has reportedly racked up USD 25 billion of debt owed to China, one of the region’s preeminent lenders, and seems close to exhausting its credit acquired on the basis of oil concessions. In seeking a deal with the IMF, the government appears to be reducing its exposure to China’s economic and political clout, which hangs over its long-term outlook as interest payments are expected to balloon.
Sara Confalonieri, an economist at BNP Paribas, argues that Laurenço’s request stems from more than just his commitment to economic reforms:
“I suspect the willingness to reduce [China’s] power in Angola’s financing needs and/or to renegotiate the bilateral external debt with Chinese partners at better conditions [is behind the government’s request. Moreover, it] will allow Angola to justify an austerity plan which would be hardly socially accepted otherwise.”
As it stands, Lourenço’s appeal to the IMF—especially during a period of rising oil prices—suggests the new president hopes to enact far-reaching economic reforms. Moreover, it seems that he intends to use the conditions of any loan as justification for much-needed change. Although it remains to be seen what exactly this deal will look like, cooperating with the IMF will also give the government some breathing space as it reduces its reliance on Chinese financing. Risks to the outlook, however, persist. High poverty rates and huge social gaps, exposure to global oil prices, resistance of the established political elite and high indebtedness all threaten to undermine the country’s long-term prospects. As it stands, however, economic growth is expected to recover next year and gather momentum over the medium-term.
Author: Almanas Stanapedis, Economist