Angola: Kwanza dives to all-time low as Central Bank floats the currency
The kwanza slumped to an all-time low against the U.S. dollar at the end of October after the National Bank of Angola (BNA) fully liberalized the foreign exchange regime. In mid-October, the Bank abandoned the trading band that was in place since January 2018, thus allowing the currency to trade freely; its previous policy of controlled exchange rate adjustment prevented the kwanza from depreciating by more than 2.0% at currency auctions. On 8 November, the kwanza ended the day at 462.5 per USD, marking a 18.1% depreciation over the same day in October. Furthermore, the currency was down 33.5% on a year-to-date basis and 33.0% in year-on-year terms.
The Monetary Policy Committee (MPC) of the National Bank of Angola officially confirmed the foreign exchange market overhaul at its extraordinary meeting on 23 October. The adoption of a floating exchange rate regime should help close the gap between the official and black-market rates. The gap has widened significantly due to the increasing shortage of U.S. dollars in the Angolan market amid shrinking foreign currency reserves and sliding oil revenues, which have been adversely impacted by falling crude oil production and faltering global crude prices.
Along with the announcement of the foreign exchange market overall, the Bank announced additional monetary and exchange rate policy measures. The MPC kept the key policy rate stable at 15.50% and maintained the interest rate for the permanent liquidity-absorption facility at 0.00%. However, in a bid to keep inflation under control and stabilize the currency, the Bank increased the coefficient of mandatory reserves in local currency from 17.00% to 22.00%. Furthermore, the BNA abolished maximum annual limits for advance payments and remittances in foreign currency, as well as loosening up limitations on private foreign exchange operations.
In the months ahead, the kwanza is likely to lose further ground before broadly stabilizing next year. Meanwhile, the Central Bank will likely hold off cutting rates until risks to inflation subside, despite the marked pressure to jump-start the economy via looser monetary policy. The NBA’s commitment to prudent monetary policy, which is reinforced by the country’s financing deal with the IMF, leaves the Bank with little space to maneuver if inflationary pressures fail to retreat.