Armando Manuel, Angola’s finance minister, emphasized his country’s excellent relations with the international financial institutions in his February speech at Chatham House. There was no hint at that time however that Angola was shortly to seek financial support from the IMF. In Angolan government circles, IMF assistance is seen as coming with too many conditions, and most believed that with international reserves of about $24.5 billion in January, Angola did not need IMF support. But oil prices have remained significantly below $45 per barrel throughout the first quarter of the year, the figure used to calculate Angola’s 2016 budget, and are unlikely to increase dramatically any time soon. With elections looming in 2017, there is also reluctance to reduce state spending.
It has therefore become increasingly urgent for the government to find alternative means of covering the resulting fiscal deficit, making a deal with the IMF more attractive. No loan has been agreed upon yet, but negotiations are scheduled to be initiated during the IMF and World Bank Spring Meetings starting this week. Manuel will not have welcomed that news of these negotiations broke via the international media, presenting it as an Angolan bailout. The Ministry of Finance responded swiftly to clarify that Angola is not close to bankruptcy, although the true state of Angola’s fiscal health is difficult to assess due to weak transparency and poor financial management in numerous state owned companies.
This is not the first time that Angola has turned to the IMF for assistance. In 2009, after the collapse of oil prices and the spending of significant central bank reserves to maintain a strong foreign exchange rate for the kwanza, Angola went to the IMF for a stand-by arrangement to address short-term balance of payment problems. The instrument most likely to be used this time around is an Extended Fund Facility (EFF), designed to support middle income countries with significant medium-term balance of payment issues. As such it is better placed to assist Angola with its stated objective of economic diversification.
Angola graduated to upper middle-income country status in 2012, an achievement driven almost exclusively by the oil boom it has experienced over the past decades, which makes it ineligible for the concessional financing (loans at discounted interest rates) reserved for lower income countries. Instead, the IMF loan will be charged at market-based interest rates. This removes a compelling argument for seeking assistance from the IMF as Angola’s debt sustainability indicators are rapidly deteriorating and might struggle to maintain its status as an upper middle-income country.
But an IMF arrangement would nonetheless represent a unique opportunity for Angola to obtain financing and address some of the deeper structural issues affecting its economy at the same time. Chief among these is the need for greater transparency and accountability in state-owned enterprises (including but not limited to Sonangol, the national oil company). We know from crises elsewhere that a lack of transparency leads to significant fiscal risks, notably hidden liabilities that can make a debt burden become unsustainable overnight. State-owned enterprises should publish audited annual financial statements and be brought under increased parliamentary oversight.
Other reform areas will need to be considered too, but the IMF knows that placing too many demands on a government with limited institutional capacity may result in suboptimal outcomes. A coordinated strategy with the African Development Bank, the World Bank and other stakeholders would increase the chances of success. Recent Chatham House research has found that there is significant scope for improvement in public investment management, particularly by reducing the temptation for corruption through better procurement processes and oversight. As the Angolan government tightens its fiscal belt, it’s also important that social expenditure (both recurrent spending and public investments) such as health and education are safeguarded. The recent outbreak of yellow fever demonstrates the fragility of the country’s health system and has impacted on the investment climate.
An IMF deal will not turn around Angola’s economic fortunes on its own. It will provide some financial assistance but more importantly it could encourage reform. Success though depends on genuine Angolan government appetite to embrace deep structural changes rather than short-term measures designed to increase liquidity until oil prices strengthen. What Angola’s leaders still need to fully appreciate is that the era of high oil prices may never return and that the old ways of doing business must change.
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