Press Release No. 24/260

Post Financing Assessment (PFA) Consultation with Angola

July 3, 2024

Washington, DC: The Executive Board of the International Monetary Fund (IMF) concluded the Post Financing Consultation (PFA) with Angola.[1]

Angola’s capacity to repay the Fund is adequate though subject to risks. Angola remained resilient in the face of significant challenges in 2023, including weaker oil production and
prices. The authorities’ efforts to follow through on economic reforms started during the EFF 2018–21, including in the areas of fiscal management, revenue mobilization, debt management, monetary policy, and financial stability, have helped enhance the resilience of the Angola economy.

Output growth remained positive at 0.9 percent in 2023, thanks to the recovery in oil production in Q4; and is expected to stabilize at an average of 3.2 percent in the medium term, aided by the authorities’ continued structural reform and diversification agenda. Inflation increased to its highest level in recent years, due to currency depreciation and supply constraints. However, inflation is expected to start declining in the second half of 2024 with improved monetary policy transmission and fading supply shocks.

Spending adjustments helped contain the impact of weaker oil prices and lower production in 2023, though the gains from fiscal consolidation were lower-than-anticipated. The non-oil primary fiscal deficit (NOPFD), estimated at 4.4 percent of GDP in 2024, is expected to steadily decline in the medium-term on modestly improving non-oil revenues, moderately lower current and capital expenditures, and savings from fuel subsidy reform.

Angola’s oil dependence and large external debt continue to pose fiscal risks but targets under the Fiscal Sustainability Law are still projected to be reached.  Downside risks to the outlook include (i) a decline in the domestic oil production or a significant fall in the international oil prices; (ii) slippages in the fuel subsidy reform; and (iii) negative spillovers from international capital markets.

Executive Board Assessment[2]

The recovery from the 2023 shock is underway, the baseline outlook is favorable, but risks remain tilted to the downside. Angola was simultaneously hit by a decline in oil production and an increase in external debt payments in 2023. The ensuing sharp exchange rate depreciation helped preserve external buffers and mitigate the fiscal impact. However, reduced FX earnings contributed to exchange rate depreciation and inflationary pressures, and reduced non-oil economic growth, underlying the need to improve monetary operations and the functioning of the FX market. The baseline outlook envisages a gradually improving growth performance but the significant exposure to the oil sector creates significant risks.

Angola’s capacity to repay the Fund is adequate, with manageable risks. Under the baseline, Angola’s projected repayments to the Fund will increase over the medium-term, peaking in 2026. Under a severe shock scenario, the projected capacity to repay indicators would weaken but remain manageable. Steps to mitigate this shock, including allowing the exchange rate to function as a shock absorber, continuing with the fuel subsidy reform and rationalizing spending, would be crucial.

Sustained fiscal adjustment is required to mitigate risks. It is critical to rationalize spending in the near-term and continue the fuel subsidy reform (with mitigation measures to support the vulnerable and a proactive communication strategy). The authorities should also build additional buffers via tax policy measures to mobilize non-oil domestic revenues and make further progress on the fiscal structural agenda, including public financial management and public investment management reforms.

Continued efforts on enhancing the monetary policy framework are needed to reduce inflation and support non-oil medium-term growth. Maintaining a tighter bias in monetary policy in the short-term and improving interbank liquidity management—coupled with a gradual move toward greater exchange rate flexibility—would help ease inflation, better anchor inflation expectations, and reduce public and private sector borrowing costs. Policy coordination between the MoF and the BNA on money market operations is essential for effective interbank liquidity management and would help improve both fiscal and price stability outturns.

Continued efforts are needed to bolster financial stability. The BNA has made progress in operationalizing new frameworks for bank supervision and resolution but needs more decisive implementation and enforcement. To safeguard financial stability and reduce contingent fiscal risk, the BNA should prepare for a decisive resolution or liquidation of problem banks, as necessary, while protecting small depositors and minimizing costs to tax-payers. Ongoing efforts to establish fiscal backup funding for the DPF and to strengthen legal protection of the BNA should be expediated.

Implementing broad ranging structural reforms is vital to improve business environment and maintain growth in the context of a long-term decline of the oil sector. The implementation of the NDP should be consistent with a medium-term fiscal framework and would benefit from the PIMA recommendations. Addressing issues related to governance, gender, and climate change remains critical to achieving economic diversification and sustainable growth.

[1] After completing an IMF lending program, a country may be subject to a Post Financing Assessment (PFA). It aims to identify risks to a country’s medium-term viability and provide early warnings on risks to the IMF’s balance sheets. For more details click here.

[2] The Executive Board takes decisions under its lapse-of-time procedure when it is agreed by the Board that a proposal can be considered without convening formal discussions.