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GDP Growth and Public Finance in Angola: FY2019/20

GDP Growth and Public Finance in Angola: FY2019/20

Real GDP Growth in Angola declined drastically after the post-2014 international commodity crisis that led to a halving of the price of crude oil. GDP growth declined from an annual average of -0.6% from 2015 to 2017, to -1.7% in 2018[1]. During this period the price of crude oil declined to its lowest annual average of USD 40.4 per barrel in 2016 (2015: USD 51.4 per bbl.) before recovering to USD 52.5 per barrel in 2017[2]. The price of crude oil has continued improving to USD 70.7 per barrel in 2018 but this has not been sufficient to enable a recovery in GDP growth.

 

Figure 1: Real GDP Growth and Inflation in Angola (2015-2021)

Real GDP Growth and Inflation in Angola (2015-2021)

Source: IMF 2018, Angola Request for An Extended Arrangement Under the Extended Fund Facility. Note: (*) Figures from 2018 onwards are projections from the IMF, 2018.

Due to the strong dependence on oil exports, Angola’s economic recovery has been constrained by the improvements in the price of crude oil. Crude oil exports constitute more than 90.0% of total export earnings in Angola. Therefore, the collapse in the oil price put pressure on gross international reserves forcing the government to initially depreciate the AOA before abandoning its fixed exchange rate regime in January 2018[3]. The annual average AOA exchange rate depreciated by an annual average of -15.5% against the USD from AOA 120.0 in 2015 to AOA 166.0 in 2017[4]. The depreciation in currency continued under the floating exchange rate to average rate of AOA 258.5 in 2018, ending at a peak of AOA 308.7 in 4Q2018[5]. Due to a relatively high reliance on imports in Angola, the AOA depreciation resulted in an increase in inflation from an annual average of 9.2% in 2015 to 29.8% in 2017, before moderating to 20.7% in 2018[6].

 

Given the difficult macroeconomic context of slow growth and high inflation, the government of Angola responded by adjusting public spending initially and later supporting the economic recovery through increased public spending to stimulate aggregate demand. In 2015 and 2016, the government of Angola reduced public spending by an annual average of -15.5% as total government revenue declined by -18.7%. In 2017 as government revenue recovered with the improvements in oil prices, the government of Angola increased public spending by 32.2% mainly through increased capital expenditure financed through public debt. Although this move by the government has resulted in an increase in public debt, the fiscal stimulus is much needed given that slow growth and high inflation has had a devasting impact on the most vulnerable Angolans.

 

Figure 2: Sources of Government Revenue in Angola (2015-2021)

Sources of Government Revenue in Angola (2015-2021)

Source: IMF 2018, Angola Request for An Extended Arrangement Under the Extended Fund Facility. Note: (*) Figures from 2018 onwards are projections from the IMF, 2018.

The government of Angola has started implementing its National Development Plan for 2018–22. The NDP2018–22 is aimed at extending the income transfer programmes to vulnerable groups through small-scale income generation initiatives and enhancing access to basic education and health[7]. Despite the ongoing macroeconomic reforms, the government has been more eager to achieve its economic balance than increasing than social wage. Little has been done until now to protect the most vulnerable Angolans from descending further into the poor living standards caused by poverty and income inequality.

 

As a result of the higher public spending financed through public borrowing, public debt has risen from an annual average of 67.1% of GDP from 2015 to 2017, to 91.0% of GDP in 2018[8]. This largely due to capital expenditure which increased from AOA 736.0 billion (approx. USD 6.1 billion) in 2015 to AOA 1.3 trillion (approx. USD 8.0 billion) in 2017 (2018: AOA 1080.0 billion)[9]. As a result of the higher borrowing and increased capital expenditure, the fiscal deficit widened from -AOA 407.0 billion (-2.9% of GDP) in 2015 to -AOA 1.3 trillion (-6.3% of GDP) in 2017[10]. The government of Angola has since reduced its spending as the price of oil and GDP growth continue recovering.

 

Figure 3: Government Revenue and Expenditure in Angola (2015-2021)

Government Revenue and Expenditure in Angola (2015-2021)

Source: IMF 2018, Angola Request for An Extended Arrangement Under the Extended Fund Facility. Note: (*) Figures from 2018 onwards are projections from the IMF, 2018.

From 2018, the government of Angola moderating public spending and reducing its borrowing which allowed for fiscal buffers to accumulate. Total government revenue is projected to have increased by 58.8% mainly due to a strong recovery in tax revenue which is projected to have grown by 64.1% in 2018[11]. Despite the windfall recovery spurred on by the improved oil prices, total government spending is projected to have increased by 14.4%[12]. Therefore, the government of Angola has taken a very prudent fiscal policy approach to guide its macroeconomic recovery from the post-2014 economic crisis. At first, by adjusting its public spending the government of Angola absorbed some of the economic shocks caused by the collapse in the oil price. In 2017, as the price of oil began recovering, the government supported the GDP growth recovery through expanding capital expenditure to spur domestic demand through public spending. The government of Angola has been able to support the GDP growth recovery and attained a fiscal balance that places it on a more sustainable fiscal position.

 

The accumulation of fiscal buffers in 2018 has reduced the fiscal deficit to a projected surplus of AOA 108.0 billion (0.4% of GDP). In the forward-looking medium-term the fiscal balance is projected to average AOA 68.0 billion (0.3% of GDP) from 2019 to 2021[13]. Real GDP growth is projected recover to an annual average of 3.0% from 2019 to 2021, whilst inflation is projected to moderate to 13.8%[14]. During this period public debt is projected to decrease from 91.0% of GDP in 2018 to an annual average of 74.9% of GDP[15].

 

Figure 4: Government Expenditure Composition in Angola (2015-2021)

Government Expenditure Composition in Angola (2015-2021)

Sources: IMF 2018, Angola Request for An Extended Arrangement Under the Extended Fund Facility. Note: (*) Figures from 2018 onwards are projections from the IMF, 2018.

The mid-2014 oil price shock had an important impact in Angola’s economy, due to high dependence oil exports and the lack of economic diversification in terms of domestic production. Prior to this little was done in order to decrease the country’s dependence on oil and to prepare the economy to face future potential crises. The government’s NDP2018-22 and other policy interventions are aimed at, (i) adopting sound policies to promote macroeconomic and financial stability; and (ii) implementing structural reforms to diminish the dependence on oil, promote economic diversification, and reduce vulnerabilities[16]. However, these interventions are not being accompanied by proper policies to assist the most vulnerable groups who are most affected by the ongoing reforms which have reduced public social investments. Although the crisis has raised the government’s concern with raising living standards and reducing poverty by creating conditions for sustainable and inclusive GDP growth, the government of Angola needs to elevate socioeconomic develop to the level of its commitment to macroeconomic stability.

 

Angola is leaving the recession of 2018 to a recovery period where GDP growth is projected to average 3.0% from 2019 to 2021[17]. The fiscal position is projected to improve into a small surplus over the forward-looking medium-term and public debt is projected to moderate to an average of 72.0% of GDP from 2019 to 2023[18]. Inflation is projected to remain high even though it is projected to moderate to lower levels in the forward-looking medium-term. This illustrates the continued need for economic diversification in the Angolan economy in order to reduce dependence on imports and reduce the pass-through inflation caused by exchange rate depreciation. Nonetheless, the government of Angola is planning to continue its public investment to attract private sector investment and diversify the economy. Capital expenditure is projected to continue growing an annual average rate of 28.5% from 2019 to 2021[19]. Even though this fiscal policy approach is commendable, the final outcome will depend on whether the government is able to attract significant private sector investment to diversify the Angolan economy away from its current depends on oil exports.

 

Figure 5: Gross Government Debt in Angola (2015-2023)

Gross Government Debt in Angola (2015-2023)

Source: IMF 2018, Angola Request for An Extended Arrangement Under the Extended Fund Facility. Note: (*) Figures from 2018 onwards are projections from the IMF, 2018.

Thus, the government of Angola appears to taken a prudent fiscal policy by supporting the GDP growth recovery through higher public spending during the slump; and moderating public spending in order to accumulate fiscal buffers during the recovery period. Nonetheless, the government of Angola needs to continue investing in improving the living standards of Angolans affected by poverty and income inequality. Hence, income generation initiatives and broadening access to basic education and health are urgent to improve living conditions, economic inclusion, and, consequently, the country´s prosperity and stability in the long-term.

 


[1] IMF 2018. Angola Request for An Extended Arrangement Under the Extended Fund Facility, International Monetary Fund: Washington. Available At: https://www.imf.org/ [Last Accessed: 7 July 2019].
[2] IMF 2019. Angola Latest High Frequency Macroeconomic Data, International Monetary Fund: Washington. Available At: https://www.imf.org/ [Last Accessed: 7 July 2019].
[3] BNA 2018. Monthly Economic Bulletin: January, National Bank of Angola: Luanda. Available at http://www.bna.ao/ [Last Accessed: 7 July 2019].
[4] IMF 2018. Angola Request for An Extended Arrangement Under the Extended Fund Facility, ibid.
[5] IMF 2019. Angola Latest High Frequency Macroeconomic Data, International Monetary Fund: Washington. Available At: https://www.imf.org/ [Last Accessed: 7 July 2019].
[6] IMF 2018. Angola Request for An Extended Arrangement Under the Extended Fund Facility, ibid.
[7] IMF 2018. Angola Request for An Extended Arrangement Under the Extended Fund Facility, ibid.
[8] IMF 2018. Angola Request for An Extended Arrangement Under the Extended Fund Facility, ibid.
[9] IMF 2018. Angola Request for An Extended Arrangement Under the Extended Fund Facility, ibid.
[10] IMF 2018. Angola Request for An Extended Arrangement Under the Extended Fund Facility, ibid.
[11] IMF 2018. Angola Request for An Extended Arrangement Under the Extended Fund Facility, ibid.
[12] IMF 2018. Angola Request for An Extended Arrangement Under the Extended Fund Facility, ibid.
[13] IMF 2018. Angola Request for An Extended Arrangement Under the Extended Fund Facility, ibid.
[14] IMF 2018. Angola Request for An Extended Arrangement Under the Extended Fund Facility, ibid.
[15] IMF 2018. Angola Request for An Extended Arrangement Under the Extended Fund Facility, ibid.
[16] IMF 2018. Angola Request for An Extended Arrangement Under the Extended Fund Facility, ibid.
[17] IMF 2018. Angola Request for An Extended Arrangement Under the Extended Fund Facility, ibid.
[18] IMF 2018. Angola Request for An Extended Arrangement Under the Extended Fund Facility, ibid.
[19] IMF 2018. Angola Request for An Extended Arrangement Under the Extended Fund Facility, ibid.

 

 


Nathalia Novaes Alves

Former Regional Analyst

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