IMF urges Angola to phase out ‘regressive’ fuel subsidies as economy improves

Out-Law News | 12 Sep 2014 | 11:47 am | 2 min. read

A new report from the International Monetary Fund (IMF) has called on Angola to phase out “costly and regressive fuel subsidies”.

The IMF staff report said that there is “significant room” to improve the efficiency of public capital spending, which could help to increase resources to improve infrastructure.

In an assessment of the southern African nation’s economy, IMF staff said the authorities had restored macroeconomic stability after the country was hit hard by the global economic crisis. However, the staff’s report (67-page / 2.62 MB PDF) said “emerging fiscal deficits should be addressed to preserve space for the authorities’ objectives of rebuilding infrastructure and reducing poverty and inequality, while continuing to save part of the oil revenues”.

According to the report, Angola’s economic growth is projected to slow to 3.9% this year “and then rally to 5.9% in 2015”. The report said oil production fell in the first half of 2014, “reflecting unscheduled maintenance and repair work in some fields”. The drop in oil output was offset by “robust growth in the non-oil economy, supported by the agricultural sector and the manufacturing and services sectors”.

Oil revenue fell by 14% during January-May 2014, mainly due to a 10% decline in oil production related to “unscheduled maintenance and repair work in some oil fields”, according to the IMF. However, international reserves at the Banco Nacional de Angola “remain adequate” at an equivalent of nearly eight months of imports.

The report said Angola is one of the world’s largest fuel price subsidisers and the fiscal cost of the country’s fuel subsidies “has been increasing in recent years due to higher international fuel prices”.

“Fuel subsidies should be reviewed and gradually reduced. International experience indicates that a public campaign and open consultations with key stakeholders to explain the move can ease the process,” the report said.

IMF analysis showed that “an increase in efficiency could help to increase the amount of infrastructure available without the need to allocate additional resources to capital spending”.

Angola’s oil sector is projected to grow by more than 2% each year on average over the next five years, making medium-term economic growth prospects favourable, the report said. “Declining production in some oil fields would be more than compensated by the commissioning of new fields.”

According to the report, large investments in the non-oil sector as well as the authorities’ policies to improve the business environment “are expected to generate much-needed diversification and job creation, mainly in agriculture but also in electricity, manufacturing, and services”.

Meanwhile, Angola’s medium-term fiscal outlook will be “challenging”, as oil revenues are expected to decline as a share of gross domestic product while there is high demand for increased spending on infrastructure and poverty alleviation, the report said. “Efforts to improve the fiscal position could start already this year... by moderating growth in the wage bill and spending on goods and services.”

In July 2014, the African Development Bank signed a $1 billion agreement to support financial and institutional reform in Angola’s energy sector and encourage increased private investment. Bank president Donald Kaberuka said the bank would work with Angola’s finance ministry as part of a "strategic partnership" to target areas for financing, which would include a range of energy infrastructure projects.

According to the bank, Angola is the second largest crude-oil producer in sub-Saharan Africa after Nigeria. “Angola’s economy is highly dependent on oil, which accounts for 47% of gross domestic product, over 95% of exports and nearly 80% of government revenues,” the bank said.