The IMF Executive Board’s lack of revelations in concluding its USD1.3bn Stand-By Agreement (SBA) this week with Angola (initiated in November 2009) was not surprising and moreover the expected final disbursement of 132.9 validates in our view the completion of a paradigm shift in terms of (i) macroeconomic stability and (ii) fiscal accountability (in this case another way of singling out the predictability of oil revenue transfers to the Treasury via [hitherto opaque] quasi-fiscal operations by Sonangol, the state oil-company-cum sovereign wealth vehicle).  To the first point the National Bank of Angola’s (BNA) introduction of a benchmark interest rate last fall (in addition to an interbank (LUIBOR) rate, which in practice acts as a guide for monetary policy and as a reference rate for commercial bank lending rates) provided a key fillip to enhanced monetary credibility upon which much of extreme exchange rate volatility traditionally emanates.  Indeed the BNA, which manages a floating exchange rate regime and utilizes an auction system as its primary tool for setting the exchange rate, saw inflation reach record lows in H2 2011 (from 15.3 percent at the end 2010 to within the 12 percent targeted band one year later) while its external position grew, allowing it to ease rates by 25bp in January while the 182-day T-bill rate, which began 2011 at 11.4 percent, fell to roughly 4 percent at the beginning of this year.

The disinflationary trend is an ideal backdrop for the newly effected energy sector FX regime requiring the financial intermediation of petroleum operations by banks domiciled in Angola[i], though the efficiency and ease of said defacto de-dollarization will hinge largely, the IMF notes, on the development of kwanza-denominated saving instruments.  The implication on domestic bank revenues going forward, needless to say, is quite positive, though what effects increased onshore dollar liquidity will have on the kwanza as well as the monetary aggregate are less clear.  To this end an IMF working paper on Angola from 2009 remains pertinent especially given how the country’s M2 and credit growth have rapidly surpassed nominal GDP growth since the global credit crisis:

“Excess liquidity, which is measured by positive deviations of M2 from its equilibrium level, adds to demand pressures, and contributes to inflation with a lag. This underlines the importance of closely monitoring the broad money growth as well as improving liquidity management. In this context, while greater sterilization efforts by the BNA are warranted to curb the rapid money growth, the analysis also suggests that fiscal policy has a role to play in sharing the burden of further disinflation by ensuring that public spending is in line with the existing macroeconomic and administrative capacity.”[ii]

This observation ties into the second point from above, namely the need for fiscal policy to scale up public investment as a prerequisite of sorts to economic diversification and inclusive growth as well as offsetting strong internal demand dynamics in the face of limited access to imported goods due to poor logistics (which underpins sticky core inflation).

Gross savings as a percentage of GDP, for instance, has actually fallen of late, diverging from the country’s growing current account surplus (itself a function of the country’s Cabinda Crude which ended February at an all-time high of 124USD/bl and accounts for ~96 percent of exports) which per the pair’s standing accounting relationship implies that investment has not only fallen in comparison with output but at a much faster rate (growth in surplus/output is 700bp more than the comparable nominal growth figure).  The question remains how to manage fiscal accountability with the need to address inherent, “structural weakness” in the non-oil sector (see Mahvash Qureshi’s 2008 study “Competitiveness of Angola’s Non-oil Sector: Challenges and Prospects”) given the latter increasingly looks to act as a long-term monetary headwind given rising internal demand pressures while the former remains a short term exchange rate driver, a quintessential catch-22 for government officials.

[i] Van Welzen, Pieter:  New foreign exchange regime for the Angolan oil and gas sector.  Available at:

[ii] Klein, Nir and Kyei, Alexander.  Understanding Inflation Inertia in Angola.  May 2009.  WP/09/98.