The economic outlook for Angola has been transformed by the peace agreement of April 4, 2002, and by increasing government revenues from oil. Since the end of violent conflict, about 4 million displaced persons have returned to their communities. Oil production, which currently accounts for about half of GDP, is expected to double to 2 million barrels per day by 2007. Large
diamond deposits and considerable natural resources in agriculture, timber, and fishing also remain to be exploited.
GDP grew strongly in 2004, largely reflecting rising oil production, and is expected to grow at an annual average rate of 18 percent during 2005–2007. However, poverty remains deeply entrenched.
Inflation has declined substantially since mid-2003, to 31 percent in December 2004, following a major change in macroeconomic policy implementation, which has largely stabilized the nominal exchange rate. rate. The policy has involved active absorption of domestic liquidity by central bank intervention in foreign currency to support a tightening in monetary policy and improvements in fiscal control.
Initial estimates indicate a substantial decline in the fiscal deficit between 2003 and 2004, reflecting the rise in oil prices, reductions in fuel subsidies, and lower spending in real terms on goods and services. Unification of the budget and publication of information on oil revenues have improved the transparency of fiscal operations, but data remain unreliable.
Progress on structural reform and policies to reduce poverty has been limited. Noncompetitive practices, privileged access, and costly bureaucratic procedures hamper the growth of the non-oil private sector and contribute to high margins in domestic prices. Public spending is high in relation to national income, but with limited provision for the social sectors. The PRSP has not yet been finalized.
The authorities’ draft budget for 2005 seeks to consolidate progress toward macroeconomic stability by targeting a further reduction in inflation during 2005 to 15 percent. Angola remains vulnerable as a result of heavy external borrowing by the public sector and low international reserves. However, if oil prices remain above their long-term trend, vulnerabilities should lessen substantially and macroeconomic prospects would improve.
Sustained progress in three areas would help Angola achieve its medium-term potential. First, macroeconomic policy management should be strengthened with a view to achieving sustainable low inflation. This will require fiscal discipline to avoid procyclical spending as oil prices vary. Second, further fundamental improvements need to be secured in transparency in relation to fiscal operations, including revenues from oil and other natural resources, and in removing conflicts of interest in the
national oil and diamond companies. Third, for the private sector to develop, structural measures are required to improve competition and contract enforcement.
The staff is continuing discussions on a possible staff-monitored program that would help establish a track record of performance, with a view to eventually moving to a Fund-supported arrangement.