ANGOLA APPRECIATES ITS CURRENCY

UNCLAS LUANDA 000518 SIPDIS SENSITIVE SIPDIS FOR AF/S NSC FOR BPITTMAN E.O. 12958: N/A TAGS: EFIN ECON AO SUBJECT: ANGOLA APPRECIATES ITS CURRENCY REF: LUANDA 441 ¶1. (SBU) On May 7, 2007, Angola announced a 6.25 percent increase in the value of the Angolan Kwanza (Kz) from 80 to 75 Kwanza per dollar. The GRA uses the Angolan Central Bank's (BNA) monopoly position in exchanging dollars for kwanza as its primary instrument in combating currency inflation. Because the commercial banking system remains under-developed, adjustments to the interest rate has yet to become an effective monetary policy instrument for the BNA. ¶2. (SBU) BNA Vice Governor Ruy Miguens told us that the decision to appreciate the Kwanza came after careful consideration and discussion. He conceded that the quantity of dollars in the economy had risen considerably, putting some pressure on the BNA to adjust the exchange rate. (Comment: Miguens was reluctant to elaborate on the exchange rate adjustment, implying that the GRA made the exchange-rate decision at a level above the BNA. End comment.) The Brazilian local director of an international accounting and business consulting form attributed the Kwanza,s strengthening against the dollar to the BNA,s desire to absorb excess dollar liquidity in the economy. The influx of petroleum earnings has greatly increased the amount of money in circulation. In 2004 alone, he said, currency (M2) increased by 60 percent. This ongoing increase in the money supply puts upward pressure on the Kwanza,s real exchange rate. However, he also noted that, with only one product ) oil -- in its economy, the choice of an exchange rate is almost arbitrary. ¶4. (SBU) Comment: In an economy as highly dollarized as Angola,s the adjustment to the exchange rate will have a minimal effect on trade. While the goods may have grown cheaper in terms of the Kwanza, Angola is paying for them with dollars earned from petroleum exports. In addition, Angola imports from the United States and other countries what it cannot make itself, and that includes almost everything. Meanwhile, oil production has already increased to 1.6 million barrels per day and is expected to surpass 2.2 million barrels per day before year,s end. At 50 dollars per barrel, the additional 600,000 barrels per day would earn the GRA an additional USD 2.2 billion during the last 90 days of the year. FERNANDEZ