IMF ARTICLE IV TEAM GIVES ANGOLA HIGH MARKS

UNCLAS SECTION 01 OF 02 LUANDA 000564

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TAGS: EFIN ECON AO
SUBJECT: IMF ARTICLE IV TEAM GIVES ANGOLA HIGH MARKS

REF: LUANDA 250


1. (SBU) Summary. On June 5, 2007, the IMF Article IV team,
which is close to winding up its first visit to Angola since
the GRA definitively walked away from a formal program with
the IMF (reftel),presented a preliminary summary of its
findings to representatives of embassies and international
organizations. Calvin McDonald, Advisor to the IMF,s Africa
Department, predicted that the Angolan economy would grow by
35 percent in 2007. He reckoned that the economy is now at a
medium risk of debt distress over the long term as its
foreign exchange reserves have more than doubled to USD 8.5
billion dollars. While budgets have grown, the execution of
capital expenditures as laid out in the budgets remains low
-- at about 50 percent -- and the GRA must improve its
capacity for medium-term planning. Although McDonald readily
admitted that the IMF has a long way to go on critical
sticking points involving transparency, he said his team had
enjoyed a good working relationship with the Angolans )
essential in a process of continuous interchange with
host-country financial officials -- and expressed his
confidence that the IMF-Angola relationship is a solid and
continuing one. This may be a lower-level delegation than
IMF sent when it hoped an agreement was imminent, yet ready
and willing to tackle technical issues with the Angolans.
End Summary.


2. (SBU) On June 5, 2007, Calvin McDonald, Advisor to the
Africa Department of the IMF and leader of the Article IV
consultation team now nearing the end of its visit to Luanda,
gave embassy and international organization representatives a
preview of its findings, which it expects to formally present
to the IMF board on August 24.

The Economy at Large
--------------

3. (SBU) The overall economic indicators are good, McDonald
reported, with real 2006 overall GDP growth at 19 percent and
real 2007 overall GDP growth estimated at 35 percent. The
oil sector should grow 40 percent and the non-oil sector 25
percent. With 2006 inflation at 12 percent, the GRA has a
chance of meeting its policy goal of 10 percent this year,
said McDonald. One participant noted that every item he sees
except gasoline has risen more than 12 percent in the last
year. McDonald conceded that the items in the CPI market
basket and the weights given to them are in need of updating.
The government,s recent moves to appreciate the currency
show the importance it gives to controlling inflation, he
continued, by keeping down the cost of imported goods.
(Note: Since the BNA cannot control the interest rate, its
only instrument is the nominal exchange rate. End note.)
Ambassador Efird asked whether the GRA had yet developed a
way to enforce coherency on fiscal policy. McDonald conceded
that tensions between the National Bank of Angola (BNA) and
the Ministry of Finance (MOF) continue. Although the BNA,s
foreign exchange operations cause it to operate at a loss, it
still has not been recapitalized by the MOF.


4. (SBU) Government revenues, fed by oil income, have
exceeded the GRA,s capacity to execute its growing budgets.
Although the 2007 budget was drafted as a deficit budget, Mc
Donald explained, it will probably, as in 2006, only be able
to execute 50 percent of its USD 15.5 billion capital budget,
leaving the GRA with a surplus equal to 2.5 percent of the
GDP in addition to last year,s slightly smaller surplus.
Angola,s reserves have also more than doubled this year,
from USD 3.5 billion to USD 8.5 billion. The cushion of
reserves permitted the GRA to pay the principal and part of
the interest on its debt to members of the Paris Club,
although penalty interest remains outstanding. McDonald He
reported that the IMF had been told by the GRA hat it is
reconciling its own data on amounts owed and paid. (Some
countries have been overpaid, others underpaid due,
apparently, to GRA accounting difficulties.) When this
reconciliation is completed the Minister of Finance will
approach the Paris Club again. The IMF, he continued, is
&neutral8 on Paris Club issues but has encouraged Angola to
regularize its relationship to its creditors as soon as
possible.

The Fiscal Sustainability Challenge
--------------

5. (SBU) On mid-term issues where the IMF has engaged the
GRA, and challenged it to develop the capacity to plan beyond
the current two-year horizon. Mc Donald sees the GRA facing

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several challenges. First, that of fiscal sustainability,
i.e., designing budgets and encouraging economic growth in
the non-oil sector that will carry the GRA over any future
oil production decline or any shock from falling oil prices.
(Note: The IMF does not include possible future discoveries
in its calculations and thus looks at Angola as reaching its
peak production in 2012. End note.)

The Debt Sustainability Challenge
--------------

6. (SBU) Angola,s second major challenge is debt
sustainability. McDonald estimated that for the long-term
Angola is at a medium risk of debt distress, although he
clarified that the Article IV team has still not finished its
analysis of the debt data it has collected during this visit.
He described the GRA as very forthcoming in supplying
information on debt and credit lines. Poverty reduction and
long-term debt sustainability will require a stronger non-oil
economy. While the construction sector has begun to grow, so
must other sectors. Angola has to change its regulatory
environment in order to attract more foreign direct
investment (FDI). For the sake of debt sustainability,
McDonald argued, the GRA needs a clear fiscal rule to mandate
saving oil revenues when prices rise above a determined
level. (Note: Angola,s Deputy Prime Minister, Aguinaldo
Jaime, described a similar mechanism to A/S Frazer, septel.)
When revenues fall, the GRA will have to decide whether to
spend its reserves, cut spending, borrow or adjust the
exchange rate. The IMF also discussed the intergenerational
transfer of oil wealth with the GRA, but met with little
response.

Structural Issues
--------------

7. (SBU) Among structural issues facing Angola, McDonald
identified the management of public finances. Although
public investment projects make up a large fraction of the
budget, the GRA does not have the means to manage effectively
and guard against waste. The Ministries of Finance and
Planning need to coordinate better when preparing the budget
and executing it. The GRA must also start budgeting for
maintenance and operation of the new roads and buildings
funded through public investment projects. He cautioned that
capital and current accounts budgets must be reconciled. The
IMF has prepared a Fiscal Report on the Observance of
Standards and Codes (a Fiscal ROSC),which addresses this
problem but has not yet been approved by the GRA and
therefore has not been published. In response to ea
question, McDonald elaborated that the IMF continued to
believe that Sonangol operations should be more transparent
with Sonangol,s role as an operator separate from its role
in granting concessions.

Angola,s Relationship with the IMF
--------------

8. (SBU) In answer to a question, McDonald said that the IMF
has adjusted to the GRA,s decision earlier this year not to
enter into a structured agreement with the IMF and is moving
forward with consultations and sharing its expertise with the
Angolan financial sector.

Comment
--------------

9. (SBU) This yeQ,s article IV visit is an opportunity for
both the IMF and the GRA to test a relationship that will
continue, but without the structural agreement that for years
had seemed to be just around the corner. The team may change
some of its conclusions based on further analysis of data,
but McDonald,s narrative stayed close to previous IMF
discussions of Angola. In conversation after the briefing,
McDonald indicated that most of the hard problems, like
Sonangol,s dual role, remain the subjects of future
discussion, leaving the IMF to concentrate now on areas where
it can make progress in modernizing the financial system and
strengthening the relationship between the IMF and its GRA
counterparts.
EFIRD