In a statement recently released by the Angolan Finance Ministry, the government stated that it would begin working with the International Monetary Fund (IMF) to help restore the economy after recent difficulties due to the major decline in oil prices. Specific discussions are expected to begin next week during the IMF and World Bank spring meetings in Washington. Angola’s economy relies heavily on oil, which accounts for more than 95% of the country’s export earnings and two-thirds of government revenue. As a result of crude oil prices currently being valued at less than half of the level it reached in mid-2014, Angola and other oil-dominating countries, such as Nigeria, Egypt, and Libya, are struggling to stay afloat economically.
According to the ministry, there has already been significant diversification since the price decline began and the share of oil in total economic activity has declined since the mid-1980’s. The non-oil sector has gone from only 40% of the economy then to just under 70% now, demonstrating how central oil and exporting that oil is to the government’s finances. In the short-term, the government aims to refocus on agriculture, fisheries, and mining in attempts to diversify the economy. The government also announced that fiscal reforms will be a large part in addressing the country’s issues, and have already been implemented in the past year.
While the deal with the IMF may be beneficial for Angola, it could have major consequences for Portugal. As one of the Eurozone’s most fragile economies, its companies have invested heavily in Angola in recent years as a result of the economic crisis in its own country. Portugal requested a 3-year bailout from the IMF and European Union five years ago. Angola is a former Portuguese colony, and is the country’s fourth-largest export market. Companies within the country are also suffering from dollar shortages, and banks are being squeezed. Banco BPI SA, which owns 50.1% of Angola’s private lender, saw its shares close down 6% on Wednesday. The bank is attempting to reduce its exposure to Angola under orders from the European Central Bank, as Angola represented more than half of its profits last year.
Capital Economics estimates the size of the bailout to be around $8 billion, which is 9% of its gross domestic product. In the last year, Angola opted to raise $1.5 billion to plug foreign currency into the economy through the issuance of a 10-year Eurobond. With a yield of 9.5%, this decision was quite costly. Even the government has admitted that its dependence on oil is too high. In a statement, however, they state that “the government is committed to improving transparency in the public finances and banking sector. There is a strong belief within the government that the continued drive toward enhanced transparency can be accelerated by partnering with an institution like the IMF.