The Angolan Economy: Formidable Challenges Remain

FORMIDABLE CHALLENGES REMAIN

Economic activity to stabilize after five years of recession

The Angolan government’s 2021 budget proposal recently presented to parliament assumes that economic activity will stabilize next year after five consecutive years of recession. Activity in the non-oil sector is anticipated to advance 2.1%, while low oil prices and a continued decline in production lead to a further contraction in real GDP in the oil and gas sector (-6.2%). The government foresees inflation declining toward 18.7% by end-2021 after reaching 25.0% this year. Meanwhile, the budget proposal also assumes that crude prices will average US$ 39 (the same forecast for this year), which is somewhat conservative bearing in mind the projections of institutions like the IMF that foresee average oil prices at close to US$ 47 in 2021.  

The budget proposal assumes a deficit of 2.2% of GDP

The 2021 budget proposal amounts to AKZ 14,785 billion, standing 9.9% above this year’s revised budget figure of AKZ 13,455 billion. The proposal assumes a fiscal deficit of 2.2% of GDP that compares with a deficit of 4.0% of GDP in the revised budget. Moreover, it assumes a primary surplus of 4.0% of GDP, above the surplus of 2.2% foreseen for this year. These projections reflect a marked improvement in tax receipts both in the oil and non-oil sectors. The expected higher non-oil revenues result from the tax reforms introduced in 2019-20, namely (1) expanding the base of VAT, (2) increasing the rates and progressivity of the property income tax, (3) reforming investment incentives for the corporate income tax, (4) strengthening transfer pricing rules, (5) improving property registration and (6) starting to integrate the informal sector. Overall, total revenues are forecasted to increase 29.3% and total expenditures 19.9% from this year’s revised budget figures, representing 18.9% and 21.1% of GDP, respectively.

Allocation towards the social sector remains by far the largest

The government plans to increase spending on all sectors of the economy, raising its expenditures to AKZ 7,029 billion (16.7% of GDP) if excluding spending on public debt operations. This is 18.5% more than the 2020 revised budget figure. The social sector is expected to remain by far the most important sector, accounting for 39.5% of primary expenditures and 18.8% of total expenditures after an anticipated increase of 15.0%. The higher spending in the economic sector (15.4%) reflects a sharp increase in fuel and energy. Defense, security and social order is projected to rise by 13.6%, while spending on general public services sees an increase of 30.9%. 

Fiscal consolidation remains imperative to bring down public debt levels

The government stated that public debt is expected to reach 123% of GDP this year, up from 113% of GDP in 2019. This is due to the country’s economic downturn and larger budget financing needs that resulted from the impact that the oil price shocks in recent years have had on public receipts. The deterioration in public debt ratios also reflects the depreciation of the kwanza since about two-thirds of Angola’s public debt is external. Although the country’s public debt is considered sustainable, the risks associated with its high vulnerability to oil price and exchange rate shocks persist. The government reiterated its commitment to implement fiscal consolidation measures to invert this upward trajectory in public debt levels. Still, it is also critical to put Angola back on an economic growth trajectory in the next few years, as this too will help with the authorities’ aim of bringing public debt down to a level equal to or below 60% of GDP over the long-term.