Get with the Program

The government has reined in hyperinflation, liberalized the banking sector and now is working towards a strict IMF structured-reform program

Angola's finance and banking sectors have been ravaged by conflict and mismanagement, and dominated by a hyper-centralized administration directly controlling the central bank. However, the system was radically restructured in 1999, laying the foundation for a broad-based recovery.

As the Governor of Angola's National Bank, Aguinaldo Jaime, explains, "When I took office in January 1999, we had a depressed financial system. Interest rates and foreign exchange rates were administratively fixed by the Central Bank. The gap between the parallel and official exchange rate was in excess of 100 percent and we had a situation of hyperinflation above 3,000 percent."

Aguinaldo Jaime tackled the financial crisis by liberalizing the exchange rate and interest rates. "In short, we gave the financial sector the freedom to operate, therefore attracting funds and channeling them to finance investment and development in Angola," he says. "Now the banks are free to establish their own interest rates, and free to negotiate contracts with their clients."

These changes wrote new rules for Angola's financial sector. "The liberalization of the banks was key to the creation of a new financial climate," says Generoso Almeida, President of the Bank of Commerce and Industry (BCI), Angola's biggest state bank.

The BCI is one of the most important financial institutions in Angola. It manages the funds allocated by the central government to the oil-rich provinces of Cabinda and Zaire, which amounts to 10 percent of total oil revenues from each province. The BCI also supports small and medium-scale enterprises, under the government instigated Economic and Social Development Fund (FDES), which allocates loans of anything up to $500,000 to entrepreneurs.

However, one of the main challenges still facing Angola is the fight against hyperinflation, with the government targeting single-digit inflation. Last year's goal was 75 percent and the government hopes to drastically reduce this figure in the current year. "Inflation remains one of the biggest problems for us to tackle," Aguinaldo Jaime notes. "Previously, the state had a huge budget deficit, which was financed by credit from the central bank. We are working hard to reduce the state deficit so that the treasury no longer needs to keep borrowing money from the central bank. We are trying to combat the deficit by ensuring that everybody pays taxes, and we are clamping down on tax evasion."

Another aspect of the financial restructuring program is the privatization of state-owned companies, including banks such as BCI and The Savings and Credit Bank (BCP). The government is also in the process of completing the liquidation of another financial institution, the Farmers' Bank (CAP). CAP has been at the center of a scandal due to corruption, including the misuse and non-payment of bank loans. Since 1995, the government has sold 272 companies, privatizing 43 state-owned enterprises in 1999 alone.

This occurs against a background of soaring growth. This year, the government anticipates that Gross Domestic Product will grow from 3.3 percent to 11 percent, based on a 16 percent increase in oil exports.

It is now, though, that the Angolan government is facing the most stringent test of its financial resolve: it signed an agreement in April 2000 with the International Monetary Fund (IMF) to set up a Staff Monitored Program (SMP) to identify and implement broad economic reforms. These include reducing state spending, establishing greater transparency in public accounting, ending extra-budgetary expenditures, and completing an audit of the oil sector.

But in its last meeting with the IMF in January, 2002, the government failed to meet IMF requirements on transparency and accountability, meaning that it is unable to move to the next stage of the program, involving a Poverty Reduction and Growth Facility (PRGF). The PRGF would have included the restructuring of Angola's external debt, access to concessionary loans, and IMF financing of the balance of payments deficit.

For Angola to meet IMF requirements and qualify for the PRGF, it would have to allow for the auditing of central bank accounts and for an analysis of the oil sector which would reveal currency flows between the state oil company Sonangol, the Treasury and the central bank. In the medium term, the government should be able to meet these requirements, but the going is likely to be slow as the country starts to claw its way towards military, political and economic stability.