Angola: first serious test for economic reforms from Lourenço

Angolan President Joao Lourenço was elected five months ago promising an “economic miracle”. But the recovery looks long and difficult. For three weeks, it has even manifested itself in a disturbing devaluation of the local currency.
In early January, the new governor of the Central Bank, Jose de Lima Massano, announced a small revolution: the gradual establishment of a floating exchange rate system.
The Angolan currency was pegged since 2016 to the greenback at the invariable price of 166 kwanzas for 1 dollar. But this rate was far from reflecting the true value of kwanza, which trades on the black market at more than 400 to a dollar.
“We have an exchange rate that does not reflect the truth,” Massano conceded.
The authorities have decided to float their currency in a secret range to avoid speculation. The first step towards a conversion system exclusively governed by supply and demand promised by the end of 2018.
The boss of the Central Bank justified his decision by the need to stop “the continued decline in foreign exchange reserves.”
In 2014, the second largest oil producer in sub-Saharan Africa was hit hard by the fall in crude oil prices, by far its main resource.
This tumble has plunged the whole country into crisis. After several years of “Chinese-style” growth, Angola has dangerously flirted with the recession and squandered its dollar reserves to support its currency in vain.
– Emergency –
This capital, estimated by analysts at $ 20 billion in early 2017, has melted to 14 in November, according to the Central Bank.
“If our level of spending in foreign currency continues at this rate, we run the risk of seeing them fall by half again by the end of the year,” said Jose de Lima Massano.
This evaporation of greenbacks convinced the new government to react.
There was urgency. Prestigious foreign companies like Emirates have recently distanced themselves from Angola, prevented by strict foreign exchange controls from repatriating their local revenues in dollars.
The new president Joao Lourenço succeeded Jose Eduardo dos Santos as head of Angola in September, who led the country for thirty-eight years.
Former apparatchik, he proclaims since he will fight against corruption and revive the economy of the country, one of the poorest in the world despite its oil rent.
His plan is drastic. Austerity, privatization and, above all, out of all-oil. “Angola has no choice but to diversify its economy,” Lourenço told reporters in mid-January. “It’s absolutely necessary, our salvation is there.”
To achieve this, he wants to bring back foreign companies and their valuable greenbacks. The floating exchange rate is part of this long-term effort.
– ‘Painful’ –
But as analysts feared, this new system has led to a tumble in the value of kwanza. In three weeks, the local currency lost 18% of its value against the dollar and more than 25% against the euro.
“It’s not a devaluation, it’s a depreciation,” reassured Governor Massano.
Still. First, the fall of kwanza was quick to push up prices, in a country where inflation is already officially over 30%.
In the streets of the capital Luanda, it is the waltz of the labels. “All imported products are more expensive,” complains a trader from Palanca district, Ibrahim Nour. “As wages continue to fall, we are losing our customers.”
“This devaluation should have been made much earlier, at the time of the economic boom,” said economist Precisio Domingos of the Catholic University of Luanda. “Today is much more painful for the people.”
The fallback movement of the Angolan currency does not seem to stop. To prevent this decline from further widening its deficits, Angola now wants to renegotiate its external debt. “A priority,” said Finance Minister Archer Mangueira.
Investors have so far welcomed the reforms of the new regime of Luanda. Most believe that his efforts will pay, especially on the public accounts.
“Lourenço is using its political legitimacy as the new president to take big steps forward,” said William Jackson of Capital Economics. “Devaluation can cause short-term problems but be positive in the long run.”

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