VZCZCXRO8702
PP RUEHBZ RUEHDU RUEHJO RUEHMR RUEHRN
DE RUEHLU #0564/01 1581535
ZNR UUUUU ZZH
P 071535Z JUN 07
FM AMEMBASSY LUANDA
TO RUEHC/SECSTATE WASHDC PRIORITY 4041
INFO RUCNSAD/SOUTHERN AFRICAN DEVELOPMENT COMMUNITY
RUEHFR/AMEMBASSY PARIS 0237
RUEAWJA/DEPT OF JUSTICE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RHEHNSC/NSC WASHDC

UNCLAS SECTION 01 OF 02 LUANDA 000564 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
FOR AF/S AND AF/EPS; EB/IFD 
NSC FOR BPITTMAN 
 
E.O. 12958: N/A 
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 
 
LUANDA 00000564  002 OF 002 
 
 
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