Angola’s central bank was faced with economic chaos at the end of the civil war in 2002. Inflation was rampant and the local kwanza currency was crippled. Charlie Corbett spoke to the bank’s governor in Luanda about rebuilding a shattered economy.

The building that houses the central bank of Angola, the Banco Nacional de Angola (BNA), recently celebrated its 50th anniversary. Since the magnificent Portuguese colonial style building, with its marbled halls and baroque-style dome, was officially opened by the then Portuguese president in 1956 it has borne witness to change on a scale that few could have dreamed of at the time.

First, in 1975, came the end of 500 years of continuous colonial occupation by the Portuguese. What followed was a gruesome and prolonged civil war that only ended in 2002. Since then, the challenges facing the BNA have been phenomenal. Along with the finance ministry, it has been charged with bringing down rampant inflation, which at one stage in the 1990s exceeded 3000%, and taking control of the country’s currency and exchange rate. For Amadeu de Jesus Castelhano Mauricio, governor of the BNA, the key to lowering inflation has been, and continues to be, fiscal and ­monetary discipline.

Angola’s official rate of inflation now sits at a steady 11.75%, with a target of 10% for next year. That is down from 105% in 2002 when the civil war ended. This dramatic drop has been achieved through a series of measures designed to control the national kwanza exchange rate, limit the circulation of foreign ­currency and strictly control public expenditure. Gone are the days when the government simply issued more currency to pay for infrastructure projects – a policy which inevitably led to hyperinflation.

From civil war to inflation war

“We’ve been able to attack all the worst situations we had in 2002. We had a very hard discipline in terms of the budget, and controlling public expenditure was the key,” says Mr Mauricio. “It is also very difficult to manage the exchange rate when you have more foreign currency ­circulating than local currency.”

Mr Mauricio admits that most bank deposits remain in foreign currency, but that the situation is now under control. Whereas in the past the exchange rate was set by traders on the street, now it is set by the central bank.

Another important development in the war on inflation was the establishment in 2003 of a treasury market. The BNA no longer lends money to the government, which now finances its short-term needs through treasury bills sold straight to commercial banks in daily auctions conducted by the central bank.

“We are using paper issued by the government and central bank to promote the concept of a new control over the interest rate,” says Mr Mauricio.

Such a dramatic turnaround from the command economy of the 1980s and 1990s, which was focused entirely on financing a war, towards a more open market-oriented system, has not been without its hardships. It takes conviction to create a free market economy in an environment where politicians are used to acting not only with partial impunity, but also without the need to publicly account for their expenditure.

Budget discipline

“It has been very hard to stay disciplined,” Mr Mauricio admits. “You have to have a clear orientation as to what direction you want to go in. And politically it is very difficult when you ask ­people to exercise more discipline in expenditure. It is a question of being rational. Otherwise expenditure gets out of control.”

The government has also acted responsibly in its budget forecasts. With oil prices hovering at $140 per barrel as The Banker went to press, the Angolan government has set its forecast for this year’s budget at a conservative $55 per barrel. This disciplined approach to budgeting has allowed the country to build up substantial foreign currency reserves of about $15bn.

“You have to think about the day when you have a drop in the price of oil,” says Mr Mauricio. “We have established a reserve fund that will be used for reconstruction in such a way that if there is a drop in the oil price we still have some cash to support our expenditure.”

Having $15bn in the bank also adds credibility with foreign lenders, according to Mr Mauricio. “There were times when all the reserves of Angola were just $500m – you can’t talk to creditors when the fortune of your country is also the fortune possibly of one man,” he says. “We are in a very comfortable position now. We have been able to normalise our arrears with the Paris Club. They are no longer outstanding, as they have been negotiated to a series of instalments.”

As of December 2007, Angola had already paid all its arrears to Paris Club creditors except late interests, and has resumed the normal payment of the maturities of its outstanding debt. The government has also committed to pay overdue interest calculated by the Paris Club in three instalments from January 2008 to January 2010.

Excess liquidity

One of the biggest problems Mr Mauricio faces is the huge sum of money in the market – much of it in foreign currency – that is looking for a home. Without a functioning stock exchange or indeed any kind of developed capital markets, it is very hard to suck up this liquidity and take control of the economy.

Mr Mauricio has a dilemma on his hands. While largely supportive of foreign investors in Angola, thanks to the technology and expertise they bring, he is also sceptical of paying the 15% rate of interest offered on domestic treasury bonds.

“We have to have a trade-off – you need foreign investors but at the same time you cannot allow them to have a 15% reward for their investment,” says Mr Mauricio.

He also believes it is still too early to set up a stock exchange. “There was a law created in 2005 to establish conditions for a stock exchange. But in my view the market is not organised sufficiently. Companies need more transparent management and this market still cannot offer these requirements. We need more expertise.”

Angola might remain a long way from what the West, and in particular what the IMF, deems to be a free market, but the government has taken great strides towards creating a more transparent culture.

Heavily criticised by the IMF in the past for its unwillingness to publish its budget expenditures, Angola, according to Mr Mauricio, is opening up: “We have daily reports, weekly reports, monthly, quarterly, semi-annual and annual reports – we are obliged by law to provide these and they are up-to-date. We publish them in print and also post them on our website.”

The Ministry of Finance has also announced the formation of a committee that will monitor the financial activity of the BNA. It is what Mr Mauricio calls “the eyes and ears of the ministry of finance in the central bank”.

Another huge incentive for government to remain secretive in the past was the war. “Now there is no reason for us to hide what we are spending but when you have a war people are reluctant to publish their expenditures,” says Mr Mauricio. “I would say that [overall] our current budget structure is very clear and very open.”


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