Political Economy Challenges in a Resource Rich African Country The Case of Angola Francisco G. Carneiro Economic Adviser - OPCS Presentation for the Course on Governance and Political Economy for Growth Analysis March 26, 2009

Background Political Economy Factors History of 40 years of civil conflict (ended in 2002) Resentment with donors (failed promises to hold donor conference; lack of endorsement for PRSP) Failed attempts to sustain a formal program with the IMF Given strong Marxist tradition and political economy of the war, desire to be seen as independent from BWIs Huge deficiencies in policy design and implementation and pervasive weak technical capacity Economic Context Second largest oil producer in Africa and world’s fourth largest producer of diamonds Oil accounts for roughly 60% of GDP and 98% of total exports Oil production growing rapidly and expected to peak by 2011 Rapidly appreciating REER Growing access to non- concessional financing from non- OECD donors Long reform agenda in the area of governance and transparency

Experience with World Prices

Low-Base Social Indicators

An Appreciating Exchange Rate

Conventional System Led by the Treasury Transactions registered in the IFMS. Non-Conventional System Led by Sonangol. Transactions outside of IFMS Oil-backed debts Other quasi-fiscal expenditures Responsible for some 11% of total expenditures Compensation Mechanisms Tax Retentions, Profit Oil Treasury Operations Two Systems of Public Spending

Five Features of our Engagement 1.Recognize the importance of political economy factors in the relationship between Angola and development partners 2.Identify and work with reform champions – try to support reforms that are ongoing and keep the focus 3.Establish a policy dialogue focused on technical issues and that try to address continuing deficiencies in policy design and implementation 4.Place emphasis on the need to define a clear strategy to manage the country’s growing mineral wealth based on principles of good governance and transparency 5.Attention to the quality and supply of public services to the poor as a way to pay a “peace dividend”

Structure of our Dialogue Consolidate Macroeconomic Stability Improve Governance and Transparency Microeconomic Reforms Promote Equity Strengthen Non-Mineral Economy

Analytical Support from the Bank PEMFAR (2005) CEM (2006) – the first since 1990 Oil Revenue Management Workshop – May 2006 PSIA on the Impacts of Phasing Out Utility and Oil Price Subsidies (2006) DTIS and ICA (2007) PER (2007) – first joint ESW in Angola ever (with EC, UNDP, WHO, UNICEF, FAO) All reports cleared by government for publication (gray cover) and presented/discussed with civil society and donors at different stages of preparation.

CEM - How To Strengthen the Non- Mineral Economy Macroeconomic Management of Oil Windfall Microeconomic Reforms Transparency Agenda

Main Topics in Policy Dialogue Policy Issues 1.Better capacity to forecast revenues 2.Appropriate fiscal policies 3.Some form of stabilization fund 4.Permanent income (expenditure) hypothesis 5.Manage the effects of a rapidly appreciating real exchange rate 6.Promote rapid and bold improvements in procurement 7.Increase the efficiency of public spending 8.Equity considerations in the preparation of the budget Outcomes 1.Adoption of an oil revenue forecasting model accompanied by TA 2.Budget prepared using a conservative price of oil to avoid pro-cyclical fiscal spending 3.No stabilization fund, but introduction of a Treasury reserve account 4.First steps to develop an MTEF 5.Using Chinese investment to rebuild infrastructure 6.Timid efforts to improve quality and coverage of data on social indicators/poverty 7.Significant improvements on quality of data on oil exports/revenues