On the sidelines of Standard Bank’s 2023 African Central Banks Conference in mid-March, Pedro Besugo spoke with Pedro Castro e Silva, deputy governor of Angola’s central bank, the National Bank of Angola, about the country’s prospects.
African banker: High oil prices have helped Angola through a rough patch, but is economic diversification happening fast enough and will the 2023-27 National Development Plan help?
Pedro Castro e Silva: Yes, economic diversification is a very important issue in Angola. Oil really controls our economy because 95% of the value of our exports comes from oil, while 65% of tax revenue comes from oil. It also accounts for about 40% of our GDP. So oil is a very important raw material for us.
Now we also recognize that it is a volatile commodity in terms of price and therefore economic diversification is critical to the sustainability of our economy. The government has a program to diversify the economy. It is mainly focused on agriculture, which currently accounts for only 6% of our GDP. In comparison, in Mozambique, for example, agriculture accounts for 20% of GDP. So we need to invest more in agriculture. This is also very important for our international reserves. Right now, we spend between $200 and $250 million every month importing food.
That is why the government is focusing on economic diversification. It has invested in infrastructure, in particular in three specific programs: grains, fisheries and livestock. So this is how we pursue economic diversification in Angola.
In which sectors do you see particular opportunities for economic growth and how can the central bank help?
Industry is one because, like most other African countries, we do not transform most of our primary products. This secondary sector of the economy therefore also needs investment and industry is a large part of it. There are also several initiatives in the service sector with investments in telecommunications and mobile money operations. I would say we need investment to really take advantage of the economic diversity throughout our GDP structure.
The IMF has stressed the importance of fiscal adjustment and welcomed the commitment to medium-term budgetary and debt targets. How important is it that the government adheres to this?
We’ve had some luck with the oil price. We’ll have to see what happens next with events in the US, but after six years of economic contraction, we had positive GDP growth last year and we expect a similar result this year. Fiscal consolidation was very important in helping us achieve this.
The reforms implemented in the forex sector were also a very important part of this. We’ve changed a lot there. Previously, you had to get a license from the central bank if you wanted to invest in the country, send more than $250,000 abroad or import food. That is no longer the case. Now it is up to the financial capacity of the person.
So we’ve moved away from the focus on exchange controls and are now much more focused on anti-money laundering and anti-terrorist financing. As long as banks perform their due diligence function, people are no longer restricted in the currency transactions they want to make.
Do you expect more turbulence for emerging market currencies, especially those in Africa?
For oil-exporting countries, the price of oil is very important; it is positively correlated with the value of the currency. Whenever the price of oil falls, we have less foreign exchange and this affects the value of the local currency. The same is true for other commodity-exporting countries, be it food or energy. It will all depend on the international economic environment.
We will therefore have to wait and see what the impact of the war is in Europe. We will have to see what happens as China opens up and supply chains are restored. And also how far the banking issues that have surfaced in the US go.
What do you think are the consequences of the conflict in Ukraine for Angola and the region as a whole?
On the one hand, the war led to high oil prices and that could be seen as a good thing for Angola, but it really isn’t. On the other hand, it also had an impact on food prices and we’re a net interest in food, so that has an impact on our inflation rate.
I think that when the conflict is resolved – and at the moment we cannot foresee when – world trade will be restored and I don’t think this will have a major impact on world prices. So these are the two scenarios that can happen. It means that we must continue to invest in economic diversification so that we are not too influenced by problems beyond our borders.
What is the current situation with inflation?
We are in an opposite cycle from most of the world as inflation is falling in Angola and it has to do with how expectations are formed in Angola.
The exchange rate is a very important indicator in terms of expectations in Angola and when you have either appreciation of the currency or currency stability, then expectations are also stable and inflation starts to come down.
On the other hand, if you have exchange rate volatility or depreciation, it has a major impact on inflation. So lately we have had an appreciation of the currency and this has had a positive effect on inflation. When we started the reforms in 2018, the difference between the formal and informal currency markets was about 150% and inflation was 42%. Now the difference is less than 20% and inflation has fallen to 11.8%. We have a target of between 9 and 11% by 2023, so I think we’re in a very good position,
What can central bank governors in Africa learn about the banking turbulence in America?
We can learn many lessons. First of all, no bank is too small to cause financial stability problems. Silicon Valley Bank was not considered a major bank in the US and was therefore not subject to the same rules that applied to the larger ones. So that may need to be adjusted.
Another lesson is that Basel II and III have turned out to be quite important regulatory frameworks. The good news is that most of the world’s banking systems apply these principles. However, in the US I don’t think those principles are widely applied, so maybe that’s something to think about.
In addition, I believe that these events will also lead to a review of the regulatory frameworks at the level of the Bank for International Settlements (BIS) and that we will all have to participate in that process. So even if it’s not good news, it could be useful as a catalyst for the review of the regulatory framework and to make the banking sector even more robust in the future.
For us in Angola, the banking system is very solid. The average capital ratios are well above the minimum. The channel through which we feel this kind of phenomenon coming from abroad is through the price of oil. The price already seems to be falling quite quickly and we will be concerned if this trend continues, but for now we will have to wait and see.
With China returning to the global economy, do you expect it to have an impact on global prices as demand is likely to increase?
Yes, I think it will be very important. The question now is whether it will offset what is happening in the US and Europe. Hopefully this banking crisis will not turn into a financial or economic crisis like in the past.
What is the National Bank of Angola’s official position on digital currencies and what are some of the pros and cons you can imagine?
We have an internal paper on Central Bank Digital Currencies (CBDCs) and we think they could be useful in three ways.
The first concerns how a CBDC can be useful in conducting monetary policy. The second is for financial inclusion. Could it be an instrument to increase financial inclusion in Angola? The third is for cross-border payments.
On monetary policy, I think we have a good framework that works. We intend to move to an inflation-oriented regime. In terms of financial inclusion there is some debate because when we look at examples like Kenya, Mozambique and even some West African countries we see that mobile money was the crucial tool used for financial inclusion so we want to do the same thing .
That is why we have already licensed two telecom operators to offer mobile money services to the market. We’re left with the cross-border payments, which is still a costly affair for Angolan importers, so we want to invest a little more time in studying CBDCs for cross-border payments.
We are happy to participate in several other BIS meetings where most of the information is shared, so it can be a way for us to get involved as well. It could be a solution to facilitate cross-border payments around the world.
Are you actively involved in Afreximbank’s PAPSS initiative and do you see it as something that could remove some payment barriers?
Yeah I think the more we integrate African payment systems the better for trade so Angola joins through SADCs RTGS system.
We will link RTGS to PAPSS and that way all 15 countries will be connected. Currently the technical issues are being discussed between SADC, RTGS and PAPSS and once resolved we will be part of it.
