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Angola Seen Needing More Than Rate Increases to Support Kwanza

Bloomberg Business , July 28, 2015

Angola Seen Needing More Than Rate Increases to Support Kwanza

Angola, sub-Saharan Africa's third-largest economy, needs to take more steps to boost its currency than increasing the benchmark interest rate twice in two months, said Eaglestone Advisory SA.

The central bank could increase reserve requirements held in kwanzas at commercial banks or hold more dollar auctions, Tiago Dionisio, a Lisbon-based Eaglestone analyst, said Tuesday in an e-mailed reply to questions. Growing demand for kwanzas should reduce pressure on the exchange rate, he said.

"The Banco Nacional de Angola is going to try to solve the problem with the shortage of dollars and to tackle the huge difference still existing between the official kwanza exchange rate and the rate on the streets," Dionisio said. "Then it will be on a wait-and-see mode to see if the exchange rate stabilizes or if there are significant risks of further strong devaluation that could hit prices."

The central bank on Monday increased the benchmark interest rate by 50 basis points for the second consecutive month, taking the key lending level to 10.25 percent. Africa's second-largest crude producer is seeking to counter the effects of lower oil prices and inflation that's beyond the bank's target range.

The kwanza fell to a record of 121.965 to the dollar last month, the bank said in a statement on its website. Inflation in June was 9.61 percent, exceeding the bank's 7-9 percent target for this year.

Oil Dependence

Angola depended on oil for about 70 percent of government revenue in 2014 and has had to cut that reliance by about half after crude prices fell about 40 percent over the past 13 months, budget documents show. The country is attempting to borrow about $25 billion this year to meet its budget shortfall and advance projects such as a new international airport in the capital, Luanda, a $6 billion refinery and a new parliament.

The benchmark rate increase is "bad news for Angola, whose external debt is increasing every month," said Jose Alves da Rocha, chief economist at the Catholic University of Angola. "But the main challenge is the behavior of the oil price."

The central bank's monetary policy committee on Monday analyzed inflation, fiscal and monetary accounts and the oil price to take "measures that contribute to reducing the volatility of prices in the national economy," the bank said in its statement.

The decision to increase rates is mainly directed at supporting the kwanza and curbing its impact on consumer prices, Dionisio said. "Due to the strong devaluation of the kwanza, and bearing in mind that Angola imports most of its goods, consumer prices have increased significantly in recent months."