Angola slashed its petrol subsidy, nearly doubling pump prices in a nation that has some of the cheapest fuel in the world.
The decision comes the same week Nigeria, Africa’s biggest oil producer, scrapped its own subsidy, causing pump prices to triple. Like Angola, Nigeria is looking to rein in spending as its economy languishes.
The yield on Angola’s 2028 Eurobonds fell 16 basis points to 11.2%, the lowest in nearly two months, after the announcement. Securities maturing in 2032 also strengthened, with yields down 22 basis points to 11.6%.
The subsidy will be reduced from Friday, meaning the price of petrol will rise to 300 kwanza ($0.51) per liter from 160 kwanza, Economic Coordination Minister Manuel Nunes Junior said after ‘a cabinet meeting on Thursday in the capital, Luanda. This is still lower than the open market price of 533 kwanzas, with the difference to be met by the government. Subsidies on other fuels, including diesel, will be phased out next year before their complete elimination in 2025, the Finance Ministry said in a statement.
Africa’s second largest crude oil producer imports most of its fuel due to a lack of refining capacity and spent 1.9 trillion kwanza ($3.5 billion) last year on support, according to the government. Higher transport costs would make life difficult for travelers in a country where the World Bank estimates that more than half of the population of 33 million lives on less than $2 a day.
“Significant Savings”
To mitigate this risk, Nunes Junior said the government will maintain gasoline subsidies for taxi drivers, farmers and fishermen.
“The elimination of these subsidies will mean significant savings, not only for public finances, but also for the survival of our state oil company Sonangol,” Nunes Junior said. The money the government saves will be used to finance education, health projects, housing and employment, he said.
Fitch Ratings said in a briefing note in January that the planned phasing out of subsidies “will increase domestic pump prices and affect household purchasing power, which is likely to lead to protests.” He identified it as the main political risk for Angola this year.
The southwest African nation’s central bank plans to revise its inflation target and interest rate outlook now that the finance ministry has finalized proposals to eliminate subsidies. He currently predicts that inflation will end the year between 9% and 11%.
In addition to the potential impact of rising fuel prices on inflation, a decline in exports and currency weakness are contributing to uncertainty about the outlook for interest rates, the governor of the National Bank of Angola, José de Lima Massano, in an interview on May 23. The kwanza has depreciated 13.5% against the US currency this year to 589 kwanza to the dollar.
Angola has the fourth lowest gasoline price in the world after Libya, Iran and Venezuela, according to data compiled by Globalpetrolprices.com. A liter of fuel in Angola costs less than a bottle of water and is well below the world average of $1.28.
Although the government has been trying to eliminate fuel subsidies for years, they still account for about 10 percent of the national budget, according to state asset management institute IGAPE. The International Monetary Fund has urged Angola to end subsidies to create room for more spending on poverty reduction.
–With help from Colleen Goko.
