Angola reduced its gasoline subsidy, almost doubling pump prices in a nation that has some of the world’s cheapest fuel.
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The decision comes the same week that Nigeria, Africa’s biggest oil producer, scrapped its own subsidy, causing pump prices to triple. Like Angola, Nigeria is seeking to rein in expenditure 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 due in 2032 also strengthened, with the yield down 22 basis points to 11.6%.
The subsidy will be reduced from Friday, meaning the gasoline price will rise to 300 kwanza ($0.51) per liter from 160 kwanza, Economic Coordination Minister Manuel Nunes Junior said after a cabinet meeting Thursday in the capital, Luanda. That’s still less than the open market price of 533 kwanza, with the difference being met by the government. Subsidies on other fuels, including diesel, will be phased out next year before their total removal in 2025, the Finance Ministry said in a statement.
Africa’s second-biggest 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 the support, according to the government. Higher transport costs would make life harder for commuters in a country where the World Bank estimates more than half the population of 33 million live on less than $2 a day.
‘Important Savings’
To mitigate that risk, Nunes Junior said the government will retain gasoline subsidies for taxi drivers, farmers and fishermen.
“The removal of these subsidies will result in important savings, not only for public finances but also for the survival of our state-owned oil company Sonangol,“ said Nunes Junior. The money the government saves will be used to fund education, health projects, housing and employment, he said.
Fitch Ratings said in a briefing note in January that the planned gradual removal of subsidies will “increase domestic pump prices and weigh on household purchasing power, likely triggering protests.” It identified that as the main political risk to Angola this year.
The southwest African nation’s central bank plans to revise its inflation target and the outlook for interest rates now that the Finance Ministry has finalized proposals to remove the subsidies. It currently forecasts inflation will end the year at between 9% and 11%.
In addition to the possible impact of higher fuel prices on inflation, a decline in exports and currency weakness are contributing to uncertainty about the outlook for interest rates, Banco Nacional de Angola Governor Jose de Lima Massano said in a May 23 interview. The kwanza has depreciated 13.5% against the US currency this year to 589 kwanza per dollar.
Angola has the fourth-lowest gasoline prices in the world after Libya, Iran and Venezuela, according to data compiled by Globalpetrolprices.com. A liter of the fuel in Angola costs less than a bottle of water and is way lower than the global average of $1.28.
While the government has been trying to eliminate fuel subsidies for years, they still account for about 10% of the national budget, according to state asset-management institute IGAPE. The International Monetary Fund has urged Angola to end the subsidies to create room for more spending on reducing poverty.
Culled from Bloomberg.
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