Angola hikes fuel prices to cut subsidies, boost spending

JOHANNESBURG (Reuters) - Angola, Africa's second largest oil producer, has increased fuel prices by an average of 25 percent to reduce subsidies and boost government spending, the finance ministry has said. The ministry said in a statement on its website this week that the price of petrol would rise to 75 kwanza ($0.76), while diesel would go up by the same margin to 50 kwanza. "When these fixed prices are adjusted, the government creates fiscal space by reducing subsidies, allowing the opportunity for other spending on social and economic sectors," it said. Fuel increases are the latest indication that Angola's budget is feeling the strain from disappointing oil output this year, said Jacques Nel, an economist at NKC Independent Economists. "While an increase in fuel prices will have inflationary effects, the overall impact of a more favourable fiscal position with spending directed towards projects with medium term gains should benefit the economy," Nel told Reuters. Angola needs to repair infrastructure and expand other sectors of the economy to cut its reliance on oil, which accounts for 40 percent of gross domestic product and over 95 percent of export revenue, economists say. In March, the International Monetary Fund urged President Jose Eduardo dos Santos' government to cut spending on fuel subsidies, which add up to 4.8 percent of GDP. The IMF said the southern African country could achieve social benefits by replacing fuel subsidies with targeted cash transfers to compensate the most vulnerable households for any increase in fuel prices. Angola's economic growth is likely to slow to 3.9 percent in 2014 from an estimated 6.8 percent last year, with strong agricultural production offsetting a drop in oil output, the IMF said earlier this month. (1 US dollar = 98 Angolan kwanza)