Angola: Staff Report for the 2016 Article IV Consultation

The oil price shock that started in mid-2014 has substantially reduced fiscal revenue and exports, with growth coming to a halt and inflation accelerating sharply. This has brought to the forefront the need to address more forcefully vulnerabilities and dependence on oil, and to diversify the economy. The authorities have taken steps to mitigate the impact of the external shock: an 18 percent of GDP improvement in the non-oil primary fiscal balance over 2015-16, mainly through spending cuts including the removal of fuel subsidies, has been implemented; and the kwanza has been devalued against the U.S. dollar by over 40 percent since September 2014, with international reserves being used to smooth the depreciation. However, the exchange rate has been re-pegged since April 2016 leading to an appreciation of the kwanza in real terms, and further policy actions are needed to continue adjusting the economy to the ‘new normal' in the oil market and to return growth to a level consistent with poverty reduction.

Abstract

The oil price shock that started in mid-2014 has substantially reduced fiscal revenue and exports, with growth coming to a halt and inflation accelerating sharply. This has brought to the forefront the need to address more forcefully vulnerabilities and dependence on oil, and to diversify the economy. The authorities have taken steps to mitigate the impact of the external shock: an 18 percent of GDP improvement in the non-oil primary fiscal balance over 2015-16, mainly through spending cuts including the removal of fuel subsidies, has been implemented; and the kwanza has been devalued against the U.S. dollar by over 40 percent since September 2014, with international reserves being used to smooth the depreciation. However, the exchange rate has been re-pegged since April 2016 leading to an appreciation of the kwanza in real terms, and further policy actions are needed to continue adjusting the economy to the ‘new normal' in the oil market and to return growth to a level consistent with poverty reduction.

Background

1. Angola is a post-conflict country—decades of hostilities ended in 2002—with significant infrastructure and human capital deficits. Oil receipts underpinned strong growth in the last decade, but have also made the country vulnerable to oil revenue volatility. Progress was made in reducing poverty rates from 54 percent in 2000 to 43 percent in 2008. However, inequality has increased. Following elections in 2012, the government has embarked on a National Development Plan (NDP) that puts priority on a large expansion of infrastructure spending to support economic diversification and inclusive growth. However, spending is well below that stipulated in the NDP. Parliamentary elections are scheduled for August 2017, and the top name of the winning party’s list of candidates will become the next President of the Republic.

Recent Economic Developments, Outlook and Risks

2. The economy has been severely affected by lower international oil prices:

  • Growth slowed to 3 percent in 2015, driven by a very sharp slowdown in non-oil activity to 1½ percent as the industrial, construction, and services sectors adjusted to cuts in private consumption and public investment amid more limited availability of foreign exchange, and agriculture underperformed its potential due to supply shocks. High frequency economic activity indicators point to a deeper slowdown in 2016, with the business confidence reaching all-time lows in the second and third quarters of 2016.

  • Inflation reached 41 percent in November 2016, year-on-year, reflecting a weaker kwanza, higher domestic fuel prices, and loose monetary conditions until the first half of the year.

  • Fiscal policy was tightened. The overall fiscal deficit narrowed to 3¼ percent of GDP in 2015, with the non-oil primary fiscal balance improving by 12¼ percent of GDP given large reductions in spending on subsidies,1 goods and services, and investment. Budget under-execution in the first nine months of 2016 led to an additional improvement in the non-oil primary fiscal balance, but an estimated 3 percent of GDP in domestic payments arrears have accumulated.

  • The BNA tightened monetary policy recently. Base money contracted by 3 percent in October 2016, year-on-year, from an expansion of 25 percent in May 2016, and banking sector excess liquidity declined to ⅓ percent of GDP in November 2016, from 1½ percent of GDP in May 2016. Short-term interest rates, however, remain negative in real terms.

  • The health of the banking system deteriorated driven by slower growth. The banking system’s capital adequacy ratio declined to 18¾ percent in September 2016 compared to 19¾ percent in December 2015, while NPLs increased to 15¼ percent from 11½ percent during the same period, reflecting lower ability of corporates to meet obligations as growth slowed. Commercial banks have managed to contain a more significant deterioration of financial stability indicators (FSIs) through increased provisioning and stricter underwriting to mitigate credit risk, and some corporate loan restructuring. In September 2016, five banks, including the systemically-important state-owned BPC, were undercapitalized and needed to meet prudential requirements.

  • The external current account deficit widened, but net international reserves (NIR) remained relatively comfortable at US$24¼ billion at end-2015. The external current account deficit reached 10 percent of GDP in 2015, compared to 3 percent of GDP in 2014, as lower exports were only partially offset by lower imports. The trade balance improved in the first ten months of 2016, as lower exports were offset by a sharper import contraction. NIR declined to US$20⅓ billion in November 2016, as the BNA increased its sales of foreign exchange (forex) amid shortages in the market, financed in part by US$2 billion (with 2-5 year terms) in Repo transactions, using some of its reserve assets (U.S. Treasury bonds) as collateral.2

  • Significant imbalances in the forex market remain. Despite a devaluation of the official exchange rate against the U.S. dollar of more than 40 percent between September 2014 and April 2016,3 and BNA’s increased provision of forex to the market in recent months, the parallel-official exchange rate spread has remained high and volatile (190 percent in November 2016),4 and the backlog of forex purchase orders in the banking system is estimated conservatively at about US$3 billion.

3. The outlook for 2016 is adverse. Growth is projected to have come to a halt, with the non-oil sector contracting by ½ percent dragged down by the industrial, construction, and services sectors; industrial production, despite the potential for import substitution, is constrained by shortages of imported inputs due to limited forex availability. Annual inflation is expected to reach 45 percent by end-2016—the highest rate in over a decade—reflecting higher domestic fuel prices, a weaker kwanza, and the lagged effects of loose monetary conditions until the first half of 2016, despite an improvement of 5¾ percent of GDP in the non-oil primary fiscal balance in 2016.

4. Linkages from the real sector to the financial sector are limited. As noted above, commercial banks have been affected by the economic slowdown, leading to higher NPLs. The private credit linkages from the financial sector to the real sector have become less significant recently due in part to increased credit risk with banks in particular reducing consumer and mortgage lending as well as reducing loans to mining and construction. Historically, the level of credit to the private sector has been relatively low, with banks channeling to the private sector less than a half of their domestic assets. As economic growth slows, banks are further tightening lending standards and this may delay, at the margin, a recovery.

5. Under the baseline scenario, the outlook for 2017 is slightly better, but subject to downside risks. Growth would pick up to 1¼ percent in 2017, with the non-oil sector expanding by the same magnitude due to higher public spending and better terms-of-trade. Inflation would decline to 20 percent by end-2017, assuming tight monetary conditions, no further domestic fuel price increases, and a stable kwanza. NIR is projected to decline further to US$17½ billion.

6. Under the staff’s proposed adjustment scenario discussed below, growth is projected to accelerate at a faster pace and inflation to decline to single digits over the medium term. While slower in the near term, non-oil growth would increase over time reflecting, in addition to improved terms-of-trade and the completion of several important projects, a more competitive real effective exchange rate (REER)5 and a faster pace of implementation of structural reforms, including a more forceful improvement in the business environment leading to increased private investment. Inflation is projected to decline as monetary policy is tightened upfront more aggressively, returning to the BNA’s annual inflation objective of 7-9 percent at the end of the projection period. Delaying the needed policy adjustment measures until 2018—after a new government is formed following the elections—is likely to increase the cost of adjustment and delay its future benefits.

7. This medium-term outlook under the baseline scenario is not without risks and is not the desirable outcome. Growth is projected to remain barely positive and below population growth, inflation is expected to decline only gradually, fiscal space would be limited, and imbalances in the forex market would remain. Angola faces the challenge of balancing the pressures from lower oil revenue compared to 2010-13 levels and high demand for much needed improvements in the country’s physical infrastructure and human capital and poverty alleviation. This will require a better balance between current and capital spending rationalization, making fiscal consolidation more sustainable over the medium term. The debt sustainability analysis (DSA) shows that Angola’s public debt remains sustainable but is highly sensitive to shocks, including to the international price of oil, real GDP growth, financial contingent liability, and the exchange rate.

8. Risks are tilted to the downside (Risk Assessment Matrix). They include lower oil prices, difficulties to control spending in the run-up to next year’s elections, continued imbalances in the forex market, a sustained period of low growth with limited opportunities to address social needs, global banks’ withdrawal of correspondent banking relationships (CBRs), delays in the recapitalization of weaker banks, and slippages in the implementation of structural reforms.

9. Spillovers: Outward spillovers to the region are generally limited given Angola’s marginal trade and financial flows with countries in the region, although a few countries, such as the Democratic Republic of Congo and Namibia, which border Angola, are being more affected by the economic difficulties in Angola through cross-border trade. Although Angola is Portugal’s largest export market outside the EU and several Portuguese banks are present in the Angolan banking system through joint-ventures with local investors, the magnitude of these interests remain relatively small if compared with the size of the Portuguese economy. On the other hand, inward spillovers from China and Europe could be tangible if their economic growth significantly slows down, putting further downward pressure on oil prices.

Authorities’ views

10. The authorities broadly agreed with staff’s overall assessment of the outlook and risks. But they expect growth to be stronger and headline inflation lower than staff’s baseline scenario.

Policy Discussions

11. The oil price shock that started in mid-2014 has brought to the forefront the need to address dependence on oil, diversify the economy, and reduce vulnerabilities. As a result of the decline in oil prices, fiscal revenue and exports fell substantially, output growth came to a halt, and inflation accelerated sharply. The policy steps taken to mitigate the impact of the external shock have been significant, including an improvement of 18 percent of GDP in the non-oil primary fiscal balance over 2015-16; and devaluation of the kwanza vis-à-vis the U.S. dollar by over 40 percent since September 2014. However, further policy actions are needed to continue adjusting the economy to the ‘new normal’ in the international oil market, including additional but gradual fiscal consolidation over the medium term; greater exchange rate flexibility and tight monetary conditions to address lingering imbalances in the forex market while restoring price stability; and supporting greater diversification of the economy to strengthen resilience to future oil price shocks. Vulnerabilities in the banking system also need to be addressed.

A. Fiscal Policy under the ‘New Normal’

12. An overall fiscal deficit of the magnitude envisaged in the draft budget for 2017 would leave the economy vulnerable to lower-than-projected oil prices and heightened concerns about public debt sustainability.6 For 2017, targeting an overall fiscal deficit of no more than 2¼ percent of GDP that is consistent with an improvement of at least 1 percent of GDP in the non-oil primary fiscal balance—in line with the gradual adjustment that would be needed over the medium term to put public debt on a clear downward path—could be achieved through additional spending rationalization. The following measures could be considered to achieve this objective: (i) granting no wage increase (⅔ percent of GDP vis-à-vis the baseline scenario); (ii) using for deficit reduction the wage bill savings from the ongoing biometric census of civil servants (up to ½ percent of GDP); (iii) further rationalizing spending on goods and services (up to 1 percent of GDP); and (iv) maintaining the execution of public investment in line with recent (lower) execution rates (¾ percent of GDP).

Angola. Fiscal Position, 2014–2017

article image
Sources: Angolan authorities and IMF staff projections.

Angola: Gross Financing Needs and Sources, 2017

(In percent of GDP)

article image
Sources: Angolan authorities; and IMF staff projections.

13. Over the medium term, permanently lower oil revenue needs to be offset by expenditure rationalization and higher non-oil revenue; and fiscal institutions need to be strengthened to properly manage oil revenue volatility. Important steps have been already taken in this direction, including the comprehensive program to gradually eliminate fuel subsidies and reforms to strengthen non-oil revenue, including by enlarging the tax base; creating a single revenue administration agency; strengthening tax inspections; and better enforcing real estate taxation. The following additional policies and structural fiscal reforms would be needed to cement medium-term fiscal sustainability:

  • Targeting a non-oil primary fiscal consolidation path of 1 percent of GDP annually over the medium term which, under current assumptions regarding international oil prices, would be consistent with eliminating the overall fiscal deficit by 2018 and placing debt on a clearly declining path.

  • Strengthening the credibility of the Law on Public Debt by introducing an escape clause to the 60 percent of GDP debt ceiling when the economy is subject to a large exogenous shock, while introducing a transparent mechanism to ensure convergence over time to the 60 percent of GDP debt ceiling.

  • Strengthening the ongoing efforts to enlarge the tax base, improve tax inspections, and better enforce real estate taxation; and introducing a VAT on January 1, 2019 (Box 1). If implemented diligently, a VAT would provide a stable revenue source for the budget, reducing the budget’s heavy dependency on oil revenue and shielding it better from oil revenue volatility.

  • Using part of the additional fiscal space to expand well-targeted social programs for the vulnerable and increasing infrastructure spending in line with absorptive capacity.

  • Reducing the wage bill as a share of GDP, as the size of the public administration is streamlined and reformed by focusing on the efficient provision of public goods; aligning wage increases in the public sector with productivity gains and performance indicators.

  • Adjusting domestic fuel prices to reflect increases (or decreases) in international gasoline and diesel prices and taking into account movements in the exchange rate.7

  • Eliminating electricity and water tariff subsidies as ongoing investments increase the supply of both products, while adopting lifeline rates to protect the poor.

  • Improving the quality of public investment through enhancing compliance of the public investment management process with existing legislation; prioritizing and monitoring the execution of projects; conducting ex-ante and ex-post project evaluations; improving technical capacity to select and monitor projects; and developing a database of reference prices to better assess the cost of projects.

  • Adopting an improved medium-term fiscal framework (MTFF) focusing on spending rules and a well-designed fiscal stabilization fund with clear deposit and withdrawal rules would contribute to smoothing oil revenue volatility and reduce pro-cyclicality of spending in the future. In addition, the MTFF should assess spending needs associated with maintaining and running investment projects once those are completed, and investment projects should only be approved and started if there is fiscal space for their (future) current spending needs.

  • Accelerating the process of restructuring, privatizing, and/or closing state-owned enterprises (SOEs) to reduce their burden or potential burden to the Treasury. In the case of Sonangol, it will be important to consider rationalizing its very large workforce and divest some of its non-core businesses, making the company more efficient and focused on its oil and gas core business and reducing financing needs going forward.

Angola. Operational Balance of SOEs, 2014–15

article image
Source: Angolan authorities.

Angola: Broadening the Tax Base

Angola’s tax base remains heavily dependent on oil revenues, that even after the oil price collapse, contributed 56 percent of total revenues. Key component of the non-oil revenue base is a consumption tax (IC) with a very narrow base. It excludes the activities of the primary sector of the economy; the value added by the commercial sector, in particular, the part of the value added to the manufacturing sector that corresponds to profit; and some services. Although the standard rate of the IC is 10 percent, many products are subject to a reduced rate (2 percent), most services are taxed at 5 percent, and other rates range from 15 to 80 percent. Moreover, there is a stamp duty whose main incidence is on invoices.

The authorities are considering replacing the IC with a VAT. Possible reform could include: (i) the adoption of a single positive VAT rate (with the zero rate applying exclusively to exports); (ii) the introduction of an excise tax; (iii) the elimination of about 50 percent of the incidence of the stamp duty; (iv) a reform of the tax on property transfers (SISA) to avoid double taxation; and (v) a very high threshold for the VAT (the equivalent in kwanzas to an annual gross revenue of $250,000) since an existing law already excludes businesses with lower gross revenues from keeping accounting procedures that are necessary to comply with VAT regulations, and because a high threshold would facilitate the introduction and management of the VAT. Preliminary rough estimates suggest that a VAT rate of 10 percent could yield about 2.5 percent of GDP in revenue to Angola.

Staff estimates that the VAT could be introduced as early as January 1, 2019 but it is important to ensure appropriate preparation prior to implementation: the Tax Authority (AGT) needs to strengthen its institutional capacity; AGT staff training and communication with taxpayers and other stakeholders will need to be improved. Moreover, the VAT should only be implemented after new IT systems for customs and domestic tax administration are put in place, tested, and prepared.

Authorities’ views

14. The authorities did not dispute the need for fiscal consolidation over the medium term, but stressed the urgent need in the near term to support growth after two years of fiscal retrenchment. Consequently, a mildly expansionary budget for 2017 has been approved by the National Assembly. They noted that public debt remains manageable and the needed increase in infrastructure investment can be financed. At the same time, they are committed to scaling back public spending from budgeted levels, if external funding is not forthcoming as projected. The authorities remain interested in working closely with the Fund on fiscal structural reform, including a VAT, although they believe a VAT may take up to four years to be introduced in Angola. The authorities mentioned that they are in the process of closing 48 SOEs that are nonoperational and privatizing 53 others. In addition, a restructuring plan for Sonangol was launched in June 2016 to be implemented over 24 months. The newly appointed Board plans to refocus Sonangol on its core oil and gas businesses while making the company more transparent and efficient.

B. Enhancing the Monetary Policy Framework

15. Greater exchange rate flexibility supported by tight monetary conditions remains critical to orderly address forex market imbalances and provide a nominal anchor to the economy. The large imbalances in the forex market, if unaddressed, could lead to a disorderly adjustment of the exchange rate, a sharp acceleration in inflation, and bank losses given the still somewhat high level of dollarization in the economy. The external balance assessment (EBA) shows that the REER was overvalued by 8 percent to 42 percent in 2015. The REER is projected to have depreciated by only 2 percent in 2016 and, absent a policy change, appreciate by 20-25 percent in 2017. Measures to help enhance the monetary policy framework with the aim of supporting a smooth transition to a more flexible exchange rate regime include:

  • Adopting a managed float from a position of strength given the still relatively comfortable level of international reserves. While the exchange rate may overshoot initially, it would stabilize at a level consistent with correcting the estimated REER overvaluation, if supporting fiscal and monetary policies are in place.

  • Unwinding the administrative measures adopted last year, including giving priority access to forex purchases, as greater exchange rate flexibility is introduced. These restrictions have encouraged misallocation of resources and exacerbated the scarcity of necessary imported inputs, constraining growth and adding to inflationary pressures.

  • Shifting to a base money target consistent with the inflation objective and proactively conducting monetary operations to achieve the target and anchor inflation expectations. In particular, base money growth should be kept close to zero over the next several months to break inflation expectations, bringing three-month T-bill rates to positive territory in real terms.

  • Conducting monetary policy operations independently to bring credibility to the new monetary policy framework.

  • Enhancing liquidity forecasting and management capacity, being more proactively engaged in open market operations, and strengthening coordination with the ministry of finance to mitigate the impact of fiscal operations on monetary conditions and facilitating the BNA to achieve the base money target.

16. Additional efforts to strengthen monetary policy are critical to enhance policy effectiveness and contain vulnerabilities, including:

  • Narrowing the policy interest rate corridor to 500 bps to enhance traction of its monetary policy decisions and make monetary policy more effective, and adjusting the interest rate policy, as needed, to signal the policy stance to the interbank and T-bill markets.

  • Maintaining ongoing efforts to improve inflation forecasting and liquidity management, including by lengthening the horizon of the daily liquidity forecasting exercise to a rolling monthly period.

Authorities’ views

17. The authorities agreed that monetary conditions should remain tight in coming months, but considered important at the present time to preserve the exchange rate peg to help contain inflation given the high pass-through of the exchange rate to prices. The authorities reiterated their strong commitment to bring inflation down quickly, noting that monetary conditions were significantly tightened in recent months and inflation is already subsiding.

C. Strengthening Financial Stability

18. Angola has also been adversely affected by the loss of U.S. dollar Correspondent Banking Relationships (CBRs). Since December 2015, global banks discontinued the supply of U.S. dollar banknotes and withdrew U.S. dollar CBRs with Angolan banks. The last remaining U.S. correspondent bank which supplied access to two Angolan respondent banks are no longer able to service their Angolan customers’ U.S. dollar cross-border payment needs. However, Angolan respondent banks are still able to conduct their own portfolio, treasury, trade finance and some credit card operations with their U.S. correspondent bank. Angolan subsidiaries of remaining global U.S. banks are also able to service their Angolan corporate customer needs. These customers are mainly Angolan operators of global oil, gas, and construction entities. Alternative payment channels through greater use of nested U.S. dollar and euro CBRs has mitigated the adverse impacts so far, but risk of losing these payment channels is high.

19. There is an urgent need to fine-tune policy solutions to address the effects of a sizable loss of U.S. dollar CBRs (Box 2). The impact on direct access to cross-border finance and payments for both exports and imports in U.S. dollars could be significant, especially if nested CBRs were also lost. Several measures could help address this issue:

  • Mitigating the drivers and risks arising from the loss of CBRs by the BNA stepping up its data collection and analysis efforts (SWIFT data and BNA Questionnaire), enhancing dialogue with the private sector and home authorities of global correspondent banks, strengthening the prudential and AML/CFT framework particularly with regard to corruption-related risks, and developing contingency plans in coordination with all stakeholders.

  • Continue to fine-tune policy solutions which may include as a last resort the BNA providing temporary access to low-risk U.S. dollar transfers but also take into account the legal constraints and risks to BNA’s other key functions. Industry solutions remain the first-best option. Greater use of nested CBRs will likely prove to be a short-term solution.

Angola: Correspondent Banking Relationships Withdrawal

The decision to terminate CBRs in Angola is likely driven by a number of different factors operating concurrently. For example, retrenchment by global banks since the global financial crisis has led to a reconsideration of the geographical reach of their business models in light of changed global macroeconomic conditions, regulatory demands, banks own risk management requirements and the perception of Angola as a higher risk jurisdiction, including with regard to the proceeds of corruption, have all played a part in a withdrawal of direct U.S. dollar CBRs.

Angolan respondent banks have responded to loss of direct U.S. dollar CBRs for their customers by finding alternative payment channels, which has mitigated the adverse macro-financial impacts. There has been a greater use of nested CBRs in U.S. dollars through intermediary banks in countries such as Portugal and South Africa. In addition, there has been a much greater use of Euro CBRs for payment flows out of Angola. However, these alternative payment channels while providing a short-term solution remain in danger of being withdrawn as compliance concerns of global correspondent banks may not be fully met. Continued strengthening of the Angolan supervisory and regulatory prudential and AML/CFT framework through addressing existing legal deficiencies, including with regard to preventative measures for politically exposed persons, active enforcement, including in conducting risk-based supervision of financial institutions, and better understanding between global correspondent and Angolan respondent banks on information needs as part of a risk-based approach would better tackle the perception of Angola as a higher risk jurisdiction.

The authorities have been actively involved in pursuing high-level dialogue with home authorities of global correspondent banks to better understand regulatory expectations around CBRs. In that context work is underway to strengthen supervisory and regulatory prudential frameworks and enforcement in line with regional and global peers. In addition, there has been open public-private sector dialogue on addressing the withdrawal of CBRs and strengthening AML/CFT frameworks through various local roundtables, workshops including one organized by the BNA and Fund staff, and at regional groups. Work is also underway at the central bank through a regular data questionnaire and analysis of CBR payment data with technical assistance input by the Fund to better understand the nature, scale, and scope of CBR withdrawal to help fine-tune policy solutions.

20. The banking system needs to be strengthened. While the banking system’s solvency indicators have been deteriorating only gradually they may not be fully reflecting the underlying deterioration in part due to loan restructuring that is being extended also to some non-viable companies (ever-greening). In addition, five banks are undercapitalized. It would be important for the BNA to take the following measures:

  • Conducting rigorous asset quality reviews linked to stress tests on the largest thirteen banks (covering about 90 percent of the banking system’s assets) on an annual basis to help identify forward-looking capitalization needs.

  • Requiring under-capitalized banks to implement action plans and closely monitor their implementation. In particular, the two banks with negative equity could threaten confidence on the banking system even though they are relatively small banks. Therefore, these banks should be immediately recapitalized or resolved.

  • Bringing to conclusion as soon as possible the process of evaluating the loan portfolio, restructuring management and operations, and recapitalizing the BPC. Also, the risk management capacity of BPC needs to be upgraded to ensure that credit underwriting is strengthened to avoid a repetition of unsustainable asset quality problems.

  • Investigating the extent to which banks are resorting to ‘ever-greening’ of loans and making sure this practice is discontinued and bad loans are fully provisioned and written off early.

  • Strengthening the crisis preparedness scheme—such as the Emergency Liquidity Facilities and other contingency planning—by completing Crisis Simulation Exercises. Attention needs to be paid to assessing for operational effectiveness and limitations the emergency liquidity facilities to support well managed, solvent banks during distress periods.

21. The authorities have made steady progress on implementing the 2012 Financial Sector Assessment Program (FSAP) recommendations especially on governance, supervision, and resolution mechanism. Supervisory functions have been restructured with dedicated departments for banking supervision, regulation, foreign exchange supervision, and consumer protection. Regulations have been issued on consolidated supervision and on banks’ internal controls and corporate governance requirements. A financial stability committee under the BNA has been established with the publication of a Financial Stability Report.8 A risk oversight unit is being established with further enhancements being made for on-site supervision and developments of a new supervision and licensing manuals in line with a risk-based supervisory approach. The BNA has also progressed work on aligning banks’ accounting and reporting practices with latest International Financial Reporting Standards (IFRS). Additional work will need to continue to build supervisory effectiveness with regard to implementation on consolidated supervision, systemic stability analysis, and operationalization of prompt corrective action procedures and regulations on emergency liquidity assistance and crisis preparedness.

22. The authorities are making progress in strengthening the Anti Money Laundering and Combating the Financing of Terrorism (AML/CFT) framework. Angola was removed from the Financial Action Task Force’s (FATF) list of countries with strategic AML/CFT deficiencies in February 2016, as a result of the progress made in addressing technical items of the action plan agreed with the FATF.9 The authorities are continuing to work with the regional FATF body (ESSAMLG) to address the full range of issues identified in its mutual evaluation report. They should continue efforts to strengthen the AML/CFT framework in line with the FATF 2012 standard, including with regard to preventive measures on politically exposed persons and risk-based supervision of financial institutions and designated non-financial businesses and professions, ahead of the next AML/CFT evaluation, tentatively scheduled in 2020.

23. In addition to existing exchange measures, staff has completed its assessment of the exchange measures introduced by the authorities during 2015.10 The operation of the priority list for access to U.S. dollars at the official exchange rate and a special tax of 10% on transfers to non-residents under contracts for foreign technical assistance or management services both give rise to exchange restrictions subject to Fund approval under Article VIII, Section 2(a). Additionally, the lack of a mechanism to ensure that the effective exchange rates for transactions that take place at the reference rate in place and the rate at which transactions take place in the foreign exchange auction on that day do not deviate by more than 2 percent gives rise to a multiple currency practice subject to Fund approval under Article VIII, Section 3. Staff encouraged the authorities to remove these, as well as the existing, exchange measures as soon as possible.

24. A first-time safeguards assessment of the BNA was completed in 2010. The assessment found that the BNA is subject to annual external audits by a reputable firm and has taken steps to address the audit qualifications. Recommendations focused on strengthening governance and transparency practices, internal audit, and the control framework in the reserves management area. Since then some progress has been made in addressing safeguards recommendations. In particular, the BNA has strengthened its internal audit function, and reconstituted its Audit Board. The BNA published its annual financial statements of 2011 through 2014, but the 2015 audited financial statements have yet to be published.

Authorities’ views

25. The authorities agreed with staff’s analysis and recommendations. They are taking steps to strengthen the banking sector. For example, they have named a new board of directors of BPC bank and set aside up to 1½ percent of GDP to recapitalize it and clean its bad loan portfolio. They also agreed with the need to enhance Angola’s AML/CFT framework to help address the concerns that have contributed to the loss of all direct U.S. dollar CBRs. The authorities have requested additional Fund technical assistance in this area.

D. Promoting Economic Diversification

26. The main economic challenge for Angola remains the need to diversify its economy and export base. Achieving this objective requires reducing costs in the non-oil sector and dealing with physical and human capital bottlenecks. These efforts should be complemented by more forcefully addressing Angola’s severe impediments to doing businesses as identified by the 2017 World Bank’s Ease of Doing Business Survey. For example, simplifying the procedures for and expediting the issuance of work visas is a priority for private sector development and attracting FDI. In the process of improving the economic climate and promoting diversification, it is important to aim at reducing the large state footprint in the economy while improving governance, and relying more forcefully on market-based allocation of resources.

A01ufig1

Angola: Components of the Ease of Doing Business,2017

(Rank, out of 190 countries)

Citation: IMF Staff Country Reports 2017, 039; 10.5089/9781475575620.002.A001

Source: World Bank, Doing Business, 2017.

27. The authorities have launched a program targeting sectors considered as having high import-substitution and/or export-promotion potential. These programs are expected to be financed through external credit lines contracted by the government that would then be channeled (on-lent) to the private sector through the state-owned BDA bank. In its initial phase, this program is facilitating the access of private companies, with the above-mentioned potential, to forex needed to import intermediate and capital goods. It will be important to define well how project selection is being conducted and take proper upfront account of risks of non-repayment of the resources that will be on-lent. This program raises concerns given the potential fiscal cost that it could entail; it should be temporary; and its progress and implementation should be more transparent, with its cost disclosed in the annual budget.

28. In addition, the authorities are implementing reforms to enhance the social protection system. With the assistance of the EU and UNICEF, the authorities launched in 2015 the APROSOC Social Protection Program, which aims to improve social assistance for the most vulnerable population. It intends to improve the efficiency, effectiveness, and impact of the national social assistance interventions in Angola and to strengthen the capacity of the leading sector Ministry (MINARS) to design and implement a social assistance agenda based on a new sectoral policy framework. The government also aims to create a Single Social Registry to help identify and target the poor.

Authorities’ views

29. The authorities are confident that the measures being implemented to upgrade the country’s infrastructure, improve its human capital, and strengthen the business climate will allow the economy to diversify, making growth more inclusive. They have been investing heavily on infrastructure. They expect two large dams to start producing energy in 2017 and have started construction of the deep-water port of Cabinda. With the assistance of the World Bank, they also plan to expand access to water supply and promote agriculture. They expected that the reforms recently undertaken to facilitate opening a business—such as reducing its cost and timing—should have been reflected in Angola’s rating in the World Bank’s Ease of Doing Business Survey. The World Bank continues to work closely with the authorities to help improve their doing business indicators. The authorities also emphasized the need to accelerate and deepen reforms to promote diversification. In this context, they have approved 23 targeted programs in the agriculture, industry, fishing, geology, and telecommunications sectors but argued that their implementation has been slow and so far only access to forex has been provided to companies.

E. Data Issues

30. While data provided to the Fund are assessed to be broadly adequate for surveillance, there is considerable room for improvement in the national accounts, including publication of quarterly data, balance of payments, producer price indices, monetary statistics, and FSIs. Significant efforts are needed to improve the quality and timeliness of fiscal data, including the operational balance of all SOEs. The monitoring of domestic payments arrears should continue to be improved. Improvements in the quality of economic and social data are essential to better inform policy makers. In this regard, it will be very important to secure proper funding to INE so it can discharge its duties

Staff Appraisal

31. The oil price shock that started in mid-2014 has substantially reduced fiscal revenue and exports, with growth coming to a halt and inflation accelerating sharply. This has brought to the forefront the need to address more forcefully vulnerabilities and dependence on oil and to diversify the economy.

32. Risks to the near term outlook are on the downside. They include lower oil prices beyond those included in the baseline, difficulties to control spending in the run-up to next year’s elections, continued imbalances in the forex market, a sustained period of low growth with limited opportunities to address social needs, global banks’ withdrawal of CBRs, delays in the recapitalization of weaker banks, and slippages in the implementation of structural reforms.

33. The authorities have taken policy steps to mitigate the impact of the external shock. An 18 percent of GDP improvement in the non-oil primary fiscal balance over 2015-16, mainly through spending cuts including the removal of fuel subsidies were implemented. Public debt, however, is projected to increase significantly to around 71½ percent of GDP, of which 19 percent of GDP corresponds to Sonangol, by end-2016, and domestic payments arrears have re-emerged. Clearing arrears and, over time, reversing this sharp debt increase will be critical. For 2017, targeting an overall fiscal deficit of no more than 2¼ percent of GDP that is consistent with an improvement of at least 1 percent of GDP in the non-oil primary fiscal balance—in line with the gradual adjustment that would be needed over the medium term to put public debt on a clear downward path—should be achieved through additional spending rationalization.

34. In the context of more limited oil revenue, expenditure rationalization and improved non-oil revenue will be essential. Fiscal deficits should be gradually reduced and over time a non-oil primary fiscal consolidation path of 1 percent of GDP per year should be targeted to restore policy buffers and ensure that part of Angola’s oil wealth is saved for future generations. This can be achieved if concerted efforts are deployed in containing the growth of the wage bill, strengthening non-oil revenue collections, including implementing a VAT, improving the quality of public investment, eliminating electricity and water subsidies while expanding well-targeted social assistance for the poor.

35. Monetary and exchange rate policies should play a central role in rebalancing the forex market. In recent months, the BNA has appropriately tightened liquidity conditions by increasing its policy rate, banks’ mandatory reserve requirements, and contracting annual base money by 3 percent. The BNA has effectively fixed the official exchange rate since April 2016 but its forex provision has not been sufficient to address needs. As a result, imbalances exist in the forex market, as reflected in wide, albeit volatile, spread between the official and parallel markets exchange rates. If unaddressed, this will likely undermine the official exchange rate as the basis for price formation and inflation expectations, and lead to misallocation of resources in the economy. Addressing this imbalance calls for greater exchange rate flexibility, moderate use of international reserves to smooth out the depreciation of the kwanza, and tighter monetary policy supported by fiscal adjustment to contain the effects of the weaker currency on inflation.

36. The effects of the loss of U.S. dollar CBRs need to be addressed. The authorities have been rightly and actively pursuing high-level dialogue with home authorities of global correspondent banks to better understand regulatory expectations around CBRs. Mitigating the drivers and risks arising from the loss of CBRs by the BNA stepping up its data collection and analysis efforts, enhancing dialogue with the private sector and home regulators of foreign correspondent banks, strengthening the prudential and AML/CFT framework, and developing contingency plans in coordination with all stakeholders will be key to address this risk.

37. Preserving the health of the banking sector is essential to allow the economy to recover over time from the current slowdown. The BNA appropriately focused its efforts to strengthen bank supervision. However, efforts should not be spared in further strengthening bank supervision, resolution frameworks, and closing or recapitalizing weaker banks. In this connection, the conclusion of ongoing asset quality reviews of the major banks and the recapitalization of the systematically-important, state-owned bank, BPC, needs to be accelerated.

38. Economic diversification is crucial to help Angola adjust to the ‘new normal’ in the international oil market. After enjoying the benefits of high international oil prices for almost four consecutive years, it will take time for the economy to adjust to lower prices. The authorities’ reform agenda tackles a number of critical constraints to economic diversification by improving infrastructure, in particular, in transport, energy, and water. Implementation of these initiatives will be critical to improve competitiveness while making growth more inclusive. However, these efforts should be complemented by investing also on human capital and more forcefully addressing Angola’s severe impediments to doing businesses. For example, simplifying the procedures for and expediting the issuance of work visas is a priority for private sector development and attracting FDI.

39. Angola’s macroeconomic data are broadly adequate for surveillance. Progress has been made in improving the compilation and dissemination of statistics, but gaps need to be addressed, particularly in national accounts, including publication of quarterly data, fiscal data, balance of payments, producer price indices, monetary statistics, and FSIs.

40. While the authorities have not requested Fund approval and staff does not recommend approval, staff encouraged the authorities to set a clear timetable for the removal of measures giving rise to the exchange restrictions and multiple currency practices.

41. Staff recommends that the next Article IV consultation with Angola be held on the standard 12-month consultation cycle.

Figure 1.
Figure 1.

Angola: Selected High Frequency Indicators, 2008–2016

Citation: IMF Staff Country Reports 2017, 039; 10.5089/9781475575620.002.A001

Sources: Angolan authorities; and IMF staff calculations.1 Excluding BESA’s write-off.
Figure 2.
Figure 2.

Angola: Selected Monetary Indicators, 2008–2016

Citation: IMF Staff Country Reports 2017, 039; 10.5089/9781475575620.002.A001

Sources: Angolan authorities; and IMF staff calculations.
Figure 3.
Figure 3.

Angola: Fiscal Projections, International Reserves, and Exchange Rate Developments for Selected Oil Exporters, 2014–20161

Citation: IMF Staff Country Reports 2017, 039; 10.5089/9781475575620.002.A001

Sources: National authorities, Bloomberg, and IMF staff calculations and projections.Legend: AGO - Angola; ARE - United Arab Emirates; CMR - Cameroon; COG - Republic of Congo; GNQ - Equatorial Guinea; IRQ - Iraq; KAZ - Kazakhstan; KWT - Kuwait; MEX - Mexico; NGA - Nigeria; OMN - Oman; RUS - Russian Federation; SAU -Saudi Arabia; TCD - Chad; VEN - Republica Bolivariana de Venezuela.1 Share of oil exports was calculated as the average ratio of oil exports to total exports of goods and services during 2011-13. Currency depreciation was calculated as the change of the exchange rate between the country’s currency and the U.S. dollar between August 2014 and November 2016. Change in international reserves was calculated as the change in gross international reserves in U.S. dollars between August 2014 and October 2016 (or the latest available data). Share of oil-related fiscal revenue was calculated as the average ratio of oil-related fiscal revenue and total fiscal revenue during 2011-13. Non-oil primary fiscal adjustment was calculated as the percentage change in the non-oil primary fiscal budget (in percentage points of GDP) between 2014 and October 2016 WEO projections.
Figure 4.
Figure 4.

Angola: Fiscal Developments, 2005–17

Citation: IMF Staff Country Reports 2017, 039; 10.5089/9781475575620.002.A001

Sources: Angolan authorities and IMF staff estimates.
Figure 5.
Figure 5.

Angola: Monetary Developments, 2010–17

Citation: IMF Staff Country Reports 2017, 039; 10.5089/9781475575620.002.A001

Sources: Angolan authorities; and IMF staff calculations.
Figure 6.
Figure 6.

Angola: External Sector Developments, 2005–17

Citation: IMF Staff Country Reports 2017, 039; 10.5089/9781475575620.002.A001

Sources: Angolan authorities and IMF staff calculations.
Figure 7.
Figure 7.

Angola: Risk Assessment Matrix (July 2016)1 Potential Deviations from Baseline

Citation: IMF Staff Country Reports 2017, 039; 10.5089/9781475575620.002.A001

1 The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff). The relative likelihood is the staff’s subjective assessment of the risks surrounding the baseline (“low” is meant to indicate a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability between 30 and 50 percent). The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly. “Short term” and “medium term” are meant to indicate that the risk could materialize within 1 year and 3 years, respectively.
Figure 8.
Figure 8.
Figure 8.

Angola: Main Recommendations of the 2015 Article IV Consultation and their Current Status

Citation: IMF Staff Country Reports 2017, 039; 10.5089/9781475575620.002.A001

Table 1.

Angola: Main Economic Indicators, 2010–17

article image
Sources: Angolan authorities and IMF staff estimates and projections.

Includes debt for the state-oil company, Sonangol, that is not directly guaranteed by the government.

Projected as of November 3, 2016.

Table 2a.

Angola: Statement of Central Government Operations, 2010–17

(Billions of local currency)

article image
Sources: Angolan authorities and IMF staff estimates and projections.

This includes disbursements in 2016 amounting to US$6.9 billion from China Development Bank (CDB) on-lent by the central government to Sonangol. In net terms, this is equivalent to about US$3.8 billion given that part of this loan is to refinance existing debt.

Table 2b.

Angola: Statement of Central Government Operations, 2010–17

(Percent of GDP)

article image
Sources: Angolan authorities and IMF staff estimates and projections.

This includes disbursements in 2016 amounting to US$6.9 billion from China Development Bank (CDB) on-lent by the central government to Sonangol. In net terms, this is equivalent to about US$3.8 billion given that part of this loan is to refinance existing debt.

Table 2c.

Angola: Statement of Central Government Operations, 2010–17

(Percent of non-oil GDP)

article image
Sources: Angolan authorities and IMF staff estimates and projections.

This includes disbursements in 2016 amounting to US$6.9 billion from China Development Bank (CDB) on-lent by the central government to Sonangol. In net terms, this is equivalent to about US$3.8 billion given that part of this loan is to refinance existing debt.

Table 3.

Angola: Monetary Accounts, 2010–171

(Billions of local currency; unless otherwise indicated)

article image
Sources: Angolan authorities and IMF staff estimates and projections.

End of period.

Including valuation.

Includes claims on public enterprises and local government.

The very high growth rate of reserve money in 2015 reflects the inclusion of a part of the deposit facilities at the BNA from February 2015 onward. If these amounts were also included at the end of 2014, the growth rate of reserve money would have been 6 percent.

Table 4.

Angola: Balance of Payments, 2010–17

(Millions of U.S. dollars; unless otherwise indicated)

article image
Sources: Angolan authorities and IMF staff estimates and projections.