Angola: Staff Report for the 2018 Article IV Consultation
Author: International Monetary Fund. African Dept.
Publication Date:
11 Jun 2018
eISBN:
9781484360194
Language:
English
Keywords:
ISCR; CR; exchange rate; GDP; real GDP; debt ratio; price; forex market; private sector; government financing; reform agenda; Oil prices; Exchange rates; Currencies; Global
Download PDF (1,019.1 KB)

2018 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Angola

Abstract

2018 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Angola

Background

1. Lower oil prices and an unsustainable policy mix in the run-up to the August 2017 elections placed the Angolan economy under stress. Angola is the third largest economy and second largest oil exporter in sub-Saharan Africa, with oil reserves estimated at 9½ billion barrels in 2016. Its economy is highly dependent on oil for both exports (over 95 percent) and fiscal revenue (about half). The authorities initially reacted to the oil price shock that started in 2014 with significant fiscal tightening coupled with exchange rate adjustments and quantitative restrictions to foreign exchange (forex) purchases. However, the unsustainable policy mix in the run-up to last year’s elections—fiscal expansion and pegged exchange rate—led to a further erosion of fiscal and external buffers.

2. The ruling MPLA party—in power since independence in 1975—has emerged from last year’s elections with a strong mandate. Though narrowing compared to previous elections, the MPLA party won a comfortable (two-third) majority in the National Assembly and retained control of the executive branch. General João Lourenço was elected President of the Republic, replacing President José Eduardo dos Santos who stepped down after 38 years in power but continues to yield some influence as the MPLA party’s head.

3. President João Lourenço is taking on entrenched vested interests and focusing attention on improving governance and fighting corruption. After a series of high profile dismissals of officials linked to the previous administration, investigations have been launched into possible malfeasance at several public entities. More recently, the President has announced the creation of a specialized anti-corruption unit.

4. The Government has been implementing a macroeconomic stabilization program (MSP) to address the economy’s imbalances. The program envisages: upfront fiscal consolidation, limiting the overall fiscal deficit to 3½ percent of GDP in 2018 under a conservative oil price assumption; greater exchange rate flexibility; reducing the public debt-to-GDP ratio to 60 percent over the medium term; improving the profile of public debt through liability management operations; settling domestic payments arrears; and ensuring effective implementation of AML/CFT legislation.

Recent Economic Developments, Outlook and Risks

5. The economy is experiencing a mild recovery but significant imbalances remain:

  • Growth recovered slightly to an estimated 1 percent in 2017, supported by non-oil GDP growth of 1¼ percent due to additional forex availability and higher public spending. Business confidence indicators have been improving steadily since the beginning of 2017.

  • Inflation receded to 26¼ percent (y/y) in 2017, reflecting moderation of food prices due to a stable kwanza and unchanged domestic fuel prices, and tighter monetary conditions.

  • Fiscal policy was loosened and the underlying overall fiscal deficit worsened to 7 percent of GDP in 2017,1 with the non-oil primary fiscal balance deteriorating by ¾ percent of GDP. Public debt, including debt of the state-owned oil company Sonangol, reached 64 percent of GDP in 2017. There was limited progress with clearing the stock of domestic payments arrears (4½ percent of GDP).

  • The current account deficit narrowed to 4½ percent of GDP in 2017. Exports increased by 19½ percent owing to better oil prices; and imports were constrained, inter alia, by an inefficient and intrusive forex allocation system carried out by the BNA.

  • Monetary policy was tight for most of 2017. Reserve money contracted, on average, by 9 percent (y/y) in 2017, driven by NIR losses. While liquidity conditions were tight, one-off effects of Treasury operations at end-2017 led to a temporary pick up and sharp fluctuation in liquidity.

  • Weak economic activity in the last three years has eroded banking sector soundness. Asset quality remains weak, with non-performing loans (NPLs) reaching 28¾ percent of total credit at end-2017 (four-fifths of the banking system’s NPLs were concentrated in the state-owned BPC bank). Other banks contained a deterioration of their balance sheets through provisioning and limited lending. On the positive side, system-wide capitalization improved and remained significantly above the minimum requirement of 10 percent. All banks have migrated to the IFRS accounting system which, inter alia, has more robust provisioning requirements.

  • Imbalances in the forex market are being addressed. The parallel-official exchange rate spread remained high at 150 percent in 2017. The BNA sold an additional 17¼ percent of forex to the market in 2017, leading net international reserves (NIR) to decline by almost 40 percent, to US$13¼ billion at end-year. In early 2018, the BNA exited the exchange rate peg to the U.S. dollar and adopted a more flexible exchange rate regime, the kwanza depreciated by 30 percent to the U.S. dollar and the spread narrowed to about 90 percent in March.

uA01fig01

Foreign Exchange Rates and Spread

Citation: IMF Staff Country Reports 2018, 156; 10.5089/9781484360194.002.A001

6. The outlook for 2018 is more favorable. Growth would accelerate to 2¼ percent, driven by a more efficient forex allocation system by the BNA and additional availability of forex due to higher oil prices; LNG production inching up to full capacity; and improved business sentiment. Inflation would decline though remain high at 24¾ percent at end-year, reflecting the effects of the kwanza depreciation,2 and expected adjustments to domestic fuel prices and utilities’ tariffs. While the current account deficit is projected to narrow to 3½ percent of GDP, NIR is expected to decline by US$3½ billion in 2018 to mitigate exchange rate overshooting pressures.

7. The outlook for the medium-term would continue improving, if structural reforms are implemented as expected. Annual growth would gradually pick up over the medium term to about 5 percent, supported by private sector credit (shored up by resumption of economic activity, clearance of domestic payments arrears, and NPL resolution at state-owned banks); scaling up of public investment; implementation of structural reforms to improve governance and the business environment as envisaged in the MSP; and recent actions to ease constraints on private investment, including improving legislation to support competition in domestic markets and attract FDI. These would more than offset the drag on growth due to gradual non-oil primary fiscal retrenchment. Prudent fiscal and monetary policies and gradual elimination of production bottlenecks would support the BNA’s objective of bringing inflation to single digits over the medium term.

8. Risks to the medium-term projections appear balanced. On the upside, the rolling out of structural reforms beyond those considered in the baseline scenario could lead to higher-than-projected growth. On the downside, lower international oil prices, potential decline in crude oil production, slippages in the implementation of macroeconomic policies and structural reforms, slower-than-envisaged pace of NPL resolution, and incomplete adjustment in the forex market could derail the projected gradual growth pickup.

9. Spillovers: Outward spillovers from Angola to the region are generally limited. Angola has marginal trade and financial flows with countries in the region, although a few countries, such as the Democratic Republic of Congo (DRC) and Namibia, which border Angola, are being more affected by the economic difficulties in Angola through cross-border trade. In this connection, the DRC announced in August 2017 a temporary ban on imports of several products from Angola to protect its local industries. Although Angola is Portugal’s largest export market outside the EU and several Portuguese banks are present in Angola through joint-ventures with local investors, the magnitude of these interests remains relatively small if compared to 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 downward pressure on oil prices.

Authorities’ Views

10. The authorities largely agreed with staff’s assessment of the outlook and risks. Their growth forecasts for 2018, initially more optimistic, have now broadly converged towards staff’s. However, they expect a faster disinflation pace, citing the limited devaluation pass-through in the first two months of 2018. Over the medium term, they believe staff’s projections would provide a lower bound to Angola’s growth potential and an upper bound to the disinflation path.

Policy Discussions

11. The policy adjustment that started in early 2018—upfront fiscal consolidation and greater exchange rate flexibility—is key for restoring macroeconomic stability and pave the way for sustainable and inclusive growth. The government has correctly focused attention on the need to improve governance and restore macroeconomic stability. The MSP is broadly in line with Fund advice and, if fully implemented, is likely to address the economy’s imbalances. Also, the National Assembly has recently approved legislation that aims to foster competition in local markets, and is discussing a revision of the legal framework to attract FDI.

12. Amid a relatively benign oil price outlook, policy discussions focused on the following: implementing a gradual fiscal consolidation over the medium term to entrench public debt sustainability, while protecting social safety net programs and improving their efficiency and effectiveness; upgrading the monetary policy framework to support exchange rate flexibility while containing inflationary pressures; developing and deepening the forex market; tackling financial sector vulnerabilities; and accelerating the pace of structural reforms.

A. Fiscal Policy: Frontloading Adjustment followed by Gradualism

13. The non-oil primary fiscal consolidation enshrined in the budget for 2018 is welcome, and any fiscal revenue windfalls should be used to clear domestic payments arrears and/or retire public debt. Under a conservative oil price assumption (US$50/barrel), the budget for 2018 targets a reduction in the overall fiscal deficit to 3½ percent of GDP, consistent with a reduction of 2 percent of GDP in the non-oil primary fiscal deficit. However, as international oil prices are currently projected to be higher than assumed in the budget, the overall fiscal deficit could be reduced to 2 percent of GDP in 2018. This fiscal stance seems appropriate given Angola’s limited fiscal space due to elevated public debt and large gross financing needs (GFN) and it would create space to clear domestic payments arrears and/or retire public debt.

Fiscal Adjustment, 2018

(In percent of GDP)

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

14. GFN in 2018 are substantial, but appear manageable given the benign external environment. GFN are expected to be met by domestic borrowing and external sources, including China and other bilateral creditors, multilaterals (World Bank and AfDB), commercial banks, and a new Eurobond issuance of US$2 billion. External financing linked to public investment projects in the approved budget has been mostly secured. However, the authorities’ financing mix—tilted toward domestic bank borrowing—might be difficult to achieve, as commercial banks report being close to their internal exposure limits to sovereign risk. Under the right conditions, exploring the appetite for further Eurobond placements could be considered, which would help further diversify the financing mix, relieve pressures on domestic debt markets, and lengthen the average maturity of public debt.

Borrowing Needs and Sources, 2018

article image

15. Despite the significant fiscal effort envisaged for 2018, gradual fiscal consolidation over the medium term is required to put the public debt-to-GDP ratio on a clear downward path. The MSP objective of lowering the public debt-to-GDP ratio to under 60 percent over the medium term provides a needed fiscal anchor. It is consistent with a non-oil primary fiscal consolidation path averaging ¾ percent of GDP annually until 2023, achieved mostly via adopting a VAT (about half of the fiscal effort) and streamlining the wage bill and spending on goods and services (the other half), as envisaged in the MSP, while creating space for additional public investment and social programs. The targeting and effectiveness of social programs and the efficiency of infrastructure spending should be improved, and spending in these areas should support poverty reduction and sustainable inclusive growth. The Debt Sustainability Analysis (DSA) shows that Angola’s public debt is sustainable under this baseline scenario but, at the same time, it remains exposed to significant vulnerabilities, including to real GDP growth and exchange rate shocks.

uA01fig02

Gross Public Debt

(In percent of GDP)

Citation: IMF Staff Country Reports 2018, 156; 10.5089/9781484360194.002.A001

16. Additional policies and structural reforms to entrench medium-term fiscal sustainability and improve the quality of public spending include:

  • Designing and implementing a credible strategy to clear domestic payments arrears during 2018 and avoid recurrence of arrears in the future in line with FAD TA recommendations.

  • Complementing efforts to reduce the public debt-to-GDP ratio through gradual fiscal consolidation with efforts to improve the debt profile and reduce GFN. These include: pursuing market-based liability management operations to lengthen the average maturity of public debt; formulating and implementing, in line with joint Bank-Fund TA recommendations, a plan to further develop the domestic debt market, including broadening the investor base, which would allow replacing in a gradual manner foreign currency and foreign currency indexed government securities with local currency government bonds with increasingly longer maturities; and implementing a robust privatization program.

  • Containing contingent liability risks, including from issuing state guarantees to large infrastructure projects, and relying on public-private partnerships that properly consider and mitigate the risks to the public sector; and from the financial sector, including by conditioning BPC’s next round of recapitalization on advancing its restructuring plan.3

  • Introducing a VAT on January 1, 2019, as planned, to provide a broad-based and more stable fiscal revenue source for the budget. This would require early actions (ongoing) on drafting legislation, defining the tax parameters, adjusting systems and infrastructures at the revenue collection agency, AGT, and communicating with taxpayers.

  • Continuing efforts to broaden the non-oil tax base and strengthen tax compliance, including through improving tax inspections, reliability and accuracy of taxpayer registry, better enforcing real estate taxation, and incentivizing formalization of informal businesses.

  • Reducing the wage bill, as a share of GDP, over the medium term, by reforming and streamlining the size of the public administration and aligning wage increases with productivity gains and performance, as envisaged in the MSP.

  • Adjusting domestic fuel prices to reflect changes in international fuel prices and in the exchange rate,4 and introducing an automatic price adjustment mechanism.

  • Improving the quality of public investment, including by enhancing compliance of the public investment management process with existing legislation to reduce costs and improve efficiency; prioritizing and monitoring the execution of projects; conducting project evaluations; and improving capacity to conduct project appraisal, selection, monitoring, and evaluation.

  • Expanding social programs for the vulnerable to alleviate poverty, including by transforming the Cartão Kikuia program into a well-targeted conditional cash transfer program to the poor with national coverage and direct links to productive inclusion initiatives; improving access and quality of basic and secondary education; and strengthening the delivery of primary health care.

  • Implementing a medium-term fiscal framework (MTFF), focusing on spending rules and a well-designed fiscal stabilization fund to reduce pro-cyclicality of spending.5 Public investment projects, should only be approved and started if there is fiscal space for their (future) current spending needs which should be properly reflected in the MTFF, and their management should follow the best practices recommended above.

  • Strengthening budget formulation and execution processes, including by enforcing budget ceilings and avoiding reallocation of spending across the main types of expenditure (i.e., recurrent and capital) without approval of the National Assembly.

  • Downsizing the public corporate sector to reduce their burden to the Treasury and increase economic efficiency. In this connection, insolvent state-owned enterprises (SOEs) should be closed; and economically viable but inefficient SOEs should be restructured and/or privatized.

  • Accelerating Sonangol’s restructuring to make it leaner, more efficient, and focused on its core oil and gas businesses, by rationalizing its large workforce and divesting part of its vast non-core businesses to limit the need for future capital injections.

Authorities’ Views

17. The authorities broadly agreed with staff’s recommendations. They are committed to using any revenue windfalls in 2018 to retire debt and/or clear domestic payments arrears, aiming to conclude the latter by 2019 at the latest. The authorities also agreed with the need for gradual fiscal consolidation over the medium term, and expressed their commitment to continue mitigating debt sustainability risks, including by bringing public debt to lower levels through fiscal consolidation and improving the debt profile through market-based liability management operations. They are working toward launching a privatization program—a high-level inter-ministerial commission has been formed to study the issue and make proposals in this area. Sonangol’s new management expressed willingness to review and divest some of the company’s non-core assets and, possibly, some of its participation in oil fields, as part of the strategy to refocus the company on its core businesses and strengthen its liquidity position. While the authorities agreed that domestic fuel prices need to be adjusted, they noted that Sonangol’s profit and commercialization margins were large and needed to be reduced prior to adjusting fuel prices. They also stressed their preference for phased domestic fuel price adjustments to mitigate the impact on inflation.

B. Monetary and Exchange Rate Policies: Modernizing Frameworks

18. The BNA’s tight monetary policy remains appropriate to support greater exchange rate flexibility. The BNA adopted base money as the new anchor for monetary policy in November 2017; tightened domestic monetary conditions by about 1 percent of GDP by reducing kwanza reserve requirements from 30 percent to 21 percent while eliminating the option for banks to meet this obligation by resorting to T-bills and/or loans to priority sectors; and exited from the kwanza peg to the U.S. dollar. In early 2018, the BNA adopted a regime of (unannounced) bands for the fluctuation of the kwanza against the euro, and conducted two auctions under the system that led to significant depreciation of the kwanza. To mitigate exchange rate overshooting, the BNA then reactivated forex auctions under revised rules wherein bids could fluctuate within a plus/minus 2 percentage point band around the average exchange rate of winning bids of the previous auction, de facto capping the maximum depreciation of the exchange rate at 2 percent per auction. Forex was increasingly supplied through forex auctions in the first quarter of 2018, and the BNA expects to phase out direct forex sales to priority sectors soon.

19. Further action is needed to strengthen monetary policy effectiveness and restore equilibrium in the forex market. The adoption of base money targeting is welcome, but there is room to enhance the credibility of the new nominal anchor to stabilize market expectations. Within the context of active liquidity management, sharp liquidity fluctuations as experienced around end-2017 will need to be avoided. The external balance assessment (EBA) shows that the external position was weaker than implied by medium-term fundamentals—the real effective exchange rate (REER) was overvalued by 20 percent at end-2017—underscoring the need for exchange rate adjustment supported by tight fiscal and monetary policies and structural reforms. Since the beginning of the year, the kwanza has depreciated by 42 percent against the euro, in nominal terms, correcting the estimated REER overvaluation. However, the parallel-official exchange rate spread remained elevated at 90 percent in March, reflecting short-term pressures as the backlog of forex purchase orders is gradually being addressed.

20. Consideration should be given to the following additional measures:

  • Aiming over time at a market-clearing exchange rate and a fully functioning forex market in line with recommendations of a recent MCM TA mission.

  • Designing and implementing a strategy to eliminate existing exchange restrictions and multiple currency practices (see detailed advice in Figure 9).

  • Eliminating excess liquidity in the banking system through active use of open market operations.

  • Targeting base money growth in line with the inflation objective while bringing and maintaining three-month T-bill rates to positive territory in real terms.

  • Developing robust frameworks for forecasting liquidity and managing inflation, including by lengthening the horizon of (currently daily) liquidity forecasts and enhancing the forecasting model for inflation.

  • Improving the communication of monetary policy actions and objectives to the public to help anchor expectations and make it easier for the BNA to achieve its objectives.

Figure 1.
Figure 1.

Angola: Selected High Frequency Indicators, 2008–18

Citation: IMF Staff Country Reports 2018, 156; 10.5089/9781484360194.002.A001

Sources: Angolan authorities; and IMF staff calculations.
Figure 2.
Figure 2.

Angola: Selected Monetary Indicators, 2010–17

Citation: IMF Staff Country Reports 2018, 156; 10.5089/9781484360194.002.A001

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

Angola: Fiscal Projections, International Reserves, and Exchange Rate, 2011–171

Citation: IMF Staff Country Reports 2018, 156; 10.5089/9781484360194.002.A001

Sources: National authorities, Bloomberg, Haver, 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 March 2018. Change in international reserves was calculated as the change in gross international reserves in U.S. dollars between August 2014 and December 2017 (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 2017 WEO data.
Figure 4.
Figure 4.

Angola: Fiscal Developments, 2007–18

Citation: IMF Staff Country Reports 2018, 156; 10.5089/9781484360194.002.A001

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

Angola: Monetary Developments, 2012–18

Citation: IMF Staff Country Reports 2018, 156; 10.5089/9781484360194.002.A001

Sources: Angolan authorities and IMF staff estimates.
Figure 6.
Figure 6.

Angola: External Sector Developments, 2005–18

Citation: IMF Staff Country Reports 2018, 156; 10.5089/9781484360194.002.A001

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

Angola: Risk Assessment Matrix (January 2018)1 Potential Deviations from Baseline

Citation: IMF Staff Country Reports 2018, 156; 10.5089/9781484360194.002.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 (ST)” and “medium term (MT)” are meant to indicate that the risk could materialize within 1 year and 3 years, respectively.
Figure 8.
Figure 8.
Figure 8.
Figure 8.

Angola: Main Recommendations of 2016 Article IV Consultation and their Status

Citation: IMF Staff Country Reports 2018, 156; 10.5089/9781484360194.002.A001

Figure 9.
Figure 9.
Figure 9.

Angola: Foreign Exchange Policy Measures and the IMF Articles of Agreement

Citation: IMF Staff Country Reports 2018, 156; 10.5089/9781484360194.002.A001

Authorities’ Views

21. The authorities agreed that greater exchange rate flexibility would help preserve external buffers and improve competitiveness. With inflation expected to remain relatively high in 2018, they noted that monetary policy should maintain a tightening bias. They also noted that NIR loss in 2018 would be unavoidable, owing to the need to mitigate possible overshooting of the exchange rate while addressing gradually the backlog of forex purchase orders. They indicated that communication with markets had already improved, including in the context of working sessions with banks. They agreed that further work was needed to provide forward guidance to markets on the role of reserve money as the new operational target in taming inflation.

C. Financial Sector: Tackling Vulnerabilities

22. While the banking system is generally stable, lingering vulnerabilities need to be addressed decisively. Banks have generally supported—and benefitted from—greater exchange rate flexibility, but a few banks are struggling with forex liquidity mismatches. The BNA introduced a new liquidity requirement for banks that curtails their daily net forex liquid position (excluding forex indexed bonds and loans) to plus/minus 20 percent of regulatory capital by March and plus/minus 10 percent by June that impacted six banks negatively. The BNA also increased threefold the minimum regulatory capital requirement for commercial banks to be met by end-2018, which could lead to some consolidation in the sector. In addition, banks continue to suffer from subdued lending and, in the case of state-owned banks, very high NPLs: BPC remains weakly capitalized, dependent on the BNA for liquidity, and the pace of its operational restructuring has been slow. A state funded asset management company, Recredit, has agreed to acquire about one-third (Kz300 billion) of BPC’s distressed assets and is working with other banks to acquire an additional Kz180 billion NPLs.

23. The economy’s heavy dependence on oil is a challenge for banks.6 Banks’ business models are closely linked to the oil sector. Oil price volatility and pro-cyclical public spending create feedback loops for liquidity and credit, leading to windfalls for some banks while building vulnerabilities for others, especially state-owned banks. Weak performance of real and financial variables tends to be associated with oil price downturns. Increasing government financing needs during oil price downturns leads banks to increase their exposure to the government through purchases of T-bills, leaving some vulnerable to sovereign distress. Government’s majority or minority ownership in six banks leads to contingent liabilities that peaked at about 4 percent of GDP in 2014 but have since declined to about 1 percent of GDP.

24. Efforts to effectively implement and strengthen the AML/CFT framework are ongoing. In February 2010, FATF identified Angola as a country with strategic AML/CFT deficiencies. After sufficient progress in addressing the technical items of its action plan, Angola was removed from FATF’s monitoring process in February 2016 and agreed to continue to work with the regional body to address the full range of AML/CFT issues identified in its assessment. Angola is currently scheduled to undergo its second mutual evaluation in 2020, at which time it will be assessed against the revised 2012 FATF standards. Addressing AML/CFT issues has become imperative following the loss of direct U.S. dollar correspondent banking relationships (CBRs) in October 2016. The BNA has been actively participating in international fora aimed at clarifying home supervisor requirements and maintaining open channels of communication between domestic and foreign banks and regulators. While the banking system has managed to mitigate the loss of CBRs, including using euro and nested U.S. dollar CBRs that are costly and suboptimal, further efforts are warranted.

25. The following actions would strengthen further the banking system:

  • Intensifying efforts to complete the second phase of banks’ asset quality reviews, with a view to gauge banks’ capitalization needs, and pursuing a swift resolution of NPLs to strengthen banks’ balance sheets and position the banking sector to play a supportive role to the recovery.

  • Raising the efficiency of state-owned banks, by fully implementing their restructuring plans. In the case of BPC, the third tranche of recapitalization that is envisaged for 2018 should only be completed after demonstrable actions to reduce the number of branches and personnel. In the meantime, BPC should not be allowed to resume lending and should focus on improving its liquidity situation.

  • Reverting Recredit to its original mandate of supporting BPC while adding a sunset clause to its operations.

  • Monitoring banks closely, including their liquidity position in both foreign and local currency, and taking prompt corrective action when problems are identified; require banks to align their forex availability to potential forex deposit outflows; strengthening crisis management and emergency liquidity assistance frameworks; ensuring enforcement of loan provisioning and monitoring loan restructuring; and certifying that banks respond promptly to capital shortfalls.

  • Sustaining efforts to monitor pressures, maintain existing CBRs, and eventually regain CBRs, by taking a lead in aggregating metrics on the extent of the problem; engaging parent jurisdictions of the correspondent banks; advocating for global actions at international fora; and fully enforcing the AML/CFT regulation, including with respect to risk-based AML/CFT supervision and to address corruption-related risks.

  • Strengthening the AML/CFT framework, in collaboration with other state agencies, to be better positioned for the next mutual evaluation assessment of the robustness of the AML/CFT framework.

Authorities’ Views

26. The authorities broadly agreed with staff’s recommendations. The BNA confirmed that some banks faced temporary liquidity challenges due to the new regulation but corrective actions were being implemented. While agreeing with the need to speed up portfolio cleaning, the BNA noted that resolving NPLs would be contingent on Recredit, which did not fall under its supervisory purview. Regarding BPC, the authorities agreed with the need for urgency in resolving the bank’s challenges, including its dependence on the BNA rediscount window, and with making additional support contingent on tangible progress with restructuring.

D. Supporting Private Sector Led Growth and Economic Diversification

27. A challenging business environment and weak governance stifle economic growth and diversification. Private investment is constrained by a weak insolvency framework, protection of minority investors and contract enforcement; poor access to finance; large footprint of the state in the economy; and governance issues. Angola scores very poorly in most measures of governance and corruption perceptions relative to SSA peers. Weak governance discourages private investment, undermines the efficient provision of public goods, and constrains human capital formation.

uA01fig03

Angola: Components of the Ease of Doing Business, 2018

(100=most favorable; 0 = least favorable)

Citation: IMF Staff Country Reports 2018, 156; 10.5089/9781484360194.002.A001

Sources: World Bank, Doing Business 2018, and Fund staff calculations.

28. The authorities are making efforts to strengthen governance, fight corruption, and improve the business environment. The National Assembly recently approved in a first-round vote a Law on Competition which, for the first time, will introduce a framework to support competition in domestic markets and address monopolistic practices in key sectors such as telecommunications and cement production, while establishing an anti-trust authority to enforce the application of the law. A draft Private Investment Law submitted to the National Assembly would remove FDI entry barriers and establish sunset clauses for tax incentives.7 President João Lourenço has recently created a specialized anti-corruption unit to serve as the executive branch’s main agency in charge of preventing and repressing corruption crimes. With support of the Bank, the authorities have launched a program for diversifying exports and substituting imports (PRODESI) that focuses on six priority areas (including easing constraints to doing business) and seeks greater private sector participation.

29. Improving governance and reducing opportunities for corruption may yield growth dividends over the medium and long term. Staff’s estimates suggest that reforms that improve Angola’s governance to the SSA average could increase real GDP per capita growth by up to 2 percentage points annually.8 Targeting the SSA frontier could yield larger gains.

30. Additional measures to improve governance and the business environment include:

  • Strengthening property rights and contract enforcement.

  • Simplifying procedures and expediting the issuance of work visas and residence permits.

  • Passing new legislation that supports private investment, and strengthening government agencies that support export promotion and FDI attraction.

  • Facilitating trade, including by simplifying licensing, customs and other procedures for exports and imports.

  • Strengthening anti-corruption agencies, including by building capacity, increasing material and human resources, and improving cross-agency coordination, while effectively enhancing and enforcing anti-corruption and AML/CFT laws.

  • Improving SOEs accountability, transparency, and oversight, including by strengthening the SOEs oversight agency, and ensuring that audited financial statements of SOEs are produced timely and regularly published.

  • Mitigating constraints to firms’ access to finance, including by strengthening property rights and improving the efficiency of the insolvency system.

Authorities’ Views

31. The authorities broadly agreed with staff’s recommendations. They noted that implementation of the Government’s structural reform agenda would help improve the business environment, diversify the economic and export base, and achieve higher and more inclusive growth. The authorities stressed that ongoing efforts to strengthen governance and fight corruption, as well as upgrade competition and private investment legislation, would be instrumental in attracting FDI and fostering a business-friendly environment to encourage private investment.

E. Data Issues

32. Data provided to the Fund are assessed to be broadly adequate for surveillance, but there is considerable room for improving fiscal data, national accounts, balance of payments and monetary statistics. Significant efforts are needed to improve the quality and timeliness of fiscal and balance of payments data, including the operational balance of SOEs; coverage of non-financial corporations for monetary statistics; and strengthen the monitoring of domestic payments arrears. The National Institute of Statistics (INE) published annual national accounts data for the first time in 2014, but has yet to disseminate updated annual and quarterly national accounts. The Ministry of Economy and Planning, which used to be the sole provider of annual GDP data prior to INE, issued estimates up to 2017. These estimates are still being used by the authorities, including in the annual budget, as well as Fund and Bank staff, and many other stakeholders.9

Staff Appraisal

33. Lower oil prices and an unsustainable policy mix in the run up to the August 2017 elections placed the Angolan economy under stress. The Government of President João Lourenço has correctly focused on restoring macroeconomic stability and improving governance and the business environment. It has chosen a clear path of reforms that, if pursued resolutely, would restore macroeconomic stability and achieve higher and more inclusive growth over the medium term.

34. The outlook is favorable and risks appear balanced. Growth is expected to accelerate modestly in 2018 and inflation would continue declining despite headwinds from currency depreciation and adjustment of domestic fuel prices and utilities’ tariffs. A relatively benign oil price outlook for 2018 would help support the authorities’ fiscal consolidation efforts and mitigate risks to debt sustainability and budget financing. Risks to the medium-term outlook appear balanced. This would help rebuild fiscal and external buffers and mitigate the impact on the Angolan economy of unfavorable external shocks.

35. The National Assembly has approved a prudent budget for 2018, and the authorities are encouraged to use any oil revenue windfall wisely. Staff welcomes the 2 percent of GDP targeted improvement in the non-oil primary fiscal balance enshrined in the budget for 2018. The authorities should use the space created by fiscal revenue windfalls to clear domestic arrears and/or reduce public debt, which would mitigate further the impact of the kwanza depreciation on the debt-to-GDP ratio. The authorities should gradually adjust domestic fuel prices to reflect changes in international fuel prices and movements in the exchange rate, easing the burden on Sonangol. The risks associated with large financing needs are manageable in 2018, and are expected to gradually decline over time through gradual fiscal consolidation, market-based liability management operations, and deepening of domestic debt markets.

36. Gradual fiscal consolidation over the medium term is needed to put public debt on a clear downward path. Non-oil primary fiscal consolidation averaging ¾ percent of GDP annually until 2023 would be needed to reduce public debt to about 60 percent of GDP—the authorities’ medium-term fiscal anchor under the MSP—by that year. As oil prices are expected to gradually decline over the medium term, fiscal consolidation should be underpinned by mobilizing additional non-oil revenue, mainly from introducing a VAT on January 1, 2019, as planned, and rationalizing expenditure. These consolidation efforts together with improvements in the quality of public spending would create space for scaling up public investment and support well-targeted programs for the poor.

37. Monetary and exchange rate policies should be carefully calibrated to rebalance the forex market while containing inflationary pressures. The BNA has formally moved to base money targeting and transitioned into greater exchange rate flexibility. Targeting base money growth at a level consistent with the inflation objective and maintaining interest rates above inflation will be key to monetary stability. It would be important to gradually phase out direct forex sales, as planned, set up pre-announced forex auctions to guide markets, and eliminate exchange restrictions and arrangements that can give rise to multiple currency practices. The BNA also needs to continue improving its liquidity forecasting capabilities and enhancing its instruments and analytical toolkits. Improved communication on the direction of monetary policy is also warranted.

38. Continued vigilance through banks’ monitoring and tackling vulnerabilities including through strong safety nets remains a priority. The BNA should intervene preemptively to reinforce capital and liquidity buffers in the relatively weaker pockets of the banking system. It would be important to strengthen governance at state-owned banks and accelerate their restructuring processes. Concrete actions with regards to completing asset quality reviews, and strengthening crisis management, emergency liquidity assistance, and AML/CFT frameworks would be essential as well. Setting a sunset clause for Recredit operations would be important given the concentration of NPLs in a single bank.

39. Structural reforms are correctly focused on fostering private sector led growth and should be implemented effectively and vigorously for Angola to reap the expected gains. The authorities’ reform agenda appropriately focuses on improving governance, fighting corruption, and improving the weak business environment, which has constrained economic diversification and inclusive growth. Strong political ownership of the reforms at the highest levels bodes well, but implementation risks due to weak institutional and implementation capacity should not be overlooked. To mitigate these risks, Angola is encouraged to continue building its institutions with technical assistance from like-minded reformers.

40. Angola’s macroeconomic data are broadly adequate for surveillance. Progress has been made in improving compilation and dissemination of statistics, but gaps need to be addressed in fiscal and national accounts, balance of payments, and monetary and financial statistics.

41. Staff encouraged the authorities to set a clear timetable for the removal of measures giving rise to exchange restrictions and multiple currency practices. The authorities have not requested and staff is not recommending approval of any exchange restrictions or MCPs.

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

Table 1.

Angola: Main Economic Indicators, 2010–23

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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.

Table 2a.

Angola: Statement of Central Government Operations, 2010–19 (Billions of local currency)

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Sources: Angolan authorities and IMF staff estimates and projections.

The year 2017 it is assumed to include one-off fiscal revenue of 1 percent of GDP from the agreement to settle tax liabilities under dispute with oil companies.

Historical figures may include valuation effects related to foreign-currency denominated deposits.

The figures for 2017 and 2018 are not actuals but rather based on the approved budget.

Table 2b.

Angola: Statement of Central Government Operations, 2010–19 (Percent of GDP)

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Sources: Angolan authorities and IMF staff estimates and projections.

The year 2017 it is assumed to include one-off fiscal revenue of 1 percent of GDP from the agreement to settle tax liabilities under dispute with oil companies.

Historical figures may include valuation effects related to foreign-currency denominated deposits.

The figures for 2017 and 2018 are not actuals but rather based on the approved budget.

Table 2c.

Angola: Statement of Central Government Operations, 2010–19 (Percent of non-oil GDP)

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Sources: Angolan authorities and IMF staff estimates and projections.

The year 2017 it is assumed to include one-off fiscal revenue of 1 percent of GDP from the agreement to settle tax liabilities under dispute with oil companies.

Historical figures may include valuation effects related to foreign-currency denominated deposits.

The figures for 2017 and 2018 are not actuals but rather based on the approved budget.