Angola: Selected Issues
Author: International Monetary Fund. African Dept.
Publication Date:
08 Jun 2018
eISBN:
9781484360255
Language:
English
Keywords:
ISCR; CR; price; bank; investment; GDP; revenue; governance reform; private sector; governance indicator; anti-corruption unit; normalized score; Anti-money laundering and combating the financing of terrorism (AML/CFT); Public investment spending; Public investment and public-private partnerships (PPP); Legal support in revenue administration; Sub-Saharan Africa; corporate governance
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Selected Issues

Abstract

Selected Issues

Governance and Economic Performance in Angola1

This chapter takes stock of the current situation, describes the main actions implemented so far by the Government of President João Lourenço, and discusses policies for further strengthening governance and fighting corruption in Angola. Since the end of the civil conflict in 2002, Angola has implemented a legal framework for supporting good governance and combating corruption. Despite these efforts, Angola did not catch up with peers in sub-Saharan Africa (SSA) and continues to underperform in many areas of governance. This reflects several factors, including remaining deficiencies in legal and regulatory frameworks, patchy law enforcement, and lack of independent and well-resourced anti-corruption institutions. The actions taken so far by the new government to promote good governance and fight corruption are encouraging steps in the right direction. Better governance will likely foster private sector led development and help achieve sustainable and inclusive growth. Bringing Angola’s quality of governance and reducing corruption perceptions to the SSA average could increase real GDP annual growth by up to 2 percentage points in the medium term, according to our estimates.

A. Introduction

1. The Government of President João Lourenço elected in August 2017 is taking vigorous actions to address Angola’s long-standing governance issues and high corruption perceptions. The new administration is fully aware that weak governance and entrenched corruption are a hindrance to Angola’s development prospects. Therefore, improving governance has been one of the main priorities of President Lourenço. In the first six months since taking office the President dismissed many public officials and launched investigations into possible malfeasance at several public entities. He also created a specialized anti-corruption unit that would be the executive branch’s key agency with a mandate to prevent and repress corruption-related crimes. The new government is also revamping the legal framework to improve competition in domestic markets and attract FDI which, if implemented effectively, would improve transparency and level the playing field and thus bode well for private sector development and growth.

2. This chapter studies the link between governance and economic performance in Angola. It identifies areas where Angola has weak governance, using several governance indicators across time and relative to peers; assesses the possible macroeconomic implications of weak governance and corruption in Angola; discusses past and ongoing governance reforms, including the main actions taken so far by the new administration; and concludes with a summary of suggestions going forward.

3. Governance refers to the broad “framework for exercising authority” while “good” governance refers to the “quality” of governance and its impact on outcomes. Broadly speaking, governance relates to the “rules of the game”, while “good” and “weak” governance reflect how the game is played and its results. The Fund has defined governance as the set of “institutions, mechanisms, and practices through which governmental power is exercised in a country, including for the management of public resources and regulation of the economy.” Similarly, the Fund refers to “good” governance as a normative concept, according to which the “quality of governance can impact its effectiveness and efficiency in achieving desired outcomes.” (IMF, 2017a).

4. For the purposes of this chapter, corruption is defined as “the abuse of public office for private gain.” This definition is widely accepted in the literature, and used by the Fund and other international organizations. It is also consistent with the provisions of the United Nations Convention Against Corruption. As the definition suggests, corruption is typically associated with the functions of the State and some of them—e.g., public finances and government regulation—may be particularly prone to creating opportunities for corruption (e.g., IMF, 2018; Tanzi, 1998).

5. More generally, distorted economic incentives and lack of accountability and transparency may create opportunities for corruption. Corruption may arise in the provision of government services (e.g., licenses) and specifically when public officials in charge of enforcing property rights and other regulations can demand bribes. It is akin to a distortionary tax on private sector and hence raises the costs of production. Corruption also diverts resources from productive uses (e.g., human capital formation) into rent seeking and less growth-enhancing activities such as ‘white elephant’ projects (e.g., Shleifer and Vishny, 1993; Acemoglu and Verdier, 1998). Appendix I illustrates the economics of corruption through the lens of a simple model of bribery.

6. Weak governance and systemic corruption are potentially macro-critical for economic performance and may hinder growth through multiple channels. In addition, systemic corruption is a symptom of weak governance and thus combating corruption cannot be delinked from strengthening governance overall (IMF, 2017a). This chapter will mostly focus on the following dimensions of governance in Angola (IMF, 2018):

  • Fiscal governance. Weak governance and corruption undermine revenue mobilization, including by weakening tax compliance; generate inefficiencies and inflate costs on the expenditure side when public financial management (PFM) controls are weak; distort public expenditure towards areas more vulnerable to graft such as public procurement; and undermine accountability and provide opportunities for misappropriation of public funds when fiscal transparency is insufficient (IMF, 2018; Baum et al, 2017; Tanzi and Davoodi, 1997).

  • Market regulation. Burdensome regulation and red tape create opportunities for corruption, which acts as a tax that discourages private investment (Mauro, 1995).

  • Rule of law. Weak enforcement of property rights and legislation, including anti-corruption laws, create uncertainty for private investors and may undermine economic activity (Gradstein, 2004; Acemoglu, 2006).

  • AML/CFT. A weak framework for anti-money laundering and combating the financing of terrorism (AML/CFT) can undermine the integrity of the financial system, allow proceeds of corruption to be concealed, and hinder capital flows (e.g., IMF 2017b).

7. This chapter relies on Fund staff assessment, complemented by analysis of several third-party indicators (TPIs) of governance and corruption perceptions. It draws primarily from staff’s work on governance-related issues for Angola, complemented by the use of the following TPIs: two main aggregate measures of governance—Kaufmann and Kraay’s Worldwide Governance Indicators (WGI) and International Country Risk Guide’s (ICRG) Political Risk Rating, complemented by the World Bank’s Ease of Doing Business Indicators (DBI); and two measures of corruption perceptions—WGI’s Control of Corruption Indicator (CCI), and Transparency International’s Corruption Perceptions Index (CPI).2,3 These indicators cover different countries and time periods but are highly correlated with each other (Table 1), even though some of these correlations are high by construction (e.g., CCI is a component of aggregate WGI). To facilitate cross-country comparison, governance (corruption perceptions) indicators are normalized to 0–100, where 0 is the weakest (highest) and 100 the strongest (lowest) performance.

Angola: Table 1.

Pairwise Correlations for SSA, 2005–16

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Sources: WGI, Transparency International, ICRG, and Fund staff calculations.Note: WGI = Worldwide Governance Indicators, ICRG = International Country Risk Guide, CCI = Control of Corruption Indicator, CPI = Corruption Perceptions Index.

B. Stocktaking

Fiscal Governance

8. Angola’s fiscal transparency has many shortcomings. The timeliness and quality of government finance statistics are weaker than expected for a country with the level of per capita income as Angola’s. Consolidated and detailed fiscal data, including on non-oil revenues and government expenditures, are not published during the fiscal year. Data on oil fiscal revenues are published monthly but more detailed reports on oil fiscal revenues are disseminated on a quarterly basis only and with a long lag. These shortcomings prevent timely monitoring of budget execution by stakeholders, leading to potentially weak financial accountability. They undermine identification and analysis of looming fiscal risks and thus the design of prompt policy responses. They also create unnecessary uncertainty for investors and potentially lead to unfavorable perceptions of sovereign risk such as lower credit ratings and higher borrowing costs (e.g., Arbatli and Escolano, 2015).

9. Furthermore, Angola’s quality and transparency of budget processes perform unfavorably compared to peers. Until mid-2000s, budget preparation and implementation in Angola lacked transparency, scrutiny, and citizen participation. The government used to provide the public with scant information during the budget preparation and during the fiscal year (Open Budget Survey;4 Chêne, 2010). Efforts to improve transparency of fiscal accounts in the past decade (e.g., publication of the budget proposal), including in the context of a Fund-supported program, have increased the country’s score in international surveys. However, oversight by the National Assembly of in-year budget implementation is weak at present. At the request of the National Assembly, Angola’s Supreme Audit Court (Tribunal de Contas) issues ex-post audit reports on the yearly General State Accounts but audits do not cover all government entities and there is little evidence of follow-up on audit recommendations. In part reflecting these weaknesses, Angola’s overall transparency score remains below peers’ (Figure 1).

Figure 1.
Figure 1.

Evolution of Budget Transparency in Angola and Peers

Citation: IMF Staff Country Reports 2018, 157; 10.5089/9781484360255.002.A003

Sources: International Budget Partnership (Open Budget Survey, 2006, 2015), and Fund staff calculations.Note: SSA denotes the average for sub-Saharan Africa. The dotted blue line is a 45° line.

10. Oversight of state-owned enterprises (SOEs) is largely ineffective. The Public Enterprises Oversight Institute (ISEP) has been unable to enforce good corporate governance practices across SOEs. Not all SOEs submit their annual accounts to ISEP for approval as required by law, and many that submit do not have their accounts in order and therefore approved. For instance, according to ISEP, only 8 out of 57 SOEs that submitted accounts in 2014 had their accounts approved without qualifications (updated detailed statistics have not been published by ISEP). Moreover, SOEs are not part of the perimeter of government finance statistics and remain a source of potential contingent liabilities for the State budget.

11. Angola has made progress towards more effective expenditure control but important weaknesses remain. With support of Fund technical assistance (TA), large balances of domestic payments arrears accumulated up to 2014 were cleared and there was an effort to implement the TA recommendations to avoid a recurrence of this problem in the future. However, weak compliance with internal controls, and cash flow pressures as a result of lower oil prices since mid-2014 as well as spending pressures in the run-up to the August 2017 elections led to the accumulation of new arrears (the outstanding stock of domestic payments arrears is estimated at 4½ of GDP at end-2017). Weak expenditure controls undermine the credibility of the fiscal accounts and budget planning and create opportunities for corruption.

12. Angola’s public investment management framework has improved but its effectiveness remains low. The legal framework for public investment management includes provisions for planning, budget execution, and public procurement (e.g., Public Investment Law 31/10, Public Contracting Law 9/16). Angola’s five-year national development plans (PNDs) identify priority investments, and define performance indicators for large investment projects (Projectos Estruturantes). PNDs are integrated with sectoral and regional development plans, and both are part of a long-term development plan (“Angola 2025”). Angola also created an information system to help prepare and manage its public investment program (SIPIP), and the Ministry of Finance has a specialized unit for inventorying, recording, and valuing all public assets—National Directorate of Public Assets (DNPE). In practice, however, the effectiveness of Angola’s public investment management remains low, including because of lack of multiyear budgeting, weak project appraisal and selection, and vulnerabilities in the public procurement process, as discussed next.

13. Most phases of the public investment cycle do not fully comply with best practices and this may create opportunities for corruption. Several weaknesses have been identified, including by Fund TA. In the pre-contracting phase: no requirement to conduct pre-feasibility studies that could avoid unnecessary costs from large projects assessed as non-viable at this stage; in the contracting phase: use of non-competitive bidding (Concurso Limitado, Negociação), and reliance on a limited number of regular contractors; in the execution phase: frequent amendments to public contracts often entailing large increases in the contract’s original value; and in the post-execution phase: absence of expost performance assessment as required by law. Furthermore, budget units of most line ministries suffer from inadequate capacity. These shortcomings, particularly the use of non-competitive bidding, contract uncertainty, and weak capacity, expose Angola’s public investment framework to vulnerabilities.

14. These weaknesses are also correlated with Angola’s low efficiency of public investment. Public investment was high in the decade prior to the 2014–15 oil price shock, accounting for about half of total investment, one of the largest share in the SSA region (Figure 2, first column). However, the quality of public investment was low (Figure 2, second column). Weak public investment management and low quality of public infrastructure prevented closing infrastructure bottlenecks more rapidly, and creating stronger externalities that could lead to higher private investment.

Figure 2.
Figure 2.

Investment Efficiency in Angola and SSA

Citation: IMF Staff Country Reports 2018, 157; 10.5089/9781484360255.002.A003

Sources: WGI, and Fund staff calculations, based on a sample of 128 countries.Note: The orange and gray boxes are the second and third quartiles (from the bottom) of the sample distribution, respectively. The blue diamond is the sample average, and the red dot is the observation for Angola.1 Percentile for the share of public investment in total investment.2 Scores are based on qualitative and quantitative measures of public infrastructure (see IMF, 2015c).

15. Paying taxes in Angola is burdensome. A new tax authority (AGT) was operationalized in 2015. AGT has a large taxpayer office (LTO) that covers about 400 large companies which account for over 50 percent of non-oil fiscal revenue. LTOs are known to support tax compliance (e.g., IMF, 2015a; Baum et al, 2017). AGT is increasing the use of information technologies to improve tax administration and compliance. It already provides an electronic portal (portal do contribuinte) to taxpayers, where corporate tax returns can be submitted electronically. It is also implementing the Automated System for Customs Data (ASYCUDA), as well as an automated system for tax administration (SIGT). But Angola still has too many obstacles to paying taxes (Figure 3, and Table 2), making the tax administration vulnerable to corruption. Fenochietto and Pessino (2013) argue that corruption could be an important determinant of a country’s tax potential. Furthermore, AGT is a young institution whose operations still face shortcomings, including lack of compliance with risk management practices, appropriate performance management framework, and an organizational structure with a clearer separation of roles and responsibilities.

Figure 3.
Figure 3.

Governance and Revenue Mobilization in Angola and SSA, 2006–16

Citation: IMF Staff Country Reports 2018, 157; 10.5089/9781484360255.002.A003

Sources: WGI (governance), World Bank’s Ease of Doing Business (obstacles to paying taxes), WEO (non-resource revenue), and Fund staff calculations.Note: SSA denotes the average for sub-Saharan Africa. Dotted blue lines are fitted linear trends.
Angola: Table 2.

Firms’ Perceptions of Regulatory Burden in Angola and Peers

(Percent averages, sample of 122 countries)

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Sources: World Bank Enterprise Surveys (most recent since 2010) and Fund staff calculations.

Percent of firms identifying tax administration as a major constraint to doing business.

Percent of firms identifying licensing/permits as a major constraint to doing business.

AML/CFT

16. Angola’s AML/CFT framework includes provisions that can support anti-corruption efforts. AML/CFT measures can provide useful tools to support efforts aimed at preventing, investigating and prosecuting corruption crimes. Angola’s main AML/CFT law was enacted in 2011 (Lei 34/11). The law criminalizes the offences of money laundering and financing of terrorism and includes preventive measures to be applied by institutions. This law was an important milestone but deficiencies remained, including lack of comprehensive criminalization of money laundering/terrorism financing activities.5

17. The AML/CFT legal framework was enhanced in 2014 with the Law on Criminalization of Money Laundering Predicate Offences (Lei 3/14), which designates corruption among the predicate offences for money laundering. This extends to passive and active corruption, trading in influence, and corrupt acts outside of Angola. Furthermore, a Financial Information Unit (FIU) was operationalized in 2015. However, the FIU remains under resourced to execute its core functions, i.e., identify, assess and disseminate suspicious transactions, and faces capacity constraints.

18. Since its 2012 mutual evaluation, Angola has made progress in strengthening its AML/CFT framework. In February 2010, the Financial Action Task Force (FATF) identified Angola as a country with strategic AML/CFT deficiencies. In 2011–12, Angola underwent an assessment of its AML/CFT framework, but remained on the FATF’s ‘grey list’ due to existing strategic deficiencies in its framework. In February 2016, having made sufficient progress in addressing the technical items of its action plan, Angola was removed from the FATF’s monitoring process. Angola is scheduled to undergo its second mutual evaluation in 2020, at which time the country will be assessed against the revised 2012 FATF international standards.

19. However, Angola is still perceived as a higher risk jurisdiction. The loss of direct U.S. dollars correspondent banking relationships (CBRs) was partly attributed to weaknesses in the AML/CFT framework and the perception of Angola as a higher risk jurisdiction, including with regards to corruption.6 Weaknesses include legal deficiencies that make difficult to hold domestic politically exposed persons (PEPs) accountable, and insufficient risk-based supervision of financial institutions (IMF, 2017b). A more structured or systematic understanding of AML/CFT risks in the banking sector is needed, including by applying a risk classification between distinct types of banks (e.g., between foreign banks and those owned or controlled by domestic PEPs).

Overall Governance

20. Angola’s overall governance is weak relative to peers, in part reflecting the shortcomings discussed above. Angola generally scores low compared to countries in SSA, countries with similar income per capita, and oil exporters (see comparator list in Appendix II). Its score is typically at the bottom quartile of the distribution of many measures of governance (Figure 4).7 However, Angola performs more favorably in the ICRG indicator—around the SSA average—in part reflecting its stable political environment since the end of the civil conflict.

Figure 4.
Figure 4.

Aggregate Measures of Governance in Angola and Peers

Citation: IMF Staff Country Reports 2018, 157; 10.5089/9781484360255.002.A003

Sources: WGI, ICRG, and Fund staff calculations.Note: The orange and gray boxes are the second and third quartiles (from the bottom) of the sample distribution, respectively. The blue diamond is the sample average, and the red dot is the score for Angola. Averages are for the sample periods indicated in the chart titles. LMI = lower-middle income countries; OIL = oil exporters.

21. Angola’s overall governance has yet to catch up with SSA peers. The long civil conflict destroyed physical and human capital, and undermined the State’s ability to perform its normal functions. The process of State building has accelerated since the end of the conflict in 2002. Angola also improved its governance in the last decade but not fast enough to catch up with the SSA average as other SSA countries also improved their governance in the same period (Figure 5). Similar pattern also holds relative to lower-middle income countries and oil exporters.

Figure 5.
Figure 5.

Evolution of Overall Governance in Angola and SSA

Citation: IMF Staff Country Reports 2018, 157; 10.5089/9781484360255.002.A003

Sources: WGI, and Fund staff calculations.Note: SSA denotes the average for SSA. The dotted blue line is a 45o degree line.

Government Regulation and Rule of Law

22. Angola’s scores are also low in many aspects of governance, including government effectiveness—i.e., the government’s capacity to formulate and implement sound policies effectively; rule of law and enforcing contracts—i.e., ability to respect laws and contracts, and secure and enforce property rights; and registering property—which illustrates the government’s ability to provide basic public services efficiently (Figure 6).

Figure 6.
Figure 6.

Disaggregated Measures of Governance in Angola and Peers

Citation: IMF Staff Country Reports 2018, 157; 10.5089/9781484360255.002.A003

Sources: WGI, and Fund staff calculations.Note: The orange and gray boxes are the second and third quartiles (from the bottom) of the sample distribution, respectively. The blue diamond is the sample average, and the red dot is the observation for Angola. Averages for the sample periods indicated in the chart titles. LMI = lower-middle income countries; OIL = oil exporters.

23. The progress made in recent years was insufficient to bring Angola closer to the regional average in important dimensions of governance. Angola improved government effectiveness but made less progress in the rule of law and in areas that support property rights such as registering property and enforcing contracts (Figure 7). The latter partly reflects an inefficient judiciary and ineffective system for conflict resolution in the private sector. Dealing with tax officials or getting a license or permit in Angola are perceived by business people as burdensome compared to peers (Table 2).

Figure 7.
Figure 7.

Evolution of Disaggregated Measures of Governance in Angola and SSA

Citation: IMF Staff Country Reports 2018, 157; 10.5089/9781484360255.002.A003

Sources: WGI (first row), World Bank’s Ease of Doing Business indicators (second row), and Fund staff calculations.Note: SSA denotes the average for sub-Saharan Africa. Dotted blue lines are 45° lines.

24. Angola’s weak governance and challenging business climate likely reinforce each other. Angola is in the group of countries with most unfavorable governance and business climate (Figure 8). Its score in the World Bank’s Ease of Doing Business survey is below most oil exporters’, and non-oil exporters’ in SSA such as Botswana and Namibia. The high costs of doing business in Angola reflect multiple factors, including cumbersome regulation, excessive State intervention in the economy, barriers to FDI, and a work visa policy that constrains the inflow of much-needed skilled workers. Weak governance and challenging business climate create opportunities for corruption and entrench vested interests.

Figure 8.
Figure 8.

Governance and Ease of Doing Business

(strong/weak indicates above/below the sample median)

Citation: IMF Staff Country Reports 2018, 157; 10.5089/9781484360255.002.A003

Sources: WGI, and Fund staff estimations and calculations.Note: Red denotes SSA oil exporters, orange denotes non-SSA oil exporters, green denotes SSA non-oil exporters and blue denotes the rest of the world.

Corruption Perceptions

25. Corruption perceptions in Angola are higher compared to peers. Angola’s normalized scores of corruption perceptions compare unfavorably across most corruption indicators and relevant comparator groups (Figure 9), echoing its low governance scores. This suggests that policies that strengthen overall governance may also lower opportunities for corruption in Angola. In the last decade, corruption perceptions improved considerably in many SSA countries but less so in Angola, and remained high and stagnant in the post-civil conflict period (Figure 10).

Figure 9.
Figure 9.

Corruption Perceptions in Angola and Peers

Citation: IMF Staff Country Reports 2018, 157; 10.5089/9781484360255.002.A003

Sources: WGI, Transparency International, ICRG, and Fund staff calculations.Note: The orange and gray boxes are the second and third quartiles (from the bottom) of the sample distribution, respectively. The blue diamond is the sample average, and the red dot is the observation for Angola. Averages for the sample periods indicated in the chart titles. CCI = Control of Corruption Indicator, CPI = Corruption Perceptions Index. LMI = lower-middle income countries. Oil = oil exporters.
Figure 10.
Figure 10.

Evolution of Corruption Perceptions in Angola and SSA

Citation: IMF Staff Country Reports 2018, 157; 10.5089/9781484360255.002.A003

Sources: WGI, Transparency International, and Fund staff calculations.Note: SSA denotes the average for sub-Saharan Africa. CCI = Control of Corruption Indicator, CPI = Corruption Perceptions Index. Dotted blue lines are 45° lines.

26. Surveys of firms and business people confirm these aggregate perceptions. Corruption is reported by firms as a relevant obstacle to doing business in Angola. Many firms also report paying bribes or being requested a bribe in exchange for government transactions. Firms’ corruption perceptions are about two to three times higher in Angola than in comparator groups (Table 3). A recent survey with Chinese entrepreneurs also shows similar findings for Angola and other seven African countries (Ethiopia, Côte d’Ivoire, Kenya, Nigeria, South Africa, Tanzania, and Zambia). The survey reveals that Chinese business people rate corruption as their top concern, with almost 60 percent of them reporting corruption as a relevant barrier to doing business. In five of the eight countries surveyed, 60–87 percent of the Chinese firms admit that they must pay bribes to obtain basic government services such as licenses (McKinsey, 2017).8

Angola: Table 3.

Firms’ Corruption Perceptions in Angola and Peers

(Percent averages, sample of 122 countries)

article image
Sources: World Bank Enterprise Surveys (most recent since 2010) and Fund staff calculations.

Percent of firms that consider corruption as biggest obstacle to doing business, out of 15 obstacles.

Percent of firms identifying corruption as a major or very severe constraint to doing business.

Percent of firms experiencing at least one bribe payment request.

Percent of public transactions where a gift or informal payment was requested.

C. Macroeconomic Impact

27. The literature points to a negative and significant impact of weak governance and corruption perceptions on growth. Mauro (1995) and many others have found that weak governance and corruption perceptions hinder investment and growth. Several studies have also found a strong negative correlation between corruption perceptions and fiscal outcomes, including lower revenue collection and lower quality of public infrastructure (Tanzi and Davoodi, 1997; IMF, 2016; Baum et al, 2017). Ugur and Dasgupta (2011) conducted a meta-analysis of the negative correlation between corruption perceptions and growth and concluded that it is genuine and economically relevant. They find that a one-unit improvement in corruption perceptions (roughly equivalent to one standard deviation) would increase annual GDP per capita growth by about 0.6 percentage point in low-income countries (LICs), and almost 0.9 percentage point in a “mixed” sample of LICs and non-LICs. IMF (2018) also finds similar growth gains, ¼-1½ percentage point for governance and ¼-2 percentage points for corruption perceptions, depending on the estimation technique and samples used.

28. Angola could reap potentially large gains from improving governance and reducing corruption perceptions. This section assesses the potential gain in long-run growth from reforms that would bring Angola’s quality of governance and level of corruption perceptions to the SSA average. The estimated gains are based on elasticities from Fund staff (Hammadi et al, 2018) using information for SSA and two measures of governance and corruption perceptions.9 The potential growth payoffs from strengthening governance and reducing corruption perceptions could be relatively large:

  • Improving Angola’s quality of governance to the SSA average could increase real GDP per capita growth by about ¾-1¼ percentage point annually, depending on the governance indicator used (Figure 11, blue bars). Improving specific aspects of governance such as the quality and effectiveness of government regulation and the rule of law could yield growth payoffs of about ½–1 percentage point. This suggests that reforming even one aspect of governance could positively affect others due to complementarities (see Table 1) and thus amplify the overall growth gains.

  • Reducing Angola’s corruption perceptions to the SSA average could increase real GDP per capita growth by about 1½-2 percentage point annually, depending on the corruption perceptions indicator used (Figure 11, gray bars).

  • The estimated gains could be larger if more ambitious targets are pursued—for instance, bringing Angola to the SSA frontier.

Figure 11.
Figure 11.

Estimated Gains from Governance Reforms

Increase in real GDP per capita growth from improving Angola’s governance and corruption perceptions to the SSA average (In percentage points)

Citation: IMF Staff Country Reports 2018, 157; 10.5089/9781484360255.002.A003

Note: ICRG = International Country Risk Guide; WGI = Worldwide Governance Indicator; CPI = Corruption Perceptions Index; CCI = Control of Corruption Indicator.

29. Improving overall governance could also help increase non-oil revenues. Reducing opportunities for corruption and obstacles to paying taxes could help strengthen tax compliance and increase non-resource revenue collection (e.g., IMF, 2016). Following Fenochietto and Pessino (2013) and using a sample of SSA countries, it is found that weak governance increases forgone non-resource tax revenue (Appendix III). The estimates suggest that bringing Angola’s governance to the SSA average (SSA frontier) could raise non-resource revenue by about 1 (4) percent of GDP.

30. Governance reforms could trigger a virtuous cycle of growth. Stronger governance and lower corruption would help strengthen revenue mobilization and reduce wasteful spending. In turn, this would create fiscal space that could be used to mitigate social inequalities and enhance human capital formation.10 It would also encourage the investments needed to increase export diversification and improve product quality, paving the way for faster growth, lower output volatility, and greater macroeconomic stability (Henn et al, 2013; IMF, 2014). In turn, greater stability and stronger growth would further enhance social outcomes and the fiscal position, in a self-sustaining virtuous cycle.

31. However, reaping the growth payoffs would depend on the scope and quality of reforms and whether these reforms are sustained over time (i.e., no policy reversals). The above simulations do not identify which specific policies would improve governance and corruption perceptions, nor the precise timing of their impact. Furthermore, and as noted in the literature, the change in corruption perceptions does not necessarily reflect the actual changes in underlying variables under the control of policymakers; and that it could take several years for governance reforms to affect economic performance (Giavazzi and Tabellini, 2005). However, the reform proposals and ongoing reforms, including those initiated by the Government of President João Lourenço, as discussed in the next section, are important steps towards supporting the materialization of the growth gains estimated above.

D. Reforms: Progress So Far and Challenges Ahead

Political Willingness and Ownership

32. Political will is critical for successfully implementing governance and anti-corruption reforms. Relevant pillars of Angola’s framework for combating corruption and improving governance have been put in place since the end of the civil conflict. In 2009, former President José Eduardo dos Santos declared “zero tolerance” for corruption but efforts to fight corruption continued to lack decisive political ownership. Political will was a key ingredient in cracking down corruption in countries like Botswana, Estonia, Georgia, Hong Kong, Singapore, South Korea, and Rwanda (Svensson, 2005; Terracol, 2015).

33. The Government of President João Lourenço elected in August 2017 seems committed to strengthen governance and fight corruption. The new administration has correctly assessed that strengthening governance and reducing corruption perceptions is not only a necessity but also critical for businesses. Before taking office, the President pledged to improve the business environment to attract FDI, increase the transparency about the way the government conducts its affairs, and fiercely fight corruption and adapt the banking system to international standards.11 President João Lourenço’s actions so far support good governance at the expense of vested interests. After many dismissals of public officials, investigations have been launched into possible malfeasance at several public entities (Appendix IV summarizes key actions taken so far).

34. The experiences of other countries suggest that political leadership is necessary but not sufficient to fight corruption successfully. Political leadership and a commitment to fight corruption at the highest levels are an excellent starting point and must be complemented by sustained reforms (e.g., Terracol, 2015). Moreover, there is no “one-size-fits-all” approach to improving governance or reducing corruption perceptions. The international experience suggests that several factors may have contributed to success in this area, starting with political willingness, but also including reforms that reduced opportunities for corruption (e.g., lower red tape and trade barriers, greater fiscal transparency), and reforms that increased the costs of corruption (e.g., independent and strong judicial system, free media, and freedom of speech) (Klitgaard, 1988; Terracol, 2015; Mungiu-Pippidi and Johnston, 2017).

Improving and Enforcing Legislation

35. Angola has put in place a legal framework to strengthen governance in public administration. The 2010 Constitution has provisions supporting transparency in public administration and against corrupt behavior by the President; a detailed Public Probity Law (2010) has norms of conduct for public officials; a Public Procurement Law (2010) promotes transparency in the procurement process and includes provisions against corruption; anti-money laundering laws (2011, 2014) also contain provisions against corruption (see Section B); and a Private Investment Law (2015) sought to ensure predictability for investors and property rights.

36. The Constitution has general provisions on governance and corruption. It requires the State budget to obey the principles of transparency and good governance, and be audited by the National Assembly and the Audit Court; it includes the fight against corruption among the key principles guiding Angola’s foreign relations; and lists corruption among the crimes that could lead to removing the President from office.

37. The Public Probity Law (Lei 3/10) is the main code of conduct for public officials. It incorporates the relevant anti-bribery provisions that had been previously spread across several statutes. The law criminalizes several types of acts (e.g., receiving bribes or kickbacks, theft of State assets). Punishments for illicit acts include fines, seizure of illegal gains, temporary (up to ten years) exclusion from public bidding, temporary (up to eight years) loss of political rights, and criminal penalties (jail time), depending on the act. Violations of budget execution rules are also punishable with imprisonment. To discourage illicit enrichment, the law requires public officials to report their assets when first assuming public office and at every two years thereafter.

38. The Public Contracting Law (Lei 20/10) contains provisions to improve transparency, impartiality, probity and ethical behavior in the procurement process. It includes an entire chapter on ethics in the procurement process and goes further than the Public Probity Law by criminalizing both passive and active corruption.12 The law also prohibits public officials from participating in procurement procedures when there is conflict of interest (e.g., procurement involving family businesses). Unlawful acts are punishable with imprisonment, administrative and disciplinary actions, and exclusion from public bidding for up to five years (Feijó and Nadorff, 2014).

39. The 2016 amendment of the Public Contracting Law was a step towards greater efficiency and transparency in public procurement in Angola. To bring Angola’s procurement regulation closer to international practices, the revision (Lei 9/16) simplified the number of contracting procedures and modalities and adopted two main forms for awarding public contracts: direct contracts and more competitive open tenders whose minimum threshold was increased threefold. The revision also aimed to prevent unethical behavior by public officials, including by prohibiting their involvement in any public procurement when there is a conflict of interest. The African Development Bank (AfDB), which supported this reform, also recommended launching a procurement portal (already operational); creating a centralized database with information on suppliers; establishing a Technical Procurement Agency; and adopting standardized bidding documents (AfDB, 2014).

40. In 2015, Angola revised its Private Investment Law (Lei 14/15), including to help attract FDI. This law ensures against the risk of expropriation by the State and grants fiscal incentives that are conditional on certain criteria, including number of jobs created, geographic location, investment amount, and economic sector. The law also has provisions against unlawful practices by foreign investors, penalties for tax evasion, and for violating tax incentives rules. However, the law does not include any provisions against active and passive corruption affecting FDI.

41. Angola must enforce more effectively existing laws that support good governance and strengthen the institutions that implement these laws. The legal framework that Angola has put in place since 2010 broadly follows international benchmarks (e.g., Feijó and Nadorff, 2014) but critical issues remain to be addressed:

  • Bring the legal framework even closer to international standards. For instance, while Angola has signed (2003) and ratified (2006) the United Nations Convention Against Corruption, its legislation does not meet standards of the Convention because it does not cover all corruption crimes defined by the Convention (World Bank, 2012). Remaining legal deficiencies in the AML/CFT that make difficult to hold domestic PEPs accountable should be also addressed, including to bring domestic PEPs into the AML/CFT legal framework.

  • Eliminate loopholes. The implementation of the asset disclosure provision under the Public Probity Law has been uneven (World Bank, 2012). Public officials can full report upfront and under report afterwards. Its effectiveness is also questioned because declarations of assets are provided in a sealed envelope which can only be opened if authorized by a Court and the public official has been prosecuted for a crime (e.g., Chêne, 2010; Feijó and Nadorff, 2014).

  • Enforce better the legislation supporting good governance. Angola lacks effective enforcement of the laws enacted so far (Feijó and Nadorff, 2014). It must enforce better its anti-corruption laws, prosecute and convict corrupt officials, and make efforts to recover the stolen proceeds. This would reduce the opportunities for corruption and increase its costs.

  • Improve the efficiency and effectiveness of the judiciary. The judiciary is typically understaffed, slow, overburdened by a large backlog of cases, and is not adequately equipped to prosecute corruption and wrongdoings in the public administration (e.g., Chêne, 2010).

Strengthening Fiscal Governance

42. There is scope to increase tax compliance and reduce the vulnerability of AGT to fraud and corruption. AGT would benefit from an organization restructuring that entails a clearer separation of roles and responsibilities. Measures that have been considered in other countries and are in line with Fund TA recommendations include: a specialized team to manage tax and customs arrears, an anti-fraud department to combat frauds and organized crimes (coercive compliance); and a taxpayer service to better interface with taxpayers and promote fiscal education (voluntary compliance). Existing paper-based bureaucratic processes create opportunities for corruption and should be replaced by more efficient and reliable procedures that use modern information technologies. AGT’s basic operational procedures have recently been redefined as part of implementing ASYCUDA and SIGT, but this must be complemented by the following actions: increase the integrity of taxpayer registration; strengthen the LTO to reduce vulnerability to fraud and better handle the demands of large taxpayers, while improving its on-time filing ratios; strengthen tax audits and other verification programs to ensure accuracy of reporting; and reduce customs post-clearance control while improving other customs administration functions.

43. Additional measures are needed to increase the quality of public investment in Angola. Several actions could be pursued within the existing system without changing legislation, including: (i) greater use of the open tender Concurso Público to reduce overpricing and collusive behavior; enforcing a budget execution law passed in 2011 (Decreto Presidencial 320/11) that prevents unjustified amendments to contracts exceeding 15 percent of the contract’s original value; (ii) supporting the Audit Court—which is deemed to have the capacity and jurisdiction to assess the financial and legal soundness of public investment projects—to exercise its authority and complying with its recommendations; (iii) conducting projects evaluations and requiring pre-feasibility studies for large projects; and (iv) enhancing technical capacity at line ministries. The recent transfer of the portfolio of public investment projects to the Ministry of Finance is a welcome step as it should help reduce coordination problems across ministries and improve the budget process.

44. Stronger governance would allow better recalibration of investment composition while supporting growth. Strengthening public investment management could close up to two-thirds of the “efficiency gap” (IMF, 2015c), while reducing opportunities for corruption including in the areas more vulnerable to graft such as public procurement.

45. Angola needs to further strengthen PFM systems. PFM-related actions include: (i) clearing the existing stock of domestic payments arrears and avoiding their recurrence in the future including by enforcing existing internal control mechanisms, holding public officials accountable for violating budget execution rules, and improving cash flow management to increase predictability for budget units, while strengthening their capacity; (ii) 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; (iii) strengthening budget oversight by the National Assembly and the Audit Court, while increasing the coverage of government entities audited by the Audit Court and following up on its recommendations; (iv) and enhancing fiscal transparency including by publishing in-year and annual fiscal reports on a timely basis and improving the quality of government finance statistics.13

46. A credible medium-term fiscal framework (MTFF) is needed, including to assess spending needs associated with maintaining and running investment projects once these are completed. New projects should only be approved and started if there is fiscal space for their (future) current spending needs (IMF, 2017b). With support of Fund TA, the authorities have recently developed an ambitious work program to implement a full-fledged MTFF by 2019. The program aims at strengthening capacity, improving collaboration across government agencies tasked with policy analysis and medium-term forecasts, improving budget processes, and formulating a fiscal responsibility law to guide fiscal policy in the future.

47. Angola should further strengthen the transparency in the institutions responsible for managing the oil wealth. For instance, Angola should consider signing up for Extractive Industries Transparency Initiative (EITI) and comply with all recommended good practices, including in the areas of contracts and licenses, and oil revenue allocation.

48. The transparency and oversight of SOEs should be strengthened. Audited financial statements of all SOEs should be timely and regularly published, as required by law, to improve accountability and transparency. The capacity and autonomy of ISEP should be strengthened to perform its oversight role effectively. Also, it should be able to hold accountable those SOEs that do not comply with the law regarding transparency and best management practices, monitor the financial situation of all SOEs on a timely manner, assess dividend performance, subsidy and capital injection needs, as well as potential sources of contingent liabilities including those stemming from government guarantees and public-private partnerships.

Improving the Business Climate

49. Reforms that support private investment should complement the measures to improve the quality of public investment. Increasing the efficiency of public investment is necessary but not sufficient to sustain growth in the long run. Angola should also create the conditions for the private sector to play a greater role in total capital formation and economic diversification. Better institutions and regulations have been successful in facilitating diversification, sectoral reallocation of resources and product quality upgrading (IMF, 2014).

50. Reforms tailored to Angola’s needs would include: simplifying procedures for and expediting the issuance of work visas; reducing the large State footprint in the economy; eliminating imbalances in the forex market, including through unwinding administrative measures and restrictions in the forex market (IMF, 2017b). These reforms should be complemented by lowering constraints to FDI that are enshrined in the 2015 Private Investment Law; effective provisioning of basic public services (e.g., licensing procedures, registering property and enforcing contracts); and increasing the effectiveness of export- and investment-promoting agencies.

51. Recently approved laws, if implemented effectively, would bode well for private sector development:

  • Revision of the Private Investment Law. A draft law reform recently approved by the National Assembly in a first-round vote would remove the requirement for foreign investors to identify a local partner to be allowed to invest in priority sectors, eliminate minimum levels of FDI, and establish stronger sunset clauses for tax incentives. The creation in early 2018 of a one-stop shop for investors (AIPEX), provided it fulfills its mandate effectively, would support the authorities’ efforts to attract FDI and diversify the export base.

  • A new Law on Competition. Monopolies and oligopolies dominate key sectors of the Angolan economy (e.g., telecommunications, cement, and international trade). A new law recently approved by the National Assembly would lay out the legal foundations for promoting greater competition in domestic markets and establish an anti-trust authority to enforce the application of the law.

Strengthening the AML/CFT Framework

52. Angola should further enhance its AML/CFT framework, including to regain CBRs. The use of alternative payment channels has mitigated the adverse impact of the loss of CBRs on the economy, but a durable solution is still needed. This would require strengthening Angola’s supervisory, prudential, and AML/CFT frameworks. In this regard, Angola should implement preventive measures for domestic PEPs, and enhance risk-based supervision of financial institutions and designated non-financial businesses and professions, ahead of the next AML/CFT evaluation in 2020 (IMF, 2017b).

53. These efforts should be complemented by additional actions, including: strengthening the capacity of the FIU so that it can perform its core functions effectively; building capacity in investigation and prosecution of money-laundering crimes; and complying with the FATF 40 Recommendations in preparation for the forthcoming Eastern and Southern Africa Anti-Money Laundering Group (ESAAMLG) mutual evaluation assessment scheduled for 2020. Fund TA will help the authorities to enhance the legal framework and risk-based supervision ahead of the ESAAMLG assessment. A positive assessment would hopefully prevent Angola from reverting back to the FATF list of jurisdictions with strategic deficiencies in AML/CFT. In addition, it may also help convince banks to eventually re-establish direct U.S. dollar CBRs in Angola in the future.

Strengthening Anti-Corruption Agencies

54. Angola does not have a centralized anti-corruption agency. The investigation of corruption crimes is currently done by a small unit operating within the Office of the Attorney General—the National Department for Prevention and Suppression of Corruption (DNPCC)—created in 2012. DNPCC’s work requires collaborating with other anti-corruption agencies, including the Audit Court, the Inspector General of State Administration (IGAE), the Ministry of Interior’s Criminal Investigation Service (SIC), the National Department for Criminal Investigation and Prosecution (DNIAP); and the FIU (United Nations, 2017).

55. Angola’s anti-corruption units have different capabilities and legal autonomy. The Audit Court is Angola’s supreme auditing institution with the authority to initiate investigations. It is perceived to possess extensive powers (Chêne, 2010), including to hold public officials accountable for public financial irregularities and mismanagement. On the other hand, IGAE is an investigative unit that answers directly to the Office of the President. Despite having a clear legal mandate, a recent episode involving high-level officials of the previous administration raises concerns about IGAE’s autonomy and independence.14 The authorities have acknowledged that DNPCC is too small and ill equipped to perform its tasks effectively.

56. Strengthening existing anti-corruption agencies should be considered. The Attorney-General’s Office, for example, noted that revamping existing units, especially DNPCC, could be easier than creating new anti-corruption agencies. Although there seems to be no consensus about this issue in the literature, some observers have favored the establishment of a centralized and independent anti-corruption agency in Angola (e.g., Feijó and Nadorff, 2014), probably because it would reduce coordination problems and be more effective in the fight against corruption.

57. Against this background, President João Lourenço created in March 2018 a specialized anti-corruption agency within the Ministry of Interior. The newly-created Department for Combating Corruption Crimes is organized under SIC, an arm of the Ministry of Interior that is tasked with combating economic crimes. This department would be the executive branch’s key agency with the mandate to prevent and repress corruption crimes. Its role and responsibilities overlap with those of DNPCC. It is still unclear whether both departments would coexist or be merged eventually.

58. The ongoing reforms, if sustained over time and complemented by other reforms, could help support higher growth. The reforms that the authorities are already implementing and effective implementation of other reforms, such as the ones discussed in this chapter, would help improve Angola’s governance and reduce vulnerabilities to corruption. Enabling an environment with less corruption opportunities would increase the legitimacy of public institutions, lower rent-seeking activities, and create a level-playing field for the private sector. Meanwhile, an improved public investment management would help crowd in private investment, and a better framework for supporting private investment and attracting FDI would further catalyze private sector development. Together, this could trigger a virtuous cycle of growth in Angola and thus support the materialization of the growth gains estimated in this chapter.

E. Concluding Remarks

59. Angola has a favorable window of opportunity to overcome its governance challenges. The country is in a unique moment of its history. The scars of the civil conflict are fading away and the physical infrastructure needed to support growth has been progressively rebuilt and expanded. A stable and predictable political environment—itself an important ingredient for sustainable growth—is in place, and the rule of law is gradually taking hold. Moreover, the Government of President João Lourenço seems to have the political will to carry forward reforms that could further strengthen Angola’s institutions.

60. The following reforms should be considered to further improve governance in Angola:

  • Speeding up and concluding ongoing legal reforms. Bring the legal and regulatory frameworks in line with international standards including by implementing ongoing legal reforms (e.g., Law on Competition, and Private Investment Law), revising the existing AML/CFT legal framework and demonstrate successful implementation in preparation for the upcoming assessment in 2020.

  • Enforcing existing laws effectively. Enforce effectively the existing anti-corruption and AML/CFT frameworks and budget and procurement laws. Equip the judicial system with resources and independence to play its role efficiently.

  • Improving transparency and oversight of fiscal institutions. Enhance the transparency of budget processes, and publish detailed in-year and annual fiscal reports on a timely basis. Give citizens the opportunity to further engage in the budget process, especially during the budget preparation phase. Legislative and audit institutions should exercise effective oversight of the State budget and government entities and their recommendations should be implemented.

  • Strengthening PFM controls. Enforce existing internal controls to prevent recurrence of arrears. Optimize public procurement, including by using competitive bidding and reducing contract uncertainty. Improve the quality and credibility of government finance statistics.

  • Increasing the efficiency of public investment and facilitating economic diversification. Strengthen the public investment management framework and implement policies to promote private sector development and FDI attraction. Together, these reforms would maximize the returns on investment and create more economic opportunities for the Angolan citizens.

  • Increasing the independence, transparency and oversight of oil-related institutions and SOEs overall. Shield the state-owned oil company Sonangol and the sovereign wealth fund (FDSEA) from political interference. Strengthen SOE transparency and oversight and equip the Public Enterprises Oversight Institute SOE (ISEP) to enforce good corporate governance practices.

  • Strengthening anti-corruption agencies. Equip these agencies with the material and human resources that are needed to perform their tasks expeditiously and efficiently. They should be granted autonomy and be shielded from political interference.

  • Building capacity. This should be especially pursued in the areas of public investment management, tax administration, anti-corruption agencies, and institutions responsible for implementing AML/CFT measures.

61. These reforms would help achieve faster and more sustainable growth. Bringing Angola’s quality of governance and reducing corruption perceptions to the SSA average could increase real GDP per capita growth by up to 2 percentage points annually, or potentially more depending on the depth and quality of reforms, and on the authorities’ objectives—for instance bringing Angola to the SSA average (which is nonetheless low compared to other regions) or to the SSA frontier. As oil prices are expected to remain soft for the foreseeable future, better governance would help foster private sector led development and achieve more sustainable and inclusive growth.

Appendix I. A Simple Model of Bribery1

Like most economic decisions, engaging in corruption depends on incentives. Addressing distorted incentives and effectively enforcing ethical norms of conduct and punishing corrupt behavior are strong mechanisms in the fight against corruption.

1. Suppose the decision on whether to take the bribe is based on a rational cost-benefit analysis. A public official is offered a bribe B. If the official does not take the bribe, he keeps his pay W and his integrity. For simplicity, it is assumed that a pecuniary value H can be attached to integrity. H could be very small for unscrupulous people or when corruption is socially tolerated. If he does take the bribe, three possible scenarios may unfold. In the first, he is caught with probability p and convicted with probability q, in which case he loses his pay and a share 0≤s≤1 of the bribe. He also faces a pecuniary cost J of going to jail (e.g., forgone income, which may be proportional to jail time), plus a cost of having his dishonesty exposed, equal to H for the sake of simplicity. In the second scenario, he is caught but not convicted, in which case he keeps his pay, the full bribe, but faces the cost H. In the third scenario, he is not caught and keeps his pay and the bribe, while facing no shaming cost.

2. It is assumed that the agent has linear utility U. The utility from not taking the bribe is U(No B) = W + H and the expected utility from taking the bribe is:

U(B)=pq[sB−W−J−H]+p(1−q)[W+B−H]+(1−p)[W+B].

The terms on the right-hand side describe in this order the expected payoffs under the three scenarios just described. The official decides to take the bribe if U(B) > U(No B), which happens if

B>2pqW+(1+p)H+pqJ1−pqr,

where r ≡ 1-s is the share of the bribe recovered by the State. This inequality holds more easily, and hence the official is more likely to take the bribe when: the bribe is large; the salary W and the cost of public stigma H are low; the penalty J is soft; the probabilities of being caught p and going to jail q are small; and the share r of the bribe that can be recovered by the State is also small.

3. This simple model also identifies key ex-ante and ex-post incentives that could inform the design of an anti-corruption framework: adequate compensation for public servants, commensurate punishment of corrupt behavior, and efficient administrative and judicial systems to monitor, investigate and convict corrupt agents. Promoting ethical behavior, honesty, integrity, accountability and transparency in the public administration and in the society more generally could also help reduce tolerance for corruption and increase its moral costs.

4. It has been noted that wage incentives can reduce bribery but only under certain conditions, i.e. the public budget can afford higher wages, the enforcement apparatus is effective, and the bribe is not a direct function of the official’s wage. If the official can bargain the size of the bribe, a higher wage would only strengthen his bargaining power (Svensson 2005). However, even when some of these conditions are not met, progress could be made along the other dimensions discussed above.

Appendix II. Comparator Groups

SSA peers (44): Benin, Botswana, Burkina Faso, Burundi, Cabo Verde, Cameroon, Central African Republic, Chad, Democratic Republic of Congo, Republic of Congo, Comoros, Côte d’Ivoire, Equatorial Guinea, Eritrea, Ethiopia, Gabon, The Gambia, Ghana, Guinea, Guinea-Bissau, Kenya, Liberia, Lesotho, Madagascar, Malawi, Mali, Mauritius, Mozambique, Namibia, Niger, Nigeria, Rwanda, Senegal, Seychelles, Sierra Leone, South Africa, South Sudan, São Tomé and Príncipe, Swaziland, Tanzania, Togo, Uganda, Zambia, and Zimbabwe.

LMI peers (51): Armenia Bangladesh, Bolivia, Bhutan, Cabo Verde, Cameroon, Cambodia, Republic of Congo, Côte d’Ivoire, Djibouti, Egypt, El Salvador, Federated States of Micronesia, Georgia, Ghana, Guatemala, Honduras, India, Indonesia, Jordan, Kenya, Kyrgyz Republic, Kiribati, Kosovo, Lao PDR, Lesotho, Sri Lanka, Mauritania, Moldova, Mongolia, Morocco, Myanmar, Nicaragua, Nigeria, Pakistan, Papua New Guinea, Philippines, Solomon Islands, Sudan, São Tomé and Príncipe, Swaziland, Syria, Tajikistan, Timor-Leste, Tunisia, Ukraine, Uzbekistan, Vietnam, Vanuatu, Yemen, and Zambia.

Oil exporters (27): Algeria, Azerbaijan, Bahrain, Bolivia, Brunei Darussalam, Chad, Republic of Congo, Ecuador, Equatorial Guinea, Gabon, Islamic Republic of Iran, Iraq, Kazakhstan, Kuwait, Libya, Nigeria, Norway, Oman, Qatar, Russia, Saudi Arabia, Timor-Leste, Trinidad and Tobago, Turkmenistan, United Arab Emirates, Venezuela, and Yemen.

Appendix III. Governance and Tax Potential

Weak governance increases tax inefficiency and leads to suboptimal revenue mobilization from non-resource sectors in SSA countries. The forgone revenue estimated for Angola is larger than that for the average SSA country, reflecting its below-average quality of governance. Therefore, improving Angola’s governance could help mobilize additional non-oil tax revenue.

1. Tax potential or forgone revenue is the distance between the tax frontier or tax capacity and the actual tax collection. As noted in IMF (2015b), this difference reflects conscious policy choices and preferences for low taxation and inefficiencies that constrain revenue mobilization. Fenochietto and Pessino (2013) argue that the quality of policy and institutions may affect the tax potential. This appendix explores the latter in the context of SSA and Angola. Following Fenochietto and Pessino (2013) and IMF (2015b), a model for the tax capacity and tax potential is estimated using a sample of SSA countries, data covering the last decade, and an econometric model that allows country-specific variables to affect the tax inefficiency:

τit=αi+β′xit+νit−uit,

where τit is (log) of non-resource revenue-to-GDP ratio for country i in period t, αt is a country fixed effect, xit is a vector of variables affecting revenue collection, νit is an error term, and uit is a nonnegative random variable independent of νit. The term αt β’ xit is the (deterministic) tax frontier, whereas uit is the (stochastic) tax potential. Following the above references, the vector xit includes the level of development given by the log of real GDP per capita and its square (to capture potential nonlinearities), trade openness (exports plus imports in percent of GDP), value added of agriculture in percent of GDP (proxy for difficulty of collecting tax), public expenditure on education in percent of GDP (proxy for tax compliance), and a dummy variable to control for differences in government perimeter (central versus general government).

2. Weak governance is assumed to constrain revenue mobilization. For the tax potential uit it is assumed a truncated normal distribution with positive mean that is modeled as a function of governance (WGI), obstacles to paying taxes from World Bank’s Ease of Doing Business survey, and dummies for armed conflicts and oil exporters. Therefore, weak governance and the factors aforementioned are expected to increase tax inefficiency and lead to suboptimal revenue mobilization.

3. As shown in the text table, most coefficients are statistically significant at conventional significant levels and have the expected sign. The positive and significant coefficient on the dummy for oil exporters confirms that non-oil revenue mobilization is weaker in these countries, reflecting their less developed tax structures and tax administrations (Fenochietto and Pessino, 2013). It is also in line with the findings of IMF (2015b) using a sample of developing and emerging market economies. Moreover, the coefficients on obstacles to paying tax and on governance have the expected sign and are statistically significant. This evidence suggests that higher obstacles to paying taxes and weaker governance may indeed constrain revenue mobilization in SSA.

Stochastic frontier model for non-resource revenue in SSA

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***, **, * denote significance at 1 percent, 5 percent and 10 percent, respectively.

Appendix IV. MPLA’s Governance Reforms and Early Actions by the New Government

Angola’s ruling MPLA party and winner of the August 2017 general elections vowed to improve governance and fight corruption. The broad contours of the MPLA’s and the early actions by the Government of President João Lourenço go in the right direction.

1. The winning party vowed to implement a broad reform of the State, involving public administration, administrative procedures, and the judicial system. The reform intends to increase the efficiency and effectiveness of government functions, while preserving law and order and political stability. The reform of the public administration would include redefining the roles of central and local governments, with the former focusing on elaborating, monitoring and assessing public policies, and the latter on delivering public services to citizens. Administrative procedures would be streamlined, to facilitate information-sharing and use of smart technologies. The reform of the judicial system would include passing laws to adapt the structure and operation of the judiciary to Angola’s needs, improve property rights (e.g., an insolvency law), strengthen human resources, and recalibrate the size of courts’ staff to ensure timely resolution of cases.

2. The MPLA’s anti-corruption strategy intends to reduce the severity of corruption problems in Angola but some specifics have yet to be fully spelled out. The strategy aims at combating all types of corruption and seeking stronger punishment for corrupt behavior. However, it is unclear how grand corruption would be addressed in practice and whether politically connected people implicated in corruption would be prosecuted to the full extent of the law. It is also unclear how the anti-corruption agencies, including the one recently created by the President, would fulfill their mandate effectively and in a coordinated manner.

3. However, the basic principles of the strategy look conceptually sound. It is aligned with theory and evidence suggesting that harsher and surer punishment is a key ingredient for combating corruption. A reform of civil service wages, if pursued under the public-sector reorganization and if focused on performance-based compensation as envisaged by the authorities, could also help reduce the incidence of corruption (Appendix I).

4. The early actions of the new government go towards improving governance, corruption perceptions, and the business environment:

  • Curbing nepotism in the public administration;

  • Moving against vested interests;

  • Investigating high-level officials for potential wrongdoings;

  • Creating an expectedly stronger anti-corruption unit;

  • Approving a new Law on Competition;

  • Approving a Private Investment Law that to attract FDI; and

  • Creating a one-stop shop for investors.

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1

Prepared by Nelson Sobrinho (AFR).

2

The aggregate WGI used in this chapter was constructed by Fund staff by combining its six individual components: voice and accountability, political stability, government effectiveness, regulatory quality, rule of law and control of corruption. See Kaufmann et al, 2010, and http://info.worldbank.org/governance/wgi/index.aspx#home.

3

In line with Fund policy, this chapter uses multiple indicators of governance and corruption. TPIs help provide a general view of a country’s governance and corruption relative to peers but have limitations and should be interpreted with caution, including because some are based on perceptions (e.g., WGI and CPI), and their scores are subject to uncertainty and to methodological changes (e.g., in 2012 the CPI’s compilation method for aggregating different data Sources was simplified to include just one year’s data from each data source). However, Hamilton and Hammer (2018) Note that the CCI and CPI are valid measures of the magnitude of overall corruption in many country contexts.

6

Other factors also contributed to the loss of CBRs, including retrenchment by global banks since the global financial crisis, regulatory demands, and banks own risk management requirements (IMF, 2017b).

7

Similarly, for other aggregate measures of governance, e.g. Mo Ibrahim Foundation’s Index of African Governance.

8

This survey focuses on Chinese entrepreneurs but its findings apply more broadly. Also, it complements information from the World Bank Enterprise Survey (Table 3) which is lagged for Angola and some other countries in the sample.

9

Hammadi et al (2018) estimate the correlation between governance (and corruption perceptions) and real GDP per capita growth through the lens of an empirical growth model focused on SSA, using system GMM and panel data for 190 advanced and developing countries over the period 1995–2015. The governance and corruption perceptions indicators used by the authors are the same used in this chapter, namely, ICRG and WGI for governance and CCI and CPI for corruption perceptions. The estimated elasticities for SSA remained statistically strong when submitted to standard endogeneity and several other robustness tests. The growth gains suggested by these elasticities are in the ballpark of those implied by other studies (e.g., Ugur and Dasgupta, 2011; IMF, 2018).

10

Angola’s investment in human capital is lower than SSA peers’ and social programs are mostly ill-targeted and have been ineffective to address the country’s large social gaps.

12

Analogous to the US Foreign Corrupt Practice Act and the UK Anti-Bribery Law (Feijó and Nadorff, 2014).

13

With help of Fund TA, the authorities are taking steps to bring fiscal data compilation in line with the international standard, the Government Finance Statistics Manual 2014 (GFSM 2014).

14

In 2017, IGAE was ordered to archive all investigations of potential wrongdoing by public officials during 2013–17.

1

Adapted from Klitgaard (1988).

Same Series

Other IMF Content

Other Publishers

Cover IMF Staff Country Reports
Angola: Selected Issues
Author: International Monetary Fund. African Dept.
Volume/Issue:
Volume 2018: Issue 157
Publisher:
International Monetary Fund
ISBN:
9781484360255
ISSN:
1934-7685
Pages:
63
DOI:
https://doi.org/10.5089/9781484360255.002
  • View in gallery

    Evolution of Budget Transparency in Angola and Peers

  • View in gallery

    Investment Efficiency in Angola and SSA

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    Governance and Revenue Mobilization in Angola and SSA, 2006–16

  • View in gallery

    Aggregate Measures of Governance in Angola and Peers

  • View in gallery

    Evolution of Overall Governance in Angola and SSA

  • View in gallery

    Disaggregated Measures of Governance in Angola and Peers

  • View in gallery

    Evolution of Disaggregated Measures of Governance in Angola and SSA

  • View in gallery

    Governance and Ease of Doing Business

    (strong/weak indicates above/below the sample median)

  • View in gallery

    Corruption Perceptions in Angola and Peers

  • View in gallery

    Evolution of Corruption Perceptions in Angola and SSA

  • View in gallery

    Estimated Gains from Governance Reforms

    Increase in real GDP per capita growth from improving Angola’s governance and corruption perceptions to the SSA average (In percentage points)

Evolution of Budget Transparency in Angola and Peers

Investment Efficiency in Angola and SSA

Governance and Revenue Mobilization in Angola and SSA, 2006–16

Aggregate Measures of Governance in Angola and Peers

Evolution of Overall Governance in Angola and SSA

Disaggregated Measures of Governance in Angola and Peers

Evolution of Disaggregated Measures of Governance in Angola and SSA

Governance and Ease of Doing Business

(strong/weak indicates above/below the sample median)

Corruption Perceptions in Angola and Peers

Evolution of Corruption Perceptions in Angola and SSA

Estimated Gains from Governance Reforms

Increase in real GDP per capita growth from improving Angola’s governance and corruption perceptions to the SSA average (In percentage points)