Angola: Request for an Extended Arrangement Under the Extended Fund Facility
Author: International Monetary Fund. African Dept.
Publication Date:
18 Dec 2018
eISBN:
9781484391334
Language:
English
Keywords:
IMF staff calculation; financial support; debt burden indicator; accounts payable; peak IMF Credit-to-GDP ratio; Global; IMF financial support
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Request for An Extended Arrangement Under the Extended Fund Facility-Press Release; and Statement by the Executive Director for Angola

Abstract

Request for An Extended Arrangement Under the Extended Fund Facility-Press Release; and Statement by the Executive Director for Angola

A Historic Opportunity

1. The authorities have launched ambitious reforms to address macroeconomic and structural imbalances and lay the ground for medium-term growth. The Government, which took office in September 2017, immediately launched a Macroeconomic Stabilization Program (MSP), followed by a National Development Plan (NDP) for 2018–22, to address the country’s macroeconomic imbalances and structural challenges, respectively. To improve social indicators, the NDP focuses on human development and welfare, consistent with the goals of the African Union’s 2063 Agenda and the United Nations’ Sustainable Development Goals (Annex I). The NDP seeks to reduce extreme poverty to 25 percent by 2020 (Annex II). In the 2018 Article IV Consultation discussions, the Executive Board commended the reform program, but urged timely implementation of structural reforms.

2. The political transition represents an extraordinary break in Angola’s recent history. The favorable political tailwinds provide a unique opportunity to help advance reforms in the third largest economy of sub-Saharan Africa (SSA), with possible positive spillovers for the region.1 Several high-profile officials from the previous administration were dismissed and investigations were launched into possible malfeasance at several public entities. An anti-corruption unit was created in March 2018.

3. The authorities requested an Extended Arrangement (EA) under the Extended Fund Facility. The support is meant to buttress reforms to restore macroeconomic stability and foster economic diversification and inclusive growth, while reducing poverty and inequality. The EA would help mitigate pressures from vested interests.

A Challenging Macroeconomic Environment

4. The economy is projected to contract for the third consecutive year in 2018 and inflation to recede slowly (Figures 1–5, Tables 1–5). Growth is projected to remain negative in 2018 on the back of a sharp fall in oil and gas production, reflecting previous underinvestment. Despite the sharp depreciation of the kwanza and the impact of water tariff adjustments, annual inflation is expected to decline to 22 percent at end-2018.

5. The current account would significantly improve in 2018, aided by favorable terms of trade. It is projected to shift to a surplus of 2 percent of GDP, as the increase in oil prices would more than offset the decline in oil production, and imports would remain contained. Negative financial flows would lead to large net international reserve (NIR) losses in 2018—NIRs declined by US$1.8 billion through October, and this trend is projected to continue in the remainder of the year, given stepped-up foreign exchange auctions. The negative balance on the financial account reflects, in part, capital repatriation by international oil companies.

6. The robust fiscal consolidation in 2018 would offset the large slippages in the run-up to the 2017 elections (Text Table). The authorities have compressed expenditures to compensate for weaker-than-budgeted non-oil revenue. The improvement in the non-oil primary fiscal deficit (NOPFD) is projected to reach 3% percent of GDP, more than offsetting the slippages the year before.

7. Monetary policy has been tight. Although mandatory reserve requirement and the policy rate were reduced in mid-2018— leading to a policy loosening of about 0.5 percent of GDP—liquidity conditions have been overall tight, owing to net sales of foreign exchange (FX), which have drained liquidity of about 5 percent of GDP by end-September. Credit growth has remained subdued, because of weak demand (e.g., delayed payment of government suppliers) and tepid supply (e.g., inefficient collateral execution processes).

Angola: Fiscal Adjustment, 2016-18

(Percent of GDP)

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

8. Imbalances in the FX market are declining. The spread between the official and parallel exchange rates has narrowed from 150 percent in December to 24 percent in early November. The depreciation of the official rate is estimated to have brought it broadly in line with fundamentals (Annex III). The Banco Nacional de Angola (BNA) has been addressing the backlog of unmet FX demand, via increased sales of FX and more frequent auctions.

A01ufig1

Angola: Foreign Exchange Rates and Spread, 2016-18

Citation: IMF Staff Country Reports 2018, 370; 10.5089/9781484391334.002.A001

Source: Angolan authorities.

9. Although the banking system has been stable, important vulnerabilities remain (Table 6). Banks’ average capital adequacy ratio (24 percent) at end-August appears high, insufficient provisioning at some banks needs to be addressed, and nonperforming loans (NPLs) are sizable. Depreciation presents challenges for the sector, considering FX liquidity shortages induced by past policies, including allowing FX borrowers to repay debt in kwanzas and obligatory conversion of FX reserve requirements to FX-linked—but kwanza-denominated—government bonds. Some banks have imposed deposit restrictions to manage FX liquidity constraints, which will be addressed under the program.

Positive Outlook with Decisive Actions

10. Although the short-term outlook is challenging, medium-term prospects would improve, if current macroeconomic imbalances are tackled.

  • During the program, the economy would recover, and inflation recede. Growth is expected to resume in 2019 and firm up at around 3.2 percent toward the end of the program, driven by gradual improvement in non-oil activities. Tighter fiscal and monetary policies, and gradual elimination of production bottlenecks, would support the BNA’s objective of bringing inflation to single digits.

  • External imbalances would gradually wind down. After temporarily reverting to a deficit in 2019, reflecting a one-off pickup in imports, the current account is projected to remain nearly balanced, thus close to its long-run equilibrium. The significant depreciation of the kwanza in 2018 would correct the earlier overvaluation of the real exchange rate. Gross international reserves would recover to 8 months of imports by 2021.

  • Fiscal sustainability would take hold. The continuation of the fiscal retrenchment under the program, albeit at more moderate pace than in 2018, and favorable oil prices, would reverse the increase in the public debt-to-GDP ratio and bring it close to the 65 percent target.

  • Monetary policy would be balanced between taming inflation and supporting economic recovery through enhanced financial intermediation.

  • Financial sector stability would be achieved by tackling rising NPLs, restructuring state-owned banks, buttressing banks’ capital and liquidity buffers, enhancing AML/CFT laws, and strengthening crisis management.

Program Discussions

A. Reform Agenda 2018–21

11. The EA will help mitigate Angola’s macroeconomic imbalances and pave the way for sustained and inclusive growth. As described in the Letter of Intent (Appendix I) and the Memorandum of Economic and Financial Policies (MEFP), the key objectives of the program are: (i) entrenching fiscal adjustment in 2018, followed by gradual fiscal consolidation in the medium term to reduce public debt to the medium-term program target; (ii) liberalizing the exchange rate regime, while gradually unwinding exchange restrictions and multiple currency practices; (iii) modernizing the monetary policy framework; (iv) strengthening financial sector resilience; and (v) fostering private-sector-led growth and economic diversification by improving governance and the business environment (Text Figure 1). Reforms to improve governance include enhancing transparency of debt management; restructuring the state oil company Sonangol; improving Public Financial Management (PFM); and strengthening the AML/CFT framework. The fiscal consolidation would help create fiscal space for enhanced public investment and social programs.

A01ufig2

Angola: Overview of the Reform Agenda, 2017-22

Citation: IMF Staff Country Reports 2018, 370; 10.5089/9781484391334.002.A001

Sources: Angolan authorities; and IMF staff.

B. Strengthening Fiscal Sustainability

12. The program entails fiscal reforms to consolidate a large upfront consolidation and entrench medium-term fiscal sustainability. At the projected Angolan oil export price (US$72/barrel) for 2018, the overall fiscal balance would turn a modest surplus of 0.4 percent of GDP, the first since 2012. This would be consistent with an improvement of NOPFD by 3.8 percent of GDP. Considering the challenges to raise non-oil revenue in the near term, the upfront consolidation would mostly come from compressing current expenditure (keeping wage increases below inflation, focusing new hiring on priority areas, and streamlining spending on goods and services); and calibrating capital expenditure to unwind past excesses and to consider implementation capacity (Text Table).

Angola: General Government Operations, 2017-21

(Percent of GDP, unless otherwise indicated)

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

Net yield from a value added tax (VAT) and one-off revenue measures.

Adjusting nominal wages below inflation, and containing spending on goods and services and subsidies.

Price that would balance the budget, taking as given the baseline expenditure envelope and non-oil revenues.

13. The 2019 budget proposal is consistent with the required medium-term fiscal consolidation. The 2019 draft budget— underpinned by conservative assumptions on GDP growth, non-oil revenues (e.g., income taxes), oil production, and oil price (US$68/barrel)—targets a modest reduction in the NOPFD, following the large upfront adjustment in 2018. The budget is predicated on a conservative net yield from adopting a value-added tax (VAT) in mid-2019—reflected in the draft VAT law, now with the National Assembly; and refraining from any immediate scaling up of public investment, while making room for social transfers to the most vulnerable to mitigate the impact of the ongoing subsidy reforms. To offset potential disruptions from VAT collection and shortfalls in other non-oil revenues, the authorities have identified contingency measures of 0.3 percent of GDP (Text Table).

Angola: Contingency Measures, 2019

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

14. More moderate fiscal retrenchment would continue after 2019 and be underpinned by a more balanced adjustment mix. Further consolidation, averaging about ½ percent of GDP annually, is needed in the outer years of the program to put public debt on a downward trajectory. The program aims at reducing the NOPFD to 7.7 percent of GDP by 2021. The adjustment mix would be more balanced—as the VAT takes holds, the subsidy reforms are concluded, and spending on goods and services is streamlined. This would allow scaling up social spending (indicative target) and public investment.

15. The program entails a comprehensive set of reforms. These will focus on providing a broad-based and stable revenue source for the budget; rationalizing current spending; eliminating domestic payments arrears; reducing the pro-cyclicality of public spending; and improving fiscal transparency (MEFP, ¶19).

  • Mobilizing non-oil revenue. The Government is diversifying the tax base to reduce dependence on oil revenue. It will start collecting VAT from large taxpayers on July 1, 2019 (structural benchmark), as the first phase of implementing a comprehensive VAT. The bulk of the net VAT yield is expected to materialize from 2020; bringing smaller taxpayers to the VAT base will be completed by 2023. The authorities requested technical assistance (TA) to help identify tax-policy options to strengthen non-oil revenue collection.

  • Eliminating subsidies. The Government has started reducing subsidies. It started by adjusting water tariffs in August 2018 and has plans to adjust electricity and public transportation tariffs, and gasoline and diesel prices. With help of the World Bank, the Government will develop and implement an automatic price-adjustment mechanism to ensure that domestic fuel prices are at cost-recovery levels, based on import-parity, while scaling up cash transfers to mitigate the impact of the subsidy reforms on the most vulnerable.

  • Clearing domestic payments arrears. The Government intends to eliminate the arrears accumulated during the oil-price crisis. Those recorded in the Integrated Financial Management System (SIGFE) would be eliminated by end-2019 (structural benchmark). The claims outside SIGFE would be audited and settled gradually during the program (Text Table). The Government recently published a decree setting a deadline of end-January 2019 for creditors to submit claims on domestic payments arrears contracted in 2013–17. Payments will be made in cash—targeting smaller and cash-constrained suppliers—and in local-currency-denominated Treasury securities. To smooth arrears management, a small and constant amount of arrears is tolerated during the program (indicative target); and arrears accumulated between end-2017 and the start of the program would be cleared before end-June 2020. The Government will enforce internal controls and improve transparency and monitoring.

    Angola: Projected Clearance of Domestic Payments Arrears, 2018-211

    (Percent of GDP)

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

    Arrears accumulated up to end-2017.

  • Strengthening PFM. To improve the allocation of public resources and strengthen fiscal policy formulation and implementation, the Government will start publishing detailed quarterly fiscal reports by end-2019; implement a medium-term fiscal framework (MTFF), taking into account medium-term fiscal targets and incorporating the impact of current public investment decisions on current spending in the future; submit PFM legislation to the National Assembly to support the MTFF, in line with IMF staff advice; and design a fiscal stabilization fund to reduce the procyclicality of spending—however, the fund’s capitalization will only start once the budget generates surpluses and public debt falls below 60 percent of GDP.

C. Promoting Debt Sustainability

16. Fiscal policy, guided by the NOPFD and anchored by a medium-term debt target, will promote debt sustainability. The medium-term debt target, which will anchor the fiscal consolidation under the program, is set at 65 percent of GDP (Central Government and Sonangol). Fiscal retrenchment, combined with higher oil revenues in kwanzas, from favorable oil prices and currency depreciation, and the restructuring of Sonangol (see below), would reduce public debt monitored under the program from 90 percent of GDP in 2018 to 65 percent of GDP by 2023. Debt reduction will enhance Angola’s credibility as a reliable borrower in domestic and international markets.

17. Angola’s public debt is assessed as sustainable, but remains vulnerable to macro-fiscal shocks. The depreciation of the kwanza, while correcting the economy’s external imbalances, has been the main driver of the debt buildup in 2018. However, debt would gradually decline, supported by the NOPFD consolidation and robust oil revenue flows in kwanzas, reflecting a more depreciated exchange rate. Staff assesses Angola’s public debt as sustainable under the baseline scenario (Annex IV). However, public debt would remain high during the program and vulnerable to macro-fiscal shocks—including growth, oil-price and contingent liability shocks—making debt management challenging under these stress scenarios (Text Figure). The baseline debt path would diverge significantly from the historical scenario. Risks to debt sustainability would be mitigated by rebuilding buffers, strengthening debt management during the program, adhering to fiscal and debt targets, and transitioning to a more flexible exchange rate regime. Risks from uncovering potential unrecorded public guarantees (prior action) and from additional banking sector needs2 would be assessed and possible corrective measures identified in the first review.

A01ufig3

Angola: Public Debt, 2018-23

(Percent of GDP)

Citation: IMF Staff Country Reports 2018, 370; 10.5089/9781484391334.002.A001

Sources: Angolan authorities; and IMF staff estimates and projections.

18. The Government will use windfall oil revenue3 to retire public debt and clear domestic payments arrears. The large gross financing needs (GFNs) in 2018 (17.3 percent of GDP; Text Table)—including domestic debt amortization needs—would be managed by reducing government deposits, Eurobond issuance, and IMF support.4 Going forward, GFNs are expected to be met by external project loans (while downsizing oil-collateralized borrowing), program financing, and improved fiscal position and domestic rollover rates. As GFNs fall to more moderate levels, budget financing would become more manageable, creating room for rebuilding buffers and clearing domestic payments arrears (MEFP, ¶9).

Angola: Fiscal Financing Needs and Sources, 2018-21

(Percent of GDP)

article image
Sources: Angola authorities; and IMF staff estimates and projections.

These items are not included in the DSA’s standardized calculation of GFN (Annex IV).

Repayment of past expenses related to the National Urbanization and Housing Plan (PNUH).

Including estimated net changes in the balances of escrow accounts.

19. Conditionality on public debt will help reduce vulnerabilities and increase the transparency of statistics. The program will closely monitor the debt trajectory of the Central Government and Sonangol through quarterly indicative targets. The authorities have provided detailed information on collateralized debt of the Central Government and Sonangol (prior action); detailed information on recorded public guarantees (prior action); and called for information on possibly unrecorded public guarantees (prior action). The program prohibits the contracting of new collateralized debt (performance criterion; MEFP, ¶21–22). By end-March 2019, the Debt Management Unit (UGD) will publish a Debt Management Strategy and start publishing an Annual Borrowing Plan, according to TA recommendations (structural benchmark; MEFP, ¶21).

D. Modernizing Monetary and Exchange Rate Policies

20. The BNA will target reserve money growth to achieve its objective of single-digit inflation in the medium-term (MEFP, ¶10). The policy will rely on monetary targeting, given capacity constraints and underdeveloped financial markets, including weak transmission mechanisms for interest rates. The desired path for reserve money will be achieved through monetary policy tools and FX operations, consistent with NIR targets, and is contingent on operational independence. The program is set to control fiscal dominance by limiting intra-year direct lending to the legal limit of 10 percent of previous year’s current revenue (MEFP, ¶10) and ensuring that the allowable amount is settled in cash at the end of the year. With an excess of liquidity concentrated in six banks, the BNA and the Ministry of Finance will need to coordinate liquidity management to achieve monetary targets.

21. The BNA intends to keep monetary policy appropriately tight to enable disinflation. Further depreciation of the kwanza and the adjustments for electricity tariffs, transport fares, and fuel prices would contribute to inflation reaching 17 percent in 2019. With the policy rate at 16.5 percent, and the three-month T-Bill rate at 13.5 percent, interest rates are negative in real terms. Although FX sales have managed to withdraw kwanza liquidity equivalent to 4.9 percent of GDP, excess reserves represented 1.1 percent of GDP in September. The BNA should stand ready to adjust monetary conditions, including the policy rate, to reflect changes in the fiscal impulse that would place reserve money and inflation objectives at risk. The BNA has strengthened transparency through improved communications (MEFP, ¶14). It is now meeting banks regularly to explain its monetary and exchange rate policies and publishes monetary policy statements to explain the rationale for policy decisions and firm up market expectations.

22. The exchange rate regime is being liberalized. After abandoning the peg to the U.S. dollar in January, the kwanza depreciated by 45 percent through end-October. The legacy backlog of unmet FX demand from 2014–17, including arrears to the airlines and telecommunications companies, was cleared. However, recent accumulation reflects insufficient kwanza funds for some clients and a tightening of regulatory enforcement by the BNA, including for AML/CFT. Nonetheless, the BNA is committed to eliminate the backlog of unmet FX demand (structural benchmark). The BNA started to announce broad amounts to be made available in auctions in September and increased the frequency of FX auctions from one to three auctions a week. It eliminated the priority list and direct sales at end-September (MEFP, –12). With assistance from the IMF’s MCM Department, progress is being made toward a market determined exchange rate in January 2019. Developing a well-functioning and continuously adjusting market will require eliminating market-distorting regulations; ensuring that customers can withdraw their FX deposits freely (structural benchmark); and unwinding the compulsory conversion of banks FX reserve requirement into government securities. The BNA will continue to supply FX for the foreseeable future for the purposes of intermediating FX from oil sales. Its interventions will be limited to smoothing excessive exchange rate volatility (MEFP, ¶14). Future auctions should be conducted in a non-discriminatory manner and ensure transparent price discovery and trading.

23. Exchange rate restrictions and multiple currency practices will be eliminated progressively (MEFP, ¶15). The BNA started to move to prevent potential spreads beyond 2 percent between successful bids at auctions by initially introducing a +/- 2 percent cap. Once the liberalization takes hold, the BNA intends to eliminate limits on the availability of FX for certain invisible transactions and on unrequited transfers to individuals and institutions overseas (MEFP, ¶15). The Government also intends to eliminate the discriminatory application of the 0.1 percent stamp tax on FX operations and the special tax of 10 percent on transfers to non-residents under contracts for foreign TA by end-March 2021 (MEFP, ¶15).

E. Reducing Financial Sector Vulnerabilities

24. Gaps in the prudential framework contribute to banking problems. Absence of restrictions on FX lending without corresponding revenues and the possibility to repay FX loans in kwanzas contributed to FX shortages and increased currency mismatches. It represents a direct FX risk and an indirect credit risk to banks. Exclusion of loan-loss provisions and off-balance sheet exposures distort the calculation of open positions, as may improper accounting of letters of credit—implying that banks may be more exposed than is apparent to losses from depreciation. Earlier compulsory conversion of banks’ foreign exchange reserve requirements limits liquidity and banks’ appetite for government securities.

25. The BNA is committed to implement policies to address financial sector vulnerabilities. External experts in collaboration with the BNA will conduct AQRs for the eight largest banks by end-September 2019 (structural benchmark). Banks with capital shortfalls will be required to submit a plan to raise capital by end-2019 and complete the recapitalization process by June 2020 (MEFP, ¶17). Banks unable to raise the required capital will be resolved. The authorities will amend the Financial Institutions Law and the BNA Law in line with IMF staff advice (MEFP, –18), to ensure that they have an effective recovery planning, enhanced corrective actions, and resolution framework for weak banks, before finalizing AQRs (structural benchmark).

26. The largest bank’s (Banco de Poupança e Crédito, BPC) restructuring plan will be updated, in consultation with IMF staff, to ensure it is sufficiently capitalized by June 2020 and is viable after the completion of its restructuring (MEFP, ¶19). The updated plan would include additional recapitalization and more transfers of NPLs to the public asset recovery entity (Recredit). Proper governance arrangements and operational procedures (including asset valuation, transfer pricing, debt workout procedures, sunset clause) would be implemented at Recredit by end-March 2019 to maximize recoveries and minimize fiscal costs (structural benchmark). The Government will limit Recredit’s mandate to purchase NPLs from BPC only. Given the criticality of BPC’s updated restructuring plan and necessary actions resulting from AQRs, additional recommendations could be proposed as conditionality in future reviews.

27. The authorities are committed to strengthen their AML/CFT regime (MEFP, ¶20). The weak AML/CFT regime has led to severe pressures in correspondent banking relations (CBRs), including the loss of direct dollar CBRs in October 2016. Recognizing that AML/CFT concerns are a key driver of CBR pressures in Angola, the authorities intend to adopt amendments to the legal framework with assistance from the IMF’s Legal Department, including submitting a revised AML/CFT Law and other related legal and regulatory amendments to the National Assembly in line with FATF standards (structural benchmark). Strengthening the AML/CFT framework can also help support anti-corruption efforts, particularly against politically exposed persons.

F. Reducing Fiscal Risks and Supporting Private-Sector-Led Growth

28. Angola’s governance is weak and structural bottlenecks are large, but payoffs from addressing them could be significant. Angola scores unfavorably relative to SSA peers in most indicators of ease of doing business, governance, and corruption perceptions. Staff estimates that even modest improvements in governance could yield sizeable growth dividends.5 The EA will focus on tailored structural reforms to reduce sources of fiscal risks and improve economic efficiency, foster private sector development, and strengthen overall governance.

29. Angola’s state-owned enterprises (SOEs) are a source of fiscal risks. Angola has nearly 80 non-financial SOEs, of which Sonangol is the largest (Text Table). Sonangol recently reduced its financial debt after receiving a US$10 billion capital injection. However, the liabilities of other SOEs—for which data are available—are sizable and seem to have increased lately. The capacity of SOEs to generate income, hence dividends for the Treasury, appears small, which suggests room for improving efficiency and corporate governance. The creation of a new oversight institute under the Ministry of Finance is expected to strengthen SOE governance and monitoring. To improve economic efficiency and contain fiscal risks, the Government is launching an ambitious SOE restructuring program to start in 2019. The program would include closing insolvent SOEs and privatizing or restructuring economically viable, but inefficient, SOEs over a two-year period (MEFP, ¶24). The Government commits not to use privatization receipts to finance current spending.

Angola: Performance of Non-Financial SOEs, 2015-17

(In Percent of GDP)

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Sources: Financial statements of SOEs; and IMF staff calculations.

Excluding Sonangol, whose annual report for 2017 was not published by end-October 2018.

30. A comprehensive restructuring of Sonangol is planned. It will begin in 2019Q1 and include the commencement of divestiture from non-core businesses by end-September 2019 (structural benchmark). The timebound restructuring will also reduce stakes in oil blocks and streamline the labor force. Its successful completion would eliminate the need for future capital injections, support reducing the company’s debt, and increase its efficiency. The intended transfer of Sonangol’s concessionaire functions to a recently created agency for petroleum and gas will center the company on its core businesses and reduce potential conflicts of interest.

31. Angola’s sovereign wealth fund is making efforts to regain control of its assets. The new management of the fund is in the process of searching for a new international fund manager and external auditor for the assets it has brought back under its control. It continues with international legal actions to recoup more of its mismanaged assets. The authorities are preparing legislation to strengthen the fund’s governance and transparency and set clearer deposit and withdrawal rules. The authorities committed to capitalizing the fund again only when the budget generates surpluses and government debt is below 60 percent of GDP.

32. Reforms to improve the business climate and unlock private investment include: enacting an insolvency law to strengthen property rights; strengthening property rights; catalyzing firms’ access to financing (MEFP, ¶25); reducing red tape and simplifying procedures for licensing and paying taxes, with support from the World Bank; and commitment to ensuring that all agencies supporting anti-corruption efforts are adequately funded, and cooperation with other jurisdictions, strengthened (MEFP, ¶26).

G. Governance and Corruption

33. The authorities are committed to address weak governance and corruption. The NDP has specific targets for reducing corruption, including implementing an anti-corruption strategy by end-2019; increasing to 60 percent the share of public investment contracts awarded through open tenders by 2022; and supporting anti-corruption institutions, such as the General Attorney’s Office and the Criminal Investigation Service under which the newly-created anti-corruption agency will operate (MEFP, ¶26).

34. The program entails measures to support the authorities’ anti-corruption efforts, including strengthening public financial management (MEFP, ¶9); eliminating direct sales of FX and priority list for access to FX (MEFP, ¶12); removing exchange rate restrictions and multiple currency practices (MEFP, ¶15); restructuring BPC (MEFP, ¶19); revamping the AML/CFT framework (MEFP, ¶20); and restructuring the public corporate sector (MEFP, ¶24).

Program Modalities and Risks

35. Duration. A three-year EA is appropriate for Angola, whose economy has been experiencing stagnant per capita growth and an inherently weak BOP position. The EA would support the authorities’ structural measures—including achieving a competitive exchange rate and implementing market and governance reforms to attract investment, which would facilitate economic diversification, reduce the dependence on oil, and ultimately address structural BOP problems. The EA’s repayment period is consistent with the lag required to diversify the economy.

36. Financing need. The estimated financing gap for 2018Q4–2021 amounts to about US$4.5 billion, and largely reflects lower-than-expected rollover rates in the domestic debt market, partly because of banks being close to their internal exposure limits to sovereign risk. In 2018, the Treasury diversified the financing sources by issuing US$3.5 billion in Eurobonds in mid-year, and partially rolling over a US$1.5 billion domestic dollar-denominated bond in August. It also requested a BNA advance (1.3 percent of GDP). Despite these efforts, usable cash balances would fall below levels deemed safe by late 2018. Covering the financing gap would bring usable cash buffers to at least 2.5 months of expenditure by 2021 (Table 7).6 The fiscal financing gap gives rise to a BOP need of equivalent amount, as additional Eurobond issuance would likely imply high spreads. The BOP need is mirrored on the external side by low international reserves, following rapid depletion in recent years (Table 8) to levels below the floor of the IMF’s Assessing Reserve Adequacy (ARA) metric.

37. Access and phasing. The authorities are keen on rebuilding international reserves (MEFP, –13). The oil-price shock, unsustainable policies before the elections in 2017, and FX sales to clear the backlog depleted external buffers. The program targets an accumulation in reserves, which would raise gross international reserves to 8 months of prospective imports by 2021 and put them just above 100 percent of the ARA metric, but still below the threshold applicable to oil exporters. Financing will be within normal access limits (361 percent of quota, US$3.8 billion). In-year frontloading during the first year will help prevent cash balances from falling to unsafe levels. IMF financial support is expected to be supplemented by budget support from the World Bank (US$750 million) through three Development Policy Operations to support structural reforms and implementation of a social safety net. Without the EA, gross international reserves would decline to US$12.6 billion in 2021, equivalent to 73 percent of the ARA metric or 4.7 months of import cover.

38. Financing assurances and burden sharing. Firm commitments of full program financing are in place for the first year of the program and there are good prospects for the remainder of the program. The IMF and the World Bank will cover the financing gap (Table 8). The African Development Bank (AfDB) could consider providing budget support in the second half of the program (not included in the baseline scenario), which would spread burden sharing. Project loans from several sources, including from China, Germany, United Kingdom, France, and Afreximbank would support Angola’s public investment program during the EA. The EA is also expected to help Angola secure more favorable terms in financial markets.

39. Capacity to repay the IMF. Total IMF exposure will be limited at most to 3½ percent of GDP, or about 18 percent of gross international reserves. The exposure, measured by credit outstanding, is in line with other upper-credit tranche arrangements (Text Figure). When measured by repayment flows, it is at the upper end of the range for recent EAs, but is not exceptionally high (Text Figure). To safeguard capacity to repay the IMF, risks are being mitigated through the non-contracting of new collateralized debt (performance criterion; MEFP, ¶21) and repayments of collateralized debt before the start of the EA’s repayment period. Debt burden indicators, adjusted by the extent of collateralization, are expected to remain contained. Repayments to the IMF would peak at 1½ percent of non-pledged exports of goods and services, whereas IMF credit outstanding would peak at 12 percent of the stock of non-collateralized debt (Table 9). On this basis, Angola’s capacity to repay the IMF is adequate, but appears subject to elevated risks under a plausible adverse scenario (Table 10).

A01ufig4

Angola: Peak IMF Credit-to-GDP Ratio in Recent EFFs

(Percent of GDP)

Citation: IMF Staff Country Reports 2018, 370; 10.5089/9781484391334.002.A001

Sources: IMF Staff reports for program requests; and IMF staff calculations.
A01ufig5

Angola: Peak Repayments-to-Exports in Recent EFFs

(Percent of Exports of Goods and Services)

Citation: IMF Staff Country Reports 2018, 370; 10.5089/9781484391334.002.A001

Source: IMF staff calculations.1/ Includes collateralized debt2/ Non-collateralized debt, baseline

40. Program monitoring. The program will be monitored through semi-annual reviews starting in December 2018 (Table 11). Monitoring modalities include (MEFP, Tables 1a, 1b, and 2):

  • Three prior actions on public guarantees and collateralized debt, all of which were met.

  • Three performance criteria on: NIRs of the BNA; BNA claims on the Central Government; and NOPFD of the Central Government.

  • Two continuous performance criteria on: non-accumulation of external debt payments arrears by the Central Government and the BNA; and no new contracting of collateralized external debt.

  • Continuous standard performance criteria on: exchange rate/import restrictions and multiple currency practices.

  • Four indicative targets on: public debt; social spending; net accumulation of domestic payments arrears; and disbursements of collateralized debt.

  • Structural benchmarks, which gauge progress in key structural reforms.

41. Data for program monitoring. There is a need to improve the quality and timeliness of statistics for successful program implementation. The creation of a dedicated team, and ongoing IMF TA, including implementation of the enhanced General Data Dissemination System (e-GDDS), will support the completion of program objectives on a timely basis and improve data provision and transparency. The authorities undertook to establish a National Summary Data Page (NSDP) under the e-GDDS. Improved data transparency may to contribute to a reduction in sovereign borrowing costs.

42. External payments arrears. Angola owes US$3.7 billion in external arrears: US$2.1 billion to a foreign commercial creditor—a preliminary agreement is in place; US$1.3 billion to a foreign state-owned supplier—funds are secured to clear them fully in the near future; US$0.3 billion to foreign private suppliers—mostly from the time of the civil conflict and the authorities have contacted the relevant embassies to help identify them.7 With respect to arrears to private sector creditors, the authorities are making good-faith efforts to reach a collaborative agreement.

43. Safeguards assessment. The last safeguards assessment was completed in 2010. A safeguards assessment update will be completed before the first review.

44. Risks to the medium-term outlook are tilted to the downside (Annex V). Lower-than-projected international oil prices, stronger-than-expected decline in oil production, and sharper-than-envisaged tightening of global financial conditions could hamper the projected growth rebound. Other risks include capacity constraints, resistance to reforms from vested interest, and shocks to the debt trajectory. There are specific risks to the financial sector from potential negative spillovers from the transition to a more flexible exchange rate regime; losses from currency depreciation; potential capital flight from lifting exchange rate restrictions; and deviations from the debt path because of the materialization of contingent liabilities. The program endeavors to mitigate these risks. TA by the IMF and other development partners will help address capacity constraints (Table 12).

Staff Appraisal

45. The policies implemented by the authorities represent a break from the past in many respects. The Government has demonstrated strong commitment to reforms. In just a year, it took courageous measures against entrenched vested interests, supported stronger governance in the public administration, put in place a sound MSP, and committed to support human development and sustainable and inclusive growth under a five-year NDP.

46. Completing the upfront consolidation and approving a prudent budget for 2019 are essential for strengthening fiscal sustainability. The authorities continue to work toward delivering the upfront consolidation in 2018. This is complemented by the submission of a draft budget for 2019 to the National Assembly, in line with program understandings. Staff urges the authorities to use possible space created by oil revenue windfalls to reduce public debt and arrears. Risks from large financing needs are expected to decline over the program period through continued fiscal consolidation and cautious public debt management.

47. Gradual fiscal consolidation in the medium term is needed to put public debt on a downward path and create space for infrastructure and social spending. Continued fiscal retrenchment during the program and beyond is needed to achieve the medium-term debt target. NOPFD consolidation, combined with improvements in the quality of public spending, and strengthened PFM controls would create space for scaling up public investment and support social programs for the most vulnerable.

48. Exchange rate flexibility is critical to improve external competitiveness and promote private sector activity. Staff supports eliminating imbalances in the FX market and the subsequent provision of FX in regular and unconstrained auctions. It will be important to remove impediments to FX deposit withdrawals and eliminate exchange restrictions and arrangements that can give rise to multiple currency practices. After achieving a continuously adjusting, market-clearing rate, the BNA’s interventions should be limited to smoothing excessive volatility.

49. Modernization of monetary policy should proceed with caution. Although monetary policy has remained tight on balance, notably via increased sales of FX, inflation is still high. Building capacity to utilize the full array of monetary policy instruments, while incentivizing banks’ recourse to money markets, will be important. Targeting base money growth at a level consistent with the inflation objective and bringing interest rates above inflation will be important to monetary stability.

50. Vulnerabilities in the banking system are a concern. The BNA should enforce compliance with prudential regulations, including capital and liquidity positions. Policies, which have exacerbated liquidity and foreign exchange mismatches should be revisited, consistent with the elimination of banks’ informal restrictions on FX deposits. Bolstering governance and credit-risk management at state-owned banks and accelerating their restructuring are important. Completing AQRs, buttressing crisis management, and submitting the new AML/CFT law to Parliament are essential for strengthening the financial system.

51. Structural reforms are tailored to reduce fiscal risks and foster private sector development. The restructuring of Sonangol, Angola’s largest SOE and taxpayer, would limit future recapitalization needs and help catalyze investments in the oil sector. A comprehensive SOE reform would curb fiscal risks, improve economic efficiency, and reduce opportunities for corruption. Putting in place an adequate insolvency framework to ease access to financing, improving governance, and reducing red tape would help economic diversification.

52. Risks to the program are tilted to the downside, but appear manageable, given the authorities’ strong policies and robust ownership of reforms. The EA will support policy discipline against the risk of reversals and send a positive signal to external and domestic stakeholders. It will be key for entrenching fiscal and debt sustainability, eliminating distortions in the financial sector and FX market, and supporting the authorities in advancing their reform agenda.

53. Staff supports the authorities’ request for an EA. IMF financial support will provide an impetus to the implementation of Angola’s reform program. Given Angola’s fiscal and BOP needs, the policy actions taken so far, and the authorities’ strong commitment to their ambitious reforms, staff supports their request for a three-year arrangement, in an amount equivalent to SDR 2,673 million.

Figure 1.
Figure 1.

Angola: Selected High-Frequency Indicators, 2009–18

Citation: IMF Staff Country Reports 2018, 370; 10.5089/9781484391334.002.A001

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

Angola: Fiscal Developments, 2007–18

Citation: IMF Staff Country Reports 2018, 370; 10.5089/9781484391334.002.A001

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

Angola: Monetary Developments, 2010–18

Citation: IMF Staff Country Reports 2018, 370; 10.5089/9781484391334.002.A001

Sources: Angolan authorities; and IMF staff calculations.
Figure 4.
Figure 4.

Angola: External Sector Developments, 2005–18

Citation: IMF Staff Country Reports 2018, 370; 10.5089/9781484391334.002.A001

Sources: Angolan authorities; and IMF staff calculations.
Table 1.

Angola: Main Economic Indicators, 2014–21

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Sources: Angolan authorities; and IMF staff estimates and projections.

Includes debt of the Central Government, external debt of state oil company Sonangol and state airline company TAAG, and guaranteed debt.

Table 2a.

Angola: Statement of Central Government Operations, 2014–21

(Billions of local currency, unless otherwise indicated)

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Sources: Angolan authorities; and IMF staff estimates and projections.

The year 2017 includes one-off revenue of about 1 percent of GDP from an agreement to settle tax liabilities under dispute with oil companies.

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

Spending on education, health, social protection, and housing and community services. 2017 and 2018 are preliminary estimates, and 2019 onwards are projected floors.

Includes debt of the Central Government, external debt of state oil company Sonangol and state airline company TAAG, and guaranteed debt.

Table 2b.

Angola: Statement of Central Government Operations, 2014–21

(Percent of GDP)

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Sources: Angolan authorities; and IMF staff estimates and projections.

The year 2017 includes one-off revenue of about 1 percent of GDP from an agreement to settle tax liabilities under dispute with oil companies.

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

Spending on education, health, social protection, and housing and community services. 2017 and 2018 are preliminary estimates, and 2019 onwards are projected floors.

Includes debt of the Central Government, external debt of state oil company Sonangol and state airline company TAAG, and guaranteed debt.

Table 2c.

Angola: Statement of Central Government Operations, 2014–21

(Percent of non-oil GDP)

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Sources: Angolan authorities; and IMF staff estimates and projections.

The year 2017 includes one-off revenue of about 1 percent of GDP from an agreement to settle tax liabilities under dispute with oil companies.

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

Spending on education, health, social protection, and housing and community services. 2017 and 2018 are preliminary estimates, and 2019 onwards are projected floors.

Includes debt of the Central Government, external debt of state oil company Sonangol and state airline company TAAG, and guaranteed debt.

Table 3.

Angola: Monetary Accounts, 2014–21

(End of period; billions of local currency, unless otherwise indicated)

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Sources: Angolan authorities; and IMF staff estimates and projections.

Including exchange rate valuation.