Introduction

1. Our Angolan authorities appreciate the constructive engagement with staff during the recent EFF program negotiations. They broadly agree with staff’s assessment and key policy recommendations.

2. Angola continues to make headway in addressing its socio-economic development challenges, enhancing resilience to external shocks, and sustaining efforts to diversify the economy away from the oil sector. Following the 2017 presidential elections, the authorities immediately launched the Macroeconomic Stabilization Plan (MSP), and a new National Development Plan (NDP 2018-2022) in January and April 2018, respectively. The MSP seeks to address macroeconomic imbalances, mitigate fiscal risks emanating from the oil price volatility, and support external sector stability through greater exchange rate flexibility. The NDP aims to lay the foundation for sustainable and inclusive growth, bolster competitiveness in the non-oil sector, and enhance governance and institutions.

3. To complement these reform efforts, our Angolan authorities request a three-year Extended Fund Facility (EFF) arrangement. This arrangement is expected to anchor the reforms, promote policy discipline and provide positive signals to stakeholders. To demonstrate commitment, our authorities have completed all prior actions for the EFF, covering public guarantees and collateralized debt.

Recent Economic Developments and Outlook

4. The Angolan economy has commenced a cycle of gradual recovery from the low oil prices experienced since mid-2014. As a result, growth is expected to gather momentum in the next three years (2019-2021).

5. Real GDP growth is projected to contract by 1.7 percent in 2018 from -0.2 percent in 2017, reflecting a decline in oil and gas production. Non-oil GDP is however, expected to record a slight recovery, driven by increased activity in agriculture, construction, and the energy sector. Over the near term, real GDP growth is projected to edge-up to 3.2 percent, supported by a faster recovery in the oil and non-oil sector as well as a gradual rebalancing of the fiscal and external positions.

6. Annual inflation has declined to 18.04 percent (end-October; year-on-year) from 29 percent, despite the sharp depreciation of the Kwanza against U.S dollar since January 2018 and is projected to reach about 22 percent by end-December 2018, as a result of the exchange rate pass-through.

7. The local currency depreciated against the U.S. dollar by 43.6 percent between January and November 2018 with the spread between the official and parallel market exchange rate declining sharply to 24 percent from 150 percent from December 2017.

8. The current account is projected to record a surplus of 2.0 percent of GDP in 2018, owing to improvements in terms of trade. The balance on the financial account is projected to remain negative, with declines in foreign direct investment liabilities and nonresident deposits more than offsetting the impact of the Eurobond issuance and higher foreign loans. As result, the net international reserves (NIRs) are expected to decline to 3.5 months of prospective imports of goods and services by end 2018.

9. The overall medium-term outlook remains favorable owing to firming oil prices, improved global financial conditions, and renewed business confidence. However, the crystallization of downside risks including, lower-than-anticipated international oil prices, and a faster-than- anticipated tightening in global financial conditions, could slow down the recovery prospects. To ease the impact of these risks, the authorities will vigorously implementation the MSP with a view to rebuild fiscal and reserve buffers.

Fiscal Policy and Debt Management

10. The authorities remain committed to a moderate fiscal retrenchment stance, focused on a reversal in the public debt-to-GDP ratio, targeting close to 65 percent. In this context, they are determined to reduce the primary non-oil deficit as a percentage of non-oil GDP, eliminate domestic payments arrears, reducing pro-cyclicality of public spending and improving fiscal transparency. The authorities are committed to deploy the following fiscal policy measures:

• i) Stepping up efforts in the mobilization of non-oil revenue. This will be underpinned by the introduction of value added tax (VAT) during the second half of 2019. The 2019 Budget Law provides a set of measures to mitigate the delay in the implementation of VAT, previously anticipated for January 2019. This will be supported by the introduction of a special consumption tax for soft drinks, jewelry, alcohol and tobacco; an increase in the tax rate on the non-housing estate; and the recovery of tax arrears.

• ii) Rationalization of current expenditure. Focusing on the containment of wage growth and expenditure control, while paying attention to high-priority sectors, such as education and health. In addition, measures will be taken to contain growth in spending on goods and services; and streamlining transfer expenses, with an emphasis on the phasing out of subsidies for refined oil products, electricity, water and public transportation tariffs.

• iii) PFM Reforms. To improve the allocation of public resources, reforms will be undertaken to reduce the pro-cyclicality of public spending, with the design of a Fiscal Stabilization Fund (FSF). To enhance fiscal transparency, the authorities will adopt a Medium Term Fiscal Framework (MFFF), which will take into account the medium term fiscal targets and facilitate internalization of the implications of present public investment decisions on current expenditure over the medium term.

11. The authorities view efficient debt management as essential to ensuring debt sustainability. They attach importance on the need to reduce financing needs through lower borrowing costs and improve the debt service profile. To this end, the Debt Management Unit (UGD) will publish a Debt Management Strategy and an Annual Borrowing Plan by end-March 2019. These publications will foster the establishment of benchmark securities, reduce the frequency of primary auctions, and increase the share of domestic financing through competitive auctions. Further, to improve the transparency of debt operations and statistics, the UGD will start publishing weekly calendars of actions, auction results, public debt statistics, and quarterly debt bulletins on its website, by end-2018. The authorities have also committed to refrain from pledging oil revenues as collateral for new external borrowing.

Monetary, Exchange Rate and Financial Sector Policies

12. The Banco Nacional de Angola (BNA) is committed to continuously improve the monetary policy framework to target inflation. Towards this end, in November 2017, the BNA adopted reserve money as the new monetary policy anchor. Going forward, the authorities are committed to setting the path for reserve money growth to achieve single-digit level inflation in the medium term. Furthermore, the authorities are determined to sustain efforts to strengthen the liquidity management and forecasting framework to gain a better grasp of liquidity conditions in the banking system.

13. Monetary policy will continue to rely on its traditional tools, including standing facilities, foreign exchange operations, the discount window, and mandatory reserve requirements to achieve the monetary targets and redistribute liquidity to relatively weaker pockets of the system, as needed. At the same time, the authorities will conduct monetary policy in a well communicated manner. To control fiscal dominance, intra-year direct lending to the Government will be limited to the legal limit of 10 percent of the previous year’s revenue.

14. As part of an effort towards greater exchange rate flexibility, in January 2018, BNA abandoned the peg to the U.S. dollar which was adopted in April 2016. This contributed to improved predictability and efficiency in the allocation of foreign exchange resources, thereby protecting NIRs. Our authorities are cognizant of the need to swiftly eliminate distortions posed by foreign exchange restrictions and multiple currency practices, and are therefore, planning to take decisive steps to address this challenge, going forward.

15. Financial sector stability is a necessary condition for achieving the authorities’ economic objectives. In this respect, they have increased the minimum share capital requirement for banks threefold, effective from December 31, 2018. In this connection, banks falling short of the new threshold already submitted their capitalization plans to the BNA in July 31, 2018. To better assess the underlying situation of the banking system, the BNA, with the assistance of external experts, will conduct asset quality reviews (AQRs) of the portfolios of the eight largest banks to gauge possible recapitalization needs.

16. The authorities continue to give special attention to the restructuring process of the Banco de Poupança e Crédito (BPC). In this respect, a new board of directors was appointed in November 2017 and they have initiated a process of cutting costs, through consolidation of their branch network. The restructuring plan will be extended until 2020, when the bank’s capitalization process ends, while in the same period, its NPLs will be transferred to Recredit, whose mandate has been confined exclusively to acquire NPLs from BPC.

Structural Reforms

17. Tackling longstanding bottlenecks to economic competitiveness, through the reinvigoration of supply-side measures to support economic transformation and diversification remains essential to achieving the authorities’ objectives as outlined in the NDP 2018-2022. In this regard, they have prioritized mobilization of revenues for infrastructure investments, to accelerate economic diversification, while creating an adequate set of incentives to promote a business-friendly environment, improve governance and fight corruption. To complement these efforts, the National Assembly approved the Competition Law in April 2018, and the new Private Investment Law in May 2018.

18. To enhance firms’ access to finance and improve the insolvency framework, the Government will submit to the National Assembly a Draft Law on the Recovery of Enterprises and Insolvency, and related regulations. These legislative steps are expected to improve the country’s investment appeal and strengthen property rights. Similarly, the authorities have launched a Program for Export Diversification and Import Substitution (PRODESI), which is aimed at simplifying licensing procedures, registering property and enforcing contracts, and facilitating export procedures.

19. The authorities recognize that minimizing government’s direct involvement in economic activity is imperative to reducing fiscal risks and fostering private sector development. In this respect, the authorities have approved a number of SOEs restructuring programs and expect the approval of the privatization law by the national assembly before the end of the year. The program envisages the closure of insolvent SOEs and the privatization of a total of 126 SOEs (including 52 non-core assets of Sonangol and 10% of TAAG – Angola Airlines). To stimulate the domestic capital market, some of the SOEs will be privatized through the stock exchange. This privatization process will observe strict standards of transparency and international best practice.

20. The authorities remain committed to strengthening the AML/CFT framework. In February 2016, the country was removed from the Financial Action Task Force’s watch list (FATF) and subsequently removed from the Eastern and Southern African Anti-Money Laundering Group (ESAAMLG) monitoring process in April 2018. Our authorities will continue to work with the ESAAMLG to prepare for the next peer assessment, which is expected in 2021, focusing on corresponding banking relations and the next FATF mutual evaluation scheduled for 2021. In this regard, the authorities are expecting to complete the National Risk Assessment on AML/CFT issues by end-2018 which will serve as a basis for the formulation of the AML/CFT strategy. A revised AML/CFT Law and other related legal and regulatory amendments will be submitted to the National Assembly, in line with FATF standards, by end-March 2019.

21. As part of the fight against corruption, the authorities have dismissed several senior staff and initiated investigations into possible illegal acts in various public entities. The National Assembly is discussing a new Penal Code, which will include stricter anti-corruption provisions, expected to be approved in early 2019. A comprehensive anti-corruption strategy is also under development, which will be finalized by the end-2019. This strategy includes strengthening the legal framework to combat corruption through the production of new laws. Relatedly, the authorities have passed a new law to recover assets previously taken outside the country illegally.

Conclusion

22. Our authorities reiterate their steadfast commitment to advancing far-reaching structural reforms to achieve durable macroeconomic stability, tackle longstanding structural challenges to broad-based growth, and improve institutions. Accordingly, they remain determined to implement an appropriate policy mix of prudent fiscal and monetary policies, complemented by structural reforms. To this end, our authorities are optimistic that sound macroeconomic policies will deliver positive outcomes and look forward to the Executive Directors’ support for the approval of a new EFF arrangement to anchor the implementation of reforms.