Angola: First Review of the Extended Arrangement Under the Extended Fund Facility, Requests for a Waiver of Nonobservance of a Performance Criterion, and Modifications of Performance Criteria, and Financing Assurances Review—Press Release; Staff Report; and Statement by the Executive Director for Angola

First Review of the Extended Arrangement Under the Extended Fund Facility, Requests for a Waiver of Nonobservance of a Performance Criterion, and Modifications of Performance Criteria, and Financing Assurances Review-Press Release; Staff Report; and Statement by the Executive Director for Angola

Abstract

First Review of the Extended Arrangement Under the Extended Fund Facility, Requests for a Waiver of Nonobservance of a Performance Criterion, and Modifications of Performance Criteria, and Financing Assurances Review-Press Release; Staff Report; and Statement by the Executive Director for Angola

Persevering Despite Headwinds…

1. The start of the Extended Arrangement under the Extended Fund Facility (hereafter the “arrangement”) has provided impetus to a reform-minded Government. Reforms have brought about improvements in governance and greater transparency. Front-loaded fiscal consolidation, exchange rate depreciation, improvements in the foreign exchange market, and a faster-than-expected disinflation have stoked confidence in the reforms.

2. However, Angola faces a deteriorated external environment. The volatility of Brent oil prices (reference for Angola) has heightened; external financial conditions have been more restrictive; and trade tensions between the U.S. and China—Angola’s major trading partner and creditor—have generated uncertainty.

3. Despite headwinds, the authorities are staying on course. They remain committed to the arrangement and have responded decisively to the deteriorated outlook by tightening fiscal policy. Going forward, fiscal adjustment needs to be complemented with tighter monetary policy, increased exchange rate flexibility, and bold structural reforms.

…Which Weigh on the Outlook

4. Overall performance in 2018 was better than expected, but the near-term outlook has weakened (Figures 14; Tables 14).

  • GDP contracted for the third year in a row. The tepid recovery projected for 2019 is driven by modest non-oil growth, which would offset falling oil production.

  • Disinflation is expected to continue. Inflation (y/y) is expected to decline to 15 percent by year-end, reflecting weak economic activity and muted exchange rate pass-through.

  • Fiscal retrenchment was stronger than expected. The non-oil primary fiscal deficit (NOPFD) outperformed program projections by 2.1 percent of GDP, driven by restrained spending and strong non-oil revenue collection. Fiscal overperformance and slower-than-projected currency depreciation at end-2018 restrained the increase in public debt (Table 5).

  • Current account registered a large surplus, but is projected to swing back to a deficit of 2 percent of GDP this year. With net capital inflows insufficient to cover the current account deficit, net international reserves (NIRs) would contract in 2019.

  • Foreign exchange (FX) imbalances were reduced through a combination of aggressive depreciation, following the exit from the peg to the U.S. dollar in January 2018, and enhanced FX sales. In nominal terms, the kwanza depreciated by 54 percent against the U.S. dollar in 2018 and cumulative foreign exchange sales reached US$13.4 billion by year end. Over the same period, the real effective exchange rate (REER) depreciated by 35 percent, significantly reducing the REER misalignment identified in the 2018 Article IV Report. FX shortages have largely subsided and the spread between the official and the parallel exchange rates narrowed from 150 percent at end-2017 to 21 percent in early October 2018 (Text Figure). However, the spread widened to 35 percent at end-April 2019. The wider spread can be partially attributed to the authorities’ reassertion of control over illegal mining and informal commerce, which reduced the supply of FX in the parallel market. At the same time, the pace of depreciation of the official rate has slowed.

  • After the tight stance of monetary policy in 2018Q1, the Banco Nacional de Angola’s (BNA) policy rate was reduced in July 2018 and January 2019, while the reserve requirement ratio was cut in May and July 2018. The more accomodative stance kept real short-term Treasury Bill rates in negative territory.

  • Financial sector vulnerabilities persist, as nonperforming loans (NPLs) represented 28.3 percent of total gross loans and profitability (return-on-assets) show signs of pressure in December (Table 6). Owing to a three-fold increase in the minimum capital requirement in 2018, banks’ cushion against credit risk has increased, with the NPL provisions/core capital ratio dropping from 35 percent (December 2017) to 12.9 percent (January 2019). A few smaller banks hold negative net open positions in foreign currency.

Figure 1.
Figure 1.

Angola: Selected High-Frequency Indicators, 2009–19

Citation: IMF Staff Country Reports 2019, 170; 10.5089/9781498320481.002.A001

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

Angola: Fiscal Developments, 2009–19

Citation: IMF Staff Country Reports 2019, 170; 10.5089/9781498320481.002.A001

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

Angola: Monetary Developments, 2009–19

Citation: IMF Staff Country Reports 2019, 170; 10.5089/9781498320481.002.A001

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

Angola: External Sector Developments, 2009–19

Citation: IMF Staff Country Reports 2019, 170; 10.5089/9781498320481.002.A001

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

Angola: Main Economic Indicators, 2018–22

(Units as indicated)

article image
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.

Includes guaranteed and excludes debt owed by the Central Government to Sonangol related to the National Urbanization and Housing Plan (PNUH).

Excludes guaranteed debt and includes debt owed by the Central Government to Sonangol related to the National Urbanization and Housing Plan (PNUH).

Table 4.

Angola: Balance of Payments, 2018–22

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

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Sources: Angolan authorities; and IMF staff estimates and projections.
uA01fig01

Angola: Inflation, and Official and Parallel Exchange Rates, 2014–19

(Inflation in percent; exchange rates in Kwanzas per U.S. dollar)

Citation: IMF Staff Country Reports 2019, 170; 10.5089/9781498320481.002.A001

Sources: BNA; INE; and IMF staff calculations.

5. Risks have become broadly balanced (Annexes I-II). Some risks envisaged at the time of arrangement approval may materialize in 2019 (e.g., lower oil prices and production). The authorities are implementing mitigating policy responses with the help of technical assistance (TA) from the IMF and development partners. Conversely, the risk stemming from another negative oil-price shock is reduced, as the revised program scenario assumes a conservative reference oil price.

The Program is off to a Promising Start

6. Program implementation was robust (MEFP Tables 12). All but one performance criteria (PCs) were met—the NOPFD by a large margin. The authorities are requesting a waiver for the non-observance of the PC on the non-accumulation of external arrears. All four indicative targets (ITs) were met, some with a large margin (e.g., social expenditure). The authorities made mixed progress with structural benchmarks (SBs). The medium-term debt strategy and annual borrowing plan for 2019 were published (SB, met), with the help of IMF and World Bank TA. Although the backlog of foreign exchange demand was not fully eliminated by end-2018 (SB, not met), the BNA reports that it was fully cleared in April 2019. The authorities intend to implement the remaining two SBs in a timely fashion. A revised AML/CFT Law and ancillary regulatory amendments are expected to be enacted by end-September 2019, with the help of IMF TA (SB, not met). Proper governance and operational procedures are expected to be implemented at Recredit (the nonperforming asset recovery company) by end-June, following IMF advice (SB, not met).

Table 2a.

Angola: Statement of Central Government Operations, 2018–22

(Billions of local currency, unless otherwise indicated)

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

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

Includes repayment of debt owed to Sonangol related to the National Urbanization and Housing Plan (PNUH).

Spending on education, health, social protection, and housing and community services. Figures for 2018 are preliminary estimates, and for 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.

Includes guaranteed and excludes debt owed by the Central Government to Sonangol related to the National Urbanization and Housing Plan (PNUH).

Excludes guaranteed debt and includes debt owed by the Central Government to Sonangol related to the National Urbanization and Housing Plan (PNUH).

Table 2b.

Angola: Statement of Central Government Operations, 2018–22

(Percent of GDP)

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

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

Includes repayment of debt owed to Sonangol related to the National Urbanization and Housing Plan (PNUH).

Spending on education, health, social protection, and housing and community services. Figures for 2018 are preliminary estimates, and for 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.

Includes guaranteed and excludes debt owed by the Central Government to Sonangol related to the National Urbanization and Housing Plan (PNUH).

Excludes guaranteed debt and includes debt owed by the Central Government to Sonangol related to the National Urbanization and Housing Plan (PNUH).

Table 2c.

Angola: Statement of Central Government Operations, 2018–22

(Percent of non-oil GDP)

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

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

Includes repayment of debt owed to Sonangol related to the National Urbanization and Housing Plan (PNUH).

Spending on education, health, social protection, and housing and community services. Figures for 2018 are preliminary estimates, and for 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.

Includes guaranteed and excludes debt owed by the Central Government to Sonangol related to the National Urbanization and Housing Plan (PNUH).

Excludes guaranteed debt and includes debt owed by the Central Government to Sonangol related to the National Urbanization and Housing Plan (PNUH).