Introduction

1. Our Angolan authorities appreciate the constructive engagement with staff during the recent Extended Fund Facility (EFF) program review mission in Luanda. They broadly agree with staff’s assessment and key policy recommendations and recognize the importance role played by the EFF arrangement in anchoring the national reform agenda.

2. Following a three-year recession, the Angolan economy is beginning to experience a modest economic recovery supported by the implementation of strong macroeconomic and financial policies, guided by the Macroeconomic Stabilization Program (MSP) together with structural reform measures implemented under the National Development Plan (NDP 2018–22). The emerging recovery, however, faces a challenging external environment, including increased oil price volatility, tightening global financial conditions, and waning global growth prospects. Against this background, the authorities remain committed to implement their reform agenda aimed at restoring macroeconomic stability and enhancing sustainable and inclusive growth.

Performance under the EFF Arrangement

3. Strong commitment to the implementation of the EFF arrangement has led to remarkable reform progress. As a result, all end-December performance criteria (PC) and indicative targets were met, except the PC on the non-accumulation of external arrears. Progress has also been made in implementing structural benchmarks. The PC on non-accumulation of external arrears could not be met, as the authorities’ payment orders to private creditors could not be processed by correspondent banks owing to AML/CFT concerns. To address this challenge, the authorities are taking corrective measures including revising the AML/CFT law in line with Fund advice, making efforts to remain current on external debt service obligations, and adjusting the Integrated Financial Management System (SIGFE) to improve monitoring of payments obligations.

4. Our authorities therefore, request approval for the completion of the first review of the EFF program, a waiver for the non-observance of the PC on external arrears and modifications of PCs and financing assurances review.

Recent Economic Developments and Outlook

5. Despite an overall negative growth performance in 2018, the economy posted a positive growth of 2.2 percent in the last quarter, driven by a recovery in the non-oil sector leveraged by industry and construction. The moderate economic recovery is expected to continue in 2019 owing to a further pick-up in the non-oil sectors.

6. Inflation continued to decline from 26.6 percent in 2017 to 18.6 percent in 2018 owing to tight monetary policy. Going forward, inflation is expected to decline further, to 15 percent by end-2019, supported by prudent policies, muted exchange rate pass-through and lackluster domestic demand.

7. The current account recorded a positive balance in 2018, reflecting higher oil exports and low imports due to the depreciation of the Kwanza against the U.S. dollar. The current account position is expected to move from a surplus of 6.6 percent of GDP in 2018 to a deficit of 2 percent of GDP in 2019, on the back of lower oil and gas exports. Consequently, gross international reserves are expected to decline from 7.3 months of imports in 2018 to 6.6 months of prospective imports by end-2019.

8. Imbalances in the foreign exchange market continued to decline in 2018 due to a significant depreciation of the exchange rate. More specifically, the REER depreciated by 35 percent in 2018, largely correcting the overvaluation estimated in the 2018 Article IV Report.

Fiscal Policy and Public Debt Management

9. The authorities remain committed to moderate fiscal consolidation to firmly bring down the public debt-to-GDP ratio to 65 percent by 2024. In this connection, the non-oil primary fiscal deficit (NOPFD) was reduced to 6.7 percent of GDP in 2018, supported by tax administration efforts, and expenditure control measures. To address fiscal pressures arising from the decline in oil-prices, the National Assembly recently approved a revision to the 2019 budget, based on a conservative oil price of US$ 55 per barrel and proposed fiscal measures to further reduce the NOPFD to 6 percent of GDP.

10. The diversification of non-oil revenues remains a top priority in the implementation of the authorities’ consolidation efforts. To this end, the planned introduction of value added tax (VAT) on July 1, 2019, will be complemented by additional measures, including an adjustment of excise rates on energy and soft drinks; removal of personal income tax (PIT) exemptions on the remuneration of taxpayers who are at least 61 years old; an increase in the base and adjustment of the real estate tax rate; widening of the stamp tax base; and strengthening of tax administration.

11. The authorities have been implementing a wide range of expenditure control measures with the aim of improving the fiscal position. In this context, they started phasing out water tariffs in August 2018 and recently approved electricity tariff adjustments in May 2019. In addition, the FY2019 Revised Budget proposes cuts in goods and services, transfers and subsidies, and capital expenditure, while preserving priority social spending. Going forward, the authorities intend to gradually phase out transportation tariffs, alongside the adoption of an automatic fuel price-adjustment mechanism. To mitigate the impact of these measures on the most vulnerable segments of the population, the authorities will implement appropriate social safety nets which have been designed with World Bank support.

12. To enhance public financial management, the authorities are committed to implement a medium-term fiscal framework (MTFF) to promote an efficient allocation of public resources. In this regard, a public finance management (PFM) law will be submitted to the National Assembly by end-2019. In addition, the authorities plan to establish a fiscal stabilization fund, whose capitalization will commence once the budget generates surpluses and Central Government debt moves below 60 percent of GDP. The legal framework underpinning the fund will be aligned to the MTFF and the reform of the PFM legal framework.

13. As part of an effort to strengthen debt management and bring debt to sustainable levels, the authorities published a Medium-Term Debt Management Strategy for 2019–22 and an Annual Borrowing Plan in March 2019. In line with the program objectives, the authorities have kept collateralized disbursements under existing credit facilities below the agreed ceilings and have not contracted any new collateralized debt. They plan to continue following a prudent borrowing strategy for public investment projects, including by only executing priority projects that have secured financing and refraining from contracting new debt to finance non-priority investments and/or projects that do not meet the project selection criteria.

Monetary and Exchange Rate Policies

14. The authorities remain committed to strengthening the reserve money targeting framework as a nominal anchor to achieve price stability. In this regard, the path for reserve money will be set to achieve the inflation objective, while continued efforts will be made to strengthen the liquidity management and forecasting framework to gain better control of liquidity conditions in the banking system. At the same time, the Banco Nacional de Angola (BNA) with IMF technical assistance will continue to enhance its analytical capacity to better understand the transmission mechanism of monetary policy under the current monetary policy framework.

15. The authorities continue to make progress towards ensuring greater exchange rate flexibility. In this respect, they have replaced direct FX sales and a priority list of FX purchases with regular FX auctions. At the same time, to improve the predictability of FX auctions, the BNA will continue to announce monthly amounts to be auctioned. Furthermore, the authorities recognize the distortionary effect of exchange restrictions and plan to gradually remove such restrictions, including multiple currency practices as the exchange rate liberalization process advances. They are determined to further improve communication of monetary and exchange rate policies to help steer market expectations and improve price formation in the FX market. To buttress policy credibility, the Monetary Policy Committee will continue to publish statements on the BNA website explaining its rationale for policy decisions.

Financial Sector Policies

16. The authorities continue to make efforts to ensure financial sector stability. In this respect, they have increased the minimum share capital requirement for banks, threefold, effective December 31, 2018.Furher, the BNA, with the assistance of external experts, will conduct asset quality reviews (AQRs) on the twelve largest banks – representing 93 percent of the banking system assets – by end-December 2019. Before the completion of the AQRs, the authorities will develop a plan to deal with the AQR findings. To complement this process, the authorities are amending the Financial Institutions law to ensure an effective resolution framework for weak banks. In parallel, they are stepping up efforts to restructure Banco de Poupança e Crédito (BPC) and Recredit.

17. The authorities remain committed to improving governance and fighting corruption. As part of the preparations for the next Financial Action Task Force (FATF) mutual evaluation, which is expected in 2021, the authorities will continue to work with the Eastern and Southern Africa Anti-Money Laundering Group (ESAAMLG). A National Risk Assessment on AML/CFT issues, which will serve as the basis for the formulation of the AML/CFT strategy, is presently underway. Further, the authorities will submit a revised AML/CFT Law and other related legal and regulatory amendments to the National Assembly, in line with FATF standards, by end-September 2019. All these actions will help deal with the pressures on corresponding banking relations.

Structural Reforms and Governance

18. The authorities are determined to broaden structural reforms to address the competitiveness challenges and promote private sector-led growth and economic diversification. To this end, they will continue to improve access to electricity, simplify procedures for the payment of taxes, and ease the cost of doing business. To improve the business environment, the authorities have introduced changes to the visa policy, extending authorized stays for businesspersons. They have established a one-stop window for investors that allows online startup procedures. Further, Board members for the newly established Regulatory Authority for Competition have been appointed. At the same time, a draft Law on the Recovery of Enterprises and Insolvency, and related regulations to strengthen the system of credit guarantees and improve the insolvency system, have been prepared. The authorities expect to enact the law by end-June 2020.

19. The authorities continue to make progress on the privatization program and reform of state-owned enterprises (SOEs). The recently approved Privatization Law has been published, and the authorities are finalizing the preparation of the privatization program to be implemented over a four-year period. The public offering of the first set of SOEs is scheduled to take place by end-September 2019. Moreover, the authorities plan to continue with the disposal of non-core assets of Sonangol and to reduce some of its stakes in oil blocks. As part of an effort to streamline the operations of Sonangol, the authorities have established the National Oil and Gas Agency (ANPG), which has taken over the function of concessionaire in the oil sector.

20. To improve governance and the fight against corruption, the National Assembly approved a new Penal Code in January 2019, which includes harsher punishment for corruption. The Attorney General’s office (PGR) is in the process of implementing the anti-corruption strategy published in December 2018 and the creation of a specialized anti-corruption unit under the Executive branch, is expected to further support the fight against corruption. Going forward, the 15 largest SOEs (by assets) will be required to publish their audited annual reports as required by the law.

Conclusion

21. The authorities reiterate their commitment to the reform agenda aimed at restoring macroeconomic stability and enhancing sustainable and inclusive growth. They are determined to continue implementing appropriate fiscal, monetary, and structural policies to set the economy on a higher growth path. Our authorities appreciate the continued Fund engagement and policy advice and look forward to the Executive Directors’ support towards conclusion of the first review under the EFF arrangement.