Abstract
Second Review of the Extended Arrangement Under the Extended Fund Facility, Requests for a Waiver of Nonobservance of Performance Criteria, Modifications of Performance Criteria, and Financing Assurances Review-Press Release; Staff Report; and Statement by the Executive Director for Angola
Introduction
1. Our Angolan authorities appreciate the constructive engagement with staff during the recent Extended Fund Facility (EFF) program review mission. They broadly concur with the staff appraisal and key policy recommendations. They consider the EFF arrangement critical for anchoring the macroeconomic policy framework and supporting the objectives of the Macroeconomic Stabilization Program (MSP).
2. The Angolan economy has continued to face a challenging external environment characterized by persistent oil-price volatility, heightened trade tensions, and weakening global activity. Despite these challenges, the authorities have remained steadfast in the implementation of the MSP, which is focused on strengthening fiscal and debt sustainability; reducing inflation; promoting a more flexible exchange rate regime; improving financial sector stability; and addressing pressures on correspondent banking relationships.
3. To consolidate their reform efforts, the authorities request Executive Directors’ support towards the completion of the second review under the EFF arrangement, which will give impetus to the implementation of the MSP. Further, they request waivers for non-observance of Performance Criteria (PCs), modification of Indicative Targets (ITs), and approval of a new PC.
Program’s Performance
4. Program performance remains adequate with all end-June and September performance criteria and indicative targets met, except the PCs on the non-accumulation of external arrears and net international reserves (NIR). Progress continues to be made with the implementation of structural benchmarks (SBs).
5. The PC on non-accumulation of external arrears was missed, as the authorities’ payment orders to one private creditor could not be processed by the correspondent bank owing to AML/CFT concerns. The PC on the NIR was missed due to lower-than-expected external disbursements and oil revenues.
6. Our authorities therefore request: (i) a waiver for the non-observance of the PCs on NIRs and non-accumulation of external debt arrears; (ii) modifications of the PC and IT on NIRs; (iii) modifications of ITs on the stock of debt contracted or guaranteed by the Central Government or Sonangol, and on disbursements of oil-collateralized external debt by the Central Government; and (iv) approval of a PC on reserve money and an IT on the issuance of new state guarantees for debt.
Recent Economic Developments and Outlook
7. GDP growth is expected to decline in 2019 owing to lower oil production and tepid activity in the non-oil sector. Looking ahead, ongoing reforms in the oil and mining sectors as well as revitalization of projects in the non-oil economy will support growth in the medium term.
8. Inflation continued to decline in 2019, reaching 16 percent in October. Going forward, inflation is expected to increase and peak at 23 percent in 2020, driven by the adjustment of regulated prices and depreciation of the Kwanza.
9. The current account position deteriorated in 2019, owing to low exports receipts attributed to subdued oil sector activity and lower oil prices. Although recent balance of payments pressures increased forex demand, gross international reserves are projected to reach US$15.5 billion (representing more than 7 months of prospective imports) by end-2019 and US$17.5 billion by end-2020.
Fiscal Policy and Public Debt Management
10. The authorities’ fiscal priorities remain founded on sustained fiscal consolidation and ensuring that the public debt-to-GDP ratio declines to a sustainable path. In this connection, a conservative 2020 budget, was submitted to the National Assembly in October 2019, underpinned by measures to promote revenue mobilization and fiscal expenditure restraint.
11. The diversification of non-oil revenues remains a high priority on the authorities’ consolidation agenda. Besides the value added tax (VAT), introduced in October 2019, the authorities intend to submit to the National Assembly a package of tax measures by end-December 2019. These measures aim to further strengthen revenue collection, including by raising the withholding rate for services provided by nonresidents; improving the progressivity of the personal income tax (PIT); lowering the threshold on property tax exemption; and introducing environment taxes.
12. On the expenditure front, the authorities have implementing a wide range of expenditure control measures with the aim of improving the fiscal position. These include the adjustment of water tariffs, liberalization of the price of Jet fuel and adjustments to electricity tariffs. Going forward, they intend to adopt an automatic fuel pricing mechanism and gradually adjust public transportation tariffs. These measures will commence after the rollout of the cash transfer program to mitigate the impact of adjustment on the vulnerable population. To improve investment efficiency, the authorities have requested the Fund to conduct a Public Investment Management Assessment (PIMA).
13. To moderate the elevated debt vulnerabilities emanating from the rapid currency depreciation, the authorities continue to implement the Medium-Term Debt Management Strategy for 2019–22. To this end, they have reduced the frequency of primary auctions and greatly reduced the issuance of Treasury bonds indexed to or denominated in foreign currency. In addition, they are committed to pursue a prudent borrowing strategy for public investment projects, prioritizing concessional financing and refraining from contracting new debt to finance non-priority investments. Since the approval of the EFF arrangement, the authorities have not contracted any new oil- collateralized debt and have kept collateralized disbursements under existing credit facilities below the agreed ceilings.
Monetary and Exchange Rate Policies
14. The authorities remain committed to strengthening the monetary policy framework by targeting reserve money as a nominal anchor to restore price stability. In this regard, they will sustain efforts to strengthen the liquidity management and forecasting framework to ensure a better handle over liquidity conditions. At the same time, the BNA, with IMF technical assistance, continues to enhance its analytical capacity to strengthen the effectiveness of the monetary policy transmission mechanism.
15. The authorities are firmly committed to achieving greater exchange rate flexibility. Towards this end, in October 2019, the BNA removed the 2 percent cap on banks’ FX resale margins to allow the interplay of market forces in the foreign exchange market. Going forward, the BNA will announce the monthly amounts of foreign exchange to be auctioned over the next three months, to improve the predictability of currency auctions. They will also progressively implement a strategy to eliminate exchange restrictions and multiple currency practices.
Financial Sector Policies
16. Strengthening financial sector stability remains a top order priority on the authorities’ reform agenda. In this regard they are making concerted efforts to advance an array of policy measures, including completing an asset quality review (AQR) by end- December 2019. They are revising their Financial Institutions law to ensure effective recovery planning and resolution frameworks. In addition, the authorities are assessing the future role of the State in the financial sector with a view to develop a strategy for reduced participation. Furthermore, to protect depositor’s funds, a Deposit Guarantee Fund was established in August 2018 and remains well capitalized to cover deposits of up to Kz12.5 million.
17. The authorities continue to make progress in the restructuring of Banco de Poupança e Crédito (BPC) and strengthening Recredit´s governance framework. Legislation has been enacted to restrict Recredit’s mandate to purchasing NPLs from BPC only as well as a ten-year sunset clause to Recredit’s operations. The authorities are also planning to further strengthen Recredit’s mandate, autonomy, governance, and operating arrangements by requiring it to pursue actions that maximize value recovery for taxpayers.
18. To strengthen the framework for crisis management and bank resolution, the BNA is introducing amendments to its supervisory and legal framework. To this end, a new BNA law and financial institutions law will be submitted to the National Assembly by end-December 2019, to strengthen its governance and supervisory mandate. The authorities expect the laws to be approved by March-2020.
Structural Reforms and Governance
19. The authorities recognize that structural reforms are essential to private sector-led growth and economic diversification. Accordingly, they plan to leverage the support of the World Bank to facilitate access to electricity, simplify procedures for paying taxes, and reduce transaction costs for businesses. The draft Law on the Recovery of Enterprises and Insolvency, and related regulations, geared at strengthening the system of credit guarantees and improving the efficiency of the insolvency system is expected to be approved during the first half of 2020.
20. The authorities continue to focus on reforms aimed to reduce fiscal risks from loss making SOEs. A privatization program (PROPRIV) for 2019–22, which sets the guidelines for the privatization process, including eligible SOEs, privatization timetable and modalities, and a communication strategy was published in August 2019. In addition, the authorities are improving the transparency and accountability frameworks for SOEs through the publication of audited annual reports of the largest SOEs by assets. This will be expanded to cover all SOEs by end-May 2020.
21. On governance and corruption, the authorities continue to steadfastly implement the anti-corruption strategy published in December 2018. During the year, the Attorney General’s office (PGR) stepped up investigations and pursued lawsuits against senior officials for misappropriation of funds, fraud and embezzlement. In addition, the authorities continue to strengthen the AML/CFT framework and submitted a new AML/CFT law to the National Assembly which was approved in November 2019.
Conclusion
22. The authorities reiterate their commitment to implement the policies and measures set out in the EFF to restore macroeconomic stability and lay the ground for 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. Importantly, the authorities look forward to continued Fund engagement and technical support in the implementation of the EFF arrangement.