I. Introduction

Our Angolan authorities appreciate the constructive dialogue with staff during the 2022 Article IV Consultations. They broadly share the thrust of the staff appraisal and policy priorities.

The recovery of the Angolan economy continues to gather pace, following the recession experienced from 2016–2020. The recovery largely benefitted from policy measures implemented under the Macroeconomic Stabilization Program (MSP) and solid foundations laid by reforms under the 2018–2021 Extended Fund Facility (EFF) arrangement. The authorities have remained in reform mode, while favorable international oil prices, and the rollback of pandemic restrictions provided additional growth impetus. Against this backdrop, the recently re-elected administration continues to make steadfast efforts in the implementation of Fund policy recommendations. They are determined to safeguard macroeconomic stability, exercise fiscal discipline to preserve debt sustainability, and advance structural reforms to ensure a durable and inclusive growth. The authorities also remain attentive to the need to foster economic diversification and climate adaption, reduce poverty and inequality, and intensify governance reforms to realize the objectives of the forthcoming 2023–27 National Development Plan (NDP).

II. Recent Economic Developments and Outlook

Economic activity rebounded strongly from a contraction of -5.5 percent in 2020 to 1.1 percent in 2021 and 2.8 percent 2022, spurred by recoveries in the non-oil sector and expansion of output in manufacturing, agriculture, construction, and services sectors. Oil production also increased, benefitting from new investments, simplification of licensing procedures, and removal of pandemic-induced maintenance impediments. Going forward, growth is projected to stabilize at 4.0 percent over the period 2023–2027. Nevertheless, the outlook remains challenged by geopolitical tensions, tightening global financial conditions, and subdued global growth prospects. Meanwhile, inflation declined significantly from 27.70 percent in January 2022 to 12.55 percent in January 2023 underpinned by improved food supplies, strengthening of the Kwanza, and tight monetary conditions. The current account registered a surplus of 11.0 percent of GDP in 2022 reflecting improved oil export earnings. Accordingly, gross international reserves (GIRs) improved from US$11.0 billion in 2020 to US$14.4 billion in 2022, representing more than 6 months of import cover.

III. Fiscal Policy and Debt Management

Fiscal consolidation ranks high on the authorities' agenda to create fiscal space to meet development needs and preserve debt sustainability in line with the dual fiscal and debt anchors. In this regard, the 2023 budget approved by the Parliament last week is consistent with the objective to achieve a non-oil primary fiscal deficit (NOPFD) of no more than 5 percent of GDP by end-2025 to firmly bring down the debt ratio to the medium-term target of 60 percent. To consolidate gains from tax reforms implemented in the last two years, further revenue generation efforts will focus on improving tax compliance and enforcement to recover tax arrears. Further, the authorities are concluding the integration of customs with the non-oil tax systems in the same electronic platform, to improve tax collection efficiency.

The authorities are implementing measures to streamline current spending and improve expenditure efficiency. Specifically, they are rationalizing perks for government officials, including the housing maintenance subsidy and vehicle allocations. Additional savings will be generated from the downgrading of ticket classes for official travels. Further, the authorities will prioritize ongoing growth-enhancing projects with high investment returns in 2023. As such, new projects are going to be considered in the pipeline starting in the FY2024 under the implementation of the 2023-2027 NDP. To improve public finance management, the authorities are developing the medium-term fiscal and expenditure frameworks (MTFF/MTEF) with Fund technical support. Concurrent efforts will be maintained to increase the share of investment projects that go through public tenders and the number of budget units, whose annual purchase plans are published on the Public Purchases Portal. Importantly, the authorities adopted a roadmap of actions designed to guide implementation of the 2019 Public Investment Management Assessment's (PIMA) recommendations.

The authorities continue to make efforts to improve debt management as part of their overall debt strategy. To this end, the one-year government securities' yield has declined significantly since implementation of the debt strategy. Government has also agreed with some domestic creditors to extend the maturities of some of the bonds including those denominated in foreign currency, a strategy that is intended to be maintained in the coming years. These measures coincide with the significant debt reduction occasioned by the strong growth, as well as the building of additional fiscal buffers benefitting from high oil prices. That said, since FY2021 the authorities have resumed debt service payments to major creditors, including obligations deferred under the Debt Service Suspension Initiative (DSSI).

IV. Monetary, Exchange Rate and Financial Sector Policies

The BNA recently eased its monetary policy stance by reducing cumulatively 200bps of its benchmark interest rate to reflect the sustained decline in inflation. Although the current pace of disinflation gives additional room to continue easing monetary conditions, the BNA will continue to monitor inflation dynamics and stand ready to make appropriate data-driven adjustments. Benefitting from Fund TA, the BNA is preparing the ground for a smooth transition towards a fully-fledged inflation targeting regime. Concurrent efforts to strengthen the central bank's communication and transparency frameworks are in progress to complement on-going efforts to bring down inflation to single digits by 2024. To consolidate gains from the successful unification of the exchange rate, the BNA will continue to allow the interplay of market forces in the foreign exchange market to help absorb external shocks. Further, the BNA plans to eliminate the remaining exchange restrictions to support the transition to an inflation targeting monetary regime, while intervening only to smoothen volatile market conditions.

Important strides have been achieved in the implementation of the 2019 Safeguards Assessment recommendations including amendments to the BNA Law. Looking ahead, the central bank re-affirms its commitment to adopt international best practices to ensure financial system stability. Besides enactment of the new Financial Institutions Law, progress has been made to approve complementary legislation. Additionally, the BNA is advancing its internal restructuring including the establishment of the Resolution Unit while ensuring its operational independence. The central bank also established the Council of Financial System Supervisors, a supervisory body constituted by all financial sector agencies.

The authorities concluded the process to strengthen Recredit's identified operational and governance weaknesses to improve NPL recoveries. Moreover, they are introducing stricter regulations to incentivize banks to reduce NPLs, which are concentrated in weaker banks. Further, the authorities are intensifying supervisory vigilance with particular attention to banks' credit portfolios.

V. Structural Reforms and Governance

Despite the challenging environment, the authorities have broadly remained on course to roll out SOEs reforms. Under the privatization program (PROPIV), 94 of the 178 selected assets have been privatized, including 27 in 2022 and 67 by the end-2021. In 2022, some of the key assets were privatized through IPOs at the Luanda Stock Exchange (LSE), representing the first stocks operations since its establishment. Additional assets will be included in the pipeline under the extended PROPIV 2023-2027 as part of the strategy to fight corruption and recover illicit assets.

To promote private sector led growth, the authorities are creating conditions to boost credit to the private sector. Accordingly, the National Development Fund (managed by the Development Bank of Angola – BDA) will avail a US$6.3 billion credit line starting in FY2023. This facility is expected to help facilitate access to credit to agriculture and other sectors, to finance grain production, livestock, and fisheries over the next five years. Moreover, they are also committed to improving financial inclusion by expanding mobile banking and digital infrastructure to cover previously underserved communities. These efforts will be reinforced by finalization of the first national strategy for financial inclusion.

While the authorities are committed to the removal of fuel subsidies, they are cautiously balancing this important decision with potential political economy risks. Guided by the approval of the roadmap with TA from the Fund and the World Bank, they are assessing the socio-economic impact, while at the same time designing an effective communication strategy to enhance public awareness on the merits of removing inefficient subsidies. To mitigate the impact of the subsidies' removal on poor households, the authorities are also continuing their efforts to expand the Kwenda initiative by increasing the monthly payouts and expanding the list of beneficiaries towards their target of reaching 1.3 million households by end-2023

Notable progress has been made in designing the national anti-corruption strategy that will be submitted for public consultation before approval and adoption. Meanwhile, the Attorney General's Office is implementing an anti-corruption mitigation plan approved in 2018. Regarding the asset declaration regime, the authorities recognize the deficiencies in the framework, and intend to revamp the Public Probity Law in accordance with international standards. Technical support from the Fund and the World Bank to prepare the reform legislation is currently under consideration. On COVID-19-related expenditures, the authorities are committed to the publication of the audited report after the institutional arrangements for the new entity responsible for the preparation of the report are fully completed.

VI. Energy Transition and Climate Change Adaptation

The authorities continue to attach great prominence on energy sector reforms and are currently intensifying decarbonization efforts through the implementation of a new energy matrix based on renewables. This follows the introduction of new electricity tariffs to reduce consumption inefficiencies. Leveraging the country's endowments, the new energy matrix aims to reach 70 percent of electricity generated by renewable sources by end-2025. As current diesel-powered plants are replaced by gas-powered plants, the authorities are also making substantial investments in solar farms. Currently, three of the main solar parks already supply energy to the national grid, while the remaining projects are entering their initial construction phase. To complement the hydroelectric and solar energy generation capacity, feasibility studies are underway to establish wind farms and commencement of projects to produce green hydrogen.

Angola continues to face recurring climate shocks, with over 1 million people, mostly across three southern provinces, facing the devastating effects of the drought. As such, the authorities are developing a water management mega-project designed to transfer water to the affected areas and climate-proof the agricultural sector. The first project (Canal do Cafu) was implemented along a 160-kilometer stretch, bringing water from the Cunene River to the affected areas to benefit more than 235,000 families. They also plan to develop three similar projects in the coming years. Furthermore, in the last two years, the authorities have attached importance to the recovery and conservation of the mangroves along the coast. Further efforts have also been directed towards reforestation and combating desertification under the 2022– 2035 National Strategy for Climate Change.

VII. Conclusion

Our authorities re-affirm their commitment to a well-coordinated fiscal and monetary policy mix alongside structural reforms to accelerate the economic recovery and preserve macroeconomic stability. They value the Fund's technical and policy support which they regard as indispensable in their efforts to address attendant macroeconomic challenges. They look forward to continued Fund engagement to consolidate their post program gains and place the economy onto an accelerated growth trajectory. In this regard, the authorities seek Executive Director's support in concluding the 2022 Article IV Consultation.