## 1. Broadening the Tax Base

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---

### Context and Key Challenges
- Angola is a post-conflict country with significant infrastructure and human capital deficits. Oil receipts underpinned strong growth in the last decade but created vulnerability to oil revenue volatility.
- Poverty fell from 54 percent in 2000 to 43 percent in 2008; inequality has increased.
- The government’s National Development Plan (NDP) prioritizes large infrastructure expansion to support diversification and inclusive growth, but spending is well below NDP stipulations.
- Parliamentary elections were scheduled for August 2017; the top name of the winning party’s list would become the next President of the Republic.

### Recent Economic Developments, Outlook, and Risks
- Growth and activity:
  - Growth slowed to 3 percent in 2015.
  - Non-oil activity slowed to 1½ percent in 2015.
  - Baseline 2016 outcome: growth projected to have come to a halt; non-oil sector contracting by ½ percent.
  - Baseline 2017 projection: growth picks up to 1¼ percent in 2017; non-oil sector expands by 1¼ percent.
- Inflation and monetary conditions:
  - Inflation reached 41 percent in November 2016, year-on-year.
  - Annual inflation expected to reach 45 percent by end-2016.
  - Base money contracted by 3 percent in October 2016, year-on-year (from an expansion of 25 percent in May 2016).
  - Banking sector excess liquidity declined to ⅓ percent of GDP in November 2016, from 1½ percent of GDP in May 2016.
  - Short-term interest rates remained negative in real terms.
- Fiscal developments and arrears:
  - Overall fiscal deficit narrowed to 3¼ percent of GDP in 2015.
  - The non-oil primary fiscal balance improved by 12¼ percent of GDP in 2015.
  - Budget under-execution in the first nine months of 2016 led to further improvement in the non-oil primary fiscal balance, but an estimated 3 percent of GDP in domestic payments arrears accumulated.
- Financial sector health:
  - Banking system capital adequacy ratio declined to 18¾ percent in September 2016 from 19¾ percent in December 2015.
  - Non-performing loans (NPLs) increased to 15¼ percent in September 2016 from 11½ percent in December 2015.
  - In September 2016, five banks (including state-owned BPC) were undercapitalized and needed to meet prudential requirements.
- External sector:
  - Net international reserves (NIR) were US$24¼ billion at end-2015; declined to US$20⅓ billion in November 2016.
  - External current account deficit reached 10 percent of GDP in 2015 (compared to 3 percent of GDP in 2014).
  - Parallel-official exchange rate spread was 190 percent in November 2016.
  - Backlog of forex purchase orders in the banking system estimated conservatively at about US$3 billion.
- Outlook scenarios and assumptions:
  - Staff’s proposed adjustment scenario projects faster growth and inflation declining to single digits over the medium term; assumes a more competitive REER and faster structural reform implementation.
  - A scenario assumption: depreciation of the kwanza vis-à-vis the U.S. dollar of 30 percent in 2016 and 45 percent in 2017.
  - Baseline 2017 projection: inflation declines to 20 percent by end-2017 (assuming tight monetary conditions, no further domestic fuel price increases, and a stable kwanza); NIR projected to decline to US$17½ billion.
- Risks (tilted to the downside):
  - Lower oil prices; difficulties controlling spending ahead of elections; continued forex market imbalances; sustained low growth; global banks’ withdrawal of correspondent banking relationships (CBRs); delays in recapitalization of weaker banks; slippages in structural reform implementation.
- Spillovers:
  - Outward spillovers to the region are generally limited; notable effects on Democratic Republic of Congo and Namibia through cross-border trade.
  - Inward spillovers from China and Europe could be tangible if their growth slows, putting further downward pressure on oil prices.

### Fiscal Position — Selected Figures and Projections
- Fiscal aggregates (In percent of GDP, selected years):
  - Overall fiscal balance: 2014: -6.6; 2015: -3.3; 2016 Prel.: -4.1; 2017 IMF Baseline Proj.: -6.7.
  - Non-oil primary fiscal balance: 2014: -28.1; 2015: -15.9; 2016 Prel.: -10.2; 2017 IMF Baseline Proj.: -11.5.
  - Total expenditures: 2014: 41.9; 2015: 30.6; 2016 Prel.: 23.6; 2017 IMF Baseline Proj.: 25.6.
  - Public debt: 2014: 40.7; 2015: 65.4; 2016 Prel.: 71.6; 2017 IMF Baseline Proj.: 62.8.
- Gross financing needs and sources (2017, In percent of GDP):
  - Gross borrowing needs 15.7
  - Overall fiscal deficit 6.7
  - Amortization 9.0
  - External 3.4
  - Domestic 5.6
  - Gross financing sources 15.7
  - External 7.2
  - Domestic 8.5
- Detailed fiscal time series (selected):
  - Total revenue (central government, percent of GDP): 2010: 43.5; 2011: 48.8; 2012: 45.9; 2013: 40.2; 2014: 35.3; 2015: 27.3; 2016: 19.5; 2017 Prel.: 18.9.
  - Of total revenue, oil-related (percent of GDP): 2010: 33.0; 2011: 39.0; 2012: 37.3; 2013: 30.1; 2014: 23.8; 2015: 15.4; 2016: 9.5; 2017 Prel.: 8.7.
  - Non-oil tax (percent of GDP): 2010: 7.8; 2011: 7.3; 2012: 6.6; 2013: 8.1; 2014: 9.1; 2015: 9.3; 2016: 8.0; 2017 Prel.: 8.2.
- Public debt trajectory and projections:
  - Total public sector debt (percent of GDP): 2010: 44.3; 2011: 33.8; 2012: 29.5; 2013: 32.9; 2014: 40.7; 2015: 65.4; 2016: 71.6; 2017 Prel.: 62.8.
  - Public sector debt (billions of U.S. dollars): 2010: 36.2; 2011: 34.7; 2012: 33.9; 2013: 40.6; 2014: 49.3; 2015: 59.6; 2016: 67.9; 2017 Prel.: 76.0.
  - Sonangol debt (billions of U.S. dollars): 2010: 7.5; 2011: 9.7; 2012: 8.9; 2013: 13.4; 2014: 15.2; 2015: 12.9; 2016: 17.9; 2017 Prel.: 16.6.

### Policy Discussions and Recommendations — Fiscal Policy under the 'New Normal'
- Macroeconomic strategy:
  - Additional but gradual fiscal consolidation over the medium term is needed.
  - Greater exchange rate flexibility and tight monetary conditions are recommended to restore price stability and address forex market imbalances.
  - Support greater diversification of the economy and address banking sector vulnerabilities.
- 2017 fiscal target and near-term measures:
  - Staff recommends targeting an overall fiscal deficit of no more than 2¼ percent of GDP for 2017, consistent with an improvement of at least 1 percent of GDP in the non-oil primary fiscal balance.
  - Suggested measures to achieve this objective:
    - Granting no wage increase (⅔ percent of GDP vis-à-vis the baseline scenario).
    - Using for deficit reduction the wage bill savings from the ongoing biometric census of civil servants (up to ½ percent of GDP).
    - Further rationalizing spending on goods and services (up to 1 percent of GDP).
    - Maintaining execution of public investment in line with recent (lower) execution rates (¾ percent of GDP).
- Medium-term fiscal framework and structural reforms:
  - Target a non-oil primary fiscal consolidation path of 1 percent of GDP annually over the medium term; under current assumptions on international oil prices, this would be consistent with eliminating the overall fiscal deficit by 2018 and placing debt on a clearly declining path.
  - Strengthen the credibility of the Law on Public Debt by introducing an escape clause to the 60 percent of GDP debt ceiling when the economy is subject to a large exogenous shock, and introduce a transparent mechanism to ensure convergence over time to the 60 percent of GDP debt ceiling.
  - Strengthen ongoing efforts to enlarge the tax base, improve tax inspections, and better enforce real estate taxation; introduce a VAT on January 1, 2019 (Box 1).
  - Use part of additional fiscal space to expand well-targeted social programs for the vulnerable and increase infrastructure spending in line with absorptive capacity.
  - Reduce the wage bill as a share of GDP by streamlining and reforming the public administration; align public-sector wage increases with productivity gains and performance indicators.
  - Adjust domestic fuel prices to reflect changes in international gasoline and diesel prices and movements in the exchange rate. (Staff estimate: immediate adjustment of domestic price of gasoline and diesel by about 40 percent to restore the authorities’ commitment to eliminate subsidies.)
  - Eliminate electricity and water tariff subsidies as supply increases, while adopting lifeline rates to protect the poor.
  - Improve the quality of public investment via enhanced compliance with existing legislation; prioritize and monitor execution; conduct ex-ante and ex-post evaluations; improve technical capacity; and develop a database of reference prices.
  - Adopt an improved medium-term fiscal framework (MTFF) focusing on spending rules and a well-designed fiscal stabilization fund with clear deposit and withdrawal rules to smooth oil revenue volatility and reduce pro-cyclicality. The MTFF should assess spending needs associated with maintaining and running completed investment projects; projects should be approved only if there is fiscal space for their future current spending needs.
  - Accelerate restructuring, privatizing, and/or closing state-owned enterprises (SOEs) to reduce their burden or potential burden on the Treasury. For Sonangol, consider rationalizing its large workforce and divesting non-core businesses to focus on oil and gas core activities and reduce financing needs.

### Box 1 — Angola: Broadening the Tax Base (Summary)
- Current tax structure and key findings:
  - Oil revenue contribution: "56 percent of total revenues."
  - Non-oil revenue key component: consumption tax (IC) with a very narrow base.
    - IC exclusions: "activities of the primary sector of the economy; the value added by the commercial sector, in particular, the part of the value added to the manufacturing sector that corresponds to profit; and some services."
    - IC standard rate: "10 percent."
    - IC reduced rates and treatment: "many products are subject to a reduced rate (2 percent), most services are taxed at 5 percent, and other rates range from 15 to 80 percent."
    - Stamp duty: exists and "whose main incidence is on invoices."
- Proposed reform elements (possible replacement of IC with VAT):
  - Adoption of a single positive VAT rate (with the zero rate applying exclusively to exports).
  - Introduction of an excise tax.
  - Elimination of about "50 percent of the incidence of the stamp duty."
  - Reform of the tax on property transfers (SISA) to avoid double taxation.
  - Very high VAT threshold: "the equivalent in kwanzas to an annual gross revenue of $250,000" to align with existing law that excludes lower-revenue businesses from VAT accounting requirements and to facilitate introduction and administration.
- Quantitative revenue estimate:
  - Preliminary rough estimate: "a VAT rate of 10 percent could yield about 2.5 percent of GDP in revenue to Angola."
- Implementation timing and preconditions:
  - Staff timing estimate: "the VAT could be introduced as early as January 1, 2019."
  - Important preparatory requirements:
    - Strengthen Tax Authority (AGT) institutional capacity.
    - Improve AGT staff training and communication with taxpayers and other stakeholders.
    - Implement, test, and prepare new IT systems for customs and domestic tax administration prior to VAT implementation.
- Authorities' views:
  - Authorities prioritized near-term growth support and approved a "mildly expansionary budget for 2017."
  - Authorities believe a VAT may take up to four years to be introduced in Angola.
  - Other actions noted by authorities: Closing "48 SOEs that are nonoperational" and privatizing "53 others." A restructuring plan for Sonangol launched in June 2016 to be implemented over "24 months."

### Social Protection, Diversification, and Data Issues
- Social protection reforms:
  - Launched in 2015 the APROSOC Social Protection Program with assistance of the EU and UNICEF.
  - Program objectives: improve social assistance for the most vulnerable; improve the efficiency, effectiveness, and impact of the national social assistance interventions; strengthen MINARS capacity.
  - Government aim: Create a Single Social Registry to help identify and target the poor.
- Authorities’ views and actions on diversification and infrastructure:
  - Heavy investments in infrastructure; two large dams expected to start producing energy in 2017; construction started of the deep-water port of Cabinda.
  - Plans, with World Bank assistance, to expand access to water supply and promote agriculture.
  - Approved 23 targeted programs in the agriculture, industry, fishing, geology, and telecommunications sectors; authorities argued implementation has been slow and so far only access to forex has been provided to companies.
- Data issues and needs:
  - Improvements needed in national accounts (including quarterly data), balance of payments, producer price indices, monetary statistics, and Financial Soundness Indicators (FSIs).
  - Significant efforts needed to improve quality and timeliness of fiscal data, including the operational balance of all SOEs.
  - Monitoring of domestic payments arrears should continue to be improved.
  - Need to secure proper funding to INE so it can discharge its duties.

### Debt, External Assessment, and Financial Stability — Key Findings
- Public debt and vulnerabilities:
  - Gross public debt: 65½ percent of GDP at end-2015.
  - Net public debt (gross debt excluding central government deposits at the BNA): 54¼ percent of GDP at end-2015.
  - Drivers of the 2015 increase: fiscal deficit of about 3⅓ percent of GDP and effect of exchange rate depreciation on foreign-currency denominated and indexed debt stocks (9½ percentage point of GDP increase).
  - Projected 2016 gross public debt: increase by 6¼ percentage points to 71½ percent of GDP.
  - Baseline projection: debt ratio expected to decline in 2017 due to projected appreciation of the real exchange rate and then stabilize at about 64 percent of GDP as fiscal consolidation continues.
- Debt stress-test scenarios (selected outcomes):
  - Growth shock: debt ratio would reach 72¾ percent of GDP in 2018 and stabilize around 73 percent.
  - Real exchange rate shock (one-off real depreciation of 30 percent, 45 percent nominal): debt-to-GDP ratio reaches 74¾ percent of GDP in 2017 and declines slightly to 74½ percent in 2021.
  - Combined shock: debt increases to 101½ percent of GDP by 2021.
  - Financial sector contingent liability shock (one-time increase in non-interest expenditures equivalent to 10 percent of banking sector assets): debt-to-GDP increases to 73½ percent by 2018 and stabilizes around 74 percent.
  - Oil price shock (30 percent drop in projected Angolan oil basket price in 2017; price under this scenario is US$32¼ per barrel): debt-to-GDP ratio increases in 2017 and stabilizes at 66½ percent thereafter.
- External sector and reserve dynamics:
  - Gross international reserves (end-2015): US$24.4 billion; NIR stood at US$20⅓ billion as of November 2016.
  - EBA-lite CA gaps for 2015: standard CA gap about -8¾ percent of GDP; oil EBA-lite CA gap about -7½ percent of GDP.
  - The CA deficit deteriorated to -10 percent of GDP in 2015 and is estimated to have improved to -4¼ percent of GDP in 2016.
  - Average nominal official exchange rate depreciated 22 percent against the U.S. dollar in 2015; official nominal exchange rate depreciated 39 percent, y-o-y, in January–October 2016.
  - REER dynamics: REER depreciated only 3 percent in 2015; EBA-lite REER overvaluation estimates for 2015 ranged from 8 percent to 54 percent depending on method.
- Financial stability indicators (selected):
  - Regulatory capital/Risk-weighted assets: 18.3 (Dec-12); 18.7 (Sep-16).
  - Core Capital (Tier 1)/Risk-weighted assets: 13.6 (Dec-12); 13.4 (Sep-16).
  - Nonperforming loans to gross loans: 6.8 (Dec-12); 15.2 (Sep-16).
  - Liquid Assets/Total Assets: 26.3 (Dec-12); 41.3 (Sep-16).
  - Total Credit/Total Deposits: 65.5 (Dec-12); 57.6 (Sep-16).
- Reserve adequacy and FX intervention:
  - Forex market is one-sided: BNA is the only supplier. Average monthly BNA forex supply fell from about US$1.8 billion per month (January–November 2015) to about US$0.9 billion per month (same period in 2016).
  - As of November 2016: NIR equals 100 percent of the standard IMF metric (down from 125 percent at end-2015); NIR equals 110 percent of the capital-control-adjusted metric (down from 140 percent at end-2015).
  - Angola’s Sovereign Wealth Fund (FSDEA), about US$4½ billion, is not included in NIR.

### Staff Appraisal — Key Policy Imperatives
- Fiscal:
  - Mobilize additional non-oil tax revenue and enlarge the tax base; implement VAT as part of revenue diversification.
  - Expenditure rationalization and improved non-oil revenue are essential given limited oil revenue.
  - Gradually reduce fiscal deficits and target a non-oil primary fiscal consolidation path of 1 percent of GDP per year.
- Monetary and exchange rate policy:
  - Greater exchange rate flexibility and tighter monetary policy are critical to rebalance the forex market and restore price stability.
  - Moderate use of international reserves to smooth depreciation of the kwanza.
  - Improve BNA data collection, analysis, and liquidity management; consider narrowing the policy interest corridor and shifting to base money targeting.
- Financial sector:
  - Preserve banking sector health: accelerate recapitalization and restructuring of weak banks; complete asset quality reviews and recapitalization of BPC.
  - Address loss of U.S. dollar CBRs via high-level dialogue with counterpart authorities, strengthen AML/CFT framework, and develop contingency plans.
- Structural reforms and diversification:
  - Accelerate implementation of infrastructure, human capital, and business-climate reforms to promote diversification and inclusive growth.
  - Improve public investment management, SOE oversight, and proceed with SOE restructuring/privatization program.
- Data and procedural notes:
  - Progress in compilation and dissemination of statistics has been made, but gaps remain; securing proper funding to INE is needed.
  - Staff encouraged authorities to set a clear timetable for the removal of measures giving rise to exchange restrictions and multiple currency practices.
  - Staff recommends the next Article IV consultation with Angola be held on the standard 12-month consultation cycle.

*Source: IMF staff report (Angola), Box 1 and related sections (cr1739).*

### 1. Broadening the Tax Base ______________________________________________________________________ 10

### 1. Broadening the Tax Base

### Context and Key Challenges
- Angola is a post-conflict country with significant infrastructure and human capital deficits. Oil receipts underpinned strong growth in the last decade but created vulnerability to oil revenue volatility.
- Progress in poverty reduction: poverty fell from 54 percent in 2000 to 43 percent in 2008; inequality has increased.
- The government’s National Development Plan (NDP) prioritizes large infrastructure expansion to support diversification and inclusive growth, but spending is well below NDP stipulations.
- Parliamentary elections were scheduled for August 2017; the top name of the winning party’s list would become the next President of the Republic.

### Recent Economic Developments, Outlook, and Risks
- Growth and activity:
  - Growth slowed to 3 percent in 2015.
  - Non-oil activity slowed to 1½ percent in 2015.
  - High-frequency indicators point to a deeper slowdown in 2016; business confidence hit all-time lows in Q2 and Q3 2016.
- Inflation and monetary conditions:
  - Inflation reached 41 percent in November 2016, year-on-year.
  - Annual inflation was expected to reach 45 percent by end-2016.
  - Base money contracted by 3 percent in October 2016, year-on-year (from an expansion of 25 percent in May 2016).
  - Banking sector excess liquidity declined to ⅓ percent of GDP in November 2016, from 1½ percent of GDP in May 2016.
  - Short-term interest rates remained negative in real terms.
- Fiscal developments and arrears:
  - Overall fiscal deficit narrowed to 3¼ percent of GDP in 2015.
  - The non-oil primary fiscal balance improved by 12¼ percent of GDP in 2015.
  - Budget under-execution in the first nine months of 2016 led to further improvement in the non-oil primary fiscal balance, but an estimated 3 percent of GDP in domestic payments arrears accumulated.
- Financial sector health:
  - Banking system capital adequacy ratio declined to 18¾ percent in September 2016 from 19¾ percent in December 2015.
  - Non-performing loans (NPLs) increased to 15¼ percent in September 2016 from 11½ percent in December 2015.
  - In September 2016, five banks (including state-owned BPC) were undercapitalized and needed to meet prudential requirements.
- External sector:
  - Net international reserves (NIR) were US$24¼ billion at end-2015; declined to US$20⅓ billion in November 2016.
  - External current account deficit reached 10 percent of GDP in 2015 (compared to 3 percent of GDP in 2014).
  - Parallel-official exchange rate spread was 190 percent in November 2016.
  - Backlog of forex purchase orders in the banking system estimated conservatively at about US$3 billion.
- Outlook scenarios:
  - Baseline 2016 outcome: growth projected to have come to a halt; non-oil sector contracting by ½ percent; inflation expected to reach 45 percent by end-2016.
  - Baseline 2017 projection: growth picks up to 1¼ percent in 2017; non-oil sector expands by 1¼ percent; inflation declines to 20 percent by end-2017 (assuming tight monetary conditions, no further domestic fuel price increases, and a stable kwanza); NIR projected to decline to US$17½ billion.
  - Staff’s proposed adjustment scenario projects faster growth and inflation declining to single digits over the medium term; assumes a more competitive REER and faster structural reform implementation.
  - A scenario assumption: depreciation of the kwanza vis-à-vis the U.S. dollar of 30 percent in 2016 and 45 percent in 2017.
- Risks (tilted to the downside):
  - Lower oil prices; difficulties controlling spending ahead of elections; continued forex market imbalances; sustained low growth; global banks’ withdrawal of correspondent banking relationships (CBRs); delays in recapitalization of weaker banks; slippages in structural reform implementation.
- Spillovers:
  - Outward spillovers to the region are generally limited; notable effects on Democratic Republic of Congo and Namibia through cross-border trade.
  - Inward spillovers from China and Europe could be tangible if their growth slows, putting further downward pressure on oil prices.

### Fiscal Position (Selected Figures and Projections)
- Angola. Fiscal Position, 2014-2017 (In percent of GDP):
  - 2014: Overall fiscal balance -6.6; Non-oil primary fiscal balance -28.1; Total expenditures 41.9; Wages 10.6; Goods and services 10.0; Capital spending 12.5; Subsidies 5.4; Other 3.5; Public debt 40.7.
  - 2015: Overall fiscal balance -3.3; Non-oil primary fiscal balance -15.9; Total expenditures 30.6; Wages 11.3; Goods and services 6.4; Capital spending 6.0; Subsidies 2.3; Other 4.7; Public debt 65.4.
  - 2016 Prel.: Overall fiscal balance -4.1; Non-oil primary fiscal balance -10.2; Total expenditures 23.6; Wages 9.5; Goods and services 3.2; Capital spending 4.5; Subsidies 1.3; Other 5.1; Public debt 71.6.
  - 2017 IMF Baseline Proj.: Overall fiscal balance -6.7; Non-oil primary fiscal balance -11.5; Total expenditures 25.6; Wages 8.6; Goods and services 5.2; Capital spending 5.0; Subsidies 1.4; Other 5.5; Public debt 62.8.
- Angola: Gross Financing Needs and Sources, 2017 (In percent of GDP):
  - Gross borrowing needs 15.7
  - Overall fiscal deficit 6.7
  - Amortization 9.0
  - External 3.4
  - Domestic 5.6
  - Gross financing sources 15.7
  - External 7.2
  - Domestic 8.5

### Policy Discussions and Recommendations — Fiscal Policy under the 'New Normal'
- Macroeconomic strategy:
  - Additional but gradual fiscal consolidation over the medium term is needed.
  - Greater exchange rate flexibility and tight monetary conditions are recommended to restore price stability and address forex market imbalances.
  - Support greater diversification of the economy and address banking sector vulnerabilities.
- 2017 fiscal target and near-term measures:
  - Staff recommends targeting an overall fiscal deficit of no more than 2¼ percent of GDP for 2017, consistent with an improvement of at least 1 percent of GDP in the non-oil primary fiscal balance.
  - Suggested measures to achieve this objective:
    - Granting no wage increase (⅔ percent of GDP vis-à-vis the baseline scenario).
    - Using for deficit reduction the wage bill savings from the ongoing biometric census of civil servants (up to ½ percent of GDP).
    - Further rationalizing spending on goods and services (up to 1 percent of GDP).
    - Maintaining execution of public investment in line with recent (lower) execution rates (¾ percent of GDP).
- Medium-term fiscal framework and structural reforms:
  - Target a non-oil primary fiscal consolidation path of 1 percent of GDP annually over the medium term; under current assumptions on international oil prices, this would be consistent with eliminating the overall fiscal deficit by 2018 and placing debt on a clearly declining path.
  - Strengthen the credibility of the Law on Public Debt by introducing an escape clause to the 60 percent of GDP debt ceiling when the economy is subject to a large exogenous shock, and introduce a transparent mechanism to ensure convergence over time to the 60 percent of GDP debt ceiling.
  - Strengthen ongoing efforts to enlarge the tax base, improve tax inspections, and better enforce real estate taxation; introduce a VAT on January 1, 2019 (Box 1). The VAT, if implemented diligently, would provide a stable revenue source, reduce the budget's heavy dependency on oil revenue, and better shield the budget from oil revenue volatility.
  - Use part of additional fiscal space to expand well-targeted social programs for the vulnerable and increase infrastructure spending in line with absorptive capacity.
  - Reduce the wage bill as a share of GDP by streamlining and reforming the public administration; align public-sector wage increases with productivity gains and performance indicators.
  - Adjust domestic fuel prices to reflect changes in international gasoline and diesel prices and movements in the exchange rate. (Staff estimate: immediate adjustment of domestic price of gasoline and diesel by about 40 percent to restore the authorities’ commitment to eliminate subsidies.)
  - Eliminate electricity and water tariff subsidies as supply increases, while adopting lifeline rates to protect the poor.
  - Improve the quality of public investment via enhanced compliance with existing legislation; prioritize and monitor execution; conduct ex-ante and ex-post evaluations; improve technical capacity; and develop a database of reference prices.
  - Adopt an improved medium-term fiscal framework (MTFF) focusing on spending rules and a well-designed fiscal stabilization fund with clear deposit and withdrawal rules to smooth oil revenue volatility and reduce pro-cyclicality. The MTFF should assess spending needs associated with maintaining and running completed investment projects; projects should be approved only if there is fiscal space for their future current spending needs.
  - Accelerate restructuring, privatizing, and/or closing state-owned enterprises (SOEs) to reduce their burden or potential burden on the Treasury. For Sonangol, consider rationalizing its large workforce and divesting non-core businesses to focus on oil and gas core activities and reduce financing needs.

*Source: IMF staff report (Angola).*

### Box 1. Angola: Broadening the Tax Base

### Box 1. Angola: Broadening the Tax Base

### Current tax structure and key findings
- Oil revenue contribution: "56 percent of total revenues."
- Non-oil revenue key component: consumption tax (IC) with a very narrow base.
  - IC exclusions: "activities of the primary sector of the economy; the value added by the commercial sector, in particular, the part of the value added to the manufacturing sector that corresponds to profit; and some services."
  - IC standard rate: "10 percent."
  - IC reduced rates and treatment: "many products are subject to a reduced rate (2 percent), most services are taxed at 5 percent, and other rates range from 15 to 80 percent."
  - Stamp duty: exists and "whose main incidence is on invoices."

### Proposed reform elements (possible replacement of IC with VAT)
- Adoption of a single positive VAT rate (with the zero rate applying exclusively to exports).
- Introduction of an excise tax.
- Elimination of about "50 percent of the incidence of the stamp duty."
- Reform of the tax on property transfers (SISA) to avoid double taxation.
- Very high VAT threshold: "the equivalent in kwanzas to an annual gross revenue of $250,000" to align with existing law that excludes lower-revenue businesses from VAT accounting requirements and to facilitate introduction and administration.

### Quantitative revenue estimate
- Preliminary rough estimate: "a VAT rate of 10 percent could yield about 2.5 percent of GDP in revenue to Angola."

### Implementation timing and preconditions
- Staff timing estimate: "the VAT could be introduced as early as January 1, 2019."
- Important preparatory requirements:
  - Strengthen Tax Authority (AGT) institutional capacity.
  - Improve AGT staff training and communication with taxpayers and other stakeholders.
  - Implement, test, and prepare new IT systems for customs and domestic tax administration prior to VAT implementation.

### Authorities' views on fiscal timing and VAT introduction
- Authorities acknowledge need for fiscal consolidation over the medium term but prioritized near-term growth support, approving a "mildly expansionary budget for 2017."
- Authorities view on VAT timing: they "believe a VAT may take up to four years to be introduced in Angola."
- Other actions noted by authorities:
  - Closing "48 SOEs that are nonoperational" and privatizing "53 others."
  - A restructuring plan for Sonangol launched in June 2016 to be implemented over "24 months" with a focus on core oil and gas businesses and improving transparency and efficiency.

*Source: Box 1. Angola: Broadening the Tax Base (cr1739).*

### 28. In addition, the authorities are implementing reforms to enhance the social protection

### 28. In addition, the authorities are implementing reforms to enhance the social protection system.

### Social protection reforms
- Launched in 2015 the APROSOC Social Protection Program with assistance of the EU and UNICEF.
- Program objectives:
  - Improve social assistance for the most vulnerable population.
  - Improve the efficiency, effectiveness, and impact of the national social assistance interventions in Angola.
  - Strengthen the capacity of the leading sector Ministry (MINARS) to design and implement a social assistance agenda based on a new sectoral policy framework.
- Government aim:
  - Create a Single Social Registry to help identify and target the poor.

### Authorities’ views and actions on diversification and infrastructure
- Authorities are confident that measures to upgrade infrastructure, improve human capital, and strengthen the business climate will allow the economy to diversify and make growth more inclusive.
- Investments and projects cited:
  - Heavy investments in infrastructure.
  - Expectation that two large dams will start producing energy in 2017.
  - Construction started of the deep-water port of Cabinda.
  - Plans, with World Bank assistance, to expand access to water supply and promote agriculture.
- Business climate reforms:
  - Reforms to facilitate opening a business by reducing cost and timing.
  - Expectation that reforms should be reflected in Angola’s rating in the World Bank’s Ease of Doing Business Survey.
  - World Bank continues to work with authorities to help improve doing business indicators.
- Sectoral programs and implementation:
  - Approved 23 targeted programs in the agriculture, industry, fishing, geology, and telecommunications sectors.
  - Authorities argued implementation has been slow and so far only access to forex has been provided to companies.
- Authorities emphasized need to accelerate and deepen reforms to promote diversification.

### Data issues
- Staff assessment: Data provided to the Fund are broadly adequate for surveillance, but considerable room for improvement exists in:
  - National accounts, including publication of quarterly data.
  - Balance of payments.
  - Producer price indices.
  - Monetary statistics.
  - Financial Soundness Indicators (FSIs).
- Significant efforts needed to improve quality and timeliness of fiscal data, including the operational balance of all SOEs.
- Monitoring of domestic payments arrears should continue to be improved.
- Improvements in quality of economic and social data are essential to better inform policy makers.
- Need to secure proper funding to INE so it can discharge its duties.

### Staff appraisal — key findings
- External shock and macro impact:
  - The oil price shock that started in mid-2014 has substantially reduced fiscal revenue and exports, with growth coming to a halt and inflation accelerating sharply.
  - This has highlighted the need to address vulnerabilities and dependence on oil and to diversify the economy.
- Downside risks to the near-term outlook include:
  - Lower oil prices beyond those included in the baseline.
  - Difficulties to control spending in the run-up to next year’s elections.
  - Continued imbalances in the forex market.
  - A sustained period of low growth with limited opportunities to address social needs.
  - Global banks’ withdrawal of CBRs.
  - Delays in the recapitalization of weaker banks.
  - Slippages in the implementation of structural reforms.
- Fiscal developments and debt:
  - An 18 percent of GDP improvement in the non-oil primary fiscal balance over 2015-16, mainly through spending cuts including the removal of fuel subsidies.
  - Public debt projected to increase significantly to around 71½ percent of GDP, of which 19 percent of GDP corresponds to Sonangol, by end-2016.
  - Domestic payments arrears have re-emerged.
  - Clearing arrears and, over time, reversing the sharp debt increase will be critical.
  - For 2017, target an overall fiscal deficit of no more than 2¼ percent of GDP that is consistent with an improvement of at least 1 percent of GDP in the non-oil primary fiscal balance—this should be achieved through additional spending rationalization.
- Fiscal policy recommendations:
  - Expenditure rationalization and improved non-oil revenue are essential in context of more limited oil revenue.
  - Gradually reduce fiscal deficits and target a non-oil primary fiscal consolidation path of 1 percent of GDP per year over time to restore policy buffers and save a part of oil wealth.
  - Achieve consolidation by:
    - Containing the growth of the wage bill.
    - Strengthening non-oil revenue collections, including implementing a VAT.
    - Improving the quality of public investment.
    - Eliminating electricity and water subsidies while expanding well-targeted social assistance for the poor.
- Monetary and exchange rate policy guidance:
  - Monetary and exchange rate policies should play a central role in rebalancing the forex market.
  - Recent BNA measures: increased policy rate, increased banks’ mandatory reserve requirements, and contracting annual base money by 3 percent.
  - BNA has effectively fixed the official exchange rate since April 2016 but forex provision has not been sufficient to address needs.
  - Imbalances in the forex market are reflected in a wide, albeit volatile, spread between the official and parallel market exchange rates.
  - Recommended actions:
    - Greater exchange rate flexibility.
    - Moderate use of international reserves to smooth depreciation of the kwanza.
    - Tighter monetary policy supported by fiscal adjustment to contain effects of weaker currency on inflation.
- Correspondent banking (CBR) issues:
  - Need to address effects of loss of U.S. dollar CBRs.
  - Authorities are pursuing high-level dialogue with home authorities of global correspondent banks.
  - Mitigating drivers and risks requires:
    - BNA stepping up data collection and analysis efforts.
    - Enhancing dialogue with private sector and home regulators of foreign correspondent banks.
    - Strengthening prudential and AML/CFT framework.
    - Developing contingency plans in coordination with stakeholders.
- Banking sector health:
  - Preserving banking sector health is essential for recovery.
  - BNA has focused on strengthening bank supervision.
  - Further strengthening of bank supervision, resolution frameworks, and closing or recapitalizing weaker banks is recommended.
  - Need to accelerate conclusion of ongoing asset quality reviews of major banks and recapitalization of systematically-important, state-owned bank, BPC.
- Economic diversification:
  - Diversification is crucial to adjust to the ‘new normal’ in the international oil market.
  - Authorities’ reform agenda addresses constraints by improving transport, energy, and water infrastructure.
  - Implementation of these initiatives is critical to improve competitiveness and make growth more inclusive.
  - Complementary actions needed:
    - Invest in human capital.
    - More forcefully address impediments to doing business (e.g., simplify procedures and expedite issuance of work visas to promote private sector development and attract FDI).
- Data adequacy:
  - Angola’s macroeconomic data are broadly adequate for surveillance.
  - Progress in compilation and dissemination of statistics has been made, but gaps remain as noted above.

### Staff recommendations and procedural notes
- While the authorities have not requested Fund approval and staff does not recommend approval, staff encouraged authorities to set a clear timetable for the removal of measures giving rise to the exchange restrictions and multiple currency practices.
- Staff recommends that the next Article IV consultation with Angola be held on the standard 12-month consultation cycle.

*International Monetary Fund: Angola — staff appraisal and recommendations as presented in the source content.*

### 13. Non-oil primary fiscal adjustment was calculated as the percentage change in the non-oil primary fiscal budget (in

### cr1739 - 13. Non-oil primary fiscal adjustment was calculated as the percentage change in the non-oil primary fiscal budget (in

### Fiscal developments (2005–17 and 2010–17 tables)
- Total revenue (central government, percent of GDP): 43.5 (2010); 48.8 (2011); 45.9 (2012); 40.2 (2013); 35.3 (2014); 27.3 (2015); 19.5 (2016); 18.9 (2017 Prel.).
- Of total revenue, oil-related (percent of GDP): 33.0 (2010); 39.0 (2011); 37.3 (2012); 30.1 (2013); 23.8 (2014); 15.4 (2015); 9.5 (2016); 8.7 (2017 Prel.).
- Non-oil tax (percent of GDP): 7.8 (2010); 7.3 (2011); 6.6 (2012); 8.1 (2013); 9.1 (2014); 9.3 (2015); 8.0 (2016); 8.2 (2017 Prel.).
- Total expenditure (percent of GDP): 40.0 (2010); 40.2 (2011); 41.3 (2012); 40.5 (2013); 41.9 (2014); 30.6 (2015); 23.6 (2016); 25.6 (2017 Prel.).
- Capital expenditure (percent of GDP): 11.4 (2010); 10.2 (2011); 12.3 (2012); 12.0 (2013); 12.5 (2014); 6.0 (2015); 4.5 (2016); 5.0 (2017 Prel.).
- Overall fiscal balance (percent of GDP): 3.4 (2010); 8.7 (2011); 4.6 (2012); -0.3 (2013); -6.6 (2014); -3.3 (2015); -4.1 (2016); -6.7 (2017 Prel.).
- Non-oil primary fiscal balance (percent of GDP): -26.2 (2010); -26.9 (2011); -29.2 (2012); -28.2 (2013); -28.1 (2014); -15.9 (2015); -10.2 (2016); -11.5 (2017 Prel.).
- Non-oil primary fiscal balance (Percent of non-oil GDP): -47.4 (2010); -51.1 (2011); -53.7 (2012); -47.4 (2013); -43.2 (2014); -20.9 (2015); -12.9 (2016); -14.1 (2017 Prel.).
- Memorandum: Non-oil revenue (percent of non-oil GDP): 19.0 (2010); 18.6 (2011); 15.9 (2012); 17.0 (2013); 17.7 (2014); 15.6 (2015); 12.6 (2016); 12.6 (2017 Prel.).

### Monetary developments (2010–17 and Monetary Accounts)
- Consumer prices (end of period): 15.3 (2010); 11.4 (2011); 9.0 (2012); 7.7 (2013); 7.5 (2014); 14.3 (2015); 45.0 (2016); 20.0 (2017 P.).
- Consumer prices (annual average): 14.5 (2010); 13.5 (2011); 10.3 (2012); 8.8 (2013); 7.3 (2014); 10.3 (2015); 33.0 (2016); 29.2 (2017 P.).
- Broad money (M2) percent change: 11.0 (2010); 35.7 (2011); 7.9 (2012); 14.2 (2013); 16.1 (2014); 11.8 (2015); 12.0 (2016); 15.0 (2017).
- M2-to-GDP ratio (in percent): 35.3 (2010); 37.6 (2011); 35.0 (2012); 36.5 (2013); 41.0 (2014); 46.4 (2015); 40.6 (2016); 36.6 (2017).
- Credit to the private sector (12-month percent change): 19.2 (2010); 28.8 (2011); 24.2 (2012); 15.0 (2013); 1.1 (2014); 17.6 (2015); 12.4 (2016); 19.1 (2017).
- Foreign currency deposits (share of total deposits): 53.3 (2010); 52.3 (2011); 50.0 (2012); 42.5 (2013); 35.5 (2014); 33.8 (2015); 33.8 (2016); 34.0 (2017).
- Reserve money (percent change): 4 (2010); 14.3 (2011); 23.2 (2012); 1.8 (2013); 15.2 (2014); 6.7 (2015); 31.8 (2016); 0.0 (2017).

### External sector and balance of payments (2005–17 and Table 4)
- Gross international reserves (end of period, millions of U.S. dollars): 19,679 (2010); 27,517 (2011); 32,156 (2012); 32,231 (2013); 27,795 (2014); 24,419 (2015); 22,448 (2016); 19,433 (2017 Prel.).
- Reserves (months of next year's imports): 5.4 (2010); 7.2 (2011); 7.8 (2012); 7.2 (2013); 8.8 (2014); 11.0 (2015); 8.1 (2016); 6.8 (2017 Prel.).
- Trade balance (percent of GDP): 41.1 (2010); 45.2 (2011); 41.1 (2012); 33.5 (2013); 24.1 (2014); 12.1 (2015); 14.0 (2016); 11.6 (2017 Prel.).
- Exports of goods, f.o.b. (percent of GDP): 61.3 (2010); 64.6 (2011); 61.6 (2012); 54.6 (2013); 46.7 (2014); 32.2 (2015); 28.6 (2016); 26.1 (2017 Prel.).
- Of which: Oil and gas exports (percent of GDP): 59.8 (2010); 63.0 (2011); 60.4 (2012); 53.6 (2013); 45.5 (2014); 31.0 (2015); 27.3 (2016); 25.0 (2017 Prel.).
- Current account balance (percent of GDP): 9.1 (2010); 12.6 (2011); 12.0 (2012); 6.7 (2013); -3.0 (2014); -10.0 (2015); -4.3 (2016); -6.1 (2017 Prel.).
- Overall balance (millions of U.S. dollars): 5,626 (2010); 7,560 (2011); 4,506 (2012); 344 (2013); -3,896 (2014); -3,010 (2015); -3,850 (2016); -3,000 (2017 Prel.).

### Risk Assessment Matrix (July 2016) — key risks and policy responses
- Additional foreign exchange market imbalance
  - Relative Likelihood: Medium; Time Horizon: Short term; Impact: High.
  - Policy Response: Increase exchange rate flexibility and tighten monetary policy together with moderate use of international reserves; conduct stress tests on banks and prepare contingency plans for possible bank failures.
- Difficulties to contain public spending in run-up to 2017 elections
  - Relative Likelihood: Medium; Time Horizon: Short term; Impact: High.
  - Policy Response: Carefully monitor budget implementation; increase exchange rate flexibility and tighten monetary policy.
- Tighter and more volatile global financial conditions (including reduced correspondent banking services)
  - Relative Likelihood: Medium (sharp rise in risk premia); High (reduced financial services); Time Horizon: Short term; Impact: Medium.
  - Policy Response: Postpone additional Eurobond issuance; develop domestic and alternative external financing sources; strengthen data collection and analysis; enhance dialogue with private sector and foreign regulators; develop contingency plans; improve AML/CFT framework.
- Unduly delay in resolution of problem banks leading to disorderly failures
  - Relative Likelihood: Medium; Time Horizon: Medium term; Impact: High.
  - Policy Response: Accelerate recapitalization and restructuring of weak banks; complete recapitalization process of BPC.
- Contingent liabilities from new support program for import-substitution/export-promotion sectors
  - Relative Likelihood: Medium; Time Horizon: Medium term; Impact: Medium.
  - Policy Response: Define project selection and risk accountabilities; improve transparency; disclose costs in the annual budget.
- Persistently lower energy prices reversing more gradually than expected
  - Relative Likelihood: High for policy response line; Low for occurrence; Time Horizon: Medium term.
  - Highlighted policy pointer: Boost non-oil tax revenues; improve efficiency in fiscal spending; increase exchange rate flexibility and tighten monetary policy.

### Main recommendations of the 2015 Article IV Consultation and status (selected)
- Fiscal: Mobilize additional non-oil tax revenue — Status: Ongoing (efforts include enlarging tax base; creating a single revenue administration agency; strengthening tax inspections; enforcing real estate taxation).
- Fiscal: Improve efficiency of public spending — Status: Ongoing (manual for project evaluation finalized; monitoring physical execution; removal of non-complying projects).
- Fiscal: Continue reducing electricity and water tariff subsidies while adopting lifeline rates — Status: Ongoing (electricity tariffs increased about 60-70 percent in 2016; water tariffs by 50 percent; APROSOC Social Protection Program launched in 2015).
- Fiscal: Adopt an improved medium-term fiscal framework (MTFF) — Status: Ongoing (Fund technical assistance to develop MTFF and fiscal responsibility legislation).
- Fiscal: Design properly a fiscal stabilization fund — Status: Not implemented.
- Monetary and financial: Continue adjusting the exchange rate supported by tight monetary policy — Status: Partially implemented (official exchange rate depreciated by more than 40 percent since September 2014 but re-pegged since mid-April 2016; parallel-official spread ~190 percent in November 2016; BNA tightened policy but short-term rates negative in real terms; banking sector excess liquidity ~⅓ percent of GDP).
- Monetary and financial: Strengthen monetary aggregates role and improve inflation forecasting and liquidity management — Status: Not implemented (BNA not adopted a clear monetary anchor; analytical capacity strengthening underway).
- Financial sector resilience: Strengthen supervision/resolution and accelerate bank restructurings — Status: Ongoing (progress on 2012 FSAP recommendations; further work required on consolidated supervision, systemic stability analysis, operationalizing prompt corrective action, emergency liquidity assistance, and crisis preparedness).
- AML/CFT regime: Address deficiencies — Status: Ongoing (exited FATF grey list; lost only remaining U.S. dollar CBR; further legal, supervisory, regulatory reforms required).
- Acceptance of obligations under Article VIII, Section 2(a), 3, and 4 — Status: Not implemented.
- Diversification: Improve business environment and competitiveness — Status: Ongoing (infrastructure investments and targeted programs for import-substitution/export-promotion; further emphasis needed on human capital and business environment reforms).

### Illustrative medium-term scenarios (Tables 5a and 5b) — baseline and active projections (selected)
- Real GDP (percent change) — Baseline (Table 5a): 3.4 (2010); 3.9 (2011); 5.2 (2012); 6.8 (2013); 4.8 (2014); 3.0 (2015); 0.0 (2016); 1.3 (2017); 1.5 (2018); 1.4 (2019); 1.5 (2020); 1.4 (2021).
- Real GDP — Active scenario (Table 5b): 0.0 (2016); 0.5 (2017); 1.9 (2018); 3.5 (2019); 4.7 (2020); 5.3 (2021).
- Non-oil primary fiscal balance (percent of GDP) — Baseline: -26.2 (2010); -26.9 (2011); -29.2 (2012); -28.2 (2013); -28.1 (2014); -15.9 (2015); -10.2 (2016); -11.5 (2017); -9.6 (2018); -8.7 (2019); -7.9 (2020); -7.2 (2021).
- Non-oil primary fiscal balance — Active scenario: -26.2 (2010) ... -10.2 (2016); -9.2 (2017); -8.2 (2018); -7.2 (2019); -6.7 (2020); -6.2 (2021).
- Oil price assumptions (Angola oil price, average U.S. dollars per barrel) — Baseline: 76.5 (2010); 108.7 (2011); 110.9 (2012); 107.7 (2013); 96.9 (2014); 50.0 (2015); 40.5 (2016); 46.0 (2017); 49.0 (2018); 51.5 (2019); 53.0 (2020); 54.5 (2021).
- Gross international reserves (billions of U.S. dollars) — Baseline projections: 19.7 (2010); 27.5 (2011); 32.2 (2012); 32.2 (2013); 27.8 (2014); 24.4 (2015); 22.4 (2016); 19.4 (2017); 17.9 (2018–2021 range shown).

### Financial stability indicators (Dec 2012–Sep 2016) — selected
- Regulatory capital/Risk-weighted assets: 18.3 (Dec-12); 18.7 (Sep-16).
- Core Capital (Tier 1)/Risk-weighted assets: 13.6 (Dec-12); 13.4 (Sep-16).
- Nonperforming loans to gross loans: 6.8 (Dec-12); 15.2 (Sep-16).
- Liquid Assets/Total Assets: 26.3 (Dec-12); 41.3 (Sep-16).
- Total Credit/Total Deposits: 65.5 (Dec-12); 57.6 (Sep-16).
- Net open position in foreign exchange to capital (positive numbers indicate a long position in the U.S. dollar): 11.9 (Mar-16); 39.9 (Jul-16); 38.9 (Aug-16); 39.9 (Sep-16).

### Public and external debt (Tables 7 and related)
- Total public sector debt (percent of GDP): 44.3 (2010); 33.8 (2011); 29.5 (2012); 32.9 (2013); 40.7 (2014); 65.4 (2015); 71.6 (2016); 62.8 (2017 Prel.).
- Public sector debt (billions of U.S. dollars): 36.2 (2010); 34.7 (2011); 33.9 (2012); 40.6 (2013); 49.3 (2014); 59.6 (2015); 67.9 (2016); 76.0 (2017 Prel.).
- External debt (billions of U.S. dollars): 17.0 (2010); 20.3 (2011); 21.7 (2012); 29.5 (2013); 34.7 (2014); 36.9 (2015); 40.9 (2016); 45.4 (2017 Prel.).
- Of which: Sonangol debt (billions of U.S. dollars): 7.5 (2010); 9.7 (2011); 8.9 (2012); 13.4 (2013); 15.2 (2014); 12.9 (2015); 17.9 (2016); 16.6 (2017 Prel.).

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

### Appendix I. Angola: External Balance Assessment Update

### Appendix I. Angola: External Balance Assessment Update

### A. External Balance Sheets
- Net international investment position (NIIP) was positive at about 4 percent of GDP at end-2015, primarily due to large level of official reserve assets.
- Negative contribution from debt has been on the rise, reflecting increasing public sector external borrowing.
- Projected current account deficits through the medium term in the context of low international oil prices mean that the NIIP will continue to fall.
- Near-term balance sheet risks will remain contained due to comfortable level of international reserves.

### B. Current Account
- The current account (CA) balance deteriorated to a deficit of 10 percent of GDP in 2015, reflecting the prolonged fall in international oil prices and limited non-oil exports.
- Trade surplus shrank from 33½ percent of GDP in 2013 to 12 percent of GDP in 2015 as the value of oil exports halved during the same period.
- The CA deficit is estimated to have improved to 4¼ percent of GDP in 2016 due to import compression from ongoing fiscal tightening and forex rationing by the BNA.
- Baseline projection: CA deficit projected to narrow only to 3¾ percent of GDP by 2021 despite modest recovery in international oil prices and improvements in the fiscal balance.
- EBA-lite assessments for 2015:
  - Cyclically adjusted CA norm (standard EBA-lite): about 0.2 percent of GDP.
  - CA gap (standard EBA-lite): about -8¾ percent of GDP.
  - Oil EBA-lite (adjusted, oil-dependent sample): CA norm about -0.3 percent of GDP; CA gap about -7½ percent of GDP.
- The CA gap could narrow in 2016 to about -3 percent of GDP due to expected improvement in the CA balance.

### C. Exchange Rate and Competitiveness
- Average nominal official exchange rate depreciated 22 percent against the U.S. dollar in 2015.
- Average real effective exchange rate (REER) depreciated only 3 percent in 2015, due to high inflation in Angola relative to trading partners and depreciation of other trading-partner currencies against the U.S. dollar.
- Average nominal parallel market exchange rate depreciated 70 percent in 2015.
- Spread between parallel and official exchange rates widened to about 100 percent at end-2015, from 55 percent a year earlier.
- EBA-lite REER overvaluation estimates for 2015:
  - Based on REER regression: 8 percent average overvaluation.
  - Based on CA regression: 42 percent average overvaluation.
  - Oil EBA-lite CA regression: REER overvaluation 54 percent (method assumes CA elasticity to REER of 0.14 vs. 0.21 in standard EBA-lite).
- January–October 2016: official nominal exchange rate depreciated 39 percent, y-o-y; REER depreciated about 4¾ percent, y-o-y, due to high inflation in Angola.
- REER dynamics in second half of 2016 indicate gains may have been erased by end-2016; REER appreciated 20 percent between April and October 2016 as the nominal official exchange rate was fixed in context of high inflation.
- Price and structural competitiveness indicators:
  - Purchasing power adjusted (PPP) price is higher by 8-20 percent than level predicted by per capita income relative to the U.S., depending on regression estimation method.
  - Angola’s competitiveness rank in the 2014-15 Global Competitiveness Report was lower than the average rank for sub-Saharan Africa and for a group of countries with similar economic structure, almost across the board, except for market size.
  - Identified constraints: access to financing, inadequately educated workforce, inadequate supply of infrastructure, and corruption.

### D. Capital Flows and Policy Measures
- Angola’s CA deficit is financed largely by long-term borrowing (primarily public sector) and foreign direct investment (FDI).
- Large share of FDI flows to/from Angola reflect liquidity management by oil companies in context of lack of local capital markets; net FDI inflows tend to move counter-cyclically with oil prices.
  - When oil price falls: residents reduce investment abroad and non-resident oil companies draw funding from deposits abroad → increase in FDI inflows (e.g., 2009, 2014, 2015).
  - When oil price rises: FDI outflows increase as residents’ foreign asset holdings increase and non-resident oil companies increase deposits abroad (e.g., 2010–13).
- Other financial flows (portfolio investment, trade credits, currency and deposits) largely reflect public sector investments abroad and banking sector trade facilitation.
- Non-residents’ investment in Angola is limited to FDI and purchases of long-term government securities issued abroad; capital account virtually closed for other flows.
- Risk of reversal of capital flows is considered very limited.

### E. Foreign Exchange Intervention and Reserve Levels
- Forex market is one-sided: BNA is the only supplier.
- Average monthly BNA forex supply fell from about US$1.8 billion per month (January–November 2015) to about US$0.9 billion per month (same period in 2016).
- Losses in net international reserves (NIR) have been moderate, while forex market imbalances have grown substantially.
- BNA measures since 2015 to manage forex shortage include:
  - Priority list for access to forex at official rate (imports of food, medicine, inputs for agriculture and industry, and the oil sector).
  - Special tax on service payments to non-residents for technical assistance and management services.
  - Stricter limits on amount of foreign currency travelers can take abroad.
- As of November 2016:
  - NIR stood at US$20⅓ billion.
  - NIR equals 100 percent of the standard IMF metric (down from 125 percent at end-2015).
  - NIR equals 110 percent of the capital-control-adjusted metric (down from 140 percent at end-2015).
- Heavy reliance on oil exports (about 95 percent of total exports) implies the reserves ratio should be closer to upper bound of adequacy range (150 percent).
- Note: Angola’s Sovereign Wealth Fund (FSDEA), about US$4½ billion, is not included in NIR.
- Reserve adequacy metrics: capital-control-adjusted metric uses lower weight on broad money (5 percent compared to 10 percent in standard metric) reflecting lower probability of capital flight under capital controls.

### F. Fiscal and Debt Vulnerabilities (from DSA excerpt)
- Gross public debt-to-GDP ratio rose by 24¾ percentage points during 2015, to 65½ percent at end-year, due to fiscal deficit and exchange rate depreciation on foreign currency denominated and indexed debt.
- Ratio expected to increase to 71½ percent at end-2016 given projected fiscal deficit of 4 percent of GDP for 2016 and a more depreciated exchange rate.
- Despite projected subdued real GDP growth, gross public debt-to-GDP ratio expected to decline in 2017 mainly due to projected real exchange rate appreciation, and then stabilize at around 64 percent mainly due to projected improvements in fiscal balances.
- Gross external debt projected to decline to 39½ percent of GDP at end-2021, from 40½ percent of GDP at end-2015.
- Stress tests show high vulnerability of public debt to shocks on real GDP growth, exchange rate, financial contingent liabilities, and the oil price.

### Key Policy Recommendations and Findings (from summary and analysis)
- Continued policy adjustment needed to strengthen the external position further.
- Gradual fiscal tightening should be implemented.
- Greater exchange rate flexibility supported by monetary policy tightening will be critical to orderly address forex imbalances.
- Structural reforms are needed to enhance external competitiveness.
- Monetary policy actions to arrest inflation (controlling growth of base money and increasing forex supply) may have started to be effective, as monthly inflation has been decelerating.

*Prepared by the staff of the International Monetary Fund; Appendix I, "Angola: External Balance Assessment Update."*

### 1.      Angola’s gross public debt is estimated at 65½ percent of GDP at end-2015. Public debt

### Angola’s gross public debt is estimated at 65½ percent of GDP at end-2015. Public debt

### Snapshot of debt levels (end-2015)
- Gross public debt: 65½ percent of GDP.
- Net public debt (gross debt excluding central government deposits at the BNA): 54¼ percent of GDP.
- Composition of public debt statistics: central government plus the external debt of Sonangol and TAAG.
- Change in 2015 relative to 2014: a 24¾ percentage point of GDP increase in gross public debt.
- Drivers of the 2015 increase:
  - Fiscal deficit of about 3⅓ percent of GDP.
  - Effect of exchange rate depreciation on foreign-currency denominated and indexed debt stocks: 9½ percentage point of GDP increase.

### Projections and baseline assumptions
- Projected 2016 gross public debt: increase by 6¼ percentage points to 71½ percent of GDP (driven by a projected fiscal deficit of 4 percent of GDP and further exchange rate depreciation effects).
- Staff macro-fiscal baseline assumptions:
  - After negative growth in 2016, a very gradual increase in non-oil GDP growth until 2019 and stable but subdued growth thereafter.
  - Inflation: projected to remain high in 2016 and then decline gradually.
  - Non-oil primary fiscal balance: projected to improve only starting in 2018 (higher public spending in 2017 delays improvement).
  - External current account deficit: expected to be reduced over the medium term due to fiscal retrenchment and higher oil prices.
- Projected debt path:
  - Public debt share of GDP estimated to decline in 2017 due to projected appreciation of the real exchange rate.
  - Debt ratio expected to stabilize thereafter, and as fiscal consolidation continues, stabilize at about 64 percent of GDP.
  - Fiscal consolidation envisaged mainly through additional nonoil taxation and expenditure savings.

### Debt burden, financing needs, and risks
- Debt-burden benchmark for emerging economies: 70 percent of GDP.
  - Angola’s debt ratio is projected to exceed this benchmark in 2016 but not in subsequent years.
- Public gross financing needs:
  - Expected to be slightly above the benchmark of 15 percent of GDP in 2017 and 2019–20.
- Forecast track record:
  - Angola exhibits a relatively large median forecast error for key macro variables compared with advanced and emerging market surveillance countries for some years.
  - Contributing factors: volatility in oil production and oil prices, swings in agricultural production, low economic diversification, and weak fiscal institutions.
- Vulnerability statement: Angola’s moderate debt burden and gross financing needs can pose risks to debt sustainability and leave debt dynamics highly vulnerable to macroeconomic shocks.

### Stress-test scenarios and quantified impacts
- Growth shock:
  - Scenario: projected real GDP rates lowered by half standard deviation (implying lower real growth by about 4 percentage points in 2017 and 2018).
  - Outcome: debt ratio would reach 72¾ percent of GDP in 2018 and stabilize thereafter at around 73 percent.
- Real exchange rate shock:
  - Scenario: one-off real depreciation of 30 percent (45 percent nominal depreciation).
  - Outcome: debt-to-GDP ratio reaches 74¾ percent of GDP in 2017 and declines slightly to 74½ percent in 2021.
- Combined shock:
  - Outcome: debt increases to 101½ percent of GDP by 2021.
- Financial sector contingent liability shock:
  - Scenario: one-time increase in non-interest expenditures equivalent to 10 percent of banking sector assets.
  - Outcome: debt-to-GDP ratio increases to 73½ percent by 2018 and stabilizes thereafter around 74 percent.
- Oil price shock:
  - Scenario: 30 percent drop in the projected price of the Angolan oil basket in 2017 (price under this scenario is US$32¼ per barrel).
  - Outcome: debt-to-GDP ratio increases in 2017 compared to the baseline and stabilizes at 66½ percent.
- Note on interest-rate shock design: for Angola the interest-rate shock applied increases by 200 basis points (rather than by the maximum real interest rate over the last 10 years) to exclude the 2008–09 outlier.

### Key quantitative projections and indicators (selected)
- Table-derived baseline projections (as of November 30, 2016):
  - Nominal gross public debt (percent of GDP): 2014: 27.8; 2015: 40.7; 2016: 65.4; 2017: 71.6; 2018: 62.8; 2019: 63.8; 2020: 63.8; 2021: 63.7.
  - Net public debt (percent of GDP): 2014: 16.5; 2015: 31.0; 2016: 54.2; 2017: 59.6; 2018: 53.4; 2019: 54.7; 2020: 55.2; 2021: 55.6; 2021 (later row) 55.9.
  - Public gross financing needs (percent of GDP): 2014: 4.8; 2015: 13.3; 2016: 12.0; 2017: 12.8; 2018: 15.7; 2019: 12.7; 2020: 15.7; 2021: 15.1; 2021 alternate 13.6.
  - Real GDP growth (percent): 2014: 10.8; 2015: 4.8; 2016: 3.0; 2017: 0.0; 2018: 1.3; 2019: 1.5; 2020: 1.4; 2021: 1.5; 2021 alt: 1.4.
  - Inflation (GDP deflator, percent): 2014: 13.4; 2015: -1.4; 2016: -4.0; 2017: 27.7; 2018: 25.9; 2019: 16.8; 2020: 14.6; 2021: 11.2; 2021 alt: 9.8.
  - Effective interest rate (percent): 2014: 6.9; 2015: 3.8; 2016: 4.9; 2017: 5.8; 2018: 6.4; 2019: 5.9; 2020: 6.1; 2021: 6.2; 2021 alt: 6.3.
  - Sovereign spread EMBIG (bp): 815 (as of November 30, 2016).
- Cumulative change in gross public sector debt (percent of GDP): 2016 projection contribution listed as 24.8 (change for 2016); identified debt-creating flows and residuals are detailed in the staff tables, including a residual (including asset changes) entry of 9.2 for 2016 and cumulative residual projection 27.9.

### Policy implications highlighted by staff
- Priority on fiscal consolidation to preserve debt sustainability as international oil prices improve but remain significantly lower than in 2011–13.
- Consolidation modalities:
  - Additional nonoil taxation.
  - Expenditure savings.
- Use of central government deposits at the BNA (which include the oil funds) to reduce financing needs is possible but only under very strict conditions and with the approval of the President of the Republic.
- Observations on Sonangol’s debt: Sonangol’s external debt (14¼ percent of GDP at end-2015) is included in public debt given full state ownership; part of a 2016 disbursement from the China Development Bank (US$6.9 billion on-lent by the central government to Sonangol) is explicitly guaranteed; in net terms this was equivalent to about US$3.8 billion given partial use to refinance existing debt.

*Italic: Source: IMF staff — Public Debt Sustainability Analysis for Angola (selected excerpts from the IMF country report).*

### 8.      Angola’s external debt is sustainable.

### 8.      Angola’s external debt is sustainable.

### External debt trajectory and outlook
- External debt is expected to continue increasing in 2016 to about 43 percent of GDP from 40½ percent in 2015.
- The external debt trajectory is projected to decline to 39½ percent by 2021 mainly due to declining current account deficits, and a slower pace of exchange rate depreciation.
- Gross international reserves are projected to remain at US$ 22.7 billion in 2016 (roughly 8 months of prospective imports), against US$ 24.4 billion in 2015 (11 months of prospective imports).

### Stress tests and shock scenarios (external DSA)
- Stress tests in the external DSA suggest that Angola’s external debt ratio is sensitive to shocks; the most significant standard shock is a real depreciation shock, followed by a non-interest current account shock, the combined shock, and a growth shock:
  - Real depreciation shock: A one-time real depreciation of 30 percent in 2017 would raise external debt to 89 percent by 2021.
  - Non-interest current account shock: An increase in the current account excluding interest payments by half a standard deviation in each year from 2017 onwards would raise external debt to 70 percent of GDP by 2021.
  - Combined shock: A one quarter standard deviation shock to the real interest rate, the growth rate and the current account would raise the external debt ratio to 60 percent by the end of the projection period.
  - Growth shock: A permanent half standard deviation shock applied to growth would raise external debt to 46 percent of GDP by 2021.

### Key DSA baseline figures (selected, in percent of GDP unless noted)
- Baseline: External debt (2011–2021): 
  - 2011: 19.7
  - 2012: 18.9
  - 2013: 23.8
  - 2014: 28.6
  - 2015: 40.5
  - 2016: 43.1
  - 2017: 37.6
  - 2018: 38.6
  - 2019: 39.1
  - 2020: 39.4
  - 2021: 39.6
- Change in external debt (2011–2021): -1.1; -0.9; 5.0; 4.8; 11.8; 2.6; -5.5; 1.1; 0.5; 0.3; 0.2 (by year, corresponding to 2011–2021).
- Identified external debt-creating flows (4+8+9) (2011–2021): -22.0; -22.5; -18.7; 1.6; 29.8; 0.8; 6.2; 5.0; 4.5; 4.0; 3.6 (by year).
- Current account deficit, excluding interest payments (2011–2021): -13.1; -12.4; -7.1; 2.5; 10.4; 2.6; 4.5; 3.4; 2.7; 2.1; 1.6 (by year).
- Net non-debt creating capital inflows (negative) (2011–2021): -5.0; -8.4; -10.7; -1.9; 9.0; -3.5; 0.5; 0.6; 0.6; 0.6; 0.6 (by year).
- Automatic debt dynamics (2011–2021): -3.8; -1.8; -1.0; 1.1; 10.4; 1.8; 1.1; 1.0; 1.2; 1.4; 1.5 (by year).
- External debt-to-exports ratio (2011–2021): 29.8; 30.1; 42.4; 57.0; 107.0; 142.7; 138.9; 137.4; 139.9; 142.9; 145.4 (by year).
- Gross external financing need (in billions of US dollars) (2011–2021): -11.5; -12.0; -6.2; 6.8; 12.9; 8.7; 11.7; 10.1; 9.4; 9.7; 9.9 (by year).
- Real GDP growth (in percent) — key macro assumption series (annual entries shown in DSA table): 3.9; 5.2; 6.8; 4.8; 3.0; 8.7; 7.6; 0.0; 1.3; 1.5; 1.4; 1.5; 1.4 (historical, average, deviation rows as presented).

### Analysis and policy implications
- The baseline path shows external debt stabilizing around roughly 39–40 percent of GDP by 2021 under the staff’s projections, but substantial vulnerabilities remain if shocks materialize, especially large real depreciation.
- The external DSA is based solely on public sector debt, including two state-owned enterprises (Sonangol and TAAG), due to lack of data on private sector external debt; the authorities are making efforts to collect private sector debt data with the help of TA from STA.
- Policies and reforms highlighted to preserve debt sustainability and reduce vulnerability include:
  - Fiscal consolidation to rebuild buffers, including the fiscal strategy to diversify non-oil revenues and pursue non-oil primary fiscal consolidation over the medium term.
  - Enhancing institutional capacity for oversight of fiscal risks from state-owned enterprises (SOEs), and accelerating the program of their restructuring and privatization, which includes closing 48 and privatizing 53 SOEs.
  - Monetary policy tightening and greater exchange rate flexibility to achieve price stability and rebalance the foreign exchange market; measures include narrowing the policy interest corridor to 500 bps and shifting to base money targeting.
  - Structural reforms to accelerate economic diversification (Program of Action for Economic Diversification) and improvements in public financial management, tax administration, VAT preparation, and investment planning.
  - Strengthening financial sector regulation and supervision, addressing risks from loss of U.S. dollar Correspondent Banking Relationships (CBRs), and aligning banking accounting and reporting with International Financial Reporting Standards (IRFS).

*Source: IMF staff report section titled "8. Angola’s external debt is sustainable."*

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_Source: https://www.imf.org/-/media/files/publications/cr/2017/cr1739.pdf_