## cr18157 ## Source details **Canonical URL:** [cr18157](https://www.imf.org/-/media/files/publications/cr/2018/cr18157.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2018/cr18157.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2018/cr18157.pdf.json) --- ### Oil Fields in Angola — Introduction and Sector Relevance - Trade-off: declining oil fiscal revenues over the medium term vs. increasing social and public investment needs. - Opportunities: utilize remaining oil reserves while reducing debt and building fiscal buffers; a sound fiscal framework with a well-designed fiscal stabilization fund may be needed. - Fiscal rule contrasts: - Spend-as-you-go (SAYG): falling oil production and volatile oil prices → declining revenues, volatile public investment, rising debt. - More active rule: allows gradual scale-up of public investment while building fiscal buffers and insulating the non-oil economy from oil price volatility. - 2017 sector snapshot and dependencies: - Oil produced on average 1.632 million barrels per day (MMbbl/day) in 2017. - Proven reserves 9.5 billion barrels in 2016. - Angola’s oil reserves: 3rd largest in Africa and 17th largest in the world (2016 data). - Production peaked near 2 MMbbl/day in 2008; recent levels about 10 percent lower than their two-year average of 1.75 MMbbl/day since August 2014. - Below Angola’s OPEC quota of 1.673 MMbbl/day. - Most production offshore (Cabinda) and deep-water (Lower Congo basin). - Sonangol: state concessionaire; stakes in 32 of 36 producing blocks; 4th largest oil producer in the country (after BP, Total and Exxon). - Block 17 (Total, Statoil, Exxon, BP) produced over 0.6 MMbbl/day in 2016. - Sector challenges: structural decline from aging fields, underinvestment, coordination problems; 2014/15 oil price collapse worsened underinvestment. - 2017 fiscal/external dependence: oil sector ≈64 percent of tax revenues and over 95 percent of exports. - Public investment 5 percent of GDP. - Public debt projected to reach 72.9 percent of GDP at end-2018. - Fiscal priorities highlighted: - Scale up public investment sustainably. - Entrench public debt sustainability and reduce public debt. - Reduce dependence on oil revenues and shield public spending from oil revenue volatility. - Possible measures: adopt a VAT on January 1, 2019 (as planned); build fiscal buffers via a fiscal stabilization fund within a coherent medium-term fiscal framework (MTFF). ### Model and Calibration (DIGNAR) - IMF’s DIGNAR model used to assess macroeconomic impact of fiscal rules for Angola. - Model characteristics: - Small open economy general equilibrium model (Melina, Yang & Zanna (2016)). - Allows increasing returns to scale in public infrastructure, inefficiencies in public investment, absorptive capacity constraints. - Flexible fiscal specifications: SAYG, delinked exogenous public investment path, and resource/stabilization fund. - Economic structure: - Three production sectors: oil (exogenous production and prices), non-tradable (labor, private capital, public infrastructure; Cobb-Douglas), tradable (similar plus learning-by-doing). - Two household types: perfect-foresight optimizers and hand-to-mouth consumers. - Government: distortionary taxes (labor, capital, consumption), oil payments, domestic and foreign debt, allocations to recurrent spending, public infrastructure investment, and debt service. - Fiscal rules modeled: - SAYG: all oil revenues each period fund public infrastructure investment; recurrent spending fixed; stabilization fund remains at initial level; taxes adjust endogenously. - Delinked approach: public investment path exogenously determined and financed by oil revenues, debt issuance and non-oil taxes; surplus/deficit saved to/withdrawn from stabilization fund. - Tradeoffs captured: - Fund-building insulates spending from volatile oil revenues. - Public infrastructure investment raises returns to private factors but may crowd out private investment and is subject to efficiency losses (only a fraction converts to public capital). - Distortionary non-oil taxation affects non-oil economy by changing after-tax marginal returns and steady-state consumption. - Calibration (selected parameters and steady-state values preserved exactly): - National accounting long-run GDP growth rate (in percent): 6 - exports/GDP*100 (in percent): 27 - imports/GDP*100 (in percent): 26 - government consumption/GDP*100 (in percent): 17 - government investment expenditures/GDP*100 (in percent): 5 - private investment/GDP*100 (in percent): 4 - mining value added (natural resource production)/GDP*100 (in percent): 26 - government wealth fund/GDP*100 (in percent) (external savings): 3 - government domestic debt / GDP*100 (in percent): 30 - concessional debt/GDP*100 (in percent): 8 - government external commercial debt/GDP*100 (in percent): 22 - annualized domestic net real interest rate: 10 - annualized foreign net real interest rate earned by the stabilization fund: 2.7 - annualized net real risk-free rate: 4 - annualized net real interest rate paid on government external commercial debt: 7.3 - elasticity of output with respect to public capital: 0.15 - depreciation rate of public capital (in percent): 7 - investment adjustment cost parameter in the non-traded sector: 25 - steady-state efficiency of public investment (share of investment turned into actual capital) (in percent): 50 - Floor for the sovereign wealth fund (in percent of GDP): 0 - Natural resource sector royalty tax rate on natural resources (in percent): 20 - user fees of public infrastructure (in percent of recurrent costs): 50 ### Simulations — Oil Production and Price Scenarios - Oil production path assumptions: - Projected gradual decline by 2023 and an annual decline of 5 percent per year thereafter. - Assume oil production remains roughly constant at 1 .65 MMbbl/day until 2023 (Sonangol’s short-run projection, 1.650 MMbbl/day). - From 2023 onwards, baseline assumes annual decline of 5 percent per year. - Statement preserved: "5.2 percent between 2017 and 2023 and is a conservative assumption for the decline in production." - Oil price path assumptions: - Use IMF Spring 2018 WEO projections to 2023; simulate AR(1) process to 2040 thereafter. - WEO path: pickup in Angolan basket to US$62.5 per barrel in 2018, followed by a gradual decline to US$54 per barrel by 2023. - AR(1) specification for t >= 2023: - pp_t = alpha + rho pp_{t-1} + epsilon_t, with epsilon_t ~ N(0, sigma_epsilon) - Estimated parameters (using data 2016–2023): - rho = .93 - baseline sigma_epsilon = 0. 1 - alternative scenario increases sigma_epsilon threefold to sigma_epsilon = 0. 3 (roughly the size of the shock to oil prices following the global crisis of 2007-08). - Stabilization fund initial level in simulations: 3 percent of GDP. - Purpose: evaluate macroeconomic and debt sustainability effects of scaling up public investment under different fiscal rules given exogenous oil production and price paths; compare SAYG vs. delinked approaches and role of stabilization fund. ### Simulation 1 — Spend-as-you-go (SAYG) fiscal rule (key projected outcomes) - SAYG rule: all oil revenues finance public investment each period; stabilization fund remains at ~3 percent of GDP. - Baseline falling production and volatile prices outcomes: - Government oil revenues (share of total revenues) decline from around 60 percent in 2017 to around 35 percent by 2040. - Public investment falls from 5 percent of GDP in 2017 to under 3 percent of GDP by 2040. - Debt rises steadily to around 75 percent of GDP by the end of the simulation period (after an initial fall in the first year). - Non-oil taxes must increase and remain highly volatile to prevent faster debt rises. - Non-oil output falls by between 10-12 percent compared to the initial level. - Private consumption and investment fall alongside higher distortionary non-oil taxation and falling public investment. ### Simulation 2 — Delinked approach with gradual scaling up of public investment (variants and outcomes) - Public investment path: scaled from 5 percent of GDP in 2017 to 8.5 percent of GDP by 2040 (sub-Saharan average). - Delinked approach: public investment less volatile; resource revenue path effectively replaced by the stabilization fund. - Fiscal-rule variants: 1. Passive tax policy — non-oil taxes respond as needed to keep debt non-explosive. 2. Active tax policy — raise non-oil tax rates immediately to create fiscal space and build a stabilization fund. 3. Debt paydown — use excess revenues to pay down debt first. - Outcomes by variant (preserved wording and figures): - Passive tax policy: - Debt rises as public investment is scaled up; debt exceeds 70 percent of GDP towards the end of the simulation horizon. - Stabilization fund depleted in about five years. - Private consumption stable initially but declines sharply as non-oil tax rates increase. - Higher public capital crowds in private investment; non-oil output growth improves relative to SAYG. - Active tax policy: - Immediate, gradual rise in non-oil taxes allows building a stabilization fund that peaks at just over 7 percent of GDP by the mid-2020s. - Debt remains relatively stable and can be reduced to about 50 percent of GDP towards the end of the simulation horizon. - Consistently higher non-oil taxes lead to declining private consumption from the outset. - Debt paydown: - Initial excess oil revenues used to pay down debt rather than accumulate the stabilization fund. - Debt falls to around 40 percent of GDP by 2040, reducing debt service burden substantially. - Government can subsequently build a stabilization fund in years of high oil prices and run it down when prices fall. - Gradual increases in non-oil taxes lower consumption but higher private and public investment boost non-oil output growth. ### Fiscal policy lessons and recommendations - A sound MTFF with a stabilization fund would: - (i) build a fiscal buffer to reduce vulnerability to declining oil revenues; and - (ii) insulate public investment from oil price volatility. - Priorities and measures: - Prioritize growth-enhancing infrastructure investment and improve the business environment; increase public investment gradually in line with absorptive capacity. - Improve public investment management to reduce inefficiencies, increase infrastructure quality, and maximize crowd-in of private investment. - Consider using part of oil windfalls to reduce public debt given projected public debt of 72.9 percent of GDP in 2018. - Implement structural fiscal reforms alongside the fiscal framework for oil revenues, including mobilizing domestic non-oil tax revenues (e.g., implementing a VAT) and increasing public investment efficiency. - Stabilization fund portfolio allocation should consider the high level of public debt when prioritizing the use of windfalls. ### Macro-Financial Linkages and Banking Sector Impacts — Overview - Transmission of lower oil prices to banks via: - Fiscal revenue declines → payments arrears to government contractors → asset quality deterioration. - Currency depreciation, tighter monetary conditions, weaker borrower repayment capacity. - NPLs in subset of SSA oil exporters increased from average 5 percent in 2011 to 17¾ percent in Q3 2017. - Financial sector structure: - 30 banks, 24 insurance companies, six pension funds, three micro-credit institutions, and 89 foreign exchange bureaus. - Banks’ assets >90 percent of financial sector and equivalent to 57.7 percent of GDP. - Bank ownership: 18 domestic private banks, nine foreign bank subsidiaries; public sector equity interests in about six banks; government directly controls three banks holding 11 percent of total assets; Sonangol holds minority stakes in seven banks. - Bank concentration: largest five banks hold over 70 percent of both assets and deposits. ### Transmission Channels of Oil Price Shock to Banks (summary) - Fiscal channel: - Lower oil prices → rising government financing needs → issuance of securities at higher yields → banks invest in government securities → pickup in banks’ financial margins. - Government had about 4.5 percent of GDP in domestic payments arrears as of end-2017; arrears contributed to asset quality deterioration. - Public investment cutbacks reduced business for suppliers → financing difficulties and higher NPLs. - Liquidity and funding channel: - Decline in oil prices → contraction of export earnings and cutback in public investment → sharp swings in bank liquidity. - Increased use of central bank financing facilities → higher funding costs. - State-owned banks with large exposures to public sector projects saw weaker profitability. - Credit channel: - Falling oil prices weakened deposit base (deposits sourced from oil-related activities and government). - Government securities became more attractive → crowding out private sector lending. - Loan-to-deposit ratio declined to 49.3 percent in December 2017. - Exchange rate and monetary policy channel: - Kwanza depreciation >40 percent from mid-2014 to April 2016. - Banks had long positions in foreign currency and indexed instruments → devaluation increased kwanza value of positions. - Inflation peaked above 40 percent in 2016 → monetary tightening → contraction in aggregate demand → amplified liquidity and credit risks. ### Event Analysis and Stress Testing — Findings - Event analysis (quarterly FSI, static): - System-wide CAR dropped from 22 percent in mid-2014 to 18.2 percent in mid-2016 but remained above 10 percent minimum. - Banks with CAR below regulatory minimum rose to 20 percent by mid-2015 from 4 percent before the crisis. - Asset quality deterioration initially delayed by evergreening and varied reporting standards. - Increase in number of banks posting negative earnings. - Stress testing (Stress Tester 3.0; 11 banks covering 90 percent of deposits; period 2013–2016): - Scenarios include actual oil price shock beginning 2014, exchange rate depreciation >30 percent, inflation >40 percent, negative credit growth, NPLs >20 percent. - Credit risk shock: aggregate increase in NPLs via downgrades across credit spectrum. - Stress outcomes: - Capital position declines by 6 percentage points in 2013 but overall banks remain well-capitalized. - CAR around regulatory minimum for 2014 if 20 percent of performing loans deteriorate; pressures on medium and small banks. - Capital injections and improving profitability improve aggregate capacity by 2015, but five of eleven banks remain undercapitalized. - Recapitalization needs: 0.2 percent of GDP in 2014 → 0.7 percent in 2016 → 1.3 percent in 2017. - Upper bound fiscal costs of bank problems in stress scenario are higher than expected values for private shareholders, indicating potential contingent liabilities for the budget, especially for state-owned banks. - Reverse stress testing: - System-wide share of performing loans that would cause CAR to fall below regulatory minimum narrows from 46 percent in 2013 to 22 percent in 2014. - By bank size: large banks 57 percent → 22 percent; medium-sized banks 30 percent → 8 percent; small banks 33 percent → 22 percent. - Some smaller banks would require 100 percent of their NPL portfolio to default before breaching capital requirements. - Two of three state-owned banks remained challenged despite recapitalization efforts. ### Sectoral Balance Sheet Analysis — Key findings (2013 vs 2016) - Banks’ exposure to domestic sovereign risk rose: banks hold 21 percent of GDP in government debt. - Private sector exposure to banks (mainly deposits) ≈46 percent of GDP. - Loans-to-deposit ratio ≈60 percent (sectoral snapshot). - ODC banking sector balance sheet allocation: - Liabilities to private sector ≈¾ of total and equivalent to 46 percent of GDP. - Loans to private sector ≈21 percent of GDP. - Investment in government securities ≈21 percent of GDP. - Placements abroad ≈2.5 percent of GDP. - Reserve deposits with the BNA ≈7 percent of GDP. - Central Government net asset position: negative net asset position of 56 percent of GDP (external liabilities 37 percent of GDP; domestic liabilities: bonds held by banks 21 percent of GDP and private corporations 17 percent of GDP). - Growing exposures 2013–2016: - Government liabilities up ~20 percent of GDP. - Banks liabilities up ~20 percent of GDP. - Net asset position deterioration: government by 25 percent of GDP; banks by 10.5 percent of GDP. - Interpretation: increases align with fiscal pressures from lower oil prices; banks hold dollar-indexed bonds with two-year average maturity. ### Determinants of Banks’ Bond Holdings — Empirical Results (selected coefficients preserved) - Panel regression (N109 observations) with FE and RE estimators; dependent variable TBs — banks’ government debt holdings in percent of total assets. - Coefficients (exactly as presented with standard errors in parentheses): - Loans: FE -0.8147*** (0.17); RE -0.6834*** (0.14) - Return on Equity: FE 0.1205** (0.05); RE 0.1375*** (0.05) - Market power: FE 0.9231** (0.42); RE 0.5594* (0.29) - Equity: FE 0.7415*** (0.27); RE 0.7618*** (0.24) - Inflation: FE 0.0240 (0.20); RE 0.0315 (0.20) - Oil price: FE -0.1279** (0.06); RE -0.1322** (0.06) - Interpretation preserved: government securities used to store liquidity; negative correlation with outstanding loans; oil price shocks negatively related to government security holdings; well-capitalized and profitable banks hold more government securities. ### Safety-net Channel, Profitability Determinants and Recredit (selected findings) - Public sector equity interests in six banks (minority) and direct government control of three banks holding ~11 percent of banking assets; state-owned banks operate with explicit/implicit guarantees → bidirectional sovereign–bank spillovers. - Government spent about 4 percent of GDP recapitalizing such banks since the oil price shock; costs expected >1 percent in 2018. - Determinants of bank performance (selected regression coefficients preserved): - lnSize: mixed coefficients across specifications (e.g., 0.5842 (0.36); -0.5888** (0.25)) - lnEfficiency: -4.1282*** (0.39); -4.1320*** (0.21) - lnOpExp: -0.6653** (0.30); 0.3748* (0.22) - Equity: 0.1089*** (0.04); 0.1042*** (0.02) - Inflation: 0.0308*** (0.01); 0.0327*** (0.01) - Oil price: -0.0105*** (0.00); -0.0124*** (0.00) - GDP growth: 0.0613*** (0.02); 0.0986*** (0.02) - Recredit (Asset Management Company) — operational aspects and concerns: - Established August 4, 2016; wholly state-owned; mission to acquire, restore, revitalize NPLs. - Original mandate: dispose of NPLs amounting to Kz201 billion (out of estimated Kz705 billion as of May 2016) from BPC’s balance sheet. - Expanded mandate late 2016: acquire impaired but recoverable loans from entire banking system; negotiated NPL purchases ~Kz300 billion with BPC and engaging to acquire ~Kz180 billion more from five banks. - Design and operational concerns: - Limited capacity to price NPLs at market value; plan to purchase at average discount of 75 percent faces valuation and recovery challenges. - Broader mandate risks moral hazard; 80 percent of NPLs concentrated in state-owned banks. - Wholly state-owned structure risks political pressure; legal obstacles to clean transfer of titles and slow judicial enforcement. - No predetermined lifespan → risk of becoming politically-driven "warehouse for NPLs". - Limited coordination with BNA; would benefit from more information exchange and technical skills. ### Managing the Sovereign-Banks Nexus — Policy recommendations (preserved wording and ordering) - Ensure that both banks and sovereign balance sheets are stronger to reduce the probability of sovereign distress while bolstering banks’ ability to withstand shocks and to avoid a strong nexus acting as a transmitter or amplifier of financial stress with adverse feedback loops for credit and liquidity. - Monitor closely excessive holdings of government securities to avoid creating a captive market that discourages prudent fiscal behavior and constrains development of capital markets. - Enhance surveillance for timely identification of risks and policy responses, including gauging underlying soundness of banks through strong supervision, asset quality reviews, and upgrading risk management to avoid recurrence of rising NPLs. - Develop public-private loss sharing arrangements to constrain public sector support, making interventions smaller, temporal, and time bound; consider reverting Recredit to original mandate and adding a sunset clause to limit contingent liabilities. - Ensure undercapitalized banks implement action plans to comply with requirements and closely monitor their implementation. ### Governance and Anti-Corruption Reforms — Overview and Findings - Chapter purpose: study link between governance and economic performance; identify weak governance areas; assess macroeconomic implications of weak governance and corruption; discuss past and ongoing reforms; conclude with suggestions. - Political context: - Government of President João Lourenço (elected August 2017) prioritized improving governance; in first six months dismissed many public officials and launched investigations. - Specialized anti-corruption unit created as executive branch’s key agency to prevent and repress corruption-related crimes. - Definitions: - Governance: institutions, mechanisms, practices for exercising governmental power and managing public resources. - Corruption: abuse of public office for private gain. - Channels through which weak governance/corruption affect economy: - Acts like distortionary tax; diverts resources to rent-seeking; impedes revenue mobilization; inflates expenditure-side costs; distorts public spending toward procurement-vulnerable areas; undermines accountability; burdensome regulation creates opportunities for corruption; weak enforcement of property rights deters investment; weak AML/CFT allows concealment of proceeds. - Indicators and methodology: - Fund staff assessment complemented by third-party indicators (WGI, ICRG, DBI, CCI, CPI); indicators normalized 0-100. - Caveats: perception-based, methodological changes. ### Fiscal Governance, PFM, Public Investment and Market Regulation — Key findings - Fiscal transparency shortcomings: - Timeliness and quality of government finance statistics weaker than expected for income level. - Consolidated/detailed fiscal data not published during fiscal year; oil fiscal revenues monthly, detailed reports quarterly with long lag. - Outstanding domestic payments arrears estimated at 4½ of GDP at end-2017. - Oversight of SOEs: - ISEP weak; many SOEs do not submit timely/clean accounts; SOEs outside government finance statistics perimeter → contingent liabilities. - Public investment management weaknesses: - Legal framework exists (Public Investment Law 31/10; Public Contracting Law 9/16) and PNDs in place, SIPIP and DNPE established. - Remaining weaknesses: lack of multiyear budgeting, weak project appraisal/selection, procurement vulnerabilities, frequent contract amendments, absence of ex-post performance assessment, limited line ministry capacity. - Public investment was ~half of total investment pre-2014/15; quality low. - Tax administration and AML/CFT: - AGT operationalized in 2015; LTO covers ~400 large companies accounting for >50 percent of non-oil fiscal revenue. - IT systems: portal do contribuinte, ASYCUDA, SIGT. - AGT shortcomings: compliance risk management, performance framework, separation of roles. - AML/CFT: main law 2011 (Lei 34/11); 2014 law (Lei 3/14) criminalizes POs including corruption; FIU operationalized 2015 but under-resourced. - Angola removed from FATF monitoring in February 2016 after progress; second mutual evaluation scheduled in 2020. ### Perceptions, Business Climate, and Empirical Correlations - Angola perceived as higher risk jurisdiction; loss of direct U.S. dollar correspondent banking relationships partly attributed to AML/CFT weaknesses and corruption perceptions. - Business climate weaknesses: government effectiveness, rule of law, enforcing contracts, registering property, burdensome tax and licensing procedures, barriers to FDI and work visas. - Corruption perceptions and firm surveys: - Chinese entrepreneurs: almost 60 percent report corruption as relevant barrier. - Selected firm-level corruption statistics (Percent averages, sample of 122 countries): - Angola: Biggest constraint 28.9; Major constraint 75.6; Bribery incidence 51.3; Bribery depth 42.9. - Sub-Saharan Africa: Biggest constraint 8.2; Major constraint 40.2; Bribery incidence 24.1; Bribery depth 18.5. - Lower-Middle Income: Biggest constraint 9.3; Major constraint 37.6; Bribery incidence 24.5; Bribery depth 19.7. - Oil Exporters: Biggest constraint 10.3; Major constraint 42.0; Bribery incidence 26.6; Bribery depth 21.6. - Pairwise correlations for SSA, 2005–16: - Governance WGI with ICRG: 0.88 - Governance WGI with CCI: -0.91 - Governance WGI with CPI: -0.94 - ICRG with CCI: -0.78 - ICRG with CPI: -0.75 - CCI with CPI: 0.97 ### Macroeconomic Impact and Estimated Gains from Reforms - Literature and IMF estimates: - Meta-analysis: one-unit improvement in corruption perceptions increases annual GDP per capita growth by ~0.6 percentage point in LICs; ~0.9 percentage point in mixed sample. - IMF (2018) finds growth gains of ¼–1½ percentage point for governance and ¼–2 percentage points for corruption perceptions, depending on method/sample. - Potential gains for Angola (based on Fund staff elasticities): - Improving governance to SSA average → increase real GDP per capita growth by about ¾-1¼ percentage point annually depending on indicator. - Improving regulation quality and rule of law → growth payoffs about ½–1 percentage point. - Reducing corruption perceptions to SSA average → increase real GDP per capita growth by about 1½-2 percentage point annually. - Bringing governance to SSA average (SSA frontier) could raise non-resource revenue by about 1 (4) percent of GDP. - Caveats: realization depends on scope, quality and persistence of reforms; timing and policy specifics not identified; perceptions may lag real changes. ### Political Will, Legal Reform and Policy Priorities (selected) - Political leadership is critical; Government of President João Lourenço has taken early actions (dismissals, investigations, new anti-corruption unit). - Legal framework exists (Constitution 2010, Public Probity Law 2010, Public Contracting Law 2010 and amendment 2016, Private Investment Law 2015) but implementation and enforcement gaps remain. - Key policy priorities (selected from chapter): - Speed up and conclude legal reforms (Law on Competition, Private Investment Law); revise AML/CFT framework ahead of 2020 assessment. - Enforce existing laws effectively; strengthen judiciary capacity and independence. - Improve transparency and oversight of fiscal institutions; publish timely in-year and annual fiscal reports. - Strengthen PFM controls; clear domestic arrears and avoid recurrence. - Strengthen public investment management; use competitive procurement; require pre-feasibility and ex-post evaluation. - Increase SOE and oil-related institution transparency; consider EITI; strengthen ISEP capacity and autonomy. - Improve business climate: simplify work visas, reduce State footprint, unwind forex restrictions, improve public services for firms, support FDI. - Strengthen AML/CFT: enhance FIU capacity, investigations and prosecutions, comply with FATF 40 Recommendations, prepare for ESAAMLG mutual evaluation in 2020. - Strengthen anti-corruption agencies: equip with resources, grant autonomy, shield from political interference. - Build capacity in public investment management, tax administration, anti-corruption agencies, and institutions implementing AML/CFT measures. ### Appendix I — Simple Model of Bribery (mechanics and policy implications) - Decision framework: - Official offered bribe B; not taking bribe yields pay W and integrity value H. - If takes bribe: with probability p caught and with probability q convicted; share s recovered by State; pecuniary cost J; shaming cost H. - Utilities: - U(Not taking bribe) = W + H - U(Taking bribe) = p q [ s B − W − J − H ] + p (1 − q) [ W + B − H ] + (1 − p) [ W + B ] - Decision inequality (official takes bribe if U(Taking bribe) > U(Not taking bribe)): - B > [ 2 p q W + (1 + p) H + p q J ] / (1 − p q r), where r ≡ 1 − s. - Comparative statics: corruption more likely when B large, W and H low, J soft, p and q small, and r small. - Policy implications: adequate compensation, commensurate punishment, efficient enforcement, promote integrity to raise H, conditional role for wage increases. *Source: IMF staff (chapter "Oil Revenues in Angola: Tradeoffs and Opportunities" and related chapters, cr18157).* ### 1. Oil Fields in Angola ________________________________________________________________________ 6 ### 1. Oil Fields in Angola ________________________________________________________________________ 6 ### Introduction - Angola faces a trade-off between declining oil fiscal revenues over the medium term and increasing social and public investment needs. - Opportunities exist to utilize remaining oil reserves while reducing debt and building fiscal buffers; a sound fiscal framework with a well-designed fiscal stabilization fund may be needed. - Under a spend-as-you-go (SAYG) fiscal rule, falling oil production and volatile oil prices lead to declining revenues, volatile public investment, and rising debt. - Under a more active fiscal rule, public investment can be scaled up gradually while building fiscal buffers and insulating the non-oil economy from volatile oil price movements. ### Angolan Oil Sector: Developments and Relevance - Oil production and reserves: - Angola produced, on average, 1.632 million barrels per day (MMbbl/day) in 2017. - Proven reserves stood at 9.5 billion barrels in 2016. - Angola’s oil reserves are the 3rd largest in Africa and the 17th largest in the world (2016 data). - Production peaked near 2 MMbbl/day in 2008; production has since been flat and more recently begun to decline. - Current production levels are around 10 percent lower than their two-year average of 1.75 MMbbl/day since August 2014, and below Angola’s OPEC quota of 1.673 MMbbl/day. - Geographic and corporate structure: - Most production comes from offshore fields in Cabinda and deep-water fields in the Lower Congo basin. - Sonangol is the state concessionaire and national oil company; Sonangol has stakes in 32 out of the 36 oil producing blocks and is the 4th largest oil producer in the country (after BP, Total and Exxon). - Block 17 (operated by Total, Statoil, Exxon and BP) produced over 0.6 MMbbl/day of crude oil in 2016. - Sector challenges: - Structural decline from aging fields, years of underinvestment, and coordination problems between sector players and Sonangol. - The oil price collapse of 2014/15 exacerbated underinvestment issues. - Fiscal and external dependence on oil (2017): - The oil sector accounted for about 64 percent of tax revenues and over 95 percent of exports. - Public investment was 5 percent of GDP. - Public debt projected to reach 72.9 percent of GDP at end-2018. - Fiscal policy priorities identified: - Scale up public investment sustainably to support growth and reduce poverty. - Entrench public debt sustainability and reduce public debt. - Reduce dependence on oil revenues and better shield public spending from oil revenue volatility. - Possible measures: adopt a VAT on January 1, 2019 (as planned), and build fiscal buffers via a well-designed fiscal stabilization fund within a coherent medium-term fiscal framework (MTFF). ### Model - The IMF’s DIGNAR model (Debt, Investment, Growth and Natural Resources) is used to assess macroeconomic impact of different fiscal rules for Angola. - Model characteristics: - Small open economy general equilibrium model (Melina, Yang & Zanna (2016)). - Allows increasing returns to scale in public infrastructure, inefficiencies in public investment, and absorptive capacity constraints. - Flexible fiscal specifications: spend-as-you-go (SAYG), delinked approach with exogenous public investment path, and a resource/stabilization fund. - Economic structure in the model: - Three production sectors: oil (exogenous production and prices), non-tradable (labor, private capital, public infrastructure; Cobb-Douglas), tradable (identical production function plus learning-by-doing externality). - Two household types: perfect-foresight optimizers with financial access and hand-to-mouth consumers. - Government raises revenues via distortionary taxes (labor, capital, consumption), receives oil payments, issues domestic and foreign debt, and allocates to recurrent spending, public infrastructure investment, and debt service. - Fiscal rules modeled: - SAYG: all oil revenues each period fund public infrastructure investment; recurrent spending fixed; stabilization fund remains at initial level; taxes adjust endogenously for debt sustainability. - Delinked approach: public investment path determined exogenously and financed by oil revenues, debt issuance and non-oil taxes; surplus/deficit saved to/withdrawn from stabilization fund; government must choose path for public debt and non-oil taxation. - Tradeoffs captured: - Fund-building can insulate spending from volatile oil revenues. - Public infrastructure investment raises returns to private factors, can crowd out private investment, and is subject to inefficiencies (only a fraction of public investment converts to public capital). - Distortionary non-oil taxation affects non-oil economy by changing after-tax marginal returns to capital and labor and the steady-state level of consumption. - Calibration: - DIGNAR calibrated to Angolan data up to and for 2017; calibrated parameters shown in Table 1 (in source). ### Simulations — Oil Production and Price Scenarios - Oil production path assumptions: - Projected gradual decline by 2023 and an annual decline of 5 percent per year thereafter. - Assume oil production remains roughly constant at 1 .65 MMbbl/day until 2023 (Sonangol’s short-run projection, 1.650 MMbbl/day). - From 2023 onwards, baseline assumes annual decline of 5 percent per year. - Oil price path assumptions: - Use IMF Spring 2018 WEO projections to 2023; simulate AR(1) process to 2040 thereafter. - WEO path: pickup in Angolan basket to US$62.5 per barrel in 2018, followed by a gradual decline to US$54 per barrel by 2023. - AR(1) specification for t >= 2023: - pp_t = alpha + rho pp_{t-1} + epsilon_t, with epsilon_t ~ N(0, sigma_epsilon) - Estimated parameters (using data 2016–2023): - rho = .93 - baseline sigma_epsilon = 0. 1 - alternative scenario increases sigma_epsilon threefold to sigma_epsilon = 0. 3 (roughly the size of the shock to oil prices following the global crisis of 2007-08). - Purpose of scenarios: - Evaluate macroeconomic and debt sustainability effects of scaling up public investment under different fiscal rules given exogenous oil production and price paths. - Compare SAYG vs. delinked approaches and the role of a stabilization fund in smoothing spending and maintaining debt sustainability. *Source: IMF staff (chapter "Oil Revenues in Angola: Tradeoffs and Opportunities", May 2, 2018).* ### 5.2 percent between 2017 and 2023 and is a conservative assumption for the decline in production. ### cr18157 - 5.2 percent between 2017 and 2023 and is a conservative assumption for the decline in production. ### Oil production and price scenarios - Production expected to decline over time; baseline production scenario used for simulations covers 1990–2040. - Oil prices modeled as an AR(1) process; persistence term estimated as 휌 = .93 (statistically different from 1), producing behavior almost identical to a random walk. - After peaking at US$62.5 per barrel in 2018, the oil price gradually declines out to 2023 and is then subject to shocks out to 2040 in baseline simulations. - Stabilization fund initial level in simulations: 3 percent of GDP. ### Simulation 1 — Spend-as-you-go (SAYG) fiscal rule - Under SAYG all oil revenues finance public investment each period; stabilization fund remains at its initial level of about 3 percent of GDP. - Key projected outcomes under baseline falling oil production and volatile prices: - Government oil revenues (share of total revenues) decline from around 60 percent in 2017 to around 35 percent by 2040. - Public investment falls from 5 percent of GDP in 2017 to under 3 percent of GDP by 2040. - Debt rises steadily to around 75 percent of GDP by the end of the simulation period (after an initial fall in the first year). - To prevent faster debt rises, non-oil taxes must increase and remain highly volatile. - Non-oil output falls by between 10-12 percent compared to the initial level. - Falling private consumption and investment accompany higher distortionary non-oil taxation and falling public investment. ### Simulation 2 — Delinked approach with gradual scaling up of public investment - Public investment scaled up gradually from 5 percent of GDP in 2017 to 8.5 percent of GDP by 2040 (sub-Saharan average). - Under the delinked approach, public investment becomes much less volatile than under SAYG and the path for resource revenue is effectively replaced by the stabilization fund. - Three fiscal-rule variants modeled: 1. Passive tax policy — non-oil taxes respond as needed to keep debt on a non-explosive path. 2. Active tax policy — non-oil tax rates increased immediately from initially low levels to create fiscal space and build a stabilization fund. 3. Debt paydown — proceeds from gradual increases in non-oil taxes are used to prioritize debt paydown. - Outcomes by variant: - Passive tax policy: - Debt rises as public investment is scaled up; debt exceeds 70 percent of GDP towards the end of the simulation horizon. - Stabilization fund depleted in about five years. - Private consumption stable initially but declines sharply as non-oil tax rates increase. - Higher public capital crowds in private investment; non-oil output growth improves relative to SAYG. - Active tax policy: - Immediate, gradual rise in non-oil taxes allows building a stabilization fund that peaks at just over 7 percent of GDP by the mid-2020s. - Debt remains relatively stable and can be reduced to about 50 percent of GDP towards the end of the simulation horizon. - Consistently higher non-oil taxes lead to declining private consumption from the outset. - Debt paydown: - Initial excess oil revenues used to pay down debt rather than accumulate the stabilization fund. - Debt falls to around 40 percent of GDP by 2040, reducing debt service burden substantially. - Government can subsequently build a stabilization fund in years of high oil prices and run it down when prices fall. - Gradual increases in non-oil taxes lower consumption but higher private and public investment boost non-oil output growth. ### Fiscal policy lessons and recommendations (Concluding Remarks) - A sound MTFF with a stabilization fund would help (i) build a fiscal buffer to reduce vulnerability to declining oil revenues and (ii) insulate public investment from oil price volatility. - Prioritize growth-enhancing infrastructure investment and improve the business environment to yield significant growth benefits; public investment should increase gradually in line with absorptive capacity. - Improve public investment management to reduce inefficiencies, increase infrastructure quality, and maximize crowd-in of private investment. - Consider using part of oil windfalls to reduce public debt given projected public debt of 72.9 percent of GDP in 2018. - Implement structural fiscal reforms alongside the fiscal framework for oil revenues, including mobilizing domestic non-oil tax revenues (e.g., implementing a VAT) and increasing public investment efficiency. - Stabilization fund portfolio allocation should consider the high level of public debt when prioritizing the use of windfalls. ### Macro-financial linkages and banking sector impacts - Lower oil prices transmit to banks through fiscal revenue declines, payments arrears to government contractors, currency depreciation, tighter monetary conditions, and weaker borrower repayment capacity. - Asset quality deterioration and falling capital buffers have been more pronounced for state-owned banks. - NPLs in the sub-set of SSA oil exporters increased from an average of 5 percent in 2011 to 17¾ percent in Q3 2017. - Angola’s financial sector structure: - 30 banks, 24 insurance companies, six pension funds, three micro-credit institutions, and 89 foreign exchange bureaus. - Banks’ assets represent above 90 percent of the financial sector and are equivalent to 57.7 percent of GDP. - Bank ownership: 18 domestic private banks, nine foreign bank subsidiaries; public sector equity interests in about six banks; government directly controls three banks holding 11 percent of total assets; Sonangol holds minority stakes in seven banks. - Bank concentration is high: the largest five banks hold over 70 percent of both assets and deposits. ### Key calibrated parameters and selected steady-state values - National accounting long-run GDP growth rate (in percent): 6 - exports/GDP*100 (in percent): 27 - imports/GDP*100 (in percent): 26 - government consumption/GDP*100 (in percent): 17 - government investment expenditures/GDP*100 (in percent): 5 - private investment/GDP*100 (in percent): 4 - mining value added (natural resource production)/GDP*100 (in percent): 26 - government wealth fund/GDP*100 (in percent) (external savings): 3 - government domestic debt / GDP*100 (in percent): 30 - concessional debt/GDP*100 (in percent): 8 - government external commercial debt/GDP*100 (in percent): 22 - annualized domestic net real interest rate: 10 - annualized foreign net real interest rate earned by the stabilization fund: 2.7 - annualized net real risk-free rate: 4 - annualized net real interest rate paid on government external commercial debt: 7.3 - elasticity of output with respect to public capital: 0.15 - depreciation rate of public capital (in percent): 7 - investment adjustment cost parameter in the non-traded sector: 25 - steady-state efficiency of public investment (share of investment turned into actual capital) (in percent): 50 - Floor for the sovereign wealth fund (in percent of GDP): 0 - Natural resource sector royalty tax rate on natural resources (in percent): 20 - user fees of public infrastructure (in percent of recurrent costs): 50 *Source: IMF staff calculations and Angolan authorities as presented in the content unit.* ### 4. This chapter identifies macro-financial linkages, assesses the resilience of banks to ### 4. This chapter identifies macro-financial linkages, assesses the resilience of banks to ### B. Macro-Financial Linkages and Transmission Channels for Angola - Heavy reliance on oil: - During 2011–2013, fiscal dependence on hydrocarbons accounted for 75 percent of total fiscal revenue on average. - Oil exports’ share in total exports of goods and services was 97 percent (2011–2013). - Limited economic diversification amplifies vulnerabilities: - During 2000–2016, growth rates of government spending and non-oil GDP were much stronger during oil upturns than in downturns. - Oil upturns → higher oil revenues and exports → stronger fiscal and external positions → public spending growth → higher non-oil output growth, accumulation of reserves, and greater banking sector liquidity and credit growth. The reverse occurs in oil downturns. - Banks’ business models aligned with the oil sector: - Government owns a majority controlling stake in three banks. - State majority owned banks hold about 14.1 percent of GDP in banks’ assets and extend about 7.3 percent of GDP in loans. - State-owned banks channel most lending to the public sector and rely heavily on government deposits. - Private banks predominantly focus on corporate banking business and hold substantial amounts of government securities. - Figure-driven observations (textual): - Oil price and real variables, and oil price and bank liquidity series described for 2000–2016 show co-movement between oil price, non-oil GDP growth, expenditure, credit growth, and deposit growth. ### Transmission channels of the oil price shock to banks (summary) - Fiscal channel: - Lower oil prices → rising financing needs for government → issuance of securities at higher and attractive yields → banks invest in government securities → pickup in banks’ financial margins. - Government had a stock of about 4.5 percent of GDP in domestic payments arrears with its suppliers as of end-2017; these arrears contributed to deteriorating asset quality as suppliers defaulted on obligations with banks. - Government cutbacks in public investment reduced business for suppliers and construction companies → financing difficulties and higher NPLs. - Liquidity and funding channel: - Decline in oil prices → contraction of export earnings and cutback in public investment → sharp swings in banks’ liquidity. - Some banks returned to central bank financing facilities, leading to higher funding costs. - State-owned banks, financing a large share of investment projects, registered weaker profitability due to significant exposure to a common set of counterparties and limited ability to pass on higher funding costs. - Credit channel: - Falling oil prices weakened banks’ deposit base (large amounts of deposits sourced from oil-related activities and the government). - Government securities became more attractive → crowding out of private sector lending. - Loan-to-deposit ratio declined to 49.3 percent in December 2017. - Exchange rate and monetary policy channel: - Kwanza depreciation by over 40 percent from mid-2014 to April 2016. - Most Angolan banks had long positions in foreign currency and foreign currency indexed instruments → devaluation increased the kwanza value of these positions. - Inflation peaked at above 40 percent in 2016 → monetary policy tightened → contraction in aggregate demand → amplified liquidity and credit risks. ### C. Event Analysis of the Impact of the Oil Shock on the Banking Sector - Method: - Static event analysis using quarterly financial soundness indicators with period-t designated as beginning of oil price shock and observation of aggregates several quarters out. - Findings: - System-wide capital adequacy ratio (CAR) dropped from 22 percent in mid-2014 to 18.2 percent in mid-2016 but remained well-above the 10 percent minimum. - Percentage of banks with CAR below the regulatory minimum increased to 20 percent by mid-2015 from 4 percent before the crisis. - Asset quality deteriorated, initially delayed by evergreening and varied reporting standards. - Number of banks posting negative earnings increased in the wake of the crisis. ### D. Resilience of Angolan Banks to Macro-Shocks (Stress Testing) - Tool and scope: - Stress Tester 3.0 used for system-wide stress tests due to limited data granularity before IFRS migration in 2017. - Tests covered 11 banks accounting for 90 percent of deposits; banks grouped into large, medium, and small subsets. - Period covered: 2013–2016 (four years); tests focused on solvency and credit risk only. - Concentration risk from default of large exposures and sectoral shocks were not performed due to absence of granular data. - Assumptions for stress scenarios: - Actual oil price shock beginning in 2014 leading to fall in fiscal revenues and exports, stalling economic growth, inflation accelerating to above 40 percent. - Partial fiscal and exchange rate adjustment with exchange rate depreciating by more than 30 percent. - Resulting financial conditions: negative credit growth and NPLs deteriorating to over 20 percent of total loans. - Focus on credit risk: - Credit risk shock comprised an aggregate increase in NPLs via downgrade of classified loans across the entire credit spectrum. - Severity determined using historical elasticities of NPLs to GDP, exchange rate, and other macro variables and ad hoc shocks aligned with FSAP exercises in peer countries. - Stress test outcomes: - Capital position declines by 6 percentage points in 2013 but overall banks remain well-capitalized. - CAR would be around regulatory minimum, on aggregate, for 2014 if 20 percent of performing loans deteriorate across all streams; pressures emerge for medium sized and small banks. - Reflecting capital injections and improving profitability, capacity to withstand asset deterioration improves on aggregate to 1 percentage point above regulatory standards in 2015, but five out of eleven banks remain undercapitalized. - Given recapitalization efforts, situation improves for most banks in 2016 except for two out of three public banks. - Recapitalization needs and fiscal contingent liabilities: - Estimated recapitalization needs more than double from 0.2 percent of GDP in 2014 to about 0.7 percent of GDP in 2016, before escalating to 1.3 percent in 2017. - Upper bound for potential fiscal costs of bank problems in the stressful scenario are higher compared to expected values to be borne by private shareholders, indicating worse outcomes for state-owned banks and potential contingent liabilities for the budget. - Reverse stress testing: - Formula used: X={(RC+Inc)-(SRC*RWA)}/{(-SRC*PL*LLP)+(LLP*PL)} where X is the shock amount causing capital to fall below hurdle; RC is regulatory capital; SRC is stressed capital/hurdle rate; Inc is income; PL is performing loans; LLP is loan loss provisions; RWA is risk weighted assets. - Reverse stress test results: - System-wide share of performing loans that would cause CAR to fall below regulatory minimum narrows from 46 percent in 2013 to 22 percent in 2014. - By bank size: large banks 57 percent to 22 percent; medium-sized banks 30 percent to 8 percent; small banks 33 percent to 22 percent. - Recovery for large and small banks in 2015; continued narrowing for medium-sized banks. - Individual bank findings: - Some smaller banks (e.g., banks 4, 9, and 11) would require at minimum all their NPL portfolio (100 percent) to default before breaching minimum capital requirements. - Two of the three state-owned banks that are weakly capitalized and exposed to both the State and individuals encounter significant challenges, except for one of them in 2016 following a capital injection by shareholders. ### E. Managing the Sovereign-Banks Nexus - Conceptual links: - Sovereign and banks linked through direct and indirect channels: banks’ claims on sovereigns, semi-automatic links between sovereign and banks’ credit ratings, public backstops, collateral operations, and effects of fiscal distress on the economy. - Problems in banking sector can trigger pressures for the sovereign and vice-versa. - Key channels for Angola: - Bond-holding channel and safety-net channel. - Preliminary assessment of bond-holding channel conducted through sectoral balance sheet analysis. - Safety net analysis is based on panel regressions. - Data note: - Analysis used monetary and financial statistics, international investment position information submitted by the BNA to IMF Statistics department, and other information available to the Angola country team. - Considering that most external sector information is undergoing improvements/revisions, results ought to be interpreted with caution. ### The Bond-Holding Channel - (Heading appears as the next section title in the source; content beyond this heading is not included in the supplied excerpt.) *Source: cr18157 - 4. This chapter identifies macro-financial linkages, assesses the resilience of banks to* ### 22. A preliminary assessment of the bond-holding channel is conducted through a sectoral ### 22. A preliminary assessment of the bond-holding channel is conducted through a sectoral balance sheet analysis ### Sectoral balance sheet analysis — methodology and caveats - The analysis used monetary and financial statistics and information related to the international investment position, all submitted by the BNA through the IMF’s Statistics Department. - Considering that external sector information is still undergoing improvements, the results ought to be interpreted with caution. - Data points referenced: end-2013 and end-2016 positions (Figure 7). ### Key findings from sectoral balances (2013 vs 2016) - Banks’ exposure to domestic sovereign risk has risen: banks hold 21 percent of GDP in government debt. - Private sector exposure to banks (mainly deposits) is about 46 percent of GDP. - Banks typically generate less loans to the private sector than they collect in deposits: loans-to-deposit ratio is about 60 percent. - Bank asset allocation (ODC banking sector balance sheet): - Liabilities to the private sector: close to ¾ of total and equivalent to 46 percent of GDP. - Loans to private sector: about 21 percent of GDP. - Investment in government securities: 21 percent of GDP. - Placements abroad: 2.5 percent of GDP. - Reserve deposits with the BNA: 7 percent of GDP. - Central Government net asset position: negative net asset position of 56 percent of GDP due to indebtedness. - External liabilities: 37 percent of GDP (mostly loans). - Domestic liabilities: bonds held by banks (21 percent of GDP) and private corporations (17 percent of GDP). - Growing exposures between 2013 and 2016: - Government liabilities increased by about 20 percent of GDP. - Banks liabilities increased by about 20 percent of GDP. - Net asset position deterioration: government by 25 percent of GDP; banks by 10.5 percent of GDP. - Interpretation: increases align with fiscal pressures from lower oil prices and indicate banks’ assets have continued lower quality; banks hold bonds often indexed to the U.S. dollar with a two-year average maturity, suggestive of hedging against foreign exchange adjustments. ### Determinants of banks’ bond holdings — empirical approach - Data: annual macroeconomic and bank data for 11 banks over the period 2007–2016 sourced from the BNA; balance sheet and income statement information from the bankers’ association database. - Estimation: panel regression with both fixed effects (FE) and random effects (RE). - Dependent variable: TBs — banks’ government debt holdings in percent of total assets. - Regressors grouped as: - XB: bank-specific variables - XS: market structure variables - XM: macroeconomic variables - Summary interpretation: government securities are used to store liquidity and help manage portfolios; strong negative correlation with outstanding loans indicates banks with fewer bankable investment opportunities store funds in government securities. Oil price shocks exhibit negative relationship with government security holdings. Well-capitalized and profitable banks take advantage of higher availability of government securities. ### Determinants of bond holdings — selected regression results (Table 2) - Specification results reported for FE and RE (N109 observations). - Coefficients (preserved exactly as presented): - Loans: FE -0.8147*** (0.17); RE -0.6834*** (0.14) - Return on Equity: FE 0.1205** (0.05); RE 0.1375*** (0.05) - Market power: FE 0.9231** (0.42); RE 0.5594* (0.29) - Equity: FE 0.7415*** (0.27); RE 0.7618*** (0.24) - Inflation: FE 0.0240 (0.20); RE 0.0315 (0.20) - Oil price: FE -0.1279** (0.06); RE -0.1322** (0.06) - Significance notation: * p<0.10, ** p<0.05, *** p<0.01. ### Safety-net channel — public ownership and fiscal costs - Public sector equity interests in six banks (minority stakes) and direct government control of three banks that hold about 11 percent of banking system assets. - State-owned banks operate with explicit and implicit government guarantees, creating bidirectional sovereign–bank spillovers. - Since the oil price shock: - Government spent about 4 percent of GDP in recapitalizing such banks. - Costs are expected to be above 1 percent in 2018 (Figure 8). - Panel regression of banks’ profitability: - Data: annual macroeconomic and bank data for 11 banks over 2007–2016 from the BNA; Bankers’ Association database for balance sheet and income statements. - Estimator: Arellano-Bond (1991) System GMM dynamic specification to remove panel-specific heterogeneity. - Dependent variables: return on assets and return on equity. - Regressors: bank-specific, market structure, and macroeconomic variables. - Results summarized in Appendix 3 (tables reported below). ### Determinants of banks’ performance — selected regression results (Table 3) - Estimation methods: Robust SGMM for Return on Equity and Robust GMM/GMM for Return on Assets; various columns reported (N8194, 8194?, 8194/8194 and 8194/8194 formatting preserved in source). - Selected coefficients (preserved exactly as presented with standard errors in parentheses): - lnSize: 0.5842 (0.36); -0.5888** (0.25); 8.5453 (7.94); -0.3477 (3.43) - lnEfficiency: -4.1282*** (0.39); -4.1320*** (0.21); -46.2120*** (6.90); -45.7871*** (2.94) - lnOpExp: -0.6653** (0.30); 0.3748* (0.22); -13.8812** (6.67); -6.9446** (3.19) - Market power: -0.0095 (0.02); -0.0142 (0.02); -0.1274 (0.42); 0.5086** (0.22) - Equity: 0.1089*** (0.04); 0.1042*** (0.02); -1.0297 (0.66); -1.1321*** (0.28) - Inflation: 0.0308*** (0.01); 0.0327*** (0.01); 0.4442*** (0.14); 0.5061*** (0.12) - Oil price: -0.0105*** (0.00); -0.0124*** (0.00); -0.1223 (0.08); -0.0879** (0.04) - GDP growth: 0.0613*** (0.02); 0.0986*** (0.02); 0.5198 (0.60); 0.6487** (0.27) - L.Return on Assets: -0.0249 (0.03); 0.0808** (0.03); -0.0746 (0.11); 0.0079 (0.04) - Interpretation of coefficients and signs: - Bank-specific: equity coefficient positive and significant → well-capitalized banks experience higher returns. - Inefficiency (costs/net interest income) associated with weak performance (lnEfficiency negative and significant). - Positive sign on operational expenses suggests banks can pass costs to the market through high spreads. - No conclusive evidence that market power influences bank returns consistently. - Macroeconomic variables: - Inflation has positive effect on bank profits. - Output growth positively impacts bank profitability. - Lower oil prices don’t seem to lead to poor bank profits — possibly due to sovereign–bank nexus where oil crises increase government financing needs and bond holdings, and lead to increased margins for commercial banks. ### Recredit (Asset Management Company) — operational aspects and concerns (Appendix I) - Recredit established on August 4, 2016; wholly owned by the State with powers and obligations exercised by the Ministry of Finance. - Mission: acquire, restore, and revitalize nonperforming loans (NPLs) to contribute to financial system stability and development. - Governance: Board of Directors comprising 3 members including three from fiscal authorities; not yet subject to regulation and supervision. - Original mandate: conduit for disposal of NPLs amounting to Kz201 billion (out of estimated Kz705 billion as of May 2016) from BPC’s balance sheet. BPC: systemic state-owned bank with about 17 percent of banking system’s assets; openly insolvent and suspended lending in mid-2015. - Expanded mandate (late 2016): acquire impaired but recoverable loans from the entire banking system to free up lending capacity. - Recredit negotiated NPL purchases of about Kz300 billion with BPC and is engaging with five additional banks to acquire about Kz180 billion more. Key design and operational concerns for Recredit: - Capacity to price NPLs at market value is limited; plan to purchase impaired loans at an average discount of 75 percent faces valuation challenges due to poor loan records, lack of documentation, weak collateral appraisal, limited staff capacity, and weak cash-flow recovery prospects in a weak economy. - Broader mandate questionable: about 80 percent of NPLs concentrated in state-owned banks; scope expansion to private banks risks moral hazard and undermining credit discipline; recovery of investment projects requires significant expertise and time. - Lack of political autonomy: wholly state-owned structure risks political pressure and disposition of assets skewed to political connections. - Legal obstacles: basis for clean transfer of titles not fully guaranteed in Law; enforcement and foreclosure impeded by slow judicial system; insolvency proceedings can delay restructurings. - Borrower-initiated NPL sales: process can be initiated by borrower or bank; borrower initiation (uncommon) creates opportunities for rent-seeking and incentives toward loan default. - Incentives and lifespan: Recredit has no predetermined lifespan, risking becoming politically-driven “warehouse for NPLs”. - Resource allocation and fairness: open bank assistance and purchases from private banks without clear allocation guidance could create trade-offs and unintended consequences. - Limited support and interaction with BNA; Recredit would benefit from more exchange of information and technical skills. ### Concluding remarks and policy recommendations (Section F) - Overall assessment: - Significant heterogeneity among Angolan banks; performance intertwined with oil price cycle. - Heavy reliance on oil provides resilience for private banks but key risks for state-owned banks. - Main transmission channel: fiscal activity — lower oil prices constrain public spending and weaken non-oil GDP, affecting credit and liquidity depending on bank-specific strengths. - Some banks diversify into government financing during oil shocks, leaving banks vulnerable to sovereign distress and crowding out private lending. - Multiple interacting channels in the sovereign–bank nexus require holistic policy measures. - Policy recommendations (preserved wording and ordering): - Ensure that both banks and sovereign balance sheets are stronger to reduce the probability of sovereign distress while bolstering banks’ ability to withstand shocks and to avoid a strong nexus acting as a transmitter or amplifier of financial stress with adverse feedback loops for credit and liquidity. - Monitor closely excessive holdings of government securities to avoid creating a captive market that discourages prudent fiscal behavior and constrains the development of capital markets as a viable alternative for investments. - Enhance surveillance for timely identification of risks and policy responses, including by gauging the underlying soundness of banks through strong supervision including asset quality reviews and stepping up efforts to upgrade risk management practices to avoid a recurrence of rising NPLs. - Develop public-private loss sharing arrangements that entrench more powers to constrain public sector support making interventions smaller, temporal, and time bound. In this regard, reverting Recredit to its original mandate and adding a sunset clause to its operations could potentially limit contingent liabilities for the government. - Ensure that undercapitalized banks implement action plans to comply with requirements and closely monitor their implementation. *IMF staff assessment as presented in the chapter.* ### 1. The Government of President João Lourenço elected in August 2017 is taking vigorous ### 1. The Government of President João Lourenço elected in August 2017 is taking vigorous ### Overview and purpose of the chapter - Studies the link between governance and economic performance in Angola. - Identifies areas of weak governance using several governance indicators across time and relative to peers. - Assesses possible macroeconomic implications of weak governance and corruption in Angola. - Discusses past and ongoing governance reforms, including main actions taken so far by the new administration. - Concludes with a summary of suggestions going forward. ### Key contextual developments (new administration) - The Government of President João Lourenço (elected in August 2017) has prioritized improving governance. - In the first six months since taking office the President dismissed many public officials and launched investigations into possible malfeasance at several public entities. - A specialized anti-corruption unit was created as the executive branch’s key agency with a mandate to prevent and repress corruption-related crimes. - The government is revamping the legal framework to improve competition in domestic markets and attract FDI; if implemented effectively, these changes "would improve transparency and level the playing field and thus bode well for private sector development and growth." ### Definitions and conceptual framework - Governance: “institutions, mechanisms, and practices through which governmental power is exercised in a country, including for the management of public resources and regulation of the economy.” (Fund definition cited) - “Good” governance: a normative concept referring to the “quality of governance” and its impact on outcomes. - Corruption: defined here as “the abuse of public office for private gain.” (consistent with UN Convention Against Corruption) - Corruption is associated with State functions—particularly public finances and government regulation—and is linked to distorted incentives, lack of accountability, and reduced transparency. ### Channels through which weak governance and corruption affect the economy - Corruption acts like a distortionary tax on the private sector, raising costs of production. - Diverts resources from productive uses into rent-seeking and less growth-enhancing activities (e.g., “white elephant” projects). - Impedes revenue mobilization by weakening tax compliance. - Inflates expenditure-side costs when public financial management (PFM) controls are weak. - Distorts public expenditure toward areas vulnerable to graft, such as public procurement. - Undermines accountability and creates opportunities for misappropriation of public funds when fiscal transparency is insufficient. - Burdensome regulation and red tape create opportunities for corruption, which discourages private investment. - Weak enforcement of property rights and legislation creates uncertainty for private investors. - Weak AML/CFT frameworks allow proceeds of corruption to be concealed and can undermine financial sector integrity and capital flows. ### Indicators and methodology used - Relies on Fund staff assessment complemented by third-party indicators (TPIs): - Aggregate governance measures: Kaufmann and Kraay’s Worldwide Governance Indicators (WGI) and International Country Risk Guide’s (ICRG) Political Risk Rating. - Ease of Doing Business Indicators (DBI). - Corruption perceptions: WGI’s Control of Corruption Indicator (CCI) and Transparency International’s Corruption Perceptions Index (CPI). - Indicators normalized to 0-100 for cross-country comparison (0 weakest/highest corruption, 100 strongest/lowest corruption). - Notes on TPIs: cover different countries/time periods, are highly correlated, but have limitations (perception-based, subject to methodological changes). ### Stocktaking — Fiscal governance (findings) - Fiscal transparency shortcomings: - Timeliness and quality of government finance statistics are weaker than expected for Angola’s level of per capita income. - Consolidated and detailed fiscal data (including on non-oil revenues and government expenditures) are not published during the fiscal year. - Data on oil fiscal revenues published monthly, but more detailed reports are quarterly and with a long lag. - These shortcomings prevent timely monitoring of budget execution and hinder identification and analysis of looming fiscal risks. - Consequences include unnecessary uncertainty for investors and potentially unfavorable perceptions of sovereign risk (e.g., lower credit ratings and higher borrowing costs). - Budget process and oversight: - Until mid-2000s, budget preparation and implementation lacked transparency, scrutiny, and citizen participation. - Publication of the budget proposal and Fund-supported program measures improved scores in international surveys, but in-year oversight by the National Assembly remains weak. - Supreme Audit Court (Tribunal de Contas) issues ex-post audit reports on the yearly General State Accounts, but audits do not cover all government entities and there is little evidence of follow-up on audit recommendations. - Angola’s overall transparency score remains below peers’. - Oversight of state-owned enterprises (SOEs): - Public Enterprises Oversight Institute (ISEP) has been unable to enforce good corporate governance across SOEs. - Not all SOEs submit annual accounts to ISEP; many that submit do not have their accounts in order. - Example: only 8 out of 57 SOEs that submitted accounts in 2014 had their accounts approved without qualifications (ISEP). - SOEs are not part of the perimeter of government finance statistics and remain a source of potential contingent liabilities for the State budget. - Expenditure control and arrears: - Progress made toward more effective expenditure control with Fund TA: large domestic payments arrears accumulated up to 2014 were cleared. - New arrears accumulated due to weak internal controls, cash-flow pressures from lower oil prices since mid-2014, and spending pressures in the run-up to the August 2017 elections. - Outstanding stock of domestic payments arrears is estimated at 4½ of GDP at end-2017. - Weak expenditure controls undermine credibility of fiscal accounts and budget planning and create opportunities for corruption. ### Public investment management (findings) - Legal and institutional framework improvements: - Public Investment Law 31/10 and Public Contracting Law 9/16 exist. - Five-year national development plans (PNDs) identify priority investments and define performance indicators for large projects (Projectos Estruturantes). - PNDs integrated with sectoral/regional plans and part of “Angola 2025”. - Information system SIPIP and National Directorate of Public Assets (DNPE) established. - Remaining weaknesses and vulnerabilities: - Effectiveness remains low due to lack of multiyear budgeting, weak project appraisal and selection, and public procurement vulnerabilities. - Pre-contracting phase: no requirement to conduct pre-feasibility studies. - Contracting phase: use of non-competitive bidding (Concurso Limitado, Negociação) and reliance on a limited number of regular contractors. - Execution phase: frequent amendments to public contracts often entailing large increases in contract value. - Post-execution phase: absence of ex-post performance assessment as required by law. - Budget units of most line ministries suffer from inadequate capacity. - Investment efficiency: - Public investment was about half of total investment in the decade prior to the 2014–15 oil price shock — one of the largest shares in the SSA region. - Quality of public investment was low; weak public investment management and low-quality infrastructure limited closure of bottlenecks and failed to generate stronger externalities to boost private investment. ### Market regulation and tax administration (findings) - Paying taxes is burdensome in Angola. - Tax Administration (AGT): - New tax authority (AGT) operationalized in 2015. - AGT has a large taxpayer office (LTO) covering about 400 large companies which account for over 50 percent of non-oil fiscal revenue. - AGT is increasing the use of information technologies: electronic portal (portal do contribuinte) for corporate tax returns, Automated System for Customs Data (ASYCUDA), and automated tax administration system (SIGT). - Remaining AGT shortcomings: - Too many obstacles to paying taxes remain, making tax administration vulnerable to corruption. - AGT faces lack of compliance with risk management practices, lacks an appropriate performance management framework, and requires a clearer organizational separation of roles and responsibilities. ### AML/CFT (findings and progress) - Legal framework: - Main AML/CFT law enacted in 2011 (Lei 34/11), criminalizing money laundering and financing of terrorism and including preventive measures. - 2014 Law on Criminalization of Money Laundering Predicate Offences (Lei 3/14) designates corruption among the predicate offences for money laundering, extending to passive and active corruption, trading in influence, and corrupt acts outside Angola. - Institutional developments: - Financial Information Unit (FIU) operationalized in 2015 but under-resourced and faces capacity constraints to execute core functions (identify, assess and disseminate suspicious transactions). - International assessment: - FATF identified Angola in February 2010 as a country with strategic AML/CFT deficiencies. - Angola underwent an assessment in 2011–12 and remained on FATF’s ‘grey list’ due to strategic deficiencies. - In February 2016, Angola was removed from the FATF’s monitoring process after making sufficient progress on technical items of its action plan. - Angola is scheduled to undergo its second mutual evaluation in 2020 against the revised 2012 FATF international standards. ### Empirical correlations and data notes - Pairwise correlations for SSA, 2005–16 (as presented): - Governance WGI with ICRG: 0.88 - Governance WGI with CCI: -0.91 - Governance WGI with CPI: -0.94 - ICRG with CCI: -0.78 - ICRG with CPI: -0.75 - CCI with CPI: 0.97 - Notes on indicators: - Aggregate WGI used in the chapter combines six components: voice and accountability, political stability, government effectiveness, regulatory quality, rule of law and control of corruption. - TPIs help provide a general view of governance and corruption relative to peers but are subject to limitations (perceptions-based, methodological changes). _Prepared by Nelson Sobrinho (AFR)._ ### 19. However, Angola is still perceived as a higher risk jurisdiction. T he loss of direct U.S. dollars ### cr18157 - 19. However, Angola is still perceived as a higher risk jurisdiction. T he loss of direct U.S. dollars ### Perception, correspondent banking relationships, and AML/CFT weaknesses - Loss of direct U.S. dollars correspondent banking relationships (CBRs) was partly attributed to weaknesses in the AML/CFT framework and the perception of Angola as a higher risk jurisdiction, including with regards to corruption. - Other factors contributing to the loss of CBRs include retrenchment by global banks since the global financial crisis, regulatory demands, and banks own risk management requirements (IMF, 2017b). - Identified AML/CFT weaknesses: - Legal deficiencies that make difficult to hold domestic politically exposed persons (PEPs) accountable. - Insufficient risk-based supervision of financial institutions (IMF, 2017b). - Need for a more structured or systematic understanding of AML/CFT risks in the banking sector, including by applying a risk classification between distinct types of banks (e.g., between foreign banks and those owned or controlled by domestic PEPs). ### Overall governance: levels and evolution - Angola’s overall governance is weak relative to peers, scoring low compared to countries in SSA, countries with similar income per capita, and oil exporters. - Angola’s score is typically at the bottom quartile of the distribution of many measures of governance. - Angola performs more favorably in the ICRG indicator—around the SSA average—in part reflecting its stable political environment since the end of the civil conflict. - The long civil conflict destroyed physical and human capital and undermined the State’s ability to perform its normal functions; state-building accelerated after 2002. - Angola improved governance in the last decade but not fast enough to catch up with the SSA average as other SSA countries also improved governance over the same period. ### Government regulation, rule of law, and business climate - Angola’s scores are low in many aspects of governance, including: - Government effectiveness (capacity to formulate and implement sound policies). - Rule of law and enforcing contracts (ability to respect laws and contracts, secure and enforce property rights). - Registering property (government’s ability to provide basic public services efficiently). - Progress made was insufficient to bring Angola closer to the regional average in important dimensions: - Improved government effectiveness, but less progress in rule of law, registering property, and enforcing contracts. - Inefficient judiciary and ineffective system for conflict resolution in the private sector are partly responsible for weak performance on enforcing contracts and registering property. - Business-related burdens: - Dealing with tax officials or getting a license or permit are perceived by business people as burdensome compared to peers. - High costs of doing business reflect multiple factors: cumbersome regulation, excessive State intervention, barriers to FDI, and a work visa policy that constrains the inflow of skilled workers. - Angola is in the group of countries with most unfavorable governance and business climate and scores in the World Bank’s Ease of Doing Business survey are below most oil exporters and non-oil exporters in SSA such as Botswana and Namibia. - Weak governance and challenging business climate create opportunities for corruption and entrench vested interests. ### Corruption perceptions and firm surveys - Corruption perceptions in Angola are higher compared to peers; normalized scores of corruption perceptions compare unfavorably across most corruption indicators and comparator groups. - In the last decade, corruption perceptions improved considerably in many SSA countries but less so in Angola; perceptions remained high and stagnant in the post-civil conflict period. - Surveys of firms and business people confirm aggregate perceptions: - Corruption is reported by firms as a relevant obstacle to doing business in Angola. - Many firms report paying bribes or being requested a bribe in exchange for government transactions. - Firms’ corruption perceptions are about two to three times higher in Angola than in comparator groups. - Chinese entrepreneurs survey findings: - Chinese business people rate corruption as their top concern, with almost 60 percent reporting corruption as a relevant barrier to doing business. - In five of the eight countries surveyed, 60–87 percent of the Chinese firms admit they must pay bribes to obtain basic government services such as licenses (McKinsey, 2017). - Selected firm-level corruption statistics (Percent averages, sample of 122 countries) reported for Angola versus comparators: - Angola: Biggest constraint 28.9; Major constraint 75.6; Bribery incidence 51.3; Bribery depth 42.9. - Sub-Saharan Africa: Biggest constraint 8.2; Major constraint 40.2; Bribery incidence 24.1; Bribery depth 18.5. - Lower-Middle Income: Biggest constraint 9.3; Major constraint 37.6; Bribery incidence 24.5; Bribery depth 19.7. - Oil Exporters: Biggest constraint 10.3; Major constraint 42.0; Bribery incidence 26.6; Bribery depth 21.6. ### Macroeconomic impact and estimated gains from reforms - Literature evidence: - Weak governance and corruption perceptions hinder investment and growth (Mauro, 1995; Tanzi and Davoodi, 1997; IMF, 2016; Baum et al, 2017). - Meta-analysis (Ugur and Dasgupta, 2011): a one-unit improvement in corruption perceptions (roughly one standard deviation) increases annual GDP per capita growth by about 0.6 percentage point in LICs, and almost 0.9 percentage point in a mixed sample. - IMF (2018) finds similar growth gains: ¼-1½ percentage point for governance and ¼-2 percentage points for corruption perceptions, depending on method and sample. - Estimated potential gains for Angola (based on elasticities from Fund staff, Hammadi et al, 2018, using ICRG, WGI, CCI, CPI indicators): - Improving Angola’s quality of governance to the SSA average could increase real GDP per capita growth by about ¾-1¼ percentage point annually, depending on the governance indicator used. - Improving specific aspects of governance such as the quality and effectiveness of government regulation and the rule of law could yield growth payoffs of about ½–1 percentage point. - Reducing Angola’s corruption perceptions to the SSA average could increase real GDP per capita growth by about 1½-2 percentage point annually, depending on the corruption perceptions indicator used. - More ambitious targets (e.g., bringing Angola to the SSA frontier) could deliver larger gains. - Fiscal and broader economic effects: - Bringing Angola’s governance to the SSA average (SSA frontier) could raise non-resource revenue by about 1 (4) percent of GDP, based on estimates following Fenochietto and Pessino (2013) and SSA samples. - Stronger governance and lower corruption would help strengthen revenue mobilization, reduce wasteful spending, create fiscal space to mitigate social inequalities and enhance human capital formation, and encourage investments for export diversification and improved product quality—creating a virtuous cycle of growth, lower output volatility, and greater macroeconomic stability. - Caveats on realizing gains: - Realizing growth payoffs depends on the scope and quality of reforms and whether reforms are sustained over time (no policy reversals). - Simulations do not identify specific policies or precise timing of impacts. - Changes in corruption perceptions do not necessarily reflect actual changes in underlying variables and it could take several years for governance reforms to affect economic performance. - Reform proposals and ongoing reforms, including those initiated by the Government of President João Lourenço, are important steps toward materializing estimated growth gains. *Source: IMF staff assessment as presented in the supplied chapter content.* ### 32. Political will is critical for successfully implementing governance and anti-corruption ### 32. Political will is critical for successfully implementing governance and anti-corruption reforms ### Political leadership and context - Relevant pillars of Angola’s framework for combating corruption and improving governance have been put in place since the end of the civil conflict. - In 2009, former President José Eduardo dos Santos declared “zero tolerance” for corruption but efforts to fight corruption continued to lack decisive political ownership. - The Government of President João Lourenço elected in August 2017 seems committed to strengthen governance and fight corruption. - Before taking office, the President pledged to improve the business environment to attract FDI, increase the transparency about the way the government conducts its affairs, and fiercely fight corruption and adapt the banking system to international standards. - Actions taken include many dismissals of public officials and investigations launched into possible malfeasance at several public entities (Appendix IV summarizes key actions taken so far). - International experience: political leadership was key in cracking down corruption in Botswana, Estonia, Georgia, Hong Kong, Singapore, South Korea, and Rwanda (Svensson, 2005; Terracol, 2015), but leadership must be complemented by sustained reforms (Terracol, 2015). ### Improving and enforcing legislation - Angola has put in place a legal framework to strengthen governance in public administration: - The 2010 Constitution has provisions supporting transparency in public administration and against corrupt behavior by the President. - Public Probity Law (2010) has norms of conduct for public officials. - Public Procurement Law (2010) promotes transparency in the procurement process and includes provisions against corruption. - Anti-money laundering laws (2011, 2014) contain provisions against corruption. - Private Investment Law (2015) sought to ensure predictability for investors and property rights. - Key features of existing laws: - Constitution: requires the State budget to obey the principles of transparency and good governance, be audited by the National Assembly and the Audit Court; includes the fight against corruption among key principles guiding Angola’s foreign relations; lists corruption among crimes that could lead to removing the President from office. - Public Probity Law (Lei 3/10): criminalizes acts such as receiving bribes or kickbacks, theft of State assets; punishments include fines, seizure of illegal gains, temporary (up to ten years) exclusion from public bidding, temporary (up to eight years) loss of political rights, and criminal penalties (jail time); violations of budget execution rules are punishable with imprisonment; requires public officials to report their assets when first assuming public office and at every two years thereafter. - Public Contracting Law (Lei 20/10): contains provisions to improve transparency, impartiality, probity and ethical behavior in procurement; criminalizes both passive and active corruption; prohibits public officials from participating in procurement with conflict of interest; unlawful acts punishable with imprisonment, administrative and disciplinary actions, and exclusion from public bidding for up to five years. - 2016 amendment of the Public Contracting Law (Lei 9/16): simplified contracting procedures; adopted two main forms for awarding public contracts (direct contracts and more competitive open tenders) whose minimum threshold was increased threefold; aimed to prevent unethical behavior and recommended procurement portal, centralized supplier database, a Technical Procurement Agency, and standardized bidding documents (AfDB, 2014). - Private Investment Law (Lei 14/15, revised 2015): ensures against expropriation, grants conditional fiscal incentives, includes provisions against unlawful practices by foreign investors, penalties for tax evasion, and for violating tax incentives rules; the law does not include any provisions against active and passive corruption affecting FDI. - Remaining legal and implementation gaps: - Angola signed (2003) and ratified (2006) the United Nations Convention Against Corruption but legislation does not cover all corruption crimes defined by the Convention (World Bank, 2012). - Remaining legal deficiencies in the AML/CFT that make difficult to hold domestic PEPs accountable; domestic PEPs are not fully within the AML/CFT legal framework. - Implementation of the asset disclosure provision under the Public Probity Law has been uneven (World Bank, 2012); declarations are provided in a sealed envelope that can only be opened if authorized by a Court and the public official has been prosecuted for a crime. - Angola lacks effective enforcement of laws enacted so far (Feijó and Nadorff, 2014); must enforce anti-corruption laws, prosecute and convict corrupt officials, and recover stolen proceeds. - The judiciary is typically understaffed, slow, overburdened by a large backlog of cases, and not adequately equipped to prosecute corruption in the public administration. ### Strengthening fiscal governance - Increase tax compliance and reduce vulnerability of AGT to fraud and corruption: - Organizational restructuring with clearer separation of roles and responsibilities. - Measures considered: a specialized team to manage tax and customs arrears; an anti-fraud department to combat frauds and organized crimes (coercive compliance); a taxpayer service to promote voluntary compliance. - Replace paper-based processes with modern information technologies; ASYCUDA and SIGT implementation needs complementing actions: increase integrity of taxpayer registration; strengthen the LTO; improve on-time filing ratios; strengthen tax audits and verification programs; reduce customs post-clearance control while improving other customs functions. - Public investment quality improvements (actions within existing system): - Greater use of open tender Concurso Público to reduce overpricing and collusive behavior. - Enforce Decreto Presidencial 320/11 (2011) that prevents unjustified amendments to contracts exceeding 15 percent of the contract’s original value. - Support the Audit Court to exercise its authority and ensure compliance with its recommendations. - Conduct project evaluations and require pre-feasibility studies for large projects. - Enhance technical capacity at line ministries. - Transfer of public investment project portfolio to the Ministry of Finance to reduce coordination problems. - Expected gains: - Strengthening public investment management could close up to two-thirds of the “efficiency gap” (IMF, 2015c) and reduce opportunities for corruption, especially in public procurement. - Public Financial Management (PFM) priorities: - Clear existing stock of domestic payments arrears and avoid recurrence by enforcing internal control mechanisms, holding officials accountable for violating budget execution rules, and improving cash flow management. - Enforce budget ceilings and avoid reallocating spending across main types of expenditure without National Assembly approval. - Strengthen budget oversight by the National Assembly and the Audit Court; increase coverage of government entities audited by the Audit Court and follow up on its recommendations. - Enhance fiscal transparency by publishing in-year and annual fiscal reports on a timely basis and improving government finance statistics. - Medium-term fiscal framework: - A credible MTFF is needed to assess spending needs associated with maintaining and running investment projects once completed; new projects should be approved only if there is fiscal space for future current spending needs (IMF, 2017b). - With Fund TA support, authorities developed an ambitious work program to implement a full-fledged MTFF by 2019, aiming to strengthen capacity, improve collaboration across government agencies, improve budget processes, and formulate a fiscal responsibility law. - Oil wealth and SOE transparency: - Consider signing up for Extractive Industries Transparency Initiative (EITI) and comply with recommended good practices in contracts, licenses, and oil revenue allocation. - Audited financial statements of all SOEs should be timely and regularly published as required by law. - Strengthen capacity and autonomy of ISEP to perform oversight, hold noncompliant SOEs accountable, monitor timely financial situations, assess dividend performance, subsidy and capital injection needs, and potential contingent liabilities. ### Improving the business climate - Complement public investment reforms with measures to support private investment and diversification: - Simplify and expedite issuance of work visas. - Reduce the large State footprint in the economy. - Eliminate imbalances in the forex market, including unwinding administrative measures and restrictions (IMF, 2017b). - Lower constraints to FDI in the 2015 Private Investment Law. - Improve basic public services (licensing procedures, registering property, enforcing contracts). - Increase effectiveness of export- and investment-promoting agencies. - Recent legislative reforms that, if implemented effectively, would support private sector development: - Revision of the Private Investment Law: a draft law reform approved by the National Assembly in a first-round vote would remove the requirement for foreign investors to identify a local partner to invest in priority sectors, eliminate minimum levels of FDI, and establish stronger sunset clauses for tax incentives; creation in early 2018 of a one-stop shop for investors (AIPEX) could support FDI attraction if effective. - A new Law on Competition: a law recently approved by the National Assembly would lay legal foundations for promoting greater competition and establish an anti-trust authority. ### Strengthening the AML/CFT framework - Angola should further enhance its AML/CFT framework, including to regain CBRs. - The use of alternative payment channels has mitigated the loss of CBRs but a durable solution requires strengthening supervisory, prudential, and AML/CFT frameworks. - Implement preventive measures for domestic PEPs and enhance risk-based supervision of financial institutions and designated non-financial businesses and professions ahead of the next AML/CFT evaluation in 2020 (IMF, 2017b). - Additional actions: - Strengthen capacity of the FIU to perform core functions. - Build capacity in investigation and prosecution of money-laundering crimes. - Comply with the FATF 40 Recommendations in preparation for the Eastern and Southern Africa Anti-Money Laundering Group (ESAAMLG) mutual evaluation assessment scheduled for 2020. - Fund TA will help enhance legal framework and risk-based supervision ahead of the ESAAMLG assessment. - A positive assessment may help prevent Angola reverting to the FATF list of jurisdictions with strategic deficiencies in AML/CFT and may help convince banks to re-establish direct U.S. dollar CBRs in Angola in the future. ### Strengthening anti-corruption agencies - Angola does not have a centralized anti-corruption agency. - Investigation of corruption crimes is currently done by a small unit within the Office of the Attorney General—the National Department for Prevention and Suppression of Corruption (DNPCC)—created in 2012. - DNPCC must collaborate with other agencies: the Audit Court, the Inspector General of State Administration (IGAE), the Ministry of Interior’s Criminal Investigation Service (SIC), the National Department for Criminal Investigation and Prosecution (DNIAP), and the FIU (United Nations, 2017). - Capabilities and autonomy: - The Audit Court is the supreme auditing institution with authority to initiate investigations and is perceived to possess extensive powers (Chêne, 2010). - IGAE is an investigative unit that answers directly to the Office of the President; a recent episode involving high-level officials of the previous administration raises concerns about IGAE’s autonomy and independence. - Authorities have acknowledged that DNPCC is too small and ill equipped to perform its tasks effectively. _Source: cr18157_ ### 56. Strengthening existing anti-corruption agencies should be considered. The Attorney- ### 56. Strengthening existing anti-corruption agencies should be considered. The Attorney-General’s Office, for example, noted that revamping existing units, especially DNPCC, could be easier than creating new anti-corruption agencies. ### Recent institutional developments - In 2017, IGAE was ordered to archive all investigations of potential wrongdoing by public officials during 2013–17. - In March 2018, President João Lourenço created a specialized anti-corruption agency within the Ministry of Interior: the Department for Combating Corruption Crimes, organized under SIC (an arm of the Ministry of Interior tasked with combating economic crimes). - The Department for Combating Corruption Crimes is intended to be the executive branch’s key agency to prevent and repress corruption crimes; its role and responsibilities overlap with those of DNPCC. It is unclear whether both departments would coexist or be merged eventually. ### Expected macroeconomic effects of sustained reforms - Ongoing reforms, if sustained and complemented by other reforms discussed in the chapter, could help support higher growth by: - Improving Angola’s governance and reducing vulnerabilities to corruption. - Increasing the legitimacy of public institutions, lowering rent-seeking activities, and creating a level-playing field for the private sector. - Improved public investment management that would help crowd in private investment. - A better framework for supporting private investment and attracting FDI that would further catalyze private sector development. - Bringing Angola’s quality of governance and reducing corruption perceptions to the SSA average could increase real GDP per capita growth by up to 2 percentage points annually. ### Concluding policy priorities (selected from paragraph 60) - Speeding up and concluding ongoing legal reforms: - Bring legal and regulatory frameworks in line with international standards by implementing ongoing legal reforms (e.g., Law on Competition, and Private Investment Law). - Revise the existing AML/CFT legal framework and demonstrate successful implementation in preparation for the upcoming assessment in 2020. - Enforcing existing laws effectively: - Enforce effectively the existing anti-corruption and AML/CFT frameworks and budget and procurement laws. - Equip the judicial system with resources and independence to play its role efficiently. - Improving transparency and oversight of fiscal institutions: - Enhance the transparency of budget processes, and publish detailed in-year and annual fiscal reports on a timely basis. - Give citizens opportunities to engage in the budget process, especially during the budget preparation phase. - Legislative and audit institutions should exercise effective oversight of the State budget and government entities and ensure implementation of their recommendations. - Strengthening PFM controls: - Enforce existing internal controls to prevent recurrence of arrears. - Optimize public procurement, including by using competitive bidding and reducing contract uncertainty. - Improve the quality and credibility of government finance statistics. - Increasing the efficiency of public investment and facilitating economic diversification: - Strengthen the public investment management framework. - Implement policies to promote private sector development and FDI attraction. - Increasing the independence, transparency and oversight of oil-related institutions and SOEs: - Shield Sonangol and the sovereign wealth fund (FDSEA) from political interference. - Strengthen SOE transparency and oversight and equip the Public Enterprises Oversight Institute SOE (ISEP) to enforce good corporate governance practices. - Strengthening anti-corruption agencies: - Equip these agencies with the material and human resources needed to perform their tasks expeditiously and efficiently. - Grant autonomy and shield them from political interference. - Building capacity in areas of: - Public investment management, tax administration, anti-corruption agencies, and institutions responsible for implementing AML/CFT measures. ### Appendix I — A Simple Model of Bribery: key mechanics and policy implications - Decision setup: - A public official offered a bribe B; not taking the bribe yields pay W and integrity value H. - If the official takes the bribe, three scenarios: 1. Caught with probability p and convicted with probability q: loses pay, loses share 0≤s≤1 of the bribe, pays pecuniary cost J of going to jail, and bears a shaming cost H. 2. Caught but not convicted: keeps pay and full bribe, faces cost H. 3. Not caught: keeps pay and bribe, no shaming cost. - Utilities (agent with linear utility U): - U(Not taking bribe) = W + H - U(Taking bribe) = p q [ s B − W − J − H ] + p (1 − q) [ W + B − H ] + (1 − p) [ W + B ] - Decision inequality (official takes the bribe if U(Taking bribe) > U(Not taking bribe)): - B > [ 2 p q W + (1 + p) H + p q J ] / (1 − p q r), where r ≡ 1 − s is the share of the bribe recovered by the State. - Comparative static insights (inequality makes corruption more likely when): - The bribe B is large. - Salary W and cost of public stigma H are low. - Penalty J is soft. - Probabilities p (caught) and q (convicted) are small. - Share r of the bribe recovered by the State is small. - Policy implications drawn from the model: - Adequate compensation for public servants. - Commensurate punishment of corrupt behavior. - Efficient administrative and judicial systems to monitor, investigate and convict corrupt agents. - Promoting ethical behavior, honesty, integrity, accountability and transparency to raise moral costs H. - Wage increases can reduce bribery only under certain conditions: the public budget can afford higher wages, the enforcement apparatus is effective, and the bribe is not a direct function of the official’s wage. - If the official can bargain the size of the bribe, a higher wage could strengthen his bargaining power (Svensson 2005). ### Additional contextual findings - MPLA’s anti-corruption strategy aims to combat all types of corruption and seek stronger punishment for corrupt behavior, but specifics on addressing grand corruption and prosecution of politically connected individuals remain unclear. - Early actions by the new government include: - Curbing nepotism in the public administration; - Moving against vested interests; - Investigating high-level officials for potential wrongdoings; - Creating an expectedly stronger anti-corruption unit; - Approving a new Law on Competition; - Approving a Private Investment Law to attract FDI; and - Creating a one-stop shop for investors. *International Monetary Fund. Angola: Selected excerpts on anti-corruption and governance reforms.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2018/cr18157.pdf_