## 1agoea2019002 - 2019. The mission met with Minister of State for Economic ## Source details **Canonical URL:** [1agoea2019002 - 2019. The mission met with Minister of State for Economic](https://www.imf.org/-/media/files/publications/cr/2019/1agoea2019002.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2019/1agoea2019002.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2019/1agoea2019002.pdf.json) --- ### Overview and mission contacts - Mission met with: Minister of State for Economic Development Manuel Nunes Júnior; Minister of Finance Archer Mangueira; Minister of Economy and Planning Manuel Neto da Costa; Minister of Commerce Joffre Van-Dúnem Júnior; Banco Nacional de Angola Governor José Massano; and other senior officials. - Stakeholders consulted: representatives of the financial sector, the non-financial private sector, the Sovereign Wealth Fund, the state oil company, and academia. - IMF staff team: Messrs. de Zamaróczy (head), de Resende, and Sobrinho, and Ms. Mwase (AFR); Ms. Chen (FAD); Messrs. Halikias (SPR), Monaghan (MCM), Souto (resident representative), Miguel (resident economist); Mr. Gray (MCM) supported parallel TA on “Exchange Rate Management and Supporting Monetary Policy.” Mr. Essuvi (OEDAE), Mr. Pereira Mendes, Mr. Ogaja, and Ms. Adjahouinou participated in report preparation. ### Macroeconomic outlook and key projections - External environment and growth: - External environment: deteriorated, with persistent oil-price volatility and ongoing global trade tensions weighing on 2019Q4 and 2020. - Economic activity weaker than expected; growth lower in 2019–20 relative to First Review projections due to lower-than-expected oil production. - Gradual recovery beginning in 2020 supported by moderate non-oil growth; higher growth in 2021–22 partly from a lower starting base for oil GDP and positive effects of exchange rate liberalization on non-oil GDP. - Inflation: - Bottomed out at 16 percent (year-on-year) in September 2019. - Projected to peak at 24 percent in 2020, following adjustments in regulated prices and rapid kwanza depreciation. - Authorities aim for single-digit inflation by 2022 after the expected 2020 peak. - External position and reserves: - Outlook improved after shift toward market-clearing exchange rate. - Current account expected to weaken near term but remain in surplus in medium term; real exchange rate depreciation to reduce imports and support non-oil exports. - Gross international reserves projected to reach US$15.5 billion at end-2019 and US$17.5 billion by end-2020 (Table 4 and narrative). - Net international reserves (NIRs) targets missed for end-June and end-September 2019. ### Program implementation and performance (to end-September 2019) - Quantitative performance: - End-June PCs met on BNA claims on Central Government; new oil-collateralized debt; and NOPFD—some by wide margins. - PC on net international reserves (NIRs) missed; all three adjustors worked to raise the target—limited exchange rate flexibility and government FX deposit drawdown contributed. - Continuous PCs met except for non-accumulation of external arrears due to correspondent bank USD transaction constraints. - All end-June ITs met; end-September ITs on NIRs and public debt missed (public debt missed by a small margin). - Structural benchmarks (SBs): - Of nine SBs up to end-September 2019, six met (two with delay); several SBs proposed for resetting (e.g., Recredit governance; AML/CFT law) with new deadlines into 2020. - AQRs and elimination of informal FX withdrawal restrictions are on track; proposed SB: submission of non-oil revenue measures to the National Assembly. ### Fiscal developments and policy stance - Windfall and financing: - Projected windfall of 0.9 percent of GDP in 2019 will be more than offset by lower-than-expected net domestic financing. - Intra-year cash deficits covered by temporary BNA advances; end-year gaps to be closed with deposit drawdowns and external borrowing. - 2019 NOPFD target: - Within reach; corrective expenditure measures in 2019Q4 (broadly split between current and capital expenditure) to address a shortfall of about 0.8 percent of GDP. - 2020 draft budget and fiscal stance: - Conservative reference oil price maintained at US$55/barrel. - Budget targets an overall surplus of 0.8 percent of GDP. - NOPFD projected at 5.6 percent of GDP, below First Review projection—supported by non-oil revenue mobilization and expenditure restraint, including on subsidies. - Non-oil revenue measures: - VAT rollout initially narrow (about 1,800 large taxpayers); net VAT yield modest in first year due to initial base and a safety reserve for reimbursements. - Higher excises and initial PIT reform approved in 2019H2 expected to generate up to 0.5 percent of GDP in 2020. - Additional package proposed for National Assembly approval by end-December 2019 (proposed SB), amounting to 0.3 percent of GDP. - Authorities committed to submitting another package of non-oil revenue measures for the 2021 budget by mid-2020 (MEFP ¶8). - Gross financing needs (GFNs): - GFNs remain high in 2020 owing to large debt service, arrears settlement, debt reimbursement to Sonangol, and bank recapitalization. - GFN would be lower by about US$1.1 billion (1½ percent of GDP) without prepayment/front-loading of selected arrears. - Sovereign Wealth Fund (FSDEA) withdrawals: - Planned withdrawals of up to US$2 billion in 2020–22 to finance municipal projects; about US$0.4 billion planned to be expensed in 2020, with US$1 billion withdrawn in August 2019. - At end-September, FSDEA total assets US$ 3.5 billion. ### Debt sustainability (Annex V highlights) - Current situation: - Debt remains sustainable but debt-to-GDP ratio has increased substantially and risks have risen. - Projected debt-to-GDP for end-2019: 111 percent (mostly reflecting rapid currency depreciation in 2019Q4). - Main risks: faster-than-anticipated exchange rate depreciation; further declines in oil prices or output; deterioration in market access; realization of contingent liabilities. - Baseline outlook: - Under baseline public debt projected to decline to 70 percent of GDP by 2024 (5 percentage points above medium-term target). - Debt reduction driven by Angola’s large fiscal oil revenues (two-thirds of total revenue), continued fiscal retrenchment, higher growth from structural reforms, and a more competitive exchange rate. - Key fiscal and financing numbers (2019–22, percent of GDP): - Financing needs: 2019: 15.7; 2020: 18.0; 2021: 11.6; 2022: 9.6. - GFN in DSA: 2019: 10.6; 2020: 15.5; 2021: 8.9; 2022: 8.5. - Overall deficit: 2019: -1.0; 2020: -0.8; 2021: -1.6; 2022: -1.9. - Debt amortization: 2019: 11.6; 2020: 16.3; 2021: 10.5; 2022: 10.4. - Domestic financing needs: 2019: 5.6; 2020: 8.6; 2021: 3.5; 2022: 5.3. - External financing needs: 2019: 6.0; 2020: 7.8; 2021: 7.0; 2022: 5.1. - Public debt composition (selected revisions, percent of GDP): - Domestic debt: 2019 (1st Rev.): 32.0; 2019 (2nd Rev.): 34.1. - External debt: 2019 (1st Rev.): 57.5; 2019 (2nd Rev.): 75.9. - Total public debt: 2019 (1st Rev.): 90.5; 2019 (2nd Rev.): 110.9. - Stress tests and vulnerabilities: - Real exchange rate shock: A 30-percent, one-time real depreciation would raise debt ratio to almost 123 percent of GDP in the first year. - Combined shock could increase debt ratio to about 150 percent of GDP and GFNs well above the high-risk benchmark. - Oil-price shock: a two-year drop averaging 30 percent in 2020–21 would produce a debt-to-revenue ratio peaking at 640 percent. ### Monetary policy, exchange rate reforms, and banking sector stability - Monetary policy and liquidity: - Accommodative policy led to reserve money growth of 30 percent year-on-year by end-September, creating excess liquidity that depressed market interest rates and incentivized FX purchases. - BNA measures since September: required banks prefund 50 percent of FX purchases at the BNA (remunerated at policy rate); raised reserve requirement ratio from 17 to 22 percent; established a short-term liquidity absorbing facility; raised rates on standard lending and liquidity-absorbing facilities. - To meet reserve money targets (proposed PC) BNA must keep liquidity under control using standard open-market operations. - Exchange rate liberalization and FX market outcomes: - Shift toward a market-clearing exchange rate improved external outlook; since mid-October BNA held more frequent FX auctions, removed bidding restrictions and the 2 percent cap on banks’ resale margin, leading to faster depreciation of the kwanza and reduced parallel-official spread. - Authorities aim to complete transition to a market-clearing exchange rate and merge cash and letter-of-credit FX auctions by end-December 2019 (MEFP ¶11). - Banking sector vulnerabilities and AQRs: - NPLs at 29 percent. - AQRs underway; BNA reviewing final reports from auditors for 13 banks comprising 93 percent of system assets (received at end-October). - BNA will complete recapitalization process by requiring banks to return to compliance with regulatory capital rules by end-June 2020 (proposed SB; MEFP ¶18). ### Financial sector strategy and Recredit reforms - Safeguarding stability: - Timely loss recognition, recapitalization, and restructuring of systemically important banks prioritized. - Strengthen BNA’s powers and tools, improve interagency coordination, and implement contingency plans. - Recredit: - Governance and operational procedures improved; mid-2019 decrees instituted a ten-year sunset clause and restricted mandate to purchasing NPLs from BPC only; assets to be transferred at fair value and after due diligence. - Further amendments proposed to strengthen autonomy and accountability (proposed modified SB; MEFP ¶17). - Credit-risk management: - BNA asset classification and provisioning rules to be updated by end-June 2020. - Banks expected to comply with new guidance on effective credit-risk management practices by end-December 2020 (MEFP ¶18). - Authorities to prepare action plan to strengthen credit infrastructure (MEFP ¶19). ### Structural reforms, governance, and social mitigation - Subsidy and price reforms: - Water tariffs raised August 2018; Jet B fuel raised June 2019; electricity tariffs raised July 2019. - Gasoline and diesel price adjustments and public transportation tariff changes to occur after rollout of cash-transfer program. - Cash-transfer program aims to compensate one million low-income families by end of first year; estimated cost US$320 million financed by a World Bank loan. - Payments arrears and PFM: - Commitments to settle at least 50 percent of arrears accumulated up to end-2017 (non-SIGFE) by end-March 2020 (proposed modified SB); complete verification and settlement of remaining non-SIGFE arrears by end-June 2021. - All SIGFE arrears accumulated in 2018 to be identified, verified, and settled by end-June 2020 (proposed SB). - SIGFE adjusted to allow electronic recording, monitoring, and certification of all arrears (SB; MEFP ¶8). - Draft Fiscal Responsibility Law to be submitted to the National Assembly by end-March 2020. - SOE reform and privatization: - 15 largest SOEs published audited annual reports (SB). - Privatization program for 2019–22 published; Sonangol started selling non-core assets and to offer 27 additional assets for sale in 2020. ### FSDEA (Sovereign Wealth Fund) overview and governance - Establishment and assets: - FSDEA established in 2012 with initial capital US$5 billion. - In June 2019 government announced intention to withdraw US$2 billion in 2020–22 for PIIM; US$1 billion withdrawn in August 2019; end-September assets US$ 3.5 billion mainly in short-term investments and fixed-income securities. - Asset allocation (as of September 2019): - Equity: 21% - Short term investments: 40% - Fixed income: 24% - Hedgefunds: 4% - Alternative Investments: 11% - Target portfolio composition: - Bonds: 25% - Listed Equity: 30% - Alternative (including hedgefunds): 35% - Cash and Quasi Money: 10% - Legal and governance reforms (July 2019): - Presidential Decrees No. 212/19 and No. 213/19 introduced a new legal framework; Minister of Finance may request up to 40 percent of Fund’s net assets in emergency situations. - Recommendations: - Clearly define objectives (savings, development, stabilization); integrate FSDEA into broad fiscal framework; prioritize debt reduction before sizable transfers; strengthen governance, risk-management, transparency, and limits on domestic investment. ### Program risks (Annex I) and mitigation - Global and trade risks: - Rising protectionism and retreat from multilateralism — Relative Likelihood: High; Time Horizon: Short Term/Medium Term; Impact on Angola: High. - Policy responses: diversify oil export markets and external financing; let exchange rate adjust; persevere with structural reforms; support SADC integration. - Financial market and global growth risks: - Sharp rise in risk premia — Relative Likelihood: High; Time Horizon: Short Term; Impact on Angola: High. - Weaker-than-expected global growth — Relative Likelihood: Medium / High; Time Horizon: Short Term/Medium Term; Impact on Angola: High. - Energy and oil sector risks: - Large swings in energy prices — Relative Likelihood: Medium; Time Horizon: Short Term/Medium Term; Impact on Angola: High. - Stronger-than-expected decline in crude oil production — Relative Likelihood: Medium; Time Horizon: Medium Term; Impact on Angola: High. - Financial sector and public debt risks: - Potential negative spillovers from exchange rate flexibility — Relative Likelihood: Medium; Time Horizon: Short Term/Medium Term; Impact on Angola: Medium. - Shocks to public debt trajectory — Relative Likelihood: High; Time Horizon: Short Term/Medium Term; Impact on Angola: High. - Social and political risks: - Reform fatigue and social hardship — Relative Likelihood: Medium; Time Horizon: Medium Term; Impact on Angola: Medium. - Policy responses: scale up cash transfers; use IMF and development partner TA. ### Monitoring, performance criteria, and structural benchmarks (selected numeric targets) - Reserve money ceilings (billions of kwanzas): 1,748; 1,739; 1,774; 1,792; 1,908 (quarterly baseline targets excerpt). - NIRs floor (millions of U.S. dollars) sample values: 10,000; 10,289; 10,640; 10,100; 9,499; 10,286; 10,300; 9,891; 11,614; 10,183. - Non-oil primary fiscal deficit (NOPFD) cumulative ceilings (billions of kwanzas) include: 2,488; 2,488; 1,471; 484; 484; 286; 977; 906; 906; 371; 1,290; 1,290; 1,044; 1,992; 1,992; 461; 461; 1,033; 1,033; 1,568; 2,384. - Public debt (gross, percent of GDP) reported series (Table 5): 87.8; 89.0; 90.6; 110.9; 83.6; 102.0; 79.9; 95.1; 75.7; 86.0. - Gross international reserves (end of period, millions of U.S. dollars): 16,170; 16,170; 15,169; 15,470; 16,542; 17,152; 18,021; 18,631; 18,521; 19,831 (Table 4). ### IMF staff appraisal and recommendations - Program status: - Despite a deteriorated outlook, authorities are keeping the program on track with a conservative 2019 supplementary budget and a 2020 draft budget consistent with program goals. - Arrangement provides discipline, catalyzes donor support, and facilitates international market access. - Fiscal recommendations: - Deliver conservative 2019 supplementary budget to meet deficit target. - Cover residual financing gaps in 2019–20 by government deposit drawdown and borrowing, including Eurobond issuances. - Mobilize non-oil revenue measures to be submitted to the National Assembly in 2019–20 and expand VAT base. - Adopt a prudent debt management strategy and mobilize more affordable financing to improve cost and profile of public debt. - A modest NOPFD retrenchment needed in the third year of the arrangement to protect debt sustainability; NOPFD to improve in 2021. - Monetary and FX recommendations: - Maintain monetary policy consistent with exchange rate flexibility and provide a credible nominal anchor (reserve money; proposed PC) to relaunch disinflation. - Recalibrate monetary stance to mitigate depreciation pressures; tighten further if needed to prevent second-round effects and pave way for single-digit inflation by 2022. - Allow higher market rates to spill over to government securities auctions to pivot government funding toward kwanza-denominated bonds. - Financial sector recommendations: - Implement timely loss recognition, recapitalization, and restructuring of systemically important banks. - Strengthen BNA’s bank resolution powers, lender-of-last-resort, and contingency-planning frameworks as soon as possible. - Complete AQRs and enforce recapitalization and restructuring plans for public banks. ### Program decisions and staff support (Second Review) - Staff recommends completion of the Second Review and supports waivers requested by the authorities for nonobservance of PCs (including NIRs and continuous PC on external debt arrears) given corrective actions. - Staff supports modification of the performance criterion on NIRs, setting up a PC on reserve money, and modifications to ITs (including ceilings on payment arrears and public debt and introduction of a ceiling on issuance of debt guarantees). - Arrangement financing and access: - Board approval of the Extended Arrangement: 715 million SDRs / 991 million U.S. dollars / 197 percent of quota (Table 10). - Scheduled availability: March 29, 2019 (179 million SDRs / 249 million U.S. dollars / 24 percent of quota) and September 30, 2019 (179 million SDRs / 249 million U.S. dollars / 24 percent of quota); total 2,673 million SDRs / 3,741 million U.S. dollars / 361 percent of quota (Table 10). *Source: IMF staff report (content unit 1agoea2019002).* ### 2019. The mission met with Minister of State for Economic ### 1agoea2019002 - 2019. The mission met with Minister of State for Economic ### Overview and mission contacts - Mission met with: Minister of State for Economic Development Manuel Nunes Júnior; Minister of Finance Archer Mangueira; Minister of Economy and Planning Manuel Neto da Costa; Minister of Commerce Joffre Van-Dúnem Júnior; Banco Nacional de Angola Governor José Massano; and other senior officials. - Stakeholders consulted: representatives of the financial sector, the non-financial private sector, the Sovereign Wealth Fund, the state oil company, and academia. - IMF staff team: Messrs. de Zamaróczy (head), de Resende, and Sobrinho, and Ms. Mwase (AFR); Ms. Chen (FAD); Messrs. Halikias (SPR), Monaghan (MCM), Souto (resident representative), Miguel (resident economist); Mr. Gray (MCM) supported parallel TA on “Exchange Rate Management and Supporting Monetary Policy.” Mr. Essuvi (OEDAE), Mr. Pereira Mendes, Mr. Ogaja, and Ms. Adjahouinou participated in report preparation. ### Macroeconomic outlook and key projections - External environment: deteriorated, with persistent oil-price volatility and ongoing global trade tensions weighing on 2019Q4 and 2020. - Growth: - Economic activity weaker than expected; growth lower in 2019–20 relative to First Review projections due to lower-than-expected oil production. - Gradual recovery beginning in 2020 supported by moderate non-oil growth; higher growth in 2021–22 partly from a lower starting base for oil GDP and positive effects of exchange rate liberalization on non-oil GDP. - Inflation: - Bottomed out at 16 percent (year-on-year) in September 2019. - Projected to peak at 24 percent in 2020, following adjustments in regulated prices and rapid kwanza depreciation. - Authorities aim for single-digit inflation by 2022 after the expected 2020 peak. - External position: - Outlook improved after shift toward market-clearing exchange rate. - Current account expected to weaken near term but remain in surplus in medium term; real exchange rate depreciation to reduce imports and support non-oil exports. - Financial account vulnerabilities persist but are mitigated by flexible exchange rate. ### Program implementation and performance - Mixed implementation to end-September 2019: - End-June performance criteria (PCs) met on BNA claims on the Central Government; new oil-collateralized debt; and NOPFD—some by wide margins. - PC on net international reserves (NIRs) missed; all three adjustors worked to raise the target—limited exchange rate flexibility and government FX deposit drawdown contributed. - Continuous PCs met except for non-accumulation of external arrears due to correspondent bank USD transaction constraints. - All end-June indicative targets (ITs) met; end-September ITs on NIRs and public debt missed (public debt missed by a small margin). - Of nine structural benchmarks (SBs) up to end-September 2019, six met (two with delay); several SBs proposed for resetting (e.g., Recredit governance; AML/CFT law) with new deadlines into 2020. - AQRs and elimination of informal FX withdrawal restrictions are on track; proposed SB: submission of non-oil revenue measures to the National Assembly. ### Fiscal developments and policy stance - Windfall and financing: - Projected windfall of 0.9 percent of GDP in 2019 (difference between projected average and budget reference oil prices) will be more than offset by lower-than-expected net domestic financing. - Intra-year cash deficits covered by temporary BNA advances; end-year gaps to be closed with deposit drawdowns and external borrowing. - 2019 NOPFD target: - Within reach; corrective expenditure measures in 2019Q4 (broadly split between current and capital expenditure) to address a shortfall of about 0.8 percent of GDP. - 2020 draft budget and fiscal stance: - Conservative reference oil price maintained at US$55/barrel. - Budget targets an overall surplus of 0.8 percent of GDP. - NOPFD projected at 5.6 percent of GDP, below First Review projection—supported by non-oil revenue mobilization and expenditure restraint, including on subsidies (Annex III). - Non-oil revenue measures: - VAT rollout initially narrow (about 1,800 large taxpayers); net VAT yield modest in first year due to initial base and a safety reserve for reimbursements. - Higher excises and initial PIT reform approved in 2019H2 expected to generate up to 0.5 percent of GDP in 2020. - Additional package proposed for National Assembly approval by end-December 2019 (proposed SB), amounting to 0.3 percent of GDP. - Authorities committed to submitting another package of non-oil revenue measures for the 2021 budget by mid-2020 (MEFP ¶8). - Gross financing needs (GFNs): - Will remain high in 2020 owing to large debt service, arrears settlement, debt reimbursement to Sonangol, and bank recapitalization. - GFNs to be filled by continued budget support from multilaterals, disbursements from existing credit lines, and borrowing. - The GFN in 2020 incorporates authorities’ intent to prepay and front-load repayment of arrears on selected credit lines; GFN would be lower by about US$1.1 billion (1½ percent of GDP) without these operations. - Sovereign Wealth Fund (FSDEA): - Planned withdrawals of up to US$2 billion in 2020–22 to finance municipal projects will partly replace project loans (Annex IV). - About US$0.4 billion planned to be expensed in 2020; spending in 2021–22 to be included in future budgets. - Governance strengthening, including at municipalities, to reduce corruption risk. ### Debt sustainability - Current situation: - Debt remains sustainable but debt-to-GDP ratio has increased substantially and risks have risen (Annex V). - Projected debt-to-GDP for end-2019: 111 percent, mostly reflecting rapid currency depreciation in 2019Q4. - Debt burden indicators expected to remain elevated as global oil prices remain subdued. - Main risks: faster-than-anticipated exchange rate depreciation, further declines in oil prices or output, deterioration in market access, and realization of contingent liabilities (including guaranteed debt). - Baseline and outlook: - Under baseline scenario public debt projected to decline to 70 percent of GDP by 2024 (5 percentage points above medium-term target). - Debt reduction driven by Angola’s large fiscal oil revenues (two-thirds of total revenue), continued fiscal retrenchment, higher growth from structural reforms, and a more competitive exchange rate. - Policy and management measures: - Domestic: reduced frequency of primary auctions; greatly reduced issuance of Treasury bonds indexed to or denominated in foreign currency (in line with MTDS). - External: refrained from contracting new oil-collateralized debt (PC); moderate drawdown of existing credit lines (IT). - Tightening ceiling on issuance of State debt guarantees proposed (proposed IT) to mitigate contingent liability risks. - Continued close monitoring and readiness for corrective action if adverse shocks materialize. ### Monetary policy, exchange rate reforms, and banking sector stability - Monetary policy and liquidity: - Accommodative monetary policy led to reserve money growth of 30 percent year-on-year by end-September, creating excess liquidity that depressed market interest rates and incentivized FX purchases. - BNA measures since September: required banks prefund 50 percent of FX purchases at the BNA (remunerated at policy rate); raised reserve requirement ratio from 17 to 22 percent; established a short-term liquidity absorbing facility; raised rates on standard lending and liquidity-absorbing facilities. - To meet reserve money targets (proposed PC) BNA must keep liquidity under control using standard open-market operations. - Exchange rate: - Shift toward a market-clearing exchange rate improved external outlook; remaining measures aim to support exchange rate flexibility and reduce parallel market distortions. - Banking sector vulnerabilities: - Significant weaknesses: Nonperforming loans (NPLs) remain at 29 percent. - Banking sector stability remains a priority; Asset Quality Reviews (AQRs) are underway (on track). - Banking sector reforms and recapitalization needs are part of the fiscal and financial stability strategy. ### Program risks, structural reforms, and technical assistance - Risks: - Significant upside and downside risks (Annexes I, II): further declines in oil price/production; weakening international market access amid international tensions; slower-than-expected debt reduction; contingent liability realization. - Upside risk: higher oil prices than baseline assumptions. - Structural reforms and governance: - Authorities committed to restoring macroeconomic stability, improving governance, maintaining market-determined exchange rate regime, and addressing debt vulnerabilities via prudent fiscal and debt management. - Structural agenda includes VAT rollout, VAT base expansion, PIT reform, reform of tax expenditures, Financial Institutions Law amendments, BNA Law amendment, Fiscal Responsibility Law submission, and strengthening governance at FSDEA and municipalities. - Technical assistance: - Robust TA program (including parallel TA on exchange rate management) will help mitigate implementation risks. - IMF support includes TA on VAT rollout, debt management, and banking sector measures. *Source: 1agoea2019002 - 2019. The mission met with Minister of State for Economic Development Manuel Nunes Júnior, Minister of Finance Archer Mangueira, Minister of Economy and Planning Manuel Neto da Costa, Minister of Commerce Joffre Van-Dúnem Júnior, Banco Nacional de Angola Governor José Massano, and other senior officials.* ### 16. The BNA moved decisively to enhance exchange rate flexibility. Strong currency ### 16. The BNA moved decisively to enhance exchange rate flexibility. Strong currency ### Exchange rate liberalization and FX market outcomes - Strong currency depreciation in 2018 and some market reforms until early 2019: - Helped eliminate the backlog of documented unmet FX demand (SB; met with delay). - Narrowed the parallel-official exchange rate spread. - Eliminated the REER misalignment of early 2019. - Slow progress in improving FX market functioning led to a re-emergence of imbalances. - Since mid-October: - The BNA has been holding more frequent FX auctions. - Removed restrictions to the bidding process and the 2 percent cap on banks’ resale margin. - These measures led to faster depreciation of the kwanza and a reduction in the parallel-official spread. - Authorities aim to complete the transition to a market-clearing exchange rate and merge cash and letter-of-credit FX auctions by end-December 2019 (MEFP ¶11). - Expected macro effects of liberalization: - Substantially reduce the risk of overvaluation of the kwanza. - Allocate limited FX more efficiently. - Beneficial effects on monetary policy instruments (e.g., open-market operations) needed to buttress the nominal anchor. - Reduce one-sided FX risk that distorts financial intermediation. - Facilitate reserve accumulation; support external competitiveness and economic diversification; narrow the parallel-official spread. - Depreciation of the official rate is expected to result in less than full pass-through to inflation—supported by tight fiscal and monetary policies. ### Measures on FX deposit access and capital account considerations - BNA actions on FX deposit withdrawals: - Working toward eliminating informal restrictions to FX deposit withdrawals (SB). - By end-December 2019, will issue legally binding instructions requiring banks to provide a written explanation to clients in case of denied access to FX deposits. - Non-compliant banks will be fined (MEFP ¶11). - Capital account restrictions: - In tandem with exchange rate liberalization, authorities are considering a gradual removal of capital account restrictions. - To support privatization plans, and in consultation with IMF staff, the BNA is considering relaxation of restrictions on foreign direct investment and less volatile portfolio flows (i.e., shares of domestic companies). ### Safeguarding banking sector stability - Comprehensive strategy for the financial sector (proposed SB): - Decide on future state involvement in the banking system (proposed SB) and dispose of assets accordingly. - Hire independent experts to help develop a proposal by end-February 2020. - Strengthen the BNA’s powers and tools to address troubled banks; improve interagency coordination and contingency plans. - Reforms to the Financial Institutions and Central Bank Laws postponed to end-March 2020 (proposed modified SB). - BNA plans to issue guidance on bank governance and risk management by end-June 2020 (MEFP ¶18). - BNA’s bank resolution powers, including lender-of-last-resort and contingency-planning frameworks, should be strengthened as soon as possible. - AQRs and recapitalization: - AQRs expected to be finalized by end-December 2019 (SB). - BNA reviewing final reports from auditors for 13 banks comprising 93 percent of system assets (received at end-October). - BNA will complete the banking sector recapitalization process by requiring banks to return to compliance with regulatory capital rules by end-June 2020 (proposed SB; MEFP ¶18). - Public banks and holistic strategy: - Completion of AQRs needs to be complemented by a comprehensive strategy to safeguard the payments system, restore confidence, and promote credit intermediation. - Strategy should address solvency and liquidity issues from AQR findings and include upfront loss recognition, timely recapitalization, and restructuring to restore viability. ### Recredit and credit-risk management - Recredit developments: - Governance and operational procedures at Recredit have improved, but challenges remain. - Mid-2019 decrees instituted a ten-year sunset clause; restricted Recredit’s mandate to purchasing NPLs from the largest public bank (Banco de Poupança e Crédito, BPC) only; required transfer of assets to Recredit at fair value and after due diligence. - Recredit will be able to take most operational decisions without prior approval once articles of association are amended. - Authorities plan to strengthen Recredit’s accountability and mandate further via regulatory changes and amending the relevant Presidential Decree (proposed modified SB; MEFP ¶17). - Credit-risk management: - BNA asset classification and provisioning rules to be updated by end-June 2020. - Banks expected to comply with new guidance on effective credit-risk management practices by end-December 2020 (MEFP ¶18). - Authorities will prepare an action plan to strengthen credit infrastructure (MEFP ¶19). ### Accelerating structural reforms and improving governance - Subsidy reform: - Water tariffs raised in August 2018, jet fuel prices in June 2019, and electricity tariffs in July 2019. - Authorities are holding off gradual adjustment in gasoline and diesel prices and public transportation tariffs due to delay of the social program to mitigate impacts on the most vulnerable. - Reforms will be complemented by an automatic fuel-pricing mechanism. - Authorities working with the World Bank to speed rolling out a cash-transfer program in 2020. - Committed to meeting agreed floors on social spending (IT) and improving operational efficiency in the electricity sector to eliminate the need for subsidies (MEFP ¶8). - Payments arrears: - Settlement of payments arrears in 2019H1 was slower than expected. - Authorities will settle at least 50 percent of arrears accumulated up to end-2017 (with commitments not recorded in SIGFE) by end-March 2020 (proposed modified SB). - Verification and settlement of remaining non-SIGFE arrears accumulated up to end-2017 will be completed by end-June 2021. - All SIGFE arrears accumulated in 2018 will be identified, verified, and settled by end-June 2020 (proposed SB). - Authorities complied, through end-June 2019, with the program ceiling of Kz 100 billion on the net accumulation of new payments arrears (IT); requested increasing this ceiling to Kz 250 billion to accommodate expanded arrears perimeter (approved in the First Review). - In 2019, authorities are settling about 2¼ percent of GDP in accounts payables and arrears on capital expenditure executed prior to 2019. - SIGFE adjusted to allow electronic recording, monitoring, and certification of all arrears and recording of residency of suppliers (SB; MEFP ¶8). - SOE reform and privatization: - In September, authorities published audited annual reports of the 15 largest SOEs (SB). - A privatization program for 2019–22 was published; Sonangol started selling non-core assets and will offer 27 additional assets for sale in 2020. - Public financial management reforms: - Authorities intend to submit PFM legislation to the National Assembly (proposed modified SB). - Draft Fiscal Responsibility Law, defining the fiscal policy framework including a fiscal rule, is being revised with IMF TA and will be submitted to the National Assembly by end-March 2020. - Since September, a long-term resident advisor has been helping prepare a Medium-Term Fiscal Framework. - Authorities on track to publish quarterly fiscal reports by end-2019 to increase fiscal transparency (MEFP ¶8). - Intend to award, through open tender, at least 45 percent of public contracts related to public investment projects (not financed by external project loans and above legal threshold) by end-December 2020 (proposed SB; MEFP ¶24). - Expanding use of electronic platform for public procurement and committed to managing qualified public investment project contracts through the platform. ### Governance, AML/CFT, and institutional strengthening - Anti-corruption and business climate: - Anti-corruption efforts stepped up; high-ranking officials investigated and prosecuted, including a former minister and associates. - Officials liaising with foreign counterparts; State Administration Inspector General’s office hiring additional inspectors. - Statutes of the FSDEA improved regarding investment policy, asset management, and transparency. - Time for issuing visas for investors and skilled workers reduced to 15 days. - Procedures for legalizing companies streamlined and costs reduced. - BNA Law revision: - Authorities intend to complete the revision of the BNA Law to strengthen BNA powers and independence. - Deadline for submission of the draft Law to the National Assembly extended until end-March 2020 (proposed modified SB) to review potential inconsistencies with Angola’s Constitution. - AML/CFT Law: - Progress slower than envisaged. Draft Law submitted to the National Assembly in August. - Authorities intend to promulgate the revised AML/CFT Law in the short term and follow up if additional legal or regulatory changes are required (proposed modified SB; MEFP ¶20). ### Program issues, financing, and risks - IMF capacity to be repaid: - Capacity indicators remain within safe ranges (Tables 9–10). - IMF credit outstanding culminates at 5 percent of GDP, 10 percent of non-collateralized external debt, and 20 percent of gross international reserves (GIRs). - Credit outstanding relative to GIRs, net of collateralized debt service, remains moderate and peaks at 24 percent. - Repayments to the IMF peak at 2 percent of non-pledged exports of goods and services. - Risks mitigated by projected reduction in stock of collateralized debt. - Financial burden sharing and financing: - First tranches of World and African Development Banks’ budget support (US$500 million and US$165 million, respectively) planned to be disbursed by year-end. - Financing gaps for remainder of 2019 and 2020 widened since the First Review due to lower loan disbursements (2019), lower projected oil exports (2020), and tighter-than-expected domestic financing. - Additional gaps to be filled by government deposit drawdown (2019) and external borrowing (2019–20). - Arrangement fully financed for the next 12 months with good prospects for its third year. - Safeguards assessment and MCPs/ERs: - Implementation of IMF recommendations from updated safeguards assessment has been slow; several recommendations have fallen behind schedule. - Multiple currency practices (MCPs) and exchange restrictions (ERs) remain but no breach of continuous PCs as they pre-date the program. - Authorities will eliminate the 0.1 percent stamp tax on foreign exchange operations by end-March 2020 and phase out all remaining ERs and MCPs by end-March 2021 (MEFP ¶13). - External debt payments arrears: - Private creditors: Angola accumulated US$51 million in new arrears between end-December 2018 and end-June 2019 due to correspondent bank constraints; authorities report about US$30 million in new arrears between end-June and end-September 2019 and expect similar additional arrears through end-year. - Preliminary agreements or secured funds to resolve arrears to two major private commercial creditors which predate the arrangement; clearance expected in 2020–21. - Staff assesses the lending into arrears policy is satisfied given prompt IMF support and good-faith efforts to reach agreements. - Official creditors: Authorities liaising with countries that inherited legacy arrears from former Yugoslavia; will seek agreements once verification concluded. - Proposed waivers and program modifications: - Request waivers of nonobservance of performance criteria and propose modifications: - Waiver for end-June 2019 PC on NIRs supported by corrective action including monthly FX intervention budget (MEFP ¶12). - Waiver for non-observance of continuous PC on external debt arrears supported by forthcoming AML/CFT Law reform (proposed reset SB); propose modification allowing payments into independent third-party escrow account when transfer of funds is rejected by intermediary financial institutions (MEFP ¶8 and TMU ¶10). - Propose to increase the NIR floors for 2019–20 and modify NIR adjustors to improve monitoring. - Propose to introduce a PC on reserve money to reinforce the nominal anchor. - Propose modifications to ITs: increase ceiling on accumulation of payments arrears in line with expanded coverage; increase ceiling on public debt to accommodate one-off impact of exchange rate liberalization; introduce ceiling on issuance of debt guarantees by the State. - Propose to modify timetable for six SBs and introduce five new ones to underpin fiscal consolidation, transparency, and support financial sector restructuring. ### Staff appraisal and policy recommendations - Program status and fiscal stance: - Despite a deteriorated outlook, authorities are keeping the program on track. - Implementing conservative supplementary budget for 2019; submitted 2020 draft budget consistent with program goals. - Mobilizing alternative financing; maintaining greater exchange rate flexibility supported by tight monetary policy; committed to speeding up structural reforms. - Fiscal policy recommendations: - Deliver conservative 2019 supplementary budget to meet deficit target and keep fiscal consolidation on track. - Residual financing gaps in 2019–20 to be covered by government deposit drawdown and borrowing, including Eurobond issuances. - 2020 draft budget anchored by conservative oil price and production assumptions; aims to revert upward trend in public debt. - A modest NOPFD retrenchment needed in the third year of the arrangement to protect debt sustainability; NOPFD to improve in 2021. - Support requires non-oil revenue measures to be submitted to the National Assembly in 2019–20 and expansion of the VAT base. - Prudent debt management strategy and mobilization of more affordable financing to improve cost and profile of public debt. - Monetary and FX policy recommendations: - Reforms to facilitate price formation in FX markets are progressing; remaining MCPs and ERs will be eliminated. - Monetary policy must remain consistent with exchange rate flexibility and provide a credible nominal anchor (reserve money; proposed PC) to relaunch disinflation. - Monetary stance recalibrated to mitigate depreciation pressures; further tightening should be pursued if needed to mitigate additional depreciation pressures, prevent second-round effects from subsidy reforms and recently implemented VAT, and pave the way for single-digit inflation by 2022. - Allow corresponding higher market rates to spill over to government securities auctions to increase attractiveness of these securities and pivot government funding from external and FX-indexed bonds to kwanza-denominated bonds. *Source: IMF staff report (content unit 1agoea2019002).* ### 40. Safeguarding financial sector stability requires a credible strategy, which is framed ### 40. Safeguarding financial sector stability requires a credible strategy, which is framed ### Financial sector stability: key actions - Timely loss recognition, recapitalization, and restructuring of systemically important banks will be critical actions. - Improving BNA tools and powers are crucial to ensure least-cost approaches can be applied to troubled banks. ### Structural reforms to reduce State footprint and fiscal risks - Ongoing structural reforms should reduce the large State footprint in the economy, reduce fiscal risks, and foster private-sector-led development. - The authorities’ home-grown reforms—including Sonangol’ s “Regeneration Program,” privatization of SOEs, and improvement of the public procurement system—are expected to reduce State presence in the economy, curb fiscal risks, and increase economic efficiency. - These efforts should pave the way for private-sector-led development and economic diversification. ### Program risks, policy stance, and support measures - While risks to the program have risen, they are manageable, given the authorities’ policies and ownership of reforms. - Despite the deteriorated outlook, the authorities are persevering with their policies and reforms. - The conservative reference oil price underpinning the 2020 draft budget reduces exposure to oil-price volatility. - The authorities’ proven commitment to use oil tax revenue windfall, including that arising from the exchange rate depreciation, to increase primary surpluses mitigates the rise in the debt-to -GDP ratio. - Pursuing appropriate monetary and exchange rate policies will complement the fiscal effort and provide a first line of defense against oil -price volatility. - Steadfast implementation of structural reforms and adequate safety nets will support growth recovery and reduce the hardships facing the most vulnerable. - The arrangement continues to provide discipline against the risk of reversals, while sending a positive signal to stakeholders. - It catalyzes donor support and facilitates international market access. - Continued IMF TA, in coordination with development partners, will continue to strengthen implementation capacity. *Source: 1agoea2019002 - 40. Safeguarding financial sector stability requires a credible strategy, which is framed* ### 43. Staff supports the authorities’ request for the completion of the Second Review, ### 1agoea2019002 - 43. Staff supports the authorities’ request for the completion of the Second Review, ### IMF staff recommendations and program decisions - Staff recommends completion of the Second Review. - Staff supports the waivers requested by the authorities, given corrective actions. - Staff supports the modification of the performance criterion on NIRs and the continuous performance criterion on external debt payment arrears requested by the authorities. - Staff supports setting up a performance criterion for reserve money to provide a robust anchor for monetary policy. - Staff recommends the completion of the financing assurances review. ### Program role and rationale - The arrangement continues to provide a consistent framework for reforms, while mobilizing support from international financial institutions and anchoring investors’ confidence. - Given the authorities’ efforts to keep the program on track and ownership of reforms, staff supports advancing the program through the Second Review and related adjustments. ### High-frequency economic indicators (selected observations, 2016–19) - Business confidence has started to recover (National Institute of Statistics Business Confidence Index, difference in percentage points shown in Figure 1). - Downward trend in bond yields has been stymied by oil-price volatility (Angola Eurobond Yield, percent; Brent Price in USD/barrel, inverted scale). - Consumer price disinflation has slowed; wholesale price inflation has been on an upward trend (CPI and Wholesale Price Inflation, percent, year-on-year). - Lower oil exports continue to drive the trade balance (Exports and Imports of Goods, percent change, year-on-year). - Net Domestic Assets (NDA) started to contribute to the growth of money supply (Contribution to M3 Growth, percent, year-on-year, three-month moving average). ### Fiscal developments (highlights) - Central government: Total revenue around 21.5–21.9 percent of GDP in 2018–19 as reported in Table 1 and Table 2b (Revenue 21.5, 21.9, 19.3, 19.8, 20.5, 20.9, 20.4, 21.5, 20.1, 21.7 across various revisions and projections). - Oil-related revenue significantly large: e.g., Oil-related revenue 13.7, 13.9, 11.5, 12.4, 12.2, 13.4, 11.6, 12.9, 11.1, 12.6 (percent of GDP series reported). - Total expenditure around 19.4–20.2 percent of GDP across reported periods (Expenditure 19.4, 19.8, 19.4, 18.8, 20.2, 20.0, 20.1, 19.9, 20.0, 19.8 in Table 2b). - Non-oil primary fiscal balance remains a large deficit: Non-oil primary fiscal balance values reported (percent of GDP) include -6.7, -6.8, -6.0, -5.6, -5.8, -5.6, -5.5, -4.7, -5.5, -4.4 (Table 2b memorandum and Table 2a memorandum items). ### Monetary developments (highlights) - Broad money (M2/M3) growth and levels: Broad money (M3) percent changes include 24.3, 20.4, 14.6, 22.6, 14.8, 21.6, 15.3, 25.6, 17.1, 12.3 (Table 3 memorandum items). - Reserve money (end of period, billions of kwanzas): Reserve money values reported include 1,709, 1,709, 1,958, 2,076, 2,248, 2,614, 2,592, 3,096, 3,036, 3,518 (Table 3). - Money multiplier (M2/reserve money) reported as 4.7, 4.6, 4.7, 4.6, 4.7, 4.5, 4.7, 4.7, 4.7, 4.7 (Table 3 memorandum items). - Foreign currency deposits share of total deposits: 46.6, 48.2, 45.5, 47.7, 44.5, 47.6, 43.4, 47.6, 42.3, 47.6 (Table 3 memorandum items). ### External sector and reserves (highlights) - Gross international reserves (end of period, millions of U.S. dollars): 16,170; 16,170; 15,169; 15,470; 16,542; 17,152; 18,021; 18,631; 18,521; 19,831 (Table 4). - Reserves in months of next year's imports: 7.3; 7.7; 6.6; 7.6; 7.2; 8.2; 7.6; 8.6; 7.5; 9.1 (Table 4 memorandum items). - Trade balance (percent of GDP) series reported include 24.4, 23.6, 18.1, 22.7, 20.3, 23.0, 19.5, 22.6, 19.0, 22.6 (Table 4 memorandum items). - Net international reserves (end of period, millions of U.S. dollars) figures appear in Table 1 and Table 3 (e.g., Net international reserves 10,646; 10,646; 9,141; 9,447; 9,391; 10,006; 9,741; 10,356; 10,241; 11,556 in Table 1; and Net international reserves 3,285; 3,285; 3,259; 4,582; 3,526; 5,854; 3,853; 6,773; 4,209; 8,004 in Table 3 monetary authorities line). ### Key macroeconomic projections and indicators (Table 1 selected) - Real GDP growth (series in Table 1): -1.7, -1.2, 0.3, -1.1, 2.8, 1.2, 2.2, 2.8, 2.9, 3.2 (reported across revisions/projections). - Oil sector GDP and Non-oil sector GDP growth series reported (Table 1): Oil sector -9.0, -9.5, -1.9, -5.0, 3.3, 1.3, 0.0, 2.5, 0.0, 1.6; Non-oil sector 0.3, 1.0, 1.3, 0.6, 2.5, 1.1, 3.0, 3.0, 4.0, 4.0. - Consumer prices (annual average and end of period): Annual average 19.6, 19.6, 17.5, 17.2, 11.1, 23.9, 7.9, 15.7, 6.5, 10.7; End of period 18.6, 18.6, 15.0, 17.5, 9.0, 23.0, 7.0, 14.0, 6.0, 8.0. - Gross international reserves (millions of U.S. dollars) also reported in Table 1: 16,170; 16,170; 15,169; 15,470; 16,542; 17,152; 18,021; 18,631; 18,521; 19,831. ### Public debt and financing (highlights) - Public sector debt (gross, percent of GDP) reported: 87.8, 89.0, 90.6, 110.9, 83.6, 102.0, 79.9, 95.1, 75.7, 86.0 (Table 5). - Table 7 fiscal financing needs and sources (billions of U.S. dollars): Example financing needs (A) reported as 7.3, 6.2, 13.6, 13.4, 15.0, 12.9, 12.0, 9.2 across periods; financing sources (B) 6.3, 5.2, 12.3, 12.2, 13.2, 9.8, 10.1, 6.5; financing gap (A-B) 1.0, 1.0, 1.3, 1.2, 1.9, 3.1, 1.9, 2.7; program financing equals the financing gap in these entries (Table 7). - External gross financing requirements and sources reported in Table 8 (millions of U.S. dollars): Gross financing requirements 9,252; 8,115; 10,531; 9,665; 7,878; 7,472; 5,989; 6,091; 7,489; 5,303; 8,647; 7,327; 9,086; 7,328 across the multi-year series. ### IMF financing and program access (selected) - Board approval of the Extended Arrangement: 715 million SDRs / 991 million U.S. dollars / 197 percent of quota (Table 10). - Observance and phasing under the Extended Arrangement include scheduled availability on March 29, 2019 (179 million SDRs / 249 million U.S. dollars / 24 percent of quota) for completion of the first review, and September 30, 2019 (179 million SDRs / 249 million U.S. dollars / 24 percent of quota) for completion of the second review. Subsequent scheduled disbursements listed through November 1, 2021 culminating in Total 2,673 million SDRs / 3,741 million U.S. dollars / 361 percent of quota (Table 10). - Table 9 shows projections of Fund credit outstanding and related obligations, including stock of existing and prospective Fund credit rising to 2,673.0 (millions of SDRs) and related obligations and memoranda items (Table 9). *Source: IMF staff report content as presented in the supplied chapter/section.* ### Annex I. Risk Assessment Matrix ### Annex I. Risk Assessment Matrix ### Global and Trade Risks - Findings: - Rising protectionism and retreat from multilateralism threaten the global trade system and international cooperation; near-term escalation and a WTO dispute settlement system under threat could imperil trade and cooperation. - Additional barriers, including investment and trade restrictions in technology sectors, reduce growth directly and through adverse confidence effects and financial market volatility. - In the medium term, geopolitical competition, protracted tensions, and fraying consensus about globalization could lead to economic fragmentation, undermining investment, growth, and stability. - Relative Likelihood: High - Time Horizon: Short Term/Medium Term - Impact on Angola: High - Policy Responses: - Continue efforts to diversify oil export markets. - Diversify sources of external financing. - Let the exchange rate adjust to mitigate developments in international trade and capital markets. - Persevere with structural reforms to diversify the economy. - Speed up efforts to support greater trade and financial integration in the Southern African Development Community (SADC). ### Financial Market Sentiment and Global Growth Risks - Sharp rise in risk premia - Findings: - An abrupt deterioration in market sentiment (e.g., policy surprises, renewed stresses in emerging markets, or a disorderly Brexit) could trigger risk-off events, recognition of underpriced risk, higher risk premia, higher debt service and refinancing risks, stress on leveraged firms, households, and vulnerable sovereigns, corrections to stretched asset valuations, and capital account pressures—depressing growth. - Relative Likelihood: High - Time Horizon: Short Term - Impact on Angola: High - Policy Responses: - Mobilize financing from multilateral and bilateral partners at affordable terms. - Diversify external financing sources. - Consider issuing Eurobonds under right market conditions. - Continue to develop domestic debt market. - Weaker-than-expected global growth - Findings: - Idiosyncratic factors in the U.S., Europe, China, and stressed emerging markets could interact to cause a synchronized and prolonged growth slowdown. - China-specific near-term risks include escalation in trade tensions, tighter financial conditions, a sharp downturn in the property market, renewed PPI deflation, and a drop in commodity prices. - Excessive policy easing could reverse deleveraging and rebalancing, increasing risks of a disruptive adjustment or marked growth slowdown. - Relative Likelihood: Medium / High - Time Horizon: Short Term/Medium Term - Impact on Angola: High - Policy Responses: - Continue efforts to diversify oil export markets. - Diversify sources of external financing. - Let the exchange rate adjust to mitigate developments in international trade and capital markets. - Re-calibrate monetary and fiscal policies to respond to further declines in oil prices. - Persevere with structural reforms to diversify the economy. ### Energy and Oil Sector Risks - Large swings in energy prices - Findings: - Risks to prices are broadly balanced with large and uncertain supply and demand shocks, translating to elevated price volatility and complicating economic management and investment in the energy sector. - Relative Likelihood: Medium - Time Horizon: Short Term/Medium Term - Impact on Angola: High - Policy Responses: - Maintain greater exchange rate flexibility. - Adopt an appropriate monetary policy and a steadfast fiscal policy response, including by mobilizing non-oil tax revenues and adjusting public spending and improving its efficiency. - Stronger-than-expected decline in crude oil production - Findings: - A stronger-than-expected decline in crude oil production would reduce growth, oil tax revenues, and availability of foreign exchange. - Relative Likelihood: Medium - Time Horizon: Medium Term - Impact on Angola: High - Policy Responses: - Streamline administrative procedures to attract investment to the oil sector. - Move expeditiously with Sonangol's restructuring. - Mobilize additional non-oil fiscal revenues. - Accelerate reforms to diversify the economy. ### Financial Sector and Public Debt Risks - Potential negative spillovers from exchange rate flexibility - Findings: - Transition to a more flexible exchange rate could cause negative spillovers on the financial sector; the capital position of some banks may be vulnerable to further exchange rate depreciation. - Relative Likelihood: Medium - Time Horizon: Short Term/Medium Term - Impact on Angola: Medium - Policy Responses: - Address gaps in prudential regulations. - Assess potential fiscal contingent liabilities from weak banks. - Ensure that resources are earmarked/budgeted to minimize risks to financial stability. - Shocks to the public debt trajectory - Findings: - Faster-than-anticipated exchange rate depreciation, further decline in oil prices, low economic growth, and materialization of contingent liabilities could shock the public debt trajectory. - Relative Likelihood: High - Time Horizon: Short Term/Medium Term - Impact on Angola: High - Policy Responses: - Re-calibrate monetary and fiscal policy to a proper response to the shock. - Maintain greater exchange rate flexibility with supporting monetary policy. - Continue to strengthen public debt management, state-owned enterprise oversight, and transparency of public debt statistics. ### Social and Political Risks Related to Reform - Reform fatigue and social hardship - Findings: - Possibility that reform fatigue could arise given pervasive hardships. - Relative Likelihood: Medium - Time Horizon: Medium Term - Impact on Angola: Medium - Policy Responses: - Scale up cash transfers, with the help of the World Bank, to protect the most vulnerable from the side effects of reforms. - Continue well-focused technical assistance by the IMF and other development partners to mitigate implementation risks and side effects of reforms. *Source: Annex I. Risk Assessment Matrix (as provided).* ### 10. Urban transportation. The Government plans to raise minibus, bus, and train tariffs ### 10. Urban transportation. The Government plans to raise minibus, bus, and train tariffs ### Urban transportation measures and subsidy reform - The Government plans to raise minibus, bus, and train tariffs gradually, once a mitigating social program is in place. - To mitigate the impact of the change in tariffs, the Government plans to double the number of buses in Luanda and in other provinces, by selling buses to the private transportation companies. - Maritime collective public transportation and subsidy were discontinued, owing to persistent irregularities. - The indiscriminate subsidy to transportation will be replaced by a targeted subsidy on the transportation of children, primary and high-school students, youth, veterans, and seniors, through dedicated transport passes. ### Refined fuel products and price adjustments - The Government plans to adjust gasoline and diesel prices gradually, once a mitigating social program is in place. - The reform will be completed by the adoption of an automatic market-clearing price mechanism. - Adjustments in LPG and kerosene prices will be delayed, as part of a third phase. - Note: At the same time, the price of Jet B fuel, which is mainly used for electricity generation, was also raised. ### Mitigation: cash transfer program - A cash transfer-program is expected to start to be rolled out in 2020. - The program is designed to mitigate the impact of subsidy reforms on the most vulnerable families. - The program aims at compensating one million low-income families by the end of the first year of implementation for the impact of subsidy removals. - It is estimated to cost US$320 million, financed by a loan from the World bank. - If successful, the Government intends to continue to fund the program from the budget after the first year. ### Annex IV — Angola’s Sovereign Wealth Fund (FSDEA): overview and recent developments - The Fundo Soberano de Angola (FSDEA) was established in 2012 with an initial capital of US$5 billion, transferred from the “Oil for Infrastructure Fund” (Fundo Petrolifero de Angola). - Despite rules of supplementary funding, no subsequent funding has happened since its inception. - In 2017, mismanagement concerns led to an overhaul of the Fund’s top management in early 2018. - The Government gradually recovered more than US$3 billion, which was under the management of a sole asset manager. - In June 2019, the Government announced its intention to withdraw US$2 billion from the Fund to finance the Integrated Municipal Intervention Plan (PIIM). - In August 2019, US$1 billion was withdrawn. - At end-September, the Fund had total assets of US$ 3.5 billion, most held in short-term investments and fixed-income securities. - The Fund remains the second largest of its kind in sub-Saharan Africa, after Botswana’s Pula Fund. ### FSDEA asset allocation (as of September 2019) - Equity: 21% - Short term investments: 40% - Fixed income: 24% - Hedgefunds: 4% - Alternative Investments: 11% ### Legal and governance reforms (July 2019) - Presidential Decrees No. 212/19 and No. 213/19 provided a new legal framework to establish “an organizational model of sound governance, with a clear and effective division of functions and responsibilities.” - The FSDEA maintains savings and development functions; a separate fund will be set up to carry out the stabilization function. - The Minister of Finance may request up to 40 percent of the Fund’s net assets in emergency situations, such as a natural disaster or an economic crisis. ### Governance structure and bodies - The President has ultimate oversight of the FSDEA. - The Board of Directors consists of five to seven members and is responsible for daily operations and reports to the Minister of Finance. - The Investment Committee consists of eight members, including the Chairman of the Board, the Administrator of FSDEA in charge of investment, representatives from the Ministry of Finance, Ministry of Economy and Planning, and National Bank of Angola, and three experts. - The Fiscal Council is the internal control body, consisting of three members, including one accounting expert. ### Investment and risk-management framework updates - New investment policy requires: - 20 percent to 50 percent of the Fund’s assets be invested in fixed-income instruments issued by supranational agencies or institutions of mainly G7 countries; - up to 50 percent in equity securities; - up to 50 percent in alternative investments. - A limit of a maximum of 30 percent of total assets may be managed by any single asset manager. - Qualifications for asset managers: at least ten years of investment experience with G7 countries and US$3 billion under their management, and be subject to the jurisdiction of a national regulator. - The Fund set a target portfolio and is preparing to start an international tender for the selection of three asset managers in early 2020. ### Target portfolio composition - Bonds: 25% - Listed Equity: 30% - Alternative (including hedgefunds): 35% - Cash and Quasi Money: 10% ### International good practices and recommendations highlighted - Clearly define objectives: savings, development, and stabilization functions should be clearly defined; stabilization may be carried out by a separate fund. - Clarify development function: the Decrees prohibit FSDEA from “direct and indirect lending or provision of guarantees”; further clarification on the FSDEA’s role for development purposes is recommended to preserve long-term investment capacity. - Integrate FSDEA into a broad fiscal framework: operational rules of accumulation and withdrawal should be consistent with the fiscal framework; a fiscal rule is currently being developed in Angola with IMF technical assistance. - Prioritize debt reduction for highly indebted commodity exporters before sizable transfers to stabilization or savings funds. - Ensure appropriate governance structure with management at arm’s length and greater emphasis on independent, external representation to strengthen governance. - Clarify roles and responsibilities of governing bodies, and introduce independent oversight bodies with expertise to ensure compliance and good practices. - Investment strategies: specify geographic limitations and clearer guidelines for or prohibition of domestic investment to avoid sterilization costs and procyclical policies. - Strengthen risk-management: an independent risk-management function, specified risk-tolerance levels, and integrated tools to measure and manage risks are needed. - Enhance transparency and accountability: timely disclosure requirements following International Financial Reporting Standards (IFRS), public accessibility of audited reports, laws and regulations, and independent oversight opinions. *ANGOLA INTERNATIONAL MONETARY FUND.* ### Annex V. Debt Sustainability Analysis ### Annex V. Debt Sustainability Analysis ### Summary findings and outlook - Angola’s debt remains sustainable, but the debt-to-GDP ratio has increased substantially and risks have risen further. - Public debt is projected to peak at 111 percent of GDP at end-2019. - The increase in the debt-to-GDP ratio reflects: exchange rate depreciation (about four-fifths of the increase in 2019Q4), lower oil prices and production, and slower economic recovery. - Under the baseline, the debt ratio is expected to converge toward the medium-term target of 65 percent of GDP, reaching 70 percent by the end of the projection horizon under assumptions of fiscal retrenchment, the exchange rate effect on oil tax revenues, and economic recovery — but convergence is slower than previously estimated. - Total debt service is projected to peak at 102 percent of total revenues in 2020 and decline gradually thereafter. ### Debt perimeter and financing assumptions - Debt perimeter covers: - Domestic and external debt of the Central Government; - External debt of Sonangol and TAAG; - Public guarantees; and - Reported external liabilities of other state entities, including external arrears. - Key financing operations and assumptions: - Sonangol raised US$2.5 billion from a syndicate of banks and US$120 million from a local bank between end-2018 and mid-2019; expects to borrow an additional US$1.5 billion in early 2020. Cash calls outstanding are about US$1.4 billion, expected to be cleared gradually. - Baseline assumes full repayment of dollar-indexed domestic bonds coming due in 2020 (US$4.8 billion); rolling over part of these bonds would lower external market financing needs. - The baseline incorporates a US$2 billion transfer in 2019–20 from Angola’s Sovereign Wealth Fund to finance investment projects in 164 municipalities. - Loans from Afreximbank and Deutsch Bank (US$2.7 billion) aim to support private-sector projects in the next 3–4 years and would be intermediated by local banks and backed by sovereign guarantees. - TAAG: some borrowing on commercial terms assumed; planned privatization. - The baseline assumes reimbursement by the Treasury for past PNUH expenses will resume in 2020. - The baseline assumes Angola preserves access to the Eurobond market during the arrangement and rollovers of dollar-denominated domestic bonds in outer years. - Guarantees and prospective SOE borrowing: - Authorities report prospective borrowing of about 8 percent of GDP in 2019–22, likely requiring sovereign guarantees. - Baseline includes prospective AfDB loans to the private sector with sovereign guarantees; conservative annual ceilings on issuance of new guarantees are part of the program. ### Key fiscal and financing numbers (2019–22) - Financing needs (Percent of GDP): 2019: 15.7; 2020: 18.0; 2021: 11.6; 2022: 9.6. - GFN as in the DSA (Percent of GDP): 2019: 10.6; 2020: 15.5; 2021: 8.9; 2022: 8.5. - Overall deficit (Percent of GDP): 2019: -1.0; 2020: -0.8; 2021: -1.6; 2022: -1.9. - Debt amortization (Percent of GDP): 2019: 11.6; 2020: 16.3; 2021: 10.5; 2022: 10.4. - Domestic financing needs (Percent of GDP): 2019: 5.6; 2020: 8.6; 2021: 3.5; 2022: 5.3. - External financing needs (Percent of GDP): 2019: 6.0; 2020: 7.8; 2021: 7.0; 2022: 5.1. - Financing sources (Percent of GDP): Deposit drawdown: 2019: 0.5; 2020: 3.2; 2021: 1.1; 2022: 1.0. Debt issuance: 2019: 15.2; 2020: 14.8; 2021: 10.5; 2022: 8.6. - Of which: Budget support under the program (Percent of GDP): 2019: 1.6; 2020: 2.6; 2021: 2.4; 2022: 0.0. - Clearance of payments arrears (Percent of GDP): 2019: 4.5; 2020: 0.9; 2021: 0.6; 2022: 0.0. - Sonangol reimbursement (Percent of GDP): 2019: 0.0; 2020: 1.2; 2021: 1.1; 2022: 1.1. ### Public debt composition (selected values) - Domestic debt (Percent of GDP): 2019 (1st Rev.): 32.0; 2019 (2nd Rev.): 34.1; 2020 (1st Rev.): 28.6; 2020 (2nd Rev.): 26.2. - Of which FX linked/denominated (Percent of GDP): 2019 (1st Rev.): 15.3; 2019 (2nd Rev.): 19.7; 2020 (1st Rev.): 8.9; 2020 (2nd Rev.): 11.8. - External debt (Percent of GDP): 2019 (1st Rev.): 57.5; 2019 (2nd Rev.): 75.9; 2020 (1st Rev.): 54.0; 2020 (2nd Rev.): 74.5. - Central Government (Percent of GDP): 2019 (1st Rev.): 52.3; 2019 (2nd Rev.): 69.0; 2020 (1st Rev.): 49.5; 2020 (2nd Rev.): 68.2. - Sonangol and TAAG (Percent of GDP): 2019 (1st Rev.): 5.2; 2019 (2nd Rev.): 6.9; 2020 (1st Rev.): 4.5; 2020 (2nd Rev.): 6.3. - Guarantees (Percent of GDP): 2019 (1st Rev.): 0.9; 2019 (2nd Rev.): 0.9; 2020 (1st Rev.): 1.0; 2020 (2nd Rev.): 1.3. - Total public debt (Percent of GDP): 2019 (1st Rev.): 90.5; 2019 (2nd Rev.): 110.9; 2020 (1st Rev.): 83.6; 2020 (2nd Rev.): 102.0. ### Vulnerabilities, stress tests, and scenario results - Main sources of risk: faster-than-expected exchange rate depreciation; further declines in oil output or prices; deterioration in financing conditions; materialization of contingent liabilities from the financial sector and state-owned enterprises. - Exchange rate exposure: Four-fifths of Angola’s debt are denominated in, or indexed to, foreign currency. - Sensitivity and stress-test outcomes: - Real exchange rate shock: A 30-percent, one-time real depreciation of the kwanza would increase the debt ratio to almost 123 percent of GDP in the first year. - Growth shock: Lowering projected real GDP growth rates by one standard deviation would keep the debt ratio significantly above the high-risk benchmark over the projection horizon. - Combined shock: A combination of growth, inflation, primary balance, exchange rate shocks and a 200-basis-point increase in the effective interest rate would increase the debt ratio to about 150 percent of GDP and GFNs well above the high-risk benchmark; under such a scenario Angola would likely be unable to service its debt. - Contingent-liability (CL) scenario: Baseline includes amounts equivalent to 1.1 percent of 2019 GDP for bank recapitalizations in 2019–20. A CL shock assuming a one-time increase in non-interest expenditures equivalent to 10 percent of banking sector assets (about 2 percent of GDP), plus lower GDP growth and higher borrowing cost, would push both debt and GFN ratios above high-risk benchmarks. - Oil-price shock: A customized scenario with a two-year drop averaging 30 percent in the projected price of the Angolan oil basket for 2020–21 would produce a debt-to-revenue ratio peaking at 640 percent and keep the debt-to-GDP ratio above the high-risk benchmark over the projection horizon. - Asymmetric risk profile: The fan chart indicates high likelihood that systematically unfavorable macroeconomic shocks would push debt trajectories above high-risk benchmarks. - Heat map summary: Debt and GFNs breach high-risk benchmarks in both baseline and stress-test scenarios; currency composition and refinancing risks worsened since program approval. ### External DSA highlights - External DSA covers external debt of the Central Government, Sonangol, TAAG, and public guarantees denominated in foreign currency; private sector external debt not comprehensively covered due to data gaps. - External public debt path: - Public external debt projected to peak at 77 percent of GDP in 2019 and gradually converge to about 57 percent of GDP in the outer years. - The share of external debt in total debt remains elevated at about four fifths in the medium term. - External financing requirements: - Peak at about 11 percent of GDP in 2020, largely reflecting external debt service falling due. - Subsequently average about 7 percent of GDP, absent a sharp decline in oil prices. - External vulnerabilities: - Absent countervailing policy actions, a 30 percent depreciation in the real effective exchange rate would push external debt to 140 percent of GDP. - External debt is vulnerable to declines in oil prices and growth, tighter financing conditions, and materialization of contingent liabilities. ### Policy implications and risk mitigation - Fiscal policy and reserves management: - Continue fiscal retrenchment and maintain adherence to supplementary budget and NOPFD/NOPB targets to stabilize debt dynamics. - Build fiscal savings during oil-price upswings to create space for downside shocks; rigorous post-program implementation of the fiscal rule under consideration is essential. - Debt and financing strategy: - Carefully manage large debt service and GFNs, including decisions on rolling over dollar-indexed domestic bonds (US$4.8 billion due in 2020). - Preserve access to external markets and manage maturities to limit refinancing risk. - Maintain conservative ceilings on new sovereign guarantees and contain prospective SOE borrowing. - Financial sector and SOE reforms: - Mitigate CL risks through prudent borrowing strategy, moderate issuance of sovereign guarantees, restructuring of Sonangol and public banks, and SOE privatization. - Monitor bank recapitalization needs; baseline includes 1.1 percent of 2019 GDP for recapitalizations in 2019–20. - Oil revenue management: - Use conservative oil-price assumptions in budgeting to reduce exposure to oil-price shocks and volatility in FX revenues. *Source: Annex V. Debt Sustainability Analysis (Angola) — IMF staff estimates and projections contained in the provided document.* ### 15. Angola’s public debt is sustainable, but risk have heightened, and vulnerabilities ### 15. Angola’s public debt is sustainable, but risk have heightened, and vulnerabilities remain ### Key findings on sustainability and vulnerabilities - Angola’s public debt is assessed as sustainable but "highly vulnerable to macro-fiscal shocks." - Main risks to debt sustainability: - Faster-than-expected exchange rate depreciation. - Further declines in oil output or prices. - A deterioration in financing conditions. - Materialization of contingent liabilities from the financial sector and state-owned enterprises (SOEs). - The conservative oil price underpinning the 2020 draft budget reduces vulnerability to negative oil-price shocks. - Rebalancing of the real exchange rate is expected to reduce the likelihood of large corrections while boosting competitiveness and growth. ### Recommended mitigation measures and policy actions - Mobilize further non-oil revenue in the 2020–21 budgets. - Implement structural reforms expeditiously. - Proceed with the privatization program. - Make further efforts to mitigate contingent liability (CL) risks, for example by adopting tighter annual ceilings for issuance of guarantees. ### Baseline projections and debt dynamics (selected figures and indicators) - Total Nominal gross public debt (Percent of GDP) — reported series: - 2017: 43.0 - 2018: 69.3 - 2019: 89.0 - 2020: 110.9 - 2021: 102.0 - 2022: 95.1 - 2023: 86.0 - 2024: 77.4 - 2024 (end row): 69.4 - Debt of Central Government and Sonangol* (Percent of GDP): - 2017: 33.6 - 2018: 69.3 - 2019: 89.0 - 2020: 110.8 - 2021: 101.7 - 2022: 94.9 - 2023: 85.8 - 2024: 77.2 - 2024 (end row): 69.2 - *Including guarantees. - Public gross financing needs (Percent of GDP): - 2017: 10.3 - 2018: 20.2 - 2019: 15.8 - 2020: 10.6 - 2021: 15.5 - 2022: 8.9 - 2023: 8.5 - 2024: 9.1 - 2024 (end row): 6.7 - Real GDP growth (in percent): - 2017: 4.1 - 2018: -0.2 - 2019: -1.2 - 2020: -1.1 - 2021: 1.2 - 2022: 2.8 - 2023: 3.2 - 2024: 4.0 - 2024 (end row): 3.6 - Inflation (GDP deflator, in percent): - 2017: 10.9 - 2018: 22.6 - 2019: 33.8 - 2020: 22.8 - 2021: 25.0 - 2022: 15.2 - 2023: 10.1 - 2024: 6.3 - 2024 (end row): 5.9 - Nominal GDP growth (in percent): - 2017: 15.6 - 2018: 22.4 - 2019: 32.2 - 2020: 21.5 - 2021: 26.4 - 2022: 18.4 - 2023: 13.6 - 2024: 10.5 - 2024 (end row): 9.8 - Effective interest rate (in percent) (defined as interest payments divided by debt stock excluding guarantees at end-previous year): - 2017: 4.8 - 2018: 5.4 - 2019: 8.7 - 2020: 7.4 - 2021: 7.6 - 2022: 7.3 - 2023: 7.2 - 2024: 6.7 - 2024 (end row): 6.3 - Change in gross public sector debt (cumulative, percent of GDP): - 2017: 6.1 - 2018: -6.4 - 2019: 19.7 - 2020: 21.9 - 2021: -8.9 - 2022: -6.9 - 2023: -9.1 - 2024: -8.6 - 2024 (cumulative final): -8.0 - Total cumulative through projection horizon: -19.6 - Identified debt-creating flows (percent of GDP): - 2017: 2.5 - 2018: -4.8 - 2019: 9.2 - 2020: -16.0 - 2021: -26.0 - 2022: -17.5 - 2023: -14.2 - 2024: -10.5 - 2024 cumulative: -9.6 - Total identified through horizon: -93.8 - Primary deficit (percent of GDP): - 2017: -0.3 - 2018: 3.0 - 2019: -6.6 - 2020: -6.4 - 2021: -7.4 - 2022: -7.8 - 2023: -7.8 - 2024: -7.5 - 2024 (horizon): -7.1 - Cumulative primary deficit through horizon: -44.0 - Primary (noninterest) revenue and grants (percent of GDP): - 2017: 36.0 - 2018: 17.5 - 2019: 21.9 - 2020: 19.8 - 2021: 20.9 - 2022: 21.5 - 2023: 21.7 - 2024: 21.5 - 2024 (horizon): 21.2 - Cumulative: 126.5 - Primary (noninterest) expenditure (percent of GDP): - 2017: 35.7 - 2018: 20.5 - 2019: 15.3 - 2020: 13.4 - 2021: 13.4 - 2022: 13.7 - 2023: 13.9 - 2024: 14.0 - 2024 (horizon): 14.0 - Cumulative: 82.4 - Automatic debt dynamics (percent of GDP): - 2017: -0.7 - 2018: -10.5 - 2019: 14.5 - 2020: -10.4 - 2021: -16.5 - 2022: -9.6 - 2023: -5.4 - 2024: -3.0 - 2024 (horizon): -2.5 - Cumulative: -47.3 ### Stress tests and scenario outcomes (high-level) - Stress tests considered: Primary Balance Shock; Real GDP Growth Shock; Real Interest Rate Shock; Real Exchange Rate Shock; Contingent Liability Shock; Combined Macro-Fiscal Shock; Oil Price Shock; Additional stress tests (e.g., 30 percent real depreciation). - Charts indicate gross nominal public debt (in percent of GDP) and public gross financing needs (in percent of GDP) under baseline and stress scenarios for 2019–2024, with debt rising under adverse shocks (figures presented in the source visualizations). ### Debt profile, markets, and indicators (selected vulnerability indicators and thresholds) - EMBIG (average over last 3 months, 17-Jul-19 through 15-Oct-19) reported as 614 bp in one figure caption. - Public debt held by non-residents: 64 percent (figure annotations). - External financing requirement defined as sum of current account deficit, amortization of medium and long-term total external debt, and short-term total external debt at end of previous period. - Heat-map framework and risk-assessment benchmarks applied (benchmarks and color rules described in source). ### External debt sustainability (selected table highlights) - Baseline: External debt (Percent of GDP) shown by year; examples: - 2014: 24.9 - 2015: 35.1 - 2016: 45.0 - 2017: 38.2 - 2018: 56.8 - 2019: 76.5 - 2020: 75.5 - 2021: 71.2 - 2022: 66.4 - 2023: 61.4 - 2024: 56.5 - Change in external debt (Percent of GDP): - 2014: 3.1 - 2015: 10.2 - 2016: 9.9 - 2017: -6.8 - 2018: 18.6 - 2019: 19.7 - 2020: -1.0 - 2021: -4.3 - 2022: -4.8 - 2023: -5.0 - 2024: -4.9 - Gross external financing need (in billions of US dollars) and as percent of GDP: - 2014: $6.8 billion; 4.9 percent of GDP - 2015: $12.9 billion; 12.5 percent of GDP - 2016: $7.3 billion; 7.4 percent of GDP - 2017: $4.4 billion; 3.6 percent of GDP - 2018: -$1.5 billion; -1.8 percent of GDP - 2019: $4.4 billion; 6.6 percent of GDP - 2020: $7.7 billion; 10.9 percent of GDP - 2021: $6.8 billion; 9.2 percent of GDP - 2022: $5.4 billion; 6.8 percent of GDP - 2023: $5.7 billion; 6.8 percent of GDP - 2024: $5.6 billion; 6.2 percent of GDP ### Program context and authorities’ requests (from Letter of Intent) - Attachments include a Memorandum of Economic and Financial Policies (MEFP) and Technical Memorandum of Understanding (TMU) updating the May 24, 2019 documents. - Program objectives reiterated: reducing fiscal vulnerabilities; strengthening debt sustainability; reducing inflation; implementing a flexible exchange rate regime; ensuring financial sector stability; strengthening AML/CFT framework. - Program performance: met all continuous performance criteria (PCs) except on non-accumulation of external debt arrears; met all end-June quantitative PCs except the PC on net international reserves (NIRs); met most end-June and end-September indicative targets. - Requests to the IMF: - Completion of the second review of the Extended Arrangement under the Extended Fund Facility and disbursement of the third tranche equivalent to SDR 179 million (24 percent of quota). - Waiver of non-observance of the PC on NIRs and the continuous PC on non-accumulation of external debt arrears. - Modifications of the PC and IT on NIRs; modifications of ITs on the stock of debt contracted or guaranteed by the Central Government or Sonangol; disbursements of oil-collateralized external debt by the Central Government; and on the non-accumulation of payments arrears. - Approval of a PC on reserve money and an IT on issuance of new state guarantees for debt. - IMF resources to be used for budget support and maintained in government accounts at the Banco Nacional de Angola (BNA). *Source: IMF staff (As of October 15, 2019) — Chapter 15, "Angola’s public debt is sustainable, but risk have heightened, and vulnerabilities remain."* ### 1. The Angolan economy continues to face a deteriorated external environment since the ### 1. The Angolan economy continues to face a deteriorated external environment since the ### Economic context and near-term performance - External environment has deteriorated since approval of the Extended Arrangement under the Extended Fund Facility; oil-price volatility, heightened trade tensions, and weakening global activity have increased uncertainty. - Overall performance in 2019 described as "adequate" despite the more challenging external environment; policies have aimed to respond to this environment. - Economic activity weaker than expected: growth is projected to decline in 2019, driven by lower-than-expected oil production and subdued non-oil activity. - Current account and reserves: - Current account balance will deteriorate in 2019 due to lower oil and gas exports but should remain in surplus, supported by currency depreciation. - Gross reserves projected to decline to US$15.5 billion (equivalent to 7.6 months of prospective imports of goods and services) at end-2019. - Recent balance of payments pressures accommodated by draining net international reserves (NIRs); improved competitiveness should allow faster reserve accumulation in 2020 and over the medium term. - Inflation and monetary stance: - Inflation declined to 16 percent in September 2019. - Inflation projected to peak at 24 percent in 2020, inter alia because of adjustments of regulated prices and kwanza depreciation. - BNA had cut its policy rate thrice since mid-2018 and the reserve requirement ratio thrice since early 2018, but the stance has been recalibrated to mitigate depreciation pressures on the kwanza; further tightening will be pursued if needed. - Banking sector vulnerabilities: - Nonperforming loans (NPLs) are high at 29 percent of total loans and expected to remain elevated in the short term. - Subdued economic activity over the last four years and weak but improving risk-management practices at some banks have eroded banking sector soundness. - Slow implementation of the restructuring of the largest public bank (BPC), but progress in reducing banking sector vulnerabilities is expected ahead. ### Macroeconomic goals and program outlook (2019–21) - Program pillars: - (i) adopting sound policies to promote macroeconomic and financial stability; - (ii) implementing structural reforms to lessen dependence on oil, promote economic diversification, and reduce vulnerabilities. - Growth target: - Expect overall growth to start recovering in 2020 and reach about 2.8 percent by the end of the program period, driven by stronger growth in non-oil sectors. - Inflation target: - Goal to reduce annual inflation to a single digit by 2022 through (i) persistence with prudent fiscal policy; (ii) a strengthened monetary policy framework based on reserve money targeting and a flexible exchange rate; and (iii) gradual elimination of domestic production bottlenecks. - Fiscal sector goal: - Strengthen sustainability of public finances by implementing prudent budgets, anchoring expenditure to realistic oil prices, and reducing the non-oil primary fiscal deficit (NOPFD) throughout the program. - Exchange rate regime: - Liberalized to buttress monetary policy, provide cushion against external shocks, improve FX allocation, competitiveness, and support diversification. - Monetary framework: - Reserve money established as the nominal anchor; targets for reserve money will be set as performance criteria supportive of disinflation targets. - Financial sector reforms: - Address banking sector vulnerabilities, including NPLs, correspondent banking constraints, and legal instrument gaps. ### Fiscal policy stance and consolidation measures - 2019 fiscal retrenchment: - Fiscal retrenchment on track in first half of 2019; NOPFD at end-June outperformed target, supported by expenditure restraint. - Conservative supplementary budget and corrective measures to achieve NOPFD target for end-2019 and contain public debt increase. - Public debt expected to peak at 111 percent of GDP in 2019. - 2020 draft budget and medium-term focus: - Draft budget for 2020 consistent with medium-term fiscal consolidation while preserving priority infrastructure and social spending. - Targeted consolidation mostly underpinned by non-oil revenue mobilization and contained expenditure envelope. - Specific fiscal measures and ceilings: - Additional expenditure measures of about 0.8 percent of GDP underpin 2019 retrenchment. - Wage bill ceiling proposed at Kz 2.218 trillion in 2020, reflecting restrained real adjustments and limited hiring. - Payments arrears accumulation kept well below program ceiling of Kz 100 billion through end-June 2019 and will not exceed the new ceiling of Kz 250 billion (indicative target). - Up to 7 percent of capital expenditure could be reallocated to current expenditure on an exceptional basis. ### Revenue mobilization, tax reforms, and subsidy reform - New taxes and measures: - Value-added tax (VAT, structural benchmark) introduced on October 1, 2019; VAT (net of reimbursements) and higher excises projected to boost non-oil revenues in 2020. - Removal of PIT exemptions on remuneration of taxpayers over 60 years old and on end-of-year and vacation allowances enacted in August 2019. - By end-December 2019, submission to the National Assembly of a robust package of tax reforms, including raising withholding rates for services by non-residents; increasing PIT tax rates for higher income brackets while raising the threshold for lower ones; lowering threshold of property tax exemption; and an environmental tax on plastic bags (structural benchmark). - Medium-term revenue reforms: - Strengthen non-oil revenue collection beyond 2020 with IMF TA, including corporate income tax improvements, reforming tax expenditures and investment incentives, transfer pricing rules, enhancing property tax collection, and measures to integrate the informal sector. - Relevant reforms to be submitted to Government or National Assembly by end-July 2020 and reflected in the 2021 budget. - Supported by an ongoing three-year revenue administration TA project from the IMF. - Subsidy reform phases: - Phase 1 completed: adjusted water tariffs in August 2018; liberalized Jet A-1 price in June 2019; adjusted electricity tariffs in July 2019; improving SOE operational efficiency in electricity sector to reduce subsidies. - Phase 2: gradual adjustment of public transportation tariffs and gasoline/diesel prices. Will start after rollout of a cash-transfer program and culminate in adoption of a comprehensive strategy for fuel pricing with an automatic pricing mechanism. Cash-transfer program targets one million low-income households and is supported by the World Bank. - Phase 3: adjustment of LPG and kerosene prices after the cash-transfer program reaches a critical number of households. - Subsidies for fuel purchases by agriculture and fishing enterprises (announced in 2019) will be subject to an independent assessment one year after rollout. ### Arrears clearance, PFM, and fiscal transparency commitments - External arrears: - Working on resolving external arrears to private and official bilateral creditors; mid-2019 agreement with a private foreign supplier to clear arrears gradually. - In 2020 will start clearing arrears to two large foreign suppliers with preliminary agreements. - Requesting a waiver for non-observance of the PC on non-accumulation of external arrears in the second arrangement review due to correspondent bank constraints transacting in U.S dollars. - Commitment not to accumulate any new external debt arrears and take corrective actions, including adopting a new AML/CFT law and setting up a third-party escrow account for rejected payments. - Payments arrears and SIGFE: - By end-March 2020, eliminate all arrears recorded in SIGFE accumulated up to 2017 (structural benchmark). - Clear at least 50 percent of non-SIGFE arrears in cumulative terms by end-March 2020 (structural benchmark). - Certify and clear 75 percent of non-SIGFE arrears in cumulative terms by end-December 2020 and complete verification and clearance of all non-SIGFE arrears by end-June 2021. - Verify and clear all payments arrears accumulated by the Central Government in 2018 and recorded in SIGFE by end-June 2020 (structural benchmark). - SIGFE adjusted to allow electronic recording, consultation, and certification of all claims and monitoring of residency of new supplier contracts; became operational ahead of September 2019 deadline (structural benchmark). - By end-2019 will start publishing detailed quarterly reports on stock of outstanding arrears, amounts paid, payment modalities, and average payment periods within six weeks of quarter end. - Medium-term fiscal framework and legislation: - Adopt an MTFF to take into account medium-term fiscal targets and deficit ceilings of a Fiscal Responsibility Law (FRL); submit FRL to the National Assembly by end-March 2020 (structural benchmark). - Finalize a pilot MTFF in May 2020 to anchor the 2021 budget proposal. - Design a fiscal stabilization fund to reduce procyclicality; capitalization will start once the budget generates surpluses and Central Government debt is below the target consistent with the FRL. - Public investment management: - Large investment projects (projectos estruturantes) subject to ex ante evaluation, rigorous governance, monitoring, ex post evaluations, and only start if financing is fully secured. - Apply principles to projects under the Integrated Municipal Intervention Plan (PIIM), fully reflected in annual budgets and funded by resources from Angola’s Sovereign Wealth Fund (FSDEA). - Follow IMF advice on PPPs to reduce contingent liabilities and fiscal risks. - Fiscal transparency and accountability: - Publish an end-year fiscal report for 2019 (full year and fourth quarter) by end-April 2020 to support pilot-MTFF and 2021 budget. - Continue to publish detailed in-year quarterly fiscal reports in line with IMF staff recommendations. - Hold senior officials accountable for breaches of budget ceilings; Ministry of Finance to finalize identification of arrears across Sonangol and Prodel by end-2019 and start implementing time-bound plan to clear them; remaining balances to be cleared without recourse to cash transfers. ### Monetary, exchange rate, and financial sector actions - Exchange rate and monetary policy: - Liberalized exchange rate regime to support monetary framework, FX allocation, competitiveness, and diversification. - Reserve money targeting established as nominal anchor; reserve money targets to be set as performance criteria. - Stance recalibrated to mitigate depreciation pressures; further tightening if needed to counter second-order effects from regulated price adjustments. - Banking sector remediation: - Address NPLs and banking vulnerabilities, strengthen risk management, resolve restructuring of BPC (largest public bank), and improve correspondent banking relationships and legal instruments. *IMF staff and Angolan authorities’ program documentation contained in the source PDF.* ### 9. We will continue to target reserve money as a nominal anchor for price stability. ### 9. We will continue to target reserve money as a nominal anchor for price stability. ### Monetary policy and reserve-money framework - Quantitative targets for reserve money under the arrangement (performance criteria) will provide a strong and credible nominal anchor, mitigate pressures on the exchange rate, and help achieve inflation objectives. - Strengthen liquidity forecasting and management framework to better grasp liquidity conditions in the banking system and to improve analytical capacity on transmission channels of monetary policy. - Intra-year direct lending to the Government restricted to the limit of 10 percent of the previous year’s fiscal revenues, as defined in Article 29 of the BNA Law. - Government commits to settle, at the end of each calendar year, any outstanding intra-year advances by the BNA solely with cash, without recourse to government securities. - Monetary Policy Committee will strengthen communication of monetary and exchange rate policies by: - publishing statements on the BNA’s website explaining rationale for policy decisions; and - holding meetings with main market participants. ### BNA legal framework, governance, and safeguards (structural actions and timelines) - Commitments to meet IMF Safeguards Assessments Policy requirements, including: - rebalancing foreign reserves portfolio to align with new investment policy; eliminate illiquid holdings with external managers; and no assets or commercial relationships with unrated institutions. - continuing timely publication of audited financial statements. - Structural benchmark: submit amendments to the BNA Law to the National Assembly by end-March 2020 to: - clearly define the BNA’s mandate; set a clear primary policy objective; strengthen governance arrangements; - legally protect and shield BNA staff from undue influence; ensure BNA’s financial autonomy, including by limiting lending to the Government; - separate emergency liquidity assistance from monetary operations; adopt international good practices; strengthen solvency support frameworks; guarantee functional autonomy; - other goals outlined in the 2019 Safeguards Assessment Report for Angola. - Requested IMF TA to meet the timeline. ### Exchange rate regime and FX market measures - Continue transition toward full exchange rate flexibility; measures taken include: - removing restrictions to banks’ participation in auctions; - streamlining bidding process during FX auctions to enhance price-discovery; - increasing frequency and predictability of FX auctions. - Operational commitments: - FX auctions held at least two times per week, on the same days of the week. - Removed the 2 percent cap on banks’ FX resale margins. - Goal: achieve a market-clearing exchange rate and eliminate any distinction between underlying flows in FX auctions by end-December 2019. - BNA will announce monthly amounts to be auctioned for the following three months to help predictability. - Structural benchmark: eliminate informal restrictions on foreign exchange deposit withdrawals by issuing legally binding instructions to banks; banks denying access must provide written documentation to clients explaining the reasons; banks will be fined for non-compliance. - Use results of bank-by-bank asset quality reviews (AQRs) and stress tests to inform measures to cushion the impact of potential further large depreciation of the exchange rate on banks. ### Net international reserves (NIRs) - Goal to rebuild BNA’s NIRs starting in 2020. - Remedial action after missing June and September 2019 targets: implement a monthly FX intervention budget agreed with IMF staff, consistent with proposed modified PCs for NIRs. ### Elimination of exchange restrictions (ERs) and multiple currency practices (MCPs) - Implement a strategy to eliminate ERs and MCPs progressively; prepare a plan with a clear timeline. - Structural benchmark: eliminate the discriminatory application of the 0.1 percent stamp tax on foreign exchange operations by end-March 2020 (ER, Article VIII, 2a and MCP, Article VIII, 3) by amending Presidential Decree No. 3/14, of October 21, 2014 to remove the stamp tax that gives rise to an exchange rate restriction and an MCP. - Commit to eliminate the special tax of 10 percent on transfers to non-residents under contracts for foreign TA or management services (ER, Article VIII, 2a) by end-March 2021. ### Financial sector stability and supervision - Closed three small banks due to capital shortfalls; continue close monitoring of other banks with high exposures to FX, credit, liquidity, and market risks. - Revising the Financial Institutions Law in line with Basel standards and IMF/World Bank advice to ensure: - effective corrective action (escalated supervisory intervention as a bank deteriorates); - recovery planning and resolution frameworks for weak banks (structural benchmark). - Created a deposit guarantee fund. - Strengthen coordination between the BNA and the Ministry of Finance, including contingency planning, by adopting a Memorandum of Understanding by end-December 2019. ### Asset quality reviews (AQRs) and bank recapitalization (structural benchmarks and targets) - AQRs of the twelve largest banks and a smaller bank (comprising 93 percent of the banking system’s total assets) nearing completion; expected to be completed by end-December 2019 (structural benchmark) with formal communication of capital impact to banks. - Any bank with capital shortfalls will be required to: - submit a recapitalization plan by end-April 2020; and - return to full compliance with regulatory capital requirements by end-June 2020 (structural benchmark). - By end-June 2020 the BNA and Government will agree on the approach to restore public banks to viability and commence restructuring; all other banks failing post-AQR regulatory capital requirements will be intervened and subsequently resolved. ### State role in the banking sector (strategy and structural benchmark) - Current state presence: four banks owned or controlled by the State and three banks with significant State shareholding (directly or indirectly, e.g., through Sonangol). - Structural benchmark: comprehensively update strategy by end-February 2020 to incorporate AQR results, including: - substantially reduced State participation in the banking sector; - engage independent experts to prepare a time-bound action plan to restructure the four public banks using a least-cost approach and within fiscal space; - specify how post-AQR solvency and capital shortfalls will be addressed; - viability analysis of proposed going-concern entities; - operational plans to dispose of real-estate-owned and tackle NPLs; - announce key elements of the plan. ### Recredit reforms and governance (timelines) - Legislation enacted to: - restrict Recredit’s mandate to purchasing NPLs from BPC only; - introduce a ten-year sunset clause; - establish that assets can be transferred to Recredit only at fair value and based on comprehensive due diligence. - Further strengthen Recredit’s mandate, autonomy, governance and operating arrangements to maximize value recovery for taxpayers using international valuation standards. - Recredit Law amendments to require independent business reviews of main debtor groups upon Recredit’s request and improve accountability by requiring publication of a business plan and annual performance reports. - Increase independence by amending articles of association to: - remove Ministry of Finance approval requirement for operational decisions; - limit oversight committee’s role to monitoring performance against the business plan; and - replace representative of the bankers’ association with an independent expert. - Timing: changes to be made in Recredit’s regulations by end-January 2020 and in a Presidential Decree by end-July 2020. ### Prudential oversight, governance, and supervisory guidance (structural benchmark and timelines) - BNA will continue to enforce prudential norms including reserve, capital, liquidity and provisioning requirements and will verify credibility of restructuring plans aimed at achieving viability. - Structural benchmark: submit amendments to the Financial Institutions Law to the National Assembly, to be adopted by end-March 2020; amendments will introduce more rigorous fit and proper requirements for bank owners, board members, and managers. - By end-June 2020, BNA will: - issue guidelines on effective bank boards; - issue guidelines on effective credit-risk management practices; and - update asset classification and provisioning rules. - Banks expected to be compliant with the new guidance by end-December 2020. ### Credit-risk management infrastructure (action plan and timelines) - In consultation with the World Bank, prepare an action plan by end-June 2020 to: - adopt international valuation standards for securities and collateral held by banks; - deploy and strengthen national registries for ownership of immovable and moveable assets; - strengthen the central credit register; - develop the system of postcodes; - enhance insolvency and enforcement frameworks. - Give due consideration to strengthening professions for asset valuation, credit-risk management, and insolvency. ### AML/CFT - Government committed to a comprehensive AML/CFT Assessment in context of forthcoming FATF mutual evaluation. - Draft AML/CFT Law submitted to the National Assembly in early August 2019; the Law is expected to be promulgated shortly. ### Public debt management - Continue implementation of Medium-Term Debt Management Strategy for 2019–22. - Measures taken include reducing frequency of primary auctions and greatly reducing issuance of Treasury bonds indexed to, or denominated in, foreign currency. - Since approval of the arrangement: no new oil-collateralized debt contracted (performance criterion) and disbursements under existing oil-collateralized credit facilities kept below agreed ceilings (indicative targets). - Borrowing strategy for public investment projects: restrict implementation to priority projects under a tight and secured financing envelope, prioritize concessional financing, and refrain from contracting new debt for non-priority investments or projects that do not meet project selection criteria. - Implement IMF and World Bank recommendations to improve public debt profile and strengthen domestic creditor base. - Tightening ceilings for issuance of debt guarantees by the State (indicative target). - Commit to act if unforeseen risks to achieving medium-term debt target materialize. ### Structural reforms and private-sector development - Continue reforms to promote private sector-led growth and economic diversification in line with NDP18–22 and World Bank support: - facilitate access to electricity; - simplify procedures for paying taxes; - reduce transaction costs for businesses. - Preparing a draft Law on the Recovery of Enterprises and Insolvency, and related regulations, with World Bank technical support; objective to strengthen credit guarantees and improve insolvency system efficiency. - Structural benchmark: submit the Insolvency Law to the National Assembly by end-March 2020. ### SOE reform and privatization - Following approval of a Privatization Law, Government published PROPRIV for 2019–22 setting guidelines for privatization, including eligible SOEs, timetable, modalities, and communication strategy. - Privatization receipts to be used primarily for infrastructure financing, strengthening viable SOEs to be privatized, and repayments of central government debt; receipts and use will be fully incorporated in annual budgets. - Sonangol implementing “Regeneration Program” to focus on core oil businesses. - Sale of the first set of Sonangol’s non-core assets took place before the September 2019 deadline (structural benchmark). - Plan to launch public offering of another 27 non-core assets by end-2020, including 25 as initially planned and 2 left out from the first round. - Sonangol will sell its stakes in the banking sector in due time. ### Governance and anti-corruption - Government committed to strengthening governance and fighting corruption. - Attorney General’s office (PGR) implementing anti-corruption strategy published in December 2018; investigations resulted in one former minister and associates jailed for embezzlement. - Structural benchmark: the 15 largest SOEs (by assets) published their audited annual reports for 2018 on IGAPE’s webpage in September 2019. - Enforcement plan: starting next year, enforce publication of these companies’ annual reports on IGAPE’s webpage by end-May, as required by law. - Procurement transparency targets: - Award at least 45 percent of contracts related to expenditure on public investment projects not financed by external project loans and whose value exceeds minimum threshold defined in the Law of Public Contracts (structural benchmark). - By end-May 2020, at least 237 Budget Units (out of 593) will publish their Annual Purchase Plans on the Public Purchases’ Portal. *Source: 1agoea2019002 - 9. We will continue to target reserve money as a nominal anchor for price stability.* ### 25. The program will be monitored through semi-annual reviews. The complete schedule of ### 25. The program will be monitored through semi-annual reviews. The complete schedule of reviews is presented in the companion staff report’s Table 10, with agreed performance criteria, indicative targets, and structural benchmarks shown in Tables 1 and 2, respectively. The third review will be based on quantitative targets for end-December 2019 and corresponding structural benchmarks. ### Monitoring and review schedule - Reviews under the arrangement assess performance criteria (PCs) and indicative targets (ITs) at specified test dates. - The second, third, fourth, and fifth reviews will assess PCs and ITs at end-June 2019, end-December 2019, end-June 2020, and end-December 2020 test dates, respectively. ### Performance Criteria and Indicative Targets (December 2018 to December 2020) - Net international reserves (NIRs) of the Banco Nacional de Angola (BNA), floor (millions of U.S. dollars): - Program and selected values appearing in Table 1a include: 10,000; 10,289; 10,640; 10,100; 9,499; 10,286; 10,300; 9,891; 11,614; 10,183; 9,516; 11,541; 10,016; 9,141; 9,441; 9,203; 9,581; 9,266; 9,790; 9,948; 10,000. - BNA claims on the Central Government, cumulative ceiling (billions of kwanzas): - Values shown: 355; 355; 355; 150; 150; 0; 250; 250; 250; 0; 300; 300; 1480; 150; 150; 250; 250; 3000. - Reserve money, ceiling (billions of kwanzas) — quarterly baseline targets: - Reserve Money Ceiling (Billions of Kwanzas): 1,748; 1,739; 1,774; 1,792; 1,908. - Components (Billions of Kwanzas): Currency in Circulation 451; 470; 479; 484; 516. Bank's Accounts (Reserves) in Kwanzas 877; 886; 904; 913; 972. Bank's Accounts (Reserves) in Foreign Currency 421; 383; 391; 395; 421. - Reserve Requirement Ratios (%): Domestic Currency 17; 17; 17; 17; 17. Foreign Currency 15; 15; 15; 15; 15. - Non-oil primary fiscal deficit of the Central Government, cumulative ceiling (billions of kwanzas): - Values shown include: 2,488; 2,488; 1,471; 484; 484; 286; 977; 906; 906; 371; 1,290; 1,290; 1,044; 1,992; 1,992; 461; 461; 1,033; 1,033; 1,568; 2,384. - Non-accumulation of external debt payments arrears by the Central Government and the BNA, continuous ceiling (U.S. dollars): - Values and status entries in Table 1a include: 0; 0; 223; 0; 0; 2,500; 0; 51; 0; 0; 3,000; 0; 0; 0; 0. - New oil-collateralized external debt contracted by or on behalf of the Central Government, the BNA, and Sonangol, continuous ceiling (U.S. dollars): - Values include: 0 entries and status “Met” for applicable periods. - Indicative targets — stock of Central Government debt and debt of Sonangol, ceiling (billions of kwanzas): - Values shown: 24,733; 24,733; 23,830; 27,348; 27,348; 24,568; 27,348; 28,011; 28,011; 26,011; 28,011; 28,011; 28,109; 28,011; 36,047; 29,642; 41,879; 29,642; 41,879; 41,879; 41,879. - Indicative targets — social spending, cumulative floor (billions of kwanzas): - Values shown: 848; 848; 1,227; 200; 200; 291; 400; 400; 400; 650; 750; 750; NA; 1,100; 1,100; 311; 311; 622; 622; 1,031; 1,440. - Indicative targets — net accumulation in the stock of payments arrears by the Central Government, ceiling (billions of kwanzas): - Values include: 100; 100; -95; 100; 100; 100; -63; 100; 100; NA; 100; 250; 100; 250; 100; 250; 250; 250. - Indicative targets — disbursements of oil-collateralized external debt by the Central Government, cumulative ceiling (millions of U.S. dollars): - Values shown include: 200; 200; 29; 71; 171; 171; 31,422; 752; 752; 3; 1,000; 1,000; 172,843; 1,000; 335; 200; 669; 400; 600; 1,160. - Authorizations by the Ministry of Finance for the issuance of debt guarantees by the Central Government, annual ceiling (U.S. million dollars): - Value: 30; 30; 30; 30; 30. ### Standard Continuous Performance Criteria (Table 1b) - Not to impose new or intensify existing restrictions on the making of payments and transfers for current international transactions. - Not to introduce new or intensify existing multiple currency practices. - Not to conclude bilateral payments agreement that are inconsistent with the IMF’s Articles of Agreement (Article VIII). - Not to impose new or intensify existing import restrictions for balance of payments reasons. ### Structural Benchmarks Under the Extended Arrangement (December 2018–December 2020) - VAT: - Begin collecting VAT from large taxpayers, as defined in the Presidential Decree No. 147/13, of October 1, 2019. - Objective: Broaden tax base and strengthen non-oil revenues. - Date: July, 1 2019. Status: Not met. Observation: Implemented on October 1, 2019. - Payments arrears (SIGFE residency monitoring): - Start identification and monitoring of the residency of all new supplier contracts in SIGFE. - Objective: Enhance recording and monitoring of payment arrears. - Date: End-September 2019. Status: Met. - SOEs — Sonangol non-core assets public offering: - Implement public offering of the first set of Sonangol's non-core assets. - Objective: Minimize fiscal risks. - Date: End-September 2019. Status: Met. - SOE transparency: - Publish audited annual reports for 2018 of the 15 largest SOEs at least on IGAPE's webpage. - Objective: Enhance SOE transparency and accountability. - Date: End-September 2019. Status: Met. - PFM law: - Submit PFM legislation to the National Assembly, in line with IMF staff advice. - Objective: Strengthen fiscal policy design and implementation. - Date: End-December 2019. Reset: End-March 2020. Observation: More time needed to consult with stakeholders. - Payments arrears verification and settlement: - Complete verification and settlement of at least 50 percent of verified payment arrears accumulated by the Central Government up to end-2017 and not recorded in SIGFE, as well as all arrears recorded in SIGFE. - Objective: Normalize supplier relations and reduce debt burden. - Date: End-December 2019. Reset: End-March 2020. Observation: Postponed to mitigate tight cash flow. - AML/CFT legislative steps: - Submit a revised AML/CFT law and related amendments to the National Assembly, in line with FATF standards. - Objective: Strengthen AML/CFT framework. - Date: End-March 2019. Status: Not met. Observation: Implemented in early August, 2019. - Enact revised AML/CFT law and related amendments: End-September 2019. Status: Not met, Reset: End-March 2020. - Recredit governance and procedures: - Ensure proper governance arrangements and operational procedures at Recredit to maximize recoveries and minimize fiscal costs. - Date: End-June 2019. Status: Not met, Modified and Reset: End-January 2020 and End-July 2020. Observation: Modified to clarify maximizing value recovery; further regulatory and Presidential Decree changes expected end-January 2020 and end-July 2020. - Restructuring BPC: - Finalize a strategic plan for BPC laying out long-term role and restructuring. - Date: End-June 2019. Status: Met. - Banking sector AQRs: - Complete Asset Quality Reviews for the 12 largest banks by external experts in collaboration with the BNA. - Objective: Promote financial stability. Date: End-December 2019. Observation: Completion will be assessed by formal communication of the capital impact to banks. - Financial Institutions Law amendments: - Adopt amendments to ensure effective recovery planning, enhanced corrective actions, and resolution framework for weak banks. - Objective: Promote financial stability and BNA governance and autonomy. - Date: End-December 2019. Reset: End-March 2020. Observation: More time needed for stakeholder consultation. - FX market backlog elimination: - Eliminate the backlog of foreign exchange demand. - Objective: Develop a well-functioning FX market. - Date: End-December 2018. Status: Not met. Observation: Implemented in April 2019. - FX deposits: - Eliminate informal restrictions on foreign exchange deposit withdrawals. - Objective: Minimize financial stability risks. Date: End-December 2019. - BNA Law amendment: - Submit amendment to the BNA Law to the Council of Ministers to define a precise mandate focusing on price stability; limit monetary financing of the Government; increase operational autonomy; strengthen oversight over executive management; and improve governance. - Objective: Strengthen the monetary policy framework. - Date: End-December 2019. Reset: End-March 2020. Observation: More time needed to consult with stakeholders. - MCP (Multiple Currency Practice): - Amend Presidential Decree No. 3/14 to remove the stamp tax on foreign exchange operations that gives rise to an exchange rate restriction and a MCP. - Objective: Promote a well-functioning FX market. Date: End-March 2020. - Proposed new structural benchmarks (selected): - Non-oil revenues: Submit a package of measures to the National Assembly to mobilize non-oil revenue, mainly through personal income tax and property tax reforms. Date: End-December 2019. - Payments arrears (2018 SIGFE): Complete verification and settlement of all payments arrears accumulated by the Central Government in 2018 and recorded in SIGFE. Date: End-June 2020. - Public procurement: Award, through open tenders, at least 45 percent of public contracts related to expenditure on public investment projects (not financed by external project loans) whose value exceeds Kz 182 million. Date: End-December 2020. - Role of the State in the banking sector: Finalize a strategy for the State's future involvement in the banking sector. Date: End-February 2020. - Banking sector recapitalization: Complete recapitalization by requiring banks to return to compliance with regulatory capital rules. Date: End-June 2020. ### Technical Memorandum of Understanding — Key Definitions, Exchange Rates, and Adjustors - Arrangement exchange rate assumptions: - For the arrangement, AOA to the U.S. dollar is set at AOA 295 per US$1 for the duration of the arrangement. - Text Table 1 Exchange Rates per U.S. Dollar: AOA 295.00000; EUR 1.15760; GBP 1.30410; CNY 0.14531; ZAR 0.07050; SDR 1.39525. - Net international reserves (NIRs) definition and coverage: - NIRs = U.S. dollar value of official reserve assets of the BNA minus reserve liabilities of the BNA. - Non-dollar assets/liabilities converted at International Financial Statistics exchange rates on September 28, 2018; monetary gold valued at market price at each test date. - Official reserve assets include: monetary gold, SDRs, foreign currency cash, foreign currency securities, deposits abroad, and reserve position at the IMF. - Exclusions from foreign assets: assets pledged/collateralized/encumbered; guarantees for third-party external liabilities; claims on residents including commercial banks; claims from FX derivatives vis-à-vis domestic currency; precious metals other than gold; assets in nonconvertible currencies; assets held with unrated correspondent banks; illiquid assets. - Reserve liabilities include: short-term foreign exchange liabilities with original maturity up to and including one year; commitments to sell FX from derivatives; all credit outstanding from the IMF. - Disbursements from the IMF received by the Central Government under the arrangement are excluded from NIRs computation. - NIR adjustors (Baseline Scenario): - Upward adjustors: - US$200 million, on a quarterly basis, for each US$1 per barrel that the average Brent crude oil price in the corresponding quarter exceeded the arrangement’s assumption in Text Table 2. - The shortfall in external debt service of the Central Government with multilateral institutions, excluding the IMF, as well as with Eurobonds, relative to the baseline projection reported in Text Table 2. - The excess in disbursements for budget support received by the Central Government from multilateral institutions, excluding the IMF, as well as proceeds from Eurobonds, relative to the baseline projection reported in Text Table 2. - Downward adjustors: - US$200 million, on a quarterly basis, for each US$1 per barrel that the average Brent crude oil price in the corresponding quarter fell below the arrangement’s assumption in Text Table 2. This adjustor lower limit is US$200 million for 2020Q1, US$400 million for 2020Q2, US$600 million for 2020Q3, and US$800 million for 2020Q4, cumulatively. - The excess in external debt service of the Central Government with multilateral institutions excluding the IMF, as well as with Eurobonds, relative to the baseline projection reported in Text Table 2. - The shortfall in disbursements for budget support received by the Central Government from multilateral institutions excluding the IMF, as well as proceeds from Eurobonds, relative to the baseline projection reported in Text Table 2. - Sample numeric entries (Adjustors from the EFF Second Review) included in Text Table 2: - Brent oil price, U.S. dollars per barrel: 64.0; 62.3; 60.8; 59.8; 59.1 (presented across proposed dates). - Disbursements from multilaterals, except the IMF, and Eurobonds (Cumulative flows from the beginning of the year, Millions of U.S. dollars): 3,777; 401; 1,580; 1,620; 2,445. - Disbursements from multilaterals, except the IMF: 777; 408; 0; 1,209; 45. - Disbursements from Eurobonds: 3,000; 0; 1,500; 1,500; 1,500. - Debt service to multilaterals, except the IMF, and Eurobonds: 576; 943; 745; 294; 5. - Reserve money adjustor for reserve requirement changes: - Revised RM ceiling = Arrangements’ RM ceiling + banks’ correspondent accounts (bank reserves) in local currency x (new rr_LC/old rr_LC - 1) + banks’ correspondent accounts (bank reserves) in foreign currency x (new rr_FC/old rr_FC - 1). - Banks’ correspondent accounts are evaluated as the quarterly average of daily balances, in Kwanzas, using the exchange rate in Text Table 1. - Non-oil primary fiscal deficit (NOPFD) — definition and measurement: - NOPFD = non-oil primary expenditure of the Central Government + clearance of external and domestic payments arrears (cash) − Central Government non-oil revenue. - Central Government covers Central and Local Administrations, Public Institutes, Autonomous Services and Funds, and Social Security. - Non-oil primary expenditure = total expenditure less payment of interest on domestic and external debt, and ANPG’s oil-related expenditure on behalf of the Government, all measured on a cash basis. - Payments arrears (for this PC) defined as external and domestic non-debt contractual obligations of the Central Government unpaid within 90 days after due date or after delivery date, related to transactions authorized inside or outside SIGFE up to December 31, 2017. - Clearance of payments arrears in cash is the cash component of repayments of arrears accumulated up to December 31, 2017. - Central Government non-oil revenue = total revenue less oil revenue, both on a cash basis. Central Government oil revenue includes proceeds from IPP, IRP, ITP, total revenue from concessionaire (without netting ANPG’s oil-related expenditure), and applicable charges on oil and gas. - The PC for NOPFD is calculated as the cumulative deficit since the start of the calendar year, based on the projected exchange rates for the arrangement period, and measured in kwanzas. - Ministry of Finance will provide, every calendar quarter, total value in U.S. dollars of invoices approved breaking down into invoices with (i) external disbursements confirmed by external lenders and (ii) those without confirmed external disbursements. *Source: IMF staff and Angolan authorities (contents of 1agoea2019002 PDF chapter provided).* ### 10. External debt payments arrears are defined as total external debt service obligations ### 10. External debt payments arrears are defined as total external debt service obligations ### Definitions and scope - External debt payments arrears: total external debt service obligations (principal and interest) of the Central Government and the BNA falling due after the date of arrangement approval that have not been paid by the time they are due, taking into account the grace periods specified in contractual agreements. - Debt definition: as in Paragraph 15 of this TMU; excludes contracts providing for payment on delivery. - Residency basis: external debt payments arrears are defined on a residency basis. - Exclusions from this PC: - Arrears resulting from nonpayment for which a clearance framework has been agreed or a restructuring agreement is sought. - External debt obligations of the Central Government and the BNA that cannot be paid solely because intermediary financial institutions reject transfers due to compliance policies, when funds have been paid into an independent third-party escrow account (specifying that escrowed funds may be used only to satisfy external debt obligations) by the contractual due date, taking into account any contractual grace period. - Note: The definition follows Law No. 12/13, issued on December 11, 2013. ### Performance criterion on non-accumulation of external debt payments arrears - The PC on the non-accumulation of external debt payments arrears will apply on a continuous basis throughout the arrangement. - New external oil-collateralized debt contracted by or on behalf of the Central Government, the Banco Nacional de Angola (BNA), and Sonangol is subject to a continuous zero ceiling (gross basis), except: - Disbursements under oil-collateralized debt contracted before arrangement approval are excluded from this PC and monitored under ITs (Paragraphs 19–20). - New oil-collateralized debt is excluded where such debt is used for financing of oil-extraction equipment, as evidenced by financing documents. - Oil-collateralized debt definition: external debt involving a security interest, charge or lien over oil, oil receivables, or proceeds of the sale of oil. Use of a collection account without a charge or lien is excluded. Prefinancing refers to debt contracted against future oil sales. - A debt is contracted on behalf of the Central Government, the BNA, or Sonangol when the borrowing entity is wholly owned and/or controlled by those entities. ### Indicative targets and debt definitions - Public debt (for IT on stock of debt contracted or guaranteed by the Central Government or Sonangol) includes: - Domestic and external debt contracted or guaranteed by the Central Government. - Debt related to the National Urbanization and Housing Plan (PNUH) owed by the Central Government to Sonangol. - External debt contracted by Sonangol. - Cross-holding of claims within this perimeter (including PNUH-related debt) are netted out. - Debt (term “debt”): - Means a current (not contingent) liability created under a contractual arrangement through provision of value in the form of assets (including currency) or services that requires the obligor to make one or more payments in the form of assets (including currency) or services at future points in time. - Primary forms: i. Loans (including deposits, bonds, debentures, commercial loans, buyers’ credits, repurchase agreements, official swap arrangements). ii. Suppliers’ credits (deferred payment contracts). iii. Leases (debt equals present value at inception of all lease payments expected during the agreement, excluding payments for operation, repair, or maintenance). - Central Government Social Expenditure (Cumulative Floor): defined as Central Government spending for a calendar year on functions specified in the General State Budget (OGE) as the “social sector”: education (budget line 04); health (budget line 05); social protection (budget line 06); and housing and community services (budget line 07). This IT is set in kwanzas. - Net-Accumulation of Payments Arrears by the Central Government (Cumulative Ceiling): - Payments arrears: all external and domestic non-debt contractual obligations of the Central Government that remain unpaid within 90 days after the due date specified in the contract or after the delivery date, and that: (i) include, but are not limited to, payment obligations from procurement contracts for goods and services, and statutory obligations for payment (e.g., civil service wages, and other entitlements); and (ii) are recorded in SIGFE. - After rescheduling by agreement with the creditor, the obligation rescheduled is not considered in arrears anymore. - The IT on non-accumulation of payments arrears is calculated as the net change in the stock of payments arrears between the date of arrangement approval and each test date. Measurement excludes claims related to transactions authorized outside SIGFE (paragraph 6) and which will be reported separately. - Disbursements of Oil-Collateralized External Debt to the Central Government (Cumulative Ceiling): - Refers to disbursements of oil-collateralized external debt to the Central Government from credit lines contracted before the start of the arrangement (paragraph 13). - This IT will be monitored on a quarterly basis. - Issuance by the State of Debt Guarantees (Annual Ceiling): - Covers all debt guarantees issued by the Central Government, irrespective of purpose, currency, and beneficiary. - Defined for each calendar year and identical to the annual ceiling for issuance of debt guarantees approved in the annual Budget Law. - Debt defined as in paragraph 15. - Monitored quarterly by amounts approved by the Ministry of Finance for guarantee issuances. ### Reporting requirements (selected obligations and timing) - Authorities to provide data as specified in Table 1 with frequencies and timing. Selected items: - BNA: Stock of the NIRs — Daily — No later than one week after the end of each day. - BNA: Exchange rates (official and parallel) — Daily — No later than one day after the end of each day. - BNA: Decomposition of daily variation of NIRs stock into foreign exchange sales/purchase — Weekly — No later than one week after the end of each week. - BNA: Any off-balance sheet position denominated or payable in foreign currency — Weekly — No later than one week after the end of each week. - BNA: Exports and imports (nominal values) — Quarterly — No later than 6 weeks after the end of each quarter. - BNA: Balance of payments — Quarterly — No later than 3 months after the end of the relevant quarter. - BNA: BNA Survey — Daily — No later than one week after the end of each week. Should include stock of bank reserves in foreign currency, evaluated at (fixed) exchange rates under the arrangement. - BNA: Bank reserves in foreign currency — Daily — No later than one week after the end of each week. Denominated in foreign currency, for each relevant currency. - BNA: Accumulation of external debt service arrears by the BNA — Monthly — No later than 6 weeks after the end of each month. - BNA, MINFIN: Stock and change in Central Government deposits at the BNA and banks and change in balances of escrow accounts — Monthly — No later than 6 weeks after the end of each month. Change in deposits broken down by currency (U.S. dollar and kwanza), and stock and change in balances of escrow accounts, broken down by beneficiary country. - MINFIN: Accumulation of external debt service arrears by the Central Government — Quarterly — No later than 8 weeks after the end of each quarter. - MINFIN: Oil revenue by category — Quarterly — No later than 8 weeks after the end of each quarter. Includes concessionaire (100 percent), other oil tax (IRP, IPP, ITP), identifying the average oil price (US$/barrel) and crude oil exports (barrels). - MINFIN: Non-oil revenue by category — Monthly — No later than 2 weeks after the end of each month. - MINFIN: Expenditure by category — Quarterly — No later than 8 weeks after the end of each quarter. - MINFIN: Domestic borrowing and debt service (principal and interest) — Monthly — No later than 2 weeks after the end of each month. - MINFIN: External borrowing and debt service (principal and interest) as recorded in the DMFAS system — Quarterly — No later than 8 weeks after the end of each quarter. - MINFIN: Stock of external debt of the Central Government, Sonangol and TAAG — Quarterly — No later than 8 weeks after the end of each quarter. - MINFIN: Debt service projection, quarterly for 2018–21 and annually from 2022 onwards — Quarterly — No later than 8 weeks after the end of each quarter. - MINFIN: Stock, new accumulation, and clearance of payments arrears — Quarterly — No later than 8 weeks after the end of each quarter. Must identify stock and clearance of payments arrears originating outside and inside SIGFE. ### Statement by the authorities (Executive Board Meeting, December 5, 2019) — key points - Authorities consider the EFF arrangement critical for anchoring the macroeconomic policy framework and supporting the Macroeconomic Stabilization Program (MSP). - Program performance: adequate with all end-June and September PCs and ITs met, except PCs on the non-accumulation of external arrears and net international reserves (NIR). - Reasons for missed PCs: - Non-accumulation of external arrears: payment orders to one private creditor could not be processed by the correspondent bank owing to AML/CFT concerns. - NIRs: missed due to lower-than-expected external disbursements and oil revenues. - Authorities request: - (i) Waiver for non-observance of the PCs on NIRs and non-accumulation of external debt arrears. - (ii) Modifications of the PC and IT on NIRs. - (iii) Modifications of ITs on the stock of debt contracted or guaranteed by the Central Government or Sonangol, and on disbursements of oil-collateralized external debt by the Central Government. - (iv) Approval of a PC on reserve money and an IT on the issuance of new state guarantees for debt. - Recent economic outlook: - GDP growth expected to decline in 2019 owing to lower oil production and tepid non-oil activity; medium-term support from reforms in oil and mining sectors and revitalization of non-oil projects. - Inflation: reached 16 percent in October 2019; expected to increase and peak at 23 percent in 2020, driven by adjustment of regulated prices and depreciation of the Kwanza. *Source: 1agoea2019002 - 10. External debt payments arrears are defined as total external debt service obligations* ### 9. The current account position deteriorated in 2019, owing to low exports receipts ### The current account position deteriorated in 2019, owing to low exports receipts ### Current account and reserves - Current account position deteriorated in 2019 due to subdued oil sector activity and lower oil prices. - Recent balance of payments pressures increased foreign exchange demand. - Gross international reserves are projected to reach US$15.5 billion (representing more than 7 months of prospective imports) by end-2019 and US$17.5 billion by end-2020. ### Fiscal policy and public debt management - Authorities’ fiscal priorities: sustained fiscal consolidation and ensuring that the public debt-to-GDP ratio declines to a sustainable path. - A conservative 2020 budget was submitted to the National Assembly in October 2019, underpinned by measures to promote revenue mobilization and fiscal expenditure restraint. - Diversification of non-oil revenues is a high priority: - Value added tax (VAT) introduced in October 2019. - A package of tax measures to be submitted to the National Assembly by end-December 2019, including: raising the withholding rate for services provided by non-residents; improving the progressivity of the personal income tax (PIT); lowering the threshold on property tax exemption; and introducing environment taxes. - Expenditure control measures implemented or planned: - Adjustment of water tariffs, liberalization of the price of Jet fuel and adjustments to electricity tariffs. - Plan to adopt an automatic fuel pricing mechanism and gradually adjust public transportation tariffs after rollout of the cash transfer program to mitigate impact on vulnerable populations. - Request to the Fund for a Public Investment Management Assessment (PIMA) to improve investment efficiency. - Debt management actions to moderate vulnerabilities from rapid currency depreciation: - Implementation of the Medium-Term Debt Management Strategy for 2019–22. - Reduced frequency of primary auctions and greatly reduced issuance of Treasury bonds indexed to or denominated in foreign currency. - Commitment to prioritize concessional financing for public investment projects and refrain from contracting new debt for non-priority investments. - Since approval of the EFF arrangement, no new oil-collateralized debt contracted and collateralized disbursements under existing credit facilities kept below agreed ceilings. ### Monetary and exchange rate policies - Commitment to strengthen monetary policy framework by targeting reserve money as a nominal anchor to restore price stability. - Continued efforts to strengthen liquidity management and forecasting framework for better liquidity control. - BNA, with IMF technical assistance, enhancing analytical capacity to strengthen monetary policy transmission. - Steps to increase exchange rate flexibility: - In October 2019, the BNA removed the 2 percent cap on banks’ FX resale margins to allow market forces in the foreign exchange market. - BNA will announce the monthly amounts of foreign exchange to be auctioned over the next three months to improve predictability of currency auctions. - Progressive implementation of a strategy to eliminate exchange restrictions and multiple currency practices. ### Financial sector policies - Strengthening financial sector stability is a top priority: - Completion of an asset quality review (AQR) by end- December 2019. - Revision of the Financial Institutions law to ensure effective recovery planning and resolution frameworks. - Assessment of the future role of the State in the financial sector to develop a strategy for reduced participation. - Deposit Guarantee Fund established in August 2018 and remains well capitalized to cover deposits of up to Kz12.5 million. - Restructuring of Banco de Poupança e Crédito (BPC) and Recredit governance: - Legislation enacted to restrict Recredit’s mandate to purchasing NPLs from BPC only and a ten-year sunset clause to Recredit’s operations. - Plans to further strengthen Recredit’s mandate, autonomy, governance, and operating arrangements to maximize value recovery for taxpayers. - Crisis management and resolution framework enhancements: - BNA introducing amendments to its supervisory and legal framework. - A new BNA law and financial institutions law will be submitted to the National Assembly by end-December 2019 to strengthen governance and supervisory mandate. - Authorities expect the laws to be approved by March-2020. ### Structural reforms and governance - Structural reforms targeted at private sector-led growth and economic diversification: - World Bank support to facilitate access to electricity, simplify procedures for paying taxes, and reduce transaction costs for businesses. - Draft Law on the Recovery of Enterprises and Insolvency, and related regulations, expected to be approved during the first half of 2020 to strengthen credit guarantees and insolvency efficiency. - Reducing fiscal risks from loss-making SOEs: - Privatization program (PROPRIV) for 2019–22 published in August 2019 sets guidelines for privatization, eligible SOEs, timetable and modalities, and a communication strategy. - Publication of audited annual reports of the largest SOEs by assets underway and to be expanded to cover all SOEs by end-May 2020. - Governance and anti-corruption measures: - Continued implementation of the anti-corruption strategy published in December 2018. - The Attorney General’s office (PGR) increased investigations and pursued lawsuits against senior officials for misappropriation of funds, fraud and embezzlement. - Strengthening the AML/CFT framework and submission of a new AML/CFT law to the National Assembly; the law was approved in November 2019. ### Conclusion - Authorities reiterate commitment to implement the policies and measures set out in the EFF to restore macroeconomic stability and lay the ground for sustainable and inclusive growth. - Continued implementation of appropriate fiscal, monetary, and structural policies intended to set the economy on a higher growth path. - Authorities look forward to continued Fund engagement and technical support in implementation of the EFF arrangement. *Source: 1agoea2019002 - 9. The current account position deteriorated in 2019, owing to low exports receipts* --- _Source: https://www.imf.org/-/media/files/publications/cr/2019/1agoea2019002.pdf_