## 1agoea2020001 ## Source details **Canonical URL:** [1agoea2020001](https://www.imf.org/-/media/files/publications/cr/2020/english/1agoea2020001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2020/english/1agoea2020001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2020/english/1agoea2020001.pdf.json) --- ### Context and immediate impact - Economic outlook substantially deteriorated since the Second Review due to the COVID-19 pandemic and collapse in oil prices. - Angola is highly dependent on oil: "95 percent of exports, two-thirds of government revenue." - The economy entered a fifth consecutive year of recession. - Rapid exchange rate depreciation and the decline in oil prices have pushed the public debt-to-GDP ratio to a very high level. - Date of document: July 20, 2020. ### Program performance - Overall assessment: broadly satisfactory since the Second Review. - Performance criteria (PCs) and indicative targets (ITs): - End-December 2019 and end-June 2020 PCs on net international reserves; central bank claims on the Central Government; and reserve money were met. - End-December 2019 PC on non-oil primary fiscal deficit (NOPFD) and all continuous PCs, except those on external arrears, were met. - End-December 2019 and end-March 2020 ITs were met, some by a margin. - Structural benchmarks (SBs) up to end-June 2020: 12 total — five met and seven not met; two of the seven not met have since been implemented. - Waiver/modification requests: - Waiver requested for nonobservance of the continuous PC on external debt payment arrears (breach up to US$52 million by end-June 2020); remedial actions include an independent escrow account and AML/CFT law enactment. - Waiver of applicability requested for the end-June 2020 PC on NOPFD (absence of data). - Proposed changes to PCs on NIR floors (to US$8,085 million for end-December 2020) and RM ceilings; proposed modifications to ITs on Central Government debt and Sonangol debt. ### Key macroeconomic outlook and projections - Growth and inflation: - 2020 GDP: projected contraction of -4 percent ("the deepest yearly contraction in three decades"). - Inflation: end-year inflation projected to increase to 22 percent (Text gives 22.2 percent in some places). - Inflation at end-2019: 16.9 percent. - Oil and external: - Oil revenue: projected to decline by 14 percent in 2020 compared to the 2019 outcome. - Current account: in 2019 in substantial surplus; projected to swing to a deficit in 2020. - Gross international reserves (GIRs): end-2019 equivalent of 13 months of prospective imports of goods and services (NIRs rose to US$11.3 billion at end-2019; GIRs rose to US$17.3 billion). - GIRs projected to reach just under 110 percent of the ARA metric by end of the program. - Public debt: - Public debt-to-GDP ratio: 109 percent at end-December 2019; projected at 123 percent at end-2020 (mainly reflecting currency depreciation and lower nominal output). - IMF credit outstanding as share of GDP peaks at 6.2 percent under augmentation scenario. - IMF credit as percent of non-collateralized external debt and GIRs, net of collateralized debt service, at 12.6 percent and 26.2 percent, respectively. ### COVID-19 containment, fiscal, and monetary responses - Containment measures (selected): - Mandatory 14-day quarantine for passengers from high-risk countries; suspension of most flights and passenger ships on March 20. - State emergency and state of calamity implemented since March 27, 2020; latest extension includes compulsory confinement except for essential activities and a cordon sanitaire for Luanda. - Public services/private businesses: allowed to function with 50 percent of personnel and reduced hours; schools, universities, restaurants closed; public events banned. - Fiscal measures (selected): - Corporate income tax deadline extension by up to 60 days for selected companies. - Exemption of VAT and customs duties on goods imported under humanitarian aid and donations; these goods and associated services tax-deductible. - 12-month VAT tax credit for imported capital goods and raw materials used in production of 54 essential goods. - Interest-free, deferred payment option for social security contributions into the second half of 2020. - Deferred payment of the urban property tax until October 2020. - Spending measures: 30 percent freeze on goods and services (except essential health expenditure); reduction in number of ministries from 28 to 21; suspension of selected capital expenditure and non-priority social support programs; hiring freeze except essential staff. - Pandemic-related tax relief measures amount to 0.3 percent of GDP. - Supplementary budget: non-oil revenue measures estimated to yield 0.3 percent of GDP. - Monetary measures by BNA (selected): - 7-day permanent liquidity absorption facility rate cut from 10 percent to 7 percent on March 27. - Additional liquidity support equivalent to 0.5 percent of GDP provided to banks. - Liquidity line of Kz 100 billion (about US$170 million) for purchase of government securities by non-financial corporations. - Credit-stimulus program expanded to allow banks to deduct credit extended to selected sectors from reserve requirement obligations. - Financial institutions instructed to grant a moratorium of 60 days for debt service. - Minimum allocation of credit to promote production of essential products increased from 2 percent to 2.5 percent of commercial banks’ net assets. - Banks instructed to provide credit in local currency to assist importers of essential goods. ### Risks and vulnerabilities - Overall outlook subject to very high risks. - Downside risks: - Deep and prolonged effects of the COVID-19 pandemic. - Depressed global demand keeping oil prices low. - Pandemic pressures on the health system. - Materialization could aggravate revenue shortfalls, increase expenditure, stymie recovery, and delay debt reduction. - Upside risks: lifting of oil quotas and higher oil prices than assumed. - Banking sector vulnerabilities: - NPLs had grown to 35 percent by September 2019 (some series report 35.5 percent). - Some banks remain weak; two public banks need deep restructuring. - AQRs identified seven banks with capital shortfalls totaling US$2.4 billion (3.7 percent of 2020 GDP); two public banks account for 96 percent of the total. - Recredit acquired 80 percent of the largest public bank’s residual NPLs in June 2020 at a price of 6 percent of nominal value. ### Fiscal strategy, revenue measures, and debt actions - Fiscal stance 2020: - Conservative fiscal stance to continue with composition tilting toward selected expenditure compression. - Budget in overall surplus at end-2019 for the second consecutive year. - Authorities intend to increase healthcare spending. - Contingent plans: delay domestically financed investment and accelerate revenue measures if risks materialize. - Revenue and reform measures: - Continued reforms expected to increase revenue by at least another 0.6 percent of GDP (Text Table 2), including reducing VAT refund stock; expanding VAT at customs; removing VAT exemptions; PIT reform; introducing minimum corporate tax; strengthening transfer pricing; improving property registration; integrating informal sector. - Major non-collection revenue source: reduction in the VAT refund stock (administrative decision). - Payments arrears: - 2019 total payments arrears equivalent to 2.4 percent of GDP were cleared—about one third through cancellations. - About 79 percent of arrears not recorded in SIGFE were cleared, exceeding end-March 2020 target. - Cash payments of arrears suspended for remainder of the year due to tight fiscal situation; authorities enhancing reporting and plan to accelerate clearance once liquidity improves. - Gross financing needs (GFNs) and financing sources: - GFNs sizable in 2020 due to COVID-19 expenses, bank recapitalization, arrears clearance, critical investment. - Planned financing: exceptional financing from G20DSSI; debt reprofiling from large creditors; budget support from multilaterals (including IMF access augmentation); privatization proceeds; disbursements from existing credit lines; drawdowns from government deposits; sale of FSDEA assets. - Public debt management: - Authorities committed to conservative medium-term debt strategy to keep debt-to-GDP declining. - Specific reprofiling steps: selective reprofiling of amortization due in three-year period starting in June 2020 with a three-year deferral; some partial relief of principal in 2024–25; repayments phased over seven years starting in 2023. - Authorities requested G20DSSI for 2020 and undertook credible steps toward debt restructuring with two large creditors; seeking assurance from a third official creditor. - Debt-to-GDP ratio projected to peak in 2020 and decline thereafter conditional on reprofiling and reforms. ### Public debt dynamics, stress scenarios, and mitigations - Bank recapitalization scenario: - Bank recapitalization of 0.7 percent of GDP in 2020: under this scenario both debt and GFN ratios would exceed the high-risk benchmarks in 2020, but fall below in ensuing years. - Oil-price shock scenario: - Two-year drop averaging 30 percent in projected price of Angolan oil basket for 2020–21 would cause debt-to-revenue ratio to peak at about 736 percent and keep debt-to-GDP above the high-risk benchmark over entire projection horizon. - Contingent liabilities (CL) from non-financial SOEs could threaten sustainability; recommended mitigations include prudent borrowing, moderate sovereign guarantees, Sonangol restructuring, and SOE privatization. - Bottom-line assessment: public debt sustainable conditional on substantial reprofiling of interest and principal payments and strong fiscal adjustment via non-oil revenue measures. ### Monetary policy, exchange rate reform, and operational requirements - Monetary policy: - BNA suspended gradual tightening in late-March 2020 and increased liquidity and credit support; baseline assumes tightening from 2021 onward. - Limited scope for further monetary easing; once crisis abates, authorities should rein in inflation and exchange rate pressures. - Exchange rate reform: - Transition toward a market-clearing exchange rate since mid-October 2019 eliminated large overvaluation; exchange rate estimated to be moderately undervalued (Annex IV). - Depreciation accelerated with crisis onset in mid-March and expected to continue through remainder of year. - Reforms: since January 2020 oil companies authorized to sell FX directly to banks; April 1, 2020 electronic trading platform started; extended to diamonds end-June and planned expansion to other participants, including Treasury. - Official–parallel market spread reduced from 151 percent in December 2017 to 6 percent in mid-April 2020; later widened to about 30 percent. - Operational requirements for floating regime: - Develop deep and liquid FX market; formulate intervention policies; establish appropriate nominal anchor and monetary framework; systems to manage exchange rate risks; build participant capacity. - FX intervention plan: BNA should retire from FX market operations except for reserve management, limit interventions to smoothing, and disclose interventions with a time lag. - Arrangement exchange rate (accounting): - The exchange rate of the Angolan Kwanza (AOA) to the U.S. dollar is set at AOA 295 per US$1 for the duration of the arrangement; this is an accounting convention and not a policy target. - Text Table 1 exchange rates preserved: AOA 295.00000; EUR 1.15760; GBP 1.30410; CNY 0.14531; ZAR 0.07050; SDR 1.39525. ### Banking sector AQRs, restructuring, and supervision - AQRs: - Completed in December 2019 for 13 banks comprising 93 percent of system assets. - Identified seven banks with capital shortfalls totaling US$2.4 billion (3.7 percent of 2020 GDP); two public banks account for 96 percent of the shortfall. - Methodology: prudential discounts on collateral (40–100 percent), three-scenario valuation for assets, IFRS 9 expected-credit-loss rules with BNA-specific weightings. - Recapitalization and restructuring: - By end-June 2020, four of seven weak banks returned to regulatory compliance; recapitalization plans for remaining three at advanced stage. - Two public banks require deep restructuring; one commenced restructuring but losses not fully recognized and banks not returned to full compliance by end-June. - Recredit: internal regulations allow operational decisions without prior approval; strategic committee meeting quarterly; acquired 80 percent of largest public bank’s residual NPLs in June 2020 at 6 percent of nominal value. - Supervisory and legal reforms: - FIL and amended BNA Law to strengthen fit-and-proper rules, early intervention, resolution framework, deposit guarantee fund, and crisis management. Deadlines: update asset classification and provisioning rules by end-September 2020; adopt bank governance and credit-risk guidance by end-December 2020. - Recredit Presidential Decree to be amended by end-August 2020. ### Structural reforms, SOEs, and governance - Revenue administration and PFM: - IMF TA-supported computerization, mandatory e-filing, VAT administration improvements, and post-crisis revenue action plan. - Draft Fiscal Responsibility Law (FRL) submitted to National Assembly in July (SB, missed). - MTFF pilot completed by end-June; MTFF to be revised after supplementary budget. - Public Investment Management: publish initial project appraisal reports for projects above Kz 10 billion (about US$17 million) from January 2021 onward (new SB). - SOE reform and privatization: - By end-June, 40 SOEs offered for public tender and 14 privatized for US$53 million; another 40 assets slated for sale by end-2020. - Sonangol: 9 non-core assets offered Sep 2019–Jun 2020: 5 sold for US$17 million, 4 to be tendered by end-2020. - Pilot WB-supported cash-transfer program started in May; objective to reach 1.6 million households nationwide by end-2021 to support subsidy reform. - Governance and AML/CFT: - Revised AML/CFT Law approved and in force January 2020. - Government committed to improving governance and fighting corruption; engagement with UN and asset recovery efforts ongoing. ### Debt sustainability, external sector, and financing - Debt path and external: - External DSA coverage includes Central Government, Sonangol, TAAG, and public guarantees denominated in foreign currency. - External public debt projected to peak at 94 percent of GDP in 2020 and converge to 58 percent of GDP in 2025. - External financing requirements projected to peak at about 10 percent of GDP in 2020; decline to about 6 percent in 2022; stabilize at about 7 percent in 2023–25. - NIIP deteriorated to -35 percent of GDP by end-2019. - Financing strategy: - Authorities requested IMF access augmentation from 361 percent of quota (SDR 2,673 million) to 434 percent (SDR 3,213 million), additional SDR 540 million. - World Bank and African Development Bank expected to provide budget support of US$1 billion in 2020 and US$665 million in 2021. - G20DSSI and selected reprofiling to fill major part of financing needs. - Supplement dated September 9, 2020 revised oil-price projections upward and adjusted NIR adjustors; augmentation equally distributed over remainder of program (SDR 540.1 million). - GFNs and program financing: - Under revised baseline, GFNs reduced on average by 1½ percent and 1 percent of GDP in 2021–25 and 2026–30 respectively. - With proposed supports, program is fully financed for next 12 months with good prospects for last half-year. ### Program monitoring, reporting, and technical assistance - Program monitored through semi-annual reviews: Fourth, Fifth and Sixth Reviews based on PCs at end-June 2020, end-December 2020, and end-June 2021 respectively. - Data reporting requirements (selected): - BNA: Stock of NIRs — Daily — No later than one week after the end of each day; Exchange rates (official and parallel) — Daily — No later than one day after the end of each day; BNA claims on Central Government — Monthly — No later than 6 weeks after the end of month. - MINFIN: Oil revenue by category — Quarterly — No later than 8 weeks after end of quarter; Non-oil revenue by category — Monthly — No later than 2 weeks after end of month; Stock of external debt (Central Government, Sonangol, TAAG) — Quarterly — No later than 8 weeks after end of quarter. - Technical assistance (Annex II highlights): extensive IMF and partner TA across Tax Policy and Revenue Administration; Expenditure Policy; PFM; SOE Reform; Capital Markets; Monetary and Exchange Rate Policies; Financial Sector Stability; Economic and Social Statistics; Business Climate. - Examples: IMF (FAD) — VAT refunds — Nov.–Dec. 2019; IMF (MCM) — Monetary policy implementation and operations — 2020; World Bank — SOE reform, privatization, and PPPs — 2019–21. ### Staff appraisal and recommendations - Staff appraisal: - Angola severely hit by a triple shock; exchange rate adjustment appropriate and should play a shock-absorbing role. - Public debt assessed sustainable but with very high risks; decisive action and further debt relief may be needed if downside risks materialize. - Safeguarding financial sector stability requires timely restructuring of two troubled banks and continued supervisory vigilance. - Continued IMF TA and coordinated development-partner support essential. - Staff recommendations/support: - Support completion of the Third Review. - Support waiver of non-observance of continuous PC on external debt payment arrears given corrective action. - Support waiver of applicability for the PC on NOPFD. - Support proposed modification of PCs on RM and NIRs. - Support access augmentation and rephasing (augmentation of SDR 540/SDR 540.1 million as requested). - Support setting targets for Fourth and Fifth Reviews and completion of financing assurances review. *International Monetary Fund — Executive Summary (Angola), July 20, 2020.* ### EXECUTIVE SUMMARY ### EXECUTIVE SUMMARY ### Context and immediate impact - Economic outlook substantially deteriorated since the Second Review due to the COVID-19 pandemic and collapse in oil prices. - Angola is highly dependent on oil: "95 percent of exports, two-thirds of government revenue." - The economy entered a fifth consecutive year of recession. - Rapid exchange rate depreciation and the decline in oil prices have pushed the public debt-to-GDP ratio to a very high level. - Continued fiscal retrenchment, prudent debt management, and debt reprofiling are expected to improve debt dynamics progressively. - Date of document: July 20, 2020. ### Program performance - Overall assessment: broadly satisfactory since the Second Review. - Performance criteria (PCs) met: - End-December 2019 and end-June 2020 PCs on net international reserves; central bank claims on the Central Government; and reserve money were met. - End-December 2019 PC on non-oil primary fiscal deficit (NOPFD) and all continuous PCs, except those on external arrears, were met. - End-December 2019 and end-March 2020 indicative targets (ITs) were met, some by a margin. - Structural benchmarks (SBs) up to end-June 2020: 12 total — five met and seven not met; two of the seven not met have since been implemented. - No reason to believe the end-June 2020 PC on NOPFD was missed; it will be assessed in the Fourth Review. ### Exceptional financing and debt actions - In light of the decline in oil prices, authorities: - Requested IMF access augmentation. - Decided to avail themselves of the G20 Debt Service Suspension Initiative for 2020. - In staff’s judgement, have undertaken credible steps toward a debt restructuring with two large creditors; are seeking specific and credible assurance on debt relief from a third official creditor. - Staff supports the requests for access augmentation and rephasing. ### Key macroeconomic outlook and projections - 2020 GDP: projected contraction of -4 percent (described as "the deepest yearly contraction in three decades"). - Inflation: end-year inflation projected to increase to 22 percent. - Oil revenue: projected to decline by 14 percent in 2020 compared to the 2019 outcome. - Gross international reserves (GIRs): by end-2019 equivalent of 13 months of prospective imports of goods and services, aided by bringing forward planned Eurobond issuance of US$1.5 billion. - External position: current account in 2019 in substantial surplus; projected to swing to a deficit in 2020. - External financing: substantial external financing gap projected to be filled by access augmentation, debt reprofiling under the G20DSSI, and selected debt reprofiling by large creditors. - Public debt-to-GDP ratio: projected to surge mainly due to exchange rate depreciation and output contraction. ### Weathering the COVID-19 pandemic — containment, fiscal, and monetary responses - Containment measures (selected): - Mandatory 14-day quarantine for passengers from high-risk countries; suspension of most flights and passenger ships instituted on March 20. - State emergency and state of calamity implemented since March 27, 2020; latest extension includes compulsory confinement except for essential activities and a cordon sanitaire for Luanda. - Public services and private businesses allowed to function with 50 percent of personnel and reduced hours; schools, universities, restaurants closed; public events banned. - Fiscal measures (selected): - Corporate income tax deadline extension by up to 60 days for selected companies. - Exemption of VAT and customs duties on goods imported under humanitarian aid and donations; these goods and associated services tax-deductible. - 12-month VAT tax credit for imported capital goods and raw materials used in production of 54 essential goods. - Interest-free, deferred payment option for social security contributions into the second half of 2020. - Deferred payment of the urban property tax until October 2020. - Spending measures include: 30 percent freeze on goods and services (except essential health expenditure); reduction in number of ministries from 28 to 21; suspension of selected capital expenditure and non-priority social support programs; hiring freeze in the civil service except essential staff; suspension of purchase of new vehicles for personal use with reprioritization of underway acquisitions. - Monetary policy measures by Banco Nacional de Angola (BNA) (selected): - 7-day permanent liquidity absorption facility rate cut from 10 percent to 7 percent on March 27. - Additional liquidity support equivalent to 0.5 percent of GDP provided to banks. - Liquidity line of Kz 100 billion (about US$170 million) for the purchase of government securities from non-financial corporations opened. - Credit-stimulus program expanded to allow banks to deduct credit extended to selected sectors from reserve requirement obligations. - Financial institutions instructed to grant a moratorium of 60 days for debt service. - Minimum allocation of credit to promote production of essential products increased from 2 percent to 2.5 percent of commercial banks’ net assets. - Banks instructed to provide credit in local currency to assist importers of essential goods. ### Risks and vulnerabilities - Overall outlook subject to very high risks (Annexes I–II). - Downside risks: - Deep and prolonged effects of the COVID-19 pandemic. - Depressed global demand keeping oil prices low. - Pandemic pressures on the health system. - Materialization of these risks could aggravate revenue shortfalls, increase expenditure, stymie recovery, and delay expected reduction in public debt. - Upside risks: lifting of oil quotas and higher oil prices than assumed in the program. - Banking sector vulnerabilities: - Some banks remain weak and highly vulnerable to shocks. - Nonperforming loans (NPLs) had grown to 35 percent by September 2019. - Two public banks need deep restructuring. - The crisis may adversely affect liquidity and asset quality. ### Policy discussions and fiscal strategy - Policy focus: keep the economy afloat, continue essential reforms amid the crisis, recalibrate macroframework and conditionality. - Fiscal stance in 2020: - Conservative fiscal stance to continue, with composition tilting toward selected expenditure compression. - Budget in overall surplus at end-2019 for the second consecutive year. - NOPFD may end up lower than the end-2020 program target owing to the supplementary budget which will weigh on non-essential expenditure. - Authorities intend to increase healthcare spending to mitigate COVID-19 effects. - Contingent plans: delay domestically financed investment and accelerate revenue measures should risks materialize. - Revenue measures and yields: - Pandemic-related tax relief measures amount to 0.3 percent of GDP. - National Assembly approved a non-oil revenue package in July increasing PIT progressivity and eliminating several exemptions. - Supplementary budget under consideration contains non-oil revenue measures, including higher excise taxes on imported luxury cars and cigarettes; estimated yield 0.3 percent of GDP (offsetting the tax relief shortfall). - Major non-collection revenue source: reduction in the VAT refund stock (administrative decision involving no collection effort). - Staff proposal to protect essential spending: - An adjustor to the NOPFD to avoid undue compression in essential social and investment spending in the event of excessive exchange rate depreciation (TMU ¶11). - Under the proposal, the NOPFD target would be adjusted upward by the impact of excess depreciation above the program baseline on foreign-financed public investment. - To safeguard debt sustainability, this adjustment would be limited annually to 1 percent of GDP. ### Additional operational and programmatic notes - Monetary policy evolution: BNA suspended gradual tightening in late-March 2020 and increased liquidity and credit support. - Data and assessment timing: - The end-June 2020 PC on NOPFD will be assessed during the Fourth Review. - Technical assistance (TA) and continued reforms: TA support will help mitigate implementation risks and assist with reforms. *International Monetary Fund — Executive Summary (Angola), July 20, 2020.* ### 0.2 percent of GDP. Continued reform ### 1agoea2020001 - 0.2 percent of GDP. Continued reform ### Revenue measures and tax reform - Continued reform measures in major tax categories will increase revenue by at least another 0.6 percent of GDP (Text Table 2). - Measures include: - further reducing the stock of the VAT refund account; - expanding the base of the VAT at customs; - removing some VAT exemptions; - further reforming the PIT to broaden its base and progressivity; - introducing a minimum tax for the corporate income tax; - strengthening transfer pricing rules; - improving property registration; - starting to integrate the informal sector (MEFP ¶8). ### Payments arrears - In 2019, total payments arrears, equivalent to 2.4 percent of GDP, were cleared—about one third through cancellations (Text Table 3). - About 79 percent of the arrears not recorded in the budget information technology system (SIGFE) were cleared, exceeding the end-March 2020 target. - Because of the tight fiscal situation: - cash payments of arrears have been suspended for the remainder of the year; - authorities are requesting a modification of the corresponding IT; - to prevent new arrears, authorities are enhancing reporting and recording of arrears and plan to accelerate clearance once liquidity improves. ### Gross financing needs and financing sources - GFNs will be sizable in 2020 due to: - COVID-19-induced expenses, - bank recapitalization, - arrears clearance, - critical investment. - Planned financing sources include: - exceptional financing from the G20DSSI; - debt reprofiling from Angola’s large creditors; - budget support from multilateral organizations (including IMF access augmentation); - privatization proceeds; - disbursements from existing credit lines within program limits; - drawdowns from government deposits; - sale of financial assets of the Sovereign Wealth Fund (FSDEA), which will reduce borrowing needs. ### Public debt and debt sustainability - Debt-to-GDP ratio projected at 123 percent at end-2020, mostly reflecting large currency depreciation and lower nominal output. - Debt indicators expected to remain high but declining as oil exports are projected to remain subdued. - Debt dynamics sensitive to growth, oil prices, and the real exchange rate. - Authorities committed to a conservative medium-term debt strategy to keep debt-to-GDP steadily declining. - External debt management and exceptional financing measures taken: - hired legal and financial advisors; - repaid outstanding oil-collateralized debt stock owed to an official bilateral creditor; - significant reprofiling of debt service commitments to ease financing pressures and reduce GFNs. - Specific reprofiling steps described: - selective reprofiling of amortization due in the three-year period starting in June 2020, with a corresponding deferral of three years; - some further partial relief of principal in 2024–25; - repayments phased gradually over a seven-year period, starting in 2023. - Authorities requested debt relief under the G20DSSI for 2020 and have undertaken credible steps with two large creditors toward debt rescheduling; seeking assurance from a third creditor for similar reprofiling terms. - Staff assesses that, with these operations, the 2020–21 fiscal financing gaps will be closed, including with the drawdown of reserves; operations incorporated in the DSA (Annex III). ### Monetary policy and exchange rate reform - Monetary policy used to mitigate crisis impacts; BNA signaled flexibilization of liquidity control with potential implications for inflation and exchange rate depreciation. - Baseline scenario assumes a tightening of monetary policy from 2021 onward. - Exchange rate reform progress: - transition toward a market-clearing exchange rate since mid-October 2019 eliminated large overvaluation; - exchange rate estimated to be moderately undervalued based on standard methodologies (Annex IV); - depreciation accelerated with onset of crisis in mid-March and expected to continue through the remainder of the year (Text Figure 1). - Recent reforms to deepen market determination: - since January 2020, oil companies authorized to sell FX directly to banks with which they have business relations; - on April 1, an electronic trading platform started for FX transactions; extended to include diamond companies at end-June and expected to be expanded to other participants, including the Treasury. - Reforms and BNA measures reduced official-parallel market spread from 151 percent in December 2017 to an all-time low of 6 percent in mid-April (Annex V); spread later widened to about 30 percent. - Widening spread under investigation; possible causes include shallowness of the parallel market and tendency to overshoot when strong depreciation pressures arise. ### Banking sector stability and restructuring - Asset quality reviews (AQRs) of 13 banks (93 percent of system assets) completed at end-2019 (SB; MEFP ¶15). - Private banks resilient with modest capital shortfalls in five smaller banks. - Two public banks had a combined capital shortfall equivalent to 3.7 percent of 2020 GDP (Annex VI). - By end-June 2020: - four of seven weak banks returned to regulatory compliance (SB, missed); - recapitalization plans for the remaining three banks are at an advanced stage. - AQRs identified systemic shortfalls in risk management, including large related-party exposures. - Authorities preparing plans to restructure two public banks: - losses exceed shareholder and subordinated debt holder value; - limited fiscal support available necessitates deep restructuring; - one bank has commenced restructuring but losses not yet fully recognized and banks not returned to full regulatory compliance by end-June (SB, missed); - second bank engaged external consultants; discussions with BNA ongoing; - staff will request an updated time-bound action plan for restructuring during the Fourth Review. - Recredit (bad-asset-management company) improvements: - internal regulations now allow operational decisions without prior approval; - Board members free of conflicts of interest; - formed strategic and monitoring committee meeting quarterly; - plan to strengthen accountability and mandate via amending the relevant Presidential Decree (modified SB; MEFP ¶17); - acquired 80 percent of the largest public bank’s residual NPLs in June 2020 at a price of 6 percent of nominal value. - Strengthening bank oversight and credit-risk management: - more rigorous fit and proper requirements in new Financial Institutions Law (FIL); - update asset classification and provisioning rules by end-September 2020; - adopt new bank guidance on corporate governance and effective credit-risk management practices by end-December 2020 (MEFP ¶18); - prepare action plan to strengthen credit infrastructure (MEFP ¶19). ### Structural reforms and governance - Revenue administration: - continued commitment to improving tax efficiency and governance; - IMF TA-supported measures aim to accelerate computerization and require mandatory e-filing; speed up recovery of tax arrears; enhance audit and verification; improve payment modalities to reduce tax fraud; - post-crisis revenue collection action plan to focus on enhanced monitoring of key industries and largest taxpayers. - Subsidy reform: - pilot phase of WB-supported cash-transfer program started in May to cover several thousands of poor households, with objective of reaching 1.6 million households nationwide by end-2021; - next phase (raising public transportation tariffs and gasoline and diesel prices) to start in 2021 when critical number of low-income households are reached by cash-transfer program; ultimate objective to introduce automatic fuel-pricing mechanism. - SOE reform: - by end-June, 40 SOEs offered for public tender and 14 privatized for US$53 million, with another 40 assets slated for sale by end-2020; - Sonangol’s 9 non-core assets offered between September 2019 and June 2020: 5 sold for US$17 million, 4 to be tendered by end-2020; - arrears between Sonangol and PRODEL verified and will be cleared by end-August; - 12 largest SOEs published audited 2019 annual reports on SOE oversight institute’s webpage by end-June; remaining 3 to publish by end-August; external audits to be completed by end-September (MEFP ¶23). - Public financial management (PFM) reforms: - draft Fiscal Responsibility Law (FRL) submitted to National Assembly in July (SB, missed); FRL defines fiscal policy framework including a fiscal rule; - published end-year fiscal report for 2019 in June 2020 to support pilot Medium-Term Fiscal Framework (MTFF); MTFF largely completed by end-June and will be revised after supplementary budget approval; - per Public Investment Management Assessment (December 2019), initial project appraisal reports to be published for all projects above Kz 10 billion (about US$17 million) undertaken from January 2021 onward (new SB, MEFP ¶8); - public procurement transparency improvements: by end-June awarded 69 percent of all qualified projects through public tender (on track to meet 45 percent target for 2020 (SB)); published Annual Purchase Plans of 308 of 593 Budget Units on Public Purchases’ Portal by mid-June. - AML/CFT legal framework: - revised AML/CFT Law approved by National Assembly and came into force in January 2020; - law introduces comprehensive definition of politically exposed persons and addresses previously identified deficiencies; - complementary legal and regulatory amendments being adopted; BNA enacted AML/CFT regulation for financial institutions; AML/CFT aspects included in FIL. - BNA Law and FIL reforms progressing but SBs missed; gaps to be addressed by end-September 2020 (SBs, missed and proposed resets): - BNA Law issues: lack of adequate personal and financial autonomy provisions; shortcomings in defining price stability mandate, appointment/dismissal procedures for key officials, provisions on BNA’s capital, profits, earnings, and quasi-fiscal activities. - FIL issues: early intervention and resolution framework needs additional work, especially asset management tool, early intervention and resolution regimes, and safeguards to protect public funds. - Governance and anti-corruption: - Government committed to improving governance and fighting corruption; - SOE Law and associated regulations planned for submission to National Assembly to enhance reporting, transparency, monitoring, and controls (new SB, MEFP ¶24); - focus on increasing professionalism of SOE management and increasing cooperation with UN on combating corruption, drug trafficking, organized crime, and terrorism. ### Program issues, access augmentation, and risks - COVID-19 shock effects: - current account worsened by US$1.4 billion in 2020 and US$1.2 billion in 2021 compared to Second Review projections; - additional fiscal financing needs of US$3.8 billion in 2020 and US$2.9 billion in 2021 (Text Table 4). - Authorities requested IMF access augmentation from 361 percent of quota (SDR 2,673 million) to 434 percent (SDR 3,213 million), corresponding to an additional SDR 540 million, within normal access limits under the GRA. - After considering supplementary budget policy adjustment, augmentation would provide part of the additional financing, with remainder from G20DSSI and selected debt reprofiling. - Authorities requesting rephasing of IMF disbursements for remainder of 2020 to advance import of medical and testing supplies (Table 10). - Staff supports the authorities’ requests given that supplementary budget’s additional fiscal adjustment pushes advisable limits amid economic weakness and health spending pressures. - Capacity to repay IMF: - proposed augmentation moves some capacity-to-repay indicators toward upper end of their ranges compared to other normal access programs (Text Figures 2–3 and Tables 9–10); - IMF credit outstanding as share of GDP peaks at 6.2 percent; - IMF credit as percent of non-collateralized external debt and GIRs, net of collateralized debt service, at 12.6 percent and 26.2 percent, respectively; - peak repayments to non-pledged exports of goods and services in line with other normal access EFF arrangements; - risks to IMF mitigated by extended debt reprofiling. - Financial burden sharing: - World Bank and African Development Bank expected to provide budget support of US$1 billion in 2020 and US$665 million in 2021; - G20DSSI and selected reprofiling will fill a major part of Angola’s financing needs; - based on these supports, program is fully financed for the next 12 months, with good prospects for its last half-year. *Source: 1agoea2020001 - 0.2 percent of GDP. Continued reform* ### 25. There are delays with the implementation of the recommendations of the Safeguards ### 25. There are delays with the implementation of the recommendations of the Safeguards Policy Assessment ### Safeguards and institutional reforms - The BNA is strengthening important functions, including reserves management, internal audit, and risk management. - Timeliness of financial statements publication has improved, but the full implementation of International Financial Reporting Standards is still missing. - Delays remain in: - Establishing a framework for BNA lending to commercial banks to mitigate financial risks. - Legal amendments to the BNA Law for governance and oversight reforms. ### Multiple Currency Practices (MCPs) and Exchange Restrictions (ERs) - MCPs and ERs continue to be reduced; there is no breach of the continuous PCs, as the remaining ones pre-date the program. - The trade restrictions related to import licensing to foster economic diversification are assessed not to constitute a breach of the relevant continuous PC. - The application of a stamp tax on foreign exchange operations (SB) was eliminated in October 2019, removing an ER and an MCP (ER, Article VIII, 2a and MCP, Article VIII, 3). - Authorities will present a detailed plan and timeline to continue the removal of ERs and MCPs by end-September 2020, including the elimination of the special tax on transfers to non-residents under foreign TA or management service contracts (ER, Article VIII, 2a) by end-March 2021. - Import licensing requirements introduced in January 2019 (Presidential Decree No. 23–19) require importing firms to demonstrate prior efforts to secure domestic sourcing and constitute a trade restriction; staff assesses they were not primarily motivated by BOP-related reasons and did not materially distort trade flows, and thus do not give rise to a breach of the relevant continuous PC. Staff urged the authorities to scale back the regulations. ### External debt payment arrears - Private creditors: - Angola accumulated US$46 million in new arrears between end-September 2019 and end-December 2019, owing to constraints associated with correspondent banks transacting in U.S. dollars. - The authorities report having accumulated up to US$52 million in new arrears between end-December 2019 and end-June 2020. - Going forward, they expect to accumulate small monthly additional arrears until correspondent banking issues are resolved. - Authorities continue good-faith discussions to resolve outstanding payment arrears; the lending-into-arrears policy is deemed satisfied. - Official creditors: - Authorities continue to verify one successor state’s legacy claims on arrears to the former Socialist Federal Republic of Yugoslavia. ### Requests for waivers and proposed modifications to program conditionality - Waiver requests and proposals: - Waiver requested for nonobservance of the continuous PC on external debt payment arrears linked to continued problems with external payments rejected by correspondent banks, with a breach of up to US$52 million by end-June 2020. - Remedial actions: setting up an independent escrow account in a bank in Angola (MEFP ¶8) and enacting the new AML/CFT Law. Rejected payments will be deposited in this account and hence will not give rise to a breach for the purpose of the PC. Staff assesses the requirements of the lending into arrears policy are satisfied. - Waiver of applicability requested for the end-June 2020 PC on NOPFD, as in the absence of data there is no evidence that this PC was not met. - Proposed change to the PC on the NIR floors to US$8,085 million for end-December 2020 to help mitigate the crisis; modification reflects lower Eurobond issuance and lower oil prices relative to the Second Review baseline and is consistent with the program’s NIR adjustor. - Despite lower gross reserves, reserve adequacy would improve (due to lower imports) to 104 percent of the ARA metric, and is projected to improve further, to 107 percent by the end of the program, and 118 percent by 2024. - Proposed changes to PCs on RM ceilings starting at end-December 2020 to accommodate increases observed in monetary aggregates, largely caused by the BNA’s response to the COVID-19 shock, but consistent with the relevant program adjustor. - Proposed modifications to the IT for the ceiling on the stock of Central Government debt and debt of Sonangol to accommodate the slower pace of debt repayment. - Proposal to reset three SBs and introduce two new SBs to strengthen governance and PFM. ### Staff appraisal — macroeconomic outlook and policy assessment - Economic shock and outlook: - Angola’s economy is devastated by a triple shock in the wake of the COVID-19 pandemic. - Restricted oil production and lower oil prices are expected to continue weighing on oil exports, economic activity, the current account, international reserves, and the exchange rate, while contributing to an elevated debt burden. - External risks will continue to stem mostly from oil prices and production; domestic risks include potential health and humanitarian crises and an aggravated economic downturn. - Fiscal policy and financing: - Authorities remain strongly committed to the program. - They submitted a conservative supplementary budget to the National Assembly in July, with additional non-oil revenue measures and stringent expenditure management, while preserving critical social and health outlays. - Remaining financing gap will be financed by running down government deposits and assets, exceptional financing under the G20DSSI, and selected bilateral debt reprofiling. - Medium-term fiscal consolidation will be largely achieved through increased non-oil revenue, in particular through enhanced VAT collection. - Public debt: - Angola’s public debt is assessed to be sustainable, but risks remain very high. - Following its 2020 peak, the debt ratio is projected to decline steadily toward the authorities’ medium-term target. - High risks to the debt trajectory stem from Angola’s vulnerability to oil price and exchange rate shocks. - Authorities should remain proactive, seek further debt relief and additional fiscal adjustment if downside risks materialize. - Monetary policy: - Limited scope for further monetary policy easing. - BNA reacted quickly to the crisis and implemented measures which relaxed monetary policy. - Once the crisis abates, authorities should stand ready to rein in pressures on inflation and the exchange rate. - Exchange rate policy: - Exchange rate reform has continued to progress and remaining MCPs and ERs will be eliminated. - Transition toward a market-clearing exchange rate regime since mid-October 2019 has been a major step forward and has served Angola well in the crisis. - The exchange rate can now play a shock-absorbing role; the BNA should not try to counter the expected depreciation of the exchange rate. - Financial sector stability: - Safeguarding financial sector stability requires decisive action given limited fiscal space for bank recapitalization. - Timely restructuring of two troubled banks is important to protect deposits and safeguard financial stability. - AQRs performed in late 2019 were point-in-time and could not have anticipated the crisis. - The April moratorium on loan repayments and enforcement of collateral introduces substantial risks to asset quality in the medium term. - Structural reforms: - Ongoing structural reforms will enhance fiscal governance, reduce fiscal risks, and reinvigorate private-sector-led growth. - Progress in SOE privatization, public procurement, and the fiscal policy framework will allow more efficient use of public resources and give room for private-sector-led development and economic diversification. - Overall assessment: - Risks have dramatically risen, but authorities’ strong policy response and perseverance with reforms will help keep the program on track. - Significant international financing support (access augmentation, G20DSSI, selected debt reprofiling) is critical to keep the program on track. - Continued IMF TA, coordinated with development partners, will strengthen implementation capacity. ### Staff recommendations and support - Staff supports authorities’ requests and recommends the following: - Completion of the Third Review. - Support for the waiver of non-observance of the continuous PC on external debt payment arrears given corrective action. - Support for the waiver of applicability for the PC on NOPFD. - Support for the proposed modification of the PCs on RM and NIRs. - Support for access augmentation and rephasing. - Support for setting targets for the Fourth and Fifth Reviews. - Recommendation to complete the financing assurances review. *IMF Country Report content (selection): "There are delays with the implementation of the recommendations of the Safeguards Policy Assessment."* ### Annex II. Technical Assistance ### Annex II. Technical Assistance ### Tax Policy and Revenue Administration - Informality and international transfer pricing — IMF (FAD) — February 2020 - Excise tax — IMF (FAD) — January 2020 - VAT refunds — IMF (FAD) — Nov.–Dec. 2019 - Building capacity in the implementation and monitoring of the multi-year reform plan — IMF (AFRITAC South) — November 2019 - Transfer pricing — IMF (FAD) — October 2019 - VAT strategy — IMF (FAD) — Sept. –Oct. 2019 - Tax policy diagnostic assessment — IMF (FAD) — July 2019 - Enhancing AGT capacity to manage reforms — IMF (AFRITAC South) — July 2019 - IT upgrade to enable effective administration of VAT — IMF (AFRITAC South) — June 2019 ### Expenditure Policy and Expenditure Administration - Expenditure management procedures and capacity building — IMF (AFRITAC South) — April 19 - Energy subsidy reform and social safety net — World Bank — 2019–21 - Social safety net system: targeting, registration, payments — World Bank — 2019–21 - Pilot child cash-transfer program — UNICEF — Ongoing - Electricity tariff reform — World Bank — 2021 - Financial Programming and Policies (FPP1.0) — IMF (ICD) — January 2020 ### Public Financial Management - Fiscal decentralization and PFM at subnational level — World Bank — Ongoing - Fiscal Reporting — IMF (FAD) — March 19–Jan. 20 - Improving Cash Management to prevent arrears incurrences — IMF (AFRITAC South) — January 2020 - Public investment management assessment (PIMA) — IMF (FAD) — December 2019 - Information requirements for fiscal execution reports — IMF (FAD, AFRITAC) — November 2019 - Fiscal responsibility law — IMF (FAD, LEG) — October 2019 - PFM diagnostic — IMF (FAD) — April 2019 - Medium- and long-term debt strategy — IMF (MCM) and World Bank — April 2019 ### SOE Reform - SOE reform, privatization, and PPPs — World Bank — 2019–21 - Corporate governance, financial performance: SOE diagnostic — World Bank — 2020 ### Capital Markets - Development of capital markets — IMF (MCM) — 2020 ### Monetary and Exchange Rate Policies, and Central Bank Governance - Monetary policy implementation and operations — IMF (MCM) — 2020 - BNA Law — IMF (LEG) — 2020 - Foreign operations and FX policy implementation — IMF (MCM) — 2019–20 ### Financial Sector Stability - AML/CFT framework — IMF (LEG) — 2019–20 - Banking sector restructuring — IMF (MCM) — 2020 - Risk assessment of illicit financial flows — World Bank — Ongoing - Financial inclusion, supervision, and stability — World Bank — 2022 ### Economic and Social Statistics - Government finance and debt statistics — IMF (STA) — 2019–20 - National accounts, and external and monetary statistics — IMF (STA) and W.B. — 2019–21 - Economic census — World Bank — 2019-20 - Consumer Price Index (CPI) — IMF (STA) — 2020 - Angola Poverty Assessment — World Bank — 2020 - Angola Water, Sanitation, and Hygiene (WASH) Sector Diagnostic — World Bank — 2020 - Macroframework and Financial Programming — IMF (ICD/AFR) — 2020–21 ### Business Climate - Payments systems — World Bank — 2020 - Business environment reform (tax admin. and trade facilitation) — World Bank — 2022 *Sources: Angolan authorities; European Union (EU); UNICEF; World Bank; and IMF.* ### 0.7 percent of GDP for bank recapitalization in 2020. Under this scenario, both debt and GFN ### 1agoea2020001 - 0.7 percent of GDP for bank recapitalization in 2020. Under this scenario, both debt and GFN ### Public debt dynamics and stress scenarios - Bank recapitalization of 0.7 percent of GDP in 2020: under this scenario both debt and GFN ratios would exceed the high-risk benchmarks in 2020, but fall below it in the ensuing years. - Contingent liability (CL) risks from non-financial SOEs could further threaten debt sustainability. - Recommended CL mitigations under the program: - adherence to prudent borrowing strategy; - moderate issuance of sovereign guarantees; - restructuring of Sonangol; - SOE privatization. - Oil-price shock scenario (customized for Angola’s oil dependence): a two-year drop averaging 30 percent in the projected price of the Angolan oil basket for 2020–21 would: - cause the debt-to-revenue ratio to peak at about 736 percent; - keep the debt-to-GDP ratio above the high-risk benchmark over the entire projection horizon. ### Overall public debt risk assessment - The asymmetric fan chart indicates that under systematically unfavorable macroeconomic shocks (e.g., fiscal and exchange rate shocks) the debt trajectory would exceed the high-risk benchmark with high likelihood. - Heat map summary of vulnerabilities: - debt and GFNs breach their high-risk benchmarks in both the baseline and stress test scenarios; - flagged risks: market sentiment (a change from the last review in part because of the sharp rise in sovereign spreads), investor base, and currency composition. ### External debt coverage and projections - Debt coverage in the external DSA includes external debt of the Central Government, Sonangol, TAAG, and public guarantees of debt denominated in foreign currency; no information available on private sector external debt. - Angola’s public external debt path: - projected to peak at 94 percent of GDP in 2020; - projected to gradually converge to 58 percent of GDP in 2025. - Share of external debt in total debt: projected to decline to represent about half of total debt in the medium term. - External financing requirements: - projected to peak at about 10 percent of GDP in 2020, largely reflecting a sharp decline in oil prices and production; - projected to decline to about 6 percent in 2022; - projected to rise and stabilize at about 7 percent of GDP in 2023–25 as principal and interest payment deferrals expire and higher debt service obligations roll in. - Vulnerabilities to shocks: - Absent countervailing policy actions, external debt would peak at 155 percent of GDP in response to a 30 percent depreciation in the real effective exchange rate. - External debt also vulnerable to further declines in oil prices and growth, tighter financing conditions, and materialization of contingent liabilities from the financial sector. ### Bottom-line assessment - Public debt is sustainable conditional on: - substantial reprofiling of interest and principal payments; - strong fiscal adjustment underpinned by structural non-oil revenue measures. - On this basis, following its 2020 peak, the debt ratio is projected to decline steadily toward the authorities’ medium-term target. - Envisaged debt reprofiling and an improved overall fiscal balance are projected to keep GFNs contained in the medium term. - Nevertheless, numerous sources of vulnerability mean decisive action is needed to safeguard debt sustainability if risks materialize. ### External sector assessment — recent outcomes and outlook - Progress since program start: - large overvaluation built during the fixed exchange rate period has been eliminated; - net external liabilities remain manageable; - foreign exchange (FX) reserve adequacy has been improving. - Assessment for 2019: external position is substantially stronger than warranted by fundamentals, with an estimated Kwanza undervaluation of over 15 percent. - Current account (CA) in 2019: remained in substantial surplus despite an 8 percent decline in oil prices and a 6½ percent decline in oil production; trade balance (as a share of GDP) little changed relative to 2018 due to subdued imports and exchange rate shock absorption. - Capital flows: limited vulnerabilities from capital flows; under the baseline Angola is not envisaged to tap the Eurobond market over the next four years; portfolio equity and private portfolio debt flows are limited. - Real effective exchange rate (REER) fluctuations mirror exchange rate policy shifts across subperiods (fixed peg through end-2017; de facto crawling peg Jan 2018–Oct 2019; more flexible/market-determined regime from late 2019). - International reserves and NIIP: - NIRs rose to US$11.3 billion at end-2019, equivalent to 8½ months of prospective imports of goods and services; - gross international reserves (GIRs) rose to US$17.3 billion, or 98 percent of the IMF’s Assessing Reserves Adequacy (ARA) metric; - GIRs projected to reach just under 110 percent of the ARA metric by end of the program (somewhat below the 120 percent threshold for large commodity exporters); - NIIP deteriorated to -35 percent of GDP by end-2019 (as a share of GDP), reflecting rising sovereign external debt and Eurobond issuance; NIIP narrowed in U.S. dollar terms. - Exchange rate and COVID-19 shock: - following the collapse in world oil prices in March 2020, REER depreciation reached almost 35 percent year-on-year by April 2020; - official–parallel market spread within a 6–30 percent range by April 2020, suggesting the Kwanza remained close to market perceptions of the new equilibrium; - severe uncertainty from COVID-19 and oil-price collapse warrants close monitoring. ### Transition to a market-clearing exchange rate — chronology and measures - Three phases reviewed (May 2016–June 2020) with increasing exchange rate flexibility: - May 2016–December 2017: fixed exchange rate (peg) at Kz 165.9 per US$1; peg led to large reserve losses, substantial real appreciation, and official-parallel spread up to 255 percent in mid-May 2016. - January 2018–October 2019: de facto crawling peg after abandonment of the peg; excluding two days of rapid depreciation (10.7 percent on January 10 and 11.6 percent a week later), average depreciation was 0.2 percent a day; between January 2, 2018 and October 10, 2019 the Kwanza depreciated by 136 percent in nominal terms while the REER depreciated by 40 percent; weekly reserve loss pace declined from US$134 million during the peg to US$39 million; official–parallel spread narrowed from 151 percent in December 2017 to 26 percent in mid-October 2019. - November 2019–June 2020: move toward market-clearing floating arrangement; mid-October 2019 removal of important FX auction restrictions produced a fast depreciation (October 2019 Kwanza depreciation of 31.4 percent) followed by slower monthly depreciation; official–parallel spread narrowed to an all-time low of 6 percent in mid-April 2020. - Further liberalization measures: - January 2020 partial opening of the capital and financial account: eliminated licensing for capital inflows by foreign investors and capital outflows linked to investments; eliminated licensing for sales of investments in securities traded on a regulated market and for sales where buyer is a non-resident foreign exchange trader; - authorized oil companies to sell FX directly to commercial banks with business partnerships; - introduction of an electronic trading platform on April 1, 2020: banks required to participate; starting June 2020 BNA FX auctions conducted on this platform; all FX operations above US$500,000 must take place on the platform, and all transactions above US$50,000 must be registered even if not on the platform; diamond companies allowed to trade on the platform in late June 2020. - The platform increased transparency and marked an important step toward a market-determined exchange rate. ### Lessons and policy implications for exchange rate flexibility - International experience indicates successful transitions to flexible exchange rate regimes typically follow a gradual path and implement risk-mitigating policies. *Source: IMF staff report content as provided in the supplied PDF chapter/section.* ### 4. Operational requirements. In addition to sound macroeconomic and structural policies, ### 4. Operational requirements. In addition to sound macroeconomic and structural policies, ### Operational requirements for transition to a floating regime - Framework (Duttagupta, Fernandez, and Karacadag (2004)) endorsed by the IMF’s Executive Board outlines operational requirements, including: - (i) developing a deep and liquid FX market for price discovery; - (ii) formulating intervention policies consistent with the new exchange rate regime; - (iii) establishing an appropriate nominal anchor in the context of an appropriate monetary policy framework; - (iv) establishing adequate systems to review and manage exchange rate risks; and - (v) building the capacity of market participants to manage those risks (IMF, 2004a and 2004b). ### Nominal anchor - IMF (2004a) observations: - Many countries moving to a flexible exchange rate regime have favored an inflation targeting framework over monetary targeting. - The IMF’s Executive Board recognized that inflation targeting could be appropriate for developing countries with a flexible exchange rate and sufficient institutional capacity. - A weak relationship between monetary aggregates and inflation often undermines the effectiveness of monetary targeting as an effective anchor, though examples exist where monetary targeting was used effectively in moving from pegged to floating regimes (example: Mozambique). - Note: "In April 2018, Mozambique moved to an interest-rate-based regime, in preparation for an inflation-targeting regime." ### Speed of transition - Robe and Vravra (2007) review of six country experiences: - Fast exits: one-step moves from different types of pegs (examples cited: Brazil (1999) de facto crawling peg; Czech Republic (1997) horizontal band; Uruguay (2002) crawling band). - Gradual exits: step-by-step moves to a full float through increasingly more flexible pegs. - Gradual movers generally took time to establish mitigating elements (credibility, loss of competitiveness from appreciation, pass-through to inflation, balance sheet effects). - Chile and Israel cited as examples where slow transition helped deepen FX markets. - Footnote: "The authors analyzed the transition in six countries—three of them implemented gradual and orderly transitions; three moved fast, under market pressure, involving the collapse of the previous peg." ### Challenges during transition - Identified challenges whether transition is gradual or rapid: - (i) difficulties in assessing readiness and the appropriate time to move; - (ii) credibility issues; - (iii) finding the right role for the central bank during and after the transition; - (4) determining a proper strategy for communication and transparency. ### Exchange rate passthrough to domestic prices (Angola-specific) - Since abandoning the fixed peg, there has been relatively low exchange rate passthrough to domestic prices in Angola (Text Figure 4). - When official–parallel exchange rate spread was high and the official rate was managed, agents operated on the parallel market; when the official rate was then allowed to move, much passthrough had already taken place, leaving remaining passthrough low. - In the presence of volatile oil prices, the challenge is to maintain an appropriately tight monetary policy to keep passthrough low. ### Implications of a market-clearing exchange rate for Angola - Angola’s dependence on oil exports makes a market-clearing exchange rate important for inflation dynamics because the nominal exchange rate ceases to be a fixed anchor. - Mechanism described: - Decline in oil prices → decline in dollar value of oil exports → downward pressure on the real exchange rate → induces depreciation of the nominal exchange rate (now more flexible) → nominal depreciation may feed into higher inflation (e.g., through import prices). - If higher inflation is accompanied by monetary accommodation, unanchored inflationary expectations can increase precautionary demand for foreign exchange, put pressure on the exchange rate, and potentially launch a vicious circle. - Policy implication: need for policies to keep inflation in check, especially after an oil-price slump. ### Recommendations for a market-determined exchange rate - FX intervention plan: - BNA’s stated goal: fully retire from FX market operations—except for reserve management—and let all operators, including the Treasury, carry out FX transactions on the FX electronic platform. - Prerequisite: achieve unmitigated FX price discovery. - BNA should develop a plan to reach that stage and announce intervention modalities, strictly limited to occasional “smoothing” of excessive volatility and reserve management. - Transparency recommendation: disclose information on actual interventions, with a time lag, to help market transparency and strengthen central bank accountability. - Footnote quote: “Central banks should be selective in their interventions and parsimonious in their use of foreign reserves. The difficulty of detecting exchange rate misalignments and disorderly markets means that decisions on the timing and amount of intervention are subjective and may be off the mark.” (Duttagupta et al. (2006)) - Forward-looking market analysis: - Develop analytical tools and market intelligence (information about market behavior and short-term exchange rate assessments) to assess fundamental drivers of the exchange rate. - Use market intelligence to supplement model-based analysis. - Plan for disorderly market conditions. - Monetary policy framework: - Choice of an appropriate monetary policy framework is crucial. - Supportive monetary framework and capacity to implement it are essential to preserve monetary credibility under a floating exchange rate regime. - Adoption of consistent monetary and fiscal policies is critical to strengthen monetary credibility and inflation control within a more flexible exchange rate regime. ### Banking Sector Assessment and Reform — Asset Quality Reviews (AQRs) - AQR scope and timing: - Central bank completed asset quality reviews (AQRs) in December 2019 for 13 domestic banks, comprising 93 percent of total banking system assets. - Independent asset valuation exercise identified 7 banks with capital shortfalls. - AQRs provide foundation for authorities’ strategy for public banks, including addressing negative equity positions; restructuring balance sheets; resolving nonperforming loans (NPLs); and returning concerned banks to compliance with capital requirements and achieving long-term viability. - AQRs also identified shortfalls in banks’ risk-management practices. - Box 1: Portfolios for testing — minimum assessment thresholds - Securities and investments: Assets whose gross book value per issuer exceeds 2.5 percent of Bank's Regulatory Own Funds (BROFs). - Loans: - Minimum coverage of 60 percent of the overall exposure (equity and off-balance sheet exposure), net of impairments and/or provisions. - Customers whose total carrying amount of loans and/or off-balance sheet exposures, net of impairments and/or provisions, is greater than 2.5 percent of BROFs. - Minimum selection of the 20 largest global exposures (equity and off-balance-sheet exposures), net of impairments and/or provisions, per individual borrower. - Assets held for sale and assets not for own use: - Assets whose gross book value exceeds 2.5 percent of BROFs. - Minimum selection of the 5 largest assets of this nature. - Other tangible assets: - Assets whose gross book value of the exposure to a specific counterparty exceeds 2.5 percent of the BROFs. - Minimum selection of the 5 largest assets of this nature. - Deferred tax assets: Assets whose gross book value exceeds 2.5 percent of BROFs at the reference date. - Other assets with credit risk: Assets whose gross book value of the exposure to a specific counterparty exceeds 2.5 percent of the BROFs. - Methodology and prudential adjustments - Credibility and reliability ensured via independent auditors and review of banks’ data quality; assessment overseen by the BNA with reputable international auditors. - Prudent point-in-time estimates of banks’ assets, assuming public debt remains on a sustainable path. - Standard adjustments applied: - Discounts of 40–100 percent applied to estimated value of real estate collateral (market illiquid; anecdotal evidence of up to a 66 percent drop from peak on average using a rental-yield approach). - Assets subject to individual assessment re-valued using three broad macroeconomic scenarios (base/favorable/adverse) as per IFRS 9 standards; BNA applied a 70/10/20 percent weighting to them respectively to arrive at a definitive assessment of capital needs. - IFRS 9 expected-credit-loss rules applied: banks must hold capital against a one-year probability of default for securities, including a local sovereign default equivalent to 1.65 percent of nominal value. - Note: provisions on local sovereign exposure would be substantially larger under a lifetime expected-credit-loss approach; that lifetime approach was not considered because IMF program objective is to maintain public debt levels on a sustainable path and hence the sovereign is currently considered a ‘Stage 1’ asset by banks. - Findings and results - The AQRs identified that seven banks required a total of US$2.4 billion (3.7 percent of 2020 GDP) to meet minimum regulatory capital requirements. - Two public banks represent 96 percent of this total. - Capital shortfalls in five other banks were relatively small and four had already recapitalized by end-2019. - Further adjustments were needed after completing the AQRs to account for asset quality changes to end-2019 and the need for a capital buffer above the minimum regulatory requirement. - Text Table (capital highlights — preserved exactly as presented) - Capital Adequacy Ratio - Capital Shortfall (USD $m) - Recap as percent of Sep-2019 Own Funds - Bank Pre-AQR Post-AQR - Bank A 11.2% -132.8% 1,831 2,899% - Bank B 20.8% -22.5% 435 91% - Five other banks 15.3% 6.1% 103 22% - Total 2,369 - Credit-risk management findings - Six private banks found to have material exposure to related parties (exposure greater than 30 percent of total credit granted and/or greater than 20 percent of BROFs). - Banks’ credit-risk policies and procedures found to have material shortfalls requiring significant improvements. - AQR implications and next steps - Authorities preparing a strategy for the future of public banks: time-bound action plan to address two troubled public banks, including recognizing losses upfront; restructuring within limited fiscal space while preserving deposits and financial stability; preparing operational plans to dispose of real estate owned; and tackling high NPL levels. - Credit-risk management improvements to be addressed via on-going bank supervision and supportive structural reforms. - BNA commitments and timelines: - Use AQR findings to update the asset classification and provisioning rules by end-September 2020. - Banks expected to comply with new guidance on effective credit-risk management practices by end-December 2020. - Authorities committed to prepare an action plan, in consultation with the World Bank, to strengthen credit infrastructure, including: - adoption of international valuation standards for securities and collateral held by banks; - deployment and strengthening of national registries for ownership of immovable and moveable assets; - strengthening of the central credit register; - enhancing insolvency and enforcement frameworks. - Note: "The 2019 strategic plan for one bank has been superseded by the large losses identified in its AQR." *International Monetary Fund — Angola staff report excerpts (selected sections on operational requirements, exchange rate regime transition, and banking sector AQRs).* ### 1. The external environment has significantly deteriorated since the conclusion of the ### 1. The external environment has significantly deteriorated since the conclusion of the ### External shock and macroeconomic impact - Angola experienced a triple shock: (i) a health crisis from the COVID-19 pandemic; (ii) a collapse in international oil prices since February 2020; and (iii) a slump in demand for oil from a depressed global economy. - Real GDP is projected to decline in 2020, driven by lower oil production and oil prices, and the decline in business activities resulting from the COVID-19 outbreak. - Inflation: - 16.9 percent at end-2019. - Projected to peak at 22.2 percent at end-2020, mainly because of expected exchange rate depreciation resulting from the external shock. - Public debt and reserves: - Public debt ratio reached 109 percent of GDP at end-December 2019, mostly because of rapid exchange rate depreciation in 2019Q4. - Gross international reserves built up to US$17.3 billion (equivalent to about 10 months of prospective imports of goods and services) by end-year 2019. - Gross reserves are projected to remain at a relatively comfortable level at end-2020, equivalent to some 10½ months of prospective imports of goods and services. - External position: - The major real exchange adjustment following the floating of the Kwanza in 2019Q4 eliminated the currency’s overvaluation that had emerged during 2019. - The current account remained in substantial surplus in 2019 but is projected to swing to a deficit in 2020, only partly mitigated by lower imports. - Balance of payments will be supported by projected net foreign direct investment inflows to domestic oil companies from overseas parents and the G20 Debt Service Suspension Initiative (G20DSSI). - Adjustment will be borne primarily by the exchange rate, with part accommodated by net international reserve (NIR) decumulation. ### Banking sector and financial stability - Asset quality reviews (AQRs) indicate most private banks have adequate capital and liquidity positions despite sizable exchange rate depreciation and challenging reserve requirements. - AQRs identified problems in two public banks, including high nonperforming loans (NPLs), weak liquidity positions, and possible exposure to further currency depreciation. - Monetary policy response: - Banco Nacional de Angola (BNA) increased the reserve requirement ratio in 2019Q4 to reduce excessive liquidity, support the transition to a market-clearing exchange rate regime, and limit depreciation pressures on the Kwanza. - Further tightening will be temporarily delayed to mitigate potential liquidity shortages from the external shock. - Monetary tightening to resume after external risks subside, including increases in BNA policy rates to positive levels in real terms. - Monetary policy will be geared toward achieving inflation objectives while balancing the need to respond to the external shock. ### Macroeconomic objectives and outlook (2020–21) - Strategy rests on two pillars: (i) sound policies to promote macroeconomic and financial stability; and (ii) structural reforms to lessen dependence on oil, promote diversification, and reduce vulnerabilities. Guided by National Development Plan for 2018–22 (NDP18–22). - Growth: - Projected recovery in 2021 in oil and non-oil sectors to about 3.2 percent, driven by normalization of oil production after temporary OPEC+ cuts and normalization of aggregate demand after COVID-19, supported by structural reforms. - Inflation goal: - Reduce annual inflation to a single digit by 2023 through continued prudent fiscal policy and reinforced credibility based on reserve money (RM) targeting and a market-clearing exchange rate. - Exchange rate regime: - Transition toward a market-clearing exchange rate regime since 2019Q4. - Introduced on April 1, 2020 a transparent FX trading platform for transactions between oil companies and commercial banks; access extended to the diamond sector at end-June and to be extended later to the Treasury. - Reform aims to allow BNA to reduce its role as main FX supplier, improve competitiveness, and foster economic diversification. - Central bank autonomy and legislation: - Support increased autonomy of the central bank provided in the forthcoming amended, new BNA Law (missed end-March SB; proposed reset date of September 2020). ### Fiscal policy response and consolidation - Fiscal aim: restore fiscal and debt sustainability in wake of COVID-19. - Budget adjustments: - Submitted a supplementary budget in July with an oil reference price reduced from US$55/bbl (current budget) to US$33/bbl. - Program financing continues with additional measures; contingency measures will be implemented, in consultation with IMF staff, if Brent prices were to fall under US$25/bbl in a prolonged manner. - Consolidation measures (revenue and expenditure): - Non-oil revenue: Measures to bolster VAT (net of reimbursements), excise taxes, and PIT; reduced VAT remitted to the refund account; additional excise taxes on imported luxury cars; increased rates for cigarettes. - Wage bill: Presidential decree to freeze hiring (except for essential social services) and practice attrition-based employment reduction to achieve the wage ceiling of Kz 2.218 trillion in 2020. - Goods and services: Freeze on non-priority expenses (travel, hotel, real estate) while creating space for higher COVID-19-related spending. - Transfers and subsidies: Tight control while preserving targeted social spending floors; committed to increasing efficiency and recouping substantial savings over and above initial 2020 budget. - Capital expenditure: Reduce non-essential capital expenditure, including transport equipment and real estate purchases; freeze on shifting from rental to purchase of government offices in Angola and overseas. - Arrears clearance: Committed to clearance of domestic payments arrears per revised indicative targets (ITs) despite tight cash position in 2020. ### Structural reforms to buttress fiscal and debt sustainability - Medium-term target: central government public debt target of 60 percent of GDP. - Key reform areas: - Non-oil revenue mobilization: Expand VAT base; increase rates and progressivity of PIT; reform investment incentives for CIT; strengthen transfer pricing rules; improve property registration; start integrating the informal sector. These reforms to be part of 2021 budget. - Subsidy reform: First phase completed in 2019; pilot cash-transfer program started in May 2020 aiming to reach several hundreds of thousands by end-2020; program targets 1.6 million households nationwide. Second phase planned in 2021 to raise public transportation tariffs and prices of gasoline and diesel, with an ultimate objective of introducing an automatic fuel-pricing mechanism. Evaluate special subsidies for fuel purchases by enterprises in agriculture and fishing in late 2020. - External debt and legacy arrears: Working on legacy arrears to the former Federal Socialist Republic of Yugoslavia; verifying claims from a successor State; working to resolve servicing problems to private creditors. Adopted new AML/CFT Law in January 2020 to enhance transparency of ownership of legal persons. Set up an independent third-party escrow account in a sound bank in Angola to deposit any debt service payments rejected by intermediary financial institutions. - Payments arrears progress: - Net accumulation of payments arrears: Kz 225 billion at end-2019; Kz 120 billion at end-March 2020; Kz 81 billion at end-June 2020, all below the program ceiling of Kz 250 billion (ITs). - Eliminated majority of arrears recorded in SIGFE accumulated up to 2017 by end-March (structural benchmark, SB), with a small amount unsettled due to technical and legal issues. - Cleared more than 60 percent of non-SIGFE arrears accumulated up to end-2017 by end-March (SB). - Verified and cleared 60 percent of all payments arrears accumulated by the Central Government in 2018 and recorded in SIGFE by end-March, but missed end-June SB on completing the verification. - Commit to complete verification and clearance of all non-SIGFE arrears by end-September 2021, owing to capacity constraints under the crisis. - After SIGFE adjustments in September 2019, began publishing detailed quarterly reports in Q4 2019 on outstanding arrears, amounts paid, payment modalities, and average payment periods within six weeks of each quarter end. - Public investment management: - For projects above Kz 10 billion from January 2021, publish an initial project appraisal report by the line ministry after review by the Ministry of Finance, including risk assessment (new SB). - Publish summaries and supporting documents for major projects; regularly review and update cost estimates and selection criteria. - Secure proper budget or external financing before starting new public investment projects. - Apply same principles to projects under the Integrated Municipal Intervention Plan (PIIM). - Will not reallocate capital expenditure to current expenditure except on an exceptional basis up to 7 percent of capital expenditure. - Fiscal framework and transparency: - Adopt a medium-term fiscal framework (MTFF) consistent with deficit ceilings of forthcoming Fiscal Responsibility Law (FRL). Draft FRL submitted to the National Assembly in July (end-March SB) after COVID-19 delays. - Completed a pilot MTFF in June to be revised after supplementary budget approval to anchor 2021 budget proposal. - Will not start capitalization of a fiscal stabilization fund before the budget generates surpluses and Central Government debt is below the target defined in the FRL. - Published end-year fiscal report for 2019 (full year and fourth quarter) in June 2020; will continue publishing detailed in-year quarterly fiscal reports. - Will enforce sanctions for spending decisions above approved budget ceilings. *Source: Content unit 1agoea2020001* ### 9. We will continue to strengthen our RM target policy framework to achieve price ### 9. We will continue to strengthen our RM target policy framework to achieve price ### Monetary policy framework and RM targets - Set monetary policy consistently with the quantitative RM targets under the program (PCs). - Use a range of instruments, including open-market operations at market interest rates, to sterilize shocks to money aggregates that may compromise the RM targets; and policy rates, as needed. - Intra-year direct lending by the BNA to the Government will be restricted to 10 percent of the previous year’s fiscal revenues, as defined in Article 29 of the BNA Law, while respecting related PCs. - Any such advances will be settled solely in cash before the end of each calendar year. ### BNA Law amendments, autonomy, and safeguards - Commitments and actions: - By end-September 2020 submit amendments to the BNA Law (missed SB; proposed reset date) to the Council of Ministers. - Amendments will: clearly define the BNA’s mandate; set a clear primary policy objective; strengthen governance arrangements; legally protect BNA staff from undue influence from third parties; ensure the BNA’s financial, functional, and personal autonomy; clearly distinguish between emergency liquidity assistance and monetary policy operations; adopt international good practices; and strengthen the solvency support frameworks (as outlined in the 2019 Safeguards Assessment Report for Angola). - Safeguards and transparency commitments: - Promptly implement the IMF’s Safeguards Assessments Policy recommendations, including by completing the rebalancing of foreign reserves asset portfolio to align with the new investment policy. - Eliminate illiquid holdings with external managers. - Timely publication of annual audited financial statements and provision of external auditor’s management letters to IMF staff, as required under the IMF’s Safeguards Assessments Policy. - Internal controls: - Steps taken to strengthen internal audit function. ### Exchange rate regime and FX operations - Continue transition toward full flexibility; achieved market-clearing exchange rate regime following October 2019 measures. - FX auctions: - Hold FX auctions at least once a week, typically on the same day of the week. - BNA will announce monthly indicative amounts to be auctioned for the following three months to aid predictability. - Banking and FX regulations: - December 2019 legally binding instruction requires banks to eliminate any informal restrictions on foreign exchange deposit withdrawals or, if denying access, to provide a written explanation for the denial (SB). Banks are fined for non-compliance. - Since January 2020, oil companies are allowed to sell FX to the banks they have business relations with. Since April 2020, such transactions have started to be transferred gradually to the FX trading platform. ### Net international reserves (NIRs) and COVID-19 impact - Met both the end-December 2019 and end-June PCs and the end-March 2020 IT on NIRs. - COVID-19 shock effects: - Temporary loss of market access and much lower oil prices render the IT for end-September and the PC for end-December 2020 unattainable. - Request recalibrating these targets, in line with the adjustors embedded in the program. - Continue to implement a monthly FX intervention budget, agreed with IMF staff, consistent with the proposed revised future NIRs targets. ### Elimination of exchange restrictions (ERs) and multiple currency practices (MCPs) - Commit to prepare a plan, with a clear timeline, by end-September. - Actions taken and planned: - October 2019: eliminated application of the 0.1 percent stamp tax on foreign exchange operations by amending Presidential Decree No. 3/14, of October 21, 2014 (SB). - Will 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 policies and stability - Ongoing monitoring of banks with high exposures identified by AQRs: FX, credit, liquidity, and market risks. - Revising the Financial Institutions Law in line with IMF and World Bank advice (missed end-March SB; proposed reset date of end-September 2020) to ensure: - Effective corrective action (escalated supervisory intervention as a bank deteriorates). - Recovery planning and resolution frameworks for weak banks. - Created a deposit guarantee fund and strengthened coordination between the BNA and the Ministry of Finance, including on contingency planning. ### Asset Quality Reviews (AQRs) and bank capitalization - Completed AQRs for thirteen banks comprising 93 percent of the banking system’s total assets. - December 2019: BNA formally communicated capital impact to individual banks and requested incorporation into 2019 financial statements. - Capital shortfalls: - Identified in seven banks, instructed to prepare capital management plans by February 2020 to return to full compliance with regulatory capital requirements by end-June 2020 (SB). - Four private banks were recapitalized by the deadline and recapitalization of the fifth is imminent. - Two public banks were granted an extension. ### Role of the State in the banking sector and public banks restructuring - Current state ownership: - Four banks owned or controlled by the State and three banks in which the State is a significant shareholder, directly or indirectly (e.g., through Sonangol). - Strategy updated (end-February 2020 SB) to incorporate AQR results; key elements include: - Upfront loss recognition with existing capital bearing losses before any fresh capital is provided. - Time-bound action plan to recapitalize and restructure the two largest public banks using a least-cost approach and within fiscal space. - Viability analysis of each bank. - Operational plans to dispose of real estate assets and to tackle NPLs. - Strengthening of governance and risk management. - Timeline: - BNA and the Government will agree on the action plan for the public banks and commence their restructuring process by end-July 2020. ### Recredit mandate, governance, and operations - Legislation enacted to: - Restrict Recredit’s mandate to purchasing NPLs from one large public bank (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. - Strengthened mandate, autonomy, governance, and operating arrangements to maximize value recovery for taxpayers using international valuation standards. - Recredit Presidential Decree to be amended by end-August 2020 (SB, reset) to require independent business reviews of the main debtor groups upon Recredit’s request. - Accountability and independence measures: - Require Recredit to publish a business plan and annual performance reports. - Update 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. - Replace the representative of the bankers’ association with an independent expert. - Operational progress: - Recredit prepared strategic and business plans in June 2020, including scaling up NPL recovery operations to facilitate BPC’s restructuring, including through outsourcing to independent experts. ### Bank governance, supervisory tools, and prudential standards - BNA will continue to enforce prudential norms: reserve, capital, liquidity, and provisioning requirements. - Amendments to Financial Institutions Law: - Submit amendments to the National Assembly by end-September 2020, to be adopted as a priority (missed end-March SB, proposed reset date). - Amendments will introduce more rigorous fit and proper requirements for bank owners, Board members, and managers. - By end-September 2020, BNA will: - Issue guidelines on effective bank Boards. - Issue guidelines on effective credit-risk management practices. - Update asset classification and provisioning rules. - Compliance expectation: - Banks will be expected to be compliant with the new guidance by end-December 2020. ### Credit-risk management infrastructure - In consultation with the World Bank, prepare an action plan by end-September 2020, with appropriate timelines. - Action plan components (inter alia): - Adoption of international valuation standards for securities and collateral held by banks. - Deployment and strengthening of national registries for ownership of immovable and moveable assets. - Strengthening of the central credit register. - Development of the system of postcodes. - Enhancement of the insolvency and enforcement frameworks. - Emphasize strengthening professional capacity for asset valuation, credit-risk management, and insolvency. ### AML/CFT framework - New AML/CFT law (Law No.5/20 of January 27, 2020) came into force in January. - Complementary legal and regulatory amendments implemented by end-June 2020 (missed end-March SB; completed with delay), including revised BNA Notices. - Going forward: focus on effective implementation of the revised AML/CFT framework. ### Public debt management - Update Medium-Term Debt Management Strategy for 2020–22 to reflect changes in domestic and international financial markets due to COVID-19. - December 2019: extinguished a large collateralized credit arrangement with an official bilateral creditor, reducing stock of collateralized debt. - Engagement with creditors: - Reprofile selected near-to-medium term debt service obligations consistent with program parameters; secured agreements with two large creditors, agreement with a third being worked out. - G20DSSI: - Requested debt relief under the G20 Debt Service Suspension Initiative (G20DSSI) for 2020 and commit to spend freed resources on COVID-19-related health or economic relief and to closely monitor such spending. - Debt disclosure: - Will disclose debt by public sector borrowing entities (per GFSM 2014) to the IMF and the World Bank no later than September 1, 2020. - Domestic debt market deepening and borrowing strategy: - Continue measures to deepen domestic debt market, bringing rates on government securities closer to market rates. - Seek additional financing from the IMF, the World Bank and other international financial institutions. - Since approval of the arrangement, have not contracted any new oil-collateralized debt (PC) and have kept disbursements under existing oil-collateralized credit facilities below the agreed ceilings (ITs). - Follow a prudent borrowing strategy for public investment projects: restrict implementation to priority projects under a tight and secured financing envelope; prioritize concessional financing; refrain from contracting new debt to finance non-priority investments and/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. - Continue to abide by the ceilings for issuance of debt guarantees by the State (IT). - If unforeseen risks to achieving the medium-term debt target materialize, act to mitigate those risks, including by seeking additional debt relief from a wider group of creditors. ### Structural reforms and infrastructure - Infrastructure projects: - Ongoing projects in energy and potable water distribution supported by the World Bank. - Working with the African Development Bank on electricity transmission infrastructure, including implementing over 300 km of power transmission lines. - Legal reforms: - Submitted the Insolvency Law and the Secured Transactions and Registry Law to the National Assembly at the end of February 2020 to introduce a robust regime for guarantees on movable property. ### SOE reforms, privatization, and transparency - PROPRIV (2019–22) privatization program: launched public tenders for 40 SOEs by end-June 2020 and privatized 14 companies for a total sale price of US$53 million. - Planned actions: - Plan to launch public tenders for up to 40 assets in the remainder of this year, with total expected net sale of up to US$125 million. - Privatization receipts to be fully disclosed to the Ministry of Finance and incorporated in the budget when assets are owned directly by the State. - Sonangol: - Under “Regeneration Program,” 9 non-core assets were put up for sale between September 2019 and June 2020, and 5 were sold with a total price of US$17 million. - Sonangol will launch public offerings for another 4 non-core assets by end-2020. - Arrears and settlements: - December 2019 identified arrears accumulated in 2016–18 between Sonangol and PRODEL; agreement reached on a progressive clearance plan involving debt securities, tax compensation, and cash payment. - Arrears for 2019 were agreed in January 2020. - All such arrears between Sonangol and PRODEL will be settled by end-August 2020 by tax compensation. - SOE transparency: - The 12 largest SOEs (by assets) published their audited 2019 annual reports on the SOE oversight institute’s (IGAPE) webpage by end-June and the remaining 3 will publish them by end-August, and the external audits by end-September—both deadlines were extended because of the ongoing state of calamity. ### Governance, anti-corruption, and public procurement - Engage with the United Nations to open an agency (UNODC) in Angola in 2020 to fight drugs, crimes, corruption, and terrorism. - By end-2020 submit a revised SOE Law to the National Assembly to enhance internal control and governance in SOEs (proposed new SB). The revised SOE Law, secondary regulations, and SOE policies will include: - Enhanced functions for the Government to act as an informed owner, improving aggregate annual reporting and performance monitoring systems. - Strengthened professionalism of SOEs by providing corporate governance requirements in line with OECD international standards. - Tighter controls by strengthening fiscal risk oversight, internal and external audit functions, and disclosure practices of SOEs. - Public investment contracts: - By June 2020, awarded 41 of 60 eligible proposals of public investment contracts (i.e., 68 percent) through open and competitive public tenders. - Ensure that by end-December at least 45 percent of the eligible contracts will be awarded through similar procedures, that is, public tenders limited to pre-qualified participants (SB). - Public procurement improvements: - Enhancing the efficiency of the electronic tender platform and training more staff. - Plan to provide incentives to encourage more voluntary participation in public tenders. - By end-June, 308 Budget Units (of 593 existing units) published their Annual Purchase Plans on the Public Purchases’ Portal. ### Program monitoring - Program monitored through semi-annual reviews. - The Fourth, Fifth and Sixth Reviews will be based on PCs at end-June 2020, end-December 2020, and end-June 2021, respectively. - The TMU specifies that test dates for the third, fourth, fifth, and sixth reviews are end-December 2019, end-June 2020, end-December 2020, and end-June 2021, respectively (MEFP, Table 1a). *IMF staff report content as provided.* ### 2. Arrangement exchange rates. For the purposes of the arrangement, the exchange rate of ### 1agoea2020001 - 2. Arrangement exchange rates. For the purposes of the arrangement, the exchange rate of ### Arrangement exchange rates - The exchange rate of the Angolan Kwanza (AOA) to the U.S. dollar is set at AOA 295 per US$1 for the duration of the arrangement. - Setting the arrangement’s accounting exchange rate does not imply a target exchange rate for policy purposes; it allows comparability across different test dates. - 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 ### I. QUANTITATIVE PERFORMANCE CRITERIA H3: A. Net International Reserves of the Banco Nacional de Angola (Floor) — Definition - Net international reserves (NIRs) of the Banco Nacional de Angola (BNA) = the U.S. dollar value of official reserve assets of the BNA minus reserve liabilities of the BNA. - Non-dollar denominated foreign assets and liabilities will be converted into U.S. dollars at the International Financial Statistics exchange rates on September 28, 2018, except monetary gold, which will be valued at the market price at each test date (Text Table 1). - Official reserve assets include: monetary gold, Special Drawing Rights (SDRs), foreign currency cash, foreign currency securities, deposits abroad, and the country's reserve position at the IMF. - Excluded from foreign assets: any assets that are pledged, collateralized, or otherwise encumbered (including guarantees for third-party external liabilities), claims on residents including commercial banks, claims in foreign exchange arising from derivatives in foreign currencies vis-à-vis the domestic currency (such as futures, forwards, swaps, and options), precious metals other than gold, assets in nonconvertible currencies, assets held with unrated correspondent banks, and illiquid assets. - Reserve liabilities: all short-term foreign exchange liabilities of the BNA to nonresidents, with an original maturity of up to and including one year, commitments to sell foreign exchange arising from derivatives (such as futures, forwards, swaps, and options), and all credit outstanding from the IMF. - Disbursements from the IMF received by the Central Government under the arrangement are excluded from the computation of NIRs. H3: A. Net International Reserves — Adjustors - The floor on NIRs will be adjusted relative to the arrangement’s assumptions given in Text Table 2. - Upward adjustors (a): - 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 (b): - 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’s lower limit is US$400 million for 2020Q2, US$600 million for 2020Q3, and US$800 million for 2020Q4, cumulatively. Similarly, in 2021, the adjustor’s lower limit is US$200 million for 2021Q1 and US$400 million for 2021Q2. - 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. H3: B. Banco Nacional de Angola Claims on the Central Government (Cumulative Ceiling) — Definition - BNA claims on the Central Government = cumulative change, from the beginning of the calendar year, in the stock of all outstanding claims on the Central Government held by the BNA, less revaluation gains/losses. - Revaluation gains/losses = changes in domestic currency terms of the value of BNA’s claims because of a change in the exchange rate. - These claims include loans, securities, shares, financial derivatives, settlement accounts, advances, and arrears. H3: C. Average Adjusted Reserve Money (Ceiling) — Definition - Reserve money (RM) = currency in circulation outside the BNA (includes cash in vaults) + balances of commercial banks’ overnight deposits + banks’ correspondent accounts (includes required reserves in local and foreign currency) at the BNA. - RM excludes balances in deposit auctions and commercial banks’ term deposits at the BNA. - For each quarter, average adjusted reserve money = the quarterly average of daily data recorded in the balance sheets of the BNA (BNA Survey). - For measuring banks’ reserves in foreign currency, exchange rates will be as in Text Table 1. - For 2019Q4, the average adjusted reserve money thus defined amounted to Kz 1,922 billion. H3: C. Average Adjusted Reserve Money — Adjustors - In the event of a change in the reserve requirement ratio in local currency (rr_LC) and in foreign currency (rr_FC), the reserve money ceiling will be adjusted according to the formula: - 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) - For the calculation of the adjustors, the banks’ correspondent accounts are evaluated as the quarterly average of daily balances, in Kwanzas, using the exchange rate in Text Table 1. - The RM ceiling will be adjusted relative to the assumptions in Text Table 3 (Angola: Reserve Money Targets and Components (Baseline Scenario), 2019–21). H3: D. Non-Oil Primary Fiscal Deficit of the Central Government (Cumulative Ceiling) — Definition - The non-oil primary fiscal deficit (NOPFD) = non-oil primary expenditure of the Central Government + clearance of external and domestic payments arrears in cash (as defined) - Central Government non-oil revenue. - Central Government covers entities of the Central and Local Administrations, Public Institutes, Autonomous Services and Funds, and Social Security. - Non-oil primary expenditure = total expenditure of the Central Government less payment of interest on domestic and external debt, and Agência Nacional de Petróleo, Gás e Biocombustíveis’s (ANPG) oil-related expenditure on behalf of the Government, all measured on a cash basis. - Payments arrears are 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; these include procurement contracts for goods and services and statutory obligations for payment; they relate to transactions authorized inside or outside the Integrated Financial Management System (SIGFE) up to December 31, 2017. - Clearance of payments arrears in cash = cash component of the repayments of arrears that were accumulated up to December 31, 2017, as defined above, and for which a repayment timetable is set out in paragraph 8 of the MEFP. - Central Government non-oil revenue = Central Government total revenue less oil revenue, both measured on a cash basis. - Central Government oil revenue = proceeds from the tax on petroleum production (IPP), tax on petroleum income (IRP), tax on petroleum transactions (ITP), total revenue from the concessionaire (i.e., without netting out ANPG’s oil-related expenditure on behalf of the Central Government), and any applicable charges on oil and gas, all measured on a cash basis. - The PC for the 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. H3: D. Monitoring of External Project Loan-Financed Public Investment - In every calendar quarter the Ministry of Finance will provide the total value in U.S. dollars of invoices approved by the Ministry, broken down into: - invoices for which external disbursements have been confirmed by external lenders; and - invoices for which external disbursements have not been confirmed by external lenders. H3: D. NOPFD Adjustor for Exchange Rate Depreciation - The NOPFD PCs and corresponding ITs will be adjusted (asymmetrically) for the Kz/USD exchange rate depreciation in excess of the program’s baseline: - PCs and ITs will be adjusted upward by a cumulative Kz 4 billion per quarter for every 1 percentage point depreciation of the cumulative average Kz/USD exchange rate (since the start of the year) by the end of the quarter in excess of the program’s baseline. - The adjustor will be capped at a cumulative Kz 100 billion per quarter. - Text Table 4. Cumulative Average Kwanza per U. S. Dollar Exchange Rates, 2020–21: - September 2020 AOA/USD 553.43 - December 2020 AOA/USD 566.26 - March 2021 AOA/USD 625.27 - June 2021 AOA/USD 638.90 - Cap units: 300, 400, 100, 200 respectively H3: E. Non-Accumulation of External Debt Payments Arrears by the Central Government and the Banco Nacional de Angola (Continuous Ceiling) — Definition - 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 contractual grace periods. - Debt is defined in Paragraph 17 of this TMU and excludes contracts providing for payment on delivery. - Arrears resulting from nonpayment for which a clearance framework has been agreed or a restructuring agreement is sought are excluded from this PC. - External debt obligations that cannot be paid solely because transfers are rejected by intermediary financial institutions’ compliance policies, and which 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), will not give rise to arrears for purposes of this PC. - The PC applies on a continuous basis throughout the arrangement. H3: F. New External Oil-Collateralized Debt Contracted by or on behalf of the Central Government, the Banco Nacional de Angola, and Sonangol (Continuous Ceiling) — Definition and Rules - Oil-collateralized debt = external debt involving creating a security interest, charge or lien over oil, oil receivables, or proceeds of the sale of oil. - The use of a collection account where no charge or lien is created over such account is excluded from this definition. - Prefinancing refers to debt contracted against future oil sales. - Debt contracted on behalf of the Central Government, the BNA, or Sonangol = borrowing entity is wholly owned and/or controlled by the Central Government, the BNA, and/or Sonangol. - Disbursements under oil-collateralized debt contracted before the approval of the arrangement are excluded from this PC and are monitored under the ITs relating to such disbursements (Paragraphs 21–22 of this TMU). - New oil-collateralized debt is excluded from this PC where used for financing of oil-extraction equipment, as evidenced by financing documents. - Contracting of new oil-collateralized debt (including prefinancing) by or on behalf of the Central Government, the BNA, or Sonangol, on a gross basis, is subject to a continuous zero ceiling under the arrangement. ### II. INDICATIVE TARGETS H3: A. Stock of Debt Contracted or Guaranteed by the Central Government or Sonangol (Ceiling) — Definition - Public debt = domestic and external debt contracted or guaranteed by the Central Government, including debt related to the National Urbanization and Housing Plan (PNUH) owed by the Central Government to Sonangol, and external debt contracted by Sonangol. - Cross-holding of claims by entities within this debt perimeter, including PNUH-related debt, are netted out for computing this IT. - External debt is determined according to the residency criterion. - "Debt" will be understood as a current (not contingent) liability created under a contractual arrangement through provision of value in the form of assets (including currency) or services requiring the obligor to make one or more payments in assets or services at future times. - Forms of debt include: - Loans (including deposits, bonds, debentures, commercial loans, buyers’ credits, repurchase agreements, official swap arrangements). - Suppliers’ credits (deferral of payments after delivery). - Leases (debt = present value at lease inception of all lease payments expected during the agreement, excluding payments for operation, repair, or maintenance). H3: B. Central Government Social Expenditure (Cumulative Floor) — Definition - Social expenditure = Central Government spending 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. H3: C. Net-Accumulation of Payments Arrears by the Central Government (Cumulative Ceiling) — Definition - Payments arrears = all external and domestic non-debt contractual obligations of the Central Government unpaid within 90 days after the due date specified in the contract or after the delivery date, and which: - Include procurement contract obligations for goods and services and statutory payment obligations (e.g., civil service wages and other entitlements); and - Are recorded in SIGFE. - The due date = deadline by which payment must be made under the applicable contract, taking into account contractual grace periods. - After rescheduling by agreement with the creditor, the obligation rescheduled is not considered in arrears anymore. - The IT on non-accumulation of payments arrears = net change in the stock of payments arrears reported between the date of arrangement approval and each test date under the arrangement. - Measurement excludes all claims related to transactions authorized outside SIGFE (these will be reported separately). H3: D. Disbursements of Oil-Collateralized External Debt to the Central Government (Cumulative Ceiling) — Definition - This ceiling refers to disbursements of oil-collateralized external debt to the Central Government from credit lines contracted before the start of the arrangement (paragraph 15 of this TMU). - This IT will be monitored on a quarterly basis. H3: E. Issuance by the State of Debt Guarantees (Annual Ceiling) — Definition - This IT ceiling covers all debt guarantees issued by the Central Government, irrespective of purpose, currency, and beneficiary. - This IT is defined for each calendar year and will be identical to the annual ceiling for issuance of debt guarantees approved in the annual Budget Law. - For the purpose of this IT, debt is defined as in paragraph 17 of this TMU. - This IT will be monitored quarterly, based on amounts approved by the Ministry of Finance for guarantee issuances. ### III. Reporting Requirements - (Section heading present in source; detailed reporting requirements follow in the source text beyond the provided excerpt.) *International Monetary Fund — Angola: Technical Memorandum of Understanding (excerpt).* ### 27. To ensure adequate monitoring of economic variables and reforms, the authorities will ### 1agoea2020001 - 27. To ensure adequate monitoring of economic variables and reforms, the authorities will ### Data reporting requirements (Table 1 highlights) - Reporting agencies: BNA, MINFIN, Sonangol, TAAG, and TAAG-related reporting where indicated. - General timing convention: many items required “No later than” specified intervals after the end of the day/week/month/quarter (examples below preserve original timing wording). - Selected BNA reporting requirements: - Stock of the NIRs — Daily — No later than one week after the end of each day. - Exchange rates (official and parallel) — Daily — No later than one day after the end of each day. - Decomposition of daily variation of NIRs stock into foreign exchange sales/purchase — Weekly — No later than one week after the end of each week. - Any off-balance sheet position denominated or payable in foreign currency — Weekly — No later than one week after the end of each week. - Exports and imports (nominal values) — Quarterly — No later than 6 weeks after the end of each quarter. - Balance of payments — Quarterly — No later than 3 months after the end of the relevant quarter. - BNA Survey (should include stock of bank reserves in foreign currency, evaluated at (fixed) exchange rates under the arrangement) — Daily — No later than one week after the end of each week. - Bank reserves in foreign currency (Denominated in foreign currency, for each relevant currency) — Daily — No later than one week after the end of each week. - BNA claims on the Central Government — Monthly — No later than 6 weeks after the end of month. - Stock and flows of bank claims on the Central Government — Monthly — No later than 6 weeks after the end of each month. - Accumulation of external debt service arrears by the BNA — Monthly — No later than 6 weeks after the end of each month. - Stock and the change in Central Government deposits at the BNA and banks and change in balances of escrow accounts (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) — Monthly — No later than 6 weeks after the end of each month. - Bank-by-bank financial data, including balance sheets, income statements, NPLs, broken down by currency (U.S. dollars and Kwanzas) and financial soundness indicators — Annually — No later than 4 weeks after the end of the year. For the 13 banks participating in the AQRs, data submission will be quarterly, and no later than 4 weeks after the end of each quarter. - Selected MINFIN reporting requirements: - Accumulation of external debt service arrears by the Central Government — Quarterly — No later than 8 weeks after the end of each quarter. - Oil revenue by category (including from the concessionaire (100 percent), from other oil tax (IRP, IPP, ITP), and identifying the average oil price (US$/barrel) and crude oil exports (barrels)) — Quarterly — No later than 8 weeks after the end of each quarter. - Non-oil revenue by category (Non-oil revenue (revenue from income taxes, property taxes, taxes on goods and services, taxes on international trade, and other taxes); social contributions; grants; other current revenues; and revenue from capital income) — Monthly — No later than 2 weeks after the end of each month. - Expenditure by category (Wages; goods and services (non-oil related and Sonangol’s expenditure on behalf of the Central Government); domestic and external interest payment; current transfers (subsidies— including price subsidies, donations, social benefits, and other transfers) and; capital expenditure, broken down between public investment program (PIP) and others, and between domestically and externally financed) — Quarterly — No later than 8 weeks after the end of each quarter. - Domestic borrowing and debt service (principal and interest) (Including Treasury bonds (broken down by instrument: OT-NR, OT-TXC, OT-ME, OT-INBT), Treasury bills (Fundada, and ARO whose disbursements should be recorded at price paid), and loans (contratos de financiamento de mútuo)) — Monthly — No later than 2 weeks after the end of each month. - External borrowing and debt service (principal and interest) as recorded in the DMFAS system (Broken down by creditor type (multilateral, bilateral, commercial, suppliers, and Eurobonds) and divided by public investment projects and budget support under the arrangement. Borrowing and debt service of collateralized debt broken down by creditor) — Quarterly — No later than 8 weeks after the end of each quarter. - Total value of invoices in U.S. dollars related to spending on public investment projections that are financed by external project loans and that have been validated by MINFIN (Broken down by invoices for which external disbursements have been confirmed by external lenders and invoices that have not) — Quarterly — No later than 8 weeks after the end of each quarter. - Stock of domestic debt of the Central Government (Domestic debt broken down by instrument type (treasury bonds: OT-NR, OT-TXC, OT-ME, OT-INBT; treasury bills: Fundada and ARO; and loans: contratos de financiamento de mútuo)) — Monthly — No later than 2 weeks after the end of each month. - Stock of external debt of the Central Government, Sonangol and TAAG (External debt broken down by creditor type: multilateral, bilateral, commercial, suppliers, and Eurobonds. Stock of collateralized external debt broken down by creditor) — Quarterly — No later than 8 weeks after the end of each quarter. - Debt service projection, quarterly for 2018–21 and annually from 2022 onwards (Principal amortizations and interest payments of domestic debt, both broken down by instrument type; and of external debt both broken down by creditor type, and by collateralized credit lines) — Quarterly — No later than 8 weeks after the end of each quarter. - Stock of public guarantees (Public guarantees broken down by currency, and identifying the amounts, beneficiary, guarantor, and maturity date of the underlying loan) — Quarterly — No later than 8 weeks after the end of each quarter. - Issuance of new guarantees (Guarantees issuances approved by the Ministry of Finance as defined in paragraphs 21–24 of this TMU) — Quarterly — No later than 8 weeks after the end of each quarter. - Contracting and/or disbursements of new collateralized debt by or on behalf of the Central Government, the BNA, and Sonangol — Quarterly — No later than 8 weeks after the end of each quarter. - Stock, new accumulation, and clearance of payments arrears (Clearly identifying the stock and clearance of payments arrears originating outside and inside SIGFE) — Quarterly — No later than 8 weeks after the end of each quarter. - Bonds issued in settlement of payment arrears, and for recapitalizations — Quarterly — No later than 8 weeks after the end of each quarter. - Bonds issued in settlement of loans by the BNA to the Central Government (The authorities should meet the corresponding PC and hence report zero issuances) — Quarterly — No later than 8 weeks after the end of each quarter. - Recapitalizations (Broken down by beneficiary and instrument (cash, bonds, and other means)) — Quarterly — No later than 8 weeks after the end of each quarter. - Stock and the change in balances of escrow and reserve accounts (Broken down by beneficiary creditor) — Quarterly — No later than 8 weeks after the end of each quarter. - Stock and the change in balances of the escrow set up in a sound bank operating in Angola to receive rejected debt service payments (Broken down by flows—disaggregated by new deposits and withdrawals—and stock (the balance in the account)) — Quarterly — No later than 4 weeks after the end of each quarter. - Social spending (Broken down by category) — Quarterly — No later than 8 weeks after the end of each quarter. - Quarterly reviews of the BPC’s restructuring plan — Quarterly — No later than 6 weeks after the end of each quarter. - Production and exports of oil and natural gas (Oil and gas production should be measured in monthly (average) barrels per day and exports measured in U.S. dollars) — Monthly — No later than 2 weeks after the end of each month. - Actual selling prices of oil and natural gas (For oil prices, it should be reported for all Angola brand fields. For natural gas, the average selling price) — Monthly — No later than 2 weeks after the end of each month. ### Revisions to the macroframework — overview and key implications - Purpose of supplement: provides (i) an update on program performance; (ii) an updated macroframework reflecting new developments in international oil prices and in debt relief; (iii) a justification for continued support for the proposed access augmentation; and (iv) an overview of other developments since the staff report. - Oil-price outlook: - Oil-price projections for Angola were revised upward relative to the staff report to reflect recent developments in global oil markets. - The annual revisions cover 2020–30 and are consistent with the IMF’s Brent price projections of August 17, 2020, and continue to incorporate a discount for Angola’s reference price as a matter of prudence. - Non-oil primary fiscal deficit: - There is no clear evidence that the end-June 2020 performance criterion (PC) on the non-oil primary fiscal deficit (NOPFD) was not met; authorities request a waiver of applicability. - Staff continues to work with the authorities to verify the data related to the PC given administrative capacity limitations due to the COVID-19 pandemic. ### Debt sustainability (Section C) - Revised framework assumes a somewhat different debt relief package but preserves debt sustainability. - Agreements reached on substantial debt relief with two large creditors; negotiations with a third large official creditor resulted in a different outcome than assumed in the staff report. - New baseline projects that all debt service payments until-end December 2020 for loans from that creditor will be rescheduled under the G20 Debt Service Suspension Initiative (G20DSSI). - Authorities have sent a formal letter of request to that creditor and the G20DSSI agreement has been activated. - Effects of higher oil prices: - Higher oil prices lead to narrower overall fiscal deficits and improved debt dynamics relative to the staff report, despite a smaller debt relief. - NOPFDs in 2020–30 remain broadly unchanged compared to the staff report, but revenue increases improve overall fiscal balances and debt dynamics (Text Table 2). - Projected debt reduction (percent of GDP) is faster in the coming decade; in 2025 is quite close to the authorities’ medium-term debt objective of 65 percent of GDP. - Gross financing needs (GFNs): - Under the new baseline, GFNs are reduced notably: on average lower by 1½ percent and 1 percent of GDP in 2021–25 and 2026–30, respectively (Text Table 3 and Figure 1). - Lower GFNs are accompanied by reduced issuance of both domestic and foreign debt and lesser reliance on drawdowns of Treasury deposits at the central bank and commercial banks. - Specifics: lower issuance of T-bills and T-bonds across the board, with the exception of 2026 when the Eurobond issuance assumed in the staff report is eliminated; lower issuance of Eurobonds in 2025 and 2028–30; smaller drawdowns of Treasury deposits until 2025 and some partial replenishment in 2022 and after 2025 (Text Table 4). - Vulnerabilities remain: - Debt dynamics are highly sensitive to further oil-price volatility. - Other vulnerabilities: exposure to currency risk, exposure to interest-rate risk, narrow creditor base, especially in the domestic market. ### External sector (Section D) - Impact of revised oil-price projections: - Positive impact on projected current accounts (CAs) and net international reserves (NIRs). - CA balance projected to improve cumulatively by almost US$1.5 billion in 2020–21 on the back of higher oil exports (Text Table 5). - Improvements partially offset by lower projected net FDI inflows (resulting from lower transfers from overseas parent oil companies, historically negatively correlated with oil prices) and by larger amortization payments due to smaller debt relief. - Expected reduction in NIRs is now smaller than in the staff report; however, NIRs remain substantially below those of the Second Review baseline scenario, and the cap to the relevant program adjustor is still binding. - Program stance on NIR quantitative PCs: - It is proposed to keep the December 2020 and June 2021 NIR quantitative PCs as specified in the MEFP. - Technical changes: - Text Table 2 in the Technical Memorandum of Understanding (TMU) is revised consistent with updated oil-price projections; revision agreed with authorities and signed-off in supplementary Letter of Intent. ### Monetary sector (Section E) - Monetary policy stance: - No major change warranted in the near term. - The temporary interruption of the gradual tightening initiated in 2019Q4 in favor of a more accommodative stance in 2020, followed by renewed tightening in 2021, remains appropriate. - Net effect of larger stocks of NIRs and greater expansion of credit to the Central Government on money aggregates is slightly expansionary in 2020–21 relative to the staff report. - Expansion of credit to the Government induces a modest crowding out of credit to the private sector relative to the staff report (Text Table 6). ### Proposed access augmentation - Rationale: - Widening of external financing gaps since the Second Review supports the case for the proposed access augmentation (Text Table 5). - Higher cumulative balance of payments (BOP) gap over the remainder of the program mainly driven by a substantial worsening of the CA, reflecting the lower oil-price path, lower portfolio inflows (no Eurobond issuance in the wake of temporary loss of market access), and larger deposit outflows (in response to stronger Kwanza depreciation). - BOP shortfalls only partially offset by higher net FDI inflows from overseas parent oil companies and lower medium- and long-term amortization (reflecting debt relief). - Use of financing: - Wider external gap since the Second Review to be partly accommodated by a drawdown of international reserves, with the remainder filled by the proposed access augmentation. - Further depletion of international reserves would not be prudent — at 106.5 percent of the ARA metric by end-2021, reserves already fall short of levels considered appropriate for commodity exporters (i.e., over 120 percent). *Prepared by the Angola Team of the African Department; supplement dated September 9, 2020.* ### 13. Directing the access augmentation toward budget ### 13. Directing the access augmentation toward budget ### Justification and fiscal gap numbers - The access augmentation toward budget support remains justified by the GFNs during the program period, which are still substantially larger than at the time of the Second Review. - Specifically, average public GFNs in 2020–21 are still estimated to be some 2¼ percent of GDP larger than the Second Review projections (Text Table 7). ### Liquidity implications for the Treasury and financing strategy - The proposed augmentation would help contain liquidity pressures on the Treasury. - In the staff report, the wider financing gaps were filled in large part by almost fully running down the Treasury’s deposits at the central bank and liquid assets of the Sovereign Wealth Fund, leaving the financing of the budget highly vulnerable to shocks. - With higher oil prices, the augmentation would allow somewhat lower drawdowns of Treasury deposits, which would, however, continue to be low: - by end-2021, they would amount to less than ½ month of annual spending (Text Table 8). ### Supplementary budget and policy measures (OTHER DEVELOPMENTS) - The National Assembly adopted a supplementary budget for 2020. - Approved on July 28, 2020, the supplementary budget is consistent with the program’s PC for the NOPFD for end-2020 and incorporates additional non-oil revenue measures to those discussed in the staff report. - The supplementary budget includes the following measures: - reduce tax arrears, - remove selected value-added tax exemptions, - increase import duties, - raise export tariffs on selected national products. - To accommodate higher essential spending and support households and businesses within a tight spending envelope, the supplementary budget rebalances resources from low-priority expenditure to health, education, and agriculture. *1agoea2020001 - 13. Directing the access augmentation toward budget* ### 16. Adoption of the draft Central Bank (Banco Nacional de Angola, BNA) and Financial ### 16. Adoption of the draft Central Bank (Banco Nacional de Angola, BNA) and Financial Institutions Laws (FIL) ### Legal reform progress and key provisions - BNA management has agreed to incorporate the latest drafting suggestions from IMF staff into the draft Central Bank Law to reflect international good practices regarding the BNA’s mandate, governance structure, and autonomy. These suggestions include: - a clear price stability objective; - an improved procedure for the appointment and dismissal of Board members; - an appropriate framework for lending to financial institutions; - limited lending to Government; - prohibition to conduct quasi-fiscal activities; - revised provisions regarding BNA’s capital, profits and losses, reserves, and profit distribution. - The draft BNA Law is expected to be sent to the Council of Ministers soon. - The draft FIL, with a new bank resolution framework, was approved by the Council of Ministers on August 14, 2020. IMF staff recommendations inserted into the draft FIL include provisions to: - safeguard the use of public funds, including a loss imposition requirement to the holders of capital instruments and the holders of other subordinated claims; - mitigate risks involved in the asset-management tool; and - strengthen the powers of the BNA to prevent contagion from troubled banks or to maximize value for all creditors as a whole when transferring assets and liabilities. ### Financial stability and bank-sector indicators (selected) - Financial Soundness Indicators, June 2019–June 2020 (selected): - Regulatory capital/Risk-weighted assets: 27.3; 27.5; 27.7; 27.9; 22.9; 22.7; 23.0; 22.6; 21.6; 28.7 - Core Capital (Tier 1)/Risk-weighted assets: 22.4; 22.5; 23.0; 23.6; 18.2; 18.1; 18.6; 18.4; 17.6; 24.9 - Foreign Currency Credit/Total Credit: 28.9; 28.9; 28.9; 29.2; 30.6; 30.3; 30.9; 32.8; 33.3; 34.2 - Nonperforming loans (NPLs) to gross loans: 35.5; 35.5; 35.4; 34.6; 32.6; 33.2; 35.8; 34.9; 34.5; 22.3 - (NPLs - Provisions for NPLs)/Core Capital: -13.4; -13.1; -13.0; -13.7; -26.8; -28.2; -20.5; -25.6; -28.2; -22.0 - Return on Assets (ROA): 0.4; 0.1; 0.3; 0.8; 3.1; 0.9; 1.0; -0.2; 0.1; 0.8 - Return on Equity (ROE): 2.6; 0.7; 1.9; 6.3; 32.5; 9.8; 10.4; -1.9; 0.7; 8.4 - Total Costs/Total Income: 102.6; 98.1; 93.7; 86.8; 55.2; 77.1; 82.9; 97.7; 96.7; 90.9 - Liquid Assets/Total Assets: 24.4; 24.1; 23.5; 24.3; 26.0; 27.2; 29.4; 27.1; 26.3; 26.4 - Number of reporting banks during the period: 26 (consistent across June-19 to Jun-20) ### Fiscal and debt outlook (selected signals and projections) - Public sector debt (gross) and related indicators (as presented): - Public sector debt (gross) (selected series values as presented): 110.9; 109.2; 102.0; 120.3; 95.1; 107.5; 86.0; 93.8; 83.7; 74.3; 67.2 - Total public debt composition (Percent of GDP) (selected entries): - Domestic (selected row): 34.4; 33.0; 26.5; 27.7; 23.9; 21.6; 19.6; 17.0; 14.6; 12.8; 11.0 - External (selected row): 76.5; 76.2; 75.5; 92.5; 71.2; 85.9; 66.4; 76.7; 69.1; 61.5; 56.2 - Of which: Sonangol (Percent of GDP): 6.8; 6.6; 6.1; 7.2; 5.8; 6.6; 5.2; 5.8; 4.7; 3.5; 3.2 - Gross financing needs and financing sources (selected figures from Tables 7 and 8): - Financing Needs (A): 13.4; 14.1; 12.9; 11.5; 9.2; 7.8; 6.4; 6.7; 6.1; 7.7 - Primary deficit (cash basis) (billions of U.S. dollars): -6.2; -5.9; -5.5; -2.6; -6.3; -4.1; -4.8; -5.2; -5.3; -5.3 - Debt service: 14.9; 16.0; 16.5; 13.4; 13.4; 11.7; 11.0; 11.9; 11.3; 12.9 - External debt disbursements (Financing Sources (B)): 6.2; 6.1; 5.2; 2.0; 3.2; 1.9; 2.6; 3.5; 3.5; 5.3 - Domestic debt disbursements: 5.1; 4.5; 3.6; 2.6; 3.1; 2.0; 3.4; 3.7; 2.9; 2.4 - Financing Gap (A-B): 1.2; 1.5; 3.1; 2.5; 2.7; 2.1; 0.0; 0.0; 0.0; 0.0 - Program financing (equals the Financing Gap per table): 1.2; 1.5; 3.1; 2.5; 2.7; 2.1; 0.0; 0.0; 0.0; 0.0 - CHECK program financing (selected row): 2.5; 2.1; 0.5; 0.8; 0.8; 0.8 - Balance of payments and reserves (selected) - Current account (millions of U.S. dollars): 2,900; 5,132; 375; -817; 340; 774; 386; 266; 83 - Trade balance (millions of U.S. dollars): 20,070; 20,593; 17,421; 10,445; 17,824; 13,580; 18,597; 15,115; 16,246 - Exports, f.o.b. (millions of U.S. dollars): 35,300; 34,726; 31,317; 20,944; 32,032; 24,947; 33,068; 26,798; 28,405 - Crude oil exports (millions of U.S. dollars): 32,456; 31,396; 28,845; 18,653; 29,109; 22,195; 29,611; 23,564; 24,828 - Gross international reserves (Millions of U.S. dollars, end of period): 15,470; 17,321; 17,152; 15,582; 18,631; 16,914; 19,831; 18,114; 19,114 - Months of next year's imports (reserves): 7.6; 12.4; 8.2; 9.9; 8.6; 10.2; 9.1; 10.2; 10.3 ### Implications and policy focus - The draft Central Bank Law and the draft FIL aim to strengthen BNA independence, governance, and crisis-management powers in line with international good practices. - The FIL’s bank-resolution framework introduces safeguards on the use of public funds (including loss imposition on holders of capital instruments and subordinated claims), risk mitigation for asset-management tools, and strengthened BNA powers to prevent contagion and maximize value in transfers of assets and liabilities. - Macroeconomic context (as presented) shows significant public debt levels and substantial financing needs in the near term, underscoring the importance of strengthened monetary and financial legal frameworks to support financial stability and creditor coordination during debt-reprofiling and program financing operations. *Source: IMF staff, Angola—2nd Review and associated tables and figures (as presented).* ### Appendix I. Supplementary Letter of Intent ### Appendix I. Supplementary Letter of Intent ### Purpose and requested revisions - Supplements the Letter of Intent (LOI) signed on July 17, 2020 and related Memorandum of Economic and Financial Policies (MEFP) and Technical Memorandum of Understanding (TMU). - Requests a further revision of the adjustor applied to the performance criteria (PCs) on net international reserves (NIRs); the NIR PC targets themselves remain unchanged relative to the previous LOI. - Replaces Text Table 2 in TMU ¶4 of the July LOI with a revised Text Table 2 (Angola: NIR Adjustors (Baseline Scenario), 2019–21). - Reports that there is no clear evidence that the end-June PC on the non-oil primary fiscal deficit (NOPFD) was not met; requests a waiver of applicability on this PC due to delays in data collection and processing associated with reduced administrative capacity in the wake of COVID-19. ### Key requests and program adjustments - Requests a waiver for non-observance of the PC on non-accumulation of external debt arrears. - Requests modifications to PCs and indicative targets (ITs) on: - Floor on net international reserves (NIRs) - Reserve money - Non-oil primary fiscal deficit (NOPFD) - Requests modifications to the IT on the stock of debt contracted or guaranteed by the Central Government and Sonangol. - Requests augmentation and rephasing of the program: - Augmentation amount: SDR 540.1 million, equally distributed over the remainder of the program. - Augmentation equals 72 percent of quota, with some partial rephasing in 2020. ### Program performance and compliance - All end-December 2019 and end-March 2020 PCs and ITs were met except: - PCs on the non-accumulation of external arrears (missed due to correspondent bank processing challenges linked to AML/CFT concerns). - Remedial actions taken: - Establishment of an escrow account in a domestic bank to hold rejected external payments. - Approval of a new AML/CFT law to strengthen financial integrity. - Structural benchmarks have continued to make progress, albeit with delays. ### COVID-19 impact and macroeconomic outlook - First COVID-19 case: March 21. - Caseload as of July 28: 950, including 41 fatalities. - Containment measures: state of emergency, state of calamity, suspension of international flights, movement restrictions between provinces, border closures, closing of non-essential businesses, increased testing capacity. - Economic projections and impacts: - Growth projected to contract to -4.0 percent in 2020 (compared to a pre-COVID-19 projection of 1.2 percent). - Overall fiscal balance expected to widen to a deficit of 3.6 percent of GDP in 2020 (from a surplus of 0.8 percent in 2019). - Gross international reserves projected to decline from 12.9 to 10.6 months of prospective import cover. - Inflation expected to increase from 16.9 percent to 22.2 percent, driven by exchange rate depreciation and a moderately accommodative monetary policy. - Medium-term growth projected to recover to 3.2 percent in 2021. - Downside risks identified: - Protracted COVID-19 pandemic - Lower-than-anticipated international oil prices - Mounting trade tensions - Geopolitical uncertainty ### Fiscal and debt management measures - Revised 2020 budget approved by the National Assembly on July 28 with a conservative oil price of US$33 per barrel (from US$ 55 in the original budget). - Fiscal measures to mitigate pandemic impact include: - 12 months VAT tax credit for imported capital and intermediate goods used in the production of identified products. - Deferral of social security contributions. - Extension of the corporate income tax deadline. - Introduction of the pilot social safety net program. - Expenditure containment measures: - Reduction in number of ministries from 28 to 21. - 30 percent freeze on goods and services spending. - Suspension of non-priority capital expenditure. - Non-oil revenue measures (to be implemented once the pandemic abates) include: - Reduction of the corporate tax to 25 percent. - Increase in personal income tax progressivity. - Introduction of an environmental tax. - Increased withholding rate for services provided by non-residents. - Debt management: - Continued implementation of the Medium-Term Debt Management Strategy. - Ongoing debt rescheduling negotiations with main creditors. - Participation in G20 Debt Service Suspension Initiative (G20 DSSI) for 2020. - Scaled back issuance of Treasury bonds indexed to or denominated in foreign currency. - Commitment to prioritize concessional financing and refrain from contracting new debt for non-priority investments. - Plans to seek debt relief from a wider group of creditors if downside risks materialize. - Continued efforts to deepen the domestic debt market. ### Monetary, exchange rate, and financial sector policies - Banco Nacional de Angola (BNA) measures: - Maintained an accommodative monetary policy stance. - Cut the 7-day permanent liquidity absorption rate from 10 to 7 percent. - Established a Kz 100 billion credit line to support the purchase of government securities and bonds held by non-financial enterprises. - Provided additional liquidity support to banks equivalent to 0.5 percent of GDP. - Exchange rate reforms and FX market liberalization: - Continued transition to a market-clearing exchange rate (following mid-October 2019 changes). - Adoption of the Bloomberg electronic foreign currency trading platform “FXGO”. - Plan to discontinue foreign currency sales auctions once registration and licensing of main FX market participants is completed; future interventions limited to smoothing disorderly market conditions. - New regulations to eliminate informal restrictions by banks on withdrawal of FX deposits and to reduce operational costs of over-the-counter FX sales. - Financial sector stability measures: - Asset Quality Review (AQR) completed in December 2019. - Recapitalization needs identified for seven banks; 96 percent of system capital needs concentrated in three banks. - Five of the seven banks have concluded their capitalization process. - Restructuring plan underway for BPC. - Strengthening Recredit’s autonomy and governance; Recredit’s mandate restricted to purchasing NPLs from BPC only. ### Structural reforms and governance - Planned post-pandemic measures: - Removal of fuel subsidies and increases in public transport tariffs to ensure cost recovery. - Implementation of Public Investment Management Assessment recommendations (mission conducted January 2020). - Private sector and insolvency reforms: - New Private Investment Law submitted to the National Assembly to streamline Foreign Direct Investment procedures. - Draft Law on the Recovery of Enterprises and Insolvency and related regulations expected to be approved in 2020Q3. - Privatization program (PROPRIV) 2019–22: - Target: privatize 195 SOEs including Sonangol’s non-core assets. - Progress: by April 2020 more than 14 SOEs privatized through public tenders; 40 more expected to be privatized by end-2020. - Use of privatization receipts: infrastructure financing, strengthening viable SOEs for privatization, and repayment of central government debt. - Governance and anti-corruption: - Intensified corruption investigations with increased charges and lawsuits against former government officials. - National Assets Recovery Service recovered assets and froze bank accounts linked to individuals related to the Luanda Leaks scandal. - Discussions with the United Nations to open an agency in Angola to fight drugs, crimes, corruption and terrorism. - Revisions to the SOE law to enhance internal controls and governance. - Budget units started publishing annual purchase plans on the Public Purchase’s Portal within the National Service for Public Procurement. ### Conclusion - Authorities remain committed to their reform agenda aimed at restoring macroeconomic stability and enhancing sustainable and inclusive growth. - Commitment to continue implementing appropriate fiscal, monetary, and structural policies to set the economy on a higher growth path. - Authorities request Executive Directors’ support for completion of the third review under the EFF arrangement. *Luanda, September 7, 2020 — Supplementary Letter of Intent signed by Vera Daves de Sousa (Minister, Ministry of Finance) and José de Lima Massano (Governor, Banco Nacional de Angola).* --- _Source: https://www.imf.org/-/media/files/publications/cr/2020/english/1agoea2020001.pdf_