## 1agoea2024001 ## Source details **Canonical URL:** [1agoea2024001](https://www.imf.org/-/media/files/publications/cr/2024/english/1agoea2024001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2024/english/1agoea2024001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2024/english/1agoea2024001.pdf.json) --- ### Fuel subsidy reform: implementation, indicators, and projections - June 1, 2023 decree: multiphase approach to remove fuel subsidies. - Near-term: gasoline price increase from Kz 160 to Kz 300 per liter (about 87.5 percent) → estimated 45 percent cut in gasoline subsidies. - Remaining subsidies on gasoline and other fuels scheduled to be eliminated over 2024-2025. - 2024 approved budget assumptions: - Assumes a two percentage points of GDP drop in fuel subsidy costs in one year. - Details on timing of reduction, mitigation strategy, and administrative revenue measures not disclosed. - IMF staff baseline assumption: - More gradual adjustment than the 2024 Budget: staff assumes a drop in the fuel subsidy cost of one percent of GDP annually in 2024 and 2025. - Contingency measures include non-priority spending cuts and continued implementation of revenue measures. - Fiscal and macro effects observed and projected: - Fuel subsidy costs were 3.6 percent of GDP in 2022. - First phase (June 2023) produced a modest fiscal gain: a 45 percent cut in gasoline subsidies and a 0.5 ppt of GDP drop in subsidies given concurrent exchange rate depreciation. - Subsequent phases expected to reduce subsidies by 2 percentage points of GDP in 2024 (Budget) and align gasoline and diesel prices to a minimum 95 percent of market-based price by 2025 (pricing formula adopted in 2020). - Social mitigation measures: - Kwenda cash transfer program registrations expanded to over one million rural families; mitigation measures estimated at 0.5 percent of GDP per year. - Urban measures: fuel and fare cards; social fare cards for certain urban bus users (students and people with disabilities). - External support: - Reform supported by a $500 million World Bank Development Policy Financing (DPF). - Staff view: - Need for greater clarity and a comprehensive approach to fuel pricing and fuel price subsidy reform; staff stands ready to provide technical assistance on next phases, mitigation measures, and communication strategy. ### Recent economic developments relevant to reform - Oil sector and external: - Oil production contracted by 6.1 percent in 2023. - Oil and gas exports fell by 29.3 percent in 2023. - 2024 budget oil price assumption: $65/bbl (vs $75/bbl in 2023). - 2024 budget oil production assumption: 1.060m bpd (vs estimated 1.070m bpd in 2023). - Real economy: - Non-oil GDP grew by 2.9 percent in 2023. - Non-oil sector accounts for about 74 percent of GDP. - Inflation and exchange rate: - CPI reached 20.3 percent y-o-y in December 2023. - Kwanza depreciated about 40 percent in May–June 2023 and broadly stabilized since July 2023. - Treasury sold $300 million at an average exchange rate of about USD/Kz 828. - Fiscal and debt: - Public debt-to-GDP projected to have increased by 18 p.p. to about 84 percent of GDP in 2023, mainly driven by a significantly weaker exchange rate. - Gross financing needs (GFNs) rose by 10 percent of GDP in 2023 due to a surge in external debt service of $9.3 billion after the end of the debt moratorium. - Fiscal consolidation in 2023 included spending adjustment of about 3 percent of GDP mainly through cuts in capital spending and related goods and services. - Overall and non-oil primary fiscal balances in 2023: -0.1 percent of GDP and -6.3 percent of GDP, respectively. - Banking and credit: - Real credit growth slowed; loan performance deteriorated in Q3 2023. - Banks’ profits rose when kwanza depreciated due to positive net open positions. ### Outlook and key projections (staff baseline) - Growth and inflation: - Real GDP growth: 2.6 percent in 2024 and 3.1 percent in 2025 (IMF projection). - Inflation expected to pick up in 2024 and gradually decline thereafter as subsidy removal effects and exchange rate pass-through diminish. - Fiscal and debt dynamics: - Primary fiscal balance expected to improve and remain positive given: (i) fiscal consolidation in 2023 and continuation of fuel subsidy reform in 2024; (ii) lower debt service starting in 2024; and (iii) expected recovery in growth. - Debt-to-GDP ratio expected to decrease to 45 percent of GDP in the medium term (staff expectation). - Risks: - Downside: stronger-than-expected decline in oil prices and/or crude oil production; more gradual implementation of fuel subsidies reform than envisaged in the 2024 budget; difficult access to international capital markets; financial sector risk materialization. - Upside: oil price and/or production increases; recognition of potential foreign liquidity buffers, including recovered assets and oil abandonment funds. ### Contingency measures and fiscal strategy - 2024 budget: non-oil primary deficit estimated at 4.1 percent of GDP (from a 6.3 percent forecast in 2023) reflecting spending cuts, lower fuel subsidies, and increased non-oil revenues. - Staff contingency measures include: - (i) Non-priority spending cuts (mainly capital spending and some current spending); limit investment spending to priority projects with recognized financing or execution level at least 80 percent. - (ii) Continued implementation of revenue measures: harmonization of VAT rates and increase of thresholds for PIT exemption planned in 2024. - Design emphasis for 2024 contingency: capital spending reductions and current spending cuts (goods and services); transfers and other current spending advised to remain comparable to 2022–23 levels (around 0.7–1 percent of GDP) while excluding education and health from cuts. - Staff recommended audit and technical assistance on domestic arrears prevention and cash management. ### Downside scenario and contingency needs - Illustrative downside: no fuel subsidy reform and no contingency measures → much slower adjustment, elevated near-term financing needs, significant fiscal and debt sustainability risks, and likely missed FSL targets. - Domestic arrears: - Grew to Kz 2.6 trillion in 2023 from Kz 1.2 trillion in 2022 (3.9 percent and 2.1 percent of GDP, respectively). - About Kz 400 billion estimated cleared in 2023; clearance plan for remaining arrears not finalized. - GFNs and financing assumptions: - Debt-to-GDP ratio expected to decline by about 14 percentage points in 2024 (to about 70 percent from 84 percent of GDP in 2023) under baseline. - GFNs about 6 percent of GDP in 2024 expected to be met with domestic financing (tilted toward longer-term maturity), multilateral and bilateral financing and project loans, and commercial financing linked to capital projects. - Between 2025–27, GFNs projected at an average of 4.7 percent of GDP. - Staff assumes continued issuance of longer-term domestic debt in smaller amounts in outer years and continued budget support from multilateral institutions. ### Debt Sustainability Analysis: baseline figures and risks - DSA summary: public debt remains sustainable; medium-term risk of debt distress assessed "high"; long-term risk assessed "moderate". - Key vulnerabilities: - High share of foreign currency debt: "about 80%". - Exposure to oil prices and production. - Narrow creditor base. - Baseline public debt (percent of GDP) — reported actual and projected: - 2022: 64.88 - 2023: 81.76 - 2024: 69.56 - 2025: 61.95 - 2026: 55.95 - 2027: 50.64 - 2028: 46.94 - 2029: 41.14 - 2030: 43.04 - 2031: 40.83 - 2032: 39.1 - Gross financing needs (GFNs, percent of GDP): - 2022: 8.3 - 2023: 11.7 - 2024: 6.2 - 2025: 4.4 - 2026: 5.1 - 2027: 5.3 - 2028: 7.9 - 2029: 7.8 - 2030: 5.7 - 2031: 4.2 - 2032: 5.8 - Memo items (2022–2032): - Real GDP growth (percent): 3.0, 0.5, 2.6, 3.1, 3.4, 3.5, 3.6, 3.6, 3.7, 3.5, 3.6. - Inflation (GDP deflator; percent): 16.5, 13.4, 24.5, 11.2, 6.3, 6.2, 6.4, 6.5, 7.6, 6.8, 6.8. - Commentary: - Public debt increased in 2023 to over 80 percent mainly due to exchange rate depreciation and is projected to stabilize at about 50 percent over the medium term. - Risks include oil price/production downside and financing access; upside from oil gains or recognition of foreign liquidity buffers. ### Debt-anchor calibration and scenarios - Methodology: adaptation of IMF FAD approach for resource-based economies; MDL recalculated to reflect current policy and external environment. - MDL (percent of GDP): Scenario 1 = 80; Scenario 2 = 80; Scenario 3 = 80; Aspirational Scenario = 98. - Debt-anchor outcomes: - Scenario 1 (No active policy): debt anchor = 40 percent of GDP (MDL 80; risk tolerance 5). - Scenario 2 (Higher fiscal risk management capacity): debt anchor = 50 percent of GDP (risk tolerance 10). - Scenario 3 (Higher fiscal consolidation and risk management capacity): debt anchor = 53 percent of GDP. - Aspirational Scenario: debt anchor = 69 percent of GDP (MDL 98; assumes reduction in effective interest rate on public debt by about 1 percentage point and government revenues at 24 percent of GDP). - Policy recommendation: consider a debt anchor below the FSL debt limit of 60 percent of GDP in the medium term. ### Monetary policy, FX intervention (FXI) guidance, and exchange rate strategy - Monetary stance: - BNA tightened policy: increased policy rate by 150 bps to 18 percent (mentioned in one section as 150 bps) and local currency reserve requirements increased by 300 bps to 20 percent; custody fee removed. - November 2023 MPC increased BNA rate by 100 basis points to 18.0percent (reported in Introduction). - Exchange rate and FXI guidance (IPF-based): - Exchange rate allowed to adjust to shocks; exchange rate depreciation in June 2023 aided adjustment and preserved GIRs (~7 months of import coverage in 2023). - IPF advice: FXI may be justified when shocks interact with frictions (shallow FX market; FX mismatches; weakly anchored inflation expectations) and threaten central bank objectives. - Costs of FXI: may delay macro adjustment, deplete reserves, create confusion about nominal anchor, hinder FX hedging market development, and incentivize FX exposure. - Recommended design: rules-based FXI with (i) threshold for daily exchange rate change to trigger consideration and (ii) maximum daily intervention volume; ensure calibration avoids over-smoothing and preserves reserves. - Communication: develop and publish objectives, rules, and operations; coordinate communication with the Treasury. - FX market functioning and fragmentation: - FX supply concentrated among Treasury and oil companies; multinational oil companies deal with few domestic banks → concentrated FX market and distribution distortions. - June-2023 episode: kwanza depreciated by nearly 40 percent in a month due to foreign currency shortages. - Authorities introduced December 2023 transfer taxes: 10 percent on legal entities and 2.5 percent on individuals for certain international transfers (subject to Fund approval under Article VIII Section 2(a)). - Staff recommendations: - Improve Treasury foreign currency cash management. - Eliminate FX market fragmentation, supported by IMF TA and clear communication. - Strengthen monetary policy framework and interbank liquidity management (use short-term instruments; align interbank rates with policy rate). - Hold amount of FX reserves that balances current smoothing benefits and future shock preparedness. ### Financial sector resilience, reforms, and supervision - Banking sector vulnerabilities and indicators: - Regulatory capital adequacy ratio: 27 percent at end-September 2023 (significant variation across banks). - A systemic state-owned bank: 10 percent of system assets; restructuring back on track. - A large problem bank: 6 percent of system assets; resolution delayed, relies on regulatory forbearance. - Loan portfolios low: 26 percent of banks’ total assets. - Deposit dollarization: around 40 percent; loan dollarization: around 20 percent. - Adjusted YoY credit growth to the private sector: 1 percent in September 2023. - Reforms and supervisory measures: - Secondary legislation issued to support 2021 legal reforms; all banks instructed to submit recovery plans by April 2024. - BNA operationalizing bank resolution framework; issued regulation on Emergency Liquidity Assistance. - Deposit Guarantee Fund enhancing operational preparedness and drafting fiscal back-up funding arrangement. - BNA commenced bi-annual Financial Stability Reports and top-down stress tests; data quality needs improvement. - Staff recommendation: comprehensive bank restructuring based on viability analyses; accelerate operationalization of resolution framework; legal protection for BNA staff acting in good faith should be strengthened. - AML/CFT and asset recovery: - National Strategy 2023–27 published February 2023; authorities have until June 2024 to address ESAAMLG recommendations to avoid gray-listing. - Beneficial ownership registry progress expected by end-June 2024. - Attorney General’s office reported assets recovered since 2019 amounting to $19 billion, of which $7 billion were recovered domestically. - Staff stressed need for greater transparency on management and allocation of recovered assets and proceeds. ### Structural reforms, National Development Plan (NDP 2023–27), and diversification - NDP targets: - Average annual GDP growth rate of 3.0 percent by 2027, with non-oil GDP growth of 5.0 percent. - Sustainable debt target: 60 percent of GDP. - By 2027, increase non-oil FDI from less than 1 percent to 9 percent of non-oil GDP. - Seven strategic pillars (as stated): - (i) Consolidate peace and democratic rule of law and tackle corruption; (ii) Balanced territorial development; (iii) Human capital development; (iv) Reduce social inequalities; (v) Modernize infrastructure while preserving environment; (vi) Private sector-led economic diversification and food security; (vii) Defense of sovereignty and regional role. - Key bottlenecks to diversification: - Governance and institutional quality; infrastructure and human capital; access to finance and financial inclusion. - Policy priorities and risks: - Continue privatization program (PROPRIV extended to 2023–26/27) and SOE reform; accelerate planned SOE privatization. - Avoid import substitution measures that limit global value chain integration. - Integrate climate-resilient infrastructure in diversification efforts. - Climate adaptation investment simulations (DIGNAD model): - Scenario 1 (No active adaptation): standard infrastructure = 3 percent of GDP; disaster in year 6 with GDP fall of 1.5 percent; recovery financed by public debt. - Scenario 2 (Adaptation infrastructure): standard = 2 percent of GDP; adaptation = 1 percent of GDP for years 1–5. - Scenario 3 (Adaptation + PIE improvements): same investments as Scenario 2 and public investment efficiency (PIE) increases from 25 percent to 59 percent. - Findings: Scenario 2 halves GDP losses and fiscal deficit relative to Scenario 1 following the shock; Scenario 3 saves about one percent of GDP in output loss relative to Scenario 1 and accelerates return to steady state. - Financing considerations: higher upfront costs for climate-resilient infrastructure → mobilize additional revenues, reprioritize spending per NDP, seek concessional financing and private engagement. ### Fiscal structural reforms, PFM, and capacity building - Progress and priorities: - Tax policy and administration: 2024 budget reduced VAT rates for 20 categories of food items and increased PIT exemption thresholds, which may cause non-oil revenue shortfalls; AGT finalizing supplementary tax administration measures. - Public Financial Management: advances in medium-term fiscal framework preparation; need progress on MTEF, fiscal strategy, public investment and PPPs, fiscal risks and reporting. - Staff urges comprehensive five-year PFM reform strategy and a 5-year PEFA reform plan; publish MTFF and fiscal strategy reports. - Procurement: improvements in annual procurement plans noted; further work needed on transparency, beneficial ownership disclosure, and electronic competitive procedures. - Capacity development: - Extensive IMF and partner TA across tax, PFM, monetary policy, financial sector, AML/CFT, statistics, and climate-related areas with timelines through 2025 (selected items preserved in source). ### Policy recommendations (concise) - Continue and complete fuel subsidy removal in 2024–25 with strong mitigation measures and a communication strategy; implement contingency measures if reforms delayed. - Maintain a tight monetary policy stance to reduce inflation while preserving exchange rate flexibility and external buffers; align interbank rate with policy rate and improve liquidity absorption with short-term instruments. - Strengthen fiscal consolidation and structural fiscal reforms: publish MTEF and fiscal strategy; boost non-oil revenue via tax policy and improved administration; protect education and health from cuts. - Enhance PFM, SOE reform, privatization, procurement transparency, and arrears management (audit of domestic arrears; clear and timely clearance plan). - Strengthen financial sector supervision and resolution: comprehensive restructuring of problem banks without regulatory forbearance; operationalize resolution framework and DGF fiscal back-stop. - Improve FX market functioning and Treasury foreign currency cash management; limit FXIs to severe market illiquidity events using a rules-based, well-communicated framework. - Mobilize concessional and private financing for climate-resilient investments; reprioritize spending according to the National Development Plan. - Accelerate AML/CFT and beneficial ownership reforms to avoid gray-listing; increase transparency on recovered assets management. *Source: IMF staff report content unit "1. Fuel Subsidy Reform" and related sections (content unit 1agoea2024001).* ### 1. Fuel Subsidy Reform ___________________________________________________________________________ 26 ### 1. Fuel Subsidy Reform ### Context - Angola’s economy recovered in 2021/22 after five years of adverse shocks through the 2018–21 EFF program, including fiscal consolidation, introduction of VAT, selective external debt reprofiling, floating of the exchange rate, and steps to transition to inflation targeting. - Significant reforms were achieved in fiscal management, financial stability, and central bank independence. - Growth turned positive in 2021 and improved in 2022 as oil prices recovered, despite some pre-election fiscal slippage. - The economic recovery nearly came to a halt in 2023 due to a double shock: falling oil prices and production in 2023H1, and the end of the debt moratorium in early 2023. - Communication challenges on exchange rate market conditions exacerbated the depreciation observed in mid-2023. ### Recent Economic Developments - Oil sector - Oil production is estimated to have contracted by 6.1 percent in 2023. - Oil and gas exports are estimated to have fallen by 29.3 percent in 2023. - The 2024 budget uses a prudent oil price assumption of $65/bbl compared to $75/bbl in 2023. - The 2024 budget assumes oil production of 1.060m bpd relative to an estimated 1.070m bpd in 2023. - Non-oil sector - Non-oil GDP is estimated to have grown by 2.9 percent in 2023. - The non-oil sector accounts for about 74 percent of GDP; one third of which is agriculture and fishery, manufacturing, and trade. About 10 percent of GDP is estimated to account for construction and transportation. - Inflation and exchange rate - CPI reached 20.3 percent y-o-y in December 2023. - A notable disinflation trend prior to June-2023 was interrupted largely due to exchange rate depreciation in June and the removal of fuel subsidies. - The Kwanza depreciated about 40 percent in May–June 2023 and broadly stabilized since July 2023. - The Treasury sold $300 million at an average exchange rate of about USD/Kz 828. - Fiscal and debt - Public debt-to-GDP is projected to have increased by 18 p.p. to about 84 percent of GDP in 2023, mainly driven by a significantly weaker exchange rate. - Gross financing needs (GFNs) are expected to have increased significantly in 2023 (10 percent of GDP), due to a surge in external debt service of $9.3 billion following the end of the debt moratorium. - Fiscal consolidation in 2023 included a spending adjustment of about 3 percent of GDP mainly through cuts in capital spending and related goods and services. - Overall and non-oil primary fiscal balances in 2023 reached -0.1 percent of GDP and -6.3 percent of GDP, respectively. - Banking and external - Banks’ profits rose when the kwanza depreciated due to positive net open positions in foreign currencies. - Real credit growth slowed further and loan performance deteriorated in Q3 2023. - Non-oil foreign direct investments continued to decline. - Policy responses - The authorities tightened fiscal stance in 2023H2 (about 3 percent of GDP in spending adjustment). - The BNA increased the monetary policy rate by 150 bps to 18 percent and local currency reserve requirements by 300 bps to 20 percent and removed the custody fee. ### Fuel Subsidy Reform: Implementation and Indicators - June 1, 2023 decree laid out a multiphase approach: - Near-term increase in gasoline price from Kz 160 to Kz 300 per liter (about 87.5 percent), resulting in an estimated 45 percent cut in gasoline subsidies. - Remaining subsidies on gasoline and other fuels scheduled to be eliminated over 2024-2025. - 2024 approved budget assumptions: - Assumes a two percentage points of GDP drop in fuel subsidy costs in one year. - Details on timing of reduction, mitigation strategy, and administrative revenue measures are yet to be disclosed. - IMF staff baseline assumption: - More gradual adjustment than the 2024 Budget: staff assumes a drop in the fuel subsidy cost of one percent of GDP annually in 2024 and 2025. - Contingency measures to preserve fiscal and debt paths include non-priority spending cuts and continued implementation of revenue measures. ### Outlook and Key Projections - Growth and inflation - IMF projects Real GDP growth of 2.6 percent in 2024 and 3.1 percent in 2025. - Inflation is expected to pick up in 2024 and gradually decline thereafter as subsidy removal effects and pass-through from nominal exchange rate depreciation diminish. - Fiscal and debt dynamics - Primary fiscal balance is expected to improve and remain positive given: (i) fiscal consolidation in 2023 and continuation of fuel subsidy reform in 2024; (ii) lower debt service starting in 2024; and (iii) expected recovery in growth. - Debt-to-GDP ratio is expected to decrease to 45 percent of GDP in the medium term. - Risks - Downside risks: (i) stronger-than-expected decline in oil prices and/or crude oil production; (ii) more gradual implementation of fuel subsidies reform than envisaged in the 2024 budget; (iii) difficult access to international capital markets; (iv) financial sector risk materialization. - Upside risks: (i) oil price and/or production increases; (ii) recognition of potential foreign liquidity buffers, including recovered assets and oil abandonment funds. ### Policy Discussions and Recommendations - Policy priorities discussed with staff: - Firm fiscal consolidation to keep public debt on a sustainable path and accelerate fiscal structural reforms. - Maintain a tight monetary policy stance to reduce inflation while preserving exchange rate flexibility and external buffers. - Ensure financial stability. - Implement the National Development Plan with emphasis on diversification, climate, gender, and governance. - Enhance authorities’ communication and coordination with stakeholders, especially during shocks. - Fiscal strategy and contingency measures - 2024 budget: non-oil primary deficit estimated at 4.1 percent of GDP (from a 6.3 percent forecast in 2023) reflecting spending cuts, lower fuel subsidies, and increased non-oil revenues. - Staff contingency measures include: - (i) Non-priority spending cuts (mainly capital spending and some current spending), limiting investment spending to priority projects and those with recognized financing or execution level of at least 80 percent. - (ii) Continued implementation of revenue measures (harmonization of VAT rates and increase of thresholds for PIT exemption planned in 2024). - For 2024 contingency design, capital spending reductions and current spending cuts (goods and services) are emphasized; transfers and other current spending advised to remain comparable to 2022–23 levels (around 0.7–1 percent of GDP) while excluding education and health from cuts. - Technical assistance and coordination - Staff stands ready to provide technical assistance on the next phases of fuel subsidy reform, mitigation measures, and communication strategy. - Staff recommends resumption of regular meetings with the World Bank and the IMF to assist authorities in finalizing reforms. *Source: IMF staff report excerpt — "1. Fuel Subsidy Reform" (Angola).* ### 11. Stronger contingency measures ### 11. Stronger contingency measures ### Downside scenario and contingency needs - A downside scenario with no fuel subsidy reform and no contingency measures would result in a much slower adjustment path and narrower buffers against shocks. - Such a scenario would entail elevated financing needs in the near-term, as well as significant fiscal and debt sustainability risks and targets under the FSL would likely be missed. - Text Figure 5 illustrates divergent paths for public debt and the non-oil primary balance under the baseline versus the downside illustrative scenario (no contingency measures taken to compensate for the lack of fuel subsidy reforms under this scenario). ### Domestic arrears and fiscal risk - Domestic arrears grew to Kz 2.6 trillion in 2023 from Kz 1.2 trillion in 2022 (3.9 percent and 2.1 percent of GDP, respectively), and continue to reflect significant fiscal risk. - The increase mainly reflects the exchange rate depreciation witnessed in June, which impacted the foreign currency component of domestic arrears. - About Kz 400 billion is estimated to have been cleared in 2023; authorities intend to clear the rest in the medium term, though a clearance plan is yet to be finalized. - Staff advice and recommendations: - Conduct an audit to take stock of all domestic arrears. - Implement technical assistance recommendations on arrears prevention and cash management to support arrears reduction efforts. ### Fiscal stance, debt path, and financing assumptions - The fiscal stance is expected to remain tight after 2025, with debt-to-GDP ratios steadily declining below the authorities’ target of 60 percent of GDP. - The debt ratio is projected to steadily decline from 2024 onward as the primary surplus is maintained and the growth outlook improves. - Failure to continue with the fuel subsidy reform would imply a more gradual adjustment path and narrower buffers against shocks in the medium term. - Key projections and financing assumptions: - The debt-to-GDP ratio is expected to decline by about 14 percentage points in 2024 (to about 70 percent from 84 percent of GDP in 2023). - Gross financing needs (GFNs) of about 6 percent of GDP in 2024 are expected to be met with a mix of domestic financing (tilted toward longer-term maturity), multilateral and bilateral financing and project loans, as well as commercial financing linked to capital projects. - Between 2025–27, GFNs are projected at an average of 4.7 percent of GDP. - Staff assumes (i) continued issuance of longer-term domestic debt but in smaller amounts in outer years; and (ii) continued budget support from multilateral institutions, including the World Bank, and to a lesser extent from the AfDB and EU, among others. - GFNs remain manageable through the medium term, although financing needs increase moderately amid large Eurobond maturities in 2028–29. - Authorities’ market access view: - The authorities conveyed that access to international markets is less likely in the near-term unless current market conditions improve. ### Climate finance and investment priorities - Efforts to secure additional sources of financing for climate resilient investment should continue. - Given the higher upfront costs in building climate-resilient infrastructure, authorities should: - Continue to mobilize domestic revenues and reprioritize current spending in accordance with the National Development Plan to create buffers for climate shocks. - Seek private sector engagement and concessional financing options for climate resilient investments to supplement domestic fiscal efforts. ### Estimated gains from proposed tax policy measures (percent of GDP) - Aggregate timing: - Total: 0.9 (Year 1: 0.5, Year 2: 0.2, Year 3: 0.2) - By measure: - VAT Threshold Reduction: 0.3 (0.1, 0.1, 0.1) - Lower PIT Rate Brackets: 0.5 (0.4, 0.1, 0.1) - Property Registry/Property Tax: 0.1 (0.0, 0.1, 0.1) - Note: Table header indicated the figures are (percent of GDP). ### Progress and priorities on fiscal structural reforms - Overall: Progress is encouraging but slower than anticipated; strong capacity development support in most areas. - Tax policy and administration: - The 2024 budget’s tax policy reform includes a reduction in the VAT rates for 20 categories of food items and an increase of the thresholds for PIT’s exemption. - These new measures are expected to result in non-oil revenue shortfalls and signal a reversal of the progress made during the 2018–21 EFF program; they are also not in line with the 2024 Budget assumptions of increased non-oil revenues. - The tax authorities (AGT) are finalizing supplementary tax administration measures to offset the expected revenue loss; staff will continue discussions with the authorities on detailed measures and revenue yield estimates. - Cash transfer program (Kwenda): - Inclusion of more than one million rural eligible vulnerable households (registrations at 89 percent) and benefit payments, compared to the original level (56 percent). - Staff recommends extension of mitigation measures to urban areas and full funding of the Kwenda cash transfer program, including from expected annual government budget allocations. - Tight fiscal space constrained allocation of the first and second annual tranches of Kz 75 billion for 2023 and 2024, respectively. - SOE reform and privatization: - Extension of the privatization program for 2023–26 and listing of a total of 56 specific state assets, including some of the largest, most economically relevant SOEs. - SOE sector financial performance was positive in 2022, driven mainly by natural resources and telecommunications sectors, but about half of SOEs registered losses in 2022. - Staff recommends acceleration of planned SOE privatization. - Public Financial Management (PFM): - Advances in technical capacity to prepare a medium-term fiscal framework (MTFF) noted, but progress needed on MTEF, fiscal strategy, management of public investment and PPPs, fiscal risks and reporting. - Staff urges design of a comprehensive five-year PFM reform strategy in coordination with capacity development donors and recommends elaboration of a 5-year reform plan for PEFA; publication of the MTFF and fiscal strategy reports is recommended. - Procurement: - Improvements noted in annual procurement plans; further work needed on transparency of procurement procedures, disclosure of ultimate beneficial ownership, increasing electronic open and competitive procedures, and publishing beneficial ownership information for publicly awarded contracts. ### Policy recommendations to preserve fiscal and debt sustainability - Continue fuel subsidy removal and implement contingency measures if reforms are delayed. - Boost non-oil revenue via tax policy measures and improved tax administration. - Continue fiscal structural and administrative reforms, including PFM reforms and capacity development. - Seek further opportunities to smooth external debt service via liability management actions and prepayments, subject to the need to increase fiscal buffers. - Mobilize concessional and private financing for climate-resilient investments and reprioritize spending consistent with the National Development Plan. ### Authorities’ views and planned responses - Authorities reiterated commitment to fiscal anchors under the 2020 Fiscal Sustainability Law (FSL) and confirmed willingness to continue with the fuel subsidy reform. - Priority targets: bring the NOPB below 5 percent of GDP and reduce the debt ratio below 60 percent of GDP. - Authorities plan to achieve objectives primarily via continued fuel subsidy reform and revenue administrative measures, and they will implement a contingency plan including cuts in non-priority spending and new revenue measures if fiscal indicators deviate. - If fuel subsidy reform is delayed, alternative compensatory measures agreed include cutting lower-priority spending, increasing contribution of informal economy sectors to domestic revenues, improving AGT efficiency and digitalization, proactive investor relations, and improved debt management. - Authorities emphasized need for a dedicated team to implement PFM reforms and noted appreciation for capacity development (CD) support and their financial contribution to AFRITAC South. ### Monetary policy stance and implementation framework - BNA progress toward inflation targeting includes allowing greater exchange rate flexibility, introducing a new central bank law, and enhancing analytical capacity with IMF TA. - BNA has tightened monetary policy in response to inflationary pressures since June-2023; the custody fee on excess reserve balances was removed. - Staff recommendations and observations: - Continue improving the monetary policy operational framework to implement inflation targeting successfully. - Improve interbank liquidity management by increasing liquidity absorption with short-term instruments to enhance transmission of monetary policy. - Reduce treasury reliance on short-term domestic financing; increase cooperation between fiscal and monetary authorities to coordinate money market operations and develop money markets. - An effectively tight monetary policy (interbank policy rate above neutral in real terms) is warranted to contain inflation expectations; align the interbank market rate with the announced policy rate. - Balance tightening rationale against challenges from the economic downturn (negative output gap) and subdued private sector credit growth; priority remains ensuring price stability. - Improve communications with forward-looking guidance to bolster central bank credibility and anchor inflation expectations. - Safeguards and internal controls: - BNA implemented most recommendations from the 2019 safeguards assessment, including establishing an audit committee and adopting secondary regulations to implement the amended 2021 BNA Law. - Staff recommends continued strengthening of internal audit capacity, including an independent assessment. ### Exchange rate flexibility and FX intervention strategy - BNA is encouraged to define a foreign exchange intervention (FXI) strategy and strengthen communication about monetary and exchange rate policies. - Recent actions: BNA significantly reduced FX market presence, intervening only in June and July 2023. - Assessment and guidance: - Use of FXIs may be justified if a shock is large enough to cause adverse effects and pose significant risks to BNA objectives, given adequate reserves and market frictions (shallow FX market, weakly anchored inflation expectations, and FX mismatches). - Caution: excessive FXIs risk delaying macroeconomic adjustment, confusing monetary policy objectives, and depleting international reserves. - The BNA should communicate its FXI policy alongside its commitment to the inflation-targeting framework and the floating exchange rate. *Source: International Monetary Fund.* ### 29. The exchange rate should remain a key buffer against shocks, with FXIs limited to ### The exchange rate should remain a key buffer against shocks, with FXIs limited to ### Exchange rate policy and FXIs - The depreciation of the exchange rate in June 2023 helped the economy adjust to lower oil exports and preserve the international reserves, which remained at about 7 months of import coverage in 2023. - The exchange rate has remained broadly stable since June 2023. - Against a potentially sustained decline in oil revenues, the exchange rate should be allowed to continue to adjust to shocks. - Angola introduced in December 2023 exchange restrictions subject to the Fund’s approval under Article VIII Section 2(a) arising from: - 10 percent international transfer tax imposed on legal entities for the purposes of payments for TA, service and consulting contracts; and - 2.5 percent international transfer tax imposed on individuals for the purposes of payments for TA, service and consulting contracts and personal remittances. - The transfer tax applies to capital transfers. - Note: The de jure exchange rate arrangement is floating; the de facto arrangement was reclassified to crawl-like from other managed (effective June 29, 2023) because the exchange rate remained within a narrow margin of 2 percent relative to a statistically identified trend for six months. ### Foreign exchange market functioning and fragmentation - A drop in oil exports and foreign currency supply from the Treasury left the foreign exchange market reliant on a reduced supply from the multinational oil companies. - Multinational oil companies’ compliance standards restrict their dealings to only a few domestic banks, leading to a concentrated foreign exchange market. - Concentration led to market distortions in distribution of foreign currency and contributed to the emergence of FX backlogs, increasing the risk of a sudden repricing in the exchange rate. - Continued efforts to address market fragmentation are critical to: - support efficient allocation of foreign currency among market participants; - facilitate external sector adjustment; and - provide greater stability to the exchange rate. - Improved foreign currency cash management by the Treasury should help alleviate pressures on the foreign exchange market. - Additional measures, possibly with the support of IMF TA, should be undertaken in close consultation with all stakeholders and supported by a clear communication strategy. ### Authorities’ views on monetary and FX policy - Authorities broadly agreed with staff’s recommendations and acknowledged the need for monetary and FX policy reforms. - The BNA reiterated its commitment to continue transition to inflation targeting and enhance the monetary operations framework in line with IMF TA recommendations. - The BNA agreed on the need to align interbank market interest rate with the policy rate and reduce fragmentation in the FX market to clear FX backlogs. - The Ministry of Finance acknowledged the need to rebuild FX buffers and noted its focus on longer term maturities for domestic financing in its draft debt strategy. - Authorities acknowledged the need for an improved communication framework and coordination between the Treasury and the BNA, as well as other stakeholders. ### Banking sector stability: vulnerabilities and exposures - The sector’s regulatory capital adequacy ratio was reported at 27 percent at end-September 2023, with significant variation across banks. - A systemic state-owned bank represents 10 percent of the system’s assets; its previously delayed restructuring is back on track with a credible plan for exiting regulatory forbearance. - A large problem bank represents 6 percent of the system’s assets; its resolution remains delayed and relies heavily on regulatory forbearance, causing overstatement of sector capital and asset quality, and posing a continuing contingent fiscal liability. - The steep kwanza depreciation and economic slowdown in 2023 reversed the trend of declining nonperforming loans (NPLs), which had been due to large write-offs in the state-owned bank. - Banks’ profitability is expected to decline in the short term as credit risk materializes and operating income declines. - Relatively small loan portfolios (26 percent of banks’ total assets) and restrictions on FX-lending help mitigate credit risk. - Banks’ sovereign exposure is high; banks’ appetite for government bonds in kwanza remains intact as it remains the only domestic major asset class. - Staff recommendation: BNA should take a more comprehensive approach to bank restructuring, predicated on robust viability analyses and without regulatory forbearance, and prepare for decisive resolution or liquidation of problem banks, while protecting only small depositors. ### Financial sector reforms and supervisory measures - All secondary legislation has been issued to support implementation of the 2021 legal reforms, broadly aligning the bank supervision framework with international standards. - All banks have been instructed to submit recovery plans by April 2024. - BNA is operationalizing the bank resolution framework and has issued a related regulation on Emergency Liquidity Assistance. - The Deposit Guarantee Fund (DGF) is enhancing operational preparedness for deposit payouts (including by establishing an agent bank framework) and has—in cooperation with the ministry of finance and BNA—drafted a framework for a fiscal back-up funding arrangement that awaits final approval. - BNA commenced issuing bi-annual Financial Stability Reports and is conducting top-down stress tests for banks. - Data quality critically needs improvement to support system risk analysis and inform prudential policy, including on credit and FX risk and profitability. - Staff noted importance of ensuring effective implementation of new supervisory regulations and close monitoring of individual banks, including their NOPs. - Efforts to operationalize the resolution framework should be accelerated; legal protection should be strengthened for the BNA, and its staff and agents acting in good faith. ### Credit dynamics, liquidity, and financial inclusion - Despite persistent excess liquidity in the banking sector, private sector credit continues to decline as a share of GDP. - Driving factors for reduced private credit include: - prudential restrictions on FX lending (since 2014); - stricter underwriting standards; - lack of bankable projects; - cumbersome collateral registration and enforcement procedures; and - expectations related to depreciation and inflation. - Adjusted for the kwanza depreciation, YoY credit growth to the private sector was only one percent in September 2023. - Staff’s medium-term projection: credit growth to fall slightly short of nominal GDP growth. - Financial inclusion in Angola remains the lowest in the region, with less than half of the population with access to formal financial services. - Uptake of digital services, in particular mobile money, is still very low; the sector is at an early stage of development, access to electricity is limited, and mobile ownership is low. - The Kwenda cash transfer program is expected to improve uptake of digital services. - Recent initiatives include improvements in the regulatory framework for micro-credit institutions (representing around 0.3 percent of total loans) and financial education programs. - Staff advice: stabilization of exchange rate and inflation expectations is widely considered a precondition for credit growth to take off. ### AML/CFT, asset recovery, and correspondent banking - National Strategy covering period 2023–27 was published in February 2023 with an action plan aligned with the June 2023 ESAAMLG assessment. - Authorities have until June 2024 to address ESAAMLG recommendations to avoid potential gray-listing by the FATF. - Several legal and effectiveness reforms, including establishment of a beneficial ownership registry with accurate and up-to-date beneficial ownership information, are progressing with support from the European Union Global Facility and are expected to be completed by end-June 2024. - Authorities plan to intensify peer learning from former and current gray-listed countries (Mauritius, Mozambique, and South Africa) to devise an effective action plan and communication campaign in the event they are gray-listed. - Asset recovery: Attorney General’s office published a list of assets recovered since 2019, amounting to $19 billion, of which $7 billion were recovered domestically, including shares in banks and companies, real estate, and cash. - Staff stressed need for greater transparency on how recovered assets and their proceeds are managed, invested, and allocated in the budget to address government development priorities. ### Authorities’ views on financial sector and AML/CFT - Authorities broadly agreed with staff’s assessment and advice and emphasized resilience of most financial institutions after the kwanza depreciation. - BNA conducts targeted credit risk reviews during its annual supervisory review and evaluation process (SREP). - BNA presented ongoing efforts to resolve the large problem bank in 2024 and an action plan to improve compilation of Financial Soundness Indicators by early 2025. - Government supports exploring alternative legal instruments to address gaps in the legal protection framework. - Authorities aim to avoid potential gray-listing by the FATF, which they consider their main priority at this stage. ### Economic diversification: strategy, bottlenecks, and risks - Oil sector accounts for over 30 percent of GDP, 60 percent of fiscal revenues, and 95 percent of total goods exports. - Oil sector indirectly impacts non-oil economy through links with construction, services, and transportation sectors. - The government has taken measures to support domestic production and export diversification, including developing funds’ capitalization, supporting access to finance, and simplifying new business licensing. - Recently initiated import substitution measures risk limiting potential integration in global value chains and increasing the cost of doing business. - Ensuring macroeconomic stability should remain a priority to support the domestic private sector. - Global transition spillover risks to growth, fiscal, BOP and financial stability amplify the urgency for non-oil diversification efforts. ### National Development Plan (NDP) 2023–27 and implementation priorities - NDP 2023–27 targets economic diversification led by the private sector focusing on agriculture, livestock, fishing, manufacturing, and tourism. - Key bottlenecks to be addressed under the strategy include: - (i) governance and institutional quality; - (ii) infrastructure and human capital; and - (iii) access to finance and financial inclusion. - Continuing efforts to diversify funding sources through concessional and grants financing as well as private sector partnership is a key element to support the diversification plan. - Leveraging lessons learned from previous diversification strategies is important to enhance NDP effectiveness. ### Governance, anti-corruption, and EITI - Draft anti-corruption strategy covering period 2024-29 was finalized and submitted to public consultation in 2023; expected to be submitted to the Council of Ministers in the first quarter of 2024 and launched shortly thereafter. - Strategy emphasizes prevention (public probity and ethics code), detection (witness protection), and enforcement (greater use of information including a beneficial ownership registry and technology). - Angola was admitted as an EITI implementing country in June 2022; first report based on extractive revenues for fiscal year 2021 was published in December 2023. - The EITI report did not reconcile reported aggregated information by the authorities with disaggregated information by extractive companies due to legal limitations preventing disclosure of tax information by the latter and was unable to disclose contracts and beneficial ownership information. - The report defines an action plan with legal and institutional reforms to gradually achieve reconciliation and disclosure consistent with EITI standards starting with the second EITI report due in September 2024. - The report covering data for fiscal year 2022 will serve as basis for Angola’s EITI validation due in October 2024. ### Gender gaps and potential growth impacts - Gender gaps are particularly salient in education: 7 years among women against 9.2 years of average schooling among men. - Informal employment rates: 89.8 percent among women against 71.2 percent among men. - Female labor force participation gap is relatively reduced (about 4 percentage points). - Policies to increase female education attainment could yield an additional annual GDP growth rate increase ranging from 0.17 to 0.21 percentage points. - Sustained adoption of gender budgeting would be critical, facilitating allocation of resources and ensuring effective interventions. - Authorities highlighted NDP and Vision 2050 emphasis on reducing gender gaps and committed to resuming the use of markers in 2025, expanded to all line ministers, and preparing a first gender budget statement. ### Climate risks to diversification and long-term resilience - High temperatures, unreliable water availability, and damages from extreme weather events threaten growth in climate-sensitive, non-oil industries such as agribusiness and fishing. - By 2050, agriculture productivity is expected to fall by 7 percent if climate adaptation measures are not adopted, and overall GDP growth is predicted to decrease by 3-6 percent. - Authorities’ diversification efforts should integrate coping mechanisms while balancing tradeoffs between required upfront costs and longer-term resilience. ### Staff appraisal: outlook, fiscal policy, and reform priorities - Angola’s recovery in the near term is subject to risks and remains reliant on the oil sector. - Despite weaker oil production in 2023 H1, growth momentum is expected to continue in 2024–25 as the oil sector recovers gradually. - In the medium term, the outlook depends on progress on the authorities’ diversification plan and continued implementation of fiscal and structural reforms. - Enhanced fiscal measures and structural fiscal reforms required to strengthen near- and medium-term fiscal and public debt sustainability, including continued implementation of: - (i) fiscal reform measures to reduce and/or maintain expenditures broadly constant relative to output, and revenue administration measures to enhance non-oil revenues; - (ii) fuel subsidy reform in 2024–25 backed by strong mitigation measures and a communication strategy; and - (iii) continued structural fiscal reforms to strengthen Angola’s fiscal planning and public financial management institutions. - Authorities need to avoid any further loss of (non-oil tax) revenues due to temporary or permanent tax cuts, including additional new tax relief measures introduced in the 2024 budget law. - To preserve fiscal and debt sustainability, the fiscal stance is expected to remain tight after 2025, with debt-to-GDP ratios steadily declining below the authorities’ target of 60 percent of GDP. - Fiscal policy should lean against the oil price cycle, saving any future windfalls to build buffers and protect priority spending in downturns. *Source: IMF staff report (content unit 1agoea2024001).* ### 45. Enhancing the monetary policy implementation framework for macroeconomic ### Enhancing the monetary policy implementation framework for macroeconomic stability ### Monetary policy stance and implementation - An effective tight monetary policy stance is required to alleviate pressures on the exchange rate and contain inflation expectations. - Staff commends the BNA on recent tightening measures, including increases in the policy rate. - Recommendations: - Continue efforts to absorb excess liquidity and improve transmission of the policy rate. - Enhance the monetary operations framework now to address a structural weakness in monetary policy transmission and deliver necessary policy tightening. - Ensure close coordination between the ministry of finance and the BNA to align the deficit financing strategy with monetary policy objectives. - BNA should manage interbank liquidity with short-term instruments to align interbank rates with the policy rate. - The Treasury should rely more on medium- to long-term issuances for deficit financing. ### Exchange rate management and foreign exchange market - The exchange rate should remain a key buffer against shocks; foreign exchange interventions (FXIs) should be limited to addressing severe market illiquidity. - Market fragmentation in the foreign exchange market contributed to the emergence of FX backlogs after the Treasury withdrew as a major supplier of foreign currency when oil export revenue dropped and debt service payments increased in 2023. - Recommendations: - Quickly improve the foreign currency cash management of the Treasury to reduce the risk of a sudden and significant repricing of the exchange rate. - IMF technical assistance (TA) to assess additional measures would be useful. - Eliminating fragmentation in the foreign exchange market is critical to ensure a well-functioning currency market. ### Structural reforms for inclusive and sustainable growth - Continued broad-ranged structural reforms are critical to foster diversified, sustainable, and inclusive growth. - Staff strongly encourages: - Improving a growth-friendly business environment. - Increasing financial inclusion. - Removing constraints to private sector credit. - Tackling corruption and improving governance; reducing red-tape and regulatory barriers to competition. - Key constraints to address for private sector lending: - Property registrations. - Collateral management. - Insolvency frameworks. - Costs of liquidity management. - Climate and public investment priorities: - Pursue climate mitigation and adaptation measures, including adaptation of infrastructure investments. - Enhance the efficiency of public investments. - Seek private and concessional sources of climate financing to fill the climate resilient infrastructure gap. ### Financial sector reforms and bank restructuring - Further efforts are needed to solidify financial sector reforms initiated in 2021. - Progress noted in operationalizing new frameworks for bank supervision and resolution, but more decisive implementation and enforcement is crucial. - Recommendations and actions: - Strengthen legal protection framework for BNA staff and agents for actions conducted in good faith, via BNA instruments and policies or legal amendments as necessary. - Establish a fiscal backup funding arrangement for the DGF. - Adopt a comprehensive approach to bank restructuring based on robust viability analyses and full compliance with regulatory requirements within a reasonable timeline. - Efforts to boost credit to the real sector should focus on anchoring exchange rate and inflation expectations. ### AML/CFT, governance, and anti-corruption actions - Addressing AML/CFT, governance, and corruption issues swiftly is crucial. - Key milestones and measures: - Launching the nationwide corruption strategy in 2024 is a key milestone that needs to be timely achieved and operationalized. - Follow-up concrete actions should: (i) promote public probity; (ii) identify and prevent malpractices, notably in public procurement; and (iii) ensure greater speed and transparency in investigation and prosecution of anti-corruption cases. - Expedite efforts to address AML/CFT weaknesses to avoid gray-listing; complement with a communication campaign to manage expectations in the event gray-listing becomes a reality. - Increase transparency in management of recovery assets and disclosure of data and contracts to support Angola’s EITI candidacy. ### External restrictions, Article IV cycle, and PFA - Angola maintains restrictions on payments and transfers for current international transactions under the transitional arrangements of Article XIV, Section 2. - The authorities introduced two new exchange restrictions subject to Fund approval under AVIII section 2(a) arising from transfer taxes discussed under para 29. - The authorities have not requested, and staff is not recommending approval of AVIII exchange restrictions at this time. - Staff recommend the standard 12-month cycle for the next Article IV. - Angola requires a Post-Financing Assessment (PFA), as its credit outstanding to the Fund exceeds 200 percent of quota. - A PFA discussion, including an assessment on the capacity to repay, is anticipated by mid-2024. ### Fuel Subsidy Reform (Box 1) — findings, timeline, and mitigation - Background and scale: - Fuel subsidy costs were 3.6 percent of GDP in 2022. - As of May 2023, Angola’s retail gasoline price was about US$0.31 per liter (the fourth lowest in the world). - First phase (June 2023): - Authorities increased the price of gasoline by about 87.5 percent and kept prices of other fuels unchanged. - Resulted in a 45 percent cut in gasoline subsidies and led to a modest drop of subsidies of 0.5 ppt of GDP given the impact of exchange rate depreciation in the same month. - Government proposed accompanying mitigation measures to support businesses, families, and workers. - Support and conditionalities: - The reform was part of key reforms supported by a $500 million World Bank Development Policy Financing (DPF). - Authorities committed to (a) approve transition of fuel prices towards market levels; and (b) implement subsidy removal by raising the price of gasoline. - Indicative DPF targets for 2023 included further adjusting gasoline prices, beginning diesel adjustment, and amending regulations to ensure equal treatment of fuel importers and refiners. - Implementation challenges and effects: - High oil prices in H2 and steep exchange rate depreciation since June narrowed expected fiscal gains in 2023. - Inflation increased from 10.5 percent end-May to 20 percent end-December. - Reduced fiscal space and logistical hurdles challenged mitigation measures, especially in urban areas. - Mitigation measures and social protection: - Expanded Kwenda program’s cash transfer registrations to over one million families in rural areas. - Urban measures relied on fuel and fare cards; social fare cards for certain urban bus users (students and people with disabilities). - Sectoral subsidies to fuel-dependent industries (agriculture and fisheries) to reduce pass-through. - Mitigation measures are estimated at 0.5 percent of GDP per year. - Budget support from the DPF has provided financing to support mitigation measures and is likely to continue doing so in the near-term. - Expected further phases and fiscal impact: - Subsequent phases expect subsidies on gasoline and other fuels to decline by 2 percentage points of GDP in 2024 (as reflected by the Budget approved by Parliament in December 2023). - By 2025, gasoline and diesel prices are expected to be a minimum 95 percent of the market-based price (based on pricing formula adopted in 2020). - A price more closely aligned with international prices will help eliminate incentive for fuel smuggling. - Authorities, with multilateral partners, remain committed to an ongoing fuel subsidy reform plan including: i) price readjustment options; ii) quantitative analyses of reform impacts (socioeconomic impact (poverty, inflation, fiscal, growth)); iii) mitigation measures; iv) a communication plan. - Staff view: - Staff sees the need for greater clarity and a comprehensive approach to fuel pricing and fuel price subsidy reform relative to the proposal presented in the 2024 budget. - Note on historical accounting: - Between 2016 and 2019 and in earlier episodes of price subsidies, fuel subsidies were borne by Sonangol and not accounted in the state budget as a line item. Since 2022, authorities include fuel subsidies as expenditures in the state budget. *Source: IMF staff.* ### Box 3. National Development Plan 2023–27 ### Box 3. National Development Plan 2023–27 ### Purpose and strategic orientation - Medium-term roadmap for Angola’s Long-Term Strategy 2050 (ELP). - Reflects authorities’ objectives for regional economic integration, human capital development, food security, and socio-economic progress aimed at building a more diversified and sustainable economy. - Timeframe: NDP 2023–27. ### Seven strategic pillars (as stated) - (i) Consolidate peace and the democratic state of law, pursue the reform of the state, justice and public administration (including good governance and tackle corruption). - (ii) Promote balanced and harmonious development of the territory. - (iii) Promote the development of human capital. - (iv) Reduce social inequalities. - (v) Modernize and make the country’s infrastructure efficiently while preserving the environment. - (vi) Ensure sustainable, inclusive, and private sector-led economic diversification and food security. - (vii) Ensure the defense of sovereignty and promote Angola’s role in the regional and international contexts. ### Macroeconomic targets and fiscal sustainability - NDP targets an average annual GDP growth rate of 3.0 percent by 2027, with non-oil GDP growth of 5.0 percent. - Authorities aim to ensure sustainable debt levels: 60 percent of GDP. - Planned fiscal management priorities include: - Allocate resources efficiently in areas that enhance the development of human capital and food security. - Implement fuel subsidy reform. - Proceed with the privatization of state-owned enterprises. - Ensure sustainable debt levels (60 percent of GDP). ### Economic diversification and sectoral priorities - Main economic priorities: accelerating private sector-led economic diversification and food security. - Key policies: promote production, export diversification, and import substitution, as well as stability and economic growth. - Sectors highlighted as key for diversification: agriculture (including agribusiness) and livestock, and industry. ### Financing strategy and targets - Plan to mobilize both domestic and external funds to meet NDP financing needs. - By 2027, focus on increasing non-oil FDI from less than 1 percent to 9 percent of non-oil GDP to finance agriculture and industry. - Strengthen external financing through grants or official development assistance. - Domestic banking sources complemented by developing Public Private Partnerships (PPPs) and capital markets to provide additional financing for the private sector. ### Implementation, monitoring, and stakeholders - Authorities propose to adopt a timely evaluation system for the implementation of the NDP. - The National Planning System will lead the process, under the coordination of the Ministry of Economy and Planning. - Civil society and other stakeholders will play a key role, including through consultations. *Source: Box 3. National Development Plan 2023–27 (from the supplied IMF content).* ### Annex I. Debt Sustainability Analysis ### Annex I. Debt Sustainability Analysis ### DSA summary assessment and risk classification - Staff assessment: public debt remains sustainable, with medium-term risk of debt distress broadly assessed as "high" and long-term risk assessed as "moderate". - Mechanical signals: fanchart indicates "High" in the medium term; the GFN module indicates "moderate" risks. - Key vulnerabilities cited: - High share of foreign currency debt: "about 80%". - Exposure to oil prices and production (impacting oil revenues). - Narrow creditor base, especially in domestic markets. - Contingency and mitigating measures recommended: - Non-oil tax policy measures. - Continuation of fuel subsidy reforms. - Fiscal structural reforms. - Contingency: cutting non-priority spending during volatility. - Social support systems to mitigate the impact of fuel subsidy reform on the vulnerable. *Note excerpted from staff text: "Angola's public debt remains sustainable, how ever risks are high."* ### Key diagnostics and interpretation - Relationship to past assessments: - Compared to the AIV 2022 DSA, the debt-to-GDP ratio is higher in the near-term reflecting currency depreciation and converges in the medium term. - Distinction between sovereign stress and unsustainable debt: - The document notes that risk of sovereign stress is broader than debt sustainability; unsustainable debt requires exceptional measures (such as debt restructuring), whereas sovereign stress can be addressed with fiscal adjustment and new financing. ### Public debt structure and coverage (high-level) - Staff notes debt-stabilization in the baseline. - Medium-term "high" risk reflects oil-sector vulnerabilities; long-term "moderate" risk reflects diversification plans that offset the pace of oil resource depletion. --- ### Baseline scenario and detailed projections (Figure 4) - Public debt (percent of GDP), actual and projected: - 2022: 64.88 - 2023: 81.76 - 2024: 69.56 - 2025: 61.95 - 2026: 55.95 - 2027: 50.64 - 2028: 46.94 - 2029: 41.14 - 2030: 43.04 - 2031: 40.83 - 2032: 39.1 - Change in public debt (percent of GDP): - 2022: -18.9 - 2023: 16.9 - 2024: -12.2 - 2025: -7.6 - 2026: -6.0 - 2027: -5.2 - 2028: -3.8 - 2029: -2.8 - 2030: -1.1 - 2031: -2.1 - 2032: -1.7 - Contribution of identified flows to change in public debt (percent of GDP): - 2022: -25.4 - 2023: -5.0 - 2024: -8.6 - 2025: -6.8 - 2026: -5.7 - 2027: -5.6 - 2028: -4.1 - 2029: -2.8 - 2030: -2.9 - 2031: -2.4 - 2032: -1.9 - Primary deficit (percent of GDP): - 2022: -4.7 - 2023: -5.5 - 2024: -7.8 - 2025: -8.2 - 2026: -7.4 - 2027: -6.4 - 2028: -6.0 - 2029: -4.6 - 2030: -4.4 - 2031: -3.9 - 2032: -3.4 - Noninterest revenues (percent of GDP): - 2022: 23.2 - 2023: 20.0 - 2024: 20.8 - 2025: 20.1 - 2026: 19.3 - 2027: 18.4 - 2028: 17.9 - 2029: 16.4 - 2030: 16.2 - 2031: 15.6 - 2032: 15.1 - Noninterest expenditures (percent of GDP): - 2022: 18.5 - 2023: 14.6 - 2024: 12.9 - 2025: 11.9 - 2026: 11.9 - 2027: 12.0 - 2028: 11.9 - 2029: 11.8 - 2030: 11.7 - 2031: 11.7 - 2032: 11.7 - Automatic debt dynamics (percent of GDP): - 2022: -24.0 - 2023: 2.5 - 2024: -1.0 - 2025: 1.0 - 2026: 1.5 - 2027: 0.9 - 2028: 1.7 - 2029: 1.5 - 2030: 1.3 - 2031: 1.1 - 2032: 1.1 - Real interest rate and relative inflation (percent): - 2022: -2.7 - 2023: 2.8 - 2024: 1.1 - 2025: 3.1 - 2026: 3.5 - 2027: 2.8 - 2028: 3.5 - 2029: 3.1 - 2030: 2.8 - 2031: 2.6 - 2032: 2.5 - Real interest rate (percent): - 2022: -9.5 - 2023: -1.7 - 2024: -10.1 - 2025: -1.4 - 2026: 1.6 - 2027: 1.0 - 2028: 1.8 - 2029: 1.4 - 2030: 1.1 - 2031: 1.1 - 2032: 1.0 - Relative inflation (percent): - 2022: 6.8 - 2023: 4.4 - 2024: 11.2 - 2025: 4.4 - 2026: 1.9 - 2027: 1.8 - 2028: 1.6 - 2029: 1.7 - 2030: 1.7 - 2031: 1.5 - 2032: 1.5 - Real growth rate (percent): - 2022: -2.5 - 2023: -0.3 - 2024: -2.0 - 2025: -2.1 - 2026: -2.0 - 2027: -1.9 - 2028: -1.7 - 2029: -1.6 - 2030: -1.6 - 2031: -1.5 - 2032: -1.4 - Other identified flows (percent of GDP): - 2022: 3.3 - 2023: -2.0 - 2024: 0.2 - 2025: 0.4 - 2026: 0.2 - 2027: -0.1 - 2028: 0.2 - 2029: 0.3 - 2030: 0.2 - 2031: 0.4 - 2032: 0.4 - Contingent liabilities (percent of GDP): 0.0 for 2022–2032. - Contribution of residual (percent of GDP): - 2022: 6.5 - 2023: 3.7 - 2024: -3.7 - 2025: -0.7 - 2026: -0.3 - 2027: 0.3 - 2028: 0.3 - 2029: 0.1 - 2030: 1.8 - 2031: 0.2 - 2032: 0.2 - Gross financing needs (GFNs, percent of GDP): - 2022: 8.3 - 2023: 11.7 - 2024: 6.2 - 2025: 4.4 - 2026: 5.1 - 2027: 5.3 - 2028: 7.9 - 2029: 7.8 - 2030: 5.7 - 2031: 4.2 - 2032: 5.8 - Of which: debt service (percent of GDP): - 2022: 13.0 - 2023: 17.2 - 2024: 14.1 - 2025: 12.6 - 2026: 12.6 - 2027: 11.8 - 2028: 13.9 - 2029: 12.4 - 2030: 10.1 - 2031: 8.1 - 2032: 9.2 - Local currency GFNs (percent of GDP): - 2022: 7.3 - 2023: 7.0 - 2024: 4.8 - 2025: 2.7 - 2026: 3.7 - 2027: 3.7 - 2028: 5.0 - 2029: 4.0 - 2030: 3.7 - 2031: 2.8 - 2032: 2.8 - Foreign currency GFNs (percent of GDP): - 2022: 5.7 - 2023: 10.2 - 2024: 9.3 - 2025: 9.9 - 2026: 8.8 - 2027: 8.0 - 2028: 8.9 - 2029: 8.4 - 2030: 8.4 - 2031: 5.3 - 2032: 6.4 - Non-oil primary balance (percent of GDP) of which: - 2022: 8.5 - 2023: 6.3 - 2024: 4.5 - 2025: 3.3 - 2026: 3.3 - 2027: 3.3 - 2028: 3.2 - 2029: 3.3 - 2030: 3.5 - 2031: 3.5 - 2032: 3.6 Memo items (as reported): - Real GDP growth (percent): 3.0, 0.5, 2.6, 3.1, 3.4, 3.5, 3.6, 3.6, 3.7, 3.5, 3.6 (2022–2032). - Inflation (GDP deflator; percent): 16.5, 13.4, 24.5, 11.2, 6.3, 6.2, 6.4, 6.5, 7.6, 6.8, 6.8 (2022–2032). - Nominal GDP growth (percent): 20.1, 13.9, 27.7, 14.6, 9.9, 10.0, 10.2, 10.4, 11.6, 10.5, 10.6 (2022–2032). - Effective interest rate (percent): 2.9, 10.4, 8.7, 8.9, 9.2, 8.2, 10.4, 9.9, 10.4, 9.6, 9.6 (2022–2032). - Commentary summary: - Public debt increased in 2023 to over 80 percent mainly due to strong exchange rate depreciation and is projected to stabilize at about 50 percent over the medium term. - Medium-term improvement reflects a projected primary surplus and healthy nominal growth; however, as primary surpluses decline their contribution to debt reduction diminishes. - Financing assumptions feasible under baseline with temporary GFN increase in 2023 and moderate increase amid large Eurobond maturities in 2028–29. - Risks: downside from fiscal slippages driven by oil price/production falling more than expected; upside from oil price/production increases or recognition of potential foreign liquidity buffers. - Large residuals in 2023 attributed to oil price changes. --- ### Realism and risk assessment figures (noted) - Staff references Figures 5–8 covering realism of baseline assumptions, medium-term risk assessment, and long-term risk assessment. The accompanying text reiterates medium-term "high" risk and long-term "moderate" risk. --- ### Source *Fund staff.* ### 2. The capacity building effort has continued to support the implementation of the ### 2. The capacity building effort has continued to support the implementation of the authorities’ reform agenda and macroeconomic policies. ### Tax Policy and Revenue Administration - IMF Fiscal Affairs Department (FAD) technical support focused on mobilizing revenue, especially non-oil revenue. - Support activities included: - modernize the income tax system; - design and implement a framework for emergency management and business continuity during a period of crisis; - implementation of a project management framework; - at the Angolan Tax Authority (AGT), enhancing access to electronic information; and - enhancement of the compliance risk management framework in the context of the VAT. ### Expenditure Policy - International institutions (including the World Bank) heavily involved in capacity building related to social protection (notably cash transfer programs) and reform of fuel subsidies in close coordination with IMF staff. - Capacity development in health, education, and other social sectors delivered by UNICEF and AfDB. ### Public Financial Management (PFM) - EU-funded IMF long-term PFM expert (2019-23) supported FAD and AFRITAC South (AFS) delivery of TA on: - medium-term fiscal framework and fiscal risks; - medium-term expenditure framework to implement Angola’s fiscal responsibility law and ensure debt sustainability. - AFS plans to deliver TA on arrears prevention and cash management, and can accommodate TA on fiscal risk management, fiscal reporting, and other Treasury reforms in 2024 and beyond. - Diagnostics concluded since 2019: IMF Public Investment Management Assessment (PIMA); AFD’s PEFA in 2022; World Bank’s Public Finance Review in 2023; AfDB’s MAPs in 2023. - IMF (FAD), AFD, AfDB, and other institutions ready to support an action plan addressing diagnostic recommendations. - World Bank started a TA program on PFM and PIM at the subnational level in 2023. - UN agencies (notably UNICEF) involved in budget transparency and performance and result-based budgeting; AFD and FSVC building capacity on PPPs. - On public debt management, a LTX funded by USAID helped build Treasury’s operational capacity with training by AFS and JICA. ### Monetary Policy Framework - IMF (MCM) providing TA on transitioning to an inflation targeting regime. - Follow-up TA envisaged in 2024 on FPAS (Forecasting and Policy Analysis System), liquidity management, and foreign exchange interventions. - MCM provided TA in 2023 on strengthening the BNA’s internal audit function. - AFD providing capacity support on BNA governance under the new BNA law. ### Financial Sector - IMF (MCM) TA on operationalizing the new bank recovery and resolution framework introduced in the banking law in 2021. - 2023 MCM TA mission assisted with diagnostics of financial market infrastructure and fintech. - 2023 STA mission provided guidance on improving accuracy and operational efficiency for compiling financial soundness indicators (FSIs) to improve systemic risk monitoring and inform prudential policy. - Follow-up TA planned in 2024 on operationalizing the bank resolution framework and FSI compilation. - Authorities plan to participate in AFS’ cyber risk supervision and regulation initiatives. - BNA requested assistance on strengthening macroprudential oversight and policies. ### AML/CFT Framework - EU-supported local UNODC office continues support on anti-corruption and asset recovery and management of seized/recovered assets. - IMF (LEG), FSVC, and AFD continue to support implementation of AML/CFT measures in support of a country-wide anti-corruption strategy. ### Business Climate and Climate Change - World Bank, AfDB, and JICA planning significant technical support to enhance business climate and attract investment. - Following the 2022 Country Climate and Development Report (CCDR), World Bank initiated activities to build climate resilience and support green growth. - AFD and EU support green financing; AfDB supports climate-smart PPPs. ### Statistics - Substantial TA from IMF and World Bank to establish/enhance statistics on: - national accounts; - balance of payments; - financial soundness indicators; - government finance and debt; - consumer price index; - economic census; and - poverty indicators. ### Selected capacity building items and timelines (excerpted from Table 1) - Modernization of Income Taxation — IMF (FAD) — 2023 - Enhancing access to electronic information — IMF (FAD) — 2023 - Compliance risk management (CRM) system in VAT — IMF (FAD) — 2023 - Emergency management and business continuity — IMF (FAD) — 2023 - Public Procurement (Core MAPS Assessment) — AfDB-AFD — 2021-23 - Social protection and PFM — EU-UNICEF-ILO — 2019-23 - Public Expenditure Review (PER) on Health and Nutrition — UNICEF — 2023 - Angola Adaptive Social Safety Nets — World Bank — 2024 - PFM reform action plan, including PEFA and MAPS recommendations — AFD-EU — 2023-25 - Arrears prevention and cash management, fiscal risk managing, fiscal reporting, and other treasury reforms — IMF (AFS, FAD) — 2022-25 - Implementation of Inflation Targeting Regime — IMF (MCM) — 2023-24 - Strengthening FSI compilation — IMF (STA) — 2023 - Bank resolution and financial crisis management — IMF (MCM) — 2023 - National accounts, and external and monetary statistics — IMF (AFS, STA) — 2024-25 - Consumer price index (CPI) — IMF (AFS) — 2024-25 - Angola Building Climate Resilience and Foundations for Green Growth — World Bank — 2025 - Green finance and financial-related climate change risk mapping — AFD-EU — 2022-25 - Financial literacy estimated at 25 percent of the population — INE. Luanda, Angola - 2022 ### Annex V — Improving BNA Communication Channels: findings and recommendations - Progress noted: BNA publishes the calendar of MPC meetings, announces MPC policy decisions through a press release on the decision date and a press conference, carries out short-horizon inflation expectation surveys, and publishes information on economic and monetary developments. - Communication performance: Angola Communication Pillar remains below the average of EMs and AEs based on the methodology of Unsal, Papageorgiou, and Garbers (2022). - Recommended actions to enhance BNA communication: - Publish a communication strategy and a comprehensive monetary policy strategy; update Central Bank’s main objectives on the English website and changes to the monetary policy framework on both English and Portuguese websites (Communication Cycle). - Publish a more forward-looking press release and a Monetary Policy (or Inflation) Report quarterly on a pre-announced calendar centered around policy meetings; press releases should focus on forecasts and associated risks; the MPR should explain forecast changes, main risks, implications if risks materialize, and potential policy responses (Communication Cycle; Announcing and Explaining the Policy Stance; Monetary Policy Report). - Ensure clear communication during economic shocks via press releases that include drivers of the shock, considered policy actions, expected results/outcomes, and forward guidance (Communication Cycle; Announcing and Explaining the Policy Stance). - Disclose updated medium-term inflation forecasts and expand assessment of inflation expectations to medium- to long-term horizons (Publication of Data). - Improve coordinated communication with the Treasury on domestic and foreign cash management and fuel subsidies reform strategy to avoid inconsistent or confusing messages. - Improve stakeholder inclusion by publishing research articles, organizing seminars and workshops for media and market participants, and making information available in English to external stakeholders (Stakeholder Inclusion). - Authorities broadly agreed with staff recommendations and requested IMF support; authorities are reviewing the memorandum of understanding between the BNA and the Treasury to improve coordination. ### Annex VI — Macro-Fiscal Implications of Climate Change Adaptation in Angola - Climate impacts and projections: - Flooding, coastal erosion, and droughts already impede development and are expected to intensify with climate change. - World Bank estimates future extreme storm risks will be, on average, 5–10 percent higher in 2020–2040 than in 1981–2010. - Carvalho et al. (2017) project Angola’s agriculture sector could face losses as much as US$700 million per year by 2100 due to droughts. - DIGNAD model purpose and mechanisms: - The Debt, Investment, Growth, and Natural Disaster (DIGNAD) model studies macroeconomic challenges from climate change and effects of public infrastructure investment in mitigating climate risks. - Adaptation infrastructure: costlier than standard infrastructure, depreciates more slowly, mitigates disaster losses by allowing standard infrastructure to function better and raising marginal product of other capital. - In the model, a natural disaster affects the economy via: (i) permanent damages to public and private capital; (ii) temporary loss in productivity; (iii) inefficiencies during reconstruction; and (iv) loss in credit worthiness. - The model captures linkages between public investment, growth, and debt (investment-growth nexus, fiscal adjustment, private sector response). - Calibration to Angola: - Steady state public infrastructure investment set at 3 percent of GDP. - Total public debt calibrated at about 84 percent of GDP (per the Sovereign Risk and Debt Sustainability Framework). - Shares of public debt: 22 percent domestic creditors and 78 percent external creditors. - Concessional debt set at 12 percent of GDP. *Source: Angolan authorities; African Development Bank (AfDB); European Union (EU); Financial Services Volunteer Corps (FSVC); French Development Agency (AFD); IMF; Japan International Cooperation Agency (JICA); United Nations (UN) Coordination Office; United States Agency for International Development (USAID); World Bank.* ### 4. The following scenarios are simulated to illustrate the macro-fiscal implications of ### 1agoea2024001 - 4. The following scenarios are simulated to illustrate the macro-fiscal implications of ### Scenarios simulated for climate adaptation investment - Scenario 1 – No Active Adaptation Infrastructure Policy - Years 1–5: authorities continue investing in standard infrastructure amounting to 3 percent of GDP per year. - No investments in adaptation infrastructure are made. - A natural disaster takes place in year 6 and GDP is calibrated to fall by 1.5 percent. - Recovery begins in the same year as the disaster ends and will be completed five years later. - Recovery after the natural disaster is financed through public debt via domestic markets and external commercial creditors. - Scenario 2 – Investment in Adaptation Infrastructure - Years 1–5: standard infrastructure investment = 2 percent of GDP; adaptation infrastructure investment = 1 percent of GDP. - Scenario 3 – Investment in Adaptation Infrastructure and Improvements in Public Investment Efficiency (PIE) - Adaptation infrastructure investment matches Scenario 2. - Public investment efficiency increases from 25 percent to 59 percent (the average efficiency for Sub-Saharan African countries). - The increase in PIE represents a reduction in inefficiencies, narrowing the infrastructure access gap and raising infrastructure output. ### DIGNAD model simulation findings - General impacts - Adaptation infrastructure investment scenarios show a better ability to withstand the natural disaster shock. - Relative to Scenario 1, GDP losses and the fiscal deficit under Scenario 2 are almost halved. - Although adaptation infrastructure is costlier than standard infrastructure, total public debt increases by a lesser extent at the onset of the climate shock due to higher returns and slower depreciation of adaptation infrastructure. - In the long-run, debt levels remain more manageable in Scenarios 2 and 3 than in Scenario 1. - Role of public investment efficiency - Scenario 3 (adaptation investment + PIE improvements) saves Angola about one percent of GDP in output loss relative to Scenario 1. - Real GDP growth returns to (and even exceeds) the initial steady state level more quickly in Scenario 3 than in Scenarios 1 and 2. - Improvements in public investment management raise the country’s growth trajectory while moderating the adverse effects of a climate shock on the fiscal position and current account. ### Macroeconomic and developmental implications - Value of climate-resilient capital - Filling Angola’s infrastructure gap with climate-resilient capital promotes long-term sustainable growth and crowds in private sector investment. - A sustained increase in the capital budget is necessary to raise the country’s growth trajectory given the infrastructure deficit and historically low rates of public investment. - Public investment reforms could greatly increase the impact of additional capital spending. - Climate-resilient capital investments support diversification and sustainability objectives under the National Development Plan and can boost non-oil sector investment by improving competitiveness and macro-fiscal robustness. - Financing considerations - Higher upfront costs for climate-resilient infrastructure imply authorities should: - continue to seek additional sources of revenues; - reprioritize current spending in accordance with the National Development Plan to accumulate additional buffers; - consider concessional financing options to alleviate the adverse impacts of climate change. ### Authorities’ views - Authorities welcomed the DIGNAD scenario analysis and affirmed that climate-resilient infrastructure is a key contributor to development and economic diversification. - Authorities acknowledged ongoing private sector involvement in green infrastructure and noted the need to: - create supportive conditions to attract further private investors; - boost institutional capacity for selecting appropriate adaptation infrastructure projects. ### Revisiting Angola’s Fiscal Anchor — key points - Fiscal Sustainability Law (FSL) - FSL introduced fiscal rules in 2020 with a mandate to assess them every five years, with a comprehensive evaluation report. - The FSL set an initial nominal debt limit of 60 percent of GDP and introduced an operational target of 5 percent for the ratio of the non-oil primary fiscal deficit (NOPFD) to GDP. - Recent debt developments - At end-2023, the debt ratio is expected to reach 84 percent of GDP down from 139 percent in 2020. - Sustainability risks - Risks remain high due to: (i) challenges in the oil sector, (ii) currency risks given high share of foreign currency denominated debt, and (iii) narrow creditor base and increased borrowing costs. - Methodology for calibrating a debt anchor - An adaptation of IMF FAD’s approach is used, considering features of resource-based economies (commodity-based TOT, asymmetric primary balance response to TOT gaps). - The maximum debt limit (MDL) is re-calculated to reflect current policy and external environment; MDL is estimated to be 80 percent of GDP. - The debt anchor equals the MDL minus the estimated safety margin required to minimize the risk of breaching the ceiling given stochastic shocks. ### Debt-anchor scenarios and numerical outcomes (Table summary) - MDL (percent of GDP): Scenario 1 = 80; Scenario 2 = 80; Scenario 3 = 80; Aspirational Scenario = 98 - Risk tolerance: Scenario 1 = 5; Scenario 2 = 10; Scenario 3 = 10; Aspirational Scenario = 10 - Fiscal reaction function: - Scenarios 1–3: Resource-Rich Countries (Scenario 3 adapted to Angola) - Aspirational Scenario: Resource-Rich Countries – Adapted to Angola - Debt anchor (percent of GDP): Scenario 1 = 40; Scenario 2 = 50; Scenario 3 = 53; Aspirational Scenario = 69 Scenario interpretations: - Scenario 1 – No active policy - MDL = 80 percent of GDP; risk tolerance = 5 percent → implied debt anchor = 40 percent of GDP. - Scenario 2 – Higher fiscal risk management capacity - Increasing risk tolerance from 5 to 10 percent raises the debt anchor to 50 percent of GDP. - Scenario 3 – Higher fiscal consolidation and risk management capacity - Modeled by adapting the fiscal reaction function; implied debt anchor = 53 percent of GDP. - Scenario 4 – Aspirational Scenario - Reduction in the cost of borrowing and improvement in domestic resource mobilization increases MDL to 98 percent of GDP (assumes a reduction in the effective interest rate on public debt by about 1 percentage point and government revenues as a share of GDP set to 24 percent). - With higher fiscal risk management and consolidation capacity, the debt anchor rises to 69 percent of GDP. ### Policy recommendations to contain debt risks and preserve sustainability - Implement significant and comprehensive fiscal reforms, including: - publishing a medium-term fiscal and expenditure framework (MTEF) and fiscal strategy to strengthen credibility of fiscal consolidation and ensure compliance with the FSL; - strengthening capacity to manage and mitigate fiscal risks, including SOEs and PPPs, and improving contingency planning; - producing a more comprehensive and transparent budget; - stepping up domestic revenue mobilization (DRM); - reinforcing asset and liability management capacity. - Given heightened global risks, consider a debt anchor below the FSL debt limit of 60 percent in the medium term. - Continue multi-pronged measures concurrently: fiscal consolidation, DRM, liability and cash management, and contingency planning. - IMF staff stands ready to provide technical assistance in the identified fiscal reform areas; the FSL mandates publication of the 5-year evaluation report on fiscal rules (due in 2025), alongside the MTFF and fiscal strategy. *Source: IMF staff simulations and report content.* ### 1. The IPF provides advice on the use of FXI based on the interactions of shocks and ### 1. The IPF provides advice on the use of FXI based on the interactions of shocks and ### IPF framework and role of FXI - The Integrated Policy Framework (IPF) offers a refreshed perspective on the use of FXI as part of the policy mix in the face of shocks. - Under the IPF, advice on FXI: - Does not require diagnosis of disorderly market conditions (DMC). - Focuses on prevailing frictions and their interactions with shocks. - Recognizes that when frictions are severe they may give rise to DMC. - Frictions identified as relevant to FXI use: - (i) shallow FX market; - (ii) FX mismatches; - (iii) weakly anchored inflation expectations. - Potential benefits of FXI when shocks interact with frictions and threaten central bank objectives: - Smoothing large changes in the currency premia. - Mitigating adverse financial amplification from FX mismatches. - Improving policy trade-offs in the face of large exchange rate changes. ### Potential costs, limitations, and governance safeguards - Potential unintended consequences of FXI include: - (i) delaying the required macroeconomic adjustment; - (ii) depleting reserves to the point when currency pressures intensify; - (iii) creating confusion regarding the nominal anchor; - (iv) hindering the development of FX hedging markets; - (v) incentivizing agents to increase FX exposure by providing false sense of security that central bank will mitigate any losses. - Conclusion: costs of FXI often exceed its benefits even in the presence of frictions; FXI should be used only when shocks are large enough to interact with frictions and cause significant macroeconomic and financial stability risks. - Successful deployment requires robust central bank governance and transparency to shield against political pressures to use interventions for goals outside the mandate. ### Ex-ante macroprudential, structural policies, and reserves - Ex-ante measures can limit systemic risks during shocks: - Macroprudential and in some cases capital flow measures to limit FX mismatches. - Policies to maintain buffers in the financial sector. - Incentives for financial intermediation in local currency. - For Angola specifically: - Strengthening the monetary policy framework to increase policy transmission and credibility is critical to stabilize medium-term inflation expectations and reduce the need for FXI during shocks. - Preemptive macroprudential policies to increase financial system resilience and limit FX credit growth while incentivizing local currency intermediation can ease trade-offs during stress. - Over the medium term, strengthening international reserves to reflect the vulnerabilities associated with IPF frictions is advisable. - Trade-off emphasized: spending reserves today vs. availability of reserves for future shocks; BNA should hold an amount of FX reserves that balances these benefits against the costs. ### Angola: country characteristics and key frictions - Distinguishing characteristics relative to typical emerging markets: - (i) high commodity concentration; - (ii) evolving monetary policy framework with nascent floating exchange rate regime; - (iii) limited domestic financial sector development. - Sources of volatility: - Fundamental shocks such as fluctuations in commodity production and prices. - Susceptibility to financial shocks such as changes in the U.S. interest rate due to reliance on non-concessional external finances. - Portfolio shocks have limited impact relative to fundamentals. - Deposit dollarization can introduce vulnerability if depositor preferences shift. - Prevalent frictions in Angola: - FX market shallowness: - Foreign exchange supply concentrated within two sectors: the Treasury and the oil companies. - Market liquidity remains limited and often one-sided trading conditions prevail. - Capacity of market participants to manage exchange rate risk is restricted; informal market spreads widen in stress. - FX mismatches: - Since transition to Inflation Targeting in 2019, financial sector dollarization has somewhat declined. - Foreign currency (FX) lending to unhedged borrowers slowed, aided by greater exchange rate flexibility and macroprudential measures. - Deposit and loan dollarization are currently at around 40 percent and 20 percent, respectively. - Public sector FX mismatches have considerably increased due to new external borrowing during the pandemic and valuation effects from recent exchange rate depreciation. - Footnote: "The BNA introduced in 2015 a regulation that limits FX-lending to only borrowers with FX-income." - Weakly anchored inflation expectations: - BNA has made progress reducing inflation and introducing a forward-looking monetary policy framework, but it is still nascent. - Large import share in the consumption basket and historically high volatility driven by oil sector boom-bust cycles undermine anchoring. - Sharp exchange rate movements can de-anchor expectations. ### Staff assessment for Angola and broader guidance - Limited potential for deploying FXI within a multi-tool policy framework due to: - Weak institutional capacity. - Nascent stage of traditional policy frameworks. - Risks of premature implementation: - Damaging central bank credibility. - Undermining BNA’s transition to an Inflation Targeting framework. - Conditional allowance: - In extreme cases when a shock threatens macroeconomic stability to a critical level, the full range of policy instruments, including FXI, should be considered. - Clear communication of objectives is necessary to support effectiveness of FXI. - FXI cannot substitute for warranted macroeconomic adjustment: - Angola’s exposure to terms-of-trade shocks requires appropriate monetary and fiscal stances first. - FXI should be reserved to address acute FX liquidity shortages to facilitate price discovery and lean against sharp exchange rate fluctuations, provided reserves are sufficient. ### Design and implementation features: rules-based FXI for Angola - A rules-based FXI can help dampen shock amplification from shallow FX markets and support macro-financial stability. - Suggested design elements: - Intervene only if daily exchange rate fluctuations exceed a certain threshold. - Not mandated to intervene unless volatility threatens BNA’s objectives. - Two key parameters to calibrate: - (i) threshold for daily exchange rate change that would give rise to FXI considerations by the BNA; - (ii) if threshold is triggered, a maximum volume for daily intervention. - Calibration objectives: - Avoid over-smoothing exchange rate volatility. - Preserve reserves. - Benefits of a rule-based approach: - Demonstrate consistency over time. - Commit to objectives. - Provide predictability to markets. - Insulate BNA from political pressures and help strengthen credibility. - Communication requirements: - Develop a framework for updating the market on objectives, rules, and operations. - Increase transparency by timely updating all publicly available information relating to the FXI policy. ### Selected Angola-specific figures and episodes - Deposit dollarization: around 40 percent. - Loan dollarization: around 20 percent. - June-2023 episode: the kwanza depreciated by nearly 40 percent in a month, triggered by foreign currency shortages; characterized by amplified volatility, disorderly market conditions, and significant widening of spread between interbank and informal markets. *Source: 1agoea2024001 - IMF (Angola: IPF advice on FXI and country assessment).* ### 0.8 percent of GDP and the non-oil primary fiscal deficit (NOPFD) is ### 1agoea2024001 - 0.8 percent of GDP and the non-oil primary fiscal deficit (NOPFD) is ### Fiscal developments and recommendations - Key fiscal outcomes: - Overall fiscal balance improved to 0.8 percent of GDP. - The non-oil primary fiscal deficit (NOPFD) is expected to have improved by 2 percent of GDP. - Improvement driven primarily by a drop in capital expenditure and goods and services, and relatively lower fuel subsidy costs. - Oil revenues weakened owing to weakness in oil production in prices. - Policy actions and priorities: - Strong commitment to enhancing debt management, including prepayments of collateralized external debt and extension of domestic debt maturities, aimed at reducing 2024-25 gross financing needs (GFNs) and medium-term vulnerabilities. - Planning for fuel subsidy reform in 2024 is underway at the technical level; its implementation would significantly support the medium-term fiscal goal. - Continued tax policy action and budget discipline are required going forward. ### Monetary policy and inflation - Monetary stance and outcomes: - The BNA maintained a tight monetary stance through 2022 while gradually reducing its tightening bias. - Combined with exchange rate appreciation in 2022, monetary policy helped sustain disinflation from above 20 percent down to 13 percent in mid-2023. - Operational challenges and reforms: - Improving interbank liquidity management remains a challenge. - The BNA removed the custody fee on excess reserve balances to reduce downward pressure on interbank rates, but excess liquidity conditions persist, contributing to lower interbank rates compared to the BNA’s announced interest rate corridor. - The BNA has continued a transition to an inflation-targeting framework, with Fund technical assistance. ### External position and exchange rate - Exchange rate and reserves: - The nominal exchange rate against U.S. dollar depreciated by 40 percent in June-2023, helping to adjust imports. - The BNA engaged in moderate intervention in August 2023 but has abstained from intervention since then to preserve international reserves. - International reserves decreased in 2023; however, they remain adequate. - Exchange arrangements and restrictions: - De jure exchange rate arrangement: floating. - De facto exchange rate arrangement reclassified to crawl-like (effective June 29, 2023). - Angola maintains restrictions on payments and transfers for current international transactions under Article XIV transitional arrangements (limits on availability of foreign exchange for invisible transactions and limits on unrequited transfers). - December 2023 exchange restrictions introduced with Fund approval under Article VIII Section 2(a): (i) 10 percent international transfer tax imposed on legal entities for payments for TA, service and consulting contracts; and (ii) 2.5 percent international transfer tax imposed on individuals for payments for TA, service and consulting contracts and personal remittances. ### Financial stability and banking sector - Regulatory and supervisory progress: - Operationalization of the Financial Institutions Law (FIL) and the BNA Law is underway. - Key regulations issued on bank supervision and emergency liquidity assistance; bank resolution regulations yet to be issued. - Authorities considering options to strengthen legal protection for BNA staff and agents; well advanced in establishing a fiscal backup funding facility for the DGF. - BNA finalizing its third round of SREP and concluded its first top-down stress tests of banks. - BNA instructed all banks to submit recovery plans by April 2024. - BNA commenced issuing bi-annual Financial Stability Reports and adopted an action plan to improve compilation of financial soundness indicators. - Ongoing vulnerabilities: - Long-standing bank recapitalization and restructuring program (aimed at addressing capital shortfalls from the 2019 AQR) continues to be delayed. ### Governance, transparency, and anti-corruption - Progress and actions: - A draft nationwide anti-corruption strategy underwent public review and is expected to be approved by the Council of Ministers in the first quarter of 2024. - The Attorney General’s office published a list of assets recovered since 2019. - Angola’s first EITI report was published in December 2023 without a reconciliation of government revenues and extractive companies’ payments and disclosure of contracts and licenses. - Recommendation: - Speed up finalization of the nationwide anti-corruption strategy and strengthen governance and transparency, including to support the government’s diversification plan. ### Social and gender-related policy - Recent developments: - The 2023-27 NDP features specific targets and measures to reduce gaps in education, formal employment, and leadership representation. - Gender markers in the budget were temporarily discontinued in the 2024 budget but will be resumed in the 2025 budget fully aligned with the latest NDP priorities. - Recommendation: - Build on recent progress with gender policies. ### Fund relations, financing, and projected payments - Membership and financial position: - Joined: September 19, 1989; Article XIV. - Quota: 740.10 100.00 - Fund holdings of currency (holdings rate): 3,705.91 500.73 - Reserve tranche position: 113.56 15.34 - Net cumulative allocation (SDR Department): 982.36 100.00 - Holdings (SDR Department): 570.15 58.04 - Extended Arrangements outstanding: 3,079.32 416.07 (SDR Million / Percent of Quota) - Latest financial arrangements: - Extended Fund Facility: Date of Arrangement 7-Dec-18; Expiration Date 27-Dec-21; Amount Approved 3,213.40; Amount Drawn 3,213.40 (SDR Million) - Stand-By Arrangement: Date of Arrangement 23-Nov-09; Expiration Date 30-Mar-12; Amount Approved 858.90; Amount Drawn 858.90 (SDR Million) - Projected payments to the Fund (forthcoming year—values presented in the source): - Principal: 178.83 (2024); 373.58 (2025); 535.57 (2026); 535.57 (2027); 535.57 (2028) - Charges/Interest: 205.57 (2024); 200.71 (2025); 168.73 (2026); 126.02 (2027); 85.75 (2028) - Total: 384.40 (2024); 574.29 (2025); 704.30 (2026); 661.58 (2027); 621.31 (2028) - Timetable: - Article IV Consultation: Angola is on the standard 12-month cycle; the next Article IV Consultation is scheduled to be completed by December 2024. ### Technical assistance and capacity development (selected) - Monetary and Capital Markets (MCM) TA highlights (years of delivery as listed): - AFRITAC South: Diagnostic Mission for FMI & Fintech analysis 2023 - In-debt Assessment of the Internal Audit Function 2023 - Operationalizing Bank Resolution Framework 2023 - Monetary Policy Framework Modernization/Inflation Targeting 2022 - Technical Assistance on FX Market Operations 2018 - Medium- and long-term debt strategy (with WB) 2019 - Fiscal Affairs Department (FAD) TA highlights: - Organizational design, strategic management and leadership 2023 - Compliance Risk Management system in VAT 2023 - Modernization of Income taxation 2023 - Medium Term Expenditure Framework 2023 - Medium Term Fiscal Framework and fiscal risks 2022–23 - Statistics Department (STA) TA highlights: - Government finance and debt statistics 2019–23 - Consumer Price Index (CPI) 2020–23 - National accounts, and external and monetary statistics 2019–23 - Institute for Capacity Development (ICD): - Macroframework and Financial Programming 2020–21; Financial Programming and Policies (FPP1.0) 2014, 2020 - Legal Department: - AML/CFT Framework 2017–2020; BNA Law 2020 - Resident Representative: - Mr. Victor Duarte Lledo has been the IMF Resident Representative in Angola since August 8, 2023. ### Statistical capacity and data dissemination - General assessment: - Data provision has shortcomings but is broadly adequate for surveillance; concerns relate mainly to data quality and timeliness. - Considerable progress in data provision and transparency, strongest at the BNA and recently at the National Institute of Statistics (INE). - National accounts and CPI: - INE is working to rebase the national accounts from base year 2002 to 2019 with Fund TA; GDP rebasing (from base year 2009 to 2015) and revised time series are expected to be disseminated this year. - Quarterly GDP by expenditure, temporally suspended, is expected to be published in March/April 2024. - INE plans an Income and Expenditure Survey (IES) in 2025 to update CPI basket and weights; INE started publishing a producer price index (PPI) with 2015 base year on a quarterly basis. - Government finance statistics: - Reconciliation of above- and below-the-line data improved over 2023. - Authorities expected to disseminate 2018-2023 GFS quarterly series for BCG aligned to GFSM 2014 in the first semester of 2024. - Medium-term GFS target: GG and NFPS compilation and dissemination; MOF GFS migration plan expected to be concluded in 2027. - Monetary and external statistics: - MFS revised to SRFs; BNA delivers monthly MFS data to the IMF and publishes monthly. - BNA resumed reporting quarterly financial soundness indicators to STA; action plan adopted to overhaul compilation with follow-up TA planned during fiscal year 2025. - Balance of payments and international investment position compiled in line with BPM6 recommendations; Reserves Data Template compiled monthly since 2021 and disseminated with short lag. - Data dissemination schedule (selected from Table 1, dates preserved): - Exchange Rates: Date of latest observation 1/30/2024; Date received 1/31/2024; Frequency of Data D; Frequency of Reporting D; Frequency of Publication D. - International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Date of latest observation 12/2023; Date received 1/2024; Frequency M; Frequency of Reporting M; Frequency of Publication M. - Consumer Price Index: Date of latest observation 12/2023; Date received 1/2024; Frequency M; Frequency of Reporting M; Frequency of Publication M. - External Current Account Balance: Date of latest observation 09/2023; Date received 1/2024; Frequency Q; Frequency of Reporting Q; Frequency of Publication Q. - GDP/GNP: Date of latest observation 2022 (est.); Date received 1/2024; Frequency A; Frequency of Reporting A; Frequency of Publication A. *Prepared by the African Department (in consultation with other departments); Staff Report for the 2023 Article IV Consultation — Informational Annex (February 26, 2024).* ### Introduction ### Introduction ### Authorities’ stance and reform objectives - Angolan authorities appreciate continued Fund engagement and broadly share staff’s appraisal and policy priorities. - Authorities continue consolidating progress under the 2018 Extended Fund Facility (EFF) arrangement through reforms to entrench macroeconomic stability and strengthen institutional and human capacity. - Reform goals: rapid non-oil recovery for job creation, maintain a market-clearing exchange rate, improve regulatory environment, address remaining macroeconomic imbalances, insulate fiscal position from volatile oil revenues, bring inflation to moderate levels. - Structural reform priorities under the third National Development Plan (NDP 2023–27): boost non-oil competitiveness, improve governance practices, and foster sustainable, green, and inclusive growth. ### Recent economic developments and outlook - 2023 real GDP growth: 0.4 percent, weakened by scheduled stops and unplanned emergency maintenance of oil platforms. - 2024 projected growth: 2.8 percent, driven by oil sector recovery, stronger-than-expected non-oil performance (transportation, agriculture, manufacturing). - Key downside risks: tight global financial conditions, uncertainties from incomplete subsidy reforms, persistent exchange rate pressures. - Inflation trajectory: - April 2023: 10.6 percent (lowest since January 2019). - End-January 2024: 21.99 percent, driven by food and transportation prices and lagged pass-through of 2023Q2 Kwanza depreciation. - BNA projection: inflation to remain elevated at 18.0 percent by end-December 2024. - External sector in 2023: weakened due to elevated debt service costs, declining oil exports, and end of DSSI moratorium; gross international reserves (GIRs) remain at more than 7.5 months of import cover at end-December 2023. ### Fiscal policy and debt management - Policy measures to contain fiscal deficit: phasing out fuel subsidies, rationalizing current expenditure (mostly goods and services), preserving priority social and capital spending. - Non-oil primary fiscal deficit (NOPFD): improved from 8.5 percent of GDP in 2022 to 6.3 percent in 2023. - Overall fiscal balance 2023: -0.1 percent (owing to lower oil revenues). - Medium-term fiscal objective: reduce the deficit by 3.8 percent. - 2024 budget measures to protect vulnerable households: - VAT on food stamps reduced from 7.0 percent to 5.0 percent. - Increase in minimum threshold for PIT exemption. - Kwenda social safety net program: - Coverage expanded from 18 (eighteen) to 86 (eighty-six) municipalities. - Amount per family increased from Kz8,000.00 to Kz11,000.00. - 2024 NOPFD projection: 4.1 percent of GDP, reflecting rationalization of capital expenditures and a 20.0 percent increase in nominal non-oil revenue relative to 2023. - Planned price adjustments in 2024 as part of subsidy phasing: fuel price adjustment accompanied by upward adjustments in electricity and water tariffs. - Medium-term fiscal strategy: fiscal consolidation, structural reforms to improve domestic revenue mobilization and public financial management. - Revenue measures: widen tax base, improve tax inspections, better enforcement of property tax, accelerate e-taxation system, improve tax compliance and efficiency. - Public investment and planning: upgrade institutional capacity for investment planning and implementation; improve the medium-term fiscal framework (MTFF). - Debt management priorities: - Clearance of domestic arrears. - Implement debt strategy to comply with the Fiscal Responsibility Law (FSL). - Negotiations with domestic creditors to extend maturities of some bonds, including foreign currency–denominated bonds. - Renegotiate external debt contracts to moderate high future debt service. - Enhance institutional capacity to oversee fiscal risk from state-owned enterprises (SOEs). ### Monetary, exchange rate, and financial sector policies - Monetary tightening to rein in inflation: - November 2023 MPC: increased the BNA rate by 100 basis points to 18.0percent. - January 2024: coefficient of mandatory reserves in local currency increased by 300 bps to 20.0 percent. - BNA readiness: to further tighten monetary conditions if inflation pressures persist; strengthen communication strategy and coordination with fiscal authorities. - Policy regime transition: leveraging Fund TA to move from monetary aggregates to an inflation targeting regime with medium-term objective of single-digit inflation. - Exchange rate policy: commitment to a market-clearing exchange rate to preserve external competitiveness; flexible exchange rate regime considered effective in absorbing external shocks. - Financial system reforms: - New Financial Institutions Law enacted; complementary legislation being approved. - BNA internal reorganization: establishment of a Resolution Unit to ensure operational independence from the Supervisory Department; establishment of a Regulation Committee in governance framework. - A Financial Sector Assessment Program (FSAP) will be conducted in 2025 to assess supervision/regulation quality and crisis management framework. - Financial inclusion initiatives: - Expansion of mobile banking and digital infrastructure. - August 2023: Head of State established the National Financial Inclusion Strategy Coordination Committee (CCENIF). - CCENIF objectives: define guiding principles of the National Financial Inclusion Strategy (ENIF), promote ENIF implementation initiatives, undertake diagnostic studies and in-depth assessment of financial inclusion nationwide. ### Structural reforms and governance - NDP 23–27 policy priorities: human capital development and modern infrastructure to bolster non-oil sector activity. - SOE reform and privatization: - Continue reducing government footprint through PROPRIV program; PROPRIV extended to 2023–27. - Roadmap for SOE reforms adopted with IMF and World Bank technical assistance. - Public funds restructuring: - Sovereign wealth fund mission expanded; focus shifting to other funds including Oilfield Abandonment Funds and recovered illegal assets. - From 2024, plan to restructure 16 (sixteen) existing public funds to reduce them to 5 (five) and adopt governance structures aligned with international standards. - Anti-corruption and probity measures: - National Anti-corruption Strategy (ENAPREC) under public consultation; aims to reduce corruption by promoting integrity, transparency, and improving service provision in public and private sectors; expected to be approved by government and submitted to the National Assembly by end-2024. - Assessment underway of revamping the Public Probity Law in accordance with international standards once ENAPREC is adopted. - AML/CFT framework reforms: - 40 shortcomings identified; Financial Information Unit (UIF) working with international partners, including EU Global Facility, to address risks related to beneficial ownership. - Establishment of a beneficial ownership database. - Revision of related legislation (AML/CFT Law, Penal Code, NGOs Law); NGOs Law submitted to Parliament and under public consultation; AML/CFT law being discussed by the Council of Ministers before submission to Parliament. ### Conclusion and requests - Authorities committed to strengthening policy coherence and coordination, advancing structural reforms, and enhancing reform implementation across government departments to achieve sustainable, balanced, and inclusive post-pandemic recovery. - Authorities value Fund advice and technical support and seek Executive Directors’ support in concluding the 2023 Article IV Consultation. *Source: Introduction (content unit 1agoea2024001)* --- _Source: https://www.imf.org/-/media/files/publications/cr/2024/english/1agoea2024001.pdf_