## _cr10143

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### Executive Summary — Context and Key Outcomes
- Executive Board approved a 27-month Stand-By Arrangement (SBA) in the amount of SDR 858.9 million (300 percent of quota) on November 23, 2009; first purchase SDR 229 million made immediately thereafter.
- First review discussions held in March; program broadly on track with all but two end-December 2009 performance criteria met. Staff recommends completion of the first SBA review and supports requested waivers relating to the end-March test date.
- Authorities’ reforms have eased heavy foreign exchange market pressures present at program negotiation (September 2009): reintroduction of the foreign exchange auction system produced a significant and orderly adjustment in the official rate and narrowed the spread with the parallel rate.
- Expenditure restraint delivered a tight fiscal stance, but the government continued to accumulate domestic arrears due to difficulties raising funds domestically.

### Executive Summary — Agreed Priorities (First SBA Review)
- Allow more competitive bidding in the foreign exchange auction to facilitate full price discovery and a more market-determined exchange rate; BNA to enhance liquidity management and keep monetary policy tight.
- Strengthen debt management capacity while allowing an increase in Angola’s program external debt limit to finance basic infrastructure projects.
- Reduce fiscal risks by steadfastly implementing expenditure restraint measures in the 2010 budget and enhancing public financial management.

### Recent Developments and Outlook (Key Facts)
- Oil and reserves:
  - Increased global demand for oil revived Angola’s oil sector; higher oil revenues strengthened the external position and allowed some reserve accumulation.
  - Economic growth accelerated in H2 2009 as both oil and non-oil sectors expanded.
- Exchange rate and inflation:
  - Official exchange rate depreciated by 15 percent in Q4 2009.
  - CPI inflation increased only slightly in 2009.
- Politics:
  - National Assembly in January 2010 approved a new constitution establishing a presidential-parliamentary system; presidential elections initially scheduled for 2009 dropped.
- Program performance:
  - Missed end-December 2009 targets: central government’s accumulation of external arrears (negligible) and domestic arrears (about 1½ percent of GDP in Q4).
  - Indicative target for the non-oil primary fiscal balance met with a wide margin due to higher-than-expected non-oil revenues.
- Outlook and risks:
  - 2010 rebound expected; inflation expected to decline further in 2010.
  - Fiscal and external current accounts expected to record surpluses in 2010 and 2011 slightly higher than projected, helped by higher-than-envisaged oil prices.
  - Staff and authorities agreed it is premature to revise program targets (except external borrowing ceiling) given data delays; to be reviewed during second SBA review.

### Program Recommendation
- Staff recommends completion of the first SBA review and supports waivers requested for specific nonobservance and information constraints.

### Press Release — First Review Disbursement
- Executive Board approved first review and disbursement: SDR 114.52 million (about US$171.5 million).
- Total disbursements under the arrangement following approval: SDR 343.56 million (US$514.5 million).
- Waivers granted for:
  - Continuous performance criterion on non-accumulation of new external payment arrears.
  - End-March 2010 quantitative PC on non-accumulation of new domestic payments arrears.

---

### Monetary and Exchange Rate Policies — Diagnosis and Measures
- Diagnosis:
  - Renewal of the auction system generated a significant exchange rate adjustment, but liquidity management difficulties mean the foreign exchange market has not produced a truly market-clearing price.
  - Continuous excess demand in FX markets and high money growth reflect weak liquidity management. BNA notes face competition from Treasury securities at the same maturities; Treasury securities eligible to meet up to 30 percent of reserve requirement.
  - Allowing banks to meet reserve requirements in foreign exchange has increased room for speculation.
  - Authorities’ low tolerance for further exchange rate adjustment has led to rejection of high auction bids without a transparent “outliers” policy; auction timing communication irregular.
- Agreed measures to improve liquidity management and exchange rate formation:
  - Removal of government securities from assets eligible to meet reserve requirements.
  - Some reduction of the reserve requirement ratio (currently at 30 percent).
  - Discontinuation of accepting foreign currency for reserve requirement purposes (foreign currency deposits presently used can be reduced but not increased).
  - Phased reduction of net open position limits on banks.
  - Issue competitively priced government paper at longer maturities to ease budget financing impact.
  - Eliminate remaining administrative controls affecting the FX auction; use intervention (consistent with program’s NIR floor) to limit excessive volatility.
  - BNA to streamline bidding process: new auction circular, fixed auction time, review administrative bank requirements, and unify secondary and parallel markets.
- Staff monetary recommendations:
  - Tight monetary policy needed to ease exchange rate pressure and support reserve rebuilding.
  - Remove government bonds and other securities as eligible assets for reserve requirements and issue more attractive BNA notes to improve liquidity management.
  - Government likely to accept higher interest rates in bond auctions to meet domestic financing needs and prevent arrears accumulation.

### Operational FX and Liquidity Actions (Authorities’ Commitments)
- Revise reserve requirement regulation to remove arbitrage options.
- Treasury to issue competitively priced long-term paper if needed.
- Regular Treasury–BNA discussions on financing needs and liquidity coordination.
- Tighten regulation of net open positions and revise capital requirement regulation on foreign currency loans.
- Improve FX auction functioning: publish circular, price-based bid selection, auction as sole FX mechanism, increase 4 percent spread limit to 6 percent initially, aim to phase out by September 2010.

---

### Debt Management — Needs, Ceiling Revision, and MTDS
- Financing context:
  - Authorities prioritize heavy investment in basic infrastructure damaged during 30-year civil war.
  - Access to concessional financing limited; reliance on nonconcessional funding.
  - Previous ceiling: $2 billion on nonconcessional borrowing plus assumed $0.75 billion concessional (now unlikely).
- External borrowing ceiling revision:
  - Staff and authorities agreed to increase ceiling on contracting new external borrowing to $6 billion, conditional on strengthened debt management capacity and program commitments.
  - Programmed net external borrowing for 2010 about $1.3 billion (1.5 percent of GDP); debt-GDP ratio expected to rise by only 1 percent from 2009 to 2010.
  - Contracting of external debt expected to peak in 2010 then decline; over time infrastructure financing to rely more on PPPs.
- Debt Sustainability Analysis (DSA) findings:
  - With revised debt ceiling and projected disbursement profile, external debt-to-GDP ratio will remain broadly stable at 20 percent; public debt-to-GDP ratio to resume downward path after a temporary increase in 2009.
  - Debt ratios remain very sensitive to oil price volatility.
  - Stress tests: noninterest current account shock (oil price collapse scenario) would sharply increase external debt ratio by 2015 (on unchanged policies); staff considers collapse unlikely.
  - Partial equilibrium analysis suggests the assumed current account shock would require oil prices to drop to below $50 per barrel.
- Project appraisal and safeguards:
  - Most proposed projects are basic infrastructure with expected high economic returns.
  - Project appraisal framework to be put in place with World Bank and AfDB help — structural benchmark for September 2010; first assessment report by December 2010.
  - Many projects underwent export credit agency and government due diligence; some follow OECD rules; projects with China subject to market-based bidding process.

### Debt Management Capacity Building — Deliverables and Timing
- Cabinet to endorse package of measures to strengthen debt management capacity by end-September 2010.
- Implement selected reforms at the DMU by end-December 2010.
- Structural benchmark: finalization of the MTDS by end-December 2010.
- Begin work on broader asset and liability management framework with Bank and Fund TA.
- Urgent need to strengthen DMU at Ministry of Finance and elevate its role ("has a seat at the policy table").

---

### Fiscal Policy and Public Financial Management — Key Numbers and Measures
- 2010 fiscal balance (cash basis) projected to shift to a small surplus of 0.7 percent of GDP from a deficit of 4.4 percent of GDP in 2009.
- Compared to 2009 outturn:
  - Overall spending projected to remain flat in real terms.
  - Real decline in current spending: 7 percent.
  - Real increase in capital spending: 14 percent.
- 2010 non-oil primary fiscal deficit expected to remain below program’s level of 47 percent of non-oil GDP.
- Permanent income approach: sustainable non-oil primary deficit in 2010 around 30 percent of non-oil GDP; medium-term convergence to sustainable level expected via non-oil GDP expansion and higher non-oil revenues.

- Text Table 1. Angola: Selected Fiscal Indicators (Percent of GDP)
  - Revenues: 28.5, 32.5, 38.6, 40.5
  - – Of which: non-oil tax revenues: 9.0, 9.5, 8.2, 8.5
  - Expenditures: 41.8, 41.6, 37.1, 35.3
  - – Of which: current spending: 27.3, 28.5, 24.3, 22.9
  - – Of which: capital spending: 14.5, 13.1, 12.8, 12.5
  - Overall fiscal balance (accrual basis): -13.3, -9.1, 1.5, 5.2
  - Non-oil primary balance (as a share of non-oil GDP): -51.8, -45.9, -46.8, -45.9

- Policy measures and timetable:
  - Formal mid-year review of budget execution urged.
  - Cabinet approved a tax reform package; staff encouraged implementation.
  - Revised 2010 budget (to be finalized in July–August) will:
    - Include action plan to clear domestic arrears.
    - Initiate phasing out subsidies and other quasi-fiscal operations related to Sonangol.
    - Better prioritize public investment program.
    - Reallocate part of expenditure savings toward social spending.
    - Initiate a social protection scheme before subsidies are eliminated.
  - Publication and transparency:
    - Sonangol’s 2007 and 2008 audited financial statements published on its website in-April 2010.
    - Draft design of planned sovereign wealth fund to be submitted to cabinet by end-June 2010.
    - Authorities committed to publish central government quarterly budget execution reports and to report and publish major SOEs financial operations by June 2010.

- Arrears:
  - Revised budget to allocate funds to clear bulk of current stock of domestic arrears, which amount to about $4 ½ billion; negotiations underway to securitize some arrears.
  - Cabinet approved arrears framework: small creditors paid in full; medium creditors 50 percent immediate and remainder later; large creditors 30 percent immediate and remainder rescheduled.

---

### Program Monitoring, Safeguards, and Data Issues
- Program monitoring:
  - Quantitative performance criteria, indicative targets, structural benchmarks, and quarterly reviews.
  - Due to delay in first review, second and third reviews combined no later than September 15, 2010.
- Net International Reserves (NIR):
  - Technical definition modified after joint analysis of BNA reserves as of end-December 2009.
  - Special NIR review to be prior action for second review.
  - As of December 31, 2009, foreign reserve assets defined amounted to US$ 10.888 billion; reserve liabilities amounted to US$ 0.365 million.
  - Adjustors applied only if floor on NIR remains at or above US$6 billion.
- Safeguards assessment of BNA:
  - First-time safeguards assessment (January 2010) confirmed significant safeguards risks.
  - Strengths: BNA subject to annual external audits and has taken steps to address audit qualifications and accelerate 2009 audit.
  - Weaknesses: weak governance and transparency, lack of publication of audited accounts, nonfunctional oversight organs, internal audit below international standards.
  - Priority safeguards recommendations incorporated into the program and aligned with BNA modernization strategy.
  - Prior actions / benchmarks include completion of an external audit on BNA to confirm foreign assets and accuracy of NIR data by August 2010.
- Data and statistical issues:
  - Data provision has shortcomings: quality and timeliness concerns.
  - Key deficiencies in national accounts, CPI scope, monetary and government finance statistics, and external sector statistics noted.
  - Authorities committed to using GDDS and improving statistical system; various technical assistance engagements listed.
- AML/CFT:
  - Authorities committed to enact AML/CFT legislation meeting international standards, implement preventive measures (including reporting suspicious transactions), and create institutions including a FIU.

---

### Structural Benchmarks, Quantitative Targets, and Prior Actions (Selected)
- Selected quantitative targets (from Letter of Intent):
  - Usable net international reserves, floor (millions of US$): 9076; 8098; 10251; 9567; 10058; 10549; 11040.
  - Net domestic credit of the BNA, ceiling (billions of kwanzas): -311; -56; -207; -308; -304; -300; -296.
  - Net credit to the government by the banking system, ceiling (billions of kwanzas): 268; 523; 396; 268; 268; 268; 268.
  - Nonaccumulation of domestic arrears, cumulative (billions of kwanzas): 0 0 116000 0.
  - External borrowing, cumulative, ceiling (billions of US$): 2; 0; 0; 2; 6; 6; 6.
  - Indicative target — Floor on social spending, cumulative effective January 1 (billion of kwanza): 786; 786; 600; 205; 411; 616; 821.
- Selected structural benchmarks and timing:
  - Prior actions:
    - Publication of Sonangol’s 2007 and 2008 audited financial statements: April 2010.
    - Publication of BNA audited financial statements for 2008 on BNA website: April 2010.
    - Completion of audited BNA financial statements for 2009, with signing: April 2010.
  - Structural benchmarks:
    - Amend provisioning regulation for foreign currency loans: March 2010.
    - Develop off-site supervisory tools: March 2010.
    - Cabinet approval of tax reform strategy: June 2010.
    - Publication of quarterly budget execution reports: June 2010.
    - Reporting and publishing major SOEs’ quasi-fiscal operations: June 2010.
    - Establish project appraisal framework: September 2010.
    - Complete first project assessment report: December 2010.
    - Cabinet approval of main MTDS recommendations from IMF TA: December 2010.
    - Publication of Sonangol’s 2009 audited financial statements: November 2010.
  - Safeguards/governance benchmarks (selected):
    - Completion of external audit on BNA confirming foreign assets and NIR accuracy: August 2010.
    - Appointment of BNA Board investment committee to meet at least monthly: May 2010.
    - Formalization of reserve investment guidelines by BNA Board: July 2010.
    - Issuance of semiannual Internal Audit Office reports on compliance with reserve investment guidelines: September 2010.

---

### Financial Sector and Banking Soundness — Key Indicators
- Banking system resilience:
  - Regulatory capital to risk-weighted assets: 18.1 19.6 19.4 18.5 21.9 19.5 22.4 (2003–09 series).
  - Foreign exchange loans to total loans: 27.8 55.7 72.7 71.4 69.9 61.9 65.3.
  - Nonperforming loans to gross loans: 9.0 8.1 6.4 4.8 2.9 2.4 2.6.
  - Liquidity (Liquid assets/total assets): 97.0 63.9 47.1 34.4 34.2 42.6 31.4.
- Staff welcomes BNA steps to strengthen banking supervision: amended provisioning regulation, strengthened management of credit risk for foreign currency loans, development of off-site supervisory tools.

---

### Staff Appraisal — Summary of Recommendations and Risks
- Assessment:
  - Reforms under the SBA beginning to bear fruit; market pressures eased and signs of recovery emerging, but serious challenges remain.
- Key recommendations:
  - Tight monetary policy and improved liquidity management.
  - Further FX auction transparency (well-understood “outliers” policy) and unification of secondary and parallel markets.
  - Articulate a coherent MTDS fully integrated into budget process and strengthen project appraisal capability.
  - Redefine role of debt managers toward policy orientation and ensure DMU influence in policy fora.
  - Implement 2010 fiscal adjustment plan, conduct formal mid-year budget review, clear domestic arrears, and phase out quasi-fiscal operations related to Sonangol.
  - Establish a well-designed sovereign wealth fund to strengthen asset management and support counter-cyclical fiscal policy.
- Main risks:
  - Potential sluggishness of global recovery and sharp decline in oil prices, which would exert heavy pressure on fiscal and external positions and endanger reserve rebuilding objective.
  - Staff advises close monitoring of fiscal and external developments and recalibration of policies as needed.

*Source: _cr10143 — Executive Summary; selected sections and annexes from the IMF staff report and Press Release No. 10/190 (May 10, 2010).*

### Executive Summary

### Executive Summary

### Context
- The Executive Board approved a 27-month Stand-By Arrangement in the amount of SDR 858.9 million (300 percent of quota) on November 23, 2009 (Country Report No. 09/320), and the first purchase of SDR 229 million was made immediately thereafter.  
- Discussions for the first review were held in March; the program appears to be broadly on track, with all but two end-December 2009 performance criteria being met. Staff recommends completion of the first SBA review and supports the waivers requested, which relate to the end-March test date.  
- Authorities’ reforms have begun to yield results: heavy foreign exchange market pressures present at program negotiation (September 2009) have eased. Reintroduction of the foreign exchange auction system produced a significant and orderly adjustment in the official rate and, together with a modest appreciation of the parallel rate, narrowed the spread between the two markets.  
- Expenditure restraint delivered encouraging results in terms of a tight fiscal stance, although the government continued to accumulate domestic arrears, reflecting ongoing difficulties in raising funds domestically.

### Key Pillars of the First SBA Review
- Staff and the authorities agreed further actions are needed to reduce remaining vulnerabilities and ensure a smooth return to a sustainable path. Agreed priorities include:
  - Allow more competitive bidding in the foreign exchange auction to facilitate full price discovery and yield a more market-determined exchange rate. The BNA is implementing measures to enhance liquidity management and keep monetary policy tight to support normalization in the foreign exchange market.
  - Strengthen debt management capacity while allowing an increase in Angola’s program external debt limit to finance basic infrastructure projects in line with the authorities’ rehabilitation program.
  - Reduce fiscal risks by steadfastly implementing expenditure restraint measures in the 2010 budget and enhancing public financial management.

### Recent Developments and Outlook
- Oil-led recovery and reserves:
  - Increased global demand for oil revitalized Angola’s oil sector, bringing in higher oil revenues and strengthening the external position, allowing for some accumulation of international reserves.
  - Economic growth accelerated in the second half of 2009 as both oil and non-oil sectors expanded.
- Exchange rate and inflation:
  - The official exchange rate depreciated by 15 percent in Q4 2009; CPI inflation increased only slightly in 2009, partly reflecting improved market confidence and a modest appreciation of the parallel market rate.
- Politics:
  - The National Assembly in January 2010 approved a new constitution establishing a presidential-parliamentary system in which the president is to be elected by parliament rather than by direct popular vote; the presidential elections initially scheduled for 2009 have been dropped.
- Monetary and exchange rate functioning:
  - Resumption of foreign exchange auctions facilitated normal channeling of foreign currency and an orderly exchange rate adjustment, narrowing the spread with the parallel market rate.
  - Banks’ demand for foreign currency remains above the level offered by the BNA, pointing to problems with the auction’s workings.
  - Monetary policy effectiveness undermined by the Treasury’s reluctance to accept higher interest rates on bond sales and weak BNA liquidity management, with competition between BNA notes and Treasury bills at very short maturities.
- Fiscal developments:
  - Fiscal data for H2 2009 suggest budget execution was tight and supportive of program objectives, though oil revenues were lower than anticipated due to lower production.
  - Expenditure restraint under the 2009 supplementary budget delivered a tight fiscal stance, but the government continued to accumulate domestic arrears.
  - The National Assembly adopted the 2010 budget in mid-December, consistent with program goals.
- Program performance:
  - All but two end-December 2009 performance criteria were met; missed targets related to central government’s accumulation of external arrears (negligible) and domestic arrears (about 1½ percent of GDP in the fourth quarter).
  - The indicative target for the non-oil primary fiscal balance was met with a wide margin thanks to higher-than-expected non-oil revenues; social spending was slightly below target due to weaknesses in the social delivery system.
  - The banking system, with large capital buffers, remained relatively resilient to the exchange rate shock. The BNA finalized regulations on amending provisioning requirements for credit risk of foreign currency loans and developing off-site supervisory tools (March 2010 structural benchmarks).
- Outlook and risks:
  - Growth and inflation: Outlook for a 2010 economic rebound is broadly unchanged; non-oil sector recovery appears healthy while the oil sector expands on improved external conditions. Inflation is expected to decline further in 2010, reflecting fiscal tightening and a better external position (and exchange rate outlook).
  - Fiscal and external positions: Fiscal and external current accounts are expected to record surpluses in 2010 and 2011 slightly higher than projected, thanks to higher-than-envisaged oil prices (Table 1). These surpluses may not fully translate into higher international reserves because a planned sovereign bond issue is likely to be significantly scaled down, and as oil prices rise outward FDI increases via higher cost-recovery payments.
  - Staff and authorities agreed that, aside from the external borrowing ceiling, it was premature to revise program targets (including for reserve accumulation) given data delays and difficulty distinguishing transitory from permanent developments; the issue will be reviewed during the second SBA review.

### Monetary and Exchange Rate Policies (Policies and Discussions)
- Main diagnosis:
  - Renewal of the auction system generated a significant exchange rate adjustment, but liquidity management difficulties mean the foreign exchange market has not produced a truly market-clearing price.
  - Continuous excess demand in foreign exchange markets and a high pace of money growth reflect weak liquidity management. BNA notes face competition from Treasury securities at the same maturities, with Treasury securities benefiting from taxation advantages and eligibility to meet up to 30 percent of the reserve requirement.
  - Allowing banks to meet reserve requirements in foreign exchange has increased room for speculation (the share of U.S. dollars in required reserves has increased over time).
  - Barriers remain to a market-determined exchange rate: authorities’ low tolerance for further exchange rate adjustment has led to rejection of high bids in auctions without a well-defined and transparent “outliers” policy; communication between BNA and market participants on auction timing is irregular, creating uncertainty.
- Agreed measures to improve liquidity management and exchange rate formation:
  - Removal of government securities from the class of assets eligible for meeting reserve requirements.
  - Some reduction of the reserve requirement ratio (currently at 30 percent) to soften the impact on banks.
  - Discontinuation of the practice of accepting foreign currency for reserve requirement purposes (foreign currency deposits presently used to meet the reserve requirement can be reduced but not increased).
  - Phased reduction of net open position limits on banks.
  - As a supporting measure, authorities intend to issue competitively priced government paper at longer maturities to ease any adverse impact on budget financing.
  - Elimination of remaining administrative controls affecting the foreign exchange auction, with intervention (consistent with the program’s net international reserves floor) used to limit excessive volatility.
  - BNA committed to streamlining the bidding process, issuing a new auction circular to clarify auction parameters and limit discretionary selection of bids, setting a fixed time for auctions, and reviewing administrative requirements on banks to unify secondary and parallel markets.

### Debt Management
- Authorities’ needs and financing context:
  - Authorities prioritize heavy investment in basic infrastructure damaged during the 30-year civil war to eliminate supply bottlenecks and accelerate development.
  - Financing available under investment framework agreements with several countries (most importantly China and Brazil). Given Angola’s middle income status and abundant oil reserves, access to concessional financing is very limited, hence use of nonconcessional funding.
  - Previously there was a ceiling of $2 billion on nonconcessional borrowing, plus an assumed $0.75 billion in concessional borrowing; the assumed concessional borrowing is now considered unlikely to materialize.
- Revision of external borrowing ceiling:
  - Staff and authorities agreed to increase the ceiling on contracting new external borrowing to $6 billion, conditional on program commitments to ensure new borrowing is well managed and debt management capacity is strengthened.
  - Rationale and composition:
    - The government’s high external debt contracting need for 2010 reflects a correction of the composition of programmed external borrowing (lower disbursements from existing contracts and higher borrowing under new contracts) rather than higher-than-budgeted investment.
    - Bunching of new contracts in 2010 reflects a freeze on contracting new debt for much of 2009, the need to finalize project financing before framework agreements expire, and improved government execution of capital spending.
    - Programmed net external borrowing for 2010 is some $1.3 billion (1.5 percent of GDP), with the debt-GDP ratio expected to rise by only 1 percent from 2009 to 2010.
    - Authorities confirmed the planned bond issuance (intended to boost reserves) would comply with the revised debt ceiling even if some projects are postponed to 2011.
  - Medium-term profile:
    - Contracting of external debt is expected to peak in 2010 and then decline gradually as government financing needs decelerate with a projected fiscal improvement.
    - Over time, contracting of external project loans will decline and subsequent infrastructure financing is expected to rely more on public-private partnerships (PPPs).
- Debt Sustainability Analysis (DSA) findings:
  - With the revised debt ceiling and projected disbursement profile, the external debt-to-GDP ratio will remain broadly stable at 20 percent and the public debt-to-GDP ratio will renew its downward path after a temporary increase in 2009 (Figures 3 and 4).
  - Debt ratios remain very sensitive to oil price volatility given Angola’s high oil dependency.
  - Stress tests show a noninterest current account shock—effectively an oil price collapse scenario—would lead to a sharp increase in the external debt ratio by 2015 (on unchanged policies), though staff considers this unlikely.
  - A real exchange rate shock of 30 percent is also likely to be linked with an oil price collapse. Staff calculations based on partial equilibrium analysis suggest the assumed current account shock would require a drop in oil prices to below $50 per barrel.
- Project composition and safeguards:
  - Most proposed projects are for basic infrastructure with expected high economic rates of return. A project appraisal framework, to be put in place with World Bank and AfDB help, is a structural benchmark for September 2010; once established, all projects should be assessed on that basis with the first assessment report completed by December (structural benchmark).
  - Many project agreements have undergone appraisal by export credit agencies and the government’s own due diligence, including approval by the Angola Court of Accounts; some projects follow OECD rules, and projects contracted with China are subject to a market-based bidding process.

*Source: _cr10143 - Executive Summary_*

### 12.      The authorities recognize that strengthening public debt management is key to

### 12.      The authorities recognize that strengthening public debt management is key to

### Debt management — findings and planned actions
- Authorities accept the need for a clear and coherent medium term debt strategy (MTDS) that is fully reflected in the budget financing plan (Box 1).
- Urgent need to strengthen the debt management unit (DMU) at the Ministry of Finance, elevate its role, and ensure it "has a seat at the policy table."
- Program deliverables and timing:
  - Cabinet to endorse a package of measures to strengthen debt management capacity by end-September 2010.
  - Implement selected reforms at the debt management unit by end-December 2010.
  - Structural benchmark: finalization of the MTDS by end-December 2010.
  - Begin work on a broader asset and liability management framework with technical assistance from the Bank and the Fund.
- Box 1 — Background and implications:
  - Current public debt management is fragmented between units in the Ministry of Finance and the BNA; capacity is weak and coordination is limited.
  - MTDS purpose: provide a framework to make informed choices on meeting government financing needs, assess cost-risk tradeoffs, coordinate with fiscal and monetary management, and reconcile objectives and constraints (including market development and balance of payment issues).
  - For an effective DMU, it should be guided by:
    - (i) an effective legal framework;
    - (ii) effective institutional arrangements; and
    - (iii) comprehensive and efficient recording of debt.
  - Implications for Angola: build the DMU at the Ministry of Finance to ensure implementation of the MTDS; may require revisions to the organic law of the Ministry of Finance to set objectives, clarify accountability, and outline reporting and audit requirements.

### Fiscal policy and public financial management — key numbers, projections, and policy measures
- Fiscal outcomes and projections:
  - 2010 fiscal balance (cash basis) projected to shift to a small surplus of 0.7 percent of GDP from a deficit of 4.4 percent of GDP in 2009.
  - Compared to 2009 outturn:
    - Overall spending projected to remain flat in real terms.
    - Real decline in current spending: 7 percent.
    - Real increase in capital spending: 14 percent.
  - 2010 non-oil primary fiscal deficit expected to remain below the program’s level of 47 percent of non-oil GDP.
  - Based on the permanent income approach, the sustainable non-oil primary deficit in 2010 is around 30 percent of the non-oil GDP; over the medium term the non-oil primary deficit is projected to converge to its sustainable level mainly due to projected expansion of non-oil GDP and government non-oil revenues.

- Text Table 1. Angola: Selected Fiscal Indicators (Percent of GDP)
  - Revenues: 28.5, 32.5, 38.6, 40.5
  - – Of which: non-oil tax revenues: 9.0, 9.5, 8.2, 8.5
  - Expenditures: 41.8, 41.6, 37.1, 35.3
  - – Of which: current spending: 27.3, 28.5, 24.3, 22.9
  - – Of which: capital spending: 14.5, 13.1, 12.8, 12.5
  - Overall fiscal balance (accrual basis): -13.3, -9.1, 1.5, 5.2
  - Non-oil primary balance (as a share of non-oil GDP): -51.8, -45.9, -46.8, -45.9

- Policy measures and timetable:
  - Formal mid-year review of budget execution urged to evaluate adequacy and consider additional measures given oil price volatility.
  - Cabinet recently approved a tax reform package; staff encouraged implementation.
  - Revised 2010 budget (to be finalized in July–August) will:
    - Include a concrete action plan to clear the stock of domestic arrears.
    - Initiate phasing out subsidies and other quasi-fiscal operations related to Sonangol.
    - Better prioritize the public investment program.
    - Reallocate part of expenditure savings toward social spending.
    - Initiate a social protection scheme before subsidies are eliminated.
  - Publication and transparency measures:
    - Sonangol’s 2007 and 2008 audited financial statements published on its website in-April 2010.
    - Draft design of the planned sovereign wealth fund to be submitted to the cabinet by end-June 2010.
    - Authorities committed to publish central government quarterly budget execution reports and to report and publish major SOEs financial operations by June 2010.

### Program monitoring, safeguards, and related operational issues
- Precautionary SBA and reserves:
  - Given improving external position, staff suggested consideration of converting the current SBA into a precautionary arrangement if external overperformance persisted over the first half of 2010.
- Net international reserves (NIR) definition:
  - Technical definition of the performance criterion on NIR modified after joint analysis of BNA’s international reserves as of end-December 2009.
  - Proposal accepted to streamline program NIR definition, including dropping an adjuster on unconfirmed asset balances.
  - A special NIR review to be carried out as a prior action for the second review.
  - Key issues identified with BNA reserves: illiquidity of some foreign assets managed by foreign asset managers, presence of investment commitments to these managers, and BNA guarantees of selected government debts that could constitute encumbrance on reserves.
  - BNA guarantees of about $8.8 billion in off-balance sheet commitments related to borrowings contracted by the Ministry of Finance; staff and authorities agreed these do not constitute encumbrance of reserves at this juncture.
- Waivers and performance criteria:
  - Staff supports waiver requests for:
    - Nonobservance of the continuous performance criterion on external arrears (nonobservance negligible; remedial action taken to strengthen Treasury payment system).
    - Non-observance on end-March 2010 performance criterion on non-accumulation of domestic arrears (authorities strengthened treasury operations).
  - Anticipated that the domestic arrears target was missed by a margin of some 60–100 billion kwanzas.
  - For four other performance criteria, staff supports waiver of applicability due to unavailability of necessary information and lack of clear evidence criteria will not be met.
  - Arrangement rephased by combining second and third program reviews largely due to logistics issues related to delay in completing the first program review.
- Safeguards assessment of the BNA:
  - First-time safeguards assessment conducted in January 2010 confirmed significant safeguards risks.
  - Strengths and weaknesses:
    - BNA is subject to annual external audits by a reputable audit firm and has taken steps to address audit qualifications and accelerate the 2009 annual audit.
    - Weak governance and transparency practices remain: lack of publication of audited accounts, nonfunctional key oversight organs (Audit Board and Advisory Council), and a control framework in reserves management area that needs strengthening.
    - 2008 audit completed with a significant delay in March 2010.
    - Internal audit function falls short of international standards and does not cover certain key operations.
  - Priority safeguards recommendations incorporated into the program and broadly in line with BNA’s modernization strategy.
- AML/CFT:
  - Authorities recognize significant weaknesses in existing AML/CFT framework.
  - Commitments:
    - Enact AML/CFT legislation that meets international standards.
    - Implement preventive measures in the financial sector (including procedures for reporting suspicious transactions).
    - Create institutions necessary to support AML/CFT, including a financial intelligence unit (FIU).

### Staff appraisal — assessment and recommendations
- Overview:
  - Reforms under the SBA are beginning to bear fruit; market pressures have been substantially eased and signs of economic recovery are emerging, but serious challenges remain requiring decisive policy actions.
- Monetary policy recommendations:
  - Tight monetary policy needed to ease exchange rate pressure and support reserve rebuilding.
  - Remove government bonds and other securities as eligible assets for meeting reserve requirements, while issuing more attractive BNA notes to improve liquidity management.
  - Government likely needed to accept higher interest rates in auctions of government bonds to meet domestic financing needs and prevent arrears accumulation.
  - Staff welcome BNA steps to strengthen banking supervision (amending provisioning regulation, strengthening management of credit risk for foreign currency loans, developing off-site supervisory tools).
- Exchange rate:
  - Renewal of auction system facilitated significant exchange rate adjustment and eased FX market pressures.
  - Further actions needed to achieve a fully market-determined exchange rate: improve transparency of auction process (introduce a well-understood “outliers” policy), and facilitate unification of the secondary and parallel markets.
  - Foreign exchange sales should be set consistent with the SBA’s goal of rebuilding reserves.
- Debt management emphasis:
  - Upward revision in the external debt ceiling acceptable to staff as it poses no macroeconomic risks and allows addressing infrastructure needs.
  - Government urged to stay within the new external debt ceiling.
  - Priority: articulate a coherent MTDS fully integrated into the budget process and strengthen project appraisal capability.
  - Redefine role of debt managers toward policy-oriented focus rather than mere recording/debt servicing, and ensure they have a seat at the policy table.
- Fiscal policy and PFM:
  - Implementation of the 2010 fiscal adjustment plan is key to program objectives.
  - Conduct a formal mid-year review of budget execution and adopt necessary additional measures to avoid slippages.
  - Staff welcomes commitment to clear all domestic arrears in the forthcoming revised 2010 budget and plans to phase out quasi-fiscal operations related to Sonangol.
  - Establishing a well-designed sovereign wealth fund will strengthen asset management and support counter-cyclical fiscal policy.
- Risks:
  - Key risk: potential sluggishness of the global recovery and associated easing of oil prices.
  - A sharp decline in oil prices would put heavy pressures on fiscal and external positions and endanger the program’s objective of rebuilding international reserves, though this is far from the baseline scenario outlined in the April 2010 WEO.
  - Authorities should closely monitor fiscal and external developments and recalibrate policies as needed.

*Source: _cr10143 - 12.      The authorities recognize that strengthening public debt management is key to*

### 30.      The Angolan authorities have, to date, shown a firm commitment to the program as

### _cr10143 - 30.      The Angolan authorities have, to date, shown a firm commitment to the program as

### Program stance and staff recommendation
- The Angolan authorities have, to date, shown a firm commitment to the program as is reflected in their ambitious fiscal adjustment measures.
- Staff recommends completion of the first SBA review and supports granting of the waivers that the authorities have requested.

### Cross-country perspective (oil exporters, averages 2004–08)
- Main message: Despite rapid growth in recent years, Angola's fiscal and external positions remain vulnerable.
- Key comparative vulnerabilities highlighted:
  - Non-oil fiscal primary deficit: Angola among the highest (chart context).
  - Real GDP Growth (Annual Percent Change): Angola outpaced many peers until 2008 (chart context).
  - Inflation (Annual Percent Change): Angola's inflation was higher than other oil exporters (chart context).
  - Central Government Balance (Percent of GDP): Angola's overall fiscal balance was lower than the average (chart context).
  - Total Debt (Percent of GDP): The debt ratio was higher than average (chart context).
  - Gross Foreign Reserves (Months of Next Year's Imports): Foreign reserves were lower than in other oil exporting countries (chart context).

### Recent economic trends and projections
- Main message: Economic activity and the fiscal balance are projected to recover in 2010, after being buffeted by severe terms of trade shocks that turned the fiscal balance into deficit.
- Output and composition (selected indicators and observations):
  - Real GDP is projected to rebound in 2010, largely reflecting the recovery in oil production (chart context).
  - Sectoral shares and annual changes shown in Figure 2 (Angolan authorities).
- Fiscal outcomes and projections:
  - The fiscal balance turned into deficit in 2009, but is projected to record a small surplus in 2010 (chart context).
  - Non-oil primary fiscal balance, excluding grants (Percent of non-oil GDP): series in Table 1: -57.2-70.8-45.9-45.9-40.0-37.4-34.8-32.9-30.6.
  - Overall balance (accrual basis) (Percent of GDP): Table 1 series: 11.5 8.9 -9.1 5.2 6.5 5.3 6.6 6.0 4.0.
  - Government expenditures (percent of non-oil GDP) are shown declining in projection charts (chart context).

### Monetary and exchange rate developments
- Main message: The nominal exchange rate has depreciated and dollarization remains high. To support the exchange rate policy, the BNA has tightened liquidity conditions.
- Nominal exchange rate: Kwanza/US$ series charted January 2007–December 2009 (chart context).
- Dollarization (January 2003–December 2009): private sector FX deposits/total private sector deposits and total FX deposits/to tal deposits shown stabilizing at a high level (chart context).
- Banking liquidity: BNA tightened liquidity conditions; charts show required reserves and excess reserves (billions of kz), with pockets of excess liquidity remaining.
- Monetary outcomes:
  - Inflation has remained stable despite the exchange rate depreciation (chart context).
  - Money and credit growth moderated as the BNA tightened policy; CPI and M2 (12-month percent change) charted January 2006–January 2010 (chart context).
  - Real interest rates and policy rate increased (chart context).
  - Credit to the private sector (Percent of GDP) series (Table 3 / Figure): 2.4 4.2 5.0 5.6 5.8 5.6 8.0 11.3 13.6 23.5 21.5 (2000–2009 prel., 2010 proj. context).

### External sector, reserves, and competitiveness
- Main message: Recovery of oil prices and the exchange rate depreciation in the second half of 2009 have stabilized international reserves and set the stage for a current account reversal in 2010.
- Real effective exchange rate depreciated and net international reserves stabilized (January 2005–January 2010 chart context).
- Current account balance (Percent of GDP): projected to record a small surplus in 2010 (chart context and Table 5).
- Table 5 selected figures (millions of U.S. dollars and percent of GDP context):
  - Current account (2006–11, selected): 11,382 9,403 6,408 -3,703 2,274 2,054 (2006–2011 proj. series).
  - Exports, f.o.b. (2006–11): 31,862 44,396 63,914 38,597 50,957 57,435.
  - Crude oil exports (f.o.b.): 29,929 42,352 61,666 36,675 48,749 53,956.
  - Imports, f.o.b.: -8,778 -13,661 -20,982 -22,402 -21,035 -22,607.
  - Gross international reserves (end of period; Table 5 memorandum): 7,318 9,630 15,378 10,251 13,811 15,720 (millions of U.S. dollars).
  - Months of imports of goods and services (usable reserves): 3.3 2.7 5.4 3.2 3.7 4.2 (2006–11 series).

### Debt dynamics and sustainability
- Main message: With favorable external conditions and projected acceleration of GDP growth, external and public debt dynamics are projected to improve and debt ratios are expected to renew their downward trajectory (Figures 3 and 4; Tables 10–12).
- External debt (Table 10 / Table 12 excerpts):
  - External debt (percent of GDP, baseline series): 46.2 33.4 16.4 16.2 16.0 21.1 22.2 22.6 21.4 20.0 19.2 18.1 (2004–2015 series context).
  - External debt-to-exports ratio (percent): 66.3 42.1 22.2 21.4 21.0 38.2 36.0 37.1 38.0 38.1 37.9 38.7 (2004–2015 series context).
  - Gross external financing need (billions of U.S. dollars): 1.2 -3.0 -9.0 -5.7 -5.0 7.2 1.1 2.1 0.9 2.1 1.1 4.8 (2004–2015 series context).
- Public sector debt (Table 11 excerpts):
  - Baseline public sector debt (percent of GDP): 46.6 40.6 21.7 26.4 34.7 41.4 39.1 32.8 29.6 26.1 23.6 22.1 (2004–2015).
  - Identified debt-creating flows and automatic debt dynamics contributions are detailed in Table 11 (rows 3–11), with primary deficit and revenue/expenditure shares reported (e.g., Revenue and grants: 38.0 40.7 46.4 46.7 50.9 32.5 37.6 39.6 38.2 38.5 37.8 36.1).
- Stress tests and scenario analysis (Figures 3 and 4):
  - Bound tests presented for external and public debt include interest-rate shocks, growth shocks, current-account shocks, real depreciation shocks (one-time real depreciation of 30 percent in 2010 in some scenarios), combined shocks, and contingent-liabilities shocks.
  - Gross financing need under baseline is charted (right scales) and scenarios include historical and combined shocks.

### Key fiscal numbers (selected tables)
- Table 1 (Selected Economic and Financial Indicators, 2007–15) highlights:
  - Real GDP (selected series): 20.3 13.4 0.7 6.7 8.3 6.3 6.3 5.7 4.4 (row context).
  - GDP per capita (U.S. dollars): 3,629 5,009 4,078 4,674 5,185 5,609 6,166 6,497 6,934 (series context).
  - Consumer price index (annual average): 12.2 12.5 13.7 13.3 9.9 8.7 7.5 6.0 4.5 (series context).
  - External debt (billions of U.S. dollars): 7.4 9.6 14.9 18.5 21.5 22.7 24.0 25.0 25.9 (series context).
  - External debt-to-GDP ratio: 12.5 11.4 21.1 22.2 22.6 21.4 19.9 19.2 18.1 (series context).
- Table 2a/2b (Summary of Government Operations):
  - Revenue (billions of kwanzas, selected): 1,684.9 2,124.7 3,217.4 1,847.9 2,850.6 3,071.2 3,532.3 (2006–11 series context).
  - Expenditures (billions of kwanzas, selected): 1,146.7 1,597.3 2,653.8 2,363.4 2,737.4 2,679.0 2,949.4.
  - Overall balance (accrual basis, billions of kwanzas): 538.2 527.5 561.7 -515.5 113.3 392.2 582.9.

### Financial sector and banking soundness
- Table 6 (Banking System Financial Soundness Indicators, 2003–09) selected indicators:
  - Regulatory capital to risk-weighted assets: 18.1 19.6 19.4 18.5 21.9 19.5 22.4.
  - Foreign exchange loans to total loans: 27.8 55.7 72.7 71.4 69.9 61.9 65.3.
  - Nonperforming loans to gross loans: 9.0 8.1 6.4 4.8 2.9 2.4 2.6.
  - Credit to private sector to total credit: 92.3 94.7 89.1 92.6 91.9 89.9 90.6.
  - Liquidity (Liquid assets/total assets): 97.0 63.9 47.1 34.4 34.2 42.6 31.4.

### External financing and Fund engagement
- Table 7 (External Financing Requirements and Sources, 2009–11, Millions of U.S. dollars):
  - Gross financing requirements (2009–11 series, selected): 557 762 1044 59 (table context).
  - External current account deficit (2009–11 series, millions of U.S. dollars): -3,703 2,274 -2,054 (2009–11 context in table).
  - Available financing includes disbursements and foreign direct investment; IMF prospective SBA noted in Table 7 financing (778 710 266 under IMF: Prospective SBA, table context).
- Table 8 (Indicators of Capacity to Repay the Fund, 2009–16, Million of SDRs):
  - Disbursements and repayments schedule and outstanding use of Fund resources are provided (table context; stock figures and memorandum items).

### Policy implications and risks
- Fiscal consolidation and careful management of non-oil primary deficit remain central given high non-oil primary deficits (e.g., non-oil primary fiscal balance series).
- External vulnerability remains tied to oil sector volatility, high share of foreign-currency exposure, and contingent liabilities (scenarios in Figures 3 and 4).
- Staff supports completion of the first SBA review and granting of requested waivers to sustain program traction.

*Sources: Angolan authorities; National Bank of Angola (BNA); World Economic Outlook; International Financial Statistics; IMF staff estimates and projections (as presented in the source PDF)._

### 1.      Angola has benefited greatly from the sound economic policies that the

### _cr10143 - 1.      Angola has benefited greatly from the sound economic policies that the

### Economic outlook and program stance
- Both the oil and non-oil sectors are on the path of recovery; inflation is expected to decline further; the external current account and the fiscal balance are projected to return to small surpluses.
- Overall outlook for key macroeconomic variables is in line with the original program.
- The authorities consider that international reserves are likely to be broadly in line with the SBA’s goals, and will wait for signs in the first half of 2010 before revising program targets (except the external borrowing limit).
- Consideration will be given to converting the current SBA into a precautionary SBA in late 2010.

### Foreign exchange, monetary policy, and liquidity management
- Resumption of the foreign exchange auction has facilitated a significant and orderly exchange rate adjustment; market conditions have become more settled and international reserves are being gradually rebuilt.
- Committed measures to support tight monetary policy and normalize the FX market:
  - Revise the reserves requirement regulation to remove the option for arbitrage against the Kwanza; government securities previously accepted to meet reserve requirements will be removed under the new norm, with complementary measures to soften the impact on banks’ liquidity.
  - If needed, the treasury will issue competitively priced government paper at the long end of the yield curve to give space to the BNA to use its short-term securities for liquidity management.
  - Treasury and BNA will regularly discuss government financing needs, timing, and fiscal–monetary coordination to keep systemic liquidity stable.
  - Introduce tighter regulation of net open position to limit banks’ exposure to exchange risk and speculation and revise capital requirement regulation on foreign currency loans; BNA requests IMF technical assistance in liquidity management.
  - Improve the functioning of the foreign exchange auction:
    - Publish a circular on BNA’s website clarifying auction parameters.
    - Auction bid selection criterion: price proposed by market makers, starting with the best price offered, while using sales and purchases of foreign exchange to avoid excessive volatility taking into account the program’s NIR floor.
    - The auction will be the only mechanism for purchase and sale of foreign exchange.
    - The 4 percent limit on the maximum spread above the reference rate for transactions by banks with customers will be increased to 6 percent initially with the aim of phasing it out by September 2010.

### External borrowing, debt management, and investment needs
- Rationale for greater flexibility in external borrowing: immense reconstruction needs and low debt level; a large part of budgeted capital spending is associated with external financing for basic infrastructure.
- Government needs to contract $6 billion projects-related credit lines in 2010; significantly lower amounts envisaged for future years.
- Authorities accept the new debt ceiling of $6 billion but request it be kept under constant review given development program needs, oil price fluctuations, and external financing variations.
- As part of reporting, authorities will report outstanding stock of undisbursed nonconcessional debt contracted.
- Debt-management capacity strengthening measures (timing and actions):
  - Cabinet to endorse by end-September 2010 a package including:
    - Developing capabilities of the debt management unit at the Ministry of Finance.
    - Providing the unit with clear channels of communication and independent access and reporting lines to the economic ministers.
    - Developing a clear medium-term debt strategy (with technical assistance from Bank-Fund experts and the resident advisor from the U.S. Treasury).
    - Establishing a project appraisal framework at the Ministry of Planning by September 2010.
  - Submit the first project assessment report by December 2010.
  - By end-December 2010, initiate substantive reforms regarding the debt management unit and cabinet consideration/endorsement of key recommendations from forthcoming IMF technical assistance on a medium term debt strategy.

### Fiscal policy, budget execution, and arrears
- Main objective: reduce the non-oil fiscal deficit while providing adequate resources for social spending and vital infrastructure projects.
- Commitment to implement the original MEFP and additional measures to normalize FX market, strengthen debt management, improve fiscal transparency, and implement IMF safeguards recommendations.
- 2010 budget actions:
  - Initiate a revised 2010 budget with approval expected in July.
  - Revised budget will allocate funds to clear the bulk of current stock of domestic arrears which amount to about $4 ½ billion; negotiations underway to securitize some arrears.
  - Aim to phase out quasi-fiscal operations with Sonangol and gradually reduce fuel subsidies.
  - Improve targeting of the public investment program; project appraisal framework at the Ministry of Planning to be finalized soon.
  - Part of spending reductions will be reallocated to social spending.
- Arrears and related items:
  - Very modest arrears to IDA of $1.3 million (0.002 percent of GDP) have been cleared.
  - For end-March 2010 data not yet available, waivers are requested for applicability except for performance criteria related to external and domestic arrears (waivers for nonobservance requested).

### Fiscal transparency, SOEs, and audits
- Published Sonangol’s 2007 and 2008 audited financial statements, which include its quasi-fiscal operations (prior action).
- Commitments and timelines:
  - Develop an action plan to implement main recommendations in Sonangol audit reports.
  - Complete and publish the audit of Sonangol’s 2009 financial statements, including quasi-fiscal operations, by November 2010.
  - Study legal and institutional pre-conditions to assess feasibility of an action plan on implementing the IMF's Principles on Resource Revenue Transparency and communicate decision by September 2010.
  - Publish audited financial statements of BNA for 2008 (including explanatory notes and Deloitte’s signed audit opinion) on BNA’s external website (April 2010 prior action); completion and signing of audited financial statements of BNA for 2009 noted as prior action for first review.

### Safeguards, central bank governance, and data practices
- Commit to implement high-priority recommendations from the safeguards assessment, including:
  - Timely publication of audited financial statements.
  - Implementation of a new governance and control framework over management of international reserves.
  - Strengthening the central bank law.
- BNA has reconciled international reserves data between accounting and DGR as of end-December 2009, eliminating inconsistencies.
- Agreement with IMF on new usable NIR definition; confirm usable NIR at end-2009 are not encumbered even after BNA’s second tier guarantee of China and Brazil credit lines.
- Prior actions and audits required for reviews:
  - Completion of the 2009 accelerated audit and signing by the BNA is a prior action for completion of the first SBA review.
  - A special audit by end-August of the BNA’s NIR position for end-June 2010 is a prior action for completing the second SBA review.

### AML/CFT and institutional framework
- Political commitment to address AML/CFT deficiencies and engage with FATF.
- Council of Ministers approved an AML/CFT law and submitted it to the National Assembly.
- Priorities: enact AML/CFT legislation in line with international standards; implement preventive measures (including suspicious transactions reporting); create institutional framework including a Financial Intelligence Unit (FIU).

### Program monitoring, reviews, and structural benchmarks
- Program monitored through quantitative performance criteria (PC), indicative targets (IT), structural benchmarks, and quarterly reviews.
- Due to delay in completing first review, second and third reviews will be combined and take place no later than September 15, 2010.
- Selected quantitative targets (Table 1: values as stated in the Letter of Intent):
  - Usable net international reserves, floor (millions of US$): 9076; 8098; 10251; 9567; 10058; 10549; 11040.
  - Net domestic credit of the BNA, ceiling (billions of kwanzas): -311; -56; -207; -308; -304; -300; -296.
  - Net credit to the government by the banking system, ceiling (billions of kwanzas): 268; 523; 396; 268; 268; 268; 268.
  - Nonaccumulation of domestic arrears, cumulative (billions of kwanzas): 0 0 116000 0 (as presented).
  - Nonaccumulation of external arrears, cumulative (billions of US$): 0; 0; 0.00137; 0; 0; 0; 0.
  - External borrowing, cumulative, ceiling (billions of US$): 2; 0; 0; 2; 6; 6; 6.
  - Indicative target — Floor on social spending, cumulative effective January 1 (billion of kwanza): 786; 786; 600; 205; 411; 616; 821.
  - Nonoil fiscal deficit (on accrual basis), cumulative effective January 1, ceiling (billions of kwanzas): 1800; 1800; 1551; 483; 967; 1450; 1934.
- Structural benchmarks and timing (selected from Table 2):
  - Prior actions:
    - Publication of Sonangol’s 2007 and 2008 audited financial statements: April 2010.
    - Publication of audited financial statements of BNA for 2008 on BNA website: April 2010.
    - Completion of audited financial statements of BNA for 2009, with signing: April 2010.
  - Structural benchmarks (timing):
    - Amend provisioning regulation to reflect credit risk of foreign currency loans: March 2010.
    - Develop off-site supervisory tools to monitor banks’ credit exposures by currency and maturities: March 2010.
    - Cabinet approval of the tax reform strategy: June 2010.
    - Publication of quarterly budget execution reports: June 2010.
    - Reporting and publishing of major SOEs’ quasi-fiscal operations and investment activities: June 2010.
    - Establishment of the project appraisal framework: September 2010.
    - Completion of the first project assessment report: December 2010.
    - Submission to the cabinet of approval documents for the Angola Sovereign Wealth Fund: June 2010.
    - Cabinet approval of main recommendations of IMF technical assistance on medium term debt strategy: December 2010.
    - Publication of the audit of Sonangol’s 2009 financial statements: November 2010.
  - Safeguards and governance benchmarks (selected):
    - Completion of an external audit on BNA by an international audit firm to confirm foreign assets and accuracy of NIR data reported to Fund staff (scope per ToR agreed with Fund staff): August 2010.
    - Appointment of an investment committee by the BNA Board to meet at least monthly: May 2010.
    - Formalization of investment guidelines for foreign reserves by BNA Board: July 2010.
    - Issuance of semiannual reports by the Internal Audit Office on compliance with reserve investment guidelines: September 2010.
    - Appointment of consultants to build Internal Audit Office capacity for a minimum period of two years: June 2010.
    - Reconstituting the Audit Board and adopting a Charter: June 2010.

*March 2010*

### 1.      The Central Government will observe a ceiling on its Overall Non-Oil Primary Deficit

### _cr10143 - 1.      The Central Government will observe a ceiling on its Overall Non-Oil Primary Deficit

### Overall Non-Oil Primary Deficit on an Accrual Basis
- Definition:
  - Cumulative balance since the start of the calendar year of Central Government revenues, except oil-related, and expenditures of the Central Government, except interest payments.
  - Measured on an accrual basis; does not include accumulation or clearance of arrears.
  - Observance of this ceiling is an indicative target.
- Adjustors:
  - Ceiling adjusted downward by:
    - The donor-financed expenditures in excess of the program assumptions.
  - Ceiling adjusted upward by:
    - The shortfall in donor-financed expenditures relative to program assumptions.

### Data reporting requirements for the deficit
- Frequency and deadline:
  - Data compiled by the Treasury and provided on a quarterly basis, submitted no later than eight weeks after the end of each reporting period.
- Required data elements:
  - Flows of:
    - (i) government revenue by category (including oil revenues received by the treasury);
    - (ii) government expenditure, including primary current expenditure, domestic and external interest payments, and capital expenditure, of all donor-financed expenditures and resulting from agreements with the Paris Club;
    - (iii) the gross clearance and gross accumulation of domestic and external arrears;
    - (iv) external loan receipts and principal payments;
    - (v) bank and nonbank financing, discriminating the domestic assets from liabilities;
    - (vi) debt cancellation and debt swap operations;
    - (vii) any other revenue, expenditure, or financing not included above.
  - Stocks of public domestic debt and external debt.
  - The monthly debt service projected for the next 12-months and annual debt service for the outer years.
- Valuation note:
  - For program purposes, net international reserves and the adjustors are valued at the end-December 2009 prevailing exchanges rates (the “program exchange rates”).

### Ceiling on Net Domestic Credit (NDC) by the Central Bank
- Definition:
  - NDC defined as the cumulative change, from the beginning of calendar-year, of the stocks of reserve money minus net foreign assets and other assets (net), evaluated at end-of-period exchange rates.
  - Reserve money comprises bank reserves, cash in circulation, and deposits of the monetary institutions as well as BNA securities outstanding.
  - Observance of this ceiling is a performance criterion.
- Adjustors:
  - Ceiling adjusted upward by:
    - The shortfall in oil revenues received by the Treasury relative to program assumptions.
    - The external debt service by the central government in excess of program assumptions.
    - The shortfall of nonproject medium and long-term central government external borrowing relative to program assumptions.
  - Ceiling adjusted downward by:
    - The oil revenues received by the Treasury in excess of the program assumptions.
    - The shortfall in external debt service by the central government relative to program assumptions.
    - The nonproject medium and long-term central government external borrowing in excess of program assumptions.
- Data reporting:
  - Monthly balance sheets of the central bank and the consolidated commercial banks transmitted monthly, with a maximum delay of three weeks.

### Ceiling on Net Credit to the Central Government by the Banking System (NCG)
- Definition:
  - NCG defined as the overall position of the main central government institutions vis-à-vis the banking system: stock of all outstanding claims on the central government (loans, advances and arrears), and all other government debt instruments held by the BNA and commercial banks less all deposits held by the central government with the BNA and with commercial banks.
  - Observance of this ceiling is a performance criterion.
- Adjustors (for calculating the adjustors, flows valued at current exchange rates):
  - Ceiling adjusted upward by:
    - The shortfall in oil revenues received by the Treasury relative to program assumptions.
    - The external debt service by the central government in excess of program assumptions.
    - The shortfall of nonproject medium and long-term central government external borrowing relative to program assumptions.
  - Ceiling adjusted downward by:
    - The oil revenues received by the Treasury in excess of the program assumptions.
    - The shortfall in external debt service by the central government relative to program assumptions.
    - The nonproject medium and long-term central government external borrowing in excess of program assumptions.
- Data reporting:
  - Data compiled by the Ministry of Finance and Public Administration provided quarterly, submitted no later than six weeks after the end of each quarter, including:
    - (i) government domestic revenue by category;
    - (ii) external budget support grants;
    - (iii) government expenditure, including primary current expenditure, domestic and external interest payments, and capital expenditure, including domestically and budget support financed capital expenditure and estimates of externally project financed capital expenditure;
    - (iv) the gross payment and gross accumulation of domestic accounts payable;
    - (v) the gross payment and gross accumulation of domestic payments arrears;
    - (vi) external loan receipts and principal payments;
    - (vii) external arrears payments and accumulation;
    - (viii) bank and nonbank financing;
    - (ix) privatization and land sale receipts;
    - (x) any other revenue, expenditure, or financing not included above.
- Clarification:
  - Privatization and land proceeds defined to include all monies received by the government from sale or concessioning of a public company, organization, or facility to private entities, sale of government land and liquidation of a public company, less restructuring costs.

### Floor on Net International Reserves (NIR) of the Central Bank
- Definition:
  - NIR of the National Bank of Angola (BNA) = dollar value of gross foreign assets of the BNA minus gross foreign liabilities of the BNA with maturity of less than one year and all of Angola’s credit outstanding from the Fund.
  - Nondollar denominated foreign assets and liabilities converted into dollars at the program exchange rates.
  - Data provided by the BNA to the Fund with a lag of not more than 1 week past the test date.
- Gross foreign assets:
  - Defined as readily available claims on nonresidents denominated in foreign convertible currencies; include monetary gold, SDRs, foreign currency cash, foreign currency securities, deposits abroad, and the country's reserve position at the Fund.
  - Exclusions: assets pledged, collateralized, or otherwise encumbered; claims on residents; claims in foreign exchange arising from derivatives vis-à-vis domestic currency; precious metals other than gold; assets in nonconvertible currencies; illiquid assets.
  - As of December 31, 2009, foreign reserve assets thus defined amounted to US$ 10.888 billion.
- Gross foreign liabilities:
  - Defined as all short-term foreign exchange liabilities of the BNA to nonresidents, including commitments to sell foreign exchange arising from derivatives and all credit outstanding from the Fund.
  - As of December 31, 2009, reserve liabilities thus defined amounted to US$ 0.365 million.
- Adjustors:
  - Floor on NIR adjusted upward by:
    - The oil revenues received by the Treasury in excess of the program assumptions.
    - The shortfall in external debt service by the central government relative to program assumptions.
    - The nonproject medium and long-term central government external borrowing in excess of program assumptions.
  - Floor on NIR adjusted downward by:
    - The shortfall in oil revenues by the Treasury relative to program assumptions.
    - The external debt service by the central government in excess of program assumptions.
    - The shortfall of nonproject medium and long-term central government external borrowing relative to program assumptions.
  - Adjustors applied only to the extent that the floor on the stock of NIR remains at or above US$6 billion.
- Data reporting:
  - A table prepared by the central bank transmitted weekly, with a maximum delay of one week, with:
    - Daily values of the stock of NIR and decomposition of daily variation into foreign exchange sales to, and purchases from, the government, banks, nonbanks, and SDR purchases from the IMF, interest accrual, and valuation changes.
    - Indication of any off-balance sheet position denominated or payable in foreign currency by the central bank.
  - Data on exports and imports, including volume and prices compiled by the Customs and central bank, transmitted quarterly within six weeks after the end of each quarter.
  - A preliminary quarterly balance of payments (including nonproject medium and long-term central government external borrowing), compiled by the central bank, forwarded within six weeks after the end of each quarter.

### Ceiling on External Debt Contracted or Guaranteed by the Central Government
- Definition and scope:
  - Debt definition for program purposes per Executive Board Decision No. 12274, Point 9, as revised on August 31, 2009 (Decision No. 14416-(09/91)).
  - Ceiling applies to debt and commitments contracted or guaranteed for which value has not yet been received; includes private debt with official guarantees that constitute contingent liabilities of the public sector.
  - Sonangol and other SOEs will not contract debt on behalf of the central government; Sonangol excluded because it borrows without a government guarantee.
  - For program purposes, debt in currencies other than the U.S. dollar converted into U.S. dollars at program exchanges.
- Exclusions:
  - (i) the use of Fund resources;
  - (ii) debts incurred to restructure, refinance, or prepay existing debt (further specified in Table 1 of the Memorandum of Economic and Financial Policies).
- Guarantee definition:
  - Guarantee arises from any explicit legal obligation of the public sector to service a loan in the event of nonpayment by the recipient, or indirectly through any other obligation of the public sector to finance partially or in full any shortfall incurred by the loan recipient.
- Data reporting:
  - Government will consult with Fund staff before assuming any liabilities when uncertain if instrument falls under the performance criterion.
  - A debt-by-debt accounting of all new debt contracted or guaranteed by the central government, including the original debt documentation, details on debt service obligations, and all relevant supporting materials, transmitted within six weeks of the end of each quarter.
  - Data on outstanding stock of undisbursed nonconcessional debt and outstanding stock of unused credit lines from framework agreements reported to Fund staff at the end of each quarter.
  - During budget preparation, full breakdown of projected disbursements for the budget from old project debt contracts and new project debt contracts provided to Fund staff.

### Nonaccumulation of Domestic Payments Arrears
- Definition:
  - Central Government may not accumulate additional domestic payments arrears. This is a performance criterion.
  - Domestic payment obligation deemed in arrears if not paid within the due date specified by the budget law or contractually agreed; after rescheduling by agreement with the creditor, obligation rescheduled is not considered in arrears.
- Data reporting:
  - Treasury will submit quarterly a detailed table of the stock of domestic payments arrears, including accumulation, clearance, rescheduling and write-off during the quarter.
  - Data provided within six weeks after the end of the quarter.

### Nonaccumulation of External Payments Arrears
- Definition:
  - Central Government may not accumulate external payments arrears. This is a performance criterion.
  - External arrears defined as total external debt-service obligations of the government and the central bank not paid by the time due, except where creditor agreements provide for a grace period.
  - Obligations in negotiation with creditors considered arrears until an agreement is legally in effect.
- Data reporting:
  - Data on external arrears accumulation, clearance, and rescheduling transmitted weekly by the BNA at most one week after the fact.

### Floor on Central Government Social Expenditures
- Definition:
  - Floor on Central Government Social Expenditures is an indicative target.
  - Social Spending comprises spending on education, health, rural development, and social affairs, both spending for the current year and arrears repayment related to these sectors.
- Data reporting:
  - Data compiled by the Treasury and provided on a quarterly basis, submitted no later than six weeks after the end of each reporting period.

### Guidelines on Performance Criteria with Respect to Foreign Debt (Excerpt)
- Debt definition (Executive Board Decision No. 12274, as revised on August 31, 2009):
  - "Debt" understood to mean a current, i.e., not contingent, liability created under a contractual arrangement through provision of value in the form of assets (including currency) or services, requiring the obligor to make payments in the future to discharge principal and/or interest.
  - Primary forms include:
    - (i) loans (including deposits, bonds, debentures, commercial loans and buyers’ credits, repurchase agreements, official swap arrangements);
    - (ii) suppliers’ credits;
    - (iii) leases (debt equals the present value at inception of all lease payments expected during the agreement, excluding payments covering operation, repair or maintenance).
  - Arrears, penalties, and judicially awarded damages arising from failure to make payment under a contractual obligation that constitutes debt are debt.
  - Failure to make payment on an obligation not considered debt under this definition (e.g., payment on delivery) will not give rise to debt.

*Source: Excerpt from the IMF staff report memorandum (text of _cr10143 - 1. The Central Government will observe a ceiling on its Overall Non-Oil Primary Deficit).*

### ANNEX I—ANGOLA: RELATIONS WITH THE FUND

### ANNEX I—ANGOLA: RELATIONS WITH THE FUND (As of March 31, 2010)

### Membership and Quota
- Membership Status: Joined September 19, 1989; Article XIV
- General Resources Account:
  - Quota: 286.30 SDR Million (100.00 percent)
  - Fund holdings of currency: 515.49 SDR Million (180.05 percent)
- SDR Department:
  - Net cumulative allocation: 273.01 SDR Million (100.00 percent)
  - Holdings: 271.03 SDR Million (99.27 percent)

### Outstanding Purchases and Latest Financial Arrangements
- Outstanding Purchases and Loans:
  - Stand-By Arrangements: 229.04 SDR Million (80.00 percent)
- Latest Financial Arrangement:
  - Type: Stand-By
  - Date of Arrangement: Nov 23, 2009
  - Expiration Date: Feb 22, 2012
  - Amount Approved: 858.90 SDR Million
  - Amount Drawn: 229.04 SDR Million

### Projected Payments to Fund (SDR Million)
- Forthcoming:
  - 2010 Principal: 114.52
  - 2011 Principal: 114.52
  - Charges/Interest by year: 2010: 2.17; 2011: 2.89; 2012: 2.89; 2013: 2.43; 2013: 1.03
  - Total by year as presented: 2010: 2.17; 2011: 2.89; 2012: 2.89; 2013: 116.95; 2013: 115.55

### HIPC and Safeguards
- Implementation of HIPC Initiative: Not applicable
- Safeguards Assessments:
  - First-time safeguards assessment of the National Bank of Angola (BNA) findings:
    - BNA is subject to annual external audits by a reputable audit firm and has taken steps to address the audit qualifications.
    - Weak governance and transparency practices identified, including lack of timely publication of annual financial statements.
    - Recommendations made to:
      - Enhance the legal framework and independence of the central bank.
      - Strengthen the control framework in reserves management and internal audit areas.

### Exchange Arrangements
- De facto exchange arrangement classification: “other managed” since October 2009.
- Operational details:
  - Banco Nacional de Angola (BNA) intervenes actively to sterilize foreign currency inflows from taxes paid by oil companies.
  - Auctions were temporarily suspended from April 20 to October 1, 2009, leading to the establishment of a formal peg.
  - Since resumption of auctions, the Kwanza has depreciated significantly; authorities maintain strong control on the exchange rate as the main anchor for monetary policy.
  - BNA publishes a daily reference rate computed as the transaction-weighted average of the previous day’s rates negotiated with commercial banks.
  - Banks and exchange bureaus may deal among themselves and with their customers at freely negotiated rates.
- Transitional arrangements and remaining measures/restrictions:
  - Angola avails itself of transitional arrangements under Article XIV, Section 2.
  - Maintains limits on the availability of foreign exchange for invisible transactions (travel, medical, educational allowances).
  - Maintains limits on unrequited transfers to foreign-based individuals and institutions.
  - Exchange restrictions:
    - Limits on remittances of dividends and profits from foreign investments that do not exceed US$100,000.
    - Discriminatory application of the 0.015 percent stamp tax on foreign exchange operations subject to approval under Article VIII, Section 2(a).
  - Multiple currency practices:
    - Arising from the Dutch foreign exchange auction.
    - Discriminatory application of the 0.015 percent stamp tax on foreign exchange operations subject to approval under Article VIII, Section 3.

### Article IV and Resident Representation
- Article IV Consultation: Angola is on the standard 12-month cycle.
- Resident Representative: No

### Technical Assistance (Selected by Department and Year)
- Monetary and Capital Markets (MCM):
  - Banking supervision, resident medium-term advisors: 1996–2000
  - Monetary policy, short-term visits: 1997–99
  - Foreign exchange operations: 1999; 1999–2000
  - Central bank organization: 1999
  - Inspection/technical assistance assessment: 1999
  - Monetary operations: 1999; 2000; 2001
  - Open market and interbank operations: 1999–2000
  - Monetary policy and foreign exchange market operations: 2001
  - Monetary policy, money market operations, and banking supervision: 2002
  - Strengthening monetary and supervisory frameworks and reinforcing the disinflation strategy: 2003
  - Monetary operations and liquidity management, foreign exchange operations, and banking supervision: 2004–06
  - Foreign exchange auction system: 2009
- Strategy, Policy, & Review (SPR) with DRI and MEFMI:
  - Debt Strategy National Workshop: 2000
  - Diagnosis of debt-data management: 2003
- Fiscal Affairs Department (FAD) short-term visits:
  - Tax and customs administration: 2001
  - Public expenditure management: 2003; follow-up 2003
  - Tax administration workshop: 2005
  - Fiscal ROSC mission: 2006
- Statistics Department (STA) short-term visits and GDDS project:
  - Government finance statistics: 2000; 2003; 2006
  - Balance of payments statistics: 2001; 2002; 2003; 2004–05; 2009
  - Money and banking statistics: 2002
  - National accounts statistics: 2003; 2004–05
  - Consumer price index statistics: 2004
- Legal Department (LEG): Financial institution legislation 2004
- International Capital Markets Department (ICM): Technical assistance on bond issuance 2004
- LEG/MCM: Review of exchange arrangements and restrictions 2006/2007

### Statistical Issues — Key Findings and Gaps
- General:
  - Data provision has shortcomings but is broadly adequate for surveillance.
  - Major concerns: data quality and timeliness. Authorities committed to using the GDDS to improve the statistical system; metadata need updating.
- Publications and timeliness:
  - Only regular statistical publication: quarterly BNA statistical bulletin, often with considerable delay.
  - BNA website and government website (www.minfin.gv.ao) used for postings; government revenue (including oil) postings not as timely as GDDS recommends.
  - Government accounts released when annual budget is approved.
- National accounts and price statistics:
  - Deficiencies: breaks in time series, inter-sectoral inconsistencies.
  - Official GDP estimates: produced annually and generally only by sector, no disaggregation by industry, no estimates by expenditure.
  - Annual GDP at constant prices estimated at previous-year prices using tentative deflators.
  - Sectoral data use indicators with weights based on incomplete surveys conducted in 2001 or earlier.
  - Lack of provincial statistical offices limits coverage.
  - CPI based on Luanda basket; price collection extended to five more provinces; unofficial quarterly index from 2005; a September 2006 STA CPI Mission did not regard expanded data as sufficiently reliable for publication.
  - CPI weights revised January 2002 based on 2001 household survey; CPI data produced monthly with a lag of two weeks.
  - No wholesale or producer price indices.
- Monetary and financial statistics:
  - Depository corporation survey and central bank balance sheet data are timely but based on old report forms.
  - Deficiencies in reporting of foreign exchange reserves; concerns about quality/timeliness of some commercial bank reports.
  - March 2006 STA mission assisted BNA to start compilation of monthly monetary statistics using SRFs and made recommendations (classification of holdings, valuation of foreign currency accounts, accounting procedures in state-owned banks, strengthen internal controls).
  - Implementation incomplete; progress in preparing new plan of accounts for other depository corporations expected to be implemented in 2009.
  - May 2007 follow-up mission assisted finalization of SRFs for central bank; further work needed for SRF for other depository corporations; linkage between SRFs and new accounting data to derive integrated monetary database.
- Government finance statistics:
  - New chart of accounts not fully operational.
  - Since 2004, budget execution data include Sonangol’s quasi-fiscal expenditures and liability assessments for oil revenue due to government; data are often late and not subject to effective scrutiny.
  - Capital expenditure data largely estimated; classification system limits analytic insight; coverage incomplete.
  - SIGFE management information system data limited in coverage and reliability.
  - Monthly government accounts rely heavily on budget-based estimates rather than actual execution figures.
  - MoF does not report government finance data for publication in the GFS Yearbook or in International Financial Statistics.
  - May 2006 TA mission found partial implementation of earlier recommendations; fiscal programming unit established in MoF (with USAID support) to systematize collection/analysis and consistency checks; unit has substantial training needs.
- External sector statistics:
  - Balance of payments and international investment position compiled following the fifth edition of the IMF’s Balance of Payments Manual; compiled and disseminated annually with a nine-month lag.
  - October–November 2007 TA mission noted progress: development of data collection instruments, implementation of ITRS, corporate surveys effective in some sectors (oil, diamond mining, insurance) but ineffective in others due to weak follow-up and penalties for non-reporting.
  - National Customs Directorate improved coverage of foreign trade operations, increasing coverage/detail in the balance of payments.
  - Improvements in reporting of public external debt transactions, although interest data missing.
  - Continued improvement depends on:
    - Increased survey response rate and administrative measures to curb noncompliance.
    - Implementation of tools/mechanisms for organization, analysis, and validation of ITRS data.
    - Compliance with agreements for data access from National Statistics Institute and MoF.
    - Integration of more data sources.

### Table of Common Indicators Required for Surveillance (As of April 26, 2010) — Selected Entries
- Exchange rates: Date of Latest Observation Apr. 2010; Date Received Apr. 2010; Data Frequency D; Reporting Frequency D; Publication Frequency D
- International reserve assets and reserve liabilities of the monetary authorities: Date of Latest Observation Mar. 2010; Date Received Apr. 2010; Data Frequency W; Reporting Frequency M; Publication Frequency M
- Reserve/base money: Mar. 2010; Apr. 2010; W; M; M
- Broad money: Feb. 2010; Mar. 2010; M; M; M
- Central Bank balance sheet: Mar. 2010; Apr. 2010; W; M; M
- Consolidated balance sheet of the banking system: Feb. 2010; Mar. 2010; M; M; M
- Interest rates: Feb. 2010; Mar. 2010; M; M; M
- Consumer Price Index: Mar. 2010; Apr. 2010; M; M; M
- Revenue, expenditure, balance and composition of financing – General Government: Dec. 2009; Feb. 2010; Q; Q; Q
- Revenue, expenditure, balance and composition of financing – Central Government: Dec. 2009; Feb. 2010; Q; Q; Q
- Central Government and Central Government-guaranteed debt: Dec. 2009; Feb. 2010; Q; Q; Q
- External current account balance: 2008; Apr. 2009; A; A; A
- Exports and imports of goods and services: 2008; Apr. 2009; A; A; A
- GDP/GNP: 2008; Apr. 2009; A; A; A
- Gross external debt: Dec. 2009; Feb. 2010; M; Q; M
- International Investment Position: 2008; Feb. 2009; A; I; A

### Statement by the Staff Representative (May 10, 2010) — Program Update
- Prior Actions (as listed in the staff report, page 42):
  - Audited financial statements for Sonangol (including quasi-fiscal operations) for 2007 and 2008 were published on Friday, April 30, 2010 on Sonangol’s website.
  - Audited financial statements of the National Bank of Angola (BNA) for 2008 were published on Wednesday, April 28, 2010 on the BNA’s external website; accompanied by the external auditor’s signed audit opinion.
  - Indications that the audit of the BNA’s financial statements for 2009 is substantially completed; staff to confirm status and results in dialogue with external auditors on Friday, May 7.
- Program Performance:
  - Preliminary BNA balance sheet data as of end-March indicate gradual improvement in foreign reserve position, with net international reserves now on the order of USD 11 billion.
  - Final data on program-related adjusters not yet available; staff cannot confirm end-March program target has been met, but all indications point to that conclusion; other elements of the monetary program appear on track.
  - Cumulative depreciation of the kwanza since October 2009: about 20 percent.
  - The end-March inflation rate was [text ends in source].

*Annex I—Angola: Relations with the Fund (As of March 31, 2010).*

### 13.8 percent on a twelve-month basis, essentially unchanged from the previous month and in

### Press Release No. 10/190 — IMF Executive Board Completes First Review Under Stand-by Arrangement with Angola and Approves US$171.5 Million Disbursement

### Disbursement and program status
- The Executive Board approved the first review of Angola’s performance under the Stand-by Arrangement (SBA).
- Approved disbursement: SDR 114.52 million (about US$171.5 million).
- Total disbursements under the arrangement following approval: SDR 343.56 million (US$514.5 million).
- The 27-month SBA for SDR 858.9 million (about US$1.3 billion) with Angola was approved on November 23, 2009 (Press Release No. 09/425).

### Waivers and performance criteria
- Waivers granted for:
  - The continuous performance criterion on the non-accumulation of new external payment arrears.
  - The end-March 2010 quantitative performance criterion on the non-accumulation of new domestic payments arrears.
- Program status: all but two end-December 2009 performance criteria were met, per the authorities’ statement.

### Executive Board assessment and guidance
- Mr. Murilo Portugal, Deputy Managing Director and Acting Chair, highlighted:
  - Commendation for authorities’ implementation of a comprehensive reform program addressing macroeconomic imbalances.
  - Renewal of foreign exchange auctions facilitated an orderly and significant exchange rate adjustment; further improvements to the auction system are planned.
  - Elimination of remaining administrative controls is a priority, conditional on supportive reforms to improve liquidity management.
  - Increase of the program’s external borrowing ceiling is feasible given large infrastructure needs and low debt burden, but projects must be soundly appraised and well implemented and resulting debt effectively managed.
  - Commitments to strengthen public debt management and establish a project appraisal framework are welcome.
  - Fiscal policy should remain sufficiently tight to strengthen the external position and ensure fiscal sustainability.
  - Authorities’ intention to lay out a concrete plan to clear the stock of domestic arrears is welcome.
  - Measures by the Banco Nacional de Angola (BNA) to publish audited financial statements and strengthen internal controls and internal audit are important for BNA modernization.
  - Existing and proposed policy measures give confidence that program objectives and targets can be realized.

### Authorities’ outlook and reform priorities (Statement by Samuel Itam)
- Objectives and confidence:
  - Authorities expect reforms under the SBA to generate positive impacts on fiscal and external accounts, help face the crisis from a position of strength, and create the basis for medium- to long-term sustained economic growth.
  - Ultimate goal: improve living conditions of the Angolan people.
- Key reform areas to be pursued:
  - Enhancing public finance management.
  - Strengthening debt management capacity.
  - Adopting structural measures to improve the growth potential of the non-oil sector.
  - Strengthening the legal and institutional framework for effective public administration and inter-generational use of natural resource endowments.

### Macroeconomic outlook and growth drivers
- 2009 saw a slowdown in real GDP growth due mainly to the decline in oil output.
- Expectation of a strong rebound in 2010 as oil price and output recover.
- During the SBA period, important growth drivers will include:
  - Steady increase in oil production.
  - Rise in agricultural output from projects to increase cereal and cash crops and production of biofuel.
  - Demand-side drivers: government expenditure and private consumption.
- Policy challenge: maintain balanced growth between capital-intensive/import-dependent activities and sectors with substantial linkages to the rest of the economy to develop a dynamic private sector.
- Economic diversification is vital for long-term growth and to address future waning of oil production.
- Demographics: youth structure of the population supports potential maintenance of relatively high growth.

### Fiscal policy and domestic arrears
- 2009: characterized by a tight fiscal stance but government accumulated domestic arrears due to internal financing constraints.
- Fiscal position projected to improve in 2010 as oil revenue recovers from rising output and higher international prices.
- Budget execution will be assessed frequently to avoid vulnerabilities and slippages.
- Ongoing and planned fiscal reforms are specified in the Letter of Intent (prior actions and structural benchmarks) to limit fiscal risks and improve transparency and public financial management.
- Cabinet actions on domestic arrears:
  - Authorities estimate the zero level performance criterion for end-March 2010 was exceeded.
  - Approved framework to address arrears, dividing creditors into three groups:
    - Small creditors: government will pay all outstanding debt at once.
    - Medium creditors: government will pay 50 percent as soon as possible and the remainder later.
    - Large creditors: 30 percent will be paid as soon as possible and the remainder will be rescheduled.
  - Implementation aims to avoid disturbing the financial sector and to guarantee appropriate management of fiscal and monetary policies.
- Recent Cabinet discussion of two draft legislations:
  - General framework for the budget.
  - Public sector procurement for public works and acquisition of goods and services.
  - These legislations are intended to set the ground for best practices.

### Monetary and exchange rate policies
- Inflation in 2009:
  - Averaged 13.7 percent.
  - 14 percent end-December.
  - Drivers: food prices in the second half of the year and supply bottlenecks in the import system.
- Depreciation of the Kwanza since the second half of 2009 revived inflationary pressures.
- Policy response for 2010:
  - Proposed tight fiscal and monetary policies to help keep prices under control.
  - Banco Nacional de Angola (BNA) will continue using a mix of measures to address money supply, including appropriate reserve requirements and use of Treasury securities in open market operations.
  - BNA measures to publish audited financial statements and strengthen internal controls and internal audit form part of modernization strategy.

### Financial sector policies and capacity building
- Maintaining confidence in the financial system is a priority.
- Challenges: extensive dollarization, lack of monetary instruments, and shallow markets.
- Authorities’ planned comprehensive strategy to strengthen the financial sector includes:
  - Prudential regulations.
  - Loan classification and provisioning standards.
  - Supervision and oversight of the financial sector.
- Authorities remain vigilant about risks to banks’ credit quality from foreign currency lending and potential exchange rate volatility.
- Importance of effective coordination of monetary and fiscal policies and prudent management of foreign reserves to protect financial stability.
- Structural benchmarks for 2010 aim to preserve and strengthen the financial sector and improve supervision and compliance in line with international best practices.
- Authorities seek Fund technical assistance and cross-country experience to strengthen the financial sector and central bank governance and transparency.

### Conclusion: challenges and opportunities
- Challenges:
  - Structural dependence on oil for export earnings and government revenues.
- Opportunities:
  - Ongoing infrastructure investments that can boost long-term growth.
  - Potential investments in agriculture given favorable soil and weather.
- Authorities value continued close engagement and dialogue with the Fund to strengthen policy design, implementation, and monitoring; the SBA will further enhance this dialogue.

*Source: Press Release No. 10/190 (May 10, 2010) and Statement by Samuel Itam, Executive Director for Angola*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr10143.pdf_