Introduction

My authorities are thankful to Management and the Executive Directors for the support extended to enable Angola cope with the impact of the financial and economic crisis. They appreciated the well-focused policy advice and the fruitful discussions with staff on the developments and challenges facing the Angolan economy. They agree broadly with the staff assessment.

Program performance

Performance under the program remains on track with most of the PCs met or missed by small margins as at end of September 2011. Preliminary data for end of December 2011 demonstrates the improving performance with only two PCs missed, and with very small margins. The improved performance is due mainly to concerted efforts by the newly established interagency group to reconcile on an on-going basis the flows of oil revenues and transactions between Sonangol (the State Oil Company) and the Treasury and to eliminate the delays in its transfer to the Treasury. Notwithstanding these efforts, revenues transferred to the Treasury by Sonangol fell short, leading to a temporary, but substantial buildup of accounts receivable and inevitable slowdown in the accumulation of NIR and deposits in the banking system. The projected improvement in the Government’s net creditor position was also hampered by delays in concluding external financing arrangements for public investments and the need to provide bridge financing from domestic resources. Performance on structural benchmarks set for end 2011 was satisfactory with nearly all measures implemented.

The reasons for missing the PCs on NIR and NCG relate mainly to the oil and quasi fiscal operations between Sonangol and the Treasury. Resolving and improving these operations has taken longer than planned, but significant progress has now been made. As already indicated above, an interagency group involving the Ministries of Finance and of Petroleum and Sonangol has been established to smooth these operations. In recognition of the negative impact of these operations on fiscal management, the Government has enacted legislation that eliminates Sonangol’s quasi fiscal activities and enhances oil sector information and transparency. In addition, the Government has prepared a reconciliation report as at end of 2011 and is looking to also extend the reconciliation to 2007-2010, while also consider conducting monthly reconciliations going forward. On account of these concerted efforts and the corrective measures taken, my authorities request waivers for the missed Performance Criteria.

Economic outlook and policies

The key objectives under the program have been achieved, but the authorities will continue to refine and implement their macroeconomic policy framework. The fiscal position has substantially improved; domestic arrears accumulated in 2008-2009 have been cleared; the inflation rate is declining steadily; and the exchange rate has stabilized, allowing a sizeable build-up in international reserves. Priority spending, which remains above program target, continues to focus on the vulnerable segment of the population and the needed investment in economic and social infrastructure.

Going forward, real growth will to accelerate in 2012 and remain well above the 2011 level, driven mainly by strong public and private sector demand, increasing oil production and commencement of the liquefied natural gas (LNG) production. Non-oil non-mineral growth will also accelerate owing largely to positive developments in the agriculture, construction, energy, trade, manufacturing and financial services sectors.

Fiscal sector developments

My authorities remain committed to implementing their fiscal reform program, and as such intend to continue to seek TA from Afritac South to develop a medium-term fiscal framework as a first step in the process of developing a multiyear budget and medium term expenditure framework. Also, as already indicated actions have been taken to improve the oil revenue transfer mechanism between government and Sonangol and to increase transparency and accountability of the oil revenue operations, aided by the inter-agency Group. During the mission, the authorities presented the first ever reconciliation report which helped staff understand the genesis of the current quasi-fiscal operations as a tool to make up for the deficit in Government’s institutional capacity to address the country’s infrastructure and social needs.

The 2012 Budget

The 2012 budget has been approved by the Parliament on the basis of a conservative oil price of $77 per barrel against the projected market price of about $100 per barrel (Brent Crude Oil), providing the necessary caution against oil revenue volatility. That said, the authorities are committed to maintain current expenditure unchanged as a share of GDP, while improving the non-oil tax revenue collection and continuing to reduce the non-oil primary deficit.

In December 2011, Presidential Decree No 320/11 was approved providing directives to phase out Sonangol’s quasi-fiscal expenditure by the year-end, except for two specific categories, for which Sonangol, as concessionaire, will be allowed to retain responsibility for (i) the provision of fuel subsidies; and (ii) the provisioning of escrow accounts for the service of external credit lines.

Monetary and exchange rate policies

Monetary policy aims at targeting inflation and bringing it to single digits in the short term, while boosting international reserves and controlling liquidity. Accordingly, the Angolan Central Bank (BNA) recently approved a new monetary policy framework building on the recommendations of Fund TA which led to the establishment of a monetary policy committee (MPC). The MPC is leading the implementation of measures contained in the newly approved law on the oil sector foreign exchange regime. Furthermore, prudential regulation in short term credit denominated in foreign currency has also been implemented, underlining the Bank’s commitment to implement the necessary instruments to better manage liquidity and fine-tune interbank activity. BNA also introduced the concept of reference interest rate, based on the new LUIBOR rate (Luanda Interbank Offered Rate) to orient BNA’s monetary stance. The central bank will implement and monitor all these initiatives, counting on Fund TA.

Structural reforms and future relations with the Fund

Building on the excellent performance in structural measures, my authorities will take further steps aimed at enhancing their structural reform agenda. They are committed to improve public debt management, and to continue implementing the tax reform road map that will improve the collection of non-oil taxes and customs revenue. With support from the African Development Bank, they will continue efforts to improve public investment programs and enhance the quality and cost-effectiveness in capital spending through improvements in project selection, implementation and monitoring.

Reducing the cost of doing business is seen as critical to my authorities goal of economic diversification. In this context, they are taking concerted measures to streamline legislation, strengthen the judicial system and simplify tax compliance. The creation of the Guichet Unico de Empresas (GUE) is an important step to reduce the delays in the registration of new private companies.

Conclusion

My authorities would like to reiterate their commitment to good macroeconomic policies and completion of the reform program initiated under the now-about-to-end SBA. They value the Fund advice and will continue to seek Fund TA in their policy implementation. They request Directors’ support for the completion of the sixth review under the SBA.