Context: (extracted from: Angola - Fourth Review Under the Stand-By Arrangement, Request for Waivers of Nonobservance of Performance Criteria, Request for Waivers of Applicability of Performance Criteria, and Request for Modification of Performance Criteria): A 27-month Stand-by Arrangement for Angola in the amount of SDR 858.9 million (300 percent of quota) was approved in November 2009. Discussions for the fourth review of the SBA-supported program took place in Luanda during November 1-10 and by videoconference in the ensuing weeks. The program is broadly on track, although some program limits have been missed due in part to a large arrears clearance operation and in part to technical features. Staff recommends completion of the fourth review and supportsthe relevant waivers.
* The authorities’ program has achieved significant success in restoring macroeconomic stability: the fiscal position has strengthened, foreign reserves are being re-built, and the government has begun to clear sizeable domestic payments arrears. Key to the adjustment has been sharp fiscal retrenchment during 2009 and 2010, along with the gradual recovery of oil prices. Sizeable challenges lie ahead: raising the level of public investment, hit hard by fiscal restraint; clearing all domestic payments arrears to regularize government’s relationship with its suppliers; boosting foreign reserves to a level that provides an adequate buffer against oil price volatility; and reducing inflation to single digits.
Key pillars of the fourth review:
* Implement the 2011 budget, which was constructed on conservative oil price assumptions and balances the need to increase capital outlays with the need to build foreign reserves, while making available financing to clear outstanding arrears. There is significant upside potential for oil revenues and hence the fiscal surplus.
* Complete the scheduled resolution of the remainder of the 2008-09 arrears by March 2011, while putting in place new measures to link spending commitments to available financial resources.
* Focus monetary policy on reining in inflation while providing support to the kwanza; and operate the foreign exchange market within a framework of well-defined and transparent rules.
* Push forward with key financial management reforms, including the development of an appropriate mediumterm debt strategy and a strong project appraisal and monitoring capacity. Press ahead with the comprehensive overhaul of the tax system that has now commenced. And expand the accountability of public sector entities through the publication of regular budget execution reports and of independent external audits of strategic public enterprises.
B. Dear Mr. Strauss-Kahn: ( Extracted from: Angola: Letter of Intent, Memorandum of Economic and Financial Policies, and Technical Memorandum of Understanding)
1. The Angolan government continues to make good progress in achieving key objectives under its stabilization program, which is being supported by the IMF under a Stand-By Arrangement (SBA). The economy is gradually recovering from the disruption caused by the collapse of world oil prices: foreign reserves are being rebuilt, the fiscal position has improved sharply, and the exchange market has stabilized. The outlook for 2011 is generally favorable, although we are well aware of the uncertainties surrounding the global economic outlook and the corresponding need to maintain a cautious macroeconomic policy stance.
2. Three of the quantitative performance criteria for end-September 2010 were missed, in part for technical reasons and in part because of the impact of our third quarter arrears clearance operation on the government cash position-an event that had not been allowed for when the original quantitative targets were set:
· The target of accumulating no new arrears (as defined in relation to the contracts with our suppliers, rather than budget law) proved to be overly ambitious, given the mechanics of our government payments system and the information it generates: we have moved to clear the bulk of the intra-year accumulation of accounts payable by end-December, have sharply reduced the stock of 2008-09 arrears via a large arrears clearance operation, and are putting in place procedures for 2011 that will tightly limit any scope for new arrears. We are requesting a change in the technical specification of this performance criterion to align the measurement of performance to the build-up of accounts payable, as captured by our existing information systems.
· The ceiling on net domestic credit extended by the BNA was missed by some Kz 160 billion, in large part reflecting the impact of the large arrears clearance operation on government deposits but also the settlement (rather than rolling over) of government domestic debt; that said, the BNA expanded its liquidity absorption operations to contain the growth of base money well within program targets and we expect broad money growth in 2010 to be below the original program target. The non-observance of this performance criterion in part reflected a flawed specification of the target variable; we are requesting a change in the technical specification of this performance criterion to make full allowance for the effects of BNA sterilization operations.
· The ceiling on banking system credit to the government was missed by a modest margin, some Kz 70 billion. This nonobservance did not stem from an overly loose fiscal stance; the non-oil primary deficit (NOPD) is running well below programmed levels. Instead, the breach stemmed from the large cash payments, some Kz 227 billion, made in the third quarter to clear 2008-09 payments arrears—an important move by the government that had not been adequately allowed for when the original financial targets for the year were set.
3. Looking to the end-December performance targets, we anticipate that the performance criteria on the non-accumulation of new arrears, the net domestic credit extended by the BNA, and on banking system credit to the government are likely to have been missed. In the first two cases, the explanatory factors listed above carry through to the end of the year-although there is a reasonable chance that our efforts to clear accounts payable accumulated through end-September will result in a net decline in the stock of accounts payable over the fourth quarter (implying that the target would have been met). As to the likely nonobservance of the end-December target for banking system credit to the government, this does not reflect an overly loose fiscal stance; we expect to have achieved a full-year non-oil primary deficit (NOPD) that is some Kz 350 billion below target. Instead, nonobservance reflects unanticipated financing-side shifts, including higher-than programmed arrears clearance over the year and a sizeable shortfall in non-bank financing (a residual category), along with a significant and unintended tightening of the full-year target resulting from deviations between forecasts and outcomes of end-2009 bank balance sheets. Looking to 2011, our arrears clearance plans are fully factored into our financial program, and we expect to meet our financial targets.
4. We therefore request waivers for non-observance of these performance criteria at end-December, given the strength of program performance, the corrective measures in place to maintain tight control on spending commitments, and the explanatory factors cited above. For the end-December performance criteria on net international reserves, we request a waiver of applicability on the grounds that program performance has been strong, the relevant information is not available, and there is no clear evidence that these criteria have not been met.
5. We are committed to implementing the program described in the attached Memorandum of Economic and Financial Policies (MEFP). Our macroeconomic objectives for 2011 are to continue the process of rebuilding reserves; to gradually rein in inflation; and to raise public capital spending to address deep-rooted infrastructure requirements. Building on the progress made thus far, we plan a new set of reform measures for 2011. The specific quantitative targets and structural measures embodied in our program are summarized in Tables 1 and 2.
6. The remainder of the program will be monitored through a mix of quantitative performance criteria, indicative targets and structural benchmarks. The quantitative performance criteria on external debt contracted or guaranteed by the central government, and the non-accumulation of external arrears, will be continuous for the duration of the Stand-By Arrangement. All other performance criteria will be evaluated at end-March 2011 in the context of the 5th review to be conducted in June 2011, and at end-September 2011 in the context of the 6th review to be conducted in December 2011. Indicative targets for end- June will also be closely monitored under the program.
7. We will regularly update the IMF on economic and policy developments and will provide the data needed for adequate monitoring of the program. The government will continue its policy dialogue with the IMF and is prepared to take any further measures as appropriate to meet its program objectives. We will consult with the Fund ahead of any revisions to the measures outlined in the MEFP. To provide a clear public statement of our policy intentions, we authorize the IMF to publish this letter of intent, the attached MEFP, and the associated staff report.
* Extracted from: Angola: Letter of Intent, Memorandum of Economic and Financial Policies, and Technical Memorandum of Understanding.