L)ocunient ot'

The World Bank

F(OR OFFIC(lAI. l SE ONLY

Report No. 10804-ANG

STAFF APPRAISAL REPORT

PEOPLE'S REPUBLIC OF ANGOLA

FINANCIAL INSTITUTIONS MODERNIZATION PROJECT

August 14,1992

Industry and Energy Operations DivisionCountry Department IIIAfrica Regional Office

I his documilent has a restrictted distribution and mas bhe used hb recipients onls in the perforimiarce oftheir ofhcial duties. It% (ontentt maa not otherwise he di% loved without \Aorld Batik authoriiationi.

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CURRENCY EOUIVALENTS

Currency Unit = New kwanza (NKz)US$ I= NKz 550US$ i exchange rate!' NKz 550 (April 1992)

WEIGHTS AND MEASURES

Metric British/US Equivalent

1 meter (ni) = 328 feet1 square meter (sq. m) 10.76 square feet1 kilometer (km) = 0.62 mileI s.uare kilometer (sq. km) = 0.39 square mile

FISCAL YEAR

January 1 - December 31

ABBREVIATIONS AND ACRONYMS

AIA Association of Angolan Industries (Associac,o de Industrias Angolanas)BCI Bank of Commerce and Industry (Banco de Comercio e Industria)BNA National Bank of Angola (Banco Nacional de Angola)BPA Banco Portugues do AtilnticoBPC Bank of Savings and Credit (Banco de Poupanca e Crddito)bpd Barrels per DayCAP Agricultural and Fisheries Credit Fund (Caixa de Cr6dito Agropecuaria e Pescas)CCS Check Clearing SystemCPI Consumer Price InderDNC National Directorate c f Accounting (Direccao Nacional de Contabilidade)DNI National Directorate of Taxation (Direciao Nacional de Impostos)DOR Directorate of Organization and Informatics (Direcc,o de Organizac,o e IniformAtica)ENSA National Insurance Company (Empresa Nacional de Seguros e Reasseguros)GARE Office of Enterprise Restructuring (Gabinete de Redimensionamento Empresarial)GNP Gross National ProductIC Informatics CommitteeICB International Competitive BiddingIDA International Development AssociationIFBA National Banking Trainirig Institute (Instituto de Formaqao Bancaria de Angola)IMF International NMonetary FundISSP Information Systems Stratcgic PlanL.Cb Local Competitive BiddingNIS Management Information SystemOGE Consolidated Budget (Orcamento Geral do Estado)PCE Enterprise Accounting Plan (Plano de Contas Empresarial)PPF Project Preparation FacilitySAR Staff Appraisal ReportSEF Program of Economic and Financial Restructuring (Programa de Saneamento Econ6mico e FinanceLiSME Sniall and Medium EnterprisesSOE Statement of ExpendituresTA Technical AssistanceUAN Agostinho Neto University (Universidade Agostinho Neto)UNDP United Nations Development Progamme

I/ Applicable to its imporu and exports, official fmancial transactions and calculations of custotm duties since April, 1992. Othertransactions may be conducted througb the commercial banks at market rates, In July 1992, the prevailing market rate was abostNKz 1,800 = USS.

FOR OMCLu1 USE ONLY

STAFF APPRAIS 0L REPORT

ANGQLA

EINANCIAL INST=l JlNS MODERNIZATION PROJECT

TABLE OF CONTENTS

CREDIT AND PROJECT SUMMALY ............. .. .............

I !NTRODUCTTON .1

II. THE FINANCIAL SYSTM. . . 2A. Macro-Economic Context ........ . . .. 2

1. Background. 22. Recent Developments. 3

B. The Financial Sector.. 41. Financial Sector Strategy. 42. Recent Develcpments.53. Financial Policies. 5

C. The Banking System .................... 71. National Bank of Angola (BNA) ...................... 72. The Commercial Banks ............. . . ............. 93. The Agricultural ard Fisheries Credit Fund (CAP) .... ....... 10

D. The Insurance Subsector .............. .. .............. 10E. Legal Framework for Financial Sector Operations ............ .. 11

H. THE PROJECT ...................................... 13A. Project Objectives and Scope ........................... 13B. Rationale for IDA Involvement ......................... 13C. Project Description ................................. 14

1. Strengthening BNA ............. .. ............... 14(a) Strengthening Information Systems ................. 14(b) Improving BNA Accounting ..................... 16(c) Improving Skills . ........................... 17(d) Housing for Cornsultants ....................... 17

2. Developing Banking Infrastructure ......... .. .......... 18(a) Establishing a Check Clearing System ............... 18(b) Establishing the National Banking Training Institute (IFBA) . 19(c) Developing a Core of Financial Professionals .. . 20

This report is based on the fruWings of an apraisa mission to Angola in May 1992 tich consistd of Mes/MmnHemansi Marte (AF3lE, Tak Maager, Mission Chief); John Omva. (AFTEF, Finau ial Advisor); Eduardo Talar(ASTIF, Development Informaties Chief); Gerud Caprio (CECFP, Senior Finacnial Economist); Teresa QrG-Fons(LECAF. Senior Counsel); Roy Kaoglan (CCMRT, Principal Banking Specialist); Stephen Gau", (Financial AnalystConsult); Rodolfo Sanjujo (Architc Consultnt). Mr. Luis Derbez (AFTEF) and Mr. Caprio (CECFP) weoe leadadvisor and peer reviewer, rspectively. Ms. Mary MoGuinnew provided eorcaal upport in the preparation of thereport. Mr. Michael Sarris and Mr. Frmaisco Aguirrenacass anr the maaginS Division Chief nd thL DepartnentDirwtor, respectively, for the operaion.

This document has a restricted distribution and may be used by recipients only in the performanceOf their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

m. 1141E PROlECT (cont.) Page No.

3. Imnproving the Legal and Regulatory Environment for FinancialOperations .................................... 20(a) 'improving the Application of Banking Legislation .... .... 20(b) Developing Insurance Laws and Regulations .... ....... 22(c) Developing Accounting and Auditing .... ........... 22

4. Improving Mechanisms for Financing Private Investment ....... 23D. Project Costs ......... ........................... 24E. Project Financing ................................. 25F. Project Implementat;n . . .......... 25G. Procurement . . .26H. Disbursements .. 28I. Accounting, Auditing and Rteporting .. 29J. Project Superv.sion .. 30

iV. PROTECT BENEFITS AND RISKS .. 31A. Project Benefits .31B. Project Risks .31

V. AGREEMENTS TO BE REACHED AND RECOMMENDATIONS 33

ANNEXES

1.1 Statement of Financial Sector Reform2.1 Consumer Price Inflation2.2 Main Features of the Banking System2.3 Angola: Monetary Survey2.4 Summary of Basic Banking Legislation3.1 Main Technical Assistance and Training Activities: Summary Description of First Year

Tasks3.2 Informatics Program

Appendix A - Assistance to Informatics CommitteeAppendix B - Assistance to Informatics Directorate on System Analysis/Pianning

MethodsAppendix C - Assistance for Information Systcrms Planning StudyAppendix D - Assistance to Prepare Information Requirements Studies

3.3 National Bank of Angola: Assistance in Improving BNA Accounting, Terms of Reference3.4 National Banking Training Institute: Terms of Reference3.5 Business Education: Assistance to Agostinho Neto University, Terms of Reference3.6 Bank Group Initiatives in Higher Education in Angola3.7 Establishment of'Standards for Accounting and Auditing, Terms of Reference3.8 Legal Assistance Component (LAC): Detailed Description

Appendix A - Implementation of Key Aspects of LAC3,9 Architecture and Civil Works3.10 Project Costs3.11 Estimated Disbursement Profile3.12 Implementation Schedule for Key Components3.13 Monitorable Actions under the Project3.14 Project Supervision4.1 Selected Documents Available in Project File

Map IBRD No. 24089

ANGOLA

FINANCIAL INSTITUTIONS MODERNIZATION PROJECT

CREDIT AND PROJECT SUMMARY

Boffower: People's Republic of Angola

Bnficies: National Bark of Angola (Barco Nacional de Angola, BNA), Ministry of Finance;Agostinho Neto University (UAN); Bank of Savings and Credit (BPC); Bank ofCommerce and Industry (BCI); Agricultural and Fisheries Credit Fund (CAP); Ministryof Justice.

Amount: USS21 million equivalent

IIr=n: Standard IDA termns with 40 year maturity

PrDectObjectives: The Project supports institution building and reform in Angola's financial system to help

stimulate resource mobilization, underpin private investment and promote economicdiversification. Specifically, the Project would assist in: (i) strengthening the centralbank so that it can perform its monetary policy and regulatory functions; (ii) developingbanking infrastructure; (iii) improving the legal and regulatory environment for financialoperations; and (iv) establishing institutional mechanisms for financing privateinvestment.

PrgieciDescription: The Project consists of:

(a) strengthening BNA, the central bank, principally chrough improvements in itsaccounts and accounting practices, procedures and information systems, and inits staff skills in administrative and functional areas;

(b) development of banking infrastructure, including establishment of a nationalcheck clearing system, a training center for financial sector personnel, andtraining of a core of financial professionals;

(c) disseminating and implementing laws and regulations affecting the bankingsector, ensuring their coherence; establishing tne legal and regulatory frameworkfor the insurance sector; md establishing accounting and auditing standards forthe enterprise sector; and

(d) improving institutional mechanisms for financing private investrnent and studieson access to credit by the private sector.

The Credit would finance technical assistance, training, equipment, vehicles materials andsupplies, as well as rehabilitation of two BNA properties to house the training center andproject consultants.

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Bene-fits: An efficient, broadly-based financial sector, with an effective banking system at its coreis necessary for the development of a market-based economy. The Project would lay thebasis for the development of such a financial system in Angola, thus improving themobilization of savings and encouraging their investtmant by the private sector inproductive uses in support of economic growth. Establishing of sound financialinstitut' )ns, strength enine the banking profession, introducing necessary regulations andthe effective supervision and surveillance of financial institutions will help improveconfidence in the system and facilitate the process of intermediation. The Project wouldbe the first vehicle for the Bank's dialogue with the Govornment on financial sectorissues, and, upon completion of the ongoing improvements in the macroeconomicframework, would provide the basis for Bank lending to the productive sectors.

RWisk: The Project faces sortie risks. First are those associated with the implementationcapability of a new member with a weak human resource capacity. However, BNA staff,led by a Project Coordinator and Deputy Projecs Coordinator, both of whom hold sermorpositions have demonstrated considerable implementation capacity during projectpreparation. Because of the heavy work load in the Project, the Project Coordinator andDeputy Project Coordinator will be assisted by an experienced consultant in theadministrative aspects of the Project. Second, the sustainability of reforms in thefinancial sector, and therefore the long-term success of the program, will depend onreforms in the macroeconomic fra&nework, which could be delayed for political reasons.The Bank will use all instruments available to help Angola prepare and implement theneeded reform program. Technical assistance financed under the proposed operation willhelp influence decisions on the structure of the financial sector.

Estimated Project Cost:Local Foreign Total

I. Si.rengthening BNA

A. Information Systems 0.8 3.1 3.9B. Improving Accounting 0.1 1.3 1.4C. Improving Skills 0.1 1.4 1.5D. Housing 0.1 Q0 8 0

Subtotal 1.1 6.6 7.7

II. Banking Infrastructure

A. Check Clearing 0.1 1.9 2.0B. National Banking

Training Institute 0.8 2.6 i.4(IFBA)

C. Development of Core Pi:fessionals Q,Q 2. 2.Subtotal 0.9 6.5 7 4

III. Legal & Regulatory Environment

A. Banking Legislation 0.1 0.8 0.9B. Developing Insurance Legislation 0.0 0.5 0.5C. Accounting and Auditing Standards QQ 06 a&

Subtotal 0.1 1.9 2.0

IV. Support for Investment Financing 0.0 1.5 1.5

V. Project Coordination 21i95i .L.

TOTAL BASE COSTS 2.5 17.4 19.9

Physical Contingencies 0.2 1.3 1.5Price Contingencies 0j 3j 19Total Contingencies 0.5 3.2 3.7

TOTAL PROJECT COSTS 3.0 20.6 23.6

Einacg&EPlan:Amount Percent

(in milliors)IDA 21.0 89%Government 2.6 11%Total 23.6 100%

Estimated FY 1993 1994 1995 1996 1997 1998 1999 2000Disbursements:

Annual 0.6 1.5 3.4 3.4 5.0 3.4 2.5 1.3Cumulative 0.6 2.1 5.5 8.8 13.8 17.2 19.7 21.0

ANG-OLA

FINANCIAL INSTIrUTIONS MODERNIZATION PROjECT

STAFF APPRAISAL REPORT

L. INTRODUCTION

1.1 In 1991, after following a socialist economic model for years, the Govrnmnent of Angolainitiated an ambitious program aimed at orienting the economy to a free market system. Decisions onthe economic front have coincided with the end of a fifteen year civil war and the opening of the politicalsystem, with free elections scheduled for September 28 and 29, 1992. A key aspect of the economicreform program is the establishment of a financial system to serve the private sector during the economicrecovery and beyrnd.

1.2 Significant improvements in the financial system are recognized as essential to achievegreater savings molilization and a more efficient aliocation of financial resources to the most productiveuses in the economy in the pursuit of increased growth and sustainable external equilibrium. Financialsector reform is thus a logical and necessary complement to the reforms in t!ie real sector.

1.3 The proposed Project aims at assisting the establishment of appropriate institutionalframework for financial sector development. Specifically, the Project would assist in: (i) strengtheningthe National Bank of Angola (Etanco Nacional de Angola, BNA), the central bank, so that it can performits monetary policy and regulatory functions; (ii) developing banking infrastructure; (iii) improving thelegal and regulatory environment for financial operations; and (iv) establishing institutional mechanismsfor financing private investment.

1 .4 The proposed Project was appraised in May 1992 by a World Bank mission consistingof Herminia Martinez (AF31E), Task Manager; John Graves (AFTEF), Eduardo Talero (AFTIF), GerardCapriJ (CECFP), Teresa Genta-Fons (LEGAF), Roy Karaoglan (CCMRT), Rodolfo Sanjurjo and StephenGaull (consultants).

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II. THE FINANCIAL SYSTEM

A. Macro-Economic Context

1. Background

2.1 Angol, the fifth largest African country south of the Sahara, has an area of 1.2 millionsq.km., a population of about 10.6 million (growing at 2.8 percent per year) and a population densityless than half the sub-Saharan African average. Gross national product (GNP) per capita in 1989, themost recent available, is estimated at US$620. Fertile soils and abundant mineral resources hold greatpromise for Angola's economic growth performance. The economy grew at an average annual rate of8 percent between 1961 ind 1974. Growth was stimulated by the coffee boom (Angola was the world'sfourth largest coffee exporter) and by oil production (144,000 bpd by 1974). The-se developmentsattracted Portuguese settlers, whose number increased from 40,000 in 1940 to 340,000 in 1974. Acc0ony of Portugal for five centuries, Angola achieved independence in 1975, following 15 years ofarmed struggle. After independence, the fighting continued between the Government and the opposingAngolan faction during the independence war. The last 15 years have seen a drastic contraction ofeconomic activity. Non-oil GNP per capita has fallen, with petroleum and dimonds (bot}. organized aseconomic enclaves) the only important exceptions to the general economic de.line. Despite 15 years ofcentrally planned economic management, there is a history of entrepreneurship and private sectoractivities are growing rapidly.

2.2 Poor economic performance since independence can be explained largely by three factors.First, the war forced more than 600,000 people to dlee from the countryside to the cities; caused extensivedamage to infrastructure; disrupted internal trade and communications; required large military expenditure(equivalent to 15-20 percent of GNP); and absorbed the bulk of the scarce supply of technicians andskilled manpower. Second, the exodus at independence of about 300,000 Portuguese settlers, who heldvirtually all administrative, managerial, skil!ed and semi-skilled jobs, created economic chaos. Third,inappropriate economic policies, state interventionism and weak economic management encouragedconsumption at the expense of production and subsidized imports for the formal urban sector. Theresulting excess demand necessitated administrative controls of consumer prices and profit margins whilethe purchasing power of public sector workers was protected through rationing of imported consumergoods at subsidized prices. The growth in oil production -- reaching 480,000 bpd in 1991 - financedthis system until the increasing financial requirements and inefficiencies led to a.. unsustainably large andrising budget deficit (about 25 percent of GNP on average in recent years). The budget deficit wasfinanced by money creation, with the ensuing inflationary pressure repressed by widespread pricecontrols, and heavy government borrowing from abroad, which caused expansion of external debt toabout 103 percent of GNP in 1991.

2.3 The war and inappropriate policies led to increased disparities between the formal urbansegment (about '5 percent of the population), employed largely in the public sector subsidized by oil, andmost of the remainder of the population. The structure of the economy became severely distorted asinvestment dwindled, import-competing production dropped drastically, non-mineral exports virtuallydisappeared and foreign exchange earnings came to depend almost exclusively on oil and diamonds.Along witn the economic deterioration, social indicators have remained below African standards: iifeexpectancy is estimated at 44 years; infant mortality, at 29 percent; adult literacy, at 41 percent (higher,however, than before independence); and access to safe water, at less than 30 percent of the population.

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2.4 At independence, Angola had a fairly developed banking system, with eight foreign banksoperating in the country. These banks had an extei.sive branch network (over 200 branches) with a widegeographical coverage. In addition, 12 foreign insurance companies were located in the country.Financial institutions were attracted by the ccJntry's wealth and the large cornmunity of european origin.Independent Angola, however, only had two banking inst'tutions: osie bank which had som3 centralbanking and commercial banking functione. and a savings bank where the deposits of individuals wereplaced. As most of the formal productive sector was publicly-owned, banks were used to channel savingsto public enterprises. As in most socialist financial systems, decisions regarding the volume andallocation of credit were made in the Ministry' of Planning, with the banking system acting as a bystander.Thus, analysis functions associated with banks in market-oriented economies were not perlormed; bankswere not supervised; and bank credit assessment, regarded as largely irrelevant, was not developed. Inthe insurance sector, all assets of private insurance companies were transferred to the Natinal InsuranceCompany (Empresa Nacional de Seguros e Reasseguros de Angola, ENSA), the state insuranceorganization which was created shortly after independence to provide insurance to new public enterprises.

2. Recent Developments

2.5 Since 1987, the Government has formulated several economic reform plans, tout on thewhole, did not implement theia. In November 1991, however, the Government began enacting a far-reaching package of reforms. Since then, the Government has devalued the exchange rate three times,from NKz 60 per US$ in November 1991, to NKz 550 per US$ in April 1992. Banks have beena*uthorized to trade foreign exchange at rates close to the parallel market rate; foreign exchange from oiland diamond exports have to be surrendered to National Bank of Angola (Banco Nacional de Angola,BNA), but those from other sources can be turned in at commercial banks. In addition, the cumbersomesystem of in-kind subsidies to public sector employees was scrapped and wages were remonetized.Substantial reforms also have been introduced in the price structure: producer and consumer pricecontrols were abolished except for utilities, petroleum products and bread, but administered prices onthese were more than doubled; and profit margin controls were removed from all but 25 goods andservices. Lastly, small public enterprises (e.g., restaurants, retail stores) have been privatized.

2.6 These reforms have altered radically the incentive framework and have had immediateeffects in reducing the large distortions in the economy. The exchange rate was devalued 95 percent insteps from NKz 30 to NKz 550 to the US$. However, the parallel rate hag remained well above theofficial rate, in the range of NKz 1,800 per US$ in the April-May 1992 period. The Governmentrecognizes the need to achieve genuine exchange unification at a realistic rate, and that its impact onprices will be limited since most prices already reflect the parallel exchange rate (Annex 2.1), althoughthe price of petroleum is a notable except cn. The devaluation will help reduce the budget deficit becausethe Government operates with a surplus in forjain exchange in its budget. Thus, this would reduce theoverall fiscal deficit and limit the Government -. need to draw on BNA advances; end the implicit tax onprivate sector investment (enterprises ratio ied from the foreign exchange market); and reduce theincentive to smuggle diamonds. The Government began to auction a limited amount of foreign exchangeto importers in May 1992, an action which represents a step in the move to a unified rate. Profits fromthese sales are to be used as one source of deficit financing this year.

2.7 Pr.ce, exchange rate and wage reforms have not been complemented by the required fiscalcontraction and monetary restraint, and a major risk exists that the resulting inflationary impact willnullify the benefits of the reforms. Accordingly, decisive fiscal and monetary stabilization is the mosturgent priority, followed by additional structural adjustment measures. The Government has requestedthe World Bank and the International Monetary Fund (IMF) to help prepare an adjustment program. A

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key aspect of the economic reform program is the establishment of a financial system to serve the privatesector during the .ecovery and beyond.

2.8 Reforms on the economic front are being accompanied by political liberalization. InMarch 1991, the Government opened the door to a multi-party system. A peace accord .vas signed ardan internationally-monitored demobilization has begun. Elections are planned for September 28 ard 29,1992, anc, a national army is being formed.

B. The Financial Sector

1. Financial Sector Stratea

2.9 The development of the financial sector is critical to the -. cessfidl transition from asocialist to a market-oriented economy. An efficient financial system will facilitate iosvestment and spurgrowth. However, a precondition for tiie successful development of the flancial system ismacroeconomic stability through fiscal prudence. Assuming fiscal control, the Government strategy forthe development of the financial sector over the next five years includes: (i) prudent management of creditto the economy, in part through the rationalization of interest rates; (ii) opening the sector to newinstitutions which can bring the required know-how and increase competition; (iii) restructuring andprivatizing existing financial institutions to make them more competitive and efficient; (iv) introductionof sound regulatory and supervisory practices in BNA (for the banking system) and in the Ministry ofFinance (for the insurance sector); and (v) improvement in the legal, regulatory and ac-ountingframework for financial operations, including their administration through the judicial system.

2.10 The key objective of the financial sector strategy is to create a sound policy environmentand institutional framework appropriate to the needs of both savers and investors in the private sector.As part of this strategy, the Government will reduce its direct ownership of financial institutions andpromote greater competition among institutions. Strong and competitive commercial banks, one or twoinvestment banks and an efficient rural savings network are likely to meet the economy's needs for themedium-term. Furthermore, because of its wealth, Angola is attracting a number of foreign banks. Inthe longer term, once the banking and insurance sectors have developed, and as the Aagolan privatesector grows and diversifies, there also will be scope for the develor:ment of more sophisticated financialinstruments and institutions.

2.11 The proposed Credit will help in the implementp 'on of the sector strategy. It will supportthe initial phases of reform in Angola's financial system by i wviding technical assistance, training,equipment and supplies to strengthen the central bank. In addialon, it will meet basic training needs forthe whole system. Experience with adjustment programs elsewhere has demonstrated that there areadvantages to initiating institutior reforms as early as possible, because of the time it takes to bringthem abou:. Having stronger in-...,utions is a precondition for the application of effective financialpolicies and structural reforms in the sector. Tlbe principal institutional reforms to be undertaken arespelled out in the Government's Statement of Financial Sector Reform (see Annex 1.1). Subsequentoperations will focus on the policy reform program and in providing financing for the pilvate sectcr.

2.12 lbe World iank began its involvement in the financial sector in 1991. The Government,conscious of the need to establish solid financial institutions as a vehicle for private sector development,requested assistance from the World Bank in preparing a series of operations designed to meet thisobjective. The Project to be financed under the proposed Credit and described in detail in Chap:er m,

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is the first of these operations. In doing preparatory work for this operation, considersble analyticalbackground work was done, some of which has been included in this Staff Appraisal Report.

2. Recent DevelopDmex

2.13 Concunent with the changes in the price structure and the exchange rate, the Governmnenthas begun to implement a reform of the financial system by establishing a two-tier banking system. Inaddition, the Government hae begun introducing monetary policy instrumants, which will enable policymakers to better manage the economy and improve the mobilization and allocation of resources once thebudget is brought under control. The Government also is planning to open the insurance sector toconmpetition.

2.14 The Angolan financial system began its transition from a socialist "monobanking' systemwith the enactment of basic financial legislation and the conversion of BNA into the central bank. in 1991.the basic outline of the banking system is contained in the new central bank statutes and a law governingfinancial institutions (Annex 2.4). Both were prepared with technical assistance from the IMF and theBank of Portugal. In addition, the Government has establishied two banks - the Bank of Savings ardCredit (Banco de Poupanga e Credito, BPC), and the Bark of Commerce and Industry (Banco deComercio e Industria, BCI) - and a specialized credit institution, the Agricultural and Fisheries CreditFund (Caixa de Credito Agropecuaria e Pescas, CAP) each with its own statutes. All three institutionshave begun to operate. During a transitional period, the conmmercial area of LNA will continue toprovide banking services to public enterprises and foreign trade operations. BNA plans to stop its foreigntrade financing operations in 1993.

2.15 Angola began the transition process with a small fin.cial sector and no monetaryoverhang. Broad money -- M2 - is only about 7-10 percent of GNP, and deposits of the non-governmentsector (i.e., households plus private enterprises) represent no more than a third of this already low figure.Indeed, the non-government deposit base is so small, that even if there were no assets in the bankingsystem, the Government would only have to be concerned about protecting deposits amounting to about2-4 percent of GNP, one-tenth the size of the deposit base in Eastern Europe. Furthermore, credit to theprivate sector has been small, and in fact most lending of the banking system hould be viewed as intra-government account transfers. However, lending to Government is growing rapidly.

3. Financial Policies

2.16 The .eforr s to the price and exchange rate structure introduced in November 1991rep.esent a transformation of the economic background to the functioning of the financial secto'. Theremonetization of wages and the application of more realistic exchange rates represent a decisive steptowards the rationalization of tradiig and price relationships, a precoddition for financial systemdevelopment. The Government is conscious of the importance of macroeconc.mic reforms for the healthydevelopment of the financial system.

2.17 On t.:e monetary policy front, the package of reforms includes: (i) a new schedule ofinterest rates; (ii) the imposition of reserve requirements and credit ceilings for banks, and (iii) theintroduction of interest payments on government debt. These instruments do not yet perform a monetarypolicy function, and are unlikely to play a meaningful policy role as long as there is an inadequate controlof the budget. In spite of this, their early introduction is useful as there will be a breaking-in period forpolicy makers and financial institutions to become accustomed to their use.

2.18 As is typical at the early stages of transition from a socialist economy, BNA b still arelatively passive bystander in the credit determination process. The central banking law provides forautomatic advances to the budget up to a limit of 10 percent of revenue. However, this limit can beoverruled by the Council of Ministers, and overshooting the credit limits carries no penalty. As part ofthe refo-ms being introduced, the Government has begun paying interest on its borrowings from BNA.This rate has been set at 6 percent per annum on the outstanding stock of central government debt (NKz450 billion as of April 1, 1992) while the Government would compensate BNA for future advancesthrough six-month, tradeable, government bills paying 11 percent per annum. As long as there are notffective limits on these advanc=s, BNA will have no control over monetary policy. Since the privatesector is quite small, increases in credit to the Government will determine total domestic credit growth.Large govermnlent borrowing is crowding out the incipient private sector. This problem is likely toworsen as government measures to encourage private sector activities take hold, and limits to total creditexpansion are introduced to stabilize the economy.

2.19 BINA set the following ceilings for interest rates on deposits in November 1991:

Table 1Deposit Rates Percent per Annum

90 to 180 days 8

181 days to 1 year 12

1 to 2 years 13

2 years or more 14

2.20 At the same time, BNA set a nm.aximum lending rate of 20 percent per annum. The ratesapplied by the banking sector are 14 percent per annum for short-tern loans (less than one year); 16percent per annum for medium-term loans - one to three years; and 20 percent per cent for long-termloans (more than three years). These rates are significantly negative in real terms. In any event, withthe mihuscule amount of private sector credii there is little interest elasticity to the demand for credit, andhigher interest rates at present will do little to curb credit growth.

2.21 Once a more market-related exchange rate is adopted, the budget deficit reduced, andprivatization begins, the demand for private sector credit should expand and interest rate variations willcome to play more of a role in the determination of credit aggregates. At that point it would be essentialthat interest rates on deposits be at least equal to or above the expected inflation rate in order toencourage the mobilization of savings. Efficient allocation of savings in turn would require that lendingrates be positive in real terms so that financial intermediaries earn an adequate return for the risks theybear PNA intends to give priority to making interest rates positive in real terms as part of themacroeconomic reform program (see Annex 1. 1).

2.22 BNA authorities also have set reserve requirements which, although not essential, willhelp in the implementation of monetary poiicy. Given the underdevelopee money markets, reserverequirements will facilitate the preCiction of reserve holdings by banks. These have been set at 20

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percent on current and term accounts and are urwremunerated. This rate is quite high and constitutes asignificant tax on financial intermediation.

2.23 BNA has begun paying interest on excess reserves at a rate of 1I percent per annum.The rate is calculated taking into account the average cost of deposits of the two commercial banks.Given the high level of bank reserves at present, this represents the key interest rate in the system.Effectively, BNA will sell the banks the new 11 percent bonds being issued to it by the Treasury andallow the banks to pay with excess reserves. BNA will likely have to rely on bank-by-bank creditceilings as a way to achieve a global credit target for some time.

2.24 At present about one-half of all non-government deposits is in the commercial section ofBNA; less than 34 percent, with the BPC (mainly personal accounts); and about 15 percent, with the BCI(mainly enterprise accounts). The breakdown of non-government credit is quite different: well over 90percent is with BNA, since it still controls credit lines with foreign banks, and almost all of the remainderwith the BPC. Most of the private sector credit in kwanzas is with BPC. The potential for a credit boomthrough the commercial banks presents challenges at the operational, prudential and monetary policylevels. At the same time, the ability of the banks to draw on their excess reserves to finance a substantialboom in credit means that monetary policy instruments must be deployed to prevent an excessive burstof domestic demand. The technical assistance and training being provided by the IMF and through theproposed Project should assist in addressing this problem.

C. Te Banking System

2.25 As mentioned above, the Government began to introduce a two-tier banking system in1991. In addition to creating a central bank, the Government established three financial institutions(described below). Three Portuguese banks - Banco Portugufs do Atlantico (BPA), Banco de Fomentoe Exterior and Banco Totta e Acores - have established representative offices in Luanda, and recentlyobtained authorization in principle to establish full-fledged branches in Angola. Banque de Paris et PaysBas, PARIBAS (Luxembourg), Standard Chartered Bank (South Africa) and Equator Bank (UnitedStates), a subsidiary of Hong Kong and Shanghai Bank, have also established representative offices inLuanda. Given Angola's rich resource base and attractive prospects, foreign banks appear interested inentering the local banking market. It is therefore possible that the banking sector could be dominated byprivate domestic and foreign banks in the next few years.

1. National Bank of Angola (BNA)

2.26 The law creating BNA as the central bank gives it functions which are generally consistentwith those of modem institutions. In addition, its organizational structure is in line with that of centralbanks elsewhere. BNA has received technical assistance from the IMF and the Bank of Portugal instarting operations. The IMF has had an advisor to the Governor for three years, and has recentlyappointed an advisor to the Supervision Department to begin setting up its organization. In addition, itprovided assistance in the separation of the central banking and commercial accounts and in setting upmonetary statistics. The Bank of Portugal and BNA have a cooptration agreement under which BNA isable to draw on the Bank of Portugal's expertise. The Bank of Portugal assisted in the setting up of someof the accounts, and has given short-term technical assistance on subjects which are determined on an ad-hoc basis. Short-term assistance has included help on preparing directives on monetary policy instrumentssuch as BNA directives on rediscounting.

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2.27 Although its statutes and formal organizational structure are generally in line with thoseof central banks, BNA is ill-equipped to handle its new functions. BNA has an acute shortage ofpersonnel familiar with central banking activities; it lacks procedures and has little modern equipment.The Project aims to address some of these problems. BNA administrative procedures need to bestructured along the lines of a central bank in a market-oriented economy. This requires a clarificationof functions of each department and a delineation of career streams, such as for economists, banksupervisors, and information technology professionals. The current policy of little pay differentiationwith the civil service will need to be changed, as has happened in many developing and industrialeconomies.' Otherwise, the better qualified staff will be lost to commercial banks, where there is alsoa serious shortage of trained personnel.

2.28 Angola has few economists trained in modem macroeconomics, money and banking, andeconometrics, and none with experience in bank supervision or reserve management. Consequently, apriority for BNA will be to ensure training and technical assistance in all of these areas. For theimmediate future, technical assistance is urgent, as it will take some time before locals have acquiredsufficient expertise to have sole responsibility for these functions. BNA staff will need to be trainedabroad, through fellowships for the pursuit of undergraduate and masters-level degrees in economics aswell as visits to other central banks for familiarization with implementation issues. This training will beespecially important in future years as BNA attempts to move to market-related methods of implementingmonetary policy. The approach to supervisory and reserve management issues should be similar. Theproposed Project would provide support for training of BNA staff in specialized areas.

2.29 BNA has established a timetable for divesting the activities of the commercial area andtransferring them to the newly-created commercial banks. This is being carried out first in Luanda. Asof September 1, 1991, BNA stopped opening new customer accounts both in local and foreign currency.On October 1, 1991, BNA stopped lending in kwanzas. The last steps will be to transfer all foreignexchange loans from BNA to the commercial banks, to cease new lending to state enterprises and totransfer existing accourts. The last phase, which has been delayed because of the country's continuingforeign exchange constraints, is expected to be completed in 1994.

2.30 The transfer of private sector accounts has run smoothly. However, the transfer of publicenterprise accounts is proving difficult because many have long overdue debts, or are likely to becomeproblem loans for banks. In fact, many public enterprises do not even satisfy the formalities for openingan account with a commercial bank, because they were never legally constituted. The Govermment hasdecided to retain these accounts until the enterprises are either liquidated or privatized.

2.31 Progress has been made in splitting the central bank and in establishing the three financialinstituitions, but BNA continues to have a predominant position in the banking sector, especially withrespect to credit, as shown in Table 2 below. This is largely because of the dependence of theGovernment on BNA for financing the budget deficit. BNA would have accounted for about 91 percentof domestic credit at the end of 1991 even if credits which were outstanding in the books of thecommercial area of BNA2' at that time had been transferred to the commercial banks.

1/ In countries a divere as Italy, Germany and more recently, the United States, centrml bank staff are paid ata higher level than gm.neral civil ervice employees, reflecting private ector salaries.

NKz A4 billion, of which NKz 3! billion were to the private wector and NKz 13 billion wen to publicentorpriesm.

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Table 2Evolution of the Banking System 1985 - 1991

Share of BNA in Total(in percentage)

198 1989 1990 1221"

Domestic Credit 100.0 99.7 99.5 97.8

Deposits 80.8 74.4 73.6 57.7

Total Assets 89.3 87.1 87.0 86.9

* End of yar figures** Provisional figums.

2.32 Outside the Province of Luanda, the commercial area of BNA has 31 branches andagencies in 16 provinces, of which BNA intends to keep only five to conduct central banking functions.BNA plans to sell the ofrices in the most attractive locations to the commercial banks. It also proposesto negotiate with the commercial banks for the operation of banking services in the more remote areas.BNA has indicated that all branches will be transferred or closed by the end of 1994 (Statement ofFinancial Sector Reform, Annex 1.1).

2. The Commercial Banks

2.33 Annex 2.2 gives highlights of the financial and portfolio position of the two commercialbanks, BPC and BCI. BPC was established in March 1991 as the successor to the Banco Popular deAngola, which had been the Government's savings bank since independence. During the period 1975-1990, Banco Popular de Angola did not lend to enterprises or individuals, but simply deposited itsresources at BNA. BPC is a full-fledged commercial bank. In May 1991, BPC had 29 offices locatedin eight of Angola's 18 provinces. At present, with around 710 staff, BPC is overstaffed and a reformof the bank will entail a reduction in staff.

2.34 In November, 1991, BPC signed a technical assistance agreement with BPA of Portugal.BPA was a natural cnoice because it had owned the Banco Comercial de Angola, which became theBanco Popular de Angola after independence. BPA and BPC also have formed a negotiating committeeto set the basis for a possible participation of BPA in BPC of some 25 percent of its capital. Theagreements also call for the opening of a branch in Luanda by BPA as a transitional measure. Thisbranch could be absorbed by BPC if BPA participates in BPC. Arthur Andersen (US) is auditing BPC's1991 accounts.

2.35 BCI was created in March 1991 by government decree and started operations on July 1,1991. Its initial subscribed and paid-up capital is NKz 1.0 billion, of which 91 percent is owned by theGovernment and 9 percent by nine state enterprises (1 percent each). This initial capital comprises abuilding valued at NKz 450 million and cash of NKz 550 million.

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2.36 Preparatory work for setting up BCI was done by a Portuguese consulting firm ownedby the Espfrito Santo Group (the controlling interest in Banco Esplrito Santo e Comercial de Lisboa).The consultants assisted the management of BCI in drawing up operational and information technologyplans, and the outline of a staff training program. BCI intends to conce,itrate on the corporate market(including medium and small businesses). BCI has a main branch and 3 agencies, and currently has 71staff who are well qualified. The Government intends to privatize BCI. As a new bank, without a heavycost structure inherited from the past, but with deposits transferred from BNA, BCI has the potential tobe an efficient and profitable operation. Initially, the method of calculation for remunerating excessreserves will favor BCI as the system average is heavily influenced by term deposits at BPC.

3. The Agricultural and Fisheries Credit Fund (CAP)

2.37 CAP also was established by government decree on March 11, 1991, as a fund whichprovides financing for small enterprises, farmers, and the fishing industry. CAP is financed fromcontributions from BNA profits; deposits (from the public); resources from the Government'sprivatization program; foreign loans contracted by the r(overnment or CAP; and grants from bilateralagenries.

2.38 The stated objectives of CAP are to promote the development of the agricultural, forestry,livestock, fishing, and coffee sectors in Angola through loans to small enterprises and farmers. Theintention is to provide assistance to small clients who would not have access to normal credit from thecommercial banks. Although the general aim of making credit available to clients with no access tocommercial credit is in line with the country's needs, CAP's legal and organizational structure andstaffing are inadequate.

2.39 CAP was established as a quasi-bank with an initial capital of NKz 200 million providedby the Ministry of Finance, and expects additional capital contributions. In addition, CAP took over aBNA branch which was situated in its head office building. At present, CAP has customer depositstotalling NKz 8 billion which have been mostly re-deposited with BNA pending a definition of CAP'sfuture. The capital funds of CAP have been lent to some 18 borrowers, mostly at medium and long term.CAP has obtained authorization from BNA to open six regional offices covering the whole country.

2.40 The Government proposes to restructure CAP. As CAP's objectives are to finance clientswhich would not have initially a credit record with commnercial banks, it is likely that CAP would be setup as a fund, and managed professionally. Such a fund would be an entity under the Ministry of Financeor would be assigned to a financial institution to manage. As the Government intends to encourage theentry of foreign investment banks, it is also possible that CAP would be managed by such an institution.The Project would provide assistance to restructure CAP.

D. The Insurance Subsector

2.41 An immediate concern for financial sector development is the growth of the insurancesector. As is the case in transitional socialist economies, the insurance industry is even moreunderdeveloped than the banking ,,ctor, as the State stood as the ultimate guarantor. Private sector firmswill require insurance for a variety of risks for which the Government should not be responsible. Sincethe Government has no clear advantage in providing this service, private entry by domestic and foreign

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firrr.s needs to be encouragedJ. The Government is conscious of this need, and haJ begun to studychanges aiming at modernizing the subsector.

2.42 As part of the reform of the financial system, an Insurance Supervisory Office has beenestablished within the Ministry of Finance. Its primary function has been to conduct a review of theinsurance subsector and to develop policy recommendations for restructuring it. The offlice's proposalsare contained in a draft law on insurance. The objective of the proposed policy is to stimulatedevelopment of a more compe:itive insurance subsector, effectively meeting consumer needs while at thesame time, providing a expartded source of long-term investment capital. The law is expected to beenacted in early 1993.

2.43 The insurance subsector is now controlled by the state-owned ENSA, which wasestablished in 1978 as the monopoly insurer in Angola. In 1981, all the private insurance companieswere liquidated and their assets and liabiiities transferred to ENSA. ENSA always has shown a profitbecause all the county's oil installations, both Angolan and foreign-owned, are obligatorily insured withENSA, as are all factories, machinery, aircraft and vessels. ENSA covers the whole range of insuranceprciucts, although its portfolio is heavily concentrated in property and civil responsibility risks withrelatively little life insurance. A high proportion of risks is reinsured abroad, notably in the Swiss,German and British markets. Relatively little is reinsured in Portugal owing to the industry's limnitedcapacity in that country. A problem which has plagued ENSA has been the arrears in payment of thereinsurers.

2.44 Although ENSA has accounts with BPC and BCI, its considerable technical reserves andcash surplus are mottly deposited in unremunerated sight deposits in BNA. The lack of income on thesereserves has been a chronic problem for ENSA, particularly because its agreements with reinsurers abroadrequire it to pay them 4 percent per annum on their share of technical reserves. When the Governmentopens the subsector, ENSA will face stiff competition, as new private insurance companies, mostly withlarge sharenoldings by Portuguese companies established in Angola. These new entrants, with smallstructures of highly trained staff, will chip away at the monopoly position of ENSA and bring a reductionin the premiums charged.

2.45 ENSA has 620 employees, of which 480 are in Luanda and the remainder is in 15provincial offices. Some 200 manage properties with limited value which ENSA inherited after thenationalization of the foreign insurance companies. Only a small group of around 15 people has thenecessary technical expertise to manage a modern insurance business, and even these people's skills needupdating as much of their relevant experience was acquired before independence. ENSA is giving astrong emphasis to foreign language courses to enable its core of proficient staff to attend courses in theUK and Switzerlanid, and to benefit from seminars delivered in Luanda by visiting foreign experts.ENSA staff would be eligible to participate in the training programs under the Project, including thoseof the National Banking Training Institute.

E. Legal Framework for Firancial Sector Operations

2.46 The legal framework for banking operations includes the banking legislation, circularsand directives issued by BNA, and general legal pri.iciples embodied in the Civil and Commercial Codes.The Government enacted on April 20, 1991, two main laws governing financial institutions: (the FinancialInstitutions Law (Lei das Instituic6es Financeiras, Law No. 5/91), and the BNA Statutes (Lei Orgznicado Banco National de Angola, Law No. 4/91). The main features of these laws are given in Annex 2.4.

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Overall, this legislation provides an adequate framework for banking operations and includes thefundamental aspects of a modem financial legislation. However, the law will need to be applied. Themain difficulties with the implementation of the legislation are the lack of some complementaryregulations, poor dissemination of the law and the weak institutiornal framework of the legal institutionswhich need to apply it. The Project would provide assistance to begin addressing these difficulties.

2.47 In addition to the legislation enacted in 1991, the Civil and Commercial Codes define thenature of contracts and the different guaranties for loans. The A4ngolan legal framework embodiesprinciples of civil law inherited. from Portugal. The regime is quite complex and antiquated, as it datesfrom nineteenth century Portiguese legislation which does not contemplate many of the institutions andmodalities which exist today. In addition, there are problems with the law on mortgages resulting fromthe uncertainty of ownership arising from the confiscation of property after Independence. Moreover,certain types of guaranties, such as liens on assets, which are available in other Portuguese speakingcountries such as Brazil are not recognized under Angolarn legislation. The basic civil legislation needsto be updated, a problem which is being tackled under the ongoing Economic Management and CapacityBuilding Project (Credit 2274-ANG).

2.48 Many financial operations in Angola cannot be executed or enforced without theintervention of ancillary institutions, notably the registries and pubic notaries, which report to theMinistry of Justice. Timely registration and issuance of a number of documents, including propertycertificates or titles, is essential to the functioning of the financial sector. The inadequacies of theregistries and notaries, both in terms of trained personnel and of material resources, render themunoperational. The Project would provide initial support to address the key operational bottlenecks tothe banking sector, and assist in defining an action program for future reforms that can be supported bythe Bank through other operations and by other institutions. One of the main concerns of the Projectwould be to design measures to stop irreparable damage to key documentation necessary for the efficientdelivery of financial transactions.

2.49 A new General Law on Insurance Activity has been drafted by the Insurance SupervisoryOffice, with input from the Insurance Institute of Portugal, and is currently under review by the Councilof Ministers. Under the terms of the legislation, the national insurance monopoly is to be ended, and themarket opened to both domestic and foreign competition. Key ENSA functions are to be privatized, ormanaged through joint venture arrangements. A regulatory framework for proposed new entrants andactivities is not yet defined and critical issues regarding entry criteria, property rights, investmentprerogatives, exchange allocation, and other institutional constraints must be resolved in order tomaximize the benefits anticipated in the proposed reforms. In addition, procedures for the adjudicationof commercial claims, maintenance of technical and other reserves, uniform reporting requirements,setting of rates, and other functions usually the responsibility of prudential regulators must be providedfor. Given the lack of both experienced supervisory personnel and of qualified financial management,as well as a shortage of technical skills, the Insurance Supervisory Office will be unable to comply withits regulatory mandate without significant external support. Assistance in the initial work of the insurancesupervision body is contemplated under the Project.

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m. THE pROJECr

A. Prc Objectives and S=LI=

3.1 The Project supports institution building and reform of the financial system to helpstimulate resource mobilization, underpin private sector investment and promote economic diversification.Specifically, the Project assists in: (i) strengthening BNA so that it can perform its monetary policy androglatory functions; (ii) developing banking infrastructure; (iii) improving the legal and regulatoryenvironment for financial operations; and (iv) establishing institutional mechanisms for financing privateinvement.

3.2 The modernization of the financial system is expected to be a medium-term process. Theproposed operation would support priority institutional reforms during the initial period. The scope ofthe Project, which would be supported by the proposed SDR14.8 million IDA Credit, is given below.Tbe proposed Credit would finance technical assistance, training, equipment, vehicles materials andsupplies to achieve the Project objectives. In adlition, it would finance the rehabilitation of two BNAproperdes, one for the training center for financial sector personnel and the other to house projectconsultants. The Project components are described in detail in paras. 3.4 - 3.50 below. The Projectconsists of:

(a) strengthening of BNA, principally through improvements in its accounts andaccounting practices; procedures and information systems; and in its staff skdilsin administrative and functional areas;

(b) development of banking infrastructure, including establishment of a nationalcheck clearing system, a training center for financial sector personnel, andtraining of a core of financial professionals;

(c) disseminating and implementing laws and regulations affecting the bankingsector, ensuring their coherence; establishing the legal and regulatory frameworkfor the insurance sector, and e-tablishing accounting and auditing standards forthe enterprise sector; and

(d) improving institutional mechanisms for financing private investment and studieson access to credit by the private sector.

B. Rationale for IDA Involvement

3.3 The Bank's first strategic priority in Angola is to cement the relationship which beganonly in 1989 when Angola joined the Bank. Principal objectives are to facilitate the transition to apeaetime economy and to support the process of economic reform so that the country can get on the pathof sustainable growth. Tbe correct phasing of reforms in the financial and real sectors and appropriateInstitutional support for their effective implementation are critical elements in the transformation ofsocalist economies. Support for a program of reforms in the real sector is provided under the EconomicManagement Capacity Building Project, which provides substantial technical assistance to key ministries,

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including Planning and Finance. The proposed operation, which would be the first of several operationsin support of the financial sector, would provide the necessary institutional strengthening to facilitatereforms in the system.

C. Project l;escgL Ripn

1. Strengthening BNA

3.4 BNA was set up as a central bank only in 1991, and it lacks personnel, procedures, andequipment, which limit its ability to function. To perform its role, BNA needs to substantially expandits institutional capabilities during the next few years. Its operational role as a first tier bank, coordinatorof money and credit supply, and manager of foreign exchange resources needs increasing sophistication,speed and accuracy. Functions such as bank supervision will need to expand in tandem with the bankingsector and BNA's analytical and policy formulation capabilities in All aspects of monetary managementneed to be vastly increased.

3.5 The Project would support the strengthening of BNA to undertake its central-banking rolesuccessfully. The activities included are those needed to improve BNA's own operations, such asstrengthening of procedures and the implementation of information systems, accounts and accountingsystems. The program also includes training for senior staff in functional areas. The Project would alsosupport the rehabilitation of a BNA building to be used by the Project's expatriate consultants.

3.6 Work under this component complements assistance being provided by the IMF and theBank of Portugal. The IMF provided assistance in preparing the basic legislation and in setting up theorganizational structure of the institution. In addition, it provided assistance in the initial split of accountsinto central and commercial areas, in setting up monetary statistics, and in organizing the supervisiondepartment. The Bank of Portugal has a cooperative agreement with BNA to provide advice on specificsubjects, as required. In this context, it provided assistance in the basic legislation, and in the preparationof a number of regulations relating to monetary policy instruments.

(a) Strengthening Information Systems

3.7 The overall objective of the informatics program to be supported by the Project is todevelop new institutional capabilities at BNA through improvements in administration and informationsystems. While computer technology will be useed for this purpose, the emphasis of the program is placednot on the technology, but on the institutional improvements that can be achieved through its judicioususe. Annex 3.2 gives a detailed description of the informatics component.

3.8 The following objectives will be pursued through BNA's information systems program:

(a) streamline and document work procedures, information flows, and informationsystems of BNA directorates;

(b) create an effective mechanism for the allocation and .nanagement mechanism ofinformatics resources in the institution;

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(c) strengthen the management and modernize the work methods of the Organizationand Informatics Directorate (DOR);

(d) install the computer application systems needed by each BNA directorate insupport of its business processes;

(e) improve staff skills to use and manage informatics resources;

(f) design information systems requirements and prepare strategic plan for systemsdevelopment and technology use; and

(g) increase the productivity of selected professional staff through the use of personalcomputing tools.

3.9 The introduction of BNA's informatics program will be paced, taking into account theinstitutional readiness to absorb new technology and irrplement administrative and managerial changes.The approach recognizes that modem computer technology - while flexible, ubiquitous, and relativelyinexpensive - requires orderly and well-informed management to yield expected benefits. It alsorecognizes that investments in informatics will be successful only if BNA first improves its managementand administrative practices, informatics policies, and staff skills.

3.10 The first phase of the program has been designed to pursue objectives (a) through (d)above in order tu build up BNA's capacity to absorb technological inputs planned for subsequent phases.Phase 1 will determine the activities projected for subsequent phases. Phase 1 is targeted to last one year,starting in late-1992, and to be financed partly under the PPF. How long BNA actually takes to completethis phase is a function not only of its own management capacity in informatics, but also of severalfactors which BNA does not control fully, such as availability of housing and the availability ofconsultants to visit Angola. The objectives and expected outputs of this phase have been specificallydefined, and the terms of reference for related consulting nssignments prepared. The Project will provide14 months of consulting services for the system requirements studies and about 18 microcomputers tomeet the pressing requirements of the operating divisions.

3.11 Two broad strategic choices will be available to BNA after Phase 1. BNA could pursuean integrated informatics strategy based on common design. This strategy would result in the creationof integrated information systems and the installation of homogeneous technology. It would be possibleonly if all of BNA's units achieve fully the objectives of Phase 1. Alternatively, BNA would pursue aninformatics strategy which accommodates substantial differences in capabilities among the variousfunctional areas. This strategy would concentrate informatics resources on those areas most able to usethem and result in faster but less integrated systems for those areas and possibly in heterogeneoustechnology. The bulk of the cost of the ir.ermatics component is in the training and technical assistance,which would be similar irrespective of which strategy is followed.

3.12 Selection of the appropriate strategy would be made through a short Information SystemsStrategic Plan (ISSP) at the completion of Phase 1. Subsequent activities in the program would be guidedby the decisions emanating from this plan. The plan will also formulate appropriate systemsimplementation, technology acquisition, and staff training plans, and thus attempt to minimize costs andpromote compatibility of technology. The plan will take about two months and require participation ofsenior staff and consultants. The proposed Credit would finance five man-months of consulting servicesto assist in carrying out the plan. Financing for the purchase of hardware and software and related

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training and technical assistance for the BNA systems would be conditioned on the completion of theISSP. Terms of reference and a definition of the plan's outputs are given in Annex 3.2.

3.13 Once the detailed information systems plan is developed, further activities will procoeeunder the guidance of that plan. Information systems will be introduced at BNA in two broad stage:

(a) Stage I - High Priority Systems. The high priority information systems will beidentified by the strategic plan and put In place over a two-year period.Administrative systems such as accounting, budgeting, and personnel, analyticalsystems such as macroeconomic analysis, and operational systems such as banksupervision, reserve management, and debt management will probably be amongthis group. For this phase, the Project would finance 33 man-months of technicalassistance, 120 personal computing training courses, and computers forapproximately 56 BNA staff.

(b) Stage 11 - Other Systems. The remaining information systems defined in theISSP would be put in place after completion of Phase I. Important systems maybe deferred for implementation during this stage simply because of limitlions inthe amount of change that the institution can absorb during a given period oftime. F.r this phase, the Project inc;udes 34 man-months of technicsl assistance,180 perbr. z' computing courses, and c,mputers for another 62 BNA staff.

3.14 Project resources need to be matched by adequate BNA resources if the program iS tosucceed. In particular, for every month of expatriate consultant time funded by the Project,approximately two months of staff time from Informatics Directorate staff are needed. This counteparteffort is needed both to complete project activities and to obtain effective transfer of technical sklils.During negotiations, the Government gave assurances that BNA staff would work with projectconsultants.

3.15 Prograin management will be provided by the Directorate of Organization andInformatics. Overall direction of the informatics program will be exercised by an Informatics Committeewhich is composed of the Directors of the user Departments and headed by a Vice Governor. ThisCommittee has existed for some time, although it was only made operational last year. Finally, a seniorinformatics management expert will be contracted for the first 42 months of the Project to asist the DORdirector with Program management. A draft informatics program and budget would be prepared underthe Project, and submitted by September 30 of each year for review and approval by BNA's InformaticsCommittee and the IDA. Assurances to this effect were obtained during negotiations.

(b) Improving BNA Accounting

3.16 As is the case with most monobanks in former socialist countries, BNA does not havetight financial controls or reliable financial data. Processing of data has been further complicated by theseparation of BNA into central- and commercial-banking areas. The existing systems do not producetimely and accurate financial data, with the result that directorates wbich depend on accouniinformation are hampered in their work. In addition, the accounts contain anomalies, particuarly in suchsensitive area as foreign exchange.

3.17 To improve the situation, the Project will provide: (i) assistance to BNA in preparnauditable accounts as of 1991 and identifying accounting systems in need of strengthening; (iI) exteal

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audits, which would identify measures which BNA should take to improve its internal controls; and (iii)assistance in designing and establishing an Internal audit function, and (iv) training BNA staff inaccounting and internal audit. Terms of reference for the accounting consultants to perform the first ofthe above Lssks are given in Annex 3.3. It is estimated that the strengthening meawures and training ofPNA staff, all of which will take place in Angola, will require the services of two full-time expatriateconsultants for a total of five consultant-years. The first e.xpatriate consultant is expected to start workin the first vear of the Project, while the second, who will assist with the internal aud!t function, will startwork in thi second year of the Project.

(c) IlmDroving Skills

3.18 BNA has prepared a program of technical assistance and training requirements for thenext three years which is the basis for the assistance provided under this component. The Project willstrengthen the administrative, managerial and policy making capabilities of BNA staff. The assistancewill involve both expatriate experts and specialized training abroad for senior BNA personnel. TheProject includes assistance in setting up the personnel management function in BNA. As in most socialisteconomies, there is no central banking tradition, and central bank staff have no career paths. The Projectincludes some 10 man-months of consultant services to develop and implement professional developmentstreams for BNA staff. Assistance in this area is expected to start towards the end of the first year ofthe program.

3.19 The Project also would include support to BNA's SupervisionDepartment. The assistancein this area was prepared taking into account the views of the IMF resident specialist, and complementshis work. It includes two special portfolio audits of the major commercial banks to assess the adequacyof provisions and the potential impact of necessary write-offs on their financial condition (six man-monthsof consulting services). These auaits will be carried out by international auditing firms under the auspicesof the Supervision Department of BNA in years two and three of the Project. In addition, assistance hasbeen included to support supervision department staff including internships for BNA staff in supervisiondepartments of other central banks. It is estimated that the program would involve a total of about tenmonths of consultant services and training abroad for two supervision departmnent staff.

3.20 Given the shortage of qualified personnel, the program includes training abroad of seniorstaff. This includes scholarships in macroeconomics for about 5 staff members and some 15 short termcourses abroad. Training for BNA staff also will be done in special courses in the National BankingTraining Institute (Instituto de FormaCao Bancgria de Angola, IFBA), para. 3.26 - 3.30 below. BNA willassign staff receiving long-term fellowships abroad financed by the Project to positions where acquiredskills will be put to use, and will require such staff to commit themselves to working for a period twotimes the duration olthe training period. The same will be true for the beneficiaries of other scholarshipsunder the Project. B., May 31, 1993, BNA in cooperation with other institutions involved in the Projectwill establish and approve criteria for the award of the long-term fellowships under the Project.Assurances on the arrangements for granting fellowships and for the employment of staff after returningto Angola were obtained at negotiations.

(d) Housing for Consultants

3.21 lTe lack of adequate housing is a major constraint to putting in place effective technicalassistance programs in Angola, because it complicates the recruitment of well qualified personnel. Toovercome this difficulty, the Project includes financing for the rehabilitation of a 1,142 m2 building (the

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L2 building) to house about ten consultants employed under the Project. Detailed architectural designsfor the rehabilitation works are being carried out by a local architectural firm and were financed underthe PPF. The facilities being constructed under the Project are discussed in Annex 3.9.

3.22 Because of the acute shortage of housing in Luanda, there will be pressure to make theProject housing facilities available for other purposes. During negotiations assurances were obtained thathousing financed by the Project would be used exclusively to hou. expatriate consultants financed underthe Project. The housing allocations would be discussed during the annual implementation review.During negotiations assurances also were obtained that the IFBA facilities would be used exclusively forIFBA-related activities.

2. Developing Banking Infrastructure

(a) Establishing a Check Clearing System

3.23 A major factor inhibiting commercial development outside the capital city in large Africancountries is the absence of a system of communications which would enable banks to effect paymentbetween regions. Although the systems required are technically simple, they can take time to developbecause of the inexperience of financial system institutions. The issue of payments between regions isexpected to be a major problem in Angola, because of the distance uztween its economic centers and thepoor communications. Although the new kwanza began to be used widely as currency only in the lastsix months, the number of checks is ir. reasing sharply. At present, it takes some six weeks for a checkissued in Benguela to clear in Luanda. This situation is likely to worstn as economic activity, and hence,the number of transactions between banks, increases.

3.24 To address this issue, the Project includes the design and implementation of a nation-widecheck clearing system. The check clearing system is the first phase of a system which could enable inthe medium-term the transfer of information and other transactions between and within banks. When inpiace, the check clearing system will improve liquidity management, reduce floats and payment delays,decrease administrative overheads, and improve customer service. The system could eventually handleintra-bank communications, regulatory reporting, and dealing in foreign exchange. The system wouldoperate electronically to the extent feasible. It would depend nn air or ground transport for the transferof checks where telecommunications links are not feasible or available. The Credit would financetechnical assistance for establishing the system in Luanda and subsequently in the key cities, training ofstaff to operate the system and the associated hardware and software.

3.25 The check clearing system will be self-financing after an initial breaking in period. Itwould be managed initially by BNA, as an outgrowth of the existing system for Luanda. However, thesystem will be designed so that the payments system, when put in place, can be managed as anindependent institution, if the users so desire. The detailed design and phasing of the program is basedon a study financed ui,dcr the PPF. In addition to the technical parameters of thc system, the studyincludes implementation and staffing plans.

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(b) Establishing the National Banking .. raining Institute IDAjf

3.26 At present, there are no more than a dozen persons trained in modern practices of financein the whole financial system. Most ( these are in the BC' which set up an emergency training programbefore starting operations. The Project will assist in the design and im..;ementation of IFBA'. strategy,scope, legal status and training programs. IFBA would deliver courses to mid-level management and staffof the country's banks, insurance companies and other financial institutions. l'he P-oject would includesupport for the architectural design, construction supervision, and rehabiiitation of a building (the L4building) for IFBA. IFBA would also administer a program of seminars for high-level management offinancial institutions.

3.27 IFBA is the successor to BNA's 'rraining Department. The Training Department wasmanaged by a veteran BNA employee, and its courses were oriented to the monobank regime whichexisted prior to 1991. To serve the training needs of the emerging financial sector, IFRA would reorientpast programs and upgrade its course delivery. To accomplish these goals, a PPF-financed consultingteam from the Portuguese Banking Institute is finalizing arrangements regarding the stakeholding andparticipation in IFBA of Angolan banks and the relationship of IFBA's program with the trainingprograms of each bank. In addition, the team is assisting IFBA in preparing the details of courseofferings.

3.28 In view of the shortage of skilled personnel in all banks, IFBA course offerings in theinitial years would emphasize focussed courses to be delivered on a part-time basis so as to minimizedisruption of banking operations. The IF3A program would lead to the eventual professionalization ofbanking personnel by means of a program of examination and cer;ification of trainees; to the degreepossible, it would ir. the long run be integrated with secondary- and tertiary-level business education.

3.29 ro carry out its responsibilities, IFBA's staff will need to be trained. Some IFBA staffwill participate in the program to send senior financial managers abroad. as described below. Tosubstitute for instructors receiving training and to improve the quality of the IFBA staff, the Ins,iute wil;contract a maximum of three expatriate instructors to prepare and deliver its course offerings. A totalof nine expatriate instructor-years is foreseen as necessary while Angolans are being trained. It ispossible that IFBA will make arrangements with a similar institute to provide these instructors. TheProject also includes financing two vehicles, office equipment (computers, photocopiers, and audio-visualaids), and pedagogical materials (course-specific textbooks and teaching aids) to be identified by the PPF-financed consultants. The Government is taking steps to cone ,lete the legal establishment of IFBA. IFBAwould be legally established prior to IDA disbursement for the rehabilitation of the physical installations,teaching staff and equipment for the institute. The terms of reference for the consulting team are givenin Annex 3.4.

3.30 The main thrust of IFBA's program would be aimed at the training needs of staff andmid-level management in the banking sector. A more specialized focuts is needed to strengthen highermlanagement levels (directors and general directors). The Project includes a series of short seminars andcourses designed to increase the exposure of Angolan bank management, which has been isolated fromdevelopments in world finance by language and socialist orientation, to current developments in bankingand finance. The seminars would also serve to sensitize high-level management to the role of the centralbanking function (e.g., instruments of monetary policy and supervision requirements) and on commercialbank management requiremerts in respect of such subjects as risk management and exposure, lendingpolicy, cash management, accounting, and internal audit. The program, which IFBA would administer,would bring authorities to Luanda, and, occasionally, sponsor participation of Angolan banking managersin short courses abroad.

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(c) Developing a Core of Financial Professionals

3.31 One of the major requirements for the development of private sector activities in Angola,both in the financial institutions and in industry and commerce, is a core of skilled managers with post-secondary and post-graduate education in business administration, with emphasis on financialmanagement. The Project addresses this need by initiating a twinning arrangement between the Facultyof Economics at the Agostinho Neto University (Universidade Agostinho Neto, UAN), which isresponsible for delivering business-administration education, and a foreign university. The ultimateobjective of this twinning arrangement is to enable UAN to deliver programs at both the bachelors andmasters levels of a quality comparable to that of the foreign twin. The Faculty of Economics would bethe initial Angolan twin. It is possible that UAN would establish a separate faculty of businessadminis- ation some time during the duration of the twinning arrangement.

3.32 The core of the twinning arrangement in its early stages would be the interchange ofpeople and lecturers from the foreign twin seconded to the UAN for one or more academic years, andmanagement personnel and lecturers from Angola registering as full-time students at the foreign twin.However, Angola's needs suggest the advisability of other modalities in addition to this interchange, suchas (i) a high proportion of courses taught locally (particularly the remedial ones) and (ii) other than full-time courses of study, some examples of which would be: (a) executive education courses of a fewweeks's duration in specialized subjects; (b) weekend or evening classes directed to existing managementof Angolan enterprises; (c) short-term seminars and workshops on specific subjects for targeted audiences;(d) business roundtables for enterprise managers, governmental officials, and expatriate staff tointerchange ideas; and (e) collaboration with other institutions in developing training programs. Althoughthe twinning arrangement is designed along traditional lines (six lecturer-years of secondment to the UANand 40 student-years at the foreign twin, foreign universities are encouraged in the Terms of Reference(Annex 3.5) to propose alternative approaches to the country's business education needs.

3.33 Successful twinning arrangements last 20 years or more. Because of the need forsustaininig this component far beyond the implementation period of the proposed Credit, the TOR invitesprospective twins to indicate the finar -ing which may be available to continue the program after the initialthree-year period, which would berin with the 1993/94 academic year (starting in September 1993).While the twinning program by itself would not begin to meet the country's business education needs,individuals benefiting from the program would be expected to teach on at least a part-time basis at eitherUAN, irWA, or one of Angola's two commercial institutes. The Project would also support theacquisition of one vehicle.

3. Improving-the Legal and Regulatory Environment for Financial Operations

(a) Improving the Application of Banking Legislation

3.34 The law governing financial institutions and its regulations, as well as legislation whichapplies to banking transactions, need to be disseminated and correctly implemented. Appropriatemechanisms need to be designed to facilitate access to banking regulations and documentary andcontractual practices by both government agencies and private sector operators. Also, banking staff needto become familiar with these procedures to provide better banking services to the public. Lastly, keyancillary institutions such as registries and notaries need to be improved so that they are ab!e to play theirrole in banking.

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3.35 The Project will assist in designing appropriate mechanisms to facilitate theimplementation of the recently-enacted banking legislation, including dissemination of the legislation andstrengthening of the legal, technical and administrative capabilities of the institutions responsible for theirimplementation. These activities are summarized below and described in detail in Annex 3.8.

3.36 The Project will support the design and publication of a banking manual and thecompilation, harmonization and dissemination of the banking legal and regulatory framework in the formof a legal inventory. In addition, it will train key lega' and paralegal personnel in the banking system.Lastly, it will provide emergency assistance to improve registries and notaries in key areas. BNA willprepare and periodically update an operational manual providing a description of banking operations andthe legal and administrative requirements to carry them out. The manual will also include standardcontractual forms required by the legislation in force. A loose-leaf version of the manual will bedesigned, published and distributed to BNA's headquarters and branches. Manuals will be available forsale to the private sector. BNA's legal staff will be primarily responsible for the coordination of thiswork.

3.37 The banking legal and regulatory framework is not widely disseminated and consists ofdiverse and not easily available legal and administrative instruments. These instruments have been issuedby different institutions, including BNA, and the Ministry of Finance; much of the legislation in factdates from colonial times. Banking staff and other public or private agents requiring banking serviceshave difficulty assessing the content and scope of the applicable legal framework. The Project willsupport the compilation, harmonization, publication and dissemination of the banking legal and regulatoryframework which will be prepared in the form of a legal inventory.

3.38 Banking services cannot be carried out effectively without a qualified corps of legal andparalegal banking staff. 'he Project will support the strengthening of the legal and technical capabilities,i staff from BNA and other banking institutions through the provision of training activities, includingseminars on legal issues affecting the financial sector. In addition, BNA's legal and paralegal staff, whichhave been isolated from modern banking practices and lack professional contacts in other countries willbe given training abroad in the form of study tours.

3.39 All banking instruments need to be executed through the public registers and publicnotarial services. If notarial and registry serv:ces are left unattended, implementation of the banking legaland regulatory framework would be hampered. It is envisaged that an initial package of emergencymeasures will be implemented under the Project to allow the provision of the most essential services bythe registries and notaries public (e.g., copies of titles; registering companies). The Project will supportthe provision of technical assistance, acquisition of essential equipment, computers and office supplies,and provide in-service practical training to avoid serious bottlenecks for banking services. Thepreparation and implementation of this work will be the responsibility of the Legal Department of BNAin coordination with the National Directorate of Registries and Notarial Services which will be assistedby a professor of the Law School of UAN.

3.40 The Project will support the acquisition of emergency materials and equipment for theNational Directorate of Registries and Notarial Services and about ten registers and notarial offices,geographically located where the pressure for banking services will be most acute (Luanda, Lobito,Benguela, Lubango and Huambo). An inventory of emergency actions, including equipmentrequirements, is being financed under the PPF. The equipment to be financed includes securitymechanisms, photocopying equipment, typewriters, one personal computer and printer, and office

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supplies. In addition, seminars will be held during project implementation to train the Registries andNotarial Services staff in the practical aspects of their work in implementing the legislation andregulations affecting bank.

(b) DevI oping Insurance Laws and Regulations

3.41 The Government has begun to study reforms for the insurance sector, and, to this end,has created an Insurance Supervisory Office, which has prepared a draft of a new insurance law. TheProject includes technical assistance to set up and strengthen the Office,and review and adjust the legaland regulatory framework for the insurance industry. Regulations will need to be issued on such mattersas entry requilements, the adjudication of commercial ciaims, the determination of reserves, rate settingsand reporting requirements. A total of two man-years of consultant services have been assigned in theProject to this task.

(c) Developing Accounting and Auditing

3.42 Notwithstanding their importance in a market economy and an elment of financialtransactions, enterprise accounting and auditing in Angola are embryonic. In 1989, the Governmentreplaced a chart of accounts appropriate for centrally-planned economies with a new enterprise accountingplan (Plano de Contas Empresarial-PCE), but this is not applied. In fact, about 80 percent of public-sector enterprises and the bulk of Angolan private enterprises have no meaningful accounts. Except forcompanies with foreign ownership, company accounts are not audited.

3.43 The solution to the problem is made more intractable by the lack of formal education inaccounting,which has not been offered since 1974. Only a handful of senior accountants, mostly trainedbefore independenc