Angola - Economic Management Capacity Building Project

Document Of The World Bank FOR OFFICIAL USE ONLY C i-2 22 7 -1 Repwt No. P-5525-ANG MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATI(NAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT OF SDR 17.1 MILLION TO THE PEOPLE'S REPUBLIC OF ANGOLA FOR AN ECONOMIC MANAGEMENT CAPACITY BUILDING PROJECT MAY 24, 1991 Thbis document has a restricted distribution and may be used by recipients only in the perfonmance of their official duties. Its contents may not otherwise be disclosed without World Bank a.uthorization.  CURRENCY EOUIVALENT (as of March 31, 1991) Currency Unit - New Kwanza Official Rate: US$l = NKz6O.OO FISCAL YEAR January 1 - December 31 GLOSSARY OF ABBREVIATIONS AND ACRONYMS DNIC Directorate of Investment of the Ministry of Planning GARE Enterprise Restructuring Unit of the Ministry of Planning IMF International Monetary Fund INE National Statistical Institute MPLA People's Movement for the Liberation of Angola OED Operations Evaluation Department SEF Economic and Financial Restructuring Program UNDP United National Development Program UNITA National Union for the Total Independence of Angola  FOR OMCIAL USE ONLY ANGOLA ECMONOIC MANAEMENT CAPAITY BUILDING PROEC CEIT AD PROJET SUMMARY Borr-owexr People's Republic of Angola g"enf iciariers tMinistries of Planning, Finance, Commerce, Labor and Agriculture and National statistical Institute Proiegt Summary: The project would help finances (a) a program of training to build up local skills in economic and financial management, accounting, procurement, project analysis and statistics; (b) technical assistance, studies and logistical support to improve economic management and facilitate the transition towards a market-oriented economic system, including a pilot program for the privatization and liquidation of parastatals; and (c) supervislin and project management to closely monitor project implementation. Amount: SDR 17.1 million (US$ 23.0 million) Tormss Standard IDA Terms, with 35 years maturity Onlendina Terms: Not applicable. linangino Plan: (us$ million) =oAl t of -Total IDA 23.0 88 Government 3.1 12 Total 26.1 100 Economlc Rate or Returns Not applicabie. Staff Aoraigal Reloort: None mm IBRD No. 22857 This document has a restricted distribution and may be used by recipients only In the prform;nce of their oi1lciai duties. Its contents may not otherwise be disclosed without World Bank authorlktldonI  MBMOMIIDUX AND RMCOIMODMATION OF THE PRESIDENT OF THE INTBRNATIOCAL DEVWLOPMBNT ASSOCIATION Tn THE EXECU$TVE DIRECTORS ON A PROPOSED CREDIT TO THE PEOPSB1'S REPUBLIC OF ANGOLA FOR AN ECONOMIC MANAGEMENT CAPACITY BUILDING PROJECT 1. The following memorandum and recommendation an a proposed credit to Angola for SDR 17.1 million (US$ 23.0 million equivalent) is submitted for approval. The proposed credit would be on standard IDA terms with 35 years maturity and would help finance the strengthening of Angola's economic management capacity. This would be the first operation supported by the Bank Group in Angola. Part I of the present document describes the country's policies and the Bank's assistance strategy. it draws upon the latest Country Brief for Angola, which was distributed to the Executive Directors in January 1991, as well as an Introductory Economic Review (Report No. 7283-ANG) which was distributed to the Executive Directors in June 1990. Social indicators are presented in Schedule E. I/ PART I - COUNTRY POLICIES AND SANK GROUP ASSISTANCE STRAITGY Backar-ound 2. Angola, with a population of about 10 million, growing at an annual rate of about 2.8 peroent, is one of the richest countries in Africa in terms of natural resource endowment (e.g., oil, diamonds, and fertile land). At the same time, its economy is one of the most distorted of the continent. Since independence in 1975, the country has developed an economy highly dependent on income from oil. Available statistics on Angola are poor and should be treated with caution. GNP per capita, which is estimated at US$620 in 1989, is closely linked to oil prices. The oil sector represents about half of the GDP. in 1991, oil export earnings were about US$3 billion, or about US$300 per capita. The oil industry, developed as an enclave, has grown rapidly since 1975, and by early 1991, oil production reached about 460,000 barrels per day. By contrast, the non-oil sector's performance has been poor since independence. it is estimated that non-oil sector's output growth per capita has been negative since the early 1980's. Angola, which was an important net exporter of agricultural products before independence, has In recent years been increasingly dependent on food imports (and food aid) to supply its urban population. The capacity utilization of existing and the development of new manufacturing industries has been severely affected by the lack of inputs, spare parts and maintenance services, as well as by a distorted policy environment. 3. The Government's failure to revive the economy after independence is largely explained by three factors: (i) a fifteen-year old civil war, which has made much of the countryside too insecure for agricultural production and transport, has required heavy military expenditures (contributing to chronically large fiscal deficits, despite substantial revenues from oil), and has destroyed a substantial part of the economic and social infrastructure; (ii) unusually severe human resource constraints, due to the massive exodus of Portuguese settlers at independence; and (iii) misguided economic policies which have created a highly distorted system with a formal economy (largely public) managed by administrative controls, and a large parallel economy (mostly private). Economic. Financial and Social Performance 4. Since independence, the Angolan economy has been ravaged by a long and costly civil war and by severe distortions commonly observed in Z./ A detailed table on economic indicators is not presented, due to the lack of data. Available indicators are presented in the text table (page 2).  centrally-planned economies. The fall of domeotic production and agricultural exports that occurred after independence was primarily caused by the destruction of the country's stock of human and physical capital, and aggravated by macroeconomic policise which favored consumption. In response to adverse domestic conditions and external shocks which reduced the country's resources, the Government resorted to rigld price controls and a system of administratively allocated foreign exchange, instead of appropriate price policies (exchange rate adjustments, corrections in relative prices) and fiscal adjustments. An expansionary monetary policy maintained the level of domestic consumption, mostly in the urban areas, at the expense of investments to increase the productive base of the economy. 5. In many cases, official prices have not been changed since independence, and the few price adjustments which have taken place have been very modest when compared with increases in the nominal purchasing power of the population. As a consequence of these pricing policies, the domestic production of many goods has been discouraged, relative prices have been severely distorted, waste in the consumption of aome goods has been stimulated, and wide gaps have appeared between the demand and the supply of practically all goods and services. The exchange rate, which has been pegged to the US$, was unchanged at 29.92 Ks per US$ between 1975 and March 1991, when it was adjusted to 60.00 NRK per US$. Exchange rates prevailing in the parallel market have, however, sometimes been as high as a hundred times the official rate. In the absence of adequate adjustments, the exchange rate became overvalued and excess demand for foreign exchange was curtailed through administrative controls. As a result of these policies and the hostilities, investment in the non-oil sector dropped substantially, traditional agricultural exports practically disappeared, non-oil domestic output per capita declined, and the country became almost exclusively dependent on oil and diamond exports for its foreign exchange earnings. 6. To compensate for the shrinking domestic (non-oil) production per capita, growing imports financed by oil income supplied the country with consumption goods. Government policies encouraged consumption through widespread consumer price subsidies, the accumulation of sizeable fiscal deficits and a system of remuneration "in kind" to Government personnel. More specifically, to protect the purchasing power of workers in the formal sector, particularly civil servants, the Government introduced a system of "buying rights" in official shops (supplied with imported consumer goods) in partial lieu of cash payments of wages. Through this system, a relatively small portion of the population has access to the bulk of the country's imported consumer goods, at prices that are substantially below those prevailing in the parallel market. Government employees, in turn, trade part of these goods in the parallel market for food and consumption goods which are unavailable in official shops (e.g., vegetables, fish, etc). Manufacturing enterprises also sell part of their production at low prices to their own employees, who also trade on the parallel market. 7. Lack of financial discipline is a serious problem at all levels of public administration and enterprises. A growing part of the formal economy has been financed through oil revenues, which in recent years have provided over 80 percent of government income. In spite of the rapid growth of oil revenues since 1986, the budget has consistently been in deficit as non-oil revenue declined continuously, while expenditures remained at high levels. A large share of government expenditure, including most of the military expenditure, is outside the budget. It is estimated that military expenditures represent about 25 percent of CDP. In 1988-90, the overall budget deficit (including extra budgetary expenditure) was on average equivalent to about one quarter of CDP at official prices. However, the underlying deficit valued at more realistic prices is estimated to be lower (about 12 percent).  - 3 - 8. .hroughout the pogt-independence period, an accommodating monetary policy fully monetized the country's sizeable fiscal deficits. As a result, a growing excess liquidity rapidly emerged but its inflationary impact did not show up in the official price indices because of the administratively controlled official prices. These policies led to the emergence of widespread parallel markets. price differentials between the official and parallel markets rapidly attained 2,000% to 10,000%. This, in turn, reinforced the existing incentives to divert resources from the official to the parallel economy. Money substLtutes (such as imported beer) and barter took on an increasing role ln Lnternal trade, further compllcating the management of monetary policy. Annual inflation in the parallel market is estimated to have reached three-digit levels during 1987-90. 9. Foreign and domestic trade have been hampered by rigld and pervasive Government regulatlons and restrLctions. There is a predominance of LneffLeLent public enterprises, not only in manufacturLng, but also in forelgn trade, wholesaling, and ln the retall network. Although there are some private enterprises, thelr role ln providlng competltion to the public sector is weak, because of the administratlve allocation of imports and fixed proflt margine imposed by the Government. Agricultural production has been particularly affected by the war, the shortcomings of the trade system, and the disappearance of bush traders. In the earlier period of its economlc history, when the country was not engulfed in armed conflicts, bush traders had played an important role ln the marketing and distributLon system by providing consumer goods in exchange for agricultural products. 10. Angola's external debt at end-1989 is estimated at over US$7 billion (including US$1 blllon ln interest arrears), of whlch about US$3.5 billion was owed to the Sovlit Union, US$2.8 blllion to Parli Club and other Western creditors (maLnly Brazil and Portugal), and the remainder to Eastern European countries and Cuba. External debt represents about 100 percent of GDP. About one-third of the total debt is military. In June 1989, the SovLet Unlon rescheduled lts loans on favorable terms (10 years and 3 percent), Lncludlng arrears and maturLtLes falllng due through 1990. In July 1989, the Parls Club rescheduled almost US$0.5 billion in arrears and maturitles fallLng due through September 1990; the other Western credLtors rescheduled their own debt on the same terms. The remainlng maturity profile is unfavorable, with payments bunched over the perlod 1991-93. Thus, scheduled debt servlce would absorb about one-thlrd of projected exports of goods and servLces ln 1991- 93. Assuming further Soviet rescheduling at terms comparable to those of 1989, and "Toronto terms" for Western credltors, overall debt-servLcing * capacity of the exLitLng debt could be suffLcient to handle the flow of debt-servlce payments ln the medlum term, without compromisLng the long- term debt profile of the country. However, the problem of arrears will ln itself requLre an orderly resolutlon. Given the above, Angola's capacity to service additlonal debt at non-concessional terms is very limited. 11. The soclal conditions prevaliLng ln Angola are poor by Afrlcan standards. This Ls the comblned result of the clvll war, Lnappropriate policLes, rapid mlgratlon to the citles and emLgration of skilled manpower. Life expectancy at blrth has been estimated at 44 years, the lnfant mortality rate is 288 per thousand, lses than 30 percent of the populatLon has access to health services and safe water, and despLte the Government's achievements ln the fleld of education, the adult llteracy rate Ls still 41 percent. DiLparLty in social conditLons among various reglons are substantial, as a result of the war-Lnduced destruction. Poverty ln the rural areas is acute. in addLtLon to the stagnation in economlc activLty, the maln contrLbuting factors for rural poverty are: the interruptLon of normal links to the cities , the drastic decline of inter-regLonal trade, lack of incentive goods, and the lack of access to social servlces.  - 4 - 12. These factors particularly affect women, considdring their predominant involvement ln agricultural activities, and their greater relative need for social services. Nevertheless, womn's access to basic educational opportunities has been expanded and the current level of lLteracy among women, although still low at 33 percent, is substantially higher than in earlier years. Also, the Government has adopted a more meritocratic approach to the assignment of responsibilities by gender than is the case in most other Sub-Saharan African countries. Women figure prominently in the civil service, includlng in high-level positions. In fact, the person who will coordinat the execution of the proposed project ia a woman. so is the person who headed the delegation which recently visited Washington to negotiate the next credit t.o Angola, which will be presented to the Executive Directors in FY92. Itteogts at Economic Reform 13. Recognizaing that Angolas economic distortions and imbalances are due in large part to inappropriate economic policies, the Government announced in 1987 an ambitious program of Sconomic and Financial Restructuring (SBr). The basic objectives of the program were to stabilize the economy and improve production incentives by adjusting price levels (including the ezchange rate) in the formal economy. The proposed reforms, had they been implemented, would have constituted a major departure from the way the economy had been managed and included: (i) a limited adjustment of the exchange rate, which would have still left a wide murgin betwoen the official and the parallel exchange ratesl (Li) a reduction in the budget deficit, and a corresponding reduction in inflationary financing; (iii) a program for restructuring public enterprises through divesture and liquidation; (lv) reform of the financial sector by encouraging the establihment of commerclal banks and ensuring greater availability of credit to the private sectori and (v) limiting price controls to only selected essentlal goods. 14. While the overall direction of proposed reforms was appropriate, the measures generally did not go far enough to address the maln structural distortions, notably ln the area of the exchange rate. In any event, with the exception of a more accommodating attitude towards parallel market activities, there has been little progress to date in implemnting the program. Since 1988, several laws were adopted thit attempted to provlde a broad framework for structural reform, but most of them have not been applied. A new package of easures, Lncluding a 100 prcent devaluation, combined with wage increases and price liberalization was announced in early 1990 as part of a New Action Plan. The exchange rate adjustment, however, was postponed for over a year and the decontrol of most prices is yet to be implemented. 15. A recent "currency reform' in September 1990 (creation of a new currency and tight limits on convertibility from the old currency) temporarily brought down the prlces on the parallel market. However, this attempt to reduce excess liquidity proved unsustainable. The experience with this reform further undermined the public's already shaky confidence in the Government's management of the economy. Inflation is accelerating and the gap between official and parallel exchange rates is widening to the range which existed prior to the Ocurrency reform". Yet another attempt to put forth a more consistent and comprehensive set of stabilization measures was made recently as part of the annual plan for 1991. Whilo reaffirming the Government's commitment to adjustment and reform, this plan still does not represent the kind of comprehensive and credible package of reform whlch would be needed to address the fundamental economic distortions of the Angolan economy. For example, the 100 percent devaluation implemented in March 1991, is insufficient to address the substantial overvaluation of the New Ewanza. 16. The absnce of concrete and coherent economic reform measures to date may be attributed to various factors, including: (1) the Governent's preoccupation with the war and, more recently, with an  intenifying peace ros (s paras. 18 and 19)1 (L) the strong vested interests ln the existing systee (LLU) the uncertainty with regad to the political Lpact of reformo and (iv) weaknesses Ln econmc especially the liLted capacity for dgang and exeutLng tld action programs wlthin a consistent maroen frw , and the inadequate coordination betwen the princLpal act*-. in the polLiy making 17. A table sunarLig Angola's economc performance sLnce 1986 iL presnted below. As has already bee noted, however, it L bsd on statistical information whose accuracy is suspeat. Aftor doeades of warfare, lt ie highly lkely, for instance, that the data for the non-oil sector is misleadLngly hlgh. trthe statLitLcal base is one of the objectlves of the p crdit. REL GBOWM RATS St 0DPt 12.1 2l 15.2 13 28 an 26.2 28.1 24.7 03 4.7 sond- 2. Q5 28 2.2 04 GDP/3_piW 93 93 12 -13 0 nawA DWPift 0 3 43 0 .6 -2.4 NOMINAL GROWnI UTBISk EupmIu nf) .40 66 * 21 -3 hycs Opta) .-17 3 43 4 4 ATOS D*SSW76 .. . 46 42 40 *oD_ .. .. . .. . GovI IgfDPW 48 34 5 29 00apwixumwI Ss 46 do 54 Ov0f doh*Gp .10 -12 -25 4.5 CuM =co" 0 lm_s 403 449 40 -20 CuwnsiasemVIl 4 6 4 0 C rmm _pa 103l. 103IA 17.7 17.7 Red =*p .. .. .. .. IUmLw=' I= mmi de osmf1980 Z ft 3s S oua. UUSpdas.- a ii _h b _ jf 191-100  - 6- Reant PolLtical Develo1ments 18. War, be lt to ceek ladependence from Portugal or between the Government and UNITA (NatLonal Unlon for the Total Independence of Angola) in the post-Lndependence period, has been the domlnant fact of llfe in Angola for decades. In recent months, however, there has been encouragLng movement towards peace. The Government has, ln March 1991, opened the door for a multiparty system through a revlslon of the constitution. In May 1991, a cease-fire between MPLA (People's Movement for the LLberation of Angola - the Government party) and UNITA forces was Lnitialled, and so far, respected. The cease-fire is part of a comprehensive agreement settLng up a detalled timetable for the Lntegration of the two armles lnto a national Angolan army, for the opening of the political system, and for the organization of multiparty elections at all levels of government before the end of 1992. The implementation of both the millitary and political aspects of the agreement would be monitored by a "PolitLcal- Military Commission* comprising, besides the Government and UNITA, representatives from Portugal (which acted as mediator) and the US and the Soviet Union (both acted as observers). It would be assisted by a Unlted Nations force of about 600. Formal signature of the peace agreement is expected shortly. 19. These developments clearly constitute a major breakthrough. For the first time since independence, an end to the civil war seems to be at hand. If successful, thls process would also significantly improve the prospects for better economic management, including the reallocation of a large amount of public resources from the military to development uses. Over the short term, a number of remaining military and political iesues will have to be solved. Among these, the orderly demobilization of about 150,000 soldiero from both armies is likely to constitute a major challenge. Central geveotment Issues and Prosngcts 20. The medium-term economic prospects of Angola depend on five factors. First, the conclusion of the civil war, which, in addition to the heavy human cost, absorbs large amounts of financial resources and interferes with economic activity. Second, the speed and determination with which economlc policy reforms are undertaken, is crucial to restoring confidence in the government's ability to manage the economy. Third, the urgent rehabilitation of the economic and social infrastructure, which has been heavily damaged by decades of war. Fourth, there is a need to get the economy -- especially lts non-oil productive sectors (e.g., agriculture) back on its feet. And finally, there is a need to overcome the constraints on longer-term development imposed by the shortage of skilled personnel and by envLronmental degradation. With peace and an approprLate policy environment, Angola has considerable growth potential in the medium term, in view of its abundant natural resource endowment. 21. There is still, however, considerable uncertainty about the prospects for economic recovery in the short term. Even if the war comes to an end, it will likely take some time before the countryside is secure and there is an effective transition to a peacetime economy. In addition, during the 18 months electoral period which is expected to follow the formal ceasefire, the prospect that the Government will be able to concentrate on improvLng economic management is uncertain. The end of the war may also not result in immediate savlngs of resourcesl demobilizatLon will take time, the integration of the Government and UNITA forces lnto a national army may requlre additLonal spending, and there are substantial costs associated wlth the resettlement of displaced people. Moreover, while there are large benefits to be gained from the rehabilitatlon of Lafrastructure, realizing them will take tlme and require large investments. Flnally, despLte the Government's renewed commitment to economic reform, weak economic management is a serious constraLnt. Therefore, capacity building and technlial assistance -- of the sort the  proposed project would provide -- wll be crucLal ln strongthening policy formulation and implementation. 22. In vLew of these uncertalnties and the Bank's llmLted country knowledge at thie stage, growth prospects and external resource requlrements are dlfflcult to assess wlth any degree of accuracy. However, given the expected substantial reconstruction needs and skllled manpower constraints, lt is clear that international assistance will be crucial during the post war reconstructLon phase. ThLi assiLtance would have to consist mainly of economic policy advice, technical assistance in general and pre-inveatmont studies in particulars, and financial aid for infrastructure rehabilitation and development, as well as for facilitating the transition to a peacetime economy. Bank Groun Country AssLstance Stratecy and Oeratlions 23. Angola joined the Bank Croup in September 1989 and the proposed Economic Management Capacity BuLlding project would be the first operation in the country. The relationship between the Bank and Angola is, therefore, still at an inclpient state, and has not yet reached the scope and intensity that is prevalent in the case of long-standing members of the institution. The Bank's first strategic priority is, therefore, to further nurture this relationship over the coming months by broadenLng the dialogue on the country's development needs with the Angolan authorities and the non-governmental sectors through lending operations, economic and sector work, and aid coordination. As contact between the Bank Group and Angola expands, confldence will grow and the dialogue can mature into the type of partnershlp typlcal of other Borrowers. 24. A broader dialogue would pave the way for the Bank to pursue the objective of promoting economic growth with equLty in Angola. To achiove these objectives, the Bank would follow an assistance strategy basd ons (l) buildLng capaclty ln economic manag nt and helping prepare pre-Lnvestment stud$es; (LL) facilltating the tran stion to a peacetime economy; (LLi) helping rehabliLtate the devastated economlc and social lnfrastructurel and (iv) supporting the process of economic reform by helping ln the deslgn and implementation of macroaeconomic and sector policies needed to stabllize the economy and restore productlon incentlves. The Bank would use considerable flexibliLty in desLgnaing lts lending and economic and sector work programs ln Angola, ln view of the uncertainty surrounding the economlc and politLcal sltuatlon ln the country. The volume of lendlng and the number of operations wlll depend on the Government's progress in implementLng the needed economic policy reforms, on the restoration of peace, security and politlcal stabillty, and on the ability of the country to effectively absorb Bank aseLstance. 25. * nLna Strateo. The lendlng program for the perlod FY91-93 comprLses an average of two operatLons per year. The londing strategy revolves around three elements. The Lnitial focus will be on technical assistance and pre-Lnvestment operations. Subsequently, the program would expand to high-priorLty rehabilltation and investment projects, partlcularly in infrastructure and the soclal sectors. Eventually, lf the Government lmplements appropriat policy reforms, the Bank would also consider adjustment lending, if the country needs quLck-disbursement assistance. 26. The fLrst two operations ln the Angola lending program would provLde technLcal asLsitance, training and engineerlrg services. They Lnelude the proposed Economic Management Capacity BuLljing project and an infrastructure EngLneerLng project to provLde asLitance ln formulating polLcLes, strategLes and detailed pre-Lnvestment studies for the rehabliLtatLon of key transport and urban lnfrastructure systems. TechnLcal assistance components are also Lncluded ln other proposed projects, notably support to improve planning and implementatLon capacity ln the social sectors.  - 8 - 27. The second element of the Bank' a lending strategy involves assistance for rehabilitation and reconstruction of the economic and *oclal infrastructure and devolopment of the productive sectors. Building on eaperience to be gained with the planned social sector rehabilitation project and proposed sector work in educatLon and related fields, several operations focussing on buman resource dovelopment (especial'ly of women) will be considered. RehabilLtatlon project are beLng prepared ln the urban, energy and transport sectors, where the need for Lmuediate rehabilltation can be clearly identified. Thle includes improvement of essential urban infrastructure (e.g., water, sanltation, solid waste and housLag) in the Lobito/Benguela area to reduco severe public health hazards, and to ensure the viability of other Loblto corridor invaetments. Based on the completed energy assessu_nt and a follow-up review of the power sector investment program, a proposed operation ln the energy sector would help to rehabilitate hlgh prlority power infrastructure and support the financial rehabilltation of the power utilities. In transport, ln addition to the pipeline of investment projecte whlch would emrge from an infrastructure Engineering operation to be presented to the Executive Director in the coming months, the Bank would focus on the Lobito/Benguela rail corridor by rehabilitating present corridor infrastructure to enable the system to handle medium-term transit and national traffic demand, and establish the basiL for future upgrading and expansion of the network. 28. The third element of the Bank's lending strategy consists of financial support, lf needed, for the Government's economic adjustment program, once the authorities have demonstrated a clear commitment to comprehensive reforms by making suffLcient progress in adoptJing key policy measures. 29. Pergormance Monitoring. The size of the investment operations, as well as the speed at which they could be processed would depend on the evolving security situation, and on the Government's progress in adopting sectoral reforms and improving implementatLon capacity. When the incentive framework iL the productive sectors improves, the Bank would undertake catalytic investments in these sectors through industrial restructuring and agricultural rehabilltation operatLons. Greater security in the rural areas would be an essential condition for agrLcultural operatlons, including protection of the environment. Government performance in implementing the proposed Economic Management Capaclty BuLlding project would also be an element taken into account to determlne the sLse and composition of future lending. Performance in macroeconomic management will be evaluated with respect to actions designed to correct the overvaluatlon of the exchange rate, liberalLsz prices, stabilize public flnances, improve production incentives, and disengage the State from productlve and caomercial activities. The volume of eventual quick-disbursing assistance would depend on the country's financing roqulrements, which would themelves be highly dependent on the evolution of the price of oil. 30. ReonomLc and Sector Work. The key objectives of the economic and sector work program are to support the policy dialogue with the Government and to provide the intellectual underpinnings for the Bank's lending operations. As executing agency for UNDP, the Bank undertook, in 1989-90, an Introductory Economic Review of Angola and an Energy Assessment. Following the c.impletLon of these reports, the Bank's economlc work has focussed on selected lsues of economic reform, whlch has provLded an input to the proposed Economic Management capacity Building Project. A major report on Traft, Prlce, and Wage Reform has been discuesed with the Goverment ln March 1991, and will be distributed to the Executive Directors shortly. In the future, the Bank plans to deepen its macroeconomLc dlalogue (lncludLng through joint mLssions wlth the IMP) by inLtiating reviews of public expenditure and of public enterprlese. Sector work will focus on acquLring and broadenLng the Bank's sector knowledge (in the productlve and social sectors), thus contributlng to an expanding lendLng program and dialogue on sectoral policy issues.  310 Donor coordinaion and Relains wLth the IMr. Many donors havw been providing assistance to Angola for some tun. As the Bank builds up its presence in Angola, however, it can be expected to play a coordinating role because of its multlsectoral experiences as well as the overview provided by its economic and sector work. In paroll-l with the potentLal build-up of the lending program and the dep"ning of the understanding of Angola's economy, the Bank also plans to Lntensify its aid coordination efforts. One of the objectives of the project presented in this report is to help coordinate, where necess"ry, the various donor efforts in certain key areas of technical assistance. A central concern of this coordination effort is to avoid duplication of technical assistance activities. The Bank has also been coordinating closely with the zu in carrying out its initial podicy dialogue with the Govrnment, and with the UMDP and bilateral donors in preparlag the components of the proposed capacity building project. 32. Summary As eesnt. Angola has made little progress in realizing its considerable development potential becaus oft (i) a destructive, costly, and protracted civil war; (i) a severe lack of skilled personnel, and (iii) misguided policies and weak economic management, as well as an inadequate legal and regulatory framework. The Bank's strategy is to "spring open" a relationship with this new member by engaging the authorities in a dialogue on the country's development needs, aupporting capacity building, helping to rehabilitate the devastated economic and ocial infrastructure, facilitating the transition to a peacetime economy, and supporting the process of economic reform. The pace and scope of the Bank's assistance program will depend on Angola's progress towards peace and security, implementation of economic reform and improvements in absorptive capacity. The initial focus will be on an active economic and sector work program and technical assistance lending operations focussing on capacity building, notably in economic management, and preparation of pre-investment studies. If the security situation improves significantly, a wider range of activities in infrastructure rehabilitation would be supported. If the Government improves the incentive framework in the productive sectors, the Bank would expand its operations and bring forward investments ln sectors such as agriculture and industry. Finally, the Dank would consider adjustment lending, depanding on the progress in implementing comprehensive macroeconomlc policy reforms as well as on the country's financing requirements, which would largely hinge on the price of oil. PAR? II - THE CRMDI? 33. Economic management throughout Sub-Saharan Africa suffers from a lack of adequate Lnstitutions and qualified manpower. The institutional and human resource constraints ln Angola are even more severe than in most parts of Africa, making the ned for capacity building more acute. First, Angola is particularly handicapped by a lack of skilled manpower and weak and inappropriate institutions. The massive exodus in 1975 of about 300,000 Portuguese settlers who held practLcally all administrative, managerial and skilled jobs before independence had a devastating effect on the economy. The almost complete lack of access to education for Angolans during the colonial era, and the lnefficiencies that have marked much of the educational effort since indep nd ene, have left the vast majority of the labor force functionally illiterate. Very few of those in higher administrative and managerial positLons have been adequately trained. Second, even the scarce available skills were in large part being used for purposes other than macroeconomic management. These included the conduct of an internal war and the operation of various economic enclaves such as the oil sector, diamond mining and the construction of the large Capanda dam. Wlth the advent of peace, the need to rebulld the economy and implement reform and the transformatLon to a  - 10 - multL-party system will place increasingly heavy demands on the administratLon. 34. The weakness and fragmentation of the institutlonal framework and the lack of qualified manpower Is felt particularly strongly at thli juncture because of the Government's lntention to address the serious problems posed by the distorted economic environment and to move towards a market-orlented economy. These efforts, which are described in Part I of this report, have shown clearly how ill prepared the authorities are for undertaking such a complex task. Whlle they have been able to outllne the broad objectives of a reform program, they are experiencing great difficulty in implementlng a coordinated set of actLons with respect to exchange rate, fiscal, monetary and lncomes polLcLes. Also, the experience of running a highly centralized and pervasive system of planning and adminisIeratLve controls has created Lnappropriate institutions and skills for operating a market-oriented economy. Thus, together with an in-depth reform of the wage and incentive system, extenslve retralning and reorientatlon of officlals will be required and many of the existLng institutLons will need to be restructured or even phased out. Some of the critical constraLnts to Angola's development lie in the area of human resources and institutlons. Capacity building and technical assistance are needed at all levels to develop an economic data base, build up the analytical capacity, strengthen policy formulation, and generally improve management skills. Thls institutioral development effort will necessarily take place in stages, requiring a series of well- designed interventions. IxLsting Technical AssiLtance in Anaola 35. While the Bank has only recently become actlve in Angola, other donors have been operating there for some time. Since the early eighties, both Portugal and Hungary provided technical assistance, primarLly in the diagnosis of economic problems and distortions. Since 1986, when macroeconomic imbalances where aggravated by the sharp decline in oil prices and preparation of the SEP program got underway, the demand for technical assistance to strengthen economic management has grown. The Government asked UNDP to fund a complete diagnostic review of the economy, and the Bank was asked to execute this review. The resultlng report, issued in June 1990, assessed the structure and performance of the economy and examlned the Government's home-grown economic reform program (SEF). It concluded that the distorted economy was in critLcal condition and urged the Government to immediately begin implementing an economic reform program along SEP lines, but with major modiflcations. As mentioned earlier, the Government was unable to implement that program. 36. UNDP has also been providing assistance to the Mlnistry of Planning, prLmarlly for the strengthening of national accounts and other statistLcs, and more recently, for the preparation of a 5-year plan for economic reconstruction (together with the African Development Bank). The U.N. Management Development Program has also provided some support in a number of areas, including provLison of a public administration advlser and training and statistlcal assistance for the public enterprise sector. Technical assistance from other donors has included support from France on fiscal issues; from the Bank of Portugal to the National Bank of Angola; from the European Communlty to improve publLc investment programming; and more recently, from Sweden through short-term missions focussing on the design, implementation and monitoring of an economic adjustment program. Recently the IMF has also provided technlcal assistance to Angola, initially funded from lts own resources and now supported by an UNDP project. To provide the basis for its technical assistance, the IMF undertook comprehensLve overview assessments of Angola's public finances, flnanclal statLtics and the banking system. Following misslons by the Flocal Affalrs, Central Banking and Statistics departments, the IMF has developed a substantLal technlcal assistance program in tax administration, budget management, treasury operations, monetary pollcy  - 11 - and financial system reform, as well as fiscal, monetary and balance of payments statistics. Rationale fQr IDA Sunnort 37. Although some of the ongoing assistance described above has begun to make a positive contribution, on the whole existing technical assistance efforts remain scattered and lack the critical mass for contributing significantly to improved economic management. There continues, therefore, to be a need for capacity building and leadership in a number of essential areas. IDA involvement would facilitate the adoption of a systematic and strategic approach to capacity building, relating technical assistance to the requirements of the reform program in the short term and laying the foundation for more permanent improvements in economic management over the medium term. In addition, with peace prospects becoming more favorable, the Government intends to design and implement a reconstruction program involving major investments in infrastructure rehabilitation and other measures to stimulate a rapid recovery in production. In view of the difficulty of this task and the need to ensure that investment resources are channelled to well-prepared high priority projects, there is an urgent need to strengthen the Government's capacity in public investment programing and project preparation. The Bank's role is to address key areas where there is a clear need for assistance to strengthen economic management and to provide leadership and complementary support for the activities covered by other agencies. The proposed project would serve as a vehicle for the definition of a coherent capacity building strategy, in close coordination with other donors. Proiect Obiectives 38. The central objective of the project is to strengthen the Government s capacity to formulate and implement sound economic policies and investment projects. Over the medium term, this objective would be pursued by the provision of training to strengthen economic, accounting and project analysis skills of Angolan civil servants, and by assisting the authorities in improving the economic data base and streamlining the legal framework. in the short term, this objective would be pursued by providing technical assistance to the economic management functions that are critical to the design and implementation of a well balanced economic reform program, including the liberalization of the trade, agricultural and industrial sectors. Prolect Description 39. The detailed project description appears in section A of the Technical Annex of this report. The project includes the following componentes (a) Human resource develonment, including targeted training programs aiming at improving skills in: (i) economic management; (ii) project analysis; (iii) accounting/financial management; and (iv) procurementt (b) Economic statistics, including strengthening of the central statistical agency and improvement in the collection, analysis and dissemination of essential datal (c) Local assistance, to streamline the legal and regulatory framework; (d) Public resource manaaement, including sub-components focussing on: (i) public expenditure management; (ii) public investment planning and programming; (lii) public enterprise financial monitoring, and (iv) public accounting and financial management; and (e) Liberalization goliciea, including studies and/or advisory services to: (i) design, implement and monitor trade liberalization and carry out a rural markets study; (ii) design and implement an income policy (price and wage) reform package, and assess its economic and social impact; (Lii) prepare an action program to restore the competitiveness of the industrial sector and carry out a pilot privatization and liquidation program; and (iv) analyze agricultural sector policy issues and development potential, support state farms privatization, and carry out a rural survey. In addition, the project includes funding for project  - 12 - administration and coordination as well as unallocated contLngency funds to be used for, Later &11a, short-term advLsory services and studL@s, to be ldentlfled and agreed upon durLng the course of project impl_mentatlon. 40. The total cost of the project net of taxes is estLmated at US$ 26.1 mlllon equlvalent, with forelgn costs of US5 23.0 million and local costs of US$ 3.1 mllion. A breakdown of costs and the fLnancing plan are shown in Schedule A. Training activities, project administration and the unallocated component represent 44 percent (US$ 10 mllion) of IDA contribution. The sise of the credit is justified by the declslon to proceed with one umbrella tochnLcal assLitance operation rather than *sveral smaller ones and by the need to "catch up' ln a country whlch has beon a member of the Bank for only 18 months. Procurement and dlsburement arrangements and amounts are presented ln Schedule B. A timetable of key project processing events is shown ln Schedule C. &jLect IMglementati2n 41. Project implementatlon and adminLstration are descrLbed ln Section B of the Technlcal Annex of thls report. The overall project implementatLon would be under the responaLbillty of the Ministry of PlannLng, but responslbility to implement the various project components would rest wlth the respective line ministries. A Project Coordlnation Committee, to be headed by a Project Coordinator and assisted by a Project Administrator would be responsible for managing the project. Aaureements 42. The Project Coordination Commlttee and the position of Project Coordinator have been legally established during project preparation. A Project Coordinator has also been appoLnted. During negotLations, IDA receLved assurances from the Government on the followLngs (i) the establiosment of the management structure to carry out the execution of the project, includlng the responsibilities and operating procedures of the Project Coordinatlng Committee and the Project Unit, and the terms of reference for the Project Coordlnator and for the Project Administrator; (iL) a first year action program for each project component and each Ministry, except for the statLstics component and the unallocated component; (iii) the terms of reference of the long-term consultants, to be flnanced under the project; (iv) a mld-term review and an annual project review to assess implementatlon progress, ldentify constraints, take corrective action and approve the action program of the following year; (v) the project accounting and auditing arrangements; (vi) procedures concerning project reporting and monitoring; and (vll) the organization by the Government of an annual donor's meetLng on technLcal assistance to ensure consistency between donor intervention and avoid overlapping. 43. conditLons of Effectiveness: (i) the legal establlshment of the Project Unit and the position of Project Administrator I and (LL) the selection and employment of the Project Administrator, with qualifications and experience satisfactory to the Association. 44. Conditlon of Disbursement: Credit funds under the unallocated category and the statistics component would be conditloned, respectively, on the Association approving a list of activities to be financed under the component with corresponding implementation schedule and budget, and on the approval by the Government of the Natlonal Statistics Plan prepared ln consultation with IDA. BM-Lts 45. improved economic management would have a major pay-off for a country as well endowed as Angola, and where the economy is performing  - 13 - so far below lt. potential. The assistance provided under the proposed project would facilitate the preparation, implementation and supervision of policy reform measures that are long overdue and which would lead to growth of incomes. The project would also help to ensure that the investments contemplated under the reconstruction program, which would be launched once peace takes hold, would be sound and contribute to more efficient resource allocation. Over the long term, the capaelty building components of the project would contribute to improving the qualifications of civLl servants in the areas of economlc and financial management Other benefits could include considerable savings resulting from improved procurement procedures applied to Angola's US$ 3 bllion per year lmport bill, and reduced risks of costly policy mistakes resulting from an improved statistical data base. 46. The proposed project carries substantial risks. First, there are the risks to successful project execution inherent to a first project in a country where civil war has been raging and where important political developments are likely to take place over the coming years. Prospects for a peaceful settlement of the civil war and for a lasting political settlement are brighter today than ever before, and the potentially large benefits of such a high-priority capacity building project warrant taking this *political" risk. Second, with respect to the training, legal framework and economic statistics components of the project itself, there are risks of overlapping with other donor activities and of slow implementation, due to the administration's limited absorptive capacity. These risks have been addressed bys (i) the special emphasis given to medium and long-term human resources development and targeted training under the proposed project; (i) clear assignment of responsibilities for various components; and (iii) close coordination with other donors. 47. I am satisfied that the proposed credit would comply with the Articles of Agreement of the Association and recommend that the Executive Directors approve the proposed Credit. Barber B. Conable President Attachments Washington, D.C. Date: May 24, 1991  - 14 - Page 1 of 1 ZCONOMSC MANAO!NNU CApAITY DUILDIEG PR=JECT W1ois1 Coat RatiMates aRd 1Finaning PIAn (US million equivalent) Protect Cost Estimates Forlian Local A (a) Ruman Resources Development S.17 0.33 5.50 (b) Economic Statistics 1.80 0.60 2.40 (c) Legal Assistance 2.62 0.17 2.79 (d) Public Recource Management 3.59 0.19 3.78 (s) Liberalization Policies 3.78 O.S9 4.37 (f) Project Administration/coordination 2.09 0.71 2.80 (9) Unallocated 1.62 0.16 1.78 Base Cot (mid-1991) 20.67 2.75 23.42 Contingencies 'l 2.33 0.31 2.64 Iotal Project Costs 3/ RjLaQ .0 .Qi06 Financina Plan ZrAMign Lgcal Total Government ------ 3.06 3.06 IDA 23.00 23--0 Total 23.00 3.06 26.06 1/ Price contingencies were calculated on the basis of international inflation. 2/ costs are not of taxes and duties.  - 1S - Schedule a Page 1 of 2 ECONOMIC MANGMENT CAPAITY BtUILDING PROJECT !ISUNTM ANDZ DISDIURNfE SUmi= OF PROPOSER BOCUEME ARRAGEMNTS (US $ MILLION EQUIVALENT) FIGURES IN BRACKETS INDICATE ANOUNTS FINANCED BY IDA PROJECT ELEMENT PROCUREMNMEalEOD Ica W&E gRf 1 TOTAL CS 1. go 1.1 BookandMlial 0.28 0.28 t (0.28) (0.28) 1.2 Office Efqulpmnt and Supplies 0.60 0.35 0.95 4 (0.5) 0.20) (0.70) 13 Vehicles 0.50 0.23 0.73 3 (0.45) (0.20) (0.65) 2. CordiWtdes. TA and Twinin 2.1 Sudis 6.84 6.84 26 (6.11) (6.11) 2.2 Consultny Seorvicc 12.45 12.45 48 (11.71) (11.71) 2.3 Training 1.45 1.45 6 (1.45) (1.45) 3. 3.1 Rental, Maintenanee, etc 2.61 2.61 10 (1.35) (1.35) 4. Mlsamo 4.1 ReflnsniagofPPP 0.75 0.7S 3 (0.7S) (0.75) TOTAL 1.10 21.60 3.36 26.06 100 (0.93) (19.95) (2.10) (23.00)  - 16 - Pag 2 of 2 ANGOLA 192mOMC AAGM3I CAPACITY RUIL21VO PAOJ3= (UsS million) Anwu of cdft % of Egil Eienad 1. a. Sbus 4.35 100% of foeig b. Camuhwn Setvs .00 100% of d relg c. Tunimg 1.40 100s%of fte I. Books and Maerls 0.25 100% of foeig 3. 5e auli.m Sm le. and Vhicle S. Offqe ipenanSod Supples 0.60 100%t of f b. Veile 0.50 1o% of foeign 4. hcl_esal perating codsa 0.90 100% of fois S. Satics compmon 235 100% of foreign 6. Ohier Assiance 1.40 100% of foeign 7. EefiunancigofPfWF 0.75 Anua due S. Umilemod t2 Total Cost 23.00 E:STINAT15D DISBITE MS (USS Million) offilk FY SbrnoflBuEd!= SbngfCXuAmiive 56 of toud 1992 Dc 31,1991 0.50 OS0. 2.2 luan30, 1992 1.61 2.11 9.2 1993 Dec 31, 1992 3.25 5.36 23.3 luam 30,1993 3.60 8.96 39.0 1994 Dec 31, 1993 3.96 12.92 56.2 Jun. 31,1994 3.96 16.38 73.4 1995 Dec 31, 1994 2.78 19.66 85.5 lun 30,1995 2.50 22.16 96.3 1996 Dec 31, 1995 0.60 22.76 98.9 lune 30,1996 0.24 23.00 100.0  - 17 - Schedule a Page 1 of 1 ECONOmHC MAMAoeNT CAPACSY BtSLDfla PRAijzO Simeatble of lNL PE ogessing ent Time Taken to Prepares 11 months Prepared by: Qov.rnment. with IDA assistance First IDA Missions February 1990 Appraisal Mission Departure: February 1991 Negotiationss April 1991 Board Presntations June 1991 Planned Effectivenesss September 1991  - I$ - Vage 1 of 1 STAUS OP MANM OMU OPERATIONS IN ANGLA (March 31, 1991) The proposed credit would be the first Bank group operation in Angola.  - 19 - Schedule E Page 1 of 2 Anoa 2or 1521) SSWi i.e p qo {t-) J kP HUMANRESOURCES 54p9 53 5 25 1 50-3 57.6 60.8 hm pa 1wown n"b~*ofap VA.! mAest .. .. .. .... Re. .. .. ..... ainua% 0. 3.4 29 3.1 2.1 1i8 P8hn _ 4.3 6.i 52 5.2 3.0 2.9 ueam 8 _t owa mdifi 3.9 3.8 3.2 2.8 19 3.1 i=20t h s .. 13,505 674322 831,021 510,48 bilth me jw~pethas py. 49.2 47.7 47.0 46.7 30.0 25.5 6a39 6.39 6.44 6.59 3.87 3275 Cl(0-4)/wom(15.49) p Usta pQr lCo0w .. ..-- Rund MatdoahM pert d ap. 289 23 6 15.5 8I 8.0 POm *A%L pe tiv MM$l 191.6 IN5 13.7 1069 52.7 45.2 IJmS or l . 6. 213.6 1S.1 81.5 54.4 Ufvi~~~~atbbftwmW ~~3S.2 39.2 45.3 51.0 65.2 67.4 fmeoW 367 40.8 47.2 52.7 67.6 69.9 Tadla *fom dwafab4 7 2fS