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 Division Country Department III Africa Regional Office I his documilent has a restrictted distribution and mas bhe used hb recipients onls in the perforimiarce of their ofhcial duties. It% (ontentt maa not otherwise he di% loved without \Aorld Batik authoriiationi. CURRENCY EOUIVALENTS Currency Unit = New kwanza (NKz) US$ I= NKz 550 US$ i exchange rate!' NKz 550 (April 1992) WEIGHTS AND MEASURES Metric British/US Equivalent 1 meter (ni) = 328 feet 1 square meter (sq. m) 10.76 square feet 1 kilometer (km) = 0.62 mile I 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 Atilntico BPC Bank of Savings and Credit (Banco de Poupanca e Crddito) bpd Barrels per Day CAP Agricultural and Fisheries Credit Fund (Caixa de Cr6dito Agropecuaria e Pescas) CCS Check Clearing System CPI Consumer Price Inder DNC 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 Product IC Informatics Committee ICB International Competitive Bidding IDA International Development Association IFBA National Banking Trainirig Institute (Instituto de Formaqao Bancaria de Angola) IMF International NMonetary Fund ISSP Information Systems Stratcgic Plan L.Cb Local Competitive Bidding NIS Management Information System OGE Consolidated Budget (Orcamento Geral do Estado) PCE Enterprise Accounting Plan (Plano de Contas Empresarial) PPF Project Preparation Facility SAR Staff Appraisal Report SEF Program of Economic and Financial Restructuring (Programa de Saneamento Econ6mico e FinanceLi SME Sniall and Medium Enterprises SOE Statement of Expenditures TA Technical Assistance UAN 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. Other transactions may be conducted througb the commercial banks at market rates, In July 1992, the prevailing market rate was abost NKz 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. . . 2 A. Macro-Economic Context ........ . . .. 2 1. Background. 2 2. Recent Developments. 3 B. The Financial Sector.. 4 1. Financial Sector Strategy. 4 2. Recent Develcpments.5 3. Financial Policies. 5 C. The Banking System .................... 7 1. National Bank of Angola (BNA) ...................... 7 2. The Commercial Banks ............. . . ............. 9 3. The Agricultural ard Fisheries Credit Fund (CAP) .... ....... 10 D. The Insurance Subsector .............. .. .............. 10 E. Legal Framework for Financial Sector Operations ............ .. 11 H. THE PROJECT ...................................... 13 A. Project Objectives and Scope ........................... 13 B. Rationale for IDA Involvement ......................... 13 C. 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/Mmn Hemansi 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 Analyst Consult); Rodolfo Sanjujo (Architc Consultnt). Mr. Luis Derbez (AFTEF) and Mr. Caprio (CECFP) weoe lead advisor and peer reviewer, rspectively. Ms. Mary MoGuinnew provided eorcaal upport in the preparation of the report. Mr. Michael Sarris and Mr. Frmaisco Aguirrenacass anr the maaginS Division Chief nd thL Departnent Dirwtor, respectively, for the operaion. This document has a restricted distribution and may be used by recipients only in the performance Of 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 Financial Operations .................................... 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 ....... 23 D. Project Costs ......... ........................... 24 E. Project Financing ................................. 25 F. Project Implementat;n . . .......... 25 G. Procurement . . .26 H. Disbursements ..28 I. Accounting, Auditing and Rteporting ..29 J. Project Superv.sion ..30 iV. PROTECT BENEFITS AND RISKS ..31 A. Project Benefits .31 B. Project Risks .31 V. AGREEMENTS TO BE REACHED AND RECOMMENDATIONS 33 ANNEXES 1.1 Statement of Financial Sector Reform 2.1 Consumer Price Inflation 2.2 Main Features of the Banking System 2.3 Angola: Monetary Survey 2.4 Summary of Basic Banking Legislation 3.1 Main Technical Assistance and Training Activities: Summary Description of First Year Tasks 3.2 Informatics Program Appendix A - Assistance to Informatics Committee Appendix B - Assistance to Informatics Directorate on System Analysis/Pianning Methods Appendix C - Assistance for Information Systcrms Planning Study Appendix D - Assistance to Prepare Information Requirements Studies 3.3 National Bank of Angola: Assistance in Improving BNA Accounting, Terms of Reference 3.4 National Banking Training Institute: Terms of Reference 3.5 Business Education: Assistance to Agostinho Neto University, Terms of Reference 3.6 Bank Group Initiatives in Higher Education in Angola 3.7 Establishment of'Standards for Accounting and Auditing, Terms of Reference 3.8 Legal Assistance Component (LAC): Detailed Description Appendix A - Implementation of Key Aspects of LAC 3,9 Architecture and Civil Works 3.10 Project Costs 3.11 Estimated Disbursement Profile 3.12 Implementation Schedule for Key Components 3.13 Monitorable Actions under the Project 3.14 Project Supervision 4.1 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 of Commerce and Industry (BCI); Agricultural and Fisheries Credit Fund (CAP); Ministry of Justice. Amount: USS21 million equivalent IIr=n: Standard IDA termns with 40 year maturity PrDect Objectives: The Project supports institution building and reform in Angola's financial system to help stimulate resource mobilization, underpin private investment and promote economic diversification. Specifically, the Project would assist in: (i) strengthening the central bank so that it can perform its monetary policy and regulatory functions; (ii) developing banking infrastructure; (iii) improving the legal and regulatory environment for financial operations; and (iv) establishing institutional mechanisms for financing private investment. Prgieci Description: The Project consists of: (a) strengthening BNA, the central bank, principally chrough improvements in its accounts and accounting practices, procedures and information systems, and in its staff skills in administrative and functional areas; (b) development of banking infrastructure, including establishment of a national check clearing system, a training center for financial sector personnel, and training of a core of financial professionals; (c) disseminating and implementing laws and regulations affecting the banking sector, ensuring their coherence; establishing tne legal and regulatory framework for the insurance sector; md establishing accounting and auditing standards for the enterprise sector; and (d) improving institutional mechanisms for financing private investrnent and studies on access to credit by the private sector. The Credit would finance technical assistance, training, equipment, vehicles materials and supplies, as well as rehabilitation of two BNA properties to house the training center and project consultants. -ii- Bene-fits: An efficient, broadly-based financial sector, with an effective banking system at its core is necessary for the development of a market-based economy. The Project would lay the basis for the development of such a financial system in Angola, thus improving the mobilization of savings and encouraging their investtmant by the private sector in productive uses in support of economic growth. Establishing of sound financial institut' )ns, strength enine the banking profession, introducing necessary regulations and the effective supervision and surveillance of financial institutions will help improve confidence in the system and facilitate the process of intermediation. The Project would be the first vehicle for the Bank's dialogue with the Govornment on financial sector issues, and, upon completion of the ongoing improvements in the macroeconomic framework, would provide the basis for Bank lending to the productive sectors. RWisk: The Project faces sortie risks. First are those associated with the implementation capability 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 sermor positions have demonstrated considerable implementation capacity during project preparation. Because of the heavy work load in the Project, the Project Coordinator and Deputy Project Coordinator will be assisted by an experienced consultant in the administrative aspects of the Project. Second, the sustainability of reforms in the financial sector, and therefore the long-term success of the program, will depend on reforms 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 the needed reform program. Technical assistance financed under the proposed operation will help 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 3.9 B. Improving Accounting 0.1 1.3 1.4 C. Improving Skills 0.1 1.4 1.5 D. Housing 0.1 Q0 8 0 Subtotal 1.1 6.6 7.7 II. Banking Infrastructure A. Check Clearing 0.1 1.9 2.0 B. 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 0.9 B. Developing Insurance Legislation 0.0 0.5 0.5 C. 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 1.5 Price Contingencies 0j 3j 19 Total 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 2000 Disbursements: Annual 0.6 1.5 3.4 3.4 5.0 3.4 2.5 1.3 Cumulative 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 Angola initiated an ambitious program aimed at orienting the economy to a free market system. Decisions on the economic front have coincided with the end of a fifteen year civil war and the opening of the political system, with free elections scheduled for September 28 and 29, 1992. A key aspect of the economic reform program is the establishment of a financial system to serve the private sector during the economic recovery and beyrnd. 1.2 Significant improvements in the financial system are recognized as essential to achieve greater savings molilization and a more efficient aliocation of financial resources to the most productive uses in the economy in the pursuit of increased growth and sustainable external equilibrium. Financial sector 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 institutional framework for financial sector development. Specifically, the Project would assist in: (i) strengthening the National Bank of Angola (Etanco Nacional de Angola, BNA), the central bank, so that it can perform its monetary policy and regulatory functions; (ii) developing banking infrastructure; (iii) improving the legal and regulatory environment for financial operations; and (iv) establishing institutional mechanisms for financing private investment. 1 .4 The proposed Project was appraised in May 1992 by a World Bank mission consisting of Herminia Martinez (AF31E), Task Manager; John Graves (AFTEF), Eduardo Talero (AFTIF), Gerard CapriJ (CECFP), Teresa Genta-Fons (LEGAF), Roy Karaoglan (CCMRT), Rodolfo Sanjurjo and Stephen Gaull (consultants). -2- 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 million sq.km., a population of about 10.6 million (growing at 2.8 percent per year) and a population density less than half the sub-Saharan African average. Gross national product (GNP) per capita in 1989, the most recent available, is estimated at US$620. Fertile soils and abundant mineral resources hold great promise for Angola's economic growth performance. The economy grew at an average annual rate of 8 percent between 1961 ind 1974. Growth was stimulated by the coffee boom (Angola was the world's fourth largest coffee exporter) and by oil production (144,000 bpd by 1974). The-se developments attracted Portuguese settlers, whose number increased from 40,000 in 1940 to 340,000 in 1974. A cc0ony of Portugal for five centuries, Angola achieved independence in 1975, following 15 years of armed struggle. After independence, the fighting continued between the Government and the opposing Angolan faction during the independence war. The last 15 years have seen a drastic contraction of economic activity. Non-oil GNP per capita has fallen, with petroleum and dimonds (bot}. organized as economic enclaves) the only important exceptions to the general economic de.line. Despite 15 years of centrally planned economic management, there is a history of entrepreneurship and private sector activities 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 extensive damage 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 and skilled manpower. Second, the exodus at independence of about 300,000 Portuguese settlers, who held virtually all administrative, managerial, skil!ed and semi-skilled jobs, created economic chaos. Third, inappropriate economic policies, state interventionism and weak economic management encouraged consumption at the expense of production and subsidized imports for the formal urban sector. The resulting excess demand necessitated administrative controls of consumer prices and profit margins while the purchasing power of public sector workers was protected through rationing of imported consumer goods at subsidized prices. The growth in oil production -- reaching 480,000 bpd in 1991 - financed this system until the increasing financial requirements and inefficiencies led to a.. unsustainably large and rising budget deficit (about 25 percent of GNP on average in recent years). The budget deficit was financed by money creation, with the ensuing inflationary pressure repressed by widespread price controls, and heavy government borrowing from abroad, which caused expansion of external debt to about 103 percent of GNP in 1991. 2.3 The war and inappropriate policies led to increased disparities between the formal urban segment (about '5 percent of the population), employed largely in the public sector subsidized by oil, and most of the remainder of the population. The structure of the economy became severely distorted as investment dwindled, import-competing production dropped drastically, non-mineral exports virtually disappeared 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: iife expectancy 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. -3- 2.4 At independence, Angola had a fairly developed banking system, with eight foreign banks operating in the country. These banks had an extei.sive branch network (over 200 branches) with a wide geographical 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 central banking and commercial banking functione. and a savings bank where the deposits of individuals were placed. As most of the formal productive sector was publicly-owned, banks were used to channel savings to public enterprises. As in most socialist financial systems, decisions regarding the volume and allocation 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; banks were not supervised; and bank credit assessment, regarded as largely irrelevant, was not developed. In the insurance sector, all assets of private insurance companies were transferred to the Natinal Insurance Company (Empresa Nacional de Seguros e Reasseguros de Angola, ENSA), the state insurance organization 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 the whole, 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 been a*uthorized to trade foreign exchange at rates close to the parallel market rate; foreign exchange from oil and 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 cumbersome system 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 price controls were abolished except for utilities, petroleum products and bread, but administered prices on these were more than doubled; and profit margin controls were removed from all but 25 goods and services. 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 immediate effects in reducing the large distortions in the economy. The exchange rate was devalued 95 percent in steps from NKz 30 to NKz 550 to the US$. However, the parallel rate hag remained well above the official rate, in the range of NKz 1,800 per US$ in the April-May 1992 period. The Government recognizes the need to achieve genuine exchange unification at a realistic rate, and that its impact on prices will be limited since most prices already reflect the parallel exchange rate (Annex 2.1), although the price of petroleum is a notable except cn. The devaluation will help reduce the budget deficit because the Government operates with a surplus in forjain exchange in its budget. Thus, this would reduce the overall fiscal deficit and limit the Government -. need to draw on BNA advances; end the implicit tax on private sector investment (enterprises ratio ied from the foreign exchange market); and reduce the incentive to smuggle diamonds. The Government began to auction a limited amount of foreign exchange to importers in May 1992, an action which represents a step in the move to a unified rate. Profits from these 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 fiscal contraction and monetary restraint, and a major risk exists that the resulting inflationary impact will nullify the benefits of the reforms. Accordingly, decisive fiscal and monetary stabilization is the most urgent priority, followed by additional structural adjustment measures. The Government has requested the World Bank and the International Monetary Fund (IMF) to help prepare an adjustment program. A -4- key aspect of the economic reform program is the establishment of a financial system to serve the private sector during the .ecovery and beyond. 2.8 Reforms on the economic front are being accompanied by political liberalization. In March 1991, the Government opened the door to a multi-party system. A peace accord .vas signed ard an 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 a socialist to a market-oriented economy. An efficient financial system will facilitate iosvestment and spur growth. However, a precondition for tiie successful development of the flancial system is macroeconomic stability through fiscal prudence. Assuming fiscal control, the Government strategy for the development of the financial sector over the next five years includes: (i) prudent management of credit to the economy, in part through the rationalization of interest rates; (ii) opening the sector to new institutions which can bring the required know-how and increase competition; (iii) restructuring and privatizing existing financial institutions to make them more competitive and efficient; (iv) introduction of sound regulatory and supervisory practices in BNA (for the banking system) and in the Ministry of Finance (for the insurance sector); and (v) improvement in the legal, regulatory and ac-ounting framework 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 environment and 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 and promote greater competition among institutions. Strong and competitive commercial banks, one or two investment banks and an efficient rural savings network are likely to meet the economy's needs for the medium-term. Furthermore, because of its wealth, Angola is attracting a number of foreign banks. In the longer term, once the banking and insurance sectors have developed, and as the Aagolan private sector grows and diversifies, there also will be scope for the develor:ment of more sophisticated financial instruments and institutions. 2.11 The proposed Credit will help in the implementp 'on of the sector strategy. It will support the 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 for the whole system. Experience with adjustment programs elsewhere has demonstrated that there are advantages to initiating institutior reforms as early as possible, because of the time it takes to bring them abou:. Having stronger in-...,utions is a precondition for the application of effective financial policies and structural reforms in the sector. Tlbe principal institutional reforms to be undertaken are spelled out in the Government's Statement of Financial Sector Reform (see Annex 1.1). Subsequent operations 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 this objective. The Project to be financed under the proposed Credit and described in detail in Chap:er m, -5- is the first of these operations. In doing preparatory work for this operation, considersble analytical background 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 Governmnent has begun to implement a reform of the financial system by establishing a two-tier banking system. In addition, the Government hae begun introducing monetary policy instrumants, which will enable policy makers to better manage the economy and improve the mobilization and allocation of resources once the budget is brought under control. The Government also is planning to open the insurance sector to conmpetition. 2.14 The Angolan financial system began its transition from a socialist "monobanking' system with 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 governing financial institutions (Annex 2.4). Both were prepared with technical assistance from the IMF and the Bank of Portugal. In addition, the Government has establishied two banks - the Bank of Savings ard Credit (Banco de Poupanga e Credito, BPC), and the Bark of Commerce and Industry (Banco de Comercio e Industria, BCI) - and a specialized credit institution, the Agricultural and Fisheries Credit Fund (Caixa de Credito Agropecuaria e Pescas, CAP) each with its own statutes. All three institutions have begun to operate. During a transitional period, the conmmercial area of LNA will continue to provide banking services to public enterprises and foreign trade operations. BNA plans to stop its foreign trade financing operations in 1993. 2.15 Angola began the transition process with a small fin.cial sector and no monetary overhang. Broad money -- M2 - is only about 7-10 percent of GNP, and deposits of the non-government sector (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 banking system, the Government would only have to be concerned about protecting deposits amounting to about 2-4 percent of GNP, one-tenth the size of the deposit base in Eastern Europe. Furthermore, credit to the private 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 1991 rep.esent a transformation of the economic background to the functioning of the financial secto'. The remonetization of wages and the application of more realistic exchange rates represent a decisive step towards the rationalization of tradiig and price relationships, a precoddition for financial system development. The Government is conscious of the importance of macroeconc.mic reforms for the healthy development of the financial system. 2.17 On t.:e monetary policy front, the package of reforms includes: (i) a new schedule of interest rates; (ii) the imposition of reserve requirements and credit ceilings for banks, and (iii) the introduction of interest payments on government debt. These instruments do not yet perform a monetary policy function, and are unlikely to play a meaningful policy role as long as there is an inadequate control of the budget. In spite of this, their early introduction is useful as there will be a breaking-in period for policy 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 a relatively passive bystander in the credit determination process. The central banking law provides for automatic advances to the budget up to a limit of 10 percent of revenue. However, this limit can be overruled by the Council of Ministers, and overshooting the credit limits carries no penalty. As part of the 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 (NKz 450 billion as of April 1, 1992) while the Government would compensate BNA for future advances through six-month, tradeable, government bills paying 11 percent per annum. As long as there are no tffective limits on these advanc=s, BNA will have no control over monetary policy. Since the private sector 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 to worsen as government measures to encourage private sector activities take hold, and limits to total credit expansion are introduced to stabilize the economy. 2.19 BINA set the following ceilings for interest rates on deposits in November 1991: Table 1 Deposit 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 rates applied by the banking sector are 14 percent per annum for short-tern loans (less than one year); 16 percent per annum for medium-term loans - one to three years; and 20 percent per cent for long-term loans (more than three years). These rates are significantly negative in real terms. In any event, with the mihuscule amount of private sector credii there is little interest elasticity to the demand for credit, and higher 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, and privatization begins, the demand for private sector credit should expand and interest rate variations will come to play more of a role in the determination of credit aggregates. At that point it would be essential that interest rates on deposits be at least equal to or above the expected inflation rate in order to encourage the mobilization of savings. Efficient allocation of savings in turn would require that lending rates be positive in real terms so that financial intermediaries earn an adequate return for the risks they bear PNA intends to give priority to making interest rates positive in real terms as part of the macroeconomic reform program (see Annex 1. 1). 2.22 BNA authorities also have set reserve requirements which, although not essential, will help in the implementation of monetary poiicy. Given the underdevelopee money markets, reserve requirements will facilitate the preCiction of reserve holdings by banks. These have been set at 20 -7- percent on current and term accounts and are urwremunerated. This rate is quite high and constitutes a significant 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 and allow the banks to pay with excess reserves. BNA will likely have to rely on bank-by-bank credit ceilings 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 of BNA; 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 90 percent is with BNA, since it still controls credit lines with foreign banks, and almost all of the remainder with the BPC. Most of the private sector credit in kwanzas is with BPC. The potential for a credit boom through the commercial banks presents challenges at the operational, prudential and monetary policy levels. At the same time, the ability of the banks to draw on their excess reserves to finance a substantial boom in credit means that monetary policy instruments must be deployed to prevent an excessive burst of domestic demand. The technical assistance and training being provided by the IMF and through the proposed 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 in 1991. 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 Fomento e Exterior and Banco Totta e Acores - have established representative offices in Luanda, and recently obtained authorization in principle to establish full-fledged branches in Angola. Banque de Paris et Pays Bas, PARIBAS (Luxembourg), Standard Chartered Bank (South Africa) and Equator Bank (United States), a subsidiary of Hong Kong and Shanghai Bank, have also established representative offices in Luanda. Given Angola's rich resource base and attractive prospects, foreign banks appear interested in entering the local banking market. It is therefore possible that the banking sector could be dominated by private 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 consistent with those of modem institutions. In addition, its organizational structure is in line with that of central banks elsewhere. BNA has received technical assistance from the IMF and the Bank of Portugal in starting operations. The IMF has had an advisor to the Governor for three years, and has recently appointed an advisor to the Supervision Department to begin setting up its organization. In addition, it provided assistance in the separation of the central banking and commercial accounts and in setting up monetary statistics. The Bank of Portugal and BNA have a cooptration agreement under which BNA is able to draw on the Bank of Portugal's expertise. The Bank of Portugal assisted in the setting up of some of 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 instruments such as BNA directives on rediscounting. -8- 2.27 Although its statutes and formal organizational structure are generally in line with those of central banks, BNA is ill-equipped to handle its new functions. BNA has an acute shortage of personnel 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 be structured along the lines of a central bank in a market-oriented economy. This requires a clarification of functions of each department and a delineation of career streams, such as for economists, bank supervisors, and information technology professionals. The current policy of little pay differentiation with the civil service will need to be changed, as has happened in many developing and industrial economies.' Otherwise, the better qualified staff will be lost to commercial banks, where there is also a serious shortage of trained personnel. 2.28 Angola has few economists trained in modem macroeconomics, money and banking, and econometrics, and none with experience in bank supervision or reserve management. Consequently, a priority for BNA will be to ensure training and technical assistance in all of these areas. For the immediate future, technical assistance is urgent, as it will take some time before locals have acquired sufficient expertise to have sole responsibility for these functions. BNA staff will need to be trained abroad, through fellowships for the pursuit of undergraduate and masters-level degrees in economics as well as visits to other central banks for familiarization with implementation issues. This training will be especially important in future years as BNA attempts to move to market-related methods of implementing monetary policy. The approach to supervisory and reserve management issues should be similar. The proposed 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 and transferring them to the newly-created commercial banks. This is being carried out first in Luanda. As of 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 foreign exchange loans from BNA to the commercial banks, to cease new lending to state enterprises and to transfer existing accourts. The last phase, which has been delayed because of the country's continuing foreign exchange constraints, is expected to be completed in 1994. 2.30 The transfer of private sector accounts has run smoothly. However, the transfer of public enterprise accounts is proving difficult because many have long overdue debts, or are likely to become problem loans for banks. In fact, many public enterprises do not even satisfy the formalities for opening an account with a commercial bank, because they were never legally constituted. The Govermment has decided 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 financial instituitions, but BNA continues to have a predominant position in the banking sector, especially with respect to credit, as shown in Table 2 below. This is largely because of the dependence of the Government on BNA for financing the budget deficit. BNA would have accounted for about 91 percent of domestic credit at the end of 1991 even if credits which were outstanding in the books of the commercial 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 at a 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 public entorpriesm. -9- Table 2 Evolution 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 and agencies 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 proposes to 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 of Financial 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 commercial banks, BPC and BCI. BPC was established in March 1991 as the successor to the Banco Popular de Angola, 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 its resources at BNA. BPC is a full-fledged commercial bank. In May 1991, BPC had 29 offices located in eight of Angola's 18 provinces. At present, with around 710 staff, BPC is overstaffed and a reform of 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 the Banco Popular de Angola after independence. BPA and BPC also have formed a negotiating committee to set the basis for a possible participation of BPA in BPC of some 25 percent of its capital. The agreements also call for the opening of a branch in Luanda by BPA as a transitional measure. This branch could be absorbed by BPC if BPA participates in BPC. Arthur Andersen (US) is auditing BPC's 1991 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 the Government and 9 percent by nine state enterprises (1 percent each). This initial capital comprises a building valued at NKz 450 million and cash of NKz 550 million. -10- 2.36 Preparatory work for setting up BCI was done by a Portuguese consulting firm owned by 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 technology plans, 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 71 staff who are well qualified. The Government intends to privatize BCI. As a new bank, without a heavy cost structure inherited from the past, but with deposits transferred from BNA, BCI has the potential to be an efficient and profitable operation. Initially, the method of calculation for remunerating excess reserves 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 which provides financing for small enterprises, farmers, and the fishing industry. CAP is financed from contributions from BNA profits; deposits (from the public); resources from the Government's privatization program; foreign loans contracted by the r(overnment or CAP; and grants from bilateral agenries. 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. The intention is to provide assistance to small clients who would not have access to normal credit from the commercial banks. Although the general aim of making credit available to clients with no access to commercial credit is in line with the country's needs, CAP's legal and organizational structure and staffing are inadequate. 2.39 CAP was established as a quasi-bank with an initial capital of NKz 200 million provided by the Ministry of Finance, and expects additional capital contributions. In addition, CAP took over a BNA branch which was situated in its head office building. At present, CAP has customer deposits totalling NKz 8 billion which have been mostly re-deposited with BNA pending a definition of CAP's future. 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 clients which would not have initially a credit record with commnercial banks, it is likely that CAP would be set up as a fund, and managed professionally. Such a fund would be an entity under the Ministry of Finance or would be assigned to a financial institution to manage. As the Government intends to encourage the entry 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 insurance sector. As is the case in transitional socialist economies, the insurance industry is even more underdeveloped than the banking ,,ctor, as the State stood as the ultimate guarantor. Private sector firms will require insurance for a variety of risks for which the Government should not be responsible. Since the Government has no clear advantage in providing this service, private entry by domestic and foreign -11- firrr.s needs to be encouragedJ. The Government is conscious of this need, and haJ begun to study changes aiming at modernizing the subsector. 2.42 As part of the reform of the financial system, an Insurance Supervisory Office has been established within the Ministry of Finance. Its primary function has been to conduct a review of the insurance subsector and to develop policy recommendations for restructuring it. The offlice's proposals are contained in a draft law on insurance. The objective of the proposed policy is to stimulate development of a more compe:itive insurance subsector, effectively meeting consumer needs while at the same time, providing a expartded source of long-term investment capital. The law is expected to be enacted in early 1993. 2.43 The insurance subsector is now controlled by the state-owned ENSA, which was established in 1978 as the monopoly insurer in Angola. In 1981, all the private insurance companies were liquidated and their assets and liabiiities transferred to ENSA. ENSA always has shown a profit because all the county's oil installations, both Angolan and foreign-owned, are obligatorily insured with ENSA, as are all factories, machinery, aircraft and vessels. ENSA covers the whole range of insurance prciucts, although its portfolio is heavily concentrated in property and civil responsibility risks with relatively 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 limnited capacity in that country. A problem which has plagued ENSA has been the arrears in payment of the reinsurers. 2.44 Although ENSA has accounts with BPC and BCI, its considerable technical reserves and cash surplus are mottly deposited in unremunerated sight deposits in BNA. The lack of income on these reserves has been a chronic problem for ENSA, particularly because its agreements with reinsurers abroad require it to pay them 4 percent per annum on their share of technical reserves. When the Government opens the subsector, ENSA will face stiff competition, as new private insurance companies, mostly with large sharenoldings by Portuguese companies established in Angola. These new entrants, with small structures of highly trained staff, will chip away at the monopoly position of ENSA and bring a reduction in the premiums charged. 2.45 ENSA has 620 employees, of which 480 are in Luanda and the remainder is in 15 provincial offices. Some 200 manage properties with limited value which ENSA inherited after the nationalization of the foreign insurance companies. Only a small group of around 15 people has the necessary technical expertise to manage a modern insurance business, and even these people's skills need updating as much of their relevant experience was acquired before independence. ENSA is giving a strong emphasis to foreign language courses to enable its core of proficient staff to attend courses in the UK 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 those of the National Banking Training Institute. E. Legal Framework for Firancial Sector Operations 2.46 The legal framework for banking operations includes the banking legislation, circulars and 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 Financial Institutions Law (Lei das Instituic6es Financeiras, Law No. 5/91), and the BNA Statutes (Lei Orgznica do Banco National de Angola, Law No. 4/91). The main features of these laws are given in Annex 2.4. -12- Overall, this legislation provides an adequate framework for banking operations and includes the fundamental aspects of a modem financial legislation. However, the law will need to be applied. The main difficulties with the implementation of the legislation are the lack of some complementary regulations, poor dissemination of the law and the weak institutiornal framework of the legal institutions which 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 the nature of contracts and the different guaranties for loans. The A4ngolan legal framework embodies principles of civil law inherited. from Portugal. The regime is quite complex and antiquated, as it dates from nineteenth century Portiguese legislation which does not contemplate many of the institutions and modalities which exist today. In addition, there are problems with the law on mortgages resulting from the 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 speaking countries such as Brazil are not recognized under Angolarn legislation. The basic civil legislation needs to be updated, a problem which is being tackled under the ongoing Economic Management and Capacity Building Project (Credit 2274-ANG). 2.48 Many financial operations in Angola cannot be executed or enforced without the intervention of ancillary institutions, notably the registries and pubic notaries, which report to the Ministry of Justice. Timely registration and issuance of a number of documents, including property certificates or titles, is essential to the functioning of the financial sector. The inadequacies of the registries and notaries, both in terms of trained personnel and of material resources, render them unoperational. The Project would provide initial support to address the key operational bottlenecks to the banking sector, and assist in defining an action program for future reforms that can be supported by the Bank through other operations and by other institutions. One of the main concerns of the Project would be to design measures to stop irreparable damage to key documentation necessary for the efficient delivery of financial transactions. 2.49 A new General Law on Insurance Activity has been drafted by the Insurance Supervisory Office, with input from the Insurance Institute of Portugal, and is currently under review by the Council of Ministers. Under the terms of the legislation, the national insurance monopoly is to be ended, and the market opened to both domestic and foreign competition. Key ENSA functions are to be privatized, or managed through joint venture arrangements. A regulatory framework for proposed new entrants and activities is not yet defined and critical issues regarding entry criteria, property rights, investment prerogatives, exchange allocation, and other institutional constraints must be resolved in order to maximize the benefits anticipated in the proposed reforms. In addition, procedures for the adjudication of 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 provided for. 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 with its regulatory mandate without significant external support. Assistance in the initial work of the insurance supervision body is contemplated under the Project. -13- m. THE pROJECr A. Prc Objectives and S=LI= 3.1 The Project supports institution building and reform of the financial system to help stimulate 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 and roglatory functions; (ii) developing banking infrastructure; (iii) improving the legal and regulatory environment for financial operations; and (iv) establishing institutional mechanisms for financing private invement. 3.2 The modernization of the financial system is expected to be a medium-term process. The proposed operation would support priority institutional reforms during the initial period. The scope of the 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 and supplies to achieve the Project objectives. In adlition, it would finance the rehabilitation of two BNA properdes, one for the training center for financial sector personnel and the other to house project consultants. The Project components are described in detail in paras. 3.4 - 3.50 below. The Project consists of: (a) strengthening of BNA, principally through improvements in its accounts and accounting practices; procedures and information systems; and in its staff skdils in administrative and functional areas; (b) development of banking infrastructure, including establishment of a national check clearing system, a training center for financial sector personnel, and training of a core of financial professionals; (c) disseminating and implementing laws and regulations affecting the banking sector, ensuring their coherence; establishing the legal and regulatory framework for the insurance sector, and e-tablishing accounting and auditing standards for the enterprise sector; and (d) improving institutional mechanisms for financing private investment and studies on 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 began only in 1989 when Angola joined the Bank. Principal objectives are to facilitate the transition to a peaetime economy and to support the process of economic reform so that the country can get on the path of sustainable growth. Tbe correct phasing of reforms in the financial and real sectors and appropriate Institutional support for their effective implementation are critical elements in the transformation of socalist economies. Support for a program of reforms in the real sector is provided under the Economic Management Capacity Building Project, which provides substantial technical assistance to key ministries, -14- including Planning and Finance. The proposed operation, which would be the first of several operations in support of the financial sector, would provide the necessary institutional strengthening to facilitate reforms 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, and equipment, which limit its ability to function. To perform its role, BNA needs to substantially expand its institutional capabilities during the next few years. Its operational role as a first tier bank, coordinator of 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 banking sector and BNA's analytical and policy formulation capabilities in All aspects of monetary management need to be vastly increased. 3.5 The Project would support the strengthening of BNA to undertake its central-banking role successfully. The activities included are those needed to improve BNA's own operations, such as strengthening of procedures and the implementation of information systems, accounts and accounting systems. The program also includes training for senior staff in functional areas. The Project would also support 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 the Bank of Portugal. The IMF provided assistance in preparing the basic legislation and in setting up the organizational structure of the institution. In addition, it provided assistance in the initial split of accounts into central and commercial areas, in setting up monetary statistics, and in organizing the supervision department. The Bank of Portugal has a cooperative agreement with BNA to provide advice on specific subjects, as required. In this context, it provided assistance in the basic legislation, and in the preparation of 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 to develop new institutional capabilities at BNA through improvements in administration and information systems. While computer technology will be useed for this purpose, the emphasis of the program is placed not on the technology, but on the institutional improvements that can be achieved through its judicious use. 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 information systems of BNA directorates; (b) create an effective mechanism for the allocation and .nanagement mechanism of informatics resources in the institution; -15- (c) strengthen the management and modernize the work methods of the Organization and Informatics Directorate (DOR); (d) install the computer application systems needed by each BNA directorate in support of its business processes; (e) improve staff skills to use and manage informatics resources; (f) design information systems requirements and prepare strategic plan for systems development and technology use; and (g) increase the productivity of selected professional staff through the use of personal computing tools. 3.9 The introduction of BNA's informatics program will be paced, taking into account the institutional readiness to absorb new technology and irrplement administrative and managerial changes. The approach recognizes that modem computer technology - while flexible, ubiquitous, and relatively inexpensive - requires orderly and well-informed management to yield expected benefits. It also recognizes that investments in informatics will be successful only if BNA first improves its management and 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 complete this phase is a function not only of its own management capacity in informatics, but also of several factors which BNA does not control fully, such as availability of housing and the availability of consultants to visit Angola. The objectives and expected outputs of this phase have been specifically defined, and the terms of reference for related consulting nssignments prepared. The Project will provide 14 months of consulting services for the system requirements studies and about 18 microcomputers to meet the pressing requirements of the operating divisions. 3.11 Two broad strategic choices will be available to BNA after Phase 1. BNA could pursue an integrated informatics strategy based on common design. This strategy would result in the creation of integrated information systems and the installation of homogeneous technology. It would be possible only if all of BNA's units achieve fully the objectives of Phase 1. Alternatively, BNA would pursue an informatics strategy which accommodates substantial differences in capabilities among the various functional areas. This strategy would concentrate informatics resources on those areas most able to use them and result in faster but less integrated systems for those areas and possibly in heterogeneous technology. 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 Systems Strategic Plan (ISSP) at the completion of Phase 1. Subsequent activities in the program would be guided by the decisions emanating from this plan. The plan will also formulate appropriate systems implementation, technology acquisition, and staff training plans, and thus attempt to minimize costs and promote compatibility of technology. The plan will take about two months and require participation of senior staff and consultants. The proposed Credit would finance five man-months of consulting services to assist in carrying out the plan. Financing for the purchase of hardware and software and related -16- training and technical assistance for the BNA systems would be conditioned on the completion of the ISSP. 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 procoee under 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 be identified by the strategic plan and put In place over a two-year period. Administrative systems such as accounting, budgeting, and personnel, analytical systems such as macroeconomic analysis, and operational systems such as bank supervision, reserve management, and debt management will probably be among this group. For this phase, the Project would finance 33 man-months of technical assistance, 120 personal computing training courses, and computers for approximately 56 BNA staff. (b) Stage 11 - Other Systems. The remaining information systems defined in the ISSP would be put in place after completion of Phase I. Important systems may be deferred for implementation during this stage simply because of limitlions in the amount of change that the institution can absorb during a given period of time. 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 to succeed. 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 countepart effort 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 project consultants. 3.15 Prograin management will be provided by the Directorate of Organization and Informatics. Overall direction of the informatics program will be exercised by an Informatics Committee which is composed of the Directors of the user Departments and headed by a Vice Governor. This Committee has existed for some time, although it was only made operational last year. Finally, a senior informatics management expert will be contracted for the first 42 months of the Project to asist the DOR director with Program management. A draft informatics program and budget would be prepared under the Project, and submitted by September 30 of each year for review and approval by BNA's Informatics Committee 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 have tight financial controls or reliable financial data. Processing of data has been further complicated by the separation of BNA into central- and commercial-banking areas. The existing systems do not produce timely and accurate financial data, with the result that directorates wbich depend on accouni information are hampered in their work. In addition, the accounts contain anomalies, particuarly in such sensitive area as foreign exchange. 3.17 To improve the situation, the Project will provide: (i) assistance to BNA in preparn auditable accounts as of 1991 and identifying accounting systems in need of strengthening; (iI) exteal *17- 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 in accounting and internal audit. Terms of reference for the accounting consultants to perform the first of the above Lssks are given in Annex 3.3. It is estimated that the strengthening meawures and training of PNA staff, all of which will take place in Angola, will require the services of two full-time expatriate consultants for a total of five consultant-years. The first e.xpatriate consultant is expected to start work in the first vear of the Project, while the second, who will assist with the internal aud!t function, will start work in thi second year of the Project. (c) IlmDroving Skills 3.18 BNA has prepared a program of technical assistance and training requirements for the next three years which is the basis for the assistance provided under this component. The Project will strengthen the administrative, managerial and policy making capabilities of BNA staff. The assistance will involve both expatriate experts and specialized training abroad for senior BNA personnel. The Project includes assistance in setting up the personnel management function in BNA. As in most socialist economies, there is no central banking tradition, and central bank staff have no career paths. The Project includes some 10 man-months of consultant services to develop and implement professional development streams for BNA staff. Assistance in this area is expected to start towards the end of the first year of the program. 3.19 The Project also would include support to BNA's SupervisionDepartment. The assistance in this area was prepared taking into account the views of the IMF resident specialist, and complements his work. It includes two special portfolio audits of the major commercial banks to assess the adequacy of provisions and the potential impact of necessary write-offs on their financial condition (six man-months of consulting services). These auaits will be carried out by international auditing firms under the auspices of the Supervision Department of BNA in years two and three of the Project. In addition, assistance has been included to support supervision department staff including internships for BNA staff in supervision departments of other central banks. It is estimated that the program would involve a total of about ten months 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 senior staff. This includes scholarships in macroeconomics for about 5 staff members and some 15 short term courses abroad. Training for BNA staff also will be done in special courses in the National Banking Training Institute (Instituto de FormaCao Bancgria de Angola, IFBA), para. 3.26 - 3.30 below. BNA will assign staff receiving long-term fellowships abroad financed by the Project to positions where acquired skills will be put to use, and will require such staff to commit themselves to working for a period two times the duration olthe training period. The same will be true for the beneficiaries of other scholarships under the Project. B., May 31, 1993, BNA in cooperation with other institutions involved in the Project will 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 returning to 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 technical assistance programs in Angola, because it complicates the recruitment of well qualified personnel. To overcome this difficulty, the Project includes financing for the rehabilitation of a 1,142 m2 building (the -18- L2 building) to house about ten consultants employed under the Project. Detailed architectural designs for the rehabilitation works are being carried out by a local architectural firm and were financed under the 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 the Project housing facilities available for other purposes. During negotiations assurances were obtained that housing financed by the Project would be used exclusively to hou. expatriate consultants financed under the 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 for IFBA-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 African countries is the absence of a system of communications which would enable banks to effect payment between regions. Although the systems required are technically simple, they can take time to develop because of the inexperience of financial system institutions. The issue of payments between regions is expected to be a major problem in Angola, because of the distance uztween its economic centers and the poor communications. Although the new kwanza began to be used widely as currency only in the last six months, the number of checks is ir. reasing sharply. At present, it takes some six weeks for a check issued 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-wide check clearing system. The check clearing system is the first phase of a system which could enable in the medium-term the transfer of information and other transactions between and within banks. When in piace, the check clearing system will improve liquidity management, reduce floats and payment delays, decrease administrative overheads, and improve customer service. The system could eventually handle intra-bank communications, regulatory reporting, and dealing in foreign exchange. The system would operate electronically to the extent feasible. It would depend nn air or ground transport for the transfer of checks where telecommunications links are not feasible or available. The Credit would finance technical assistance for establishing the system in Luanda and subsequently in the key cities, training of staff 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. It would be managed initially by BNA, as an outgrowth of the existing system for Luanda. However, the system will be designed so that the payments system, when put in place, can be managed as an independent institution, if the users so desire. The detailed design and phasing of the program is based on a study financed ui,dcr the PPF. In addition to the technical parameters of thc system, the study includes implementation and staffing plans. -19- (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 finance in the whole financial system. Most ( these are in the BC' which set up an emergency training program before 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 staff of the country's banks, insurance companies and other financial institutions. l'he P-oject would include support for the architectural design, construction supervision, and rehabiiitation of a building (the L4 building) for IFBA. IFBA would also administer a program of seminars for high-level management of financial institutions. 3.27 IFBA is the successor to BNA's 'rraining Department. The Training Department was managed by a veteran BNA employee, and its courses were oriented to the monobank regime which existed prior to 1991. To serve the training needs of the emerging financial sector, IFRA would reorient past programs and upgrade its course delivery. To accomplish these goals, a PPF-financed consulting team from the Portuguese Banking Institute is finalizing arrangements regarding the stakeholding and participation in IFBA of Angolan banks and the relationship of IFBA's program with the training programs of each bank. In addition, the team is assisting IFBA in preparing the details of course offerings. 3.28 In view of the shortage of skilled personnel in all banks, IFBA course offerings in the initial years would emphasize focussed courses to be delivered on a part-time basis so as to minimize disruption of banking operations. The IF3A program would lead to the eventual professionalization of banking personnel by means of a program of examination and cer;ification of trainees; to the degree possible, 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 staff will participate in the program to send senior financial managers abroad. as described below. To substitute 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 total of nine expatriate instructor-years is foreseen as necessary while Angolans are being trained. It is possible that IFBA will make arrangements with a similar institute to provide these instructors. The Project also includes financing two vehicles, office equipment (computers, photocopiers, and audio-visual aids), 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. IFBA would 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 given in Annex 3.4. 3.30 The main thrust of IFBA's program would be aimed at the training needs of staff and mid-level management in the banking sector. A more specialized focuts is needed to strengthen higher mlanagement levels (directors and general directors). The Project includes a series of short seminars and courses designed to increase the exposure of Angolan bank management, which has been isolated from developments in world finance by language and socialist orientation, to current developments in banking and finance. The seminars would also serve to sensitize high-level management to the role of the central banking function (e.g., instruments of monetary policy and supervision requirements) and on commercial bank management requiremerts in respect of such subjects as risk management and exposure, lending policy, cash management, accounting, and internal audit. The program, which IFBA would administer, would bring authorities to Luanda, and, occasionally, sponsor participation of Angolan banking managers in short courses abroad. -20- (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 financial management. The Project addresses this need by initiating a twinning arrangement between the Faculty of Economics at the Agostinho Neto University (Universidade Agostinho Neto, UAN), which is responsible for delivering business-administration education, and a foreign university. The ultimate objective of this twinning arrangement is to enable UAN to deliver programs at both the bachelors and masters levels of a quality comparable to that of the foreign twin. The Faculty of Economics would be the initial Angolan twin. It is possible that UAN would establish a separate faculty of business adminis- 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 of people and lecturers from the foreign twin seconded to the UAN for one or more academic years, and management 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, such as (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 few weeks's duration in specialized subjects; (b) weekend or evening classes directed to existing management of 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 to interchange ideas; and (e) collaboration with other institutions in developing training programs. Although the twinning arrangement is designed along traditional lines (six lecturer-years of secondment to the UAN and 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 for sustaininig this component far beyond the implementation period of the proposed Credit, the TOR invites prospective twins to indicate the finar -ing which may be available to continue the program after the initial three-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 either UAN, irWA, or one of Angola's two commercial institutes. The Project would also support the acquisition 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 which applies to banking transactions, need to be disseminated and correctly implemented. Appropriate mechanisms need to be designed to facilitate access to banking regulations and documentary and contractual practices by both government agencies and private sector operators. Also, banking staff need to become familiar with these procedures to provide better banking services to the public. Lastly, key ancillary institutions such as registries and notaries need to be improved so that they are ab!e to play their role in banking. -21- 3.35 The Project will assist in designing appropriate mechanisms to facilitate the implementation of the recently-enacted banking legislation, including dissemination of the legislation and strengthening of the legal, technical and administrative capabilities of the institutions responsible for their implementation. 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 the compilation, harmonization and dissemination of the banking legal and regulatory framework in the form of 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 will prepare and periodically update an operational manual providing a description of banking operations and the legal and administrative requirements to carry them out. The manual will also include standard contractual forms required by the legislation in force. A loose-leaf version of the manual will be designed, published and distributed to BNA's headquarters and branches. Manuals will be available for sale to the private sector. BNA's legal staff will be primarily responsible for the coordination of this work. 3.37 The banking legal and regulatory framework is not widely disseminated and consists of diverse and not easily available legal and administrative instruments. These instruments have been issued by different institutions, including BNA, and the Ministry of Finance; much of the legislation in fact dates from colonial times. Banking staff and other public or private agents requiring banking services have difficulty assessing the content and scope of the applicable legal framework. The Project will support the compilation, harmonization, publication and dissemination of the banking legal and regulatory framework 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 and paralegal 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, including seminars on legal issues affecting the financial sector. In addition, BNA's legal and paralegal staff, which have been isolated from modern banking practices and lack professional contacts in other countries will be given training abroad in the form of study tours. 3.39 All banking instruments need to be executed through the public registers and public notarial services. If notarial and registry serv:ces are left unattended, implementation of the banking legal and regulatory framework would be hampered. It is envisaged that an initial package of emergency measures will be implemented under the Project to allow the provision of the most essential services by the registries and notaries public (e.g., copies of titles; registering companies). The Project will support the 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. The preparation and implementation of this work will be the responsibility of the Legal Department of BNA in coordination with the National Directorate of Registries and Notarial Services which will be assisted by a professor of the Law School of UAN. 3.40 The Project will support the acquisition of emergency materials and equipment for the National 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 equipment requirements, is being financed under the PPF. The equipment to be financed includes security mechanisms, photocopying equipment, typewriters, one personal computer and printer, and office -22- supplies. In addition, seminars will be held during project implementation to train the Registries and Notarial Services staff in the practical aspects of their work in implementing the legislation and regulations 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. The Project includes technical assistance to set up and strengthen the Office,and review and adjust the legal and regulatory framework for the insurance industry. Regulations will need to be issued on such matters as entry requilements, the adjudication of commercial ciaims, the determination of reserves, rate settings and reporting requirements. A total of two man-years of consultant services have been assigned in the Project to this task. (c) Developing Accounting and Auditing 3.42 Notwithstanding their importance in a market economy and an elment of financial transactions, enterprise accounting and auditing in Angola are embryonic. In 1989, the Government replaced a chart of accounts appropriate for centrally-planned economies with a new enterprise accounting plan (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 for companies 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 in accounting,which has not been offered since 1974. Only a handful of senior accountants, mostly trained before independence, remain. All auditing of multinational companies is conducted by expatriates. There is an official register of accountants, but no academic achievement or professional experience is required; anyone can register as an accountant. 3.44 The Ministry of Finance has jurisdiction over all aspects of both private- and public-sector accounting. Within the Ministry, the National Directorate of Accounting (Direcgao Nacional de Contabilidade - DNC) is the responsible unit. Except for publication of the enterprise accounting plan, the Ministry's efforts in improving accounting since 1989 have been in the public sector. With assistance from five expatriate advisors financed under the IMF/UNDP project, the Ministry has produced detailed budgets for governmental operations; prepare. an accounting pl tn for the Government; and improved the performance of accounting and treasury operations. Under the proposed Project, the Ministry of Finance will address the country's needs in respect of commercial accounting, auditing, and establishment of an accounting profession. This work will be done with assistance from a full-time consultant (terms of reference are given in Annex 3.7). 3.45 The Project would develop Angola's legal and regulatory framework in respect of accounting and auditing. It would strengthen the Ministry of Finance's capabilities to (i) improve commercial accounting; and (ii) publish national accounting and audit standards as well as model accounting and audit manuals. The Project also would support the establishment of the accounting profession and the acquisition of one vehicle. To improve commercial accounting, the DNC of the Ministry of Finance would (i) publish accounting standards; (ii) review the enterprise accounting plan to ensure that it is harmonized with national charts of accounts of industrialized countries, particularly those of the European Community; (iii) publish a simplified chart of accounts for small and medium enterprises (SMEs); and (iv) publish En accounting manual to serve as a model for public sector enterprises. -23- 3.46 After establishing the conceptual framework for the auditing of company accounts, the DNC would publish national audit standards and a model audit manual. In its definition and publication of accounting and auditing standards, the DNC would avail itself of similar standards of industrialized countries and of international organizations responsible for such activities, namely, the International Accounting Standards Committee (for accounting) and the International Federation of Accountants (for auditing). 3.47 To establish the accounting profession, the DNC would determine the classifications of accountants to be recognized (bookkeepers, technicians, fully-qualified). In addition, it would define the academic, professional examination, and professional experience requirements for each classification; and set standards and establish monitoring mechanisms for examinations. 3.48 To facilitate implementation of its work program, DNC will hold a series of workshops, which would be supported by the proposed project, for all interested parties, such as financial managers, registered accountants, the academic community, and government officials. The purpose of the initial workshops will be to establish a framework for the DNC's activities and prioritize them; subsequent workshcps will be the means of getting reaction to drafts and disseminating final versions of the standards, manuals, and other papers for which DNC is responsible. At some future workshop, the topic of shifting responsibility for the profession from the Ministry of Finance to an independent professional body might be discussed, but that discussion would have to await the establishment of :, core of fully- qualified professional accountants in Angola. 4. Improving Mechanisms for Financing Private Investment 3.49 Private sector investment is expected to be the engine of growth of the Angolan economy in the transitional period and beyond, and it is thus importane that adequate mechanisms be in place to facilitate its financing requirements. The problems that have plagued investment financing in underdeveloped capital markets in Africa are even more acute in Angola. This is true not only because financial institutions are in an embryonic state, but also because most private entrepreneurs are unknown to financial institutions and have no credit history. It is thus inevitable that in a transition period, there will be a need to establish institutional mechanisms which will permit financing to clients who are unknown to the banking sector, and who will, in due course, become clients of commercial or investment banks. 3.50 The Government, realizing that there is a vacuum in the institutional arrangements for the financing of new clients to the banking system, created CAP. As discussed earlier, CAP faces serious difficulties, including inadequate statutes and unqualified staff. The Government now intends to transform CAP into an investment fund which manages lines of credit from abroad and budget resources. The fund, which would have a transitional nature, would exist only as long as there is financing available. The Government would like this fund to be professionally managed. The Project would provide technical assistance and training to assist in the support for the design and implementation of the restructuring of this fund and appointment of its key staff. Once CAP has been satisfactorily restructured, and qualified staff have been appointed to it, the Credit would allow disbursements to finance: (i) technical assistance and training of staff for the operation of the restructured CAP; (ii) acquisition of basic office equipment, supplies and computer hardware/software; and (iii) technical assistance for the strengthening of the banking and productive sectors' capabilities for financing private investment. The technical assistance and training requirements, which are expected to be complemented by other institutions, are estimated at one to two persons for approximately two years. The initial staff would include a General Manager and a Director of Finance. The operating policies of the restructured CAP, would be defined at the -24- outset. These would include interest rates to be charged which will be positive in real terms. In addtidon, as the financial system develops, some of the existi.j banks may be in a position to provide investment financing. The Project includes some six months of consulting services to support banks in this area. D. Prgject Costs 3.51 Project costs are summarized below, and are given in detail in Annex 3.10. Total project costs are estimated at US$23.6 million equivalent, with a foreign exchange component of US$20.6 million. Costs have been calculated excluding taxes and duties. Costs include expenses related to consulting services for technical assistance and studies; training both locally and abroad; the parchase of equipment, including hardware/software, furniture, vehicles, and teaching materials; and civil works associated with the rehabilitation of two buildings and related professional services. 3.52 Technical assistance costs are based on recent costs for comparable technical assistance being provided by the Bank under other projects and by other institutions, including UNDP. The costs include transportation and housing allowance where needed, such as in the case of the short term consultants and of travel abroad. The costs have been estimated as follows: (i) specialist services, US$140,000 per annum; (ii) short-term consultants, US$20,000 per month; (iii) short-term seminars abroad for high level staff, US$10,000; (iv) fellowships abroad, US$30,000. Scholarships abroad would cover tuition and a flat fee for living expenses and books; the same system will be applied to short term training abroad. The costs of civil works for rehabilitation are estimated to be US$450 per square meter for the IFBA and US$602 per square meter for the housing unit. The difference in costs is due to the type of facility. 3.53 Costs, especially those for construction, are relatively high compared with others in the region, but reflect the isolation of Angola and the inadequacy of housing and other facilities in Luanda. IDA reviewed the structure of construction costs with local and foreign construction firms during the preparation of the First Education Project. The relatively high construction costs are due to several factors: the high import content of construction materials, the high cost of customs operations, the high proportion of foreign labor, and the poor payment record of the Government, which has led contractors to inflate prices. The increased use of competitive bidding procedures as a result of World Bank involvement in several key sectors requiring large civil works construction, such as education and road construction, is expected to increase competition and reduce costs. The prices for equipment are based on contracts awarded by other donorz and on direct discussions with suppliers. All items imported for the Project would be exempt from direct customs duties and taxes, in line with the standard practice of the Government. Assurances to this effect were obtained during negotiations. 3.54 The base costs for the Project are exp;essed in mid-1992 prices. Project costs include physical contingencies averaging about 8 percent of base costs. Price contingencies have also been added, with annual rates of foreign and local (expressed in dollars) price increases estimated at 4 percent during project implementation. This approach has been used because suppliers of goods and services in Angola quote prices in dollar equivalent. 3.55 The foreign exchange component is estimated as follows: (a) civil works, 85 percent; (b) imported furniture, 100 percent; (c) equipment and vehicles, 100 percent; (e) teaching materials, 85 percent; (f) training abroad, 100 percent and (g) specialist services, 95 percent. The resulting foreign exchange component, including contingencies, is estimated at about US$20.6 million. -25- E. Project Financing 3.56 The proposed IDA credit of US$21 million equivalent, would finance 89 percent of total costs. The Government would finance the tL '.iice of the Project costs (US$2.6 million). To permit BNA to complete project preparation, including studies associated with IFBA, the rehabilitation of BNA buildings to house project consultants, the accounting of BNA, two advances under the Project Preparation Facility totaling US$1.2 million were authorized in December 1991 and June 1992, respectively. They would be refinanced under the proposed Credit. To facilitate project implementation, 30 days after Credit effectiveness the Government will open and maintain in a commercial bank an account, and make in this account an initial deposit of US$250,000 equivalent to finance its contribution to the Project. Assurances to this effect were obtained during negotiations. F. Proiect Implementation 3.57 The Government has designated BNA as the executing agency for the Project. Project activities will be coordinated by a Project Coordinator and assisted by a Deputy Project Coordinator, both of whom are senior BNA staff. In addition, an expatriate Project Administrator has been appointed to carry out day-to-day activities such as keeping project accounts, and preparing periodic reports on the progress of the Project for the Government of Angola and the World Bank. Prior to effectiveness of the Credit the Government and BNA will sign an Administration Agreement for the transfer of Credit funds to BNA. 3.58 Responsibility for implementing the specific project components will rest with the Project Coordinator and with the unit concerned with the component, which will participate in the selection of, consultants, and the procurement of equipment, materials and supplies. For instance, the technical aspects of the check clearing system will be the responsibility of the Director of Money Supply and Credit while the information systems component for BNA will be the responsibility of the Director of Organization and Informaticg. The external audits of BNA will be the responsibility of BNA's Audit Committee. There is considerable commitment to the Project and 'ownership' of the Project is broadly shared in BNA. 3.59 The Directorate of Organization and Informatics will receive policy guidance on the information systems component from an existing Informatics Committee which consists of user departments and is chaired by a Vice Governor. BNA's architect has been formally assigned on a part- time basis (some 25 percent of his time) to the Project to supervise the civil works financed under the Credit, and he will participate in the selection of consultants and contractors to carry out the civil works component. 3.60 BNA Project Coordinator also will be responsible for the components which concern the Ministry of Finance, Ministry of Justice and the UAN. The technical responsibility for the implementation of project components outside the BNA will rest with the National Directorate of Accounting and the Insurance Supervision Office of the Ministry of Finance; with the Faculty of Economics of the UAN; and with the Directorate of Registries and Notarial Services of the Ministry of Justice, which would be assisted by the legal staff of BNA. -26- 3.61 An Interagency Committee consisting of representatives of the Ministries of Plan and Finance and of BNA, and including the Project Coordinator and the Deputy Project Coordinator also will be established prior to effectiveness of the proposed Credit. The Committee will provide guidance to the Project Coordinator and Deputy Project Coordinator on policy issues, monitor progress of the Project, and address issues requiring interagency coordinadon. Representatives of the University, Ministry of Finance and of other government agencies will be invited to some of the Committee meetings, as required. These arrangements will ensure involvement in the Project of key government agencies involved in financial sector development. A Project Implementation Review will be conducted annually by the World Bank and BNA staff to monitor progress in project execution; update the project timetable; identify implementation issues that may have arisen; and find appropriate solutions. The Project Coordinator and Deputy Project Coordinator will make the necessary arrangements to prov.de the required information and participate in the Annual Implementation Review. Key project actions to be monitored at the Annual Implementation Reviews are given in Annex 3.13. Agreement on the Annual Implementation Reviews and on the key actions was obtained at negotiations. G. Procurement 3.62 Bid packages for equipment amounting to more than US$125,000 would be procured under contracts awarded following interrational competitive bidding procedures, in accordance with "Guidelines for Procurement Under IBRD Loans and IDA Credits," dated May 1992. Bid packages for works for BNA's housing in an aggregate amount equivalent to US$850,000, and goods with an estimated value below US$125,000, per contract, up to an aggregate amount equivalent to US$400,000, would be procured under contracts awarded though local competitive bidding procedures, advertised locally, in accordance with procedures satisfactory to IDA. The aggregate limit for local competitive bidding would be the equivalent of US$1.2 million. Small contracts for equipment and office supplies to support project coordination and IFBA, amounting to US$50,000 or less per contract, and up to an aggregate amount equivalent to US$400,000, would be procured through local shopping with price quotations from at least three local suppliers, in accordance with procedures acceptable to IDA. Consulting services would be selected in accordance with "Guidelines: Use of Consultants by World Bank Borrowers and by the World Bank as Executing Agency," dated May 1992. Under the PPF, the rehabilitation of the building to house expatriate advisors is being procured in accordance with LCB procedures. Local competitive bidding will allow for a faster rehabilitation of the building, which is urgently needed to house project consultants. The contracts for rehabilitation of this building are unlikely to generate interest from companies which are not already established in Angola. Bid packages for the rehabilitat.on of the IFBA building would be procured following ICB procedures. During negotiations, assurances were obtained that BNA would use World Bank Sample Bidding Documents for all international procurement of equipment and works; and that contracts for consultants wculd be based on the World Bank Sample Form of Contract for Consultants' Services. A summary of procurement arrangements is given in Table 3 below. -27- Table 3 Summary of proRosed Procurement Arrangements (US$ Millions equivalent) Procurement Mlvethod Project Element ICB LCB Other NBF Total Cost 1. Works 1.1 Buildings 0.9 0.9 -.- 0.5 2.3 (0.8) (0.8) -. (1.6) 2. Goods 2.1 Equipment, 0.5 0.3 0.2 -.- 1.0 Vehicles and (0.5) (0.3) (0.2) -.- (1.0) Furniture 2.2 Informatics 2.1 0.1 0.2 -.- 2.4 (2.1) (0. 1) (0.2) (2.4) 3. Consultancies 3.1 Studies -.- -.- 1.61 -.- 1.6 . - - - (1.6) - (1.6) 3.2 Design/ -.0- -.- -.- 0.2 Supervision -.- -.- (0.2) -.- (0.2) 3.3 Technical -.- - - 4.8b 1.2e 6.0 Assistance -.- -.- (4.8) . (4.8) 3.4 Training -.- -' 8.2b 0.7d 8.9 (8.2) - - (8.2) 4. Miscellaneous 4.1 Refinancing -.- -.- 1.2 -.- 1.2 PPF -.- (1.2) -.- (1.2) Total 3.5 1.3 16.4 2.4 23.6 UJ4 (1.2) (16.4) -au (21,0) Note: Figurs in parenthes are the amounts frnanced by the IDA credit. N.B.P.: Not Bank-Thanced. a Includea civil works for regional check clearing housa and for the Project coordination unit. b Service should be selected in accordae with World Bani, GsdlhU,es: Use of Consuats by World Bank BorTwrn and by dw World Bank as Executing Agency (Washington, D. C., Aigust 1992). c Includes laries of projet gaff, local counterparts, nd supplies. d Includes salaries of local staff and supplies. -28- 3.63 Procurement will be the responsibility of the Project Coordinaor and the Deputy Project Coordinator at BNA, who will organize selection committea consiting of the relevant BNA Departments and government agencies to review each tender offer. 3.64 IDA-financed contracts above a threshold of US$50,000 would be subject to IDA's prior review for the first year of the Project, or until it is determined that BNA staff has sufficient experience; at that point, a higher ceiling may be set. Under these procedures, IDA's prior review would cover initially about 90 percent of total contracts; IDA's prior review, in any case, will be over 70 percent of contracts in years two and three of the Project. To simplify the task of contract review, a standard letter of invitation and contract for consultants will be prepared prior to effectiveness. 3.65 Comprehensive semi-annual reports wiJl be sent to IDA by the borrower in March and September of each year, using a standardized reporting format, and indicating: (a) updated cost estimates for individual contracts and the total project; (b) the revised timing of procurement actions, including advertising, bidding, contract awards, and completion time for individual contracts; and (c) compliance with aggregate limit on LCB. H. Disbursements 3.66 Disbursement under the IDA Credit would be made on the basis of categories and percentages shown in Table 4 below. The Credit would be disbursed on the basis of fully documented withdrawal applications except for expenses related to contracts valued at less than US$50,000 equivalent, which would be reimbursed against Statements of Expenditures (SOEs), for which the documentation would be retained at the office of the Project Coordinator for review by IDA supervision missions and for annual audits. Applications for the replenishment of the Special Account also would include a bank statement of the account transactions since the last applications, with the balance certified by the bank holding the account. The disbursement profile reflects the experience with technical assistance projects in Africa. -29- Table 4 Summary of Disbursements Category Percentage Financed Total (1) Civil Works 85% of total (a) Housing 0.6 (b) IFBA 0.6 (2) Goods, Vehicles and Services 100% of total (a) BNA Informatics 2.8 (b) IFBA 1.7 (c) Investment Financing Mechanisms 0.9 (3) Equipment, Vehicles, Materials and Supplies 100% of total 1.3 (4) Consultants' Services and Audits 100% of total 4.6 (5) Training 100% of total 4.9 (6) Refunding of Project Preparation Facility 100% of total 1.2 (7) Unallocated 2A TOTAL 21.0 3.67 To facilitate disbursements under the PPF, BNA has opened a Special Account in Equator Bank, which has a representative office in Luanda, and which is acceptable to IDA. A similar arrangement will be made during project implementation. US$0.5 million equivalent would be advanced from the IDA credit and deposited in the Special Account. That amount is estimated to cover about three months of expenses for project expenditures, which will be paid out of the Special Account. I. Accounting. Auditing and Reporting 3.68 The Project Coordinator would maintain separate accounts for the IDA credit. These accounts would be subdivided into expenditures for each component. During negotiations, the Government gave assurances that (i) IDA project accounts, including disbursements against SOEs, and the Special Account will be audited annually by an independent auditor acceptable to IDA, and that the audit report will be sent to IDA by June 30, of each year, beginning in 1993; (ii) the Project Director will submit to IDA semi-annual reports on project implementation, including procurement information and expenditures by March 31 and September 30 of each year, beg.,ning in 1993; and (iii) a Project Completion Report will be submitted to IDA within six months of the Closing Date of the IDA Credit. -30- J. Project Supervision 3.69 Given the multi-component nature of the Project, requiring specialized follow-up and involving important institution-building efforts, project supervision input by Bank staff is expected to be above average in the early stages of project impler'icntation. The organizational structure of the Project, which includes an experienced expatriate administrator, will facilitate project implementation and supervision. To ensure a clear understanding of project implementation requirements, a manual has been prepared and will be finalized with the Angolan counterparts during the a project launch workshop in October 1992. The workshop will include sessions on procurement and disbursement under IDA-financed projects. -31- IV. PROJECT BENEFITS AND RISKS A. Project Benefit 4.1 An efficient, broadly-based financial sector vwith an effective banking system at its core is necessary for the development of a market-based economy. At present, financial policies and financial institutions are very new in Angola. The Project aims at laying the groundwork for the development of a financial system in Angola which will facilitate the mobilization of savings and their investment in productive uses. The Project will be the first vehicle for the Bank's dialogue with the Government on financial sector issues. The establishment of sound financial institutions, support for strengthening the banking profession, improvements in the legal and regulatory environment, and the effective supervision and surveillance of financial institutions by BNA and the Ministry of Finance will increase confidence in the banking system and facilitate the process of intermediation. 4.2 The Project is expected to contribute significantly to the establishment of the Angolan financial system. On-going or planned policy reforms will facilitate the liberalization of the financial system. However, the institutional strengthening and infrastructure arrangements required to allow the system to benefit from the reforms have only now begun to be put in place. This will constitute a major constraint to the system's development, as it takes considerable time for training and institutional strengthening to show results. Nevertheless, the technical assistance and training to be provided under the Project would benefit the financial sector irrespective of the pace or deta.led features of the reform program. 4.3 Through the improved operation of financial institutions, the Project would contribute to a better mobilization of financial resources, higher financial savings rate, and an improved allocation of resources to productive activities along efficiency and profitability criteria. It would thereby help the restructuring of the economy by making financial resources available to the most profitable activities. 4.4 It is widely recognized that the liberalization of financial systems places increased demands on the legal and regulatory system for financial institutions. The absence of information and the weakness in the legal administration is one of the key bottlenecks for the development of financial transactions. Improvements in the dissemination of laws affecting the system, and in the operation of the registries and notaries to be financed under the proposed Credit will assist in this area. The Project will assist in the development of the regulatory framework for the insurance sector, thereby helping to ensure transparent management, which, in turn, would increase the trust by the local population. It would also assist in building up the supervision agency in the Ministry of Finance, thereby helping to overcome the problem of a lack of qualified staff. 4.5 Finally, the improvements in the accounting and audit framework to be assisted under the Project are indispensable to the further development of the financial system and the economy as a whole. The improvements in the framework would help to bring Angolan standards in line with international ones in the coming years. They would improve significantly the transparency and reliability of financial data as well as to help decision making by investors. An improved financial disclosure framework would also be highly beneficial for promotion of direct foreign investment in Angola. B. project Risks 4.6 First, there are risks associated with the slow implementation capability of a new member with a weak human resource capacity. BNA staff, led by a Project Coordinator and Deputy Project -32- Coordinator, both of whom hold senior positions in the institution, have demonstrated the ability to carry out a number of tasks associated with implementation during project preparation. Because of the work load that the Project will generate, the Project Coordinator and the Deputy Project Coordinator will be assisted by an experienced consultant, who will support the Angolan management in the administrative and aspects of the Project, and provide support on procurement work. Moreover, the Bank has created an implementation manual containing sample bidding documents, which has been distributed already to the Angolan counterparts, and has also scheduled a project launch mission for October 1992. A furthc risk is related to the possibility that a new government after the elections in September 1992 may not fully agree with the objectives and scope of the Project. This risk is small, given the consensus among the major political parties about the general direction of economic reform and the non-controversial nature of the Project, with its focus on institution building. Experience elsewhere in Africa shows that governmental changes have not affected materially projects aimed at institutional development and capacity building. 4.7 Another set of issues relates to the speed of macroeconomic reforms. Reforms in the financial sector, and therefore the long-term success of the program, will depend on reforms in the macroeconomic framework, which could be delayed for political reasons. The Bank will use its lending program to keep Angola on the reform course. Experience during project preparation has demonstrated that the authorities appear willing to discuss key issues in the financial sector; technical assistance under this operation will thus permit the bank to expand its dialogue on sector issues. 4.8 Another risk concerns the speed at which BNA and other project institutions can be built up in light of the scarcity of qualified staff and the time required to implement thorough institutional development programs. The introduction of modern banking concepts and related technology will test the absorptive capacities of the institutions involved. In this respect, it should be recognized that institution building will be a long-term process which will require the commitment from both policy makers and managers of the relevant institutions. This Project will provide assistance for the first phase of the modernization program of the financial system. -33- V. AQJtEZNN7 TO BE EAC AND RCONDATONS 5. 1 DDuring N 1otatlons. the Government has given asurancM that it will: (i) apply IDA's guidelines for the procurement of civil works and goods, and for the selection of consultants; use World Bank Sample Bidding Documents for all international procurement of equipment and works; and use World Bank Sample Contract for Consultants (para. 3.62); (ii) open, 30 days after Credit effectiveness, and maintain in a commercial bank an account (the Project Account) in d currency acceptable to IDA, and maintain in this account an initial deposit equivalent to US$250,000 to finance its contribution to the Project (para. 3.56); (iii) have the Project accounts, including disbursements against Statements of Expenditures (SOEs) and the Special Account, audited annually t.y an independent auditor acceptable to IDA, beginning in 1993; (para. 3.68) and furnish to IDA audit reports, not later than six months after the end of the fiscal year. (iv) submit to IDA semi-annual reports on project implementation, including procurement information, and expenditures by March 31 and September 30 of each year, beginning in 1993, and a Project Completion Report within six months of the Closing Date of the Credit (paras. 3.66 and 3.68); (v) use the rehabilitated L2 building exclusively to house consultants employed under the Project, and use the L4 building exclusively for IFBA (para. 3.22); (vi) provide necessary information and participate in annual project implementation reviews to be conducted by BNA and the WorLd Bank staff to monitor progress in project execution; update the Project timetable; identify implementation issues that may have arisen; and find appropriate solutions (phra. 3.61); (vii) establish criteria by May 31, 1993, for the award of the long-term fellowships; assign staff receiving long-term fellowships abroad financed by the Project to positions where acquired skills will be put to use, and require such staff to commit themselves to working for a period two times the duration of the training period (para. 3.20); (viii) assign BNA staff to work with project consultants In the informatics component in a ratio of two local staff to one consultant, and submit a yearly draft informatics program and budget for approval by IDA (paras. 3.14 and 3.15); -34- 5.2 The following are Conditions of Disbursement for specific items under the Credit: (i) complete the Information Systems Strategic Plan (ISSP) prior to disbursement for the equipment, training and technical assistance associated with the information systems development program of BNA (para. 3.12); (ii) legally establish IFBA prior to disbursement for the rehabilitation of the physical installations, consultants' services, equipment and vehicles for the institute (para. 3.29); (iii) restructure CAP and appoint qualified staff prior to disbursement for technical assistance training and associated equipment (para. 3.50). 5.3 Prior to Effectiveness of the Credit, the Government will: (i) appoint an Interagency Committee to advise and provide guidance on policy issues and overall project coordination (para. 3.61); (ii) sign with BNA an Administration Agreement for the transfer of Credit funds to BNA (para. 3.57). 5.4 Subject to the above agreements and conditions, the Project constitutes a suitable basis for an IDA credit of SDR14.8 million (US$21 mil!ion equivalent) to the People's Republic of Angola. Annex 1.1 Page 1 of S ANGOLA - FINANCIAL INSIllONS MODERNIZATION PROQEC[ Statement of Financial Sector Reform Background 1. At the end of 1987, the Government of Angola began to implement a series of institutional reforms intended to transform the economy into a market-oriented system, in which private sector investment is expected to play a significant role. Among other measures, these reforms included a substantial devaluation of the kwanza; the remonetarization of wages and the elimination of payments in kind to civil servants; and, a reduction of price controls and privatization of some smali public enterprises. At the same time, interest rates were increased and other monetary policy instruments, such as the establishment of mandatory reserves, were introduced. 2. Among the reforms that were begun, modernization of the financial system is one of the Government's priorities, given its importance for mobilizing savings, allocating resources, macroeconomic stabilization and the promotion of private sector activities. In order to achieve the desired restructuring of the financial system, the Government has begun to change the legislative framework that governs it and has set up new institutions to operate in the new context. The Government has also recognized the need to establish an appropriate macroeconomic structure for promoting the development of the financial system to enable the latter to play its role in fostering sustainable growth. This structure is being developed with the support of the International Monetary Fund and the World Bank. Financial Sector Reform 3. The Government intends to reform the financial system by making radical changes in certain areas to achieve adequate levels of efficiency. In the banking sector, in particular, establishing a two-tier system and opening it to competition constitute two principles already enshrined in the recent legislation. The elimination of the state monopoly in insurance and the opening of the sector to private insurance companies is the strategy which, in the near future, will guide the restructuring of the sector. So that future adjustments will be consistent with those already made, macroeconomic policies that affect the financial sector will be designed so as to maintain price stability and encourage financial intermediation. An important factor in this area is the setting up of positive real interest rates. 4. As noted, the Government has already approved legislation defining the basic structure of the banking system. Law No. 4/91 of April 20, 1991 establishes the statutes of the central bank, the National Bank of Angola (Banco Nacional de Angola, BNA), and enumerates its responsibilities. Law No. 5/91 of April 20, 1991 sets out the conditions governing the operations of financial institutions. To regulate this law, the Governor of BNA issued Notice No. 01/92 of April 3, 1992 defining the terms applicable to requests for authorizations to open and operate new banks. Thle CeralBank S. Like central banks in other economies in transition, BNA is making a significant effort to develop its capabilities so that it can perform its central banking functions, particu.arly :ts capacity to Annex 1.1 Page 2 of 5 formulate and implement policies and supervise financial institutions through a program of technical assistance and wide-ranging professional training. In addition, in order to attract and retain qualified personnel, BNA is working on the prepaiation and implementation of a career development program for central bank personnel. BNA is already receiving technical assistance and training from the IMF and the Bank of Portugal in support of these objectives. Tbe World Bank will provide support through the Financial Institutions Modernization Project. 6. In order to focus on its central banking functions, BNA is reducing its involvement in activities of a commercial nature, which previously was one of its service areas. BNA has prepared a timetable for the gradual transfer of all its commercial banking operations to the commercial banks. This process has begun in Luanda and will be extended to the provinces in a second phase. Since the first phase, which began on September 1, 1991, BNA has stopped opening new client accounts, including foreign currency accounts, and on October 1, 1991, it ceased making loans in local currency to private sector clients. 7. BNA has retained the accounts of the public enterprises on its books during a transitional period given the financial and legal situation of these enterprises, which makes the commercial banks reluctant to accept them as clients. In compliance with Government guidelines to the effect that the banking sector should operate in strict accordance with basic banking norms and standards, and until such time as a more comprehensive set of measures is defined for restructuring the public enterprise sector, BNA (Commercial Area) will continue to work with this type of client. The Government will take measures to eliminate annually from BNA's portfolio the non-performing loans resulting from this situation. Ibis portfolio enhanment process will be one component of the settlement of accounts between the Government and BNA, and will be made through the Treasury account in BNA. The Government is determined not to compel the commercial banks to lend to the public enterprises. Any BNA loans to public enterprises made on non-commercial terms will be guaranteed by the Government. 8. In Luanda, by March 31, 1992, 20 of the 21 offices and branches of BNA had been closed; 2 had been transferred to the BCI; and 1, to the CAP. It is expected that the process of closing BNA branches will be concluded in 1994. Outside the province of Luanda, BNA's commercial area is still operating 31 branches. 9. The termination of BNA's commercial activities outside the province of Luanda and the closure or transfer of its offices depends, however, on the timing of the expansion of activities of the existing and new commercial banks. Elementary prudence requires that BNA not withdraw its services from regions not served by any other institution. 10. The Government may grant incentives to encourage commercial banks to operate, to acceerate the geogphical dispersion of the existing and new commercial banks, especially into certain areas in which banking services must be mraintained during the economic recovery period, despite the lack of any significant commercial activity. BNA is also studying measures to promote this dispersion of banking operations by establishing guidelines (on location) when authorization is given to open new bank branches. 11. At the same time, as regards banking services in rural areas, the Government will encourage the establishment of rural savings and loan associations of the type found in many African countries. Under its statutes, BNA alone will be responsible for supervising these institutions and will Annex 1.1 Page 3 of 5 if necessary issue pertinent regulations, taking into account the size of the institutions and the nature of their activities, particularly to guarantee the security of rural savings deposits. 12. The Government is firmly committed to establish an effective two-tier banking system within a reasonable period. 13. In this context, it is expected that in 1994, in addition to its Luanda headquarters, BNA will retain only about five offices in the principal geographic regions of Angola to carry out its central banking functions. BNA will negotiate the transfer of all its remaining branches to the commercial banks. 14. BNA will also continue to reduce its international commercial banking activities; it has begun to allocate foreign exchange to the existing commercial banks, which on this basis are issuing letters of credit and other foreign payments instruments. This process will be refined in line with the growth of competitiveness in the banking sector and BNA's increased efficiency in the management of foreign assets. 15. The final step in this process of banking system reform - the cessation of BNA's foreign commercial operations - will largely depend on the solutions found to Angola's current foreign exchange crisis, on the growth and consolidation of banking operators, and on implementation of an integrated program to strengthen key sectors of BNA. BNA is undertaking a series of actions with a view to ceasing to issue letters of credit by the end of 1993 at he latest. Establishment of New Banking Institutions 16. In addition to approving legislation authorizing a two-tier banking system, in 1991 the Goverment also set up three financial institutions, all of which are now operational. The first two are commercial banks, Bank of Savings and Credit (Banco de Poupanga e Cr6dito, BPC), and Bank of Commerce and Industry (Banco de Comercio e Industria, BCI). The third Institution is the Agriculture and Fisheries Credit Fund (Caixa de Credito Agropecuaria e Pescas - CAP). 17. Under the legislation already approved, the Government will continue its gradual withdrawal from commercial banking operations, and will take steps to turn over the participations it now holds to economic agents with experience in providing banking services. To this end, the statutory basis of the existing commercial banks would be revised as necessary, to remove any obstacles to the process that has been started. 18. Contacts and discussions have begun with a view to finding partners with technical skills and recognized merits, to reduce the Government's present involvement in the commercial banks. To this end, negotiations began in July 1992 on the first phase of the privatization of BPC (observing the provisions of Law No. 20/91 of October 18, 1991, which stipulates the sale of 40% of the capital held by the Governrment). The revaluation of BPC's assets, required by the privatization process, is already under way. The second phase of privatization, which is expected to start during the current year, will take into account the decision by the Permanent Committee of the Council of Ministers on December 3, 1991, regarding the requitement of public competition in respect of acquisitions of participations in the capital of financial institutions. It is anticipated that the privatization of BCI will be started and completed during 1993. In line with these projections, the Government intends to complete the process of privatizing financial institutions by the end of 1993. Annex 1.1 Page 4 of 5 19. In addition to strengthening and privatizing the commercial banks, the Govermment also intends to transform the CAP so that it can provide long-term financing for directly productive activities which, during the period of economic transition, would probably not be financed by the commercial banks. The Government is considering a number of options, such as conversion of the CAP into an autonomous fund, with resources provided from the budget or by foreign donors, to finance specific development activities. The final decision on the future of the CAP will be taken following the conclusion of studies to be undertaken for this purpose, as part of the objectives of the technical assistance planned in the Financial Institutions Modernization Project. Meanwhile, immediate action will be taken to inrtiqte the prucess of transferring deposit accounts in the CAP to the existing commercial banks. 20. Opening the banking system to private national and foreign investors is also seen by the Government as a way of enhancing competition and efficiency in the sector. Therefore, the laws and regulations already approved, as well as any further legislation that may be necessary, will not impose specific discriminatory restrictions on foreign operators, whether as regards subsidiaries, branches of the respective parent company or shareholders in the existing banks. Until the currency is stabilized, the foreign banks will be authorized to convert their capital at a parallel rate, and consideration is being given to their being authorized to keep part of their capital in foreign exchange, probably as a function of their foreign commitments. Also under study is the possibility of issuing of an addendum to Notice No. 1/92, concerning the procedure for converting the minimum capital required (US$4.5 million) for establishing financial institutions; although this requirement will continue to be denominated in local currency, the addendum would specify that the amount in question would be the local counterpart of foreign currency transferred at the floating market rate on the date of the operation. The law on foreign investment which permits the repatriation of dividends will be applied to the commercial banks. 21. Responding to the principles of the Government's sector policy, a number of foreign financial institutions have already submitted requests to establish branches in Angola. From among these, dossiers have aiready teen prepared in respect of three Portuguese banks, and the Government is committed to authorizing the opening of these branches by the end of the current year. 22. The introduction and application to all banks, of prudential norms is required for the banking system to function properly and perform effectively. In addition, if the banking system is to be opened up and developed, the regulatory and supervisory functions need substantial strengthening, which it is hoped would be achieved in part through implementation of the Financial Institutions Modernization Project. 23. Although short and medium-term efforts are focusing on upgrading the existing banking system, the Government will encourage the establishment in the near future of a full-service private bank with experience in investment financing. Should this bank also come to participate in the management of specific-purpose government funds, consideration could be given to making it responsible for managing the CAP when the latter is turned into a fund. 24. 'lhe Government intends to initiate exploratory contacts with certain institutions - such as Portugal's Banco de Fomento e Exterior, the European Investment Bank and the International Finance Corporation - in order to assess the feasibility and desirability of such a step. Annex 1.1 Page 5 of S Upgrading of the Insurance Sector 25. Like banking, the insurance sector must be thoroughly restructured in order to introduc9 proper levels of competition and efficieiucy. The Government also intends to encourage diversification of the products offered so as to invigorate the insurance market and modernize the financial system in general. 26. The General Law on Insurance Activities will shortly be presented to the Council of Ministers for discussion and approval and is expected to come into force during the first half of 1993. The opening of the insurance market to national and foreign operators and the disappearance of the state monopoly will be the basic features of this law, which will also make reference to the agencies whose subsequent task will be to regulate the matters mentioned and undertake other activities stemming from the law. 27. Recent preliminary studies made as part of the preparatory work for the Financial Institutions Modernization Project indicate the difficulties which, given the lack of experience and scarcity of resources, will be encountered both with regard to the establishment of a competent agency tO regulate and supervise future activities and the necessary restructuring of the existing insurance company (ENSA). The lack of specialists with adequate knowledge at many different levels also highlights the current weakness of the sector. 28. A series of actions, ranging from professional training to the preparation of specific regulations, and designed to restructure insurance activities, is planned as part of the technical assistance included in the Financial Institutions Modernization Project. C~oncl us ions 29. The action program set out above is evidence of the Government's determination to establish conditions in which an effective restructuring of the financial system can be achieved; this will contribute to the recovery of the economy, to the mobilization and productive use of private sector savings and to a substantial improvement in the management of public savings. 30. However, the ongoing reform program is part of a complex process resulting from the interaction of a number of different variables, acting at times in opposite directions; preeminent among these is Angola's present economic situation and, more particularly, the foreign exchange crisis. 31. Furthermore, although the measures already taken have introduced a new vigor into the activities of economic agents, the enormous difficulties stemming from the current lack of an adequate number of qualified and experienced specialists still have to be overcome. 32. In conclusion, it should be pointed out that, in the context of an economy undergoing restructring after a long period of instability, assistance and support from the international community will play an important role in bolstering the Government's efforts to achieve the targets set out in the reform program outlined above. ANGOLA - FINANCIAL INSTITUTIONS MODERNIZATION PROJECT Consumer Price Inflation 35 30 25 *20 15 ~15 5 0 I I I I I iI c ~ ~ ~ ~ ~ ~ I , _I _J _I _ C_d_ s f a , X X * 0 0 0 c 0 0 0 0 e 0 0 0 0 C | L0 5L.t h<Z -5 OQ .0.S 60 0 U 0. Annex 2.2 Pop 1 of 5 Main Features of the Bankj5gystem Dominance of National Bank of An&ola (BNA) 1. As is the case with most monobanks, BNA's dominance of the system was pronounced before beginning the refor-m of the banking system. At the end of 1990, BNA accounted for 99.5 percent of domestic credit, 76 percent of deposits and 87 percent of asets, which totalled NKz 655 billion. Even after the establishment of the three financial institutions, PNA's positionremained considerable, especially with respect to credit extension. Thus, at the end of 1991, BNA accounted for 98 percent of domestic credit, 58 percent of deposits and 87 percent Of assets, which are provisionally estimated to have approached the level of NKz 1,700 billion. At the enJ4 of 1991, BNA's credits totalled about NKz 669 billion, of which 87 percent were extended to the Government, 9 percent, to public enterprises and only 5 percent, to the private sector. Even if the credits which were outstanding in the books of the Commercial Area of the BNA at the end of 1991, which stood at NKz 44 billion (of which NKz 31 billion were to the private sector and Nkz 13 billion to public enterprises), had been transferred to the commercial banks, BNA would still have accounted for 91 percent of domestic credit at year end. This reflects the excessive dependencts of the Government on BNA for financing its large budget deficit. ExcessLig9Nk 2. At present, the two commercial banks operate in 8 out of Angola's 18 provinces. Bank of Savings and Credit (Banco de Poupanga e Cr6dito, BPC) operates 18 branches and 13 sub-branches in 8 provinces, employs a staff of 710 and had total assets of NKz 137 billion at the end 1991. BCI operates three branches in Luanda, has a staff of 110 and total assets of more than NKz 76 billion ct the end of 1991. The combined growth and performance of the two banks in 1991 is summarized' in Tables I and 2 below. Although customer deposits increased by 123 percent and assets, by 150 percent during 1991, the commercial banking system contracted in real terms, since the rate of inflation during the year exceeded those levels. 3. In view of the limited opportunidiee for lending in local currency, the commercial banks have been very liquid. At the end 1991, the banbs aggregate loan portfolios fell short of NKz 15 billion, equival6at to only 7 percent of assets. The bulk of the Li,,s' assets took the form of deposits with BNA, which totalled NKz 150 billion at year end, equivalent to 90 percent of customer deposits. Only a portion of the banks' balances with BNA are required reserves, which are currently set at 20 percent of curreut and term deposits and are unreerated. In the past, both re uired and excess reserves with BNA earned no interest. Given the limited investment opportunities present, BNA recently decided to begin paying interest on the banks' excess reserves at the rate of 11 percent per annum, thereby increasing the banks' future net interest income. Effectively, BNA will sell the banm the new 11 percent bonds being issued to it by the Treasury. Caix do Cidto Agopecudris * P1m. (CAP) ha beeo eclded fom the above abmlyms boo... is Ia a oo_mIa banu and ibs opmdou an limitd. It nploys aff of 37 uad opoA ou of its badqwutm in LuandJ. At dX and of 1991, i had wltomw depost of NKz 6,276 million, loum of NKz 6E4 miland Manea of NKz 7,095 milon. AlhouSh its omutomsr depoit rohed Xt level of NKz 10,977 millDi2 by May 20. 1992. its loan pofolio _ ony NKz 737 million. lb bulk of CAP'ases consisted of deposa with DNA, which amounted to NXz 6,595 min an May 20, 1992. Annex 2.2 Page 2 of S LonPgrtfolios 4. As mentioned earlier the banks' lending is exclusively in local currency. At the end of 1991, the banks' loan portfolios were equivalent to only 9 percent of customer deposits. Short-term loans and advances account for almost four-fifths of the banks' loan portfolios, while medium and long-term loans (i.e. loans in excess of one year) account for the remainder. About two-thirds of the short-term lending goes to finance trade and commerce with the bulk of the rema,nder going to the industrial, agricultural and transport sectors. Term financing is more evenly distributed among the sectors, with 21 percent accounted by car purchases, 15 percent by housing, 15 percent by trade and commerce, and 10 percent for each of agriculture, fishing and services, and 6 percent for each of industry and transport. Even though during the first quarter of 1992 the banks' loan portfolios increased at a faster rate than their customer deposits (i.e. by 55 percent as compared with 44 percent for customer deposits), the banks' loans to deposits ratio was still a meager 9 percent at the end of March 1992. Changing Composition of Customer Deposits 5. At the end of 1990, about 94 percent of BPC's customer deposits came from the private sector and more than 62 percent of total deposits were term deposits. During 1991, the composition of the banks' customer deposits changed significantly due to two main factors: the inflationary pressures and the entry of a new commercial bank offering faster and better services to its clients. The inflationary pressures and the increasingly negative real interest rates, resulted in a major shift in deposits from term accounts to current or savings accounts. Thus, at the end of 1991, term deposits accounted for only 8 percent of total customer deposits, with demand deposits accounting for 45 percent and savings accounts, for 47 percent. The creation of Bank of Commerce and Industry (Banco de Com6rcio e Industria, BCI) resulted in a significant increase in public sector deposits in both absolute and relative terms. At the end of 1991, public sector deposits with commercial banks approached the level of NKz 44 billion, equivalent to 26 percent of total customer deposits. By the end of March 1992, public sector deposits increased urffier to about NKz 79 billion, equivalent to almost 33 percent of the banks' customer deposits. Undercapitalization 6. At the end of 1990, BPC's net worth was equal to only 1.5 percent of its assets. Article 20 of Law 5/91 requires that the capital and reserves of financial institutions (including branches of foreign institutions) be at least equal to 10 percent of the institutions risk assets, but does not provide a formula for the calculation of risk assets. At the end of 1991, the aggregate net worth of BPC and BCI exceeded NKz 15 billion. This is equivalent to 7.15 percent of their total assets, and more than 10 percent of their risk assets, if their deposits with BNA are considered risk-free assets. However, revaluation reserves (or tier two capital) accounted for about 68 percent of the banks' net worth at the end of 1991. Consequently, if the Basle capital adequacy requirements were to be applied to the Angolan banks, the inadequacy of their primary or liquid capital (or tier one capital) would become apparent. Ihe pressure on the banks to increase their liquid capital will intensify with the growth of their risk assets (i.e. their loan portfolios as well as their off-balance sheet assets). 7. Although BCI started operations only on July 1, 1991, the two commercial banks recorded a combined profit of NKz 2,981 million for 1991. This is equivalent to a return of around 2 percent on average total assets and about 36 percent on average net worth (or to 95 percent if revaluation Anmax 2.2 Page 3 of 5 reserves are excluded). Given the small size of the banks' loan portfolios and the fact that balances at dNA (both required and excess reserves) were unremunerated in 1991, net interest income accounted for only 26 percent of the banks' operating income (or gross earnings margin). Actually, net interest income did not cover operating costs in full. The bulk (i.e. about 70 percent) of the banks' operating income, or NKz 3,389 million, consisted of foreign exchange income. This substantial windfall was the result of BNA's policy of allowing the two banks to maintain positive net foreign exchange posidons. 'he banks derived abnormal profits because of the substantial devaluation starting n November 1991. However, without the abnormal net foreign exchange income, the banks would have recorded a combined loss of NKz 408 million in 1991. More importantly, it shou'd be noted that although the Government has in principle transformed the 'monobanking" system into a two-tier system, in practice the system is not much different from that of 'monobanking". Until all foreign exchange operations with customers are transferred from BNA to the banks, Angola will not have a well functioning two-tier banking system. Annex 2.2 Page 4 of S Table I Argreiated Balance Sheet of the Commercial Banks in Angola. 1990/91 (in millions of kwanzas) End End Alsets Cash 1,239 6,137 Balances with the Central Bank 75,946 150,319 Items fbr collection 47 7,184 Due from banks 7, 95 Current accouts (-) (2,954) Margins on L/Cs (-) (175) Term deposits (-) (4,066) Loan portfblio 2,136 14,688 Short-trm (1,546) (11,659) Medium & long-term (405) (2,804) Other debtors (185) (225) Equity investments 29 29 Fixed assets (net) 128 10,696 Order and regularization accounts 5.742 12.388 Total Assets 85,267 213,636 Liabilities Deposits 75,153 167,726 Public sector (4,741) (43,759) Private sector (70,412) (123,967) Other liabilities 2,680 21,037 Provisions 199 680 Order and regularization accounts 5L2 924,911 Total Liabilides 83,956 198,354 Capil 267 1,267 Revaluation reserves - 10,323 Other reserves 870 711 Profit for the year 174 L2B. Net Worth 1,311 15,282 Total Liabilities & Not .jt. rh 85,267 213,636 * Thn Wm caetd of oly one bank, DMC (z-Bmo Popuka de Anla) n 1990, and tw bank, inchadips DcI in 1991. Source: Derivar from information obtained from the banks. Annex 2.2 Page 5 of 5 Table2 Aggregated Income Statement of the Conunercial Banks in Angola for 1991 (in millioas of kwanzas) Interest Income 2,067 Interest Cost 799 Net Interest Income 1,268 Commission Income 173 Net Foreign Exchange Income 3,389 Other Operating Income S2 Gs Earnings Margin 4,882 Operating Costs 1,322 Staff costs (952) ftcvr operating costs (M Net Earnl&; Margin 3,560 other Costs 579 Depreciation costs (97) Provisions for bad debts NM Profit for the Year 2,981 * Includirg two banks, BPC (ex-Banco Popular de Angola) and BCI, whici. wu etablished in March 1991. Source: Derived from information obtained from the banks. Annax 2.3 Page I of 1 AN- LA - FiNANCIAL INSTITUTIONS MODERNIZATION PROJECT Angzola: Mono=ar Survey Billions of NKz 1986 1987 1988 1989 1990 1991 Net Foreign Asit -18.5 10.5 9.2 6.9 6.8 0.3 Net Domestic Credit 265.1 274.0 318.7 389.4 418.3 450.4 Government (Net) 158.3 227.9 274.3 326.5 373.7 349.3 Non-government 106.8 46.2 44.5 62.9 44.6 101.1 Total 284.5 327.9 396.3 425.2 450.7 Wide money (M2) 220.3 263.7 317.1 370.8 289.6 40'.2 Currency in circulation 92.3 117.0 137.4 151.9 21.8 111.5 Demand deposits 128 133.0 167.4 185.3 161.8 203.3 Time deposits 13.7 12.3 33.6 51.7 27.3 Compulsory securities 54.5 59.1 Medium/Long-term Foreign 0.7 0.4 0.8 3.3 24.1 Liabilities Other items net 26.4 20.1 10.4 24.7 132.2 25.4 Wide money (M2A) 220.3 263.7 317.1 370.8 235.3 342.1 Money (MI) 220.3 250.0 304.8 337.2 183.6 314.8 GDP (interpolated) 196.3 203.4 223.8 254.3 327.7 % of Interpolated GDP Percent M2 112.2 129.7 141.7 145.8 88.4 M2A 112.2 129.7 141.7 145.8 71.8 Currency 47.0 57.5 61.4 59.7 6.7 Domestic credit 135.0 134.7 142.4 153.2 127.7 Domestic (Government) 80.6 112.1 122.6 128.4 114.1 Credit (Non-government) 54.4 22.7 19.9 24.7 13.6 NOTE: 1983-86 uses different methodology especially for Net Foreign Assets and Credit to Non-government. Data for 1991 are for November. * Not including frozen "compulsory' securities Annex 2.4 Page 1 of 4 Summar of Basic BankingLelalo 1. Central Bank Statutes (Lei Orgdnica do Banoo Nacional de Angola. BNA) Overview I. The legal framework for the operations of BNA, the central bank, is contained in Law No. 4/91 of April 20, 1991. These statues establish (i) BNA's level of capital (NKz 1 billion) and reserves, (i) its right to issue money, (iii) its general functions, (iv) its relations with financial institutions and the State, (v) its international relations, (vi) its internal organizational structure and administrative procedures, and (vii) its accounts and balances. 2. In addition to issuing money and acting as the State's only banker, the BNA executes monetary and exchange policies and coordinates these markets. The BNA manages external reserves; acts as the intermediary for the State's interuational financial relations; oversees the stability of the financial system; acts as the lender of last resort; compiles monetary statistics; manages external debt; and prepares the national balance of payments. 3. General N s - The BNA may issue securities in its own name and for its own account, and may purchase, sell or negotiate them with the public. It may not, however, engage in certain operations such as: (a) rediscounting securities from the commercial portfolio of financial institutions for a period greater than six months; (b) lending to financial institutions for a period of greater than three months; (c) promoting the establishment of financial institutions; (d) owming real estate other than that needed to carry out Its essential functions; and (e) providing risk insurance. 4. The restrictions on the term of instruments that the DNA can employ in market itrerventions may in the future limit the central bank's ability to carry out its monetary policy functions, such as through repurchase agreements. 5. Relatigns with Financial Institutions - The BNA has the authority to supervise financial istitutions, ecsure their solvency and liquidity, as well as open account and accept deposits from them. 'he BNA may constitute requirements for mandatory reserves and liquid asets based on financial institutions' deposits and other liabiities. In addidon, the BNA may asess monetary penalides for non- compliance. The central bank may also establish operational pgidines regarding interest rates, matrities, commissions, as well as implementing financial ratios relating to the financial institutions' ar.%s, liabities and guarantees. With institutions that maintain accounts with the BNA, the central bank may purchase, sell, discount, and rediscount: Annex 2.4 Page 2 of 4 (a) bills and promissory notes falling due within six months; (b) publicly issued treasury bonds and other instruments issued or guaranteed by the State, falling due within one year; and (c) instruments issued by the BNA. 6. Relations with the State - The BNA may extend credit to the Government in an amount up to 10 percent of the latter's receipts, by transferring negotiable, interest-bearing public debt instruments. The BNA may purchase and trade with the public instruments issued or guaranteed by the Goverrnment. The Government may not borrow beyond a percentage of receipts to be defined by the Council of Ministers; however, if it appears that the limit established by the Council of Ministers will be exceeded, the central bank must make a report to the Council of Ministers regarding both the causes and remedies for the situation. Stricter limits should be placed on the Government's ability to draw on automatic advances from the BNA. Moreover, the Ministry of Finance, not the BNA, should be charged with making the report if the Govermnent is overdrawing its limit. 7. 1 - The BNA manages the country's international reserves, for which It may discount instruments in its portfolio, as well as regulate and supervise the operation of non- financial institutions in such markets. The BNA may purchase and trade gold, foreign exchange, Government obligations and other instruments with institutions abroad. 8. Inteal O ational Structur - The Governor of the BNA presides over the Board of Directors, which is composed of an unspecified number of Vice Governors and five Directors. The Governor and Vice Governors are sppointed by the President of the Republic, while the Directors are appointed by the Council of Ministers. To allow more central bank independence, however, several changes are necessary. The Governor should be appointed to a fixed and renewable term, such as the five-year term stipulated for the Directors, and should be removable only by a sizeable majority vote of Parliament. Terms of Board members should be lengthened to between 8-14 years, and should be staggered to ensure that Board members are not all replaced at once. 9. Votes in the Board of Directors are implemented by a majority, although the Governor has a special 'casting' vote. Under Article 63, the Governor can also postpone the enforceability of any Board decision for 30 days. The Governor should have no veto power, but should direct staff and set the tone of the institution, with decisions being implemented only by consensus. H. Legislative and Regullatory Frwnework of Bank SuRervision: Lei das Instituic8es Financeiras 10. Mt. basic legal authority for banking operations in Angola is contained in the Law of Finana Insdltitons, Law No. 5/91 of April 20, 1991. Only financial institutions - defined as banking nsttio, special crodit institutions and parabanking institutions - may carry out credit and other bking functis, with the exception of the Government when acting through specialized institutions. The law asigns a contrl role to the National Bank of Angola (BNA) with respect to supervising the aciviies of financl institutions and defiing operational norms. ITe power to authorize the operations Annex 2.4 Page 3 of 4 of fiinancial institutions rests with the Minister of Finance, after hearing an opinion of the Governor of the BNA. In the case of foreign institutions, the Council of Ministers grants such authorization. 11. The banking law comprises: (i) an enumeration of different types of financial institutions; (ii) the criteria for establishment and incorporation of both local and foreign financial institutions, including the delegation of authority to the BNA to set minimum capital requirements; (iii) a framework for the internal organization of financial institutions; (iv) the constitution of operating rules, which need to be supplemented with the subsequent definition by the BNA of specific norms; (v) the financial inspection and supervision rights of the BNA, as well as the obligations of financial institutions regarding external auditing, accounting, furnishing of information; and (vi) an elaboration of the enforcement powers of the BNA, including temporary direct intervention, warnings, actions akin to cease and desist orders and monetary penalties. Prudential Rule 12. The prudential regulatory framework contained in the Law of Financial Institutions is based on the following main components: (a) Solvency - Financial institutions must conform to ratios still to be defined by the BNA regarding assets, liabilities and net worth. In addition, according to Directive No. 1/92 of April 3, 1992, commercial and investment banks must maintain a minimum capital of NKz 2.2 billion deposited with the BNA. This amount may be reduced up to 40 percent in the event that the bank's headquarters is located outside Luanda, or if the bank commits itself to opening branches in areas of the country where there are no such installations. (b) Capital Adegay - Capital and reserves mus. be at least 10 percent of total amount of risk assets, but no instructions have been issued on how to measure this. (c) Liquidity - Banks must coniply with rules to be defined by the BNA regarding the composition and amount of minimum cash. (d) Credit Concentration Limits - For a single borrower, banks may not grant credit, including endorsements or guarantees, in excess of 10 percent of their capital and reserves. Credit to the top ten largest borrowers may not exceed 30 percent of a bank's capital and reserves. (e) Connected Lending - Banks may not lend to managers or directors. Banks may lend or furnish guarantees to shareholders who own more than 10 percent of the bank's c'rporate capital only if justified and with prior notification to the BNA. (f) Ownership of Non-financial Enterprises - The BNA will define limits on the direct or indirect ownership of shares by banks of non-financial enterprises, as well as the acquisition of obligations, whether or not convertible into shares, issued by such enterprises. (g) Issuance of Debt Obligations - Tle BNA is empowered to authorize the issuance of debt obligations by financial institutions. Annex 2.4 Page 4 of 4 (h) Investment in Real Estate - Banks may not invest in or possess real estate that Is not essential to their operations, except that which results from non-payment of their loans, in which case banks must divest themselves of such property within two years. (i) Comnpulsory External Auditing - Banks are required to undergo an external audit once every three years, or whenever required by the BNA. The periodicity should be changed to a yearly basis in the regulations. 0) Supervision - Banks are subject to the supervision of the BNA, which may inspect books, records, documents or any other items it deems necessary. (k) Special Powers - If a bank's condition were such as to impair its smooth functioning or to disturb that of the money, financial or exchange markets, the BNA may intervene by: (i) suspending directors and appointing new management or a management commission; (ii) granting temporary exemptions from compliance requirements; (iii) arranging for appropriate financial support; and (iv) freezing assets of the directors. (1) Duration of Intervention - The BNA would establish the duration of intervention, during which the appointed management or management commission may take any measures designed to rectify the situation, including freezing deposits for up to two years. (m) Enforcement Powers - The BNA has the following punitive powers in addition to those mentioned above: (i) give warnings; (ii) impose fines up to NKz 1 million; (iii) prohibit temporarily or permanently the performance of certain functions; (iv) require financial institutions to be jointly and severally responsible for fines assessed on their directors, managers, employees, or consultants Rules Which Need to Be Issued lbrough BNA Directives 13. The Law on Financial Institutions lacks some fundamental aspects of prudential rules which need to be issued through BNA directives. These areas include instructions regarding: (i) asset classification, (ii) provisioning policy, and (iii) interest suspension policy. Annex 3.1 Page 1 of 2 ANGOLA - FINANCIAL INSMITUTONS MODERNIZATION PROJECT Main Technical Assistance and Training Activities Summary Description of First Year Tasks Strengthening BNA Information Systems Assistance to Informatics Directorate on System Analysis/Planning Methods 1. The objectives of this consulting assignment are fourfold: (i) to introduce a system analysis methodology at DOR and (if available) supporting software; (ii) to train Informatics staff in the methodology; (iii) to develop a plan and methodology for directorate-level information requirements studies; (iv) to test the above methodology in the Informatics Directorate (DOR), and refine and document the methodology; and (e) to introduce system developmentJtesting/maintenance methodology and at DOR recommend supporting software. Assistance to Informatics Committee 2. The objectives of this consulting assignment are threefold: (i) to empower the Informatics Committee (IC) of BNA through appropriate training in strategic management of informatics; (ii) to assist the committee in making a few key policy decisions; and (iii) to create an effective secretariat function to the committee by on-the-job training of the Informatics (DOR) Director. Assistance for Information Systems Strategic Plan (ISSP) 3. The objectives of the Information Systems Strategic Plan (ISSP), will be (i) to recommend a long-term strategy for informatics development as outlined above; (ii) to develop information and data architectures for the institution; (iii) to recommend a technology architecture; and (iv) to prepare long- term system implementation, equipment acquisition, and staff training plans. The ISSP will be a foundation upon which BNA's information systems will develop in an integrated, orderly manner to support key institutional priorities. Assistance to Prepare Information Requirements Studies 4. The consultant will be responsible for providing technical leadership to a team of analysts in the produ7ction of an information requirements study for each BNA directorate. The study team will be managed by either the affected director or the DOR director, and be composed of (i) knowledgeable Directorate staff, (ii) the consultant, (iii) a DOR systems analyst, and (iv) a DOR organizational analyst (half time). Some of the components of each requirements study are: (i) business functions carried out in the organizational unit; (ii) data classes required to carry out the business functions, and the source from which those data can be obtained; (iii) critical success factors for unit management; (iv) streamlined work and forms flow; and (v) systems requirements. This assistance is to be provided to BNA by senior systems analysts for a period of up to eight months beginning on or about November 1, 1992. Study on Improvements in Accountming 5. The primary objective is to assist BNA in preparing auditable accounts (including balance sheet, income statement, statement of sources and applications of funds, and such other subsidiary Annex 3.1 Page 2 of 2 statements and explanatory notes as may be desirable) as at December 31, 1991. These accounts will be audited by an external firm of auditors under separate TOR. The secondary objective is to help BNA improve its internal access to and flow of accounts-related information, thereby facilitating the operations of BNA departments which depend on such data. Specific tasks to be undertaken include the reconciliation of key accounts (short-term lines of credit from correspondent banks; foreign-exchange deposits with correspondent banks; overall foreign-exchange position; BPC deposits in BNA; certain accounts of Commercial Area) and recommendations for the strengthening of BNA processing (non- coincidence of reporting data needed for preparation of monetary statistics from the Central Area and Commercial Area). Assistance in Developing Career Streams 6. The objective of the consultancy would be to assist setting up the personnel management function in the BNA. As in most socialist economies, there is no central banking tradition, and central bank staff have no career paths. The consultancy would assist in organizing the BNA Personnel Department, including the introduction professional development streams for BNA staff. Banking Infrastructure: IFBA 7. The purpose of the consultancy is to make recommendations in respect of: IFBA's ownership and management; the training objectives and course offerings of IFBA; and the IFBA's financial arrangements. Establishment of Standards for Accounting and Audit 8. While further improvements in public-sector financial management would continue to be a priority of the Ministry of Finance, officials of the Ministry realize that a major effort is required for the Ministry of Finance to undertake its regulatory role in respect of commercial accounting and auditing. This effort embraces three activities for which the National Directorate of Accounting (DNC) is responsible: accounting, auditing, and registry of accountants. Many of these activities have a direct bearing on income tax matters and are therefore of interest to National Directorate of Taxes (DNI). The consultancy would require the efforts of an individual to provide assistance to the Ministry of Finance over a three-year period to establish standards for accounting, auditing, and education, examination, and training of accountants. Annex 3.2 Page 1 of 13 ANGOLA - FINANCIAL INSTITUTIONS MODERNIZATION PROJECT Informatics Program I - BNA Information Systems Program 1. This Annex to the Staff Appraisal Report of the Financial Institutions Modernization Project for Angola describes the informatics program of the project which comprises (1) the BNA Information Systems Program, and (2) the Check Clearing System. Present Situation 2. Despite major resource constraints, weak national supply of parts and technical assistance, long procurement lead times, and limited training opportunities for technical i:aff, BNA has made progress over the years in the area of inforinatics. (a) There is growing staff awareness of the usefulness and flexibility of modern microcomputer technology to facilitate day-do-day secretarial, analytical and professional work. (b) There are on-going initiatives in several areas of the i.istitution to develop small computer systems in support of critical internal functions. (c) BNA has a small cadre of resourceful analysts and programmers with some experience in the development and maintenance of traditional computer applications. (d) BNA has an aging but still functioning set of computer applications but these support mainly its commercial operations. BNA also has a mainframe computer, and approximately 60 microcomputers of which about half are lats models. Obiectives 3. To perform its role as a full-fledged central bank, BNA needs to expand substantially its institutional capabilities during the next few years. The scope of functions such as bank supervision will expand in tandem with the banking sector; its analytical and policy formulation capabilities in all aspects of monetary management need to be vastly increased; its operational role as a first tier bank, coordinator of money and credit supply and manager of foreign exchange resources, needs increasing sophistication, speed and accuracy. 4. The overall objective of the informatics program, therefore, is to contribute to the development of the above capabilities by improving BNA's administration and information systems. While computer tecl:nology can and will be used for this purpose, the emphasis of the programn is placed not on the technology, but on the institutional improvements that can be achieved through its judicious use. Annex 3.2 Page 2 of 13 5. Specifically, the following objectives will be pursued through BNA's Information Systems (Informatics) program: (a) streamline and document work procedures, information flows, and information systems of BNA directorates; (b) install the computer application systems needed by each of BNA's directorates in support of their mainline business processes; (c) create an effective mechanism for the allocation and management of informatics resources in the institution; (d) strengthen the management and modernize the work methods of the Informatics Directorate (DOR); (e) improve staff skills to use and manage informatics resources; (f) develop a information systems strategic plan to guide BNA's informatics activities during the duration of the project and beyond; and (g) increase the productivity of selected professional staff through the use of personal computing tools. Design Stratyg 6. As a basic strategy, BNA's informatics program will be paced and conditioned to institutional readiness to absorb new technology and implement administrative and managerial changes. This strategy recognizes that: (a) modern computer technology, while flexible, ubiquitous, and relatively inexpensive, requires orderly and well-informed management to yield expected benefits; and (b) investments in informatics will only be successful if BNA improves first its management and administrative practices, informatics policies, and staff skills. 7. Consequently, a preparatory phase (Phase 1) of the program has been designed to pursue objectives 5(a), 5(c), 5(d), and 5(e) above, in an attempt to build up BNA's capacity to absorb technological inputs planned for subsequent phases. Completion of Phase I should be a major landmark in the informatics program, and technology investments and activities projected for subsequent phases should be conditioned upon its success. 8. More specifically, it is envisioned that two broad strategic choices would be available to BNA depending on the outcome of Phase 1, BNA could pursue: Annex 3.2 Page 3 of 13 (a) an integrated informatics strategy based on common engineering design. This strategy would facilitate the creation of integratod information systems, the installation of homogeneous technology, and lower long-term costs. It would be possible only if BNA is successful in achieving fully the objectives cf Phase 1; (b) a piecemeal informatics strategy which accommodates substantial differences in capabilities among the various functional areas. This strategy would concentrate resources on those areas more able to use them, and result in faster, but less integrated systems for those areas and possibly in heterogeneous technology from rather small, incremental purchases made over several years. It would probably be implemented in an environment of decentralized nianagement of the informatics resources of BNA. 9. Selection of the appropriate strategy will be made through a short Information Systems Strategic Plan at the completion of Phase 1 (shortly after project effectiveness), and subsequent activities in the program will be guided by the decisions made during this study. Implementation Activities Phase 1 - Preparatory Phase 10. Phase I is targeted to last one year, start in late 1992, and be financed partly under the Project's PPF. How long BNA actually takes to complete this phase is a function not only of its own management capacity in informatics, but also of several non-controllable factors such as availability of housing and supply of consultants during a period of vacations in Europe and of presidential elections in Angola. Nevertheless, the duration of Phase 1 and the quality of its outputs should be considered a strong indicator of institutional capacity to absorb new technology investments. The objectives and expected outputs of this phase are explained below: Annex 3.2 Page 4 of 13 Table I - Objectives and Outputs of Phase 1 Objectives Outputs Terms of Reference 1. Create an effective 1.1 Deliver training seminar to members of Appendix A resource allocation and Informatics Committee. management mechanism for 1.2 Develop the function of Informatics informatics resources. Committee (IC) secretariat. Train DOR director in this function. 1.3 Develop informatics management policies, and a first year budget. 2. Strengthen 2.1 Introduce a system analysis methodology Appendix B management and and (if available) supporting software. modernize work Train Informatics staff in the methods of the methodology. informatics function. 2.2 Develop a plan and methodology for directorate-level information requirements studies. 2.3 Test the above methodology in the Informatics Directorate (DOR), and refine and document the methodology. 2.4 Introduce system development/testing/maintenance methodology and recommend supporting software. 3. Define information 3.1 Conduct information requirements study Appendix D flows and requirements for each BNA directorate. Study team wil! of all BNA be managed by either the affected director directorates. or the DOR director, and be composed of a) knowledgeable Directorate staff, b) an external system analyst, c) a DOR system analyst, and d) and DOR organizational analyst (half time). 11. To achieve the objectives of Phase I the Project will provide the following resources: (a) Technical Assistance. (i) 10 staff months of expatriate system analyst to prepare an information requirements studies for each BNA directorate; (ii) 3 staff months of expatriate organizational analyst to support the DOR for the same studies; (iii) Annex 3.2 Page 5 of 13 2 staff months of senior informatics management expert to design and introduce modern work procedures in DOR; and (iv) I staff month of very senior informatics management expert to train BNA Informatics Committee (IC) members, and draft broad informatics management policies for BNA. (b) Technology. 18 microcomputers which are urgently needed by BNA directorates, and desk-top-publishing equipment and software licenses for DOR. Phase 2 - Information Systems Strategic Plan (ISSPI 12. To decide oii a long-term informatics strategy (see para. 8) and plan its implementation, a strategic Information Systems Strategic Plan (lSSP) will be conducted at the completion of Phase 1, early after Credit Effectiveness. This plan will also formulate appropriate system implementation, technology acquisition, and staff training plans, and thus attempt to minimize costs and promote compatibility of technology. The plan will take about two months and require participation of senior BNA staff, 2 high-level consultants, and one junior-level consultant. Terms of reference for these consultants and definition of the plan's outputs are included in Appendix C. Phase 3 - Information Systems Development 13. Once an adequate information systems plan is developed, further activities will proceed under the guidance of that plan. For design purposes, it will be assumed that an integrated strategy is chosen as described under para. 8.(a) above. Information systems will then be implemented at BNA in two stages: (a) Stage I - High Priority Systems. This group of systems will be identified by the ISSP and implemented during the first two project years. It may include operational systems such as Bank Supervision, Reserve Management, and Debt Management; analytical systems such as Macro and Monetary Policy Analysis; and administrative systems such as Accounting, Budgeting, and Personnel. Resources to be provided for this Phase are as follows: (i) 33 months of TA from expatriate system analysts/programmers to work on the development of priority information systems. (ii) 24 months of TA from expatriate senior informatics management specialist to assist DOR director in managing the informatics program. (iii) Training as follows: (i) 2 DOR management courses; (ii) 120 personal computing courses for selected BNA staff; (iii) 3 microcomputer user support courses; (iv) 2 system analysis courses; (v) 10 courses for DOR staff on new data base/programming languages; (vi) 2 informatics project management courses, and (vii) 1 special telecommunications course. (iv) Computers and their operating software as follows: (i) 26 micro computers and accessories; (ii) 3 multi-user computers with capacity for Annex 3.2 Page 6 of 13 appraximately 30 concurrent users, for the priority information systems developed during this stage. (v) So'tware licenses to ensure that BNA owns the latest version of microcomputer software it uses, and that it gets access to proper documentation and technical support. (b) Stage II - Other Systems. The remaining information systems defined in the ISSP will be implemented during the last three years of the project. Some important systems may be deferred to this stage due simply to limitations in Lhe amount of change that the institution can absorb during a given period of time. The project will provide the following resources during this stage: (i) 34 months of TA from expatriate system analysts/programmers to work on the development of the remaining basic information systems for BNA's directorates. (ii) 18 months of TA from expatriate senior informatics management specialist to continue assisting DOR director in managing the informatics prograrn. (iii) Funding for two 20-hour-long personal computing courses for 90 selected BNA staff; and for special overseas courses for DOR staff in telecommunications and project management. (iv) Computers and their operating software as follows: (i) 42 additional microcomputers and accessories; (ii) 2 multi-user computers with capacity for approximately 20 concurrent users, for the information systems developed during this stage. (v) Application software package licenses for software that can be bought off-the-shelf instead of developed at BNA. Implementation and Procurement Guidelines 14. The following guidelines would be observed during project implementation: (a) Project resources need to be matched by adequate BNA resources if the program is to succeed. 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 counterpart effort is needed both to complete project activities and to obtain effective transfer of technical skills. While this clearly within current BNA's staff capacity, it will only be possible through careful work planning. Annex 3.2 Page 7 of 13 (b) Hardware, application software and technical assistance funds under the program should be mutually fungible to accommodate strategy and priorities decided upon during the ISSP. (c) Training should be followed within two months by on-the-job application of subjects learned. (d) Unit costs of technical assistance contracts do not include management overhead from contractor, since the project is financing a senior expatriate management expert to assist DOR director with prograni management. Recruitnent services companies should therefore be invited to bid for these contracts, as well as informatics consulting firms. (e) The functional characteristics and throughput requirements of computer hardware and software needed should be defined during the ISSP and submitted as the technical basis of bidding documents. The bidders should be allowed to propose the technical specifications of equipment which would meet these requirements. Care should be exercised in the bid evaluation methodology to weigh heavily the quality and reliability of after-sale maintenance and technical support service in Luanda. (f) Computer equipinent should be scheduled for delivery only after utilization plans are completed and application software is ready for use. Therefore, application software should be developed in advance of equipment purchases using the computer of DOR. 15. The following is an indicative guideline on the contracts in the BNA Informatics Program: Aninex 3.2 Page 8 of 13 Table 2. Summary of Contracts in BNA Informatics Program Coract No. Type' Amount Description Comments IS $143,000 TA for Information Systems Alternatively, evcral requirements tudies. individual consultants may be contracted. 2 IS $30,000 TA for Informatics Directorate May combine with Contract I or 3. 3 IS $25,000 TA for Informatics Committee 4 LCB $107,000 Emergency microcomputer equipment S IS S12S,00C) TA for Infornatics Systeus Strategic Plan 6 IS $429,000 TA for priority application May be combined in systems development or whole or in part. software purchase. 7 IS $630,000 TA for Informatics Management support during years 1/4 of the project. 8 LCB $120,000 Training for systems users in & Angola, and selective technical IS training in Portugal 9 ICB $240,000 Computers and their operating May combine with software. Contract 11 or 14. 10 LCB S145,000 Microcomputers & operating software 11 lCB $200,000 Application software licenses. May combine with Contracts 6 or 16. 12 ICB $442,000 TA for application systems May combine with development or software Contracts 6 or 16. purchase. 13 LCB $82,000 Training for systems users in May combine with & Angola, and selective technical Contract 8. IS training in Portugal 14 ICB $160,000 Computers and their operating May combine with software Contract 15. IS ICB $220,000 Microcomputer aMd operting software 16 IS $100,000 Application software Ucens. May combine with Contract 11 "IS, indicas that TA will be contracted through as wide as possible international competitive selection. Annex 3.2 Page 9 of 13 Program Management 16. Overall direction of BNA's informatics program will be exercised by the Informatics Committee. Program management will be provided by DOR Director or other executive designated by Informatics Committee. The Project Administrator will provide assistance to Iifnrmatics Program manager on contracting and procurement. Finally, as noted above, a senior informatics management expert will be contracted for the first 42 months of the project to assist the DOR director with Program management. 17. A yearly informatics program and budget should be prepared under the project, and submitted for review and approval by BNA's Informatics Committee and the World Bank. Annex 3.2 Page 10 of 13 -----------------------------------------------------------------------__----__--------- I I I QUANTITY PER YEAR I I---------------------------I ITEM I Unit I 1 2 3 4 5 6 TOTALI ! I Label I I ! I. BNA INFORMATION SYSTEMS I I ! -----------------------i ! ~ ~ ~~~~~~~~~I I I A. TECHNICAL ASSISTANCE I I ! Bank Supervision lexp. St. mo. I 1 2 2 2 2 1 10 1 I Monetary Policy, Statictics Iexp. at. mo. I 1 4 2 2 2 2 13 1 I Money Suppiy & Credit lexp. at. mo. I 1 2 2 2 2 1 10 1 ! Reserve Management lexp. at. mo. I 1 2 2 2 2 1 10 1 ! External Del,t lexp. et. mo. I 1 2 2 2 1 1 9 1 ! Accounting, b"dAgeting laxp. at. mo. I 1 1 1 1 0 0 4 1 I Organization Planning/Informatics Iexp. *t. mo. I 3 1 1 1 1 1 8 I Facilities, Equipment, and Services lexp. at. mo. I 1 1 1 1 1 0 5 1 I Personnel Administration lexp. et. mo. I 1 3 2 1 1 1 9 1 ! Informatics Management lexp. et. mo. 1 2 12 12 12 6 0 44 1 Informatics Committee lexp. et. mo. I 1 Informatics Strategy Stud- lexp. st. mo. 1 5 1 ! ~ ~ ~~~~~~~~~I I I ! i ~ ~~~~~~~~~~ I I ! I I I I B. TRAINING I I ! Management of Informatics Iperson/coursel 1 1 0 0 0 2 1 Personal Computing for BNA professionalsiperson/coursel 60 60 60 60 60 300 1 I Microcomputer Support Iperson/coursel 1 2 3 1 ! Systems/Organizational Analysis Iperson/coursel 1 1 1 3 1 ! 4th. Generation Data Base/programming Iperson/coursel 10 4 1 System development project management iperson/coursel 1 1 1 Lan/telecomunications Iperson/coursel 1 1 ! I II ! I I I ! I I I ! C. COMPUTER EQUIPMENT & SOFTWARE I ! Informatics Strategy Study Imicro & *oft.1 0 3 0 0 0 0 3 1 ! Professional Productivity Imicro & soft.1 0 9 9 9 9 9 45 1 ! Main Inf. Systems - Multiuser computers ILan or Mini I 0 2 1 2 0 0 5 1 ! Multiuser computer & operating software llump sum I 0 2 1 2 0 0 5 I ! Application software packages llump sum 1 2 2 2 6 1 I DOR Graphics & Documentation Equip. Ilump sum I 1 1 1 I M.in Inf. Systems - Workstations Imicro & uoft.118 5 5 5 5 38 1 ! Spec. Microcomputer Software licenses Ilump sum 1 7 10 5 5 5 1 -------------------------------------------------------------------------__--__--------- Annex 3.2 Page 11 of 13 II - CHECK CLEARING SYSTEM 19. BNA operates at present a manual check clearing mechanism which functions adequai.ely for the level of transactions currently processed. The project will finance the investments necessary to replace the manual system with a computerized one, and to improve the transportation of physical payment instruments initially to the national clearing center in Luanda and later to fegional centers in the provinces. 20. The design of the Check Clearing System (CCS) -- encompassing all the organizational, regulatory, staffing, training, logistical, and technological aspects -- was done as part of project preparation by an international consultant. The information below is supplemental to the design report, and results primarily from discussions during the appraisal mission. Design and Organization Guidelines 21. The folkl -ing general guidelines have been agreed with GOA for the design, organization and operation of the CCS: (a) A separate organizational entity will be set up to operate the CCS and evolve into an iniependent, industry-owned organization operating Angola's payment system. Initially, this organization will be setup within the Central Bank in under the Directorate of Money Supply and Credit. (b) BNA will provide suitable office space, office equipment, and attendant services to the CCS organ;zation. The project will finance the cost of office furniture and computer technology. (c) A CCS manager will be designated by BNA to direot the activities of the new organization. One of the key responsibilities of this individual will to organize an efficient system for transportation of payment instruments country-wide, through the use of existing commercial and private air transport facilities. (d) The goal of the CCS organization will be to become self-sustaining during the project life. For this purpose, the organization will charge an increasing share of its operational costs to client banks on a per transaction basis. (e) The project will finance a total of 25 overseas staff courses to train the technical personnel who will operate the computer sys.em of the CCS organization. The project will finance also two international trips in project year 5 for CCS organization managers to visit payment systems organizations in other countiles. (f) The CCS system will operate as suggested in the CCS Design Study report, which was financed under the PPF, except that clearing confirmation transactions will not be required from participating banks, but rather items will be cleared automatically by the system for which a rejection transaction has not been received for a pre-specified time period, say three days. P Annex 3.2 Page 12 of 13 (g) A study will be done during Project year 5 to design the Angola Payment System. This system will be a successor the CCS and will only be justified if the Angolan financial sector has developed considerably. Procurement 22. The following is a summary of the procurement contracts for the CCS: Contraet No. Type' Amount Description Comments I Is S30000 TA for design of check clearing system Done by Ken Pfeiffer. 2 IS S105,000 TA for CCS development 3 IS $72,000 Overseas training on IT and telecommunications. 4 LCB $72,000 Computer equipment, accessories. 5 LCB $43,000 Vehicle and office furniture. 6 IS S39,000 TA for installation of CCS in During years 2 provinces, through 4. 7 IS S42,000 Overseas training on IT and telecommunications 8 ICB $360,000 Computers and their operating software Deliveries for provinces, phased over ytars 3/4. 9 LCB $132,000 Vehicles and office furniture for provinces 10 IS $60,000 TA for Payment System design. 11 IS $52,000 Overseas training in It and telecommunications. ' IS' indicates that TA will be contraeted through intemational competitive selection. Costs and Schedule 23. The table below shows costs and timing of project-financed CCS activities: Annex 3.2 Page 13 of 13 I I I QUANTITY PZR YZAR I I
Группа Всемирного банка · Staff Appraisal Report
Angola - Financial Institutions Modernization Project
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Staff Appraisal Report
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Ангола
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Всемирный банк