Angola's failure to diversify away from oil has led to faltering growth in what has been in recent years one of Africa's best-performing economies. Though the government is managing the crisis better than in previous years, the currency remains unstable and access to foreign currency is in short supply. 

Throughout most of the past decade and a half, the blessings of Angola’s oil wealth have been clear for all to see. Oil has propelled much of the significant economic success experienced by the country since the end of the civil war in 2002. Angolan gross domestic product (GDP) growth has been in high-single or low-double digits for most of the post-war period, per capita income has increased considerably and the banking sector has grown from almost nothing to measuring its collective assets in the tens of billions of dollars.

Look beyond the headline-grabbing changes made by this resource bonanza, however, and the picture is a little different. Like oil on water, petro-wealth has given the Angolan economy a nice surface sheen, but has yet to fundamentally improve its depth. It has not conquered Angola’s endemic joblessness. Indeed, unemployment remains stubbornly high at 6.8%, according to World Bank figures. Education levels are still poor, and infrastructure remains too weak to support economic activity in the country’s vast hinterland.

‘Diversity’, then, has been the watchword of the Angolan economy for many years. The brief oil price collapse in late 2008, which saw crude fall from more than $140 per barrel to just $40 per barrel in a few short months, reinforced the need for a move away from reliance on oil money. Oil prices soon recovered, but the shock dealt a harsh blow to Angolan government finances, 80% of which depend on oil revenues. GDP growth fell from 10% in 2008 to just 2% in 2009.

In the years since, the Angolan government has made much noise about diversification, but, according to analysts, little has been achieved. “Most agricultural and industrial development has been very limited in ambition,” says Ricardo Soares de Oliveira, a politics lecturer at the University of Oxford in the UK. “A large industrial zone has been established outside [the capital] Luanda but it isn’t viable without significant state support, and its output is not competitive with similar products from other countries. The question is whether this much-hyped ‘diversification’ is happening at all.”

Slim pickings

The root of the problem is one often found in countries with weak governing structures and a heavy reliance on revenues from a single resource. The dominant industry intertwines itself so strongly with society’s elite that there is little incentive for the elite to champion different sectors. In Angola, the regime operates a rentier system where domestic and foreign businesses must seek a ‘partnership’ with the regime in return for permission to operate. As a result, contracts and general business support often go to firms with the best contacts, rather than superior expertise.

The Angolan sovereign wealth fund has set aside large sums to invest in the timber, healthcare, mining and tourism sectors in Angola, as part of its general requirement to put its money in assets that are uncorrelated to oil. Beyond that, however, pickings are slim for non-oil business sectors.

Of the non-oil industries, analysts say agriculture has the best chance of significant improvement. Angola has 4.1 million hectares of arable land, and before the civil war started in 1975, the country was self-sufficient in all major crops except wheat. However, thanks to the damage caused by the war, the country is now reliant on imports for most essential foodstuffs. Agriculture’s contribution to Angola’s GDP is currently estimated to be just less than 10%, though two-thirds of Angolans work on the land.

There is much speculation as to whether the latest slide in oil prices will finally galvanise the Angolan government to change its priorities. Unlike the short, sharp shock in 2008, this time it looks as though the oil market is in for a prolonged slump, with the main Middle East producers happy to keep prices low until competition from shale gas producers is fully driven out. In March, the Angolan government was forced to release a secondary budget based on a per barrel price of $40, rather than the original $80. This involved a 25% cut in government expenditure, and a significant widening of its budget deficit. The growth forecast for 2015 has been cut from more than 6% to 4.4%, and may yet fall further. Whether Angola can endure a long-term revenue drought on this scale and invest in a diversified economy at the same time is up for debate.

Catch-22

The recent oil crisis has made the need for economic diversity ever more apparent, but the Angolan government might have left it too late. It now faces a catch-22 situation. To adapt to low oil prices it needs to move into other areas of growth, but the low oil price makes this impossible in the short term. The new budget has already made a massive cut to expenditure on capital projects, such as infrastructure.

"The only real solution is to move away from short-term planning toward longer term horizons and investing in diversification when times are good rather than waiting for a crisis to hit," says Markus Weimer, an independent consultant and Angola expert.

One sign of long-term planning is Angola’s current efforts to expand its domestic capital markets. A new stock exchange has been set up, and is expected to open for trading in 2017. The government has in turn beefed up its regulatory agencies to deal with oversight of secondary market trading of equities and fixed-income instruments.

"We have a capital markets agency that is well organised with proper regulation. We also have a stock market, of which we were the first member. We will see new players entering this market that will allow it to play a new role. Public debt is the first area of effort, then corporate debt, then private company shares. This will add new dynamism to our economy,” says Dr Emidio Pinheiro, chief executive of local lender Banco Fomento Angola in Luanda.

Marks for improvement

Though the Angolan government failed to heed the diversification lessons of the oil price crisis in 2008, it has certainly used the experience to improve its crisis management technique. Rather than stick its head in the sand and claim a minimal impact on public finances, as it did in 2008, the regime has reacted swiftly. The new budget was released with a minimum of fuss, and is recognised as being a realistic assessment of future revenues.

The government has shown the seriousness with which it takes the current situation by cutting the popular fuel subsidies usually on offer to the Angolan population. “Fuel subsidy reforms are a big step for the regime, and has brought about $1bn of savings since October 2014. As of October 1, the gasoline subsidy enjoyed by car owners will be removed entirely, though the subsidies for products, such as diesel used for domestic electricity production, will remain,” says Samantha Singh, an Angola analyst for Standard Bank.  

These changes have been designed to reduce the impact on the poorest Angolans, as car ownership is generally reserved for the small middle and upper classes. However, prices on the ubiquitous Luandan taxis, which take ordinary workers in and out of the capital city in lieu of any kind of public transport system, are expected to rise.

FX scarcity

One of the major challenges for the Angolan government is ensuring a smooth supply of foreign exchange to the banking sector and wider economy. Despite government efforts to boost the supply and use of the kwanza, the country's economy is still partially dollarised. Demand for foreign currency has strengthened over the past nine months as the value of the kwanza has been on a steady slide thanks to oil price woes. The stream of US dollars entering the economy has been stifled by lower oil revenues, and since mid-2014 the central bank has burned through about $4bn of its $30bn in foreign exchange reserves to keep the dollar supply moving and support the value of the kwanza.

“The central bank is the main provider of dollars to the market, but we estimate that there is now a shortfall of about $5.5bn between supply and demand,” says Ms Singh. “That puts depreciation pressure on the kwanza, which further increases demand for dollars. It’s a problem that is not likely to go away until oil revenues pick up again.”

In this scenario, Angola’s importers, who need to pay dollars for goods, are being squeezed badly. The central bank used to distribute dollars via auctions with commercial banks held two or three times a week. It has now moved to a more means-tested system, directly allocating dollars to essential economic activity via the banks. Under this process, importers of essential medical supplies and foodstuffs, along with oil industry payments, are given the highest priority.

The central bank is still grappling with the nature of this demand, and it is likely to keep using its foreign currency reserves to manage a smooth downward path for the kwanza. The currency has fallen from 96.77 against the dollar on August 1 last year to 109.05 on May 18 this year, though the black market rate is significantly less favourable to the kwanza.

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