The recent collapse in the price of oil accentuated the critical need for Angola to diversify its oil-dependent economy. Despite the fall in growth, however, the country has weathered the storm and must now focus on public sector reform. Writer Charlie Corbett



The last time Angola experimented with democracy, back in 1992, a disputed election sent the country spiralling back into civil war.

It is testament to the progress of the formerly troubled African state that this time around a peaceful election resulted in victory for the ruling Movement for the Liberation of Angola party (MPLA). The MPLA defeated the former rebel faction turned opposition party The National Union for the Total Independence of Angola and took 80% of the vote. With such a forceful popular mandate, the government can focus on completing the political reformation it started almost a decade ago and further consolidate the economic gains it has made through its huge reserves of oil.

Oil dependence

For the past four years, Africa's biggest exporter of oil has benefited from soaring oil prices that contributed to gross domestic product (GDP) growth figures of between 15% and 20% year on year since 2006. The former communist country, which only came out of a 30-year civil war in 2002, has also made great strides in transforming its political and economic institutions. The government has taken on board many of the recommendations concerning fiscal and monetary responsibility passed on by the World Bank when it turned the country down for a loan in 2002. The currency has remained stable at or about Kz75 to the dollar, while inflation has been reduced to a manageable level. At one stage in the late 1990s, it had been at 3000%. It is now 13.5%.

Such is the transformation that the former pariah state is on the verge of being welcomed into the club of IMF-backed nations. An IMF mission returned from Angola in August praising its government's handling of the global economic downturn and promised to go back in September with a view to negotiating a potential loan package.

This fact has impressed observers. "Any success in negotiations [with the IMF] will be warmly welcomed by international investors because of the implications for improved transparency," says Richard Segal, an analyst at UBA Capital in London. "In addition, any loan agreement - even a precautionary standby agreement - would help to insulate the Angolan economy should a double dip affect the global economy and oil prices begin to slide again."

Economy shaken

Mr Segal's comments neatly summarise the problems the country now faces. Oil comprises more than 90% of Angola's revenues and the recent collapse in prices has hit the government coffers hard. In July 2008, the oil price was at or about $140 per barrel. The government had plentiful foreign exchange reserves and a fighting fund of cash with which to make much-needed investment in infrastructure and housing. Since that time, however, the price of oil has collapsed to lows of $40 per barrel in January 2009 and was sitting at about $70 per barrel in mid-September. As a result, foreign exchange reserves have collapsed by about 30% and stood at just more than $12bn in May.

The forecast for Angola's GDP growth has been similarly affected. The government recently halved its GDP growth prediction for 2009 from 11.8% to 6.2%. Others are not quite so optimistic. The African Economic Outlook (AEO), an offshoot of The Organisation for Economic Co-operation and Development, stated recently that it expected the economy to shrink by 7% in 2009 before rebounding in 2010 to 9.3%.

The Angolan government's response to the economic downturn has been measured. The role of the country's central bank has been pivotal in dealing with falling international reserves, rising inflation and an exchange rate threatened with instability.

Much to the chagrin of many of the country's nascent banking class, the central bank doubled the capital reserve requirement of banks to 30% this year and imposed strict limits on the amount of dollars it sells at daily auctions. The Association of Angolan Banks has complained that these actions have cut liquidity to the sector at a dangerous economic time, and restricted businesses that rely on using the dollar to pay for goods and services from overseas. This is especially critical as the kwanza is not a valid currency outside Angola.

Resilient banks

However, central bank governor Abraao Gourgel defended his actions, saying the measures were aimed at controlling inflation and stopping the kwanza from devaluing yet further against the dollar. It has already lost 4% of its value against the dollar in 2009, and up to 20% of its value on the black market. The central bank recently eased its limits on the sale of dollars by holding two weekly auctions. Mr Gourgel is confident that the bank sector in Angola is weathering the storm. "Under current conditions and taking into account the big impact of the economic crisis on oil prices and on our fiscal revenues, the performance of the banking system has been exemplary," he told a local news agency in July.

Angola's banks have indeed proved resilient to the global economic crisis. Deposits to the sector expanded by 45% in 2008 and loans expanded by 83%, according to the AEO. It has remained immune to the direct impact of the financial crisis due to its unsophisticated nature. The domestic banking sector has a low loan-to-deposit ratio, no strong reliance on financing from abroad and the inter-bank lending market is tiny.

There is also no stock exchange in Angola. This has meant that Angola's banks avoided the fate of many of their peers in countries such as Nigeria that were hit hard by the margin lending losses on the back of a share market crash. The country's banking sector is sound and well capitalised, but in order for it to expand it will need to improve its risk management and train or hire more skilled banking professionals.

Diversify to survive

Outside the country's bank sector, the crash in oil prices has accentuated Angola's critical need to diversify its oil-dependent economy. It is a startling fact that diamonds (Angola's other big export) and oil make up 98% of the country's revenues. This should not be the case. The country is one of Africa's most fertile regions, it has abundant natural resources and before the civil war was agriculturally self-sufficient. However, 30 years of civil war devastated the country's infrastructure and rendered huge tracts of the interior useless due to landmines. Just 10% of Angola's potentially productive land mass is under the plough. Attempts are under way, however, to change this situation.

The government said last year it was committed to raising $6bn to pour into agricultural development over a five-year period. Given that agriculture employs 50% of the country's workforce, and the oil sector just 10,000 people, an agrarian revolution would transform the economy. According to the AEO, Angola is already making strides towards this goal. Agricultural production increased by 28% in 2008 and by 27% in 2007. Elsewhere, manufacturing production increased by 11.7% in 2008 and the services sector now accounts for 17% of GDP, according to figures from the AEO.

More change needed

Looking ahead, Angola has a long way to travel before it can truly emerge from its troubled past. More investment is needed to update the country's dilapidated and war-ravaged infrastructure, something a collapse in oil revenues will not help.

Perhaps a more important goal, however, is reform of the public sector. There has been little in the way of privatisation of key public utilities and the role of the country's single oil company, Sonangol, is coming under increasing international scrutiny. Its dual role as both market participant and regulator has come under heavy criticism and there are no firm plans to resolve this conflict of interest.

Angola's constitution is also under scrutiny. News that the presidential elections planned for 2009 could be delayed to 2010 will only add to concerns that Angola will remain a one-party state for the foreseeable future. The first elections of their kind since president José Eduardo dos Santos took power in the late 1970s, they are dependent on the drafting of a new constitution. However, the Constitutional Commission has requested a 180-day delay from the initial deadline of September 23.

Of perhaps more importance to Angola's stability is the age of President dos Santos. The 67-year-old president has ruled Angola for 30 years, both during and after the civil war, and he has yet to anoint a successor. With no effective opposition and no strong figure to replace the president, this could spell trouble for the country. Power vacuums are not healthy for African economies, particularly ones with the oil wealth of Angola.


All fields are mandatory

The Banker is a service from the Financial Times. The Financial Times Ltd takes your privacy seriously.

Choose how you want us to contact you.

Invites and Offers from The Banker

Receive exclusive personalised event invitations, carefully curated offers and promotions from The Banker

For more information about how we use your data, please refer to our privacy and cookie policies.

Terms and conditions

Top 1000 2023

Request a demonstration to The Banker Database

Join our community

The Banker on Twitter