The starting point on Angola needs to be the recognition that it is a post-conflict country (hostilities ended in 2002) with large oil receipts (95 percent of exports and 75 percent of budget revenues and near half of GDP in 2013), and faces the opportunities and challenges of both. Large oil receipts have underpinned solid growth, but also make the country vulnerable to oil price volatility.
The country’s oil dependency and its large infrastructure and human capital deficits also undermine competitiveness, hamper diversified growth in the non-oil sector, and make it heavily reliant on imports. It has also accentuated income inequalities.
Once conflict ended, Angola’s macroeconomic policy stance was overstretched so that it lacked adequate policy buffers (including foreign reserves) to face the global crisis and the country was badly affected. Under an IMF-supported program in 2009-12, Angola made good progress in restoring macroeconomic stability: the exchange rate stabilized, foreign reserves topped seven months of imports, inflation fell to single digits, and the fiscal balance turned into a surplus. More importantly, the government has moved to strengthen policy formulation and coordination, including the formulation of a medium-term macroeconomic framework that allows it to assess and manage macroeconomic vulnerabilities more effectively. This puts Angola in a much better position than before to face another oil price shock. With macroeconomic stability largely restored, the government has been able to turn to its longer-term developmental objectives.
The longer-term prospects for the oil sector are bright. Preliminary explorations in the deep sub-salt fields, that geologically mirror those in Brazil, have been positive. If commercially fruitful, Angola could become the region’s top oil producer within a decade; though still early days, there is talk of production reaching 3 million barrels per day. Meanwhile, however, production from existing oil fields is leveling off. Production in 2013 was a disappointing 1.7 million barrels per day and projections for production to reach and surpass 2 million barrels per day in the medium term are starting to look optimistic. A more cautiously realistic picture would be for output to edge up to around 1.85 million barrels. This implies that the oil production will add little to overall growth, though oil revenues will continue to underpin growth in the rest of the economy.
Perhaps more important to Angola’s longer-term stability and prosperity is what happens in the non-oil sector. The presidential elections in 2012 highlighted the need for diversified and inclusive growth to spread the benefits of the country’s oil wealth more widely.
Following the elections, the government has embarked on a medium-term National Development Plan (NDP) that puts priority on a large expansion of infrastructure spending (transport, water, and electricity) to support economic diversification.
The large expansion in capital spending is critical for economic growth but also poses risks. The government is projecting a high growth dividend that may fall short of expectations, and will need to manage spending carefully to ensure good value for money and that the economy is not destabilized. Mindful of the destabilizing experience before the global crisis, the expectation is that the government will err on the side of caution. However, the fiscal expansion also comes at a time of softening oil revenues that have already deteriorated the fiscal balance by 10 percent of GDP over the past 4 years, pushing it back into deficit in 2013. Moreover, to meet the plan’s large financing needs, the government is embarking on substantial domestic and foreign borrowing, including a possible sovereign debt issue. But at the same time, the government is also shifting resources from foreign reserves into the new Sovereign Wealth Fund that is geared more towards long-term investments than to liquid assets that could serve a stabilization role should oil revenues fall. But with foreign reserves above US$30 billion, or about a year’s worth of non-oil imports, the government has room to maneuver.
Meanwhile, the business environment remains difficult. Angola ranked poorly on the latest World Bank’s Doing Business index (179 out of 189) though it was also rated amongst those that had most improved. Business complaints include difficulties dealing with a centralized and bureaucratic government administration, acute shortages of skilled labor, poor infrastructure, limited access to finance, and slow judicial processes. Much of this is a legacy of Angola’s post-conflict history, exacerbated by high, oil-fueled demand; effectively a function of delayed development that would find an echo elsewhere in the region. Improvement in these areas is critical, but progress - at best expected to be slow - is hampered by limited institutional capacity. And addressing the human capital shortfall could take generations. But what is perhaps most needed is a determined political assault to implement the structural reforms required to remove the blockages in the business environment. There are also other elements –expatriate labor quotas and tariffs to encourage nascent domestic production – that reflect the understandable political desire to give preference to Angolans, but that also make doing business more complicated.
Continued macroeconomic stability, the successful implementation of the infrastructure program, and decisive action on the structural reforms needed to enhance the business climate would go a long way to support economic diversification. This, in turn, would support more inclusive growth to spread the benefits of the country’s oil wealth. High poverty rates and income inequalities are potentially destabilizing, especially once memories of conflict wear off. And some provision is needed to take care of the poor and vulnerable; currently, the country lacks effective social assistance to protect them. Instead, large fuel subsidies (used for both transport and private power generation) provide the main conduit for distributing oil revenues though, as elsewhere, the poor benefit disproportionately little. The government is committed to reducing the subsidies to finance other spending priorities but is concerned about the impact on business and the vulnerable segments of the population. Improving electricity services will alleviate a large part of this concern. To protect the vulnerable, the government is also implementing a social assistance program based on direct cash transfers, but this too will take time to build up.
Preliminary government estimates are that overall output in 2013 was 6.8 percent, driven by a large agricultural rebound following the drought in 2012. The IMF now projects real growth in 2014 to moderate to 4 percent because of a large but temporary drop in oil production during the first half of the year but should then recover to 6 percent in 2015 as oil production recovers. Over the medium term, we can envisage non-oil sector growth trending up to around 8 percent, but modest oil production growth will hold overall growth down to around 6 percent.
About the author: Mr. Nicholas Staines has been the IMF’s representative in Luanda for the past three years. He has been an IMF staff member for 15 years, working mostly on African countries. Prior to joining the Fund, he worked in the private sector as a macroeconomic modeler, forecaster and consultant. He previously spent several years as an academic teaching macroeconomics and finance. He holds a Ph.D. specializing in Finance.