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ANGOLA’S DIVERSIFICATION PROBLEM:A POLICY BRIEF

Nick DuganECON 3559 Professor Mark PlantApril 17, 2018

On My Honor As a Student, I have neither given nor received aid on this assignment

Word Count: 2270

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Executive Summary:

Currently, Oil accounts for 30 percent of Angola’s GDP, 80 percent of its tax revenues and 95

percent of export revenue. [1][table 1] Angola’s oil economy has created large concentrations of

wealth for elites while neglecting rural sectors with high potential for growth. A few years

removed from the 2014 oil prices crash, Angola is still struggling with high inflation and

unemployment while the climate for new businesses remains hazardous. As a solution, Angola

should seek to diversify its economy by expanding its agricultural sector with increased funding

and fiscal incentives for farmers. Diversifying the economy with sound agricultural reform will

decrease problems stemming from dutch disease and reduce incentive for rent-seeking behavior

while breathing new life into Angolan exports and agrarian communities. Angola should also

seek to develop its infrastructure to ensure that these new initiatives and programs are met with

success, and that funding and foreign investment towards agriculture is successful in alleviating

poverty and unemployment.

Country Overview:

Angola is a large Southern African nation rich in oil with a population of nearly 29

million. Angola is currently Africa’s 2nd largest oil producer, behind Nigeria. Since gaining

independence from the Portuguese in 1975, Angola has faced a variety of political and economic

problems including a 27-year long civil war that ended in 2002.[2] Since then, Angola has

established a unitary presidential republic, bringing relative political stability to an area with

strong socialist and communist roots dating back to Soviet Union influence leading up to their

1975 revolution. Though the civil war between communist and anti-communist factions is over,

Angola has continued to struggle economically and is consistently categorized as a low human

development country. South African droughts and the collapse of international oil prices

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combined to lead Angola into a recession in 2016, and since experiencing a mild recovery in

2017, Angola has taken a new look at its current macroeconomic problems.

Part of Angola’s new focus on macroeconomic policy has come with a change in

Presidential office for the first time in 38 years. In September of 2017, President João Gonçalves

Lourenço was sworn in after winning a free election, promising an “economic miracle” and

promoting a platform to diversify and strengthen the Angolan economy. Since being elected,

Lourenço has pursued an economic and social improvement plan that amends the 2013-17

development plan, adjusting for Angola’s inflation and oil crises and looking ahead to the 2018-

2022 period.[3] These reforms are long-overdue, judging by Angola’s on-going problems with

inflation, high unemployment, and currency issues stemming from oil dependency and a lack of

structural changes needed to promote diversified growth.

Economic Brief: The Diversification Problem

Since the global crash of oil prices in 2014 and 2015, inflation in Angola has steadily

hovered around 25 percent. The official unemployment rate currently lies at 25 percent though

the official rate may be higher. Sustained black markets have taken root in recent years for both

currency and consumer products in the wake of the recession.[4] Due to the crash, reduced

revenues have caused GDP growth to decelerate from an annual average of 10.3 percent from

2004 to 2014, to only 1.5 percent since 2015.[5] This has had a rippling effect beyond the oil

economy, damaging investment prospects in Angola’s private sector and agricultural economy

and, combined with droughts, contributed to food shortages.

Most of these problems have been exacerbated by Angola’s oil-centric economy that does

little to create new jobs or wealth and has been a source of corruption for decades. Today, the oil

industry supplies only 1 percent of Angolan jobs while dominating 80 percent of government

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revenues.[6] In contrast, agriculture accounts for 11% of GDP but 70% of total employment. In

terms of export composition, the UNDP lists Angola as the world’s second most concentrated

economy after Iraq. The issue of diversification is nothing new to Angolan officials, as they have

admitted to a “failure to develop the non-oil economy” in years prior to the recession.[7] With

corruption stemming from concentrated government revenues in oil providing barriers to reform,

weak institutions and infrastructure, poor agricultural production and inadequate export support

systems continue to stand in the way of a cohesive economic diversification plan. In order to

address these hindrances, Angola must develop a plan that promotes agricultural sector growth

by removing non-oil sector restraints such as an overvalued exchange rate. Angola must also

address its unfriendly business environment and seek out structural solutions such as utilizing

foreign investment to rebuild infrastructure and open up export markets to help ensure continued

growth in other sectors, especially once the price of oil rebounds.

Policy Recommendation: Invest in Agriculture

Angola currently ranks in the top 5 countries in terms of agricultural potential according

to the United Nation’s Food Agency FAO. [8] Angola’s 58 million hectares of arable lands means

it has the potential to become an African agricultural giant, though only 10% of this land is

exploited due to poor irrigation and private property rights. In recent years, Angola’s oil

dependence has created a revenue trap that makes diversification and structural changes even

more difficult once government revenues dry up in times of oil crisis. To combat this, Angola

must prioritize agricultural investment to help the country develop its small business and create a

stronger lineup of exports to reduce its current account deficit, which it slipped back into during

the recession for the first time since 2009.[9]

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Prior to the country’s civil war, Angola was a leading producer in sugar cane, coffee

beans, and bananas, and was self-sufficient in all food crops except wheat. Decades of political

unrest and economic instability have damaged these industries, and the government is only

beginning to respond with policy that protects agricultural interests and stimulates this industry.

Today, almost 17 million Angolans engage in farming, most at a subsistence level with little

advanced technology or financing help. This is an untapped market that could significantly boost

Angola’s overall production and give them a greater standing in African trading markets. Though

the government has moved in 2017 to implement more expansive micro-credit programs to go

towards financing irrigation projects, Angolan officials should further explore microfinancing

and cash transfer options to encourage the expansion of family farming. Angola’s overreliance

on food imports has been a problem highlighted for years by officials, so investing directly in an

area that contains much of Angola’s rural poor and is ripe for growth should have a domino

effect that makes the country more desirable to investors while solving malnutrition concerns.

One of the biggest hurdles currently facing agricultural development in Angola is the

need for stable investment in the face of corruption and barriers to business and trade. Angola

scored as one of the World Bank’s 15 worst countries in its 2017 Ease of Doing Business

rankings.[10] Seen in Figure 2 below, Angola lags particularly behind with business issues of trade

and credit, two areas that significantly effect family farms and larger-scale operations alike. In

the last decade, Angola’s investments in oil grew constantly while investment and mechanization

in the agricultural sector continued to lag behind. After the oil crash, investment is beginning to

bounce back thanks to new private investment laws that set minimum participation requirements

to encourage confidence in foreign investors.[11] Laws that specifically create fiscal incentives for

Angola’s less-developed regions should be pursued, and the government should continue to

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make additional tax breaks available for investors that generate higher exports and create more

local jobs. Targeted programs focused on sectors with high export-promotion potential or high

import-substitution should be expanded in the fishery, agricultural, and geology industries.[12]

Looking East: Chinese Investment

The potential for a foreign investment surge into emerging agriculture markets has been

present since the beginning of this decade. In 2011 and 2012, Chinese investment in banana

plantations in Caxito caused banana production in the area to triple by 2013.[13] This is just one

example of the small-scale agricultural foreign investment streams that have begun to carve out

areas of land that can turn profitable exports. In January of 2018, Angola and China signed a

Visa facilitation agreement to help encourage businessmen and entrepreneurs seeking

opportunities in Angola.[14] Angola sees China as a part of its economic rebuild in the near future,

and it is wise to create greater ease of investment and financial backing. Angolan Foreign Affairs

Minister Manuel Augusto sees China as a major player, accelerating their economy’s

diversification and industrialization.[15] Angola must be smart with these increasing investments,

looking for agreements with China that emphasize agricultural infrastructure buildup in rural

areas as well as the creation of personnel training centers. This type of investment will lay a

framework for sustainable agricultural growth that can weather times of hardship and create

lasting economic output. As Angola’s debts to China increase, it must be wary of new forms of

monopolization and profit-taking in the private sector, and should promote investment with

human development in mind.

Part of Angola’s push towards a diversified economy through agriculture should consider

the necessity for a more competitive real exchange rate. At the beginning of the decade,

excessive appreciation in exchange rates correlated with oil booms, but continued to crowd out

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agricultural and manufacturing growth, areas that could absorb the female workforce and begin

to alleviate poverty among women.[16] After the exchange rate was repegged in August 2016, the

kwanza has further appreciated. With reserves depleting, Angola should continue to pursue a

policy outlined by the IMF in previous years calling for a more flexible but managed exchange

rate to address FOREX imbalances and begin to develop a plan to alleviate restrictions on

exchange such as Angola’s multiple currency problem.[17] Addressing exchange rates first will

help other industries and decrease barriers to business and trade. In order to reestablish

competitive exports in non-oil sectors, dutch disease effects must be reversed with sound

macroeconomic policy, while also emphasizing the input side of the agricultural sector.

Lowering costs and increasing productivity should be a top priority to create a foundation for

growth and attract rural workers and women to the agricultural sector. One of the main input-side

solutions consists of sound infrastructure reform.

Infrastructure development: A way forward

In order to provide a path for growth in non-oil sectors, Angola must prioritize

development of its roads and bridges. The combination of infrastructure development, financial

incentives, and support for the private sector are all crucial to the growth of the agriculture.

Continued expansion of railroad and road programs is needed to ensure that crops can be moved

across the country and overseas, and that rural farmers can receive the tools and machinery they

need. Angola’s past Angolan Development Bank programs already tell a story of attempted

diversification without proper infrastructure. Started in 2006, the ADB is in dire shape today

after aiming at funding development projects in the agricultural and manufacturing sectors. On

the program, senior Africa analyst Maja Bovcon said, “its ratio of non-performing loans has hit

70%, resulting in losses of $400m. This is a good indication that several large agricultural

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schemes never saw the light of day.”[18] Without strong infrastructure in place to help resources

reach farmers, and without regulation on government programs tracking money, agricultural

development may fail to materialize as it has done in the past in Angola. A program without

strict regulation would have significant downsides and may expose farmers to greater markets

without giving them the ability to compete in these markets.

Pros/Cons

This infrastructure dilemma presents a key distinction between reform initiatives that

could “save” Angola from its oil dependence, or drive it further into debt with unwise

government projects. On the positive side, investment in agriculture and infrastructure should

benefit Angolan’s poorest citizens, employing women in rural areas while helping Angola

reemerge as a more diverse exporter. Angola may even emerge as a major food supplier for the

SADC region if it points its agricultural growth in a more commercial direction to help shift

production from low-value staple crops into higher value commodities that are more appealing

across borders. [19] This higher yield production may create more value added in labor than crude

oil exports as Angola continues to invest in updated agricultural technology.

In terms of risks to this solution, too much reliance on overseas money and government

investment may pose problems since local farming growth may not be sustainable while the

country as a whole is consolidating its spending. One specific drawback related to infrastructure

is that industry expansion may expose small-time, previously “incubated” farmers to new

markets. Vulnerable farmers, previously protected by their isolation, may face greater

competition from imports and larger producers, and agricultural programs may accelerate this by

exposing domestic agriculture to a more connected national market that allows imports to thrive.

In order to reduce poverty, infrastructure and agricultural reform should protect small-time

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farmers and give them increased financing options to capture a greater space in the export

market.

Conclusion:

Today, the Angolan government recognizes that it is in dire need of economic

diversification. In order to reduce poverty and unemployment and create much-needed wealth in

rural areas, agricultural investment that coincides with financing programs for farmers should

help stir interest in agricultural expansion as the government makes exporting more feasible with

actions such as limiting exchange rates. Addressing structural changes while also working to

remove barriers presented by poor infrastructure is the only way Angola can successfully

diversify its economy without falling into the traps of previous failures. Recognizing that limited

human resources, corruption, and low agricultural production areas pose problems will help

Angola develop solutions that promote long-term, structural change. None of these issues can be

solved independently, and the government must look to create smart programs to invest in the

future of its people, and the backbone of its workforce, in agriculture.

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Table 1: http://www.banking-awards-2012.worldfinance.com/investment-in-angola

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Table 2: https://www.imf.org/en/Publications/CR/Issues/2017/02/06/Angola-2016-Article-IV-

Consultation-Press-Release-Staff-Report-and-Statement-by-the-44628

Works Cited

1. “Angola Economic Outlook.” African Development Bank,

www.afdb.org/en/countries/southern-africa/angola/angola-economic-outlook/.

2. “Angola World Factbook.” CIA,

www.cia.gov/library/publications/the-world-factbook/geos/ao.html.

3. “President Lourenço’s economic reforms are making Angola attractive” Business Live,

https://www.businesslive.co.za/bd/opinion/2018-02-16-president-lourenos-economic-

reforms-are-making-angola-attractive/

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4. “Angola's inflation steady at 25.18 percent year/year in September” Reuters,

https://www.reuters.com/article/angola-cpi/angolas-inflation-steady-at-25-18-percent-

year-year-in-september-idUSJ8N1KQ002

5. “Angola Overview” World Bank http://www.worldbank.org/en/country/angola/overview

6. “Angola in mild revovery by Macroeconomic Challenges Remain” Reuters

https://www.reuters.com/article/angola-imf/angola-in-mild-recovery-but-

macroeconomic-challenges-remain-imf-idUSL8N1NL7A7

7. “Inequality crowds growing economy” UN.org

https://www.un.org/africarenewal/magazine/august-2014/inequality-clouds-growing-

economy

8. “Inequality crowds growing economy” UN.org

https://www.un.org/africarenewal/magazine/august-2014/inequality-clouds-growing-

economy

9. “Angola seeks to roll back oil dependency” Africa News

http://www.africanews.com/2017/08/22/angola-seeks-to-roll-back-oil-dependency-to-

diversify-economy-through/

10. “Ease of Doing Business Index” World Bank Open Data

https://data.worldbank.org/indicator/IC.BUS.EASE.XQ?year_low_desc=true

11. “Angola Diversifying Oil” How We Made it In Africa

https://www.howwemadeitinafrica.com/angola-diversifying-oil/56664/

12. “Angola Economic Outlook.” African Development Bank,

https://www.afdb.org/en/countries/southern-africa/angola/angola-economic-outlook/

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13. “Why it’s Critical to Cultivate Agriculture in Angola” The Huffington Post

https://www.huffingtonpost.com/zandre-campos/why-its-critical-to-

culti_b_9643300.html

14. “Angola and China Sign Visa Facilitation Agreement”

http://www.angop.ao/angola/en_us/noticias/politica/2018/0/3/Angola-and-China-sign-

visa-facilitation-agreement,ad7f79eb-c2ee-4dd0-9fc2-c63e7fd6b2db.html

15. “Angola and China Sign Visa Facilitation Agreement”

http://www.angop.ao/angola/en_us/noticias/politica/2018/0/3/Angola-and-China-sign-

visa-facilitation-agreement,ad7f79eb-c2ee-4dd0-9fc2-c63e7fd6b2db.html

16. “Who is benefiting from trade liberalization in Angola” UNCTAD

http://unctad.org/en/PublicationsLibrary/ditc2013d3_en.pdf

17. “Angola : 2016 Article IV Consultation-Press Release; Staff Report; and Statement by

the Executive Director for Angola” IMF

http://www.imf.org/en/Publications/CR/Issues/2017/02/06/Angola-2016-Article-IV-

Consultation-Press-Release-Staff-Report-and-Statement-by-the-44628

18. “Angola Agricultural Diversification Stalls” African Business Magazine

http://africanbusinessmagazine.com/sectors/agriculture/angola-agricultural-

diversification-stalls/

19. “Who is benefiting from trade liberalization in Angola” UNCTAD

http://unctad.org/en/PublicationsLibrary/ditc2013d3_en.pdf