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SYBMS Macroeconomics Project (Semester III; 2020-21)

UNDERSTANDING THE DYNAMICS OF AN ECONOMY

(ANGOLA)

UID - 194103
Roll number - 27
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PART A

1.1 Angola is located on the western Atlantic coast of Africa. The country is endowed with
petroleum, diamonds and other minerals. Oil drives the economy of Angola. There is strong
potential for maritime transportation and fisheries development because of its 1600 km Atlantic
Ocean coastline. It also has fertile soils, abundant water, and a favourable climate. A number
of rivers flow through the country, providing water for irrigation and potential for hydroelectric
power. Interestingly, subsistence agriculture provides the main livelihood for two-thirds of
Angola’s population, but more than 50% of the country's food is still imported (1). A 27 year
long civil war led to a near standstill in agricultural production.

Angola has a population of 31.8 million. The global demand for oil did foster economic growth,
but it failed to reach 40.6% of the population living below the poverty line (2), as billions were
channelled into decades of civil war instead of development. In rural Angola, 94% qualifies as
poor. The civil war also led to a massive brain drain in which over 5,00,000 Angolans fled the
country.

Luanda, Angola’s capital city is one of the world’s most expensive places (for expats) and is
surrounded by large shantytowns where millions of people live in extreme poverty. In terms of
income inequality, Angola ranks 169 out of 175 countries. The GINI index was reported at
51.3 in 2018. The under 5 mortality rates is one of the highest in the world (3) while life
expectancy (61.2 years) is extremely low (4). The steady decline in school enrolments, since
2009, also hinders growth of its people.

1.2 Angola is an open economy, payments mainly flow from foreign sectors to government,
firms and financial institutions. Post the civil war, the government relied on personal networks
and foreign intervention to rebuild the country.

Predatory inflows from china is the main source of Angola’s debt ($42.8bn between 2000-
2017) which is mainly invested in infrastructure developments (5). But employment
opportunities remained scarce regardless of the inflow. By law only 30% should be expatriate
staff but this is seldom followed as many professionals are brought in from china. Even when
opportunities are given, Angolans are appointed in the lowest positions (6). The repayments
are often paid with oil or funds go directly to Chinese construction firms so dollars don’t end
up entering the real economy either.
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1.3 National income sectoral contributions along with NIGR

GDP sector wise division, 2019 (Author’s graph based on World bank data)

GDP growth rate (2000 – 2020)

The oil price volatility is reflected on the NIGR as Angola is highly dependent on oil which
contributes 50% of the GDP (2009, 2016-2017,2018-2019 oil price crash)

As the GDP is growing with the depletion of the resource base, adjusted net savings (ANS) can
be considered for Angola to get a better understanding of the economy. The negative ANS rates
indicate that their national savings and investments in education does not compensate for
resource depletion (Refer Appendix I)
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2. Historical landmarks

• Colonial history: 1648–1961 - Under the Portuguese, Angola was a major exporter of
staple foods.
• War of independence (1961–1974)
• The civil war (1975-2002) was a power struggle between two former anti-colonial
guerrilla movements (6)
• After 1973 the mining and service sectors increased their share in the GDP.
• During the first decade of the 21st Century, Angola was one of the fastest-growing in
the world, with reported annual average GDP growth of 11.1 percent (2000- 2011), this
was an expansion stage (7). High oil prices and rising oil production contributed to
strong economic growth, although with high inequality. The country’s growth reached
its highest (22.6%) in 2007 when oil price hit a record high, leading to a peak in the
business cycle

3. Role of commercial associations

The World bank ranks Angola 177 out of 190 countries for ease of doing business. When FDI
does flow in, it is mostly allocated to the oil industry, decreasing the growth prospects for other
industries.

Beginning in 1989, Angola introduced initial regulations to transfer certain activities to the
private sector, boosting a PPP model. But the economy still remains public sector driven.

Associations like The Angola national private investment agency (ANIP) and The National
Agency for Investment Promotion and Export (APIEX) were created to assist investors,
facilitate new investment to expand private sector participation. The Chamber of Commerce
and Industry of Angola, aspires to assist, coach and inform companies. Thirty commercial
banks were authorized to operate in Angola as of 2017. Ownership is mostly spread out among
SOEs, Portuguese institutions and Chinese investors.

National Statistics Institute and the BNA (Central bank) releases the data in the country.
Authenticity of it is dubious and it is difficult to access. Various papers have shown differences
in figures.
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PART B

2.1 Fiscal policies

Fiscal consolidation and expansion – In 2014 a fiscal consolidation was adopted. The overall
fiscal deficit was reduced to 3.3 per cent, which was made possible through expenditure cuts
such as large reductions in spending on subsidies, goods and services, and investments. Lower
budget execution rates further narrowed the deficit in the first nine months of 2016, although
payment arrears increased. It was also found that, the minimum wages for agriculture was not
increased during this period (Refer appendix II). There was a trade-off where the fiscal deficit
was reduced but at the cost of welfare, making the lives of the common man more difficult as
a majority is highly dependent on agricultural wages.

However, leading to the 2017 elections, an expansionary fiscal policy was adopted, this was
done to win the favour of the dissatisfied voters. A crowding out effect kicked in, This led to a
higher MPC as government investment was increased. But this resulted in further erosion of
fiscal and external buffers. The increase in payment arrears from the previous year’s put an
added burden. Gross government debt worsened to 65 percent of GDP in 2017.

Once again, Fiscal consolidation was given priority in the Macroeconomic stabilisation plan
(2018). This involved improving public investment efficiency, and further developing the
domestic debt market to wean off exposure to foreign currency-denominated debt. These
measures, which have been in progress for two years, have influenced the generation of two
consecutive fiscal surpluses, recorded in 2018 (2.2% of GDP) and in 2019 (0.8% of GDP),
after four successive years of fiscal deficits.

Trade - Angola's trade regime has been considerably liberalized since 1999, and is still in the
process of reorganization and modernization. It has substantially reduced its import duties and
rationalised their structure, cutting the top tariff rate from 110% to 35% and then to 30%. When
a significant reduction in imports and exports was seen post 2018, the fees charged by the
Angolan National Shippers Council was also decreased by 50%

Subsidies - Angola’s social protection spending is highly regressive, since price subsidies
(which mainly benefit the better-off) accounted for almost 64 percent of total social protection
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spending between 2010-2017. The government had introduced a bold subsidy reform in
September 2014 where there was a reduction in spending on asphalt, light and heavy fuel oil,
and gasoline. Diesel, LPG, and kerosene are still subsidized although at much lower levels.
Mitigating measures were developed to compensate the poor, particularly for the phasing out
of LPG and kerosene. The extent of the total impact of the subsidy reform is not yet known
because information regarding the magnitude and structure is scarce. Research showed only
the World Bank’s preliminary estimations which stated the direct effect of the increased tariffs
will be on wealthier households more than poorer ones. However, the urban poor could be
adversely affected.

Taxation – Angola’s non-tax revenue consists nearly entirely of oil revenues hence this source
of income substantially dropped from 16.6 per cent in 2014 to 5.4 per cent of GDP in 2015.
The consumption tax had a very narrow base, as many sectors are excluded and many
exceptions exist to the standard rate of 10%. The consumption tax was replaced by a 14%
VAT to improve tax revenue. This may be reclaimed on purchases and imports made by tax
payers, making it neutral for business. This was done to strengthen non-oil tax revenue and
increase stability. Basic foodstuffs are exempted, including rice, beans, sugar, cooking oil and
school materials. This had a positive impact as the non-oil tax revenue increased by 34% in
three months after implementation.

2.2 Monetary policies

Angola’s financial sector is highly concentrated. The top six banks account for 80% of total
assets and 93% of total loans. There are stringent collateral requirements along with an
almost non-existent land titling. This proves to be an issue as the civil war displaced 1/3 of the
population. When ownership remains a prerogative of the state and user rights are uncertain,
this land cannot be used as collateral, which seriously limits lending to different sectors,
especially agriculture. This is a leading reason for the underdevelopment of a large group of
people employed in it. Commercial banks also show a marked preference for large firms having
relatively long track records and strong connections to the establishment. With regard to
capitalization, in February 2018 the central bank tripled the commercial banks’ minimum
capital requirement, leading to less money supply.
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Anti-inflation policy - Since the adoption in September 2003, there has been a sharp decline
in inflation which dropped from about 100 percent in mid-2003 to about 12 percent at year-end
2006.

In 2004 the kwanza depreciated modestly. In 2005 there was a draw-down of government
deposits, matured treasury bills and Central bank (BNA) securities which led to more liquidity
in the market. In 2006 the BNA moved to sterilize liquidity by selling foreign exchange and
BNA securities, causing base money growth to slow to just 1 percent. This decreased the money
supply and consumer’s purchasing power was reduced. The key interest rate charged by the
central bank was also increased. These measures have led to higher commercial bank interest
rates and facilitated the nominal appreciation of the kwanza. Thus, the cost of borrowing
increased.

The appreciation process occurred during a period of high volatility in the international
currency market, mostly focused on the falling dollar, a fall in the dollar against other
currencies is also a significant element in the appreciation of the kwanza. The boom observed
in the construction sector, benefiting from the non-tradable character of the construction
services and cheaper imported inputs also led to appreciation.

In 2011, The Kwanza maintained a smooth depreciation trend of less than 3% against the USD
and the BNA meanwhile eased monetary policy, reducing the reserve ratio from 30% to 20%.
This move reflects the soundness of the country’s macroeconomic performance and is aimed
at increasing the availability of credit to the economy.

After adopting the pegged exchange rate policy in September 2017, Angola has experienced
forex shortages, which hurt the import and export leading to rapid decline in reserves., the
difference between the official and parallel exchange rates reached 128%. This could be
attributed to the building of corruption in the country. Angola also has higher levels of
economic informality, with the shadow economy accounting for average 44% of the total
economy.

Later the benchmark interest rate was raised from 16% to 18% in December 2017 leading to a
significant decline in inflation from 42% in 2016 to 29.8% in 2017. After abandoning the
dollar peg in January 2018, the central bank has gradually depreciated the kwanza in a
controlled manner through a series of auctions, where more USD was parked to strengthen
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supply. The money supply in the broadest sense, represented by M3 expanded 24.37% over the
year and reflected in the expansion of the monetary aggregate M2 by 24.30%.

2.3 Overall policies

During the pandemic Angola took a double hit because of the sudden drop in oil prices and the
economic impact of the global pandemic. The following fiscal and monetary measures were
taken to stay afloat during this time -

• To mitigate risks of shortage of goods being imported, the central bank instructed banks
to provide credit in local currency to assist importers. Prices are regulated for a list of
medical goods. VAT and customs duties exemptions are given to goods imported under
humanitarian aid.
• Additional liquidity support to commercial banks and a liquidity line to buy government
securities are provided by the central bank. This will help them to continue or even
expand lending. As instructed by the central bank, the financial institutions are to allow
a 60-day moratorium on capital and interest repayments.

Resources in Angola have been used to increase consumption but have not been reinvested
with a view to long-term development. But effort was made to soar ahead, where two main
funds were created–

• The social economic development fund (FDES) is a credit institution to channel part
of the country’s large oil revenues to support investment in the private sector. FDES
targets mostly small and medium-sized enterprises with loans channelled through
commercial banks. According to the original plan, FDES was supposed to receive $150
million from oil “bonuses” in 2000, but as of mid-2004, only $30 million had been
disbursed. It has financed 170 projects, mainly in transport and fishing, generating more
than 4,500 jobs. But its activity has been hindered by scarcity of financial resources and
the weaknesses of the financial system.
• Like Norway, Angola founded a sovereign wealth fund to invest oil export revenues
for long-term growth. This was meant to play an important role in promoting Angola’s
social and economic development generating wealth for its people. But the richest seem
to be benefitting more. Various projects in health, education, water supply and
entrepreneurship were approved but scarce data is available on its implementation. And
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in 2019 three billion dollars siphoned off by corruption and money-laundering had been
recovered.

Both the policies were implemented keeping in mind the need to invest for long term growth
but the leakages that existed due to the power and corruptive nature of the heads of state,
refused to fill the funds and left little for those in need, giving lesser welfare benefits.

2.4 Investment trajectory

The paradox of plenty refers to the paradox that countries with an abundance of natural
resources tend to have less economic growth, less democracy, and worse development
outcomes than countries with fewer natural resources. Angola embodies the very definition of
this paradox. The boom and bust cycles are preventing sustained investment in physical and
human capital, which will prove counterproductive to longer-term development. The ANS rate,
which is the lowest in the sub - Saharan region at −67.8 percent of GNI (2018) is worrisome.

Poverty reduction and employment growth have not been as responsive to economic expansion
as expected, Special Economic zones was funded with foreign debt to attract domestic and
foreign investment and to encourage the development and diversification of the economy but
most factories are dormant for lack of inputs and local skills. This leads to Angola going deeper
into a debt trap without much benefit to its economy and people.

From 1992 to 2015, real value added increased by 229 percent, while employment increased
by only 116 percent. The elasticity of employment growth to economic growth was particularly
low (0.13) between 2003 and 2008, when oil prices were rising and GDP growth was extremely
high. There is disproportionate distribution of employment and productivity across sectors.
Since 2014, the household budget has decreased by 48% and prices in Luanda have increased
by 111.4% due to the depreciation of the currency and its consequent impact on prices which
have a negative effect on consumption of households because of the dependence on imports.

The regression calculation showed me that there’s a lower degree positive correlation between
the NIGR and employment rate of the country. If there is any effect on contributors of GDP, in
Angola’s case, the oil sector which constitute about 50% of the GDP, the economy experiences
diminishing marginal utility returns due to high dependency on oil which effects the wage rate
policy of the entire country. (Refer appendix III)
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Angola has recognised the need for FDI to foster long term growth. In 1994, Angola replaced
its FDI regulation with a new and more liberal investment code. The new Code permitted FDI
in various forms within most industries. Priority is given to the export promoting or import-
reducing investments. Investors may enjoy certain incentives including exemptions from or the
reduction of income tax and custom duties. Also, in the same year, the Government of Angola
shortened investment application procedures. To add value to the local diamond industry, in
April 2003 the government approved a plan to end the monopoly of Ascorp over diamond
purchasing.

In 2018 a private investment policy was introduced to diversify Angola's national economy
and to propel productive activity leading to opening of new concessions and reduced
monopolies.

But the FDI flows to the country has significantly decreased over the years, with negative
growth rate indicating disinvestment. Even though FDI slightly increased, -4 billion USD in
2019 compared to -6.5 billion USD in 2018 (Refer appendix IV). FDI inflows remain
constrained due to Angola’s infrastructure quality as evidenced by its low score in the Africa
Infrastructure Development Index (31st rank out of 54) and the high Corruption perception
index (146th rank out of 180). Corruption is recognized as one of the largest inhibiting factors
to private sector investment in Angola.

How is the country combating corruption to improve private sector investment?

Agreements were signed in 2009 between the Angolan government and the IMF to foster
greater accountability, especially in the oil sector. In principle the agreement should have
included disclosure of the government’s oil revenues and an audited account of public
expenditures but on analysing the agreement it was found that there was only a commitment to
publish an audit of Sonangol. The new president has also created an anti-corruption unit in
March 2018 and several high-profile officials were dismissed and prosecuted and there is
investigation on the members of the ex- president’s family for misappropriation of public fund.
This new development is positive but might be a cosmetic change with political motives. It is
too early to analyse if the impact will be long lasting in an economy that has seen incessant
corruption for years.
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2.5 Recommendations –

Strengths

• Angola has abundant natural resources and considerable agricultural, fisheries and
manufacturing potential
• The Government’s vision is to expand the productive base of the economy into
agriculture and fisheries.
• A number of new and revised laws redefine its trade and investment framework

Weaknesses

• An unfriendly business environment, including long delays in processing approvals,

high cost of doing business and relatively high corruption levels;
• Angola has structural weaknesses in the economy, especially in fundamentals such as
infrastructure, skilled and trained human resources, and the lack of access to finance.
These are severe constraints to business in the country.
• The lack of economic opportunities in the rural sectors limits its fuller integration into
the economy.

Opportunities

• Fertile soils and a favourable climate present an attractive opportunity for investment
in agriculture.
• The new Government’s firm commitment to address corruption is a positive signal to
make the country a more attractive investment destination for both domestic and foreign
investments.
• The ongoing renovation to enable greater access to electricity supply would spur
economic and trade growth
• The availability of a wide range of fiscal and tax incentives for both domestic and
foreign investors
• Preferential treatment in the markets of many industrialized countries under GSP,
European Union EBA Initiative, and the United States AGOA (Refer appendix V)
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Challenges

• Large areas of agricultural land need to be de-mined to make it available for agricultural
and economic development;
• Dutch disease: Having to promote a non-oil dominated economy after the civil war in
an environment of real exchange rate appreciation presents challenges to policymakers
• Global environmental threats, including climate change, that could affect agricultural
production, prices and food security
• It is predominantly young nation (Refer appendix VI) with disease, hunger and lower
school enrolment rates.

The colonial legacy and decades of war turned Angola into one of the poorest countries in the
world, both in terms of human resource development and economic growth. Based on the
SWOC analysis of Angola, I would recommend the following.

• Trade expansion of the exports of manufactures and agricultural commodities should

be given more emphasis in Angola’s trade policy. Trade diversification is the need of
the hour for Angola as the country’s reserves are expected to be exhausted by 2032.
Currently, less than 10% of arable land is under cultivation, because landmines put huge
areas of land out of production. Even after 18 years, the impact of the civil war is visible
in the human displacement, infrastructure damage and the rural economy collapse.
Pollution from the oil industry has also been blamed for reducing fish stocks and
decreasing employment opportunities in the sector. Thus, there is a need to invest more
oil wealth into improving the agricultural and fisheries sector which will lead to the
development of millions employed in it.

• Angola should work on improving the ANS, which has constantly been negative.
Angola’s social gaps are large and widespread, including higher poverty incidence than
predicted by income levels, and higher mortality rates than regional peers. Public
spending is insufficient in critical areas like education and healthcare. A well-designed
conditional cash transfer program could help reduce poverty.
• Sonangol has turned into an industrial and financial conglomerate, it has become a
financing source for activities such as real estate construction and property holdings. It
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also holds strategic positions in domestic and foreign banks. Limiting this participation
could avoid shocks to other sectors as well.
• As a business student, I also believe funds should be allocated to improve the internet
access that is limited but slightly more developed than its neighbour countries. In 2016,
23.5% of the population had Internet access. This can be significantly improved to help
aid the banking and commerce growth in the country.

PART C

Academic takeaways

• While conducting the secondary research for this project, I came across a lot of
economic jargon that I wasn’t aware of. I referred the dictionary of economics (Oxford)
and The Economist to understand these terms better.
• I dearly missed the access to our wonderful library but I am privileged to have online
resources which cleared my misconceptions. I read up about terms such as fiscal policy,
monetary policy, trade deficit/surplus, pegged exchange rate, Resource curse and
liquidity sterilization which gave me a better understanding of economics concepts and
the country.
• I also got a chance to analyse the policies and correlate it with the macroeconomic
concepts taught in class.
• I learnt how to work with data, I could do the regression calculation and understand the
shifts in the graph as I saw data. For example, I could understand why the exports
peaked when the Kwanza depreciated, prior to this I did not understand that exports
became cheaper and in turn increased due to depreciation of the currency.
• I now have a better understanding of the impact of policies on the economy and its
people, it was an eye opener to see the trade-off of welfare for economic growth,
initially I was looking at only the economic progress of the country but once I checked
the wage policies and public spending for poor, I realised the cost at which this
economic growth came.
• I learnt how to dig deeper into research papers which was extremely helpful as I could
use the links in it to extract more information.
• I understood how important it is to check if the data was dubious by looking into various
sites to check reliability.
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• When compared with India, I believe Angola is a healthy combination of Gujarat and
the city of Mumbai. Gujarat has similarities with its coastline, oil production and marine
transportation. Like Angola, manufacturing is the largest sector in Gujarat, albeit the
industries are different. Mumbai and Angola are both lands of contrast; the ultra-rich
and slum dwellers share neighbourhoods. In Angola it is skyscrapers next to slums,
gleaming new hotels next to old façades (riddled with bullet holes)
• “The heights that great men reached and kept were not attained in sudden flight but,
while their companions slept, they were toiling upwards in the night.” - Henry
Longfellow.
Economics has always been a daunting subject for me, but practical papers like this
push me to learn more and do my best. I tried to make use of the extra time that the
pandemic gave me, to improve myself by gaining a deeper understanding of the
macroeconomics theories.

Bibliography

1)https://www.cia.gov/library/publications/the-world-factbook/geos/print_ao.html

2) https://www.worldbank.org/en/country/angola/overview

3) https://data.unicef.org/country/ago

4) https://data.worldbank.org/indicator/SP.DYN.LE00.IN?locations=AO

5)https://books.google.co.in/books?id=0lutDwAAQBAJ&pg=PA52&lpg=PA52&dq=angola
nise+employment+law&source=bl&ots=-jPnwn_6A9&sig=ACfU3U2rOzIwNQT19cJ-
O8VfCbLWAip7DA&hl=en&sa=X&ved=2ahUKEwim9tL93KfsAhUeILcAHbylAI4Q6AE
wDXoECA0QAg#v=onepage&q=angolanise%20employment%20law&f=false

6)https://www.britannica.com/place/Angola/History

7)https://www.globaltenders.com/economy-
ofangola.php/#:~:text=The%20Economy%20of%20Angola%20is,independence%20in%2019
75%20until%202002.
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Other links include

• https://www.sida.se/contentassets/ba7b93a54d014cb999cbe87f81477f92/20066-
angola-surfing-the-oil-market_1366.pdf
• https://www.cia.gov/library/publications/the-world-factbook/geos/print_ao.html
• /https://www.afdb.org/fileadmin/uploads/afdb/Documents/Generic-
Documents/country_notes/Angola_country_note.pdf
• http://documents1.worldbank.org/curated/ar/727941517825869310/pdf/123137-
Replacement-PUBLIC.pdf
• https://www.bbc.com/news/world-africa-51128950
• http://documents1.worldbank.org/curated/ar/727941517825869310/pdf/123137-
Replacement-PUBLIC.pdf
• https://assets.kpmg/content/dam/kpmg/pdf/2016/06/pt-2015-angola-banking-survey-
en.pdf
• https://openknowledge.worldbank.org/bitstream/handle/10986/31443/angola-scd-
03072019-636877656084587895.pdf
• https://economic-research.bnpparibas.com/html/en-US/shock-4/12/2016,27702
• https://www.imf.org/external/pubs/ft/scr/2007/cr07355.pdf

• https://unctad.org/en/PublicationsLibrary/ditctncd2015d5_en.pdf
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Appendix

I) Measuring adjusted net saving

Gross national saving - consumption of fixed (physical and produced) capital + education
expenditures (which adds to human capital) - depletion of natural capital (oil and mineral
resources) - pollution damages
= Adjusted net saving

Source- World bank (Angola – Systematic country diagnostic)

Angola Adjusted net savings (2000 - 2017) Source – World Bank

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II) Minimum wages for agriculture Angola 2010 - 2020

Source – World bank

III) Regression on Employment rate and National income growth rate (2010 -2020)

Chart Title y = 0.1644x - 238.68

R² = 0.4808
100

80

60

40

20

0
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
-20

NIGR Employment Linear (Employment )

Source for NIGR – World bank, Source for Employment rate – World bank.

The data for Employment rate is dubious as I have found different values on different papers
and sites. ANGOP, the official news agency reported that unemployed in 2019 was 31.8%,
while this data shows unemployed was only 6.88%. I also tried to access the National statistics
institute data but it was not available.
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IV) The FDI flow (2017-2019)

Source - UNCTAD’s World Investment Report 2020

V) Generalized System of Preferences (GSP) are U.S. trade preference programs which
provide opportunities for many of the world’s poorest countries to use trade to grow
their economies and climb out of poverty. The Everything but Arms scheme grants
full duty free and quota free access to the EU Single Market for all products (except
arms and armaments). The African Growth and Opportunity Act (AGOA) is a
United States Trade Act which enhances market access to the US for qualifying
Sub-Saharan African (SSA) countries.

VI) The Age distribution of the people of Angola (2018)

Source – Global edge