#Angola – In reset mode as lower oil revenue stretch government finances

By Weyinmi Omamuli

Forced spending cuts to slow growth to 3.2% in 2015. The country’s fledging non-oil economy (43% of GDP) has registered impressive growth rates in recent years, averaging 8.1% over the last five years. The Agriculture sector – which employs 70% of Angolans – grew by 11.9% in 2014. Still, Angola cultivates just 30% of its available agricultural land. Nascent investment and reforms in the sector should see improvements over the medium term. For instance, a 2005 irrigation project funded with Chinese money in Caxito has recently helped transform the country from a net importer of bananas to a net-exporter. A recently approved 12 billion kwanza credit facility aimed at small-holder farmers should also help boost output. That said, the agriculture sector has actually shrunk by at least 1% since 2009, underscoring the urgency for ramped-up efforts.

WOAngola2
Source: IMF Article IV report (Sep 2014); macroafricaintelligence

Authorities to reset diversification plans with planned infrastructure projects & reforms likely delayed. Recent strides towards economic diversification are still too closely linked to the oil sector. For instance, the significant expansion in construction’s share of GDP to 10.4% in 2013 from 8.2% in 2009, reflects ramped-up government investments in public infrastructure projects, linked to high-oil prices. However, the sector’s capture of economic activity has been far less pronounced than the public sector’s (administration and defence), which expanded to 17.5% from 13.5% between 2009 and 2013, and is the largest single driver of ‘economic diversification’. Now, both sectors are threatened by weaker oil prices, especially the former as planned infrastructure projects are delayed, cancelled or squeezed due to a lack of funding. Although the government has already secured a one billion dollar loan from the AfDB to fund its Power Sector Reform Support Program (PSRSP), it is likely that the planned five billion dollars of investments in the energy sector will be delayed. However, on-going projects such as the 2000MW hydroelectric power project in the Kwanza basin will probably still be implemented. These delays and shortcuts will further add to the government’s poor track record of executing its Public Investment Program and improving the operating environment.

WOAngola1
Source: IMF Article IV report (Sep 2014); macroafricaintelligence

Medium-term prospects for non-government, non-energy sectors of the economy will hinge on the authorities’ ability to generate alternative revenues. To consolidate recent momentum in the non-oil sectors, the authorities are targeting reforms to mobilise non-oil sources of revenue. A $450 million World Bank loan – agreed at the end of June – has been contracted to facilitate this goal. Yet this will be a long-term agenda, given high levels of poverty (and even higher inequality), which limit the domestic tax base. However, on-going projects should support the shorter-term outlook. For instance, circa 3.5 billion US dollars of investments are currently in place to revive manufacturing in the agro-industry and textiles sectors – the latter supported by funding from Japan’s Marubeni Group. However, prospects could be hampered by the disruptions in planned complementary public infrastructure investments — particularly in power generation – which are essential to sustain the sector’s high growth rates which reached 8% in 2014. The services sector (23% of GDP) has struggled to attract significant private sector FDI, however, partly due to Angola’s high operating costs. Still, the information and communication technology (ICT) segment could provide a boost to the sector over the long-term as growth rates averaging 55% per year over the last decade begin to attract foreign investment. Yet projects here are still facing delays such as the launch of the Russian-funded AngoSat-1 – Angola’s first satellite – now expected to launch in 2017 from an initial date in 2015. Low economic returns on public investment also raise doubts about the sustainability of the government’s public sector-led economic diversification model, adding downward pressure on slowing FDI flows. These are set to decline to 12.3 billion dollars this year, from 14.5 billion in 2013 – most of which will go towards pre-salt oil exploration which has the potential to double Angola’s estimated 13 billion barrels (2013) of proven oil reserves. Consequently, the oil sector continues to hold the greatest promise for the country’s long-term economic fortunes with output expected to expand by 2.25% a year over the next five years as production recovers, and new fields (including the first phase of a pre-salt oil field), come on stream in 2017.

(Edited by Rafiq Raji, Ph.D.)

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