Angola’s Economic Contradiction

The Angolan economy is replete with contrasts: on the one hand, with its treasure trove of natural resources, the country has been registering record levels of growth; on the other hand, it remains one of the poorest countries in Africa. While its main cities sprout skyscrapers seemingly by the week and real estate prices are some of the highest in the world, the cost of living for most of the population is astronomical. Perhaps Angola’s hitherto lopsided development reflects the long and destructive years of the civil war. With peace now firmly entrenched, Angola is making up for lost time with vast infrastructural projects and a strong attempt to diversify the economy. It has become a magnet for investors from all corners of the world, with China leading the charge. Will Angola be able to punch at its correct weight and stand among the continent’s economic giants as its vast natural resources suggest it should?

On paper, Angola’s potential is glaring. In 2008, the country startled many when it temporarily overtook Nigeria as Africa’s biggest oil producer. Its GDP, which is estimated to grow by around 11% this year, has been in double figures for several years over the last decade.

Angola’s demographics are also impressive: its population flirts with the 20m mark and, for Africa, it is strikingly urbanised – nearly 60% of the country’s citizens live in towns and cities. Its oil sector is booming and interest in its diamond-mining potential is reported to have reached record-breaking levels. Infrastructure development projects have also been thriving, with roads, bridges and railways being revamped at a breakneck speed. And, unsurprisingly, foreign interest in Angola with respect to all these sectors is intensifying.

 The outlook is very bright for Angola: we anticipate double-digit economic growth over the next few years, thanks largely to a number of sizeable oil projects which will be coming online,” says Lisa Lewin, head of sub-Saharan Africa Analysis at Business Monitor International (BMI), capturing the mood well.

“However, there are several other factors which should also prove growth-supportive: investment from international oil companies into Angola’s sub-salt resources, various infrastructural development programmes, and increased government spending in the run-up to elections,” she adds.

Yet Angola’s economic progress is precarious and it remains one of the world’s poorest countries. “Despite the rapid headline growth rates, poverty remains widespread, with around two thirds of the population living on less than $2 a day, and the gap between rich and poor has been growing,” says Lewin of BMI.

Indeed, the World Bank’s last poverty headcount ratio for the country found that nearly 55% of the population live on less than $1.25 a day. And around two thirds, as mentioned above, live on less than $2 a day. The richest fifth of the population hold almost two thirds of the country’s total wealth. Life expectancy is depressingly low, at 51 years, and Angola has one of the world’s highest infant mortality rates. Accusations of corruption are frequently levelled. at the country’s government, headed by the long-standing President Dos Santos.

Angola is also a recovering economy. Its infrastructure, production and labour pool were left annihilated by a civil war that racked the country for more than 20 years, and only came to an end in 2002. It is difficult to exaggerate the effects the war has had on the economy. It led to 1.5m deaths and left over 4m citizens internally displaced.

Agricultural production, oil extraction and gold mining virtually ground to a halt. Infrastructure was destroyed. A generation of Angolans have missed out on education and the government is still engaged in a daunting struggle to reintegrate them properly back into society. In some ways, the zeal with which Angola has bounced back since the conflict has been remarkable. In other ways, there have been some serious rehabilitation failures.

This all makes economic analysis of the country tricky. Both chimerical optimism, infused with utopian visions of Angola standing alongside South Africa and Nigeria as a potential African superpower, and gloomy despondency that Angola is yet another African country doomed to be defined by poverty and corruption are tempting depending on what figures are invoked.

In the end, the most informed opinions will draw on observations and assertions from both camps.

Bouncing back from the brink

Given the formidable traumas that the country’s economy has been exposed to in the recent past, its current growth level is all the more impressive. Economists have projected around 10% GDP growth for this year. The country’s GDP growth figures from slightly further back are also staggering – between 2005 and 2007, GDP growth averaged around 21%, peaking at nearly 23% in 2007.

Such growth has been overwhelmingly due to the hike in Angola’s exports of its most lucrative natural resource: oil. The government has invested heavily in oil exploration and infrastructure to boost production and capacity. Its enthusiasm is now paying dividends: Oil accounts for 90% of export revenues and 80% of government revenues. Moreover, Angola is anticipated to rev up its oil output in coming years, through further expansion of operations in both onshore and offshore facilities.

Using its new oil-based windfall, Angola has been able to make dramatic strides in terms of rebuilding its infrastructure. The results of the construction boom are overt in the country’s dusty capital, Luanda, where skyscrapers and cranes graze the skies, and concrete mixers are becoming as common as street-food stalls.

Much of the country’s construction efforts have involved the revamping of thousands of kilometres of its main, secondary and tertiary roads and railway tracks. Moreover, infrastructure development efforts are becoming more ambitious by the day, from plans to build Africa’s biggest airport to bringing 4G networks to Angola in advance of many European countries.

It therefore comes as little surprise that foreign interest in Angola is deepening. China, in particular, has captured headlines by pumping billions into the country in the form of loans and credit lines in an attempt to gain favoured access to Angola’s oil fields, an arrangement which has been dubbed ‘infrastructure for oil’ by observers.

Such financial assistance has mainly focused on public investment projects in infrastructure, agriculture and telecommunications. Meanwhile, bilateral trade between China and Angola reached $120bn in 2010, making Angola China’s largest African trade partner. And Chinese firms, as well as ramping up their operations in Angola’s oil sector, are keen to explore new areas of the country’s economy, such as the diamond mining sector.

European counties have also been eager to step up their relations with Angola recently. For example, the UK’s annual investment in Angola has reached $3bn, making it the country’s second largest investor. And, although trade with Germany is relatively modest, German construction companies are showing a strong appetite for building their stake in Angola’s infrastructural development. The interest of rising power in fellow former Portuguese colony, Brazil, is also one to watch. In the last six years, the country has extended $3bn of credit lines to Angola and the activities of Brazilian oil firm, Odebrecht, in the country are intensifying.

Yet, the drawbacks of the country’s reliance on revenue from oil exports became clear during the global crisis of 2008–2009, when slowing demand from oil-consuming countries caused the average US price of oil to dip to $56.15 a barrel (inflation adjusted). GDP growth duly collapsed in Angola, plummeting to 2.4% in 2009 and 2.3% in 2010.

Thus, any projections when it comes to Angola’s GDP growth prospects for the years to come are inevitably volatile, being ultimately tied to oil prices. Any assessment of the sustainability of the Angolan economy must therefore also rest on tight scrutiny of its progress in diversifying its economy away from oil-based wealth.
 
Diversification: staggering rather than striding

Experts warn that Angola’s economy is dangerously undiversified and overreliant on oil for capital. It is, however, true that, to a very limited degree, other non-oil aspects of the Angolan economy are also anticipated to grow over the next few years.

Unsurprisingly perhaps, the one non-oil aspect of the economy that is perhaps set to flourish the most in coming years also comes within the extractive category – the mining sector. Angola now has one of the biggest and most varied portfolios for mining on the continent and is the world’s third major supplier of diamonds. Moreover, diamond extraction is set to increase significantly in coming years – last year, the industry recorded its best ever production figures. And with 60% of Angola’s diamond-rich territory still awaiting exploration, the potential is massive.

Yet, in many ways, the country has a far way to go. Take the country’s ailing agricultural sector. Before the war, Angola was self-sufficient in virtually all food crops and exported various products including sisal, banana, tobacco and maize. It was also the fourth-largest coffee producer in the world. Now a large proportion of food is imported and only 10% of the 35m hectares of the country’s cultivable land is being used for agriculture.

The civil war has been a big contributing factor to the poor state of agriculture in Angola. A particularly destructive repercussion of that war is the fact that large tracts of land remain abandoned because the prevalence of land mines, hidden in these plots during the conflict.

The government has nonetheless shown an encouraging willingness to make the agricultural sector a priority and commit much-needed investment: in 2009 it announced its intention to commit no less than $12bn to agriculture and increase cereal output five-fold to 15m tons by 2013. It is, nonetheless, clear that transforming the sector will be no easy task: Angolan banks are reportedly reluctant to lend to farmers, and disease, poor practices when it comes to management and harvesting of crops, scarcity of vital inputs and lack of training support for farmers continues to prevent sufficient growth within the sector.

The country’s manufacturing industry is also struggling to take off. The area contributes only slightly to the economy, making up 5.79% of value-added GDP in 2010, according to World Bank figures. Moreover, this figure represented a decrease from 2009, when industry contributed 6.07% of GDP. Although manufacturing flourished before the war, the onset of conflict compromised the skills of the work pool and disrupted production; the sector is still recovering from these setbacks.

There have been some attempts to reinvigorate Angola’s manufacturing arm, however. In the 1990s the state undertook a privatisation drive and began its battle to encourage foreign investment. And there is a smattering of evidence of such foreign interest today.

Although some mooted manufacturing ventures, such as Volkswagen’s plans to build a car plant in Angola, have not come into fruition, others have resulted in success. For example, the South African packing company Nampak, which opened its first plant in the country in 2011, plans to build two further manufacturing facilities.

International organisations have also shown a keenness to boost SME manufacturing. For example, the International Finance Corporation (a member of the World Bank Group) has recently provided loans to companies within the sector: one to a cement plant worth $27m and one to a soap manufacturing firm.

Perhaps the most daunting task that the country faces over the next decade is in creating a skilled labour pool: because of the civil war, a whole generation of Angolans have missed out on education and training. The overall proportion of skilled workers is low – 74% of those aged 20-24 years old are unskilled, according to the OECD. That figure is 68% for those aged 25 to 29. Eighty-eight per cent of women in Angola are also unskilled. The implications that this has in terms of boosting non-oil aspects of the economy and encouraging foreign firms to invest in both industry and agriculture is, of course, massive.

There have been some attempts to tackle this issue – a major three-year government plan to boost technical education levels was announced in 2005, which included the construction of 35 technical institutes with Chinese support in the form of capital. Yet, according to the OECD, the curricula needs updating and there are no known plans to train new teachers. There are also nowhere near enough vocational training centres in Angola to meet demand.
 
Corruption: Angola’s Achilles heel?

Worryingly, alleged corruption is also reportedly depriving Angola of the capital investment that the non-oil sectors of its economy need to develop. According to Human Rights Watch (HRW), “the scale of corruption and mismanagement in Angola has been immense”. Moreover, HRW contends that between 1997 and 2002, around $4.2bn vanished from the government’s coffers.

As this report explores in more detail elsewhere (see page XXX), the Angolan government has shown some glimmers of willingness to reform. Yet, the country’s rankings in Transparency International’s Corruption Perceptions Index for 2011 was poor, with the country coming in 168th, a worse result than in 2008.

Angola is awash with advantages; from its natural resources stockpile to its enviable demographics, the country has several pillars of strength which it will be able to lean on when propelling itself towards further economic growth. Experts assess that impressive growth should materialise in coming years, as long as the prices of its major export, oil, remains high.

Yet, the country’s economy is dangerously undiversified and faces some daunting macro-economic challenges. With both political and economic power still heavily concentrated in the hands of very few in Angola, perhaps it is fair to assert that whether these will be tackled depends, more than anything, on the mettle and appetite for change of its government.