8 March 2016

Angola: Low Oil Prices Undo Angola

analysis

The crash in the price of oil has hit Angola hard. Hospitals across the country are low on resources, including medicines. There are food shortages in the North, drought in the South. From Cabinda to Namibe, empty shelves in the stores attest to the government's lack of response.

If people are facing such serious difficulties in their day-to-day lives (in the so-called 'micro' economy) matters are no better on the macroeconomic scale where double-digit inflation is taking its toll.

According to the National Institute of Statistics, inflation in the capital Luanda was running at 1.4% between September and October 2015. Additionally, in the first months of 2016, the Kwanza has been devalued by 26%.

The reason for all this is the low price of oil. According to the United Nations Development Program, Angola has the least diversified economy in the world after Iraq. Any fall in the price of a barrel of crude has a profound effect because it represents 95 percent of exports and 75 percent of revenue. The result is a serious shortfall in expected income.

In the words of one observer, "It is worth adding that national production is in the hands of pseudo-entrepreneurs who are no more than rent seekers, not used to efficiency and competition." This is the potentially catastrophic scenario that the Angolan economy is facing.

What policies could be adopted to overturn this doomsday scenario?

Diversification The first word on the lips of economists at home and abroad is "diversification". It's the obvious first essential step for the world's least diversified economy after Iraq. But how to diversify? The problem is that the few non-oil projects of value in Angola are in the hands of the ruling oligarchy. For there to be effective diversification the markets must be truly free, the economic sector must be open to all, and competition must be encouraged.

In practice, this is unacceptable to all those currently benefiting from uncompetitive arrangements with the government. Who wants to see others muscling into their niche area of operation? It would spell the end for their lucrative "commissions".

Diversification is, above all, a political issue in Angola. It is unlikely to be achieved under the current government, which commands loyalty based on a system of patronage. To usher in a system that could result in the bankruptcy of their closest supporters, not just in the realm of politics but in the military as well, would be suicidal to a government whose popularity is in free fall.

As well as requiring the establishment of a truly free market, diversification also requires what the Austrian economist Schumpeter calls the right "social climate." Potential investors require the provision of at a least a few guarantees before they commit large sums of money into new enterprises in risky countries.

Is the country politically stable? Does the rule of law prevail? Is corruption rampant? Investors are likely to be deterred if their projects are at risk of expropriation as soon as they start to return a profit. Or if there are unnecessary delays to break-even because of an inefficient and excruciatingly slow bureaucracy. There are also the courts that may issue rulings in complete defiance of the published laws. And the possibility that the payment of excessive "commissions" to a voracious presidential family, rapacious generals and greedy ministers guarantee insufficient profits.

Infrastructure

Does the country have basic infrastructure in place, such as effective water and energy distribution networks? Take one concrete example: the tourism sector.

Angola is a land of stunning natural beauty but to accommodate visitors, the hotel sector needs self-sustaining set-ups with an ample supply of water and energy. The hotels that do exist operate as a cartel to keep prices high so their political masters enjoy a generous return on their investment.

Even getting to Angola in the first place is complicated. Potential visitors have to undergo a lengthy, expensive and complex visa application process conducted by unhelpful and taciturn officials whose primary objective appears to be to keep people out. Clearly diversification is impossible without political reforms.

Budget Cuts

With reduced income from oil, Angola's government announced there would be cuts in the national budget. Perhaps they should start with a cull of people on the state payroll? The president heads the government, assisted by 34 ministers with more than 50 deputy ministers. Is that too many? Is there an ideal number? The size of the Cabinet varies from country to country: the United States has only 15 Secretaries of State in the Cabinet but a large number of Deputy Secretaries, Assistant Secretaries and Under-Secretaries; Portugal has 17 Cabinet Ministers, with 39 Secretaries of State. Botswana has a cabinet of 24. In comparison, does Angola have too many ministers?

Could some of these functions be amalgamated under the same ministry? Does it make sense to have one ministry for the Economy, a separate ministry for Commerce, another ministry for industry, as well as a ministry for Hotels and Tourism, and separate ministries for fisheries and agriculture? Could there be economies of scale in grouping them into a super-ministry, the Economy Ministry?

Similarly, is there unnecessary duplication in having a Ministry for Urban Development and Housing as well as a Ministry for Construction? Or in having separate Ministries for Water, Oil, and Geology and Mines?

This profusion of ministries is a common feature of dictatorships whose need for a network of patronage often results in a plethora of ministerial positions. Similarly, there is a deliberate overlap, with no clear definition of the parameters of responsibilities for each portfolio, so that each Minister has to refer areas of ambiguous jurisdiction up to the dictator.

Spending excessive amounts on organizational duplication is, once again, a political decision, not one based on economic good sense. The state apparatus consumes a colossal 77% of the 2016 budget. In theory, this is divided between all eighteen provinces but in practice none receive the full amounts as set out for them. How can a regime that is not able to decentralize the implementation of the budget be able to diversify the economy?

Kwanza

Another relevant issue in analyzing the Angolan economy is the sorry state of the national currency, the Kwanza. The Kwanza has suffered a notable loss of value against world currencies; yet the Angolan government says it will try to shore it up. To achieve this, the government has to spend foreign currency reserves which could have been better directed towards other projects. A devaluation of the national currency could attract foreign investment into new areas of economic activity and thus promote diversification. But this would also encourage competition, which is inconvenient for the ruling oligarchy.

Furthermore, a devalued Kwanza would mean imported goods would become more expensive and that would upset the middle class, which is now accustomed to consuming imports.

The consequences are twofold. First, boosting the Kwanza to keep the exchange rate artificially high, is costly but protects the interests of the leaders of the regime. Second, devaluing the currency could attract foreign investment, increase competition and diversify the economy, but would make imports more expensive and could cause social unrest.

In summary, Angola's economic crisis is inextricably linked to the political regime. Without regime change, there is little possibility of any resolution to even the more basic economic problems faced by Angola. The signs are that the regime has no other strategy than to wait and hope for the price of oil to rise. Like Venezuela's President Maduro and Russia's President Putin, Angola's President José Eduardo dos Santos is betting his leadership and his country's future on the uncertain fortunes of 'black gold'.

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