Impact of Political Uncertainty on Angolan Growth

Impact of Political Uncertainty on Angolan Growth

Angola bid farewell to its longest serving president, President Eduardo Dos Santos. Dos Santos has ruled the country for thirty-eight years. He is credited for having been able to bring and maintain peace and stability to the country, and for steering the country’s economy toward the path of growth. However, Angola remains a nation of contradictions. The rate of economic growth has not been commensurate with socio-economic transformation in the country. The country has achieved impressive income per capita and stable economic growth at 4.5% from 2010-151. Yet this has not translated into improvements in the livelihoods of the majority of its population due to high inequality, at 42.7 as measured by the Gini coefficient2. The country stands at position 150 out of 188 on the Human Development Index3. This is mainly due to the politicised nature of the Angola’s economy. The Mo Ibrahim Index of African Governance ranked the country at 45 out of 54 in 20164. Former President dos Santos, who ruled for the last 38 years was also involved in business, which entrenched the family’s private interests, making some of its members amongst the wealthiest individuals on the continent.

 

Apart from the President’s private economic interests, the structure of the economy is heavily biased toward oil extraction for export which constitutes 30.0% of GDP and approximately 90.0% of export earnings. Despite pressures to diversify its economy, the country continues to rely on imports for even the most basic consumer goods and the government’s main priority has been to ensure a recovery of the oil sector from the 2014 commodity price decline.

 

The economy is showing signs of recovery and growth with an annual growth rate projected at 2.3% for 2017 and 3.2% in 20185. The austerity measures put in place by the government at the end of 2016 are paying dividends. The National Bank of Angola also tightened liquidity conditions in the country. This has ensured macroeconomic stability, and put a hold on volatility in the forex market. Month on month inflation continues to decelerate standing at 34.1% in May, down from 36.3% in April. Inflation had been on the rise due to the depreciation of the AOA, which had seen an increase in the imports bills. The situation was further compounded by a shortage of foreign currency. The Monetary Policy Committee (MPC) of the National Bank of Angola (BNA) attributed this to the goods and services sectors, which are increasing their share of the GDP. The Angolan government has also strategically moved to increase its public infrastructure spending in order to induce domestic investment, employment creation and to inject new energy into the economy. Despite these efforts, the gap between the official bank rate and the black-market rates continues to widen due to the scarcity of the US dollar in the country. The official exchange rate is pegged at AOA 165.91 per USD while the going rate on the black market stands between AOA 450-600 per USD.

 

The Angolan economic prospects have been further buoyed by the recent pronouncement that the country has diamond reserves of over a billion carats. This is likely to encourage the country’s strategic move from over-dependence on a single commodity, oil, and still return its prime trade balance sheet. The country is also in its final year of rolling out the National Industrialisation Programme (NIP) 2013-176. The NIP is the government of Angola’s consolidated strategy to diversify the economy through support of industrialisation and move away from overdependence on a single commodity.

 

The Angolan economy faces structural hurdles that were an unintentional creation of the oil-dependent economy. The cost of doing business and investment for small to medium enterprises remain prohibitive for both locals and international investors. Angola is placed number 182 out of 190 on the World Bank’s Ease of Doing Business Index. It fares poorly on enforcing contracts (188) and starting a business (144). The prevailing macroeconomic environment is not conducive for developing local industries and it does not encourage foreign direct investment (FDI).

 

The cost of living in Angola and especially its capital Luanda, which has been sustained by many expatriates and multinational oil companies, is a deterrent to small to medium enterprises. Luanda is ranked as the city with the highest cost of living in the world on the Mercer Annual Cost of Living Survey for 20177. The expatriate backed economy is choking on the back of the exodus of the expatriates after the slump in oil prices, leaving behind the locals who are unable to afford a decent living. The government would have to go beyond its current investment policies, guided by the 2015 new Private Investment Law, and try and stimulate domestic investment and medium scale enterprise development. Recently, the country’s full ratification of the UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards8 has significantly improved its standing as a favourable investment destination, with a guarantee and commitment to subject itself to international arbitration in all commercial contracts and matters.

 

In addition, Angola would benefit more if concerted efforts were made toward nurturing entrepreneurial activities and promoting development and growth of local industries. It remains to be seen how the Angola Sovereign Wealth Fund (the Fund) might leverage oil revenue to provide a funding vehicle for small start-ups and young entrepreneurs. Under Dos Santos, the Fund has been an extension of the family’s grip on the economy, through its chairman Jose Filomeno Dos Santos, son to Eduardo Dos Santos. The Fund has been mentioned in the Panama papers, accused of laundering over USD 5 billion from oil revenues9.

 

The post-election period will be a real test for the new president, as he confronts pre-existing corruption and nepotism and patronage networks. The country continues to score poorly on corruption and governance indices10. Though the government has vehemently denied the ranking, it is common practice for state owned enterprises to operate in an opaque environment with no public accountability structures. Even when conceding the indices themselves are controversial and not bias free, the overall impression created by the country does not bode well for investors and the building of national cohesion going forward. The new president will have to demonstrate that the new administration will be able to transform the economy and bring radical change in the public and private sector. The focus will be on how the new administration will transform key institutions such as BNA, Sonangol and the institutions charged with watchdog and oversight responsibilities, such as the judiciary that is populated by Dos Santos’ appointees and loyalists.

 

While Mr Dos Santos will no longer be head of state and government he remains the chairman of the MPLA, thus retaining power and influence on both the national politics and the economy. He still holds the power to influence the selection of members of parliament and government appointments through the party. Dos Santos also put in place measures that guarantee his hold on political and economic power of the country. One such move by the MPLA, through its majority in parliament, was passing of a law that extended the contracts for all serving security chiefs for 8 years – widely seen as limiting the reach and powers of the new President. In addition to this, President Dos Santos strategically placed his children in key institutions of the economy. Isabel dos Santos heads the country’s national oil company Sonangol, the country’s major source of revenue. Jose Filomeno dos Santos, Isabel’s brother is also chairman of the Angola Sovereign Wealth Fund (FSDEA) a state company charged with managing the nation’s investment portfolio. FSDEA handles all major infrastructure and social development programmes. Dos Santos’s two other children Welwitschia José dos Santos Pego and Jose Paulo have been placed in key national points. The two Dos Santos siblings are invested in the arts and communications industry with Jose Paulo managing TPA2 which is a state run TV channel. Channel TPA2 forms part of the public media and is itself a key state institution. The two jointly own Semba Comunicação which is used as preferred communication house for most state related communication needs.

 

Going forward, major policy shifts in Angola from the new president are unlikely. Given the measures that Dos Santos and MPLA as a party have put in place, the new president is not expected to bring any radical changes. The political and economic machinery as set up by the former president is guaranteed to remain intact. Because of the structure of the Angolan economy, socioeconomic transformation will not take place soon, thus consigning the majority of the population to poverty. The macroeconomic environment is expected to become more investor friendly out the necessity to diversify and bring in new players into the economy.


1 Political Economy Southern Africa
2 African Development Bank
3 United National Development Programme
4 Mo Ibrahim Foundation
5-6 African Development Bank, ibid.
7 Mercer
8 The Convention entered into effect on Angola on June 4th 2017.
9 African Network of Centers for Investigative Reporting
10 Mo Ibrahim Foundation, ibid.


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