Angola - An introductory economic review (Vol. 1 of 2) : Main report

Report No. 8906-ANG Angola An Introductory Economic Review (In Two Volumes) Volume 1: The Main Report June 29, 1990 Country Operations Division Southern Africa Department Africa Region FOR OFFICIAL USE ONLY N~~~~~~~~~~~~~~~~~~~~~~~ *~~wtot~oI I {) - K .j Docunent of the Worl4W_ank,Z Thisdocumemnt has a retriscted disrbution ond may be 6r~d.by recipient only In the perf ceof their ocial duttes. ts cone may not otherw b,e disclosed wihu VrdBank aut\orizatldn. V\ \  CURRIENCY EOUIVALENI Since 1975 US$ 1.00 - Xz 29.92 FISCAL YEAR January 1 - December 31  FOR OFFICIAL USE ONLY PREFACE This report is based on a UNDP-financed economic mission to the People's Republic of Angola in November/December 1987, for which the World Bank served as Executing Agency. The mission comprised the following consultantss Jose Silva Lopes (Mission Leader and Principal Author), Hendrik Koppen (Deputy Mission Leader), Milton P. de Assis (Macroeconomist), John Caskey (Macroeconomist), Jorge Braga de Macedo (Macroeconomist), Ana Neto (Research Assistant), Jorge Moita (Institutional Specialist), Witold Teplitz Sembitzky (Energy), Rob Harrison (Transport), Martyn Marriott (Mining), Alberto Mello e Souza (Human Resources), Richard Lacroix (Industry), Richard Callahan (State Enterprises), David Goodman (Regional and Urban Development), Stahis Panagides, Cesar Aguiar, and Alberto Castanheira Diniz (Agriculture). Jdime Biderman (Southern Africa Department), coordinated mission planning and report-writing. Dora Hollister assisted in the preparation of the mission and the report. The report was discussed and updated with Angolan Government authorities in February 1989, and vss issued on June 26, 1989. It has since been updated further based on ae Ltional or corrected information obtained in November/December -89, when further dissemination of the report's findings and recommendations also took place. As indicated in the UNDP Project Document (ANG/87/001), dated September 1987, the major objectives of this introductory economic review were to examine the structure and evolution of the Angolan economy and key sectors, and to provide recommendations on an economic rehabilitation strategy. Due to the fact that this is a first report, it includes more background information than is common for a typical Country Economic Memorandum. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  ANGOLA AN INTRODUCTORY ECONOMIC REVIEW TAIL! OF CONTENTS Volume I - Main Report Page No. Abstract Abbreviations and Acronyms Country Data Executive Summary i-xim Chapter 1. COUNTRY BACKGROUND 1 A. Geographical Characteristics ... ..... ....... 1 B. Population .................................................... 2 C. Economic Development during the Colonial Period ...... 4 D. The Transition to Independence . ............... 5 Chapter 2. THE ECONOMIC FYS?EK OF ANGOLA 8 A. Development of the Economic System since Independence 8................ . a B. Institutional Organization of Economic Management.... 10 C. The System of Economic Planning ................. .... . 11 D. The Allocation of Foreign Excha ....... 13 E. Price Polces.... i........... e s...... 14 F. The Trade Sector. 19 G. The Financial System. 20 H. The State Enterprises . .......... 22 I. Private Enterprisese. 28 J. Parallel Markets ....... . . ..... ..... ... 29 K. The Subsistence Sectore.. .r........ . ........ 31 Chapter 3. MACROECONOMIC PRFORMNANCE 32 A. Causes of the Economic Crisis since Independence..................... .. ..... 32 B. Structure and Evolution of Gross Domestic Product 36 C. Gross National Exennditur e 39 D. Employment and Wages............ .. ............ 41 E. Government Finance 43..................... ........ 43 F. Monetary Policy. . .............. . . * . ........ . 50 G. The Balance of Payments and External De b t 51  Paae No. Chapter 4. SECTORAL DsVELOM_49NT 58 A. Agriculture... ................................... 58 B. Fisheries .............. ......*...**....*........... 67 C. M . ..........** .......... .. 69 D. Manufacturing Industry. ............. d.... ......... *.. 78 E. Construction and Building Materials .....85 F. Energy .. .. . . ....................................... 91 G. Transport ......... .. .... ... . 96 H. Human Resources ...... .104 I. Regional and Urban Development .. ..117 Chapter S. ECONOMIC POLICY REFORM 130 A. The Program of Economic and Financial Restructuring (SEF) ..... . .. ....130 Introduction .. ...... 130 Stabilization Measures Announced in the SEF. 131 Structural Reforms in the Economic System ...... 135 B. The SEF and Prospects for Economic Rehabilitation.... 138 Introductionr..... .. .. .. .. .138 Definition of Key SEF Objectives . .139 Strategies for eform ... . 141 Institutional and Training Requirements 144 Development of a Network of Competitive Enterprises .......... . .... ..147 Reduction of the Budgetary Deficit . .152 Price and Wage Policies. 153 Exchange Rate Policy... 156 Monetary Policy. . 157 Social Impact of Economic Adjustment and Reform Policiess... .... . * .. 159 Improvements in Statistical Daa . .161 A Scenario Based on the End of the War . .163 Lessons from the Programs of Economic Reform in Ghana and Mozambique ...... . .. .165 Volume II ANNEXES AND STATISTICAL APPENDIX I. Economic Development During the Colonial Period............ II. The Angolan Economy in Comparative Perspective............ III. Government Institutions................................... IV. The System of National Accounts in Angola.................. V. The Legal Framework of SEF.................. .............. VI. The Tax System............................................ VII. Agriculture .............. .............. .................... VIII Transport and Communications............... ............... IX. Education..................................................  Statistical Appendix Maps Map I Angola Map II Angolas Relief Map IlI Angolat Pop'lation Density  LIST OF TEXT TABLES Pate No. Chapter 2 2.1 Controlled Retail Prices of Selected Goods and Services ... 16 2.2 Numbers of Public and Private Enterprises - 1984 ........... 23 2.3 Size Distribution of Public, Private and Mixed Entepiss.***.... p ri..... s es....**.... 23 2.4 Employment in Public, Private and Mixed Enterprises - 1984 24 2.5 Classification of Plblic Enterprises by Responsible Mi isty........................... 25 2.6 Financial Flows between Government and Public Enterprises, 1980-87 .. .... .. .... . ......... 26 2.7 Claims and Debts of State Enterprise by Sector, end 1986. 27 2.8 Prices in Official and Parallel Market in Luandan......... 31 Chapter 3 3.1 GDP by Sector, 1980-87 ............... ..................... 37 3.2 Expend'.tures of Avalilable Resources, 1982-87 ................ 40 3.3 Economically Active Population, 1985....... ............. .. 42 3.4 Summary of Government Finance, 1985-89 .................... 45 3.5 Government Revenue, 1981 and 1987 ......................... 46 3.6 Economic Classification of Recurrent Expenditure in 1987.. 47 3.7 Monetary Survey, 1983-88.... . ..... .. . ........ .. 51 3.8 Balance of Payments, 1980-87..* ..................... 52 3.9 Total External Debt Stock, as of December 31, 1988 ........ 55 3.10 External Debt Arrears as of December 31, 1988 ......... .. 56 Chapter 4 4.1 Cereals Deficit .................................................. 59 4.2 Estimated Reserves of Diamonds in Luanda Norte, 1979 ...... 70 4.3 Endiams's Receipts and Disbursements in Foreign Exchange, 1985-88............ .... ............ 74 4.4 Projected Diamond Production, 1988-92 ..................... 76 4.5 Index of Industrial Production, 1973-87 ......** .......... 79 4.6 Employment in Manufacturing Enterprises, 1984 ............. 79 4.7 Financial Flows Between Government and Industrial Public Enterprises, 1980-87 ....... ............ *000* ...... 81 4.8 Public Sector Investment in Industry, 1980-86 ............. 82 4.9 Building and Engineering Construction Output, 1985 and 1986 87 4.10 Energy Balance Overview, 1986 ............ ......... . ..... 91 4.11 Selected Indicators on Angola's Energy Sector ............. 92 4.12 Projected Crude Oil Exports, 1987-91..... ......#........... 94 4.13 ANGOLA: Output of MINTEC controlled Transport Services 1985-86 ....... *.......................... 98 4.14 Labor Force Data, 1985 ...... ................. .. . . . .......... 105 4.15 Educational Level of Labor Force, 1983/84 ................. 106 4.16 P.ealth Facilities by Type, 1973 and 1985 ................... 115  Abstract Despite abundant natural resources, and the rapid development of an enclave oil sector (which provided nearly US$2 billion in exports in 1985), the Angolan economy has been characterized by enormous distortions and poor output performance since Independence in 1975. These problems may be attributed to three main factorss (a) the continuing war against UNITA and South Africa, which has made much of the countryside too insecure for agricultural production and transport, requires heavy military expenditures (contributing to chronically large fiscal deficits), and has destroyed a substantial part of the economic and social infrastructure and production capacity; (b) unusually severe human resource constraints, due to the massive exodus of Portuguese settlers at Independence and the resulting skill shortages; and (c) deficiencies in economic management and inadequate policies (i.e., ineffective central planning and pervasive administrative controls, including administrative allocation of foreign exchange in the face of a fixed, overvalued exchange rate, price controls for most goods and services with differences of 40sl between official and parallel market prices, inadequate control over government finances, inefficient public enterprices, and a generally distorted incentive framework for producers and consumers). The decline in oil prices which began in late 1985 aggravated the situation by worsening the budget deficit while reducing the Government's ability to import essential inputs and consumer goods (especially food for the urban population). Recognizing that orgonizational and policy shortcomings have contributed significantly to the country's economic difficulties, the Angolan authorities announced a program of *Economic and Financial Restructuring' (known as SEF) in 1987. Although the formulation and implementation of SEF are still at an early stage, the program envisages a more important role for market prices and the private sector and the reduction of the multiple distortions created by bureaucratic controls. In this context, this report recoimends economic policy measures oriented towards three main objectives: (a) control of domestic demand (reduction of the budget deficit and more effective control over the expansion of domestic credit); (b) stimulation of domestic supply (more attractive prices for agricultural products; incentives to the establishment of small private enterprises); and (c) improvements In the allocation of resources (reduction of bureaucratic controls, including in particular price controls and the administrative allocation of foreign exchange; depreciation of the exchange rate; review of public expenditure priorities; stimulation of more competition in the productive sectors; reform of public enterprises; and reduction of the difference between official and parallel market prices. Although the Government's limited implementation capacity makes it unlikely that all of these major transformations can be fully undertaken in a short period, the distortions in the Angolan economy are so large that it will be imperative for the Government to introduce, already in the initial stages, very strong measures in the areas of price, wage and exchange rate policy and public resource management. The resulting improvement in the incentive framework is essential in order to elicit a supply response from the productive sectors and will enable the Government to undertake other actions outlined in this report to promote sectoral development and accelerate rehabilitation activities when the war-related constraints are eased.  ABBREVIATIONS AND ARONM ANQONAVE National Shipping Company AUP Agrupmaento de Unidades do Produga. (state fores) Auto-consuso Internal Consumptioti In EnterprIes iNA National Bank of Angola SPA Popular Sank of Angola CASOTANO Coastal Shipping Company Cafangol National Co fe Cotpany CDA Angolan Mail Service Cf1 Senguea Railway Company CfL Luanda Railway Company CFM Mocamodos Railway Company CIMCAE Angolan Intorminliteital Commission for Coordination of Emorsency Assistance CPL Provincial Comiosariat of Luanda Dosiocadoe Refugeos/Displaced Population Dimang Diamond Company of Angola DINAMA National Distribution Company for Agricultural Direcgao Nacional do Precoo National Prtci Off ice DUCT National Council for Mail and Tlec*mmunications ONMUP National Directorate for Merchant Marine and Ports DSCT Mail and Tlecomamunications Directorat ENATEL National Tslecomuanieatlon Company ETP State Transport Company IMPORTANO Angolan Importing Agency EDA Agricultural Dovelopment Stations EDNA National Wholoesle Food Distribution Company EDlOIS National Wholeele Distribution Company for Industrial Good. ENAMA National Agricultural Mechanization Company ENUNA Airport and Navigation Company EMAS National Water and Sanitation Company ENCIB Basic Infeastructure Construction Company ENCODIPA National Distribution Company for Agricultural Products ENDIAMA National Dlamnd Company EPAL Luanda Provincial Water Company "PRV OffIce for Museq ue Renewal and RehabilItation sxr Regional Planning Office INE National Statistical Institute MANAUTO Vehicle Maintenance nd Workshop Organization NED Ministry of Education MIC Minltry of Internal Trade mINTEC Ministry of Transport and Tlecomzutications WLA-PT Popular Vovem"nt for the Liberation of Angola - Workers' Party Musseques Human Settlemomts on the Fringes of Urban Areas O