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

Document of UNITED NATIONS DEVELOPMENT PROGRAMITHE WORLD BANK Report No. 7283-ANG ANGOLA AN INTRODUCTORY ECONOMIC REVIEV (in two volumes) Volume I June 26. 1989 ANG/87/001 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 UNDP or World Bank authorization.  CURRICY EQUrVALENT Since 1975 US$ 1.00 - Kz 29.92 FISCAL YEAR January 1 - December 31  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 Executive Agency. The mission comprised the following consultants: Jose Silva Lopes (Mission Leader and Princi,al Author), Hendrik Koppen (Deputy Mission Leader), Milton P. de Assis (Macroeconomist), John Caskey (Hacroeconomist), 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), Jaime Biderman (Southern Africa Department), coordinated missicn planning and report-writing. Dora Hollister assisted in the preparation of the mission and the report. The report was discussed with Angolan Government authorities in February 1989. 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 UNDP or World Bank authorization.  ANGOLA AN INTRODUCTORY ECONOMIC REVIEW TABLE OF CONTENTS Volume I - Main Report Page No. Abstract Abbreviations and Acronyms Country Data Executive Summary i-xvii Chapter 1 COUNTRY BACKGROUND 1 A. Geographical Characteristics ......................... I B. Population ........................................... 2 C. Economic Development during the Colonial Period ...... 4 D. The Transition to Independence ....................... 5 Chapter 2 THE ECONOMIC SYSTEM OF ANGOLA 8 A. Development of the Economic System since Independence. 8 B. Institutional Organization of Economic Management 10 C. The System of Economic Planning .11 D. Foreign Exchange Allocation Syste sm .13 E. Price Policies ............... ...................... 14 F. Trade .19 G. Financial System .20 H. State Enterprises .22 I. Private Enterprises .27 J. Parallel Markets .29 K. Subsistence Sector .31 Chapter 3. MACROECONOMIC PERFORMANCE 32 A. Causes of the Economic Crisis since Independencep..32 B. Structure and Evolution of Gross Domestic Product 36 C. Gross National Expenditure.39 D. Employment and Wages.41 E. Government Finance.43 F. Monetary Policy .50 G. Balance of Payments and External Debt .51  Paae No. Chapter 4. SECTORAL DEVELOPMENT 58 A. Agriculture ..58 B. Fisheries ..67 C. Mining ..69 D. Manufacturing and Industry . .78 .. Construction and Building Materials .85 F. Energy ..91 G. Transport ..96 H. Human Resources ..103 I. Regional and Urban Development .115 Chapter 5. ECONOMIC POLICY REFORM 128 A. The Program of Economic and Financial Restructuring (SEF) .128 Introduction .128 Stabilization Measures Announced in the SEF 129 Structural Reforms in the Economic System 133 B. SEF and the Prospects for Economic Rehabilitation... 136 Introduction .136 Definition of Kev SEF Objectives .138 Strategies for Rfom. .139 Institutional and Training Requirements .142 Development of a Network of Competitive Enterprises ...145 Reduction of the Budgetary Deficit . .150 Price and Wage Policies ...152 Exchange Rate Policy ...155 Monetary Policy . . 156 Social Impact of Economic Adjustment and Reform Policies .. ................................... 158 Improvements in Statistical Daa . .160 A Scenario Based on the End uf the War ..... .... 162 Lessons from the Programs of Economic Reform of Ghana and ozambique .164 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 Hap I Angola Map II Angolat Relief Map III Angola: Population Densit,-  LIST OF TEXT TABLES Page No. Chapter 2 2.1 Controlled Retail Prices of Selected Goods and Services ... 16 2.2 Number of Public and Private Enterprises, 1984 . . 23 2.3 Size Distribution of Public, Private and Mixed Enterprises ..23 2.4 Employment in Public, Private and Mixed Enterprises, 1984. 24 2.5 Classification of Public Enterprises by Responsible 24 Ministries ..26 2.6 Financial Flows between Government and Public Enterprises ..27 2.7 Claims and Debts of State Enterprised by Sector, end 1986. 27 2.8 Prices in Official and in the Par.%llel Market in Luanda 30 Chapter 3 3.1 GDP by Sector, 1980-87 .................... 37 3.2 Expenditure of Available 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, 1987 .... 47 3.7 Monetary Survey, 1983-87 .................................. '1 3.8 Balance of Payments .. 52 3.9 Stock of External Civilian Debt, 1982-87 . . 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 ............ 70 4.3 Endiama'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 ............. 80 4.7 Financial Flows Between Government and Industrial . Public Enterprises, 1980-87 ................... 81 4.8 Public Sector Investment in Industry, 1980-86 ............. 82 4.9 Building and Engineering Construction Output, 1985 & 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 Output of MINTEC Controlled Transport Services, 1985-86 ... 97 4.14 Labor Force Data, 1985 .................................... 104 4.15 Educational Level of Labor Force, 1983/84 ................. 105 4.16 Health Facilities by Type, 1973 and 1985 .................. 113  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 factors: (a) the contin'ling war against UNITA and South Africa, which makes 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 40:1 between official and paralle. market prices, inadequate control over government finances, inefficient public enterprises, and a generally distorted incentive framework for producers and consumers). The decline in oil prices since late 1985 has aggravated the situation by increasing budgetary constraints while reducing the Government's ability to import essential inputs and consumer goods (especially food for the urban population). Recognizing that dIganizational 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 recommends economic policy measures oriented towards three main Ohjactives: (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 for 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; stiftlation 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 unlikelv that all of these major transformations can be fully undertakeL. in a short period, the distortions in the Angolan economy aLc tn 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 ;-nprovement 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 ACRONYMS ANGONAVE National Shipping Company AUP Agrupamentos de Unidades de Produ,a-o (state farms) Auto-consumo Internal Consumption in Enterprises BNA National Bank c; Angola BPA Popular Bank of Angola CABOTANG Coastal Shipping Company Cafangol National Coffee Company CDA Angolan Mail Service CFB Benguela Railway Company CFL Luanda Railway Company CFM Mocamedes Railway Company CIMCAE Angolan Interministerial Commission for Coordination of Emergency Assistance CPL Provincial Commissariat of Luanda Deslocados Refugees/Displaced Population Diamang Diamond Company of Angola DINAMA National Distribution Company for Agricultural Direc,ao Nacional de Precios National Price Office DNCT National Council for Mail and Telecommunications DNIMP National Directorate for Merchant Marine and Ports DSCT Mail and Telecommunications Directorate ENATEL National Telecommunication Company ETP State Transport Company IMPORTANG Angolan Importing Agency Inputs EDA Agricultutal Development Stations EDINBA National Wholesale Food Distribution Company EDINBI National Wholesale Distribution Company for Industrial Goods ENAMA National Agricultural Mechanization Company ENANA Airport and Navigation Company ENAS National Water and Sanitation Company ENCIB Basic Infrastructure Construction Company ENCODIPA National Distribution Company for Agricultural Products ENDIAMA National Diamond Company EPAL Luanda Provincial Watei Company GARM Office for Musseque Renewal and Rehabilitation GRP Regional Planning Office INE National Statistical Institute MANAUTO Vehicle Maintenance and Workshop Organization MED Ministry of Education MIC Ministry of Internal Trade MINTEC Ministry of Transport and Teleconmunications MPLA-PT Popular Movement for the Liberation of Angola - Workers' Party Musseques Human Settlements on the Fringes of Urban Areas OGE General State Budget Roque Santeiro Major Parallel Market in Luanda RPA People's Republic of Angola SEF Program of Economic and Financial Restructuring SONANGOL State Oil Company  TAMG Angolan National Airline UEE State-owned Enterprise UNTA National Labor Union I I  COUNTRY DATA ANGOLA AREA (Thousand Se Km.) P(19) DENSITY km. 1,276.7 V8m7illon 70 per eq Rate of Growth: 2.5C (sonc 19U0) POPULATION CHARACTERISTICS (194/186) HEALTN (1986) Crude Birth Rnte (per 1,000) 47 Populotton per phynician 16,S21 Crude Death Rote (per 1,06) 22 Population ier hospital bad 034 Infant mortality (per 1000 Live births) 1" INCOME DISTRIBUTION ENERGY CONSUMPTION PER CAPITA (1966) X of national income, highest quintile (Kilograms of oil equivalent) 229 lowest quintile ACCESS TO SAFE WATER (1936) ACCESS TO SEWERAGE (1966) X of populotion - urban: 8 X of population - urban 26 - rural; 15 - rural 16 NUTRITION (1980) EDUCATION (1985) Cori-, intake *s X of requirements 87 Adult lititriyrat (X) 28 Per capita protein intak- (grams/day) Primary school enrollment 44 GDP PER CAPITA IN 1987: US 537? L Gross Domestic Product In 1986 Arnual Rate of Growth of CDP at Constant Prices (X) US$ Min a 1986-1973 1974-198! 1982-1986 CDP at Market Prices 5,197.6 100 6. * Investment 9638 17 Gross Dometic Savings 1,616.4 29 Resource Balance -611.6 -12 Exports of Goods A NFS 2,364.6 46 Imports of Goods A NFS 1,743.0 34 Government Finance General Government Kwanza Billion X of GDP 1987 1987 1982-87 Current Revenue 64.4 28.9 Current Expenditure 76 4 34.4 Current Surplus -12 ' -6.4 Capital Expenditure 11. 4.9  Money and Credit / 1963 1964 19165 19" 1987 -----=--Kz brTren, onief p rleaT --------- Money and ;usel-iMoney 146 172 2 4 229 263 Bank Credit to Central Cov-r ent 6 118 13 145 166 Other Bank Credit SI 117 124 14$ 167 166 (Perentags) Mon*y as X of GOP 8a9 *9.. 9 lOl 112.5 113.6 Annual Percentage Change In: Bank Crodit to Central Goverment 48.7 19.1 11.5 14.6 Other Bank Credit Sl -9.4 19.9 28.1 -1.8 Balance of Payments 1943 1964 1986 1986 1967 Mjjor Mrchandijo Exepots (US2 ul on) - (Average 1992-86) Exports (9 & nfo) 1C 93 2.129 2,344 1,486 2,356 USS Million X Imports (9 g nfs) 1.357 2.199 2.063 1,689 1.743 Crude Oil 1, 76 86.7 kofined Oil 78 4.e Resource Balance 36 49 232 -283 612 LPG 29 1.6 Diamonds 69 3.6 Not Factor Incom -191 -173 -194 -228 -296 Coffee 59 3.1 Total 1,911 100.0 Official Transfero (not) 23 26 29 139 62 Civilian External Dobt June 30, 1988 Current Account Balance -152 -217 1in -36U7 38 Total Outstanding & 3,901 Diebursed Public MALT Borrowing (not) 56 178 171 7 -72 Civilian Debt Sorvice Ratio for 198! Other dL 111 161 -283 42 -S61 Total Outatanding Pt 21.9 Change In Reserves Disburued - lncreas) -35 -57 -16 78 43 Cross Official Roesrveo g/ IBRO/IDA Lendins (end of Pertod) 182 248 257 179 242 Not applicable  Exchanog Ret 19:! 1984 1985 1966 1987 UStlig e Kz29.92 US21.U 9 Kz29.92 USS1.9 * KZ29.92 US81. 0 Kz29.92 US81.9S u Kz29.92 K.1 00 a USU.*0384 Kzl.W u USSU.83a4 Kt.09 * US80.OS44 Kz1.9 a USMU.684 Kzl.1 a US8U.0334 Note: All conversions to dollar* In this tablo are at the implicit average exchange rate derived from CDP estimates in kwsnzan and USS. */Boxod on the oil and non-oil quantity Indexes (bae year 19) Indicated by the official estimates. of CDP ond oil export prices and an estlate of the non-oil International dollar rate of Inflation. AIso aswumes official exchano rate was overvalued by 23X in 198 (See Vol m II Annex IV for oxplanation). b/ Thore are no comprehensive data on conoumer prices or other Indicotoro of Inflation In Angola. ELIncludes credits to State enterpriess and to tho privets sector. S7Includes direct investmnt, not short-term capit, and *rrors and motssions. / Balance of payments data. Not available June 1989  EXECUTIVE SUMMARY Country background i. Angola ls the second largest country south of the Sahara, with a population of about 9 million, and a low population density of 7.2 inhabitants per Km2. The population is growing at an average rate of around 2.5Z per year and the proportion of the urban population is increasing rapidly. The country is very rich in natural resources. The abundanc. of arable land and the diversified climatic conditions provide favorable conditions for extensive development of a wide variety of agricultural crops of tropical and temperate regions (cotton, coffee, sugar, tropical fruits, maize) as well as livestock. There are also abundant fishing and mineral resources (especially diamonds). Petroleum reserves are extensive and the production and export of oil is the mainstay of the economy. The energy and irrigation potential of the rivers is considerable. Infrastructure in the energy, transportation, and communication sectors was fairly well developed uy African standards, but its state of conservation has deteriorated substantially in recent years when it has been seriously affected by the war and deferred maintenance. ii. The development of the Angolan economy under the Portuguese colonial regime accelerated considerably in the post-war period. It was stimulated initially by a corfee boom, reflected in an increase of the production of that crop from 14,000 tons in 1940 to 210,000 tons in 1974. During the sixties and up to the end of the colonial period in 1974, the rapid development of a wide variety of agricultural, fishing, mining, and industrial activities led to an annual average growth rate of GDP of nearly 7Z in real terms. However, the most spectacular development was that of oil production, which started in the late 1950s and had reached 144,000 barrels per day in 1973. The favorable economic opportunities attracted thousands of Portuguese settlers, whose number increased from 40,000 in 1940 to 340,000 in 1974. A significant proportion of the rural population was employed in the growing plantations, mines and factories, either on a voluntary basis (at very low wages), or under a system of forced labor, which was abolished only in 1961. However, the vast majority of the Angolan population continued to live in poverty and social indicators remained extremely low. iii. The transition to Independence in Angola was painful. The struggle against the colonial regime started in 1961. The armed struggle for independence was conducted by three rival movements ( the MPLA, the UNITA and the FNLA) which in 1975 became involved in a civil war with each other, with the military support of foreign powers. The MPLA assumed control of the government in 1975 after forcing the retreat of invaders from South Africa and defeating the FNLA and UNITA with the assistance of Cuban troops and Soviet material assistance. However, UNITA has continued the war and related economic disruption since then, mainly with the support of South Africa which has invaded parts of Angola repeatedly.  - ii - The Economic Crisis Since Independence iv. Disruptions in the economy created by the armed struggles and the exodus of the Portuguese settlers during the transition to Independence in 1975-76 led to drastic reductions in productive activities. From 1973 to 1978, the decline in output reached 681 in coffee, from 801 to 98Z in several other agricultural crops, 72Z in gross manufacturing production, 85Z in diamonds, etc. Th- il industry, which plays a key role in the economy, was also severely affected. V. After these sharp economic contractions, there was some recovery of total productior in subsequent years, although with fluctuations. It is estimated however that during the first post-Independence decade (1975-85) average real growth probably did not exceed 12 per year. GDP per capita is thus certainly much lower now than at the end of the colonial period. vi. In most sectors, particularly in agriculture and manufacturing industry, output has remained far below levels reached during the colonial period. Angola, which before Independence was an important net exporter of agricultural products, has in recent years been increasingly dependent on food imports (and food aid) to supply its urban population. There are severe shortages of essential consumer goods and services both in rural areas and in the cities. The capacity utilization of manufacturing industries has been badly affected by the lack of inputs, of spare parts and of maintenance services. The oil industry, an economic enclave, has been the only important exception to the general decline of economic activity. In 1977 the output of oil had already exceeded the pre-Independence level of 144,000 barrels per day and by early 1989 it had reached about 450,000 barrels per day. vii. The serious difficulties and decline experienced in productive activities are explained largely by three factors. First, the war, in which the Government has been involved during the e. "ire post-Independence period against UNITA guerillas and against repeated South African invasions, has created insecurity in many areas of the country (probably 80Z to 90Z of the territory). The war has forced the exodus of more than 600,000 people into the cities, and has destroyed important economic and social infrastructure as well as productive units (power plants, electric transmission lines, mines, manufacturing plants, coffee plantations, bridges, railways, health and education facilities, etc.). It has disrupted internal transportation, imposed a heavy burden on the budget (with defence accounting for more than 402 of government expenditure), absorbed a large proportion of the limited supply of technicians and skilled manpower, and created enormous suffering and deprivation among the population. viii. The second factor is the massive exodus during the period of transition to independence of about 300,000 Portuguese settlers (90Z of the total) who held practically all administrative, managerial and skilled jobs. This exodus created a situation of chaos in the economy. Few Angolans had the professional qualifications to run the enterprises which were abandoned or to fill the jobs which had been left. In spite of the progress made by  - iii - Angola in education, the scarcity of trained human resources continues to be one of the major constraints on economic development. ix. The third factor is the inefficient economic management and inadequate economic policies which have prevailed, as described below. These organizational and policy shortcomings have contributed significantly to the decline in aggregate production, scarcities in the supply of consumer goods and inputs for industry, and distortions in the distribution of income. Without the contribution of expanding oil production, the economic crisis in Angola would have been far more serious. During the period 1980-87 the oil industry accounted for about 30Z of GDP and for 40Z to 65Z of government revenues. Oil exports, comprising about 93Z of total exports, provide the foreign currency resources for imports of war material, inputs for industry, food for the urban population, and other consumer goods. In view of such dependence on oil exports, the decline of international oil prices in 1985 has had a strongly negative impact on the Angolan economy. It is estimated that in 1986, GDP expressed in current US dollars may have fallen about 112. The reduced availability of imports was reflected in lower levels of industrial production and in more severe scarcities of consumer goods. x. Exports of goods and nonfactor services increased from US$1.8 billion in 1982 to US$2.3 billion in 1985. The subsequent decline to US$1.4 billion in 1986 is entirely explained by the fall in international oil prices. In 1987, however, due to the recovery of oil prices and a 272 increase in oil production, exports of goods and non-factor services went back to US$2.4 billion. Exports of diamonds and coffee, which were very important before Independence, have fallen drastically in the post-colonial era and in 1986 accounted for less than 72 of total export earnings. Import restrictions have ensured consistent trade surpluses, but these have been exceeded by deficits on the service account. Current account deficits have been financed by capital inflows, mainly medium and long term loans. The external debt reached US$3.9 billion in June 1988, corresponding to about 150Z of exports of goods and services. Beginning in 1986, capital inflows were insufficient to finance the current account deficit and Angola began to accumulate arrears in its external payments (US$378 million at the end of 1986 and US$648 million at the end of 1988). Angola has been engaged in negotiations to reschedule its official debt. Even with success in these negotiations, the balance of payments situation will continue to be extremely difficult in the years ahead, unless there is a substantial increase in international oil prices. Severe scarcities of consumer goods and of inputs for domestic industries are likely to persist in the medium term. The Administrative and Productive Structures xi. The Angolan economy consists not only of a formal sector, but also of parallel markets and a substantial subsistence sector. The subsistence sector, which covers most of the activities in rural areas, has grown in recent years, mainly because of disruptions in trade and transportation between the -ountryside and urban areas due to the war. The formal sector is organized in accordance with the official socialist  - iv - ideology, on the basis of central planning, State ownership of a large proportion of productive enterprises, and rigorous administrative control of economic activities. xii. The key authority in economic management is the official party (the MPLA-PT) which is installed at all levels of administrative and economic activity (public administration, regional and local authorities, residential areas, trade unions, etc.). The party provides basic orientation for the economic policies implemented by the Government and intervenes at different levels of the country's economic activity. The Government extensively regulates all economic activities using a complex system based on authorizations and controls which affect a large proportion of decisions concerning prices, foreign exchange allocations, financing of enterprises, investments, composition of output, sources of inputs, distribution of consumer goods, etc. Since the capacity of the public administration is affected by severe shortages of trained personnel, the bureaucratic interventions involve serious problems of inefficiency, lack of coordination, and generalized lack of discipline at all levels. xiii. The modern sector of the Angolan economy is dominated by State enterprises which resulted from the nationalizations and confiscations in the early years of the post-independence period. The only significant exception is the oil industry, in which foreign private companies play a key role. In 1984 there were almost 400 public eaterprises, accounting for three quarters of employment in modern productive activities. The public enterprises are subject to tight controls and authorizations from the government, especially from the sectoral ministry to which they report. Rates of return for public enterprises are substantially influenced by administrative decisions concerning the allocation of foreign exchange, prices, financing, wages, labor relations, etc. With such widespread administrative interference, it is impossible to evaluate the performance of the managers of public enterprises and to make them accountable for the results achieved. It is recognized that the efficiency of public enterprises has been highly unsatisfactory. Only about half report a profit. Losses of public enterprises have been partly financed by transfers from the budget. Over the period 1980-85, profit transfers from public enterprises to the Government budget, and payments from the budget to cover losses of public enterprises (including price subsidies), were roughly of the same order of magnitude. xiv. In 1984, there were 267 private enterprises and 19 mixed enterprises but their average size tended to be significantly smaller than that of public enterprises. The activities of private enterprises strictly depend on government decisions as regards import licences, allocations of foreign exchange, supplies of raw materials and other inputs, prices, operating margins, purchases by the public sector, etc. The influence of administrative decisions on the operation of private enterprises implies that the autonomy of those enterprises is very limited. They are not subject to the stimulus of market forces or the constraints of competition. It is noteworthy, however, that Angola has maintained a relatively open policy on cooperation with foreign companies. These companies, operating as enclaves, are particularly important in the oil industry. They have been  established under special regimes or on the basis of joint ventures and production sharing agreements with the national oil company. Xv. Severe shortages of goods and services at official prices have led to the rapid develupment of parallel markets in which prices are freely dete.-mined by de"nd and supply. Technically, these markets are illegal but in fact are tolerated by the Government. The parallel markets play an important role in the Angolan economy especially in the area of Luanda. They provide most consumers the only possibility of finding goods and services that are not available in the official market. They stimulate production of goods and services that would not take place at official prices. Competition in the parallel markets is fairly active. Available evidence on parallel market prices shows that differences between those prices and controlled prices in the official market are enormous and have increased continuously in recent years. While the official price of the US dollar has been maintained at 29.92 Kz without any change since 1975, parallel market prices for that currency have increased from about 600 Kz in October 1984, to 2,500-3,000 Kz at the beginning of 1989. The average ratio between prices for most common goods in the parallel markets and in the official market in Luanda seems to have risen from around 20:1 at the beginning of 1985 to about 50:1 in November 1987. Economic Policies in Angola xvi. As mentioned above, the crisis in the Angolan economy is due not only to the war and the scarcity of skilled managers and workers, but also to inadequate economic policies. The economy has been run essentially by administrative decisions. The market has not been allowed to play a significant role. Prices have been maintained at artificially low levels. The exchange rate has been grossly overvalued. The budget deficit has fuelled inflation. Distortions in relative prices have made economic calculations almost impossible. Serious problems of lack of discipline are found at different levels of public administration and enterprises. xvii. Central planning plays, in principle, a key role in the system. In view of shortages of qualified personnel, of widespread lack of discipline, and vulnerability to external shocks (especially fluctuations in international oil prices),the experience of Angola with the planning system has been far from satisfactory. Medium term plans which should provide a basis for annual plans have not been prepared and annual plans have been incomplete and unrealistic in their targets and in their assumptions concerning implementation capacity. Control of the execution of annual plans has in general been inadequate and the degree of fulfilment of planned targets has usually been very low (often less than 50Z). Because of these deficiencies, administrative or bureaucratic controls on an ad-hoc basis have certainly been more important than planning. The efficiency losses resulting from the insignificant role of market mechanisms have been very substantial. xviii. Given the significant dependence of the Angolan economy on imports, foreign exchange Policy has had a far stronger influence on levels of consumption and production than any other component of the plan. The  - vi - exchange rate has been pegged to the dollar and maintained at 29.92 Kz per US$ without any changes since 1975. Foreign exchange is allocated administratively on the basis of an annual foreign exchange budget. However, foreign oil companies and other enclave companies operate outside of the foreign exchange allocation process. xix. Price policy is based on government controls which affect practically all prices of goods and services. This policy has been a major cause of the persistent difficulties in the Angolan economy since independence. There has been an excessive rigidity and stability in the levels of controlled prices. In many cases, prices have not been changed since Independence. The price adjustments which have taken plrce were extremely modest when compared with increases in the nominal puchasing power of the population. As a consequence of the price policies, the production of many goods has been discouraged, relative prices have been severely distorted, wastage in the consumption of some goods has been stimulated, and very wide gaps have appeared between the demand and the supply of practically all goods and services in official markets. Thus, severe rationing of the most essential goods was introduced. In 1987, an average worker in Luanda was unable to spend more than 5Z to lOZ of his salary in purchases of goods and services sold at official prices. Widespread scarcities of practically all goods and services led to the rapid development of parallel markets which at present are quite important. The authorities wero forced to create special shops for senior person.iel in the public sector in which there are far more possibilities of obtaining consumer goods at official prices than in the shops which serve the rest of the population. Likewise, the foreign enclave companies created special shops of imported products for their employees. Manufacturing enterprises sell part of their production to their own employees, who in turn trade these goods in the parallel market for consumption goods which they need. The system of controlled prices and of administered distribution of goods implies that there is no competition among enterprises operating in the official market. xx. Both foreign trade and domestic trade activities are constrained by rigid and pervasive government regulations and restrictions and by the predominance of inefficient public enterprises in imports and exports, in distribution, in wholesaling and in the retail network. There are also some 60 private trading enterprises, but their role in providing competition to the public sector is very weak because of the administrative allocation of imports, fixed margins of commercialization imposed by the Government, and constraints in getting more merchandise or diversifying the range of products sold. The level of agricultural production has been particularly affected by shortcomings of the trade system. During the colonial period, bush traders, by providing consumer goods in exchange for agricultural products, played an important role in stimulating peasant farmers to produce more. The problems created by the disappearance of the bush traders have not been solved by recent attempts of the Government to place a high priority on the distribution of essential goods in rural areas. Implementation of a special program of commercialization in the countryside has been far from satisfactory.  - vii - xxi. An indication of the role of budgetary policy in the economy is that, since independence, a large and growing part of the official economy --nearly two thirds in 1986--has been financed through the Government budget. This situation is explained by the growth in government oil revenues, which in recent years have provided between 40% and 60% of total govenment income. Another factor accounting for the relative size of the budget has been the integration of the financial results and investments of public enteprises in government revenues and expenditures. The availability of oil resources was a major factor explaining the rapid rise (although with fluctuations) of public spending. Together with rising non-oil taxes, those resources have supported growing military expenditures, which doubled between 1980 and 1986 and which accounted in 1987 for about 48Z of total recurrent expenditures. They also contributed to finance large current expenditures, mostly on wages and salaries (two thirds of the total) and subsidies (72), as well as public investments (especially in public enterprises) which often have been unprofitable. xxii. In. spite of the rapid growth of revenues, the overall budget has consistently been in deficit. In 1987, total budgetary expenditure exceeded revenue by 362 and the budget deficit corresponded to about 7Z of GDP. Since the deficit has been mainly financed through borrowing from the Central Bank, it has contributed to the rapid growth of the money supply. It has therefore been the major source of inflationary pressures. xxiii. Monetary policy has been largely determined by the borrowing needs of the Government and by the flucutations in the net foreign assets of the National Bank of Angola. Because of the expansion of credit to finance government deficits, the money stock has risen very rapidly, although with large year to year fluctuations. In recent years, currency in circulation and individual deposits have grown at about 20Z a year. This growth in the money supply has aggravated scarcities of goods in official markets and has fuelled inflation in parallel markets. The apparent steady decline in the velocity of circulation since Independence essentially reflects increasing prices in parallel markets, which are not included in measures of GDP. It does not indicate rising money demand or forced savings. The Reform of Economic Policies xxiv. Recognizing t1iat existing economic difficulties are due in large part to inadequate economic policies, the Angolan authorities announced in 1987 an ambitious Program of Economic and Financial Restructuring, usually designated as SEF. In 1988, they prepared a Program of Economic Recovery (PRE) covering the years 1989-90. At the beginning of 1989, the authorities had not yet taken the key decisions which are foreseen in the SEF and the PRE in such areas as the liberalization or adjustment of controlled prices, the depreciation of the exchange rate, the more effective control of public finances, etc. The decisions already taken and the policy guidelines which were defined suggest, however, that the general thrust of the SEF reforms and of the PRE measures are well adapted to the needs of the Angolan economy. If adequately implemented, the SEF and the PRE may bring substantial improvements in the economic situation and in prospects for future growth.  - viii - xxv. A program of economic reform in Angola must be oriented toward three main objectives: the control of domestic demand, the stimulation of domestic supply, and the improvement in the allocation of resources. The control of domestic demand wil' have to rely primarily on: (i) efforts to reduce the budget deficit, which has been the main source of inflationary pressures; and (ii) effective control of the expansion of domestic credit to the productive sector in order to avoid excessive growth of the money stock. xxvi. The stimulation of domestic supply should be based mainly on agriculture, which is expected to respond quickly to adequate incentives. Policies to promote agricultural output should include: (i) more attractive producer prices; (ii) development of a network of private bush traders; (iii) greater availability of industrial goods for purchase by peasant farmers for consumption or use as inputs in agricultural production; (iv) better transportation and storage facilities for agricultural crops; and (v) improved support services and technical assistance. Other areas in which a supply response is much needed and could be rapid and significant include repair services, private truck transportation, and small-scale consumer goods industries. Efforts aimed at stimulating the production of manufacturing industries and of large scale agricultural activities should be more selective. xxvii. Improvements in the allocation of resources will require, among other measures: (i) a reduction of administrative interference in the economy and more reliance on market forces; (ii) stimulation of more competition in the productive sector; (iii) substantial changes in price policy and the exchange rate; (iv) progressive unification of official and parallel markets; (v) a review of priorities for government publtc expenditures; (vi) reform of public enterprises; and (vii) an improvement of mechanisms for the evaluation and selection of public investments. xxviii. The success of efforts aimed at economic reform will depend on progress in decentralizing economic decisions, reducing the generalized lack of discipline which at present is found at different levels of economic life, and improving the availability, allocation, and utilization of skilled personnel and foreign technical assistance. Not all of the very drastic transformations required in the reform of the economic system and of the economic policies of Angola can take place suddenly or in a short period. The full process of reform will have to be extended for several years and will have to involve a gradual approach. However, the existing economic distortions are so serious that it will be necessary to introduce, in the initial stages, radical changes in price and wage policies, the exchange rate, the system of allocation of foreign exchange, taxation, public expenditure, and incentives and regulations affecting private enterprises. A gradual approach risks failure if it is founded on weak measures. Moreover, since its results will not always be immediate, a gradual approach requires a strong political commitment from the authorities to be maintained for several years. xxix. In considering economic reform measures, it should be recognized that the development of a network of competitive enterprises is indispensable to achieve more efficiency through the reduction of  - ix - bureaucratic interference, a more important role for the market, and a greater decentralization of economic decisions. In order to attain these objectives, deep structural changes are necessary. The most important changes involve giving more autonomy to public enterprises, stimulating competition, and creating incentives to establish private enterprises. All these changes have been mentioned in the SEF guidelines. However many key issues have yet to be addressed, such as the extent to which greater autonomy for public and private enterprises is hindered by central planning, by price controls, or by the administrative allocation of foreign exchange. It is also unclear to what extent managers of public enterprises will have the professional capacity to run those enterprises without constant government support. The SEF reforms will also undoubtedly encounter political resistance to the liquidation of unprofitable public enterprises which provide jobs for large numbers of workers. In spite of the difficulties which will have to be faced, the authorities should give high priority to efforts aimed at legalizing enterprises which operate in parallel markets, easing conditions for the installation of new enterprises, and establishing a program of incentives for small and medium sized private enterprises (mainly in rural commercialization, transport, and repair services). Reducing administrative requirements which hinder competition and improving the legal environment for private enterprises (to provide better protection against unwarranted State interference) are necessary acompanying steps. xxx. The reduction of the budgetary deficit, mentioned in the SEF as one of its major objectives, will require both the mobilization of non-oil revenues and improved control over the growth of public expenditures. Changes in the tax system should includes (1) simplification of the import tariff and elimination of most existing tariff exemptions; (2) an increase of tariff duties on less essential consumption goods; (3) an increase of internal indirect taxes on petroleum products, tobacco, beer, alcoholic beverages, and other consumer goods; and (4) the introduction of a unified profit tax on all (including public) enterprises. An improvement in tax administration should also be a priority, but it is unlikely to yield the expected benefits until some of the major distortions in the economy have been removed. xxxi. Apparently, in addressing the budget deficit problem, the SEF puts more emphasis on tax reform than on the reduction of expenditures. The possibilities for reducina budgetary expenditures are constrained by the financial requirements of the war effort. However, measures aimed at controlling spending are likely to contribute more quickly to a reduction in the budgetary deficit than efforts to increase non-oil revenues. Such expenditure measures should include: (1) strengthening mechanisms of evaluation and selection of public investments and of monitoring their implementation; (2) reducing subsidies to public enterprises by allowing them more freedom in their price and labor policies and by increasing the accountability of their managers; (3) improving discipline over the admission of new staff into public administration and over the control of wages and salaries; and (4) reinforcing the mechanisms of budgetary control. In addition, a depreciation of the exchange rate and necessary increases in official prices could also contribute to a reduction in the  budget deficit. After the devaluation, the value in Kwanzas of oil revenues and of indirect taxes uould increase substantially. Government expenditures would also rise, but in principle there should be a net reduction of the budgetary disequilibrium, depending mainly on the international price of oil and the extent of wage adjustments. xxxii. The SEF envisages important adjustments in price and wage policies. Although the authorities intend to maintain a system of generalized price controls during the first stage of implementation of the SEF, it is expected that significant changes will be introduced in the levels of many controlled prices and in the control process, which will become more flexible and more decentralized. The prices of a certain number of agricultural products were already liberalized in 1988. The authorities announced the intention of increasing the average level of controlled prices by 44Z in 1989. While it must be recognized that conditions in Angola are not ripe for the introduction of full price liberalization (because of insufficient competition, and dangers of speculation and overshooting), there is a risk that the maintenance of generalized price controls will continue to create serious economic distortions. These distortions can be reduced, however, if the initial price reform measures meet three criterias (a) the average level of prices wsiich remain subject to controlz should be raised very substantially and should reflect the large gaps existing at present between supply and demand- (b) in order to stimulate production, the authoritie should liberalize specific prices already in the first stage of implementat.Lon of the SEF as they have done already for sine agricultural goods; and (c) the adjustments of controlled prices should take into account the need to correct the most glaring distortions in relative prices. xxxiii. The increase in official prices must be accompanied by adjustments in wage levels. However, the average percentage increases in wages should be substantially lower than the average increase in prices. Workers would not necessarily lose with the change because for most of them the proportion of their wages spent in the official market is very low (less than 102). For some categories of workers, including in particular the technical and managerial staff who benefit from access to special "baskets" of goods at official prices, adjustment in wages may have to be more substantial. xxxiv. Regarding exchange rate policy, the SEF envisages a devaluation of the kwanza. However, on the basis of the preliminary indications, it seems that the devaluation being considered by the authorities, although substantial when expressed in percentage terms, would be far from sufficient to modify significantly the existing system of administrative allocation of foreign exchange. Although the price of the dollar in the black market (2,500-3 000 Kz at the beginning of 1989) is not a precise indicator, it suggests that a very large devaluation is in fact required. However, even if the necessarily large initial adjustment is undertaken, a policy of successive steps will probably be necessary in order to arrive at an adequate exchange rate policy. In order to avoid an inflation-devaluation spiral, it is indispensable to combine a policy of gradual devaluation with substantial cuts in the budget deficit. In the initial stages of a gradual devaluation process, foreign exchange would certainly continue to be  - xi - rationed. In order to reduce the negative consequences of an administrative system of allocation of foreign exchange, the authorities should analyse the possibility of introducing on a temporary basis, partial solutions which might include: import surcharges, export subsidies to agricultural products, export retention schemes, auctioning of import licenses, or a system of dual exchange rates. Xxxv. The changes in monetary and credit policies embarked upon and envisaged in the SEF should bring better control of the money supply and improve the allocation of financial resources. In implementing these policies, the following points require special attention: (a) while better control over the growth rate of the money supply depends primarily on a reduction in the budget deficit, SEF reforms aimed at avoiding the full monetarization of that deficit and developing alternative instruments for financing it (such as public debt securities to be sold to households and non-financial enterprises) are also important; (b) the authorities have already published legislation creating Treasury bonds to be sold to the public; (c) SEF reforms aimed at separating the central bank and commercial bank functions of the National Bank of Angola should be continued; (d) the Central Bank should have adequate instruments (such as the power to set cash reserve requirements, rediscount quotas and credit ceilings) and political support to control the money supply; (e) interest rates on bank deposits and loans should be increased and in time they should become positive in real terms; (6) the financing of public enterprises must be shifted from the budget to the banking system, and the banks should be able to make their credit decisions exclusively on the basis of sound financial considerations; (7) priority should be given to improving the accountin3 system, the internal controls, operational capacity and training of staff cf .he National Bank of Angola; and (8) at a later stage it would be advantageous to promote competition in the area of comme-cial brinking th.ough the establishment of two or three indepandent banks. xxxvi. The authorities must pay particular attention to the social impact of the policies of economic adjustment and reform envisaged in the SEF and the PRE. The benefits expected from such policies will be reaped to a large extent by some of the poorest strata of the population, especially the peasant farmers. However, significant difficulties are likely to arise as regards the changes in the real incomes of some of the employees of the public administration and of public enterprises, the unemployment which may be created by the restructuring or liquidation of unpr