December 31. 1/ Angola's fiscal year is January 1 2/ U.S. assistance takes the form of PL-480 (Food for Peace), earmarked funds to the ICRC and UNHCR for refugee and civilian disaster relief and private voluntary agency administered disaster assistance. The People's Republic of Angola (PRA) potentially could be one of Africa's richest countries. Relatively sparsely ANGOLA populated, it has large hydrocarbon and mineral resources, huge hydroelectric potential, and ample arable land. Civil and foreign war from independence in 1975 until May of 1991 have wreaked havoc on the country, and prevented Angola from realizing this potential. In addition to the extreme disruptions caused by conflict, a severe lack of managerial, administrative, and technical talent has hampered economic performance. Misguided and ineffective attempts at collectivist economic planning and centralized decision-making have further precluded development. Analysis of the Angolan economy has been limited seriously by the inadequacy of data. Only the country's oil sector, second to Nigeria's in Subsaharan African oil production and jointly run by foreign multinationals and the PRA oil monopoly, SONANGOL, has remained well-managed and prosperous. In 1991, oil accounted for over half of real GDP, 90 percent of exports and 62 percent of government revenues, and kept the rest of the economy barely afloat. Urban populations, swollen by refugees and isolated from their natural former regions, have subsisted largely on foreign food aid or extensive black markets based on barter and illegal currency dealings. The bulk of the rural population lives in the bush, often in marginal security and barely existing by subsistence farming. Extensive administrative chaos and corruption have tended to vitiate reform and normal economic activity. The budget of the Government of the People's Republic of Angola (GPRA)* has been perpetually in deficit from the heavy military burden; in 1991 that deficit was 28.5 percent of GDP. The deficit's magnitude depends on the fortunes of the oil sector. Around half of the PRA's foreign exchange, 40 percent of its budget, and an inordinate proportion of the country's energy and talent have been spent on the war effort. In addition, ailing state enterprises are supported through heavy subsidies and credit facilities. The deficit has been financed by the printing press, increasing the money supply without ameliorating shortages of goods and services. Shortages, artificial price controls, and erosion of confidence in the national currency have encouraged black markets and led to widespread dependence on barter. The signing of the Angola Peace Accords in May, 1991, provided the first real hope in 16 years for economic recovery in Angola. The Accords provide for a UN-supervised ceasefire, the creation of a new, non-partisan national armed force, and free and fair internationally-monitored elections between September 1 and November 30, 1992. (The government has announced its intention to hold these elections in September.) While the ceasefire has held to date, the long-term effects of the war, destruction to infrastructure and years of general mismanagement remain to be addressed. The end of the conflict should offer opportunities for economic growth and stabilization, but there is little hope of an immediate "peace dividend." Recovery is likely to be slow *The United States does not recognize any government as the Government of Angola; see Section 5. ANGOLA even with concerted efforts at economic reforms. The GPRA has declared its intentions to reform and restructure the economy along market lines. In 1987, under the Economic and Financial Reorganization Plan (SEF), basic laws on privatization, management of state enterprises, and the role of private investment were published. The SEF was to feature new rigor in financial management, the opening of certain sectors to private enterprise (e.g., legalization of illicit parallel market activities), semi-privatization of commerce and agriculture, restructuring of the largest state-operated enterprises (SOEs), liberalization of foreign investment, and devaluation. Removal of price controls on some fruits and vegetables in effect legalized their parallel market prices. Guidelines for sale or liquidation of some SOES have been approved; over 200 enterprises in the industrial sector are reportedly to be privatized in the first phase of this effort, beginning in late 1991. An Office of Foreign Investment, Office for the Privatization of State Enterprises and Office on Sectoral Privatization was established. In March and April 1991, basic legislation to start reform of the financial sector was enacted. New laws provided for the creation of a commercial bank and a credit institution for agriculture and fisheries; a savings and mortgage institution is planned. Loans for new private enterprises are to come from commercial banks, not from the central bank, and other changes are contemplated. Reform efforts continued in November 1991, with the focus on exchange rate adjustment and the loosening of price controls. Fiscal measures and action to privatize state-owned enterprises (SOEs) remain to be announced. The GPRA claims to welcome foreign trade and investment and eagerly is seeking Western participation in development projects. Barriers to U.S. exports and capital lie not so much in deliberate government policies as in the regime's sheer ineffectiveness and incapacity. The oil sector, the only one run in a reasonably systematic and straightforward manner and fairly isolated from battle, has been the focus of U.S.-Angolan trade and U.S. investment to date. The United States buys about half of Angola's oil exports, while equipment for the sector accounts for the bulk of U.S. sales to Angola. With the end of the war, and the expectation of elections by September 1992, U.S. investors are beginning to look at additional investment possibilities in Angola. Given the country's huge potential, peace and genuine economic liberalization could provide substantial opportunities for U.S. trade with and investment in Angola. 2. Exchange Rate Policies From 1978 to September 1990, the PRA maintained the official exchange rate for the kwanza (Kz), a non-convertible currency, at 29.918/$1.00. The new kwanza (NKw) replaced the old at par in September 1990. In March 1991, the kwanza was devalued by 50 percent, from 29.92 to 59.24 NKw per U.S. dollar, the first of several devaluations intended to ANGOLA determine a true value for the kwanza. The rate on the parallel (black) market has been as much as 120 times the official rate. In much of the country, in both areas controlled by the PRA and the National Union for the Total Independence of Angola (UNITA), barter continues to be common for consumer transactions. In accordance with IMF recommendations, the kwanza was devalued a second time to 90 NKw per dollar in November 1991, and to 180 NKw per dollar in late December 1991. A multiple exchange rate scheme, designed to cut imports and stimulate nontraditional exports, was also instituted. There are two surcharges for imports, one for raw materials (180 NKw/$) and one for other imports and nontraditional exports (550 NKw/$). Oil, coffee, diamonds and other minerals will continue to be traded at the official rate. Until April 1991, all legal foreign exchange transactions were handled by the National Bank of Angola. Foreign exchange was carefully budgeted on an annual basis and allocated quarterly by quota. In April, new legislation authorized the central bank and newly formed commercial banks to conduct foreign exchange transactions. 3. Structural Policies Price controls have been pervasive, but were often rendered meaningless because products were unavailable or found only on the black market. Basic commodities are still rationed at officially fixed prices. Prices of many other goods and services were also fixed or subject to price ceilings. Minimum purchase prices are established for most agricultural and livestock products and fixed commercial margins are set at various stages of transport and trading. The system is inefficient and incoherent, causing extreme price distortions. For some time, the regime has been planning to deregulate most prices. The first concrete step was taken in 1988 when price controls on 52 fruits and vegetables were eliminated. In November 1991, the PRA announced that the basket of goods furnished under the fixed price rationing system would be trimmed from 17 to 5. Prices have skyrocketed in response to these changes and to the exchange rate changes, as the still-distorted economic system struggles to find the appropriate market-clearing rates. 4. Debt Management Policies The GPRA began substantial foreign borrowing only in the early 1980s, principally to finance large oil sector investments. Prior to the 1986 slump in international oil prices, the PRA scrupulously met its foreign debt commitments, even those contracted prior to independence. Subsequently, however, large payment arrears accumulated ($378 million by the end of 1986), and major Western export credit agencies suspended cover to the country. The GPRA announced a foreign debt of more than $7.7 billion in 1990. A substantial part of the debt is owed to the Soviet Union for military purchases ANGOLA during the 16-year civil war against UNITA. The GPRA's recent economic and financial strategy relies heavily on debt rescheduling. In 1989, the PRA joined the IMF and the World Bank. Also in 1989, official medium- and long-term debts were rescheduled by the Paris Club for the first time. The U.S.-Angola bilateral rescheduling agreement ($7.1 million) entered into force in March of 1990. 5. Significant Barriers to U.S. Exports and Investment The United States does not recognize or maintain diplomatic relations with the PRA. While it does maintain a liaison office in conjunction with the U.S. role as an observer to the Joint Political Military Commission (JPMC) overseeing implementation of the Peace Accords, it has no personnel there to evaluate economic and trade conditions. The potential for U.S. exports to Angola is constrained by certain U.S. laws or policies which prohibit the following: - extension of Export-Import Bank (EXIM) cover; - utilization by U.S. investors in Angola of tax credits or deferments. The holding of free and fair elections in late 1992, as stipulated in the Accords, could allow for changes in the above provisions. Since the sharp decline of its coffee and diamond sectors, Angola's ability to import has depended almost entirely on oil earnings. When oil export growth halted in 1981-82, stringent import curbs were imposed. After some easing in 1984-85, they were re-imposed after 1986's oil price slump. At the end of 1991, hard currency reserves reportedly were reduced to one month import coverage. All imports require a license. An annual foreign exchange budget is implemented on a quarterly basis with individual quotas allocated to ministries and state, mixed, and private companies. The quotas are strictly enforced. Company applications are assessed in terms of overall ministerial quotas. Documentary requirements can be burdensome. Equipment for the oil industry, food, agricultural inputs, and consumer goods for rural marketing campaigns receive the highest priority for civilian imports but military equipment probably had accounted for about half of total purchases through the end of the war in mid-1991. recent years, the PRA has relied on foreign food aid for a substantial proportion (at least half in 1990) of foodstuff imports. In A large part of the country's imports are handled by state trading companies. Except for foreign companies' shares of oil production, most exports are handled by state agencies. Countertrade deals (involving exchanging oil for imports of goods and services) have been signed with Brazil and Portugal. |