Angola's Economy: Market Forces Or Government Control?

Angola is a lower-middle-income country with a GDP of US$106 billion and a population of 35 million. Angola's economy is heavily influenced by its oil sector, which accounts for about 50% of its GDP, more than 70% of government revenue, and over 90% of exports. The country's economic growth is tied to global oil demand, which has led to volatile growth and high levels of poverty and inequality. Angola has recognized the need to diversify its economy and reduce its dependence on oil revenues, with a focus on developing its agricultural sector.

Angola's oil sector

The country's oil industry is dominated by major international companies such as Chevron, ExxonMobil, BP, and Total, with a market share of over 90% in crude oil production. The state oil company, Sonangol, holds a small share of the market. Angola's oil sector faces challenges such as high production costs, lack of investment, and the need for infrastructure development. The country has implemented reforms and incentives to attract more foreign investment and reverse the decline in oil production observed in recent years.

Angola has untapped oil and gas resources, with significant potential in offshore crude and natural gas deposits. The country plans to increase its oil refining capacity and develop new refineries to reduce its dependence on imported refined petroleum. The government is also working to diversify the economy away from oil, with a focus on sectors like agriculture and mineral exploration.

The petroleum industry in Angola has a long history, dating back to 1955 when the country first produced oil from the Benfica oil field in the Cuanza Basin. Angola's economy has been heavily influenced by the effects of the war for independence from Portugal and the subsequent civil war, which ended in 2002. The country's economic growth has been volatile due to its dependence on global oil demand, resulting in high levels of poverty and inequality.

Angola's non-oil sectors

Agriculture

Agriculture is a crucial non-oil sector in Angola, providing a livelihood for a significant portion of the population. While subsistence agriculture is prevalent, the country still imports a large proportion of its food. However, the sector is being developed with the help of international investment and initiatives such as the Angola Commercial Agriculture Development Project (PDAC) and the Angola Smallholder Agricultural Transformation Project. These projects aim to increase agricultural productivity, enhance climate resilience, and promote a shift towards a more market-oriented and competitive agriculture sector. Angola has abundant arable land and favourable climatic conditions, making agriculture a sector with high growth potential.

Fisheries

The fisheries sector in Angola has experienced growth and is an important contributor to the country's non-oil economy. Fisheries and aquaculture production play a significant role in food security and economic development. Angola has a long coastline, providing access to diverse marine resources.

Construction

The construction industry in Angola is also making significant contributions to the non-oil economy. Various housing projects, such as the Angola Investe program and the Casa Feliz initiative, are stimulating economic activity and creating much-needed infrastructure. Additionally, the government has invested in improving and expanding transportation infrastructure, including roads and railways.

Minerals and Mining

Angola is rich in mineral resources beyond its oil and gas reserves. Diamonds are a notable export, contributing a significant portion of the country's total exports. Other mineral resources include gold, iron ore, copper, and manganese. The mining sector has the potential to attract further investment and contribute to economic diversification.

Tourism

With its diverse natural attractions, ranging from pristine beaches to wildlife reserves, Angola has the potential to develop its tourism industry. The country offers unique cultural and ecological experiences that could appeal to international visitors.

Manufacturing

Angola's manufacturing sector has a history of producing various products, including textiles, footwear, beverages, and processed foods. While it has faced challenges, there is potential for growth and expansion, particularly with technological advancements and investments.

Angola's economy and global oil demand

Angola's economy is heavily reliant on its oil sector, which has left the country vulnerable to global oil demand. Oil production and supporting activities contribute about 50% of the country's GDP, more than 70% of government revenue, and over 90% of exports. As a result, Angola's economic growth is closely tied to fluctuations in global oil demand and prices.

In recent years, the Angolan government has implemented economic reforms to reduce the country's dependence on oil and promote economic diversification. These reforms include improving macroeconomic management, public sector governance, and fiscal consolidation. While the non-oil sector has shown promising growth, it still accounts for a relatively small portion of the country's economy.

The impact of global oil demand on Angola's economy can be seen through the country's economic growth rates. When global oil prices were high during the first decade of the 21st century, Angola's economy was one of the fastest-growing in the world, with an average annual GDP growth rate of 11.1% from 2001 to 2010. However, with the end of the oil boom around 2015, Angola entered a period of economic contraction.

To reduce its vulnerability to global oil demand, Angola has been working to attract foreign investment and promote economic diversification. The country has implemented reforms to improve its business environment, such as establishing a new Foreign Investment Law. Additionally, Angola has been working to develop its agricultural and renewable energy sectors, taking advantage of its abundant arable land and favourable climatic conditions.

While Angola has made progress in economic diversification, the oil sector still plays a dominant role in the country's economy. The country's ability to maintain economic growth and stability will depend on its ability to attract investment, improve infrastructure, and diversify its exports.

Angola's economic growth

Angola's economy is heavily influenced by its oil sector, which has brought volatile growth and left the country with high levels of poverty and inequality. Oil production and supporting activities contribute about 50% of its GDP, more than 70% of government revenue, and over 90% of exports. However, the country is trying to diversify its economy and reduce its dependence on oil revenues.

Despite its efforts to diversify, Angola's economy remains heavily dependent on the oil sector. Oil production fell short of expectations in 2023, leading to a downward revision of economic growth to 0.8%. Lower-than-expected oil exports and high debt service payments reduced the supply of foreign currency, triggering a 40% currency depreciation. The non-oil sector also slowed down, affecting revenues and employment.

To address these challenges, the Angolan government has implemented various measures. It has cut expenditures, increased non-oil revenues, and devalued the kwanza. Additionally, it has adopted an expansionary fiscal policy, pegged its currency, increased forex sales, and tightened liquidity to manage inflation. While these measures provided short-term relief, they failed to address the underlying macro imbalances, including high inflation, fiscal deficits, and soaring public debt.

Angola's economic diversification

Angola's economy is heavily reliant on its oil sector, which contributes about 50% of its GDP and more than 70% of government revenue. However, the country has recognised the need for economic diversification and has taken steps to reduce this dependence.

To support these diversification efforts, the World Bank has identified five key pathways. These include managing water resources effectively, ensuring a green and climate-resilient power supply, leveraging arable land for climate-smart agriculture, building green and resilient cities, and boosting human capital to foster a culture of climate preparedness.

In addition to agriculture, Angola is also focusing on other sectors such as renewable energy, fisheries, and infrastructure development. The country has attracted significant foreign investment in recent years, particularly in its oil & gas sector, which is vital for funding its diversification plans. Angola's first oil wells were drilled over a century ago, and it is now one of the top oil-producing countries in Africa. However, the country is also working to develop its dispute resolution legal landscape to provide greater comfort to foreign investors.

While Angola's economy is still heavily dependent on the oil & gas industry, the combination of regulatory and fiscal reforms, along with significant oil discoveries, provides cautious optimism for the country's economic recovery and continued diversification.

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