President João Lourenço’s mission impossible: Fixing Angola’s economy

In depth
This article is part of the dossier: João Lourenço’s Angola

By Estelle Maussion
Posted on Friday, 21 May 2021 00:20

Elected president in 2017 on the promise of delivering an economic miracle, João Lourenço has faced challenges with regard to debt, privatisation, Covid-19. Not to mention intense criticism, even from within his own political party.

This is part 5 of a 6-part series.

Angola’s President João Lourenço, at the helm of Africa’s second-largest oil producer, agreed to take on the ‘ mission impossible’ of reforming Angola’s economy. The problem is, unlike agent Ethan Hunt, the fictional character played by Hollywood actor Tom Cruise, he is unsure of his ability to succeed.

Since he took office in 2017, Lourenço – the successor of José Eduardo dos Santos and fellow member of the political party Movimento Popular de Libertação de Angola (MPLA) – has faced enormous obstacles.

While acknowledging that Lourenço is facing a very difficult situation and inherited a complicated legacy, we had hoped for better results, especially in the social sphere.”

The year 2020 marked the country’s worst recession on record (the economy shrank 5.1%, according to government figures) since independence and its fifth consecutive year of reporting a contraction in gross domestic product (GDP). Oil production also declined, debt rose and there was the emergence of the Covid-19 pandemic to contend with.

“The year 2020 brought a lot of suffering,” said President Lourenço in his end-of-year address in early January 2021. “We are seeing the light at the end of the tunnel … which gives us hope that 2021 will be a year of economic recovery,” he said, while also pledging that the government would step up its efforts.

Though ‘JLo’ has the support of the international community, chiefly the IMF, he faces a shortage of allies at home to back his policies. But with the next general elections scheduled for 2022, the race to the finish line has begun.

Tough debt negotiations

Against a difficult backdrop and with Fitch downgrading Angola’s credit rating to CCC (indicating a high risk of default) in September 2020, many Angolans feared the worst. The President was, however, able to stabilise the country’s macroeconomic situation.

The most significant relief came from a debt-repayment moratorium granted by the G20 group of countries and China, which is by far Angola’s largest creditor, with around $20bn owed. The country’s debt-to-GDP ratio peaked at 130% in late 2020. The repayment pause helped Angola avert disaster and will give it some breathing room over the next two years, as the G20 Debt Service Suspension Initiative continues through June 2021, while Beijing’s moratorium is set to expire at the end of 2022.

Finance minister Vera Daves, the first woman to ever hold the post and the linchpin of Lourenço’s economic policies, led the tough negotiations. Luanda had hoped that China would cancel its debt outright, but this was not to be.

“With our country caught in a perfect storm, our action is focused on three fronts: managing debt, revenues and expenditures,” Daves said in early March, during the ninth African Fiscal Forum hosted by the European Commission and the IMF. She also noted that the period of economic hardship had spurred greater efficiency among public officials.

This comes alongside other long-awaited positive signals on the monetary and banking fronts, as Angola’s currency, the kwanza, had been in free fall since early 2018, when the country’s exchange rate regime was liberalised. This reform, one of Lourenço’s first, involved moving from a fixed to a floating regime and caused the kwanza to lose almost 75% of its value against the US dollar. As a knock-on effect, local-currency cost of the national debt (more than 80% of which was denominated in or indexed to foreign currency) increased and inflation soared, reaching 25.1% at the end of 2020.

Glowing praise from the IMF

In recent weeks, however, the kwanza has stabilised, easing pressure on prices, while the exchange-rate differential between official and black market rates has continued to fall, plummeting from a record-setting 150% in December 2017 to 15% at the end of 2020, according to analysts at Eaglestone. “Even though it’s a painful process, it’ll improve access to foreign currency,” an oil industry source said.

Another key reform is also under way: a banking sector clean-up involving the restructuring of two troubled financial institutions (BPC, Angola’s largest state-owned bank, and BE, formerly Banco Espírito Santo Angola, a subsidiary of the Portugal-based Espírito Santo Financial Group) and the recapitalisation of other state-owned banks. José Lima Massano, the seasoned, internationally respected central banker at the helm of the Banco Nacional de Angola (BNA), is spearheading these clean-up efforts.

Nonetheless, JLo’s main backers continue to be the international community, especially the IMF. After the fund increased its financial support to Angola in September 2020, bringing the total to $4.5bn, it heaped glowing praise on President Lourenço in a January 2021 report.

Although Angola had only met two of eight structural reform targets at the end of 2020, the IMF emphasised the progress the country had made towards the six other targets, particularly commending the draft law on central bank independence, the launch of a privatisation programme, the introduction of a value-added tax and the settlement of 80% of the government’s arrears.

Oil prices on the rise

Other international institutions also stepped up their loans to Angola, with the World Bank lending the country $500m and the African Development Bank committing $200m, while Afreximbank announced it would provide close to $1bn in financing.

Another external factor that is working in the President’s favour is the rise in oil prices since the beginning of the year. The going rate for a barrel of oil is now approaching $70, well above the $39-a-barrel price on which Angola’s budget was based.

“If oil prices remain at an average of $60 a barrel this year, it will produce a revenue surplus equal to 3% of GDP,” said Tiago Bossa Dionisio, an Angola expert at Eaglestone.

This would come as welcome news, seeing as Lourenço’s policies have been met with a very different response on his home turf. In Angola, criticism is mounting from all the usual suspects – opposition parties, civil society and young people – with even the MPLA joining in, however surreptitiously.

His domestic critics point to the government’s inability to curb unemployment (which impacts more than 30% of the labour force, according to government data) and poverty. In other words, macroeconomic progress has not translated into improved living conditions and the population’s growing discontent has, in turn, fuelled a spike in strikes and demonstrations.

Shortcomings in the implementation of reforms

The private sector is also sceptical, complaining that many barriers to credit and bureaucratic red tape still remain. “While acknowledging that Lourenço is facing a very difficult situation and inherited a complicated legacy, we had hoped for better results, especially in the social sphere. The reforms undertaken will take time and have little impact on the country’s social situation in the short run,” said Daniel Ribant, an Angola specialist and former banker.

Consequently, Lourenço – who in 2017 had voiced his ambition to turn Benguela Province, the country’s second-largest business hub after Luanda and home to the south’s main city, also named Benguela, into the ‘California of Angola’ – has failed to persuade Angolans that the country is going down the right path.

Further complicating the task are the shortcomings in the implementation of reforms. Lourenço’s top campaign promise of waging an anti-corruption crusade has been full of them, becoming a way to settle political scores with the Dos Santos family and to recover illicit assets offshore. So far, the state has managed to recover $5bn in stolen assets, just a fifth of the estimated total.

There is also friction between Lourençco and the oil industry, which, while pleased with the proactiveness of Diamantino Azevedo, Angola’s mineral resources and petroleum minister, has called attention to contradictions in the new local employment law. Although the law sets out to promote the hiring of Angolan citizens, by requiring in some instances the use of 100% local subcontractors instead of those employing a majority local staff (as were used in the past), oil companies argue that it could discourage the foreign investment needed to maintain oil production levels at around 1.2m barrels a day and to improve competitiveness.

Privatisation plan

The government’s privatisation plan has also had mixed results. To be sure, it has helped trim down the state-owned oil company Sonangol. It has more than 50 companies under its umbrella, a majority of which non-oil-related, up for sale. The state also plans to raise approximately $500m through the sale of SMEs and small and medium-sized factories.

But it is clear that buyers are not lining up to acquire Sonangol’s biggest assets, such as the insurance company ENSA, the bank BCI, other bank holdings, and property. Local investors are complaining that the process favours foreign firms over domestic ones. The government has removed some 30 assets from the privatisation list, as they were deemed ‘non-viable’, including Sonangol’s airline, SonAir, which went into liquidation.

Crucially, Lourenço, while painting himself as a champion of change, has sabotaged his efforts by repeating certain historical missteps. Even if the IMF says the opposite, the President’s pledge to expand the use of tenders so as to prevent conflicts of interest and corruption has been undermined by his recent tendency to award contracts and projects through ad-hoc deals.

Lacking a modern economic vision

“When he took office, he cancelled a series of contracts that José Eduardo dos Santos had awarded via the same process, so it’s hypocritical,” an Angolan legal expert told us. The decision announced in January to ink a concession agreement with DP World, following an international tender process, for the operation of the multipurpose terminal at the Port of Luanda, does not cancel out the government’s other widely criticised moves.

For instance, an estimated $650m worth of construction projects have been awarded through a simplified procedure, i.e., non-competitively, to the Angolan company Omatapalo, while the Barra do Dande terminal project was awarded directly; even though the government had taken the deal away from a firm owned by the former president’s daughter, Isabel dos Santos, for that reason.

For many, these pitfalls reflect the bitter reality that without a modern economic vision for Angola, real reform is impossible. Indeed, despite the promise and rhetoric of change, the foundations of the economy – which blends a Marxist heritage and distortions created by the country’s oil wealth – remain unchanged.

Although President Lourenço encourages private-sector growth, the state continues to be the driving force behind Angola’s economy. While the anti-corruption drive is in full focus, the ministry of justice, which plays a key role in the effort, has a smaller budget than that of the president’s security services.

Lourenço is pushing to expand farming, fishing and tourism so as to diversify the economy and end its reliance on oil revenue. But with the country’s legislative body passing a law that permits oil exploration activities in protected areas, there are clear policy contradictions. If a change in mindset – or ‘software’, as some in Luanda say – may not happen overnight for a president who studied military science and history in Soviet-era Russia during the Cold War, what Angola has, for now, is a shaky presidency that fuels disappointment and frustration.

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