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¢.:itable enterprises and the scarcity of budgetary resources to finance social programs. Special emphasis must therefore be attached to the policy measures aimed at reducing such difficulties, including, in particular, higher than average increases in the nominal wages of some categories of workers (especially technical and management staff), the introduction of unemployment subsidies or tempora-y employment sch1emes for workers who lose their jobs (especially in public works and housing construction) and the protection of priority expenditures on health and education in the preparation of the Government budget. - xii - Sectoral Development Agriculture xxxvii. About three quarters of the population earns a living from agriculture. Given an abundance of arable land and a diversified ecological setting, Angola has potential for significant production of a broad range of tropical and semi-tropical agriculture, livestock and fishery products. Present output of most products is far below the level achieved before independence. Previously self-sufficient in food, Angola now relies on large food imports. Similarly, whereas Angola was previously the fourth largest coffee exporter, agricultural exports have now virtually dried up. The factors responsible for this transformation include the abrupt and massive exodus of the Portuguese and the resulting abandonment of most commercial farms, the impact of the war which limits access to the countryside, destroys infrastructure and disrupts rural life, and finally the agricultural policies adopted by the Government which have led to a neglect of peasant farming even though such farming dominates agricultural production. xxxviii. Many abandoned commercial farms were understandably taken over by the State. However, many state farms have not been effactive, and in some cases have contributed to a further decline of agricultural sector performance. Agricultural policy also has been highly centralized. The supply of inputs as well as the marketing and distribution of agricultural products and consumer goods, previously undertaken by numerous private traders, is the responsibility of various government departments. With unattractive producer prices and inadequate agricultural support services and investment, these agencies have failed to satisfy the nieeds of smallholders and to create the incentives and conditions necessary to encourage production for the market. Despite the lack of security and the serious manpower shortage, a significant increase in agricultural production could be achieved in the 20Z to 252 of the territory that is relatively secure, if appropriate agricultural policies and incentives are introduced. Policy adjustment, aimed at greater reliance on market forces, should include measures that establish adequate price incentives and ensure the supply of inputs and consumer goods in the countryside, institutional reform in the area of marketing and distribution, investment for rehabilitation of storage and transport, and technical assistance focussed on strengthening selective agricultural support services. The authorities have already liberalized the prices of a certain number of agricultural products. Az a consequence of the liberalization, significant increases in output were already achieved, especially in the areas around Luanda. Fisheries xxxix. Angola has rich potential fishing resources. The 1972 fish harvest reached 600,000 tons but the Portuguese exodus in 1975 depleted Angola of its fishing fleet and expertise and the catch declined to as low as 76,000 tons in 1983. However, domestic fish supplies are supplemented by foreign fishing fleets operating under license in Angolan waters. In 1987, these fleets landed 123,000 tons (42Z of their catch) in Angolan ports in - xiii - payment of fishing fees. The program of SEF and of PRE attaches a high priority to the rehabilitation and development of the fisheries sector. The authorities are preparing a Master Plan for the sector which envisages an increase of financial autonomy to state enterprises, a greater role for the private sector, more assistance in the development of artisanal fishing (particularly in the Southwest region), retention of larger shares of foreign exchange earnings by exporting enterprises and increased efforts aimed at training staff for the fishing fleet. Mining xl. While there are a variety of mineral deposits in Angola, including iron ore, phosphates, copper, gold, mica, Kaolin, rare earths, uranium, granite, marble and quartz, the only significant mining activity at present is that for diamonds. Until independence the prospecting for and development of diamond deposits was largely in the hands of Diamang, a joint venture between the Portuguese Government and various foreign shareholders. Currently these activities are the responsibility of the state owned company Endiama, which has assumed Diamang's obligations and continued its operationE However, prospecting and development of the deposits is expected to be opened to private, including foreign, interests. Diamond production reached a high of 2m. carats in the early 1970s and diamonds were Angola's principal export until 1971. Following a sharp decline in output after independence, Endiama has recently entered into a number of contract mining operations, which are expected to ensure production of around lm. carats in 1988, with steady expansion thereafter. The value of diamond production is projected to grow from US$125 million in 1988 to around US$230 million in 1992 and U$360 million in 1995. Mining operations are severely handicapped by the security situation which limits mining and prospecting activity and greatly increases operating costs. Following an increase in output in 1987, the company's net foreign exchange earnings reached US$16 million in that year and more than Us$40 million ip 1988. An estimated US$50 million worth of diamonds has been smuggled out of Angola every year, the major part from direct theft in the mines. Strong efforts have been made to tighten security in the mines. xli. The longer term future of the diamond mining industry lies with the successful development of the Kimberlite pipes, of which there are 638. In size alone they are among the largest in the world. In view of the high investment cost and long gestation period involved, development of these pipes is not expected to start until peace has been restored. The iron ore mine at Cassinga was closed after independence. A re-opening of the mine is not economically viable at current international prices and with the best of the high grade deposits depleted. The possibility of exploiting other mineral deposits, including phosphate, kaolin, granite, marble and quartz have been constrained by the impact of the war, the distorted prices and exchange rate as well as the lack of management expertise and capable artisans. - xiv - Industry. xlii. At independence Angola had, for a country of its size and level of income, a relatively large and broadly based manuf '-ring sector. By 1974, there were almost 4000 registered manufactur. 3rprises in the country employing 200,000 workers. The influx of s :s from Portugal during the few decades before independence had helped creat 't market for a range of consumer goods, and was a source of entrepreneurial, cechnical and administrative skills. The imposition of exchange controls in 1962 led many large Portuguese trading and agricultural enterprises to invest in manufacturing activities. The situation changed radically at independence when the massive departure of the settlers deprived the sector of many of its human resources as well as a major part of its market. Within a few years, industrial output had dropped to less than 30Z of its pre- independence level. The partial recovery since then has been constrained by the progressive deterioration of industrial facilities a: well as by a growing scarcity of foreign exchange to purchase inputs. The manufacturing sector as a whole has been turning in a net loss at least since 1978. In 1987, this loss was estimated to be the equivalent of 17Z of gross output, or 31Z if the mining sector was included. The distorted price structure, low rates of capacity utilization and the inability to lay off workers when they are not needed, contribute to these losses. These losses could only be sustained over such a period because they were covered by government subsidies. xliii. The vovernmentls industrial development efforts have been marked by an absence of clear objectives. The fundamental question of the economic viability of industrial activity has not been addressed. A principal long term aim of the Government should be to restructure the industrial base so that it better reflects relative scarcities of resources. This would require a major adjustment of the system of incentives as determined by policies affecting external trade, prices, interest rates and labor. As these policy reforms will take time, the Government should at an early stage undertake a review of the major public industrial enterprises with a view to phasing out those that will clearly not be viable. The remaining industries should be given greater operational autonomy. Construction xliv. Output in the construction sector has fallen throughout the 80's and has been unable to keep pace with the demand. In recent years the sector has been operating at less than half of capacity and output has been on the order of 50Z of planned targets. Expenses of the large firms of the enginnering and building subsectors exceeded revenues by more than 40X. A large proportion of the need for new housing is met by small units working in the parallel or informal market. Contracting with international construction companies has played an important role in the sector. xlv. The main problems in the major construction enterprises include poor and irregular supply of materials, both from local and imported sources; poor training and motivation of personnel and increasing absenteism; poor accounting and inventory controls, leading to waste, losses - xv- and theft of costly items; frequent breakdowns of equipment due to insufitcent maintenance and la^k of spare parts and low availability of transport services. The improvement of macro-economic management will create more favorable conditions for the development of the construction sector. The financing and recovery of the sector should include a reduction in the number of government entities by focussing on the key production centers and cutting those that are absorbirg resources without prospect for improvement; strengthening the role of mixed and private enterprises; the implementating of control and accounting systems; and the introducing measures to motivate and train personnel. Investment programs must be carefully prepared and should take into account the existing constraints regarding financial resources and the capacity of the sector. EnerRy. xlvi. By African standards, Angola is well endowed with energy resources, which include a large hydro potential, ample biomass stocks and substantial oil and gas reserves. While primary energy supply per capita (2.2 toe in 1986) is exceptionally high, final energy consumption is moderate (229 kgoe). The petroleum sector is of crucial importance to Angola's economy, and has been developed in a fairly efficient way. Large investments undertaken in the 1980s (by foreign private capital) laid the basis for a continuous increase in oil production since 1982. A non- distortionary tax regime, favorable geological conditions and relatively low production costs have attracted the foreign capital required to keep the sector prospering. Between 1980 and 1986 annual investment in oil exploration and development averaged US$390 million. Expenditure in upstream activities during the period 1987-90 is scheduled to exceed US$500 million a year. Financial and management constraints of Sonangol, the state-owned oil company, may make it difficult to maintain such a high level of investment. For the next three to four years the crude oil production rate is by and large determined by the level of p#pt and current investment in field development. Petroleum output, is expected to increase to 450,000b/d in 1989, but the reserves to production ratio has now dropped to below 10 years. Apart from the investment in oil exploration and development required to prevent reductions of the reserves-to-production ratio, there is no need for heavy investment in up or downstream operations. In particular, the Government should not attempt to integrate the oil enclave into the economy through large downstream projects such as fertilizer production or refinery modernization/expansion. xlvii. In the power sector the main task will be the rehabilitation of the existing infrastructure rather than the provision of additional capacity which will not be required until the mid 1990s. The 4 x 130 MW hydroplant at Capanda, whose cost could reach US$2 billion, will not contribute to solving the power sector's most pressing problems. The additional generating capacity will not be needed, and the project will add greatly to the country's external debt as well as to the sector's financial difficulties. Angola's vast biomass resources can under normal conditions easily meet rural and urban woodfuel demand. With a return to peace, measures will be required to improve the efficiency and competitiveness of woodfuel (charcoal) production and trade, and to ensure the adoption of - Zvi - environmentally sound practices. The key to a more rational use of energy resources are major improvements in the sector's incentive framework, combined with efforts to upgrade the organizational and managerial capability of the institutions involved in the supply and distribution of energy products. Measures should include the establishment of a domestic price structure in line with import and export parities, privatization of part of the petroleum products distribution, upward adjustment of electricity tariffs and improved collections, and the development of policy instruments to help increase the competitiveness of woodfuel markets. Transport. xlviii. The present configuration, though not the condition, of Angola's basic transport infrastructure is essentially unchanged since independence. The system is based on a modal mix--of rail, highway, air, cabotage and shipping--which has excellent potential for supporting economic development. It has three lateral railport corridors, supported by feeder roads. Additional highways provide very basic north-south provincial links and access to national borders. The air mode, which links all key provincial cities, has become the only dependable means of passenger and light freight transit over much of the country, due to the security situation. Between 1980 and 1985 the value of government controlled transport and communication services showed significant decline in the road sector, with rail and maritime services holding steady, port output rising slightly, and communications and air travel showing strong growth. Overall, the total value of services in 1985 was less than half of that achieved in 1974. xlix. The security problem has disrupted all transport modes. Services have been cut, investment programs cancelled, infrastructure destroyed, and domestic transit efficiency lowered. The sector is in urgent need of restructuring at akll modal levels. It is characterized by the following constraints: inadequate fleet sizes of vehicles, trains, ships and aircraft; short service lives of vehicles, railway engines and mechanical handling equipment; distorted tariffs; unsatisfactory service schedules; failure of urban passenger transit systems to meet rapid growth in demand; a chronic lack of all modal spare parts; weak trans-shipment facilities, especially at ports; inadequate maintenance facilities and insufficient technical staff; poor management, remuneration and control of staff; and inconsistent road vehicle licensing arrangements. 1. The sector has limited capacity to absorb investment. A sector program focussed on short term high impact projects with modest financing requirements seems appropriate, supported by policy reforms. The program prepared by MINTEC proposes to reduce the demand for air services, both for cargo and passengers, by raising service levels in other modes, notably highways and cabotage. This needs to be accompanied by a review of the tariff structure. In the road sector, the emphasis should be on maintenance and rehabilitation of vehicles and highway infrastructure, the latter through the creation of an effective road maintenance organization. Also the private sector should be allowed to play a bigger role in road transport. Cabotage has an excellent potential for providing part of the - xvii - regional transport link betwen producer and consumer. The program proposes investment in the ship fleet for both cargo and passenger cabotage. Investment requirements for the railway system are considerable, and include the need to rehabilitate the permanent way, replace damaged bridges, renew rolling stock, purchase new engines, renovate signalling and communications, improve transshipment facilities, develop an adequate technical staff, and ensure a regular supply of spare parts. The Benguela corridor requires a separate, in-depth analysis using standard evaluation criteria and taking into account demand and security considerations, as well as the ongoing rehabilitation of other corridors. In the air transport sector, the underutilized fleet needs to be rationalized, the number of personnel should be cut and management improved. An adjustment of the tariff structure is urgently needed to allow TM G to operate on a sound financial basis. Finally, all transport modes could benefit from assistance to develop and retain good management and technical staff. Education and Human Resources li. Limited data on the labor force indicate that in 1985, 44Z of the total population of about 9 million was of working age, with the participation rate being 53Z and official unemployment 3Z. The vast majority of the labor force--in some provinces more than 95Z--is functionally illiterate, despite the high priority given to education since Independence. This is due primarily to the almost complete lack of education for Angolans during the colonial period, the exodus of the Portuguese at Independence, and the inefficiencies and constraints of the present education system, which have been exacerbated by the continuing war. Enrollment in primary education almost tripled in the first years after Independence, then dropped by nearly 50Z to a gross enrollment ratio of 44Z in 1984. This decline shows the effect of the war as well as the attempt to increase access to education without a major investment in educational facilities and teacher training. Internal efficiency is low, indicating serious wastage. Secondary education, which has grown rapidly, has faced serious difficulties due to a lack of equipment, inadequate and inappropriate teaching materials, and a high proportion of part-time teachers and "cooperantes' among the staff. lii. Enrollment in higher education is now nearly twice as high as before Independence. Despite limited resources, the university offers a wide range of specializations. The quality is affected by a shortage of qualified staff and of teaching materials and equipment. The regular education cycle is complemented by opportunities for adult education, including literacy classes and vocational training. liii. The Government should focus on generally raising the quality of education, especially through an increase in the supply of qualified teachers. Expenditures on buildings, equipment and teaching materials are also needed. The government has recently increased its efforts to improve the performance of the sector by revising curricula, building new schools and increasing the wages of teachers. International technical assistance should play an important role in dealing with the difficulties faced by the sector, especially as regards the training of teachers. Finally, since - xviii - education, including board and lodging is free, some cost recovery could help reduce resource constraints. liv. Available information on child malnutrition, as well as on infant and maternal mortality point to extremely low levels of health status. Causes include the disruption and destruction due to the war, precarious water supply and sanitation facilities, malnutrition due to inadequate food supplies, and the foreign exchange shortage which limits the availability of medical supplies and equipment. The provision of health services is based on a primary health care strategy, which is directed mainly towards children in the 0-5 years age,group and pregnant mothers as well as reductions in the incidence of communicable disease. However, health services have deteriorated significantly, as indicated by increases since Independence in the ratio of inhabitants per health post, hospital and physician. Regional development and basic urban services lv. Spatial development patterns since independence have been shaped largely by the volatile security situation rather than economic forces. The continuing internal conflict since the 19609 has provoked significant movements of displaced people, currently estimated to number 1OZ of the rural population, who are seeking security and reliable supplies of food. These movements have been an important source of urban population growth. The security situation effectively precludes the application of regional economic analysis. Only the South-Southwest provinces of Huila, Namibe and Cunene have constituted what meaningfully can be described as a region in economic and institutional terms. Only here has the situation been sufficiently stable to contemplate the implementation of a regional development program to meet emergency relief needs and to promote immediate economic reconstruction. A program currently is being formulated which uill comprise specific projects and policy recommendations in the areas of pricing, institutional development, and regional planning. A positive response from the international donor community is absolutely vital to its successful implementation. lvi. The issue of institutional decentralization is a central one in regional development. In the absence of guidelines defining relationships, routine coordination between institutions operating in a regional context and the regional branches of central government ministries is effectively non-existent. The degree of autonomy at present found in the South Southwest region is an exception and is not institutionalized. A related problem is that given the highly centralized structure of public administrafion in Angola and the acute shortage of administrative personnel, there are no local institutions capable of taking over decentralized activities. While decentralization must be preceded by national administrative reforms, the weakness of local institutions presents a major obstacle to its realization. lvii. Patterns of urban development since independence have been determined mainly by the disruptive effects of the war. Though the data on urbanization trends is very limited, there is little doubt that urban - xix - population growth has been very rapid. This has overburdened the capacity of urban infrastructure and public utility systems. Lack of managerial and technical cadres, limited equipment, and the precarious financial condition of public utility companies have led to a marked declined in both service standards and service coverage. With only limited investment since independence and grossly inadequate maintenance, the basic urban services of water supply, sewage and sanitation, rnd refuse collection are now in a critical state. The housing stock has also deteriorated due to lack of maintenance and no provision has been made for sites and services or upgrading of the areas which have absorbed the bulk of the new migrants. The situation is exacerbated by the virtual absence of any urban planning. Moreover, the operational capacity of urban institutions is in most cases extremely weak, in part reflecting the loss of local financial autonomy and the decision to replace municipal utility agencies with national companies. CHAPTER 1 COUNTRY BACKGROUND A. Geographical Charcteristics Physical Setting 1.01 The People's Republic of Angola is, after Zaire, the second largest nation south of the Sahara. It has an area of 1,276,700 sq. km. (including the 7,270 sq. km of the oil-rich Cabinda enclave) and is the largest Portuguese speaking African country. Angola is located on the West Coast of Africa and is bordered to the north by the People's Republic of Congo, to the northeast by Zaire, to the east by Zambia, and to the south by Namibia. Without considering Cabinda province (a separate enclave in the northwest separated from the rest of the national territory), Angola has a roughly square shape (see Map I), measuring 1,:17 i-m from north to south and 1,236 km from west to east (from the mouth o'- the Cunene river to the Zambia border). Plateaus, averaging altitudes betwreen 3,050 and 1,350 meters, account for about two thirds of the Angolan te.ritory (see Map II). The Angolan coast, with an extension of 1,650 km, is mountainous to the north of the mouth of the Kwanza river, and quite flat with occasional cliffs to the south. The coastal plains are separated from the inland plateau by a score of irregular "terraces" that form a subplateau. The most important rivers in the country originate in the plateau regions and flow in three directionst east-west to the Atlantic, south-southeast, and northeast. Most rivers, however, do not provide easy access to the interior regions as they are not navigable. Nevertheless, they offer energy and irrigation potential. The main rivers of Angola include the Kwanza (with an extension of 960 km, 200 of which are navigable by small watercraft), and the Cunene (945 km long and bordering Namibia to the south). Though the Kasai and other rivers are better known for their importance to Zaire, the Kasai's tributaries in the Lunda region contain important diamond reserves. Climate 1.02 Angola's location in the intertropical and subtropical zones of the southern hemisphere, its proximity to the sea and the cold Benguela stream, and its topographical characteristics are the factors which create two distinct climatic regions with two seasons: the dry and cool season (from June to September) and the hot and humid season (from October to May). The northern region from Cabinda to Ambriz has a humid tropical climate with heavy rainfall, while the region from Luanda to Mo,amedes (Namibe) has a moderate tropical climate, with the rainfall reduced on the coast by the Benguela wind stream. The southern strip between the plateau and Namibia has a desert climate, given the proximity to the Kalahari, with irregular rainfall between 600 and 1000 mm. annually. Temperatures average 23 degrees C in the north and the coastal areas, and 19 degrees C in the interior, including the central plateau. Natural Resources 1.03 The country's flora is quite diversified given Angola's size, the variety of climates, and the diversity of soils. In the Cabinda region, - 2 - very dense forests predominate (Maiombe forests) with economically important timbers such as black wood, ebony, African sandalwood, and ironwood. The abundance of land and the diversified climatic conditions provide favorable conditions for the development of a wide variety of agricultural crops of tropical and temperate regions, including coffee, cotton, sugar, sisal, palm oil, tropical fruits, maize, and horticultural, as well as livestock. With a coastline of 1650 km, Angola's waters are rich in fish, mollusks, and crustaceans. The cold water species predominate in the Namibe coast and the tropical species along the Benguela coast. Angola also has large mineral resources. The most economically important are oil, diamonds, iron, manganese, copper, asphalt and marble. The main petroleum basins under exploration are located near the coast of Cabinda and Zaire provinces. The main diamond producing area is located in Lunda Norte province. Finally, as noted in para. 1.01 above, the energy and irrigation potential of Angolan rivers is considerable. Transportatior. and Communications 1.04 Angola's road network is estimated at around 72,323 km, 8,317 of which are asphalted. The main roads link Quimbele (Uige) in the north to Namibe (down to the Namibia border), and the capital city of Luanda to other major cities and to Lumbala (Moxico), near the Zambia border. Traffic on many of the most important roads has been interrupted because of the destruction of bridges, bad road conditions, and problems of security. The railway network was built with two objectives in mind: making access from the interior to the coast easier, and allowing the export of Zambia's copper and Zaire's zinc through the port of Lobito. Thus, railways cross the country only in east-west directions, without connecting with each other. The railway network, with 3,069 km, is composed of three main railway lines: Luanda-Malange, Benguela (connecting Zambia to Lobito) and Namibe-Menongue. A large proportion of the railway network is not used at present because of war-related destruction and insecurity. All internal air transportation is provided by the national airline TAAG. Given the insecurity of ground travel, air transportation has been increasing. Angola has a significant airport network, the main ones being in Benguela, Cabinda, Huambo, Lobito and Namibe. Luanda has the only international airport. As for shipping, the major ports in Angola are Lobito, Luanda, and Namibe, while Cabinda is almost exclusively used to handle the country's petroleum production. B. POPULATION 1.05 Recent population figures are difficult to obtain due to the lack of a full national census. A limited census was carried out in the province of Luanda in 1983, which was extended to the provinces of Cabinda, Namibe and Zaire in 1984. War-related problems make it impossible to carry out a national census. Appendix Table K.1 presents the available population data. It took 70 years for the population to double from 2.7 million in 1900 to 5.6 million in 1970, with the rate of growth accelerating in the 1940-1970 period, due to significant Portuguese immigration. In 1980, accordirg to official estimates, the population reacted 7.7 million, implying an average annual growth rate of 3.2Z for the previous decade. This rate is incredibly high considering the mass exodus of Portuguese settlers at Independence in the mid-1970s and the war. Though data is - 3 - scanty, the population was projected to grow at an annual rate of 2.5Z during the 1980s, reaching about 9 million in 1986. Population density (7.2 inhabitants per Km2) is quite low, with the most populous provinces being Huambo, Luanda, Bie, Malange, and Huila, which together account for 56Z of the total population (see Map III). About three-quarters of the population comes from three ethno-linguistic groups: the Makongo in the Northwest, the Ovimbundu in the Central plateau region, and the Mbundu living in a belt exterding from Luanda to the east. 1.06 The rate of growth of the urban population, estimated at 7.6Z per annum for the 1980s, compares with 0.8Z for the rural population. This may be largely attributed to the massive dislocation, rural insecurity, and rural-urban migration related to the war. As a result, the urban population increased from 1.8 million in 1980 to 2.8 million in 1986, increasing its proportion of total population during this period from 23Z to 31? (see Appendix Table K.2). The capital city of Luanda and its satellite city of Viana had a combined population of 1.2 million in 1986, representing 44X of the urban population. In the period 1940-70, the population of Luanda grew at an average annual rate of 7Z, i.e., it nearly doubled every decade. In the 1980s, the pace of Luanda's growth has declined slightly to 6.2? per annum, but remains quite high. Other important cities, such as Malanje, Huambo, Benguela, Lobito and Lubango have populations in the 100-250,000 range. 1.07 The crude birth rate of 47 per thousand for the 1980-85 period reflects a high total fertility rate (6.4) combined with a large proportion of women of fertile age. The crude mortality rate of 22 per thousand for the period 1980-85 is influenced by widespread malnutrition, precarious sanitary conditions, a large proportion of illiterate mothers, and inadequate health facilities. The main causes of death are tetanus, measles, diarrheal diseases and malaria. Infant mortality is very high, although precise estimates are very difficult to obtain, ranging from 200 per thousand according to United Nations figures to 325-375 per thousand according to a recent UNICEF study, both for children under five in 1985. For infants under oie, UNICEF estimates mortality at 200 per thousand, while U.N. figures show a decline from 193 per thousand for 1960-70 to 166 per thousand for 1980-85. For Luanda, another source reveals an increase in the infant mortality rate, from about 107 per thousand in the years before Independence to 130 per thousand in 1980. UNICEF has found rates in the 240-300 per thousand range in emergency areas directly affected by the war. Life expectancy has increased from 35 years in 1960-70 to 42 years in 1980-85 but remains quite low. The rapid growth of the population, together with a relatively low life expectancy, are clear indicators of a young population. Indeed, the proportion of the population under 15 years of age is 45Z, whereas those 65 years or older represent only 3?. As a result, the dependency ratio is extremely high. C. ECONOMIC DEVELOPMENT DURING THE COLONIAL PERIOD 1/ 1.08 In the early decades of the 20th century, there had been some davelopment of the modern sector of the Angolan economy based on railway building, diamond mining, plantation agriculture and trade. However, rapid economic growth began only after the Second World War. The initial stimulus came from the coffee boom. Coffee production rose from 14,000 tons in 1940 to around 100,000 tons in the early 1960s. In 1950, coffee was already the most important of Angolan exports, accounting for 30 percent of total X foreign currency earnings. Widening economic opportunities contributed to an increase in the population of Portuguese settlers, from 44,000 in 1940 to 172,000 in 1960. However, most Angolans continued to live in extremely difficult conditions. Subsistence peasants, having little contact with the market economy, made up the great majority of the population. However, many of them became employed in the plantations and mines, either on a voluntary basis (at very low wage levels), or under the so-called system of contract labor, which imposed forced labor on about 350,000 workers by the mid-1950s and was only abolished in 1961. 1.09 The pace of economic growth accelerated considerably in the period 1960-74, despite the anti-colonial war of independence which began in 1961. In fact, it was in response to popular unrest that the Portuguese colonial administration initiated policies in the early 1960s to promote further economic growth. Public investment in economic infrastructure increased significantly, restrictive investment laws were liberalized in 1965 to encourage foreign investment and the Portuguese authorities also encouraged the immigration of Portuguese settlers. During the period 1960-- 74, GDP rose at an annual rate of almost 7Z in real terms, representing one of the highest real growth rates in Africf. The Portuguese population continued to increase rapidly and reached 340,000 in the last year of the colonial period (representing about 5Z of the total population). The volume of annual coffee production doubled to 210,000 tons between 1960 and 1974 and, by the early 1970s, Angola ranked fourth among the world's coffee producers. Besides coffee, several other cash crops (such as sisal, sugar, tobacco, and cotton) contributed to foreign exchange earnings or supplied local industries. Angola was almost self-sufficient in basic foodstuffs and exported maize, while the rich fishing waters off the Southern coast provided the basis for an export-oriented processing industry. In the early 1970s, Angola was also the fourth largest producer of diamonds (over 2 million carats a year), and the production of iron ore, which was negligible in 1960, exceeded 6 million tons per year in 1970-73. The most spectacular development, however, was that of oil production. The first commercial disnovery of oil resources was made in 1955 and production rose rapidly in subbsequent years, particularly after 1969. In 1973, output was already on the order of 144,000 barrels per day and, following the price increases in that year, oil overtook coffee as the leading export commodity, accounting for more than 30 percent of total export revenues. 1/ Annex I provides a detailed description and analysis of the colonial economy. - 5 - 1.10 The growth of the domestic market, resu' ing from the rapidly increasing Portuguese population, opened up profitable opportunities for the development of the manufacturing sector. Consequently, manufacturing increased at an average annual rate of more than 20Z between 1964 and 1971 and, on the eve of Independence, Angola had one of the most developed manufacturing sectors in Sub-Saharan Africa. The range of manufacture',d products was quite diversified, including not only the transformation of agricultural products, and the production of beer, tobacco and cement, but also textiles, paper, glass, paints, steel rods, electric cables, cellulose, agricultural implements, etc. However, most industries depended to a large extent on imported inputs. 1.11 Overtll, although per capita income increased significantly, the growth patterns which characterized the colonial economy did not necessarily benefit the bulk of the Angolan population. In some areas the best land was taken away from the Angolans and given to Portuguese settlers, and the compulsory relocation of large numbers of African peasants into protected villages (as a counter-insurgency measure) was also very disruptive of traditional African agriculture. Educational standards were very low and Africans were denied access to education. As a result, native Angolans were not only absent in managerial, professional, and technical employment, but due to the influx of poorly educated Portuguese settlers (on a scale unparalleled in the Zritish and French colonies), almost all semi-skilled jobs and a high proportion of low skilled jobs were reserved for European immigrants. D. THE TRANSITION TO INDEPENDENCE 1.12 The armed struggle for the independence of Angola from Portuguese colonial rule began in 1961 and was conducted by three rival movements: the MPLA (Movimento Popular para a Libertarao de Angola), the FNLA (Frente Nacional de Libertacao de Angola) and UNITA (Uniao Nacional para a Independencia Total de Angola). A separatist movement appeared also in the Cabinda region (Frente para a Libertacao do Enclave de Cabinda - FLEC). In 1974, after a coup d'etat against the Portuguese regime that had maintained colonial rule, Portuguese authorities opened negotiations with the independence movements. Those negotiations culminated in the Alvor agreement of January 1975, which provided for the establishment of a transitional coalition government, with the participation of ministers from Portugal and from the three liberation movements. 1.13 However, the coalition government was short-lived. Its activities were disrupted by intense rivalries between the three liberation movements, which degenerated rapidly into open civil war. The FNLA, which received extensive support from Zaire and other sources, occupied the Bakongo provinces of the North. The MPLA, assisted by Cuban advisers and anti-Zairean gendarmes from Katanga, reinforced its position in Luanda and -n the major inland cities, while UNITA had its bases in the Ovimbundu regions of Huambo and Huila. With the evolution of the civil war, there was increased intervention of foreign powers. In the summer of 1975, the FNLA was being supported by Zairean troops. South African forces invaded Angola, occupying the Southern provinces and coming within about 200 km of Luanda. The intervention of Cuban troops in November 1975 and the supply of -6- Soviet material assistance enabled the MPLA to force the retreat of the South African invaders in the South and of the Zairean and FNLA forces in the North. The independence of Angola was officially proclaimed on November 11, 1975, with the MPLA in control of the Government. Although large-scale warfare against the forces of South Africa, Zaire, FNLA and UNITA ceased in 1976, UNITA maintained a guerrilla war in the South, with the military support of South Africa and others. This war was enlarged in subsequent years to the central and northern provinces, creating extremely severe disruptions to the economy. 1.14 Angola's war-torn transition to Independence inflicted very heavy damage to the economy. In the face of the chaos, inaecurity, and uncertainties created by the civil war, most of the Portuguese settlers who were running the economy left Angola in the second half of 1975. That departure, together with the disruptions of the economy caused by the war, led to drastic reductions in productive activities. In the immediate aftermath of the 1975-76 conflict, the economy was devastated. Economic infrastructure was destroyed. Thousands of commercial farms and enterprises were abandoned by the departing settlers, who took with them every asset that could be transported. Some sectors of the economy, such as the coffee and diamond industries, lost most of their African labor force as well, since people returned to their tribal homelands or migrated to urban areas for security. Between 1974 and 1976, every sector of the economy experienced sharp output declines (ranging up to nearly 1002). Moreover, the mass exodus of the bush traders destroyed the traditional rural marketing system, forcing the peasants to revert to subsistence agriculture, while the Government resorted to imports to feed the urban population. 1.15 Since the economic dislocations of 1975-76, the Government has aimed at restoring production to the levels achieved before Independence. However, with the notable exception of oil production (which returned to its 1973 output levels by 1977 due to its relatively insulated enclave nature and good protection after 1976) this has remained an elusive goal and in some key sectors (e.g., agriculture), there have been further declines even from the depressed levels of 1975-76. This negative economic performance (outside of the enclave oil industry) is particularly striking in view of the steady growth in oil earnings (until the sharp fall in oil prices in 1985-86), which under more normal circumstanc:s could have facilitated rehabilitation of the rest of the economy. 1.16 The legacy of the colonial period and the disruptions of the Independence process have left an indelible mark on the Angolan economy. These factors, together with the prolonged war, the rapid development of the oil sector and the policies pursued after Independence, have left the Angolan economy in a unique situation, characterized by very uneven indicators of development. For example, Angola's substantial oil production leads to a per capita GDP (approximately US$554 in 1987) that would place it among lower middle income countries. 2/ On the ot.her hand, the war has 2/ See Annex II for a more extensive discussion of Angolan social and economic conditions in comparison to those found in other Sub-Saharan African countries. - 7 - required the country to devote a disproportionate share of its limited resources to military expenditures at the expense of desperately needed investments in economic and social development. Due to the war, large segments of the population have little or no access to educational institutions or health services. Moreover, the extreme shortage of human resources resulting from colonial policies and subsequent upheavals have compounded the need for social as well as economic development measures. For these reasons, on the basis of such social indicators as life expectancy, infant mortality rates, educational levels, and health status, Angola is very disadvantaged, even compared to low income countries and other Sub-Saharan African countries. Thus, a modern enclave oil sector, the war, and Angola's historical background, together with the economic organization and poLicies followed since Independence, leave the country with unique problems, as will be described in detail in subsequent chapters. The authorities are actively engaged in contributing to the solution of those problems by changing their economic policy and introducing reforms in the economic system. The results of their efforts will be determined to a decisive extent by the steadiness of their commitment to the process of reform, by the prospects for internal peace and for the end of external agressions and by the volume and quality of the technical and financial assistance which may be received from the international cormunity in forthcoming years. - 8 - CHAPTER 2 THE ECONOMIC SYSTEM OF AhGOLA A. THE DEVELOPMENT OF THE ECONOMIC SYSTEM SINCE INDEPENDENCE 2.01 After independence, the new People's Republic of Angola declared itself a socialist country. According to the Constitution, the organs of the State are subordinated to the ruling party, which was renamed the MPLA- PT (Movimento Popular para a Libertacao de Angola - Partido do Trabalho) in 1977. The basic decisions concerning the organization of the economic system are taken by the MPLA, in its Congresses, in the Central Committee, and in the Political Bureau. The Party approves the strategies and main instruments of economic policy. The government is an executive body with responsibility for implementing the policies approved by the Party.1/ 2.02 The establishment of a socialist economic system, based on central planning, nationalization of a large proportion of productive enterprises, and rigorous State control of economic activities, was determined not only by official ideologv, but also to a large extent by the conditions prevailing after independence. Immediately after independerce, the major objective of the Party was to revive production rather than to establish a fully socialist economy. Neither collectivization of farmers nor wholesale nationalization of enterprises was attempted. The large number of productive assets, both agricultural and industrial, that ended up in government hands arrived there for the most part as a result of abandonment by their previous owners. The law on State Intervention (3/76), which formally nationalized these private enterprises and the subsequent law on Foreign Investment (10/79) allowed for a significant role for the private sector. The initial resolution on economic policy approved by the Central Committee in October 1976, the year after independence, stated that a centrally planned socialist economy ("with agriculture as its base and industry as the decisive factor") was a strategic goal rather than an immediate objective. However, central planning and administrative controls quickly became entrenched ideas in both the Party and the Government. 2.03 A National Planning Commission was established in 1976 as an organ of the Council of Ministers. That Commission was given the task of coordinating planning at all levels and directing activities in almost all sectors of the economy. From 1976 to 1978, state monopolies were established in foreign trade, banking, and insurance. The nationalization and confiscation of enterprises after independence meant that the State quickly assumed major responsibilities not only in managing the economy but also in operating a wide range of specific productive activities. I/ For more information concerning the institutional structures of economic management in Angola see Annex III. 2.04 A problem that arose in the early days of independence was the role of workers in company management. Neighborhood and workers' commissions increasingly took an active part in company management, particularly of those industries that had been abandoned by their owners and kept in operation by the workers. This led to growing conflicts within enterprises between the workers and management, which caused many strikes and disruptions of production. Thus, an important decision taken at the 1976 Central Committec was to end the system of collective management and replace it with more conventional forms of company operation. It was re- emphasized, though, that enterprise directors should be picked from party ranks and should be approved by the Political Bureau The workers' commis- sions, organized by the Union Federation, were abolished and the Union Federation itself was brought under strict party control. 2.05 The First Party Congress, in December of 1977, reviewed economic performance since independence and concluded that the pace for building a socialist economy should be accelerated by improving centralized supervision and planning of the economy, by continuing the policy of nationalizations and confiscations, by establishing tural cooperatives, and by other policies related to the productive sector. The Special Party Congress of 1980 declared that progress had been made in implemventing past guidelines and creating structures for building a socialist society, but noted continuing problems. A delay in drawing up the national plan had led, it was alleged, to a failure to achieve some important objectives. These included recreating a rural distribution system, re-establishing links between industry and agriculture, and reducing the exodus of rural populations to the towns. It was noted L.hat the country had failed to institure a rational system of production and that the total amount of wages paid far outstripped the total volume of production. The existence of a black market caused by price controls was also acknowledged. Although specific achievements in agricultural production were hailed, it was also admitted that agricultural units under state control produced only 12Z of the food needs of the population and only 15Z of the raw material requirements of Angolan industries. With respect to industrial production, significant increases were noted in the output of several products, but it was recognized that aggregate production remained far below the levels achieved before independence. 2.06 At the Second Party Congress in December of 1985, the MPLA-PT reaffirmed that Angola had chosen the socialist path of development and that the national plan should be the main instrument of economic management. However, it was recognized that the economic results achieved (although due in large part to the war and to the scarcity of skilled managers and tezh- nicians) were far from satisfactory and that important changes were needed in the economic system and in economic policy. The strategic guidelines approved by the Congress called for an improvement in the methods of socialist planning and a more efficient utilization of prices in the management of the economy. 2.07 In the framework of the policy changes approved by the Second Congress, the Central Committee of the MPLi approved in 1987 a Program of E-onomic and Financial Restructuring (Programa de Saneamento Econ6mico e Financeiro), known as SEF. That program reaffirms that the economy of - 10 - Angola will be organized along socialist lines, but it envisages the introduction of substantial changes in the system of economic management. In particular, the SEF calls for introducing a more important role for the private sector, more flexibility in the price system, less centralization in economic planning, and more autonomy for public enterprises. In addition, the SEF stresses the need for a reduction in the government budget deficit and a correction of other important financial disequilibria. 2.08 The present chapter discusses the most important features of the system of organization and management of the Angolan economy. It analyses the key roles played by central planning, the foreign exchange budget and administered prices in the management of the economy. It also presents a brief description of some of the main productive structures and units in the economy. B. THE INSTITUTIONAL ORGANIZATION OF ECONOMIC MANAGEMENT 2.09 Three princip;es guided the design of instituions in Angola: (i) the principle of *unified managementm aimed at ensuring a single direction for all the country's political, economic, and social life at the level of administrative central, sectoral, or regional units; (ii) the principle of "centralism3 aimed at ensuring that decisions made by the nation's higher organs would be binding on lower units and that each unit would develop the necessary means to execute these decisions in its own area of competence; (iii) the principle of "planning" aimed at defining national priorities, ensuring inter-sectoral and inter-regional economic coordination, and selecting the most efficient alternative uses of factors of production. 2.10 These principles created a bureaucratic-administrative structure with a sophisticated legal basis, in which nearly all decisions are regulated. The principles of unified management and centralism imply the presence of the MPLA-PT, the official party, at the various organizational levels of administrative and productive units. Indeed, party structures are installed at all levels of economic and administrative activity, including central, regional and local authorities, residential areas, enterprises, trade unions, etc. It is the generalized presence of the party which resolves conflicts. All the other authorities are subordinated to its political power. 2.11 The institutional principles of unified management, centralism, and planning have created a "culture of dependency" in the relations between lower administrative units and higher units or levels. In effect, little or nothing is decided without consulting and receiving approval from the overseeing government department, and sometimes from several departments with contradictory interests. This system has apparently led to very slow decision-making and implementation of policies and programs both at the level of public administrations and of state enterprises. 2.12 The organization, functions and responsibilities of all departments of public administration are specified by regulations, which often are very detailed. Many of such regulations also specify in great detail the interventions of the public administration in the main areas of economic policy (price controls, licensing of practically all economic - 11 - activities, planning, investments, etc.). The bureaucratic structure which has thus been created introduces great rigidity, complexity, and distortions in economic management. The design of that structure does not reflect the lack of trained personnel in public administration and is not adapted to the realities of Angolan economic life. As a consequence, there are serious problems of inefficiency and lack of coordination in the system of bureaucratic controls on which the management of the economy is based. Not surprisingly, the motivation of civil servants, even at high levels in the hierarchy, is affected by the overlaps in responsibilities, interference in routine decisions of the government by party structures, and low levels of remuneration (in spite of the *baskets* of consumer goods sold to them at official prices in order to improve the purchasing power of their salaries). 2.13 Paradoxically, excessive regulations and centralization in public administration and economic policy have resulted in a generalized lack of discipline and fragmentation. Ministries and other important departments and public enterprises tend to become self-contained organizations, which often have overlapping jurisdictions with other units. In order to circumvent bottlenecks and regulations, both government departments and civil servants do not hesitate to adopt informul solutions (esquemas), in what may be called a "parallel institutional market". The following examples illustrate the operation of that "market'. Some government offices or ministries, in the face of shortages of foodstuffs for their employees, have created farms operated and financed by themselves. This had led to fragmentation, duplication of effort and waste of resources. Some departments, which have been unable to obtain import licenses and foreign exchange through regular channels, have entered into agreements with enclave companies, which have revenues in foreign exchange but which need kwanzas for their domestic operations. In such agreements, the enclave company will for instance import a car, which is paid for in kwarizas by the government department. The foreign exchange spent on the operation thus does not pass through the central bank and regulations on import licencing and on foreign exchange allocation are circumvented. C. THE SYSTEM OF ECONOMIC PLANNING 2.14 As mentioned in the preceding section, the system of economic management in Angola is based on central planning. There are four levels of planning: national; sectoral; provincial; and at the level of productive units and some government institutions (for example hospitals, schools, scientific institutions, etc.). No national medium-term plan has ever been prepared. All plans have been annual. In principle, annual plans at the national level must include indicators and programs in the following areas: (i) growth projections of the aggregate social product and disposable national income; (ii) budgets for foreign exchange receipts and expenditures (imports, exports, invisibles, foreign debt, etc.); (iii) an aggregate financial program, including the state budget, credit policy, and foreign debt; (iv) a program of material balances, specifying the supply and planned distribution of essential goods for consumption or use as inputs in productive activity; (v) a program for internal trade; (vi) a program for investments and building activities; (vii) a program for the transportation and communications sectors; (viii) a program for employment and wages; and - 12 - (ix) a program for the production of high priority goods and services. In practice, not all of these components of annual plans have been prepared every year. 2.15 In spite of extensive efforts and improvements in recent years, the experience of Angola with the planning system is far from satisfactory. As mentioned above, medium term plans, which should provide the basis for the annual plans, have never been prepared. Annual plans have been incom- plete 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 fulfillment of the planned targets has usually been very low. In many cases, the actual results have corresponded to less than 50 percent of the targets. 2.16 The shortcomings of the planning process in Angola can be attributed to several factors. One important factor is the strong influence of fluctuations in the world oil market on the Angolan economy. Budget revenues and imports of goods for consumption, investment, or for use as inputs or spare parts in productive units are strongly influenced by the level of international oil prices. For example, the annual plan of 1986 had to be completely revised after the drastic fall in the price of oil in 1985-86. In spite of the revision, foreign exchange constraints were far more serious than had been projected and the authorities were not able to avoid drastic reductions in planned targets for industrial production and supplies of consumer goods to the population. 2.17 A second cause of difficulties in the planning process is the shortage of qualified personnel at all levels required to deal with the complex tasks of preparing the plans, as well as implementing, monitoring, and evaluating results. The statistical data required for the preparation of projections and targets for the plans are completely inadequate. Many enterprises do not have appropriate systems of accounting and have no possibility of satisfying the requirements of the planning process. Lack of discipline in the implementation of the plans is an important additional reason for disappointment with the planning process. There are no rewards for the fulfillment of the targets and no penalties for their non- fulfillment. Many important decisions concerning imports, financing, investments, and the allocation of scarce goods made at the level of ministries and enterprises, do not take into accoujt:the targets, constraints, and guidelines established in the annual 'plans. 2.18 The system of planning in Angola has failed to achieve an adequate level of economic efficiency. The system is based on quantitative targets and does not recognize adequately the role of prices in ensuring greater efficiency in the allocation of resources and in assessing the performance of productive units. As a consequence, examples of inefficiency and waste in planned activities are widespread. Productive units have not been encouraged to reduce production costs, to improve the quality of their output, or to produce the mix of goods for which there is the most demand at current prices (except when these goods are diverted to parallel markets). The absence of competition has severely limited pressures for better performance. Importing new machines and vehicles has often been easier than repairing existing ones. The activities of many enterprises have often been - 13 - interrupted by shortages of spare parts, while at the same time foreign exchange was spent on imports of goods and services which were not significantly contributing to production or the welfare of consumers. 2.19 Central planning has implied that the economy is managed by administrative or bureaucratic controls. The overloading of various parts of the institutional system, which results from extreme centralism in economic decision making, has hindered inter-sectoral coordination and, hence, planning activities. In fact, given the problems described above, bureaucratic controls have certainly been more important than planning. Bureaucratic decisions are often taken on an ad-hoc basis rather than being based on consistent objectives and clear plan guidelines and priorities. An inordinate amount of the time of managers of enterprises is occupied with efforts to negotiate with the ministries in their sectors and with other authorities. The success of an enterprise depends more on the ability of its managers to get favorable decisions from the government than on their efforts to raise operational efficiency through reductions in costs, improvements in the quality of products, expansion of the volume of output, etc. The inability of central authorities to supply foreign exchange, spare parts, raw materials or other inputs is used by many managers as an excuse to release themselves from what would otherwise be their responsibility. D. THE ALLOCATION OF FOREIGN EXCHANGE 2.20 Given the heavy dependence of the Angolan economy on imports, the allocation of foreign exchange plays a central role in the planning process. The availability of foreign exchange and the methods for its allocation have had a far stronger influence on consumption and production than any other component of the plan. Foreign exchange is allocated administratively on the basis of economic and social priorities (and, reportedly, in some cases, on the basis of pressures from special interest groups). With the exception of some companies (notably the oil and mining sectors), which retain their foreign currency earnings and operate outside of the foreign exchange allocation process, firms that earn foreign currency through exports must turn all of their earnings over to the central bank at the official exchange rate. An enterprise that requires access to foreign exchange for imports must obtain a license from the Ministry of Foreign Trade. Such approval is contingent upon the proposed use of the foreign exchange being in accord with the priorities established in the annual and quaterly foreign exchange budgets. If the license is granted, the enterprise presents the license to the National Bank of Angola (Banco Nacional de Angola (BNA)), along with a draft for the kwanza equivalent of the foreign exchange, and asks that the foreign exchange be released. In periods of severe foreign exchange shortages, such as 1981-82 and 1986-88, enterprises with import licenses have, in many cases, been refused the right to purchase the foreign exchange from BNA, the central bank. Currently, efforts are under way to improve the coordination between the Ministry of Foreign Trade and BNA so as to more closely link the granting of import licenses to the availability of foreign exchange. 2.21 The foreign exchange budget, 'Or9amento Cambial', is drawn up annually by the Ministry of Planning with the assistance of the National Bank of Angola, the Ministry of Foreign Trade and the Ministry of Energy and - 14 - Petroleum. The foreign exchange planning process has three main steps. The first step is to forecast export earnings, with most of the attention given to the petroleum sector. Forecasts are also made of capital inflows. In the second step, foreign exchange allocations are made for external debt service, costs of oil and diamond exploration, technical assistance, international transport, and embassy operations. In the planning process, these items are referred to as "fixed costs'. In the third step, planned merchandise imports are divided into four categories: direct consumption (mainly food imports), intermediate consumption (industrial and agricultural inputs), social consumption (education, health and culture), and state administration. Priorities are established among the categories and import ceilings are set. Currently, high priority sectors are defense, agriculture, and rural commercialization. Within the categories, more specific ceilings are set for particular products which are ir,puts into strategic goods. While the Ministry of Planning plays the primary role in drawing up the foreign exchange budget, its implementation is the responsibility of the central bank. In fulfilling this role, the central bank establishes allocations of foreign exchange for each quarter and receives monthly reports from the ministries regarding foreign exchange expenditures. 2.22 The annual plan does not specify an international debt ceiling nor does it set guidelines for the term structure of the debt. it does, however, specify planned debt service expenditures and planned new external credit flows. When imports are financed by external credit, the central bank plays a key role in negotiating the terms of the debt. In many cases, the central bank also guarantees the external debt of Angolan importers. In the past, BMA devoted little attention to the term structure of the external debt. The standard policy was to seek medium-term financing from commercial creditors under guarantees by export credit agencies. Recently, in response to the foreign exchange crisis of 1986-87, the central bank has established a division to collect data on the external debt and handle debt negotiations, with a view toward giving a higher priority to harmonizing the terms of the debt with debt-service capacity. E. PRICE POLICIES 2.23 Practically all prices of goods and services in the official market have been controlled by the government. The policy of controlled prices is administered by the National Planning Office (Dtrecgao Nacional de Pregos), a department of the Ministry of Planning. The Ministry of Finance and the sectoral Ministries are also often involved in price control decisions. Prices of several products (the so-called regional products) have been fixed or controlled at the regional level by the Regional Commissariats. The responsibility for monitoring and supervising controlled prices belongs to the Office for Inspection of Economic Activities (Direc&ao Nacional de Inspecsgo e Investiga9ao das Actividades Econ6micas), a department of the Ministry of the Interior. 2.24 Angolan price control policy has been divided into four regimes (following Decrees 17/84 and 18/84). The fixed price regime has been applied to the most. essential goods and services, including a certain number of food products, soap, clothing, footwear, housing rents, water and - 15 _ electricity, oil products, cement, tobacco, sisal and cotton. These prices have been fixed at the national level and are uniform for all the regions. They have been approved by the Council of Ministers on the basis of proposals of the Ministry of Planning. In principle, the distribution of products with fixed prices has been based on the annual plan and on administrative decisions which specify the amounts, origins, and uses of such products. 2.25 The controlled price regime has covered a large number of agricultural products, raw materials, and services which are considered important but which are not subject to fixed prices. Most controlled prices specify either minimum or maximum prices. Prices in this regime have been set by decisions of the Ministers of Planning, Finance, and of the sectoral ministry involved. The two remaining regimes are a fixed commercial margin regime and a declared price regime. In the former, prices are set through specification of mark-up margins. The-margins take into corcideration the costs of transportation and commercial distribution. This regime has been applied to a wide variety of products. In the declared price regime, prices of goods and services must be announced in advance to the appropriate ministry and they must be approved by that ministry. This system has been applied to all products and services not included in the other regimes. 2.26 In principle, prices of individual goods and services shculd be influenced by a transaction tax (imposto de circulacao) and by production subsidieu. Aecording to intentions originally announced by the authorities, transaction tax rates and subsidies should be highly differentiated, in order to ensure: (1) equilibrium between incomes and consumption expenditures of the population; (2) equilibrium between the demand and the supply of specific goods and services; (3) relatively higher prices for less essential goods and subRidized prices for "merit goods" considered of high social priority; and (4) adequate profitability for enterprises involved in production and distribution. However, a generalized and consistent system of transaction taxes in accordance with the basic guidelines of the projected price policy was never introduced. At the same time, the subsidies that have been granted tend to respond more to the financing needs of producing enterprises than to the objectives of a well-defined price policy. 2.27 Price policies have been a major cause of the persistent difficulties in the Angolan economy since independence. Because of generalized controls and rigidities and inefficiencies in their implementation, prices have not been allowed to play a significant role in the allocation of resources and in equating demand with supply. In 1988 the authorities initiated a reform of the price regime in the framework of the SEF, as described in Chapter 5. They announced the intention of ir.creasing most controlled prices and of liberalizing many others. They have already liberalized the prices of a certain number of foodstuffs, a particularly important decision which has already had noticeable positive effects on the agricultural output around Luanda. However, at the beginning of 1989 the controlled prices of a significant number of goods were still the same as 12 years ago. The price adjustments which had taken place until then were very moderate when compared with increases in the nominal purchasing power of the population. A rough indication uf the increase in purchasing power - 16 - of the population is provided by monetary statistics, which show that in the period 1980-85 the amount of currency held by the population increased 160 percent and the stock of M2 rose 180 percent. In that same period, the real supply of goods and services did not increase significantly, and may even have fallen, as suggested by available data on output and imports. In addition, there are no apparent economic reasons (such as increasing interest rates or declining inflationary expectations) to suggest that the velocity of circulation of money would have decreased voluntarily to a significant extent. In such conditions, if prices had not been controlled, they would certainly have risen on average by more than 20 percent per year in the period 1980-85. Table 2.1 shows, however, that this did not happen. During that period, many prices remained unchanged and most of the adjustments which took place were comparatively modest. Table 2.1: CONTROLLED RETAIL PRICES OF SELECTED GOODS AND SERVICES (kwanzas) 1980 1985 Bread (Kg) 17.00 17.00 Maize (Kg) 13.50 13.50 Rice (Kg) 21.00 35.00 Potatoes (Kg) 27.50 27.50 Beans (Kg) 40.60 45.00 Pasta (Kg) 29.00 31.00 Cassava (Kg) 9.50 15.00 Fresh fish (Kg) 28.00 30.00 Dried fish (Kg) 34.50 50.00 Beef (Kg) 90.00 90.00 Chicken (Kg) 85.00 110.00 Edible oils (L) 42.00 65.00 Margarine (Kg) 100.00 116.00 Coffee (Kg) 115.00 295.00 Salt (Kg) 3.00 3.00 Sugar (Kg) 22.00 22.00 Biscuits (Kg) 370.00 425.00 Banana (Kg) 7.00 13.50 Beer (1) 40.00 50.00 Soft drinks (1) 27.00 40.00 Tobacco (Kg) 396.00 646.00 Soap (Kg) 28.00 37.00 Matches (box) 1.50 5.00 Textile cloth (m2) 200.00 250.00 Blankets (each) 616.00 1,130.00 Towels (each) 267.00 275.00 Leather shoes (pair) 1,000.00 1,050.00 Radios (each) 644.00 950.00 TV sets (each) 25,000.00 25,000.00 Cement (5OKg) 60.00 120.00 Hoes (each) 50.00 50.00 Bicycles (each) 5,000.00 5,000.00 Kerosene (1) 4.00 4.30 Butane gas (12Kg) 161.00 180.00 Gasoline (L) 12.50 25.00 - 17 - 2.28 Relative prices have also been severely distorted. The product mix of the supplies available in the retail shops does not correspond to the structure of consumer preferences at official prices. The price distortions artificially stimulate consumption of goods with lower relative prices. Thus, for instance, there has been an artificial stimulus to the consumption of gasoline and other oil products which are in ample supply and have prices that are aegligible when compared with prices in parallel markets for goods like sugar, soap, etc. The welfare of consumers would improve if the price of gasoline were increased and if consequent reductions in gasoline consumption were used to increase exports of oil products. The resulting increase in foreign exchange earnings would permit an increase in imports of soap, sugar, etc. The production of goods with artificially low relative prices is also discouraged. For example, private producers have not been interested in selling coffee at official prices because these are too low. In addition, there is no significant possibility of selling coffee in the parallel market. Since parallel market prices for cassava are more attractive than the official prices for coffee, peasant farmers have uprooted coffee trees in order to plant cassava. This choice is rational, given the alternatives open to such farmers. However, both farmers and consumers would benefit substantially if the domestic relative price of coffee in relation to cassava (and other goods) were closer to the ratio of the international prices for those products. 2.29 The artificial stability imposed by price controls and the rapid increase in cash balances held by consumers led to large and increasing gaps between the supply and demand of practically all goods and sarvices in the official market. Thus, severe rationing of most essential goods had to be introduced. Rationed goods are often sold only once a month to each worker. The amounts of rationed goods sold to the holders of rationing cards vary from month to month, depending on the availability of supplies. Those amounts are always very small in relation to demand. In some months there is no supply at all of specific rationed goods. Goods which are not rationed are available only sporadically in retail shops, or are not available at aUl, which is more often the case. In 1987, the average worker in Luanda, without access to special shops, was unable to spend more than 5 to 10? of his salary in purchases of goods and services sold at official prices. 2.30 The widespread scarcities of practically all goods and services have produced several types of responses. For example, the authorities have created special shops for senior personnel with responsibilities in the political structure, in public administration, and in enterprise management. There are far greater possibilities of obtaining consumer goods at official prices in those special shops than in the shops which serve the rest of the population (lojas do povo). There are, however, limits to the monthly expenditure of each beneficiary in the special shops, depending on his level in the hierarchy. Moreover, the product mix available in the special shops does not usually correspond to the structure of demand. Consumers with access to these shops tend to purchase whatever goods are in sufficient supply at official prices and later trade them in the parallel market for products which they need but which are scarce in the official market. - 18 - 2.31 The foreign enclave companies (in the oil sector, in construction works, etc.) and other foreign institutions have also created special shops for their workers. In those shops, there is a comparatively diversified supply of imported consumer goods at official prices. There is also a special shop which sells exclusively imported goods against foreign exchange. No questions are asked about the origin of the foreign exchange used in these shops. A large proportion of the goods purchased in the foreign exchange shop is channelled to the parallel market (especially beer, which to a large extent plays the role of a parallel currency). 2.32 In productive enterprises, especially those in the manufacturing sector, each worker benefits from the opportunity to buy a certain quantity of the products of such enterprises at official prices. This practice, which is designated as self-consumption (auto-consumo), applies not only to consumer goods (beer, tobacco, food items, shoes, etc. but also to construction materials and other intermediate goods (cement, paints, etc.). The enterprises producing goods which cannot be sold easily in the parallel market (for instance steel rods), have replaced the 'self-consumption' of their own products by the creation of special shops of the type described above. A large proportion of the goods purchased as self-consumption are exchanged in barter transactions or sold in the parallel market, in order to purchase other types of scarce goods. 2.33 In response to goods shortages in official shops, some public enterprises have established barter agreements among themselves in order to improve and diversify the supply of consumer goods to their workers or, more rarely, to avoid production bottlenecks caused by difficulties in getting scarce inputs. Some Ministries, enterprises, and other organizations have established not only special retail shops, but also their own farms and special fleets of buses to senre their employees exclusively. They have created special repair shops for their cars and are often directly engaged in the importation of the spare parts and components which they need. Finally, the parallel markets, which are analyzed in a separate section of the present chapter, play an important role in supplying scarce goods, although at very high prices. 2.34 It should be noted that regional authorities and sectoral ministries have not always complied with legislation on controlled prices. In some provinces, the controlled prices actually in force for certain goods and services are different from the prices fixed by the Council of Ministers for the entire country. Thus for instance, in the Southern provinces, the prices in official retail shops are sometimes more than double official prices. Another example of a lack of compliance with price legislation is provided by a decision taken in 1987 by the Ministry of Transportation to increase road transportation charges for merchandise, in complete disregard of the provisions of decree 17/84. 2.35 Three final points should be made concerning official price controls. First, the agencies and ministries with responsibilities in the area of price controls are not equipped with the information and technical capabilities which they would need to play their role satisfactorily. Moreover, the coordination of the activities of the different ministries and agencies that oversee and establish price controls are far from adequate. _ 1.3 _ Secondly, agricultural prices are especially distorted. For example, prices of agricultural products are not adjusted for seasonal fluctuations in supply. In addition, in Lubango, the same price of 100 Kz per kg was in force in December 1987 for all agricultural products sold in municipal markets, despite the fact that such products have different production costs, face different levels of consumer demand, and are subject to different fixed prices in the State shops. Finally, the system of controlled prices and administered distribution of goods means that there is no competition among enterprises operating in the official market. The commercial margins fixed officially by the authorities are often very wide. Those margins, combined with the absence of competition, are a cause of inefficiency and unwarranted distortions in income distribution. F. THE TRADE SECTOR 2.36 Both foreign and domestic trade are strictly regulated by the authorities. The exclusive reliance of the foreign trade system on administered mechanisms of licensing and allocation of foreign exchange and the unsatisfactory performance of the foreign trade enterprises have been major causes of inefficiencies and disruptions in the productive sector and in the supply of consumer goods to the population. Shortcomings in the network of internal trade have also been a source of serious economic difficulties. 2.37 In 1976, the authorities established a state monopoly on foreign trade. Initially, almost all imports and exports were handled through a few state enterprises, most of which specialized in certain products. Some enterprises fully or partially owned by the private sector were also engaged in foreign trade but they accounted for minor shares of total imports and exports. In view of the inefficiency of some of the public enterprises involved in foreign trade, the Government was forced to introduce more flexibility in the organization of imports and exports. A large number of enterprises were allowed to import, and several private enterprises are aow directly engaged in import activities. However, there is still no significant competition in the foreign trade sector. 2.38 All imports and exports are subject to licenses. The import licenses are issued by the Ministry of Foreign Trade on the basis of ceilings established for different sectoral units and enterprises, in accordance with the foreign exchange budget included in the national plan and the priorities given to different categories of products. Due to insufficient coordination between the Ministry of Foreign Trade and the central bank, the enterprises having an import license have not always been automatically entitled to the allocation of corresponding amounts of foreign exchange. 2.39 The network of internal trade is based essentially on state enterprises. Most of the goods, imported or produced domestically, are supplied and transported to wholesalers through two centralized national distributors: one for foodstuffs (EDINBA) and another for industrial goods (EDINBI). Wholesale trade is concentrated basically in three enterprises: one for foodstuffs (EGROSBAL), another for industrial products (EGROSBIND), and another for other goods (EGROMISTA). A large proportion of the retail -20- outlets are integrated in four state enterprises (EREMISTA, EREBIMO, ENCODIPA and DINAPROPE). The wholesale and the retail enterprises have subsidiaries at the provincial level. There are also other categories of state shops, including shops specializing in a particular product (for instance bread or fish), or focusing on a particular consumer group (for instance, personnel of the upper echelons of the party and public administration). Municipal markets and private traders also play a significant role. According to the Na ional Register of Enterprises, in 1984 the internal trade sector included 50 private commercial enterprises, employing 3,800 workers, as compared with 48 public enterprises, employing about 20,000 workers. There are, however, many enterprises in the trade sector which are not included in that register. 2.40 Commercial enterprises operate either on the basis of fixed prices or margins fixed by government regulations. These margins, the specialization of enterprises, and the severe scarcity of practically all goods exclude any form of competition. Private traders do not compete with public enterprises or with each other because the range of their activities is regulated by the government and because they are severely constrained in their opportunities to obtain more merchandise. Complaints concerning difficulties created in the economy by inefficiencies in the commercial sector are widespread. That sector is often blamed for scarcities of goods which are not its fault. However, since there is practically no competition, it is probably true that in many cases the operating costs of commercial enterprises are excessive, that the enterprises do not respond to the requirements of their clients, and that their contribution to domestic production is far from satisfactory. 2.41 Agricultural production has been particularly affected by shortcomings in the trade system. During the colonial period, bush traders played an important role in stimulating peasant farmers to produce more, by seeking to exchange agricultural products for the industrial goods needed in rural areas. The disappearance of the bush traders after independence has been a major cause of the drastic decline in marketed agricultural production. A few years ago, the authorities tried to revive that production by introducing a special program of commerce in the rural areas. That program gave high priority to supplying the countryside with goods which are of particular interest to farmers. These goods were sold at official prices against the delivery of agricultural products, also at official prices. However, implementation of the program has been disappointing. In many cases it was not possible to achieve half of the established targets. In view of the inefficiency of state trading enterprises, private traders were called upon to participate in the program. However, their activities have been comparatively limited, not only because there are so few of them, but also because the allocation of industrial goods for exchange is decided administratively and is far from adequate. G. THE FINANCIAL SYSTEM 2.42 The financial system consists of two banks which have branches across the country. The most important bank is the Banco Nacional de Angola (BNA) which serves as the country's central bank and until very recently, as - 21 - the only commercial bank. It is also the sole legal holder of foreign exchange and all official foreign exchange transactions pass through it. The other bank, the Banco Popular de Angola (BPA) was until very recently simply a deposit taking bank whose assets were deposits in BNA. Since BPA did not make loans, it did not play a role in the determination of the money supply. As part of the ':EF reforms, BPA has been authorized to make short cerm loans to small enterprises. However, these loans, in total, are not to exceed 20 percent of its demand deposits. Thus, BNA will continue to be by far the most important bank. 2.43 Prior to the SEF, BNA was the only source of domestic credit and as discussed above, it continues to be the only source of credit for most enterprises. The vast majority of its loans are to the government and .tate enterprises. BNA credit has been provided to the government whenever government expenditures exceed receipts. This credit is for an indefinite period. BNA loans to enterprises are almost exclusively short-term: up to 180 days to finance acquisition of commercial goods and up to 30 days to finance wage payments. By law, BNA can make longer term loans to enterprises, but in practice it does not. However, in the case of some high priority enterprises, such as the Benguela railroad, exceptions have been made to this rule and credit has been provided for extended periods. Medium- and long-term investment projects have been financed by government appropriations. 2.44 Within the BNA, decision making on loans to enterprises is decentralized, but provincial branches are restricted to making smaller loans than those which are made at the headquarters in Luanda. Provincial bank credit limits can be extended with the approval of the Governor of BNA. BNA interest rates on its loans to enterprises are set administratively. The current interest rate structure, which has not changed since independence, is broadly based on colonial practices and is as follows: Up to 180 days 8.5Z 180 days to 1 year 9.52 1 year to 5 years 10.OZ 5 years to 10 years 8.0O 2.45 The Government and all enterprises are required to deposit all cash holdings (except petty cash) in BNA. However, it is reported that this requirement has not been strictly enforced for enterprises in recent years. Interest is not paid on deposits, with two exceptions to this rule: cooperatives and agricultural and fishing enterprises receive 1? interest on their deposits, and BPA receives 2 to 3.5Z interest on its deposits. All payments between enterprises and the government are made by drafts which are cleared through BNA. Enterprises can make cash withdrawals to pay salaries. 2.46 The Banco Popular takes deposits of individuals and some organizations. Demand deposits pay no interest, but time deposits pay the following interest rates: 6 months to 1 year - 4X; 1 year or more - 6X. To attract deposits, BPA also offers depositors the possibility of winning prizes in well-publicized lotteries. BPA has difficulty in attracting deposits because people are not accustomed to using banks for savings. In addition, people fear that the authorities might ask how they obtained any - 22 - large deposits. Also, checks cannot be written without visiting the bank to obtain certification of sufficient funds, and interest rates are not attractive. H. THE STATE ENTERPRISES 2.47 The modern sector of the Angolan economy is dominated by state enterprises. The only significant exception is the oil industry in which foreign private companies play a key role. The departure of the Portuguese at independence deprived numerous enterprises of most of their managers and technical and administrative staff. Inevitably, the operations of many of them virtually came to a standstill. The government stepped in and took over the abandoned firms in an effort to restore production levels and maintain employment. In October 1976, the Central Committee of the MPLA declared that the state would acquire 702 of the equity of all banks. It further legalized the nationalization of enterprises of strategic importance in the economy and of those abandoned by their former owners. The Party mad; 4t. clear that enterprises of foreign companies, including Portuguese companies, which were willing to work with the government, would not be expropriated. Subsequently, on the basis of policies formulated in October, 1976, the Government nationalized all banks on February 25, 1978, and in April 1978, established a state monopoly in insurance. By mid-1977, more than 852 of enterprises were under state control. However, all non- Portuguese foreign concerns and capital remained untouched. By the end of 1978, the government owned 512 of the oil industry, 1002 of sugar processing, textile manufacturing, bicycle and motorcycle manufacturing, paper, pulp and plywood production, the only steel plant in the couMtry, all ship repair and maintenance facilities, all motor vehicle assembly works and 852 of the brewing industry. Since the late 1970s there has been little change in the proportion of economic activity conducted by public enterprises, which is roughly estimated to be about 602 at present. 2.48 In March, 1976, the government issued a decree which assigned operational responsibility for many of the relinquished assets to worker collectives. However, the disruption in production caused i'y strikes and other conflicts between workers and management proved too hantful to the economy. In 1977, a new law, (17/77), was promulgated stipulating the authority, responsibilities, organizational form and operational characteristics of state owned enterprises (Unidades Econ6micas Estatais). The implementation of law 17/77 was slow. By 1980, when the first census of companies was undertaken, only 41 enterprises had been converted into state enterprieses out of a total of 1,900 registered companies. However, four years later the number of public enterprises had risen to 397. By that time the total number of registered companies had shrunk to 687 as a result of liquidations, mergers and consolidations (See Table 2.2). Thus, by 1984, almost 60 percent of corporate enterprises were state owned and led by government appointed managers. In addition, 18 enterprises were jointly owned by the state and private interests. In most of these, the government had a majority stake. - 23 - Table 2.2: NUMBERS OF PUBLIC AND PRIVATE ENTERPkISES-1984 Public Private Mixed Enterprises Enterprises Enterprises Total Industry 139 91 11 741 Petroleum 2 10 0 12 Energy 5 3 1 9 Fisheries 21 15 1 37 Construction 24 12 4 40 Agriculture 65 14 0 79 Transportation 64 21 1 86 Internal Commerce 48 50 1 99 External Commerce 9 18 0 27 Other Sectors 24 33 0 57 To%..al 401 267 19 687 Sourcet Minister of Industry, General Registry of Enterprises, April, 1984 2.49 In terms of the number of employees, p blic enterprises are considerably larger than those in the private sector. Altogether, they account for three quarters of employment in registered enterprises (Table 2.3). Table 2.3: SIZE DISTRIBUTION OF PUBLIC, PRIVATE MND MIXED ENTERPRISES Percentage of Total number of enterprises Number of employees Public Private Mixed 1-49 17.4? 43.6Z 5.5? 50-99 12.5Z 24.7? 16.7Z 100-249 25.3? 21.9Z 16.62 250-499 17.1Z 6.2Z 16.7? 500-999 14.8Z 3.1Z 22.2? 1000-2499 9.7Z 0.3? 11.1? 2500 and more 3.1? 11.1? Total 1OO.OZ 100.0? 1OO.OZ Source: The same as Table 2.2 Nearly 60X of public enterprises employ more than 150 persons, compared to less than 25? of private companies. The average company in the public - 24 - sector employs 480 people, almost five times as many as the average private firm. It should be noted, however, that the public sector figure may be inflated because of over-staffing. The bulk of employment in public enterprises is in manufacturing, with substantial employment also in transport, trade, and agriculture (Table 2.4). Roughly 40? of the state enterprises operate on a national scale. Table 2.4: EMPLOYMENT IN PUBLIC, PRIVATE AND MIXED ENTERPRISES-1984 (Thousands of workers) Public Private Mixed Total Enterprises Enterprises Enterprises Industry 52.2 9.7 23.1 85.0 Petroleum 3.2 3.2 - 6.4 Energy 2.5 0.2 0.6 3.3 Fisheries 6.9 1.2 0.2 8.3 Construction 12.0 2.1 2.0 16.1 Agriculture 63.6 3.3 - 66.9 Transportation 26.2 2.3 6.0 34.5 Internal Commerce 20.0 3.8 0.4 24.2 External Commerce 0.5 1.1 0 1.6 Other Sectors 5.7 0.8 0 6.4 Total 192.8 27.7 32.2 252.7 Source: The same as Table 2.2 2.50 The Government exercises control over the state enterprises through the technical (or sector) ministries as well as through the Ministries of Planning and Finance. Each state enterprises is directly responsible to a ministry or similar body. A third of all state enterprises are supervised by the Ministry of Industry. The Ministries of Agriculture and of Transport together account for another third (Table 2.5). Table 2.5: CLASSIFICATION OF PUBLIC ENTERPRISES BY RESPONSIBLE MINISTRY Ministrl/Institution Number of State Enterprises Industry 135 Agriculture 65 Transport 65 Internal Commerce 47 Construction 24 Fishing 21 External Commerce 9 MPLA 9 Others 22 Total 397 Source: The same as Table 2.2. - 25 - The ministerial assignment does not always coincide with the nature of the activity of a state enterprise. Thus, for instance, many agro-industries report to the Ministry of Agriculture although they are engaged in manufacturing. Virtually every ministry is responsible for one or more state enterprises. In addition, nine state enterprises are supervised by the Party, and one by the Secretariat of the Council of Ministers. 2.51 Under law 17/77, which until recently constituted the basis for the organization, staffing, and operation of state enterprises, enterprises must prepare annual plans and budgets, in which all inputs and outputs are detailed. These should identify capital requirements, foreign exchange needs, the size of the subsidy to cover losses or, if the enterprise is profitable, the amount of the quarterly profit transfer to the Ministry of Finance. The plans and budgets are reviewed by the supervising ministry as well as by the Ministries of Planning and Finance. Regular reports on a company's performance in terms of the approved operational plan are to be submitted to the ministry to which it belongs. The appointment of the chief executive of a state enterprise requires the approval of Party structures. The MPLA is also formally represented on the board of directors, as is the Workers' Union. A new law on state enterprises was issued in 1988, with the basic objective of providing more autonomy to those enterprises and of reducing the interferences by the Government in their management (see Chapter 5). 2.52 In practice, the control of state enterprises by the government is often less strict than is apparent from formal requirements. First, meaningful planning of the operations of state enterprises in an economy that is seriously disrupted by war and suffers from a severe shortage of administrators has not been feasible. Thus, the actual performance of enterprises may differ significantly from what has been planned. The performance reports submitted by the enterprises are often late and incomplete, and their usefulness as an instrument of control is extremely limited. A second factor that introduces a measure of flexibility into the operations of state enterprises is the personal relationships among the small group of Angolan managers, politicians, and administrators which play an important role in the allocation of scarce resources to enterprises and in bypassing the cumbersome decision-making process. Nevertheless, bureaucratic planning mechanisms and the direct interventions by ministries in the operations of state enterprises remain important obstacles to their efficient operation. The performance of these enterprises is closely dependent on administrative decisions concerning the allocation of foreign exchange, prices, financing, wages, labor relations, etc. With such widespread administrative interference, it is impossible to evalulate the managers of the public enterprises and to make them accountable for the results achieved. 2.53 The efficiency and profitability of public enterprises have been highly unsatisfactory. It is extremely difficult to assess the performance of these enterprises in view of the heavy distortions produced by the unrealistic exchange rate, controlled prices, labor regulations and also by such factors as the disruptive effect of the war and the unequal impact of protection provided by import restrictions. An analysis of the financial performance of state enterprises is also hindered by the fact that many do - 26 - not produce financial statements and balance sheets, and those that do, generally produce documents that are unreliable due to poor accounting standards. 2.54 Financial flows between the government budget and the state enterprises nevertheless provide some useful information about the operating results of these enterprises. As the Government covers the losses of state enterprises and, at least until 1986, the profits of state enterprises had to be transferred to the state, government accounts should reflect the operating results of public enterprises. Table 2.6 shows that over the period 1980-85 the two flows, the profit transfers and the payments to cover state losses (including price subsidies), were roughly equal. Subsidies exceeded profits in the years 1980, 1981, 1984 and 1985, while in the other years the balance was positive. Table 2.6: FINANCIAL FLOWS BETWEEN GOVERNMENT AND PUBLIC ENTERPRISES, 1980-87 (Kz billion) 1980 1981 1982 1983 1984 1985 1986 1937* Profit Transfers 7.86 8.98 9.20 8.49 8.04 10.28 7.49 9.49 Subsidies 8.25 9.18 8.67 8.44 9.50 14.14 6.03 4.00 losses 8.25 8.25 8.26 7.79 9.23 11.57 5.11 working capital 0.67 0.30 0.12 0.14 1.84 0.15 price subs. 0.27 0.11 0.52 0.12 0.72 0.77 Depreciation 1.72 1.73 1.83 1.65 1.86 1.89 1.88 Investment 18.12 34.17 17.67 9.48 12.47 9.33 7.69 13.00 * (budget) Source: Ministry of Finance However, table 2.6 presents too favorable a picture of the financial performance of the state enterprises for a number of reasons: (i) the profits are gross profits, i.e., no tax has been yaid on them; (ii) the losses are larger than indicated by the budgetary subsidies, as they have been partly financed by other means, such as non-payment of suppliers; (iii) profits that exist on paper may reflect claims that are unlikely to be paid and provisions for bad debt are inadequate; (iv) profits are not always genuine operating surpluses; and (v) the total ptofits figure includes a large contribution from the National Lotteries. 2.55 While it is estimated that about half the state enterprises report a profit, the conclusion from the above discussion must be that, taken together, the public enterprise sector probably generates a net loss. Thus, that sector requires resource transfers to cover its net losses as well as - 27 - to finance its capital expenditures. The latter are in part covered by depreciation, 70Z of which had to be transferred, until recently to the Government. 2.56 Access of the state enterprises to sources of finance other than the government has been extremely restricted. BNA provides only a limited amount of short term credit. Some enterprises do receive ext-rnal credit directly, via BNA, though in principle this should pass through the budget. The extent of this extra budgetary funding is not known. Table 2.6 shows the extent of budgetary financing of the investment of state enterprises-all in the form of capital grants-- as well as depreciation transfers by enterprises. 2.57 Substantial amounts are owed by the state enterprises to each other and to the government, as well as by the government to those enterprises. Though details on these debts are not available, a sectoral breakdown of the total amount owed indicates that the principal enterprises with net claims outstanding are engaged in external trade, energy and petroleum, and industry (Table 2.7). Agricultural enterprises are large debtors, as are the state enterprises engaged in internal trade, though the latter also have large claims outstanding. Table 2.7 shows also that the public enterprise sector as a whole is a net creditor to the tune of more than Kz 20 billion. Almost all of this is owed by the Government. The Ministry of Defense is the principal debtor among the ministries. Table 2.7: CLAIMS AND DEBTS OF STATE ENTERPRISE BY SECTOR, END 1986 (Kw billion' Sector Owed by UEE Owed to UEE Agriculture 8.6 1.4 External Commerce 7.5 14.2 Internal Commerce 15.1 16.8 Energy and petroleum .6 7.5 Industry 3.3 9.6 Other 6.0 12.0 Total 41.1 61.7 Source: Ministry of Finance I. PRIVATE ENTERPRISES 2.58 The private sector in the official market consists largely of enterprises which were not nationalized after independence. As shown in Table 2.2, in 1984 there were 267 private enterprises and 19 mixed enterprises, which are joint ventures between the prtvate and public sectors. Those enterprises had 60,000 employees, corresponding to about a quarter of the total labor force in the modern productive sector. More than half of the jobs provided by private and mixed enterprises are found in manufacturing industries. On the basis of the number of employees, the - 28 - private and mixed enterprises are also comparatively important in the oil sector, in construction, in transportation, and in internal trade (See Tables 2.2 and 2.3). 2.59 Private enterprises have, by and large, been operating under legislation that dates from pre-independence days. Such legislation refers to licensing and registration, to corporate income tax and, for foreign owned enterprises, to profit and capital repatriation. The activity of private enterprises is strictly dependent on government decisions with regard to import licenses, 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 means that the autonomy of those entarprises is very limited. They are not subject to the stimulus of market forces or to the constraints of competition. The allocation of foreign exchange and other decisions affecting the private sector depend on the degree of priority accorded to a particular enterprise, and on personal relations between company management and the authorities. 2.60 In spite of the constraints resulting from government interference and regulations, many private enterprises have been profitable, especially because they benefit from comfortable operating margins under the regime of controlled prices. However, several private enterprises have shown significant losses, primarily resulting from a lack of foreign exchange, raw materials, and other inputs. Some enterprises have been kept alive on the basis of expectations that better opportunities will arise in the future. 2.61 Mixed private/public companies were formed immediately after independence in industries where not all shareholders had abandoned a particular company. The abandoned part of the shareholding was taken over by the Government, while the shares of owners who remained were left intact. Often, remaining private shareholders later entered into managerial and technical assistance contracts with their own enterprises. Apparently, the remuneration for these services is accepted by both the managing partners and, tacitly, by the Government, as an indirect means to reward the private shareholders. Actual capital repatriation or dividend remittance abroad has, as far as could be ascertained, not taken place from mixed companies. 2.62 The country has maintained a relatively open policy on cooperation with foreign companies, including major multinationals. The foreign investment law, passed in 1979, permits foreign equity in Angola provided that the country's independence and interests are respected. Foreign firms are under a special obligation to train as many Angolans as possible. Foreign investments are not allowed in defense related industries, banking, insurance, telecommunications, and water supply. These restrictions do not apply to foreign technical assistance (see Chapter 5 on new foreign investment legislation). 2.63 Foreign companies, operating as enclaves, play a central role in the oil industry and, therefore, in the Angolan economy. These companies operate under special regimes or on the basis of joint ventures and produztion sharing agreements with SONANGOL, the national oil company. - 29 - Diamond mining companies and the most important hotel in the country also operate as foreign enclaves. Enclave enterprises are free from most government interference and regulation. They especially benefit from their ability to use their foreign exchange revenues to satisfy their import needs (including those of consumer goods for their workers), without being submitted to the normal import licensing process and without having to compete for allocations of foreign exchange from the central bank. Some large foreign contractors in the building industry share this benefit. J. PARALLEL HARXETS 2.64 Severe shortages of goods and services at official prices have led to the rapid development of parallel markets, in which prices are freely determined by demand and supply. Transactions in the parallel markets escape all government regulations. Technically, these markets are illegal but in fact they are tolerated by the Government. In the past, the authorities took some initiatives to repress these markets by confiscating merchandise, imprisoning traders, and destroying sales stands. However, the effect of such moves on the development of the parallel markets was transitory and not very significant. The markets have grown continuously and are now quite diversified. Host of the traders and producers in the parallel market operate on a very small scale, but some of them have evolved into fairly sophisticated enterprises, with a substantial turnover. 2.65 Parallel markets play an important role in the Angolan economy. They provide most consumers, and even many producers with the only opportunity to obtain goods and services which are not available in the official market. They reduce the gap between aggregate demand and supply, although at much higher prices than in the official markets. They contribute to the welfare of consumers by making it possible to reach a better adjustment between their patterns of consumption and their preferences. They encourage the production of goods and services which would not take place at official prices (for instance, the production of horticultural products by individual peasants around the main cities). Parallel markets are also the source of many services that are difficult to obtain through official markets, such as repairs by skilled workers, transportation in private cars within Luanda (unofficial taxis), and cargo transportation by truck between different regions of the country. 2.66 At present it is possible to find a wide variety of goods and services in the parallel markets, including agricultural products, beverages, fish, manufactured foodstuffs, textiles, clothing, shoes, household appliances, radios, TV sets, watches, construction materials, agricultural instruments, etc. The goods come from different sources: (i) from the production of foodstuffs, handicrafts, and services by individuals or families, which are not channelled to the official market; (ii) from sales of 'self consumption" goods obtained by workers in industrial enterprises; (iii) from sales of goods purchased in special shops, in shops of enclave companies or in foreign currency shops; (iv) from contraband; and (v) from sales of goods stolen from enterprises, ports, and some departments of public administration. - 30 - 2.67 Competition in parallel markets is fairly active. Prices of commonly consumed goods tend to be very similar in the different parallel markets of Luanda. There are, however, large disparities between prices in the parallel markets in different regions of the country. Such disparities, which in several cases exceed the ratio 1:5 and may even reach the ratio 1:10, are explained by regional differences in the balance between demand and supply cnd by difficulties in the transportation of goods between different regions (due mainly to the war). Thus, foodstuffs tend to be much cheaper in the agricultural region of Lubango than in Luanda, and they tend to be far more expensive in the region of Lunda, which has insufficient agricultural production and which to a large extent must be supplied by air. 2.68 While information on parallel market prices is far from satisfactory, available evidence shows that differences between parallel market prices and the controlled prices in the official market a-e enormous and have increased continuously in recent years. A rough indication of the difference bstween official and parallel market prices in Luanda is provided by the data in Table 2.8. It should, however, be stressed that parallel market prices show substantial seasonal fluctuations. Differences between the US dollar exchange rate in the parallel and in the official market provide some indication of the evolution of the gap between parallel and official market prices for many common goods. The official price of the US dollar has been maintained at 29.92 Kz without any change since 1975, but the parallel market price for that currency has increased from about 600 Kz in October 1984, to 1,200 Kz in February 1985, to 1,800 Kz in July 1986, to 2,100 Kz in November 1987, and Lo 2,500 - 3,000 at the beginning of 1989. Thus, the average ratio between prices in the parallel market and in the official market in Luanda seems to have risen from around 20:1 at the beginning of 1985 to at least 50:1 in November 1987. Interestingly, many parallel market prices have not increased very much from November 1987 to the beginning of 1989 because the authorities substantially increased imports of consumer goods, notwistanding the increase in arrears on external payments. Table 2.8: PRICES IN OFFICIAL AND PARALLEL MARKETS IN LUANDA (Kwanzas) Official price Parallel market 1985 1987 1985 Nov.87 Egg (one) 5 5 300 500 Beans (lKg) 45 45 2,000 1,000 Rice (lKg) 35 35 1,000 1,000 Potatoes (lKg) 27.5 27.5 1,000 2,000 Maize flour (Kg) 17.5 17.5 1,800 1,000 Beef (lKg) 90 90 2,500 3,500 Chicken (lKg) 110 110 2,500 4,000 Beer (1 can) 50 50 1,500 1,500 Powdered milk (lKg) 90 90 1,600 3,200 Bread (lKg) 17 17 500 1,000 Cooking oil (11) 55 55 1,000 2,000 Source: National Price Office and Mission estimates. - 31 - 2.69 The extreme discrepancies between parallel and official market prices, which go far beyond that found in most other countries with shortages and black markets, create very serious distortions in the Angolan economy: (a) they encourage the diversion of goods from the official to the parallel market, (b) they are a main cause of contraband and of the high incidence of theft in enterprises and other institutions in the productive sector, and (c) they lead to arbitrary differences in the real incomes of the population. The real significance of nominal wages is very limited as compared to access to 'self-consumption" goods. For example, because of 'self-consumption' benefits, a worker in a brewery receiving a nominal wage of 10,000 Kz a month, has in fact an income four times higher than a skilled worker or technician who earns 35,000 Rz a month but has no access to special shops or to *self-consumption". K. THE SUBSISTENCE SECTOR 2.70 The subsistence sector involves about two thirds of the Angolan population and it provides a major proportion of agricultural production. Peasants living in the subsistence sector have few contacts with the market, either to sell their products or to buy the goods and services which they need. The relative importance of the subsistence economy has probably grown substantially since independence. This is a result of the departure of bush traders, difficulties of internal transportation, and drastic reductions in the supplies of industrial goods to the countryside. Moreover, the peasant population may have increased with the return to their villages of many workers who lost their jobs on commercial farms and in other enterprises owned by Portuguese settlers. The return of the refugees who emigrated to Zaire during the period of the colonial war msy have also increased the proportion of the population living in the subsistence sector. In recent years, however, problems of insecurity in the countryside have exerted an opposite influence. Because of the war situation, many subsistence farmers were forced to leave their villages and to seek refuge in urban areas. - 32 - CEAPTER 3 MACROECONOMIC PERFORMANCE A. CAUSES OF THE ECONOMIC CRISIS SINCE INDEPENDENCE The Deterioration of the Economic Situation since Independence 3.01 As mentioned in Chapter 1, the economy of Angola was severely disrupted during the transition to independence. The level of output declined sharply in 1975 and 1976. While there was some recovery in the period 1977-81, GDP is estimated to have practically stagnated in subsequent years until 1986 when aggregate output again fell significantly. In spite of the growth of the oil industry, GDP per capita is certainly much lower now than at the end of the colonial period. 3.02 Food production has been insufficient to feed the cities. Oil exports, which account for about 95? of total exports, have been unable to simultaneously finance the war effort and meet the demand for imports of spare parts, equipment, and intermediate and consumer goods. This situation has resulted in high levels of idle capacity in the industrial sector. The transportation system linking the provinces has collapsed, leaving the cities isolated from rural areas. The trade system has to a large extent regressed to one of a barter economy. 3.03 These serious difficulties are largely explained by three factors: (a) the war in which the Government has been involved during the entire post-independence period, against UNITA guerrillas and against repeated South African invasions; (b) disruptions created by the massive exodus of Portuguese settlers during the period of cransition to indepen- dence; (c) the inadequacy of economic policies and economic management. These difficulties have been partially offset by the rapid growth of the oil sector, but the decline of international oil prices in 1980 deepened the economic crisis. The Economic Disruptions Created by the War 3.04 The guerrilla war waged by UNITA, which has persisted since independence, is creating serious disruptions in a large proportion of the territory of Angola. Moreover, South Africa, besides providing active support to UNITA, has invaded Angola several times, attacked important economic targets, and has repeatedly occupied large areas in the south of the country. 3.05 The burden imposed on the Angolan economy by the guerrilla war and the South African aggression has been very heavy: (a) The insecurity in many areas of the country has severely affected production, especially in agriculture. At the end of 1987, it - 33 - was roughly estimated that only about 202 of the territory was relatively safe from war disruptions; (b) The war has intimidated foreign technicians, many of whom have been captured, and has forced the exodus of more than 600,000 peasants (according to estimates of the International Red Cross) into the urban areas, where many depend on international relief assistance; (c) Many important infrastructure facilities and productive units have been destroyed, including bridges, hydroelectric dams and power pylons, railway tracks, mines, manufacturing plants, coffee plantations, etc: (d) A large proportion of the road and rail transportation network has been disrupted, including in particular the Benguela Railway, which served the hinterland of central Angola and provided an important access route to the sea for Zambia and southern Zaire; (e) The sunply to urban areas of domestic agricultural products from the countryside has been severely affected, forcing a heavy reliance on imported foodstuffs. At the same time, enormous obstacles have been created in the transportation of industrial products to rural areas; (f) The defence effort has absorbed very large resources and accounts at present for more than 40Z of total budgetary expenditures, and for a large proportion of the foreign debt; (g) A high percentage of the limited supply of technicians and skilled manpower has had to be diverted to the armed forces. The Consequences of the Exodus of PortuRuese Settlers 3.06 During the colonial period, public administration, social and educational services and the productive units in the modern sector of the economy were run almost exclusively by Portuguese settlers. Those settlers, whose number had increased from 173,000 in 1960 to 340,000 in 1975, held practically all skilled jobs and a large proportion of semi-skilled jobs. The level of education of the Angolan population was extremely low. In 1973, 852 of that population was illiterate. The number of students in secondary and higher education accounted for only 1.22 of the school age population (5 to 24 years) and a high proportion of these were white settlers. 3.07 In the transition to independence, during the years 1975 and early 1976, about 300,000 Portuguese settlers fled from Angola. This exodus of practically all technical and administrative personnel, teachers, traders, managers, craftsmen and skilled workers created a situation of chaos in public administration and in the economy generally. Few Angolans had the professional qualifications to run the enterprises which had been abandoned and to fill the skilled and semi-skilled jobs previously held by the Portuguese. Most services and the activity of practically all enterprises - 34 - were seriously disrupted. This situation explains to a large extent why, in many sectors, the level of economic activity is still much lower than in the years before independence. In spite of the progress made by Angola in developing human resources, there are still huge difficulties in recruiting the skilled people needed. It is estimated that at present 922 of civil servants in central and local government have less than 9 years of schooling. Foreign technical assistance has filled only a small proportion of the need for skilled workers. Inadequate Economic Policies 3.08 The decline in production, scarcities in the supply of consumer goods and of inputs for industry, and distortions in the distribution of income can be attributed to a significant extent to inefficiencies in economic management and to inadequate economic policies. As explained in Chapter 2, the economy has been run essentially by administrative decisions. The market has not been allowed to play a significant role, and prices have been maintained at artificially low levels. The overvalued exchange rate has implied that all foreign exchange must be rationed and that exports of non-oil products have been severely discouraged. Public and private enterprises have had little autonomy and have depended on govern- ment decisions with regard to supplies of essential inputs, prices, and operating margins. The efficiency of public enterprises has been affected by labor indiscipline, overstaffing, lack of responsibility of some managers, and absence of adequate performance incentives. Distortions in relative prices have made economic calculations almost impossible. Low official prices for agricultural goods and the scarcity of supplies of consumer and industrial goods at official prices in the countryside have eliminated almost entirely the willingness of peasant farmers to supply foodstuffs through official markets. The large gap between demand and supply at official prices has led to the rapid development of parallel markets. The Contribution of the Oil Industry 3.09 Without the contribution of expanding oil production, the economic crisis in Angola would have been far more serious. In 1985 the oil industry contributed about 30X of official GDP, almost 53? of government revenues, and 95Z of total export earnings. However, since the petroleum sector is an enclave sector, it is isolated from other sectors of the economy, and its impact on GDP growth is limited by the way in which oil revenues are spent by the Government. 3.10 Given the financial drain imposed by the war (military expenses, etc.) and taking into account the momentum of large-scale spending programs launched in the late 1970s, the Government had no choice but to capture the oil windfalls rather than to give them away (e.g., by reducing taxes). However, the net benefits of the Government expenditure of oil revenues proved disappointingly low, even though the opportunity cost of taxing windfalls was marginal. Most oil earnings were spent for current consumpti- on (including military expenses) or sunk into unprofitable investments. As a consequence, the effect of oil income on medium-term GDP growth was limited. - 35 - 3.11 On the other hand, oil revenues had a strong short-term impact on the government's fiscal stance and on the balance of payments. In fact, the rise or fall in total government revenues was closely related to changes in tax receipts from the petroleum sector. Since some government expenditures proved inelastic with respect to the fluctuations in oil income, large budget deficits were incurred between 1979 and 1986 (totalling Kz 33 billion) which in turn put a heavy pressure on the country's external current account. In addition, oil revenues have supported the Government policy of real exchange rate appreciation, leading to a squeeze on tradables in favor of non-tradables and, in particular, reinforcing the market isolation of the agricultural sector. This, in turn, has increased the country's dependence on oil for foreign exchange. In this context, it should be noted that the "Dutch disease' effect of the oil windfalls might have been even more pronounced if military spending had not absorbed a considerable share of the export revenues from oil. 3.12 The fact that petroleum windfalls have encouraged the government to maintain public expenditure and domestic absorption at unsustainable levels has contributed to the inflationary pressures exerted by the country's steadily growing money stock. Since the credit overhang caused by a general lack of fiscal and monetary discipline has increasingly fuelled parallel market activities, the oil revenuas' 'secondary" spending effect let demand spill over into the parallel matket and, thus, deepened the sectoral disintegration of the economy. 3.13 In sum, it can be concluded that out of Angola's oil income little was returned to taxpayers or saved for the future. Because of the lack of experience in economic management, the lion's share of the oil windfall was channelled into unprofitable ventures or spent for current consumption (i.e., expenditures for defence and consumption imports). Though the latter expenditure categories may have alleviated the oil revenue's direct impact on the real exchange rate and the relationship between tradables and non-tradables, it was the financial leeway provided by the oil income and the (incorrect) prospect of ever rising oil revenues which made the Government feel quite free from borrowing constraints. 3.14 The large margins of manoeuvre in the expenditure policies of the Government provided by the petroleum boom were severely affected by the declines in oil prices in 1985t86. In the face of such declines, the crisis in the Angolan economy was ceepened to a considerable extent. Iii spite of a 25Z increase in the volume o' crude oil exports from 1985 to "986, the value of those exports fell from US$1.90 billion to US$1.15 billion As a consequence, foreign debt rose substantially and some arrears emerged in external payments. At the same time, the value of imports in dollars had to be cut by about 25?, adversely affecting industrial activity, investment, and supplies of consumer goods. - 36 - B. STRUCTURE AND EVOLUTION OF GROSS DOMESTIC PRODUCT The Growth of GDP 3.15 Aggregate statistical data on the Angolan economy are incomplete and of dubious reliability. National output estimates exclude parallel market activity and are incomplete in their coverage of official markets. In addition, value added and factor income estimates are based only on official prices that bear almost no relationship to market prices. Compounding these shortcomings are the lack of satisfactory comprehensiveness and reliability of the data on public finance, foreign trade, the balance of payments, domestic credit and external debt. 3.16 Changes in real GDP are closely related to oil production. Available information points to a slow recovery in real GDP following the sharp fall in 1975-76. However there was a marked setback in 1981, when real GDP decreased 102, mainly because oil production fell 152, and another in 1982, when South Africa and UNITA intensified their attacks and sabotage operations. It was only in 1985 that production again reached the 1980 level. In 1986 GDP increased 6.82 in volume mainly because oil production increased 222. but GDP expressed in current dollars fell 11X, as a result of depressed international oil prices which fell from US$ 26 a barrel in the previous year to US$12.5. In 1987, the increase of 252 in the volume of oil production and the recovery of oil prices to US$ 17.1 a barrel, resulted in an increase of 142 in GDP measured in current dollars. 3.17 The distribution of value added by sector using 1980 official prices for the period 1980-87 is presented in table 3.1. The paragraphs below summarize the main developments in the various productive sectors since independence. 1/ 1/ Chapter 4 provides more detail on sectoral development. - 37 - Table 3.1 GDP BY SECTOR. 1980-87 (Kz Billions at 1980 Official Prices) Average shares in GDP 1980 1985 1986 1987 1980-87 Agriculture and Fisheries 37.0 32.9 33.1 28.1 21.0 Industry 19.2 13.8 11.5 14.7 9.9 Oil 37.7 54.3 66.1 84.2 30.5 Construction 10.7 8.1 10.3 6.5 4.3 Transport and Communications 5.5 6.7 6.2 6.4 3.9 Commerce 16.8 11.9 10.5 11.1 8.7 Services 34.9 34.0 32.5 34.1 21.7 GDP at Factor Cost 161.8 161.6 170.2 185.0 100.0 GDP at Market Prices 167.6 165.f5 176.8 192.1 104.0 GNP 167.0 161.3 172.4 182.9 101.6 Sources Statistical Appendix, Table C.3. Agriculture and Fisheries 3.18 Agriculture accounts for about 201 of GDP, 15? of which is suusistence farming. Production of most agricultural crops marketed through official channels declined rapidly after independence and, in several cases, reached negligible levels. Thus, by 1987, the output of coffec, a commodity in which Angola had been the fourth largest world producer, had dropped to less than 62 of its pre-independence level. Comparable percentages in other crops were 12 for sisal, 32 for maize, 17Z for sugar, 362 for bananas, and less than 12 for cotton and rice. At present, the country is significantly dependent on food imports. 3.19 The state farms and trade enterprises set up to replace the previous system failed to reactivate agricultural production due to con- straints in administrative and technical capability, the collapse of the transportation system, and lack of security in rural areas. The later introduction of farmers' associations and cooperatives, the gradual reac- tivation of private farms, and the creation of a network of rural services were attempts to reorganize the system, but these failed to increase production because the guerrilla war isolated most rural areas from the cities. In addition, the foreign exchange constraint did not allow enough imports of inputs and consumer pgods to be traded with farmers as an incentive to produce for the market. - 38 - 3.20 The contribution of the fisheries sector to value added is modest, about 1Z of GDP. This is despite the sector's large potential, especially in the southwestern cold waters of Namibe &ad in the tropical waters of the Benguela coast. During the period of transition to independence, the modern processing plants were destroyed and the best fishing boats left the country packed with Portuguese refugees. An effort to rehabilitate the sector with external assistance has been plagued by organizational problems. Hinina and Oil 3.21 Although mineral resources are varied and substantial, diamonds constitute the only significant mineral production. While diamond mining was interrupted after independence, marketed production of diamonds recove- red rapidly from 333 thousand carats in 1977 to 1,479 thousand carats in 1980, when it reached about two thirds of the output in 1973. It subsequently fell again by about 502 because of the insecurity created by UNITA attacks and growing theft and smuggling. A new strategy adopted in 1986, based on production sharing agreements, has led to a recovery in output. In 1987, production reached 870 thousand carats. 3.22 The enclave oil industry has been an important exception to the general decline in economic activity. The output of crude oil declined from 172,00 barrels per day in 1977 to 130,000 b/d in 1981, but subsequently increased rapidly to 359,000 b/d in 1987. The planned production for 1990 is 450,000 barrels per day. 3.23 The continuous growth of oil production was in part achieved through a successful association of the state enterprise Sonangol with foreign firms. In the rich Cabinda area, which supplies 70Z of national oil production, a joint venture system was adopted, while in the new promising offshore areas of Zaire province a system of production sharing prevails. Sonangol is the only concessionary for oil production and has an internal monopoly in the distribution of refined oil products. The State is the sole owner of oil and gas deposits. The Manufacturing and Construction Sectors 3.24 Value added in the manufacturing sector is aess than 102 of GDP. In 1976, in order to overcome the paralysis of production created by the exodus of Portuguese managers and technicians, the Government created state enterprises to run manufacturing firms. However, the limited availability of skills, fc_eign exchange limitations, inadequate supplies of agricultural inputs, and the lack of a disciplined work force seriously hampered the reactivation of industrial activity. In spite of these obstacles, total manufacturing production at constant prices doubled in the period 1977-83, but has stagnated since. Despite the 1977-83 recovery, output of manufac- turing industries corresponds at present to only about two-thirds of the 1973 level. 3.25 Construction expanded in 1985-86 but its value added is less than 5Z of GDP. The sector has been unable to meet the large demand for invest- ment in infrastructure, to repair the war damage, and to build a significant - 39 - number of houses. Most new houses in the rapidly growing urban areas are small and rudimentary, and have been built by their owners with the partial help of workers with some experience in construction. The development of the building industry is constrained by the limited domestic capacity to produce construction materials, but plans exist to double cement production capacity in Luanda. Services and Transportation 3.26 The tertiary sector accounted for 342 of total value added in 1980-87. The Central and Provincial Governments are the major components of this sector. Value added of public administration accounts for more than one-fifth of GDP and consists mainly of the salaries of the Ministries of Education, Health, Culture, Social Welfare and Defence. Commerce and transportation together account for almost 132 of GDP. This percentage does not include the commercialization margin of oil exports and the value added in the important parallel market activities in commerce and private transportation. C. GROSS NATIONAL EXPENDITURE 3.27 There are no official estimates of national accounts from the expenditure side. The figures shown in Table 3.2 were based on data provided by the government and on mission estimates. (See an analysis of the Angolan system of national accounts in Annex IV). Total investment was estimated on the basis of available information on imports of capital and transport goods and the value added by the construction sector. Private consumption was derived as a residual. - 40 - Table 3.2 EXPENDITURES OF AVAILABLE RESOURCES, 1982-87 (Kz Billions at Current Official Prices) Percentage of GDP 1982 1985 1986 1987 1987 Private Consumption 108.5 88.2 97.9 90.3 40.6 Public Consumption 44.1 63.4 66.0 67.2 3029 Private Investment 26.1 36.7 39.5 35.1 19.8 Public Investment 2.4 2.3 4.7 3.6 1.6 Total domestic expenditure 181.2 190.6 208.1 196.1 88.2 Exports of goods and NFS 67.0 93.7 60.5 100.7 45.3 Imports of goods and NFS 81.3 82.5 72.7 74.5 33.5 GDP at Market Prices 166.9 201.8 195.9 222.3 100.0 Net Income sent Abroad -5.6 -7.0 -3.6 -10.4 -4.7 GNP 161.3 194.8 192.3 211.8 95.3 Source: Statistical Appendix, Table C.5 3.28 In spite of the data limitations, some trends can be observed in the evolution of consumption expenditures. First, government consumption grew more rapidly than GDP in the period 1982-85. As a result, the share of government consumption in GDP increased from 262 in 1982 to 30Z in 1985. At the same time, the share of private consumption fell from 652 to 412. However, in the following two years, reflecting the adjustment effort, there was practically no increase in government consumption. Increases in private consumption have also been very modest; in real terms private consumption in 1987 was lower than in 1985. 3.29 The level of investment after independence has been very low (about 18Z of GDP in the period 1982-87). Moreover, it has been concentra- ted in the oil industry and was undertaken mostly by the international oil corporations. Until 1980, investments in oil exploration and development were inadequste and, as a result, production fell in the period 1980-82. After 1980, new exploration and production arrangements were established with the international oil companies and, as a result, investments in the sector increased from US$201.6 million in 1980 to US$326.3 million in 1981. Total petroleum sector investments in the period 1981-86 attained US$2,522 - 41 - million, or an average of US$420 million per year. However, the official GDP estimates do not include value added under the production sharing agreements, and the corresponding goods and capital flows are not recorded in the balance of payments. These omissions lead to underestimates of the amount of private investment in national expenditures. 3.30 On the basis of available data, public investment spending appears to have been less than 22 of GDP in 1982-87. These expenditures are well behind the needs for infrastructure reconstruction and development. Public investment has been low primarily due to a lack of foreign exchange. 3.31 Exports of goods and non-factor services increased from USS 1,810 million in 1982 to US$ 2,344 million in 1985 and corresponded to about 43Z of GDP over this period. In 1986 however, the sudden collapse in oil prices brought exports of goods and non-factor services to US$ 1,406 million. In 1987, due the recovery of oil prices and a 272 increase in oil production, exports of goods and non-factor services attained the peak level of USS 2,355 million. Imports of goods and non-factor services have been determined mainly by the availability of foreign exchange provided by oil exports. They averaged USS 2,044 million in the period 1982-85. However, due to the crisis in international oil prices, imports fell to US$ 1,689 in 1986. In 1987 the increase in exports, combined with an apparently very modest increase in imports of goods and non-factor services, resulted in a substantial improvement in the balance of goods and non-financial services, from a deficit of USS 283 million in 1986 to a surplus of US$ 612 million in 1987. However, as discussed in paragraph 3.65 below, in view of the very large negative errors and omissions entry for 1987, some skepticism about this turnaround is warranted. D. EMPLOYMENT AND WAGES Employment 3.32 A comparison of the 1970 census and the official estimates for 1985, based on the census conducted in 1983 in Luanda and in 1984 in the provinces of Cabinda, Zaire and Namibe, shows an important change in the population structure and labor force. The population of working age (between 14 and 59 years old for men and 14 and 54 years old for women) decreased from 63% of the total population in 1970 to 442 in 1985 and the proportion of the economically active population fell from about 322 to 24t. 3.33 The war induced peasants to migrate to the cities, reducing the labor force in rural areas from 742 of the economically active population in 1970 to an estimated 37% in 1985. Most of the population of the rural areas remains in the subsistence sector. The increase in the urban population forced the Government to absorb the migrants in the public sector and in state enterprises. According to official est:mates, employment in industry, commerce, transport and administration increased from about 10% of the economically active population in 1970 to 352 in 1985, in spite of sharp declines in production in all sectors except the oil industry. - 42 - 3.34 Despite serious weakness in the data on public sector employment, it is estimated that the Government employs about 150,000 workers in civilian activities, of whom 25,000 are in local administration. In addition, there are about 90,000 - 100,000 persons engaged in military and security functions or whose status is not clear. Table 3.3 ECONOMICALLY ACTIVE POPULATION, 1985 Thousands of Sector employees Percentages Total 2,109 100 Agriculture 756 35.8 Industry 238 11.3 Construction 155 7.3 Services 403 19.1 Non-productive sectors 485 23.0 Unemployed 71 3.5 Source: Statistical Appendix, Table B.1. 3.35 There is also no reliable estimate of the number of salaried workers in the economy. The number of affiliated workers in the official trade union organization UNTA (Uniao Nacional dos Trabalhadores de Angola) in 1985 was 666,000 workers or 32Z of the economically active population, of whom 83X were employed in state enterprises, 12Z in private enterprises and 52 in mixed enterprises. Wages 3.36 The general labor law established a uniform salary scale. While this could, in theory, create rigidities in the labor market by not considering differences in economic activities, in practice official wages are only a small part of total remuneration. Real income is mainly determined by access to goods at official prices and by the value of income in kind. Thus, wage differentials are misleading as an indication of differences between categories of workers. 3.37 According to the UNTA statistics (See Tables B.3 and B.4 in the Statistical Appendix), the average monthly salary in 1985 was 9,758 Kz, equivalent to about US$325 at the official exchange rate. Wage differences among professional categories were rather narrow, fluctuating from a minimum of 5,761 Kz for agricultural workers to 18,000 Kz for technicians. In public administration, there are four occupational categories: laborers, with salary scales from 4,500 to 19,800 Kz; administrative workers, with monthly salaries between 5,000 and 15,700 Kz; technicians with salary scales from 10,000 to 35,000 Kz; and directors and managers, earming from 10,000 to 30,000 Kz. - 43 - 3.38 In 1986, the average wage increased to 12,049 kwanzas for the 410,000 workers' wage bill controlled by the National Bank of Angola (BNA). The average monthly salary in 1986 is reduced to 11,754 Kz if corrections are made to exclude the high incentives given to the workers in the sectors of wood, mantufacturing, and mining. Comparing the UNTA and the BNA samples, the increase in the average wage was about 23Z in 1986. The average monthly wage controlled by the BNA increased 20Z in 1987, reaching 14,444 Kz. 3.39 The purchasing power of salaries and fringe benefits is very low because the supply of goods at official prices is limited. In November 1987, an average worker was able to spend only about 300 Kz in the official market. Since prices in the parallel market were about 30-50 times official prices, the purchasing power of nominal salaries is extremely low. However, higher level employees have the opportunity to purchase larger quantities of scarce goods at official prices (3,000, 6,000 or 8,000 Kz worth of goods per month according to their position in the hierarchy). Similarly, in order to remedy the low purchasing power of salaries, many state enterprises make payments in kind to their workers (auto-consumo). The exchange in the parallel market of goods received through *auto-consumo introduces an unequal real wage distribution that does not reflect workers, productivity. Auto-consumo' consists basically of the gift or the sale at official prices of goods produced by the enterprise. The value of those goods in the parallel market corresponds to several times the official wage. Thus, for instance, workers in tte beer factory in Luanda, who are certainly among the greatest beneficiaries of auto-consumo, earn on average a nominal monthly wage of 10,000 Kz, but the parallel market value of the beer which they receive as auto-consumo raised their total earnings to an estimated 140,000 Kz per month in 1988. In such conditions, it is clear that the system of real wage formation precludes economic rationality in the distribution of the available supply of food and other consumer goods. E. GOVERNMENT FINANCE Introduction 3.40 The public sector dominates economic activity in Angola. Since independence, a large and growing part of the official economy - nearly two thirds in 1986 - has been financed through the government budget. State controlled enterprises account for an additional large share of GDP. The prominent position of the central government is partly a consequence of the rapid growth of the oil sector as a source of government revenue over the past 15 years. It also reflects the government's wish to control key sectors of the economy. The practice of incorporating the financial results and investment expenditure of public enterprises in the budget further adds to the central role of the government. 3.41 The government's finances since independence have passed through two phases. The first phase extends from independence through 1981. It is characterized by buoyant revenue perforwance, an even faster growth in expenditure and, at least since 1978, large overall deficits. The second phase, which follows the initial fall in oil prices in 1981 and continues - 44 - through the present, is marked by large fluctuations in both revenue and expenditure, and continuing deficits. 3.42 These two prominent features of the Government's finances -- rapid growth in resources and subsequent instability - are related to the heavy dependence on revenue from oil and the volatility of the oil price. They have posed special problems for fiscal policy. First, the rapid rise in available resources has put the system for allocating and utilizing these resources under severe strain. Secondly, the revenue instability has made budgetary management difficult, and carries some responsibility for the persistent budgetary deficits. The problems of how to establish a better balance between revenue and expenditures and how to improve the use of resources are the most important fiscal issues to be addressed. Revenue 3.43 Revenue collection has expanded greatly since independence, largely as a result of the development of oil exploration and events in the world oil market. The increase in revenue took place mainly during the period 1974-81 when total revenue quadrupled. Since 1981 budgetary resources have been marked by considerable instability. Revenue fell by almost a third in 1982, recovered graduallv through 1985, but declined again over the next two years. The 1989 budget foresees another improvement in the resource position. In.ome from oil has been the principal source of revenue. In 1981, taxation of petroleum operations accounted for 61? of total government revenue, and 71? of tax revenue (table 3.5). The dependence is even stronger when the indirect effect of oil sector activity on tax revenues is taken into account. Oil exports determine the level of imports. Consequently they determine not only the revenue from import taxes, but also the level of economic activity and thus the revenues from direct and indirect taxes in general. Given this dependence on oil, revenue fluctuations are largely explained by changes in Angola's oil production and in world oil prices. - 45 - Table 3.4 SUMHARY OF GOVERNMENT FINANCE 1985-89 (Kz billion) 1985 1986 1987 1988 1989 (Budget) (Budget) Revenue 78.5 71.2 64.4 89.5 78.1 Taxes on petroleum 41.7 30.1 35.8 35.8 41.5 Other taxes 24.5 21.7 18.9 23.2 -on income & property (14.9) (12.0)(10.3) (9.0) -on domestic goods and services (5.6) (5.0) (5.1) (7.4) -on international trade (4.0) (4.7) (3.4) (6.8) Non Tax Revenue 12.4 19.5 9.7 26.4 13.4 Total Expenditure 90.5 86.2 87.4 106.0 112.7 Recurrent expenditure 81.2 75.7 76.4 87.8 92.6 Capital expenditure 9.3 10.5 11.0 18.2 20.1 Overall budget deficit 12.0 15.0 23.0 16.5 34.6 Statistical discrepancy -9.2 7.3 -4.0 - Financina 2.8 22.3 19.0 16.5 34.6 Domestics BNA (net) 2.8 22.3 19.0 14.0 24.1 non-bank - - - - 5.0 Externals loans n/a n/a n/a 3.0 grants - - - 2.5 2.5 Source: Ministry of Finance: Reports on the Execution of the Budget 3.44 The performance of non-oil taxes during the 1980s has been poor. In 1987, they were only slightly above the level in 1980, implying a substantial decline in real terms. Of the three main types of non-oil taxes, those on domestic production and consumption have performed better than those on income and on international trade (table 3.5). The principal revenue components are discussed in more detail in Annex VI. 3.45 The ratio of non-oil taxes to non-oil GDP in Angola averaged 1OZ during 1985-87, compared to an average ratio of ¢7Z for lower-middle income countries.2/ The comparison is even less favorable for Angola when allowance is made for the effect on the ratio of distortions in the 2/ World Development Report, 1987. - 46 - economy.3/ The low tax/GDP ratio indicates that due to the large contribution of the oil sector to revenue, the cost of government expenditure to the Angolan taxpayer is relatively modest. Table 3.5 GOVERNMENT REVENUE - 1981 and 1987 (Percentages) 1981 1987 Taxes on petroleum 61 56 Other taxes- 25 29 - on income (15) (16) - on domestic goods 5 8 - on international trade 4 5 Non-tax revenue 14 15 Total 100 100 Source: Statistical Appendix, Table D.2. Recurrent Expenditure 3.46 Government administration is highly centralized in Angola. The budget covers not only expenditure by the central government but also spending by provincial authorities and, in part, by public enterprises. On the other hand, some government outlays are not included in the budget but should be, such as expenditure financed through external grants. Moreover, it appears that in several years a significant amount of public spending, including some investments, military expenditure, and interest on the external debt, were undertaken without budgetary authorization. 3.47 Recurrent expenditure grew rapidly after independence, and in 1980 amounted to five times the pre-independence level. Despite the subsequent revenue instability, current expenditure maintained an upward trend during the 1980s, notably from 1983 to 1985. It has tended to increase when revenues improved, and to remain stable in years when revenue declined. However, this trend in spending masks important changes in its composition. There has been a major shift towards expenditure on defence and internal security since 1980, in particular from 1982 to 1985. As a result, military outlays doubled between 1980 and 1985, and in 1987 defence accounted for 48? of total recurrent expenditure. Given the overall budgetary constraint 3/ GDP is understated as it does not include a major part of the substantial parallel market activity; transfers to government of the entire non-oil public enterprise profits have been included in non-oil taxes. - 47 - imposed by the revenue position, this increase was achieved at the expense of nonmilitary expenditures. While fluctuating considerably, these expenditures had in 1987 droppeA below their level in 1980. Real spending for civilian purposes nas thuo suffered a sharp decline over the years. 3.48 Expenditure on personnel accounts for the bulk of the recurrent budget. Salaries and other personnel related expenditure absorbed 662 of recurrent spending in 1987 (table 3.6). This includes the cost of military personnel. The personnel coRt is equally high in the civilian sector, reaching an estimated 64Z in 1986, up from 43Z in 1981. The rise in the wage bill appears to have accelerated in recent years. In the absence of data on civil service employment and pay it is hard to identify the factors contributing to this increase. A general salary increase was granted in 1986 and a job evaluation exercise was started in the same year. The latter is gradually being implemented, and its impact on the budget will be spread over several years. The government is aware of the inflexibility which the large civil service wage bill imposes in terms of budgetary management. It is undertaking a survey of the civil service in order to improve its control over personnel expenditure. Table 3.6 ECONOMIC CLASSIFICATION OF RECURRENT EXPENDITURE IN 1987 (Percentages) Personnel 66 of which: salaries and benefits (62) other costs ( 4) Goods and services 17 Subsidies 7 Transfers 5 of which: interest on ext.debt ( -) Other expenditures 5 Total 100 Source: Ministry of Finances Report on the Execution of the Budget, 1987. 3.49 Until 1986, subsidies to public enterprises absorbed around 25Z of the non-defence recurrent budget (30Z in 1985). While these subsidies comprised mainly payr nts to cover operating losses, they also included specific price subsic -s and provisions for working capital. Between 402 and 50Z of the subsid-s were in support of agricultural enterprises. With effect from 1986, public enterprises were required to be financially more autonomous. Budgetary transfers were to be restricted to cases where losses are war related or are due to specific social functions which the enterprises are expected to perform. As a result, subsidies dropped to 14Z of non-defence spending in 1986 and 1987, and are down to 8Z in the 1989 budget. While some enterprises were allowed greater flexibility to set - 48 - higher prices for their products, others seem to have reduced their losses through increased parallel market operations, or were forced to finance them by not paying their suppliers and, in some instances, their employees. 3.50 A budgetary provision for payment of interest on external debt was made in some years, but only once, in 1986, was such a payment actually made by the Ministry of Finance. Interest payments in other years were made by the central bank (BNA) which is responsible for servicing the external debt. However, these payments were never recorded as budgetary expenditure and should account for part of the extra budgetary expenditure by BNA. No interest has ever been paid by the government on its domestic borrowing from Bik. Capital Expenditure 3.51 The budget distinguishes between two kinds of capital expenditure: investment undertaken by public enterprises (so-called productive investment) and investment under the direct responsibility of ministries. The latter have been of minor importance until 1986. Public enterprise investment has relied almost entirely on the government for its financing as little bank credit is available for this purpose, and until 1986 obligatory transfer to the State of 902 of profits and 70Z of depreciation left enterprises practically without financial resources.4/ Actual investment expenditure differs substantially from budgetary provisions due to the lack of coordination between the institutions responsible for preparing the investment budget (BNA and the Ministries of Planning and Finance). The size and composition of the public investment program is to a large extent determined by BNA which plays a key role in the allocation of foreign exchange for investment projects. 3.52 Capital expenditure grew rapidly after 1975: from Kz 2 billion before independence to Kz 34 billion in 1981. In the wake of the 1981 fall in oil prices, severe cuts were made in the investment program, primarily because of the foreign exchange constraint. As a result, budgetary expenditures on "productive" investment dropped sharply between 1981 and 1987, from Kz 34 billion to less than Kz 7.4 billion in nominal terms. In 1987, capital expenditures represented less than 102 of total government outlays. The decline in public investment is probably less drastic when extra-budgetary expenditures are taken into account. Thus, for instance. much of the expenditure on the Capanda dam is not included in the budget. Also, the lower figures for 1986 and 1987 may in part be due to changes in regulations governing financial relationships between public enterprises and the government. As a result of these measures, a larger part of the investments of public enterprises may have been financed by the enterprises themselves. Apart from a broad sectoral composition of public investment (Table D.4 in the Statistical Appendix) few details on actual investment expenditure are available. 4/ Exceptions include Sonangol, Endiama and a hotel, which have been given special status. - 49 - Fiscal policy and inflation 3.53 The overall budget has consistently been in deficit since 1978, the first post-independence year for which data are available. The deficit has persisted ever. in years when revenue was buoyant, as in 1981 and 1984. In recent years, the overall deficit has increased and reached 7Z of GDP in 1987, up from 3.5Z in 1984. The current account balance is also negative. Since 1985, revenue has been insufficient to cover recurrent expenditure, with the gap rising to 4Z of GDP in 1987. 3.54 There are substantial discrepancies between BNA data on net credit to the government and the official deficit as pres-nted by the Ministry of Finance. While these may in part be due to different accounting practices, they could also be explained by extra-budgetary expenditures. As mentioned earlier these might include certain investments, some military expenditures, and the servicing of the external debt. Such expenditure could in particular explain the item *other credit to government, in the BNA's accounts (as distinct from *budgetary financing"), which in 1987 amounted to Kz 22 billion. This would imply a much larger budget deficit than shown in the Ministry of Finance accounts. 3.55 Government borrowing from BNA to finance the budget deficit has been the principal source of growth of the money supply, and thus a major contributory factor to inflationary pressure and the expansion of parallel markets. Advances from BNA are under present procedures the only source of deficit financing. However, they include drawings on external loans which the BNA, as manager and administrator of Angola's external debt, channels to the budget, but which are not distinguished from domestic financing, and at present cannot be quantified. An analysis of the inflationary impact of the budget would requite an improvement in the accounting procedures relating to budgetary financing. The 1989 budget, for the first time, identifies separately both BNA and non-bank domestic borrowings as well as external borrowing. Planning, Budgeting and Control of Expenditure 3.56 Development of the budgetary system has not kept pace with the rapid growth in government spending. The present institutional structure and responsibilities, budgetary procedures and available accounting skills are not adequate for the formulation and implementation of a large and complex budget. As a result, serious deficiencies are apparent in the planning and preparation of the budget as well as in the monitoring and control of expenditure. 3.57 Financial planning. There is no satisfactory financial plan for the public sector which on an annual basis analyses resource availability, expenditure options and borrowing needs, and provides a framework for the budget. The budget is also not well integrated into the overall planning exercise. Particularly weak aspects are its links with the preparation and execution of the foreign exchange budget, and the preparation of the public investment program, which does not adequately relate to other budgetary aggregates. Financial planning is particularly important in a country like Angola where large swings in resources occur from year to year. - 50 - 3.58 Budget preparation is seriously hindered by a lack of information. Because of the delays in the preparation of accounts, there is no feedback into the budgeting exercise of data on actual expenditure in the past year. Basic information necessary for budget formulation is often not available. Thus for instance estimates of the civil service wage bill are made without knowledge of the size and structure of government employment. The public investment program is drawn up on the basis of generally badly prepared proposals by the various ministries, at times no more than project ideas, which are rarely supported by proper feasibility studies. There is no capability to appraise projects, either in the Ministry of Planning or at the sector level, nor are uniform selection criteria used for inclusion of projects in the budget. 3.59 MonitorinR and control. Maintaining financial discipline and monitoring expenditures has been difficult in the face of a shortage of accounting skills, inadequate expenditure and reporting procedures and poor coordination between agencies. Ministries currently do not need expenditure authorization before making specific commitments. The system of quarterly expenditure ceilings by ministry does not lend itself to effective control, in particular when accounts are delayed. The lack of control is most serious with respect to investment expenditure. When there are no realistic cost estimates and expenditure targets, as in the case of many projects, no control is possible. The situation is exacerbated by the apparently different priorities of the Ministry of Planning and BNA regarding implementation of the investment program. 3.60 The Ministry of Finance does not have a Treasury department, but plans for its establishment are well advanced. It will consist of three divisions: treasury operations, external finance and relations with public enterprises. This should constitute a major step towards improved control over expenditure. P. MONETARY POLICY 3.61 The National Bank of Angola maintains a fixed exchange rate and finances government budget deficits, which severely limits discretionary monetary policy. As indicated in the lower half of Table 3.7, the annual growth rate of the money supply (M2) has been erratic, which is explained by large year to year fluctuations in net foreign assets and domestic credit. The data show that net credit to the government consistently contributed to the growth of the money supply while credit provided to other sectors has contracted in recent years. However, the contraction in non-government credit was insufficient to offset the expansion of government credit, and net domestic credit growth averaged about 15? annually over the past five years. 3.62 While there are not reliable data available to calculate growth rates of narrow and broad measures of the money supply (M1 and M2) prior to 1984, the data in Table E.3 of the Statistical Appendix show that the growth rate of currency in circulation averaged about 232 annually from 1977 to 1987. From 1983 through 1987, currency in circulation averaged a 18Z annual growth rate, the narrow measure of the money stock (Ml) grew at an average - 51 - annual rate of 14?, and the broad measure of the money stock (M2) averaged an annual growth rate of 15X. With prices fixed in official markets and supplies limited, this growth of the money stock has fuelled inflation in the parallel market and created extremely large relative price distortions between official and parallel markets. Table 3.7 MONETARY SURVEY, 1983-1987 (Billions of Kz, end of period) 1983 1984 1985 1986 1987 Net foreign assets (0.7) (2.5) 0.0 (18.5) (21.2) Net domestic credit 188.6 215.4 243.0 265.2 305.1 of which Net claims on gov't 51.8 91.5 94.3 158.3 199.3 Claims on other sectors 136.8 123.9 148.7 106.8 105.8 Other net assets (42.2) (40.9) (39.1) (26.4) (31.4) Notes in circulation 59.9 71.9 80.0 92.3 117.0 Depusits (net of gov'r) 85.9 100.1 123.9 128.0 135.5 Memorandum Broad money stock (M2) 145.8 172.0 203.9 220.3 252.5 Aiuiual growth in M2 NA 18.0X 18.6? 8.0? 14.6? Ratio GDPlmoney 1.20 1.12 0.99 0.89 0.88 Source: Statistical Appendix, Tables E.1 and E.2. 3.63 As indicated in Table 3.7, the velocity of monetary circulation has fallen in recent years and stood at 0.88 in 1987. This could be taken as an indication of forced savings. However, given that much economic activity takes place in parallel markets at elevated prices and is not included in the measure of grorss domestic product, the numbers reported in Table 3.7 probably understate actual velocity by a large margin. In view of the lack of any reliable measure of inflation, it would be impossible to estimate a reasonable money demand equation. G. THE BALANCE OF PAYMENTS AND THE EXTERNAL DEBT Balance of payments 3.64 Table 3.8 provides the balance of payments in recent years. In examining these figures, one should keep in mind that the data used by the authorities in constructing the balance of payments are often of poor quality. For exampie, as explained by the authorities, prior to 1988 debt service payments were generally not categorized according to whether they were interest or principal payments. In constructinig the balance of - 52 - payments, only specifically identified interest payments were recorded as such, resulting in a downward bias in reported interest payments and an upward bias in amortization numbers. In addition, data on the financing of the global balance are incomplete; the figures shown in Table E.4 of the Statistical Annex are mission estimates. Table 3.8 BALANCE OF PAYMENTS, 1980-87 (millions US $) 1980 1984 1985 1986 1987 Merchandise exports 1,883 2,033 2,238 1,303 2,269 Merchandise imports 1,368 1,575 1,415 1,097 1,316 Service and income exports 179 111 128 115 92 Service and income imports 604 811 864 828 729 Net unrequited transfers 21 26 20 139 +51 Current account balance 110 (217) 107 (368) 368 M&L term capital Inflows 475 765 845 785 716 Outflows 189 367 404 549 674 Basic balance 396 181 549 (132) (676) Short term capital (309) (124) (558) (187) (676) incl. errors and omissions Global balance 87 57 (10) (319) (267) Memorandum Gross International reserves 309 240 257 179 242 Reserves in months of import coverage 1.9 1.'i 1.4 1.1 1.4 Source: Stat4stical Appendix, Table E.4 3.65 Examination of the balance of payments data in Table 3.8 indicates that Angola consistentiy runs trade balance surpluses and service account deficits, which generally exceed the trade surpluses. The data show Angola to have run current account surpluses ir 1985 and 1987. However, since the errors and omissions and shorc-term capital flow entries for these years were negative and large relative to the current account balance, it is likely that more accurate accounting would reveal current account deficits occurred in these years as well. Moreover, as discussed above, since some interest payments were recorded as amortization payments, current account deficits may be understated for all of the years. Priur to 1986, capital - 53 - inflows were sufficient to cover current account deficits, capital outflows, and omitted items. Subsequently, global balance deficits were large relative to reserve holdings and Angola was forced to accumulate debt service arrears and seek debt reschedulings. 3.66 As indicated in Table E.6 of the Statistical Annex, the most striking feature of Angola's export earnings is the large share accounted for by petroleum exports. Indeed, almost 952 of Angola's export earnings come from oil and gas production. Moreover, the sharp fluctuations in Angola's merchandise export earnings in recent years is almost entirely explained by fluctuations in petroleum prices. From 1982 to 1987, the volume of crude oil exports rose every year, from 39 million barrels in 1982 to 116 million barrels in 1987. For most of these years, the rise in the volume of exports offset the decline in petroleum prices, and oil export earnings grew. However, in 1986, the price decline was so severe that despite a 25Z increase in the volume of exports, earnings fell almost 402. With the partial recovery of oil prices in 1987 and the continued growth of production, merchandise export earnings in 1987 recovered to 1985 levels. 3.67 Exports of diamonds and coffee, which provided substantial amounts of foreign exchange before independence, have fallen drastically in recent years. In 1987, reflecting new arrangements for the mining of diamonds, there was a sharp recovery in diamond export earnings, though diamonds still accounted for less than 5Z of merchandise exports. Exports of other goods, especially of agricultural products which were important in the colonial period, declined steadily over the past decade and by 1987 accounted for less than 22 of exports. The deterioration in agriculture, especially coffee production, has been so prolonged and severe that, even with improved polices, the recovery of exports may take many years. 3.68 Compounding the contractionary effect of falling oil prices has been the depreciation of the dollar. While Angola's export earnings are overwhelmingly dollar denominated, the United States is the source of less that 152 of Angola's imports, according to the IMF's Direction of Trade Statistics. Thus, the fall in the dollar from 1985 through 1987 added to the adverse shift in Angola's terms of trade. 3.69 Balance of payments data on merchandise imports are based primarily on exchange records at the central bank. More detailed data on the composition of merchandise imports are available from customs records, the source of the data in Table E.5 in the Statistical Appendix. However, the authorities warn that these data should be viewed cautiously since many imported goods are not recorded by customs or are recorded incorrectly. Nevertheless, it is worth noting that about 25Z of import expenditures are for food and 502 are for capital goods. 3.70 In the balance of payments data, fluctuations in merchandise imports generally mirror fluctuations in merchandise exports, which reflects government efforts to attain a trade surplus sufficient to service external debt and cover nonfactor service imports. For example, following the decline in exports in 1986, the authorities enacted the following measures to limit imports: a sharp reduction in imported industrial inputs, especially of spare parts; a cut-back on foreign technical assistance; - 54 - reductions in foreign travel; and tight limits on financial transfers by resident foreign workers and technical assistants. These restrictive measures were not without costs. Many directors of factories reported operating far below capacity for lack of spare parts and industrial inputs, and shortages of imported consumer goods contributed to inflation in the parallel market. 3.71 Exacerbating Angola's debt service difficulties was a decline in new external lending, forcing Angola to make much larger net resource transfers to its creditors. Thus, while the authorities' restrictive policies in 1986-87 did compress imports and produced trade surpluses, the surpluses were insufficient to cover the increase in required net resource transfers and substantial arrears accumulated. 3.72 Although balance of payments data for 1988 are not yet available, it appears that growth in the volume of oil exports and a small increase in petroleum prices led to comparatively strong export earnings. However, Angola continued to experience severe debt service problems and to accumulate arrears. This appears to be due to a substantial relaxation of restrictions on imports. External Debt 3.73 Prior to 1986, organizing and analyzing data on the Angolan external debt situation was not a priority within the National Bank of Angola. However, when export earnlings fell sharply in 1986 and debt service problems arose, the central bank established departments to 'ollect data on short-term and long-term debt and handle negotiations with creditors. Appropriately, efforts in this regard have focused on Angola's current and future obligations. Consequently, while data for the 1988 debt stock and associated future payment obligations are probably reliable, data for earlier years should be viewed cautiously. With this caveat in mind, as indicated in Table 3.9, Angola's external debt for civilian purposes almost doubled over the past 5 years. As of June, 1988, the total external debt stood at approximately US$3,901 million. Of this total, US$691 millior. was short term and US$3,210 million itas medium and long term. Approximately US$1,800 million of the medium ard long term debt was with western countries, US$1,367 million was with socialist countries, and US$43 million was with multilateral organizations. Almost 82 percent of Angola's debt to western countries is government guaranteed, about 7 percent is non-guaranteed commercial credits, and 11 percent consists of intergovernmental loans at concessional interest rates. - 55 - Table 3.9 STOCK OF EXTERNAL CIVILIAN DEBT, 1982-87 (Millions US$) June 1982 1985 1986 1987 1988 Medium & L-T Debt 2,075.0 2,449.4 2,456.5 2,956.1 3,210.2 Short-term Debt 271.3 250.8 614.5 625.6 691.2 Total External Debt 2,346.6 2,700.2 3,071.0 3,581.7 3,901.4 Ratios: Debt/GDP 52.2Z 53.7? 68.51 70.12 Debt/Exports of G & S 127.7Z 114.1? 216.62 151.7? Debt Service/ Exports of G&S 15.9? 12.8Z 31.12 21.9? Source: Statistical Appendix, Table E.8 3.74 As indicated in Table 3.9, Angola has a heavy debt burden, though in comparison to other sub-Saharan African countries, Angola's debt service burden is favorable. The debt service to export ratios in Table 3.9 are based on actual debt service payments made, not debt service payments due. Since these data are derived from the balance of payments data, they should be viewed cautiously, but they give a rough idea of the trends and magnitudes of Angola's debt service burden. At the end of 1987, Angola's debt was approximately 70 percent of its GDP and 152 percent of its exports of goods and services. Table 3.9 provides estimates for earlier years, but as noted above these should be viewed cautiously. 3.75 With the sharp fall in its export earnings in 1986, Angola was unable to fully service its debt. Consequently, it largely limited its debt service to credit lines required for high priority imports, such as food and defence, and accumulated arrears on its other debts. Angola also opened debt rescheduling negotiations with its medium and long term creditors. Bilateral agreements were reached with Portugal, Brazil, and the USSR. By late 1987, Angola and Paris Club members had established joint terms of reference for bilateral reschedulings of interest and amortization on guaranteed debts contracted prior to 1987 and falling due before December of that year. The terms called for a 100 percent rescheduling of principal at commercial interest rates with a three year grace period and a three year repayment period. 3.76 Even with the reschedulings and a recovery in export earnings. (Attributable to an increase in oil prices and steady growth in oil production), Angola has continued to accumulate debt service arrears. As of the end of 1988, Angola's arrears totaled US$648.2 million: - 56 - Table 3.10 EXTERNAL DEBT ARREARS AS OF DECEMBER 31, 1988 (Millions US$) I. Medium and long term debt 479.2 A. Western countries 278.1 1. Government guaranteed 163.9 2. Bilateral aid credits 18.2 3. Non-guaranteed commercial 96.0 B. Socialist countries 201.2 II. Short term debt 169.0 Total 648.2 3.77 In addition to debt service arrears, Angola had arrears of US$261 million on suppliers credits as of the end of 1988. The continual accumulation of arrears through 1988 in light of the recovery in export earnings must be viewed with alarm. As long as arrears persist, Angola will find international trade more difficult and costly. Moreover, the larger Angola's arrears, the more difficult will be future reschedulings and required adjustment measures. 3.78 The feasibility of addressing Angola's short and medium run debt payment difficulties must be addressed in the context of balance of payments projections. Table E.6(1) of the Statistical Appendix reports mission projections of major export earnings from 1988 through 1993. The petroleum sector projections are based on data provided by Sonangol and on mission estimates. The diamond export projections are based on data provided by Endiama and mission estimates. The coffee export projections assume a constant volume of exports and a four percent growth rate in prices. 3.79 Table E.7(l) of the Statistical Appendix presents a balance of payments forecast based on the export earnings projections of Table E.6(l). If hostilities end in Angola, the composition and quantity of imports demanded could change significantly, but given the limited data available on imports and their uses it is difficult to project these changes. Consequently, imports are assumed to remain the same fraction of exports as they averaged in 1984-85. The baseline forecast shows Angola continuing to accumulate modest additional arrears in 1989, with serious difficulties arising in 1991 and 1992. The large financing gaps in these years reflect obligations to repay the principal rescheduled with Brazil and Paris Club members in 1986 and 1987. After 1994, repayment obligations decline sharply, as shown in Table E.9 in the Statistical Appendix. Thus, the projections suggest that if Angola is able to reschedule its arrears as well as some payments falling due in 1991-92 and limit the growth rate of imports, it should be able to service its debt. Moreover, the elimination of debt payment arrears could result in a significant increase in new external credits above the modest projected levels, increasing the probability that Angola would be able to meet its debt service obligations without undue import compression. - 57 - 3.80 Tables E.7(2) and E.7(3) in the Statistical Appendix present alternative balance of payments projections. The optimistic case in Table E.7(2) assumes that export earnings from 1990 through 1993 are 20 percent greater than in the baseline scenario. In this case, Angola can sustain a higner level of imports while running surpluses in its global balance. The pessimistic case presented in Table E.7 (3) assumes that export earnings from 1990 through 1993 are 20 percent lower than in the baseline forecast. In this case, even with a tight compression of ports, Angola would be unable to fully service its debt and arrears would accumulate rapidly. As these projections demonstrate, Angola's capacity to service its debt are highly dependent on petroleum prices and its ability to limit imports to high priority items. - 58 - CHAPTER 4 SECTORAL DEVELOPMENT A. AGRICULTURE 1/ Agricultural Performance and Policy 4.01 Seventy to eighty percent of the population is rural and about 20X of GNP is generated by agriculture.2/ With an area of 481,000 square miles and diversified ecological setting, Angola can grow a large variety of tropical and semi-tropical crops. Arable land is plentiful, with estimates ranging from five to eight million hectares. Extensive areas are also suitable for grazing, the Southern regions being free form the tse-tse fly. There is potential for significant production of a broad variety of agricultural, livestock and fishery products; including corn, manioc, beans, sorghum, sunflower, millet, potatoes, coffee, citrus, cotton, sugar, tobacco, bananas, palm oil, sisal, beef, pork, poultry, forestry and fish. Agricultural production, including livestock and fishery products, grew steadily until the disruptions of 1975-76. Angola was self-sufficient in all major food crops. The production of maize, the basis of the diet in the heavily populated central zone, had reached 710,000 tons in 1971, sufficient to permit significant exports (112,000 tons). Surpluses of other food crops, notably bananas, rice, sugar and palm oil, were also exported. Angola produced enough tobacco to satisfy its own needs and, in addition to being the fourth largest exporter of coffee, it was also one of the world's major producers of sisal. Exports of forestry products were considerable and livestock resources were abtndant. According to the 1971 census, the last census available, there were more than 2 million head3 of cattle and nearly a million goats. 4.02 Since independence, agricultural output has experienced a dramatic decline which has affected virtually all products. The sudden departure of the Portuguese resulted in the abandonment of most of the Portuguese-owned and managed farms, and created a manpower vacuum in many areas that are crucial to the effectiveness of agricultural operations, such as agricultural marketing, transport, input supply and research. Another major cause of the poor agricultural performance since independence is the war. The limited access to the rural areas, the destruction of infrastructure, the disruption of families and communities, and the budgetary demands of the war have had an immense impact on agricultural activity. Finally, an equally important contributory factor has been the failure of agricultural policy and government intervention to provide producers with adequate incentives and the necessary support services. 11 See also Annex VII: Agriculture. 2/ This includes only state controlled production, which is estimated to be 10 to 15X of total production. - 59 - 4.03 The current situation in the sector is in stark contrast to both pre-independence production levels and to Angola's agricultural potential. Appendix Table F.1 presents estimates of current output levels for a range of agricultural products compared to pre-1975 figures. Production of the principal staple foods (maize, cassava, sorghum, millet) is estimated at 25-35Z of the output reported in the statistics just before independence. Production of many other crops (tobacco, sisal, cotton, palm oil, groundnuts) does not even reach 10? of earlier levels. While the number of cattle declined by only about 20?, and the goat population actually grew by around 50Z, the number of swine as well as beef production were well below previous levels. 4.04 Angola has been transformed from a country self-sufficient in food to one dependent on increasing food imports, including food aid, and on the verge of famine. The increasing dependence of Angola on food aid is shown in Table 4.1. Food aid requested for 1987/88 amounted to 200,000 tons of cereals, three times greater than the 68,000 tons requested in 1983/84. The ability of government to finaace commercial food imports diminished from 238,000 tons in 1983/84 to 94,700 tons in 1986/87. In addition, 18,000 tons of meat were imported in 1987. Table 4.1 CEREAL DEFICIT (tons) Deficit Programmed Requested Actual Delivered Commercial Food Commercial Food Cowmercial Food Total April/March Imports Aid Imports Aid Imports Aid Deficit 1983/1984 254,000 68,000 238,000 63,100 16,000 4,900 20,900 1984/1985 242,000 82,(600 196,000 70,500 46,000 11,400 57,400 1985/1986 210,000 120,000 192,600 44,300 17,400 75,700 93,100 1986/1987 120,000 143,700 99,700 52,762 20,300 90,938 111,238 1987/1988 100,000 199,200 Sources World Food Program, Luanda 4.05 Agricultural exports have virtually dried up. Production of coffee, until 1973 the principal foreign exchange earner, had fallen to 13,500 tons in 1987 as compared to 240,000 in 1974. Timber exports in 1985 were only 14? of the volume exported in 1973. A number of products that were previously exported are now imported (e.g., sugar, palm oil, beans). 4.06 Agricultural Policy. The massive abandonment of the Portuguese- owned and managed farms at independence created a vacuum with which the new government had to deal. With commercial private sector agriculture disin- tegrating, centralized organizational arrangements were introduced in an attempt to quickly fill the gap and establish a state controlled agricultural model. The central government institutions dealing with agriculture, have since formally administered prices, production, investment, marketing, distribution, exports, imports and all other aspects of the sector. They have attempted this in the face of severe technical, - 60 - human resource, and administrative deficiencies and despite serious problems in internal transportation and in trading in the rural areas. Central planning, price controls and other macro-economic distortions, together with the neglect of the peasant sector, which was the major producer of food, eliminated incentives. Prices at all levels have been centrally determined and rarely changed and consumer goods have become increasingly scarce in the countryside. 4.07 A plethora of agricultural agencies has been established in spite of severe deficiencies in qualified staff. Only 1Z of the labor force under the jurisetction of the Ministry of Agriculture is classified as technical and most agricultural schools are closed. Under the Ministry of Agriculture alone, there are more than one hundred public enterprises and agencies. They include state farms and integrated agrarian complexes, as well as specialized forestry enterprises, service companies, etc. Under yet different bureaucratic jurisdictions, other public entities are responsiblc for agro-industries such as sugar cane and the production of agricultural implements and materials. In summary, Angola's initial experiment with centralization and administrative controls is understandable, in view of the post-independence disruption and insecurity, the harshness of the Portuguese system of private sector exploitation and the disarray following the massive exodus of Portuguese farmers and traders. Nevertheless, the maintenance of these policies despite the obvious constraints and failures is now recognized by many Angolan policy-makers as a mistake. 4.08 In addition to the problems of security and inadequate policies, investment in agriculture has been limited and poorly planned and imple- mented. In 1986, for instance, of the US$12.6 million in foreign exchange equivalent originally approved for investment, only US$2 million was made available, in view of the severe balance of payments constraints. Moreover, while a cursory review of the 1986 investment performance shows a level of implementation exceeding 100?, it appears that 69Z of the total investment for agriculture went to build 900 residences in Kuanza-Bengo, a questionable project not contemplated originally in the Ministry of Agriculture plan. In contrast, only 47Z of the planned investment for training and support services took place. Rural Structure 4.09 Producer Organization. Policies regarding the organization of agriculture since independence have emphasized state or collective owner- ship. However, some private commercial farms continue to exist and the SEF program encourages the expansion of private commercial farming and gives greater attention to the individual peasant producer. Official policy for agriculture established two main forms of organization: (a) State Farms or AUPs (ARrupamentos de Unidades de Producao). Abandoned commercial farms were combined into state-owned production units with managers and workers as public employees. AUPs depend on the Government for financial support and they have incurred substantial losses. In 1986 the reported losses of state - 61 - farms were 1815 million Kz, or US$61.3 million at the official exchange rate; and (b) Peasant Associations. Intended originally to be collectives, thty have become agglomerations of peasant households making their own production decisions. Their presumed advantage is priority access to government services and inputs. Unlike state farms, peasant associations do not collectivize production. 4.10 Despite the effort to change the rural structure to conform to ideological considerations, the role of the peasant remains essentially the same as it was before independence. Today the rural structure consists of three major groups: (i) declining large-scale state farms; (ii) relatively small numbers of Portuguese farmers known as cooperantes*, and of Angolan farmers, who produce mainly fruits and vegetables in middle sized farms; and (iii) a large and dominant sector of peasant (small holder) agriculture. The latter is made up of various types of producers: (a) pastoralists in the Southern regions engaged in nomadic herding; (b) small-scale farmers producing maize, sorghum and cattle in the transitional zones of the pastoral areas; (c) small farmers in the fertile and densely populated central plateau; (d) small farmers in the coffee areas; (e) small farmers growing cassava as their main staple in the Northern and North Eastern regions and in the tropical forest; and (f) a small number of hunters in the far South. The typical peasant family cultivates 1.5 to 2.5 ha with subsistence crops. Rotation and intercropping is the usual practice. Tools are rudimentary with the hoe most common. Animal traction is used in some areas, such as the fertile areas of Huila province. The number of peasant family units is estimated at between 800,000 and 1 million. 4.11 Whereas peasant agriculture remained essentially unchanged since independence, commercial farming, which flourished in colonial times, has almost disappeared. Colonial policy supported the cultivation of cash crops and livestock by settlers from Portugal with land grants and financial incentives. Substantial investments were made in infrastructure such as irrigation and transport in support of commercial farming. Farm sizes varied, with some farms as large as several thousand ha. Commercial livestock production is estimated to have been as high as 40; of the total. 4.12 Marketing and Parallel Market. The Ministry of Internal Commer:e (MIC) is responsible for the supply and distribution of goods in both urban and rural areas. In rural areas, MIC is expected to supply consumption goods in exchange for agricultural products. The distribution of meat, however, is under the control of the Ministry of Agriculture. The goods to be supplied are planned annually at the central level in what is known as the 'Fundo da Hercadoria para a Populacaol. Before independence, merchants, estimated at between 20,000 and 30,000, performed the marketing in rural areas. Most were not specialized traders but combined trading with farming and cattle raising. The variety and flexibility of the large number of private traders and entrepreneurs responded to the local conditions in a way the present centralized trading system is not able to. - 62 - 4.13 Government stores have very few goods to offer. It is estimated that up to 901 of family income in Luanda is consumed in the parallel market. Most peasants have sufficient cereals but have no access to imports. The imported food goes to meet urban demand, the needs of the armed forces, and the displaced. In the absence of price incentives, the availability of consumer goods and access to them by the peasantry deter- mines the size of the rural suLplus available for exchange. Since the present system is failing to provide most of these needed goods (both consumer goods and agricultural inputz). peasants no longer produce for the market, but only to meet their family needs. 4.14 It is difficult to estimate how muchi of domestic agricultural production moves through official channels. For instance, in 1986, maize production through official channels was 18.6 thousand tons, whereas total maize production is estimated to be about 300 to 350 thousand tons, having been as high as 700,000 tons previously. Consumer goods, when available in rural areas, can be purchased up to the value of the produce the peasant supplies the store at official prices. The shelves of these stores, however, are empty and what goods become available move quickly to the parallel markets. More reliance on market forces is needed, not because such reform is in and of itself sufficient for agricultural development but because the flexibility and adjustment which markets allow, are prerequisites for a successful implementation of other measures promoting long-term agricultural development. Important steps in that direction were taken with the liberalization of many agricultural prices in 1988. Agricultural Support Services 4.15 Services. Agricultural support services come under the Ministry of Agriculture, with the exception of ENCODIPA which deals with marketing. Excessive centralization and severe limitations of qualified staff generally inhibit their effectiveness. The Ministry of Agriculture, within the guidelines and objectives of the S.E.F. program, is reviewing agricultural policy and ways by which to improve agricultural services. At the provincial level, the Ministry of Agriculture is represented by a branch (Delegacao) with "directoratesm to support peasant associations, livestock, conservation, etc. There is no institutionalized rural credit system and all services to agriculture are provided by state agencies. With no alternatives in the private sector, these agencies are the conduits of all supplies. Even when seeds can reach the provincial level through official channels, there are no local and intermediate marketing links. It is indicative of conditions prevailing in Angola and iin particular of price distortions, that as much as one-third of seeds destined for planting are used for human consumption despite being chemically treated. 4.16 Security problems and problems of infrastructure, especially of transport, affect the provision of agricultural services. However, structure and organizat_on of the support system diminishes its effectiveness and creates distortions. In fact the emerging emphasis on the neglected peasantry is mistakenly perceived as requiring another layer of costly official institutions. The recently introduced agricultural development stations (EDAs), for instance, are already burdened with - 63 - Departments of Planning, Finance, Human Resources, Technology, Supply, and others (i.e., yet another cumbersome bureaucracy). Agricultural policy and organization should move in the opposite direction and become less reliant on the public sector. Government institutions have an important role to play in supporting production and some public services should clearly be strengthened. However, the extreme scarcity of human, organizational, and financial resources has made excessive reliance on government a risky course. Some of the agricultural support services provided are described further below but it should be noted that at the beginning of 1989 the Angolan authorities were preparing substantial changes in the structure and in the range of activities of the agencies and of the public enterprises operating in the agricultural sector. (a) Mechanization: ENAMA (Empresa Nacional de Mecanizacao Agricola) provides mechanical services to agriculture. It is involved in ground clearing, leveling, and construction of earthworks for reservoirs. In 1986, less than 2? of the work force of ENAMA was classified as technical and more than 70? of its tractor fleet was inoperative due to lack of spare parts and maintenance problems. The parts problem is aggravated by lack of uniformity in makes of equipment which is partly due to the fact that donors promote their own brand of equipment. (b) Fertilizers and Implements: DINAMA (Distribuidora Nacional de Materiais Agricolas) is responsible for the procurement and distribution of implements, fertilizer and insecticides. It procures and distributes these materials on the basis of the national master plan for the agricultural sector. But even when fertilizer and other inputs are available, transportation is a major constraint. Seventy percent of the transport fleet of DINAMA is out of commission. Even when the security situation permits, transport of supplies over long distances and poor roads is problematic. (c) Seedst ANGOSEMENTES is responsible for the purchase and distribution of seeds. Seed distribution is given high priority by the Ministry of Agriculture and the amounts of seed distributed have been increasing in recent years. The distribution of maize seed increased from 773 tons inl 1984 to 1,668 tons in 1985, and 1,994 tons in 1986. As noted earlier, however, a major share of these seeds goes to human consumption. (d) Marketing and Distribution of Goods: ENCODIPA (Empresa Nacional de Comercializacao e Distribuicao de Produtos Agricolas), under the Ministry of Internal Commerce, is responsible for providing consumer goods to rural areas in exchange for agricultural products. It operates through commercial outlets in both urban and rural areas. Although allocations are determined annually by the national economic plan, actual allocations may be different. As pointed out earlier, ENCODIPA's stores in the countryside are almost empty. (e) Extension Services: Dinamizadores rurais (rural mobilizers) can be considered a type of rural extension service. It is estimated that approximately 1,000 dinamizadores have been trained since independence with attrition around 30?. However, only about one third receive any training in - 64 - agriculture and there are no linkages between the dinamizadores and the other services. As with the other services, the development of extension is costly. In the face of enormous human resource gaps, extension should focus on grass roots support and organization rather than on formal institutions and agencies. The authorities are preparing a plan of rural extension with the objective of assisting 1 million families. A pilot project included in that program will start to be implemented in the Huila province in the years 1989-90. The organizational structure of the program appears to be heavy. Apparently it will involve some functions (including in particular rural trading) which should preferably be transferred to private enterprises. International technical assistance in this area is highly needed. (f) Agricultural Development Stations: EstagOes de Desenvolvimento Agricola (EDAs) are a recent introduction and constitute a response to the failures of the other institutions serving agriculture. The intention is to transform the state farms into peasant associations which do not collectivize production. The EDAs were designed to fill the gap between services which DINAMA and AGROSEMENTES provide and the peasant. EDAs, as pointed out earlier, are already heavily bureaucratized. 4.17 Agricultural Education and Research. The institutions whi'ch serve agriculture, depend on human resources. The scarcity of trained people at all levels is enormous. The colonial regime provided little training to Angolan nationals. Decolonization and the withdrawal of trained persons depleted all sectors of the skills needed to manage agriculture at the most basic levels. The few qualified individuals are drawn into administrative positions where the demands are perceived to be more immediate. In spite of Government efforts to improve agricultural education, most agricultural schools under the supervision of the Ministry of Agriculture are either closed or only partially operating, mainly because of security considerations and lack of food. There are tvo secondary technical schools in Huila and Huambo and another is being built in Malanje. The school in Uige was closed down for security reasons. The faculty of Agronomy is in Huambo. Even when institutions (e.g., for extension and research) are considered critical to agricultural development, simple and very selective forms of organization should be encouraged rather than the wholesale transplant of institutional models from environments with ample huaan resources. Institutional development should recognize the extremely limited human resources in Angola. Ani attempt at better understanding already existing peasant systems and their improvement might be a better approach to rural development in these circumstances. The Instituto de Investigacao Agronomica is the entity responsible for agricultural research in Angola. It has a staff of six agronomists, five of whom work at Huambo. Before independence, the institute had 60 professionals, some with graduate training. With the Portuguese exodus only one remained. There are no Angolans with M.S. or Ph.D. degrees in agricultural disciplines in the country. The lack of trained people and the dismantling of the limited agricultural research at independence left Angola with no capability in this area. Only sporadic contacts with international research centers (CYMMYT, ICRISAT) and national programs (mainly EMBRAPA in Brazil) have taken place. - 65 - Policy Reform 4.18 Agricultural Policy Adiustment and Supply Response. The memory of colonial exploitation and the identification of that period with a liberal market-based agricultural policy, should not prevent the return to greater market reliance. The objectives of SEF are an indication that Angolan economic policy makere are beginning to realize this. The distribution of power and land ownership are now different from that in the colonial period. The possible adverse effects of market-based agricultural policy can be dealt with through corrective measures and selective controls. The balance between social and economic objectives in agriculture does not have to preclude incentives for individual production, especially for the peasantry. 4.19 Government authorities recognize the need for urgent reform of agricultural policy. Policy reform is seen as a prerequisite to the needed technical assistance, institution building and agricultural investment for the country's long-term-agricultural development. Present production levels are so distant from production possibilities and past performance, that an initial positive response is assured. A program of agricultural policy adjustment should draw from experience elsewhere in Africa and should includes (a) production incentives through improved prices and the availability of consumer goods and inputs in the countryside; (b) institu- tional reforms encouraging local intermediaries and private transport for marketing and distribution; (c) investment for rehabilitation of storage and transport; and (d) coordinated and focused technical assistance and training to strengthen selective support services for agriculture. 4.20 The Angolan authorities have already liberalized the prices of a certain number of agricultural products. Agricultural supply response to price incentives has been shown to be positive throughout Africa, and the results already achieved since the liberalization of prices confirm that Angolan agriculture is not an exception. The recent experience in Huila province also illustrates that response. Improved availability of goods in the countryside of that province has brought about a significant increase in marketable supply. The total production of maize moving through official channels reached 17.5 thousand tons in 1986, of which one third was produced in Huila. Though this performance reflects better security cond'cions in this province, it is also an indication of peasant response to incentives. This production increase is modest when considering that in 1970 Huila marketed 50,000 tons of maize. 4.21 Even though a short term production response can come from the available labor and land, the long term development of Angolan agriculture will require improved practices and technology inputs and trained people. Increasing the financial and human resources, and improving the institutional organization necessary for stch development is a long-term process. Use of improved seeds, fertilizer, insecticides and animal traction should raise yields significantly. Increasing agricultural production will require institutional reform in order to reduce centralized state control and provide for more reliance on the peasantry. Such a reform is not as radical as it might appear since in practice production and distribution of the bulk of agricultural output already takes place outside - 66 - formal institutions and controls. This is also the case with regart to institutional support to agriculture, i.e., the gap between the official, controlled and planned actions and what actually happens is considerable. 4.22 The political economy of adiustment. A broad liberalization of agricultural production, marketing and distribution for all agricultural and food products within the context of SEF, is a prerequisite to reversing the dangerously declining food situation in Angola and realizing the country's agricultural potential. The major part of the economy has operated in the parallel informal sector. As the contribution of agriculture to Government revenue is marginal (with the exception of coffee) the liberalization of agricultural policy will have no adverse effect on current public finance. Rather, with appropriate policies, the increased agricultural production will improve agriculture's contribution to public revenues. The short-term effect of price liberalization will be adverse for those who presently benefit from access to agricultural products through official channels at controlled prices. But only a small share of the population has access to this limited supply and the percentage of income spent on price controlled goods is small. A senior public servant family in Luanda, with two members working, censumes about 52 to 10% of its monthly income on *the circuito official"--Government stores at official prices - unless he has access to special shops. What the agricultural policy reforms will accomplish is to legitimize what has been the parallel economy. An indirect benefit of more reliance on the market would be the reduction of corruption which the large discrepancies between official and parallel market prices is fomenting. 4.23 Potential response. While the security situation limits the potential for raising agricultural oroduction throughout the country, there are secure areas that could provide an immediate response to policy adjustment. The following regions, which constitute about 20 to 252 of the national territory, are relatively secure and could produce considerably more. (a) S-SW Region. From the city of Lobito on the Atlantic coast to the town of Tambor in the South to the valley of the river Cunene, about 300 km inland, where three areas can be distinguished: - an arid strip, where only irrigated agriculture is possible, limited to the plains of the main rivers; - a semi-arid strin, where rainfed agriculture is possible, based on drought-resistant grains such as massambala (sorghum) and massango (pearl millet), as well as cotton, while irrigated agriculture also offers attractive possibilities; - inland plateau, where rainfed agriculture is fully viable. (b) N-NW Region. Including Cabinda Province in the North and the coastal area south to Sumbe (capital of Cuanza Sul province), extending to the interior from Soyo and along the transport - 67 - corridor Luanda-Dondo. 1-te following agricultural areas can be delineated in this region: - Luanda region, between the Dande valley and the Cuanza; suitable for fruits and vegetables and also cassava, sweet potatoes and maize. Considerable potential and adequate infrastructure exist in this region to supply most of the food needs of the 1.2 million people of metropolitan Luanda. - Region south of the Cuanza, between the Cuanza valley and Sumbe, capital of Cuanza Sul province; cattle raising, cotton, food crops. - Region north of the Dande, between the Dande valley and the Soyo (course of the Zaire); food crops, inland fishing. - Cabinda region, comprising the province of Cabinda with considerable forestry potential. Appendix Table F.7 gives estimates of the potential response for major products over a three-year period if appropriate policies and incentives for agriculture are introduced. B. FISHERIES 4.24 The 1,600 Km long coastline of Angola, particularly to the south off Namibe and Benguela, is rich in fishing resources. The !-rting of the cold Benguela current and the warm Agulhas current creates favorable conditions for plankton, which attract sardine and horse mackerel, the two principal commercial species, accounting for about 90 per cent of the catch. Other species include tuna and shellfish, whose commercial potential the government is now beginning to develop. The fishing industry is based mainly in the Southwestern ports of Namibe, Tombwa and Lucira and the port of Lobito in Benguela province. Before Independence, the industry was relatively well-endowed with fish processing capacity for canning, freezing, drying and salting, and the production of fish meal and fish oil. At that time, most of the commercial catch was exported, mainly as fish meal or frorein fish. The fishing fleet was estimated at 700-800 boats in the early 197)s but many of these vessels departed following the outbreak of the 1975- 76 war. Industrial installations were abandoned, and often sabotaged, by their Portuguese owners, and the situation was exacerbated by the exodus of managers, technicians and trained seamen. Rehabilitation of industrial processing capacity has been slow, reflecting shortages of skills, limited foreign exchange, and delays in the delivery of equipment and spare parts. This procurement function is the responsibility of the National Enterprise for Assistance to the Fishing Industry (ENATIP). The Ministry of Fishing has overall control of the industry from fish capture to distribution, and supervises the activities of separate State Economic Units (UEE) operating in individual sectors. 4.25 Delays in the re-equipment of the national fleet and in the delivery of new vessels ordered from Spain have impeded the recovery of - 68 domestic fishing output. Ir. recent years, the Angolan fleet has landed between 65,000 and 75,000 tons annually, significantly below output levels in the late colonial period. However, domestic fish supplies are supplemented by foreign flshing fleets operating under licence in Angolan waters, which land a portion of their catch in Angolan ports in payment of fishing fees. This payment in kind rather than in foreign exchange increases domestic fish supplies for local consumption by some 120-130 thousand tons annually. For example, the total foreign fleet catch in 1987 was 295.7 thousand tons, of which 122.7 thousand tons or 41.5 per cent were landed in Angola. The total foreign catch in 1987 was considerably below 1985 (403.5 thousand tons) and 1986 levels (373.3 thousand tons), due mainly to the termination and consequent winding down of agreements with Spain and USSR. Several agreements with foreign fleets are likely to be revised in the near future in order to incorporate the higher operating capacity of the domestic Angolan fleet due to the arrival of new boats purchased from Spain and Italy. In 1987, the national fishing fleet numbered 466 motorized craft, excluding artisanal fishing boats. 4.26 In common with other state-owned productive sectors, the fishing industry is now caught up in the process of decentralization and reform launched by the SEF/PRE. The present organization of the industry is under review and the Ministry of Fisheries is evaluating the possibility of privatizing certain activities or forming mixed enterprises. Further broad policy objectives include higher production and better distribution facilities in order to increase domestic fisb consumption, and the reinvestment of a higher proportion of the foreign exchange earnings generated by the industry in modern installations and equipment. In addition to continued support for 'industrial fishinga, the Ministry will give greater priority to the development of artisanal fishing, particularly in the Southwest region. This region has the richest fishing areas and considerable international assistance, mainly from EEC governments, already has been received to restore the capacity of the national fishing fleet and rehabilitate fish processing activities. The Ministry of Fisheries is now incorporating individual investment projects in a Master Plan (Plano Director para as Pescas) which is in the final phases of preparation. This Plan identifies delays in supplies of parts and vital equipment as major obstacles to rehabilitation, together with shortages of trained staff and skilled labor, especially in the fishing fleet. 4.27 In the medium-term, the Ministry intends to promote the development of higher value species, notably shellfish. There is also some concern to avoid increases in the quotas allowed to foreign fleets on the grounds that fish stocks may be excessively depleted. There also are unconfirmed allegations that the fishing methods utilized by foreign fleets are reducing plankton supplies, thus threatening the sustainability of this valuable natural resource. Properly managed, the expansion of Angola's fishing industry would provide increased supplies of protein for dom'tic consumption and an important source of export earnings. The SEF/PRE reforms promise to bring this objective closer by increasing the financial autonomy of state firms, giving a greater role to the private sector, and by allowing firms to retain a larger share of foreign exchange earnings, which would relax the main constraint to the rehabilitation of the industry. - 69 - C. MINING Introduction 4.28 The geology of Angola was comparatively well explored and mapped in colonial times. Additional information has been gained from prospecting for oil and from more recent work carried out with foreign technical assistance. The most important mineral occurrences are the diamonds in Luanda Norte Province, the iron ore at Cassinga, and the phosphates in Cabinda and in Zaire Pro-vince. There are also small deposits of copper and associated minerals in various places, the possibility of development of small gold mines at M'popa and Lombige, as well as known deposits of mica, kaolin, asphaltic coal, rare earths and uranium, which might merit further exploration. Quartz, marble and granite are found in the south and are mined on a small scale. The only significant mining activity at present is that for diamonds. Thb iron ore mine is being held on care and maintenance, potential exploitation of phosphates has not gone ahead and exploration of other known deposits of various minerals is at a virtual standstill. 4.29 The prospecting for and development of mineral deposits in Angola is governed by law 5/79 which vests the mineral wealth of the country in the State, provides for the State to carry out all prospecting and for State mining enterprises to develop mineral deposits (with the assistance of outside agencies where necessary). Amendments to the law, which are expected to be published shortly, will permit foreign companies to prospect for minerals in Angola, and will remove the provision whereby mining companies must be 51Z owned by the State. Law 10/79 governing foreign investment in general is also under review. The Direccao Nacional de Geologia e Industria Mineira (DNGIM or Geominas) which is part of the Ministry of Industry, is the Government agency controlling prospecting and mining and recommending the issue of prospecting licences and mining leases. It is also responsible for geological mapping. Development of mineral deposits has been left in the hands of State enterprises especially formed for this purpose. Thu-, the Empresa Nacional de Diamantes de Angola (Endiama) controls the diamond inditstry and the Empresa Nacional de Ferro (Ferrangol) the iron ore mine at Cassinga. Other state enterprises exist for developing phosphates (Fosfang), granite and marble (Roremina), quartz (Minoquartz), and underground water (Hydromina). Diamonds 4.30 Development until 1987. Diamonds were first discovered in Angola in 1912. They exist in Angola in three environments--in gravels found in rivers and on river banks, in conglomerates known as Colonda resulting from old river beds subsequently disturbed and distributed, and in old volcanic pipes known as Kimberlites. The known deposits of alluvial diamonds are spread over very considerable areas, extending southwards from the Zaire border along the main rivers for some 400 kilometres in the northeast corner of the country and to the west a similar distance from the border along the Cuango River. While in general it is clear that considerable reserves of alluvial diamonds remain to be exploited, the detailed information available on proven reserves is unreliable. Complete records were not - 70 - handed over by previous managements and in recent years prospecting has been hampered by insecurity and by lack of staff. In 1979, Geominas estimated the reserves of diamonds in Luanda Norte, as shown in Table 4.2 below. Since then some 8.5m carats of alluvials have been mined from the river banks, beds and terraces, and there has been an unquantified deterioration in reserves due to illicit mining. Moreover, some of the reserves are located at a consideraole distance from existing plants. Table 4.2: ESTIM&TED RESERVES OF DIAMONDS IN LUNDA NORTE, 1979 Proven Grade Implied Grade (carats) (ct/m3) (carats) (ct/m3) Alluvial & Terraces 40m. 1.0 130m. 0.6 Kimberlites 50m. 1.2 22um. 1.0 Source : Geominas. 4.31 The Companhia de Diamantes de Angola (Diamang) was founded in 1917 with its Irincipal shareholder the Societe Generale de Belgique, the Ryan-Guggenheim group from the USA and various French and Portuguese banks. In 1921 it received the right to prospect for and mine diamonds throughout the whole of Angola, with only part of the coastal strip being excluded. Early developments concentrated on rich and easily available gravels. By the late 1940s production had risen to 800.000 carats a year. In the early 1970s production was coming from some 42 different areas, each with its own washing plant, and had reached just over 2m carats a year. After coffee, diamonds were Angola's most valuable export until they were surpassed by oil in 1971. In 1971, Diamang's concession was reduced to 50.000 sq.km. in the Luanda Norte are" and the remainder of the old concession was granted to the Consorcio Mineiro de Diamantes (Condiama), a consortium consisting of the Angolan Government, De Beers and Diamang. This was part of the effort at that time to extend mineral development over wider areas of the country. 4.32 In the aftermath of Independence almost all of Diamang's skilled expatriate labor force of 2.500 left and the overall labor force fell from 20.G00 to 6.000. In 1976, Diamang's head office was moved from Lisbon to Luanda, when the Angolan Government took over tne Portuguese State's 38Z interest in the company. This interest was increased to 77Z by nationalising the holdings of small shareholders in 1977 and 1979. Societe Generale and Sibeka remained the principal other shareholders with 17Z and a management agreement was signed with them. The Diamond Corporation, a De Beers subsidiary, and minor shareholder, continued to market the production through the Central Selling Organisation (CSO). - 71 - 4.33 Production fell to 333.000 carats in 1977 and in an effort to improve the situation a new management agreement was signed with Mining and Technical Services Ltd. (MATS), a company indirectly owned by De Beers or its associates. This company managed to double production in 1978 and to increase it further to nearly 1.5m carats in 1980. Meanwhile, in line with law 5179, a state enterprise, Endiama, was incorporated in 1981 to take over the State's holding in Diamang. It also was given the right to market all diamonds produced in Angola and to prospect for diamonds throughout the country. The contract with HATS was not renewed in 1985 for several reasons, including: (a) attacks on installations in the Cuango area and on the company's supply routes, which affected the provision of consumer goods to workers and required the airlifting of diesel fuel and spare parts; (b) the deterioration in security against theft in Lucapa and Andrade; (c) the fall in diamond prices; and (d) dissatisfaction on the part of E.diama with the performance and cost of MATS. In 1986, shareholders decided to put Diamang into liquidation due to the accumulation of operating losses, whereupon the State assumed the responsibility for the liabilities of Diamang, while Endiama assured the continuation of the operations. 4.34 Following a drop to only 267.000 carats ($16m.) in 1986, output recovered to around e7l.000 carats (S107m.) in 1987. Endiama achieved this by opening up the Cuango mining area again under a contract mining arrangement with RST. Under this arrangement Endiama seconded local staff to RST and allowed it the use of its equipment. In return RST supplied the necessary expertise and expatriate staff to operate the concession. RST meets all foreign exchange costs and Endiama meets the local costs. RST receives a fixed monthly payment in foreign exchange and a variable bonus based on its attainment of an agreed production plan. The contract is being renegotiated for a further two-year period, and will involve RST investing US$3 m. mainly in spares and earthmoving equipment, to be matched by a similar investment by Endiama. In 1987, a second co-.,ract mining arrangement was entered into for the Lucapa area with the Sociedade Portuguesa de Emprendimentos (SPE), a Portuguese group with access to staff previously employed by Diamang and in which Sibeka has an interest. This arrangement is for a two year period with phase one being the rehabilitation of the infrastructure in the area. It includes a prospecting component and provides for SPE to invest $3 m. in the first year. An unidentified third company is negotiating to enter into a further contract mining arrangement for the areas around Luo and Catoca. Negotiations with the De Beers group took a significant step forward after a letter of intent was signed between that group and Endiama, that could pave the way to the required investment in the kimberlites. If all goes according to plan on the mining side, Endiama will give the CSO in due course exclusive marketing rights to their production again. 4.35 A major concern of Endiama is the limited amount of prospecting that it is able to carry out at present, since this means that it is impossible to tailor operations L.o the average grade of the deposit, with the result that high- grading is almost certainly taking place. Given peace and stability a further major investment would be required from return the mines to the sort of high volume low grade operation that will make t'ie - 72 - most economic use of the remaining reserves. Through the years, Diamang, and its successor Endiama, built up and raintained a considerable social infrastructure in the Luanda Norte Provin.e. The company provided power and water, schools and hospitals, bus services and sports facilities for the entire province, and developed ranches and fruit and vegetable farms to supply its requirements. 4.36 Government Control and Pclicy Making Framework. The organisation and control of the diamond mining industry has always been different to that of the rest of the mining industry. In coloni&l times Diamang was very much a law unto itself, particularly in the mining areas. Now, although nominally responsible through Geominas, Endiama's management effectively reports directly to senior Government levels through the Minister of Industry. It also has a direct relationship with the National Bank ot Angola. Hence, the companiy continues to have a special position due to its economic and social importance. In October, 1986, the Economic Commission of the Council of Defence and Security decreed that the newly constituted management of Endiama must run the company without recourse to further loans of foreign exchange or local currency and that the company must survive on its earnings. Since then Endiama's management has been allowed to get on with the job. Endiama controls the operations of its contractors through agreed mining plans which are part of the basic agreement with them. how'-r, due to the weakness of the aata base on proven ore reserves, these plans have tended towards overmining in the past. Endiama is working to overcome this by including prospecting commitments in the more recent agreements. 4.37 Marketing and financial Derformance. Until December 1985, Angolan diamond production had always been sold through the Central Selling Organisation (CSO), which sells 802 of world production. Since 1986, the diamonds have been sold through the open market, first directly to diamond dealers, and subsequently by tender. Being a small producer, Angola has been able to ride on the back of the CSO's marketing monopoly. Endiama was able to sell its diamonds at higher prices than it would have obtained from the CSO, mainly because it was selling into a rising market, and its buyers required much lower mark-ups than the CSO. The CSO normally requires a mark-up of 11.12 on the diamonds it markets to cover expenses of its worldwide advertising for diamonds (same US$llOm in 1987) and from its role in running a buffer stock for diamonds, which at times has reached a value of US$2 billion. In comparison, an independent diamond merchant with low overheads and the ability to achieve a rapid turnover will only seek a margin around 32. Endiama is aware of the possibility that the tender system may not prove so profitable in a weaker market and has also been concerned that it is net building up any longterm relationships with the dealers involved in the tenders nor providing any training in diamond marketing for Angolan nationals. Consequently, since October 1988 it has been experimenting with a system of selling direct to selected diamond merchants upon the basis of its independent preevaluation with provision for the merchants involved to share excess profits with the company and for them to have Angolar.s in their offices to monitor the sales and to learn about diamond marketing. This arrangement seems likely to continue until Endiama returns to an exclusive arrangement with the CSO, perhaps early in 1990, if 73 - serious progress is made with an agreement with De Beers to develop a major kimberlite mine. In the meantime the CS0 is unwilling to buy only part of the production, but will market any diamonds that it itself produces. 4.38 In the absence of proper financial accounts, Endiama's profitability can only be assessed on the basis of its provisional accounts. As shown in Table 4.3, Endiamas foreign exchange earnings in 1987 amounted to about US$16 million. Deduction of domestic expenses running at Kz 117m. a month leave a monthly operating loss of Kz 66m. The Gover-iment provides a subsidy to make up to the company the added costs arising from the war and obligations to provide services to the people of the Lunda Norte Province, including payments to workers who are unemployed but still remain housed, paid and fed by the company. Hence, Endiana is left with monthly losses of around Kz 8om. As to the net foreign exchange earnings of the company, after net losses of US$52m. in 1985 and US$33m. in 1986, there should be a net surplus of some US$23m. in 1987. The det's taken over by Endiama from Diamang amount to some Kz 18bn, of which Kz 2Ln is due to the National Bank of Angola, and of the remaining Kz Sbn, Kz 2bn is due to local suppliers and Kz 6bn is owed in foreign exchange. Endiama pays a 5Z royalty on sales to the Government as well as paying normal income taxes when it makes a profit. - 74 - Table 4.3: ENDIAMA'S RECEIPTS AND DISBURSEMENTS IN FOREIGN EXCHANGE, 1985-a8 1985 1986 1987 1988 (9mths) Receipts Sales $33.937m $16.808m S97.280m $125.433D Disbursements Goods 38.025 13.862 10.099 27.354 Services Overseas salaries 9.043 6.384 9.400 4.717 Transport 23.432 16.627 20.947 12.950 Technical services 16.128 7.430 22.345 15.928 Royalties* .598 - 8.204 10.080 Brussells nffice .305 .125 Lisbon office .280 .160 .276 .230 Other financial costs .143 4.847 .116 4.940 Total disbursements S85.954 $49.435 $71,387 $76.239 Capital Expenditure 9.913 9.119 Net gain (loss) (S52.017) ($32.627) $15.980 840.073 * Royalties paid to contractors - payable to MATS in 1985 aud to RST in thereafter. Notes: 1. Gool4s included 43Z foodstuffs in 1985 and 562 in 1986. 2. Other financial costs In. 1986 includes expenditure that has not yet been allocated to other ca%egories. 3. Capital expenditure is not included in this schedule for 1985 and 1986 when some $5m was spent in 1985/86. Source: 1985 Ministry of Industry 1986. 1987 and 1988 Endiama 4.39 It is estimated that some US$50m worth of diamonds leave Angola unofficially every year, either smuggled across the Zaire border for sale in the open market in that country or smuggled to Lisbon. A small part of this arises from illicit mining that takes place near the Zaire border and on the fringes of the various areas mined by Endiama, but the major part comes from direct theft by people working on the mires. The au1.horitiev in Angola are well aware of the problem that exists. Security in the ivining areas is the joint responsibility of Endiama and of the mining police which reports to the Minister of State Security. Steps have been taken to improve cooperation between them and to tighten physical security at the - 75 - plants. Nevertheless, enormous pressures exist on everyone in the area to obtain diar;.-.s as they are the sole means of paying for both necessities a-d luxuries available only through traders from Zaire. The situation cannot realistically be expected to improve until consumer goods are available to workers and security personnel in Lunda Norte. 4.40 Prospects. The future of the diamond mining industry in Angola lies with the successful development of the kimberlite pipes krcw,n to exist there. There are over 638 of them in all, 300 of which have grades better than .04 carats per cubic metre. Four are especially interesting, as shown belows Gcade Diamond Name Size carat/m3 Type Latoca 66.2ha. 1.0 Low quality Camatue 19.8ha. .24 Good quality Camatchia 22.5ha. No firm information Camafuca-Camazombo 150.Oha. .10 Diverse In size alone the pipes are amongst the ten largest in the world. Despite the limited information available, there -would seem to be a strong chance for developing at least one major diamond mine from amongst them, given peace and stability. Endiama is currently discussing possible steps to develop these kimberlites with the De Beers group and also has offers of cooperation in this area from the USSR. In addition, other major mining finance groups with experience in diamond mining are showing some interest. The first requirement is for a desk study to pull together all existing information and to decide what further drilling and sampling is required before a full feasibility study is undertaken. Full development of a mir- would take at least five years and it is unlikely that a development of this mag'tude could be attempted before peace has been restored. 4.41 The contract mining arrangements entered into by Endiama should ensure that production is maintained at around a million carats a year in 1988, and expands steadily thereafter over the next five years, provided there are no serious attacks on mining installations. A major investment iu the development of one or more kimberlites could boost production in 1992. The following estimates of future production (shown in Table 4.4 below) are based on a range of assumptions including, in the worst case, further attacks in mining areas, and in the best case, a major additional mine coming into production in 1992. Whatever happens, some production from the kimberlites is expected in 1992. It is not expected that Endiama will achieve higher prices in 1988 than in 1987, but thereafter prices are expected to rise with inflation as the De Beers CSO continues to use its control of the market to achieve this. - 76 - Table 4.4: PROJECTED DIAMOND PRODUCTION, 1988-92 ($mi1lion) 1989 1990 1992 1995 Low 160 160 175 200 High 220 260 310 500 Best guess 180 210 230 360 Source: Mission estimates Other Minerals 4.42 Iron Ore. The iron ore deposits at Cassinga were discovered in 1910 but serious exploration did not commence until 1954 when development by the Companhia MLineira do Lobito began. By 1967, 130m tons of ore with 63Z fe had been proven and a further thousand million with 35Z to 532 fe was indicated. A USS93m project was developed in partnership with Krupp, including a 94 km branch line from the main railway, a pier for berthing bulk carriers of up to 160.000 dwt, and ship loading facilities capable of handling 5.000 tons per hour at Mocamedes (now Namibe). Exports began in 1967 and early reports showed the ore specification to be extremely acceptable. Between 5 n. and 6 m. tons a year were exported annually from 1968 to 1973. With the best of the high grade reserves depleted and the general situation uncertain, the mine was closed in 1974 before independence. Plans to reopen the mine in 1981 were disrupted by attacks on the power plant and the railway line. The mine 's now held on a care and maintenance basis. However, it will not be economically viable at current international prices, taking into account the enormous investments which would be needed in the railway and in the port And considering that the best ore reserves seem to have been depleted. Ferrangol also controls extensive iron ore deposits at Cassala-Kitunga and manganese in Kwanza-Norte. 4.43 PhosDates. Large deposits of phosphate occur in Cabinda at Mongo-Tando and in Zaire Province at Kindonacaxa. Reserves of lOm tons have been proven at Kindonacaxa and a 15.000 ton a year pilot plant was built in 1981. Tests shuv that the crushed phosphates produced are suitable for domestic use as fertilisers, but further development has been delayed mainly, it is understood, due to expected difficulties in transporting the fertilisers because of the war. A State enterprise Fosfang controls the production in the Zaire province and is studying the possibility of using the phosphate ores as a new material for the production of phosphoric acid. The deposits in Cabinda were prospected by Cofan, a consortium of Portuguese, US and British companies, which spent over a million dollars, but gave up when their concession expired due to lack of funds and discouraging results. Fosfang is reviewing the possibility of developing these deposits with the help of Bulgargeemin. - 77 - 4.44 Other Minerals. The only other mining taking place in AngolaL at present is the quarrying of granite, marble and quartz. In colonial times more than 22 companies were involved in the quarrying of granite, marble and ornamental rocks mainly in Huila and Namibe. Angolan black granite is highly regarded in world markets. Roremina (Empresa Nacional de Rochas Ornamentais) has recently chosen a partner for a joint venture company which will operate the two best granite quarries. The project will require an investment of about US$2.Sm. and will earn about US$3m. a year in foreign exch le. Expansion is envisaged if the project is a success. Its location means that there will be no interference from the war. Minquartz, another state company, controls the mining of quartz in Kuanza Sul, but because of security problems its production has been very low. In 1988 exports amounted to only 301 tons, worth US$ 336 thousand. Since the development of small gold deposits is fashionable in the mining world at present, it is possible that outside interest may be aroused in the small deposits at M'popo near Cassinga and at Chipinde in Huila/Huambo. the resources of Kaolin are also of significant economic interest. An investment of aboit USS 25 million will be made in a project to explore those resources in the province of Huila. Potential Censtraints 4.45 The extent of mineralization, the fact that eome 240 mining and e-ploration concessions existed in 1959 (although many of them were undoubtedly speculative), and the fact that 27 companies were actively prospecting and mining in Angola in 1970 are all indicative of the mineral potential of the country. Furthermore, most of the south east remains to be explored. The principal constraint on further development of the mining industry is without doubt the continuing war in Angola. Mining installations and essential infrastructure have been attacked, workers have been kidnapped, transport routes are seriously disrupted, and it is impossible for geologists to travel safely about the business of prospecting. As a result, the cost of running the diamond mines is vastly inflated. Diesel oil and essential spares have to be flown in to the mining area and it is difficult to get staff. The iron ore mine is closed following an attack on its power station and due to the insecurity -f the railway; phosphatus are not mined because the fertiliser product cannot be transported to the agricultural areas. 4.46 The development of the mining sector will be helped by the geological map (scale 1: 1 000 000) and by the geomorphological map (scale 1:1 200 000) of Angola. swever, since independence, with the exception of the oil industry, little has been done to encourage foreign investment, but with the proposed changes to the mining law and the policy changes expected to occur as a result of SEF, the way should now be clear for foreign interests to participate in the industry. Moreover, the experience of the oil companies will demonstrate that the Government is willing to allow those who do participate a good return on their investments. However, one major obstacle still stands in their way and that is the weakness of the local currency. Ways around this problem can be found by operating through unincorporated joint ventures, with the foreign investor assuming foreign exchange costs in return for a share of the foreign exchange earnings of - 78 - selling the production. A local partner, usually the Govsrnment in some form, would meet local costs and receive its reward from the rest of the production revenue. 4.47 Another constraint that is difficult to quantify in the present circumstances is the lack of management expertise and of capable artisans in Angola, as a result of the aimost total failure of the colonial power to train local people rather than use labor imported from Portugal. In the diamond mining areas, the lack of artisans has been partly overcome by employing people from the Phillipines who are willing to work for pay and conditions below those required by Europeans. However, this must be necessarily a temporary solution and any major development in the future will have to incorporate a high training component. It should be noted that this lack of management skills is also likely to hinder the Government in its dealings with prospective investors. If peace and an improved economic situation lead to a wider interest from outsiders in investment in Angola the Government will need assistance to enable it to find the right balance between encouraging investment and controlling those providing it. D. MANUFACTURING INDUSTRY Structure and Performance 4.48 At independence Angola had, for a country of its size and level of income, a relatively large and broadly based manufacturing sector. By 1974, there were almost 4000 registered manufacturing enterprises in the country employing 200,000 workers and producing the equivalent of US$650 million. Production ranged from processed food to shoes, textiles and metal fabrication, and was larger and more diversified than in most other African countries. The influx of settlers from Portugal during the few decades before independence had helped create a market for a range of consumer goods, and constituted a source of entrepreneurial, technical and ad- ministrative skills. The fact that Angola was regarded as an overseas province rather than a colony also encouraged the establishment of local industries. This was given a further bn--t in 1962 when exchange controls were imposed to avoid large scal- -apital flight after the outbreak of the liberation war in 1961. This measure led many large Portuguese trading companies and agricultural entcrprises to invest in manufacturing ac- tivities. 4.49 The situation changed radically a* independence when the massive departure of the Portuguese settlers caused numerous enterprises to be abandoned. While some of these maintained limited operations under government control, many others ceased to function altogether. The Portuguese exodus also deprived the sector of many of its human resources and affected the demand for manufactured goods. The outcome was a sharp drop in manufacturing activity. Out of a total of 687 enterprises listed in An&ola's company registry, 280 (41Z) are currently considered to be engaged in manufacturing, as compared to almost 4000 in 1974. Industrial production also declined dramatically. In 1977, industrial output had dropped to 28Z of the level achieved four years earlier (table 4.5). Mining in particular was hit very hard, with mineral output, mainly diamonds, down to as low as - 79 - lOt of production in 1973. The subsequent partial recovery was uneven. Though the index of industrial output masks shifts in the composition of production within each of the branches, it appears that light industry, which in 1987 produced 62S of its 1973 output, is furthest on the way towards regaining pre-independence levels of output. To a large extent, this recovery is attributable to two new textile plants, a medium scale one that started operations in Benguela in 1979, and the large Textang II plant in Luanda, which came on stream in 1983. The figures indicate, however, that production in most branches stagnated from 1983 to 1986, and then fell quite sharply in 1987. It appears that this is the result of a progressive deterioration of assets that have not been adequately maintained, and of the increasing scarcity of foreign exchange to purchase raw materials and other inputs. Table 4.5: INDEX OF INDUSTRIAL PRODUCTION, 1973-87 (1973 - 100) 1973 1977 1983 1986 1987 Weight in 1987 Food processing 100 37 48 48 42 33 Light industry 100 31 87 88 61 45 Heavy industry 100 24 45 52 36 15 Mining 100 10 28 13 17 7 Total 100 28 57 56 43 100 Source: Statistical Appendix, table H.5 4.50 Employment in manufacturing was also seriously affected by the widespread closure of companies and the decline in the level of activity after independence. Employment in registered manufacturing enterprises in 1984 amounted to 85,000 (representing a third of total employment in enterprises) compared to 200,000 ten years earlier. Having taken over many of the abandoned enterprises, the state has acquired a dominant position in the sector. This is reflected in its share of 78Z of manufacturing employment, with a further 6Z in state controlled joint ventures. (Table 4.6). - 80 - Table 4.6: EMPLOYMENT IN MANUFACTURING ENTERPRISES, 1984 No. of Total number Percent Average Ownership firms of workers of Total No. of Workers UEE 163 65,908 78 404 Mixed 13 5,330 6 410 Private 99 13,764 16 139 TOTAL 275 85.002 100 309 Source: Angola. Company Registry 4.51 The principal industrial branch in terms of output is light industry. In 1987, it contributed an estimated 45Z of total output, followed by food processing ;332), heavy industry (15Z), and mining (72). Before independence the structure of industry was somewhat different, with mining playing a more important role (17Z). In spite of the deteriorating trend in production, Angola's industry remains broadly based with a wide range of products. In 1987, the food processing subsector produced, among other products, beer and soft drinks (over 500,000 tons), corn meal and wheat flour (over 55,000 tons), cooking oil and margarine (over 4,500 tons) and a number of minor products. The light industry sector produced a variety of textiles and clothes, shoes, matches, plywood, soap, paint and glue, plastic ware, etc. Heavy industry produced tyres, bicycles and motorcycles, dry batteries, refrigerators, radios and televisions, metal furniture, etc. Although amounts produced are increasingly modest, production capacity for a wide range of consumer goods still exists. 3/ 4.52 Financial Performance.According to data collected by the Ministry of Industry, the manufacturing sector as a whole has been turning in a net loss at least from 1978 onwards. These losses have ranged from 92 to 182 of the value of gross output. While both the food processing and heavy industry branches have consistently operated at a loss, light industry as a whole has been profitable between 1981 and 1985. Obviously, within each branch of industry results vary a great deal. Until 1981, mining also showed a profit, but since then results have deteriorated rapidly. The combined loss of the manufacturing sector in 1987 was estimated at the equivalent of 172 of gross output. This figure would rise to 312 if mining were included. It should be stressed that, given the severe price distortions, the financial results are not a reflection of economic efficiency. Several reasons account for these losses. They include an overvalued exchange rate, price controls, low capacity utilization, and the inability to lay off workers when they are not needed. For example, the large deficits of Diamang (now Endiama) are a direct consequence of the 3/ Direct observations in plants visited would indicate that plant utilization is, on average, below 202 of nominal capacity (including auto-consumo and theft). - 81 - unrealistic exchange rate. The inflexibility of the wage bill is illustrated by a comparison of the results of 1986 with those of 1987. Although the value of output fell by 25Z in 1987 (in constant prices), payments for wages and salaries increased by 3Z. The large losses could only be sustained over such a lengthy period due to government subsidies. These subsidies, which included specific price subsidies and grants for working capital as well as the coverage of operating losses, reached Kz 3,270 million in 1985 for enterprises under the supervision of the Ministry of Industry (Table 4.7). Although government policy since 1986 stresses greater financial autn1r'-y of public enterprises, the budget for 1987 still included Kz 1,800 million as subsidies for industry. Table 4.7: FINANCIAL FLOWS BETWEEN GOVERNMENT AND INDUSTRIAL PUBLIC ENTERPRISES, 1980-87 a/ (Fz. million) 1980 1981 1982 1983 1984 1985 1986 1987 Profit transfers 287 814 552 623 796 701 862 Subsidies 1122 906 1505 1763 1976 3270 1428 1800 -losses 1122 864 1055 1161 1251 1660 760 750 -working capt. 31 28 50 27 300 -price subs. 42 450 571 697 1560 641 750 a/ Relates only to enterprises supervised by the Ministry of Industry Sources: Ministry of Industry and Ministry of Finance. 4.53 Investment. Public sector investments in manufacturing industry since 1980 have been erratic. The following table shows the pattern for the industries under the jurisdiction of the Ministry of Industry, subdivided into four categories usually considered in Angola, i.e., industries engaged in food processing, other light industry, heav} industry and mining. Heavy industry is somewhat of a misnomer, since apart trom a cement factory, the petroleum refinery and a moderately sized steel plant, truly heavy industry does not exist in Angola. The investment figures listed in Table 4.8 have usually covered a combination of civil works, equipment, technical assistance, studies and financing costs. The relatively large investments in the light industry sector in 1981 and 1982 were mainly for the textile plant Textang II in Luanda and for the forestry and plywood producing operation of Panga Panga. A large part of investment in heavy industry, notably in 1981, has been dedicated to rehabilitation of the steel plant. Total annual investments averaging the equivalent of about US$44 million appear small compared to total original investments in the manufacturing sector in Angola, which have been estimated at over of US$ 1 billion. - 82 - Table 4.8: PUBLIC SECTOR INVESTMENT IN INDUSTRY, 1980-86 (Kz. million) 1980 1981 1982 1983 1984 1985 1986 Food Proces. 167 700 700 nla nla n/a 229 Light Industry 158 1328 1038 n/a n/a n/a 304 Heavy Industry 330 1721 408 n/a n/a n/a 283 Mining 0 468 116 n/a n/a n/a 324 TOTALS 655 4217 2262 1064 672 463 1140 n/a - not available Source: Ministry of Industry. 4.54 Government control. Within the established centralized system of close guidance and control of economic activities, each industry, irrespective of ownership, is assigned a tutelary Ministry. The majority of firms (219) come under the Ministry of Industry, with several other ministries, notably those of Agriculture, Fisheries, and Construction also supervising some. A key responsibility of the tutelary Ministry is to develop, together with each enterprise, its yearly production plan, identifying inter alia financing needs for both working capital and investments, the level of subsily (if necessary) and foreign exchange requirements. The enterprise relies upon its tutelary ministry for the disbursement of operating subsidies and for the all-important foreign exchange allocation. Within the prevailing system, there is an incentive for the industry to keep the production target low, so as to avoid subsequent pressure for better performance. Profitability of operations, or even minimization of costs, have hitherto not been emphasized. The ministry on the other hand will make efforts to increase planned production. As a result of these opposed interests, the planning process becomes a negotiating process rather than a process to plan and optimize production per se. 4.55 A considerable number of firms under the tutelage of the Ministry of Industry are privately owned (36%), while a few others (5Z) are joint ventures of public and private capital, though with the former usually having a controlling stake. Private firms are considerably smaller than public manufacturing enterprises, at least measured in terms of number of employees. The averaga state owned company employed almost three times the number of workers as the average private firm. Each publicly-owned industry has a board of directors with representatives of both the party and the unions. In the period immediately following independence, many workers, with the aid of local committees and some support in the party, tried to take control of day-to-day management operations. Experiments with collective management, including workers commissions, were abandoned in late 1916. Enterprise directors are supposed to be selected from party ranks and have to be approved by the political bureau. - 83 - 4.56 Public sector industries are supposed to obtain their raw materials and inputs from other government owned companies. Imports are made exclusively through the state import monopoly and non-payment for these supplies is used as a common means to finance industrial operations. This, in effect, forces government to subsidize industry indirectly by footing the bill for a large part of industrial inputs through its own trading com- panies. In theory, total production has to be handed over to state distribution companies at pre-determined prices. In practice, a substantial part of production goes into other channels, including barter trade between enterprises, workers' auto-consumo, the enterprise's own auto-consumo, and theft. The latter has been estimated ab high as 35Z for certain producers of much sought after consumer articles, such as plastic toys and sandals. Industrial Policy 4.57 Despite the MPLA's commitment to the establishment of a socialist economy, its leaders have apparently taken a pragmatic approach with respect to nationalization and foreign investment. Legalization of state intervention in the economy, including nationalization of industry, was laid down in law 17/77 and by mid 1977, 85Z of the abandoned enterprises were put under state control. It was made clear, though, that foreign companies, including Portuguese, who were willing to work with the government would not be expropriated. 4.58 The Government's industrial development efforts have been marked by an absence of clear objectives. The early Central Committee resolution of October 1976 stressed a revival of production as a short term tactical aim, but did not indicate priorities. Relatively large investments were made in a few projects, notably in the production of textiles and steel, with the latter possibly reflecting an emphasis on heavy industry. The foreign exchange shortages during the 1980s have been felt acutely in industry, which is heavily dependent on imported inputs. The deteriorating situation in the manufacturing sector led to new guidelines for industrial development after the second party congress in 1985, which stressed the need to conserve foreign exchange. These gave priority to the production of mass consumer goods in order to reduce imports as well as to the provision of incentives for increased agricultural production. Diversification of exports was also supported. However, the fundamental question of the economic viability of existing industrial activities has not been addressed. There is at least a strong presumption that the relatively large and broadly based industrial sector Angola inherited at independence does not represent an efficient use of resources. This is in part due to the changes in the economic environment following the departure of the Portuguese settlers. Thus, a principal long-term aim of the government should be to restructure Angola's industrial base so that it better reflects relative scarcities of resources. 4.59 The existing system of incentives, as determined by policies affecting external trade, prices, interest rates and labor, does not help to achieve this industrial restructuring. The highly overvalued Kwanza, and the unrealistic official prices and interest rates are giving producers and consumers of manufactures the wrong signals, and have created a large gap - 84 - between demand and supply of foreign exchange, credit and most consumer and intermediate goods. This has required government intervention in the form of rationing, costly subsidization of many industrial activities, and tight control over operations and investments of public industrial enterprises. However, such intervention has been unable to correct for the price distortions. For example, the state controlled marketing system has failed to overcome the disincentive effect of unattractive prices on agricultural supplice to agro-inc stry. With regard to exports, the foreign exchange retention scheme which is supposed to partly offset the disincentive effect on exports of the overvalued Kwanza, only applies to a few exporters (e.g., Sonangol, and one hotel). Thus, a major adjustment of the system of incentives is a prerequisite for the establishment of a more viable industrial sector. 4.60 Policy changes with respect to industry are, among others, reflected in the proposals that are part of the SEF program. In principle, more operational autonomy will be granted to state enterprises, with the concomitant responsibility to operate profitably. Direct subsidies to offset operational losses are being restricted. While past policy was one of complete dependence of the enterprises on the government for funds, the new rules allow 50 of earnings to be retained. Companies were also promised increased leeway to set prices and to hire and fire personnel. These policy changes are predominantly of importance to state enterprises and will have less impact on private or mixed companies. Those private companies that remained in operation after independence have, by and large, been operating within the framework of pre-independence laws and regulations. Private industry has been left to fend for itself, though within the realities of a socialist economic system. Access to foreign exchange appears to be the main problem of these industries. Many of them operate, at least in part, through the parallel market. Repatriation of profits is allowed for private foreign investment up to an annual limit of 252 of the original foreign equity, but this rule is not automatically applied. Prospects and recommendations 4.61 Numerous industries have been kept in operation after independence in spite of fundamental changes in the market and in the economy in general. Limited resources, both material and human, are spread too thinly over a diversified industry whose broad range of production should be questioned. There are no indications of systematic efforts to restructure this industry with a view to using resources more efficiently. The wisdom of producing motorcycles while nuts and bolts have to be imported, should be questioned. An industrial sector study, focusing on the value added at international prices of major manufacturing sub-sectors and enterprises, should be undertaken. In those cases in which this value added is proportionately small and involves a high cost in domestic resources, it will in general be preferable to abandon the existing production. Such a move would contribute positively to the development of other domestic productive activities by releasing scarce resources, including skilled personnel and foreign exchange spent on imported inputs. Trained manpower being a major constraint, dedication of some of the country's financial resources to training of - 85 - technical shop floor personnel should show good returns in the long run. Angola urgently needs more of the type of trade school that exists at the steel plant in Luanda. Not only will such schools generate the technical cadre that is indispensable for the operation of industry, but from the ranks of these same technicians will spring the future entrepreneurs of small new industries. 4.62 The establishment of a more appropriate incentive framework is an essential step towards the creation of a more viable industrial base in Angola in the longer run. Policy measures relating to the exchange rate, prices, interest rates, import licensing and marketing are discussed elsewhere in this report as part of a general economic reform program. Together, these would gradually lessen the need for administrative controls and provide incentives to more efficient industrial activities. As these reforms will take time to become effective, the government shoald at the same time undertake a review of the major public enterprises in industry with a view to phasing out those enterprises that clearly lack long term economic viability. The remaining industries should be given greater operational autonomy, with tutelary Ministries focusing on monitoring and control of performance rather than on prescribing production levels. In the next few years, investments should be concentrated mainly on the recovery of those industries which appear to be viable in the long run, rather than on new projects. In addition to re-establishing the trade schools, the training of skilled operators should be encouraged by creating adequate salary differentials between skilled, semi-skilled and unskilled workers. There is also a need for an incentive and support system to encourage the growth of small entrepreneurs. Seed capital, foreign exchange allocation, pertinent legislation and fiscal incentives are among the measures needed. E. CONSTRUCTION AND BUILDING MATERIALS Introduction 4.63 Angola's infrastructure, industrial and urban sectors all require significant levels of new investment to rehabilitate systems, improve output, and raise the quality of services. The successful implementation of such investment programs requires the availability of au appropriate mix of funding, materials, human resources and construction enterprises. In the early 1980s, the infrastrutural planning focus has been on financing issues, with less emphasis on the physical inputs and production elements. However, in recent years, it has become increasingly obvious that tha national construction sector, which includes all activities from design to building services, was incapable of even meeting routine needs, let alone the consequences of any new investment packages. Many such programs would require quantities of materials (sometimes large) which could be reliably supplied against tight construction schedules, while meeting minimum standards of quality at reasonable cost. The national construction materials sector is presently incapable of meeting these conditions and this represents a serious obstacle to the success of generAl recovery programs like SEF and to specific sectoral programs like urban renewal. - 86 - 4.64 The Ministry of Construction (MC) is the apex sectoral planning entity and has managed its operations by categorizing activities geographically (province, region and national) and by type of output (building, engineering and materials). However, productivity has continued to fall throughout t1:e 1980s. In 1986, only about half (52Z) of the MC planned output was achieved by the 34 companies directly under its control - Kz 4,7 billion out of a targeted Kz 9.1 billion. Furthermore, global production expenses for the sector were double the sales income received, although 23 companies were reported as financially self supporting during the same period. There are 12 companies (almost all state entities) responsible for the construction of buildings, 8 for infrastructural projects, 10 supplying materials and 4 providing specialist services like geo-technical work. 4.65 While building and engineering companies are generally under the direct responsibility of the Ministry of Construction, in the materials sub- sector the Ministry of Industry (MI) largely controls metal, plastics, paints and electrical products. As an example, in a study of building materials in the Luanda region, consultants found four separate organizations involved in the operation of companies and production units in the sub-sector. These were: (i) Ministry of Constructions 17 companies and 40 production sites. (ii) Ministry of Industry: 18 companies and 21 production sites. (iii) Commissars 15 production units, and (iv) Ministry of Agriculture: 2 production units This highlights a potential problem of coordination within the sub-sector and points towards recognition of the heterogeneous nature of the sub-sector when considering much needed policy reforms. The study of the building and construction materials industry identified over 80 production sites in Luanda and Bengo alone, and there are likely to be many more small units working in the parallel or informal market. However, it is the commercial strength of the larger companies that will either help or hinder economic recovery in the short to medium term, and these should be the initial focus of sub-sector investment. Performance of the Sector 4.66 Table 4.9 shows construction output for 1985 and 1986, by category of company. It is noted that output in the building sector has fallen - 87 - Table 4.9: BUILDING AND ENGINEERING CONSTRUCTION OUTPUT, 1985 AND 1986 (Kz million) Categories Building Engineering Total 2 Achieved of Planned Output 1985 1986 1985 1986 1985 1986 1986 Provincial Delegations 42 77 410 394 452 472 55 Provincial Companies 1,226 373 47 122 1,274 495 65 Regional Companies* 611 862 611 862 87 National Companies 1,817 1,254 174 198 1,991 1,452 35 Total Sector 3,086 1,705 1,243 1,576 4,329 3,281 49 * Not operating in building sub-sector Source: Annual Report: Construction Sector, MC.1987 back in 1986, while the engineering groups have generally shown some growth. However, total sector production fell by 25 percent. Equally importantly, the full sector was operating at less than half capacity. Contracting with international construction companies is generally a second-best solution, and the long term policy which accords most effectively with economic reform programs is one which would strengthen the national sector and enable it to provide a good proportion of the required services on schedule, within estimated cost, and at a profit. Recent data confirm that the sector continues to weakean, adversely affecting productivity and financial strength. Sub-sector performances are briefly detailed below. 4.67 Engineering - In 1986, this sub-sector employed over 6000 workers, and produced an output valued at Kz 1.6 billion, with one company responsible for half of that value. In the balance sheet for that year, total expenditures for the sector exceeded revenues by over 40 percent. In general terms, mixed companies fared better than public entities. Total revenues were dominated by general work (742) followed by the maritime sector (10Z), bridges (72), and water/sanitation (22). The small size of the latter category is rather surprising given the rapid growth of urbanization, which must have created a significant demand for basic utilities throughout the country. - 88 - 4.68 Building - This sub-sector accounts for 46Z of the MC budget and over 60? of its foreign exchange budget. It employed over 10.000 workers in 1986, most with low levels of education and skills. The need to augment the work force with specialized foreign personnel (730) contributed to the size of the foreign exchange needs, and this is likely to be a feature of building operations over the short and medium term. As with engineering sub-sector, overall financial performance was very poor, and expenses exceeded revenues by almost 50X. Gross output, at Kz 2.6 billion, was only that of 1983, showing that despite the need for various rehabilitation in recent vears, output has failed to respond and meet this demand. A few companies dominate the sub-sector and 3 entities were responsible for over 60? of the revenue generated. 4.69 Materials - In terms of the MC budget, this sub-sector is relatively modest in its financial needs, accounting for 152 of MC costs and 14? of its foreign exchange allocations. Nevertheless, it is critical in any recovery strategy for the building and engineering sub-sectors. In addition, there are excellent job creation and foreign exchange saving opportunities which strengthen the attractiveness of investment in materials production. In 1QB6, actual revenue reached Rz 1,436 million, which was about 6Z of planned targets. Investment Proposals 4.70 In the southern region, a number of measures have been proposed to carry out emergency rehabilitation of existing infrastructure, together with new buildings and facilities required as part of the economic recovery program, including low cost housing and community infrastructure. To accomplish these objectives, it is proposed tot (i) develop appropriate building and construction techniques, taking into account technical skills and materials availability; (ii) improving the capacity of local production units, especially for brickmaking, cement, wood products and carpentry activities; (iii) promote small scale labor intensive construction projects (irrigation, rural roads); and (iv) improve technical assistance and organization to meet the extensive construction needs. No costs are given for the program, though the labor intensive program is estimated at around US$0.5 million per year, including payments in food for salary. Technical assistance costs, including key personnel and equipment for a single, large five year program totais out at US$ 3.3 million. 4.71 In the Luanda region, consultants selected 46 factories to assess what actions could be taken to raise productivity, currently averaging only 16? of installed capacity. They concentrated attention on the production of clay bricks, wooden door and window frames, and steel reinforcing bars, and found that major factors affecting output were shortages of foreign exchange for raw materials and spare parts, lack of manpower skills and poor staff incentives. They recommended a five year program of 44 projects which would cost US$22 million plus Kz 159 million (1988 prices) local currency to fund (a) US$10.2 million technical assistance, (b) US$ 9.8 million equipment purchases and (c) US$2 million plus Kz 159 million for civil works. In addition, they recommend linking financial incentives to productivity for - 89 - salary payments. Management: techniques (like setting production targets) and accounting practices alto need improvement and strengthening. 4.72 It is currently unclear how ministerial staff intend to schedule these programs and integrate them into overall sector planning. Most production entities are struggling with a complex series of problems, some operational and others completely out of their control. At this moment, the size and economic significance of the informal market is unknown, except that it dominates the private housing construction sub-sector. However, MC staff are correct in attempting to improve the productivity of the larger formal companies so that short and medium term planning can be strengthened. Since the production methods of many building products and materials do not lend themselves to small scale units, MC staff should identify those entities more suitable for private/mixed operations and separate them from those where government finance and technical assistance would have a high impact. It needs to focus on those key materials related to proposed investment projects, and try organize and support the sector so that material centres (of whatever ownership pattern) supply as much of the related demand as possible. Conclusions 4.73 The main points to emerge from this review of the building and construction materials sector are the following: Mi) the national construction sector, covering activities from design to uilding services, is currently incapable of meeting routine demand for products and services, sad output has continued to fall throughout the 19809. (ii) output in the government controlled sector is domina%ed by few companies, while many other units contributing little value continue to absorb budgetary resources. (iii) the work force is difficult to motivate, education and training skills are low, and absenteeism is increasing. Part of this is related to very low salary purchasing power. (iv) equipment needs are often specialized; public companies have a worse record of equipment maintenance and availability than mixed entities, and spare parts availability for all the sector is poor causing frequent breakdowns in production. In addition, the irregular supply of materials, both from local and imported sources, combines with production difficulties to affect productivity. (v) poor stock, accounting and inventory controls are noted in the sector, leading to waste, losses and theft of costly items, which therefore contributes to a lack of cost control. - 90 - (vi) low availability of transport services severly constrains the supply of raw materials, operational capabilities and the distribution of final products. (vii) the security situation continues to limit operations and raise costs. 4.74 Within the overall context created by the security situ%%!nn and macroeconomic policies, sector policies should focus on strengthtning the sector and improving operational capabilities. Specific measures might include: (i) calculating the demand for products and services on a regional basis, and avoiding the necessity of importation wherever possible. This requires a five year plan, covering both existing demand patterns and those arising from investment in construction programs of a.l types. (ii) reducing the number of goverpment controlled entities by focusing on the key production centers and cutting those absorbing resources without prospect for improvement. (iii) strengthening the role of mixed and private enterprises, (iv) rationalizing public enterprises in the sector by setting achievable targets, payment by results, adequate salary levels and improved access to foreign exchange where appropriate to production needs, implementing cost control and introducing appropriate accounting system to manage costs, help set prices and determine investment requirements. The current situation creates a grave hindrance to economic recovery and labor employment prospects. Produiction does not meet demand levels, at official prices, and is highly erratic as a consequence of both input difficulties and production problems. If sectei forecasting can be coordinated with other sector needs, like deman4 from infrastructure, transport and urban renewal, bottlenecks can be identified. These can then be analyzed and alternative strategies developed to correct deficiencies, and determine alternative local and regional sources of supply, before international sources are employed. - 91 - F. ENERGY 4/ Introduction 4.75 By African standards, Angola is well endowed with energy resources, including a large hydro potential, ample biomass stocks and substantial oil and gas reserves. In terms of its proven oil and gas reserves, Angola ranks first among the African countries with medium-scale hydrocarbons. Furthermore, based on both the crude oil reserves which have been discovered so far (more than 1.4 billion bbls. equivalent to about 17.5 million tons) and the current level of domestic petroleum product consumption (aboat 1.5 million tons p.a.), Angola's long-run position is that of self-sufficiency in oil (assuming that the rate of time preference is positive). 4.76 In 1986, Angola's primary energy supply amounted to 19.7 billion toe which, on a per capita basis (2.2 toe), is an exceptionally high figur_. However, if adjusted for crude oil exports, the non-energy use of natural gas (reinjection) and the losses involved in charcoal production, final energy consumption proves moderate (see Table 4.10 below). In 1986, final energy consumption worked cut at 229 kgoe per capita, of which about 102 kg were commercial energy (petroleum products and electricity). For comparison, in 1985 final commercial energy consumption in Gabon and the Congo (two other African countries with medium-scale hydrocarbon endowments) amounted to 602 kgoe and 151 kgoe, respectively. Table 4.10: ENERGY BALANCE OVERVIEW 1986 (in '000 toe) Fuelwood/ Natural Crude Electricity Petroleum Charcoal Gas Oil Hydro Products Total Total Domestic 2,074 3,418 14,102 173 - 19,765 Supply of Primary Energy Final Energy Consumption 1,180 49 879 2,108 Source : Energy Sector Assessment Report. 41 This section provides an overview of the energy sector, based on the forthcoming Energy Sector Assessment report, which should be consulted for further details on the sector. - 92 - 4.77 Figures on comercial energy consumption indicate that in the 1980s there was hardly any correlation between energy demand and the overall performance of the economy. As real GDP declined between 1980 and 1986, the consumption of electricity remained almost constant (-0,51) while the consumption of petroleum products showed a strong upward trend (+6.62), as shown in Table 4.11 below. In fact, given the extremely low level of electricity tariffs and refined product prices (measured in terms of the purchasing power of parallel market income), commercial energy demand (dominated by household and mil.tary use) did not face constraints other than those set by the supply capacity and the availability of end-use devices. Accordingly, the regional and sectoral distribution of commercial energy became heavily distorted, reflecting the drawbacks of the civil war and the depressed and disintegrated state of the economy. Table 4.11: SELECTED INDICATORS ON ANGOLA'S ENERGY SECTOR Average Annual Rate of Change a/ 1986 1980-1986 (X) Crude Oil Reserves (million bbl) 1,418 - Crude Oil Production (1,000 b/d) 282 (b) +14.70 Natural Gas Reserves (TCF) 5 - Petroleum Product Consumption (1,000 toe) 879 + 6.63 Electricity Consumption (GWh) 588 - 0.49 Electricity Generation (GWh) 753 + 0.57 a/ Least square estimates. b/ In early 1988, oil output had increased to about 450 000 barrels per day and the reserves to production ratio had dropped to below 10 years. Source : Minist-y of Energy and Petroleum and mission estimates. 4.78 Woodfuels contribute significantly the country's energy balance, even though the supply from rural areas is frequently disrupted. However, the high degree of urbanization and the constraints imposed by the war have led to regional and local supply/demand imbalances, particularly in urban coastal areas. Moreover, in nominal terms woodfuels, which are almost exclusively traded in parallel markets, prove to be the country's most expensive source of energy, a fact which is attributable to temporary, war-dependent shortages and inefficiencies (particularly in the distribution systems), rather than to a general lack of biomass resources. The Role of Petroleum 4.79 As explained in Chapter 2, the petroleum sector has beca of crucial importance to the economy of the country. While Angola has not been - 93 - in a position to optimally use tts oil revenues, it managed to develop the petroleum sector in a fairly efficient way. Large investments undertaken in the 1980s (financed by foreign private capital) laid the groundwork for a continuous increase in oil production since 1982, and except for 1986 output growth even offset the fall in international petroleum prices. So far, a non-distortionary (but tight) tax regime (which concentrates on net profits rather than on royalties), favorable geological conditions and comparatively low production costs have attracted the foreign capital required to keep the petroleum sector prospering. Between 1980 and 1986 the average annual investments in crude oil exploration and development amounted to USS390 million, and for the period 1987-90 the expenditures in upstream activities are scheduled to exceed US$500 million per annum (see Appendix Table G.3). However, the deterioration of Angola's balance of payments in 1986/67, the financial burden of loss-making downstream operations and growing debt service requirements of SONANGOL (the country's state-owned oil company), coupled with the fact that part of the old SONANGOL management has recently been replaced with relatively inexperienced technocrats, will make it difficult to maintain the high level of investments required to ensure that crude oil preduction continues to rise in the 1990s. 4.80 Clearly, as long as the war continues, Angola's primary concern will be the development and exploitation of its oil reserves at the fastest pace possible. Moreover, if petroleum prices remain in the vicinity of US$16/bbl until the early 1990s, there is a strong economic incentive to deplete the producing fields as quickly as feasible (and to convert the oil into more profitable assets). However in the medium term, the more relevant question will be the country's absorptive capacity for oil revenues, particularly if output continues to increase as rapidly as in the past. Broadly speaking, in the event of peace, it might become more advisable to slow down the expansion of the petroleum sector and to give priority to the development of other sectors, such as agriculture and industry. In fact, the removal of the war constraints would favor the implementation of a structural adjustment program envisaging a reduced dependence of the economy on oil. 4.81 For the next three to four years, however, the crude oil production rate is by and large determined by the level of past and current investments in field development on the one hand, and the pressing revenue needs of the Government on the other hand. In 1987, petroleum output increased significantly to 351,000 b/d. Output growth continued in 1988, but will probably slow down by 1990. Crude oil export revenues recovered from US$1,150 million in 1986 to US$2,000 million in 1987 and climbed further to around US$2,600 million in 1988 (see Table 4.12 below). However, since production from. Cabinda is expected to stagnate at the end of the 1980s (due to delays in investment and the shifting of priorities towards Block 3), export earnings will remain below the US$3,000 million level until the early 1990s (unless oil prices happen to rise considerably). - 94 - Table 4.12: PROJECTED CRUDE OIL EXPORTS, 1987-1991 1987 1988 a/ 1989 1990 1991 Oil Production (million tons) 17.55 21.70 22.25 22.40 22.50 Exports (million tons) 16.05 20.02 20.75 20.90 21.00 International Price of Oil (USS/bbl) 17 18 18 19 19 Export Revenues (milion US$) 1,992 2,631 2,727 2,899 2,913 Source: Sonangol and mission estimates. a/ Actual oil production in 1988 was 22.5 m.tons. 4.82 Apart from the planned investments (by foreign ail companies) in oil exploration and development, which are required to prevent the reserves- to-production ratio from falling significantly below the level of 10 years, there is no need for additional heavy investment in up or downstream operations of the petroleum sector. In particular, the Government should refrain from any attempts designed to integrate the oil enclave into the economy on the basis of large downstream projects such as fertilizer production or refinery modernization/expansion. In the medium-term the economic prospects for the proposed ammonia/urea plant are far from favorable. Moreover, the recent de-bottlenecking of the Luanda refinery (which seems to run profitably) will make a broadly satisfactory supply of the domestic market feasible (with excess fuel oil being exported and deficit fuels being imported at the margin). This is particularly the case if two minor, economically viable LPG recovery projects which could substitute for household LPG imports come on stream in the immediate future. The Power Sub-Sector 4.83 In the power sector, the main task will be the rehabilitation of the existing infrastructure (and the financial recovery of the utilities) rather than the provision of additional capacity. Power demand projections indicate that new capacity (above and beyond the existing capacity which is susceptible to rehabilitation) will not be required until the mid-1990s. Thus, the Capanda project, which involves a 4x130 MW hydroplant at an estimated total cost which could reach US$1.6 billion, will not contribute to the solution of the most pressing problems of the power sector. Rather, it will add considerable generating capacity for which there is no need (until the end of the century) and which could not even be used because of the limited and outworn transmission and distribution facilities of the country. It will also greatly inflate Angola's external debt and, at the same time, create very little additional revenue for the utilities, thus - 95 - aggravating the financial difficulties of the sector. In summary, therefore, the power sector should follow a risk-averse, least cost expansion path which concentrates on the maintenance of existing assets (and restores the financial viability of the utilities) rather than advancing a large and lumpy investment in additional capacity at a single location. Bio-mass Resources 4.84 The country's vast biomass resources (with an aggregate sustained yield exceeding 150 million tons per year) would, under normal conditions, easily meet rural and urban woodfuel demand. Hence, there is also no need to launch expensive afforestation programs. On the contrary, Government is well advised to continue its *hands-off' policy in order to avoid additional disruptions in the supply of firewood and charcoal, particularly to urban concentrations on the coast (the main shortage areas). However, with the return to peace, measures will be required to improve the efficiency and competitiveness of both woodfuel charcoal production and trade so that woodfuel supply costs become more reasonable relative to "commercial energy, counterparts such as LPG and Kerosene. Until then, government policy should restrict itself to selected activities in a few areas (e.g., introduction of improved stoves, agro-forestry trials in rural areas). Energy Policies 4.85 The key to a more rational use of Angola's energy resources are major improvements in the energy sector's incentive framework, combined with substantial efforts to upgrade the organizational and managerial capabilities of the institutions which are involved in the supply and distribution of energy commodities. In particular, measures should be taken to: (a) reduce wasteful and low priority consumption of petroleum products through the establishment of a more efficient pricing scheme which eliminates subsidies on the refinery's crude oil supply and petroleum product output and brings the domestic price structure in line with import and export parities; (b) privatize at least part of the petroleum product distribution system, currently a Sonangol monopoly; (c) adjust the electricity tariffs to a level at which the financial cost (and in the longer run, the economic cost) of supply can be recovered, and improve the management and revenue collection/ accounting system of the utilities by means of technical assistance, training efforts and a decentralization of responsibilities; and (d) develop policy instruments that may help to increase the competitiveness of woodfuel markets, to be implemented as soon as the civil strife comes to a halt. - 96 - 4.86 In view of the currently prevailing distortions in energy production and consumption, it is difficult to predict what changes in demand and supply are likely to result from the proposed policy measures. Moreover, much depends on when and to what extent the economy will recover from the present recession and what role agriculture and industry are going to play. Without resumption of growth in agriculture and industry and as long as the civil strife continues to disrupt the basic infrastructure of the country, the short-term demand impact of the measures will certainly be limited to the (urban) household sector. A more reasonably structured pricing system for household energy (in particular the prices of commercial energy compared to traditional energy sources) is likely to curb the future increase in electricity, LPG and kerosene consumption. However, industry's demand, which is dominated by a few energy-intensive operations using boiler fuels (cement, refinery, extraction) as well as government consumption which is biased towards transport fuels, will show little response unless major structural changes take place. 4.87 On the supply-side, the above-mentioned measures may lay the groundwork for a gradual financial recovery of the country's utilities and the fuel distribution system, so that future increases in demand can be met on a more viable basis. However, any sustained success in restoring the efficiency of the energy sector (excluding the oil enclave) is conditional on the design and sequencing of the overall policy reforms required for structural adjustment, on both the macro and micro levels. G. TRANSPORT Overview 4.88 Angola's basic infrastructure has strong colonial antecedents and its present configuration, though not its condition, is essentially unchanged since Independence (see map I). In 1975, the system had a comprehensive modal mix which included rail, highway, air, cabotage and shipping and provided an excellent opportunity for potential transit facilities to match or facilitate economic development. The modal pattern was dominated by a distinctive, lateral three rail-port corridor system (north, central and southern), supported by feeder road networks. Additional highways provided very basic north-south provincial links, as well as access to national borders. The air sector, which then linked all key provincial cities, has subsequently become the only dependable means of passenger and light freight transit over much of the country, due to the security situation. 4.89 In 1987, Angola's transport infrastructure comprised 72.000km of roads, 2.500km of railways, 3 international and 3 cabotage ports, and a hierarchy of 31 airports. An estimated 30.000 non-military trucks and 400 buses, 40 locomotives, 11 long distance ships, 10 cabotage vessels, and 21 aircraft operated infrequent modal services at low levels of efficiency. Rail and port systems form distinctive corridors, which previously ran eastwards from Luanda to Malange (a distance of 430km) in the north, Lobito to Luau (1.350km) in the central heartland and Namibe to Menongue (750km) in the south. Regions are linked to these corridors by 9.000 km of paved highway and 66.000 km of secondary and feeder roads, which together with the - 97 - air services provide the main means of north-south travel. Cabotage currently accounts for 180.000 tons of freight between the four main ports and has potential for substantial growth. The Cabinda enclave is dominated by the oil industry and the non-petroleum infrastructure is small. 4.90 Output from 1985 to 1987 for the system under the Ministry of Transport and Communications' (MINTEC) control is shown in Table 4.16 below. Total freight traffic for 1986, at around 3 million tons, is about three quarters that of 1985, with the road and maritime sectors compensating to a limited degree for the continuing decline in rail traffic. In 1987, the number of passengers carried fell below 25 million, following a decline in bus services which offset improvements in rail and air transit demand. The total value of MINTEC-controlled transport and communications services in 1987 was estimated at Kz 17.631 million, of which 312 was attributed to road services, 30X to air and the remainder split fairly evenly between the other modes and communications. The data for the period 1980 to 1987 show a significant decline in road activity, especially urban bus services, with rail and maritime holding constant, and port output rising slightly then falling back. The communications and air travel sub-sectors both showed consistent growth, although both faltered in 1987. In spite of the progress made in the sector, it is sobering to note that the value of total sector output in 1987 was less than half that achieved in 1974. Table 4.13 ANGOLA: OUTPUT OF MINTEC CONTROLLED TRANSPORT SERVICES (1985 - 1986) Freight a/ Passengers b/ 1985 1986 1987 1985 1986 1987 Road 996 1,309 1,100 29,475 19,546 16,203 Rail 521 465 517 7,200 7,980 6,398 Maritime 512 598 53 - - - Air 43 35 42 926 1,098 815 Ports 1,739 1,551 1,172 - - - Totals 3,812 3,958 2,884 37,602 28,623 23,516 a/ Thousands of tons. b/ Thousands of passengers. Source: MINTEC, 1987. 4.91 The security problem has disrupted all transport modes and severely constrained corridor operations. Services have been cut, investment programs cancelled and overall domestic transit efficiency lowered. Destruction of at least 45 bridges and key sections of track has virtually paralyzed regional rail movement and only 20X of the system can be - 98 - operated normally. Mineral shipments have ceased and port activities, 1.2 million tons in 1987, are concentrated on handling import commodities for urban consumption, especially food, for which rail transit is not well suited. Road transport to autarchic regional centers is only possible with armed convoys, operating irregularly and at great cost. The road system has not been systematically maintained since Independence, over 200 bridges need rehabilitation, and 5 400 Km (602) of paved surfaces need rehabilitation or reconstruction. 4.92 In 1987, the truck fleet was estimated at 30,000 units but many of these are not operational or are severely under-utilized. For example, in 1987, only 37Z of the heavy vehicles controlled by MINTEC were operational, their output had fallen 12Z over 1986 and vehicles averaged just 11,500 km a year. The state trucking sector has been very successful in channeling imported vehicles into their operations and this is reflected in a fleet profile which is technically sophisticated and young in age. The private sector, in comparison, operates vehicles generally at least ten years old and of simple, robust design. Fortunately, they are well suited * to current Angolan conditions where journeys are rarely longer than 50 km and vehicle trip speeds are low. Urban passenger transport is concentrated in Luanda where advanced bus designs are operated over extremely rough roads in overloaded conditions, resulting in service lives less than 20Z of those for normal use. Urban bus service levels during 1987, in terms of route kilometers offered, had fallen to 19Z of that achieved in 1981, which partially explains the growth in private taxi and light truck urban services. Demand still far exceeds supply, however, and all urban areas have experienced large growth rates in pedestrian flows which add to the problems of congestion and safety. All vehicles are affected by chronic spare parts supply problems which appear intractable under current distributional arrangements. 4.93 Port operations fell dramatically at Independence and in 1986 were less than a fifth of their 1973 level, which was 6.4 million tons. Furthermore, the flow of goods has been reversed, with imports dominating the freight business (representing 90Z of the 1.7 million total 1986 port tonnage). Facilities originally designed for large bulk exports are not adequate for the type of import products currently handled and the lack of warehousing, cold storage, secure areas, equipment and transport facilities result in an inefficient physical distribution system. Shipping is subject to costly delays, cargo is damaged and pilfering rampant. Angolan- controlled shinping accounts for about a third of port tonnage, divided equally between the three national agencies. Containers have not been a success due to a combination of ineffective and costly use within Angola and poor transshipment facilities. Operations at Luanda port have improved over the past 18 months only because traffic has declined over 60Z as a result of falling oil revenues. Privatization of container work is being openly discussed and t number of shipping agencies and companies are interested in taking on this business. Cabotage has failed to attract passengers or increase freight traffic, although MINTEC has given coastal transport a key role in their short term investment proposals. - 99 - 4.94 Air transport has grown consistently since 1975, assisted by attractive tariffs and greater security from attacks and sabotage. Aircraft are operated by Angolan Airlines (TAAG), which is nominally profitable due to cheap fuel, lcw wages and high load factors. The fleet is currently operating at about half the number of annual hours considered efficient for its operation. Six Boeing 707s are used for international flights, though they are banned from a number of European airports because they no longer meet 1988 European Community noise requirements. Domestic traffic is carried by a mixed fleet of 15 aircraft, including five Boe .ng 737s, though the marketing of domestic services is weak (for example, daily service schedules are published in the newspaper and not in easily distributed passenger time-tables). Airport activities are She reponsibility of the Airport and Navigation Company (ENANA), and airport facilities form the main constraint to improved subsector domestic operations. Most regional airports are unable to take the 737, cannot offer refuelling facilities and lack radio navigation and other safety aids. As a result, TAAG has to operate its domestic flights during daylight hours, which severely limits utilization and schedules. The need to fly planes with adequate fuel reserves and also meet high seat demand and carry urgent cargo, results in overloading. The reduction in safety margins is reflected in the loss of three 737s since 1977. Issues and Recommendations 4.95 The sector was found to be in urgent need of restructuring at all levels of modal activity. It is characterized, inter alia, by the following constraints: [i) inadequate fleet sizes of vehicles, trains, ships and airplanes; (ii) short service lives of road vehicles, railway engines and mechanical handling equipment of all types; (iii) distorted tariffs, leading to inefficient modal distribution of passengers and cargo; (iv) unreliable, ad-hoc and inconvenient service schedules; (v) the failure of urban passenger transit systems to meet the needs generated by rapid urbanization, and a consequent growth in pedestrian trips; (vi) chronic lack of foreign exchange to purchase all modal spares and poor support from the commercial section of the National Bank of Angola; (vii) weak transshipment capabilities, especially at port facilities; (viii) inadequate modal maintenance facilities and insufficient numbers of technical staff; - 100 - (ix) the large size of transport parastatal entities has created management and manpower staffing problems which are overwhelming administrators; (x) poor management, remuneration, and control of staff; and (xi) inconsistent road vehicle licensing arrangements. These constraints result in costly passenger and cargo rates in real terms and an inefficient demand for modal services. In general, the supply of services is totally inadequate to meet the demand at official price levels and parallel pricing of maintenance and services is present in the road subsector, together with queuing and time delays in other modes. 4.96 If the Government of Angola wants to take corrective action, it is important to note that the transport sector has limited capacity to absorb large investment programs. Limitations include inadequate local complementary s,rvices, lack of experience in managing large projects at Ministry and Provincial levels, and potential difficulties in meeting targets for locally produced and financed inputs because of irregular supply of locally manufactured materials and budgetary constraints. In these circumstances, a sector program focusing on short term, high impact projects with modest financing requirements seems to be the most appropriate response, supported by policy changes. Large single projects should be evaluated separately, taking into account their consequences in terms of sectoral absorptive capacity. 4.97 MINTEC's programming and evaluation unit has proposed a series of investment programs based on a hierarchy of provincial, regional and national/ international transport needs. The plans are modest and pragmatic and recognize the dual problems of security and budgetary constraints. In the short term, it is considered desirable to reduce the demand for air services, both cargo and passengers, by raising service levels in other modes, particularly highways and cabotage. In addition, MINTEC controlled tariffs are grossly distorted, do not reflect real resource costs and require urgent review and upward revision. Modal Development 4.98 Roads. The key issues and options in the road sub-sector are as follows: (a) SuPply of Services. The numbers of operational vehicles must be increased and useful life in kilometers extended through easier access to spare parts, training mechanics and improving maintenance facilities. In addition, stricter control of drivers and loads, and improved road conditions would contribute significantly to prolonging vehicle life. There should be an efficient private sector to complement State transport enterprises. Regulation should be very carefully evaluated, as excessive control has rarely had the desired effect in other African countries and vehicle licenses should be freely available as long as applicants meet required operational standards. Tariffs should be detxvmined by market - 101 - forces and efficient operators should be allowed to have more than one vehicle. A variety of vehicle types, providing different levels of service at different prices, will determine the appropriate price levels, as long as excessive regulation is avoided. In urban transport, bus fleets need to be expanded and the surface roughness of the route network needs to be improved to reduce vehicle damage. The desirability of companies and parastatals operating bus services for the sole benefit of their employees should be reviewed and the private sector, comprising taxis, pick-ups and mini-buses, should be allowed to grow. (b) Highwal Infrastructure. The Ministry of Construction (MC) has the responsibility for the design, construction and maintenance of the highway network. It is currently operating with a severely constrained budget. Highway infrastructure needs to be regularly monitored to implement a needs program, related to a revised highway maintenance system. Such a program could have an important regional employment potential. There are five rehabilitation projects which, with the exception of Malange to Saurino, are located along the more secure coastal belt. Three relatively short construction projets are currently being undertaken, with an equal number being evaluated for their economic viability. Critical links which would complete the north-south coastal highway are also being put forward to international agencies for possible funding and should generate high rates of return. Finally, there are several lateral network sections identified by MC engineers that link the coastal highway with interior provincial regions, but there is no current prospect for their funding. In discussions with MC staff, it was determined that there was little chance of significant improvements to the network while the present administrative structure was retained. MC staff favored the creation of an autonomous highway authority, directly funded from road users and beneficiaries, charged with operation and maintenance of the network. The Junta Aut6noma de Estradas de Anaola which existed until independence could be a role model for such an operation, with suitable modifications for current socio-economic conditions. In planning terms, road investment is appealing because its flexibility permits regional impacts to be finely tuned and the sector also has attractive employment prospects, particularly in the areas of road construction and maintenance. As part of the proposed reorganization, consideration may also be given to determining a system of vehicle user charges to cover infrastructural investment and maintenance. l 4.99 Cabotage. Regional development requires that goods and produce from an area be transported to major markets without delay and at low cost. Cabotage has an excellent potential for providing services over part of the regional transport link from the producer to consumer, though its present performance is dismal. MINTEC is proposing programs for both passenger and cargo cabotage investment, principally in the ship fleet which is presently old, unreliable and incapable of providing the desired level of service. Two new 320 passenger s.ips are operating between Luanda and Lobito but facilities at all ports need to be improved to allow coastal ships to be promptly berthed, unloaded and serviced. The existing arrangements represent a serious obstacle to efficient cabotage operations. - 102 - 4.100 Railways. Investment requirements for Angolan railway systems are considerable. There is a need to rehabilitate the permanent way, replace damaged bridges, renew rolling stock, rebuild non-operational locomotives, renovate signalling and communications, improve transshipment facilities, develop adequate numbers of technical staff and ensure a regular supply of spare parts for the entire operation. The analysis of the Benguela corridor should be treated separately, using standard evaluation criteria and an assessment of security to determine the desirability and timing of rehabilitation. Railway projects that promote short-term sectoral impacts should be favored, such as improving rail transit in the Luanda port and hinterland, providing technical assistance to adequately maintain existing engines, rebuild engines and rolling stock in all three systems and plan sequential investments within selected corridors. Such corridor projects should include passenger traffic where appropriate. Finally, demand forecasts need to be carefully examined to avoid the unwarranted assumption that pre-Independence traffic levels can be easily regained once the military and political obstacles are removed. This may simply not be the case, given the growth of competing modes and routes in Southern Africa. 4.101 Air. The evaluation of TAAG's long distance aircraft should be a separate project and only measures to improve domestic services should be considered in the proposed program. The company currently operates a severely under-utilized fleet which needs rationalization. In 1986, over 5,400 staff were employed at high nominal salary levels by African standards, given that most had no technical or managerial skills. Personnel numbers need to be cut, and management improved (perhaps by the privatization of cleaning and catering) in an effort to bring about inimediate improvements in productivity. TAAG presently carries a large and costly eight-month inventory of spare parts because of difficulties in obtaining foreign exchange. Also if ENANA airport safety and commuunications could be improved within the domestic system, TMG could operate its aircraft over a longer daily period and thereby improve utilization. Finally, due to tariff diatortions and the fixed exchange rate, TAAG is subsidizing all its activities in real resource terms. A sequential adjustment to the tariff structure is urgently needed to allow TAAG to operate on a sound financial basis. 4.102 Technical Assistance. All transport modes could benefit from assistance to develop and train good management, retrain experienced and responsible operators and develop the competence of technical staff. Technical assistance should be targeted on critical areas withiba selected projects, like installing a highway inventory and condition system as part of a revitalized provincial network. An improved equipment maintenance capsMlity is required for most modes and highway maintenance could well be a prominant feature of technical assistance. Training programs at all levels in all modes are also highly desirable and should result in higher utilization and productivity, to the benefit of the economy. 4.103 Communications. The transport sector, in common with other sectors, would benefit from improved public communications at all levels. Communications in general have failed to attract sufficient investment to match demand and to maintain standards. The number of subscribers doubled - 103 - to over 50,000 since 1975. Companies were nominally profitable in 1986 but tariffs do not reflect resource costs and the whole subsector needs reorganization in terms of tariffs, salaries, mail tra.dport, maintenance, technical training and management control of staff and operating producers. The mail system is essentially a low technology operation while telecommunications is characterized by high technology, with substantial investments and good potential profitability. The reform of the mail service can be achieved by concerted Government action, with little help from external agencies. A number of pr3jects in the area of telecommunications have been proposed by MINTEC and technical assistance and equipment could be provided in some areas. B. HUMAN RESOURCES 5/ Characteristics of the Labor Force 4.104 According to the latest census data,6/44Z of the total population in the mid-1980s was of working age (table 4.17), the labor force par- ticipation rate was 53?, and the official unemployment rate was 3?. In Luanda, the proportion of working age was higher, and the labor force participation rate lower than the national average. As shown in Table 4.17 below, the proportion of those employed who work in the primary sector has dropped sharply since 1970. The change reflects less a structural development than the problems agriculture is facing as a result of the war and the lack of adequate incentives. About half the workers in the tertiary sector in Luanda are thought to work in government administration. In the other provinces, the sectoral composition of workers varies widely. 5t The structure and growth of the Angolan population are discussed in Chapter 1. 6/ The census information relates to 1983/84 for the provinces of Luanda, Cabinda, Zaire and Namibe (covering only 15Z of the country's population). The results for the latter three provinces were combined and the relative distributions were taken to be representative of the other 14 provinces. - 104 - Table 4.14: LIJBOR FORCE DATA, 1985 (Percentages) Total Other 1970 1985 Luanda Provinces Population cf working age 62.6 44.0 47.5 44.8 Labor force participation rate 53.3 48.0 54.2 Unemployment 3.3 3.9 3.2 Percentage employed in: - primary sector 74.5 37.1 5.5 41.6 - secondary " 7.7 19.3 33.3 41.1 - tertiary " 17.8 43.6 61.2 17.3 Source: Anuirio Estatistico and Census of 1983 (Luanda) and 1984 (other provinces). 4.105 The educational level of the labor force in Angola is extremely low, as shown in Table 4.18 below. The sum of illiterates and those with incomplete basic education was 88% in Luanda and as high as 97% in Namibe, indicating that the vast majority of the labor force can be considered functionally illiterate. Less than 10% of the labor force completed basic education, and the proportion receiving education beyond that level is very small indeed. The educational level of the labor force in the provinces is substantially lower than in Luanda. As a result, the shortage of skilled workers is very acute. In Luanda, the percentage of workers in jobs requiring at least secondary education is estimated at 14%, whereas only 3% meet that requirement. In the other provinces, the situation is worse; the number of jobs requiring secondary education compared to the number of workers that have achieved that level was 2,857 versus 103 in Cabinda, 1,830 versus 47 in Zaire, and 1,478 versus 78 in Namibe. Assuming that the jobs in the administration's higher echelons require a university degree, the number of these jobs (1,319) vastly exceeds the number of those holding such degrees (177). - 105 - Table 4.15: EDUCATIONAL LEVEL OF THE LABOR FORCE, 1983/84 (Percentages) Educational Level Luanda Cabinda Zaire Namibe Illiterates 15.5 43.7 47.9 42.8 Basic Education - incompleted 72.0 50.6 47.9 53.7 completed 9.6 5.2 3.9 3.1 Secondary Education 2.8 0.5 0.2 0.4 Higher Education 0.01 0.01 0.005 0.02 Total number 201,918 21,228 19,868 16,858 Source: Census of 1983 (Luanda) and 1984 (other provinces) Structure and Organization of the Educational System 7/ 4.106 Regular Education. Regular Education is divided into three levels: basic or primary education, secondary education and higher educa- tion. The first two levels have regular courses offered to students in the normal age group. Apart from regular education, vocational training and adult education are offered to older students. Primary education lasts eight years, and is also divided into three levels, in addition to one year of pre-school. The first level lasts four years and is compulsory. The second and third levels last two years each. Secondary education is open to students who have completed the third level of primary education and offers three alternatives: pre-university, a two-year course leading to entrance in the university; secondary technical education, which offers different specializations and lasts four years; and a four year teacher tra4ning program. The pre-university course has proved too short and has been extended, on an experimental basis, to three years. There are 14 pre-unive- rsity schools, of which only three have their own facilities. The teacher training course for primary education teachers is given by the National Institute of Education, located in 14 provinces. Besides these institutes, there are the Luanda National Institute of Physical Education and the Pedagogical industrial Institute in Huambo. Secondary technical education offers specializations for technicians in areas such as agriculture, electricity, health, mechanics, fishing and finance. 7/ For a more detailed account, see Annex IX: The Education Sector. - 106 - 4.107 The Agostinho Neto University, established in November 1976, is the sole institution of higher education tn Angola. It has three sites: Luanda, Huambo and Lubango. Tn Luanda, there are faculties of Law, Economics, Science, Engineering, Medicine; in Huambo, faculties of Agronomy, Medicine, Economics and Law (although these hardly function); and in Lubango, there are courses in Economics and Law as well as the Institute for Educational Science. The Institute trains teachers for the National Institutes of Education. It also offers correspondence courses in Huambo and Luanda, and so it does not have resident teachers. University courses consist of two levels: a first level of three years and a second level of two years, except for medicine which lasts a total of six years. Only the completion of the second level provides a diploma. Most students have full time jobs, and those from other cities receive free board and lodging. 4.108 Adult Education and Vocational Training. Students who are too old for regular primary education have other options. Adult education is offered at levels corresponding to levels I, II and III of primary educa- tion. Each level is a two-year program divided into four semesters. Adult classes are given at night using the facilities of regular schools. Literacy programs equivalent to the first semester of Adult Education are carried out by the National Center for Literacy. The Center conducts one year programs using volunteer teachers, and the program and manuals used are specifically designed for the students' needs. The literacy programs are managed by the party (MPLA). Provisional schools offer a four year course to children older than 10 years and to dropouts, concentrating on rural areas. The first two yefars are spent learning vocational skills such as farming, carpentry, masonry, shoe making, printing, etc. Provisional scgools are boarding schools. Finally, the Centers for Vocational Training provide regular courses under the direct control of MED or offer courses for a firm's employees, financed by the Ministry that controls these firms. There are 11 Centers operated by MED and 107 within firms. The Centers controlled by MED offer two cycles. The first cycle corresponds to level II of primary education and takes two years. The second cycle, which has few students, offers courses equivalent to level III of primary education. 4.109 Education Sector Obiectives, Organization and Resources. The main objectives of educational policy are formulated through the MPLA-PT Congresses and resolutions, and through government legislation. Important among the former are the First Congress of MPLA held in 1977 and the Second Congress in 1985. The First Congress set the nature and goals to be followed by the educational system, including nationalization and seculariz- ation of schools, compulsory primary education, free education and coopera- tion between community and school. The First Extraordinary Congress of the Party (1980) and the Second Congress expressed concern about the issues of quality and efficiency, and recommended a diagnosis of the educational system. Recently the Party's Central Committee approved two documents containing the diagnosis, and expressed its concerns for more effective action to pursue the existing priorities. 4.110 Government responsibilities and resources related to education are with some exceptions centralized in the Ministry of Education (NED). This organization has four administrative levels: the central - 107 - administration, the provincial delegations, the municipal delegations and the comnunal units. The central administration coordinates educational policies, sets the guidelines, allocates t1xe resources, determines curriculum changes, buys school materials, sets teacher wages, supervises schools, organizes teacher training programs, etc. It has two Vice- Ministers, each responsible for various Departments or Directorates. Under the reorganization of MED in 1987 (Decree 9/87), the responsibilities of the Vice-Ministers were changed. One Vice-Minister now handles all matters related to secondary, technical, and vocational education and the other is responsible for general education, mainly primary education. The main purpose of the organizational change was to charge the MED with the responsibility for the coordination of vocational training, which is facing a major crisis. However, MED has its hands full with planning and ad- ministering regular education. The organization of the provincial delega- tions is similar to that of the Ministry of Education, with supporting units and executive departments, although their number is smaller. Contacts between the provincial delegation and the municipal delegations and communes are severely affected by difficult communications, large distances and poor roads. The autonomy given to the school directors is minimal. 4.111 Over the period 1980-87, the proportion of the government budget allocated to education has varied between 9.61 and 13.7Z. Apart from the budget of the Ministry of Education, separate budgets exist for the Agostinho Neto University, the National Center for Literacy, and the National Institutes for Languages and for Scholarships. While budgeted expenditure has fluctuated considerably from year to year, the overall trend until 1987, even !n nominal terms, has been downward. In 1985, the education budget was 122 below the level in 1980. Given the increases in the cost of goods and services, the decline in real terms was much greater. Available data about actual expenditures are limited, but indicate that they fall substantially short of budgeted figures. 4.112 Many of the critical problems affecting the education sector are related to poor management capacity of MED or to poor government organization. For example, MED lacks responsibility for the coordination of the budgets of the Provincial Delegations, which is carried out by the Ministry of Finance; in school construction, which is the task of the Ministry of Construction and in the production of equipment, supervised by the Ministry of Industry. For imports, the foreign exchange allocated to Maquimport (about US$ 6 million) was not used in 1987 and the arrival of the imports was delayed for more than one year. As a consequence, in 1987, half of the required textbooks and the whole supply of pens, stencils, etc. were not available. Domestic production has also been below the planned levels. Thus, only 122 of the textbooks and 192 of notebooks were produced in 1987. For student desks, the percentage was less than 2X. 4.113 Primary Education. Enrollment in primary education almost tripled between 1976 and 1979, then declined by nearly 502 between 1980 and 1986. This dramatically shows the consequences of the war and of trying to increase access to education without a major investment in education facilities, teacher training and supplies and materials. The war has disrupted educational activity and absorbed scarce human and financial - 108 - resources. The drop in enrollment can be attributed to several factors: a decline in the number of teachers and classrooms, inadequate school inputs, transportation difficulties, linguistic problems and parental illiteracy. The gross enrollment rate declined from 762 in 1980 to 442 in 1984. Low internal efficiency, as reflected in promotion rates well below 502 and a productivity index of 222 for Level I. indicate serious wastage which reduced net enrollment rates from 702 in Level I to 12 in Levels II and III. 4.114 Secondary Education. Secondary technical education has grown rapidly. Enrollment increased at an average annual rate of 232 between 1978 and 1985 in the face of serious difficulties which affected the quality of education. Problems include a lack of equipment, inadequate and insufficient teaching materials, and a high proportion of part time teachers and ucooperantesi among all teachers. The effectiveness of the latter is impaired by language problems and cultural differences. Though internal efficiency is generally low, there are signs that it is improving. The National Institutes of Education present similar problems, and each year less than 5S of the sto..k of primary education teacher ,raduates, which is insufficient to even cover the normal attrition rate. Moreover, most graduates are already teaching. A high proportion of teaching staff at the Institutes consists of 'cooperantes'. Enrollment at pre-university courses has been growing at an annual rate of 132. The high proportion of both part time teachers and mcooperantes' poses a problem here as well. It is also generally agreed that two years are insufficient to prepare students for university. 4.115 Higher Education. Enrollment in higher education is now nearly twice as high as before independence. The University offers a wide range of specializations, despite the limited availability of resources, suggesting high unit costs. Students are often not adequately prepared for university and the quality of education is affected by a serious shortage of teaching materials, laboratory equipment and qualified staff. Higher education, including board and lodging, is free. A significant part of non-personnel expenditures on higher education is devoted to food. There are also questions about the relevance of curricula. The University Council has approved new curricula for all fields of study in January 1989. The final decision is to be made by higher government levels. However it is expected that the new curricula will be introduced in the coming school year (September 1989). This reform is very important for the Faculty of Economics, which will offer a new specialisation (Business Administration) and, possibly, Agricultural Economics. 4.116 Reorganization of the educational system. There is a proposal for the reorganization and rehabilitation of the educational system, which involves substantial investments. This Emergency Program deals with construction and maintenance of school buildings, increasing teacher's wages and improving their recruitment, and increasing the local capacity to produce school materials. In primary education the construction of 29 schools (404 classrooms) and the repair of 8 schools (25 classrooms) is planned only in Luanda because of acute problems in the supply of construction materials in the remainder of the country. The total cost is estimated at USS 22 million, although it is not clear whether the budget - 109 - will provide these resources. In technical secondary education, it is expected that the Institute of Economics in Luanda will be completed in 1989 and that the Institute of Agriculture in Huambo will be completed in 1990. They are both being funded by a loan from the African Development Bank. The projected construction of the Institute of Agriculture in Malange and the Institute of Education in Lubango will also use resources provided by the ADB. In higher education, investments are planned for the Higher Institute of Educational Sciences in Lubango (US$25 million) with financing from ADB and there are also plans for opening a branch in Luanda (US$1 million). The Faculty of Agriculture in Lubango (to be created) will receive resources from the ADB (US$ 35.7 million) and the existing Faculty of Agriculture in Huambo requires resources estimated at US$ 3 million which have not yet secured. The Faculty of Law is negotiating a loan from Spain (US$10 million) to build its facilities in Luanda. 4.117 The Emergency Program also provides for an increase in the wages of all teachers of 60?, starting in 1989. Although this incr -A is necessary to reduce the number ot teachers who leave their Jo id of part- time teachers, the impact of this measure may prove to be smali ecause it will be unable to compensate for the absence of non-pecuniary benefits for those who work for MED. Finally, the Emergency Program has given attention to the domestic production of school materials, first through investments to rehabilitate existing plants and secondly, by expanding production capacity. Initial investments are estimited at USS 10 million. 4.118 According to the program. important changes in the educational system should start to be implemented after the phases of preparation, testing and evaluation. Compulsory education will be extended to six years and the second and third levels of primary education will be eliminated. After primary education, there will be a three year course - the secondary first level - which will branch out in general technical and teachers courses. The secondary second level will be the equivalent of the existing secondary offering four-year technical and teachers courses and a three-year general course to replace the pre-university (two-year) course. Higher education will offer short-duration courses (three year) in addition to the five-year courses. Adult education will have courses corresponding to primary education and secondary first level education; professional training will have courses corresponding to primary education and both levels of secondary education. At the momen,, it is hard to judge the impact of the proposed changes. The extension of compulsory education to six years and of primary and secondary education to 12-13 years will have to be accompanied by other changes for the system to be able to retain the students longer. Whereas the secondary first level teachers course will train the teachers for the first four grades of primary education, it is not yet clear, aside from differences in the students age, what will be the differences among the secondary first level technical courses and the corresponding adl1t courses and professional training courses. The short-duration university diploma may be refused by the market, if there is an attractive private rate of return for the additional two years. - 110 - Priority Areas for Possible Technical Assistance in the Education Sector 4.119 Basic Education. Basic education is in a state of disarray and requires concerted action in three main areas: (a) School Materials. Most textbooks and other school materials are imported even though a domestic supply is feasible, especially at an equilibrium exchange rate. There is a need to identify the existing plants which could increase production without subsidies, their need for additional investments and for required inputs, including skilled labour. The reduction of the import content of school materials should allow a larger availability, per student, of textbooks, pencils, notebooks, etc. There is also a need to examine ways to improve the existing distribution facilities. Technical assistance should be extended to INIDE, the agency of MED which is responsible for curriculum design, textbook elaboration and other areas of research related to the learning process. At the moment, the lack of trained personnel is the major cause of its abysmal performance. (b) School Construction. The absence of school construction and maintenance in recent years and the intensive use of the existing facilities have caused severe deterioration in the buildings and their equipment. For the required construction in the coming years, it is necessary to: (i) carry out an inventory of the school buildings, their availability and use and the maintenance and enlargement work required; (ii) study the construction materials available in the country, especially those locally produced; (iii) train the personnel for an agency to be established within MED, responsible for the design and supervision of school construction; and (iv) secure foreign assistance to start school mapping studies. (c) Teacher Training. To increase the number of qualified teachers, a two-pronged strategy is required: (i) increase the number of full-time Angolan teachers at ISCED, which provides college training level for teachers at the Institutos Normais de Educagao (INEs); (ii) improve the qualifications of the stock of teachers in basic education through better designed in-service training. UNESCO has been active in this area. Both of these teacher training programs will require additional financial and technical assistance. 4.120 Educational Planning. Decision-making at MED is deficient and its improvement is essential to increase the efficiency of the system. Three areas, in particular, require attention: (a) Educational statistics. The existing educational data is limited and there are large delays in its availability. There is a need to expand the statistics to cover relevant indicators and to improve the data collection system. Other information such as - ill - actual educational expenditures, cost studies, teacher qualifications, is also missing. (b) Educational planning. The ability to plan the educational system at the central administration level is very weak. Both training abroad and foreign experts are required to bring that ability up to acceptable levels. (c) Coordination and decentralization. The coordination tasks both at central and provincial levels suffers from the lack of qualified administrative personnel and of facilities. Also there is a need to further decentralize tasks. Technical assistance could help in the organization of courses for the administrative staff of MED (both in the central administration and in the provinces) and in providing resources to buy the equipment (vehicles, telex, etc.) required for improved communications. 4.121 Manpower demand. The shortage of qualified administrators both in the government and in public enterprises is a serious constraint for the implementation of policies and the sound management of firms. In this regard, two studies are recommended: (a) Identification of skills needed in the higher and middle administrative echelons of government and public enterprises. The requirements would be expressed in terms of the educational content (formal, at secondary and university levels, and short training courses). (b) Identification of the need to expand enrollment, change curriculum, train teachers and provide adequate textbooks ind other school materials to the students in the fields of economics and administration. At the moment, a major change of the economics curriculum both at secondary and university levels is being proposed, but a course in administration does not exist. Short training courses are being offered by many public institutions. A better knowledge of the type of courses required, and their organization and desired content, is needed to design their expansion. Recommendations for the Education Sector 4.122 The following recommendations emerge from the analysis of the education sector's structure, performance and constraints: (i) High priority must be given to teacher training, starting with the highest institutions. Thus, an increase in the number of teachers to eliminate the need for correspondence courses and to replace most of the scooperantes' at the Institute for Educational Sciences in Lubango is vital. The approach suggested places emphasis on quality of education and institution building. Measures with more immediate impact on basic education are changes in the curriculum and improvement of teaching materials - 112 - and in-service training. The issue of teachers' wages must also receive attention. (ii) Reorganization of MED should have four goalss transfer of the responsibility for vocational training to an agency outside MED; placing of the National Center of Literacy under MED; strengthening educational planning and management and improving the flow of information; and decentralizing decision making, to reduce delays and inefficiencies in the use of resources. (iii) Additional resources should be made available to avoid further deterioration of school buildings, replace equipment, increase teaching materials, and improve teachers' salaries. Cost recovery could make an important contribution, initially through charges for board and lodging. (iv) The economy's lack of qualified policy analysts and management personnel requires urgent measures such as curriculum reform in the economic courses, both in secondary technical schools and at the university, as well as the creation of administration courses. For this purpose, better coordination of INORAD with the university is required, as well as technical assistance to be provided by a reputable university. (v) In primary education, and in other levels as well, the emphasis should be on improving quality. Improved maintenance of school buildings, better teachers and educational materials and changes in the curriculum are the main steps needed to reduce wastage. (vi) The future expansion of enrollment in secondary education should be predominantly in general education courses rather than technical ones, since these are costlier than the alternative. The pre-university courses should in_rease their duration, probably to four years. (vii) In higher education, the increase in the proportion of full-time Angolan professors requires higher wages and increased opportunities to study abroad. Presently, the available resources are spread too thinly through the various courses and specializations, resulting in low efficiency. In some cases, it would be better to send students abroad. Another way to increase efficiency of resource use is to widen the common core curriculum. (viii) Technical assistance should play an important role in teacher training, in educational planning and administration, in school construction and maintenance and in the improvement of the supply of textbooks and other school materials. - 113 - The Health Sector 4.123 The Ministry of Health is responsible for activities related to the organization, coordination and control of the health sector. It comprises the offices of the Minister and the Vice-Minister; supporting units (Consultative Council, Planning Office, National Institute of Public Health and Office of Internatfonal Affairs) and the Provincial Delegations. The organization of the health network is in line with the administrative division of the country (18 provinces, 163 municipalities and 532 communes). Medical service in the communtities is provided by Health Posts, Village Health Workers and Traditional Birth Attendants. Further up the scale are Health Centers and Municipal Hospitals, Provincial Hospitals and National Hospitals. Table 4.19 presents the number of these facilities in 1973, in 1985 and in 1987. The number of inhabitants per health post increased by 82% between 1973 and 1985, indicating a serious deterioration in the assistance provided by these facilities. The ratio of inhabitants per hospital has risen by at least 47% over this period. The situation improved slightly in 1987. Table 4.16: HEALTH FACILITIES BY TYPE - 1973 AND 1985 1973 1985 Inhabitants per Inhabitants per Type Number Health Facility Number Health Facility Health Posts 1,318 4,651 1,036 8,450 Health Centers and Municipal Hoapitals 671 23,852 225 38,907 Provincial Hospitals 17 514,941 National Hospitals 7 1,250,571 Source: UNICEF 4.124 The number of beds in national and provincial hospitals in 1985 was 8,018, of which 2,388 were in Luanda. For health centers and municipal hospitals, the number of beds is 6,478, of which 146 in Luanda. The ratio of beds per 1,000 inhabitants, which was 3.0 in 1973 had dropped to 1.7 in 1985. The availability of medical personnel is also far from satisfactory. There were 554 physicians in Angola in 1985, the majority of them foreigrers (406), as compared to 561 physicians in 1973. The ratio of inhabitants per physician increased from 10,927 in 1973 to 15,521 in 1985 (by 42%), declining to 12,770 in 1987 (723 physicians). The number of paramedics in 1985 was 8,553, of which 204 were foreigners, with a ratio of 1,000 inhabitants per paramedic. This ratio remained the same in 1987. - 114 - 4.125 The training of health personnel poses major questions. At lower levels, training initially focused on meeting the urgent demands arising from the massive exodus of health personnel in 1975/76. Course3 lasted for 2 years and the prerequisite was Level II, or six years of primary education. It is estimated by UNICEF that about 10,000 basic health technicians were trained in these courses in the last 10 years. In 1986 there were 21 schools providing this training, at least one per province. At the intermediate level, there are 3 secondary technical health institutes in Bie, Huambo ttnd Luanda. In 1989, Cabinda will have its institute. The number of graduates from these institutes in the period 1982/83 - 1985/86 was 217. The course lasts four years and requires 8 years of primary education. Finally, there is one Faculty of Medicine, in Luanda and a nucleus in Huambo, offering a six-year course. In the period 1975/76 - 1984/85, a total of 230 physicians graduated. It is expected that about 45 doctors will graduate every year. The two major problems of health manpower training at the secondary and university levels are an insufficient number of graduates and deficiencies in the curriculum. Also, there is a need to upgrade basic level technicians, which is not being met. 4.126 Government expenditures in the health sector in 1985 amounted to Kz 650 per capita. In the period 1981/89 an average of 6.22 of budgetary resources was spent on health. Howaver, real expenditures declined considerably in the same period because of inflation. This decline was partly compensated by foreign assistance provided by bilateral and multilateral agencies, such as the Swedish International Development Agency (SIDA), the World Health Organization (WHO) and UNICEF, which funded various health programs. For example, SIDA will provide, in the period 1988/91, US$ 24 million for various programs; the European Economic Community is expected to provide US$ 27 million for hospital construction and the Italian government will provide US$ 16 million also mainly for construction. Cuban and Soviet aid consists of doctors and nurses. 4.127 Health policy is directed mainly towards assisting children in the 0-5 age group and pregnant mothers, and towards reducing the incidence of communicable diseases. A primary health care strategy underlies the provision of health services. Health posts, village health workers, and traditional birth attendants provide care at the lowest level. Cases in which the health posts cannot provide adequate care are directed to Health Centers or Municipal Hospitals first. If medical care is not feasible in these facilities, use is made of Provincial or National Hospitals. In this way, better use is made both of installations and available human resources. There is limited information about the use of health facilities. In 1987, there were 6.5 million consultations and 247,700 admissions to hospitals. The proportion of assisted births was 17Z in 1987. Figures available for vaccinations against infectious and contagious diseases in 1987 indicate that the highest coverage is for measles (372) and the lowest for polio (32). 4.128 There is only circumstantial evidence about health conditions. Infant mortality is very high, although precise estimates are very difficult to obtain, ranging from 200 per thousand, according to United Nations figures, to 325-375 according to a recent UNICEF study, both for children - 115 - under five in 1985. For infants under one, UNICEF estimates mortality at 200, while U.N. figtres show a decline from 193 per thousand for 1960-70 to 166 per thousand fo: 1980-85. For Luanda, the infant mortality rate increased, from about 107 per thousand in the years before Independence to 130 per thousand in 1980 and to 186 per thousand in 1984. UNICEF has found rates in the 240-300 per thousand range in emergency areas directly affected by the war. The proportion of born children weighing less than 2,5Kg was 212 in 1986. Life expectancv has increased from 35 years in 1960-70 to 42 years in 1980-85 but remains quite low. 4.129 War-related problems, aside from disrupting roads and destroying medical supplies and health posts, are reflected in the 650,000 refugees, 802 of which are mothers and children. In addition, the destitute people, mostly migrating peasants, who live in the periphery of the cities demand health services in already congested facilities or are not served at all. Finally, there were about 11,000 disabled people in 1987 as a consequence of the war, 852 of them with leg disabilities. The serious health conditions which prevail are difficult to deal with because of a variety of causes, and the fact that many of these causes cannot be addressed by the health authorities. One of the main causes is the war. Another important cause of the serious health conditions is the precarious supply of water and the lack of any sewage system or other sanitation facilities in the periphery of many cities, as well as inadequate shelter and the absence of solid waste collection and disposal services (see Section I of this chapter for more details on urban services). Under these circumstances, it is r.ot surprising to find that communicable diseases are the most important causes of death, including acute diarrheal diseases, tetanus, measles, tuberculosis, malaria, sleeping sickness and infectious hepatitis. These problems are aggravated by other factors, such as the high proportion of illiterate mothers and malnutrition. There is a heavy concentration of health services in favor of Luanda and Cabinda and, generally, of the urban areas. Thus, only 282 of the municipalities have a physician. In Luanda and Cabinda, the ratio of physicians per 10 000 inhabitants (1,9) was almost five times larger than the ratio in the other regions. 4.130 Faced with budgetary, health personnel and other constraints, the design of a viable and effective health policy is a major challenge, particularly in the context of war-related destruction and insecurity. One major difficulty is the lack of reliable statistical information, which is necessary for more effective targeting of actions. High priority should be given to better vaccination campaigns, at least in the secure areas, dissemination of information to mothers about the prevention and control of diarrheal diseases, improvement of nutrition standards and maternal and child health programs generally. The limited government resources must also be complemented by the effective use of foreign and community resources. I. REGIONAL AND URBAN DEVELOPMENT Spatial Development Patterns 4.131 Regional development and planning in Angola is inextricably linked to the continuing war and changing conditions of internal security. - 116 - Since only 10-202 of the national territory is estimated to be sufficiently secure to permit normal economic activity, regional development planning on a national scale is clearly impossible. Spatial development patterns since Independence in 1974 have been shaped largel by the volatile security situation rather than economic forces. The security situation determines the nature and intensity of regional economic activity and the possibilities for interregional trade. Although its spatial impact varies considerably, the disruptive effects of the war are felt in some measure in all regions. The continuing conflict has provoked significant population movements of displaced people seeking greater security and reliable supplies of food. These movements have been an important source of urban population growth in the unplanned, self-built comunities on the periphery of such centres as Luanda, Huambo, Kuito, Malange and Benguela. It is estimated that the displaced population currently numbers 534,000 people, roughly 9Z of the rural population. 4.132 Although the war and terrorist activities agaiast the civilian population are the principal cause of economic disruption in rural areas, this has been aggravated by the inefficiencies of centralised planning and administrative controls. Thus, the State distribution system has proved an extremely poor substitute for the colonial bush traders, resulting in a pronounced decline in levels of marketed agricultural surplus. Consequently, even in areas where normal economic activity can be pursued, rural trading networks have atrophied, reducing commercial flows between the countryside and towns. These institutional factors have accentuated the withdrawal of agricultural ptoducers into a self-provisioning or subsistence economy and direct barter transactions. Since this regression has occurred in all regions, it is often difficult to disentangle the disruptive effects of the war from other causes. 4.133 The security situation effectively precludes the application of regional economic analysis and only the 'relatively secure' South-Southwest provinces of Huila, Namibe and Cunene constitute what meaningfully can be described as a 'regionlin economic and institutional terms. Even then, the boundaries of this region are ill-defined and change with the security situation. A second spatial category comprises pockets of relatively stable economic activity on the coast, which form small 'enclave regions'. The security perimeter of these enclaves is variable, however, depending on the frequency of attacks, and may be as little as 30-50 miles. These enclaves include (i) the province of Luanda and the coastal area extending north to Soyo; (ii) the area around the coastal towns of Benguela and Lobito, and (iii) the oil producing province of Cabinda. The third spatial category which can be distinguished includes strategic provincial capitals, such as Huambo, Kuito Bie, Malange, and Uige, which have significantly smaller rural hinterlands than the "enclave regions'. Lacking seaports, these strategic interior towns and other protected urban settlements have precarious economic links with the rest of the country, as road and rail transport require military support. The areas most affected by the war are those which border the zone that has been occupied by insurgents and South African forces in the provinces of Kuando Kubango and Cunene. Elsewhere, the regional impact of the war varies according to such factors as (i) proximity of sources of infiltration from the occupied territory in the - 117 - South and from foreign bases; (ii) the frequency and intensity of guerrilla activity. (iii) population density and concentrations of displaced people. and (iv) logistical difficulties which, in practice, depend on ease of communication with the coastal port cities. 4.134 The Eastern provinces of Lunda Norte, Lunda Sul, Moxico, and Kuando Kubango are the most severely affected by the current conflict. Kuando Kubango has suffered large-scale military exchanges which have caused direct damage to economic and social infrastructure and forced the local population to flee from the war zone. There are an estimated 70,000 displaced people in Moxico, and thousands of others have taken refuge in emergency camps established in nearby provinces. Guerrilla operations and the occupation of the southernmost area of the country by South African forces have brought economic activity there to a standstill. The local economy has been crippled by the systematic destruction of dwellings, roads, bridges, dams, wells, schools and health facilities. Relief supplies are transported mainly by air. Also, the provinces of Lunda Norte and Lunda Sul are both seriously affected by guerrilla activity. As indicated in an earlier section of this chapter, the diamond mining area operated by Endiama, in the north-east of Lunda Norte, is now supplied mainly by air. Security conditions in the northern provinces, comprising the provinces of Zaire, Uige, Halange, Bengo, Kwanza Norte and Kwanza Sul, have reportedly worsened significantly in the past year or two. This is particularly the case in Uige and Malange, where guerrilla operations have seriously disrupted agricultural production. The railway between Luanda and Halange has only operated irregularly since mid-1986. Several of these provinces have relatively large concentrations of displaced persons, as shown by 1988 United Nations African Emergency Task Force estimates for Halange (15,000), Uige (28,000), Kwanza Norte (38,000) and Kwanza Sul (114,000). In addition, an estimated 60-80,000 Angolans have returned from Zaire since 1985. The northern enclave province of Cabinda has not suffered significant war disruption as its economy is dominated by tne offshore oil industry and this sector is protected by a strong garrison of Cuban troops. 4.135 Outside the immediate war zones in the south, the central highland provinces of Huambo, Bie and Benguela are the worst affected by the current conflict. In the colonial period, this region was Angola's granary', while the city of Huambo was the country's second manufacturing center. These activities have been severely disrupted by guerrilla operations and economic sabotage, which have resulted in large contingents of rural migrants and displaced people. Rising levels of emergency relief aid are now required to support the population in this former agricultural heartland of Angola. Road and rail links with the port of Lobito and Benguela have become increasingly precarious, essentially cutting off Huambo and Bie from other regions of the country. In these heavily populated central provinces, the guerrilla conflict and the attendant insecurity have had a devastating impact on all sectors of economic activity. The disruption of agricultural production, together with the impaired transport links with the coast, has created an emergency situation with thousands of people lacking basic needs and suffering from malnutrition. Health conditions also are deteriorating due to the increasing scarcity of food and essential medical supplies, as well as guerrilla attacks on health posts. - 118 - NGO survey data indicate that in Huambo province 40-452 of children under six were malnourished and 5-6Z presented clinical symptoms of severe malnutrition. Red Cross surveys in Huambo in 1985 revealed infant mortality rates of 250-350 per thousand in badly affected areas, as well as maternal mortality exceeding 10 per thousand live births. In response to this situation, the provinces of Huambo and Bie are receiving priority under the Emergency Assistance Program administered by the United Nations Emergency Operations Group (UNEOG) and the Angolan Interministerial Comission for Coordination of Emergency Assistance (CIMCAE). 4.136 As indicated above, the South-Southwest Provinces of Huila, Namibe and Cunene form the largest area in Angola where the security situation permits a significant measure of normal economic activity. This large, semi-arid region, with an estimated 1.1 million irhabitants and population density of 5.3 per km2, has a strong agricultural vocation, notably for beef cattle and corn production. The possibility of rehabilitating the regional economy in order to generate an exportable agricultural surplus endows the South-Southwest with specia, importance in the present context of widespread economic disruption and Angola's increasing dependence on food imports. The security of the South-Southwest region is only relative, of course, and varies within the region. For example, the rural areas in the northern and eastern parts of Huila province are considerably less secure than the area in the vicinity of the provincial capital, Lubango. Cunene, in turn, is even more dangerous and virtually the whole population, mainly nomadic or seminomadic pastoralists, has been badly affected by the war. Economic and social infrastructure in Cunene has been devastated by the South African occupation and subsequent hostilities. An estimated 89,000 people in Cunene depend on emergency relief, and a further 25,000 live in camps in Huila, which also has roughly 37,000 deslocados in temporary camps. The emergency needs of this displaced population and the reconstruction of the regional economy have become the focus of assistance from several multilateral and bilateral donors. Regional Development Policies 4.137 In line with the general trend towards greater decentralization of economic decision-making espoused by the SEF, the new Planning Legislation (Lei de PlanificagIo, Lei nQ. 12/88) issued in July 1988 explicitly acknowledges the importance of regional planning. National Plans should elaborate measures to correct regional disequilibria (Article 4) and Multiyear Plans are expected to formulate spatial planning and regional development policy (Article 6). The new legislation provides for the preparation of regional plans and the creation of corresponding administrative structures, although these activities are subordinated to the National Plan and require the prior approval of the Council of Ministers (Article 18). Particular emphasis is given to the elaboration and coordination of local plans by provincial and municipal government institutions. Planning at the local level is to focus mainly on meeting basic needs, and specifically in the areas of housing, health, and other public services (Article 17). - 119 - 4.138 Since the new planning legislation was issued in July 1988 preliminary steps have been taken to establish more appropriate institutional structures. However, this work is largely formal in content and so far there has been little concrete improvement in the administrative capacity of regional and local institutions. Within the Ministry of Planning and the National Institute of Physical Planning, spatial analyses of the Angolan economy are being undertaken in order to establish the appropriate divisions fot regional planning purposes. It is anticipated t:&&t eight regional planning areas will be created, together with Luanda province, which will form a separate region. Following the example of the Southwest region, each area will have a Regional Planning Office (GPR) which, under the direction of the Ministry of Planning, will be responsible for the preparation and coordination of regional plans. 4.139 At the local level, it is proposed to strengthen the capacity of m'nicipal agencies to plan and execute small infrastructure projects to meet basic needs for urban and social services. The restoration of local administrative and management capacity is regarded as an essential foundation for effective regional planning. In this respect, it seems that the colonial local government atructures of municipal councils (camaras municipais) may be revived in some form. This possibility also is suggested by current proposals to decentralize public finances in order to restore some measure of financial autonomy to municipal and provincial governments. These institutional proposals have yet to be implemented, however, and a pilot project involving some 50 municipalities has been mooted as possibie first step. Within the context of the SEF, such decentralization potentially can make an important contribution to the revival and reconstruction of regional and local economies. 4.140 Institutional changes currently underway in the Southwest region of Huila, Namibe and Cunene illustrate how regional development planning may evolve in the immediate future. In order to ensure consistency, final preparation of a reconstruction program for this region has had to await the more detailed elaboration of the SEF and formal approval of the PRE. On the basis of the UNDP-sponsored report by Dar Al-Handasah Consultants, which identified well over 100 large and small projects in infrastructure sectors and productive activities, and incorporating SEF/PRE priorities, a regional investment plan will be announced in the first semester of 1989. This plan will provide the basis for project submissions to donor countries, and a donor conference is likely to be held in the second half of 1989. 4.141 A detailed assessment of the regional investment plan for the Southwest region must await publication of the project proposals and policy recommendations. Nevertheless, some preliminary observations are made here. After the destructive and destabilizing effects of the war, it is only to be expected that priority should be given to the immediate relief needs, the resettlement of displaced families, and economic reconstruction. In addition to the rehabilitation of basic economic and social infrastructure, the revival of agricultural production and the mobilisation of increased marketed surpluses hold the key to regional economic recovery. Reforms of the pricing and distributior system to ensure that there is an adequate supply of manufactured goods available on favorable terms to rural producers - 120 - are therefore of crucia3. impo.tance. While this point is recognised by the regional authorities in buila, the nature and timetable of these reforms has yet to be determined. Obviously, the response of the international donor community is also critical to the success of the program, in view of the absence of local resources or earmarked central government revenues. The regional authorities are aware that the key to recovery of the productive sectors, particularly peasant agriculture, is the revitalisation of trade and commerce. However, the full resolution of this problem requires basic policy and institutional reforms at the national level. 4.142 The issue of institutional decentralisrtion is a central one in the context of regional development, and involves a complex mix of national and local considerations. First, there are no national guidelines which define relationships between institutions operating in a provincial or regional context and the provincial branches of the vertically-organized central government ministries. Routine coordination at the regional level therefore is effectively non-existent. Given the highly centralised structure of public administration in Angola and the acute shortage of administrative cadres, there are no local or regional institutions which at present are capable of taking over decentralised activities. While decentralisation must be preceded by national administrative reforms, the weakness of local institutions presents a major obstacle to its realisation, at least in the short term. A case in point is the Regional Planning Office (GPR), which was established to coordinate the planning effort in the South-Southwest region. With its small and inexperienced staff, the GPR is ill-equipped to perform this role. Its operational weakness also reflects the lack of effective complementary government agencies to collaborate with the GPR in planning and implementation. In large measure, the GPR is operating in an institutional vacuum. 4.143 ~c->* institutional limitations qualify the view that the South- Southwest relief and reconstruction program is a major exercise in decentralisation. Rather, it represents no more than an initial step in this direction. Far more fundamental reforms are required, including the creation and strengthening of regional institutional structures, if this process is to gain momentum. For example, the budgetary process must be decentralised to give provincial authe'rities a real voice in setting priorities and coordinating the expend;tures at the local leve. of national state enterprises and central government ministries. 4.144 When announcing the reconstruction program for the southwest, the Minister of Planning is expected to provide further details on the general framework for regional planning, including the creation of regional planning offices (GPRs). Depending in part on the experience of the Southwestern reconstruction program, and particularly the response of donc.rs, it ie expected that at least one other program, and possibly two, will be under preparation by late 1990. The leading candidates are the Central region of Benguela, Huambo, Bie and Moxico and the Middle North region, comprising the provinces of Kwanza norte, Kwanza Sul, Malanje and Bengo. Clearly, economic and social reconstruction in these provinces can only be contemplated if there is a significant improvement in the security situation. - 121 - Urban Development and Basic Urban Services 4.145 Introduction. Patterns of urban development in Angola since Independence have been determined mainly by the disruptive effects of the war. Guerrilla warfare and economic sabotage, including the widespread use of antipersonnel mines, have destabilized agricultural activities and forced the rural population to seek safety in protected urban sites. Rural urban migration in response to economic factors is thus heavily distorted by these war-induced population movements. The urban population is estimated to have risen from 15X of the total population in 1970 to 232 in 1985, although it should be noted that there are no recent Census data at the national level. However, most observers agree that urban population growth has been rapid since 1974. This is particularly evident in the capital city of Luanda, whose population has risen from 450,000 to 1.3 million in the period 1975- 85. 4.146 The large influx of migrants has overburdened the capacity of urban infrastructure and public utility systems and led to a marked decline in both service standards and service coverage. Lack of managerial and technical cadres, limited equipment, and the precarious financial condition of public utility companies have resulted in the deterioration of the systems inherited from the Portuguese in 1975. These same factors, in combination with rapid and unplanned urban settlement, have caused service coverage to fall. With only limited investmenw since Independence and grossly inadequate maintenance, the basic urba services of water supply, sewage and sanitation, and refuse collection are now in a critical state. This situation is exacerbated by the virtual absence of any urban planning, or sites and services provision. Urban expansion since 1975 has been characterized by the proliferation of self-built housing in unplanned, and largely unimproved, communities (musseaues) on the fringes of the main urban centres. The neglect even of elementary urban planning can be attributed to the vertical structure and power of the central government ministries and state enterprises. This has resulted in the absence of routine working relationships at the provincial level which would provide the basis for coordinated programs embracing several interdependent sectors of activity. 4.147 The institutional framework of urban development. The most striking feature of the urban institutional framework in Angola is that, although formal structures have been established, the operational capacity of the component institutions is in most cases extremely weak. The sources of this weakness include the departure of Portuguese managerial and technical staff, the loss of significant local financial autonomy, and the decision to replace the municipal utility agencies by national companies under central government ministries. Before Independence, urban management and basic services provision were undertaken by the municipal councils and public utility companies. These activities were financed to a large extent by local revenues. This financial autonomy effectively was eliminated following Independence and these revenues now accrue to the central government. Fiscal centralisation was accompanied by the reorganization of the municipal public utility companies under the 'super-ministry' of Construction, Housing, Transport and Public Works and, in the case of electric power, under the Ministry of Energy. The municipal companies were - 122 - consolidated to form national companies in the respective public utility sectors, such as the National Water and Sanitation Company (ENAS). Operational difficulties caused by the excessive degree of centralisation eventually were recognized in 1986, when the super-ministry" was reorganized. This reform included the creation of a State SecLetariat for Urbanization, Housing and Water but this new institution has no operational capacity at present. 4.148 With the abolition of colonial municip&l administrative structures, those functions not transferred to central government ministries were vested in Provincial Commissariats. These have considerable formal powers, including planning, budget preparation, and project implementation at the provincial level. In practice, however, these powers are significantly diluted by the independence of the provincial delegations of central government ministries and state enterprises. The activities and budgets of these entities are controlled by the respective ministries, and their expenditures are included in the provincial budget simply for formal accounting purposes at present. The Provincial Commissariats thus neither control nor coordinate the bulk of public sector expenditure at this level. 4.149 Urban water supply. Before Independence, responsibility for water supply was vested in the municipal councils and, in the case of Luanda, delegated to the municipal water and electricity company. Following the dismantling of these councils, water supply and electricity became the responsibility of the Ministries of Construction and of Energy. The municipal water companies were replaced by provincial companies, whose activities would be coordinated by the National Water and Sanitation Company (ENAS). ERAS was established in 1978 but its statutory duties have never been properly defined. It failed to execute a coordinated national water supply program. It may also have aggravated the acute shortage of managerial and technical cadres as it was staffed mainly by transferring personnel from the municipal water company in Luanda. 4.150 In 1986, some of the functions previously attributed to the Ministry of Construction, including urban water supply, were assumed by the newly-created State Secretariat for Urbanization, Housing and Water (SEUHA). This new agency has only a handful of staff, and no effective operational capacity. The position of ENAS following this reorganization remains in some doubt. At present, the national coordinating functions of ENAS are being exercised by the Luanda Provincial Water Company (EPAL). The institutional framework of urban water sunply is therefore extremely weak and lines of responsibility between natiLval and provincial agencies are poorly defined. 4.151 As in the other main cities of Angola, the physical infrastructure of the water supply system in Luanda is deteriorating rapidly due to the large backlog of routine maintenance work and lack of investment in equipment. Rehabilitation requirements extend to all segments of the existing system - collection, pumping stations, treatment, and distribution - although distribution is perhaps the most critical area. Apart from rehabilitation, it is necessary to extend the system to serve the rapidly growing population living in unplanned settlements in semi-urban - 123 - areas. The present system supplies an estimated 871 of the population, with 20? having water connections and 67Z with access to public fountains. This latter figure must be heavily qualified, however, a. a large proportion of the public water fountains in the musseque communities are out of order due to damage or lack of maintenance or because the supply has been turned off to avoid excessive water losses. Also, public fountains frequently fail to work because of insufficient pressure due to clandestine or 'pirate' connections made to supply private households. 4.152 Although the combined capacity of Luanda's two water supply systems is 200,000m3 per day, actual production does not exceed 50-602 of this total. This poor performance is due principally to lack of maintenance and essential spare parts. As a rule, the distribution system operates for only 6-8 hours each day in order to allow storage capacity to be restored. In addition, there is insufficient pressure to raise water to even the second floor of multi-story buildings in Luanda. Service standards in Luanda also are reduced by the significant level of water loss, including frequent burst water mains and long delays in repair, which may amount to half the total water produced. 4.153 Operational inefficiency is aggravated by the administrative and financial weakness in ENASIEPAL. Tariffs were last revised in 1954, with the result that EPAL requires an extremely large subsidy from the Budget, roughly estimated to cover 85-90 of operating costs. A complete set of accounts was last submitted in 1979. Billings and collections are substantially in arrears, and water supply is effectively free to many consumers. Billings are made every six months but many meters are defective and the installation of new ones is slow. The large omissions in billings are compounded by the low rate of collection, amounting to no more than 5O? of billings. An immediate revision of the level and structure of tariffs clearly is required if EPAL is to reduce its deficitary position. The current charge is a flat rate of three kwanzas per cubic meter. There is no differentiation between household and industrial consumers. As to administration, like most enterprises, in Angola, EPAL has serious staff shortages. Most of the professional engineers and middle-level technical personnel departed at Independence and have not been replaced. There is also a lack of semi-skilled and unskilled labour to undertake routine repairs and maintenance, as well as a shortage of meter readers and bill collectors. Rates of turnover and absenteeism are high. 4.154 Public utility Pricing. Mission discussions of the PRE indicate that there is still considerable uncertainty about precise details of implementation. This also applies to basic urban services but the issue of public utility pricing is now much more prominent than in December 1987. In order to restrict the drain on general budgetary resources, it appears that efforts will be made under the PRE to reduce the operating deficits of public utility companies and their recourse to central budget financing to cover investment expenditures. At present, these enterprises have only formal financial autonomy and virtually all their revenues go directly into the central budget. As a first step towards greater autonomy, it is proposed to raise user charges by an across-the-board increase of some 300 per cent. These charges have been little changed since the colonial period. - 124 - This increase will be accompanied by other measures interded to stimulate greater managerial initiative and responsibility. Specifically, it is proposed that the present system of financing operating deficits and expenditures indiscriminately will be replaced by a flat rate of subsidy per unit of production. This unit subsidy is expected to increase the utilization of installed capacity and to raise managerial efficiency as, for example, by encouraging more effective billing and collection practices. However, although the revision of user charges and growing awareness of the importance of cost recovery represent important steps forward, these proposals have yet to be implemented. Indeed, the planning authorities seem prepared to continue subsidizing basic urban services so long as they can achieve greatet control over the absolute amount of subsidy. This may be done by creating a Price Compensation Fund to subsidize public utilities but in close coordination with fiscal policy. This position is defended on the grounds of the special characteristics* of basic urban services and the alarming shortfall in service provision. 4.155 Sewage, surface drainage and solid waste. Following the abolition of the municipal councils, management of the systems of kiewage, surface drainage, and solid waste collection was taken over by the Provincial Commissariat of Luanda (CPL). Responsibility for sewAge and surface drainage subsequently was transferred to ENAS in 1978 before reverting to the CPL in 1983. In the course of these transfers, the size of the original CPL staff engaged in this sector fell from almost one hundred to 10-15 workers. The construction of new sewage and surface drainage systems and majoz repair works was assigned in 1977 to the newly-created Basic Infrastructure Construction Company (ENCIB), which was subsequently split into Provincial Commissariats. The ENCIB inherited by the CPL has practically no operational capacity due to an acute lack of administrative, technical and financial resources. This degree of disorganisation is indicative of the problems and difficulties of improving service in this sector. 4.156 Luanda has a long history of inadequate sewage and sanitation services and the situation was already considered serious in the 1950g. To keep pace with the housing boom during the 19608, and following the destruction of many mains and pipelines by landslides, the colonial authorities drew up a master plan to reconstruct and extend the existing system over a 15 year period. This program was only very partially implemented before Independence, and since then the system has experienced a long and continuous decline. Falling service standards have been accompanied by lower service coverage. Current estimates suggest that only 13Z of Luanda's urban population has sewage connections and 161 has septic tanks. However, all types of existing facilities - sanitary installations in buildings, main sewers, and septic tanks - have deteriorated for lack of cleaning, maintenance, and repair. The problems found in the household sector extend to industrial wastes. The situa-:ion regarding the disposal of industrial effluents is said to be critical due to the saturation of existing septic tanks and the lack of maintenance. 4.157 Collection and treatment services for solid wastes are also extremely deficient in Luanda, particularly in the unplanned musseque - 125 - settlements. Even in the central urban zones, waste collection is inadequate due to the insufficient capacity of public containers and the lack of vehicles to empty them. The untreated garbage is dumped on open ground and there are no facilities for landfill. Solid waste collection services in Luanda urgently need an infusion of financial and technical resources to rehabilitate existing equipment and increase overall capacity. Proposals for improvement made in 1987 by a Ministry of Health Working Group include the imnediate purchase -f an additional 18 coAlection x...ucks and, in the medium term, the construction of a proper landfill site. Urban Housing 4.158 The State Secretariat for Urbanization, Housing, and Water Supply (SEUHA) is responsible for public housing programs and urban settlement planning, but this agency has only a skeleton staff and very limited operational capacity. These limitations are exacerbated by the disorganisation of the provincial Basic Infrastructure Construction Companies (ENCIBs), which are meant to undertake the construction work required for basic sites and services provision. As a consequence, public housing programs and urban planning policies effectively are nonexistent at both national and provincial level. Zoning regulations intended to direct the spontaneous urban settlement process in Luanda have not been enforced. Areas designated for self-construction and future site and service provision have been invaded by squatters, replicating the haphazard patterns typical of earlier musseaue settlement. Apart from selected higher income residential areas, the housing stock in the *formal* sector in Luanda is in a poor and degraded state. Many apartment blocks built during the late 1960s were abandoned at Independence and subsequently occupied by Angolans, including rural migrants and people displaced by the war. This housing now suffers from chronic overcrowding and disrepair. Some apartment buildings were left unfinished without water and sewage services, but in many others the installed services no longer function. These overcrowded high-rise blocks have been described as 'vertical' musseques. These conditions are also found in the 'popular'34 story apartment buildings constructed with Cuban assistance after 1975. Several schemes to resettle musseque communities in modern apartment blocks were proposed in the late 19708 before the focus shifted to self-construction and site upgrading as reflected in the Auto-Construcao legislation. 4.159 It is estimated that over 900,000 of Luanda's 1.3 million inhabitants live in musseaue settlements. In addition to these areas of improvised, extremely high density housing, there is also a limited number of bairros populares or native townships which were established towards the end of colonial rule. These bairros were endowed with a planned network of serviced streets b'tt, following the deterioration of basic urban services since 1975, conditiors now are approaching those found in the musseques. Most musseaue inhabitants live beyond the 'formal' urban structure in unplanned and poorly serviced communities on the periphery of the city. A high proportion of the housing stLck in Luanda thus consists of self-built units with no access to the piped water or sewage sys'ems. Most houses have only very primitive sanitary facilities, typically shallow latrines, and sewage and surface drainage channels are open and close to dwellings in many - 126 - cases. In areas subject to flooding during the rainy season, the danger to public health from these sanitation conditions becomes acute. Only very initial steps have been taken to formulate a policy of musseque upgrading. These include the recent creation of the office for Musseque Renewal and Rehabilitation (GARM). Though it is premature to attemp: an evaluation of GARM, the weakness of other urban planning and executive agencies does not augur well for its future. Nevertheless, the housing conditions of the urban poor in Luanda would be improved significantly by an effective programme of musseque upgrading and sites and services provision. Investments in urban infrastructure and housing 4.160 Public utilities, including water supply, sanitation, and electricity, figure prominently in the investment priorities of the PRE. However, only the general guidelines of the PRE investment program and priority sectors had been established at the beginning of 1989. Sectoral investment allocations, and especially foreign exchange allocations, will be determined at a later stage. Emphasis will be given to projects which allow existing installed capacity to be utilized more fully. 4.161 The shortages of construction materials, especially of bricks, tiles, ceramics. pipes and metal structures, are critical. These shortages represent a serious bottleneck to urban reconstruction programs, and imply a corresponding increase in their foreign exchange requirements. For example, a pilot project in self-help housing to build 1500 dwellings with very basic specifications in the industrial suburb of Viana in Luanda has absorbed US$ 5 million in imported tools and construction materials. 4.162 The priority given to basic urban services in the PRE investment program apparently reflects concern at the highest level about the deterioration and critical state of urban infrastructures notably in Luanda. In February 1988 the President established a Commission of Inquiry into Sanitation and Water Supply in the city which identified seven priority projects for the immediate rehabilitation of Luanda's infrastructure in these sectors. Although these projects have not been implemented due to funding constraints, several recent initiatives should be noted. Solid waste collection services have improved by subcontracting these to a German firm. The main garbage disposal site has been moved away from its close proximity to housing and the principal parallel market ("Roque Santeiro") but its new location and the continuing lack of treatment of solid waste are considered unsatisfactory by the provincial authorities. Discussions are underway with the African Development Bank to finance a further re-siting of the city's main garbage dump. The seven priority rehabilitation projects identified by the 1988 Presidential commission with an estimated cost of US$30 million have also been submitted to this source. The Provincial Commissariat is seeking assistance from the European Community estimated at 10 million ECUs for an emergency program to rehabilitate the sewage system. France and Portugal are assisting in the rehabilitation of Luanda's main water pumping station on t!'e Bengo River. The Canadian government apparently has expressed interest in musseque upgrading projects, which might allow the newly-created Office for Musseaue Renewal and Rehabilitation (GARM) to extend its activities beyond the stage of pilot projects. - 127 - 4.163 It remains to be seen whether this flurry of activity and emergency relief proposals will produce concrete results. The physical degradation of Luanda's water supply and sanitation systems remains critical and nothing short of a major long-term rehabilitation program, including institutional reforms to restore administrative capacity and greater financial autonomy, is likely to bring lasting improvements in service provision. 4.164 Despite the avowed intention of the SEF/PRE to pursue administrative decentralization, there are as yet only very incipient signs of progress in this direction in the Provincial Commissariat of Luanda. However, the Commissariat is reviewing all local tariffs and charges in anticipation of these changes in local government finance. In some cases, penalties and fines have been reinstated (eg., litter laws), the building licence system is being updated, and rents for public housing are under review. - 128 - CHAPTER 5 REFORM OF ECONOMIC POLICIES A. THE PROGRAM OF ECONOHIC AND FINANCIAL RESTRUCTURING Introduction 5.01 Although the difficulties of the Angolan economy are, to a large extent, due to problems created by decolonization and the continuing war, the authorities recognize that the failings and deficiencies of their economic system and policies are also important causes of the existing situation. Consequently, in 1987 they announced an ambitious program of Economic and Financial Restructuring, usually designated as SEF (Programa de Saneamento Economico e Financeiro), oriented toward the following two main objectives: (a) stabilization of the financial situation, by reducing internal and external disequilibria, which are reflected in inflationary pressures, large budgetary deficits, excessive losses and indebtedness of many enterprises, serious deterioration of the financial situation of the banking systemn, accumulation of arrears in foreign payments, and difficulties in servicing the external debt; (b) reform of the economic system, in order to increase productivity, improve the allocation of resources and create the conditions for a faster rate of economic growth and equitable development in the future. 5.02 The authorities established a rechnical Secretariat charged with the task of preparing proposals for new legislation and of taking other initiatives required to implement the policy changes set forth in the SEF. During 1988, the Government approved several laws and discussed several drafts of new legislation, with the objective of establishing the new basic framework for the economic policies and economic reforms to be undertaken under the SEF in specific areas (foreign exchange controls, development of the private sector, restructuring of public enterprises, foreign investment and issue of securities). At the beginning of 1989, the authorities approved a "Program of Economic Recovery" (Programa de Recuperacao Economica), known as PRE, oriented to the two main objectives of starting the process of macro-economic adjustment and of promoting the rapid recovery of production. The PRE, which in principle will initiate the implementation of the economic reforms announced in the SEF, covers the period 1989-90 and defines the main guidelines, objectives and priorities for macro-economic policy and for the investment projects to be implemented at the sectoral and regional levels. 5.03 The legislative initiatives already taken by the government under the SEF have to be completed by regulations before they can be implemented. Though implementation of the PRE is expected to extend over a - 129 - exchange rate, more effective control of public finances or the money supply, etc. The process of implementation of the SEF will thus have to reach a more advanced stage before it is possible to know to what extent the program will be sufficient to deal with the serious problems of stabilization and development faced by the Angolan economy. The description and analysis of the present chapter show, however, that there are good reasons to believe that, if adequately implemented, the SEF will bring very substantial improvements to the management of thc Angolan economy and to the efficiency of the productive structures. 5.04 The following sections summarize the main changes in economic structures and policies announced in the SEF and in the PRE. in some of the laws already published and in documents produced by the Technical Secretariat. Annex V to the present report includes an analysis of the main laws already published under the SEF: the law on the control of foreign exchange, the law on economic activities, the securities law, the foreign investment law, and the law of state enterprises). The Stabilization Measures Announced in the SEF 5.05 The most important measures of financial stabilization announced in the SEF include: (1) the reduction of the deficit of the state budget; (2) the adoption of new solutions to finance the budget deficit; (3) the restructuring of the financial situation of public enterprises; (4) the reform of domestic credit policies; (5) the rescheduling of external debts; (6) adjustments of controlled prices; and (7) adjustments in the exchange rate. Those measures are expected to contribute not only to a reduction in the external disequilibrium and domestic inflationary pressures, but also to the structural adjustments required to achieve higher productive efficiency and faster economic growth. 5.06 Reduction of the Deficit of the State Budget. In order to achieve a reduction in the budget deficit, the SEF envisages both a reform in the tax system and stricter control of budgetary expenditures. The devaluation of the kwanza will also contribute to a significant extent to improving the oublic finances. According to the guidelines established in the PRE, several tax rates will be raised and exemptions from customs duties will be sharply reduced. Taxation of the profits of enterprises will be extended to public enterprises and to the activities of the parallel market. At the same time, stronger incentives will be granted to tax collectors in order to stimulate their efficiency. The SEF also announces the intention of the authorities to initiate studies for a reform over the medium term of the Angola taxation system, including an analysis of possible benefits from introducing a tax on value added and a unified income tax. 5.07 The possibility of cutting budgetary expenditures is constrained by the financial requirements of the war effort. However, the authorities expect that a major contribution to the more effective control of expenditures will come from reductions in subsidies and other transfers to public enterprises. These reductions will be achieved by improvements in the profitability of public enterprises and by the introduction of a new system for financing their investments. Such investments will be financed - 130 - by the retained earnings of public enterprises and by bank credits obtained directly by them, rather than by budgetary transfers. In addition, the PRE announces planned increases in the prices charged to the users of public utilities and services provided by the public sector (housing rents, transportation, post and telecommunications, water, electricity, etc.). A reduction in the level of expenditure may also be achieved through the proposed reform of the system of project evaluation and approval, which aims at establishing better screening procedures and criteria for investment projects. 5.08 According to the PRE, the authorities will take initiatives to strengthen the mechanisms of control of public expenditures. They envisage the reorganization of the services of Public Accounting and the Treasury, which will control the public debt and all cash payments and receipts of the government. The PRE also announces that a survey will be undertaken of all the personnel in the public administration, in order to ensure a more satisfactory control of budgetary expenditures on wages. 5.09 New Solutions to Finance the Budget Deficit. Until now, the budget deficit has been financed mainly by monetary creation and also partly by foreign credits. In order to avoid the inflationary effects of money creation, the authorities intend to finance a larger proportion of the deficit by domestic borrowing from households and from enterprises with large cash balances. For that purpose, they intend to develop a market for public debt securities with attractive returns for private savers. The SEF also envisages the possibility of issuing a compulsory war loan to be subscribed by wage earners. 5.10 In 1988, the government approved a law on securities (law 8188) which regulates the issue of savings bonds with maturities ranging from 12 to 18 years, to be subscribed by individuals, of development bonds to be subscribed by enterprises and other collective entities and of restructuring bonds to be used in the settlement of the arrears of the Government and of public enterprises. The PRE announces plans to issue 5 billion kwanzas of savings bonds and 90 billion kwanzas of restructuring bonds. It is the intention of the authorities to issue the savings bonds at a price above par and to reimburse them totally or partially in foreign exchange. 5.11 Restructuring of the Financial Situation of Public Enterprises. The authorities will seek to reduce the losses of enterprises in the public sector by restructuring some of them, privatizing others, and closing those that do not appear viable in the long term. The profitability of the enterprises kept in the public sector will be improved by the liberalization or increase of their prices and by the introduction of measures designed to increase their productivity. The financial situation of existing public enterprises will be restructured by cancelling part of their debts or by converting such debts into equity. The rescheduling of debts through the issue of restructuring bonds, involving the extension of their amortization periods, is also envisaged. Finally, the SEF announces a stricter ex-post control of the financial operations and payments of public enterprises. The Government has initiated a number of studies aimed at restructuring the financial situation of the public enterprise sector. - 131 - One of these involves an analysis of the indebtedness between public enterprises as well as between those enterprises and the government, with a view to establishing a more rational financial structure of existing enterprises. Work is also proceeding with respect to the development of a methodology for assessing the viability of existing public enterprises. 5.12 Strengthening of the Financial System. According to the SEF program, the arrears of public enterprises will be identified and rescheduled by means of restructuring bonds. Those bonds will replace bad and doubtful debts in the portfolio of the National Bank of Angola (BNA). The cleaning of the balance sheet of that bank will be followed by a revision of its intermediation margins, in order to improve its profitability. The interest rates on both deposits and bank credits will be increased. The authorities envisage the introduction of more flexibility and more competition in the banking sector. As discussed in Chapter 3, legislation has already been enacted to enable the Popular Bank of Angola (BPA) to begin making loans. The possibility of further expanding the powers of BPA or establishing other banks in the future is admitted. 5.13 Reform of Domestic Credit Policies. The SEF envisages not only a reduction of the proportion of credits from the banking system channelled to the Treasury, but also an improvement in the allocation of credit to the productive sector. To this end, the National Bank of Angola (BNA) is being administratively separated into central banking and commercial banking departments. In addition, legislation has been enacted to permit the introduction of securities, to be sold by firms to other enterprises and the public, as alternative sources of financing. Interest rates on deposits and loans will be increased to make bank deposits more attractive and to discourage the unnecessary use of credit. BNA will begin to provide medium and long-term credits to enterprises to finance investment and banks will become more independent from government instructions in their credit decisions. Unless there is an explicit government guarantee, approval of credit to public or private enterprises will depend on judgments by bank management on profitability and risks of the operations to be financed. BNA will closely monitor the use of credit by enterprises to ensure that the funds are used for projects with a reasonably high probability of generating sufficient resources for enterprises to reimburse their debts. Longer term SEF plans call for credit to be allocated increasingly on the basis of interest rates and less on mandatory rules of selection. 5.14 Rescheduling of External Debt. One of the main purposes of the SEF is to provide the basis for negotiations concerning the rescheduling of Angolan external debt. The authorities are interested not only in a solution to the current arrears problem, but also in extending the maturity of existing debt, so as to alleviate the debt service burden in the next few years. At the same time, they intend to introduce more discipline in the management of their external debt in order to avoid the resurgence of new debt crises. 5.15 Liberalization and Adiustments in Controlled Prices. According to the SEF, among the main economic reform measures to be enacted, is the key role to be attributed to the liberalization or adjustment of controlled - 132 - prices, in order to reflect changes tthat have taken place in wages and input costs, particularly imported inputs. Many agricultural prices were already liberalized in 1988, with clearly positive results as far as the supply response is concerned. The objective of the liberalization and of the adjustments in controlled prices is to create conditions for the adequate profitability of enterprises. 5.16 The PRE announces the intention of the authorities of maintaining price controls at the national level on a certain number of essential goods and services, including in particular water, electricity, oil, gas and transportation. In. the agricultural sector, the government will introduce guaranteed minimum prices for the producers of some key products. In most productive sectors, the elimination of the existing system of price controls will allow enterprises more autonomy in their pricing decisions, giving them more opportunity to adapt their prices to changing conditions of supply and demand. Regulations will, however, continue to be applied regarding the maximum margins charged by trading enterprises and the prices of enterprises which enjoy a monopoly position. In view of the gradual liberalization of prices, the control of the aggregate price level will tend to rely essentially on macroeconomic policies. 5.17 Adiustment of the Exchange Rate. The SEF explicitly envisages a devaluation of the kwanza. Under discussion is an initial 100 percent devaluation to be followed by a second devaluation of similar magnitude within a year. An explanatory text about the SEF suggests that, in the external debt rescheduling negotiations, creditors will probably press for a larger devaluation than considered appropriate by the authorities. The same text states that 'the exchange rate will not be the most important instrument of stabilization." According to the authorities, the reduction of the budget deficit and adjustments in the price level will to some extent replace the role of the exchange rate in restoring equilibrium. The SEF admits that, in a second stage of the reform process, a crawling-peg system for the exchange rate may be introduced if it is considered necessary to stimulate exports. It should be emphasized that the reference to a devaluation of the Kwanza represents a fundamental change in the economic thinking of the Angolan authorities. Until 1987, the authorities persisted in maintaining a fixed exchange rate against the dollar, without acknowledging the enormous distortions created by such a policy. 5.18 Foreign Exchange Control. The allocation of foreign exchange has probably been the most important factor determining the volume and the structure of consumption and investment and the level of activity in all productive sectors which depend strongly on the availability of imported inputs. Even after the devaluation of the exchange rate, the allocation of foreign exchange will continue to be based essentially on administrative mechanisms. A new exchange law (law 9188) was issued by the government with the objective of improving those mechanisms. 5.19 The exchange law establishes the obligation of delivering to the exchange authority the foreign exchange received by the residents, forbids compensation of debts and credits between residents and non-residents, and limits the ability to carry out exchange functions to the entities so - 133 - authorized by the exchange authority. The Central Bank is responsible for managing foreign exchange holdings. All foreign exchange operations, regarding capital movements, current invisible transactions and payments related to goods, will continue to be subject to controls. All such transactions require authorizations or licenses. In the particular case of imports and exports of goods, the licensing authority is the Ministry of Foreign Trade. According to the new foreign exchange law, the first fortnight of each month, the Central Bank will inform the ministry of the maximum amount of foreign exchange available for licenses to be issued the next month. Priority in the issuance of licenses is to be given in accordance with the objectives of the national plan. Structural Reforms in the Economic System 5.20 In order to increase the efficiency of the productive system, the SEF announces, among other measures, a more important role for the private sector, more autonomy for public enterprises, a revision of the law on foreign investment and improvements in the planning system. 5.21 Enlargement of the Role of the Private Sector. Recognizing the shortcomings and inefficiencies of public enterprises, the SEF envisages the establishment of more favorable conditions for the development of the private sector. It explicitly admits that smaller public enterprises will be transferred to the private sector and that state ownership will be concentrated largely in key enterprises with strategic roles. 5.22 In 1988, the authorities issued a new law (law 10/88) which defines the regimes for the different types of ownership of enterprises. Tnat law recognizes four categories of enterprises: (1) Public enterprises; (2) mixed enterprises owned jointly by the public sector (the state, public enterprises or other public entities) and by private capital (national or foreign); (3) cooperatives; and (4) private enterprises (including individuals, partnerships and corporations). No economic activity can be performed without previous authorization by the authorities. A number of activities, including those of central banking, military industry, distribution of electric power, basic sanitary services, telecommunica- tions, transport (except short range maritime transport) and port and airport administration will be reserved exclusively for public enter- prises. However, the Council of Ministers may exceptionally authorize private enterprises to undertake economic activities reserved for public enterprises, except for central banking and military industry. Natural resources owned by the State, as specified in terms of constitutional law, may be explored only through concessions or other regimes not involving the transfer of ownership. The Council of Ministers was charged with revising the legislation on the establishment and functioning of priva-e enterprises and cooperatives, nationalization and expropriation, interven:ion of the State in private enterprises, and licensing of economic activity. In the meantime, any intervention of the State in private enterprises on the basis of the existing legislation requires authorization by the Council of Ministers. A major objective of the new legislation on economic activities is to establish clear rules and guarantees for private enterprises and to enlarge substantially the productive sectors in which those enterprises will be allowed to operate. A special emphasis will be given to the - 134 - development of private activities in retail trade. It is expected that private traders will make an important contribution to the development of closer economic relations between the countryside and the cities, thus stimulating the marketable production of agricultural crops. Piivate enterprises will also be especially encouraged in the sectors of internal road transportation, building, repair services, and handicrafts. Enterprises which are currently operating in the parallel market in those sectors will be legalized. 5.23 Increased Autonomy for Public Enterprises. A new law on public enterprises (law 11188) was published in 1988 with the major objective of providing more autonomy to the management of those enterprises. The activities of the enterprises will be based on their budgets and on their annual and medium term plans, which will be integrated in the macro-economic targets and guidelines established in the national plan. According to the principles announced, the ministries will establish general regulations for the different productive sectors and will plan the activities of such sectors, but will not intervene in specific management decisions at the enterprise level. The law states that, except as provided in specific legal regulations, no organism of the State or other third party has any right to interfere in the conduct of these enterprises. It is foreseen, ir particular, that eaiterprises will have more autonomy in their price and labor policies, although within constraints established by the government for the protection of consumers and workers. Public enterprises will face more active competition, not only because of their greater autonomy but also because of the encouragement of private sector activities. 5.24 Public enterprises will be subject to the same tax treatment as private enterprises. The supervision of the enterprises is the responsibility of the ministry responsible for the sector (Ministro de Tutela), and the Minister of Finance. The sectoral ministry guides and supervises the activitie3 of state erterprises by def,ning the development policy of the economic activity concerned, approving the multi-year plans and budgets proposed by the enterpriscs, evaluating directors and approving enterprise accounts. In the case of large companies, the Council of Ministers may require approiral by the Minister of Planning of the multi- year plans and budgets and of the investment programs of the enterprise. Public enterprises are to be given greater financial autonomy. The State is not liable for their obligations. Enterprises will retain their depreciation, though its use will still be subject to control, as well as 502 of their profits. Part of the profits may bs allocated to workers on the basis of their individual performance. Enterprises will be urged to operate along commercial lines, and will be told that they can only expect government subsidies if their performance is affected by circumstances beyond their control, such as the war. Also, SEF raises the prospect of liquidating non-viable companies as well as privatization of others. However, in practice it appears that fairly close ministerial control, in terms of both planning and execution of operations, is still being maintained. Questions remain about the operational freedom that management of public enterprises will have, for instance in terms of selecting their supply sources and their markets. - 135 - 5.25 Revision of the Legislation on Foreign Investment. A new law on foreign investment (law 13188 of June 16, 1988) was approved with the objective of improving the authorization, encouragement and supervision of foreign investments by the Government, and of simplifying the process of negotiation and approval. The new system is aimed at ensuring that foreign investments will contribute effectively to the economic development of Angola and correcting important distortions and shortcomings of recent years in that area. Another major objective is to establish more attractive conditions for potential foreign investors. The creation of a new Institute for Foreign Investment was announced. That Institute will promote foreign investments in Angola including, in partizular, joint ventures with Angolan enterprises. Among other functions, the Institute will evaluate foreign investment projects, centralize negotiations with foreign investors, and assist them in all the initiatives and formalities concerning their proposed investments. 5.26 There will be a substantial enlargemen.t of the sectors of economic activity in which foreign investment is permitted. The law excludes investment by non-residents only in the areas of defence, central banking, education, health, water supply and sewerage, electric power, postal services, telecommunications, social communications, administration of ports and airports, air transport, and long range maritime transport. This list notwithstanding, the Council cf Ministers may authorize specific investments in areas complementary to those so listed. Limitations on the percentage of foreign ownership of the capital of ernterprises will be reduced and foreign investors may be allowed to establish new enterprises fully owned by them. They will also be permitted to acquire Angolan enterprises which are not producing or which are highly inefficient and could be turned around. 5.27 The law specifies that investors are to receive just and equitable treatment and, in particular, it guarantees the repatriation of profits or of the foreign investor's share in case of liquidation or sale * he enterprise. In both instances, the prior authorization of the Minister of Finance is required. In case of expropriation, the investor will be given "just compensation'. In case of disputes between the foreign and local investor which cannot be resolved amicably, the parties may have recourse to arbitration according to UNCITRAL rules. It should be emphasized that the disputes which may be subject to such arbitration are not those involving the State but only those between the local and foreign partners. Thus, in the case of expropriation, there would not be the possibility of submitting a dispute regarding compensation to arbitration. 5.28 Foreign investments under this law may be given certain incentives, such as exemption from or reduction of income taxes and customs duties on inputs or outputs. They may also benefit from other incentives available under existing legislation in cases in which they reinvest profits, develop activities of a social character, and train and use local labor and management. 5.29 The law leaves a number of matters to future regulation. These include areas of priority for foreign investment, compensation in case of expropriation, guarantees whic'. might be required from the investor, terms - 136 - of the contract to be signed between the investors after approval of the investment, and obligation of employment of local labor. 5.30 Improvement of the Planning System - A new law on economic planning (law 12/88) was published on July 9, 1988. The new law states that national plans will continue to be a major instrument of economic management. However, it is recognized in the preamble of the law that the system of economic planning has relied too much on administrative mechanisms and bureaucratic methods and that it will be necessary to assign a more important role to the operation of market forces. The authorities intend to improve the system of planning by changing some of its more important characteristics and mechanisms and by better recruitment and training of experts charged with the planning tasks at the central, sectoral and enterprise levels. In view of the unsatisfactory experience with detailed quantitative planning, the authorities will reduce substantially the nvmber of annual targets for the production and supply of important goods and services. Annual plans will be based to a larger extent on projections of key economic variables and will put more emphasis on the macro-economic policies required to ensure internal and external equilibrium at very aggregate levels. Macro-economic management will be based essentially on the level of public expenditures, the average level of taxation, the exchange rate, interest rates, the average rate of increase of wages, and the average rate of increase of controlled prices. However, most prices will be determined by market forces. The allocation of resources, especially as regards the volume of investment and the structure oi output, will be determined essentially by the price mechanism and by market competition. The plan will influence the activities of major productive sectors mainly through broad guidelines, incentives, public investments, taxes and tax credits and the accountability of managers, rather than through output targets. 5.31 The authorities will seek to achieve better coordination between the Annual Plans, the State Budget, and the Foreign Exchange Budget. The State Budget and the Foreign Exchange Budget will be more effectively subordinated to Ann2al Plans. Investment programs which are being executed at present will be reviewed and some large projects may be slowed down or stopped. Domestic financial constraints and the availability of foreign exchange will have a greater weight in decisions concerning new investments. Enterprises will have more autonomy in their investment decisions if they can finance them internally or if they can obtain domestic credits without government support. Finally, there will be more decentralization of planning activities from the Planning Ministry to the planning organizations at regional levels. B. THE SEF AND PROSPECTS FOR ECONOMIC REHABILITATION Introduction 5.32 As mentioned above, the general thrust of measures envisaged in the SEF seems to be appropriate. However, since the actual implementation of most of those measures has not yet started, it is not possible to present precise comments on their expected contribution to the adjustment - 137 - of the Angolan economy. Nevertheless, an evaluation of that contribution will require: (a) a definition of the key objectives to be pursued; (b) a discussion of the strategies to be adopted in implementing the reforms envisaged; (c) an analysis of institutional constraints to implementation of the SEF program and of the measures which will be needed to ease such constraints; (d) a discussion of the main reforms in macro-economic policies and economic structures to be introduced under the SEF, including in particular: (i) the development of a network of competitive enterprises, providing a basis for the operation of the market system; (ii) the reduction of the budget deficit; (iii) the reform of the price system and the adjustment of wage levels; (iv) the adjustment of the exchange rate and the policy of foreign exchange allocation; (v) monetary and credit policy. (e) an assessment of the social problems which may be created by the implementation of the policies of economic adjustment and reform envisaged in the SEF; (f) an assessment of shortcomings in the availability of key statistical data required for the conduct of economic policy; and (g) an analysis of a scenario based on the end of the war. 5.33 The following sections deal in turn with each of the foregoing points. In order to provide some useful information about the difficulties and the achievements to be expected from the SEF and the PRE and from the policies recommended in the present report, the last section of this chapter summarizes experiences with the implementation of similar programs undertaken in recent years by Ghana and Mozambique. Both of these countries were facing serious economic difficulties similar to those of Angola and tried to respond to such difficulties with economic policies similar to those that Angola has been contemplating. The experiences of Ghana and Mozambique are thus highly relevant for the discussion of the SEP. - 138 - Definition of Key SE? Objectives 5.34 As mentioned repeatedly in various parts of this report, the development of the Angolan economy over the next few years is closely linked to the evolution of the war. The analysis of the following sections is implicitly based on the assumption that substantial improvements will be achieved as regards the war situation and that Angolan authorities will have the opportunity and the international support to divert a substantial volume of resources from the war effort to the tasks of economic recons- truction and improvement of social conditions. The results expected from the SEF would, of course, be almost entirely frustrated if the Angolan Government is forced to allocate a high share of available resources to defence activities, if there is not a significant enlargement of the areas of the country enjoying reasonable security, or if there are frequent attacks against installations of strategic economic importance. ;.35 The behavior of international oil prices will also be an important factor influencing the success of the SEF. If those prices drop to significantly lower levels, it would be extremely difficult for the SEF reforms to offset the negative effects of the tighter external constraints on the economy. However, if oil prices rise very substantially, there might also be risks that the authorities would reduce their commitment to the SEF reforms, and would return to some of the inefficient and wasteful economic policies of the early 1980s. 5.36 As mentioned in paragraph 5.02, the SEF reforms are oriented towards two main objectives: (1) st'bilization of the financial situation; and (2) reform of the economic system. The analysis of the following paragraphs is based on an alternative formulation, probably more significant from the operational point of view, which identifies the following priorities for the economic reform program in Angola: (a) ensure adequate control of domestic demand; (b) stimulate domestic supply; and (c) improve the allocation of resources. 5.37 Control of Domestic Demand. The control of domestic demand is indispensable to reduce the inflationary pressures reflected in the generalized and growing scarcities at official prices of consumer goods and inputs for productive activities. Such control is also essential to keep the current account in balance and the external debt within sustainable limits, without excessive recourse to rigid and inefficient schemes of administrative allocation of foreign exchange. The control of domestic demand will have to rely primarily on efforts to reduce the budget deficit, the main source of inflationary pressures. However, effective control of the expansion of domestic credit to the productive sector will also be necessary in order to avoid excessive growth in the money supply and in the demand for imports. 5.38 Stimulation of Domestic Supply. The rapid recovery of domestic production is one of the basic objectives of the PRE. That recovery will have to be based mainly on agriculture. There are good reasons to believe that agricultural production by peasant farmers in the areas not affected by the war (mainly in the provinces in the southwest and around Luanda) will respond very quickly and substantially to adequate incentives. Such - 139 - incentives should include: (i) more favorable prices for agricultural products, some of which have already been introduced; (ii) development of a network of private bush traders; (iii) greater availability of consumption and agricultural input goods for purchase by peasant farmers; (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 quite important are those of repair services, private truck transportation, small-scale consumer goods industries and construction. Efforts aimed at stimulating the production of manufacturing industries and of large scale agricultural activities should be more selective. Resource constraints wilt limit new investments and the rehabilitation of existing capacity. Severe scarcities of managerial and technical skills will also create serious obstacles to a rapid and easy recovery of production in many of the larger enterprises. 5.39 Improvement in the Allocation of Resources. In view of the extremely large distortions in the Angolan economy, improvements in the allocation of resources can increase the welfare of consumers and correct arbitrary inequalities ir. income distribution that are not justified by reason!. of productive efficiency. A better allocation of resources can also increase productivity in most sectors of the economy and improve the efficiency of investments. The achievement of these objectives will require, among other measures: (i) the reduction of administrative interferences in the economy and more reliance on market forces; (ii) the stimulation of competition in the productive sector; (iii) substantial changes in price policies and the exchange rate; (iv) the progressive unification of the official and parallel markets; (v) a review of public expenditure priorities; (vi) the reform of public enterprises; and (vii) an improvement in the mechanisms for evaluation and selection of public investments. Strategies for Reform 5.40 The reform process in Angola will require very drastic transfor- mations in the economic system, in the methods of economic management, and in economic policies. In principle, two strategies can be conceived for the implementation of such transformations: (a) a shock adjustment, under which the most important changes would be made within a very short period; or (b) a more gradual or staged approach, under which the required transformations would be introduced progressively, in partial steps taken over a period of several years. 5.41 In t:.e case of Angola, a full shock adjustment does not seem to be feasible for a number of reasons. In theory it would be possible to introduce measures of advanced liberalization and stabilization within a comparatively short period (elimination of controls over prices and imports; introduction of a market-determined floating foreign exchange rate; introduction of strict controls on the expansion of credit to the public sector; introduction of market-determined interest rates; etc.). However, in practice there is the risk that, given the state of development - 140 - of Angolan economic structures, the extent of the distortions and the constraints created by the war, a strategy of very rapid liberalization vould produce new economic disequilibria, different from those which exist at present, but not necessarily less serious. Similarly, attempts to stabilize the economy over a short period of a few months would involve very harsh decisions. The shortcomings and insufficiencies in existing administrative and productive structures would compound the adverse effects which would certainly arise. 5.42 On the other hand, a gradual approach involves dangers if it is extended over too long a period. There is no doubt that the new economic policies required in Angola will only be effective if they are supported by structural adjustments. If these cannot realistically be achieved in a few months, the gradual approach will be unavoidable, although its results will appear only slowly. At the same time, a gradual approach will reduce the risks of big mistakes and will provide more opportunities to learn through experience and to introduce corrections in the course of the adjustment and reform process. A gradual approach will, however, tend to fail if it starts with weak measures and if it is extended over an excessive long period. Weak measures produce weak effects, undermine the credibility of the reform program, and may be counterproductive. In addition, if the implementation of the program is extended over an excessively long period, there is the risk that the political commitment that it requires will become progressively weaker and that the resistance of adversely affected groups will become progressively stronger. 5.43 In view of the considerations and circumstances prevailing in Angola, a combination of shock treatment with a gradual approach should be considered. The existing economic distortions are so serious that a rapid reduction of many of them is urgently required. That reduction cannot be achieved without the introduction, even in initial reform stages, of radical changes, involving adjustments in price and wage policies, the depreciation of the exchange rate, more flexibility in allocating foreign exchange, and more autonomy and accountability for public enterprises. Initial reform measures should also include improvements in taxation, better control of public expenditures, stimulation of competition, more attractive incentives to private enterprises and less government interference in productive activities. Such measures must be integrated into a consistent package, conceived so as to reinforce the total positive impact of the various measures and to neutralize the undesirable effects of some of them. 5.44 Further work and discussions will be needed to formulate the required changes with precision. It is clear, however, in light of the analysis and discussion presented here, that the process of reform should begin with decisive steps involving: (a) a very substantial adjustment of the exchange rate; (b) the liberalization of a high proportion of administered prices (including not only the prices of agricultural products, many cf which have already been liberalized, but also the prices of goods and services in which the volume of transactions is comparatively - 141 - small or which at present are mainly supplied in the parallel market); (c) substantial increases in the prices which will continue to be controlled; (d) the introduction of incentives to stimulate exports of agricultural goods; (e) the adoption of solutions to reduce the rigidity of the administrative allocation of foreign exchange for some key imports (spare parts, inputs for agriculture, etc.); (f) increases in tariff duties, elimination of a large number of tariff exemptions and increases in some indirect taxes; (g) adjustments in wage levels (as far as possible combined with a reduction in self-consumption facilities and privileged access to goods and services at official prices); (h) the enlargement of the autonomy of public enterprises, the financial restructuring of the most important of those enterprises and the closing of public enterprises which are not viable; (i) the legalization of a substantial proportion of the activities in the parallei market and, more generally, improvements in the legal framework for private enterprises and the introduction of incentives for the development of small scale enterprises, especially in the areas of trading, truck transportation, repair services and construction; (j) the revision of the methods and mechanisms of economic planning with a view to introducing more flexibility and reducing bureaucratic interference in productive activities. 5.45 The initial changes in economic policies would have to be complemented by additional reforms to be introduced gradually in subsequent stages. These reforms should involve further steps towards the reduction of administrative controls and the elimination of existing economic distortions. They should be based to a large extent on structural transformations aimed at increasing the efficiency of taxation and public expenditure control systems, public enterprises, the banking sector, the educational and training system, urban services, the transportation sector, etc. 5.46 The impact of a reform program like the SEF on the level and efficiency of production may not come about very quickly, even if the initial package of adjustment measures is strong. Many existing difficulties will persist in the medium term and new problems will certainly emerge. Thus, for instance, even if the output of marketable agricultural products responds rapidly to new incentives, scarcities of essential consumer and intermediate goods are not likely to disappear in - 142 - the next few years. Changes in economic structures, including, for example, the development of an internal market with a reasonable degree of competition, cannot be achieved in a short period. Similarly, drastic changes in economic policies, including in particular the liberalization of prices, will not produce the expected results if they do not take into account the constraints and conditions imposed by shortcomings in economic and administrative structures. It is for all these reasons, that the implementation of the SEF should be based on a combination of shock tceatment and a gradual approach: the initial package of adjustment measures should introduce drastic transformations in economic policy, but the implementation of the structural reforms and the additional adjustments in economic policies will have to be undertaken over a period of several years. 5.47 The success of an economic adjustment and reform process extended over several years will depend on the proper sequencinR of the measures to be undertaken. A given measure, introduced too early, before the basic conditions for its success are created, may aggravate the problems of disequilibrium instead of correcting them. Thus for instance, in the Angolan context, a policy of full liberalization of domestic prices and a depreciation of the exchange rate sufficient to permit the liberalization of imports could create risks of a vicious spiral of inflation-devaluation -inflation if the budget deficit is not previously reduced to levels which could be financed without excessive monetary creation. Similarly, the adoption of a new system of prices to stimulate agricultural production can only produce its expected positive effects if transportation to rural areas and trade in those areas are allowed to develop unconstrained by bureaucratic decisions and controls. Institutional and TraininR Requirements 5.48 As mentioned in various sections of this report, many difficulties in the Angolan economy result not only from inadequate economic policies, but also from institutional constraints, including serious shortages of management capacity and skilled personnel, as well as a generalized lack of discipline at various levels. It is thus evident that the preparation and approval of a well conceived program of economic reform will not by itself be sufficient to achieve the objectives mentioned in the preceding sections. The success of such a program will depend crucially on the capacity of the Angolan authorities to implement the program. The following paragraphs deal briefly with some of the key requirements for a reasonably adequate implementation of a program of economic reform. The points to be analyzed include: (i) political commitment; (ii) decentralizing economic decision-making; (iii) reduction of the prevailing lack of discipline; and (iv) the availability of skilled personnel. 5.49 Political Commitment. In view of the arguments presented in the preceding sections, the success of the SEP will depend to a large extent on the commitment of the Angolan authorities to implement it over a period of several years. The strategy of rehabilitation and reform will fail completely if the Angolan authorities do not persist for a sufficiently long period in the implementation of the SEF policies, even in the face of - 143 - disappointing initial results and resistance against the transformations to be introduced. Such resistance may come from two sources: those who will argue that the policies envisaged are not appropriate in the specific Angolan context; and those who fear that such policies will affect adversely their privileges and power. For these reasons, without a strong political will, it may for example be extremely difficult to develop a stronger role for market forces, given the natural resistance against such a change in a country which until now has been so closely managed by bureaucratic decisions. 5.50 Decentralization of Economic Decisions. The decentralization of economic decision-making would certainly reduce many of the inefficiencies, contradictions, overlaps, and delays created by the existing system. Another important justification for economic decentralization is that it would economize on scarce resources of qualified manpower. At present, a substantial part of those resources are absorbed in tasks such as preparing detailed regulations (which often are not observed), granting a multitude of authorizations and licenses, and intervening in minor decisions of enterprises and departments at the lower levels of public administration. A more decentralized system would make it possible to concentrate scarce managerial and technical capacities on the design, implementation, and control of general economic policies and on the more important decisions. If detailed decisions of less importance were taken on a more decentralized basis by a large number of economic agents, lower level decision-makers could develop expertise in specific areas. In addition, under a decentralized system, the greater dispersion and smaller impact of possible mistakes would reduce the seriousness of their consequences. Such a decentralization of economic decision-making must be primarily based on: (i) a more important role for the market; (ii) greater autonomy for public and private enterprises; and (iii) more delegation of decision-making powers in the public administration, including regional and local authorities. These measures are envisaged in the SEF, but their implementation will not be easy and will require a strong commitment from the authorities. 5.51 Reduction of the Lack of Discipline. As mentioned in several sections of the present report, there is a widespread lack of discipline at various levels of the public administration and within the enterprises in Angola. The manifestations of such lack of discipline include decisions that are contrary tr existing regulations, decisions taken by some authori- ties which encroach upon the jurisdiction of others, high absenteeism of workers, theft of a substantial proportion of the production of some enterprises, theft from the ports, etc. Part of that lack of discipline is due to existing economic difficulties, such as the scarcity of essential consumer goods, difficulties experienced by the workers in getting transportation to their jobs, and bottlenecks created by the war. The program of economic reform will undoubtedly ameliorate some of the fundamental causes of loose discipline but, to be effective, decisive efforts by the authorities to combat the generalized lack of discipline will be required, starting at very high levels of the political and administrative structure. Without such efforts, there is the risk that the objectives of the reform program will be frustrated to a large extent. - 144 - 5.52 Availability of Skilled Personnel. The scarcity of skilled personnel is one of the main constraints to improving economic policies and to increasing economic efficiency in Angola. As mentioned above, decentralization of economic decision-making will economize on scarce human capital resources. However, there are many areas in which management at the central level will have to be maintained and improved: for instance, in the control of budgetary expenditures, in tax and customs administra- tion, in the credit system, in the administration of justice, in the organization and functioning of the education and health systems, etc. At the same time, the need to train personnel at intermediate skill levels for public sector administration and for enterprise management and production is critical. For example, there is a pressing need for accountants, mechanics and foremen. The recourse to foreign technical assistance, in the framework of economic aid programs or on a commercial basis, will continue to be necessary on a large scale. However, the efficiency of foreign technical assistance has not always been entirely satisfactory, mainly because of bad choices in priorities, inadequate efforts to follow up the work started by foreign experts, and insufficient interaction and knowledge-transfer between foreign and Angolan experts. In such conditions, the implementation of a program of economic reforms in Angola will require action in the following areas: (i) the allocation of existing human resources; (ii) training; and (iii) the utilization of foreign technical assistance. 5.53 Allocation of Existing Human Resources. The existing allocation of skilled personnel should be reexamined, taking into account the objectives of the program of economic reform. The changes to be introduced in economic institutions and policies will create the opportunity and the need to transfer a substantial number of experts and administrators from functions whose relative importance will decline (especially bureaucratic regulations and controls) to other functions that will become more essential (for instance, management of large enterprises and administration of incentives and support schemes for medium and small enterprises). The reallocation of scarce human resources in the public administration and in the productive sector will depend essentially on the structure of incentives. That structure includes at present not only the level of wages, but also payments in kind (self-consumption in manufacturing enterprises) and the possibility to acquire goods and services at official prices (access to special shops, possibilities of buying or renting houses, priorities in purchases of cars, air tickets, etc.). The complexity of the existing structure of incentives creates strong distortions and rigidities. It will thus be essential to: (i) define priorities for the allocation of the scarce supply of managers, administrators and experts; and (ii) review the existing structure of incentives for skilled personnel in order to simplify them and adapt them to the requirements of the new mechanisms and institutions of economic policy to be introduced in the next few years. 5.54 Training of Skilled Personnel. In the medium- and long-run, the availability of skilled personnel at the different levels in public administration and in the productive sector will depend primarily on the development of the educational system. As explained in Chapter 4, and in Annex IX, the Angolan authorities have made substantial efforts in the area - 145 - of education, particularly at the level of secondary and higher education. However, important improvements are required in educational policies. including in particulart (i) more emphasis on vocational training at the secondary level; an4 (ii) changes in the 'curricula, in higher education, in order to give more priority to applied techniques. The authorities are studying transformation- in line. -.Lth these proposals. They are for instance studying the introduction of substantial changes in the curriculum of the Economics Faculty at the University of Luanda, with a view to increasing the relative importance of courses in applied economics. In connection with these transformations, it would be important also to emphasize courses in management (accounting, financial management, project evaluation, maLketing, etc.). In parallel with the development of the educational system, there is a strong need for training courses for experts, managers and skilled workers in the public administration and in productive enterprises. The precise definition of the programs and priorities for such courses can only be determined after further studies, but it is known that they are required in many areas and at different levels (including, for example, courses in accounting or in the repair of machinery and transport vehicles). Also, one of the first priorities should be to organize specialized seminars on the Economic Reform Program for economists and managers. 5.55 Technical Assistance. Substantial amounts of money have been spent on technical assistance provided to Angola either on a commercial basis or in the context of bilateral and multilateral programs of international cooperation. In the coming years. Angola will continue to depend very heavily on foreign technical assistance. For that reason, it will be essential to define priorities and to install mechanisms which will ensure more efficiency in expenditures on technical assistance. The preparatory work should start with a survey of technical assistance experience in recent years, assessing the results achieved in relation to the costs, the follow up of the studies and recommendations made by foreign experts, the transmission of knowledge to Angolan nationals, etc. That survey would provide the basis for a medium-term program, subject to annual revisions, defining the priorities and the guidelines for expenditures on technical assistance and taking into account the resources available both from internal and from external sources. Development of a network of competitive enterprises 5.56 One of the fundamental reforms of the Angolan economic system should be to introduce a more important role for market forces. However, it will be extremely difficult to achieve that objective with existing structures. A predominant part of productive activities in the official market is based on public enterprises which operate at low levels of efficiency, with very little autonomy and without competition. Private enterprises in the off5cial market are also so strictly regulated and dependent on governmen administrative allocations that the influence of the market on their dec ions is very weak. Peasant farmers, who, in principle, can provide the main basis for the expansion of agricultural production, are isolated in subsistence activities and have few links with the market. The only area in which market forces operate freely is that of the parallel market. Given this situation, deep structural changes in the - 146 - organization of the productive sectors are needed, especially to develop more autonomy for public enterprises, to liquidate or sell off some public enterprises, to stimulate competition and develop incentives for the es- tablishment of small private enterprises. 5.57 More Autonomy for Public Enterprises. According to the SEF and law 11/88, more autonomy will be given to public enterprises, an undoubtedly very important objective. However, the central economic plan will apparently continue to play a major role in the activities of public enterprises. Those enterprises will still prepare, for at least a year ahead. business plans and budgets, in which all their inputs and outputs will be detailed quantitatively and financially. The plans will continue to be sent to the Ministry of Planning through the ministry that oversees the enterprise in order to be integrated into the national plan. A council, comprising the Ministers of Finance and Planning and the over- seeing ministries, will revise these plans if necessary, and return them to the companies for implementation. Public enterprises will still be responsible for keeping detailed performance records, which will be submitted periodically up the chain of command for scrutiny. These do not appear to be changes that will stimulate very much autonomy for public enterprises. 5.58 The authorities recognize that the degree of control over management decisions inherent in the hierarchical command structure has in the past invited too much political interference in what are essentially economic activities. To rectify this situation, law 11/88 envisages a much wider separation between the supervisory ministries and management. However, the planning process, which will remain intact, will continue to limit managerial initiatives because the plan instructions, V.Lich must be observed in order to qualify for foreign exchange allocations, will limit short-term flexibility. The relaxation of the pervasive system of govern- ment price controls will enlarge opportunities for producers of goods and services to charge whatever they believe necessary to reach profitabi- lity. The Government. however, reserves the right to place a ceiling on any price in the irnterest of consumer protection. It is clear, however, that for the present steps towards financial autonomy to be effective, progress has to be made in liberalizing a broad range of prices, in adding flexibility in the allocation of foreign exchange, and eliminating other constraints imposed by government policies on the management of public enterprises. 5.59 Public enterprises are expected to enjoy greater financial autonomy. Access to bank credit will remain unchanged, but to compensate for the withdrawal of unlimited government budgetary support, these enter- prises will be able to accumulate extra investment and working capital, beyond the original equity (Fundo de Constituigao) provided by the State. This new source of financing is to come from retained depreciation and presumably a larger share of operating profits. Public enterprises will also be allowed to raise money through debt issues. 5.60 Apart from the need to establish an economic environment that encourages a more efficient allocation of resources, which is an essential condition for the efficient operation of any enterprise, the key to a - 147 - successful rationalization of the state enterprise sector is having capable managers at the enterprise level and ensuring ex-post control of their performance. Without able managers it will not be easy to set up a system of arms-length ministerial control and reduce the current interference in operations. To find good managers, it will be necessary to reform the present pay structure in order to offer adequate incentives. Law 11188 envisages a quite complex management structure for the large enterprises consisting of: a Board of Directors with 3 to 5 members, one of whom will be appointed by the workers; an Auditing Board, with 3 members appointed by the Government; a Managing Board, consisting of the chief Executive Manager, appointed by the Board of Directors, and several senior executives of the enterprise; and an Advisory Board to the Management, with consulta- tive functions and composed of the Managing Board, a representative of the trade unions and a representative of the official party. According to the same law, the management structure of the smaller public enterprises will be more simplified. In those enterprises, there will be no Board of Directors, the Auditing Board may be replaced in some cases by a single auditor, and the Managing Board may consist only of the Managing Director. However, in smaller enterprises the composition and the functions of the Advisory Board to the Management will be similar to those of large enter- prises. In order to strengthen the autonomy of the managers, it is foreseen that they will be appointed for periods of 3 to 5 years with opportunities for renewal, and that they can be dismissed only under conditions specified in general regulations. Solutions of this type are probably not well adapted to the constraints imposed by tne scarcity of managers and professional skills in Angola. It would certainly be more realistic to envisage less elaborate management structures, except in very few large enterprises of key importance in the economy (Sonangol, TAAG and a few others). The effective autonomy of public enterprises and the efficiency of their management will depend mainly on the process of selecting managers and their allocation among enterprises. Enterprise autonomy and efficiency will also depend on the extent of interference by political structures and by ministers in the day-to-day activities of the enterprise, as well as on training programs in management skills, manage- ment performance evaluations, incentives for good performance, and penalt.ies for incompetence or neglect. 5.61 Liquidation or Transfers of Public Entcrprises. Constraints on the availability of imported inputs, equipment and managerial capacity and professional skills make it extremely difficult to ensure the viability of a significant number of public enterprises. The maintenance of some of these enterprises absorbs scarce resources which often could be used more productively elsewhere. Very often these enterprises provide jobs without a proper corresponding contribution to the gross domestic product. They tend, therefore, to impose a burden on the economy, instead of helping its development. In such conditions, the Angolan authorities face the challenge of having to close some public enterprises which offer no encouraging prospects of becoming viable. In a few cases, they will have to transfer such enterprises to the private sector (by total or partial privatization, leasing, management contracts, etc.). 5.62 The existing law on public enterprises recommends that management of public enterprises pursue operational efficiency and maximize operating - 148 - profits. However, the practice has been to permit those enterprises that for one reason or another have shown iosses, to resort to either an annual state budget subvention or to obtain long-term loans from the central bank. According to the intentions of the authorities, public enterprises which do not show a profit are presumably to be terminated by liquidation or sale. This discipline will undoubtedly be beneficial for the economy, but it is uncertain whether it can be uniformly enforced because of political resistance and the adverse effects on urban employment. 5.63 While the private sector can accomplish some productive activi- ties more efficiently than the state sector and letting it do so would relieve the Government of an unnecessary burden, there is clearly a significant role for state enterprises. Some public enterprises operate in naturally monopolistic areas (e.g., public services) and others in areas considered vital to state security (e.g., air transport and telecommunica- tions). These will definitely not be privatized or liquidated. It is. moreover, possible that the operational management of some of private companies will not be allowed to be more than executors of pieces of the national plan. Some of the larger trading companies, and many of the local public enterprises which are logical candidates for privatization, may not move in that direction rapidly for lack of available entrepreneurial talent and capital. In addition, the scope for privatization is limited by problems of insecurity, labor relations, lack of skilled personnel, narrow- ness of the domestic markets, difficulties in internal transportation, irregularities in energy supply. etc. 5.64 Stimulation of Competition and Incentives for Medium-sized and Small Private Enterprises. The market cannot provide efficient mechanisms for the operation of the Angolan economy unless there is a sufficiently large number of enterprises competing actively against each other in a large proportion of the productive sectors. In order to fulfill that condition, it will be indispensable to stimulate actively the development of medium and small scale private enterprises in several sectors. This raises several considerations: (a) The possibility of rapid growth in agricultural production in the next few years will depend primarily on the contribution of peasant farmers. That contribution may be very significant if it is stimulated by appropriate price policies and by the develop- ment of adequate trade and transportation facilities. A limited number of large commercial farms, of which some exist already, can also make a useful contribution, especially as regards the introduction of new technologies. (b) The development of diversified structures in the trade sector should be a cornerstone of the reform of the Angolan economic system. These structures should be based on a large number of small and medium enterprises in all levels of trade, including imports, exports, domestic distribution, and wholesale and retail trade. Encouraging the establishment of traders in rural areas (bush traders) is particularly important, given their potential role in stimulating agricultural production; - 149 - (c) To support the development of the trade sector and agricultural production, it will also be essential to stimulate the creation of small private enterprises in transportation (e.g., in trucking and bus services); (d) There is also considerable potential for the establishment of small-scale private enterprises and artis3r.. in several manu- facturing activities, services, and the construction sector (mechanical and electric repairs, cloth and shoe-making, food processing, furniture, restaurants, etc.). 5.65 A major reason for encouraging the development of a large number of new private enterprises should be to create a climate of active competition in the economy. Competition is indispensable to ensure efficiency in production and in the allocation of resources and to avoid high levels of concentration of wealth and economic power. In order to achieve more competition the iuthorities should avoid imposing special- ization on enterprises. Rather, they should encourage the establishment of new trade and transportation enterprises in branches and regions in which there are already similar enterprises and activities. They should avoid granting special benefits in favor of specific enterprises which could lead to distortions in competition. 5.66 The creation of conditions by the authorities for the establishment and development of new enterprises in competition with each other should involve a number of steps: (a) The authorities must clearly define the legal conditions for the operation of private enterprises, specifying the guarantees offered to them and ensuring that they will not be subject to arbitrary interventions not specified in the law. The legislation should also provide for adequate legal protection against crimes, breach of contracts, etc. The strengt .ning of the judiciary system will be particularly important for that purpose. (b) The authorities must develop adequate flexibility in policies concerning price controls, wages, labor, credit, allocation of foreigr- exchange, etc. If these policies continue to be based almost exclusively on administrative decisions, risks involved in the creation of new enterprises would be much higher and new initiatives would be stifled. (c) The authorities need to quickly legalize enterprises which at present operate in the parallel market. The legalization process should not be unduly restricted beyond requiring the enterprises involved to comply with adequate regulations concerning taxation, protection of health and security, enrollment of labor, etc. (d) The system of licensing the establishment of new enterprises should be liberalized. The creation of new enterprises complying with existing general regulations should be authorized without great formalities and with a minimum of restrictions. - 150 - 5.67 The authorities should give high priority to the creation of incentives for the development of small enterprises in different sectors of econo,my. The incentives to be introduced could include: (a) tax holidays; (b) assistance for professional training of selected categories of skilled workers (mechanics, electricians, construction workers, accountants, etc.); (c) technical assistance to small enterprises, based on the support of foreign technicians; (d) adequate credit facilities; and (e) provision of adequate infrastructure (warehouses for storing agricultural products, rental of shops and industrial buildings owned by the State, supply of water and electricity, etc.) In addition, specific programs for the development of small enterprises in priority sectors (trade, transportation, mechanical repairs, etc.) should be prepared and implemented, if possible with the support of technical and financial foreign assistance. It should be noted that the authorities are considering at least some of these measures and that the authorities envisage the preparation of OSectoral Programs for the Promotion of Small Enterprises". Reduction of the Budgetary Defici'. 5.68 Two basic means are open to the government to reduce the budgetary deficit. These are increased mobilization of non-oil tax revenues and containment of the growth of public expenditure. 5.69 Mobilization of Non-Oil Revenues. At present, the bulk of government revenues are derived from the oil sector, and the domestic tax burden is thus light. There are good reasons for making an effort to exploit the domestic revenue potential more fully. Widening the revenue base would not only contribute additional fiscal revenues but would also lessen the inherent instability in the government's finances due to their dependence on the international oil market. The main components of a tax reform package should include changes in the tax system as well as improvements in tax administration. Changes in the tax system should include: (a) the simplification of the import tariff and the elimination of most existing tariff exemptions; (b) an increase in tariff duties on less essential consumption goods; (c) an increase in indirect taxes on petroleum products, tobacco, beer, alcoholic beverages and other consumer goods; and (d) the introduction of a unified profit tax on all (including public) enterprises. Adjustments in the exchange rate and internal prices recommended in the present report would contribute to a substantial increase in the base for indirect taxation. The Government is already considering reforms in these areas, and in some instances (e.g. with regard to the import tariff and the unified profits tax) they are well advanced. 5.70 Better tax administration and collection would require more and better qualified staff, which in turn depends on satisfactory pay levels, on proper training, and on adequate physical facilities and equipment. An improvement in tax administration is certainly necessary but it is unlikely to yield the expected benefits until some of the major distortions in the economy have been removed. Such distortions create strong incentives for evading taxes. On the other hand, the growth of non-oil revenues depends significantly on the integration of parallel markets into the official economy. Such integration would help to raise the tax base of both direct - 151 - and indirect taxes. The authorities should proceed with the simplification and rationalization of the tax system, as it would contribute to the establishment of a more efficient incentive system. 5.71 Utilization of Budgetary Resources. The SEF appears to put more emphasis on tax reform than expenditure restraint. However, priority should be given, at least in the short to medium term, to measures aimed at controlling the level of spending. Such measures are likely to contribute more quickly to a reduction in the budgetary deficit than efforts to increase non-oil revenues. There is also considerable scope for improving the efficiency of resource use in the public sector through better alllocation of resources as well as through stricter controls and reduced waste. 5.72 In the area of recurrent expenditures, it is essential to curb the growth in the wage bill. This requires a strengthening of personnel and salaries administration. A first step has been taken through the start of a census of all employees in the public sector, which would help to verify the existence of all staff on the government's payroll. Strict controls should also be imposed on recruitment. The increased autonomy of public enterprises, price adjustments, and the greater flexibility of labour policies will help to cut losses of public enterprises and thus reduce budgetary expenditures on subsidies. Most urgently needed, however, is a rationalization of the process of formulation and implementation of the public investment program. This will involve a wide range of actions, including strengthening of project preparation, creation of adequate project appraisal capacity, the introduction of clear and uniform project selection criteria, improvement in reporting procedures to monitor implementation, and establishment of clearly defined responsibilities for formulating and executing the investment program. 5.73 Effects of Exchanae Rate Depreciation and Price Adiustments. In principle, devaluation of the kwanza and the adjustment of controlled prices would contribute to reduce the budget deficit. Devaluation would result in increases in kwanza terms of both budgetary expenditures and revenues. For example, there would be increases .'n the revenues from the oil sector, customs revenues and other sources. There would be increases in expenditures which involve payments in foreign exchange (service of the external debt, imported equipment, war material, external technical assistance, diplomatic representations, etc.), in expenditures on wages, to the extent that these are adjusted after a devaluation, and expenditures on goods and services produced domestically (mainly tradeable goods, to the extent that their prices would be adjusted). While the final net effect would depend very much on the level of international oil prices as well as salary adjustments and their factors, in the present situation, a devalua- tion would contribute to a significant extent to reduce the budget deficit. 5.74 Similarly, the adjustment of controlled prices would be one of the most decisive factors for reducing the budget deficits. First, the increase in prices would in principle contribute to a reduction in losses of public enterprises and their need for budgetary subsidies. Second, the base for indirect taxes would be raised by the increases in controlled prices. The net budgetary effects of price adjustments would depend on the - 152 - specific rates of increase of the prices of different goods and services and on the weight of those goods and services in public expenditures and on the base for indirect taxation. 5.75 Monltorinlg and Control. The comments of the preceding paragraphs show how important it will be to strengthen the management of the budget. The budget should become a major instrument of economic policy, particularly with regard to the allocation of resources of the public sector. This requires effective coordination between the planning process, foreign exchange management, and budget formulation. While the overall responsibility for the size and financing of the budget should be shared by t.e Ministries of Finance and Planning, the former should be solely responsible for external borrowing and the management of the external debt, with the central bank in charge of its administration. Price and Wage Policies 5.76 On the basis of the information available it is not yet possible to evaluate the likely impact of the changes in price policy envisaged in the SEP. According to the announcements made, the authorities intend to maintain a system of generalized price controls during the first stage of implementation of that program. At the beginning of 1988, the authorities had the intention of increasing the average level of controlled prices by 44 percent. The fundamental question which needs to be clarified is whether the price adjustments involved in that increase will be of sufficient magnitude to significantly correct for the extremely serious distortions and inefficiencies created in the Angolan economy by the existing system of controls. 5.77 Apparently, the adjustments of controlled prices envisaged by the authorities will be decided largely on the basis of the objectives of covering the costs of production and reaching satisfactory levels of profitability for public enterprises. These objectives will, however, be far from sufficient to correct all the important shortcomings of the present price policies. If prices are determined on a cost plus basis, they may protect productive units with very low inefficiency, but they will create problems for consumuvrs and for other enterprises. Moreover, prices based on costs, which in turn are based on artificial prices of foreign exchange and domestic inputs, will not reflect the strength of demand and wtill not solve the problems creaved by the existing system of administrative allocation. 5.78 However, it is apparent that the situation is not yet ripe for the introduction of a drastic transformation of the price system of Angola, involving the removal of most price controls and a high degree of liberalization of prices. A system of free prices would only operate satisfactorily if there were active competition in most markets. Even if there were sufficient competition, the rapid transition to a generalized system of free prices would probably create serious disruptions and difficulties: the equilibrium in the price levels would not be found quickly, and there would be risks of overshooting and speculation as shown by the experiences of other countries. - 153 - 5.79 In such conditions, price controls will probably continue to play an important role in Angola during the initial stages of implementation of the SEF. It must recognized, however, that remaining price controls will continue to create serious economic distortions, given the insufficient administrative capacity of the state bureaucracy and the enormous shortages of essential consumer goods and inputs. In such conditions, it will be essential to introduce important changes in the existing system: first, the average level of prices which remain subject to controls should be raised very substantially; second, the authorities should envisage the liberalization of many specific prices, already in the first stage of implementation of the SEF; and third, the adjustment of controlled prices should take into account the need to correct the most glaring distortions in relative prices. 5.80 The need for very large increases in the level of controlled prices is obviously justified by the large gaps existing at present between aggregate supply and demand. The devaluation will be a key parameter in determining the average increases to be introduced in domestic prices. As mentioned above, increases in controlled prices should reflect not only the objective of covering the costs of imports and of domestic production, transportation and marketing, but also the objective of reducing the severity of the scarcities which led to highly inefficient mechanisms of administrative allocation. The hesitation of the authorities to accept sufficiently high increases in prices are based mainly on two types of argumentst they fear the effects of price increases on the acceleration of inflation; and they consider that price increases would reduce the standard of living of consumers with lower incomes. 5.81 The risks of inflationary effects depend on the budgetary, monetary, and wage policies to be followed in the future. By themselves, increases in controlled prices would only reflect the existing repressed inflation which is made so obvious by scarcities in the official market and high parallel market prices. On the other hand, increases in controlled prices could contribute to reducing inflationary pressures, by cutting the budgetary deficit and the losses of public enterprises. Moreover, increases in controlled prices would in principle tend to reduce prices in parallel markets. 5.82 The argument about the negative effects of price increases on the standard of living of the poor is also of doubtful validity. As explained in other chalpters of the present report, scarcities of goods and services supplied at official prices are so severe that the poorest groups of the population get very small quantities of those goods, or none at all. Those groups must satisfy their consumption needs by self-sufficiency production and by participating in parallel markets. The existing system of administrative allocation at low official prices involves such important privileges for some categories of workers and consumers that apparently it contributes to widening income inequalities rather than to reducing them. Increases in the controlled prices of many products would probably improve the situation of the poor, by raising the income of peasant farmers, by reducing scarcities and by lowering prices in the parallel market. - 154 - 5.83 In some cases, price subsidization may be used to resolve conflicts between adequate profitability for producers and low prices for consumers, However, in Angola, extended price subsidization would be incompatible with the objective of balancing the Government's budget. Moreover, its effects on income distribution would be negative, unless a system of rationing would ensure a fair distribution of goods with subsidized prices among all the consumers, especially consumers with lower incomes. Schemes of social assistance targeted to specific groups of the poor (including in particular children and refugees) would probably be more efficient, from the point of view of a more equitable distribution of income, than generalized price subsidies. It must, however, be recognized that there are important administrative difficulties in implementing schemes of that type, as there are in implementing effective rationing mechanisms. 5.84 With regard to a large number of goods and services, the authorities should go beyond the objective of increasing controlled prices. In markets in which there is enough competition, they should consider introducing full price liberalization at an early stage. The prices of some foodstuffs produced by small farmers or fishermen (especially horticultural products, fruits, fresh fish) have already been liberalized. With the liberalization of prices which have been subject to controls, the production of agriculture, small scale industries and of services will certainly be stimulated. Recourse to systems of direct barter to encourage agricultural production (such as the Market PrL.ram in the Countryside - Programa de Comercializagao no Campo) cannot satisfa'torily fulfil all the needs to stimulate agricultural production, as experience has amply demonstrated. 5.85 The correction of distortions in relative prices should also be a major objective of the new price policy. As described in other chapters, the losses of efficiency resulting from the existing pattern of relative prices are enormous. For tradable goods, the structure of relative prices prevailing in the world market should provide a benchmark for the determi- nation of relative prices in Angola. Of course, the structure of relative prices in the world market should not be trgnsferred rigidly into the structure of Angolan prices for tradable goods (in view of transportation costs, etc.). But satisfactory improvements in economic efficiency, both for producers and consumers, cannot be achieved if extremely high distor- tions in relative prices are not substantially reduced. 5.86 The price policies recommended in the preceding paragraphs should be accompanied by some adjustment in wage levels. Increases in official prices will not require increases in wages of the same magnitude because for most workers the proportion of their wages spent in the official market is very low (often less than 1OZ). In correspondence with the proposed average increase of 44Z in controlled prices, the authorities intend to increase wages by 20X. Both of these increases are low in the face of the existing distortions in prices and wages, but the difference between them does not seem to be unreasonable in relative terms. However, 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, the adjustments in wages may have to be more substantial. In any - 155 - case, adjustments in prices and wages should take the following points into consideration: (a) they should contribute to narrowing existing gaps between supply and demand; (b) they should not impede the objective of reducing the budget deficit; (c) they should contribute to a reduction in losses of public enterprises; (d) they should contribute to narrowing income d'.fferentials between the urban population and the rural population, in order to stimulate agricultural production and discourage the exodus of peasants to the cities. 5.87 The price policies recommended in th preceding paragraphs would certainly contribute to: (a) stimulate productiun in various sectors, especially agriculture and small scale industries and services; (b) improve the profitability of enterprises and reduce the budget deficit; (c) reduce inefficiencies in production and consumption which result from the existing system of administrative allocation in all official markets; (d) improve social equity; and (e) reduce the distortions resulting from the existence of separate official and parallel markets. Exchange !Late Policy 5.88 As stated in Chapter 2, the exchange rate of 29.92 kwanzas per dollar, maintained without change since 1975, has involved very tight rationing of foreign exchange. It was also indicated that together with price controls, this exchange rate policy has been an important factor in the decline of agricultural exports and in the enormous distortions in relative prices. As noted earlier in this Chapter (para. 5.17), current SEF plans envisage the devaluation of the kwanza. However, while such a devaluation would be substantial in percentage terms, it is unlikely to reduce significantly the severity of the existing system of administrative allocation of foreign exchange. It is, of course, extremely difficult to determine even approximately the devaluation required to arrive at an equilibrium exchange rate. The price of the dollar in the black market Caround 2,500 Kz in February 1989) is not necessarily an accurate or precise indicator, although it suggests that a very large devaluation is in fact required. Following a substantial initial devaluation of the kwanza, a strategy of successive steps will probably be necessary in order to arrive at an equilibrium rate. 5.89 There are two additional reasons why this approach to exchange rate adjustment should be preferred. First, many of the expected effects of devaluation will only be produced If domestic prices are sufficiently flexible. In principle, the prices of tradable goods should increase by approximately the same percentage as the price of foreign currency. Otherwise, the devaluation would produce no significant effect on agricultural production nor would it significantly improve the allocation of foreign exchange, correct existing distortions in relative prices, or create conditions to stimulate the development of competitive markets. 5.90 Second, an attempt to jurap instantly to an equilibrium exchange rate would create risks of an inflationary spiral if it is not accompanied by an adequate control of the money supply. Thus, following the first- stage devaluation, the equilibrium rate should be approachied gradually in conjunction with substantial cuts in the budget deficit, which are required - 156 - to slow down considerably the rate of expansion of the money supply. While reductions in the budget deficit are necessary to ensure the success of devaluation, the devaluation can in turn contribute to those reductions as explained in para. 5.73 above. 5.91 Until the equilibrium exchange rate is reached, foreign exchange would continue to be rationed. The licensing of all imports and the allocation of foreign exchange by administrative methods currently in effect would continue to be a source of distortions and production bottlenecks, with serious consequences for productive efficiency. In order to reduce the negative impact of these consequences, the authorities should consider introducing partial solutions for the difficulties created by the existing system. Such solutions might include import surcharges, export subsidies for agricultural products, export retention schem¢s, auctioning of import licenses, or a system of dual exchange rates. All of these solutions are unsatisfactory, but they may be preferable to the existing system of administrative allocation and, therefore, deserve careful consideration. If any of these solutions are introduced, they should be gradually abandoned as the exchange rate moves to equilibrium. Monetary Policy 5.92 The improvements in monetary and credit policies embarked upon and envisaged in the SEF will certainly increase efficiency in the use of scarce financial resources and ensure a better control over the money supply. In implementing the changes envisaged in the SEF, the following points deserve special attention. 5.93 Policies to reduce inflationary pressures and the growing discrepaDsy between official and parallel market prices must include slowing the growth rate of the money supply or increasing the publiL's demand for monetary balances. A reduction in the growth rate of the money supply depends on the Government budget reforms recommended earlier in this chapter. The central bank should possess adequate instruments to control the money supply, including in particular the power to regulate the liquidity of the banks through cash reserves and rediscount quotas. A policy of ceilings on the expansion of credit to enterprises may be necessary in the next few years. 5.94 While there is no reliable price index in Angola, it is clear that current interest rates on bank deposits are negative in real terms. Increasing interest rates on individual deposits would encourage financial savings and alleviate inflationary pressures. However, in view of the multiple reasons for peoples' failure to use the banking system (discussed in Chapter 3), one should not expect a quick and dramatic increase in bank savings in response to such interest rate increases. 5.95 Currently, much of the financing of investment projects by enterprises is provided by government grants since the fixed price structure does not allow many enterprises to generate sufficient resources for investment nor to borrow on commercial terms. Conditional on the enactment of the price policies recommended in this chapter, medium and long term investment financing should be provided on the basis of sound - 157 - financial considerations. However, before proceeding with this step, careful thought should be given to additional measures that may be required to establish financially viable independent enterprises out of industries with insufficient capital and antiquated equipment, long accustomed to receiving direction and financial infusions from the Government. 5.96 In line with the above policy measures, increasing loan interest rates to more closely reflect market conditions is advisable. If, as proposed in the SEF, a new price policy is introduced and enterprises are encouraged to operate financially independent of the Government, setting interest rates to reflect demand conditions would reduce the administrative burden of allocating scarce credit. Concessional lending should be limited to high priority industries or industries where externalities distort the price structure. Moreover, for administrative and accounting reasons, it would be preferable to remove this subsidizing role entirely from the banking system and place it explicitly under the state budget. 5.97 An increase in the autonomy of banks and an enlargement in their responsibilities for financing the investments of enterprises, which until now have been financed by the Government, can improve efficiency in the allocation of financial resources. These objectives of the SEF will require, however, that: (a) banks possess adequate authority to refuse loans to enterprises which do not offer adequate guarantees and satisfactory prospects for repayment; and (b) the growth of credit to enterprises be limited in accordance with monetary policy requirements and the objective of reducing the rate of inflation. 5.98 Efforts under way to administratively separate the commercial banking functions of BNA from its role as a central bank should be continued. Such a separation will clearly delineate the dual functions of the bank and allow the authorities to separate monetary policy from commercial loan activities. The change will also provide the authorities with better information on monetary developments and improve control of policy measures. 5.99 Priority should be given within the BNA to improving the accounting system and administrative controls. Given the shortage of trained personnel within the banking system, it is advisable for BNA to contract a team of accountants to help in cleaning up its balance sheet. Such a project would give the authorities a clear picture of developments in the monetary sector. In addition, as the banking syetem's role in financing enterprises' investment projects grows, it is vital that the bank have in place trained personnel to enact administrative controls that will protect the financial integrity of the commercial banking division. Development of such a staff will require a substantial commitment to personnel training programs. 5.100 At a later stage it would be advantageous to promote competition in the area of commercial banking through the establishment of two or three independent banks. Creation of a medium and long term credit department in the BNA should also be considered. Such a department could later be transformed into an independent investment bank. - 158 - Social Impact of Economic Adjustment and Reform Policies 5.101 The implementation of the policies envisaged in the SEF and recommended in the present report is expected to have significant positive effects on the average living standards of the Angolan population. By stimulating the recovery of economic activity, the improvement of productivity and the faster growth of output in several sectors, especially in agriculture, the SEF policies will contribute to increase the volume of goods and services available for cons-.mption and investment. At the same time, they will create conditions for a better allocation of the available resources and for the correction of some serious distortions in income distribution. These results will be achieved mainly by reducing the inequities associated with rigid mechanisms of allocation and with the operation of parallel markets. .S.102 The expected benefits from economic liberalization will be reaped to a large extent by some of the poorest strata of the population. In particular, many peasant farmers, who together with their families account for a significant majority of the Angolan population and whose standards of living tend to be worse than those of urban dwellers, will benefit from increases in their real incomes. With the liberalization ci prices, the improvement of transportation facilities and the development of commerce in rural areas, peasant farmers will find better opportunities for marketing part of their ctutput and purchasing the industrial consumer goods and agricultural inputs that they need. 5.103 However, in spite of their probable net positive impact on social conditions, the economic reforms recommended in the previous sections are likely to create difficulties for specific groups of the population, especially in urban areas. Those difficulties will result mainly from: (a) the reductions of the real incomes of the employees of the public administration and of public enterprises who enjoy valuable advantages of access to special shops or to systems of payment in kind (auto-consumo); (b) the problems of unemployment which may be created by the liquidation or the restructuring of unprofitable public enterprises; and (c) the scarcity of budgetary resources to finance social programs, especially in the areas of health and education. 5.104 Reductions in the Real Income of Employees in the Public Sector. As stated in the preceding paragraphs, the policies of adjustment and reform of the Angolan economy require that the increases in controlled prices exceed the increases in wages by a significant margin. However, as already explained, the difference between the rates of increase in controlled prices and in wages does not imply a corresponding decline in the levels of living of workers, because for most of them the proportion of wage income spent in goods and services at official prices is very low. If prices in the parallel market increase less than wages, as is to be expected, there may be even an improvement in the real incomes of large segments of the population, including in particular workers with lower wages and those who are not employed in the formal sector. 5.105 The workers who enjoy preferential access to special shops or to special 'baskets" of goods and services at official prices, and those who - 159 - benefit from "auto-consumo" would, however, tend to be negatively affected to a very significant extent. Their privileges would be reduced as a consequence of the liberalization or adjustments in controlled prices and the reductions which should be introduced in the preferential schemes of allocation through special shops, special baskets and "auto-consumoT. The reduction of such privileges would not necessarily be undesirable from the point of view of social equity or economic efficiency. The existing schemes of preferential allocation of scarce goods and services at the very low prices of the official market create huge inequalities in the distri- bution of real incomes which in many cases have no relation whatsoever to the social productivity of the beneficiaries. Thus, for instance, unskilled workers of a beer factory or a tobacco company get real incomes from *auto-consumo" which in most cases are several times higher than those of teachers or of skilled employees in public administration or firms that do not provide the same opportunity to acquire scarce goods at official prices. 5.106 The reform of the price system and the introduction of market mechanisms in the distribution of goods and services must however be combined with important reforms in the structure of nominal wages. At present, nominal wage differentials are so low that they have to be compensated by differentials in access to special schemes involving the purchase of scarce goods and services at low prices. The reduction of the importance of these schemes should not affect the real incomes of the officials, experts and managers who play key roles in the public administration and in public enterprises. It is for that reason that their nominal wages should be increased far more than those of workers at lower levels of skills, as recommended in paragraph 5.86. 5.107 Problems of Unemployment. The liquidation of nonviable public enterprises will create problems of unemployment for their workers. Similar problems wilU result from the restructuring or privatization of public enterprises which are over-staffed. In order to reduce the difficulties created by unemployment, the Government has prepared draft legislation creating an 'Unemployment Fund' which will pay unemployment subsidies to workers who lose their jobs. At the same time, the Angolan authorities have the Intention of establishing training facilities for recycling workers into other industries and other skills. Finally, the recovery of productive activities which is expected to result from the reform of the economic system and policies should create new employment opportunities for workers laid-off from public enterprises. Some direct measures to create jobs for laid-off workers could also be undertaken by the Government (e.g., through the enrollment of these workers in public works projects financed by the public sector or by foreign funds). There will in principle be many opportunities to implement such a solution. The rehabilitation and construction work needed in urban infrastructure, roads, railroads, bridges, electric transmission lines, housing and social infrastructure, will require the employment of large numbers of unskilled workers. 5.108 Resources to Finance Social Programs. The reduction of the budget deficit must be one of the cornerstones of the program of economic adjustment in Angola. However, this cannot be achieved without strict - 160 - discipline in public expenditures. In principle, it will be possible to combine the reduction of total budgetary expenditures with the maintenance or even some growth in selected expenditures that may contribute more strongly to long term economic growth or an improvement in the social situation. In fact, cuts in budgetary expenditures can be concentrated to a large extent in the reduction of subsidies to loss-making enterprises, in expenditures on surplus personnel in public administration, and in defence expenditures if there is an improvement in the war situation. The Government should, therefore, be able to reduce significantly its expenditures, while avoiding reductions in expenditures on social programs, especially in the areas of health and education. Improvements in Statistical Data 5.109 Tn the past year, the Angolan govorrnment has made commendable efforts to improve the statistical data on the economy. However, a firm conclusion that should be drawn from this report is the continued high priority that these efforts should command. Such an improvement is essential for effective management of economic policy. Better economic data would enable the authorities to analyze the causes of economic deficiencies, project and monitor the effect of policy reforms and also strengthen Angola's position in its interactions with external creditors and agencies. While data on economic conditions are deficient across most sectors of the economy, this section identifies some of the highest priority needs for improving macroeconomic data. 5.110 In the area of national production, it should be a short-run priority to improve data on the quantitative output of the most important goods and services in the economy by ensuring that firms reporting to the various ministries report conscientiously and promptly. The ministries could assist this effort by devising reports that clearly define the requested data and that can be completed reasonably quickly by personnel with modest technical training. In the longer-run, surveys should be conducted to estimate the extent of small-scale production and the percentage of production channeled to official markets. 5.111 Development of national price indices should also be a high priority. The authorities should collect monthly or quarterly data on (a) producer prices of a selected number of the most important goods and services, (b) official retail prices for goods and services with an emphasis on private consumption goods, and (c) representative prices of the most essential goods traded in parallel markets. In addition, a survey should be undertaken of typical household consumption spending patterns, at least in urban areas, specifying no. only the quantities of goods purchased but also the percentage of these products that come from official and parallel markets. The results of this survey should be used to construct a consumer price index. The weights of different goods and services dorived from the surveys might have to be corrected periodically, in order to reflect important changes in the availability of specific consumer goods in the official and parallel markets. 5.112 'ith regard to government finance, an improvement in data is needed in the following areas. With regard to both the format for - 161 - presentation of the budget and the classification of revenues and expenditures, it is recommended that the IMF's Manual on Government Finance Statistics be followed. This would distinguish between revenue, recurrent and capital expenditures and financial flows; with regard to revenue a distinction would be made on the one hand between tax and non-tax revenue, and on the other hand between oil and non-oil taxes, as well as between major categories of non-oil taxes (taxes on income and property, on domestic goods and services, and on international trade). The Manual also gives guidance on establishing an economic classification of expenditure. In addition to providing more up-to-date information on actual expenditure (now 3 years delayed) the authorities should improve the information on capital expenditure, reduce the amount of extra-budgetary income and expenditure (notably external grants and loans, capital expenditure and external debt service), and strengthen personnel and salary administration. 5.113 In the monetary sector, there are three clear priorities in terms of improving the data. First, efforts should be made to clean the balance sheets of the Central Bank, writing down assets that have little or no value. Second, the data on monetary statistics should be organized and classified according to well defined accounting standards (following IMF guidelines in this regard would be advisable). Third, monetary statistics should be prepared on a monthly basis without long delays. Without these improvements, it will be practically impossible to conduct monetary policy on a satisfactory basis. 5.114 In the area of balance of payments data, the major effort should be to ensure that the data are as all-inclusive as possible and that the categories agree with the guidelines established in the IMF's Balance of Pavments Manual. The advantage of using these guidelines is that they are well-defined, compatible with most other countries' procedures, and would be immediately comprehensible to external creditors and multilateral agencies. Second, given the overwhelming importance of the oil sector, efforts to create two measures of the balance of payments, one for the oil sector and the other for non-oil sectors, should be continued. Third, there is a pressing need to improve data on imported merchandise. Currently these data are reported to be highly unreliable. 5.115 Finally, the major efforts that have been made to collect and centralize data o.. the source of outstanding external credits and the terms of these credits should be continued. Ho-wever, better coordination between the depaztments responsible for medium and long term debt and those responsible for short term debt would aid in the effort to provide up to da..e assessments of the overall external debt obligations of the country. 5.116 It must be recognized that given the shortage of trained personnel in Angola and the scale of the task, improving the quality of economic lata in the short run will probably require contracting outside experts to aid in the effort. Besides assisting in the above projects, foreign experts could assist the National Statistical Institute (INE) in collecting other basic statistics required for effective economic policy making. Some priorities here include: creating a central register of enterprises; classlfying activities, goods and services, and occupations wh_ch will be needed in compiling and presenting data; collecting basic - 162 - demographic data; developing the technical capability to gather reliable survey data; and establishing in-house training programs for collecting and analyzing descriptive statistics. In the longer run, it is desirable that Angolan nationals replace any outside experts that are employed. This process can be accelerated through formal training programs and the assignment of high quality counterpart personnel to assist. the experts. A Scenario Based on the End of the War 5.117 If the war ended in the near future, the prospects for the recovery of the Angolan economy and for the success of the economic reform program would become much more encouraging. The end of the war would create conditions for: (a) improving the confidence of domestic economic agents and of foreign partners in the future of the economy; (b) diverting substantial financial and human resources from the defence effort into productive purposes; (c) reducing the budget deficit and the currenL account deficit of the balance of payments more rapidly; and (d) improving the utilization of existing natural resources and of productive installed capacity. If the war ended quickly, a special plan for economic recovery should be prepared. Such a plan would emphasize, in particular, the rehabilitation of the productive capacity and infrastructure damaged by the war (including dams, transmission lines, manufacturing plants, farms, bridges, roads, railway lines, etc.). The areas of transportation, regiornal development, and resettlement of displaced persons would deserve special attention. 5.118 The Transportation Sector. Cessation of armed hostilities would have a dramatic effect on the economic performance of the transport sector. The impact of a return to internal security and peace would be greatest in the rail mode but wouild have the highest short-term benefit in the road sector. All rail corridors would require considerable investments in rehabilitation programs to bring them back to reasonable operating levels and the benefits would take time (often many years) to be realized. Corridor evaluations have been done on two of the three key networks (Benguela and Mo,amedes) and all have emphasized the regional development benefits, while stressing the corridor impact rather than the rail impact. Fortunately, there are a number of bilateral and multilateral agencies that stand ready to supply both capital and human resources for corridor rehabilitation once peace is established. In terms of sequencing, rail corridor rehabilitation should be considered as part of a medium-term recovery strategy. 5.119 Road investment, on the other hand, can be undertaken in modest increments and finely tuned to take account of the manner in which hosU_ilities are ended. Calculations in Annex VIII demonstrate that war conditions are largely responsible for driving up real ton kilometer rates by 300 percent (and over 420 percent when the impact of poor highway maintenance is estimated). Even when allowances are made both for errors in estimation and the impact of non-security related influences on productivity (like lack of spare parts), it is clear that under more peacefull conditions the existing vehicular stock would become significantly more productive, to the benefit of related sectors like agriculture. Army vehicles and equipment could be transferred to state (or private) trucking - 163 - enterprises to re-equip fleets and highway maintenance facilities. Human resources presently in the armed forces would be available to service equipment, repair vehicles and subsequently maintain existing infrastructure and develop new low-cost feeder road systems linked to the new agricultural programs. The plans of the Ministry of Transportation to develop the private trucking sector at provincial levels would fit well with this re-deployment scenario. 5.120 The desire to strengthen provincial transit links to ports and generally improve cabotage operations will enable that joint modal system to supply more inter-regional transport services in a relatively short time span, once hostilities cease. The rehabilitation of all these transport modes would affect both the flow of passenger traffic and of cargo, releasing pressure from the overloaded air sector. 5.121 Regional Development. An end to hostilities in Angola and the re-establishment of secure conditions in agricultural areas would allow the implementation of regional reconstruction programs to restore the economic and social infrastructure of regional economies. If the rehabilitation of road and rail corridors received priority in national reconstruction plans, the revival of regional economies would lead to the growth of trade and the gradual re-emergence of regional specialization along lines of comparative advantage (although some irreversible changes have probably taken place in the patterns of demand and supply from what prevailed in earlier periods). In the rural sector, self-provisioning strategies and barter would give way to production for local and interregional markets. That development should be supported by institutional changes in marketing and distribution systems. 5.122 Although peace-time conditions would increase resource availability, policymakers would still have to decide on the spatial priority and sequencing of regional reconstruction efforts. The central highland region of Huambo, Bie and Benguela would be a leading candidate for priority in any regional economic reconstruction initiative. As the country's "granary' in colonial times, this region possesses the productive capacity to make a significant contribution towards improving the domestic food situation. Assuming complementary changes in transport and distribution systema, the size of this region's poter.L!.al agricultural supply response, and hence its quantitative impact on national food deficits and the external payments position, is a strong argument for priority. Other grounds include the relatively high concentration of population in these central provinces and the possibility of reviving industrial activities in the city of Huambo, formerly Angola's second largest manufacturing center. These considerations suggest that an end to hostilities would stimulate Angolan authorities and international donors to undertake a detailed review of regional development priorities, which are currently focused on the South-Southwest provinces of Huila, Cunene and Namibe (as discussed in Chapter 4). 5.123 Resettlement of Displaced Persons and Urban Rehabilitation. The end of the war is likely to result in some reduction of rural-urban migration, including the return of some displaced people to their communities. Although these changes may attenuate current pressures on - 164 - urban infrastructure and services provision, the resettlement of large numbers of displaced persons will be a major task and many of the changes in population patterns which have taken place are not likely to be reversed. In the field of urban services, greater resource availabi!ity and security would allow a start to be made on the long-deferred rehabilitstion of the infrastructure of Angola's towns and cities. Immediate priorities include institutional changes to restore the organizational capacity, financial independence, and morale of the agencies responsible for urban services. A major immediate effort is needed to replenish staffing levels, to eliminate the backlog of maintenance work, and improve the performance and coverage of existing service systems. In the housing sector, an immediate priority is for sites and services projects to improve service provision and housing conditions for the urban poor. Such projects should be integrated with urban planning efforts to arrest the current haphazard process of urban settlement, notably in Luanda. Lessons from the Programs of Economic Reform in Ghana and Mozambique 5.124 Until a few years ago, Ghana and Mozambique were facing serious economic difficulties very similar to those Angola is experiencing at present. Both of these countries launched programs of economic adjustment and reform which, broadly speaking, have many elements in common with the SEF proposals and with the policy recomendations of the present report. Thus a summary of the experiences of Ghana and Mozambique can provide useful insights into the packages of policy measures which are needed in Angola, especially as regards the magnitude of some of the changes which may be required (for instance in the exchange rate and in controlled prices). Moreover, a review of the experiences in Ghana and Mozambique can suggest some of the difficulties which will be faced and the results which may be expected. 5.125 The Economic Recovery Program of Ghana. 1/ The Ghanaian economy experienced a protracted decline throughout the 1970s and the early 19809, owing to a combination of adverse exogenous factors (mainly oil price shocks) and inappropriate domestic policies (expansionary fiscal and credit policies which led to a marked inflation, overvalued exchange rate, administrative allocation of foreign exchange, and an intensification of price and distribution controls). From 1970 to 1982, real per capita inco,me declined by more than 30 percent and real export earnings fell by 521. In addition, import values fell by one third, inflation accelerated to 44Z, and arrears in external payments accumulated (amounting at the end of 1982 to 90? of export earnings for that year). Faced with this extremely serious situation, the authorities of Ghana introduced in April 1983 a comprehensive Economic Reform Program (ERP) whose key elements included the introduction of a new exchange rate policy, liberalization of imports, a reduction of price controls and the adjustment of controlled 1/ Summarized from "Ghana: Policy Framework Paper, July 1988-June 1991', September 30, 1988, International Bank for Reconstruction and Development. - 165 - prices with a view to reduce subsidies. In addition, the program eliminated distribution controls, increased interest rates to positive real levels, and took steps to control domestic demand. Additional reform measures adjusted the wage policy to offset partially the erosion in real incomes and to reverse the severe compression between the top and bottom grades, and sought to rehabilitate the country's economic and social in- frastructure. 5.126 The new exchange rate policy played a particularly important role in the ERP. Thus, the official exchange rate of the cedi was adjusted, in stages, from C 2.75 per U.S. dollar in April 1983 to C 90 per U.S. dollar in January 1986. Subsequently, in September 1986, a dual exchange rate system was temporarily introduced with the establishment of a second foreign exchange window where the :ate was market determined in the context of a weekly auction. Initially, the auction rate applied to all external transactions through the official banking system, except for foreign exchange earnings from exports of cocoa end residual oil and except for import payments for crude oil, petroleum products, and essential drugs, as well as service payments on government debt contracted before January 1, 1986. Exports and imports of goods and services exempted from the market rate were effected at the first foreign exchange window, which maintained a rate of C 90 per U.S. dollar. However, effective February 21, 1987, official exchange rates were unified in the context of the auction market and, in March and September, access to this market was widened significantly. The exchange rate depreciated from 145 cedi per US dollar after the introduction of the weekly auctions to 176 cedi per US dollar at the end of 1987. The spread between the auction and parallel market exchange rates fell to about 302, compared with some lOOZ prior to the introduction of the new exchange system. 5.127 The reform of the exchange system was completed with the widening of access to the foreign exchange market. Most bids 2'r foreign exchange to cover imports of goods and services and some current transfers are eligible for participation in the weekly auctions. To help meet the additional demand for foreign exchange resulting from the widening of access to the auction market, the authorities reduced the amounts of foreign exchange retained by the government or held outside the official banking system. The depreciation of the official exchange rate has made it possible to improve price incentives in the economy. In particular, the producer price for cocoa, which amounted to only C 12,000 per ton for the 1982/83 crop, was raised progressively to C 85,500 per ton for the 1986/87 crop year, and to C 140,000 per ton for the 1987/88 crop year, almost trebling the real purchasing power of cocoa farmers over the period. 5.128 The recovery effort was set back by the severe impact of drought and bush fires in 1982-83, as well as by the expulsion of over one million Ghanaians from Nigeria. However, with the expansion in agricultural, mining, and manufacturing output, real GDP grew by 8.7Z in 1984, 5.1Z in 1985, 5.3Z in 1986 and 4.8 percent in 1987. The supply situation thus eased appreciably, as increased food crops, spare parts, and consumer items began to flow into the marketplace. Exports of cocoa, which fell to a low of 149,600 tons in 1984, have risen steadily to an estimated 195,200 tons in 1986. Meanwhile, demand-management policies have been effective in 13 of the B=RUNDlU 2 A ANGOLA (ANGOLA) ZAIRE POPULATION DE NISITY 'Lu MALAWI Persons per Km2: ANQ.Li> J > ;1 / \ ,.Less Than 1 0 Selected Towns Ocean _ 1 - 5 (R) Province Capitals \ NAMIBIA r \~ZIMdBABWE(tzpOB^ain *6 - 20 National Capital \ ~~BOTSWANA a4 _.. 21 - 30 Province Boundaries 0E RR.OF Greater Than 30 International Boundaries I2A8W H~~E CONG CABI O MILES 0 100 2C,0 300 MBANZA KILOMETERS 0 100 200 300 400 500 CONGOG< / ahd ZA/,E 0 24 Ton'bbaco 'V _r \>S4 ">c 1Z AIRE - \ a ~~~~UGCE 0 .~~~~~~ ~~~~~ UND LUC 0 - * i,c 8 CA XIT4 Tt CUNZ UNDAO rE_ LUIANDAk r NORTE IdALANJE L UA NDA OI DDAAO cu p' Ia^cr SAURIMO O , _o, A,4P,gT/$7¢r \SENGO- p., 01v Th toOE __. 000 4 SUL. > V -12- ~ ~ ~~~* . F rL~~~~UENAe _ --- 12 12' 12 BENGUELA, )K. MOVCO( 0 O l ^5;? .t/ f ,0 0 t .B_ NAMIBE LUBANGO P ' ~~HUILS A- cCLMe \ .... .. Te<_ O .. }} OOme, &)<¢ANUDO '9 -r8@ R s - 3 ~~~CUNENE \ s|CLI \ 4AAK10 NAB NA6BA _- >D 12 16 20 __ 94' 0 . I UII I 18 12A' B' C16N0