Published on Africa Can End Poverty

Angola's economic prospects (revised)

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In his earlier post on this blog, Ricardo Gazel forecast a 10% decline in Angola’s GDP. This was based on the country’s 2009 budget, which was elaborated before the deepening of the financial crisis and its spillover to the real economy. He now writes:

Since then, OPEC agreed to two production cuts, amounting to a reduction of 244,000 barrels per day or a 13% production cut for Angola. Given the current composition of GDP, if the oil sector shrinks by 13%, the non-oil sector would need to grow at around 22% in order for total GDP to stay flat in 2009. As the non-oil sector depends strongly on public expenditures, and given the dramatic decline in oil revenues expected for 2009, adjustments of the budget are likely to result in a slowdown of the non-oil sector, resulting in a negative growth rate of GDP as a whole in 2009. In nominal terms, with the oil price around $50 a barrel and non-oil sector growing around 10%, GDP would be around 17% lower in 2009 compared to 2008. At $40 a barrel, the decline in nominal GDP comes to 23%.

Under all these scenarios, the government will experience lower revenues than in 2008. In a pessimistic scenario of oil around $40/bbl and a 13% cut in production for the entire year, total revenues in 2009 could decline by as much as 50% compared to 2008. Although the savings from the past few years give the government some room to maneuver, it is likely that the government may decide to make dramatic adjustments to the budget, with substantial impact on public investment, in order to avoid a drastic deterioration of fiscal and debt indicators. Substantial cuts in the budget could trigger many negative effects. Angola is currently engaged in a reconstruction process (rebuilding and expansion of infrastructures such as roads, railroads, ports, schools, hospitals, among others), economic diversification (with emphasis on the agriculture and light manufacturing sector), increased productivity (lower transaction costs and training of the labor force), and improving the quality of life of the population (especially the poor). Large cuts in growth-enhancing investment projects will hurt the economic diversification process, limiting the positioning of Angola as a potential producer and player in regional and global markets as the global economy improves in the future. Cuts in social expenditures will disproportionately hurt the poor. 

There is no doubt that the economic stabilization achieved in the last years should be preserved as much as possible. However, the global crisis will not last forever: As the global economy improves, the countries that are better positioned in terms of competitiveness and productive capacity will reap larger gains.”


Shanta Devarajan

Teaching Professor of the Practice Chair, International Development Concentration, Georgetown University

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