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Angola economy back on track, non-oil sector expands

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Angola economy back on track, non-oil sector expands

Angola economy back on track, non-oil sector expands
Photo credit: wilsonbentos | World Bank

Despite a slight deceleration in 2013 due to lower oil revenues, Angola’s economy appears to be back on track with real GDP growing by 4.4%, according to the World Bank’s latest Angola Economic Update. This is well above the 2009-2011 average of 3.5%, although still below the 5.2% growth in 2012. The country’s non-oil sector also expanded rapidly last year, with non-oil GDP growth reaching 6.3% in 2013 as a result of a recovering agricultural sector, as well as investments in the electricity sector. 

The expanded agricultural output and lower food import prices have also helped curb inflation rate to a single digit. “Angola’s inflation is projected to remain on a downward trend as we expect global agriculture price indexes to decrease, and domestic agriculture production to continue its recovery from the 2012 drought,” said Gregor Binkert, World Bank Country Director for Angola.

The drop in oil revenue, coupled with an increase in expenditures, is estimated to have led to a fiscal deficit for the first time since 2009. The 2014 budget (adopted in December 2013) is expansionary relative to 2013, with capital expenditures expected to increase by about 3 percentage points of GDP to about 13% of GDP. If fully implemented, the 2014 budget would imply a fiscal deficit of 4.9%.

At the same time, lower oil related export earnings and higher imports have narrowed the resource-rich country’s current account surplus. While Angola continues to run a significant surplus, the current account remains vulnerable to external shocks. Oil export revenues, which dominate foreign-exchange earnings, declined as global oil prices fell 2013. The correlation between the current account and fiscal balance magnifies the effect of fluctuations in global oil prices on economic activity in Angola, further highlighting the need to diversify the economy and decouple public finances from the oil sector.

“Although the outlook for 2014 is favorable in light of an expected increase in oil production, absent new discoveries, oil production is unlikely to further accelerate GDP growth,” said Elisa Gamberoni, World Bank Economist and lead author of the report. “Non-oil GDP would thus need to expand rapidly to bring Angola back to the strong performance observed before the 2009 crisis. Refocusing public expenditures on capital investment could positively affect Angola’s economic outlook, but only if execution capacity can be increased and the quality of public investment can be ensured.”

One way to do this is to strengthen the export competitiveness of the non-oil sector (including non-oil extractive industries) to help maintain a stable current account surplus, and reduce Angola’s exposure to terms-of-trade volatility. On the fiscal side, there is a need to reform the tax system in order to reduce the exposure to fluctuations in oil related revenues, since non-oil tax revenue as a percentage of non-oil GDP has consistently decreased in recent years. While the non-oil economy expands, maintaining the observed level of international reserves will also help shield the country from potential oil price fluctuations.

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