Artigos

Proposal for a pilot job guarantee design in Angola

Introduction: the magnitude of the unemployment problem and the need for a systematic government response

In Angola, in the third quarter of 2020, the unemployment rate stood at 34%[1]. This number corresponds to a chain increase (i.e., compared to the previous quarter) of 9.9% and homologous (referring to the same period in 2019) in the order of 22%[2]. In view of these data, whatever the perspective adopted, it is easy to see that unemployment is a fundamental and serious problem facing the Angolan economy and societies.

Fig. Nº 1- Recent evolution of the unemployment rate in Angola (2017-2020). Source: INE-Angola

So far, the government recognizes this problem, but is betting on the recovery of the economy at the private sector level, to resolve the issue, believing that the State can do little to face the situation. The solution lies in economic growth and business dynamism, says the executive. The President of the Republic, João Lourenço, was clear in the last speech of the State of the Nation when he stated: “priority of our agenda [is): to work for the resuscitation and diversification of the economy, to increase the national production of goods and basic services, to increase the range of exportable products and increase the supply of jobs. ” João Lourenço makes an indelible link between the diversification of the economy and the increase in national production and the decrease in unemployment.

Basically, the government relies on the traditional postulate stated by the American economist Arthur Okun, according to which there would be a linear relationship between changes in the unemployment rate and the growth of the gross national product: with each real GDP growth in two percent would correspond to a one percent decrease in unemployment[3]. The truth is that several empirical studies do not confirm this empirical relationship at all, and in recent years in several countries around the world, an increase in GDP has not led to a sharp decrease in unemployment, while in other cases it has, therefore, it is difficult establish a permanent relationship between unemployment and GDP. In addition, the magnitude of unemployment in Angola would imply that in order to decrease the rate for the still frightening 24%, GDP would have to grow 15% …

The fundamental issue is that the problem of unemployment in Angola is not cyclical, but structural, this means that it is closely connected to the permanent deficiencies of the Angolan economy and does not have a mere dependence on the economic cycle.

The fact that the problem of unemployment is structural and of an economic recovery for the years 2021 and onwards is only between 2% and 4% of GDP[4], according to the current IMF projections, imply that such economic animation will have little impact on employment.

In this sense, it is essential to understand that the solution to the problem of unemployment does not depend only on the market and the economic recovery, it requires, at least in the short term, the muscular intervention of the State. It is in this context that this proposal for a pilot experience arises.

Fig. No. 2- GDP growth projections Angola (2021-2024). Source: IMF

A pilot job guarantee experiment in Angola

Starting from the first experience of universal employment guarantee in the world, designed by researchers at the University of Oxford and administered by the Austrian Public Employment Service, which takes place in the Austrian city of Marienthal[5], the same methodology would apply to a specific location in Angola, possibly, to a specific municipality in Luanda.

According to this regime to be implemented on an experimental basis in a municipality in Luanda, a universal guarantee of a properly paid job would be offered to all residents who have been unemployed for more than 12 months.

In addition to receiving training and assistance to find work, the participants would have guaranteed paid work, with the State subsidizing 100% of the salary in a private company or employing participants in the public sector or even supporting the creation of a microenterprise. All participants would receive at least one minimum wage set in accordance with the Presidential Decree that regulates the matter appropriate to a life with dignity.

The pilot Design would work as follows:

i) All residents of the chosen Luanda municipality, who have been unemployed for a year or more, will be unconditionally invited to participate in the pilot design.

ii) Participants begin with a two-month preparatory course, which includes individual training and counseling.

iii) Subsequently, participants will be helped to find suitable and subsidized employment in the private sector or supported to create a job based on their skills and knowledge of the needs of their community or will still be employed by the State.

iv) The job guarantee ensures three years of work for all long-term unemployed, although participants may choose to work part-time.

Fig. No. 3- Brief description of the pilot employment design

In addition to eliminating long-term unemployment in the region, the program aims to offer all participants useful work, be it in paving streets, in small community repairs, in a day care center, in the creation of a community cafe, in access to water and energy , basic sanitation, in the reconstruction of a house, or in some other field.

The pilot project is designed to test the policy’s results and effectiveness and then be extended to more areas of the country.

Financing

“As part of the asset recovery process, the State has already recovered real estate and money in the amount of USD 4,904,007,841.82, of which USD 2,709,007,842.82 in cash and USD 2,194,999,999.00 in real estate, factories, port terminals, office buildings, residential buildings, radio and television stations, graphic units, commercial establishments and others. ”

Thus, the President of the Republic spoke in the most recent speech by the State of the Nation mentioned above.

Now, nothing better than to allocate part of these recovered funds to the promotion of employment. Consequently, an amount withdrawn from there would be used to create an Employment Development Fund which we would simply call, because of the origin of the amounts, “Marimbondos Fund”. This Fund would receive part of the recovered assets and would use them to finance initiatives to promote employment such as the one presented here. Money withdrawn in the past from the economy would return to this one to foster work for the new generations.

With this self-financing model, any constraints imposed by the International Monetary Fund or the need for budgetary restraint would be removed. The promotion of employment would have its own funds resulting from the fight against corruption. There doesn’t seem to be a better destination for money than that.

Fig. No. 4- Financing the pilot Design


[1] https://www.ine.gov.ao/

[2] https://www.ine.gov.ao/images/Idndicador_IEA_III_Trimestre_2020.PNG

[3] Arthur M. Okun, The Political Economy of Prosperity (Washington, D.C.: Brookings Institution, 1970)

[4] https://www.imf.org/en/Countries/AGO#countrydata

[5] https://www.ox.ac.uk/news/2020-11-02-world-s-first-universal-jobs-guarantee-experiment-starts-austria

The devaluation of Kwanza and inflation

Some studies by prestigious economic consultants have lately issued some reports on the Angolan economy that only report negative numbers and projections, without taking into account either the theoretical models on which some of the main economic policy decisions in Angola are based, or the actual reality of its economy.

One of the most intriguing cases is the permanent link between the rise in inflation and the devaluation of the Kwanza, presenting the two phenomena as cause and effect or effect and cause, as well as always giving a negative connotation to the term “devaluation”.

This article, which does not aim to make forecasts, which at this time of Covid-19 would be rash, offers alternative explanations behind the Kwanza`s devaluation, looking instead at the opportunity it offers foreign investors.

It is evident that the semi-rigid or controlled exchange rate regime that existed before the adoption of the flexible exchange rate last year, was partly responsible for the crash in the Angolan economy.
In fact, pegging the Angolan currency at a high value in view of market conditions, caused unrestrained consumerism while domestic production was allowed to decline, since international prices were artificially made more competitive.

It was the time when Luanda became the most expensive city in the world with the Angolan elite making flagrant shows of wealth. This situation did not correspond to domestic production or development, but rather excessive spending of foreign currency earned from high oil prices which bolstered the inadequate value of the Kwanza. This was unsustainable.

The prolonged recession since 2014 demanded an end to the artificial appreciation of the Kwanza and the introduction of a flexible exchange rate.

The model underlying the adoption of flexible exchange rates has clear goals. Since Milton Friedman’s seminal text in 1953[1] on flexible exchange rates, two arguments support this policy: first, free movements in exchange rates are an efficient way of adjusting international relative prices in response to macroeconomic shocks; second, with flexible exchange rates, policymakers are free to choose and follow their own inflation target, rather than depending on the inflation rate from abroad. This last factor should be emphasised. Milton Friedman stressed that exchange rates would help to insulate the domestic economy from external shocks and would give national political authorities the ability to meet domestic goals. Flexible exchange rates provide enough insulation to the domestic economy if the sources of the recessionary shock are abroad.

This means that with a flexible exchange rate, it is possible for the government / central bank to pursue an autonomous anti-inflationary policy on the external value of the currency.
In fact, the devaluation of the Kwanza could mean that the prices of international goods become excessively expensive for Angola, and spark that, contrary to what happened previously, being cheaper to produce goods in Angola. That would be the opportunity to invest in Angola`s agriculture and industry, at they will have a market and low production costs due to the devaluation.

With national goods becoming more competitive than corresponding foreign goods, this will boost national production and encourage exports.

And provided that the central bank does not pint excess money, national production should increase and inflation should decrease if internal policies are adequately followed.

This does not mean that the transition from an economy artificially anchored by a high-value Kwanza supported by rising oil prices to a competitive and productive economy is easy. Angola is currently in deep crisis, made worse by the Covid-19 pandemic, and luck, either bad or good, has to be considered.

However, the exchange rate easing policy is right and there is no need to be afraid of devaluation. This is making the economy more competitive overseas and encouraging the manufacture and production of goods to sell both internally and abroad. Success depends more on government policies; policies that are coherent and consistent.

That is why the figures being released on devaluation and inflation are, on the surface, frightening, but they will only have a negative impact if the government implements the wrong policies.

Otherwise, they are not, by themselves, of any relevance. It is known that the Kwanza was overvalued and that this has greatly affected the Angolan economy. It is known that combating inflation, with flexible rates, does not depend on the outside world, but on the right decisions by the government.

There is awareness that Angola is in deep economic crisis, but some real encouraging indicators are beginning to emerge. One of them is that “Angola disbursed, in the first quarter of the year, 495 million dollars (436.5 million euros) on importing food products, a decrease of 31% compared to the 717 million dollars (632.3 million euros) ) for the last quarter of 2019.[2]

The Angolan government attributed this evolution to a better organisation of its foreign exchange market and to an increase in the demand for national products. Official sources state: “We are verifying these two factors, we can say that we are on the right path, there is a demand for national production, there is a decrease in imports.” These facts seem to confirm the analysis we do. Obviously, in the end everything will depend on the right internal public policies.


[1] Friedman, M. (1953) “The Case for Flexible Exchange Rates.” In Essays in Positive Economics, 157–203. Chicago: University of Chicago Press.

[2] https://www.sapo.pt/noticias/economia/angola-importou-menos-31-de-alimentos-no_5f0f32adb34d505496f5eddd

The opportunity for privatizations in Angola. 2020 analysis

Introduction

The privatization program currently underway in Angola has a scope never before outlined in the country and deserves extra attention by the international business community.

Legislation

The legal basis for the Angolan privatization program is found in the Privatization Act (Law No. 10/19, 14th of May) and ProPriv (Presidential Decree No. 250/19 5th of August). The Private Investment Act (Law 10/18, 26th of June) is also relevant.

Table 1- Basic legal regulations for privatizations

Privatization Act Law No. 10/19, May 14th
ProPriv Presidential Decree No. 250/19, August 5th
Private Investment Act Law No. 10/18, June 26th

Terms of reference

Under ProPriv, 195 public entities will be privatized during a 4-year program (2019-2022). These entities were grouped into four sectors: National Reference Companies, Sonangol’s Participating and Active Companies, Industrial Units in the Special Economic Zone (SEZ) and Other Companies and Assets to be Privatized. The sectors of activity that refer to privatizations are diverse: mineral and oil resources, telecommunications and information technologies, finance, transport, economics and planning, hotels and tourism, industries, agriculture, fisheries.

In the list of to be privatized companies, we have the country’s most important such as Sonangol (oil), Endiama (diamonds), Unitel (telecommunications), TAAG (aviation), Banco Económico (ex-Besa, bank), ENSA (insurance company)), CUCA (brewer) and also another type of more modest entities such as Centro Infantil 1 de Junho, Pungo-Andongo Farm or INDUPLAS (plastic bags industry). It is, therefore, a comprehensive and an extensive program.

Table 2 – Core elements of privatization

195 entities to privatize
4 years (2019-2022)
Key companies such as Sonangol and Endiama

Achievements

To date, the privatization program has been focused on small industries and entities. In 2019, Angola earned US $ 16 million due to the privatization of five factories, which costed the State approximately US $ 30 million. For 2020, the 2nd  phase of privatization embraces 13 plants located in the Economic Zone Luanda / Bengo. The factories operate in sectors such as ​​metal packaging, concrete, carpentry, plastic bags, paints and varnishes, metal towers, PVC tubes, metal tiles, PVC fittings manufactoring, absorbents and cement bags.

Also in progress is the privatization of several agricultural projects, as well as some assets belonging to Sonangol.

Advantages and opportunities

This vast privatization program is extremely attractive to foreign investors due to several reasons, namely:

  • IFC / World Bank Quality Assurance. The privatization program is being carried out within the framework of the IFC-International Finance Corporation, which belongs to the World Bank, that provides investment, advisory and asset management services to encourage the performance of the private sector in less developed countries. IFC guarantees a global projection of the project and the World Bank warranty seal in the procedures followed, in addition to being an experienced partner and knowledgeable of the global rules. In this way, the Angolan privatization process comes with an appreciable quality certification that can reassure foreign investors.
  • Institutional strengthening and property protection in progress. The present government is committed with the consolidation of institutions, the transparency of due process and the adequate protection of property rights through the promotion of the rule of law. This is not immediate obtained allowing to quickly remove the risks associated with losing investments in Angola.  However, it is a trend already in motion.  In this context, it is important to highlight the new Private Investment Act (Law no. 10/18, 26th of June) that expressly provides legal guarantees to investors, regarding their rights, property and also legal guarantees (articles 14 , 15 and 16 of the Law metioned). In addition, the same Act drops the local investment partner exigence for any foreign investment, which was a source of the greatest abuses and fraud in the relationship with the non-national investor. And the investment is no longer preceded by permission, preventing or delaying registration.
  • Economic reform towards free markets.The executive led by João Lourenço, with the support of technicians from the International Monetary Fund, is developing an economic liberalization program for the economy that increases competition between companies and reduces barriers to entry into the markets. This becomes accentuated connecting to the fight against corruption, which has the immediate consequence, in economic terms, of the breaking of the existing monopolies and oligopolies in the country and which limited competition, besides imposing higher prices and abusing practices regarding taxation. Consequently, in addition to the legal reinforcement, the economic component seems more prepared for a functioning market economy.
  • Atractive companies to be privatized. To privatize are companies with great worldwide attraction such as Sonangol, Endiama or Unitel. They are what can be called the Blue Chips of Angola, that will offer a very high growth potential to the investor once they are submitted to a strict management discipline, rationalized investment and optimization of their values. At a time when the African economy due to demographics and the complementarities with Asia that act as determinants, has an increased growth potential, it becomes a good bet to invest in large companies linked to natural resources and communications in Angola .
  • Small and medium-sized companies with lucrative niche markets. The interesting thing about the program is that the universe of companies to be privatized is vast and diverse. In this context, several small and medium-sized companies can be the basis for small investors who want to explore niche markets in Angola or Southern Africa from a platform that tends to be business friendly and eager in infrastructure development. In Africa, the potential of small and medium-sized enterprises is very large. Some surveys carried out in specific South African provinces, encouragingly, conclude that 94% of small businesses surveyed are profitable, while 75% of small business owners believe they earn more money running their own businesses than in any other alternative. The areas covered by these companies are very diverse: travel, tourism and hospitality; agribusiness; brewers; etc.
  • Business problems are not structural. The companies to be privatized suffer essentially two types of problems: incompetent management and lack of capital. Any new investor who provides professional management and fresh money to the company will be able to successfully exploit its potential. The markets are yet to develop and far from being mature, consequently, there is a very broad and stimulating path for companies with capital and professional management.
  • High rate of return on investment. Given the needs that are still emerging in the Angolan market and the possibilities that integration with SADC (Southern African Development Community) bring, the prospects for obtaining high profit rates are high. In fact, there is a low-cost labor force and with a very large market extension. These two factors predict growth and a good return on capital.

Table 3 – Reasons for attracting privatizations in Angola

• IFC / World Bank Quality Assurance
• Ongoing institutional strengthening and property protection
• Liberalizing economic reform
• Desirable companies
• Small and medium-sized companies with attractive niche markets
• Business problems are not structural
• High rate of return on investment

Problems to solve

The problems envisaged are of three types: bureaucratic-administrative and assessment of the real situation of companies. There is also a lack of clarity of purpose in relation to large companies and banks.

On the bureaucratic-administrative issue, it is important to highlight the multitude of coordinating entities. The President of the Republic appears as the leader and strategic coordinator, but then we have the Minister of State for Economic Coordination as the general coordinator of the program, the Secretary of State for Finance and Treasury under the Ministry of Finance as the operational coordinator, each Sectorial Ministry will have duties of sharing information and data of companies operating in the sector. The State Assets and Participations Management Institute (SAPMI) as manager and executor of the program, in addition to other institutions with specific roles. Perhaps because of this, all schedules have been exceeded. By mid-February 2020, around 50 companies were expected to be privatized. The number as seen earlier is much smaller. In fact, the privatization program has not reached an exciting dynamic phase, the so-called momentum.

“The Privatization Czar”

It is essential to give privatizations an accelerated dynamic. For this, the best solution is to nominate what can be called a “Czar of Privatizations”. Someone the President trusts  who, under his command alone, directs the privatizations with legal powers to instruct any minister or body and to override them by deciding to concentrate the competencies and powers for the privatizations.

Technical problems

The remaining types of problems are of a more technical nature. For many companies, there is no clear idea of ​​their values ​​or of any hidden losses that may exist. For example, in relation to banking, the previous due dilligence has encountered several situations in which unknown impairments are detected that require recapitalization or levels of non-compliance with some indicators of financial balance, namely excessive concentration of investments in low-profit properties.

No internal audit work has been done on the companies to be privatized. This obviously implies that investors are taking risks. The answer that cannot be given is that a thorough internal audit will have to be carried out for each of the 195 companies. This will be impossible and would require an endless delay in privatization.

Thus, it will be necessary to provide for possible state compensation mechanisms if impairments are found after a certain level, imputing liability below that level to buyers. At the same time, in doubtful cases, the State will have to sell at a sharp discount. And trust that appropriate private management will make it possible to solve most cases.

In fact, the essential point of the privatization program, more than obtaining revenues for the State, is to create professional management based on investment that contributes to the structuring of flourishing markets, so it is justified to sell at a discount or to support any previously undetected impairments. It is a risk that the State must accept in order to achieve the eagerly-awaited objective of creating a competitive free market economy.

Finally, in relation to large companies, the total privatization program must be defined and publicly disclosed with reference to the percentage amounts to be offered to the market, the dates and other qualifying conditions. There is still a lot of ignorance in the national and international markets about the privatization of these companies.

INVESTOR RECOMMENDATIONS:
◈ For large investors, the Angolan Blue Chips that are going to be subjected to privatization have vast potential for growth and rationalization of costs and organization, so they can provide very high rates of return on investment;
◈ For small and medium entrepreneurs there is a range of companies that can serve as a platform for launching moderate sized businesses;
◈ In general, given the positive Schumpeterian social climate that is being created, there is a strong recommendation to participate and buy in the privatization process in Angola.
 
RECOMMENDATIONS TO THE ANGOLAN STATE:
◈ To avoid delays and some administrative and decision confusion, a “Czar of Privatizations” should be instituted, managed directly by the President of the Republic and with delegated legal powers that will allow him/her to carry out the privatizations;
◈There must be mechanisms to compensate for the lack of internal audit by companies;
◈ Capital repatriation mechanisms for investors must be clarified;
◈ Clarification is required with dates, percentages and specific conditions for privatizations to take place in major reference companies (Blue Chips).