According to London based Chatham House, an International think tank and policy Institute, Angola is the highest indebted country to China in Africa as it has borrowed most from the latter in the last 20 years, to the tune of over USD 40 billion. For a developing country with paucity of funds and need to develop basic infrastructure, borrowing is not an unusual thing. But when borrowed funds for infrastructure projects are siphoned off and do not yield revenue, the borrowing country lands up into a debt trap. Notwithstanding heavy burden of Chinese loan on Angola, the country has again decided to build a refinery with Chinese support. Chinese debts are now scaring many of the Angolan analysts because it is already very high and may become unsustainable over time.
According to S&P out of the total loans of Angola, close to 40% comprises concessional loans from bilateral and multilateral lenders. But Angola relies heavily on Chinese loans, which make up about 40% of government external debt and nearly 30% of total government debt as of end 2021. Recently, Angola’s Ministry of Mineral Resources, Oil and Gas (MIREMPET) revealed that state-owned Sonogol EP signed a MoU with China National Chemical Engineering Co. Ltd. (CNCEC) to build a new 200,000 b/d refinery in Lobito, Benguela Province. The Lobito refinery is part of strategic downstream developments under President Lourenco’s national plan to increase domestic crude processing capacity to help reduce the country’s dependence on refined products imports, encourage foreign investment and create employment. But the past experience is not good, as Chinese funded projects could not achieve these goals.
The problem is not borrowing, but the inefficient use of the borrowed funds. Professor Edwardo Nikosi of Financial Management University says that neither China could be blamed for lending nor Angola for borrowing.The devil lies in the use of the funds in the projects it was borrowed for without corruption and leakage which did not happen. There are other problems as well in Angola’s borrowing. Professor Nikosi further adds, “the debts that Angola contracted with China were used for disposable infrastructures, such as 11 de Novembro Stadium and others but today they are as they are, the Angolan roads practically no longer exist.” He says that “a good part of that debt ended up in the private accounts of Angolan leaders who took it to enrich foreign economies and impoverished the Angolan economy.” Angola’s debt service to export earning ratio was one of the worst in the world according to the World Bank at 33.3% in 2021, just behind Armenia 37.8% and Brazil 44.8%. The situation is grave as debt service leaves little for development expenditure.
According to S&P, Angola’s total debt stock stood at 131% of GDP in 2020 while its GDP growth was projected for 2022 at 2.8% and 3.5% in 2023. Angola achieved 3% growth rate in the year 2022 against 1.1% in 2021. But in 2023 the challenges for Angola are so many. According to PwC, poor road infrastructure and transport logistics inhibit Angola’s economic development. Global oil prices are falling despite cut in supply by the OPEC. They may fluctuate in 2023. Although oil exports make up more than 90% of current account receipts of Angola, the port capacity of Angola is not well developed. The high proportion of debt denominated in foreign currency (80%) exposes Angola to volatility in debt valuation. It is projected that with government’s concerted policy measures, the debt stock as percent of GDP would fall to 64% by 2025. However, it could only be expected that Angola is not affected by projected global recession and high cost of living crisis. The rising interest rates in the world economies could make borrowing for removing infrastructure gap further costlier.
In 2022, Angola’s oil receipts contributed only about 50% of government revenue, down from more than 60% in 2018-19. The S&P report though predicted oil prices to remain USD 75 per barrel in 2022, vouched for its decline to USD 65/bbl in 2023 and USD 55/bbl in 2024, compared with USD 71/bbl 2021. This is important for Angola how oil prices move in future and how fast it is able to diversify its economy away from hydrocarbons. As of end 2021, external debt made 70% of Angola’s total debt and of the USD 19 billion owed to China, more than 80% comprised oil backed facilities. It is this trend that prompts the analysts to caution against collaboration with China for Lobito refinery. This heavy dependence on Chinese debt might prove counter productive already seen in case of Sri Lanka and even Pakistan. The President of the Angolan Industrial Association (AIA), Jose Severino has rightly warned, “the big problem is that this debt is not being reduced. We continue to make projects with China, we need not continue to keep this debt at such a high level and it is not good for the country, it is not good for our economy, and it is not good for the national business community.”
Angola’s foreign exchange reserves decreased to USD 13.6 billion in June 2023 from USD 14.58 billion in May. In its June report, Fitch Ratings revised the outlook on Angola’s Long Term Foreign currency Issuer Default Rating (IDR) to stable from positive and affirmed the IDR at ‘B’. This reflects weaker economic growth prospects, expected higher inflation and an increase in government debt/GDP ratio as a sharp depreciation of Angolan Kwanza is liskely. Fitch Ratings forecasted deceleration in Angola’s GDP to 1.5% in 2023 and 2.0% in 2024 from 3.1% in 2022. The report projected the debt-GDP ratio of Angola to rise to 69.9% in 2024, more than 10% from what it is now. And that is what is a matter of concern.