ANGOLA: CAUSES AND IMPLICATIONS OF ECONOMIC DECLINE

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP84S00897R000200080007-2
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 23
• Document Creation Date: December 21, 2016
• Document Release Date: April 3, 2009
• Sequence Number: 7
• Publication Date: December 1, 1983
• Content Type: REPORT

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Directorate of Secret
Intelligence
Angola:
Causes and Implications
of Economic Decline
Secret
ALA 83-10192
December 1983
COPY 3 4 0
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Directorate of Secret
Intelligence
Angola:
Causes and Implications
of Economic Decline
This paper was prepared by Office of
African and Latin American Analysis, with
contributions by Office of
Central Reference, and Office of
Soviet Analysis. It was coordinated witthe
Directorate for Operations
Comments and queries are welcome and may be
directed to the Chief, Africa Division, ALA, on
Secret
ALA 83-10192
December 1983
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of Economic Decline
Angola:
Causes and Implications
Key Judgments Apart from the oil sector, the Angolan economy has hit rock bottom.
Information available Growing security and financial problems in recent years have deepened the
as of 25 November 1983 decline that began with the abrupt departure of the Portuguese in 1976 and
was used in this report.
the onset of civil war:
? Stepped-up Angolan military activities since 1981 to counter South
African attacks and the growing UNITA insurgency have forced the
government to boost defense expenditures.
? Agriculture has reverted largely to a subsistence level, as the fighting. has
cut off major producing areas in southern Angola from key urban
centers.
? Shortages of imported spare parts and other inputs have cut industrial
output to around 20 percent of capacity; many plants have shut down
altogether.
? World prices for the country's major exports-petroleum, coffee, and
diamonds-have dropped, depressing foreign exchange earnings.
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These pressures have drained Angola's foreign exchange resources and
made Angolan President dos Santos more dependent on Soviet military
assistance and economic concessions. The problem came to a head in 1982
as burgeoning investment costs in the petroleum and diamond sectors and a
heavy debt service obligation for foreign military supplies and technicians
consumed almost all of the country's hard currency earnings.
difficult.
manage to meet its remaining obligations to the West or to the Soviet
Union and its allies in 1982 or this year. Angola would welcome Western
assistance in revitalizing its economy, but these financial problems make
an expansion of Luanda's ties with private Western interests increasingly
In our judgment, Luanda's balance of payments will not improve signifi-
cantly next year, although we estimate that increased oil production will
boost export revenues by 10 to 15 percent-to around $1.8 billion.
l
additional oil-generated revenues will be used primari
y to reduce out-
standing financial obligations rather than to increase imports substantially.
Secret
ALA 83-10192
December 1983
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We doubt that the Soviets will offer Angola much of the new financial sup-
port it needs over the coming year. The $2 billion economic agreement that
Moscow and Luanda signed in 1982 will provide no significant relief
because it is earmarked for large public-sector projects that probably will
take almost two decades to complete.
We expect that Moscow will continue to press Luanda to pay for Soviet
and Cuban personnel support, spare parts, and repairs. Moscow almost
certainly realizes that Luanda is not in a position to pay hard currency, but
we believe that Soviet officials will insist on access to future oil production
below market prices. This will make it even more difficult for Angola to
boost trade with the West. Moscow probably will also demand repayment
of at least part of Angola's commercial debt. Although the Soviets may
squeeze Angola financially, they will not do so to a point that threatens the
economic viability of the country or Luanda's longer range ability to repay
the USSR or serve purposes useful to Moscow.
In our view, there is no hope for economic growth in 1984. We predict that
overall GDP will drop at least another 5 to 10 percent because of Luanda's
inability to increase imports needed to revitalize domestic production and a
probable steady decline in economic activity as UNITA's sabotage teams
move farther north. This will cause painful adjustments, including a need
to use scarce resources to import food for urban consumers. The general
public's preoccupation with economic survival, however, will probably
continue to limit active opposition to the regime.
We believe that dos Santos and Moscow are betting that increased Soviet
military assistance will enable the regime to survive politically at least until
1985 when they foresee an increase in oil revenues large enough to allow
some economic breathing room. We, too, expect oil revenues to increase
substantially beginning in 1985:
? Development of new oilfields in Cabinda will probably increase petro-
leum production by around 50 percent.
? Commercial exploitation of several of Angola's other oil-rich offshore
blocks is also likely to begin.
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In our judgment, economic factors alone will give Washington little
leverage on the Angolan situation so long as the regime is threatened by
UNITA and South Africa. We do not anticipate that economic conditions
will deteriorate between now and 1985 to a point where the regime would
be willing to give up the security protection that the Communists are
providing-even in exchange for massive Western financial aid. If dos
Santos accepted such an offer-particularly if it were contingent on a
Cuban withdrawal-he probably would be overthrown by pro-Soviet
hardliners within the regime. As long as oil production remains at current
levels, however, we believe that Luanda will have enough funds to provide a
sufficient level of imports to keep the economy from becoming a threat to
the regime. 25X1
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Contents
Key Judgments
The Legacy of Independence
Financial Crunch, 1982-83 4
The 1982 Financial Crisis 4
Continuing Squeeze in 1983 5
Faltering Economy and Growing Malaise 7
Short-Term Implications
The Longer Term
Prolonged War
A Peaceful Solution
Implications for the United States
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Angola:
Causes and Implications
of Economic Decline
The Angolan economy has suffered for a long time
from the effects of a disruptive independence process,
which led to the exodus of almost all of the 400,000
Portuguese in the-country and left an inexperienced
government to cope with massive economic and secu-
rity problems. These difficulties have intensified dur-
ing the 1980s because of falling world prices for
Angola's major export commodities and the deterio-
rating security situation caused by the South African-
assisted UNITA insurgency. Although President dos
Santos has made overtures to the West for diplomatic
and economic assistance, Luanda has grown increas-
ingly dependent on the Soviet Union and Cuba for
military hardware and manpower.
The situation was made worse by the new govern-
ment's drive to socialize most factories, banks, mines,
processing plants, refineries, and plantations aban-
doned by the Portuguese. Committees of largely
unskilled workers complicated the difficult job of
inexperienced and untrained managers. Bureaucratic
inefficiency, corruption, and chronic shortages of raw
materials, fuel, and spare parts also undermined
productivity.F____1 25X1
The continuing guerrilla war also hindered economic
recovery. In the late 1970s guerrillas increased at-
tacks on bridges, railbeds, trains, roads, vehicular
traffic, and government installations. The fighting
was most intense in southern Angola, where much of
the country's food production is concentrated. Farm-
ers began cutting back plantings to avoid harassment
This paper analyzes Angola's economic problems and
longer term economic prospects and estimates the
economic course that the government is likely to
follow. It also analyzes the implications of these
prospects for the United States.
The departure of most of the Portuguese in 1975-76
triggered a deep decline in the economy. The Portu-
guese had occupied almost all managerial, technical,
and professional positions, made up most of the skilled
labor force, and-along with consumers in Portugal-
represented the bulk of the middle-class market.
? Commercial agriculture was hardest hit as seasoned
Portuguese plantation owners emigrated, and the
colonial marketing and distribution system
collapsed.
? Manufacturing, the fastest growing economic sector
prior to independence, began operating well below
capacity, primarily because of the evaporation of
Portuguese skills and purchasing power.
? Mining was crippled by the loss of technicians as
well as equipment, including vehicles and aircraft,
taken by the Portuguese.
? The Western-run petroleum industry was the only
sector to remain largely unaffected because of the
continued operations of Western oil companies.F_
from insurgent, government, and Cuban forces.
The introduction beginning in 1976 of several thou- 25X1
sand Communist civilian economic and technical ad-
visers, mostly Cubans, failed to revive the economy.
Although occupying key advisory positions in almost
every economic ministry, they were too few and too
lacking in familiarity with local conditions, manage-
ment techniques, and Western machinery to fill the
void left by the Portuguese. 25X1
As a result, toward the end of the 1970s the Angolans
increasingly began to turn to Western capital, tech-
nology, and manpower to revive the economy and as
an alternative to exclusive reliance on the Soviets,
Cubans, and East Europeans, with whom they were
already growing disenchanted. The government
adopted a liberal investment code in 1979. Because of
dos Santos's economic overtures to the West, Angola
received strong non-Communist official assistance-
primarily from European and Arab donors-and at-
tracted considerable private investor interest.
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Angola: Commodity Prices and
Production Trends
Production
Thousand metric tons
Petroleumb
Production
Thousand b/d
74 75
aData reflect average prices for South African diamonds.
b Pegged to official Nigerian sales prices.
c Estimated.
Prices
US $ per pound
Even these actions allowed only a brief respite from
the country's downward economic trend. The increase
in oil revenues associated with rising world oil prices
and Western aid did provide a temporary improve-
ment in living standards as food and other badly
needed consumer imports rose by 20 percent. The
increased availability of goods did little for agricul-
ture and mining, however, which continued to suffer
from the fighting. Moreover, with the exception of the
petroleum industry, investors were jittery about mak-
ing large long-term commitments because of the
insurgency. As a result, most contracts stipulated that.
projects would begin only after the security situation
improved.
Economic Pressures in the 1980s
0
Prices
US $ per barrel
25
TO
15
RM 10
s
1 1 1 1 1 1 1 1 1
80 830 0 1974 75 80 82
Setbacks in 1981
A sharp decline in the economy in 1981 was triggered
by the fall in world demand for petroleum, which cut
the revenues on which Luanda had become heavily
dependent for its foreign exchange earnings. There
were, however, other setbacks:
? A plunge in the prices of Angola's other major
exports-coffee and diamonds-further depressed
foreign exchange earnings.
? A second consecutive year of drought forced Luan-
da to increase imports of food at the expense of
needed machinery and spare parts.
? Stepped-up attacks by South Africa and UNITA
forced the government to boost defense
expenditures.
? The migration of farmers to urban areas to escape
both drought and the chaos caused by UNITA
placed added pressure on the government's limited
resources, according to the press and other sources.
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Moscow's Military Role
Moscow's influence in Angola rests largely on its
military assistance role. After helping the Popular
Movement for the Liberation of Angola (MPLA) to
consolidate its grip on power at Angolan independ-
ence in 1975-through the rapid airlift of Cuban
troops and supplies-the USSR formalized its rela-
tionship with Angola by signing a 20-year Friendship
Treaty in October 1976 and promising additional
military supplies.
The annual increments of Soviet military aid to
Angola declined after 1976, partly because Angola's
military services needed additional time to absorb
the equipment already received. Moscow's decisions
to reduce even further its military shipments in 1980
and 1981 probably were designed to signal Soviet
displeasure with Luanda's failure to pay for spare
parts and repairs. Even so, by the end of 1981
Moscow and its allies had concluded a total of
almost $1 billion in military agreements with Angola.
The USSR sharply increased its arms shipments to
Luanda in 1982 largely in response to attacks by
UNITA and South African military incursions into
southern Angola. We believe that Luanda's willing-
ness to talk with the West-and with Pretoria-
about a Namibian settlement was also instrumental
in the decision by Moscow to upgrade its commit-
ment. The Soviets introduced more advanced weap-
ons to shore up Luanda's air and coastal defenses,
boosting the annual level of arms shipments to Ango-
la to record levels. Havana augmented its military
presence to stiffen the government's defenses and to
man some of the new, more advanced equipment.
The Soviet military commitment in Angola is con-
tinuing to increase. Since February 1983, Soviet SA-6
and SA-8 surface-to-air missile systems and MI-24
helicopter gunships arrived in Angola for the first
time.
There are also 1,000 to 1,200
Soviet military advisers and at least 25,000 to 30,000
Cuban military personnel in Angola, including about
20,000 Cuban combat troops.
Moscow's Economic Role
The Soviets extended about $430 million in economic
aid to Angola from 1975 to 1982, of which only $32
million was drawn. Questions about types of projects,
the quality of Soviet assistance and advisory support,
and the quantity of actual Soviet aid disbursements
have been a constant source offriction in bilateral
relations since the mid-1970s. 25X1
Early in January 1982 Angola received a significant
new Soviet commitment that eventually could provide
up to $2 billion in credits for economic development
over a 10- to 20 year period. The agreement followed
several years offeasibility studies and negotiations-
a typical feature of Soviet economic programs. The
accord probably will provide credits on near commer-
cial terms. It calls for the USSR to construct heavy
public-sector infrastructure and industrial projects
that have become its specialty in the Third World:
? Moscow has signed a contract to provide $400
million in equipment credits for the Kapanda hy-
droelectric dam and power plant, which will be
Angola's largest construction project.
? The Soviets plan to construct a 990,000-acre irriga-
tion system, bridges, and other projects in Malange
Province.
Luanda and Moscow are discussing the construc-
tion of an oil refinery.
The agreement will not meet Angola's current eco-
nomic needs, however, because it does not provide
financial support for badly needed imports or highly
skilled technical services needed to revitalize plant
and equipment. 0 25X1
Moscow has some 1,500 civilian advisers and eco-
nomic technicians in Angola, many of whom are 25X1
attached to various government ministries and state
industries. In addition, there are some 7,000 to 8,000
Cuban and East European civilian advisers.
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Soviet advisers work with the Finance inis- 25X1
try, a Central Bank, and the fishing and mining
industries. 25X1
The large contingent of Cuban technicians is a partic-
ular source offriction with the Angolans. As food and
consumer goods shortages became more pronounced
this year, Angolans became increasingly restive over
what they saw as a Communist monopoly of the few
remaining imported food and consumer items. Luan-
da has even threatened to cut back on the number of
Cuban civilians because of frictions over their sala-
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As a result of these factors, the government faced a
financial crisis. Although previously a conservative
borrower, Luanda substantially increased its foreign
debt exposure in an effort to meet its foreign currency
commitments. External public debt doubled from $1.1
billion in 1980 to $2.2 billion in 1981
For the first time, Angola
entered the Eurocurrency market to meet short-term
borrowing needs and began requesting extended trade
credits in lieu of making cash payments for imports.
we estimate
that the trade balance deteriorated from a $471
million surplus in 1980 to a $5. million deficit in 1981
as the government stepped up imports by 15 percent.
Spending pressures also caused the government's bud-
get to soar. Public expenditure jumped by 25 percent
from $2.8 billion in 1980 to $3.5 billion in 1981,
according to a French press report. Defense spending
rose to more than 50 percent of the budget,
Meanwhile, the
gap between state revenues and expenditures widened
to over $1 billion because of the drop in revenues from
the petroleum sector. The government used the print-
ing press to cover the deficit, causing inflation to rise
to a 40- to 45-percent annual rate.
Financial Crunch, 1982-83
The 1982 Financial Crisis. Angola's foreign currency
problems worsened in 1982 as burgeoning investment
costs in the petroleum and diamond sectors and a
heavy debt service obligation for military supplies and
technicians consumed almost all of the country's hard
currency earnings. Investment costs in the petroleum
sector doubled from the previous year to about $260
million in 1982 as the country began investing in new
oilfield development in Cabinda
hard currency expendi-
tures in the diamond industry exceeded export earn-
ings because of both continued theft and low world
prices. Debts incurred to the Soviets and Cuba for
military purchases and services also started piling up.
these commitments
absorbed nearly all of the country's resources, causing
the government to resort to commercial credits to buy
By mid-April 1982 the country had fallen behind in
payments to all creditors. The Soviets and Cubans
insisted that Luanda stem the backlog on its short-
term debt to them, which caused officials to forgo
payment to Western petroleum companies and to
banks on letters of credit. By midyear, the country
was almost six months behind in payments to Western
creditors, despite a 30-percent cut in imports.
Efforts to boost output of Angola's major exports in
1982 brought few results:
? Petroleum production and prices both fell as world
demand slackened further.
? Official diamond output fell 15 percent because
DeBeers evidently lowered the quota of Angolan
production that it would buy and because of wide-
spread corruption involving senior government
officials.
? Coffee volume remained stagnant because of mar-
keting problems and the poor security situation in
coffee-growing regions. In many areas farmers
pulled up coffee trees, planting subsistence food
crops in their place because government purchasing
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Table 1
Angola: Current Account Estimates a
-259
-705
-750
-630
-525
Trade balance
471
-5
-10
100
200
Exports (f.o.b.)
1,997
1,745
1,400
1,600
1,800
Of which:
1,450
106
Diamonds
315
Imports (f.o.b.)
1,526
Of which:
Military equipment and spare parts
175
110
210
420
450
Net services and transfers
-730
-700
-740
-730
-725
Of which:
Communist military and economic
support c
-300
Soviet repair charges
-30
-30
-30
-30
-40
Petroleum transfers
-232
-208
-200
-200
-260
Demurrage charges
-60
-60
-60
-40
-40
a These data are presented primarily to highlight the character,
scale, and direction of Angola's payment problems. Because we
cannot specify with any certainty what level of current account
deficit the Soviet Union was prepared to underwrite for Angola in
any single year, line entries-especially for nonmilitary imports and
for services and transfer transactions with Communist countries-
should not be ascribed a high degree of accuracy. They are largely
estimates based on statistics of trade partners and on fragmentary
reporting. We used world market prices to calculate the value of
exports.
b Projected.
c These figures represent estimates of hard currency obligations.
We do not have adequate information about how much was
actually paid. We excluded obligations for Angolan military train-
ing in foreign countries.
financial squeeze caused dos Santos to scale down
economic targets in 1982. Setting a ceiling of $72
million for the 1982 budget deficit, the government
decreased subsidies on food and other basic consumer
goods, terminated all investment in new development
projects, and, for the first time since independence,
began collecting income taxes from private individ-
uals. In late 1982 the Central Committee of the ruling
party gave dos Santos special powers to deal with the
deteriorating security situation and to enact emergen-
cy measures giving priority to expanding food and key
industrial production and to raising exports.F__
Continuing Squeeze in 1983. We believe that foreign
lending to Angola in 1983 has fallen significantly
below the levels obtained in previous years, although
Luanda has searched East and West for assistance.
Pleas to French and Soviet officials for large-scale
balance-of-payments support have drawn negative
responses. Portugal, Spain, and Italy mustered only a
few small export loans. A recent Brazilian offer to
extend medium-term trade credits and to swap food
for petroleum has not been adequate to meet Angola's
growing import requirements. 25X1
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The Political Context of Economic Decision Making
We believe that dos Santos has delegated day-to-day
responsibility for managing the economy to Minister
of Planning Lopo do Nascimento, an extremely capa-
ble technocrat who also controls the National Bank
of Angola, the country's central bank.
do Nascimento is a
political opportunist who comes across as a pragma-
tist, particularly in contacts with Westerners. He has
hinted broadly that he wants
Angola to move away from close ties with Moscow
and has expressed concern that the Angolan economy
is too centralized. He has also said that Angola
wishes to establish diplomatic relations with the
United States.
Neither do Nascimento nor dos Santos can make
major policy decisions, however, without the collec-
tive agreement of other key leaders in the ruling
party. The political balance within the leadership as
a whole is delicate and tense, and decisions on key
issues are subject to considerable factional pulling
and hauling. A hardline faction generally holds the
upper hand, favoring inflexible policies and strong
ties with Moscow and Havana; the Soviets and
Similarly, appeals to foreign bankers and investors
have generated few results.
The only glimmer of relief comes from the oil sector.
Petroleum production rose 30 percent by the end of
the first half of 1983 to about 160,000 barrels per day
(b/d), owing to the start of production from the
offshore Takula oilfields. The rise in export volume
has been partially offset, however, by declining prices
for Angolan oil. We estimate an increase in oil
receipts this year of around 20 percent.
Cubans influence the policymaking apparatus
through the hardliners as well as through direct
contacts with dos Santos. A weaker, relatively mod-
erate faction led by black nationalists has a more
pragmatic outlook, particularly on questions of polit-
ical and economic dealings with the West, but it
remains on the margins of decisionmaking.
In policy debates, dos Santos has tended to comport
himself with the caution and indecisiveness of a
compromise leader, generally favoring a moderate
approach but acting as if he doubts he is strong
enough to challenge the hardliners. In order to
strengthen his position vis-a-vis both factions, over
the past year or so he has removed some of the
hardliners and some of the most strident black
nationalists from positions of power. This has not
won him solid support in either group, however, and
has created instead a three-way standoff that has
worked against major policy departures.a
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Despite doubled purchases of military equipment to
cope with the insurgency, we expect Angola's current
account position to improve because of the higher oil 25X1
earnings and tight controls on imports of food, raw
and intermediate goods, and capital equipment.
Moreover, based on our analysis of data on Angolan
trade with the West, we estimate that imports of basic
food items such as cooking oil and cereals were
further eroded by a progressive rise in the inflow of
meat, processed foods, and luxury consumer goods to
satisfy the elite of the ruling party and Soviet, Cuban,
and East European personnel in Angola.
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official prices has driven most Angolans to the black
market where they pay many times the regulated
price or often resort to barter. Even then, there is
rarely enough food to go around.
there is nothing to buy
Shortages have become even more acute as
stepped-]up attacks by UNITA create panic in the
buses lie idle for lack of foreign made spare parts
da. Public transportation is almost nonexistent as
interior, adding to the stream of refugees into Luan-
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I most of the
factories in Angola are working at only 0 percent of
capacity and have an average absentee rate of 40
Rather than risk another sharp rise in inflation,
Luanda has sought to try to rein in public spending
even further in 1983. This will not be easy, however,
because the upsurge in UNITA activity will, in all
likelihood, drive defense expenditures in 1983 above
last year's 50-percent share of the budget.
Faltering Economy and Growing Malaise. The per-
formance of the economy has given Luanda little
cause for optimism. Agriculture-which employs
about 80 percent of the population-has recovered
only marginally despite the return of normal rainfall.
According to press reports, sabotage by UNITA in
central Angola has destroyed almost all of the modern
farms in what was once the country's breadbasket.
The expanding insurgency reportedly now also endan-
gers farms in Malange Province close to Luanda.
Much of what is produced is intercepted by insur-
gents. A shortage of parts for machinery and a lack ,of
seeds and fertilizer add to farmers' problems. As a
result, most rural Angolans rely on subsistence agri-
culture to satisfy immediate family needs, leaving
Luanda little choice but to continue to import food to
meet the needs of urban consumers.
Slashes in food imports and budget cuts have hit
lower class Angolans the hardest. According to press
notices long
food lines occur daily in the capital city at govern-
ment-run stores for the general public. Lack of food at
percent, with some as high as 70 percen
t
o not report
many urban workers
for duty because they need to spend most of their day
foraging for food. In addition, raw material shortages
and a lack of spare parts have brought some produc-
tion units to.a complete standstill.
Corruption has grown as the country's economic woes
have deepened, according to press reports. These
sources also cite burgeoning overseas bank accounts of
high-ranking Angolan military officers and govern-
ment officials as signs that many leaders are preoccu-
pied with protecting their assets in case they decide to
flee. it has become
obligatory in business dealings to pay a certain per-
centage of each contract; into the personal overseas
accounts of public officials. Even though the govern-
ment has initiated an intensive anticorruption
campaign and hired a Swiss firm to supervise all
contracts, the practice has become so blatant
The limited information available to us suggests that
opposition to the regime over economic issues remains
diffuse. Although we have reports of isolated strikes
and work slowdowns, we have no indications that
these generated any widespread support. We believe
that opponents of the regime's current policies have
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ties to poor urban blacks, but they do not appear to be
able at this point to turn discontent into open unrest.
In our view, most urban Angolans are too preoccupied
with economic survival to oppose the government
actively.
he prevailing attitude is apathy, not rejection of
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We expect the insurgency to put increased pressure on
the regime in 1984. UNITA probably will continue to
spread its activities into the northeastern diamond-
producing area and into the north, particularly around
farming areas near Malange.
guerrilla operations have already begun
? Most of the remainder of oil revenues has already
been mortgaged to cover petroleum investment costs
for a gas-injection project in Cabinda,
25X1
? Mounting creditor demands to stem the burgeoning
backlog on short-term debt are likely to result in 25X1
additional foreign exchange outflows as Luanda
tries to keep its credit lines from being cut. 25X1
? Coffee and diamond earnings will contract further
as the security situation worsens. Even major gov-
ernment attempts to secure diamond and coffee-
producing regions probably would not succeed in
increasing exports.
? Even if the Soviets are lenient on some repayment
terms, the worsening security situation will probably
boost war-related costs, particularly for food, cloth-
ing, spare parts, and equipment repairs.
to intensify in these areas. We believe the government
will continue to hold the country's key urban centers,
but that its control of the countryside will erode
further.
In these circumstances, we would expect foreign
investors and domestic producers to avoid new com-
mitments in Angola. Although some foreign business-
men may sign new investment contracts, few will be
willing to commit funds until the security situation
improves. Farmers will continue to flock to the cities
or resort to subsistence agriculture, while many of the
few remaining expatriates are likely to abandon their
farms because of harassment by UNITA. As anxiety
grows in Luanda, members of the Angolan elite will
probably continue to send their money outside the
country
Balance-of-payments problems will continue to plague
Luanda even though petroleum export revenues are
officially projected to rise by about one-third in 1984
to around $1.6 billion as new oil production becomes
marketable.
? Luanda recently committed itself to begin deliver-
ing to the USSR and Eastern Europe in early 1984
slightly over half of its 50-percent share of crude oil
production from Cabinda (the other 50 percent
belongs to the Gulf Oil Corporation) to pay for
Communist military and economic assistance,F_
Continued Aid Shortfalls
Over the coming year we do not expect the Soviets to
offer much economic relief. Funds from a $2 billion
Soviet-Angolan economic agreement in 1982 will
continue to be reserved for large infrastructure proj-
ects such as the Kapanda Dam and a new oil refinery,
which probably will take almost two decades to
complete.
Luanda will probably continue to look to the West for
financial relief. In our view, however, private creditors
will be reluctant to extend new loans until Luanda
makes some headway in reducing the backlog of its
commercial debt. Almost all potential Western do-
nors-including France, Brazil, Portugal, Italy, and
Spain-have their own economic problems. These
countries have indicated that their support to Angola
will be limited to government-guaranteed trade cred-
its, a few investment loans, and some food aid,
In the absence of any substantial aid, we expect
Luanda, to ask Moscow for greater concessions in
their bilateral military and economic relationships.
25X1,
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Capitalizing on Oil
The US Economic Stake
Oil is Angola's key economic link with the United
States. The United States buys about two-thirds of
Angola's oil, and American oil companies play a
major role-in partnership with the Angolan Govern-
ment-in exploiting Angola's resources.
? Production by Gulf, established in Cabinda since
1957, accounts for about 60 percent of Angola's
total output.
? Texaco participates in several joint ventures, in-
cluding one in the Congo basin which provides
almost 30 percent of national production.
? Mobil has joined ELF Aquitaine, a French oil
company, in an exploration and production-sharing
venture that has resulted in afind off the coast of
northern An ola.
Other Western Interests
Other Western companies have a sizable stake in
Angolan oil. Private and official Western loans and
export credits provided the capital in 1981 to fund a
$168 million gas injection project to boost output in
the Cabinda oields. US and French banks recently
offered Luanda financing to develop the rich Takula
oilfields off Cabinda.
25X1
We believe, however, that Moscow will continue to
press Luanda to pay for Soviet and Cuban technical
and military personnel support, spare parts, and re-
pairs. Moscow almost certainly realizes that Angola is
in no position to pay hard currency, but the Soviets
stand to receive about $400 million in oil next year if
Luanda honors the recent agreement to turn over half
of its share of oil from Cabinda. Moscow probably
also will insist on repayment of at least part of
Despite the worsening security situation and the drop
in oil prices, Western oil companies have indicated a
willingness to stay in Angola because they like doing
business with Luanda.
? The Angolans with whom they deal are businesslike
and anxious to see that companies realize accept-
able 25X1
profits.
? The government does not interfere in day-to-day
company operations.
? There is constant communication between responsi-
ble Angolan officials and company representatives,
which has resulted in satisfactory contract negotia-
tions. 25X1
track Western investment programs for developing
new oilfields, despite the reluctance 4f oil companies
to step up production in the midst of a world oil glut.
The Angolans realize the need to work with the West
and, they are 25X1
able to separate oil issues from political concerns.
Angola's commercial debt. Although the Soviets may
squeeze Angola financially, they will not do so to a
point that threatens the economic viability of the
country or Luanda's longer range ability to repay the
USSR or to serve purposes useful to Moscow.
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Short-Term Implications
In our view, there is no hope for economic growth in
1984. Just to restore depleted stocks of industrial raw
materials, intermediate goods, fertilizers, machinery,
and spare parts would require a 40-percent increase in
imports, according to our analysis. We doubt Luan-
da's ability to finance even a small portion of this
amount.
We predict that overall GDP will drop at least
another 5 to 10 percent next year as a result of
Luanda's inability to increase imports of goods needed
to support domestic production and the steady drop in
economic activity as UNITA's sabotage teams move
further north. Heightened guerrilla disruption of the
remaining food-growing areas is bound to cause a
further decline in agricultural output next year. Most
factories probably will either remain closed or contin-
ue operating at low levels of capacity. There will
continue to be shortages of spare parts and intermedi-
ate goods-such as yarn for textile factories-and a
low employment participation rate as searching for
food becomes a full-time occupation for many and a
growing number of workers are conscripted by the
military to fight against UNITA.
Painful adjustments will be widespread, particularly
In our view, however, urban consumers are used to
commodity shortages, and only a massive shortfall in
food supplies-a development we do not foresee at
this time-could provide government opponents with
the popular support needed to make a move against
the regime. Moreover, we believe that dos Santos also
is aware of this possibility and will do what he can to
ensure adequate food supplies in key urban centers.
The Longer Term
munist military hardware and personnel support.
The two most important factors in determining the
long-term future of the Angolan economy will be the
oil sector and the insurgency. We expect oil to play an
increasingly important role in 1985 and beyond so
long as Luanda is able to bring its rich oil reserves
into production. The level of the insurgency will
largely determine whether vital foreign exchange
earnings from the petroleum sector go to rebuild
Angola's war-torn economy or to pay for more Com-
Prospects for development of the oil sector will remain
good as long as the insurgents do not attack the
oilfields. We believe that crude oil exports in 1985
probably will rise about 50 percent above the current
1983 level, from 136,000 b/d to 200,000 b/d, based
on information provided by the Angolan state oil
company, Sonangol, and Western oil companies oper-
ating in Angola. Most of the increase will come from
newly developed fields off the coast of Cabinda. We
also expect commercial exploitation of several of
Angola's other rich offshore oil sites to begin by 1985.
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Secret
Prolonged War
If, as we expect, UNITA tightens its hold over the
`countryside, eventually isolating the country's dia-
mond, agricultural, and other outlying regions and
confining the government's area of control to the
major cities, we believe the regime would become
almost totally dependent on oil revenues to meet
current operating and defense costs. Oil probably
would represent over 95 percent of foreign exchange
revenues and almost all of Luanda's budget.
In the event that sabotage of the petroleum sector
drives away Western petroleum companies, we believe
that the Soviets would press to take over the fields
themselves. While damage such as ruptured pipelines
or destruction of the single mooring buoy used to
export oil would be relatively easy to fix if replace-
ment equipment were available, we believe that exten-
sive damage to offshore oil platforms would cause
costly and longlasting damage. Soviet offshore techni-
cal expertise and operating equipment are very limit-
ed so that, in this contingency, Moscow probably
would have to depend on Western technology for
construction of offshore facilities.
Should the cost of the war continue to escalate in the
face of a cutoff in oil revenues, the Soviets could be
forced to underwrite the war completely. While press-
ing financial problems at home and heavily extended
commitments in other parts of the world would make
such an outcome unwelcome in Moscow, Angola has
become an important symbol of the USSR's ability
and willingness to project its power to distant areas
and of its determination to support the national
liberation struggle in southern Africa. Failure to back
Luanda would damage Soviet credibility among its
other clients. Thus we would not foresee the Soviets
pulling out even in this extreme circumstance.
make new investments. The country would still be
plagued for years by a lack of skilled local managers
and workers. F__1 25X1
Under this scenario, Angola's lack of skilled managers
and workers probably would cause Luanda to build on
the steps that dos Santos and Minister of Planning
Lopo do Nascimento have already taken to expand
the country's economic links with the West. Luanda
would be likely to increase the Western advisory
presence in the fields of education, port administra-
tion, rail transport, industry, and mining. Luanda
would also be likely to encourage Western-particu-
larly US, Portuguese, French, and Brazilian-invest-
ment and technical and services contracts. We doubt,
however, that the government would move far from its
commitment to a largely government-run economy.
25X1
As financial priorities shifted to peacetime develop-
ment, Luanda's foreign exchange requirements would
increase. The reconstruction of the mineral, industri-
al, and agricultural sectors would consume vast 25X1
amounts of foreign currency for imports of vital
producer goods. Pressures to increase food and con-
sumer goods imports would also rise as'Angolan
expectations of a postwar peace dividend rose. At the
same time, Luanda would still be strapped for repay-
ment of investment loans for the petroleum sector and
burgeoning arrearages on its short-term debt.
During this fragile transition period, Angola would be
largely dependent on anticipated large increases in oil
revenues. In addition, if the regime were able to keep
the austerity lid on as export revenues climb, Luanda
could pay off much of its overdue debt. We believe
that this would improve Luanda's credit rating and
enhance its eligibility for greater European aid, espe-
cially if the world economy had picked up momentum
A Peaceful Solution
In the less likely event that dos Santos or a successor
reaches an accommodation with UNITA or South
Africa, it would still take time, money, and a vast
infusion of foreign technical expertise to turn the
economy around. There would be a substantial lag
before Angolans dislocated by the war could return to
productive tasks and before foreign businessmen could
by then.
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25X1
25X1
25X1
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Secret
Implications for the United States
In our judgment, economic factors alone will give
Washington little leverage on the Angolan situation so
long as the re ime is threatened by UNITA and
South Africa.~ 25X1
Dos Santos and do Nascimento both claim that they
would personally prefer to end the war and turn to the
West for aid to rebuild their country, but we doubt
their ability to remain in power for long if they 25X1
accepted an offer of large-scale US economic assist-
ance-particularly if it were conditioned on a Cuban
withdrawal. In that contingency, dos Santos probably
would be ousted by pro-Soviet hardliners within the
regime for agreeing to such terms, or by UNITA if
they were implemented. We believe that neither dos
Santos nor do Nascimento nor any other possible
successor would see much wisdom in throwing out the
Communists unless their own security were guaran-
teed.) 25X1
Even without major US or other Western aid, Ameri-
can oil companies probably will continue to operate
profitably in Angola-unless UNITA attacks the
oilfields. Luanda has often stated that it regards
Western expertise as superior to anything the Soviets
offer, and it will continue to try to attract other
potential Western investors. F I 25X1
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700766 (545154) 12-83
19
Secret
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 Secret
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Secret
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