ANGOLA: STRUGGLING WITH DECLINING EXPORT EARNINGS

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP89B00224R000501760014-3
• Release Decision: RIPPUB
• Original Classification: T
• Document Page Count: 27
• Document Creation Date: December 22, 2016
• Document Release Date: November 30, 2011
• Sequence Number: 14
• Publication Date: July 1, 1987
• Content Type: REPORT

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Intelligence
Angola: Struggling With
Declining Export Earnings
An Intelligence Assessment
To ecret
TopB"ecret
87-10036C
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u~ ly !YU
?'385
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Directorate of
Intelligence
Angola: Struggling With
Declining Export Earnings
This paper was prepared by
Chief, Africa Division
and Latin American Analysis. It was coordinated
with the Directorate of Operations. Comments and
queries are welcome and may be directed to the
Top Secret
ALA 87-10036C
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Angola: Struggling With
Declining Export Earnings) 25X1
Key Judgments Angola is being economically and socially buffeted by the combined impact
Information available of lower oil prices and the indirect costs of fighting an internal war. The
as oft/ July 1987 steep decline in world oil prices in 1986 has cut oil earnings to Angola's oil-
was used in this report.
dependent economy by one-third. At the same time, attacks by UNITA,
while not affecting the oil industry to date, have cut production of
diamonds-formerly a distant second to oil in export earnings-by three-
fourths, causing further foreign exchange losses. Domestically, the drop in
foreign exchange earnings is being compounded by the already high costs
of battling the UNITA insurgency while driving home the effects of serious
management deficiencies stemming from socialist policies. Growing short-
ages-particularly of food-are raising concerns among Angolan leaders
over the potential political consequences of economic decline.
The Soviet Union, however, has kept the decline in oil earnings from
endangering the security of President dos Santos's regime. A large increase
in credit by Communist suppliers, particularly the USSR, has more than
balanced the impact that reduced foreign exchange earnings could have
had on Angola's military capabilities. We calculate that Moscow delivered
more than $1 billion in military equipment in 1986. Hardware deliveries
ranged from tanks and trucks to MIG fighter aircraft and SAM air
defense systems. At the same time, Luanda-unable to meet repayment
schedules to the Soviets-asked for and received from Moscow a three-
year moratorium on repayment of principal on its $3.3 billion debt to the
USSR
Payments difficulties extend beyond the Bloc. Angola has fallen 6 to 8
months behind on scheduled debt repayments to Western creditors,
according to sources of varying reliability. Arrearages, however, have not
discouraged Western financial institutions from making loans in excess of
$900 million for oil exploration and development in 1987. In addition,
Angola is attempting to negotiate new payment terms for about $1 billion
owed to Western lenders, in part by pledging future oil production as
collateral, according to untested sources. Angola also is trying to attract
Western aid and investment funds and is, formulating economic reforms
designed to increase domestic market incentives and economic growth.
Against this financial backdrop, Angolan officials appear to be increasing-
ly concerned that deteriorating living conditions could provoke domestic
unrest, according to reports from the press and sources of varying
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ALA 87-10036C
July 1987 25X1
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Top Secret
reliability. Foreign exchange shortages have forced Luanda to cut commer-
cial food imports by more than one-third and have stimulated an active
black market for basic goods. The government has sought foreign aid for
the first time to meet food requirements in cities as well as in rural areas.
Although we have no evidence of civil unrest over shortages, Luanda
recently purchased riot control gear from Europe, signaling growing
official concern, in our view.
We do not believe, however, that Angola's economic slide alone will lead to
regime-threatening infighting among the political elite or to increased
flexibility on issues of importance to the United States, such as talks with
UNITA or Cuban troop withdrawal. President dos Santos has been able to
maintain consensus within the Politburo on most key issues, appears to
have the backing of Moscow and Havana, and, in our view, is in a stronger
political position now than at any time since assuming power in 1979.
Luanda's military dependence on Communist largess and its difficult
security situation will limit its flexibility on Cuban troop withdrawal. We
believe that Moscow would rein in Luanda if economic ties appeared to be
yielding appreciable Western gains in political influence
Looking further down the road, the combined effect of budget and foreign
exchange shortfalls, UNITA attacks, and socialist management deficien-
cies virtually rule out chances for significant improvement in economic
conditions outside the oil sector during the next few years. Unless world oil
prices unexpectedly rebound to pre-1986 levels, relief from foreign ex-
change shortages will be limited to little more than the measured pace of
increases in oil production, now projected by industry experts to rise from
280,000 b/d in 1986 to about 310,000 b/d in 1987, and to no more than
400,000 b/d by 1990. While Luanda probably will be able to cope with the
dislocations generated by its present financial bind, the growing array of
economic problems are likely to intensify Luanda's internal security and
political problems over the longer term.
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Key Judgments
iii
Increasing Financial Squeeze
1
Economic Impact
1
Deteriorating Living Conditions ...
4
Handling the Foreign Payments Angle
6
Coping With Arrearages
6
The Military Spillover
8
Outlook and Implications
9
Implications for the United States
11
Appendix
US and Cuban Interests in Angolan Oil Production
13
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Scope Note This Intelligence Assessment is part of a major research effort on
economic, social, and political conditions in Angola. It expands upon a
study of
. . role played by oil production and the revenue it
generate
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papers will include assessments of the new information on Angola
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the leader- 25X1
ship dynamics of the Angolan regime, and the demographic and social
changes provoked by the protracted civil war.
Angola presents an extremely difficult collection environment because of
the lack of US and IMF representation there, as well as poor collection and
reporting of economic data by the Angolan Government. Consequently,
reporting on basic economic statistics, such as national accounts, balance of
payments, and budgets, is often sketchy and inconsistent. Economic
reporting
has improved over the past year, however, providing enough
information to analyze major economic trends. Recent reporting
has furnished credible data on the balance of
payments, foreign borrowing, and economic reform.
information on foreign borrowing and on some commercial relations with
Cuba
vii Top Secret
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Figure 1
Selected Economic Activity in Angola
ABI
C.bud.
South
Atlantic
Ocean
Industry Agriculture
? Cement Coffee
Fishing part Cereal grain
Food processing Mineral Extraction
Iran/steel processing Diamonds
Textiles * Iron ore
Petroleum refinery Petroleum
CUANDO
CUBANGO
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Angola: Struggling With
Declining Export Earnings
The steep decline in world oil prices in 1986 has
profoundly affected Angola's already shaky economy.
According to a review oil
Angola's earnings from oil exports have
declined by one-third despite steady increases in the
volume of oil production and exports. Domestically,
oil production accounts for about one-third of GDP,
over 90 percent of exports, and more than one-half of
government revenues. Taking both oil and other non-
oil export losses into account, the decline of export
revenue is translating into economic contraction,
growing shortages, and sharply increased debt for
Soviet and Cuban military aid.
This paper analyzes the causes of Angola's current
economic problems; examines measures taken by the
government to offset the impact of reduced foreign
exchange earnings, such as budget and import reduc-
tions and increased foreign borrowing; and assesses
prospects for economic recovery. In addition, the
paper looks at the domestic political implications for
Angola of these economic changes, the role of the
Soviet Union and Cuba in offsetting the impact of the
decline in foreign exchange earnings on Angola's
military situation, and assesses the implications for
the United States.
Increasing Financial Squeeze
Angola was hurt disproportionately when competition
in Western markets by Saudi Arabia and other
Middle Eastern oil-producing states pushed average
international oil prices down from about $27 per
barrel in 1985 to $15 per barrel in 1986. Luanda
earned even less-an average of $14 a barrel, accord-
ing to our estimates-because it was forced to cut
prices for more than 40 percent of its oil exports to
about $12 a barrel, according to data compiled by
Angola's state oil company (SONANGOL), to pre-
vent sales from lagging behind production. As a
result, earnings from oil exports fell by one-third to
about $1.3 billion last year, despite an increase of one-
fourth in the volume of oil exports
Nonoil exports also fell sharply in 1986, accordin to
reports from the press
as diamond production plummeted. large-scale
attack by UNITA (National Union for the Total
Independence of Angola) in March 1986 virtually
shut down Angola's principal diamond mine at An-
drada. Efforts to reactivate a mine at Cafunfo during
the summer to offset the loss of Andrada's production
proved futile because of sporadic attacks by UNITA
against resupply aircraft. A devastating attack by
UNITA last December also destroyed mining facili-
ties at Cafunfo and forced the evacuation of
mineworkers. As a result, diamond production fell by
three-fourths from 1985 levels to only about 180,000
carats in 1986. The impact of this decline on the value
of total exports was offset, only in part, by small
increases in coffee exports and in coffee and diamond
prices, and by a sharp rise in the export of fish to more
than $80 million, I
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The loss in export revenue, regardless of the source,
has had a profound effect on the Angolan economy
and the government budget. According to press re-
ports, Luanda calculated that the export decline
translated into a shortfall of about $600-800 million
in budget revenues during 1986, compared with initial
budget projections approved by the Angolan People's
Assembly. Although Luanda was able to trim back its
outlays by 15 percent from planned levels,25X1
the budget deficit, compared 25X1
with 1985, jumped by 25 percent to about $500
million. The cuts in budget revenues coupled with the
foreign exchange shortfall in turn translated into an
economic contraction of about 9 percent in 1986,
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The Economy at a Glance
As in most African countries, subsistence agriculture
provides the main livelihood for 80 to 90 percent of
Angola's population, but accounts for only about 10
to 20 percent of GDP. Oil production is far and away
the most lucrative industry. Fish, coffee, and dia-
monds rank a distant second, third, and fourth,
respectively, among exports. Angola's manufacturing
sector accounts for 10 percent of GDP and includes
about 180 companies in food processing, textiles,
cement and other construction materials, assembly of
imported machines and vehicles, and oil refining.
Except for the oil sector, economic trends have
largely been downhill since independence in 1975.
GDP plummeted during and immediately after the
transition to independence, according to our esti-
mates, because of the mass emigration of 300,000 to
400,000 Portuguese residents, which depleted not
only managerial, technical, professional, and skilled
labor positions, but also the middle-class market.
The economic decline was exacerbated over the first
several years of independence by the government's
drive to implement a socialist system, including
nationalization of abandoned coffee plantations,
mines, factories, banks, and the oil refinery. The
introduction, beginning in 1976, of several thousand
Communist economic and technical advisers, mostly
Cubans, failed to revive the economy. Although occu-
pying key advisory positions in almost every econom-
ic ministry, they were too few and too unfamiliar with
local conditions, management techniques, and West-
ern machinery to fill the void lift by the Portuguese.
The economy continued to contract during 1981-83,
according to a government report, because of a combi-
nation of decreased world demand for petroleum, a
plunge in world coffee and diamond prices, drought,
and stepped-up attacks by UNITA. Guerrilla attacks
against bridges, railroads, trains, roads, and vehicu-
lar traffic have strangled internal distribution sys-
tems. Fighting destroyed crops, prevented planting
and cultivation, and caused shortages of seed. fertil-
izer, and parts for machinery.
end of 1985.
Investment in expansion of the oil industry, spurred
by the rise in prices through the early 1980s, began to
pay off during 1984-85. Increases in oil production to
230,000 b/d in 1985 pushed up total exports by more
than one-third over 1983 levels to $2.2 billion. Never-
theless, the current account deficit, which had de-
clined to $67 million in 1984, according to press
reports, nearly doubled as a result of increases in
imports of food and other nonmilitary commodities,
while foreign debt grew to about $2.7 billion by the
Although the booming oil sector had reversed chronic
economic contraction in 1984-85 for the first time
since independence, according to an Angolan Govern-
ment report, data in the press and from various
sources indicate that all nonoil sectors continued to
decline. Agricultural production equaled barely one-
fifth of preindependence levels in 1985, according to
press reports, and manufacturing output fell to less
than 40 percent of capacity. Production of diamonds
and coffee continued to fall, and by 1985 equaled
only one-third and 5 percent, respectively, ofpreinde-
pendence levels.
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Figure 2
Angola: Commodity Production and Price Trends, 1973-86
Production Prices
Thousand metric tons US $ per pound
0.50
I I I I I I I I I I 1
1973 74 75 76 77 78 79 80 81 82 83 84 85 86 0 1973 74 75 76 77 78 79 80 81 82 83 84 85 86
Production Prices
Thousand carats US $ per carat
I.
50 '
I I I I I I I I I I
Prices
US $ per barrel
I I I I I I I I I I
0 1973 74 75 76 77 78 79 80 81 82 83 84 85 86
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Table 1
Angola: Government Budget, 1984-86
Billion US $
Revenue
2.5 2.6
2.3
Oil taxes
1.8 1.9
1.2
Other
0.7 0.7
1.2
Deteriorating Living Conditions ...
Regardless of the exact rate of economic decline, it is
clear that living conditions, particularly in the cities,
have seriously eroded in the past year. A variety of
reporting
indicate that the decline in foreign exchange
earnings has brought increasing hardships, rising
black-market activity, and severe shortages of most
goods. In addition to longstanding complaints about
shortages of water, electricity, and transportation
services, travelers note increasingly inadequate sup-
plies of imported consumer goods in urban markets,
especially medicines
Cholera has become a serious problem in shantytown
areas because of contaminated water
A wide assortment of im-
ports, such as shipments of batteries from Japan and
poultry from Hungary, have been canceled because of
Angola's inability to pay,
Observa-
tions orroborate press
accounts depicting soaring prices in the black-market
system as well as increased barter of consumer goods
because of shortages and the government's inefficient
and corrupt system of rationing
Perhaps the most severe shortages have occurred in
foodstuffs. Foreign exchange shortages have cut com-
mercial food imports from 192,600 tons in 1985 to
about 120,000 tons in 1986, according to press re-
ports. This has forced the government to seek foreign
aid to meet the food needs of the country's cities, in
addition to the normal food aid long needed in rural
areas. Estimates by the UN Food and Agricultural
Organization put the April-June harvest last year at
about 300,000 tons, compared with about 500,000
tons annually in the mid-1970s. These estimates put
requirements for food imports at nearly 340,000 tons
for the period April 1986-March 1987. Government
officials told a meeting of foreign donors in Luanda in
June 1986 that about 600,000 Angolans were suffer-
ing from hunger and malnutrition, according to press
reports. An emergency assistance plan presented by
Luanda at the meeting included requests for 131,000
tons of cereals as well as $39 million worth of goods,
such as blankets, clothing, and medical support. The
MPLA (Popular Movement for the Liberation of
Angola) government asked the Portuguese Govern-
ment at the end of last year to arrange for the
purchase of 50,000 tons of corn and 30,000 tons of
wheat from the United States or West European
countries, and in June 1987 Angolan officials visited
Maputo to study Mozambique's emergency food as-
sistance nroera
... and the Political Fallout
Growing shortages, particularly of food, have raised
sensitivities among Angolan officials to the possibility
of civil unrest in Luanda and other urban areas. At
the same time, cuts in budget expenditures and
foreign exchange earnings have allowed opposition
elements in the MPLA Central Committee to delay
economic reform, and undermine the positions of
fellow officials who want to increase contact with
Western countries.' Despite the seriousness of these
economically induced problems, however, they do not
threaten the political survival of the MPLA regime, in
our view, and are unlikely to increase Angolan flexi-
bility on key security issues.
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In addition to weighing policies designed to win
greater Western investment and aid, Luanda is toying
with economic reform ideas that, if implemented,
would be aimed at spurring domestic growth. First
considered at policymaking levels by the second
MPLA party congress in December 1985, economic
reform so far has centered around proposals to grant
greater responsibilities to local managers in agricul-
tural and distribution enterprises and to shift invest-
ment away from large state farms toward peasant
farmers. Following the party congress, the land on 13
state farms in Huila Province was distributed among
induced dos Santos to initiate an investigation into
deficiencies in the food rationing system. Moreover,
reporting indicates that
Luanda recently purchased riot control gear from
several European countries. We believe a riot in early
1987 by a religious sect-albeit over noneconomic
grievances-that resulted in more than 50 deaths
probably has heightened concern among senior gov-
ernment officials that similar disturbances could
erupt over economic shortages.
The MPLA's concern with the economic situation has
also been reflected in the recent removal of several
senior government officials
in early May dos Santos fired the
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local farmers, according to press reports.
Government planners are working on a more compre-
hensive program, to be initiated in 1988, that will
include measures designed to achieve financial re-
form, monetary stabilization, and economic recovery,
according to an untested source. Specific proposals
will include:
? Increases in prices to reflect more accurately scarci-
ties of goods for sale and to improve the profitabili-
ty of government corporations.
? Introduction of personal income taxes and of oblig-
atory personal loans to the government, and reduc-
tions in government spending in order to cut budget
deficits.
? Increases in interest rates to encourage saving, and
improvement in accounting procedures and control
over the debt of public corporations.
? Limitation of government credit to not more than
the rate of savings, to limit the growth of the money
supply.
? Passing of management responsibilities from cen-
tral planning ministries to individual enterprises.
? Reservation of transportation, retail commerce,
small and medium industrial and agricultural en-
terprises, and artisan production for the private
sector.
In recent months there have been growing signs that
Angolan leaders have become increasingly concerned
about the potential consequences of severe food short-
ages in the capital. Indeed
food shortages in Luanda have already
misters o Foreign Trade and Internal Trade as
scapegoats for the deteriorating food situation in
Luanda and the countryside. Press reports indicate
that the Transportation Minister was removed in
March because of the poor performance of the distri-
bution system. Economic shortfalls also have fueled
charges of corruption and mismanagement at the
highest level of the government, leading to the remov-
al of the governor and other top officials of the
National Bank of Angola
Officials fired so far have been
technocrats without significant political bases in the
ruling party, and have thus been targets for the senior
party officials actually responsible for economic
affairs.
In our view, economic setbacks and personal rivalries
among key economic ministers have stalled govern-
ment reform efforts aimed at liberalizing the econo-
my. Steep cuts in budget expenditures and foreign
exchange earnings have left the government without
the funds needed to implement many of the reforms.
Sharp differences between the two most senior eco-
nomic czars in the ruling party-Pedro van Dunem
"Loy" and Maria Mambo Cafe-however, have prob-
ably been the primary reason for the stagnation of
economic policy. Although ideological differences
may exist between the tw Cafe
is opposed to economic liberalization-we believe that
the competition is mainly over political power.
the political struggle be-
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competition over the disposal of foreign exchange
available to the regime and over finding sources to
refinance Angola's debts on more favorable terms.
Despite these difficulties in the economic decision
making arena, we believe President dos Santos's
political position is secure.
(that there is consensus within the o it uro
that the MPLA's top priority is a military victory over
UNITA, and that the Soviets and Cubans continue to
back this effort. In addition, continued oil revenues-
even at reduced levels since the oil price decline-
ensure that at least the political elites in Luanda will
remain insulated for the most part from the econom~
hardships in the rest of the country.
Handling the Foreign Payments Angle
The impact of the decline in export earnings is
affecting not only internal conditions but also an
array of external relations. Despite the major cuts in
nonmilitary imports reported by the press, a review of
trade and profit and dividend remittance data sug-
gests that the country's chronic current account defi-
cit has continued to increase. This, in turn, has
generated a number of financial pressures as well as
government attempts to find nontraditional solutions.
Coping With Arrearages
Angola's most pressing financial payments problem
has been its international debt. Despite measures to
conserve foreign exchange, Angola has fallen behind
on scheduled debt repayments to Western creditors.
the National Bank
of Angola promised West European banks early last
year that, despite the decline in foreign exchange
earnings, it would honor short-term credits on time,
make regular payments on commercial bank medium-
term credits, repay all arrears by June 1986 on
government-guaranteed medium-term credits-over-
due since 1985-and in the future fall no more than
five months behind. Nevertheless, Luanda has re-
mained six to eight months in arrears on many short-
term loans. Moreover, the National Bank of Angola
has explained in a series of messages to the export
credit guarantee agencies of Sweden, Italy, Spain,
repayments to five months as promised.
and the Netherlands that it has reduced significantly
its outstanding medium- and long-term guaranteed
obligations, but has been unable to reduce the delay in
Despite these problems, Luanda has been able to
arrange some financial relief. In addition to oil-
related borrowin ress re-
ports indicate that Angola has renegotiated repay-
ment terms for $600 million in overdue debt to Brazil
and Portugal; acquired $185 million in new credits
and a six- to nine-month moratorium on repayment of
principal from Spain; received loans of $140 million
and $100 million, respectively, from Portugal and
East Germany; and won $12 million in insured export
credits from France for food imports.
The government also has a number of arrangements
still in the works that would provide further, albeit
limited, relief. for
example, Luanda is working on a $75 million loan
from Spain for a series of cold storage plants as well
as $20 million in guaranteed credits by French banks
for agricultural goods and services. Senior Angolan
economic officials also are attempting to renegotiate
repayment terms on about $1 billion owed to nine
West European countries-Spain, France, Sweden,
United Kingdom, Belgium, Netherlands, Yugoslavia,
Italy, and Portugal
Using an assortment of bonds and notes guaranteed in
part by future oil deliveries, Angola hopes to bypass
Paris Club rescheduling that would raise pressures to
gain IMF approval. Without these new loans, debt
service would absorb one-fourth to one-third of annual
export earnings through 1990, according to projec-
tions by the National Bank of Angola.
Oil as Collateral
Angola increasingly has tried to obtain new Western
loans and export deals by promising future oil deliver-
ies as collateral. Luanda,
is working on a deal, for example, whereby 2.2
million barrels of Angolan crude will be stored in
Portugal as advance payment for Portuguese exports
to Angola. In another oil collateral deal
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Table 2
Angola: Balance of Payments, 1981-86
Other
76
28
23
37
29
125
Imports
-1,514
-1,123
-990
-1,275 -
1,375
-1,100
Service balance
-423
-633
-660
-787
-885
-900
Capital, medium and long term
237
100
55
203
224
300
Basic balance
-50
-140
21
136
114
-150
Financing
50
140
-21
-136
-114
150
a Data probably exclude military imports.
b Data for 1986 are estimated.
year until 1993
anKnas agree o accep crude and fuel oil export
he French export credit
Cuanza. The Capanda dam, to be designed and built
by a Brazilian company using Soviet construction and
power generation equipment, is Angola's largest non-
oil capital construction project. The government esti-
mates that the dam will cost at least $100 million a
contracts from Angola to finance a $25 million loan to
cover arrearages and to apply against future debts. In
a more ambitious scheme, SONANGOL has tried to
convince the Chevron and Mitsubishi corporations to
put up $75 million worth of non-Angolan oil as partial
collateral for a $200 million loan
To encourage their backing, Angolan
officials claimed the loan would relieve pressure on
Luanda to seek Paris and London Club rescheduling
agreements. The officials argued that such reschedul-
ings would restrict SONANGOL's access to Western
money markets and force it to cut back on joint
ventures with the two companies in Angola.
In another large "oil for finance" deal, Angola is
increasing oil deliveries to Brazil to pay for a planned
$1.2 billion hydroelectric dam at Capanda, on the Rio
delays caused by UNITA attacks on initial construc-
tion of access roads and other support facilities have
already increased costs and delayed work by about
one year. We believe that the dos Santos government
is afraid that canceling or delaying the project would
risk forfeiting as much as $750 million in up-front
payments made for Soviet equipment. As a result,
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Oil Exploration: A Source of Funds
Arrearages have not precluded substantial new bor-
rowing by Luanda and by Western firms for oil
exploration and development in Angola. Western
banks and export credit agencies have approved at
least $650 million in oilfield development loans over
the past several months, and Luanda is completing
negotiations on another $250 million,
? The French export credit insurance agency ap-
proved in January 1987 a $250 million line of
credit by French banks for drilling 15 to 20 new
wells by Chevron in Cabindan offshore fields.
? Angola is completing negotiations for about $250
million in loans to cover its share of development
costs and to restructure payments on earlier loans
for offshore oil development.
? The French oil company Elf-Aquitaine has ap-
proved a $100 million oilfield development loan to
SONANGOL secured by promises of future oil
deliveries as collateral.
? British banks have received approval from Britain's
export credit agency for $300 million in credits for
sales to Angola of machinery and equipment, pri-
marily for the oil industry.
b/d to 30,000 b/d to compensate for the decline in oil
prices and the added cost imposed by UNITA attacks
Other Measures
Luanda also continues to use an array of other
measures to garner hard currency. Government pro-
grams include directives to foreign companies to pay
hard currency for residential rental fees, hotel bills,
and salaries of Angolan employees
Since the oil price fall, the MPLA
Central Committee has suspended hard currency
allocations for foreign travel by Angolan Government
officials, students, and cultural and sport delegations,
according to press accounts. It also has directed
nonmilitary government departments to postpone ex-
penditures and reduce expatriate labor associated
with foreign technical assistance contracts. The gov-
ernment has limited the distribution of ration cards to
Angolan employees of government corporations, thus
forcing private firms, foreign companies, and diplo-
matic offices to pay for imported goods with foreign
exchange
In addition to these piecemeal measures, the govern-
ment has been working to attract greater Western
investment in Angola and to increase Angolan share-
holdings in foreign companies
Angola has conditioned the renew-
a o of eve opment contracts on investment by
foreign oil companies in nonoil-related social services.
Chevron, for example, has agreed to build roads, an
electrical distribution system, a television station, and
new water and sewer systems for Cabinda, and Tex-
aco is developing an agricultural project and training
center
The Military Spillover
Despite the decline in Luanda's foreign exchange
earnings, and thus in its ability to pay hard currency
for military imports, both the USSR and Cuba have
increased military aid flows to Angola. While Bloc
military deliveries have continued apace, growing
arrearages by Angola as oil prices declined generated
considerable pressure on Luanda by Moscow and
especially by Havana to catch up on repayments.'
Evidence of Soviet pressures consists mainly of scat-
tered remarks by Angolan officials about Moscow's
3 Repayment pressures and dissatisfaction with Soviet Bloc trucks
have encouraged Luanda to turn to Brazil for a portion of its
military trucks. Dos Santos approved in March 1986 a $130 million
contract to buy more than 2,000 trucks from Brazil, and cho
Brazil over the USSR in December 1986 t
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unhappiness with tardy payments. Cuban pressure,
however, apparently was more heavyhanded. Last
October, Cuba confiscated an Italian shipment of rice
to Angola, asserting that the rice could serve as
partial payment of Luanda's debt
oreover, a Cuban freight
enterprise operating to and from Angola threatened in
late 1986 to end services unless Luanda paid $1.2
million in freight and charter expenses owed since 1
January 1986. Luanda finally paid this debt in Janu-
Cuba has also pressured Luanda to provide crude oil
as partial compensation for services. Despite objec-
tions by SONANGOL and the Angolan Ministry of
Energy, the Cuban state oil company conducted
negotiations in mid-1986 to sell Angolan oil to firms
from France, Switzerland, and the United Kingdom,
and delivered cargoes of oil during the third quarter of
President dos Santos persuaded Moscow during a visit
in May 1986 to defer further payments on principal to
the USSR until 1989 and to continue interest charges
at 3 percent ngo-
la's inability to stay current on repayments, moreover,
did not discourage Moscow from continuing deliveries
of military equipment, which totaled slightly more
than $1 billion in 1986. As a result, estimates by the
National Bank of Angola indicate that by October
1986 the Soviet portion of Angola's foreign debt had
jumped to $3.3 billion from about $2.1 billion at the
end of 1985
Outlook and Implications
Angola's economic situation is unlikely to improve
significantly through the rest of this year or in 1988,
in our judgment. At prices projected by industry
experts-$17.00 to $17.50 a barrel--oil export earn-
ings will total roughly $1.8 billion in 1987, still
substantially less than the $2 billion earned in the
peak year of 1985. Oil production is projected by the
Angolan Ministry of Petroleum and SONANGOL to
rise about 10 percent-from 280,000 b/d in 1986 to
about 310,000 b/d in 1987, according to industry
data.
Even if oil prices unexpectedly rebound this year or in
1988 to $25 or $30 a barrel, a decline in the pace of
oil exploration, in our view, has undercut Angola's
potential for economic growth. SONANGOL officials
said in January 1987 that they had reduced explora-
tion plans because of financial limitations caused by
low oil prices hese
cuts plus disappointing results rom two large offshore
oil development projects, headed by AGIP of Italy
and PETROBRAS of Brazil, have caused
SONANGOL to cut its projections for oil production
in 1990 from 500,000 b/d to 400,000 b/dr-_
Angola's economic picture is further clouded by the
likely failure of nonoil exports to rise above $100-200
million annually, according to our estimates based on
a variety of reporting. UNITA attacks probably will
thwart efforts to increase diamond production. In-
creases in coffee exports will be small, despite Brazil-
ian aid and a large new concession to a Swiss coffee
firm, because of the five-year maturation period
required by coffee plants. Exports of fish, aided by
Soviet technicians and equipment, also are unlikely to
show further large increases, in our judgment, and
other nonoil exports are unlikely to rise at all. An
Austrian construction company, for example, has
completed rehabilitating iron ore mining and export-
ing facilities at Cassinga that had been closed since
independence, but UNITA attacks on the railroad
link to loading facilities at the port of Namibe will
prevent renewed exports
Debt negotiations, even if successful, will not reduce
problems significantly. We believe that most benefits
will be offset by disruption to transport and distribu-
tion systems caused by insurgent attacks. In addition
to direct damage to farms and crops by UNITA
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2bAl
' See the appendix for a detailed discussion of Angolan payments to
Cuba. (s NF)
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Figure 3
Warsaw Pact Military Deliveries
to Angola, 1982-86
attacks, transport and distribution problems will
cause shortages of imported seed, fertilizer, and ma-
chinery that will stall efforts to expand agriculture.
Manufacturing output will remain depressed by raw
material and spare part shortages, as well as by
management deficiencies. While beneficial in the long
run, the country's two major nonoil foreign invest-
ment projects-the Soviet- and Brazilian-sponsored
Capanda hydroelectric dam and the Brazilian mili-
tary truck repair facility near Luanda-both rely
almost exclusively on imported technicians, workers,
and supplies, and thus will provide very few new
employment opportunities or spur demand for Ango-
lan goods and services for the next few years
The extent of the financial shortfall is reflected in the
skyrocketing budget deficit-from $10 million pro-
jected before the oil price decline in 1986 to $780
million this year-despite a cut in budgeted expendi-
tures from $3.4 billion to $3.1 billion, according to
press reports. We see little prospect, however, that
Luanda will be able to tap domestic and foreign
lenders for sufficient funds to cover the deficit. After
covering military outlays, which probably will equal
or exceed the $1.1 billion budgeted for 1986, Luanda
may be left with little more than $1.2 billion covered
by budgeted revenues for nonmilitary spending.
All of these factors taken together have a number of
serious short-term implications for the economy:
? The expansion of oil production will not be great
enough to offset the negative impact of the UNITA
insurgency on major economic sectors, such as
agriculture, manufacturing, and distribution, and,
as a result, the economy is likely to continue to
contract, or at best stagnate, through 1988.
? Servicing foreign debt will remain a major foreign
exchange drain, and will again become unmanage-
able when the Soviet moratorium on repayments
ends in 1989.
? Growing shortages and hardships, particularly in
Luanda and other urban areas, will increase the
potential for civil unrest.
? Budget and foreign exchange shortfalls, disruption
from UNITA attacks, and opposition among some
government officials will continue to forestall signif-
icant progress on economic reform.
? Growing economic troubles will spur greater efforts
by the dos Santos government to win Western aid
and investment, which may in turn lead the USSR
and Cuba to use their leverage to curtail Luanda's
ties.
Although the government probably will weather these
short-term problems caused by the decline in oil
prices, the array of policies designed to improve longer
term prospects-increased oil production, limited eco-
nomic reform, and greater Western aid and invest-
ment-will prove insufficient to ease economic prob-
lems significantly, in our judgment. We believe that
the costs of fighting the UNITA insurgency-direct
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Top Secret
damage, indirect costs caused by interrupted trans-
port and distribution, and budget drains for military
expenditures-will continue to forestall economic re-
covery
Implications for the United States
Angola's economic problems are unlikely to lead to
increased flexibility on key security and political
issues such as reconciliation with UNITA or Cuban
troop withdrawal. The large Soviet and Cuban mili-
tary inputs over the past several years, which have
bolstered Luanda's military capabilities, have in-
creased its confidence that it can cope with the
insurgency, and will not have to seek reconciliation.
Moreover, Luanda's dependence on Soviet and Cuban
military support makes it vulnerable to pressure from
Moscow and Havana to limit its flexibility on the
issue of Cuban troop withdrawal.
Luanda's desire for Western aid and investment also
is unlikely to lead to greater Western political influ-
ence. Angola's economic problems have significantly
increased the cost to the USSR of its relations with
Angola, and, in our view, Moscow may calculate that
greater Western economic involvement will reduce the
growing Soviet burden. We believe that Moscow will
monitor closely Angola's dealings with the West,
however, and pressure the Angolan officials with
which it has close ties to work against Western gains
in political influence that could undermine Soviet or
Cuban interests.
In our view, additional US economic sanctions on
Angola would have little impact on the economic or
political situation and gain the United States little
additional leverage. In our judgment, new loans from
European banks and export credit agencies and in-
vestment by European oil firms have offset the impact
on Angola of current US commercial restrictions,
such as the ban on US Export-Import Bank credits
and on US company tax exemptions for operations in
Angola. Similar adjustments could be expected if the
United States cut off trade with Angola or forced
Chevron and other US companies to pull out
European or Brazilian oil com-
panies would quickly move in to fill the gap left by
Chevron and Texaco, and European, Asian, and
Brazilian companies would supply equipment current-
ly acquired from US firms.
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Appendix
US and Cuban Interests in
Angolan Oil Production
The interests in Angola of US companies, UNITA,
and Cuba converge on the oil industry:
? US companies account for almost three-fourths of
Angolan oil production and four-fifths of oil exports.
? UNITA President Jonas Savimbi has long seen the
oilfields as a potentially lucrative target in his
campaign against the MPLA, but has inflicted only
minor damage because of UNITA's military weak-
ness in the north where the oilfields are located, its
inability to mount strikes against offshore rigs, and
strong government defenses-manned partially by
Cubans-around onshore oil facilities.'
? The flow of Angolan oil earnings to Cuba in return
for military support provides a significant source of
hard currency for Havana.
Following are industry data on the physical distribu-
tion and ownership setup of the Angolan oil industry,
and our estimates
of Angolan foreign exchange earnings from US
companies and hard currency payments to Cuba.
Geographic and Ownership Features
Angola's oil wells are concentrated in three areas,
according to oil industry data:
? Approximately 200 Chevron-Gulf wells in nine oil-
fields off the coast of Angola's exclave of Cabinda
exported about 200,000 b/d in 1986 through the
Malongo and Takula loading terminals.
? About 15 wells operated by Texaco and by Elf-
Aquitaine (French) in three oilfields off the north-
western coast of the Angolan mainland (about 230
kilometers northwest of Luanda) exported roughly
50,000 b/d in 1986 through the Quinfuquena and
Palanco terminals.
? Over 80 small, onshore Petrofina (Belgian) wells in
northwestern Angola and around Luanda produced
about 30,000 b/d in 1986, which were processed for
domestic consumption and bunkering ships by the
country's only refinery near Luanda.
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SONANGOL controls exploration and production
through a combination of joint-venture agreements
with companies that were operating before indepen-
dence in 1975 and production-sharing agreements
with companies that have begun operation since inde-
pendence. SONANGOL is a 51-percent participant
in joint ventures, and shares that percentage of invest- 25X1
ment expenses and petroleum output with its partners.
In production-sharing agreements, foreign companies
serve as contractors to SONANGOL, make the nec-
essary investments, and are compensated by shares of 25X1
proceeds from oil sales: 25X1
? The most important joint-venture agreement is with 25X1
Cabinda Gulf Oil Co. (CABGOC)-now owned by
Chevron-for Cabinda's offshore operations. Other
joint ventures are with Petrofina for onshore
production.
Marathon, and Conoco.
? Elf-Aquitaine and Texaco are the operating compa-
nies in production-sharing agreements for the two
producing offshore areas outside Cabinda. Other
members of these two consortiums and of other
exploration groups with production-sharing agree-
ments include AGIP (Italy), Petrogal and Braspetro
(Brazil), Total (France), Mitsubishi (Japan), British
Petroleum, Inanaftaplin and Naftagas (Yugoslavia),
Hispanoil (Spain), Svenska (Sweden), Cities Service,
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Figure 4
Angolan Petroleum Facilities and Oilfields
South
Atlantic
Ocean
Oilfield
Oil pipeline
.rim Oil terminal
Petroleum
refinery
0 50 Kilometers
0 50 Miles
7Ambriz
M'banza Congo
South
Atlantic
Ocean
Area of
main map
Indian
Ocean
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Four development projects by CABGOC will bring
Cabinda's offshore production to about 230,000 b/d
by mid-1988
? An artificial lift platform at Takula field will
become operational in the fourth quarter of 1987.
? A production platform at a new field, called Numbi,
will be completed by the first quarter of 1988.
Production at Numbi is expected to peak at 65,000
b/d.
? A production platform at Wamba field, producing
15,000 b/d, will be completed in mid-1988.
? A water injection platform at Takula will be com-
pleted by late 1988.
Development by Texaco and Elf-Aquitaine will push
non-Cabindan offshore production to about 110,000
b/d by mid-1988.
Foreign Exchange From US Oil Companies
Chevron and Texaco are the only producing US oil
companies in Angola. Other US oil companies
there-Cities Service, Marathon, and Conoco-are
involved in exploration in offshore Angolan waters but
have not yet struck oil. Although we do not have hard
data on payments by US companies to the Angolan
Government, we believe that Angolan revenues come
exclusively from production and exports. Angola ap-
parently does not tax nrosoecting activities by foreign
companies.
Operations by Chevron from offshore wells owned
jointly with the Angolan Government yielded about
200,000 b/d in 1986, about 70 percent of total
Angolan production and 80 percent of oil exports.
Production by Texaco, in partnership with a Brazilian
company and the Government of Angola, equaled less
than 10,000 b/d.
We estimate that hard currency paid directly by
Chevron and Texaco to the Angolan Government in
royalties and fees totaled about $400-500 million in
1986, mainly from Chevron. In addition, Angola
earned about $500-525 million in hard currency from
sales of its share of oil produced by Chevron and
Texaco.' We arrived at these estimates as follows:
6 Angola also earned about $300 million-minus operating fees-
from oil produced by a consortium of companies headed by the
French oil firm Elf-Aquitaine-]
? Chevron and the Angolan Government divide their
oil production roughly in half-about 100,000 b/d
to each partner, according to the terms of their 25X1
partnership agreement. We assumed that Chevron
paid Angola at world average prices-$15.35 per
barrel-minus an operating fee reported by a reli-
able source to equal $2.00 a barrel. (100,000 b/d X
365 days X $13.35 per barrel = $487 million.)
? Angola sold its half of Chevron production for about
$14 a barrel, according to our estimates. (100,000
b/d X 365 days X $14.00 per barrel = $511
million.)
? Under the terms of a production-sharing agreement,
we believe that Angola sells all oil produced by 25X1
Texaco-10,000 b/d-and pays Texaco and its
Brazilian partner a fixed fee for costs, estimated at
$10 a barrel, plus an estimated one-third of any
earnings in excess of $10 a barrel. (10,000 b/d X
365 days X [$14 per barrel - $10 costs X 70
percent] = $10 million.)
Angola's hard currency o igations for the 37,500
Cuban military troops and 6,000 civilian technicians
there equal roughly $300 million annually, about 25X1
$150 million for each group.6 Althoug 25X1
figures ranging from 25X1
zero to $700 million annually for Angolan payments
to Cuba, we have chosen
the most credible because of their specific mention of
hard currency payments-as opposed to costs in local
we estimate that 25X1
currency-and their accordance with our judgments
about what annual costs would most likely run- 25X1
about $25,000 per man for civilian engineers, doctors,
and technicians, and $4,000 per man for combat
troops:
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Angola paid Cuba $15.6 million a
6 In addition, we estimate that Angolan expenditures in local
currency to defray the cost of Cuban combat troops total about
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month-$187 million a year-for military and
civilian aid and materiel, and that Havana insisted
on payment in US dollars.
ed that Angola paid Cuba million annually in
foreign exchange for commercial transactions and
military and civilian cooperation.
? Th
Angola paid $2,000 per
man per month for Cuban civilian technicians-
about $144 million annually for the estimated 6,000
technicians there.
? Angolan payments to Cuba were estimated by
Western bankers in early 1987 at $150-175 million
per year, about $4,000 per year for each of the
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that Angola is incurring hard currency obligations to
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to our estimate of $300 million.
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