69643 MAIN REPORT Public Disclosure Authorized Angola: Diagnostic Trade Integration Study Public Disclosure Authorized Public Disclosure Authorized SUBMITTED TO World Bank USAID Public Disclosure Authorized SUBMITTED BY Nathan Associates Inc. UNDER CONTRACT NO. World Bank 7134881 USAID PCE-I-00-98-00016-00 www.nathaninc.com Task Order 13 September 2006 MAIN REPORT Angola: Diagnostic Trade Integration Study SUBMITTED TO World Bank USAID SUBMITTED BY Nathan Associates Inc. UNDER CONTRACT NO. World Bank 7134881 USAID PCE-I-00-98-00016-00 Task Order 13 September 2006 Contents Acronyms and Abbreviations vii 1. Introduction 1 Rationale for the Study 1 Socioeconomic Context and Recent Economic History 2 Growth and Internal Balance 4 Subsidies and Price Controls 6 External Sector 6 2. Trade and Poverty 13 Export Production and Poverty 13 Inequality, Rural Poverty, and Agriculture 15 Urban Poverty 17 Poverty Reduction, Economic Growth, and Trade Expansion 17 3. Oil and Macroeconomic Incentives 19 Oil Dependence and Real Exchange Rate 19 Rehabilitation of Angolan Production of Tradable Goods 22 4. Infrastructure and Public Services 25 Transport 26 Water, Electricity, and Telecommunications 34 5. Trade Institutions and Capacity 37 Trade Agreements and Preferential Access Arrangements 38 IV CONTENTS Trade-related Institutions and Capacity Building 42 Recommendations for Strengthening Trade Institutions and Processes 51 6. Trade Barriers 59 Tariffs 59 Nontariff Measures 62 Export Incentives 70 7. Trade Facilitation 71 Customs Administration 71 Registration and Documentation Requirements 73 Trade Financing 75 8. Private Sector Development 77 Infrastructure 78 Foreign Direct Investment 79 Credit and Banking System 83 Investment Promotion 85 Privatization 87 Intellectual and Industrial Property Rights 87 Environmental Protection 88 9. Potential of Key Sectors 89 Agriculture 89 Manufacturing 102 Tourism 112 Fisheries 120 10. Donor Assistance 133 ILLUSTRATIONS Figures Figure 1-1. Composition of Angolan Exports in 1972 and in 2001-2003 (average) 3 Figure 1-2. Kwanza–U.S. Dollar Exchange Rate 7 CONTENTS V Figure 1-3. Main Export Partners, 1990-2003 10 Figure 1-4. Main Import Partners, 1990-2003 10 Figure 3-1. Real Kwanza–U.S. Dollar Exchange Rate 20 Figure 6-1. Breakdown of Applied MFN Duties, 2005 60 Figure 6-2. Tariff Escalation by ISIC Two-Digit Industry 61 Figure 8-1. Importance of Informal Employment in the Urban Economy 77 Figure 9-1. Historical Production of Major Crops 1960–2003 90 Tables Table 1-1. Composition of GDP by Sector, 1966–2004 3 Table 1-2. Selected Economic Indicators, 1998-2004 5 Table 1-3. Trends in Merchandise Trade 9 Table 1-4. Customs Revenues 2003-2005 (in US$) 11 Table 2-1. Basic Poverty and Social Indicators, 2004 14 Table 3-1. Mineral Income as Percent of Government Revenue and GDP in Mineral Exporting Countries 19 Table 4-1. SADC Infrastructure Indicators, by Human Development Rank 26 Table 4-2. Condition of the Paved Road Network 27 Table 4-3. Rail Rolling Stock by Company 30 Table 9-1. Angola Food Balance Sheet, Crop Year 2002-2003, Marketing Year 2003-2004 92 Table 9-2. Yield per Hectare (kg) 96 Table 9-3. Comparative Yields for Key Crops, 2003 99 Table 9-4. Manufacturing in Relation to Other Sectors 1996—2004 (percent) 103 Table 9-5. Registered Manufacturing Units by Subsector, September 2005 104 Table 9-6. Output of Manufacturing Units by Subsector, January-September 2005 105 Table 9-7. Tourism’s Gross Revenues in 2004 (US$ million) 116 Table 9-8. Tourism Master Plan Programs and Projects 118 Table 9-9. Annual Supply of Fish to the Domestic Market, 1989 and 2003-2004 122 Table 9-10. Employment in Fisheries by Type of Entity, 1989 and 2003-2004 122 Table 9-11. Exports of Principal Fish and Fisheries Products, 2004-2005 124 Table 9-12. Processed Fish Products (tons) 124 Table 10-1. Development Assistance to Angola from Major Donors 134 Exhibits Exhibit 3-1. Maintaining Non-oil Exports in Oil-rich Countries:: Lessons from Nigeria and Indonesia 21 Exhibit 5-1. Trade-related Training in Angola 55 Exhibit 6-1. Import Duties, Effective Rate of Protection, and Economic Efficiency 63 Exhibit 8-1. Doing Business Scores, 2006 82 Exhibit 9-1. Tourism Sector Strengths, Weaknesses, Opportunities, and Threats 117 Acronyms and Abbreviations AfDB African Development Bank AGOA Africa Growth and Opportunity Act ANIP Agência Nacional de Investimentos Privados BIVAC Bureau of Inspection Valuation Assessment & Control BNA Banco Nacional de Angola CEMP Customs Expansion and Modernization Program DFID Department for International Development (UK) DTIS Diagnostic Trade Integration Study ECP Estratégia de Combate à Pobreza EDA Estacao de Desenvolvimento Agrario EDEL Empresa de Distribuição de Electricidade de Luanda EITI Extractive Industries Transparency Initiative ENAMA Emresa Nacional Angolana de Mecanizacao Agricola ENDIAMA Empresa de Diamantes de Angola ENE Empresa Nacional de Electricidade EPA Economic Partnership Agreement EPAL Empresa Pública de Águas de Luanda EU European Union FAO Food and Agriculture Organization FAS Fundo de Acção Social FDES Fundo de Desenvolvimento Económico e Social FDI foreign direct investment GATT General Agreement on Tariffs and Trade GEPE Directorate of Planning and Studies GDP gross domestic product GSA Gabinete de Seguranca Alimentar GII Directorate for International Interchange IIA Instituto de Investigacao Agronomica IANORQ Insituto Angolano de Normalizaco e Qualidade IDR Inquérito de Despesas e Receitas IMF International Monetary Fund VIII ACRONYMS AND ABBREVIATIONS INCA Instituto Nacional do Cafe INE Instituto Nacional de Estatísticas IPZ industrial processing zone ISO International Standards Organization ISPS International Ship and Port Facility Security MECANAGRO State Agricultural Machinery Company MFN most favored nation MICS Multiple Indicator Cluster Survey MINADER Ministry of Agriculture and Rural Development MOC Ministry of Commerce MPLA Movimento Popular para a Libertação de Angola NEPAD New Partnership for Africa’s Development OECD Organization for Economic Development and Cooperation OPEC Organization of Petroleum Exporting Countries SADC Southern African Development Community SSA sub-Saharan Africa TBT technical barriers to trade TRIPS Trade Related Intellectual Property Rights UNDP United Nations Development Program UNITA União Nacional para a Independência Total de Angola WHO World Health Organization WTO World Trade Organization 1. Introduction Rationale for the Study The primary goal of this Diagnostic Trade Integration Study (DTIS) is to provide a plan for reactivating Angola’s productive sectors that reduces the country’s reliance on imports while enabling the restoration of export capacity in the medium to long term. Executing such a plan will involve investing in the rehabilitation of infrastructure destroyed by war and making and adjusting policies that affect the institutional underpinnings of a market economy, as well as incentives for exporting and importing. This goal is inextricably linked with the overriding need to create jobs and alleviate poverty identified in the government of Angola’s long-term poverty reduction plan, the Estrategia de Combate a Pobreza (ECP). This study Evaluates Angola’s trade performance and identifies sectors that hold promise for rehabilitation; Identifies weaknesses in the trade policy environment—tariff structure, nontariff measures, export incentives, customs administration, trade facilitation--and suggests measures to improve that environment; Describes how the relationship between oil-induced macroeconomic distortions identified in the World Bank’s Country Economic Memorandum (forthcoming) and the rehabilitation of productive sectors will influence the extent to which Angola can reactivate domestic production in the short term and export nonmineral goods in the medium to long term; Describes the extent to which reactivation of investment and production in trade-related sectors will depend on infrastructure rehabilitation and rebuilding, as well as improvements in the business environment; Describes what the agriculture, manufacturing, tourism, and fisheries sectors will need to achieve their potential; Identifies how Angola can better use its involvement in regional and international trade agreements to increase trade-related growth. 2 ANGOLA DIAGNOSTIC TRADE INTEGRATION STUDY Identifies institutional constraints on trade, including institutional linkages and authorities, and the capacity of entities to formulate and implement trade policy; and Describes how growth in trade-related sectors can alleviate poverty (i.e., how reactivating production in trade-exposed sectors such as agriculture can boost the incomes of the poor). Socioeconomic Context and Recent Economic History With a natural resource base that can support a wide range of economic activities, Angola has the capacity to be an exemplar of economic success in Africa. With a total territory of 1,246,700 square km and a population of 15 million, it is sparsely populated. Abundant arable land, much of it uncultivated, is capable of supporting rainfed agriculture, and variations in altitude permit the growth of tropical and temperate zone crops. Known for its oil and diamonds, Angola has other mineral resources as well, such as iron, quartz, ornamental stones, and phosphates. It is likely that more minerals will be discovered when the country’s mineral potential is fully explored.1 As a colony of Portugal, for nearly 500 years Angola served the needs of Portugal.