Angola's cabinet recently cut the proposed 2015 budget spending by 1.8 trillion kwanza ($17 billion) to 5.4 trillion kwanza ($51 billion) after slashing expected oil revenues.
Oil accounts for about half of Angola's GDP, 80 percent of tax revenues and 90 percent of export earnings.
The revised budget figures were based on an oil price of $40 per barrel down from, the previously forecast, $81.
State-owned news agency, Angop reports that the revised plan forecasts a budget deficit of 7 percent of GDP, a shortfall that could be partially covered by Angola's $26 billion in foreign exchange reserves.
This was the first time Angola had posted a deficit since 2009.
The Standard & Poor’s rating agency (S&P) had since downgraded its credit rating of Angola’s debt in foreign currency from “BB-” to “B+” although it maintained a stable outlook.
It said in a statement that the cut in Angola’s credit rating was due to the impact felt in the economy from the drop in the price of oil and consequent reduction in tax revenue.
S&P was expecting Angola’s deficit to experience significant deterioration, reaching 5 percent on average, between now and 2017.
“When we looked at Angola in August 2014, we predicted the price of Brent crude oil would stand at $105 in 2015 and US$100 from 2015 to 2018,” S&P’s statement said.
“We now expect that the price per barrel will be $55 in 2015 and $70 between 2015 and 2018, so we have revised forecasts for Angola’s main macroeconomic aggregates.”
The International Monetary Fund (IMF) head of a mission Ricardo Velloso said although Luanda’s proposal to revise the state budget was “timely and fast”, it experience a “tough period” this year, as a result of the drop in the price of oil per barrel.
He said the economy needed to be adjusted tax-wise.
The IMF also suggested recently the elimination of state subsidies on gasoline and the phased reduction by 2020 of subsidies on other fuels to offset the effects of the decline in oil prices on the Angolan economy.
The falling oil prices came at a time Angola had been pushing for the diversification of the economy.
Reliance on oil for economic growth had long been seen as a ticking time bomb, hence the need to expand the mining industry, specifically the diamond sector.
Angola produced 8.75 million carats of diamonds last year realizing about $1.3 billion in revenue.
Diamonds and oil alone helped the country record a double-digit growth in GDP annually between 2002 and 2008.
The average annual growth had been 17 percent in the last five years.
Angola’s most advanced mine at the moment is Catoca, which produces 63 percent of the country’s gems in terms of value.
It was regarded as the fourth largest kimberlite pipe in the world.
New diamond operations, for example Lucapa’s Lulo project would come on stream soon, and this was expected to help boost output and revenue.
As Angola come face-to-face with the dangers of plummeting oil prices, Botswana should be reminded that its overreliance on diamonds as a source of revenue was equally dangerous.
Diamonds accounted for 80 percent of Botswana’s exports and 30 percent of the gross domestic product.
The country was not new to this experience, though.
The 2008-2009 global economic meltdown sent a tremor to the country’s economy as weak economies of the U.S and Europe, two of the main export markets for Botswana diamond production, slowed growth in the country.
As a result of that, Botswana started talking about the need to reduce reliance on diamond revenue.
Gaborone noted at the time that it was aiming to develop production of non-core minerals, including copper, gold and nickel.
However, apart from the steady growth of the coal sector, there hasn’t been much movement as far as this diversification is concerned.
Botswana has an estimated coal resource of 212 billion tonnes.
Therefore, developments in Angola offers a clarion call for Botswana to take the diversification of the economy seriously.
Mathew Nyaungwa, Editor in Chief of the African Bureau, Rough&Polished
