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V. Expenditure Discrepancies

While the Oil Diagnostic shed light on how laws were flouted, how the central bank did not really know how much revenue was generated through oil production, how much the government was entitled to receive, and where missing funds might have been diverted, it did not examine expenditures since that was not part of KPMG’s terms of reference for the Oil Diagnostic. However, the IMF elsewhere has examined how the government spent its money, most recently in its sharply critical March 2002 and July 2003 annual staff reports on the Angolan economy. The IMF determined that the government could not account for more than four billion dollars of public funds from 1997-2002 and attributed this loss of funds to mismanagement, the government’s refusal to provide accurate information on those expenditures, and corruption.

The IMF concluded that from 1997-2002, the Angolan government could not account for about U.S.$4.2 billion in expenditures—an average of about U.S.$703 million, or about 9.25 percent of the country’s GDP, per year.64 The scale of discrepancies is staggering. For example, if 9.25 percent of the U.S. GDP “disappeared” in 2002, the loss would total approximately U.S.$966 billion.65 The IMF noted that the lack of transparency and accountability over the use of funds was the main obstacle to greater humanitarian relief and social development. It rejected the government’s argument that excessive opaqueness, mismanagement, and a failure to fully implement reforms were caused by a lack of capacity, but instead concluded that they were due to lack of political will.66

The March 2002 and July 2003 IMF Staff Reports

Every year, the IMF conducts a visit to its member countries to examine the state of the economy and discuss issues with the relevant government officials. Following those consultations, the IMF releases a “Staff Report” that details the state of the economy, the content of policy discussions, and recommendations to the government. Over the last few years, those reports usually have been made public. However, governments must authorize their public release and sometimes choose to keep them confidential because they believe that the information is sensitive. Although the government of Angola had allowed the release of prior staff reports, it chose to keep the highly critical March 2002 staff report confidential, thereby avoiding public scrutiny or criticism.67 The government did agree to publish the July 2003 Staff Report. That report and its related appendix was made public on September 10, 2003. However, the July 2003 report was not as overtly critical of the government and did not highlight the problems of poor governance and corruption to the same extent as the prior report. But it did not say that the government’s performance had improved. It noted that the economic and humanitarian situation was fundamentally unchanged and the government had not implemented major reforms. In effect, the analysis and conclusions from the March 2002 report were still applicable in 2003. Human Rights Watch, however, has obtained copies of the March 2002 report and the July 2003 statistical appendix.

Prior public releases by the IMF had indicated that reforms were not on track and many steps were not implemented. But the March 2002 IMF staff report went much further and was scathing in its criticism of the Angolan government. The Fund found numerous problems with the government’s management of the economy generally and oil revenues in particular. The Fund concluded that despite the IMF’s efforts, the government was largely unwilling to implement reforms and become more transparent. It described a secretive government that sent large sums to offshore accounts free from public scrutiny. Such shortcomings further undermined the economy, hindered poverty-alleviation, and contributed to widespread corruption. As the IMF’s March 2002 report phrased it:

Frequent dialogue with the authorities [the Angolan government] and significant technical assistance in recent years has yielded little progress in the key areas of governance and transparency. There is virtually no public information on fiscal and external borrowing, the state-owned oil company manages the country’s oil-related receipts through a web of opaque offshore accounts, the central bank and other public companies suffer from poor internal controls and large operational deficits, and the weakness of basic economic data hampers the design and monitoring of a macroeconomic program. It would be very difficult for Angola to formulate a meaningful poverty reduction strategy without addressing these and other transparency and governance-related problems.68

The government often claimed that the main impediments to reform were lack of capacity and war, which restricted access to many parts of the country, diverted resources away from social expenditures and towards defense, and led to the destruction of infrastructure. In one case, Aguinaldo Jaime, the then central bank Governor and currently deputy prime minister, even claimed that “global warming” led to massive destruction of infrastructure that required substantial funds to rebuild.69 Governmental capacity and war—much less global warming—however, could not explain lack of transparency, something firmly within the government’s control: nothing prevented the government from maintaining accurate accounts or publishing them. The IMF thus concluded that the principal impediment was a lack of political will, stating: “Transparency enhancements, initially in the provision of information and data, would be the first step in designing a new SMP. Such a step requires political commitment, much more than it does technical assistance.”70

Missing Funds

Perhaps the most disturbing disclosure by the IMF in its March 2002 and July 2003 reports was the sheer size of unaccounted for funds, which it describes as “discrepancies,” in government expenditures. The report included a stark account of how much money had been spent for unexplained purposes and were effectively missing. Contrary to some public reports, the amount was not exactly U.S. $1 billion per year for the prior five years, but had varied with the year.71 Nevertheless, the total amount of lost funds was substantial. It totaled about U.S.$ 703 million per year from 1997 to 2002, or about 9.25 percent of the country’s GDP.72

In Angola, the largest discrepancies occurred in 1997 and 1999, when unaccounted for monies totaled nearly U.S.$1.8 billion (23.1 percent of GDP) and more than U.S.$1.1 billion (18.4 percent of GDP), respectively.73 The IMF defined discrepancies as “recorded inflows (revenue and financing) in excess of all recorded (i.e. including recorded extrabudgetary outlays) expenditures.”74 These funds were spent, but basically “disappeared” since the government could not, or would not, account for how they were spent. These expenditures were categorically different from expenditures that were “unclassified”. Unclassified funds were determined to have been spent legitimately, but were not properly classified. Discrepancies, however, were largely missing funds. The IMF believed that some of the money was spent for legitimate purposes, but some was also lost to corruption.75 Such expenditures further damaged the already precarious economy and contributed to very high levels of deficit spending. The following table illustrates the IMF’s findings:

Table 8: Angolan Government’s Unexplained Expenditure Discrepancies 1997-200276

Year

1997

1998

1999

2000

2001

2002

TOTAL

Total Government Expenditures (U.S.$ Millions)

4,966

2,771

5,016

5,387

4,383

5,370

27,893

Discrepancy (U.S.$ millions)

1,775

34

1,119

407

540

347

4,222

Discrepancy (% Government Expenditures)

35.7

1.23

22.3

7.56

12.3

6.46

Discrepancy (% GDP)

23.1

0.6

18.4

4.6

5.7

3.1

Average Discrepancy 1997-2002 (U.S.$ millions)

703.6

Average Discrepancy 1997-2002 (% Government Expenditures)

15.14

Average Discrepancy 1997-2002 (% GDP)

9.25

It is possible that the actual discrepancies were far more than the IMF estimated because the IMF included in its calculations “ex post” extrabudgetary expenditures for goods and services, even though the uses of such expenditures were not fully explained. These expenditures were in addition to the discrepancies above. The government provided accounts of such extrabudgetary expenditures sometimes months after the IMF had requested explanations for them,77 and the IMF noted that the “total amount and nature of these expenditures had not been fully identified.”78 The following table shows the amount of these expenditures from 1997 to 2001:

Table 9: Ex Post Extrabudgetary Expenditures for Goods and Services 1997-2001 (U.S.$ millions) 79

1997

1998

1999

2000

2001

TOTAL

980

566

1,290

1,062

205

4,103

The IMF believed that some of these funds were actually spent on goods and services, but the government’s inability to adequately account for them also created suspicions of mismanagement and potential corruption.80

Inadequate Record Keeping

The government’s failure to account for missing funds also stems from the government’s failure to keep accurate records of its revenues and expenditures. In this context, even if the government decided to fully disclose information, it would not necessarily meet public needs, since its own record keeping is so poor. It is possible to determine that funds are missing and that there are major discrepancies in government accounts, but without an audit, it is very difficult to determine exactly how public funds were spent. Historically, major corruption scandals have been uncovered by foreign law enforcement agencies, such as the Swiss or French (see section VI below).

This failure to keep records and disclose information is part of the reason why the Oil Diagnostic and the still-confidential IMF Staff Report are so critical: they provide some meaningful insight into the use of public funds. An even more meaningful step would be conducting an audit of major government institutions—Sonangol, the Ministry of Finance, and the central bank (the Banco Nacional de Angola, or BNA)—and making the results public.

The BNA has been audited by Ernst & Young and it found that widespread mismanagement plagues the institution.81 But since much of Sonangol’s revenue bypasses the BNA, a full audit of that institution alone would not enable Angolans to exercise their right to information. For example, KPMG in the July 2003 Oil Diagnostic Executive Summary noted that:

The Consultants [KPMG] also had access to the Relatَrio de Revisao Limitada ao Balanço da Sonangol (Report on the Limited Revision to Sonangol's Balance Sheet) and concluded that, due to scope limitations, the external auditors could not perform an audit in conformity with the international accounting standards (IAS). One of the main results of the scope limitation was that no auditor could voice an opinion on this accounting giving or not a true and just picture of the financial status of the Sonangol Group. It is important that the readers be aware of this limitation.82

The government has only agreed to “limited reviews” of Sonangol and perhaps audits by at some point in the future.83 Given these problems, transparency and accountability over the use of public funds in Angola requires both disclosure and affirmative measures to discern the amount and use of funds. The Oil Diagnostic and IMF Staff Reports were first steps towards greater transparency, but much more is needed.

Indications of Corruption

The World Bank and Transparency International generally define corruption as “the abuse of public office for private gain.” The World Bank notes that this definition includes situations when “public officials accept, solicit, or extort bribes; and when private actors offer bribes to subvert or circumvent public policies for competitive advantage and profit.” Corruption can also occur in the absence of bribes. For example, the World Bank considers patronage or nepotism by government officials, theft of state assets, or diverting state revenues as corruption.84

The World Bank also distinguishes between two forms of corruption: state capture and administrative corruption. State capture is defined as the “actions of individuals, groups, or firms in both the public and private sectors to influence the formation of laws, regulations, decrees, and other government policies (i.e., the basic rules of the game) to their own advantage by means of the illicit and non-transparent provision of private benefits to public officials.”85 Administrative corruption involves changing or altering the implementation of existing laws, rules, and regulations to “provide advantages to either state or non-state actors as a result of the illicit and non-transparent provision of private gain to public officials.” In this case, state officials can “simply misdirect public funds under their control for their own or their family’s direct financial benefit.”86

Corruption has a corrosive impact on human rights. It facilitates violations of human rights and can impede accountability for such violations. Corruption can contribute to civil and political rights violations such as torture, ill-treatment, and arbitrary detention because officials sometimes use such means to extort bribes. Corruption can also undermine the judiciary: equal treatment under the law can be manipulated or ignored if officials exploit their positions for personal gain. Freedom of information is undermined when corrupt officials impede the flow of information. Where there is a significant financial incentive to hold onto power and officials use corrupt means to resist democratization, corruption can undermine the ability of individuals to choose their government and participate in elections.

The diversion of funds from institutions or activities that can improve or protect human rights is another negative consequence of corruption. Where it leads to underfunding of hospitals, schools, and other essentials services, diversion of funds can prevent or impede the progressive realization of economic, social, and cultural rights.

Human Rights Watch believes that when corruption or gross mismanagement of funds contribute to human rights violations or prevent improvements in human rights, they must be addressed as part of efforts to improve human rights practices. As in this report, Human Rights Watch believes it important to document such linkages.

In Angola, corruption appears to be a persistent problem, and the IMF concluded that corruption played a substantial role in the discrepancies noted in its reports. While not all of the unexplained discrepancies could be attributed to corruption, there were signs that corruption was a major factor. The IMF highlighted Angola’s declining living standards when it cited a 2000-2001 confidential Angolan Ministry of Planning study that found “the percentage of households living under the poverty line and that in extreme poverty have increased since a similar survey was carried out in 1995.” While poverty levels increased, the IMF reported that expenditures of the richest 10 percent of Angolans had increased during the same period and led to a wider gap in income inequality.87 The IMF went further and described the specific types of corruption present in Angola:

Cross-country analyses have shown a strong positive correlation between, on the one hand, easily appropriable rents arising from the exploitation of mineral resources and, on the other, higher levels of corruption, slower economic growth, and higher poverty rates…In a recent survey by a local organization…among a panel of Luanda residents (including parliamentarians), the majority of those interviewed identified corruption in Angola as a “systemic problem” affecting all level of society, particularly “the top political and administrative hierarchies…”

Petty corruption is widespread in Angola. Typical examples involve cases of civil servants receiving a “facilitation fee” in exchange for the processing of applications or licenses, as well as widely reported incidents involving the economic police, in which it extracts bribes from small businesses in the process of verifying compliance with operating licenses and “profit” margins. On a larger scale, corruption involves monopolistic practices maintained by political access and public banks engaging in connected lending (to companies where there was no expectation of repayment or to nonexistent ones) that eventually necessitates bailouts from the treasury.

A general lack of transparency in public finances—with scant data being officially published and a complex set of offshore finances—has generated the perception of a poorly managed treasury…substantial funds received as signature bonuses for oil contracts and oil royalties have been outside the control of the treasury; and nontransparent external debt transactions have been made.88

The IMF highlighted two oil-related transactions that raised suspicions of corruption. The first was the government’s underreporting of a U.S.$400 million signature bonus payment for Block 34 and the second was a questionable series of transactions to repay Russian debt that led to Swiss authorities freezing U.S.$750 million in Angolan funds deposited in Swiss banks. 89 A corruption trial in France also raised suspicions of widespread corruption (see Section VI below for more details on these three cases).

In August 2002, Transparency International (TI), the anti-corruption organization, ranked Angola 98th out of 102 countries in its Corruption Perceptions Index (1 being the least corrupt and 102 the most corrupt country). The TI survey also ranks countries on a scale of one to ten, where one is the most corrupt and ten the least. The ten-point scale is a statistical calculation of a country’s score based on the twelve in-depth data sources TI draws upon to formulate its Index.90 Angola received a score of 1.7 (+/-.4).91 Based on the TI ten-point scale, the IMF noted that even a slight improvement in Angola could have a significant impact on education, health, income inequality, and child mortality, among other areas of government expenditure. It said that a “one-point increase in the transparency scale would leave Angola with an estimated level of corruption still higher than in most of its neighboring countries. The benefits would likely increase if Angola were to achieve greater improvement along the transparency scale.” 92 For example, the IMF estimated that a one-point decrease on the TI corruption scale—improving from 1.7 to 2.7, for example—could increase annual expenditures by 0.7-0.9 percent of GDP for education; 0.6-1.7 percent of GDP for public health; could reduce the infant mortality rate by 1.1-2.7 deaths per 1,000 births; and could annually improve the income of the lowest 20 percent of Angolans by 1-1.5 percent of GDP.93

Increasing those expenditures would have a positive impact on the population. A 0.7-0.9 percent GDP increase in funding for education would add approximately U.S.$77-$99 million per year.94 According to a recent UNICEF study, the country faces an acute shortage of primary school teachers. The government reportedly budgeted U.S.$40 million in 2003 to pay for approximately 29,000 teachers, some of whom would have to be recruited and trained. Adding U.S.$77-$99 million to the education budget would facilitate the hiring of additional teachers and further improvements in education.95 Similarly, a 0.6 to 1.7 percent increase in health spending would equal approximately U.S.$66-$187 million in additional funds. In 2002, Angola spent approximately U.S.$213 million on health, so an increase of U.S.$66 million to U.S.$187 million could have a substantial impact on improving Angolans’ healthcare. 96

The Economist Intelligence Unit (EIU) raised more suspicions of corruption in its February 2003 quarterly report when it published information about Angola’s wealthiest people. The EIU reported that there were thirty-nine individuals worth at least U.S.$50 million in Angola and another twenty reportedly worth at least U.S.$100 million. Six of the seven wealthiest people on the EIU’s list were longtime government officials, while the seventh had only left longstanding government service about two years earlier. Overall, the combined wealth of these fifty-nine people was at least U.S.$3.95 billion.97 By comparison, the total GDP of Angola with a population of about 13 million was approximately U.S.$10.2 billion in 2002.98

War as an Impediment to Economic Reform

Angolan officials have long maintained that war was themajor impediment to economic reform. For example, in August 1998, shortly before the country resumed a state of all out war, Emmanuel Carneiro, the former Minister of Planning, said:

[T]he last few months have brought increasing violent actions by UNITA... Not only do such actions set the peace process back, they also hamper economic reconstruction efforts and impede economic activity.99

A few years later, Aguinaldo Jaime, the then central bank Governor and current Deputy Prime Minister also held the war as partly responsible for the slow pace of reforms. He said:

[T]he rebellion took their actions close to some urban areas. The need to strengthen security around those areas implied the allocation of additional financial resources beyond the framework of the program. As a result government expenditure is likely to be out of target by the end of program period.100

It is true that war required significant expenditure and much of Angola’s infrastructure was degraded or destroyed because of the war. Landmines, displacement, and lack of government control over key areas of the country also impeded economic diversification and development. However, the war would not have prevented increased transparency by the government or investment in programs to improve respect for human rights in areas under government control; nor would it have affected the oil sector since virtually all of the oil industry was offshore.

Angola was not under any embargoes during the 1990s and afterwards. The government often has claimed that it had no choice but to give funding for the war precedence over other claims on revenue. Military and security expenditures have historically been the largest government expenditure, averaging about 13 percent of GDP and about 19 percent of total government expenditures from 1997 to 2002.101 This explanation, while plausible, does not account for the massive discrepancies in expenditures and thus does not address whether necessary military and security expenditures could have been maintained while allocating sufficient resources for humanitarian and social needs.

From 1997 to 2002, unexplained expenditures were sometimes greater than total reported military expenditures and strongly suggest that military expenditures were not the reason for the government’s failure to provide for basic needs and were not the primary destination of diverted oil revenues. The following table compares military expenditures with unexplained discrepancies:

Table 10: Comparison between Military and Security Expenditures and Unexplained Discrepancies 1997-2002102

Year

1997

1998

1999

2000

2001

2002

Military Expenditures (u.S.$ millions)

640

934

1,572

793

680

808

Discrepancy (U.S.$ millions)

1,775

34

1,119

407

540

347

Military Expenditures (% GDP)

8.3

14.5

25.8

9.0

7.2

7.2

Discrepancy (%GDP)

23.1

0.6

18.4

4.6

5.7

3.1

Difference ($U.S. millions)

-1,135

+900

+453

+385

+140

+461

Total Military Expenditures 1997-2002 (U.S.$ millions)

5,427

Total Discrepancy 1997-2002 (U.S.$ millions)

4,222

Total Difference: Military Expenditures-Discrepancy 1997-2001 (U.S.$ millions)

1,205

In 1997, discrepancies outpaced military expenditures, even though that was a year of relative peace. Overall, the discrepancies were about 78 percent of military expenditures from 1997 to 2002. Based on this information, the government’s assertion that the war diverted resources away from humanitarian and reconstruction is questionable. Military expenditures rapidly declined in 2000 and 2001, but were exceptionally high in 2002. This is notable since the war with UNITA had ended by April 2002, yet military expenditures for that year were much higher than when the war was ongoing in 2000 and 2001.103 Moreover, military expenditures themselves were controversial and led to allegations of corruption. (see Section VI above).

Overall, the most serious impediment to development was the government’s mismanagement of the economy and not the war. Had the unaccounted-for funds been available to it, the government could have easily sustained the same levels of military expenditures while spending more funds on social and economic development. This was also the opinion of the IMF when it said, “despite the reduction of hostilities in war zones and substantially lower military expenditures in 2000 and 2001, poverty was not being reduced because of the hesitant implementation of the government [reform] program and the persistence of severe governance and transparency problems that…prevented the reallocation of public resources to priority sectors.”104



64 “Angola: Staff Report for the 2002 Article IV Consultation,” pp. 31-33; and International Monetary Fund (IMF), “Angola: Staff Report for the 2002 Article IV Consultation,” March 18, 2002, p. 33; and International Monetary Fund (IMF), “Angola: Selected Issues and Statistical Appendix,” July 11, 2003, pp. 107-109.

65 According to the U.S. Department of Commerce, Bureau of Economic Analysis, the 2002 GDP of the United States was U.S.$10.4462 trillion. See: U.S. Department of Commerce, Bureau of Economic Analysis, “Gross Domestic Product: Second Quarter 2003,” press release, July 31, 2003.

66 “Angola: Staff report for the 2002 Article IV Consultation,” pp. 25-26.

67 Since the report was kept confidential, the government could also claim that the pace of economic reform was adequate and that the relationship with the IMF was sound, even when it was not. For example, the then Finance Minister, Julio Bessa, told Angop, the Angolan state news agency, that relations with the IMF were “good” because of the government’s “good performance” on economic reforms, even though the Fund had just concluded a tense mission to the country. See: “Finance Minister Says Relationship with IMF, World Bank, ‘Good.’” ANGOP, February 19, 2002.

68 “Angola: Staff Report for the 2002 Article IV Consultation,” p. 3.

69 Aguinaldo Jaime, Former central bank Governor and current Deputy Prime Minister, “Angola: Economic Reform and Adjustment Program,” speech at the Center for Strategic and International Studies, Washington, D.C., June 12, 2001.

70 “Angola: Staff Report for the 2002 Article IV Consultation,” p. 3.

71 See, for example: Global Witness, “Will Angola finally publish its oil accounts?” press release, June 20,2003.

72 “Angola: Staff Report for the 2002 Article IV Consultation,” pp. 31-33; and “Angola: Selected Issues and Statistical Appendix, 2003,” pp. 107-109.

73 Ibid.

74 “Angola: Staff Report for the 2002 Article IV Consultation,” p. 9.

75 Human Rights Watch interviews with IMF staff on April 3, 2002, November 30, 2002, December 3, 2002, and December 5, 2002.

76 The sources for this table are: Angola: Staff Report for the 2002 Article IV Consultation,” pp. 31-33; and “Angola: Selected Issues and Statistical Appendix, 2003,” pp. 107-109.

77 “Angola: Staff Report for the 2002 Article IV Consultation,” p. 32; and Human Rights Watch interview with an official close to these discussions, April 3, 2002.

78 “Angola: Staff Report for the 2002 Article IV Consultation,” p. 32.

79 Ibid.

80 Human Rights Watch interview with officials close to these discussions, April 3, 2002.

81 KPMG, Avaliação do Sector Petrolífero Angolano Sumário Executivo Relatório Inicial, July 2003, p.35.

82 Ibid., p.32.

83 “Angola: Staff Report for the 2003 Article IV Consultation,” p. 10.

84 The World Bank, Helping Countries Combat Corruption: The Role of the World Bank (Washington, D.C.: The World Bank, 1997), p.8; and Transparency International, “Frequently Asked Questions About the Corruption Perceptions Index: 2002,” press release, August 28, 2002.

85 The World Bank, Anticorruption in Transition: A Contribution to the Policy Debate (Washington, D.C.: The World Bank, 2000), pp.1-2.

86 Ibid., p.2.

87 “Angola: Staff Report for the 2002 Article IV Consultation,” p. 6.

88 Ibid., p.13.

89 Ibid., pp. 19-20.

90 For a complete discussion of the scale, see: Dr. Johann Graf Lambsdorff, “Framework Document 2002: a background paper to the 2002 Corruption Perceptions Index,” a background paper by Transparency International and Göttingen University, July 2002.

91 Transparency International, Corruption Perceptions Index, August 28, 2002.

92 “Angola: Staff Report for the 2002 Article IV Consultation,”p.15.

93 Ibid.

94 Estimates based on IMF figures. See “Angola: Selected Issues and Statistical Appendix, 2003,” p. 109

95 “Angola: Rebuilding Education System Vital, UNICEF,” IRIN, July 24, 2003.

96 Ibid.

97 Economist Intelligence Unit, “Angola: Country Report,” February 2003, p. 17.

98 Economist Intelligence Unit, “Angola: Country Report,” May 2003, p. 5.

99Former Minster of Planning Emmanuel Carneiro, Speech at the US-Angola Chamber of Commerce
Washington, D.C., August 27, 1998.

100 Aguinaldo Jaime, former central bank Governor and current Deputy Prime Minister, “ANGOLA: Economic Reform and Adjustment Program,” speech at the Center for Strategic and International Studies, Washington, D.C., June 12, 2001.

101 Angola: Staff Report for the 2002 Article IV Consultation,” pp. 31-33; and “Angola: Selected Issues and Statistical Appendix, 2003,” pp. 107-109.

102 Angola: Staff Report for the 2002 Article IV Consultation,” pp. 31-33; and “Angola: Selected Issues and Statistical Appendix, 2003,” pp. 107-109.

103 “Angola: Selected Issues and Statistical Appendix, 2003,” p.109.

104 “Angola: Staff Report for the 2002 Article IV Consultation,” p. 14.


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January 2003