Some studies by prestigious economic consultants have lately issued some reports on the Angolan economy that only report negative numbers and projections, without taking into account either the theoretical models on which some of the main economic policy decisions in Angola are based, or the actual reality of its economy. It is evident that the semi-rigid or controlled exchange rate regime that existed before the adoption of the flexible exchange rate last year, was partly responsible for the crash in the Angolan economy.
In fact, pegging the Angolan currency at a high value in view of market conditions, caused unrestrained consumerism while domestic production was allowed to decline, since international prices were artificially made more competitive. It was the time when Luanda became the most expensive city in the world with the Angolan elite making flagrant shows of wealth. This situation did not correspond to domestic production or development, but rather excessive spending of foreign currency earned from high oil prices which bolstered the inadequate value of the Kwanza.
This was unsustainable. The prolonged recession since demanded an end to the artificial appreciation of the Kwanza and the introduction of a flexible exchange rate.
The model underlying the adoption of flexible exchange rates has clear goals. This last factor should be emphasised. Milton Friedman stressed that exchange rates would help to insulate the domestic economy from external shocks and would give national political authorities the ability to meet domestic goals.
Flexible exchange rates provide enough insulation to the domestic economy if the sources of the recessionary shock are abroad.
