Algeria. Government Hesitation Paralyses Growth

Rising inflation, persistent massive unemployment, imports at half-mast: by timidity as much as because of the choice of the duo that runs Algeria, economic reforms are on hold. The current rise in the price of oil is not likely to change the situation for an impoverished population.

Algiers, Ministry of Finance

A bit more than two years after they took charge of the country, the tandem who officially rule Algeria, Chief of State Abdelmajid Tebboune and chief of staff General Saïd Chanegriha, are clinging desperately to a two-fold refusal: “no” to foreign indebtedness which would endanger national independence and “no” to a more economic and less political management of the Bank of Algeria’s foreign currency reserves. The government keeps a close watch on these, hoarding them as much as possible to the detriment of foreign currency expenditures (goods, services, various allotments, etc.) compressed beyond all reason and yet indispensable for any economic and social development. The country’s entire political economy is indexed on the level of its foreign exchange reserves.

This “nest egg” obsession can be explained in part by the history of the oil crises of 1985–1999 and 2014 which involved extended depreciations of hydrocarbon prices. At the time, Algeria had not reduced its imports and had gone into debt to finance its lifestyle, as best it could, in a period of political turmoil and insecurity. As a result, in 1994 the International Monetary Fund (IMF) had to be called in, the national monopoly on foreign trade abandoned in exchange for the rescheduling of a foreign debt that was strangling the country, and the dinar was devalued by 50%.

Imports: an adjustment variable

This time, it has been decided to avoid foreign indebtedness altogether and make imparts the adjustment variable. From 2014 to 2020, these were practically halved1, deeply depressing the country’s economic activity, aggravating unemployment, and pushing up prices. The other reason for this choice, typical of heavily indebted countries, was political. Diplomats and (above all) the army are afraid that resorting to the IMF may involve an unwritten political requirement: withdrawing support of the Sahrawi struggle for independence in Western Sahara2, a conflict in which Morocco has been scoring points since 2019 thanks to the backing of the US and Israel. The military high command would then be faced with what it would regard as a hateful alternative: either abandoning a cause which it has been defending tooth and nail for nearly half a century or giving up a sizeable share of its budget – the country’s largest (11 billion dollars this year) – in the name of austerity and balancing the national budget.

For the population at large, the most spectacular and most distressing aspect of this cutback in imports is the return of massive scarcities and, for industrialists, the sudden unavailability of components vital to their activities. Such products as milk, vegetable oils, medicaments, motor vehicles and spare parts, all vanish periodically or necessitate endless queues to buy them. The edicts of the Trade Ministry which regulates imports with impromptu reversals only make matters worse. In July 2021, it blocked the importation of powdered milk despite being warned by specialists that the supply chain might be interrupted. In mid-December, the Ministry reversed its decision in a panic and into the bargain created a subsidy for the durum wheat sold to pasta manufacturers. Made public on 31 December 2021, the 2022 budgetary act established very heavy taxes on mobile phones, software, and electronic equipment. Less than one month later and a few days before the third anniversary of the outbreak of Hirak, in the middle of a cabinet meeting the president of the Republic announced their suspension and abandoned all customs duties on food imports. For five years now, the purchase of new cars has been banned, which is an absurdity in such a huge country which has no mass transit system and where the automobile is the only form of transport available. As a result, the price of second-hand cars has skyrocketed and traffic jams in the big cities are as bad as ever.

Will the ongoing desperate effort to stabilise the different markets be more successful than in the past? This is doubtful. The fiscal deficit amounts to 4,175.2 billion Algerian dinars (AD) before the 13 February 2022 tax freeze, i.e. nearly 29.42 billion dollars at the official exchange rate. Financing it via money printing has made the central bank a branch of the Finance Ministry, and domestic indebtedness already represents half the GDP. To which must be added an accelerated depreciation of the exchange rate, offering a gap with the parallel market which has rarely been so wide. Indeed, this gap is 50% with respect to the dollar and 20% to the euro. The Bank of Algeria depreciates the greenbacks more than it does the European currency because the former increases the budgetary receipts in dinars while the latter is used to pay for most of the country’s imports (except for those from China, its number one supplier, and Turkey). The mix is an explosive one and could easily lead to open double-digit inflation of the Latin American type. Which is already on the way, a former governor of the Bank of Algeria has warned.3

A population growing faster than the economy

It is not surprising that in this context unprecedented price rises have occurred: + 9.2% between October 2020 and October 2021 according to the official price index which has remained unchanged since the seventies, despite the generous food and energy subsidies. – Price and unemployment statistics are habitually underestimated, and growth is conspicuously absent. Starting next year, according to the IMF, the economy will grow more slowly (scarcely + 0.2% per annum on the average between 2024 and 2026) than the country’s demographics (a million more Algerians per year).

Will the barrel of oil at 100 dollars save Algeria from a catastrophe? Even though this price is based more on the surge in world prices than on the conditions of local production, this is the hope of the authorities who have financed their recent social measures – among them an unemployment allowance for young people under forty and tax relief – on the capital gains from oil taxes. However, this hope is only partly justified. For lack of foreign investment over the past twenty years now, oil production has fallen off and while that of gas has been stable, the domestic market captures an increasing share of the country’s resources, leaving smaller and smaller amounts available for export. More than a third of all production goes to domestic consumption, especially fuels and natural gas which goes to produce nearly all of the country’s electric power.

Some Algerian experts go so far as to predict that by 2030, the country will no longer export any crude oil at all. In 2021 there was a rise in the production of natural gas (+5%) thanks to the exploitation of several new deposits by foreign companies. On the other hand, the price-fixing system adopted by Sonatrach, the State-owned company, has caused serious shortfalls. At the beginning of the eighties, the Energy Ministry indexed the price of gas on those published monthly by the Organisation of Petroleum Exporting Countries (OPEC). Since the prices of crude oil have risen less than those of gas, Sonatrach has profited less by the boom than its competitors with its sales of natural gas.

Oil at 100 dollars per barrel will not settle the issue of people’s buying power. The recent price rises and the de facto wage freeze for at least ten years now, may lead to a social explosion among the three million civil servants who traditionally form the power structure’s grass-root base. In 2011, the year of the Arab Spring, President Abdelaziz Bouteflika raised civil servants’ salaries across the board; in just one year, the public sector payroll increased by 50%, and this sector is practically alone in applying the fiscal and social laws of the Algerian State.

For the majority of the active population, i.e. the millions of workers in the informal sector who have no papers and no welfare rights, the situation is worse still, as is that of the tens of thousands of college graduates who invariably find themselves with diplomas but no jobs. Not to mention the deep poverty afflicting so many people on the high plateaux of the South. The economy has nothing to offer them and escaping overseas is a mirage which attracts growing numbers of young people. It is hard to say whether the unemployment compensation promised by President Tebboune for 15 February but subject to many conditions will flip the script. And will young people be its sole beneficiaries? The wildest rumours are already circulating in the larger cities, and ever since the President’s announcement, the modest offices of the Agence nationale de la main-d’œuvre (ANEM), which has limited resources, are besieged by supplicants.

Foreign policy failures

A lot will depend on the new Finance Minister, Abderrahmane Raouya, 62, former Director-General of Taxes. He has replaced Premier Aïmane Benabderrahmane who held this position simultaneously with that of the keeper of the public purse. How long will this one keep his job? His record is already marred by several major fiscal bloopers such as the attempt to tax attorneys which had to be abandoned after they went on strike. Under the Algerian regime, failure is rarely penalised, as witness the Foreign Minister who has been collecting one diplomatic setback after another, such as Washington’s ambiguous position on Western Sahara or the absence of any date for the forthcoming Arab summit in Algiers, or the failure to block Israel’s joining the African Union at its last meeting in February 2022. There have been rumours about his being sacked but it is said that the army chief won’t hear of it...

158.5 billion dollars in 2014, 34.4 billion in 2021 according to the Finance Ministry.

2In 1994, Algiers had had to give up on its nuclear ambitions and sign the Treaty on the Non-Proliferation of Nuclear Weapon (TNP) though this does not figure officially in the agreement.

3Mohamed Laksaci, “Résurgences de l’inflation et stabilisation en perspectives : références au cas algérien”, 20 February 2022. A former governor of the Central Bank (2001–2016), he is in favour of foreign borrowing and criticizes the monetary financing of the budget deficit.