The Financial Cancer That Is Eating Away at the Heart of Algeria

Like Janus, the two-faced Roman god, the Algerian financial system conceals two-time bombs, each as dangerous as the other for the future of the country: an insane mass of subsidies which weigh a good quarter of the GDP and a constantly expanding budget deficit of almost the same dimensions.

Facade of the Bank of Algeria (central bank)

In Algeria, the public treasury is not only incapable of covering the State aids of every kind which have piled up over the years, but also just as incapable of making up the deficit. Therefore, the government cobbles together solutions which consist in casting off onto other actors the financing of its social benefits and its outright gifts as well as the resulting overall deficit. The subsidies inscribed in the budget, and hence visible for the public, amount to 6,000 billion dinars for a gross domestic product estimated in 2022 at around 24,000 billion DA (168 billion dollars) – are in fact only a minority share part of the total. It must be said that clientelism reigns supreme and that there is no lack of contenders, often with sound justification. The poorly housed want a decent home, the most underprivileged want enough to eat, the sick want to be cared for, farmers struggling with a thankless nature want support, old people want a real pension, industrials want their undertakings to be backed up, backward regions want to catch up with the rest of the country…

A social state that rests on three institutions

The ‘social’ State, so highly touted by generations of rulers which have made it the regime’s trademark but also by public opinion which simply takes it for granted, is increasingly bloated every year, but President Abdelmajid Tebboune, who celebrated in December his third year as chief of State, repeats over and over again, ‘Algeria will remain a social State.’ In fact, his future depends on three institutions – the national budget, the state petroleum company, and the banking sector. And on one victim, the population, especially in the big cities, which suffer from shortages, delays, and soaring prices due to the system’s failings and an unprecedented impoverishment, to boot.

The State devotes 2,000 billion DA to ‘budgeted welfare transfers’ according to the official terminology which are written into the official accounting. Three quarters of these go to housing, health care and the family. Contrary to a widespread belief, basic products (semolina, bread, sugar, oil, milk) account for only a tiny share (scarcely 1% of the GDP). And for good reason: the price of bread has been frozen for twenty years now; bakers can hardly survive. Old age pensions (1,45% of the GDP in 2022) can hardly be said to be divided on a social basis, since the Executives’ Social Fund mops up over 80%, while the low-wage earners must make do with the rest, 900,000 retirees receive less than 40 dollars per month. An acute parsimony which does not keep the annual deficit of the National Pension Fund from approaching a record-breaking 7 billion dollars.

The second institution called upon thus is the Sonatrach, the national oil company which sells at least 40% of its production on the domestic market at cut-rate prices. All in all, it is ‘national’ turnover represents scarcely 6% of its exports. Who profits by this huge loss of income, calculated by a former minister of energy, Sadek Boussena, at 13 billion dollars per year? Car owners, people with air-conditioned homes and the largest consumers of electricity, all of whom, for the most part, belong to the urban middle and upper classes.

Every year there is talk of raising the rates, but it never happens. The fuel and natural gas which drive the power plants of Sonelgas are still provided free of charge or almost. And finally, the rare exports other than hydrocarbons, of which the regime is so proud, benefit from such cheap energy that one cannot help but wonder: would it not be better to export those fuels directly?

The generosity of the banking sector

As for the banking sector, it foots the bill for another type of gift, the rebates on interest rates, already negative in ordinary times. Price increases are two or three times greater than the cost of money which amounts to significantly lightening the burden on the borrower. At present, inflation is nearly 10% per annum and lending rates are around 3%. These are still too high and the government very generously provides payment facilities to just about everybody: public companies, private industrialists, real estate developers, farmers with good connections, young people in search of liquid assets… The Treasury keeps mum about these ‘fiscal expenses’ which were last estimated publicly in 2014 at 954.4 billion DA, a figure which conveniently ‘forgets’ all those who neglect to make their repayments on time or pay the interest due. To which must be added the annual losses of the public companies (equivalent to the wages paid to over 600,000 workers according to the Board of Audit), the warranties which the Treasury provides to countless debtors (equivalent to 25% of the GDP in 2016) and finally the distribution free of charge of land belonging to the State. The first two of these expenses taken together amount to sums well beyond the banks’ resources and make credit unavailable to other actors wishing to invest.

In June 2021, to bail out the banks, a strange construction was put in place, the State cleared off the debts owed to seven public establishments to the tune of some 2,100 billion DA. How was this possible? The money was created out of thin air by the Bank of Algeria. The International Monetary Fund, in its last recension of the Algerian economy (2021), made no secret of the worries inspired by this unorthodox manoeuvre which ‘threatens the stability of the country’s currency, greatly endangers its public finances and compromises the capacity of the Bank of Algeria to finance the national economy.’

Defence ministry’s privileges

Because of this binge of subsidies, aggravated by the unreasonable rise in recurrent expenditures (+27%) – thus the Defence Ministry’s running costs were increased by 90% in the 2023 Finance Act compared with 2022. No one knows what this corresponds to, especially since the new presentation of the budget law may have reintroduced into the Ministry of Defense budget expenditures that were previously hidden elsewhere. To which must be added the cost of arms purchases which is never made public, a huge but incomplete budget deficit of 658.3 billion DA, i.e., 23.7% of the GDP! The ratio is gigantic, unparalleled in the rest of the world except for certain failed States1, even if the manner of calculating oil taxation underestimates by convention the fiscal price per barrel and slightly overestimates the deficit.2 Between 2002 and 2013, Algeria forged a considerable ‘war treasure,’ housed with its Stabilisation Fund and which enabled it to finance four heavily loss-making exercises between 2014 and 2018. After that came the financing system dubbed ‘non-conventional,’ in other words, purely monetary, in the absence of a financial market capable of taking over from there. The bond issue launched in 2016 by the Treasury proved to be a non-starter. Potential investors were put off by the negative interests offered. The few public institutions which are cost-effective (essentially the Bank of Algeria and Sonatrach) do not earn enough to finance the deficit. As a result, issuance of currency has replaced the Stabilisation Fund as the main way of financing the public deficit. This situation is abnormal and prevents the government from building schools and hospitals, the national oil and gas company from prospecting to replace the deposits that are running out and the banks from underwriting forward-looking business ventures.

The present situation cannot last. Its most predictable consequence is inflation which for the moment, however, is not perceptible in the official statistics. Price rises – even in 2022, when inflation was pronounced worldwide – were officially kept below 10%. There are several explanations for this. The index used is out of date, concerns only Algiers and its structure has remained unchanged for half a century: the informal sector, which constitutes 30 to 40% of the economy, is under the radar of the Organisation nationale des statistiques (ONS). And the recurrent shortages will cause a product to disappear … so that its price is impossible to monitor! With such an undependable thermometer, any serious measurement is impossible. There is in addition a more technical explanation. When the imports are larger than the exports as was the case between 2014 and 2020, the currency outflow to finance the trade deficit destroys their counterpart in dinars. The currency issuance to finance the budget deficit is reduced by just that much which diminishes the inflationary pressure. The net quantity of currency issuance (creation minus destruction) is therefore less than the gross amount created.

Preparing the 2024 presidential election

‘Prices have soared in the name of the freedom to trade, people’s incomes are stagnating, the value of the dinar has dropped, where are we headed?’ Abdelmajid Tebboune, President of the Republic admitted, without quoting any figures, in one of his rare TV talks on 22 December 2022. Three days later he announced sizeable increases in the salaries of the country’s 2.8 million civil servants, frozen since 2012, in old-age pensions and in unemployment compensation for the 1.8 million young graduates still out of work. The increases will amount to 47% between 2022 and 2024 the President promised, though without providing a precise date for the implementation of these measures. As if by chance, their final year is also the year of the next presidential election which Tebboune is, for the moment, slated to win.

Public expenditures, along with the deficit, will keep on climbing. On the revenue side, Sonatrach is being asked to double its gas production in 2023, a prowess quite beyond the national company’s reach, when it generally takes a good ten years to start exploiting a new deposit. Nor is there any sign of raising the prices of the oil and gas sold off cheaply on the domestic market, nor any attempt to restrain their consumption. The cancer will continue to spread in the indifference of the country’s rulers, so tight-fisted in the management of their dollar mattress, so blind to the tragedy of their national currency, the dinar.

1On the list on 42 countries monitored by The Economist, only Pakistan and the Philippines run slightly over the ratio of 7% of the GDP.

2For the fiscal exercise of 2022, the fiscal price selected by the Finance Ministry was 60 dollars per barrel, when the sales price was over 100 dollars on the year. The difference was to be found in the Stabilisation Funds and served to finance a minority share of the Treasury deficit.