The Illusory Reform of the Algerian Economy

Visiting Algiers in November, Jean-François Dauphin, chief of the International Monetary Fund’s mission for Algeria, expressed the hope that in future the country’s “development would be led more by the private sector and be less dependent on petroleum.” In other words, the private sector should supplant public expenditure financed by oil revenues as the motor of the Algerian economy. But things are not that simple.

Magharebia, 2012.

With the collapse of the price of crude oil, from $112.66 a barrel in June 2014 to $45.13 in November 2016 (- 60%), the petroleum sector was severely affected and the oil windfall amputated by as much: the country’s hydrocarbon exports were reduced by nearly two thirds, from a record 70.5 billion dollars in 2012, to the 26 billion expected this year. No longer can President Abdelaziz Bouteflika hire countless thousands of civil servants, raise their wages across the board to nip an “Arab spring” in the bud, heavily subsidise water, gas, electricity, fuel, couscous, sugar and housing, build hundreds of hospitals and mosques, buy countless SUVs for his protégés and launch huge construction projects like the East—West freeway, commissioned from foreign firms and paid in cash.

Between 2014 and 2016, the GNP will have fallen by about 30%, from 235 billion dollars to 166 according to the IMF. The full extent of this collapse has been hidden from public opinion. For the first semester of 2016, the government announces an illusory growth of 3.9%, similar to last year’s figure, by calculating a GNP based on volume rather than value, thereby masking the sharp drop in the price of oil as well as the devaluation of the national currency, the dinar (-38.4% against the dollar). Algerian production was equal to that of 2014 but was sold at half the price.

During the last decade, the share of public investment in the economy reached Chinese proportions—30 to 40% of the GNP—with what can only be regarded as modest results in terms of growth. Income per capita rose by approximately 1% per annum until 2014, but with monstrous territorial disparities to the detriment of the high plateaus and the south. A recent study of the public finances of the country’s 1541 municipalities, conducted by the Ministry of the Interior, illustrates this: 958 (62%) are poor, which is to say they have no taxable economic activity, 480 are “average,” they barely survive, and 103 (7%) are “rich” being the only ones capable of covering their own expenditures. The traffic jams in Algiers and its vicinity can hardly conceal the impoverishment of large portions of the country and its population.

Do private companies have the capacity to take over the burden of public financing, to replace the tens of billions of dollars swallowed up by the collapse of the price of crude oil, pull the country back from an inevitable recession and “lead growth” as Dauphin and many advocates of “reforms” would suggest? One may have serious doubts about this.

The informal sector’s hidden cash

First of all, there is what is called, for want of a better term, the “informal” sector, a huge patchwork of activities and circumstances more or less on the fringe of the law and which, in any given year, amount to a good third of the legal economy. For two years now Premier Abdelmalek Sellal’s government has been trying unsuccessfully to “normalise” them. And with good reason, for unless the informal sector returns to legality, paying customs duties, taxes and health insurance contributions, there can be no hope of stimulating the economy via private enterprise.

Actually, the barons of the informal sector are mostly interested in the difference between the official exchange rate of the dinar (111 DA for 1 euro) and the parallel market rate (approx. 180 DA). They obtain from the banks import credits at 111 DA and immediately sell a good share of these with 182 DA. The 5.5% interest promised by the Treasury can’t compete with the 70% produced by this speculation.

Former finance minister Abderrahmane Benkhelfa found that out the hard way. He had counted on the hidden cash when he launched a National Loan for Economic Growth which yielded only 568 billion DA (less than 5 billion dollars). The money never came out of the trash bags where it is hidden by the billions, waiting to purchase hard currencies, gold or real estate. Distrust was the order of the day and the bulk of subscriptions came from the banks, corporations and insurance companies, all state-owned and obeying oral instructions from their line ministries. As a consequence, the resources of public finance institutions took a nose-dive and the central bank, the Bank of Algeria, had to step in to get them out of this dangerous situation and, indirectly, come to the rescue of the Treasury.

The fragility of the private sector

In addition to the lack of interest in the informal sector, the “legal” private sector is singularly weak. For many years it was the object of political repression and only got underway in earnest in the midst of the “Dark Decade” (1988–1998) to use the official terminology. According to the National Office of Statistics which published an Economic Census for 2011, Algeria counts slightly under a million companies, of which over 90% are personal, family enterprises composed of a single unit, generally a store, a workshop or a vehicle. For the most part, employers are tradesmen and craftsmen who generally have neither the means nor the know-how to invest their money in lieu of the State. There are scarcely more than 45,000 legal entities in Algeria— corporations, limited partnerships or limited liability companies. Only around fifty have a turnover of $2 million or more, and half of these are in the public sector: energy, banking and public transportation belong to the State, while private enterprise prevails in the agri-food, building and service industries. These companies exist in an environment which does not favour their development, as is shown year after year by the World Bank’s “Ease of doing business index”2: Algeria ranks 156th out of 196 countries studied. It has even lower ratings for credit facilities, protection of minority stockholders or ease of property transfers.

« Darlings of the state »

There is another major obstacle: the executive branch’s many interventions in business activities. The “darlings of the Republic” as they are called in Algiers are the object of all sorts of attention: public land at discount prices, credit facilities, subsidies, public commissions, tax write-offs, protection from competition, all this in return for their unfailing support of President Abdelaziz Bouteflika and his family. Over the last ten years these conditions have allowed several groups to prosper and earn a great deal of money. Whereas those who are frowned upon run into insuperable obstacles. The law requires that any “strategic” investment be approved by the National Investment Commission, chaired by the Prime Minister and under the authority of the Minister of Industry, Abdeslam Bouchouareb, a commission to which several of his colleagues belong. By simply withholding a verdict, it can delay for long months or even years projects presented by investors who, being out of favour, are deprived of the facilities granted the “darlings” and are thus rendered quite powerless.

Added to this is the considerable clout of “the boss of bosses,” Ali Haddad, chairman of the Forum of Entrepreneurs who, with the support of the president’s brother Said Bouteflika and the prime minister, organises the support which the tiny world of Algerian management brings to the powers-that-be and in return controls access to the facilities listed above. This “crony capitalism” does not make it easier for the private sector to replace the oil rent. Nor does the accumulation of arrears by the government and its branches. Private suppliers of Sonelgaz, the State gas and electricity monopoly, have not been paid in many months and are downsizing their workforce. To pay their personnel they are obliged to sell off their claims against Sonelgaz to banking institutions, especially foreign ones, on the cheap. Billions of dollars are at stake, because along with Sonatrach, Sonelgaz is one of the country’s two main investors. This year’s treasury deficit of some thirty billion dollars, and next year’s of some twelve billion if the budget voted in December—and financed by mountains of arrears—is respected, do not bode well for a rapid solution to the problem.

Do more with less

Barring a rapid rise in the price of oil to levels unattainable today, and without a private sector “hefty” enough to take over that role, is the Algerian economy condemned to a state of permanent crisis? This to be feared, although there do exist more modest routes that have not been sufficiently explored. In contrast with the recent past, when investments were massive and growth was feeble, it is important to learn to do more with less, putting over-capacities to work where they exist (cement-making, agri-food), collecting the rent on public housing or charging proper rates for gas, electricity and fuel which today are practically given away. Developing personal services would also help, for example in the millions of housing estates built over the last ten years and which have no managing agents, janitors or gardeners. But as long as the question of President Bouteflika’s succession remains unsettled (he will be 80 next spring, his eighteenth year in office) it is unlikely that anything much will happen.