Bleak Economic Outlook Bodes Ill for Algeria’s Stability

The stability of the Algerian regime has long rested on its generous handouts powered by its oil revenues. With the oil price plunge, and which is set to continue, the Algerian government is bracing for tougher times threatening to erode its social peace.

The oil price slump, which started in 2014 dealt a heavy blow to Algeria’s finances. Algeria has heavily invested in oil and gas to boost its finances but has lost 30% of its total budget as a result of the low oil prices. The government was prompted to impose new taxes and austerity measures in a bid to reduce spending.

To make up for the dwindling revenues, the government resorted the sovereign fund to balance the budget. But after two years, the fund is on course of depletion and will be dried up in two years at best.

Likewise, Algeria’s oil and gas producing capacity is shrinking every year. The government tried to buy time by prospecting new oil and gas reserves in 2016. State-owned energy firm Sonatrach claimed to have discovered 32 new potential exploration zones, most of them are new fields of shale gas whose exploitation is unsustainable in view of the lack of water resources needed to undertake hydraulic fragmentation.

Some analysts argue that Algeria’s attempts at diversifying the economy have failed because of a lack of clear-sighted strategy to prompt the private sector and attract foreign direct investments.

The car industry for example is a striking fiasco with car assembly units being created in Algeria and often described by economist as “disguised imports”. Since 2012, Algeria has been trying to attract foreign investments by automotive giants in order to reduce its imports bill, but the results so far are disappointing. Indeed, the opening of a car assembly plant by Volkswagen in Relizane received little acclaim amid frustration at the counterproductive results of the previous assembly factories opened by Renault and Hyundai.

The perception of Algeria’s unfriendliness towards foreign investors is worsened by recent investment reforms that left unchanged a rule requiring 51% of national ownership of any projects.

The 51/49 rule provides that at least 51% of the shares of Algeria-based companies must be owned by Algerian nationals residing in Algeria or by companies, which are wholly owned by Algerian resident shareholders.
The archaic banking system has also been pushing investors away. Algeria’s banks remain state-dominated and highly corrupt thus thwarting foreign direct investments.

The bleak economic prospects are felt in the country’s social peace, which is on the brink of collapse. Riots in the oil and gas rich southern towns over economic marginalization and inadequate public investment as well as the recent violent riots over the latest tax hikes in the historically rebellious region of Kabylie, notably in the large coastal city of Bejaia highlight the risks for Algerian authorities from altering its subsidy system in a country where social peace hinges on the distribution of oil rent through subsidizing key commodities.

Like other oil rich countries in Africa and the Middle East, Algeria’s political and economic model relies heavily on a high level of state spending to maintain social peace. In April 2016, Abdelatif Benachenhou, an ex-finance minister and former close advisor to President Abdelaziz Bouteflika, told Reuters he estimated that Algeria allocated around 22% of the country’s gross domestic product (GDP) to its system of social welfare and subsidies. This system, Benachenhou believed, was unsustainable even in times of higher state revenues, due to steady increases in the prices and volumes of materials consumed.

In light of the unsustainability of its public spending and the plummeting revenues from oil prices coupled with an increasing domestic consumption of hydrocarbons, the prospects seem gloomy for Algeria.

The political instability and the uncertainty surrounding the successor to the ailing president Bouteflika also contribute to undermining the flow of foreign direct investments, badly needed to diversify the economy. The unattractive business climate and investment unfriendly policy along with an underdeveloped banking system thwart foreign direct investment in the country.

The “new economic growth model” developed by Algerian authorities to diversify the economy and draw more investments to compensate for the collapse in oil prices is obstructed by poor governance, insecurity, vested interests and regime opacity.

Algeria’s 2017 appropriation bill is calculated on an oil price of 50 dollars per barrel, while the IMF estimates that Algeria needs a barrel price of $110 to maintain macro-economic balance at a moment economic analysts warn of an upcoming budget crisis if oil prices remain at the current levels of around $50 per barrel.

All analyses predict gloomy days for Algerian economy and social peace because of Algeria’s heavy dependence on hydrocarbon revenues. The North African country started resorting to foreign debt with a recent €900-million loan from the African Development Bank, but how much debt will be enough to address the huge needs of Algiers’ rentier system?