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Economy of Algeria

Introduction

Algeria’s economy remains dominated by the state, a legacy of the country’s socialist post-independence development model. In recent years the Algerian Government has halted the privatization of state-owned industries and imposed restrictions on imports and foreign involvement in its economy, pursuing an explicit import substitution policy.

Hydrocarbons have long been the backbone of the economy, accounting for roughly 30% of GDP, 60% of budget revenues, and nearly 95% of export earnings. Algeria has the 10th-largest reserves of natural gas in the world – including the 3rd-largest reserves of shale gas – and is the 6th-largest gas exporter. It ranks 16th in proven oil reserves. Hydrocarbon exports enabled Algeria to maintain macroeconomic stability, amass large foreign currency reserves, and maintain low external debt while global oil prices were high. With lower oil prices since 2014, Algeria’s foreign exchange reserves have declined by more than half and its oil stabilization fund has decreased from about $20 billion at the end of 2013 to about $7 billion in 2017, which is the statutory minimum, According to the CIA World Factbook.

Declining oil prices have also reduced the government’s ability to use state-driven growth to distribute rents and fund generous public subsidies, and the government has been under pressure to reduce spending. Over the past three years, the government has enacted incremental increases in some taxes, resulting in modest increases in prices for gasoline, cigarettes, alcohol, and certain imported goods, but it has refrained from reducing subsidies, particularly for education, healthcare, and housing programs.

Algiers has increased protectionist measures since 2015 to limit its import bill and encourage domestic production of non-oil and gas industries. Since 2015, the government has imposed additional restrictions on access to foreign exchange for imports, and import quotas for specific products, such as cars. In January 2018 the government imposed an indefinite suspension on the importation of roughly 850 products, subject to periodic review.

President BOUTEFLIKA announced in fall 2017 that Algeria intends to develop its non-conventional energy resources. Algeria has struggled to develop non-hydrocarbon industries because of heavy regulation and an emphasis on state-driven growth. Algeria has not increased non-hydrocarbon exports, and hydrocarbon exports have declined because of field depletion and increased domestic demand.

Gross domestic product

Algeria’s gross domestic product (GDP) grew by 1.6 per cent in 2017 compared to the previous year. The average GDP growth rate was 3.5 per cent between 2001 and 2017, with the highest level of 7.2 per cent in 2003 and the lowest level of 1.6 per cent in 2017.

Despite the strong non-oil economic performance, growth slowed slightly in the second quarter of 2018 and further in the third quarter as oil and gas production fell more sharply. Although the service sector growth fell slightly, the agricultural sector continued to grow strongly, and the industrial and construction sector witnessed rapid growth.

State energy company Sonatrach has the world’s third-largest shale oil reserves, according to 2018 estimates, and there are ongoing negotiations with Exxon Mobil and other companies to conduct explorations to increase export revenues for the energy sector, which accounts for 95 per cent of the country’s total exports.

The number of oil wells discovered since 1999, according to Algeria’s energy minister, is 356, or 20 wells a year, allowing Algeria’s reserve base to increase in the last three years to 166 million tons of oil equivalent. The number of workers in the sector was more than 258,000 in 2018, an increase of 76,000 workers since 1999. This is despite the fact that about 10,000 engineers, drilling workers and oil reservoir experts and others have left Sonatrach since 2010.

Energy revenues during the first ten months of 2018 amounted to about $31.8 billion. The government estimated the total value of Sonatrach investments in various hydrocarbon projects between 1999 and 2017 to be $140 billion, 80 per cent of which was for exploration and development.

The total number of industrial small- and medium-sized companies reached 97,803 entities by mid-2018, of which 99.9 per cent was owned by the private sector, according to the Ministry of Industry and Mines. These companies numbered 95,010 at the end of 2017, compared to 89,694 at the end of 2016, an increase of 5.9 per cent. Meanwhile, the number of public sector companies declined from 97 in 2016 to 80 in 2017 as a result of the ongoing restructuring of the industrial sector and privatization implemented by the government several years ago. Data from the Ministry of Industry and Mines revealed that 5,333 new industrial entities – all private sector – were registered in 2017, compared to 5,896 enterprises registered for the same sector in 2016.

The percentage of workers in the industrial sector fell from 47 per cent of the total number of employees in 2017 to 46.5 per cent in 2018, according to World Bank data.

Indicatorsmeasuring unit20162017Change ±
GDP (at constant 2010)Billion US$196.035199.1713.136
GDP growth (annual)%3.31.6-1.7
GDP per capita (constant 2010)US$4,827.74,820.4-7.3
GDP (at current value)Billion US$160.130167.5557.425

Source: World Bank.

Industry

Algerian industry has always been dominated by oil and natural gas in two ways. First, the hydrocarbon sector is by far the largest industrial sector. Second, the revenues generated by the export of oil, gas, and related products have been the main source of investment capital for other industries, along with huge loans from the international capital market that form a mortgage on those reserves.Economy Algeria - Industry Oil

From the major production sites in the Sahara desert, oil and natural gas are transported to the Mediterranean coast. The industrial areas surrounding major cities such as Algiers, Oran, and Annaba are home to huge refineries and petrochemical complexes and plants for the liquefication of natural gas that is transported in tankers to foreign markets.

As the main entity responsible for the oil and gas sector, the state oil company SONATRACH (Société Nationale pour la Recherche, la Production, le Transport, la Transformation, et la Commercialisation des Hydrocarbures, National Company for the Exploration, Production, Transport, Transformation, and Commercialization of Hydrocarbons) is often considered a state within the state. After its foundation in 1963, it grew in size and significance with the nationalization of foreign oil interests in the following decade.

The 120,000-strong workforce operates the entire production chain, from exploration to consumer sales. The decentralization of certain parts of the company and the increasing cooperation with foreign oil firms have not substantially changed the position of SONATRACH as a power centre. This is reinforced by the interlinking and exchange of personnel with other parts of the state apparatus, especially the Oil and Energy Ministry.

In the 1970s, the government invested billions of petrodollars (and money borrowed on the international markets) in the construction of heavy industries, especially the steel industry, supplied by Algerian iron-ore deposits. Together with other basic industries (e.g., cement plants), steel mills were meant to be the basis of extensive industrial development and provide inputs to light industries producing consumer goods. This approach of ‘industrializing industries’ did not work out as planned, due in part to political factors inherent in the rentier economy. Many industries remained inefficient and appeared to be generators of jobs for the regime’s constituency of workers and managers and the bureaucracy at the ministries in charge.

With shrinking resources and increased foreign debt, the restructuring and ultimate privatization of part of the industrial sector seemed inevitable. In the 1980s, many large state enterprises were divided. A decade later, the emphasis shifted to a policy of attracting foreign investment in the Algerian industrial sectors. This policy was not pursued to its full extent, as some activities were still considered to be of strategic interest to the state. More importantly, the structural deficits and inefficiencies that had plagued many enterprises in the state sector discouraged foreign companies from investing, as did the civil war. After 1999, the apparent stabilization of the political and security situations and the beginning of a new era of rising oil and gas revenues began to change this picture. As a result, the emblematic steel complex at al-Hajar went into the hands of the Indian Arcelor Mittal group. Increased opportunities for foreign investment also led to the French company Renault producing cars in Algeria. Negotiations and other preparations moved slowly, but the fact that two-thirds of Algerian cars are produced in France provided sufficient motivation.

Light industry is more diversified and has always involved greater private entrepreneurship. As with heavy industry, most factories are found near the main urban centres in the north, although the decentralization of the 1980s has also led to the creation of more light industry in the increasingly populous centres of the High Plateaux and some oasis towns. The light industrial sector comprises the processing of food and the manufacture of household appliances and some luxury items. In many cases, though, consumers prefer imported goods that bring higher social status.

Agriculture and livestock

Agriculture

Economy Algeria - Agriculture

By the early 21st century, grain products occupied a strategic place in Algeria’s diet and economy, making up 40 per cent of the fertile agricultural area. The Ministry of Agriculture divides the period between 2000 and the end of 2017 into two to monitor the development of agricultural and livestock production in the country, namely 2000-2009 and 2010-2017.

The ministry estimated the area planted with grain in 2010-2017 at 3.4 million hectares, a 6 per cent increase on the 3.2 million hectares in 2000-2009. Grain production was estimated at 41.2 million quintals, a 26 per cent increase on the 32.6 million quintals produced in 2000-2009.

Grain production consists mainly of durum and barley, which accounted for 51 per cent and 29 per cent respectively of the total grain produced in 2010-2017.

The main industrial crops are tomatoes and tobacco, which covered 19,400 hectares in 2000-2009 and 2010-2017. For tobacco, the average cultivated area was 485,000 hectares during both periods. Tomato production increased by 136 per cent as a result of improved productivity per hectare. Vegetable production also increased, by 121 per cent in 2010-2017 compared to the previous period.

During 2000-2009, orchards covered an area of 396,500 hectares, 39 per cent of which were reserved for olive groves, 30 per cent for fruit trees, 23 per cent for palm trees and 8 per cent for citrus trees.

During 2010-2017, this area increased by 47 per cent compared to 2000-2009. The area of olive groves increased by 58 per cent, fruit trees by 56 per cent, citrus trees by 41 per cent and palm trees by 20 per cent.

Livestock

Five main animals are bred in Algeria: cows, sheep, goats, camels and horses. The total number of all species between 2000-2009 was about 24.5 million. This number increased by 37 per cent to 33.6 million between 2010-2017. In the same period, sheep accounted for 78 per cent of the total livestock, with 26.4 million head. Goats came second with 4.8 million head (14 per cent), followed by cows with 1.9 million head (6 per cent). Camels and horses make up 1 per cent and 0.5 per cent respectively of the total livestock.

The percentage of workers in the agricultural and livestock sector was estimated at 12.8 per cent of the total labour force in 2018, compared to 12.7 per cent and 12.8 per cent in 2016 and 2017 respectively. The value added in the agricultural sector accounted for 12.2 per cent and 12.3 per cent of GDP in 2016 and 2017 respectively.

Foreign trade

Algerian exports amounted to $34.13 billion in the first ten months of 2018, according to the National Center for Transmission and Information System. The trade deficit was $4.11 billion in the first ten months of 2018, compared to a deficit of $9.95 billion in the same period in 2017, a 58.65 per cent decrease.

Imports fell slightly to $38.24 billion in the first ten months of 2018 from $38.37 billion in the same period in 2017, a 0.35 per cent decrease. Exports covered 89 per cent of imports in the first ten months of 2018, compared to 74 per cent in the same period in 2017.

Indicators20162017Change ±
Total Exports30.02634.7634.737
Total imports47.08945.957-1.132
Trade Balance Deficit17.06311.194-5.869
Ratio of total export coverage to total imports (%)63.875.611.8

The value of hydrocarbon exports, which are usually the most important sales in terms of the relative proportion of the commodity composition of exports, was estimated at $31.80 billion (93.2 per cent of total exports) in the first ten months of 2018, compared to $26.90 billion in the same period in 2017, an 18.2 per cent increase.

Non-hydrocarbon exports remained marginal, accounting for only 6.8 per cent of total exports, and reached $2.33 billion during the first ten months of 2018, despite increasing by 52.6 per cent in the same period in 2017. These exports included semi-finished products ($1.85 billion), food commodities ($301 million), raw materials ($81 million), industrial equipment ($75 million) and non-food consumer goods ($28 million).

As for imports, the bill for energy, oil and lubricant products declined significantly to $879 million in the first ten months of 2018, compared to $1.61 billion in the same period in 2017, a decrease of $732 million, according to customs data. Imports of industrial materials amounted to $11.05 billion, while imports of semi-finished products fell to $9 billion from $9.1 billion in the same period in 2017. Imports of agricultural equipment amounted to $470 million; imports of food products rose slightly by 1.8 per cent to $7.3 billion.

Italy was Algeria’s primary trading partners, importing $4.9 billion worth of goods (14.3 per cent of total exports), followed by Spain ($4.1 billion), France ($3.9 billion), the United States ($3.1 billion) and Britain ($2.4 billion).

As for the five most important exporters to Algeria during the first ten months of 2018, China topped the list at $6.4 billion (16.8 per cent of total imports), followed by France ($3.9 billion), Italy ($3.1 billion), Spain ($3 million) and Germany ($2.6 billion).

Poverty

According to the National Office of Statistics (ONS), Algeria’s unemployment rate was 11.7 per cent in September 2018, unchanged from September 2017 but up from 10.5 per cent in 2016, reflecting stagnant growth in the non-oil sectors. Unemployment is especially high among educated and young people and women. The World Bank attributes this to the preference among these groups to wait for employment in the public sector. The increase in unemployment is undermining the reduction in poverty levels. Some 10 per cent of the population is on the verge of falling (back) into poverty, and the disparities between regions continue with unemployment in the desert regions twice as high as the national average and in the plain regions three times the national average.

The most recent official figures (2011) recorded a national poverty rate of 5.5 per cent, with 0.5 per cent of the population living in absolute poverty.

Official figures are based on the poverty line, which is estimated at $3.57 per day in urban areas ($3.18 in rural areas) (2011 purchasing power parity), which is low for a country that is in the high segment of middle-income countries.

Tourism

International tourism revenues accounted for 0.46 per cent of the country’s total exports in 2017 compared to 0.75 per cent in 2016, according to World Bank data. Algeria received about 2.5 million tourists in 2017, of which 170,000 came for desert tourism. The total number of tourists rose by 18 per cent compared to 2016, and tourism amounted to 1.5 per cent ($330 million) of the national income.

A total of 1,649 hotel projects were registered, of which 791 were accepted in 2017. The remainder are under review. These projects will add more than 300,000 beds by 2025.

Banking

Six state-owned banks dominate 95 per cent of the commercial market, but Citibank, HSBC, BNP Paribas, Société Générale, French banks and Arabian Gulf banks are also active in Algeria. International money transfer services, such as Western Union, are also available.

The collapse of el-Khalifa Bank in 2003 shook the government’s confidence in the private banking sector, despite the flaws in state-owned banks. As a result, banking reforms were introduced and continued to progress slowly in the wake of the 2008 global financial crisis. The privatization of the state-owned Credit Populaire d’Algerie was also suspended indefinitely.

Barriers to cash transfers abroad and the old domestic cash transfer system pose challenges to foreign investment. Although the Central Bank has set up a system to allow cheque and credit card payments, this system is still very new and has not been adopted by many sellers or buyers. ATMs are available in some locations including five-star hotels. Algeria remains largely a cash-based country. In late 2010, the government retroactively banned commercial loans from overseas shareholders after July 2009.

The government has adopted many reforms based on economic and social requirements. In the early 1990s, with the introduction of the Money and Credit Act, the authorities sought to liberalize banking activities to improve performance. As a result, the banking sector has changed radically. In 2016, it comprised 20 commercial banks, eight financial firms and a number of foreign banks’ liaison offices. Total assets increased significantly from 2000 to 2015, growing by 412 per cent, which represented 75.5 per cent of GDP in 2015.

This progress in banking activities has had a positive impact on banks’ profitability. Return on investment was 0.5 per cent in 2005 and had risen to 1.9 per cent in 2015. The liberalization policy encouraged the entry of 13 foreign banks, leading to improved service quality.

International market position

Algeria was ranked 86th out of 137 countries covered by the Global Competitiveness Index 2017-2018, one place higher than in 2016-2017. Since 2015, improvements in many areas of competitiveness have suffered from a deteriorating macroeconomic environment due to lower oil and gas prices.

The budget deficit was 11.6 per cent of GDP in 2016, compared to a surplus of 0.1 per cent three years earlier. Even so, it was ranked 71st in the world in the Global Competitiveness Index and remains one of Algeria’s relative strengths, along with levels of health and primary education (71st). Among other aspects, improvements have been faster in higher education, training, infrastructure and technological readiness, but these remain the biggest gaps with developed countries, according to the World Bank.

Over a period of ten years, there was a leap in the level of enrolment in general secondary education, and enrolment in higher education almost doubled (36.9 per cent in 2015). However, the quality of education (105th) and the use of in-service training programmes (124th) have yet to be improved. For transport infrastructure, progress over the past decade has been mainly in the rail sector (currently ranked 49th). More Algerians are now connected to the internet, but the country still ranks 98th globally because it has failed to catch up with advanced economies on the technological front. Neither has the country adequately addressed its labour market shortcomings (133rd), which have deteriorated further absolutely and relatively.

The World Bank believes that diversification away from natural resources into higher value-added activities will be essential for ensuring long-term sustainable opportunities, and the focus on innovation and integration into the global economy will be key to achieving this goal.

Labour force

The total labour force in Algeria (15-64 years) at the end of 2018 was about 12.26 million compared to 12.11 million in 2017, according to the World Bank. Women account for 18.4 per cent of the total labour force compared to 18.3 per cent in 2017, while men account for the rest.

A 2018 survey by  the National Office of Statistics showed that 16.1 per cent of the total labour force works in construction, 16.1 per cent in trade, 15.8 per cent in non-health public administration, 14.4 per cent in health and social work and 11.7 per cent in the transformative industries.

Unemployment dropped dramatically from 29.8 per cent in 2000 to its lowest level of 11.7 per cent in 2017. The public sector continues to play an important role in absorbing labour, attracting 42 per cent of the total workforce in 2017.

In parallel, the unemployment rate for women dropped to 20.7 per cent in 2017 from 28.7 per cent in 2000. Despite this improvement, the unemployment rate among young women in 2017 remained high at 45.7 per cent compared to 24.8 per cent among young men. During this period, the proportion of women enrolled in higher education exceeded the proportion of men, pushing up the gender equality index in higher education from 1.1 in 2000 to 1.6 in 2015.

Infrastructure


Economy Algeria - Infrastructure

The war of independence left the physical infrastructure of Algeria devastated. This was a large impediment to creating a functioning economy and a well-run nation-state. Building a new infrastructure has therefore became a priority in successive national development plans since the 1960s. In northern Algeria, the building of roads and rail lines has often lagged behind the growth of the population and internal migration from rural areas to the main cities. The industrialization drive of the 1970s only increased the need for an adequate infrastructure, especially roads, water supply, and a secure national electricity grid. The economic crisis of the 1980s and the following civil war meant a delay of many plans. The violence also resulted in the neglect or destruction of existing infrastructure.

The increase in oil and natural-gas revenues since 2000 has enabled the government to launch an ambitious plan for new highways, railroads, and urban transport systems. The construction of a trans-Maghreb highway linking Algeria with Tunisia and Morocco was revived, and a second east-west highway is being built across the High Plains, where the urban population has grown significantly. Existing rail lines have been upgraded, and new lines, including high-speed tracks between major cities, are planned. In Algiers, the long-delayed underground line finally went into service in 2011.

Energy

As a major energy supplier to industry and consumers elsewhere in the world, Algeria is, in principle, able to produce all the energy it needs for its own development. Its refineries convert crude oil into products for use in transport, heating, cooking, and other applications.

Natural gas is an important source of electricity for the national grid. The problems experienced with domestic energy supply over the years had to do mostly with the difficulties of expanding and maintaining the electricity transmission network. The grid is also fed by hydroelectric plants that have been built in mountainous areas such as Kabylia. The economic upturn in the first decade of the millennium resulted in an increase of demand for electricity by almost 50 percent.

In the near future, solar energy will probably become more important. With a growing population and dwindling oil reserves, solar energy is attractive. Making use of this renewable source will free up more hydrocarbon products for export or the production of chemicals. Moreover, the wider application of solar energy could make a difference in tackling air pollution and limiting the emission of greenhouse gasses that contribute to global warming.

Although there are still many problems to solve, the large-scale production of solar energy may even lead to the export of electricity to Europe. Algeria participates in the large-scale DESERTEC project, which aims to produce solar energy in North Africa and transport it to European markets. According to an agreement between the state electricity company Sonelgaz and the DESERTEC Foundation, Algeria intends to produce 650 megawatts of solar energy in 2015 and 22 gigawatts by 2030. The future of this challenging project, involving many companies and states, is not yet assured.

Informal Sector

The dominant hydrocarbon-based industries have not created enough jobs. They are mostly high-technological ventures that require few workers. The light industries and formal trade sector have also been unable to absorb the many entrants into the labour market. At the same time, there has been a structural lack of consumer goods made in Algeria, while imported goods are often more expensive or less available. Before the 1990s, the import restrictions imposed by the state only aggravated this situation.

For these reasons, an important black market developed early in the history of independent Algeria. The state’s formal monopoly on foreign trade was belied by widespread illegal trafficking in goods. The informal economy is estimated to employ about 40 percent of the Algerian labour force. This includes transactions involving not only consumer goods but also industrial inputs for medium and small-scale enterprises. The informal sector has always run parallel to – and is, in fact, integrated into – the formal, state-dominated economy, as goods flow in both directions. Outputs of state firms sometimes follow remarkable paths before turning up as inputs into other economic activities. The informal economy affects a variety of economic sectors, including construction and agriculture, as industrial outputs are not channelled into formal activities and prices are undercut by illegal imports.

The existence of the black market is no secret to the state, and its role has often been acknowledged by government officials. They do have reasons to live with it, even if its eradication were possible. The existence of a large informal sector may disadvantage the state in tax revenues, but it also lessens the state’s responsibility for the creation of jobs and for the supply of consumer goods. This state of affairs probably detracts from the credibility and legitimacy of the government.

Regional Development

The dominance of the hydrocarbon industry and the earlier emphasis on heavy industrialization has typically favoured a centralized economic infrastructure. Most industries are concentrated in major urban centres in the north, where the oil and natural gas pipelines from the desert end in refineries, petrochemical plants, and shipping terminals. Most other industry is based there as well. In order to redress the balance, government policies since the 1980s have aimed to create new centres of industrial development in the cities of the Hauts Plateaux and some Saharan towns. These efforts have been partially successful. In addition, a large network of regional airports was developed that facilitated transactions between the economic core and the regional centres.

The government’s regional development strategy included the promotion of agriculture in more remote and especially more arid areas that were not traditionally the main producing regions. In line with the generally disadvantaged position of agriculture and rural development relative to other economic activities, these initiatives did not initially get off the ground. In 2005, a new plan was launched that combined job creation in outlying rural areas with sustainable forms of agriculture and the preservation of the rural environment, including local culture.

Further Reading

A number of internal and external challenges, including security threats, plunging oil prices and surging domestic energy demand, is forcing the Algerian government to reconsider its economic policy. An overview.
Two days after the general strike, Prime Minister Ahmed Ouyahia said that he will not tolerate “the persistence of this anarchy” and promised to put an end to it. Despite his threats and ongoing state repression against protes...
Efforts to diversify the economy following the 2014 oil price shock have largely failed. Although numerous industrial projects like factories and assembly plants have been launched in recent years, their impact on reducing the tra...
Algeria currently produces 98 per cent of its electricity using natural gas. Experts affirm that the solar energy available in the Sahara will shape the future development of Algeria’s energy sector. The Algerian authorities are...

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