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Algeria’s Economy Continues to Struggle as Diversification Efforts Flounder

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Cars drive on a road in the Algerian capital Algiers. Photo AFP

The oil price shock in 2014 continues to challenge Algeria’s macroeconomic stability in 2018, as the state budget and trade balance sheet remain highly affected by the country’s dependency on crude oil and natural gas exports. Although the market price for hydrocarbons has been on the rise since December 2017 and stood at $67 Per barrel.

Since 2016, the Algerian government has implemented a limited austerity programme in an attempt to reduce the budget deficit as well as the shrinking foreign currency reserves, which dropped from $195 billion in 2014 to $97 billion in December 2017. After imposing import bans for 851 non-essential goods in 2016, Algeria’s trade deficit dropped to $410 million in January 2018, compared to $1.1 billion in January 2017. The government also intends to reduce the import bill to $30 billion in 2018, compared to $46.7 billion in 2016.

Although these measures have successfully slowed Algeria’s shrinking foreign currency reserves, they have caused shortages of consumer goods and raised the prices of essential foodstuffs like milk and dairy products. This has fuelled protests and social unrest.

Despite this, the government has maintained its austerity programme and consistently refuses to adopt a stricter neoliberal policy, as Algeria’s ruling elite is historically hostile toward foreign interference in domestic politics and the economy. Therefore, the government has turned to the Central Bank, which is flooding the country with ‘easy money’ to cover the budget deficit instead of external borrowing, a strategy that was criticized by the International Monetary Fund and is expected to fuel inflation rates.

At the same time, Algeria’s competing political factions are sending mixed messages about how the government might tackle the ongoing crisis. Whereas Prime Minister Ahmed Ouyahia, the leader of Algeria’s second largest party, the National Democratic Rally (RND), promotes a stricter austerity approach, cuts in food and fuel subsidies and the privatization of state-owned companies, the National Liberation Front (FLN), led by President Abdelaziz Bouteflika, remains hostile toward such actions.

Ouyahia reached an agreement with the state-controlled trade union federation (UGTA) and the powerful businessmen’s association (FCE) about a privatization programme of public companies in December 2017, but had to back down after the FLN’s Secretary General Djamel Ould Abbés intervened and rejected any attempt to sell public assets. After Ould Abbés held a meeting with the UGTA and the FCE in early January 2018, Bouteflika publically rebuked him over his privatization plans.

Although negotiations about liberalizing the hydrocarbon sector are still ongoing, as Algeria intends to attract foreign investments in order to expand its hydrocarbon production, it remains unlikely that non-Algerian investors will be able to gain a majority share of companies operating in the country. The 2009 Finance Law only allows foreign investors to control up to 49 per cent of any industrial project, in an attempt to maintain national sovereignty over the economy.

Sources: World Bank Dara, IMF, IndexMundi, countryeconomy.com, atlas.media.mit.edu .Click to Enlarge. @Fanack

Meanwhile, the tug of war over the country’s economic strategy continues to affect government appointments. In March 2018, rumours about Ouyahia’s possible dismissal swirled, amid alleged disagreements between him and Bouteflika’s clan over the government’s handling of the crisis. On 4 April 2018, Bouteflika announced a limited government reshuffle, replacing four members of Ouyahia’s cabinet, although not Ouyahia himself. One of those to go was Mohamed Benmeradi, the minister of trade, a key post for the austerity programme.

The reason for his dismissal remains unclear but might be related to his intention to partially revoke the import bans or his recent call to devalue the dinar, according to the news website TSA Algérie. Devaluation remains a red line for key regime figures and the Central Bank. The latter has promised repeatedly to keep the exchange rate stable, as any further devaluation will further fuel inflation and social unrest.

The ’’surprise’ appointment of Mahdjoub Bedda as the new minister for parliamentary affairs gave yet another glimpse into the internal power struggle. He first joined the cabinet in the spring of 2017, when Bouteflika executed a major government reshuffle. But Bedda was sacked alongside Abdelmajid Tebboune, the new prime minister, only 80 days after taking office. Bedda’s reappointment indicates that the tug of war over the country’s economic policies is far from over and exacerbates uncertainty over the government’s overall strategy in the coming months.

As the 2019 presidential elections approach and social unrest, notably in health care and education sectors, continues to challenge the government’s agenda, the pro-austerity wing of the regime is being forced to make concessions.

Moreover, 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 trade deficit and replacing imports by local production remains low. Most of these factories are joint ventures between Algerian and foreign companies such as the Algerian-Turkish Tayal SPA, which announced the construction of a huge yarn factory in the industrial zone of Sidi Khettab. An assembly plant for solar panels in the city of Ouargla is scheduled to start production in July 2018, while the Spanish company Dulcesol has announced a major investment in its bakery plant in western Algeria.

These projects are due to create jobs, reduce the import bill and foster exports, but in many cases the prospects for achieving these goals remain questionable. This is particularly true of the car assembly industry, which the Algerian government has promoted heavily in the past decade. While several foreign companies, such as Renault and Daimler, have established car assembly plants in Algeria in recent years, Groupe Mazouz announced in April 2018 that its assembly plant for Chinese buses and lorries is ready for production. Although these plants create thousands of new jobs, the import bill has not been significantly reduced as the plants depend on imported spare parts. A boycott of cars made in Algeria, which are even more expensive than imported vehicles, was launched in early 2018 and represented a major blow for the whole industry.

Yet although the strategy of establishing numerous semi-industrial assembly plants has not had the expected outcome, Algeria is turning yet again to the expansion of commodity exports. The government intends to increase oil and shale gas exploitation and announced its intention to ramp up phosphate production from 2 million tonnes per year to 15 million tonnes per year by 2020.

Exporting more commodities might improve Algeria’s trade balance sheet, but these industries do not create enough jobs to meet local demand and are therefore unlikely to ease social tensions.

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