Algeria economy: ‘The worst is to come’

Algiers –  Algerian Prime Minister Abdelmalek Sellal is expected to announce a new package of reforms to cope with plummeting global energy prices within the coming weeks.

Last December, Sellal established a task force to diversify the country’s oil-dependent economy.

While the Algerian government did not respond to Al Jazeera’s questions on the matter, one source who spoke on condition of anonymity said Sellal would be hosting a meeting in mid-May, after which the reforms would be announced.

“There are ongoing tensions within the government between those who say that Algeria needs to pass urgent reforms only, and those who want overall reform as well to develop both non-hydrocarbon and private sectors,” the source told Al Jazeera.

READ MORE: Algeria shakes up economy as oil prices plummet

Analysts say the new austerity measures are likely to be announced in an effort to control public-sector debt. Hassan Haddouche, a journalist specialising in economic issues, told Al Jazeera that the task force’s plan would “feature further spending cuts, as the crash in energy prices is putting Algeria under financial pressure”. 

Algeria, Africa’s largest country and a major energy exporter, is in the throes of a budget crisis amid the global slump in oil prices. Energy sales account for 95 percent of Algeria’s exports and provide 60 percent of the state budget. But in 2015, Algeria saw its export revenues halved, owing to both falling oil prices and the depreciation of the dinar. As a consequence, the fiscal deficit, which has been growing since 2014, nearly doubled to 16 percent of gross domestic product in 2015, according to the Finance Ministry.

In less than 10 years, Algeria's oil production would only cover the growing domestic demand. That is to say that Algeria does not only need urgent reforms, but it also must embrace an alternative economic model.

by Hassan Haddouche, journalist

Despite not wanting to talk about an “economic crisis”, Sellal has admitted that the “current situation is certainly difficult“. 

“Algeria’s rulers don’t speak frankly about the ongoing economic crisis, because they have in mind the series of street demonstrations that occurred in October 1988 [after a drop in oil prices],” said Dalia Ghanem-Yazbeck, a research analyst at the Carnegie Middle East Center. “They are afraid that history could repeat.”

Despite these fears, the Algerian government has started to pare back some subsidies, for the first time since President Abdelaziz Bouteflika came to power almost two decades ago. Fuel and electricity prices, as well as mobile phone subscription fees, have risen this year owing to a 10 percent increase in value-added tax. Meanwhile, the government has frozen some infrastructure projects, including the construction of five university hospitals.

In March, the government announced it would reduce imports by 15 percent to save its foreign currency reserves. Some restrictions have already been approved on certain automobile, cement and steel imports.

Surprisingly, though, many Algerians say they are barely feeling the pinch of the economic downturn. 

“Though some prices appear to have been increased, such as both fruits and meats, the situation is not as bad as what we were expecting. Obviously, poor households are suffering more,” said Fatima, a middle-aged woman buying vegetables in a grocery store in downtown Algiers.

“Where is the crisis? We broke an all-time shopper numbers record during our winter clearance sales, with roughly 54,000 customers per day,” said Alain Rolland, CEO of the Society of Shopping Centres in Algeria. “They were coming from across the country.”

The economic situation in Algeria is indeed not as dramatic as in countries such as Venezuela. In Algeria, a weak dinar is fuelling inflation only on imported goods, experts say. “There is not yet a substantial increase in food and energy prices, as the inflation was estimated at less than 5 percent in 2015 and is forecast to reach 6 percent in 2016,” Haddouche explained. “Milk, corn, flour and many other items are still subsidised. When the dinar falls, the price of imported products, especially the items coming from outside the eurozone, increase.”

But the economic downturn is already exacerbating existing social inequality in Algeria. “It is unsurprising that unprivileged and vulnerable people are the first to be affected by the inflation,” said Ghanem-Yazbeck. More than a third of Algerians reportedly live in poverty, while the unemployment rate was 11 percent as of September 2015, according to Algeria’s National Office of Statistics. If the price of crude oil does not recover, experts say quality of life for Algerians will deeply suffer.

Unlike Venezuela, Algeria is not yet in a “state of emergency as it has got almost no foreign debt,” Haddouche said. 

“The oil-and-gas-generated revenues allowed the regime to amass what was for a time the world’s eighth-largest foreign currency reserves,” Ghanem-Yazbeck noted.

READ MORE: Oil price slump threatens to erode Algeria’s status quo

But Algeria’s foreign currency reserves have been steadily declining. According to Algeria’s Finance Ministry, reserves fell from almost $180bn in December 2014 to $143bn in 2015. “If the trend continues, the government may run out of foreign exchange reserves in three years. The worst is to come,” Haddouche said.

Experts believe that, unless Algeria soon passes wide-ranging reforms, it may be struck by financial crisis. “If the economic situation continues to worsen in the upcoming months, it is clear that the government will need to revamp Algeria’s controversial system of subsidies,” Ghanem-Yazbeck said. Algeria’s subsidies programme accounted for nearly a fifth of Algeria’s GDP in 2012.

Regardless of whether oil prices eventually rise, Algeria’s welfare system will likely see major changes. 

“Even if the [price of] crude is to recover, Algeria’s economic model is not sustainable since crude oil production has been gradually declining. In less than 10 years, Algeria’s oil production would only cover the growing domestic demand,” Haddouche said. “That is to say that Algeria does not only need urgent reforms, but it also must embrace an alternative economic model.”