Algeria’s Silver Lining

Opinion Articles

The dramatic drop in oil prices—and the low likelihood that they will return to above $100 per barrel—have Algerian authorities worried, given the country’s heavy reliance on hydrocarbons revenues. According to official data, they account for about 97 percent of total export revenues, almost 30 percent of GDP, and 60 percent of state revenues.

However, Algeria has some breathing room. Public debt does not currently exceed 9 percent of GDP, and the government has on hand foreign exchange reserves totaling $185 billion. Under present circumstances, this will allow the Algerian government to finance all of the country’s imports for three years. Additionally, foreign debt is relatively small at $3.7 billion, and the government has a revenue regulation fund worth about $60 billion. Together, these factors will ease the burden of low oil prices. 

More importantly, however, falling oil prices are signaling a new era in Algeria’s economy. Budget deficits will be the norm despite a fifteen-year period of surpluses. And even if oil prices recover, the deficit will remain. Indeed, revenues from hydrocarbon exports in Algeria have plateaued (about $60 billion in 2014) while expenditure on imports of goods ($59 billion in 2014) increased by more than 6 percent due to growing demand for foreign goods. On the one hand, the past era of surpluses allowed Algerian authorities to repay foreign debts early on, establish a revenue regulatory fund, and accumulate significant foreign exchange reserves. But this period has not been put to good use in terms of speeding up reforms that would have paved the way for the much-needed diversification of the Algerian economy. In particular, the government has failed to create a financial market that would have had the capacity to support the private sector and the country’s economic development. Instead the focus was on infrastructure construction and a policy of untargeted price subsidies, all of which has caused operating expenses to surge without changing the nature of the Algerian economy.

Clearly, the current economic model has become unsustainable and Algeria has no other choice but to carry out structural reforms. The government must do so quickly so as to avoid the inevitable slide into a serious crisis whose impacts will be severe if not addressed in the long run.

Translation Source: 
Carnegie Middle East Center