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Algeria sacrifices the economy for political stability

With looming presidential elections in April 2019, no Algerian politician is willing to implement painful structural reforms, that are necessary for the long-term health of the Algerian economy. Lately, the draft budget has scrapped plans to decrease the share of subsidies by doing just the opposite: Algeria’s new budget increases this share by 7%, thus bringing the part of the budget dedicated to subsidies to 21% of the budget.

Although it is true that the Algerian economy is doing much better compared to previous years, when oil prices were low, the postponement of needed reforms is a sign that the country’s officials continue eschewing reforms that would ultimately prevent Algeria from finding itself in the same quagmire. From 2014 onward, the world’s fifth largest producer of gas and thirteenth biggest oil producer was in a difficult position as revenues started to crumble in light of lower energy prices. So much that in 2016, the country reached $17 billion of negative trade balance, thus prompting its sovereign wealth fund (Fond de Regulation des Recettes, FRR) to pump nearly $30 billion a year into the economy from 2015. By 2017, the FRR was out of steam and growth had plunged from 3.3% in 2016 to a meagre 2.2%.

Growth has now risen to 4% in 2018 as a result of higher oil prices, but the improving economic situation leaves many investors with the apprehension that Algiers is also going to shelve plans for structural reforms, especially considering that elections are nearing. Algeria is still a country highly dependent on its energy sector, as it gets 60% of its budget revenues and nearly 95% of its foreign currency from that sector. Energy consumption is also rising at a fast pace in the country, so much that the national gas company, Sonatrach, estimates that it will exceed domestic production by 2025, if better efficiency and new fields are not found. Algeria is therefore in dire need of economic diversification but the political spheres continue to conduct an opaque and unsteady set of economic policies. Currently, the main adjusting policy applied -short of in-depth structural reforms- is the devaluation of the dinar, which has lost around than 50% of its value since 2014.

Whilst some economists believe that the country’s leaders will initiate reforms after the elections, others point to a less encouraging picture: the country’s president, Abdelaziz Bouteflika is in power for 20 years and substantive reforms are yet to be implemented by him. On the 31st of October, he addressed the nation in one of his rare appearances and announced his candidacy for the 2019 elections, which he is set to win for the fifth time considering that the opposition is deeply fragmented and Algerians growing uninterested in politics: the previous elections showed a staggering abstention rate of nearly 50%. For many, it is difficult to envision the post-Bouteflika Algeria, but considering the president’s poor health and old age, this vision will have to emerge sooner or later.

The day after Bouteflika is likely to be painful for Algeria, but it is the next generation of Algerian politicians’ responsibility to ensure that structural reforms are undertaken, and that political transparency, economic policy predictability and better access to markets are achieved.

Sources:

Reuters, 16 November 2018, “Algeria shelves subsidy reforms before presidential elections”

Le Point Afrique, Hadjer Guenanfa, 21 August 2018, “Algérie: les reformes économiques suspendues à la présidentielle de 2019”

Photo Copyright © Algeria Press Service 2018.

 

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