In the middle of popular discontent with the regime led by the Hirak movement, Algeria, rich in resources, continues to face the same socio-economic challenges it has faced for a decade. It is only now that the country’s economic situation has been further complicated by the ongoing coronavirus pandemic and the recent drop in oil prices. The first slowed down investment and consumption, while the second lowered export earnings.
What is at the origin of the current struggles of the oil and gas giant and what measures can the Algerian regime take to face them?
The widespread popular discontent running through Algeria is in part triggered by multidimensional inequalities and economic hardship. The repercussions of the coronavirus pandemic and associated lockdown measures, as well as the drop in oil prices in 2020, have exacerbated the vulnerabilities of the Algerian economy. The economy suffers from several structural problems linked to poor management of rents accumulated in the 2000s, an unfavorable business environment dominated by the military and a constrained private sector. More importantly, the economy is too dependent on oil and gas, which are sensitive to price fluctuations.
In fact, oil and gas rents represented 19% of Algeria’s gross domestic product (GDP) in 2018 and an estimate 40% of the 2018 government budget, while fuel exports represented 94% of merchandise exports in 2017 (see Figure 1). Given the recent tensions on the national budget, it is expected that the Algerian national oil and gas company Sonatrach (which controls more than 75% of total hydrocarbon production) must set the price of a barrel of oil at $ 118.20 in 2020 and $ 135.20 in 2021 for break even fiscally.
FIGURE 1: Fuel and merchandise exports
However, Algeria continues to accumulate a significant budget deficit is expected to reach 16.5% of GDP in 2020 and 14.8% in 2021, due to lower hydrocarbon export revenues. Demand for oil and gas fell: in the first two months of 2020, crude and condensate export volumes declined 27 percentage points year-over-year, while gas export volumes declined 26 percentage points. In addition, COVID-19 has severely affected some of Algeria’s main gas customers; in April 2020, piped gas exports to Spain were down 44% year-on-year.
This situation was exacerbated by falling oil prices, which fell to a record low of $ 16 to $ 17 per barrel in April 2020 and are expected to stay below. $ 45 until 2021. In addition, falling demand for fuel exports coupled with falling prices are expected to further deplete Algeria’s foreign exchange reserves. These should reach $ 44 billion at the end of 2020, continuing the downward trend since 2014, when they stood at $ 195 billion (see Figure 2). Overall, according to the latest projections from the International Monetary Fund (IMF), the economy is expected to contract by 5.5% in 2020.
FIGURE 2: Total foreign exchange reserves minus gold (current, billion US dollars)
These revenue cuts have forced the state to review its fiscal policy. In May 2020, he announced a 50% the reduction of public spending and the postponement of several promised economic and social projects. Such measures could cause greater discontent among the ranks of the Hirak, which demands root-level reforms that would eliminate corruption and socio-economic inequalities.
Indeed, Algeria suffers from disparities at several levels, in particular between the sexes, the regions (urban / rural) and the income brackets. Over the past decade, total male unemployment has stabilized at around 10% and young male unemployment at 26%; for women – especially young women – unemployment continued to rise, widening the gender gap (see Figures 3 and 4). Consequently, Algerian women who wish to enter the labor market are less and less likely to be hired, compared to their male counterparts.
FIGURE 3: Total unemployment rate and youth unemployment rate (15-24 years)
However, the state has tried to improve the regulatory framework for businesses in favor of women to give them better access to economic opportunities. The score of the Women in Business and Law Index in Algeria increased by 17 points over the past 20 years (but it still lags behind neighboring Morocco and Tunisia). The country has also shown an improvement in terms of income distribution. According to the latest available data, income inequality decreased well below the levels of its neighbors. Yet while the richest 10% of the population represented 23% of 2011 incomes, the poorest 10% represented only 4%. In terms of consumption inequalities, the gap between the rich and the poor is almost 28%.
In addition, Algeria still faces disparities between rural and urban areas. Although the gap in terms of access to basic infrastructure and public services decreased over time, other disparities persist. People living in the Algerian Sahara and the steppe, for example, suffer from double and triple the national poverty average, respectively.
Outlook: diversify, diversify, diversify
With limited fiscal space to cover public spending and finance national projects, the state has little choice but to cut spending and further increase domestic debt financed by its central bank. Coupled with the current political crisis, this will likely fuel further social unrest. The scheme can temporarily remedy this problem by seeking long-term loans from foreign lenders. However, this is an unlikely scenario as the regime has avoid sell debt abroad since 2005 due to its negative experience borrow from the International Monetary Fund (IMF) in the 1990s and have to restructure billions of dollars in external loans.
To achieve long-term change, the Algerian state must prioritize far-reaching reforms that restructure the economy away from dependence on oil and gas. Algerian non-hydrocarbon exports are equivalent to approximately 2% of its total exports, which means that it is one of the most oil-dependent countries in the world. However, according to the IMF, its current oil and gas reserves will be impoverished in the mid-2030s and mid-2050s, respectively. Algeria should have prepared the ground for a massive diversification plan two to four decades ago like the others rich in resources states like Indonesia and Malaysia. However, the regime still has leeway to undertake reforms if it slows the rate of growth of domestic consumption by lowering hydrocarbon subsidies, thus slightly delaying these depletion dates. A potentially profitable sector in Algeria (post-COVID) is tourism, which can serve as a alternative source for foreign currencies. To make the country an attractive international destination and encourage investment in this sector, the regime will however have to invest massively in security, accommodation and its image; it will also have to reform its strict visa rules.
Another way to achieve long-term change is to promote a growth model driven by the private sector. Currently, the Algerian economy follows an oversized model of public growth, which has constrained the business environment and private sector development. Ease of Doing Business Index, Algeria gets bad scores and ranks far behind neighboring countries from 20 to 25 points. The country is short notably in terms of access to credit (181 out of 190 economies), protection of minority investors (179), property registration (165) and business creation (152). These constraints limit entrepreneurship opportunities and startups’ chances of survival, which are essential for developing a sustainable private sector capable of absorbing incoming cohorts of young graduates and contributing to growth unrelated to oil and gas.
In the meantime, in the medium term, the government must gradually diversify its revenue stream, rebuild fiscal buffers and continue to reorient non-priority spending.