Amid political upheavals in other Arab countries, Algeria's government maintained stability through a combination of minimal political reforms and public sector expenditure. To fulfill a pledge that the Algerian President, Abdelaziz Bouteflika, made shortly after the outbreak of the Arab Spring, a raft of constitutional amendments were adopted in February 2016 to strengthen Algeria’s governing structure and deepen separation of powers. Regional instability continues to be a major concern for the Algerian authorities that recently stepped up security measures along the border with Libya.
On the economic front, Algeria’s fundamentals have steadily worsened since mid-2014, in line with the slump in global oil prices, but the recent budget approved signal a turning point. In 2015, growth slowed to 2.9 percent from 3.8 percent in 2014, hit by a falling average oil price from US$100 p.b. in 2014 to US$59 p.b. in 2015. Under initial expectations that the fall in oil prices would be short-lived, lack of fiscal consolidation led the budget deficit to double to -15.9 percent of GDP in 2015. The current account deficit also tripled to -15.2 percent of GDP in 2015. Despite tight monetary policy, inflation rose to 4.8 percent as the partial result of pass-through effect from about a 20 percent nominal depreciation of the dinar, aimed to correct the external imbalance. Unemployment rose to double digits and is acute among women and youth.
In response, in December 2015, the government adopted an overdue set of austerity policies. The 2016 budget calls for a 9 percent cut in expenditure (mostly investment) and a 4 percent increase in tax revenue based on a 36 percent hike in gasoline prices and higher taxes on electricity and gasoline VAT rates and on car registrations. The budget empowers finance authorities to approve further cuts if oil prices fall lower than its average oil price assumption, and to engage in external borrowing if needed. The Government will also apply new import licenses and is considering to raise electricity prices closer to their cost. Monetary Authorities will allow the dinar to further depreciate so as to prevent its misalignment.
Policy makers will continue facing difficult trade-offs in 2016 with oil prices projected at US$35 p.b. in the budget 2016. Authorities have little choice but to restore fiscal and external balances. Growth, however, is projected to remain modest at 3.4 percent driven by modest dynamism in the hydrocarbon sector, with gas projects coming online and the non-hydrocarbon sectors. Growth would benefit from reduced, but still positive, public expenditure and stagnant hydrocarbon exports, especially if the oil prices remain weak or fall further and if the global recovery remains tepid. In 2017-18, following some recovery in oil prices, the growth slowdown will continue to be driven by public investment and still significant subsidies. Private investment will remain tepid as the country may also be undergoing a complex political transition with no clear succession plans, high pressure for jobs, continuous regional security threats and some social instability shaken by the first adjustment to energy products in decades.
The long term structural challenges facing the economy remain unchanged, namely reducing subsidies, improving the business environment, diversifying the economy and creating private sector jobs. While the government talks about the need for reforms, the steps it has taken have been modest. The government formed following the April 2014 presidential elections promised more action but has yet to deliver on promises.
A business climate marked by difficult access to credit, a complex regulatory environment, and time-consuming procedures to set up a business, holds back the private sector. Trade integration has also proceeded very slowly, and negotiations to join the WTO have not made much progress. To bolster the economy, the government is seeking to further develop its hydrocarbon resources and has also explicitly embraced private sector development by opening research centers and launching major transport and housing projects. Regarding the business climate, the government has established a committee to come up with an action plan to help reform it. Economic diversification and reduced reliance on the hydrocarbon sector are both key to strong and balanced growth.
Last Updated: Mar 31, 2016