Development in infrastructure and agriculture, two large segments of the non-oil economy, were major contributors to this performance. Per capita GDP reached US$5,451 in 2013, exceeding its 2008 peak of US$4,967. All sectors grew over that period except for the hydrocarbon sector where production has been declining since 2006. Inflation, which increased to close to 9 percent in 2012 due to expansionary fiscal policy, has since declined to 3¼ percent and remains subdued.
The rapid decline, however, in hydrocarbon output and exports has resulted in a narrowing of the external current account surplus; should that continue, it will strain the government budget. The economy remains highly dependent on the hydrocarbon sector, which accounts for about a third of GDP and 98 percent of exports. Domestic energy consumption is on the rise at the same time as hydrocarbon production is declining.
Amid political upheavals in other Arab countries, Algeria's government maintained stability through a combination of minimal political reforms and public sector expenditure. But the long term 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 new 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. Unemployment has remained at about 10% since 2010, and is significantly higher for youth (24.8%) and women (16.3%). Trade integration has also proceeded very slowly, and negotiations to join the WTO have not made much progress. On the fiscal front, expansionary budgets have propped up the economy but led to widening deficits, which peaked at 5% of GDP in 2012 and are expected to remain high over 2014-15 as hydrocarbon revenues decline. Public spending has declined over the past two years but remains in the order of 35% of GDP, partly due to a scaled-up investment program, but more importantly because of a high spending on wages and transfers. Subsidies in particular, projected to reach close to 13% of GDP in 2014, continue to weigh on government finances, underscoring the urgent need for subsidy reform.
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. In the absence of these much-needed reforms, however, the Algerian economy is likely to continue to grow slowly. Economic diversification and reduced reliance on the hydrocarbon sector are both key to strong and balanced growth. The government’s ongoing development program has not met expectations.
Last Updated: Jan 31, 2015