Ranked as the third most important economy in the MENA region and a leader in the Maghreb, Algeria is one of a hand full of countries that have achieved 20% poverty reduction in the past two decades. Indeed, the Algerian government took significant steps to improve the wellbeing of its people by implementing social policies in line with the United Nations Sustainable Development Goals. Among other major achievements, the country’s oil boom has enabled the authorities to clear its debt, invest in infrastructure projects, and improve Human Development Indicators.
Algeria has made significant gains in each of the key Human Development Indicators (HDI). The country’s position is at 83 out of 188 countries which ranks it among the highly developed cohort in the latest Human Development Report. Life expectancy at birth increased by 16.6 years and mean years of schooling increased by 5.8 years. Algeria is considered to have achieved universal primary education with a 97% Primary Net Enrollment Rate in 2015 (with gender parity) and equally elevated higher education enrollment rates. Going forward, the Government will need to improve the quality of education as Algeria’s 15-year olds ranked 71 out of 72 economies in science and mathematics in the 2015 PISA.
These positive results of shared prosperity have contributed to Algeria’s overall socioeconomic stability, however, the costs of the underlying social programs and subsidies are no longer affordable with low oil prices. The continued worldwide drop in oil prices has necessitated changes in country economic models and have triggered a domino effect of reforms in the MENA oil exporting countries to adapt to the new scenario. Similar to its neighbors, Algeria’s hydrocarbon revenues have been halved in the recent years in addition to a rapid decrease in its currency reserves.
On the economic front, despite a sharp decline in oil price and unfavorable weather, Algeria was able to maintain economic growth at 3.4% in 2016. Sustained growth has been achieved by increasing the fiscal deficit, which doubled to 15.6 percent in 2015, although it has improved to an estimate of 12.5% in 2016 due to a slight recovery in oil prices. The deficit had widened also due to a slow reduction in fiscal spending in the 2016 Budget Law. The latter 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 on car registrations. The budget also empowered finance authorities to approve further cuts if oil prices fell lower than its average oil price assumption, and to engage in external borrowing if needed.
Prime Minister Abdelmalek Sellal recently reiterated that the country remains resilient to the collapse of the oil prices because of the socio-economic reforms the Government has initiated. The Council of Ministers also adopted a bold strategy for “A New Growth Model” in mid-2016 based on fiscal consolidation over the medium term coupled with a critical mass of structural reforms aimed at restoring macroeconomic balance and diversification of the economy. However, reliance on hydrocarbon revenues does make Algeria highly vulnerable to volatility in global oil prices in the face of substantial global oil inventories, and weaker than anticipated recovery in demand.
The possibility of social discontent resulting from government spending cuts and tax hikes poses a risk for Algeria. The political will to rationalize inefficient, inequitable and costly subsidies has been repeatedly expressed by President Bouteflika himself. However, such reforms requires improved safety nets, a cash transfer system reaching the needy, a solid media campaign to ensure better public understanding during its implementation, and, a stronger statistical system that allows monitoring of households’ living conditions more frequently. These accompanying measures are medium term in nature and take some time to put in place.
The shift towards a more diversified economy will help Algeria move toward sustainable growth and create jobs. This does need to be done in a way that protects the most vulnerable by ensuring well defined and targeted compensation mechanisms. The Bank’s global perspective, analytical expertise, knowledge and resources are shared with the Algerian government to support the country in the implementation of the reforms.
Last Updated: Apr 01, 2017