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Algeria’s Economic Outlook- Spring 2016


The latest MENA Economic Monitor Report - Spring 2016, expects Algeria’s growth to remain modest at 3.4 % in 2016.

The slump in global oil prices since mid-2014 has led to deterioration in macroeconomic balances. In 2015, growth slowed to 2.9 % from 4.1 % in 2014, hit by a falling average oil price from $100 p/b. in 2014 to $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 % of GDP in 2015. The current account deficit tripled to -15.2 % of GDP in 2015. Hydrocarbon exports amount to 95 % of total exports and around two-thirds of government revenues. Hydrocarbon exports have fallen from a peak of 36 % of GDP in 2011 to 19 % of GDP in 2015, while hydrocarbon revenues have dropped from a peak of 27.4 % of GDP to 14 % of GDP. Due to very large drawdowns, the size of the oil stabilization fund has fallen from 25.6 % of GDP in 2014 to 16.2 % of GDP. International reserves remain high at 28 months of imports, but are declining fast. Despite tight monetary policy, inflation rose to 4.8 % as the partial result of pass-through effect from a 20 % nominal depreciation of the dinar, aimed to correct the external imbalance. Unemployment rose to double digits and was acute among women and youth.

The 2016 budget emphasizes fiscal consolidation, and assumes an average oil price of $35 p/b. It calls for a 9 % cut in expenditure (mostly investment) and a 4 % increase in tax revenue based on a 36 % hike in gasoline prices and higher taxes on electricity and gasoline, and on car registrations. The budget empowers the government 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 raising electricity prices closer to the production cost. Monetary Authorities will allow the dinar to have the flexibility needed so as to prevent its misalignment.

Policy makers continue to face difficult trade-offs in the next few years. The government has little choice but to restore fiscal and external balances. Growth, however, is projected to remain modest at 3.4 % driven by modest dynamism in the hydrocarbon sector, with gas projects coming online, and by 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, growth will continue to be driven by public investment and still significant subsidies. Private investment will remain tepid due to domestic uncertainty and continuous regional security threats.

Risks are tilted to the downside. Externally, these include sharper than assumed declines in energy prices and a slow growth recovery in Algeria’s trade partners in Europe and China. Domestically, risks include mounting social discontent from budget cuts, tax hikes and high youth unemployment levels. The political will and national consensus to rationalize inefficient and generous subsidies is slowly emerging, but such reform requires improved safety nets, a cash transfer system reaching the needy and a solid media campaign during its implementation. These risks notwithstanding, the decline in oil prices represents an opportunity to structurally reorient the economy away from oil and public-led dominance towards more diversified growth featuring increased private sector participation.  


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