How is Algeria Reacting to Low Oil Prices?

Algeria exports 540,000 b/d of its total production of about 1.1 million b/d. However, crude oil and natural gas production have gradually declined in recent years, mainly because of repeated project delays, difficulties in attracting investment partners, infrastructure gaps, and technical problems. The economy is heavily reliant on hydrocarbons for its exports and government revenues, standing at 95 and 75 % respectively. The oil price crash has eroded its finances, trade balance and international reserves. Fiscal deficits have been rising from 1.4 % of GDP in 2013 to 15.7 % of GDP in 2016. Total reserves have fallen from $194 billion in 2013 to an estimated $108 billion in 2016 and are projected to decline further to $60 billion in 2018. The deterioration of Algeria’s terms of trade led to a 20 % nominal depreciation of the dinar since mid-2014; inflation picked up to 4.8 % in 2015.

Facing a constant decline in oil and gas revenues and high import bills, the government has adopted a set of corrective measures as part of the 2016 budget law. Formulated under the assumption of an average oil price of $35 p/b, the 2016 budget calls for a 9 % cut in expenditures—mostly in capital expenditure—and a 4 % increase in tax revenues. The set of revenue measures includes a 36 % hike in fuel prices, higher VAT rates on fuel and power consumption, and higher taxes on car registration. Further adjustments to power tariffs and new import licenses have been announced but details are still pending. These measures are first steps toward a possible comprehensive reform of Algeria’s costly and regressive subsidies (Fuel and other subsidies represent more than 12 % of GDP). The budget also allows the government to adopt additional corrective measures if oil prices were to fall below $35 p/b and to engage in external borrowing. These include new import licenses, raising electricity prices closer to their cost, and further depreciation of the currency. The government has attempted to open up public companies to private investment. The 2016 budget includes measures to allow for private investment in state-owned enterprises, creating new industrial zones, and easing restrictions on the investment of revenues accrued from tax breaks. A new investment law was passed by the parliament in July aimed at improving the business sector outside of the oil industry.