Algeria cuts imports and investment spending as revenues decline

Intent is to spare at least $24 billion, could however lead to more unemployment.
Sunday 29/03/2020
A file picture shows anchored container ship near the ports of in Algiers. (REUTERS)
Cutting imports. A file picture shows anchored container ship near the ports of in Algiers. (REUTERS)

TUNIS – Algeria slashed import bills by $10 billion and investment spending by 30% this year in a bid to stay afloat as the global coronavirus outbreak and a decline in oil prices hurt the economy.

The austerity measures were ordered at a cabinet meeting chaired by Algerian President Abdelmajid Tebboune, who told the government March 23 to slash public investment and cut the value of total imports by $10 billion to $31 billion this year, but spare the education and health sectors.

“Spending in the health sector must remain the same with the means and allocations to fight the transmission of the coronavirus epidemic strengthened,” Tebboune urged the government.

Critics point out however that years of neglect have prevented the public health sector from meeting the demand of the population for adequate medical care. The virus epidemic is likely to sorely test the inefficiencies of the sector.

Oil and gas exports are Algeria’s economic lifeline, accounting for more than 95% of its total exports and more than half of the state budget.

Oil prices have steadily declined this year due to the coronavirus outbreak and a price war between major oil exporters Saudi Arabia and Russia.

This has hit Algerian workers hard, causing business slowdowns and a shortage of some imported goods.

Public investment spending is the engine of Algeria’s economy, including the private sector, which depends on state projects.

Cutting both public spending and imports could tank some private sector businesses and drive up unemployment as they slowdown the economy.

Tebboune ordered the government to draft a rescue plan to bailout businesses affected by the crisis and cover lost wages of workers.

Tebboune asked Algeria’s state-owned Sonatrach to cut its 2020 spending budget in half — from $14 billion to just $7 billion — due to the oil price slump.

He said Algeria had already lost $1 billion in oil and gas export earnings in the first two months of 2020 due to the fall in oil prices and the ongoing health crisis.

He said the crisis exposed the “vulnerability of our national economy due to our decades of negligence” and warned that the country would have to “seriously prepare to overcome the aftermath of the global economic crisis.”

Calling on Algeria to “free itself” from dependence on oil and gas revenues, Tebboune said it was “imperative to put an end to the bad practices that the period of financial affluence has instilled, like waste, laziness, and overconsumption.”

Algeria had hoped to increase public spending after passing a new hydrocarbon law aimed at drawing in major foreign investors.

Earlier this month, Sonatrach agreed to a memorandum of understanding with US major Chevron under which the two sides would discuss joint opportunities in the North African country’s upstream.

Sonatrach had already held preliminary talks with Chevron and fellow US major ExxonMobil in 2019 about upstream projects as Algeria looks to reverse declining foreign upstream investment.

The new hydrocarbon law passed by Algeria is considered key in attracting investors as the country struggles to get the sector back on its feet due to declining oil and gas prices.

Energy experts say Algeria is not able to offset the price decrease by increasing output.

Oil production has fallen in Algeria over the past few years, averaging just 1 million b/d in February, according to official figures.

Algeria’s pipeline gas exports to Spain and Italy fell by more than 11 billion cubic meters (Bcm ) year on year in 2019 to just 21.1 bcm due to foreign competition and changes in the gas market. This was  only partly offset by higher LNG exports, which rose by almost 2 Bcm to 16.4 Bcm of gas equivalent.

Tebboune ordered the government to increase investment spending in farming, which has been the country’s most rapidly expanding sector over the past 15 years.

“The priority in investment in agriculture must be given to farming products that ensure food security of the country, namely wheat, corn as well as sugar and olive oil,” he added.