Algeria girds for cutting sensitive subsidies
Tunis - Algerian Prime Minister Abdelmadjid Tebboune is considering the country’s first cuts to the subsidy regime, long held as sacrosanct.
Tebboune was ordered by Algerian President Abdelaziz Bouteflika to steer clear of foreign debt and spare the country’s dwindling foreign reserves while addressing economic issues.
Subsidy cuts would likely prove unpopular with the public but experts said the move is part of an overdue reform of the Algerian economy. The government’s legislative agenda said the “progressive adaptation of the subsidy system” will be made with the involvement of “parliament, political parties and civil society… to give it more efficiency, greater justice and social fairness through precise targets.”
Algeria’s subsidy system, which costs an estimated $66 billion per year, provides crucial services for 40 million citizens and funds most sectors of the economy, including education, health, agriculture and medicine. Subsidies for food and energy cost the country approximately $28 billion annually.
This is considerable given that Algeria’s GDP, which was $214 billion in 2014 and slowed to $165 billion in 2016, is expected to total $164.8 billion for 2017.
“For the year of 2013, subsidies totalled more than $60 billion,” said financial analyst Said Rabiaa. “The government’s financial open-handedness was even broader than that in the previous years to buy social peace.”
Tebboune has not released details of the revised subsidy system but any change is likely to be heavily scrutinised. Many Algerians view proposed cuts as a sign of politicians’ arrogance and incompetence. They say the government failed to diversify the economy when oil prices were high and is now incapable of moving Algeria away from a rentier economy.
Tebboune has assured that he would safeguard the welfare of the economy.
“Algeria was and will remain a social and democratic republic,” he told parliament while outlining his programme. “We are committed to the social nature of the state, which is the product of the revolution and the independence and never, ever will we touch this gain and asset.”
His task will be tricky because of Algeria’s worsening economic conditions and the leadership’s reluctance to take on foreign debt.
Bouteflika tasked the cabinet with cutting the value of imports to safeguard foreign currency reserves and avoiding foreign debt. Each of these conditions strains the treasury.
“The crisis of the oil prices is enduring and is imposing a set of challenges on us,” Bouteflika acknowledged during a cabinet meeting.
Presidential Chief of Staff Ahmed Ouyahia, who heads the National Rally for Democracy political party, warned that Algeria would suffer in the near future if it were unable to get its act together on the economy.
“If we fail to strengthen the economy we risk finding ourselves under the yoke of the [International Monetary Fund] IMF by 2024-25 and we will then come under the chainsaw,” he said.
Reforms that might shock people were needed in the context of the crisis, he added.
Algeria cut imports this year but official figures show that the change was not substantial, with it slowing 0.9% to $19.7 billion in the first five months of this year. This is mostly due to Algeria’s reliance on food imports, which cannot be reduced.
Algerian experts say the country’s dire economic outlook has pushed the government into undertaking painful reforms.
“(Algeria’s) main economic indicators are bad, including its budget, trade deficit, unemployment and inflation,” said financial analyst Mohamed Gouali, who noted that the country’s growth forecast slowed from 4.2% in 2016 to 1.4% this year and to 0.6% in 2018.
“With such low rates of growth, there is no prospect for oil prices to rise to more than $55 per barrel unless there is war in the Gulf region,” he said. “I add that Algeria is in the second year of its five-year plan to diversify the economy with no substantial progress.”
Tebboune said Algeria’s foreign currency reserves total $114 billion, down from $122 billion at the end of 2016. The World Bank expects the reserves to fall to $60 billion in 2018.
Rachid Sekak, a former director of the debt department at Algeria’s Central Bank, said: “The country needs the equivalent of $20 billion-$25 billion to plug the deficit each year. Where will this money come from? The situation could worsen if oil prices were to decline on the world market.”
Economist Ali Bahmane said that declining oil revenue has rendered the state’s efforts to ensure social stability by providing a comprehensive subsidy system and welfare programme “out of date.”
“All of this had robbed Algeria of the opportunity to build a productive economy that can cushion the impact of falling oil prices and the repercussions of the return of a demographic boom,” Bahmane said.
Experts said the government was likely to start the reforms by trimming subsidies on petroleum products, electricity and gas, which together account for approximately $15.3 billion, 72% of which benefit the wealthy.