Algeria protects dinar as US dollar depreciates

The decline of the US dollar complicated the government’s efforts to trim imports.
Sunday 04/02/2018
A man counts Algerian dinar banknotes in Algiers.                                                            (Reuters)
Over-valued. A man counts Algerian dinar banknotes in Algiers. (Reuters)

TUNIS - Algeria is artificially propping up the dinar to finance increased state spending in 2018 ahead of presidential elections. The move comes despite a spillover effect from the depreciation of the US dollar, which cancelled some of Algeria’s gains from rebounding oil prices in 2017.

The decline of the US dollar, a development that confounded Algerian analysts and economists, complicated the government’s efforts to trim imports to preserve the country’s shrinking foreign currency reserves.

“The reality today on the currency exchange markets shows a weak dollar,” said Algerian economist Hassan Haddouche. “Unfortunately, a weak dollar and a strong euro do not help our country’s economic affairs.”

“The reason is that our oil and gas are sold abroad in the US dollar while almost half of (our) imports are paid in euros,” he said, adding that this resulted in “the cancelling of part of the gains from oil prices, which rose around 20% in annual average last year.”

The US dollar lost 10% of its value on the DXY index in 2017 and has dropped approximately 1.5% in 2018.

The sale of oil and gas abroad accounted for 94.5% of Algeria’s exports in 2017. Sales were $34.8 billion, up from $30 billion the previous year.

Total imports fell to $46 billion in 2017, compared to $47 billion in 2016. The government had sought to slash imports by almost $10 billion by tightening its licensing system.

The government said it wants to reduce costs to $30 billion in 2018 by halting imports of more than 900 goods and products. The policy is part of a broader economic strategy to cut trade, current account and budget deficits in 2020 after presidential elections in April 2019.

Algerian economists said a strong euro combined with an over-valued dinar and declining dollar would make it difficult for the government to reconcile the conflicting aims of its economic policy.

Algerian President Abdelaziz Bouteflika, in a rare interview with Oxford Business Group January 24, outlined a bold plan to wean Algeria off its reliance on oil and gas revenue and towards diversification and growth. He said the government had implemented an economic growth model in 2017 that would run for five years and that includes an “economic diversification project with a 2030 horizon.”

“The model will also make significant GDP per capita growth possible, doubling the participation of the manufacturing industry to 10%, a successful transition…  and result in a more diversified export portfolio that will be supporting financing growth,” Bouteflika said.

Local economists warned that overvaluing the dinar relative to the dollar runs counter to most governmental diversification plans.

They said Algeria’s central bank was allowing the value of the dinar to remain abnormally high to increase profits from the sale of foreign currencies from its foreign reserves and reduce inflation.

“It is without a doubt the beginning of stabilisation-revaluation of the value of the dinar, which will continue in 2018 and the following three years,” said Haddouche. “The finance minister, Abderrahmane Raouya, told the parliament during the debate of the budget in December that the parity of the dinar will remain at least at 115 dinars per one dollar until 2020.”

Nour Meddahi, who teaches economics at the Toulouse School of Economics, said the move was “certainly the biggest mistake in the Algerian government’s economic policy.”

“Algeria’s central bank should have continued depreciating the dinar. It is a necessary measure to preserve the country’s economy even though it would have the effect of causing price hikes,” added Meddahi.

By law, profits earned by the central bank from foreign currency trading are funnelled into the state coffers to finance government spending.

“The budget deficit for 2018 is at 9.4% of GDP versus 5.6% in 2017,” said Meddahi, adding that he expected the government to fill the gap with profits the Central Bank earns through the sale of reserves.

“There is only one explanation for such a dangerous deficit target,” he said, “the presidential election.”

Algeria’s central bank bought most of the currency reserves from state energy firm Sonatrach and other oil producers from 2000-14, when there were higher current account surpluses.

During that time, it bought the dollar for around 75 dinars. Today, one dollar is worth 115 dinars. Algerian economists estimate that a gain of one dinar in the exchange rate translates to 25 billion dinars in profit for the state.

Foreign reserves stood at $97 billion in 2017, down from $193 billion three years ago.

Trade Minister Mohamed Benmeradi, in a January 28 interview with Algerian state radio, noted that “almost 75% of imports are done by the private sector” and that “the dinar is likely overvalued at the official exchange market and it should be brought to the same value as the black market.”

At Algiers’ Square Port Said, the main foreign exchange market for the country’s parallel economy, the dinar traded at 171 to the US dollar on January 31.