Algeria raises oil price basis for next year’s budget

Sunday 30/10/2016
A general view of the headquarters of Algeria’s state energy company Sonatrach in Algiers.

Tunis - Algeria for years resisted raising its reference price for crude oil in state budget forecasts, stick­ing with $37 per barrel even when prices were booming. Excesses were used to build a rainy day fund and keep foreign currency reserves high.
But 2017’s draft budget broke with this traditional fiscal caution by setting an average price of crude oil at $50 per barrel as the country prepares for local and legislative elections — the latest political test for President Abdelaziz Bouteflika, whose nearly 20 years in office ends in 2019.
Oil and gas account for 95% of Al­geria’s exports and 60% of the state budget.
A cabinet meeting in early Oc­tober approved the draft budget, which slashes spending 14% but maintains social spending, includ­ing subsidies, at current levels. Op­position leaders warned the govern­ment against “impoverishing” the population by adopting austerity measures in the 2017 draft budget.
“The fact that the budget fore­casts are based on $50 (per barrel) is a good thing. That means that the fi­nancial law is realistic and there will be more rigour and belt-tightening,” said economist M’hamed Hami­douche. “The bad thing is a return to the policy of the 1980s, of launch­ing bold investment projects when oil prices are high and stopping them during price contractions.”
Algeria has been struggling fi­nancially since oil prices slumped in June 2014 from more than $100 per barrel, forcing the government to delay ambitious plans to upgrade infrastructure.
Despite lower oil prices, Algeria has preserved two sacrosanct poli­cies: Remaining free of foreign debt and maintaining high levels of for­eign currency reserves.
Under Bouteflika, authorities have sought to avoid a repeat of the social upheaval of 1988 when shrinking oil prices pushed Algeria to reschedule its foreign debt, take austerity measures and grant politi­cal concessions to the opposition.
Ultimately, the country plunged into a 10-year civil war pitting Is­lamist insurgents against the pow­erful military at the cost of more than 200,000 lives and an estimat­ed $100 billion in economic damage and lost development opportuni­ties.
“Bouteflika gave priority [in the 2017 draft budget] to the necessities of the short term [by] maintaining the social transfers which represent about 25% of [gross domestic prod­uct] GDP while reducing investment by more than 25%,” said economic analyst Kadi Ihsane.
“This move stems from Boutef­lika’s political DNA. He always pays to win time. He resists and waits while paying for the costs of gaining the time.”
A social spending spree helped Algeria buy social peace and escape the turmoil of the “Arab spring” revolutions, which began in 2010 and plunged some countries into violence and civil wars.
“The government fears the re­percussions of a degradation of the social situation before the elections in 2017,” said Brahim Guendouzi, a financial consultant and economics professor.
Despite rising spending that cut an estimated $850 billion from funds Algeria had accumulated from oil and gas exports since Bouteflika took over as president in 1999, the country maintained a rainy day fund called Fund for the Regulation of Receipts (FRR).
Analysts said that moving the ref­erence price of oil from $37 to $50 suggested that the FRR might be depleted, requiring the government to draw from reserves or even be forced to tap the international bond market to plug budget gaps.
“The FRR is almost empty and with a budget deficit of 15% for 2016 and 10% for 2017 according to the most optimistic forecasts, Algeria would likely resort to foreign debt for the next few years, [which] is not a bad thing if the debt will fi­nance investment projects,” said Alexandre Kateb, an economist at TELL group.
Financial experts argue that Al­geria must keep its budget deficit slightly less than $20 billion to pre­serve its foreign currency reserves, which could dry up within three years if the deficits climb to $30 bil­lion.
The World Bank and International Monetary Fund (IMF) forecast oil prices at $50 in 2017 and at $57 and $59 for the two following years be­fore reaching $60 per barrel in 2020.
Algerian Prime Minister Abdel­malek Sellal said: “Some experts predicted that Algeria’s economy would face difficulties during the next three years through 2019. We have studied the situation and con­cluded that, until 2019, the foreign currency reserves will not fall below the threshold of $100 billion and in­flation will remain stable between 4% and 5% with GDP growing by 3.5% in 2016 and 3.9% in 2017.”
The government’s supporters control parliament and a vote in fa­vour of the draft budget in Decem­ber is considered a foregone conclusion.