Algeria reduces unemployment, inflation with ‘easy money’ policy

Algeria’s jobless rate dropped 0.6% to 11.1% year on year during the first quarter of this year.
Sunday 05/08/2018
A customer buys a light bulb at a lighting store in Algiers. (Reuters)
Economic necessities. A customer buys a light bulb at a lighting store in Algiers. (Reuters)

TUNIS - The Algerian government has reduced unemployment and kept inflation under control through an “easy money” strategy, confounding critics who said the policy would hamper long-term success of a diversified economy.

The Bank of Algeria has bought assets, including government debt with a long-term maturity, and churned out more than $190 billion — double the country’s expected foreign currency reserves for the year — to cover the 2017 and 2018 budget deficits and keep the economy afloat.

The policy, known as quantitative easing, is similar to expansionary monetary policies used by the US Federal Re­serve and the European Union to jump-start the global economy during the 2008 financial crisis.

In Algeria’s case, the result has been impressive: Algeria’s jobless rate dropped 0.6% to 11.1% year on year during the first quarter of this year. The economy grew 1.3% during the same period and inflation slowed to 4.6% versus 5.6% year or year, official figures released July 24 indicated.

That contradicted predictions by international financial institutions, such as the International Monetary Fund (IMF) and the World Bank, which argued the policy would weaken the economy and cause massive inflation. They used the example of Venezuela, which recorded an annual inflation rate of 41,838% in June.

Algeria turned to “easy money” to stabilise the economy during a period of low oil prices. Oil and gas exports account for 95% of its total sales abroad and 60% of the state budget.

Analysts said Algeria’s policy has been surprisingly effective.

“Few experts shared the government’s assumptions that this financial alternative would have positive results,” said Algerian economist Mohamed Touati. “The experts, including teams of the IMF, expected an inflation rate at least of two digits. In their eyes, Algeria would be contaminated by the Venezuelan syndrome.”

Inflation in Algeria was 5.6% in 2017 but slowed to 4.6% year on year this June, well below the government’s target inflation rate of 5.5% for 2018.

“The government announced these figures about inflation, growth and unemployment to show that it had made the right choices,” said Touati. “With the rising oil prices, the Algerian economy will not be in the stagnation many experts had predicted earlier.”

Algerian Prime Minister Ahmed Ouyahia pointed to the lower unemployment rate as evidence of the policy’s success. Economists said since the plan produced gains, the government was unlikely to change course before 2019 presidential elections.

“More than 200,000 fewer unemployed Algerians in less than one year. That is the result of the government policy to stimulate the economic activities by high spending,” said economist Hassan Haddouche, adding that it is “a good reason for the government to stick to this policy.”

However, the IMF in its July review of Algeria’s economy warned that “the government may need to resort to monetary financing in subsequent years, which risks plunging the economy into an inflationary spiral.”

“The environment may become less conducive to reforms and private sector development,” it added. “Importantly, the new policies are likely to reduce the economy’s resilience to shocks, externally from lower oil prices or domestically from higher-than-planned fiscal spending or contingent liabilities.”

Some economists said the results should be considered part of the government’s efforts to preserve the stability of the regime, not necessarily to ensure a diversified economy that will succeed in the long term.

Economist Ali Tatouche, who teaches at Algiers University, said planned spending for this year rose to $19.4 billion against $11.8 billion in 2017. The government’s appropriated funds for development programmes for 2018 totalled $34.2 billion, compared to $19.5 billion in 2017.

“For all that investment, the economy expanded by a meagre 1.3% and the breakdown of the workforce showed that the sectors that create more jobs and wealth are getting nowhere fast,” he said.

Many of the jobs created this year were in the construction and administrative sectors, which rely heavily on government spending, figures from the Algeria’s National Office of Statistics showed.

“The new figures underline anew that the government’s economic choices were rarely stemming from economic necessities and logics,” said analyst Mustapha Hammouche, adding that the regime was interested only in ensuring its own survival.

“There is a relation between the democratic deficit in Algeria and the underdevelopment of its economy. The IMF will never say so because it is not its business. It falls on the Algerian political parties and civic society to play a role on that,” he added.