Algeria tries to diversify economy as oil prices decline

Sunday 29/05/2016

Tunis - Algerian officials have de­vised a plan to diversify their hydrocarbons-de­pendent economy and energise growth as fall­ing oil prices threaten to unravel the de facto petrostate’s status quo.

The ambitious scheme, to be im­plemented by 2019, aims to open the economy, of which the oil and gas output accounts for approxi­mately 30%, to increase the role of the private sector, boost foreign in­vestment and ease a business envi­ronment hampered by red tape and a heavy welfare state.

Authorities called the plan Alge­ria’s “new economic model”. It is expected to be endorsed June 5th at a gathering of business groups, the main trade union UGTA and Al­gerian Prime Minister Abdelmalek Sellal’s cabinet.

“The new economic model that will be adopted by Algeria for the next three years is built on eco­nomic investment away from fi­nancing economic ventures from the state budget,” said Finance Minister Abderrahmane Benkhalfa. “It aims to recycle national savings into the economy’s dynamic and achieve an average growth [of 7%] per year.”

Algeria has economic breathing space until the end of 2017 with enough foreign reserves to finance imports for up to 23 months, for­eign debt is at 1.8% of gross domes­tic product (GDP) and domestic debt at 8% of GDP — the lowest lev­els in North Africa.

The relatively healthy economic balance sheet is mainly due to a cautious management of oil and gas export revenues since 2000 when the government set up the rainy day Receipts Regulation Fund.

“This fund was at $77 billion in 2013. It was halved in 2015. If we do not diversify the economy over the next three years, no single dol­lar will remain in this fund,” said finance expert Lies Kerrar.

The World Bank expects low oil prices, which represent 60% of budget revenues, will weaken Al­geria’s outlook. GDP growth is seen at 1.7% in 2016 and 2.2% in 2017. Growth was 3.9% in 2015.

Algeria’s Saharan Blend crude averaged $37 a barrel from Janu­ary through April. The government had forecast $35 a barrel in drawing up its budget.

Algeria faces more challenges than the shrinking of its financial cushion. More than 10 million peo­ple will enter the job market in the coming years and rising domestic consumption of gas and oil will eat away at potential export volumes.

Algeria has attempted econom­ic diversification in the past but fears of creating instability have hindered the efforts. The heavy economic central command and the burden of subsidies were more hurdles.

Officials are haunted by their ex­perience with the Algerian version of the “Arab spring”. In October 1988, Algeria opened its single-party system allowing resurgent Islamists and other parties to com­pete over the country’s political future. Global oil prices collapsed at the time, forcing Algiers to curb subsidies.

The country plunged into civil war for more than a decade after 1992 at the cost of 250,000 lives and more than $60 billion in eco­nomic damage and lost develop­ment opportunities.

The leadership continued to fear social repercussions from deeper economic reforms because Algeria spends an average of 30% of GDP on subsidies.

The domestic price of gas is ten times lower than its export value, making it the cheapest in the Arab world. Residents of Algeria — even foreigners and wealthy locals — enjoy the benefits of subsidies, including free health care and edu­cation along with cheap consumer goods and energy products.

“The new plan’s priorities are de­veloping farming, tourism, indus­try and services,” Sellal said of the new economic plan.

Agriculture contributes about 10% of GDP and industry output accounts for around 5% with con­struction and public works repre­senting 10.4% thanks to increased spending on infrastructure projects over the past ten years.

The total of the three main sec­tors is dwarfed by the 30% of GDP from hydrocarbons, suggesting the country has a huge potential to generate growth even with timid steps.

The new model is unlikely to af­fect subsidies as the country is going through delicate political circumstances stemming mainly from the transition of the rigid rul­ing system after the end of Presi­dent Abdelaziz Bouteflika’s term in 2019, were he to finish his term despite his frail health.

Benkhalfa attempted to calm worries that the new model may upset the economic and social status quo saying: “The transition of the new model will provoke no shock to the economy.”