Algerian dinar at record low as government strives to protect reserves

September 17, 2017
Historic low. A man counts Algerian dinar banknotes in Algiers city. (Reuters)

Tunis - Algeria’s central bank allowed the value of the country’s currency to drop to a historic low against the euro, driving concerns about inflation and social instability. Lower oil prices and shrinking foreign currency reserves have left the government unable to shore up the dinar’s depreciating value and offset economic hardships.

The government previously handed out interest-free loans to young people, raised wages and provided free housing to improve living conditions and ward off protests from a restive population in times of high oil prices but the severity of the current problem has made such policies untenable.

The dinar has shed 13.5% of its value against the euro this year, with most of the depreciation accelerating in the last three months. Financial expert Samir Allam said the euro was worth a record 132.03 dinars on September 3.

While the US dollar fell slightly against the dinar over the first eight months of the year, one dollar was worth 109.87 dinars on August 24, not far off the record value of 111.51 dinars to the dollar, Algerian economist Ali Ait Idir said.

At Algiers’ Square Port Said, the main foreign exchange market for the country’s parallel economy, the dinar’s decline was even steeper, with one euro trading for around 194 dinars.

“We anticipate one euro for 200 dinars later in September,” one trader told Tout sur l’Algérie website, citing increased demand for the euro from importers in the informal market.

Powerless to boost exports outside of oil and gas sales, which account for 94% of its total exports, Algeria has little room to manoeuvre.

The central bank, officially called Bank of Algeria, keeps the dinar in a managed float against major currencies. It hopes this will curb imports, which have been eating away at foreign currency reserves and brought the economy closer to what Prime Minister Ahmed Ouyahia has warned could be a “national catastrophe.”

The government has limited imports since early 2016 but that has not produced the needed result. Algeria’s imports cost an estimated $15.42 billion during the first four months of this year compared to $15.44 billion for the same period last year, government figures showed.

The figures reflect the country’s reliance on foreign markets to feed its people and supply its economic machine. Food imports totalled $2.8 billion for the first four months of this year, up 8% from the same period last year. Capital goods imports rose 11.3% to $5.9 billion, government data showed.

The value of oil and gas exports rose 37% to $11.2 billion from January through April compared to the same period in 2016. Other exports totalled $685 million, up 13% from the same period last year.

Foreign currency reserves were approximately $108 billion on July 1, Central Bank Governor Mohamed Loukal said. Reserves stood at $114 billion last December and $195 billion at end of 2014.

Algerian President Abdelaziz Bouteflika has repeatedly urged the government to keep the reserves steady to “defend the country’s sovereignty.”

A change in oil prices prompted the central bank to adopt a managed floating exchange rate in 1996, breaking its former rigid exchange system that was reliant on the US dollar. The central bank has since used the exchange rate to absorb the shock of falling oil prices.

Nour Meddahi, an economics professor at Algiers University who studied the Central Bank’s policy from 2014-16, said the adjustment it made at that time was “necessary… following the collapse of oil prices.”

He said “the dinar declined 28% versus the dollar from June 2014 and the end of May 2016 and lost 13.2% of its value compared to the euro for that period when the price of oil slumped 55%.”

While economists said a weak dinar helps the government cut imports, plug the budget deficit and increase oil sales abroad, ordinary Algerians feel differently. The middle class is hit especially hard by the change, with many struggling to buy consumer goods from the parallel market, which accounts for an estimated 52% of the country’s economy.

“A poor dinar reflects Algeria’s economic and financial weakness,” said Allam. “Bad news has been piling up over the past few months. The oil price fails to increase that much despite OPEC efforts. The decline of the US dollar versus the euro further reduces the international purchasing power of the country.”

Economists noted that when the dinar falls, the prices of imported goods go up and become less affordable. This is especially problematic in a country that meets much of its population’s basic needs — such as food and medicine — through imports.

The dinar’s fall increased inflation, which rose 6.4% in 2016 compared to 4.8% the previous year, said the state-run National Office of Statistics, which reported a 6.9% inflation rise for the first five months of 2017.