Algerian government pursues high spending for 2019 as it eyes elections

Algeria increased spending 22% this year, creating a deficit of 10.2% of GDP, to temper effects of previous years’ austerity policies.
Sunday 16/09/2018
Algerians shop at a supermarket in Algiers. (AFP)
Election economics. Algerians shop at a supermarket in Algiers. (AFP)

TUNIS - The Algerian government reversed plans to cut the budget and will continue high-level spending in 2019, coinciding with the country’s presidential elections, a draft budget released by the government indicated.

Algeria increased spending 22% this year, creating a deficit of 10.2% of GDP, to temper effects of previous years’ austerity policies following a sharp decline in oil and gas exports.

While the government initially tied the 2018 budget increase to a “balanced budget trajectory and steady growth path beginning 2019,” next year’s draft budget revealed high social spending.

The government released a draft budget of 8.5 trillion dinars ($71.9 billion) for 2019, which would finance free housing programmes, agricultural and water development, infrastructure and subsidies on consumer goods. It would result in a deficit equal to 9.2% of GDP.

“The provisions and economic arrangements included in the draft budget for 2019 are dictated more by political considerations than by economic imperatives of efficient economic growth,” said Algerian economist Makhlouf Mehenni.

“Ensuring social peace, especially in a year of elections, is the main imperative for the spending choices of the government. Spending programmes amounting to 1.772 trillion dinars ($14.6 billion) or the equivalent of 8% of GDP are allocated for poor families and middle class to finance subsidies of essential consumer goods, education, housing and health-care programmes.”

Yassine Benadda, chairman of the Algerian consulting firm Djazair Experts, agreed that political considerations were at the heart of the draft budget and pointed to next year’s presidential elections.

“The planned spending in the draft budget for 2019 appears to be one component of the electoral process of 2019,” Benadda said. “That is why economic reforms or ideas of reform are absent in the draft.”

The government’s release of the 2019 draft budget coincided with an announcement by the ruling National Liberation Front (FLN) that it had written a document detailing “all the achievements and development programmes overseen by President Abdelaziz Bouteflika since 1999.”

“All these programmes and achievements are financed at the cost $1 trillion,” said the announcement.

Opposition leaders and economists have accused the Algerian government of mismanaging revenue from oil and gas exports since 1999, when Bouteflika became president.

The document featuring Bouteflika’s achievements, which FLN Secretary-General Djamel Ould Abbes said would be released in the coming weeks, is likely to be followed by an announcement of Bouteflika’s candidacy for a fifth term as president, political analysts said.

Bouteflika, 81, has suffered a series of health problems during his tenure, including a stroke in 2013 that diminished his mobility. He returned to Algiers on September 1 after a medical check-up in Switzerland, his office said.

While signing off on Algeria’s 2018 budget last December, Bouteflika pledged the dramatic spending increase would be followed by moves to gradually reach a balanced budget.

Algerian economist Hassan Haddouche said the statement was “without a doubt made to sweeten the pill of the spending spree financed by a huge budget deficit. The authorities then promised the return to budgetary discipline with a cut of spending in 2019.”

The rise of oil prices has been a boon to Algeria’s economy, emboldening the government to keep up its high spending. Oil and gas exports account for 95% of Algeria’s total exports and 60% of the state’s budgetary resources.

Experts said Algeria’s sweet Sahara Blend crude oil sold at an average $20 above the average $50 forecast for 2018 and could remain at the same rate next year.

Algeria’s government adopted what is known as an “easy money” approach, using the Central Bank to buy assets, including government debt with long-term maturity, to finance the deficit and high spending of 2018.

Speaking on next year’s draft budget, Finance Minister Abderrahmane Raouya said that “no taxation hikes for citizens are planned for 2019 and all the subsidies will remain unchanged.”

However, economists and financial experts warned that high spending would fuel an increase in imports, causing the country’s foreign currency reserves to shrink and prompting it to borrow from abroad, a trend the government has struggled to avoid.

The Finance Ministry said it expects current account deficits of $17.9 billion in 2019, $14.5 billion for the year after and $14 billion in 2021.

“An obvious result from such a situation is the shrinking of the foreign currency reserves to $62.5 billion in 2019, then $47.8 billion for 2020 and $33.8 billion for the following year,” said Haddouche.

The government previously vowed to keep foreign currency reserves no lower than $100 billion to keep the country “free of foreign debt” but, Benadda said, “in the view of the government’s macroeconomic configurations for 2019-21, the path of foreign debt is becoming inevitable.”