October 01, 2017

Algerians scramble for euros as prime minister warns of severe crisis

At record low. Algerian man counts dinar banknotes in the capital Algiers. (Reuters)

Tunis - Algerians rushed to the parallel market to con­vert dinars to foreign currency after Algerian Prime Minister Ahmed Ouyahia announced the country needed to print money to weather a worsening economic crisis.

“My brothers, the situation is hell,” Ouyahia told parliament. “The state coffers are almost emp­ty.” He noted there was “only 50 billion dinars” ($440 million) in the treasury as of August 31.

“For the state machine to func­tion we need at least 250 billion di­nars ($2.2 billion) per month. “We will have no money to pay your salaries if we do not print money,” he said.

Algeria suffered a severe financial crisis after oil prices fell in 2014, causing a sharp decline in the coun­try’s foreign currency reserves. Its economy is highly dependent on oil and gas exports, which account for 95% of foreign currency earnings and 60% of budget revenue.

The Fund for the Regulation of Receipts (FRR) — an oil savings fund that had held $445 billion in 2012 — helped the government plug its budget deficit, which was 13.5% of GDP in 2016.

The government, however, un­derestimated its deficit for three consecutive years, causing the fund to dry up more quickly than expect­ed.

The government’s projected defi­cit for 2016 was 10.8% but it ended up being 15% of GDP. The govern­ment has projected a 7% deficit for this year of $10.5 billion but inde­pendent economists said it could reach $17.6 billion.

The government has adopted an “unconventional financing” strate­gy similar to quantitative easing, an expansionary monetary policy used by the United States and Europe to stimulate the global economy following the 2008 economic crisis.

The plan would require Algerian officials to draw heavily on foreign currency reserves, which could dip below $100 billion for the first time in a decade, but minimise foreign debt. The Finance Ministry said it expects reserves to fall to $97 bil­lion by the end of the year. They totalled $105.8 billion at the end of July.

Algerian economist Rida Bekkat noted that, on September 23, the euro began trading for 200 dinars ($1.76) on the parallel market “for the first time since the launch of the common European currency in January 1991. The euro traded at 193 dinars ($1.70) before Ouyahia made comments on the economic crisis.

“That triggered a state of panic among economic operators and im­porters in the private sector,” Bek­kat said.

Economists also noted that the US dollar was trading higher on the black market, another indication that the government’s policy has triggered panic.

“It is an unprecedented situation that can only be explained by the business class panicking over their assessment of the government`s policy and decision-making,” said Bekkat.

Economist Badreddine Khris, who talked to traders at Port Said Square’s black market in Algiers — the largest of Algeria’s four paral­lel markets — said: “There has not been enough supply of euros after the level of 200 was breached.”

“There is a limit for the rise of the euro. Traders see 300 dinars ($2.64) per one euro as the highest limit because at this level there would not be enough dinars left in the pockets of Algerians to trade with,” he estimated.

“A statement from Ouyahia was enough to push citizens to look for a safe refuge of their savings and assets. We are all wondering what will happen once the government begins implementing in earnest the policy based upon unconventional financing.”

The rise of currency trading on the black market reflects the growth of Algeria’s parallel market, which is estimated to account for 52% of the overall economy. Former Prime Minister Abdelamajd Teb­boune said the parallel economy represented 45% of GDP, about $125 billion.

While Algeria’s Central Bank tightly controls the exchange of for­eign currency, authorities tolerate trading on the black market.

Economist Naddir Idir said a cur­rency trader at Port Said Square re­ported making “a deal with a senior government bureaucrat who came with a friend working for a parlia­ment member.”

“They left with 4,500 euros ($5,300),” the trader said.

Ouyahia said he was aware of the rush to hoard foreign currencies but warned buyers they would lose in the long run.

“Rumours have caused foreign currencies to rise like a missile at the square but Algeria is not ruled by rumours,” Ouyahia said in a speech September 25. “Those who buy currencies on the black mar­kets will return to sell them. The situation will improve within one year or one year and a half.”

Former Prime Minister Ahmed Ghozali joined independent econo­mists in warning that the “uncon­ventional financing” policy would lead to high inflation and devalua­tion of the local currency.

“The unconventional financing will have an immediate effect: The devaluation of the dinar and the loss of purchasing power of most Algerians,” Ghozali told Algerian website TSA in an interview. “This financing means that we eat the bread of our children.”

To restore reserves and finance high imports, the Algerian govern­ment is betting on oil prices shoot­ing back up. The Ministry of Fi­nance said it expects the value of oil and gas exports to rise to $31 billion this year, $3 billion more than in 2016 but down from $60.3 billion in 2014.

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