Algeria’s foreign currency reserves shrink despite rising oil revenues
Tunis - Algeria’s foreign currency reserves are on a downward trajectory that economists warned could harm the country’s economic stability. Despite higher oil earnings from 2014-18, Algeria’s reserves dropped $105 billion during the period, a trend that is expected to continue.
Algerian Finance Minister Abderrahmane Raouya told parliament that reserves, which stood at $90 billion in May, would total $62 billion in 2019, $47.8 billion the following year and $33.8 billion in 2021.
Algeria’s Central Bank urged the government to “apply the tourniquet to stop the bleeding” and economic experts warned of a deepening crisis.
“The government does not know how to handle the erosion of the foreign currency reserves,” said Algerian economist Hassan Haddouche, adding that the problem is linked to Algeria’s current account deficit.
“All experts agree that we are in a crisis despite the huge amounts of dollars from oil sales,” said political writer Sofiane Ait Iflis. “All indicators point to the crisis hitting us in 2019.”
Algiers previously maintained that reserves would not fall beneath a “floor of $90 billion,” acting as a cushion for the country if steep declines in oil prices cause foreign currency earnings to fall.
However, the country’s reserves steadily declined for years, dropping from $178 billion in December 2014 to $97.3 billion in December 2017, official data show.
Algeria replenishes its foreign currency reserves from oil and gas exports, which account for 97% of its total sales abroad. However, international oil prices plunged 30% since early October, dragged lower by a broader market sell-off and growing consensus that supply will outpace demand next year.
For Algeria, the decline in oil prices restricts the government’s ability to preserve foreign currency reserves without tightening the budget and driving social unrest, which it is reluctant to do ahead of presidential elections next year.
“The $105 billion decline in reserves is huge but it is especially worrying for a country in which the government fails to bow to the common sense and economic orthodoxy repeated by the experts to cut imports and diversify exports, which means expanding sales outside the oil and gas,” said Iflis.
Algeria unveiled a bold plan to diversify its economy away from oil and gas when oil prices slumped in 2014, aiming to cut imports, slash subsidies and expand the role of the private sector in the economy. However, reforms stalled and painful economic policy adjustments failed to take effect with the government eyeing presidential elections.
Algerian economists said the decline of foreign currency reserves is linked to its current account deficit. It and the capital account make up a country’s balance of payments.
“The reserves follow the evolution of the current account balance,” Haddouche said. “This year with an average oil price of $72 the barrel, we will have a deficit in the current account of $17 billion and the reserves will fall in the same proportion.”
Algerian experts said oil will need to be “sold at an average of $105 a barrel next year to stabilise Algeria’s foreign reserves,” a price “no serious expert or world institution will predict… for a very long time,” Haddouche said.
That means “a potential economic crisis could come as soon as 2019,” warned a recent International Crisis Group report, “…[and] thus overlap with tensions surrounding the presidential election.”