Algeria has been working diligently ahead of the September 27 Organization of the Petroleum Exporting Countries (OPEC) meeting to secure an agreement among member states, especially Saudi Arabia and Iran, to freeze oil production levels—which would, in principle, raise oil prices to at least $50 a barrel. Algeria has a vested interest in securing higher prices: the hydrocarbon sector accounts for 95 percent of its exports, and since prices fell dramatically in 2014 its external revenues have been halved. This has posed a major issue for Algerian leaders, who rely on sizeable oil revenues to keep the country’s generous (and expensive) social welfare program and centralized economic model afloat. Already observers have warned of a scenario similar to 1988, when the cash-strapped state faced shortages of basic goods, causing consequential social riots.
Despite the important media coverage of the OPEC meeting, the Algerian leadership has not placed all its chips on a sudden and unlikely oil-price recovery to bail them out. In fact, the meeting appears disconnected from the economic recovery strategy Algeria has pursued over the past 24 months. Since the 2014 price decrease, the Algerian leadership has gone through three approaches: they maintained a reassuring “wait-and-see” attitude, expecting international prices to soar back up, followed by a phase of austerity measures in 2015 and, more recently, the announcement of an ambitions economic diversification scheme. Initially, the state opted to wait out the price decreases, and relied on the state’s $179 billion reserve fund (at the end of 2014) to address budget and commercial balance deficits, which together amounted to $24 billion in 2014.* Consumption trends did not change and neither did official attitudes, but foreign institutions began to sound the alarm, forcing an initial change.
In 2015, the Algerian leadership seemed to change course, driven by the realization that $40 a barrel would represent the “new normal.” The World Bank and other outside observers began highlighting the dangers to Algeria’s finances, especially because the Algerian state needs $115 a barrel to break even. The state has faced immense fiscal pressures to stabilize its currency level and avoid a sharp increase in prices. While it continues to rule out foreign borrowing, it has opted for strong austerity measures to save up its foreign currency reserves to pay for its large imports of food and consumption goods, as Algeria has very few non-hydrocarbon exports and a weak agriculture sector. The state’s foreign reserve fund provides a convenient, albeit temporary, cushion to maintain the fiscal balance, the aim of austerity being to extend the reserves’ lifespan.
The most notable measure taken at this point was reducing investment spending by 9 percent and increasing taxes on fuel products in the 2016 budget, in addition to freezing several infrastructure projects and the recruitment of civil servants across the country. The law faced unprecedented opposition in parliament, including among the ruling coalition, before it was adopted in late November 2015. The 2017 budget law, currently under consideration, is expected to contain higher taxes on imported consumption goods, but also on everyday goods such as fuel and cigarettes.
In January 2016, the government also sought to restrict the flight of Algerian currency by establishing a system of licenses and quotas on car imports in a bid to discourage Algerians from purchasing foreign cars. The measure reduced the commercial balance for automobiles to $768 million, a 68 percent decrease from 2015, but has been deeply unpopular and carried out with confusion and delays, especially at dealerships. For 2016, the quota has been set at 83,000 vehicles, compared to 265,523 imported in 2015. The ultimate aim was to force Algerians to alter their consumption patterns to “live within their means.”
However, austerity has been a stopgap measure, especially after news emerged that the government had used an initiative to sell sovereign bonds, launched in April, to fund its deficit—after promising this revenue would go toward investments such as the Cherchell industrial port in Hamdania. Furthermore, the Algerian National Office for Statistics announced in August that consumer prices increased 8 percent from 2015, and the value of the Algerian dinar is at a historical low compared to the dollar and the euro, indicating this austerity approach is unable to prevent the deterioration of the economic situation. So the government has had to reconsider.
In response to mounting criticism, on June 4, Prime Minister Abdelmalek Sellal spoke at the “tripartite” annual conference between the government, the General Union of Algerian Workers, and employers’ associations, announcing a “new model for economic growth.” His tone was reassuring yet sober, insisting that Algeria could no longer rely on its oil and gas and that “we must seek growth elsewhere in the real economic sphere, where public or private companies are the keystone.” This represents a major turning point, one that experts and economists have long called for. The specific details of the plan have yet to be fully communicated, but the gist of the new approach is economic diversification—including developing the digital and agricultural sectors and encouraging more efficient management of companies—without altering the country’s social model. In time, the government hopes diversification will stimulate other sectors of the economy to share the hydrocarbon export burden and ensure economic stabilization.
Though this plan is in the early stages, the government has been active in trying to attract foreign investment to establish strong industrial units. Following encouraging statements by Sellal and the work of Minister of Industry Abdeslam Bouchouareb and Minister of Trade Bakhti Belaib, several automotive companies have announced their decision to build construction units in the country, which would provide jobs and alleviate the car quota issue by providing Algerian-made cars for the public. These companies include Peugeot (through its local partner, the Condor group) and Volkswagen (through its local partner, Sovac).
This new approach has failed to convince some Algerian economists, who insist the current system needs a wholesale transformation, including tackling the structural obstacles that deter foreign investors or the emergence of a dynamic private sector. Algeria’s cumbersome legal framework continues to put-off foreign investors. Despite discussions over changes to the investment legal framework (including the “51-49 percent” rule regarding foreign entity ownership), no changes have been implemented. Furthermore, decades of socialist-inspired centralism and a protected domestic market have instilled a legacy of suspicion that globalization means a loss of economic sovereignty. It remains to be seen how this plan could spur the private sector to innovate and whether the government would consider foreign debt as a source of economic investment, especially in new areas such as solar energy.
Despite the fiscal crisis, the sharp decline of oil revenues, and political instability among elites, the Algerian government is tackling the issue and has one or two years left of reserves to use as a cushion. In the meantime, it needs to carry out an extensive amount of reforms, which will require a fundamental shake-up, something the prime minister has ruled out for now. But the government needs to do more to put in place the conditions that would allow economic activity to thrive. In a sense, the initiatives of the past two years ensure that even though OPEC countries are meeting in Algiers, the country’s economic survival will not depend on external geostrategic competition.
Idriss Jebari is a postdoctoral research fellow with the Arab Council for Social Sciences working on social and cultural change in North Africa.
* Correction: an earlier version of this article stated that Algeria's combined budget and commercial deficits were $30 billion per year. The article has been updated to reflect the clarified figures for 2014.