The Cost of Revamping Algeria’s Economy

The Cost of Revamping Algeria's Economy

Few North African economies can claim to be faring well at the moment, but Algeria’s financial problems are especially burdensome. The country depends on oil and natural gas for 94 percent of its total exports (most of which go to Europe) and 60 percent of its budgeted revenues. When oil prices plunged in 2014 before leveling out below $40 per barrel, Algiers was forced to drain its coffers to keep paying for its imports, pushing its budget deficit to a record high of 16.4 percent of gross domestic product in 2015. Of course, Algeria still holds a massive amount of oil wealth, boasting a higher GDP per capita than even its more diversified competitor, Morocco. But high levels of income inequality continue to plague the country.

Algiers will have to funnel some of its oil wealth into diversifying the economy, even as it keeps existing social spending programs and state industries afloat. (It will also maintain its defense spending, which the government is not eager to shrink amid its ongoing rivalry with Morocco.) Despite being Europe’s second-largest supplier of natural gas, behind only Russia, Algeria has had a tough time making ends meet as prices and demand in Europe have dropped. Declining output in Algeria’s own energy sector over the past decade has only made matters worse.

The government has dipped into its considerable reserves to pay the bills and prop up the Algerian dinar, with the unfortunate side effect of boosting inflation. In an effort to stanch the bleeding, Algiers recently slashed its spending by 14 percent, deepening the cutback of 9 percent outlined in last year’s budget. In 2017 alone, Algeria will try to reduce its imports by $5 billion. Though Algeria intends to remedy the situation in the long run by investing in growth beyond the oil sector, it has been slow to follow through with its plan.

Part of the problem is that restructuring the energy industry would threaten the patronage networks that have been built up around Algerian oil and natural gas giant Sonatrach. Since 2007, Algeria’s consumption of oil and natural gas has risen by more than 50 percent while its oil production has fallen by 25 percent. With less oil available for export, the government’s revenues have been hit hard — as have the payouts and perks that the ruling elite dole out through Sonatrach to keep their supporters satisfied. Leaders have moved hastily to invest in shale and enhanced recovery projects in an effort to counteract declining output in oil, but so far they have had little success in turning the energy sector around. All the while, Algiers’ fears of stoking unrest by revamping the country’s long-standing economic norms have grown

Source: https://www.stratfor.com/image/cost-revamping-algerias-economy

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