Oil curse takes Algeria's economy to the brink
Comment: Falling prices and a growing population mean that Algeria has some tough decisions to make in order to save its economy, says George Joffe.
5 min read
28 Aug, 2015
Algeria's oil-dependent economy needs major restructuring, says George Joffe [AFP]
At the end of last year, Algeria's prime minister, Abdelmalek Sellal, suddenly gave warning that the country faced financial crisis.
The shock was all the greater because, just a few days earlier, the government had expressed confidence that foreign exchange reserves of $193 billion would allow the country to weather the storm caused by a fall in oil prices.
Just six months later, reports show that the prime minister was right.
During the first seven months of 2015, the country's external revenues declined by 42 per cent. Earnings from hydrocarbon sales abroad - 94 per cent of all foreign earnings - totalled $21.6 billion, compared with $37.2 billion in the same period in 2014.
Overall, exports during this period declined by 40 per cent to $22.9 billion, while imports only declined by 10.3 per cent to $31 billion, leaving a trade deficit of $8 billion, compared with a trade surplus of $4 billion during the same period the previous year.
The problem is compounded by the fact that Algeria's hydrocarbon production is static or declining - but domestic consumption is rising, thus leaving ever less for export to earn the money that keeps the economy afloat.
Thus, in 2014, Algeria consumed 395,000 of the 1.5 million barrels of oil it produced a day, leaving about 1.1 million for export. Three years earlier, the country consumed 350,000 of the 1.6 million bpd it produced, leaving less for export.
Sales of gas tell the same story; 83.3 billion cubic metres were produced in 2014 against domestic consumption of 37.5 billion cubic meters, compared with 82.7 billion cubic metres produced and 27.8 cubic metres consumed in 2011.
Although the government wants to start a fracking programme to improve production, domestic opposition is so fierce that it is unlikely to occur in the near term.
The oil price, meanwhile, has continued on its downward path. In the 12 months following July 2014, prices for Algeria's oil have declined from $110 a barrerl to $54. They declined further, to $45 per barrel, by August.
Gas is sold on long-term contracts but linked to oil prices, meaning a fall in prices is inevitible.
One result of these figures has been that they caused a decline of $19 billion in Algeria's all-important foreign reserves in the first four months of this year.
In fact, the actual decline in the financial reserves total has been also due to the domestic demands upon them.
The government's subsidy policies on essential foodstuffs and domestic energy - equivalent to 30 per cent of national GDP - have meant that, from a level of $193.3 billion at the end of June 2014, they stood at only $160 billion at the end of March this year.
That implies a decline of about $44.5 billion over a full year - but in reality, as oil prices continue to slide, that figure is more likely to become closer to $57 billion. At that rate, they will only last for three more years.
There are other problems, too. Algeria's import bill declined, not so much because of the country's restraint but because the euro declined in value against the dollar by some 15 percent. About 40 per cent of Algeria's imports come from Europe.
Indeed, despite the Algerian government's promises to restrict imports, these ambitions are likely to be no more than vain delusions. Import substitution is no longer a viable option - domestic manufacturing capacity has fallen from 30 per cent of GDP in 2000 to five percent today.
Beyond that, too, Algeria depends on its ability to import cereals to feed its growing population. The cost of cereal imports over the first half of 2015 rose by seven per cent in value, to $1.9 billion for a total of 6.9 million tonnes -or about 20 per cent more by weight than in the first half of 2014, when only 5.9 million tonnes were imported.
What is to be done?
Since Opec has rejected cutting production - the option that Algeria prefers but Saudi Arabia rejects - oil prices will not rise in the near future. One possibility is to raise capital through a bond issue, as Saudi Arabia has done, but the government opposes increasing foreign debt.
Another would be "austerity" - and the government has already delayed major infrastructure projects. This, however, will only marginally improve public finances next year.
A third option is to allow the Algerian dinar to depreciate, as proposed by the new finance minister, Abderrahmane Benkhalfa. Imports then become more expensive and, presumably, reduce demand. But a similar policy in the 1980s led to riots, and consequently the civil war.
There are fears that that would happen again. It might yet reoccur, for the dinar has already depreciated by 11 per cent this year, though most economists consider that it should be far lower, at $1 = AD130-to-140, compared with AD79 in June last year.
In reality, Algeria has no easy options and is about to become the archetypical victim of "oil curse" and being a high capital absorber.
It is a fate that also threatens Iraq and Iran, and underlines the fact that it is economics and globalisation, rather than politics and extremism, that ultimately determines the future of the Middle East and North Africa.
George Joffe is a research fellow at the Department of Politics and International Studies at the University of Cambridge and visiting professor of geography at Kings College, London, specialising in the Middle East.
The shock was all the greater because, just a few days earlier, the government had expressed confidence that foreign exchange reserves of $193 billion would allow the country to weather the storm caused by a fall in oil prices.
Just six months later, reports show that the prime minister was right.
During the first seven months of 2015, the country's external revenues declined by 42 per cent. Earnings from hydrocarbon sales abroad - 94 per cent of all foreign earnings - totalled $21.6 billion, compared with $37.2 billion in the same period in 2014.
Overall, exports during this period declined by 40 per cent to $22.9 billion, while imports only declined by 10.3 per cent to $31 billion, leaving a trade deficit of $8 billion, compared with a trade surplus of $4 billion during the same period the previous year.
The problem is compounded by the fact that Algeria's hydrocarbon production is static or declining - but domestic consumption is rising, thus leaving ever less for export to earn the money that keeps the economy afloat.
Thus, in 2014, Algeria consumed 395,000 of the 1.5 million barrels of oil it produced a day, leaving about 1.1 million for export. Three years earlier, the country consumed 350,000 of the 1.6 million bpd it produced, leaving less for export.
Sales of gas tell the same story; 83.3 billion cubic metres were produced in 2014 against domestic consumption of 37.5 billion cubic meters, compared with 82.7 billion cubic metres produced and 27.8 cubic metres consumed in 2011.
 |
Algeria's hydrocarbon production is static or declining but domestic consumption is rising |
Although the government wants to start a fracking programme to improve production, domestic opposition is so fierce that it is unlikely to occur in the near term.
The oil price, meanwhile, has continued on its downward path. In the 12 months following July 2014, prices for Algeria's oil have declined from $110 a barrerl to $54. They declined further, to $45 per barrel, by August.
Gas is sold on long-term contracts but linked to oil prices, meaning a fall in prices is inevitible.
One result of these figures has been that they caused a decline of $19 billion in Algeria's all-important foreign reserves in the first four months of this year.
In fact, the actual decline in the financial reserves total has been also due to the domestic demands upon them.
The government's subsidy policies on essential foodstuffs and domestic energy - equivalent to 30 per cent of national GDP - have meant that, from a level of $193.3 billion at the end of June 2014, they stood at only $160 billion at the end of March this year.
That implies a decline of about $44.5 billion over a full year - but in reality, as oil prices continue to slide, that figure is more likely to become closer to $57 billion. At that rate, they will only last for three more years.
There are other problems, too. Algeria's import bill declined, not so much because of the country's restraint but because the euro declined in value against the dollar by some 15 percent. About 40 per cent of Algeria's imports come from Europe.
Indeed, despite the Algerian government's promises to restrict imports, these ambitions are likely to be no more than vain delusions. Import substitution is no longer a viable option - domestic manufacturing capacity has fallen from 30 per cent of GDP in 2000 to five percent today.
Beyond that, too, Algeria depends on its ability to import cereals to feed its growing population. The cost of cereal imports over the first half of 2015 rose by seven per cent in value, to $1.9 billion for a total of 6.9 million tonnes -or about 20 per cent more by weight than in the first half of 2014, when only 5.9 million tonnes were imported.
What is to be done?
Since Opec has rejected cutting production - the option that Algeria prefers but Saudi Arabia rejects - oil prices will not rise in the near future. One possibility is to raise capital through a bond issue, as Saudi Arabia has done, but the government opposes increasing foreign debt.
Another would be "austerity" - and the government has already delayed major infrastructure projects. This, however, will only marginally improve public finances next year.
A third option is to allow the Algerian dinar to depreciate, as proposed by the new finance minister, Abderrahmane Benkhalfa. Imports then become more expensive and, presumably, reduce demand. But a similar policy in the 1980s led to riots, and consequently the civil war.
There are fears that that would happen again. It might yet reoccur, for the dinar has already depreciated by 11 per cent this year, though most economists consider that it should be far lower, at $1 = AD130-to-140, compared with AD79 in June last year.
In reality, Algeria has no easy options and is about to become the archetypical victim of "oil curse" and being a high capital absorber.
It is a fate that also threatens Iraq and Iran, and underlines the fact that it is economics and globalisation, rather than politics and extremism, that ultimately determines the future of the Middle East and North Africa.
George Joffe is a research fellow at the Department of Politics and International Studies at the University of Cambridge and visiting professor of geography at Kings College, London, specialising in the Middle East.
Opinions expressed in this article remain those of the author and do not necessarily represent those of al-Araby al-Jadeed, its editorial board or staff.
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