Financial Constraints and Governance crisis in Algeria of 2017 – 2020

The present contribution is about the Financial Constraints and Governance crisis in Algeria of 2017 – 2020 and would want to be a reminder of those economic and financial indicators of the influencing factors to be considered whilst taking steps towards structural reforms.  These number 8 and are as follows:

1.-The International Monetary Fund (IMF) is concerned as much as are the European Union (EU) and all foreign economic partners, about the impact of recent measures of unconventional financing.  Algeria would have a real GDP growth rate that is below 1.5% for 2017 and 0.8% for 2018 whilst the International Energy Agency (IEA) does not expect a substantial increase in oil prices in 2018, but at best their stabilization. So, with a GDP declining between 2017 and 2018 would be less than the population growth rate and unemployment rate would exceed 13% in 2018 from the Office National of Statistics (ONS) assessed of more than 12% in 2017.

2.-  The national reports as the IMF suggests that the State’s actual budget deficit exceeded the huge level of 20% of GDP as at end of 2015 due to a delayed reaction of the authorities who have maintained a level of public spending high despite falling revenues. In 2017, the continuation and acceleration of the reduction of State spending under the 2017 Finance Act was to bring the deficit to around 7% of GDP with drastic cuts in equipment expenditure. The particularly high level of budget deficits has been aggravated since the beginning of 2017. The decline in financial revenue and continued public spending at a high level generated the use of savings from the Regulatory Fund (FRR ) was as follows: 1.132 billion Dinars (DZD) in 2013, DZD2.965 billion in 2014, DZD2.886 billion in 2015, DZD1.387 billion in 2016, and after using what remained to be DZD784 billion at the beginning of 2017.   The depletion of the latter in February 2017 has given rise to a serious funding problem.

3.- The explanatory memorandum of the amendment of the Finance Act 2017 is counting on nearly DZD6.002 billion in revenues and DZD7.115 billion of expenditure or a deficit of DZD1.113 billion that the Treasury uses to cover part of the amount of nearly DZD570 billion of its deficit until the end of 2017. To cover therefore this deficit, a combination of monetary and financial tools have been used to mobilize additional resources, including funds for the payment of interest of the Bank of Algeria (BA), the Exchequer (DZD610 billion in 2015 and DZD919 billion in 2016) and advances from the BA to the Exchequer (DZD276 billion in 2015 and DZD280 billion in 2016) and the funds recovered in the operation of the bonds of economic growth (DZD580 billion), in addition to a loan of DZD105 billion, contracted with the African Development Bank (ADB).

4.- Under the title “Algeria Net Oil Export Revenues” the EIA information magazine on OPEC- 2017, highlights the revenue of SONATRACH, the Algerian State oil company between 2005 and 2017 as about $553 billion.

5.- In 2016, according to the Algerian Customs Statistics (2017), hydrocarbons accounted for the bulk of exports with a share of 93.84% of the total volume with a decrease of 17.12% from 2015. Exports “off oil”, are still marginal, with only 6.16% of the total and equivalent to $1.78 billion, with a decrease of 9.55% compared to 2015. Groups of products exported consist essentially of semi-finished hydrocarbons products for a share of 4.5% of all exports in the overall volume equivalent to $1.3 billion, food goods with a share of 1.13%, or $327 million of gross revenues with a share of 0.29%, or in absolute terms of $84 million and finally industrial capital goods and non-food consumer goods with the respective shares of 0.18% and 0.06%. As for the breakdown by economic regions in 2016, official data clearly show that the bulk of all Algeria’s external trade remains polarized on its traditional partners, i.e. the countries of the OECD with 60.94% for imports and 79.59% for exports.

6. The financing needs, although scaled down, more than 70% in foreign currency only for SONATRACH and SONELGAZ, Algeria’s Electrical utility provider, according to official statements between 2017 and 2022 will annually be about $50 billion, or $250 billion for five years. Foreign currency financing needs will be greater because of the economic situation. The rate of integration of private and public sector does not exceed 15% with over 70% of the needs of public and private companies sourced from outside. Moreover, the economic area is dominated more than 83% of small services, trade with the informal sphere prevailing in these segments. The industrial fabric is less than 5% of the GDP and within these 5%, more than 95 to 97% are non-innovative SMEs.

7. Unconventional financing concerns the Dinar part that would include salaries and some local goods. But because of the loss of some of the productive fabric, providing Dinars, would equate to more and necessary borrowing for more exchange for hard currency from the primary banks. The revival of demand by printing money can speed up currency outflow. This can be cushioned only if the internal added value is substantially increased over two to three years, through entrepreneurial innovation but in a global competitive environment so as to prevent any rise in inflation and further exhaustion of foreign exchange reserves.

8. The outflow of currency for imports of goods and services; these latter fluctuating between $10-12 billion / year between 2010 and 2016 and all legal transfers total amounted in 2016 to about $60 billion. According to the latest Customs Statistics, the first eight months of 2017 would see an outflow of currency between $55/60 billion. In this context, whilst avoiding any pessimism, I would rather say that in October 2017, Algeria is not in real financial crisis but in a crisis of governance for its external debt is less than $5 billion and foreign exchange reserves were $195 billion as at January 1, 2015 and could eventually come down to somewhere between $92 billion (source IMF) and $97 billion (government source) leaving a respite of three years.

In short, without mobilizing people around a broad national front whilst considering all the different sensitivities, and assuming a great morality of the leadership, condition of the restoration of confidence, no way out of the current crisis of development would be possible.

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