The weekly column of El Kadi Ihsane on El Watan of October 30, 2017, reveals a surprising debate that is not yet public on how to engage the reforms that would prevent Algeria from another economic trap. Republished on Maghreb Emergent of November 3rd, it obviously tracks the financial uphill struggle of an oil exports based rentier economy trying to remain afloat. It is about the idea of resorting in anticipation to the IMF and as early as possible. We reproduce this article here below as translated by ourselves with our compliments to the author as well as thanks to both publishers.
Algeria should immediately knock on the door of the IMF while it is still standing. This is a bold idea that was floated by one of the Algerian think-tanks working on the economy and society. It carries an implicit assumption that without any contracted debt with a multilateral institution, there might be no economic modernization reform. Thus, a dual purpose. Straighten the budget in the short term to allow a serene look at the concerning medium-term horizon. And avoid arriving in 2021-2022 at the IMF in a situation of a failed state. With the implication that this might cause in terms of tough adjustments.
There is of course another path towards modernization, that of self-reform. This unfortunately seems not to be on the agenda under the reconstituted Bouteflika-Ouyahia-ticket. This ruled over 7 years out of the last 18 years. It is urgent to act and for that matter go faster towards the external constraint. The idea suggested in the debate would be to borrow ten billion dollars from the IMF in support of the “restructuring” of the balance of payments as spread over the next five to seven years against part of a reform roadmap structure that would boost the performance of the investment market conditions in Algeria. Technically, the risk of excessive debt, would under this proposal, be largely sustainable.
The monetary accommodation policies of Western central banks will be in place for a long time and the recovery of interest rates will be spread over that period. Another argument, the negotiation of any conditionality will be easier, allowing the smoothing of better mastered reform effects. For instance, removing the bailout of public companies without market would trade in a more socially acceptable agenda. The strategic function of such an action in advance to the IMF would be to put the Algerian economy under positive external constraint. It would force future governments to act as if the country was already insolvent in its balance of payments. But “with heads held high” because it would not really be the case. The Algerians could then choose “commitments” to adjust their economies more freely than in the case where it is the IMF that would dictate according to its well-known standard list, although it has been updated since 1994.
Would the international financial institutions lend to a country that is not yet in deficit in its balance of payments? There are conflicting views in this debate. The idea is not to wait to have to go to the financial market to finance the anticipated trade hole between Algeria and the rest of the world. Ahmed Benbitour, former minister of finance thinks not; Algeria would not in this case be able to raise any funds. “No creditworthy assets to table as collateral for reimbursement in medium to long term deals”, he said. Only short-term trade credits would be available as per those same people who aggravated the situation in the country between 1986 and 1990.
The use of the IMF from 2018 would therefore not to have and gauge his signature to market at the most sensitive moment when the exchange reserves come to flirt with zero in 2020. The idea that stirs this think tank is well on to against current official orthodoxy that binds political sovereignty to debt reduction. This is its unrealistic side. So innovative. It proposes to make debt stress macro-adjustment modernizing an engine of reform. Without which nothing serious would happen. Until the next collapse. Who under Bouteflika IV to politically sell this early return to the IMF as a booster of diversification?
Oil at $ 60 ?
The move in oil prices above $ 60 this week is unlikely to change the perception of the Algerian risk of collapse. For at least two reasons. The first is related to the new structure of the world oil market making the US Shale Oil, its new adjustment variable. Historical role that was of the OPEC and its major producers. The US production recovered in 2017 and the additional exports will come inflate global stocks in the coming months.
$ 60 this week appears to most observers as a high threshold difficult to maintain in the absence of a hard reboot of global consumption of carbon energy. At $ 60 a barrel, Algerian exports remain within the borders of 30-35 billion Dollars in annual revenue. So always on the path of the external shock with a rampant deficit of the balance of payments. Why?
This is where the second reason for maintaining the negative prospective on Algerian risk. The increase in domestic oil consumption is astronomical. It cancels any effects to medium term. This is the Algerian energy minister who as responsible reminds all, this week. Domestic oil consumption doubled between 2010 and 2017.
The structural reforms that an IMF loan may require of Algeria? These would be researched here.
And it’s an emergency.