The Algerian economy has been hard hit by the drop off in oil prices. Although the adjustment process was launched rather late, the first measures are beginning to pay off. Though still significant, the budget deficit nonetheless contracted in 2016, and the government’s goal is to bring the budget deficit close to zero by 2019. The roadmap looks very ambitious, possibly excessively so. Major cutbacks in public spending threaten the economy, which is already showing signs of weakness. Granted, there is still some manoeuvring room. The external position is still solid despite the rapid drop in foreign reserves, and public debt is moderate. However, it is still uncertain how the authorities intend to cover their future financing needs.
Legislative elections in May 2017 did not change the balance of power. As expected, the ruling coalition held on to its absolute majority in the National Assembly. Yet the participation rate continued to plunge, to only 38%. The main reasons people didn’t vote are the parliament’s secondary role relative to the executive branch, and the high level of unemployment. The new government will have to operate within a tough environment until the next presidential elections in 2019. A durably low oil prices questions the Algeria’s development model. After letting fiscal and external deficits deteriorate sharply to buffer the shock, Algiers finally seems to have changed its strategy. The 2016-2019 development plan, approved in April 2016 but only published in April of this year, marks some noteworthy changes, beginning with recognition of the excessive level of public spending. That’s a good place to start, but if the State disengages from the economy, it quickly risks running up against reality.
■ Public finances: adjustments are finally underway
With a fiscal breakeven point of more than USD 90 a barrel, the Algerian economy faces a long and delicate adjustment process to adapt to the new oil market situation. Yet the authorities have decided to act. Whereas government expenditures continued to rise sharply in 2015, to an all-time high of 46% of GDP, they were cut back last year by 4% in nominal terms. Granted this is far less than the initial 9% target approved in the fiscal bill. Yet these first spending cuts, combined with strong growth in non-hydrocarbon revenues, helped to stop the deterioration in the public finances, even as oil prices continued to drop. The budget deficit narrowed slightly to 13.7% of GDP, after peaking at 15.4% of GDP in 2015. This makes Algeria one of the region’s rare oil producing countries in the MENA region to successfully consolidate public finances last year (see chart 2). Although the budget deficit is still alarmingly high, it should nonetheless continue to narrow in the years ahead, assuming that oil prices are not hit by another sharp correction.
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by Anna DORBEC