Oil price slump threatens to erode Algeria’s status quo

Violent protests over deteriorating public services have raised fears of more extreme responses.

Saudi oil fields
Oil prices dipped below $50 a barrel in January, but Algeria needs the country's main crude grade to trade at $121 a barrel to avoid a budget deficit [EPA]

Algiers Last December, hundreds of protesters in Touggourt, a Saharan city 600km southeast of Algiers, demonstrated against the delay in government social handouts. Three men died during violent clashes between protesters and police.  

While protests over deteriorating public services in the south are common, they are rarely violent. Recent developments have raised fears of more extreme responses, analysts say, as more and more Algerians have started to feel the pinch, with oil prices at their lowest levels in about five years. 

Recent protests have taken place against the backdrop of Algeria’s government introducing 10 “save-money measures”, including a public-sector hiring freeze and postponement in funding mega-projects, such as railways. Last October, hundreds of officers marched through the streets of a number of Algerian cities, including Khenchela and Oran, demanding better pay and working conditions, along with public housing for their families.

OPINION: Eroding Algeria’s status quo

In Algeria, the hydrocarbon sector accounts for 97 percent of the country’s total exports and 58 percent of its total fiscal revenues, according to the International Monetary Fund. While oil prices dipped below $50 a barrel in January, Algeria needs the country’s main crude grade to be traded at $121 a barrel in order to avoid a budget deficit.

As a consequence, Algeria slipped into the red in 2014, with a deficit reaching 18 percent of the gross domestic product (GDP) for the first time in 15 years.

When oil prices plunged in 1986, Algeria was on the verge of bankruptcy, and riots broke out across the country. At the time, the slump in oil prices was among the factors leading to the “black decade”, Algeria’s civil war, which killed more than 200,000 civilians.

But government officials maintain history will not repeat itself this time around, since the country’s foreign exchange reserves would be able to cushion any short-term shock.

“It is inappropriate to talk about a recession in Algeria, given our large foreign currency reserves, which reached about $193bn in 2013,” said Samira Bouras Kerkouche, an MP from the ruling National Liberation Front (FLN).

Actually, in Algeria, the falling oil prices is less an economic issue than a political problem given the lack of legitimacy of the decision-making institutions. They have been buying their legitimacy with the oil receipts.

by Omar Saoudi, Rally for Culture and Democracy

“There is nothing to worry about, because even if oil prices continue to plunge, our budget law is calculated on a basis of a barrel at $37. In other words, we would feel the pinch in about three years only,” Kerkouche told Al Jazeera.

Abdelaziz Bouteflika – Algeria’s ailing president, who has barely been seen in public since his election for a fourth consecutive term in April 2014 – echoed similar sentiments. In a statement published by Algeria’s official news agency APS,  the president said the country “will survive without major difficulties the serious disruptions in the global markets”.

In a rare public appearance late last year, Bouteflika chaired a meeting exclusively devoted to this issue, instructing the government to ensure a “permanent follow-up” and the necessary economic and budgetary adaptations. But he ruled out all questioning of the current public investment policy, especially in sectors that directly affect residents.

Bouteflika recently signed the 2015 budget law, increasing state spending by 15 percent and pushing Algeria’s deficit to 22 percent of its GDP.

But the government did not completely turn a deaf ear to those calling for cost-cutting measures amid the plunge in oil prices. Central Bank Governor Mohammed Laksaci warned recently that oil and gas dividends would not last forever.

“This capacity to resist such shocks will disappear quickly if the price of oil stays at a low level for a long time,” Laksaci said in an address to parliament, in which he lamented the economy’s continued dependence on oil.

A few days later, Prime Minister Abdelmalek Sellal introduced 10 money-saving measures. These included a hiring freeze for Algeria’s largest employer, the public sector, which covers 60 percent of the job market. In addition, Sellal said that funding for mega-projects, such as tramways and railways, would be postponed.

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Such measures, however, have met with opposition from Algerian civil society. 

“This is completely not efficient since, as a priority, the government should reduce its generous subsidies,” Omar Saoudi, who is in charge of environmental issues for the Rally for Culture and Democracy (RCD) political party, told Al Jazeera. “The petrol costs about 20 dinars [$0.20] while its real price is about 100 dinars. This encourages fuel wastage.”

On Algeria’s policy of subsidies, a recent World Bank report cited “growing evidence that they are disproportionally benefiting the well-off segments of the population, while adding to both fiscal and current account pressures”. Government subsidies account for 21 percent of Algeria’s national annual economic output, covering electricity, housing, many food items and petrol, the cheapest in North Africa.

By providing subsidies and assistance that are funded by energy revenues, the government is able to “buy” social stability, analysts say. In 2011, the government granted zero-interest loans to thousands of unemployed young people and increased the salaries of thousands of public sector employees in an attempt to prevent social unrest from spreading across the country.

The falling oil prices, however, have raised questions about this model. “The government ‘tricked’ itself into a future bailout,” Saoudi said. “With the oil prices dropping to uncertain low levels, the Bouteflika administration might not have the financial tools with which it used to buy social peace in Algeria.

“Actually, in Algeria, the falling oil prices is less an economic issue than a political problem given the lack of legitimacy of the decision-making institutions. They have been buying their legitimacy with the oil receipts,” he said.

In December, the state-owned energy giant Sonatrach started drilling pilot shale wells in In Salah, a Saharan city 1,300km south of Algiers, but the local population organised several protests against the exploitation of the shale wells.

Since the beginning of January, hundreds of demonstrators across the Algerian desert have been staging general strikes and marches to call on both Sonatrach and the government to stop the shale gas drilling operation, saying the exploitation of this non-conventional resource will damage locals’ health and the environment. After a two-week demonstration, the government backed down, with Sellal announcing via Facebook that “the exploitation of shale gas is not on the agenda”.

According to the Algerian opposition, there has also been little impetus for structural reforms at the highest levels due to the president’s frail health. “The political life has been on hold because of Bouteflika’s illness,” Saoudi said.

In a recent statement, former Prime Minister Ali Benflis noted: “The country has no guide, no visibility on its future and no perspective, since the regime is more concerned with its survival.”

Source: Al Jazeera