Algeria shakes up economy as oil prices plummet

Algiers, Algeria – In the face of plunging oil and gas revenues and persistently strong imports, the Algerian government has taken steps to alleviate barriers to private investment in the country for the first time in years.

The Minister of Industry and Mines Abdeslam Bouchouareb described the government’s 2016 budget as a “revolution” for Algeria’s industrial sector.

But it may be too little, too late to prevent an irreversible economic slide in a country that has become overwhelmingly reliant on hydrocarbons for its economic growth and political stability, say analysts and observers in Algeria.

Hydrocarbons, such as oil and natural gas, account for about 95 percent of Algeria’s export revenues and two-thirds of government revenues, according to the International Monetary Fund.

READ MORE: Oil price slump threatens to erode Algeria’s status quo

But the price of oil has dropped from an average $108 a barrel in June 2014 to about $30 a barrel today, and the consequences for Algeria have been dramatic.

The country’s international reserves have fallen from $195bn in 2013 to an estimated $151bn at the end of 2015 and they continue to decline at a rapid pace.

The reaction from opposition parties has been quite sharp. They say that the government is selling off the country.

by Michael Willis, expert on Algerian politics at Oxford University

The trade balance has swung from a surplus of $25bn in 2011 to a deficit of about $13bn last year, and the government ran a budget deficit of about 14 percent in 2015.

In response, the government has cut spending and reduced subsidies on fuel and power, and it is now seeking to stoke growth in non-oil industries.

The latest budget, covering the current calendar year, includes measures to allow for private investment in state-owned enterprises, creating new industrial zones and easing restrictions on the investment of revenues accrued from tax breaks.

Article 66 of the budget allows for the private sale of up to 66 percent of the shares in a state-owned enterprise, and a complete sale after five years, subject to the approval of the government investment council, the Conseil des participations de l’etat.

The article revives a similar measure that first appeared in the government’s mid-year budget in 2009, known as the supplementary budget, but was never implemented. Its reiteration today indicates that the government plans to move forward with its implementation.

Bouchouareb has argued that Article 66 will help Algerian companies cope more effectively with international competition. But it has also excited considerable opposition from parliamentarians opposed to selling off public firms to the private sector.

READ MORE: A changing of the guard in Algiers

Article 66 was initially overturned after a meeting of the parliament’s finance and budget commission, only to be reinstated as an oral amendment with superficial changes by the Minister of Finance Abderrahmane Benkhalfa.

The parliament’s adoption of the budget on November 30 was boycotted by several opposition parties, including the Socialist Workers Party, the Kabylie opposition party the Socialist Forces Front, and two moderate Islamic parties, the Green Algerian Alliance and the Front for Justice and Development, reported the state news agency, Algerie Presse Service. 

“The reaction from opposition parties has been quite sharp,” said Michael Willis, an expert on Algerian politics at the University of Oxford. “They say that the government is selling off the country.”

Privatisation on a large scale has been tried before in Algeria. Regulations to facilitate privatisation were first introduced in 2001, and in 2004, the government launched the sell-off of 1,200 public companies. But barely a third of those 1,200 companies have actually been privatised.

Plans to sell a strategic stake in Algeria’s third-largest bank, Credit Populaire d’Algerie, were abandoned in 2008 amid claims that the global economic climate had undermined the deal.

The first Algerian company to be privatised, the El Hadjar iron and steel complex, was relinquished to the state last year by Luxembourg-based ArcelorMittal. Opponents claim that the state overpaid for the purchase.

Bouchouareb has described the state’s retention of a minimum 34 percent of the companies subject to privatisation for at least the first five years as a “blocking minority”.

READ MORE: Algeria looks to develop shale gas sector

But the limited scope of the privatisation measures will hamper their effectiveness, say analysts.

Article 66 applies only to local private companies, not foreign ones, while overseas firms also remain subject to the so-called 51/49 regulation, introduced in 2009, which limits foreign companies to a minority stake in local joint ventures.

Perhaps the greatest barrier to real change is that the government has made it clear that the privatisation process will not be applied to the largest state companies.

Article 66 makes no explicit exceptions, but the state hydrocarbons company, Sonatrach, state power company Sonelgaz, and telecoms operator Algerie Telecom will all be excluded, according to Abderrahmane Benkhalfa.

“There are a tonne of tiny, underperforming companies and small and medium enterprises, but what contribution to GDP do they make?” asked Geoff Porter, president of North Africa Risk Consulting, a firm that specialises in political and security risk and business intelligence. “Maybe a couple of percent at most.”

Willis agreed that the impact of the new measures would be insignificant.

“It seems that no one has any idea what to do,” he said. “They are cutting spending, cutting back on projects. But it is way, way, way too late to start diversifying. It’s just rearranging deck chairs on the Titanic.”

Algerians have little faith that the government’s efforts to tackle the economic crisis will be effective.

“It’s not the first time they’ve looked at selling off companies, and so far nothing has happened, so people are disillusioned,” said Amel Boubekeur, a researcher in Maghreb affairs at the University of Grenoble. “Everyone is aware that the government has no clear economic policy, no clue how to get out of the economic crisis.”

“We have a huge economic crisis and a lot of corruption,” added Farah Souames, an Algerian reporter covering the Middle East and North Africa. “With the oil crisis, even if the government tries to improve the budget, they can’t.”