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George Joffe

Algeria introduces austerity as panic strikes

Sellal (R), here with President Itno of Chad, is warning of an economic crisis (AFP)

Date of publication: 2 January, 2015

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Government warns of end to subsidies as oil prices continue to drop, damaging country’s foreign reserves and ability to pay its way out of domestic discontent.

Algerian Prime Minister Abdelmalek Sellal proffered some very unwelcome news to his long-suffering fellow-nationals on Christmas Eve. Speaking at a press briefing as he attended the inaugural session of a major trade fair in Algiers, he abruptly warned his audience that the country was about to face an economic crisis.

The announcement was all the more shocking because, until very recently, he – in common with all senior Algerian politicians – had been serenely confident in the face of falling oil prices over the past four months. Algeria, with

     Algeria bought its way out of trouble in 2011. Now it will no longer be as easy.

foreign currency reserves of over $190 billion, would not face any problems, he had suggested.

At the briefing and in a letter he sent to all ministries, provincial governors and heads of state enterprises the next day, his tone was very different. Public sector expenditure would have to be radically reined in, he argued, and the state would have to find new sources of finance in future. Public sector employment would be frozen and state largesse on trips abroad and on meetings would be cut.

In end had to come, in short, to ‘waste’, even if this meant ongoing shortfalls in employment in the vital health and education sectors. Trade Unions have already begun to grumble that cutting ‘astronomic’ senior official salaries would be a better and fairer way of achieving this outcome.

Austerity

Although existing state investment projects would be completed, proposed new ventures are set to be abandoned unless they serve a social purpose or were essential. In future, project finance would have to be sought from the private sector and Algeria would have to diversify away from its reliance on oil-and-gas. The state would move against illegal cash flows abroad and would also seek to take control of the informal sector of the economy, to ensure that, in future, it would pay its share of taxes too.

How this will all be done is quite unclear, however, and most observers consider it to be highly unlikely.

The cause for the premier’s anxiety is not too difficult to discern. At the end of November, OPEC had held one of its regular meetings in Vienna. At the meeting, Saudi Arabia had held out against cuts in oil production even if this would accelerate a price drop. Algeria, on the other hand, had sought production cuts in order to restore prices to the levels that had existed before last September, when the current price collapse had begun.

Saudi Arabia’s motives for tolerating the price decline are not clear but may, some observers feel, reflect its desire to punish Iran or to remind the United States of its dislike of the shale oil-and-gas revolution that is under way there. Others suspect a Saudi-American plot, to undercut Russia in response to its behaviour in Ukraine. None of that, however, interests the Algerian government very much, given its predominant concerns over the future of North African security.

Algerian anxieties are all too clear; it had bought its way out of the crisis of confidence that affected the Arab world in 2011 with consumer subsidies on essential products. It could afford to do so, given its plentiful foreign reserves and continuing high oil prices. Now this is no longer true, hence the panic, including threats to rein in subsidies on imports – on which Algerian consumers increasingly depend as domestic production stagnates.

The prime minister has warned that, even under the most optimistic assumptions, his experts do not expect oil prices to rise back to $80 per barrel until 2016 at the earliest. By then, Algeria would need prices to rise to $120 per barrel in order to cover its budget shortfalls.

The real implications

At the same time, the prime minister reassured his audience that Algeria was not facing a repeat of the oil price crisis in 1986. Then the country suffered from massive foreign debt and introduced savage restraints on imports. Now, he pointed out, Algeria had no foreign debt and abundant foreign exchange reserves; enough to cover its import needs for four years, although the IMF calculates that they will only cover imports for the next thirty months.

Oil and gas will remain Algeria’s economic mainstays, although output is expected to be stagnant for the next year. However, as Algerian economists have pointed out, the country’s budget had been predicated on an oil price of $71 per barrel. Even given the recent price falls, Algeria will end 2014 having enjoyed an average oil price of $101 per barrel; in other words it will have earned a ‘profit’ of $30 on every barrel of oil it sells. The crisis, in short, is for the future, not for now.

Beyond that, too, the promised measures sound far more ferocious than they will be in reality. ‘Social’ expenditure – consumer subsidies and employment subsidies – will be maintained. Microfinance enterprises will continue to be encouraged – and they are expected to produce 88,000 new jobs next year. ‘Pre-employment’ arrangements for unemployed youth will continue, despite the promised public sector employment freeze. And the state is still the major employer within the formal economy of Algeria.

Nor will the security sector suffer, with the army’s budget of $10 billion and the interior ministry’s budget of $7 billion being untouched as well the 500,000 jobs they provide. There will not be, in short, a return to the disasters of 1994 when IMF-prescribed reforms, in the midst of Algeria’s civil war, saw employment fall precipitously by 400,000. Sellal will certainly not let that reoccur.

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