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Algeria’s dangerous economic gamble

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The political system is closed to Algeria’s citizens, who cannot choose their leadership. Plummeting government revenues and soaring food prices could prompt wide-scale unrest.

Kamal Benkoussa
9 September 2012

So far, the Arab Awakening has effectively skirted Algeria’s borders, leaving the regime unscathed, as well as Algeria’s political, social and economic crises intact.  But why?

Firstly, alongside the 200,000 lives claimed by the civil war of the 1990s, our social fabric was destroyed, causing ordinary people to think twice before taking to the streets to hanker for the sudden downfall of the Leviathan.  Secondly, the grip of the Algerian regime is less iron, in public at least, than was Ben Ali’s Tunisia or Mubarak’s Egypt: it is possible to criticise government policies to a certain extent, within important limits.  But thirdly, and much more importantly, Algeria is endowed with significant hydrocarbon resources.  This has enabled the regime to increase spending on wages, subsidies and services, and to bank on the belief that expenditure can substitute for emancipation.        

Yet even on its own terms, the government’s strategy is a losing one.  Indeed, the military regime holding sway in Algeria is making two dangerous economic gambles. 

In the first place, the economy remains overwhelmingly reliant upon income from its oil and gas resources, which in 2011 comprised 98.6% of the country’s export revenues. At the same time, and despite the government’s clumsy attempts at economic diversification, exports of non-oil goods represent only 2.93% (source: Centre National de l’Informatique et des Statistiques des Douanes).  Industry continues to account for no more than 5% of the economy.  Thus, Algeria’s budget is extremely vulnerable to oil price shocks, particularly given the high level of capital spending to which the regime has committed itself in order to stave off the Arab Awakening.  Indeed, the government has launched a $286bn Public Investment Programme ($130bn for the completion of major projects and $156bn for the launch of new projects), financed from general government revenues over the period 2010-2014.  

However, this deep dependence on hydrocarbons is fraught with long and short term risks.  To begin with, Algeria’s known oil reserves will last at current production levels for only 19.3 years.  Moreover, any drop in oil prices in the coming year will have a dramatic effect on Algeria’s external and fiscal balances.  An oil price of at least $112/barrel is needed in order to balance the 2012 budget.  This would only be possible with a sudden upturn in global oil prices in the coming months – that is to say, an unrealistic scenario, unless Israel were to launch a strike against Iran over its nuclear programme.  More likely, the Algerian government will be forced to make substantial cuts to its capital expenditure in 2013. 

Of course, a budget deficit can be covered in the short term through foreign exchange reserves (more than $200 billion) and the government’s oil stabilisation fund (Fond de Regulation des Recettes).  However, if sustained low oil prices compel the government to draw upon these funds,that will almost certainly prompt a re-think regarding its commitments under the five-year infrastructure development plan.   That is, public spending – the pillar of the regime’s strategy to ‘buy social peace’ – will have to be cut.

Secondly, as a major importer of agricultural products, the Algerian economy is highly exposed to fluctuations in global food prices.  In the first six months of 2012, the government spent $1.6bn on importing wheat alone.  In the past few weeks, and owing to hot weather and drought in the US cereals belt, wheat prices have skyrocketed.  Since 14 May, Chicago Mercantile Exchange Wheat Future prices have risen by 52% to $9/bu.  Because of significant increases in the costs of importing food – mainly wheat, but also corn and soya bean – Algeria’s year-on-year inflation rate is ever increasing (currently 8.2%). 

By and large, Algerians cannot afford to eat beef, which is an imported luxury beyond the budget of the average household.  Chicken is widely used as a substitute.  Consequently, chicken farmers are highly dependent upon the corn used to feed their poultry.  However, a corn supply shock is soon likely, with potential for prices to more than double from their current (already elevated) levels.  This is because the US, which in recent years has exported more corn than the rest of the world put together, is set to deplete its corn stocks this year, which may well result in a reduction or outright ban on corn exports.  Such developments would lead to a major event the likes of which have not been witnessed since the 1970s, when the price of corn reached the inflation adjusted equivalent today of  $9/bu.  Below is the inflation adjusted chart of corn, going back to the mid-1950s:

AlgeriaGraph

A reversion to 1970s corn prices – or higher – would not be impossible.  Where will this leave Algeria, given that its consumer price index is heavily weighted to food at 43.1% (source: Office Nationale des Statistiques July 2012)?  Recall that spikes in the prices of sugar and cooking oil led to protests and riots in January 2011, prompting (as it turned out, premature) speculation that the Arab Awakening had taken hold in Algeria.  With inflation averaging around 9% in the first six months of 2012, a sudden rise in the cost of bread has the potential to spark more sustained political strife.

The regime’s survival strategy in Algeria is its economic policy, and its economic policy is a gamble with awful odds.  Our leaders may not be capable of understanding the challenges by which Algeria is confronted, let alone of devising targeted solutions.  At the same time, the political system is closed to Algeria’s citizens, who cannot choose their leadership.  Combining these factors together, it should come as no surprise if plummeting government revenues and soaring food prices prompt wide scale unrest.

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