Algeria Experiencing a Few Crises in a Row
The situation in Algeria, regardless of the advanced age of President A.A. Bouteflika, with all economic complications in the country, the food crisis is stable due to the purge of the elite, which periodically encircles the head of the government. It weakens the governing clans and does not strengthen them to such a degree as to become dangerous.
The system requires reforms, but there is no one to carry them out even with the support of the EU and the Arab monarchies. The bureaucracy hinders any attempts to modernise the economy, although the oil and gas components helps to keep it afloat. Competing with Morocco, Algeria monitors the situation in the Sahel, Tunisia and Libya, fearing the strengthening of hostile elements, such as Islamists, as in Libya and former military personnel of Khadafy’s army. The policies on migrants, running to Europe from Africa through Algeria, cause anxieties in the EU. We will look into the situation based on material from expert of the Middle East Institute A.A. Bystrov and S.S. Balmasov.
According assessment by American experts, Algeria in the mid-term will remain stable, regardless of President Bouteflika’s health condition, decrease of revenue from oil and gas exports and the necessity for unpopular reforms of reducing government subsidies. One of the main priorities of the government is the attraction of foreign investors in the sphere of oil and gas, which requires amendments in local laws. In such a scenario, the Americans consider that Algeria will push the return of Morocco into the ranks of the African Union and its active work in the restoration of influence on the continent. Despite the fears of the executive authorities, it is unavoidable to pass painful reforms. The question is only when will their start.
On the agenda is the diversification of the economy. Hydrocarbons consist of 94 percent of the volume of national export, which gives the budget around 60 percent of revenues. The country fully depends on imports. The volatility of oil and gas prices fundamentally influences the budget deficit. After the fall of hydrocarbons prices in 2015, the attempt to maintain an acceptable level of imports cost the Algerian People’s Democratic Republic (APDR) a budget deficit of 16.4 percent. Regardless of the crisis, Algeria’s GDP per capita is higher than Morocco, which has achieved more significant results in the diversification of its economy. But in Algeria a critical situation developed with the stratification of the population into the very poor and the very rich.
Foreign reserves catastrophically melt. They consist of 112 billion dollars, which in 2014 were 177 billion, and in 2015 were 143 billion. According to the IMF, at the current rate of government spending these reserves in 2017 account for 91 billion dollars, and in 2018 will be 76 billion. The question about reformatting of state revenue for Algeria is a priority. The funds, which the country directs at economic diversification, are significantly inferior to the expenses for the maintenance of public enterprises, social benefits and defence. The government cannot under these circumstances, under pressure from the presidential circle, revise any of these articles.
Attempts are made but arouse social discontent, as was in 2016 when the authorities increased sales taxes from 14 to 17 percent. Their plan was to decrease social payments by 45 billion dollars. The reduction of state social spending in 2017 should be 14 percent (initially planned at 9%), the total amount of imports is marked for a reduction by 5 billion dollars. Attempts to prevent the devaluation of the dinar cause a sharp increase in inflation. This demonstrates that the country, despite the fact it is the second exporter of gas to the EU after Russia, and the stabilisation of oil prices, it is unable to maintain the necessary balance of payments.
The situation is further aggravated by the necessary modernisation of the oil and gas infrastructures. Since 2007 domestic consumption of hydrocarbons has increased by 50 percent, but the extraction of the black gold has decrease by a quarter. Accordingly, the amount of social support of the population has decreased, which the government organised through the state-run company Sonatrach. Attempts to activate the extraction of shale oil and apply new technologies to extract residues from depleted fields did not have any economic effects largely because according to Algerian legislation the share of any foreign business in the project must not exceed 49 percent. For the preservation of this there is the lobby of the veterans of the struggle for independence. In the end, Algeria for the first time in the last decade asked international financial institutions for help. The government is trying as well to raise funds for agriculture in order to lower food imports.
The renewal of the constitution in 2016 includes a few points, designed to make a more liberal internal market and to attract foreign investments. They prohibit the formation of new monopolies and require more to transform the law in the framework of attracting foreign capital. But repairs do not bring specifics, blurred and subject to different interpretations. As a monument to the local bureaucracy it is often brought as an example the East-West highway, original costs on which were increased three times and amounted to six billion dollars. The construction was plagued with constants corruption scandals. This was especially painful when compared to the successful implementation of similar projects in Morocco.
The Algerian central bank is considered as the least transparent and conservative among the Maghreb countries. The degree of implementation of current banking technologies, Algeria is far behind Egypt, Morocco and Tunisia. American experts do not expect sharp turns in the economic policies of the country at least for the duration of the old guard power headed by President Bouteflika; apparently this will be the task of the young generation, not so much focused on the oil business.
With Reinforcements for Licensing
The leadership of the EU tries to increase its gas imports from Algeria, lowering the Russian market share of the blue fuel, in order to decrease Moscow’s influence in Europe. The task must be resolved through diversification and strengthening of the APDR economy, as well as increasing the share of non-hydrocarbon energy in the country. This, as Brussels expects, will reduce the gas needs inside Algeria and increase production and export to the EU market. This is what the EU intends to support. This is evidenced by the ten
th session of the Association Council of Algeria and the EU, which started on March 13th in Brussels under the presidency of the heads of the Ministry of Foreign Affairs of Algeria Ramtane Lamamra and the European diplomat Federica Mogherini.
It is noteworthy that the meetings took place behind closed doors, without announcing details. However, it became known that the sides signed a number of agreements, which should contribute to the stated objectives. In particular, the EU intends to focus on the technical support for economic reforms (long neglected by Algeria) for which Brussels signed with the APDF a number of projects for a total of 40 billion euros. The EU intends to pay special attention in helping the country in diversifying its economy, developing renewable energy and improving of the business climate through reforms in areas of public finances.
The EU, being the main trading partner of the APDR, despite the Chinese “offensive”, criticised the Algerian political and economic realities that prevent problem solving. Especially the “Institute of Import Licensing”. The leadership of the EU condemned the use of “restrictive measures in the bilateral trade”, introduced in Algeria in its fight against capital flight. In particular, it was specified for appropriate actions with respect to cars, cement and armatures. According to the national Customs services, import from EU countries reached 16.79 billion dollars in nine months of 2016, when for the same period in 2015 it reached 19.22 billion. Apparently, while this state of affairs in the mid-term perspective not only France, but the European Union as a whole, risks losing the position of first trading partner of the APDR.
Algeria was criticised for the “downward trend” in gas production, which “does not promote investments from international operators” and was caused by restrictive measures by the authorities against international investors. This cost the Treasury nearly seven billion dollars of lost revenue from duties on imported goods. Brussels again raised the painful for the Algerian regime topic of human rights, paying particular attention on the restrictions on the rights of demonstrations and gatherings, freedom of religion and pressure on the media, including the closure of some television stations.
The EU praised the Algerian leadership for its “improvement of the business climate, in particular in relation to investment, through which the rule 51:49 (under Algerian law, foreign companies can implement their projects only with local institutions and have no more than 49% in them) can be mitigated”. According to Mogherini, regardless the fall in prices on oil since 2014, Algeria has a relatively comfortable position in financial relations with foreign exchange reserves, estimated at almost 110 billion dollars. Satisfaction was expressed about the security situation in the country. It was telling that Mogherini completed the presentation of EU’s vision of Algerian affairs with a favourable opinion towards the Algerian authorities, stating its intention to send a delegation to the parliamentary elections scheduled for May 4th.
Ramtane Lamamra responded to the attempts to “chide” Algeria reservedly. He stated that his country’s relations with the EU stems firstly from their own interests and intends to do so in the future, while respecting its obligations. So the EU leaders, who dream of getting rid of the “energy dictates” from Russia at the expense of Algerian gas face a dilemma: for the development of relations it must relinquish the “spreading of democracy” there, in order to not ruin their energy plans. Brussels cannot understand that in the bureaucratic realities of the Algerian regime, it is impossible to achieve the stated goals quickly. Attempts to change the country for themselves, based on the examples of Iraq and Libya, are fraught with serious risks.
Algerian authorities announced savings measures seeking to increase its own production of grain crops. The most significant among them is durum wheat, a product that is the main staple food for the majority of the rural population and important to city dwellers. Because of rare rains in 2016 local farmers lost their harvest in more than a third of the cultivated area (about a million hectares). As a result, only about 3.4 million tons of grains were harvested (a record of 6.12 million tons was registered in 2008-2009). This forces the Algerian authorities to cover the country’s needs in wheat through purchases abroad, including from Russia, one of the main suppliers of bread.
The strategic section, on which depends the food security of the country continues to develop by depending on the climate in the absence of management decisions to reduce the dependence of agriculture on the vagaries of the weather, although other countries have shown that it is possible to increase yields by using new technologies and irrigation. Without changes the 2016 situation will inevitably arise again. The relevant UN body responsible for agriculture and food production predicts a repeat situation for Algeria for a few years. Mitigating the problem is unsuccessful. It is blocked by the ineffective, expensive irrigation system (sprinklers), leading to losses. Moreover, not all parts of the country can use it.
At first glance the situation does not appear catastrophic. If in 2015 the authorities spent 3.43 billion dollars on the purchase of wheat from abroad, in 2016 it was 2.71 billion, due to falling prices on the international market. However, the cost of food, as well as wheat, will be pushed up by the increasing demography in developing countries (including Algeria, where in the recent years the birth rate is stabilising at around 1.1 million persons, and the mortality rate does not exceed 250 thousand). The decrease in volumes of foreign exchange reserves of the APDR while maintaining low prices for hydrocarbons concerns the authorities. The maintenance of subsidies for the baked goods industry is under question and the preservation of its production with reduced prices.
It is imperative that Algerian agriculture achieves stable harvest growth up to two and a half million tons of wheat per year. To reach this, the government must in the course of three to five years invest millions if not even billions of dollars in the industry for the improvement of means, able to increase the yield (irrigation, intensification of production, agronomic research, etc.). However, these measures, according to Algerian experts in the agriculture field, will be effective in coordination with the economic actions of the authorities, including assistance to producers. To count on funds for this in the economic conditions from the authorities of the APDR is not advisable. We should remember the problem of depletion and salinization of soil, which in a bureaucratic and inefficient state mechanism are very difficult to solve.
Statistics on Garlic
2017 started for Algerians with a noticeable growth in prices on products. As in many other countries, this happened in January after the New Year. However in Algeria this process continues and is ahead of the “world graphic”. In comparison with January 2016 prices on tomatoes grew by 105.1 percent, peas by 62.4, potatoes by 25.5, garlic by 21.8, dried beans by 11.7 percent. A grocery basket, according to government statistics, rose by 8.52 percent (by 40% in comparison with 2015). The growth in food prices began to be felt in the third quarter of 2016 and ongoing, despite the fact that many indicators according to estimates of the authorities, the country, except for wheat and garlic, gathered a “very good harvest”, which should have considerably “amortized” the rise in prices.
It also touched seasonal products, touched dates and citrus, despite the fact that their harvest was “particularly good”. So, for oranges picked in Algeria, in 2015 the average price per kilogram was 139 dinars, in 2016 it was 194 (increase of 41%), and now it passed 200. In 2015 the cost for nuts was 165 dinars per kilogram, in 2016 it was 240 (increase of more than 46%), today it is 330. A record was set with the threefold increase in the price of apples (from 300 to 900 dinars per kilogram), despite the fact that in 2016, 500 thousand tons were picked. Despite the large harvest, the APDR in 2016 imported apples for 51.1 million dollars versus 99.5 million in 2016. For garlic, the corresponding figures had increased to almost 22 million dollars in 2016, versus 15.8 million a year earlier. And if the APDR had a poor garlic harvest, then there were no problems with apples, which proves that the artificial reduction of competition due to the introduction of restrictions by the authorities on the supply of foreign goods and an overestimation by the local producers the value of their products.
The authorities say that the discourse is on the “seasonal price fluctuations” and in comparison with December 2016 they increased by a “mere 2.5 percent”. At the same time “a decrease in prices on certain products occurred from meat to salad in the range of 2.3 to 23 percent”. However, according to expert estimates, it was so small, that meat is inaccessible for the majority of the population with above-average incomes. On the other hand, the price jump in 2017 covered the decreases. So, if a kilogram of potatoes in December cost slightly more than 50 dinars (about 50 cents US), at the beginning of the year its price reached 90 dinars. If in 2015-2016 the authorities managed to ship Algerian potatoes to the Persian Gulf countries, now the volume of deliveries will be reduced by at least 50 percent.
Recall that in the second half of 2015 the authorities tried to reduce the outflow of capital abroad and the decline in foreign reserves by artificial barriers to foreign products. Since 2017, in Algeria, the practice of limiting access of food, as well as fruits, including bananas and vegetables was introduced. The result was the explosive growth of prices on some of them, for example apples. The cost increases are noted for all types of vegetables, fruits, fish and meat. This brought to the expansion of the “black market” due to the delivery of smuggled goods from Tunisia and Morocco.
Representatives of the National Association of Merchants and Artisans (NAMA) declare, among the reasons contributing to the increasing cost of food, the total increase in taxes and the depreciation of the Algerian currency (officially inflation was 6.7%), and the rising transportation costs resulting from the increase in the cost of fuel. The NAMA consider that the problem with prices lies in the shortcomings of the system of product storage due to the lack of specially equipped warehouses and refrigerating chambers, and because of that there is a lot of spoilage. Wholesale trading markets are controlled by mafia structures associated with the security forces, who increase up to 30 percent the cost of products. These are extremely worrying figures.