Algeria Year in Review 2015


Low oil and gas prices weighed on the Algerian economy in 2015, with hydrocarbons revenues falling by 50% to an estimated $34bn

In spite of external headwinds, Algeria’s economy was expected to expand by around 3% in 2015, according to the IMF. While down from the 3.8% growth recorded in 2014, this tracks with broader prospects for global growth, which stood at 3.1%, and ranks well above the MENA average of 2.3%.

IMF forecasts suggest GDP growth will rebound to 3.9% for 2016, the highest level since 2005, aided in part by government efforts to stimulate activity in non-oil sectors, including construction, transport and manufacturing.

Fiscal buffers

Nonetheless, the scale of Algeria’s energy challenge remains significant, with oil and gas accounting for 95% of exports and 60% of government revenues on average.

The first 11 months of 2015 produced a $12.6bn trade deficit, down from the $5.5bn surplus recorded as of November 2014.

According to Abdherrahmane Benkhelfa, minister of finance, income from hydrocarbons looks likely to drop by another 22% in 2016, taking total earnings from the sector down to $26.4bn. This comes on top of a 50% decline in energy receipts in 2015.

Algeria has largely turned to its sizeable foreign currency reserves to bridge the fiscal shortfall, which reached an estimated 12% of GDP in 2015.

Foreign reserves were on track to reach $151bn by the end of the year, Benkhelfa told media in November, down from almost $200bn in mid-2014. By the end of 2016, they are expected to fall to $121bn, equivalent to around 23 months of imports.

This is well in excess of the IMF’s minimum suggested threshold of three months, although it does represent a significant deterioration in the country’s fiscal buffers, which is further underscored by the country’s dependence on imported consumer goods.

With more of the same expected in 2016, the authorities have moved to enact policies that will set the economy on the road to fiscal recovery, including tax increases and import duties.

Seeking solutions

Key measures were announced in the 2016 budget, which was approved by Parliament at the end of November.

The budget, which assumes an average per-barrel oil price of $37 over the year, calls for a 9.9% decrease in spending – primarily in recurrent expenditures – helping to bring the fiscal deficit back to 2014 levels of 7% of GDP.

In a bid to shore up public finances further, the government has moved to raise taxes and impose import duties in the year ahead. Slightly lower capital expenditure has also been announced, with several infrastructure and transport projects shelved – including the €430m Annaba tramway project – and a public sector hiring freeze in effect across many sectors.

There are also signs that aspects of the country’s generous energy subsidy regime could be revised. According to the IMF, the majority of total subsidies, which amount to around 20% of GDP, are energy-related.

The 2016 budget calls for an increase of the value-added tax on electricity from 7% to 17% when consumption exceeds 125 KWh – meaning that the price increases will be primarily confined to large consumers and industry.

Gasoline and diesel prices are likewise expected to increase, by AD6 (€0.05) and AD1 (€0.01), respectively, to AD29.60 (€0.25) and AD14 (€0.12).

However, the government has stopped short of revisiting other subsidy programmes. Total spending on subsidies is projected to increase by 7.5% under the 2016 budget due to increases in the food, transport, housing and public health domains.

Boost for businesses

Increasing the private sector’s contribution to the economy also remains a central focus of Algeria’s reform agenda. While key state-owned enterprises are expected to maintain an outsized role, with fresh capital injections to state firms in the textile and construction sectors, the government has signalled its interest in attracting higher levels of private investment, particularly in developing the non-oil economy.

One of the primary focal points for the private sector push has been the pharmaceuticals sector. As the second-largest pharmaceuticals market in Africa, with annual sales of around $3bn, Algeria is seen as a particularly attractive destination for international drug companies.

There have been several significant investments in recent months in the sector, though international companies say foreign exchange controls and other regulations continue to present hurdles.

Import controls are already being used to encourage local production. For example, government regulations prohibiting the import of drugs that are already being produced locally helped boost local production by 41% in 2014, according to the Ministry of Health, Population and Hospital Reform.

Source: Oxford Business Group