Economic studies
Algeria

Algeria

Population 39.5 million
GDP 5,406 US$
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Synthesis

major macro economic indicators

  2013 2014  2015(f) 2016(f)
GDP growth (%) 2.8 3.8 3.7 1.9
Inflation (yearly average) (%) 3.3 2.9 4.2 4.1
Budget balance (% GDP) -0.4 -7.3 -13.7 -11.2
Current account balance (% GDP) 0.4 -4.3 -13.2 -10.8
Public debt (% GDP) 8.3 8.8 10.2 13.6

 

(f) Forecast

STRENGTHS

  • Large oil and gas reserves
  • Potential in the fields of renewable energy and tourism
  • Strong external financial situation (very low level of external debt, large currency reserves)

WEAKNESSES

  • Level of dependence on oil and gas and problems using this income
  • Disconnect between political power and the population
  • High rate of youth unemployment
  • Excessive size of public sector
  • Bureaucratic inertia, weak financial sector and problematic business climate

RIsk AssessmenT

Slowed growth due to weak oil and gas prices

 Weak oil and gas prices will continue to slow Algerian economic activity in 2016. Algeria remains highly dependent on the energy sector which accounts for 30% of its GDP. The problems faced by the hydrocarbon sector due to its lack of competitiveness and the obsolescence of its production equipment lead to the conclusion that if the oil market remains low Algerian energy production performance will stay weak in 2016. Indeed, as its budgetary room for manoeuvre becomes increasingly constrained, the government will have to maintain its support to the economy. Even if a number of infrastructure projects will be postponed, the support for consumption through food subsidies will remain in place. Household demand will continue as one of the driving forces for economic activity in 2016. Household purchasing power could however suffer from a rise in the level of price and in a lesser extent from the implementation of new tax rules linked with energy consumption. Non-oil growth will show signs of contraction in 2016. The manufacturing sectors that suffered a slowdown in 2015, particularly the Iron and steel and construction material industries could see further declines in their levels of activity in 2016.

Inflation accelerated significantly in 2015 and is expected to remain at a similar level in 2016. The effects of lower global commodity prices have been cancelled out by the depreciation of almost 20% of the Algerian dinar against the dollar since the start of 2015. Food remains the leading contributor to inflation. The Algerian central bank is likely to let the dinar to depreciate against the dollar in 2016 in order to absorb the impact of the low oil price on budget revenues although this bias could increase inflation.

Public accounts remain vulnerable to oil and gas market movements

The contraction of oil and gas revenues and the continued high level of public spending (40% of GDP) deepened the public deficit in 2015. However some budget adjustments should be adopted in 2016. The expected measures would seem to focus on reducing subsidies under the cover of an increase in indirect taxes.  Among the key measures announced by the Algerian authorities, they are committed to increase the tax on oil products and to higher VAT on diesel. In addition, the budgets granted to tourism and agriculture Ministries have been revised downwards. Despite these measures, the public accounts deficit will remain substantial and will be partly funded by transfers from the Revenue Regulation Fund. The size of its currency reserves and the low level of public debt enabled the government to cope with the shock resulting from the collapse in oil and gas prices in 2014 and 2015. However, the running down of currency reserves and the dwindling of the Revenue Regulation Fund by half in 2015 will limit the funding possibilities in 2016 which should result in an estimated 30% increase in the public debt.

The external accounts will continue to suffer from lower export earnings in 2016. The current account deficit should however shrink slightly as a result of lower imports. This decline is attributable to weaker economic activity in 2016 and the entry into force of a law for licensing imports as of January 2016, which targeted among other goods the new private vehicles. Other protectionist measures targeting iron and steel products and computer equipment could also be introduced.

 

Ministerial reshuffle in May 2015

The large scale Ministerial reshuffle carried out by President Bouteflika in May 2015, the first since 2011, was an indication of the severity of the situation in which Algeria finds itself in terms of the developing economic crisis. The increasing economic difficulties may lead to new changes in the government team in 2016 leaving room to personalities close to the presidential circle. We also expected change at the head of the prime ministry in 2016. Besides, the country should proceed to a constitutional reform in January 2016, which should conduct to a modification of the electoral process before of the 2017 parliamentary elections.

Whilst the security situation seems somewhat improved, the activities of radical Islamist groups and instability along the Tunisian and Malian borders have increased. The recent ethnic disturbances (clashes between rival Berber and Arab gangs) also seem to have been brought under control.

 

Last update: January 2016

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