Algeria

major macro economic indicators

(e): Estimate (f): Forecast

RIsk AssessmenT

Economic growth damped by weaker hydrocarbon revenues

In 2022, Algeria's economic growth benefited from the significant increase in hydrocarbon prices and the rise in European demand following Russia's invasion of Ukraine. The country's economic activity, which is highly dependent on the energy sector, is expected to weaken in 2023 due to the decline in oil export revenues. The latter will be linked to the slight decline in the price of a barrel of oil – a barrel of Brent will slip from an average of USD 100 in 2022 to an average of USD 95 in 2023 – and to limited production capacity in the sector. Due to several years of underinvestment, oil production is expected to stagnate at around 1 million barrels per day in 2023, thereby shrinking the net contribution of exports to GDP. That said, economic growth should be resilient, shored up by increased gas exports to Europe, which is seeking alternative energy sources to Russian gas. Thanks to public and foreign investment in the gas sector, production is expected to increase by 6.6% during the year. Public and private investment will also support the non-hydrocarbon sector, particularly agriculture and construction. Lastly, private consumption (42% of GDP), which is largely maintained by social support measures for households introduced by the government, is expected to grow by 2.7% and thus bolster economic activity. However, the latter will still be embattled by high inflationary pressures in 2023. Despite a slight downturn in inflation due to the base effect and weaker global economic growth, the central bank will be unable to bring inflation back to its flexible target of 3.5%.

Fiscal flexibility and easing of liquidity constraints

In 2022, windfall hydrocarbon revenues did not offset additional spending to support the economy and the government deficit continued to widen. As in 2022, continued high prices and strong demand for oil and gas in 2023 will obviate the need for fiscal consolidation and continue to support an accommodative fiscal policy. The public deficit is therefore expected to remain high due to a further increase in social spending aimed at ensuring the country's internal stability. Among the priority expenditures, the government will finance a 47-50% increase in the salaries of public sector workers between 2023 and 2024, an increase in the retirement allowance for the poorest, an increase in unemployment benefits, and a doubling of the defence budget (estimated at 6.7% of GDP in 2022). With low external debt and an historical reluctance to seek foreign assistance to finance its public deficit, Algeria may this year seek financial support from allies such as China. In addition, as was the case in 2022, the country will continue to rely heavily on monetary financing through its central bank, as well as on foreign exchange reserves.

Exceptionally high export earnings in 2022 have enabled Algeria to record a high current account surplus. However, the current account surplus is likely to decline in 2023 as a result of a shrinking trade surplus and an increase in the services deficit. While the import bill is set to increase as a result of the lifting of restrictions on automobile imports, export revenues should decrease given the expected decline in global oil prices and the continuation of the OPEC+ alliance's agreement to crimp oil production through 2023. Profits repatriated by foreign companies to their home countries will decrease. Despite various incentives introduced by the government in an attempt to attract foreign investors which included the removal of the so-called "51/49" restriction requiring a majority Algerian stake in all new companies and improved tax conditions and contract flexibility, FDI flows are likely to remain low, except in the gas sector. For the first year since 2014, foreign exchange reserves increased in 2022 thanks to hydrocarbon export revenues. This trend is likely to continue in 2023 before reaching a comfortable level equivalent to 14 months of import cover.

Social risk is contained, but tensions exist with neighbours

Backed by the military, Abdelmajid Tebboune became President of Algeria in 2019 following the Hirak protests that led to the resignation of Abdelaziz Bouteflika. Tebboune is riding high on the significant financial windfall from hydrocarbon prices to lock in a peaceful social climate and internal stability until the next presidential elections due in 2024. Government policy will focus on mitigating the rising cost of living, particularly through multiple subsidies. While the social risk seems to be contained, the population's distrust of the political class and perception of corruption among the elite have led to a significant decline in the dominant political formations since independence in 1962. In the last legislative elections held in 2021, the National Liberation Front (98 seats out of 407) and the National Democratic Rally (58 seats) lost significant political clout, while the opposition parties - the Movement of Society for Peace (65 seats) and the independents (84 seats) - registered significant gains.

Since the breakdown of diplomatic relations with neighboring Morocco and the closure of the Maghreb-Europe gas pipeline in 2021, geopolitical tensions over the sovereignty of Western Sahara and the relationship with Israel have continued to grow between the two countries. Algeria maintains a balancing act in its relationship between the West and Russia, which remains its preferred supplier of weapons.

Last updated: April 2023