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After Bouteflika, Algeria’s economy needs revival

April 20, 2019 at 1:21 pm

Algerians carry a giant national flag as they take part in a demonstration in the capital Algiers against President Abdelaziz Bouteflika on 19 March, 2019 [RYAD KRAMDI/AFP/Getty]

Protests that gripped Algeria for nearly two months finally came to fruition this month, after long-ruling, ailing President Abdelaziz Bouteflika announced that he would be stepping down. His resignation was hailed as the end of an era in a country where 70 per cent of people have known no other ruler during their adult life.

Yet with the figurehead gone, the country’s fragility, particularly its economy, is in the spotlight; growth has fallen dramatically in recent years, inflation has been volatile and government debt has soared. Much of the recent protests were motivated by public frustration at economic austerity, with too few improvements observed for their sacrifices. Moving forward, Algeria’s new government will have to take decisive steps to prevent further economic disintegration and address the structural challenges that have underpinned the country’s economic and political authoritarianism for decades.

The rentier state

Algeria’s main source of income has long been its natural resources; the government relies heavily on sales of natural gas for its revenue and sales of hydrocarbons almost account for its entire export income. Its lack of diversification has rendered it a rentier state, largely dependent on external states to pay rents for use of their resources.

However, with the price of oil falling, Algeria’s international reserves have more than halved since peaking in 2014. Algerian authorities have projected the stockpile would drop further to $68 billion in 2019, based on a conservative budget that assumed an average oil price of $50 per barrel. At current rates of spending, the government would need prices to return to nearly $100 a barrel to balance its budget.

READ: IMF slashes growth forecast for MENA economies

Algiers has attempted to cushion the impact of falling prices by redirecting funds from the country’s oil stabilisation funds. However, after running dry in early 2017, the government embarked on a series of austerity measures to cut public spending, even as growth continued to fall.

Recent protests and political upheaval have left oil production relatively unaffected, but a multibillion-dollar fallout is still a possibility. Last month, petroleum giant Exxon announced its negotiations with Algeria for the development of local shale gas resources were being delayed because of the widespread anti-government protests. Weeks later, Algeria’s state-run oil company Sonatrach suspended plans for a joint trading venture; British Petroleum and Norway’s Equinor have also put the brakes on investment plans.

Reliance on natural resources can only get a state so far. Algeria’s new leadership will have to go further and prioritise exploring other sources of revenue to generate long term income that both the state and its citizens can rely on.

Jobless generation

At first glance, unemployment in Algeria is high, at 11.7 per cent. Yet this worsens when one unpacks the figures, narrowing in on young people; making up some two-thirds of the population, a staggering 26 per cent of 18-30-year-olds are out of long term work. The lack of opportunities, particularly for the country’s best educated youth, has been a crucial driver of the protests since their outset. The bloated public sector is an increasingly undesirable option for young people, with many dreaming instead of migrating to Europe.

Despite employing quantitative easing techniques – constituting large scale asset purchases to inject money into the economy – which cut unemployment by some 0.6 per cent last year, analysts criticised the plans as hampering greater development in the long term. With many of the jobs created in the construction and administrative sectors, they relied heavily on government spending, money authorities increasingly did not have.

The lack of diversification within Algeria remains a key cause of unemployment, particularly among the youth. The country has not attracted the level of tourism of neighbouring Morocco and Tunisia, an industry that has the potential to create thousands of jobs. A scheme of interest-free loans, introduced two decades ago to encourage young Algerians to start their own businesses, has also not borne out early hopes that it could boost the non-energy sector, which today accounts for only six per cent of exports.

READ: Algeria opposition announces plan to boycott elections

Consequently, according to some analysts, up to 60 per cent of the economy is made up of informal work, with little regulation, taxation or records of the professions people undertake for cash in hand or favours in kind. Despite the greater risks associated with unregulated markets, such smaller firms have met with some success, with certain segments thriving among the healthy competition and growing demand. Harnessing such creativity and innovation will be important in meeting the rising need for jobs, but structural changes to the business environment are needed for long term change.

Bouteflika’s backers

Algeria’s ruling elite is largely comprised of veterans of the country’s independence war from France in 1962, backed by the military which famously intervened in 1991 to oust the Islamic Salvation Front (FIS) party that won the first stage of the national election. Since then, the military has continued to be the primary player in the country’s governance, resulting in substantial corruption. A significant portion of the country’s oil reserves is transferred to Swiss bank accounts of prominent defence officials, privileges designed to be kept amongst the few at the disadvantage of broader society.

The lack of transparency around government institutions has resulted in a complete lack of accountability, leaving generals of a bygone era to dictate economic policies for a new generation. Reluctant to take on any external debt, they have instead placed heavy restrictions on imports in an attempt to lessen demand for foreign currency. Officials have continued to pump the inefficient, over-administered public sector, adding to the state payroll and taking away investment from infrastructure. This burden of regulation and the bureaucratic deadweight incubates corruption, pushing many towards the informal economy for job opportunities.

Algeria ranks 105th out of 175 countries on the Global Corruption Index, a position that poses a serious obstacle to business and investment. The government and public sector are perceived as nepotistic and subject to bribery, with courts strongly affected by political influence and opaque bureaucracy. Even within the petroleum industry, high-levels of corruption are reported with the government providing minimal information often required by foreign investors.

Prominent Algerian businessmen have recently come under scrutiny in a crackdown on shady dealings; Ali Haddad, one of the country’s wealthiest individuals who was close to President Bouteflika, was arrested at the beginning of this month, alongside six other businessmen on accusations of corruption. The Panama Papers also exposed gas deals secured by Farid Bedjaoui as being facilitated through $275 million worth of bribery. Though the legal framework to tackle such corruption offenses does exist, enforcement, particularly against notable individuals, remains a key issue.

READ: General strike in Algeria against Bensalah’s ascension to presidency

As the country leaves behind the governance of Bouteflika, its new government would do well to look to the circumstances of their neighbours as to what development could look like if concrete steps are not taken.

Egypt, a nation similarly dominated by the military establishment, has embarked upon an economic development strategy since 2016 in accordance with a conditional loan agreement from the International Monetary Fund (IMF). Harsh austerity measures have gripped the country in recent years, as fuel, food and water prices have soared. The severity of circumstances have even prompted brief incidents of online protests in the heavily-surveyed state and witnessed the emergence of “used food” markets, selling leftovers to families unable to afford market prices.

Whilst the IMF has praised Egypt’s progress, the country so far has little to show for it. Despite decreasing the debt burden, foreign direct investment in Egypt fell by nearly 25 per cent last year according to the central bank, with most of the existing funding still concentrated in the gas and oil sectors.

READ: Algeria’s Constitutional Council Chairman Tayeb Belaiz resigns

Even neighbouring Tunisia, considered to have transitioned most successfully in the region, has battled with economic trouble since the 2011 revolution. Slow growth has been complicated by political instability, which has led to numerous strikes and protests by powerful unions over low wages and rising prices.

Algeria’s new leadership must acknowledge the challenges ahead and opt for structural reforms specific to their context. A strong-willed and confident government must emerge that is ready to reorient the economic system in favour of Algerians, and not be dictated to by foreign interests or groups. Yet with ongoing political uncertainty with the potential to stoke further unrest, a resolution to the country’s leadership quandary remains the first step on its path to revival.

Algerians protest president’s bid for 5th term - Cartoon [Mohammad Sabaaneh/Middle East Monitor]

Algerians protest president’s bid for 5th term – Cartoon [Mohammad Sabaaneh/Middle East Monitor]

The views expressed in this article belong to the author and do not necessarily reflect the editorial policy of Middle East Monitor.