Algeria's economy is teetering on its precarious foundations. The government knows it needs to enact reforms to prevent economic collapse, but its approach is to rely on what it knows best: isolation. After energy prices tumbled in 2014, Algeria — which depends heavily on hydrocarbons, even compared with other energy exporters in the region — opted to burn through its saving rather than borrow money abroad. But that measure is proving unsustainable. Recent estimates revealed that Algeria's cash reserves could dip below $100 billion in the next couple of months, prompting the government to try a different strategy.
In September, Algerian Prime Minister Ahmed Ouyahia announced a five-year plan to reduce his country's ballooning budget deficit by borrowing directly from the central bank. The plan aims to solve Algeria's economic woes while still avoiding international debt markets and includes proposals for structural reform to accompany five years of financing, drawn almost solely from within the country. The unconventional strategy goes against the advice of the International Monetary Fund, and it carries significant risks, including high inflation. Still, it offers Algeria's leaders a way to placate their public and the business community, at least in the short term, without resorting to foreign debt.
A History of Keeping to Itself
Algeria's distaste for external investment is rooted in the country's history and geopolitics. Since winning its independence from France in 1962, Algeria — North Africa's largest country by area, and the region's second-most populous — has eschewed involvement in global economic, political and security affairs. Its mistrust of international lenders is linked to a more recent experience. As the oil market bottomed out in the 1980s, Algeria went to borrow overseas. But then oil prices sank lower, the country headed into a debt crisis, and domestic conflicts gave way to civil war, exacerbated by poor economic conditions. The debt crisis forced Algeria to seek assistance from the IMF and World Bank, which then pushed the government to reform and liberalize the economy. Once oil prices recovered, Algeria managed to free itself from its obligations to the international financial institutions, but the country has resisted the IMF's recommendations ever since.
Fast forward some 30 years. Though its budget deficit has reached new heights, hitting $33 billion in 2016, Algeria appears loath to accept outside help. In a recent speech — delivered through an interlocutor because of his failing health — President Abdel Aziz Bouteflika stressed the need for "economic sovereignty." He also pushed for the unorthodox financing plan Ouyahia outlined. It's unlikely that the policy will change once the aging president passes power to a successor; Bouteflika's health is so poor it's widely believed a circle of elites around him is conducting government affairs. If that's the case, then the president's advisers must have signed off on the policy to shore up Algeria's economic independence and sovereignty, even at the cost of the country's solvency.
When Ouyahia, a veteran prime minister, returned to office in August the government hoped the continuity he represented would assuage concerns among the business elite about the economic reforms underway. Ouyahia replaced Prime Minister Abdelmadjid Tebboune, whom Bouteflika dismissed for reportedly going too far in his efforts to unravel Algeria's corrupt and powerful business networks. Some of Tebboune's proposals — such as measures to make Algeria's domestic economy more transparent and to loosen import restrictions — likely would have helped advance the reform process. Considering the enormity of the changes to come, however, the government probably calculated that it would be better off letting sleeping dogs lie as it undertook the disruptive enterprise of restructuring the economy. Tebboune pursued too much change too quickly for Algeria's business leaders to stomach. Ouyahia, on the other hand, has promised that the government will prioritize domestic production and initiatives such as injecting more capital into local banks to quell fears in the private sector.
Independence, With Risks
Still, many Algerians may be skeptical of the government's new five-year plan, having already experienced the side effects of economic reform. When the current budget year began in January, new taxes on a variety of goods coincided with a 14 percent cut in government spending, sparking weeks of protests in urban centers throughout the country. This year's draft budget, revealed in September, sets money aside to help poorer Algerians offset the increased taxes, probably in response to the unrest. At the same time, however, the budget introduces new value-added taxes — and, for the first time, a wealth tax — along with a 23 percent overall spending cut. Although Ouyahia told the legislature last month that the wealth tax "will not concern 90 percent of Algerians," it remains to be seen whether his reassurance will satisfy the public.
Either way, the IMF won't be on board with the government's plan. Its most recent recommendations to Algeria, based on discussions in March, make clear that the institution doesn't see a way for the country to finance its deficit without borrowing more money abroad. By continuing to ignore the IMF's prescriptions and instead turning to its own central bank, Algeria has demonstrated that it is willing to assume more financial risk to maintain its independence. Its stance sets it apart from nearby countries such as Egypt, which has adopted austerity measures over the last year to fulfill the IMF's requirements for financial assistance. Unlike Egypt, though, Algeria has a wealth of oil and natural gas to fall back on. Ouyahia explained the government's position in September, noting that his country would "need to borrow $20 billion a year to repay the deficit and ... be unable to repay the debt" in four years' time if it followed the IMF's advice. And so, the administration looked for an alternative solution.
Necessity Opens the Oil and Gas Sector
While Algeria is shunning external funding for its deficit problem, the country may be warming up to foreign investment in its oil and gas sector. The new CEO of Sonatrach, Algeria's state oil and gas company, has repeatedly alluded to impending changes in the firm, on top of the restructuring he already has overseen since taking office in March. The prime minister, likewise, has announced the government would resume development on Algeria's shale gas formations and revise the country's hydrocarbon laws to make the terms for international investment more attractive (though the government will retain 51 percent ownership of its energy projects). In addition, Ouyahia and the Algerian energy minister alike have discussed moving forward with hydraulic fracturing projects, despite the political risks entailed. Controversy over the practice led to protests and the oil minister's removal from office in 2015. Nevertheless, given its financial straits, the government is willing to do whatever it takes to get the most out of its oil and gas reserves. Algeria has even shown a degree of openness to cooperating with foreign companies to pursue hydraulic fracturing, and it wants to welcome more qualified international bidders to its concession rounds for oil and gas exploration.
Notwithstanding these signs of change, reforming the energy sector will be a slow and gradual process. And in the meantime, Sonatrach reportedly is having trouble honoring its delivery commitments to foreign partners, which won't help the company build trust with its customers and clients. Algeria is still a difficult place for foreign investors to do business, and beyond helping the country make as much money as quickly as possible, the government has little interest in overhauling the energy sector.
In Algeria's tightly cloistered power structure, meanwhile, it's business as usual, as Ouyahia's reinstatement illustrates. Private media outlets have reported in recent weeks that the government is restricting their access to officials — a new development in the country's already tightly controlled media environment. If the reports are true, the crackdown may signal that the government lacks confidence in its ability to deliver the ambitious reforms it has promised and hopes to pre-empt criticism. The current administration understands that it will need to maintain firm control over the economy to survive the next elections in 2019.