High oil price enables Algeria to revert to rentier economy

Algeria

Published on Wednesday, 23 February 2022 Back to articles

World Bank called for aceelerating reforms to protect Algeria’s economy

The reason why the Algerian economy is progressively failing is because the regime has remained stuck in its mindset of living off one of the world’s most extreme ‘rentier’ economies: one based almost entirely on hydrocarbon rents. Since the 2014 collapse of the oil price it has been talking about enacting structural economic reforms, notably diversifying the economy away from reliance on hydrocarbons and getting rid of the massive state subsidy system, which has proven itself to be unsustainable. It is also a system which has enabled the regime to ‘buy off’ any social unrest or labour trouble. However, the regime had talked, but done nothing. Over these crucial seven years, the hydrocarbon sector’s contribution to export earnings only declined from around 97% to about 93%-95%.

By late last year, however, the regime realised that it had finally run up against the buffers and that it had no choice but to enact long overdue reforms to the subsidy system. It was also realising that it no longer had the oil-generated financial surpluses to ‘buy- off’ the potential social unrest, as it had always been able to do in the past, and most spectacularly after the ‘Arab Spring’ unrest of 2011. Today, potential unrest is threatening the regime’s very survival but unable to do anything about it other than resort to massive repression. 

Therefore, with the regime’s financial back finally up against the wall, the Finance Law which came into force on 1 January 2022 bit the bullet and factored in subsidy reform to this year’s and future budgets. However, the 2022 Budget had only been in force for 43 days before President Tebboune scrapped it. The details of his latest announcement are still awaited but, in essence, all newly introduced taxes are to be cancelled or frozen, and subsidies are to be brought back in.

The revision of the subsidy system seems to have been abandoned or at least postponed. Many in the regime will breathe a huge, but short-lived, sigh of relief. Although the annual cost of social transfers is about US$17 billion, it would have been almost impossible to reduce it rapidly, simply because the lack of precise figures on the levels of poverty — mainly caused by the role of the large informal sector in the economy — would make it extremely difficult to implement any such reforms quickly.

Set against that difficulty, the almost vertiginous recent rise in the cost of living, especially foodstuffs (which will now be exacerbated by Russia’s invasion of Ukraine), along with stagnating wages, were posing a potentially serious threat of social unrest, which, once started, would be difficult for the government to contain.

Facing those unpalatable options, the very rapid rise in world oil and gas prices presented too great a temptation to a regime that does not have the financial or administrative abilities to reform, and which has never known anything but a rentier system. The current world oil prices are, albeit perhaps unsustainable, providing the regime with a comfortable short-term threshold for continuing the subsidy system.

Tebboune’s decision to scrap the budget will almost certainly bring some immediate relief on the cost of living front and so deter serious unrest. It has already brought significant falls in the prices of pasta and couscous, and some other foodstuffs. But by merely kicking the can a little further down the road, Tebboune has ensured that the country will face even greater economic and fiscal problems in the not-too-distant future.

This excerpt is taken from Algeria Focus, our monthly intelligence report on Algeria. Click here to receive a free sample copy.

The February 2022 issue of Algeria Focus also includes the following:

Politics

  • The reincarnation of the ‘God of Algeria’
  • Regime threatened by Swiss trial of Khaled Nezzar
  • Ministerial reshuffle limited to Abderrahmane Raouya
  • Fraudulent scam involving Algerian students
  • Implications

Foreign Relations

  • France is concerned by Algeria’s partnership with Russia

Security

  • Incarcerating Hirakists at home and resorting to ‘death squads’ abroad 

Economy & Business Environment

  • High oil price enables regime to revert to its outmoded ‘rentier’ economy

Energy

  • Can Algeria deliver more gas to Europe?

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