Economic Policy in Algeria: Challenges and Opportunities

Algeria is the largest country in Africa and has an economy that is heavily dependent on oil and gas. The country’s oil and gas sector accounts for around 35% of the gross domestic product (GDP), 60% of budget revenues and over 95% of export earnings (OEC, 2022). However, in recent years, Algeria has faced significant economic challenges due to the volatility of oil prices and the need to diversify the economy.

This article provides an overview of the key economic policies and reforms in Algeria and analyzes the major opportunities and challenges facing policymakers. The first section gives background on Algeria’s economy and economic policy since independence. The second section examines the impact of fluctuating oil prices and the challenges of overdependence on hydrocarbons. The third section discusses policies and reforms relating to macroeconomic stabilization, structural transformation, economic diversification, and improving the business environment. The fourth section looks at strategic opportunities in sectors such as agriculture, industry, tourism, and information technology. The final section provides a summary and recommendations for future economic policy priorities.

Background on Algeria’s Economy and Economic Policy since Independence

Algeria gained independence from France in 1962 following a protracted war of independence. The new socialist government under President Ben Bella focused on protecting state sovereignty over natural resources, land redistribution and expanding the industrial sector under a centrally planned economy (Rouadjia, 2022). Algeria nationalized the oil and gas industries in 1971 and used the rising hydrocarbon revenues in the 1970s to make major investments in heavy industry, infrastructure and social welfare.

However, the 1986 collapse in oil prices exposed the flaws in Algeria’s dominant hydrocarbon sector and centrally planned economy. Faced with growing fiscal and balance of payments deficits, rising foreign debt and high inflation, Algeria undertook gradual macroeconomic reforms under the auspices of the World Bank and IMF (Kpodar, 2015). Price controls on consumer goods were reduced, exchange rates corrected, subsidies lowered and money supply tightened. Structural adjustment programs focused on privatizing large loss-making state enterprises, opening trade, reducing import restrictions and encouraging private investment in sectors outside hydrocarbons.

These reforms helped stabilize the economy in the 1990s but the country continued to be vulnerable to oil price volatility. The civil war during this period also impeded economic progress and foreign investment. The rise in oil and gas prices after 1999 enabled Algeria to earn record export revenues. However, dependence on hydrocarbons deepened, non-hydrocarbon industries struggled to compete with cheap imports and unemployment remained stubbornly high at over 10% (African Economic Outlook, 2022).

The Challenge of Hydrocarbon Dependence

Algeria’s high dependence on hydrocarbons is the economy’s Achilles heel and poses major challenges for economic growth and stability. Oil and gas account for almost all export earnings and over one-third of GDP. As a result, the economy is highly vulnerable to fluctuations in international hydrocarbon prices. For instance, the oil price collapse after 2014 led to a halving of export revenues and the growth rate turned negative in 2015-16 (Kpodar, 2019). Declining hydrocarbon production and export volumes due to field depletion is also impacting revenues.

The dominance of the hydrocarbon sector has hindered the development of non-oil industries in Algeria. The appreciation of the real exchange rate due to large oil inflows has made other export sectors like agriculture less competitive. The sector also attracts the major share of foreign direct investment (FDI) limiting funding for other industries. The high taxes and royalties on oil and gas have enabled extensive subsidies especially on fuel, electricity, food and housing. These subsidies are costing the budget billions of dollars and are inefficient and regressive. The challenge for policymakers is to reduce the dependence on hydrocarbons by developing competitive non-oil sectors. But this will require substituting revenues from oil and gas through higher non-hydrocarbon fiscal revenues.

Macroeconomic Stabilization Policies

Maintaining macroeconomic stability has been a key challenge for policymakers in Algeria given the economy’s vulnerability to commodity price volatility. After the oil price collapse post-2014, Algeria’s fiscal and current account deficits widened substantially. Fiscal deficits rose from 6.4% of GDP in 2015 to 15.7% by 2019 while the current account deficit increased from 16.5% to 17.7% over the same period (African Economic Outlook, 2022). To stabilize finances the government cut capital spending sharply leading to slowdown in non-hydrocarbon growth.

Tight monetary policy helped reduce inflation from 8.2% in 2015 to 1.9% by 2019 but private sector credit slowed. External debt remains low at under 2% of GDP partly due to past debt relief initiatives. External reserves have declined but still cover about 16 months of imports. The medium-term policy focus is on phasing out untargeted subsidies especially on fuel and mobilizing non-hydrocarbon fiscal revenues through steps like expanding the tax base and fighting tax evasion (Rouadjia, 2022). The aim is to lower the non-hydrocarbon fiscal breach to 5% of GDP. More flexible exchange rates can also help absorb external shocks.

Structural Transformation and Diversification

Algeria’s long-term economic policy priorities include structural transformation, economic diversification and raising productivity in the non-hydrocarbon sector. Some progress was made in the 2000s in diversifying the export basket like rising food and manufacturing exports. But the share of mining (mainly hydrocarbons) is still over 93% of merchandise exports highlighting limited diversification (UNCTAD, 2021). The economy also needs to move towards higher productivity sectors like manufacturing and services and away from the low productivity agriculture sector that employs over 10% of the workforce.

Under its 2016-2035 development framework, Algeria aims to transform into a diversified, inclusive and sustainable emerging economy over the long term (Algeria, 2022). Policy measures planned include lowering business and investment restrictions, developing special economic zones, improving access to finance for small and medium enterprises (SMEs), investing in transport networks, training programs and R&D support. Major opportunities are being opened up in sectors like agriculture, pharmaceuticals, automotive, chemicals, renewable energy, business process outsourcing and tourism. Attracting higher volumes of FDI will play a key role in diversification and upgrading technology especially in the non-energy sector.

Improving the Business and Investment Environment

Algeria’s business environment has weaknesses that have hindered economic diversification and private sector development. The country ranked 157th out of 190 countries in the World Bank’s 2020 Ease of Doing Business ranking and scored poorly on indicators like starting a business, getting electricity, registering property, getting credit and paying taxes (World Bank, 2020). The country was ranked 131st out of 141 countries in the World Economic Forum’s 2017-18 Global Competitiveness Index, reflecting weaknesses in innovation, technological readiness, education and market efficiency (Schwab, 2017).

To improve Algeria’s competitiveness and attract investment, the government has taken some steps like removing the 51% foreign ownership restriction and eliminating some bureaucracy around investments. Further measures planned include facilitating business registration and licensing processes, easing tax procedures, reducing trade tariffs, improving access to industrial land and strengthening the financial system (Rouadjia, 2022). Accelerating Algeria’s integration with regional and global markets can also help attract foreign investment and improve the business climate.

Strategic Opportunities in Key Sectors

Algeria has major opportunities to achieve growth and diversification across several sectors including agriculture, industry, tourism and information technology:

Agriculture: This sector has high potential given Algeria’s vast arable land and diverse agro-climatic conditions. Only around 12% of the land is currently cultivated. Agriculture provides jobs for 20% of the workforce but accounts for just 12% of GDP reflecting low yields and productivity (FAO, 2021). There is scope for expanding production of cereals, citrus fruits,Dates, olives, and vegetables. Growth can be achieved by facilitating access to credit and insurance for farmers, promoting efficient irrigation, improving supply chains and logistics, developing food processing industries and easing exports.

Industry: Algeria aims to raise the manufacturing share of GDP from 5-6% currently to 15% by 2030 (Rouadjia, 2022). Opportunities exist in petrochemicals, fertilizers, construction materials, textiles, agri-food processing, automotive and electronics assembly. Attracting FDI, developing industrial parks and improving skills can help establish Algeria as an export-oriented manufacturing hub.

Tourism: Algeria has untapped tourism potential given its extensive coastline, scenic desert landscapes and unique cultural heritage. The government aims to attract 7 million visitors annually by 2025. Key opportunities are in coastal resort tourism, Saharan desert adventure tourism, health and wellness tourism leveraging the country’s hot springs and thalassotherapy, eco-tourism showcasing Algeria’s natural assets like the Tassili N’Ajjer National Park, and cultural tourism focused on UNESCO World Heritage sites like the Al Qal’a of Beni Hammad and the Roman ruins of Timgad and Djémila (Rolffs et al, 2015).

Information Technology (IT): Algeria is aiming to become the leader in digital transformation in Africa having invested over $1 billion in projects like fiber-optic networks and e-government services (Algiers Smart City, 2020). The country has an educated, tech-savvy youth population that can drive IT exports and services. Opportunities exist in areas like software development, business process outsourcing, call centers, mobile apps and digital content.

In conclusion, Algeria faces considerable economic challenges but also has major potential opportunities across sectors like agriculture, manufacturing, tourism and IT. Reducing excessive dependence on hydrocarbons, maintaining macroeconomic stability, upgrading infrastructure, developing human capital and improving the business climate will be key priorities. Successfully diversifying the economy can help Algeria emerge as a vibrant emerging market economy integrated with the global economic system.

References

African Economic Outlook. (2022). Algeria. African Development Bank Group. https://www.afdb.org/en/countries/north-africa/algeria

Algeria: Moving Towards an Emerging Economy. (2022). Oxford Business Group. https://oxfordbusinessgroup.com/algeria-2022

Algiers Smart City. (2020). About the Program. https://www.algeria-smartcity.dz

Food and Agriculture Organization (FAO). (2021). Algeria at a Glance. http://www.fao.org/algeria/fao-in-algeria/algeria-at-a-glance/en/

Kpodar, K. (2019). Managing Oil Rents for Economic Diversification in Algeria. International Monetary Fund. https://www.imf.org/en/News/Articles/2019/03/27/na032719-managing-oil-rents-for-economic-diversification-in-algeria

Kpodar, K. (2015). Economic Diversification in Algeria: The Pathway to Sustainable Growth. International Monetary Fund. https://www.imf.org/external/pubs/ft/bp/2015/afr1506.htm

Observatory of Economic Complexity (OEC). (2022). Algeria. https://oec.world/en/profile/country/dza

Rolffs, P., Oyen, A., & Behrendt, S. (2015). Time for Tourism: Potential, challenges and constraints. Algiers: GIZ. https://www.giz.de/en/downloads/giz2015-en-time-for-tourism-algeria.pdf

Rouadjia, A. (2022). Algeria Plans Sweeping Economic Reforms to Cut Dependence on Oil and Gas. The National News. https://www.thenationalnews.com/mena/algeria/2022/05/24/algeria-plans-sweeping-economic-reforms-to-cut-dependence-on-oil-and-gas/

Schwab, K. (2017). The Global Competitiveness Report 2017–2018. World Economic Forum. http://www3.weforum.org/docs/GCR2017-2018/05FullReport/TheGlobalCompetitivenessReport2017%E2%80%932018.pdf

UNCTAD. (2021). Key Statistics and Trends in International Trade 2021. United Nations. https://unctad.org/webflyer/key-statistics-and-trends-international-trade-2021

World Bank. (2020). Doing Business 2020. https://www.doingbusiness.org/content/dam/doingBusiness/pdf/db2020/Doing-Business-2020_rankings.pdf

World Bank. (2022). The World Bank In Algeria. https://www.worldbank.org/en/country/algeria/overview

SAKHRI Mohamed
SAKHRI Mohamed

I hold a bachelor's degree in political science and international relations as well as a Master's degree in international security studies, alongside a passion for web development. During my studies, I gained a strong understanding of key political concepts, theories in international relations, security and strategic studies, as well as the tools and research methods used in these fields.

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