The Prime Minister has highlighted in his speech to the National Assembly, this September 21, 2017, the general lines of his comprehensive economic program. This present and brief analysis is a contribution to the debate by recalling that the amended Law on Money and Credit states that “the Bank of Algeria may, within the limits and under the conditions laid down by the Council of Money and Credit, intervene in the money market, including buy and sell government securities and private assets eligible for rediscounting or advances”. Now, the new version allows the Bank of Algeria to “lend directly” to the Treasure. In our view, this would imply as far as Security and Development: Ten Truths on the Algerian Economy.
1. In this difficult period of fiscal pressures, Algeria must mobilise and encourage productive dialogue because a negative or low growth, as related to the rate of population growth, would have repercussions on social, political policies as well as geostrategic at the region’s level because of the existing dialectic link between security and development.
2. In any economy based on wealth creative enterprise within a knowledge economy with productive potential, any devaluation would necessarily result into a stimulation of exports generally. In Algeria, the Dinar (DZD) quoted at about DZD5 per US Dollar in 1974, and currently at $110 with a devaluation creeping or for example at the beginning of 2017 by 20% about 2016 (more than DZD130 a Euro) and the Algerian economy is still directly and / or indirectly hydrocarbons related. Thus, any blockage could only be systemic and avoid any monetary illusion.
3. The Bank of Algeria simultaneously devalued the Dinar as from the drop in the price of oil in June 2014, both against the Euro and the Dollar to cover the budget deficit and in the past, it has artificially inflated the Regulatory Fund of Revenues as calculated in Dinar that ran dry at beginning of 2017. Indeed, oil revenues are in Dollars and the devaluation of the Dinar swells the hydrocarbon tax. Imports in Euros converted into devalued Dinar swell the regular taxation.
4. Any monetary emissions without productive counterparties would necessarily lead to inflationary pressures especially as non-conventional financing concerns the non-convertibility of the Dinar hence the importance of defining a ceiling in relation to the GDP and not go for a current price but a constant as per the ratio of the year-by-year budget deficit.
5. There are two ways for a State to decrease fixed income to deal with financial difficulties: either a direct decision of reduction of X per cent or either act through inflation thus allowing forced savings into being an indirect tax that supports fixed income including all employees and official functionaries.
6. When a country experiences a sharp depreciation of its currency especially for a country with its public and private enterprises needs depend on overseas input such as Algeria, inflationary pressures will be there that depending on the importance of the imported goods into the domestic consumption, the impact of certain property in production (energy and raw materials), the ability of wages to resist inflationary pressures (labour market condition and problems of business financing) all contributing to the increase of prices for financing investment and as a result end up with the so-called “imported” inflation
7. There is a correlation and this is not unique to Algeria (devaluation of the Russian Rouble) between foreign exchange reserves through the hydrocarbons ‘rente’ and the official listing of the Dinar to more than 70% according to our calculations. But there is also an indirect correlation in addition to fluctuations in the basket of international currencies to which the Bank of Algeria refers, between the induced rate of inflation by this quotation and inflation driving even more to devaluation. Measure the impact of the rate of inflation on the exchange rate, according to the unanimous opinion of financial experts to also introduce other factors to understand the relationship between inflation and the value of a convertible currency, specifying that each currency has a different interest rate that affects the exchange rate with other currencies, currencies with high interest attracting investors (the phenomenon of carry trades). We could take note of other factors so as to identify those that influence the exchange rate: economic growth, monetary policy, public debt, current account, the status of the currency and geopolitical events.
8. For a convertible currency, this refers to a Parity of Purchasing Power (PPP), used in international finance and which is often a basic assumption of many theories about exchange rates. This theory is based on the idea that exchange rates should be set over the relative price of goods between two countries. Evolution of the rate of inflation of a country would be so immediately offset by an opposite movement of the exchange rate. When prices rise in one country, then the currency of this country should be depreciated so that parity is restored. If inflation is higher in one country than another, this is where inflation affects the exchange rate. The currency with the highest rate of inflation will then lose its value and depreciate, while the currency with the lower inflation rate will rise.
9. Concerning the amount of the informal sphere, the ex-Minister of Finance had assessed it to be between $ 40 to $ 50 billion and by 2016, the former Prime Minister said officially that the amount was $ 37milliards citing data from the Bank of Algeria. Today in September 2017, the current Prime Minister gives another figure that is $ 17 billion. Having had to conduct a study on the informal sphere for the French Institute of International Relations (IFRI – Mebtoul – Paris, France circa December 2013), we identified four calculation modes, each giving a different amount, with a gap of 20 to 30%. How then could we explain the huge gap of $ 20 billion given by two Premiers a year apart? How also could we explain this small amount at odds with most reports given by previous Governments of 2000 through June 2017, that showed a low banking penetration of the economy?
10. As Far as non-conventional financing is concerned, whilst avoiding any comparison with Europe and especially with the United States of which the Dollar being an international currency although after having fallen in relative value with the introduction of the Euro. Japan is a country that has big savings, domestic debt being covered by these, the Japanese preferring funding their State using external debt rather than raise taxes explaining deflation. For the case of Turkey, an emerging country, it had in the past some monetary drift that depreciated but quickly recovered because of its significant productive capacity. We should rather compare to similar cases such as Venezuela and Nigeria and in so doing assess and learn to not make the same mistakes.
In summary, I am pleased that my proposal made in December 2014 and recently reiterated early September 2017, an independent Commission for monitoring the action of the Government, including the ceiling that the Bank of Algeria must allow to the Treasury for all monetary supply, composed of independent experts under the authority of the Presidency of the Republic and not of the Prime Minister who cannot be judge and party became reality. The Prime Minister has certainly been misled by his advisers to have had a so clear-cut position between inflation/exchange rate relations as well as comparisons with countries whose political and socio-economic structure is totally different from that of Algeria.
Many international and national experts agree on the following International Monetary Fund assertion that there is an indirect correlation, in the case of structural rigidities, and without productive counterparties, for unconventional financing between the inflation rate and rating of a currency and this combined with the effects of other variables and macroeconomic parameters, macro-social internal and external effects. Algeria suffers a certain lack in forward-looking with major geostrategic changes ahead 2017/2030.
I hope that all projects in the program would be individualized and their mode of funding (Dinar share vs. currencies) by year are clearly defined with their impact on the fiscal trajectory, growth rate and the rate of employment clearly defined. – ademmebtoul@gmail.com
