Stronger energy earnings, efforts to curb imports and increased tax revenue saw Algeria’s economy move onto a more solid footing in 2017; however, the country’s ongoing reliance on hydrocarbons revenue continues to leave it exposed to external shocks.
A positive return from the energy sector continued to drive growth this year. Energy exports rose 18% year-on-year in the first 10 months of 2017 to reach $27.2bn, according to official data. And although oil and gas output is predicted to fall by 2.7% in 2017, the rebound in global oil prices means that full-year energy export revenue is expected to reach $32.3bn, up 16.6% on last year.
The increase in overall national export earnings between January and October, which totalled $28.7bn once non-energy sectors were included, came amid a 1.8% contraction in imports to $38.2bn, leaving a trade deficit of $9.5bn over the period.
The government aims to reduce the value of imports to $30bn in 2018 – down from the $41bn expected this year – by promoting greater self-sufficiency and increasing the number of products subject to import restrictions.
This goal should also be supported by improved energy returns; Ministry of Energy forecasts, reported in international media, expect earnings to reach $33.6bn in 2018, achieved through a 6.5% rise in energy output as new developments come on-line throughout the year.
Oil price decline weighs on currency reserves
While the improved performance of the energy sector, which funds around 60% of the state budget and accounts for 95% of exports, is set to support overall economic growth moving forward, weaker earnings in the years following the 2014 decline in oil prices – when revenues totalled $58.4bn – continue to weigh on the economy.
Lower energy income has seen foreign currency reserves drop from $192bn in 2014 to $102.4bn as of September, according to data issued by the Ministry of Finance.
Even with the predicted increase in revenue, these reserves are expected to decline further in the medium term. Abderrahmane Raouia, the minister of finance, told Parliament in November that foreign currency levels are forecast to drop to $85.2bn by the end of 2018 and $76.2bn by 2020.
Increased revenue collection to reduce deficit, boost spending
In light of lower earnings and depleted cash reserves in recent years, the government has undertaken a series of measures aimed at boosting state revenue and broadening the base of the economy.
Revisions to value-added-tax regulations, introduced at the beginning of 2017, saw the levy for standard goods and services increase from 17% to 19%, and the reduced rate rise from 7% to 9%. Meanwhile, a series of other taxes affecting the real estate sector and the sale of vehicles, alcohol and tobacco were also implemented, with the government forecasting this year’s budget deficit to stand at 8%, down from 15% in 2016.
While some levies are set to rise in 2018, so too is state spending after two years of austerity. The government plans to boost outlays by 25% next year, following cuts of 14% and 9% in 2017 and 2016, respectively, with much of the fresh expenditure to be directed towards restarting stalled infrastructure developments.
This spending should boost activity in the construction, materials and logistics sectors, creating momentum for the broader economy; the government forecasts GDP to expand by 4% next year, up from 2017 predictions of 2.2%.
Despite challenges, the outlook remains positive
While there are still a number of challenges associated with boosting revenue generation and diversifying the economy, a recent survey of CEOs conducted by OBG found that 61% of respondents were either positive or very positive in their expectations of business conditions in the coming 12 months.
Underscoring this outlook, 70% said it was either likely or very likely that their company would make significant capital investments in 2018.
One common concern, however, was in relation to recent changes to Algeria’s tax regime, with a majority of respondents rating the tax environment as uncompetitive or very uncompetitive.
While helping to bolster state coffers, there are concerns recently implemented taxes could curb private sector consumption in some segments, especially with the new round of tax increases and price rises set to come into force in 2018.
This information was originally published by Oxford Business Group (OBG), the global publishing, research and consultancy firm. For economic news about the MENA and other countries covered by OBG, please visit http://www.oxfordbusinessgroup.com/economic-news-updates.