This is a summary note relating to the last report of the Bank of Algeria on the economic and financial situation of the country at the end of 2017. It is a photograph of Algeria’s economic and financial situation as it stands today.
1.- According to the Governor of the Bank of Algeria in his business note dated February 12th, 2018, on economic and financial indicators, the growth rate was only 2.2% in 2017 (compared to 3.3% in 2016). This rate in our view barely covers the demographic growth rate. The Algerian population exceeded according to the Office of National Statistics to 41 million inhabitants in January 2017, the labour force being estimated at about 11 million and demand for employment in addition to the current overestimated unemployment stock including non-productive or very low productivity varies between 300,000 and 350,000 per year.
Employment is based on the rate of growth and the structures of productivity rates, with a significant change in the profile of the growth rate structure, that according to the IMF, could be extrapolated to an unemployment rate of 13.2% in 2018. Because employment is not created by decree or with overstaffing in the administration: public or private companies are not competitive in terms of cost/quality within the framework of international values.
2.- Out of a total of exports, the Bank of Algeria’s report notes an amount of US$32.9 billion in 2017 compared to $29.3 billion in 2016; non-hydrocarbon exports were only $1.3 billion (70% of hydrocarbon derivatives) against $1.4 billion in 2016. Exports of hydrocarbons declined in volume after an increase of 10.8% in 2016 while their value increased to $31.6 billion as at end of 2017 compared to $27.9 billion in 2016.
As for imports, legal transfers of capital and currency outflows of services not included, despite all restrictions they were $48.7 billion in 2017 compared to $49.7 billion in 2016, a decrease of $1 billion only compared to 2016. The prognosis is for an import of goods that could be $30 billion in 2018.
Could it be realistic when we know kthat the economic area is represented by 83% of small trade-services, and the industrial sector accounts for 6.3% of GDP; 97% of these enterprises are small SMEs and that most of public and private enterprises operate at more than 70/75% with imported raw materials?
3.- As a result, the trade balance deficit was $15 billion, and the overall balance of payments deficit closed at $23.3 billion in 2017 compared to $26.3 billion in 2016. This gives a hard currency outflow representing all services whose amount fluctuated in 2010 and 2016, between 9 to $11 billion, plus all legal capital transfer of foreign firms of $8.3 billion. On the budgetary level according to the central Bank, the actual budgetary revenues at the end of September 2017, were 4.74 trillion Dinars (DZD) versus DZD3606 billion in September 2016 and the budgetary expenditure remained quasi-stable at DZD5.535 trillion of dinars; or a deficit of DZD795 billion. It should be noted that for the IMF in its 2017 report, the public debt is estimated at 12% of GDP and the external debt would not exceed 3% of GDP.
4.- Foreign exchange reserves closed at $97.3 billion as at end of 2017 compared to $56 billion in 2005, $77.78 billion in 2006, $110 billion in 2007 to $138.35 in 2008, and $147.2 billion in 2009, to $157 billion in 2010, $188.8 billion million in 2011, $190, 66 in 2012, $194 billion in 2013, $179.9 billion in 2014, $144.1 billion in 2015, from $114.4 billion by end 2016, to $97.3 billion at end 2017. The Foreign Exchange Reserves amount by end of 2017 should have been lower since many foreign company invoices were not honoured, and this would affect year 2018.
Unconventional financing would also increase this dynamic with all new project financings accelerating the outflow of hard currencies by those companies strongly dependent for their operation on outside Algeria input. The country has a respite of three years to avoid a return to the IMF and thus to put in place a competitive productive economy and assume a real strategy off-hydrocarbon rente. These keep the Dinar rating at more than 70%. If the foreign exchange reserves tended towards $20 billion, the Bank of Algeria would be forced to rate the Dinar at about DZD200 an Euro, not to mention the on-going discrepancy with the informal sphere where the Dinar stood as at February 13th, 2018 between DZD206/208 an Euro.
5.- As for the official inflation rate, between 2016/2017, it approached the 6% with all subsidized goods whose amount increased under the Finance Act of 2018 by about 8% compared to 2017. This rate is biased for not considering that nowadays, the basket which must preside over the calculation of the index must be historically dated. In addition, there are approximately $17 billion for unconventional financing only for 2018: In cases where this amount or a significant fraction would go to unproductive or low-value-added expenditure, it will be expected to cause an inflationary surge, which will necessarily require an increase in the interest rates of primary banks, if they want to avoid bankruptcy, which will slow down productive investment and speed up speculative action.
6.- So, to avoid an uncontrolled inflationary process, arises the problem of subsidies. In the face of the previously reviewed budgetary tensions, the success of any targeted subsidy operation would involve three actions.
- First, this operation is technically impossible without a reliable real-time information system, highlighting the distribution of national income by social strata and regional distribution and / or how to tell the rich from the poor.
- Secondly, this operation is also impossible without quantifying the informal sphere which allows for the consolidation of income, existing different data or that one refers to the gross domestic product (between 40/50% according to the ONS), compared to employment (more than 33% of the labour force according to the Ministry of Labor) or the money supply. Per the governor of the Bank of Algeria dated February 12, 2018, who holds, I quote: “The money trust circulating in the economy until December 31, 2017 was DZD4.78 trillion and on these DZD4.78 trillion, about DZD2000 billion are hoarded amongst the private and / or economic operators, that is exactly 41.84%.
Therefore, to avoid confusion in the analysis of the money supply at the level of the informal sphere, the normal share held by personal-use households must be differentiated from the amount stored for speculative purposes.
- Thirdly, there is need to define precisely an institution that would be responsible for all traceability and to establish a balance which must be positive, otherwise this operation would have no meaning, both in Dinars and in foreign currencies. In 2012, in an operational report which I forwarded to the Government following a dossier made under my leadership, which I personally presented to members of the National Assembly’s Economic Commission on Fuels in 2008, I had advocated a National Chamber for Compensation authority to be responsible for establishing all intra-socio-professional and inter- regional transfers. (1)
7.- In summary, faced with the current situation characterized by social tensions, economists and politicians, before developing a socio-economic policy must recognize their limits therefore needing to know the historical movements, the anthropological, political, economic and social forces, often influenced by external actors; thus, to know the functioning of the society always on the move.
Hence the strategic importance of the dialogue where the natural place would be the Economic and Social Council as enshrined by the new Constitution which should bring together the best competencies and all the components of the representative society, where a realistic policy of targeted subsidies would be discussed and developed. The 2018/2025/2030 strategic objective will be to overcome the current status-quo.
(1)-Audit under the direction of Professor Abderrahmane Mebtoul “For a new fuel policy in a competitive system” (Ministry of Energy 2007/2008) assisted by executives Leaders of SONATRACH, national experts and Ernst & Young (8 volumes 780 pages) where a volume was devoted to subsidies, and a new pricing policy, another volume on the development of new fuels from the Gas whose GPLc and the Bupro.