Algeria risk Bankruptcy in less than 5 years

World Bank vs Bank of Algeria on the depletion of foreign exchange reserves .

1 – The World Bank (WB) in a comprehensive report on the MENA region present finances dire straight as at end of July 2016, indicated that Algeria’s foreign exchange reserves will be $60 billion circa 2018.  On August 8^th, 2016, in the UK, ‘The Independent‘ feeding on the controversial assertion of the WB, ran an alarmist statement that said: ” Algeria risk Bankruptcy in less than 5 years”.

On August 9^th, 2016, less pessimistic IMF, noted that the country has “a unique opportunity to focus on the implementation of these essential reforms and thus reshape its economy on a more sustainable, rather than stay dependent on oil reserves that are likely to be exhausted within 20 years” before him.  The IMF advised the Government to accelerate structural reforms as a condition towards a diversified economy, and not count on a return to a price of a barrel at more than $70, failing which the country might towards 2020 experience economic and social tensions.

So according to the IMF, Algeria could well escape but only under certain conditions that include greater social moralization, de-bureaucratization of the economy, and development of freedoms towards the development of all creative energies.  For both the IMF and the World Bank, Algeria may not carry on running between 2017 and 2020 on the basis of a price of $110 to $120 as during 2013 to 2015 and $85 to $90 according to the IMF as in 2016.  If the price fluctuated between $45 to $50, the risk might be the probable exhaustion of the Regulatory Fund of revenues by early 2017.  The immediate consequence would be the depletion of foreign reserves, leading to growing economic and social tensions with an accelerated skidding of the official Dinar (imported inflation) which artificially reduces the budget deficit.

2 – In response to the report published by the World Bank (WB), the Central Bank of Algeria (BA) on August15, 2016) assured that the level of foreign reserves to end 2018 will be “significantly higher” than the WB projected $60 billion because of the effects of fiscal consolidation and a return to growth.  For the BA, the projection of the BM fixing of the foreign reserves in 2018 to $60 billion is based on the only data that the oil price should range between $41 and $60 in 2016 and 2018, at $36.6 a barrel in 2016, $42.8 in 2017 and $46 in 2018.

In this context, foreign reserves for the Bank of Algeria should be at $122 billion in late 2016 and $112 billion as forecast by the IMF with also $92 billion as at end of 2017 and this thanks to the rationalization of expenditure which “does not mean that there will be drastic public spending cuts” stressing that the Algerian economy “conceals huge undeveloped sites for revenue deposits” in order to better support and stimulate economic growth.

By and large, to avoid a high deficit, say above $30 billion, the Central Bank  would put on export greater quantities of oil and gas and on an raise in prices that both are exogenous factors, without giving details of implementation of structural reforms that specifically allow the return to growth (Construction Industry with nearly 1,900,000 jobs) which currently draws growth experiencing significant difficulties with the risk of a housing bubble.

The report contains no specific and dated sectoral action (how many times and which sectors propel growth knowing that 83% of the economic fabric is made up of small trade / services and that the industrial sector represents less than 5% of GDP and of the remaining 95%, 7% are little innovative SMBs).  Because it is not a matter of seeking refuge in promises but rather to implement the field actions condition of a return to growth, and this in order to avoid that foreign exchange reserves stood at a level higher than $60 billion in 2018.

Before appearance and essence of evil which corrodes the social body, the savings in Dinars and savings in foreign currency, fiscal and monetary measures contained in the report could be seen as only short-term and conjectural measures; the level of foreign reserves being the culmination of everything a long process produces the economic circuit.

3 – I recall that the WB report regarding the amount of foreign exchange reserves it assessed as at end 2018 to be $60 billion is not a report on Algeria but on the whole MENA region.  Also according to our information, this report started off the data of the BA, simply because all WB and IMF’s reports gather their data from official data that is slightly adjusted for consistency tests.

One must, for any objective analysis with a view to assess the levels of foreign exchange in addition to imports of goods, include imports of services (which fluctuated between $10 to $12 billion annually between 2010 and 2015) and legal transfer of capital from overseas companies; the only document of reference being not the trade balance but the balance of payments.

The official data of the BA give imports of goods at $58.58 billion in 2014, and services at $11.5 billion, amount to which must be added the legal transfer of capital, ($3 to 4 billion/year) more than $73 billion in 2014 of currencies output.  Imports of goods in 2015, are valued at $51.50 billion, thus an outflow of currency with services exceeding $60 billion for 2016, imports of goods fell slightly from $25.1 to $24.5 billion (very small amount despite all restrictions) from mid-2015 to mid-2016

4 – I would not like to insist that the solution lies with the IMF or the WB.  Evil is in us and the healing depends above all on the Algerians and that any destabilization of Algeria would have a negative impact on the whole Euro-Mediterranean and North African region with foreign interference due to the fact of the new geo-strategic military, security and economic mutations that will emerge between 2017 and 2020.  Five urgent solutions including three short-term and two medium and long-terms to have a level of more than $60 billion by end 2018 are as follows:

• Greater budgetary rigour, focused on the fight against corruption and tax evasion
• Review the policy of the generalised subsidies to the poorest and better target of subsidized interest
• Go to a targeted external debt in the medium and long term, reducing the depletion of foreign exchange reserves, which caters only to competitive productive projects, while relaxing the rule of 49 / 51%
• Concretely determine all streams segments, distinguishing between the internal market and the external market, taking into account the fourth economic revolution that can boost growth, to always establish the technological scales, managerial and currencies in dynamic and not static.
• And for finality, have a strategic vision within the framework of the new global changes through far-reaching structural reforms, the effects of which would not be felt positively only towards 2020 through 2025 if reforms were adopted in 2016.

 Dr. Abderrahmane Mebtoul, University Professor, Expert International,  ademmebtoul@gmail.com

Translation from French by Microsoft / FaroL  faro@farolco.onmicrosoft.com