Devaluation of the Algerian Dinar or else . . .
In a structured productive economy, the Algerian Dinar great slide and its ensuing devaluation should promote exports at the same time as hinder imports.
- It is interesting to track The Algerian Dinar great slide and get to know through the evolution of the Algerian Dinar from 1970 to 2016, recalling that it all started in the recent past on a par with the French Franc at 1 Algerian Dinar (DZD) = 1 French Franc (FF) in 1971 and DZD1 = FF0.84 in 1985. Ref. to graph below for its parity with the US Dollar. Read more on Wikipedia .
According to the central Bank of Algeria, “the exchange rate of the Algerian Dinar against the major currencies is determined flexibly on the inter-bank market exchange, depending on the conditions of supply and demand”. Moreover, “the external value of the Dinar is fixed at the rate of the inter-bank foreign exchange market where depreciation of the value of the Dinar, as compared to the Euro and the Dollar, is the result of the differential between the rate of inflation recorded in Algeria and that of the rest of the world. Paradoxically, the rate of inflation in the developed countries between 2013 and 2015 is less than 0.5%, the sliding of the Dinar continues and imported products have no appreciable reductions.
- In a structured productive economy, the devaluation or the Algerian Dinar great slide should have promoted exports and at the same time hindered imports. In Algeria, it is the opposite that was witnessed demonstrating that monetary measures without a strategic vision have had so far no impact.
And all this is reminiscent of the nature of the semi-annuity type of the country’s economy and the weakness of the local productive fabric; this semi-annuity linked to hydrocarbon exports always gave an artificial official rating. The Bank of Algeria’s rhetoric, speaking of a skidding of the Dinar so as to perhaps obscure the importance of the budget deficit, and in so doing skewing the public accounts. We notice that when the Dollar declines and the Euro rises, the Bank of Algeria devalues; most probably for political reasons whereas in a true market economy, the Dinar should be assessed against the depreciating international currency.
Then, why this accounting trick?
The main reason is that by devaluing the Dinar against the Dollar, the state will end up with an artificial oil tax increase which together with that of the ordinary tax on imported products tend to contribute to this semi-annuity economy model where oil revenues being converted back into Dinars, evolved as for example, from DZD75 a Dollar to DZD108 a Dollar. Ditto for all imports denominated in foreign currencies, because Customs duties calculated on the Dinar portion would end up with not only the devaluation but also the domestic inflation rising. All this seems to be due to lack of effectiveness in the state management of the public expenditure budget, that artificially inflated revenue of the Dinar denominated State Regulatory Fund. Inflation being the result of that would only strengthen the distrust in the Dinar where the official rate is found disconnected over the one of the parallel free market.
In Algeria and despite this devaluation, certain legal regulations such as the companies 49 / 51% ownership share which generalized, gave the illusion of prosperous living. This is not adapted to the current situation where certain technical measures tackling conjectural aspects while not blocking other ones should be systemic, involving a clear political will for deep structural reforms.
- With the foreign exchange reserves tending to diminish, it would be impossible to continue to pay wages without productive counterparts, and devote the same amount of subsidies and social transfers that are not targeted primarily at the poorest 27 to 28% of GDP. Because the value of the Algerian Dinar, its social rapport potential, transcribes above all the weakness of any production and / or internal productivity. These correlate in Algeria with 70% of the foreign exchange reserves that are from oil exports revenue. The level of inflation can be understood by first analyzing the productivity of labour and the dialectical relationship between development, income distribution and consumption model by social strata. One’s perception of inflation is different whether one gets €300 or €30,000 per month.
According to an OECD report, labour productivity in Algeria is one of the lowest in the whole of the Mediterranean basin. The average Algerian citizen in his struggle against inflation, therefore the deterioration of the Dinar, does not plough in his savings in land assets, real estate or gold, but by placing a substantial portion of these savings in hard currencies. It is a security option in a country, where the volatile evolution of oil prices is decisive. If, however foreign exchange reserves reached $10 billion, the Bank of Algeria would not hesitate to have the Euro exchanged at DZD200. This might explain that the recently adopted integration measures of the informal economy capital within the actual official sphere will certainly have a very mixed impact. Moreover, the difference in the value of the Dinar between the official and parallel informal market and the distortion with the parities of the neighbouring countries currencies would explain the enormous products run off out of the country’s borders. Administrative measures can only be one-off, otherwise it would take an army of controllers.
- Since the Act on the currency and credit in the early 1990s, Algeria still lacks a stock exchange market to speak of operating according to universally accepted rules and regulations. Avoiding false solutions to wrongly exposed problems, any solution lies in adopting new mechanisms of regulation so as to affect the promotion of local production in value-added segments within internationalized sectors. Also, democratic control mechanisms based on greater morality of the leaders does help. This makes urgent the deepening of comprehensive reform, including rehabilitating enterprise and its foundation knowledge base. The reform of the financial distribution of the hydrocarbon related semi-annuity system, integrated into all international networks, overtaking the currently simple administrative counters with state-owned banks control more than 85% of the credit granting, is now overdue. The private banks that are presently marginal ones should take over within a background of Public-Private-Partnerships.
Certain win-win partnerships with the objective to penetrate international markets are required especially in Africa where Algeria may have comparative advantages. Can Algeria with shrinking hydrocarbon revenues continue to generalize interest rate subsidies in favour of all those young people without any discerning ? Benefits and results of the beneficiaries of the different investment agencies with VAT exemption, subsidized interest rates, etc. has become urgent in order to avoid paying without counting for a fictitious social peace, which to now, thanks to the hydrocarbon related semi-annuity, that by the way, if well used, is a blessing, but if misused, is a curse, source of corruption and waste.
Today’s situation is different from that of 1986 with the relatively high level of the official reserves, though declining, coupled with the low external debt can overcome the external ‘shocks’, but only if subject to a novel central and local governance and an urgent reorientation of the current socio-economic policies. Otherwise, the regulatory revenue Fund will run out early 2017 and the Exchange reserves in 2018 to 2019. A return to the IMF for stringent draconian conditions and a significant devaluation of the Dinar leading to increases in interest rates could be the consequence.
Optimism of some officials with respect to the seriousness of the socio-economic situation, could destabilize the country. What needs to be inaugurated, could start with not making us think of the wrong forecasts similar to those of the former leaders of the years 1986, thinking that monetary solutions and few imported schematics can solve the problems of the functioning of society. In fact, the leaders of today must re-frame the debate, adopt a language of truth, and tackle the essence not the appearances.
Written by Professor Abderrahmane Mebtoul, PhD Economics 1974,
Algiers, 11 May 2016.