Allies, Investors, Protesters press for Change in Lebanon

Allies, Investors, Protesters press for Change in Lebanon

Lebanon pushed to the brink, faces reckoning over graft after allies, investors, protesters press for change in the country as per Jonathan Spicer, Tom Perry and Samia Nakhoul, Reuters News in this ECONOMY‘s article dated 21 October 2019.

Demonstrators hold Lebanese flags as they gather during a protest over deteriorating economic situation, in Beirut, Lebanon October 18, 2019.
Demonstrators hold Lebanese flags as they gather during a protest over deteriorating economic situation, in Beirut, Lebanon October 18, 2019. REUTERS/Mohamed Azakir

BEIRUT – Lebanon is closer to a financial crisis than at any time since at least the war-torn 1980s as allies, investors and this week nationwide protests pile pressure on the government to tackle a corrupt system and enact long-promised reforms.

Prime Minister Saad al-Hariri‘s government on Thursday hastily reversed a plan, announced hours earlier, to tax WhatsApp voice calls in the face of the biggest public protests in years, with people burning tyres and blocking roads.

The country – among the world’s most indebted and quickly running out of dollar reserves – urgently needs to convince regional allies and Western donors it is finally serious about tackling entrenched problems such as its unreliable and wasteful electricity sector.

Without a foreign funding boost, Lebanon risks a currency devaluation or even defaulting on debts within months, according to interviews with nearly 20 government officials, politicians, bankers and investors.

Foreign Minister Gebran Bassil said in a televised speech on Friday that he gave a paper at an economic crisis meeting in September saying Lebanon needed “an electric shock”.

“I also said that what little remains of the financial balance might not last us longer than the end of the year if we do not adopt the necessary policies,” he said, without describing what he meant by financial balance.

Beirut has repeatedly vowed to maintain the value of the dollar-pegged Lebanese pound and honour its debts on time.

But countries that in the past reliably financed bailouts have run out of patience with its mismanagement and graft, and they are using the deepening economic and social crisis to press for change, the sources told Reuters.

These include Arab Gulf states whose enthusiasm to help Lebanon has been undermined by the growing clout in Beirut of Tehran-backed Hezbollah, and what they see as a need to check Iran’s growing influence across the Middle East.

Western countries have also provided funds that allowed Lebanon to defy gravity for years. But for the first time, they have said no new money would flow until the government takes clear steps toward reforms it has long only promised.

Their hope is to see it move towards fixing a system that sectarian politicians have used to deploy state resources to their own advantage through patronage networks instead of building a functional state.

A crisis could stoke further unrest in a country hosting some 1 million refugees from neighbouring Syria, where a Turkish incursion in the northeast this month has opened a new front in an eight-year war.

“If the situation remains, and there are no radical reforms, a devaluation of the currency is inevitable,” said Toufic Gaspard, a former adviser to Lebanon’s finance ministry and former economist at its central bank and the International Monetary Fund.

“Since September a new era has begun,” he added. “The red flags are large and everywhere, especially with the central bank paying up to 13% to borrow dollars.”

The first reform on Beirut’s agenda is one of the most intractable: fixing chronic power outages that make private generators a costly necessity, a problem many see as the main symbol of corruption that has left services unreliable and infrastructure crumbling.

Hariri, in a televised speech to the nation, said he had been struggling to reform the electricity sector ever since taking office. After “meeting after meeting, committee after committee, proposal after proposal, I got at last to the final step and someone came and said ‘it doesn’t work’,” he said.

Presenting the difficulties of implementing reform more widely, Hariri said every committee required a minimum of nine ministers to keep everyone happy.

“A national unity government OK, we understand that. But committees of national unity The result is that nothing works.”

Underscoring the pressure from abroad, Pierre Duquesne, a French ambassador handling so-called CEDRE funding, is traveling to Lebanon next week to press the government on the use of offshore power barges, a banker familiar with the plan said.

Duquesne wants the barges included in the electricity overhaul plan, the person said, requesting anonymity.

Duquesne could not immediately be reached for comment.

The contents of the 2020 budget will be key to helping unlock some $11 billion conditionally pledged by international donors under last year’s CEDRE conference. But a cabinet meeting on the budget set for Friday was cancelled amid the protests.


Hariri’s government, which includes nearly all of Lebanon’s main parties, had proposed a tax of 20 cents per day on calls via voice-over-internet protocol (VoIP) used by applications including WhatsApp, Facebook FB.O and FaceTime.

In a country fractured along sectarian lines, the protests’ unusually wide geographic reach may be a sign of deepening anger with politicians who have jointly led Lebanon into crisis.

Fires were smoldering in central Beirut, where streets were scattered with glass of several smashed shop-fronts. Tear gas was fired on some demonstrators.

The newspaper an-Nahar described it as “a tax intifada”, or uprising. Another daily, al-Akhbar, declared it “the WhatsApp revolution”.

“With this corrupt authority, our kids have no future,” said protestor Fadi Issa, 51. “We don’t just want a resignation, we want accountability. They should return all the money they stole. We want change.”

As confidence has faded and dollars have grown scarce, new cracks have emerged between Lebanon’s government and its private lenders, according to several of the bankers, investors and officials who spoke to Reuters.

After years of funding the government with the promise of ever higher rates of return, the banks – sensing the country is approaching collapse – are pressing for it to finally deliver reforms to win over donors.

Most said Lebanon would likely feel more economic and financial strain in the months ahead but avoid haircuts on deposits or a worst-case sovereign default.

Yet Beirut’s years of failure to deliver reforms and the new determination among its traditional donors to press for them has left even top officials, bankers and investors divided over whether a devaluation is in store for the Lebanese pound.

“You need a positive shock. But unfortunately the government thinks reforms can happen without touching the structure that benefits them,” said Nassib Ghobril, head of economic research and analysis at Byblos Bank.

Lebanon must promote reforms to increase capital inflows, he said.

“We can’t keep going to the Emirates and Saudis. We need to help ourselves in order for others to help us.”


This month, Moody’s put Lebanon’s Caa1 credit rating under review for a downgrade and estimated the central bank, which has stepped in to cover government debt payments, had only $6 billion-$10 billion in useable dollars left to maintain stability.

That compares with some $6.5 billion in debt maturing by the end of next year.

The central bank says its foreign assets stood at $38.1 billion as of Oct. 15.

An official told Reuters Lebanon has only $10 billion in real reserves. “It is a very dire situation that has five months to correct itself or there will be a collapse, around February,” he said.

Hariri’s government may have only a few months to deliver fiscal reforms to convince France, the World Bank and other parties to the CEDRE agreement to unlock $11 billion in conditional funding.

The head of regional investments for a large U.S. asset manager said Lebanese officials are privately saying a plan that addresses short- and long-term electricity shortages will be announced before year-end, after which the government will raise tariffs.

But critics say no concrete steps have been taken despite energy ministry statements that the plan is on track.

Hariri left Paris last month with no immediate cash commitment after visiting French President Emmanuel Macron. Likewise this month he left Abu Dhabi empty-handed after meeting Crown Prince Sheikh Mohammed bin Zayed al-Nahyan.

Lawmakers in Beirut struggled to explain what happened in Abu Dhabi after Hariri claimed the United Arab Emirates had promised investments following “positive” talks.


Investors, bankers and economists say at least $10 billion is needed to renew confidence among the Lebanese diaspora whom for decades have underpinned the economy by maintaining accounts back home.

But so far this year, deposits have shrunk by about 0.4%.

The government has sought a smaller cushion from Sunni Muslim allies to buy some time. But to secure funding from the UAE or Saudi Arabia, Beirut would likely have to meet conditions meant to weaken Shi’ite Hezbollah’s hand in Lebanon’s government, said several sources.

Hezbollah, which faces U.S. sanctions, is seen to be gaining more control over state resources by naming the health minister in January after last year’s elections brought more of its allies into the legislature.

Some say Saudi Arabia, UAE and the United States are motivated to hold out on Beirut as part of their wider policy seeking to weaken Iran and its allies which have been fighting proxy wars with Gulf Arab states on several fronts.

“Their tolerance of Iran and Hezbollah has lowered significantly. The ‘Lebanese exception’ is gone,” said Sami Nader, Beirut-based director of the Levant Institute for Strategic Affairs.

“The balance has tilted and we are now at odds with our former friends because Hezbollah now has the upper hand politically.”

The former regional head at a major Western bank put it bluntly: “People have lost patience with the corruption in which a frozen Parliament with no authority is simply divvying up the pie among politicians.”

“But at the end of the day the Lebanese political class usually succeeds in convincing allies that they should not let the system collapse and bring civil war again,” he added.


Lebanon, straddling the Middle East’s main sectarian lines, was historically the region’s foreign-exchange hub into which deposits flowed, especially since 1997 when its currency was pegged to the dollar at 1,507.5 pounds.

But after a reckoning in August and September in which the cost of insuring Lebanon’s sovereign debt surged to a record high, things have changed.

Depositors, including the diaspora drawn by rates much higher than in Europe or the United States, are pulling funds in the face of Lebanon’s swelling twin deficits, inability to secure foreign funding, and unorthodox central bank efforts to attract dollar inflows.

Among Lebanon’s 6 million citizens, trust has worn thin.

Depositors can no longer easily withdraw dollars, and most ATMs no longer provide them, forcing people to turn to so-called parallel FX markets where $1 is worth more than the official peg.

“I am with the protesters,” said Walid al-Badawi, 43. “I have three children, I am a taxi driver, I work all day to get food for my kids and I can’t get it.”

Gaspard, the central bank’s former research head, said foreign exchange was easy even through Lebanon’s 15-year civil war. There was also always a balance of payments surplus – until 2011 when deficits began to grow, reaching $12 billion last year.


Three events precipitated the crisis of confidence that for years seemed inevitable: a series of central bank efforts since 2016 to keep growing deposits with rates of more than 11% on large deposits; a public sector pay hike last year that raised the budget deficit to more than 11% of GDP; low oil prices in recent years that have weakened Gulf allies.

In a report on Thursday, the IMF described Lebanon’s position as “very difficult,” adding “substantial new measures” are needed to protect it and reduce large deficits.

As dollars have dried up, banks have effectively stopped lending and can no longer make basic foreign-exchange transactions for clients, one banker said.

“The whole role of banks is to pour money into the central bank to finance the government and protect the currency,” he said. “Nothing is being done on the fiscal deficit because doing something will disrupt the systems of corruption.”

The resistance from banks has been subtle but telling given their central role in financing the government.

When Beirut proposed a $660 million reduction in debt service costs in its 2019 budget, banks never signed up to the idea. They have also been less enthusiastic about subscribing to Eurobonds including a planned $2-billion issuance later this month, officials said.

Without reform, “banks agree we can no longer support the public sector,” said Byblos Bank’s Ghobril.

(Reporting by Jonathan SpicerTom Perry and Samia Nakhoul; Additional reporting by Yara Abi Nader and Ellen Francis in Beirut and John Irish in Paris; Editing by Hugh Lawson) ((; Reuters Messaging: @jonathanspicer))

Global trade war impacting the MENA region

Global trade war impacting the MENA region

Michael Fahy, Business journalist in the UAE and editor of with his motto of “My views are both infrequent and my own”, wrote about the global trade war impacting the MENA region.

DP World’s Jebel Ali Port in Dubai, the United Arab Emirates (UAE). Image supplied by DP World. Image used for illustrative purpose.

MENA region will not escape impact of global trade war, says economist

Arab Bank’s Radwan Shaban said oil exporting nations provide 80 percent of region’s GDP

The Middle East and North Africa region is unlikely to escape the impact of a trade war, with the biggest potential impact coming from a decline in oil prices, according to the chief economist of Jordan’s Arab Bank.

Speaking on a panel debate on the global outlook for the MENA region, Arab Bank’s chief economist Radwan Shaban said that falling oil demand from China and other nations, as the result of a prolonged trade dispute, would be “a negative for the region”.

“This is a region in which, yes, we have oil exporting and oil importing countries, but in terms of numbers, oil exporting countries account for 80 percent of GDP of this region in 2018,” Shaban said. “Even the welfare of oil-importing countries is closely tied to oil-exporting countries through trade, tourism, FDI, foreign assistance – a whole bunch of factors.”

He said that oil importing countries such as Jordan witness lower trade, lower investment levels and lower assistance with Gulf neighbours if oil prices decline, which “translates into lower economic growth”.

Monica Malik, chief economist with Abu Dhabi Commercial Bank (ADCB), said that with oil prices maintaining a level above $70 per barrel since the second quarter of this year, “we are more optimistic” of the region’s prospects for growth.

She anticipates that higher revenues from oil will mean the government will enjoy a fiscal surplus in 2018, while Saudi Arabia will “substantially reduce” its deficit to under 5 percent of gross domestic product (GDP), although other nations such as Bahrain, Kuwait and Oman had been less progressive with their reforms.

“But I think with the GCC [Gulf Cooperation Council] support packages to Bahrain, we expect the pace of reforms there to accelerate. We’ve already had parliament approve their VAT law,” Malik said.

Both the United Arab Emirates and Saudi Arabia have shifted fiscal policy from consolidation towards growth, Malik said, and had given indications that they intend to continue doing so throughout next year.

In the UAE, she said the country has benefited from “a number of stimulus packages and support measures which aren’t just for short-term growth support but also to improve the business environment, to bring capital inflight, to bring foreign direct investment.”

“I think the critical driver of economic activity, non-oil activity, in the Gulf is government activity still. So, I think focused growth, supported by investments that will really improve the medium-term environment, will be positive for the private sector, though at this point it’s still weak and tightening monetary policy is one of the key headwinds.”

James McCormack, global head of sovereign and supranational ratings at Fitch Ratings, was less positive about Saudi Arabia’s fortunes.

“If you dig around the numbers a little bit, you see a big increase in oil revenues, which has been matched largely by increases in spending. And the concern there is the increases in spending are in current spending, not capital, so (it’s) a little bit more difficult to bring those back down when oil prices maybe come down,” he argued.

A widening gap
He said that the balance of the non-oil economy as a proportion of GDP was worsening.

“The deficit is getting bigger. So, this is really an oil story in terms of the fiscal recovery that we’re seeing in Saudi Arabia,” McCormack argued.

McCormack also said that he feared the trade dispute between the United States and China could be a prolonged one.

“I think it (dispute) is going to last longer, in part because of the fact that the U.S. has moved the goalposts – in fact, widened the goalposts a couple of times,” McCormack said.

He argued that some of the demands being made by the U.S. are considered to be “non-negotiable” by the Chinese government.

“I don’t see how we’re going to have a discussion that’s going to satisfy both sides. This has the potential to turn into something meaningful from a global macro sense,” McCormack argued.

Shaban said that a slowdown in global trade would hit the region in other ways. For instance, he said that Morocco is a significant supplier to Europe’s automotive sector, while in Egypt revenues from ships passing through the Suez Canal provide the country with an important source of foreign currency revenues.

“As global trade slows, that will affect the Suez Canal activity,” Shaban said.

(Reporting by Michael Fahy; Editing by Shane McGinley)


Some countries are far more unequal than others

Some countries are far more unequal than others

Three reasons some countries are far more unequal than others

By Sandy Brian Hager, City, University of London

The picture above is of Hyejin Kang / Shutterstock

Why do the richest 1% of Americans take 20% of national income, but the richest 1% of Danes only 6%? Why have affluent British people seen their share of national income double since 1980, while over the same period, the income share of wealthy Dutch hasn’t budged?

Technological change and globalisation act as powerful forces for income distribution, but these market processes cannot alone account for the continued range in top income inequality in different countries. After all, some of the most technologically advanced and globalised countries, such as Denmark and the Netherlands, are the ones that are the most equal.

To explain why some advanced capitalist countries are more unequal than others, we need to look beyond the market and explore the role of politics and power in shaping distributive outcomes.

Want to have a more equal society? In a critical review of recent research, I’ve found that the formula is surprisingly simple: tax the rich, vote for left-wing parties, implement electoral systems of proportional representation, and empower trade unions.

1. Tax levels

One key political factor is government policy, especially taxation. Countries that have made the biggest reductions to their top rates of income tax have seen the largest increases in top income shares. For example, in more equal France, the top rate in 2010 was only 10% lower than it was in 1950. Meanwhile, in the more unequal US it was 50% lower. At the company level, CEO pay tends to be much higher when the top income tax bracket is lower.

Tax policy plays a pivotal role in explaining top-end income inequality. But policies do not emerge out of thin air. These variations in the policies that influence distributive outcomes at the top result from social power relations, which have been shown to shape the evolution of top-end income inequality over time.

2. Politics

The formal political arena is one site where these power relations unfold. A recent study by Evelyne Huber, Jingjing Huo, and John Stephens studied the income share of the top 1% in postindustrial democracies from 1960 to 2012. They found that centre and right-wing governments in rich countries are consistently associated with increases in top income shares. Meanwhile, policies of left-wing governments generally reduce inequality at the top end.

The institutional design of the political system also matters. Electoral systems of proportional representation tend to favour left-wing parties, while systems that are led by majority rule favour right-wing ones. Certain institutional features, such as having presidents and bicameral legislatures encourage gridlock and empower special interests to block progressive policy reforms.

There are questions about the extent to which the institutional story can be generalised, but as Jacob Hacker and Paul Pierson show, it is crucial in explaining the spectacular rise of the super-rich in the US.

3. Trade unions

In addition to left-wing parties, strong trade unions act as a power check on top income shares. Unions can align with left-wing parties and push for egalitarian policies. Within the firm, unions can bargain to increase their wages and reduce the amount of revenue going to executive compensation and shareholder dividends.

One academic study found that unionisation decreased the compensation of top US executives by 12%. Another found that in US industries with higher levels of union membership, the gap between executive and non-executive pay was narrower. In the numerous cross-national statistical studies that I surveyed the rate of unionisation is one of the few variables consistently associated with lower top income shares.

Prompted in many ways by the pioneering efforts of Thomas Piketty and his collaborators, the study of top incomes has made remarkable progress in the past decade. But there is still room for further exploration.

The study of top incomes tends to be US-centric. There needs to be more in-depth analysis of the experiences of other countries. We need further research that investigates who the top 1% are in different countries, and how their political preferences compare to other segments of the population. We also need to explore in much greater detail the racial and gender dimensions of the income hierarchy in different countries.

Given the compelling evidence that living in highly unequal societies destroys our minds, our bodies, our relationships, our communities, and our planet, this is something we should all take seriously. The better the grasp we have of the causes of top-end income concentration in different countries, the more effective we will be in assessing what, if anything, can be done to slow or even reverse it.The Conversation

Sandy Brian Hager, Senior Lecturer in International Political Economy, City, University of London

This article is republished from The Conversation under a Creative Commons license. Read the original article.

IMF’s alarming report on Algeria’s economy outlook

IMF’s alarming report on Algeria’s economy outlook

The release of July 2018 report of the International Monetary Fund calls on the highest authorities to analyse the prospects of the Algerian economy with lucidity according to internal and external constraints and no longer to sail on sight. In July 2018, the IMF’s alarming report on Algeria’s economy outlook, contrary to the views of gloom must be realistic. The country is in a situation that could take on another dimension and possibly worsen without any deep change in the system of governance, adapting it to new internal and global changes.
There is a unanimity of national and international experts on the Government that clearly shows lack of strategic vision, as if suffering from lack of foresight. We always said:
“The greatest ignorant is the one who does not listen; instead of beliefs everything to deepen the culture of tolerance and favour the interests of Algeria and not his interests.
The IMF report of July 2018
For the IMF in its last report, the country remains faced with significant challenges, posed by the decline in oil prices four years ago. Economic choices are also likely to “complicate macroeconomic management”, undermining growth “and” aggravating risks to financial stability in the medium term. Despite a critical budget adjustment in 2017, budget deficits and the external current account remain high. Overall economic activity has slowed down, although growth outside the oil sector has remained stable. The current policies of the Government according to the IMF weaken the resilience of the economy rather than strengthen it. Therefore, without profound reforms, these measures may lead the country into a deadlock at horizon 2020/2022. In any case and despite these measures to pay off some of the liquidity injected through monetary financing, the Bank of Algeria which raised the minimum reserve rate from 4% to 8% in January whilst resuming its absorption operations by taking bank deposits at seven days and also envisaging a moderate increase in the price of management, the use of printing money to finance the budget deficit risks aggravating imbalances, increasing inflationary pressures and accelerating the loss of foreign exchange reserves, notably through the use of banknotes to finance the budget deficit which according to the Bank of Algeria, the amounts loaned to the Treasury was in the order of 5,723 Dinars (DZD) as at the end of March 2018.
The inflationary thrust has undoubtedly not (yet) taken place, and even growth is expected to have a net rebound this year to 3%, compared to 1.6% in 2017, but for the IMF, unconventional financing representing 23% of GDP which will have enabled the funding in the first quarter 2018, for nearly 50% of the credits to the public sector, the economy will also have reached its limits from 2020 with rates of inflation and unemployment record likely to exceed in 2020/2022, 15%.
Quoting the IMF report, the increase in liquidity will stimulate demand, which will result in short-term price increases due to insufficient domestic supply and savings opportunities. At the same time, the hardening of import barriers is likely to fuel inflationary pressures by reducing supply – even by leading to shortages for specific products. Wage and price expectations could quickly adjust and strengthen each other. The authorities could then be forced to resort to monetary financing in subsequent years, which could lead to an inflationary spiral in the economy.
The International Monetary Fund advises to “use a wide range of financing instruments, including the issuance of public debt securities at the market rate, public-private partnerships, asset sales and, ideally, borrowing to finance well-chosen investment projects. “No progressive depreciation of the Dinar combined with efforts to eliminate the parallel market in foreign exchange would also promote adjustment”.
Two factors: demographic pressure and changes in foreign reserves
The Algerian population evolution looks thus:

DZ population

For that, 350.000/400,000 productive jobs per year will have to be created with a real growth rate of 9/10% over several years to avoid sharp social tensions. However, the blocking of investment in Algeria does not lie in changes in laws or the elaboration of utopian strategies, bureaucratic vision, as one does not fight the informal sphere by strict administrative measures, but by improving on the functioning of the society, with a focus on participatory and civil society.
Hence the urgency of a speech of truth for the foreign exchange reserves have evolved as follows:
According to the IMF, foreign exchange reserves will, in 2022, allow less than five months of estimated import and in 2023 assessed at $12 billion less than three months of import.
Growth is expected to slow very strongly as early as 2020, causing an increase in the unemployment rate. It will also result in a particular persistence of budgetary deficits and, above all, external deficits which will gradually eliminate all the leeway available to Algeria.
As per the IMF, Algeria needs a barrel at $87.6 to achieve a balanced budget by 2016 compared to $60 in 2007, $80 in 2009, $125 in 2010, $140 in 2012, $110 in 2015. As for 2017, under the year’s Finance Act, the level is close to $75.
As far as 2018 is concerned, the supplementary finance law of 2018, as approved on 5 June 2018, for an additional envelope of DZD500 billion (approximately $4.4 billion) to cover all current public and unproductive expenditure, generalized subsidies, other costs and mismanagement not to say bribery, will require a barrel exceeding $100, for not to draw off the foreign reserves that could then increase.
Conclusion: The return to confidence and growth within the framework of universal values as a condition of political, social and economic stability.
To meet future challenges, to project on the future, far from any devastating populism, new governance, a language of truth and morality of the leaders are necessary.
A certain budgetary rigour, better governance, a change of course in the current economic policy, with a barrel between $60/70, Algeria can sense out, possessing assets. Debt is low, 20% of GDP, external debt 2.5% of GDP. However, above all, Algeria needs a return to trust to secure its future, to move away from the vagaries of the rentier mentality, to rehabilitate work and intelligence, to bring together all its political, economic and social parties, avoiding division on secondary subjects, to learn to respect our different sensibilities. This is how eternal Algeria can realise as bound by its oath of November 1st, 1954, a sustainable development accommodating economic efficiency and profound social justice to which we are deeply attached.

A photograph of Algeria’s Economic and Financial situation

A photograph of Algeria’s Economic and Financial situation

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.

Algeria’s economy move onto a more solid footing

Algeria’s economy move onto a more solid footing

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.

Algeria: Year in Review 2017

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



The Next Frontier: The future of finance in the MEASA

The Next Frontier: The future of finance in the MEASA

The Dubai International Financial Centre (DIFC) is a global financial centre strategically located between the East and West, providing a stable and secure platform for businesses and financial institutions to tap into the emerging markets of the Middle East, Africa and South Asia (MEASA). The Centre’s internationally recognised and independent regulation, common law framework, tax-friendly regime, and enabling environment to make the ideal hub to access the region’s rapidly growing demand for financial and business services. DIFC fills the time-zone gap between the leading financial centres of London and New York in the West and Hong Kong and Tokyo in the East. Guided by its core values of integrity, transparency and efficiency, the Centre continues to play a pivotal role in meeting the growing financial needs of the region.  It has commissioned this report titled “ The Next Frontier: The future of finance in the MEASA ” from the Economist . This latter’s Intelligence Unit explored the forces shaping the future of financial services, focusing on market, technology and policy enablers within the context of the Middle East, Africa and South Asia.  It notably found that not only there is a strong preference for cash, but 86%, 66% and 46% of adults respectively do not have traditional bank accounts. As far as the MENA North African region is concerned, the large informal sphere of business financial transfers is notoriously known for its ability to side track thus remaining independent from any State interference, guidance or control with consequences as rightly described in this report of which its Executive Summary is reproduced below:



The Middle East, Africa and South Asia (MEASA) region is already poised to shape financial innovation. With a combined population of over 3bn, deepening mobile connectivity, and growing prominence as a trade and investment hub, MEASA will be a source of both demand and supply for more and better financial services. For companies that move quickly, this is a multi-billion-dollar opportunity to bank on the future of a diverse region. Some firms are at the vanguard of financial innovation, using smarter business models and the latest technologies. The rise of “challenger” providers—often from different industries, such as telecommunications and e-commerce—is bringing even more varied financial services offerings to a far larger community of individuals and businesses. This report, which draws on expert interviews and country analysis, assesses the state of finance in MEASA, the factors shaping the future of key financial subsectors, and the regulatory framework and best practices required to enable the delivery of these services. Key findings of the report: Gaps in financial services present an opportunity for financial companies—both traditional and nontraditional players. A growing young population across MEASA is increasing demand for digitally delivered financial services. In addition to this, women’s access to finance substantially lags behind that of men, particularly among low-income groups, as regulatory requirements for accessing formal finance, such as official ID or billing documentation, create bias against them. Even among wealthier segments of the population, many individuals remain underbanked. Taken together, this untapped potential presents an attractive opportunity for companies providing financial services. As trade and investment increase in the MEASA region, there will also be a growing market for wholesale banking and capital markets.

Overcoming a strong preference for cash in the MEASA region will be imperative to move towards a cashless economy. Across the region, the majority of utility bills, school fees and even wages are paid in cash. Building trust in digitally delivered finance will take time, despite a growing preference for it among the younger generation. A fully cashless economy may be decades away. Blockchain has the potential to change the financial architecture in MEASA, particularly for banking. Blockchain is helping to reduce high money-transfer and exchange costs by bypassing intermediaries, and blockchain-based digital registries could tackle other problems, like land expropriation. While these applications are experimental and pose regulatory difficulties, the core technologies can help to overcome some of the challenges of the existing financial system, such as money-laundering and corruption in a cash economy. More importantly, they are expected to reduce costs for financial institutions, particularly around compliance with anti-moneylaundering (AML) and Know Your Customer (KYC) rules. New business models are being developed to reach the “missing middle” of retail investors and medium-sized businesses. The rise in equity crowdfunding platforms and lower-cost portfolio investment products is unleashing new capital for entrepreneurs and businesses, and is giving middle- and lower-middle-income citizens the ability to become investors. Growth in the provision of credit, an increasing interest in private equity and a rise in venture capital are also helping to drive growth in the middle market. In Islamic finance, the approach is shifting from “sharia-compliant” to “sharia-based”. The approach to Islamic finance thus far has been to adapt existing products and services so that they comply with sharia law, for instance eliminating interest charges on credit cards and loans. Enabled by technology, companies are now developing fresh products and services that follow the spirit rather than adhering strictly to the letter of sharia principles. Governments and regulators have a crucial mandate to drive financial innovation. Governments and regulators must ensure that regulation keeps pace with advances in technology in the financial sector. There are examples across MEASA of legislation that enables a wider array of providers to enter financial services, from postal systems and telecoms

Security and Development: Ten Truths on the Algerian Economy

Security and Development: Ten Truths on the Algerian Economy

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. –