Maintaining foreign exchange reserves at $100 billion ?

At a time when preparing for the hosting on 4 and 5 September, of the world’s great and wealthy, China, the Organizer of the Hangzhou G20 summit will presumably not miss the opportunity to project to the leaders of G-20 countries—and to the world—that it takes global governance seriously. This G20 meeting for which out of the MENA region, only Saudi Arabia and Turkey are convened with Egypt as an exceptional invitee, is only a far flung news story.  For Algeria and / or any country of the Maghreb which for that matter, are concerned about their immediate future as cash flow and above all hard currency reserves worries tend to take precedence over anything political, economic and social concerns. So for maintaining foreign exchange reserves at $100 billion, here are some preservation recipes of the country’s cash cushion at that rounded figure and how I would recommend it should safely be kept at that level.

How to do it ?

At the outset, everything indicates that Algeria has only a three year long respite to change course and avoid great social tensions by 2018 / 2020 if it were to stick to the above objective.

So how to keep as announced everywhere to this $100 billion foreign reserves, noting that the value of the Dinar (DZD) owes it to that in the first place.  If regrettably these reserves were to come down to, say, $10/20 billion, this would result in the official listing of the Dinar to most probably be more than DZD 200 a Dollar.

May we have only $22 billion foreign exchange pay out between 2017/2018 that is 7 billion dollars annually?

How then to compress those imports of goods and services whilst at the same time boost the annual receipts of Sonatrach knowing that both depend on lower domestic consumption, international competition and future prices of which Algeria has no control?

In view of the above and more specifically of the prevailing nature of the on-going regional and world mutations, we would advocate the following :

The first solution would require a new central and local governance model, a greater moralization of the political, social and economic worlds, a renewal of the fight against blatantly generalised corruption, tax evasion for a shared sacrifice, and a real decentralization around regional hubs, stimulating entrepreneurship and the knowledge economy.

The second condition would be the rehabilitation of work source of wealth of any Nation, avoiding this distribution of income without productive counter-parties; avoiding these fictitious jobs for ephemeral social peace that clouds the official unemployment rate.

The third solution is about improving the business climate, reducing all red tape to a minimum, reforming the financial, social and educational systems, as well as the thorny problem of land

The fourth is that any project must be thought through in its specific cost/quality/competition elements, and according to international standards thus checking off all over runs that took lately exorbitant proportions sometimes up to 20 and 30%.

The fifth is for all those sizable projects development to be preferably undertaken using the Build, Operate and Transfer (B.O.T) techniques, e.g. infrastructure which would ease short-term tensions at budgeting time, with share and transfer of profits.  Remember that the BOT techniques is mainly based on the model of the “project financing / project finance” which is essentially a financing technique where lenders agree to fund a project based only on its profitability and its ROI.  In practice, the repayment of the loan depends on the cash flow generated by the project itself, so that the ability of the project to generate revenue that will be used for the repayment of the loan is the cornerstone of the project financing.

The sixth solution is the relaxation of the non-effective rule of 49 / 51% for all non-strategic segments, and to define precisely what is strategic and what is not, where all the extra costs and risks are equally shared, with possibility of a blocking minority.

The seventh solution would be an increase of oil exports, the price of which depending on external factors would be out of Algeria’s control. The revenue of Sonatrach at $60 a barrel and most contracts of gas, whose price being indexed to that of oil and long term contracts expiring between 2018/2019 are estimated to be around $34 billion, with expenses of 20% taken away, would give a net profit of $27 billion.   At $50 a barrel, the net profit could be $21 billion and at $40 it will be $15/16 billion.  Between 2016-2020, it is unrealistic to rely on non-oil exports (maturation and profitability of all project implemented in 2016, putting at least in Algeria 4/5 years in light of the bureaucratic constraints) including mining (see our different contributions, heavy investment and currencies gains relatively weak).

The eighth solution is for a right balance that would be struck between the satisfaction of the domestic market and exports, thus posing the problem of widespread source of waste and social injustice non-targeted subsidies. Algeria is likely to be a net importer of oil by 2015/2020, before betting on gas and especially its transformation in a win-win partnership.  It is that, the majority of medium-term contracts expire between 2018/2069, before ‘ align on the free market says market spot, being impossible to compete with Russia (pipeline Siberia / China and Iran in the Asian market, to rely on exports to the USA that themselves export to Europe; the natural market of Algeria being the European market).  Hence, the urgency of the energy transition and a new model of consumption based on an energy mix model, including renewables, should take into account the strong international various competitive markets.

The ninth solution, which I had the honour to have recommended to the Government two years back, would be to target external debt long term but only for segments with competitive advantages of $30/50 billion between 2017 and 2020 in order to maintain the level of reserves at $100 billion, or $60 billion as from the World Bank forecasts that have been established, according to my information from Washington, and from the 2014/2016 Algeria Bank data.

The most probable and the safest is definitely to have a strategic vision, far from any tactics to paraphrase military experts, to fit within a strategic objective function. That is to go for the now sorely lacking deep structural reforms without which, a diversified economy cannot be brought about.  Without reforms, beyond 2020, even with an external debt as a solution, it will be impossible to maintain the level of reserves in the light of the economic situation at end of 2016.  In fact, not being able to boost the productive fabric, currently in lethargy, the two assumptions most likely to have by then a level of exchange reserves of $100 billion is to bet on a price of $70+ a barrel and go for an external debt or combine the two together.

The Gross Domestic Product (GDP) always assessed at constant prices, has a meaning limited to current price and the important thing is to analyse its structure. 3/4% economic growth was driven mainly by public expenditure such as Public Works to more than 70 / 80%.  According to the latest official statistics 94% exports are oil and gas in its raw state and semi crude including natural gas represents more than 33 / 35% of Sonatrach and on these 6% non-oil revenue around 70 / 75% are derivatives of hydrocarbons, the private sector contributing less than a billion dollars for foreign exchange earnings. The industrial sector represents 5% of the GDP, and on these 5%, about 97% little innovative SMIs / SMEs, so are non-competitive in the international market.

About 83% of the economic fabric is made up of small trades / services with a clear dominance of the informal market sphere that controls 50% of the economic area. The recent bond issuance had a mixed result towards the insertion of the loose capital money of the informal sphere, with most of the actual capitalized is from the real sphere which has led to the drying up of liquidity of banks, whilst at the same time encouraged some speculative annuities at 5 to 5.75% interest rate.  But what does the advertised amount (which some in the form of promises) frozen in time, before the future deficits 2017/2019, and as compared to a budget deficit of 2016 exceeding $30 billion.  In the light of 2016 customs statistics, imports of goods / services and legal transfers, foreign exchange outflows were more than $75 billion in 2014 and more than $63/65 billion in 2015.

In summary, Algeria as from its potentialities and with a new economic policy could overcome its shortcomings and thus bypass any economic recession that would not only have social and political implications internally but could also geo-strategically have destabilising impacts in the Mediterranean region and Africa.

Dr. Abderrahmane Mebtoul, University Professor, Expert International,

Translation from French by Microsoft / FaroL