In the parallel market,
Economic laws being generally immune to any political slogans and bureaucratic measures; how to explain the reasons for the slippage of the Algerian Dinar that for €1 on the parallel market in this month of December 2016 would fetch about DZD186 and DZD168 for a Dollar.
And most significantly why is there a gap with the official market that is DZD118 a Euro and DZD111 a Dollar?
Are we not moving towards the DZD200 a Euro with the inevitable inflationary impact due to the fact that all prices tend to often line up with those of the parallel market?
Will it not remind us of issues related to the level of the general lack of production and / or weak productivity, to the bureaucratic measures without strategic vision, and to either the monetary illusion or its mechanics interpretations that in the end have increased distrust towards this national currency?
To reply to these queries, let us start with :
A Short history of the the Algerian Dinar (DZD).
Set up in 1964, the DZD was on a par with the French Franc until 1973. Since 1974, the value of the Dinar has been set following the evolution of a basket of 14 currencies. We have seen depreciation between 1986/1990 of 150% from DZD4.82 to DZD12.191 a US Dollar, followed by a second one, of the order of 22% in 1991. With the cessation of payment in 1994 and following the rescheduling and conditions imposed by the IMF, there was a new devaluation of more than 40% followed by its commercial convertibility in 1995/1996.
The evolution of the official exchange rate has evolved from 2001 to December 12, 2016 thus:
- 2001 – DZD77.29 a Dollar
- 2005 – DZD73.35 a Dollar
- 2008 – DZD64. 58 a Dollar
- 2010 – DZD74.39 a Dollar
- 2015 – DZD100.46 a Dollar
On December 12th, 2016, the rating of the Dinar got close to DZD111 a Dollar and DZD118/119 a Euro at the official rate, a difference of 57% with reference to the parallel market and a slippage of about 60% from the 2010s.
This accentuates the inflationary process, with the risk of two-digit inflation by end of 2016, due to the fact that 70% of the needs of households and of public and private businesses are met by imports which with the falling price of oil are making the State no longer able to subsidize as it did in the past. The value of the Dinar that is function of the trust and a productive economy, which in the case of Algeria being an economy fundamentally of a rentier type, will contradict the basic laws of economy where any devaluation should in principle boost exports. Paradoxically, we see that when the price of the Dollar decline and the rise of the Euro, the Bank of Algeria make the Dinar slide (whilst avoiding to talk of devaluation) for political reasons.
Why then this accounting trick ? The answer or main reason could be that by devaluing the Dinar rate to the Dollar, is the artificial increase in oil tax that fluctuates depending on the price of a barrel, between 60 and 70%. Because oil and gas revenues are converted into Dinars, together with Customs taxes on hard currency imports being calculated in Dinars, would only lead to a definite devaluation. All this hide the importance of the budget deficit and thus the effectiveness of the State through its public expenditure budget and artificially inflates the Regulatory Revenue Fund as calculated in Algerian Dinars.
Inflation being the result, a certain distrust towards the Algerian Dinar that is officially administered and therefore disconnected with the real world as represented by parallel market. In General, both foreign and local investors are wary of an administered low currency. The real value of a currency, which is only a medium of Exchange could be interpreted as a nominal value adjusted for inflation.
Hoarding would not create value. It is the work through continuous innovation, whilst adapting to this ever more interdependent world, turbulent and in perpetual upheaval that is the source of wealth of a Nation. The value of a money depends on the confidence in that economy and all related politics of production and productivity, as shown by the Classics. In fact, the essence of this situation lies in the dysfunctions of the different structures of the State because of its excessive intervention that distorts the market rules forcing households and operators to circumvent them.
So when the authorities immoderately tax and regulate excessively or by declaring illegal the activities of the free market, it skews the normal relations between buyers and sellers. In response, buyers and sellers naturally seek ways around all Governments imposed obstacles.
What then are the reasons for the devaluation of the Dinar on the black market?
I count seven and here there are :
First, the gap could be explained by the reduction in the supply due to the fact that the global economy slowdown, combined with the death of many Algerian retirees, has largely paid off savings of the emigration. This decrease in the supply of currency was offset by fortunes acquired regularly or irregularly by the Algerian community who transfer regularly or irregularly currencies into Algeria. Conversion of money from corruption, playing on the distortion of the official reference exchange rate (you charge me DZD150 a Dollar instead of a commodity bought 100 with the complicity of foreign operators; operations easier and faster in the trade) clearly shows that the parallel currency market is much more important than the savings of the emigration that explain the soaring real estate prices notably in urban areas.
Second, demand comes from traveling ordinary citizens: (tourists, medical tourists abroad and Hajis) because of the weakness of the derisory travel allowance. But it is the travel agencies that failing to benefit from the right to free exchange, they being importers of services also tend to use the black market currencies. They mostly export currencies instead of import as would the tourism logic like in Turkey, Morocco or Tunisia.
Thirdly, the strong demand comes from the informal sphere that controls 40 to 50% of the money supply in circulation and 65% of the different market segments; fruits &vegetables, red &white meat market, and through imports using small resellers, because it is an informal financial intermediation away from State circuits. This sphere, which is the product of bureaucracy, everything is handled in cash thus promoting dialectical relationships with rentier segments favouring tax evasion and corruption.
Fourth, the gap is explained by the passage of the REMDOC to the CREDOC documentary credit, explaining the easing measures, in 2013 which largely penalized small and medium-sized companies representing more than 90% of the industrial fabric in decline (5% in GDP). There are many SMEs that to avoid supply disruptions use parallel currency market. The Government has in the past increased the allowance upto DZD4 million, but this is not enough, explaining the easing measures in the 2017 budget bill.
Fifth, many foreign businesses including domestic operators use the parallel market for their transfer of currency, since every Algerian is entitled to €7200 per transfer trip, using Algerian employees to increase the amount.
Sixth, the gap can be explained by the weakness of production and productivity; the injection of monies without productive counterparties generating a certain level of inflation and depreciation of the Dinar. According to an OECD report, the productivity of Algeria’s is one of the lowest in the Mediterranean basin. The industrial fabric that some would revitalize without a strategic vision, according to the old mechanical vision, without seeking to take into account new technological changes and global managerial methods is a strategic error that the Algeria might pay dearly in the medium term.
Industry representing less than 5% of GDP and of these 5%, more than 95% are PMI/SMEs that are uncompetitive, costs indirectly devalue the value of the Dinar. There is no proportionality between public spending and the low impact, the average growth rate not exceeding 3%, is source of inflation and explains the deterioration in the rating of the Dinar (imbalance of supply and demand that is supplemented by a massive importation of goods and services) on the open market against currencies the Bank of Algeria supported artificially thanks to oil revenues.
If foreign exchange reserves tended towards zero, the Euro open market to trade more than DZD300 and the official exchange fluctuate between DZD200/250 a Euro, where the importance of an external targeted debt, only on productive activities, in order to avoid the complete depletion of foreign exchange reserves which take the value of the dinar to over 70%.
Seventh, to guard against inflation, and therefore deterioration of its Dinar, the Algerian citizen does not place only his assets in land, real estate or gold, but would apportion his savings in currencies. Many Algerians benefit from the crisis of real estate, especially in Spain, acquiring apartments and villas in the Iberian Peninsula, in France and some in the USA, Latin America and tax havens. It is a choice of security in a country where the evolution of oil prices is decisive.
Political uncertainty, and a certain psychosis created by financial scandals, is pushing many officials to sell their assets and purchase property abroad. Also many households put in the prospect of a fall in oil, and given the commodities erratic fluctuations revenues, on the decline since year 2O13, buy the currencies on the informal market. (Ref paper by Professor Abderrahmane Mebtoul “Informal Sphere in the Maghreb and how to integrate it into the real sphere” Institut français des relations internationales (IFRI) Paris – Brussels December 2013 – 60 pages)
In summary, distortions between the formal and informal market reflects the weakness of local productive fabric, oil based rentier economy could only give an artificial official rating of the Dinar. An objective an analysis of inflation which has repercussions on the real value of the Dinar, would suppose a serious grasp of the dialectical relationship between development, the distribution of income and consumption by strata models. Subsidies and the distortion of the exchange rate between the official and parallel markets with neighbouring countries are basic explanations of overbilling and the spilling over of a good number of products out the borders. Administrative measures can only be one-off, otherwise an army of controllers would be needed. The solution lies simply in a new type of governance, ideally with new mechanisms of regulation, local production in segments of value-added in internationalised sectors, so of successful companies.
Read more on these 2 previously published here contributions Algeria’s currency rating between 2017 and 2020 and