Dec 18, 2017
Further to Global Inequality is on the Rise at different Countries Rates we propose Kaushik Basu, writing for Project-Syndicate since 2002 is a former Chief Economist of the World Bank, and Professor of Economics at Cornell University and Non-resident Senior Fellow at the Brookings Institution. He has on December 15, 2017, elaborated on how inequality deepening worldwide challenges all great, small, rich and poor.
As inequality continues to deepen worldwide, we do not have the luxury of sticking to the status quo. Unless we confront the inequality challenge head on – as we have just begun to do with another existential threat, climate change – social cohesion, and especially democracy, will come under growing threat.
MUMBAI – At the end of a low and dishonest year, reminiscent of the “low, dishonest decade” about which W.H. Auden wrote in his poem “September 1, 1939,” the world’s “clever hopes” are giving way to recognition that many severe problems must be tackled. And, among the severest, with the gravest long-term and even existential implications, is economic inequality.
The alarming level of economic inequality globally has been well documented by prominent economists, including Thomas Piketty, François Bourguignon, Branko Milanović, and Joseph E. Stiglitz, and well-known institutions, including OXFAM and the World Bank. And it is obvious even from a casual stroll through the streets of New York, New Delhi, Beijing, or Berlin.
Voices on the right often claim that this inequality is not only justifiable, but also appropriate: wealth is a just reward for hard work, while poverty is an earned punishment for laziness. This is a myth. The reality is that the poor, more often than not, must work extremely hard, often in difficult conditions, just to survive.
Moreover, if a wealthy person does have a particularly strong work ethic, it is likely attributable not just to their genetic predisposition, but also to their upbringing, including whatever privileges, values, and opportunities their background may have afforded them. So, there is no real moral argument for outsize wealth amid widespread poverty.
This is not to say that there is no justification for any amount of inequality. After all, inequality can reflect differences in preferences: some people might consider the pursuit of material wealth more worthwhile than others. Moreover, differential rewards do indeed create incentives for people to learn, work, and innovate, activities that promote overall growth and advance poverty reduction.
But, at a certain point, inequality becomes so severe that it has the opposite effect. And we are far beyond that point.
Plenty of people – including many of the world’s wealthy – recognize how unacceptable severe inequality is, both morally and economically. But if the rich speak out against it, they are often shut down and labelled hypocrites. Apparently, the desire to lessen inequality can be considered credible or genuine only by first sacrificing one’s own wealth.
The truth, of course, is that the decision not to renounce, unilaterally, one’s wealth does not discredit a preference for a more equitable society. To label a wealthy critic of extreme inequality as a hypocrite amounts to an ad hominem attack and a logical fallacy, intended to silence those whose voices could make a difference.
Fortunately, this tactic seems to be losing some of its potency. It is heartening to see wealthy individuals defying these attacks, not only by openly acknowledging the economic and social damage caused by extreme inequality, but also by criticizing a system that, despite enabling them to prosper, has left too many without opportunities.
In particular, some wealthy Americans are condemning the current tax legislation being pushed by Congressional Republicans and President Donald Trump’s administration, which offers outsize cuts to the highest earners – people like them. As Jack Bogle, the founder of Vanguard Group and a certain beneficiary of the proposed cuts, put it, the plan – which is all but guaranteed to exacerbate inequality – is a “moral abomination.”
Yet recognizing the flaws in current structures is just the beginning. The greater challenge is to create a viable blueprint for an equitable society. (It is the absence of such a blueprint that has led so many well-meaning movements in history to end in failure.) In this case, the focus must be on expanding profit-sharing arrangements, without stifling or centralizing market incentives that are crucial to drive growth.
A first step would be to give all of a country’s residents the right to a certain share of the economy’s profits. This idea has been advanced in various forms by Marty Weitzman, Hillel Steiner, Richard Freeman, and, just last month, Matt Bruenig. But it is particularly vital today, as the share of wages in national income declines, and the share of profits and rents rises – a trend that technological progress is accelerating.
There is another dimension to profit-sharing that has received little attention, related to monopolies and competition. With modern digital technology, the returns to scale are so large that it no longer makes sense to demand that, say, 1,000 firms produce versions of the same good, each meeting one-thousandth of total demand.
A more efficient approach would have 1,000 firms each creating one part of that good. So, when it comes to automobiles, for example, one firm would produce all of the gears, another producing all of the brake pads, and so on.
Traditional antitrust and pro-competition legislation – which began in 1890 with the Sherman Act in the US – prevents such an efficient system from taking hold. But a monopoly of production need not mean a monopoly of income, as long as the shares in each company are widely held. It is thus time for a radical change, one that replaces traditional anti-monopoly laws with legislation mandating a wider dispersal of shareholding within each company.3
These ideas are largely untested, so much work would need to be done before they could be made operational. But as the world lurches from one crisis to another, and inequality continues to deepen, we do not have the luxury of sticking to the status quo. Unless we confront the inequality challenge head on, social cohesion and democracy itself will come under growing threat.
Nov 5, 2017
What Energy Transition for a new global energy mega-structure?
Taking the opportunity of the COP23 in Bonn, Germany on November 6 to 17, 2017, this analysis addresses the strategic components of the necessary energy transition for Africa in general and specifically in Algeria.
Far from the euphoria of the Paris Agreement, the signatories meet again in Bonn, Germany, from 6 to 17 November 2017. It is the 23rd UN Climate Conference (COP23) with accordingly three UN goals.
- First, to progress negotiations on the Paris Agreement that was ratified in December 2015 by 168 countries, and recently joined by Nicaragua after having been alone as a long time reluctant State. The Paris agreement stipulated control of global warming “by keeping a global temperature rise this century well below 2 degrees Celsius above pre-industrial levels and to pursue efforts to limit the temperature increase even further to 1.5 degrees Celsius”, without setting of binding targets for each country. Many experts doubt its feasibility and the IPCC, the group of UN climate experts must meet, review in autumn 2018 and report on this issue.
- Second, prevent other countries to join the Donald Trump position who confirmed on June 1, 2017 that the United States would withdraw from the Paris Agreement for reasons that the text “disadvantaged” his country. However, the decision of the US President will not come into force until 2019 and a US delegation will nevertheless be present in Bonn. If the risk seems moderate, it is not impossible that other countries that fear the rules to which they could be subjected to, would be tempted to opt out of the Paris Agreement like the United States. As such, particular attention will be paid to the case of Russia, the only G20 country, with Turkey, which has not ratified the text to date.
- Third, inform about the Pacific Islands and the globe generally that has seen disasters that occurred in 2017 with super-hurricanes in the Caribbean and Florida, fires of unprecedented intensity in Portugal or California, lasting drought in East Africa, etc. To the point according to scientists, that it should further intensify in the coming years and that according to the UN’s Environment Program (UNEP), 2017 “would probably be a record year in terms of human, social and economic disasters.”
However, whilst not being utopian, fossil fuels including gas, will still for a long time over 2017/2025 be the main source of energy. But to govern is to foresee, it is up to African governments already facing the new global energy irreversible mutations to orientate towards an energy MIX between 2020 and 2030. And to prepare for an energy transition on a model linear energy of the past would be an error of reasoning.
Also, the energy engaging Nations’ security, renewable energy strategy must fit into the framework of clear and dated for a new model of energy focused on a certain energy mix, the resource assessment for achieving a set of objectives to prepare the industries of the future, new technologies and green industries, subject to the new 2020/2040 economic revolution.
According to the report from Bloomberg New Energy Finance (BNEF), to cover global demand for energy, there will be investments of around $2,100 billion by 2040 for all fossil fuels, as opposed to $7,800 billion for renewables. It is perhaps interesting to note that with $3,400 billion for solar and $3,100 billion for wind energy, both renewable energies seem to be clearly those that are likely to produce sustainable electricity cost levels lower than those of fossil energy.
China with a rapidly growing solar energy, stands since 2015 at the forefront of the global PV market, ahead of Germany. It is also reported that its highly proactive policy would allow it to display in the next 25 years the highest CO2 emission reductions. Thus, alone, China already accounts for 40% in the new TeraWatt Hour (TWh) supplied by renewable energy. China has pledged $103 billion, or 36% of the world total, representing an increase of 17% of its annual effort. The investments also increased sharply in Chile, India, Mexico, South Africa, Pakistan and Morocco. According to the International Energy Agency (IEA), the production of renewable electricity will increase by 40/60% by 2017 / 2020 and will provide more than a third of global electricity with notable acceleration between 2020 and 2030.
Meanwhile, the last devastating hurricanes pose the problem of global security and the urgent need for energy transition. UN studies project an unparalleled drought in North Africa between 2020 and 2025. “Governments should hasten an end to fossil fuel subsidies, which still amount to about $500 billion per year as “advocated on November 1st, 2017 by the Secretary General of the Organization for Economic Co-operation and Development (OECD ) Angel Gurría in Toronto, Canada, in a widely reported in the world press statement; suggesting comparative advantages for non-fossil fuels.
Around the world, the combination of volatile fossil fuel markets and the need to protect the environment and reduce greenhouse gas emissions require a revision of energy strategies. That is why we will have as a matter of urgency, to first, review our current energy consumption and, secondly, and to use all forms of energy, particularly renewable energy which remain an essential alternative for internal needs.
The world will experience a profound change in a global energy map and therefore energy transition in years 2020, 2030 and 2040 although currently the weight of fossil (coal, oil & gas) remains overwhelming (78.3%), while the nuclear plays only a marginal role in the world (2.5%). The share of renewable energy is growing in the production of electricity (23.7% at the end of 2015 against 22.8% at end 2014), but remains tiny in transport and heating and cooling systems. This high proportion of fossil fuels is due to imbalances between the subsidies granted by States on fossil fuels and those allocated to renewable: $490 billion for the first in 2015, against $135 billion, almost four times less for the second.
These blockages do not prevent the sector to now total 8.1 million direct and indirect jobs in the world (+ 5% in one year), including 2.8 million in the photovoltaic (PV) industry: 59 gigawatts (GW) in 2005, 198 in 2010, 279 in 2011, 283 in 2012, 318 in 2013, 370 in 2014 and 433 in 2015 including solar 227GW against 73GW in 2005. the investment billion rose from 73 in 2005, 239 in 2010, 279 in 2011, 257 in 2012, 234 in 2013, 273 in 2014 and 286 in 2015. subject to long-term investment, because currently it is the technological development costs and investments in production equipment (wind turbines, solar panels, biomass boilers, etc.) that affect the cost of renewable energy. In the future, they will become a less expensive energy with stable prices. Regarding the lower costs, the IEA notes that the price of photovoltaic systems has been divided by two and sometimes more in five years (2008 to 2012).
Today, joining the production cost of hydropower, technologies advancement are making some renewables virtually reach parity for the cost of electricity, with other conventional energy sources. Renewables have essential assets to take an important place in the energy mix of the country, to bring production sites to consumption centers, to reduce the dependence of these countries on fossil fuels, contribute to security of supply and energy independence, allow for long-term control of energy prices, constitute the most appropriate vectors for the development of decentralized energy production, offer considerable potential for industrial development and new growth and help limit the impact of energy production on the environment: reduction of greenhouse gas emissions, reducing the effects on air, water and soil pollution. The production facilities of renewable energy affect very little the environment, its biodiversity and the climate generally. But to ensure a sustainable energy transition, a significant investment and adaptation would be required in power systems to absorb, redistribute a greater proportion of power generated by renewable energy back to the energy storage and management demand for flexible power generation units on the importance of decentralized energy production in order to bring them closer to “touch points.”
According to a report of Bloomberg New Energy, there is a reversal of energy consumption in 2025: a fall in demand for fossil fuels and a net increase in demand for alternative energy. This trend must be seen in the light of the exponential development of technology (telecommunications, Internet, media, etc.) and of more electro-dependent, as in the case of our economies in the case of consumption to come to allow the access to energy for the 1.3 billion people worldwide still without light and without telecommunications as in Africa.
So, what is it for Africa where much of the population suffers from energy shortages?
The average solar irradiation of African countries, according to IRENA (International Renewable Energy Agency), between 1750 and 2500 kWh / m2 / year, almost twice that of Germany (1150 kWh / m2 / year) which has a photovoltaic park installed around 40 GW (or a photovoltaic capacity 20 times greater than that of all Africa). The load factor of photovoltaic installations would be much higher in Africa than in European countries. At the end of 2015, Africa had 2100 MW of solar photovoltaic installations assembled, 65% of this capacity is concentrated in South Africa (13% in Algeria and 9% in the Réunion islands). During the past two years, the continent has more than quadrupled its installed capacity of PV parks, but these are still modest compared to the large African potential for nearly 600 million Africans still lacking access to electrical power.
According to the Agency, this energy would be competitive today as compared to the currently used fossil fuels, whether in the case of large plants or micro isolated systems (as well as domestic systems). According to Irena, the investment costs of large photovoltaic plants in Africa decreased by 61% since 2012. They now reach almost 1.3 million per MW installed (global average for PVs is around 1.8 million of $ / MW).
President Adnan Z. Amin of the IRENA is still considering a possible decline in 59% of these costs during the coming decade. The Irena highlights the fact that the present photovoltaics for Africa and a decentralized solution “modular” (with few facilities W to several tens of MW) to quickly electrify the unconnected to the regions power grids.
According to experts, it is true that the energy needs of Africa are limited to a few kWh per capita per year, the use is primarily lighting. There are no electrical networks in Africa, therefore no possible economies of scale. Africans pay for their electricity 2 times more than Europeans. It is always interesting to have cheap electrical power. But industrial development requires large amount of power, especially that of heat. While PVs are certainly more suitable for smaller off-grid installations for some African countries, industrial production would need to combine it with heat. Indeed, it is necessary to have a strategic approach to development of renewable energy. It should primarily target projects that contribute most to the achievement of objectives, without a clear position between the photovoltaic and thermal. The solar towers in Spain have proven themselves to be over many years quite valuable. This is to identify the different technologies endpoints. With GTZ (Germany) decomposition of the component value chain and cost allowed to set a realistic integration rate of 70% for solar thermal. Industrial solar thermal converges with that rate, while also agreeing with the electricity export levels to Europe. Indeed, Europe will need to import 15% of its needs in 2030, equivalent to 24 GW power or the equivalent of 50 billion M³ of gas per year.
Recent international studies have defined the four conditions to be :
- A stable policy framework, sustainable local market size of 250 MW / year
- An open market.
- The technologies chosen must match the greatest potential namely allowing an integration rate, the largest job creation, providing the best match for the electricity market
- Finally, most importantly, the technologies must offer the greatest potential for cost reduction competing fossil fuels.
In summary, a new global energy superstructure will be born between 2020 / 2030 / 2040, in which if Algeria wants to avoid a deadlock from outdated traditional patterns of the past, it would have to develop coping strategies. It is therefore a matter of clearly identifying the real players and not have a strategic vision based on utopia but realism that laws and changes in organizations would be able to solve problems. For Algeria to cover its internal consumption, its needs of 40% renewable energy by 2030 as was announced by the Ministry of Energy and in this case; what would the amount to mobilize be for the funding of such a move?
For starters, without any strategic vision of this transition, a suitable training program, a revision of the prices and subsidies policies in Algeria, private local or international investments in renewable energy would perhaps not be as profitable as one would expect. If it wants to avoid errors of economic policy in general, it should necessarily prevent any linear vision of the energy model. The passage of the coal era to that of hydrocarbons was dictated by a change in technology not in availability of this or that resource.
New technological processes that produce large scale economies with costs savings, influence the reshaping of global economic structural arrangements that in turn bear on local and global governance.
For Algeria, it is the issue of energy security that arose with the urgency of a reasonable and controlled energy transition fitting into the overall framework of a transition from a rentier economy to an economy excluding hydrocarbons in the context of global comparative advantages.
This implies to revitalize the National Energy Board, the sole authority to define energy strategy because under national security, chaired by the president of the republic, to open a national debate on the future model of energy consumption and raise all environment bureaucratic constraints that impede the growth of the creative value-added enterprise and foundation of the knowledge economy. That is why we will have in urgency, to first, review the current mode of energy consumption and, secondly, to use all forms of energy including renewable energy, which remain an alternative for domestic energy needs with other conventional energy sources.
Dr. A. Mebtoul is a University Professor, International Expert and former Director of Studies at the Department of Energy and SONATRACH both of Algeria ademmebtoul@gmail.com
Sep 21, 2017
What prospects for a balanced economic cooperation ?
A meeting of the Algerian and Russian intergovernmental commission was held in Algiers on September 18 to 20. An Algero-Russian Joint Commission whilst meeting political convergences and acknowledging Russia’s as well as Algeria’s efforts to stabilize the price of oil, a call was launched for a widening of cooperation based on a closer and win-win sharing partnership.
The concerned sectors are particular areas of professional training, scientific and technical research, industry, transport, civil nuclear and of renewable energy.
At the International Fair of Algiers last May, in which Russia was the guest of honour, its delegation reported that three Russian companies were ready to invest in Algeria through a long term partnership in areas such as green energy, industrial and household waste treatment and management of water resources.
Concerning cooperation in renewable energy, the Russian Minister highlighted the interest of his country in the vast renewable energy programme launched by Algeria to develop a capacity of 4,500 megawatts by year 2030.
Three companies, Uralvagonzavod, PAO NPK. and ZAO Transmachholding are interested in projects with Algerian partners with the objective of the development of assembly of rolling plants, the creation of centres of services in the rail sector and the production of agricultural combine machines.
In addition, the Russian company KAMAZ PAO, the largest producer of trucks in Russia, is ready to make proposals for partnership in the field of industrial vehicles production assembly plants.
What about exchanges between Russia and Algeria, two competing economies in the field of oil and gas?
The laws of economics being immune to political slogans, these two countries are currently facing budgetary tensions characterized by a significant decline in their foreign exchange reserves and the devaluation of their respective currencies; although not wanting to be utopian as through not comparing comparable for Russia is nevertheless a great economic and military power.
Trade between Algeria and Russia, apart from military equipment and armaments, that was $ 175 million in 2002, reached $ 530 million in 2014. The balance was clearly not in favour of Algeria, especially when one realizes that $ 523 million of the $ 530 million represent products imported by Algeria with Russian suppliers. The remaining seven million Dollars, represents the small value of Algerian exports, including three million Dollars in food products destined for Russia.
We therefore are witnessing a timid progression since the volume of the two-way trade off any military equipment reached $ 885 million in 2015.
For 2016, according to official statistics cited by Algeria Press Service, we have a 65.3% increase, about $ 2 billion, of which 1.4 billion Dollars were military equipment. To rebalance trade in fields of industry with the Department of National Defense as I pointed out in an interview (1) with a private television on September 20, 2017 is in need to be looked at and can thereby be developed.
There remains only $ 600 million outside of military equipment so it is down from 2015.
Thus Russian military imports are important, the Russians for their commercial balance would need perhaps to look into contributing towards a military industry in the context of import substitution in Algeria.
Exchanges between Russia and Algeria are not that substantial if compared to imports / exports of each Russia and Algeria. All commercial transactions between Algeria and Russia which, according to the Bank of Algeria, should be carried out in Rubble, would perhaps energize more exchange work?
But what would the public and private Algerian companies provide in return to Russia above all knowing that Algeria whose revenues are 97 / 98% directly and / or indirectly drawn from exports (50% off hydrocarbons from the derivatives of hydrocarbons), is currently going through budgetary tensions.
In short, the trade imbalance is obviously to the disadvantage of Algeria, but because of Russia’s own financial difficulties, substantial money inflows should not be expected in Algeria. It would instead be of a contribution in terms of technology transfer and managerial streaming that should be planned and put high on any future bilateral cooperation.
ademmebtoul@gmail.com
(1) – Interview with Professor Abderrahmane Mebtoul by Dzair TV on 20/09/2017 7:45 pm
Sep 20, 2017
The IMF’s outlook for the MENA region has become over the years some sort of a report of a year’s economic policy result assessment of each country. Generally, and despite the on-going unrest in parts of the Arab world and in its neighbouring countries, the near-term economic outlook is very much subject to uncertainties of the global economy. Lower oil prices and production volumes are felt to have led to obviously lower growth in 2017 for most of the region’s oil exporters. These latter have over time past given some boost to the economies in the region. We could safely say that the IMF’s outlook for the MENA region has more to offer than what it is credited with.
The role of the International MonetaryFund as an overseeing organisation is undeniably helping to have a view at one’s country’s performance from as it were a certain distance. As a global organisation, its main function is to help stabilise exchange rates and provide loans to countries in need. It has previously in its Economic Overview of the MENA countries came up with the following :
“The MENA region commands abundant human and natural resources, accounts for a large share of world petroleum production and exports, and enjoys on average a reasonable standard of living. Within this general characterization, countries vary substantially in resources, economic and geographical size, population, and standards of living. At the same time, intra-regional interaction is weak, being restricted principally to labour flows, with limited trade in goods and services.”
This past summer, it reviewed Morocco twice and under as it said ‘under the arrangement under the Precautionary and Liquidity Line (PLL) and produced a report (IMF Country Report No. 17/264) and available in its PDF format.
The report consists of a Press Release of a statement by the IMF following the report proper prepared by a staff team of the IMF in conjunction with officials of Morocco on economic developments as at on August 1, 2017. We republish excerpts of its Executive Summary with our respectful compliments to the IMF staff and executves.
Growth prospects for 2017 have improved, but non-agricultural growth is subdued. Inflation is low. The current account deficit is projected to decline and international reserves are at a comfortable level. The outlook is still subject to significant domestic and external risks, including weak growth in the euro area and geopolitical risks in the region.
Key policies and reforms. The new government is committed to pursue fiscal adjustment and key program objectives, including bringing public debt to about 60 percent of GDP by 2021, from 64.7 percent at end-2016, as well as a gradual transition to a more flexible exchange rate regime. Achieving these objectives, reaching higher, job-rich and inclusive growth, and addressing social tensions requires accelerating key reforms in the areas of tax policy, labour market, education, and the business environment, while strengthening social safety nets.
PLL arrangement. In line with the generally positive assessment of Morocco’s policies by the Executive Board in the 2016 Article IV consultation, and despite a recent slowdown in reform implementation, staff considers that Morocco continues to meet the PLL qualification criteria and on this basis, staff recommends the completion of the second review of the PLL arrangement:
Morocco’s economic fundamentals and policy frameworks are sound, the country is implementing (and has a track record of implementing) generally sound policies, and remains committed to maintaining such policies in the future.
Staff assesses that Morocco continues to meet the PLL qualification criteria and performs strongly in four out of the five areas of PLL qualification (external, monetary, financial, and data), does not substantially underperform in the fifth area (fiscal), and does not face any of the circumstances under which the Fund might no longer approve a PLL arrangement.
The end-March 2017 fiscal deficit indicative target (IT) was met, but the end-March 2017 reserves IT was missed due to the widening current account deficit, due in part to temporary factors, since July 2016. The authorities have not drawn on the arrangement and continue to treat it as precautionary.
Further reading is in Country Report 17/265 .
Sep 14, 2017
Would an amendment to the law on currency and credit in Algeria together with the introduction of unconventional funding impact the economy with inflationary risks and opportunities reduction?
A draft amending the law on money and credit, allowing the Bank of Algeria to “directly” lend to the Treasury, was recently adopted by the Council of Ministers. Moreover, the Government notes that the recovery of the budgetary balances is dictated by the constraints imposed on public finances and the use of exceptional and transitional (for a period of five years) methods to allow non-conventional finance, including direct funding of the Treasury via the Bank of Algeria.
The purpose of this modest contribution is to, whilst taking into account the reality of the Algerian economy, pose the problem of risks and opportunities that could be brought by this change in the money supply legislation.
Basis of the Law on currency and credit
It should be noted that the current law was introduced on April 14, 1990, before being slightly modified in August 26, 2003 and in August 26, 2010.
This law has introduced, universal banking orthodoxy rules granting greater autonomy to the banking and financial system and total independence of the Bank of Algeria under the high authority of the president of the Republic, responsible for monetary policy, as separate from the Department of Finance under the Government, in charge of fiscal policy. In addition to its issuing of currency operations, the Bank of Algeria provides the conditions for an orderly development of the national economy by ensuring the stability of the currency and the functioning of banking in the prudential rules in line with international standards.
The Currency and Credit Act instituted the National Council of Money and Credit (CNMC), a banking commission and the Association of Banks and Financial Institutions (ABEF). This law marks a break with the old system of financing insofar as it substituted funding by the Treasury with that of financing by the banking system, establishing a separation between the real and monetary spheres.
Indeed, by devoting a certain degree of autonomy to the Central Bank, the Currency and Credit Act (CML) puts an end to the relationship between the Government (represented by the Treasury Board) and the Bank of Algeria responsible for setting all monetary objectives and policy instruments and this allowed Algeria to avoid one or two digit inflation.
Thus, under this Act, the Bank of Algeria has a mission of creating the most favourable conditions for the development of the national economy through monetary policies and Exchange, and to ensure internal and external currency stability in order to create a business climate conducive to savings and investment.
Foundation of the non-conventional funding as adopted by the Government?
Western Central banks have used these unconventional measures which may take the form of easing of certain standards of conventional monetary policy and massive injections of liquidity into the financial system in circumstances that justify their adoption, especially during the appearance of a risk of deflation, a stock market crash or bond, bankruptcy of a large credit institution and crisis of confidence in the financial sector.
Thus, the Bank of England launched in July 2012 the Funding for Lending Scheme (FLS) to encourage banks and building societies to lend more to households and non-financial private corporations. This has helped credit institutions to refinance loans in the long term by providing a wider range of collateral advantages in return.
This program has also inspired the Targeted longer-term refinancing operations (TLTROs) as one of the European Central Bank’s non-standard monetary policy tools. Specifically, the non-conventional measures are temporary monetary policy measures whose goal is the restoration of the transmission of the monetary policy and ultimately channels to bank credit and liquidity support on the money market. The non-conventional measures fall into three categories.
First, quantitative easing, (QE) are measures by which the Central Bank offers an unlimited amount of money to commercial banks. The saturation of demand for money of these must lead to what they spend surplus balances, that they grant again loans to households and businesses.
Second, measures of orientation of the future rate expectations are for the Central Bank to engage in the future path of rates contributing to lower interest rates in the medium and long term and to bring them closer to the main rate of the Central Bank. They take the form of explicit commitments to maintaining a very low level or zero rate for a significant period of time.
Third, credit easing measures that tend to bypass the blocking of credit caused by channel either by the phenomenon of ‘liquidity trap’, or tensions on some key segments of the financial markets. The Central Bank then acts as a ‘last resort’ by directly funding the economy. A de-facto relaxation of the eligibility criteria will lead banks to less hesitation in their risk-taking, and so to grant more loans to small and medium enterprises.
Unconventional financing has been used but in a structured market economies with potential for possible added value creation as in the case of growing and / or restructuring businesses or enterprises, and when traditional financing would not enable an enterprise to fully develop, or when funding is simply not available.
As a matter of fact, when an enterprise has assets and / or generates a cash flow, non-conventional financing options are also open to it, in addition to the traditional financing.
As far as Algeria is concerned, this type of funding must be closely supervised because of its having certain structural rigidities. If this funding is for any of the competitive productive sectors in terms of cost/quality, the eventual tensions in the short-term would be amortized by the positive effects in the medium-term due to the creation of added value.
In the case of the absence of a productive sector, of payments of wages without productive counterparties and the appearance of new speculative annuities by printing money, with the assumption of a $50/55 a barrel, we would have the following consequences,:
- A two-digit inflation and distrust on behalf of the public whom might take refuge in purchases and storage of gold, currencies, real estate, durable goods, etc. and expanding the informal sphere.
- A recovery required of banks interest rates to avoid bankruptcy.
- With two-digit interest rates that would block any productive investment.
- An equivalent drop in the employees and public service functionaries incomes whom might end up being halved in terms of purchasing power parity with possibly a further reduction of the middle class earnings all of which could lead to increased inflation with the risk of being caught in the non-ending spiral of social demand – rising wages – inflation – rising wages and inflation, and so on,
- An accelerated lowering of the value of the Dinar (DZD) in hard currency that is officially approaching the DZD200 a Euro on the “free” parallel market that is a deviation of 50% with the rising cost of all goods imported inflationary process.
Apart from all of the above, the question that arises is why did the current Government set a five-year period, for the transitional phase of the implementation of this policy whereas this Government’s life is most certainly 20 months, as a run off time to the presidential elections in 2019?
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