Algerian Economy Stares into the Abyss

Massive protests against President Abdelaziz Bouteflika’s re-election for a fifth term in Algeria were precipitated by political and economic paralysis. Even with Bouteflika’s April 2 resignation, the oil and gas-export dependent economy is expected to worsen this year, pushing the country closer to instability.

The long dormant political activism awakened in Algeria in February 2019.

The long dormant political activism awakened in Algeria in February 2019. This North African nation has weathered one of the largest protest movements in its recent history since February 22, when thousands of Algerians marched en masse peacefully opposing President Abdelaziz Bouteflika’s bid for a fifth term, which was planned to take place in April. Bouteflika has since stepped down, announcing his resignation from office on April 2, but leaving only more uncertainty in his wake.

Emerging from the independence war with France in the 1950s and 60s and the ten-year civil war of the 1990s, the Algerian governing elite, the so-called le pouvoir (the power), has tightened its grip on political freedoms and dissent of the conflict-fatigued body politic. And the latter had largely resigned itself into a status quo. Notwithstanding the regime’s ostensible capitulation to the will of the people with Bouteflika’s announcement that he will not run pending a National Conference on Reform to be held supposedly some time in 2019, cracks are appearing in the regime’s control over the society. And it may not be as easy to contain as it was before.

The country’s law enforcement was able to quash the protests that erupted last time in 2011 over economic and political grievances. President Bouteflika managed to keep a lid on the brewing public discontent by offering sweeteners to prevent the spread of the Arab spring contagion. He supported the formation of more than two dozen new political parties. He increased public sector worker salaries and subsidies on essential food staples. He offered interest-free loans and opened thousands of new job opportunities in the public sector for the unemployed youth. Projecting himself as a paragon of peace and stability, Bouteflika has for years pushed the idea that his departure from power would return the country to the chaos of the “black decade” of the 90s.

Many Algerians see the incapacitated 83-year-old leader, who has been confined to a wheelchair since suffering a debilitating stroke in 2013 and can hardly talk, as an embodiment of paralysis of the political system and the failing economy. The stability that Bouteflika offered is now synonymous with the lack of progress and stagnation. Algerians, particularly the youth, want a real change in the country’s crisis-stricken economy, which is expected to get worse in coming years.

This time, Bouteflika’s regime cannot quiet the protesters with the same carrots it offered before, because it cannot afford it. Low global oil prices over the past four years have cut state revenues from oil and gas exports in half. Although oil prices recovered back up to a four-year high in most of 2018, they fell again by the end of November 2018 and remained at around 58 USD a barrel in the first quarter of 2019, which hurts the budget of oil-dependent countries, such as Algeria. 98 percent of Algerian export income, 70 percent of its tax revenue, and 50 percent of its gross domestic product (GDP) depend on oil and gas sales.

Low oil prices since 2014 have progressively increased the unemployment rate in Algeria.

Low oil prices since 2014 have progressively increased the unemployment rate in Algeria. Youth unemployment is at staggering 25 percent in a country where 70 percent of the population of 42 million is under the age of 30. “Brain drain” of educated young people is another problem. While the government provides generous welfare subsidies to its citizens, the state-controlled economy keeps salaries low across the board, which increasingly drives away well-trained young professionals in all sectors of the economy to other countries. Algeria’s private sector remains weak and salaries uncompetitive. The majority of the educated class does not see a better future in Algeria under the current economy, which the ruling elites–whoever they may be–are unlikely to be able or willing to change soon.

Despite the drop in oil and gas revenues over the past four years, government spending remains high. With expenditures exceeding revenue, the fiscal deficit is nearing ten percent of GDP and is likely to increase. Limited efforts to rein in on spending are insufficient due to fundamental problems in the economy, such as complete financial dependence on the oil and gas trade, massive subsidies, and the lack of industrial diversification.

At the same time, imposing austerity measures, for example, cutting subsidies to basic foods, fuel, housing, and public sector jobs, will likely spur more social turbulence during this volatile period. Therefore, with ongoing protests, there will be no drastic cuts in spending lest they galvanize more public anger toward President Bouteflika. Barring serious reforms in the near future, if global oil prices continue to remain way below 100 USD per barrel for several more years, the state coffers may run out of money.

According to the International Crisis Group, successive governments under Bouteflika failed on their multiple promises to carry out economic reforms, partly due to fears of causing instability in the wake of the civil war and economic downturn of the 1980s. Another reason for stalled economic reforms is that any bold change would go against special business interests, which benefit from the public sector and the state largesse. For years, vested interests have kept the country from implementing fiscal reform or privatization of state-run enterprises. However, business, as usual, may not last long.

The biggest reason to kickstart reforms should be the decline of the country’s fossil fuel sector. Without technological breakthroughs to extract oil and gas from more complex geological formations or without discovering new fields, these resources are estimated to last for only twenty to fifty years in Algeria. In addition, foreign investment in Algeria’s fossil fuel sector has fallen under the tough fiscal terms of the current hydrocarbon law. While a new law is in the works, it may be difficult to pass if the political situation deteriorates.

The country’s economy is bound to slow down further if the protests continue.

The country’s economy is bound to slow down further if the protests continue. And it is also likely to suffer now that Bouteflika has decided to step down because of the structural problems in the economy and global low oil prices. Algeria critically needs to implement a series of reforms for long-term sustainable growth. To begin with, that means reduction of the enormous public sector, expansion of the private sector, creation of favorable conditions for foreign investments, diversification of industries, and introduction of transparency into public finances. But that is easier said than done.

First, special interests behind Bouteflika’s regime do not have the appetite for these changes, which may be the source of their own loss in the end, because the status quo is unsustainable and dangerous. Second, reforms will be painful. Reforms will likely make a lot of people, especially, in the public sector–the country’s largest employer–unhappy. Third, it is even less clear now that Bouteflika has stepped aside what Algeria’s political future holds. Therefore, the political and economic situation in Algeria is likely to get much worse before it gets better.