Too Few Solutions from Algeria’s Leadership for Economic Woes

The economic news for Algeria, tied to its opaque political-business regimen, is hardly heartening. Despite the recent decree of yet another attempt at reform, the country remains stagnated within a system that inspires little confidence in international investors and drives away its talented youth looking for opportunities elsewhere.

Robert Looney in Foreign Policy, argues that the country has done little to a significantly change its business culture, characterized by an interlocking coterie of politicians and businesses that still regard foreign investment as a Trojan horse for breaking their stranglehold on the commercial life of the country. Worse still, the country “is perceived to be among the world’s 10 most corrupt.” Its indicators are all moving in the wrong direction as “Fiscal and trade deficits have shot up, international reserves are falling rapidly, and the currency has been devalued by nearly 30 percent.”

Similar negative outcomes are project for GDP growth, which will end up around half of last year, largely due to the over-reliance on all things hydrocarbon. Looney paints a damning picture. He asks, “Will the new strategy [New Economic Growth Model] be the stabilizing force the government needs? If Algerian history and international experience are any indication, the answer is no.”

He goes on to note that on critical indicators such as quality of governance, rule of law, control of corruption, government effectiveness, and regulatory quality, it ranks below all of its North African neighbors. Algeria is unable to mobilize its population of 40 million, shrinking foreign reserves now around $150B, and proximity to Europe and Francophone African countries to take steps as its neighbor Morocco has done to implement a more sophisticated and open investment regime.

Looney mentions that there are “too many vested interests with a stake in blocking economic, social and political reforms have been created. Since it appears that the new reform plan was designed precisely by such vested interests in the corrupt government inner circle, it is unrealistic to expect the plan to set off a virtuous circle of reforms.”

Downward Trends

Some indications of how far Algeria has yet to go were noted in an article in the Sada Journal. It says that “This new approach has failed to convince some Algerian economists, who insist the current system needs a wholesale transformation, including tackling the structural obstacles that deter foreign investors or the emergence of a dynamic private sector.”

ITs over-reliance on hydrocarbons has stagnated Algeria's development

Over-reliance on hydrocarbons has stagnated Algeria’s development

This recommendation flows from the assumption that needed reforms, which would, among other steps, shift trade and investment responsibility to technocrats, free the financial and monetary system from its political albatross, provide transparency to contracting and commercial laws, and accept international accounting and banking standards, would be forthcoming. Not likely.

The basic structure of the economy, under the new model, like Saudi Arabia, is meant to move from its dependence on hydrocarbons to a more diversified economy. While the kingdom has Prince Mohammed bin Salman as the cheerleader-in-chief for Vision 2030, there is no comparable leadership in Algeria. It is ironic that it hosted the most recent meeting of OPEC, which will only continue to make it difficult to wean itself away from hydrocarbons if the price of oil even incrementally rebounds, thus making it easy for the Algerian leadership to once again postpone needed reforms.

The latest figures from Algeria paint a very difficult lie ahead. According to BMI Research, using Algerian government sources, “Cuts in public spending, mainly affecting capital expenditure, and higher taxes and import duties will be negative for investment and consumption. While Algeria’s remaining fiscal buffers will help to delay a more dramatic fiscal and economic adjustment, the next few years are likely to see subdued growth and rising macroeconomic challenges.”

The problem with business as usual is broad and deep. For example, due to declining hydrocarbon exports, the trade deficit went from a $4.3B surplus in 2014 to a $13.7B deficit in 2015, with the rate continuing throughout 2016. As the BMI report points out, “With investment largely dependent on public spending, there are few other domestic sources to pick up the slack. Private investment has long been constrained by Algeria’s byzantine operating environment, marked by difficult access to credit and numerous regulations and time-consuming procedures.”

There can be little satisfaction to watching Algeria weaken itself by continuing to bring on its own debilitation by continuing to rely on inadequate assumptions for economic strategies. Even the agreement with China to build and run a new port project valued at some $3.5B will not alleviate the long term consequences of failing to restructure and relaunch its economy based on a globally competitive series of assumptions that takes advantage of the keen human resources in the country.




A recent article by a former deputy director of the IMF highlights the challenges the Maghreb countries face in energizing their financial sectors to promote large-scale and equitable economic development. Amor Tahari is not promoting wealth redistribution or onerous regulations but rather a freeing up and development of mature financial services to generate greater opportunities for more actors.

“Achieving higher and more inclusive growth in the Maghreb region in thus required to bring down the high unemployment rate, especially among youth, and to raise living standards…Maghreb countries have to accelerate their economic reforms in various areas, in particular with regard to their financial sectors.”

Mr. Tahari notes that although Morocco has the “most advanced and diversified financial system, all the countries in the region still need to further modernize, deepen, and regionally and globally integrate their financial markets.”

Morocco’s Central Bank Moves Ahead

As if on cue, the central bank of Morocco issued an update this week on the economy’s performance, which spelled out its assessment and proposed actions. The good news is that due to external factors such as the fall in energy prices, the inflation forecast for 2013 is down to 2.1 percent. There is a general consensus that good harvests and fewer energy imports will contribute to a 5-5.5 percent GDP growth rate. The not good news is that “the international environment was still characterized by a ‘continued worsening of economic activity and the persistently high levels of unemployment,’ particularly in the euro area.”

In response to the kingdom’s unemployment challenges, the “Bank Al-Magrib said it would implement a new program to encourage banks to lend to very small, small, and medium-sized enterprises, particularly industrial companies that are export-oriented due to a continued deceleration in non-agricultural activity and bank credit.” It is this latter issue of growing the economy in non-agricultural sectors with sufficient financial support that holds back broader growth in the region. Even this program “provides banks with liquidity collateralized mostly by private securities issues by such businesses.” This is part of the problem: what banks will make loans based on collateral provided by companies with unproven or marginal performance? It is a contradiction that Mr. Tahari notes that blocks diverse and inclusive growth strategies. He calls on Maghreb countries to “double their efforts to improve access to financing and make it available to a larger part of the population…”

Reforms Captive to Politics

As in the US and Europe, financial reforms often get caught up in the political dust-ups between and among political parties seeking to take advantage of the public mood to score points against their opposition.

In Morocco, according to an article in Al-Hayat and elsewhere, “A delegation from the International Monetary Fund (IMF) threatens to withdraw the $6.2 billion in loan guarantees earmarked for Morocco if the Moroccan government doesn’t announce a schedule to reform the compensation fund, which will cost $6 billion this year….The IMF…said that the financial situation and the overall economy were worsened by the government’s inability to stop the financial waste caused by political differences.” Morocco has already been downgraded from an “emerging market” to a “frontier market” on the MSCI Index, which may affect its ability to borrow internationally. Morocco needs to borrow $6-8 billion annually to financial some development projects and pay for some economic and social obligations.

While Algeria and Libya do not face a financial crunch due to their energy exports, their financial systems are seriously lacking in the infrastructure, systems, and regulatory environment that act to stimulate business and minimize risk. In Tunisia as well as Algeria and Libya, the financial sectors are paying the price for years of neglect.

For example, financial systems are dominated by government banks and heavy public sector presence in lending portfolios. Non-performing loans (NPLs) burden the liquidity of banks and there are few if any secondary markets for fixed income (bonds) and equity (stocks) products. Insurance similarly suffers from weak guidelines and, along with banking, will be affected by the coming implementation of Islamic banking.

Regarding the banking systems, Tahari proposes that “it is urgent to increase competition and openness in the banking system in most countries.” Allowing private banks to enter the market, increasing the scale of micro-financing and micro-lending, eliminating poorly performing state banks and their high ratios of NPLs, and promoting the growth of a range of financial services and non-bank financial institutions within the context of international standards and transparent regulations, will enable Maghreb financial sectors to be on firm ground for greater regional integration.

As Tahari concludes, reducing youth unemployment “will require achieving a significantly higher and more inclusive economic growth…[by accelerating] reforms to bring about considerably higher productive investment…[including] further financial development and deepening, as well as regional integration within the Maghreb Block.” If the Maghreb countries are to make good on their promises made during the Arab uprisings, key to their progress is a sound, vibrant, equitable, and proactive financial sector.