Algeria prepares for worst as economic storm gathers

Algeria prepares for worst as economic storm gathers
Analysis: Algeria's government is staring an economic crisis in the face, and knows full well what can happen if it reacts the wrong way, says George Joffe.
4 min read
17 April, 2015
A failing economy is sure to bring fresh protests [AFP]

The true cost of Algeria's "brain drain" has finally been revealed by a new study made public earlier this week.

The Cread research paper showed that more than 270,000 Algerians with post-degree qualifications have left the country since the 1990s. France welcomed 75 percent of them, followed by Canada 11 percent and the UK 4 percent.

They now form one quarter of all the Algerian immigrants in the OECD region. Another quarter have a degree and the remainder having completed secondary school education.

France does not only welcome qualified Algerians; all told, there are 454,000 immigrants with higher-level education there but Algerians form the largest group, 31 per cent of the total.

The loss of qualified personnel is particularly marked in the medical professions, for there are 10,318 Algerian doctors working in France. That is equivalent to a quarter of all the doctors employed in Algeria itself where there are 12 doctors per 10,000 population, - less than half the ratio of doctors to population typical of OECD countries.

Qualified Algerians left the country originally because of the civil war in the 1990s but the flow has hardly fallen off since it ended at the beginning of this century, fifteen years ago.

It is a measure of the frustration many feel in Algeria at the sclerotic political system and the ineffectiveness of economic and social reform.

     Qualified Algerians left the country originally because of the civil war in the 1990s but the flow has hardly fallen off since.

It represents an enormous loss of qualified talent that the country desperately need as it tries to overcome the financial and economic disaster now facing it as a result of the recent collapse of oil prices.

IMF warns of crisis to come

The IMF has warned that Algeria's growth rate, which was 4.1 percent of GDP in 2014, would fall to 2.6 percent in 2015 before rising to 3.9 percent in 2016.

Yet, last October, it had forecast a growth rate of 4 percent for the current year, thus underlining it its latest forecast how dependent Algeria's economic performance is on energy prices - oil and gas sales generate 98 per cent of its foreign earnings.

The IMF also warned of a worsening current account balance, expected now to be -15.7 percent of GDP in 2015 and -13.23 percent in 2016, compared with -4.1 percent last year.

Algerian commentators expect that the worsening external account indicators to be reflected in declining foreign exchange reserves, which have already fallen by $15bn from their 2014 high of $192bn.

Unemployment, too, is expected to increase from an official rate of 10.6 percent in 2014 to 11.8 percent in 2015 and 11.6 percent in 2016.

Not surprisingly, the Washington-based institution recommends more reform and economic diversification, even though privatisation - its favoured policy - has been on hold in Algeria for almost a decade.

Government reaction

The Sellal government is well aware of the problems. At the end of last December, the prime minister had shocked public opinion by abruptly warning that public sector expenditure was to be sharply reined in and major projects with no direct public utility would be put on hold.

At the same time, he had promised that the government would not repeat the mistakes of 1986 when, in similar circumstances, the government had radically cut back the import bill. That led to a wave of discontent and, two years later, to countrywide riots and protests that acted as the precursor to Algeria's civil war in the 1990s.

Now the reality is beginning to bite particularly as last year's imports cost Algeria almost $60bn. However, given the prime minister's previous assurances, the government will have to rely on persuasion, rather than decree to ensure the austerity it needs.

     The government is well aware of the problems.

Last week, the finance minister called in the country's leading bankers to encourage them to refuse to pay for imported cars by banker's order. Car distributors, in short, are an easy target for new cars are after all accessible only to a moneyed minority which is politically marginalised.

Domestic funds, then, can be reserved for essential imports rather than to satisfy the whims of the well-off.

If measures of this kind did not produce the cutbacks in expenditure the government seeks, it would be forced to unilaterally impose expenditure restrictions, despite the danger of popular unrest.

And the crisis is now. Algeria's energy receipts in January and February fell to only $4bn - far too little to cover an import bill as large as last year's.

Nonetheless, Algeria's bureaucrats already know that they face as large a call on Algeria's foreign exchange reserves as they did in 2009 when the sub-prime crisis struck.

Then the reserves were halved and a similar scenario seems unavoidable today, whatever measures to restrain import costs are adopted.

Yet they must hope that voluntary restraint will work because of the political consequences if compulsion is used.

Algeria's ailing president has just completed the first year of his fourth (and last) presidential term and he will hardly want it to end in a storm of political protest.