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Algeria’s New Economy Strategy Will Spark Unrest: BIM Research

Algeria’s New Economy Strategy Will Spark Unrest: BIM Research

Image from www.moroccoworldnews.com


Algeria is currently going through one of the hardest economic crises seen during the presidency of Abdelaziz Bouteflika, which began in 1999. For nearly 15 years, the Algerian government has been able to rely on comfortable oil revenues, leading to a financial ease that allowed it to maintain social peace and protect the country from the tumult of the Arab Spring.

But while barrel prices exceeded USD 110 per barrel in 2011, they began to plummet in the summer of 2014, sparking unease for this country, whose economy depends almost exclusively on hydrocarbons.

The country hopes to enforce tight austerity measures through its new economic plan, which mainly consists of borrowing money directly from the central bank. Having announced the plan September 17, the government frankly acknowledged the critical state of the Algerian economy, and of government finances in particular, laying the ground for making tough economic decisions.

In BMI’s analysis titled “Unorthodox Financing Plan Will Raise Political Risk,” the research firm explains that while this new economic model “will help keep debt levels manageable,” it is “not a long-term solution, [and it] carries risks in terms of political discontentment,” and will not allow the Algerian government to “successfully balance its budget by 2022, as it has set out to do.”

A man for hard times

Ahmed Ouyahia, who had executed a painful structural adjustment plan dictated by the International Monetary Fund (IMF) 20 years ago, was recalled last month to the post of prime minister. BIM Research describes the move as Algeria’s latest resort to “strive harder in cutting spending in a bid to narrow its costly budget deficit.”

The firm explains that Ouyahia’s reappointment was driven by the Algerian government’s need to implement this new economic initiative, which is already sparking great concern in the country. The 65-year-old official, known for his ability to handle difficult conjuncture, “will likely enact more rigorous cost-cutting than his recent predecessors, having presided over similar periods of tough economic measures previously.”

For BIM, while Ouyahia’s reappointment will give “renewed impetus to cost-cutting,” there will be limits to how swiftly the government can enact this without stirring up major public discontent.

Printing money

Amid the critical state of Algeria’s public accounts, Ouyahia will now be in charge of implementing the country’s new action plan, which provides for the use of “unconventional funding” by authorizing the Bank of Algeria to buy directly securities issued by the Treasury – in other words, to print money to eliminate the budget deficit.

But for BIM, this “proposed unorthodox plan could well lead to greater problems than it solves.”

“Rather than seeking financing abroad, as has been advised by the IMF, the government will borrow from the central bank under an amendment to the Money and Credit Act which will enable non-conventional financing,” states BIM, explaining that Algeria’s refusal to resort to borrow from international debt markets stems from a fear of undermining national sovereignty.

The firm expects Algerian public debt to climb to 31.4 percent in 2017 compared to 20.5 percent in 2016, even if the government adopts the strategy of seeking to avoid borrowing from private lenders.

While BIM is slightly reassured by the limited transitional period of five years in the first phase of this unorthodox financing policy, it nevertheless disagrees with “the government’s postulation that higher inflation – which generally follows from such a policy – will be successfully avoided.”

In fact, BIM expects that “central bank financing of the budget deficit will prompt a renewed sell-off of the currency, with attendant price pressures.” While the liquidity injection will help stroke the economy, it will however come at a cost that will hit lower-income brackets hardest, explains the firm.

High risk of political unrest

In light of these developments, BIM forecasts the rise of serious political risks. Driving austerity while borrowing from the central bank will lead to higher rates of price growth. Thus the population will feel the heat of inflation from both sides, leading to growing discontent and higher potential for street protests.

In fact, the firm expects these protest to get more violent as the presidential elections near, which will push the authorities to clamp down on unrest.

“This risk will be greater still, if there is a perception that planned privatisations as part of the new economic plan will benefit only a small number of oligarchs close to the political elite,” further warns the firm.

While voter apathy and the yoke of President Bouteflika and his ruling Front de Libération National (FLN) will squash any major challenge to the status quo, the firm however points out the rapidly-growing youth population that “has grown up under the present regime and cannot remember the years of conflict.”

“As such, if lower-income citizens take the brunt of Algeria’s economic readjustment once again, the government could start to lose significant support,” concludes the firm.

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