Oil, Gas Revenue No Substitute For a Real Algerian Economy

Article Summary
Al-Hassan Ashi, researcher at the Carnegie Middle East Center, claims that Algeria is in dire straits. Even with its oil reserves, the country is plagued by unemployment, low wages and a burgeoning foreign debt. The public has had enough. But how much longer can the Algerian economy rely on petrodollars before its reserves run dry?

In 1994, Algeria went from a socialist system to a market economy. Now, the country is one of the biggest Arab exporters of petroleum and natural gas, with the oil and gas sectors accounting for 60% of the country’s revenues. This is equivalent to 36% of Algeria’s GDP, or 97% of its export earnings in 2010.

However, Algerians do not directly benefit from their country’s huge oil revenues. In fact, no Algerian government has been able to deal with the economic and social crises plaguing the Algerian people’s daily lives, including high unemployment, particularly among the youth (21% of whom were unemployed in 2010); the rising price of basic consumer goods paired with an inadequate minimum wage and a housing crisis which triggered the 2010 protests.

Al-Hassan Ashi, head researcher at the Carnegie Institute, told As-Safir that “by the end of 2012, the hydrocarbon sector will account for one-third of Algeria’s GDP, 98% of its total exports, and more than 70% of the country’s revenue.” He added that “gas and oil revenues allow the Algerian government to essentially pay for social stability by subsidizing the prices of basic commodities, increasing employee wages, stimulating the economy and pumping tons of cash into infrastructure and public-housing projects.”

However, Ashi also said that “each successive government has failed to create the legal environment necessary for encouraging individual initiative and private investment. It has also failed to diversify the economy and stop depending on global oil and gas prices.” He argued that “Algeria’s failure to exploit the resources that they do have and to stimulate competitive economic activity beyond the hydrocarbon sector will expose the country to grave dangers in the future.”

Ashi warned that there would be consequences if “the price of oil suddenly dropped below $100 per barrel,” as this would prevent the government from maintaining its current policies. “If the government cuts public spending in order to reduce the budget deficit, this might exacerbate public anger and push the country toward social unrest. Even if the price of hydrocarbons remained at their currently elevated levels, Algeria’s oil and gas reserves could be exhausted within 20 years, which means that they must begin seriously planning for the post-hydrocarbon economy.” Notably, Algeria’s budget deficit totaled 4% of GDP in 2011, with foreign debt reaching $4.4 billion in the same year.

In the latest corruption index published by Transparency International in 2011, Algeria ranked 112th out of 183 countries. Ashi noted that in order to avoid the repercussions of the Arab Spring, the Algerian government “dramatically increased its public spending in order to reduce the widespread frustration caused by the government’s unconvincing political and economic performance.”

Under the Supplementary Finance Law for 2011, total government expenditures rose from $95 billion to approximately $120 billion, which equals 62% of GDP, according to Ashi.

Ashi believes that the government hastily created a policy for allocating funds, which reflected “a lack of foresight in addressing the Algerian economy’s real problems.” He explained that additional spending was primarily focused on “subsidizing the cost of basic consumer goods (such as wheat, sugar and milk), financing public-housing projects for both the middle and lower classes, covering government-employee wage increases and creating 60,000 new public-sector jobs.”

Ashi argued that these measures were inadequate, since “the seriousness of the situation in the medium term is reflected by Algeria’s continuing economic dependence on global oil and gas prices, as well as the obvious lack of a serious strategy for encouraging economic diversification.”

Found in: unemployment, oil and gas, oil prices, oil, economic, algerian gdp, algerian economy, algeria