Agriculture, mining and industry offer clearest path for Algeria's economic diversification

Al-Monitor Pro Members

Francisco Serrano

Journalist and analyst specialized in North Africa

April 18, 2023

In a bid to diversify its economic revenue sources, Algeria has been attempting to raise domestic and foreign investment in non-energy sectors. The increase in non-hydrocarbon exports, which went from $1.7 billion in 2019 to $7 billion in 2022, suggests how other sectors of the economy are improving their performances and finding markets abroad. Authorities have set the target of reaching $10 billion in non-hydrocarbon exports in 2023. While this can be seen as an improvement, non-hydrocarbon exports continue to be dwarfed by the country’s exports of oil and gas, which accounted for $38.6 billion in 2021 and $60 billion in 2022. High energy prices and bigger orders for Algerian hydrocarbons following Russia’s invasion of Ukraine in February 2022 have allowed the North African country to muster vast financial reserves over the past couple of years. But to translate this current increase in revenues emanating from oil and gas into meaningful economic diversification would require addressing three longstanding challenges: easing investment regulations, reducing the role of the state in the economy, and bolstering domestic production.

Scenario 1: Collapse in energy revenues reduces economic support and political will to diversify.

A sharp fall in oil prices over 2023-2024 curbs the government’s ability to allocate financial resources to diversification. The government revives attempts to raise employment through statist policies, empowering state-owned industrial firms and the public banking sector. Private sector initiative is crowded out. Industry and agriculture will be negatively impacted by a strengthening of government controls over sector activity. The economy remains anchored to energy price fluctuations. The threat of social instability rises due to the inability of the private sector to create new jobs and lack of state budgets to sustain social spending. Non-hydrocarbon exports grow slowly over 2023-2025, but remain highly concentrated on semi-finished goods.

Scenario 2: Strong financial resources and private-sector liberalization expedite diversification efforts.

Geopolitical disruption pushes oil prices back into 2022 levels for a sustained period of time. Stronger foreign exchange reserves extend the window of opportunity for diversification policies to take hold. Allocation of financial resources to domestic production incentives encourages manufacturing and agriculture. Energy revenues extend the state’s margin to quell social discontent through spending. Some regulations improve the environment for private business operations in Algeria. But vested interests still drive policymaking in some sectors. Non-hydrocarbon exports continue to grow, and benefit from government-led export promotion efforts. A return to large-scale public infrastructure projects encourages construction materials industries and other domestic services. But government support still reaches out to other sectors through well-financed industrial support programs. Overall, non-hydrocarbon exports accelerate both in terms of volume as well as the number of product categories. Although high energy revenues often reduce a country’s willingness to reform, Algeria’s recent memory of economic crisis after the 2014 collapse of oil prices would likely keep some government policies tilted towards diversification.

Francisco Serrano is a writer and analyst who focuses mainly on North Africa. He has been published in several outlets, including Foreign Policy, World Politics Review and the Middle East Institute. His second book, "As Ruínas da Década," about the past decade in the Middle East, was published in March 2022.