Algeria’s economy in decline despite vast resources

Article Summary
Despite having vast natural and human resources, the Algerian economy is suffering due to poor management and ineffective policies.

Algerian Prime Minister Abdelmalek Sellal revealed weeks ago that his government had completed the draft of the 2015-2019 five-year plan. This comes as the 2010-2014 plan, for which the government allocated $286 billion, is nearing its end. In the absence of any official reports, conflicting numbers appear in terms of the achievements of the current five-year plan in the various economic and social sectors. It is possible, without delving into the details of the projects, to determine the course of economic growth in Algeria by monitoring the large gap between the country’s natural and human resources on the one hand, and the economic and living conditions of many households on the other.

Algeria is ​​Africa's largest country by area, and the tenth largest in the world. It has the third largest oil reserves in Africa — after Nigeria and Libya — and its proven crude oil reserves are estimated at 12.2 billion barrels. Moreover, it has the second largest natural gas reserves in Africa after Nigeria, and is ranked among the top 10 countries in the world when it comes to shale gas reserves. Algeria has a foreign exchange reserve of around $200 billion, an amount sufficient to finance Algeria’s imports for more than three years.

However, despite these striking numbers, the majority of Algerian households are facing an increasing number of social and economic challenges. Most Algerians complain about the decline in the quality of basic social services — including education, health care and access to housing. Unemployment rates are still high, reaching up to 21.5% among young people aged between 15 and 24, according to official figures. Moreover, most of the jobs created over the last decade are unstable, pay low wages and do not provide any social coverage.

Nevertheless, the volume of public investment in Algeria exceeded twofold that of neighboring countries such as Morocco and Tunisia over the past five years. However, Algeria failed to realize the same level of economic growth achieved by its neighbors. Compared with a sample of countries in the Middle East, Africa, Asia and Latin America, Algeria’s case seems to be an outlier, as it combines a high level of public spending and modest economic growth.

Corruption is an important factor in explaining the gap between the huge resources and the failure of these five-year programs to achieve real economic takeoff. In this respect, it is worth mentioning that in Transparency International’s 2012 Corruption Perceptions Index, Algeria ranked 105 out of 176 countries worldwide, and 12th among the 17 countries in the Middle East and North Africa (MENA) region.

Algeria ratified the United Nations Convention against Corruption (UNCAC) in 2004, with some reservations, and it promulgated a law for the prevention of corruption in the public sector. The state also established the National Body for Preventing and Combating Corruption the same year. However, it was not until 2010 that the Algerian president appointed the seven members of the body, which so far has yet to achieve any tangible results. Moreover, the World Economic Forum’s Global Competitiveness Report indicated that the judicial system in Algeria suffers from interference by members of the executive authorities as well as powerful companies and individuals. The report ranked Algeria 123rd out of 144 countries in terms of ​​judicial independence, thus lagging behind the entire MENA region, with the exception of Lebanon.

Successive governments have failed to break the Algerian economy’s excessive dependence on the global oil and gas market. Therefore, the energy sector still accounts for more than one-third of the gross domestic product (GDP) in Algeria, two-thirds of government revenue and about 98% of exports. Algeria's economy is considered one of the least diversified economies [in the world]. The share of the agricultural sector in the GDP is only 8%, alongside a 5% share for the transformational industries sector. Moreover, only a few sectors — which are driven by the proceeds of oil and gas — contribute to economic growth such as construction and public works and government administration consumption.

The Algerian government failed to create a legislative and regulatory environment that encourages initiative, private investment and economic diversification, which are essential for economic growth and stability in the long term. Most small and medium-sized private companies face market access barriers and limited access to funding from banks. Consequently, local and foreign investors refrain from launching industrial and service projects, which — if implemented — would promote the Algerian economy and improve its competitiveness. According to the latest report on ease of doing business issued by the World Bank, Algeria ranks 153 out of 189 countries — behind most countries in the MENA region.

It is difficult to develop the Algerian economy and enable it to meet the challenges of diversification, competitiveness and creation of decent jobs without ceasing to apply the methods of management of economic resources that the country has been accustomed to for a long time now. The five-year programs must represent a clear development strategy drafted by the private sector and civil society, rather than a tool to win over voters and distribute proceeds. The quality of public projects must be improved, mismanagement must be controlled and governance mechanisms must be improved by establishing supervision and accountability authorities. Moreover, parliament's supervisory role must be strengthened, and the latter must be enabled to set up fact finding committees following scandals of misuse of public funds. As for the judiciary, its independence must be enhanced, and it must be empowered to fully assume its role. Unless the government implements these reforms, the chances of economic takeoff will remain very slim, despite the magnitude of the resources.

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Found in: unemployment, oil & gas, natural gas, economic downturn, algerian economy, algeria
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