Corrupt economy fuels Algerian revolt

The North African country’s rentier model is collapsing.

al-monitor Technicians inspect the Krechba gas treatment plant, about 1,200 kilometers (746 miles) south of Algiers, Algeria, Dec. 14, 2008. Photo by REUTERS/Zohra Bensemra.

Jul 9, 2019

Algeria’s Feb. 22 uprising against President Abdelaziz Bouteflika’s two-decade rule coincided with the exhaustion of an economic model based on the unequal redistribution of the country’s energy wealth. Even before the ailing leader’s bid for a fifth term triggered the current political crisis, some experts had been saying the country could experience an economic crisis in the next few years absent an unlikely long-term hike in oil prices.

The continuing overall drop on the world market has laid bare the Algerian economy’s structural weaknesses. With hydrocarbon exports still making up more than 30% of the economy absent any real effort at diversification, Algiers has been printing money for the past two years: From late 2017 through January 2019, more than 6 trillion dinars — $50 billion — have been put on the market.

The current financial morass can be traced to the start of the Bouteflika era in 1999, which coincided with a steep hike in oil prices. By 2013, foreign currency reserves had reached $193 billion. But poor economic choices have squandered this manna: Algeria, long wedded to its own version of socialism, began flirting with a unique form of crony capitalism that some experts have qualified as large-scale economic crime.

One of its main instruments has been the National Investment Council created in 2006 at Bouteflika’s initiative to oversee projects worth more than 1 billion dinars (currently $8.4 million). Instead, this political-bureaucratic body emerged as a key player in the country’s corruption.

Four months since the start of the popular revolt, many of the main actors of Algeria’s private-sector economic elite that emerged under Bouteflika are in prison. They join two former prime ministers, Ahmed Ouyahia and Abdelmalek Sellal, charged with a litany of crimes, including corruption, abuse of power and squandering public goods. Seemingly every day, another business or public official lands in jail.

In many ways, Algeria’s transition to a market economy has taken on mob-like qualities. The new oligarchs owe their fortune to their proximity to power rather than any particular managerial skill. And now the country’s new rulers are cleaning house.

Businessmen such as Ali Haddad and the Kounicef brothers — Abdelkader, Reda, Karim and Tarek — have been arrested for their close ties to the Bouteflika clan. Even the president's critics are not immune: Issad Rebrab, Algeria’s richest man according to Forbes with $4 billion in the bank, is now in prison in an overbilling scandal that many see as payback for his cozy ties with Algeria's military and security services in the 1990s. With these arrests, an entire economic system is reeling.

In mid-June, the government of Prime Minister Nourredine Bedoui announced that the economy had lost $1 billion because of the uprising. Some experts are skeptical. “How can a few days of strikes in the state-run industrial sector cost $1 billion when the entire sector [both public and private] only produces $7 billion to $8 billion per year?” asked University of Algeria management and economy professor Mohamed Cherif Belmihoub. “That’s a mind-blowing estimate.”

Belmihoub, however, does believe the ongoing protests have had a negative impact on investment, credit financing and new projects in the absence of a road map to a negotiated end to the political crisis. Meanwhile, financial expert Raif Mokretar Karroubi said the country’s new leaders have yet to take stock of the severity of the situation that involves “frozen salaries, crumbling demand, layoffs and other consequences that we have already suffered in the past and do not wish to relive.”

Indeed, economists estimate that the country has seen no new foreign investment since Feb. 22 as political instability has only further harmed the country’s reputation for endemic corruption and lawlessness. Since 2014 and the fall of oil prices, Algeria has struggled to attract foreign investment outside of the hydrocarbon sector. And even there the situation is grim.

National energy regulator Alnaft’s bids to sell oil and gas concessions have fallen short, in part due to security concerns and a legal framework that bars foreigners from owning more than 49% of Algerian businesses. But experts argue that it is investor confidence that is lacking rather than specific legislation.

Indeed, the country’s public spending spree has done little to prevent a surge in joblessness (13.7% predicted for 2020 versus 11.7% in 2018) while jacking up inflation (from 4.3% in 2018 to 6.7% in 2020) and the public deficit. Credit rating agencies have taken note, with Moody’s anticipating a “long period of uncertainty” in the wake of the February revolt and adopting a “wait and see” attitude to investment.

The setbacks come as Algeria continues to sit on about 1% of the world’s oil reserves and 3% of natural gas production. Some 57 years after independence, the country’s economy remains heavily dependent on energy exports and subject to the volatility of the global market.

A new law on foreign investment in the hydrocarbons sector, although largely finished, remains blocked, probably until the election of a new president. Its main aspects have left energy experts skeptical, as has the purchase of Texas-based Anadarko’s African assets by the French company Total. The company’s Algerian operations amount to about 260,000 barrels a day, or more than a quarter of Algeria’s crude oil production. Algerian authorities had threatened to oppose the deal before saying they were looking for a compromise to preserve the interests of national energy company Sonatrach while seeking to “maintain good relations with foreign partners.”

One of the few certainties in the energy sector has been the renewal of long-term contracts with Spain and Italy. Italy’s ENI and Sonatrach have signed a deal to continue to provide Italy with Algerian gas until 2027. Another contract, with Spain’s Gas Natural Fenosa, will last until 2030 (Spain is Algeria’s second-largest gas client and relies on the country for 55% of its needs).

This rare bit of good news doesn’t change the fact that Algeria’s rentier model has reached its limits. Since Feb. 22, the entire political system has been paralyzed. As a result, the economy’s structural deficiencies are more clogged than ever.

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