Algeria working to reduce imports and increase investment

Hydrocarbons production remains central to the Algerian economy, worth AD4.66trn (€42.87bn) in 2014, or 27% of GDP – down from 29.8% the previous year and a recent peak of 35.8% in 2011. Hydrocarbons also account for around 97% of export revenues and 58% of government income. However, the sharp fall in oil prices since mid-2014 has put substantial pressure on Algeria’s trade and fiscal balances, with average oil prices falling from $108.97 per barrel in 2013 to an average of just $58.23 by the first half of 2015, according to Bank of Algeria (BoA) figures.

Government Revenues

Government revenues from oil taxes fell from AD1.87trn (€17.2bn) in the first half of 2014 to AD1.25trn (€11.5bn) in the first half of 2015. This has helped to reduce the Treasury’s financing capacity to AD4.45trn (€40.9bn) in the second half of 2014, according to BoA figures, down from AD5.24trn (€48.2bn) six months earlier, while the fiscal balance was in deficit to the tune of AD902bn (€8.3bn) as of May 2015, compared to AD463bn (€4.26bn) at the end of the first half of 2014.

The IMF forecast a fiscal deficit of 13.7% in 2015, up from 7.3% in 2014 and 0.45% in 2013. Oil export volumes also fell in the first half of 2015, by 4.6% on the same period a year earlier. As a result, total hydrocarbon export revenues for the period fell to $18.1bn, a drop of 43.1% on the figure in the first half of 2014 of $31.79bn. The government expects energy earnings for 2015 to stand at $34bn, half the level in 2014, and Finance Minister Abderrahmane Benkhelfa in November 2015 forecast them to fall to $26.4bn in 2016.

Reducing Imports

The country aims to reduce its import bill and also attract increased foreign investment to boost local production of goods that have traditionally been imported. “The reduced oil price has been a wake-up call for Algeria and has pushed it towards diversifying away from energy sector and towards new industries as well as to attract more partners from abroad,” said Ismail Chikhoune, President and CEO of the US-Algeria Business Council. “The country can’t afford to keep on importing as much as it has been and needs to urgently move in a different direction and set up more local production facilities, especially as regards food,” he told OBG.

The 2016 budget is expected to include measures to impose import duties of 30% on computers, in order to encourage local assembly operations. The BoA’s decision to allow the dinar to devalue in recent months is also set to reduce imports, by making imported goods more expensive, although a large share of imported goods have been paid for in euros.

In August 2015 a new BoA regulation reducing the amount of credit banks can provide through foreign commitments to their capital came into effect. The amount had previously stood at twice banks’ capital, and was brought down from a level of four times their capital in November 2014. Algerian importers are obliged to finance imports with either documentary credit or documentary remittance, and cannot pay up front for purchases from abroad. The government is also treating imports more stringently, particularly for goods that can be substituted locally. “Customs are now applying import regulations and administrative requirements more strictly than in the past in order to reduce imports,” Markus Haas, commercial counsellor at the Austrian Embassy told OBG.

Fiscal Pressures

In January 2015 the government announced a public recruitment freeze in all areas except education, energy and health, as well as placing several tram and urban rail projects on hold. The 2016 budget includes AD222bn (€2.04bn) of subsidies for basic goods such as cereals, milk and sugar. However, in December 2015 Benkhelfa told local radio that the government intended to gradually phase out generalised subsidies over a period of two to three years by progressively raising prices towards market levels, while also providing additional income for poorer Algerians to compensate for the rises.