Deficits become more common in Algeria

Up to and including 2013, Algeria had registered a positive current account balance every year since 1999, including very large surpluses in some years. The indicator peaked at a figure of 24.7% of GDP in 2006, according to IMF figures. However, the balance was transformed into a deficit of AD1.38trn (€11.4bn), or 4.4% of GDP, in 2014, helped by a decline in international oil prices in the second half of that year. As the oil price fall gathered pace, the deficit widened to a figure of $27.5bn in 2015, according to the Bank of Algeria (BoA), equivalent to 16.3% of GDP, according to the World Bank, by far the largest in Algerian history since at least 1980. Prior to 2014, the country’s worst performance had been a deficit of 5.3% in 1995.

As a result of the oil price fall, the value of hydrocarbons exports fell from $58.5bn in 2014 to $33.1bn in 2015, according to the BoA. The value of overall exports of goods and services fell as a result, from $63.7bn to $38.1bn, outpacing a fall in the value of imported goods and services from $71.4bn to $63.7bn. The net value of current transfers to Algeria also fell in 2015, from $3.22bn in 2014 to $2.56bn. While the oil price decline has been the immediate trigger for the deficit, its emergence reflects wider structural economic issues; even before the price of oil fell, the size of the country’s trade balance had begun to shrink.

Reactive Reforms

The deficit is partially impacted by the country’s real effective exchange rate, which in spite of recent declines in the value of the dinar – which is in a managed float – has nonetheless seen the continued existence of a large parallel currency market that functions at a discount. However, devaluation would not fully address the trade shortfall, with the IMF noting in its 2016 Article IV consultation that while further currency depreciation could help close the deficit, it should not be the primary tool used to do so, given factors such as the under-developed nature of the non-hydrocarbons export sector (meaning devaluation is unlikely to stimulate exports) and inflation risks.

Fiscal policy is likely to play a larger role in reducing the deficit, with the government looking at a number of potential policies to limit imports and drive up value-added domestic exports. Among the reforms under consideration include measures to lower domestic consumption of locally produced hydrocarbons and thereby boost exports, as well as increase downstream processing. Some measures to cut current spending have already been introduced, and the situation looks set to improve in coming years, though the balance will still remain very high by Algeria’s historical standards.

Closing The Gap

The IMF, having previously expected the deficit to rise to 17% of GDP in 2016, in its October 2016 update to the World Economic Outlook, revised this to 15.1% of GDP, representing a fall on 2015 figures. The fund expects this to fall further in 2017 to 13.7% of GDP. The IMF also believes the balance could return to a surplus by 2021 should the government implement an ambitious reform programme – though its current forecast is a deficit of 6.8% in 2020.

In the meantime, the deficit has been pushing down the value of the country’s foreign exchange reserves. Nearly a decade and a half of current account surpluses helped the authorities build up hefty reserves, which reached a peak of $194bn in 2013, or around three times the size of the country’s annual import bill, according to the IMF. However, with the government reluctant to issue external debt, the authorities have effectively been using the reserves to finance the deficit since its emergence. As a result, their value has been declining increasingly rapidly and is likely to continue to do so for some time if oil prices remain well below their pre-2014 highs. The size of reserves had fallen to nearly $179bn at the end of 2014 and stood at nearly $137bn as of mid-2016, and the government expects them to fall again to around $121bn by the end of 2016. Despite this, the current size of reserves remains comfortable, at equivalent to the cost of around two years’ worth of imports, and should remain so in coming few years.