• Military Menu                       

• Introduction
• Systems
• Facilities
• Agencies
• Industry
• Operations
• Countries
• Hot Documents
• News
• Reports
• Policy
• Budget
• Congress
• Links

• WMD
• Intelligence
• Homeland Security
• Space

Algeria - Economy

Algeria's economy is struggling with low oil prices taking a heavy toll on its finances. Hydrocarbons such as oil and natural gas account for 60 percent of Algeria's budget and made up 97 percent of its exports. But with oil prices low and unlikely to bounce back for some time, Algeria's Central Bank expected its "black gold" to bring in only $34bn in 2015, down from $68bn in 2014.

Hydrocarbons income plummeted by 40 percent in 2015, and the effect on the Algerian economy would be colossal if prices do not increase soon as energy revenues represented 70 percent of the country's budget. The macroeconomic conditions are prone to a rise in popular discontent, especially among young people - among whom unemployment stands at 25 percent because of the establishment’s incapacity to diversify the domestic economy.

Following the sudden collapse in oil prices over the last six months of 2014, Algeria faced its greatest economic challenge since the 1990s, when it was torn apart by civil war. As a major oil exporter, Algeria built up a nest egg when oil prices tripled in the years leading up to the 2008 global financial crisis. In the wake of the crisis, and amid popular uprisings in the region, the government drew on its ample savings to increase spending on public sector wages, housing, subsidies, and other programs aimed at maintaining social stability. The government long had the objective of reorienting the economy away from oil and public spending toward a model that is more diversified and dynamic.

Economic activity has picked up in 2014, with real GDP growth projected to reach 4.0 percent following 2.8 percent growth in 2013. Inflation had decelerated sharply to 2.1 percent, thanks in part to tighter monetary policy. Algeria continued to enjoy substantial external and fiscal buffers, but threats to macroeconomic stability are growing. For the first time in nearly 15 years, the current account was expected to record a deficit.

The hydrocarbons sector is the backbone of the Algerian economy, accounting for roughly 60% of budget revenues, nearly 30% of GDP, and over 97% of export earnings. Algeria has the ninth-largest reserves of natural gas in the world (2.7% of proven world total) and is the fourth-largest gas exporter; it ranks 14th for oil reserves (2006). Its key oil and gas customers are Italy, Germany, France, the Netherlands, Spain, the United Kingdom, and the United States. U.S. companies have played a major role in developing Algeria's oil and gas sector; of the $5.3 billion (on a historical-cost basis, according to statistics gathered by the U.S. Department of Commerce, Bureau of Economic Analysis) of U.S. investment in Algeria the vast bulk is in the hydrocarbon sector.

Faced with declining oil revenues and high-debt interest payments at the beginning of the 1990s, Algeria implemented a stringent macroeconomic stabilization program and rescheduled its $7.9 billion Paris Club debt in the mid-1990s. The macroeconomic program was successful at narrowing the budget deficit and at reducing inflation from near-30% averages in the mid 1990s to almost single digits in 2000. The government reported an inflation rate of 5.7% in 2009 and an economic growth rate of 3.9%. The country's foreign debt fell from a high of $28 billion in 1999 to $4 billion in 2008. The spike in oil prices at various times this decade, along with the government's tight fiscal policy and positive trade surpluses based on oil exports, have led to a tremendous increase in the country's foreign exchange reserves, which reached nearly $145 billion in 2008.

The government seeks to diversify the economy by attracting foreign and domestic investment outside the energy sector but announced several economic policies in 2008 and 2009 that would strengthen Algerian Government control over foreign investment projects. Algeria adopted a "complementary finance law" on July 22, 2009, which imposed new restrictions on foreign investment, import companies, and domestic consumer credit. The law requires a minimum of 51% Algerian partnership in new foreign investments, a 30% Algerian partnership in all foreign import companies, and payment of all imports by letters of credit opened by banks. The Algerian Government has had little success at reducing high unemployment--officially estimated at 10% in January 2009, though international estimates put the figure much higher--or at improving living standards.

Policies needed to modernize the economy and increase growth are banking and judicial reform, improving the investment environment, partial or complete privatization of state enterprises, and reducing government bureaucracy. The government has privatized or closed some state-owned enterprises in certain sectors of the economy and allowed joint venture investment in others. In 2001, Algeria concluded an Association Agreement with the European Union, which was ratified in 2005 by both Algeria and the EU and took effect in September of that same year. The government continues to expresses interest in working toward accession to the World Trade Organization.

The global crisis affected the Algerian economy via the trade channel resulting in a contraction of demand of hydrocarbons and the fall of barrel prices starting in the 2008 second half. Economic growth was thus limited in 2009 by the decline in oil production, which had to be adjusted to foreign demand and OPEC quotas. Activity in the non-oil sector was dynamic, however, particularly in construction and public works, spurred by counter-cyclical policy. Despite the drop in oil production, oil revenues put into reserves in past years in the Revenue Regulation Fund (RRF) have enabled the government to pursue a vast public investment programme in infrastructure and housing. After the poor farm season in 2008, excellent harvests also contributed to the growth. But measures taken to limit imports have affected activity in the private sector and employment. And the banning of consumer credit has dampened household consumption.

The recovery in 2010 was driven by the rebound in hydrocarbon production which adjusts to a gradual increase in external demand. It could however suffer from a weaker than expected European demand. Activity in the non-oil sector was expected to grow at a respectable pace underpinned by public spending.

With falling oil revenues and expansionary policy, the public sector posted a deficit in 2009. With public spending continuing to support growth in 2010, the public finance remained in deficit, despite an upturn in oil prices. But, barring lasting collapse of prices, the RRF reserves were expected to suffice to cover financing needs. Algeria moreover has very limited public sector debt, which provides it with some room for manoeuvre. Despite the fall of exports, the external financial position remains solid. An active policy to reduce foreign debt with a prohibition on companies borrowing abroad and early repayment of the rescheduled debt has brought the corresponding ratios to very low levels.

In the economic policy arena, the adoption since 2009 of stronger protectionist measures on foreign direct investment and imports was prejudicial to the business environment in the near term and economic development in the longer term. The measures involving import restrictions could result in higher costs and longer supplies delay for companies.

Population growth and associated problems--unemployment and underemployment, inability of social services to keep pace with rapid urban migration, inadequate industrial management and productivity, a decaying infrastructure--continue to affect Algerian society. Increases in the production and prices of oil and gas over the past decade have led to foreign exchange reserves exceeding an estimated $150 billion in 2010. The government began an economic reform program in 1994, focusing on macroeconomic stability and structural reform that has met with some success in certain sectors. At the start of his third term in office, President Bouteflika announced that his five-year plan (2009-2014) would include an increase from $120 billion to $150 billion in spending to improve national infrastructure, create three million jobs, and build one million new homes.

Housing is woefully short, while unemployment and underemployment are endemic (at least 50 percent among young people by 2008). In a relatively new phenomenon, many young people are trying to flee the country, by small boat if necessary. The average age at which Algerians marry is now into the mid 30s - a vivid indicator of how unhappy the twenty-somethings are. Algeria's National Statistics Office places the country's unemployment rate at 10.2 percent, and estimated in 2010 that unemployment rates for people under 35 is around 86.7 percent. Algerian youth had a choice between death at sea and a slow, gradual death at home given the profound lack of opportunities in the country's stagnant economy.