Algeria’s Foreign Exchange Reserves Volatility

World Bank’s Report on Algeria’s reserves going down ?

The World Bank released last July 2016 an alarming report on the Algerian economy, elaborating on Algeria’s Foreign Exchange Reserves Volatility continuing as a result of the durable drop in the price of oil.

1. Algerian foreign exchange reserves have been estimated at $56 billion in 2005, $77.78 billion in 2006, $110 billion in 2007. $138.35 billion dollars in 2008, $147.2 billion in 2009 to end 2010 at $157 billion, $188.8 billion in 2011, $190.66 in 2012, $194 billion in 2013, $179.9 billion in 2014, $152 billion by end of 2015, and according to the report by the IMF in April 2016, at $113.3 billion in 2016 (that covers 22.2 months of imports) and $92.3 billion in 2017.

Furthermore, the World Bank noted that Algeria’s budget deficit widened from 1.4% of GDP in 2013 to 15.7% in 2016 and that being massively dependent on oil exports, its revenues represented 95% and 75% respectively as based on a total production of about 1.1 million barrels per day, it exports 540,000 barrels, the production of crude oil and natural gas have regularly decreased in recent years, due primarily to delays to projects, difficulties to attract investment partners, of insufficient infrastructure and numerous other technical problems.

The period 2017/2020 does encourage little optimism since according to the World Bank, in a second report covering the greater MENA region, will not ant notable increase in the price of oil. “The oversupply phase might end and a rebalancing in the world oil markets starting at the beginning of year 2020, with prices to be around between $53 and $60 a barrel. It then follows that according to this report, the subsidies are costly and regressive with fuel and other subsidies representing over 12% of GDP. Algeria in order to achieve a balanced budget to the IMF requirements, would therefore need in 2016, a $87.6 oil price per barrel against $109.8 in 2015.

2. The conclusion of this very pessimistic report that many independent Algerian experts having undertaken similar analysis, predicted that “Algeria will be called to live a real financial and economic shock sometime in 2018, with its foreign exchange reserves at around $60 billion.” The Algerian Dinar (DZD) being correlated to more than 70% of these foreign exchange reserves, it follows that the deterioration of the terms of trade of Algeria has led to a nominal 20% depreciation of the DZD since the middle of 2014 and that inflation (including subsidised products) has increased to 4.8% in 2015. With the decrease of foreign exchange reserves, the Central Bank of Algeria will be compelled to continue to devalue the DZD to artificially cover the country’s budget deficit; the bond issuance aimed at the informal sphere having had mixed results as I assessed it in several of my contributions while contributing to help dry up all banking liquidity, with the risk of the use of the monetary programme of the Central Bank of Algeria, thus increasing the inflationary risk.

As I said in several of my contributions, less than $60 billion of foreign reserves, in the assumption of a non-promotion of rentier sections, the oil price constant, fluctuating between $40 and $60, 33% of the revenues of the national O&G SONATRACH from gas; transfer price of which will be even lower with the end of medium-to-long term contracts, the Dinar officially could be rated at more than DZD150/160 a Dollar in 2018 and in the parallel market moving toward the DZD200 a Dollar mark. It should be noted that for the period 1970-1995, the DZD was administratively rated, with little real meaning. Since 1994/1995 to 2016, the Dinar’s rating fluctuated between administrative and IMF guidelines inspired management, since the Algerian Dinar is not convertible. It was listed in 1970 at DZD4.94 a Dollar, at DZD5.03 in 1980 and at DZD47.68 in 1995, following the country’s debt rescheduling, and in August 8, 2016 to DZD121.67 an Euro and DZD109.77 a Dollar with its ‘parallel market’ rate going towards theDZD180 an Euro thus leading all economic agents, households and private operators to chase hard currency, gold or real estate so as to preserve the purchasing power of their savings.

3. This is not a matter of producing endless strings of investment laws, but rather to deepen comprehensive reforms, sine-qua-non condition for a productive economy per international values. Can Algeria continue to pay wages without productive counter-parties, as well as devote large amounts of subsidies and social, non-targeted and not aimed primarily at the poorest welfare ?

The situation is different from that of 1986 with this time, exceptionally high level of the official reserves, although declining and historically low level of external debt that make it today relatively easy to overcome these external ‘shocks’, provided however an urgent reorientation of the entire socio-economic policies were adopted.

This could be achieved only with precise strategic objectives, a language of truth, the return to confidence and morality above any reproach of those in charge. Indeed, local and central governance based knowledge economy, with institutions carrying out citizen-state symbiosis, and profound structural of all micro economic and institutional, admittedly difficult reforms, because moving large segments of the current system, should refrain from selling the monetary illusion of the 1970s. Not only that, Algeria today, with its enormous potentialities, should face up and address these many challenges and most probably avoid going back to the IMF by 2019/2020.

Dr. Abderrahmane Mebtoul, University Professor, Expert International, ademmebtoul@gmail.com

Translation from French by Microsoft / FaroL faro@farolco.onmicrosoft.com