Things are bad in Algeria, and they will likely get far worse.
“[…] crunch point is approaching fast,” states a recent report from London-based financial analysis firm Capital Economics.
The problems stem from a multitude of factors including a weak oil price and rotten economic policies, which are both exacerbated by recent mass protests.
If the situation doesn’t change soon, then expect higher inflation, skyrocketing unemployment, and the likelihood of the government running out of cash within a few years, analysts say. In other words, Algeria is heading for something close to an economic Armageddon.
Here’s a quick recap on recent news that brought attention to the burgeoning crisis.
The country’s ruling president Abdelaziz Bouteflika, already in office for two decades, is seeking a fifth term via an April election. In turn, that prompted tens of thousands of Algerian students to take to the streets in protest, according to Reuters and other news agencies. The protestors were at it for days on end, the reports state.
The protests should not be a surprise to anyone, especially in light of the underlying economic hardship facing the country. The unemployment rate is already at 11.7%, but joblessness among the young is far greater. Algeria’s youth unemployment is a staggering 29% and has been high for years, according to data collated by Trading Economics. That matters a lot in Algeria where the population is young, with an average age of 28 years and half the population younger than 25, according to data from U.S. spy agency the CIA.
The economy slowed to a near standstill over the past half decade. Annual GDP growth came in at a paltry 0.8% in the most recent reading down from a robust 3.5% to 4% yearly rate as recently as 2017, again according to data collated by Trading Economics.
With those things as an economic backdrop, it should not be too startling to see tens of thousands of angry students massing on the streets, demanding a new leader.
Worse to come
What might shock some people is the high likelihood that the situation could deteriorate even further, and with some speed.
The problem is mostly the unsustainable policies pursued by the country’s government, but, in what amounts to a sad irony, those matters will be exacerbated by the street demonstrations themselves.
“A period of social unrest will simply add to the headwinds facing the beleaguered economy,” states the Capital Economics report. In other words, social instability will lead to more economic uncertainty which tends to put a damper on economic growth. It is something of a vicious cycle.
Big spenders in Algiers
The country’s government is massively overspending. The fiscal deficit will hit a staggering 10% of GDP this year, according to projections in a recent Capital Economics report. That’s huge for any country, but more so for a state that is relatively undeveloped.
Capital Economics also says the trade balance is set to hit a 12.5% deficit, meaning that the value of the country’s imports will exceed that of its exports by 12.5%. “Algeria is now running among the largest twin deficits in the emerging world,” a recent Capital Economics report says.
Both types of deficits can deplete the country’s foreign exchange reserves unless the government decides to tap the global capital markets. Sadly, Algeria’s leaders are opposed to doing that for philosophical reasons.
The result is that what money Algeria has in the bank (a.k.a. its foreign exchange reserves) is dwindling fast, now totaling half what it was half a decade ago in 2014, the Capital Economics report says.
Oil slump woes
What’s making the matter even worse is that the Algerian government relies heavily on oil revenue to fund its government spending, but the pullback in oil prices over the past few years means that energy-related revenue is shrinking.
Brent crude oil fetched more than $100 a barrel in mid-2014 versus around $66 recently, according to data from media company Bloomberg. The country produces approximately 1 million barrels of the energy a day, according to a February-dated report from OPEC (the Organization of Petroleum Exporting Countries.)
“As long as oil prices remain low, say well below $80 per barrel, Algeria’s economy will deteriorate,” says Garbis Iradian, chief economist for the middle east and north Africa at the Washington DC-based think tank The Institute of International Finance.
If the government spending continues at its current pace, and it likely will, then that means the massive fiscal deficits will continue and eventually, Algeria will run out of cash.
Recent efforts at slashing spending got delayed due to the forthcoming April election, and the student protests will slow down any attempts at fiscal prudence even longer, Capital Economics says.
Will the government ever get its act together? If it doesn’t, there will be a problem.
Continued spending at the current level (with low oil prices) “would deplete its official reserves by 2024, and lead to rapidly increasing public domestic debt,” says Iradian. He also sees unemployment rising even higher than its already elevated rate.
In other words, the country is on course to go broke within five years. Maybe the crunch will come faster if the oil price slips further, or slower if the government gets its act together with some new economic policies.