Algeria

Plummeting purchasing power opens debate on the fate of oil and gas windfall revenues

The fall in oil prices in 2014 put the stability of the Algerian regime on the ropes. With an economy anchored on hydrocarbons and a repressive political model, Algeria entered a convulsive period that would lead five years later to the outbreak of the Hirak, a peaceful national mobilization spurred by the intention of the then President Abdelaziz Bouteflika to run for a fifth time in the 2019 elections. The demonstrators also demanded far-reaching reforms of the State.

The magnitude of the movement led to the dismissal of the veteran Bouteflika by the army. The regime had to act to maintain the status quo, even if nothing changed, as was demonstrated by the arrival of Abdelmadjid Tebboune as president after the elections. A prominent member of the ruling party and holder of several ministerial portfolios under the late Bouteflika, Tebboune used the COVID-19 pandemic to repress dissent and consolidate the new face of the regime. However, the delicate economic situation and the strong discontent in the streets raised fears of a new wave of protests.

Fears seem to have dissipated. At least that is the current perception of the Algerian leadership, which has witnessed an unprecedented increase in oil and gas revenues in recent months. As Russia's invasion of Ukraine sent prices soaring and accelerated Europe's energy disconnection from Russia, the continent is desperately looking for alternative sources to prepare for what is expected to be a difficult winter. Many have set their eyes on Algeria, such as Draghi's Italy and Macron's France, which have recently visited the Maghreb country in search of advantages and new gas contracts.

According to official data, Algeria's trade balance shows a surplus of $5.6 billion in the first half of 2022, well above the figures for 2021, which were limited to $1.34 billion. In this course, moreover, exports have grown by almost 50%, a level that favors the stabilization of foreign exchange reserves. Along these lines and according to the World Bank (WB), Algerian GDP regained the muscle lost during the COVID-19 crisis. In short, the wind is blowing in favor of the establishment. Not so for the population.

The strong increase in oil and gas revenues has not translated into social and economic improvement for Algerian citizens. This has been reflected, among other examples, in the exponential increase in the number of families who have applied for the purchase of school supplies for their children in installments after the start of the school year. Purchasing power has suffered as a result of the crisis, which has led many to question where the energy windfall is going. There are doubts.

In addition, Algeria's structural economic problems remain. The high unemployment rate, which stands at over 12%, galloping inflation or the exponential increase in prices, combined with the heavy dependence on hydrocarbons, threaten to break Algeria's period of relative growth.

Bouteflika's stay in power (1999-2019) coincided with stable gas and oil prices. This allowed the authoritarian leader to rule without being subject to the dictates of the economy, using income redistribution measures as a firewall to contain the outbreak of the Arab Spring in Algeria. Well into the course, his successor, Tebboune, had not suffered the same fate as a result of the pandemic and the growing instability in the Maghreb. However, the current president is trying to copy the 'Bouteflika method'.

At the beginning of the year, Tebboune, who is preparing for a second term, assured that the executive would put the economy at the center of its action. An increase in public spending was therefore expected after years of austerity encouraged by the International Monetary Fund (IMF), whose prescriptions were aimed at reducing public debt, which had soared to $65.54 billion. The result has been a drastic reduction of the State and a visible deterioration of public services, a source of social discontent.

During this period, the Algerian government has put in place a series of so far unsuccessful measures to contain the fall in purchasing power. Unemployment benefits for new workers, wage increases, withholding of basic tariffs or subsidies for certain consumer goods such as oil, sugar, milk or bread. The frustration in the streets, however, does not abate. The scenario is still worrying and most families barely have room for maneuver to face the coming months.

The WB director for the Maghreb, Jesko Hentschel, stressed in his latest report that, despite the apparent recovery of economic activity in Algeria, "challenges remain, aggravated by the high volatility of oil prices and the uncertainty of the dynamics of the global economy." To overcome this situation, the German economist recommended that the Algerian state involve the private sector in its efforts, which "will be key to stimulating inclusive growth and creating jobs".

However, the Algerian power elite controls the national economy. It dominates virtually unchallenged in all sectors, obstructing the development of private initiative and ultimately blocking the social elevator. Economist and president of Paris-Dauphine University, E.M. Mouhoud, describes the Algerian economic model as a type of "crony capitalism" in which the elites "reserve markets for themselves and prevent the emergence of private and independent competitors." “Inmarriage” and excessive bureaucracy make Algeria one of the most difficult environments in the world in which to establish and operate a business, according to Freedom House.