Algeria: Seeking to diversify
Detailed reports from both a group of business leaders and the International Monetary Fund (IMF) have outlined steps Algeria can take to diversify the economy away from hydrocarbons. Indeed, local policymakers and members of the private sector have long said that for Algeria to truly develop, it must aim to become less dependent on energy revenues, which remain a key contributor to the economy.
According to the IMF, hydrocarbons revenues in 2011 accounted for around 40% of GDP, or some $189.3bn. It came as welcome news, then, when a detailed document published by the Director’s Forum (Forum des Chefs d’Entreprises, FCE) outlined 50 key measures the government and private sector should take.
Foremost to diversification efforts is the necessity to stimulate and support investment into the economy, as well as reduce the role of the informal sector, which undermines the proper functioning of the economy, the FCE said. Other measures included simplifying and improving the business environment and reorganising the institutional structure of the economy.
Moving away from public sector spending and investing instead in the development of small and medium-sized enterprises (SMEs) is the approach favoured by the forum. The government, the FCE suggested, should provide more incentives to private sector investors. By supporting greater private sector participation in the economy, the country would be able to boost its non-oil exports.
The FCE is not alone in wanting to see greater economic diversification. In January 2012, the IMF’s article IV report on the state of the economy said Algeria “remains very dependent on hydrocarbons wealth”. It suggested improving competitiveness, the business climate and the labour market, as well as instituting more ambitious structural reforms, to increase the role of the financial services sector.
The IMF also highlighted youth and female unemployment as areas of concern, despite total unemployment decreasing over the past 10 years. Unemployment for young graduates was around 21.5% and 19% for women. To combat this issue, the IMF recommends a review and reform of existing labour laws. Greater flexibility and reducing the costs of recruitment are two further measures supported by the report.
Activity on Algeria’s stock exchange is relatively low, and the government is already seeking to address the issue via a reform programme for its capital markets. In May 2011, a $5.1m scheme – with assistance from the UN Development Programme – was introduced to look at how to improve the current regulatory structure and incentivise more firms to list on the Algiers bourse.
It is a programme the IMF supports. The fund points to a lack of depth in financial markets: “The lack of a reliable credit reporting system in Algeria, compared with other Middle East and North Africa countries, is considered to be one of the main factors hindering access to finance,” the report stated.
A more private sector-led economy would not only move the country away from an overreliance on hydrocarbon revenues, but it would also help the state increase its income and balance its budget. IMF data puts the budget deficit at -4% of GDP and projects it to rise to -6% in 2012.
Although the country’s hydrocarbons revenues have benefitted from high oil prices, if expenditure were to remain at its current level, the size of the Oil Stabilisation Fund (Fonds de Regularisation des Recettes, FRR), established in 2000 to insulate the economy from oil and gas price volatility, would begin to shrink.
Civil service pay rises and social service programmes adopted in the 2011-12 budget have also increased total government expenditure. If this level of spending continued until 2016, the FRR would drop to half its 2010 level, according to the IMF.
In both the public and private sectors, greater economic diversification is the goal. One of the ways to achieve this, identified by both Algerian private company directors and the IMF, is to increase the role of the private sector in the economy. Most importantly, an expanded and diversified economy would provide the state with greater financial stability and further reduce its vulnerability to any future oil and gas price shocks.