The government of Algeria pursues a new long-term approach to combat lower oil prices


The collapse in oil prices has weighed heavily on the Algerian economy, giving rise to wide twin deficits in the budget and current account. Given that the state is still heavily involved in the non-hydrocarbons sector of the economy, but depends on hydrocarbons exports for the bulk of its revenues, it is unsurprising that efforts to close the budget deficit – which have been under way since the second half of 2016 – have slowed growth. Nonetheless, moves to lessen hydrocarbons dependency have coincided with the private sector playing a much stronger role in the economy.

Algeria remains a relatively closed economy, with foreign investors barred from taking majority stakes in local firms or projects since 2008. A range of import restrictions have also been introduced in recent years, as the government attempted to boost domestic production capacity and reduce imbalances in the external accounts. Diversification has not, however, extended to the export sector, the vast majority of which is still accounted for by oil and gas. In mid-2016 the government introduced a bold medium-term budget framework that targets a balanced budget by 2020, alongside a new growth model setting out a strategic vision for economic development and diversification by 2030.

Structural Shift 

A long-term structural shift is already under way in the Algerian economy. Having stood at 42% in 2000, the private sector’s economic contribution grew to 70% of GDP by 2015, with economic output increasing four-fold over the same time-frame. Growth in the non-hydrocarbons sector was also steady over this period, maintaining an average of 6% in the decade to 2009, when it reached a peak of 9.3%, and recording an expansion of 5-8% from 2010 to 2015. Meanwhile, its share of aggregate GDP grew from 74% in 2000 to 85% by 2015. “In the past, there has been a very strong link between economic growth in Algeria and public expenditure, notably on equipment. That is why the non-hydrocarbons growth rate was relatively high, at around 6% per year over the 2004-14 period,” Djamel Eddine Benbelkacem, deputy governor and director of research at the Bank of Algeria, told OBG.

By The Numbers

Relatively robust growth in the non-hydrocarbons sector in 2014 and 2015, with gains of 5.6% and 5%, respectively, offset weakness in the still-dominant hydrocarbons sector, which contracted by 0.6% in 2014 before posting a modest 0.2% gain in 2015, according to the National Statistics Office (Office National des Statistiques, ONS). This allowed aggregate GDP growth to remain respectably strong at 3.8% in both 2014 and 2015, even in the face of lower oil prices, against which about 95% of exports are benchmarked.

Despite a moderately strong rebound in the energy sector in 2016, when it posted a 7.7% gain, 2.9% non-oil growth weighed on overall GDP expansion, which slowed to 3.3%, according to the IMF. The improved performance of the industry mostly achieved during the second half of 2016 was due to both a modest recovery in the oil price from cyclical lows, as well as increased output from the Tigantourine gas plant, which ramped up its production following a terrorist attack in 2013.

Meanwhile, the government was able to attenuate the impact of lower oil prices on its finances by drawing from the oil stabilisation fund to plug a widening fiscal deficit. This in turn supported investment and consumption in the non-hydrocarbons sector.

According to the ONS, nominal GDP reached AD17.4trn ($144.3bn) in 2016, equating to $3894 per capita. At AD7.5trn ($61.9bn), or 42.9% of GDP, the investment rate remained elevated in 2016, actually increasing from the AD7trn ($58.4bn), or 42.2%, seen in 2015. Investment advanced 3.5% on the year before in terms of volume, albeit slowing slightly from the 5.7% rise in 2015. Consumption, meanwhile, held up relatively well, with growth of 3.3% in 2016.

The hydrocarbons sector maintained strong results in the first quarter of 2017, posting 7.1% year-on-year (y-o-y) gains, and helping GDP for the quarter come in 3.7% higher than a year earlier. At 2.8%, the non-oil growth for the quarter was rather mode modest – a 1.2-percentage-point decrease on the same period of the year before. Nonetheless, it was the strongest quarterly performance for the non-hydrocarbons sector since the first half of 2016.


In its World Economic Outlook published in October 2017, the IMF projected that growth would slow in the second half of 2017 and in 2018, to come in at 1.5% in 2017 and 0.8% in 2018 amid stagnation in the non-hydrocarbon sector. In mid-2017 the government, however, projected GDP expansion of 2.3-2.7% for 2017 and 3% in 2018. In any case, the non-hydrocarbons sector is expected to continue to underperform, meaning that even if growth accelerates to 2.5% by 2022, as per IMF predictions, this would be below the rate seen in the first 15 years of the 2000s. With production in the hydrocarbons sector likely to progress only modestly over the medium term, prevailing global prices will be the key determinant in its direct and indirect contribution to GDP growth and public coffers. Higher prices – Brent crude was trading at $63 per barrel in mid-December 2017 – would help cushion the coming fiscal adjustment. In an economy where the state sector still predominates, this correction in public finances is likely to be critical to the performance of the non-hydrocarbons sector. The IMF has recommended that authorities take advantage of the country’s low national debt levels to move more gradually towards a balanced budget than current plans dictate and better minimise the impact on economic growth (see analysis).

Inflation & Monetary Policy 

While lower oil prices are at the root of Algeria’s current economic challenges, some policy responses contributed to a pick-up in inflation through to mid-2017, exacerbated by volatile prices of agricultural produce. Given modest growth and financial stability risks, the central bank has maintained interest rates, while also reducing the main discount rate for open-market operations from 4% to 3.5% in September 2016, even in the face of rising consumer prices. “Interbank rates are very close to the key 3% rate,” Benbelkacem told OBG.

A variety of other factors have contributed to consumer price growth, including the tightening of import restrictions to promote domestic production, the raising of the value-added tax (VAT) rate and subsidy reforms. Similarly, the near-30% devaluation of the dinar since 2014 has fed through to higher import prices. Having been as low as 2.9% in 2014, consumer price inflation averaged 4.8% in 2015 and spiked to 6.4% in 2016 before moderating to 3.1% by the end of July 2017.

The price of industrially produced food and beverages increased by 4.05% y-o-y in July 2017, almost cancelling out the price reduction in fresh produce, resulting in food price inflation being essentially flat for the year. In the year to end-July 2017 the price of manufactured goods had increased 7.1%, the highest of any category of goods and services included in the consumer price index. Meanwhile, annual price inflation in services was 3.31% for the period.

Continued moderation in price pressures through late 2017 and into 2018 as the economy weakens further should allow the central bank to maintain an accommodative monetary stance. However, inflation rose again in the second half of 2017, reaching 6% in October, mainly due to higher food prices.


As the international oil price collapse saw Algeria’s terms of trade deteriorate rapidly, the authorities responded by devaluing the dinar – which is in a managed float – to help mitigate the local-currency impact of hydrocarbons revenues. From levels around AD77:$1 in early 2014, the dinar surpassed AD100:$1 in July 2015 and has traded in a relatively narrow band from 104 to 112 since late 2015.

This means that the local currency had lost approximately 30% of its value over a two-year period before consolidating at the lower level. This consolidation partly came from central bank efforts to soak up excess liquidity denominated in dinars.

Depreciation vis-à-vis the euro – the currency of Algeria’s most important trading partners – was more limited, at around 8% over the same period. In its June 2017 Article IV consultation, the IMF suggested that this still leaves the dinar considerably overvalued, noting that the foreign exchange premium on the parallel market was around 60%, with local press reporting that the dinar reached AD200:€1 on this illegal market in September 2017. The IMF recommends that further sanctioned exchange rate depreciation should be part of ongoing policy given the current economic challenges, arguing that this could reduce demand for imports without price distortions caused by import restrictions. It could also ease the burden of fiscal adjustment by boosting the dinar value of hydrocarbons revenues. Unless there is a strong recovery in the international oil price, further dinar weakness is to be expected through 2018. Following trends of the recent past, this is likely to continue feeding into higher inflation as the cost of imported goods increases.


In 2016 oil and gas accounted for 95.2% of Algeria’s exports, this share having been as high as 97.3% in 2014 before oil prices fell. Currency devaluation has helped stabilise the dinar value of hydrocarbons exports and their contribution to the public coffers to a certain degree; however, the decline in both has still been significant.

The volume of hydrocarbons exports was relatively flat in 2015, and increased by 7.3% in 2016, but this was offset by the impact of declining prices. From $58.4bn in 2014, hydrocarbons exports fell to $33.1bn in 2015 and further to $27.7bn in 2016. The IMF projects a recovery to $35.7bn for 2017.

In terms of volume, exports of liquid petroleum have remained relatively stable at 1.2m barrels per day (bpd) over the 2014-17 period, with a modest increase to 1.3m bpd projected for the years to 2021. By contrast, exports of natural gas slipped slightly from 44.3bn cu metres in 2014 to 43.1bn cu metres in 2015, before recovering to reach 53.1bn cu metres in 2016. More modest increases are expected over the medium term, ramping up to 59.3bn cu metres by 2022.

The dollar value of non-hydrocarbons exports has also been in decline, from $1.6bn in 2014 to a projected $1.3bn in 2017, although the IMF has forecast a recovery to the 2014 level of $1.6bn by 2021.


Compared to exports, imports have adjusted more slowly, falling from $59.7bn in 2014 to $52.6bn in 2015 and $49.4bn in 2016. The IMF projects imports will remain flat for 2017, but will decline gently in subsequent years. In order to contain the trade deficit and promote self-sufficiency through import substitution and increased domestic production, the authorities have progressively introduced a system of import restrictions since December 2015, first by passing Decree No. 15-306. The licensing regime concerned only automobiles, cement and concrete to begin with, before being extended to include agri-food products. In May 2017 the regime was extended again to include additional product types – such as household appliances, mobile phones and cosmetics – with the government stating that restrictions could be further expanded in the future.

Administered by the Ministry of Trade, import licences allowing a certain quota of products to be brought into the country by economic actors are valid for a period of six months, after which they must be renewed. During the window opened by the ministry in the first half of April 2017, 1540 applications for import licences were received. These submitted dossiers have yet to be examined by an inter-ministerial commission.

Certain quotas have also been tightened, for example, the number of automobiles permitted for import was reduced from 90,000 in 2016 to 30,000 for 2017. To foster domestic production, the authorities have exempted auto parts destined for assembly in Algeria from import restrictions. It is hoped that such measures will increase domestic auto production from around 30,000 vehicles in 2016 to 40,000 in 2017. Likewise, large increases in domestic agricultural production are also foreseen for the coming years.

The system of import licences is not without side effects, however. The IMF noted in its most recent Article IV Consultation that they “should be avoided, because they add to inflationary pressures, and introduce distortions and rent-seeking opportunities that are likely to drive more activity underground”.

Balance Of Payments 

Having been broadly in balance in 2014, the combination of the sharp fall in the value of exports and the delayed response in declining imports meant that the trade balance swung to an $18.1bn deficit in 2015 before peaking at a deficit of $20.4bn in 2016. The IMF projected that it will decrease to $12.4bn by the end of 2017, and to $9.7bn by end-2018, before continuing a slower adjustment in subsequent years. However, during the first 10 months of 2017, the trade deficit narrowed by 34% y-o-y to $9.5bn, according to the Customs Agency.

The widening trade deficit was the key driver behind the deterioration in the current account deficit, which itself widened from 4.4% of GDP in 2014 to 16.6% in 2015 and 16.9% in 2016. Although the IMF estimates that the current account deficit will narrow to 11.9% of GDP in 2017 and improve further to 9.7% in 2018, the gap is expected to remain above 6% of GDP by 2022, giving rise to concerns about sustainability. Further currency depreciation would allow for a faster and more comprehensive adjustment in the external accounts.


The central bank had built substantial reserves up to 2014, meaning that they had scope to delay and alleviate the subsequent adjustment. However, the deterioration in the external accounts, coupled with central bank efforts to slow depreciation of the dinar since 2016, have seen a steep decline in foreign reserves. From $177bn and 33 months worth of imports at end-2014, reserves had fallen to $113bn by end-2016, and $102bn by September 2017. The IMF projects further declines in reserves in the years to come as the current account deficit is expected to remain sizeable; reserves could reach as low as $38bn and 8 months of imports by 2022.

Budget Deficit 

Algeria’s government depended on the hydrocarbons sector for 59% of its revenues in 2014, so public finances were severely impacted by the oil price collapse. The budget deficit doubled from 8% of GDP in 2014 to 15.8% of GDP in 2015 and declined marginally to an estimated 14% in 2016. Between its low national debt, the buffer built up in the oil stabilisation fund and special dividends from the central bank, the government was able to delay the fiscal adjustment, so that the impact on economic growth and living standards was tempered until 2017.

It is likely, however, that the drying up of excess liquidity in the banking sector, combined with a prolonged aversion to external financing, will make financing a wide deficit challenging (see Banking chapter).

In mid-2016 the government unveiled the new growth model for economic revitalisation and a medium-term budget framework covering the period to 2019. The target of achieving a budget surplus by 2020 was described by the IMF as “exceptionally ambitious” and is expected to feed through to a significant slowdown in economic growth, a near-standstill in the non-hydrocarbons sector to 2018 as well as higher unemployment (see analysis).

However, the government now expects a budget deficit of 9% of GDP in 2018, up from the 8% forecast for 2017 but down from 14% in 2016, the presidency said in a statement after a cabinet meeting in early October 2017 (see analysis).

Tax Reform 

Under the 2017 Finance Law the standard rate of VAT was increased from 17% to 19%, and the reduced rate raised from 7% to 9%. The zero-rate VAT was kept in place for staple products, though the law raised charges on items such as tobacco, alcohol and luxury vehicles. In addition to raising revenues, increasing VAT also has the effect of discouraging consumption, since it increases the cost of consumer goods. This in turn feeds through to inflation. Moreover, because the tax burden falls on consumers without taking into account their varied abilities to pay, such increases in indirect taxes can impact income distribution. When coupled with recent broad-based increases to the cost of living and efforts to reform the extensive system of price subsidies, this could potentially give rise to social tensions going forward if macroeconomic weakness weighs on living standards.


Consistent with the government’s deep involvement in the economy, the price of numerous goods and services is subsidised, which has replaced the system of direct price controls that used to operate in the 1990s. These not only distort economic activity, but also are a burden on public finances and, in the case of energy subsidies in particular, benefit those further up the income distribution. Facing the challenge of reducing the budget deficit, the government began to phase out some subsidies in 2016, which meant increasing the price of electricity, natural gas, petrol and diesel for the first time since 2005. Fuel prices were further increased in the 2017 budget, with the state announcing its intention to introduce a cash-transfer programme to reduce the impact of subsidy withdrawals on the most vulnerable population segments.

At the end of November 2017 Algeria’s lower house of Parliament approved hikes in subsidised petrol and diesel prices as part of the 2018 budget.

Upon taking the helm of the new government in May 2017, then Prime Minister Abdelmajid Tebboune announced that further subsidy reform was on the way. In order to deepen subsidy reform efforts and design an appropriate welfare alternative, the government is collaborating with the World Bank. The latter is expected to deliver its report on the matter in March 2018. Traditionally, interest rate subsidies provided by public banks have ensured that Algerian businesses can borrow at attractive rates. This is one of the reasons why the development of the country’s capital markets has been lagging (see Capital Markets chapter).

National Debt

At 7.7% of GDP in 2014, Algeria boasted a very modest national debt before the onset of the period of lower oil prices, though major widening of the budget deficit caused the national debt to nearly triple to 21% of GDP by 2016. While the rate of increase may be of concern, the level of debt remains relatively modest compared to peer countries.

According to government projections, gross debt is expected to fall slightly to 18.3% of GDP by end-2017 before increasing to 19.3% of GDP in 2018 and 19.6% of GDP in 2019. If the targeted budget surplus for 2020 is achieved in accordance with the medium-term budget framework, the national debt should begin to decline, with the IMF projecting that it will fall to 14.6% of GDP by 2022. The government continues to have an aversion to external financing, which accounted for only $3.9bn in 2016, up marginally from $3.6bn in 2014. This represents minimal growth given the rise in the overall national debt over this timeframe. Despite recommendations from the IMF to relax this constraint, there has been no indication that the authorities plan to adjust their approach.

Oil & Gas

After two difficult years of stagnated production in 2014 and 2015, the hydrocarbons sector enjoyed a rebound in 2016, as production surged by 7.8% to 152m tonnes of oil equivalent. This followed a slight decline of 0.6% in output in 2014 and a modest gain of 0.4% in 2015. This one-off surge in production – due in large part to the Tigantourine plant regaining full capacity, as well as new fields coming on-stream – is set to be followed by a succession of more modest y-o-y gains, with production ramping up gradually to reach 172m tonnes of oil equivalent by 2022, according to the IMF. Growth in the hydrocarbons component of GDP is therefore expected to slow to 1.3% in 2017, improving to 2.2% in both 2018 and 2019.

In an effort to accelerate production, Sonatrach, the state-owned oil firm, signalled in early 2016 that it was prepared to sell minority stakes in 20 oil and gas fields directly to foreign investors, following lack of interest in an earlier tendering process when oil prices were near cyclical lows. On top of attracting foreign funding to invest in new production capacity, such partnerships could also help bring the latest technology and know-how to the country. To generate greater interest among foreign investors over the longer term, it will likely be important to continue efforts to improve the business environment. This could be achieved through more attractive financial terms on hydrocarbons exploration and production contracts. Recognising this reality, in early 2017 the government raised the idea of making changes to the hydrocarbons law, which has been widely criticised for being too restrictive. The authorities announced in October 2017 that the first draft of the amended energy law would be ready by mid-2018.


Given the trying circumstances – the “BP Statistical Review of World Energy 2017” estimated that the country’s gas reserves would be depleted in 49 years, and its oil reserves in 21 years – the long-term sustainability of the hydrocarbons-driven growth model is questionable. The government’s unveiling of its new economic development plan in 2016 was thus both a timely response to the challenges posed by the oil price collapse, and an important strategic effort to engender a more diversified, dynamic and self-sufficient economy by 2030 (see analysis).


Increasing manufacturing capacity has been a particular government priority and appears set to remain so under the growth model. Public statistics from early 2017, however, signal that existing production capacity is still underutilised, particularly in the public sector. According to survey results published by the ONS, 88% of public sector firms and 56% of their private sector counterparts were using less than 75% of their production capacity in the first quarter of 2017. The survey highlighted some of the key challenges facing Algerian industry. For example, 56% of public sector companies and 18% of those in the private sector reported a lack of supplies that had caused work stoppages. Meanwhile, 44% of private sector businesses and 13% of those in the state spoke of electricity shortages.


The auto sector provides a concrete example of Algeria’s recent experience with import substitution policies. In August 2017 the new minister for industry and mines, Youcef Yousfi, told local media that the auto industry remains a government priority. “The sector constitutes one of the essential bases for the development of a diversified economy, which would help end our dependence on hydrocarbons,” he said.

The government has moved to limit the import of cars, granting import licences to 40 actors for just 25,000 vehicles in 2017, down from nearly 100,000 in 2016, according to local press. The number of imported vehicles fell by 78% in the first half of 2017. Since 2010 imports of vehicle parts that are used to assemble vehicles in Algeria have been exonerated from taxes and Customs duties. This incentive cost AD13bn ($107.8m) in 2016 and AD8.2bn ($68m) in the first five months of 2017 alone, suggesting that government efforts have been relatively successful in shifting the final-stage assembly of vehicles to Algeria. Renault has been operating in the country since 2012, while Volkswagen opened a plant in July 2017. Hyundai and its local distributor, the Takhout Group, have also operated a production facility in Tiaret since early 2017. Additionally, in November 2017 it was announced that France’s PSA Group had signed a joint-venture agreement with Algerian partners to manufacture cars in the country.

Despite improvements, the local content in vehicles assembled in Algeria, estimated at 15%, is still limited, leading some to label these as hidden imports. Moreover, with local production unable to meet the demand for vehicles, estimated at 400,000 annually, the price of cars has reportedly risen by 40% over 2014-17.

Economic Reforms

Challenges arising from the oil price fall have given fresh impetus to the authorities to pursue structural reforms that will further diversify the economy and promote a dynamic private sector. Initiatives include the adoption of a new investment code in July 2016, a new Customs code in December 2016 and a draft law on public-private partnerships that was being developed in 2017 (see analysis). However, further efforts are needed to improve the business environment: in the World Bank’s 2018 ease of doing business index, the country fell 10 spots to 166th place.

Foreign Direct Investment 

Since 2008 foreign investors have been restricted to a maximum stake of 49% in a company. This 49:51 policy has been criticised extensively, cited as one of the reasons foreign direct investment (FDI) flows to Algeria have diminished in recent years. According to the UN Conference on Trade and Development, FDI inflows averaged $1.59bn from 2005 to 2007, but had stagnated at $1.51bn by 2014. In 2015 the figure turned negative, at -$584m, and remained below levels of a decade earlier in 2016 at $1.55bn. As a percentage of GDP, however, FDI progressed from 12.6% in 2014 to 17.3% in 2016.

Although many foreign firms that were operating in the country were granted exemptions from the 49:51 policy, foreign companies generate just 2% of Algerian GDP, according to a study published by the Franco-Algerian Chamber of Commerce and Industry in June 2017.

“For investment consulting firms, there has been a drop of 20% between 2016 and 2017, which shows that Algeria needs to change its policy if it wishes to keep attracting foreign investments,” Mahfoud Kaoubi, founder and general manager of Ingénierie Financière et de Conseil en Management, told OBG.

Small Business 

Small and medium-sized enterprises (SMEs) continue to constitute the backbone of Algeria’s private sector, with 1m SMEs accounting for 2.5m employees in 2016. Although there is evidence that the rate of enterprise formation has picked up in recent years, it has still fallen short of targets. Scaling up remains a challenge for small SMEs, while accessing finance can also be an issue (see analysis).

Labour Market 

According to the ONS, the workforce stood at 12.3m in April 2017, of which only 20.6% were women. This reflects the sharp gender divergence in the labour force participation rate, which stood at 66.3% for men but 17.4% for women; the overall participation rate is 42%. In the six-months to end-April 2017 the number of people employed declined by 76,000. This decrease in was reflected in unemployment figures, which rose from 10.5% to 12.3%. The increase was particularly pronounced among young people, as the unemployment rate among those aged 16-24 grew by three percentage points to 29.7% over the period.


Although oil prices have recovered from cyclical lows and hydrocarbons production made great strides in 2016, this is insufficient to bridge the large twin deficits in public finances and external accounts. However, currency devaluation has helped mitigate increases in the current account deficit in local currency terms, and could play a further role in the future if the authorities were to further pursue this course of action.

Moves to achieve a balanced budget by 2020 are likely to be a key determinant of dynamism in the non-hydrocarbons sector in the medium term, with stagnant growth in this area of the economy likely to lead to further weakness in the labour market. In the long term, the structural economic transformation that is under way looks set to accelerate, particularly if the recent uptick in reform momentum can be sustained as the government implements its new economic model.


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The Report: Algeria 2017

Economy chapter from The Report: Algeria 2017

The Report: Algeria 2017

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