The oil and gas sector has long been the backbone of Algeria’s economy, bankrolling the country’s regime while leaving it vulnerable to volatile markets. Despite the authorities’ stated aim to diversify the economy, analysts fear surging hydrocarbon prices will act as an impediment to reform.
Algeria marked 60 years of independence from France with pomp and circumstance on Tuesday, celebrating “a day of glory for a new era” with nationwide ceremonies and its first military parade in years – all financed by a timely gush in oil revenues sparked by the war in Ukraine.
The windfall has given much-needed breathing room to a regime that was recently rattled by a nationwide protest movement, known as the Hirak, that led to the 2019 ouster of Algeria’s longstanding leader, Abdelaziz Bouteflika.
Six decades after independence, it has also exposed the North African nation’s continuing dependence on hydrocarbons and its failure to master its economic fate.
Like other “rentier economies”, Algeria is especially exposed to volatility in energy markets. State coffers were depleted when hydrocarbon prices slumped between 2014 and 2021, depriving the regime of the revenue it traditionally relies on to loosen the purse strings and quell dissent.
The Russian invasion of Ukraine has reversed the recent trend, with high oil and gas prices replenishing the regime’s financial reserves after years of depleting them.
A threefold increase in oil prices year-on-year means Algeria is projected to rake in $58 billion (€55.6 billion) in hydrocarbon revenues in 2022, up from $34 billion (€32.7 billion) last year, according to the International Monetary Fund.
But even as buyer countries are accelerating efforts to wean their economies off oil and gas, Algeria has done little to reduce its dependence on hydrocarbons – leaving it dangerously exposed to global price shocks.
“Hydrocarbons still account for 95 percent of the country’s exports and more than 50 percent of the state’s budget,” says Alexandre Kateb, founder of The Multipolarity Report, a consulting firm.
Reforms in limbo
Prior to the latest surge in energy prices, Algerian authorities appeared to have acknowledged the need to rethink the country’s economic model. In September 2020, President Abdelmadjid Tebboune called for an “overhaul of the banking and fiscal systems”, promising to “open the economy to the world”.
The government has made progress in one key area, waiving some restrictions on foreign investment. It notably abolished the "51/49" rule, which prohibited foreign investors from holding more than 49 percent of shares in an Algerian company. The move marked a small revolution for a country long billed as a “closed economy”, where foreign investment pales in comparison with neighbouring Morocco.
Two years after Tebboune’s pledge, however, structural reform is yet to materialise and Algeria’s economy is still asphyxiated by familiar woes: an omnipresent bureaucracy, irregular taxation, the lack of an industrial strategy and a bloated public sector.
Human resources untapped
A sprawling nation that stretches from the Mediterranean to the heart of the Sahara, Algeria has considerable assets to diversify its sources of income. They include an abundance of natural resources and “an energy sector that could sustain the country’s reindustrialisation”, says Kateb. Algeria is also blessed with “exceptional sunshine”, he adds, providing ample scope for “the large-scale development of renewable energy projects”.
The Algerian government is also counting on a fledgling tourism industry to reduce its dependence on hydrocarbons, though the country has a long way to go to match its neighbours. The sector generates an estimated $300 million per year (€288 million) – a far cry from the $13 billion reaped by Morocco in 2019. Visa restrictions, a lack of infrastructure and prohibitive travel costs are just some of the factors keeping foreign visitors at bay.
Algeria also has vast and largely untapped human resources, particularly “a young population that is well educated compared with countries that have reached the same level of development”, notes Kateb.
It’s a view shared by economist Camille Sari, head of the Euro-Maghreb Institute of Studies and Prospects, who laments “a system of nepotism and privilege” that denies young graduates equal opportunities, “allowing the system to reproduce itself" and preventing the emergence of a true “meritocracy”.
“That too is a consequence of a ‘rentier’ economy,” adds Kateb. “This human capital ends up being marginalised because the sectors that could employ young graduates – like the tech industry, for instance – are insufficiently developed.”
According to World Bank figures, 32 percent of Algerians aged under 24 are out of work. In addition to the wasted talent, this widespread joblessness comes at a cost for the government, which this year began handing out a monthly allowance of 13,000 dinars (about €80) to unemployed youths, coupled with medical coverage.
Lack of ‘political vision’
While surging oil prices mean the government is once again able to apply such Band-Aids, experts have voiced concern that the short-term gush in revenues will make it easier for the autocratic regime to deal with any hint of popular discontent while failing to diversify the economy.
“It’s surprising to see that the authorities are not using these exceptional revenues to inject the surplus income into the real economy,” says Sari. “The real problem is the lack of political vision,” adds the economist, pointing the finger at widespread corruption and the military’s outsized role in the Algerian economy.
“That’s what happens when an economy is historically managed in a vertical, top-down manner. Changing this requires a proper cultural revolution,” says Kateb, calling for an overhaul of the system of governance and the revitalisation of the private sector.
According to Prime Minister Ayman Benabderrahmane, Algeria is on track to diversify its economy. “Non-hydrocarbon exports have reached their highest level since independence,” he told reporters earlier this year, noting that exports from sectors other than oil and gas had passed the $4-billion mark (roughly €3.8 billion) in 2021. The government is hoping to bring that figure up to $7 billion this year.
“The ball is now in the government’s camp,” says Kateb. “It’s up to them to prove they can use the windfall wisely rather than to buy some form of social peace and perpetuate the rentier model.”
This article was adapted from the original in French.
