BY: Hana Saada
ALGIERS- The World Bank has released its latest report assessing the economic landscape of Algeria. Published on June 22, 2023, the report indicates that the Algerian economy is experiencing favorable conditions.
The World Bank’s document begins by reviewing Algeria’s economic situation in 2022 and then shifts its focus to the “Outlook and risks” section, where it emphasizes that non-hydrocarbon activities are expected to be the primary driver of growth in 2023. The report states, “The non-hydrocarbon sector should support growth in 2023, contrasting with the stability of hydrocarbon production.”
In the base scenario, the World Bank predicts that GDP growth will reach 1.8% in 2023, driven by a 2.2% growth in non-hydrocarbon activity and a 0.6% stability in hydrocarbon GDP. The report notes that the agricultural sector is expected to slow down due to low rainfall, which has caused significant delays in crop development, particularly in the country’s main agricultural regions.
Regarding energy production, the World Bank foresees an increase in gas production but a decrease in crude oil production. This decline is attributed to the reduction in production quotas implemented since November 2022 and further reinforced in March 2023, which came into effect in May. Despite this, the services sector is expected to remain the main contributor to growth.
From an expenditure perspective, the World Bank highlights that growth will be driven by strong private consumption and the recovery in investment, although net exports may experience a decline.
The report explains, “Private consumption should remain dynamic, supported by increased public spending aimed at preserving purchasing power, as well as activity in the service sector. The expected recovery in investment would be stimulated by the hydrocarbon sector, which would drive industrial activity in 2023.”
However, net exports are anticipated to slow down growth due to reduced hydrocarbon exports resulting from production quotas and an increase in imports necessary for investment and compensating for the drop in agricultural production.
The World Bank forecasts a rebound in agricultural and crude oil production in 2024, leading to an acceleration in growth. Assuming average rainfall levels and agricultural production in 2024, along with increased OPEC quotas due to the global economic recovery, GDP growth is estimated to reach 2.6%. The rise in exports and moderate growth in imports would help offset the slowdown in consumption and investment growth.
The report also suggests that despite the moderation in import prices, inflation in Algeria will remain high in 2023. The World Bank explains that the consumer price index is expected to gradually slow due to the delayed disinflationary effects caused by falling import prices and the appreciation of the Algerian dinar in 2022, particularly in import-dependent sectors such as agro-industrial and manufactured products.
The World Bank highlights the decision to grant the Algerian Cereal Office (OAIC) a monopoly on the purchase of domestic and imported wheat, along with the extension to rice and pulses imports. This move may limit price increases if OAIC’s production capacity can meet domestic demand. However, the report warns that low rainfall’s impact on agricultural production, coupled with the delayed effect of increased public spending and money supply in 2021 and 2022, could contribute to higher prices.
Title: Algeria Faces Increasing Pressure on Fiscal and External Balances in 2023, World Bank Warns
Algeria’s fiscal and external balances are expected to come under mounting pressure in 2023, as highlighted in the report by the World Bank. The country’s current account surplus is projected to shrink by 1.9% of GDP due to declining prices and volumes of hydrocarbon exports. Additionally, the average Algerian oil export price is predicted to decrease in line with international prices, while gas export prices may remain relatively high.
The decline in oil prices is anticipated to be accompanied by decreases in the prices of fertilizers and iron, which began towards the end of 2022. Simultaneously, imports are expected to resume, as falling global market prices are offset by increased Algerian demand, particularly for investment purposes and the supply of food products, according to the World Bank.
While import prices stabilize and the pressure on imports eases, along with an increase in oil production and sustained high gas prices, the current account is forecast to remain positive in 2024. However, the growth of hydrocarbon exports is expected to slow down in 2025, despite increased production, due to the ongoing rise in domestic consumption driven by costly energy subsidies.
The drop in hydrocarbon revenues coupled with a planned increase in public spending will widen the budget deficit in 2023. Nevertheless, the report suggests that this deficit will be partially pre-financed by the savings accumulated in 2022. The World Bank notes that in the base scenario, the decline in hydrocarbon export revenues will be partly cushioned by higher tax revenues resulting from inflation and increased dividends from the Bank of Algeria.
Although spending is projected to rise, driven by further increases in civil service wages and the higher cost of unemployment benefits introduced in 2021, the World Bank expects the overall budget deficit to reach 7.0% of GDP. To finance this deficit, domestic bond issues and Treasury savings at the Bank of Algeria, which reached 6.5% of estimated GDP over the last four quarters, can be utilized.
The pace of spending increases is predicted to slow in 2024 and 2025, and when accounting for anticipated revenue growth, the overall Treasury deficit is expected to stabilize around 6% of GDP. Public debt, on the other hand, is projected to stabilize at approximately 62% of GDP. The increase in the stock of public debt will be offset by the growth of nominal GDP, ensuring a stable debt-to-GDP ratio.
The World Bank report emphasizes the importance of economic diversification in light of the volatility of oil prices. Algeria benefited from the recent surge in oil and gas prices in 2022, which allowed the country to accumulate reserves, generate a trade surplus, and reduce the budget deficit. This enabled Algeria to mitigate the risks of sudden macroeconomic adjustments in the event of further price declines.
However, the report also highlights the need for sustained efforts to reduce imports and enhance economic diversification. While reduced imports have supported the current account balance and increased foreign exchange reserves, they have raised concerns about product availability and pricing. Furthermore, the report acknowledges that prudent spending policies and the accumulation of significant savings will be crucial in financing future deficits and avoiding reliance on the Bank of Algeria.
The World Bank notes that Algeria’s macroeconomic outlook remains highly sensitive to global oil prices, which continue to exhibit uncertainties. Factors such as the trajectory of the global economy, demand from major energy-consuming countries, supply from producers, and global hydrocarbon prices all contribute to the elevated level of uncertainty. This is evident in OPEC’s recent surprise announcement of production quotas in March 2023 to offset an unexpected drop in prices.
Besides, the Algerian economy is expected to face significant implications due to oil price fluctuations and climate hazards, according to the report. This latter highlights the importance of diversifying the economy, attracting private and foreign investment, and adapting the agricultural sector to mitigate risks and ensure long-term sustainability.
The World Bank’ simulation based on a barrel price of US$100 in 2023 suggests that Algeria’s current account surplus would reach 5.5% of GDP, along with a decrease in the budget deficit to 4.5% of GDP. These positive outcomes would allow for a faster accumulation of foreign exchange reserves.
Conversely, if the oil price drops to US$70 per barrel, Algeria could experience a current account deficit of 1.7% of GDP and a widening fiscal deficit of 9.5% of GDP. In such a scenario, increased import controls, spending reductions, and greater reliance on the domestic banking system to finance the deficit may negatively impact growth and inflation.
The World Bank emphasizes the importance of efforts to diversify the Algerian economy and exports. The Algerian authorities have implemented various measures to stimulate private and foreign investment, including a new law on hydrocarbons in 2019, the partial lifting of limits on foreign shareholding in 2020, and a new investment law in 2022. These reforms aim to improve the business climate and encourage the participation of the private sector in the economy, thereby reducing vulnerability to oil price fluctuations.
Furthermore, the report highlights climate hazards as a growing risk for Algeria and the region. Below-average rainfall since 2019 has had adverse effects on agricultural GDP, which contracted by 1.9% this year. Inflation for fresh agricultural products soared to 13.9%, driven by a substantial increase of 21.3% in fruit and vegetable prices. The period between October 2022 and February 2023 witnessed one of the lowest rainfall levels in 20 years, and while there was a moderate increase in March, agricultural production prospects remain below average. Prolonged low rainfall in 2023 and subsequent years could hamper the growth of the agricultural sector and contribute to inflationary pressures.
The World Bank warns that food inflation can have significant long-term effects, contributing to overall inflation in the MENA region and disproportionately impacting vulnerable households. It can increase food insecurity levels and have multigenerational consequences for children’s education, health, and future income.
In light of these challenges, the World Bank emphasizes the urgent need to adapt the agricultural sector, ensure the availability of sufficient food products through imports, and enhance the resilience of households to climate shocks. This can be achieved through targeted social protection and insurance measures aimed at the most vulnerable households.
The report concludes that pursuing reforms to improve the business climate and diversify exports is crucial for the sustainability and resilience of the Algerian economy. By reducing reliance on oil, Algeria can mitigate the impact of oil price fluctuations, while enhancing the agricultural sector’s capacity to withstand climate hazards will contribute to long-term economic stability and food security.
As Algeria navigates these challenges, concerted efforts by the government, private sector, and international partners are necessary to secure a prosperous and sustainable future for the country.
