Algerian shortfalls on austerity weaken GDP outlook

Algeria’s economy is expected to slow as the commodities crunch tightens and the government rolls back spending.

Fitch’s BMI Research forecasts GDP growth this year to drop 15 per cent to 2.9 per cent, and by as much as 30 per cent next year compared with the four-year annual average of 3.4 per cent.

“Production cuts will weigh more heavily on the hydrocarbons sector, while government’s austerity measures will constrain government and private consumption, as well as public investment, which will have damaging effects over the longer run,” the company said in a report.

Algeria, like other oil-dependent nations, has grappled with the three-year low oil price environment. The Opec member has committed to production cuts of 50,000 barrels per day (bpd), but the lack of economic diversification will weigh on its economy.

While the government is, in some ways, making an effort to curb spending, it has had a knock-on impact on the non-oil sector’s growth. The IMF said in June that the non-hydrocarbon sector slowed to 2.9 per cent last year as a result of the spending cuts, while inflation increased to 7.7 per cent yearon-year in February.

Algeria is in a difficult position, walking a tightrope to keep social stability despite the necessity to curb spending and diversify its economy.

“The government has backtracked on some cost-cutting plans, boosting pensions for the second year running in June,” BMI said. However, the impact of lower subsidies and higher taxes will reduce consumption to 2 per cent this year, compared to the earlier five-year 4.2 per cent average.

The country’s president, Abdelaziz Bouteflika, replaced key cabinet members in May, bringing in new energy, finance and foreign ministers while also creating a new ministerial role to oversee the renewable energy sector.

This reshuffle meant that many items on the agenda went back to the drawing board, as is the case with the renewable energy sector that has been waiting in the wings to get off the ground. Renewable energy projects could help to decrease domestic hydrocarbon use in the country’s power generation sector, freeing up more oil and gas for export to Europe.

The shake-up was more than anyone expected, said Adel Baba-Aissa, the director for the boutique advisory and project development firm, Renewable Energy Partner (REP). The company has been operating in Algeria’s renewables sector since 2013, but the latest government changes have also persuaded REP to revamp its country strategy.