World Bank Report on Algeria: The Truth Behind the Controversy

The latest monitoring report on the economic situation in Algeria by the World Bank proved controversial. Government representatives and media outlets objected to the findings published on December 22, writes our correspondent.

In the report, the World Bank depicts a gloomy situation of the economy in Algeria, which not only was hit by the pandemic but also seems held back by a lack of reforms. In addition, the revenues from the oil and gas industries are levelling off and the government is facing political and social tensions. Not to mention inflation, which accelerated sharply in 2021, affecting households disproportionately. Compared with Morocco and Tunisia, its neighbors in the Maghreb, Algeria is called upon to diversify its economy, which is heavily dependent on the oil and gas sector.

Hard hit by the Covid-19 pandemic, Algeria will need to urgently boost its economic growth. Due to the fall in oil prices, Algeria has been plunged into a permanent economic crisis since 2014, as oil revenues account for nearly a third of its GDP, 97% of export revenues and 70% of tax revenues. This dependence on the a segment that has remained intact for some thirty years has known its limits with the sharp decline of nearly 50% of oil prices in the second half of 2014, which saw the barrel of the black gold valued at between 60 and 70 U.S. dollars.

Economic and Political Crisis

To revitalize the sector and mitigate this decline in prices, the minister of energy at the time had announced a five-year investment program (2015-2019) worth 90 billion U.S. dollars for Sonatrach, the national company for research, production, transport, processing and marketing of hydrocarbons. But these provisions have not had the hoped for effect because the country is very dependent on its hydrocarbons and needs to sell the oil at around 110 to 120 U.S. dollars per barrel to ensure a macroeconomic and macro-prudential balance.

This economic crisis against the backdrop of falling oil prices is exacerbated by political and social tensions. In particular with the Hirak movement, which in 2019 managed to foment enough popular dissent to force the departure of President Addelaziz Bouteflika. His successor Abdelmadjid Tebboune hasn’t the full support either, with the Hirak movement demanding the creation of the second republic and the departure of dignitaries of the former regime.

Historically High Inflation Rate

Despite the controversy surrounding the publication of the report monitoring the economic situation in Algeria, the truth is that the country has reached a historic level of inflation, recorded in the first ten months of the year 2021. According to data provided by the governor of the Bank of Algeria (BA), Rostom Fadhli, the country’s inflation rate has risen to 9.2%. A record that corresponds to an increase of 6 percentage points compared with the year 2020 (3%). The surge in inflation corroborates the World Bank’s report. In its statement issued on January 7, the Bretton Woods institution suggested that the conclusions of its controversial report were consistent with the official data available in the note de conjuncture of the Bank of Algeria, published on December 22, 2021.

However, in order to provide an appropriate response to the aforementioned inflation, the Algerian president and his government have recently announced measures to remedy this situation. Thus, with the implementation of the new finance law of 2022, a reduction of the global income tax (IRG) for salaries and an increase in the salaries of civil servants are planned.

Need of Rapid Implementation of Reform Agenda

In its report, the World Bank pointed to the lack of a rapid implementation of a reform agenda. According to the World Bank, this will further weaken the country’s economy, which is struggling to recover from the economic consequences of the pandemic. It has aggravated the fall in the price of oil, which naturally pummeled the economy of this nation dependent on its hydrocarbons.

Significantly depreciated, the Algerian economy experienced a recession of -4.7% in 2020, after already weak growth of 0.8% in 2019. With the relaxation of containment measures and the recovery of hydrocarbon prices and production, Algeria has seen its growth recover. With a rate of 2.3% recorded in the first quarter of 2021, a new start was hoped for in this Maghreb country, especially for its hydrocarbon exports. They have increased significantly to reach 34.5 billion U.S. dollars in 2021 against 20 billion dollars in 2020, according to official figures provided by Sonatrach.

A Uniform Economy Compared With Maghreb Neighbors Morocco and Tunisia

Compared with its Maghreb neighbors, Algeria’s economy remains undiversified. It is economically fragile especially due to its heavy dependence on hydrocarbons. Algeria, the third-largest oil producer in Africa behind Nigeria and Angola, risks being hit by the Dutch disease if its economy continues its non-diversification dynamic. Indeed, oil and gas revenues carry its economy to the great detriment of other sectors that fall into oblivion and neglect and remain less competitive.

This economic structure led to an increase in the country’s imports, reaching 2,463 billion dinars (about 17 billion dollars) in the first half of 2021 against 2,130 billion dinars in 2020. One of the consequences of this increase in imports is a high inflation rate that affects the purchasing power of the population and ultimately leads to a poisonous social climate, accompanied by discontent in the streets and political and social instability, a situation that has prevailed in Algeria since 2019.

A trap avoided by its neighbors in the Maghreb like Morocco and Tunisia. Morocco has a liberal market economy diversified through the tourism sector (about 12 million tourists per year before the pandemic, generating some 7% of GDP), agricultural (12%), industrial (30%), fishing (1%) and services (50%). This diversification of the economy contributes to the control of the inflation rate, stable at about 2% in 2021, compared with the 9.2% in Algeria during the same period. Algeria has also recorded a higher inflation rate than its other Maghreb neighbor, Tunisia, which has stabilized at 6.2%. Despite its political instability since 2011, the beginning of the Arab Spring, outside the pandemic period, Tunisia has always managed to achieve positive growth rates. This is due to the diversification of its economic base, which is mainly driven by the agricultural sector (production of wheat, olives, dates, citrus fruits, etc.), mining, tourism (around 6 million tourists before the Covid-19 pandemic), and manufacturing industries.

With an economy less diversified than those of Morocco and Tunisia, Algeria’s massive dependence on hydrocarbon sales is a heavy burden. Aware of the country’s economic fragility, President Abdelmadjid Tebboune plans to undertake significant changes in the setup of the country’s economy, stressing that this almost total dependence on oil and gas rents is fatal for Algeria.