This two-hour bomb that threatens the Algerian economy

“Like the two-faced Roman god Janus, Algeria’s financial system hides two ticking time bombs, each equally dangerous to the country’s future: insane subsidies that already account for a good quarter of GDP, and a growing budget deficit. more and more, close to the same weight”. Jean-Pierre Sereni, journalist, former director of Nouvel Economiste, former editor-in-chief of Express and author of several books on the Maghreb, the Gulf… Orient XXI”, a reference magazine in the Arab world. This means that a man knows his element well.

Moreover, these are the realities that international financial institutions, especially the World Bank and the International Monetary Fund (IMF), are constantly warning about.

In the article, “This Fiscal Cancer That Shakes Algeria,” the author analyzes the weight of subsidies weighing on the Algerian economy and the worrisome budget deficit that they have contributed to the expansion of Algeria’s coffers to alarming and unsustainable levels.

First, social transfers that flow subsidies to the state budget. In 2022, the government had planned to allocate $17 billion to them, before that amount was long gone due to rising prices.

For 2023, subsidies will account for 25% of the country’s GDP, with recorded subsidies of 6,000 billion dinars, or about $40 billion, for an estimated GDP of 24,000 billion dinars ($162.53 billion). Which is just mind boggling.

However, in November 2021, the Algerian parliament passed a financial law to end subsidies for 12 consumer products (flour, bread, semolina, packaged milk, soybean oil, drinking water, gasoline, diesel, butane gas, LPG, electricity). and town gas).

However, like the previous governments that ruled the country, the governments of President Tebbu are only engaged in buying social peace with subsidies, paying little attention to the economic development of the country. Moreover, the “social” State is regularly invoked by President Tebbu and his ministers as an argument to justify the expenditure of huge resources and to justify the lack of investments capable of putting the country on a growth trend.

This indicates a lack of strategic vision among Algerian leaders and explains why every drop in the price of a barrel of oil plunges the country back into a sharp economic and financial crisis.

However, by neglecting to invest in the country’s economic development, they are putting the future of the country and the youth at stake. A young man who only cares about immigration and knows that the future will be uncertain as long as the military is in charge in the shadows.

Later, despite increased revenues from hydrocarbons, which account for more than 45% of budget funds, along with comprehensive subsidies, the budget deficit has reached alarming levels. And this is not only under the influence of social transfers. Some budgets blew up without explanation. This exceeds the budget of the Ministry of Finance, which is 3,704.85 billion dinars, and yet in 2023, an increase of 90% compared to 2022, which is 2,486 billion dinars.Algerian dinar. “No one knows what it is for, especially since the new introduction of the finance bill may re-introduce costs previously hidden elsewhere into the Ministry of Defense budget. To these are also added the purchases of arms, the amount of which has never been disclosed,” emphasizes Jean-Pierre Sereni.

This is not without mentioning the opacity surrounding certain headings of the budget, which accumulate large sums. For example, let’s note that the financial budget hides a large amount that has not been determined, in other words, 2486 billion dinars that have not been distributed. An amount strangely equivalent to the defense budget.

Thus, these two ministries account for a total of 6190 billion dinars or 45% of the state budget’s expenses! A unique situation in the world.

As a result, if we take into account the budgets of Education and Higher Education ($1707.78 billion), Health (702.24 billion dinars) and Labor, Employment and Social Security (1021.42 billion dinars), we understand that the state has invested a lot of money in the economy. does not give development and construction of basic infrastructures that can contribute to the development of the country. Moreover, despite the financial crisis caused by rising hydrocarbon prices, which account for 95% of the country’s export earnings, many projects that have been announced for years are still in the pipeline.

In the 2023 budget, the budget deficit is 6,586.3 billion dinars or 44.58 billion dollars, which is 23.7% of GDP. “This rate is huge, unprecedented or almost outside of failed states in the world,” Sereni said.

As a result, the private sector finds it difficult to develop. Moreover, “the few non-hydrocarbon exporters the regime boasts of enjoying such cheap access to energy may rightly wonder: wouldn’t it be better to export the fuel directly?” amazes the author of the article.

After the country’s sovereign wealth fund, the Fund for Revenue Regulation (FRR), spent all the resources it collected between 2002 and 2023 to finance budget deficits between 2014 and 2018, it forced governments to resort to this method until it ran out. “Unconventional” financing (“printing money”) to finance the budget deficit must be a solution to deal with the current government’s declared deficit for this year. In any case, oil will not be enough. According to IMF projections, Algeria will reach a balanced budget in 2023 The average price of oil should be 150 dollars/barrel for 2018. However, even at the height of the Russia-Ukraine crisis, a barrel could not come close to this level, which it never did.

This means that the deficit will be a cliff. Algeria’s “welfare state” rests on three pillars that can no longer stand: the state budget, Sonatrach and public banks. With social transfers, spending allocated to the Ministry of Defense and recorded in the strictest secrecy, the Treasury is unable to cope with the country’s abysmal budget deficit.

As for the state’s cash cow, Sonatrach, it is currently benefiting from a favorable trend in oil prices, but is investing little at a time when many of its oil and gas wells are in decline. It continues to sell 40% of its production in the domestic market at the lowest prices, which wastes the country’s resources. The rich benefit more than the poor from these fuel and gas subsidies. It’s just that the company is struggling to invest because of costly subsidies, and it won’t be able to meet the demand to double production this year, as the authorities want.

As for the state-owned banks, the financial arm of the state, they suffer from a lack of liquidity because Algerians do not trust them and prefer to hoard their savings. A situation where President Tebbounu, during his last visit, asked Algerians to stop hoarding by placing their savings in the country’s banks. But the population is not deceived. These banks, which finance real estate and some industrialists close to the regime, are structurally fragile. In order to pay the debts of the state institutions to the state banks, i.e. the debt of 14.22 billion euros, the state resorted to printing money in the amount of 2100 billion dinars. This “threatens the country’s monetary stability, puts public finances at great risk and undermines the Bank of Algeria’s ability to finance the national economy.”

Last November, the IMF also warned of gray risks hovering over the Algerian economy, stressing that “strengthening the links between the balance sheets of the state, public companies and public banks could pose risks to financial stability and debt sustainability.” .

The worst part is that this welfare state does not benefit everyone and is not sustainable. By allocating a large part of the budget to subsidies and defense, the state forgets about investments in social sectors. “This abnormal situation prevents the state from equipping the country with schools and hospitals, the national hydrocarbon company from searching to replace depleted deposits, and banks from financing promising entrepreneurs,” the author explains.

Furthermore, despite the subsidies, “the population, especially outside the big cities, suffers from shortages, delays, price hikes and, as a bonus, unprecedented poverty due to system failure.” And this fosters a helping mentality among Algerians, when the state really plays its role as a growth stimulator and pays civil servants decent salaries and pensions. This is far from knowing that “900,000 pensioners benefit from less than 40 euros per month”.

Thus, according to Jean-Pierre Sereni, this situation is not sustainable. “Inflation, which is the most expected result of this, is not yet visible in the statistics. Price growth – even in 2022 with high global inflation – has officially remained below 10%. A few explanations for this. The old-fashioned index refers only to the city of Algiers, and its structure has not changed for more than half a century; The informal sector, which accounts for 30-40% of the economy, is left out of the Office for National Statistics (ONS) forecasters. Finally, chronic shortages lead to the disappearance of the product and the impossibility of tracking its price. Any serious measurement is impossible with such a biased thermometer.

Moreover, even President Tebbu admitted that the situation was intolerable during his interview on December 22, 2022, and emphasized that “under the name of trade freedom, prices have risen, citizen’s incomes have stagnated, and the value of the dinar has fallen. Where are we going?”. The recognition was followed by some promises to increase wages, pensions and unemployment benefits for unemployed youth. Young people need jobs, not benefits. It’s just that these new expenses, which further increase the budget deficit, are mostly explained by election goals. The president is already considering leading the country for a second term.

Therefore, the end of the subsidies announced by the authorities is suspended during the presidential elections. All of a sudden, “the indifference of the cancer country’s officials, who are so stingy in managing the dollar mattress and will continue to be so blind to the tragedy of the national currency, the dinar,” concludes the author.

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