Algeria unveils plan to diversify sources of government income

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Posted by Serrai Invest Capital Ltd ( Media Team)

Fresh details on Algeria’s long-term plan to reduce reliance on hydrocarbons have been announced, providing investors with new clues to the country’s economic direction in an age of low oil prices.

Development goals

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More specifics of the ministry of finance’s “new model for growth” emerged in mid-April, outlining some of the government’s economic objectives through to 2030.

Initially announced in mid-2016, the economic blueprint came as a response to the recent collapse in oil prices, which caused energy revenues to fall by 55%, to $27.5bn, from 2014 to last year.

In the medium term, the plan aims to cap public spending at AD7trn (€58.8bn) annually until 2019 and curb the budget deficit from 20% of GDP in 2015 to 1.9% by 2019. Meeting this goal would imply achieving a current account surplus of $2.2bn that year.

These outcomes are, however, contingent on oil prices rising from an average of $50 this year to $55 in 2018 and $60 in 2019.

While analysts consider this scenario feasible – and in April the OPEC reference basket price improved 2% month-on-month to $51.34 – the country remains vulnerable to oil-price volatility: hydrocarbons account for 95% of its exports and 75% of state revenues, according to the World Bank.

As a result, the new growth model aims to diversify sources of state income by raising non-oil tax revenues by 11% each year until 2019. The government expects the extra money to fund 84% of its operating expenses by 2019, up from 47% in 2014, though it has laid out few details on how this will be accomplished.

Another key enabler of the country’s goals, political stability, was bolstered following parliamentary elections on May 5, 2017, which saw President Abdelaziz Bouteflika’s ruling party – the National Liberation Front – strike a coalition with the National Rally for Democracy, albeit losing 51 seats in parliament.

The victory brought some certainty to investors, who feared a shift away from the government’s economic strategy should power change hands. A Cabinet reshuffle enacted on May 25 may also help boost momentum on the path to the country’s medium-term ambitions, with 13 ministers leaving their positions and six new members joining the team.

Growth areas

As part of diversification efforts under the plan, Algeria’s authorities have highlighted a number of strategic sectors for investment.

The share of GDP from manufacturing, for example, is forecast to grow from 5.3% in 2015 to 10% in 2030. Trade is expected to grow by 7.4% over the period, with agriculture following closely behind at 6.5%. Progress is expected to be slower in construction, a cornerstone of Algeria’s economy, with growth of 1.7% per year.

The country’s burgeoning mining industry is also expected to feed growth in the coming years. In mid-July, the government signed a $4.5bn deal with Indonesia’s Indorama to develop the phosphate mining segment.

Under its terms, the two sides will together develop a phosphate mine in the eastern province of Tebessa, and build a plant in Souk Ahras near the Tunisian border to produce phosphoric acid and diammonium phosphate.

More such contracts will be needed for the government to meet its goal of growing the non-hydrocarbons economy by 6.5% between 2020 and 2030. This in turn should see GDP per capita more than double and propel Algeria to high-income status, according to the new growth model.

Challenging times

Hitting these targets is likely to hinge on high growth in the non-oil sector. Last year Algeria’s economy grew by 3.8%, per World Bank figures, on the back of a slight rebound in oil prices and a 3.4% increase in hydrocarbons output.

However, neither the World Bank nor the IMF see this momentum lasting into the medium term: the former foresees oil and gas output growing by only 2.5%, and both project GDP expansion of 2.9% this year and 2.6% next.

Positive progress has nonetheless been made in reducing the deficit, which fell from 16% in 2015 to 12.5% last year, driven by lower capital expenditures and a slight uptick in oil prices. New revenue measures in the 2016 budget had included raising fuel prices, value-added tax on electricity and vehicle registration fees.

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