The World Bank has just published its report monitoring the economic situation in Algeria. In its document published on June 22, 2023, the international financial institution estimates that “the winds remain favorable” for the Algerian economy.
After recalling the economic situation in Algeria in 2022, the World Bank indicates, in the “Outlook and risks” section, that non-hydrocarbon activity should be the main driver of growth in 2023. “The non-hydrocarbon sector should support growth in 2023, contrasting with the stability of hydrocarbon production,” reads the report.
“In the base scenario, GDP growth would reach 1.8% in 2023, resulting from the growth of non-hydrocarbon activity (+2.2%) and the stability of hydrocarbon GDP (+0.6 %)”, predicts the World Bank, which underlines that “the agricultural sector would slow down, the low rainfall having generated significant delays in the development of crops at the beginning of the year, particularly in the main agricultural regions of the country.”
According to the same source: “Gas production would increase and crude oil production would decrease, constrained by the reduction in production quotas from November 2022, then that decision in March 2023, coming into force from May. Thus, the services sector should remain the main contributor to growth.”
From the expenditure angle, continues the World Bank, “Growth should be driven by the good dynamics of private consumption and the recovery in investment, despite the drop in net exports.”
“Private consumption should remain dynamic, supported by the public effort to preserve purchasing power through increased public spending, and thus by activity in the service sector. The expected recovery in investment would materialize in 2023, supported by that of the hydrocarbon sector, stimulating industrial activity,” predicts the financial institution.
And to add: “Net exports would however slow down growth, the fall in hydrocarbon exports, weighed down by the drop in quotas and the concomitant recovery in domestic consumption, being reinforced by the rise in imports, necessary for investment and to compensate for the drop in agricultural production.”
Rebound in agricultural and crude oil production in 2024
In the baseline scenario, the World Bank forecasts the rebound in agricultural and crude oil production in 2024 would allow for an acceleration in growth. “Under the assumption of a return to an average level of rainfall and agricultural production in 2024, on the one hand, and the increase in OPEC quotas under the effect of the recovery in global activity, on the other hand, GDP growth would accelerate in 2024, to reach 2.6%”, estimates the same source, adding that “the rise in exports and the moderate growth in imports would make it possible to offset the slowdown in consumption and investment growth.”
According to the same institution, “inflation would slow but remain high in 2023, despite the moderation in import prices. “In the baseline scenario, growth in the consumer price index gradually slows over the projection period due to the delayed disinflationary effect induced by the fall in the prices of imported products and the appreciation of the Algerian dinar in 2022, particularly in import-dependent sectors (agro-industrial and manufactured products)”, explains the World Bank.
“The decision to grant the OAIC a monopoly on the purchase of domestic and imported wheat, extended to the import of rice and pulses, may also limit price increases, to the extent that the production capacity of the OAIC can meet domestic demand”, indicates the financial institution, which specifies: “Conversely, the effect of low rainfall on agricultural production, as well as the delayed effect of the increase in public spending and money supply in 2021 and 2022, could fuel higher prices.”
Pressure on fiscal and external balances should increase
“In 2023, the current account surplus would shrink (+1.9% of GDP) as a result of the fall in prices and volumes of hydrocarbon exports. In addition to the drop in exported volumes, the average Algerian oil export price should decrease in 2023, following international prices, while the Algerian gas export price could remain at a high level. the World Bank.
“The fall in oil prices would also be accompanied by that of fertilizers and iron, which began at the end of 2022. At the same time, imports would resume, the fall in prices on the world markets being offset by the increase in Algerian demand, in particular, to allow the resumption of investment, and for the supply of food products”, according to the same source.
And to specify: “The stabilization of import prices, less pressure on imports, an increase in oil production and the maintenance of high gas prices would allow the current account to remain positive in 2024. In 2025, the growth of hydrocarbon exports should slow down despite the increase in production, due to the constant growth of domestic consumption, fueled by the costly policy of subsidies for energy products.”
The drop in hydrocarbon revenues and the announced increase in public spending will widen the budget deficit in 2023, but this would be partly pre-financed by the savings accumulated in 2022, according to the World Bank, which explains that in the base scenario, the revenues are falling, the fall in revenues from hydrocarbon exports being partly cushioned by the increase in tax revenues, sustained by the high level of inflation, and that of dividends from the Bank of Algeria.
“Spending would rise again, however, driven by the further rise in civil service wages, and that of the higher cost of unemployment benefit introduced in 2021, despite the lower cost of food subsidies,” notes the same financial institution, predicting that “the overall budget deficit would therefore climb to reach 7.0% of GDP, but it could be financed by domestic bond issues and Treasury savings at the Bank of Algeria, which reached in March 2023 6.5% of estimated GDP over four rolling quarters.”
“Despite the continued rise in civil service wages, the pace of spending increases would slow in 2024 and 2025 and, taking into account the anticipated increase in revenues, the overall Treasury deficit would stabilize around 6% of GDP. Public debt would stabilize at around 62% of GDP, with the increase in the stock of public debt being cushioned by that of nominal GDP,” predicts the World Bank.
The volatility of oil prices recalls the imperative of economic diversification
“In 2022, Algeria took advantage of the jump in oil prices and then those of gas to build up a safety cushion. The peak in oil export prices, followed by that of natural gas, enabled Algeria to significantly increase hydrocarbon revenues, generate a trade surplus and reduce the budget deficit, but also to increase reserves by Algeria’s foreign exchange and Treasury savings, removing in the short term the risks of an abrupt macroeconomic adjustment in the event of a further fall in prices”, recalls the Bretton Woods institution.
And to add: “In addition, the sustained reduction in imports, although it presents risks for the availability and the price of imported products and equipment, makes it possible to support the current account balance and a continuous increase in foreign exchange reserves in the base scenario. Finally, the less marked increase than anticipated in public spending has allowed the accumulation of significant savings, which could contribute to financing the deficits over the projection period, and to avoid having recourse to the Bank of Algeria. in 2023, assuming a prudent spending policy.”
According to the World Bank: “Despite this, the macroeconomic outlook remains highly sensitive to global oil prices, the trajectory of which remains uncertain. Uncertainties surrounding the trajectory of the global economy, demand from major energy-consuming countries, supply from producers and global hydrocarbon prices remain elevated, as evidenced by OPEC’s surprise announcement of production quotas in March 2023 to compensate for the unexpected drop in prices.”
“For Algeria, these developments will have significant implications. For example, all other things being equal, a simulation based on a barrel price of US$ 100 per barrel in 2023 suggests that the current account surplus would reach 5.5% of GDP (+3.6 pp) and the budget deficit should decrease to 4.5% of GDP (+2.5 pp), allowing, in particular, a faster accumulation of foreign exchange reserves. Conversely, an oil price of US$70 per barrel would generate a current account deficit of 1.7% of GDP and the fiscal deficit would widen to 9.5% of GDP, prompting increased import controls, a reduction in spending and greater recourse to the domestic banking system to finance the deficit, with potentially adverse effects on growth and inflation”, explains the same source.
In this context, the Bank believes, “pursuing efforts to diversify the economy and exports remains essential. “The authorities have made significant efforts to stimulate private and foreign investment, in particular through a new law on hydrocarbons (2019), the partial lifting of limits on foreign shareholding (2020), and a new investment law (2022),” recalls the same source.
And to add: “The pursuit and effective implementation of reforms aimed at improving the business climate, in particular, to allow greater participation of the private sector in the economy, remains essential to sustainability and resilience. of the Algerian economy. Among other things, the diversification of exports would reduce the vulnerability of macroeconomic balances to oil prices.”
Climate hazards represent a growing risk for Algeria and the region
“The hazards linked to climate change represent growing risks for Algerian growth and inflation, including for the year 2023”, indicates the World Bank, which recalls: “Since 2019, rainfall has been below average This year, agricultural GDP contracted by 1.9%, and inflation for fresh agricultural products soared to 13.9% (compared to 2% the previous year). ), driven in particular by a 21.3% increase in fruit and vegetable prices.”
“Between October 2022 and February 2023, rainfall in Algeria was among the lowest the country has seen in 20 years and, despite a moderate increase in rainfall in March, agricultural production prospects are below average. “, notes the same source, who explains:” In parallel, inflation of fresh agricultural products accelerated to reach 24.7% y/y in Q1–2023. Thus, an extension of the low rainfall in 2023 and over the years 2024 and 2025 could limit the growth of the agricultural sector and fuel inflation.”
“In addition to the immediate macroeconomic effects, food inflation can affect long-term economic prospects. This contributes at least half to inflation in the MENA region and disproportionately affects vulnerable households. It can increase the level of food insecurity, and have multigenerational effects on the level of education of children, their health, and their future incomes”, estimates the World Bank.
“This underlines the importance of rapidly adapting the agricultural sector, ensuring the availability of food products in sufficient quantities through imports, and strengthening the resilience of households to the effects of climate shocks, including through protection and social insurance, targeted to the most vulnerable households”, concludes the international financial institution.
