Subsidies costing in Algeria

What subsidies cost to Algeria : could they benefit the rich as well ?

By Tewfik Abdelbari, 5 August 2015. TSA

Whether direct or indirect, all different goods and services grants weigh heavily on the budget of the Algerian State.

Tombeau de la ChretienneIt is a well-known fact that Algeria subsidizes all life sustaining products from water to food commodities (oil, sugar, wheat, bread, milk…), and energy products (electricity, petrol, gas & heating fuels), with prices widely supported by the state budget.

Are these subsidies benefiting the majority and by how much?

What consequences are there on the national economy and,

How to reduce these subsidies intelligently?

The grants amounted to 18% of GDP in 2012

The total of direct and indirect subsidies amounted in 2012 to the equivalent of 18% of the GDP, or $29 billion dollars, according to official figures, as validated by the IMF (International Monetary Fund).  Indirect support of fuel prices by itself is 10.9% of GDP.

Taking into account all the social security, hospitals, schools, etc. that are meant for ensuring a relative calm in a turbulent social front and to bringing and maintaining a decent standard of living for the most disadvantaged populations, the figures can be up to 50% of GDP.

The details of these subsidies is a well-kept secret in the Government circles.  The general public and even institutions such as the (BA) Bank of Algeria (Central Bank) do not have access to all information.  But in 2014, for the first time since 1996, the Government published the implicit subsidies costs in that year’s budget.

Grants that benefit the rich

In theory, the massive support of food commodities and energy prices is supposed to allow those categories of the low income populations get access to these products.  In fact, although these generalised subsidies manage to reach their destination by improving their purchasing power, they also benefit the wealthier segments of the population.

An IMF analysis reveals that subsidised products are consumed mainly by the well-off populations.  Indeed, by dividing the population into 5 categories according to their revenue, the IMF found that the top quintile (Q5), i.e. with the highest incomes, devotes nearly 26% of its income on the consumption of grain products.  The bottom quintile (Q1) uses less than 15% on cereals and derivatives.  The same apply for milk and derivative products with 30% for the Q5, compared to about 12% for the Q1.  The proportions are identical for oil and cooking fats as well as for sugar and its derivatives.

As can be deducted by the above, the highest incomes earners tend to consume subsidized products far more than any other categories of the population, hence it can be said that these generalized subsidies benefit the affluent classes rather than any other category of the population.  It must however be mentioned that these affluent classes, do include industry owners, captains and such like of the soft drinks, fast food and biscuit industry and that these benefit from regulation of the prices of sugar and an exemption of VAT and customs duties on their product.

Fuels : the most unfair subsidy

With respect to these, the contrast is even more striking.  For example, lower revenues Q1 represent only 8.2% of total expenditure in terms of transport and movement of goods.  In comparison, the fifth (Q5) quintile represents 40% of these expenditures.  By including the Q4, this rate jumps to more than 60%, according to data from the IMF.

The report of the international institution concludes that the overwhelming majority of indirect fuel subsidy benefit the affluent of the population.  Out of the $17.6 billion of fuel subsidies, more than $10.5 billion are taken by the 2 upper bands of the population.

Excessive consumption and damage to the national economy

Beyond the obvious consequences on the country’s state budget that is by the way in deficit since 2009, those generalized subsidies tend to favour overconsumption generally leading and / or generating domestic waste.  With affordable prices, the Algerian society consume more than what it needs.  This include electricity for air conditioning and fuels, bread as well as many other consumables.

Furthermore, as of the admission of the Bank of Algeria, subsidies have led “to a relative price structure that led to perverse effects that are harmful to the national economy”.  The monetary institution recalled that wage increases granted by the State some time ago and without consideration for productivity, coupled with thee above described subsidies have favoured the consumption of imported goods “in total inadequacy with the structure of domestic production.”

In addition, the BA also believes that the decline in prices in international markets, particularly for food products (cereals, sugar), were not reflected on domestic prices.  Moreover, these products in the country continue to benefit from exemptions from VAT and customs duties, enabling operators to maximize their margins, always according to the same source.

The increase in wages without consideration has led to an increase in the cost of labour, thus reducing the competitiveness of Algeria and its products, always according to the same source. Thus, this “upset the industrial strategy of import substitution”, deplores the BA.  At the same time, this situation has “created excessive consumption energy in all its forms even leading to fuel imports,” notes the Bank of Algeria.  In conclusion, the report of the national monetary institution shows that subsidies put the country before two major challenges, namely “sustainability to mid-term public finance and the impact of public expenditure on economic activity.

A gradual withdrawal and better targeting

In these circumstances, the maintenance of the different subsidies seems at best hazardous, even ‘suicidal’.  This observation is shared by all, including the current government which agreed to a reduction of the wasted subsidies and has suggested a ceiling on the subsidised quantities of fuel.

That said, these measures may seem insufficient for it is the global system of price support that deserves to be reviewed.  The IMF calls for a gradual abolition of direct and indirect subsidies.  With regard to energy, the Fund invited the Algerian authorities to gradually reduce implicit subsidies to petroleum related fuels and electricity, products that encouraged an unprecedented increase of domestic consumption and an endemic cross-border traffic in the region.

The Bank of Algeria has in addition to highlighting the same dangers, indicated that these subsidies are “poorly targeted” and that in agreement with the IMF calls for a phased withdrawal, whilst at the same time preserve the present aid but to the disadvantaged only.  To do this, the IMF calls for setting up some sort of system of ‘ transfer of cash “, i.e. to grant a pension to needy households, in lieu of a direct total withdrawal of subsidies.  Thus, the State would save up to $ 13 billion, without affecting the purchasing power of the poorest Algerians.

To read the original text, refer to TSA




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