IMF concerned about Algeria’s economy

The IMF is concerned about Algeria’s economy . . .

Whilst waiting for Kuwaiti production to reach its cruising speed, after a long strike, the price of a barrel of Brent in the morning of April 26, 2016 was at $44.67 and its WIT equivalent at $42.98, with the Euro at $1,1261.  At this stage, one should avoid euphoria or Utopian promises for the IMF concerned about Algeria’s economy as well as those of a majority of observers and international agencies, were genuine in the past.  Today, a resumption of growth of the world economy, the entry of new producers and a new model of energy consumption at the global level that could accelerate between 2020 and 2030, would bring only a gradual increase between 2016 and 2020 of between $50 and $70 in the price of a barrel of oil.

In the event of a low recovery especially of China and other emerging countries, the price would fluctuate between $50 and $60 and in case of a non-resumption of growth, the price would be less than $40 – $45 or perhaps less.  The majority of oil producer countries, whose production is more important than Algeria’s being more and more aware of this, have become more inclined to prepare the after hydrocarbons.  Thus, on April 25, 2016, Saudi Arabia announced its intention to trade up to 5% of the oil giant ARAMCO and to establish a Sovereign Wealth Fund of some $2,000 billion, as a first step part of a comprehensive plan of transformation of its economy.

1 – Algeria’s external trade data in 2015

According to the Algerian Customs statistics, the country had a deficit of $13.7 billion in 2015 due to the oil price volatility, and the rate of coverage of imports by exports is reduced by 73% vs. 107% in 2014.  Although its trade surplus with the EU decreased in 2015, -95.7% at $457 Year on Year (YOY) in 2014 of 14.8% at $10.7 biullion, with streams of $51.1 billion (-27.0% in 2014), the EU remains the largest trading partner of Algeria with a -36.1% decrease, from $40.4 billion to $25.8 billion (i.e. 68.3% of the total of Algerian exports (against 64.2% in 2014).

Algerian imports from the EU increased from -14.6%, from $29.7 billion to $25.3 billion (or 49.2% of the total imports of Algeria).  But the deficit also concerns Asia which in 2015 is the second partner of Algeria, with trade which amounted to $14.4 billion (-18.6% YOY).  According to official statistics, it covers 23.0% of imports while it absorbs only 6.8% of its exports, with a trade deficit towards this region,-$9,3 billion, an increase of 22.6% compared to 2014, when the deficit was only $7.6 billion, because of the imbalance in its relations especially with China.

Commercial exchanges between the Maghreb countries [Union du Maghreb Arabe (UMA)] are less than 3% of their overall trade with the Arab world countries (including UMA) represent $4.8 billion, down from 24.8% of 2014, to end up with 5.0% of Algerian imports and 5.9% of its exports.  Trade relations between Algeria and all sub-Saharan African countries are down also by 19.6% to $442, with 0.7% of all imports and 0.2% of exports.

Spain in 2015 is the first customer of Algeria, despite a drop of 31.2% of the amount of its imports, to $6.6 billion and Italy the second, with $6.2 billion of imports, down from 25.6% of 2014.

France is the third client of Algeria, with an amount of imports at $4.9 billion (a decrease of 29.2%).

Overall, there is a concentration of requests to Algeria: its first three clients represent 46.7% of the total exports in 2015 while they accounted for only 39.4% of the total in 2014.  France in 2015 and for the third consecutive year is the second supplier of Algeria, behind China.  Algerian exports to France were $6,744 billion and imports at $6,342 billion.  Trade for 2014 between Algeria and France are generally worth $13,086 billion, whereas for 2015, France holds 10.5% of market share, amounting to $5.4 billion, $8.2 billion with China, to 16.0% of the market.  Italy is in third place with $4.8 billion and $3.9 billion for imports from Spain.

France remains the leading non-hydrocarbon investor in Algeria with a stock of FDI estimated by the Embassy of France in Algiers at more than $2.2 billion.  For the first quarter of 2016, according to Customs statistics the first five customers of Algeria, are Italy with $1,505 billion (25.45% of Algerian overall exports, followed by France with $879 million (14.86%), Spain with $810 million (13.7%), Turkey with $328 million (5.55%) and Canada with $278 million (4.7%).).  As the leading supplier to Algeria, China spearheaded all with $2,109 billion (18.3% of total imports in the first quarter), followed by France with $1.363 billion (11.82%), Italy with $1,09 billion (9.45%), Spain with $842 million (7.3%) and Germany with $670 million (5.81%).

2 – Worrying forecasts of the IMF and of the official data

The IMF forecast data published on April 25, 2016, in their report on the prospects for growth in the Middle East and North Africa region + Afghanistan + Pakistan (MENA+A+P), the nominal gross domestic product of Algeria (GDP) is forecast at $166 billion for 2016 from $172.3 billion in 2015, with unemployment rising.

In 2016, exports should go down to $27.7 billion against $38.4 billion by 2015, but should pick up in 2017 to $32.3 billion.  As always, in order to have a balanced budget, according to the IMF, Algeria will require, in 2016, an oil price of $87.6 per barrel against $109.8 in 2015.  The budget deficit would amount to 15% of GDP in 2016 (vs. 15.9% in 2015) and could be reduced to 11.8% in 2017.

Imports in 2016 are estimated at $57.5 billion against $63.7 billion in 2015; these are expected to reach in 2017, $61.3 billion, in contradiction to what the IMF said about a reduction in the budget deficit.

The balance of the current accounts deficit at -$28,3 billion in 2016 against -$27 billion in 2015, and at -$28.2 billion in 2017.

The official reserves of Algeria are expected to drop as impacted by the fall in the price of oil to $113.3 billion in 2016 covering some 22.2 months of imports, against $142.6 billion in 2015 and could continue their contraction to $92.3 billion in 2017.

In the meantime, Algeria needs to put some order in its statistics, excellent tool for its government, especially knowing that the IMF or the World Bank are often government data and most often those of the Central Bank of Algeria.

Indeed, these data do not support the latest data provided by the National Centre of Customs (CNIS) statistics.  Algeria’s trade deficit reached $5,616 billion during the first quarter of 2016 against $3,464 billion for the same period in 2015 because of the drop in the price of oil of more than 70%, representing 33% of the revenue of SONATRACH gas transfer price indexed on the oil.

Exports fell to $5,914 billion in the first three months of 2016 against $9.8 billion in the same period of 2015, down by 39.65%.

Imports despite all the restrictions announced by the Government amounted to $11.53 billion against $13,264 billion in the same period of 2015 and the rate of coverage of imports by exports was 51% in the first quarter of the year 2016 compared to 74% in the same period in 2015.

And on the $11.53 billion of recorded imports, amounting to $6.64 billion has been paid cash (57.55% of imports), a slight decrease of 14.01% from the first quarter 2015.  Hydrocarbon oil constitute the bulk of exports during the first quarter 2015 with 93.19% with an amount of $5.511 billion against $9,142 billion in the same period in 2015 (-39.72%).  Non-hydrocarbon exports, 6.81% of the total exports, decreased to $403 million, down 38.75% being composed of semi-finished products with $316 million, essentially over 70% being of the derivatives of hydrocarbons.  Food with an amount of $66 million and all industrial goods at $6 million would not make great difference.

In summary, the IMF should provide its database and Customs statistics should tell us if these data concern the trade balance or the balance of payments.  This is a document that should reflect the financial situation of the country, including services and legal transfer of capital.  Thus, with the assumption of trade imports and exports being at the same pace during the last three remaining quarters and if services that fluctuates from 2010/2014 between 10/12 billion and legal capital of foreign firms transfer between 4/6 billion are included, the deficit in the balance of trade being extrapolated to 2016 at $22 billion in 2016, the overall deficit would fluctuate between $36 and $40 billion.

At the current pace, the reserves being $143 billion as at January 1st, 2016, these could close between $107 and $103 billion by 2016 end but could run out between 2018 and 2019.

Also with a deficit in the 2016 Act of finance, the risk would be the exhaustion of the Fund’s regulation revenue in 2017.  In few words, we are witnessing in this month of April 2016 a cacophony of contradictory speeches between Ministers, particularly between those of finance and industry concerning the potential recourse to external debt.  This is according to most is felt as to giving a negative image of Algeria that could be discouraging for both local and international investors (1).

Algeria needs a clear coherent discourse, and should assume at the earliest, a new economic policy rather than follow on the same bureaucratic laws, and above all avoid doubting that a new investment code could energize all sections out of their usual hydrocarbons semi-annuity without addressing the actual functioning of society, through deep reforms in the context of international values, if it wants to avoid returning to the IMF horizon 2018 through 2019.

Dr. Abderrahmane Mebtoul, University Professor, Expert International, ademmebtoul@gmail.com

(1) – Discussion of half an hour held on TV Ennahar between 11:00  to  11:30 on April 25, 2016, by Professor Abderrahmane Mebtoul on the State of the Algerian economy.  The professor was also interviewed on April 26, 2016 on TV Ajay on the same topic.

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