The purpose of this contribution is to analyze the operationality of the adopted unconventional financing by the Council of Ministers of June 14, 2017. This is done by a critical review of the impact of non-conventional Finance in Algeria that appears to be not a suitable response at this conjecture. This method of finance is by the way applicable to a structured competitive market economy, with idle production factors, i.e. underemployed equipment and skilled labour whereas Algeria suffers from structural rigidities with a dieback productive fabric and a total dependence on the volatile price of oil, hence the risk of printing more money, with a consequent inflationary process.
The Foundation of the non-conventional funding
The Council of Ministers held unconventional financing which is a recipe of anticipating the growing demand in investment and consumption but in the case of structural rigidities and not boosting the productive fabric, it could end up speeding up the inflationary process.
Unconventional financing has been used but in a structured market economy with potential for possible added value in the case of growing businesses or companies in restructuring, used when traditional financing does not enable an enterprise to fully develop, or when funding is simply not available.
In fact, when a company has assets and/or generates a cash flow, non-conventional financing options open to it, in addition to the traditional financing.
Central banks have used these methods which may take the form of easing of certain standards of conventional monetary policy and massive injections of liquidity into the financial system in circumstances which justify, including with the occurrence of a risk of deflation, a stock or bond market crash, bankruptcy of a large credit institution and crisis of confidence in the financial sector.
This is how for instance, the Bank of England launched in July 2012 the Funding for Lending Scheme (FSL) to encourage banks and loan companies to lend more to households and non-financial private corporations. This method has helped credit institutions to refinance loans in the long term by providing in return a wider range of collateral facilities.
This program has also inspired the Long-term Target Refinancing Operation (TLTRO) of the European Central Bank. Specifically, the non-conventional measures are temporary monetary policy measures whose goal is the restoration of the transmission of the monetary policy and ultimately channels support to bank credit and liquidity in the monetary market.
In any case, the non-conventional measures fall into three categories.
- First, quantitative easing (QE) measures are those measures by which the Central Bank offers an unlimited amount of money to commercial banks.
- Saturation of demand for money of these must lead them to spend surplus balances, that is, they grant more Bank loans to households and businesses again.
- Second, measures of orientation of the future rate expectations are for the Central Bank to engage in the future path of rates contributing to lower interest rates in medium and long term and so to bring them closer to the rate of the Central Bank. These take the form of explicit commitments to maintaining a very low level or zero rate for a significant period of time.
- Third, the easing of the credit tend to bypass the blocking of credit channel caused either by the phenomenon of ‘door to liquidity’, or tensions on some key segments of the financial markets.
The Central Bank then acts as a “last resort” by directly funding the economy.
De facto a relaxation of the eligibility criteria will lead banks to less hesitation in their risk-taking, and so to grant more loans to companies of medium or small size.
Keynesian theory cannot be applied to the Algerian economy
Political ‘strategies’ of Keynesian stimulus are based on the importance of the role of the State as regulator and not as state-manager of the economy.
As far as Keynes is concerned, the State is able to stimulate demand when it is insufficient through monetary injection by anticipating the revival of aggregate demand in investment and consumption. The use of factors of production is according to Keynes due to the fact that entrepreneurs have pessimistic expectations whilst underestimating the actual demand; the salary is not only a cost, but an important determinant of demand.
Investment cannot “start” if business expectations are not positive. It’s a matter of consumers’ confidence; to implement the means of distribution of wealth allowing economic agents who have the average propensity to consume the highest (i.e. all ‘disadvantaged’ social categories) to spend and therefore kick-start the economic machine; lower interest rates to stimulate consumption and investment credit and finally to embark on a policy of major public works will cause a multiplier and accelerator of investment income.
The recovery of consumption will bring in investment increase so employment will be improved and this thanks to the income multiplier. The State intervenes transiently in time of crisis so located as part of short-term actions applying the elasticity available factors of production, equipment, and work quality.
Also the Keynesian, short-term and based on assumptions reasoning of a closed economy, has resisted any long-term vision of the economy, unlike the conventional theories of Adam Smith (morality), of David Ricardo, Karl Marx and Joseph Schumpeter who internalizes the dynamics of institutions and dynamics of social groups.
However with the current crisis we, taking into account the interdependence of economies, need a dynamic model for the medium and long term, the new ecological challenge and this unbearable duality between North and South, for a shared responsibility; governance of many leaders of the Third World being most questionable.
The growing internationalization of economies at the present time is a major limiting factor on the model. Thus, in the light of the Algerian experience, the Keynesian model is hardly transposable. For this country in 2016, 97 / 98% of foreign exchange earnings came directly and indirectly from hydrocarbon, 83% of the productive fabric is made up of small trade/services enterprise, the industrial sector less than 5% of GDP with more of 95% made up of little innovative SMIs and SMEs.
So there exist on one hand incompressible but necessary imports for the public and the productive segments, 70% of public and private – enterprise integration rate below 15%, working with imported inputs.
In case of not stimulating the productive sector between 2017 and 2020, by sticking to our own internal financing, we would necessarily deplete the foreign exchange reserves. As foreign exchange reserves sustain the value of the Dinar (DZD) already officially rated at more than DZD120 an Euro and over DZD190 per Euro on the parallel market, the amount of reserves of $10 to $20 billion will necessarily mean an official rating of over DZD200 per Euro, possibly leading towards to an inflationary process with necessarily raising of interest rates.
Because between 2000 and 2016, we have seen bad programming, overestimation of costs and long delays in the execution of vital projects, with very important budget overruns including the appearance of gaps between the budget planning and sectoral priorities, the lack of effective interventions due to fragmentation of the budget as a result of the separation between the investment budget and the operating budget potentially significant contingent liabilities, long delays and extra costs for the execution of the projects.
This testifies on the weakness of the enforcement capacity of the State agencies that neither the line ministries, nor the Department of Finance have sufficient technical capacity to oversee the quality of these studies, limiting itself to financial control, technical or physical follow-up exercised by entities or at best by insufficient and unknown enforcement.
Many weaknesses are rooted in the urgency that accompanies the preparation of projects including the myriad of specific requests that the projects are supposed to respond to with overlaps of responsibilities between the various authorities and stakeholders (from dozens of ministerial committees and commissions of local authorities) that witch economists refer to as transaction costs and this because of a non-optimal institutional organization.
Therefore, we would have 4 impacts of inefficiency in public spending:
- on the value of imports because the swelling is the essentially to public spending.
- on the inflationary process that is originally for part of inflation and very incidentally wages that are less than 25% reported to gross domestic product;
- on the balance of payments of the fact that the doubling of the value of services between 2002 and 2016 of $10 to $11 billion a year mainly concerns the infrastructure/oil (foreign aid) post referring to the devaluation of knowledge;
- on the global and sectoral growth rate. Here also the numbers need to be replaced into their true contexts because hydrocarbons irrigate the whole economy and nonhydrocarbon segment of more than 80% with a total of 5 to 6% of non-oil growth rate as invoked by officials ( on average between 2000 and 2016), remaining only real businesses real participation of less than 10% of the total of the Gross Domestic Product (GDP) as shown for several years (about 3% of the total) nonhydrocarbon export.
Non-conventional financing and the inflationary
Generally, public spending has its own limits as shown in the recent global crisis, and the fundamental strategic problem which arises in Algeria lies in the urgency of a renewed good governance as based on a Rule of Law and the Democratisation of decisions, development of a competitive national or international enterprise as founded on the development of knowledge. How can we forget that during the national conference on economic and social development on November 4, 2014 in the presence of the Prime Minister at the time and members of the Government, reproduced in October / November 2014 in the national and international press, I had proposed to deepen structural reforms and put in place a broad social front against the fall in the prices of oil under the title “Prof. Mebtoul advocates the creation of an independent Committee to safeguard against the effects of the crisis”.
Were we listened to since then?
The monetary expense encouraged by infrastructure building is only one way that has little impact for sustainable development. There is urgency to pose real problems to the deepening of the comprehensive reform for a true development of non-hydrocarbon and the passage from a rentier to a non-oil economy.
And only internal reforms would allow change and reach sustainable growth in non-hydrocarbon condition of value-added job creation, ending gradually this volatile growth and subject to external shocks, monetary expenditures without worrying about the impacts and the importance of foreign exchange reserves, is not synonymous with development because function, the price of oil.
However, paradoxically, the advanced or the acceleration of reforms in Algeria is inversely proportional to the price of oil, being held back when prices rise making it for Algeria to wonder whether oil was a blessing or a curse?