Return to protectionism, in this day and age, is it feasible ?

by | Jan 19, 2017 |

Return to protectionism, in this day and age, is it feasible ?

Let’s ponder October 1929 and October 2008

For the Chinese president, Xi Jinping, who during the World Economic Forum in Davos, paradoxically seeming to be defending Free Trade, threw at the new American president, Donald Trump on January 17th, 2017 that no one would emerge as the winner of a trade war, or as he put it, a Return to protectionism, in this day and age, is it feasible ?

“It doesn’t help to blame globalization. Any attempt to stop trade in capital, technology, and products between countries is impossible and contrary to history. We must remain committed to the development of free trade and investment (transnational), and say no to protectionism. We got to ‘rebalance’ globalization, and make it stronger, more inclusive and more sustainable”. In this context it is useful to recall the fundamentals of the crisis of 1929 and 2008.

The 1929 Crisis.

The 1929 crash is caused by a speculative bubble, whose genesis dates back to 1927. It was a new system of credit purchase of shares based on investors buying securities with 10% coverage that started it all. It was ‘Black Thursday’ October 24th, 1929 that the famous crisis broke out in the United States.

le krach boursier de Wall street plongeant l’économie américaine et l’économie mondiale, dans la tourmente et ce malgré l’apparente santé de l’économie américaine dont les bases de sa croissance étaient pourtant faibles.

The stock crash of Wall Street plunged the American and the global economy in turmoil, and this despite the apparent health of the U.S. economy of which bases of its growth, were however weak.

October 2008

There are many similarities between the crisis of October 1929 and October 2008. Economic boom prior to the crisis, rising debt and divorce between the real and financial impact on the real economy with the fall of technology stocks.

But in contrast with 1929, it is the interconnection of economies with stronger global regulation where the developed countries economies being in deflation (low inflation, unemployment, negative growth) and not stagflation (inflation and unemployment decline) that characterised 2008.

As evidenced by the socialization of losses of some banks, the rapid response of the central banks of the US Fed., the European Central Bank, the Bank of England, Japanese, Russian, and even Chinese and Indian banks in coordination so as to break the vicious circle in the lack of confidence and the blocked interbank lending that is the lifeblood of the functioning of the global economy.

All economic and reliable financial system is based on trust. With repeated bankruptcies, interbank credit source of the expansion of the global economy has tended to dry out especially at the investment banks that have experienced an unparalleled expansion in the contemporary period.

However, unlike a universal bank, a Merchant Bank has not the possibility, in case of difficult market conditions, to rely on deposits of individuals to raise money for the short term, although they continue to issue short-term debt to finance their business.

However, more financial institutions from which investment banking sourced finance do refuse in times of crisis to lend for lack of confidence in the ability of repayment of these banks. Generally the essence of the crisis of both 1929 as of 2008 are a distortion of the Foundation of capitalism as describing by the founders of political economy based on the enterprising creators of wealth, Karl Marx did not write about Socialism but the Capital.

This crisis is therefore related to the increasing financialisation in disconnection with the real economy and not in symbiosis of any economic and social dynamics forgetting that labour is certainly a price but also creator of value and growth through consumption. Indeed, with this increasing financialisation, we have two types of shares ownership.

The direct holding (those who own directly) and the indirect holding (those who own through an intermediary such as management, life insurance companies, pension funds, etc.). The new fact is changing fast and important type of shares held by households. The direct holding of shares becomes a minority whereas the indirect holding grew strong.

It is the pension funds that control Wall Street whilst managing more than one third of the market capitalization of the USA today. These malfunctions have been materialised with the mortgage crisis of the Subprime in August 2007; a crisis that has spread across the global stock markets with great losses which I summarize in five steps:

  1. The banks made mortgages available to insolvent households or with few guarantees, at high interest rates;
  2. Dissemination of bad debt in the market: to evacuate the risks, banks “securitised” their debts, meaning that they cut their debt in financial products to resell them on the market. Globalisation did the rest, by disseminating these risky securities in the portfolios of investors from all over the world. Hedge funds have been big buyers of Subprimes, often on credit to boost their yields (up to 30% per year), and played the leverage effect, hedge funds borrow up to 90% of the sums required;
  3. Reversal of the U.S. real estate market: towards the end of 2005, U.S. interest rates began to rise while the financial market has faltered. Thousands of households have been unable to honour their payments causing losses for banks and investors who bought bonds saw their value collapse:
  4. Confidence crisis: the banks found themselves in a situation where as in a poker game, they know what they have on their balance sheet, but not what is in that of others because these bad mortgages were bought everywhere in the world and we don’t know what is the distribution of risk where a serious crisis of confidence and since July 2007, this situation causes the exchanges to fall and paralyzes the interbank market; banks are paying more or very little fearing that their counterparts are in a red line;
  5. Intervention of central banks: facing the paralysis in the market, the Central Banks intervened massively in early August 2007 by injecting hundreds of billions of Dollars and Euros in cash.

November 15th, 2008 : G20 crisis meeting in Washington, USA.

Elle s’est articulée autour de  cinq objectifs dont  le renforcement du système de régulation qui ne saurait signifier protectionnisme. Premièrement de dégager une réponse commune à la crise financière-deuxièmement ouvrir les pistes d’une réforme en profondeur du système financier international -troisièmement prendre de nouvelles initiatives pour parer à d’éventuelles faillites bancaires et imposer aux banques de nouvelles normes comptables -quatrièmement des règles plus strictes sur les agences de notation, la titrisation et les parachutes dorés

This meeting focused on five objectives, including the strengthening of the system of regulation which does not mean protectionism.

  • First to identify a common response to the financial crisis;
  • Second to open tracks for a reform of the international financial system;
  • Third to take new initiatives to counter possible bank failures and impose on the banks of new accounting standards;
  • Fourth to adopt stricter rules on credit rating agencies, securitisation and the Golden parachutes;
  • Finally, in fifth to increase public spending through coordinated budget deficits, but for the benefit of energy savings for the building and infrastructure development and clean auto technology, questioning the European stability pact (3% of GDP and spending on / GDP less than 60%.)

But it is clear that in this month of January 2017, the global economy is still characterized by turbulence with protectionist options but in a framework of unbridled internal liberalization wanting back in vogue Adam Smith’s invisible hand of the market, which is likely to repeat the scenario of the 1929.  However, the strategic goal is to rethink the current global economic system that promotes bipolarisation North / South, poverty detrimental to the future of humanity, which is also accelerated by the most questionable governance on behalf of most of the leaders of the South.

In short, the return to global protectionism is a chimera and realism will prevail in the end.

In the meantime, let us meditate the crisis of October 1929 and that of October 2008. The large deficit of the American balance of payments, which will be accentuated with the new spending program announced by the new president (with the risk of a loss in value of the Dollar), is currently offset by the large flows of capital from outside the US. . Let us for the sake for humanity, put aside all nationalism, chauvinism that are source of tensions, hatred and war and meditate this quote that is sometimes attributed to French president Charles de Gaulle, under the title “Patriotism is loving his country, Nationalism, is hate of others’” and sometimes to Romain Garyn in his book “European Education” published in 1945 under the title “Patriotism is the love of one’s kin Nationalism is hatred of others”.    ademmebtoul@gmail.com

Algeria’s accession to the World Trade Organisation

by | Jan 18, 2017 |

Algeria’s accession to the World Trade Organisation

Algeria’s accession to the World Trade Organisation (WTO) in the face of domestic and international constraints

Per the official Algerian Customs statistics, in 2016, China is the leading provider of Algeria, with a market share of close to 18% and US$8.396 billion.  France comes second with $4.744 billion and a share of 10%, followed by Italy with $4.642 billion and 9.93%. Spain and Germany are respectively in the 4thand 5th position in this ranking, with $3.595 and $3.009 billion.  In the top 10, there are also Turkey (7th), Brazil (9th) and South Korea (10th).

If China is the big beneficiary of the explosion of the Algerian import bill, the deficit in trade between the two countries is huge between 2007 and 2016 all while official reviews were still focusing on Europe. Indeed, customers of Algeria are Italy with $4.779 billion and a market share of 16.55% of exports of the country. Spain comes second with $3.562 billion, followed by the United States ($3.227 billion) and France ($3.192 billion). Tunisia is 12th with $610 million, Morocco 13th with $589, Singapore 14th with $542 million and India 15th with $511 million closes this ranking.  For the 2016 official figures, exports declined to $28.88 against $34,66 billion in 2015, or a drop of 16.7%, non-oil exports fell to $2.063 billion in 2016 against $2.582 billion in 2015 (-20,1%).

Imports have also declined but at a lower rate to $46.72 billion in 2016 from $51.7 billion in 2015, down 9.62% giving a deficit in the balance of trade of about $18 billion, amount to which services and legal capital transfers are to be added; the balance of payments is the unique reference with between 2014 and 2016 as key partners of Algeria the countries of the European Union.  Also, as pointed out in my contributions and notably in my conference at the invitation of the European Parliament, and after some concern of the international community over the possible abandonment of the Agreement, Algerian officials were clear.  There is no question of breaking the Association Agreement which binds it to Europe.  Europe however, should consider Algeria not only from the point of view of a market.

Now with regards to the WTO, and according to the Algerian Press Service (APS), the Uruguayan Gustavo Miguel Vanerio Balbela has been appointed as of January 14, 2017, new Chairman of the Working Group for the accession of Algeria to the WTO in replacement of Alberto D’Alotto of Argentina, as per the last WTO newsletter.  Mr. Balbela was immediately invited from the Algerian Trade Minister, to visit Algiers and discuss the next steps of the Working Group, which had not met since March 2014.

We must remember that for more than 15 years, dozens of meetings took place and commissions created for Algeria’s accession to the WTO. All of the Algerian major economic players such as workers’ unions, employers’ federations, government representatives, and many experts were conveyed but so far in vain.

Algeria has since 1987 an observant status within the WTO organization and has been negotiating for more than 20 years thus achieving a world record. Looking at developing countries, such as heavyweight of Africa, Nigeria and South Africa, or small countries like Chad, Niger, Togo, Angola, Benin, Gabon, Ivory Coast, Ghana, countries of the Maghreb, Morocco and Tunisia, the majority of the Arab oil countries of which the latest being Saudi Arabia not to mention the majority of the countries of South America including Brazil, Venezuela, Chile, Bolivia, Peru, Mexico, Cuba, in Asia with India, Indonesia, Malaysia, Viet Nam, South Korea, and China, the latter having joined the WTO in 2001, without forgetting Turkey and Russia which joined the WTO in December 15, 2011.

With the WTO agreements, which are part of a global space concern only the economic component, are broadly outlined by the agreement linking Algeria since September 1, 2005 to Europe, as anchored in the Barcelona process, which is part of a regional space but do include political and cultural components.  These agreements have strategic implications for both economy and society: prohibition of the use of the “duality of prices” for natural resources; general elimination of quantitative restrictions on import and export trade; quality and health standards; environmental protection in the use of oil energy, environmental agreements conceived, outside the WTO but lately incorporated to the WTO when felt to be hampering the development of trade; measures concerning the freedom of movement of capital.  Intellectual property protection is an essential condition in order to fight against piracy and therefore the integration of the dominant informal sphere in Algeria which controls 40% of the money supply and more than 65% of the basic necessities.  In General, Algeria’s accession to the WTO would require opening of its borders and the increased specialization as prompted by globalization.  Indeed, both association to the European Union and that of accession to the WTO are based on the development of trade by putting in place the conditions for the gradual liberalisation of trade in goods, services and capital.  It then will be followed by Algeria proceeding with the dismantling of customs duties and taxes for industrial and manufactured products over a period of transition.

All State monopolies must be progressively adjusted in a way that there is no discrimination regarding the conditions of supply and marketing goods between nationals of the Member States. These agreements should turn the Algerian industries from the status of protected industries to industries completely open to international competition with the total removal of tariff and non-tariff obstacles. If Algeria’s WTO entry may have little impact on the oil market, already inserted in a global or regional logic (gas), it is different for all oil products that will be subject to international competition.

Thus, the duality of prices – measure by which a Government could keep domestic prices at levels lower than those determined by the international market forces and the export restrictions – can no longer be valid in a context of trade liberalization. One of the stumbling blocks in the negotiations, in addition to the importance of the informal sphere, is the duality of the gas price for units for export, which would distort international competition. In case of accession, oil products, mainly fuels, will no longer benefit from crude prices lower than the international price upstream. The Agreement emphasizes the opening to competition of the market for energy services as far as it concerns all activities, from exploration to the provision of the product to the consumer through the production and transport.

The environment is a prime area of cooperation, the aim being the preservation of the ecological balance, requiring to implement more and more stringent quality standards; Algeria would be committing to gradually implement the various recommendations of the charters on energy and the environment.  Being in a situation of mono-exporter does not warrant any acceptance; the main OPEC already being WTO member countries. So much more than Doha agreements, a transition period to avoid the wild tariff dismantling that could adversely affect the Algerian infant Industries would be necessary. Indeed, it has made clear that the main resolutions of the fourth Ministerial Conference, held in Doha in November 2001, examined the problems facing developing countries to implement the current WTO agreements, i.e. the agreements of the Uruguay Round of negotiations. The decision on implementation has focused on the following: exception in respect of the balance of payments and clarification of the less stringent conditions set out in the GATT.

This is applicable to developing countries if they restrict their imports to protect their balance of payments. Then a commitment in terms of access to markets, longer periods are granted to developing countries to enable them to adapt to new SPS in other countries. Then technical assistance to those countries least developed and review of technical assistance, including the transfer of technology to least developed countries would be provided. The terms of a special provision concerning developing countries, which recognizes that developed countries must take specifically into account the situation of developing countries when considering to apply anti-dumping measures; the extension of the deadline for developing countries to implement the agreement; development of a method to determine which developing countries fulfil the criterion according to which their GNP per capita must be less than $1.000 so they can grant subsidies contingent upon export.

New rules allowing developing countries to provide grants under programs that aim “legitimate development objectives”, but without giving rise to a countervailing action; and finally, the review of the provisions on investigations countervailing.

Not wanting to unnecessarily dwell on the notion of license according to the rules of the WTO to avoid sterile debates, I would in this context, like to request an answer as to what came about that decision of the Council of Ministers dated December 30, 2014 and thereafter the law passed for the return import licenses in Algeria?

The answer will be that these licenses should fit in the context of respect for all international commitments of Algeria.  The information I gathered however from the Algerian Government, provide the following details :

The freedom of trade and industry is the foundation of economic and trade policy of the Government of Algeria, consecrated by all the provisions of Algerian law.

In this context, this legislation as provided by several countries with open economy in Europe and elsewhere, the possibility of using in specific and predefined cases, a certain transition period, in order to upgrade their productive apparatuses, to import or export licenses neutral in application and administered in a fair and equitable way, so as to handle exceptions to this freedom to trade and this in accordance with the rules of the WTO.

It is in this context that the law that was passed, should first reaffirm the freedom of import and export of products, without prejudice to the rules relating to public morality, security and public order, the protection of the health of the people, as well as to the preservation of the environment and the historical and cultural heritage.

The reasons for implementation of licenses of import or export of which, those with the only objective to limit the trade of certain exhaustible natural resources, the guarantee for the national availability of locally produced raw material processing industry, the supply of the market in products on which would be felt a shortage, as well as backup outside the country financial equilibria.

It is in this framework that the Government introduced a 03-04 amendment of July 19, 2003 to the general rules applicable to operations of import and export of goods, the amendments aimed to upgrade the legislation in accordance with the rules of an open economy. In contrast to the restrictive licensing regime previously applied to imports, these licenses are defined as administrative procedures in the rules of the WTO and are aimed to ensure better quality and product safety as well as secure human, animal and plant health.

Reference to the WTO rules, texts of which clearly state that import licences are administrative procedures requiring, as a condition to the importation of goods, the presentation to the administrative body of a request that is separate from the documents required for customs purposes; the Government states that this kind of license does not mean restriction or distortion of imports.

Control undertaken by the administration is concerned only by those aspects of quality and compliance and not by the commercial aspects, to ensure fairness in commercial transactions, including between the community of traders themselves or between the retailer and the consumer whereas the former regime had for purpose the distribution in the amount of foreign currency to importers.

Also, it has never been said that Algeria would not adhere to the WTO as adopted by the successive governments since 1995, but that accession cannot be at the expense of the interests of Algeria’s which would be seeking to benefit from the Doha agreements that provide for a transitional period for countries such as Algeria.

Also, Algeria, per our sources, whilst safeguarding its interests as any country, intends to comply with international agreements, notably that agreement of association with Europe, the negotiations with the WTO, which it is not to call into question, is no issue to discredit the image of Algeria at the international level, unlike certain tendentious statements.

From my point of view the debate is elsewhere and is about how, with the fall in the prices of hydrocarbons, to deepen all structural reforms for a strategy leading out of the rentier type economy and how can we put aside any tensions between Europe and Algeria relating to the association agreement.

Agreement signed in full sovereignty by the Government and with fundamental implications. Certainly, the concerns being legitimate because tariff cuts are a shortfall ranging between $1.5 and $2 billion annually for Algeria.

Invoking the situation of a mono-exporter would not help, for there will not be any specificity for Algeria alone and per our information from the EU, no renegotiations of the basic clauses with Europe from 2020 onwards.  An extension of time limits for certain products per the terms of the agreement.  Similarly, there will not be any specificity also for accession to the WTO.

Membership or not to the WTO would greatly depend on internal political forces rapport and especially a real desire for clarification of the future path of the controlled liberalisation of the Algerian economy not only for its efficiency that should be coupled with a deep social justice through a better and equitable spread of the national income and therefore put up an effective fight against corruption.

This is not a question about legislation but rather of social practice referring to the urgency of a renewed governance model. All these constraints imposed by both the association and accession to WTO agreements, could not they secure the Algerian economy into the world economy and act as an important pull factor in economic development and social progress?

Legal instability and the lack of visibility in the socio-economic policy, the dominance of the informal sphere and a financial system that is totally disconnected from the international financial system tend to worsen the growing pessimism about a political opening in fact real economic and political reforms which explains the successive downgrades between 2007/2014 of many international organizations.

Is it that the new Algerian economic policy must better articulate the market forces and the action of the State as a regulator in its role of macroeconomic management and macro social within a space balanced and solidarity, the challenge being the massive arrival on the job market of millions of young people within the next two decades.

The question that arises then is the possibility of change in growth to achieve a double objective, today apparently contradictory: on the one hand, create the necessary jobs, on the other hand, improve international competitiveness while distributing more revenue, including through the productivity of factors.

The current productive structure makes growth volatile and subject to external shocks, the financial resources, the importance of foreign reserves is not synonymous with development. The external position of Algeria remains dominated by the weakness inherent to its specialization in hydrocarbons, (weak production and non-hydrocarbon exports less than 4% of the total so marginal and within these 4% semi-finished ferrous and semi-ferrous representing more than 60%), having no control over its own external accounts, which depend only on the price oil/gas and the exchange rate of the Dollar, GDP per capita moving chaotically.

Having a natural wealth that is ephemeral, Algeria must at the same time preserve this resource for future generations and gradually find different revenue sources. It follows that the levels of growth necessary to result in a significant improvement in the situation, estimated at 8 / 9% per year until 2017/2020/2025, seem difficult to achieve in the short term.  In the meantime, its association agreement of free trade with the European Union (EU), Algeria incurred a shortfall in customs duties that was valued for year 2016, at $1.27 billion and in 2015 at $1.09 billion.

To benefit from the positive effects of the agreement with Europe to a possible WTO membership, would require us to undertake first some cleaning in the Algerian economy and that they are obstacles to the comprehensive reform of the result of displacement of the segments to be able to which explains the dieback of the productive fabric that any operational analysis will have to connect the advanced or the brake reforms by analysing the different social forces, public policy strategies located fluttered between two conflicting social forces, rentier logic supported by proponents of importation (of the monopolists and not shopkeepers, actually only 100 controlling more than 80% of the total) and unfortunately dominant informal sphere, and minority entrepreneurial logic.

This explains, Algeria is in this interminable transition since 1986, not a market economy, nor an economy administered, explaining the difficulties of regulations, the progress of reforms being inversely proportional over the oil and the value of the Dollar, the reforms since 1986 being blocked or timidly with inconsistency when the price rises.

In summary, Algeria’s accession to the World Trade Organization is irreversible if it wants to avoid its marginalization, benefitting from both the Doha agreements and from the success stories of Russia and Saudi Arabia whose economies mainly dependent on hydrocarbons.  The security aspect having been improved, Algeria must create favourable conditions for the development by raising the environmental constraints to enhance the vitality of local and international enterprise as sole source of permanent wealth creation, and its foundation on promoting knowledge and the adaptation of its economic strategy to the fourth economic revolution that is looming between 2020 and 2030.

Read more on the WTO website.

16 events that will shape 2017

AMEinfo came up with this formidable vision of next year titled 16 events that will shape 2017; we could not help but reproduce it here all for the benefit of our readers.  All comments are welcome but we would advise to address direct to AMEinfo with nevertheless a copy to MENA-Forum.  

AMEinfo, is a well known and reliable middle east online medium of information.

Historically as per Wikipedia, AMEinfo.com was initially Arabian Modern Equipment Est., incorporated in Abu Dhabi, in February 1993 by Saif Al-Suwaidi and Klaus Lovgreen. The first version of the AME Info CD-ROM database of 125,000 companies was developed and compiled late 1996 and sold some 10,000 copies.  

The listing of the events as proposed by AMEinfo summed up thus.

  •  Many events of 2016 will have repercussions spilling over into 2017
  •  Positive impacts include Saudi Vision 2030, OPEC deal
  •  The fallout of Trump’s presidency, JASTA law, Italy referendum, etc. remain to be seen

The year 2016 was eventful, to say the least, with the world shaken by several momentous events whose repercussions will spill over into 2017.

Here are 16 events of 2016 that will most probably shape the coming year:

 

Saudi Vision 2030

This vision, announced in April, is one of the top economic highlights of 2016. Its repercussions are yet to be experienced throughout 2017 and beyond. Some of the biggest follow ups to this event are the Saudi Aramco IPO, expected to take place in 2018, privatising Football Clubs in the kingdom and its green card plan.

 

Trump as president of the United States

President-elect Donald Trump filling posts for his administration, getting ready to officially take office in January. This is when his foreign policy is expected to take its final shape and impact the whole world, starting with countries of the Americas, passing through Europe and the Middle East and reaching Asia.  

(Donald Trump wins US elections 2016: What it means for MENA)

 

Brexit

The United Kingdom voted to exit the European Union last June through a national referendum. Since then, the country underwent several months of economic chaos that it tried to keep under control, especially because it had not yet left the European Union. The chaos is expected to continue until the announcement of an exit plan, expected in March 2017.  

(Brexit: Who’s next?)

 

JASTA

The Justice Against Sponsors of Terrorism Act is a law passed by the United States Congress, allowing survivors and relatives of victims of terrorist attacks to pursue cases against foreign governments in the US federal court. The bill raised tensions with Saudi Arabia – when the bill was introduced, Saudi Arabia threatened to sell up to $750 billion in United States Treasury securities and other US assets if the bill is passed. Saudi Arabia is still lobbying the US over the law.

 

Egypt’s floating of the pound

Egypt’s central bank floated the pound currency in November, devaluing by 32.3 percent to an initial guidance level of EGP 13 to the dollar and hiking interest rates by three per cent to rebalance currency markets following weeks of turbulence. According to many observers, Egypt’s floating of its currency comes in a bid to attract more investors to the country.

 

China’s AIIB development bank

China launched the Asian Infrastructure Investment Bank (AIIB), a new international development bank, seen as a rival to the current, US-led World Bank. Countries such as Australia, Britain, Germany, Italy, the Philippines and South Korea agreed to join the AIIB, recognising China’s growing economic strength.

 

Google Alphabet

Last August, Google announced creating a new public holding company, Alphabet. Alphabet become the mother of a collection of companies, including Google, which includes the search engine, YouTube and other apps; Google X, the Alphabet arm working on big breakthroughs in the industry; Google Capital, the investment arm; as well as Fiber, Calcio, Nest  and Google Ventures.

 

Panama papers leak

Roughly 11.5 million documents were leaked in April, detailing financial and attorney-client information for hundreds of thousands of offshore entities. The documents contained personal financial information about famous, wealthy individuals and public officials.

The documents were created by a law firm in Panama, with some dating back to the 1970s.

 

Iran nuclear deal: lifting of sanctions

Although the framework of this agreement was announced in 2015, economic sanctions started to lift only in January 2016. The year saw the beginning of Iran’s return to international markets and more is expected for 2017 as the country has not yet made a full comeback.

 

Samsung Galaxy Note 7

Samsung Galaxy Note 7 phones, released this year, started to heat up and explode, causing some injuries in different markets around the world and killing the model altogether. This created massive chaos for the South-Korean manufacturer, which withdrew all units from the markets and started a gruelling investigation into the rootcause of the issue.

 

King Salman bin Abdel Aziz Bridge

Last April, Saudi Arabia and Egypt agreed to build a bridge over the Red Sea, linking the two countries together. This was seen as a historic move highlighting the excellent relationship between the allies. The bridge would be called “King Salman bin Abdel Aziz Bridge”.

 

OPEC deal

Members of the Organisation of Petroleum Exporting Countries (OPEC) and non-OPEC members as well, reached their first deal since 2001, to curb levels of oil output to ease a global glut after oversupply pressured prices for more than two years. Long-term market reactions to the deal are yet to be felt and will probably be seen throughout 2017.

 

Pokémon Go

The new augmented reality game, developed by Niantic, quickly became a global phenomenon and was one of the most profitable apps of 2016, with more than 500 million downloads worldwide.

 

Italy referendum

Italy’s government, led by then-Prime Minister Matteo Renzi, held a nation-wide referendum proposing reforms and amendments to the country’s constitution. The referendum failed, leading to the resignation of Renzi, tipping the country into potential political turmoil and the rise of the populist, right-wing movement in the country.

Renzi’s resignation and the country’s instability also brought up concerns over a looming banking crisis in Italy, the third-largest national economy in the euro zone.

(Italy referendum: Step 1 to another Brexit?)

 

Fed raises interest rates

The US Federal Reserve raised interest rates, signalling a faster pace of increases in 2017, with central banks adapting to the incoming of a Donald Trump administration, which has promised to cut tax. The year 2017 will probably see the repercussion of that decision.

 

Turkey’s coup

A coup d’état was attempted in Turkey in July against state organisations including the government of President Recep Tayyip Erdogan. The failed coup was carried out by a faction of Turkey’s armed forces, who attempted to seize control of several areas in the capital of Ankara, Istanbul and elsewhere.

The coup, and other terrorist attacks, disturbed Turkey’s peace and stability and harmed its tourism industry, among others.

 

The Reasons for the Slippage of the Algerian Dinar

In the parallel market,

Economic laws being generally immune to any political slogans and bureaucratic measures; how to explain the reasons for the slippage of the Algerian Dinar that for €1 on the parallel market in this month of December 2016 would fetch about DZD186 and DZD168 for a Dollar.

And most significantly why is there a gap with the official market that is DZD118 a Euro and DZD111 a Dollar?

Are we not moving towards the DZD200 a Euro with the inevitable inflationary impact due to the fact that all prices tend to often line up with those of the parallel market?

Will it not remind us of issues related to the level of the general lack of production and / or weak productivity, to the bureaucratic measures without strategic vision, and to either the monetary illusion or its mechanics interpretations that in the end have increased distrust towards this national currency?

To reply to these queries, let us start with :

A Short history of the the Algerian Dinar (DZD).

Set up in 1964, the DZD was on a par with the French Franc until 1973.  Since 1974, the value of the Dinar has been set following the evolution of a basket of 14 currencies.  We have seen depreciation between 1986/1990 of 150% from DZD4.82 to DZD12.191 a US Dollar, followed by a second one, of the order of 22% in 1991.  With the cessation of payment in 1994 and following the rescheduling and conditions imposed by the IMF, there was a new devaluation of more than 40% followed by its commercial convertibility in 1995/1996.

The evolution of the official exchange rate has evolved from 2001 to December 12, 2016 thus:

  • 2001 – DZD77.29 a Dollar
  • 2005 – DZD73.35 a Dollar
  • 2008 – DZD64. 58 a Dollar
  • 2010 – DZD74.39 a Dollar
  • 2015 – DZD100.46 a Dollar

On December 12th, 2016, the rating of the Dinar got close to DZD111 a Dollar and DZD118/119 a Euro at the official rate, a difference of 57% with reference to the parallel market and a slippage of about 60% from the 2010s.

This accentuates the inflationary process, with the risk of two-digit inflation by end of 2016, due to the fact that 70% of the needs of households and of public and private businesses are met by imports which with the falling price of oil are making the State no longer able to subsidize as it did in the past.  The value of the Dinar that is function of the trust and a productive economy, which in the case of Algeria being an economy fundamentally of a rentier type, will contradict the basic laws of economy where any devaluation should in principle boost exports.  Paradoxically, we see that when the price of the Dollar decline and the rise of the Euro, the Bank of Algeria make the Dinar slide (whilst avoiding to talk of devaluation) for political reasons.

Why then this accounting trick ? The answer or main reason could be that by devaluing the Dinar rate to the Dollar, is the artificial increase in oil tax that fluctuates depending on the price of a barrel, between 60 and 70%.  Because oil and gas revenues are converted into Dinars, together with Customs taxes on hard currency imports being calculated in Dinars, would only lead to a definite devaluation.  All this hide the importance of the budget deficit and thus the effectiveness of the State through its public expenditure budget and artificially inflates the Regulatory Revenue Fund as calculated in Algerian Dinars.

Inflation being the result, a certain distrust towards the Algerian Dinar that is officially administered and therefore disconnected with the real world as represented by parallel market.  In General, both foreign and local investors are wary of an administered low currency.  The real value of a currency, which is only a medium of Exchange could be interpreted as a nominal value adjusted for inflation.

Hoarding would not create value.  It is the work through continuous innovation, whilst adapting to this ever more interdependent world, turbulent and in perpetual upheaval that is the source of wealth of a Nation.  The value of a money depends on the confidence in that economy and all related politics of production and productivity, as shown by the Classics.  In fact, the essence of this situation lies in the dysfunctions of the different structures of the State because of its excessive intervention that distorts the market rules forcing households and operators to circumvent them.

So when the authorities immoderately tax and regulate excessively or by declaring illegal the activities of the free market, it skews the normal relations between buyers and sellers.  In response, buyers and sellers naturally seek ways around all Governments imposed obstacles.

What then are the reasons for the devaluation of the Dinar on the black market?

I count seven and here there are :

First, the gap could be explained by the reduction in the supply due to the fact that the global economy slowdown, combined with the death of many Algerian retirees, has largely paid off savings of the emigration.  This decrease in the supply of currency was offset by fortunes acquired regularly or irregularly by the Algerian community who transfer regularly or irregularly currencies into Algeria. Conversion of money from corruption, playing on the distortion of the official reference exchange rate (you charge me DZD150 a Dollar instead of a commodity bought 100 with the complicity of foreign operators; operations easier and faster in the trade) clearly shows that the parallel currency market is much more important than the savings of the emigration that explain the soaring real estate prices notably in urban areas.

Second, demand comes from traveling ordinary citizens: (tourists, medical tourists abroad and Hajis) because of the weakness of the derisory travel allowance. But it is the travel agencies that failing to benefit from the right to free exchange, they being importers of services also tend to use the black market currencies. They mostly export currencies instead of import as would the tourism logic like in Turkey, Morocco or Tunisia.

Thirdly, the strong demand comes from the informal sphere that controls 40 to 50% of the money supply in circulation  and 65% of the different market segments; fruits &vegetables, red &white meat market, and through imports using small resellers, because it is an informal financial intermediation away from State circuits. This sphere, which is the product of bureaucracy, everything is handled in cash thus promoting dialectical relationships with rentier segments favouring tax evasion and corruption.

Fourth, the gap is explained by the passage of the REMDOC to the CREDOC documentary credit, explaining the easing measures, in 2013 which largely penalized small and medium-sized companies representing more than 90% of the industrial fabric in decline (5% in GDP). There are many SMEs that to avoid supply disruptions use parallel currency market. The Government has in the past increased the allowance upto DZD4 million, but this is not enough, explaining the easing measures in the 2017 budget bill.

Fifth, many foreign businesses including domestic operators use the parallel market for their transfer of currency, since every Algerian is entitled to €7200 per transfer trip, using Algerian employees to increase the amount.

Sixth, the gap can be explained by the weakness of production and productivity; the injection of monies without productive counterparties generating a certain level of inflation and depreciation of the Dinar. According to an OECD report, the productivity of Algeria’s is one of the lowest in the Mediterranean basin. The industrial fabric that some would revitalize without a strategic vision, according to the old mechanical vision, without seeking to take into account new technological changes and global managerial methods is a strategic error that the Algeria might pay dearly in the medium term.

Industry representing less than 5% of GDP and of these 5%, more than 95% are PMI/SMEs  that are uncompetitive, costs indirectly devalue the value of the Dinar. There is no proportionality between public spending and the low impact, the average growth rate not exceeding 3%, is source of inflation and explains the deterioration in the rating of the Dinar (imbalance of supply and demand that is supplemented by a massive importation of goods and services) on the open market against currencies the Bank of Algeria supported artificially thanks to oil revenues.

If foreign exchange reserves tended towards zero, the Euro open market to trade more than DZD300 and the official exchange fluctuate between DZD200/250 a Euro, where the importance of an external targeted debt, only on productive activities, in order to avoid the complete depletion of foreign exchange reserves which take the value of the dinar to over 70%.

Seventh, to guard against inflation, and therefore deterioration of its Dinar, the Algerian citizen does not place only his assets in land, real estate or gold, but would apportion his savings in currencies. Many Algerians benefit from the crisis of real estate, especially in Spain, acquiring apartments and villas in the Iberian Peninsula, in France and some in the USA, Latin America and tax havens. It is a choice of security in a country where the evolution of oil prices is decisive.

Political uncertainty, and a certain psychosis created by financial scandals, is pushing many officials to sell their assets and purchase property abroad. Also many households put in the prospect of a fall in oil, and given the commodities erratic fluctuations revenues, on the decline since year 2O13, buy the currencies on the informal market. (Ref paper by Professor Abderrahmane Mebtoul “Informal Sphere in the Maghreb and how to integrate it into the real sphere” Institut français des relations internationales (IFRI) Paris – Brussels December 2013 – 60 pages)

In summary, distortions between the formal and informal market reflects the weakness of local productive fabric, oil based rentier economy could only give an artificial official rating of the Dinar. An objective an analysis of inflation which has repercussions on the real value of the Dinar, would suppose a serious grasp of the dialectical relationship between development, the distribution of income and consumption by strata models. Subsidies and the distortion of the exchange rate between the official and parallel markets with neighbouring countries are basic explanations of overbilling and the spilling over of a good number of products out the borders. Administrative measures can only be one-off, otherwise an army of controllers would be needed. The solution lies simply in a new type of governance, ideally with new mechanisms of regulation, local production in segments of value-added in internationalised sectors, so of successful companies.

Read more on these 2 previously published here contributions Algeria’s currency rating between 2017 and 2020 and

The Algerian Dinar great slide by 

Privatization as a Panacea for Declining Oil Wealth

Chatham House published this article written by Professor Paul Stevens, Distinguished Fellow, Energy, Environment and Resources, on 13 December 2016 and in view of its obvious interest for all our readers, it is reproduced here with all its proposed links for further reading.  The GCC’s countries economic reform as spearheaded by Saudi Arabia is believed to be only a matter of Privatization as a Panacea for Declining Oil Wealth.

The Royal Institute of International Affairs, commonly known as Chatham House, is a non-profitnon-governmental organisation based in London whose mission is to analyse and promote the understanding of major international issues and current affairs. It is the originator of the Chatham House Rule and takes its name from the building where it is based, a Grade I listed 18th-century house in St. James’s Square, designed in part by Henry Flitcroft and occupied by three British prime ministers, including William Pitt, 1st Earl of Chatham.

 

Economic Reform in the GCC: Privatization as a Panacea for Declining Oil Wealth?

Project: Energy, Environment and Resources Department

Economic liberalization through privatization is unlikely to succeed in the GCC states without simultaneous political liberalization and reform.

A Saudi investor at the Tadawul (the Saudi Stock Exchange) in Riyadh, on 15 June 2015. Photo: Getty Images.

Summary

  • The collapse in oil prices since 2014 has presented serious economic challenges for the countries of the Gulf Cooperation Council (GCC), underscoring the need to diversify their economies away from oil and develop their private sectors. In response, the GCC states have devised wide-ranging economic reform plans, central to which are, in many cases, options to privatize state-owned enterprises (SOEs).
  • Media attention has focused particularly on the proposed sale of parts of Saudi Aramco, but across the GCC states the interest in privatization extends beyond energy to other areas of industry and services.
  • Privatization, for the GCC states, is expected to create more effective incentives; force greater accountability on senior management; reduce government interference in business operations; and give management clear commercial targets unfettered by requirements of social policy. It is also intended to reduce the financial constraints on enterprises that have hitherto been dependent on government revenue.
  • However, much of the current discussion disregards the lessons learned from privatization experiences elsewhere in the 1980s and 1990s. The very large literature developed at this time raises serious questions about the ability of divestment programmes to deliver the objectives now expected of the same process in the GCC.
  • Analysis of the ideological arguments for privatization – derived from the economic theory of politics, theories of public choice and principal-agent analysis – can be used to explain why there is a strong possibility that governments in the GCC states will fail to privatize effectively.
  • Previous experience shows that simply changing the property rights of an enterprise – i.e. switching it from public to private ownership – is not in itself sufficient to improve performance. This requires other conditions, including increased competition; improved signals that force management to be responsive, flexible and inventive; reduced government interference to allow management to maximize shareholder value; and effective and efficient capital markets to impose the necessary discipline on managers.
  • The socio-political conditions that characterize the GCC countries – based on family and other elite patronage networks, and where property rights are dubious, the rule of law may be debatable, and the prospects for independent regulation of privatized enterprises are uncertain – are not conducive to enabling the necessary conditions for privatization to succeed.
  • Economic liberalization through privatization is unlikely to succeed in the GCC states without simultaneous political liberalization and reform. If privatization simply delivers a set of windfalls for the state while reinforcing traditional patronage networks, this is likely to aggravate the same perceptions of corruption and helplessness that triggered the Arab uprisings from the start of 2011.
  • Theory and contextual analysis alike therefore suggest that privatization will not be the panacea that many believe it to be for the GCC states. A process that allows the entry of the private sector and thus forces a (hitherto monopoly) SOE to compete and perform appears to be a more realistic way forward than does wholesale privatization.

– See more at: https://www.chathamhouse.org/publication/economic-reform-gcc-privatization-panacea-declining-oil-wealth?utm_source=Chatham%20House&utm_medium=email&utm_campaign=7845295_CH%20Newsletter%20-%2016.12.2016&utm_content=GCC-Title&dm_i=1S3M,4O5GV,NUSYEK,HFPWZ,1#sthash.hbTldyjO.dpuf