cynic would argue that there is only one important question when discussing the Algerian economy: the price of oil. The volatile commodity is the inescapable constant for its economy and it is on this one variable that Algeria’s macro-economic status depends.
The last four years illustrate the pattern. In 1998, the average annual price of crude oil was just under $13 per barrel. By 2000, the price was $28.5, dropping slightly in 2001 to approximately $26.
Over the same period, the government’s total budget revenue and grants increased from $10.1 billion to approximately $21 billion, the current account from a deficit of –1.9% of GDP to a massive surplus of 16.8% in 2000 and 12% in 2001, gross official reserves from $6.8 billion to $17.9 billion, while total debt as a percentage of GDP dropped from 64.3% to around 40%. Financially, Algeria has never been so good.
However, the capacity of the hydrocarbons sector to transform the state’s public finances highlights Algeria’s vulnerability; its spending policies and domestic economic growth are hostage to fluctuations in international energy prices. This dependence also illustrates how crucially important Algeria’s reform agenda is in order to rehabilitate and diversify the economy.
Economic reform, in place since a balance of payments crisis in 1994, has had mixed results. Stringent fiscal measures undertaken in coordination with an IMF-sponsored stabilization program resulted in the sharp drop in inflation, the balance of payments regime was workably restored, while the negative trend in economic growth was reversed. Testimony to this change was the ability of the Algerian government to maintain – albeit sluggish – economic growth in 1998-1999, a time of severely depressed oil prices.
But, while the tightening of domestic demand has helped to decrease Algeria’s vulnerability to external shocks, economic growth as a whole has not been strong.
Despite surging oil prices since 1999 and a strong increase in hydrocarbon exports, overall economic growth dropped from 3.2% in 1999 to 2.4% in 2000, with growth in 2001 hovering around the 3% mark. This is insufficient to meet Algeria’s social and material demands. Most estimates argue that the Algerian economy needs to grow at approximately 7% per annum in order to at least make some inroads into the country’s acute unemployment problem – which stands at around 30% to 35%, 60% of which are young and unskilled – and improve the generally poor level of living standards. It is estimated that poverty affects approximately two-thirds of the total population, 20% of whom live on less than a dollar a day.
 

GDP: GDP PER CAPITA: 2001 GDP GROWTH: EXPECTED 2002 GDP GROWTH: INFLATION: POPULATION:	$57 billion $1,620 3% 4.9% 4.5% 30 million
Thanks to high oil prices in 2000-2001, Algeria’s financial situation is strong. Increased levels of social unrest in 2001, high unemployment, housing shortages, and severe urban floods mean the government will spend much of that money on stimulating the economy in 2002
WATCH OUT FOR The price of oil and the Algerian government’s budget deficit. The IMF wants the government to match its fiscal expenditure to developments in the oil market. If prices continue to fall in 2002, this will likely curtail the government’s expenditure and jeopardize its economic stimulus package. The IMF projects that a low-oil price scenario will see Algeria’s budget balance ballooning from a healthy surplus of 9.9% in 2000 to a deficit of 7.6% in 2003.
GOOD NEWS FOR BUSINESS President Bouteflika signed in 2001 the much-awaited Association Agreement with the European Union. This is a major step in Algeria’s customs tariff reform and its attempt to gain admission to the WTO. Further efforts came with the 2001 Complimentary Finance Bill, which did away with a product-specific tax and replaced it with a “provisional additional duty” – the DAP – which will be introduced at 60%, drop to 48% after one year and then a further 12% annually until zero. A ministerial decree last year also cut the top rate of customs duty from 40% to 30% as of the beginning of this year and the intermediate rate from 15% to 5%.

The problem largely lies with structural reform, needed to increase growth and diversify the export and revenue bases away from hydrocarbons. This has proved much more difficult to implement than balancing the government’s finances. Public industry productivity continues to decline, the banking sector is still burdened by non-performing loans and privatization has been distinctly limited.
In tandem with its economic problems, Algeria has been experiencing a recent upswing in social unrest. Unemployment, a shortage of housing, ethnic unrest in the Berber region of the country and severe flooding in Algiers in late 2001 have contributed to a tense social situation. Resolving the overall structural weakness of the economy without jeopardizing short- to medium-term growth is therefore the priority for upcoming reform efforts.

THE GOVERNMENT'S LATEST ECONOMIC strategy was unveiled in the spring of 2001 in the form of the Plan de soutien à la relance. In an attempt to make use of Algeria’s oil-driven financial health, the plan commits around $7 billion (approximately 14% of GDP) in expenditure over a four-year period from 2001 to 2004.
The plan’s broad objective – increasing economic activity – comes in four parts: stimulating demand, focusing on developing labor-intensive activities via increased support for agricultural production such as fisheries and animal production as well as small and medium-sized enterprises, engaging in public infrastructure works and, finally, developing human resources.
Proponents of the plan expect it to generate an annual GDP growth of 5% to 6% in the following years, with the majority of the stimulus package scheduled for disbursement by the end of this year (see table above).
The IMF, Algeria’s principle donor, has in the main endorsed the plan, arguing that a more expansionary fiscal policy is consistent with Algeria’s strong financial position and its growing social demands. Nevertheless, it expects Algerian authorities to maintain a cautious monetary stance and fulfill a commitment to adjust fiscal policy to future developments in the oil market. The inability of OPEC to convince other major oil producers, such as Russia, to cut output will be a continuing worry for the government. The falling oil price – $19 in early 2002 – will most likely force a more limited implementation of the 2001-2004 economic plan.
Overall, the plan is designed as a supplement to the government ongoing structural reforms, which must remain the focus. Some notable positives have been the liberalization of the hydrocarbons sector, telecommunications deregulation and customs tariff reform, a crucial part of the government’s Association Agreement with the European Union and for its attempt to gain membership to the World Trade Organization.
The ongoing pursuit of these reforms will depend on the government’s ability to override vested interests, while at the same time alleviating the poor living standards of its people. In truth, of course, there are many more questions than just the price of oil.