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Why Oil-Rich Algeria Can't Extract Itself From Dire Poverty

Algeria faces a real risk or going bankrupt by 2029. How did it come to this, in one of the world's leading hydrocarbon producers?

Image of freedom graffiti street art in Algiers

"Freedom" graffiti street art in Algiers

Ilyes Zouari*


ALGIERS — Algeria's enormous natural-resource wealth is no longer enough to mask the economic reality of the country, which lags far behind its French-speaking Maghreb neighbors, and is likely to experience serious difficulties around 2028.

For the first time since its independence in 1962, Algeria posted the lowest GDP per capita of the three Maghreb countries in 2021, before it was inflated by an exceptional — and brief — rise in hydrocarbon prices the following year.

According to World Bank data, Algeria's GDP per capita stood at $3,691 in 2021, the latest year for which statistics are available, compared with $3,807 for Tunisia and $3,795 for Morocco, which had always occupied last place among the three Maghreb countries since their independence.

By overtaking Algeria, neighboring countries Morocco and Tunisia have achieved a remarkable feat, given their limited natural resources compared with Algeria — one of the world's leading hydrocarbon producers.

As Africa's leading producer of natural gas and third-largest oil producer, Algeria extracted 101 billion cubic meters of natural gas in 2021 and around 900,000 barrels of oil per day in the same year: 53 times more gas and 24 times more oil than Tunisia, whose limited natural resources are themselves considerably greater than Morocco, which has almost none.

Maghreb neighbors

This is the result of the ineffective economic policies pursued by Algeria since independence, and the increase of its hydrocarbon production. Because of a lack of diversification, the Algerian economy is still heavily dependent on hydrocarbons, which account for around 90% of national exports.

Compare that to Western oil and gas-producing countries like Canada and the UK, where oil and gas account for just 30% and 11% of their respective GDPs — or to Algeria's Maghreb neighbors, which have also succeeded in developing diversified and competitive economies.

Alongside the establishment of a favorable framework for national and international investment, Tunisia and Morocco have built up numerous industrial sectors, allowing them to occupy top positions on the continent in terms of industrialization and business environment.

According to the latest rankings published by the African Development Bank (ADB), in Nov. 2022, Morocco and Tunisia ranked second and fourth respectively among the continent's countries in terms of industrialization, while Algeria came only 11th. In fact, Morocco is set to rise to the top in the near future, overtaking South Africa.

Image of A high-speed train at a station in Rabat, Morocco\u200b

A high-speed train at a station in Rabat, Morocco

© Aissa / ZUMA

Morocco's economy takes flight

The judicious economic policies pursued by Algeria's two main neighbors have enabled them to make considerable progress in recent decades. While Tunisia was a pioneer, Morocco has really taken off over the last 20 years, and today stands out as the only Arab country with a genuine automotive industry, and the only African country equipped with high-speed trains.

Morocco will have no fewer than 56 of the 500 largest African companies in 2021.

Morocco has also become a key player on the African scene, becoming the continent's second-largest investor (after South Africa, which is particularly active in the mining industry), boasting a highly-developed banking network (to the point where there are now twice as many Moroccan bank branches as French branches in French-speaking sub-Saharan Africa), as well as having made the national airline, Royal Air Maroc, a major player in African skies.

Likewise, the dynamism of Morocco's economy is also reflected in the number of national companies among the continent's largest corporations. According to the latest annual ranking published by Jeune Afrique magazine in March, Morocco will have no fewer than 56 of the 500 largest African companies in 2021, compared with just 12 for Algeria and 46 for Egypt, whose population is 2.8 times larger than Morocco's.

In fact, Algeria comes a long way behind Tunisia (21 companies) and Côte d'Ivoire (27), despite their much smaller populations.

But while Morocco's good performance is primarily due to the sound economic strategies it has adopted, as well as the size of its domestic market (three times larger than Tunisia's, but one-fifth smaller than Algeria's), it is also due to the country's membership of the French-speaking world, which has allowed it to attract substantial French investment and benefit from privileged access to the vast neighboring French-speaking sub-Saharan Africa. With 22 countries, this is the most economically dynamic, stable, least indebted and least unequal part of the continent.

Given its geographical and linguistic proximity, its dynamism and greater stability, French-speaking sub-Saharan Africa was the starting point for the international expansion of Moroccan companies, which were able to gain in size and experience before expanding beyond this vast area.

Real risk or Algerian bankruptcy

While Morocco has seen its foreign exchange reserves increase in recent years, reaching an all-time high of $35.5 billion USD at the end of March 2023 (compared with just $19 billion at the start of 2014, and thanks to the strength of its diversified economy), Algeria's heavy dependence on hydrocarbons has led to a collapse in the country's foreign exchange reserves, alongside an explosion in its indebtedness — and all this in an international context marked by declining hydrocarbon prices, which are increasingly being replaced by renewable energy sources.

At the same time, and according to the latest data provided by the IMF, the country's public debt has increased considerably, rising from just 7.7% of GDP at the end of 2014 to 62.8% at the end of 2021 (before falling back, provisionally, to 52.4% at the end of 2022).

Algeria is soon set to become one of the 10 most indebted countries.

While Algeria was the least indebted of the continent's 54 countries in 2014, it has risen to 26th place in just seven years, and is soon set to become one of the 10 most indebted countries, according to forecasts on debt (especially as it has one of the world's most abysmal budget deficits, having reached 12.3% of GDP in 2022, according to the World Bank).

Indeed, with the country's diversification still minimal, compared to that of its Maghreb neighbors, the economic situation will continue to worsen, given the return of hydrocarbon prices to their pre-Ukraine war levels (or even lower overall) and their continued decline due to the rise of renewable energies.

Without in-depth economic reforms, Algeria's foreign exchange reserves are likely to decline at a rate of several billion dollars a year. Indeed, the current modest policy of diversification could only be sufficient to cover the future decline in hydrocarbon income, resulting from both the sustained fall in hydrocarbon prices and the drop in the country's hydrocarbon exports (following the rise in domestic consumption). At the same time, it will be difficult to reduce import levels further, given the scale of the restrictions already imposed and the country's growing population.

With foreign exchange reserves reaching $66.1 billion at the end of March 2023, and assuming an annual decline to just $10 billion a year, compared with $13.2 billion over the 2018-2021 period (and which might require starting to cut a number of social benefits), Algeria should then only be able to cover four months' worth of imports by mid-2028 — which is the level at which a country is considered to be close to bankruptcy (like Kenya, which is currently unable to pay all of its civil servants).

Such a situation is difficult to avoid given the modest diversification policy currently being pursued, and the fact that it is unlikely Algeria could achieve in just five years what Tunisia and Morocco took many years to put in place. This would force the country to turn to international financial institutions and implement painful reforms, in order to avoid complete bankruptcy — a scenario similar to that experienced by Venezuela, another major hydrocarbon-producing country, and ally of Algeria.

Despite significant natural wealth, Venezuela totally collapsed by the middle of the last decade, causing the exodus of over 6 million people since 2015, a fifth of the Venezuelan population — one of the greatest humanitarian disasters in recent history.

*The author is the president of the Centre d’étude et de réflexion sur le Monde francophone.

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