Algeria among oil-exporting nations considering reforms, speaker says

Algeria faces economic management challenges equal to those of Nigeria and Iraq amid depressed global oil and gas prices, a speaker said during a discussion of Middle East and North African oil-exporting nations’ economic outlooks.

Algeria faces economic management challenges equal to those of Nigeria and Iraq amid depressed global oil and gas prices, a speaker said during a discussion of Middle East and North African oil-exporting nations’ economic outlooks.

“Some may say it has resisted change and made essentially cosmetic reforms, but I believe this disregards its political history,” said Haim Malka, deputy director of the Middle East program at the Center for Strategic & International Studies.

“Over the last several decades, economic reforms triggered by low oil prices have led to violent responses there. The government’s approach has become very cautious as a result, but there still is positive forward movement,” Malka said during the May 4 event at CSIS, which followed a similar discussion there about Venezuela and Brazil (OGJ Online, Apr. 18, 2016).

“Hydrocarbons and hydrocarbon revenue are Algeria’s life blood. The revenue they generate was used to create a social system designed to encourage stability. People have come to expect free health care, education, and other services,” Malka said.

Government cuts in social welfare spending in 1986 after oil prices plunged from $30/bbl to $10/bbl triggered protests that took lives, he said. Political reforms allowing free elections and formation of political parties came 3 years later, but were reversed by a military coup when Islamic parties began taking hold. A new president initiated fresh reforms as oil prices rose in the late 1990s, and Algeria began protecting its borders with less stable neighboring countries.

“In 2016, Algeria is facing its lowest economic growth—about 1.4%—in decades. Revenue from oil and gas is falling as producing fields mature and domestic demand grows,” said Malka. “This is troubling because energy is so closely connected to political stability. Spending has been cut, some taxes have been raised, and plans to invest in energy have been delayed. The important point is that there’s an active debate, and a will to change.”

Barriers to reforms

Iraq and Nigeria may face more obvious barriers to instituting serious reforms amid depressed commodity prices, but all three countries as well as other Middle Eastern and North African (MENA) oil and gas exporters should begin to move now and not wait for prices to improve, a second speaker urged.

“They need to make their revenue more resilient by diversifying it, make spending more efficient so there’s more bang for the buck and fewer energy subsidies, creating stronger economic as well as political institutions, and creating frameworks for saving during good times so they don’t have to cut spending in bad times,” said Benedict Clements, division chief for the International Monetary Fund’s fiscal policy and surveillance division.

Most MENA oil and gas exporting countries expect much lower revenue through 2020 but have increased spending relative to their gross domestic products, he added. “For these countries to have balanced budgets, oil prices would have to be over $60/bbl. Practically all of the oil exporters are going to have to make fiscal adjustments. Some of those will need to be big.”

Institutions within Iraq and Nigeria are withstanding exterior economic pressures better than many outside observers suspect, two other speakers suggested. “Despite the recent chaos in Baghdad, ministries including the oil ministry have continued to function. But this also affects the government’s capacity to address reforms,” said Jared Levy, who directs custom research at the Iraq Oil Report.

“In the oil sector, Iraq is continuing to invest, but at about half the levels announced in the country’s investment strategy. The emphasis is on sustaining production. Financing for projects critical to removing bottlenecks is unclear,” Levy said.

Meanwhile, Aaron Sayne, a senior governance office at the Natural Resource Governance Institute, noted, “Nigeria is better placed than some of Africa’s other oil producers, particularly the newer ones, because it hasn’t pinned its hopes and dreams on big new exploration programs that are uneconomic now or expected big licensing rounds.”

The country’s new government is not doing much right now to mobilize nonoil revenue, particularly company income taxes and value-added taxes, Sayne said. “Tax collection in recent years has account to 3-4% of GDP, compared to 15% in other countries. The government also is talking about more borrowing, which is perfectly rational in the short term. But if you look further out, there’s some concern its being able to spend the way it plans without taking on an unacceptable amount of debt that comes due relatively soon,” he said.

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