Algeria: Abdelmadjid Tebboune soon forced to call on IMF?
Plunged into a severe recession, accentuated by the health crisis and the sharp drop in oil prices, Algeria could be forced to resort to external debt. Anxious to preserve its sovereignty, Algiers has so far excluded all financing from the International Monetary Fund. But it may better to go early, while it still has room to negotiate terms.
With the downturn, accelerated by the fall in the price of oil and the health crisis, Algeria seems ever closer to financial crisis.
Serious enough for the country to be forced to resort to external debt before it is too late.
Despite Algiers’ first painful experience with the multilateral lender in the midst of the civil war, there are new signals that suggest the country may now be interested in IMF support.
The first signal was the appointment by President Tebboune, at the end of September, of Rosthom Fadli as new central bank governor.
The governor of the Bank of Algeria is not empowered to make decisions regarding the possible use of external credit: the decision is the responsibility of the President of the Republic.
A path that Abdelmadjid Tebboune has always refused to take “for the sake of preserving national sovereignty. A concern shared by all Algerians,” says Bader Eddine Nouioua, former governor of the Central Bank (1985-1989).
The Algerian president nevertheless chose to appoint a more open-minded technocrat from its ranks. Fadli spent most of his career at the Bank of Algeria in the Directorate of External Financial Relations, before becoming its vice-governor.
IMF “Committed to help Algeria”
Another sign is the IMF’s increasingly regular statements about Algeria, even if the country is the only one in the region not to have had recourse to the Fund’s financial support in the fight against the consequences of Covid-19.
Algeria’s worsening economic situation, however, has not left the radar of the Bretton Woods institution.
Moreover, according to Geneviève Verdier, IMF Head of Mission for Algeria, “the IMF remains committed to helping Algeria cope with the impact of the coronavirus pandemic. Remote missions on capacity building have taken place, and the country team has worked with the authorities to obtain strategic advice.”
At the end of April, the international institution sounded the alarm. The Fund estimated the price of a barrel of oil required for the Algerian budget to be balanced in 2020 at $157.2 in its “Regional Economic Outlook – Middle East and Central Asia”, which also covers North Africa.
The IMF also says this level of budget balance for Algeria would have required an impossible $100/barrel on average over the last three years (2017-2019).
A budget unbalanced by oil
This equilibrium price for 2020 is one of the highest in the world, after that for Iran ($389/b) and before that for Bahrain ($96/b). At present, the current price of Brent crude does not exceed $42-43 per barrel.
“This illustrates once again the very strong dependence of the Algerian economy on the price of hydrocarbons, especially the price of oil. This situation has been well known for many years, but it is even more true in this very difficult year of 2020,” says Francis Perrin, research director at Iris (Paris) and associate researcher at the Policy Center for the New South in Rabat.
In addition, the IMF also calculates the level of oil prices to ensure that the current account balance is balanced. For Algeria, it is $112 per barrel for 2020. This is the highest level among oil-producing countries covered by the IMF outlook.
“Whether we are talking about internal (budget) or external (balance of payments) economic balances, Algeria needs a very high oil price,” adds Francis Perrin.
Local media have hammered this home in recent weeks to emphasize the depth of the economic crisis that the country is going through. One more worrying anomaly: the Central Bank has stopped producing monthly statistics since December 2019.
“With such estimates, the IMF is increasing the pressure on the Algerian government to find sources of revenue outside oil,” says an analyst specializing in Algerian economic policy.
Low external debt…
On October 15, the IMF brought out the heavy guns to highlight the urgency of the Algerian economic situation. In an economic outlook note, the international institution forecasts a historic drop in GDP to -5.5% in 2020, before a slight recovery of 3.2% in 2021.
“Prior to the pandemic, credit growth in Algeria had been rapid, the monetization of the deficit had increased macroeconomic risks, and international reserves had declined significantly. Government interventions in the economy are pervasive and financed by hydrocarbon revenues, making Algeria highly vulnerable to exogenous shocks and leaving it with limited room for maneuver to absorb them,” the Fund notes.
“I think now is the time to go to the IMF, or turn to international donors such as the African Development Bank (ADB) or the World Bank,” said Algerian economist Ali Harbi, at a conference organized October 18 by Algeria in motion, a program of the Forum France-Algeria 2018.
“As long as we still have a small mattress and that we have enough to negotiate, it’s time,” he said. Indeed, the country has a relatively low external debt, at 1.7% of GDP in 2019, according to French Treasury figures.
Former Bank of Algeria Governor Bader Nouioua also points out: “At present, Algeria has a very low external debt and can obtain sufficient credit from the multilateral financial institutions of which it is a member, if it presents them with reliable and well-considered projects without compromising its sovereignty and independence. This is an important issue, and it is regrettable that the country has been slow to decide to resort to external financing, in complete freedom, to undertake its development before it is forced to do so under difficult conditions, under pressure from the IMF.”
…but an acute pressure on the balance of payments
Apart from the external debt, considered “good debt” by economists, other indicators that measure the balance of payments debt, and therefore the risk of deficit of the country, have gone into the red.
According to data compiled by international institutions, by the end of 2020, Algeria should have just under $45bn in foreign exchange reserves, compared to $61bn at the end of 2019. And IMF projections for end 2021 anticipate a level of less than $22bn dollars.
In addition, Algeria’s fiscal and current account deficits are projected to reach -20% and -18% of GDP, respectively, by 2020; and its domestic public debt ratio is projected to be close to 46% of GDP in 2019 – five times higher than in 2014 – and to rise to more than 53% by the end of the year.
“At this rate, the reserves needed to pay for the imports the country needs will be exhausted by early 2022,” said an Algerian economic policy specialist contacted by JA.
“All of this puts the government in a budgetary deadlock, since the public debt affects the dinar, and President Tebboune has prohibited himself from printing money,” continued our interlocutor.
“But without creating money, how can we act to increase government revenues? With a low oil price, insufficient tax collection since the economy is almost at a standstill because of the Covid-19 …”.
As for the dinar, after an accelerated fall since February, it is at its lowest level against the euro in ten years.
When 1 euro was still trading at nearly 134 dinars at the end of 2019, it has reached more than 150 dinars today. And the economist concludes: “The IMF becomes unavoidable, because banks will lend only if the Fund is in control.”
In other words, by procrastinating as it is doing, while its foreign exchange reserves remain high but are under pressure (from the trade deficit and weakened dinar), the Algerian government risks aggravating a fragile situation… And being forced to turn in extremis to the IMF, which would this time be in a position of strength to set terms.