Algeria: collapse in purchasing power opens debate on the fate of oil and gas windfall revenues

The fall in oil prices in 2014 put the stability of the Algerian regime on the ropes. With an economy anchored in hydrocarbons and a repressive political model, Algeria entered a period of upheaval that would lead five years later to the outbreak of the Hirak, a peaceful national mobilisation spurred by the intention of the then president Abdelaziz Bouteflika to run for a fifth time in the 2019 elections. The demonstrators also demanded far-reaching reforms of the state. 

The scale of the movement led to the removal of the veteran Bouteflika by the army. The regime had to act to maintain the status quo, even if in reality nothing changed, as was demonstrated by the arrival of Abdelmadjid Tebboune as president after the elections. A prominent member of the ruling party and holder of several ministerial portfolios under the late Bouteflika, Tebboune used the COVID-19 pandemic to repress dissent and consolidate the new face of the regime. However, the delicate economic situation and strong discontent on the streets raised fears of a new wave of protests. 

These fears seem to have dissipated. At least that is the current perception of the Algerian leadership, which has witnessed an unprecedented increase in oil and gas revenues in recent months. As Russia's invasion of Ukraine sent prices soaring and accelerated Europe's energy disconnection from Russia, the continent is desperately seeking alternative sources to prepare for what is expected to be a difficult winter. Many have set their sights on Algeria, such as Draghi's Italy and Macron's France, which have recently visited the Maghreb country in search of advantages and new gas contracts.

According to official data, Algeria's trade balance shows a surplus of $5.6 billion in the first half of 2022, well above the figures for 2021, which were limited to $1.34 billion. In this course, moreover, exports have grown by almost 50%, a level that favours the stabilisation of foreign exchange reserves. According to the World Bank (WB), Algeria's GDP has regained the muscle it lost during the COVID-19 crisis. In short, the wind is blowing in the establishment's favour. Not so for the population. 

The sharp increase in oil and gas revenues has not translated into social and economic improvements for Algerian citizens. This has been reflected, among other examples, in the exponential increase in the number of families who have applied to buy school supplies for their children in instalments after the start of the school year. Purchasing power has suffered as a result of the crisis, leading many to question where the energy windfall is going. There are doubts. 

Moreover, Algeria's structural economic problems remain. High unemployment, which stands at over 12%, galloping inflation and exponential price rises, combined with heavy dependence on hydrocarbons, threaten to shatter Algeria's period of relative growth.

Bouteflika's time in power (1999-2019) coincided with more or less stable oil and gas prices. This allowed the authoritarian leader to govern without being subject to the dictates of the economy, using income redistribution measures as a firewall to contain the outbreak of the Arab Spring in Algeria. Late in the year, his successor, Tebboune, had not suffered the same fate as a result of the pandemic and growing instability in the Maghreb. However, the current president is trying to copy the 'Bouteflika method'. 

At the beginning of the year, Tebboune, who is preparing for a second term in office, assured that the executive would focus on the economy. An increase in public spending was therefore expected after years of austerity encouraged by the International Monetary Fund (IMF), whose prescriptions were aimed at reducing public debt, which had soared to 65.54 billion dollars. The result has been a drastic reduction of the state and a visible deterioration of public services, a source of social discontent.

During this period, the Algerian government has put in place a series of so far unsuccessful measures to contain the fall in purchasing power. Unemployment benefits for new workers, wage increases, the withholding of basic tariffs and subsidies for certain consumer goods such as oil, sugar, milk and bread. The frustration on the streets, however, is not abating. The scenario continues to be worrying and most families have little room for manoeuvre to face the coming months. 

The WB's director for the Maghreb, Jesko Hentschel, stressed in his latest report that, despite the apparent recovery of economic activity in Algeria, "challenges remain, aggravated by the high volatility of oil prices and the uncertainty of the dynamics of the global economy". To overcome this situation, the German economist recommended that the Algerian state involve the private sector in its efforts, which "will be key to stimulating inclusive growth and creating jobs". 

However, the Algerian power elite controls the national economy. It dominates virtually unchallenged in all sectors, obstructing the development of private initiative and ultimately blocking the social lift. The economist and president of Paris-Dauphine University, E.M. Mouhoud, describes the Algerian economic model as a kind of "crony capitalism" in which elites "reserve markets for themselves and prevent the emergence of private and independent competitors". Inbreeding and excessive bureaucracy make Algeria one of the most difficult environments in the world in which to establish and operate a business, according to Freedom House.