Algeria Economic Outlook
Real GDP growth was an estimated 2.5% in 2018, up from 1.4% in 2017, driven mainly by growth in the nonhydrocarbon sector (5.2% growth) and significant fiscal spending (36.7% of GDP). The hydrocarbon sector remained sluggish (shrinking 0.1%).
Growth estimates and projections over 2018–20 are based on the conservative hypothesis of a weak hydrocarbon sector and a slightly improving nonhydrocarbon sector. Economic growth is projected to be 2.7% in 2019 and 1.9% in 2020. The subdued 2020 growth is due partly to a more restrictive fiscal policy—as of 2019 public expenditures are projected to decline due to budgetary consolidation, which is projected to reduce the fiscal deficit from 5.3% of GDP in 2018 to 5.0% in 2019 and 4.7% in 2020.
Faced with contracting bank deposits since 2015, the Bank of Algeria resumed bank refinancing and stimulated the interbank money market by reducing reserve requirements and better regulating the capital markets. Inflation remained under control at 4.8% in 2015, 6.4% in 2016, and 5.6% in 2017.
Tailwinds and headwinds
Algeria’s infrastructure, geographic position, diaspora, domestic market, and natural resource endowment provide the assets to transform and diversify its economy. In addition, the external debt reduction policy over the past decade and substantial foreign exchange reserves, though declining, enable Algeria to better withstand economic shocks.
Algeria has not financed its deficit through increased external debt, which remains negligible at less than 2% of GDP. Likewise, government debt, consisting mainly of domestic debt, is limited to 40% of GDP. A major decline in external financial resources led authorities in 2016 to adopt the New Economic Growth Model 2016– 2030, aimed at structural transformation. The main reforms relate to improving the business climate and replacing direct and indirect subsidies with targeted social protection for low-income populations.
To respond to the sharp deterioration in the country’s external position in 2015, import restrictions were introduced on 850 products. The large current account deficit in 2018 (9% of GDP) is smaller than in 2017 (13.1%) and is projected to reach 7.4% in 2020. Official foreign exchange reserves decreased from 22.5 months of imports at the end of 2016 to 18.6 months in June 2018, and the drop is expected to continue. Inflation is projected to drop further to the 4% range by 2020.
Despite efforts to diversify the economy, Algeria still depends on external resources from oil and gas exports. Directly or indirectly, around 80% of the economy relates to hydrocarbons. The economic outlook will depend mainly on hydrocarbon prices, which started to fall in June 2014, rebounded to nearly $80 a barrel in October 2018, and fell again toward the end of the year. Between 2012 and 2017, falling oil prices reduced the hydrocarbon sector’s contribution to GDP from 37.1% to 21.1%. Real GDP growth, projected at 2.7% in 2019 and 1.9% in 2020, seems insufficient in the medium term to tackle social protection and unemployment reduction.
The terms of trade improved in 2017 and 2018. The real exchange rate depreciated by 8.8% in 2018.