Algerian Prime Minister Ahmed Ouyahia’s first major policy announcement on September 17 sparked one of the largest economic debates that Algeria has witnessed in the past few years. His proposal to let the central bank finance the fiscal deficit riled most economists, who saw this measure as a return to the past. The prime minister justified this move by arguing that, without printing money and injecting it into the government’s coffers, the state would run out of cash by November and would be unable to pay public sector employees’ salaries. The implicit subtext was that this debt monetization process is the only tool the authorities have to avoid a destabilizing wave of political and social unrest.
In the short term, injecting extra liquidity in a closed, commodity-dependent economy with a very small non-hydrocarbon sector, little competition, and tight import restrictions will inevitably result in fast-rising inflation and a depreciating exchange rate. Contrary to Ouyahia’s claims that this measure can be compared to quantitative easing policies in the United States and Europe, Algeria’s isolation, oil and gas dependence, and limited manufacturing base mean that this additional liquidity will only partially boost business activity and will instead overheat the economy. However, inflation and depreciation will depend on how much liquidity the central bank will provide: the government has so far refrained from setting a specific target or ceiling for this “helicopter money,” leaving everyone in the dark as to the exact impact of this policy.
Debt monetization will allow Algeria to finance its deficit automatically and to stop worrying about borrowing money for the next few years. This policy puts a temporary end to the almost endless debate around the country’s economic adjustment, in which the authorities have scrambled to find a policy response to the deterioration of fiscal and external accounts over the past few years. Since 2014, when Algeria first recorded significant fiscal and current account deficits due to the sharp decline in oil prices, the government has struggled to identify financing sources to plug these twin deficits—particularly as the regime has consistently refused to raise funds on the international markets or turn to the International Monetary Fund (IMF).
This taboo on foreign debt is puzzling given the strikingly different policies that other oil producers in the region have recently pursued. While Saudi Arabia and Qatar have issued sovereign bonds to diversify their sources of financing and fund their economic restructuring programs, Algeria initially chose to tap into its quasi-sovereign wealth fund (Fonds de Régulation des Recettes, FRR) to postpone any politically sensitive austerity measures. Once the resources set aside in this fund were almost entirely depleted, the authorities turned to tapping domestic savings to plug the fiscal deficit.
That said, low levels of financial penetration and the size of the informal sector mean that a significant portion of private savings are kept outside of the formal banking sector. Despite multiple attempts to get people to invest in government bonds that the state could then use to finance its debt, this liquidity has remained out of the government’s reach. Algerian savers have consistently shunned government bonds and other programs, thus highlighting the very low level of trust that citizens have in the country’s institutions. As a result, the formal business sector (mainly state-owned banks and politically affiliated companies) has borne the brunt of government borrowing, which has in turn decreased its liquidity and increased the cost of credit for the private sectors, effectively crowding them out.
Needless to say, this strategy has had a negative impact on business activity. In addition to exacerbating liquidity shortages that have raised credit costs for businesses, government capital spending cuts have also led to payment delays and cash-flow problems for Algerian companies. Most of Algeria’s small non-hydrocarbon economy is dependent on government contracts and public spending more generally. Inevitably, over the past few years the combination of investment spending cuts and difficult access to credit have pushed many companies to the brink of bankruptcy, for example in the construction sector, in which 60 percent of companies are reportedly at risk of bankruptcy.
It is in this increasingly difficult context that former Prime Minister Abdelmadjid Tebboune’s failed policy experiment can be understood. In his three months at the head of the government, Tebboune tried to address the crisis in two ways: by tightening import restrictions and quotas to reduce the current account deficit and by targeting Algerian oligarchs and their alleged political interference to gain support for the government’s austerity policies. While it is unclear what Tebboune’s long-term strategy was (and chances are good there was none), his policy agenda reflected a clear disapproval of the chaotic system of smuggling and patronage that has characterized the country’s economic liberalization since the 1980s. In his view, it was the importers and the business class that needed to pay the price for the country’s painful economic adjustment.
These measures backfired very quickly, as his strategy only succeeded in uniting a powerful coalition of interest groups—composed of the import lobby, the oligarchs, and large sections of the regime—against his policies. Tebboune tried to strong-arm Algeria’s formal and informal private bourgeoisie into submission, regulate their activities, and inject newfound legitimacy in the state institutions. Yet eventually it was him, a representative of the state bourgeoisie, who was evicted and replaced with the politically savvy Ouyahia.
Against this backdrop, Ouyahia’s “helicopter money” policy is a short-term fix not only to Algeria’s economic problems, but also to its precarious political equilibrium. Direct debt monetization allows the government to repay its overdue debts to the business class, reduce its reliance on domestic credit, and increase capital and spending that will benefit Algerian companies and households. This will offer some respite to the business class while postponing any painful cuts either to public sector wages, which could alienate the support of civil servants and teachers, or to welfare spending, which could upset the general public. Prime Minister Ouyahia is treading even more carefully on imports, trying to reconcile the interests of the shadowy but influential import lobby with the need to reduce purchases of foreign goods. So far, Ouyahia has canceled Tebboune’s trade restrictions, but also announced on October 8 that it plans to implement stricter conditions on financing imports through domestic banks.
More importantly, though, this new course is meant to avoid overlap between the country’s twin political and economic transitions. In this race against the clock, the authorities are trying secure the support of the key pro-regime constituencies—public sector employees, formal economy workers, oligarchs, and importers—ahead of the presidential succession, which continues to be shrouded in a thick layer of uncertainty. Whether President Abdelaziz Bouteflika will run for a fifth term in the 2019 presidential ballot or be replaced by a hand-picked successor, the authorities cannot afford to deal with the political and social consequences of austerity measures in the meantime.
Riccardo Fabiani is a Senior North Africa Analyst at Eurasia Group. Follow him on Twitter @ricfabiani.