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Algeria: Has the Moment of Diversification Finally Arrived?

Emmanuel Noubissie Ngankam's picture
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Algeria: Has the Moment of Diversification Finally Arrived? "Rent (from hydrocarbons) must not mislead us ... the future lies with private enterprise ... Algeria’s future can only be set on a solid industrial base". At first view, these bits of phrases appear ordinary, even trivial. However, they take on a whole new meaning when they come from a top Algerian official, in this case the former Minister of Industry Cherif Rahmani. He spoke on August 5th during a workshop on the state of private investments in Algeria, offering a glimpse into Algeria’s foreseeable future if inertia was overcome, in which case the private sector will be able to play its role as the engine of growth in an emerging economy.

The socioeconomic challenges facing Algeria are many, the most urgent of which is without doubt youth unemployment. In a July 5 interview with the weekly, Jeune Afrique, Mr. Issad Rebrab, the CEO of Algeria’s leading private industrial group Cevital, ran through the raw facts: “Our unemployment rate is 10%, but youth unemployment is above 35%”. He added: “Algeria must move swiftly towards diversifying its economy and creating jobs.

‘Diversification’ – there you have it. It has become almost a refrain because it shows a deepening understanding of the vulnerability of the Algerian economy if it remains heavily dependent on one product. The oil and gas sector, which constitutes 98% of exports, 70% of government revenue, and nearly 40% of the GDP, employs only 2% of the labor force. The "sluggish" Algerian non-oil industrial sector is a mere 5% of GDP (compared to about 28% in emerging countries). The country is ranked 152nd out of 185 in the 2013 Doing Business Report. Slipping since 2008, FDI (Foreign Direct Investment) was a mere US $1.5 billion in 2012, reflecting the limited progress made despite recent improvements to the business environment.

It is reassuring that no one perceives the abundance of oil and gas as a curse. Despite obstacles, the country’s leaders speak openly about the risks and the paradox of plenty, and there is a growing consensus that Algeria must urgently embark on a path of economic and industrial transformation. In particular, improving the business environment is a priority. The single biggest challenge in this context is how to curb the country’s over reliance on hydrocarbons while, at the same time, leveraging the country’s oil and gas wealth to diversify its economy, trigger inclusive growth, and promote the emergence of a value-added and job-creating industrial and service sectors.

Algeria’s intelligentsia and civil society seem ready to tackle this challenge. Such is the case of Think Tank NABNI which last January commissioned a study on lessons learnt and Algeria’s 2020 Vision. And it is an ambitious program! This group of intellectuals envisions “the transformation of the business and investment environment to world class standards, ensuring that Algeria is among the three top countries of the Mediterranean and among the 50 leading nations worldwide”. They have understood the key role that the business environment plays in a flourishing economy. The daring “new economic model” that NABNI proposes sets out to use rent from hydrocarbons as the engine of economic diversification. The goal is to double non-oil GDP by 2025, and to significantly raise non-oil exports to 15% of total exports in 2020, 25% in 2025, and 40% in 2030, all up from 2% in 2012.

Such ambition fits squarely with Algeria’s enormous potential. Algeria is the biggest country in Africa, in the Arab world and in the Mediterranean Basin (2,382,000 km2). Its per capita income, estimated at US $5600 in 2012, is higher than India’s (US $3800) and many other emerging countries. Its oil production (around 1.8 million barrels per day) and gas production (more than 60 billion m3 per year), make Algeria the third largest European Union gas supplier behind Russia and Norway. Revenue from oil has enabled it to amass external reserves of about US $ 200 billion, equivalent to 100% of GDP and more than 3.5 years of imports. The fiscal space provided by these revenues has precluded any need for Algeria to borrow. Rather, the country prepaid most of its debt and even lent US $ 5 billion to the IMF last year. More recently, Algeria canceled over one billion dollars in debts owed by 14 African countries .

As with any metamorphosis, the economic transformation advocated will impose choices, some of them with social implications. Some useful guiding principles can be gleaned by recalling Algeria’s past and, notably, the vision its independence heroes had and that continues to resonate in the name of the country: People's Democratic Republic. They made important socioeconomic choices key to the country’s post-independence stability. But isn’t it time to reconsider some of these policies, such as subsidies (12% of GDP), which are a heavy burden on the public treasury? Are they sustainable?

Without downplaying its importance, we will not belabor the need for political stability as the bedrock for reassuring investors and fostering the harmonious transformation that Algerians crave. Economic transformation and political stability go hand in hand and are made possible by the strategic choices of leaders and the sovereign people. In this light, 2014 will be a landmark year with, among others, a presidential ballot billed for April, which will put a spotlight on the country.

Inevitably, major reforms are needed to bring about the much-desired economic take-off and the social transformation of Algeria. Happily, the principle of rolling out major reforms is broadly accepted and shared across this country which, beyond improving the lives of its 38 million inhabitants, has a good opportunity to play a leading role in Africa and Arab world. 

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