Algeria's 'disastrous' price rises outstrip income increases

Report confirms dire economic situation as dinar loses half its purchasing power

Consumers such as this one at Ali Mellah produce market in Algeria's capital Algiers have found it difficult to balance food budgets. AFP

It has been painfully apparent to many Algerians for years. Now a report has confirmed that price rises are dramatically outstripping any increase in household income.

Although the country has one of the region's most generous subsidy systems, inflation has led to the Algerian Dinar losing half of its purchasing power over the past decade, said the report published in early September by Algerian consumer rights group Apoce.

Lentils, a staple, have increased from 100 dinars per kilogram 10 years ago to 250 dinars in 2021. Equally, a kilo of rice that sold for 80 Dinars in 2010 is now marketed at 150 Dinars.

Most significantly for the oil and gas-based economy, petrol has increased from 19 dinars a litre in 2010 to 45 dinars today, doubling transportation costs.

'Lots of people are suffering'

In May last year, the country increased its basic minimum wage for the first time in eight years from 18,000 to 20,000 Dinars, (around $170).

“The situation in Algeria is disastrous economically,” said Saied, an engineer from Constantine, in the north-east. “Lot of people are suffering. Buying a car for example has become impossible (for) the majority of the population.”

Saied also pointed to the everyday difficulties of balancing food budgets or providing a typical family with a healthy meal. He said 1kg of meat or fish was around 10 per cent of the minimum wage.

For decades, Algeria has relied almost exclusively on oil and gas exports to power its economy. However, the dramatic fall in revenue that began in 2014 swept away many of the economy's foundation stones and continues to gnaw away at its ability to fund its subsidy programme.

At the time of the crash, Algeria's robust foreign currency reserves were able to absorb much of the shock. But now, with foreign currency reserves standing at around US$44 billion, a fraction of their 2013 levels, the peace of mind they once bought is looking increasingly costly. And given the cost of fuel, gas, gas-based electricity and imported food are increasing while the private sector remains underdeveloped, foreign currency reserves are unlikely to buck their downwards trend.

This could compel Algeria to seek external debt, a decision seen by parts of the establishment as a violation of sovereignty. Further complicating matters has been the Algerian state’s tendency to print more and more dinars, especially since 2017, a policy that can only prove inflationary.

Algerian journalist Akram Kharief said little government time was given to explaining the fundamental structural challenges facing the economy.

“No, the government doesn't bother explaining it to the population. When it comes to major crises, they only blame somebody else. Now for instance they are blaming (former president, Abdelaziz) Bouteflika or Morocco for that,” he said, referring to the regional rival with whom Algeria severed all diplomatic relations in August.

From independence to the modern-day, the shifting opaque group of military officials, trade unionists and businessmen surrounding the presidency – known collectively as the pouvoir – has steered the country and its economy through civil war and hydrocarbon-subsidised boom. However, since the oil crash of 2014, the group's half-hearted attempts to diversify the economy, including a tepid attempt at drawing in tourists, have foundered.

There is also the unbridled emphasis on military spending, which conjures up parallels with the last decade of the Soviet Union. Algeria, which already has one of the largest military budgets in the region despite its tanking economy, is understood to be negotiating a further $7 billion purchase of arms from Russia.

“The huge military spending currently envisaged is woefully out of synch with Algeria’s overall situation,” said Jalel Harchaoui, a senior fellow at Global Initiative.

“But even apart from this problem of lavish defence buying, the issue of the oligarchs’ stranglehold on the economy remains unaddressed.

“It may sound ironic given the (mass protest movement) Hirak has been demanding that all government-linked elites be removed. In reality, only a few of the most visible figures have been in trouble since February 2019,” he said, alluding to one of the main reasons no overhaul of the Algerian economy is being undertaken.

For now at least, a precarious sense of calm appears to hold with regard to Algiers’s finances. From a fiscal perspective, last year turned out to be brutal and painful. But the worst was still avoided thanks largely to an increase in gas production in late 2020 against a backdrop of a rally in hydrocarbon prices, Mr Harchaoui said. And this year, hydrocarbon prices are holding up.

Nevertheless, with its currency reserves facing the very real possibility of being depleted entirely within the next year or two, there are signs that Algeria may finally be compelled to break with years of proclaimed opposition to what many in the Algiers establishment see as a concession on sovereignty. The anti-IMF rhetoric, which has been a pillar of Algerian policy for two decades, is fast becoming unsustainable.

External debt is arguably unavoidable.

“Talks have been going on quietly with the IMF (International Monetary Fund) for some time,” Mr Harchaoui said.

As Algeria's neighbour, Tunisia, continues to discover, the conditions attached to hard-currency loans often have a high domestic and social cost.

“With domestic consumption of oil and gas continually rising, there's an expectation that the IMF will demand to see the Algerian population pay the true market price for the fuel it consumes,” Mr Harchaoui said, pointing to another reason for Algeria's creeping fuel costs, a substantial chunk of household expenses.

Further evidence that Algeria is seeking hard-currency loans came in August, when Algeria signalled it was ready to join the European Bank for Reconstruction and Development in return for external funding.

Whatever happens in Algeria, economics are unlikely to secure the kind of social cohesion the pouvoir has craved for years.

The mass protests that once dominated city streets across the country may have gone, but no warming to the government has flourished in its absence.

How an angry and distrustful population will react to further economic hardship remains the key test for any government.