The end of Algerian “splendid isolation”

Based on the data from “Fund for Peace”, Algeria ranks 67th in the list of “the most fragile States”, thus being labelled as relatively more stable than many other African countries. In fact, the much criticized and alleged dictatorship of President Bouteflika, holding on power since 1999, made it possible to maintain cohesion inside the country and to protect its borders from political unrest and from the external terrorist threat.

However, the current stalemate in the country’s economic performance is casting a shadow over its capability to maintain its resilience faced to the several internal and external dangers, and to the presidential succession, which is told to be scheduled for 2016.

Algeria’s economy is mainly state-driven and heavily relies on oil and gas revenues. In fact, data from the CIA Fact book report that the hydrocarbon sector accounts for 60% of budget revenues, 30% of GDP and over 95% of export earnings. The country is Europe’s main gas provider after Russia, the first gas provider for Africa and one of the main three gas producers in the whole African continent. The lion’s share of the production is monopolized by a domestic company, the Sonatrach, while the remaining quarter, the oil and gas production, is controlled by foreign companies like British Petroleum, Eni, Total, Repsol, Cepsa, Statoil and Anadarko.

The turnover from oil and gas exportations made it possible for Bouteflika, from the Front of National liberation party (FLN), to heavily subsidize the economy in order to run undisturbed the country since his first election to the Presidency of the Republic in 1999. Not only did he launch a domestic reconciliation process, but he also managed to silence with little trembling the internal echo of the social protests marking the so called “Arab Springs”. For instance, in 2011 the Government distributed more than $23 billion in grants and subsidies in the wake of protests against poor housing conditions and unemployment, protests in which a man even set himself on fire. The money injection had a sort of placebo effect and allowed policy makers to procrastinate the adoption of substantial economic reforms. This worked pretty much since Bouteflika was re-elected in 2014 as President of the Republic, despite the stroke of 2013 that forced him out of the political and media spotlights, despite the imposition of further restrictions to rights and freedoms. One for all, after the 2008 constitutional reform removing the limits to the number of presidential mandates, the President introduced restrictions to foreign investments and to freedom of expression. As a result, the regime managed to preserve itself against any domestic and external threat and entered into a kind peaceful stalemate, symbolized by an immovable, ill and evanescent leader. That was kind of welcomed by Western countries, which maintained an important economic and political ally in the midst of a terrorism-driven and war-torn region.

Unfortunately, this situation is now being menaced by the economic conundrums that the North African State is being faced with consequently to the global fall in oil prices. First, the decline in the price of oil to around $60 per barrel makes it difficult for Algeria to sustain its costs of production. Second, the poor economic performance is linked to shortage in investments for the upgrading of the existing fields and for exploitation of new discoveries.

It is true that the country can count on 12,2 billion reserve barrels, but the two thirds of the Algeria’s reserves are still unexplored as well as offshore fields. According to data from the Energy Information Administration (EIA), the discovered reserves of shale gas are the third biggest worldwide and could represent a valuable source of income for the future. Nonetheless, its exploration and exploitation is still embryonic.

Consequently, the conjunction of these factors resulted in a decline of oil exports to 42.8% of the country’s overall. Furthermore, while current annual growth rate stands at 3%, the budget deficit has risen to 22.1% while public debt has widened to 2.1% of the GDP.

Despite being only relatively alarming, the economy outlook will probably make it difficult in the near future to address properly the country’s current social problems. First, the Government is yet to provide a valuable solution to the lasting housing and unemployment issues, which add to the malcontent deriving from the decreasing quality of social services. Second, the country needs to develop a sound business environment to attract foreign investments, which are essential to develop the private sector, to diversify the economy and to find ways to react to the oil prices downturn.

So far, the solutions provided are double fold. On the one hand, the Government adopted some austerity measures aimed at reducing the weight of social spending on its finances. On the other, it tightened restrictions on imports, despite that it is evidently incompatible with the promises to open research centers with a view to improve a transition from a state-driven to a free market economy.

Unfortunately, this seems a bad timing for Algeria. The impasse concurs with the looming succession to President Bouteflika, who is in poor health conditions. The coincidence is quite worrisome as the President, despite the debated establishment of a “controlled” democracy, has become a symbol of domestic reconciliation, of stability and has managed to make Algeria an oasis of peace compared with the political instability and terrorist insurgence in the region.

That is why Western countries have always relied on Bouteflika, not only for the economic ties but also for cooperation against terrorism. For instance, President Hollande, whose country is involved in the war in Mali, just recently paid a second visit to his Algerian counterpart in an attempt to prompt cooperation on the above-mentioned issue.

Given the importance of finding a valuable and accepted substitute to Bouteflika, the Government is now mainly focusing on political reforms in order to secure a smooth transition. A sign comes from the reshuffle in the Government cabinet, which occurred last May.

Thus, and despite the urgency, there seems to be little space for substantial economic reforms ahead. In fact, it is told that the next President, who is believed to be the current Prime Minister Sellal, will be an interim figure, having the only function of accompanying the country towards the end of Bouteflika’s legal mandate, which is in 2019. Consequently, for the moment the Government is likely to continue to subsidize the economy thanks to the foreign currency reserves that amount to around $200 billion. The move is allegedly aimed at attracting consensus from the population, providing stability in the domestic domain and avoiding the country to plunge in a situation of chaos, which could be exploited by terrorist groups waiting on the other side of the borders. Instead, the much-waited substantial economic reforms will have to wait.

Undoubtedly, the State’s foreign reserves are still considerable, but they are going to finish sooner or later if the country does not manage to attract foreign investments and to prompt the transition to unconventional energy resources, like shale gas. However, in order to attract foreign investments, Algeria needs to reform its internal legal and administrative procedures to make it easier for foreign companies to invest and do business in the country.

Hence, after having secured a safe and stable transition, the future leader must put the economic reforms at the top of his agenda because the placebo effect of the subsidization scheme will not last forever. On the contrary, the growing population’s discontent regarding the poor quality of social services could turn into anger and result in a revival of revolts that the country experienced in the late 80s. Social instability from the inside will pull threats from the outside. In particular, jihadists operating in Libya, in Mali and in Niger would exploit the domestic unrest to easily cross the border and put under siege the natural gas reserves located in the Southern and Southeastern parts of the country. Indeed, if the EU and the US do not want to lose also Algeria, they should cooperate with the country to help modernize its economy and open up its political landscape to liberalism and real democracy.

In conclusion, with the economic dynamism fading and the approaching shift in political leadership, the age of immobility and “splendid isolation” of Algeria is ending. The outcome of the process depends on the choices of its political elite.

Francesca Azzarà

Master’s degree in International Relations (LUISS “Guido Carli”)