Two and a half years after the downturn in global oil prices, from $108 to $30 per barrel, the Algerian economy is still struggling to recover from the impact.
Immediately following the drop, at the end of 2014, Algeria’s energy earnings declined by 40 percent. As a result, the country incurred a national trade deficit of $13 billion, while it had previously enjoyed a $25 billion surplus. At the same time, youth unemployment reached a high of almost 30 percent.
To mitigate the potential for an economic crisis, the government began introducing austerity measures in 2015. These measures included cutting government spending by 9 percent overall for 2016, which involved a proposed 15 percent reduction in import spending, a freezing of infrastructure projects, and a reduction in energy subsidies. For 2017, the Algerian parliament approved increasing spending cuts from 9 percent to 14 percent, at the behest of the IMF.
Unfortunately, these measures have not had the desired effect. Despite predictions that the economic situation would improve last year, a weak dinar has caused unprecedented inflation in food prices, with some products becoming 1,000 percent more expensive. The cuts to energy subsidies have also caused the cost of electricity to skyrocket to levels most Algerians cannot afford.
In response to the rising cost of living, widespread protests have erupted across the country. In southern Algeria, particularly, anti-austerity demonstrations have been routine, since the summer of 2016. Recently, authorities have had trouble containing local protests, as violent clashes have erupted in Kabylie and other neighboring provinces between security forces and demonstrators.
If they intensify, these outbursts could potentially destabilize the country, and disrupt Algerian energy exports. In fact, southern European countries, which rely on Algerian natural gas supplies, are making contingency plans to deal with the deepening political crisis. Without a diversified economy, a potential drop in energy exports could devastate the economy even more.
As a member of OPEC, Algeria is one of the world’s major oil and gas producers (the largest in Africa). Its economy is heavily dependent on revenues from the energy sector: 94 percent of Algeria’s export revenues come from oil and gas, and typically make up 60–70 percent of the government’s annual budget.
Recognizing crude oil dependence as the primary cause of the current economic hardship, the Algerian Ministry of Energy is trying to develop its renewable energy sector. Recently, the ministry launched a bid for companies to buy into the installation of four solar energy plants.
While this effort appears positive, the government has pre-selected partners for the project, including Algeria’s state-run oil producer, the Sonatrach Group. Many observers see this as problematic, as Sonatrach’s investment in the oil sector may create a conflict of interest that actually hinders the growth of the national solar plan. The effect would be to keep Algeria dependent on crude oil, prolonging the economic downturn, and subjecting the country’s poorest residents to unsustainable living conditions.
As Algeria’s ongoing economic recession worsens, it is necessary to diversify the economy to break the country’s reliance on oil revenues. As long as corporate interests do not intervene, solar energy may offer the best and only viable path toward economic recovery.