Another Oil Exporter Plans to Curb Subsidies as Budget Suffers

  • Implementation of subsidy reforms would be gradual, Ammi says
  • Change in free universal health care is being considered

Algeria is working on proposals to further curb energy subsidies and introduce cash transfers for those most in need, according to its finance minister, the latest push by the OPEC member to cut spending while avoiding unrest.

The plan being developed with the World Bank comes as Algeria is embarking on a three-year fiscal consolidation program to offset the decline in its oil revenues. It lifted gasoline and diesel prices by 14 percent and 11 percent respectively last year. Total subsidies still account for 27 percent of gross domestic product.

As in fellow North African nations Egypt and Tunisia, it needs to be wary of stoking protest, especially given high youth unemployment rate. Government spending on housing, health care and basic foodstuffs helped suppress dissent in the years following the Arab Spring.

Implementation “will be gradual,” Finance Minister Haji Baba Ammi said in an interview in Jeddah, Saudi Arabia on Wednesday, on the sidelines of an Islamic Development Bank conference. “Our policy is to manage the transition.” Continuing free universal health care is “not possible,” he said, without elaborating.

After more than a decade of surpluses, the government has reported a current-account deficit since 2014, with income from oil and gas exports -- which make up nearly 60 percent of GDP and 95 percent of foreign receipts -- almost halving.

Oil Rebound

While a projected recovery in oil prices will help economic growth accelerate in 2018, non-oil growth will barely expand as the government seeks to repair public finances, according to estimates released by the International Monetary Fund in April. 

The fund expects the budget deficit to narrow to 2.5 percent of GDP this year and 2.1 percent in 2018, from almost 12 percent last year.

Algeria has no plans to return to external borrowing because the country is focused on “gathering national savings,” Ammi said. However, it would welcome public-private partnerships to help fund projects.

A growing list of Arab and North African oil producers have cut subsidies and curb spending on some long-standing social safety nets -- including Saudi Arabia, the United Arab Emirates, Qatar and Kuwait. The Saudi government last month reinstated some of the perks and bonuses originally cut in September after state employees complained privately and on social media about their reduced incomes. The government said the reversal was prompted by a better-than-expected increase in revenue.

Algerians voted in parliamentary polls on May 4, amid growing concern over political stability, with no clear successor to ailing President Abdelaziz Bouteflika. Turnout was low at 35 percent, according to official data. Changes to the cabinet are expected to be announced next week.

The IMF said in March, following the end of a staff visit to Algeria, that fiscal consolidation should be based on broadening the tax base, containing spending, and gradually replacing energy subsidies by offering direct support to the poorest.

“Too abrupt a fiscal deficit reduction, however, should be avoided to reduce the risk of a sharp slowdown in growth,” Jean-François Dauphin, the IMF official who led the mission,said in a statement.

— With assistance by Tarek El-Tablawy

    Before it's here, it's on the Bloomberg Terminal.