Can Algeria meet its objectives for economic diversification this time?

Has the Hirak Movement, several unstable economic conditions brought on by the COVID-19 epidemic, and the Russian-Ukrainian war allowed Algeria to broaden its economic base?

Located in North Africa, Algeria is bordered by the Mediterranean Sea to the north, Tunisia and Libya to the east, and Niger and Mali to the south. The third and largest zone, south of the Saharan Atlas mountain range, is mostly desert. About 80% of the country is desert, steppes, and mountains. Algeria consists of three main geographical zones, each with its own climate. Algeria is the tenth-most populous country in Africa and the 32nd-most populous country in the world. The capital and largest city is Algiers, located in the far north on the Mediterranean coast.

Reports show that Algeria’s economy is dominated by its export trade in petroleum and natural gas, commodities that, despite fluctuations in world prices, annually contribute roughly one-third of the country’s gross domestic product (GDP). Until 1962, the economy was largely based on agriculture, which complemented France’s economy. According to the African Development Bank Group (AfDB), real GDP growth is projected to reach 3.1% in 2023 before dropping to 2.1% in 2024. While crude oil prices are expected to remain high, the capacity to expand production could be limited in the short term. As a result, growth may decline due to the lack of an explicit economic diversification policy and constraints on the capacity to expand natural gas production in the short term. Inflation is projected to decline to 7.7% in 2023 and 6.7% in 2024.

The Hirak Movement has created a new repertoire of peaceful political resistance that has already had major consequences for the country’s future power structures. Before now, critics have long accused a power elite surrounding former president Abdelaziz Bouteflika of mismanagement and corruption, arguing a large chunk of the wealth is pocketed by a privileged minority. But for years, Algeria’s oil- and gas-rich economy served as a salve for a restless nation, helping to bankroll housing and other social subsidies. Analysts say that after years of self-imposed withdrawal from international politics under the leadership of geriatric former president Abdelaziz Bouteflika, Algeria now wants to reinvigorate its role as a regional power.

However, it is re-emerging amid heightened tensions with its rival Morocco and rapidly destabilising its southern and eastern neighbours. But it is re-emerging amid heightened tensions with its rival Morocco and rapidly destabilising southern and eastern neighbours. The fallout of Russia’s war in Ukraine is aggravating Algeria’s domestic and international policy problems and forcing it to rethink the balance of its security partnerships. This energy opportunity, the imperative to help stabilise the region, and the desire for new security partners following Russia’s degradation have catalysed the country’s re-emergence on the global stage. However, the Algerian political system understood the need to diversify the Algerian economy and become less dependent on the oil and gas industry, which still accounts for 96% of the country’s exports.

Algeria has a mixed economic system that includes a variety of private freedoms combined with centralised economic planning and government regulation. However, the country’s economy remains highly centralised and excessively bureaucratic, which altogether stifles private enterprise and entrepreneurship that would stimulate job creation and economic diversification. Despite promising moves towards economic reform and the loosening of regulations, including new rules to stimulate investment and non-oil exports, Algeria’s past inability to stay the course is eliciting scepticism about whether it can, at this juncture, move beyond its archaic economic model to turn this temporary remission into sustainable development and durable growth—and in the process, create the space for popular participation. Also, the retail market in Algeria is poised for remarkable growth, with expectations of a 20% surge in 2024.

With a population of more than 44 million, experts say Algeria has the potential to diversify its economy, reduce its dependence on imports, and increase non-hydrocarbon exports while sustainably creating private sector jobs. Although it is too early to attribute it to recent reforms, the sustained economic performance is encouraging, and efforts to stimulate private sector investment should be strengthened. Similarly, the good performance of the hydrocarbon sector and positive investment dynamics are expected to be sustained. Algeria has built short-term macroeconomic buffers by accumulating foreign exchange reserves and budget savings.

Towards Diversification of the Economy

The Algerian government continues to increase the role of industry in the economy by encouraging diversification to tackle a budget deficit that resulted from low oil and gas prices. The economic contribution of the sector has increased to reach 5.6% of total GDP. According to figures from the National Statistics Office (Office National des Statistiques, ONS), industry grew by 3.1% in terms of added value in 2018. However, global uncertainty is on the rise, and the sensitivity of external and fiscal balances to global oil prices remains, emphasising the need to strengthen resilience against future commodity shocks. According to the World Bank, non-hydrocarbon industries are likely to lead development in 2023 and beyond, with several sectors spearheading economic growth. Meanwhile, analysts identify five major areas in the predominantly Muslim country of North Africa that are expected to increase due to the government’s various efforts towards economic diversification. These include mining, agriculture, renewable energy, green hydrogen, and the nation’s tourism sector.

Experts say several fiscal policies have been adopted by resource-exporting countries mainly to address the negative effects of the so-called resource curse. Among those policies, diversification seems to be the most important in dealing with the dependence of such economies on the export of their resources. Additionally, to create more jobs and more inclusive growth, the authorities need to transform Algeria’s state-led, hydrocarbon-based growth model into one that is more diversified and led by the private sector. Such a transformation will require an ambitious structural reform agenda. Key reforms include improving the business climate, for instance, by streamlining regulations and administrative procedures and making it easier to start a business, as well as opening up the economy to more trade and investment, improving access to finance, developing capital markets, and strengthening governance, competition, and transparency.

Algeria-China Relations

While made-in-China products and projects have been making remarkable contributions to the livelihoods of Algerians in recent years, observers said that deepened cooperation under the Belt and Road Initiative (BRI) framework will constitute a further boost to the North African country, accelerating its efforts to diversify away from heavy reliance on energy exports. Experts note that this initiative facilitates direct trade and ultimately aims to establish win-win partnerships and foster infrastructure development, enabling participating countries to transition from import dependency to becoming producers in collaboration with Chinese companies.

In January 2024, China Railway Construction Corporation (CRCC) announced that it had begun work to build a 575-kilometre railway to connect the Gâra Djebilet iron ore mine in the remote Tindouf province of western Algeria with the national rail network at Béchar. As reported, the new railway would connect the mine with centres of industrial production and ports on the national network, facilitating the development of iron ore mining in Algeria, which is expected to create 3000 jobs during its first phase. Also, China’s increasing investments in Algeria in the energy and logistics sectors show China’s desire to expand its power and influence in the Maghreb to the detriment of Algeria’s traditional partners.

A Failed BRICS Attempt

BRICS refers to certain emerging market countries—Brazil, Russia, India, China, South Africa, and more—that seek to establish deeper ties between member nations and cooperate on economic expansion, including trade. The countries act as a counterbalance to traditional Western influence. Algeria boasts a wealth of resources, ready to enrich the BRICS collective with petroleum gas, crude petroleum, nitrogenous fertilisers, and ammonia. Additionally, the country is a trove of mineral wealth, much of which is still ripe for exploration and development. This includes bountiful reserves of iron ore, phosphate, and precious metals like gold. That being said, Algeria declared in November 2022 that it had formally filed an application to become a member of the BRICS.

After Algeria’s application for membership was rejected in August 2023, the BRICS decided to accept Saudi Arabia, Iran, Ethiopia, Egypt, Argentina, and the United Arab Emirates. The newly expanded BRICS have a combined population of about 3.5 billion people, with a combined economy worth over $28.5 trillion, or about 28% of the global economy. The BRICS partnership has grown in scope and depth, with BRICS members exploring practical cooperation in a spirit of openness and solidarity to find mutual interests and common values. Indeed, Algeria suffers from multilevel disparities, including between genders, regions (urban and rural), and income brackets. The observer says the Algerian regime, thirsty for any international gains, was deflated by BRICS nations, who deemed the oil and gas-dependent Algerian economy unworthy of joining the group that has some of the world’s rapidly growing economies.

Next Step

In order to achieve long-term change, the Algerian state must continue to prioritise deep reforms that restructure the economy away from oil and gas dependency, according to experts. They said the Algerian government should promote a private-sector-led growth model. While the state needs to gradually diversify its stream of revenues, rebuild fiscal buffers, and continue reorienting non-priority spending,.

Writer and researcher at Alafarika for Studies and Consultancy.

Similar Topics