Economic Growth

How Algeria can boost its economy

View of the sunrise at an altitude of 3,000 metres in Tamanrasset, some 2,000 km south of the Algerian capital Algiers on New Year's Day January 1, 2005. NO RIGHTS CLEARANCES OR PERMISSIONS ARE REQUIRED FOR THIS IMAGE. REUTERS/ Louafi Larbi  L.L/acm - RP5DRIIDOSAA

Algeria faces the challenging task of transforming its economy. Image: REUTERS/ Louafi Larbi

Rabah Arezki
Chief of Commodities, Research Department, IMF
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Inclusive Growth Framework

Algeria’s economy is growing far too slowly to provide enough jobs for a young, expanding, and increasingly restless population. The country's authorities need to boost competition, spur the creation of a digital economy, and revamp state-owned enterprises.

Algeria faces the herculean task of transforming its economy to meet the pressing demands of a young, growing, and increasingly restless population. Despite the country’s favorable demographics, its economy remains almost entirely dependent on oil and natural gas, which account for 95% of merchandise exports. To provide enough jobs for the millions about to enter the labor market, Algeria’s economy needs to grow by more than 6% annually over the next few years. But GDP growth was a paltry 1.5% in 2018, and is projected to stay below 2% for the foreseeable future.

The Algerian authorities must therefore take urgent steps to liberalize and strengthen the economy, and lay the foundations for greater social inclusion. In particular, they need to boost competition, spur the creation of a digital economy, and revamp the country’s state-owned enterprises (SOEs).

Algeria’s economy has been running in place, with most major businesses and banks still in state hands. Moreover, measures to promote greater competition and establish an antitrust framework are in their infancy, and the legal and judicial system has been weak in enforcing them.

High barriers to market entry help explain why most Algerians work in the informal sector, for low wages and with no social insurance. The country’s impenetrable markets have also deterred foreign direct investment, especially in labor-intensive service sectors such as tourism and hospitality.

Instead, under a tired social contract that dates back to Algeria’s independence from France in the early 1960s, an inefficient form of redistribution has been the sole engine of economic development. But promotion and protection of so-called national champions, often SOEs, together with high levels of public employment and universal subsidies, has proven to be a frustratingly ineffective formula for sustained growth.

Market forces and more competition are essential for helping individuals and economies to reach their full potential. But, as in other parts of the Arab world, this view has struggled to gain ground in Algeria. Too often, powerful elites have seized control of economic liberalization attempts, weakening popular support for change. But market reforms, if accompanied by arm’s-length regulation and supported by a reinforced legal system, could prevent the perpetuation of such an oligarchy. This would help to promote equal opportunity and strengthen social cohesion.

Algeria also needs to build an advanced digital economy that could enhance growth and provide jobs for its cyber-savvy youth. Like their peers in other Arab countries, young Algerians are active on social media; nearly all have mobile phones or smartphones. But although they are intimately familiar with Facebook and Instagram, they have limited access to financial payment apps such as PayPal, because the country’s over-regulated banking and telecommunications systems favor existing firms, stymie competition, and foster collusion. As a result, most Algerians cannot order goods and services online and transfer money in the way their counterparts in advanced economies do.

Promoting a digital economy in Algeria requires an extraordinary “moonshot” effort. For starters, the authorities must improve broadband quality, make Internet access more affordable, and create digital and mobile payment systems. These digital public goods are as important to a new service economy as utilities such as electric power plants are to a traditional one.

Increased connectivity will create new activities, tear down entry barriers – starting with the critical transportation, distribution, and logistics sectors – and help to develop e-commerce by bringing urban and rural areas closer to one another. Connectivity will also make it easier to track public spending, limit bureaucratic red tape, and improve health care and education – in well-off and poorer regions alike.

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Finally, Algeria must shake up its SOEs so that a genuine private sector can flourish. This will require reducing entry barriers in the utility sector and other areas, as well as establishing a dedicated regulatory body and credible legal enforcement to promote competition.

The authorities should be transparent about government transfers to SOEs and avoid the pitfalls of soft budget constraints that can result in higher-than-anticipated public spending. Policymakers must also strengthen the governance of SOEs in order to improve managerial independence, accountability, and efficiency. This, in turn, could reduce the potential burden that such enterprises impose on the budget through contingent liabilities, such as government loan guarantees that would come due in the event of a default.

Private companies could help Algeria’s economy to make the technological leap needed to boost productivity. Policymakers need to encourage this, including through partnerships that pair private firms with SOEs.

Here, European utility giants could serve as a model to follow. Since the European Union began liberalizing its electricity sector more than two decades ago, and also as a result of the 2015 Paris climate accord, these utilities have invested massively in generating renewable energy and digitizing their services. By tapping into Algeria’s vast solar potential, utilities and SOEs could turn renewables into the new oil.

Algeria’s economic and social challenges are clear, and policymakers must address them at a time of heightened political uncertainty. Given the country’s current mood, they may need to move fast.

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