Wednesday, 13 July 2016

Algeria: Presidency Reshuffles Cabinet To Reform Ailing Economy

PGI Intelligence’s latest Insight report is now available on the recent cabinet reshuffle and the outlook for reforms in Algeria. Please attribute any reference to this report to PGI Intelligence.
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  • President Abdelaziz Bouteflika’s administration replaced the finance and energy ministers in a cabinet reshuffle on 11 June aimed at facilitating economic diversification and improving government revenues. 
  • The reshuffle comes as state finances, which rely heavily on hydrocarbons, have been severely affected by the fall in oil and gas prices and declining production. 
  • The incoming ministers will push for increased gas production and economic liberalisation, but the pace of reforms will be slowed by divisions within the political elite and vested interests. 
Algeria announced the replacement of seven cabinet ministers and the creation of a new cabinet position on 11 June, with the appointments focused on the energy and financial sectors. No reason was given for the changes, however the sector focus reflects broader attempts to diversify the economy and address declining state revenues, which have dropped 40 percent since oil and gas prices peaked in 2014. Many of the new appointments include respected technocrats and have been viewed by some commentators as the latest effort to deliver much-needed economic reform.

The changes included the replacement of the minister of energy and mining, Salah Khebri, with former Sonelgaz chief Nouredine Bouterfa, as part of a wider effort to reshape Algerian energy policy and attract foreign investment. Bouterfa is a downstream expert with a background in the natural gas sector stemming from his time at Sonelgaz, a state-owned utility, since 2004. Following his appointment, Bouterfa said that he would focus on developing the gas sector, seeking to increase production. Bouterfa has also previously advocated higher energy prices with the aim of increasing state revenues and curbing rising domestic demand to make more gas available for export. He will, however, be under pressure to deliver reform quickly, considering that his predecessor, Salah Kebri, was only in the role for 13 months before being replaced for failing to attract foreign interest in the Algerian gas sector.

At the finance ministry, junior budget minister Hadji Baba Ammi replaced Abderrahmane Benkhalfa as finance minister and former director of Algeria’s electronic banking regulator Mouatassim Boudiaf took up the newly created role of junior minister for digital economy and modernisation of financial systems. The reshuffle comes a month after the government fired the governor of the central bank, Mohammed Lakasci, who had held the position for more than a decade, amid criticism of his response to the impact of the global oil price drop. Ammi’s technocratic background in the budget and planning ministry and at the treasury mean he is well placed to enact cuts and liberal reforms required to tackle structural imbalances in the economy.

Political divisions and liberalisation

The presidency’s move to appoint technocrats over political allies is indicative of his growing confidence in his position after a prolonged period of political uncertainty. It follows several months of infighting between the presidency and competing military factions that peaked in January with the dismissal of the head of the DRS military intelligence directorate, Mohammed Mediene. Several agencies under the DRS were subsequently consolidated under the authority of trusted presidential ally Chief of Staff General Ahmed Gaid Salah. Mediene was part of a powerful faction of the old guard that opposes efforts to liberalise the economy and promote foreign investment, fearing liberalisation would threaten Algeria’s economic sovereignty. A key source of contention is over limits on foreign ownership of local businesses of 49 percent, which were upheld in a new finance law passed in November 2015. Although the replacement of members of military officers with technocrats will benefit the reform agenda, vested interests will remain a powerful obstacle to the reform agenda.

The move to replace key economic figures with technocrats is also indicative of the parlous state of Algerian state finances and the need to invigorate the long overdue diversification process. Non-hydrocarbons exports are equivalent to around 2 percent of imports, making Algeria one of the most oil and gas-dependent economies in the world. With Algeria’s budget requiring an oil price of well over USD 100 to breakeven, the government is facing intense fiscal pressures to restructure its economy.

Long-running efforts to diversify the economy, however, have failed to deliver significant results. The government increased infrastructural investment in recent years to target projects in the health, education, telecommunications and transport sectors, among others, yet none of these areas have seen significant growth. Economic reform will continue to be hampered by political uncertainty around the presidential succession and suggestions President Abdelaziz Bouteflika could step down before the end of his term in 2019. Divisions within the political elite present a further obstacle as some factions continue to oppose liberalisation. In these conditions, the prospects for diversification remain limited. Underinvestment and sluggish policy making will mean industries such as pharmaceuticals and agribusiness will see only muted growth in the next few years and the uncompetitive tourism environment is unlikely to generate significant returns. This will leave Algeria vulnerable to widening budget deficits and any future external shocks to gas exports.
 

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