Algeria is a developing country that is resource oil rich but income poor for the majority of its 32.3 million citizens. The nation is advancing forward from its independence in 1962 from France, but it is being held back primariliy due to its political instability. Algeria’s brutal 11-year Islamic insurgency civil war has left upwards of 150 thousand dead after the Algerian government abruptly cancelled 1992 elections to prevent the fundamentalist Islamic Salvation Front from taking office when it had taken a large lead in the opinion polls. The Algerian military stepped in and postponed subsequent elections. At present, the on-going terrorist attacks have transformed Algeria into an extremely dangerous and violent country. Economic difficulties amongst a deep rooted social & political divisions makes Algeria vulnerable to a possible dreadful social explosion. More recently, an example of this violence took place in January 2003 where 56 were killed from Islamic attacks. Continual and pre-meditated attacks have become a way of live where large number of attacks claim an ever-increasing death toll. Disgruntled citizens, social riots and previous mass protests have been a way of life in Algeria. But surprisingly, the Algerian dinar for the most part has performed relatively stable amongst all this confusion.
POLITICS: Chief of state President Bouteflika elected in 1999 is supported by the military to keep his hold on power. Essentially, Algeria is basically a military dictatorship. In May 2002, the ruling party of Prime Minister Ali Benflis won victory in parliamentary elections representing The National Liberation Front. But the real story took place in October 2002 when Prime Minister Benflis’s party swept local elections while the Islamic parties support fell. The Algerian military states that 400 militant terrorists are currently residing in Algeria. Year 1997 was a peak period for the Islamic insurgency for widespread violence and death. In 2001, approximately 1,100 were killed. Further domestic internal political risk includes the 20 percent speaking Berber minority based in Kabylia, eastern Algeria who want greater independence, they too have used violence to send a message of discontent and are calling for the government to end its repression of northeast Algeria. President Bouteflika is a moderate who seeks stronger ties with the West, European Union and NATO. Accordingly, Algeria’s military is conducting joing naval exercises with the US military in establishing closer military links between the two nations. President Bouteflika’s has good working relationship with U.S. President George W. Bush with the hopes of increasing Algeria’s military stability and thus attracting U.S. investment for Algerian oil and gas industries.
ECONOMY: the Algerian government has been implementing a comprehensive program of economic and structural reforms including privatizations during the 1990’s in order to transform Algeria into a full market economy and to improve living standards. During the 1970’s and up until the mid 1980’s, Algeria was a socialist economy. The petroleum industry is vital to Algeria’s economic stability and with current high world oil prices, the country is benefitting with surplus revenues. The economy has diversified into chemical and plastics industry focusing on petrochemicals & fertilisers available for export coupled with a large agricultural output component of the economy.
The government has implemented an aggressive $8 billion USD capital works program from 2001-04 in order to try and stimulate the economy. There is strong political pressure to tap into Algeria’s rich exchange reserve position from energy windfall revenues to help fund an even larger public works infrastructure program and to increase social benefits. It is the government’s preference to have foreigners buy into Algeria’s private companies to help stimulate the very quiet domestic stockmarket as Algerian private industry is experiencing slow growth. It is only the energy sector that is booming. Currently, many state-owned industries are technically bankrupt with over 100,000 jobs at risk.
Economic Statistics
GDP at $177 billion USD (2001) using PPP, GDP/capita at $5,600 USD. Year 2001 GDP growth rate at 3.8 percent, year 2000 growth at 2.4 percent. Sound balance of trade figures primarily due to high world oil prices. Current account surplus 2001 at $6.9 billion USD, 2000 at $8.9 billion USD. Year-end 2000 external debt at $25.5 billion USD equivalent to 48 percent of GDP and fell to 40 percent by year-end 2001. It should be pointed out that external debt has fallen from 72 percent of GDP in 1997 and continues to fall with surplus energy revenues. Inflation is low with 2001 at 3 percent, year 2000 at 0.3 percent, inflation for 1999 came in at 5.7 percent well down from the 20 percent level in the mid 1990’s. Unemployment is very high at 27 percent primarily due to Algeria’s demographic profile as the young represent the majority. Remittances from Algerian’s living abroad are worth $1 billion USD/year.
POSITIVE: reduction in foreign debt, record highs in foreign exchange reserves resulting from increase in trade surpluses, government is committed to increasing international ties and foreign investment. CONCERN: need to diversify petroleum based economy, Algeria has to increase its telecommunications usage as it has very low telephone density, fair literacy levels, demographic issue as 60 percent of the population is under age 25, impending water crisis as reserves are only 40 percent ful, housing shortages.
BANKING SYSTEM: restructuring, modernizing the payments system. Bank of Algeria is Algeria’s central bank, an ammendment made in February 2001 gives President Bouteflika more intervening power on the currency and credit council which may allow him to have influence with respect to domestic interest rates. Algeria is presently sitting on a massive $23.1 billion USD (February 2003) in foreign exchange reserves which is now larger than its foreign debt. Current reserves are equivalent to 24 months of imports. World higher oil prices currently at $36 USD/barrel have directly attributed to this large increase in reserves from year 1997’s level of $6.2 billion USD.
REGIONAL: European Union
Year 2001, Algerian signed an Association Treaty with the European Union (EU) which enables Algeria to increase trade from lowering of tariffs.
KNOWLEDGE: oil and natural gas economy represents 30 percent of Algerian GDP, 95 percent of export earnings, 60 percent of government revenues. At present, Algeria accounts for as the 5th largest reserves of natural gas, 14th in oil reserves. It is important to note that Algeria for the most part remains under-explored as there is tremendous wealth yet to be tapped. Potential natural gas reserves alone are huge at 200 trillion cubic feet including liquefied natural gas, propane, butane, etc. Algeria is confined to an oil production quota of 782,000 barrels per day as a member of OPEC, however Algeria is pumping more like 1.1 million b/p/d. More importantly, oil production output does not apply to Algeria’s natural gas energy. Geographically, Algeria is strategically located fairly close to large wealthy markets in Western Europe where it buys 90 percent of Algeria’s energy exports. At present, Italy is its largest client as Algeria has 2 undersea pipelines in place that feed directly into Italy.
Algeria has invested heavily and borrowed abroad to build its energy infrastructure of which many years have been required to pay down this debt. For the most part, Algerian citizens have not seen the energy wealth trickle down to them in the form of a higher standard of living. This creates tension, terrorism and divisions throughout Algerian society. Fortunately, Algeria is now on the verge of realizing this tremendous wealth for all, a higher standard of living is inevitable as much of their energy investment has been paid and foreign reserves are increasing to record levels. This net financial windfall has taken place over the last 1 to 2 years.
CURRENCY: ISO symbol ‘DZD’, Algerian dinar. At time of review on February 3, 2003 the dinar had an exchange value of 77.21 DZD to the USD. The dinar is pegged to a basket of currencies and is currently stable.
CURRENCY HISTORY: from September 1998 until May 1999, the dinar depreciated by 15 percent versus the USD. Historical exchange valuations include November 1996 at 54.62 DZD to 1 USD, January 1997 at 56.45, January 1998 at 57.85, January 1999 at 61.28, January 2000 at 66.67, January 2001 at 70.62, January 2002 at 76.99, December 2002 at 78.6.
CURRENCY FORECAST: BI.C 12-month outlook is modest appreciation to 75 DZD to 1 USD. Continued higher world oil prices will more than offset the domestic violence. The outlook for the Algerian dinar is favorable although risks remain including a sharp sustained drop in energy prices coupled with domestic political risk and the potential for increasing inflation fears. The short to medium currency outlook is stable as Algeria continues to accumulate foreign exchange reserves, lowering of debt levels and begins the process of diversifying its petroleum- based economy. Increased wealth may inevitably provide for greater social peace within Algeria over the long term. UPDATED: February 3, 2003
