For 2016, the National Defence budget is expected to remain the same as for 2015, i.e. at some US $ 10.2 billion (€9.02 billion), constituting the 23% of the overall Budget allocated for the year. In comparison, the second largest amount allocated by Algeria in its 2016 Budget in a ‘specific’ direction –namely some €6.16 billion- are to be spent on Education.

Algeria has always been a rich country in terms of natural resources. Hydrocarbons (petroleum, gas) are the backbone of the Algerian economy, accounting for the 30% of the country’s GDP and contributing to 95% of export earnings. Moreover, Algeria has the 10th largest reserves of natural gas and the 17th largest oil reserves, while it is the 6th largest gas exporter worldwide; these indicators contribute to the preservation of the country’s macroeconomic stability.

However, despite the fact that the external debt still remains low –at about 1.8% of the GDP in 2015-, according to the International Monetary Fund (IMF) and as a result of the long lasting drop of oil prices and reduced hydrocarbon revenues, overall the Algerian economy did not develop as expected; this has affected mainly its fiscal and external balances –in 2015, inflation increased by 4.8% and the fiscal deficit widened sharply to 16% of the GDP -, indicating the need for structural reforms in the country’s growth model.

According to the World Economic Forum, Algeria belongs to the ten most competitive Middle Eastern economies; nevertheless, it only ranks as 87th (out of 140) worldwide, compared to the 1st of the list (of the most competitive Middle Eastern Economies), namely Qatar, that ranks 14th globally.

Agriculture has a minor role in the economy of the country, while the highly profitable mining and manufacturing sectors are owned and operated by the state.
Following the reduced hydrocarbons revenues, Algeria’s economy has recorded a ‘shrinkage’ since 2014, with growth falling from 3.8% in 2014, to 2.9% in 2015 (See chart below). The initial optimistic estimations, regarding the short-lived fall of oil prices, in combination with the lack of fiscal consolidation, led the budget deficit to nearly double.

The aforementioned fiscal issues, and the significantly increased unemployment during that period, forced the government to adopt a set of austerity policies, in December 2015.

Algeria’s growth is expected to slow down, under the reforms adopted, in an attempt to adjust to the new reality of low oil prices. Therefore, apart from the decreased expenditure (by 9%), and increased tax revenue (by 4%) measures foreseen in the 2016 budget, it seems crucial for Algeria to turn to a more ‘diversified’ economy, less dependent on energy exports. The fact that it exhibited very low public debt over the last few years, allowed Algeria to increase borrowing, as well as to attract private investors; these in turn could help make the implementation of reforms much easier, turning probably towards a more private sector based economy.

Since 2011, Algeria’s trade surplus has decreased as a result of the high pace of imports, when compared to that of exports.

Algeria’s largest gas and petroleum deposits are mainly found in the Eastern Sahara and these are transported to various sea ports through pipelines, with the 90% of its crude oil ending up in Western Europe. In addition to petroleum and natural gas, Algerian exports mainly consist of iron ore, phosphates, uranium lead, zinc, coal and salt.

More specifically, in 2014, the fuels and mining sector exports constituted almost the 98% of total exports, translating into some 40% of the country’s GDP.

Note: Manufactures include iron and steel, chemicals, other semi-manufactures, machinery and transport equipment, textiles, clothing and other consumer goods.

For the same year (2014), the top 5 export destinations for Algeria were the EU (64.2%), the US (7.7%), Brazil (4.4%), Turkey (4.2%) and China (3%).

As seen in the chart below, the vast majority of exports to the European Union (EU) consisted of “Mineral fuels and oil” (86.8%) and “Organic chemicals” (12.7%), while “Electrical machinery”, “Optical, medical, surgical instruments” and “Fruit and nuts” contributed less than 0.2% of the related exports.

On the other side, the main commodities Algeria imported, were manufactured items (71.9%) and agricultural products (21.8%), while the main exporters to Algeria were the EU (50.7%), China (14.1%), the US (4.9%), Turkey (3.6%) and Argentina (3.3%).

The EU exported to Algeria (2014), Pharmaceutical products, Machinery, Iron and steel products, as well as other commodities.

In terms of services, Algeria has recorded a high trade deficit in recent years. In line with this trend, in 2014, related exports were only about 25% of the respective imports.

More specifically, travel and other services were exported from Algeria, while a significant amount of transportation services were imported to the country.

Since the year 2000, when the unemployment rate in Algeria hit its highest record of about 30%, significant progress was noted to reach its lowest level of 9.8%, in 2013 (See chart below). It is worth noting also that the unemployment rate of highly educated people, dropped by 2.5%, from 2014 to 2015.

However, even at a slow pace, the number of unemployed people has been increasing since 2013, to date (2016), reaching some 1.3 million overall.  

Forecasts project a further increase of unemployment to some 14%, by 2020. Therefore, generating the right conditions for the private sector to grow will be crucial for creating sufficient employment opportunities, particularly for the young population.

During the last decade, despite the investment ‘fluctuations’ in the MENA region, Algeria managed to increase its foreign inflows, recording the highest level of FDI in 2012 –equal to US $3 billion (See chart below). Two years later (2014), the country saw its FDI inflows sharply decrease, due to an 87% fall in the announced greenfield investment (a form of Foreign Direct Investment where a parent company starts a new venture in a foreign country by constructing, from scratch, new operational facilities). The 2013 hostage situation at the gas site of In Amenas contributed to this sharp drop in related investment, as did the continuing unrest in Libya that influenced negatively investors’ perception of the region’s potential as an FDI host.

This decline can also be identified in related international rankings; as in 2016, according to the “Doing Business” report issued by the World Bank, Algeria dropped to the 163rd place, out of 189 countries.

According to the National Agency of Investment Development of Algeria, during the period 2002-2015, the main FDI contributors included Kuwait, Spain, Egypt, and the US, along with France, Saudi Arabia and China, while funding was mainly directed to the Industrial sector (indicatively, 68% of the FDI for 2012).

Some recent notable investments, include the construction of an ironworks complex that has started in early 2015, with Qatar holding 49% of the capital in the project, estimated at €2 billion. The company Total is also expected to invest around €168 million in a lubricants plant, with production planned to begin in early 2017.

It is noteworthy that the Government officially insists on its commitment to economic liberalisation and therefore seeks foreign investment in sectors such as infrastructure, telecommunications, energy and water supply –the latter have been proven of crucial importance in the last few years. Despite the measures undertaken to support investments, the reality of the 49/51 investment law –requiring the majority share to be held by an Algerian party in any foreign investment-, in addition to a heavily bureaucratic system and legal insecurity in terms of intellectual property, appear as major obstacles to FDI flows into the country. Protectionist influences and weak finances further worsen the situation.

Considering that the development of the hydrocarbon fields –of major importance for the Algerian economy- will require a substantial inflow of FDI in the coming years, reforms towards a less state-led economy, with a more ‘relaxed’ regulatory system, with stronger focus on non-hydrocarbon related revenues, need to be accelerated.

Despite being a member of the Arab Monetary Fund (AMF), the League of Arab States, the Maghreb Arab Union (MAU), the Organisation of Arab Petroleum Exporting Countries (OAPEC), the Organisation of Petroleum Exporting Countries (OPEC), as well as an active member in the African Union and the NEPAD initiative, Algeria has not yet managed to join the World Trade Organisation (WTO), even though its original application to join, dates back to 1987.

To reinforce the economy, the government has focused towards the development of the country’s hydrocarbon resources and has involved the private sector in research centres and major transport and housing projects. Furthermore, the government has worked towards the development of an action plan to boost the business climate; currently though, the private sector stands aside, due to the difficulty in access to finances, the complex regulatory framework and the time-consuming bureaucracy.

The long-term economic challenges of the country indicate the need for diversification of the economy, in order to reduce its dependence on hydrocarbon exports, bolstering of the private sector, as well as attraction of foreign investment for the creation of adequate jobs for younger Algerians. In reality, the development of the services sector, could mitigate the consequences of the current lack of ‘employability’, towards the restructure and further boosting of the economy.