Algeria: Spending cuts threaten further protests in 12-month outlook

18 Jan 2017

Algeria: Spending cuts threaten further protests i...
  •   Violent protests in the northern Algerian city of Bajaia in early January highlight the scope for further protests in the year ahead over recent government tax hikes and cuts to energy subsidies.
  •   The austerity measures underscore Algeria's increasingly untenable political and economic model as the country struggles with low gas prices and the likelihood of repeat unrest, resulting in confrontations with security forces and vandalism of private property. 
  •   Despite intense economic pressures, the government has maintained its high level of defence expenditure for 2017, but sustaining this over the longer-term is likely to be challenging if energy revenues remain low.

Violent riots erupted in the northern Algerian city of Bejaia on 2 January, following the introduction of the national budget set by the 2017 Finance Law the previous day The events started with a strike by the city’s shopkeepers in protest against the law’s tax increases and reduction of key subsidies, with other members of the public joining the demonstration. The protest descended into rioting after the crowd came into confrontation with local security forces, and clashes continued into the early hours of the morning. Videos uploaded to social media show the police firing tear gas at protesters, and members of the crowd setting fire to a bus, a police van, and various local shops. The premises of several foreign businesses – including a branch of BNP Paribas – were wrecked, while some buildings were looted. Around 100 protesters were arrested, and others hospitalised by rubber bullets fired by police. 

The violence in Bejaia has been among the most disruptive protests to occur in Algeria since the 2011 riots in Algiers which took place during the ‘Arab Spring’. The incident highlights the risks associated with altering the subsidy system, which reduces the price of fuel, electricity, food, and other essentials for the public. The 2017 budget also increases value added tax, income tax, property tax, and tobacco tax, which Algerians have been vocal in opposing over recent months. Labour unions have held a series of related anti-austerity demonstrations and strikes since October – particularly in opposition to the government’s planned extension of the age at which employees can retire – though the events in Bejaia have been the first sign of this unrest turning into serious violence.

Like other countries in the Middle East and North Africa, Algeria’s political and economic model relies heavily on high state spending to reduce the prospect of instability. In April 2016, an Algerian ex-finance minister and former close advisor to President Abdelaziz Bouteflika, Abdelatif Benachenhou, told Reuters that he estimated that Algeria allocated around 22 percent of the country’s GDP to its system of social welfare and subsidies. This system, the former advisor believed, was unsustainable even in times of higher state revenues, due to steady increases in the prices and volumes of materials consumed.

Over the past two years, there has been ongoing debate in Algeria about the need to alter this economic model as the government’s revenues from energy sales have plummeted. After years of oil being priced at over USD 100 per barrel, this dropped sharply from late 2014, resulting in a corresponding drop in Algeria’s large accumulated reserves of foreign currency. As oil remained at an average of around USD 50 or less throughout 2015/16, Algeria’s reserves fell from a high of over USD 190 bn in 2013 to USD 114 bn by the end of 2016. The scale of this deficit has forced government attempts to drastically reduce public spending, which it did by 9 percent in 2016, followed by the current year’s reduction of 14 percent.

Unsurprisingly, Algeria has not been the only regional state facing a large budget deficit and dwindling currency reserves since 2014. In April 2016, the Saudi government unveiled a 15-year roadmap to reforming its economy, titled ‘Vision 2030,’ which stemmed from the unbridgeable gap between the state’s forecast oil income and its rate of social spending until that point. However, unlike Saudi Arabia, which has cast a restructuring toward the private sector as a positive opportunity for its nationals, Algeria has offered few concrete suggestions as to what the old, unsustainable economic order should be replaced with. Rather, the government has sharply cut public spending without focusing on a real strategy to replace it, providing the public with few assurances of where the reforms may lead. This is resulting in heightened anxieties and frustration among the public, and there is a strong likelihood of further violent and disruptive protests over the year ahead.

The protests will continue to be concentrated in Algeria’s northern provinces, which have been the focus of unrest over the past 18 months, with less direct impact on the country’s southern desert regions, where most gas extraction sites are located. While Algerian security forces will prioritise the protection of critical national infrastructure in the event of future protests, the risk remains that public frustrations will lead to further destruction of local businesses, and even hinder Algeria’s prospects for attracting highly-needed private investment. It is notable that a BNP Paribas branch was attacked during this month’s protests in Bejaia and it is possible that other French or Western businesses will be specifically targeted if unrest persists.

The one sector in which Algeria’s spending is being maintained is its defence budget, which will be allotted USD 10 bn in 2017, approximately the same as the previous year. This will be viewed with relief among domestic and international observers, who see Algeria as a relative haven of security alongside neighbours Libya and Mali, thanks to increased Algerian efforts in 2016 to militarise its borders. Algeria’s maintaining of this security beyond 2017, however, will be dependent upon its ability to sustain its exceptionally high rate of military spending, particularly given the inherent challenges of the country’s vast desert geography. If the government is not more pro-active in finding an economic infrastructure to replace high energy rents, a reduction in both security from terrorism and domestic political stability remains possible over the longer term. 

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