ALGERIA

Algeria’s economy is excessively dependent on hydrocarbon activity (oil and especially gas). The sector’s output accounts for around 40% of GDP, 94% of exports and one third of fiscal revenues. Since 2014, economic growth has failed to catch up with the pace of population growth (2% on average) due to bottlenecks that limit growth potential. The Algerian economy's main structural woes are the trend decline in hydrocarbon production and deteriorating infrastructure, a by-product of underinvestment and inefficiencies of the state-led economic model. The slowdown in private consumption and the freezing of public investments due to spending cuts have also hindered economic activity over the past few years. As a result, GDP grew only by +0.7% in 2019, down from +3.2% in 2016, in a context of declining hydrocarbon prices and heightened political uncertainty.

The outbreak of Covid-19 severely hit the Algerian economy when growth momentum was already muted. The sharp drop in hydrocarbon prices and social distancing measures to contain the spread of the virus heavily weighed on activity: Algerian GDP contracted by -5% in 2020. Rising hydrocarbon prices as well as the easing of sanitary restrictions are expected to drive an economic recovery in 2021 (+3.5%) and 2022 (+2.4%). However, low vaccine rollout and an inflation overshoot due to soaring food prices are the main risks to the recovery. In the medium term, we expect growth to remain volatile and highly dependent on hydrocarbon activity, especially on gas. Algeria has so far shown only slow progress in harnessing the significant potential for renewable solar energy production in Sahara.   

Algeria's business environment has only marginally improved over the past few years. The World Bank Doing Business 2020 survey ranks Algeria 152th out of 190 economies (it was ranked 154th in 2015). Key bottlenecks relate to trading across borders (ranks 172th ), getting credit (181st) and protecting minority investors (179th rank). In June 2020, the government adopted a supplementary finance bill to ease business regulation and promote attractiveness to foreign investors. Towards the end of 2021, Algeria also launched the “Government Action Plan” that entails a wide range of reforms to support the transition towards a more diversified economy and bolster governance and social cohesion.

Political instability remains a notable risk in Algeria and weighs on investment and consumption decisions, with negative knock-on effects on trade. In 2019-2020, Algeria witnessed its largest protests (Hirak movement) in 20 years, demanding radical change in the political system and the functioning of the government (more transparency and less clientelism). These protests have been interrupted because of sanitary restrictions but are likely to resume in 2022. Widespread poverty, the lack of employment opportunities and the difficult economic context may fuel discontent at the exit of the sanitary crisis. The unemployment rate was already nearing 12%, while youth unemployment was already close to 30% in 2019. Both the employment and income outlook deteriorated drastically due to the Covid-19 economic fallout. To preserve social cohesion, the government is expected to keep its focus on social spending in the coming years (at the expense of fiscal sustainability).