Algeria budget aims to rein in spending

14 February 2013

Algeria plans to cut spending by 11.2 per cent in 2013, after the government spent extra money last year to avoid civil unrest

Algeria’s budget for 2013 outlines plans to cut spending by 11.2 per cent and projects a 10.1 per cent increase in income. The budget envisages spending of AD6.88 trillion ($87.8bn) and income of AD3.82 trillion. Expenditure will be divided between AD4.36 trillion in operational spending and AD2.54 trillion in capital spending.

Although austerity measures have been championed by a number of government officials in recent months, the cut in expenditure is largely attributable to a natural correction following an extraordinary increase in government salaries and a rise in the cost of basic foodstuffs on the local market last year.

The 2012 supplementary budget allocated an additional AD317bn to cover a 20 per cent increase in the monthly minimum wage for civil servants, from AD15,000 to AD18,000, along with a revision of retirement benefits. This took the total cost in 2012 to AD679bn. The increase followed a 25 per cent rise in the minimum wage from AD12,000 a month, introduced in 2010.

The budget is based on a reference oil price of $37 a barrel, making the projected AD3.06 trillion budget deficit academic. In 2012, the government reached its projected income for the year by the end of April. Analysts expect the average oil price in 2013 to be in the region of $100 a barrel, slightly lower than that of 2012.

Defence spending

The operational budget for the coming year is dominated by spending on defence, the interior ministry and social spending. Defence spending accounts for AD825.8bn, or 19 per cent of the total. National education is the next largest outlay, at AD628.7bn, followed by the interior ministry, with AD566.5bn.

Other departments with budgets of AD200bn or more are dominated by public services: health and hospital reform; higher education; labour and social security; and the moudjahadine. The only productive sector with a budget of more than AD200bn is agriculture and rural services, highlighting the onus that the government is placing on increasing domestic food production as a means of controlling prices.

According to Finance Minister Karim Djoudi, the 2013 budget is intended to meet three key aims: to preserve spending power among the less privileged members of the population; to promote private investment; and to encourage the regionalisation of the economy.

It is unlikely to go far enough to make genuine headway towards any of these goals. Just as in 2012, the impact of any increase in the cost of living this year will be felt disproportionately by the country’s poor. The Washington-based IMF expects inflation to fall from the damaging 8.4 per cent average in 2012. But it still forecasts a rate of 5 per cent for 2013. This will be exacerbated by a persistently high rate of unemployment. Although this too has fallen, from an official rate of 10 per cent in 2011 to 9.7 per cent in 2012, it is still high, and is much higher among young people.

[The] new measures are unlikely to have a significant impact on foreign investment

The budget includes several measures that the government claims will help to promote private investment. There is a commitment not to introduce any new taxes. The threshold above which projects must be approved by the state’s Conseil National de l’Investissement (CNI) has been increased to AD1.5bn from AD500m, removing a layer of bureaucracy from the process. Companies benefiting from government tax breaks are free from the obligation to reinvest the money saved if they incorporate it in lower prices and services.

But these new measures are unlikely to have a significant impact on foreign investment.

The new threshold for approval by the CNI is still less than $20m, ruling out large-scale infrastructure projects, while tinkering with the tax-break measure will benefit the consumer rather than the investor.

FDI barriers

There is also no sign that more telling barriers to foreign investment, such as the 49 per cent limit on foreign equity in local joint ventures and restrictions on the repatriation of dividends, will be removed. The government’s insistence on the first right of refusal on the divestment of any foreign shareholding in a local joint venture still looms large over existing investors and gives potential investors reason to hesitate. The recent terrorist attacks on BP’s gas facility at In Amenas could further erode the appetite of foreign firms to invest in the country.

Plans to promote regional investment are making gradual progress, but a major reorientation of the economy away from the capital Algiers and the major oil, gas and industrial hubs along the coast is extremely unlikely.

Proposals for an inland refinery at Tiaret have been on the drawing board since 2005, and in the recent deal signed with Renault for a new car manufacturing facility, the government’s preferred location of Jijel was rebuffed by the French firm in favour of the existing car-making hub in Oran.

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