For North Africa, this is a time of contrasts in macroeconomic terms, as countries across the region feel the benefits and strains of rising energy and food prices in dramatically different ways.
While Algeria and Libya reap the benefits of the hydrocarbons boom, Morocco is under intense pressure as the government struggles to protect living standards by maintaining subsidies at a high level. Tunisia, on the other hand, continues to perform steadily.
In 2007, Tunisia achieved 6.3 per cent real gross domestic product (GDP) growth, while Morocco’s GDP grew by only 2.2 per cent. Rabat had been hoping to consolidate its fiscal position in 2008, an achievement that would have won it the plaudits of international ratings agencies. But the surge in global prices for grain and fuel has imposed new costs and put such ambitions out of reach for now.
The markets have noticed: ratings agency Standard & Poor’s (S&P) has revised its assessment of Morocco downwards, from ‘positive’ to ‘stable’, and the prospect of Rabat securing investment-grade categorisation has receded.
Instead, with many people still surviving on low incomes, the Moroccan authorities are resigned to the fact they will have to continue to heavily subsidise grain and fuel oil, in an effort to keep down domestic consumer prices. The cost to the state budget of holding the line in this way has of course increased, as the world market price of imported supplies rises.
In neighbouring Algeria, traditions of government intervention are even stronger, thanks to the country’s socialist history. But the cost of protecting consumers is much more affordable, because the gas boom has poured cash into state coffers.
In April, the government of former prime minister Abdelaziz Belkhadem felt able to announce that it had earmarked the equivalent of $2.5bn for food subsidies this year, almost 80 per cent of which will be used to hold down the price of wheat, with most of the rest allocated to dairy products. But for a government that has cut its total debt to less than 10 per cent of GDP this year, such an outlay is easily affordable.
In the long term, Algeria’s Prime Minister Ahmed Ouyahia - who is generally regarded as a supporter of liberal economic thinking - may be tempted to move to a more market-driven approach to stimulate domestic agri-cultural output. But the government’s strong fiscal position gives him the freedom to decide if and when do to so, in light of domestic consumer pressures.
Of course, the revenue boom could yet be used by traditionalists in the ruling Front de Liberation Nationale (FLN) as an argument against further liberalising economic reform, and not just in the farming sector. But such policy wrangles are for the future. For now, the surge in oil and gas income is providing a rich bonus for a country that less than a decade ago faced serious debt problems. Today it can afford to allocate $155bn to a massive programme of public investment for 2005-09.
Although continued Islamist violence and uncertainty over the health of President Abdelaziz Bouteflika raise some questions, the current economic boom has reinforced overall stability because it facilitates job creation and investment in industry and infrastructure.
For Libya, likewise, high energy prices could assist the long-term transition to a more market-based system, but could equally provide a cushion and an excuse to delay changes needed to make the economy more competitive and diversify employment. Libya has already made some progress in privatisation, and its non-oil GDP rose by 7.4 per cent in real terms last year.
Even so, the country remains heavily reliant on oil for both revenue and overall economic output. The sprawling and well-financed public administration may be twice the size it needs to be, says Taher el-Jehaimi, secretary of the General People’s Committee (ministry) for Planning.
With 36 billion barrels of oil - 60 years’ production at the current output rate - Libya will clearly remain reliant on hydrocarbons as a major source of income, even though the sector is of limited value as a direct source of new jobs for a growing population.
The impact of the rise in crude prices is illustrated by the fact that per capita GDP has more than doubled over the past four years, from $4,267 in 2003 to $12,277 in 2007. The International Monetary Fund (IMF) recently noted that oil-funded fiscal expansion was “in full swing”.
But in terms of consumer living standards, some of the benefit has been eroded by rising inflation, which reached 6.8 per cent in 2007 and was predicted to be 8.8 per cent this year, even before the latest surge in global com-modity prices. Moreover, says the IMF: “The inflationary pressures that have accompanied the economic expansion of the past few years are unlikely to abate.”
Algeria too faces inflationary threats that are directly fuelled by the country’s own oil and gas-funded surge in domestic spending.
Tunisia has not enjoyed the sort of revenue boom that allows Algeria and Libya to swallow extra costs with relative ease - and to step up imports while still piling up huge surplus positions on the overall balance of payments. But nor is it prone to such domestic inflationary drivers, because it simply does not have the capacity to increase public spending on a comparable scale.
The inflationary pressures in Algeria and Libya clearly result from the rising cost of food and energy on the world market. However, both still have sufficient hydrocarbon production to be at least partially cushioned against the upward drift in international fuel prices.
In Egypt’s case, the overall impact of rising fuel prices is broadly neutral for the government, as the increased flow of royalty income roughly balances the extra cost of maintaining domestic fuel subsidies, says Farouk Soussa, director of Africa and Middle East sovereign ratings at S&P.
For Tunisia, revenue from oil and gas output is not quite enough to match the increased expense of holding retail fuel prices at a reasonable, subsidised level. The overall cost of fuel and food subsidies has risen to 2 per cent of GDP from its usual 0.7-0.8 per cent.
However, Soussa says the extra net cost is not great. Moreover, with living standards already well ahead of those in Morocco and Egypt, the Tunisian authorities have felt able to pass on some of the extra cost of energy to consumers. “The government has been willing to raise domestic fuel prices more than Morocco,” says Soussa.
Today’s high hydrocarbon prices have had a further benefit for Tunisia: bolstering the viability of marginal fields that might have remained untapped when oil prices were lower. This helps to gradually expand the overall level of oil and gas production.
Even so, food price pressures are being felt, just as in Morocco. Across North Africa, this problem is compounded by inefficiencies in the local distribution system for key commodities such as flour.
All this increases the pressure for economic diversification, to broaden the base of GDP, enhance the capacity of national economies to cope with rising import costs, and broaden the range of income earning opportunities available to hard-pressed local consumers.
Historically, Morocco’s economic output has been heavily conditioned by rainfall. Drought years have a dramatic effect on the growth rate and overall GDP. In the past two years, harvests have been good and government irrigation programmes are reducing the extent to which agriculture is exposed to fluctuations in the weather.
But progress is gradual. The real key to steadying the pace of growth must lie with investment and diversification. Tourism, telecommunications and transport are all growth areas, as is manufacturing. “These are bringing in foreign revenues and helping to smooth out economic cycles,” says Soussa.
While Gulf investors such as Emaar Properties are putting money into big real estate projects, Western companies are the main source of foreign direct investment in manufacturing. US clothing company Fruit of the Loom recently opened a plant in Morocco, to take advantage of the textiles free-trade agreement, which gives the kingdom’s factories in this sector open access to the consumer markets of the EU.
The trend is further advanced in Tunisia, where manufacturing has just overtaken agriculture as the biggest export sector. Industry is already well developed and the country is beg-inning to move into hi-tech areas, helped by a full multi-sectoral free-trade accord with the EU.
With an ample supply of relatively low-paid, French-speaking workers, and open access to the EU market, Tunisia is able to compete with Eastern European states as a production base. Growth in this area both contributes to and feeds off the considerable progress made in reducing inequalities, raising the basic standard of living and strengthening public services.
The one major flaw in this model is the failure to generate sufficient employment. “The country is going down the route of a knowledge economy,” says Soussa. “But this does tend to be capital intensive rather than labour intensive.”
Although the authorities hope to create more jobs in tourism, at present about a quarter of the employable population under the age of 30 are jobless, including many well-educated Tunisians. By contrast, in Morocco and Egypt, unemployment is primarily concentrated among the less well-educated.
Job creation is also a prime challenge for Algeria. But with ample reserves of cheap energy, heavy industry is marked out for a bigger role. There are plans, for example, to construct two aluminium smelters.
A first project, with the UAE’s Dubai Aluminium (Dubal) and Mubadala Development Company partnering Algerian state energy giant Sonatrach, is sited at Beni Saf, 500 kilometres west of Algiers, and should open in 2012. A second, announced by local private sector group Cevital, in partnership with Australia’s Rio Tinto Alcan, is a more distant prospect, with opening pencilled in for 2015 at Cap-Djinet, 65km east of the capital.
But while giant projects like these are eye-catching, the Algerian economy is sluggish and uncompetitive outside the oil and gas sector. The IMF has warned that productivity is low and has pressed for further liberalising measures to stimulate non-hydrocarbons development.
Still, trade liberalisation and the diversification of the banking industry is already helping the private sector. The entry of foreign banks has been welcome news for local businesses that have struggled to extract the credit they need from deeply conservative local financial institutions, and evidence of real progress is beginning to appear: last year, non-oil economic output rose by 6 per cent in real terms.
A MEED Subscription...
Subscribe or upgrade your current MEED.com package to support your strategic planning with the MENA region’s best source of business information. Proceed to our online shop below to find out more about the features in each package.