Algeria: Spending hike

Buoyed by rising oil and gas prices and keen to stave off socioeconomic discontent, the Algerian government has passed a law raising spending in the 2011 budget by 25%. The extra spending will raise concerns about the deficit and inflation, but signs of a bumper harvest that will reduce the need to import costly wheat from abroad and should help counteract such pressures.

The Algerian cabinet in early May approved a draft law – the supplementary finance law, (loi de finances complémentaire, LFC) – amending the government budget for 2011. The law includes measures to keep the price of basic goods affordable, pay for additional civil servants and salary increases for government worker, stimulate economic activity in priority areas of the country and among small and medium-sized enterprises (SMEs), reduce unemployment through training programmes and improve the country’s infrastructure and housing provision.

The government frequently amends its budget mid-year to reflect changes in the price of hydrocarbons, which account for the bulk of government income, though this year’s changes came earlier than usual, possibly spurred in part by recent socioeconomic discontent and protest. In line with rises in oil prices early in the year, the LFC increases government expenditure by around 25%, from AD6.6trn (€64bn) to AD8.3trn (€80.5bn). The hike will see government spending rise to a total of 70% of GDP.

The state plans to use a large proportion of the additional funds to enhance subsidies for basic items, such as cooking oil, sugar and wheat, to support the purchasing power of Algerians. Under the LFC subsidies for such goods will increase by 170% on 2010 levels, taking them to AD271bn (€2.6bn). The law also extends exemptions from import duties and value-added tax for cooking oil and sugar in order to make prices more palatable to consumers, following protests over the cost of such goods in January.

The extra funds will also cover pay rises for government workers and help meet the costs of plans to recruit an extra 60,000 civil servants this year. The law will also provide AD139bn (€1.3bn) for youth training initiatives to reduce unemployment, and increase funding for housing projects by AD897bn (€8.7bn), with government plans to build an additional 400,000 housing units.

The budget also includes various fiscal measures to support the growth of SMEs, particularly those in priority areas of the country that the government regards as under-developed. Among measures these are steps to reduce social security payments for businesses operating in the southern and high plateau areas of the country. Small companies qualifying as “micro-enterprises” and enterprises created to bring informal economic activities into the formal, taxed economy will also receive significant incentives, including a tax exemption for their first two years of operation and further tax breaks of 70%, 50% and 25%, respectively, in the subsequent three years of operation.

The increase in spending combined with reductions in government income through various tax breaks will raise the nominal fiscal deficit accounted for in the budget to 33.9%, which on first sight suggests unsustainable spending levels. However, in reality the deficit will only be a tiny fraction of this figure, as the budget calculations are based on an average oil price of $37 a barrel, around half of levels seen in 2011 so far. The government will also be able to draw from the country’s oil stabilisation fund to cover the deficit. Set up to help balance the budget in the face of volatile oil prices, the fund may be drawn on as long as it maintains a minimum balance of AD740bn (€7.15bn). As of early May the fund stood at AD4trn (€38.6bn), leaving the government significant room to manoeuvre.

A less illusory potential risk involved in pumping such a large amount of money into the economy through salary increases and other spending programmes is inflation, which has hovered around 3.7% in recent months. Adding to such pressures are rising international wheat prices, which have almost doubled over the past year and saw large increases in mid-May.

Algerian per capita wheat consumption stands at around 210 kg, more than 2.5 times that of the US and almost double that in EU countries, making Algeria the world’s seventh-largest importer of wheat. After several worrying weeks, rains towards the end of April saw the government lift drought warnings and should boost local grain production, reducing reliance on expensive imports. Furthermore, additional spending on subsidies to keep prices down, while waiving taxes on key goods should also help to counteract inflationary pressures. The budget envisions an inflation rate of 4% for 2011 as a whole.