Overview:
  • ​In the first quarter, Algeria’s economy grew 3.6% year-on-year, which was a deceleration over the 4.8% expansion seen in the fourth quarter of 2015. The hydrocarbon sector, which accounts for 30% of GDP, expanded 3.2%. To reduce the country’s dependency on the hydrocarbon sector, the government is making efforts to improve the business climate in the non-hydrocarbon sector. On 17 July, the Parliament passed a law aimed at boosting investment domestically, by introducing tax exemptions and increasing the efficiency of investment procedures.[1]
Economic Climate :
  • Algeria’s fundamentals have steadily worsened since mid-2014, in line with the slump in global oil prices, but the recent budget approved signal a turning point. In 2015, growth slowed to 2.9 percent from 3.8 percent in 2014, hit by a falling average oil price from US$100 p.b. in 2014 to US$59 p.b. in 2015. Under initial expectations that the fall in oil prices would be short-lived, lack of fiscal consolidation led the budget deficit to double to -15.9 percent of GDP in 2015. The current account deficit also tripled to -15.2 percent of GDP in 2015. Despite tight monetary policy, inflation rose to 4.8 percent as the partial result of pass-through effect from about a 20 percent nominal depreciation of the dinar, aimed to correct the external imbalance. Unemployment rose to double digits and is acute among women and youth.[2]
  • The long term structural challenges facing the economy remain unchanged, namely reducing subsidies, improving the business environment, diversifying the economy and creating private sector jobs. While the government talks about the need for reforms, the steps it has taken have been modest. The government formed following the April 2014 presidential elections promised more action but has yet to deliver on promises.
  • A business climate marked by difficult access to credit, a complex regulatory environment, and time-consuming procedures to set up a business, holds back the private sector. Trade integration has also proceeded very slowly, and negotiations to join the WTO have not made much progress. To bolster the economy, the government is seeking to further develop its hydrocarbon resources and has also explicitly embraced private sector development by opening research centers and launching major transport and housing projects. Regarding the business climate, the government has established a committee to come up with an action plan to help reform it. Economic diversification and reduced reliance on the hydrocarbon sector are both key to strong and balanced growth.
  • Hydrocarbon growth is expected to increase in 2016, but fiscal consolidation will weigh on nonhydrocarbon growth. Hydrocarbon growth is expected to accelerate to close to 2 percent as new fields come on stream and a key gas facility that closed after a terrorist attack in 2013 resumes full production. However, fiscal consolidation should weigh on nonhydrocarbon growth, which is expected to slow to 3.7 percent. Headline inflation will likely remain higher than 4 percent, driven by further dinar depreciation and increases in administered energy prices. The spending cut envisaged in the 2016 budget, combined with higher tax revenues, is projected to reduce the nonhydrocarbon deficit to 29.9 percent of nonhydrocarbon GDP from 37.8 percent in 2015. The current account deficit should widen further as oil prices continue to fall, and reserves are projected to fall to 712 percent of the ARA metric. Broad money growth should remain low due to a continued decline in net foreign assets compensated in part by increased domestic debt issuance by the government. Beyond 2016, the outlook hinges on the strength of the policy response to the oil price shock. Over the medium term, Algeria's macroeconomic prospects will depend on the size and pace of fiscal consolidation, the extent of structural reforms, and the appropriateness of other policies. Staff developed three scenarios to illustrate the possible outcomes under different policy responses and highlight the policy trade-offs at play.[6]
Economic Reforms:
  • The 2016 budget emphasizes fiscal consolidation, and assumes an average oil price of $35 p/b. It calls for a 9 % cut in expenditure (mostly investment) and a 4 % increase in tax revenue based on a 36 % hike in gasoline prices and higher taxes on electricity and gasoline, and on car registrations. The budget empowers the government to approve further cuts if oil prices fall lower than its average oil price assumption, and to engage in external borrowing if needed. The Government will also apply new import licenses and is considering raising electricity prices closer to the production cost. Monetary Authorities will allow the dinar to have the flexibility needed so as to prevent its misalignment.
  • Policy makers continue to face difficult trade-offs in the next few years. The government has little choice but to restore fiscal and external balances. Growth, however, is projected to remain modest at 3.4 % driven by modest dynamism in the hydrocarbon sector, with gas projects coming online, and by the non-hydrocarbon sectors. Growth would benefit from reduced, but still positive, public expenditure and stagnant hydrocarbon exports, especially if the oil prices remain weak or fall further, and if the global recovery remains tepid. In 2017-18, following some recovery in oil prices, growth will continue to be driven by public investment and still significant subsidies. Private investment will remain tepid due to domestic uncertainty and continuous regional security threats.[2]
Issues and Reforms Needed:
  • To create more jobs and more inclusive growth, the authorities need to transform Algeria’s state-led, hydrocarbon-based growth model into one that is more diversified and led by the private sector. Such a transformation will require an ambitious structural reform agenda. Key reforms include improving the business climate, for instance by streamlining regulations and administrative procedures and making it easier to start a business, as well as opening up the economy to more trade and investment, improving access to finance, developing capital markets, and strengthening governance, competition, and transparency.[3]
  •  Subsidies cost about 14 percent of GDP in 2015. Their fiscal cost is not the only problem: subsidies are largely unfair, as they benefit the most affluent much more than the poor. For instance, the 20 percent richest households spend, on average, six times more on subsidized fuel products than the 20 percent poorest households. Furthermore, subsidies also encourage overconsumption, and lead to economic and environmental distortions. Further reducing, gradually, generalized subsidies and replacing them with a well-targeted cash transfer system to protect the most vulnerable households would make the system fairer, while reducing its cost.
Economic Sectors:

Oil and Gas
  • According to the 2012 BP Statistical Energy Survey, Algeria had proved oil reserves of 12.199 billion barrels at the end of 2011, equivalent to 19.3 years of current production and 0.73 % of the world's reserves while Algeria produced an average of 1728.5 thousand barrels of crude oil per day in 2011, 1.85% of the world and a change of -1.5 % compared to 2010. Algeria consumed an average of 344.5 thousand barrels a day of oil in 2011, 0.38% of the world and a change from 2010 of 5.3%. According to the same survey, Algeria had 2011 natural gas production of 77.99 billion cubic metres, a change of -3% versus 2010 and equivalent to 2.37% of the world total while the coutrny's natural gas consumption was 28.03 billion cubic metres, 0.86% of the world total. Although Algeria is one of the major oil and gas producing countries of Africa it is still considered to be relatively under-explored. Its hydrocarbon industry is key to its economy. [4]
  • The Algerian economy is highly dependent on oil and gas, which are 97 per cent of total exports, and provide almost two-thirds of government income and over a third of GDP. To cope with this distortion, to balance the budget and to reduce public debt, the government set up a “revenue regulation fund” in June 2000 using surplus tax revenue that overshot budget targets because of a rise in oil prices. 
  • The Algerian national oil company is Sonatrach (Entreprise Nationale Sonatrach) and it plays a key role in both upstream and downstream oil and gas industries. It is responsible for exploration and production, transport, refining, processing, marketing and distribution. Through its subsidiaries, the company has a domestic monopoly on oil production, refining, and transportation. Algeria's oil sector, though, is not completely open to foreign companies. All foreign operators must work in partnership with Sonatrach, with Sonatrach usually holding majority ownership in these production-sharing agreements.
Banking Sector

  • On aggregate, the banking sector remained well capitalized and profitable, but liquidity tightened. According to preliminary figures, the overall capital-adequacy ratio was 17 percent at end-2015 compared to 16 percent in 2014. Bank profitability improved in 2015, with an aggregate return on assets of 2.2 percent. The ratio of gross non-performing loans (NPL) to total loans, which had been on a declining trend thanks in part to growth in credit, edged higher to around 9.5 percent at end-2015. However, the net NPL ratio was 3.6 percent owing to high provisioning levels (around 61 percent on aggregate). Liquidity in the banking system contracted sharply due to the impact of lower oil prices on bank deposits and to rapid growth in credit to the public sector (partly used to finance imports). On aggregate, 27 percent of bank assets were liquid at end-2015 (compared to 38 percent at end-2014), sufficient to cover almost two-thirds of their shortterm liabilities.[6]
Agriculture
  • Algeria’s agricultural sector contributes about 8 percent of gross domestic product (GDP) but employs 14 percent of the workforce. The country is currently unable to meet the food needs of the population. As a result, 45 percent of food is imported. The primary crops are wheat, barley, and potatoes, dates are also heavily exported in the foreign countries. Cultivation is concentrated in the fertile coastal plain of the Tell region, which represents just a slice of Algeria’s total territory. Altogether, only about 3 percent of Algerian territory is arable. Even in the Tell, rainfall variability has a significant impact on production. Government efforts to stimulate farming in the less arable steppe and desert regions have met with limited success. However, herdsmen maintain livestock, specifically goats, cattle, and sheep, in the High Plateaus region.[5]
Minerals
  • Algeria is rich in minerals; the country has many iron, lead, zinc, copper, calamine, antimony and mercury mines. The most productive are those of iron and zinc. Lignite is found in Algiers; immense phosphate beds were discovered near Tébessa in 1891, yielding 313,500 tons in 1905. Phosphate beds are also worked near Sétif, Guelma and Aïn Beïda. 

[1] Worldbank Algeria Country Profile: http://www.worldbank.org/en/country/algeria/overview
[2] Worldbank 2016 Prospects
[3] IMF: ALGERIA STAFF REPORT FOR THE 2016 ARTICLE IV CONSULTATION
​[4]https://www.bp.com/content/dam/bp/pdf/energy-economics/statistical-review-2015/bp-statistical-review-of-world-energy-2015-full-report.pdf​
[5] OECD Country Profile, Algeria: https://www.oecd.org/countries/algeria/2497129.pdf​
[6] International Monetary Fund 
PRODUCTS

       EXPORTED

            FROM
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                 ALGERIA
DESTINATION

           OF
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              EXPORTATIONS
      ​PRODUCTS

     IMPORTED
 
                                IN
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      ALGERIA
source: AJG Simoes, CA Hidalgo. The Economic Complexity Observatory: An Analytical Tool for Understanding the Dynamics of Economic Development. Workshops at the Twenty-Fifth AAAI Conference on Artificial Intelligence. 
Economic Complexity of Algeria 
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The economy of Algeria has an Economic Complexity Index (ECI) of -0.545 making it the 100th most complex country. Algeria exports 15 products with revealed comparative advantage (meaning that its share of global exports is larger than what would be expected from the size of its export economy and from the size of a product’s global market).

 Algeria: Selected Macroeconomic Indicators (IMF 2016)

Source: Data For Algeria