The Algerian economy is faltering after years of oil-driven economic bonanza. Within OPEC, Algeria, perhaps more than other of its oil-producing members, is experiencing the fallout of declining oil prices. Now, more than ever, the Algerian government must take this significant development to restructure and strengthen its economy.

External factors

Firstly, American energy independence looks likely to trigger the next great geopolitical shift in the modern world. Exploitation of fields in Appalachian states such as West Virginia and Pennsylvania, and further west in North Dakota, have transformed the US’s energy outlook pretty much overnight. Professor Dieter Helm, an energy expert at Oxford University, said: “In the US, shale gas didn’t exist in 2004. Now it represents 30% of the market.”

Because they have proven to be quickly producible in large volumes at a relatively low cost, shale / tight oil and shale gas resources have revolutionized oil and natural gas production.

In response to falling prices, OPEC’s most prominent members, Saudi Arabia, Kuwait, and the United Arab Emirates, have expressed their determination to increase production in order to preserve their market share. In July, OPEC´s members pumped 31.51 million bpd, which is estimated to be its highest level since May 2012.

OPEC’s Secretary General, Abdullah al-Badri dismissed any suggestion of decreasing supply to increase prices, saying OPEC expects rising demand to bolster prices. However, Algeria’s own energy minister, Salah Khebri, announced that, in light of improved Iranian-Western relations, by December, there will be a glut of oil in the market place.

Internal factors

Now more than ever, the Algerian GDB is vulnerable to changes in global energy prices. Indeed, more than 60% of the government’s revenue is currently derived from the hydrocarbon sector, and oil and gas account for around 97% of total exports. One may add the current account deficit that 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 also rose to double digits and is acute among women and youth.

As a consequence of this, in a span of twelve months, the Algerian economy has been rocked. The price of Brent crude oil (ICE) dropped from a $108 high to about $54 per barrel this past year, an almost 50% dip. In July 2015 alone, the average price of an Algerian barrel of oil lost more than 5 USD. In the same period, the country produced 1.1 million barrels per day, and further boosted its production of crude oil by 32,000 bpd. This is due to the opening of the Bir Sebaa and Bir el Msana oil fields, located in eastern Algeria.

Algeria, like many OPEC members, has fallen into the trap of assuming its natural energy resources will be the economy’s engine for decades to come. Algeria’s economy is heavily lopsided, with reliance on oil and gas having stifled diversification. In addition, unemployment remains a constant headache for the Bouteflika government, which has responded by promising to spend more on housing and food subsidies.

Algeria´s central bank is concerned that if the price of oil stays low, and the depreciation of dinar continues, the country’s foreign exchange reserves could diminish. Despite these warnings, Sonatrach announced late last year that it intends to invest $90 billion over the next five years in oil and gas development.

A chance for Algeria?

With an economy heavily dependent on oil, Algeria is currently at a crossroads and has a unique opportunity to promote structural reforms.

In that particular context, the government is now under pressure and has launched a series of measures to secure falling revenues. Algeria wants to introduce austerity measures and dip into foreign reserves to cover demand for imported goods. That is why it  has started to reduce its budget, as energy revenues are only expected to reach $34 billion, versus the $60 billion it was expecting to generate. It is estimated that Algeria’s budget deficit could reach a staggering $30 billion by the end of the year 2016.

In an extraordinary move, the country launched a tax amnesty, set to expire in December 2016, to improve government finances and salvage part of the $4 billion Algiers estimates it loses through tax fraud and evasion. 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 (10 for Oran only, the 2^nd city of the country) 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.