Between 2014 and 2016, oil barrel prices dropped from USD 100 to USD 45.13. Algeria, a country that is mainly dependent on fuel exports, saw its hydrocarbon exports revenues divided by three. Standing at USD 60 billion in 2014, they dropped below USD 20 billion in 2016.

With this sharp decline in oil and gas exports, the main driver of Algeria’s economy, GDP fell by 30 percent from USD 235 billion in 2014 to USD 160 billion in 2016, according to the IMF.

In 2015 for example, the government’s budget deficit stood reached its lowest record at -15.3 percent of GDP.

Algeria wasn’t the only oil producing country suffering from the repercussion of the price crash, but the way they have chosen to manage the crisis has only worsened the situation.

OPEC VS USA: The Collapse of the Petrodollar

By late 2014, the United States doubled its oil production. This sudden increase in supply drove prices down. Facing this situation, the Organization of the Petroleum Exporting Countries (OPEC) – a group of the biggest oil exporters in the world – decided to react in an unexpected way.

Instead of reducing their production to keep prices up, they chose the opposite by maintaining their production level and thus exacerbating the price collapse. The strategy was to intended protect the cartel’s shares by killing US production with irresistibly cheap prices for producers across the Atlantic.

But this fall in prices impacted the state budget of OPEC members, who found themselves forced to find other funding sources.

Some turned to the International Monetary Fund (IMF) for loans, while others, like Saudi Arabia and Qatar, issued sovereign bonds to diversify their financing sources and fund their economic restructuring programs.

Algeria did neither, choosing instead to tap into its quasi-sovereign wealth fund, the Oil and Gas Revenue Regulatory Fund (FRR), to delay any politically sensitive austerity measures.

The FRR was created in 2000 to collect the surplus of oil export revenues. One of the fund main objectives was “the repayment of the public debt and the financing of the Treasury deficit, with a mandatory minimum threshold set at DZD 740 billion,” according to the Algerian finance ministry.

But the financial mattress that Algeria has built for several years melted in the space of two. While the balance of the FRR amounted to DZD 4.41 trillion by May 2014 (USD 38.5 billion at current exchange rate), DZD 2.34 trillion evaporated from the fund to settle at DZD 2.07 trillion by the end of 2015, according to the Official Monetary and Financial Institutions Forum (OMFIF).

As oil prices did not recover by 2016, the Algerian government continued to pump from the FRR’s reserves, leaving only DZD 840 billion by December 2016 to cope with a budget deficit that settled around DZD 2.45 trillion.

Although the remaining FRR balance was obviously too low to plug the deficit, the government decided to unlock the fund’s minimum threshold during the elaboration of the 2017 finance bill.

However, what should have been Algeria’s safety mattress in overcoming the oil curse was fully drained by February 2017.

Public Banks: The Last Lifeline

The Algerian government thus found itself between a rock and a hard place. On the one hand, it had to continue to buy social peace by subsidizing certain commodities, and on the other hand, the exhaustion of the FRR left it with no room for maneuver. Since the outburst of riots in Béjaîa, the government had a hard time to make the population, accustomed to this unequal distribution of the petroleum wealth, swallow the bitter pill of end of the subsidies.

Alongside withdrawing money from FRR, in 2012 Algerian authorities began using other surplus financial resources accumulated through oil exports gains. Public commercial banks were massively solicited to finance the public investment instead of the Treasury, which exclusively ensured this role until recent years.

By May 2014, the Algerian central bank increased the rate of the minimum amount of reserves held by commercial banks to 12 percent, as another measure aimed at absorbing excess bank liquidity in bank accounts. This was the second increase enforced by the central bank in a relatively short time, the previous one having taken place in 2012 when the reserve requirement ratio jumped to 11 percent compared to 6.5 percent since 2004.

However, since the beginning of 2015, the collapse of oil revenues ended up plumbing the liquidity of the banks, which in a margin of a couple of years jumped from a surplus in liquidity to urgent need. By the second quarter of 2016, they even began seeking financing from the central bank, which had to restart the instruments of short-term debt securities.

In critical need of liquidity, the Algerian government made a puzzling decision by launching the state bond issue, jeopardizing the capacity of public banks. The banks were called to ensure the state’s role by subscribing most of the bonds issued by the Treasury, an investment that cost them, according to Algerian news website TSA, more than USD 4 billion.

In order to prevent the new obligation imposed on state-owned banks from jeopardizing their ability to finance the economy, the Bank of Algeria had to reduce the amount of reserve requirements in May 2016 from 12 to 8 percent.

While Algerian banks were not forced to provide anymore loans to the state in 2017, the financing constraints imposed on public banks, which provide more than 90 percent of loans to the economy; remained unchanged: compulsory financing of the micro enterprise, investments of large public companies that can reach huge amounts of money in the case of a company like Sonelgaz, or even public housing programs whose budget weren’t changed despite the financial crisis.

But as oil barrel prices kept their downward trend, blocking any new emergence of liquidity, the Algerian banking system couldn’t uphold such level of commitment in financing of the economy. Even lowering bank’s reserve requirement ratio from 8 percent to 4 percent as of August 2017 to allow them more liquidity proved to be insufficient to solve their financing needs, forcing them to turn increasingly to the central bank for more liquidity.

The Printing Machine

Put under pressure by the state, which can no longer ensure its funding, Algerian banks are unable to find the liquidity needed to finance the economy. After 15 years of absolute plenitude, the trend   has suddenly been reversed, to the point where the Central Bank is forced to print money to fill up the Treasury.

When the government announced in September its plan to directly borrow money from the central bank, the country hoped to enforce new tight austerity measures. The government frankly acknowledged the critical state of the Algerian economy, and of government finances in particular, laying the ground for making tough economic decisions.

In BMI Research’s analysis, entitled “Unorthodox Financing Plan Will Raise Political Risk,” the research firm explains that while this new economic model will help keep debt levels “manageable,” it is “not a long-term solution, [and it] carries risks in terms of political discontentment.” Further, it will not allow the Algerian government to “successfully balance its budget by 2022, as it has set out to do.”

Ahmed Ouyahia, who had executed a painful structural adjustment plan dictated by the IMF 20 years ago, was recalled in September to the post of prime minister. BMI Research describes the move as Algeria’s last resort to “strive harder in cutting spending in a bid to narrow its costly budget deficit.”

The firm explained that Ouyahia’s reappointment was driven by the Algerian government’s need to implement this new economic initiative, which is already sparking great concern in the country. The 65-year-old official, known for his ability to handle difficult conjuncture, “will likely enact more rigorous cost-cutting than his recent predecessors, having presided over similar periods of tough economic measures previously.”

For BMI, while Ouyahia’s reappointment will give “renewed impetus to cost-cutting,” there will be limits to how swiftly the government can enact it without stirring up major public discontent.

Amid the critical state of Algeria’s public accounts, Ouyahia will now be in charge of implementing the country’s new action plan, which provides for the use of “unconventional funding” by authorizing the Bank of Algeria to buy directly securities issued by the Treasury – in other words, to print money to eliminate the budget deficit.

But for BMI, this “proposed unorthodox plan could well lead to greater problems than it solves.”

“Rather than seeking financing abroad, as has been advised by the IMF, the government will borrow from the central bank under an amendment to the Money and Credit Act which will enable non-conventional financing,” states BMI, explaining that Algeria’s refusal to borrow from international debt markets stems from a fear of undermining national sovereignty.

While BMI is slightly reassured by the limited transitional period of five years in the first phase of this unorthodox financing policy, it nevertheless disagrees with “the government’s postulation that higher inflation – which generally follows from such a policy – will be successfully avoided.”

In fact, BMI expects that “central bank financing of the budget deficit will prompt a renewed sell-off of the currency, with attendant price pressures.” While the liquidity injection will help stroke the economy, it will however come at a cost that will hit lower-income brackets hardest, explains the firm.

At first glance, the method seems attractive. Algeria will actually make even more money to finance salaries, the budgets of ministries, and markets granted to public or private companies in the hope of growth. Except, this growth will be illusory because in exchange, the Algerian economy remains based on rentierism and produces little value added that would allow it to export abroad and to reap revenues to repay what the Central Bank has loaned to the Public Treasury.

This raises a great concern among Algerian economists, who fear a “Venezuelan scenario” for their country as high risk of hyperinflation looms overhead. By increasing the quantity of money in circulation, it diminishes its value and mechanically raises prices. According to the available figures of the IMF and World Bank, inflation is already standing at 6 or 7 percent in Algeria.

“The risk is real. As we are in a mono-export economy, the money supply will increase but will have no equivalent in internal production,” said Kamel Rezig, professor at the University of Blida, reports the AFP.

Ahmed Benbitour, the first prime minister appointed by President Bouteflika after his election in 1999, also predicts the worst. “Algerians must prepare for four-digit inflation,” added Benbitour.

During his speech to parliament where he answered MPs’ questions about the government’s plan of action late September, Ouyahia publicly admitted that the current balance of the central bank could barely finance the government budget for two months.

According to the figures provided by Ouyahia, the funds available to the Central Bank amounted to USD 3.6 billion as of  September 14, “at a time when the country needs nearly USD 2 billion on average for the management of a single month.”

Still, the prime minister justified the refusal of the Algerian state to resort to indebtedness or external borrowing as not “solely dogmatic.”

“The public banks do not have enough money, and to mitigate the DZD 2 trillion failure of the Treasury, Algeria must borrow USD 20 billion each year from the IMF,” he said.

“After four or five years, the Algerian state will be unable to pay its debt, a situation we know since we have experienced it,” said the head of government, insisting on “its infernal consequences on the daily life of Algerians.”

According to the prime minister, the debt from the Treasury does not exceed 20 percent of GDP. Algeria would thus benefit from a margin of maneuver at the Bank of Algeria to request funding at a moderate pace.

For Ouyahia, printing money has therefore become necessary and urgent. Downplaying the risks of inflation and the excessive increase in the prices of consumer goods because “the money supply available to the country does not equate to the value of foreign exchange reserves, which is estimated at 14,700 billion dinars.”

However, he immediately acknowledged that these foreign exchange reserves are constantly melting, falling from USD 193 billion in May 2014 to USD 105 billion in July 2017.

Algeria has changed prime ministers three times since Bouteflika’s last re-election in April 2014, but Ouyahia’s government’s action plan is in line with the president’s commitments. Despite the new challenges, no break or major change are in sight. For Ouyahia, it is the financial crisis that came to thwart the implementation of this rather ambitious program, one whose impact Algerians are still expecting considering the serious state of the country’s economy.

Case Study: Zimbabwe and Venezuela

Today, the question is whether Algeria is likely to experience the same scenario as the friendly countries of Venezuela and Zimbabwe.

Back in 2000 in Zimbabwe, the price of a consumer goods doubled in a matter of one month. President Robert Mugabe was forced to abandon his own currency to adopt the US dollar and the South African rand as the only valid currencies in the country, in order to restore the confidence of citizens and foreign partners in the state’s economy at the end of fifteen years of painful reforms.

Since 2015 in Venezuela, another ally of Algiers, many drugs have disappeared from pharmacies and goods from supermarkets due to the lack of foreign currency. Even today, the country is incapable of importing the country’s needs.

Will Algeria face the same fate? If oil prices continue on their current trend, struggling to rise above the USD 50 mark, the government will have no choice but to go beyond what is reasonable. It must be noted that in a matter of three years, the government has completely exhausted the Revenue Regulation Fund (FFR), as almost the balance of the central bank.

This means that the country may exploit the printing money policy in a similar rate, creating an abundant amount of dinars equivalent to nearly USD 15 billion annually.