Sixty years after Algeria’s independence, will soaring prices increase its dependence on oil?

The oil and gas sector has long been the backbone of Algeria’s economy, funding the country’s regime while leaving it vulnerable to market volatility. Despite the authorities’ stated aim to diversify the economy, analysts fear that soaring hydrocarbon prices could pose an obstacle to reform.

Algeria celebrated 60 years of independence from France on Tuesday with pomp and circumstance, celebrating “a day of glory for a new era” with national ceremonies and its first military parade in years – all funded by a timely increase in oil revenues triggered by the war in Ukraine.

The windfall has given much-needed breathing room to a regime that has recently been rocked by a nationwide protest movement, known as the Hirakwhich led to the 2019 ouster of longtime Algerian leader Abdelaziz Bouteflika.

Six decades after independence, it also revealed the North African nation’s continued dependence on hydrocarbons and its inability to master its economic destiny.

Like other “rentier economies”, Algeria is particularly exposed to the volatility of the energy markets. State coffers were depleted as hydrocarbon prices fell between 2014 and 2021, depriving the regime of the revenue it traditionally relies on to loosen purse strings and stifle dissent.

The Russian invasion of Ukraine reversed recent trends, with high oil and gas prices replenishing the regime’s financial reserves after years of depleting them.

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In this file photo taken on July 2, 1962, young Algerians, waving national flags, parade between the European and Muslim quarters of Algiers, the day after the referendum of self-determination on the independence of their country. ©AFP

A three-fold increase in oil prices year-on-year means Algeria is set to reap $58 billion (€55.6 billion) in hydrocarbon revenue in 2022, up from $34 billion ( 32.7 billion euros) last year, according to the International Monetary Fund.

But even as buyer countries step up efforts to wean their economies off oil and gas, Algeria has done little to reduce its dependence on hydrocarbons, leaving it dangerously exposed to global price shocks.

“Hydrocarbons still represent 95% of the country’s exports and more than 50% of the state budget,” explains Alexandre Kateb, founder of The Multipolarity Report, a consulting firm.

Reforms in limbo

Before the latest spike in energy prices, Algerian authorities seemed to have recognized the need to rethink the country’s economic model. In September 2020, President Abdelmadjid Tebboune called for an “overhaul of the banking and tax systems”, promising to “open the economy to the world”.

The government has made progress in a key area, lifting some restrictions on foreign investment. In particular, he abolished the “51/49” rule, which prohibited foreign investors from holding more than 49% of the shares of an Algerian company. This decision marked a small revolution for a country long presented as a “closed economy”, where foreign investment pales in comparison to neighboring Morocco.

Two years after Tebboune’s engagement, however, structural reform has yet to materialize and the Algerian economy is still suffocated by familiar ills: pervasive bureaucracy, irregular taxation, the absence of an industrial strategy and a overstaffed public sector.

Untapped human resources

A sprawling nation stretching from the Mediterranean to the heart of the Sahara, Algeria has considerable assets to diversify its sources of income. They include an abundance of natural resources and “an energy sector that could support the reindustrialization of the country,” says Kateb. Algeria also benefits from “exceptional sunshine”, he adds, offering ample opportunities for “the large-scale development of renewable energy projects”.

The Algerian government is also counting on a nascent tourism industry to reduce its dependence on hydrocarbons, although the country still has a long way to go to match its neighbours. The sector generates around $300 million a year (€288 million), a far cry from the $13 billion raised by Morocco in 2019. Visa restrictions, lack of infrastructure and prohibitive travel costs are not just a few of the factors that keep foreign visitors at bay. .

Algeria also has vast and largely untapped human resources, including “a young and well-educated population compared to countries that have reached the same level of development,” Kateb notes.

This is an opinion shared by the economist Camille Sari, director of the Euro-Maghreb Institute for Studies and Foresight, who deplores “a system of nepotism and privileges” which deprives young graduates of equal opportunities. , “allows the system to reproduce itself” and prevents the emergence of a true “meritocracy”.

“That too is a consequence of a ‘rentier’ economy,” adds Kateb. “This human capital ends up being marginalized because sectors that could employ young graduates – like the tech industry, for example – are underdeveloped.”

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According World Bank figures, 32% of Algerians under 24 are unemployed. In addition to the waste of talent, this widespread unemployment has a cost for the government, which began this year to pay a monthly allowance of 13,000 dinars (around €80) to unemployed young people, coupled with medical coverage.

Lack of “political vision”

As soaring oil prices mean the government is once again able to apply such band-aids, experts have expressed concern that the short-term increase in revenue will allow the autocratic regime to cope more easily to any hint of popular discontent while failing to diversify. the economy.

“It is surprising to see that the authorities do not use these exceptional revenues to inject the surplus income into the real economy,” says Sari. “The real problem is the lack of political vision,” adds the economist, pointing to widespread corruption and the disproportionate role of the army in the Algerian economy.

“This is what happens when an economy is historically run vertically and top-down. Changing this requires a real cultural revolution,” says Kateb, calling for an overhaul of the governance system and the revitalization of the private sector.

According to Prime Minister Ayman Benabderrahmane, Algeria is on track to diversify its economy. “Non-hydrocarbon exports reached their highest level since independence,” he added. told reporters earlier this year, noting that exports from sectors other than oil and gas surpassed the $4 billion mark (about 3.8 billion euros) in 2021. The government hopes to raise that figure to $7 billion. dollars this year.

“The ball is now in the government’s court,” says Kateb. “It’s up to them to prove they can use the windfall wisely rather than buying some form of social peace and perpetuating the rentier model.”

This article has been adapted from the original in French.