Algeria’s Economy: The Vicious Circle of Oil and Violence
Algeria’s Economy: The Vicious Circle of Oil and Violence
Table of Contents
  1. Executive Summary
Report / Middle East & North Africa 5 minutes

Algeria’s Economy: The Vicious Circle of Oil and Violence

The crisis in Algeria, now a decade old, is not merely a consequence of the interruption of the December 1991 elections by an army-backed coup to keep the Front Islamique du Salut (FIS: Islamic Salvation Front) from power.

Executive Summary

The crisis in Algeria, now a decade old, is not merely a consequence of the interruption of the December 1991 elections by an army-backed coup to keepprevent the Front Islamique du Salut (FIS: Islamic Salvation Front) from taking power. It is also an economic crisis. The same parties who have struggled over the control of the Algerian state arehave also been engaged in the plundering of Algeria’s resources.

Algeria’s mThe military leaders have manipulated the generalised atmosphere of fear and violence to accumulate funds, especially through commissions on trade, which they use to support an extensive political patronage system that buttresses their hold on powerprotect their monopoly over Algeria’s hydrocarbon wealth, using the proceeds from gas and oil exports to fund a lucrative import sector and extend political patronage among their close allies. The Islamists have used the prevailing state of emergency to fund their activities through extortion rackets and the black market activities. In between, both private and public sector interests have exploited the gaps in an officially sanctioned culture of corruption and profiteering to make personal gains from the privatisation process and to prevent genuine competition arising in key sectors such as the construction industry and pharmaceuticals. The mass of the population has been, and continues to be, excluded from the benefits that market liberalisation promised to bring them.

Pressures to open up the politiicsal and the ecconomyic spheres areto wider participation have been mounting, but so far the Algerian authorities have failed to respond. In fact the opposite has been true: tThe continuing violence has financially benefitsed them, and Algerian regime to such a degree that their survival depends on avoiding the kind of political settlement that would expose their arbitrary political and economic power to greater local and international exposure. While the Algerian conflict lasts, esEspecially in the current period of international resolvefervour  against terrorism, few serious demands have been placed on the Algerian regime to negotiate with the Islamists, or engage in genuine democratic and economic reform.

Paradoxically, The paradox is, however, that AAlgeria has never been better placed in macro-economic terms to promote the kind of structural and fiscal reforms the IMF among others havehas been recommendeding for a number of years. Even at the height of violence in northern Algeria, the hydrocarbon sector of the southern Saharan Algeria has continued to attract capitalhigh levels of investment capital from international oil companies, compensating for the dearth of local and foreign direct investment (FDI) in other sectors of the economy.

Because the Saharan oil fields are far from populated centres, exploration and exploitation deals have been sheltered from the effects of the conflict, almost as if they were situated ‘offshore’. Southern European demand for Algerian gas has in fact substantially increased over the past decade, making this as much a strategic resource for Algeria’s European neighbours as well as for the Algeria’s military authorities. Via trans-Mediterranean pipelines, Spain currently imports 75 per cent of its natural gas from Algeria, Portugal (throughvia Spain) 100 per cent and Italy 54 per cent.  A making all three states – and France for more complex historical reasons – are reluctant to disrupt established relations with the Algerian authorities. 

After a severe liquidity crisis for much of the 1990s, the Algerian economy showed significant signs of recovery by 2000. Thanks to higher oil prices, receipts from oil and gas exports rose to $21.1 billion in 2000, up from $11.9 billion in 1999. This rise not only represented a 75 per cent increase in foreign earnings but boosted government reserves to $16.4 billion at the end of July 2001. In turn, this allowed for a substantial reduction in public debt, as an extra $1 billion was paid off ahead of schedule in 2000. Foreign debt – the main shortcoming of the Algerian economy in the mid-1990s – now stands at $25 billion, and falling, with a manageable debt service ratio in 2000 of 20.8 per cent in 2000, down from 39 per cent only a year earlier[fn]See IMF Statement by the IMF Staff Representative August 2001 and IMF (2001) Public Information Notice (PIN) No. 01/94 IMF Concludes 2001 Article IV Consultation with Algeria, statistical data.Hide Footnote .

However, what the macro- economic picture and these figures disguises is a much grimmer micro-economic realityy at the micro-economic level. In contrast to the booming hydrocarbon sector, which generates 97 per cent of foreign export earnings, the domestic economy is stagnating under a lack of both private and public sector investment, leading to official levels of unemployment of nearly 30 per cent. Under the influence of plans promoted by the IMF, World Bank and European Union (EU), thousands of workers have been laid off as a consequence of restructuring industries for privatisation. Yet few investors have been forthcoming to taken over heavy and inefficient heavy industryial plants running at around 40 per cent of their capacity for more than a decade. Social investment in housing, welfare, infrastructure and transport systems has all been neglected in favour of importing basic goods. The access of newcomers to the market, which, underin accordance with agreements with the international financial institutions and the EU is being prepared for full trade liberalisation by the year 2012[fn]2012 is the target date set by the Euro-Mediterranean (Barcelona) Partnership, to which Algeria is a signatory, for the creation of a Mediterranean Free Trade Zone between EU member states and 12twelve Mediterranean partners, including Algeria. , is severely restricted.

Popular discontent, meanwhile, has also been visibly rising since the sSpring of 2001, but not, this time, because of the continuing Islamist-inspired violence. Even thThough armed  Islamists remain active in rural areas of Algeria, the rallying cry of protestors drawn from the Berber region of Kabylia has been directed against ‘hogra’ – namely, the neglect and contempt with which Algeria’s rulers have responded to the growing needs of the general population. What is at stake There is a growing popular realisation that the continuation of violence has actually bolstered the concentration of both economic and political power in the hands of the Algeria’s military elite. Algeria’s rulers have engineered their own enrichment – not only during the last decade’s crisis, but because of itthe crisis. In other words, for Algeria’s generals, war has paid, and continues to pay, but not without increasing and more focused popular protest.

In the wake of the 11 September 2001 terrorist attacks in the U.S., the international community can no longer ignore the unanswered demands of the Algerian population for full participation in a stable economy and democracy. As tThis report argues, turning a blind eye to the country’s to the economic and political violations of the Algerian system has in fact helped fuel the continuing violence could foster renewed recruitment to radical Islamist organisations and fostered recruitment to radical Islamist organisations. The dearth of political and economic alternatives for a young and could alsodisaffected youth  has not only added weight to the Islamistts’ cause. It , but has already also encouraged criminality close to the EU’s southern borders together and with conditions for organised illegal migration northwards to Europe, often in conditions of hostility and desperation.  

Where Western governments the US, EU aand international financial institutions have sought to promote stability, a mafia-style regime has come to hold sway, constituteing a factor of instability in itself.

Brussels, 26 October 2001

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