The government has spent much of the past month preparing for a new, supplementary budget (Loi de Finance) for 2020. This is scheduled to be presented to the People’s National Assembly on 26 May and the Council of the Nation (senate) on 31 May.
As a result of the COVID-19 coronavirus pandemic, which led to a collapse in world oil prices, the government has no choice but to draft a new budget for this year. The original budget was deemed overly optimistic and unrealistic.
Although the oil price seems to have bottomed out the overall hit to the economy is likely to be a decline in oil revenues for the year of US$10-US%15 billion. At its meeting on 3 May, the Council of Ministers forecast that they would decline to US$20.6 billion compared to US$37.4 billion expected in the initial 2020 budget.
At its 22 March council meeting the mministers decided that they had little choice but to cut the state’s operating budget by 30%. Despite the seriousness of the financial situation, the government — hamstrung by and committed to the wishful thinking of President Abdelmadjid Tebboune’s election promises — pledged to increase the minimum wage by just over 11%, from AD18,000 to AD20,000, and abolish income tax for those receiving a salary equivalent to or less than AD30,000 from 1 June.
On 3 May, with the oil price slump lasting longer and going deeper than expected, the government revised its cut in the state’s operating budget from 30% to 50%.
In the original budget for 2020, the state’s overall expenditure was AD7,773 billion, of which AD4,863 billion was in the operating budget and AD2,880 billion in capital expenditure. The total salary bill for the country’s 2.28 million state sector jobs is AD2,900 billion or 59% of operating expenses. However, as Tebboune has pledged that wages and salaries will not be reduced, a 50% cut in operating costs is impossible. With the increase in the minimum wage, the wage bill will actually be higher.
How will the government make ends meet? One possibility is to cut state subsidies. The original 2020 budget for social transfers was AD1,798 billion or 8.4% of GDP but cuts are out of the question because Tebboune has pledged that social transfers will not be cut.
Because wages and social transfers will not be affected, the decision to reduce operating costs by 50% could result in a drastic reduction in the state’s lifestyle and its disbursements. So far there is no signs that Tebboune is thinking about this despite it becoming a necessity. In early May there was expansive talk about reviving the industrial and agricultural sectors, and Tebboune personally ordered the creation of four new state agencies, but with no indication as to how they might be financed.
The government could survive another two years drawing down its foreign exchange reserves. However, even here, there seems to be a slight massaging of the figures. Speaking on national radio, Amar Belhimer, the government’s spokesperson, said forex reserves would fall to US$44.2 billion by the end of 2020. We suspect that this is also wishful thinking. At the end of 2019, the reserves stood at over US$57 billion. At the current rate of decline, we would expect the year-end figure to be closer to US$37 billion.
The government has a very limited range of choices. This month it has been talking about increasing existing taxes and creating new ones, but none of them sound as if they will have much impact. The government also seems to have ignored the fact that the tax base will have shrunk as a result of the pandemic.
External debt is another possibility but Tebboune has already made it very clear that Algeria will not turn to the IMF. This is understandable in view of the unacceptable structural conditions that the IMF would expect. Other countries, notably China, might be willing to fund certain projects, but they could run into resistance on sovereignty issues.
Tebboune — who has so far demonstrated a remarkable lack of economic and financial realism — has said that the solution is to ‘borrow from Algerians’. He has pointed out that the so-called ‘informal’ sector comes to between AD6 trillion and AD10 trillion, close to 50% of GDP. However, Tebboune seems to have failed to grasp that the informal sector is so large simply because Algerians do not trust the state. He will be aware of the fact that recent prime ministers, notably Abdelmalek Sellal and Ahmed Ouyahia, have both tried to raise money from the domestic market with embarrassing failure.
There is, of course, a vast amount of government waste that can be reined in, not least in the army. However, Tebboune is still far too weak a president to start whittling away at his own base. Instead, we will have to wait until the supplementary budget is published, to see what sort of white rabbit Tebboune can pull from his hat.