Falling oil prices force Algeria to confront heavy spending and subsidies

With oil prices at their lowest in five years and showing few signs of hitting bottom, Algeria is feeling the pinch.

Though its problems are dwarfed by the impact on Russia for example, Algeria may have to rein back many of the policies it has held dear over many years. Generous subsidies, for one, may have to be scaled back despite the potential risk of social unrest in the North African country.

Oil revenues make up 97 percent of the country's hard currency earnings and 60 percent of the government's budget. Like Russia, which has seen a full-scale run on its currency, there have been few efforts to diversify the economy away from oil and gas.

Central Bank governor Mohammed Laksaci has warned that the oil and gas dividend won't last forever though nearly $200 billion of foreign reserves can help cushion the blow in the short-term.

"This capacity to resist such shocks will disappear quickly if the price of oil stays at a low level for a long time," he told parliament recently, deploring the economy's continued dependence on oil.

In many ways, the rule of Algerian President Abdelaziz Bouteflika has echoes with that of his counterpart in Russia, Vladimir Putin. Both have seen their long tenures buttressed by oil-driven economic growth.

There has been little impetus for reform at the highest levels with much of policymaking on hold due to the president's fragile health. Since suffering from a stroke in 2013, Bouteflika has rarely appeared in public.

"This is the system that he built, as long as he is in power he's going to keep it that way," said Geoff Porter, a North Africa analyst. "The risks that come with market reform and privatization are too daunting for Algeria right now."

According to the International Monetary Fund's latest report on Algeria, growth for 2014 is estimated to be a decent 4 percent. However, it cautioned that with declining oil production and lower prices, Algeria's imports will exceed its exports this year for the first time in 15 years.

Subsidies, which amount to 21 percent of the country's annual economic output, cover electricity, many foodstuffs and its gasoline is the cheapest in North Africa. Some 60 percent of the jobs in the country are on the government payroll and nearly everything is imported.

The government also subsidizes education and provides housing. Social unrest, even before the scattered protests of the Arab Spring, was effectively bought off with higher wages and promises of housing — all funded by the bountiful oil receipts.

Now, however, falling prices have thrown this model into question and stirred up fears in the country's normally staid political scene.

"Algerians will not find anything to eat if the price of oil continues to fall," warned Habib Zegad, an independent parliamentarian during the debate over the latest central bank figures.

Algeria is still flush and can continue spending at its current rate for the next few years, but economist Mohammed Sghir Babes said the country needs to make reforms now to rein in spending and cut subsidies.

"We can't continue to subsidize so many products knowing that these subsidies don't really serve the people and only encourage waste," he said, noting the heavy smuggling into neighboring countries.

Changing Algeria, however, is difficult. On the one hand, a restrictive business environment for both domestic and international investors has tilted the economy toward importing.

Social peace also depends on continued spending. On Tuesday, hundreds of young people demonstrated in the desert oil city of Hassi Messaoud calling for jobs and housing and in October there were demonstrations by the police themselves for higher salaries. There have been an estimated 10,000 — mostly small scale — demonstrations since 2012.

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Schemm reported from Rabat, Morocco.