May 31, 2016 / 2:16 PM / 4 years ago

Algeria dinar's fall hits finances, but may bring reserves benefits

* Central bank allows controlled depreciation

* Depreciation to push inflation

* Algerians may turn to local products

By Hamid Ould Ahmed

ALGIERS, May 31 (Reuters) - Algeria’s dinar currency has fallen to its lowest levels since independence from France, hit by lower energy prices that have sapped the OPEC producer’s revenues.

After a few weeks of stability, the dinar on May 25 hit a five decade, reaching 110.52 to the dollar and 123.17 against the euro, according to figures from the central bank.

Economists and business executive expect the currency to keep falling, raising prices and reducing purchasing power for a country that relies heavily on imports.

But this may bring financial benefits too, helping the government ease the burden on its foreign reserves.

Since early last year, the central bank has let the dinar drop against the dollar following a sharp fall in global crude oil prices that hit severely its export earnings.

The downward trend of the currency’s value may help the government in its battle against a parallel currency market and reduce demand for imported goods, allowing authorities to save some more of its reserves.

There is still a considerable cushion saved during oil boom times. But reserves fell $35 billion to $143 billion at the end of 2015, from nearly $179 billion in December 2014 and $193 billion in the first half of the same year.

“Imported goods are already being sold at higher prices. Most people will opt for domestic products,” Abdelmalek Serrai, a business consultant, forecasting the dinar would fall in a controlled depreciation to cope with a widening trade deficit. “This will reduce demand for imports and help save reserves.”

FALLING CURRENCY

The dinar started falling when the country began running a trade deficit coinciding with a decline in currency reserves. Algeria posted a trade deficit of $13.71 billion in 2015 after a $4.306 billion surplus in 2014.

“The dinar is expected to fall further because there is no sign so far that crude prices will rebound to push up currency reserves,” said university economics professor Mohamed Taibi.

The government has introduced tougher import licence restrictions to try to limit imports, as a way to protect its foreign reserves used to pay overseas suppliers.

Energy accounts for 95 percent of total exports. It is also a source of 60 percent of state revenue in an economy that has little diversification away from energy.

Looking to access untapped local dinar, the government has also been targeting for the first time the untaxed parallel economy, including a semi-tolerated but illegal currency trade, to find new sources of financing.

It has announced a fiscal amnesty under which Algerians have until the end of next year to deposit income from undeclared businesses with banks and pay a 7 percent fee.

In April this year, the government also launched its first domestic debt issue in years in a bid to find financing sources.

Reducing the trade deficit may help balance government books, but the dinar fall ispushing up costs for all imported products. Apple prices, for example, have more than doubled.

Algeria’s inflation reached 4.8 percent in 2015, up from 2.9 percent in the previous year.

“We are forced to sell at higher prices because we paid everything in dollars, but the number of buyers here have significantly declined,” said Mohamed Djemi, owner of a shop for mobile phones in El Harrach, in eastern Algiers.

The government has launched a campaign to incentivise consumption of domestic goods to cut its import bill after the oil price drop. But programmes to push more domestic production are in their infancy.

The International Monetary Fund (IMF) has nonetheless warned that the dinar drop would negatively impact Algeria, urging the government act against overvalued exchange rate. (Editing by Jeremy Gaunt.)

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