Oil Report

Algeria subsidy system "unsustainable" even with high oil price - economist

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* Algeria’s $45 billion subsidy system unsustainable

* Algeria needs to increase oil and gas output

* Foreign debt possible, but FDI better

By Lamine Chikhi

ALGIERS, April 4 (Reuters) - Even if world oil prices go back up, Algeria will be obliged to reform its oil-reliant economy and adjust a subsidy system that is unsustainable, a former finance minister and influential adviser to President Abdelaziz Bouteflika said.

Algeria, a major gas supplier to Europe, still has nearly $143 billion in foreign reserves officials say will cushion it from the oil price drop. But it has seen its energy earnings fall by nearly 50 percent in 2015, and has already cut spending and taken steps to reduce its import bill.

Algeria’s foreign exchange reserves fell $35 billion in 2015 because of lower global oil prices, an IMF representative said on March, suggesting foreign debt may be one way to address the crash in revenues.

The North African OPEC member is also trying to increase oil and gas production that has stagnated for a decade, but foreign oil companies remain nervous because of Algeria’s contract terms and low world oil prices.

Abdelatif Benachenhou, once a long-serving economic adviser to Bouteflika and an ex-finance minister who many believe might return to a position of power, told Reuters he estimates Algeria allocated 22 percent of its GDP to its vast system of social welfare.

“This social model is unsustainable even if oil prices go up because we have a problem of price, but also a problem of volume,” Benachenhou said at the weekend, referring to energy production.

Algeria has already started to trim back on some subsidies, including in January increasing the price of gasoline and other products for the first time in more than a decade. It has also suspended some infrastructure projects.

But tackling a vast welfare system is sensitive after years in which the government provided basically free services and products financed by oil and gas exports. Heavy social spending helped Algeria calm protests during the Arab Spring uprisings in 2011.

The government is expected in April to announce a new package of measures to help shore up the economy and reduce the impact of the oil price fall.

“It has not been enough, 2015 has been a lost year because we did nothing to tackle the crisis,” Benachenhou said. “Yes in 2016 we took a series of measures but they are not enough.”

Reliant on its mature fields, Algeria’s energy output has been stagnating for a decade. It peaked at 233 million tonnes of oil equivalent in 2007, before dipping to 187 million toe by 2012. Last year it was estimated at 190 million toe, but the government sees it at 224 million toe by 2019.

Benachenhou estimated the total amount of subsidies at $45 billion per year, but added the amount has been reduced in the past year because of the fall in oil prices, which cut the cost of some fuel products.

He said Algeria had no alternative but to move ahead with more structural reforms, but foreign debt was not a solution for the North African state. Algeria has very little foreign debt which along with its reserves puts it in a better position to weather the oil price drop than other producers.

But potential foreign investors complain about Algeria’s unfriendly business environment citing bureaucracy, arcane banking, red tape and corruption as the main hurdles to investing.

“It is key for the business climate to improve so that foreign direct investment can come here,” Benachenhou said. “Better to have FDI (foreign direct investment) than to go for foreign debt.” (Reporting By Lamine Chikhi; Editing by Patrick Markey and Richard Balmforth)