ALGIERS (Reuters) - Algeria is preparing to speed up the diversification of its oil-reliant economy in the coming year after starting to cut state subsidies to offset a fall in energy earnings, the head of parliament’s finance committee said.
In the past, the OPEC member took advantage of high prices for oil and gas, which account for 60 percent of the state budget, to ease social pressures by subsidizing almost everything from food to fuel and medicine.
But lower oil and gas prices in the last two years have forced the North African government to shift its spending policies. State expenditures for 2017 are officially projected to decline 14 percent after a 9 percent cut in 2016.
Algeria’s trade deficit expanded 20 percent to $15.4 billion in the first nine months of this year because of lower values for oil and gas exports.
In past years, Algerian officials repeatedly promised to diversify the economy through private-public partnerships and removing bureaucratic hurdles, but there has been limited progress in creating non-oil industries in the country of 40 million people. Now, that task has become more urgent.
“Our financial situation has changed. It is difficult. We need to rationalize spending,” said Mahdjoub Bedda, head of the parliamentary committee, said in an interview at the Reuters Middle East Investment Summit.
“The crisis has negatively affected economic plans. This is why there is a need for a period of transition until 2018 to accelerate the diversification of the economy.”
Algeria’s budget for 2017 is based on an average oil price of $50 per barrel, and Bedda said he was optimistic prices would rise in the next few years.
Parliament earlier this year approved a new investment law in an effort to improve the business climate, mainly in non-oil sectors. It includes tax cuts and identifies industry, agriculture and tourism as priority sectors.
In July, the industry ministry awarded Indonesian company Indorama Corp deals worth $4.5 billion to develop a phosphate mine and build two plants to process the crop.
However, Bedda said the government had dropped a plan authorizing state banks to list on the Algiers stock exchange and allowing foreigners to acquire controlling stakes in those banks.
He said the plan “would have been a good step to help diversify funding sources”, but the government had instead opted for new taxes to cover deficits for next year. “We will not rely only on foreigners. The diversification goal will be achieved by allowing the private sector a greater role.”
A finance law for 2017, approved by the government and submitted to parliament for final endorsement, includes new and higher taxes for some products, in addition to higher fuel prices for the second straight year.
Domestic prices for energy products are still very low by international standards.
“There are strong signs that the government wants to reform the subsidy system. We are expecting further steps in this direction,” Bedda said. “Basic foodstuffs will not be affected. Subsidies will target the poor in the future.”
Editing by Aidan Lewis and Andrew Torchia/Mark Heinrich