Algeria to lean on central bank to plug deficit amid oil slump

By Tarek El-Tablawy and Salah Slimani on 9/18/2017

CAIRO (Bloomberg) -- Algeria’s prime minister laid out a sweeping plan to plug the budget deficit that would include direct borrowing from the central bank, as the OPEC member looks to compensate for lower oil revenue without tapping international debt markets.

The five-year plan presented by Prime Minister Ahmed Ouyahia aims to balance the budget by 2022, and reverse a deficit that ballooned with the plunge in global crude prices, which also cut foreign reserves by nearly half.

“If we turn to external debt, as the IMF suggests, we will need to borrow $20 billion a year to repay the deficit and within four years we will be unable to repay the debt,” Ouyahia said. “This is what made the government look at non-traditional financing.”

With domestic debt currently around 20% of gross domestic product, Algeria has room to take on additional borrowing, the IMF has said. Earlier this month, the cabinet authorized the central bank to lend money to the Treasury to narrow the deficit. Businesses and importers would stand to benefit from a cash injection from the regulator, but analysts say the plan has risks.

Combined with current import restrictions, “the central bank financing the fiscal deficit will stoke inflation and depreciate the currency,” Eurasia Group’s senior analyst for the Middle East and North Africa, Riccardo Fabiani, wrote in a recent report.

Ouyahia said international reserves have fallen to about $100 billion since 2014 from about $177 billion. But Fabiani warned that the measures outlined on Sunday, including tapping Islamic financing, may not be enough to fend off the need to tap international markets.

“Austerity measures and the currency depreciation will only have a limited impact on the current-account deficit that is likely to be partly counterbalanced by stronger domestic demand,” he said. If oil prices don’t rebound in the coming five years and authorities aren’t able to curb imports, “Algeria is likely to burn through its foreign reserves by 2020” and may have to tap outside support to cover a financing gap, he said.

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