A Decades-Old Regime Nears Economic Breaking Point

The Arab Spring continues in Algeria.

Algeria’s President Abdelaziz Bouteflika may have ruled out running for a fifth term, but that has done little to quell protesters’ demands that he immediately step down and hold presidential elections. Weeks of demonstrations have stirred memories of the Arab Spring in neighboring Tunisia, fueling concerns of political contagion and a looming economic crunch. The 2011 uprising ignited protests throughout the Middle East, leading to the downfall of Egypt’s President Hosni Mubarak and Libyan leader Colonel Muammar Gaddafi and triggering the brutal civil war in Syria.

But Algeria’s elite, known as le pouvoir or “the power”—a group of politicians, military officials and businesspeople who have dominated the ruling National Liberation Front for decades—do not want to cede their grip on power. Amid the political deadlock, the main opposition parties accuse the government of stalling on reforms and illegally delaying presidential elections. A protracted political crisis is likely to deepen Algeria’s economic plight, with data suggesting that Algeria has yet to come to terms with the drop in oil prices starting in 2014.

That may not be possible much longer. According to Capital Economics, Algeria’s current account and budget deficits are among the largest in the emerging world and will reach 12.5% and 10% of GDP, respectively, this year. Bouteflika, in power since 1999, has shown little interest in attracting foreign investment, forcing authorities to drawn down foreign exchange (FX) reserves to prop up the dinar and fund the current account deficit.

Reserves have fallen by more than half from their 2014 peak, and will be completely exhausted in less than four years at the current rate of depletion. But further political upheaval could spark capital flight much earlier, accelerating the rate of decline in FX holdings. Capital Economics predicts that the dinar will fall by 25% against a euro-dollar basket in the coming years.

Still, Jason Tuvey, Capital Economics’ senior emerging markets economist, says the dinar could become a political tool: “Authorities might try to keep a tight grip on the currency in order to dampen unrest.”