Algeria’s GDP growth to slow as oil production dips

August 16, 2023, 3:50 AM

A Sonatrach facility in Ouargla province, eastern Algeria. The state-owned company has pledged to invest $30bn in oil and gas

Opec+ cuts drive 2% drop in hydrocarbon production
Lack of investment hampers gas sector, despite high demand from EU
Low rainfall has raised concerns over agricultural output

Algeria’s economic growth is expected to slow this year and in 2024 as oil production drops.

Analysts at BMI, formerly Fitch Solutions, forecast that the country’s real GDP will be 2.1 percent in 2023 and 1.9 percent next year – down from 3.3 percent in 2022.

Algeria’s hydrocarbon production – made up of one-third gas and two-thirds oil – is expected to shrink by 2 percent this year, following the Opec+ production cuts that came into effect in May, BMI said.

Economic growth has also been hampered by sluggish growth in the agriculture sector, which led to a spike in food prices at the beginning of the year.

Algeria’s agriculture sector grew by 4 percent in 2022, according to the World Bank, but growth is set to fall to 1.9 percent this year and in 2024. The World Bank is forecasting another dip for 2025, to 1.7 percent.

The country’s gas production, which declined by 3.4 percent in 2022, is forecast to shrink by another 1.8 percent in 2023 – even as gas exports to Europe have risen since Russia’s invasion of Ukraine.

The BMI analysts attribute the fall in production to Algeria’s ageing fields and lack of investment.

“While we forecast growth of 4.1 percent in 2023 in the non-hydrocarbon sector, as an expansionary fiscal policy will almost offset the impact of lower oil prices, this will not be sufficient to avert an economic slowdown this year,” they said.

At the start of this year, state-owned oil company Sonatrach said it planned to invest over $30 billion in hydrocarbons, with a focus on natural gas for export.

Cyril Desponts, the World Bank's Algeria economist, pointed to "the dynamism of the country's economic activity", despite the "reductions in oil production and the impact of low rainfall on the agricultural sector".

The World Bank said rainfall levels between October 2022 and February 2023 were among the lowest in 20 years, leading to output concerns for this year and 2024.

BMI's Algeria GDP forecast also said a partial lifting of import restrictions on cars would exacerbate the negative contribution of net exports to growth. It expects net exports to subtract 1.3 basis points from GDP growth in 2023.

The government imposed tight controls on car imports in 2016 and banned them outright in 2019. Early this year, it decreed that cars less than three years old could be imported.

Imports of cars and food are expected to rise this year.

A farmer in Tipaza, west of Algiers. Sluggish agricultural production has led to a spike in Algerian food prices — A farmer in Tipaza, west of Algiers. Algerian food prices spiked at the start of the year

Analysts also said the government's expansionary fiscal policy would shore up private consumption. Against a backdrop of elevated inflation, the authorities raised spending last year, with increases in wages, pensions and unemployment benefits.

Algeria’s investment momentum – driven in part by a 2022 law that lifted some restrictions on foreign investors – is predicted to wane towards the end of 2023 as energy prices stabilise at lower levels.

Under the law, foreign investors in non-strategic sectors excluding mining and hydrocarbons are no longer required to have a local partner with a majority stake.

BMI said the investment law “carried momentum” into the first six months of the year, but this effect would likely moderate.

The Economic Intelligence Unit has predicted that despite rising gas exports and increased foreign investment, Algeria's economic prospects in 2023-24 will remain constrained by an “over-centralised management and an opaque business environment”.