The economic and financial environment in light of the health crisis ~ Investment,finance for businesses

Tuesday, September 7, 2021

The economic and financial environment in light of the health crisis

 The economic and financial in the health crisis

The economic and financial environment of Algeria in light of the health crisis

In this interview, financial expert Berkouk discusses various topics that characterize the country's economic and financial news at this time of health crisis. He believes that to finance its recovery plan.

How do you read Algeria's financial situation at the start of 2021?

Mr. Berkouk: Algeria's financial situation in Q1 2021 is no surprise. It confirms and extends the forecasts of deterioration in internal and external financial balances and the continued attrition of foreign exchange reserves. Algeria ended 2020 with a sharp deterioration in its fundamentals: GDP: -6.5%, budget deficit: -13.5% GDP, current balance -13% GDP, public debt: 60% GDP and reserves Exchange Rate: 45 MDS USD.

The Government seems paralyzed by the scale of the crises to be managed. He wanders without leadership unable to take decisions on structural reforms or develop coordinated actions of different ministries that could give the feeling that he has a plan and a strategy for economic recovery. Many announcements are made without resources and without overall consistency. Everything suggests that he hopes that the global recovery and the strengthening of the price of oil will solve Algeria's economic and social problems without effort and pain. Unfortunately, Western economic forecasting bodies (IMF, WORLD BANK, OECD, etc.) do not foresee a return to the ex ante Covid 19 situation until the end of 2022 in the best cases, except China. So the Algeria of 2021 will look like that of 2020 and worse!

The Covid-19 health crisis was brutal in Algeria as everywhere else; what is the scale of this crisis, especially on the budgetary level ?

The health crisis is global. It had consequences for the whole of world economic activity with sharp contractions in activity of around 10% on average. It triggered colossal spending to support economic agents and the health system, driving state budgets to unprecedented peacetime deficits. The central banks of developed countries (FED, ECB, BOE, BOJ….) Have broken with monetary rigor and orthodoxy to flood the economies of their respective zones with liquidity. At the same time.

Algeria and Europe:

 Western countries have abandoned the dogmas of a budget deficit limited to 3% and overall debt less than or equal to 60% of GDP.

They were able to do this in an environment of low inflation. Their support and recovery plans are coordinated. They will enable them to emerge stronger from the crisis and they will make the rest of the world pay for it (developing countries).

This crisis becomes an opportunity for them and a disaster for countries like Algeria, whose economy was already drained before the Covid-19.

In some of your media outings, you said that the use of printing money is inevitable; can you tell us more about it?

Algeria has cumulative budget deficits of 14,000 MDS DZD from 2014 to 2020 !! It used unconventional financing from October 2017 for a total amount of DZD 6,500 billion. After having exhausted the 7,500 MDS of the FRR. Today the country is seeing a drop in its oil and ordinary tax revenues without being able, given the economic and social context, to lower the operating budget. He has already cut the equipment budget in contradiction with what the economy demands while maintaining the National Defense Budget.

At the same time, it fails to broaden the tax base and to reintegrate informal economic activity into the formal sphere. In this context, budget deficits will continue and the lack of liquidity will suffocate dying economic activity.

Western countries are in the process of printing money directly or indirectly with the help of their central banks. Their economies were stronger before the health crisis. They absorb the inflationary consequences of this policy through innovation and the transformation of their economic paradigm. In the poor countries which will watch the train go by, only the inflationary consequences will remain.

To finance its recovery plan, the Government will have to act according to the types of internal (DZD) or external (foreign exchange) expenditure.

On domestic spending in local currency, it will need to optimize its regular tax revenues by broadening the tax base without increasing tax rates. This presupposes a real and merciless fight against informal activities and a banking system of the economy which will make it possible to channel hoarded savings outside the financial circuits.

We must encourage and ultimately force informal agents to contribute to the national effort by subscribing to a National Covid-19 Loan for economic recovery in two installments: one without interest but with a participation indexed to the rate of GDP growth, the other carrying an interest rate of 7% at 7 years.

These loans will be listed on the Algiers Stock Exchange to ensure liquidity to the holders. Like all central banks, the Bank of Algeria would be the buyer of last resort in the secondary market. This would amount, in the event of repurchase by this Institution of these bonds, to non-conventional, unsystematic financing. Subscribing to these Public Loans would be a convenient way to "enter" into the official financial circuits the immense amount of money "captured" by informal activities.

Regarding the foreign exchange expenditure of the stimulus plan, the Algerian state refused to resort to direct external borrowing when it could do so easily and at low cost.

Given the scale of the needs, it will have to take all legal, fiscal and administrative measures to promote a strong flow of FDI to Algeria. It will have to determine a clear development strategy by designating the sectors to be favored for which it will seek partnerships (PPP). It will favor public enterprises / foreign enterprises associations by renouncing the majority of the capital and control.

This process will not save all public enterprises, but it will allow the state to save on subsidies and "get out" of the market economy. Bilateral and multilateral financing have not been excluded, they are part of the additional financing possibilities at the same time as the supplier credit promised by China.