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UNCLAS SECTION 01 OF 03 ALGIERS 001172 
 
SIPDIS 
 
CAIRO PASS TO TREAS ASEVERENS 
 
E.O. 12958: N/A 
TAGS: EFIN EINV ECON PGOV AG
SUBJECT: 2009 GOVERNMENT BUDGET PAINTS ROSY PICTURE 
 
REF: A. ALGIERS 930 
     ¶B. ALGIERS 1003 
 
¶1.  SUMMARY.  The Algerian parliament approved the 
government's 2009 budget with few amendments.  Spending will 
increase six percent over 2008 levels, and the budget law 
estimates economic growth of 4.1 percent overall and 6.6 
percent outside of the hydrocarbons sector.  The budget uses 
an oil reference price of USD 37 per barrel, and while the 
finance minister defended the budget as sustainable in the 
short-to-mid term, he, the prime minister and the president 
each have expressed concerns publicly that the falling price 
of oil might negatively affect Algeria's economy and may 
force the government to draw from its hydrocarbons revenue 
regulation fund in order to balance future budgets.  The 
government included in the 2009 finance law new measures 
aimed at encouraging new investment, combating fraud, 
simplifying the tax system, and guaranteeing taxpayer rights. 
 But the law's assumptions regarding oil prices, combined 
with the Algerian economy's continued dependence on oil and 
gas revenues, may force the government to run bigger deficits 
or make tough choices to balance the budget.  END SUMMARY. 
 
BUDGET PASSED WITHOUT A FIGHT 
----------------------------- 
 
¶2.  The Algerian parliament has approved the 2009 finance law 
that includes the government's budget as well new fiscal 
measures and government policies.  The finance law, defended 
at parliament by Finance Minister Karim Djoudi, easily passed 
each house with few amendments and included increased 
benefits for those who fought in the 1950s Algerian war for 
independence (known as the "moudjahidine").  Parliament left 
intact a controversial tax on new car sales.  Action to 
eliminate the tax was anticipated in the lower house when it 
took up the finance law on October 23.  The car tax, seen by 
many Algerians as an attack on the working class, created an 
uproar in the press and among opposition lawmakers when 
implemented in August as part of the 2008 supplemental budget 
(ref A).  But an opposition party deputy announced that 
instead of an amendment to the budget law, MPs would issue a 
recommendation to the government to evaluate and reconsider 
the tax after one year. 
 
¶3.  The decision by the National Popular Assembly (APN) to 
avoid controversy and pass the finance law with no 
significant changes drew almost no derogatory headlines, save 
the October 25 edition of the French-language daily 
L'Expression that included a headline "deputies approve 
antisocial measures" in reference to the failure to repeal 
the car tax.  Even the Trotskyist Worker's Party Secretary 
General, Louisa Hanoune, who is usually on the front line of 
government-bashing within the APN, managed to draw only a 
small story in the state-run daily El Moudjahid on October 
27, where she was quoted as saying budget amendments made by 
her party had been rejected in a "dogmatic manner," and that 
the budget benefited only the rich.  The upper house, the 
Council of the Nation, passed the finance law with little 
fanfare on October 29 and President Bouteflika is expected to 
sign it in December. 
 
THE NUMBERS 
----------- 
 
¶4.  The 2009 finance law anticipates economic growth of 4.1 
percent overall, and 6.6 percent outside the hydrocarbons 
sector.  Inflation is projected to average 3.5 percent.  The 
government expects to receive USD 80 billion in oil and gas 
revenues in 2008 while spending USD 34 billion on imports, 
and the budget anticipates a 10-percent increase in imports 
for 2009.  Overall government spending for 2009 will increase 
6.3 percent over 2008 levels, due in part to increases in 
government salaries and new hires, increased benefits to the 
moudjahidine, and price supports for water, wheat and milk. 
This will result in a USD 40 billion dollar budget deficit 
even as tax revenues outside of the hydrocarbons sector are 
expected to increase by 10 percent over 2008 levels. 
 
 
ALGIERS 00001172  002 OF 003 
 
 
¶5.  The 2009 budget provides increases for every ministry 
except three: the Ministry of Transportation will receive a 
two-percent budget cut from 2008; the Ministry of Work, 
Employment and Social Security will suffer a 23-percent 
budget reduction; and the Ministry of Water Resources will 
see the largest budget cut at 32 percent.  These budget cuts 
follow policy trends as the government's previous five-year 
public works plan draws to a close in 2009, and ongoing 
privatization efforts and a growing private sector have 
allowed the government to reduce its share of workers' 
benefits payments.  The biggest winner among ministries will 
be the Ministry of Energy and Mines, who will see its budget 
grow by 67 percent as it strives to expand oil and gas 
development in the desert and finish pipeline and other gas 
projects on the coast.  Most other agencies will experience a 
budget increase of between 10 and 17 percent over 2008 levels. 
 
THE EFFECTS OF OIL PRICES 
------------------------- 
 
¶6.  The 2009 finance law uses an oil reference price of USD 
37 per barrel to project government revenues, up from USD 19 
used for the initial 2008 budget.  In general, any added 
revenue gained from a positive difference between the 
reference price and the actual price of oil is to be 
deposited into the hydrocarbons revenue regulation fund.  As 
he defended the 2009 finance law before parliament, Finance 
Minister Djoudi stated that a budget based on the USD 37 
reference price is sustainable for the short-to-mid term, but 
that over time it may be necessary to draw from the 
regulation fund to balance the budget.  In fact, Djoudi, 
Prime Minister Ouyahia and President Bouteflika have each 
stated publicly in recent weeks that Algerians should brace 
for some sort of economic shock associated with the falling 
price of oil, and Djoudi told parliamentarians that he has 
created a special commission charged with monitoring domestic 
economic effects of the drop in oil prices. 
 
¶7.  Business leaders told the Ambassador and visiting NEA/MAG 
Director on November 3 that revenues based on USD 37 per 
barrel of oil probably cannot sustain the government given 
its spending priorities.  A former minister said it was 
possible for Algeria to maintain budgets for two or three 
years using the current reference price, but suggested that 
the government should consider basing its budget calculations 
on natural gas prices rather than oil prices because gas is 
becoming the more important hydrocarbon export commodity for 
Algeria.  A leading bank president said he did not feel that 
the USD 37 marker as used in the finance law is an accurate 
budget reference price.  The online news journal Tout sur 
l'Algerie on November 1 was less forgiving: it claimed that 
well-informed, anonymous sources confirmed that the 
government is actually using a reference price of USD 75 per 
barrel for internal calculations, and since prices have 
already dipped to near USD 60 on several occasions, Algeria 
will likely face a larger-than-expected budget deficit in 
¶2009.  The journal also reported that the government has 
already transferred more than USD 40 billion from the 
hydrocarbons revenue regulation fund to balance its budget in 
¶2008. 
 
OTHER PRIORITIES 
---------------- 
 
¶8.  The 2009 finance law also contains several legislative 
measures designed to spur investment and curb tax evasion and 
fiscal fraud.  The law would establish a new investigative 
service under the direction of the tax administration while 
enhancing taxpayer rights by delineating new rules of conduct 
for tax inspectors.  It codifies the recent imposition of a 
15-percent tax on the transfer of revenues made in Algeria by 
companies not domiciled here, while extending tax breaks on 
capital gains from stock transactions and expanding broader 
micro-credit incentives. 
 
COMMENT: PREPARING FOR THE END OF OIL... OR NOT 
--------------------------------------------- -- 
 
 
ALGIERS 00001172  003 OF 003 
 
 
¶9.  In his November 1 Revolution Day speech, President 
Bouteflika said the Algerian economy "is at a crossroads," 
and that Algerians must "face an economic earthquake" caused 
by the global financial crisis that will continue to shake 
weak economies of the developing world.  Meanwhile, just as 
Finance Minister Djoudi warned of serious budgetary 
consequences if oil prices drop below USD 67 for sustained 
periods of time, Prime Minister Ouyahia told reporters that 
it is time for Algeria to prepare for a post-oil era.  Yet, 
while Algerian leaders seem to be resolved that they cannot 
rely on sky-high oil prices to fill government coffers and 
pay for expansive public works projects, they offer little in 
terms of concrete measures to diversify the economy.  The 
incentives packages and tax modernization plan, while 
beneficial, will do little to attract significant new foreign 
or domestic investments outside of the oil and gas industry. 
 
¶10.  Until measures are taken to modernize the financial 
sector and reform the government bureaucracy, Algeria must 
continue to rely on oil and gas sales -- which make up almost 
99 percent of exports -- as its chief source of revenue, even 
as the prices of those commodities have become volatile. 
Furthermore, in each of the last two years, the government 
has burned through its annual budget within six months: 
supplemental budget laws were passed in the summers of 2007 
and 2008 that generally adjusted upward projected government 
expenditures across the board.  If the same pattern holds 
true for 2009, Algeria's budget deficit will likely exceed 
the projected USD 40 billion figure by 10 percent or more. 
We have reported that the Algerians feel vindicated in their 
conservative, non-integration economic policies by the fact 
that the country has thus far been relatively safe from the 
effects of the global financial crisis and that the 
government has been able to stash away over USD 130 billion 
in foreign currency reserves.  But running budget deficits 
while the price of oil and gas plummets could force 
Bouteflika's government to make hard choices between 
continued spending on legacy projects or preserving the rainy 
day funds of the hydrocarbons regulation fund and the 
country's external reserves.  This is a particularly hard 
choice for a government wary of riots in a country where 
socioeconomic discontent boils over regularly into 
small-scale civil unrest. 
PEARCE