Oil prices and exchange rate reform: Will the Arab Countries rise to the challenge?

  • Florence Eid-Oakden, Ph.D., Chief Economist
  • Charlene Rahall, Atousa Tahmasebi, Mingqiao Zhao, Analysts    

Algeria: Highly reliant country vastly impacted by oil prices

Algeria continues to face challenges due to lower oil prices and revenue which are expected to improve in 2017. High dependence on oil and commodity prices and its limited production remain major challenges. Hydrocarbon production represents 97% of Algeria’s total exports and 60% of government budget. 

Assuming the IMF’s projection of USD 51.68 oil price per barrel in 2017, we should witness an increase in oil revenue. Oil revenue decreased by 48% between 2014 and 2016 to USD 16.2B due to lower oil prices, but is expected to increase by 52% in 2017. In Q1 2017, oil production stood at 1,055 mb/d, 3.6% higher than for the same period last year. 

Foreign reserves now stand at USD 108B (equivalent to 20 months of imports) compared to USD 178B in 2014 (equivalent to 33.5 months of imports). This decrease is mainly due to lower oil export revenue that is down by 51% to USD 29.1B in 2016 from 2014 as compared to imports that only decreased by 17% to 49.4B during the same period. As a result, the trade balance went from a surplus of USD 300M in 2014 (0.14% of GDP) to a deficit of USD 20.4B (13% of GDP) in 2016.

Morocco: The rise of the Hirak Movement

On 1 July 2017, Prime Minister El Othmani revealed details of the exchange rate reform. Currently, the dirham is at a 0.6% band of fluctuation. The liberalisation would be gradual starting with the widening of the band to 5%, which will expand continually over the course of up to 15 years. The authorities have been working with the International Monetary Fund (IMF) on this exchange rate reform as part of a larger policy package to strengthen the country’s finances.

This new policy, which has been reviewed by the government for months, has seen strong reaction, especially from domestic and foreign investors, who fear a devaluation of the dirham, as it happened in Egypt in November 2016 following the floatation of the Egyptian pound. Governor Jouahri has, however, reassured markets, highlighting that there will be no devaluation, and that foreign reserves are at a comfortable level of USD 27B, equivalent to 6 months of imports. 

The liberalisation of the dirham is likely to have a limited impact on macroeconomic stability in the short and medium term. Dirham volatility has been low in recent years. Indeed, in January 2010, MAD 1 was traded at EUR 0.088, compared to EUR 0.093 in January 2017. However, the date of implementation of the new regime has not yet been decided, as Prime Minister El Othmani announced that studies were still ongoing in the beginning of July.

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