The Case Against Devaluing the Algerian Dinar: Why Economic Diversification, Not Currency Devaluation, is Key to Stability

Over the past two decades, the Algerian Dinar has seen a significant depreciation against the US Dollar, climbing from around 70 DZD per USD in the mid-2000s to 133 DZD per USD in 2024. This depreciation largely reflects Algeria's dependence on hydrocarbons, particularly oil and gas, which makes the economy vulnerable to external shocks such as fluctuating oil prices. Some might argue that further devaluation of the Dinar could improve Algeria's export competitiveness, but upon closer analysis, it becomes clear that devaluation is not a viable solution. Further devaluation could worsen the country’s economic situation given its weak industrial base and low levels of exports outside the oil and gas sectors. Instead, the path to long-term stability lies in economic diversification.

A History of Depreciation and Its Consequences

Algeria’s heavy reliance on oil and gas has left its currency vulnerable to global energy markets. The Dinar's depreciation accelerated after the global oil price collapse in 2014, as Algeria’s foreign reserves, once standing at over $190 billion, declined to $44 billion by 2021. The 2014 oil price shock was a wake-up call, showing just how exposed the economy was to fluctuations in a single commodity market.

Despite government attempts to manage the depreciation, the ongoing weakness in oil prices coupled with rising inflation has made it difficult to maintain the value of the Dinar. Today, with the Dinar trading at 133 DZD per USD, Algeria’s economy faces significant challenges: inflation, rising import costs, and slow growth outside the energy sector. For some economists, a further devaluation of the currency could boost Algeria's export competitiveness, but this view overlooks the fundamental weaknesses in Algeria's non-oil economy.

Why Devaluation is Not the Answer for Algeria

Devaluation is often viewed as a way to make exports cheaper and more competitive, encouraging foreign buyers and stimulating economic growth. However, in Algeria's case, the situation is more complex. Devaluing the Dinar further could exacerbate economic problems rather than solve them, for several reasons:

1. Limited Export Base: Algeria's economy lacks diversification, with oil and gas accounting for over 90% of export revenues. Even if the Dinar were to be devalued, few non-hydrocarbon industries would benefit from increased export competitiveness. In contrast, countries like Japan—which has a weak currency, the Yen, at around 148 Yen per USD—can leverage their industrial and technological sectors to remain globally competitive. Algeria lacks this industrial depth, so a devaluation would have limited benefits.

2. Import Dependency: Algeria is highly dependent on imports for essential goods such as food, medicine, and machinery. A devaluation of the Dinar would make these imports more expensive, contributing to inflation and hurting the purchasing power of average Algerians. In the long term, this would create a cycle of rising costs without a corresponding increase in export revenues, worsening the economic outlook.

3. Inflationary Pressures: Devaluation often leads to inflation, as imported goods become more expensive. Algeria already faces inflationary pressures due to its reliance on imports and an underdeveloped industrial base. With inflation already contributing to a rising cost of living, devaluation could make matters worse, fueling further discontent among the population and putting more pressure on the government to subsidize essential goods, a strategy that is unsustainable in the long run.

4. Lack of Economic Alternatives: Unlike countries that have diversified economies, Algeria does not have a robust industrial or technological sector to absorb the benefits of a devaluation. In economies like South Korea or Germany, devaluation can make exports more attractive and fuel growth. In Algeria, however, devaluation would mainly make oil exports cheaper but given that oil prices are set on global markets, this would not significantly benefit Algeria, especially when oil prices are low. At the same time, it would increase the cost of importing everything from machinery to raw materials, making it harder for local businesses to grow.

The Case Against a Currency Reform: Redenomination is Not a Solution

In addition to the debate about devaluation, some policymakers may suggest redenominating the currency, where the government would remove two zeros from the existing Dinar, creating a "New Dinar". For example, 1 New Dinar could be equivalent to 100 old Dinars, similar to what Turkey did in the 1990s when it introduced the New Turkish Lira to replace the old Lira, which had undergone years of hyperinflation. While redenomination may seem like a symbolic reset, it is not a solution for Algeria’s underlying economic problems and can even lead to confusion and instability if not accompanied by substantive reforms.

Why Redenomination Won’t Solve Algeria’s Problems:

1. No Impact on Economic Fundamentals: Changing the nominal value of the currency by cutting off zeros does not address the structural issues in the economy, such as a lack of diversification, weak exports, or heavy reliance on oil and gas. The underlying weaknesses remain, and a mere redenomination will not enhance Algeria’s competitiveness or boost productivity in the non-hydrocarbon sectors.

2. Temporary Psychological Effect: While redenomination can create a short-term boost in confidence by giving the impression of a stronger currency, this effect is often temporary. If the economic fundamentals do not improve, inflationary pressures and the depreciation of the currency will continue. For example, Turkey’s experience with redenomination was followed by a temporary stabilization, but the country has since faced continued currency instability due to underlying economic and political issues.

3. Potential for Inflationary Shock: If not managed properly, redenomination can confuse consumers and businesses, leading to inflationary shocks as prices adjust to the new currency. In countries like Zimbabwe and Argentina, which have undergone multiple redenominations, inflation remained high due to persistent economic mismanagement and a lack of real reforms.

4. Costly Implementation: Introducing a new currency involves significant logistical costs, such as printing new bills, updating accounting systems, and recalculating prices across the economy. These costs can be burdensome for a government already facing fiscal challenges, and without a broader strategy for economic reform, the financial benefits of redenomination may be minimal.

Academic Perspectives on Redenomination

Research has shown that currency redenominations are most successful when part of a comprehensive economic reform package. For instance, a 2005 study by Céline Rochon on redenominations in Latin American countries concluded that "redenominations alone do not solve inflationary or currency depreciation problems. Success requires coordinated monetary, fiscal, and structural reforms." In Algeria’s case, without tackling the core issues of economic diversification, industrial development, and fiscal discipline, redenomination would likely fail to deliver lasting improvements.

Diversification: The Real Path to Stability

Rather than devaluing or redenominating the Dinar, economic diversification is the key to Algeria's long-term stability. The government must focus on developing industries beyond oil and gas, including:

- Renewable Energy: Algeria has vast potential in solar energy and green hydrogen production, given its geographic location and abundance of sunlight. Investing in these sectors would help reduce Algeria’s reliance on oil and gas and create a new source of export revenue.

- Manufacturing and Industry: The focus on developing industries like phosphates, iron, zinc, and automobile production can help Algeria diversify its export base. Recent partnerships with international companies like Fiat and Chinese car manufacturers (Geely and Chery) can foster the growth of the domestic automotive industry, similar to how Japan built its global industrial footprint.

- Agriculture and Agri-Tech: Algeria has the potential to develop a strong agricultural sector, reducing its reliance on imported food. Modernizing the agricultural sector with agri-tech solutions could turn Algeria into a net exporter of certain agricultural goods, helping diversify the export base.

- Technology and Services: Investing in technology, telecommunications, and services could also help Algeria develop a more resilient economy. Countries like India have seen significant economic benefits from developing their tech sectors, and Algeria could follow a similar path, particularly in areas such as cybersecurity and information technology.

Conclusion: Neither Devaluation nor Redenomination is the Solution

Given Algeria's weak non-hydrocarbon export sector, devaluation and the Dinar's redenomination are not sustainable solutions to the country's economic problems. Instead of relying on short-term fixes that could lead to higher inflation, reduced purchasing power, and financial instability, the government should focus on diversifying the economy. Building a strong industrial base, investing in renewable energy, developing agriculture, and fostering a tech sector are essential to ensure long-term economic resilience.

As the world transitions away from fossil fuels and global oil prices become more unpredictable, Algeria must take decisive action to reduce its dependence on hydrocarbons. By doing so, the country can avoid the pitfalls of both devaluation and redenomination and instead build a more sustainable, prosperous future for its people. In this context, a stronger, diversified economy will lead to a more stable currency and improved living standards for all Algerians.