MENAS Associates, London, 25 October 2022

LONDON - When we first heard a whisper about the size of Algeria’s proposed 2023 Budget (a.k.a. Loi de Finance) we did not report it because we assumed that it was a malicious rumour or joke. It was not its overall size that smacked of incredulity but, in particular, the gargantuan increase in the military budget.

We now know that these figures are correct because they were tabled at the last Council of Ministers meeting. We should stress, however, that this is only the proposed budget and it still has to be rubber-stamped into law though, from past experience, that can be taken as a formality.


The bare figures are mind-boggling:


- The total proposed budget for 2023 is AD13,789 billion (US$98 billion) which is a 63% increase on the AD8,429 billion (US$60 billion) in 2022;

- This increase is enormous but is less than half the rise allocated to the army. If approved its budget will increase by 130% compared to the US$9.3 billion in 2022 — and the US$9.3-US$10.0 billion of the last three or four years — to AD3,186 billion (US$22.78 billion) in 2023;

- The army will therefore receive 23% of the next year’s entire state budget or 13.8% of estimated GDP compared to 6.7% in 2022 and a world averaged of 2.2%. We believe that these figures mean that the Algerian army’s budget will be the world’s largest in terms of its percentage of GDP.

Before turning to what these figures mean — especially in terms of the implications for the army — there is the obvious matter of how this budget can be afforded. So far this is unclear because the government has given no clear explanation.

The government’s estimated total income appears to come to the equivalent of US$56.4 billion but this could vary by as much as 10% either way. It is expecting to raise about half this sum in taxes and about half from hydrocarbon revenues. This would result in a budget deficit of approximately US$42 billion or a huge 25.4% of GDP.

The government has given no clear indication as to how this deficit will be financed but, according to our sources, there seems to be an assumption that it can be done from reserves. This is conceivable, because the government has deliberately kept the level of its foreign exchange reserves secret for the last two years — which coincides with the rise in global hydrocarbon prices — when analysts were predicting that the reserves would run out by around 2023. It is conceivably possible, although unlikely, that Algeria’s Forex reserves could now be around US$40 billion.

This brings us back to the key question of why the government has decided to allocate such an unprecedented budget increase — from USS$9.3 billion to US$22.8 billion — to the army.

The local media — effectively muzzled from raising such politically sensitive questions — has tended to steer clear of talking about the budget, and especially the army’s unreasonably large share of public funds. Those who have raised the question have received inane answers. One explanation given by the authorities is that some army equipment has reached the end of its lifespan and is due for replacement. Another is that the army has had to meet several additional social transfer costs. No reason has been given, however, as to what these are or why they might be higher than those for civilians. A third equally implausible reason is that the financial crisis caused by the previous drop in hydrocarbon revenues had delayed the implementation of many programmes and projects which are now scheduled to be covered by the 2023 budget. Unsurprisingly, the Moroccan media has turned these explanations into their new line of anti-Algerian jokes.


Replacing Russian military equipment


According to sources close to the regime, we believe that the real reason for this extraordinary budget is because the army’s high command has now finally come to realise that it has been backing the wrong horse. Russian armaments not only can no longer be supplied — because of the need to first resupply Russia’s massive equipment losses in Ukraine — but have proven inadequate on the battlefield. The Algerian regime, which depends solely on hydrocarbons and its army for survival, has now realised that, thanks to Ukraine, it must spend its hydrocarbons revenues to literally ‘buy a new army.’

Whether Algeria’s military command is actually capable of undertaking a near wholesale transformation of its military equipment is highly debatable. It will certainly be interesting to see how it sets about such a massive new procurement operation, and whether it would get bogged down in the usual morass of corruption. We would expect that Türkiye, and perhaps also China, will do well out of it. Many expect Army Chief of Staff, General Saïd Chengriha — now seen by many as a ‘dead man walking’ — will be replaced by someone like General Mohamed Kaïdi. If so, then lucrative orders might start flowing to both the US, France, and other European countries.

The most important aspect of this transformatory budget is not the question of new arms procurement, or whether the army can even handle such a transformation, but what it says about Algeria’s geopolitical reorientation.

Since the February 2022 start of Russia’s war against Ukraine, the key question has been whether Algiers would remain loyal to Moscow or grudgingly turn towards Washington and the EU. Our interpretation of this extraordinarily budget is that we are witnessing the first very large down-payment — albeit through gritted teeth — in the geopolitical realignment from Moscow to Washington and the EU. As we suggest below, Paris appears to be a key interlocutor in this process.