How the Algerian dinar lost 35% of its value in 7 years?

Year after year, month after month, the dinar continues its vertiginous fall and the purchasing power of Algerians continues to erode. The national currency hits its lowest level in at least fifteen years. On Tuesday, May 10, 2022, one euro was exchanged for 153 dinars according to the official rate and for 215 dinars on the black market.

In 2015, according to the bank exchange rate, 1 US dollar (USD) was worth 107.27 Algerian dinars; and 1 euro was worth 116.79 dinars. And today, a dollar is exchanged against 145.75 dinars, and 1 euro against 153.23 dinars. Thus, the national currency has lost more than 35% of its value against world currencies in the space of 7 years.

The easing of regulations decided by the government is not enough to counter the contraction of liquidities and the tumble of the currency. This situation is explained, among other reasons, by the covid-19 pandemic, the drop in oil prices over a long period, the global economic crisis, as well as by the national financial strategy.

In October 2021, the Bank of Algeria reported an inflation rate of 9.2%. In January 2022, the National Statistics Office reported that consumer prices had increased by 9% over one year. Food products are particularly affected.

The 2021 finance law provided for a loss in value for the dinar of around 5% each year, until 2023.

Algerian dinar, the reasons for the fall

While many attribute the depreciation of the dinar to the money-printing policy adopted in 2017 to deal with the liquidity crisis, other experts do not share this analysis.

Money printing policy

The professor of economics, Raouf Boucekkine, believes, for his part, that the inflationary trend is “a phenomenon fueled by imported inflation due to the fact that the prices of raw materials and food products have experienced major growth”.

For its part, the Bank of Algeria already warned in January 2019 that unconventional financing “risks dragging the economy into a highly damaging inflationary spiral and depreciation of the national currency”. To stop the bleeding, the Bank of Algeria printed in the space of two years, from 2017, more than 6,500 billion dinars (49 billion euros). “Unconventional financing is palliative care and not a structural solution,” warned Mohamed Nazim Bessaih, vice-president of the Banking Commission of ICC Algeria.

Currency floating strategy

The value of the Algerian dinar is based on the strategy of floating foreign currencies. The government adopted this strategy in order to balance the budget deficit. The doctor of finance, Nemouchi Farouk, declares on El Watan: “the government was advised to depreciate the currency to face the money supply which is shrinking as well as the budget deficit, but also to preserve the level of foreign exchange reserves “. “The State must draw up, continues Namouchi, an economic strategy which aims to revive growth, but also to maintain competitiveness on the market if it wants to control this depreciation and its consequences. »

Dr. Namouchil explains that the value of the dinar depends on two main parameters:

  • The number of months of imports covered by foreign exchange reserves. At present, this figure is only 16 months, which impacts the recovery of the national currency.
  • The inflation rate that determines the level of competitiveness of the national economy. This rate must be close to that of the economic partners.

Lower oil prices

Other parameters of the national economy still explain the decline in the value of the dinar, and make the phenomenon almost “natural”. For example, the significant drop in hydrocarbon prices in recent years has directly affected government revenues.

In addition, the authorities have to deal with the increase in public expenditure. To solve this equation, the government opted for the depreciation of the currency as a remedy for the budget deficit and a means of maintaining the country’s major economic balances.

Depreciation of the dollar against the euro

Another variable precipitated the devaluation of the national currency. This is the depreciation of the US dollar against the euro. Indeed, as the majority of trade in Algeria is carried out in dollars, fluctuations in the latter affect the Algerian dinar head-on. The management consultant, Mohamed Saïd Kahoul, explains in the columns of El Watan that “Algeria’s trade flow in dollars directly impacts the value of the dinar when the euro appreciates against the greenback. »

The economic recovery plan, drawn up by the government, intervenes in a context of health and financial crisis, is still in its infancy. In this context, the Algerian dinar faces an uncertain future and no mechanism seems able to stop its free fall. And the consequences of this situation are being felt more and more: purchasing power is eroding, and unemployment is on the rise.

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