One year ago, the imminent arrival of helicopter money among endless discussions of pervasive lowflation was all the rage within high-finance policy circles. Then, everything changed as if on a dime, and in recent months the dominant topic has been global coordinated tightening - and in some cases even revisions to central bank mandates and the lowering of inflation targets - perhaps as a result of central banks' realization that monetizing debt by central banks leads to bad outcomes, not to mention global asset bubbles.
But not everywhere.
On Sunday, Algeria’s prime minister unveiled a plan to plug the country's budget deficit as the the OPEC member state looks to offset lower oil revenue by directly borrowing from the central bank, while avoiding international debt markets. In other words, direct monetization of debt, which bypasses commercial banks as a monetary intermediate, and is better known as "helicopter money."
According to Bloomberg, the five-year plan presented by Prime Minister Ahmed Ouyahia aims to balance the budget by 2022, and reverse a deficit that ballooned with the plunge in global crude prices, which also cut foreign reserves by nearly half.
"If we turn to external debt, as the IMF suggests, we will need to borrow $20 billion a year to repay the deficit and within four years we will be unable to repay the debt," Ouyahia said. “This is what made the government look at non-traditional financing.”
And that's where the country's central bank comes in.
With domestic debt currently around 20 percent of gross domestic product, Algeria has room to take on additional borrowing, the IMF has said. Earlier this month, the cabinet authorized the central bank to lend money to the Treasury to narrow the deficit. Businesses and importers would stand to benefit from a cash injection from the regulator, but analysts say the plan has risks.
The biggest risk, of course, is hyperinflation because without deep asset markets to "sterilize" the liquidity injections, the money will flood the local economy sending prices of goods and services sky high. It will also crush the Algerian Dinar. Combined with current import restrictions, “the central bank financing the fiscal deficit will stoke inflation and depreciate the currency,” Eurasia Group’s senior analyst for the Middle East and North Africa, Riccardo Fabiani, wrote in a recent report.
Algeria's The Prime Minister also said international reserves have fallen to about $100 billion since 2014 from about $177 billion, dwindling as the country was forced to offset budget spending from internal sources of funds in lieu of high oil revenues. But the Eurasia analyst warned that the measures outlined on Sunday, including tapping Islamic financing, may not be enough to fend off the need to tap international markets. “Austerity measures and the currency depreciation will only have a limited impact on the current-account deficit that is likely to be partly counterbalanced by stronger domestic demand,” he said.
As a result, if oil prices don’t rebound in the coming five years and authorities aren’t able to curb imports, “Algeria is likely to burn through its foreign reserves by 2020” and may have to tap outside support to cover a financing gap, he said.
Incidentally, while other OPEC nations have been rumored to consider such a currency devaluation "nuclear option" in light of oil prices that are far below "budgetary breakevens" for most OPEC nations, it was not until today that it was finally implemented. And now that that the first country has succumbed, the question is who is next. Until then, keep an eye on Algeria's inflation:
it is about to go vertical.