OFFICIAL INFLATION STATS MASK STUNTED MARKET

C O N F I D E N T I A L SECTION 01 OF 03 ALGIERS 000253

SIPDIS

SIPDIS

STATE FOR NEA/MAG (FLOWERS)
STATE PASS FOR USTR (BURKHEAD)
CAIRO FOR TREASURY (SEVERENS)

E.O. 12958: DECL: 03/03/2018
TAGS: ECON ETRD EAGR AG
SUBJECT: OFFICIAL INFLATION STATS MASK STUNTED MARKET
ECONOMY

REF: A. ALGIERS 003


B. 07 ALGIERS 1214

C. 07 ALGIERS 367

Classified By: Deputy Chief of Mission Thomas F. Daughton;
reasons 1.4 (b) and (d).


1. (C) SUMMARY: Although official figures show a relatively
modest inflation rate of 3.5 percent, Algerians are
complaining loudly about the high and rising cost of living
in Algeria. Economists and even Algerian government
officials argue that official inflation calculations
underestimate what is likely a 7 to 8 percent real
inflation rate. High global commodity prices and Algeria's
heavy reliance on imported food products continue to push
inflation upwards, but experts also note that speculation
and non-competitive practices have compounded the problem.
In an effort to blunt the impact of rising prices, the
government has increased subsidies on many food products.
While this may create short-term relief, the long-term
impact is to discourage investment in Algeria's
agricultural sector and prolong reliance on imported
agricultural products. With prices high and rising even
higher, Algerians are questioning why they are not reaping
the benefits of their country's wealth. END SUMMARY.

THE NUMBERS CAN LIE
--------------


2. (C) Despite an official inflation rate of 3.5 percent,
economists and even Algerian government officials argue
that real inflation is significantly higher. Mohamed
Ghernaout, private financial consultant, estimates that
real inflation is closer to 7 or 8 percent. Official
inflation is kept artificially low through the use of an
outdated basket of goods in the Consumer Price Index (CPI)
calculation. Rachid Zekri, Director of Macroeconomic and
Financial Studies at the Ministry of Finance, told us that
the basket currently used was weighted in 1989 -- a time
when cars and cell phones were not part of a normal
household's expenditures and the prices for most products
were still controlled. Although the government still
maintains a system of fixed prices and subsidies for
staples such as milk, wheat-based products, sugar and
flour, the prices for chicken, eggs, beef, cooking oil, and
fruits and vegetables have all been liberalized. Mohamed
Yazid Boumghar, Permanent Researcher at the National Center
for Applied Economic Research (CREAD),characterized the
official inflation statistics as "ridiculous." He said
that weight decreases for products such as yogurt have also
disguised inflation by keeping prices at previous levels.
The weight per container of yogurt, he noted, has decreased
from 125 grams to 100 grams while the price has remained
the same, representing an effective price increase of 25
percent.

HIGH PRICES EVEN HIGHER
--------------


3. (U) As Algeria imports nearly USD 5 billion in food
imports annually, it has been hard hit by rising world
commodity prices. Algeria relies heavily on imported
wheat, milk powder and animal feed to meet domestic
consumption, leading to steep price hikes in prices for
liberalized food products and a rising subsidy bill for
goods with fixed prices. Although the CPI reflects a 6.6
increase in food prices from 2006 to 2007, many Algerians
complain that the original prices were already high and are
now increasingly burdensome for the average Algerian
household. According to a table compiled by the National
Union for Public Administration and Personnel (SNAPAP),
prices for meat have increased between 400 and 500 percent
from 1989 to 2007 and fresh vegetables between 200 and 300
percent during the same time period. In comparison, the
minimum wage has only risen 50 percent, from 8,000 dinars
per month to 12,000 dinars (roughly 182 USD). Currently,
one kilo of chicken costs 190-250 dinars (2.90 - 3.80 USD)

ALGIERS 00000253 002 OF 003


and one kilo of beef runs about 700-800 per kilo (10.60 -
12.15 USD). The CPI for Algiers weights about 44 percent
for food, 5.6 percent for lodging, 6.8 for furnishings and
home expenses, 11 percent for clothing, 3.4 percent for
healthcare, 6.5 percent for education and leisure, 11.5
percent for transport and communications, and 10.6 percent
for other miscellaneous expenses. According to this
allocation, an Algerian making the minimum wage would spend
672 dinars (10 USD) per month on housing and 5,280 dinars
(80 USD) per month for food -- reflecting the disconnect
between current prices and Algerian purchasing power.

MARKET FORCES NOT AT WORK
--------------


4. (C) Even as rising world commodity prices have created
upward pressure on prices, several economists argue that
speculation and non-competitive practices have also played
a role. Zekri stated that Algerian government efforts to
increase purchasing power by raising salaries have fueled
inflation by increasing demand and encouraging
speculation. He noted that prices have already gone up in
response to the announcement of a salary increase in 2008
that has yet to go into effect. In addition, Boumghar and
Zekri both separately complained about the existence of de
facto monopolies for certain products. Boumghar noted that
privately-owned Cevital controls nearly 70 percent of the
market share for cooking oil, adding that even for other
products with more distributors present in Algeria,
producers act as cartels by fixing prices. According to
Boumghar, the absence of competition has permitted price
increases beyond economic justification. Growing
complaints in February that Cevital's price increases were
speculative prompted the company to issue a detailed press
communique refuting the existence of a monopoly and arguing
that the increases were due to world price hikes.

SHORT-TERM RELIEF, LONG-TERM PROBLEMS
--------------


5. (C) In an effort to blunt the impact of rising prices on
Algerian consumers, the Algerian government has relied on
subsidies for flour, milk, and semolina-based products (ref
A). According to Minister of Commerce El Hachemi Djaaboub,
in 2007 Algeria spent USD 2 billion subsidizing those three
products alone. Over the past two years the price of
cooking oil has increased 300 percent, leading Djaaboub to
announce that the government is now considering regulating
the price of cooking oil, as well. Ghernaout called the
growth in subsidies "troubling" and noted that the
subsidies will prevent investment in the agricultural
sector. He emphasized that "prices are incentives" and the
subsidies for imported wheat will have the effect of
prolonging Algeria's deficit in wheat production. Zekri
cautioned that Algeria's current subsidy expenditures would
be unsustainable if the price of oil dropped to USD 50 per
barrel. The move to subsidize products reflects a
continued reliance on government control. Boumghar
stressed that Algeria has not completed the transition from
a centrally planned economy to a market economy. He
complained that when the government intervenes, it
intervenes ineffectively. Referencing government
mismanagement of the potato supply (ref B),he lamented,
"When you can't even manage potatoes, it's a serious
problem."

COMMENT: KEEPING FREE MARKET FORCES AT BAY
--------------


6. (C) Although high hydrocarbon prices have made Algeria
rich, the average Algerian has yet to reap much benefit
from the country's newfound wealth. Keeping the official
inflation rate low does little to disguise the situation on
the ground. Algerians and expatriates alike complain of
the high and rising cost of living in Algeria. High global
commodity prices have pushed inflation up throughout the
world, but Algeria's heavy reliance on imported food

ALGIERS 00000253 003 OF 003


products and commodities makes it particularly vulnerable
to world price rises. Government efforts to blunt the
impact on Algerians by increasing subsidies may create
moderate relief, but represent both a band-aid and a fig
leaf on the serious structural problems in the economy.
The government's efforts prevent market forces from working
effectively, discouraging investment in the agricultural
sector and prolonging reliance on imports.