May 15, 2020 / 4:05 PM / 16 days ago

Algeria plans fuel price rise, sees economy contracting 2.6% this year

May 15 (Reuters) - OPEC member Algeria will raise the price of gasoline and diesel to reduce its consumption and imports as the economy comes under pressure due to a sharp fall in energy revenue, according to a revised 2020 budget plan drawn up by the cabinet and seen by Reuters.

The new plan, which follows a 2020 budget that was already approved late last year, must now be approved by parliament.

Financial pressure will cause the economy to contract 2.6% this year after growing 0.8% in 2019, according to the cabinet document, which outlines a comprehensive review of the country’s financial policies after the drop in energy earnings.

The cabinet did not mention the new coronavirus in the document, but the global pandemic has added to a tumble in oil prices, forcing the government to cut spending and investment planned for this year in several sectors including hydrocarbons.

The North African country has reported about 530 deaths related to the virus so far.

Under the new measures outlined by the cabinet, the budget will be based on an oil price of $30 a barrel, down from $50 in the previously approved plan.

In a bid to find new funding sources for the oil-reliant economy, the government plans also to impose taxes on some imported goods.

But Algeria, which is trying to diversify its economy away from oil and gas, may exempt some businesses from taxes and customs duties to help boost its non-energy sectors and attracting foreign investors.

State finances, already reduced by a fall in oil prices since 2014, have been hit hard this year by the collapse of the energy market as a result of the global pandemic.

That forced the government to change its previous plans for this year by mainly reducing public spending by 50% and delaying scheduled investments in sectors including oil and gas.

Under the new plan, the price of regular gasoline, premium gasoline and unleaded gasoline will go up by 5.7% per litre, while the cost for diesel will rise by 15.5%.

Domestic fuel prices are very low by international standards as they are subsidised by the government. Overall subsidy spending, which includes also basic foodstuffs, medicine and housing, among others, account for 8.4% of the gross domestic product.

The planned price rise is also aimed at countering smuggling to neighboring countries where fuel costs are much higher and easing financial pressure.

“Algeria, like other hydrocarbon exporting countries, faces a large budget and balance of payments deficit,” the cabinet said in the document, in which the government also stressed the need to reduce trade deficits.

Algeria had hoped to cut the balance of payments deficit to $8.5 billion this year, from $16.6 billion in 2019. However, the latest official figures showed the trade deficit widened by 80% in the first two months of 2020 after a 28.17% fall in energy earnings.

New taxes planned for this year are due to be imposed mainly on car imports after the government decided to lift a ban on purchases from abroad.

But authorities will encourage domestic production by removing the value-added tax for imported and locally manufactured raw materials intended for car assembly plants as well as electronic and electrical industries.

Startups, or small businesses, will also benefit from a tax exemption for three years, a measure that coincides with a government plan to remove a rule imposing a minority stake for foreign investors in projects involving the non-energy sector. (Reporting by Hamid Ould Ahmed; Editing by Hugh Lawson)

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