Why Algeria hides a $40bn untaxed parallel economy?

Day and night, trucks trundle the 10 miles from Algiers port to the suburb of Semmar, where workers unload and stack goods that will feed into a vast black market.
Merchants pack narrow streets to buy canned and dry fruit, grains and vegetables for cash, with the biggest crowds gathering after dark. Bazaars like this drive a $40bn untaxed parallel economy, one the government says it can no longer tolerate as the oil slump slashes revenue and fellow Opec members rebuff Algeria’s pleas for steps to prop up prices.
Under the terms of an amnesty, Algerians have a year to deposit income from undeclared businesses with banks and pay a 7% fee, or face punishment. For President Abdelaziz Bouteflika’s administration, alternative measures – such as cutting a soaring bill for subsidies that helped ward off the strife which has swept the region since 2011 – aren’t attractive.
“These are powerful constituencies but at the same time, it’s less problematic than reforming subsidies,” said Riccardo Fabiani, senior North Africa analyst at the London-based Eurasia Group. Foreign reserves of $158bn as of June mean Algeria doesn’t have to risk a popular backlash, “and that’s why they are tackling this issue of the black market.”
In a mid-year budget last month, officials unveiled tax changes to penalise importers and boost local production. The government has also allowed the dinar to depreciate – it hit a record low of 105.55 to the dollar last week, according to data compiled by Bloomberg, and is down about 30% since January. Thousands of planned projects have been put on hold, except for housing.
“The government is counting on these funds to diversify its extra-budgetary sources of finance,” newly appointed Finance Minister Abderrahmane Benkhalfa was quoted by state-run APS news service as saying. In a radio interview on Monday, he urged Algerians to accept the terms of the amnesty for the good of the nation.
For decades, Algerian authorities have turned a blind eye to the black market, a sort of unspoken social contract whereby the state doesn’t interfere in return for support. In Port Said Square, right outside government offices in the heart of Algiers, illegal currency traders work in broad daylight, counting notes and shouting for business.
In El Eulma, a city about 200 miles east of Algiers, there’s a large market for illicit electrical products from China. Locals call it Marche Dubai El Eulma because many of the products come via Dubai.
Efforts to break with the trade have so far been half-hearted. In October 2010, authorities made the use of checks compulsory for large transactions. That spurred an increase in prices and demonstrations, and the measure was withdrawn.
Black marketeers have until December next year to bank their cash and qualify for the amnesty, signalling official disquiet over tackling illicit commerce.
Traders at Semmar, the largest wholesale market for black-market, non-perishable fruit and vegetable in the country, embody the challenges the government faces.
“I heard about that measure,” said Aziz, who’s been coming to the market for about 15 years and asked for his full name not to be published, referring to the amnesty. “But we aren’t paying any attention. What would I gain?” he said, standing in front of a truck laden with sacks of white beans that he bought for 125 dinars ($1.18) per kilo and will sell for twice as much.
At the back of a dimly lit garage, surrounded by boxes of tinned tomatoes and corn, a bearded man named Abdelmalek, who would also only give his first name, says he’s sure many people would deposit money if Islamic banking were widely available. A colleague argues that excessive red tape makes operating legally nearly impossible: “Waiting means losing business and time is money,” he said.
“If you made a lot of money in shady ways in Algeria, the last thing you’d want to do is deposit it in the bank and pay a levy to authorities you don’t even trust,” Fabiani of Eurasia Group said.
Ferhat Ait Ali, a former finance ministry official and analyst, said Algerians will begin to feel the rising cost of imports – from foodstuff to cars – in the next few months. The cost of subsidies, which account for about 30% of GDP, will also rise and increase the fiscal deficit, he said.
Providing oil prices and spending stay near current levels, crunch time is likely to come by 2017, Fabiani said.
“That’s when we’ll see more serious reforms,” he said. “This is the typical Algerian approach. They wait until they hit the wall, then they panic and take the most unpopular and controversial measures.”