The Impact of Oil Price Fluctuations on the Balance of Payments in Algeria during the Period (1980–2022) Using the ARDL Model
https://doi-001.org/1025/17653512712654
· Rabah Derdouri
– deriboh@gmail.com
· Kaoukab Habita
– Kaoukabhabita@gmail.com
Submission date: 03.03.2025, Acceptance date: 12.08.2025, Publication date: 10 .12.2025
Abstract
This study aims to analyze the impact of oil price fluctuations on the balance of payments in Algeria during the period 1980–2020, given the heavy reliance on hydrocarbon revenues. The study used the ARDL model because the variables are stable at different degrees. The results showed the existence of a long-term cointegration relationship between oil prices and the balance of payments, with a positive and significant effect of rising oil prices on the trade balance in both the short and long terms. The results also indicated that inflation negatively affects the external balance, while the exchange rate shows a positive effect in the long term. The study confirms that oil price volatility remains the most influential factor on the external sector’s balance, highlighting the vulnerability of the Algerian economy. The study suggests accelerating efforts toward economic diversification and enhancing non-hydrocarbon revenues to reduce the balance of payments’ sensitivity to oil shocks.
Keywords: Oil prices, Balance of payments, Algeria, ARDL.
JEL Classification: F32, Q43, C32
Introduction
The hydrocarbon sector is the cornerstone of the Algerian economy and a key factor in shaping its external financial balances due to its high contribution to tax revenues and export earnings. Given this heavy reliance, any fluctuation in international oil prices directly affects the performance of the balance of payments, considered the most important indicator for measuring the national economy’s ability to meet external obligations and absorb economic shocks.
Over the last four decades, oil markets have witnessed sharp fluctuations, ranging from periods of exceptional price increases to deep price collapses, influenced by various economic, geopolitical, and structural factors, making the economies of rentier states—especially Algeria—susceptible to continuous disruptions in their external balances.
In this context, studying the impact of oil price fluctuations on the balance of payments in Algeria during the period 1980–2020 is highly important, particularly because this period was characterized by multiple global oil and financial crises and Algeria launching several economic reform programs that had a direct impact on external sector performance. Analyzing the relationship between oil prices and the balance of payments allows for assessing the national economy’s vulnerability to external shocks and measuring the effectiveness of economic policies in mitigating the effects of these fluctuations.
Accordingly, the central research question of this study is:
To what extent do oil price fluctuations affect the balance of payments in Algeria during the period 1980–2020, and what is the nature of the relationship between the two variables according to the econometric method?
From this central question, several sub-questions emerge, including:
– To what extent does the Algerian balance of payments reflect its sensitivity to oil price fluctuations?
– What are the most important periods during which oil prices had the greatest impact?
– Did economic reform policies contribute to reducing these effects?
Research Hypotheses:
– Oil price fluctuations significantly affect the balance of payments in Algeria during the studied period.
– Falling oil prices lead to a deterioration in the balance of payments through reduced oil export revenues and declining foreign reserves.
– Periods of rising oil prices improve the balance of payments due to increased oil revenues and improved current account performance.
Research Significance:
Studying the impact of oil price fluctuations on economic stability indicators in Algeria is highly significant due to the economy’s heavy reliance on oil and gas exports as a primary source of government revenue. Understanding the effects of oil price fluctuations on the national economy helps in devising strategies to reduce dependence on oil and enhance economic stability through analyzing the effectiveness of economic policies in coping with oil price volatility. Furthermore, the study contributes to future economic planning by helping develop sustainable plans for economic diversification and strengthening other sectors, and it increases the ability to respond to economic crises by providing a detailed analysis of past crises.
Previous Studies:
- A study by Belgharbi Fatima and Medahi Mohamed, “The Impact of Oil Price Fluctuations on the Algerian Balance of Payments: An Econometric Study during the Period (1990–2020)”, which used the ARDL model. The study concluded the existence of a significant relationship in both the short and long term at the 5% level between oil prices and the balance of payments.
- A study by Lyas Aida and Mohrez Nour Eddine, titled “The Impact of Oil Price Fluctuations on the Algerian Balance of Payments: An Econometric Study Using the Vector Autoregression (VAR) Model during the Period (2000–2019)”, which found a statistically significant effect of oil price fluctuations on the balance of payments at the 5% significance level.
- A study by El Sadiq Ashour and Fatima Haji, titled “The Impact of Global Oil Price Fluctuations on the Balance of Payments of Arab Countries and Ways to Address Them: Case Studies of Algeria, Saudi Arabia, and the UAE during the Period (2000–2018)”, aimed to determine the impact of global oil price fluctuations on the balance of payments of Algeria, Saudi Arabia, and the UAE during the study period, and the government measures taken to address these effects. The study concluded that multiple interrelated factors, both economic and otherwise, contributed to price instability.
- A study by Amin Mohamed Saï Al-Idrissi and Gharib Jaafar Douri Al-Barzanji, titled “Measuring and Analyzing the Impact of Oil Price Fluctuations on the Balance of Payments in Iraq during the Period (2000–2022)”, aimed to highlight the significant role of oil price fluctuations for oil-exporting countries, as any increase or decrease in oil prices leads to changes in balance of payments components and, consequently, the economic structure of rentier states, given the relative importance of oil exports. Using the VAR model, the study concluded the existence of a significant relationship in both the short and long terms.
- A study by Fathi Harkati, titled “The Impact of Global Oil Price Volatility on the Algerian Balance of Payments: An Econometric Study for the Period (2000–2017)”, hypothesized that fluctuations and instability in global oil prices have negative effects on the Algerian trade balance, concluding an inverse relationship between oil prices and the balance of payments.
- A study by Ayyubova Natavan Soltan, titled “Analysis of Cointegration Relationships Between Azerbaijan’s Balance of Payments and World Oil Prices”, examined the impact of rising oil prices on Azerbaijan’s balance of payments from 1995 to 2024 using the Vector Error Correction Model (VECM). The study concluded that the long-term equilibrium relationship between variables is stable, as stability is restored in short periods after disruptions caused by shocks in global oil prices.
The current study focuses on Algeria using annual data from 1980 to 2020, allowing for long-term coverage and a deeper understanding of economic transformations over four decades. This choice reflects the importance of the long time span to understand the cumulative effects of oil price fluctuations on economic stability indicators.
Methodology:
This study relied on descriptive, historical, and analytical inductive methods. The descriptive method is used to describe the phenomenon and analyze its elements to reach generalizable results. The historical method presents the development of oil prices and the balance of payments during the period 1980–2020 in the Algerian economy. The analytical inductive method was particularly used in the applied and econometric study through time series analysis and Autoregressive Distributed Lag (ARDL) models to analyze annual economic data from 1980 to 2020.
First: Literature Review
1. Oil Prices:
Oil prices are one of the main indicators of the global economy, as they affect fuel and energy costs in various economic sectors such as transport, industry, agriculture, and trade. Oil prices can also influence government policies, investment decisions, and the performance of energy-related companies. Several definitions of oil prices exist, including:
- The monetary value or cash equivalent of a barrel of crude oil measured in U.S. dollars for a 42-gallon barrel (Huwaidi Saleh, 2017, p. 97).
- A financial indicator to determine the exchange value of oil by balancing supply and demand to guide the oil market (Al-Bermani & Hassan, 2019, p. 279).
- The value of the oil commodity expressed in a specific monetary unit influenced by economic, social, political factors, and market forces (Hussein Saud, Ali Taleb, & Hadi Rashid, 2022, p. 485).
Multiple price concepts have been used throughout the history of oil, applying to transactions at specific points in time, sometimes involving the same buyers, sellers, and type of crude oil (Mabro, 1984, p. 1).
Types of Oil Prices:
- Posted Price: The price per barrel of crude oil announced by companies at the wellhead (Saad Fahd, 2021, p. 377).
- Actual Price: The announced price after deductions and discounts due to location or product quality issues.
- Marker Price: Emerged in the 1960s after actual prices appeared alongside posted prices, with two directions (Jaafar Abdul-Rida, 2011, p. 87):
• The marker price is below the posted price and above the actual price.
• The marker price is the average of a basket of oils close in density or geographically dispersed, serving as a reference for pricing a group of oils. - Cost-Plus Tax Price: Used by oil companies operating in oil fields, including production costs plus government revenue represented by income tax (Al-Shami, Al-Mousawi, & Mahdi, 2023, p. 358).
- Spot Price: The price of a barrel of oil exchanged immediately in the open oil market, reflecting the commodity’s value between selling and buying parties instantaneously.
- Transfer Price: The price of crude oil exchanged between two subsidiaries of the same parent company or through the transfer of activities like transport and production to one company (Dahan Hamza & Naji Mohamed, 2022, p. 491).
2. Determinants of Oil Prices:
In recent years, oil prices have experienced significant fluctuations. Previously, they were known as “producer prices,” determined by a group of major producers. Today, oil prices, like all other commodities, are determined by the market according to the following factors:
2.1 Oil Demand
Oil demand refers to the quantity of oil and petroleum products consumers and industries wish to purchase and use to meet their energy needs. It expresses the quantitative and qualitative level of required oil and derivatives at a given price during a specific time period (Belkala, 2014/2015, p. 24). According to Ghouri (2001, pp. 339-355), changes in oil prices can affect demand, depending on several factors, including:
- Economic Growth: Oil and energy are key components of production processes. Current economic progress is closely linked to energy use, which indicates development and economic growth. Rising economic growth and expanding economic activity increase global oil demand, leading to higher prices, while declining or slow economic growth reduces global oil demand, lowering prices (Belkala, 2014/2015, p. 28). Therefore, the future of oil prices largely depends on the balance between global oil supply and demand and global economic developments.
• Oil Price: The crude oil price is considered one of the determinants of crude oil demand, and the relationship between them is inverse. Historically, any decrease in oil prices is met with efforts by consuming countries to increase demand for oil, whether in its crude form or as derivative petroleum products. However, there is a difference in the oil price basis, as producing countries attempt to adopt a strategy for setting oil prices differently from other goods due to the diversity of costs in the oil industry. Thus, as the costs of this industry rise, the oil price increases, and consuming countries seek to develop alternatives to oil, which leads to a decrease in global demand and affects the economic performance of oil-producing countries. On the other hand, consuming countries consider it a normal commodity subject to supply and demand, which they can influence. (Hammadi, 2008/2009, pp. 70–71)
2-2. Oil Supply
Supply is considered one of the main factors affecting oil prices. Oil supply refers to the quantity that producers can provide, whether crude oil or petroleum products, at specified prices and within a certain period. (Qattoush & Ben Loukil, 2017, p. 183). Oil supply is affected by several external factors, as follows:
- Oil demand and its price: Oil demand and prevailing prices are among the most important determinants of oil supply. Oil supply largely depends on consumer demand, where production and stock quantities are determined based on current and expected demand. This is evident in OPEC’s role in setting production quotas to achieve market balance. When global demand for oil rises and prices increase, OPEC may raise production quotas to meet demand. Conversely, when demand and prices fall, OPEC may reduce quotas to maintain market balance. (Belkala, 2014/2015, p. 30) The effect of oil demand on supply is therefore interlinked; increased demand generally increases pressure on supply.
- Oil reserves and production capacity: Reserves and production capacity are important factors influencing global oil supply. Oil reserves represent known and officially confirmed quantities that can be extracted with current technology. Larger confirmed reserves suggest additional capacity for future production. Production capacity depends on the ability of companies and countries to extract and produce oil efficiently. If existing wells operate at full capacity but further production is possible, output can be increased by enhancing current wells’ productivity or drilling new wells in newly discovered areas. Technological advancements also increase reserves and production capacity. Over time, improved extraction and production techniques have enhanced the utilization of available oil resources. (Mahi, 2019/2020, p. 41)
- Government policies: Governments worldwide are key actors influencing the oil sector because they control 94% of proven oil reserves and supplies and make investment decisions in exploration and production, significantly affecting oil supply and thus global oil prices. (Gyagri, Amarfio, & Marfo, 2017, pp. 11–12)
3. Balance of Payments (BOP)
The balance of payments represents the window through which the national economy views the global economy and vice versa. It is a record of all economic transactions linking the national economy to the world economy through reciprocal relationships involving creditors and debtors. The BOP includes the movement of goods, services, and capital between countries and allows the state to understand how money and resources flow across borders and how these operations affect both the national and global economy.
1-3. Concept of Balance of Payments: Several definitions exist, converging on a unified concept:
- The BOP of a country is typically defined as a record of transactions between its residents and foreign residents during a specified period, recorded according to double-entry accounting principles, meaning the amount involved is recorded on both sides of the BOP accounts. Therefore, the totals of both sides in full BOP accounts should always be equal, meaning the BOP remains balanced. (Fieleke, 1976, p. 3)
- It can also be defined as a statistical summary of international transactions, understood as transfers of ownership of economically valuable items measurable in currency between residents of one country and another. These may include goods (tangible or visible), services (intangible), income, financial claims, and obligations with the rest of the world, including changes in reserve assets held by central monetary authorities. (Mosbacher, Darby, Young, & Carson, 1990, p. 1)
- The IMF defines it as a double-entry record covering statistics for a certain period regarding changes in components or the value of a country’s economic assets due to dealings with other countries or migration, including changes in reserves, gold holdings, special drawing rights, and obligations to the rest of the world. (Kharouf, Thawamriya, & Fariha, 2020, p. 22)
2-3. Structure of the Balance of Payments: The BOP has several divisions highlighting different aspects of financial and economic relations between the state and the rest of the world, as per the IMF’s 6th edition, 2009. (INTERNATIONAL MONETARY FUND, 2009, pp. 1–6)
- Vertically: Two main sides (Al-Eidi, 2001/2002, p. 7):
- Credit side: Reflects financial inflows the state receives from foreign currency earnings through exports of goods and services or other financial inflows such as foreign investments.
- Debit side: Records all transactions that result in an obligation to pay money abroad, including all activities requiring payment from a country to others, whether related to imports of goods/services or other financial obligations.
- Horizontally: Divided into accounts:
- Current account: Tracks transactions in imports/exports of goods and services, income flows (wages, profits, dividends), and transfers (remittances, foreign aid). (Manzano, Pablo, Vigonte, & Abante, 2023, p. 3)
a. Goods and services account (trade balance): Shows transactions reflecting production activities, focusing on the exchange between residents and non-residents, unlike national accounts, which focus on production, consumption, or capital formation. (INTERNATIONAL MONETARY FUND, 2009, p. 149)
b. Primary income account: Represents returns accumulated by institutional units for contributions to production or for providing financial assets/natural resources to others, including compensation of employees, investment returns, and interest on debts. (Bank of Jamaica, 2015, p. 13)
c. Secondary income: Covers current transfers between residents and non-residents, including taxes, worker remittances, insurance claims, etc. (Bank of Jamaica, 2015, p. 13)
- Capital account: Measures transactions in financial assets between residents and non-residents. Transfers of fixed assets and money related to disposal or acquisition are included, as are financial claims on the country where the asset is located. Divided into:
a. Long-term capital account: Records capital transactions exceeding one year, including direct investment abroad. Debits recorded here correspond to credits in the short-term account. (Al-Eidi, 2001/2002, pp. 10–11)
b. Short-term capital account: Records net changes in transactions within a year, including cash, bank deposits, bills, short-term securities, and trade credits. (Al-Eidi, 2001/2002, p. 11)
- Financial account: Records transactions involving financial assets and liabilities between residents and non-residents. Classified by instruments and functional categories, it includes:
- Direct investment: Involves acquiring 10%+ of shares or voting power in a foreign entity with effective management control. (Robinson, 2004, p. 13)
b. Portfolio investment: Involves holdings under 10% of voting rights, including securities, bonds, financial market instruments, and derivatives. (Robinson, 2004, p. 13)
c. Other investments: Covers other equity, currency, deposits, loans, insurance, pensions, guarantees, trade credits, etc. (Al-Hajj Al-Arabi, 2021/2022, p. 99)
d. Reserves: Foreign currencies available to finance imbalances with other countries. An increase in reserves (debit) indicates a surplus in non-reserve transactions, and vice versa. (Robinson, 2004, pp. 13–14)
- Errors and omissions account: Despite theoretical balance, discrepancies occur due to data limitations, called net errors and omissions. They are calculated separately to reconcile differences between credit and debit sides, reflecting issues such as exchange rate fluctuations or valuation errors. (Shashoui, 2020/2021, pp. 107–108)
3-3. Importance of the Balance of Payments: The BOP allows significant assessment of a country’s economic situation:
- Trade: Provides information on international trade in goods and services; current account surplus indicates higher exports than imports, suggesting competitiveness. Deficits indicate the opposite. (Manzano, Pablo, Vigonte, & Abante, 2023, p. 2)
- Economic strength: Reflects national economic power and adaptability to international economic changes. (Al-Hajj Al-Arabi, 2021/2022, p. 85)
- Analytical tool: Offers insights into a country’s position in the global economy and serves as a database for forecasting and decision-making. (Boumediene, 2020/2021, p. 97)
- Policy decisions: Provides valuable information for policymakers to identify weaknesses and design economic policies. (Manzano, Pablo, Vigonte, & Abante, 2023, p. 3)
4. Relationship between Oil Prices and the Balance of Payments in Oil-Exporting Countries:
The first and second oil crises highlighted the impact of oil price changes on macroeconomic activity. Time-series models indicate that a current account deficit is not necessarily harmful and may occur naturally in certain periods. Excessive current account deviations, however, can pose risks to both the country and the global economy. There is a close relationship between oil prices and the current account in exporting countries. Price increases generally improve the current account, though indirect effects may negatively impact economic growth and reduce oil exports. (Turan, Karakas, & al, 2020, pp. 55–56; Bibi, Haq, & Rashid, 2021, p. 517)
Lower oil prices have clearer and more significant short-term effects. Exchange rate responses may mitigate these impacts. The maturity of oil production affects current account behavior: new producers require more investment and imports, resulting in a worse current account position, while long-established producers can sustain higher deficits. (Alwerfalli, 2022, p. 45; Morsy, 2009, p. 3)
5. Relationship between Oil Prices and the Balance of Payments in Oil-Importing Countries:
The current account is a vital part of the BOP, providing information on economic policy changes and shocks. Volatile oil prices affect the current account of importing countries differently, causing imbalances. Higher oil prices increase trade deficits and reduce foreign asset positions, while reducing disposable income and corporate profitability lowers domestic demand. Exchange rate adjustments may partially restore balance. Initial effects of price shocks worsen the current account, but over time, reduced consumption can restore balance or even create a surplus. (Bibi, Haq, & Rashid, 2021, p. 517; Varlik & Berument, 2020, p. 1)
Third: Econometric Methodology and Data Sources
The study chose to focus on Algeria using annual data from 1980 to 2020, allowing for long-term coverage and a deeper understanding of economic transformations over four decades. This choice reflects the importance of the extended time period for understanding the cumulative effects of oil price fluctuations on the balance of payments.
In this context, the study uses annual data for econometric analysis with 40 observations in Algeria. Based on the sample used in the analysis, the model can be formulated as follows:
BC=c+a1(POIL)+a2(ER)+a3(INF)+εtBC = c + a_1(POIL) + a_2(ER) + a_3(INF) + \varepsilon_tBC=c+a1(POIL)+a2(ER)+a3(INF)+εt
To define and identify the variables mentioned in the study model, the following table is used:
Table (01): Definition and Identification of Study Variables
| Variable | Symbol | Unit of Measurement |
| Oil Prices | PIOL | USD per barrel ($/barrel) |
| Consumer Price Index representing inflation | INF | Algerian Dinar (DZD) |
| Current Account Balance representing the balance of payments | BC | Percentage (%) |
| Foreign Exchange Rate | ER | USD/DZD ($/DZD) |
Source: Prepared by the researcher based on previous information
Economic Analysis of Oil Prices and Economic Stability Indicators in Algeria (1980–2020)
This section analyzes the development of these variables in the Algerian economy during the study period and examines their responses during oil shocks and financial crises in Algeria.
Development of Oil Prices in Algeria (1980–2020)
The following figure illustrates the evolution of oil prices in Algeria during the study period:
Figure (01): Evolution of Oil Prices in Algeria (1980–2020)
Source: Prepared by the researcher based on the OPEC database
Tracking the evolution of oil prices in Algeria during the period (1980–2020) shows a clear fluctuation, reflecting the sensitivity of the oil market to international economic and political changes. Prices ranged from $36 per barrel in 1980 to $42.12 in 2020, while the highest level was recorded in 2012 at $109.5 per barrel, and the lowest level in 1998 at $12.3.
During the 1980s, oil prices experienced successive declines due to miscalculations by OPEC regarding production levels, a decrease in global demand, and intensified competition from non-OPEC producers, in addition to the expanded use of energy alternatives such as gas and coal following the oil price surge in the 1970s. Internal disputes among OPEC member countries also contributed to the severity of the price decline.
Although prices saw a relative increase in 1989 and 1990 due to the Second Gulf War and the halt of Iraqi and Kuwaiti exports, they quickly fell again after the war ended and continued to decline until 1995. After OPEC successfully readjusted production quotas in 1996, prices temporarily improved but fell again with the Asian financial crisis in 1997 and the organization’s decision to raise production ceilings, leading to a historic low in 1998. The decision to cut production in 1999 helped prices recover some of their value during 1999 and 2000.
Between 2001 and 2020, oil prices rose significantly, especially from 2001 to 2008, due to rapid global economic growth, particularly driven by Asian countries. However, the 2008 global financial crisis caused a decline in prices in 2009 due to the economic recession and reduced demand.
Prices rose again between 2010 and 2012, before entering a sharp decline during 2013–2016 due to the high value of the US dollar, falling global demand, and increased oil production, especially from shale oil in the United States. Prices saw a relative recovery in 2017 and 2018 but fell again in 2019 and 2020 as a result of the economic repercussions of the COVID-19 pandemic, which directly affected the Algerian economy through slower growth, higher unemployment rates, and disruptions in macroeconomic indicators.
These developments indicate that the Algerian oil market has remained over the past four decades at the mercy of structural fluctuations in the global economy, supply and demand policies in energy markets, and OPEC’s directions. This reality highlights the limited capacity of the Algerian economy to withstand external shocks due to its excessive reliance on oil revenues, underscoring the need to adopt sustainable economic diversification strategies.
Development of the Balance of Payments in Algeria (1980–2020)
The following figure illustrates the evolution of the balance of payments in Algeria during the study period:
Figure (02): Evolution of the Balance of Payments in Algeria (1980–2020)
Source: Prepared by the researcher based on the previous information
The trajectory of Algeria’s balance of payments during the period (1980–2020) shows a clear fluctuation between periods of surplus and deficit, reflecting the strong correlation of the national economy with volatility in global oil markets. The balance ranged from a surplus of 0.59% in 1980 to a deficit of -12.48% in 2020, while the highest surplus was recorded in 2006 at 24.71% and the largest deficit in 2016 at -16.37%.
During the 1980s and early 1990s, the balance of payments experienced significant fluctuations, moving from minor surpluses to consecutive deficits due to the sharp collapse in oil prices starting in 1986. This decline led to a substantial reduction in oil revenues and the emergence of a current account deficit, prompting public authorities to adopt austerity policies that included reducing public spending and resorting to external borrowing, which contributed to increased debt levels.
In the 1990s, the balance of payments was affected by internal security and political conditions, which negatively impacted foreign investment flows and hydrocarbon revenues. This resulted in deficits during the period 1992–1995. With the implementation of an economic reform program in cooperation with the International Monetary Fund, which included trade liberalization and improvement of the investment climate, Algeria was able to achieve a surplus in 1996 and 1997, before recording a new deficit in 1998. With the improvement of oil prices at the end of the 1990s, the balance returned to significant surpluses in 1999 and 2000.
The period from 2001 to 2006 was characterized by a substantial improvement in the balance of payments, driven by the notable rise in oil prices and the state’s adoption of extensive development programs that strengthened the national economy. This allowed for consecutive surpluses, which positively reflected on the current account and reduced external debt.
However, the 2008 global financial crisis led to a sharp decline in the balance between 2007 and 2009 due to falling oil prices and the slowdown in global economic activity. Despite relative improvements in 2010 and 2011 due to a moderate price increase, the balance of payments entered a phase of continuous deficits starting in 2014, peaking in 2020, due to the significant decline in oil prices and the COVID-19 pandemic, which caused economic contraction and reduced oil revenues. During this phase, the Algerian government was forced to adopt austerity measures aimed at containing the deficit, including reducing spending, expanding the tax base, and enhancing efforts to diversify the economy.
The data indicate that Algeria’s balance of payments has remained over the past four decades highly dependent on oil price fluctuations and global economic crises. This trend highlights the fragility of the national economic structure and its excessive reliance on the hydrocarbon sector, confirming the urgent need to implement effective economic diversification strategies to ensure external balance stability and sustainable economic growth.
2. Standard Models and Approaches Used in Processing the Study Data
We will estimate the stationarity of the time series by applying a unit root test using the Augmented Dickey-Fuller (ADF) test, and the Zivot & Andrews (1992) unit root test, which takes into account structural breaks to consider the possibility that the series contain shocks resulting from oil price fluctuations. The following two tables present the results obtained from the unit root tests for the time series under study:
Table (02): Results of the Time Series Stationarity Test According to Dickey-Fuller (ADF)
| المتغيرات | Constant and trend | Constant no trend | No Constant no trend | ||||
| P | p-value | t-stat | p-value | t-stat | p-value | t-stat | |
| BC | I(0) | 0.8221 | -1.4736 | 0.5560 | -1.4341 | 0.1216 | -1.5079 |
| I(1) | 0.0001 | -5.9083 | 0.0000 | -5.8763 | 0.0000 | -5.9326 | |
| ER | I(0) | 0.0015 | -5.0013 | 0.9912 | 0.7207 | 0.9850 | 1.9120 |
| I(1) | 0.0078 | -4.3076 | 0.0017 | -4.2593 | 0.0014 | -3.3387 | |
| POIL | I(0) | 0.6046 | -1.9602 | 0.5289 | -1.4889 | 0.3712 | -0.7816 |
| I(1) | 0.0007 | -5.2125 | 0.0001 | -5.3016 | 0.0000 | -5.3775 | |
Source: Prepared by the researcher based on the outputs of EViews12
Table (03): Results of the Time Series Stationarity Test According to Zivot & Andrews
| Variables | K | B. date | p-value | t-stat | Observation |
| INF | 1 | 2005 | 0.036351 | -3.621387 | I(0) |
Source: Prepared by the researcher based on the outputs of EViews12
Based on the results of the time series stationarity tests for all study variables shown in the previous two tables, it is evident that the study variables are integrated and stationary at mixed orders between the level and first difference. This means that the integration order of the study variables is a combination of zero order I(0) and first order I(1). Therefore, the most suitable model for measuring and analyzing the relationship between the independent variables and the dependent variable in this study is the Autoregressive Distributed Lag (ARDL) model, which does not require all time series to be integrated of the same order.
Before estimating the model and analyzing the short-term and long-term relationships according to the ARDL model between the balance of payments and the explanatory variables, it is necessary to select the optimal model based on the Schwarz criterion (SC). The optimal model is considered to be the one in which the Schwarz value is at its lowest, as illustrated in the following figure:
Figure (03): Test of Optimal Lag Periods for the Balance of Payments Model
Source: Prepared by the researcher based on the outputs of EViews12
From the above figure, we find that the best model capable of analyzing the relationship between the balance of payments and oil prices is the ARDL (1, 4, 4, 3) model among 20 estimated models. This selection is based on the Schwarz criterion (SC), which reached its lowest value of 4.85.
After selecting the optimal model, the balance of payments model will be estimated as follows:
Figure (04): Results of Estimating the ARDL Model for the Balance of Payments
Source: Prepared by the student based on the outputs of EViews12
From the above figure, it is clear that the model possesses overall significance, as evidenced by the F-statistic, which reached 39.32850 with a significance level of 0.000000, below the 5% significance threshold. This indicates that the model adequately explains the studied phenomenon. Additionally, all estimated parameters in the model are significant at the 5% level.
Regarding the explanatory power of the model, the coefficient of determination (R-squared, R²) is 0.965626, indicating a very high explanatory power. This means that 96.56% of the variations in the balance of payments are explained by the independent variables included in the model, while the remaining 3.44% are attributable to other factors not captured by the model.
Before fully adopting the model to analyze and measure the relationship between the balance of payments and oil prices, it is necessary to ensure the model’s validity, quality, and absence of econometric issues. The following diagnostic tests were employed:
Table (04): Diagnostic Tests for the Quality and Validity of the Balance of Payments Model
| Test | Prob. | Statistic | Notes |
| Normality of Residuals | 0.595047 | Jarque-Bera 1.038230 | Prob. |
| Heteroskedasticity | 0.3239 | F-statistic 1.001918 | Prob. F(1,34) |
| 0.3100 | Obs*R-squared 1.030487 | Prob. Chi-Square(1) | |
| Serial Correlation of Residuals | 0.7918 | F-statistic 0.236362 | Prob. F(2,19) |
| 0.6382 | Obs*R-squared 0.898219 | Prob. Chi-Square(2) |
Source: Prepared by the researcher based on the outputs of EViews12
The figure below illustrates the results of the structural stability test for the balance of payments model:
Figure (05): Results of the Structural Stability Test for the Balance of Payments Model
Source: Prepared by the researcher based on the outputs of EViews12
Based on the results shown in the above table and figure, the following observations can be noted:
The normality test of the residuals indicates that the Jarque-Bera statistic in the estimated ARDL model is 1.038230 with a probability value of 0.595047, which is not significant (greater than the 5% significance level). This leads us to accept the null hypothesis, indicating that the residuals in the estimated ARDL model follow a normal distribution.
The heteroskedasticity test shows that the F-statistic is 1.001918 with a probability value of 0.3239, which is greater than the 5% significance level, leading us to accept the null hypothesis that the variance of the random error term in the estimated model is stable.
Moreover, the serial correlation test of the residuals shows an F-statistic of 0.236362 with a probability value of 0.7918, which is greater than the 5% significance level, allowing us to accept the null hypothesis that there is no serial autocorrelation problem in the residuals.
The estimated coefficients of the ARDL model also indicate stability according to the cumulative sum of residuals (CUSUM) and the cumulative sum of squares of residuals (CUSUM of Squares). The figures above show that the lines remain approximately within the critical bounds, indicating structural stability of the estimated model at the 5% significance level for the CUSUM of Squares test. Similarly, the CUSUM test confirms the stability of the parameters at the 5% significance level, indicating consistency between the study variables and the model, and coherence between short-term and long-term error correction results.
To test whether there is a cointegration relationship between the balance of payments and the other independent variables (oil price, exchange rate, and inflation), the results of the Bounds Test are presented in the following table:
Table (05): Cointegration Test Using the Bounds Approach
| K | F-statistic | Critical Values | Significance Level |
| 3 | 5.609476 | I(0) / I(1) | %1, %2.5, %5, %10 |
| 3.65 / 4.66 | 1% | ||
| 3.15 / 4.08 | 2.5% | ||
| 2.79 / 3.67 | 5% | ||
| 2.37 / 3.2 | 10% |
Source: Prepared by the researcher based on the outputs of EViews12
From the table above, it is clear that the calculated F-value of 5.609476 is greater than the upper bound critical values at all significance levels (1%, 2.5%, 5%, 10%), which implies rejecting the null hypothesis and accepting the alternative hypothesis. This confirms the existence of a cointegration relationship between the dependent variable (balance of payments) and the explanatory variables included in the study (oil price, exchange rate, and inflation).
After confirming cointegration between the balance of payments and the independent variables of the estimated model, we move to estimating the error correction model and short-term relationship, as shown in the following table:
Table (06): Short-Term Parameters Estimation for the Balance of Payments Model
| Prob | t-Statistic | Std. Error | Coefficient | Variable |
| 0.8449 | 0.198075 | 1.206832 | 0.239044 | C |
| 0.0005 | -4.147864 | 0.112436 | -0.466371 | BC(-1)* |
| 0.0812 | 1.832103 | 0.061345 | 0.112390 | POIL(-1) |
| 0.0013 | 3.702800 | 0.159060 | 0.588969 | ER(-1) |
| 0.0022 | -3.482484 | 0.154216 | -0.537056 | INF(-1) |
| 0.0000 | 7.681184 | 0.043523 | 0.334310 | D(POIL) |
| 0.3231 | -1.012007 | 0.050682 | -0.051291 | D(POIL(-1)) |
| 0.3896 | 0.878489 | 0.045405 | 0.039888 | D(POIL(-2)) |
| 0.0506 | -2.073611 | -0.051137 | -0.106039 | D(POIL(-3)) |
| 0.0100 | 2.829153 | 0.141956 | 0.441616 | D(ER) |
| 0.0461 | -2.120330 | 0.162803 | -0.345197 | D(ER(-1)) |
| 0.0903 | -1.775489 | 0.136905 | -0.243074 | D(ER(-2)) |
| 0.0014 | -3.676159 | 0.149678 | -0.550241 | D(ER(-3)) |
| 0.0678 | -1.925474 | 0.251662 | -0.484569 | D(INF) |
| 0.7676 | 0.299389 | 0.277413 | 0.083054 | D(INF(-1)) |
| 0.0044 | 3.186988 | 0.289104 | 0.921371 | D(INF(-2)) |
| 0.0000 | -5.778385 | 0.080710 | -0.466371 | CointEq(-1)* |
Source: Prepared by the researcher based on the outputs of EViews12
Before interpreting the short-term parameters of the balance of payments model, the error correction term CointEq(-1) should be examined. If it is negative and significant, it indicates the possibility of correcting deviations from short-term to long-term equilibrium. The error correction equation takes the following form:
EC=BC−(0.2410∗POIL+1.2629∗ER−1.1516∗INF+0.5126)EC = BC – (0.2410*POIL + 1.2629*ER – 1.1516*INF + 0.5126)EC=BC−(0.2410∗POIL+1.2629∗ER−1.1516∗INF+0.5126)
The error correction coefficient appears as -0.466371, which is negative and significant with a probability of 0.0000, confirming the existence of a long-term equilibrium relationship. This implies that deviations from equilibrium are corrected at a rate of 46% per year.
The table shows that most parameters of the estimated model are statistically significant with respect to the dependent variable.
The following table presents the long-term relationship estimates according to the ARDL model between the explanatory variables and the dependent variable (balance of payments):
Table (07): Long-Term Parameters Estimation for the Balance of Payments Model
| Prob | t-Statistic | Std. Error | Coefficient | Variable |
| 0.0415 | 2.171238 | 0.110991 | 0.240988 | POIL |
| 0.0001 | 4.810498 | 0.262525 | 1.262876 | ER |
| 0.0002 | -4.550552 | 0.253060 | -1.151564 | INF |
| 0.8461 | 0.196503 | 2.608408 | 0.512561 | C |
EC=BC−(0.2410∗POIL+1.2629∗ER−1.1516∗INF+0.5126)EC = BC – (0.2410*POIL + 1.2629*ER – 1.1516*INF + 0.5126)EC=BC−(0.2410∗POIL+1.2629∗ER−1.1516∗INF+0.5126)
Source: Prepared by the researcher based on the outputs of EViews12
From the table above, it is evident that there is a long-term equilibrium relationship between the explanatory variables and the dependent variable (balance of payments). Specifically:
- Oil price is positively and significantly associated with the balance of payments in the long term, with a coefficient of 0.240988 and a probability of 0.0415.
- Exchange rate is positively and significantly associated with the balance of payments in the long term, with a coefficient of 1.262876 and a probability of 0.0001.
- Inflation is negatively and significantly associated with the balance of payments in the long term, with a coefficient of -1.151564 and a probability of 0.0002.
The long-term results indicate that the impact of oil prices on the balance of payments operates through a direct channel reflecting changes in revenues and expenditures related to oil exports and imports for exporting countries.
Conclusion
The topic of oil price fluctuations and their impact on the balance of payments in Algeria is a vital economic issue, given the rent-based structure of the Algerian economy and its vulnerability to external shocks linked to international energy markets. The conducted econometric study allowed the tracking of long-term developments in oil prices and balance of payments components, analysis of causal relationships between them, and estimation of the magnitude and impact of these fluctuations on macroeconomic indicators.
The econometric results yield several key conclusions:
- There is a strong and persistent positive relationship between oil prices and the balance of payments, where price increases improve net external positions via higher export revenues, while sharp declines exacerbate external deficits.
- The balance of payments relies almost entirely on hydrocarbon exports, making sub-accounts (current account, capital, and financial accounts) highly sensitive to oil market fluctuations.
- Economic diversification policies have been weak during the studied period, as non-hydrocarbon exports remain low and unable to absorb shocks.
- Government expenditures are highly sensitive to oil price changes, amplifying the cyclical impact of oil shocks on the balance of payments.
Based on these findings, several recommendations can strengthen Algeria’s external position and reduce the impact of oil price volatility:
- Accelerate and implement economic diversification strategies by supporting exportable productive sectors, particularly manufacturing, high value-added agriculture, and competitive service industries.
- Enhance non-hydrocarbon revenues through tax system reform, improved investment climate, and removing administrative obstacles for SMEs.
- Establish a stable financial mechanism for managing oil revenues, such as sovereign wealth funds, to absorb cyclical fluctuations and utilize surpluses in a manner that maintains macroeconomic stability.
- Adopt more disciplined fiscal policies focused on rationalizing public spending and directing it toward productive investments rather than current expenditures sensitive to global price changes.
- Improve monetary policy effectiveness and exchange rate management to reduce reliance on “petrodollars” and strengthen external competitiveness.
- Develop oil price hedging instruments through futures contracts and financial derivatives to mitigate the effects of sudden shocks on external balances.
- Invest in renewable energy and related industries as a long-term strategic option to gradually reduce dependence on crude oil revenues.
In conclusion, addressing Algeria’s balance of payments imbalances requires a comprehensive economic vision based on strengthening the productive structure, diversifying income sources, and protecting the economy from external shocks. Achieving this goal necessitates integrated structural reforms that transcend the rent-based nature of the economy and redefine the developmental role of various sectors in line with sustainability and long-term competitiveness
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