Algeria's Islamic Bonds an Incomplete Step Toward Diversifying Government Revenues

(AFP via Getty Images)

People walk through a main square in Algeria's capital of Algiers on Sept. 15, 2024.

Algeria's inaugural issuance of Islamic bonds marks a symbolic step toward diversifying government funding, but the limited size of the effort means it will have minimal short-term impact on reducing dependence on hydrocarbon revenue and more traditional forms of raising government funds. Algeria is set to issue its inaugural sukuk, or Islamic bonds, with a seven-year maturity and a 6% fixed annual return in early 2026. According to reports, the initial issuance will be valued at around 297 billion Algerian dinars, or $2.3 billion, equivalent to about 1% of the country's GDP. The bond sale — which was initially planned for November 2025 but later postponed due to government efforts to finalize debt issuance regulations — is only open to Algerian citizens and backed by state-owned real estate assets. The original plans for sukuk issuance, initially reported in September, came during early discussions for Algeria's 2026 fiscal year budget.

Sukuk are Sharia-compliant and are common debt financing instruments throughout the Muslim world. Sukuk differ from traditional bonds in that they generate revenue tied to real assets rather than through interest, as bonds do. As such, the government-backed assets will likely mitigate the risk of these investments.
According to the International Monetary Fund (IMF), Algeria's debt-to-GDP ratio was 54% in 2025. However, only a small fraction of that debt is external debt, which according to the IMF's September Article IV report is projected to be around 1% of Algeria's GDP for 2025.

The sukuk issuance comes as Algeria seeks to diversify its financing sources as it maintains high levels of public spending and a large, but decreasing, budget deficit while global oil prices remain low. Algeria's spending as a percentage of GDP remained relatively unchanged at around 47%, though nominal spending is set to increase from $128 billion in 2025 to $135 billion according to the 2026 budget. Algeria's budget increases the public wage bill and defense spending and maintains high levels of spending on subsidies. Even so, the budget attempts to improve fiscal consolidation by reducing its annual budget deficit by more than a third to 12.4% of GDP through reliance on increasing revenues tied to growth in nonhydrocarbon sectors, which the World Bank projects to drive economic growth of 3.5% in 2026. Amid gas market volatility and persistent low global oil prices, Algeria is making an effort to diversify away from hydrocarbons, which account for around 50% of government revenues. The 2026 budget projects low oil prices at an average of $60 per barrel and therefore lower hydrocarbon revenue. Even so, although Algeria's government has looked to other sources to finance the budget — including traditionally borrowing from banks — it does not increase its reliance on external borrowing, maintaining its stance of having low levels of external debt.

Algeria's social spending increases come amid domestic criticisms of inadequate public service provision, including healthcare, education and employment. In recent months, other North African countries, especially Morocco, have had protest movements criticizing their governments' public service provisions. Similar movements have not gained momentum in Algeria, where protests and opposition are repressed.
Austerity measures imposed by IMF and World Bank programs during the 1990s contributed to economic instability that led to Algeria's painful "Black Decade." Nearly 200,000 Algerians died during the Black Decade in clashes between the Algerian government and Islamist groups. Significant government spending subsequently helped stabilize the country. As such, the legacy of the Black Decade is a key reason why the Algerian government remains highly reluctant to rely on foreign borrowing and external debt and hesitant to impose austerity measures.
The IMF's September Article IV report said that Algeria's near-term outlook was "broadly positive." The Algerian government has forecast growth of 4.1% in 2026 and 4.4% the year after, though other estimates are lower. However, the IMF also encouraged Algiers to take broader reform efforts to improve the medium-term economic outlook since hydrocarbon fluctuations remain a risk.

Algeria's sukuk sale will start to diversify the government's funding sources. If successful, additional sukuk issuances will likely somewhat reduce reliance on domestic borrowing from banks, though the government will remain reluctant to borrow externally. Even though the $2.3 billion sukuk sale comprises only about 10% of Algeria's budget deficit, the inaugural sale portends Algeria's ongoing efforts to diversify financing sources to cover its deficit. The sukuk sale is part of the Algerian government's efforts to try to mobilize informal savings, estimated at 10 trillion Algerian dinars ($77.2 billion; approximately 27% of GDP), to promote economic growth. Furthermore, the depletion of Algeria's Revenue Regulation Fund, which decreased the government's financial buffer, and the relatively high debt-to-GDP ratio will pressure the government to seek alternative financing sources. Even so, while the returns on the sukuk will likely be attractive to Algerians, the lack of previous sukuk issuances may cause some skepticism compared to other Muslim countries, like Malaysia, where the instrument has a robust, decades-long history. The initial sukuk sale is unlikely to significantly alter Algeria's debt financing patterns, since it accounts for only around 10% of the budget deficit. If this round is successful, additional, larger issuances are likely, which would somewhat decrease — but not eliminate — the government's reliance on borrowing from the banking sector to finance deficits, depending on the fiscal deficit and the size of informal savings. Even so, Algeria will still likely resist diversifying its funding sources to expand reliance on external borrowing. For one, since Algeria's economic outlook over the next one to two years is positive and despite increased pressure to diversify funding, the government still has access to sufficient funding sources for the near term. Second, Algerian President Abdelmajid Tebboune has repeatedly rejected the prospects of issuing external debt, which he claims would impede Algeria's sovereignty. Third, the national memory of the Black Decade — including among senior government and military officials — will preclude Algeria from becoming more amenable to foreign borrowing. As such, Algeria's aversion to issuing external debt will push the government to seek other domestic sources for debt financing, such as expanding domestic sukuk issuance.