Current Economic State of Algeria
Current Economic State
Amidst the bloodshed that has plagued this North-African nation since the early 1990s, Algeria, with IMF and World Bank support, has taken impressive steps in implementing a structural economic adjustment program. Thus far, the country has successfully met and surpassed all macroeconomic performance criteria. The government has stabilized its currency, lowered inflation and recorded a positive balance of payments. Furthermore, despite the terror and chronic high unemployment (about 30%), Algeria has continued to achieve positive economic performance, much of it coming from its enormous hydrocarbon resources.
The microeconomic story, however, is significantly bleaker. Industrial output is declining and restructuring is proceeding slowly. And although the country’s privatization law offers numerous advantages to private investors, such as tax incentives, deferred payments, and an employee ownership option, just few enterprises have been privatized which is necessary to lure the investors.
Strong opportunities for foreign investment in Algeria have come from the country’s investment code. As part of this code, the country established in April 1997 a free trade zone in Bellara. This has positioned the hydrocarbon, agribusiness and construction sectors for substantial expansion.
The continuing, albeit abating, violence remains one of the most significant deterrents to attracting investors. Simply visiting the country requires businesspeople to ensure that an Algerian national accompanies them from the time of arrival to departure. The extent of security necessary to provide company workers and the cost of such security must be factored into any decision regarding investment in Algeria.
Algeria’s economy relies heavily on its hydrocarbons resources. In recent years, the gas and oil sector accounted for an average of 30 percent of the country’s GDP and about 95 percent of its export earnings. This dependence places the economy at the mercy of crude petroleum prices, which in the past few years have been unusually volatile.
Besides this exposure to oil price swings, the national stabilization scheme has thus far failed to improve the living standards of most Algerians. Pressure is mounting on the government to increase wages and social project expenditures and to eliminate the 2 million job and housing shortage.
Intent on diversification so as to reduce the dependency on oil, the Algerian Government continues to pursue industrial reforms. Progress has, however, been slow, because employee dismissals have provoked much social dissent.
Algeria’s GDP presently amounts to $47.1 billion, while its per capita GDP hovers around $1,500. But in purchasing power terms (which adjusts for exchange rates and costs of living), per capita GNP is approximately $4,000. The agricultural sector contributes 12 percent to the GDP, while the industrial and services sectors contribute 49 percent and 39 percent, respectively.
In 1996, Algeria achieved real growth of 4 percent, but in the following two years this rate dropped to between 1-1.5 percent. In the past two years, Algeria’s hard currency reserves depleted rapidly. By the end of 1999 they amounted to $4.66 billion. In comparison, by the end of 1998, the Algerian foreign currency reserves had contracted 15 percent to $6.846 billion versus $8.047 billion in 1997. This collapse was primarily due to declining international oil prices. Consequently, the government decided to limit spending and slashed the 1999 budget by roughly 30 percent. State administrators and public sector enterprises have been advised to dramatically lower their expenditures, except in the areas of wages, debt reimbursements and imports.
Higher imports, coupled with a steep decline in the value of its oil and gas exports, caused the country’s trade surplus to shrink from $5.79 billion in 1997 to $803 million in 1998. Imports totaled $9.3 billion in 1998, up 7.4 percent from the previous year. Oil and gas exports – which accounted for more than 96 percent of total exports --amounted to $9.7 billion in 1998, compared to $13.6 billion in 1997.
Algeria’s leading trade partner was the European Union, which absorbed 63.5 percent of its exports and provided 57 percent of its imports. Meanwhile, the trade surplus dropped to $460 million in the first half of 1999 -- a reduction of approximately 50 percent from the same period in 1998. Exports totaled $4.86 billion, compared to $5.66 billion in the first six months of 1998, while imports reached $4.4 billion, compared to $4.7 billion in the equivalent period in the previous year.
2000p 1999e 1998 1997
GDP ($ billions) 53.84 49.7 47.1 45.9
GDP Growth (percent) 5.0 6.2 2.0 3.0
GDP Per Capita ($) 1,637 1,608 1,608
CPI Inflation (percent) 4.5 4.5 5.0 5.7
Unemployment (percent) 30.0 30.0 27.0 28.0
Foreign Exchange Reserves ($ billion) 3.0 4.5
Exports ($ billion) 9.72 10.12 13.89
Imports ($ billion) 8.8 9.3 8.6
Trade Surplus ($ billion) 0.92 0.82 5.29
Foreign Currency Reserves ($bill))4.6 6.8 8.0
Foreign Debt ($ billions) 32.0 33.4 32.7
Budget Deficit ($ billions) 3.38
* As of the end of December
p - projections based on an average price of $15 per oil barrel
In general, the government is continuing to liberalize foreign trade and payments. But the pace of reform has slowed since its mid-1990s peak. Some imports, particularly luxury goods, continue to be restricted to a limited number of importers as state-owned banks refuse to provide all importers with the necessary customs clearance documents. The Algerian Customs Authority is also attempting to stop the rotten food imports through more stringent controls, including a regulation that contains a minimum validity period for imported food products.
To expand the country’s economic base, the Algerian government is offering significant export incentives to increase non-hydrocarbon exports. The authorities have established the Algerian Foreign Trade Promotion Company as well as the Foreign Trade Promotion Fund, which is financed by a luxury-imported goods tax. The Algerian Export Management Company manages an export credit insurance agency, while an Export Promotion Fund was created in June 1997 to give logistic and financial assistance to export enterprises.
A black market for hard currency exists for small-scale importing and personal travel abroad. The gap between the official and black market rates is approximately 10-15 percent.
Algeria's industrial sector continues to be characterized by large and inefficient state-owned enterprises (SOEs). These firms have survived primarily on credit extended by Algeria's state-owned banks. In the mid-1990s, the SOEs were adversely affected by successive dinar devaluations, which raised the cost of servicing their foreign currency loans.
Because of this and other causes of their insolvency, the government continues to aggressively restructure public enterprises, including the rescheduling of SOE foreign debt. In the fall of 1998, 11 specialized holding companies were established according to different sectors to manage the public sector companies, which they are commissioned to privatize.
In recent years, the Algerian government has liberalized the country's import regime. Supplier financing is no longer required to import capital equipment. Furthermore, the rescheduling of Algeria’s foreign debt released substantial foreign currency for imports. Algerian importers can access this foreign exchange provided they have enough Algerian dinars to cover the hard currency cost of imports.
Algeria’s vital hydrocarbon sector has remained immune to terrorist acts. Sonatrach, the state-owned hydrocarbons company, plans to raise annual export earnings to over $16 billion next year. A key element to this plan is the doubling of natural gas exports to 60 billion cubic meters per annum. Toward the end of 1996, the Trans-Maghreb pipeline linking Algeria's Hassi R'Mel gas field to Spain and Portugal via Morocco commenced operations. By the end of this year, Sonatrach hopes to expand the Trans-Med gas pipeline's capacity to Italy to 24 billion cubic meters per year.
Sonatrach strongly encourages foreign oil exploration. During the past ten years it has signed roughly 40 oil/gas exploration and production sharing agreements with foreign firms. Several American energy companies, such as Anadarko, Arco, and Louisiana Land & Exploration, are pursuing projects in Algeria.
Plans include much more extensive hydrocarbon exploration, a larger liquefaction capacity to boost LNG exports, additional pipelines, and more contracts with foreign companies skilled in enhanced oil recovery methods for use at existing oil fields. American, French, German, and Japanese firms dominate this sector. The most lucrative markets are for wellhead and down-hole equipment and supplies, and drilling machinery.
Agriculture production depends on weather conditions and thus if volatile. In 1996, for example, agricultural output rose 19.5 percent, but subsequently dropped 76.1 percent the following year due to drought.
The potential for agricultural exports will rise after the government institutionalizes procedures making it easier for farmers to own and sell land and to access medium- long-term credit. The government hopes that a merger between one of the country's insurance companies and the state-owned Agricultural Bank for Rural Development will result in more funding being channeled to the agricultural sector. The inauguration of a leasing company would enable Algeria's farmers and fishermen to obtain capital equipment through lease-purchase agreements, which would provide them with an opportunity to raise productivity.
Improving the water resource supply and enhancing agricultural productivity are among the Government's top priorities. Its irrigation program offers lucrative opportunities for direct sales and licensing arrangements. Several Algerian companies seek to manufacture irrigation and waste water treatment equipment locally, and all have expressed interest in collaborating with foreign firms. The most promising markets therefore, are for drilling, irrigation, and waste water treatment equipment.
Algeria's agricultural sector has the potential for substantial development in the next few years. There are particularly strong opportunities for foreign manufacturers of farm equipment and supplies because Algerian farmers need such things to increase productivity.
Historically, the state has played a predominant role in providing housing. Yet, Algeria’s government has been unable to satisfy the housing market’s demand. In recent years, the government’s control of this sector on the one hand, and its inefficient management on the other, have led to construction delays and a mounting housing deficiency. At times, this housing gap has been covered by illegal construction. Despite these difficulties, Algerian authorities boast of their achievement in doubling the annual supply of housing units from about 80,000 in 1993 to over 160,000 in 1997 and 1998. Nevertheless, this remarkable augmentation has fallen short of the sector’s rising demand.
In mid-July 1999, the head of Algeria’s National Privatization Board, established in September 1998, said the country’s privatization program had resulted in both positive and negative consequences,. He said that profit-oriented transactions, rather than privatization-oriented operations, had thus far been executed. Eighty-nine of Algeria’s 384 large public sector enterprises had been privatized. Of the new companies’ owners, 20 percent are foreigners, 25 percent internal employees, and 55 percent national private firms.
The Algerian government in recent years has taken steps to implement and push forward its privatization program. Algeria's Parliament has amended the privatization law to facilitate the privatization process. The law now includes flexibility in pricing and payment terms. It authorizes the sale of non-autonomous public firms and abolishes the buyers’ obligation to maintain a firm's activity and its labor force intact for at least five years. The law also allows for the sale of some enterprises to the general public, in particular to workers. Furthermore, the law provides for an employee stock ownership option, whereby up to 30 percent of the capital of a company being privatized may be offered to its workforce.
© 2000 Mena Report (www.menareport.com)