Investing in Algeria

Inviting increased investment

New Government Aims to Speed Reforms and join Global Economic Community

Following years of economic reform, which have achieved an impressive degree of economic stability amid political turbulence, Algeria has advanced its reintegration into the global economy by the signing in April of a Euro-Mediterranean partnership (EMP) agreement with the European Union.

Membership of the World Trade Organization is set to follow. Foreign Minister Abdelaziz Belkhadem says Algeria's WTO application has full EU and U.S. support.

The EMP accord will stimulate competition and economic restructuring, with the reciprocal removal of industrial import tariffs over 12 years. The European deal also includes the immediate liberalization of some of Algeria's agricultural exports - a symbolic gesture for an economy whose potentially rich farming sector has failed to deliver good results following collectivization in the 1960s and 1970s.

The agreement will lift tariffs, putting new pressure on Algeria’s underdeveloped private sector. Measures will be put in place, however, to help Algerian entrepreneurs raise their performance.

Raising Standards

Agriculture Minister Said Barakat believes "competition ... Will force us to raise our standards and improve the quality of our products." To achieve this, private investment is needed in all sectors, including agriculture, which is undergoing a major transformation. "Algeria has learned to grow again," Mr. Barakat says. Now it must exploit its European connections to build marketing and distribution networks.

Such agreements are important for an economy which has made substantial strides toward stability in the past decade, mastering a difficult debt situation and winning strong support from the International Monetary Fund. The critical economic issue for successive Algerian governments has been how to dismantle the legacy of decades of socialist state management and replace it with a functioning market economy.

To achieve this, a new round of privatization is promised, with a commitment by the government to do better this time. Economists have not deemed previous sales a big success.

A key player will be Abdelhamid Temmar, the liberal Participation and Investment Promotion Minister, who knows that to complete the job, "recourse to foreign investment is indispensable, as is the upgrade of (Algeria's) institutional, financial and investment environment."

The agreement with the EU and WTO membership will help speed this process - and the government is looking for a dividend in the form of a much-increased flow of foreign direct investment. While official data may show high levels of FDJ entering Algeria along with a trade surplus with the EU currently, this is due mainly to a world-class oil and gas industry, which represents 97% of exports and nearly one-third of the gross domestic product.

The government plans to maintain a vibrant hydrocarbons industry, pushing for increased oil production and pressing ahead with the development of downstream energy-related industries. And, importantly, it will promote further exploitation of Algeria's huge gas reserves - taking advantage of the opportunities offered by electricity and gas sector liberalization in Europe, where new private operators have been courting Sonatrach, the country's state energy giant.

According to another leading liberal, Energy and Mines Minister Chakib Khelil, "our reform program for the hydrocarbons sector will give back to the state its role of policy-maker - encouraging investments, controlling safety, technical and environmental regulations - while letting the public enterprise (Sonatrach) focus on a commercial role, and (being) a partner for the companies who come into the country."

This should provide a big boost for exports. But if critical issues such as unemployment are to be solved, oil and gas alone cannot create sufficient momentum. The current unemployment rate is estimated at more than 25%, with young Algerians unable to find jobs or housing. This has created a volatile social atmosphere.

Generating Growth

The National Economic and Social Council (CNES), an official economic watchdog headed by Mohamed Salah Mentouri, reports that despite relatively buoyant oil prices, the economy grew just 1.9% in 2001, less than government forecasts.

In a report published last month, the CNES noted that "the domestic economy is stuck in a rut." It was looking to the government's economic recovery plan to generate growth and to meet "the increasingly urgent need to upgrade (the economy) to international standards,"

Following legislative elections on May 30, Prime Minister All Benflis was returned to office at the head of a "reformed" National Liberation Front (FLN) party, winning by far the biggest bloc of seats in Parliament in a poll boycotted by some parties.

Mr. Benflis sees the win as a springboard for new reforms, spearheaded by a new government appointed in mid June. His new government must now address the widening gap between rich and poor highlighted by the new CNES report. This inequality feeds "increasingly sharp tensions" in society, the report said. It concluded that the economy remained hostage to vested interests, and suffered from a reluctance to carry out reforms.

Many Algerians complain that reform has not moved sufficiently quickly, and that I their living standards have fallen sharply, even while various administrations have won IMF plaudits for achieving macroeconomic stability.

Higher government spending last year meant inflation rose to a still low 4.2% from 0.3% in 2000 - underscoring how far Algeria has come in stabilizing its economy from the mid-1990s when fears of hyperinflation were common.

External debt is also under control, dropping to $22.6 billion (€23.25 billion) at the end of 2001, against $25.3 billion in 2000, according to Banque d'Algerie, the central bank. The central bank's scrupulous commitment to repaying debt has made it a darling of the secondary-debt market. JP Morgan recommends its fixed-income investors remain "overweight" on Algeria in their portfolios.

Plans to secure an international rating have been on hold for some time, but following the May parliamentary elections, bankers now expect Banque d'Algerie to approach the markets for a rating and then, possibly, to raise a benchmark financing.

Much is expected of reforms that can liberate the Algerian population's entrepreneurial instincts. The local private sector remains weak, but a handful of big business groups have come to occupy some of the space previously held by the government during more than three decades of socialist dominance.

These include the influential Issad Rabrab and Rafik Khalifa, whose El Khalifa Group has risen rapidly. Khalifa Airways is now a fixture at airports around Algeria and, increasingly, abroad. Khalifa is building a genuine conglomerate.

Symbolic Value

For President Abdelaziz Bouteflika's government, the EMP agreement has symbolic value. During a decade of conflict between the government and its radical Islamist opponents, the EU has been critical of the regime's human-rights record. By signing the EMP agreement (which includes political conditions) the government believes Europe has given Algeria a new level of recognition.

Since Sept. 11, President Bouteflika's message - delivered at two meetings with President George W. Bush - has been that Islamist-inspired political violence had to be countered with a very heavy hand, and that Algeria is now emerging from its nightmare.

The administration knows it must deliver real economic results. If it is to win genuine popular support, it must create a new environment for local and international investment - which means seriously confronting vested interests.