ALGERIA - Economic Reform Will Boost Non-Oil Sector.

The reform process has been underway since the mid-1990s, under an IMF-inspired structural adjustment programme. So far this programme has not brought many visible benefits to the poorest segment of society, which forms the bulk of Algeria's population and a prime recruiting ground for radical Islamists. Basic infrastructure remains inadequate, with shortages of everything from water to transport and especially housing, and unemployment is high.

Yet the reform process continues and the overall situation has been improving slowly but steadily every year. Starting from a position of extreme vulnerability in the early 1990s, due to low oil prices, unsustainable foreign debt servicing, severe acts of terrorism which led to the loss of human lives and infrastructure, social and political tensions, and external isolation, Algeria has achieved a remarkable turnaround since 1996. GDP grew by 3% per annum, on average, from 1999 to 2002.

During that period, there was a similar growth performance from the non-hydrocarbon and non-agricultural sector. By 2001, macroeconomic imbalances have been turned into sizable surpluses and inflation was brought under control - from a high of 20% in 1994 to 1.4% in 2002. Reserves stood at US$23.1 billion at end 2002, reaching their highest levels since independence in 1962 and matching the country's stock of foreign debt at the time. This was exactly 10 years after the upsurge in violent militancy began in February 1992.

It is important to note that the Algerian economy had suffered decades of mismanagement since independence in 1962. Continuous civil unrest in the country since 1992 has also had a negative impact. Liberalisation measures began to be implemented since 1994, at the height of the militant campaign and for the next five years there was virtually no visible improvement in the situation.

The effects of reform began to be felt in 1999 and, at the same time, oil prices began to rise. Then the Algerian economy began to perform better than in the previous years. The country's foreign exchange reserves have risen considerably since end-1999. Foreign debt has dropped considerably as well.

Reforms have included: (1) liberalisation of invisible transactions in 1997, leading to current account convertibility; (2) recapitalisation of state banks to reach an 8% capital adequacy ratio by 1999; (3) creation of treasury bill and bond market; (4) privatisations of state-owned companies; (5) continued efforts to cut tariffs; (6) elimination of profit margin controls in the pharmaceutical industry by 1998; (7) cuts in public spending and reform of the civil service, aimed at generating a budget surplus; and (8) reform of the agricultural sector, including privatisation of land, supported by a World Bank structural adjustment loan.

The regime of President Abdelaziz Bouteflika has outlined a national development agenda focused on reforms to sustain growth, generate employment, and reduce poverty and vulnerability. There is a strong emphasis on privatisation and small business development, i.e. a focus on non-oil enterprise among the Algerian public. It is envisaged by the government that such an emphasis will have a positive impact on the poorer segments of the population; some 70% of Algeria's poor live in rural areas and more than half of the rural population is poor.

The rise in poverty is strongly linked to unemployment. Lack of income, however, is only one dimension of poverty. Lack of opportunity, empowerment and access to social services also contribute to deepening income poverty - and the regime technocrats are beginning to act on the knowledge that all of these can be addressed effectively by promoting enterprise.

About one fourth of Algeria's workers are engaged in farming, but agriculture contributes less to the country's GDP than either mining or manufacturing. The state plays a leading role in planning the economy and owns many important industrial concerns, including the mining and financial sectors. In the late 1990s, there was some privatization and openness to foreign investment.

Farming is concentrated in the fertile valleys and basins of the north and in the oases of the Sahara. The principal crops are wheat, barley, oats, citrus fruit, wine grapes, olives, tobacco, figs, and dates. Algeria is also an important producer of cork. Large numbers of sheep, poultry, goats, and cattle are raised and there is a small fishing industry.

Minerals extracted in significant quantities in Algeria include iron ore, lead, phosphates, uranium, zinc, salt, and coal. The country's leading manufactures are processed food (notably olive oil), beverages (especially wine), tobacco products, construction materials, chemicals, metals, textiles, and clothing.

The government is working closely with the World Bank to achieve its reform objectives. On June 12, 2003, the Bank's Board of Executive Directors discussed the Country Assistance Strategy (CAS) for Algeria. The CAS was designed after drawing on discussions with the Algerian private sector, civil society organisations, academics and various governmental agencies. The previous CAS for Algeria was launched in fiscal year 1996.

The CAS will involve assistance from the International Finance Corporation (IFC) and the Multilateral Investment Guarantee Agency (MIGA) through financing, and/or risk mitigation through structured loans, hedging products, and guarantees. The IFC, which is the private sector arm of the World Bank Group, will complement the Bank's support through financial sector development, support for small and medium-sized enterprises, promoting private investments in infrastructure and supporting the regime's privatisation efforts.

According to a statement issued by the World Bank after the June 12, 2003 meeting: "Based on consultations with civil society and discussions with the Government, Algeria has three key development challenges: (a) how to use its oil and gas reserves for the long-run benefit of the Algerian population; (b) how to create growth and employment in the non-oil economy to both benefit from the surge in the size of the labour force over the next decade and avoid the social tensions that would be caused by increased unemployment; and (c) how to provide better public services so that all Algerians are able to participate in and benefit from a twenty first century market economy.

"Bank Group priorities for strategic support mirror these challenges and are: (1) support to fiscal sustainability and hydrocarbon revenue management to build the basis for a sustained growth; (2) support to removing the constraints to private sector-led growth, particularly those affecting the business environment, SMEs, the financial sector, and infrastructure development; and (3 support the Government's efforts to articulate and implement a strategy for better service delivery, particularly for water supply, housing, environmental services (municipal waste management), and human development to meet the critical needs of its population".

There are problems in implementation, however. Critics point to the way the business environment for small and medium-size enterprises (SMEs) has been undermined. In Algeria, as in most parts of the developing world, some 80% of SMEs are established by owners who invest their own funds. In Algeria, such ventures face a very difficult credit market despite the World Bank efforts. While loans are not easy to obtain in most parts of the developing world, the critics believe that the whole process of SME development and administration has been spoiled by the poor business atmosphere, partly generated by the banking system.

They note that they system is dominated by cumbersome and outdated administrative practices, endless procedures and important time delays along the bureaucratic chain. When applying for a loan, for instance, a business should expect up to 12 months before a decision is made. Algerian banks, especially state-controlled financial institutions, mistrust private enterprise. The banks little tolerance or understanding of entrepreneurship and are themselves incapable of taking risks when funding companies that are source of economic growth and wealth, the critics say, adding that when a business applies for a loan, banks require high level of guarantees to insure that there is zero risk for their investment. The bar is thus raised so high that SMEs abandon all hope to find sources of financing.

Similarly, the privatisation programs drafted by the various cabinets since the 1990s, which aimed at transforming state companies into productive assets and open up the market to foreign investors and create new jobs, have either been abandoned, slowed or halted. The success of some partial privatization initiatives such as the partnerships between steel company Sider and India's Ispat, Enad and Germany's Henkel, Saida and America's Pfizer or even the collaboration between Eco and Tipceram and Embalplast and Flash represent only the tip of the iceberg in terms of the potential to privatise state enterprises.