ALGERIA - The Economic Base.

Thanks to high oil prices since 1999, the Algerian economy is doing far better than in the previous years. The country's foreign exchange reserves have risen considerably since end-1999. High oil revenues have enabled Algiers to reduce its outstanding debt in 2006 by $7,900m to about $5,000m.

In mid-November 2006 Algiers settled its outstanding debt to the Paris Club of creditor states with payments of $620m to the US and $387m to Germany. These boosted Algeria's position on international financial markets and complied with an agreement signed in May to complete repayment of a total of $8,000m to Paris Club members.

The reimbursements were the latest in a series of payments made by Algeria since 2000 which have seen Algiers clear ahead of schedule more than $13,000m in foreign debt. This included repayment in September of $800m owed to the London Club of private creditors.

Algiers earned special praise on Aug. 28, 2006, when the IMF chief economist Abderahim Bessaha said: "The balancing of [Algeria's] external debt is a strong signal that could contribute to a better grading for Algeria by international credit rating agencies".

By late August 2006, Algeria had accumulated $60,000m in foreign reserves, i.e, almost three years of foreign imports cover. Debt servicing costs by then had run to $4,500-5,000m, whereas real interest rates of about 2% a year meant that the investment of an equivalent amount of foreign reserves in international banks was only generating about $1,500m. Bessaha said: "The opportunity cost of a retention of excessive reserves is substantial and surpasses that which is necessary for financial stability".

The investment of the accumulated reserves in a national infrastructure programme, le Plan Complementaire de Soutien a la Croissance (PCSC) - known as Algeria's Marshall Plan - was also praised by Bessaha. This calls for investment of at least $55,000m in social and infrastructure schemes by 2009. According to Bessaha, the investment will enjoy returns of at least 6% a year over the next 10 years, yielding a total of at least $10,000m.

However, inflation and the rate of unemployment have been high. Social problems remain a headache for a government still focused on fighting a long-running rebel uprising (see sbme1AlgeriaJan31-05).

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 markets which have expanded; (4) privatisation of state-owned companies; (5) continued efforts to cut tariffs; (6) elimination of profit margin controls in the pharmaceuticals 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, backed by a World Bank structural adjustment loan (see background in Vol. 56).