Algeria: politically insolvent.

Since the suspension of elections in January 1992, Algeria has lurched from one crisis to another. With mounting violence from Islamic militants, the mass exodus of foreigners and political paralysis blocking economic recovery, there seems little hope of a comeback in 1994.

A TELL_TALE SIGN of Algeria's ills can be found in the failure of the Higher Council of State (HCS) to hand over power to a new, broader form of collective leadership as promised for the end of 1993. The HCS is the five-man military junta controlling the recently appointed government of the prime minister, Redha Malek. Its chief (some would say sole) aim is to avert the radical Islamist threat to the state, embodied by the illegal Front Islamique du Salut (FIS). While calling for "national dialogue", the HCS means to exclude the FIS and any of its splinter groups. In the October creation of a "Committee for National Dialogue", the military's grip on power was made clear. Three generals were included in the eight-man team.

The military obviously feel their involvement necessary as the only powerful group that remains (as yet) undivided in the face of the Islamists. On the other hand, such a pervasive involvement makes it extremely difficult for a credible coalition of non-Islamist parties to form and assume power.

This year will surely see some kind of new transitional government. Its success will depend on how representative of a deeply fractured political class it can aim to be, while remaining acceptable to the army leadership which is ready to take over at any time. Whether the military will be willing to accept the minimum involvement of Islamists needed if popular support is to be regained remains to be seen. So far prospects are slight at best.

Hocine Ait Ahmed, leader of the Front des Forces Socialistes, the second biggest vote winning party in the 1992 elections after the FIS, has withdrawn from talks on a new collective leadership, as has ex-president Ahmed Ben Bella. This reflects the disquiet of centre-left and establishment groups over the direction the military are forcing Algeria to take.

Meanwhile, Algeria's economic decline looks set to continue. The output of non-hydrocarbon industries fell by 2.2% in 1992, while manufacturing output was reduced to 50% of capacity. Short of a miracle, it will go on falling this year. In response, Redha Malek's government will continue to try and move away from the statist economic policies of his predecessor, Belaid Abdesselam. The main problem for the economy minister, Mourad Benachenhou, is that while massive readjustment of the Algerian economy is required to fall in line with the IMF and gain the fresh finance so desperately needed, the political impasse means that the decisions needed take months to be reached. "It is no good having an economic policy if it doesn't have full popular support," he said in a recent interview. That support is unlikely to materialise in 1994, and liberalisation will be slow and painstaking.

On the more encouraging side, the government has taken some measures to ease the process. A new unitary bureau, l'Agence de Promotion de Soutien et de Suivi des Investissements, was created in November to consider investment applications within a maximum time of 60 days, as well as dealing with subcontracting and research. The government is also preparing the partial deregulation of import controls and access to hard currency by abolishing the ad hoc committee that controlled imports under Abdesselam.

Meanwhile, talks with the IMF in December, although closing without agreement, have brought Algeria nearer to a one-year standby accord than it has in the 20 months since the last facility lapsed. This would free up about $1bn in new finance available to cover an estimated $1.4bn shortfall in financing for 1994. Algeria's external debt has reached $25bn, but so far the government has resisted pressures (notably from France) for multilateral rescheduling, favouring instead bilateral negotiation and prompt debt servicing. A solution to the debt crisis may be found in 1994, but IMF-approved economic policies will do little in the short term to improve the lives of the bulk of the population. Without a comprehensive political settlement, many Algerians will continue to see radical Islam as the only alternative to what they regard as a Western-inspired collapse. While many more may not support the FIS, they have an equally jaundiced view of the military and the present batch of politicians. A stab at liberal economics can be little more than playing for time and a minimum of stability. The brightest news lies in the development by the British Petroleum Company and the Algerian state energy company, Sonatrach, of the enormous gas reserves that lie under Algerian soil. Oil and gas account for 96% of Algerian exports and a boost to production would more than help the import crisis.

However, not only will this be of little direct assistance in 1994, since potential is still only beginning to be assessed, but even the oil companies, with an interest in Algeria's long term future, are pulling out personnel. Following the deaths of 23 foreigners at the hands of the Islamists since last September, well over 3,000 foreign workers have left Algeria.

Closer coordination between France, Germany, Britain, and the United States may help the Algerian government limit Islamist activities abroad and show solidarity, but it can do little to stop the killing at home. The only thing that can stop the rot in 1994 is a realistic political settlement. A new government imposed by the military will not be enough.

Algeria

GDP: AD1.5trn; ($58bn) GDP per capita: $2,090 Population: 28m GDP growth: 3% (1993); 4.6% (1994) Inflation: 30% (1993); 25% (1994)

* The overriding issue in 1994 will continue to be the escalating bloody confrontation between the army and Islamist militants. Both sides are now so deeply committed to conflict rather than negotiation that force will be the only deciding factor. If military suppression does not make noticeable headway, or the civilian leadership balks at increasingly repressive measures, a military coup cannot be ruled out.

* While the political situation remains unresolved, the government is unlikely to make any substantial moves towards economic reform. Liberalisation will remain official policy, but its progress will be painfully slow at best. Spending will focus on infrastructural projects, and subsidies to the public sector will be maintained. The budget deficit looks likely to grow yet further, and there is no likelihood of the dinar being fully convertible for another two years at least.