Algeria - The Economic Base.

The Algerian economy has suffered decades of mismanagement since independence in 1962. Continuous civil unrest in the country since 1992 has had a negative impact. By late 1998 Islamic militant violence had caused a 12% reduction in industrial capacity, with industry dominated by a corrupt and inefficient public sector. More than $2.5 bn worth of losses have been suffered because of sabotage by the militants. Liberalisation measures have been implemented since 1994, under an IMF- inspired structural adjustment programme. So far this programme has not brought visible benefits to the poorer segment of society, which forms the bulk of Algeria's population. Basic infrastructure remains inadequate, with shortages of everything from water to transportation and especially housing. Low oil prices in 1998 and the past month have caused Algeria's income from oil, gas and condensate exports to fall sharply from the 1997 level. A fall of $1/barrel in the oil prices results in a loss of $560m/ year, 4.3%, in export revenue. Technocrats in the government say the effects of reform will begin to be felt in 1999, when a big number of state companies are to be privatised. They point to positive macro-economic indicators such as declining inflation. In a report after a mission to Algiers at end-June 1998, the IMF said Algeria had obtained "strong results...restoring macro-economic balances: inflation was lowered to 5% and international reserves exceeded nine months of imports". Algeria's hard currency reserves, excluding gold, had officially reached $8.8 bn in late April 1998, though the real figure was said to be higher. The IMF added that Algeria had "achieved substantial progress towards a market-based and private- sector-led economy". But it was worried that "economic growth has not reached the level for a marked reduction in the high unemployment". The reforms have included: (1) liberalisation of invisible transactions in 1997, leading to current account convertibility; (2) recapitalisation of state banks to reach 4% capital adequacy ratios, with 8% capital adequacy to be reached in 1999; (3) creation of a 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) cutbacks 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, to be supported by a World Bank structural adjustment loan. Privatisation is a critical aspect of the IMF's reform guidelines. This is a very sensitive issue in Algeria, as in most other developing countries, because the sale of state-owned companies virtually guarantees higher unemployment. Lack of productive work is closely associated with the civil strife affecting the country. Yet the government is planning large-scale privatisations and has set up two new agencies to supervise the process. These are the privatisation council and the privatisation operations control committee, functioning under the Industrial Restructuring and Participation Ministry. By end-1998, almost 220 industrial units had been sold, of which many were construction companies. A new privatisation law passed by the National Transition Council on March 2, 1997 aimed at speeding up the sale of state- owned enterprises. A further 150 companies are to be sold in 1999 for Algeria to become eligible for the second tranche of the World Bank's structural adjustment loan. Most of these are small companies, or individual plants belonging to large public sector firms. Before privatisation began, the Algerian public sector had more than 450 companies including 22 big groups. These were the main source of employment in the industrial sector. Because of privatisation and restructuring, some 200,000 workers would have been laid off by end-1999. Unemployment is at almost 30% of the workforce. Reforms are being carried out with an eye on integration with the EU. The EU and Algeria signed a $175m deal on Dec. 2, 1996, to help finance structural adjustment. Negotiations for an association agreement with the EU began on March 4, 1997. Association means Algiers would have to phase out customs duties protecting local industries. The EU allocated $5.3 bn to help prepare Algerian industry for European competition. Efforts are being made to diversify the economy by expanding the non-oil sector as oil and gas exports account for over 95% of external income. To boost the non-oil industry, a free trade zone is being set up in Bellara, in Jijel province. According to the foreign investment promotion agency APSI, the zone has attracted foreign capital. The zone is near Jijel airport and 40 km from a new harbour. Operations at the zone will be exempt from all taxes and only international companies will be allowed to set up production facilities. A second zone will be set up.

                            BUDGETS, 1995-99
                       (Algerian dinars, billion)

             1999        1998      1998      1997      1996      1995
             Draft     Revised     Draft
Revenue     937.10      882.00    901.50    829.40    810.10    586.50
Spending  1,098.57    1,022.69    976.70    914.10    841.60    734.90
Deficit     161.47      140.69     75.20     84.70     31.50    148.40

Exchange rates: $1 = AD53.37 in 1995; $1 = AD57.12 in 1996/97; $1 = AD58.09 in 1998/99. The debt situation in Algeria is difficult. The total foreign debt in 1998 stood at $33.5 bn and the government last year had to pay about $4.9 bn in debt servicing. Over the past three years, the government secured rescheduling agreements with the Paris and London clubs of creditors. These helped Algiers get loans from the IMF.