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Nostalgic about the bad old days.

Algeria ought to be in the throes of economic change. The government is committed to shaking off the inheritance of 30 years of socialist mismanagement. The problem is that nothing seems to be happening. Covering an area of almost 2.5m sq kms, Algeria is the largest country in the region and has huge natural resources. But this potential has not been translated into wealth, and the country's oil and mineral resources are still under-exploited.

While its neighbours, Morocco and Tunisia, have raced ahead with programmes of economic liberalisation, Algeria has lagged behind. The roots of its current economic and social crisis lie in the choices made by its political leaders after the country's independence in 1962.

Coming to power after a bloody and drawn-out struggle against the French colonialists, Algeria's new rulers chose to follow a model of development inspired by the socialist ideals of the Soviet Union. The prevailing ideology was that the state should act as the driving force and behind economic development, to lay the foundations for a future socialist society. The state took control of most foreign-owned companies, nationalising the mines in 1966 and the oil and gas industry five years later.

Driven by a fiercely nationalist spirit, the regime of President Houari Boumedienne built up giant state corporations. Millions of dinars were spent on setting up industrial complexes, ranging from steel works to chemical factories, with the country borrowing heavily on the basis of future oil income.

But the heady days of the 1970s came to an abrupt end with the dramatic fall of oil prices during the next decade. Almost overnight, Algeria found itself with bloated state industries, producing low quality goods which no-one wanted to buy. The shortfall in foreign earnings led to cuts in the importation of spare parts needed to keep the state giants working and, in many cases, factories were left to function at only 50% of capacity.

At the same time the country was burdened with a staggering foreign debt of $26bn. Servicing the debt is eating up most of Algeria's foreign earnings. The crisis was aggravated by widespread corruption, which burgeoned under the rule of the former single party, the Front de liberation nationale (FLN). Greedy party officials siphoned off state funds to build villas and buy expensive French jewellery for their wives. A former minister claims that more than $20bn disappeared from the state coffers into the pockets of corrupt officials.

In this atmosphere, it is scarcely surprising that so much of the population has been attracted to the alternative offered by the Islamic fundamentalists. Preaching a message of social justice, the main fundamentalist party, the Front islamique du salut (FIS), took 55% of the vote in local elections in 1990. The party was on the verge of repeating this victory in general elections in 1991, when the army stepped in and called off the poll.

The challenge for Algeria's military-backed regime is to correct the mistakes of the past 30 years and revive the country's moribund economy. Government officials talk about rolling back the state sector and opening the country to foreign investment. But steps towards a market economy have been hesitant, with overriding concern expressed about the social impact of the reforms.

The recovery programme

Every Sunday, a committee of senior officials chaired by the trade minister meets in Algiers to decide whether or not to authorise hundreds of import requests. Their task is to ensure that valuable foreign currency is not spent on non-essential imports. The controls, introduced in November by the prime minister, Belaid Abdessalem, are a key element of his crash austerity programme to pull the country out of its deep economic crisis.

But the decision to impose import controls on a wide range of products is in danger of stifling businesses, which suffer from a shortage of spare parts and raw materials. Many investors were caught out when the restrictions were introduced. In one case, an Algerian businessman living in Paris returned home to start a factory producing foam mattresses. But after getting his business up and running, he received an official notice prohibiting him from importing the raw materials he needed to manufacture the mattresses. Forced to close down, the factory now stands empty.

Such incidents are symptomatic of the lack of a coherent government approach towards turning Algeria into a free market economy. The reform programme was launched in 1988 but five years later the state still dominates most areas of economic life. There has been much talk in government and business circles about a new code for investments, a shake-up of the public sector and liberalisation of trade controls. But there has been little in the way of action. "The main feature of the government's economic programme is stunning inactivity," said a Western diplomat who has been in Algeria for several years.

The almost yearly change of prime ministers has undermined any attempts at a coherent economic programme. Every head of government seems to believe that he has the answer to the country's economic ills, and undoes the decisions implemented by his predecessor.

Belaid Abdessalem is no exception. On taking office in July 1992, he reinstated government controls on imports and suspended part of the Law of Credit and Money which in April 1990 had opened the country to foreign investors.

The long delays in reforming the economy have given rise to fears that the authorities are not fully committed to a programme of economic liberalisation. The appointment of Belaid Abdessalem as prime minister in July 1992 to replace the reformist Sid Ahmed Ghozali was widely seen as a setback to advocates of liberalisation.

These concerns have been fuelled by recent comments from the head of state, Ali Kafi. "The transition to a market economy will take place in an orderly manner," he said in an address to the nation at the beginning of May. "Those changes which need to be made to our economy will not be introduced at the expense of our fundamental principles of social justice. The Algerian state will maintain its role in this field and will endeavour to protect the most deprived sections of society."

These issues have come to the forefront in discussions with the IMF which had prescribed a strong dose of economic austerity. Under the terms of a 1991 agreement with the IMF, Algeria agreed to liberalise prices and devalue the dinar in return for the release of a $400m loan.

The country has gone some way towards meeting these demands. In September 1991, the dinar was devalued by 22% and over the following six months the government removed subsidies on a range of consumer products. Basic foodstuffs, such as milk and bread, continue to be subsidised to avoid aggravating the social crisis.

But these reforms have not satisfied the IMF. It wants the dinar to be devalued by at least a further 50% and more action to be taken towards liberalising foreign trade before giving the green light for additional credits. Abdessalem has apparently vetoed these proposals, arguing in favour of a strong dinar. Instead, the government is planning to address the IMF's demands by adopting a new code of investments and introducing a system of parallel exchange rates, originally scheduled for the end of 1992. Officials now say these measures are due to come into effect in the next few months.

Reaching an accommodation with the IMF is crucial for Algeria as this would open up the way for loans from other sources. Several creditors, such as the European Community, are holding back funds pending an agreement between the IMF and Algeria. The ideological gap between Abdessalem and the IMF is jeopardising such an agreement, leading to speculation that Abdessalem's days as prime minister could be numbered.

Salvation from oil

Despite the fall in oil prices in recent years, the Algerian government still believes the oil sector can spearhead the country's economic recovery. Officials from the state run oil giant, Sonatrach, say many existing oil fields are underexploited, while large areas of the country have yet to be explored.

Oil revenue accounts for virtually all of Algeria's foreign earnings. But last year's figures were disappointing, despite the inauguration of two new oilfields at Hassi Guettar and Hassi Chergui, and an increase in exports of crude and refined products from 570,000 b/d in 1991 to 580,000 b/d in 1992. Sonatrach's earnings fell by a billion dollars, from $11.9bn in 1991 to $10.9bn in 1992. The company said lower prices were to blame for the fall in the value of exports.


The oil industry is in urgent need of reform. Sonatrach officials put the emphasis on new technology, particularly in the field of exploration and exploitation. Most of Sonatrach's technology is outdated, but in the current economic climate, the government cannot afford to provide the massive injection of cash necessary to revive the stagnant oil industry.

Official studies estimate that Algeria faces a decline in sustainable output to between 300,000 b/d and 500,000 b/d by early next century, without new oil finds. Sonatrach needs to bore around 100 exploration wells a year in the hope of finding new reserves and keeping up current production levels of 770,000 b/d. Yet at the moment, Sonatrach has only drilled an average of 15 wells a year.

At the same time, Sonatrach suffers from a disastrously low rate of extraction. The company estimates it will only be able to extract two billion tonnes out of the eight billion tonnes of oil reserves. This recovery rate of 25% compares with a world average of 50%. In some cases, such as at the Rhourde Nouss oil field, the recovery rate is as low as 7%.

The Algerian authorities see their salvation in the opening up of the oil sector to foreign investment. This would pave the way for an influx of foreign capital and the latest skills and technology. Plans put forward by the prime minister at the time, Sid Ahmed Ghozali, to reform the country's 1986 hydrocarbons legislation came before the National Assembly in December 1991. The parliament, made up of deputies from the former ruling party, the FLN, opposed the reforms, seeing them as an attempt to sell off the family silver.

After a long struggle, Ghozali managed to push his proposals through parliament. Under the new legislation, international oil companies would be allowed to explore for oil in return for an upfront payment for entry rights. The companies could also enter into partnership deals with Sonatrach to exploit any finds. The authorities hoped the state of the art technology brought in by foreign companies could lead to the discovery of new reserves and increase the recovery rate of oil wells already in production.

Ghozali believed the reforms would bring in more than $8bn in direct revenue from the selling of entry rights to international oil companies. Sonatrach officials estimated earnings from oil exports could increase by $3bn by 1996 and by $6bn by the end of the century due to higher production levels.

But Ghozali's ambitious plans have so far failed to take off. There have been some contracts with foreign firms, but not on the scale originally expected. The greatest setback came in July 1992, when Ghozali was replaced by Belaid Abdesselem. As an old-fashioned nationalist, who oversaw the expansion of the state sector in the 1960s and 1970s, Abdesselem is fundamentally opposed to selling off a key Algerian resource.

On taking office, Abdesselem launched a virulent attack against foreign oil companies, accusing them of wanting to buy into Algerian oil at a cut price. His chauvinistic attitude has without doubt slowed down the negotiations with potential international partners who baulk at the high front-end bonusses and other entry fees they expected to pay for the privilege of developing Algerian oil.

But the Algerian authorities insist that they are still committed to opening up the oil fields. According to the energy minister, Hacene Mefit, discussions with international firms are continuing but at a slower pace than initially envisaged. "I thought we were on the point of concluding our first agreement at the beginning of the year," said Mefti in a recent interview. "But new contractual problems sprung up and delayed the negotiations."

The Algerian government put out to tender ten oil concessions. Two of the fields have failed to attract international interest, while there has been a lukewarm response to three others. Negotiations on the remaining five concessions, which will require investments of billions of dollars to develop, are expected to last until the end of the year.

Officials admit the talks may continue into 1994, given the difficult and complicated nature of the discussions. But they remain optimistic that an initial deal on a concession at Rhourde el Baguel may be struck soon. They say this could set an example for other contracts and help speed up the negotiations.

Gas pipe dreams

After years of protracted negotiations, work has started on the construction of a pipeline to carry Algerian natural gas overland through Morocco and across the straits of Gibraltar to Europe. The project, known as the Gazoduc, is of vital importance to Algeria, as it will enable the country to develop further markets for its natural gas. The pipeline will also have a significant psychological impact, as it will serve as a symbol of Algeria's desire to tie itself ever more closely to Europe.

The cost of building the Gazoduc, estimated at $1.3bn, will be financed by the Spanish public gas company, Enagas. It is expected to be completed by September 1995 and initial capacity will be 10bn cubic metres a year, although there are plans to double this.

The pipeline will stretch for some 1,200 kms from the gas fields of Hassi R'mel in Algeria to Seville in southern Spain, via Morocco. Laying the pipeline across the straits of Gibraltar will be one of the most difficult aspects of the project, due to the depth of the sea, the complex geology and the strong currents.

Initially the pipeline will provide Algerian gas solely for the Spanish market. At the moment natural gas accounts for just over 5% of Spain's fuel needs, but this is expected to rise to 13% following the country's decision in 1991 to phase out all its nuclear power plants. Spain already imports 4bn cubic metres of Algerian natural gas annually and will receive an additional 6bn cubic metres over a period of 25 years through the Gazoduc pipeline. Algeria is also looking at using the pipeline to supply gas to other countries such as Portugal, France and Germany, which have expressed an interest in the project.

The Gazoduc pipeline to Spain will complement a similar 2,500km pipeline which links Hassi R'mel to northern Italy, via Tunisia and Sicily. The pipeline currently carries around 12bn cubic metres a year to Italy and this is expected to double by next year.

Algeria believes natural gas exports can make a significant contribution to its balance of payments deficit. The country has natural gas reserves of 3,000bn cubic metres, which accounts for 2.3% of the world's total reserves. Energy officials believe gas will play a greater role in the fuel needs of Europe in the future, particularly due to concerns over the environmental impact of other fuels. They estimate Europe will need to import an additional 75bn cubic metres of gas by the year 2000.

With the construction of pipelines to Italy and Spain, Algeria hopes to become Europe's major gas supplier over the next decade. The pipeline will enable the country to export 40bn cubic metres of gas a year to Europe by the end of the century. In order to meet this demand, Sonatrach is placing greater emphasis on exploring gas fields in the south of the country, which have been largely neglected in the past.

Debt morass

There were gasps of disbelief when Algerians opened their newspapers one morning in April, and learned how their government had been handling the country's foreign debt. "$35bn repaid in four years," screamed one headline. For days to come, one of the main talking points in Algeria was how the country still owed at least $25bn if $35bn had flowed out to its creditors.

The explanation is simple. Over the past four years, Algeria has paid off one set of creditors by borrowing from another. More shocking is that there was a net transfer of $10bn in favour of the creditors, without any real improvement in the size of the debt.

The debt has its roots in the grand industrialisation programme of the 1970s. Algeria borrowed heavily to finance large industrial projects, aimed fantastically at turning the country into the Japan of Africa by the year 2000. The sharp fall in oil prices in the mid-1980s sent shock waves through the economy, which suddenly found itself with a shortfall of more than $4bn dollars in meeting its foreign obligations. Rather than reschedule its debt, Algeria chose to raid its foreign exchange reserves and take out short-term loans, in the hope that oil prices might rise again.

But this solution proved short-sighted, as oil prices remained low. The government's action drained the reserves of the Central Bank to virtually zero, while at the same time service payments doubled from the 1985 level of $4.79bn to more than $9bn in 1991. Over the course of the six years, the proportion of Algeria's foreign earnings being used to service the debt has also doubled and it now consumes more than 70% of the country's hard currency revenue.

Algeria has repeatedly ruled out rescheduling the debt, fearful of the signal this would send to the country's creditors. Instead it has adopted a variety of measures to reduce the overall level of borrowing. The government is seeking to improve the reserves of the Central Bank, which now stand at around $2bn, and to limit the number of short-term loans.

The treasury is also aiming to reduce interest payments on the debt through negotiations with its creditors. One option under consideration is to restructure the debt and increase the period over which it has to be repaid.

At a recent news conference, the finance minister, Ahmed Benbitour, expressed optimism about Algeria's ability to honour its foreign debts. "Our respect for our commitments can only reinforce our position in the eyes of our foreign business and financial partners," said Benbitour. "The country's financial situation is improving. Like any company, Algeria suffers from a problem of cashflow, rather than insolvency."
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Title Annotation:Special Feature; Algerians
Publication:The Middle East
Date:Jul 1, 1993
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