The Algerian Economy

March 28th, 2010

IN AN UPWARD TREND, THE ECONOMIC INDICATORS ARE CONTINUING TO IMPROVE

Algeria’s economy is performing well, with all of the country’s major macroeconomic indicators on an upward trend. The economy has reached an average annual growth rate of 5% in recent years, inflation has remained under control, and unemployment is steadily decreasing. The evolution of the country’s major macro-economic and financial indicators demonstrates the good health of the Algerian economy. Rising oil prices around the world have allowed the country to strengthen its fiscal and external balances, and build up massive foreign exchange reserves.

Algeria is the world’s third-largest natural gas producer and tenth-largest oil producer. The hydrocarbons industry therefore remains the backbone of the economy, accounting for around 45% of total GDP, the nearly all of its export revenues and over three-quarters of its fiscal revenues.

Foreign direct investment (FDI) in Algeria has been on a steadily rising path in recent years, and the country has become a very active country in attracting foreign investments.

Public-private partnerships are developing significantly, notably in build-operate-transfer projects. The law allows foreign investors to fully repatriate profits, dividends and the proceeds of potential asset sales.

ECONOMY AND TRADE

When he came to power in 1999, on the promise of implementing a range of political, economic and social reforms, President Bouteflika boosted the country’s ailing economy with a US$18 billion public-sector spending program. This generated four years of steady growth and won President Bouteflika a wide public support. It also reduced the country’s massive unemployment, bringing it down to 23%. It currently stands at around 13%.

ECONOMIC POLICY

Algeria is spending a lot of money for the creation of jobs for those entering the economy. Success on this front is seen as crucial to the country’s ability to sustain its growth, and its efforts to diversify its economy beyond the oil and gas sector. Considerable progress has already been made, with education being free to all, and school attendances more than doubling to in excess of 5 million students.

The government has succeeded in privatizing certain sectors of the Algerian economy, and has encouraged industry to form joint ventures with some state-owned and operated organizations. Algeria is conducting negotiations to join the World Trade Organization, a step that is seen as very positive in its implications both for domestic business and for inward investment.

The vast majority of the population lives along the Mediterranean coast, which occupies some 12% of the country’s land mass. This of itself creates a large urban population, with some 45% of the country’s population living in cities such as Algiers. The government’s economic policy has some challenges trying to stem the mass migration of people from the rural areas to the more affluent cities. In part, support for Algeria’s agricultural sector is designed both to accomplish this, and to generate greater wealth in a potentially lucrative sector.

The banking sector has been liberalized since 1990, and there are some 22 public andprivate-sector banks, 12 of which are foreign-owned. Reforms at the end of 2003 paved the way for investment banks and leasing companies. Similarly, a massive reform of the telecoms and postal sector since 2000, and a new legal and regulatory framework for a multi-operator telecommunications infrastructure are now in place. The World Bankcurrently rates Algeria’s telecommunications market as the most liberalized in the MENA region.

ECONOMIC PERFORMANCE

Thanks to its oil and gas exports, Algeria currently runs a trade surplus. This rose to US$39.07 billion at the end of 2008, up by more than 20% on the prior year’s figure of US$32.53 billion. Imports, which range from consumer goods to medical and technical supplies, were worth US$39.15 billion in 2008, up 42.7% on the previous year. The country’s GDP, in terms of purchasing power parity, amounted to in excess of US$240 billion in 2008, and Algeria continues to build up its foreign reserves, despite the downturn.

According to informations released by the Algerian National Agency for the Development of Investment (ANDI), in January 2009, foreign inward investment into Algeria was expected to continue in 2009, on the back of “good economic indicators.” The economy grew by over 3% in 2008 and is expected to maintain positive growth in 2009, despite the global recession.

France currently provides more than 30% of Algeria’s imports, and some 60% of Algeria’s trade last year was with the European Union. An agreement between Algeria and theEuropean Union envisages the creation of a free-market area, with the phasing out of tariff barriers over the next decade. The Algerian government has also said that it intends to dismantle all monopolies in the country by 2010—a necessary condition of its joining the WTO.

Much of Algeria’s current domestic economic performance outside the oil and gas sector comes from the success of its liberalization program. Algeria is in the process “of reviewing all regulatory matters and installing a (modern) legislative framework to give (the country) a wholly liberal economy.”

Apart from hydrocarbons, areas that could be attractive to investors, and to companies looking for joint venture deals in Algeria include housing, agriculture, and some mining of local ores. Algeria is also cited by the World Bank as having considerable potential as a manufacturing base, given its proximity to Europe.