Share the article
twitter-iconcopy-link-iconprint-icon
share-icon
AfricaNovember 7 2005

Oil revenues aid recovery

Algeria is working hard to recover from years of civil war. Its twin aims of social reconciliation and fiscal reform include restructure of the financial services sector. James Eedes reports on progress.
Share the article
twitter-iconcopy-link-iconprint-icon
share-icon

Late in September, Algerians voted overwhelmingly in favour of a deal to offer amnesty to all but the worst perpetrators of atrocities committed during the north African country’s decade-long civil war throughout the 1990s. Despite protestations from human rights campaigners, who said the move simply papered over a wrenching part of the country’s history, the referendum marked another tentative step towards normalisation.

Sustained relative stability has put Algeria back on the map, with immediate investment opportunities available in the hydrocarbon sector and, shortly, a slew of other opportunities expected on the back of a massive public investment programme. But peace is fragile and is not helped by social tensions, which are being exacerbated by high unemployment and sporadic acts of terror by Islamic fundamentalists.

National reconciliation has been one of president Abdelaziz Bouteflika’s twin priorities since he was first elected in 1999 in the country’s first presidential elections (he was re-elected by a wide margin in 2004). Algeria still bears raw scars from the civil war that tore the country apart and caused up to 200,000 deaths. In 1991, the then military-controlled government nullified elections that were heading for a victory for the fundamentalist Islamic Salvation Front. That triggered the civil war, which was marked by terror tactics on both sides.

Mr Bouteflika’s other priority has been economic reform. Aided by strong oil and natural gas export revenues and substantial fiscal stimulus, the country is enjoying a significant economic upturn. Real gross domestic product (GDP) growth is forecast at 5%-7% in 2005, following estimated growth of 5.5% in 2004. And all key economic indicators – including inflation, reserves and debt – are in healthy shape.

For his second term, Mr Bouteflika’s main priority has been to transform a centrally planned economy into a market economy, liberalising trade and harnessing the private sector. Key reform programmes to be pursued include reform of the judiciary, reform of the educational system to align it with the needs of the new market and knowledge economy, and redefining the role of the state and modernising the administration. The government plans to privatise the remaining 1200 state-owned enterprises.

Public investment

With national coffers swelled by a sustained boom in energy prices, the government is planning to spend $55bn on a public investment programme until 2009. Speaking to The Banker, finance minister Mourad Medelci said the investment would be targeted towards infrastructure to support economic growth, including roads, railways, dams and desalination plants, as well as investment in public services such as education and health. According to Mr Medelci, the capital injection is intended not only to grow the economy but also to broaden the economic base away from its heavy concentration in the hydrocarbon sector. The aim is to stimulate the domestic private sector but foreign firms will be invited to tender on large-scale projects. As an immediate consequence, Mr Medelci anticipates a strong boost to the construction materials sector.

The other key pillar of the government’s reform programme is the long-delayed restructuring of the financial services sector, which now has renewed impetus. Mr Medelci emphasises the government’s commitment to privatisation of the state-owned banks. “We have made the decision to proceed and the process is under way,” he says pointedly, answering criticisms that despite promises of reform, the government has been slow to deliver.

Plans to privatise

Credit Populaire d’Algérie (CPA) is slated for privatisation by July 2006, and privatisation of Banque Nationale d’Algérie (BNA) and Banque du Développement Local (BDL) will follow. Mr Medelci says privatisation will proceed “gradually” to avoid risks and disruption to the banking sector, but critics contend this leaves the timeline open-ended and vague.

Although privately-owned banks are licensed to operate in Algeria, they occupy only a small segment of the market. More than 90% of banking sector assets are held by state-owned banks, which have historically been forced to lend on non-commercial terms to generally loss-making public enterprises. Consequently, non-performing loans are high.

The May 2003 collapse of Kalifa Bank, the country’s largest private bank, and two subsequent liquidations of privately-owned banks in the following two years severely eroded public confidence in the privatisation process.

“The reforms are not just about privatisation,” says Mr Medelci. “We are in a very advanced stage of implementing a modern payments system.” He points out that Algeria’s financial sector is constrained by a basic lack of infrastructure that either prevents basic banking processes altogether or permits them with great difficulty.

Trade liberalisation

Another important area of reform has been trade liberalisation. After years of negotiation, Algeria and the EU have reached an Association Agreement. Under the accord, Algeria will cut tariffs on EU agricultural and industrial products over the next 10 years, and the EU will eliminate duties and quotas on many Algerian agricultural products. In December 2002, Algeria signed a co-operation pact with the European Free Trade Association (EFTA), providing for expanded and liberalised trade with EFTA members (Iceland, Liechtenstein, Norway and Switzerland). Algeria is also pursuing membership of the World Trade Organization, slated for 2006.

Algeria’s reform agenda is long and complex. Its trump card is the revenue windfall from high energy prices that provide it with the resources to restructure the economy and ameliorate any painful social consequences of reform. Even if prices soften, the oil and gas sector shows considerable unrealised potential, with further fiscal revenue upside.

Hydrocarbon potential

In terms of oil, Algeria is estimated to have 11.8 billion barrels of proven oil reserves, the 15th highest in the world. According to the US Department of Energy, with recent oil discoveries and plans for more exploration drilling, proven oil reserve estimates could climb upward in coming years.

Analysts generally consider Algeria to be underexplored, even though it has produced oil since 1956. Algeria’s National Council of Energy believes that the country still contains vast hydrocarbon reserves. A hint of this potential has been significant new oil and gas discoveries, largely by foreign companies, in the past few years.

Algeria wants to increase its crude oil production capacity significantly over the next few years by attracting more foreign investment. Energy minister Chekib Khelil has stated that his goal is to double the number of companies operating in Algeria, restructure the domestic oil industry and establish new regulatory bodies independent of the Energy and Mining Ministry.

In March 2005, the Algerian parliament adopted a new law to liberalise the hydrocarbons sector further. This law separates the commercial role of Sonatrach, the state-owned hydrocarbons company, from its previous regulatory and procurement/contracting functions. Sonatrach is now required to bid on domestic projects alongside foreign firms and will no longer be an automatic partner in all projects.

Algeria’s hydrocarbons sector is attractive to investors for other reasons: the country’s Saharan Blend oil, 45° API with negligible (0.05%) sulphur content, is among the highest quality in the world, and European countries rely on it to meet increasingly stringent EU regulations on sulphur content of petrol and diesel fuel. Approximately 90% of Algeria’s crude oil exports go to western Europe, with Italy as the main recipient followed by Germany and France.

In terms of natural gas, Algeria has 160,000bn cubic feet of proven reserves, the eighth largest in the world. Its recoverable natural gas potential, however, may be as high as 282,000bn cubic feet, according to the US Department of Energy. Algeria is a major natural gas exporter, mostly to Europe and the US – it accounts for one-fifth of the EU natural gas imports, second only to Russia.

IMF is upbeat

In October, an IMF mission visited Algeria to undertake its annual Article IV consultation. The mission’s head, Erik de Vrijer, speaking ahead of the IMF’s official report, was generally upbeat, citing robust growth, moderate inflation and a downward trend in unemployment. He also highlighted positive reform momentum, singling out the Association Agreement with the EU, the modernisation of the legislative and regulatory framework in the hydrocarbons sector, anti-corruption laws and the start of tax administration modernisation.

“These positive developments and the robust outlook for hydrocarbon exports in the medium term represent an excellent opportunity to speed up the pace of economic and social development in Algeria and reduce the rate of unemployment, which is still high,” he said.

“The additional hydrocarbon resources generated by the hike in oil prices are increasing the authorities’ leeway for modernising the infrastructure, strengthening the available human and institutional capital and implementing the priority reforms, with a view to supporting private sector development and the creation of productive jobs.”

Was this article helpful?

Thank you for your feedback!

Read more about:  Africa , Algeria