General economic profile of Algeria

Contingent to Europe, Africa, and Arab nations, Algeria is the largest of the five Maghreb countries (Mauritania, Morocco, Algeria, Tunisia and Libya), the second largest country on the African continent after Sudan and tenth largest in the world. This strategic geographic location offers many advantages likely to boost investment potential, in particular foreign investment in export-oriented activities. The hydrocarbons sector is the backbone of the economy. At the beginning of the Nineties, the Algerian government started a process of transition from a centralised to a market-oriented economy by implementing stabilisation and structural adjustment programmes with the technical assistance and financial support of the IMF, the World Bank, and the European Union. A significant progress has been made in structural reforms thanks to this programme, financial and economic indicators have been successfully stabilised, and a more dynamic private sector is emerging, attracting greater inflows of foreign direct investments (FDI). Algeria’s economic growth has continued to be underpinned by ongoing growth in oil and gas exports, (revenues from hydrocarbons represent 97 percent of export earnings from goods and non factor services), leading to a large increase in the trade surplus ($50 billion). Thus, GDP grew from 3 percent in 2000-02 to nearly 6 percent in 2003-04 and 5.1 percent in 2005. Thanks to taxes on oil, which represent more than 60 percent of public revenue, this comfortable financial situation led authorities to pursue an expansionist budgetary policy and launch the Complementary Plan for Support to Growth (Programme complémentaire de soutien à la croissance – PCSC), which earmarks public expenditure for the period 2005-09, and the National Programme for Agricultural Development (PNDA).

Per capita GDP rose from $1783 in 2002 to $3100 in 2005, with purchasing power parity estimated at $7189 in 2005, fuelling an improvement in living standards throughout Algeria. Multi-year projections in the 2005 finance law show an average growth rate of 5.3 percent a year over the period 2005-2009. Prudent management of oil income has enabled Algeria to reduce debt while maintaining reserves. Thanks to the Central Bank of Algeria’s restrictive monetary policy, inflation was kept down to 3.6 percent in 2004 and 1.5 percent in 2005. With public debt rolled back to 24.7 percent, foreign-exchange reserves equivalent to nearly 24 months of imports and a surplus in the overall budget, Algeria has finally succeeded in attaining economic stability. The unemployment rate fell from 23.7 percent in 2003 to 17 percent in 2004 and 13 percent in 2005. The State continues to play a dominant role in managing the economy, though its role is decreasing. The State continues to own most arable lands and real estate and dominates investment, concentrated in the hydrocarbons sector. Many sectors have been opened to privatisation over the past two years: telecommunications, maritime and air transport, agriculture, tourism and mining as well as energy. Nearly 400 public entities have been privatised or shut down since the beginning of the privatisation process but there remain some 1200 to be privatised. The government announced recently that all state owned companies are eligible for privatisation except those working in strategic sectors like Sonatrach (oil) and Sonelgaz (electricity).

Moreover, economic and institutional reforms launched in various sectors testify to the authorities’ firm determination to integrate Algeria into the global economy. The main social and economic challenges facing the country are:

 Intensification of structural and institutional reforms
 Ongoing liberalisation of foreign trade
 State disengagement from production, in a move to attract private investment
 Promotion of know-how and transfer of expertise
 Improved prospects for growth
 Diversification of the production base and strengthening of the non-hydrocarbon industrial sector
 Restructuring of financial services

A capital expenditure programme was launched in 2001, called the Support to Economic Recovery Programme (PSRE), endowed with a $7 billion budget that accounted for 8.5 percent of GDP in 2004 and covering the period 2001-2004, which made it possible to boost growth in the short run. This was then supplemented by a complementary programme to support growth (PCSC) and another targeting wilayas in the South and the high plateaus, with a preliminary investment budget of $65 billion (DZ8000 billion) for the 2004-2009 period.

The second PCSC focuses on six main priorities: improvement of living conditions ($25 billion), development of infrastructure ($22 billion), support for economic development ($4 billion), development of regions in the south and high plateaus ($10 billion), modernisation of public utilities ($3 billion), and development of new communication technologies (nearly $1 billion). Sector-wise, the programme gives priority to major infrastructure projects in transport, public works, and housing. The list of projects is available at: http://www.cg.gov.dz/ Algeria’s external position has improved. The trade balance surplus rose to $25.64 billion in 2005 (up 86 percent over the 2004 figure) thanks to a significant increase in income from exports (43.4 percent). The rate of coverage of imports by exports rose from 175 percent in 2004 to 226 percent in 2005.

Imports rose to $20.35 billion in 2005, made up primarily of capital goods (42.30 percent of total), especially transport equipment, machinery, telecommunication equipment, and pumps. Imported foodstuffs account for 17.62 percent of total, worth $3.6 billion, made up of cereals, semolina and flour. Hydrocarbons dominate exports, representing 98.03 percent of total volume in 2005. Soaring oil prices worldwide made it possible to record a 44.06 percent increase in revenues compared to the 2004 figure. Non-hydrocarbon exports remain marginal.

The European Union is Algeria’s largest trading partner, followed by the US. Imports from the EU reached $11.26 billion in 2005, France being its number one supplier with a market share of 22 percent, followed by Italy (7.5 percent) and Germany (6.2 percent). Exports to the EU came to $25.6 billion, Italy being its primary client (16 percent) followed by Spain (11 percent) and France (10 percent).

Foreign direct investment (FDI) in the hydrocarbons sector grew from $671 million in 1999 to $2.3 billion in 2003. Over the period 1999/2003, foreign companies in partnership with Sonatrach and its subsidiary companies in exploration and development of existing oil fields invested a cumulative $8.6 billion in investments. New legislation relating to hydrocarbons opens up opportunities for foreign investment in Algeria’s oil sector, including excavation, pipelines and transport as well as downstream operations such as petrochemical processing. France is the third largest investor in the country, behind the US and Egypt. In December 2001, Algeria and the EU concluded negotiation of the Association Agreement, ratified in March 31, 2005 and effective since September 1, 2005. The Association Agreement will commit both parties to further liberalisation of bilateral trade and is intended to have Algerian businesses and consumers share in the benefits of enhanced trade and investment ties. The Agreement provides for the gradual removal of import duties on EU industrial products over twelve years and eliminates duty on 2000 other products. It also provides for an exchange of concessions regarding trade in services. Negotiations for Algeria’s accession to the World Trade Organization are in the final stages.

Continue to Section 1.2. Main Challenges