profile Algeria
mjuge@mail.utexas.edu
Sun, 25 Oct 1998 01:50:18 -0500
Algeria faces many challenges in its pursuit to enter the global economy
as a full participating member of the global market. The nation emerges
from harsh colonial beginnings and was forged from revolution. The violence
of its past echoes today with the present civil war that continues despite
the fact that there is an official cease-fire. Algeria is a country that is
too dependent upon oil for revenue. And though Algeria is making quite an
effort to adjust its economy to be more market oriented and less dependent
upon oil export revenues as well as trying to reform many of its Socialist
economic policies, attracting enough foreign investment to attain these
goals alludes them. Algeria's struggle for macroeconomic stability
continues and is further deepened with the crash of the stock markets in
Asia.
Algeria became a French colony following its invasion by the French in
1830 and would have a harsher colonial legacy than other French colonies in
the Middle East, namely Tunisia (Henry 1996:161). The nationalism of
Algeria took on a more directly secularist and Socialist tone. The Front of
National Liberation founded in 1954 by Mohammed Boudiaf would lead the
country in a war for freedom from the French. In 1962, Algeria gained its
independence from the French at the cost of losing over a million lives,
but would be dominated by the one-party rule of the Front of National
Liberation ever since (Financial Times, 12 January 1998: 13)(Financial
Times, 23 October: 6). From then on, it would be a one-party regime of a
Socialist doctrine, despite political attempts to reform to a multi-party
and open system later on. Algeria would face even more turmoil in 1992
with the civil war of the Islamists who were denied an electoral victory by
military intervention.
Algeria's economic crisis hit around 1986. Being too dependent upon oil
revenues, when oil prices sharply fell that year and a following decline in
export revenues during the mid 1980's thrust Algeria into economic turmoil.
Most of the MENA countries fell into both foreign and domestic debt during
the 1970' and 80's and the respective banking systems made the problem even
worse. The amount of domestic credit to GDP indicates the indebtedness of
a country. Algeria had a steady increase of total domestic credit to GDP,
and reached among the highest in the world after 1988 (Henry 1996: 26).
The high amount of domestic credit is a result of 1. Short-term commercial
bank loans that continue to be rolled over annually 2. Permissive
accounting practices 3. The failure of relying on a rentier economy which
depends to a greater or lesser extent upon oil revenues and worker
remittances. But more critical than the actual stocks of debt is the debt
service ratio, which is the payments of principal and interest to the
export revenues. From its accumulated debt prompted by the above-mentioned
causes, in 1986, Algeria's debt service ratio increased to 56%. In 1988,
Algeria paid more than its export revenues to service $8.5 billion to the
debt. Its debt service ratio was at a painful 100.3%. Though Algeria's
stocks of debt to GDP were relatively low, it had a high debt service ratio
indeed. The drop in oil prices was the actual catalyst to the economic
crisis in 1986, for Algeria and its exports dependent upon the price of oil
even for non-petroleum exports. But the problem became augmented. (Henry
1996: 27-30)
Algeria had pursued economic reform since the crisis in 1986. It had
joined the IMF back in 1971, but it wasn't until 1989 that Algeria finally
wrote a letter of intent and received credit from the IMF (Henry 1996: 33).
The government had always been wary of using external sources of assistance
in resolving its challenges. Many of the MENA have viewed the IMF as
neo-colonialists to a certain extent. I believe that Algeria's government
was most reluctant in involving the IMF for it had such a rememberable
colonial past and a hard won liberation. The IMF doesn't hold as much
leverage on Algeria as it does on other MENA countries. Even Algeria's
letter of intent was written while Algeria's ruling party was
uncharacteristically in disarray. Algeria reached standby agreements with
the IMF between 1989-90 of $155.7 million and between 1991-92 receiving
$300 million. After the military coup in 1992, the government avoided IMF
intervention till 1994. (Henry 1996: 34, 82) Algeria used state
intervention primarily in its economy. Algeria had about twice as much
domestic debt to GDP compared to the other MENA (with the exception of
Egypt), and most credit by the banks was given to the central government
and state enterprises (Henry 1996: 40).
Algeria's banking system is much less developed than the other MENA
countries. Many years of Socialism have created a largely informal cash
economy. It does not posses as strong of a central banking system. The
percentage of cash as a percentage to GDP has been consistently highest in
Algeria compared to the other MENA. The percentage of cash to GDP has
reached up to 35%. This points to the truth of a large informal cash
economy. (Henry 1996: 54) Without a strong and autonomous banking system,
President Chadly Benjedid's financial and political reforms wouldn't be
able to be carried through; furthermore, the large informal cash economy
would have inflation rates above interest rates.
After the economic crisis, Algeria attempted to restructure the banks and
public enterprises simultaneously. In 1988, eight "participation funds"
were established as state holding companies where each was concentrated n
one sector of the economy and each would own a part of each other. This was
done to encourage the enterprises to be more competitive and autonomous and
to change from a managed state economy. But the funds were in the end still
the responsibility of the planning ministry. (Henry 1996:56)
As far as the banks go, reforms were made in effort to liberate them from
the Ministry of Finance and the Treasury. And the Law of Money and Credit
officially did so. The banks would be responsible for its allocation of
credit rather than from government directives. Algeria's five commercial
banks could choose its clients and make its own credit decisions, subject
to the Banque d'Algerie credit ceilings. The result was that banks
generally kept their good clients while refusing each other's less
attractive one's, which resulted in an even larger cash economy of 50% in
1990. As far as autonomy, directors were still shifted around with the
shifting powers political alliances then as before the reforms. The
directors general of two major banks lost their jobs in an attempt to stand
up to the Treasury. In the end, banks were still at the whim of the
political powerbase. (Henry 1996: 55-57)
I would consider President Chadly Benjedid the major impetus of both
economic and political reform. His efforts would eventually fail after the
military coup in 1992, but he did initiate efforts between 1988-1992 to
reform both the economic and political systems simultaneously regardless.
After taking office in 1981, his real first opportunity to restructure came
after the riots in 1988, where he could overcome the FLN initiatives to
discredit him, for the FLN was in disarray. He was able to pass a letter of
intent to the IMF in 1989. Chadly wanted to introduce a multi-party system;
however, the FLN resisted any of the reforms. (Henry 1996: 75-76)
One of the emerging parties was an Islamist group the Islamic Salvation
Front (FIS). The FIS had enough in common with the President in terms of
wanting political and economic reforms, and one of those was the emergence
of Islamic banks. There was a deal where there would be formal recognition
of the FIS an exchange for support of his economic reforms. The hope of
Chadly was that the development of a multi-party system would divide the
power, but the FIS was gaining a clear majority in 1991 in legislative
elections. Chadly hoped that the FIS would accept his remaining in office.
But this changed when the FLN backed army cancelled the second round of
elections in 1992 and forced Chadly to resign in January of that year.
(Henry 1996:76-80)
The military coup that took place in 1992 not only would cancel
the elections (ending the political reforms that have until then been
enacted), but would distance Algeria from the economic reforms supported by
the World Bank and the IMF until 1994. In March 1994, Algeria started
renegotiating with the IMF when Prime Minister Redha Malek signed an accord
with the IMF in effort to lighten foreign debt and possible rescheduling.
Algerian officials prepared a new letter of intent. The deal provided a
standby loan of $500 million and unblocked funding from the World Bank and
the European Union. (MEED, 8 April 1994: 8) The World Bank would add 10 new
project loans in it Monthly Operation Summary which are major public works
projects such as: emergency agriculture, water and sewerage with financing
equipment, supply and consulting services, housing and motorway
construction. (MEED, 8 April 1994:18) These loans were a change in the
World Bank's strategy by accepting these public works, and thereby
accepting more of government's role in economic reform.
By the first half of 1997, Algeria showed marked improvement at least in
its macroeconomic stability. Reserves are over $5.3 billion, the inflation
rate had dropped from over 21% in 1995 to 15% in 1996 and hoped to be down
to 10% by the end of the year (MEED, 9 May 1997:21). Trade surplus in the
first six months of 1997 had reached $3.15 billion, which is twice the
surplus compared to that time a year ago; furthermore, exports increased to
$7.2 billion as imports fell 12% to $4 billion. (MEED, 5 September 1997:20)
It was even hoped that further debt reconstruction and IMF programs would
no longer be needed as soon as the agreements run out in 1998.
Algeria did restart its economic liberalization efforts as well. Ali
Bourkrami president of Cosob was appointed in helping to set up the stock
exchange by the end of 1997 (MEED, 7 November 1997:8). Plans were also made
to bring changes to the financial sector. Banks and insurance companies
were encouraged to form new groupings that are better at channeling
resources into housing and other investments. The reasoning of the new
groupings was that insurance companies have plenty of savings that aren't
being used, and banks need money to back investment (MEED, 9 May 1997:21).
Three new guarantee institutions were formed to increase savings and
refinance public sector debt. Among them is the state savings bank to be
converted into more of a housing and savings bank, and Banque Algerienne de
Development to be restructured to be an investment bank for small and
medium enterprises (MEED, 9 May 1997:21).
In August of 1997, Prime Minister Ahmed Ouyahia, in effort to continue
privatization and encourage foreign investment, wrote three decrees: 1. Tax
incentives for investment 2. Rules for governing both public and private
enterprises to be homogenized 3. A reduction of paper work. This is one of
the programs initiated by the plan to raise economic growth rate to 7%
(MEED, 5 September 1997:20). Other reform policies that the IMF support are
to downstream the oil industry where refineries and petro sectors are to be
opened to foreign Investment through partnerships, creating new financial
companies by merging certain state-owned banks and insurance companies and
open them to private investment , and increase housing development to build
800,000 homes by 2000 (MEED, 5 September 1997:20).
These are some of the efforts of Algeria to move from a state-owned
Socialist structure whose economy so much depends upon oil revenues to a
market economy that has a more viable non-oil industry. Structural
adjustment programs continued to be introduced in order to attract foreign
investment so to achieve this goal. 11 holding companies were set up in
1996 to take over the national state-owned enterprises, and were
responsible to restructure the companies and prepare them for
privatization. (MEED 7 November 1997:8) Restructuring is to take place in
staff (reduce staff who do paperwork, and the rest wouldn't be paid unless
their targets were met), stocks, finances operations, and sales (they were
now to be on the lookout for investors wanting to buy shares of their
company). Even state-owned enterprises that were not being controlled by
holding companies were restructured as well. As an example, there was to
be a binding contract between the client company and creditor banks where
the company had to stick to the agreed amount of production and sales in
order to retain its financing. (MEED, 7 November 1997:8)
Algeria's efforts have met with limited success. The economy still to this
day remains too dependent upon oil and gas. In a year, non-oil exports
declined by 40% to $495 million, privatization programs are failing to
really take off, GDP actually declined last year by 1% as compared to 4%
growth in 1996, housing construction stagnates with only a third of the
projected number of houses built, unemployment is at 28%, and the
restructuring programs introduced caused 96,000 workers to lose their jobs
(Financial Times, 23 April 1998:4). As a result, the IMF urged to take the
"credit facility" for another year after the three year, $1.5 billion
program expired. This is to reassure creditors and investors and help
relieve the uncertainty of oil prices, which fell $3 below the budget
projection (Financial Times, 23 April 1998:4). While there is a decline in
oil prices, Algeria will resume its debt service of $5 billion, while
dealing with this challenge as well.
There is a relapse in Algeria's economy, and its continued reliance upon
oil is not helping matters much. But what also ails Algeria is the civil
war. This situation keeps the European Union and other investors wary of
such an unstable situation, and the violence naturally causes more grief
upon the civilian population as well as the government. The Islamic
Salvation Front (FIS) when the first round of elections back in December of
1991, but the army backed FLN cancelled the second round of elections in
1992 and banned the FIS, and rounded up its leaders. The FIS took up arms,
and the FLN have used a military solution (Financial Times, 12 January
1998). The initial targets were security forces and foreigners. But as the
government has armed over 200,000 civilians and when the FIS is refused
support by certain villages, the attacks spread to be upon the population.
So far, 75,000 lives have been lost (Financial Times, 27 January 1998:20).
A cease-fire was declared back in September 1997, but one wing of the FIS
the Armed Islamic Groups (GIA) has broken away and continues to fight
(Financial Times, 22 May 1998:5)
This adds to a situation that keeps Algeria in a precarious position
economically. The European Union criticizes Algeria's refusal to allow the
UN to investigate reports of torture, and allowing some of the massacres
committed by the FIS to take place (Financial Times, 23 April 1998:4).
They, among others, feel that there is little they can do to resolve the
conflict. But this distrust in a government who is trying to show its
legitimacy will make investors wary. Algeria has from 1988 engaged in
efforts to achieve macroeconomic stability and structural reform. It has
attempted to restructure to a market economy from its old Socialist
structure since 1994. But the dependence upon an oil economy remains, and
the government which hides its own actions breeds mistrust with the global
economic community.
Algeria's condition in the world economy is much more precarious than that
of Tunisia's. Though Algeria has the benefit of oil revenues, Tunisia in
the end maintains macroeconomic stability, which Algeria tends to regress
back into instability both economically and politically. The modern states
of both nations are borne out of the French occupation. Both endured this
occupation, though Algeria's colonial history is more violent, and both are
under one-party regimes today. Their respective strategies of reform will
show similarities despite their diverging results.
Bibliography
-Henry, Clement; The Mediterranean Debt Crescent; American university in
Cairo Press
1996
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-1997: Marks, Jon. " Financial reforms planned to speed economic growth."
MEED v 41, n 19 (9 May): 21-22
-1997: " New government sets high economic targets." MEED v 41, n 36 (5
September): 20
-1997: Khalab, Roula. " 'What elections? Everyone in my family is dead.'"
Financial Times (23 October): 6
-1997: " The struggle to win investor confidence." MEED v41, n45 (7
November): 8
-1998: " Financial Times Guide to Algeria." Financial Times (12 January): 13
-1998: Warner, David. " The deadly waiting game." Financial Times (27
January): 20
-1998: Khalab, Roula. " IMF urges Algeria to extend credit facility."
Financial Times (23 April): 4
-1998: Khalab, Roula. " Algerian cease-fire divides leadership of banned
party." Financial Times (22 May): 5