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<text> <title> Algeria: Economic Policy </title> <article> <hdr> Economic Policy and Trade Practices: Algeria </hdr> <body> 1. General Policy Framework Throughout 1991 Algeria continued attempts to move away from its former reliance on autarchic economic development, characterized by central planning and heavy government control of all economic activity. However, at the end of 1991, there was a political crisis precipitated by the Islamic Salvation Front's (FIS) first round National Assembly victory, President Bendjedid's unexpected resignation January 1992 and the subsequent takeover by a military-dominated High State Council. While these events have dominated in Algeria, there is reason to believe that the Government of Algeria remains committed to the economic reform plan launched earlier. The government has attempted to reassure nervous investors and creditors that it will continue its plans to revamp the Algerian economy and will honor its debt commitments. The economic reform program underway since 1987 has continued to gain momentum, with significant measures adopted within the past year to open the economy up to foreign trade and investment. State companies have been formally divested of their former monopoly over imports and the prior system of import licensing has been abolished. Also, the 1990 regulations permitting both private Algerian and foreign firms to become distributors and wholesalers of a wide range of imported consumer and industrial products have been implemented. The first authorized dealers and wholesalers are beginning to set up their operations. Algeria has also applied for GATT membership. Following up on the liberalization of the investment code in 1990, the government passed a new hydrocarbon law in November 1991 governing investment in the hydrocarbon sector. The law would allow foreign firms to exploit, in partnership with the state oil firm, existing oilfields in Algeria for the first time since the hydrocarbon sector was nationalized in the late 1960's and early 1970's. Other reforms have continued to relax the former rigid system of price controls and have significantly reduced the gap between the official and the parallel market exchange rates of the Algerian dinar. Major revisions to the tax system and the tariff schedule that will both streamline their structures and reduce rates are slated to be introduced in 1992. Despite these changes, the government still retains a preponderant economic role, and inefficient state enterprises and chronic shortages are prevalent. The most important sector is the state-owned petroleum industry, which accounted in 1990 for 97 percent of exports, 23 percent of GDP, and 40 percent of Algerian government revenues. The oil price slumps in 1986 and 1988 drastically reduced Algeria's hard currency earnings, from 13 billion dollars in 1985 to 8 billion dollars in 1988, and forced the government to sharply curtail imports. Although the unforeseen rise in oil prices during the second half of 1990 provided temporary relief, Algeria's balance of payments situation remains difficult as a result of a heavy reliance on imports of foodstuffs, spare parts, and consumer goods combined with a high level of debt servicing. This situation has caused economic performance to be sluggish since the mid-1980's with marginally positive or negative growth rates registered each year. Given Algeria's difficult balance of payments situation, financing for imports has been essential. However, as part of its efforts to revise the debt structure, the government has attempted to separate financing from procurement of imports, preferring to rely on bilateral and other general credit lines, rather than supplier credits, to finance imports. Algeria's economic difficulties have caused U.S. exports to level off in 1991 after a significant increase from the mid-1980's through 1990. The increase occurred primarily because of the growth of sales of agricultural commodities financed by USDA guaranteed credits. Agricultural product sales grew from 282 million dollars in 1986 to approximately 460 million dollars in 1990, reflecting both Algeria's great reliance on agricultural imports and its current need for financing. Industrial exports also rose due to a cheaper dollar and the need of Algerian industries to modernize their operations. Algerian private enterprise remains crippled by difficult access to bank credits and especially foreign currency. Further, a punitive tax structure forces most private operators into black market transactions and takes away profit incentive from state enterprise managers. However, the private sector's role in construction and services, particularly tourism, is expanding and some private manufacturing firms are getting underway. 2. Exchange Rate Policies The dinar is a nonconvertible currency. A value for the dinar is maintained partly against a basket of currencies that roughly reflects Algeria's trade patterns. The rate is adjusted frequently to reflect the government of Algeria's domestic economic objectives. Since September 1987 the Central Bank has allowed the official rate to slide approximately 360 percent against the dollar in nominal terms. The pace of the devaluation accelerated during the first six weeks of 1991 and again in late September 1991. Despite its severe decline since 1987, the official exchange rate is valued at twice the parallel rate. The Central Bank has stated its intention to unify the official and parallel rates and make the dinar convertible by 1993. Since the dinar remains overvalued, further devaluation will be necessary to increase significantly nonhydrocarbon exports or reduce dramatically the competitiveness of imports in relation to local production. 3. Structural Policies During the past year, the Algerian government has continued to liberalize considerably the trade regime. The government enacted several regulations during the first half of 1991 (Executive Decree 91/37 of February 1991 and Bank of Algeria Regulation 91-03 of April 1991) that abolish the monopoly rights formerly held by state corporations to import virtually all products. Private and public firms inscribed in the commercial register are now allowed to import goods directly, although importation of goods destined for resale to third parties is limited to dealers and wholesalers established under the regulations adopted in August 1990. These regulations, supplemented by an April 1991 Ministry of Commerce order, permit private Algerian and foreign firms to become distributors and wholesalers of a wide range of imported consumer and industrial products except clothing. These wholesalers and distributors may use hard currency obtained outside of official channels to import goods, which may then be sold in hard or local currency depending on the product and on whether the goods are sold to retailers or consumers. The government anticipates that this new arrangement will stimulate agricultural and industrial production and alleviate shortages of consumer goods. The first dealers and wholesalers authorized under these procedures are beginning to set up their operations and import goods. The Ministry of Commerce order issued in April 1991 states that wholesalers or dealers that import foodstuffs, agricultural inputs, construction materials and books must comply with certain conditions. They must demonstrate ability to raise the necessary credit and have in place arrangements for transport and stocking capacity that conform to Algerian government regulations. Furthermore, their importations must conform to the requirements of tender documents available from the Ministry of Economy. Bank of Algeria Regulation 91-03 also eliminated the former import licensing system. The type and volume of imports, except where restricted or prohibited by law, are now dependent on the availability of foreign exchange or financing. Finally, Algeria has recently submitted an application for GATT membership and has adopted the harmonized tariff system. In tandem with this opening up of the trading system, the Algerian government is gradually moving towards adopting a market-oriented approach to allocate foreign exchange. The system of hard currency budgets for state enterprises and private firms, implemented in 1989, has been replaced by a much more flexible system, in which the Central Bank makes hard currency available from hydrocarbon earnings, which generate virtually all foreign exchange receipts, to the banks, which in turn allocate it to claimants according to certain priorities (imports of foodstuffs, medicines, and capital goods are assigned highest priority) and financial criteria. Exporters of agricultural products are allowed to retain 50 percent of their hard currency earnings and those exporting manufactured products can retain 100 percent, giving both types of exporters latitude to purchase additional imports beyond those that can be financed by allocations from the banking system. The Algerian government has announced that the tariff schedule will be revised in 1992 to reduce both the number of different tariff rates and the rates themselves. The 19 current tariff levels will be reduced to 8 and the maximum tariff rate will fall from 120 to 42 percent. Despite these significant moves to liberalize the trading system, hard currency availability and financing terms remain by far the most important constraints on purchases, outweighing such items as pricing and tax policies. Although used frequently in the past, the Algerian government is not promoting countertrade, particularly that involving hydrocarbon exports. The only regulatory constraints currently affecting U.S. exports are restrictive phytosanitary standards, which have limited sales of U.S. seeds. 4. Debt Management Policies Algerian government officials are proud of the country's excellent debt repayment record and have repeatedly expressed their commitment to continue paying Algerian debts on time. However, Algeria's debt burden has become progressively heavier since the mid-1980s owing to lower oil prices and dollar weakness. At the end of 1990, the external debt totalled 26.1 billion dollars, of which 24.2 billion dollars represented medium and long-term debt and 1.9 billion dollars is short-term debt. Repayments during 1991 are projected to total 9.1 billion dollars, of which 7.1 billion dollars is principal. The 1991 debt service level is projected to be about 77 percent of export earnings, somewhat higher than last year's level. Since the average maturity of Algeria's debt is 3.5 years, servicing it will continue to be a heavy burden during the next two years. To reduce the servicing burden, the Algerian government is attempting to restructure the debt, by obtaining medium and long-term loans to repay obligations coming due in the near future. The implementation of some recent loan agreements will advance this process. However, private banks, many of which have reached internal limits on lending to Algeria, have generally been reluctant to extend further loans. Few U.S. banks are now active in the market. As part of its debt restructuring efforts, the Algerian government has sought to obtain more concessional financing, such as bilateral lines of credit. It has discouraged importers from asking suppliers for financing on the grounds that such financing, often limited to the short term, is much more expensive than existing long term lines of credit. Thus, imports are increasingly being directed to those countries with lines of credit in place such as France, Italy, Japan, Belgium and Spain. Algeria has also turned to multilateral sources for balance of payments financing. It has received 650 million dollars of World Bank structural adjustment assistance over the past two years. A 10 month IMF standby program was implemented in June 1991. The implications of Algeria's debt burden for U.S. trade are great. Competitive financing has become essential for sales to Algeria. Exim Bank and the Commodity Credit Corporation have guaranteed or financed the great bulk of U.S. sales to Algeria. 5. Significant Barriers to U.S. Exports Although the government has opened up the economy to greater imports, many barriers remain which are designed to conserve scarce hard currency and to protect local industry. These barriers discriminate against all foreign suppliers, not just those from the United States. The economic reforms underway have modified but not eliminated certain practices by Algerian government entities and state-owned firms that have impeded U.S. firms from obtaining service contracts, particularly in the engineering, civil works, and construction sectors. For example, Algerian government entities and state firms no longer automatically favor other Algerian state firms over foreign companies in awarding service contracts. However, the ability of foreign firms to obtain such contracts depends critically on their ability to offer attractive financing; firms from countries that have bilateral lines of credit with Algeria have an advantage over U.S. firms in this regard. In addition, excessive demands for extra services or the acceptance of responsibility, levied on foreign companies in the past by Algerian government agencies or state companies, have diminished. They are displaying more flexibility on contract terms and conditions, enhancing the ability of foreign firms to compete successfully and prove their capabilities. Under the money and credit law adopted in April 1990, foreign banks are allowed to establish branches in Algeria after receiving government approval. They must maintain the same level of capital, which has not yet been defined, as Algerian banks. The insurance sector is currently a state monopoly but the government is considering opening it up to private and foreign firms. Algerian contracting standards are moving away from those inherited from the French at Independence and are increasingly negotiated on a case by case basis with foreign suppliers. However, they have posed problems for U.S. suppliers of seeds. Algeria requires that imported seeds be certified by an Algerian entity despite having already been certified in the United States. This requirement is particularly burdensome since the local certification process requires that the seeds be tested for three years before they can be approved. This procedure effectively eliminates the marketing of U.S. seeds not only because of its cost but also because manufacturers have developed new varieties within that time period. The Algerian government has also radically revised and liberalized its approach to foreign investment within the past year. Under the money and credit law, nonresidents of Algeria (defined as foreigners and Algerians who have not been resident in the country for the previous two years) are allowed to bring in capital to finance all economic activity not specifically reserved to the state (the sectors reserved to the state include telecommunications, domestic transport, power and water production and distribution, and refining and distribution of hydrocarbons). The form of such investments is not specified, leaving the door open to investors to establish their own firms or create joint ventures with private and public Algerian firms. Investments will be approved by the Central Bank based on their ability to promote employment, train Algerians, transfer technology, and assure foreign exchange stability. However, there are no explicit performance requirements in these or other areas. The money and credit law also states that foreign investors' capital, as well as their profits, interest, dividends, royalties, and other forms of investment income can be repatriated under conditions defined by the Central Bank. All of these funds also enjoy the guarantees specified by international conventions ratified by Algeria. Foreign investment in the oil and gas sector is now regulated by a new hydrocarbon law passed in November 1991. The law allows foreign companies to explore for oil in association with the state oil company. The foreign firms can exploit the deposits under a production sharing contract or joint venture with the state oil company. However, their share of the resulting oil production is limited to a maximum of 49 percent. The new law allows foreign firms to explore for and develop natural gas deposits as well as to exploit existing oil fields. Foreign firms' involvement in both activities would be in association with the state oil company. The law also allows international arbitration of disputes between foreign firms and Algerian entities. 6. Export Subsidies Policies Since 1986 the Government has placed increased importance on nonhydrocarbon exports. It has done so in an ad hoc manner, reflecting the fledgling state of the sector. The government has given preferential access to finance for private and state companies seeking to make export-related investments. It allows companies exporting agricultural products to keep 50 percent of their foreign exchange earnings and those exporting manufactured products to retain 100 percent. 7. Protection of U.S. Intellectual Property Algeria is a party to the Universal Copyright Convention and the Paris Convention on payments. The government of Algeria has a good record of respect for intellectual property rights. Generally, Algerian practice is to obtain authorization and pay royalties for proprietary technology. Copying of patented technologies is generally beyond Algeria's present technical capability. As for trademarks, most major international brands are unavailable on the local market. However, Adidas shoes, and several French products are made under license. While Algerian government policy is to enforce these trademarks, some counterfeiting exists, particularly of basic consumer goods. 8. Workers Rights a. The Right of Association From independence until 1989, workers did not have the right to form autonomous labor unions. In June 1990, the Algerian National Assembly passed a law which gave workers and employers the right to form independent trade unions. This law formally ended the monopoly of the ruling FLN party-linked General Union of Algerian Workers (UGTA) on labor representation. Under the June 1990 law, no government approval for the creation of a labor union is necessary. The result of the new law was a renaissance of labor activity in Algeria, as well as numerous strikes in all sectors of society. Although many of these strikes were not legally authorized under the terms set by the law, the Algerian government has not prosecuted the personnel involved. b. The Right to Organize and Bargain Collectively Both the June 1990 law on trade union activity and a law adopted in April 1990 on work relations provide for collective bargaining, which has been freely practiced throughout Algeria. Labor law also prohibits anti-union discrimination by employers against union members and organizers. c. Prohibition of Forced or Compulsory Labor Forced or compulsory labor is incompatible with the Constitution's sections on individual rights, and the Penal Code was amended in 1990 to ban it explicitly. d. Minimum Age for Employment of Children The minimum employment age is 16 years. The minimum age is enforced in the state sector, the country's largest employment sector. Enforcement is less effective in the agricultural and small private sectors, but violations are not widespread. With continuing economic hardship, however, more children are occupied in informal employment, such as street vending. e. Acceptable Conditions of Work Algeria has a 44 hour work week and strict occupational and health regulations. However, enforcement of these provisions has generally been lax. Minimum wages are fixed by government decree after negotiations between the government and UGTA. f. Rights in Sectors with U.S. Investments U.S. investment in Algeria is limited to four firms. Two oil service firms have a limited presence here to support the development and production efforts of Algerian and foreign oil companies. Two U.S. oil firms have production sharing contracts with the state-owned oil company to explore for oil; one of these firms has launched its exploration efforts. Conditions for workers at these existing U.S. investments as defined by the above-mentioned worker rights are better than those prevailing in the Algerian economy at large. Source: National Trade Data Bank, Agency: U.S. Department of State </body> </article> </text>