Engineering Export Promotion Council Report ALGERIA EXECUTIVE SUMMARY Algeria is a large market for American exports, but one difficult to develop because of the ongoing political crisis and widespread terrorism. Indian exports to Algeria reached $0.15 billion in 1994, up over thirty percent from 1993 levels. Grains and petroleum- sector equipment and services comprise the bulk of U.S. sales. This export surge came as the Algerian economy is undergoing an immense transition. The Algerian government over the past 15 months has implemented a broad array of economic liberalization measures, backed with strong support from the IMF. It has substantially deregulated foreign trade. In addition, IMF financing and generous foreign debt rescheduling have made foreign exchange readily available to Algerian importers. The Algerian government also has substantially deregulated its investment and product distribution controls. After several years of disappointing economic performance, the government projects the economy will grow about four percent in 1995; the petroleum, agriculture and construction sectors appear poised for substantial expansion. Indian exporters targeting these and other market niches will find substantial opportunities. The murderous violence plaguing Algeria will challenge Indian companies seeking to capitalize on these opportunities, however. The economy likely will not expand if the political crisis continues. Armed gangs regularly attack infrastructure and economic facilities. Moreover, terrorists target both foreigners and Algerians alike. Any firm thinking of establishing a new operation or an office in Algeria will have to make security considerations a priority. Companies new to the market may find it best to use local distributors or agents able to undertake all the necessary legwork on the ground. Country Commercial Guides are available on the National Trade Data Bank on CD-ROM or through the Internet. Please contact STAT-USA at 1-800-STAT-USA for more information. The Algerian economy is now undergoing a wrenching transition from a state-controlled system to a market economy. The past eighteen months have witnessed more market-oriented reform measures than any previous period in Algeria's history. Overshadowing this tremendous progress in reorienting the economy, however, is the ongoing political violence wracking the country. Despite substantial help from the International Monetary Fund and the World Bank, and a generous foreign debt rescheduling, GDP registered growth of -1.1% in 1994; this followed negative growth of 2.2% in 1993. This disappointing performance stemmed from reduced gas export earnings, low agriculture-sector output due to bad weather conditions and continued public-sector production inefficiencies. In addition, new investment shied away from Algeria because of investor worries about the political/security situation. The government hopes that new investments in the hydrocarbons and construction sectors, as well as better rainfall, will hike economic output in 1995 by about four percent. Economic growth is essential to reverse the trend of rising unemployment. About a quarter of the workforce is unemployed, a problem with major political implications. Principal Growth Sectors Construction: One of the worst problems faced by young Algerians is the shortage of housing; the Government estimates Algeria needs over one million units immediately, as well as an additional 140,000 annually. Production in 1994 totaled only 80,000 units, however. Large, state-owned construction enterprises dominate the housing sector. They have suffered from constant financial difficulties, as well as shortages of key materials such as cement and steel bars. As part of its economic reform program, the Government plans to inject 30 billion dinars ($600 million) to improve the firms' balance sheets and improve their access to bank credits and imported inputs. The Government hopes up to 160,000 units will be built during 1995. Major Local and Third Country Competitors Algeria's domestic producers are not in a position to compete with their American counterparts. While Algeria has a relatively well-developed industrial base which covers most manufacturing sectors, local production is largely below international standards in terms of quality and range. It also is not sufficient to meet local demands. This is particularly true of consumer products, since basic industrial goods make up most of what is locally produced. The success in recent years of the local "trabendo" (contraband) trade in consumer goods demonstrated that Algerians are prepared to pay world prices for high quality imported goods. The U.S. has become Algeria's second largest trading partner following France. Italy, Germany, Spain, and to a lesser extent Japan, are the other main U.S. competitors. The four European countries' combined exports account for an annual average of 40- 60% of total Algerian imports in such sectors as telecommunications, computer equipment, mining equipment, building products, and water resource equipment. Suppliers from these countries also have staked out near-monopolistic positions in some sectors. Examples include France which supplies 70% of Algeria's pharmaceutical imports; Italy whose market share for food processing equipment and agricultural machinery has averaged 70% and 40% respectively in recent years; and Germany, which accounts for 40% of mining equipment imports. Other competitors have established specific market niches, such as Finland and Sweden in telecommunications, and Japan in telecommunications and water resource equipment. Government Role in the Economy Trade Liberalization: Although the economy was stagnant in 1994, the Government laid useful groundwork for the future. It broadly liberalized the foreign trade sector, abolishing in the summer of 1994 a list of 80 goods, mostly machinery and foodstuffs produced already by Algeria's public sector, whose importation previously was illegal. In January 1995 the Government abolished a second list of goods, mostly basic food commodities, for which special import permits were required. In addition, the Government has sought to make foreign exchange more readily available to importers in both the private and public sectors, by allowing commercial banks to buy foreign exchange from the Bank of Algeria (Central Bank). Thes banks' demand for foreign exchange assets is to determine the foreign exchange rate of the Algerian dinar. Since this system went into operation in September 1994, the dinar has depreciated 20%. The Government plans to allow commercial banks to trading in foreign exchange by the end of 1995. In addition, in June 1995 the Bank of Algeria began allowing Algerians to buy foreign exchange to pay for medical and educational expenses overseas. By 1996, the dinar may become fully convertible. Budget Austerity and Price Liberalization: Beyond the trade liberalization measures noted above, the Government sought to reduce inflation, estimated at 30% for 1994, and also bring domestic prices into line with world prices. The Government has followed a strict policy of budget austerity in which spending in many categories, such as infrastructure investment and wages for public-sector workers, fell after inflation adjustment. As a result, the Government has reduced the budget deficit to under 3% of GDP, down from about 9% in 1993. In tandem with the budget restraint, the government has implemented very tight monetary policy. Interest rates average about 24%. Despite these tough measures, price inflation remained stubbornly in the thirty percent range in early 1995. Interest rates are, therefore, unlikely to fall soon. To restrain consumption and boost domestic production, the Government also has cut subsidies and lifted controls on prices on nearly all items and eliminated the previous controls on profit margins for politically sensitive items such as foodstuffs. State Enterprise Reform: The reform policies above have had an adverse impact on the output of Algeria's industrial sector, which produces about 14% of GDP. Algeria's industry is marked by large, inefficient state-owned enterprises dependent on imported inputs and easy bank credits; many operate at only 35-40% of capacity. The dinar devaluation raised their costs substantially, while the tight monetary policy largely closed their access to financing. Industrial output during the first quarter of 1995 slumped nearly 8% from that of the same period of 1994. To remedy this the Government is restructuring companies which could be made solvent and providing them new financing. It will close firms which are chronically unprofitable. It also plans to privatize some firms. Infrastructure Situation Algeria, whose territory is one third the size of the U.S., has devoted significant resources to expanding and modernizing the transport and telecommunications sectors since the 1970s. Today, Algeria has a relatively well-developed infrastructure as a result. Unfortunately, armed groups fighting the Government have often targeted the power and telecommunications networks as well as rail and road transport lines. Shipping: Algeria has 12 main ports: eight are general purpose ports, and four are specialized hydrocarbon terminals. Algerian ports in 1994 handled a total of 82.2 million tons in goods traffic, 63.6 million tons for exports, and 18.6 million tons for imports. Passenger traffic was 408,400 passengers. Some of the largest ports (Algiers, Oran, Annaba) are being equipped with container handling installations. By 1995, a number of businessmen were complaining of difficulty finding shipping lines still willing to call on Algerian ports; like air carriers, fewer shipping firms are maintaining their service to Algeria. Telecommunications: The Algerian Post and Telecommunications Ministry operates telephone, telex, telegraph, and facsimile networks, a mobile telephone system, a public data communications network, and a maritime radio service. All new installations since 1986 use digital technology. The international telephone network links Algeria to most countries, and is more reliable than the domestic network; the domestic network also has suffered from acts of sabotage. Algeria relies heavily on satellite communications, particularly in the Sahara. DHL was operating services in Algeria until the PTT without warning or explanation suspended its operations in April 1995.
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