Oil-rich Algeria seeks escape route from time warp

Oct 07, 2005 02:00 AM

by William Wallis

Algeria's rising fortunes in the oil and gas industry have provided a rare opportunity for the government to modernise the economy while cushioning the social impact of reform.
With the remaining embers from civil war in the 1990s showing signs of burning out and record oil and gas production, the country is now chasing Egypt's position as the African continent's second largest economy with gross domestic product up 5.5 % over the past three years to $ 93.5 bn (EUR 78 bn, £ 52 bn). Budgeting on a $ 19 barrel of oil but earning more than three times that, the government had accumulated foreign reserves of $ 50 bn -- covering at least two years of imports.

As a measure of Algeria's success as a strategic energy supplier to Europe and the US, Sonatrach has become the African continent's largest enterprise. The state oil company employs 120,000 people, earned export revenues of $ 32.8 bn last year, and has a growing appetite for ventures abroad.
But precisely because theAlgerian state is so flush and its principal revenue earner smooth running, economists fear the incentive to inject dynamism into the private sector is missing.

The IMF's latest country report suggests a five-year $ 55 bn government-spending programme launched in 2004 is helping modernise infrastructure and reduce unemployment of 24 %. Elsewhere, the report stated bluntly that "structural reforms have stalled".
"Today the government has the best possible conditions. We have huge budget surpluses and more than sufficient reserves. What we lack are the instruments to effect reform," says a former top government official.

Thirty years of socialism, followed by 10 years of civil war, have left Algeria in a time warp. While stock markets elsewhere in the Middle East are enjoying a period of oil-fuelled exuberance, the most pressing need at Algeria's bourse is for a plumber to fix the leaks, says a regional financial analyst. There are only a handful of traded stocks, and technically the floor is open only four hours a month.
It can take weeks for a cheque to clear through the antiquated banking system, 90 % of which is controlled by state-owned banks weighed down by non-performing loans to state-run companies.

An attempt to create the country's first investment bank foundered when the privatisation programme failed to take off. For the past decade the government has had a list of 1,200 state companies slated for sale.
An Algiers-based economist, with 30 years experience abroad, sees now as the moment for President Abdelaziz Bouteflika to speed up the momentum. Since assuming power with the backing of the army in 1999, Mr Bouteflika has been consolidating power in the presidency.

Exhausted by the war and turmoil, the population is for now acquiescent. With a measure of stability restored, foreign companies have been coming in. Americans are heading into pharmaceutical production, South Africans are opening a desalination plant, the Chinese are chipping away at a deficit in housing, and Frenchcompany Michelin, which left the country in 1993, is back with plans to employ some 500 people. In Algiers, the capital, foreign retailers are also setting up shop.
Where ministers have championed liberalisation, they have found room for manoeuvre. Thus the oil minister pushed a new hydrocarbons law through parliament this year, relaxing Sonatrach's monopoly and paving the way for greater foreign participation in production.

The former telecoms minister opened the door for private mobile phone operators such as Egypt's Orascom, whose Djezzy brand is enjoying soaring subscriptions. By privatising Credit Populaire D'Algerie, one of the state-run banks, and shedding Algeria Telecom the government could help shift the balance away from state dependence, the Algiers-based economist says.
"They could move a hundred times faster without destabilising the social situation."

But more gradual change remains more likely. Algeria has been negotiating entry to the World Trade Organisation and has already agreed an association agreement with Europe.
Economists say these will erode the trading hegemony of an elite business and ruling class known locally as the "mafia-politico-financiere".

Source: The Financial Times
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