Algeria implements reforms and develops policy framework to lessen oil dependency

 

The oil price-induced economic difficulties facing Algeria may prove to be a double-edged sword: although the added pressures are certain to slow the rate of improvement in living standards and have already begun to strain public finances, the new circumstances also provide a pressing incentive for the country to slowly wean itself off its hydrocarbons dependency develop a more dynamic private sector. While reform efforts have tended to move slowly in the country in the past, the IMF noted in its most recent Article IV Consultation, published in June 2017, that there is evidence of an uptick in the momentum of reforms.

National Strategy 

In May 2014 the authorities adopted the nation’s latest five-year action plan for economic and social development, covering the 2015-19 period. While the government reshuffle after the May 2017 legislative elections may give implementation of the plan new impetus and focus, the key lines on guiding public investment and structural reform over the medium term remain. Structured in eight chapters covering the main areas of government activity, the plan has high-level goals and initiatives at the macroeconomic and sector levels, foreshadowing reforms in the financial sector, tax administration, Customs, public-private partnerships (PPPs) and the investment regime, among others, as well as efforts to improve the business environment. In essence, the plan aims to support social and economic development by fostering a dynamic and diversified private sector, including through the promotion of import substitution.

In response to the oil price crisis, the state unveiled a new growth model in July 2016. The vision outlines a plan to transform the economy by 2030, as well as a medium-term budgetary strategy for 2016 to 2019. Key objectives of the new framework include achieivng a growth rate of 6.5% in non-hydrocarbons GDP over the decade to 2030, and doubling the manufacturing sector’s contribution to GDP, from 5.3% in 2015 to 10% by 2030. Building on these efforts, the IMF reported in its June 2017 Article IV Consultation, “The government is fleshing out a broad strategy to reshape the country’s growth model… with World Bank support.” The newly installed government is expected to bring forward more detailed reform proposals in due course.

“Hydrocarbons income has not only shaped the Algerian economy, but also the mindset of the society,” Amara Charaf-Eddine, CEO of MADAR Holding ( previously SNTA Tobacco), told OBG. “We need a paradigm shift that covers numerous elements of our economy: labour, tax, trade policies, human resources development and the improvement of governance. Algeria has great potential to become one of the first foreign investment destinations. The administrative approach to investment shall disappear – a lot should change.”

Combined Efforts 

In order to ensure that the necessary conditions and frameworks for efficient development are in place, a national economic and social pact for growth was signed in February 2014. Designed to provide a platform for dialogue surrounding the implementation of national strategies, the pact brings the government together with social and economic partners, including trade unions and business organisations. This will give diverse societal actors ownership of the plan, helping smooth implementation. The tripartite conference of the partners on September 23, 2017 in Ghardaïa focused on the acceleration of the economic transformation process.

Doing Business 

In the World Bank’s “Doing Business 2018” rankings published at the end of October 2017, Algeria fell 10 places overall to 166th out of 190 countries. This was mainly due to a notable drop – from 77th to 146th place – in the dealing with construction permits category. The number of procedures required to obtain the permit rose from 17 to 19, while the time needed for the process increased by 16 days to 146. At 71st place, the country received its highest score in the resolving insolvency category. In light of import restrictions, it is hardly surprising that the country performed worst in trading across borders, placing 181st. Falling two spots to 177th for getting credit shows this is another area where there is significant scope to target reform efforts.

However, it is worth noting that OBG’s inaugural Business Barometer: Algeria CEO Survey, conducted between March and October 2017, shows CEOs to be largely positive about the economy: most notably, more than two-thirds of CEOs said they were likely or very likely to make a significant capital investment in the coming 12 months, which shows a level of comfort with the local rules (see Business Barometer: Algeria CEO Survey). While the IMF projected GDP growth of 1.5% for 2017, 66% of respondents to OBG’s survey are confident about the economy and trust that the 3% milestone will be exceeded.

Tax Reform 

Efforts to streamline and simplify tax administration included “open days” run by the General Directorate of Taxes in May 2017, to better inform taxpayers of their responsibilities and allow them to raise any questions they had about their tax affairs. Article 90 of the 2017 Finance Law also stipulates a possible extension for firms unable to pay their full tax bill by the deadline, allowing for rescheduled payments within 36 months of the original deadline. In addition, the single flat tax system was expanded and simplified, allowing for payment in instalments.

Construction Permits 

In April 2017 the government eliminated a number of documents from the dossier required to obtain a construction permit and reduced the number of copies of the dossier that needed to be provided. Concurrent with these updates, local governments were instructed to speed up the delivery of permits once applications are received. These changes have effectively streamlined the process, but efforts to further improve may be required.

New Investment Code 

Adopted in July 2016, Algeria’s revised investment law – Law No. 16-09 – together with the 2016 Finance Law, overhauled the legal framework applicable to investments in the country. Notable changes included the removal of the requirement for foreign investors to generate a foreign exchange surplus to the benefit of Algeria over the life of any given investment. In practice, this meant that overseas investors were limited to the extent that profits on investment could be repatriated through dividends or asset sales. So as long as the initial equity investment requirement is respected, foreign investors are free to repatriate the proceeds of the investment, improving the attractiveness of the country as an investment destination and opening the capital account.

Under the new regime, foreign investors are no longer required to notify the Algerian authorities of transfers of shareholdings in locally incorporated firms unless that shareholding is greater than 10%, which reduces the reporting burden on investors.

The 2016 Finance Law also relaxed the restriction on foreign financing, which henceforth was to be permitted for strategic investments, subject to government approval on a case-by-case basis. As with the removal of restrictions on profit repatriation, this measure has further opened up Algeria’s economy to the benefit of foreign investors.

In addition to the removal of restrictions and easing of the burden on investors, Law No. 16-09 also introduced a suite of new incentives. All investments in new or improved production capacity, with the exception of those on the negative list, can now benefit from three new schemes. In March 2017 a new negative list was published, setting out 110 segments of the economy for which new investments cannot avail of the tax incentive regimes. Chief among these segments were transport, flour mills, brick manufacturing and cement plants. The ordinary regime includes a range of incentives for eligible investments, which are dependent on the nature of the investment. There is an additional incentives regime applicable to the tourism, industry and agriculture sectors, as well as to other investments that are expected to generate sizeable employment. Lastly, an investment agreement regime was introduced with extra incentives on offer for investments of special interest to Algeria, subject to an investment agreement being signed between the investor and the National Investment Development Agency.

Foreign Ownership 

Since 2008 foreign firms have been prohibited from taking a majority stake in firms operating in Algeria. The law was not retroactive, so many firms operating in the country were granted an exemption. Nonetheless, this stipulation greatly reduced the attractiveness of Algeria as a target for mergers, acquisitions or other direct investments from abroad. Over the course of 2016 there was speculation that the restriction would be lifted as part of the passage of the new investment code. Instead, the restriction was not only left in place, but the 2016 Finance Law actually cemented the scope of the restriction, covering all foreign investment in sectors producing goods, providing services or procuring imports.

New Customs Code

In December 2016 the government unveiled a new draft Customs code to update Law No. 79-07, which had last been amended in 1998. Approved by Parliament in early 2017, the new code includes 10 elements aimed at modernising Customs administration and aligning Algerian practices with international conventions. The reform represents a key plank of the new growth model presented by the government in mid-2016. Of Algeria’s system of Customs regimes, which aim to promote non-hydrocarbons investment and exports, those for cabotage and trans-shipment were more clearly defined in the new code. Other important elements of the Customs reform included better-targeted spot-checks of travellers and the introduction of a temporary admission region, whereby deposits are left with the Customs Agency for a six-month waiting period before they can be accessed by importers. Goods imported for re-export, however, are exempt from value-added tax and Customs duties. The reforms give the Customs Agency permission to conclude cooperation agreements with foreign Customs authorities, and stipulates that its agents are sworn to confidentiality even after they cease their employment as Customs officials.

Draft Ppp Law 

In line with the Public Investment Programme 2015-19, a law on PPPs is currently under development, with a view to clarify the legal and institutional framework for such investments. A draft law was to be presented to the government for consideration in early 2017 by an inter-ministerial working group, but as of late-2017 it had yet to be enacted by Parliament. The government has also been engaging with the World Bank and the African Development Bank to align the new Algerian PPP framework with international best practices. It is clear from the government’s new growth model that PPPs are being prioritised as an important mechanism to support social and economic development, while also making more efficient use of scarce public resources.

As in many emerging markets, the government is increasingly turning to private financing to supplement public investment as a means of reducing the overall burden on state finances. Even before such a dedicated framework was in place, PPPs were being utilised in Algeria in the water, electricity and transport sectors, though much broader use of PPPs is expected in the future. The existing legal framework allows for concessions in the maritime and air transport sectors, but it is forbidden for foreign-controlled capital to have a majority interest in such projects. It is as yet unclear whether such restrictions will be removed in the new legal framework for PPPs, or how it might interact with the prevailing 49:51 policy proscribing foreign-majority control of new firms or investments in Algeria.

More Progress To Come 

Despite recent headway, Algeria has a significant distance to travel before it can boast an operating environment on par with neighbouring countries. Moreover, while enacting reforms is challenging, their rigorous implementation is crucial and must remain a primary focus in the coming years.

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The Report: Algeria 2017

Economy chapter from The Report: Algeria 2017

The Report: Algeria 2017

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