The main challenge for the Algerian economy over the next decade is to achieve greater economic diversification. High and broad-based productive investment is required now more than ever, particularly in sectors such as the manufacturing industries and tradeable services other than trade and transport. As in many other countries, in Algeria these sectors are anchored by small and medium-sized enterprises (SMEs), which also typically constitute the main job suppliers.

The preliminary results of the 2012 economic survey indicate that the Algerian economic network, with the exception of agriculture, is essentially composed of very small enterprises or micro-entities (90.6% of economic entities are individuals), which are essentially active in the tertiary sector where trade is currently predominant – constituting roughly 89% of economic entities – and belong in their majority (95.9%) to the private sector. This situation dictates that investment should be geared towards new tradeable and productive activities as well as towards encouraging the expansion of the existing micro-entities and their transformation into small and, perhaps more importantly, medium enterprises. To this end, the banking sector needs to meet the challenge of improving the financial condition of SME financing, particularly in terms of investments.

Over the past decade, substantial progress has been achieved in this area. Notwithstanding the relatively small increase in the share of the private sector in the economy’s total value-added (excluding hydrocarbons and public administration services), 5.9 percentage points between 2001 and 2012 (from 80.2% to 86.1%), the share of the credits to the private sector in total to the economy grew far more significantly, from 31.3% to 52.3% over the same 10-year period. In addition, recent financing developments highlight that credits to private enterprises have accounted for approximately 49% of total credits to enterprises over the previous four years.

Moreover, the share of investment financing in total credits to the private sector has increased from 49.6% to 55.6%. In 2012 and over the first half of 2013, investment financing went up by 15.6% and 11.5%, respectively.

However, that being said, and notwithstanding these positive developments, further progress is needed to better anchor the development of SMEs and achieve economic diversification.

To help improve bank financing of SMEs, the authorities have introduced a number of key measures in recent years, including (i) the provision of a higher level of credit guarantee provided by the Investment Credit Guarantee Agency to SMEs from AD50m (€460,000) to AD250m (€2.3m); (ii) the creation of the National Investment Fund and regional investment funds (one in each of the 48 regions); (iii) interest rate partial coverage on investment credits; and (iv) the coverage by the Public Treasury of interests due over the grace period on rescheduled debt of eligible enterprises.

Efforts towards improving the financing of Algeria’s SMEs must be complemented by the promotion of advisory bodies (particularly in the appropriate ministries) to help guide and support the creation of new enterprises and ensure the provision of adequate, timely economic information to guide investment and investment financing decisions.

Already, banks have significantly improved communication and also reduced credit processing times, which has helped, but nevertheless, much more needs to be done, including further developing advisory activity, providing expertise in investment project analysis as well as improving risk management to limit non-performing loans. By the same token, SMEs need to work to improve accounting and management transparency as well as quality. Doing this will help enhance the quality and accuracy of information provided to the banking sector, especially given the large prevalence of informal activities.