The public sector remains the primary driver of economic growth in Algeria. State-owned businesses – such as oil company Sonatrach, one of Africa’s largest corporate entities – dominate production in sectors such as energy and industry. Unsurprisingly, this has a dampening effect on private enterprises, but the government is increasingly looking to strengthen private sector activity in order to support sustainable economic growth and reduce unemployment. Several programmes launched in the last decade to support small and medium-sized enterprises (SMEs) are beginning to bear fruit.

Data from the Ministry of Industry and Investment Promotion indicated that by 2011 the private sector accounted for 55% of GDP and 72% of total employment, up from 42% of employment a decade earlier. As in many emerging markets, fostering SME activity will be central to accelerating private sector growth, although doing so will require addressing a number of challenges, including a complex business environment and limited credit.

SME Creation

According to data published by the Ministry of Industry and Investment Promotion in 2012, the number of SMEs increased at an annual rate of 8.4% from 245,350 companies in 2001 to nearly 620,000 in 2010. The Global Entrepreneurship Monitor (GEM), a survey of Algerian entrepreneurs jointly conducted in 2013 by the German international cooperation and development agency GIZ and the Algerian Centre for Research in Applied Economics and Development, found that the rate of new SME creation has slowed since the onset of the global economic downturn in 2009. The survey indicated that 11.3% of respondents were involved in the creation of a new business in 2009, but this dropped to 5.3% in 2011 and 2% in 2012.

However, the GEM also showed that existing businesses, created between one and three years prior, were performing better. The number of respondents who owned an established SME rose from 4% in 2011 to 7% in 2012, suggesting that once companies are able to make it past the one-year mark, they are better able to support themselves today. According to the survey findings, “In the 2009-12 period, the entrepreneurial dynamic in Algeria has shifted considerably. The rate of new business creation has undoubtedly slowed, but positive signs have been observed with regard to SME capacity to reach a phase of maturity, at least 42 months of operation, and the rate of business closure has declined.”

Operating Challenges

In particular, the percentage of new business owners that had closed or sold their operations within the last year dropped from 7.9% in 2009 to 6.9% in 2012. More than 30% of respondents said their businesses had folded because they were not profitable enough, due to difficulty in penetrating the market or insufficient demand. Another 25% said access to financing was the main reason behind their closures. In fact, the survey found that 50% of SMEs were founded with capital mobilised by the owner’s family or network, rather than the banking sector.

A gap still exists between Algeria’s primarily family owned SMEs and the formal banking network. Efforts to increase entrepreneurial training mechanisms or SME support could help provide the structures necessary to encourage confidence in lenders. There is also a question of physical access, which could be addressed by efforts to modernise payment systems and expand the banking network. The governor of the central bank, Mohammed Laksaci, emphasised that the bank branch network has only expanded from 12.7 agencies per 100,000 population in 2010 to 13.1 agencies in 2013, leaving considerable room for growth.

The 2012 GEM also highlights the need for non-financial support and business coaching to better structure and expand SMEs after the first year. According to the study, “Public authorities have created an important system to assist in the creation of new businesses; however, in later phases of development, there are no resources available to help companies penetrate the market, negotiate with intermediaries or build client relationships.”

Efforts to structure the private sector, increase access to financing and enforce production standards will also help to reduce competition from Algeria’s sizeable informal economy in the future. Private enterprise surveys conducted by the World Bank in 2007, the most recent year available, showed that nearly 67% of private companies surveyed responded that they competed against unregistered or informal firms. Nearly 55% responded that the presence of informal competitors was a major constraint to their operation. However, it was noted that the efforts towards standardisation should not be top-down. “As homegrown industry develops, Algerian firms are hoping to create a set of norms to govern their activities,” Amine Zouioueche, the country chief executive for the certification and testing firm Bureau Veritas, told OBG. “It is important to let the private sector develop the norms, otherwise there is a risk that production will be offshored elsewhere.”

Support Programmes

To help address these challenges, several government agencies are dedicated to supporting private sector activity, particularly for young entrepreneurs – a crucial segment given the country’s large youth population. The National Agency for the Support of Youth Employment (Agence Nationale de Soutien à l’Emploi des Jeunes, ANSEJ), created in 1996, offers low-interest loans to youth between the ages of 19 and 35 who want to start a business. For investment projects up to the value of AD10m (€93,000), ANSEJ will furnish up to 29% of the initial cost, non-reimbursable, and provide access to bank financing for the remaining 70% of the project through low-interest or zero-interest loans. As a result, entrepreneurs are only left with 1-2% of the total project cost. ANSEJ states that from 2007 to 2013 nearly 300,000 projects were launched that should create over 700,000 jobs; however, the agency does not specify how many of these companies are still in operation.

The National Micro-Credit Agency (Agence Nationale de Gestion du Micro Crédit, ANGEM) offers loans for small-scale purchases of equipment or primary materials for a small business. ANGEM credit is available to any citizen over 18 years of age with irregular income, including seasonal workers and homemakers. Zero-interest loans are capped at AD1m (€9300). Officials announced in November that some 641,000 individuals had benefitted from ANGEM financing from 2005-14. Finally, the National Unemployment Insurance Fund offers loans to individuals who became unemployed within the last year. Loans are capped at AD10m (€93,000) and are available to citizens between the ages of 30 and 50.

Private Sector Credit

Thanks in part to these programmes, the amount of credit extended to the private sector is on the rise. According to the Bank of Algeria, the volume of bank credit awarded to the economy, including both the public and private sectors, jumped by 20% in 2013 and another 11.7% in the first half of 2014 to reach AD5.76trn (€53bn) by the end of June. The central bank stated that much of the recent increases were due to credit facilities (state subsidies) to allow private enterprises access to the formal financial sector. Half of the total outstanding credit, AD2.59trn (€24bn) as of June 2014, was awarded to private enterprises, up 19.3% year-on-year (y-o-y).

Laksaci stated in November 2014 that bank financing awarded to SMEs in 2013 had expanded at a much faster rate than overall credit to the economy. Overall bank credit was equivalent to 44.2% of non-hydrocarbons GDP in 2013, up from 40.6% in 2012. That said, credit extended to SMEs and micro enterprises under the three programmes mentioned above jumped by 38% year-on-year to AD499.7bn (€4.6bn) in 2013, up 38% from AD362.4bn (€3.37bn) in 2012.