A TUMULTUOUS year – with the pandemic and the oil price slump – has left its mark on Algeria. However, Nabil Frik, Managing Director Africa & Middle East at British Arab Commercial Bank (BACB), believes that economic reforms and increased impetus behind economic diversification are laying the foundations for better days ahead. As BACB celebrates the 20th anniversary of its representative office in Algiers, Nabil reflects on the impressive progress that the country has made over the past two decades
Algeria – the largest country in Africa and largest economy in the Maghreb region – is positioning itself for the future. Over the past two decades, successive leaders have been making meaningful improvements on the security situation, and, more recently, the government has embarked on a series of wide-ranging reforms which are serving to open up the country to foreign business and investment. With plentiful natural resources and a stable business environment, the country boasts attractive opportunities for trading companies. What’s more, with a 1,200km long coastline and sophisticated port infrastructure, the country serves as a gateway for companies in Europe and the Middle East to do trade with Africa.
The ongoing repositioning of the country – which has been reinforced by Algeria’s commitment to modernising its infrastructure and developing robust anti-corruption controls – is also accompanied by economic reforms. For years, Algeria was characterised as having a host of large, state-run businesses – but the country is now taking concrete steps to cultivate a more outward-looking and diverse economic environment.
A symbolic milestone in the country’s journey towards stimulating economic activity and encouraging foreign investment is the government’s recently announced plan to remove the long-standing “51/49” rule, which had dictated that foreign ownership of a company under Algerian law must be capped at 49 percent, and the majority ownership lie with a local partner.
The regulations also required an Algerian manager to run the enterprise, with sufficient authority to makes strategic decisions. With this obligation lifted, we expect to see an influx of business into the Algerian marketplace, with far-reaching economic benefits. The incumbent government’s continued investment into private sector growth will also help bolster this effect – with one recent example being the launch of a new public fund and tax exemptions for start-ups.
These latest reforms send a clear message to the world: Algeria is open, and actively preparing the ground, for foreign business, in the form of both trade and investment. Given that trade already accounts for 58 percent of the country’s GDP, according to the World Bank, this could be a significant boon to the country’s economy in the future.
Today’s challenges could propel change further
The oil price shock and the Covid-19 pandemic this year have underlined more than ever why such reforms were so necessary. The pandemic has proven to be an unprecedented disruption in Algeria, both in terms of the threat to public health, as well as to the economy. Generally, African countries have been more socially resilient to the effects of the pandemic than their counterparts in Europe – but the economic effects have been far-reaching. The International Monetary Fund (IMF)’s World Economic Outlook forecasts the Algerian economy to contract by 5.46 percent in 2020. Nonetheless, the Algerian government has made efforts to stimulate economic recovery, and expects unemployment figures to actually decrease by the end of the year from 2019’s figure of 11 percent. Trade will be key to the country’s continued economic recovery – and the best way to encourage trade is by creating an environment conducive to business growth and foreign participation.
The economic situation was not helped by the dramatic decline in oil prices in early 2020. Oil and gas represent a staggering 98 percent of Algerian exports, with much of it headed for Western European markets. Indeed, Algerian budgetary firepower relies heavily on hydrocarbon prices. In the period from 2000 through to 2012, the sector was immensely lucrative, and revenue from exports enabled massive investments in infrastructure. But Algeria’s reliance on hydrocarbons also makes it vulnerable – as was evidenced by the commodity market shock this year.
According to the IMF, Algeria would require an average oil price of around $157.20 in 2020 to balance its national budget. Prices hovering at around $40 mark, not to mention the temporary dive into negative territory this year, have therefore been less welcome. Though a tough year, and an undeniable hit to Algeria’s reserves and to the country’s economy in the short-term, the oil price crash could well light a fire under the government’s drive towards diversifying exports, which had already begun to gather momentum in the country, and could serve to open up new trading opportunities to foreign importers.
The road to growth runs through new markets
The need for export diversification has only been made more pressing by the global momentum behind the transition away from carbon-intensive energy sources. Indeed, the European Union – Algeria’s largest trade partner, predominantly for energy products – has placed a significant focus on “greening” its trade relationships, and in its Comprehensive Strategy with Africa, launched in March, the EU outlined a plan for future collaboration in a range of areas, including trade and sustainability.
Clearly, Algeria will need to be responsive to meet this demand. And thankfully, the green shoots of progress are already starting to show. In the past five years, the manufacturing sector has posted steady growth of about 4 percent a year, and auto exports are viewed as a particularly promising area for growth.
Algeria also produces a surplus of 20 million tonnes of cement a year – 1 million of which is already exported to sub-Saharan African neighbours. The Ministry of Trade has recently announced plans to export the rest of the surplus production, with the intention of generating $900 million per year. Tourism has also been hailed as another potential growth sector, and the country’s proximity to Southern Europe means it may be an attractive destination when global tourism picks up again after the pandemic.
Diversification could also come in other forms – by finding new markets to complement Algeria’s strong trading relationships with Europe and China, for instance. In this respect, the growing phenomenon of intra-African trade provides tremendous opportunity. The African Continental Free Trade Agreement, signed in 2019, marked a significant milestone in the development of intra-regional trade – and though its implementation has been pushed back due to the pandemic, the pause provides leeway to iron out any unresolved issues. Increased regional collaboration is key to economic growth in Africa, and with its strategic position between Europe and the fast-growing markets of sub-Saharan Africa, Algeria is well placed to benefit from future developments. Indeed, for many, the country is already becoming a trading partner of increasing strategic importance.
Doing business with Algeria, of course, still entails navigating a complex business environment – something which could limit the otherwise burgeoning potential of the country. While the government has displayed commitment to move the country in a more globally-oriented direction, bureaucratic processes can still hinder the country’s gradually modernising economy and, for some, the predominance of the French language can be seen as a barrier to entry. At BACB, we see this as the natural by-product of such rapid change to the country’s economic modus operandi, and something that will increasingly improve with time.
In the meantime, navigating the ecosystem of authorities, regulators and exporters does require deep market knowledge and local relationships. But developing, or outsourcing, the expertise required to seize the business opportunities that Algeria boasts, however, is well worth it – particularly in a post-pandemic environment as companies look to expand their horizons and recover lost revenues. Algeria offers plenty of potential for both trade and investment, and the current reform drive could well put the country in a position to convert the post-pandemic recovery, into a new age of opportunity.
