Back Matter
Author: Ms. Nicole Laframboise, Ms. Patricia Alonso-Gamo, Mr. Alain Feler, Mrs. Stefania Bazzoni, Mr. Karim A. Nashashibi, and Sebastian Paris Horvitz1
  • 1 0000000404811396https://isni.org/isni/0000000404811396International Monetary Fund
Language:
English
Keywords:
OP; government; reform program; public enterprise; Algeria's achievement
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Abstract

This paper offers Algeria's recent experience with macroeconomic stabilization and systemic transformation from a centrally planned to a market economy. The analyses focuses on the period since 1994 when Algeria embarked on a comprehensive reform program that has benefitted from IMF support, first through a one-year Stand-by Arrangement, and from May 1995, through a three-year arrangement under the Extended Fund Facility. To better understand this experience, this paper provides some background information on Algeria's political history and economic developments during the period preceding the Stand-By arrangement.

Appendix I Algeria’s Hydrocarbon Sector: Evolution and Prospects

The hydrocarbon sector dominates the Algerian economy. In 1997, it accounted for nearly 30 percent of GDP and contributed to 95 percent of export receipts and 60 percent of budgetary revenues. Because of the low labor intensity of production processes, the sector’s share in aggregate employment is only about 3 percent.

According to the government of Algeria, proven recoverable reserves of crude oil were estimated at 9.98 billion barrels in 1996 and, at the current extraction rate, would be depleted in about 35 years (Organization of the Petroleum Exporting Countries (OPEC) estimates reserves at 9.2 billion barrels).46 In addition, Algeria possesses enormous sedimentary basins that probably contain larger reserves of crude oil than current estimates suggest. Recoverable reserves will certainly rise in future years as a result of new discoveries and the installation of enhanced recovery systems. By contrast, proven natural gas reserves are more significant, amounting to 3,700 cubic meters (36 billion barrels of oil equivalent) at the beginning of 1996, and at current extraction rates would not be exhausted for at least 70 years.47 In 1996, Algeria was the fourth largest natural gas exporter in the world. Algeria also has reserves of condensate and liquefied petroleum gas. According to the government, total recoverable hydrocarbon reserves in terms of tons of oil equivalent are broken down as follows: 57 percent for natural gas; 27 percent for crude; 9 percent for condensate; and 7 percent for liquefied petroleum gas.

The exploitation of hydrocarbon resources generates five different types of fuels, which are consumed domestically and/or exported: (1) crude oil, for which production is limited by Algeria’s OPEC quota now set at 750,000 barrels a day; (2) refined petroleum products; (3) natural gas, which can be transported through pipelines or converted into liquefied natural gas; (4) condensate, which is a by-product of natural gas production; and (5) liquefied petroleum gas, which must be separated into butane and propane. The domestic market consumes about 20 percent of Algeria’s total hydrocarbon sales (Figure 18).

Figure 18.
Figure 18.

Hydrocarbon Export Receipts

(In billions of US. dollars)

Source: Algerian authorities.

Evolution of Hydrocarbon Strategy

Unlike most oil-producing countries, Algeria found itself with a well-diversified endowment of energy resources from the early 1950s. It was at that time that a French company, Entreprise de Recherches et d’Activites Petrolieres, discovered two giant oil and gas fields at Hassi-Messaoud and Hassi R’Mel, which still account for 70 percent of today’s hydrocarbon output. This diversified endowment made the exploitation of gas products the potential centerpiece of Algeria’s long-term hydrocarbon policy after independence in 1962, and the decision to exploit gas resources has helped to reduce the potential constraint of OPEC quotas on crude oil imposed since the first oil shock in 1973. The subsequent oil price increases also made it profitable, first to undertake investments in gas liquefaction and liquefied natural gas transportation and, subsequently, to take advantage of its proximity to European markets through the construction of trans-Mediterranean pipelines. Thus, in the pursuit of a vision unique among oil producers, Algeria embarked on an ambitious—though not always successful—industrial and marketing strategy aimed at diversifying its hydrocarbon exports and establishing the country as a prime regional supplier of a broad menu of energy products.

Two phases can be identified in the evolution of this policy. From independence to the mid-1980s, the authorities emphasized economic nationalism in the context of a planned economy, which, ultimately, constrained production decisions and led to inefficient domestic pricing and suboptimal exploration efforts. In a second phase starting after the reverse oil shock in late 1986, the hydrocarbon sector was gradually opened to foreign participation while a more efficient domestic pricing policy was introduced. This strategy has improved oil recovery and gas export prospects.

Nationalistic Approach Under Central Planning

Following independence, the government’s policy called for the transformation of the hydrocarbon sector into a highly integrated, state-owned complex under centralized management. Sonatrach,48 the national oil company, was established in 1963 initially to transport and market hydrocarbons and, later, to carry out petroleum exploration, extraction, and processing. It became a quasi-monopoly in the early 1970s, following the nationalization of activities of foreign companies and the extension of state control over the whole hydrocarbon sector. By 1981, the state’s share of the country’s oil production had increased to 99 percent, from 77 percent in 1972, and 10 percent in 1962. The growing predominance of the state was established through Sonatrach’s involvement in a wider range of downstream activities, including oil refining, and petrochemical production and marketing. Sonatrach also extended its purview to the development of pioneering gas liquefaction techniques.49

This industrial policy soon showed its limitations: economies from producing a wide range of products became quickly exhausted, and diseconomies in the management of this giant complex undermined its performance. In particular, oil and gas discoveries were hampered by the technological isolation in which Sonatrach had placed itself. Despite the vast, unprospected acreage available, the rate of discovery was just sufficient to prevent erosion of recoverable reserves and to stabilize the reserve-to-production ratio.50 Partly because of this mixed performance, Sonatrach was restructured in 1982 and its mission restricted to upstream oil and gas activities and hydro-carbon exports. Several specialized state-owned enterprises were spun off from Sonatrach’s divisions.51 Yet, despite the industry’s restructuring, Sonatrach and the other public enterprises of the hydrocarbon sector remained sheltered from external competition and unable to undertake cooperative ventures with foreign partners. This limited their ability to adapt effectively to developments in the world energy market and to update their technical know-how.52 As in most other oil-producing countries, Algerian policymakers have for a long time set internal prices for energy products more with reference to their low cost of production than to their export opportunity cost. The resulting implicit subsidization of energy products has encouraged both consumer demand and industrial use that was already biased toward excessive energy requirements because of the promotion of heavy industries in the central plan and distorted relative prices that favored capital intensity. As a result, Algeria’s per capita energy consumption has been several times greater than in neighboring countries without a corresponding difference in per capita income.53

Foreign Participation and Evolution of Domestic Pricing Policy

The lack of foreign participation in oil and gas production became particularly costly following the 1986 reverse oil shock. In a major break with the past, the authorities responded by relaxing the legal constraints to foreign participation in the hydrocarbon sector and by adopting a more efficient domestic energy pricing policy.

The petroleum code established by the 1986 hydrocarbon law allowed foreign participation in oil exploration, under the terms of concession agreements, service contracts, or production-sharing contracts. For the first time, foreign companies were permitted to repatriate their profits. Nevertheless, the government’s right to acquire a majority interest in any joint venture was maintained. The 1991 amendments to the 1986 law extended some of these provisions to joint ventures in oil production and in the development and exploitation of gas fields. Moreover, foreign companies were granted fiscal status in Algeria, enabling them to avoid double taxation, and Sonatrach’s transportation monopoly was terminated.

At the same time, the authorities also introduced a new policy regarding the pricing of energy products for domestic consumption. This policy has aimed at bringing prices of most energy products in line with their economic costs. Besides improving allocative efficiency, this new approach has encouraged energy conservation and substitution of natural gas for petroleum products. It has also improved the financial situation of local refineries and distributors as well as their contribution to the government’s budget. The first major adjustments to domestic energy prices occurred in 1989 and 1992. After a pause, this policy acquired a new momentum in the context of the 1994/95 IMF-supported program. From April 1994 to March 1995, domestic prices of energy products increased on average by 75 percent and the implicit subsidy—reflected in the difference between the domestic price and the true opportunity cost implied by export prices—was reduced to about 10 percent of their economic costs.54 Energy prices were raised further in 1995 to eliminate the subsidy, and further price adjustments took place to offset the world oil price increases that occurred in 1996–97.

Production and Exports

Reflecting the diversification strategy pursued by Sonatrach, the product mix has evolved through time, with the share of crude oil declining at first in favor of refined products, and later, in favor of gas. This shift in the product mix started in the 1970s and became more pronounced as a result of investment efforts since the late 1980s, particularly those aimed at intensifying the exploitation of Algeria’s considerable gas potential (see Figure 19).

Figure 19.
Figure 19.

Structure of Hydrocarbon Production, Consumption, and Exports, 19931

1The scale of parallelograms (a parallelogram is a quadrilateral with opposite sides parallel and equal) reflects the relative importance of hydrocarbon volumes.2The numbers in parentheses refer t o millions of tons of oil equivalent.3Input into production.4Reinjected into the gas fields.

At independence, natural gas resources were still underexploited and hydrocarbon production consisted almost exclusively of crude oil. Crude oil output fell steadily, however, during the first half of the 1980s because of the gradual depletion of some fields, inadequate secondary recoveries, and the constraint represented by OPEC quotas. By 1984, crude oil production stood at 64 percent of its 1979 level (Table A1).

Table A1.

Exports of Hydrocarbons

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Source: Algerian authorities.

Refining capacity remained limited during the 1960s, but began to expand during the 1970s, reaching its peak in 1981, when the coming-on-line of the Skikda plant brought overall capacity from 150,000 barrels a day to 475,000 barrels a day or about 60 percent of 1996 crude oil production. On the one hand, production of refined products increased more than threefold between 1979 and 1984. Since then, the margins on refined products have been steadily eroded as a result of new entries of efficient suppliers in the world market and increasing production costs to meet higher environmental standards. As a result, the additional refinery constructions contemplated in the early 1980s have been abandoned and there are no plans for further capacity expansion in the future. On the other hand, rapidly growing domestic demand reduced the amount of refined products (or crude oil) available for exports. This was particularly evident through the 1970s when domestic consumption of refined petroleum products (3.9 million tons in 1979) absorbed most of the production (5.4 million tons).

The exploitation of natural gas became significant in the mid-1970s, when the quadrupling of oil prices made it profitable to build Algeria’s second and largest gas liquefaction complex and invest in additional expensive gas tankers. Another crucial development in the sector occurred in 1983 with the completion of the trans-Med pipeline to Italy, which marked the beginning of a marketing strategy seeking to exploit vast European potential demand for cleaner sources of energy. Total gas production (after reinjection) increased by more than 25 percent between 1979 and 1984.

At the end of the 1970s, liquefied petroleum gas and condensate output amounted to about 10 percent of crude oil production. This share increased to more than 40 percent by 1984 mainly as a result of both the higher production of refined petroleum products and the increased extraction of natural gas, the two energy sources with which liquefied petroleum gas is a joint product.

The changing composition of exports mirrored the increased importance of refined petroleum products and gas in hydrocarbon production. The share of petroleum products in total export receipts declined from 94 percent in 1979 to 78 percent in 1984, with a corresponding increase in the contribution of gas products from 6 percent to 22 percent. This rise in gas exports would have been even more pronounced if Sonatrach’s gas marketing and pricing strategy had not resulted in the loss of significant markets in Germany, the United States, and the United Kingdom, and the subsequent underutilization of liquefied natural gas capacity.55 Within the group of petroleum products, the volume of crude oil exported fell by two-thirds during this period, while exports of condensate and refined products increased almost fourfold.

The trend in favor of gas production and exports has continued since the mid-1980s. By 1997, the share of gas products in total export receipts had increased to 34 percent, with a corresponding decline in the contribution of petroleum products to 66 percent. (See Table A2 and Figure 19.) Three factors contributed to this evolution. First, gas production and exports more than doubled between 1984 and 1997 as a result of further increases in gas liquefaction capacity and in the throughput volume of pipeline capacity, particularly in 1996 and 1997. Second, the growth of crude oil output has been constrained by an insufficient use of appropriate recovery techniques. Third, increases in domestic consumption of refined petroleum products, in the context of unchanged production levels, have reduced exports of refined petroleum products.

Table A2.

Volume of Hydrocarbon Exports

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Source: Algerian authorities.

Recent Investments and Medium-Term Prospects

In the context of opening up Algeria’s exploration and production of hydrocarbons to foreign participation, a major investment plan was launched in the early 1990s with foreign partners to address four main concerns. First, considering the gradual decline in oil output, there was a need for more exploration activity, particularly in the vast sedimentary basins of the western and southwestern parts of the country that remain largely unexplored,56 and that account for more than one-half of Algeria’s prospective oil and gas acreage. Second, barring significant new discoveries, the yield from proven oil reserves had to be improved through wider adoption of enhanced recovery techniques to maintain current production rates.57

Third, Algeria needed to overcome constraints on sales of gas imposed by the existing transportation infrastructure. This called for the construction of new pipelines to less-developed gas fields and to new markets, as well as the expansion of the present network to meet greater prospective domestic and foreign demands. Global demand for gas in recent years has grown rapidly in response to heightened environmental concerns and because of the shift away from nuclear plants to safer, gasdependent technologies for power generation.58 Fourth, liquefaction facilities had to be properly maintained and upgraded to prepare Algeria for a likely “deregionalization” of international trade in gas. Liquefied natural gas trade offers a more flexible way to market natural gas and avoids the political risks associated with transportation by pipelines.

Since the passage of the 1986 law on foreign participation in the hydrocarbon sector, Sonatrach has signed over 30 production-sharing and exploration agreements involving a corresponding financial commitment by foreign partners in excess of $1 billion. Negotiations between Sonatrach and foreign firms have not been significantly hampered by the current civil strife, in part because most hydrocarbon activities in Algeria are located in remote areas removed from political unrest. Indeed, over one-half of the aforementioned agreements, worth over $500 million, were concluded with 23 foreign companies since the aggravation of political tensions in early 1992. These have led to significant increases in both oil and gas discoveries, and an expansion in production at existing facilities. Cooperation with foreign partners advanced further in the year to April 1996: Algeria signed the first agreement associating a foreign company (BP) in the development and exploitation of known gas fields (Ain Salah); the first agreement associating a foreign company with the exploitation of a producing oil field was signed; and a contract for the development of the Tin Fouye Tabankort gas and condensate field was awarded to two foreign companies in association with Sonatrach.

Foreign companies were responsible for most of the significant oil discoveries during 1994 and 1995.59 Approximately 16 hydrocarbon discoveries were made in the course of 1994 and 1995, raising the replacement ratio to greater than one. In other words, Algeria more than replaced its marketed production, keeping the reserves-production ratio at about 35 years. As regards the higher production through enhanced recovery methods, the agreement reached earlier with the American company Arco will lead in three phases to an eventual increase in production by Algeria’s second largest oil field (Rhourde El Baguel) from 27,000 barrels a day to 125,000 barrels a day by 1999. The first phase involved the installation of gas injection processors to stem the decline in oil production from the field. The second phase involves the installation of four compressors to boost the gas injection capacity. Finally, by 1999, Arco is to have expanded capacity by drilling new wells and adding new flow lines. This is the first agreement of its kind involving a joint operating company between Sonatrach and a foreign partner. It is expected to establish a model for similar contracts in other oil fields such as the Hassi Messaoud reservoir.

Several of Algeria’s foreign investment partners have found new discoveries recently, particularly in the Berkine East field. The government has awarded a provisional exploitation license to Anadarko, in which Sonatrach has part equity, to begin the first phase of an estimated $ 1 billion development in the Hassi Berkine and Hassi Berkine South fields. These and other new oil discoveries together with investment in enhanced oil recovery projects are expected to raise crude production capacity well above Algeria’s prevailing OPEC quota of 750,000 barrels a day. Crude output at the end of 1997 was estimated at over 800,000 barrels a day, but growing capacity could shortly accommodate a quota of about 1.25 million barrels a day. While the government is committed to maintaining quota discipline within OPEC, it hopes to negotiate a new agreement that will allow for increased production.

As regards liquefied petroleum gas, a major project agreed to in 1994 (the “Jumbo liquefied petroleum gas” unit at Arzew) with Japanese construction and financial backing was delayed for some time because of stalled credits to finance equipment and supplies. These were unblocked in 1996 and construction has been under way. This project will help to double butane and propane production capacity by the end of the decade to 8 million tons a year from the current level of 3.5 million tons a year.

On the transportation front, the trans-Med gas line in the eastern part of Algeria, which stretches over 600 miles, has connected Hassi R’Mel to Italy since 1983. It was recently expanded, in collaboration with Italian companies, to increase its maximum annual throughput from 16 billion cubic meters to 24 billion cubic meters. In addition, Sonatrach has been pumping liquefied petroleum gas through its 1,000 kilometer pipeline running from Alrar and other southern fields to Hassi R’Mel.

A second large-scale project—the construction of the 700-mile Maghreb-Europe gas line from Hassi R’Mel to Seville via Morocco—was completed in early 1997 and involved a variety of foreign partners. Natural gas flows started in December 1996, consolidating Algeria’s position as the world’s fourth largest gas exporter. The Maghreb-Europe gas line will provide throughput capacity of 9.5 billion cubic meters a year and will serve the Moroccan, Portuguese, and Spanish markets. Morocco is not taking gas through the Maghreb-Europe gas line because the power plant projects targeted to use the gas have not yet been commissioned. In the interim, Spain will pay a rent to Morocco for the gas crossing Moroccan territory. This is based on a model developed for the sale of Algerian gas to Italy via the trans-Med pipeline, which crosses Tunisia. In a second phase, the Maghreb-Europe gas line’s initial capacity could be doubled with the installation of additional compression stations in Algeria, and further extensions would allow direct supplies to France and Germany. To ensure full use of these two export pipelines, there is a need to connect the gas fields in the southeastern basin (Alrar) with the network node at Hassi R’Mel; foreign partners have already expressed interest in such an undertaking for which Sonatrach is seeking external financing.

As for liquefied natural gas production, Sonatrach completed rehabilitation work on Algeria’s three liquefaction plants by the end of 1996. (Work at the fourth plant—Skikda—was delayed but is expected to be completed by 1998.) The renovation was the product of a $1.5 billion program started in 1990, which included substantial input from foreign partners.60 This program will restore the plants’ capacity to their originally targeted level of 30.5 billion cubic meters in late 1998.

The government is trying to promote increased domestic use of natural gas. The state-owned Société Nationale de l’Electricité et du Gaz (Sonelgaz) predicts that Algeria’s gas consumption will more than double by 2010. With a further expansion of the distribution network (see below) and the growing demand on the part of power stations, this will translate into an average annual rate of consumption growth of 4.6 percent over the period. Sonelgaz aims to achieve 90 percent penetration of the Algerian market, which will require a further expansion of the gas line network and revitalization of the public gas distribution program.

The expansion of the trans-Med pipeline, the construction of the Maghreb-Europe gas line, and the revamping of the liquefied natural gas facilities will help to boost Algeria’s gas exports considerably. Together with new gas production facilities scheduled to come on stream in 1997 and 1998, Algeria should be able to reach its annual target for gas exports of 60 billion cubic meters a year by the end of the decade compared with 32 billion cubic meters a year in 1994 (about 26 million cubic meters a year will be exported in the form of liquefied natural gas). The corresponding sales contracts have already been secured, and expected trends in global demand suggest that a more ambitious export target could be justified.

Foreign partnership will continue to play a central role in the gas sector. The Arzew-based joint venture Helios has commissioned studies that could lead to the construction of a second helium and nitrogen production plant in Algeria, provided sales contracts can be concluded with major clients. Helios already sells its helium output to U.S. and French shareholders, and all of its nitrogen to Sonatrach. To summarize, total production capacity is about 62 billion cubic meters a year, and with the completion of the first phase of the Maghreb-Europe gas line, total export capacity will be 34 cubic meters a year by gas line (10 billion cubic meters a year through the Maghreb-Europe gas line and 24 billion cubic meters a year through trans-Med).

Current volume projections envisage a 20 percent increase in hydrocarbon exports by 2001: this incorporates an increase of roughly 20 percent in both gas and petroleum products exported. Owing to the downward revision in medium-term oil prices, this would increase annual export receipts by 11 percent over the next four years. Western Europe absorbs more than 80 percent of Algeria’s total exports of crude oil. Germany became the biggest buyer of Algerian crude in 1993 and 1994 ahead of France, Italy, the United States, and the United Kingdom. Algeria’s main market for natural gas is western Europe, which absorbs over 30 billion cubic meters a year. Moreover, this market is expected to face an estimated annual gas shortfall of 33 billion cubic meters a year by 2000. Sonatrach hopes to cover up to 40 percent of that deficit in view of Algeria’s particular advantages, such as proximity, the size of its gas reserves, a favorable investment regime, and the existence of an established transport infrastructure whose capacity is being increased. In addition, Sonatrach is targeting other markets, including neighboring African countries and North America.

Algeria’s energy production has doubled every 10 years since 1971, and according to Sonatrach officials, it could double again by 2006 if exploration and development activities continue at the prevailing pace. Successful implementation of the new investment strategy will place Algeria in a good position to take advantage of the favorable demand prospects for its energy products. To fulfill export projections, Algeria’s hydrocarbon sector will have to keep displaying enough technical and managerial flexibility to cope with challenges posed by an increasingly competitive marketplace. This will require both fostering foreign participation and further restructuring of the industry, including the privatization of some elements of the Sonatrach group.

Implications for Macroeconomic Policy

The presence of a large natural resource sector has been an important element in shaping the structure and management of the Algerian economy. For instance, it weakened incentives to develop tradables production outside the hydrocarbon sector, and influenced the design of the tax structure by reducing the necessity to develop alternative revenue sources.

Indeed, Algeria’s dependence on hydrocarbon revenue as the major source of foreign exchange also has important macroeconomic implications since the volatility of international oil prices has translated into the volatility of important macroeconomic aggregates. Movements in international energy prices have generated corresponding variations in the value of exports, government revenues, and the availability of foreign exchange. There has been, for example, a strong correlation between changes in international oil prices and real GDP growth, which seems to have become even more pronounced in the 1990s.

Links between growth and other aggregates, on the one hand, and international oil prices, on the other hand, have operated through a number of channels. With respect to the impact on growth, oil price variations have affected both demand and supply. In the face of adverse price (or output) developments in the hydrocarbon sector, negative wealth effects are likely to have reduced consumption demand, reinforced by a compression of government expenditure and lower investment outlays. In addition, in the early 1990s, the defense of the exchange rate peg required periodic intensification of rationing of foreign exchange or increased recourse to foreign borrowing. Formal or informal foreign exchange rationing affected supply, by reducing access to imported inputs (and distorting their selection), thereby leading to a fall in capacity utilization and a deterioration of capital equipment owing to shortages of spare parts. For instance, as Algeria’s access to external credit weakened in the late 1980s, formal payment restrictions were introduced to repress excess demand for foreign exchange, a development that may explain the more pronounced link between oil prices and growth in recent years.

Through the budget’s dependence on revenue from the oil sector, fluctuations in oil prices had important direct implications for public expenditure management. Favorable oil prices were often seen as signaling permanent increases in income, and triggered higher levels of public expenditure that were difficult to reduce once the boom had proven only temporary. For example, following the reverse oil shock of 1986, budgetary revenue fell sharply from 38 percent of GDP during 1981–85 to 28 percent of GDP during 1986–90. As public expenditure—mostly capital expenditure—could only be reduced by about 5 percentage points of GDP, the fiscal deficit shifted from an average surplus of 3.5 percent of GDP in 1981–85 to a deficit of about 2.7 percent of GDP in 1986–90.

Over the coming years, the relative importance of the hydrocarbon sector is unlikely to change substantially. Nonhydrocarbon activity is expected to benefit eventually from the impact of liberalization and a growing private sector, notably in agriculture, industry, and construction in response to the strong demand for housing, although in the near term, output may be sluggish as divestment of state industries leads to contraction in employment. The continued impact of the real exchange rate depreciation of 1994–95 (and the maintenance of a competitive exchange rate) is also likely to stimulate tradables production outside the hydrocarbon sector and, over time, reduce somewhat the relative importance of hydrocarbon exports. Nonetheless, under baseline projections, hydrocarbon exports are still likely to account for about 85 percent of total exports by 2005.

Under this outlook, Algeria’s vulnerability to fluctuations in international energy prices will decline only modestly over the next years. For example, hydrocarbon exports would decline by about $700 million annually for every $1 per barrel decline in the price of oil. Real GDP growth would be lower, the external debt/GDP ratio would decline only marginally (and could rise depending on the magnitude of the oil price drop), and current account deficits would be larger. Since borrowing from abroad to maintain the same level of absorption may be inappropriate, Algeria would have to respond to such a shock with adjustment measures, including further fiscal tightening and possibly exchange rate depreciation to reduce imports and accelerate the development of exports outside the hydrocarbon sector. More notably, structural reforms would have to be seriously accelerated.

By contrast, higher oil prices would raise different policy issues and would under current circumstances warrant an asymmetric policy response. In particular, if the higher revenue from the hydrocarbon sector were to be used to reduce public debt rather than finance higher spending, and if pressure toward a real exchange rate appreciation were to be resisted, it would reduce Algeria’s vulnerability to future adverse price shocks, strengthen the current account, and further alleviate the debt-service burden, as the external debt/GDP ratio would decline more rapidly. Indeed, these trends began to materialize in 1996.

In any event, the shift to a managed float of the exchange rate in 1994–95 changed the nature of the mechanism transmitting changes in oil prices to macroeconomic aggregates. Most importantly, continued exchange rate flexibility will protect Algeria from some of the destabilizing effects of energy price volatility. A deepening in the domestic financial and foreign exchange markets and their integration into global financial markets would further increase such protection. For example, adverse oil shocks that are perceived by the market as temporary would cause less pressure on the exchange rate, and the temporary widening of the current account deficit would be more readily financed from abroad, thereby smoothing out the path of aggregate income and absorption. By contrast, market perception of a more permanent adverse oil shock would result in strong pressure on the exchange rate, signaling the need for a real depreciation to channel resources into the tradables sector and a tightening in demand management policies. Exchange rate flexibility would avoid the need for nominal wage and price deflation that may be difficult to implement in Algeria given the strength of labor in the sociopolitical landscape. Stabilizing output and relative prices in the face of shocks perceived by markets as temporary, while quickly adjusting to permanent shocks, will have the additional effect of supporting investment by reducing the risk premium that agents, faced with uncertainty about relative sectoral profitability, will attach to the required rate of return.

To conclude, continued predominance of the hydrocarbon sector in Algeria’s economy means policymakers will have to continue to respect the power of energy price fluctuations on the domestic economy. This influence will have to be taken into account in the formulation of economic policy, with a view to minimizing the adverse impact of volatility in international energy markets while implementing policies that help diversify the Algerian economy over the longer term. In this respect, employment creation will have to come almost exclusively from the nonhydrocarbon sector. Indeed, the social and economic costs of unemployment—the biggest challenge currently facing policymakers—point to the urgency behind the authorities’ efforts to invigorate the nonhydrocarbon private sector with their program of structural reform and privatization.

Appendix II Dynamics of Unemployment

This appendix aims at providing an assessment of employment developments in the context of different growth scenarios using a simple growth/employment framework.61 The projections in this appendix assume that participation (as a percentage of the population) continues to rise through 2010 in line with recent trends, while population growth continues to slow. On a net basis, there would be about 250,000 new entrants to the Algerian labor market each year.

To establish a link between output growth and the demand for labor, assumptions need to be made regarding the elasticity of employment to growth. Past developments provide little guidance, as recruitment policies in the dominant public sector reflected political and social concerns rather than efficiency considerations. Thus, while real GDP remained virtually flat, total employment expanded by 34 percent between 1985 and 1995, from 4.06 million to 5.44 million; of this, government employment rose from 900,000 to 1.29 million. Sectoral elasticities have also fluctuated widely for 1991–95. In agriculture, the most dynamic and most labor-intensive sector, the elasticity of employment to GDP growth was about 0.6. In the rest of the economy, the average elasticity during 1991–95 was high but negative, as public enterprises continued to recruit despite stagnating or declining output.

To indicate a broad range of possible outcomes, two scenarios have been developed (Tables A3 and A4, and Figure 20). In the first scenario, Low Growth, annual growth of real GDP during 1998–2010 averages about 3.2 percent, with manufacturing growth averaging 2 percent. In the second scenario, High Growth, higher annual growth in manufacturing (5.7 percent on average) results in annual GDP growth of about 5 percent on average during the same period. In both scenarios, government employment slows, as the authorities reduce net recruitment even while upgrading the qualification levels of the civil service. For each scenario, two sets of assumptions regarding the sectoral employment/output elasticities outside the government sector are examined. Under a pessimistic assumption, sectoral elasticities remain low at about 0.5, broadly in line with elasticities observed in other countries, while under an “optimistic” assumption, the total elasticity remains constant at about one.

Table A3.

Employment Prospects: High-Growth Scenario

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Source: Data provided by the Algerian authorities; and IMF staff estimates and projections.

At factor costs.

In percent.

Table A4.

Employment Prospects: Low-Growth Scenario

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Source: Data provided by the Algerian authorities; and IMF staff estimates and projections.

At factor costs.

In percent.

Figure 20.
Figure 20.

Unemployment Rates Under Low- and High-Growth Scenarios

Source: IMF staff estimates and projections.

Under the low-growth scenario, and assuming high elasticities of employment/output creation, unemployment would only fall to 26 percent by 2001 and 23 percent by 2010, with 2.9 million jobs created during 1998–2010. Making the pessimistic assumptions on elasticities, unemployment would rise rapidly to about 31 percent by 2001 and about 37 percent by 2010. Under the high-growth scenario, and assuming high elasticities, about 1.2 million jobs would be created between 1998 and 2001, and another 3.5 million by 2010; unemployment would fall to 23 percent by 2001 and to about 8 percent by 2010. Assuming low elasticities, high growth would be insufficient to reduce unemployment, which would gradually rise to 32 percent by 2010, even while a total number of 2.1 million jobs are created between 1998 and 2010. As discussed above, the high elasticity outcomes would become more likely with further reforms of the labor market and a continued restrained incomes policy to make economic growth more labor intensive. Strong growth in the construction sector to alleviate the housing shortage, in particular, could contribute substantially to further raising the labor-intensity of GDP. At the same time, strong and credible reform policies may help Algeria to achieve growth above 6 percent, which, even in the presence of relatively low elasticities, would help generate faster employment gains.

1

This legacy is reflected in the name of Algerian currency, the dinar, which comes from the denarius coin used throughout the Roman Empire.

2

The 1996 budget surplus also reflected the impact of particularly favorable oil prices. Without this impact, the surplus would have been 0.7 percentage points of GDP.

3

Disbursements of the Rehabilitation Fund also compensated for foreign exchange losses incurred mainly by state-owned banks on past external borrowing to import basic food staples and other consumer goods at the behest of the government. This compensation is registered among the financing items of the budget.

4

The central government’s share in VAT proceeds amounts to 85 percent of the total, and the remaining 15 percent accrues to local governments.

5

A similar operation of DA 187 billion (about 7 percent of GDP) took place in early 1997 to clean up the balance sheet of the food-importing agencies, the gas and electricity company, and the railway company.

6

World Bank, Algeria: Public Expenditure Review (draft), 1997.

7

Since 1998, the responsibility of the investment budget has been transferred to the Ministry of Finance.

8

The council is chaired by the Governor of the Bank of Algeria, and includes the three Vice-Governors as well as three government representatives, thereby vesting the majority with the Bank of Algeria.

9

For an overview of the rationale and the history of the reforms, and the change of orientation in the conduct of monetary policy, see Mohammed Laksaci, Politique monetaire en Algiers: (Algiers: Bank of Algeria, March 1995).

10

The Bank of Algeria maintained the rediscount window in parallel with the auction system for a transition period to ensure that the liquidity needs of commercial banks were met.

11

The introduction of the auction mechanism followed a number of actions taken in 1994 aimed at strengthening both banking institutions and public enterprises. Public enterprises acquired management and financial autonomy; nonperforming loans were transferred to the state in exchange for treasury bonds; and performance contracts were introduced to impose discipline and efficiency norms on public enterprise managers. At the level of commercial banks, credit risks were addressed through an ongoing bank recapitalization program and the restructuring of the 23 largest loss-making public enterprises, including their debt.

12

For a discussion of the rationale for the introduction of new monetary instruments in Algeria, see Karim Djoudi, Marche monetaire et innovations financieres (Algiers: Bank of Algeria, April 1995).

13

Mohammed Laksaci in Une conjuncture financiere et monetaire favorable a la reprise (Algiers: Bank of Algeria, April 1995) underscores that an efficient credit allocation becomes all the more important if the ambitious growth objectives are to materialize, while monetary policy must continue to be geared toward achieving the convergence of Algeria’s inflation rate to the level prevalent in its partner countries.

14

These ratios are for illustrative purposes only, since a stock of nonperforming loans accumulated over several years are compared to one year’s output.

15

The amount was assessed on the basis of the financial restructuring of the 23 loss-making enterprises and audits of the five commercial banks at the end of 1991, and involved the issuance of nonnegotiable government bond to the banks. About 70 percent of these bonds were subsequently redeemed between 1992 and 1995.

16

B. Achari in Typologie des risques bancaires et reglementation prudentielle (Algiers: Bank of Algeria, 1995) provides an overview of the main measures undertaken by the Bank of Algeria since 1994 to improve banking supervision and strengthen the financial position of commercial banks in Algeria.

17

The audit is being completed for the Banque Algerienne de Developpement Rural, whose financial situation has suffered from large nonperforming loans mainly to food-importing agencies. This problem was tackled in early 1997 through the takeover of these loans by the government in exchange for government bonds, for an amount of DA 187 billion (of which DA 50 billion for the debts of the Societe nationale de l’electricite (Sonelgaz) and the Societe nationale des transports ferroviaires, and the remainder for the debt of food- and pharmaceutical-importing agencies). The restructuring and financing needs of the CNEP are discussed in Chapter VI.

18

This was dramatically demonstrated at the end of 1995, when banks denied credit to several loss-making public enterprises (mostly in construction), resulting in layoffs of 130,000 workers and a general strike in February 1996.

19

See Abdelali Jbili, Klaus Enders, and Volker Treichel, Financial Sector Reforms in Algeria, Morocco, and Tunisia: A Preliminary Assessment (Washington: International Monetary Fund, 1997). In their study, econometric analysis provided some evidence that, on the one hand, financial sector reform did strengthen savings in Algeria. On the other hand, consistent with other studies, direct effects of financial sector reforms on growth were more difficult to pinpoint.

20

Reflecting an ongoing exodus from rural areas into cities, the urban population has been growing even faster, at 4.8 percent on average during 1981–90, and only in recent years did its growth fall below 4 percent (Office National des Statistiques, Retrospective 1962–1991, No. 35, Algiers, 1991).

21

The participation rate rose from 36 percent of all persons 15 years to 64 years of age in 1977 to 41 percent in 1991 on account of both rising male (from 71 percent to 75 percent) and female participation rates (from 3.5 percent to 6.7 percent).

22

A labor survey conducted in 1996 estimated unemployment at 28 percent. Current measures may overstate Algeria’s unemployment rate, however, since the definition used is wider than the International Labor Organization’s definition, that is, underemployed individuals can classify themselves as unemployed in the reference week. (S. Al-Qudsi, R. Assaad, and R. Shaban, “Labor Markets in Arab Countries: A Survey,” presented at the First Annual Conference on Development Economics, Cairo, 1993).

23

For an analysis of labor markets in Algeria, see Klaus Enders, “Labor Market Prospects in Algeria” (unpublished mimeo: International Monetary Fund, 1996).

24

The use of capital-intensive techniques was encouraged by the overvalued exchange rate and negative real interest rates.

25

The formal sector of the Algerian labor market comprises public sector and private sector firms with 10 or more employees, while the informal sector is made up of small firms as well as the self- and home-employed.

26

According to a recent World Bank report, social security contributions in Algeria amount to 20–30 percent of the wage bill; adding other nonwage costs, the share rises to 30–50 percent.

27

The existing apprenticeship scheme is not supported by formal curriculums or degrees. It might be possible to take certain elements of the German apprenticeship scheme, which provides young men and women with nationally recognized degrees that are obtained through practical work within a firm as well as attendance of a postsecondary school.

28

Subsidies on certain items (mostly food) were paid out of a special treasury extrabudgetary account, the Compensation Fund, which paid enterprises the difference between the import cost of the products and their controlled prices. This fund was financed by three sources of revenues: (1) budgetary transfers; (2) earmarked levies on imports and on domestic production in the form of compensatory taxes; and (3) other exceptional levies on domestic sales.

29

A larger fraction of subsidies accrued to consumers belonging to the upper deciles of the income distribution, reflecting their larger consumption: consumption of rice and flour by the top percentile was 5 times greater than that of the bottom decile; the ratio was 4 for bread, 3 for table oil, 2 for pasta and lentils, and 1.5 for semolina. See Michel Lazare, Ehtisham Ahmad, and JeanLuc Schneider, “Options pour la Reforme de la Protection Sociale,” Fiscal Affairs Department Technical Assistance Report (Washington: International Monetary Fund, February 1994).

30

See Ehtisham Ahmad and Philippe Marciniak, “Algeria: Social Safety Nets and Protecting the Vulnerable,” Fiscal Affairs Department Technical Assistance Report (Washington: International Monetary Fund, October, 1991).

31

The three other cash transfers were integrated into salaries, family allowances, and pensions, thus eliminating the burden of administrating these schemes on the government. To keep enterprise contributions (including social security contributions) unchanged, the budget took over the cost of the family allowance scheme.

32

Some public works, included in the Youth Employment Program, recruited young job seekers for short periods (six to nine months) at the minimum wage, and created about 40,000 temporary jobs annually.

33

For employees with 15 years or more, the total severance payment received is equivalent to 15 months of salary, as under the original system. Under the new system, however, the average amount of compensation received has gone down from the equivalent of 12.5 months of salary to about 12.3 months of salary, assuming a uniformly distributed labor force and a worklife of 45 years.

34

Assuming a uniform distribution of tenure and a worklife of 45 years, the average duration of benefits is 29.6 months.

35

The Compensatory and Contingency Financing Facility is an IMF loan facility that provides financial assistance to members experiencing temporary shortfalls in export earnings and temporary excesses in cereal import costs attributable to circumstances beyond members’ control.

36

The 1991 Compensatory and Contingency Financing Facility was in the form of an external contingency financing mechanism to be drawn in the event of lower oil prices. It was not activated, and the final review of the 1991 Stand-By Arrangement was not completed.

37

Import coverage would have been even lower relative to a noncompressed level of imports.

38

A 1978 law granted the state monopoly rights over all external transactions.

39

Concessionaires had the right to an exclusive dealership from a foreign supplier. These entities needed the approval of the Council on Money and Credit for importing or accepting foreign investment. The system was meant to improve supply and after-sales services in the economy.

40

If this quest failed, the importer could ask the Foreign Borrowing Committee to approve less favorable terms or use a foreign currency account.

41

Imports were subdivided into three categories: (1) “priority” imports relating to strategic commodities (including food staples, medicines, construction materials, school supplies, and products necessary for the development of the hydrocarbon sector), authorized by the Ministry of Trade, with implied quotas and a pricing policy to ensure uniform domestic prices; (2) “second priority” imports, that is, goods needed to promote production and investment in strategic, high-employment industries; and (3) restricted goods, mainly luxury consumer goods (added to another list of already-prohibited consumer goods), and 60 items that could only be financed by the importers’ own foreign exchange resources.

42

Except for private vehicles until the end of 1994.

43

Goods banned for religious, health, or social reasons; goods temporarily suspended until the end of 1994; and 10 basic commodities—mostly subsidized food staples—whose restrictions were phased out by the end of 1994.

44

A rescheduling of debts, amounting to $2.3 billion, was conducted in May 1991 with the Italian Export Credit Insurance Agency (SACE), and in March 1992, $1.5 billion was rescheduled with a group of commercial banks headed by the Credit Lyonnais.

45

Since the 1980s, in an attempt to cushion the impact of oil price changes, Algeria has strived to diversify its hydrocarbon sector and has successfully expanded the production of natural gas and crude oil derivatives to the extent that, by 1996, crude oil exports amounted to only 24.6 percent of total hydrocarbon export revenues, while natural gas exports accounted for 33.9 percent, with the remainder being petroleum products.

46

See Arab Petroleum Research Center, Arab Oil and Gas Directory, 1996.

47

Ibid, 1994.

48

Societe Nationale pour le Transport et la Commercialisation des Hydrocarbures.

49

Power generation was the responsibility of another parastatal, Sonelgaz.

50

The chronology of discoveries as reported in A. Benbitour, L’experience algerienne de developpement, 1992, is 80 percent before 1962, 11 percent in 1963–73, 4 percent in 1974–79, and 5 percent in 1980–87.

51

Naftal received the responsibility to manage oil refining and domestic distribution of petroleum products, including liquid petroleum gas. Eight new companies were created for special purposes (geophysical research, drilling, and petroleum engineering). Three enterprises were formed for civil works and pipeline construction and three others to produce fertilizers, petrochemicals, plastics, and rubber. Another entity was created for sea transport of hydrocarbon and chemical products. Finally, in 1987, Naftal was itself restructured when its refining activities spun off to a new enterprise, Naftec.

52

This is in part reflected in the slowdown in drilling activities, which fell from about 100,000 meters a year on average in the late 1970s to 75,000 meters in the first half of the 1980s.

53

Algeria’s per capita energy consumption is over 1 ton of oil equivalent a year, about twice that of Tunisia and four times that of Morocco.

54

This implicit subsidy was financed through lower revenue transfers from the oil refineries to the treasury.

55

In 1979, Sonatrach attempted to modify the price formula in existing contracts. In the course of negotiations, two previous customers (El Paso of the United States and British Gas) terminated their contracts with Algeria. In addition, the American company Panhandle later suspended its purchases of Algerian liquefied natural gas while Distrigas of Boston was forced into liquidation.

56

Only about 15 percent of Algeria’s 1.5 million square kilometers has been prospected for oil and gas. Thus, the country’s exploration density is low relative to other oil-producing regions: the number of drills per 1,000 square kilometers is less than 1, compared with 50 in North America, 4.5 in western Europe, and 9 in the states of the former Soviet Union. See A. Benbitour, L’experience algerienne de developpement, 1992.

57

Secondary recovery methods are used in about 70 percent of Algeria’s crude oil production.

58

See Thomas P. Enger, “The World Market for Natural Gas: Macroeconomic and Financial Implications,” IMF Paper on Policy Analysis and Assessment 93/15 (Washington: International Monetary Fund, 1993).

59

Major participants included Agip of Italy, Spain’s Cepsa, PetroCanada, Mobil, and Anadarko of the United States.

60

American, French, and Belgian companies provided technical expertise, while most of the financing came from export credit agencies of Canada, France, Japan, the United Kingdom, and the United States.

61

The analysis in this appendix draws on the study of Klaus Enders, “Labor Market Prospects in Algeria” (unpublished mimeo: International Monetary Fund, 1996). Assuming that Algeria’s GDP can be summarized by a simple Cobb-Douglas production function Y = ALα K1-α = ALk1-α, where Y is real GDP, L is employment, K is the capital stock, k = K/L is the capital stock per worker, A is a measure of total factor productivity (TFP), and a is the share of labor income in GDP, and denoting percentage change in a variable by a hat (^), and thus, Y^=L^+A^+(1-α)k^=L^+y^ with y = Y/L total labor productivity, the partial elasticity of employment with respect to output (i.e., given A and k) is then equal to one. The global elasticity referred to in the scenarios may be different if there are annual TFP gains (A^>0) and/or if capital endowment per worker k changes. Clearly, Algeria’s structural reforms should aim at raising TFP, which by itself would reduce demand for labor for any given output growth rate. In particular, reform of the public enterprise sector and labor shedding will raise A. At the same time, wage restraint would help lowering capital intensity (k); policies geared toward stimulating housing production (where the sectoral k is likely low) would lower the economy’s overall capital intensity; in agriculture, where land supply is more or less fixed, expansion of output may continue to require growth in employment; and in industrial sectors with currently low rates of capacity utilization, expansion of production would also result in employment gains without much additional investment.

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Cited By

Cover Algeria
Algeria
Stabilization and Transition to Market
Author: Ms. Nicole Laframboise, Ms. Patricia Alonso-Gamo, Mr. Alain Feler, Mrs. Stefania Bazzoni, Mr. Karim A. Nashashibi, and Sebastian Paris Horvitz
ISBN:
9781557756916
ISSN:
0251-6365
Publication Date:
06 Aug 1998
Publisher:
International Monetary Fund
DOI:
https://doi.org/10.5089/9781557756916.084
Pages:
92

Hydrocarbon Export Receipts

(In billions of US. dollars)

Structure of Hydrocarbon Production, Consumption, and Exports, 19931

Unemployment Rates Under Low- and High-Growth Scenarios