External developments have always played a key role in Algeria’s economy owing to the dominant role of the hydrocarbon sector, which contributes a large share of budget revenue, and whose exports have generally accounted for more than 95 percent of total export receipts. Changes in the external environment and domestic economic policies have, therefore, remained closely intertwined. Persistent domestic financial imbalances in the late 1980s hindered attempts to liberalize external transactions and gave rise to an overvalued exchange rate and mounting external debt as unsustainable absorption levels were financed by borrowing abroad. Escalating debt service costs precipitated the withdrawal of external financing in the face of a looming balance of payments crisis at the end of 1993, which, in turn, was one of the key factors behind the authorities’ decision to implement a drastic adjustment program. Since a realignment of relative prices and price liberalization were the cornerstone of the reform package launched in 1994, the latter was accompanied by a large up-front devaluation and included broad trade and exchange rate liberalization measures. These steps had widespread repercussions on the financial position of enterprises and banks, and on the budget balance, which had to be addressed in the context of structural reforms. This section examines external developments since the mid-1980s, as well as different aspects of external policies and their role in the overall reform process.

External developments have always played a key role in Algeria’s economy owing to the dominant role of the hydrocarbon sector, which contributes a large share of budget revenue, and whose exports have generally accounted for more than 95 percent of total export receipts. Changes in the external environment and domestic economic policies have, therefore, remained closely intertwined. Persistent domestic financial imbalances in the late 1980s hindered attempts to liberalize external transactions and gave rise to an overvalued exchange rate and mounting external debt as unsustainable absorption levels were financed by borrowing abroad. Escalating debt service costs precipitated the withdrawal of external financing in the face of a looming balance of payments crisis at the end of 1993, which, in turn, was one of the key factors behind the authorities’ decision to implement a drastic adjustment program. Since a realignment of relative prices and price liberalization were the cornerstone of the reform package launched in 1994, the latter was accompanied by a large up-front devaluation and included broad trade and exchange rate liberalization measures. These steps had widespread repercussions on the financial position of enterprises and banks, and on the budget balance, which had to be addressed in the context of structural reforms. This section examines external developments since the mid-1980s, as well as different aspects of external policies and their role in the overall reform process.

Balance of Payments Developments

Developments Until 1994

Up until the mid-1980s, high oil prices had allowed Algeria to finance high domestic absorption. The dramatic fall in oil prices in 1986, however, highlighted emerging domestic macroeconomic imbalances and the country’s vulnerability. Algeria’s crude oil export price fell by one-half between 1985 and 1986, and total export revenues declined by 38 percent (see Figures 10, 11, and 12). In response, although the authorities stepped up borrowing, they had to resort to import restrictions and, between 1985 and 1987, imports declined by 43 percent in real terms. State enterprises, unable to purchase needed supplies, ran into difficulties, and strong incentives for the emergence of a parallel foreign exchange market were generated.

Figure 10.
Figure 10.

Oil Prices and Real GDP Growth

(Annual changes, in percent)

Source: Algerian authorities.
Figure 11.
Figure 11.

Impact of Oil Price Changes on the Economy

(Annual changes, in percent)

Source: Algerian authorities.
Figure 12.
Figure 12.

Hydrocarbon Export Receipts

(In billions of U.S. dollars)

Source: Algerian authorities.

Although oil prices recovered gradually by 1990, and rose sharply during the 1991 Gulf crisis, Algeria made an effort to move to a more open, market-driven economy, and entered into two financing arrangements with the IMF in 1989 and 1991. Both programs were accompanied by a purchase under the IMF’s Compensatory and Contingency Financing Facility35 on account of fluctuations in exports and the cost of cereal imports.36

In 1991, Algeria had been experiencing the effects of prolonged drought conditions, and international oil prices had begun to decline again. Algeria’s balance of payments during this period was characterized by reserve losses and increased borrowing. The stock of external debt rose from $18.4 billion (about 30 percent of GDP) in 1985 to $26.5 billion (63 percent of GDP) in 1993. Not only was the increase substantial but, by 1994, the maturity profile was shortened and unevenly distributed; new borrowing—mostly from export credit agencies—had been short-term in nature (two to three years), and thereby contributed to raising the debt-service ratio from 35 percent of exports of goods and nonfactor services in 1985 to an unsustainable level of 82 percent in 1993 (see Table 9).

Table 9.

Balance of Payments

(In billions of U.S. dollars)

article image
Sources: Data provided by the Algerian authorities; and IMF staff estimates.

Does not include the reprofilage in 1992 of debt to commercial banks and an export credit agency.

Includes short-term debt and use of IMF resources; excludes debt to Russia.

While efforts to improve openness had made some progress, the reform package was incomplete, and the heavy debt-service burden hindered efforts to expand productive capacity through new investment and prevented any serious recovery in growth. These circumstances set the stage for a reversal in the trend toward a more open trade regime. In 1992, trade policies reverted to past administrative practices as further explicit exchange restrictions were applied and a wider range of imports was prohibited. Growing imbalances, however, could not be contained by this approach and a foreign exchange crisis emerged at the end of 1993 when reserves had declined to below $1.5 billion (about one month of imports).37

Developments Since 1994

To address the crisis, a major reform initiative was launched in early 1994, supported by an IMF arrangement and comprehensive debt rescheduling. A 12-month Stand-By Arrangement in April 1994 was followed by a three-year Enhanced Fund Facility in May 1995. Both arrangements were accompanied by a Compensatory and Contingency Financing Facility purchase and Paris Club reschedulings. A rescheduling agreement with the London Club was reached and concluded in June 1996.

The external sector objectives of the authorities’ program were to reduce the debt service to a sustainable level and to establish balance of payments viability by mid-1998. The key element was an up-front devaluation of the Algerian dinar and the switch from an exchange rate peg to a managed float responsive to market signals. Unlike previous occasions, the devaluation was accompanied by external assistance and appropriately supportive economic policies that enhanced its contribution to the stabilization and recovery process. These included (1) major liberalization of prices and the exchange and trade systems to realign domestic prices with world prices and provide the appropriate market incentives; (2) tight financial policies; and (3) structural reforms to establish market mechanisms and elicit a supply response. The reform strategy was designed to help relieve import shortages that had arisen due to administrative controls. This was achieved by accompanying trade liberalization with sufficient external financing so as to allow greater domestic absorption and preserve per capita income even in the context of the adjustment program. The external current account shifted from a surplus of 1.6 percent of GDP in 1993 to a deficit of 5.3 percent of GDP in 1995.

External conditions were adversely affected by a decline in the terms of trade in 1994 because of lower oil prices, and in 1995 because of higher cereal import costs, while external financing flows declined significantly (see Figure 13). In 1994, capital inflows were still fairly high at $4.6 billion, which, together with balance of payments support, allowed for a buildup in official reserves to three months of imports and a reduction in the debt-service burden from 82 percent of exports to 49 percent (see Figure 14). By contrast, in 1995, the increase in nonhydrocarbon imports following import liberalization measures, a severe drought, and exchange rate movements—which raised debt-service costs in U.S. dollars terms—contributed to a deterioration in the current account deficit to more than 5 percent of GDP. With little new borrowing, despite balance of payments support of $6 billion, official reserves declined by $530 million.

Figure 13.
Figure 13.

Trade Flows

(In billions of U.S. dollars)

Source: Algerian authorities.
Figure 14.
Figure 14.

Debt and Debt Service

Source: Algerian authorities.

These trends changed radically in 1996 and 1997: while hydrocarbon export receipts advanced strongly as average oil prices surged by $4 to $21.7 a barrel, imports contracted after pent-up demand for imports was satisfied and stocks were replenished, and the current account moved into a surplus of 2.7 percent of GDP in 1996 and 7.3 percent of GDP in 1997. Despite a further decline in capital inflows to $1.8 billion, foreign reserves rose by more than $2 billion to $4.2 billion by the end of 1996, and $8 billion by the end of 1997.

Trade Policy

Trade Policy and Reforms Prior to 1994

During the 1970s and 1980s, decisions related to external trade were centrally planned.38 The government awarded monopoly importing rights to designated public enterprises, and all other public and private firms needed prior authorization by the central bank for the payment of imported goods and services. In 1989, a gradual but significant liberalization of the trade regime was initiated (see Box 11). Centralized import controls were replaced by a more flexible system whereby firms were allocated a certain amount of foreign exchange and credit for use at their discretion. The Law on Money and Credit, adopted in April 1990, was accompanied by the Supplementary Finance Law in August 1990, which introduced a system of concessionaires and wholesalers, contributing to the breakup of the import monopolies to some degree.39 From April 1991, any entity on the Algerian commercial registry became eligible to import goods for resale as a wholesaler, thereby greatly increasing competition, and importers of merchandise were given full access to foreign exchange at the official rate. All import licensing restrictions were abolished, although a few imports continued to be subject to administrative control owing to domestic trading restrictions. Each import transaction was channeled through a bank that had to help the importer find foreign credits on appropriate terms.40 Restrictions on trade-in services—tourism, and health and education expenses abroad—remained.

Trade Regime and Foreign Exchange System—Pre-1994 Chronology of Reforms


  • Only registered public enterprises (41) were authorized to import with foreign exchange allocated by a centralized system of import licenses; other entities needed government authorization; 100 percent of export receipts had to be surrendered immediately to the Bank of Algeria.

  • The Algerian dinar exchange rate was pegged to a basket of currencies; no interbank foreign exchange market was in existence and all foreign exchange was held at the central bank; nonresident foreigners were allowed to hold foreign currency accounts; nationals could hold foreign currency accounts with accredited institutions if the funds had been transferred from abroad or between banks; direct deposits by residents were allowed provided the funds were declared upon entry into the country.


  • Imports financed by credits in excess of 90 days required Bank of Algeria authorization; imports under $2 million had to be paid in cash or with financing terms under 90 days.


  • Imports under DA 10,000 were unrestricted; accredited importers were allowed to import certain items without restrictions using their own foreign exchange; the surrender requirement was reduced to 50 percent for agricultural exports, 20 percent for tourism receipts and wine, and 10 percent for transport, insurance, and financial services; exporters had to use their own foreign currency for authorized imports, and could only exchange it at the Bank of Algeria.

  • Companies as well as individuals were allowed to hold foreign currency accounts that could be funded by retention of foreign exchange from export activi-ties; funds could be transferred to other foreign currency accounts or used abroad to pay for imports.


  • All entities were allowed to import for their own use or resale except goods prohibited by the state; imports of privately financed automobiles were suspended; certain strategic items (food, medicine, construction materials) were subject to controls due to domestic trading restrictions; import requests had to be channeled through accredited banks that had to try to attain financing terms over three years for capital goods and 18 months for all other imports.

  • Foreigners were allowed to hold foreign currency accounts; account holders could obtain forward contracts against currency risk from their financial institutions.


  • Imports were subject to (1) an import duty (scale of 6), (2) an ad valorem fiscal surtax, and (3) a duty surcharge of 2.4 percent; under tariff reform, international tariffs were harmonized: the number of tariff rates was reduced from 18 to 6 (0.3 percent, 7 percent, 15 percent, 25 percent, 40 percent, and 60 percent); the maximum rate was reduced from 120 percent to 60 percent, the number of exemptions was also reduced; all imports in excess of $100,000 and financed by official foreign exchange reserves had to be authorized by the Ministerial Comite Ad Hoc; imports were restricted according to the following classification: “priority,” “second priority,” and “prohibited.”

  • Commercial banks were allowed more freedom to manage foreign exchange from export receipts; they were no longer required to submit to the central bank foreign exchange borrowed abroad or arising from nonhydrocarbon exports.

In 1992, renewed financial imbalances led authorities to tighten exchange restrictions and broaden import prohibitions. In late 1992, authorities started to enforce strict rules on financing: transactions over $100,000 had to be approved by the Comité Ad Hoc, and commercial credit had to meet minimum maturity requirements ranging from 18 months to 36 months. Since trade financing on these terms was not available for imports of intermediate goods, imports were biased toward finished products. To offset this bias, authorities decreed that “nonpriority” imports would be denied access to foreign exchange.41

Essentially, from the onset of the reverse oil shock in 1986 until March 1994, the government attempted to contain imports using trade and payments restrictions. As a result of these policies, import volumes in 1988 were about 30 percent lower than in 1985. After some increase in imports following the liberalization of 1989, controls and exchange restrictions were intensified again in 1992 to ensure the full servicing of external debt and protect a minimum level of foreign exchange reserves. By 1993, imports were only two-thirds of their 1985 level in real terms. Import rationing had a severe negative impact on the manufacturing and construction sectors, depriving them of needed equipment and supplies.

Trade Reforms Since 1994

The reform package launched in 1994 included broad trade liberalization measures. The removal of restrictions that began in April 1994 was executed in stages: the rule that certain consumer imports be exclusively financed by the importer’s own foreign ex-change was eliminated;42 imports of used industrial and professional equipment were liberalized; minimum maturity requirements on import financing were abolished (gradually in the case of capital goods imports). To increase openness and foster regional integration, tariff protection was also reduced and maximum import tariffs were lowered first in 1996, from 60 percent to 50 percent, and then to 45 percent on January 1, 1997. Import prohibitions were limited to three categories43 but were subsequently completely abolished by the middle of 1995. On the export side, virtually all previous export prohibitions—about 20 items—were eliminated. By June 1996, Algeria’s trade system was free of quantitative restrictions.

As a result of trade liberalization, imports rose sharply in 1994 and this upward trend continued in 1995. Nonetheless, total imports in 1995 remained below the 1990 level in real terms and despite trade liberalization, imports declined in real terms in 1996 and stayed at that level in 1997. This occurred for several reasons: imports declined in 1996 after an initial surge to satisfy pent-up demand; food imports fell in the wake of an exceptional domestic agricultural harvest; and state enterprises experienced difficulties obtaining foreign financing, while domestically they became subject to increasingly hard budget constraints at a time when they suffered from more intense competition. In addition, consumer goods imports declined owing to falling real house-hold incomes. These forces continued to exert down-ward pressure on import growth in 1997, although a more fundamental change in the economy’s propensity to import has evolved because of the adjustment program; that is, imports as a share of GDP have declined following the closure of restructuring of inefficient, import-intensive public enterprises. Consequently, the composition of imports is also changing, and while non-oil economic activity remains weak, imports are expected to remain subdued. Over the medium term, imports are expected to grow in line with GDP and further tariff reductions are envisaged in the context of a Free Trade Agreement currently being negotiated with the European Union, as well as membership in the World Trade Organization.

Exchange Rate Policy and Exchange Restrictions

Exchange Rate Policy

From January 1974, the exchange rate of the Algerian dinar was pegged to a basket of currencies, which was adjusted from time to time. The U.S. dollar was assigned a relatively large weight in the basket due to its importance in oil export receipts and debt-service payments. The substantial appreciation of the U.S. dollar during the first half of the 1980s led to a correspondingly large rise (about 50 percent) in the real value of the Algerian dinar, thus undermining the competitiveness of nonhydrocarbon exports and stimulating imports. In 1986, Algeria’s economy experienced the reverse oil shock, and the government responded to the dramatic erosion of export revenue by borrowing abroad and intensifying import restrictions. Concurrently, an active exchange rate policy was adopted, which involved a depreciation of the Algerian dinar against the basket by 31 percent between 1986 and 1988. Nevertheless, with the allocation of foreign exchange subject to a myriad of restrictions, demand for foreign exchange in the informal market grew, driving the premium in the parallel market rate to a factor of about 5.

Starting in 1988, this rigid system was replaced by a system of foreign exchange allocation to the five public commercial banks within the framework of credit ceilings, which were consistent with balance of payments targets, with banks allocating foreign exchange to their client public enterprises. From 1991, the Council on Money and Credit was made responsible for setting foreign exchange and external debt policy, and for approving foreign investments and joint ventures. The Supplementary Finance Law of August 1990 granted businesses and individuals the right to hold foreign currency accounts. Between 1989 and 1991, the Algerian dinar was allowed to depreciate to counteract the terms of trade losses during this period. In 1991, as part of an attempt to realign domestic relative prices and increase openness, the Algerian dinar was devalued by more than 100 percent to DA 22 per U.S. dollar (see Figure 15). During 1991–94, the rate of nominal depreciation averaged only 4 percent annually, bringing the value of the Algerian dinar to about DA 24 per U.S. dollar on the official market. This relative stability of the nominal rate did not correspond to economic fundamentals: adverse terms of trade shocks and expansionary domestic financial policies had led to inflation persistently higher than Algeria’s trading partners. The Algerian dinar, therefore, appreciated by 50 percent in real terms between October 1991 and the end of 1993, while the ratio between the parallel market rate and the official rate—which had fallen from about 5 in the mid-1980s to 2 in 1991—rose again to 4 by early 1994.

Figure 15.
Figure 15.

Exchange Rate Developments

(1990 = 100)

Source: IMF staff.1Trade-weighted index of nominal exchange rate deflated by seasonally adjusted relative consumer prices; increase means appreciation.

The immediate objectives at the outset of the adjustment program in 1994 were to correct the over-valuation of the Algerian dinar, allowing its value to be determined by market forces, and to make the system more transparent. A large devaluation of the Algerian dinar of about 50 percent took place in two steps: in March–April 1994, bringing the Algerian dinar to DA 36 per U.S. dollar; then again at the end of September 1994, bringing the Algerian dinar to DA 41 per U.S. dollar. The parallel rate fell to about twice the official rate during this time.

Following the devaluation in 1994, the exchange rate was managed flexibly, and some nominal depreciation took place until mid-1996 (Figure 15). Since that time, tight financial policies and the strengthening in Algeria’s external position have resulted in increased nominal exchange rate stability, helping in turn to anchor lower inflationary expectations. The authorities intend to continue allowing market forces to determine the exchange rate, while adapting their intervention to avoid any sustained real effective appreciation, thus promoting economic diversification. Such a policy would help protect Algeria from some of the destabilizing effects of energy price volatility by facilitating adjustment in the face of external shocks. A deepening in the domestic financial and foreign exchange markets and their integration into global financial markets would further enhance this process.

Reform of the Exchange System

In the 1970s and 1980s, the central bank allocated foreign exchange, mostly from hydrocarbon exports, by a centralized system of import licenses awarded to approved trading entities. In addition to a complicated system of import authorizations, Algeria maintained a set of exchange premiums for remittances in excess of preset thresholds that constituted multiple currency practices. On the export side, exporters—with few exceptions—were generally not allowed to retain export earnings, and allowances for travel abroad were restricted. Under the two IMF arrangements between 1989 and 1992, currency convertibility was seen as key for greater economic efficiency and sustained growth. Financial imbalances coupled with high debt-service payments, however, led to a tightening of restrictions on international transactions in 1992–93: minimum maturities for new trade credits were enforced, while access to foreign exchange or credits was increasingly denied to importers. The immediate concern of the authorities was to lower the debt-service ratio and avoid resorting to a debt rescheduling.

Beginning in October 1994, the exchange rate became flexible by means of daily fixing sessions, organized by the Bank of Algeria. The exchange rate for all transactions was determined daily based on bids submitted by commercial banks at the beginning of each session and the availability of foreign exchange. An important step taken in January 1996 was the introduction of an interbank foreign exchange market in which commercial banks and financial institutions were allowed to hold positions in foreign currencies and trade among themselves. Foreign exchange surrender requirements for exports were lowered on average and unified at 50 percent, with the exception of earnings from hydrocarbon and mining exports. Export proceeds could be repatriated directly on the interbank foreign exchange market and represented, in the initial stage, the bulk of resources for banks and financial institutions.

As oil export proceeds from Sonatrach revert to the Bank of Algeria, the latter remains the largest supplier of foreign exchange, and hence plays a major role in the interbank market. Nonetheless, commercial banks have adapted well to the new system and to new prudential regulations on open foreign positions established with IMF assistance. The system of foreign currency accounts was retained at this stage to preserve confidence among foreign exchange earners, particularly the private sector, and to avoid disrupting workers’ remittances. A further step in the exchange system reform, the establishment of bureaux de change to deepen the market and broaden the public’s access to foreign exchange, took place in December 1996.

Payments for current transactions were also liberalized. In April 1994, the Comite Ad Hoc was dissolved; the rule that some imports be exclusively financed by the importer’s own resources was eliminated; and minimum maturity requirements on import financing were abolished, with the exception of capital goods imports, which were gradually phased out in 1995. By mid-1995, all exchange rate controls on merchandise trade were dismantled. Restrictions on payments for invisibles were to be removed in stages—first for health and education, and later for all other invisibles. In addition, banks became free to provide foreign exchange to importers for bona fide requests, while the Bank of Algeria ended the provision of forward cover on foreign exchange that had been extended to enterprises. The system of foreign currency accounts, however, was retained to promote confidence among foreign exchange earners and attract foreign remittances. By the end of 1996, payments for health, education, and other expenditures abroad could also be authorized by commercial banks up to a specific ceiling beyond which Bank of Algeria authorization was required. The final restrictions on payments for the remaining current transactions, including tourism travel, were lifted in 1997, and Algeria accepted the obligations of Article VIII in September 1997.

External Debt Burden and Critical Role of External Financing

Algeria borrowed heavily in the 1980s and much of this borrowing was used to finance either consumption or investments with low rates of return in the ailing state industrial complex. As a result, the stock of medium- and long-term external debt rose to 70 percent of GDP in 1994, while its average maturity had fallen substantially since much of the new borrowing in the early 1990s took the form of short-term suppliers’ credits maturing in one to three years. Consequently, annual debt service costs rose to more than $9 billion, equivalent to 82 percent of total export receipts and almost one-fourth of GDP. In conjuction with the 1991 Stand-By Arrangement, the Algerian authorities eschewed a comprehensive debt rescheduling in favor of voluntary refinancings on a creditor-by-creditor basis reprofilage. These reschedulings only dealt with a small part of the external debt on a voluntary basis and did not provide sufficient relief.44 Nevertheless, the government continued to scrupulously meet all external debt payments until they reached 85 percent of export proceeds. The external payments situation then became unsustainable and, in April 1994, Algeria requested a comprehensive debt rescheduling from its bilateral official and commercial creditors.

With the request for multilateral debt rescheduling, capital inflows declined markedly, mostly because official export credit agencies withdrew cover to Algeria. Paradoxically external borrowing, which had consistently exceeded $6 billion annually in the late 1980s and early 1990s—when macroeconomic imbalances were rising—dropped to $4.5 billion in 1994, $3.2 billion in 1995, and further to $1.7 billion in 1997, when macroeconomic stability was restored. Offsetting this decline, however, Algeria received balance of payments support of more than $21 billion between 1994 and March 1998, most of which came from debt rescheduling by the Paris and London Clubs (see Box 12). The remainder was provided as balance of payments support by multilateral financial institutions, most notably the IMF, which provided about $3 billion during this period. Overall, the combination of exceptional financing and new borrowing from official and commercial creditors provided Algeria with external financing of about $30 billion between 1994 and 1997: $10.3 billion in 1994, $9.3 billion in 1995, $6.3 billion in 1996, and $4.7 billion in 1997.

External financing aided the adjustment process in Algeria through several channels. First, in the absence of balance of payments support during the initial stages, growth, investment, and consumption would have undergone a much more severe and prolonged slump than actually occurred. After experiencing declines in 1993–94, real GDP grew by more than 4 percent in 1995 and 1996, the highest consecutive rates of economic growth since 1985. Without this financing, ceteris paribus, imports would have been lower, thereby jeopardizing growth prospects by reducing imports of capital goods and intermediate inputs. In 1995, imports of investment goods and consumer durables recovered strongly as pent-up demand was unleashed by the trade liberalization of 1994–95. In a climate of economic austerity, eliminating shortages and filling stores with foodstuffs and consumer products—albeit at high prices—may have had an important positive influence on public support for the program. Second, it allowed Algeria to restore reserves from an uncomfortably low level in 1993 to almost three months of imports in 1994, thereby providing an important signal of stability to international markets. With higher oil prices, official foreign exchange reserves reached the equivalent of almost nine months of imports by the end of 1997, and debt service as a share of total export receipts fell to 30 percent.

Reschedulings with the Paris and London Clubs

Paris Club

In June 1994, following the approval of a Stand-By Arrangement with the IMF, Algeria agreed on a debt rescheduling package with the Paris Club group of official bilateral creditors. Algeria obtained relatively generous rescheduling terms, with creditors agreeing to include debts contracted before September 1993—the “cutoff date”—and a graduated repayment schedule over 15 years with a short grace period (compared with the standard Paris Club terms of 10 years’ maturity with five years’ grace). The rescheduling covered loans with an original maturity of over one year extended to, or guaranteed by, the government of Algeria (including state agencies), and excluded creditors with claims of less than SDR 1 million falling due during the consolidation period (although these were to be paid on the original due dates or no later than a specified dead-line).1 The 1994 agreement contained a socalled “goodwill clause,” indicating that Paris Club creditor members would meet in principle to consider pre-cutoff debts falling due after May 31, 1995, provided Algeria implemented the terms of the agreement, continued to have a program with the IMF, and reached refinancing arrangements with other creditors on comparable terms.

In July 1995, after the approval of the Extended Arrangement with the IMF in May 1995, a follow-up “exit” rescheduling was agreed. Given the short maturities on Algeria’s debt, the second rescheduling effectively amounted to a restructuring of most of Algeria’s debt stock.2 Indeed, in 1995, Algeria received debt relief on principal falling due over a span of three years (the consolidation period) as compared to the standard Paris Club consolidation period of 12 months to 18 months (as received in 1994). The agreement stipulated that the provisions would apply each year until 1998, provided Algeria continues to have an arrangement in good standing with the IMF (to be confirmed by IMF reports to the Paris Club), and that Algeria has made on due dates all payments referred to in the agreement to Paris Club creditors. In late 1996, the Paris Club implemented the second tranche of the agreement, covering maturities through June 1997, and the implementation of the third tranche was approved in July 1997.

The Paris Club deals provided over $12 billion in cashflow relief during the period covered by the Stand-By and Extended Arrangements. This had a significant impact on Algeria’s debt-service costs, which fell from 82 percent of exports in 1993 to 42 percent in 1995, and an estimated 31 percent in 1996.

London Club

Algeria reached an agreement in September 1995 with the Steering Committee of Commercial Banks—known as the London Club—on the terms of commercial debt rescheduling that was endorsed by all participants in June 1996. The agreement covered debts falling due between March 1, 1994 and December 31, 1997: a total of $3.23 billion, including $1 billion in previously rescheduled debt. Under this agreement, all previously rescheduled debts (excluding those owed to Japanese leasing companies) were rescheduled over 15½ years, with a 6½ years’ grace period. This new amortization period is longer not only than the one granted by commercial banks on previously rescheduled debts, but also than the one granted by Paris Club creditors on pre-cutoff date debt. The London Club agreement also included provisions for debt/equity conversions, debt buybacks, and debt exchanges.

1 Specifically, the June 1994 agreement rescheduled the following pre-cutoff date obligations: (1) all principal and interest due and not paid as of May 31, 1994; (2) all principal falling due between June 1, 1994 and May 31, 1995; and (3) all interest falling due between June 1, 1994 and October 31, 1994. Rescheduled amounts were to be repaid in 24 semiannual, gradually increasing installments starting on May 31, 1998.2 The July 1995 agreement rescheduled pre-cutoff date obligations for (1) all principal falling due between June 1, 1995 and May 31, 1998; and (2) all interest falling due between June 1, 1995 and May 31, 1996. The provisions of the June 1994 agreement were not affected by the 1995 deal. Repayments on these amounts are to be made in 25 semiannual gradually increasing installments starting on November 30, 1999 and ending in 2011.

Future Prospects

To date, even in the absence of large capital flows outside the oil sector, Algeria’s balance of payments position has strengthened dramatically—owing to the tight domestic demand policies and a recovery in oil prices. Resort to exceptional balance of payments financing is expected to cease in 1998. While still high, debt and debt-service ratios are expected to fall to below 30 percent in the medium term, even on the basis of fairly conservative oil prices. With the improvement in Algeria’s financial position and the restoration of macroeconomic balances, international confidence has resumed—as illustrated by the increase in the secondary market price of Algerian debt from $0.56 in September 1996 to about $0.88 by June 1998—and Algeria’s access to external financing has begun to recover.

Algeria’s balance of payments position, however, remains fragile and sensitive to a number of elements beyond its control, particularly the vagaries of international oil prices. Fluctuations in oil prices have obvious implications for the trade balance since hydro-carbon exports continue to represent about 95 percent of total export receipts.45 Notwithstanding the need for reducing the country’s vulnerability by diversifying exports, hydrocarbon exports are likely to continue to dominate Algeria’s trade flows in the long term in view of the country’s proven hydrocarbon reserves, particularly natural gas. Moreover, aside from the impact of the hydrocarbon sector on the domestic economy, other elements of the balance of payments are affected by growth prospects in the industry, such as trade in oil-related services, and foreign investment and related imports.

In addition, Algeria continues to be vulnerable to changes in world cereal prices, since it is the largest importer of durum wheat. Its total food imports exceed $2 billion. There is substantial scope for reducing this vulnerability, as price liberalization in agriculture has increased production, while granting property rights to farmers in 1998 is expected to lead to an increase in investment.

A third key element for future sustainable growth compatible with external viability will be Algeria’s ability to attract non-debt-creating private capital flows, especially for investment in the nonhydrocarbon sector. The external debt burden is still high, and new external borrowing is likely to be undertaken prudently. As the economy evolves and market forces are free to allocate resources to their most productive uses, Algeria should be able to attract capital flows and direct investment commensurate with the economy’s productive potential. This would permit higher imports and promote the acquisition of foreign technology and expertise. Improved confidence in Algeria’s economic prospects and a stabilization of the economic and political picture will be instrumental in Algeria’s ability to attract higher levels of foreign investment.

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Stabilization and Transition to Market