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Algeria - Significant changes in investment climate

Tuesday, 20 October 2009 18:20

The Algerian investment climate has gone through some significant changes in recent times. Over the course of 2009, sweeping governmental reforms have been implemented in an effort to curb the high level of imports and encourage local benefits from foreign capital inflows.

One of the most significant amendments is the revised partnership condition between local and foreign entities. Under the new regulations, all future investment from abroad must now partner with an Algerian-owned shareholding, limiting foreign ownership to a maximum of 49%. The measure further states that the National Board of Investment must first approve any proposed foreign direct investment project. Also, capital increases for partnerships must come from domestic services.

Another new regulation requires foreign traders, primarily importing companies, to have a minimum of 30% minimum local participation in their capital. Although doubts about the measure's implementation date - and in particular over whether it should be retroactive - lingered for the first few months of the year, in June the Ministry of Finance confirmed that the new raft of legislation would only count for companies established after July 28, 2009.

A trailer piece of legislation obliges all import-related payments to be secured through a letter of credit. In a reaction on heavy domestic and foreign criticism for unnecessarily increasing bureaucracy as well as costs, the Algerian Association of Banks and Financial Establishments indicated at the end of August that exemptions would be made in the case of imports of half-finished products as well as those "necessary for national production". Further specifications are soon to be expected.

Despite amendments to the measures in the months following implementation, such as the revision of retro active application and exemptions to the requirement of letters of credit, the objective has been clear from the outset: to increase the role of domestic companies in the country's economic development while reducing imports for the benefit of industrial development.

In recent years, revenues from hydrocarbons have resulted in a comfortable current account surplus. However, due to the lower oil prices and growing levels of imports, the trade balance has come under increasing pressure.

During the first half of 2008, exports exceeded imports by an impressive total of $22.21bn, while imports totalled $21.95bn during the same period. As a result of fluctuations in the price of oil, export revenues continued to dwindle through most of 2009, while import levels continued to grow. Consequently, the nation's trade surplus stood at $1.44bn after the first seven months of the year.

The changes have slowed commercial activity, particularly amongst foreign investors who faced a significant tightening of business opportunities in the country.

The EU has also been critical. At the end of June, the EU trade commissioner, Catherine Ashton, expressed her disagreement with the 30% ruling in a letter to the government, claiming that it was in violation of the Association Agreement between the EU and Algeria, signed in 2008.

In a reaction to Ashton's criticism, Hachemi Djaâboub, Algeria's minister of commerce, stated that, "Algeria takes its decisions in full sovereignty and no one can assume the right to dictate what it must do." Nevertheless, the decision in July not to apply the measures in a retroactive manner has helped European concerns.

The 51% ruling has also led to some anxiety as local companies with the capability to carry the necessary financial load are few, and predominantly public.

Anticipating these issues, the Ministry of Finance has established a national investment fund of $2.1bn. During its official launch in March of this year, Karim Djoudi, the minister of finance, declared that its mandate "will cover the financing of investments of public projects and those of the productive sector by local banks rather than resorting to foreign debt."

The implementation of the new rules showcases the country's plans to increase the benefits derived from the activities of foreign companies. The need for higher local production levels has been evident for some time and Algeria has long sought to boost capital and knowledge flows within the country. Although the swift implementation of the new measures have led to questions over the consistency of the country's investment climate, it highlights the government's desire to strengthen the domestic economy's competitiveness.

Global Arab Network

This article is published in partnership with Oxford Business Group

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Last Updated on Thursday, 22 October 2009 13:23

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