Import restrictions and structural reforms boost Algeria's domestic production

The fall in oil prices from mid-2014 onwards not only heralded an economic slowdown and a sharp rise in Algeria’s twin deficits, it also called into question the longer-term sustainability of the country’s hydrocarbons-dependent development model. In July 2016 the authorities unveiled their new growth plan, a strategic vision to transform the economy by 2030. The overarching objective is to promote economic diversification through accelerated growth in the non-hydrocarbons economy, particularly in manufacturing. This is to be accompanied by medium-term fiscal consolidation and a relatively neutral monetary policy. However, in late 2017 the government tweaked its economic strategy. In addition to postponing fiscal consolidation and loosening monetary policy to directly finance budget deficits and public investment, the authorities introduced a range of import restrictions and structural reforms to promote economic transformation, domestic production and long-term sustainability.

Import Barriers

Algeria has long imposed restrictions on imports through tariffs, excise duties, licensing and other behind-the-border measures. These can help improve the trade balance and promote domestic production by encouraging businesses and consumers to switch from purchasing imported goods to those produced domestically. In theory, such protectionism should shelter local industries until they are strong enough to become globally competitive, at which point import barriers can be phased out. Although such import substitution strategies have become somewhat unfashionable since the 1980s, they were popular in many now-advanced economies during their initial industrialisation phase and across the southern hemisphere in the post-Second World War period. The same mercantilist economic theory also underpins the increased trade protectionism being pursued by the current US administration of President Donald Trump in respect to steel and aluminium imports, for example. However, such a strategy is not without costs, which may arise in the form of increased prices, reduced choice of goods for consumers and intermediate inputs for domestic producers.

In January 2018 the government replaced the pre-existing import licensing regime with a more restrictive temporary import ban on 851 products. For the most part, these consisted of food and household consumer goods for which Algerian-produced alternatives are readily available, but it also included some industrial equipment and construction materials. At the same time, the government extended the list of imported goods subject to a 30% excise tax – which now includes salmon, dried fruit and confectionery – and increased Customs duties on certain electrical products and industrial goods to 60%, including laptops and tablets, electric cabling, and tractor and truck bodies. According to the Ministry of Commerce, the new import restrictions enabled the country to save $700m in the first quarter of 2018 alone.

In order to ensure that these import barriers stimulate domestic production, the authorities established a committee charged with monitoring implementation and advising on changes to the restricted list. Through the committee, Algerian producers can request that products be added or removed from the restricted list. For example, the list of import restrictions was revised in early 2018 following advice from the committee to exclude raw materials and intermediate imports destined for the production of final goods.

Updated Framework

In June 2018 the Complementary Finance Law unveiled temporary additional safeguards (droit additionnel provisoire de sauvegarde, DAPS), a new regulation designed to replace import restrictions in order to reduce imports and protect national industry. Indeed, the temporary import bans set up in January 2018 have generated significant discontent among economic operators due to the sudden deficit of key products, some of which were used as raw materials in specific industries, particularly in the agri-foods segment. To avoid such shortages and their related impact on local industrial production, DAPS plans to introduce taxes of between 30% and 200% on certain products that were previously subject to import restrictions.

A decree published in September 2018 indicated that an inter-ministerial committee will be in charge of determining the list of goods that will be subject to this new regulation mechanism, as well as the specific tax rate fixed for every item. Said Djellab, the minister of commerce, confirmed in early December 2018 that the list was being finalised by the committee.

Structural Reforms

Long dominated by the government and largely dependent on the hydrocarbons sector, Algeria does not yet benefit from a policy framework conducive to balanced, dynamic, private-sector-driven growth, despite some progress in recent years. Establishing such a framework will be key to unleashing the productivity potential needed in the non-hydrocarbons and private sectors to drive sustainable improvements in living standards. Substantial structural reforms are perhaps the most important, and also the most challenging, pillar of the government’s economic growth and transformation strategy.

There has also been speculation about potential reforms that would be aimed at reducing energy subsidies through increased taxes on fuel and electricity. Further adjustments to energy subsidies will likely target the households most in need, but no such changes were included in the 2019 budget. The central bank has also been charged with assessing the government’s implementation of reforms and reporting on their progress directly to President Abdelaziz Bouteflika. While this could ensure expert and independent evaluation of reforms by a competent and well-respected body, some have expressed concerns that the reporting structure could compromise the independence of the central bank.

In the 2018 Article IV Consultation for Algeria, the IMF highlighted the necessary policy reforms and emphasised the importance of their sequencing. Priority reforms noted by the IMF include: improving governance and transparency while reducing red tape; easing access to finance, particularly for small and medium-sized enterprises; opening up to foreign trade and investment, partly by relaxing the 51:49 rule; improving the functioning of the labour market, notably through advancing revision of the labour code; and encouraging more women to take up employment.

In a positive signal for reform, President Bouteflika made a rare address to the nation on November 1, 2018, the 64th anniversary of the outbreak of the Algerian revolution, and said the country must “meet the challenge of accelerating economic reforms and the diversification of national production to free ourselves from dependence on hydrocarbons and the fluctuation of their prices on international markets”. The government had already flagged plans to simplify business regulations, modernise the financial sector and reform the pension system; however, more concrete plans are not expected before late 2019.

Diversified Investment

In 2017 inward foreign direct investment (FDI) stock equalled 16.4% of GDP, half the level in Libya and less than a quarter of that in neighbouring Tunisia. While Europe, especially France, has traditionally been the most important source of FDI, Algeria has begun to look to markets in the east. Turkey is playing an increasingly important investment role, as evidenced by the visit of Turkey’s President Recep Tayyip Erdoğan to Algeria in February 2018 for the Turkey-Algeria Business Forum. In 2016 Turkey leapfrogged France to become the single biggest source of inward investment to Algeria. The Gulf countries have also become increasingly active investors, with international investment agreements concluded with Saudi Arabia and the UAE in 2016. China, too, is becoming a key player, accounting for 17.9% of total inbound trade to Algeria in 2016, making it the African nation’s biggest import market. In September 2018 Algeria signed a memorandum of understanding to join China’s Belt and Road Initiative, with a focus on potential future infrastructure investment in Algeria.

Broad-based structural reforms have the capacity not only to improve the business environment for Algerian firms, but to make it a more attractive destination for foreign investors. Nonetheless, there are a number of reforms that could prove particularly beneficial in terms of attracting FDI. For example, the 51:49 rule prohibits foreign investors taking a majority stake in Algerian firms or subsidiaries. Similarly, foreign contractors are required to seek local partners in bidding for public tenders. Investors are reluctant to transfer capital, technology or knowhow to a country in which they cannot maintain a majority interest, since minority stakeholders can be taken advantage of in the absence of sufficient protections. A relaxing of this rule would not only encourage increased inward FDI, but could have a beneficial spillover effect by boosting productivity in the rest of the economy. It would also increase the domestic, albeit foreign-owned, production base.

Next Moves

Loosening fiscal and monetary policy in the short term can serve to buy time and ease the adjustment process for the sort of structural reforms needed to promote economic dynamism in the medium to long term. Then, as reforms start to bear fruit in the medium term by way of increased demand and higher productivity, fiscal and monetary policy can be gradually withdrawn.

In effect, Algeria likely has a window of opportunity to implement reforms until mid- to late 2019, after which fiscal consolidation will be required and monetary financing reined in so as to avoid its twin budget and current account deficits becoming unsustainable, and its international reserves from being extinguished. While import restrictions can help to foster domestic production, they will be far from sufficient on their own to achieve the goal of a diversified and hydrocarbons-independent economy. Therefore, a lot hinges on the country making the most of its narrow reform window in the second half of 2019 to lay the foundations for more sustainable economic growth.