Imports, red tape stifle Algeria diversification

Recently high oil prices mean Algeria’s economy is still growing. But the factory where Fertas Salah works shows how attempts to diversify are stuttering, condemning its young men to idleness.

The factory making brass taps, household fittings and cutlery is losing money as bureaucracy and a lack of investment hamper efforts to adapt to counter more nimble Chinese rivals.

“The demand is huge but we can’t respond because we are not investing,” said Fertas, general manager of the state-owned Saniak plant 280km east of Algiers. “Our equipment is aged—the government hasn’t bought any since 1994.”

President Abdelaziz Bouteflika, the overwhelming favourite to win elections on April 9, has pledged $150-billion to modernise the economy, build one million homes and address mass unemployment which stands officially at 12% but rises to 70% among the young.

Yet critics say many of the projects are behind schedule and failing to create the millions of jobs needed to restore hope to the population of Africa’s second-biggest country.

“Sustained efforts are needed to diversify the economy and reduce dependence on the hydrocarbon sector, improve productivity and the business climate,” said the International Monetary Fund in a February public information notice.

Bouteflika, running for a third five-year term, is promising to push ahead with big infrastructure projects to help the Opec member recover from a brutal civil conflict that raged through the 1990s, leaving up to 150 000 people dead.

The state-funded dash to build roads, railways, dams, houses and airports helped the non-oil economy grow 6% in 2008—but industries that create skilled, long-term jobs such as textiles, manufacturing or food production have shrunk.

At the Saniak plant, employees in tatty overalls toil amid the clang of outdated machines.
One worker wears no face protection as he pours molten brass into a mould.

The firm is struggling to find skilled workers: engineers unhappy with their pay are quitting every day, making it harder to update its products and stay in the game, said Fertas.

Locals hoped business would grow and that Saniak would add to its 470-strong payroll, but sales slipped to 2,43-billion dinars ($32,44-million) last year from 2,46-billion in 2007.

“Stagnation is a bad sign, especially as demand is strong,” said Fertas. “Decisions are made by bureaucrats and politicians in Algiers. They know nothing of the reality here in the firm.”

Grain importer
Algeria moved away from centralised economic planning in the 1990s but bureacratic foot-dragging, antiquated banking and poor training have forced non-oil industries into steady decline.

Oil and gas now account for about 96% of exports.

The share of non-oil industry in Algeria’s economy has tumbled to less than 5% from 18% in 2003 and is still falling, according to Algeria’s Business Leaders Forum.

As oil export income grew, the country has fallen back on imports to meet growing demand for food, clothes, consumer goods, machinery and construction materials.

Algeria has turned from a colonial bread basket into one of the world’s biggest grain importers as farmers abandoned the land, and construction along its fertile northern coastal strip shrinks the area available for food production.

Energy and Mines Minister Chakib Khelil said last month the country would earn about $30-billion from oil and gas sales this year if energy prices stay at current levels, down from $76-billion in 2008.

Imports were more than $40-billion last year.

The sprawling port in central Algiers has become overwhelmed and dozens of ships queue for days in the bay to unload.

Dear oil for food
Bumper energy income has helped Algeria pay off foreign debt and build up foreign reserves of $135-billion by last October, equivalent to two-and-a-half years of imports.

But economists say its reliance on foreign goods looks increasingly worrying after crude prices tumbled.

The IMF sees non-hydrocarbon GDP growth of about 6% this year as public investment boosts construction and services, but said continued low oil prices could curb investment and growth.

“The government is doing its best to reduce the bill because if the oil price continues to fall, Algeria will be unable to feed itself,” said Mohamed Bendjelloul, marketing director at state industrial firm BCR.

As well as the decline of farming, the textile industry—which used to employ about 150 000 people in the 1970s-1980s—has now virtually disappeared as Chinese imports flood the market, said Reda Hamiani, head of the business forum.

“There is no training, no tradition, no culture,” he said. “If we don’t have technology transfer, if we don’t have quality investments, we will be neither a low-cost country nor one producing goods to international standards.”

Algeria’s economic liberalisation was supposed to instil the expertise for a nascent market economy: instead, critics say, it just helped people with the right connections milk the system while impoverishing the middle class whose well-being is a bulwark of social stability.

In the run-up to the poll, state economic policy has taken a nationalist turn. Bouteflika has pledged to lift barriers to a market economy but said state regulation must remain to ensure Algerians see the benefits.

The goverment has said it will oblige foreign importers to give local firms at least 30% of their business and capped stakes of foreigners in non-energy sectors at 49%.

Foreign investment officials are quietly worried about the new measures and complain they have not been fully explained.

Analysts say they could also weaken Algeria’s efforts to join the World Trade Organisation.

“This measure must not freeze foreign investment,” said Hamiani. “We are seeing a return to more economic patriotism, nationalism, and it’s not good.” - Reuters

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