Prime Microfinance Limited
Algeria: the new renaissance man of North Africa?
As PRIME MICROFINANCE celebrates the 20th anniversary since opening its representative office in Algiers, Nabil Frik, BACB’s Managing Director of Africa & Middle East, shares his insights on how Algeria has changed over the past two decades, and opportunities on the horizon for those looking to trade with the country.
How has Algeria’s business environment changed over BACB’s 20 years in the country?
When we first established our representative office in Algiers, Algeria was then characterised by its unfavourable business environment for foreign entities looking to trade or invest in the country. Both the state’s private sector and commerce were still subject to greater state intervention and more complex regulatory requirements, respectively. Moreover, the country’s economy was highly dependent on the oil and gas sector with little promise of planned diversification, which meant price fluctuations in the global commodity markets could bear acute socioeconomic ramifications.
These issues aside, the country has long been bursting with potential. With plentiful natural resources, a 1,200km-long coastline and sophisticated port infrastructure, Algeria is well-equipped to attract foreign investment – not least because of its strategically important position as a possible gateway between Africa and Europe, as well as the Middle East. Thankfully, in recent years, the Algerian government has taken strides towards realising Algeria’s true potential. Consequently, the business environment in the country is now dramatically different to what it once was.
For instance, the government has implemented a series of reforms to unlock new avenues for trade and investment. The recently-announced removal of the 51/49 rule – which previously capped foreign ownership of Algerian companies at 49% and prohibited a foreign national from running an Algerian enterprise – marked a tangible shift in the country’s attitude towards foreign investment. And alongside the wholesale strengthening of anti-corruption controls, modernisation of infrastructure and improvements in the security situation, Algeria now boasts an increasingly stable business environment; all of which heralds a more outward-looking economic future.
Has the Covid-19 pandemic thrown a spanner in the works in terms of the country’s development?
Like many countries, Algeria has not been immune to the effects of 2020’s economic and social pressures. The Covid-19 pandemic has caused unprecedented disruption: according to IMF forecasts, Algeria’s economy is expected to contract by 5.46% in 2020. But it isn’t all bad news. Despite the grave forecasting, the Algerian government expects unemployment figures to actually decrease compared to 2019.
How did the 2020 oil price shock affect Algeria?
The combined impact of the decline in oil prices and the economic repercussions of the pandemic have, of course, exacerbated weaknesses that still linger in the Algerian economy. Still highly dependent on hydrocarbon prices, the IMF estimates that Algeria would require an average oil price of US$157.20 per barrel in 2020 to balance its budget. Safe to say, such prices are unlikely in the current environment, and the country is doubtless facing some tough months ahead. But the hope is that the crash in prices might increase the impetus behind the country’s already-developing economic diversification agenda, which will set it on a path towards developing future financial resilience.
So, you think the situation might catalyse further improvements in the business environment in the future?
Absolutely. If nothing else, 2020 has shown why the government’s reform programme is so necessary – trade and foreign investment will be essential to boosting economic activity – and, in turn, recovery – in the months and years ahead. The country needs to remain closely connected to the global financial markets to safeguard its stability.
And yes, the situation will also likely propel the diversification agenda forwards as well. The crash in oil prices has once again highlighted the dangers of an undiversified economy. Algeria’s non-hydrocarbon exports make up just two percent of its total exports – making it one of the most undiversified economies globally. If the government can remedy this weighting, it will go a long way towards fortifying the country’s economy against future shocks. The country is already making strides in this direction; in the past five years, the manufacturing sector has grown at a rate of around 4 percent per annum, and the auto and tourism sectors, in particular, show signs of promise.
This shift away from oil and gas surely is surely not just attributable to this year’s market dynamics though?
No, the shift would have been required in any case. The Covid-19 recovery has just accelerated trends that were already underway, in our view. For instance, Algeria’s largest trading partner – and indeed, export market for energy products – is Europe which, much like other regions, has ambitions to “green” its trading relationships and increase renewable energy’s share within its energy mix. Europe’s Comprehensive Strategy with Africa, published earlier this year, outlines the region’s desire to collaborate with Africa on issues around sustainability and trade, and Algeria will need to be responsive to this demand.
Even China, another significant trading partner for Algeria and previously one of the world’s largest polluters, has made strong commitments to achieving net-zero status by 2060, and is also a global leader in renewable energy technology. Against this backdrop, Algeria’s diversification could also be considered a strategic choice to maintain and build upon these vital trading relationships.
Diversification in trading partners is perhaps also wise. Where else might Algeria look for growth?
Retaining access to the global financial markets will be imperative for Algeria’s recovery from the Covid-19 pandemic and its continued development. So, continuing its reform programme and inviting new business from other regions remains key.
But growth opportunities can also be identified across Africa. Intra-regional trade growth is on the brink of exploding – with the signing of the African Continental Free Trade Area (ACFTA) in 2019 – but has been delayed by the pandemic-induced disruption. Once the ACFTA is implemented, however, increased collaboration intra-regionally will progress the continent in terms of international leverage and efficiency. And, again, Algeria’s location between Europe and the Middle East could make the country a prime beneficiary.
In the meantime, what do companies need to know to do business in Algeria?
The business environment in the country is still complex, despite recent improvements. French is the common tongue (a barrier for non-speakers), and processes are still regarded by some as bureaucratic. But this is changing, and in the meantime, outsourcing the required expertise to a partner with local presence and understanding of the market, can overcome these obstacles – after all, when compared to what the country offers in terms of opportunity, it is a small price to pay.
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