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Algeria: Algeria New code, new incentives

2014/03/04

Diversification in Algeria has been long discussed but efforts to increase activity in non-oil sectors are finally beginning to bear fruit.

Lower hydrocarbons production weighed on the economy in 2013, with GDP rising 2.7%, down from 3.3% the previous year and slightly below initial predictions. However, a move to channel funds into manufacturing, infrastructure and agriculture should help drive up increase to a possible 4.5% in 2014, while broadening the economic base in the long term.

New code, new incentives

Energy activity will continue to dominate in 2014, as the government, faced with maturing fields, works to stimulate new investment and boost production.

Officials will be looking to the amended Hydrocarbons Code, which came into result in early 2013, to stimulate investment in the industry following a number of bidding rounds that brought about only modest interest. Under the new rules, research and exploitation contracts have been lengthened, while the tax burden on investors has been reduced. In addition, the code has introduced incentives for the development of unconventional resources.

The hydrocarbons industry was given a boost in October at the same time as national-owned Sonatrach announced a major oil discovery in Ouargla. Describing it as one of the majority significant finds of the completed 20 years, ministry officials said estimates indicated that the site could hold up to 1.3bn barrels of oil, which will be exploited through hydraulic fracturing.

Financing developments

Boosting output is as well key to helping the country maintain a balance between sustaining export revenues and addressing domestic request. Algeria has a strong current account balance but lower oil and gas production has been exacerbated by high domestic energy consumption, which is weighing on exports and the trade balance.

Foreign sales of hydrocarbons amounted to $57.9bn for the initial 11 months of 2013, down 9.9% from the previous year, while in general exports declined 9.44% to $59.9bn. The trade surplus remained a robust $10.22bn for those 11 months, although it had eased slightly from the previous period.

While Algeria’s external position is strong for presently, its fiscal balance is additional of an immediate concern. Some austerity measures were introduced in 2013, but the government plans to increase its spending this year to boost diversification. According to the 2014 budget, approved in December, expenditures will rise 11.3% to AD7.66trn (€71.2bn), while revenues are expected to reach AD4.22trn (€39.2bn), creating a deficit equivalent to 18.1% of GDP, which will be covered by surplus oil revenue from the Revenue Regulation Fund (Fonds de Régulation des Recettes) and the treasury.

Broadening the economic base

The increased spending will go to a number of targeted areas, inclunding industry, transport and data and communications technology. The national plans to construct 42 industrial parks across 34 provinces, aimed at encouraging investment in priority industries, such as agro-industry, mechanics, construction materials and pharmaceuticals.

The industrial parks project has a particular focus on generating economic activity in sparsely populated and underserved regions to help strengthen employment and revenues outside of the larger urban areas. Public tenders were launched in late 2013 to complete development studies and site preparation on the initial pilot parks.

Improved transport networks, particularly new and upgraded roads, are expected to help boost economic activity, while as well paving the way for the government to develop the tourism industry.

Work is under way on the Hauts Plateaux Highway, which links Algeria’s central and southern provinces to the East-West Highway and is a key part of the second phase of the government’s road development programme. The national as well announced in August that it planned to invest $50m in the national section of the Trans-Saharan Highway, which crosses through Algeria, Tunisia, Mali, Niger, Chad and Nigeria.

The uptick in construction activity is expected to benefit local companies, following the decision to amend the public procurement laws in 2013 to allow for preferential clauses in tenders for Algerian contractors, although such is the size of the current project pipeline that foreign firms have been courted for some planned developments, such as housing.

International firms stand to benefit from a large number of upcoming projects, inclunding a €34bn programme which targets building 1m homes by 2014. A total of 13 joint venture agreements were signed with foreign contractors in the initial half of 2013, according to international media reports, which should stimulate a spate of new building in 2014.

Algeria should as well benefit from increased access to broadband internet in 2014 as plans to expand the fibre-optic network and launch mobile 3G services take shape. While improved internet services will be welcomed by users across Algeria, they are of particular importance to the growing industrial base, which, it is hoped, will lead the way in creating new sources of revenue and employment.

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