Algeria Country Forecast

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Country Report

Updated as of 1-Dec-2010

Original Publication Date: June 1, 2010

Algeria

Political Risk Services 1-Nov-2010 Reproduction without written permission of The PRS Group is strictly prohibited.

Global PRS Risk Index. Ranked in ascending order of risk.

PRS Risk Index 1-Nov-2010 • PRI-1

11/10 09 08 07 06 GLOBAL AVERAGES 72 72 73 73 73 1. Canada 92 95 96 96 96 1. Hong Kong 92 91 91 92 90 3. Singapore 89 89 90 90 90 3. Sweden 89 89 90 91 91 5. Austria 88 88 88 87 87 5. Netherlands 88 87 89 89 89 5. Taiwan 88 83 84 85 84 8. Australia 87 86 86 87 86 8. Finland 87 87 87 87 87 8. Norway 87 88 88 87 86 8. United Arab Emirates 87 88 90 90 90 12. Oman 86 86 87 87 86 12. Slovakia 86 83 84 81 81 12. Switzerland 86 86 85 87 86 15. Botswana 83 83 85 85 85 15. Chile 83 83 82 83 84 15. Czech Republic 83 83 84 84 86 15. Japan 83 83 83 85 84 15. Trinidad & Tobago 83 83 84 84 84 20. Belgium 82 82 85 86 85 20. Bulgaria 82 83 84 84 84 20. New Zealand 82 83 83 81 80 23. Germany 81 80 81 81 82 23. Uruguay 81 77 77 77 78 25. Ireland 80 80 80 84 82 25. Kuwait 80 79 79 80 80 25. United Kingdom 80 80 86 89 89 28. Denmark 79 79 79 82 82 28. Malaysia 79 78 79 80 79 28. Saudi Arabia 79 76 79 78 78 31. Israel 78 78 76 75 70 31. Poland 78 80 82 80 83 31. United States 78 76 78 79 79 34. France 77 77 79 81 80 34. Panama 77 74 70 73 73 34. Portugal 77 77 79 81 80 37. Brazil 75 76 76 77 76 38. Costa Rica 74 74 76 73 70 38. Gabon 74 77 77 76 75 38. Italy 74 77 77 78 78 38. Mexico 74 74 77 81 81 38. Romania 74 74 75 75 76 38. Spain 74 76 79 79 79 44. Azerbaijan 73 74 74 73 73 44. Cameroon 73 73 73 73 69 44. Hungary 73 77 76 80 79 47. Congo 72 72 70 71 75 47. Greece 72 73 78 80 80 47. Nicaragua 72 69 67 66 67

11/10 09 08 07 06 47. Peru 72 68 69 67 67 47. South Korea 72 73 73 73 73 47. Tunisia 72 72 74 75 74 53. Paraguay 71 71 69 67 68 53. South Africa 71 72 74 77 77 53. Zambia 71 70 72 72 71 56. China 70 70 70 70 68 56. Dominican Republic 70 69 72 72 75 56. El Salvador 70 70 69 71 71 56. Guatemala 70 70 73 73 72 56. Indonesia 70 67 69 69 70 56. Jamaica 70 68 70 71 71 56. Kenya 70 66 67 67 68 56. Morocco 70 70 72 73 74 64. Honduras 69 67 69 69 72 64. Papua New Guinea 69 69 69 69 72 64. Suriname 69 73 70 67 66 64. Thailand 69 69 69 70 73 68. Algeria 68 69 71 73 74 68. Angola 68 68 65 67 69 68. India 68 70 66 66 64 68. Libya 68 69 70 68 68 72. Colombia 67 64 65 66 67 72. Egypt 67 67 67 64 61 72. Ghana 67 67 69 70 73 72. Guyana 67 65 66 65 62 72. Philippines 67 66 66 66 64 72. Vietnam 67 69 71 68 66 78. Bolivia 66 66 64 62 61 78. Sri Lanka 66 65 64 65 65 80. Kazakhstan 65 63 68 68 68 80. Turkey 65 66 68 70 67 82. Côte d'Ivoire 64 61 58 58 58 82. Russia 64 64 67 68 68 84. Haiti 63 62 58 62 60 85. Sudan 62 63 66 66 66 85. Syria 62 60 63 63 59 87. Argentina 60 58 63 64 65 87. Bangladesh 60 59 57 54 58 87. Ukraine 60 62 67 68 66 90. Iraq 58 56 52 48 51 91. Nigeria 57 58 58 58 58 92. Congo DR 56 54 60 61 61 93. Guinea 55 52 51 51 53 94. Ecuador 53 51 55 55 62 94. Pakistan 53 56 55 53 55 96. Iran 50 51 54 54 54 97. Cuba 49 49 51 49 52 98. Venezuela 48 46 51 51 50 99. Zimbabwe 46 47 47 49 49 100. Myanmar 43 43 45 47 44

Political Risk Services 1-Nov-2010 Reproduction without written permission of The PRS Group is strictly prohibited.

Regional PRS Risk Index. Ranked, within region, in ascending order of risk.

PRI-2 • 1-Nov-2010 PRS Risk Index

11/10 09 08 07 06 GLOBAL AVERAGES 72 72 73 73 73

N. & Cent. America Avg. 72 71 72 73 73 Canada 92 95 96 96 96 Trinidad & Tobago 83 83 84 84 84 United States 78 76 78 79 79 Panama 77 74 70 73 73 Costa Rica 74 74 76 73 70 Mexico 74 74 77 81 81 Nicaragua 72 69 67 66 67 Dominican Republic 70 69 72 72 75 El Salvador 70 70 69 71 71 Guatemala 70 70 73 73 72 Jamaica 70 68 70 71 71 Honduras 69 67 69 69 72 Haiti 63 62 58 62 60 Cuba 49 49 51 49 52

South America Avg. 68 67 67 67 67 Chile 83 83 82 83 84 Uruguay 81 77 77 77 78 Brazil 75 76 76 77 76 Peru 72 68 69 67 67 Paraguay 71 71 69 67 68 Suriname 69 73 70 67 66 Colombia 67 64 65 66 67 Guyana 67 65 66 65 62 Bolivia 66 66 64 62 61 Argentina 60 58 63 64 65 Ecuador 53 51 55 55 62 Venezuela 48 46 51 51 50

West Europe Avg. 80 81 82 83 83 Sweden 89 89 90 91 91 Austria 88 88 88 87 87 Netherlands 88 87 89 89 89 Finland 87 87 87 87 87 Norway 87 88 88 87 86 Switzerland 86 86 85 87 86 Belgium 82 82 85 86 85 Germany 81 80 81 81 82 Ireland 80 80 80 84 82 United Kingdom 80 80 86 89 89 Denmark 79 79 79 82 82 France 77 77 79 81 80 Portugal 77 77 79 81 80 Italy 74 77 77 78 78 Spain 74 76 79 79 79 Greece 72 73 78 80 80 Turkey 65 66 68 70 67

Cent. & South Asia Avg. 64 65 64 63 64 Azerbaijan 73 74 74 73 73 India 68 70 66 66 64 Sri Lanka 66 65 64 65 65 Kazakhstan 65 63 68 68 68 Bangladesh 60 59 57 54 58 Pakistan 53 56 55 53 55

11/10 09 08 07 06 East Europe Avg. 75 76 77 78 78 Slovakia 86 83 84 81 81 Czech Republic 83 83 84 84 86 Bulgaria 82 83 84 84 84 Poland 78 80 82 80 83 Romania 74 74 75 75 76 Hungary 73 77 76 80 79 Russia 64 64 67 68 68 Ukraine 60 62 67 68 66

MidEast/N. Africa Avg. 71 71 72 71 71 United Arab Emirates 87 88 90 90 90 Oman 86 86 87 87 86 Kuwait 80 79 79 80 80 Saudi Arabia 79 76 79 78 78 Israel 78 78 76 75 70 Tunisia 72 72 74 75 74 Morocco 70 70 72 73 74 Algeria 68 69 71 73 74 Libya 68 69 70 68 68 Egypt 67 67 67 64 61 Syria 62 60 63 63 59 Iraq 58 56 52 48 51 Iran 50 51 54 54 54

Sub-Saharan Africa Avg. 66 66 66 67 67 Botswana 83 83 85 85 85 Gabon 74 77 77 76 75 Cameroon 73 73 73 73 69 Congo 72 72 70 71 75 South Africa 71 72 74 77 77 Zambia 71 70 72 72 71 Kenya 70 66 67 67 68 Angola 68 68 65 67 69 Ghana 67 67 69 70 73 Côte d'Ivoire 64 61 58 58 58 Sudan 62 63 66 66 66 Nigeria 57 58 58 58 58 Congo DR 56 54 60 61 61 Guinea 55 52 51 51 53 Zimbabwe 46 47 47 49 49

East Asia/Pacific Avg. 75 75 75 75 75 Hong Kong 92 91 91 92 90 Singapore 89 89 90 90 90 Taiwan 88 83 84 85 84 Australia 87 86 86 87 86 Japan 83 83 83 85 84 New Zealand 82 83 83 81 80 Malaysia 79 78 79 80 79 South Korea 72 73 73 73 73 China 70 70 70 70 68 Indonesia 70 67 69 69 70 Papua New Guinea 69 69 69 69 72 Thailand 69 69 69 70 73 Philippines 67 66 66 66 64 Vietnam 67 69 71 68 66 Myanmar 43 43 45 47 44

Political Risk Services 1-Dec-2010 Reproduction without written permission of The PRS Group is strictly prohibited.

Country Update 1-Dec-2010 • Page U-1

Algeria

Country Update

MOST LIKELY REGIMES AND THEIR PROBABILITIES 18-Month: Bouteflika 65% Five-Year: *Reformist Coalition 50% FORECASTS OF RISK TO INTERNATIONAL BUSINESS

Turmoil Financial Transfer

Direct Investment

Export Market

18-Month: High B+ C+ B (B-) Five-Year: Moderate A- (B+) B- B+ (B) ( ) Indicates change in rating. * Indicates forecast of a new regime. KEY ECONOMIC FORECASTS

Years

Real GDP Growth %

Inflation %

Current Account ($bn)

2005-2009(AVG) 3.1 3.6 23.12 2010(F) 4.0 4.8 3.40 2011-2015(F) 4.2 4.7 10.30 Power Struggle Heightens Uncertainty

It appears that the power struggle between President Abdelaziz Bouteflika and the country’s intelligence chief, Mohamed Mediène, will end in a draw, leaving both of the former allies weakened. It is now all but certain that the 74-year-old Bouteflika, whose health has long been a source of concern, will not seek re-election in 2014, and there is a fairly high probability that he might depart the scene before the completion of his current term. Likewise, Mediène, who has headed the Department of Intelligence and Security (DRS) since 1990, is reported to be under pressure from his colleagues within the military establishment to head for the sidelines. The battle between the two leaders is believed to have been triggered by Mediène’s suspicion that the president and his allies were plotting to remove him from his post. The long-time head of the DRS was instrumental in securing the military’s approval of Bouteflika’s third-term bid, but he made known his opposition to plans for a dynastic transfer of power from the

Political Risk Services Algeria Country Update 1-Dec-2010 Reproduction without written permission of The PRS Group is strictly prohibited.

Page U-2 • 1-Dec-2010 Country Update

president to his younger brother, Said Bouteflika. It is unclear whether Mediène’s concerns were founded in reality, but such a move would hardly have been unprecedented. Indeed, Mediène himself had teamed up with the president to engineer the ouster of Gen. Mohamed Lamari, the very powerful former chief of staff of the armed forces, shortly after Bouteflika won his second term in 2004. Mediène’s position has been weakened by recent revelations pointing to the involvement of the DRS in a 1994 terrorist attack on a hotel in Marrakech, Morocco that resulted in the death of two Spanish tourists, and (less directly) the abduction of a group of Spanish aid workers by Al Qaeda in the Islamic Maghreb (AQIM) in November 2009. The disclosures have added to tensions in Algeria’s relationship with Morocco, created a potential threat to the country’s relations with Spain, and raised doubts about Algeria’s status as a crucial ally in the battle against global terrorism. However, if Mediène has made himself expendable, it is not because of any unsavory associations, but rather stems from the potential damage his battle with Bouteflika has inflicted on the economy. The power struggle became public knowledge in late 2009, when the DRS launched an anti-corruption campaign that targeted close allies of the president. Among those accused of illegal activity were several top executives of the state-owned energy company, Sonatrach. The firm is the nerve center of the Algerian economy; its overseas sales of oil and gas account for very nearly all of the country’s exports, and it is by far Algeria’s largest employer, with a total work force of roughly 120,000. However, it is also notorious for the snail-like pace of its internal decision-making, which along with unfavorable financial terms contributed to weak interest among foreign investors for development licenses auctioned in 2008 and 2009. Although the government has in recent years adopted a less welcoming stance vis-à-vis foreign participation in the energy sector, the fact remains that Sonatrach needs the expertise provided by foreign partners to realize the economic potential of the country’s oil and gas reserves, and the company had announced plans to hold another bidding round in 2010. However, the replacement of nearly the entire top tier of Sonatrach’s management team threw a cloud of uncertainty over the timeline for auctioning the licenses, and raised concerns that the new team of executives would be so focused on



ensuring transparency that an already sluggish decision-making process would become completely paralyzed, with negative implications for Algeria’s medium-term economic prospects. It is fairly safe to assume that Mediène’s initiation of a purge of Sonatrach’s top management for what to all appearances were political reasons was viewed by many of Algeria’s political and military leaders as a reckless act, regardless of the merits of the corruption allegations. The same is likely true of a probe into charges that several top officials from the Ministry of Public Works received illegal payments from Chinese companies connected to the $12 billion East-West Highway project. The chief target of the investigation was Public Works Minister Amar Ghoul, a close ally of the Bouteflika brothers, but to the extent that the accusations threaten Algeria’s hopes of attracting billions of dollars worth of investment from China, the incident could cause significant collateral damage to the economy. In any case, the personnel reshuffling and the quashing of the government’s dynastic plans have added to political uncertainty, as a government that has long operated under the strong control of a muscular executive is now moving ahead without clear direction. Significantly, the president has no obvious successor. In addition to being unacceptable to Mediène (and quite likely others within the military establishment), Said Bouteflika lacks his brother’s charisma and demonstrated leadership and competence. For the time being, the odds-on favor to replace Bouteflika is Prime Minister Ahmed Ouyahia, who is constitutionally first in line to succeed the president should he fail to complete his current term. Ouyahia enjoys the confidence of the top military brass, and is viewed favorably by the international business community, owing to an established record of supporting liberal economic reforms. However, his National Democratic Rally (RND) controls only 61 seats in the 389-member National Assembly, and it is doubtful that he would be able to establish a stable majority coalition as president unless his party more than doubles its current seat total at elections scheduled for May 2012. Moreover, the same liberal reforms that have endeared Ouyahia to foreign investors have made him unpopular among Algerians. Trouble on the Oil Patch

The uncertainty comes at an inauspicious time, as the government has recently revised its growth forecast for 2010 downward from 4.6% to 4%, as weak global demand for gas has driven down prices, resulting in a shortfall in expected



export revenues. In October, the Oil Ministry reported that an accident-related shutdown of a liquefied natural gas (LNG) plant had cut gas production by 20%, and indicated that it could be months before production returns to normal levels. Before the end of the month, the Finance Ministry issued a report forecasting a 4.5% decline in oil revenues for 2011, which Finance Minister Karim Djoudi attributed to an anticipated fall in oil production. Experts have long warned Algeria that it is not investing enough to maintain its production facilities, and the recent developments in the hydrocarbons sector suggest that those concerns were warranted. All of which has added to the urgency surrounding the government’s efforts to jump-start its stalled exploration program. Somewhat surprisingly, the reshuffle of the top management of Sonatrach did not result in a prolonged delay in launching the planned licensing round, which kicked off in September. On offer are 10 offshore zones holding a total of 24 blocks; bidding is scheduled to close in early March 2011. Investors had expressed hope that the government would offer more attractive terms than those presented in the previous two bidding rounds, but officials have given no indication that this is the case (the terms will not be finalized until December). Indeed, the fact that eight of the 10 zones have never been offered before suggests that the government will depend on the appeal of fresh acreage, rather than improved terms, to generate a higher level of interest this time around. If that is the case, there is a high probability that the current round will be as disappointing as the last two. Foreign Investors Get Rough Handling

During Bouteflika’s first term in office, the government initiated a push to liberalize the economy, recognizing the need to reduce the dependence on income from hydrocarbons. However, a boom in oil prices during the president’s second term prompted a reconsideration of the government’s strategy, resulting in the reintroduction of restrictions on foreign investors. With oil and gas earnings expected to decline in 2011, despite a recovery of oil prices since early 2009 and an anticipated rise in gas prices next year, the need for diversification is again becoming apparent. Unfortunately, rather than renewing its embrace of liberal reform, the government is instead adopting an increasingly adversarial posture vis-à-vis foreign investors.



Under laws approved over the last two years, foreigners are prohibited from owning more than 49% of an Algerian firm, and are required to obtain official permission before selling their Algerian assets. In October, Prime Minister Ouyahia, who has generally supported liberal reforms, responded angrily to criticism of the restrictions imposed on investors, declaring, “Algeria doesn’t need foreign money. It needs know-how, technology, and modern management.” Ouyahia’s outburst occurred amid a row between the government and the Egyptian telecommunications firm, Orascom, which has been at odds with the government since 2009, when officials blocked the repatriation of the company’s Algerian profits on the grounds that Orascom owed some $600 million in back taxes, a claim the firm denied. The current battle was triggered by the government’s refusal to grant permission for the sale of Orascom’s Algerian mobile operator, Djezzy, to a Russian firm, Vimpelcom. The government claims that it wants to buy Djezzy, and under law enjoys the right of first refusal. Vimpelcom has offered to surrender any claim to Djezzy for $7.8 billion, but the government has refused to recognize Vimpelcom’s interest in the mobile company, and has in any case rejected the proposed purchase price as unreasonable. The government is further insisting that Orascom settle all of its outstanding financial obligations, which include $230 million in back taxes, debts to the telecoms regulator, and wages owed to the employees of the company’s landline service, which is to be liquidated. Officials have also indicated that Orascom must answer to charges that it illegally transferred money out of the country. In the meantime, Orascom is being blocked from repatriating funds. The dispute has reached the highest levels. When Russian President Dimitri Medvedev visited Algeria in October, Oracom and Vimpelcom used the opportunity, apparently unsuccessfully, to apply pressure on Algiers to seek a mutually acceptable resolution of the dispute. Lack of Diversification Will Hold Growth below Potential

In October, Alliance Assurance became the first private firm to list on the Algerian stock exchange, a milestone that merely highlighted the underdeveloped state of the country’s private sector. The attention surrounding the listing brought to light the fact that only seven other companies are listed, none of which has floated equity on the exchange in a decade, and the total value of transactions for all of 2009 was a minuscule



$6.7 million. Hopes that the bourse would include the shares of several newly privatized firms, especially banks, came to naught when the government cancelled plans to sell off the largest state-owned financial institutions, and instead renationalized companies it had already sold off. Clearly, then, the state of the economy will remain heavily dependent on the performance of the hydrocarbons sector. The increase in oil and gas revenues, while lower than projected, will nevertheless be sufficient to power real GDP growth of 4% in 2010, but the pace of expansion will slow slightly next year, reflecting the negative impact of a projected decline in oil output and an anticipated weakening of economic growth in Europe. A combination of higher prices for imports of food and fuel and a generous wages policy that has reinforced already strong demand pressures have pushed the consumer price index upward. The government introduced subsidies and price caps for more than a dozen food staples in early 2010, and the Ministry of Commerce has stepped up enforcement of competition rules, policies that have helped to check inflation. A good harvest will have a beneficial impact on food prices in the near term, and annual inflation is forecast to fall within the 4%–5% range in both 2010 and 2011. Exports have recovered on the back of higher oil sales, while the growth of imports has been slowed by the strengthening of the local currency against the euro and the implementation of measures aimed at dampening demand for foreign goods, resulting in a significant widening of the trade surplus. The current account surplus is forecast to widen to $3.4 billion (or about 2% of GDP) in 2010. Another surplus of about 1%–2% of GDP is likely in 2011, but given the sensitivity of the external balances to movements in hydrocarbons prices, the possibility of a deficit cannot be ruled out, especially in light of the potential for debt difficulties to trigger an economic crisis in Europe.

Economic Forecasts for the Three Alternative Regimes

Reformist Coalition Military-Civilian Fundamentalist Growth

(%) Inflation

(%) CACC ($bn)

Growth (%)

Inflation (%)

CACC ($bn)

Growth (%)

Inflation (%)

CACC ($bn)

2010 4.0 4.8 3.40 3.3 5.5 2.80 2.9 5.9 2.00 2011-2015 4.2 4.7 10.30 3.2 5.4 7.20 0.6 10.8 -1.10

© 2010, The PRS Group, Inc. ISSN: 1054-5220

Algeria Table of Contents

Page PRS Risk Index…………………………………………………………………………………………………… PRI-1 Country Update .....................................................................................................................................................U-1 Country Forecast Map..................................................................................................................................................................... 2 Highlights .......................................................................................................................................................... 3 Current Data...................................................................................................................................................... 5 Comment & Analysis ..................................................................................................................................... 11 Forecast Scenarios Most Likely Five-Year Regime Scenario: Reformist Coalition (50% Probability) .......................... 17 Second Most Likely Five-Year Regime Scenario: Military-Civilian (40% Probability) ................. 29

Third Most Likely Five-Year Regime Scenario: Fundamentalist (10% Probability) ...................... 31 Forecast Summary.................................................................................................................................. 34 Political Framework Players To Watch.................................................................................................................................... 37 Political Players....................................................................................................................................... 38 Country Conditions Climate for Investment & Trade Overview ................................................................................................................................................... 1 Tariff and Non-tariff Barriers ................................................................................................................. 2 Policies ....................................................................................................................................................... 2 Legal Framework...................................................................................................................................... 2 Infrastructure ............................................................................................................................................ 3 Corruption and other Bureaucratic Obstacles ...................................................................................... 4 International Agreements........................................................................................................................ 4 Labor Conditions...................................................................................................................................... 5 Background Geography................................................................................................................................................. 7 Recent History .......................................................................................................................................... 7 Social Conditions.................................................................................................................................... 10 Government ............................................................................................................................................ 11 Political Conditions ................................................................................................................................ 11 Foreign Relations.................................................................................................................................... 12

Page 2 Map

Political Risk Services Algeria Country ForecastReproduction without written permission of The PRS Group is strictly prohibited.

REV2003

Port. Spain

Morocco

West Sahara

Mali Niger

LibyaTu

nisi

a

Italy

Mauritania

North Atlantic Ocean

M e d i t e r r a n e a n S e a

Tindouf

Tamanrasset

Béchar

TlemcenSidi Bel AbbèsOran Sétif

ConstantineAnnaba

Batna

Biskra

Ghardaïa

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ATLAS MTS.

S A H A R A

Algiers

Algeria

Political Risk Services 1-Jun-2010 Reproduction without written permission of The PRS Group is strictly prohibited.

Highlights 1-Jun-2010 • Page 3

Algeria

Country Forecast

Highlights MOST LIKELY REGIMES AND THEIR PROBABILITIES 18-Month: Bouteflika 65% (80%) Five-Year: *Reformist Coalition 50% (65%) FORECASTS OF RISK TO INTERNATIONAL BUSINESS

Turmoil Financial Transfer

Direct Investment

Export Market

18-Month: High B+ C+ B- (B) Five-Year: Moderate B+ (A-) B- (C+) B ( ) Indicates change in rating. * Indicates forecast of a new regime. KEY ECONOMIC FORECASTS

Years

Real GDP Growth %

Inflation %

Current Account ($bn)

2005-2009(AVG) 3.0 3.5 23.44 2010(F) 4.2 5.2 3.40 2011-2015(F) 4.5 4.7 10.30

Military Re-emerges Key Points To Watch… After easily winning re-election in early 2009, President Abdelaziz

Bouteflika seems to be losing some of his grip on power, especially since the re-emergence of military leaders on the public stage has raised concerns that a destabilizing power struggle could be in the offing…

Rising food prices have added to discontent among the broader population,

and domestic calm has been disturbed by industrial action from both public- and private-sector workers…

Signs of a looming disruption of political stability became apparent when

Mohamed Meziane, chief executive of Sonatrach, which accounts for 98% of

Political Risk Services Algeria Country Forecast 1-Jun-2010 Reproduction without written permission of The PRS Group is strictly prohibited.

Page 4 • 1-Jun-2010 Highlights

the country’s foreign currency earnings, was ordered to court to face allegations of questionable tenders for services and security contracts…

While Bouteflika had pledged to fight corruption, the wholly unexpected

targeting of high-profile figures who are well-known to be close political allies of the president has fueled speculation that the legal pressure is, in fact, evidence of an orchestrated campaign to clip Bouteflika’s wings…

Longer Term Effects of Erratic Policies

Whether the military is preparing for a full-court press or feels it has pushed back against Bouteflika sufficiently for the time being will become apparent in the near term…

Over the long term, if the military influences the outcome of the 2014

presidential election, the next government is likely to promote a reform agenda aimed at creating a more attractive climate for foreign investment…

The person who seems likely to benefit more from conflict between

Bouteflika and the generals would be Prime Minister Ahmed Ouyahia.

Economic Forecasts for the Three Alternative Regimes

Reformist Coalition Military-Civilian Fundamentalist Growth

(%) Inflation

(%) CACC ($bn)

Growth (%)

Inflation (%)

CACC ($bn)

Growth (%)

Inflation (%)

CACC ($bn)

2010 4.2 5.2 3.40 3.4 6.0 1.70 1.2 7.9 -2.00 2011-2015 4.5 4.7 10.30 3.3 5.4 7.20 0.6 10.8 -1.10

Political Risk Services Algeria Country Forecast 1-Dec-2010 Reproduction without written permission of The PRS Group is strictly prohibited.

Current Data 1-Dec-2010 • Page 5

Political Fact Sheet

CAPITAL:

Algiers

CONSTITUTION: December 7, 1996

ADMINISTRATIVE SUBDIVISIONS: 48 provinces

POPULATION: 2009: 34.90 million

AREA: 2,381,740 sq. km.

OFFICIAL LANGUAGE: Arabic

STATUS OF PRESS: completely controlled

SECTORS OF GOVERNMENT PARTICIPATION:

State-controlled enterprises dominate most commerce and industry, but liberalization is being pursued in hydrocarbons, mining, power, banking, telecommunications, pharmaceuticals, transportation, and tourism.

CURRENCY EXCHANGE SYSTEM: managed float

EXCHANGE RATE: 11/22/2010 $1=74.35 dinars

ELECTIONS: Presidential elections are held every five years; last, April 7, 2009; next, scheduled April 2014. National Assembly members are elected for a maximum five-year term; last, May 17, 2007; next, by May 2012.

HEAD OF STATE: President Abdelaziz Bouteflika (1999) HEAD OF GOVERNMENT: Prime Minister Ahmed Ouyahia (2008) OFFICIALS: Noureddine Zerhouni, Deputy Prime Minister Rachid Benaissa, Agriculture Mustapha Benbada, Commerce Abdelaziz Bouteflika, Defense Youcef Yousfi, Energy & Mines Karim Djoudi, Finance Mourad Medelci, Foreign Affairs Djamel Ould Abbes, Health Noureddine Moussa, Housing & Urban

Development Abdelhamid Temmar, Industry & Promotion of

Investments Mohamed Benmeradi, Industry & Promotion of

Investments, Small & Medium Enterprise Dahou Ould Kablia, Interior & Local Authorities Tayeb Belaiz, Justice Tayeb Louh, Labor & Social Security Said Barkat, National Solidarity, Family &

Algerian Communities Abroad Amar Ghoul, Public Works Bouabdellah Ghallamallah, Religious Affairs Amar Tou, Transport LEGISLATURE: Bicameral; 389-member National Assembly (Majlis) and 144-member National Council. Seat distribution in the National Assembly: National Liberation Front (FLN); 136; National Democratic Rally (RND), 61; Movement of a Peaceful Society (MSP), 52; Workers' Party (PT), 26; Rally for Culture and Democracy (RCD), 19; Algerian National Front (FNA), 13; independents, 33; other, 49.

AlgeriaDatabank

Reproduction without written permission ofThe PRS Group is strictly prohibited.Political Risk Services

1-Dec-2010

2000-2004 Average

2005-2009 Average 2000 2001 2002 2003 2004

Domestic Economic IndicatorsGDP (Nominal, $bn) 64.01 132.74 54.79 55.18 57.00 68.05 85.03Per Capita GDP ($) 2031 3909 1796 1783 1815 2134 2627Real GDP Growth Rate (%) 4.1 3.1 2.4 2.1 4.1 6.8 5.2Inflation Rate (%) 2.4 3.6 0.3 4.2 1.4 2.6 3.6Capital Investment ($bn) 14.93 32.68 11.33 12.50 13.95 16.35 20.50Capital Investment/GDP (%) 23.2 24.5 20.7 22.7 24.5 24.0 24.1Budget Revenues ($bn) 23.54 57.26 20.97 19.50 20.12 25.85 31.26Budget Revenues/GDP (%) 36.7 42.9 38.3 35.3 35.3 38.0 36.8Budget Expenditures ($bn) 20.21 49.75 15.65 17.11 19.46 22.11 26.73Budget Expenditures/GDP (%) 31.5 36.6 28.6 31.0 34.1 32.5 31.4Budget Balance ($bn) 3.33 7.51 5.32 2.39 0.66 3.74 4.53Budget Balance/GDP (%) 5.2 6.3 9.7 4.3 1.2 5.5 5.3Money Supply (M1, $bn) 19.82 56.54 13.87 16.03 17.90 21.12 30.20Change in Real Wages (%) 1.4 1.7 1.3 1.3 1.4 1.5 1.6Unemployment Rate (%) 18.8 12.6 15.2 11.9 25.7 23.7 17.7

International Economic IndicatorsForeign Direct Investment ($bn) 0.61 1.87 0.41 0.44 0.97 0.62 0.62Forex Reserves ($bn) 25.81 106.89 11.91 17.96 23.11 32.94 43.11Gross Reserves (ex gold, $bn) 25.94 107.36 12.02 18.08 23.24 33.13 43.25Gold Reserves ($bn) 0.27 0.30 0.26 0.25 0.27 0.29 0.30Gross reserves (inc gold, $bn) 26.22 107.66 12.28 18.33 23.51 33.42 43.55Total Foreign Debt ($bn) 23.05 7.70 25.26 22.57 22.64 23.35 21.41Total Foreign Debt/GDP (%) 37.2 6.4 46.1 40.9 39.7 34.3 25.2Debt Service ($bn) 5.09 2.18 4.92 5.10 5.14 5.24 5.04Debt Service/XGS (%) 19.2 3.6 19.8 22.8 22.6 17.9 13.1Current Account ($bn) 8.06 23.12 8.93 7.06 4.36 8.84 11.12Current Account/GDP (%) 12.6 17.8 16.3 12.8 7.7 13.0 13.1Current Account/XGS (%) 29.1 33.7 35.9 31.5 19.2 30.2 28.9Exports ($bn) 23.37 57.09 22.02 19.17 18.84 24.58 32.22Imports ($bn) 12.51 28.47 9.17 9.91 12.01 13.53 17.95Trade Balance ($bn) 10.85 28.61 12.85 9.26 6.83 11.05 14.27Exports of Services ($bn ) 1.23 2.88 0.93 0.88 1.19 1.29 1.85Income, credit ($bn) 0.79 3.51 0.50 0.83 0.73 0.90 0.99Transfers, credit ($bn) 2.16 3.02 1.41 1.50 1.97 2.53 3.38Exports G&S ($bn) 27.54 66.49 24.86 22.38 22.73 29.30 38.44Liabilities ($bn) 1.58 1.01 1.93 1.71 1.76 1.39 1.10Net Reserves ($bn) 24.64 106.65 10.35 16.62 21.75 32.03 42.45Liquidity (months import cover) 22.4 44.2 13.5 20.1 21.7 28.4 28.4Currency Exchange Rate 76.323 70.489 75.260 77.215 79.682 77.395 72.061Currency Change (%) -1.8 -0.4 -13.0 -2.6 -3.2 2.9 6.9

Social IndicatorsPopulation (million) 31.43 33.87 30.51 30.95 31.41 31.89 32.37Population Growth (%) 1.5 1.5 1.6 1.4 1.5 1.5 1.5Infant Deaths/1000 40 30 42 42 41 39 38Persons under Age 15 (%) 34 28 35 35 34 34 34Urban Population (%) 60 63 60 60 60 60 61Urban Growth (%) 2.2 2.8 3.3 1.4 1.5 1.5 3.2Literacy % pop. 64 71 62 62 62 62 70Agricultural Work Force (%) 23 14 22 22 22 22 25Industry-Commerce Work Force (%) 28 28 30 30 26 26 26Services Work Force (%) 50 58 48 48 52 52 49Unionized Work Force (%) 18 18 18 18 18 18 18Energy - total consumption (1015 Btu) 1.27 1.61 1.24 1.26 1.28 1.29 1.26Energy - consumption/head (109 Btu) 0.04 0.05 0.04 0.04 0.04 0.04 0.04

Current Data 1-Dec-2010 ~ Page 6-7

AlgeriaDatabank

Reproduction without written permission ofThe PRS Group is strictly prohibited.Political Risk Services

1-Dec-2010

2000-2004 Average

2005-2009 Average

Domestic Economic IndicatorsGDP (Nominal, $bn) 64.01 132.74Per Capita GDP ($) 2031 3909Real GDP Growth Rate (%) 4.1 3.1Inflation Rate (%) 2.4 3.6Capital Investment ($bn) 14.93 32.68Capital Investment/GDP (%) 23.2 24.5Budget Revenues ($bn) 23.54 57.26Budget Revenues/GDP (%) 36.7 42.9Budget Expenditures ($bn) 20.21 49.75Budget Expenditures/GDP (%) 31.5 36.6Budget Balance ($bn) 3.33 7.51Budget Balance/GDP (%) 5.2 6.3Money Supply (M1, $bn) 19.82 56.54Change in Real Wages (%) 1.4 1.7Unemployment Rate (%) 18.8 12.6

International Economic IndicatorsForeign Direct Investment ($bn) 0.61 1.87Forex Reserves ($bn) 25.81 106.89Gross Reserves (ex gold, $bn) 25.94 107.36Gold Reserves ($bn) 0.27 0.30Gross reserves (inc gold, $bn) 26.22 107.66Total Foreign Debt ($bn) 23.05 7.70Total Foreign Debt/GDP (%) 37.2 6.4Debt Service ($bn) 5.09 2.18Debt Service/XGS (%) 19.2 3.6Current Account ($bn) 8.06 23.12Current Account/GDP (%) 12.6 17.8Current Account/XGS (%) 29.1 33.7Exports ($bn) 23.37 57.09Imports ($bn) 12.51 28.47Trade Balance ($bn) 10.85 28.61Exports of Services ($bn ) 1.23 2.88Income, credit ($bn) 0.79 3.51Transfers, credit ($bn) 2.16 3.02Exports G&S ($bn) 27.54 66.49Liabilities ($bn) 1.58 1.01Net Reserves ($bn) 24.64 106.65Liquidity (months import cover) 22.4 44.2Currency Exchange Rate 76.323 70.489Currency Change (%) -1.8 -0.4

Social IndicatorsPopulation (million) 31.43 33.87Population Growth (%) 1.5 1.5Infant Deaths/1000 40 30Persons under Age 15 (%) 34 28Urban Population (%) 60 63Urban Growth (%) 2.2 2.8Literacy % pop. 64 71Agricultural Work Force (%) 23 14Industry-Commerce Work Force (%) 28 28Services Work Force (%) 50 58Unionized Work Force (%) 18 18Energy - total consumption (1015 Btu) 1.27 1.61Energy - consumption/head (109 Btu) 0.04 0.05

2005 2006 2007 2008 2009

102.33 115.50 134.30 170.99 140.573115 3463 3966 4975 4028

5.3 2.7 2.0 3.0 2.31.6 2.5 3.5 4.5 5.7

23.09 27.08 35.28 42.68 35.2822.6 23.5 26.3 25.0 25.1

42.48 50.59 54.23 79.14 59.8441.5 43.8 40.4 46.3 42.6

28.66 34.31 45.93 66.20 73.6328.0 29.7 34.2 38.7 52.4

13.82 16.28 8.30 12.94 -13.7913.5 14.1 6.2 7.6 -9.8

33.00 43.60 61.10 76.88 68.141.7 1.7 1.8 1.8 1.4

15.4 12.3 13.8 11.3 10.2

1.06 1.76 1.37 2.34 2.8056.18 77.78 110.18 143.10 147.2256.30 77.91 110.32 143.24 149.040.28 0.29 0.31 0.30 0.31

56.58 78.20 110.63 143.54 149.3516.49 5.60 5.47 5.59 5.3316.1 4.8 4.1 3.3 3.84.51 2.94 1.68 0.90 0.898.4 4.7 2.4 1.0 1.6

21.18 28.95 30.60 34.45 0.4120.7 25.1 22.8 20.1 0.339.5 46.3 43.6 38.2 0.7

46.33 54.74 60.59 78.59 45.1819.86 20.68 26.35 38.07 37.4026.47 34.06 34.24 40.52 7.782.51 2.58 2.84 3.49 2.991.43 2.42 3.81 5.13 4.743.39 2.84 2.89 3.00 2.98

53.66 62.58 70.13 90.21 55.890.47 0.80 0.75 0.73 2.30

56.11 77.40 109.88 142.81 147.0533.9 44.9 50.0 45.0 47.2

73.276 72.647 69.292 64.583 72.647-1.7 0.9 4.6 6.8 -12.5

32.85 33.35 33.86 34.37 34.901.5 1.5 1.5 1.5 1.532 31 29 29 2934 29 27 27 2562 62 63 64 653.1 1.5 3.1 3.1 3.170 70 70 70 7514 14 14 14 1428 28 28 28 2958 58 58 58 5718 18 18 18 18

1.43 1.55 1.61 1.70 1.780.04 0.05 0.05 0.05 0.05

Current Data 1-Dec-2010 ~ Page 6-7

Algeria Country Forecast

1-Jun-2010 Comparison: Algeria

Page 8 • 1-Jun-2010 Current Data

Reproduction without written permission of The PRS Group is strictly prohibited

Regional Real GDP Growth (2009): MidEast/North Africa

-2 -1 0 1 2 3 4 5 6

Kuwait

United Arab Emirates

Saudi Arabia

Israel

Iran

Libya

Algeria

Syria

Tunisia

Oman

Iraq

Egypt

Morocco

(percent)

Regional Inflation Rates (2009): MidEast/North Africa

-4.0 -2.0 0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 16.0

Iraq

Morocco


Syria

Libya

Israel

Oman

Tunisia

Kuwait

Saudi Arabia

Algeria

Egypt

Iran

(percent)

Algeria Country Forecast

1-Jun-2010 Comparison: Algeria

Current Data 1-Jun-2010 • Page 9

Reproduction without written permission of The PRS Group is strictly prohibited

Regional Current Account/GDP (2009): MidEast/North Africa

-10.0 -5.0 0.0 5.0 10.0 15.0 20.0 25.0 30.0 35.0

Morocco

Syria

Tunisia


Egypt

Iraq

Algeria

Oman

Iran

Israel

Saudi Arabia

Libya

Kuwait

(percent)

Economic Performance ProfileCountry's Ranking Relative to All Countries

Covered by Political Risk Services2005-2009

4033

3.0

3.5

12.2

24.8

6.6

18.0

3.6

-0.4

BEST 25% NEXT 25% NEXT 25%

GDP Per Capita ($)

Real GDP Growth (%)

Inflation (%)

Unemployment (%)

Capital Investment (% of GDP)

Budget Balance (% of GDP)

Current Account (% of GDP)

Debt Service Ratio

Currency Change (%)

WORST 25%

Political Risk Services Algeria Country Forecast 1-Dec-2010 Reproduction without written permission of The PRS Group is strictly prohibited.

Page 10 • 1-Dec-2010 Current Data

Social Indicators as of 2009

Primary Energy

Energy Consumption (1015 Btu): 1.78

Per Capita Consumption (109 Btu): 0.05

Population

Annual Growth 1.5%

Infant Deaths per 1,000 29

Persons Under Age 15 25%

Urban Population 65%

Urban Growth 3.1%

Literacy 75%

Work Force Distribution

Agriculture 14%

Industry-Commerce 29%

Services 57%

Unions 18%

Ethnic Groups

Arab-Berber (99%), other (1%)

Languages

Arabic, French, Berber dialects

Religions

Sunni Muslim (99%), other (1%)


Comment & Analysis 1-Jun-2010 • Page 11

Algeria

Country Forecast Comment & Analysis

Military Re-enters Political Arena

President Abdelaziz Bouteflika easily won a third term at an election held in April 2009, but his grip on power has shown signs of weakening in recent months. In a particularly ominous development, military leaders—who during the height of the bloody armed battle with religious extremists in the 1990s were widely perceived to be the true power behind the throne, but have seemed content to remain on the political sidelines since Bouteflika won a landslide victory in 2005—have re-emerged on the public stage, raising concerns that a destabilizing power struggle could be in the offing. Meanwhile, rising food prices are contributing to discontent among the broader population. Domestic calm has been disturbed by industrial action by both public- and private-sector workers, and with inflation squeezing household budgets, and a lack of employment opportunities fueling frustration and anger among the country’s youth, the risk of an explosion of social unrest is present. The persistence of tiny but committed terrorist cells, for which disillusioned youth are a key source of fresh recruits, adds to the threat. The signs of building political tension have emerged against the backdrop of corruption scandals that have heightened public displeasure with Bouteflika’s regime, and further diminished the country’s investment profile, which was previously damaged by the introduction of new restrictions on foreign business ownership last year. Sidelining the President’s Men

Signs of a looming disruption of political stability became apparent in January 2010, when Mohamed Meziane, the chief executive of Sonatrach, the state energy group that accounts for fully 98% of the country’s foreign currency earnings, was ordered to appear in court to answer allegations that he and other top officials of the company had questionable tenders for services and security contracts. To date, more than a dozen people, including two of Meziane’s sons and several of Sonatrach’s senior managers, have been implicated in the fraud scandal. At the same time, several top officials from the Ministry of Public Works have been detained on charges of receiving illegal payments from Chinese companies and European


Page 12 • 1-Jun-2010 Comment & Analysis

middlemen connected to the $12 billion East-West Highway project. Investigations have also been launched into financial irregularities at the Ministry of Transport and the Ministry of Posts, Communication and Information Technologies (PCIT). On the surface, the arrests might be seen as the manifestation of Bouteflika’s pledge to fight corruption within the state apparatus. However, the wholly unexpected targeting of high-profile figures widely recognized as close political allies of the president has fueled speculation that the legal pressure is in fact evidence of an orchestrated campaign to clip Bouteflika’s wings. In that vein, observers note that the corruption investigations have been launched on the basis of information provided by the Department of Intelligence and Security (DRS), a division of the Interior Ministry headed by Gen. Mohammad Mediene, whose resistance to Bouteflika’s efforts to tighten his control over the security services has led to frequent clashes with the president. Suspicions that the anti-corruption drive was the manifestation of an institutional power struggle were reinforced in late February, when the national police chief, Col. Ali Tounsi, was shot to death by a subordinate who had been fired as head of the police force’s air division the previous day. According to local press reports, the assailant, who killed himself after shooting Tounsi, had come under investigation for questionable financial transactions. However, press coverage noted Tounsi’s links to the military “old guard,” which has resisted Bouteflika’s attempts to impose his authority on armed forces, as well as his very prickly relationship with his boss, Interior Minister Nourredine Zerhouni, another close ally of the president. It appears that matters may be coming to a head. In early May, Meziane was formally replaced as chief executive of Sonatrach by Nourredine Cherouati, who previously had headed the Hydrocarbons Regulatory Authority. At the end of the month, Bouteflika sacked four members of his Cabinet, including the minister of energy and mines, Chakib Khelil, who had held a position in Bouteflika’s government continuously since 1999. Khelil’s replacement, Youcef Yousfi, held the Energy and Mines portfolio in the late 1990s, and previously served as president of the Organization of Petroleum Exporting Countries (OPEC). Although Khelil has not been accused of any wrongdoing, his departure became a foregone conclusion after it was revealed that Cherouati was not among his preferred nominees to head Sonatrach. The reshuffle also saw the replacement of the heads of other troubled ministries, including Health, Commerce, and PCIT.



In perhaps the most surprising move, Zerhouni was “promoted” to the newly created post of deputy prime minister. The vacancy at Interior was filled by Dahou Ould Kablia, who had served under Zerhouni. Ouyahia’s Political Stock Rising

Although opinion as to the significance of the reshuffle is mixed, in terms of the political balance of power, the moves represent a loss of influence for Bouteflika. If there is a winner among the top figures in the current political establishment, it is probably Prime Minister Ahmed Ouyahia, whose National Rally for Democracy (RND) is the junior partner in the government headed by Bouteflika’s National Liberation Front (FLN). A three-time prime minister, Ouyahia is closely tied to the military leadership, and his appointment to the premiership in June 2008 was intended to keep the generals at bay as Bouteflika and his supporters set about the task of making the constitutional change that enabled the president to stand for a third term last year. Cherouati likely was appointed as head of Sonatrach (against Khelil’s wishes) at Ouyahia’s urging, and the same may be true of the choice of Yousfi to replace Khelil as minister of energy and mines. Likewise, Zerhouni’s installation as deputy prime minister makes him much more directly accountable to Ouyahia, and also reduces Bouteflika’s influence within the Ministry of Interior, which in addition to being responsible for domestic security also oversees the electoral process. The latter point is significant in that political tensions were expected to rise over the issue of the aging president’s successor. Many Algerians interpreted Bouteflika’s appointment of his brother Said as his personal adviser as a sign of dynastic ambitions, a plan that was certain to meet resistance from the president’s political rivals and the military. It would be difficult to identify anyone who stands to benefit more from conflict between Bouteflika and the generals than Ouyahia. As prime minister, he is the first in line to succeed Bouteflika should the president for any reason fail to complete a full term. Moreover, to the extent that the president’s weakened control over the electoral apparatus and the sidelining of his key allies diminishes the likelihood of a victory for Bouteflika’s hand-picked successor in 2014, Ouyahia’s own chances of securing the presidency are improved, and would be further enhanced if, as a reward for his cooperation in undermining Bouteflika, he were to receive an overt endorsement from the military brass. Whether the military is preparing for a full-court press or feels it has pushed back against Bouteflika sufficiently for the time being will become apparent in the near term. Among



the president’s close allies whose ministries have come under scrutiny for corruption are Public Works Minister Amar Ghoul and Transport Minister Amar Tou. The departure of either (or both) of them in the coming weeks would suggest that the military brass intends to carry out a thorough housecleaning, and that Bouteflika lacks the institutional resources to put up a fight. Effect of Erratic Policies Will Linger

In terms of the impact of the recent political developments on the investment climate, the general sentiment is that the personnel reshuffle at Sonatrach and the Ministry of Energy and Mines points to increased opportunities for foreign investors in the oil and gas sectors. However, even if the shakeup signals a retreat from the strategy of resource nationalism implemented since 2006, financing constraints and a global gas glut—which Khelil predicted in May would persist for at least three more years—will dampen the enthusiasm of foreign firms in the near term. A new Hydrocarbons Law approved in 2005 ended Sonatrach’s monopoly over hydrocarbons exploration, production, and transportation activities, putting the state-owned company on an equal footing with international oil companies (IOCs) in the competition for contracts. But before the new law went into effect, Bouteflika issued a presidential order requiring a minimum 51% stake for Sonatrach in all oil and gas ventures undertaken by foreign firms—thereby nullifying most of the liberalizing effect of the legislation—and adding a hefty windfall profits tax. Although the reversal took investors by surprise, soaring oil and gas prices helped to sustain the interest of the IOCs. However, the appeal of Algeria’s hydrocarbons resources diminished in step with the decline of oil and gas prices over the second half of 2008. A seventh bidding round for exploration licenses held in December 2008 was a dismal failure, with fully 11 of the 15 blocks on offer receiving no bids. The failure of the bidding round has cast doubt upon the government’s medium-term goals for boosting hydrocarbons output, and difficulty obtaining investment capital in the wake of the global financial crisis is forcing revisions to the timetable for completion of major midstream and upstream projects currently under way. A new bidding round is planned later this year, and Khelil had indicated that investors could expect much more favorable terms. Responsibility for organizing the next licensing round has fallen to Yousfi, who will have to overcome the understandable skepticism of the IOCs if the effort is to bear fruit.



Cherouati’s top priority will be boosting the country’s gas exports from 60 billion cubic meters (bcm) currently to 85 bcm by 2012. His most immediate task will be ensuring the timely commercial startup of the Medgaz pipeline, which will carry 8 bcm of gas to Spain each year. Construction of the subsea portion of the pipeline was completed in December 2008, at which time project managers expected to begin pumping gas by the second half of 2009. The scheduled start date was pushed back to July 2010 earlier this year, and was more recently revised to September 2010. Similarly, completion of the Galsi pipeline, which was expected to begin carrying another 8 bcm of gas per year to Italy via the island of Sardinia in 2012, has been delayed until 2014, the result of an alteration in the planned route of the pipeline. In fact, the delays in completing the pipeline projects are not a matter of great immediate concern. Europe is keen to reduce its dependence on Russia for its gas supplies, and has turned to Algeria as an alternative. But with the global supply of gas currently exceeding demand, Europe has more gas at present than it needs. Oversupply has stunted the recovery of gas prices, which have not risen as rapidly as oil prices since early 2009. (The oil-gas price ratio has been running at about 21 to 1, compared to a four-year average of 12 to 1.) That creates a problem for Algeria’s European customers, who are contractually obligated to purchase a specified amount of gas at a price that is indexed to the price of oil. Consequently, many face the choice of selling their Algerian gas at a loss or keeping it out of the market altogether. European calls for a revision of the pricing scheme have predictably been rejected by Algeria. However, the current arrangement cannot be sustained indefinitely, and the gap between supply and demand is unlikely to close anytime soon. In fact, the looming threat of an EU-wide debt crisis points to the risk of a regional or global economic downturn that will further dampen demand for gas. Bluntly put, Cherouati and Yousfi have inherited an unenviable task. They must keep major pipeline projects on track even as the looming threat of an EU-wide debt crisis points to the potential for a sharp drop in European demand in the near term, and a dearth of new exploration casts doubt upon the country’s ability to supply enough gas to operate the pipelines at capacity over the medium term. The speculation of political motives behind their appointments will only make the challenge that much more daunting.



Government Will Count on Oil Income to Buy Social Stability

The inflation rate fell to 5.3% (year-on-year) in March, from 5.9% at the end of 2009. However, the government is under pressure to address the impact of high food prices on the overall spending power of households. In February, the Ministry of Commerce announced subsidies and price caps for 15 basic food products, and a new law is being formulated that would extend the government’s authority to regulate the profit margins and prices of an expanded range of products and services. The measure has not been welcomed by traders, and, if implemented, might fuel the growth of parallel markets. The government’s wage policy will further complicate efforts to control consumer price increases. Workers have complained that a 25% hike in the minimum wage introduced last year did not prevent an erosion of purchasing power, and both public- and private-sector workers have organized strikes since late 2009 demanding higher pay. In May, the government yielded to the demands of the General Union of Algerian Workers (UGTA), signing an agreement that provides for a 20% rise in private-sector wages and a 23% wage hike for civil servants, retroactive to January 2010. The official target rate for 2010 is 3.5%. A good harvest will help to contain the rise of food prices, but the government’s maintenance of a loose fiscal policy (the 2010 budget foresees a 13% increase in overall spending) will make it difficult to bring inflation below 5%. Given the priority the government assigns to maintaining social stability, the possibility that episodes of unrest might prompt further increases in social spending represents an upside risk to the inflation forecast. Increased hydrocarbon revenues will power a rebound of the broader economy, and real GDP growth is forecast to accelerate to 4.2% this year. Exports will recover on the back of higher oil sales, but strengthening domestic demand and higher commodity prices will spur double-digit growth of imports, as well. The current account surplus is forecast to widen to $3.4 billion (or about 2% of GDP) in 2010, but the external balances are sensitive to shifts in hydrocarbon prices, and the possibility of a current account deficit cannot be ruled out in light of the potential for a renewed economic crisis in Europe.


Forecast Scenarios 1-Jun-2010 • Page 17

Algeria

Country Forecast Forecast Scenarios

SUMMARY OF 18-MONTH FORECAST

REGIMES & PROBABILITIES

Bouteflika 65%

Military-Civilian 30%

Fundamentalist 5%

SUMMARY OF FIVE-YEAR FORECAST


Reformist Coalition 50%


Fundamentalist 10%

Most Likely Regime Scenario 18-Month Forecast Period: Bouteflika (65% Probability) Five-Year Forecast Period: Reformist Coalition (50% Probability) President Abdelaziz Bouteflika easily won re-election to a third five-year term in April 2009, and undoubtedly would have done so even if the country’s main opposition parties had not boycotted the vote. The president began his third term with no obvious obstacles in his path. His allies in the National Assembly—the National Liberation Front (FLN), the National Rally for Democracy (RND), and the Movement of a Peaceful Society (MSP)—control slightly less than a two-thirds majority of seats, and constitutional amendments approved in 2008 weakened the ability of the prime minister to block presidential initiatives. However, government critics have expressed concern about the consolidation of political control in the person of Bouteflika, who they claim has established personal patronage networks at the expense of the development of democratic institutions. The fear is that the country’s institutional weakness will become a serious liability if Bouteflika, whose health is a subject of great speculation, fails to take the steps necessary to ensure that his eventual departure from the scene does not trigger a damaging power struggle.

Reformist Coalition

Growth (%)

Inflation (%)

CACC ($bn)

2010 4.2 5.2 3.40 2011-2015 4.5 4.7 10.30


Page 18 • 1-Jun-2010 Forecast Scenarios

It appears that the military brass shares that concern. Since late 2009, Algeria’s generals—who during the height of the bloody armed battle with religious extremists in the 1990s were widely perceived to be the true power behind the throne, but retreated to the political sidelines after Bouteflika won a landslide re-election victory in 2004—have re-emerged on the public stage, raising concerns that a destabilizing power struggle could be in the offing. A series of corruption investigations targeting close allies of President Bouteflika have been launched on the basis of information provided by the Department of Intelligence and Security (DRS), a division of the Interior Ministry headed by Gen. Mohammad Mediene, whose resistance to Bouteflika’s efforts to tighten his control over the security services has led to frequent clashes with the president. Suspicions that the anti-corruption drive was the manifestation of an institutional power struggle were reinforced in late February, when the national police chief, Col. Ali Tounsi, was shot to death by a subordinate who had come under investigation for questionable financial transactions. Press coverage of the shooting noted Tounsi’s links to members of the military “old guard” that has resisted Bouteflika’s attempts to impose his authority on the armed forces, as well as his very prickly relationship with his boss, Interior Minister Nourredine Zerhouni, a close ally of the president. Among those facing prosecution on various charges of malfeasance are several top officials of Sonatrach, the powerful state energy group, including Mohamed Meziane, who was suspended from his duties as chief executive in January 2010, and formally replaced in May. In addition, key figures at the Ministry of Public Works have been detained on charges of receiving illegal payments from Chinese companies and European middlemen connected to the $12 billion East-West Highway project, and investigations have also been launched into financial irregularities at the Ministry of Transport and the Ministry of Posts, Communication and Information Technologies (PCIT). In late May, Bouteflika sacked four members of his Cabinet, including the minister of energy and mines, Chakib Khelil, who had held a position in Bouteflika’s government continuously since 1999. Although Khelil has not been accused of any wrongdoing, his departure became a foregone conclusion after it was revealed that Nourredine Cherouati, who was named as Meziane’s replacement earlier in the month, was not among his preferred nominees to head Sonatrach. The reshuffle also brought leadership changes at the troubled ministries of Health, Commerce, and PCIT. In perhaps the most surprising move, Zerhouni was “promoted” to the newly created post of deputy prime minister. The vacancy at Interior was filled by Dahou Ould Kablia, who had served under Zerhouni.



In terms of the political balance of power, the personnel changes represent a clear loss of influence for Bouteflika, and it seems unlikely that the president would have sidelined loyal allies voluntarily. Significantly, Zerhouni’s installation as deputy prime minister makes him directly accountable to Prime Minister Ahmed Ouyahia, rather than the president, and also reduces Bouteflika’s influence within the Ministry of Interior, which in addition to being responsible for domestic security also oversees the electoral process. The latter point is significant in that political tensions were expected to rise over the issue of the aging president’s successor. Many Algerians interpreted Bouteflika’s appointment of his brother Said as his personal adviser as a sign of dynastic ambitions, a plan that was certain to meet resistance from the president’s political rivals and the military. It would be difficult to identify anyone who stands to benefit more from conflict between Bouteflika and the generals than Prime Minister Ouyahia, who is closely tied to the military leadership. His return to the premiership (for the third time) in June 2008 was widely perceived as an attempt to keep the generals at bay as Bouteflika and his supporters set about the task of making the constitutional change that enabled the president to stand for a third term last year. Cherouati’s appointment as head of Sonatrach (against Khelil’s wishes) likely came at Ouyahia’s urging, and the same may be true of the choice of Youcef Yousfi to replace Khelil as minister of energy and mines. As prime minister, Ouyahia is the first in line to succeed Bouteflika should the president for any reason fail to complete a full term. Moreover, to the extent that the president’s weakened control over the electoral apparatus and the sidelining of his key allies diminishes the likelihood of a victory for Bouteflika’s hand-picked successor in 2014, Ouyahia’s own chances of securing the presidency are improved, and would be further enhanced if, as a reward for his cooperation in undermining Bouteflika, he were to receive an overt endorsement from the military brass. Whether the military is preparing for a full-court press or feels it has pushed back against Bouteflika sufficiently for the time being will become apparent in the near term. Among the president’s close allies whose ministries have come under scrutiny for corruption are Public Works Minister Amar Ghoul and Transport Minister Amar Tou. The departure of either (or both) of them would suggest that the military brass intends to carry out a thorough housecleaning, and that Bouteflika lacks the institutional resources to put up a fight. In general, the re-emergence of the military as an active political force will halt (if not reverse) the trend toward increased state involvement in economic affairs. However, given the high potential for a renewed assertion of military influence to trigger political



instability, any near-term positive impact on the general investment climate will likely be limited. Assuming the military plays a role in influencing the outcome of the 2014 presidential election, the next government can be expected to promote a reform agenda aimed at creating a more attractive climate for foreign investment, which holds the key to producing the large number of jobs required to reduce the appeal of extremism among Algerian youth and generate the improvements in living standards required to foster social stability more generally. Outlook for Reform Remains Cloudy

Bouteflika’s landslide victory in 2004 was in large part a reflection of his success in enhancing the security of average Algerians. However, as the security threat has receded, pressure has grown to address problems such as housing shortages, inadequate services in rural areas, and a very high unemployment rate (particularly among younger Algerians). The president’s 2009 campaign platform was chock full of grand promises, including pledges to construct one million new housing units, create three million jobs, and commit $150 billion of public money to investment projects over the next five years. Algeria currently boasts more than $140 billion in hard currency reserves and there is another $160 billion available in the country’s oil stabilization fund, meaning that Bouteflika will not want for financial resources, at least in the near term. However, any chance of providing jobs for younger Algerians, who account for more than 70% of all unemployed workers, hinges on reducing the country’s dependence on energy exports, which will require aggressive steps to remove the many impediments to private-sector expansion, which include excessive red-tape and competition from public-sector firms that receive favored treatment. Unfortunately, Bouteflika’s second term was marked by a tightening of restrictions on foreign investment, which owing to the underdeveloped state of Algeria’s capital markets and its lack of skills and technology will of necessity play a key role in any significant expansion of the private sector. Attacks on foreign “profiteers” initially focused on firms in the energy sector, but in mid-2008 the government began targeting foreign investors more generally. As part of the supplementary budget for 2008, the government introduced a requirement that foreign firms reinvest profits of an amount equivalent to any tax breaks received (beginning in 2008) within four years. Subsequent changes to investment rules included a new 49% cap on foreign equity in all investment projects (including those that previously



had no limit) and a ban on foreign ownership of the land used for investment projects. More recently, the government announced that any foreign-owned commercial companies that import goods for local resale must cede a minimum of 30% of their capital to an Algerian partner, and measures in the 2009 budget imposed a new 15% tax on repatriated profits and bestowed upon the government the right of first refusal in the event a foreign firm decides to sell its share in any project. The fact that the government’s retreat from liberalization occurred without any prior consultation with the firms affected only heightened the sense of uncertainty among investors. So obvious were the negative implications of the moves for the development of the non-oil sector—not to mention Algeria’s hopes of joining the WTO—that some observers speculated that Bouteflika was merely engaging in pre-election populist grandstanding. In fact, the government has softened its position slightly since the election, announcing in May 2009 that the 49% cap will not apply to projects already under way. However, Bouteflika has hailed the five-year development program initiated in April 2010 as a new direction for Algeria, in that it focuses on bolstering the private sector while also reducing the country’s reliance on foreign direct investment (FDI) to finance development and steering clear of “an uncontrolled liberalism that threatens the interests of the national group.” Instead, every effort will be made to attract domestic investors and bolster the local private sector by means of incentives, the rehabilitation of state enterprises, and the establishment of “quality” (read Algerian) public-private partnerships. In the near term, the government will promote export-oriented industries and the domestic production of food, with the aim of diversifying the sources of foreign exchange and reducing the country’s dependence on imports to meet its basic needs. Bouteflika also called for a “cleansing” of public sector firms with the aim of determining which are viable and which would benefit from the sale of some of its assets to a “credible” private partner. Bouteflika’s stress on self-reliance did not really come as much of a surprise. Going back to 2006, when the Hydrocarbons Law approved the previous year was amended (before it ever came into force) so as to eliminate many of its liberalizing features, Bouteflika’s administration has signaled in numerous (and increasingly less subtle) ways that foreign investment is no longer seen as essential to Algeria’s plans. Indeed, while chaotic global economic conditions undoubtedly were a factor in the persistent sluggishness of FDI flows, the perceived hostility of the government also has played a role.



If anything, the global financial crisis most likely reinforced the government’s apparent doubts about the reliability of foreign partners. A prime example is Dubai’s Emaar Properties, which signed a deal with Algeria in March 2008 for four large-scale property development projects representing a total investment of $20 billion. In July 2009, Emaar shuttered its office in Algiers, declaring that the projects had stalled for reasons beyond the company’s control, throwing the future of the projects into uncertainty. Owing to the lack of local skills, experience, and technology, foreign investment is still being sought for oil and gas projects. In March 2009, the government awarded contracts totaling $3 billion to foreign companies that are partnering with Sonatrach to develop the El-Merk field, which is scheduled to be producing 135,000 barrels per day (bpd) of crude and 85,000 bpd of condensates and liquefied petroleum gas by 2012. In addition, the government is planning to auction off new exploration licenses in 2010. But elsewhere in the economy, the government has been tightening restrictions on foreign investment, and began doing so even before the global financial crisis hit. As part of the supplementary budget for 2008, the government introduced a requirement that foreign firms reinvest profits of an amount equivalent to any tax breaks received (beginning in 2008) within four years. Subsequent changes to investment rules included a new 49% cap on foreign equity in all investment projects (including those that previously had no limit) and a ban on foreign ownership of the land used for investment projects. The government then announced that any foreign-owned commercial companies that import goods for local resale must cede a minimum of 30% of their capital to an Algerian partner, and measures in the 2009 budget imposed a new 15% tax on repatriated profits and stipulated that the government will have the right of first refusal should a foreign firm decide to sell its share in any project. Adding insult to injury, the new restrictions have added to the bureaucratic impediments encountered by foreign investors, who must obtain documents confirming that they have met the new tax requirements and have cleared any previous tax obligations. That has caused major headaches for at least one major foreign investor, Egypt’s Orascom Telecom, which has been blocked from repatriating $257 million in dividends to non-resident shareholders owing to its inability to obtain tax certification. Algerian authorities contend that Orascom owes nearly $600 million in taxes dating back to 2004, a claim that is disputed by company officials. The firm was initially prevented from transferring $515 million, but the government cleared the way for the repatriation of one-half of the total in mid-September 2009. Even so, the blocked funds amount to about 20% of the parent company’s total profits for 2008, and concern about the impact of the dispute (including the tax claim) on the firm’s liquidity management prompted both



Standard & Poor’s and Moody’s to downgrade Orascom’s rating in the second half of 2009. The issue remains unresolved, and Algeria’s threats to nationalize Orascom’s assets in the event of non-payment have left negotiations between Orascom and South Africa’s MTN for the sale of some $10 billion of the Egyptian company’s holdings, including its operations in Algeria, on the brink of collapse. Some observers have questioned if taxes are really the issue, or whether the government is simply trying to prevent the outward flow of capital. In that vein, it is worth noting that new rules have been put in place that require businesses to use letters of credit for import payments and ban the extension of credit for the purchase of consumer goods, restrictions that have drawn protests from both local and foreign business owners. In terms of the impact of the recent political developments on the investment climate, the general sentiment is that the personnel reshuffle at Sonatrach and the Ministry of Energy and Mines will bring fresh momentum to efforts to attract foreign capital into the oil and gas sector. However, even if the shakeup signals a retreat from the strategy of resource nationalism implemented since 2006, financing constraints and a global gas glut—which Khelil predicted in May 2010 would persist for at least three more years—will dampen the enthusiasm of foreign firms in the near term. A seventh bidding round for exploration licenses held in December 2008 was a dismal failure, with fully 11 of the 15 blocks on offer receiving no bids, in part owing to a requirement that the winning bidders turn over their rights to a comparable block of non-Algerian reserves to Sonatrach. The failure of the 2008 bidding round has cast doubt upon the government’s medium-term goals for boosting hydrocarbons output, and difficulty obtaining investment capital in the wake of the global financial crisis is forcing revisions to the timetable for completion of major midstream and upstream projects currently under way. A new bidding round is planned later this year, and Khelil had indicated that investors could expect much more favorable terms. Responsibility for organizing the next licensing round has fallen to Yousfi, who will have to overcome the understandable skepticism of the IOCs if the effort is to bear fruit. Cherouati’s top priority will be boosting the country’s gas exports from 60 billion cubic meters (bcm) currently to 85 bcm by 2012. His most immediate task will be ensuring the timely commercial startup of the Medgaz pipeline, which will carry 8 bcm of gas to Spain each year. Construction of the subsea portion of the pipeline was completed in December 2008, at which time project managers expected to begin pumping gas by the second half of 2009. However, the scheduled start date was pushed back to July 2010 earlier this year, and was more recently revised to September 2010. Similarly, completion of the Galsi pipeline, which was expected to begin carrying another 8 bcm of gas per year to Italy via



the island of Sardinia in 2012, has been delayed until 2014, the result of an alteration in the planned route of the pipeline. In fact, the delays in completing the pipeline projects are not a matter of great immediate concern. Europe is keen to reduce its dependence on Russia for its gas supplies, and has turned to Algeria as an alternative. But with the global supply of gas currently exceeding demand, Europe has more gas at present than it needs. Oversupply has stunted the recovery of gas prices, which have not risen as rapidly as oil prices since early 2009. (The oil-gas price ratio has been running at about 21 to 1, compared to a four-year average of 12 to 1.) That creates a problem for Algeria’s European customers, who are contractually obligated to purchase a specified amount of gas at a price that is indexed to the price of oil. Consequently, many face the choice of selling their Algerian gas at a loss or keeping it out of the market altogether. European calls for a revision of the pricing scheme have predictably been rejected by Algeria. However, the current arrangement cannot be sustained indefinitely, and the gap between supply and demand is unlikely to close anytime soon. In fact, the looming threat of an EU-wide debt crisis points to the risk of a regional or global economic downturn that will further dampen demand for gas. Bluntly put, Cherouati and Yousfi have inherited an unenviable task. They must keep major pipeline projects on track even as the looming threat of an EU-wide debt crisis points to the potential for a sharp drop in European demand in the near term, and a dearth of new exploration casts doubt upon the country’s ability to supply enough gas to operate the pipelines at capacity over the medium term. The speculation of political motives behind their appointments will only make the challenge that much more daunting. The Ministry of Labor has promised to pursue reforms of labor legislation as part of the government’s goal of boosting employment, but no steps have been taken as yet. Labor policies have changed radically with the end of the monopoly of the General Union of Algerian Workers (UGTA) and the expanded use of employment contracts under which pay is based on performance. However, the government will continue to favor generous salary increases and hikes in the minimum wage as a means of containing social discontent. The government has moved to offset the impact of recent wage increases on business costs by reducing the top corporate tax rate from 30% to 25%, and establishing a lower rate of 12.5% that can be obtained by companies that reinvest profits in their local operations. However, with the fiscal balance having fallen deep into deficit in 2009, no



further reduction of tax rates is likely, and there is a distinct danger that existing tax rules will be applied in a manner that discriminates against foreign-owned firms. Despite a significant narrowing of the current account surplus and the accumulation of a fiscal shortfall equivalent to 8.5% of GDP in 2009, foreign exchange reserves increased a bit last year, and currently amount to about $150 billion, sufficient to provide more than three years of import cover. The debt-service burden is minimal, and higher oil prices in 2010 point to an easing of fiscal strains. Even so, as the new 15% tax on repatriated profits makes clear, political considerations will at times trump objective necessity when it comes to policies affecting investment, and the possibility of tighter restrictions on profit repatriation or other foreign currency transactions cannot be ruled out. Little Progress on Trade Liberalization

The government has reduced its customs duties under negotiations for Algeria’s entry into the WTO, and trade rules are also being relaxed under an association agreement with the EU, which came into force in September 2005. The agreement with the EU, which was initialed by both sides in December 2001, is an important step toward the creation of a Euro-Mediterranean Free Trade Area (EMFTA) by 2010. However, Algeria’s trade imbalance with the EU has grown since the agreement came into force, amid frequent complaints that Algeria’s non-energy exports, especially agricultural products, continue to face obstacles in European markets. The establishment of the Union for the Mediterranean (UPM) in 2008 has raised doubts about the timetable for the EMFTA, and the Algerian government’s recent moves to tighten restrictions on foreign investment have set back efforts to join the WTO. In combination, both of these trends point to a loss of impetus for trade liberalization during the five-year forecast period, the government’s professed support for trade-friendly policies notwithstanding. Pockets of Violence Will Persist

The recent healthy growth of the economy stemmed primarily from the strong performance of the oil and gas sectors, and so had little positive impact on either unemployment or general living standards. Protest demonstrations over poor social and economic conditions occurred in dozens of towns throughout the country in 2008. In some cases, a combination of frustration over immediate circumstances and the pent up resentment over the government’s failure to address longstanding grievances contributed to the eruption of rioting, stirring fears of a repeat of the events in 2001, when an uprising by the Berber majority in the northern Kabylie region was quickly transformed into a more generalized anti-government movement that for a time threatened to bring an early end to Bouteflika’s tenure as president.



The rioting that erupted in the town of Oran in late May 2008 stands as a perfect example of how relatively innocuous developments can quickly spin out of control. What began as an outbreak of violence perpetrated by thuggish soccer fans angered over the relegation of the town’s soccer team to the second division was joined by youths and others in the region who resent what they view as the neglect of the town by a corrupt government in Algiers. Similar incidents occurred in other parts of the country, notably in the Berber town of Beriane. In that case, the violence was fueled not only by unhappiness over a lack of jobs and housing, but also by longstanding tensions between ethnic Berbers and Arabs, who clashed for several days in mid-May before the government sent hundreds of riot police to quell the disturbances. In October 2009, strikes and other demonstrations were organized in towns throughout the country to protest a lack of jobs and poor public services, sometimes resulting in violence. Significantly, the capital, Algiers, was rocked by the most serious social disturbance in years, as a dispute over housing policy escalated into violent clashes that left dozens of people injured. The real concern of government officials is that the simmering discontent, which is especially pronounced among young Algerians, could give rise to a resurgence of religious extremism and the revival of armed Islamic groups, which have been significantly neutralized by a combination of heavy military pressure and a generous amnesty offered by Bouteflika’s government. The danger of a return to the levels of violence during the period of civil war is minimal, but the Islamist insurgency persists, in the form of the small but utterly committed AQIM, which as known as the Salafist Group for Preaching and Combat (GSPC) before striking an alliance with Al Qaeda. Authorities contend that the GSPC’s alliance with Al Qaeda and the group’s adoption of suicide bombings as a standard tactic are acts of desperation, and the government’s official position is that a conciliatory posture still offers the best hope for ending the bloodshed. Although Prime Minister Ouyahia favors a hard-line approach to the AQIM, Bouteflika will be wary of approving any policies that suggest his national reconciliation program has failed. For its part, the AQIM has promised to be “a thorn in the necks of the American and French crusaders and their allies, and a dagger in the hearts of the French traitors and apostates,” pointing to a persistent threat to foreign businesses, personnel, and tourists, at least in the short term. Despite a call by former militant leaders for a cessation of armed violence, ambush attacks on security patrols in May and July 2009 highlighted AQIM’s commitment to carrying on the fight. Government officials and independent analysts are in general agreement that the AQIM lacks the capacity to pose any significant threat to broader



national security or political stability. But as the continuing attacks highlight, the group is still capable of inflicting damage, and the targeting of foreign facilities and personnel is a stated focus of its strategy. Substantial progress toward a resolution of a prolonged battle between the government and the dominant Berber ethnic group in the troubled Kabylie region was made in early 2005, when representatives from Algiers accepted, in its entirety, the so-called El-Kseur Platform, a list of non-negotiable demands first presented by Berber tribal leaders in mid-2001. Among the key demands are greater investment in the development of the Kabylie region, the withdrawal of security forces from the area, and official recognition of Berber culture, in particular, the Berber language, Tamazight. Another important forward step was made in July 2005, when Bouteflika signed a decree calling for the dissolution of the mainly pro-government municipal and local assemblies in the provinces of Tizi Ouzou, Boumerdes, Bejaia and Bouira. However, the decision of the main Berber parties to boycott the 2009 president election indicates that there is more work to be done in laying a foundation for lasting peace in Kabylie. More generally, the violent conflict between Arabs and the minority Berber population in the southern town of Beriane in May 2008 underscores the potential for ethnic unrest in a climate of rising frustration over economic conditions. Lack of Diversification Will Hold Growth below Potential

Receipts from oil and gas exports account for more than 98% of export revenues and about 70% of state income, and economic growth rates historically have reflected the volatility in global prices for oil and fluctuations in the output of oil and gas. Despite a steep decline in oil and gas revenues in 2009, ample financial resources enabled the government to finance a robust public investment program that boosted activity in the construction industry, while an expansion of the public-sector wage force and pay increases for state workers helped to sustain domestic demand, resulting in positive real GDP growth of 2% last year. Higher oil prices will boost state revenues, providing a solid basis for the maintenance of a loose fiscal policy that will boost real GDP growth to 4.2% in 2010. The inflation rate fell to 5.3% (year-on-year) in March 2010, from 5.9% at the end of 2009. However, the government is under pressure to address the impact of high food prices on the overall spending power of households. In February, the Ministry of Commerce announced subsidies and price caps for 15 basic food products, and a new law is being formulated that would extend the government’s authority to regulate the profit margins and prices of an expanded range of products and services. The measure has not been welcomed by traders, and, if implemented, might fuel the growth of parallel markets.



The government’s wage policy will further complicate efforts to control consumer price increases. Workers have complained that a 25% hike in the minimum wage introduced last year did not prevent an erosion of purchasing power, and both public- and private-sector workers have organized strikes since late 2009 demanding higher pay. In May, the government yielded to the demands of the UGTA, signing an agreement that provides for a 20% rise in private-sector wages and a 23% wage hike for civil servants, retroactive to January 2010. The official target rate for 2010 is 3.5%. A good harvest will help to contain the rise of food prices, but the government’s maintenance of a loose fiscal policy (the 2010 budget foresees a 13% increase in overall spending) will make it difficult to bring inflation below 5%. Given the priority the government assigns to maintaining social stability, the possibility that episodes of unrest might prompt further increases in social spending represents an upside risk to the inflation forecast. The growth pattern of recent years underscores the degree to which overall economic health remains dependent on the performance of the hydrocarbons sector. The lack of attention to improving the management of the agriculture sector will impede the development of a potential alternative engine of growth, and the persistent security threat will deter investment in tourism, another sector that figures to play a key role in any successful diversification drive. The government’s retreat on liberalization of the hydrocarbons sector and its more cautious approach to privatization will impede investment flows, economic diversification, and job creation. That said, as long as the government possesses the wherewithal to finance a significant program of public investment, and assuming new development projects in the hydrocarbons sector are completed, annual growth rates of 5% or more can be expected later in the forecast period, resulting in average economic expansion of about 4.5% per year through 2015. Given the dim prospects for significant progress in reducing the structural imbalances that impede private-sector growth, government spending is unlikely to be scaled back in any substantial way as long as oil and gas revenues remain sufficient to support an expansionary policy. The resulting strong demand will contribute to persistent inflation averaging 4.7% per year through 2015. External Surpluses Will Track Increases in Gas Production

A sharp decline in exports, combined with continued strong demand for project-related imports, contributed to a significant narrowing of the trade surplus in 2009, resulting in a



similar reduction of the current account surplus, from $35.2 billion (20.6% of GDP) in 2008 to just $1.3 billion (less than 1% of GDP) in 2009. Exports will recover on the back of higher oil sales in 2010, but strengthening domestic demand and higher commodity prices will spur double-digit growth of imports, as well. The current account surplus is forecast to widen to $3.4 billion (or about 2% of GDP) this year, but the external balances are sensitive to shifts in hydrocarbon prices, and the possibility of a current account deficit cannot be ruled out in light of the potential for a renewed economic crisis in Europe.

In March 2009, Dubai’s DP World took over the main port of Algiers and the port of Djien-Djen under a 50/50 joint venture with EPAL, the Algerian port authority. The move promises to improve the efficiency of port operations, with unclear implications for Algeria’s trade balance; as long as oil and gas make up the vast majority of exports, the most significant impact of smoother port operations may well be an increase in the amount of foreign goods entering the market. Over the medium term, increased gas exports will serve as a buffer against the impact of fluctuations in oil prices, and the current account balance will show surpluses averaging $10.3 billion per year through 2015.

The government has announced its determination not to enter into another agreement with the IMF. As long as world oil prices and the development of gas resources help to restore fiscal surpluses and the external balances remain in the black, it should be able to avoid doing so. Only in the event of a renewed and prolonged plummeting of oil prices or a destabilizing escalation of civil violence that completely undermined investor confidence might Algeria be forced to seek help from the IMF.

Second Most Likely Regime Scenario

18-Month Forecast Period: Military-Civilian (30% Probability) Five-Year Forecast Period: Military-Civilian (40% Probability)

Although President Bouteflika has made great strides in reasserting civilian control over political affairs since his stunning re-election victory in April 2004, recent developments indicate that senior military officers are re-establishing their presence in the political arena, presumably owing to concerns that Bouteflika’s consolidation of power poses a threat to stability over the medium term. Any developments that touch off a destabilizing succession battle could prompt intervention by the military, particularly if political sparring were accompanied by a rise in social unrest or terrorist violence. Under such circumstances, the generals might not be satisfied with merely engineering the rise

Military-Civilian

Growth (%)

Inflation (%)

CACC ($bn)

2010 3.4 6.0 1.70 2011-2015 3.3 5.4 7.20



of their chosen candidate, creating the potential for the military’s continuing active role in political affairs (albeit behind the scenes).

The emergence of a civilian government dependent on the backing of the military for its authority would significantly weaken the country’s already fragile democratic institutions, and would likely be accompanied by a renewed crackdown on Islamist forces, including those that have benefited from Bouteflika’s amnesty. Such a regime would attract substantial international criticism, but might be tolerated should it prove to be more effective in fighting terrorism. In any event, a military-backed regime would do all it could to maintain favorable international relationships and deflect complaints about domestic security practices.

Slight Policy Changes to Compensate for Increased Disorder

The military’s top priority under this scenario would be taking all steps necessary to minimize domestic disorder, an objective that would impede the aggressive pursuit of structural reforms opposed by the unions and, in general, dimming the prospects for any significant progress toward reducing the public-sector’s role in the economy. Although some incentives might be offered in hopes of attracting foreign investment in priority sectors, especially tourism and banking, the maintenance of a dominant position for the state in hydrocarbons and utilities would limit the opportunities available to investors in the most attractive sectors. Although the political uncertainty accompanying this scenario might encourage capital flight, the significantly improved debt and reserves positions inherited by this government would limit the risk that exchange controls or restrictions on repatriation might be tightened.

The suspicions of the international community could threaten the prospects for WTO membership or closer relations with the EU, decreasing the incentive to pursue vigorous liberalization of trade restrictions. Even so, the government would pursue a path of cautious reform.

More Turmoil

This government would most likely come to power after a period of increased turmoil, and the emergence of this regime would itself be expected to meet with some incidents of violent resistance. However, the military would crack down hard on dissent, leading to a fairly rapid restoration of order. In any case, the threat posed by Islamist extremists would persist throughout the forecast period.

Economic Hazards

The uncertainty accompanying the military’s reassertion of political influence would discourage investment in sectors other than oil and gas and put pressure on the government to placate the civilian population with interventionist economic measures. A



marked retreat from economic reform would create significant obstacles to diversifying the economy and enhancing the role of the private sector. But barring a significant reduction in either the output or price of oil and gas, the fairly healthy growth of the hydrocarbons sector would contribute to overall expansion averaging 3.3% per year through 2015. Consumer prices would steady once post-transition stability was assured, and inflation would average 5.4% annually over the five-year forecast period. Although the emergence of a military-backed regime might hamper some investment in the hydrocarbons sector, the government would ensure that oil and gas continued to flow, preventing a collapse of the mainspring of the country’s economy. At the same time, the slower pace of economic expansion would contribute to correspondingly weaker demand for imports, ensuring fairly sizeable current account surpluses averaging $7.2 billion per year through 2015. Third Most Likely Regime Scenario 18-Month Forecast Period: Fundamentalist (5% Probability) Five-Year Forecast Period: Fundamentalist (10% Probability) Bouteflika’s health-related absence from the country in late 2005, and the general confusion over who was actually in charge of the government in the president’s absence, highlighted the potential for an unexpected vacancy at the top to trigger dangerous political instability. Although the constitution outlines the process for filling a vacancy in the president’s office, there is a high probability that powerful political factions might seek to deviate from that course in a bid to ensure their rise to power, or, even if the prescribed course were followed, that the resulting election would be marred by violence, fraud, and challenges to the legitimacy of the outcome. Under such circumstances, the military would be expected to intervene, either assuming direct control of the government, or propping up one of the challengers for the presidency. However, if the military hierarchy itself were divided over how to proceed, the resulting breakdown of order could create an opening for an Islamist takeover. The probability of such a scenario is extremely low, as it is very unlikely that the mass of Algerians would back a power grab by religious parties. Although the religious conservatism of the Islamic Salvation Front (FIS) positioned the party to emerge as a dominant political force in the early 1990s, the viciousness of the terrorist campaign that

Fundamentalist Growth (%)

Inflation (%)

CACC ($bn)

2010 1.2 7.9 -2.00 2011-2015 0.6 10.8 -1.10



followed the military’s cancellation of the second round of parliamentary elections in January 1992 turned much of the population against the party. It is only slightly more probable that the fundamentalists might come to power over the medium term through the electoral process, particularly given the specific ban on religious parties under the terms of the national reconciliation plan approved by referendum in September 2005. Moreover, the leadership of the outlawed FIS became badly divided during the period of civil war, and the party’s self-proclaimed “president in exile,” Rabah Kebir, actually endorsed Bouteflika ahead of the 2004 presidential election. Following his return to Algeria in 2006, Kebir explicitly ruled out the possibility of re-forming the FIS, and a proposed plan for forming a new Islamist party has been dismissed by many of his former allies as a scheme directed by the government. Given the deep divisions among the various groups capable of founding a credible Islamist political force—not to mention the guaranteed hostility of the military to such a development—fundamentalists would find it exceedingly difficult to form a regime capable of governing the country. Tighter Controls

A fundamentalist government would increase restrictions in order to reduce non-Islamic influences and would emphasize Islamic tenets of social justice. The FIS rejects all international agreements Algeria has signed since the cancellation of the 1992 elections, and all such agreements with foreign companies would be at risk under an Islamist government. A fundamentalist regime would impose tighter restrictions on the employment of expatriates. Repatriation restrictions and exchange controls would be tightened to protect against capital flight.

The country’s export potential and its quest for imports would not change even under a fundamentalist regime. However, such a government would be much less inclined to cooperate with multilateral organizations. In keeping with Islamic tenets of social justice, it might raise tariff barriers in order to protect local industry and increase subsidies on foodstuffs and other essentials.

Business conditions and government policies under an Islamic regime would be highly uncertain, prompting capital flight. Social unrest could disrupt oil and gas production. The reduced foreign exchange available for imports would lead to increased payment delays.

Chaotic Conditions

The country would be polarized by the emergence of a fundamentalist regime, whose attempts to impose strict Islamic standards would produce even greater lawlessness. It would experience immense difficulty in trying to control violence and might even face a



full-scale civil war. The Berbers, who are already struggling to promote their culture and prevent its subordination to Arabism, would become further alienated. Algerians living in France and elsewhere would form a powerful force against this regime.

Serious Economic Setbacks

A sharp economic slowdown in the immediate aftermath of a fundamentalist takeover would be followed by weak growth averaging less than 1% per year through 2015. Inflation would rise to double digits, averaging 10.8% annually. This government would increase spending in order to satisfy new constituencies and establish order. It would make few changes in fiscal and monetary policies over the short run; but restrictions on banking and credit would result in capital flight, draining domestic liquidity and dampening prospects for investment growth.

A fundamentalist regime would be hard-pressed to maintain its popular support. Wage increases might be more generous. Government-financed projects would be undertaken in a bid to reduce unemployment, which would nevertheless increase as private-sector business activity was sharply reduced.

The current account balance would show a deficit amounting to $1.1 billion per year on average over the forecast period. The country would maintain its position as a major oil exporter, but trade agreements would be suspended, hampering non-oil exports.

A fundamentalist regime would encounter great difficulty in obtaining loans. If disturbances associated with the Islamists’ rise to power lasted long enough to disrupt the production or export of hydrocarbons, this regime would need new credits, and would have to pay dearly for such funds.



Forecast Summary

SUMMARY OF 18-MONTH FORECAST


Bouteflika 65%


Fundamentalist 5%

RISK FACTORS CURRENT

Turmoil High Same SLIGHTLY MORE MORE

Investment

Equity High Same Same MORE

Operations High SLIGHTLY MORE SLIGHTLY MORE MORE

Taxation High Same SLIGHTLY MORE MORE

Repatriation Moderate Same SLIGHTLY MORE MORE

Exchange Moderate Same Same MORE

Trade

Tariffs Moderate SLIGHTLY LESS Same MORE

Other Barriers High Same Same MORE

Payment Delays Moderate Same SLIGHTLY MORE MORE

Economic Policy

Expansion Low MORE MORE MUCH MORE

Labor Costs Low SLIGHTLY MORE Same Same

Foreign Debt Low Same MORE MORE

SUMMARY OF FIVE-YEAR FORECAST


*Reformist Coalition 50%


Fundamentalist 10%

RISK FACTORS BASE

Turmoil Moderate Same Same SLIGHTLY MORE

Restrictions

Investment Moderate SLIGHTLY MORE Same MORE

Trade Moderate Same Same MORE

Economic Problems

Domestic Moderate Same SLIGHTLY MORE MORE

International Low Same SLIGHTLY MORE MORE

* When present, indicates forecast of a new regime



AlgeriaReal GDP Growth Under Alternative Regimes

0.0

1.0

2.0

3.0

4.0

5.0

6.0

2005 2006 2007 2008 2009e 2010f 2011-2015f

(per

cent

)

Reformist Coalition Military-Civilian Fundamentalist

AlgeriaInflation Under Alternative Regimes

0

2

4

6

8

10

12

2005 2006 2007 2008 2009e 2010f 2011-2015f

(per

cen

t)


AlgeriaCurrent Account Under Alternative Regimes

-5.0

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

2005 2006 2007 2008 2009e 2010f 2011-2015f

($b

illio

ns)



Political Framework 1-Jun-2010 • Page 37

Algeria Country Forecast Political Framework

Players To Watch

Abdelaziz Bouteflika: The president won re-election to a third five-year term in April 2009 with slightly more than 90% of the vote, reflecting both popular appreciation of his strong leadership and the impotence of the divided opposition. Concerns that the president’s consolidation of power could give rise to instability as he prepares to step down appears to be causing discomfort among military leaders, who have re-entered the political fray after a five-year hiatus. Recent hostile moves by the government against foreign “profiteers” in non-oil sectors of the economy is at odds with official acknowledgment of an urgent need for economic diversification, and uncertainty about Bouteflika’s policy intentions will reinforce the negative impact of a political power struggle on business sentiment…

Ahmed Ouyahia: The leader of the RND, a junior partner in the governing coalition, and an enthusiastic advocate of liberal reform, Ouyahia was reappointed prime minister (a position he previously held in 2003–2006) in late June 2008. Although Ouyahia’s return fueled speculation that Bouteflika planned to resume reform efforts, the move appears to have been motivated by the president’s desire to gain the RND’s backing for his third-term bid, which Ouyahia had opposed. Ouyahia is closely tied to the military establishment, and recent indications that the generals are returning to the political arena bode well for his chances of succeeding Bouteflika…

Military: Although the military retreated from the center of political affairs after Bouteflika won re-election in 2004, recent events suggest that the long-time presumed power behind the throne is reasserting its influence in response to concerns that the process of determining the president’s successor could trigger a destabilizing power struggle…

Al Qaeda in the Islamic Maghreb: The most hard-line of the militant Islamist groups that have waged war against the government, the renamed GSPC is believed to account for most of the fighters still in the field following the extension of a generous amnesty offer in 2006. The group’s alliance with Osama bin Laden’s Al Qaeda was marked by the adoption of suicide bombings as a weapon. Some of AQIM’s attacks have targeted foreigners, a development that may complicate efforts to woo investors from western countries…

National Democratic Rally: The party’s strengthened position in the National Assembly following the April 2007 elections has increased its leverage within the governing coalition, a fact that was underscored in late June 2008, when Bouteflika reappointed Ouyahia, the party’s leader, as prime minister. Ouyahia’s own presidential ambitions could become a source of conflict between the RND and the main governing FLN over the medium term…

…more on these and other Players in the Political Players section


Page 38 • 1-Jun-2010 Political Framework

Political Players Al Qaeda in the Islamic Maghreb (AQIM)

Known as the Salafist Group for Preaching and Combat (GSPC) until January 2007, when it changed its name to formalize an alliance with Osama bin Laden’s terrorist organization, the AQIM is the most hard-line of the militant Islamist groups that have waged war against the government, and its members are believed to account for most of the fighters still in the field following the extension of a generous amnesty offer in 2006. The group’s alliance with Osama bin Laden’s Al Qaeda was marked by the adoption of suicide bombings as a weapon. Some of AQIM’s attacks have targeted foreigners, a development that may complicate efforts to woo investors from western countries. The GSPC was formed in 1998 by Hassan Hattab (aka Abu Hamza), who parted ways with the main Armed Islamic Group (GIA) over its tactic of massacring innocent Algerians, and emerged as a leading player in the country’s civil strife after refusing to accept the government’s amnesty offer in 1999. After its formation, the GSPC’s efforts were abetted by the financial and logistical support of Osama bin Laden’s terrorist network, which had expressed reservations about the GIA’s indiscriminate killing of Muslims. Shortly after the September 11, 2001 attacks on the US, a press release attributed to Hattab threatened retribution against American and European targets in response to the assault on the international Islamic community being carried out in the name of the war on terrorism. The group gained its first real taste of international notoriety in 2003, when it was blamed for the disappearance of dozens of European tourists in Algeria. The tourists were ultimately freed, reportedly following the payment of some $5 million in ransom to the GSPC. In late April 2004, the media reported that as many as 300 members of the GSPC and dozens of members of the smaller GIA were prepared to surrender to the government in return for amnesty. There has been little concrete sign of progress on that front since then. However, the killing of hard-line GSPC leader Nabil Sahraoui and some of his top aides in a June 2004 clash with military forces was undoubtedly a damaging blow to the militants. However, the GSPC was intent on proving that it was not dead yet. In early September 2004, the group announced that Abou Mossaab Abdelouadoud had been chosen to succeed Sahraoui. A 33-year-old former science student, Abdelouadoud is known in militant circles for his bomb-making abilities. Immediately following the naming of a new leader, the group stepped up its attacks, which increasingly focused on the capital.



A prolonged shootout left at least a dozen policemen injured, and a series of roadside ambushes, including one in which 16 youths traveling to a soccer match were killed, pushed the GSPC’s death toll for the September–October 2004 period to 70. Commenting on the surge in violence, Interior Minister Noureddine Zerhouni noted that the attacks indicated that “the battle against terrorism [may be] won, but it is not finished.” That continues to be the case. While the AQIM’s numbers (estimated at several hundred) are too small to pose a direct threat to the government, the group has characterized its alliance with Al Qaeda as a “blessed union” bent on being “a thorn in the necks of the American and French crusaders and their allies, and a dagger in the hearts of the French traitors and apostates.” The militants made good on their explicit threat to US and French interests in December 2006, when a bomb attack on a bus carrying foreign oil workers employed by US-based Halliburton was bombed in the capital. Abdelaziz Belkhadem

A close and extremely loyal ally of the president, Belkhadem played a key role in wresting control of the dominant FLN from Bouteflika’s rival, Ali Benflis, and subsequently was elected leader of the party. Although his appointment as prime minister in 2006 was widely viewed as the first step toward clearing a path for Bouteflika to seek a third term in 2009, plans for constitutional reform were slowed by the FLN’s weak performance at the 2007 parliamentary elections, the result of widespread discontent over the government’s failure to translate an oil-and-gas windfall into improved living standards. Although Belkhadem was replaced as prime minister in June 2008, he remains an influential figure by virtue of his leadership of the FLN, whose support will be crucial to Bouteflika’s ability to govern effectively. Belkhadem was born on November 8, 1945, in Aflou. Before beginning his political career, he worked as a finance inspector and a professor. He served as a lawmaker from 1977–1992, holding the post of parliamentary president in 1990–1991. He spent the better part of the 1990s focusing his energies on the affairs of the FLN, and was appointed minister of foreign affairs in Bouteflika’s Cabinet in 2000. As the rivalry between Bouteflika and FLN leader Ali Benflis heated up in 2003, Belkhadem, as head of the FLN’s pro-Bouteflika “rectification faction,” waged a successful court battle to deny Benflis’ faction access to the party’s resources. Following Bouteflika’s landslide victory in the 2004 presidential election, Benflis surrendered his claim to the party leadership post. Belkhadem was formally elected leader of the FLN (and Bouteflika its honorary chairman) at a party congress held in February 2005.



Berbers

The Berbers, an indigenous ethnic group inhabiting northern Africa west of Tripoli, had settled in present-day Algeria long before the Arab conquest. The largest Berber group, the Kabyles, are native to Kabylie in the mountains east of Algiers. Three smaller groups are the Shawiyas of eastern Algeria; the Mozabites, concentrated near the Saharan town of Ghardaia; and the small group of Tuareg nomads of the southern Sahara. A common cultural milieu, including identity with the Malikite sect of Sunni Islam, has facilitated the Berbers’ assimilation into Arab society. However, Berber nationalists have attempted to preserve their cultural heritage, which has been threatened by the government’s program of promoting Arab culture. Since the legalization of opposition parties in 1989, Berber interests have been advocated by two parties, the Rally for Culture and Democracy (RCD), headed by Säid Sadi, and the Kabylie-based Socialist Forces Front (FFS), headed by Hocine Aït-Ahmed. In the June 1997 national elections, the FFS won 20 seats and the RCD won 19. In the local elections of October 1997, the FFS won 645 of the 7,242 seats and the RCD won 444. Efforts to gain official status for the Berber language have been a central focus of the group’s political agenda. A national charter signed in 1996 recognized the Berber culture and language as important components of the Algerian identity but did not include sufficient guarantees to satisfy Berber leaders. A 1998 law requiring that Arabic be used in all official business sparked protests by Berbers. Berber criticisms of the government focus on its disregard for human rights and alleged election fraud. Berbers opposed the new constitution approved by referendum in November 1996. Activists among the Berber community who campaigned against the new constitution were arrested in the days preceding the referendum. The Berbers also fear being drawn into the conflict between the Islamic fundamentalists and the government. The kidnapping of one prominent Berber and the shooting of another by fundamentalists in September 1994 led to mass demonstrations by Berbers and to threats that they would take up arms. In June 1998, the killing of the popular Berber singer, Lounes Matoub, triggered rioting by Berbers who demanded that the government address the concerns of the Berber community. The government’s failure to do so was reflected in renewed rioting that began in late April 2001 following the death of a Berber teenager in police custody. A demonstration organized by the FFS in mid-June 2001 drew an estimated 1 million protestors, the largest anti-government demonstration since independence.



The government’s conciliatory gestures failed to produce much in the way of concrete progress, but they did open up divisions between moderates and radicals within the Berber movement that weakened the group’s ability to pressure the government. As the May 2002 legislative elections approached, the FFS and the RCD sought to regain leverage by threatening to boycott the elections; both parties were well aware that Bouteflika was hoping for an uneventful election, and reasoned that he might be willing to make significant concessions in order to encourage the parties to participate. Although the president did issue a decree granting Tamazight (the Berber language) status as a national language and approved the withdrawal of paramilitary forces from Kabylie, unrest continued unabated in the region, and both the FFS and the RCD made good on their threat to boycott the elections. Consequently, the Berber parties no longer hold any seats in the National Assembly (they held a combined 39 seats in the legislature elected in 1997), leaving the Berber community with few options other than further demonstrations to press their demands on the government. Just ahead of the 2004 presidential election, Bouteflika made a renewed effort to ease tensions in the Kabylie region. Talks were held between Berber leaders and government representatives in January 2004, and resulted in the government’s agreement to several of the demands included in the El-Kseur platform presented by the Berbers in June 2001. Among the most significant concessions were the government’s pledge to terminate or reverse all punitive action against Berber leaders accused of instigating violent riots that have erupted periodically in Kabylie since Spring 2001, government payment of the utility bills of residents of the region, and the termination of taxes levied on traders in the region. A sixth demand—the dissolution of municipal and regional councils elected in 2002—was to be addressed in separate future talks. However, those talks collapsed after Prime Minister Ouyahia, himself a native of Kabylie, openly asserted that the Berber language could only be granted equal status with Arabic if a majority of voters approved the move in a referendum. Bouteflika immediately adopted a conciliatory stance toward the Berbers following his re-election, asserting that all impediments could be overcome, and pledging to do whatever was necessary to break the impasse. A major breakthrough was achieved in mid-January 2005, when the government agreed to accept the El-Kseur platform in its entirety. The details of important components of the agreement, including official recognition of Tamazight and the withdrawal of the gendarmerie, must still be filled in, and implementation could takes months or even years. However, in an effort to prevent the collapse of the accord, both sides agreed to the establishment of a committee to oversee



implementation that will include representatives from the government and the Arouchs, the village committees in Kabylie. Important progress was made in mid-July 2005, when President Bouteflika signed a decree dissolving the municipal and local assemblies in the provinces of Tizi Ouzou, Boumerdes, Bejaia, and Bouira in preparation for the holding of partial local elections before the end of 2005. Key Berber groups boycotted the 2002 local elections, and had refused to recognize the authority of the mainly pro-government assemblies. Despite the progress, the relationship between the government and the Berber community is far from healthy. The president’s recent declaration that Arabic is the one and only official language of Algeria, while true, appeared to many Berbers to be pandering to the prejudices of the majority. Moreover, a call by Berber parties to boycott the referendum on the president’s amnesty program was widely respected, as turnout in key Kabylie districts was reported to be only about 11%. Not surprising, the two main Berber parties, the Socialist Forces Front (FFS) and the Rally for Culture and Democracy (RCD) easily beat the pro-government parties in partial local elections held in Tizi Ouzou and Bejaia in November 2005. Abdelaziz Bouteflika (President)

The president won re-election to a third five-year term in April 2009 with slightly more than 90% of the vote, reflecting both popular appreciation of his strong leadership and the impotence of the divided opposition. Concerns that the president’s consolidation of power could give rise to instability as he prepares to step down appears to be causing discomfort among military leaders, who have re-entered the political fray after a five-year hiatus. Recent hostile moves by the government against foreign “profiteers” in non-oil sectors of the economy is at odds with official acknowledgment of an urgent need for economic diversification, and uncertainty about Bouteflika’s policy intentions will reinforce the negative impact of a political power struggle on business sentiment. Born in 1937, Bouteflika was the youngest commander in the struggle against French occupation that ended in 1962. He was named foreign minister at the tender age of 26 and held the post for 16 years. Bouteflika was closely associated with Houari Boumediene, who is considered the father of modern Algeria. He withdrew from Algerian politics after failing in a bid to succeed Boumediene in 1979, and spent most of the next two decades outside the country. During that time, he acted as adviser to several Persian Gulf rulers. In 1994, military leaders attempted to persuade him to run for president, but he refused after the army demanded that he obtain the blessing of other political leaders.



After then-President Liamine Zeroual announced in September 1998 that he would resign, the army again offered Bouteflika its backing. This time he accepted, returning from abroad as the army’s preferred candidate in the April 1999 presidential election. Combining a fierce nationalism with a reputation for diplomatic skill, he ran a victorious campaign in which he promised to restore Algeria’s international stature and bring an end to the armed conflict with Islamist extremists. Although he officially ran as an independent, Bouteflika’s candidacy received the support of leaders of the FLN and the RND; however, the endorsements caused bitter controversy within both parties. Shortly after winning the presidency, Bouteflika maneuvered to establish his independence from the military leaders who aggressively backed him in 1999, although any success he achieved in that regard was more apparent than real. He did dismiss the heads of five of the six military regions, the territorial army, and the gendarmerie, as well as nine senior army officers in February 2000, but critics claimed (with justification) that Bouteflika’s role in the dismissals amounted to announcing them. That said, a further reorganization of the military in August 2000 occurred in tandem with a Cabinet reshuffle that included some appointments, most notably that of Benflis to the premiership and Abdelaziz Belkhadem to head up Foreign Affairs, that met with a cool reception by the military. In late 2002, new reports of tensions between the president and the military appeared in the press, following the sacking of three of the president’s political allies amid charges that Bouteflika was seeking to win the early release of leaders of the outlawed Islamic Salvation Front (FIS) against the wishes of the military leadership. In late 2003, rumors began circulating that top generals had grown tired of the president’s reform program and were casting about for an alternative candidate to back in 2004. However, the military ultimately insisted that it would remain on the sidelines as long as order was maintained through the campaign and voting, and it made good on the promise. Although his first term was troubled by persistent domestic unrest, tense relations with military leaders, a stalled reform program, and a political struggle with his former prime minister, Ali Benflis, for control of the dominant FLN, Bouteflika won re-election with an astonishing 85% of the popular vote in April 2004. Even more astonishing was the assessment of most observers that the result more or less accurately reflected the president’s popularity, largely owing to his success in reducing the level of deadly extremist violence that has plagued the country for more than a decade. After winning re-election, Bouteflika pursued a campaign of national reconciliation and liberal reforms with renewed vigor, and managed to solidify civilian control of the government and further reduce the threat of extremist violence. However, the



government’s enthusiasm for liberal reforms waned as oil receipts increased and discontent over continued poor living standards spread. Questions about the state of the president’s health were raised in late 2005, when he traveled to France for treatment of a bleeding ulcer. However, he returned in time to sign the 2006 budget into law before the January 1 deadline, and has shown no outward signs of serious illness. The president has conceded that he was seriously ill at the time, but insists that his condition is much improved. In any case, his successful pursuit of a third term suggests that he feels fit enough to continue as president until 2014. Islamic Salvation Front (FIS)

Bouteflika pledged to seek accommodation with the Front Islamique du Salut, and at least one high-profile leader of the group endorsed his re-election in 2004. The more recent extension of an amnesty to militant groups formerly allied with the FIS has further improved the prospects for a rapprochement. However, the efforts of several FIS founders to win legal recognition of a new party have been short-circuited by provisions of an amnesty plan approved in 2005 that effectively ban members of the FIS—even those seeking political cover in new organizations—from participating in political affairs, creating a potentially problematic impediment to the achievement of national reconciliation. When originally formed in 1989, the FIS encompassed a broad range of Islamic factions, from radical revolutionaries to democrats willing to work toward gradual change within the secular system. The party attracted wide support, especially among the urban poor frustrated at what they considered a corrupt government’s failure to solve serious economic difficulties. The party also attracted adherents who believed the FIS could seize power. Some recruits were veterans of the Afghan resistance, and others were survivors of the Buyali band that took up arms against the government in the mid-1980s. The more militant members had resorted to violence even before the 1991 election. The FIS received 47% of the votes in the first round of the 1991 general elections. The panicked government responded by banning the party in March 1992, making membership illegal, and dissolving most elected local councils, including the 885 controlled by the FIS. The government also prohibited social and charitable groups connected with the FIS, dissolved the trade union organized by the FIS (the Islamic Syndicate of Workers), forbade senior FIS officials to travel abroad, and ordered newspapers not to print interviews with anyone associated with the party.



The government’s harsh actions, instead of quelling dissent, provoked a violent response from militant Islamists. The violence escalated, leaving thousands dead from confrontations between the fundamentalists and government forces. In January 1995, the FIS joined other opposition parties in endorsing a plan for limiting violence and establishing a democratically elected government, but some party militants opposed the declaration. The FIS formed the AIS to distinguish itself from more radical armed Islamist groups. In the 1995 presidential election, the party suffered a blow when Algerians largely ignored its calls for a boycott. The FIS denounced the election and called for a boycott of the 1996 constitutional referendum. Zeroual, however, took a conciliatory approach to the fundamentalists, appointing a dissident FIS member, Ahmed Merani, to the post of minister of religious affairs in January 1996. The FIS leadership acknowledges that the public is weary of violence. Many FIS members have surrendered in response to a presidential promise of clemency. The clemency offer has split the FIS, since some of the more moderate elements are interested in participating as a legal party in national and local elections. In September 1997, FIS representatives called for a truce and proposed that the FIS be permitted to resume functioning as a legal party, but the government rejected the request. In July 1997, the government released imprisoned FIS leaders Sheikh Abassi Madani and Abdelkader Hachani from prison. Madani was put under house arrest in September 1997, however, after calling for the UN’s secretary-general, Kofi Annan, to intervene in the country’s political affairs. In late 1999, Hachani, who had led the FIS to its 1991 electoral success and later spoke out in favor of peace and reconciliation, was assassinated. Madani was released from house arrest in mid-2003, along with FIS Vice President Ali Belhadj, on the condition that they refrain from engaging in political activity. Belhadj openly defied the political ban, but Madani reportedly agreed to the conditions for his release. Even so, despite the fact that the FIS remains barred from legal political activity, neither has shown much inclination to remain on the political sidelines. Labor

The political influence of Algeria’s labor force of about 7 million is exercised primarily through the activism of the General Union of Algerian Workers (Union Générale des Travailleurs Algériens, or UGTA). The effectiveness of the unions has traditionally depended upon the conservatism of military leaders, whose fears of social unrest inclined



them to apply pressure on the government to maintain a cautious approach toward reform. The military’s withdrawal from the political stage robbed the unions of this crucial leverage, prompting the UGTA to display greater flexibility with regard to privatization and other proposed reforms. However, more recent events suggest that the more accommodating approach was temporary. The UGTA, founded in 1956, claims an estimated 1 million members; this number represents about 15% of the labor force, including some 350,000 members of the National Federation of Agricultural Workers. The UGTA encompasses national syndicates organized by sector. After independence, the union’s radicalism led to its subordination to the FLN. The UGTA favors conservative socialism. In 1988, the government separated the UGTA from the FLN and permitted rival trade unions to register. Some autonomous unions—such as a Syndicate of Air Algerie Pilots, airport technicians, and teachers in Kabylie—exist outside the UGTA. At least one Islamic trade union has applied for registration. Early in 1996, a second labor confederation, the Autonomous Syndicates Confederation (CSA) tried to organize the autonomous syndicates, but it did not gain wide support for this effort. It made its application to the Labor Ministry in September 1995. It has not received approval but is allowed to function without official status. In 1998, the country suffered much labor unrest, including numerous strikes. High unemployment, firings from privatized firms, a declining standard of living, and the country’s political quagmire have caused enormous frustration among labor’s rank and file. In October 1998, the UGTA forced Ouyahia (then in his first term as premier) to agree to halt the closing of state enterprises. The UGTA’s adamant opposition to privatization has been an important factor in the government’s poor implementation of its divestment program. In February 2003, the union responded to the government’s announcement of its intention to move forward aggressively with privatization and other structural reforms by organizing a two-day general strike. The effectiveness of the action became apparent in early 2003, when Minister of Energy and Mines Khelil announced that legislation aimed at liberalizing investment in the oil and gas sector would be shelved indefinitely. Somewhat surprisingly, the UGTA supported Bouteflika’s re-election in 2004, and Khelil has pressed ahead with his plans to increase foreign participation in the oil and gas sectors. The government has also announced plans to push ahead aggressively with its long-stalled privatization program in 2005, and the UGTA gave its qualified blessing to the sale of state enterprises. However, fears that privatization would result in mass



layoffs encouraged the adoption of a less accommodating posture by the unions in 2006, and pressure from the UGTA played a significant role in forcing the resignation of Prime Minister Ouyahia in May 2006. Military

The military wielded significant political power during the period of intense civil conflict in the 1990s, which was triggered by the intervention of senior officers to halt elections that appeared to be carrying an Islamist government to power. A shadowy group of military leaders, known as le pouvoir (the power) or les decideurs (the deciders), was assumed to be calling the shots behind a façade of a civilian-led democratically elected government. President Bouteflika’s stunning victory in the 2004 presidential election, achieved without benefit of the military’s explicit endorsement, and signs that the deadly Islamist insurgency was approaching its end, prompted a marked shift toward greater civilian control of political affairs. Several top members of le pouvoir announced their retirement in early August 2004, providing Bouteflika with greater latitude to neutralize the influence of those who remained. The president installed close allies in top military positions, and put forward a plan to separate intelligence functions from military control. However, more recent events suggest that the military is reasserting its influence in response to concerns that the process of determining the president’s successor could trigger a destabilizing power struggle National Democratic Rally (RND)

The strengthened position of Rassemblement National Democratique in the National Assembly following the April 2007 elections has increased its leverage within the governing coalition, a fact that was underscored in late June 2008, when President Bouteflika reappointed the party’s leader, Ahmed Ouyahia, an enthusiastic advocate of liberal reform, as prime minister. Although Ouyahia’s return fueled speculation that Bouteflika planned to resume reform efforts, the move appears to have been motivated by the president’s desire to gain the RND’s backing for his third-term bid, which Ouyahia had opposed. Ouyahia is closely tied to the military establishment, and recent indications that the generals are returning to the political arena bode well for his chances of succeeding Bouteflika. However, Ouyahia’s own presidential ambitions could become a source of conflict between the RND and the main governing FLN over the medium term. The RND was founded in February 1997, with the backing of the bureaucratic establishment and the military. At its inception, the party was more than a clone of the FLN, formed primarily to provide former President Liamine Zeroual with a means of distancing his government from the more unsavory aspects of the FLN’s three decades of



rule following independence in 1962. Opposition leaders claimed that manipulation of the voting process led to the RND’s victory in the 1997 elections, in which the party won 38% of the votes and 41% of the seats. Election observers reported that the ballot boxes from military posts showed 100% support for the RND. Furthermore, while authorities restricted the political activities and coverage on state-controlled television of other legal parties, the RND received extensive, favorable coverage. The party also won 55% of the elective offices in the 1997 municipal elections and 896 seats of 1,779 in the provincial assemblies. These elections, as well, were widely considered to have been fraudulent. The RND suffered a crushing defeat at the May 2002 legislative elections, as its number of seats in the National Assembly fell from 156 to just 48, while the FLN saw its total rise from 62 seats to 199. The reversal of fortune for the two parties largely reflected the fact that the guiding force behind the RND’s creation, Zeroual, had long since left the political scene. Despite its weakened position, the RND became an invaluable ally to Bouteflika when factional strife within the FLN threatened his ability to command a legislative majority. Ouyahia was named to replace then-FLN leader Ali Benflis as prime minister in May 2003, and was re-appointed to the post in April 2004, following Bouteflika’s victory in the presidential election. However, the healing of the rift within the FLN under Belkhadem’s leadership made Ouyahia expendable, and he was pushed out of the prime minister’s post in favor of Belkhadem in May 2006, after coming under pressure to resign from opponents of the government’s reform program. National Liberation Front (FLN)

The Front de Libération Nationale re-established itself as the dominant party at the 2002 elections, winning 199 seats in the 389-member National Assembly, and has formed the core of Bouteflika’s legislative support ever since. The party’s leader, former Prime Minister Belkhadem, is a close ally of the president, and spearheaded the push for constitutional changes required to permit Bouteflika to stand for a third term in 2009. However, the party’s representation in the legislature was reduced to just 136 seats at the April 2007 elections, leaving the government dependent upon the backing of allied parties for a majority. The FLN was formed in 1954, and headed what was effectively a one-party state for three decades after independence. However, the FLN’s support was undermined in 1997 by the emergence of the military-backed RND, as well as by charges of inefficiency and corruption during the long period in which it held power. In the 1997 legislative elections, the FLN finished third, winning just 62 seats in the National Assembly as its share of the vote fell to 16%. The party made a stunning comeback under the leadership



of Ali Benflis, winning an outright majority of 199 seats in the National Assembly at elections held in May 2002. The FLN showed that its revival was no fluke in the October 2002 local elections, in which it gained control of 668 of the country’s 1,541 town councils and 43 of 48 district councils. However, the party was wracked by internecine warfare beginning in mid-2003, when a pro-Bouteflika “rectification” faction, headed by then-Foreign Minister Belkhadem, marshaled its forces to block efforts by Benflis to challenge Bouteflika for the presidency in the 2004 election. Belkhadem’s faction successfully won court backing for a freeze of the FLN’s activities and the nullification of party elections in March 2003 that gave Benflis another term as leader with expanded powers. Bouteflika’s rout of Benflis in the April 2004 presidential election effectively marked the end of the power struggle. Benflis officially surrendered his claim to the party’s leadership following his defeat, and Bouteflika and Belkhadem were formally named as the party’s leaders, in the positions of honorary president and secretary-general, respectively, at the FLN congress held in late January 2005. Although the anti-Bouteflika faction of the party continued to create some problems for the president early in his second term, his progressive consolidation of political power encouraged his FLN detractors to make their peace with the rectification faction. Internal disagreements are nothing new for the party. Two factions emerged within the FLN during the 1990s, one advocating reforms and the other favoring a return to the statist policies that predominated before 1990. In January 1996, the party replaced Abdelhamid Mehri, a member of the liberal wing, as its leader, naming former Minister of Finance Boualem Benhamouda, a conservative, to the post. Fourteen other members of the FLN political bureau were also removed from office. Benhamouda then distanced the FLN from other opposition parties, declaring that the conditions that prompted the creation of their alliance no longer existed. Although the FLN endorsed Bouteflika’s candidacy for the presidency in 1999, the move generated substantial criticism within the party. Former Prime Minister Hamrouche, the head of the FLN’s reformist faction, ran as an independent candidate. Then-Prime Minister Benflis was elected secretary-general of the party in September 2000, and was re-elected to the post (with expanded powers) in March 2003. However, both his re-election and the decision to provide him with enhanced powers were nullified by the courts in late 2003 following a legal challenge launched by Belkhadem’s rectification faction. Opposition Parties

Political parties were legalized by constitutional reform in 1989, rapidly leading to the founding of dozens of parties. To operate legally, parties must receive government



recognition; this can be withdrawn, an action that led to the banning of the FIS. The parties represent views ranging from Trotskyite to moderate Islamic. Some of these groups are obscure, but others represent effective opposition forces and attract a considerable following. On the left, the Workers’ Party won 26 seats in the 2007 elections, benefiting from the boycott conducted by two other opposition parties. The Movement for National Reform (Islah), which seeks the creation of an Islamic state through democratic means, saw its legislative representation reduced from 43 seats to just three, after the unexplained disqualification of the party’s leader prompted calls for a boycott of the 2007 elections. The ethnic Berber Socialist Forces Front (FFS) has been one of the country’s main secular political groupings, but as a result of the decision to boycott the 2007 National Assembly elections (after boycotting the 2002 contest), holds no seats in the legislature. The party draws much of its strength from Berber areas, but it has broadened its base in order to conform to changes made to the electoral law in 1997 that require a party to provide evidence of national support. The FFS, which advocates moderate social democratic views, came into existence in Kabylie. The party was formed by Hocine Aït-Ahmed, one of the nine so-called historic chiefs of the FLN, who returned to Algeria in 1989 after years of exile in Europe, and support for the party stems primarily from his prestige. Having lived in exile for more than 20 years, Aït-Ahmed was untainted by the FLN’s mistakes and corruption. Members of other parties, notably the FIS, also trust Aït-Ahmed. The party won 9% of the vote in the November 1995 presidential election and 19 seats in the June 1997 elections. Legal parties are often constrained by the government, sometimes finding it difficult to obtain official permission to hold rallies. In the April 1999 presidential election, the parties complained of government bias toward Bouteflika’s candidacy, particularly in the use of the mass media.

Political Risk Services 1-May-2010 Reproduction without written permission of The PRS Group is strictly prohibited.

Climate for Investment & Trade 1-May-2010 • Page 1

Algeria Country Conditions

Climate for Investment & Trade Overview Openness to Foreign Investment

Algerian officials are quick to seek technology and know-how transfer. However, they have been pursuing efforts to secure greater returns for Algerian interests since the 2006 amendments to the hydrocarbons law, which required majority state partnership in all oil and gas projects and imposed a heavy windfall profits tax on oil profits when prices are above $30 per barrel.

In July 2008, President Bouteflika publicly expressed anger over alleged massive profits reaped from foreign investments in Algeria and repatriated abroad. Since that speech, the tax law has been amended to require that investors re-invest within four years the equivalent value of any tax benefits they obtain as incentives to locate in Algeria. In addition, the major local cell phone provider in Algeria, a subsidiary of the Egyptian firm Orascom, was levied a $600-million tax readjustment in November. U.S. investment outside of the oil and gas sector is currently limited to a pharmaceutical factory, a desalination plant, a bottling plant, and a cable-making factory.

Three agencies have mandates to encourage and manage investment in Algeria. The National Agency for Investment Development (ANDI) (www.andi.dz) is responsible for facilitating investments and granting tax exemptions; the National Investment Council (CNI) was created to define investment strategies and priorities as well as to approve special investment incentives by sector; and the Ministry for Industry and Investment Promotion (www.mipi.dz) maintains one office for investment policy and another for the promotion of privatization. The privatization process in Algeria has all but stopped, however, due in part to a lack of interest by foreign firms and the lack of a stable regulatory environment.

In July 2009, the government adopted a budget amendment (the Complementary Finance Law of 2009) which enacted restrictions on imports and foreign investment. These measures require 51-percent Algerian ownership of new foreign investment, 30-percent Algerian ownership of foreign import companies, and use of letters of credit for the payment of import bills. Additionally, a new Central Bank regulation stipulates that all invoices must state a due date for payment. Invoices without a due date or that exceed 360 days cannot be paid.

Transparency of the Regulatory System

Generally, Algeria’s regulatory system is transparent, but decision-making authority remains opaque. Each ministry defines its rules for doing business in the sectors it manages, and regulatory bodies are established to administer them. Challenges arise in managing the bureaucracy, because authority is generally vested at the top of every organization, and access to decision-makers is often limited. Furthermore, the Algerian bureaucracy is slow and protocol-oriented, such that even minor deficiencies in paperwork can lead to significant delays, frustration, and fines. In some cases, authority over a matter may rest among multiple ministries, which imposes additional bureaucratic steps and the likelihood of inaction due to errors or unusual circumstances.

Political Risk Services Algeria Country Conditions 1-May-2010 Reproduction without written permission of The PRS Group is strictly prohibited.

Page 2 • 1-May-2010 Climate for Investment & Trade

Foreign/Free Trade Zones/Ports

There are currently no free trade zones in Algeria.

Tariff and Non-tariff Barriers Algeria applies a value-added tax (VAT) to all sales in the country. The VAT rates are 7 percent and 17 percent, depending on the product. Staples such as bread or milk are not subject to VAT. The reduced rate of 7 percent is applied to most non-luxury goods.

Getting goods cleared through Algerian customs represents the single most frequently reported problem facing foreign companies operating in Algeria. Delays can take weeks or months, and bribes are occasionally demanded to expedite goods transfers.

Policies Conversion and Transfer

The Algerian dinar is considered fully convertible for all commercial transactions. The Bank of Algeria (Banque d’Algérie, the nation’s central bank) manages Algeria’s foreign reserves, controls foreign exchange, and delegates most of these controls to the banks themselves. Legally registered economic operators can access foreign currency to make payments, subject to bank domiciliation, without any pre-authorization. Operators must possess a clean audit report and a certificate from the tax authority in order to repatriate funds.

Foreign investors can repatriate dividends, profits, and real net income out of their assets through transfers or liquidation. In certain cases, due to the inefficiency of the banking system and the heavy bureaucracy, it may take longer to obtain official permission from the central bank to make transfers/payments, or for the local bank to proceed with the transfer. However, U.S. suppliers benefit from generally faster and more predictable payments as a result of the mandatory letter of credit requirement. In addition, payment delays may result due to the new regulation that limits Algerian importers’ payment options to letters of credit. Direct wire payments are no longer authorized.

Performance Requirements

Algeria does not impose general performance requirements on foreign investments. However, the national energy company, Sonatrach, must be a majority shareholder in any hydrocarbon sector venture. In accordance with the 2009 Complementary Finance Law, foreign investments in any sector now require a 51-percent Algerian partnership.

The investment code provides a number of incentives for investment in Algeria, which are primarily related to VAT and other tax exemptions, for periods of time that are dependent on the type of investment and the nature of the package agreed between the investor and the National Agency for Investment Development (ANDI). The 2009 Complementary Finance Law requires foreign investors to reinvest in Algeria the equivalent of any tax benefits bestowed upon them, in a manner similar to the offsets investment requirement commonly seen in Gulf countries.

Legal Framework Expropriation and Compensation

The government of Algeria has not engaged in expropriation actions against foreign firms.



Dispute Settlement

Algeria is a signatory to the convention on the Paris-based International Center for the Settlement of Investment Disputes (http://www.worldbank.org/icsid). Algeria ratified its accession (http://arbiter.wipo.int/arbitration ) to the New York Convention on arbitration and is a member of the Multilateral Investment Guarantee Agency (http://www.miga.org). The code of civil procedure allows both private and public sector companies full recourse to international arbitration. Algeria permits the inclusion of international arbitration clauses in contracts.

An American oil company this year exercised the dispute settlement mechanism in its contracts with the state oil company to contest the implementation of a windfall profits tax imposed long after the company began doing business in Algeria. Negotiations prior to conciliation and binding arbitration were very slow. The entire dispute resolution process, including arbitration, will likely take 18 to 24 months.

Right to Private Ownership and Establishment

Foreign entities have largely equal rights to establish and own business enterprises in Algeria and engage in most forms of remunerative activity, within the framework of the requirements for majority Sonatrach participation in hydrocarbon ventures and the new requirement for majority Algerian participation in all new foreign investment. Private enterprises have equal status with public enterprises and compete on an equal basis with respect to access to markets, credit, and business operations.

Protection of Property Rights

Secured interests in property are generally recognized and enforceable, but court proceedings can be lengthy and results unpredictable. Most real property in Algeria remains in government hands, and controversy over the years has resulted in conflicting claims for real estate titles, which has made purchasing and financing real estate difficult. One prospective U.S. investor seeking to build a factory in Algeria tried in vain for two years to obtain approvals from a local governor to purchase suitable land for the project.

While there is legislation protecting copyright and related rights, trademarks, patents, and integrated circuits, implementation has been inconsistent, and enforcement remains spotty. The Office of the U.S. Trade Representative placed Algeria on the Priority Watch list in 2009 for ineffective protection of pharmaceutical tests and data.

Infrastructure A number of international airlines serve Algeria. There are no direct flights between Algeria and the U.S., though a direct Algiers – New York City flight is under consideration. Air Algérie and Tassili Airlines provide domestic service. There is railway passenger service between the major northern cities and bus services to many of the smaller cities and towns. Good paved roads cover the northern region and connect some oases, but congestion and security checkpoints impede overland travel. Rental cars are available but expensive. Parking is also an issue in urban areas, and many companies hire a car and driver for daily meetings of executives.

Telecommunications. Algeria’s telecommunications are mostly modern, but outdated infrastructure and bureaucracy makes negotiating for service difficult. GSM technology has made mobile phones commonplace. Most hotels and private businesses have high-speed Internet, but the government largely does not.


Page 4 • 1-May-2010 Climate for Investment & Trade

Corruption and other Bureaucratic Obstacles There were a number of arrests in 2009 of high-ranking Algerian Government officials in a variety of ministries and state-owned enterprises. Foreign companies do not complain of requests for bribes or lost contracts due to failure to pay bribes. However, customs officials have been known to demand bribes to expedite goods lingering in Algerian ports awaiting customs clearance. Many Algerian citizens believe that corruption is a problem within the upper reaches of government. Some evidence suggests that bribes are usually paid to bypass Algerian bureaucracy or to avoid government interference.

The government investigated several high-profile corruption scandals in 2009 and early 2010. One investigation implicated officials at the Ministry of Transportation on charges of fraud related to the construction of the East-West highway. Another involved senior officials of the state oil company, Sonatrach, investigated for corruption in procurement. Lower-level investigations involved customs officials and private sector executives charged with embezzlement, illegal currency transfers, and misuse of public funds.

In 2006, the Algerian Government adopted an anti-corruption bill that reinforced existing legislation and brought Algeria into compliance with the UN Convention against Corruption, which Algeria ratified on August 25, 2004. The law was designed to promote transparency in government and public procurement, introduce new crimes such as illicit enrichment and reinforce existing penal sanctions.

Algeria is not a financial center, and financial transactions are tightly regulated. However, it is estimated that half of the country’s economic transactions are done within the informal sector, effectively escaping the purview of state auditors. In 2005, the government adopted anti-money laundering legislation and established a financial intelligence unit to monitor suspicious financial transactions and refer violations of the law to prosecutorial magistrates.

International Agreements Trade Agreements. Algeria has ratified a number of bilateral trade agreements with other countries though there are currently no bilateral trade agreements between the U.S. and Algeria. In 2001, the two countries signed a Trade and Investment Framework Agreement (TIFA) that created a platform for discussions on trade provisions. Algeria ratified an EU association agreement in September 2005 and began active membership in the Arab Free Trade Zone in 2009. The Algerian Government says it is working towards accession into the WTO, but real progress has proceeded at a glacial pace over the years and the country actually went backwards in 2009 in terms of opening up its market to trade and investment.

Bilateral Investment Agreements. The United States and Algeria signed a Trade and Investment Framework agreement (TIFA) in 2001 to create a forum for involved discussion. TIFA council meetings were held in 2001 and 2004. Algeria executed a European Union association agreement in 2005. The agreement provides for the gradual removal of import duties on EU industrial products over 12 years, and removed duties immediately on 2,000 other products. However, the EU has complained that some provisions in the 2009 Complementary Finance Law violate that agreement. Algeria signed bilateral investment agreements for the protection and promotion of investments with the following countries in the indicated years: Belgium/Luxembourg (1991), Italy (1991), France (1993), Romania (1994), Spain (1994), China (1996), Germany (1996), Jordan (1996), Mali (1996), Vietnam (1996), Egypt (1997), Bulgaria (1998), Mozambique (1998), Niger (1998), Turkey (1998), Denmark (1999), Yemen (1999), Czech Republic (2000), Greece (2000), and Malaysia (2000). There is no bilateral investment treaty between Algeria and the United States. Algeria has also signed bilateral treaties to prevent double taxation with the following nations: United Kingdom (1981), France (1982), Tunisia (1985), Libyan Arab Jamahirya (1988), Morocco (1990),



Belgium (1991), Italy (1991), Romania (1994), Turkey (1994), Syrian Arab Republic (1997), Bulgaria (1998), Canada (1999), Mali (1999), Vietnam (1999), Bahrain (2000), Oman (2000), Poland (2000), Ethiopia (2002), Lebanon (2002), Spain (2002), and Yemen (2002). There is no double taxation treaty between Algeria and the United States. In 1990, Algeria signed both investment protection and double taxation agreements with the Arab Maghreb Union (AMU) countries (Libya, Morocco, Mauritania, and Tunisia.

OPIC and Other Investment Insurance Programs. The U.S. Overseas Private Investment Corporation (OPIC) (http://www.opic.gov), the U.S. Export-Import Bank (Ex-Im) (http://www.exim.gov), and the U.S. Trade and Development Agency (USTDA) (http://www.ustda.gov) support projects in Algeria. However, the Algerian Government announced in 2009 that all financing for future foreign investments in the country must be financed through Algerian banks. A $250-million water desalination project in Algiers was finished in 2008 with OPIC support, and Ex-Im supported the U.S. content of a power project in Skikda in 2003.

Labor Conditions Algeria’s labor force consists of roughly 10 million (10,315,000 in December 2008) people out of a total population of 36 million. According to the National Office of Statistics, over 70 percent of the population is under age 30. Beginning January 1, the monthly minimum wage increased to DA 15,000 ($215) from DA 12,000 ($170). The official unemployment rate is approximately 13 percent (11.3 percent in December 2008), but international organizations believe it is as high as 25 percent.

Algeria’s labor code sets minimum work standards, including a minimum work age of 16, a 40-hour workweek, and higher rates for overtime pay. Employers pay 26 percent of gross salaries in social security taxes, including provisions for both retirement and health/accident insurance.

U.S. companies are able to hire trained technical staff. However, recruiting and retention has become more difficult, as well-educated and trained Algerians are increasingly lured by higher salaries offered in the Gulf region. English speakers remain difficult to find. Arabic is Algeria’s official language, and French is the most common language of business.

There are no restrictions on the number of expatriate supervisory personnel a company may establish. Entry visas for foreign workers must be requested through the Ministry of Employment and Social Solidarity (http://www.massn.gov.dz). Foreign workers must then obtain work permits from the Ministry of Labor (http://www.mtss.gov.dz) and a residency card from the local police office in the district where they will be working.

The employer is responsible for submitting all tax payments for individual workers to the proper local tax collection authorities.

Algerian regulations allow foreigners to repatriate 50 percent of their salaries.

Sources: Algeria Country Commercial Guide FY 2010, US & Foreign Commercial Service and US Department of State; PRS files.

Political Risk Services 1-May-2010 Reproduction without written permission of The PRS Group is strictly prohibited.

Background 1-May-2010 • Page 7

Algeria Country Conditions

Background Geography Algeria encompasses nearly 2.4 million square kilometers, making it the 10th largest country in the world and the second largest in Africa. Morocco lies to its west, Tunisia and Libya to the east, and on its southern borders are Mauritania, Mali, and Niger. Despite heavy migration to coastal cities, 40% of the population lives in villages. Except for the fertile coastal belt on the Mediterranean Sea, Algeria consists mainly of arid mountains and desert. Inadequate water supplies limit agriculture to 3% of the land. Hydrocarbons are its major natural resources; Algeria’s reserves of natural gas rank among the top 10 countries in the world and its proven oil reserves rank 14th. The country’s exports include oil, condensates, liquefied natural gas, other minerals, and agricultural products.

During January, the coastal capital of Algiers averages low temperatures of 9ºC, high temperatures of 16ºC, and receives an average of 12 days of significant precipitation. During July, its average low and high temperatures are 21ºC and 28ºC, and it receives an average of less than one day of significant precipitation.

Recent History 2000: Attacks continued against civilians and security forces and were thought to be the work of small groups still opposed to the civil concord. Violence was estimated to have claimed over 100,000 lives in Algeria between 1992 and 2000.

January 2001: President Bouteflika made the first visit to Sudan by an Algerian Head of State in 30 years.

April-May 2001: Scores of demonstrators were killed in violent clashes between security forces and Berber protestors in the mainly Berber region of Kabylie following the death of a teenager in police custody.

May 2001: The mainly Berber party, the Rally for Culture and Democracy, withdrew from the government in protest against the authorities’ handling of the riots in Kabylie.

October 2001: Within a concession package, the government agreed to make the Berber language official.

November 2001: Several hundred people were killed as massive flooding hit Algiers, causing devastation that became a catalyst for protests over longstanding conditions of substandard housing and inadequate employment opportunities. The government announced plans to privatize Sonelgaz, Algeria’s sole supplier of gas and electricity, end its monopoly, and open the sector to private sector competition, beginning with partial privatization in 2004.

December 2001: President Bouteflika signed an association agreement with European Union President Romano Prodi aimed at establishing a free trade zone between the EU and Mediterranean nations by 2010.

March 12 2002: Bouteflika made the gesture of elevating Tamazight, the Berber language, to the status of a “national language” without benefit of a referendum, falling short, however, of meeting the Berbers’ demand, that it be declared an “official language.”


Page 8 • 1-May-2010 Background

March 24, 2002: The paramilitary police began withdrawing from the Kayblie replaced by local civilian police units, in an attempt to prevent the bloody riots of April 2001.

May 30, 2002: Although Prime Minister Ali Benflis’ FLN won a clear majority of 199 seats in the 389-member National Assembly, violence and a boycott by five parties marred the elections, which saw the lowest voter turn out (46.2%) in four decades.

October 10, 2002: Nationwide elections for district and town councils affirmed the renaissance of Benflis’ FLN, highlighted the growing divide between the government in Algiers and the minority Berber population concentrated in the Kabylie region. Support for most Islamist parties continued to decline, except for El Islah, which gained control of 39 town councils.

February – March 2003: The Salafist Group for Preaching and Combat (GSPC) kidnapped more than 30 foreign visitors, whom they released later in the year.

February 2003: Authorities arrested three executives of the El Khalifa Group as they prepared to board a private jet belonging to the corporate head; the men were carrying two million euros in cash and were subsequently charged with currency smuggling. The UGTA organized a two-day general strike, involving 95% of its 3 million members, to protest the government’s structural reforms and its failure to improve living standards.

March 2003: Benflis was re-elected as leader of the FLN with broadly expanded powers.

May 2003: An earthquake on the 21st killed about 2,300 people, injured 10,000, and left 80,000 homeless. Bouteflika sacked Prime Minister Ali Benflis, replacing him with Ahmed Ouyahia.

July 2, 2003: Abassi Madani, the leader of the now-outlawed Islamic Salvation Front and his deputy, Ali Belhadj were released from jail.

September 2003: Bouteflika removed six of FLN’s ministers from the government.

October 2003: Benflis ordered the remaining FLN members in the Cabinet to quit their posts, prompting the resignations of seven ministers, while a group belonging to the pro-Bouteflika faction of the party, including Foreign Minister Abdelaziz Belkhadem and Agriculture Minister Said Barkat, refused to do so. The FLN held a party congress, in defiance of a court injunction, and nominated Benflis as its presidential candidate; a subsequent court ruling held that the injunction had been illegal.

December 30, 2003: The administrative chamber of the Court of Algiers froze FLN activities and funds and nullified changes made at the March 2003 convention, including Benflis’ re-election as general secretary.

April 8, 2004: As expected, Abdelaziz Bouteflika won the presidential election with 85% of the vote, but the process was marred by irregularities; however, international observers general agreed that even if the process was not completely transparent, the degree of fraud was smaller than the margin of victory.

January 2005: After capturing Nourredine Boudiafi, leader of the Armed Islamic Group (GIA), the government declared the Islamist insurgency all but dead. The government accepted the entire “El-Kseur Platform,” Berber demands promulgated in 2001, including more investment in the Kabylie region, withdrawal of security forces, and official recognition of the Berber culture and its language, Tamazight.



February 2005: The FLN named Bouteflika as honorary chairman, and Foreign Minister Abdelaziz Belkhadem, Bouteflika’s close ally, was chosen as the party’s secretary-general.

May 2005: Bouteflika reshuffled his Cabinet, keeping Prime Minister Ouyahia but replacing six ministers.

June - July 2005: The GSPC reportedly shot down a military helicopter and attacked several military bases. France warned that GSPC was actively cooperating with Al Qaeda’s objective of a “global jihad.”

September 2005: In a nationwide referendum, an overwhelming majority (97%) approved the “Charter for Peace and Reconciliation,” which offers full amnesty for deeds perpetrated by both the military and Islamic militants during a bloody civil conflict that has claimed an estimated 150,000 lives since 1992.

November 2005: Ali Nour Harzallah (aka Cheikh Salem), the head of the El-Ansar Brigade, a faction of the GSPC, surrendered to authorities under the amnesty plan.

January 2006: Seven people died in violence attributed to the GSPC, and several members were arrested.

February 21, 2006: The government implemented the “Charter for Peace and National Reconciliation.”

March 2006: A six-month period of amnesty for prisoners began.

September 2006: FIS leader Rabah Kebir, returned from exile and called for rebels to disarm.

April 2007: Members of Al Qaeda in the Islamic Maghreb (AQIM) bombed both the Government Palace and a police special-forces base outside the capital.

May 17, 2007: Bouteflika’s FLN, the National Democratic Rally (RND), and the Movement for a Peaceful Society (MSP) won 249 seats in the 389-member National Assembly, just shy of a two-thirds majority.

September 2007: AQIM claimed responsibility for a failed assassination attempt on Bouteflika.

June 2008: Bouteflika replaced Abdelaziz Belkhadem with Ahmed Ouyahia, bringing him back for his third turn as premier, the second under Bouteflika.

November 2008: Having a large legislative majority under the control of his FLN party, Bouteflika managed to win approval for constitutional changes that, among other things, clear the way for him to stand for a third term in April 2009.

April 10, 2009: Bouteflika won a third term with over 90% of the vote, but some opposition boycotted the polls.

June 2009: In the deadliest attack on government forces in six months, Islamist rebels ambushed a military convoy and killed at least 21 police.

July 2009: Algeria, Niger, and Nigeria agreed to build a $10 billion natural gas pipeline linking vast reserves in Nigeria to Europe.



Social Conditions Ethnic and Racial Divisions. Under the constitution, Islam is the state religion, authorizing governmental control over such religious practices as providing financial support to mosques, overseeing the training of imams, assigning preachers, and providing general guidance on the content of sermons. The government also monitors activities in mosques for possible threats to security. The constitution also prohibits discrimination based on religious belief; the tiny Christian and Jewish communities practice their faiths without government interference. However, in June 2008, four Islamic converts to Christianity were jailed for worshipping illegally, and during the 1990s especially, many non-Muslims were inhibited from public professions of faith because the Groupes Islamiques Armés (GIA), a terrorist band previously associated with the FIS and now linked to al-Qaeda, had pledged to expel Jews, Christians, and polytheists.

Berbers comprise the largest minority group, perhaps 20%-30% of the population. Their leaders maintain close connections with Algerian expatriates in France. Berber nationalists have sought to counter the government’s imposition of Arab culture through efforts to maintain their own ethnic and linguistic identity. As part of the National Charter signed in 1996, the government and several major political parties acknowledged that the Berber culture and language, Amazigh, were major political components of the Algerian identity. However, in 1998, the government established Arabic as the official language, triggering widespread protests in Berber regions. The month before these protests there were massive riots in response to the death of Matoub Lounes, a popular Berber singer and outspoken advocate of the Berber language and culture who had been killed under suspicious circumstances after his car was stopped in the Kabylie region. While the government conceded to recognize the Berber language, Tamazight, as a national (but not official) language in March 2002, violent demonstrations still occur in Berber areas such as Kabylie.

Regional and Class Divisions. Although conflict has, at times, been rooted in religious beliefs, much of the violence stems from the disparities in wealth that have resulted from years of economic depression. About 5% of the population holds 45% of the country’s wealth. Islamic fundamentalism has proved popular among the urban poor, who are disillusioned not only by their desperate conditions but also by government corruption. Economic reform policies spurred by the IMF since the mid-1990s have added to the hardships for many. Unemployment is pervasive, especially among the young, but the overall rate was reduced by more than 50% between 2002 and 2006. A high birth rate skewed age distribution, heightening employment strains. Inadequate infrastructure in urban areas and severe shortages of housing and consumer goods add to public dissatisfaction.

Education. About 25% of the national budget is devoted to education. Some 90% of all primary-age children are enrolled in school, but only 50% of children attend secondary school. Enrollment rates for girls and for students of both sexes in rural areas are lower than the general figures, but have improved since independence. Nevertheless, overall literacy is just 75%, considerably higher for men then for women, and among the lowest rates in the world. Rapid population growth has strained the educational system as the number of school-age children rises. All children between six and 15 years must be educated in Arabic, creating teacher shortages that have led to the recruitment of foreign teachers.

Health. The huge proportion of young people in Algeria has encouraged an emphasis on preventive health care, marked by reliance on clinics and health centers rather than hospitals. Most medical care is provided at no cost, although a sliding scale of charges applies to the wealthy. All doctors and dentists are required to work in public health for a minimum of five years. As a result, most people, except those in remote areas, have access to adequate medical facilities, but poverty and problems such as a shortage of housing and inadequate sanitary conditions in some areas create health issues. Average healthy life expectancy stood averages 61 years, and the infant mortality rate remains high, 29 deaths per 1,000 live births in 2009.



The following sections are extracts from the publication: Background Note: Algeria, March 2010 Published by Bureau of Near Eastern Affairs, US Department of State

Government Under the 1976 Constitution (as modified 1979 and amended in 1988, 1989, 1996, and 2008), Algeria is a multi-party state. The Ministry of the Interior must approve all political parties. According to the Constitution, no political association may be formed “based on differences in religion, language, race, gender or region.” Algeria has universal suffrage at the age of 18.

The head of state and of government is the president of the republic. The president, elected to a five-year term, is the head of the Council of Ministers and of the High Security Council. He appoints the prime minister as well as one-third of the upper house of parliament (the Council of the Nation).

The Algerian parliament is bicameral, consisting of a lower chamber, the National People’s Assembly (APN), with 389 members and an upper chamber, the Council of the Nation, with 144 members. The APN is elected every five years. Legislative elections for the APN were held in May 2007. Two-thirds of the Council of the Nation is elected by regional and municipal authorities; the rest are appointed by the president. The Council of the Nation serves a six-year term with one-half of the seats up for election or reappointment every three years. Either the president or one of the parliamentary chambers may initiate legislation. Legislation must be brought before both chambers before it becomes law, but this cannot happen without the support of the presidency. If the APN vetoes legislation, it must technically be dissolved. Sessions of the APN are televised.

Algeria is divided into 48 wilayat (states or provinces) headed by walis (governors) who report to the Minister of Interior. Each wilaya is further divided into communes. The wilayat and communes are each governed by an elected assembly.

Political Conditions Terrorist violence in Algeria resulted in more than 150,000 deaths during the 1990s. Although the security situation in the country has improved, addressing the underlying issues that brought about the political turmoil of the 1990s remains the government’s major task. President Bouteflika implemented the Charter on Peace and National Reconciliation on March 1, 2006, as one way to bring closure. Thus far, it has successfully gained the surrender of a number of moderate Islamists but, paradoxically, has emboldened the more hard-core elements, in particular the Salafist Group for Preaching and Combat (GSPC), which merged with al-Qaida in September 2006, and changed its name in January 2007 to al-Qaida in the Islamic Maghreb (AQIM).

In keeping with its amended Constitution, the Algerian Government espouses participatory democracy and free-market competition. The government has stated that it will continue to open the political process and encourage the creation of political institutions. Presidential elections took place in April 2009 and returned President Bouteflika to office for a third term. The next presidential elections are scheduled for 2014.

Algeria has more than 45 daily newspapers published in French and Arabic, with a total circulation of more than 1.5 million copies. There are 20 domestically printed weekly publications with total circulation of 622,000 and 11 monthly publications with total circulation of 600,000. In 2001, the government amended the Penal Code provisions relating to defamation and slander, a step widely viewed as an effort to rein in the



press. While the Algerian press is relatively free to write as it chooses, use of the defamation laws significantly increased the level of press harassment following President Bouteflika’s April 2004 re-election victory and, as a result, the press began to censor itself. In July 2006, President Bouteflika pardoned all journalists convicted of defaming or insulting state institutions. The pardon effectively dismissed the charges against 67 people. Critics point out that, according to the criminal code, insulting the president is punishable by prison sentence. Nevertheless, the pardon was widely seen as a significant step toward democracy. The government holds a monopoly over broadcast media; however, Algerian newspapers are widely seen to be among the freest in the region. Editors of major Arabic- and French-language print dailies often complain of the government’s reluctance to share information, grant interviews, or relax its defamation law. Under this law, a joint criminal-civil lawsuit can be brought against a newspaper’s publisher, editor in chief, and the reporting journalist, which can result in fines, a jail sentence, and civil liability.

Population growth and associated problems--unemployment and underemployment, inability of social services to keep pace with rapid urban migration, inadequate industrial management and productivity, a decaying infrastructure--continue to affect Algerian society. Increases in the production and prices of oil and gas over the past decade have led to foreign exchange reserves exceeding an estimated $150 billion in 2010. The government began an economic reform program in 1994, focusing on macroeconomic stability and structural reform that has met with some success in certain sectors. At the start of his third term in office, President Bouteflika announced that his five-year plan (2009-2014) would include an increase from $120 billion to $150 billion in spending to improve national infrastructure, create three million jobs, and build one million new homes.

Foreign Relations Algeria has traditionally practiced an activist foreign policy and, in the 1960s and 1970s, was noted for its support of Third World policies and independence movements. Algerian diplomacy was instrumental in obtaining the release of U.S. hostages from Iran in 1981. Since his first election in 1999, President Bouteflika worked to restore Algeria’s international reputation, traveling extensively throughout the world. In July 2001, he became the first Algerian President to visit the White House in 16 years. He has made official visits to France, South Africa, Italy, Spain, Germany, China, Japan, Portugal, Russia, the United Kingdom, and Latin American countries, among others, since his inauguration.

Algeria has taken the lead in working on issues related to the African continent. Host of the Organization of African Unity (OAU) Conference in 2000, Algeria also was key in bringing Ethiopia and Eritrea to the peace table in 2000. In 2001, the 37th summit of the OAU formally adopted the New Partnership for Africa’s Development (NEPAD) to address the challenges facing the continent. In 2006, Algeria negotiated the Algiers Accords between the Malian Government and Tuareg rebel groups and has continued to play an active role in seeking resolution to that conflict. In August 2009, Algeria initiated a regional counterterrorism approach with Mali, Niger, and Mauritania, seeking to increase security cooperation and address the root causes of instability in the region. In recent months, Algerians also campaigned publicly for strengthening the international legal regime against ransom payment for terrorist kidnappings, including the call for a UN-sponsored resolution condemning such payments.

Since 1976, Algeria has supported the Polisario Front, which claims to represent the indigenous population of Western Sahara. A staunch defender of the Sahrawi right to self-determination under the UN Charter, Algeria has provided the Polisario with support and sanctuary in refugee camps in the southwestern Algerian province of Tindouf. UN involvement in the Western Sahara includes MINURSO, a peacekeeping force, UNHCR, which handles refugee assistance and resettlement, and the World Food Program (WFP).



Active diplomatic efforts to resolve the dispute under the auspices of the United Nations Secretary General are ongoing.

Algeria’s support of self-determination for the Sahrawi is in opposition to Morocco’s claim of sovereignty over Western Sahara. The dispute remains a major obstacle to bilateral and regional cooperation. Although the land border between Morocco and Algeria was closed in the wake of a 1994 terrorist attack in Marrakech, Morocco lifted visa requirements for Algerians in July 2004. Algeria reciprocated by lifting visa requirements for Moroccans on April 2, 2005. Algeria has friendly relations with its neighbors Tunisia and Libya, and with its sub-Saharan neighbors, Mali and Niger. It closely monitors developments in the Middle East and has been a strong proponent of the rights of the Palestinian people, as well as a supporter of Iraq’s democratic transition.

Algeria has diplomatic relations with more than 100 foreign countries, and over 90 countries maintain diplomatic representation in Algiers. Algeria held a nonpermanent, rotating seat on the UN Security Council from January 2004 to December 2005. Algeria hosted 13 Arab leaders at the Arab League Summit, March 22-23, 2005.

U.S.-ALGERIAN RELATIONS. In July 2001, President Bouteflika became the first Algerian President to visit the White House since 1985. This visit, followed by a second meeting in November 2001, a meeting in New York in September 2003, and President Bouteflika’s participation at the June 2004 G8 Sea Island Summit, was indicative of the growing relationship between the United States and Algeria. Since the September 11, 2001, terrorist attacks in the United States, contacts in key areas of mutual concern, including law enforcement and counterterrorism cooperation, have intensified. Algeria publicly condemned the terrorist attacks on the United States and has been strongly supportive of international counterterrorism efforts. The United States and Algeria consult closely on key international and regional issues. The pace and scope of senior-level visits has accelerated. In April 2006, then-Foreign Minister Bedjaoui met with Secretary of State Condoleezza Rice, and Secretary Rice visited Algiers in September 2008. Secretary of State Hillary Clinton met with Algerian Foreign Minister Mourad Medelci, along with the Moroccan and Tunisian Foreign Ministers, on the margin of the March 2009 donor conference in Sharm-el-Sheik, Egypt. In December 2009, Algerian Foreign Minister Medelci met with Secretary Clinton in Washington, DC.

In 2007, U.S. direct investment in Algeria totaled $5.45 billion, mostly in the hydrocarbon sector. American companies also are active in the banking and finance, services, pharmaceuticals, medical facilities, telecommunications, aviation, seawater desalination, energy production, and information technology sectors. Algeria is the United States’ second to third-largest trading partner in the Middle East/North African region. U.S. exports to Algeria totaled $1.2 billion in 2008, and U.S. imports from Algeria reached $19.3 billion in 2008, primarily in the form of crude oil. In March 2004, President George W. Bush designated Algeria a beneficiary country for duty-free treatment under the Generalized System of Preferences (GSP). In July 2001, the United States and Algeria signed a Trade and Investment Framework Agreement, which established common principles on which the economic relationship is founded and forms a platform for negotiating other bilateral agreements. Within the framework of the U.S.-North African Economic Partnership (USNAEP), the United States provided about $1.0 million in technical assistance to Algeria in 2003. This program supported and encouraged Algeria’s economic reform program and included support for World Trade Organization accession negotiations, debt management, and improving the investment climate. In 2003, USNAEP programs were rolled over into Middle East Partnership Initiative (MEPI) activities, which provide funding for political and economic development programs in Algeria. The U.S. Government continues to encourage Algeria to make necessary changes to accede to the World Trade Organization, move toward transparent economic policies, and liberalize its investment climate. The U.S. also funds a program supporting Algerian efforts to develop a functioning,



transparent banking and income tax system. The U.S. Department of Commerce established a Commercial Attaché in Algiers in 2008.

Cooperation between the Algerian and U.S. militaries continues to grow. Exchanges between both sides are frequent, and Algeria has hosted senior U.S. military officials. In May 2005, the United States and Algeria conducted their first formal joint military dialogue in Washington, DC; the second joint military dialogue took place in Algiers in November 2006, and a third occurred in October 2008. The NATO Supreme Allied Commander Europe and Commander, U.S. European Command, General James L. Jones visited Algeria in June and August 2005, and then-Secretary of Defense Donald Rumsfeld visited Algeria in February 2006. In November 2009, U.S. Africa Command (AFRICOM) Commander General W. Ward visited Algiers and met with Algerian officials, including President Bouteflika. The United States and Algeria have also conducted bilateral naval and Special Forces exercises, and Algeria has hosted U.S. Navy and Coast Guard ship visits. In addition, the United States has a modest International Military Education and Training (IMET) Program ($870,000 in FY 2009 and $950,000 in FY 2010) for training Algerian military personnel in the United States, and Algeria participates in the Trans-Sahara Counter-Terrorism Partnership (TSCTP).

The United States has implemented modest university linkages programs and has placed two English Language Fellows, the first since 1993, with the Ministry of Education to assist in the development of English as a Second Language courses at the Ben Aknoun Training Center. In 2006, Algeria was again the recipient of a grant under the Ambassadors’ Fund for Cultural Preservation. That fund provided a grant of $106,110 to restore the El Pacha Mosque in Oran. Algeria also received an $80,000 grant to fund micro-scholarships to design and implement an American English-language program for Algerian high school students in four major cities. In 2009, the U.S. Government began a pilot program in Constantine, Algeria at Mentouri University. The program is designed to ease the transition between the university and the workforce, fight unemployment, and train Algerian university professors and students in English and business management to better equip graduates to secure meaningful employment.

In November 2009, Algeria and the United States reciprocally extended visa duration to two years for most visa categories, including tourists, businesspeople, and students. Also in November 2009, the countries finalized language for both a Mutual Legal Assistance Treaty and a Customs Mutual Assistance Agreement. Both agreements will be signed in 2010. Law enforcement cooperation continues to increase, both in the field of counterterrorism and in countering more conventional transnational crimes. The FBI established a Legal Attaché Office at the U.S. Embassy in Algiers in 2008.

Funding through the Middle East Partnership Initiative (MEPI) has been allocated to support the work of Algeria’s developing civil society through programming that provides training to journalists, businesspeople, female entrepreneurs, legislators, Internet regulators, and the heads of leading nongovernmental organizations. Additional funding through the State Department’s Human Rights and Democracy Fund provides training for Algerian judges and lawyers, with a particular emphasis on female judges.

The official U.S. presence in Algeria is expanding following over a decade of limited staffing, reflecting the general improvement in the security environment. During the past four years, the U.S. Embassy has moved toward more normal operations and now provides most embassy services to the American and Algerian communities.

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