The 2009 additional budget law and the 2010 supplement to the money and credit law introduced a new FDI policy, which could have important economic implications for Algeria. Although the stated goal is to promote domestic private investment by supporting local SMEs, this new strategy could have negative repercussions and may hamper efforts to diversify the country’s economy out of the hydrocarbon sector.
The new investment decree was approved in May 2009, imposing all trading companies registered with local authorities to open 30% of their capital to domestic partners. The measure was followed by the complementary finance act (LFC) 2009, published on July 26, 2009. According to this law, all foreign direct investment (FDI) projects are required to have an ownership structure of 49-51%, in which the domestic partners own the majority stake, removing, therefore, ownership by foreign investors. Furthermore, a new tax was introduced by the government on 01 January 2009. This consists of 15% tax transfers on capital abroad from MNEs operating in the country. This tax was not only applied to the energy sector, but also in other sectors, such as the pharmaceutical industry where a few international firms were granted four years of free taxation whereby laboratories could import without restrictions. However, after this grace period, the government obliged them either to invest in the production of drugs or to leave the country (The Economist Intelligence Unit, 2010).
The Algerian government justified this measure by arguing that MNEs tend to be profit- based and they tend to transfer their entire profit to their home countries rather than reinvesting it in the local economy. It could also bring a pool of domestic investors into key projects. Despite their minority stakes, MNEs can still control the management, but are expected to transfer the knowledge and skills to their local partners.
Although the main objective was to improve economic growth, the new FDI rules introduced tax concessions for local entrepreneurs, and new tax rules for the import of goods and services, a series of actions to encourage the contribution of domestic financial institutions in the economy, and a more restrictive FDI regime. The FDI rules also included some measures to reduce the imports bill, which had grown considerably in recent years and
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was considered a potential risk to economic stability. These restriction measures included more severe controls on external trade operations and a ban on consumer credit (excluding mortgages).
The government’s new investment legislations were criticized by foreign investors, who accused the government of creating barriers to investment, intervening in the market and acting in favour of a few firms, and warn that this new shift towards investment would jeopardise the presence of multinationals in the country. The European Union, led by the French, British, Italian and Spanish ambassadors in Algeria, have urged the government to withdraw the new law regarding foreign investors, removing all barrier s of entry to the local market as well as respecting the bilateral agreement between Algeria and the European Union (The Economist Intelligence Unit, 2010).
According to the ministry of investment figures, in 2010 nearly 200 foreign firms withdrew from the Algerian market (mainly in the energy sector) due essentially to the new energy law allowing the national companies Sonatrach and Sonalgaz to be associated with all foreign investment in the country’s hydrocarbon sector. While the economic analysis suggests that the introduction of new investment policies shows a growing confidence by the Algerian government to manage its own business without a foreign hand, aiming to encourage local investment and continue to stimulate the foreign investment and partnership (The Economist Intelligence Unit, 2010).
Furthermore, the state also retains pre-emptive rights in the sale of assets and requires that the National Council of Investments approve all new projects. For all external trade operations, MNEs are now required to file a letter of credit (crédit documentaire; CREDOC). Tax identification numbers are also required for all external trade transactions.
A tax cut for leasing purchases, known as credit bail, was presented as proof that the authorities wanted to encourage private domestic investment. The government has injected €1.47billion in capital over to the National Investment Fund and transferred AD48m (€471,000) to a public investment fund that gives assistance to small and medium-sized
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enterprises (SMEs). Finally, the cap on government guarantees for SMEs loans was raised to AD250m (€2.45m), up from AD50m (€491,000) (IMF, 2011).
Unlike other middle-income economies, Algeria has failed to attract large amounts of FDI. Figure 2.3.2 shows the evolution of FDI flows to Algeria in comparison with countries from the Middle East and North Africa (MENA) region, middle-income countries, the BRICs (Brazil, Russia, India, and China) and a group of diversified commodity exporters from 1980 to 2009.
Source: IMF, 2011
Figure 1.10 FDI flows to Algeria in comparison to (MENA) region, middle-income countries, the BRICs and a group of diversified commodity exporters from 1980 to 2009
The figure shows that Algeria is not an attractive country for investment as it received little FDI. Most foreign investment (36 percent of total) is focused on the hydrocarbon sector, which is well below MENA and income level averages. Moreover, the group of diversified commodity exporters and the BRICs received large amounts of FDI flows, well above the middle-income category.
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Another concern is the country’s attractiveness to FDI lowering further after the enforcement of the FDI rules. Figure 1.11 highlights the evolution of FDI to Algeria from 2003 to the first semester of 2010 (excluding the hydrocarbon and financial sectors). The figure indicates a significant fall of FDI in 2009 with no significant recovery in 2010, whereas other emerging economies have experienced a visible FDI recovery.
Source: IMF, 2011
Figure 1.11 FDI net inflow to Algeria by sector, USD billion, 2003 -2010
In contrast, the lack of FDI flow could have a negative impact on the country’s growth prospects, as both theoretical and empirical frameworks suggest a positive impact of FDI on economic growth (Dunning, 1980, 1988; Borezstein, de Gregorio and Lee, 1995; and Ram and Zhang, 2002).
Moreover, in a global economy where control of knowledge and technology are key factors for multinational enterprises success, ownership limits, such as those described in Algeria’s new investment policies, could discourage MNEs. For multinational prospects, sole venture
0 0,2 0,4 0,6 0,8 1 1,2 1,4 1,6 Other sectors Manufacturing Water and electricty Construction Telecom
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investments are indispensable for operating overseas in order to protect the firm’s competitive advantage and safeguard its internal knowledge (Kogut and Zander, 1993)
An additional consequence of FDI restriction policy is the possible negative effect on export and economic diversification. Banga (2006) and Buckley et al (2002) argue that FDI can help stimulate export diversification and performance. These results suggest, in the case of Algeria, that the fall in FDI could hamper the government’s efforts to diversify the economy and make it more dependent on the energy sector.
In terms of the possible impact of the world financial crisis and the crash of oil prices, the Algerian Prime Minster, Mr Ahmed Ouyahia, declared in October 2010 that Algeria is supposed to be safe and not likely to be hit by any financial shock as the Algerian stock market is pretty new and not fully integrated in the world financial stock markets.
This opinion was supported completely by the IMF commission experts who insisted that Algeria will not suffer from the financial crisis. The IMF expert warned that, due to the inflexibility of the Algerian economy and the lack of openness in the world market, the country’s heavy dependency on hydrocarbon revenue could weaken the its financial position, especially in the event of an oil price drop. The IMF commission highlighted that, with a tradition of high savings, abundant of skills workers, diversity of natural resources, and an advantageous geographic location, the country has a huge potential for swift and sustainable growth in all economic sectors. A more favourable business environment is needed to support the development of the emerging private sector, as the vital pillar of sustainable growth and employment generation strategy, as well as reducing the country’s dependence on the oil sector (IMF, 2011).
2012 is announced to be very promising with the accomplishment of major new investments in the country and the upgrade of the existing infrastructure, which will probably expose Algeria to new economic areas. Furthermore, joining the Arab Free Trade on 01 January 2009, and the new deal to join the world trade organisation by mid-2012, would create new prospects for the country while encouraging FDI flow and strengthening its position as one
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of the major players in the Mediterranean region. In addition, the country’s wealthy reserves could help protect Algeria from the global financial crisis as the debt is kept down to $600m and foreign exchange reserves reached $150billion in October 2010, making Algeria the first African and Arabic country and the fourteenth in the world in terms of foreign exchange reserves (IMF, 2011).
After examining the Algerian economy, and in order to improve the economy and make it a more attractive destination for FDI, I suggest the following based on the World Bank (2009) report:
First, infrastructure development and macroeconomic stability are essential for export diversification. Algeria should continue upgrading its economic infrastructures, improving its business climate. In this respect, the country is lagging behind its North African neighbours due to inefficient structural reform measures. Reforms in key sectors, such as banking and finance as well as exploiting the country’s potential in the service industry, are essential to promote the economic diversification and increase the country’s attractiveness to foreign capitals.
Second, the policy towards FDI is also vital for the development of a private sector-led export industry. FDI to Algeria has been traditionally scarce and has been flowing mostly to the hydrocarbon sector. Third, the new FDI law is likely to discourage MNEs by putting restrictions on control ownership and tax profits. The government should review its FDI strategy to attract more foreign capital by creating a more FDI-friendly regime.
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