Algeria - Economic Rehabilitation Support Loan

ji. - { CUR- EQUIVALEN Unit of currency = Algerian Dinar (DA) 1222 IM2 1924 US$1.00 21.84 23.34 40.96 (end-October) FISCALYEAR January I - December 31 WEGH AlD AS, Metric System ABBREVIATIONS AFS Allocation Forfaitaire de Solidarit6 (Lump-sum Solidarity Allowance) APSI Agence pour la Promotion et le Soutien des Investissements (National Investment Agency) AIG Activit6s d'int6r6t Gdn6ral (Public Works-based Jobs Program) BA Banque d'Alg6rie (Central Bank) BAD Banque Alg6rienne de D6veloppement (Algerian Development Bank) CNEP Caisse d'dpargne et de Pr6voyance (Household Savings Institution) CNT Conseil National de la Transition (Interim Legislature) EFSAL Entreprise and Financial Sector Adjustment Loan EPE Entreprise Publique Economique (Autonomous Public Enterprise) EPIC : Etablissement Public h caractbre Industriel et Commercial (Autonomous Public Utility) EPL : Enterprise Publique Locale (Local Public Enterprise) EPS : Entreprise Publique Socialiste (Non-autonomous Public Enterprise) ERL Economic Rehabilitation Loan ERSL Economic Reform Support Loan EU European Union FA Fonds d'assainissement (Restructuring Fund) IAIG Indemnit6 pour Activit6 d'int6ret G6n6ral (Public Works Allowance) ICB International Competitive Bidding ICSR Ind6mnitt aux Cat6gories Sociales sans Revenus (Direct Transfer Payment to Households without Income) LSMS Living Standards Measurement Survey MRIP Minis*e de la Restructuration Industrielle et de la Participation (Ministry of Industrial Restructuring and Participation) OAIC Office Alg6rien Interprofessionel des Cdrdales (National Cereals Board) PE Public Enterprise PEC-1988 Programme en Cours 1988 (Program of Public Enterprise Investments as of 1988) PER Public Expenditure Review PSA Private Sector Assessment SGG Secr6taire G6nral du Gouverrement (Secretary General of the Government) SOE Statements of Expenditure SME Small and Medium-scale Enterprise FOR OFFICIAL USE ONLY DEMOCRATIC AND POPULAR REPUBLIC OF ALGERIA ECONOMIC REHABILITATION SUPPORT LOAN TABLE OF CONTENTS LOAN AND PROGRAM SUMMARY ...................................... i PART I: THE GOVERNMENT'S ECONOMIC REFORM PROGRAM ................ 1 A. Introduction.............................................. I B. Background .............................................. 1 C. Economic Refoim Strategy .................................... 2 D. The Stabilization Program .................................... 3 E. External Debt Rescheduling ................................... 6 F. Structural Reform Program .................................... 6 G. Medium-term Policy Framework and Outlook ...................... . 13 PART U: THE ECONOMIC REHABILITATION SUPPORT LOAN ................ .14 A. Origin and Objectives .. .................................... 14 B. Rationale for Bank Involvement ................................ 15 C. Project Description ........................................ 15 D. Implementation Arrangements ............................... 15 E. Agreements Reached ....................................... 16 F. Environmental Assessment ................................... 18 G. Risks ................................................. 18 H. Recommendation .. ....................................... 19 ANNEXES ANNEX I: Letter of Economic Policy and Policy Matrix ANNEX II: Social Indicators: 1993 ANNEX M: Selected Macroeconomic Indicators: 1984-94 ANNEX IV: Key Processing Events ANNEX V: Status of Bank Group Operations MAY: IBRD No. 26393 This document has a restricted distribution and may be used by recipients only in tw poran aftheir ial dutes. Its contents may not otherwise be disclosed without World Bank authorizalon. DEMOCRATIC AND POPULAR REPUBLIC OF ALGERIA ECONOMIC REHABILITATION SUPPORT LOAN LOAN AND PROGRAM SUMMARY Borower Democratic and Popular Republic of Algeria Amount: US$150 million equivalent Terms: Repayment in 17 years, including 5 years grace, at the Bank's standard variable interest rate. Loan Objectives: The proposed Economic Rehabilitation Support Loan (ERL) is an essential component of the Bank's assistance strategy for Algeria. This strategy aims to support the deepening of the macroeconomic stabilization and structural reform program, establish the conditions for a strong supply response, and help meet the basic social needs of the population. The ERL would provide urgent support for the reform effort by continuing the progress achieved under the two previous adjustment loans, and by laying the groundwork for the preparation of future adjustment operations. Lnan Descriptien: The Economic Rehabilitation Support Loan would support a broad progtum of policy reforms to accelerate Algeria's transition to a market economy. The key components of the program include macroeconomic stabilization, trade and price liberalization, private sector development, privatization, restructuring of the public enterprise sector, public expenditure reform, financial sector reform and strengthening of the social protection system. The specific measures to be supported by the ERL are outlined in the Government's Leetr of Economic Policy, submitted to the Bank by the Minister of Finance on December 4, 1994, and attached as Annex I. The attachments to the policy letter include a matrix detailing actions taken prior to Board presentation of the ERL and those planned during the subsequent twelve months. Benefits: The Economic Rehabilitation Support Loan provides an important opportunity to help set the foundation for the emergence of a market economy in Algeria. The ERL also enables the Bank to contribute to, and help catalyze, the international community's efforts to mobilize the substantial external financing crucial to restoring growth and accelerating economic reform in Algeria. Risks: Implementation of the economic reform program is complicated by the difficult political and security situation related to the economic and social crisis in Algeria. The authorities have made extensive effots to engage in a dialogue with a broad range of political groups, and presidential elections have been announced before the end of 1995. Given the present uncertainties, a rehabilitation loan with substantial up-front actionw provides the Bank with flexibility in its support of Algeria's economic reform efforts. Disbursements: The Economic Rehabilitation Support Loan would disburse in a single tranche of US$150 million within 24 months after Board approval in January 1995. The Closing Date for the loan would be December 31, 1996. Parallel Fnancing: Parallel financing may be provided by the European Union. Fnancing Plan: EX9 (US$ million equivalent) IBRD 150 (foreign exchange cost) Poverty Category: Poverty focused; supports strengthening of the social protection system. Map: IBRD No. 26393 REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED ECONOMIC REHABILITATION SUPPORT LOAN TO THE DEMOCRATIC AND POPULAR REPUBLIC OF ALGERIA 1. 1 submit for your approval the following report and recommendation on a proposed Economic Rehabilitation Support Loan (ERL) to the Government of the Democratic and Popular Republic of Algeria for the equivalent of US$150 million in support of a program of macroeconomic stabilization and structural reform. The Loan would be at the Bank's standard variable interest rate, with a maturity of 17 years, including five years of grace. Parallel financing may be forthcoming from the European Union (EU). The status of the Algerian economy and the economic reform program are detailed in the recent Country Economic Memorandum, dated May 25, 199A (Report No. 12048-AL). PART I: THE GOVERNMENT'S ECONOMIC REFORM PROGRAM A. Introduction 2. In the first quarter of 1994, weak world oil prices, the drying up of external financing, growing macroeconomic imbalances, mounting inflationary pressures, a deepening social crisis, and a build-up of external debt arrears convinced the authorities to accelerate economic policy reforms. They have requested the financial assistance of the Bretton Woods institutions and other creditors in support of these reforms. The content of the authorities' macroeconomic stabilization and structural reform program, including actions recently taken and those envisaged over the coming year, is summarized in the attached Letter of Economic Policy and Policy Matrix (Annex 1). B. Background 3. Prior to 1994, Algeria experienced three distinct phases of econounc policy. From independence to the mid-1980s, the country followed a socialist model. It utilized its abundant hydrocarbon resources to finance an extensive, largely publicly owned industrial base. Much social progress was achieved and an impressive infrastructure was put in place. Although population growth remained high, life expectancy increased, illiteracy was reduced, and school enrollment reached almost 100 percent. However, the combination of bureaucratic, centralized control and over-dependence on hydrocarbon exports fostered severe economic distortions and inefficiencies, and prevented the development of non-oil export . Bank support during this period was limited and sporadic. 4. The second, adjustment phase began after the precipitous decline of oil prices in 1986, which caused a 50 percent drop in Algeria's terms of trade. The initial response was to treat the shock as temporary and to borrow to maintain consumption levels. This approach quickly lost favor, however, as the country's external debt rose sharply from about US$17 billion in 1985 to over US$24 billion in 1987. The breakup of the State farms into private cooperatives holding long-term usufruct rights in 1987 signalled the beginning of a broad program of economic reform. In subsequent years, macroeconomic imbalances were substantially reduced and a range of structural reforms was implemented. Most public enterprises (PEs) were granted autonomy and many domestic price controls were remved. Legal 2 restrictions on the access of private firms to domestic credit and foreign exchange were lifted, State import monopolies were abolished, and the foreign investment regime was liberalized. Collective bargaining was decentralized, and the right to strike fully recognized. Monetary policy and banking supervision were formally devolved to the central bank, and new prudential regulations and accounting standards were introduced. The Bank actively supported the reform program, with lending to Algeria averaging about US$350 million annually during FY87-91. This support included two adjustment operations: the US$300 million Economic Reform Support Loan (ERSL), approved in August 1989, and the US$350 million Enterprise and Financial Sector Adjustment Loan (EFSAL), approved in June 1991. 5. The third phase, covering 1992-93, witnessed a significant slow-down of the reform effort and some back-tracking. Mounting civil unrest, falling oil prices and burgeoning external debt service payments, coupled with the authorities' reluctance to reschedule external debt obligations, placed severe strains on the economy. Trade and payments restrictions were tightened in 1992. A broad list of imports was prohibited, and an inter-ministerial ad hoc committee was established to allocate foreign exchange and external credit to priority imports. As a result, imports were compressed to US$10.0 billion in 1993, compared with US$11.5 billion in 1990, a decline of one-third in real terms. The exchange rate experienced a real appreciation of 50 per -ent over the period, stimulating parallel market activity. Financial discipline was also relaxed, with an increase in implicit and explicit subsidies and large increases in government salaries. Output stagnated and per capita income declined. Structural measures relating to PE restructuring and financial sector reform were delayed. 6. Years of economic stagnation and a population growth rate of over 2.5 percent have taken their toll on Algerian society. Per capita income has fallen by roughly 20 percent since 1985, and unemployment is close to 25 percent. It exceeds 30 percent for the 16-25 age group, and is even higher for educated youth in urban areas. Rapid urban migration, encouraged by past agricultural and industrial policies, has resulted in a severe housing shortage and growing environmental problems. The overall housing shortfall is estimated at two million units and the occupancy ratio of 8.5 persons/unit is one of the highest among middle income countries. Declining living standards and rising unemployment have contributed to political turmoil. C. Economic Reform Strategy 7. The core development issue facing Algeria's policymakers is how to foster a resumption of sustainable growth while coping with the immediate problems of high unemployment, the housing crisis, and shortages of basic necessities. The authorities have developed a three-pronged economic reform strategy to meet this challenge: (i) implement a stabilization program to arrect macroeconomic imbalances and distortions with the support of the IMF; (ii) approach key creditors for a rescheduling of the country's official bilateral external debt (Paris Club), as well as a restructuring of its commercial debt (London Club), in order to finance an increase in the severely compressed level of imports; and (iii) accelerate the transition to a market economy by reinvigorating the structural reform program with the support of the Bank to create the conditions for a rapid supply response as macroeconomic conditions improve. The authorities are fully aware that ensuring the credibility of the reform program is as important in the eyes of the populace as a return to growth and measures to address the immediate social crisis. For the first time, the reform program includes concrete privatization actions. The authorities also recognize that the re-establishment of political stability is a key factor in the success of the economic reform program. To this end, they have made extensive efforts to engage in a dialogue with a broad range of political groups. 3 D. The Stabilization Program 8. On May 27, 1994, the IMF Board approved a one-year stand-by arrangement and a request for a purchase under the compensatory and contingency financing facility, for a total of SDR 731.52 million (about US$1 billion). The program period is from April 1. 1994 to March 31, 1995. The key elements of the stand-by program are: adjustment of the exchange rate and reform of the exchange regime, trade liberalization, domestic price liberalization, deficit reduction, monetary restraint and higher interest rates. The program also provides for an explicit increase in budgetary allocations for the social safety net to alleviate the impact of stabilization on the most vulnerable groups of the population. The expectation is that, if the stand-by program is implemented satisfactorily, it will be followed by an Extended Fund Facility (EFF). 9. The first stand-by TABLE 1: STABILIZATI NUTLOK, 1994-95 program review (Us$ bittlins. untess otherwise Indicated) was successfully Actual Projected INF Program 1/ Projected completed on 1993 1994 1994/95 1995 November 2, 1994. Thembere ,1GDP Growth Rate -1.1% 0.6% 1.6% 3.8% Th r Treasury Revenue/GDP 27.2% 30.6% 33.1% 33.2% established that all Treasury Expenditure/GDP 36.6% 35.4% 35.9% 35.4% structural measures Treasury Balance/GDP -9.4% -4.9% -2.8% -2.2% under the program Growth of Net Domestic Credit 21.1% 7.51 9.7% 0.8% 2/ olw Credit to Economy 3/ -50.3% 53.6% 85.3% 20.6% are being imple- M2 Growth 21.5% 17.1% 14.7% 13.5% mented on sched- M2/GOP 54.01 49.6% 44.7% 43.5% ule. The quan- Inflation Rate 4/ 21.0% 28.91 28.1% 19.7% ttiVe performance Iiports (GUFS) 10.0 10.9 11.9 12.3 Exports (GMFS) 10.8 9.8 10.3 11.Z criteria for end-June o/w Hydrocarbons 9.8 8.8 9.2 9.8 and end-September Met Factor Income -1.9 -1.7 -1.9 -2.0 o/w Interest Payments 5/ 1.7 1.4 1.9 2.1 have been met. Met Transfers 1.6 1.4 1.3 1.5 Theauthoritieshave Current Account Balance 0.4 -1.5 -2.1 -1.7 Capital Account Balance -0.1 1.4 2.7 2.0 also implemented a Change in Net Reserves 0.3 -0.1 0.6 0.3 series of supple- Gross Reserves 1.5 2.1 2.3 2.7 mental fiscal in months of imports GNFS 1.5 2.0 2.3 2.3 measures to bring Total External Debt 6/ 25.8 28.5 29.6 30.7 Total External Debt/XGS 7/ 218.7% 261.1% 285.0% 8/ 237.6% the budget deficit Debt Service/XGS 9/ 67.4% 10/ 75.5% 82.1% 56.5% back toward the Debt Service/xGS 5/ 67.4% 42.0% 32.81 35.3% target for March jo w pap s us hm be i t6mi t ad pgg %*w. 1995, which has 1'"m as&% *ou**on**- it WANi boon of IMM iQFWMi 'I'U been adjusted from aj c*... hd. b. W s.e . mp... 3.3 percent of GDP NAff*1- Sblt stna dbt an to 2.8 percent on Xebs =I... a.A the basis of higher- W Xaimes a.. W..i.. . than-expected oil A 8e e e..ue by Sfm L"01B -one uinw ad so Mow Gowmust. prices. The evolu- Source: IMF, W estimates. tion of key macro- economic indicators under the program as projected by the Bank is summarized in Table 1. Preliminary data indicate that the economy will expand by about 0.6 percent in 1994, an improvement over the 1.1 percent contraction in 4 1993. The limited growth response in 1994 is the result of a drought-olagued harvest, tighter demand policies, and some apparent inertia in the reaction of banks and PEs to the increased availability of foreign exchange and the liberalization of trade. Growth is projected to accelerate in 1995, as import capacity continues to expand (para. 15). 10. Exchange Rate Policy. The authorities' objective is to establish a regime in which the exchange rate is determined by market forces. In April 1994, the od hoc inter-ministerial committee charged with overseeing the allocation of foreign exchange was dissolved, and the Dinar was devalued by some 40 percent. After subsequent adjustments, the nominal exchange rate reached 40.9 DAIUS$ by the end of September, compared with about 24 DA/US$ at the beginning of the year. As a further step, exchange fixing sessions were introduced in October 1994, with a view to managing the exchange rate in response to the demand for foreign exchange from the commercial banks. After a brief surge in May, the parallel market exchange premium has dropped to less than 100 percent, according to the IMF, compared to over 400 percent in mid-1992. The authorities plan to move to a market-determined exchange rate through the introduction of an interbank foreign exchange market during the second half of 1995, in the context of the envisaged EFF. 11. Trade Liberalization. Wide-ranging measures to liberalize imports were adopted in April 1994, and the general principle that enterprises are free to import for their own use or resale was reaffirmed. The list of socially sensitive "strategic" products was sharply reduced (essentially to basic food staples, medical equipment and pharmaceuticals), and the requirement that importers obtain ex ante approval to import these products was replaced with a set of professional criteria that they must respect. At the same time, many administrative trade restrictions were eliminated. The improving b:,ance of payments situation (para. 15) and the growing number of private importers have prompted the authorities to further accelerate trade liberalization. Import suspensions were lifted for twelve products (mostly textiles) in July 1994, and three products (coffee, barley and infant formula) were dropped from the list of products subject to professional criteria in September. By the end of 1994, the trade regime will be essentially free of quantitative restrictions. The remaining import suspensions will be lifted and sugar will be dropped from the list of products subject to professional criteria. Pharmaceuticals will be dropped from the list by mid-1995. The authorities are considering the option of increasing tariffs in the 1995 Finance Law for some of the products for which quantitative restrictions are being removed.2 12. Domestic Price Liberalization. Very significant measures have been adopted during the past nine months to liberalize the price system and increase administered prices. Most prices subject to ceilings on markup margins have been freed, including the prices of fertilizer and other agricultural inputs. The share of free prices in the consumer price index (CPI) now exceeds 80 percent, compared with only about 10 percent in 1989. Further reductions -i price controls are planned in 1995, including the elimination of ceilings on markup margins for corn, pulses and rice. In parallel, the range of goods subject to consumer price subsidies has been reduced to three essential food staples (bread, semolina and 1/ Importers are required to certify their capacity to import products subject to the professional criteria system. The oriteria include access to an appropriate distribution network and sufficient financial backing. While cr ante approval is not necessary, failure to respect the criteria can lead to sanctions. The authorities have agreed to review the professional oriteria system during the coming year with the Bank, and take measures, if needed, to ensure that it does not act as a barrier to entry for patential importers. V A major tariff reform in January 1992 reduced the maximum tariff from 120 percent to 60 percent, and equalized the rates of the para-fiscal compensation tax on imports and domestic products. As a result of the reform, the average, import- weighted tariff wedge fell from an estimated 34 perocnt in 1991 to 20 pewuent in 1992. 5 milk) and certain energy products. Increases in administered prices have exceeded IMF program targets. Since the end of 1993, the prices of the three subsidized food staples have been increased by an average of 106 percent. Similarly, domestic energy prices have been raised by an average of 59 percent. As a result of these price increases and :he adjustment of the exchange rate, the total subsidy (explicit and implicit) on food staples and energy products on an annual basis has fallen to about 3.5 percent of GDP, compared with almost 9 percent in 1993. Further subsidy reductions are planned over the remainder of the stand-by period. To institutionalize free price setting, the authorities have prepared, in consultation with the Bank, a law on competition which is currently being examined by the interim legislature (Consell National de Transition, CNT). 13. FialgPolicig. The key objective of the fiscal adjustment under the program is to restore domestic financial balance and reallocate resources from the Government to the productive sector. To achieve this objective, the program targets a reduction in the fiscal deficit from 9.4 percent of GDP in 1993 to 2.8 percent during the program year (1994/95, see Table 1). Revenue enhancements include. (i) new excises on cars and a number of other goods, (ii) the elimination of some VAT exemptions, (iii) an increase in the corporate tax rate on retained dividends, and (iv) the positive impact of the exchange rate adjustment on hydrocarbon taxes and customs duties. Expenditure reductions include a slow-down in public investment expenditures and a cap of 12.5 percent on the increase in civil service salaries over the program period. However, the fiscal adjustment has been complicated by the emergence in recent months of expenditure pressures, notably higher-than-expected security expenditures. To offset these pressures, the authorities have implemented a set of supplemental measures in consultation with the IMF. These include: (a) a delay in wage increses for civil servants and a freeze on new hiring, (b) supplemental increases in administrative prices (para. 12), and (c) a reduction in the compensation of enterprises for foreign exchange losses resulting from the large devaluation in April 1994. The authorities are targeting a further reduction in the budget deficit over the remainder of 1995, resulting in a projected deficit of 2.2 percent of GDP by the end of the year. The Public Expenditure Review (PER), being carried out with the Bank, will be an important instrume.: for guiding future deficit reduction measures. 14. Monetary and Interest Rate Policies. The stabilization program relies heavily on tighter monetary policy and a move to positive real interest rates. Broad money is programmed to increase by 17 percent in 1994 and by less than 14 percent in 1995, compared with nearly 22 percent in 1993. Tighter money is to be made possible through a sharp reduction in credit to the Government as a result of the fiscal adjustment. While certain quantitative controls remain in effect, including quarterly ceilings on bank credit to the core group of non-autonomous PEs covered under the EFSAL, the program foresees a greater role for interest rates in the allocation of credit. The 20 percent ceiling on lending rates was replaced in April with a ceiling on average bank margins of five percentage points, and key reference rates were increased by 3-5 percentage points. The tighter demand policies under the program have restrained inflationary pressures. After a large jump in the price level following the devaluation and increases in administered prices in April, monthly inflation moderated to some two percent on average in the third quarter. If this trend is sustained, the IMF estimates that average infladon over the program year would be about 28 percent, down sharply from the 37 percent initially programmed. 15. Balance of Payments and External Financing Plan. The external payments situation is improving. After a slow start, imports are expanding, and are expected to reach nearly US$12 billion (GNFS) during the program year, an increase of more than 20 percent in real terms over 1993. Nevertheless, higher-than-expected oil pric, '"ave lowered the projected current account deficit and capital inflows have been strong, leading tu a substantial build up of reserves. The Paris Club 6 rescheduling agreement (para. 16) provided highly favorable terms, which are expected to be reflected in the debt restructuring agreement under discussion with the London Club. Multilateral financing has proceeded as expected, including the IMF stAd-by, the release of ECU 150 million in balance of payments lending by the EU, and the release of the US$175 million second tranche of the EFSAL in July 1994, which triggered the release of an additional US$150million from the 5xport-Import Bank of Japan. The improving external payments picture has resulted in a faster-than-expected increase in reserves. Non- gold reserves are now projected to reach US$2.3 billion (slightly more than two months of imports) by the end of the program year in March 1995, US$800 million more than initially programmed. The higher level of reserves will facilitate the introduction of the interbank foreign exchange market in 1995. E. External Debt Rescheduling 16. In early 1994, the drop in world oil prices and difficulties in mobilizing external financing prompted the authorities to reconsider the option of formal debt rescheduling. The total stock of Algeria's external debt (about US$26 billion at the end of 1993, or roughly 50 percent of GDP and slightly more than twice the level of exports) is high, but not excessive relative to many other middle- income countries. However, prior to the Paris Club rescheduling, the average maturity of the debt had steadily decreased to a level of about three years. For many years, the authorities consistently rejected formal debt rescheduling, relying instead on increased multilateral lending, refinancing arrangments, and controls on external borrowing and imports. The rationale was that the problem was only short-term, and the country would get over its debt "hump" in a couple of years. Unfortunately, continued heavy dependence on expensive short-term credits effectively pushed a growing hump into the future. Although two important refinancing agreements were reached in 1991, these provided only partial, temporary relief. At the end of 1993, debt service (excluding refinanced principal payments) had reached almost 70 percent of exports. Following approval of the stand-by arrangement, the Government reached agreement with the Paris Club for a rescheduling based on favorable terms: 15 years maturity, including 4 years of grace and a graduated repayment schedule; a cut-off date of September 1993; and rescheduling of interest payments on official debt through October 1994. This rescheduling should save Algeria approximately US$3.5 billion in debt servicing costs in 1994, and US$500 million in 1995 (or about US$2.4 billion if the rescheduling is extended through the end of 1995). It is estimated that the London Club agreement under discussion with the commercial banks will reduce debt service by an additional US$800 million in 1994, and by US$1.1 billion in 1995, if the agreement extends through the end of the year. F. The Structural Reform Program 17. The authorities' objective in accelerating the structural reform program is to transform Algeria into a full-fledged market economy as soon as possible in order to establish the conditions for sustainable growth and avoid dissipating the short-term gains from debt rescheduling. In order to transform the economy, the reforms must eliminate structural rigidities, correct distorted incentives, promote private ownership, and stimulate domestic and external competition. At the microeconomic level, the top priorities are to encourage the private sector to become the principal source of growth and employment generation in the emerging market economy (particularly in the sectors from which the State must withdraw) and to reform the PE sector. In parallel, nascent structural reforms in the financial and labor markets must be deepened to promote factor redeployment and a more efficient allocation of new resources in response to changes in relative prices. Finally, the social protection system must be strengthened. Given the social conditions prevailing in Algeria, this is particularly vital to the success of adjustment. 7 Private Sector Development 18. The proposed ERL would support private sector development through a three-pronged approach aimed at encouraging private sector investment, stimulating competition, and promoting the development of the labor-intensive small- and medium-scale enterprise (SME) sector. The private sector assessment (PSA), which will be carried out in 1995, will focus on developing a longer-term strategy for expanding the role of private enterprise in all aspects of the economy. Terms of reference for the PSA have been agteed with the authorities. 19. Encouraging Private Sector Investment. The proposed ERL would support the implementation of the new Investment Code. The Code, promulgated in 1993, clarifies the investment regime-including the repatriation of profits and capital-and authorizes the establishment of free trade zones. The Code also creates a national investment agency to: (i) act as a "one-stop window" to help private investors (foreign and domestic) cut through bureaucratic red tape, and (ii) administer tax breaks and other investment incentives. This agency was established formally in September 1994, and the initial response from the private sector has been encouraging. The agency has already been presented with over 100 investment projects, totalling more than US$1 billion. The authorities have agreed to devolve the function of investment promotion to a separate agency run by the private sector, and they plan to request technical assistance from FIAS for this effort. The new Investment Code is the latest in a series of legal measures that the authorities have enacted to promote private sector investment. The revised Commercial Code, promulgated in 1993 under the EFSAL-supported program, formalizes the level playing field between the public and private sectors. It establishes bankruptcy procedures for autonomous public enterprises (Entreprise PubhUque Economique, EPE) and authorizes the creation of private joint-stock companies. In conjunction with the new Investment and Commercial Codes, the Government approved a law removing the State's monopoly on the insurance market in June 1994. This law is presently being examined by the CNT. 20. Stimulating Competition. The new competition law, drafted in consultation with the Bank, will be an important milestone in the effort to stimulate competition in the highly concentrated Algerian economy. Under the present circumstances where competition from imports and foreign investment is likely to remain constrained in the near term, the dominance of PEs in many subsectors presents major challenges. An analysis of firm concentration indicates that the largest four enterprises account for 100 percent (or close to 100 percent) of production in the majority of subsectors. A large number of subsectors are characterized by a single PE producer. The problem of excessive concentration is magnified by the de facto lack of competitive business practices. The competition law will ban uncompetitive business practices, provide a basis for establishing market-oriented regulatory instruments, and help ensure that privatization does not transform public monopolies into private ones. The competition law has been approved by the Government and it is currently under consideration by the CNT. As a complementary measure, the authorities have notified concerned distributors that they are no longer legally obliged to average transport costs, except for the limited list of products subject to fixed prices. The obligation of averaging transport costs to achieve pan-territorial pricing (prdquadon des prix) constituted an important barrier to entry by local private distributors in the past. 21. Small- and Medium-scale Enterpnrise Development. The authorities have removed a major bottleneck to the development of small- and medium-scale enterprises through the inclusion in the 1995 Finance law of a provision liberalizing imports of used industrial and professional equipment. Macroeconomic stabilization, incentive reforms, and tight budget constraints on PEs to avoid crowding out are the most important reforms for promoting SMEs in the manufacturing and service sectors, where 8 labor absorption prospects are the most favorable during the transition period. However, stabilization measures must be accompanied by complementary, well focused measures to remove specific constraints on SME development. Liberalizing the import of used equipment is an important step for private entrepreneurs faced with limited resources. The authorities have established a Ministry charged with developing additional measures to promote SMEs This Ministry has asked for Bank support in designing and implementing its work program. Public Enterprise Reform 22. The proposed ERL would support PE reform through: (i) the establishment of the legal and institutional framework for privatization, (ii) the launching of a pilot privatization program to generate concrete results quickly, and (iii) the implementation of a market-oriented framework for PE restructuring. The low level of productivity of the PE sector, which accounts for roughly 60 percent of non-government GDP, is at the heart of the economic crisis in Algeria. Under the EFSAL-supported program, substantial progress was made in providing PEs with operational autonomy (under the aegis of eight Participation Funds which act as fiduciary agents for the State) and in restructuring their non- performing debts under the financial restructuring program (assainssementfinancier). However, physical restructuring has lagged behind, and operating losses have continued. The authorities acknowledge the need for further measures, including privatization, to eliminate operating losses and increase the productivity of the PB sector. The program which the ERL would support aims to improve PE performance through a combination of privatization, tighter budget constraints, higher capacity utilization through the increased availability of imports, physical restructuring (notably the shedding of excess labor), and further debt restructuring where appropriate. 23. Prvtiaign. In November 1994, the Government adopted a wide-reaching policy, which opens all sectors either to outright privatization or to private sector management under concession agreements. Priority sectors for privatization include tourism, retail services, housing construction, road transport, port and airport services, ex-monopoly importers, and insurance companies. For a restricted list of public services (i.e., production and distribution of energy and water; airport, port and road infrastructure; and air and rail transport), the program will be limited to granting concessions to private sector operators. A Ministry of Industrial Restructuring and Participation (MRIP) has been created zo lead the privatization effort. In preparation for privatization, legal provisions were introduced in June 1994 for opening the capital of autonomous PEs to private investors up to 49 percent and for the sale of PE assets to the private sector. Bank staff are presently assisting the authorities with the preparation of a privatization law, which is expected to be promulgated in early 1995. The law will establish a comprehensive, consistent legal and institutional framework for privatization. It envisages the creation of a National Privatization Council charged with implementing the privatization program, approved annually by the Government, and provides the Council with wide-ranging authority to carry out its mission. The authorities have requested support from the Bank for the design and implementation of a broad privatization program in the priority sectors in 1995. To a significant extent, the pace of privatization will be driven by the absorptive capacity of the private sector and its willingness to invest under the prevailing circumstances in Algeria. I SME are defined in Algria as enterprises with up to 200 employees. This definition incorporates the vast majority of private fims in the country. 9 24. As part of their strategy, the authorities have launched a pilot privatization program with technical assistance from the Bank. The objective is to gererate some successful operations quickly in order to establish the feasibility of privatization, even before the new law is passed, and to send a clear signal of intent to the population and to other concerned parties, such as the bureaucracy and Algeria's external partners. To this end, the scale of the pilot program has been kept modest in order to streamline its implementation. Under the program, some 88 local PEs (out of a total of roughly 1,200) have been dissolved and their assets placed in liquidation. In addition, calls for bids for five national hotels, which have yet to begin operations, were published in late November 1994. These five hotels represent roughly six percent of the total capacity of the public hotel sector in Algeria. The authorities are presently selecting a diverse group of at least 12 additional national hotels to be sold in a second phase under the pilot program. The lessons learned from the pilot program will be an important input into the broader privatization effort in 1995. 25. PE Restructuring. In the context of the proposed ERL, the authorities have established a market-oriented framework for implementing the restructuring plans for the 23 non-autonomous PEs (EPS) which were the subject of diagnostic studies under the EFSAL. These firms include most of Algeria's largest PEs, e.g., the national steel company and the national fertilizer producer. Together, they account for roughly one-third of industrial production, which in turn accounts for about 10 percent of GDP. The restructuring framework, summarized in Annex I, is designed to ensure the viability of the restructuring plans, to tighten the budget constraints on the firms, and to create incentives for their managers to assume responsibility for restructuring and become actively involved in the search for private partners. Under the framework, a distinction is made between the restructuring of past debts (to be financed by the Treasury) and rehabilitation investments (to be financed, as a rule, by the enterprise through a combination of self-financing, commercial bank credit, asset sales, and private investment). The framework calls for all 23 EPS to pass to autonomy or be closed (and their assets sold) by the end of 1995, starting with a first group of six enterprises-including the steel company-before the end of 1994. In order for an EPS to pass to autonomy, its managers must obtain a non-objection of their restructuring plan from the authorities, following revision if necessary, and sign a performance contract with the State. This contract commits management to implementing the restructuring plan and to mobilizing financing for the rehabilitation investments proposed in the plan. Upon signature of the contract, the enterprise will undergo financial restructuring and pass to autonomy. Responsibility for overseeing the performance contract will be incumbent on the shareholder assembly of the enterprise. As an autonomous EPE, the enterprise will be authorized to open its capital to private investors and to sell off assets to the private sector. During 1995, the authorities will continue to impose ceilings on bank credit and wages for the EPS which have not yet passed to autonomy or been closed. Public Expenditure Reform 26. The proposed ERL would support two important public expenditure reforms geared to tightening the budget constraints on PEs and banks: (i) consolidating the withdrawal of the State from the financing of PE investments, and (ii) phasing out the financial restructuring program introduced in the context of the EFSAL. In Algeria, public expenditure reform is the linchpin of the adjustment program. In the past, the Treasury used bountiful hydrocarbon revenues to finance State interventions throughout the economy. The withdrawal of the State from financing productive activity, which was initiated in the context of the ERSL and extended under the EFSAL, would be consolidated under the ERL, in particular to impose strict budget constraints on PEs and banks. Hard budget constraints are critical to macroeconomic stability and the operation of the new marketoriented legal framework (e.g., PE bankruptcy procedures under the revised Commercial Code). Phasing out the financial restructuring 10 program will contribute to the fiscal adjustment and strengthen the credibility of hard budget constraints. In addition, the ERL would support implementation of the recommendations of the PER, which will aim to improve the efficiency of public spending and help ensure that fiscal adjustment does not come at the expense of basic social objectives. The PER covers both current and capital expenditures. Building on the results of the Public Investment Review carried out in 1990 in the context of the ERSL, the PER will help strengthen the fiscal adjustment efforts initiated under the IMF stand-by. It will analyze notably the decision-making procedures for public spending in order to improve efficiency, and it will identify a core public investment program. 27. Treasury Efinancin of PE Investments. Under the reform program, the responsibility for financing investments of autonomous EPEs has shifted from the Treasury to the enterprises and the commercial banks, which are also autonomous. However, as an interim measure, the Treasury has continued to finance investment projects for the EPEs which were approved prior to the end of 1988 (PEC-1988). The authorities realize the importance of subjecting all PE investments to a market test, notably by potential private sector partners authorized to participate in the capital of autonomous PEs. To this end, the Treasury has informed EPEs that it will stop financing investments under the PEC-1988 by the end of the stand-by period (March 1995). The authorities have also set ceilings on potential State support for the rehabilitation investments of the non-autonomous EPS and confined it to a few exceptional cases (para. 25). In order to ensure transparency, this support will take the form of equity injections or credits from the budget. Treasury guarantees for bank credits to the EPS will be terminated once the latter pass to autonomy. In addition, the Participation Funds have the authority to guarantee bank credit to EPEs. As part of the effort to tighten budget constraints on PEs, the general assemblies of each of the eight Participation Funds will pass a resolution before the end of March 1995 capping the level of guarantees issued to banks at the level of the Fund's own resources (fonds propres). 28. Financial Restructurin Proaram. Agreement has been reached on a framework for future expenditures under the financial restructuring program and on a calendar for phasing out the Restructuring Fund in the context of the proposed ERL. The financial restructuring program has reduced the debt burden on PEs and public utilities, thereby cutting their losses, and strengthened the balance sheets of the banks. However, the future expenditures of the Restructuring Fund (Fonds d'asainsssement, FA) must be strictly determined according to transparent criteria, and a calendar for phasing out the FA established, in order to support fiscal adjustment and strengthen the credibility of hard budget constraints. Otherwise, PEs and banks could anticipate that financial losses not presently covereO by the FA will be covered in the future. This anticipation of a future bail-out would have an extremely detrimental effect on PE performance. Under the agreed framework, summarized in Annex I, expenditures by the FA will stop by the end of 1996, with the possible exception of one-time capital allocations to PEs and public utilities which have not yet passed to autonomy by that date.' An exhaustive list of non-autonomous PEs and public utilities which are eligible for such allocations will be established by the end of 1994. Financial Sector Reform 29. The financial sector reforms which the ERL would support focus on: (i) strengthening the legal and regulatory framework, (ii) pursuing the restructuring of the existing banks under market V An autonomous publio utility is defmed in legal terms as an EPIC (&abiment P abwlc h Cmemre Asdassie et Comosemial). In principle, EPICs enjoy full fmancial autonomy fiom the State. However, they am eligible for ompenshon from te Tseesumy for any losses resulting from continued State control over tariffs. 11 conditions and subjecting them to tighter budget constraints, and (iii) identifying measures to attract new private financial institutions. An efficient financial sector is the foundation of a market economy. The importance of the financial sector in Algeria is accentuated by the need to transform large hydrocarbon rents into productive investments. While the legal and regulatory framework has been extensively reformed, implementation of the new framework is just beginning. The financial sector is presently dominated by five public banks which are severely undercapitalized for the most part and have little experience in financial intermediation. The legacy of lax budget constraints and sectoral specialization has left the banks with major portfolio problems which have only been partially resolved by the financial restructuring program. Competition is marginal. There are now two private banks, but the scale of their operations remains modest Although several foreign banks have established representative offices, they have not played a significant role to date. The macroeconomic and financial sector reforms that the proposed ERL would support will address the weaknesses of the financial sector and pave the way for the establishment of a stock exchange and the development of longer-term financial markets, which are needed to sustain an expansion of private investment. 30. Strengthening the Leal and Regulatory Frapework. While much of the legal and regulatory framework of a modem financial sector has been established in the context of the ERSL and EFSAL programs, the framework must be completed and made fully operational. The prudential regulations were revised in November 1994, notably to provide a more accurate picture of bank solvency. In parallel, clear rules for the application of the five percent ceiling on bank margins have been established. These rules provide room for banks to cover costs and to lend for higher risk, but potentially higher return, projects. In order to make the new legal and regulatory framework more operational, a plan to reinforce bank supervision, prepared in consultation with the Bank, was adopted by the BA in November 1994. The plan incorporates training programs for bankers, accountants and inspectors. 31. Restructuring the Existing Banks. The authorities have expressed a clear intent to privatize at least some of the existing banks, and agreement has been reached on terms of reference for a feasibility study in 1995 of the opening of the capital of existing banks to private investors, including the option of full privatization. However, as highlighted by the institutional and financial audits carried out by international auditors in 1992, the structural weaknesses of the banks are such that their successful privatization is likely to require extensive preparation. The authorities have developed a market-oriented framework for implementing the restructuring plans developed for the five public banks in the context of the EFSAL. A key component of this framework is the signing of performance contracts between the managers of the banks and the State. These contracts are expected to be signed by early 1995. The State will proceed with a final recapitalization of the banks (on the basis of audits of the 1993 accounts currently underway) through the FA in order to establish a capital adequacy ratio of at least 4 percent for each bhnk by mid-1995. From that point on, the contracts will hold bank managers directly and solely responsible for respecting the capital adequacy ratios set by the BA, which are to increase to 8 percent for the five banks in question by the end of 1999. The banks, in turn, are being provided with increased autonomy with respect to operational decisions, notably the allocation of credit. The expectation is that the new framework, if implemented and supervised properly, will tighten the budget constraint on the banks and increase the incentives for bank managers to mobilize resources, improve the allocation of credit and search for potential private partners. 32. Aracting New Private Financial Institutions. The authorities are actively promoting the establishment of new private banking institutions to increase competition in the sector and provide private investors with broader access to credit. Terms of reference have been agreed for a study in 1995 to identify measures to encourage the creation of private banking institutions. This study will examine, inter 12 alia: (i) the impact of existing capital requirements for banks and financial institutions (approximately US$12 million and US$4 million, respectively); (ii) potential administrative constraints on establishing new banking institutions; (iii) fiscal incentives and disincentives; Civ) the role of interest rates, the ceiling on bank margins and remaining quantitative controls on credit; (v) the payments system; and (vi) bank concentration ratios and other factors related to competition in the financial sector. The authorities are also working with the Bank to devise regulations authorizing the establishment of credit unions, which represent a means of mobilizing household savings, broadening access to domestic credit, and increasing competition in the financial sector in the relatively short term. Strengthening the Social Protection System 33. The authorities have recently launched two major initiatives to strengthen the social protection system: (i) the establishment of a scheme to protect workers laid off because of enterprise restructuring, and (ii) a reform of the social safety net. These initiatives are part of a larger effort to better use the limited resources available, and to move from a dependence on secure public sector employment and distortionary price subsidies to a reliance on private sector job growth and more economically neutral income transfers. A stronger, better targeted social protection system will facilitate structural adjustment by reducing incentive distortions, facilitating enterprise restructuring, and enhancing the efficiency of the labor market. Under the proposed ERL, implementation of the worker protection scheme and the social safety net reform would be closely monitored and corrective measures would be taken as required. 34. Unemployment Insurance and Early Retirement. A national scheme to protect redundant workers, financed entirely through employer and employee contributions, was adopted in May 1994, after intensive consultations with the labor unions. The scheme incorporates unemployment insurance and early retirement programs for workers employed on permanent contracts. The new scheme, which contains several innovative features, will facilitate PE restructuring. However, an initial review has indicated that the benefits provided may prove to be too generous and the costs to enterprises too high for the scheme to be fully effective. The authorities have agreed to conduct a review of the new scheme during the coming year in collaboration with the Bank in order to monitor its effectiveness and identify corrective measures if needed. 35. Reform of the Social Safety Net In October 1994, the authorities introduced an ambitious reform of the transitional social safety net implemented in 1992 to compensate for reductions in food subsidies. The objective of this reform, designed in collaboration with the IMF, is to target scarce budgetary resources more effectively to truly vulnerable groups. The reform limits social assistance benefits to those families with no other source of income and unable to work (i.e., handicapped individuals, widows and the elderly). In parallel, a new pay-for-work scheme has been introduced to provide financial support for individuals able to work through participation in activities of community interest (acivit6s d'intgr& gndral, AIG). Participants in the AIG scheme will be paid only for days worked at a monthly rate slightly more than half the minimum wage of DA 4,000. Discussions of the new scheme with the Bank have pointed to concerns about the capacity of the administration to operate such a program on a national scale. In particular, it is critical that the scheme be fully self-targeted in order to channel the benefits to the truly needy, while minimizing administrative costs. Moreover, the 51 Under Algerian law, financial institutions have business powers sinilar to those of banks, but they cannot accept monetary deposits. 13 private sector should play a central role in implementing the activities of community interest envisaged under the scheme. The authorities have acknowledged the Bank's concerns. They have agreed to carry out during the coming months an evaluation of the social safety net reform in collaboration with the Bank, and to take measures, if necessary, to improve the ability of the system to reach the most vulnerable groups at a sustainable cost. This evaluation will serve as a basis for the preparation of a proposed social safety net project. The terms of reference for the evaluation have been agreed upon. G. Medium-tea Policy Framework and Outlook 36. Accompanied by stabilization, the acceleration of structural reforms should provide a sound basis for a medium-term policy framework geared to supporting adjustment and setting the economy on a permanent high-growth path. Of particular importance is a sustained reduction in the debt service ratio in order to underpin a permanent boost in import capacity. While the level of growth that higher import capacity can generate over the medium term will depend on the costs of adjustment, notably PE restructuring, the objective is to create jobs at a rate at least equal to the 4 percent growth rate of the labor force. This would stabilize unemployment and help ease social tensions. Restored growth would also support faster structural adjustment, which, in turn, would accelerate the transition to markets and generate a more rapid improvement in economic efficiency. The resulting increase in market forces and productivity would help sustain growth, and provide for a more flexible response to adverse external shocks. As the reforms take hold, sustained growth and greater efficiency would support further increases in per capita consumption. 37. The Bank has developed medium-term projections TAKE Z: SLN EDUM-TE CUTUMK for Algeria which are consistent (M billion uiess otheruise indicated) with the deepening of the Projected stabilization and structural reform 1998 -- program. The projections, which (avg) have been reviewed with the IF, Growth Rate 4.02 4.02 4.5% 5.02 are summarized in Table 2. They Treasury Batance/QDP -1.02 0.02 1.02 L.X target continued expansion of the Inflation Rate 1/ 10.1% 8.32 7.82 4.42 economy and a deceleration of Imports 13.1 13.9 14.0 14.9 inflation.Exports 11.7 12.8 13.7 15.5 inlto.Ana D rwhi /a Hydrocarbons 10.1 10.8 11.4 12.3 targeted to average about 4 percent current Account Balance -1.9 -1.8 -0.8 0.3 through 1998, in part through Gross Reserves 21 2.6 2.7 2.8 3.0 increases in the capacity utilization Total External Debt 3/ 33.1 35.1 3 Totl EteralDebt/XGS 41 243.32 237.22 225.12 192.82 rate which is currently under 60 Debt Sevc/XGS S/ 39.42 31.52 ".0% 41.1% percent. Inflation is targeted to fall _ o" h -N below 10 percent per year. While J can" t if of i1VM% of M& the authorities are targeting a faster 21 * *EN ad W meft deceleration of inflation under the i Aft I envisaged EFF, this will not be easy to achieve given the fragile state of the PE sector, the underdeveloped finanicial sector, and the growing stock of public debt. As the economy adjusts over the medium term, a further increase in the growth rate can be expected. Achieving the growth targets will depend on three critical factors: () the pace of stabilization and structural reform; (a8) the costs of adjustment, especially PE restructuring, which are difficult to quantify, and (iii) the ability and 14 willingness of private investors to respond to the reforms. Higher-than-expected adjustment costs have proven to be a major obstacle in other transition economies. The fact that the private sector has always been present in Algeria, along with the ccuntry's relatively modern capital stock, substantial agricultural potential, and readily exploitable energy resources argues for lower adjustment costs than in other former socialist economies. Moreover, the projected expansion in hydrocarbon exports (para. 38) and continued capital inflows will help alleviate the costs of adjustment and facilitate the transition process. Nevertheless, it is possible that actual medium-term performance could fall short of the targets, despite the acceleration of reform and higher import capacity, particularly if private investors hesitate, or lack sufficient resources, to respond to the reforms. This risk highlights the need for continuous efforts to sustain popular support for the reform program, to bolster the confidence of private investors, and to ensure their access to foreign exchange, domestic credit and other resources. 38. The medium-term growth projections are underpinned by continued increases in import capacity. Import levels (GNFS) are expected to increase steadily through 1997, reaching nearly US$14 billion, and then stabilize thereafter. This projection reflects the anticipated slow-down in hydrocarbon investments as the on-going program to expand gas exports comes to a close. Hydrocarbon investments support a projected increase in gas exports-consisting of LNG, piped gas, and liquified petroleum gas (LPG)-from US$3 billion in 1994 to about US$5.4 billion by 1998.6 Oil export volumes are projected to remain at current levels over the medium term. Sustained oil production is underpinned by foreign direct investment such as the signing last summer of Algeria's first, large-scale production sharing agreement: a US$1.3 billion, 25 year deal with the Atlantic Richfield Company (ARCO). Assuming a steady recovery of oil prices, total hydrocarbon exports are projected to reach US$11.4 billion by 1998. Non-hydrocarbon exports and private transfers are also projected to increase in response to the stabilization and reform program. Taken together, these developments underlie the projected improvement in the current account from the present deficit to a modest surplus after 1998. To support higher growth and accelerated reform, the macroeconomic policy framework must include a comprehen- sive strategy for maintaining the external debt service burden at a sustainable level. Further multilateral debt rescheduling in the context of a future EFF would reduce MLT principal repayments to a projected average of US$3.2 billion p.a. over 1996-98. Under these assumptions, the debt service ratio would decline to 31 percent by 1997, followed by an increase in 1998 as repayments of rescheduled debt begin, and then average about 40 percent thereafter. PART 1: THE ECONOMIC REHABILITATION SUPPORT LOAN A. Origins and Objectives 39. The proposed ERL has been prepared in response to the Government's request for support from the international financial community for its economic reform program. The Bank assisted the authorities in developing the matrix of policy reforms attached to.the Letter of Economic Policy presented in Annex I. This effort relied heavily on the achievements of the ERSL and EFSAL programs, and the understandings built up through many years of intensive dialogue, including detailed discussions of the 01 On-going gas development projects include: (i) the doubling of the capacity of the TRANSMED I pipeline to Italy from 12 billion cubic maters (BCM) per year to 24 born, (ii) the construction of a TRANSMED II pipeline with an initial capacity of about 8 bosn per year from Algeria through Morocco to Spain, and (iii) the revanping of LNG liquefaction facilities to increase capacity from some 23 born to 32 born per year. 15 draft Country Economic Memorandum in December 1993. The policy matrix presents a comprehensive program of reform measures critical for the transition to a market economy including, for the first time, concrete actions to privatize Algeria's extensive public enterprise sector. The program also includes realistic targets and indicators to monitor progress over the coming year. If implemented vigorously, this program will provide a sound basis for future Bank assistance for structural adjustment in Algeria. The macroeconomic framework for the reform program has been established in close cooperation with the IMF, which is providing support under the stand-by arrangement approved in May 1994. B. Rationale for Bank Involvement 40. Two principal reasons justify the proposed ERL: (i) it will help the authorities defme and implement policy reforms to accelerate the transition to a market economy; and (ii) it will contribute to, and help catalyze, the international community's efforts to mobilize the substantial external financing package needed to underpin restored growth and bolder economic reform. The proposed ERL represents a renewal of the Bank's efforts to support the macroeconomic stabilization and structural reform program, particularly the reforms of the productive sector needed to set the economy on a path of sustained growth. Key reform measures include private sector development, privatization, restructuring of the PE sector, public expenditure reform, financial sector reform, and the strengthening of the social protection system. In concert with macroeconomic stabilization, these policy reforms will help establish the foundation for the emergence of the private sector as the engine of growth over the medium term. Given Algeria's high debt service and dependence on imported inputs, restoring growth requires a loosening of the external resource constraint. The international community has launched a concerted effort to reduce the debt service burden and provide additional resources in order to increase imports from the critically low level in 1993. The multilateral institutions are foreseen as playing a major financing role, and the program supported by the IMF stand-by includes this source of financing. Other creditors are paying close attention to the extent of Bank support. The EU has expressed interest in providing parallel financing of the structural reform program supported by the proposed ERL through an ECU 200 million balance of payments loan, which would also be linked to continued implementation of the IMF-Supported stabilization program. C. Prqject Description 41. The proposed Loan would finance imports in an amount of US$150 million equivalent. The Loan would finance 100 percent of the foreign exchange cost (C) of goods imported from Bank member countries and Taiwan. Goods imported after September 15, 1994, would be eligible for retroactive financing under the Loan up to a maximum of US$30 million, equivalent to 20 percent of the Loan amount, in view of the considerable progress already achieved in implementing the reform program. The Loan's closing date would be December 31, 1996. D. Implementation Arrangements 42. The Borrower would be the Government of the Democratic and Popular Republic of Algeria, represented by the Ministry of Finance. The National Planning Council is the lead !EWD Implementation Aiency for the management of the Loan. An inter-ministerial working group is in charge of coordinating the monitoring of the program. A formal program review will be held in 1995 (para 47). 43. Procrment. The proposed loan would be used to finance the CIF cost of eligible imports of eligible goods and services by the public and private sectors. Procurement would be carried 16 out in accordance with the Bank's Procurement Guidelines. Contracts for the procurement of eligible imports estimated to cost the equivalent of US$5 million or more each shall be awarded through International Competitive Bidding. Ineligible items would include those financed from bilateral or other multilateral sources, expenditures in the currency of the Borrower or for items supplied from the Borrower's territory, items intended for military or para-military use, and luxury items. Commodities would be procured under procedures acceptable to the Bank. Eligible expenditures for petroleum products and foodstuffs would be limited to US$30 million each. Contracts for the procurement of eligible imports estimated to cost less than the equivalent of US$5 million would be awarded on the basis of established commercial practice and/or the Borrower's public sector procurement procedures which are acceptable to the Bank. As in all quick-disbursing operations, there will be no prior review of contract awards; verification of supporting documents will be on a selective post-review basis comprising: evidence of bid invitation, record of bid opening, bid evaluation report, and the signed contract/purchase order or official customs declaration(s). 44. . The Algerian Development Bank (BAD), which operates as an annex of the Treasury, would be responsible for administering the Loan, including the preparation and submission of all withdrawal requests. The BAD would also be responsible for managing a special account in US dollars at the Central Bank under the Loan in the amount of US$12 million. For contracts valued below US$5 million equivalent, disbursements would be made on the basis of statements of expenditures (SOE), prepared on the basis of information contained in customs certificates or other appropriate documents showing that eligible goods at least equal in value to the amount requested from the Bank had been imported into Algeria during the period under consideration. Supporting documentation for SOEs would be retained by the BAD for at least one year after receipt by the Bank of the audit report for the year in which the last disbursement was made. This documentation would be made available to the auditors (para. 45) and to Bank staff upon request. Withdrawal applications would be consolidated and submitted in amounts of not less than US$1 million equivalent. Contracts valued at less than US$100,000 equivalent would not be eligible for financing under the Loan. Retroactive financing of up to US$30 million equivalent would be provided for eligible items imported after September 15, 1994. 45. Auditiar. The BAD would be responsible for maintaining all Loan accounts and the records of all transactions under the Loan in accordance with accepted accounting practices. All accounts would be audited following the end of the Borrower's fiscal year by independent auditors acceptable to the Bank. These reports would include a separate opinion on the use of SOEs and the special account. Certified copies of the audit would be submitted to the Bank within six months of the end of the Borrower's fiscal year. . Agments Reached 46. Actions prior to Board Presentation. The official submission to the Bank of the Government's Letter of Economic Policy was a condition of Board presentation. The full set of prior actions for Board presentation is detailed in the policy matrix attached to the Letter of Economic Policy. Key prior actions include: Incentive Framework and Private.Sector Development * Publication of the implementing regulations for the Investment Code, including a decree establishing the National Investment Agency. 17 * Adoption by the Council of Ministers of the draft law on competition. * Dissemination of circulars to concerned enterprises stating that pan-territorial pricing is not required, except for a restricted list of products subject to fixed prices. * Inclusion in the 1995 Finance law of a provision liberalizing the import of used industrial and professional equipment. Reform of the Public Bnterprise Sector * Adoption by the Council of Government of a privatization policy opening all sectors either to outright privatization or to private sector management. * Adoption by the Council of Government of implementing regulations for the sale of assets by autonomous PEs to the private sector. * Preparation of a draft privatization law in consultation with the Bank. * Launching of the pilot privatization program, including the dissolution of 88 local PEs and the publication of the call for bids for five national hotels identified during appraisal. * Adoption by the authorities of the framework for implementing the restructuring of the 23 non-autonomous public enterprises (see Annex I). * Establishment of the ceiling on bank credit to the 23 EPS for the last quarter of 1994, and agreement to impose wage and credit ceilings in 1995 on the EPS which have not yet passed to autonomy or been closed. Public Expenditure Reform * Notification by the Treasury to autonomous EPEs that it will terminate, at the end of March 1995, financing of investment projects approved prior to the end of 1988. * Establishment by the authorities of ceilings on potential State support for the rehabilitation investments of the EPS and commitment to limit such support to exceptional cases in accordance with the adopted framework. * Agreement on the structure of future Restructuring Fund expenditures and on a calendar for phasing it out (see Annex I). Financial Sector Reform * Publication by the BA of a directive expanding and strengthening the prudential regulations. * Establishment by the BA of a plan to strengthen banking system supervision. * Agreement on the model for the performance contracts between bank management and the State holding the former responsible for respecting capital adequacy requirements. 18 * Adoption by the BA of regulations for the application of the ceiling on bank margins. Str=ngtening of the Social Protection System * Publication of the implementing regulations for the unemployment insurance/early retirement system for workers laid off for economic reasons. * Agreement on terms of reference for the evaluation of the reform of the social safety net enacted in October 1994. 47. Program Review. The policy matrix includes a broad range of measures to be implemented during the 12 months following Board presentation. While these measures are not conditions for the ERL, satisfactory progress in their implementation will be a trigger for the preparation of new adjustment lending in 1995, in concert with a successor IMF program. The ERL-supported program will be the subject of a formal review on June 30, 1995, or any other mutually agreed date. In addition to evaluating the implementation of the measures included in the policy matrix, the Bank will monitor a series of quantitative indicators, developed in collaboration with the authorities, with a view to assessing the impact of the economic reform program. The choice of indicators, which are attached to the Letter of Economic Policy, was influenced by data requirements, and the need for broad, but economical, coverage of the program. F. Envirenmental Assessment 48. The project is consistent with the Bank's environmental policies and will follow accepted Bank procedures in this area. In conformity with the policy for rehabilitation operations, no environmental rating has been assigned. The question of environmental liability for past pollution will become a major issue as the privatization process proceeds. During the consultations on the draft privatization law, the Bank underlined the importance of establishing, on the basis of independent environmental audits, a clear division of responsibility between the State and prospective new investors for remedying past pollution problems. G. Risks 49. The proposed ERL would support a complex program of macroeconomic stabilization and structural reform for a country suffering from a severe social crisis, and struggling to overcome the legacy of nearly three decades of centralized planning and over-dependence on hydrocarbon exports. It is an operation subject to a significant degree of risk. Four categories of risk can be identified: social and political upheaval, external shocks, higher-than-expected adjustment costs and a slow private sector response, and the capacity of the Algerian administration to carry out the program. so. Implementation of the reform program is subject to political risks arising from the economic and social crisis in Algeria and the difficult security situation. The authorities have made extensive efforts to maintain a dialogue with a broad range of political groups, and presidential elections have been announced before the end of 1995. Even so, the situation is quite uncertain, and there is no guarantee that the politically motivated violence will diminish soon or that the composition of the government will not change. However, the medium-term program supported by the proposed ERL will need to be implemented by any government. As a result of the long duration of the economic crisis, there is a much greater acceptance by the population of the need for stabilization and structural reform. 19 This is evidenced by the muted opposition to the stabilization program, and the implicit support for the program (despite a significant expected decline in real wages) by the trade unions. The unions are now keenly interested in an economic strategy that ensures more sustainable growth and employment, despite the short-term social costs. 51. With regard to external shocks, the two main factors for Algeria are fluctuations in world oil prices and in the value of the US dollar. At current export and import volumes, a US$1 dip in the average price for Algerian crude oil entails a loss of roughly US$500 million in annual export earnings, and a one percent depreciation of the US dollar raises import costs by an estimated US$80 million. A depreciation of the dollar also increases the cost of servicing external debt which is denominated largely in non-dollar currencies. While the oil price risk can be addressed through contingency financing mechanisms, the economy remains vulnerable. This vulnerability highlights the urgent need to accompany stabilization with a deepening of structural reform in order to diversify the country's export base and improve the economy's ability to respond to adverse external shocks. 52. Higher-than-expected adjustment costs have proven to be a major obstacle in other transition economies, and a slow response from the private sector has bedeviled many adjustment programs. It is difficult to estimate precisely the extent of the adjustment costs that will be generated by Algeria's economic reform program. As noted earlier (para. 37), there are several factors, including the long-standing private sector, as well as the country's relatively modern capital stock and readily exploitable energy resources, which indicate that adjustment costs will likely be lower than in other former socialist economies. Hesitation by private sector investors to take advantage of opportunities created by the reform program, or a lack of sufficient resources to do so, is another potential risk. This underscores the need to ensure the credibility of the program in the eyes of private investors and to provide them with sufficient access to resources under market conditions, notably by eliminating the public sector deficit, establishing a foreign exchange market, and encouraging the creation of private financial institutions. Continued support will also be needed from the international community to help alleviate the costs of adjustment and to help ensure that sufficient resources are available to sustain the momentum of the transition to a market economy. 53. Implementing the economic reform program's many interdependent components will tax the already strained public administration in Algeria. Many of the areas covered by the program, such as privatization, represent relatively unfamiliar territory, and mid-course corrections will be inevitable. The inter-ministerial working group responsible for monitoring the program will help provide the necessary coordination. However, the Bank will need to maintain an intensive dialogue with the authorities and provide a significant amount of technical assistance. H. Recommendation 54. 1 am satisfied that the proposed Loan would comply with the Articles of Agreement of the Bank, and I recommend that the Executive Directors approve the proposed Loan. Lewis T. Preston President Attachments December 15, 1994 Washington, D.C. 'P4 I2k IISk ';JIijm 01i P4.' ~i~jI Q5 ANNEX I Page 2 of 31 DEMOCRATIC AND POPULAR REPUBLIC OF ALGERIA LETTER OF ECONOMIC POLICY 1. INTRODUCTION 2. STRUCTURAL REFORMS 3. EXTERNAL SUPPORT FOR THE ECONOMIC REFORM PROGRAM 1. INTRODUCTION 1.1 The Current Situation Although facing a difficult situation, the Algerian authorities are pursuing a comprehensive economic reform program, which includes macroeconomic stabilization; incentives for private sector development and the establishment of an enabling framework; reform of public enterprises, public expenditure and the financial system; and strengthening of the social protection system. This last component is vital to the success of the program in the current situation. Algeria is going through a twofold transition in the political and economic arenas, which adds to the social cost of adjustment. If economic adjustmen -eates too heavy a burden, this could jeopardize these two transition processes. An optimum course must therefore be taken which accounts for both the need to move quickly, so as to ensure that the reforms are irreversible and to minimize their social costs, and the importance of avoiding a treatment so brutal that it risks being counterproductive in the current economic context. Too sharp a deterioration in living standards and the quality of education, health and the Governments social support services in general, might lead to widespread rejection of the reforms. 1.2 Medium-Term Outlook 1.2.1 Development Objectives Since there are many development objectives, they must be assigned priorities. The most important aim is to achieve a growth rate that will make it possible gradually to absorb unemployment or, if that is not feasible, to keep it at a tolerable level. The average annual rate of growth in GDP for the 1994-98 period should at least be equal to the rate of growth in the working population. Growth is necessary for creating jobs, but is not sufficient by itself. In addition to adjustments in the relative prices of capital and labor, which are important, it is essential to provide incentives to promote the kind of productive investment that will create jobs on a significant scale. The standard of living has steadily eroded during the past five years. This loss must be gradually restored, notably by pracicing a wage policy that will help increase the productivity and purchasing power of the low-income segments of the population, in conjunction with policies to control inflation. ANNEX I Page 3 of 31 Algeria has been in the throes of an acute housing crisis for several years. Housing is a major concern of the people. The construction sector should be given top priority to halt the deterioration in the housing occupancy rate, especially for low-income households. For these households, emphasis will be placed on low-cost housing, and a rational policy for both purchasing and renting housing will be implemented. In a broader context, increasing the supply of housing and resolving the housing crisis requires that the structural reforms undertaken in this sector be pursued. In the fields of education, health, and basic infrastructure, which are the responsibility of the State, the quantitative advances already made will be consolidated and enhanced from a quality standpoint. A fundamental economic objective is stabilization, reflected in a coherent set of relative prices (exchange rate, wages, and interest rates) and a rate of inflation which does not jeopardize the objective of improving purchasing power. The stabilization of the macroeconomic framework will be closely associated with the deepening of the adjustment process, which entails public enterprise restructuring, progressive privatization, development of the private sector, trade liberalization, and application of the rules needed to ensure the free play of competition. In addition, appropriate steps will be taken to revitalize the agriculture, construction and public works sectors, as well as the small and medium-scale enterprise sector. A more effective allocation of resources as a result of macroeconomic stabilization will give a boost to the housing industry and revitalize the construction sector. Agricultural policy will be geared to improving the trade balance in food products. Agricultural investment should expand, with intensive State participation in the infrastructure required to increase the arable land area. The deveiopment of small and medium-scale enterprises will be encouraged by a favorable macroeconomic framework, and especially by easier access to foreign trade. In addition, these businesses will now have access to activities that were reserved for public sector enterprises until recently. Economic growth should generate moderate increases in consumption, in line with the increase in, GDP. Essentially, the objective is to reverse the trend in recent years of a decline in average per capita consumption. At the same time, the savings needed to finance housing construction and other private investment will be encouraged. 1.2.2. The Eonomic Role of the State The shift from a centrally managed economy to a market economy calls for a redefinition of the role of the State in the economic domain. This new role will require the State to take responsibility for four essential functions: * The function of regulating the economy: The State must define and implement a macroeconomic policy that will provide for the transition to a market economy at the lowest social cost. It must ensure that the country's productive potential is preserved and expanded in an environment of fair competition; * The function of leadership: The State must adopt incentives to ensure that production is oriented toward increasing national wealth and the country's prosperity, in accordance with the general principles of the macroeconomic policy framework; ANNEX I Page 4 of 31 * The function of managing public property as owner and shareholder, pursuant to the laws of a market economy: However, the State should progressively withdraw from the productive and service sectors so that it can better fh4fill its functions in other areas; * Finally, the State as protector will play the role of arbitrator among the various segments of society by ensuring that the fruits of development are fairly distributed and in particular that the share of wages in value added is equitable. It will also protect and preserve public property, and will ensure that the quality of the environment is maintained and where necessary Improved. 1.2.3. The Social Role of the State If the State's role in the economy is to be redeined, its role in the social sector must be clarified as well. Besides die areas traditionally under its jurisdiction, the State will have to assume responsibility for addressing the negative effects of restructuring the economy and introduce mechanisms to protect the most vulnerable groups in society. It must make sure that poverty does not generate social problems arising from the people's inability to provide for their most basic aceds. In the field of education, the State must make sure that all school-age children have access to primary education. For secondary school and higher levels, consideration will be given to each individual's abilities, the needs of the economy for skilled workers, and the financial resources of the State. In the health sector, besides its responsibility in the field of public health, the State must provide access to health care for those segments of the population that cannot afford medical care and medicines. The State will promulgate and enforce labor legislation. The State has a responsibility with respect to maintaining the existing level of employment and fighting unemployment. It will, however, avoid taking any steps that would increase the rigidity of the labor market and impair its functioning. 1.2.4. Structural Reforms The purpose of the structural reforms is to put in place the mechanisms of a market economy typified by the free play of competition and by prices which reflect the relative scarcity of resources and their most efficient use. These reforms cover the prices of goods and services, with the exception of a very limited number of products to which, in the State's view, all citizens must be ensured access until the system of income transfer, which targets the poorest households, is fully effective. Similarly, interest rates and the exchange rate should reflect a situation of market equilibrium. As for wages, a floor will be maintained to ensure a minimum income for workers, while taking into account the need to promote the creation of new jobs. The scope of private sector activities will be expanded to promote competition by multiplying the number of economic agents, and eliminating monopolies and excess profits. The public sector will be confined to a limited number of activities for which it is impossible to apply market rules and to a small group of enterprises, which offer a public service or a similar service in the public interest and are regarded as vital to the economy. Public services not provided by the State ANNEX I Page 5 of 31 through its own resources and administration shall be performed, indifferently and without discrimination, by public enterprises or private companies. The State will complete its disengagement from competitive market activities and will strengthen its role as the public authority that ensures order, security for persons and property, education, the construction and maintenance of basic infrastructure, public health, and protection for the poorest, most vulnerable segments of the population. 13. Program of Action The program pursues and intensifies the reform process initiated in 1988. A major goal is for the prices of goods and services, the exchange rate, and interest rates to attain their equilibrium values over time. As regards the exchange rate, mechanisms which take into account the supply of and demand for foreign exchange must be applied to determine the currency's equilibrium value, thereby ensuring balance of payments equilibrium. In addition, maintaining a stable exchange rate means that inflation must be reduced and subsequently contained. During the program period, the transition from a fixed exchange rate regime to a variable rate system determined by the foreign exchange market will be made. Interest rates must also reflect the scarcity of capital and the true value of money. The monetary authorities will eliminate the causes of rigidity in the capital market so that positive real interest rates can be achieved, which is the only way to mobilize the savings needed to finance the investments of the business sector. The State will, however, ensure that the agriculture and housing construction sectors benefit from the investments they need via appropriate mechanisms. The liberalization of foreign trade, which is already very advanced, will be pursued by lifting import suspensions on all products, except for those goods which are banned for moral, health, religious, or security reasons. Budgetary and fiscal policy will be designed to improve tax collection by enlarging the tax base and improving the efficiency of the administration concerned, and by rationalizing government spending. The combination of measures planned in the area of public finance should make it possible to reduce and subsequently to eliminate the overall Treasury deficit. With respect to wages, a realistic policy will be followed in line with the objective of rationalizing government spending. This will require restraint in civil service wages, a policy that will be extended to cover non-autonomous institutions and enterprises whose wage policies can be influenced by the public authorities. However, for these categories of economic agents, the State will ensure that wages for workers at the low end of the wage scale are raised, based on the principle of an equitable distribution of the cost of adjustment among all the households in the country, but taking into account the need for enhanced productivity. Autonomous public enterprises will implement a wage policy which is consistent with their economic performance and budget constraints. A reduction in the overall Treasury deficit will also require a cut in spending on price subsidies for staple goods. These expoeditures will be progressively reduced by adjusting prices and by bringing them closer to economic costs. The safety net mechanism will be fine-tuned and oriented towards providing direct support to the poorest households. ANNEX I Page 6 of 31 The financial rehabilitation of non-autonomous public enterprises constitutes an additional burden on government finances. The authorities intend to clarify the status of these enterprises once and for all and to ensure that the impact of their financial losses on the Treasury is reduced. The measures to be applied will lower the budgetary cost of the public enterprise Rehabilitation Fund, by reducing this spending and eliminating it over the longer run. These measures will help reduce the State's role in the competitive economic sector. Pricing policy will be designed to increase the number of free prices and to bring the prices of subsidized products closer to their economic value, thereby reducing the amount of budget subsidies. In the area of public service tariffs, progressive adjustments will make it possible to move closer to, and finally to cover, economic costs. This will restore the financial position of the enterprises affected and eliminate the implicit subsidies which they have been receiving up to now. The deregulation of prices must be accompanied, however, by the establishment of a legal framework to promote the development of competition. A law will be promulgated to this effect. The State's withdrawal from the competitive market place will lead to the emergence of a private sector better equipped to take over all or part of these activities during the transitional phase. The State has put in place an institutional framework to encourage the development of the private sector. Investment will be promoted by simplifying administrative procedures and improving access to land for project sites. Investors will benefit from the new macroeconomic framework being established during the transition to a market economy. 2. STRUCTURAL REFORMS The structural reforms of the program will consolidate and strengthen the measures already adopted in connection with the transition to a market economy. The steps to be taken, most of which are contained in the policy matrix attached to this letter, relate to following areas: * macroeconomic framework; * incentives and development of the private sector; * reform of public enterprises; * reform of public expenditure; * reform of the financial system; * strengthening of the social protection system. For each of the areas listed above, certain steps have already been completed or initiated in an effort to step up the pace of reforms; other, no less important measures, which require more time to implement because of their nature, will be launched and/or completed in the course of 1995. ANNEX I Page 7 of 31 2.1 The Macroeconomic Framework: 2.1.1. Exchange Rate System The substantial adjustment of the exchange rate as an anchor for the stabilization process was followed by the establishment of fixing sessions in October 1994, in order to set the exchange rate of the dinar. This increased flexibility in determining the exchange rate is one step towards putting in place an interbank foreign exchange market in the context of the envisaged Extended Fund Facility (EFF). The Bank of Algeria will make the necessary preparations to establish this interbank market by the second half of 1995. 2.1.2. Liberalization of Foreign Trade During the period of the program, foreign trade policy will promote the effective participation of Algerian enterprises in international trade. Administrative procedures required for foreign trade transactions will be eliminated, and the system for encouraging the development of non-hydrocarbon exports will be strengthened. Work will proceed on developing information systems and significant databases for imports, exports, and other data on external markets, including prices and quality. Efforts will be made to improve the efficiency of the organizations and agencies involved in foreign trade data gathering and research. The procedures for overseeing foreign trade flows will be adjusted to bring them into line with international rules, and wide-ranging efforts will be made to promote competition. 2.13. Mobilization of External Resources The hydrocarbons sector will continue to play an important role in mobilizing external resources. Exports of hydrocarbons will generate some US$30 billion to US$45 billion during 1995-98, depending on the price of crude oil during that period. However, large investments will be required to improve the exploitation of oil reserves and to increase gas export capacity. It should be noted that a major effort has been made to promote private investment in this sector. Also helping to bring about balance of payments equilibrium will be non-hydrocarbon exports, facilitated by improvements in the efficiency of public enterprises, the development of the national and foreign private sector, and dynamic exchange rate management that makes good use of the country's comparative advantages. Direct foreign investment will be encouraged, so as to help bring the balance of payments into equilibrium without worsening the country's external indebtedness. Privatization is one way to encourage this investment. In addition to external resources generated by exports of hydrocarbons, other exports and direct foreign investment, management of the external debt will aim to provide the additional external resources needed for balance of payments equilibrium. The rescheduling of the external debt eligible for treatment by the Paris Club and the initiation of negotiations with concerned foreign banks to reschedule the private debt constitute the basic framework for debt management in the context of economic reform. ANNEX I Page 8 of 31 2.1.4. Budget Policy In the framework of the stabilization program, budget policy will help reduce inflationary pressures, notably by promoting a moderate wage policy. In a broader sense, it is necessary to reduce the absorption of resources by the State so as to make more resources available to the productive sector. To accomplish this, the State will also have to free up budgetary resources to contribute to the completion of the financial restructuring program for the banks and enterprises. 2.1.5. Monetary Policy and Interest Rates Measures to liberalize bank interest rates and to raise the rates of the household savings institution (CNEP) and Treasury bonds are consistent with the recent substantial increase in the rediscount and overdraft rates of the Bank of Algeria. The introduction of a flexible intervention rate on the money market has initiated a move by the Bank of Algeria to indirect regulation, notably based on a liberalization of interbank money market rates. These liberalization measures will be accompanied by the maintenance in 1995 of bank credit ceilings on non-autonomous public enterprises (EPS). A key step in the move to indirect monetary policy instruments was the introduction in October 1994 of obligatory bank reserves, which bear interest of 11.5 percent. The Bank of Algeria will set up an auction system for central bank credits during the last quarter of 1994. The growth of the money supply will be restricted to less than 17 percent in 1994 and 14 percent in 1995. 2.1.6. Wage Policy The authorities will apply a moderate wage policy to the civil service and to the public institutions under the jurisdiction of the ministries. At the same time, however, they will make sure that the purchasing power of low-income households is protected. In the economic sector, economic agents, whether public or private, will practice an appropriate wage policy in line with their performance, labor productivity gains and budget constraints. For reasons of equity and social justice, all employers will be required to pay a minimum wage. 2.1.7. Employment Promotion The authorities are aware of the fact that macroeconomic stabilization, and especially control over inflation, could lead to increased unemployment. To ward off this undesirable side-effect of adjustment, steps will be taken to encourage the maintenance of existing job levels and the creation of new jobs for young people coming onto the labor market, without hampering the fluid operation of that market. As for salaried employment, productive investment will be promoted and every effort will be made in the execution of public works projects to utilize labor-intensive techniques. Self-employment will be encouraged, especially among young people who want to set up their own businesses, by providing job promotion funds to make up for the shortage of capital among young businessmen. ANNEX I Page 9 of 31 2.1.8. Pricing and Rate-Setting Policy Efforts will be pursued to deregulate prices and in general to strengthen the role of market forces in setting prices. The program to reduce explicit and implicit subsidies on certain products will result in a periodic readjustment of prices on the domestic market. The same will be true for rates charged for certain public services, so that they will adequately cover economic costs. 2.2. Development of Incentives and Competition 2.2.1 Objectives The authorities are planning to intensify efforts to liberalize trade and industry so that a spirit of initiative can develop. They will create the conditions for enterprises and businesses to adapt freely to market situations and values. All obstacles and procedures that might hamper the free play of market forces will be eliminated. Improvements will be made to the incentive framework for promoting businesses and their economic and financial profitability. Professionalism and progress in trade and industry will be encouraged. Mechanisms to monitor commercial practices will be developed so as to eliminate the abuse of monopolies and/or dominant positions. Measures to facilitate competition will be implemented and maintained to promote productivity increases and cost-efficient production, governed by the basic rule of "market sanction." 2.2.2. Promotion of Competition A law on competition is an essential instrument to establish healthy competition among economic agents in a market economy. A draft law will be submitted to the National Transition Council. This law will be promulgated, and the implementing regulations drafted and published, during the next few months. A "competition council" in charge of enforcing the laws and regulations on competition and furthering the competitive process will be set up under this law. Competition in the market will be consolidated by pursuing efforts to liberalize the prices of certain products on the basis of the status of the market and competition. Rules governing pan-territorial pricing have been abolished for products for which prices are either freely determined or subject to regulated margins; pan-territorial pricing is now part of enterprises' internal policies, when necessary at all. A study will be conducted to determine how best to handle the high costs of transportation for supplying the wilayas in the southern part of the country with essential goods. Finally, the requirement to declare producer prices will be eliminated when the law on competition comes into effect. 2.23. Organiation of Foreign Trade The authorities are continuing to implement the plan to lift suspensions on imports of certai products, as specified in the stabilization program, so that all such suspensions will be abolished, with the exception of imports of articles banned for security, health, religious, or moral reasons. It was out of a concern to ensure a secure supply on the market of a very limited number of widely consumed products that the authorities were led to issue regulations defining so-called "criteria of professionalism" for importers of these products. The effectiveness of these regulations will be reviewed in 1995. The intention is to abolish them, once there are enough operators on the market to guarantee competition and a steady supply of these products. All other administrative procedures applicable to foreign trade will be eliminated. ANNEX I Page 10 of 31 23. Development of the Private Sector 2.3.1. Objectives Development of an entrepreneurial private sector is critical for the proper functioning of a market economy. Because private small and medium-scale enterprises in Algeria were marginalized for a long time, the measures adopted to ensure equal treatment with the public sector, especially as regards lifting administrative restrictions and allocating resources, must be fully implemented and the reforms which liberalized the legislative code governing productive investment must be intensified. 23.2. Promotion of Investment The new Investment Code enshrines the freedom to invest. It provides for the creation of an investment support agency to serve as a "one-stop" window in response to a public administration which at present remains characterized by certain cumbersome procedures and red tape. The implementing regulations stipulated in the Investment Code, notably the executive decree defining the responsibilities, organization and functioning of the investment support agency, have been published. The authorities have, however, decided to postpone for a year the implementation of interest rate subsidies on investment loans, until the operation of the Investment Code has been reviewed in consultation with the World Bank. 2.3.3. Promotion of Small and Medium-Scale Enterprises The economic reforms initiated to effect the shift to a market economy call for the rapid implementation of the necessary instruments and measures to stimulate private investment. Economic recovery will depend, among other things, on promoting small and medium-scale private businesses. To achieve this, and to reduce the cost of the initial investments by businessmen, legislation will make it possible to purchase low-cost used equipment for investments that lead to the rapid creation of permanent jobs. Recourse to imports of equipment bought on the secondhand market will also make it possible for entrepreneurs to benefit from the relocation of foreign investments to other countries. The legislation will be revised accordingly. Technical assistance is another part of the policy framework to promote small and medium-scale enterprises. A program to develop entrepreneurs, combining training activiies, services, and assistance to enterprises, devised after consulting with the Algerian associative movement for small and medium- scale enterprises, will be presented to the World Bank with a view to involving the latter in its execution. A thorough knowledge of the private sector is essential to the adoption of measures required to expand its contributions to the recovery effort. The authorities have agreed to the terms of reference for an evaluation of the private sector (PSA). The authorities will contribute to this study which will be conducted by the World Bank. The study will be completed, and itr recommendations will begin to be implemented, during 1995. ANNEX I Page 11 of 31 2.4 Reform of Public Enterprises 2.4.1 Objectives To reduce their burden on the government budget, public enterprises must increase their efficiency by improving their management in a context of macroeconomic stability. They must also increase the proportion of their output for export by increasing labor productivity and improving quality. Implementation of a coherent privatization policy will help to reduce and eventually eliminate the costs currently borne by the State as a result of the inefficiency of certain public enterprises. 2.4.2 Pubi Enterprises From now on, public enterprises are to be managed on the basis of the rules of a market economy. They must establish rational business strategies and adjust their output to domestic and foreign demand. Managers will be evaluated on the basis of management contracts which establish objective criteria. This will induce them to adopt measures for rigorous management in order to eliminate the deficits of these enterprises. In this way, public enterprise managers will be made fully responsible as the State plays a more neutral role in the day-to-day running of these enterprises. The organization of the ownership and management of the State's commercial capital will be re- examined with a view to revising the 1988 laws on the autonomy of enterprises. The revision of these laws will determine the future of the Participation Funds. The non-autonomous public enterprises will be restructured in accordance with the framework adopted by the authorities. This policy will hinge on the contractual commitment of the enterprise managers to implement restructuring plans for these enterprises and to mobilize the financing of the rehabilitation investments contained in the plans. After examining the restructuring plan, the authorities will issue their notice of non-objection or they will decide on the future of the enterprise concerned. In the case of non-objection, the authorities will proceed to financially restructure (assainissememinancier) the enterprise in question and will see that It is provided with sufficient capital to enable it to pursue its restructuring under positive conditions. Once the enterprise is financially restructured, it will become autonomous in accordance with the procedures currently in effect. By way of exception, certain of these enterprises may receive State assistance in the form of a direct contribution toward the financing of part of their rehabilitation investments (see Appendix A of the policy matrix). Among the measures designed to alleviate the burden on the State budget of covering the losses of non-autonomous enterprises, 88 non-viable local public enterprises were recently closed. Depending on their financial situation, the remaining local public enterprises will either be financially rehabilitated and made autonomous, or immediately made autonomous, or liquidated, if they should prove to be non- viable. 2.4.3 Privatisation The ultimate aim of privatization is to establish a new configuration of the economic landscape characterized by the predominance of private initiatives in the competitive sectors of the economy. Privatization will have to be gradual and based on a predetermined policy for the State's withdrawal from commercial sectors over the medium term. Preparations for, and implementation of, privatization must be carefully developed and executed. ANNEX I Page 12 of 31 At the present time, the legal framework for privatization is defined by Articles 24 and 25 of the supplementary Finance law for 1994. These articles and their implementing texts set out the methods for selling off the assets of economic public enterprises and for private participation in their capital stock. This legal framework will be enlarged by a law on privatization which will define the modalities of privatization, the agencies in charge of this operation, and all other general conditions required for the process to be carried out correctly. The World Bank has been asked to provide assistance to the agencies responsible for privatization to ensure that the process takes place under the best possible technical conditions. 2.5 Reform of Public Ependiture 2.5.1 Objectives The reform of public expenditure aims to ensure greater control over government spending so as to contain and then absorb the Treasury's overall deficit. This will require improved rationalization of expenditure commitments, which will in turn facilitate the control of projections and their realization. 2.5.2 rFiandag the Investments of Public Enterprises Since 1988, the Treasury has withdrawn from the financing of the investments of autonomous public enterprises. The investment program of autonomous public enterprises, committed before the end of 1988, is financed solely by repayments on medium- and long-term borrowing contracted with the Treasury. This source of financing for autonomous public enterprises will be abolished as of March 1995. 2.53 Future of the RehablHtation Fund Appropriations for the public enterprise Rehabilitation Fund are being charged to the national budget to permit the financial rehabilitation of enterprises, notably as they are converted to autonomous enterprises. The scope of this fund will be reduced progressively with the objective of phasing it out over time, in conjunction with the policy for restructuring public enterprises and in accordance with Appendix B of the policy matrix. 2.5.4 The Efficiency of Public Expenditure World Bank staff are involved in a review of the efficiency of public expenditures, whose recommendations, to be issued in 1995, will be reflected in appropriate measures to achieve the formulated objectives. 2.6 Reform of the 1oancial Sector 2.6.1 Objectives The objective is to speed up the transformation of the financial sector, particularly by making significant progress toward privatizing existing banks. In order to provide a better and lasting foundation for the operating effectiveness of banks, financial establishments and other financial institutions, sound ANNEX I Page 13 of 31 financial intermediation on a broad scale is a prerequisite for effective resource allocation in the context of strong and lasting economic growth. 2.6.2 Steps to be Taken The institutional action plans for banks are designed to strengthen them and improve their operational efficiency, with a view to opening access to their equity capital. The progress achieved in implementing these action plans is one of the criteria governing the eligibility of existing banks for official banking licenses under the Money and Credit law. The purpose of the on-going audit of the 1993 financial statements of the banks is to identify more precisely the steps to be taken to improve their capital structure, including their recapitalization in mid-1995. The strengthening of the banks' capital structure, in conjunction with the respect of capital adequacy requirements, is another criterion governing the eligibility of existing banks for banking licenses. The evolution of the minimum capital adequacy ratio over time is defined in the new directive amending and supplementing the prudential regulations. Improvements in the application of the prudential regulations will be supported by the reinforcement of the capacity to supervise banks and financial establishments. Within this framework, management contracts will be introduced which will make bank managers responsible, notably for observing the minimum capital adequacy ratio in a context of hard budget constraints. The need to improve the operational efficiency of the financial sector underscores the necessity of promoting the creation of new banks and financial institutions. A new financial establishment was authorized by the Money and Credit Council in September 1994. The study on incentives to encourage the creation of banks and financial establishments will focus on identifying conditions conducive to strengthening the financial sector in an environment of competition and increased efficiency. This is the context for the objective of introducing, in 1995, a legal framework for the establishment of mutual credit institutions. The ultimate objective of the financial liberalization process is to achieve completely deregulated lending rates in the longer run. As part of this process, a draft law liberalizing the insurance market is under consideration by the National Transition Council. 2.7 Strengthening the Social Protection System 2.7.1 Objectives To help mitigate the impact of the adjustment measures to be adopted as part of the package of economic reforms, new types of social protection have been instituted. These involve unemployment insurance and early retirement plans for employees subject to lay-off for economic reasons. A social safety net system has also been put into place to ensure the social protection, integration and inclusion of the underprivileged segments of the population. ANNEX I Page 14 of 31 2.7.2 Improvement of the Protection System for Workers Laid Off for Economic Reasons The new system of benefits for workers laid off for economic reasons has made it possible to move from a system of a one-time severance payment, the amount of which depended on years of service, to a true income replacement system, financed jointly by all the parties involved (State, workers and employers). This system, based on a funding mechanism including worker contributions, creates greater solidarity through the sharing of unemployment risk, and significantly reduces the burden on employers. The purpose of the new system is not to support non-viable enterprises or to be part of the effort to rehabilitate enterprises. These are new measures, in no way comparable to the operations carried out by the public enterprise Rehabilitation Fund. The law creating the Unemployment Insurance Fund has been promulgated. It gives the fund administrative and financial autonomy under a tripartite management unit, comprising workers, employers, and the State. In conjunction with the World Bank, a review of the operation of the system of benefits for workers laid off for economic reasons is planned, which could result in recommendations and proposals for its improvement. 2.73 Reform of the Social Safety Net The former social safety net system, introduced in 1992, has been replaced by a new scheme in effect since October 1994. The new scheme is based on fresh thinking and a new approach designed to provide the poorest segments of the population with social protection. Its objectives include: * a policy of consistent and transparent aid within a comprehensive framework of solidarity; * a campaign against all forms of marginalization and social exclusion of the disadvantaged segments of the population using appropriately adapted programs to foster integration and improvements in living standards; and * accessibility of basic public services to the underprivileged segments of society living in pockets of poverty. The benefits provided by the new system are: * a lump-sum solidarity allowance (AFS); and * payment for public service activities (IAIG). The AFS is paid to heads of families and to single persons who live alone, who have no income and are 60 years of age and over, and to those who are physically disabled and unable to work. The IAIG is paid to the member(s) of families without income; or to single persons who live alone, have no income, and are of active age who request participation in the AIG. The payment is made on a prorated basis determined by the number of full days of public service performed, up to a maximum monthly limit. These public service activities are performed in a spirit of solidarity and do not constitute a work relationship. ANNEX I Page 15 of 31 APS and IAIG recipients are considered social security beneficiaries and therefore qualify for maternity/health insurance, and workman's compensation in the case of AIG participants. The new system is thus based on: * "self-targeting," which is the basic method for persons eligible for the IAIG; * targeting based primarily on the lists established for the former social safety net system (ICSR) in the case of AFS recipients (the elderly and disabled persons); * supervision and management by the local authorities who have acquired a great deal of experience in organizing programs of community interest and public service activities, particularly in the form of community development and local technical assistance programs, which have been in existence for over 20 years and have made it possible to carry out many important projects. The AIG programs have three basic focal points: * maintenance and rehabilitation of infrastructure and public property in rural and urban areas as well as habitat rehabilitation, with special focus on those used by disadvantaged populations; * social welfare, health, educational and cultural activities; * preparation, encouragement and incentives for self-employment through retraining programs, vocational training geared to self-employment and microbusinesses. This will be done in liaison with job promotion, public service work and neighborhood projects. Other activities are planned to encourage and promote the creation or expansion of microbusinesses, particularly targeting unemployed youth and workers who have lost their jobs. These activities will also include training and retraining programs, and will involve the associative movement (NGOs) in selecting and implementing AIG programs. 2.7.4. Evaluation and mprovement of the Social Safety Net The authorities will ensure that the new social safety net system achieves the best possible results while respecting budgetary constraints. With this in mind, the following evaluation system will be set in place: * A monitoring and control system, involving all the government agencies concerned and the associative movement, with the goal of providing technical assistance to the communes and local collectivities. * Periodic evaluation at the community, daira, wilaya, and national levels. The planned system is not a fixed, but an evolving one. It is extremely flexible and lends itself to precise, periodic evaluations with a view to improvement. The World Bank has agreed to provide ANNEX I Page 16 of 31 financial and consulting assistance for a study to evaluate the operating conditions of the new social safety net system with the goal of improving its performance and efficiency. To provide better information on the situation of the poorer segments of the population, a study on living standards has been initiated. It will be completed during the next twelve months and will be used as a basis for a study on poverty. The terms of reference of the poverty study will also be determined during the next year. 2.8 Indicator System As an aid to monitoring the economic reform program, the authorities have drawn up a list of quantitative indicators. The authorities will provide the World Bank with all the information necessary for calculating the indicators in question prior to supervision missions relating to the Economic Rehabilitation Support loan and will jointly examine the evolution of these indicators during such missions. The indicators are shown in an annex to this letter. 3. 1ETERNAL SUPPORT FOR THE ECONOMIC PROGRAM 3.1 Multilateral Support (Other than from the World Bank) This economic program has already received the support of the International Monetary Fund in the form of a one-year standby arrangement (May 1994 to April 1995). The IMF standby arrangement has made it possible to release the second tranche of a balance of payments support loan from the European Union. The program has been favorably evaluated by the European Union. It has the support of the Arab Monetary Fund. It is expected that other multilateral institutions, including the African Development Bank, will support it. The Paris Club agreed to reschedule Algeria's public debt following the approval of the IMF standby arrangement. Under this framework, certain bilateral agreements have already been signed with the authorities of the countries in question. Negotiations with private banks have been initiated in order to define the modalities for treating the private debt. 3.2 Bilateral Support Algeria's partners support the program. As a sign of this support, certain partners concluded or are planning to conclude bilateral agreements to put in place concessional credit lines to fmance imports. 3.3 The World Bank's Support The World Bank has been supporting Algeria's econtic reform program for many years. The Algerian authorities are hopeful that this support will be maintained and deepened. Implementation of the program described in this letter has already made it possible to release the second tranche of the ANNEX I Page 17 of 31 World Bank's EFSAL and the associated cofinancing by the Export-Import Bank of Japan. The Algerian authorities hope that the World Bank will renew Its support of the economic reform program via: * financial assistance in the form a quick-disbursing Economic Rehabilitation Support loan, in a single tranche (ERL); * a technical assistance program focussing particularly on: * obtaining more information on certain sectors, including a study to be conducted on the private sector; * a study on public expenditure, with the aim of achieving better control and management of these expenditures; * improving implementation of the social safety net; * implementing privatization. * the following loans: * a structural adjustment loan; e a loan to support the reform of the construction and housing sectors; * an agricultural support loan; * a loan for the social safety net; * a health sector support loan; * a toxic waste treatment loan. The World Bank's support in all these areas is pivotal during this period of economic reform in Algeria. ANNEX I Page 18 of 31 ANNEX LITER OF ECONOMIC POUCY INDICATORS Macroeconomic framework * GDP growth (annual indicator) * money market interest rate (monthly indicator) * consumer price index (monthly indicator). Private Sector Development and Incentives * estimate of value added by the private industrial sector (annual indicator) * number of new private companies set up annually: sources - Ministry of Commerce and Ministry of SME (annual indicator) * average customs tariff weighted by imports, in as much detail as possible (annual indicator). Reform of Public Enterprises * list of PEs partially or totally privatized or liquidated, differentiating between national and local PEs and including their turnover (annual indicator). Public Expenditure Reform * Treasury deficit as percentage of GDP (quarterly indicator) * cost of Rehabilitation Fund as percentage of GDP (quarterly indicator). Financial Sector Reform * overdrafts as percentage of bank credit to the economy (quarterly indicator) * equity capital ratio by bank (annual indicator). Strengthening the Social Protection System * Number of beneficiaries of early retirement or unemployment insurance (annual indicator) * Number of beneficiaries of the social safety net (annual indicator).7 2/ Separat indicatom for the APS and AIG prognms. ECONOMIC POLICY REFORM MATRIX (11I4I94) Component Measures takeu before Measures to be taken before Measures to be taken during the July 1994 presentation of the ERL to the 12 months following premention Board of the ERL to the oard Macroeconomic framework Foge - substantial exchange rate adjustment, - impknentation of fixing sessions - preparation by dke BA of the intr~ including a devaluation of 40.17% in between the Central Bank (BA) and the ducton, during the second semester of April 1994. banks to deterine *e exchange rate of 1995, of an interbank foreign ex- dhe dinar according to a mechnim change market. ag with e IMF. Trade lberalization - dissolution of the interminiterial - elimination in July 1994 of a dozen - atniination of au pot sions commitee overåeing imports, and products from the list of import mpen- except for a list of product prohibited replacement of import licenses (cahiers sions. for religios, moral, healdh or seoity des charges) by professional oriteria reasons. for sensitive and bask commodities; reduction in the number of ~spended imports from 107 to 85. - elimination of a broad range of prod. - eimino n of barey, coffee and - eliminadon of sugar before Dece~- ucts from e list of commoditie aub- infant form1a from the list of com- ber 31, 1994) and pharmaceuticals ject to professional criteria, including modities subject to professional crit- (before June 30, 1995) from de list of onstruction materials and agricultural ria. commodites subject to profesional input. criteria. - review of the professional critada system. Evaluation of 0e reita and adoption of jointly agreed recommen- dations for adapting the system a necessaiy. Fiscal & Budetary - implementation of a senies of fihcal - implementation of a second ~eries of PjNO neasures (foreseen in the standby fiscal meares in 1995 (a~er consul- agreement), including d ~iminaion of tation widi te IMP), including a we- the compensation tax and introduction duction inde margin rate on person- of an excise tax (tae spé~que ad- al income taxes from 79% to 50%, a ditiomwele). reduinn in the number of VAT rates, and an expansion of is base. - implementation of a series of mea- - reduction of the Treasury deficit sures to limit budgetary expenditures in from 9.4% of GDP in 1993 to 5.0% confor~ity with the stand-by agree- in 1994; acceleration of deficit reduc- ment. tion in 1995. Component Measures taken before Measures to be taken before Measures to be taken during July 1994 presentation of the ERL to the the 12 m ~oths foowing Board presentation of the ERL to the Monetary nolicy and - replacement of dhe 20% oling on - introduction of mandatory reserve - achievement, by die end of 1994, of lending rates with a o~iling of 5 per- requirement for banks remuneated at positive rel intrest rates on bank centage points on bank margins; in- 11.5%. The perspective oreases in deposits with respe to de annuulized crease in reference interest ratos of the reserverate will permit the inflation rae antäcipated within *e about 4 percentage points. absorption of AU potetial sources of fram~work of the stand-by agrmement. addi~ional liquidity outside of de mon- etary sytem.L - esta of redit ciing (by - estnbishmont of redit ceilings (by - eshabishment of redit cefiings (by bank) for tho 23 non-autonomous pub- bank) for the 23 EPS for the last quar- quarter and by bank) for the BPS for lic enterprises (EPS) for the second and ter of 1994 in conformity with the 1995, which have been agreed befor- third quarters of 1994 in conformity stand-by agreement. hand with the Bank. with the stand-by agreement. -establishment of an objective for broad - respect of the objective for M2 money (M2) of a maximum increase of growt for 1994, which has been 15% in 1994. adjusted to 17%; establishIment of an objectivo of less than 14% for 1995. - liberalization of the interbank money - review of progress in developing the market rates. money market, notably wit respectio the implementation of an adjudication system for central bank rdit. Waae oliev - establishent of a ceing on the - respct of tho ceing on salary in- inoreasc in salaries for civil servants creases. and EPS efployee dving the period of the stand-by agreement. $ubsidvoliev - increase (on averag)betwoen March - futherincrease in September 1994 in - continualion of the policy ofreduc- and June 1994 in the prices of subsi- e prices of subsidized food staples ing prico subsidies in paraDel with dized food staples of 56%, and in and in controled energy prices in improvements in the efficiency of the controlled energy prices of 40%. conformity with the stand-by agre- social safety net. ment. 1'- ANNEX I Page 21 of 31 C-gi Ibb d x0 ii ' ANNEX 1 Page 22 of 31 h 12, 3 Ck jEi 1 1 h111 i Component Measures taken before Measures to be taken before Measures to be taken during July 1994 presentation of the ERL to the Board the 12 months following presentation of the ERL to the Board ReforM of public enterises - launching of a restructuring program - adoption by the Council of Govern- - implementation of the privatization for public enterprises, and passage to ment of the privatization policy pro- program in priority sectors. autonomy of almost 400 public enter- pared in consultation with the Bank. prises (EPEs). - opening of the capital of EPEs up to - presentation to the SGG and adoption - publication of the decree cited in 49%, and authorization to sell EPE of the implementing decree for article column three. assets to the public sector. 24 of the 1994 complementary Finance Law concerning the sale of EPE assets. - preparation of a draft law on privat- - promulgation of the law on privatiza- izaion in consultation with the Bank. tion. Publication of the implementing texts after consultation with the Bank, and implementation of these texts. - launch of a pilot privatization pro- - pursuit of the pilot privatization pro- gram for EPEs. gram for EPEs with the support of the Bank. - preparation of a technical assistance - implementation of the technical program for the Ministry of Industrial assistance program cited in column Restructuring and Participation three. (MRI). - establishment of a legal framework - publication of a decree establishing for the dissolution and liquidation of the modalities for the dissolution and non-autonomous public enterprises and liquidation of non-autonomous public EPICs in the 1994 Finance law. enterprises and EPICs. - dissolution of a group of 88 local PES - implementation of the liquidation of (EPL) in accordance with regulatory the EPLs concerned. procedhures. Page 24of 31 jt~~~ ti1'1 ___ .1 i<* 111: qu 0h '144 21i ANNEX 1 Page 25 of 31 1 :1 II tu 1 tt 0 all £ Iii i~Iit 8 2' ~ Ii*u tt ~* .a. ~ ~u 1~it~t ~~iii 2 il ~I'I ~I, 1 ~jff~ i~ [Ii III ii~I I 0 Component Measures taken before Measures to be taken before Measures to be taken during July 1994 presentation of the ERL to the Board the 12 m ~onts following presentation of the ERL to the Board Reform of the financial sec - annisi and institutional audits of the - completion of audit reports of the - completion of audits of end-1993 and 5 public banks on fhe basis of their end-1993 balance sheets for at least 3 end-1994 bank balance sheets and their acounats at Oe ond of 1991. banks. comn ication to the Bank. - enactment of the law on money and - establishment of eligibility criteria for - approval of licenses for exisng credit, and establiment of approval of licenses for existing banks. banks which meet criteria. capitaitinn d=sholds for banks and financial institutions. - adopdon of an approach ~imed at - publication of the regulatory texts for authorizing the estabishment of credit the establishmn~t of ~redit unions. unions. - agreement on th terms of reference - completion of the study cited in for a study to identify measures to colun three, and initiation of imple- encourage the creation of privat bank- mentatin of agreed upon recommen- ing institutions. dations. - approval by BA of inst1utional - implemetation of the insdtutional development plans for existing banks, development pla of existing banks and the inifiation of a recapimliation with a view to opening ther capital to program for the banks. private investors. - agreement on a model mangenent - signature and implementation of the contract between the Ministry of fanagement ontracts. Finance and the manager. of the banks, holding the latter responsible notably for respeeng the capital adequacy requi*ent. - enactment of prudential regulations - publication of an instruction expand- - implemenation of the measures prepa d in collaboration with the ing the prodential regulations, including required to allow existing banks to Bank, the establisment of the minimm meet the mininmm capital ratio cited capital adequacy ratio for existing in coun 3, including expenditures to banks at the end of June 1995, afler be included in the 1995 State budget consultation with the Bank. (after consultation with the Bank). fQ t4o ANNEXI Page 27 of 31 l itl eu t t is Page 2of31 = lii .1 i iil iii ~~1 ANNEX I Page 29 of 31 Appendix A Framework for Implementation of the Restructuring of the 23 Non-autonomous PEs The 23 EPS are the subject of medium-term restructuring plans, established on the basis of audits carried out by consulting firms and with the collaboration of the internal departments of the enterprise. As these plans are finalized, the authorities examine them, revise them if necessary, and either issue a non-objection or decide on the future of the enterprise. The non-objection by the authorities of the restructuring plans results in three simultaneous consequences: (a) The authorities inform the managers of the enterprises of the termination of coverage by the State of any financial losses that the enterprises may incur from the date of their passage to autonomy, as well as the termination of all guarantees. (b) The authorities invite the managers of the enterprises to sign a time-bound contract which obliges them to: (bl) implement actions aimed at achieving the objectives and performances contained in the restructuring plans; the supervision of the implementation of the restructuring plan is incumbent on the General Assembly of each of the enterprises concerned. (2) propose for approval, within a period of 12 to 18 months following the signature of the contract, firm and definitive financing plans for the rehabilitation investments proposed in the restructuring plans. The financing plans can be comprised only of self-financing, bank credit, and receipts from the sale of assets and/or the opening up of the capital of the enterprise, as appropriate. (c) in counterpart of the commitments by the managers, the authorities commit to: (cl) proceed with the financial restructuring required to clean up past debts (assainissemet jinancier) with the objective of passing the enterprise to autonomy. ANNEX I Page 30 of 31 The financial restructuring measures will consist of: * treatment of the materprlse's Indebtedness, and * an allocation of capital (capital, fonds propres, et fonds de roulement) through: (a) the transformation of the enterprise's debts and (b) a cash transfer, depending on the situation of each enterprise. These measures will be determined for each of the six enterprises in the first group before November 30, 1994. A global ceiling on cash transfers will be established for the nine enterprises of the second group before December 15, 1994. The financial restructuring measures for the third group of eight enterprises will be evaluated following the elaboration of their restructuring plans. (c2) On the basis of the available restructuring plans, the authorities will evaluate the amount of the rehabilitation investments and establish: * before November 30, 1994, for the first group of six enterprises, the ceiling on the amounts of potential direct support from the State, and * before December 15, 1994, for the second group of nine enterprises, the global ceiling on the amount of potential direct support from the State. This ceiling will not exceed 113 of the total amount of rehabilitation investments. The intervention, under exceptional circumstances, of the State will be limited to a list of enterprises which will be determined before November 30, 1994, for the first group of six enterprises; before March 31, 1995, for the second group of nine enterprises; and before September 30, 1995 for the third group of eight enterprises. N.B. Unless the State decides otherwise on the future of these enterprises, the projected calendar for the passage to autonomy of the 23 EPS is as follows: * The first group of six enterprises before December 31, 1994. * The second group of nine enterprises before June 30, 1995. * The third group of eight enterprises before December 31, 1995. ANNEX I Page 31 of 31 Ap~ diB 14~r of the Restrcturng ~d (FA) Binenditure Cate.ory rpsdAto 1. Differentia of commercial bank charges on - Tranr from the PA at the end of 1996; a ur hat dato, mese cxrnal borrowind conated for the account of pn~æmare to be treated according to the same procedures as the State before April 1990. dk p deb. 2. Repaymet of remsucturing bond d (b e - Transfer from the FA as of October 1, 1996; aRer &at dato, thoe rachat. obligations an to be treated accordng to *e same proccdures as ie pubic debt. Advance repaymets to the badks by ie Treasury wig be ha~ed ~ier April 1, 1997. 'Ie amo~nt of ese advance repaymets wil not exceed 2/3 of to total am~ot afioated to repay fbo pubio debt. 3. Finan~al restruc~uring alocations (assamr- - Eablis, at the end of 1994, dm definitive "it of enterprises ssemenftnander) at te moment of transfor- wbich can poten~ialy benf& fram tes afloca~ions at the moment mnion of an enterprime's legal d~etu. of die transformation of heir legal statute. AR alloations to he 23 EPS wiin the fra ework of eir ansaidssemenjander must be acompanied by a medium-tn restructuring plan including a firm flning plan (if needed) for rehablitation investmenta. 4. Service payment (to te bank) for PE over- - Cloe (in acconing terms) at Om end of 1994. dras frozen by te Stat. 5. apt i of &e b e - Cose afer te recapiratiztian of mid-1995. 6. Recapithiation of PEs. - Cioso, in terms of commi~tment, at the end of 1994; continn paymnts until te relevant dipositions of dhe 1995 Pinane aw ar amend 7. Foreign exchange loses of PEs and EPICs - Close before Ue end of 1995, aier having made advance pay- on ~igible debs contracted before the end of menta if needed) to cover lone on eligiblo mau~rities which fafi 1989. du, ~er that dato. Utilizntin, if psible, of part of the supple- meatary budgetary afocation for foreign exchange losse. pro- grammed under te stand-by to flnane these advance payments. 8. Coverage for foreign ex~hange lomses by - Give priority to: (i) EPICs, (i) enterpises subject to price ceil- enterprises (public and private) on 1994 mauri- ing (OAIC, etc.), and (ii) if posible, te advance payments noted ties. in (7) above. The rema~nng eaterprises are to be treat d equaly through a mochanim to be deter~ined. 9. Operating subiies. - Cose at the end of 1994, wihout any furiher payments. 88* 8*88 8 88 8* tj I '' 8 888 138 g 88: 88 8 8 3 3 4 y ' 88 ~3~S 8 ~ 8 ~ 8 88 8 8 8 9 8 8 ; 8 8 8 I -- - ·· g 8381 88 888 g6~ ! i i a L *1 i i* 3 i o ý t øhøb tn, u., . st. $e. s cldte, t tE .i... ad.. .. .eedss 1 AD= u Pap i of 6 DEMOCRATIC AM POPUAR REPUBUC OF AIGERIA ECONOMIC REIALITATION SUFPORT WAN SELECTED MACROECONOMIC INDICATORS TMLE I KEM IMR0Ei0N5C INDICATU8 Algetla Ky Economic Indicators 1984 195 1986 1987 1988 1989 1990 1991 1992 1993 1994 aP Orowth Rate 5.6% 5.6% -0.2% -0.71 -1.9% 4.9% -1.31 -1.29 1.6% -1.1K 0.6% rØD Gr~uth Rate 4.3K 6.0% -16.1% 0.11 -6.6 4.8U 0.81 1.11 -.1% 1.1% -2.6% W~P/Pr Capita Growth Rate 1.9% 2.1 -3.51 -2.31 .5.81 2.21 -3.8X -5.0% -0.41 -.9% -2.1% COn~ o i Cap. Growth Rate 2.O 2.1% -2.4% -6.0% -9.8X 4.2% -4.9X -6.1K 2.9% -5.3% -1.5% NLT 0 Inct. MNF (U) 14124 16380 19482 500 2417 25258 27061 26955 26017 25057 27806 short Trm Døbt <UM$> 794 746 1000 1315 1621 180 791 1239 793 79 693 Total Dbt (Incl. ST 8 >IF 14918 17127 20482 24395 26038 27090 27852 28194 26810 25150 28499 MLT 00 (inct. INF~/XGS 1/ 105.31 118.5K 230.8 229.9 280.7% 20. 197.8 206.3% 201.3% 212.0% 254.7% short T Gra L0/Xas 5. 5.4% 11.8 13.1% 18.6% 17.5K 5.81 9.5 6.11 6.71 6.31 Totat om/~IU 109.1X 123.9% 242.7% 243.0M 299.3X 258.1% 203.6% 215.8M 207.4% 218.7% 261.1% WLT Dbt ServoeCinet. WNF) 4973 4870 5109 5372 6244 6876 8625 9068 9103 9110 4579 HLT Debt Service (Int. IKNF/MG 36.4% 35.2% 60.51 53.5% 71.8 65.5% 63.01 69.41 70.4 77.1% 42.0% Net WLT Døbt Servic/XGS 2/ 36.4K 35.2% 60.5% 53.5% 71.8 65.5% 63.01 66.3% 56.5% 67.41 42.0% Grosa Inv~stmnt/COP 3/ 35.1% 33.21 33.5% 30.01 27.2% 29.0% 28.1% 31.81 30.81 29.21 31.0% Gros Dmestic SavIng/CP 37.4 36.4% 29.4% 31.9% 27.01 29.3% 26.U1 37.41 32.31 28.31 26.5% National Savins/GDP 39.41 40.6% 33.6% 36.9% 32.11 37.4% 31.31 37.7% 32.4 29.9% 26.1% Centrat Gav't lnvstmnt/GDP 16.7% 15.21 13.7% 11.9% 12.21 10.29 8.5% 6.2% 6.9% 8.7% 7.93 Central Gov't aving/DP 18.2 19.3% 10.21 9.4% 5.5% 9.6 11.81 10.6% 7.21 1.93 6.0% NnGov't Investøent/fP 18.4% 18.0% 19.81 18.11 15.1% 18.81 19.61 25.7% 23.9% 20.5% 23.11 Non.Govt avings/DP 21.1% 21.31 23.4% 27.51 26.5% 27.8 19.5% 27.1% 25.21 28.0K 20.0% ICOR (5 yarer e 8 6 7 10 19 19 194 N 58 40 NA Treasury Revnus/®P 38.2% 37.9% 31.93 30.4% 27.6% 28.9% 29.93 32.3X 30.3% 27.2% 30.61 Treasury ExpmndItures/®P 46.3% 46.2% 42.2% 37.6% 39.9% 30.1% 26.1% 30.01 32.01 36.6% 35.4% Deficit<-/SP -8.1% -8.3% .10.3% -7.2% -12.4% -1.21 3.M 2.2X -1.7% -9.4% .4.9X XGNFS Growth Rate 5.7% 2.6% -0.3X 6.0% 0.4% 8.01 3.4% -0.93 3.9 -1.8 -0.5% XGNFS/DP 25.7% 23.51 13.1% 14.7% 14.41 18.6% 26.31 29.1% 25.4% 21.93 23.11 NGFS Growth Rate 8.1% 8.93 -21.1% -27.29 5.0% 15.61 -13.2X -16.3X 3.1% ..3 6.1% NGNFS/ODP 25.48 20.4% 17.1% 12.8% 14.5% 18.3% 25.OX 23.61 23.93 22.81 27.61 Current Aooout (BOP U > -90 713 -3435 39 -1903 -1029 1352 2223 1020 361 -1482 Current Account/WP -0.2% 1.2% -5.4K 0.1% -3.2% -1.9X 2.3% 4.9% 2.11 0.71 -3.6 Algerien Crude Price (US$ b . 29.54 28.93 14.77 18.48 16.14 18.45 24.32 20.44 28.06 17.52 16.03 Trms of Trad (1980100) 102 99 47 54 48 49 53 61 48 52 46 N2/GDP 74% 7 ??1 821 84% 74% 64 49X 49 54% 50% Inflation 8.2% 10.41 12.41 7.4% 5.9 9.31 16.6% 22.M 31.81 21.0 28.95 Source: Vortd Bank 1/ Inetuds workers' rmittencas. 2/ Net of reproflinh. 3/ Currnt price ratios. Page 2 of 6 TAL8 11: MAACE OF PAmE ENTS tIn mlltions of oumnt U8) 1984 1985 1986 1987 1988 1989 1990 1991 1992 193 1994 A.Exprta of God a mFS 13201 13373 7959 9290 8347 10147 13395 12819 12036 10758 953 1.Nerandise (ob 12 1298 740 8737 7811 959 12880 12587 1139 1016 9075 Ou Hydrocarbns 12479 12724 7279 8531 7352 909 12348 11975 10874 970 8774 /9 ~on-Wydrocarbns 298 59 191 206 460 473 5a 41 5a 399 299 2.m ftor service 425 390 490 553 536 578 515 432 617 595 680 8.1orts of S~cd 8 mFs 12646 12448 1110 940 9767 11336 11481 968 10336 10038 10900 1.Nerchands fb) 9771 9639 8130 7399 7592 9363 9459 774? 8541 8161 8985 a/w capitat Bood. 2972 2999 2839 1879 1905 2288 3034 1863 1905 1735 2018 o/ Cnumr ~ ooda 3250 3676 305 3261 3256 4360 3546 3097 3427 3510 3297 o/u Intemdfte Goods 3569 2964 2857 2259 2452 2715 3079 2788 3209 2916 3670 2.~an-Factor Service 2875 2809 2443 2008 2174 1974 1833 1881 1795 1877 1915 olu unofficita Services 149 202 243 239 298 307 338 322 347 345 315 C.Resouroe bulane 555 925 -3204 -117 -1419 -1189 1914 3191 1720 720 -1147 9.et Factor ncme -1477 -1570 .2029 -1332 -2010 -1893 .2090 -2258 -2158 -1945 -175 1.Factor Receipts 180 191 171 314 70 111 72 73 112 11 118 2.Factor Paymnts 1657 1761 2200 1645 3080 2004 213 230 3370 3086 1853 o/ w 7 Interest (DvS 1/ 1315 1397 1547 1565 161 1740 1784 1789 181 1706 1537 ola OLT Internt after reached. 1375 1397 1547 156 1681 1740 1784 1789 1831 1706 1369 E.et Current Transfer 832 1358 1798 1487 1537 2053 1538 1290 1458 1586 1400 i.cu~nt Recepts 990 1509 1942 1589 1603 2091 1587 1334 579 1743 1565 ak Uages & Saterle 291 265 310 434 333 306 313 274 829 993 1115 Wa/ unofficial Transfers (net) 679 1030 1074 1014 1152 1224 1234 1060 750 750 450 2.Curret Pay~ents 158 151 144 102 76 38 59 44 121 157 165 F.Current Account malance -90 713 .3435 39 -1903 -1029 1352 2225 1030 361 -1482 G.Long Term Capitel Inflom 448 396 897 626 1168 387 -478 -1018 -87 -678 1433 1.Dire~t IWetment -14 -87 -64 -109 -48 -25 -39 -34 3 -2 100 2.fflcai Captat Grans 0 0 0 0 0 0 0 0 0 0 0 3.mot NU Lomns 515 423 950 551 1570 455 113 -588 215 -479 1423 *.1LT Diburement (DS) 4113 3896 4512 4357 6133 5569 6892 662 7251 6555 4426 b.NLT Amnortfzation (DS) 1/ 3598 3473 3562 3806 450 5113 6779 7220 7036 7034 6701 c.^T Amortation after res~bed 3598 3473 3562 3806 4563 5113 6779 7220 7036 7034 3003 4.OtherL Inflow .53 60 11 184 -354 -43 -552 -396 -305 -197 -90 (net Inct. DRS discrepcy H.otet other Itm (not> -150 254 1379 -617 -61 0 -959 -678 -866 618 -18 1.et Short Teram Capitat 4 -48 254 315 39 342 -1049 -905 -858 531 -100 2.Cpitai FL NI8 -213 192 -78 -1071 -118 -304 388 227 •8 87 82 3.Errrs 4 &Asions (not) -543 110 1203 19 -28R -38 -298 0 0 0 0 1 ~.Cange In Net Reserve. -392 1363 -1159 48 -796 -642 -85 527 67 301 -67 <. a la) -------------------------------------------------------------------------------------------------------------------- Page 3 of 6 TABL Is: UALANCE 0F PAOIrNT (In mttIju of curr~t 008> 1984 1985 1986 198? 19 1989 1990 1991 1992 1993 19% Foreign Exange Rserves 1.God 4fin Troy oc tend 5.6 5.6 5.6 5.6 5.6 5.6 5.1 5.6 5.6 5.6 5.6 2.Gold prIca UKLondan 308 327 391 484 410 381 384 362 343 360 384 3.lnt#t Resers, Gold 1720 1825 2181 2701 2289 312n 1971 2021 1916 2007 2143 4.Total Rsves excl.Gold 1464 2819 1460 1640 900 847 725 1486 . 1457 1473 2125 5.Totet Reseves inst.Gold 3184 4644 3841 4341 3189 2975 2696 3507 3373 3483 4266 6.~ros Resrvas<mnths of W~ p> 2/ 1.2 2.4 1.5 1.8 0.9 0.8 0.6 1.5 1.4 1.5 2.0 Ex~hange Rates (DA/8> 1.Rut Eff.Eib.Rate 135 144 133 117 95 83 75 47 48 53 41 (base=1980) 2.E.off.Exch.Råate 5.0 5.0 4.7 4.8 5.9 7.6 9.0 18.5 21.8 23.3 36.0 (IFIB, /USS) SOaresof ®P tesource Balans. 1.05 1.69 .5.1% .02 .2.4 .2.31 3.29 7.05 3.6 1.43 -2.8 Total NLT Interest Paymnts 2.6 2.4% 2.59 2.41 2.9X 3.29 3.01 3.91 3.89 3.4% 3.31 Current Acomg alanc -0.21 1.2Z -5.41 0.11 -3.25 -1.9Z 2.3X 4.91 2.11 0.7X .3.6 LT Capital Inftu 0.1 0.7X 1.4% 1.01 2.01 0.7 -0.8% -2.2 -0.2% -1.41 3.5% Net Credit FroM INF 0.05 0.0% 0.01 0.01 0.0 1.11 0.01 0.7 -0.3 -0.7 1.6x Chang In Not Reevs (.4toss .392 1363 -1159 48 .7% 442 .85 527 67 301 .67 Vatution Changs C-atoss 0 0 0 0 0 0 0. 0 0 0 0 Chang In et foreign AUts (Ca) .392 1363 •1159 48 .7% -42 .85 527 67 301 -67 Chng In rossmrva (Ca) -416 1355 -1159 .20 -740 -53 -122 761 .29 18 648 Met Crodit fro IN 0 0 0 0 0 604 0 308 .16 -329 653 C In Othr Liab. (CS) -24 -8 0 -68 56 -15 -37 -74 70 46 62 gmt: CDP at Current MS 5297 57997 63065 64479 58788 54940 59902 45715 47866 49762 41139 Total C0 ST (US> 794 746 1000 1315 1621 1840 791 1239 793 793 693 Source: World Ban 1/ without rescheduling. 2/ laports includs fator services. Page 4 of 6 TAML8118 lis TUUAL CAPITAL FLOWM e0 OET (in aittinS of currnt U) 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 Oiabursemmnt k*ulc & Puticty Guar.NLT 4113 3896 4512 457 6133 5569 4892 46M2 7251 655 1. Official Creditors 819 560 68 441 m 1138 1852 1919 1464 1364 a. Kultiåtaerst 215 184 314 264 473 459 613 955 552 454 alouiURD 70 148 138 129 170 204 300 347 268 176 almIDA 0 0 0 0 0 0 0 0 0 0 b. itateral 604 376 324 178 299 679 1238 964 913 909 2. Private Creditorf 3294 336 3174 3916 5362 4431 504M 4713 5787 5191 a. nd 0 500 93 50 447 232 0 1 0 0 b. Finmncial Credits 612 1025 1920 99 1451 376 445 602 2022 1710 c. Commerita Credita 2683 1811 1862 2867 3463 3833 4595 4110 376 3481 o/w Eport Credita 1608 1311 1427 2078 2776 3066 4107 3372 3315 3193 e/ ~plieraf Credits 1075 500 435 789 687 757 488 738 450 289 Privata HLuaratae MT 0 0 0 0 0 0 0 0 0 0 Total HLT Dlabursm~s 4113 3896 4512 4357 6133 5569 6892 6632 7251 6555 ImFPurchass 0 0 0 0 0 604 0 308 0 0 uet hortorm Capitat 4 -48 254 315 339 342 -1049 -905 -858 531 Totat Disburest 4117 3848 476 4672 6472 6514 5843 6035 6f93 7086 Repayments Public & Pubtiely Gur.LT 3598 3473 3562 3806 450 5113 6779 7220 7036 7034 1. Official Croditors 649 674 760 886 961 1011 1204 1292 1234 1263 a. Multitlateral 100 143 104 184 208 214 314 392 338 355 ww/ im 40 42 51 79 112 112 130 176 166 170 o/u iA 0 0 0 0 0 0 0 0 0 0 b. sitaterat 549 531 656 702 752 797 8m0 900 896 907 2. Privat# Creditors 2949 2799 2803 2921 3603 4103 5575 5928 5801 572 a. onds 15 71 27 58 98 40 16 5 129 663 b. Financilt Credite 952 851 53 427 715 919 1356 1357 978 1122 o. Comwercial Crodits 1983 1877 2212 2435 2790 3144 4203 4566 4694 3967 aM Export Credits 82 823 1200 138N 1833 2405 3335 3843 3774 3419 W/i Usepiers' Credits 1151 1053 1012 1055 958 738 868 723 921 567 Privat* onuaratad HL7 0 0 0 0 0 0 0 0 0 0 Total N4T Repymnts 3598 3473 3562 3806 4563 5113 6779 7220 7036 7034 IF epurchas 0 0 0 0 0 0 0 0 166 329 Total RLT Rey. & INF Repur. 3598 3473 3562 3806 450 5113 6779 7220 7202 7362 .............. ........................................................... Sor Ms Page 5 of 6 TALE 111: EXTERNAL CAPITAL FLOUS AND DET (in mittlons of current UD8) 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 met Flou Public & Pubtliety Guar.NLT 515 423 950 551 1570 455 113 588 215 •479 1. Official Creditors 170 -114 -121 -444 -189 127 648 627 230 102 a. ultilaterat 115 41 210 80 264 245 299 563 213 99 o/U IORD 30 106 87 50 58 92 170 171 101 6 </ IDA 0 0 0 0 0 0 0 0 0 0 b. Sitatera 55 -155 -361 .535 453 -118 349 64 17 2 2. Private Creditors 345 538 1072 995 1759 328 -5 -1215 .14 -581 a. ands -15 429 65 .8 350 192 -15 .4 -129 -663 b. Financial Credits -341 174 1357 571 737 -543 -912 -755 1045 588 c. Conmercial Crodits 701 .66 -350 432 673 679 392 -456 -930 -506 o/m Export Credits 776 487 228 698 944 661 772 .471 -459 -227 o/N Suppl lera' Credits -76 -553 -577 -266 -271 18 -380 15 -471 -279 Privat NonGuarateed NLT 0 0 0 0 0 0 0 0 0 0 Total HLT Net Flo~s 515 423 950 551 1570 455 113 .588 215 -479 Net INF Credit 0 0 0 0 0 604 0 308 -166 -329 Totat NLT+INF 515 423 950 551 1570 1059 113 -20 49 -808 Net ShortTom 4 -48 254 315 339 342 -1049 -905 -858 531 Totat Net Flots 519 375 1204 866 1909 1401 -936 -1185 .809 -277 Interst Public & Pubtiely uar.NLT 1375 1397 1547 156 1681 1740 1784 1789 1831 1706 1. Official Creditors 260 271 312 305 329 307 317 356 400 400 a. Multilaterat 46 49 70 88 93 97 117 154 199 212 lu IBRD 24 30 46 62 72 70 73 107 112 113 o/U IDA 0 0 0 0 0 0 0 0 0 0 b. Bilaterat 214 222 243 218 236 210 201 203 200 188 2. Private Creditors 1115 1126 1235 1260 1352 1433 1467 1433 1432 1306 a. onds 22 42 58 60 63 91 105 98 90 68 b. Financial Credits 531 446 448 474 532 567 529 455 427 498 c. Commrcial Credits 562 638 730 726 757 775 833 880 915 739 oN Export Credits 242 35 437 488 558 628 704 750 758 632 o/w suppliers' Credits 320 303 292 238 198 147 129 130 157 108 Private NonGuarateed NLT 0 0 0 0 0 0 0 0 0 0 Totat NLT Interst 1375 1397 1547 150 1681 1740 1784 1789 1831 1706 INF Service Charges 0 0 0 0 0 22 62 59 69 42 Interest Paid en ST Debt 138 140 53 78 399 242 317 482 369 38 Total Interet Paid 1513 1537 1600 1643 2080 2004 2162 2330 2270 2086 Source: DRS Page 6 of 6 TAMl% III: EXTEMAL CAPITAL FL~ A= DEBT <in el tttom of current USS) 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 Externat 0b <00) Pubito Pub~ily ar.NLT 14124 1680 19482 23080 24417 24638 26397 25964 2525 24587 1. Officfot cr*ditor 3513 3835 4288 4675 470 4750 5712 6466 6450 6554 a. Nultlaterat 445 582 912 1204 1396 1610 2038 2667 2768 2872 O/M IB0 284 479 693 924 895 960 1208 1413 1474 1512 /S IDA 0 0 0 0 0 0 0 0 0 0 b. SIlatemt 3067 3252 3377 3449 3308 3120 3674 3798 3682 368 2. Privat* Creditors 10611 12546 15194 18407 19713 19908 20684 19499 1875 18032 a. Sands 232 680 777 82 1169 1347 1420 1436 1281 645 b. Financial Crodits 3923 4258 5884 7050 7677 6877 6189 5566 6542 7292 c. Carfat Credits 6457 7609 8532 10133 188 116 1305 12497 10953 10095 *u Export Credits 3492 4867 5985 7878 8264 9125 10724 10142 9146 8552 o/m *ipL ers' Crodits 2965 2742 2547 2655 2604 2559 2351 2355 1806 1543 Privat* nuarated LT 0 0 0 0 0 0 0 0 0 0 Total Hy mO 14124 1680 19482 23080 24417 24638 26397 25964 25225 24587 Us of INF Crodit 0 0 0 0 0 619 670 995 795 471 ShortTom Dobt 794 746 1000 1315 1621 1840 791 1239 793 793 Total External Debt 14918 17127 20482 24395 26038 2709 27858 28199 2681 25850 Shares of Total DO0 PUMic Plcly Guar.LT 100.0 100.02 100.02 100.01 100.0% 97.5% 97.5 96.32 96.9% 98.12 1. Offlfal Croditorm 24.9Z 23.42 22.01 20.2X 19.3X 18.7% 21.1% 24.01 24.82 26.2% a. ultitlaterat 3.2% 3.6% 4.72 5.22 5.79 6.4% 7.5% 9.91 10.6X 11.5% /m lev 2.02 2.9X 3.61 4.01 3.72 3.89 4.52 5.29 5.7% 6.01 olm IDA 0.01 0.0% 0.01 0.01 0.01 0.01 0.01 0.0 0.02 0.01 b. 1itara, 21.7% 19.9% 17.32 15.01 13.5% 12.4% 13.62 14.11 14.22 14.7% 2. Privat* Croditors 75.1 76.6% 78.01 79.82 80.7 78.% 76.4x 72.32 72.2 72.0 .. lands 1.6 4.11 4.02 3.6% 4.81 5.32 5.22 5.32 4.9% 2.6% b. Financial Credits 27.8 26.01 30.21 30.52 31.42 27.2% 22.9X 20.61 25.1% 29.12 c. Commerial Credits 45.72 46.42 43.8 45.61 44.52 46.32 48.32 46.4% 42.12 40.31 olm Export Crodits 24.7% 29.72 30.72 34.1% 33.89 36.1% 39.69 37.6% 35.21 34.12 o/m SWptiers' Crmdits 21.0 16.7% 13.12 11.5 10.7% 10.1% 8.7% 8.7% 6.9% 6.2% Private mnoarated HLT 0.01 0.0% 0.02 0.01 0.02 0.01 0.0% 0.01 0.02 0.01 Tott iL? 0m 100.02 100.02 100.02 100.0 100.0 97.52 97.5% 96.32 96.91 98.12 Us of IKF Credit 0.01 0.02 0.01 0.01 0.01 2.5% 2.52 3.7X 3.12 1.91 Total Externot Debt (HLM 100.0% 100.01 100.0 100.0 100.01 100.01 100.02 100.0% 100.01 100.02 ........................................................................ Scurca m8 Annex IV Page 1 of 1 DEMOCRATIC AND POPULAR REPUBLIC OF ALGERIA ECONOMIC REABIUTATION SUPPORT LOAN KEY PROCESSING EVENTS Time taken to prepare: 7 months Project prepared by: Government with the assistance of IBRD staff and consultants Identification: June 10-15, 1994 Pre-Appraisal: July 11-22, 1994 Loan Committec: August 31, 1994 Appraisal: September 12-23, 1994 Negotiations: October 27 - November 4, 1994 Board Presentation: January 12, 1995 Expected Effectiveness: January 20, 1995 Closing Date: December 31, 1996 Bank staff contributing to the prject include: M~sm/Mnes. Parks (Task Manager), Underwood (Lad Boonoist), l Baruudy (Private Seotor Development and Puivaiz n), Press (Finanial Sctor Reform and PR Rast=~turing), Wolff - (Social Safety Not Reform), Ruppert (Macrmmenonio Framewotk and Unmployment Inurance System), Hayth~rn (Privaäan Law), Dutz (Competition Law), Michalet (Investent Promotion), Alai (Private Sector Development), and Van Psg (Procureen t and Disburment). Mr. Hadi Abushakra is the counsel for A~geria. Mr. Mahmood Ayub and Mr. Daniel Rit~hie am, repedtively, the managing Division Chief and Department Di~ector for the operation. Me. M~ri-Hugmite Oe1yn provided dant ~pport srvice. Annex V Page 1 of 3 DEMOCRATIC AND POPULAR REPUBLIC OF ALGERIA ECONOMIC REHABILITATION SUPPORT LOAN STATUS OF BANK GROiP OPERATIONS 1. World Bank Group involvement in Algeria has been intermittent. After a nine-year moratorium, Bank lending resumed in 1973. By 1980, 23 IBRD projects with commitments totalling over US$1.1 billion had been approved. Over time, increasing disagreement on project selection and implementation criteria resulted in low disbursement rates. Several operations were cancelled by mutual agreement in 1980, and another interruption in Bank lending followed. A new agreement led to renewed lending and, in 1984 and 1985. three projects, totalling US$680 million, were approved. Subsequent improvements in the dialogue led to a large increase in the lending program. Between 1987 and 1992, 26 operations, with associated commitments of almost US$2.3 billion, were approved. These operations included two adjustment loans: the US$300 million ERSL and the US$350 EFSAL, approved in June 1991. The EFSAL was co-financed in the amount of US$300 million by the Export-Import Bank of Japan. Bank lending declined again in 1993, in large measure due to the slow-down of economic reform. However, a US$110 million Water Supply and Sewerage Rehabilitation project was approved by the Board in June 1994 and a US$51 million Emergency Reconstruction project for the Mascara region was approved in December 1994. A significant expansion of lending is envisaged over the FY95-97 period, provided the acceleration of economic reform is sustained. 2. Despite intermittent involvement, the IBRD's Algeria portfolio is one of the largest in the Middle East and North Africa Region. As of November 30, 1994, cumulative commitments to Algeria stood at US$3,911 million (less cancellations). Of this total, some US$1,230 million had been repaid and US$1,175 million was undisbursed (see attached Table). As of the same date, IFC commitments were US$10 million, of which US$1.54 million was undisbursed. The Bank's shares of Algeria's total MLT debt (7 percent) and MLT debt service (7 percent) are low compared with other Bank borrowers. 3. In close collaboration with the authorities, the Bank is engaged in a broad effort to improve the performance of the project portfolio. A full country portfolio performance review (CPPR) was carried out in July 1993, which resulted in action plans to address the key issues affecting the Bank's portfolio, including closing several problem projects. For 18 active projects, the authorities communicated to the Bank last June detailed summaries of actions taken and planned. In a subsequent letter, the Finance Minister indicated his strong support for improvements in the performance of the portfolio, including full cooperation in putting in place ad hoc project supervision arrangements in response to the difficult security situation in Algeria. Six additional projects are slated for closure by end-1994. The Bank is providing technical assistance to strengthen the project monitoring capacity of the Ministry of Finance. The Bank is also working with the Ministry of Public Works, which oversees the single largest share of the public investment budget, to modernize its project management capacity. 4. Other members of the World Bank Group are active in Algeria. The IFC's strategy for Algeria focusses on the hydrocarbon sector, due to its strategic importance, and the financial sector. The IFC approved its first project in 1992: a US$10 million loan to Helios, a joint venture between SONATRACH and foreign investors to produce helium gas for export. In the financial sector, the IFC's efforts have concentrated on establishing a leasing company and a private bank. FIAS drafted a report on investment in Algeria, and has actively consulted on the new Investment Code. Algeria has held preliminary discussions with MIGA concerning future membership. Annex V Page 2 of 3 DEMOCRATIC AND POPULAR REPUBLIC OF ALGERIA ECONOMIC RElABIITATION SUPPORT LOAN The Status of Bank Ganap Operations In Alria Statennt_oBank Loans and IDA Cfredits As of November 30. 1994 (US$ Million Amount) (less cancellations) toan or Fiscal Creditmit $1. Undisbursed Thirty-One loans fiatly disbursed 1,579.69 Of which SAL, SECAL, and Program Loans a/ 3117 1990 Republic of Algeria Economic Reform 298.79 DiSbArsing on 2591 1985 Republic of Algeria National Water Supply/S 262.00 11.92 2808 1987 Republic of Algeria Highways V 120.00 38.24 2809 1987 Republic of Algeria Irrigation Chelit 1 94.00 46.78 2821 1987 Republic of Algeria Nat. Water Supply I 250.00 82.99 2977 1988 Republic of Algeria Vocational Trainkng 54.00 19.80 2981 1988 Republic of Algeria Power m 159.43 67.51 3076 1989 Republic of Algeria Mitidja Irrigation 110.00 71.47 3105 1989 Republicof Algeria Ports II 63.00 47.88 3176 1990 Republic of Algeria Tedical Assistance 26.00 18.11 3210 1990 Republic of Algeria Industrial Restructuring 47.60 41.44 3211 1990 Republic of Algeria Industrial Restructuring 29.20 24.09 3212 1990 Republic of Algeria Industrial Restructuring 12.70 10.74 3213 1990 Republic of Algeria Industrial Restructuring 5.00 .45 3214 1990 Republic of Algeria Industrial Restructuring 5.00 3.79 3216 1990 Republic of Algeria Research and Exension 32.00 27.11 3266 1991 Republic of Algeria UniversityDevelopment 65.00 55.58 3352 * 1991 Republic of Algeria Baterp. & Financial Sector 350.00 106.16 3395 1992 Republic of Algeria Pirs Petroleum 100.00 25.01 3405 1992 Republic of Algeria Sahara Development 57.00 55.00 3487 1992 Republicof Algeria Forestry and Watershed 25.00 22.15 3488 1992 Republic of Algeria Cadestre 33.00 26.38 3561 1993 Republic of Algeria Housing Completion 200.00 146.80 3573 1993 Republic of Algeria Basic & Secondary Education 40.00 37.49 3690 1994 Republic of Algeria Locust Control 30.00 27.00 3743 1994 Republic of Algeria Water Supply & Sewerage bI 110.00 110.00 3813 1995 Republic of Algeria Mascara Emergency Rec. b/ 1 .0 0 TOTAL 3,910.62 1,174.88 Of which has been repaid (only amortization) 1,229.79 Total held by Bank 2,680.84 Amount sold 36.37 of which repaid 36.37 Total Undisbursed 1,174.88 * SAL, SECAL or Program Loan al Approved after FY80 bf Not yet effective 0 0 ~ 0 0 - - - i g i i i kelø - 0- i' il il il 1iI~ .14 I 11111 1>*1 I i iu~g .1 il i 1~y s <ø0 - db&*.\