COMVIISSION OF THE EUROPEAN COMMUNITIES 
COM(91)257 final 
Brussels, 5 July 1991 
PROPOSAL FOR A COUNCIL DECISION ON 
A MEDIUM-TERM LOAN TO ALGERIA 
(presented by the Commission) 
EXPLANATORY MEMORANDUM 
1. Recent economic and political situation 
In recent years the Algerian economy has suffered a series of 
difficulties and shocks which have adversely affected economic 
growth and the country's foreign exchange position (falling energy 
exports, falling oil prices, decline in agricultural production, 
etc.). Real GDP, which had increased at an average annual rate of 
5% In 1980-85, declined by about 1% annually In 1986-88. In 1986-
88 the average Inflation rate was 8.5% and during the same period 
the unemployment rate rose from 18% to 22%. The industrial sector 
was particularly hit since Imports of raw materials and capital 
goods were drastically reduced due to the scarcity of foreign 
exchange. 
Faced with trsse difficulties, the Algerian authorities, with 
financial support from the IMF and World Bank, embarked upon an 
ambitious adjustment and reform programme In 1989. The Central 
Bank was given sole authority over monetary policy, state import 
monopolies were abolished, many domestic prices were liberalised 
and the currency was devalued. In parallel, fiscal restraint 
helped lower the Treasury borrowing requirement. In conjunction 
with high oil prices, the adjustment efforts generated a current 
account surplus equal to 3.2% of GDP In 1990. GDP grew by 3.4% in 
1989 but by only 1.1% In 1990 due to the adverse consequences of a 
severe draught. 
Until 1985, Algeria's external debt management was not problematic. 
From 1986 onwards, however, the decrease In export revenue (with 
the decline In oil prices) generated a rapid Increase of the 
external debt with particularly heavy resort to short-term trade 
credits at the end of 1989. Arrears on trade payments and credits 
began to appear and by the end of 1990 the level of international 
reserves had fallen to the very low level of three weeks of 
imports. 
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The total external debt outstanding is presently around u$$ 2$ 
blillon (about 50% of QDP and 200% of exports) with debt servicing 
(Including arnort Izat !on> amounting to some US$ 8.5 billions (about 
70% of exports) In both 1991 and 1992 due to repayments of short-
term credits and a bunching of repayments on the medium-term debt. 
These developments have taking place against the backdrop of a 
critical social and political situation, in 1991, as the very 
first Arab country, Algeria Is committed to organize general 
elections and began to transform the country into a modern 
democracy. The recent events related to the upsurge of islamic 
fundamentalism highlight the difficult social environment In which 
the economic and political reforms are taking place. 
2. The reform process 
Following an Initial phase of exchange and trade reform, the 
Algerian authorities sharply accelerated the reform programme In 
1991. It is now the Intention to give all commercial operators 
free access to foreign exchange at the official rate for most 
Imports, and by early 1992 the authorities plan to make the dinar 
convertible for all commercial transactions (In preparation of this 
step, the dinar has been devalued by some 50% since the beginning 
of 1991). In a second phase of trade reform beginning In 1992, the 
authorities plan to overhaul the tariff regime. Domestic price 
liberalization is also being accelerated. An estimated 55% of 
consumer goods is now free of price controls and by mid-1992 the 
authorities Intend to have eliminated price controls on all goods 
except for subsidized basic commodities. 
These measures are being complemented by a comprehensive programme 
of private enterprise and financial sector reform. In order to 
contain inflationary pressures associated with exchange and price 
liberalization, the authorities also continue to pursue a cautious 
fiscal and monetary policy under the stand-by arrangement agreed 
with the IMF In June 1991. Finally, to mitigate the Impact of the 
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move towards a market economy, the authorities are Implementing a 
social safety net In favour of the poorest groups of the 
population. 
3. The need for external financial assistance 
Algeria's current account balance is expected to register a deficit 
of some US$ 300 million In 1991 as compared with a surplus of US$ 
1.4 billion in 1990. Even If the deterioration Is substantial the 
external deficit Is not In Itself particularly large. Barring 
political upheavals and assuming that oil prices stabilize and that 
the reform efforts (Including diversification towards non-energy 
exports) are pursued vigorously, the outlook Is favourable for a 
return to sustained growth and a viable external balance over the 
medium-term. However, In the short-run, Algeria Is faced with 
tight external resource constraints related to the very high debt 
servicing burden and difficulties In fully refinancing the large 
amortisations that are falling due. 
To help meet these financing needs, Algeria has Initiated a series 
of negotiations with Its creditors with the aim of achieving a more 
manageable profile for its debt servicing burden and of obtaining 
additional financial support from multilateral financial 
Institutions and from bilateral official creditors. Since the 
current payments crisis essentially reflects a short-term liquidity 
crunch rather than a solvency problem the authorities have decided 
not to request a formal rescheduling which might endanger Its 
creditworthiness over the medium term. 
In June 1991, a stand-by agreement amounting to SDR 300 million 
(about US$ 404 million) was reached with the IMF In support of the 
Government's reform programme. The Fund is prepared to release an 
additional amount of SDR 210 million (about US$ 283 million) If 
energy prices decline. The World Bank Is also expected to mobilize 
during the next months some US$ 350 million in favour of Algeria in 
the form of a structural adjustment loan. 
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As regards Algeria's negotiations with official creditors on 
bilateral basis apart from export or supply credits already 
committed, Algeria recently signed a three-year financial 
agreement with Italy for a total of US$ 2.7 billion (of which US$ 
300 million will be provided as "fresh" money In 1991). 
Consultations are on-going with Japan about an Ex-1 m bank balance 
of payments loan at an amount still to be determined. 
As regards the Algerian obligations to the commercial banks, the 
authorities are currently negotiating a re-financing package 
covering part of the country's debt servicing obligations falling 
due in 1991 (and possibly in 1992). 
To complement the resources from traditional official and private 
sources, the Algeria authorities have requested a medium-term 
financial support from the Community. On June 28 and 29, the 
European Council, taking into consideration the difficult economic 
and political situation of Algeria, agreed In principle to provide 
such assistance the amount and modalities of which will be decided 
by the ECOFIN Council, on a proposal by the Commission. The 
Commission considers that a medium-term balance of payments loan of 
about ecu 500 million would be an appropriate measure to help this 
country strengthen its reserve position, safeguard Its credit­
worthiness and facilitate to move towards convertibility. By 
demonstrating the Community's support for the government's reform 
efforts, such a loan may also help catalyse financing from other 
official as well as private creditors. 
It is envisaged that the support would be released in two 
Instalments subject to compliance with the IMF and World Bank 
programmes. An additional condition would be clear evidence that 
Algeria and Its commercial bank creditors are making progress 
towards Improving the country's future debt servicing and repayment 
profile through new loans and/or financing agreements. 
Proposal for a 
COUNCIL EBCISICN 
providing a Bedlua-tera loan 
to Algeria 
THE COUNCIL OF THE EUROPEAN COMMUNITIES, 
Having regard to the Treaty establishing the European Economic 
Community, and In particular Article 235 thereof, 
Having regard to the proposal of the Commission1), 
Having regard to the opinion of the European Parliament2), 
Whereas Algeria has undertaken since 1989 political and economic 
reforms and has decided to adopt pluralism and a market economy model; 
Whereas the Community and Algeria traditionally have close economic, 
political and cultural links, which have been further developed within 
the framework of the Cooperation Agreement of 1978 and related 
Protocols and Agreements; 
Whereas the Algerian authorities have adopted for 1991 an economic and 
financial programme designed to accelerate market-related reforms and 
the liberalisation of Imports and foreign exchange arrangements with 
the aim of achieving convertibility for the national currency by early 
1992; 
Whereas this programme is supported by the International Monetary Fund 
(IMF) which has recently approved a stand-by credit authorizing 
drawings of up to SDR 300 million, and by the World Bank which has 
recently approved a US$ 350 million structural adjustment loan; 
1) 
2) 
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Whereas in spite of the financing which would be provided by the IMF, 
the World Bank and other multilateral and bilateral official creditors, 
Algeria will be facing during 1991 and 1992 exceptional balance of 
payments financing needs reflecting heavy external debt servicing 
payments related to short-term borrowing and a bunching of repayments 
on medium-term foreign debt; 
Whereas the Algerian authorities have requested complementary financial 
assistance from the Community In order to safeguard Algeria's credit­
worthiness, strengthen Its reserve position and facilitate the 
Introduction of convertibility; 
Whereas the success of Algeria's economic and financial programme will 
depend crucially on the agreement with the commercial bank creditors on 
a refinancing arrangement designed to improve the profile of the 
external debt service and repayments; 
Whereas the grant by the Community of a medium-term loan to Algeria 
will assist the balance of payments, strengthen the country's reserve 
position and support the economic and political reform process-, 
Whereas the Community loan should be managed by the Commission; 
Whereas the realisation of the above-mentioned measures will help to 
achieve the Community's alms and whereas the Treaty does not provide, 
for the measures In question, powers other than those of Article 235, 
HAS DECIDED AS FOLLOWS : 
Article 1 
1. The Community shall grant to Algeria a medium-term loan facility of 
a maximum amount of ecu 500 million in principal, with a maximum 
average duration of seven years, with a view to ensuring a 
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sustainable balance-of-payments situation, strengthening the 
reserve position, and facilitating the Introduction of 
convertibility for the national currency. 
2. To this end the Commission is empowered to borrow, on behalf of the 
European Economic Community, the necessary resources that will be 
placed at the disposal of Algeria in the form of a loan. 
3. This loan will be managed by the Commission in full consultation 
with the Monetary Committee and In a manner consistent with any 
Agreements reached between the IMF and the World Bank, and Algeria. 
Article 2 
1. The Commission is empowered to negotiate with the Algerian 
authorities, after consultation with the Monetary Committee, the 
economic policy conditions attached to the loan. These conditions 
shall be consistent with the agreements referred to In the third 
paragraph of Article 1. 
2. The Commission shall verify at regular intervals, In collaboration 
with the Monetary Committee and In close coordination with the IMF 
and the World Bank, that the economic policy In Algeria is in 
accordance with the objectives of this loan and that Its conditions 
are being fulf11 led. 
Article 3 
1. The loan shall be made available to Algeria In two instalments. The 
first instalment shall be released on the basis: 
of the IMF "Stand-by Arrangement11 and the World Bank structural 
adjustment loan agreed in June 1991 with Algeria; 
of an agreement between Algeria and Its commercial bank 
creditors on Improving the country's future debt servicing and 
repayment profile through new loans and/or refinancing 
agreements. 
2. The second instalment shall be released after a period of at least 
two quarters subject to the provisions of Article 2 (2). 
3. The funds shall be paid to the National Bank of Alger la. 
Article 4 
1. The borrowing and lending operations referred to In Article 1 shall 
be carried out using the same value date and must not involve the 
Community In the transformation of maturities, In any exchange or 
interest-rate risk, or in any other commercial risk. 
2. The Commission shall take the necessary steps, If Algeria so 
decides, to Include In the loan conditions, and also to exercise an 
early repayment clause. 
3. At the request of Algeria, and where circumstances permit an 
Improvement in the interest rate on the loans, the Commission may 
refinance all or part of Its Initial borrowings or restructure the 
corresponding financial conditions. Refinancing or restructuring 
operations shall be carried out in accordance with the conditions 
set out in paragraph 1 and shall not have the effect of extending 
the average duration of the borrowing concerned or increasing the 
amount, expressed at the current exchange rate, of capital 
outstanding at the date of the refinancing or restructuring. 
4. All related costs Incurred by the Community In concluding and 
carrying out the operation under this Decision shall be borne by 
Algeria. 
5. The Monetary Committee shall be kept informed of developments in 
the operations referred to in paragraphs 2 and 3 at least once a 
year. 
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Article 5 
At least once a year the Commission shall address to the European 
Parliament and to the Council a report, which will Include an 
evaluation, on the Implementation of this Decision. 
Done at Brussels, 
For the CounclI 
The President 
FINANCIAL RECORD 
1. Budget Iine concerned 
Article (B0-218) loan guarantee for aid to Algeria (to be created 
through an amending and supplementary Budget). 
2. References (legal base) 
Article 235 of the Treaty 
3. Classification of the Expenditure 
Obi igatory 
4. Description and Justification for the action 
a) Description of the action 
Provision of a guarantee from the Community for a loan to 
Algeria In view of supporting Its balance of payments 
strengthening the country's reserve position and facilitating 
the Introduction of convertibility. 
b) Justification for the action 
The European Council have endorsed the principle of 
providing assistance in response to a request from Algeria. 
The budget entry is Intended to provide a budgetary support 
for guarantee offered by the European Community to cover a 
loan extended to Algeria. 
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5. Nature of the expenditure and method of calculation 
a) Nature of the expenditure 
A guarantee to a loan to Algeria 
b) Method of calculation 
A token entry Is proposed given that the amount and timing of 
any call on this budget line cannot be calculated in advance 
and because It Is expected that this budget guarantee will not 
be cal led. 
6. Effect of the action on Intervention credits 
Only in the case of an effective call on the guarantee. 
7. Financing of intervention expenditure 
Endowment of the line by transfer, by réutilisation of 
reimbursed amounts (Article 27(3) of the Financial Regulation 
of 1977), or by amended and/or supplementary budget. 
In order to fulfill Its obligations, the Commission can 
provisionally ensure the debt service with funds from Its 
treasury. In that case, Article 12 of the Counclf Regulation 
(EEC, Euratom) no. 1552/89 of 29.5.1989 will apply. 
ISSN 025W5 
C0M(91) 257 final 
DOCUMENTS 
EN 11 
Catalogue number : CB-CO-91-305-EN-C 
ISBN 92-77-74189-9 
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