PROPOSAL FOR A COUNCIL DECISION ON A MEDIUM-TERM LOAN TO ALGERIA
Date: 1991-07-08
Institutions: European Commission
Subjects: Algeria, Community loan, International Monetary Fund, financial aid, medium-term credit, reflation

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. 

2  -

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 

-  3  -

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. 

-  4 

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) 

- 2 -

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 

- 3 -

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. 

5  -

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. 

- 2 -

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 

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ISBN 92-77-74189-9 

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