Proposal for a COUNCIL DECISION providing further macro- financial assistance for Algeria
Date: 1994-10-04
Institutions: European Commission
Subjects: Algeria, Community loan, EU aid, European Commission, International Monetary Fund, economic development

COMMISSION OF THE EUROPEAN  COMMUNITIES 

C0M(94) 409 final 
Brussels, 04.10.1994 

94/0218 (CNS) 

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vf:1 

Proposal for a 

COUNCIL DECISION 

providing further macro-financial  assistance 

for Algeria 

(Presented by the Commission) 

EXPLANATORY  MEMORANDUM 

Algeria's request for Community macro-financial  assistance 

Algeria received  Community macro-financial  assistance for the first time in  1991, in the 
framework  of  a far-reaching  economic  stabilisation  and  reform  programme  which  was 
supported by an IMF Stand-By arrangement.  In September  1991, the Council approved 
complementary  balance  of payments  assistance  from  the  Community  for  an  amount  of 
ECU 400 million and the first tranche of ecu 250 million was disbursed in January 1992. 
As  economic  performance  for  the  first  quarter  of  1992  did  not  meet  the  programme 
criteria,  both  IMF financial support  and  Community  macro-financial  assistance  were 
suspended  and  the  disbursement  of  the  second  tranche  (ECU  150  million)  of  the 
Community loan was delayed. 

In early April  1994, the Algerian authorities reached an understanding with the IMF on a 
new economic  stabilisation  and  reform  programme for  the period  April  1994 to  March 
1995.  The Letter of Intent  of the Algerian authorities  and  some US$  1 billion  financial 
support for the programme were approved by the IMF Executive Board on 27 May. 

On  30  April,  the  Algerian  Prime  Minister  addressed  a  request  to  the  Community  for 
further  macro-financial  assistance  in  the  framework  of  the  new  economic  programme 
1994-95.  The request  included  the release of the remaining second  tranche of ecu  150 
million of the 1991 Decision as well as a new Community support. 

Following this request, the Commission considered that it was appropriate to re-activate 
Community's  macro-financial  assistance  to  Algeria  and  announced  to  the  Council  its 
intention  to  release  the  remaining  ECU  150  million  second  tranche  and  to  propose  a 
further  ECU  200  million  balance  of payments  loan  after  the  adoption  of the  country's 
new macro-economic programme by the IMF Board. On  16 May the Council agreed on 
this approach  and  stated  that  it will  consider  favourably  the  Commission's  proposal  on 
the  basis  of  a  satisfactory  track  record  of  Algeria's  macro-economic  programme  as 
agreed with the IMF. 

The IMF Board  approved  the new programme  on 27 May  1994, the ECU  150 million 
remaining tranche was disbursed  in August  1994 and the present  proposal  is made as a 
follow-up to the Council's decision in principle. 

Economic developments 1992-93 

Algeria's  economic  situation  deteriorated  rapidly  since  the  government  abandoned,  in 
early  1992, the  targets  of the  1991-92  economic  programme.  GDP  growth  remained 
moderate in 1992 at 2.2%, mainly due to a good agricultural  season, but fell to -1.8% in 
1993.  Inflation  reached  nearly  32%  in  1992,  and  remained  at  around  20%  in  1993 
* 
despite the public sector wage freeze and continued price controls. 

As the authorities  maintained  an  administered  exchange rate  regime, the  real  exchange 
rate  of  the  Dinar  appreciated  by  14%  in  1992  and  25%  in  1993.  Stringent  import 
controls and foreign  currency allocation procedures were established towards the end of 
1992, leading to a fall in imports from US$ 9 billion in  1992 to US$ 7.8 billion in  1993. 

As  a  result  of  these  measures,  consumer  hardship  increased  and  industrial  capacity 
utilisation  declined  as  spare  parts,  investment  goods,  construction  materials  and  other 
imported  inputs  were  not  available  in  sufficient  quantities.  Socio-political  unrest 
intensified  and the security situation deteriorated  further  against the background  of high 
unemployment (over 20%) and an acute housing shortage. 

The fiscal deficit  increased from 1.3%  of GDP in  1992 to  9.2% in  1993.  Total  central 
government  revenue declined,  mainly as a result  of falling  hydrocarbon  revenue  (which 
accounted for nearly two thirds of all government revenue in 1992) and total expenditure 
increased  sharply  against  the  background  of  the  government's  attempts  to  stem  social 
unrest. 

Towards the end of  1993, Algeria's external financial situation became unsustainable, due 
to  a  sharp  decline  in  oil  prices.  By  the  end  of  the  year,  hydrocarbon  exports,  which 
account  for  nearly all export  revenue, had fallen to US$ 9.9 billion, down from US$ 11 
billion  in  1992.  At  the  same  time,  external  debt  service  payments  reached  US$  9.4 
billion.  As export  revenues fell  below  external  debt  service charges, Algeria  started  to 
accumulate  arrears  on  external  debt.  By  March  1994,  they  reached  some  US$  500 
million.  A rescheduling of the country's external debt thus became inevitable. 

The government's economic programme for 1994-95 

In early April  1994, the Algerian government reached a new understanding with the IMF 
on an economic programme for  1994-95.  The programme is designed  to  speed up  the 
transition  to  a  market  economy  with  a view  to  restoring  growth  and  to  reducing  the 
external debt burden.  It includes: 

-  The elimination of quantitative trade restrictions and the liberalisation of imports; 
-  The  pegging  of the  Dinar  to  a basket  of currencies  during  the first 6 months  of the 
programme and the introduction of a market clearing exchange rate regime by the end 
of September 1994; 

-  Price  increases  for  subsidised  goods  and  further  liberalisation  of  the  domestic  price 

regime; 

-  A  review  of  the  social  security  system,  including  a  monthly  allowance  system  for 

participants in public works projects; 

-  Fiscal measures to reduce the government deficit  from  9.2% of GDP in  1993 to 3.3% 

in 1994 

-  A tightening of credit policy and an overall increase in various refinancing  rates of the 

Bank of Algeria as well as banks' interest rates to positive levels in real terms; 

-  The acceleration of public enterprise and banking sector reforms; 
-  A  review  of  rents  for  public  housing  and  further  structural  reforms  in  the  housing 

sector. 

Prior  actions  foreseen  in  the  programme,  have  been  carried  out  in  January  and  April 
1994.  These  include  a substantial  devaluation  of the  national  currency  (from  25  to  36 * 
Dinar  per  US$),  significant  price  increases  for  petrol  and  basic  food  items  in  order  to 
reduce  subsidies, increases  in deposit  and lending  interest  rates  as well  as  central  bank 
refinancing  rates  and  a first package  of measures to  liberalise  domestic  prices  and  the 
imports regime.  These measures are consistent  with the  structural  reform  performance 

criteria that were attached  to the release of the second  tranche  of the  1991 Community 
balance of payments loan. 

The new programme makes allowance for  a more than 20% increase in imports that  is 
required  to  supply industries with vital  spare parts, investment  goods  and  other inputs, 
the absence of which has inhibited economic growth in the period  1992-93.  The increase 
is designed to be compatible with a resumption of economic growth to 3% in  1994 and 
6.2% in 1995, up from -1.8% in 1993. 

Medium-term  external  financial  prospects  are  expected  to  improve  from  1995-96 
onwards  when  additional  hydrocarbon  production  and  transport  capacity  will  become 
operational.  The  resulting  increases  in  import  capacity  and  fiscal  revenue  will  also 
stimulate activity in residential housing construction, agriculture and industries. 

External outlook and financing needs 

Under  the  programme,  the  current  account  is  expected  to  deteriorate  from  a  US$  1 
billion surplus in  1993 to a US$ 2.2 billion deficit  in  1994.  Export  revenue is expected 
to further  decrease from  US$  10.3 in  1993 to US$ 8.9 billion in  1994 and allowance is 
made  for  a  significant  rise  in  much  needed  imports  of  consumer  goods  and  inputs  for 
industries, from US$ 7.8 billion in 1993 to some US$ 9.4 billion in 1994.  All projections 
are based on an oil price of US$ 15fàarrel throughout the programme period. 

The  global  external financing gap,  before  debt  rescheduling  and  including  arrears  on 
external  debt  service,  is estimated  at  around  US$ 6.9  billion for  the programme  period 
from May 1994 to April  1995.  It would only gradually decrease to zero by 1998. 

In June  1994, Algeria obtained an agreement  on a rescheduling of its official  debt in the 
Paris  Club.  The Paris Club creditors  agreed  to  reschedule  debt  service  due  during  the 
consolidation  period,  including  arrears,  over  a  15 years repayment  period  with  4 years 
grace.  The cut-off  date has been set at  September  1993.  These rescheduling terms are 
expected  to  reduce  the financing gap  by  some  US$  4.9  billion  during  the  programme 
period.  Algeria  has  also  initiated  négociations with  its  commercial  bank  creditors  on  a 
similar rescheduling operation. 

The  residual  financing  gap  for  the  programme  period,  after  debt  rescheduling,  is 
estimated at around US$ 2 billion.  Financial support from the IMF, approved on 27 May 
1994,  amounts to  some US$  1 billion,  with  a combination  of  a  Stand-By  arrangement 
(SDR  457.2  million)  and  a  Complementary  and  Contingency  Financing  Facility  (SDR 
274.32 million). 

The expected  financial  support  from  the World  Bank would  amount  to  some US$ 435 
million during the programme period.  This includes the release of the US$  175 million 
second tranche of the Financial and Enterprise  Sector Loan (FESAL), the  disbursement 
of  some  US$  60  million  under  the  existing  housing  sector  loan  and  a  new  Structuralv 
Adjustment  Loan for an amount in the range of US$ 200 million.  Japan is also expected 
to  contribute  some  US$  150 million in  co-financing  the  second  tranche  of the  FESAL 
and various other  donors may contribute  some US$  100 million (Arab Monetary  Fund, 
African  Development Bank, Islamic Development Bank), thus leaving a financing gap in 
the order of US$ 400 million. 

Total  Community  macro-financial  assistance  during  the  programme  period  would 
amount to a maximum of ECU 350 million (US$ 420 million), comprising the ECU  150 
million of the second tranche released in August  1994 and the ECU 200 million new loan 
facility provided for by the present proposal. 

The  Algerian  authorities  have  already  announced  their  intention  to  start  négociations 
with the IMF in early  1995 on a successor 3-year economic programme, to be supported 
by  an  Extended  Fund  Facility.  Financial  projections  by  the  IMF  services  show  that 
Algeria  will  probably  require  further  external  financing  facilities  and  debt  rescheduling 
arrangements until the end of 1997. 

Main features of the loan 

The  Commission  is proposing  that  the  Community  grants  Algeria  a further  balance  of 
payments loan of up to Ecu 200 million, with a maximum maturity of seven years. 

The assistance would  complement  resources made available by the IMF and  the World 
Bank  and would  be disbursed  in two  tranches  subject  to  a satisfactory  track  record  of 
Algeria's macro-economic programme agreed with the IMF and progress with respect to 
structural reforms, including the observance of a number of performance criteria. 

As  in  the  case  of  similar  operations  in  favour  of  third  countries,  the  Community  will 
provide  the  funds  through  market  borrowing  with  a  guarantee  by  the  general  budget. 
Algeria  will  subsequently  borrow  from  the  Community.  The  borrowing  and  lending 
operations  will  be  perfectly  matched  and  without  any  commercial  risk  for  the 
Community. 

On the assumption that the Guarantee Fund mechanism will be in place before the end of 
the  year,  the  budgetary  implications  of  a  decision  to  grant  further  assistance  of  up  to 
ECU 200 million to Algeria would imply an ECU 28 million provisioning of the Fund. 

s 

Proposal for a 

COUNCIL DECISION 

providing further macro-financial  assistance 

for Algeria 

THE COUNCIL OF THE EUROPEAN UNION, 

Having  regard  to  the  Treaty  establishing  the  European  Community,  and  in  particular 
Article 235 thereof, 

Having  regard  to  the  proposal  of  the  Commission1  submitted  after  consulting  the 
Monetary Committee, 

Having regard to the opinion of the European Parliament2, 

Whereas  Algeria  has  undertaken,  since  1989,  political  and  economic  reforms  and  has 
decided to adopt a market economy model; 

Whereas the Community and Algeria traditionally maintain close economic, political and 
cultural links which have been developed within the framework  of the  1978 Cooperation 
Agreement; 

Whereas, by Decision 91/510/EEC3, the Council decided to grant Algeria a medium-term 
loan for  an amount  of ECU 400 million in support  of the government's  adjustment  and 
reform programme agreed with the International Monetary Fund (IMF) in 1991. 

Whereas  a first tranche  of  ECU  250  million  of  this  loan  was  effectively  disbursed  in 
January  1992,  and  whereas  the  release  of the  second  tranche  of ECU  150 million  has 
been  delayed  owing  to  slippages  with  respect  to  macro-economic  performances  and 
structural reform progress; 

Whereas  Algeria  has  reached  an  agreement  with  its  Paris  Club  creditors  on  a 
comprehensive rescheduling of its official  debt and whereas a similar agreement is under 
negotiation with Algeria's commercial bank creditors; 

Whereas the Algerian authorities have requested complementary financial  assistance from 
the  European  Union  in  support  of  the  1994-95  economic  programme;  whereas,  after 
taking into account  assistance which could be provided through  debt  rescheduling,  IMF 
and World Bank financing  and financial support from other  donors, a residual  financing 
gap of some US$ 400 million remains to be covered during the programme period; 

Whereas, in the context  of this programme, the Commission  has released  the remaining 
tranche  of  ECU  150  million  under  the  loan  facility  provided  by  Council  decision ^ 

OJn°L272,  2Ç^.91,p.90. 

91/510/EEC and whereas the grant by the European Community of a further  loan facility 
to Algeria is an appropriate  measure to  ease the country's  external financial constraints 
and support the policy objectives attached to the government's reform  effort, 

Whereas the Community loan should be managed by the Commission; 

Whereas  the  Treaty  does  not  provide  for  the  adoption  of this  Decision,  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 200 million in principal with a maximum maturity  of seven years, 
with  a  view  to  ensuring  a  sustainable  balance-of-payments  situation  and 
strengthening the reserve position. 

2.  To  this end the  Commission  is empowered  to  borrow,  on behalf  of the  European 
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  close  consultation  with  the 
Monetary  Committee  and  in  a  manner  consistent  with  any  agreement  reached 
between the IMF 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 Article 1(3). 

2.  The Commission shall verify  at regular intervals, in collaboration with the Monetary 
Committee and in close coordination with the IMF, that Algeria's economic policy 
is in  accordance  with  the  objectives  of this  loan  and  that  its  conditions  are  being 
fulfilled. 

Article 3 

1.  The loan shall be made available to Algeria in two installments. The first installment 
shall be released on the basis of a satisfactory  progress in Algeria's application of the 
stand-by  arrangement  agreed  with the IMF and  subject  to the provisions  of Article 
2(1). 

2.  The second  installment  shall be released  at least  one quarter  after  the release  of the 
» 

first instalment and subject to the provisions of Article 2 (2). 

3.  The funds shall be paid to the Bank of Algeria. 

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 wishes, to ensure that 
an early repayment  clause is included  in the  loan terms  and  conditions  and  that  it 
may be exercised. 

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 maturity 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. 

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 Council 

The President 

1.  Budget line concerned 

FINANCIAL RECORD 

Article  (...)  loan  guarantee  for  the  Community  loan  to  Algeria  (to  be  created 
through an amending and/or a supplementary Budget). 

2.  Referencesdegal base) 

Article 235 of the Treaty 

3.  Classification  of the Expenditure 

Obligatory 

4.  Description and Justification for the action 

a) 

Description of the action 

The budget entry reflects the commitment of the budget guarantee  associated 
with the Community loan to  Algeria  designed to ensure a sustainable balance-
of-payments position and strengthening international reserves of this country. 

b) 

Justification for the action 

The  viability  of  Algeria's  external  accounts  heavily  depends  on  external 
financial  assistance from official  sources. 

5.  Nature of the expenditure and method of calculation 

a) 

Nature of the expenditure 

A guarantee for the Community 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 called. 

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  reutilisation  of  reimbursed  amounts 
(Article  27(3)  of  the  Financial  Regulation  of  1977),  or  by  amending  and/or* 
supplementary Budget. 

-  In  order  to  fulfill  its  obligations,  the  Commission  can  provisionally  ensure  the 
debt  service with funds from its treasury.  In th?t  case,  Article  12  of the  Council 
Regulation (EEC, Euratom) no.  1552/89 of 29.5,1989 will apply. 

9 

ANNEX 

BUDGETARY  RESOURCES  NECESSARY  FOR THE PROVISIONING  OF 

THE GUARANTEE  FUND IN  1994 AND NOTIONAL MARGIN  UNDER  THE 

RESERVE FOR  GUARANTEES 

(IN ECU  MILLION) 

Operations 

Basis of the 

Provisioning  of 

Calculation 

The Fund  <\) 

Reserve 

Margin 

Project related  assistance 

EIB/CEEC 

EIB/MED 

EÏB/PVDLA 

EURATOM 

Macro-financial  assistance 

Moldova 

Bulgaria 

Romania 

Algeria 

Slovakia 

765 

100(3) 

500(4) 

150 

45 

40(5) 

125 

200(6) 

130(6) 

107 

14 

70 

21 

6 

6 

18 

28 

18 

318(2) 

211 

197 

127 

106 

100 

94 

76 

48 

30 

(1)  According to the provisioning rules agreed in the Council's common position of  13 

September  1993 

, 

(2)  Reserve amount in  1994 under the financial  perspective 
(3) 

Including amounts of estimated  disbursements in  1993 and operations for  Cyprus 
and  Malta 
Including amounts of estimated  disbursements in  1993 

(4) 
(5)  Commission  proposal to increase the amount  of assistance-(ECU  110 million) 

decided  in  1992 
(6)  Commission  proposal 

/\  o 

ISSN 0254-1475 

COM(94) 409 final 

DOCUMENTS 

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11 

Catalogue number : CB-CO-94-432-EN-C 

ISBN 92-77-80819-5 

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