CELEX: 51991PC0257
Language: en
Date: 1991-07-08
Title: PROPOSAL FOR A COUNCIL DECISION ON A MEDIUM-TERM LOAN TO ALGERIA

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)
 ---pagebreak---                                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.
 ---pagebreak---                                              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
 ---pagebreak---                                        - 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.
 ---pagebreak---                                    - 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.
 ---pagebreak---                                 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)
 ---pagebreak---                                     - 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
 ---pagebreak---                                    - 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.
 ---pagebreak--- 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.
 ---pagebreak---                                 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
 ---pagebreak---                             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.
 ---pagebreak---                                  - 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.
 ---pagebreak---                                                                      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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