Within the Maghreb region, the fortunes of individual states remain mixed. While the Algerian and Libyan economies are constrained by public entities but protected by hydrocarbon revenues, Morocco and Tunisia are embedded in the international market, but rely on cash flow from tourism, placing them in a potentially more vulnerable position.

A significant political risk in Algeria is the return of economic nationalist sentiment in the past two years

Western export credit agency official

For a country that a decade ago was wrestling with external debt and bloody internal civil conflict, the transformation in Algeria’s fortunes has been undeniably impressive. With gross domestic product (GDP) growth outside the hydrocarbons sector of 9 per cent, inflation in single figures and foreign exchange reserves of $149bn, the country’s prospects look promising.

Capital spending

Yet the policy choices made by President Abdelaziz Bouteflika and his government are open to question. The domestic media and overseas partners such as the International Monetary Fund (IMF) have expressed serious doubts about the administration’s reliance on massive public capital expenditure as the engine of future growth and its failure to stimulate a more active credit market.

Moroccan authorities’ policy was appropriate and their interventions were very well targeted in our opinion

Mark Lewis, IMF mission chief, Morocco

Booming gas and oil revenues over the past decade have driven up economic output, fattened reserves and strengthened the current account; they have enabled the government to clear most of the country’s foreign debt and launch a wave of major infrastructure projects.

It is this surge in public capital spending that is reflected in the high headline growth figures. But the investment has not been matched by any overhaul of the economy’s productivity or of its ability to create new employment or stimulate new business.

However, there is a certain political and social logic behind the government’s continued reliance on a largely state-based strategy. For many years the conflict with radical Islamist rebels – fuelled partly by resentment at housing and employment shortages – deterred many, though not all, foreign investors and created a difficult climate for the indigenous private sector. It was understandable that the authorities would resort to public spending to bolster economic activity and massage social tensions. For the moment, at least, the strategy looks sustainable, with hydrocarbons income funding a crowded programme of projects.

But problems are becoming apparent. There has been a flurry of allegations about corruption in some contracts for work on the east-west motorway and heavy expenditure is failing to translate into a commensurate improvement in living standards, levels of employment or public service quality. More-over, opportunities are being missed, by comparison with neighbours in the region. Libya has the huge energy resources and small population to afford an attempt to replicate the Gulf states’ oil boom of 30 years ago, achieving development in spite of waste and bureaucratic over-manipulation. But, while Algeria also has huge hydrocarbon reserves, its oil and gas revenues are spread much more thinly across its higher population of 34.2 million.

The country also lacks the entrepreneurialism and rising competitiveness of its much less well resourced neighbours, Tunisia and Morocco. While their airlines, banks and tourist resorts cater for the international market, the Algerians lag far behind. Inefficiencies in the domestic economy were exemplified by a surge in inflation to a rate of 5.8 per cent last September. The IMF says this reflected a 25 per cent jump in food prices, attributed to structural problems in the supply chain.

The heavy reliance on public spending is reflected in spectacular fluctuations in the fiscal position, in line with rises and declines in hydrocarbon revenues – collapsing from a surplus equal to 8 per cent of GDP in 2008 to an 8 per cent deficit last year.


New regulations, and a mood of economic nationalism, have been a serious deterrent to potential foreign investors. After Egypt’s Orascom sold a local cement plant to France’s Lafarge – a decision thought to have angered the government – it was barred from repatriating half the profits of its highly successful wireless telecom operator, Djezzy.

“A significant political risk in Algeria is the return of economic nationalist sentiment in the country in the past two years. After first constraining international oil and gas companies to 49 per cent stakes in local fields in 2008, the government extended the same limit to foreign investors in all other sectors of the economy with the passage of the 2009 Complementary Finance Law (introduced in July 2009),” points out an official at one leading western export credit agency.

The 2009 law also included a vague clause, which theoretically requires all foreign investments to produce a foreign exchange balance surplus for the Algerian economy during their lifespan. The government does not appear to have issued further clarifications of the clause, and it is difficult to see how it would be implemented. “The language reflects a general sentiment among the Algerian leadership that some foreign investors have taken the country for granted and failed to reinvest enough of their sizable profits in the local economy,” adds the credit agency official.

Algeria’s continued caution contrasts sharply with the increasingly positive attitude towards foreign investment in Libya, where the authorities have, for example, encouraged small banks to seek experienced international partners. At least two new partly foreign-owned banks have been licensed, while a 15 per cent stake in one of the large state banks has been sold to investors through an initial public offering.

International partners

These shifts in ownership and management have been backed up with prudential reforms to place the financial sector on a more conventional commercial footing. Capital requirements for banks have been increased and the authorities have established an asset management company to handle non-performing loans. These measures have had some success in nudging the banks into a more proactive stance. The IMF has noticed a significant increase in the volume of banking credit to the economy since the reforms were put in place. Meanwhile, the public sector is making its own contribution to the rise in bank strength: increased deposits by state entities have sharply bolstered the banks’ deposit base.

As it becomes more commercially focused, Libya is also moving towards a more disciplined management of public finances; after three years of growth in expenditure, last year brought a tighter fiscal stance. The big cutbacks came in capital projects, as the government took back responsibility for the wages of many personnel that it had attempted to move into the private sector. With little previous experience of such liberalising structural reforms, planners seem to have overestimated the pace at which private business and employment could develop.

Many of the reforms being undertaken by Libya at this stage are technical. They are designed to equip it with financial and economic governing structures more suited to the needs of a modernising 21st century state. The finance and planning ministries have been merged and steps are being taken to improve the co-ordination of monetary and fiscal policy, upgrade the payments system and make tax collection more efficient. The IMF has been pressing for steps to cut back on spending outside the framework of the budget.

At the same time, Tripoli is allowing the development of a consumer and property boom, transforming expectations in society in a manner reminiscent of the Gulf states some 30 years ago. Even so, government has not gone away and public entities will continue to play a major role.

While Libya and Algeria remain state-led economies with strong hydrocarbon revenues to shield them from the impact of the global economic downturn, Morocco and Tunisia have been in a potentially more vulnerable situation, relying on inflows of investment, worker remittances and tourism from Europe, and revenues from exports of consumer goods to EU markets. Yet both countries have more diverse and resilient production sectors, and a track record of conservative financial management that helped them weather the international crisis relatively unscathed.

Working from a strong financial base, the Moroccan government has not been afraid to relax its fiscal position as a support to economic activity, budgeting for a deficit equal to 4.5 per cent of GDP this year. “The authorities did not fend off the fiscal impact of the crisis; they did not try to maintain the previous level or try to attain the 2008 surplus… The authorities were unable to prevent tax revenue from diminishing, which is normal when there is a decline in economic activity, and their policy was appropriate in the context… There were interventions targeting the affected sectors, which were very well targeted in our opinion, and this helped the sectors withstand the worst of the crisis,” says Mark Lewis, IMF mission chief for Morocco.

Moreover, the financial sector was barely touched by the problems in world credit markets. But the IMF does believe that, as domestic and international economic activity picks up, the government in Rabat should begin to tighten its financial position to maintain low-level inflation. It would like to see the fiscal deficit brought back below 3 per cent of GDP over the medium term. For 2010, it is still budgeted at a relatively large 4.4 per cent.

The government is also trying to bolster productivity in agriculture – a key sector for Morocco, and often decisive in determining the overall rate of economic growth.

European market

Looking further ahead, the kingdom aims to sharpen up its use of public spending and continue down the road of liberalisation, moving to a more flexible exchange rate regime. But caution will be the watchword, given that current policies have proven themselves so well.

Like Morocco, Tunisia has suffered from the softening of the European tourism market and demand for North African goods. But the country has managed to sustain steady growth during the global crisis. The government has actively sought to bolster tourism and air transport, with the construction of a new airport at Enfidha and a package of fiscal relief to enable Tunisair to overhaul its fleet.

Banks have emerged more or less unscathed, because they need not rely on external financing and, in the face of weaker demand for exports and tourism services, the government last year adopted a fiscal stimulus package equal to 1.4 per cent of GDP. However, the financial sector is burdened by a relatively high level of non-performing loans, and a strengthening of prudential regulation will be a priority for government over the medium term.

Overall, Tunisia appears set for a steady, if unspectacular, emergence from the global downturn. The country remains committed to liberalisation of trade and services as a tool for development and a support to its already close relationships with European economies.