Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No. 15316-AL

REPORT AND RECOMMENDATION

OF THE

PRESIDENT OF THE

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

TO THE

EXECUTIVE DIRECTORS

ON A

COUNTRY ASSISTANCE STRATEGY

OF THE WORLD BANK GROUP

FOR THE

DEMOCRATIC AND POPULAR REPUBLIC OF ALGERIA

FEBRUARY 5, 1996

Country Operations IMiddle East and North Africa Region

This document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

CURRENCY EOUIVALENTS

Unit of currency = Algerian Dinar (DA)

1992 1993 1994 1995

US$1.00 21.84 23.34 35.06 47.69

FISCAL YEAR

January I - December 31

WEIGHTS AND MEASURES

Metric System

LIST OF ACRONYMS AND ABBREVIATIONS

ASAL Agriculture Structural Adjustment LoanCAB Current Account BalanceCCFF Compensatory Contingency Financing FacilityCNEP Caisse Nationale d'Epargne et de PrdvoyanceDOD Debt Outstanding and DisbursedEFF Extended Fund FacilityERL Economic Recovery LoanESW Economic Sector WorkEU European UnionFDI Foreign Direct InvestmentFIAS Foreign Investment Advisory ServiceFIS Front Islamique du SalutFTA Free Trade AgreementGDP Gross Domestic ProductHSAL Housing Structural Adjustment LoanICOR Incremental Capital Output RatioIDF Institutional Development FundIFC International Finance CorporationIMF International Monetary FundLSMS Living Standards Measurement SurveyMIGA Multilateral Investment Guarantee AgencyPE Public EnterprisePER Public Expenditures ReviewPSA Private Sector AssessmentSAL Structural Adjustment Loan

ALGERIA FOR OFFICIAL USE ONLYCOUNTRY ASSISTANCE STRATEGY

Table of Contents

Overview .....

Country Context ...................................... .. 3

1. Economic, Political and Social Developments ........ 3A. Economic Developments . 3B. Political Developments . 6C. Social Developments .. 6

II. External Environment .............................. . 8

III. Government Development Agenda ... 9.......................... 9A. Stabilization and Viability of External Balances ..e.e.e.e... 9

B. Resumption of Labor-intensive Private Sector-led Growth .11C. Social Protection . ...................................... 13

IV. Macroeconomic Prospects ....... ................................. 14

Bank Group Country Assistance Strategy .. 16

I. Current Program ............... ............................... t6

II. Country Assistance Objectives ................................... 18A. Stimulating Private Sector-led Employment Generating Growth . .19B. Protecting the Poor ... .20

C. Enhancing the Country's Ability to Mobilize External Resources . 21D . O ther ......... _ . . . . . .... .... ... . ............... 21

III. Proposed Assistance Program .. 22A. Lending .22B. Portfolio Management .23C. Non-Lending Services and Resource Mobilization .24

IV. Resource Implications .25

V. Risk Management and Creditworthiness .25

VI. Triggers and Future Lending Range .27

VII. Performance Criteria .............. ... ............ ....... 28

Agenda for Board Discussion .... 28

Attachments

Country Program ObjectivesAnnexes

This document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents may not othervise be disclosed without World Bank authorization.

MEMORANDUM OF THE PRESIDENT OF THE INTERNATIONAL BANK FORRECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A

COUNTRY ASSISTANCE STRATEGY OF THE WORLD BANK GROUP FORTHE POPULAR AND DEMOCRA'TIC REPUBLIC OF ALGERIA

Algeria is a country in transition on many interlinked fronts. It is facing a deep economictransition from a state-controlled oil-dependent economy to a private sector-led one; a socialtransition due to shifts in social values, demographic pressures and generation change; and apolitical transition from a centralized structure to a democratic system. The role of the Bankin this transition has been difficult, all the more so because the current transition has led toconflicts and violence, sometimes bordering on civil war. Following the recent elections,Algeria now has a unique opportunity to accelerate the process of economic, social andpolitical transformation and to rebuild social unity. Support from the Bank during thistransition will be crucial, as well as flexibility to adapt our support quickly to a fast evolvingsituation. In this environment, the country assistance strategy outlined below presents atransitional assistance program for the next 12 months aiming at balancing strong supportwith continuing high risks. We will return to the Board after one year to assess progress andreview future lending allocations and priorities.

OVERVIEW

Algeria is one of the 1 The next 12 months in Algeria present an unparalleled period ofBank's most significant opportunity and nsk for the Bank. Our presence can make a significant

challenges. difference in supporting the economic, social and political transformationunderway. but the intemal violence which has marked recent politicaldevelopments carries continued risks surrounding the sustainability of theeconomic program. The economic objectives of the Govenmment toconsolidate social stability are:* to urgently reverse 10 years of economic decline;* to intensify the process of economic transformation to achieve sustainablegrowth; and* to enhance social protection during the transition period of highunemployment and social unrest.

Based on recent 2. The Govermuent is fully aware that there can ultimately be no returnprogress, a major effort to political and social stability without urgent and significant improvement into support the ongoing economic conditions. To this end, the Govemment has launched a far-

reform program is reaching stabilization and adjustment program with the assistance of thewarranted... Bank and the Fund over the last two years, despite the adverse social

environment. This program has been well accepted by the population.

Highlights of recent economic developments are as follows:* the Government has delivered fully under its agreed program with theIMF (Stand-by and EFF) and under the Bank's ERL;

- 2 -

* macroeconomic management has improved dramatically: inflation is down,the budget deficit has been substantially reduced, and the exchange rate hasbeen devalued by close to 1 00%:* substantial progress has also occurred on the adjustment front: trade hasbeen liberalized, prices have been freed and general subsidies virtuallyeliminated. and manv of the legislative and regulatory measures are now implace to stimulate private sector grovth. including a new privatization law, anew investment code and prudential regulations for the banking system;* based on its solid performance. the Government succeeded in reschedulingits external debt with both the Paris and London Clubs, providing a muchneeded breathing space over the next four years: and* this program is starting to show results and the private sector is beginningto respond: GDP grow%th should reach 3.5% in 1995 -- achieving the first percapita grow th in a decade: almost half of all new Government housing is builtby private contractors; the first sale of a public enterprise has been completed;and Algeria's first private bank has been authonrzed

3. For the first time in the last four years, developments on the politicalfiront also offer a window of opportunity:* the November 16, 1995 presidential elections took place in a calmenvironment, with a massive turnout (75%). despite calls for boycott by theopposition and threats of violence by extremists, and* President Zeroual. the architect of the economic reform program and of thepolitical opening process, was elected with 61% of the vote, giving him amuch needed legitimacy and a mandate to start rebuilding political unity.

despite continued 4. The Bank has activelv supported the current Government's reformrisks... efforts. In the past year, new commitments and disbursements were at their

highest levels since the early nineties. Nonetheless, Algeria expects more fromthe Bank to carry out the urgent reforms required to help transform itseconomy. In fact, during the last 25 years of relations betwveen Algeria andthe Bank, there has never been a greater convergence of views on futuredirections. This unique opportunity, carries, however, continued high risksuntil Algeria succeeds in stabilizing its social environment.

Political risks stem from:* possible deterioration of the security situation undermining the legitimacy ofthe new Government; and* possible hesitancy of a democratically elected President to press reforms atan accelerated pace during the current political transition.

Economic risks stem from:* possible delays in the supply response by the private sector coupled withfurther deterioration in the productivity of state enterprises;* mounting unemployment aggravating the tense social environment;

-3 -

* vulnerable external financial conditions due to the dependence on oilreceipts and high external debt; and* progressive economic deterioration if violence escalates to an open civilwar.

5. These risks could well be reduced in the future if the Governmentseizes the opportunity following the elections to rebuild social unity andaccelerate the reform program. The recent election results and the reschedulingagreements reached with external creditors offer a solid breathing space toaccelerate the process of transfornation. The major costs of adjustment mayalready have been substantially incurred, and economic recovery has started.Our support at this time may be pivotal in ensuring continuity in the economicreform program, in supporting the reconstruction process initiated, and inattracting further external support.

... although the road to 6. Recent progress, however, still remains insufficient to reestablish asuccess remains long and sustainable growth path and improve the living standards of the population. A

uncertain. sustained supply response will require a further acceleration of the reformagenda, continued improvements in the social and political climate, as well asa more efficient safety net and employment programs during the period oftransition. Progress along these three priorities will depend on the continuedcommitment of the authorities as well as success in resolving the social andpolitical crisis, through broad-based dialogue and continued deepening of thedemocratic process.

COUNTRY CONTEXT

I. Economic, Political and Social Developments

A. Economic Developments

Algeria's development 7. The economic agenda facing Algeria is huge. Algeria is both a state-agenda remains huge. controlled and an oil-dependent economy. While, during the oil boom years,

economic inefficiencies could be masked by mounting oil revenues, theeconomic adjustment was all the more severe when the oil price collapsed in1986. The 1986 oil price drop resulted in a 50% decline in Algeria's terms oftrade. The intemal impact was further compounded by the extreme reliance ofthe budget on oil receipts and the gross inefficiency of the large publicenterprise sector and of public investment. Since then, GDP per capita hasdeclined by about 3% a year, resulting in a cumulative decline of per capitaconsumption by 28% and of household disposable income of 31%, andunemployment has soared from 17% in 1986 to 25% in 1994.

-4 -

OfficialUnemplo ym ent GDP perCapita (US$)

25% 300024% 2 80023% 2 60022 % 2 400

20% 2200

19% 200018 % 180 017% 160016% 14 00

86 88 90 92 94 86 88 90 92 94

After an initial period of 8. As in many oil-producing countries, Algeria attempted initially tohesitancy,.... finance the 1986 oil price shock by an increase in external borrowing. This

strategy, however, further compounded the crisis by increasing foreignindebtedness. Algeria's external debt increased by US$6 billion over 1985-87, and reached US$28 billion (68% of GDP) by end 1994, with a shortmaturity structure. By 1987, the Government realized that adjustment was

| o40 CH Flfiew. M unavoidable, and it initiated a broad program of economic reforns, includinga start in land privatization, reform of state enterprises and price

180 liberalization. However, the Government backtracked on its program in1992, following the political crisis which emerged from the canceled

.m- (\ . | | parliamentary elections. The Government adopted an expansionary fiscalpolicy, widening the deficit by more than 7% of GDP in 1993, and

8D - r F . 1 F J | compressed imports severely to make room for debt repayments. This

40 uL u -e r l -- j m | strategy put a high burden on the rest of the economy. Private investment fell78 81 84 87 90 93 by 40% contributing to a further slowdown of the economy. By 1994, the

ap. od 'widening of the macroeconomic imbalances, the increased difficulty to accessexternal financing, and the deteriorating social and political situation hadreached an unsustainable level, leading to the appointment of a new, mostlytechnocratic Government, led by President Zeroual. That Governmentintroduced swift and wide-ranging stabilization and adjustment measures,supported first by an IMF stand-by and CCFF arrangement of about US$1billion (May 1994), a World Bank Economic Rehabilitation Loan (US$150million approved in January 1995), and a first Paris Club reschedulingagreement; and then by a further IMF 3-year EFF program, amounting toUS$1.8 billion, in May 1995.

economic reforms 9. During the short period since the adoption of this program, Algeriahave accelerated succeeded on the stabilization front in bringing the budget deficit to 4.4%

markedly over the last in 1994 down from 8.7% in 1993. The dinar was devalued by close totwo years... 100%, and a ceiling was imposed on the Government wage bill. Money

- 5 -

-5-~~~~~~~

supply growth was tightened from 21% in 1993 to 15% in 1994, contributingto the containment of inflation despite price liberalization and devaluationpass-through effects. A new Paris Club rescheduling agreement was reachedin July 1995 covering about US$7 billion, as well as an agreement with thesteering committee of commercial banks covering about US$3 billion. On thestructural reform front. the authorities succeeded in elimninating most non-tariff trade and payments restrictions, liberalized prices, and drasticallyreduced subsidies, limiting them to a few food products. Ceilings on banklending rates were removed, and non-autonomous PEs were put under tightbudget constraints. The authorities also started to put in place the regulatoryframework for a market economy with an investment code that does notdifferentiate between local and foreign investors, a competition law and a newprivatization law. A financial sector reform was also initiated, in part toapply market discipline to state enterprises.

Fiscal &CurrentAccount Terms ofTrade &Real

Balances Effective Exchange Rate

3%~~ ~% T 1 5% 2 0T (Monts o=Imort)

6%

80.3 %

6% ~~~~~~~~~60ta6% 0_9% 4

-12 % 20

-15%

84 86 88 90 92 94 84 86 88 90 92 94

HBudgetBalancc/GDP ~ Terms ofTrade G&SCA/GDP oRealEffective Exch. Rate

Inflatio n Gross Reserves

(%) .. a % .5 (Months o shorts) 453 0e% 40

2 5% 2- 3530

2t0

n 1.5- 25

15% t I 2

0.5 15/

0% 0 : Fi 0

84 86 88 90 92 94 84 86 88 90 92 94

tEM oney GTowth Offic .Exch. Rates

-Inflation Reserves

..and offer for the first 10. This program is starting to show results, with a small recoverytime a glimpse of hope... expected in 1995, possibly amnounting to 3.5% GiDP growth. This would

translate into a modest but positive GDP per capita growth for the first time inmore than a decade. While this recovery stems in a large part from a good

agricultural harvest, there are also signs of an emerging private sectorresponse in other sectors brought about by the trade liberalization and theavailability of foreign exchange for importing inputs, especially in servicesand construction activities The performance of the manufacturing sector,mostly dominated by large public enterprises, continued to deteriorate,however, partly due to increased competition from imports. While this recentgrowth is encouraging, overall, it is still too modest to make a dent inunemployment and to improve living standards on a sustainable basis. Anylonger term recovery will depend on stronger private investment, which willonly be possible if the adjustment program is intensified and the socialsituation stabilizes.

B. Political Developments

...while in contrast, the 11. In contrast to the impressive progress on the economic front, the lastpolitical situation four years have witnessed a sharp deterioration on the political front

continued to characterized by increased political turmoil, guerrilla activities and repression,deteriorate,... verging on a civil war The nearly four-year-old conflict between Government

forces and opposition groups has claimed the lives of some 40,000 Algeriansand over one hundred foreigners. In addition to human losses, some 900schools were burned in the conflict and total losses to infrastructure areestimated at about US$2 billion by the Administration.

although the recent 12. In an effort to gain legitimacy domestically and abroad, the currentelections may offer a regime held presidential elections on November 16, 1995, supervised bymuch needed window of external organizations (the Arab League, the United Nations, and theopportunity. Organization of African Unity), in which 4 individuals were candidates.

Despite calls for a boycott by opposition parties and threats of acts of violenceby extremists, the turnout was 75%, exceeding all predictions, and theelections proceeded in a calm environment, amid strong security measures.President Zeroual, the architect behind the elections and the economicrecovery program, received 61% of the vote. The election process was widelyacknowledged as fair and most opposition parties have since declared theirreadiness to work with President Zeroual in restoring civil peace and economicand social recovery, although scattered terrorism activities have continued.

C Social Developments

Meanwhile, the social 13. During the oil boom years, the State had the resources to providesituation remains employment, infrastructure and services, but through a very inefficient

alarming and explosive. centrally-controlled system. Social indicators improved markedly and poverty

-7-

SchoolErnroTrnent declined thanks to high investment in education, health and basic(6-15years) infrastructure, as well as generous subsidies. The decline in oil prices in the

90% eighties put an end to this period, and highlighted the inefficiencies of the80% economic structure. As a result, unemploymnent grew rapidly -- to 25%, and a70_ staggering 65% among the young -- and acute housing shortages developed,__ with an average occupancy rate of 8 persons per unit, the highest in North40%- Africa. The housing crisis was further compounded by a high population

S 9%71 S77 983 S growth rate (2.9%) and continued rural mnigration to cities.TotalEnroiment

-BoysGrls Hiousehold Size perUnit Housing OccupancyRatios

(perso ns per unit)70 7 9

60]7

74 06 7

306.4

20

w 1 {_w98711___= l X~6 1 M

10 .0 5 ..

Ito 7 7 to 10 11

01966 011977 01987 1966 1977 1987 1994

14. This immediate social crisis -- high unemployment and housingshortages -- is at the root of the political problems plaguing the country. Itwill require priority attention for any economic reform to take hold and foreventually reaching political stability. However, there are also signs that thesocial crisis may have deeper roots, which will take longer to solve.Algeria may be facing a fundamental shift in its social and cultural fabric, asreflected by the following statistics: (i) over 50% of the population is below 20years of age, mostly educated in the Arabized school system; the ruling elite ismostly over 40 years of age and francophone; and (ii) most of that youngpopulation is unemployed, while most job holders are over 40 years of age.

15. The Government is aware of the crucial need to mitigate the socialcrisis while effecting the transition of the economy. It has recently launched abroad-based safety net program and is reviewing its housing strategy, relyingmore on private sector contractors for the implementation of Governmenthousing programs. As a result, it succeeded in doubling the number ofhousing completions in 1995 (80,000 units compared to 40,000 the yearbefore). While this represents a solid achievement, it is still far short of theneeds. Any significant improvement in employment and housing will requirecontinued fundamental changes in economic incentives. The Government isalso currently undertaking a poverty review, based on LSMS surveys, toimprove the targeting and the design of its current programs.

-8 -

II. External Environment

The internal fragility is 16. The fragility of the internal situation in Algeria is compounded by itsfurther compounded by a vulnerability to external shocks associated with its over-dependence on

high external hydrocarbon exports (20% of GDP; 60% of fiscal revenues; and 95% ofvulnerability due to exports) and the level and structure of its foreign debt. Simulations suggest

strong dependence on oil that at current production levels, a one dollar decline in the barrel price ofrevenues... oil would reduce Algeria's annual export revenues by over US$500 million

while a one percentage point fall in hydrocarbons export volumes wouldreduce export revenues by about US$100 million a year. The pattern ofgeographical concentration of trade is also a source of exposure to shocks.The purchasing power of Algeria is linked to the value of the dollar in whichmore than 95% of its exports are denominated while more than two-thirds ofits imports are denominated in other, mostly European, currencies. It isestimated that over 1995 the exchange rate movements have caused a currentaccount loss of over US$200 million.

Table 1: Effects of Seleded Shocks on Algeria (1995)

Changein Percent Absolute Change in AbsoluteGDP Differ. in Differ. in CAB Ratio Differ. in

Growth in Exports. Exports to Base CABExogenous Shocks % SM Exports SMlyr

Fall in Oil Price -1.3 -5.1 -543 -5 -531of USS$1blFaU in Hydro Exp. -0.2 -0.9 -91 -0.9 -92Vol Growth (lpp)Rise in Interest Rate) -0.02 0.0 0.0 -0.3 -75(100 bp)

*-- and high external 17. The weight of Algeria's external debt is high due to its short maturity

debt. structure. Owing to the recent debt rescheduling (Paris and London Clubs),the debt service ratio dropped from 73% in 1993 to 37% in 1995

ShnT- (MUiD 9 and is expected to fall to 28% next year. This relief is, however, onlytam U temporary as the debt service ratio is expected to climb again to around 40%

, , 4b/uki| by the end of the decade. This should be manageable, provided theGovernment pursues its stabilization and adjustment progran as agreed under

lllui lllthe EFF. The currency structure of the debt is also highly sensitive to currencyP&&C l 1 movements against the dollar, unlike exports. It is estimated that the

depreciation of the dollar during the first six months of 1995 increased debt_________________ servicing by US$250 million.

-9-

Over 1995, however, 18. 1995 demonstrated the Government's ability to respond to externalAlgeria showed strengths shocks. During the first half of this year, adverse exchange rate movements

in absorbing shocks. among major currencies increased the cost of imports and debt repayment. Inmid-year, the terms of trade suffered a significant deterioration due to a largeincrease in imported cereal prices together with weakening oil prices. Thiswas compounded by a US$1 billion reduction in short-term credit lines fromofficial export credit agencies. These shocks were well contained, owing to animproved resiliency of the economy and to a strong determination of theauthorities to adjust to these shocks. Policy measures were adopted rapidly,including depreciating the exchange rate well beyond the EFF targets. Thesedevelopments did not affect further structural changes, such as continued priceliberalization, which went ahead at an accelerated pace. External reserves,however, declined to about 2 months of imports, limiting future flexibility.

111. Government Development Agenda

Three objectives: 19. Over the last year, the Government has initiated a wide-ranging(i) stabilization and BOP stabilization and adjustment program to effect a progressive transition from a

viability; (ii) growth; and state-controlled economy to a market-driven one. The recent election results(iii) safety nets. and the financing agreements reached with external creditors offer a solid

breathing space to accelerate that program. The key priority objectives of theGovernment for the next few years are as follows:* continued economic stabilization and strengthening of balance of paymentsviability, while ensuring a sufficient level of imports compatible with growthobjectives;* promotion of labor-intensive private sector-led growth to reduceunemployment and reverse a decade of deterioration in the living standards ofthe population; and* protection of the vulnerable groups during this transition through safetynets and employmnent programs. A specific priority is also low-incomehousing in view of the severe housing crisis confronting the country.

A. Stabilization and P'iability of External Balances

The EFF provides a 20. A drastic stabilization effort was initiated last year, with IMF supportbroad macro under the Stand-by. This effort is being consolidated under the current EFFframework... program and complemented by the on-going ERL from the Bank. The EFF

provides a consistent macroeconomic framework for the next three years,combining stabilization and adjustment policies to support the followingGovernment objectives:* achievement of a 5% annual growth rate in non-hydrocarbon output overthe next three years;* reduction of inflation to the rate of trading partners;

- 10-

* achievement of a budget surplus of about 2.5% by 1998 (a sensible policyin view of the country's oil dependency), and* reduction of the current account deficit to about 2.5% by mid-1998.

21. The EFF program envisages the following key measures to attain theseobjectives:* buidgetary policy. budget surplus to be achieved through a review of theVAT, control of the wage bill: elimination of general subsidies; reduction intransfers; and review of the structure of public expenditures to protect socialspending,* price and trade liberalization: establishment of current accountconvertibility; progressive reduction of external tariffs (to a maximum of 60%and an average nominal rate of about 15% in 1996; tariff rates will be furtherreduced based on an effective protection study to be completed by mid-1996);completion of price liberalization by removing remaining general subsidiesand profit control margins; and elimination of energy price subsidies,i monetary and banking reforms: rationalization of interest rates;introduction of auction system for central bank refinancing and of indirectmonetary controls; restructuring and recapitalization of public banks andpromotion of private participation; and- public enterprises restructuring and privatization, in coordination with theWorld Bank.

22. While support from the Fund and the Bank is requested to provide aconsistent macro-economic framework, the authorities fully own this program,as evidenced by recent implementation progress. Key issues facing theauthonties in implementing this program will be as follows:- reaching external balances viability by 1998 will be vital to meet debtservice obligations at the end of the rescheduling period. In the short tomedium term, this Will require continued improvements in hydrocarbon exportrevenues, while export diversification takes place from a very low base.Fortunately, Algeria has good potential both in oil and gas, and foreigninterest in this sector remains strong . The authorities plan to: (i) intensifyexploration efforts; (ii) encourage foreign investment in the rehabilitation ofexisting plants; and (iii) accelerate development of new proven reserves;* inflation remains high (22%), although declining. This is receiving priorityattention by the authorities. The objective is to reduce inflation to the levels oftrading partners (5%/) by 1998. To this end, domestic liquidity targets aim atmaintaining monetary growth below nominal GDP for the next three years;and* the sustainability of this far-reaching program. So far, thanks todissemination efforts, the population has well accepted the reform program,despite its negative impact. To mitigate the cost on vulnerable groups, theGovernment is strengthening its safety net (see below).

-11 -

B. Resumption of Labor-intensive Private Sector-led Growth

but Algeria's agenda 23. Beyond this macro-framework, Algeria's development agenda remainsremains huge. To huge to complete its transformation to a market economy, unleash private

sustain growth and initiative, improve the efficiency and competitiveness of its productive sectors,employment, ... and achieve export diversification, all key requirements for sustainable growth

at levels sufficient to reduce unemployment from its current unsustainablelevel. In particular, Algeria is still a state-dominated economy plaguecl by ahost of inefficient enterprises in all sectors. Transformation to a full marketeconomy will, however, take time as market mechanisms still need to beput in place in many crucial areas. A key issue will be to manage thistransition carefully in the current context of social instability and highunemployment.

Table 2: Public Sector Shares in Value Added and Employment (1991)

Sectoral Public Sector Total Public SedorValueAdded Share Employment Share

(%GDP) (to) (000) (%)

Agriculture 10.2 0.2 1,040 3.6Hydrocarbons 30.5 100.0 38 100.0Industry 11.4 73.5 509 67.7Construction 11.2 44.6 674 54.3Services 24.0 26.4 870 33.4

o/wcommerce 14.0 19.1 400 19.1PublicAdrmin. 12.7 100.0 1,100 100.0

TOTAL 100% 63.00% 4,231 51.5%

...privatization and 24. At the heart of the Government program will be a three-prongedprivate sector strategy to revitalize the enterpnse sector and enlarge the scope of private

development should sector development for a more efficient and sustainable supply response:accelerate,... * For large public enterprises (totaling about 400), in the absence of

adequate demand for their privatization under the present situation, thestrategy of the Government is to impose strict performance criteria, improvetheir autonomy under market constraints, and restrict budget support. At thesame time, a program of PE restructuring is under way, including spinning offauxiliary activities, sale of assets, management contracts, and opening up ofcapital for private sector participation. The large PE sector will bereorganized under holding companies, with a view to improve financialdiscipline and prepare them for eventual privatization.

For small and medium enterprises (totaling about 1,300), a significantprivatization demand exists, especially in construction activities and services.For these sectors, the Government intends to launch a large-scale privatizationeffort, now that the privatization law has been enacted. The Governmentis presently completing institutional arrangements to ensure speed andtransparency in this process.

- 12 -

The third element of the strategy consists of measures to enhance privatesector development. This is well under way through the current liberalizationdrive. In particular, private sector activities are already responding, thanks tothe reform of trade, exchange rate and payments systems. Trade reform iscontinuing, as well as financial sector reform. New incentive systems(investment code, competition law and tax reforms) are also under way orcompleted. Also starting to emerge is private competition for Governmentcontracts, concessions and public works.

25. This broad program is, however, still in its infancy, and the supplyresponse remains constrained by the current environment. Issues that willrequire priority attention from the authorities are as follows:* while the legislation is in place, the privatization program still needs to beimplemented forcefully, especially in commercial and construction activities;good progress has been achieved in restructuring the public banks, but thebanking sector remains mostly in public hands and the financial sector remainsunderdeveloped. Entry of new private banks, and new management methodsin public banks, including through private participation, is desperately needed.

w.., while employment 26. Another key issue facing the Government in the current environmentand reform programs will be to ensure quick achievement of a labor intensive pattern of growth in

are put in place... the non-oil sectors to contain the already high unemployment. Algeria is notonly a state-dominated economy, but also a capital intensive one, driven bymisguided policies of the past. Macroeconomic projections indicate that even5% non-oil growth may be insufficient to reduce unemployment, unless theGovernment adopts a pro-active strategy to eliminate the anti-labor biasquickly. This strategy will need to encompass the following elements:D macroeconomic policies (including interest and exchange rates) which donot favor capital intensive activities to the detriment of labor intensive ones,and acceleration of the reform agenda to foster private sector operations;* labor market policies to improve labor skills, mobility and flexibility, andto enhance competitiveness and continue the realignment of the real wageswith productivity levels. To facilitate enterprise restructuring, laborlegislation also needs to be reviewed;* promotion of small-scale and informal sector activities; and* active labor intensive programs to carry out public investments, especiallyin infrastructure, agriculture and housing until the reform program generates asufficient supply response.

... especially in housing 27. As part of this effort, the Government is putting special emphasis onand agriculture... two sectors, to promote fast employment generating growth: housing and

agriculture. In both sectors, the Government intends to promote fundamental

- 13 -

transformation through deep reforms, while complementing them with activeemployment programs.* In housing, at the heart of the Government strategy, is a structural reforminvolving shifting from a supply driven, public sector dominated strategy to ademand driven, market oriented sector, while progressively focusing publicsector activities towards low-income housing needs and squatter settlementsthrough improved targeting. Key measures include: reforming housingfinance, shifting from occupancy rights to property rights; shifting frombudget financing to cost recovery; and, in the construction industry, shiftingfrom performance contracts with public enterprises to privatization andcontracting out of public programs.* In agriculture, the Government's strategy is to deepen the land privatizationprocess initiated in 1987 and to enhance private sector activities through:securing property nghts and developing market institutions to regulate landtransactions; land titling; regularization of property rights over state lands;privatization of agricultural public enterprises; development of regulatoryframework; and development of rural finance. This strategy would becomplemented by labor intensive work programs, especially to control landerosion. Investments in natural resources and water management are alsourgent; at this stage, priority is on rehabilitation, maintenance and reformns(e.g. pricing).

C. Social Protection

... together with 28. The third major element of the Government's strategy during theimproved safety nets for transition towards a market economy is the development of a social safety net,

the vulnerable groups. while protecting social expenditures (health and education) from budgetconstraints. The Government started developing its safety net program in1992 to mitigate the impact of the reduction in general subsidies. While thesystems developed initially were very broad-based, the Government has madeimpressive progress since 1994 in improving targeting and mechanisms. Thesafety net includes: a public works program, a payment transfer system forvulnerable groups (elderly, handicapped), and a national unemploymentinsurance scheme for workers laid-off for economic reasons. The worksprogram has already in one year provided jobs to more than 420,000participants at more than 16,000 work sites; the social transfer system nowcovers 430,000 heads of households; and about 40,000 people have beeneligible for benefits under the unemployment insurance scheme. There are,however, design problems, such as poor targeting, inefficiencies and paymentdelays, that still need to be addressed. A review of the programs is currentlyunder way to identify remedies.

- 14-

29. Health and education services have also deteriorated over the last fewyears and both sectors are in need of reform. While resource allocation isadequate overall, there are serious intemal inefficiencies. Too much was spenton new facilities and salanes: as a result, it is estimated that less than 50% ofexisting health facilities are utilized, and salaries account for the bulk of therecurrent education budget, leaving little room for financing textbooks andother inputs. In addition, until recently, health delivery was furtherconstrained by the lack of medicine, due to foreign exchange limitations.Schools and health centers have also suffered from acts of violence during therecent conflicts The needs are further compounded by low quality ineducation and the need for health service rationalization. The health situationis particularly worrisome, with new epidemics reported in some regions. TheGovernment strategy is two-fold to address these problems: in the short term,emphasis is placed on improving the sectors' internal efficiencies throughexpenditure reallocation, while laying the groundwork for longer term reforms.A final Government social priority is the need to address the desperate low-Income housing situation, especially in city slums, as discussed above.

IV. Macroeconomic Prospects

Algeria's growth and 30. Non-hydrocarbon growth will reach about 4% in 1995. a modest butbalance of payments important turnaround in a decade long recession. Provided the Government

prospects are promising, can maintain the momentum of adjustment, prospects are good for sustainingprovided the and accelerating non hydrocarbon growth to 5.5% progressively by the year

Government stays the 2000. This growth would be primarily driven by stronger growth incourse on adjustment. construction activities, services and agriculture. Construction will benefit

from the housing sector reforms, the availability of imported inputs, theincreased use of private contractors for public works, and the privatizationprogram. The agriculture sector will benefit from land privatization and thebreak-up of inefficient monopoly suppliers. Industrial activities should alsorecover slowly, as greater participation of the private sector takes place, andthe current restructuring efforts pay off. While non-petroleum sectors willgenerate internal growth, Algeria will remain dependent on petroleum exportsfor a quick return to balance of payments viability (expected by 1998).Investments under way are expected to double natural gas exports and reversethe decline in oil exports, resulting in an increase in hydrocarbon exportrevenues of US$3 billion between 1995 and 1998. Thereafter, growth wouldslow down to about 1-2% per year unless new investments come on strearn bythen.

31. Notwithstanding the glimpse of hope this scenario offers, the situationremains worrisome when measuring these prospects in terms of employmentgeneration. As noted above, at the current 4% growth rate of the activepopulation, even a 5% rate of growth (excluding oil) may not be sufficient

- 15 -

to reduce unemployment without further policy efforts. In the short run, therise in unemployment would be contained mainly through a Government laborintensive works program. As the market and private sector-led structure ofthe economy strengthens and the on-going macroeconomic reforms deepen, theswitch towards more labor intensive activities should contribute to higheremployment generation, Speeding up the structural reforms in the housingand agricultural sectors, both highly labor intensive activities, would furtheraccelerate the turnaround in the unemployment situation.

32. A key requirement to sustain these growth rates will be an increase ininvestment and savings. The ICOR is expected to remain high (about 7), evenconsidering some improvements in efficiency, because of the obsolescence ofthe capital stock of the public sector. As foreign savings decrease with thegradual reduction of the current account deficit, it is national savings thatshould sustain the projected growth. While private savings should grow inresponse to the financial sector and housing sector reforms, this is likely totake time, as, in the short term, private consumption should increase after thesignificant decline of consumption per capita during the last decade. Hence,most of the savings effort will have to be borne by the Government, with aprojected doubling of Government savings (from 4.5% to 9% of GDP) by theyear 2000. Most of these savings would come from the additionalhydrocarbon revenues of the new gas projects, underscoring the criticalimportance of the hydrocarbon performance in the short term.

33. The savings rate required to sustain the projected investments andgrowth will depend to a great extent on more efficient use of the currentproduction capacity, in view of the large unused capacity existing in almost allsectors. In this respect, it is worth noting that a lowering of the ICOR by onepoint would compensate, all things equal, a 3 percentage points decline in thesavings rate.

34. With the conclusion of the Paris and London Club reschedulingagreements, the external financing plan of the country should be secured until1998, barring any additional external shocks, and assuming the rest of thefinancing plan falls into place as scheduled. The viability of the balance ofpayments should also be restored thereafter, provided the performance of theeconomy and of the hydrocarbon sector remain on track.

- 16 -

Table 3: Financing Plan (USS bilion)

1994 1995 1996 1997 1998

Needs 5.72 6.00 4.78 3.42 0.99Sources:Total Rescheduling 4.49 4.78 3.73 2.38 0.56Paris Club 3.70 3.77 2.81 1.74 0.56London Club 0.79 1.01 0.92 0.64 0.00

IMF 0.85 0.61 0.53 0.52 0.13IBRD (BOP) 0.08 0.26 0.20 0.20 0.20Other Mufrilateral (BOP) 0.30 0.35 0.32 0.33 0.10Financing Gap 0.00 0.00 0.00 0.00 0.00

But prospects remain 35. The above scenario, while realistic, remains nevertheless vulnerable.vulnerable to internal Down side risks could, for instance, emanate from a significant deterioration

and external shocks. of the political situation. This would have a serious impact both on potentialinvestments and on production disruptions. In such a case, higherunemployment and budget pressures would build up, leading to likely policyreversals, such as in the 1992/93 period. The current account and growthobjectives could also be seriously jeopardized should a persistentdeterioration in the price of oil and gas occur. In such a case, pressures wouldbuild on the foreign exchange regime, and/or lead to reduced imports, withnegative impact on growth.

BANK GROUP COUNTRYASSISTANCE STRA TEGY

Over the last two years, the Bank has remained an active partne in Ajgeria, andwe intend to remain fully present to assist Algeria in its current transition toenable it to capitalize fully on the emerging window of opportunity. Ourproposed program represents a: high nsk high pay-off :strategy aiming ataccelerating the process of transformation of the Algerian economy. 1n view ofthe uncertain environment, however, flexibility will bea required to adapt quicklyto evolving country circumstances. Hence, the proposed Bank strategy outlined::below should be.seen as an4interim strategy, focusing on the next 12 months..

1. Current Program

The Bank has remained 36. In view of the evolving circumstances, no country assistance strategyactively involved in as such has yet been discussed at the Board. The broad lines of the BankAlgeria, despite the strategy were, however, discussed during the recent presentation of theworsening security Economic Rehabilitation Loan, presented to the Board in January 1995.

situation...

- 17 -

37. Over the last two years, the Bank has remained fully involved inAlgeria, working closely with the Fund and the Algerian authorities on theirreform program. This effort has been rewarding, thanks to a fully committedGovernment team. Over the last year, the Bank: restructured its portfolio,resulting in a doubling of disbursements compared to the last few years;continued mounting supervision and preparation missions through innovativemeans, such as negotiations outside the country, appraisals based on videos,use of local consultants, and selective field visits; and continued an mtensepolicy dialogue. through sector work and adjustment lending preparation.

38. These efforts have resulted in the following outcomes:* annual disbursements reached US$440 million in FY95, more than doubletheir level in FY94. and the highest level of any country in the region;* the portfolio was reduced to 20 loans, from 24 at the beginning of the year,despite the addition of three new loans;* problem projects declined from 45% to 30%, despite the existing difficultcircumstances: and* active preparation is on-going on the new Government priorities, such asemployment, housing, agriculture, public expenditure restructuring, privatesector development and privatization, leading to strong policy dialogue andpreparation of new operations.

Supervision Strategy and Development Impact:Housing Completion and Sector Development Project (1993)

US$200 million

The main objectives of the project were: to trigger a rapid housing supplyresponse and to support medium-term objectives of housing sector reform. By theend of FY95 US$107 million had been disbursed. A major concern during theearly stages of this project was the availability of critical building materials whichwere in vety short supply. Simplified procurement procedures coupled with therecent trade liberalization has now eased the imports of the required materials.As a result, good progress is being made in reaching the two projcct objectives:(i) the CNEP (housing fimd) reform agenda was approved by the GovernmentCouncil in AugtLst 1995; and (ii) the completion of the 51,000 social housingunits before the end of December 1996 is advancing as scheduled. In addition,the project has provided a vehicle for a productive policy dialogue on the wholehousing reform agenda of the Government, presently under preparation. Projectsupervision was intensive, and took place patly in Algeria, but mostly throughreviews outside the country (Paris, Geeneva, Tunis). Use of consultants was madeto supplement Bank staff supervision. Project implementation was also facilitatedby a dynamic and competent Govemment team. An issue, however, is that whilewe could influence project and program design, it remains extemely difficult tohave first-hand appreciation of implementation through field visits.

- 18 -

39. An issue affecting our operations in the current environment has beenthe difficulty to consult with all stakeholders in the country due to the securitysituation- Feedback on our operations and strategy was, however, received inthe following way

regular consultations outside the country with the private sector in thecontext of the Private Sector Assessment (PSA).* use of independent local consultants;* close contacts with external agencies and intemational banks;* monitoring of the local and external press;* broad-based informal contacts outside the country; and* periodic visits to Algeria by Bank staff.

II. Country Assistance Objectives

... and intends to remain 40. Algeria needs to achieve quickly a high and sustainable rate offully present in view of economic growth if it is to provide any hope of a better life for its citizens and

the major role it can play to reduce social tensions This will require a fundamental change in itsduring the transition. economic management from a centrally planned model to a fully market driven

one. It also needs to manage carefully this transition and strengthen its safetynets and employment programs. All this, while being constrained by anextremely difficult external financial situation and the continued need tostrengthen internal social stability. The Government expects strong Banksupport in these difficult times, as a lender of last resort, especially in view ofthe close convergence of views on its development agenda, and the recentprogress both on the economic and political fronts.

41. The Bank intends to remain actively present during this period.However, while recognizing the existing opportunity to deepen the reformprogram, we have to realize that any lasting improvements may hinge on theresolution of the existing political and social crisis, that the pace of reformsitself has to be tailored to these difficult circumstances, and that the potentialrisks to the Bank, as an institution, also have to be carefully managed duringthis transition.

42. In this environment, the main objective of our current transitionalstrategy will be to capitalize on the present window of opportunity to deepenand ensure the irreversibility of the reforms as the central condition for futuregrowth, while carefully balancing our support with prudent risk managementto preserve the Bank's financial position. To achieve this, the Bank'ssupport to Algeria will focus on the following three key priorities:

stimulating private sector-led employment generating growth through adeepening of the reform program;

- 19 -

* protecting the poor during the transition through targeted operations" and* providing external financial viability and enhancing the country's ability tomobilize external resources by providing comfort, together with the IMF. tothe international community, and attempting to mobilize additional resources

43 The principles that would guide our strategy are to:* maximize results on the ground by selecting interventions that would makea qualitative and quick difference in the lives of people (i.e. housing. laborintensive public works, and safety net), and projects that would enhancecreditworthiness (i.e hydrocarbon sector);* reinforce solid economic performance and reforms, based on up-frontactions, with quick-disbursing policy-based loans, appropriately phased:* retain maximum flexibility in choosing Bank assistance instruments,focusing on simpie. easily implementable operations, and actively restructurethe on-going portfolio in sectors where supervision becomes difficult, and* monitor the evolving situation carefully and constantly to quickly adapt ouroperations and program.

A. Stimulating Private Sector-led Emploiment Generating Growvth

From legislative reforms 44. While the Govemment and the Bank fully agree on this mainto actual privatization, to objective, a key issue facing the countrv will be the appropriate sequencing

stimulate a supply and pace of the reforrn program, considering both the current difficult socialresponse on the ground... and political environment and the need for job creation to manage a successful

transition. The Bank will focus on the following priorities:* support to further structural reforms. through a SAL, focusing on largescale privatization of small and medium enterprises, while larger ones arerestructured, made autonomous and prepared for privatization; strengtheningof the banking sector and further progressive financial sector liberalization,and safety net protection,* phased further adjustment programs in kev growth sectors. such as housingand agriculture, supporting both transition programs to create employmentand reforms in the incentive system (including land privatization, and housingfinance reformn) and* complementing the EFF program in place with analysis and dialogue onfurther trade, financial sector and labor market refonns, the structure ofpublic expenditures, and social protection. FIAS also contributed to thepreparation of the new investment code.

45. In general, there is full convergence of views with the Government onthis strategy and the legislative framework is in place. Very close cooperationwith the Fund is also in place to ensure consistency in policy advice andcomplementaritv of reforms. To ensure the irreversibility of the reform

- 20 -

program, Bank support in the proposed SAL will be conditioned on asignificant start of the privatization program. This operation is intended to befollowed next year by a possible agriculture SAL (ASAL) and/or a housingSAL (HSAL). The reformn agenda in both sectors is at an advanced stage.

R Protecting the Poor

... with increased support 46. Quick employment generation and protection of the vulnerable groupsfor employment will be crucial to safeguard the reform programn and resolve the social crisis

programs and protection which has plagued the country over the last four years. Priorities are: (i)of vulnerable groups,... expanding and strengthening safety nets; (ii) accelerating implementation of

well targeted labor intensive programns; and (iii) addressing the desperate low-income housing situation, especially in city slums. The Bank intends tosupport these objectives as follows:* review and strengthening of the safety nets as part of the SAL, andpreparation of supportive safety net operations;* poverty assessment to improve targeting and programs design;* elaboration of an employment strategy based on a labor market review,coupled with support for labor intensive programs in agriculture,infrastructure and housing construction;* low-income housing project to improve the targeting of Governmentprograms and improve their implementation efficiency; and* development of appropriate education and health strategies, based on thefindings of the detailed reviews carried out in these sectors as part of thepublic expenditures review (PER).

Gender Objective

Our proposed strategy is gender neutral. It aims at reducing povrty andhardship for the whole population, while strengthening the reform program as.the key condition for sustainable growth. Nevertheless, it also incorprates a.detailed agenda for supporting women. Women in Algeria benefit from similar educational achievements as men. They are, however, stillI a small part of the.labor force. There are also indications that professional women have beenatargeted: particularly in recent terrorist attacks. Indications in other countriesare:tat women may bef disproporo nately affected at the time of lay-offs andthat women heads of households are usually among the most vuinerab groupsin times of economic hardship. Our proposed poverty study will discuss theigender aspects of poverty and progress in social indicators. In addition, the

social safety net project will aifm at increasing women's participatido rate intpublic works programs. The SAL will also ensure that poor femalc heads of

households are covered by the safety net.

-21 -

C. Enhancing the Country's Ability to Mobilize External Resources

... as well as support to 47. Mobilization of new extemal financing is one of the key constraintsincrease foreign inflows. affecting the near future of Algeria, and one of the most important to introduce

efficiency changes. While the current climate is not conducive to substantialincreases in FDI, Algeria does offer a relatively well sheltered oil and gassector with large potential and which is crucial to Algeria's medium-termprospects. The Bank group intends to take the following approach to increaseextemal resources mobilization:* continued support, together with the IMF, in completing the Paris andLondon Club reschedulings, already agreed in principle. The Bank would alsobe ready to provide institutional support to improve debt management;* joint efforts with IFC and MIGA to mobilize FDI, especially in the oil andgas sectors, in large infrastructure projects, in the banking sector, and toattract potential strategic investors in large privatizable public enterprises,when this becomes possible (see box on IFC below);* dialogue on the policy environment in the hydrocarbon sector, to besupported by specific catalytic operations, should this be required;* active efforts to attract co-financing in all our operations (especially butnot limited to the EU); and* consultations with multilateral and bilateral agencies to support priorityGovernment programs, especially in housing and safety nets.

Esternal Assistane Programs

Anticipated intemational assistance to Algeria is summarized in its financingplan. The major sources would be: debt reschedulng, and BOP support fromthe IMF, the World Bank, the EU, the Arab Monetary Fund, and the AfricanDevelopment Bank, The European Development Bank (EIB) has also providedsupport for gas development. Negotiations are on-going with the EU on apossible Free Trade Agreement, as part of the Euro-Med itiative. Should thisbe concluded rapidly, Algeria could benefit from substantial EU financialsupport The largest bilateral donor has been France, which provides annualsupport in the order of US$1.2 billion in concessional financing and creditguarantees.

D. Other

48. The needs of the economy are great in all sectors. In particular.education and health provision, infrastructure, water management andpollution control have all deteriorated and are in need of support. While wewould like to be responsive through a progressive build-up of our pipeline, theBank alone cannot address them all. At this stage, the key issues confrontingus are:

- 22

* the need for focus and selectivity to maximize the impact of our efforts;* progress in our involvement, and* likely sustainability of our efforts in the current environment.

111. Proposed Assistance Program

49. The main Bank instrument for carrying out the above objectives willbe a combination of new lending, portfolio restructuring, policy dialogue andincreased resource mobilization efforts, while maximizing flexibility to adaptquickly our interventions to changing circumstances.

A. Lending

Base case of US$400 50. Our proposed lending program for FY96 amounts to US$400 million,million in FY96, with or about the same level as in the early nineties, during the first efforts at

US$300 million for economic restructuring. Out of the US$400 mnllion, US$300 million isadjustment support. earmarked for adjustment support, with the remaining amount mostly focused

on safety net type projects. In view of the current uncertainty, we propose togo back to the Board with a CAS update within twelve months to reviewfuture lending levels and priorities. In the meantime, we are planning anindicative lending range for FY97 between US$250 - US$400 million (ofwhich 50% for adjustment lending), depending on progress on the economicreform effort and in the securitv and social environment.

51. The central piece of our FY96 program will be the proposed SAL. Itwill be complemented by pilot safety net and low-income housing projects.Both of these projects are focused on the most vulnerable groups and includelocal community participation and construction activities through small andmedium-scale private enterprises. We would plan to follow this effort inFY97 by deeper reform programs in agriculture and/or housing,complemented by larger employment and housing projects, based on lessonslearned in the pilot operations. The proposed lending program is alsocomplemented by strong policy dialogue based on short strategy notes,preparation activities and detailed analytical work to support the reformprogram and prepare new operations. In particular, a private sectorassessment and a public expenditures review helped in designing the SAL, ahousing sector strategy review is being completed; and a poverty assessmentand an employment and labor market study have been initiated.

- 23 -

Complementarity of Bank-IFC Involvement

In Algeria, IFC and the Bank have been coordinating closely. IFC's strategycomplements the CAS framework on the following three key objectives:l resource mobilization: emphasis on the hydrocarbon sector. IFC's role isprimarily to: (i) identify joint ventures between Sonatrach and foreign partners tobring new technologies to Algeria; and (ii) mobilize the necessary financing forthese capital intensive projects. In addition, IFC and the Bank are collaborating onthe restructuring needs and policy dialogue in the sector. IFC is arranging asyndicated loan of US$125 million to help finance the US$1.4 billion Rhourde ElBaguel oil recovery project;,* deepening of the financial sector and capital market development. The possibleestablishment of private sector universal banks and leasing companies is a highpriority. IFC is actively searching for potential partners, who would play the role oftechnical partners in such ventures. IFC is also financing regional intermediarieswith interest in Algeria, IFC has provided assistance in reviewing the legalframework in the sector and in drafting new laws; and* privatization. Algeria's privatization program is only starting. Once in place,IFC will review possible projects. A priority might be cement plants to support thedevelopment of the housing and construction markets.An improvement in the security situation in Algeria would greatly enhance IFC'sability to attract foreign partners.

B. Portfolio Management

Improvement in portfolio 52. Overall, although not yet fully satisfactory, portfolio performanceperformance... improved steadily last year, despite the difficult security situation and the

continued limited ability of staff to travel to the country. This was the resultboth of: (i) a revised supervision strategy coupled with aggressive portfoliorestructuring, including judicious management of closing dates; and (ii) anequally intensive effort by the authorities to address problems, improvemanagement of Bank financed projects, and act quickly on their restructuring.As a result, the portfolio is now more performing and more in line withGovernment priorities and current realities and disbursements improveddrastically, doubling their level compared to the previous years. Moreimportantly, the number of problem projects declined, and assessment of theirexpected development impact improved. Disbursement performance was alsovastly speeded up by simplified disbursement procedures both in the ERL andin the housing project under implementation.

...but more is needed. 53. More efforts are still needed, however, to refocus and complete theclean up of the portfolio. In particular, two areas need continued efforts:

- 24 -

the agriculture portfolio which accounts for most of our problem projects.The Government and the Bank are currently reviewing ways to refocus theentire agricultural portfolio to meet the urgent employment needs in ruralareas and to reduce land erosion. About US$50 million has been identified forcancellation or restructuring. Should this amount be canceled, we wouldreplace it by a new, better focused operation of a similar arnount; and* the human resources portfolio which has been plagued by weakimplementation and cumbersome disbursement procedures. Whileimplementation has recently improved, disbursements are still lagging. Weare currently carrying out a joint review of these projects with the Governmentand expect progressive improvements in disbursements to take place. Policydialogue was intensified to address the major constraints identified in the PER.

Table 4: Portfolio Performance

FY93 FY94 FY95

Number of Operatwons 25 24 20

Outs. Amount Start of FY (USS biion) 1.3 1.2 1.1

Disbursement Ratio 14.3 15.9 19.8

Dev. Objedive Rating (-Io Problem Projeds) 28.0 45.8 29.2

C. Non-Lending Services and Resource Mobilization

Non-lending services to 54. Strong priority is being devoted to analytical work during the currentremain focused on transition period. The main objectives of our non-lending services will focus

reform strategies to on helping the Government with policy design during the current process ofsupport new operations economic transformation and on providing the basis for future operations.

and policy dialogue- Such services and analytical work are formulated and implemented jointlywith the Government to improve ownership and ensure capacity transfer. InFY96, we will complete a private sector assessment and a public expendituresreview (both at an advanced stage), as well as three informal strategy pieceson effective protection, housing and the financial sector. In FY97, we willcomplete a poverty assessment as well as a labor market and employmentstrategy review, and initiate strategy notes on human resources issues, theagricultural sector and the hydrocarbon sector. In addition, assistance willcontinue to be provided to support the implementation and design of theprivatization program and possibly on debt management. Non-lendingactivities will be coordinated closely with the IFC and the EU, especially onthe follow up to the private sector assessment, the privatization program andfinancial reforms.

- 25 -

IV. Resource Implications

55. The table below summarizes the resource implications of ourproposed strategy, compared with our level of support in the last few years. Italso reflects the need to build up progressively our project portfolio.

Tabk 5: Resource Use

FY90/91 FY92/93 FY94 FY95 FY96 FY97AvK Act Av. Act Act Act Budget Indicative

Staff Years 25.0 16.6 14.1 14.7 170 18.0USS 7.3 4.8 4.1 4.3 4.9 5.2

%LEN 54 30 33 44 40 44%6SPN 24 44 45 39 34 30%ESW 18 20 17 12 17 18%OTH 4 6 5 5 9 8

Note: DoUlar budgets computed at average all-in-cost of USS290,000/SY.

V. Risk Management and Creditworthiness

Strong but prudent 56. The proposed Bank program airns to strike a delicate balance betweensupport, rewarding active support to Algeria during this crucial transition, and risk and

achievements, but uncertainty management in view of Algeria's internal and external economicbalancing risk vulnerability.management.

57. Our program was tailored along the following financial objectives:* a level of support consistent with our support in the early nineties, duringthe first phase of strong adjustment;* keeping our exposure in line with that of the Fund during the programperiod, and at a level sufficient to meet extemal financing needs;* ensuring positive net disbursements and no negative net transfers; and* keeping our exposure within prudential limits.

58. At the same time, we are faced by the following constraints:* limitations on Bank staff to travel to the country for project preparationand supervision, especially outside Algiers, until the security situationimproves markedly; this affects the program scope and design;* the social and economic uncertainties which may limit the pace of reformnsand the sustainability of Bank financed projects; and* potential risks to the Bank's financial position, should Algeria enter into anon-accrual status (the Bank's DOD amounts to US$1.8 billion), due to asharp worsening of economic conditions.

- 26 -

59. The two tables below summarize the results of the financial impact ofour proposed program on expected flows and exposure:

Table 6: Net Lending by the World Bank

Actual ProposedRange

FY90/91 FY92/93 FY94 FY95 FY96 FY97Avg. Avg. Indicative Range

Commitments 444 228 140 331 400 250 400Disbursements 278 300 198 441 450 420 480Repayments 145 164 189 237 260 270 270Net Disburst 133 136 9 204 190 150 210Interest 80 112 114 126 140 144 145Net Transfers 53 24 -105 78 50 6 65

Table 7: IYerld Bank Exposure

1994 1995 1996 1997'

Total DOD (USS billions) 28.4 32.3 34.9 36.5of wick lBRD 1.6 1.8 1.9 2.1of which AI8F 1.1 1.6 2.0 2.4

ExposureIBRD Debt Service/Exports 2.8% 3.3% 3.0% 2.9%IBRDDS/PublicDS 7.2% 9.4% 11.1% 9.5%Pref: Cred DS/PublicDS 21.7% 23.3% 26.4% 22.0%Share of IBRD Portfolio 1.5% 1. 7% 1.7% 1.7%

l/ ANo significant change over the USS250-400 lending range.2/ IMF exposure is projected tofall to US$2.0 billion in 1998.

Risks remain high, but 60. The main sources of risk relate to two factors: (i) possible deteriorationare manageable of the security situation; and (ii) external financial vulnerability due to

Algeria's high debt service and its extreme dependence on hydrocarbonrevenues. Hence, the risk of policy reversals and payment interruptions,especially for non-preferred creditors, may be high. Such risks should,however, be balanced with: (i) the performance record of the Govenunent overthe last year on the economic front; (ii) the agreements reached with externalcreditors offering a viable external financing plan; and (iii) the window ofopportunity to deepen social stability following the recent elections. Inaddition, these risks should also be balanced with the risk of not beinginvolved at this crucial juncture as well as that of not fulfilling our mandate asa development institution.

- 27 -

61. The focus of our program on reforms, employment and safety net,combined with close monitoring of economic management (EFF program)aims at strengthening the emerging economic recovery and at accelerating thetransformation of Algeria's economy, two factors which should improveAlgeria's creditworthmess over the medium term. Furthermore, our programaims at providing a graduiated response. based on performance, as a basis forour proposed adjustment loans. Possible risks of default and of policyreversals are also mitigated by the continued need for international support,and the broad acceptance in Algenan society of the need for deep economictransformation and the thrust of the reform program. In fact, our proposedprogram focuses on actions which are widely accepted across the wholespectrum of political parties and social groups. Hence, the most likely risksmay be the pace of reforms and the relative development impact of ourinterventions. Taking these risks into account affects the size and timing ofour support, as well as the design of our operations.

VI. Triggers and Future Lending Range

Program to be reviewed 62. Our FY96 program is conditioned on substantial up-front actions,within one year based on including a significant start on the privatization program. In addition, the

economic and social Government is in compliance with the Fund EFF program and with the Bank'sprogress. ERL. Significant progress has also already been made on the policy

framework in housing. agriculture and safety nets. The program for FY97and beyond will be reviewed within one year, based on continued progressunder the proposed SAL and EFF programs, together with an assessment ofprogress on the political and social front and of the future Governmentprogram. While we are currently planning on a lending range of US$250 -400 million for FY97, our program would depend on the evolving situation inthe country. The upper range of support (US$400 million) would beconditioned by: (i) strong progress on adjustment, including continuedacceleration of the privatization program, deregulation and private sectordevelopment, while the EFF and the SAL remain on track; (ii) agreement onhousing and agriculture sector reforms (including progress on housing marketreforms and land privatization); (iii) continued improvements in the securitysituation, enabling a return to normal business; and (iv) continued strongimprovements in portfolio restructuring, especially in the agriculture andhuman resources portfolio.

63. In the present environment, while we feel we should capitalize on theemerging wvindow of opportunity and support the Government's reconstructionefforts on the economic, social and political fronts, it nevertheless remainsextremely difficult to predict future support, as it would depend on thesecurity situation and our capacity to prepare and supervise projects, actualprogress on the reform program, and possible pace of reforms and supplyresponse in the current difficult environment. Hence our program could range

- 28 -

anywhere from zero, in the drastic and unlikely event of civil war or default, toUS$400 million, depending on reform progress as outlined above andcreditworthiness considerations. We plan to keep the Board informed of anysignificant change in our strategy during this limited CAS period, and returnto the Board within twelve months with a CAS update.

VI]. Performance Criteria

The main criteria for 64. Specific objectives and performance indicators are included in thesuccess will be the ability attached table on the FY96-98 Country Program Objectives. The mainto sustain labor intensive criteria for evaluating the success of the proposed strategy will be:

growth and move the * the ability of the economv to sustain the emerging growth performance inreform agenda forward. the context of continuing sound macroeconomic management and sustained

progress in achieving social stability,* the ability of the economy to generate a labor intensive pattern of growth,and together wvith Government programs, to reduce unemployment;* continuation of economic transformation towards a market economythrough a deepening of the reform program, especially through the launchingof a major privatization program,* widening of the safety net program to protect vulnerable groups during thetransition period, and completion of a broad-based poverty reduction strategy;and* agreement on reform strategies in each sector to support Bank financialprojects, and clean up of remaining portfolio issues by FY97.

A GENDA FOR BOARD DISCUSSION

65. The main agenda for Board discussions should focus on:I adequacy of the proposed approach in the current circumstances;* program focus and resource implications; and* performance criteria.

James D. WolfensohnPresident

AttachmentsWashington, D.C.January 31, 1996

ALGERIAFY96-97 COUNTRY PROGRAM OBJECTIVES

Country % of % ofObjectives Objectives Bank Services Work Program Tasks $ Total t Total

Stimulate private * Privatlation of one-half of existing SMEs Bank adjust lending/superv. SAL 1, HSAL and ASAL; ERL supervision 803.1 16% 987.2 19%sector-led growth with othcr PEa prepared for privatlzatlon Analytical output PSA, PER. Competltilvcrne Review 397.0 8% 251.0 5%Financial sector reform: strengthening Trado Protection, Financial Strategy andpublic banks aid creating private banks llousing Sector Stratcgy

* Implementation of agriculturc reforms with iivcstment lesding preparation hifrastructure and Agriculturc projccts 250.0 5% 306.7 6%substantial land privitntizion, and rceform Institutional developmcnt IDF: Privatizatlon and PSD 83.7 2% 111.5 2%of Govt housing program and financeIncreased dclivery of public servicesby private sctor .Rcsourn Sub ti -- i53 31 . 165 4

Protcct thc poor ' Rcform of socia safety neA Investment lending preparation Low tncome Housing, Social Safety Net, 1095.0 22% 780.8 15%during the transition 4 Launching of employment promotion Rural Employment and lhcalth Sectorprograms Portfolio mansgement Vocational Training and Univcrsity Dcv. 167.4 3% 89.2 2%

4 Protecting and increasing access Analytical outputs Labor Market and Employment, lHuman 343.0 7% 529.8 10%ta eAlucatiosn, icaltil and basic scrvicce Rcources Strategy a*id PA

. . ....... .... . _ .. , ,40t F.-, .404 , -,,, ..... ..Enilance couitry's + Encourage DFI It oil and gas, utilities and Informual analytical oulput Petrolcumn Sector Reform 139.4 3%iability to mobilize infrastructurc Bank lending preparation Petrolcum Rthabilitalion 55.8 1 % 167.3 3%external resources + Enhiance role in donor coordination Cofinancing activitics 83.7 2% 83.7 2%

Donor coordination lnformal donors meetings on social priorities 60.0 1% 60.0 1%Istitutionai development IDF: Debt Management 37.7 1% 83.7 2%

ft R.sourS iub-tota: 2T72 -% 5741. 10.Portfolio manage- 4 Strengthen institutional framework for Portfolio management Industrial Pollution Conlrol, Water Resources. 1386.3 28% 1310.f 25%mucat and other environmental management Watershed Management, Porcstry and Water-4 Protect natural resources, particularly shed, Locust Control, Resrch and

water EtLension, Mitidja Irrigation, Sahara0 liprove Implementation of existing projects Dcvelopmcnt and Infrastructure projects

CPPR 60.0 1 %* Rebuild infrastructure portfolio New lendinig preparation Natural Resources portfolio 158.5 3%* Mainltin coulinry progrOm support Noii-lcndting servicc Counitry/policy dialogue/CAS 167.3 3% 83.7 2%N .w Computed at rate of 290,000uY costFr sile:A.: ::r 3% >

Note: Computed at rate of $290, 000/SY cost File: ALStrategy

Annex AlPage 1 of 1

Algeria - Selected Indicators ofBank Portfolio Performance and Management

Indicator FY 93 FY 94 FY 95 FY 96(current)

Portfolio Performance

Number of projects under implementation 25 24 20V 20Average implementation period (years)'/ 3.8 4.4 4.5 4.9Percent of problem projects rated U or HU

(for past year. rated 3 or 4) b/

Development objectives tI 28.0 45.8 29.2 30.0Implementation progress (or overall

status for past years d/ 32.0 58.3 41.7 40.0Cancelled during FY in US$m 34.81 135.85 59.64 54.14Disbursement ratio (%) r/ 14.3 15.9 19.8 24.4Disbursement lag (%) tl 26.1 32.9 26.0 27.7Memorandum item: % evaluated projects rated unsatisfactory 51 55.6

Portfolio Management

Supervision resources (Total US$) 917.3 783.1 673.7 298.2Average supervision (US$/project) 36.7 32.6 28.1 14.9Supervision resources by location (in %)

Percent headquarters 100.0 100.0 100.0 100.0Percent resident mission .0 .0 .0 .0

Supervision resources by rating category (USS/project)Projects rated HS or S 39.3 28.4 28.4 17.3Projects rated U or HU 31.2 49.9 39.5 13.0

Memorandum item: date of last/next CPPR

a/ Average age of projects in the Bank's country portfolio.

b/ Rating scale: "HS" denotes "Highly Satisfactory", "S" denotes "Satisfactory", "U" denotes "Unsatisfactory", and "HU' denotes'Highly Unsatisfactory".

_/ Extent to which the project will meet its development objectives (see OD 13.05, Annex D2, Preparation of ImplementationSummary (Form 590)).

d/ Assessment of overall performance of the project based on the ratings given to individual aspects of project implementation (e.g.management, availability of funds, compliance with legal covenants) and to development objectives (see OD 13.05, Annex D2),Preparation of Implementation Summary (form 590)). The overall status is not given a better rating than that given to projectdevelopment objectives.

e/ Ratio of disbursements during the year to the undisbursed balance of the Bank's portfolio at the beginning of the year: investmentprojects only.

f/ For all projects comprising the Bank's country portfolio, the percentage difference between actual cumulative disbursements andthe cumulative disbursement estimates as given in the "Original SAR/PR Forecast" or, if the loan amounts have been modified, inthe "Revised Forecast". The country portfolio disbursement lag is effectively the weighted average of disbursement lags forprojects cornprising the Bank's country portfolio, where the weights used are the respective project shares in the total cumulativedisbursement estimates.

g/ PCR/PAR cumulative FY80-94: from the OED database, ARPP.

h/ Four loans closed in FY 1995.

Annex A2Page 1 of 2

Algeria - Bank Group Fact Sheet, FY93-97

IBRD/IDA Lending Program, FY93-97

Past Planned Indicative

CategoryFY93 FY94 FY95 FY96 FY97

Commitments 240.0 140.0 331.0 400.0 250.0 400.0(US$m)

Sector (%)'

Agriculture .0 21.4 .0 .0 40.0 25.0Education 16.7 .0 .0 .0 .0 .0Energy .0 .0 .0 .0 .0 .0Heatth .0 .0 .0 .0 .0 .0Non-Sector .0 .0 45.3 75.0 .0 .0Other PHN .0 .0 .0 .0 .0 .0Pollution/Waste Mgmt .0 .0 .0 .0 30.0 18.7Power .0 .0 .0 .0 .0 .0Social Sector .0 .0 .0 12.5 30.0 31.3Transportation .0 .00 39.3 .0 .0 .0Urban/Housing 83.3 .0 15.4 12.5 .0 25.0Water Supply & Sewag .0 78.6 .0 .0 .0 .0

TOTAL 100.0 100.0 100.0 100.0 100.0 100.0

Lending Instrument (%)

Adjustment Loans /b .0 .0 45.3 75.0 40.0 50.0Specific Investment Loans & 100.0 100.0 54.7 25.0 60.0 50.0

Others

TOTAL 100.0 100.0 100.0 100.0 100.0 100.0

Disbursements (US$m)

Adjustment Loans /b 22.2 5.9 225.7 225.7 200.0 250.0Specific Investment Loans & 184.9 192.5 210.0 224.3 220.0 230.0Others

Repayments (US$m) 171.3 189.1 237.1 260.0 270.0 270.0

Interest (US$m) 115.9 113.7 125.6 140.0 144.0 145.0

a. For future lending, rounded to nearest 0 or 5%. To convey the thrust of country strategy more clearly, staff may aggregate sectors.b. Structural adjustment loans, sector adjustment loans, and debt and debt sevice reduction loans.

Annex A2Page 2 of 2

Algeria - IFC and MIGA Program, FY 93-96

Category FY 93 FY 94 FY95 FY 96

IFC approvals (US$m) .0 10.0 .0 125.0Sector (%)Manufacturing .0 .0 .0 .0

Total .0 .0 .0 .0

Investment Instrument (%)

Loans .0 100.0 .0 100.0

Total .0 100.0 .0 100.0

Annex A3Page 1 of 1

Algeria - Summary of Economic and Sector Work

(US$ thousands)

Category FY95 FY96 FY97Actual Proposed Indicative

Other 220.8 204.0 55.8Agriculture 2.2 .0 .0Education .0 .0 .0Social Sector 5.6 228.7 529.8Non-Sector 114.3 189.6 195.2Health .0 .0 .0Transportation 0.6 .0 '0Power .0 .0 139.4Environment .0 .0 .0Pollution/Waste Management .0 .0 55.8Privatization 147.2 83.7 .0

Total economic and sector work 490.7 706.0 976.0

Annex A4

Algeria Page 1 of 2Most Same region/income group Next

Latest single year recent Mid-East Lower- higherUnit of estimate & North middle- income

Indicator measure 1970-75 1980-85 1988-93 Africa income group

Priority Poverty IndicatorsPOVERTYUpper poverty line local curr. .. .. ..

Headcount index % of pop. .. .. ..

Lower poverty line local curr. .. .. ..

14eadcount index % of pop. .. .. ..

GNP per capita USS 950 2,490 1.780 1.9S0 1.590 4.350

SHORT TERM INCOME INDICATORSUnskilled urban wages local curr. .. .. ..

Unskilled rural wagesRural terms of trade

Consumer price index 1987=100 31 83 270Lower incomeFood

Urban '. 79 207Rural

SOCIAL INDICATORSPublic expenditure on basic social services % of GDP .. .. 12.7Gross enrollment ratiosPrimary % school age pop. 93 92 99 97 104 105Male 109 102 105 103Female 75 82 92 90

.MortalitvInfant mortality per thou. live births 132.0 88.0 52.8 52.3 39.0 35.8Under 5 mortality " . .. 68.0 69.9 61.5 42.6

ImmunizationMeasles % age group .. 17.0 83.0 81.3 77.6 82.0DPT .. 33.0 89.0 84.0 82.2 74.2

Child malnutition (under-5) " .. .. 9.2Life expectancyTotal years 54 61 67 66 67 69Female advantage 2.0 2.0 2.4 2.3 5.9 5.9

Total fertility rate births per woman 7.4 6.4 3.8 4.7 2.9 2.9Maternal mortality rate per 100,000 live births . 129 ..

Supplementary Poverty IndicatorsExpenditures on social security % of total gov't exp. .. . ..

Social security coverage % econ. active pop. .. .. 62.0Access to safe water: total % of pop. .. 69.0 .. 83.5 .. 86.7

Urban 84.0 85.0 .. 98.7 .. 93.9Rural " .. 55.0 .. 69.0 .. 66.7

Access ro health care 8.. .. .. 7.4

.~~~~~~~~~Population growth rate GNP per capita growth rate Development diamondb

(annual average, percent) (anualaverge.perct)6+- ~ ~~~~~~~l~(ana vrge ecn)Ufe expectancy

GNP Gross2-i .-. .. 0. per i ~1primary

capita enrollment0< -5

1970-75 1980-85 1988-93 [ 1970-75 1980-85 1988-93 Access to safe water

Algeria _ Aleeria- Lower-middle-income Lower-middle-income

a See the technical notes. p.387. b. The development diamond. based on four key indicators, shows the average level of development in the countryzompared with its income group. See the introduction.

Annex A4Algeria Page 2 of 2

Most Same regionlincome group NextLatest single year recent Mid-East Lower- higher

Unif of estimate & North middle- incomeIndicator measure 1970-75 1980-85 1988-93 Africa income group

Resources and ExpendituresHVLVAN RESOURCESPopulation (mre=1993) thousands 16.018 21,887 26,722 261.650 1.096.665 500,507ACe dependency ratio ratio 1.07 0.97 0.89 0.87 0.69 0.62Urban %of pop. 40.3 47.5 54.2 55.2 54.7 71.2Population growth rate annual % 3.1 3.1 2.4 2.7 1.6 1.7Urban 3.5 4.9 3.9 3.7 2.9 1.8

Labor force (15-64) thousands 3.455 4.834 6.503 71,333 459,196 190.136Agnculture % of labor force 39 .. ..Industry 24 .. ..Female 7 9 10 16 31 29Females per 100 males

Urban number .. .. ..Rural

NATURAL RESOURCESArea thou. sq. km 2.381.74 2,381.74 2,381.74 11,021.26 40,682.67 21,848.14Densitv pop.persq.-km 6.73 9.19 10.96 23.10 26.52 22.51Agricultural land %of land area 18.37 16.40 16.19 32.10 39.61 41.26Change in agricultural land annual % -1.31 -1.41 -0.19 0.04 -0.13 0.08.Azricultural land under irrigation b 0.56 0.87 1.12 30.59 12.66 8.84Forests and woodland thou. sq. km .. 0.04 0.04 0.45 5.95 8.04Deforestation (net) annual % .. .. 0.76

INCOMEHousehold incomeShare of top 20% of households % of income .. .. 47Share of bottom 40% of households .. .. 18Share of bottom 20% of households .. .. 7

EXPENDITUREFood % of GDP .. .. 19.9Staples .. .. 6.2Mfeat. fish, milk, cheese. eggs .. .. 5.9

Cereal imports thou. metric tonnes 1,669 5.266 5,821 38,092 66,281 48,947-ood aid in cereals " 54 2 IS 1,249 5,477 544Food production per capita 1987 100 125 107 103 102 101 102Fertilizer consumption kglha 2.8 7.2 2.5 89.9 48.0 67.8Share of agriculture in GDP %ofGDP 9.9 8.2 10.8 13.3 15.7 8.0Housing % of GDP .. .. 5.7Average household size persons per household .. .. ..Urban .. .. ..

F-txed investment: housing % of GDP 2.2 .. 6.5Fuel and power % of GDP .. .. 1.2Energy consumption per capita kg of oil equiv. 373 904 955 1.097 1,595 1.632Households with electacityUrban % of households .. .. ..Rural .. .. ..

Transport and conununication % of GDP .. .. 3.2Fixed investment: transport equipment 5.9 .. 2.3Total road length thou. km 78 78 75

INVESTMENT IN HUMAN CAPITALHealthPopulation per physician persons 8,095 2,343 2,322 ., 3.277Population per nurse .. 332 329Population per hospital bed 352 .. 399 633 604 395Oral rehydyration therapy (under-5) % of cases .. .. 27 56 .. 51EducationGross enrollment ratioSecondary °o of school-age pop. 20 50 60 56 53 53Female 14 42 53 50

Pupil-teacher rato: primary pupils per teacher 41 28 27 26 .. 25Pupil-teacher ratio: secondary " 27 22 17 21Pupils reaching grade 4 % of cohort 93 96 98 95Repeater rate: primary 5oof total enroll 13 8 7Illiteracy % of pop. (age 15+) 74 51 43 45 19 14Female % of fem. (age 15+) .. 65 55 57 .. 17

\vewspaper circulaton per thou. pop. 18 26 38 33 74 125. orld Hank IntemationaT Economics Department. Apnl 1995

Annex A5Page 1 of 3

Algeria - Key Economic Indicators

Actual Estimate Projected

Indicator 1991 1992 1993 1994 1995 1996 1997 1998

National accounts(as % GDP at currentmarket prices)

Gross domestic product 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Agriculturea 9.1 10.9 10.8 9.5 9.8 9.4 9.6 9.7

Industrya 35.7 34.8 34.7 34.6 30.0 28.6 28.5 28.1

Services' 31.5 33.5 34.6 34.8 38.6 40-0 40.0 40.4

Total Consumption 62.6 67.7 72.2 73.3 72.5 71.5 71.0 71.2

Gross domestic fixed 31.8 30.8 29.2 31.5 33.0 31.5 30.7 29.9

investmentGovernment investment 8.3 8.0 10.4 10.1 9.6 8.5 7.5 7.2

Private investment 23.5 22.8 18.8 21.5 23.4 23.0 23.2 22.6

(includes increase instocks)

Exports (GNFS)b 29.1 25.4 21.9 23.7 25.7 26.9 27.1 27.3

Imports (GNFS) 23.6 23.9 23.2 28.6 31.1 29.8 28.7 28.3

Gross domestic savings 37.4 32.3 27.8 26.7 27.5 28.5 29.0 28.8

Gross national savings' 37.7 32.4 28.5 26.7 25.7 27.1 27.3 27.0

Memorandum items

Gross domestic product 45715 47866 49762 41941 40974 44389 47001 49731

(US$ million at currentprices)Gross national product per 2309.6 1899.8 1737.1 1690.0 1536.8 1506.0 1521.6 1569.5

capita (1994 US$, Atlas method)

Real annual growth rates(%, calculated from 1994prices)

Gross domestic product at -1.2% 1.6% -2.2% -1.2% 3.5% 5.8% 4.2% 3.5%

market pricesGrossDomestic Income 1.3% -2.5% -6.5% -2.0% 4.7% 5.5% 4.9% 3.4%

Real annual per capitagrowth rates (%, calculatedfrom 1994 prices)

Gross domestic product at -3.6% -0.9% -4.6% -4.0% 0.9% 3.4% 2.0% 1.3%

market pricesTotal consumption -4.0% 3.1% -3.6% -1.8% 1.8% 1.6% 2.2% 1.4%

Private consumption -5.6% 2.5% -3.8% -2.3% 2.7% 2.4% 2.6% 1.4%

Annex A5Page 2 of 3

Algeria - Key Economic Indicators

(Continued)

Actual Estimate Projected

Indicator 1991 1992 1993 1994 1995 1996 1997 1998

Balance of Payments(USSm)

Exports (GNFS)b 12819.0 12056.0 11005.0 9580.0 10556.4 11920.4 12719.3 13562.6MerchandiseFOB 12387.0 11439.0 10410.0 8890.0 9745.1 11051.5 11792.2 12567.4

Inports (GNFS)b 9627.9 10335.8 9596.8 11079.8 12812.9 13233.9 13503.7 14081.3

MerchandiseFOB 7746.9 8541.0 7990.0 9150.0 10666.1 11051.2 11238.3 11721.9

Resource balance 3191.1 1720.3 1408.2 -1499.8 -2256.4 -1313.4 -784.4 -518.7

Net current transfers 1290.0 1458.0 1143.0 1400.0 1337.4 1374.2 1473.9 1597.3

(including official currenttransfers)Currentaccountbalance 2223.1 1020.3 802.2 -1820.6 -2979.9 -1961.4 -1617.5 -1414.2

(after official capital grants)

Net private foreign direct -34.0 3.0 -2.0 0.0 0.0 300.0 400.0 450.0

investmentLong-term loans (net) -984.0 -90.0 -335.0 -2478.0 -3024.6 -1841.3 -1088.7 1087.6

Official 626.0 231.0 107.0 996.0 1413.0 1175.9 882.5 682.2

Private -1610.0 -321.0 -442.0 -3474.0 -4437.6 -3017.2 -1971.2 405.4

Other capital (net, including -678.1 -866.3 -513.2 4787.6 5125.0 3559.0 2350.0 530.0

errors and omissions, rescheduling)

Change in reservesd -527.0 -67.0 48.0 -489.0 879.5 -56.3 43.9 -653.4

Memorandum itemsResource balance (% of 7.0% 3.6% 2.8% -3.6% -5.5% -3.0% -1.7% -1.0%

GDP at current marketprices)Real annual growth rates(1994 prices)

Merchandise exports 0.1°% 2.3% -2.5% -5.7% 3.2% 14.5% 5.5% 4.6%(FOB)

Primary 2.0% 1.7% -0.5% -3.1% 2.5% 14.1% 4.7% 3.4%

Manufactures -46.4% 9.5% -25.6% -49.1% 7.3% 8.0% 8.0% 9.0%Merchandise imports -13.9% -4.0% -11.4% 8.7% 10.6% 3.0% 3.3% 1.7%

(CIF)

Public finance(as % of GDP at current

market prices)eCurrent revenues 32.3 30.3 27.6 28.0 29.2 29.6 29.5 29.9Current expenditures 22.2 22.6 24.9 23.4 22.2 21.7 21.9 20.9

(Continued)

Annex A5Page 3 of 3

Algeria - Key Economic Indicators

(Continued)

Acttai EstUInaL Projected

Indicator 199 1 '992 ( 91)4 1 99(, 1997 998

Current account surplus (± 7 -4. 70 79 76 91

or deficit (-)Capital expenditure k 3 8' i 3 1O.5 9 7 8 7 7 7 4Foreign tinancing 06 -0.3 0.1 9.4 i2.s 8 1 I 2 7

Monetary indicatorsM2/GDP (at current market -49 3 4' 4 53 8 -1 2 4) S 38 9 38 0 38. Iprices)

GrowthofNM2(%) 21.3 24.') >2 - 158 12.0 13.2 'O0 9.4Private sector credit growth / IO w' 137 2 -2Y1.9 645 3 140 0 i31 S 99 0 6(6 0total credit growth (%)

Price indices( 1994 =100)Merchandise export pnce 131 7 i17.7 1W7 9 10()0 106.2 105.2 106.4 108.5index

Merchandise import price 79. 88.7 94 9 100.0 105 7 106 4 104.7 107.4indexMerchandise tenns oftrade 168.5 132.6 113.7 I(0.() 10.5 98.9 101.7 101.0indexReal exchange rate 88 5 87 0 77 5 100 t) 88.7 88.7 88.7 88 7

(US$/LCU)f

Real interest ratesConsumer price index 22.8%VIt 31 8°0/, 20 5%M,, 290% 29'6% 15.2% ?.5% 5.6%(% growth rate)

GDPdeflator 59.3'%o 21.8% 13.6% 28.1% 28.4% 15.0% 8.7% 5.4%(% growvth rate)

a. If GDP components are estimated at factor cost, a footnoote iidicatiing this fact should be added.b. "GNFS" denotes "goods and nonfactor services."c. Includes net unrequited transfers excluding official capital grants.d. Includes use of IMF resources.e. Should indicate the level of the government to wvhichl the data refer.f. "LCU" denotes "local currency units." An increase in US$/LCU denotes appreciation.

Annex A6Page 1 of 1

Algeria - Key Exposure Indicators

Actuai Estimate Projected

hIdicator 1991 1992 1993 1994 1995 1996 1997 1998

Total debt outstanding and 28198.0 26814.0 25758.0 28377.8 32280.6 34913.3 36472.9 38208.2

disbursed (TDO) (US$m)'

Net disbursements (UJS$m)a -281.0 51.0 -896.0 2094.8 2103.9 1863.4 1732.1 1185.7

Total debt service (TDS) 9169.0 9303.0 9145.0 4662.5 4543.3 3882.8 4754.5 6372.4

(US$rn)a

Debt and debt service indicators

(%)TDO/XGSb 64.5 195.1 206.8 252.0 264.4 256.2 250.4 245.3

TDO/GDP 61.7 56.0 51.8 67.7 78.5 78.7 77.6 76.8

TDS/XGS 64.5 67.7 73.4 41.4 37.2 28.5 32.6 40.9

Concessional/TDO 3.2 3.8 4.8 6.5 7.4 7.8 7.9 7.6

IBRD exposure indicators (%)

IBRD DS/public DS 3.1 3.1 3.2 7.2 9.4 11.1 9.5 8.4

Preferred creditor DS/public 6.7 8.5 10.3 21.7 23.3 26.4 22.0 25.5

DS

IBRD DS/XGS 2.0 2.0 2.3 2.8 3.3 3.0 2.9 3.0

Share of IBRD portfolio 1.5 1.5 1.5 1.5 1.7 1.7 1.7 1.7

IFC (US$m)

Loans 0.0 0.0 0.0 10.0 0.0 0.0 0.0 0.0

Equity and quasi-equity /c 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

MIGA

MIGA guarantees (US$m) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

a. Includes public and publicly guaranteed debt, private nonguaranteed, use of AIF credits and net short-

term capital.

b. "XGS" denotes exports of goods and services, including workers' remittances.

c. Includes equity and quasi-equity types of both loan and equity instruments.

Annex A7Page 1 of 2

Algeria - Status of Bank Group OperationsIBRD Loans and IDA Credits in the Operations Portfolio

(as of January 18, 1996)

Differenco Last ARPP

Orginal amount between actual supervision rating

mn US$ nmllions and expected Developmt. Overall

Project ID Fiscal Year Borrower Purpose IBRD IDA Cancellations Undisbursed disbursements a/ objectives Status c/

DZ-PA4899 85 Government National Water Sup/S 262.00 10 46 10.46 S S

DZ-PA-4903 87 Government Nat Water Supply l 250.00 68.31 6831 S S

DZ-PA-4904 88 SONELGAZ PowerI[[ 160.00 057 38.79 3935 S S

DZ.PA4907 95 Rep. ofAlgeria Highways VI 13000 127 00 4.67 HS HS

DZ-PA-4914 88 Govt. ofAlgeria Voc. Trainng 5400 1651 15.68 S U

DZ-PA4917 89 Rep. of Algeria Ports DI 63 00 46.60 46 60 S U

DZ-PA-4923 90 Govenmnent Research & Extension 32.00 26.00 20 92 U U

DZ-PA4925 90 Govt. Algeria/Enterprise Ind. Restructuring D 99 50 32.33 32.23 U U

DZ-PA-4929 89 Government Mitidjalnigation 11000 4000 31 47 64.14 HU HU

DZ-PA-4934 91 Govt. of Algeria University Develop 65 00 54 20 54.20 U U

DZ-PA-4938 92 Govermnent Sahara Develop. 57 00 54 78 34 45 U HIU

DZ-PA4939 90 Government Technical Assistance 26.00 8.87 8 87 U U

DZ-PA-4944 92 Govt. of Algeria Forestry & Watershed 25 00 19.95 3 87 S S

DZ-PA-4952 92 SONATRACH FirstPetroleum 10000 1500 15.00 HS HS

DZ-PA-4954 93 Govt. of Algeria Basic & Secondary Educ 40 00 34 03 3.53 S S

DZ-PA4964 92 Rep of Algeria Cadastre 33 00 23 00 (1.53) S S

DZ-PA-4974 94 Govt of Algeria Water Supply & Sewer 110.00 103.03 8.70 S S

DZ-PA-4976 93 Rep. of Algeria Howing Completion 20000 96.36 74.13 S U

DZ-PA-34140 94 Govt of Algeria Locust Control 3000 24.92 24.92 S S

DZ-PA-38695 95 Govt. of Algeria Mascara Emerg Reconst 51.0( 46 00 10.17 S S

1,897.50 40 57 877 61 538 67

Acuve projects

Total disbursed (IBRD and IDA) 982.54

Of which has been repaid 346.30

Total now held by IBRD and IDA 1,513 85

Amount sold 0 00

Of which repaid 0 00

Total Undisbursed 877.61

Number of closed Loans/Credits 44

a Actul disbuasemeias o daLe mimsa alnded diaba.e.esi to dale t projected at appraiaal.

b Rating of 1-4; see OD 13 05, Annex D2. Preparation of lmplementation Summary (Form 590). Followmg the FY94 Annual Review of Portfolio Perfonmance (ARPP), a letter-based

system will be used (HS=highly satisfactory, S=satisfactory, U=unsatisfactory, HU=highjy unsatisfactory see Proposed Improvements m Project and Portfolio Perfonnance Rating

Methodology (SecM94-901), August 23, 1994

c. Followuig the FY94 ARPP. 'Implementation Progress" will be reported here

Annex A7Page 2 of 2

Statement of IFC Investments

(as of January 18, 1996)

Amount in USS millions

Fiscal Year Obligor Business Loan Equity Total

94 SONATRACH HELIOS 10 0 10.0

lotal Gross Commitments IW 1)

I otal Commitments now held by [FC I 0

I otal undisbursed (including participants portiorni 0

MBRD 21836

-36' T'. e T;Dr

Sd~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~dBe, K~~~~~~heedtokt os.Ine i >t eIp hss

ii,ec taro o~ Ia

2 ) '* I1J , ,.

B I

30~~~~~~~~~~~~~~~~~~~~~~~~.

-36L^ 3' 0 6' 9' I Z

33-

denoncnat,ons and any r El Banedh Loghoolother anfocanoain shown a Nadimon..Xe -on) tfrs map do not 64 eOaed caply. an Ihe port of 3fDThe Wodd BonE Group. 'i 3'any odgmrent on Ihe Itegal -V .Status of aay terr,tory. or any endorsemenlt

ar cceptance of such '5 Godoo|

/ N'_ <','d 30 '.. '. El -csu \ Adx. *

noEtao ''u ss>t >

22- ALGERIA\\

ADMINISTRATION *\K\=

aJ W,faya Capifals \ta

i2 Noftiomo Capitol \ _Taeraegfsa../

Infermjilenf takes \i

Mjor Highways

Wdrlyo Boondories TGo

Infereatronal aaaet.sarIes \>| / /21'

7~~~~~~~~~~~~~~~2-

0 0 100 IS0 200 250 300 350 400j

n eLOmtLETERS Les

18' 6' 3' 0 3' 6' 9'C12'

DECEMBER 1995

iM,AGI N.

Report No: 1531G ALType: C-Ac,