Al 34' t/ -Documen Of

The World Bank

FOR OMCIL USE ONMX

Rept No P-6448-AL

MEMORANDUM AND RECOMMENDATION

OF TIE

PRESIDIENT OF THE

INTERNATIONAL BANK FOR RECONSTRUCTION AND OEVELOPMENT

TO THE

ExECUTIVE DIRECTORS

ON A

PROPOSED ECONOMIC REHABILITATION SUPPORT LOAN

IN AN AMOUNT EQUIIVALENT TO

US$150 MILLION

TO THE

DEMOCRATIC AND POPULAR REPUBLIC OF ALGERIRA

DECEMBER 15, 1994

M T rs,Cen 7r

>=t JfDX 1'' :

I" T

lhis dockmt bss a resticted d oributn ad may be sed by reciyits only In the perforance ofthedr official dties Its contens my not otherwn be diclosei widout Word Bank autorization.

C-CY EQUVL

Unit of currency = Algerian Dinar (DA)

1992 I229 1924

US$1.00 21.84 23.34 40.96 (end-October)

FISCAL YEAR

January 1 - December 31

WEGHGS AND WEASURES

Metric System

ABBREVIATIONS

AFS Allocation Forfaitaire de Solidarite (Lump-sum Solidarity Allowance)APSI Agence pour la Promotion et le Soutien des Investissements (National

Investment Agency)AIG Activitds d'int6ret Gdn6ral (Public Works-based Jobs Program)BA Banque d'AlgErie (Central Bank)BAD Banque Alg6rienne de D6veloppement (Algerian Development Bank)CNEP Caisse d'epargne et de Prdvoyance (Household Savings Institution)CNT Conseil National de la Transition (Interim Legislatre)EFSAL Entreprise and Financial Sector Adjustment LoanEPE Entreprise Publique Economique (Autonomous Public Enterprise)EPIC : Etablissement Public a caractere Industriel et Commercial (Autonomous Public

utility)EPL : Enterprise Publique Locale (Local Public Enterprise)EPS : Entreprise Publique Socialiste (Non-autonomous Public Enterprise)ERL Economic Rehabilitation LoanERSL Economic Reform Support LoanEU European UnionFA Fonds d'assainissement (Restructuring Fund)IMG Indemnit6 pour Activit6 d'intreOt G6neral (Public Works Allowance)ICB International Competitive BiddingICSR Indemnite aux Cat6gories Sociales sans Revenus (Direct Transfer Payment

to Households without Income)LSMS Living Standards Measurement SurveyMRIP Minis*e de la Restructuration Industrielle et de la Participation (Ministry of

Industrial Restructuring and Participation)OAIC Office Alg6rien Interprofessionel des Coreaes (National Cereals Board)PE Public EnterprisePEC-1988 Programme en Cours 1988 (Program of Public Enterprise Investments as of 1988)PER Public Expenditure ReviewPSA Private Sector AssessmentSGG Secretaire G6n&ral du Gouvemement (Secretary General of the Giovernment)SOE Statements of ExpenditureSME Small and Medium-scale Enterprise

FOR OFFICLAL USE ONLY

DEMOCRATIC AND POPULAR RIEPUBIC OF ALGERIA

ECONOMIC REHABILITATION SUPPORT LOAN

TABLE OF CONTENTS

LOAN AND PROGRAM SUMMARY ...................................... i

PART I: THE GOVERNMENT'S ECONOMC REFORM PROGRAM . ............... 1A. Introduction ............................................ IB. Background ............................................ 1C. Economic Refoim Strategy .................................. 2D. The Stabfladon Program .......... ......................... 3E. Extrnal Debt Rescheduling ......... ......................... 6F. Structural Reform Program ......... ......................... 6G. Medium-term Policy Framework and Outlook ...................... 13

PART I: THE ECONOMIC REHABILITATION SUPPORT LOAN ..... ........... 14A. Origin and Objectives .14B. Rationale for Bank Involvement .15C. Project Description .15D. Implementation Arrangements 15E. Agrements Reached .16F. Environment Assessment ...................... 18G. Risks ...................... 18H. Recommendation ...................... 19

ANNEXES

ANNEX I: Letter of Economic Policy and Policy MatrixANNEX II: Social Indicators: 1993ANNEX m: Selected Macroeconomic indicators: 1984-94ANNEX IV: Key Processing EventsANNEX V: Status of Bank Group Operations

MAYL: IBRD No. 26393

I Thisdocmet has a restrcted distnluton and may be usd by ipies only in the opfk w thf iiT duties. Its contet may not othewise be disclosed without Wold Bank autho_zo. I

DEMOCRATIC AND POPULAR REPUBLIC OF ALGERIA

ECONOMIC REHABILITATION SUPPORT LOAN

LOAN AND PROGRAM SUMARY

Bwrower: Democratic and Popular Republic of Algeria

Amount: US$150 million equivalent

Term. Repayment in 17 years, including 5 years grace, at the Bank'sstandard variable interest rate.

Lan Objectives: The proposed Economic Rehabiliaion Support Loan (ERL) isan essential component of the Bank's assistance strategy forAlgeria. This stategy aims to support the deepening of themacroeconomic stabilization and structural reform program,establish the conditions for a strong supply response, and helpmeet the basic social needs of the population. The ERL wouldprovide urgent support for the reform effort by continuing theprogress achieved under the two previous adjustment loans, andby laying the groundwork for the preparation of futureadjustment operations.

Lean Description: The Economic Rehabilitation Support Loan would support abroad progtim of policy reforms to accelerate Algeria'stransition to a market economy. The key components of theprogram include macroeconomic stabilization, trade and priceliberalization, private sector development, privatization,restructuring of the public enterprise sector, public expenditurereform, financial sector reform and strengthening of the socialprotwcion system. The specific measures to be supported by theERL are outlined in the Government's LeUr of EcononicPoli, submitted to the Bank by the Minister of Finance onDecember 4, 1994, and atached as Annex I. The atachmentsto the policy letter include a matrix detailing actions taken priorto Board presentation of the ERL and those planned during thesubsequent twelve months.

Bendfts: The Economic Rehabilitation Support Loan provides aniMportant opportMity to help set the foundation for theemergence of a market economy in Algeria. The ERL alsoenables the Bank to contribute to, and help catalyze, theinternational community's efforts to mobilize the substantialexten financing crucial to restoring growth and acceleratingeconomic reForm in Algeria.

Risb: Implementation of the economic reform program is complicatedby the difficult political and security situation related to theeconomic and social crisis in Algeria. The authorities have madeextensive effo'ts to engage in a dialogue with a broad range ofpolitical groups, and presidential elections have been announcedbefore the end of 1995. Given the present uncertainties, arehabilitation loan with substantial up-front actions provides theBank with flexibility in its support of Algeria's economic reformefforts.

Disbu_rsents: The Economic Rehabilitation Support Loan would disburse in asingle tranche of US$150 million within 24 months after Boardapproval in January 1995. The Closing Date for the loan wouldbe December 31, 1996.

Paral Finncing: Parallel finmcing may be provided by the European Union.

Finaning Plan: FY95 (US$ million equivalent)

IBRD 150 (foreign exchange cost)

Poverty Category: Poverty focused; supports strengthening of the social protectionsystem.

Map: IBRD No. 26393

REPORT AND RECOMMENATIONOF THE PRESIDENT OF T1lE

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMETO THE EXECUTIVE DIRECTORS

ON A PROPOSED ECONOMIC REHABI!TATlON SUPPORT LOANTO THE DEMOCRATIC AND POPULAR REPUBLIC OF ALGERIA

1. I submit for your approval the following report and renommendation on a proposedEconomic Rehabilitation Support Loan (ERL) to the Governmen of the Democratic and Popular Republicof Algeria for the equivalent of US$150 million in support of a program of macroeconomic stabilizationand structural reform. The Loan would be at the Bank's standard variable interest rate, with a maturityof 17 years, including five years of grace. Parallel financing may be forthcoming from the EuropeanUnion (EU). The status of the Algerian economy and the economic reform program are detailed in therecent Country Economic Memorandum, dated May 25, 199A (Report No. 12048-AL).

PART L: T_H GONERNMENT'S ECONOMIC REORM

A. Iodudion

2. In the first quarter of 1994, weak world oil prices, the drying up of extal financing,growing macroeconomic imbalances, mounting inflationary pressures, a deepening social crisis, and abuild-up of external debt arrears convinced the authorities to accelerate economic policy reforms. Theyhave requested the financial assistance of the Bretton Woods institutions and other creditors in supportof these reforms. The content of the authorities' macroeconomic stabilization and structural reformprogram, including actions recently taken and those envisaged over the coming year, is summarized inthe attached Letter of Economic Policy and Policy Matrix (Annex 1).

B. Backgrmd

3. Prior to 1994, Algeria experienced three distinct phases of ecnonuo policy. Fromindependence to the mid-1980s, the country followed a socialist model. It utilized its abundanthydrocarbon resources to finance an extensive, largely publicly owned industrial base. Much socialprogress was achieved and an impressive infrastructure was put in place. Although population growthremained high, life expectancy increased, illiteracy was reduced, and school enrollment reached almost100 percent. However, the combination of bureaucratic, centralized control and over-dependence onhydrocarbon exports fostered severe economic distortions and inefficiencies, and prevented thedevelopment of non-oil export . Bank support during this period was limited and sporadic.

4. The second, adjustment phase began aRter the precipitous decline of oil prices in 1986,which caused a 50 percent drop in Algeria's terms of trade. The initial response was to treat the shockas temporary and to borrow to maintin consumption levels. This approach quickly lost favor, however,as the country's external debt rose sharply from about US$17 billion in 1985 to over US$24 billion in1987. The breakup of the State farms into private cooperatives holding long-term usufruct rights in 1987signalled the beginning of a broad program of economic reform. In subsequent years, macroeconomicimbalances were substantially reduced and a range of structural reforms was implemented. Most publicenterprises (PEs) were granted autonomy and many domestic price controls were remnved. Legal

2

restrictions on the access of private firms to domestic credit and foreign exchange were lifted, Stateimport monopolies were abolished, and the foreign investment regime was liberalized. Collectivebargaining was decentralized, and the right to strike fully recognized. Monetary policy and bankingsupervision were formally devolved to the central bank, and new prudential regulations and accountingstandards were introduced. The Bank actively supported the reform program, with lending to Algeriaaveraging about US$350 million annually during FY87-91. TIis support included two adjustmentoperations: the US$300 million Economic Reform Support Loan (ERSL), approved in August 1989, andthe US$350 million Enterprise and Financial Sector Adjustmen. Loan (EFSAL), approved in June 1991.

5. The third phase, covering 1992-93, witnessed a significant slow-down of the reform effortand some back-tracking. Mounting civil unrest, faling oil prices and burgeoning external debt servicepayments, coupled with the authorities' reluctance to reschedule external debt obligations, placed severestrains on the economy. Trade and payments restrictions were tightened in 1992. A broad list of importswas prohibited, and an inter-ministerial ad hoc committee was established to allocate foreign exchangeand external credit to priority imports. As a result, imports were compressed to US$10.0 billion in 1993,compared with US$11.5 billion in 1990, a decline of one-third in real terms. The exchange rateexperienced a real appreciation of 50 per ent over the period, stimulating parallel market activity.Financial discipline was also relaxed, with an increase in implicit and explicit subsidies and largeincreases in government salaries. Output stagnated and per capita income declined. Structural measuresrelating to PE restructuring and financial sector reform were delayed.

6. Years of economic staion and a population growth rate of over 2.5 percent have takentheir toll on Algerian society. Per capita income has fallen by roughly 20 percent since 1985, andunemployment is close to 25 percent. It exceeds 30 percent for the 16-25 age group, and is even higherfor educated youth in urban areas. Rapid urban migration, encouraged by past agricultural and industrialpolicies, has resulted in a severe housing shortage and growing environmental problems. The overallhousing shortfall is estimated at two million units and the occupancy ratio of 8.5 persons/unit is one ofthe highest among middle income countries. Declining living standards and rising unemployment havecontributed to political turmoil.

C. Economic Reform Strate

7. The core development issue facing Algeria's policymakers is how to foster a resumptionof sustainable growth while coping with the immediate problems of high unemployment, the housingcrisis, and shortages of basic necessities. The authorities have developed a three-pronged economicreform strategy to meet this challenge: (i) implement a stabilization program to -zrrect macroeconomicimbalances and distortions with the support of the IMF; (ii) approach key creditors for a rescheduling ofthe country's official bilateral externa debt (Paris Club), as well as a restructring of its commercial debt(London Club), in order to finance an increase in the severely compressed level of imports; and (iii)accelerate the transition to a market economy by reinvigorating the structural reform program with thesupport of the Bank to create the conditions for a rapid supply response as macroeconomic conditionsimprove. The authorities are fully aware that ensuring the credibility of the reform program is asimportant in the eyes of the populace as a return to growth and measures to address the immediate socialcrisis. For the first time, the reform program includes concrete privatization actions. The authoritiesalso recognize that the re-establishment of political stability is a key factor in the success of the economicreform program. To this end, they have made extensive efforts to engage in a dialogue with a broadrange of political groups.

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D. The Stabilization Program

8. On May 27, 1994, the IMF Board approved a one-year stand-by arrangement and arequest for a purchase under the compensatory and contingency financing facility, for a total of SDR731.52 million (about US$1 billion). The program period is from April t. 1994 to March 31, 1995.The key elements of the stand-by program are: adjustment of the exchange rate and reform of theexchange regime, trade liberalization, domestic price liberalization, deficit reduction, monetary restraintand higher interest rates. The progrm also provides fbr an explicit increase in budgetary allocations forthe social safety net to alleviate the impact of stabilization on the most vulnerable groups of thepopulation. The expectation is that, if the stand-by program is implemented satisfactorily, it will befollowed by an Extened Fund Facility (EFF).

9. Thefirst stand-by TABLE 1: STMUILIZRTIOOUTLOOK, 194-95program review billtins. untess othermise indicated)

was successfully Actual Projected IMF Program 1/ Projected

completed on 1993 1994. -- 994i95-- ------19November 2, 1994.The review GDP Graoth Rate -1.1X 0.6X 1.6X 3.8%

The review Treasury Revenue/GDP 27.2X 30.6X 33.1X 33.2Xestablshed that all Treasury Expenditure/GDP 36.6X 35.41 35.9X 35.4X

strucal measures Treasury Balance/GDP -9.4X -4.9X -2.8% -2.21

under the progrm Growth of Net Domestic Credit 21.11 7.51 9.71 0.81 2/o/w Credit to Economy 3/ -50.31 53.61 85.31 20.61are being imple- H2 Growth 21.51 17.11 14.71 13.51

mented on sched- N2/GDP 54.0% 49.61 44.7X 43.51

ule. The qnti- Inflation Rate 4/ 21.01 28.91 28.1X 19.7%

taive performance Imports (GNFS) 10.0 10.9 11.9 12.3-r *e -X! *end-Ju*e Exports (GCFS) 10.8 9.8 10.3 11.Z

cr:taia formdu-June o/w Hydrocarbons 9.8 8.8 9.2 9.8and d-Sepember Net Factor income -1.9 -1.7 -1.9 -2.0

o/w Interest Payments 5/ 1.7 1.4 1.9 2.1have been met. Met Transfers 1.6 1.4 1.3 1.5

Theanithoritieshave Current Account Balance 0.4 -1.5 -2.1 -1.7Capital Account Balance -0.1 1.4 2.7 2.0

also implementd a Chne in Net Reserves 0.3 -0.1 0.6 0.3

series of supple- Gross Reserves 1.5 2.1 2.3 2.7mental fiscal in months of iqports GNFS 1.5 2.0 2.3 2.3

measures to bring Total External Debt 6/ 25.8 28.5 29.6 30.7Total External Debt/X)S 7/ 218.7X 261.11 285.01 8/ 237.61

the budget deficit Debt Service/xGS 9/ 67.41 10/ 75.51 82.11 56.5X

back toward the Debt ServicelxGs 5/ 67.41 42.01 32.81 35.3%

target for March jJ I V %us hm bew feIm to XSd pes %*w.

1995, which has l1 dMbao_v_m*u*aUude.it himi boo of .1 - I isSebi 'I'Ubeen adjusted from gj cm. w j. w u *mp*3.3 percent of GDP 3 Adf 1 0 d gto 2.8 percent on xes _ _the basis of higher- 3w Xs a_i We"

than-expected oil 08pe*uIe I b SB lm ug&inw ad s ltio Gewm u.t_

prices. lEe evolu-prices The volu-Source: IMP, IUB estimiates.tion of key macro-economic indiCatorsunder the program as projected by the Bank is summarized in Table 1. Preliminay data indicate that theeconomy will expand by about 0.6 percent in 1994, an improvement over the 1.1 percent contraction in

4

1993. The limited growth response in 1994 is the result of a drought-olagued harvest, tighter demandpolicies, and some apparent inertia in the reaction of banks and PEs to the increased availability offoreign exchange and the liberalization of trade. GrGwth is projected to accelerate in 1995, as importcapacity continues to expand (para. 15).

10. Exchange Rate Policy. The authorities' objective is to establish a regime in which theexchange rate is determined by market forces. In April 1994, the ad hoc inter-ministerial committeecharged with overseeing the allocation of foreign exchange was dissolved, and the Dinar was devaluedby some 40 percent. After subsequent adjustments, the nominal exchange rate reached 40.9 DAIUS$ bythe end of September, compared with about 24 DA/US$ at the beginning of the year. As a furither step,exchange fixing sessions were introduced in October 1994, with a view to managing the exchange ratein response to tie demand for foreign exchange from the commercial banks. After a brief surge in May,the parallel market exchange premium has dropped to less than 100 percent, according to the IMF,compared to over 400 percent in mid-1992. The authorities plan to move to a market-determinedexchange rate through the introduction of an interbank foreign exchange market durng the second halfof 1995, in the context of the envisaged EFF.

11. Trade Liberalization. Wide-ranging measures to liberalize imports were adopted in April1994, and the general principle that enterprises are free to import for their own use or resale wasreaffirmed. The list of socially sensitive "strategic" products was sharply reduced (essentially to basicfood staples, medical equipment and pharmaceuticals), and the requirement that importers obtain ex anteapproval to import these products was replaced with a set of professional criteria that they must respect.'At the same time, many administrative trade restrictions were eliminated. The improving b.lance ofpayments situation (para. 15) and the growing number of private importers have prompted the authoritiesto further accelerate trade liberalization. Import suspensions were lifted for twelve products (mostlytextiles) in July 1994, and three products (coffee, barley and infant formula) were dropped from the listof products subject to professional criteria in September. By the end of 1994, the trade regime will beessentially free of quantitative restrictions. The remaining import suspensions will be lifted and sugarwill be dropped from the list of products subject to professional criteria. Pharmaceuticals will be droppedfrom the list by mid-1995. The authorities are considering the option of increasing tariffs in the 1995Finance Law for some of the products for which quantitative restrictions are being removed.2

12. Domestic Price Liberalization. Very significant measures have been adopted during thepast nine months to liberalize the price system and increase administered prices. Most prices subject toceilings on markup margins have been freed, including the prices of fertilizer and other agriculturalinputs. The share of free prices in the consumer price index (CPI) now exceeds 80 percent, comparedwith only about 10 percent in 1989. Further reductions i price controls are planned in 1995, includingthe elimination of ceilings on markup margins for corn, pulses and rice. In parallel, the range of goodssubject to consumer price subsidies has been reduced to three essential food staples (bread, semolina and

.1/ Imports ae reqred to cr* their cpacwty to mpot prduct subject to Xt profesonal crtia sysem. The criteriainclude acess to an sppnoprie distributin netvwork and sufficient financial bacin. While cc anwe approval is notrcessary, failur to respect the criteria can lead to sanctions. The authoriif hwve agreed to review the professionalcriteria sytem durg the coung year with the Bank, and tae measu, if needed, to anwr thit it does not act as abarier to enty for poatent inpotes.

v/ A mjor taiff reform in January 1992 reduced the iaximm tff from 120 pereet to 60 percent, and equalized t ratesof the para-fiscal compensai tax on imports and domestic products. As a result of the reform, the averap, inpott-weigted trff wvedp fe firm an esimatd 34 paeont in 1991 to 20 parent in 1992.

milk) and certain energy products. Increases in administered prices have exceeded IMF program targets.Since the end of 1993, the prices of the three subsidized food staples have been increased by an averageof 106 percent. Similarly, domestic energy prices have been raised by an average of 59 percent. As aresult of these price increases and the adjustment of the exchange rate, the total subsidy (explicit andimplicit) on food staples and energy products on an annual basis has fallen to about 3.5 percent of GDP,compared with almost 9 percent in 1993. Further subsidy reductions are planned over the remainder ofthe stand-by period. To institutionalize free price setting, the authorities have prepared, in consultationwith the Bank, a law on competition which is currently being examined by the interim legislature (ConsellNational de Transition, CNT).

13. Fiscal Policies. The key objective of the fiscal adjustment under the program is to restoredomestic financial balance and reallocate resources from the Government to the productive sector. Toachieve this objective, the program targets a reduction in the fiscal deficit from 9.4 percent of GDP in1993 to 2.8 percent during the program year (1994/95, see Table 1). Revenue enhancemerts include.(i) new excises on cars and a number of other goods, (ii) the elimination of some VAT exemptions, (iii)an increase in the corporate tax rate on retained dividends, and (iv) the positive impact of the exchangerate adjustment on hydrocarbon taxes and customs duties. Expenditure reductions include a slow-downin public investment expenditures and a cap of 12.5 percent on the increase in civil service salaries overthe program period. lhowever, the fiscal adjustment has been complicated by the emergence in recentmonths of expenditure pressures, notably higher-than-expected security expenditures. To offset thesepressures, the authorities have implemented a set of supplemental measures in consultation with the IMF.These include: (a) a delay in wage increases for civil servants and a freeze on new hiring,(b) supplemental increases in administrative prices (para. 12), and (c) a reduction in the compensationof enterprises for foreign exchange losses resulting from the large devaluation in April 1994. Theauthorities are targeting a firther reduction in the budget deficit over the remainder of 1995, resultingin a projected deficit of 2.2 percent of GDP by the end of the year. The Public Expenditure Review(PER), being carried out with the Bank, will be an important instrumei. for guiding future deficitreduction measures.

14. Monetry and Interest Rate Policies. The stabilization program relies heavily on tightermonetarv policy and a move to positive real interest rates. Broad money is programmed to increase by17 percent in 1994 and by less than 14 percent in 1995, compared with nearly 22 percent in 1993.Tighter money is to be made possible through a sharp reduction in credit to the Government as a resultof the fiscal adjustment. While certain quantitative controls remain in effect, including quarterly ceilingson bank credit to the core group of non-autonomous PEs covered under the EFSAL, the program foreseesa greater role for interest rates in the allocation of credit. The 20 percent ceiling on lending rates wasreplaced in April with a ceiling on average bank margins of five percentage points, and key referencerates were increased by 3-5 percentage points. The tighter demand policies under the program haverestrained inflationary pressures. After a large jump in the price level following the devaluation andincreases in administered prices in April, monthly inflation moderated to some two percent on averagein the third quarter. If this trend is sustained, the IMF estimates that average inflajion over the programyear would be about 28 percent, down sharply from the 37 percent initially programmed.

15. Balance of Payments and External Financing Plan. The external payments situation isimproving. After a slow start, imports are expanding, and are expected to reach nearly US$12 billion(GNFS) during the program year, an increase of more than 20 percent in real terms over 1993.Nevertheless, higher-than-expected oil pric. "ave lowered the projected current account deficit andcapital inflows have been strong, leading tu a substantial build up of reserves. The Paris Club

6

rescheduling agreement (para. 16) provided highly favorable ter, which are expected to be reflectedin the debt restructuring agrFeement under discussion with the London Club. Multlatr financing hasproceeded as expected, including the IMF staid-by, the release of ECU 1S0 million in balance ofpayments lending by the EU, and the release of the US$175 million second tranche of the EFSAL in July1994, which triggered the release of an additional US$150million from the 5xport-Import Bank of Japan.The improving external payments picture has resulted in a fastr-tan-expected increase in reserves. Non-gold reserves are now projected to reach US$2.3 billion (slightly more than two months of imports) bythe end of the program year in March 1995, US$800 million more than initially programmed. The higherlevel of reserves will facilitate the introduction of the interbank foreign exchange market in 1995.

Er External Debt Rescheduling

16. In early 1994, the drop in world oil prices and difficulties in mobilizing external financingprompted the authorities to reconsider the option of formal debt rescheduling. lTe total stock ofAlgeria's external debt (about US$26 billion at the end of 1993, or roughly 50 percent of GDP andslightly more than twice the level of exports) is high, but not excessive relative to many other middle-income countries. However, prior to the Paris Club rescheduling, the average maturity of the debt hadsteadily decreased to a level of about three years. For many years, the authorities consistently rejectedformal debt rescheduling, relying instead on increased multilateral lending, refinancing arrang :ents, andcontrols on external borrowing and imports. The rationale was that the problem was only short-term,and the country would get over its debt "hump" in a couple of years. Unfortuntely, continued heavydependence on expensive short-term credits effectively pushed a growing hump into the future. Althoughtwo important refinancing agreements were reached in 1991, these provided only partial, temporary relief.At the end of 1993, debt service (excluding refinanced principal payments) had reached almost 70 percentof exports. Following approval of the stand-by arngement, the Government reached agreement withthe Paris Club for a rescheduling based on favorable terms: 15 years matwit, including 4 years of graceand a graduated repayment schedule; a cut-off date of September 1993; and rescheduling of interestpayments on official debt through October 1994. This rescheduling should save Algeria approximatelyUS$3.5 billion in debt servicing costs in 1994, and US$500 million in 1995 (or about US$2.4 billion ifthe rescheduling is extended through the end of 1995). It is estimated that the London Club agreementunder discussion with the commercial banks will reduce debt service by an additional US$80 million in1994, and by US$1.1 billion in 1995, if the agreement extends through the end of the year.

P. The Stucural Reform Program

17. The authorities' objective in accelerating the structural reform program is to transformAlgeria into a full-fledged market economy as soon as possible in order to establish the conditions forsustainable growth and avoid dissipating the short-term gains from debt rescheduling. In order totransform the economy, the reforms must eliminate structural rigidities, correct distorted incentives,promote private ownership, and stinulate domestic and external competition. At the microeconomiclevel, the top priorities are to encourage the private sector to become the principal source of growth andemployment generation in the emerging market economy (particularly in the sectors from which the Statemust withdraw) and to reform the PE sector. In parallel, nascent structural reforms in the financial andlabor markets must be deepened to promote factor redeployment and a more efficient allocation of newresources in response to changes in relative prices. Finally, the social protection system must bestrengthened. Given the social conditions prevailing in Algeria, this is particularly vital to the successof adjustment.

Private Sector Development

18. The proposed ERL would support private sector development through a three-prongedapproach aimed at encouraging private sector investment, stimulating competition, and promoting thedevelopment of the labor-intensive small- and medium-scale enterprise (SME) sector. The private sectorassessment (PSA), which will be carried out in 1995, will focus on developing a longer-term strategy forexpanding the role of private enterprise in all aspects of the economy. Terms of reference for the PSAhave been agteed with the authorities.

19. Encouraging Private Setor Investment. The proposed ERL would support theimplementation of the new Investment Code. The Code, promulgated in 1993, clarifies the investmentregime-including the repatriation of profits and capital-and authorizes the establishment of free tradezones. The Code also creates a national investment agency to: (i) act as a "one-stop window" to helpprivate investors (foreign and domestic) cut through bureaucratic red tape, and (i) administer tax breaksand other investment incentives. This agency was established formally in September 1994, and the initialresponse from the private sector has been encouraging. The agency has already been presented with over100 investment projects, totalling more than US$1 billion. The authorities have agreed to devolve thefunction of investment promotion to a separate agency run by the private sector, and they plan to requesttechnical assistance from FIAS for this effort. The new Investment Code is the latest in a series of legalmeasures that the authorities have enacted to promote private sector invesunent. The revised CommercialCode, promulgated in 1993 under the EFSAL-supported program, formalizes the level playing fieldbetween the public and private sectors. It establishes bankruptcy procedures for autonomous publicenterprises (Etreprise Publique Economique, EPE) and authorizes the creation of private joint-stockcompanies. In conjunction with the new Investment and Commercial Codes, the Government approveda law removing the State's monopoly on the insurance market in June 1994. This law is presently beingexamined by the CNT.

20. Stimulating Competition. The new competition law, drafted in consultation with theBank, will be an important milestone in the effort to stimulate competition in the highly concentratedAlgerian economy. Under the present circumstances where competition from imports and foreigninvestment is likely to remain constrained in the near term, the dominance of PEs in many subsectorspresents major challenges. An analysis of firm concentration indicates that the largest four enterprisesaccount for 100 percent (or close to 100 percent) of production in the majority of subsectors. A largenumber of subsectors are characteized by a single PE producer. The problem of excessive concentrationis magnified by the de facto lack of competitive business practices. The competition law will banuncompetitive business practices, provide a basis for establishing market-oriented regulatory instruments,and help ensure that privatization does not transform public monopolies into private ones. Thecompetition law has been approved by the Government and it is currently under consideration by theCNT. As a complementary measure, the authorities have notified concerned distributors that they areno longer legally obliged to average transport costs, except for the limited list of products subject to fixedprices. The obligation of averaging transport costs to achieve pan-territorial pricing ( rgquawdon desprix) constituted an important barrier to entry by local private distributors in the past.

21. Small- and Medium-scale Enterprise Development. The authorities have removed a majorbotdeneck to the development of small- and medium-scale enterprises through the inclusion in the 1995Finance law of a provision liberalizing imports of used industrial and professional equipment.Macroeconomic stabilization, incentive reforms, and tight budget constraints on PEs to avoid crowdingout are the most important reforms for promoting SMEs in the manufacturing and service sectors, where

8

labor absorption prospec are the most favorable during the transition period. However, stabilizationmeasures must be accompanied by complementary, well focused measures to remove specific constraintson SME development. Liberalizing the import of used equipment is an important step for privateentrepreneurs faced with limited resources. The authorities have established a Ministry charged withdeveloping additional measures to promote SMEs.3 This Ministry has asked for Bank support indesigning and implementing its work program.

Public Erprise Reform

22. The proposed ERL would support PE reform through: (i) the establishment of the legaland institutional framework for privatization, (ii) the launching of a pilot privatization program togenerate concrete results quickly, and (iii) the implementation of a market-oriented framework for PErestructuring. The low level of productivity of the PE sector, which accounts for roughly 60 percent ofnon-government GDP, is at the heart of the economic crisis in Algeria. Under the EFSAL-supportedprogram, substantial progress was made in providing PEs with operational autonomy (under the aegis ofeight Participation Funds which act as fiduciary agents for the State) and in restructurming their non-performing debts under the financial restructuring program (assainssementfinancier). However, physicalrestructuring has lagged behind, and operating losses have continued. The authorities acknowledge theneed for further measures, including privatization, to eliminate operaing losses and increase theproductivity of the PE sector. The program which the ERL would support aims to improve PEperformance through a combination of privatization, tighter budget constraints, higher capacity utilizationthrough the increased availability of imports, physical restructuring (notably the shedding of excesslabor), and further debt restructuring where appropriate.

23. Edtr1g=n. In November 1994, the Government adopted awide-reaching policy, whichopens all sectors either to outright privatization or to private sector management under concessionagreements. Priority sectors for privatization include tourism, retail services, housing construction, roadtransport, port and airport services, ex-monopoly importers, and insurance companies. For a restrictedlist of public services (i.e., production and distribution of energy and water; airport, port and roadinfrastructure; and air and rail transport), the program will be limited to granting concessions to privatesector operators. A Ministry of Industrial Restructuring and Participation (MRIP) has been created -olead the privatization effort. In preparation for privatization, legal provisions were introduced in June1994 for opening the capital of autonomous PEs to private investors up to 49 percent and for the sale ofPE assets to the private sector. Bank staff are presently assisting the authorities with the preparation ofa privatization law, which is expected to be promulgated in early 1995. The law will establish acomprehensive, consistent legal and instituional framework for privatization. It envisages the creationof a National Privatization Council charged with implementing the privatization program, approvedamwally by the Government, and provides the Council with wide-ranging authority to carry out itsmission. The authorities have requested support from the Bank for the design and implementation of abroad privatization program in the priority sectors in 1995. To a significant extent, the pace ofprivatization will be driven by the absorptive capacity of the private sector and its willingness to investunder the prevailing circumstances in Algeria,

SMEs are defined in Alpeia so enterprise wit up to 20 eVployee. This &efinitn inorporats the vt naori ofprivaw finm in the couty.

9

24. As part of their straegy, the authorities have launched a pilot privatization program withtechnical assistance from the Bank. lbe objective is to gere some successful operations quicldy inorder to establish the feasibility of privatization, even before the new law is passed, and to send a clearsignal of intent to the population and to other concemned parties, such as the bureaucracy and Algeria'sexternal partners. To this end, the scale of the pilot program has been kept modest in order to stramlineits implementation. Under the program, some 88 local PEs (out of a total of roughly 1,200) have beendissolved and their assets placed in liquidation. In addition, calls for bids for five nationsl hotels, whichhave yet to begin operations, were published in late November 1994. These five hotels represent roughlysix percent of the total capacity of the public hotel sector in Algeria. The authorities are presentlyselecting a diverse group of at least 12 additional national hotels to be sold in a second phase under thepilot program. The lessons learned from the pilot program will be an important input into the broaderprivatization effort in 1995.

25. PE Restructuring. In the context of the proposed ERL, the authorities have establisheda market-oriented framework for implementing the restuctuing plans for the 23 non-autonomous PEs(EPS) which were the subject of diagnostic stdies under the EFSAL. These firms include most ofAlgeria's largest PEs, e.g., the national steel company and the national fertilizer producer. Together,they account for roughly one-third of industrial production, which in tum accounts for about 10 percentof GDP. The restrucuring framework, summarized in Annex I, is designed to ensure the viability of therestructuring plans, to tighten the budget constraints on the firms, and to create incentives for theirmanagers to assume responsibility for restrucuring and become actively involved in the search for privatepartners. Under the framework, a distnction is made between the restuctring of past debts (to befinanced by the Treasury) and rehabilitation investments (to be financed, as a rule, by the enterprisethrough a combination of self-financing, commercial bank credit, asset sales, and private investment).The framework calls for all 23 EPS to pass to autonomy or be closed (and their assets sold) by the endof 1995, starting with a first group of six enterprises-including the steel company-before the end of1994. In order for an EPS to pass to autonomy, its managers must obtain a non-objection of theirrestructuring plan from the authorities, following revision if necessary, and sign a performance contractwith the State. This contract commits management to implementing the restructuring plan and tomobilizing financing for the rehabilitation investments proposed in the plan. Upon signature of thecontract, the enterprise will undergo financial restructuring and pass to autonomy. Responsibility foroverseeing the performance contract will be incumbent on the shareholder assembly of the enterprise.As an autonomous EPE, the enterprise will be authorized to open its capital to private investors and tosell off assets to the private sector. During 1995, the authorities will contnue to impose ceilings on bankcredit and wages for the EPS which have not yet passed to autonomy or been closed.

Public Expenditure Reform

26. The proposed ERL would support two important public expenditure reforms geared totightening the budget constraints on PEs and banks: (i) consolidating the withdrawal of the State from thefinancing of PE investments, and (ii) phasing out the financial restructuring program introduced in thecontext of the EFSAL. In Algeria, public expenditure reform is the linchpin of the adjustment program.In the past, the Treasury used bountiful hydrocarbon revenues to finance State interventions throughoutthe economy. The withdrawal of the State from financing productive activity, which was initiated in thecontext of the ERSL and extended under the EFSAL, would be consolidated under the ERL, in particularto impose strict budget constraints on PEs and banks. Hard budget constraints are critical tomacroeconomic stability and the operation of the new market-oriented legal framework (e.g., PEbankruptcy procedures under the revised Commercial Code). Phasing out the financial restructuring

10

program will contribute to the fiscal adjustment and strengthen the credibility of hard budget constrints.In addition, the ERL would support mplem on of the recommendations of tbe PER, which will aimto improve the efficiency of public spending and help ensure that fiscal adjustment does not come at theexpense of basic social objectives. The PER covers both current and capital expenditures. Building onthe results of the Public Investment Review carried out in 1990 in die conte of the ERSL, the PER wfllhelp strengthen the fiscal adjustment efforts initiated under the IMF stand-by. It will analyze notably thedecision-making procedures for public spending in order to improve efficiency, and it will identify a corepublic investment program.

27. Treasury Fi ancina of PE Inve s. Under the reform progrm, the responsibility forfinancing investments of autonomous EPEs has shifted from the Teasy to the enterprises and thecommercial banks, which are also autonomous. However, as an interin measure, the Treasury hascontinued to finance investment projects for the EPEs which were approved prior to the end of 1988(PEC-1988). The authorities realize the importance of subjectng all PE investments to a market test,notably by potential private sector partners authorized to participate in the capital of autonomous PEs.To this end, the Treasury has infomed EPEs that it will stop financing investments under the PEC-1988by the end of the stand-by period (March 1995). The authorities have also set ceilings on potential Statesupport for the rehabilitation investmens of the non-autonomous EPS and confned it to a few exceptionalcases (para. 25). In order to ensure transparency, this support will take the form of equity injections orcredits from the budget. Treasury guarantees for bank credits to the EPS will be t d once thelatter pass to autonomy. In adition, the Participation Funds have the authority to guarantee bank creditto EPEs. As part of the effort to tighten budget constrin on PEs, the general assemblies of each ofthe eight Participation Funds will pass a resolution before the end of March 1995 capping the level ofguarantees issued to banks at the level of the Fund's own resources (fnds propres).

28. Einanial ReucturinProam. Agreement has been reached on a framework for futreexpenditures under the finacial restucurig program and on a calendar for phasing out the RestrumcngFund in the context of the proposed ERL. The financial restucuring program has reduced the debtburden on PEs and public utilities, thereby cuttig their losses, and strngthned the balance sheet ofthe banks. However, the future expenditures of the Retuctring Fund (Fonds d'asaiissemet, FA)must be strictly determined according to transparent criteria, and a calendar for phasing out the FAestablished, in order to support fiscal adjustment and strengt the credibility of hard budget constraints.Otherwise, PEs and banks could anticipate that financial losses not presenty covered. by the PA will becovered in the fxture. This anticipation of a future bail-out would have an exftemely detrimental efcton PE performance. Under the agreed frmework, summarized in Amnex I, expenditures by the PA willstop by the end of 1996, with the possible exception of one-me capital allocations to PEs and publicutilities which have not yet passed to autonomy by that date.4 An exhaustive list of non-autonomous PEsand public utilities which are eligible for such allocations will be established by the end of 1994.

Financial Sector Reform

29. The financial sector reforms which the ERL would support focus on: (i) strengtheningthe legal and regulatory framework, (ii) pursuing the restructuring of the existing banks under market

V An autono_mo pubhi uWt i defnd i legad tem as an EPIC ( bAinwmPc a Cwuc*re hdird etCa.,rciaZ . In pinciple, EPICs ezoy fill fiacial autonmy fitom the Stte. However, tey am eigible for_oonVehon frm the TDsJy for my lkwes reulting frm ontined Ste contol over tariffs.

11

conditions and subjecting them to tighter budget constraints, and (iii) identifying measures to atract newprivate financial institutions. An efficient financial sector is the foundation of a market economy. Theimportance of the financial sector in Algeria is accentuated by the need to transform large hydrocarbonrents into productive investments. While the legal and regulatory framework has been etensivelyreformed, implementation of the new framework is just begining. The financial sector is presendydominated by five public banks which are severely undercapitalized for the most part and have littleexperience in financial intermediation. The legacy of lax budget constraints and sectoral specializationhas left the banks with major portfolio problems which have only been partially resolved by the financialrestructuring program. Competition is marginal. There are now two private banks, but the scale of theiroperations remains modest. Although several foreign banks have established representative offices, theyhave not played a significant role to date. The macroeconomic and financial sector reforms that theproposed ERL would support will address the weaknesses of the financial sector and pave the way forthe establishment of a stock exchange and the development of longer-term financial markets, which areneeded to sustain an expansion of private investment.

30. Strentening the Legal and Regulatory Framework. While much of the legal andregulatory framework of a modem financial sector has been established in the context of the ERSL andEFSAL programs, the framework must be completed and made fully operational. The prudentialregulations were revised in November 1994, notably to provide a more accurate picture of bank solvency.In parallel, clear rules for the application of the five percent ceiling on bank margins have beenestablished. These rules provide room for banks to cover costs and to lend for higher risk, but potentiallyhigher return, projects. In order to make the new legal and regulatory framework more operational, aplan to reinforce bank supervision, prepared in consultation with the Bank, was adopted by the BA inNovember 1994. The plan incorporates training programs for bankers, accountas and inspectors.

31. Restrutuinng the Eisting Banks. The authorities have expressed a clear intent toprivatize at least some of the existing banks, and agreement has been reached on terms of reference fora feasibility study in 1995 of the opening of the capital of existing banks to private investors, includingthe option of full privatization. However, as highlighted by the institutional and financial audits carriedout by international auditors in 1992, the structural weaknesses of the banks are such that their successfiuprivatization is likely to require extensive preparation. The authorities have developed a market-orientedframework for implementing the restructuing plans developed for the five public banks in the contextof the EFSAL. A key component of this framework is the signing of performance contracts between themanagers of the banks and the State. These contracts are expected to be signed by early 1995. The Statewill proceed with a final recapitalization of the banks (on the basis of audits of the 1993 accountscurrently underway) through the FA in order to establish a capital adequacy ratio of at least 4 percent foreach hbwk by mid-1995. From that point on, the contracts will hold bank managers directly and solelyresponsible for respecting the capital adequacy ratios set by the BA, which are to increase to 8 percentfor the five banks in question by the end of 1999. The banks, in turn, are being provided with increasedautonomy with respect to operational decisions, notably the allocation of credit. The expectation is thatthe new framework, if implemented and supervised properly, will tighten the budget constraint on thebanks and increase the incentives for bank managers to mobilize resources, improve the allocation ofcredit and search for potential private partners.

32. Attracting New Private Financial Institutions. The authorities are actively promoting theestablishment of new private banking institutions to increase competition in the sector and provide privateinvestors with broader access to credit. Terms of reference have been agreed for a study in 1995 toidentify measures to encourage the creation of private banking institutions. This study will examine, inter

12

alia: (i) the impact of existing capital requrements for banks and financial institutions' (approxmatelyUS$12 million and US$4 million, respectively); (ii) potential administrative constraints on establishingnew banking institutions; (iii) fiscal incentives and disincentives; Civ) the role of intst rates, the ceilingon bank margins and remaining quantitative controls on credit; (v) the payments system; and (vi) bankconcentration ratios and other factors related to competition in the financial sector. 'Me authorities arealso working with the Bank to devise regulations authorizing the establishment of credit unions, whichrepresent a means of mobilizing household savings, broadening access to domestic credit, and increasingcompetition in the financial sector in the relatively short term.

Strengthening the Social Protection System

33. The authorities have recently launched two major initiatives to strengthen the socialprotection system: (i) the establishment of a scheme to protect workers laid off because of entrpriserestrucuring, and (ii) a reform of the social safety net. These initiatives are part of a larger effort tobetter use the limited resources available, and to move from a dependence on secure public sectoremployment and distortionary price subsidies to a reliance on private sector job growth and moreeconomically neutral income trasfers. A stronger, better targeted social protection system will facilitatestructural adjustment by reducing incentive distortions, facilitating enterprise restructuring, and enhancingthe efficiency of the labor market. Under the proposed ERL, implemention of the worker protectionscheme and the social safety net reform would be closely monitored and corrective measures would betaken as required.

34. Unemploye sance and Early Retirement. A national scheme to protect redundantworkers, financed entry through employer and employee contributions, was adopted in May 1994, afterintensive consultations with the labor unions. The scheme incorporates unemployment insurance andearly retirement programs for workers employed on permanent contracts. The new scheme, whichcontains several innovative features, will facilitate PE restucuring. However, an initial review hasindicated that the benefits provided may prove to be too generous and the costs to entprises too highfor the scheme to be fully effective. The authorities have agreed to conduct a review of the new schemeduring the coming year in collaboration with the Bank in order to monitor its effectiveness and identifycorrective measures if needed.

35. Reform of the Social Safety Net In October 1994, the authorities introduced anambitious reform of the transitional social safety net implemented in 1992 to compensate for reductionsin food subsidies. The objective of this reform, designed in collaboration with the IMF, is to targetscarce budgetary resources more effectively to truly vulnerable groups. The reform limits socialassistance benefits to those families with no other source of income and unable to work (i.e., handicappedindividuals, widows and the elderly). In parallel, a new pay-for-work scheme has been inroduced toprovide financial support for individuals able to work through participation in activities of communityinterest (adivit6s d'i7rt g6Mrai, AIG). Participants in the AIG scheme will be paid only for daysworked at a monthly rate slightly more than half the minimum wage of DA 4,000. Discussions of thenew scheme with the Bank have pointed to concerns about the capacity of the administration to operatesuch a program on a national scale. In particular, it is critical that the scheme be fully self-targeted inorder to channel the benefits to the truly needy, while miniming administrative costs. Moreover, the

5/ UndeAlgerin law, fincial instituti have businempowers snuiltotlwso of bans, but th camotept montaydexst.

13

private sector should play a central role in implementing the activities of community interest envisagedunder the scheme. The authorities have acknowledged the Bankes concerns. They have agreed to carryout during the coming months an evaluation of the social safety net reform in collaboration with the Bank,and to take measures, if necessary, to improve the ability of the system to reach the most vulnerablegroups at a sustainable cost. This evaluation will serve as a basis for the preparation of a proposed socialsafety net project. The terms of reference for the evaluation have been agreed upon.

G. Meiumtem Policy Framework and Outlook

36. Accompanied by stabilization, the acceleration of structural reforms should provide asound basis for a medium-term policy framework geared to supporfting adjustment and setting theeconomy on a permanent high-growth path. Of particular importance is a sustained reduction in the debtservice ratio in order to underpin a permanent boost in import capacity. While the level of growth thathigher import capacity can generate over the medium term will depend on the costs of adjustment, notablyPE restructuring, the objective is to create jobs at a rate at least equal to the 4 percent growth rate of thelabor force. This would stabilize unemployment and help ease social tensions. Restored growth wouldalso support faster structural adjustment, which, in turn, would accelerate the transition to markets andgenerate a more rapid improvement in economic efficiency. The resulting increase in market forces andproductivity would help sustain growth, and provide for a more flexible response to adverse externalshocks. As the reforms take hold, sustained growth and greater efficiency would support furtherincreases in per capita consumption.

37. The Bank hasdeveloped medium-term projections TALE 2: StNW NEDU1-TEN OTLOUKfor Algeria which are consistent IS bittiom ntess otbehise indicated)

with the deepening of the Projectedstabilization and structural reform -996 1997 1998 1999-03

program. The projecions, which Cavg)have been reviewed with the IMF, GOP Growth Rate 4.0Q 4.0X 4.5 5.0Qare summarized in Table 2. They Treasury Balance/QDP -1.0Q 0.0X 1.0 2.0Xtarget continued expansion of the Inflation Rate I/ 10.1% 8.32 7.8% 4.42

economy and a deceleration of Imports 13.1 13.9 14.0 14.9inflation. Annual GDP growth is Exports 11.7 12.8 13.7 15.5Madon.Annua GDP rcowt is o/t Hydrocarbons 10.1 10.8 11.4 12.3targeted to average about 4 percent Current Account Balance -1.9 -1.8 -0.8 0.3

through 1998, in part through Gross Reserves 2/ 2.6 2.7 2.8 3.0increases in the capacity utilization Totel Externat Debt 3/ 33.1 35.1 35.7 34.3

Total Exterral Debt/XGS 4/ 243.3X 237.2X 225.1X 192.8Xrate which is currently under 60 Debt Service/XGS 5/ 39.42 31.52 44.0X 41.1Xpercent. Inflation is targeted to fall ___- P- - -N

below 10 percent per year. While t can" b i of i1VM# of Msthe authorities are targeting a faster II _A *A t d AN SW ON P uuuc

deceleration of inflation under the s Afh I

envisaged EFF, this will not beeasy to achieve given the fragile Source: US estimates.state of the PE sector, theunderdeveloped financial sector, and the growing stock of public debt. As the economy adjusts over themedium term, a fiuther increase in the growth rate can be expected. Achieving the growth targets willdepend on tre critical factrs: (J) the pace of stabilization and strucural reform; (ii) the costs ofadjustment, especially PE restrcturing, which are difficult to quantify, and (Mii) the ability and

14

willingness of private investors to respond to the reforms. Higher-than-expected adjustment costs haveproven to be a major obstacle in other transition economies. The fact that the private sector has alwaysbeen present in Algeria, along with the ccuntry's relatively modern capital stock, substantial agriculturalpotential, and readily exploitable energy resources argues for lower adjustment costs than in other formersocialist economies. Moreover, the projected expansion in hydrocarbon exports (para. 38) and continuedcapital inflows will help alleviate the costs of adjustment and facilitate the transition process.Nevertheless, it is possible that actual medium-term performance could fall short of the targets, despitethe acceleration of reform and higher import capacity, particularly if private investors hesitate, or lacksufficient resources, to respond to the reforms. This risk highlights the need for continuous efforts tosustain popular support for the reform program, to bolster the confidence of private investors, and toensure their access to foreign exchange, domestc credit and other resources.

38. The medium-term growth projections are underpinned by continued increases in importcapacity. Import levels (GNFS) are expected to increase steadily through 1997, reaching nearly US$14billion, and then stabilize thereafter. This projection reflects the anticipated slow-down in hydrocarboninvestments as the on-going program to expand gas exports comes to a close. Hydrocarbon investmentssupport a projected increase in gas exports-consisting of LNG, piped gas, and liquifled petroleum gas(LPG)-from US$3 billion in 1994 to about US$5.4 billion by 1998.6 Oil export volumes are projectedto remain at current levels over the medium term. Sustained oil production is underpinned by foreigndirect investment such as the signing last summer of Algeria's first, large-scale production sharingagreement: a US$1.3 billion, 25 year deal with the Atdantic Richfield Company (ARCO). Assuming asteady recovery of oil prices, total hydrocarbon exports are projected to reach US$11.4 billion by 1998.Non-hydrocarbon exports and private transfers are also projected to increase in response to thestabilization and reform program. Taken together, these developments underlie the projectedimprovement in the current account from the present deficit to a modest surplus after 1998. To supporthigher growth and accelerated reform, the macroeconomic policy framework must include a comprehen-sive strategy for mintuining the external debt service burden at a sustainable level. Further multilateraldebt rescheduling in the context of a future EFF would reduce MLT principal repayments to a projectedaverage of US$3.2 billion p.a. over 1996-98. Under these assumptions, the debt service ratio woulddecline to 31 percent by 1997, followed by an increase in 1998 as repayments of rescheduled debt begin,and then average about 40 percent thereafter.

PART II: TM ECONOMC REHABILITATION SUPPORT LOAN

A. Orgins and Objectives

39. The proposed ERL has been prepared in response to the Government's request for supportfrom the international financial community for its economic reform program. The Bank assisted theauthorities in developing the matrix of policy reforms attached to.the Letter of Economic Policy presentedin Annex I. This effort relied heavily on the achievements of the ERSL and EFSAL programs, and theunderstandings built up through many years of intensive dialogue, including detailed discussions of the

ot On-going gas development projects include: Oi the doublin of the capacity of the TRANSMED I pipeline to Italy from12 billion cubic maers (BCM) per year to 24 bom, (u) the constuction of a TRANSMED n pipeline with an iniacapacity of about 8 bcm per year from Algeria twgh Marocco to Spain, and (ti) the revanping of LNG liquefactionfacilities to incrse capacity fmn some 23 born to 32 born per year.

13

draft Country Economic Memorandum in December 1993. The policy matrix presents a comprehensiveprogram of reform measures critical for the transition to a market economy including, for the first dme,concrete actions to privatize Algeria's extensive public enterprise sector. The program also includesrealistic targets antd indicators to monitor progress over the coming year. If implemented vigorously, thisprogram will provide a sound basis for future Bank assistance for structwal adjustment in Algeria. Themacroeconomic framework for the reform program has been established in close cooperation with theIMF, which is providing support under the stand-by arrangement approved in May 1994.

B. Rationale for Bank Involvement

40. Two principal reasons justify the proposed ERL: (i) it will help the authorities define andimplement policy reforms to accelerate the transition to a market econony; and (ii) it will contribute to,and help catalyze, the international community's efforts to mobilize the substantial external financingpackage needed to underpin restored growth and bolder eco4omic reform. The proposed ERL representsa renewal of the Bank's efforts to support the macroeconomic stabilization and structural reform program,particularly the reforms of the productive sector needed to set the economy on a path of sustained growth.Key reform measures include private setor development, privatization, restructuring of the PE sector,public expenditure reform, financial sector reform, and the strengthening of the social protection system.In concert with macroeconomic stabilization, these policy reforms will help establish the foundation forthe emergence of the private sector as the engine of growth over the medium term. Given Algeria's highdebt service and dependence on imported inputs, restoring growth requires a loosening of the extemrresource constraint. The international community has launched a concerted effort to reduce the debtservice burden and provide additional resources in order to increase imports from the critically low levelin 1993. The multilateral institutions are foreseen as playing a major financing role, and the programsupported by the 1ME stand-by includes this source of financing. Other creditors are paying closeatention to the extent of Bank support. The EU has expressed interest in providing parallel financingof the stuctura reform program supported by the proposed ERL through an ECU 200 million balanceof payments loan, which would also be linked to continued implementation of the IMFf-S7pportedstabilization program.

C. Project Descron

41. The proposed Loan would finance imports in an amount of US$150 million equivalent.The Loan would finance 100 percent of the foreign exchange cost (CMF of goods imported from Bankmember countries and Taiwan. Goods imported after September 15, 1994, would be eligible forretroactive financing under the Loan up to a maximum of US$30 million, equivalent to 20 percent of theLoan amount, in view of the considerable progress already achieved in implementing the reform program.The Loan's closing date would be December 31, 1996.

D. Imple ion Arrangeme

42. The Borrower would be the Government of the Democratic and Popular Republic ofAlgeria, represented by the Ministry of Finance. The National Planning Council is the lead ProjeImplementaion Ainy for the management of the Loan. An inter-midisterial working group is in chargeof coordinatng the monitoring of the program. A formal program review will be held in 1995 (para 47).

43. Prmient. The proposed loan would be used to finance the CEF cost of eligibleimports of eligible goods and services by the public and private sectors. Procurement would be carried

16

out in accordace with the Bank's Procurement Guidelines. Contracts for the procurement of eligibleimports e_stated to cost the equivalet of US$5 million or more each shall be awarded throughInerional Compedtiwve Bidding. Ineligible items would include those financed from bilateral or othermultilaeral sources, expenditures in the currenwy of the Borrower or for items supplied from theBorrower's terrory, items intended for militay or para-militry use, and luxury items. Commoditieswould be procured under procedures acceptable to the Bank. Eligible expenditures for petroleumproducts and foodstuffs would be limited to US$30 million each. Contracts for the procurement ofeligible imports estimated to cost less than the equivalent of US$5 million woud be awarded on the basisof established commcial practice and/or the Borrower's public sector procurement procedures whichare acceptable to the Bank. As in all quick-disbursing operations, there mill be o prior review ofcontract awards; verification of supporting documen will be on a selecive posl-review basis comprising:evidence of bid invitation, record of bid opening, bid evaluation report, and the sigted contract/purchaseorder or official customs declaration(s).

44. . The Algerian Development Bank (BAD), which operas as an annex ofthe Treasury, would be responsible for administering the Loan, including the prepsration and submissionof all withdrawal requests. Ihe BAD would also be responsible for managing a special account in USdollars at the Central Bank under the Loa in the amount of US$12 million. For contracts valued belowUS$5 milion equivalent, disburements would be made on the basis of staements of expenditures (SOB),prepared on the basis of information conained in customs certificates or other appropriate documentsshowing that eligible goods at least equal in value to the amount requested from the Bank had beenimportd ito Algeria durng the period under consideration. Supporting documentation for SOEs wouldbe reinedby the BAD for at least one year after receipt by the Bank of the audit report for the year inwhich the last disbursement was made. Tbis documentation would be made available to the auditors(para. 45) and to Bank staff upon request Withdrawal applications would be consolidated and submittedin amounts of not less than US$1 million eqvalen. Contrac valued at less than US$100,000equivalent would not be eligible for flnacing under the Loan. Retoactive financing of up tO US$30million equivalent would be provided for eligible items imported after September 15, 1994.

45. Audting. The BAD would be responsible for maintaining all Loan accounts and therecords of all transactions under the Loan in accordance with accepted accounting practices. All accountswould be audited following the end of the Borrower's fiscal year by independent auditors acceptable tothe Bank. These reports would include a separate opinion on the use of SOEs and the special account.Certified copies of the audit would be submitted to the Bank within six months of the end of theBorrower's fiscal year.

X Bm,t Reacbed

46. Actions prior to Board Presentation. The official submission to the Bank of theGovernment's Letter of Economic Policy was a condition of Board presention. The full set of prioractions for Board presentation is detailed in the policy matrix attached to the Letter of Economic Policy.KS prior aczions include:

Incemive Frameworlk and Private revelopment

* Publication of the implementing regulations for the Investment Code, including a decreeestablishing the National Investment Agency.

17

* Adoption by the Council of Ministers of the draft law on competition.

* Dism ation of circulars to conernd etprises stating that paneritorial pricing isnot required, except for a restricted list of products subject to fixed prices.

* Inclusion in the 1995 Finance law of a provision liberaizing the import of used industrialand professional equipment.

Reform of the Public Eterprise Sector

* Adoption by the Council of Government of a privatzation policy opening all sectorseither to outright privatzation or to private sector management.

* Adoption by the Council of Goverment of implementing regulations for the sale ofassets by autonomous PEs to the private sector.

* Preparation of a draft privatization law in consultation with the Bank.

* Launching of the pilot privatization program, including the dissolution of 88 local PEsand the publication of the call for bids for five national hotels identified during appraisal.

* Adoption by the authorities of the framwork for implememing the restrug of the23 non-autonomous public enterprises (see Annex 1).

* Establishment of the ceiling on bank credit to the 23 EPS for the last quarter of 1994,and agreement to impose wage and credit ceilings in 1995 on the EPS which have not yetpassed to autonomy or been closed.

Public Exniu Rorm

* Notification by the Treasury to autonomous EPEs that it will terminate, at the end ofMarch 1995, feancing of investment projects approved prior to the end of 1988.

* Establishment by the authorities of ceilings on potential State support for therehabiliation investm of the EPS and commitment to limit such support to exeptionalcases in accordance with the adopted fraimwork.

* Agreement on the strucure of future Restructring Fd expenditures and on a calendarfor phasing it out (see Annex 1).

Financial Sector Reform

* Publication by the BA of a directive expanding and strengthening the prudentialregulations.

* Establishment by the BA of a plan to strengthen banking system supervision.

* Agreement on the model for the performance contracts between bank management andthe State holding the former responsible for respectng capital adequacy requiements.

18

* Adoption by the BA of regulations for the application of the ceiling on bank margins.

StrengUening of the Social Poteton Ssm

* Publication of the implementing regulations for tde unemployment insurance/earlyretirement system for workers laid off for econowic reasons.

* Agreemnt on terms of reference for the evaluation of the reform of the social safety netenacted in October 1994.

47. ProEram Review. The policy matrix includes a broad range of measures to beimplemented during the 12 months following Board presentation. While these measures are notconditions for the ERL, satisfactory progress in their impl ion will be a trigger for the preparationof new adjustment lending in 1995, in concert with a successor IMF program. The ERL-supportedprogram will be the subject of a formal review on June 30, 1995, or any other mutually agreed date.In addition to evaluating the implementation of the measures included in the policy matrix, the Bank willmonitor a series of quantitative indicators, developed in collaboration with the authorities, with a viewto assessing the impact of the economic reform program. The choice of indicators, which are attachedto the Letter of Economic Policy, was influenced by data requirements, and the need for broad, buteconomical, coverage of the program.

F. Assessment

48. The project is consistent with the Bank's environmental policies and will follow acceptedBank procedures in this area. In conformity with the policy for rehabilitation operations, noenvironmental rating has been assigned. The question of enviromental liability for past pollution willbecome a major issue as the privatization process proceeds. During the consultations on the draftprivatization law, the Bank underlined the importance of establishing, on the basis of independentenvironmental audits, a clear division of responsibility between the State and prospective new investorsfor remedying past pollution problems.

G. Risks

49. The proposed ERL would support a complex program of macroeconomic stabilization andstructral reform for a country suffering from a severe social crisis, and struggling to overcome thelegacy of nearly three decades of centralized planning and over-dependence on hydrocarbon exports. Itis an operation subject to a significant degree of risk. Four categories of risk can be identified: socialand political upheaval, external shocks, higher-than-expected adjustment costs and a slow private sectorresponse, and the capacity of the Algerian administration to carry out the program.

so. Implementation of the reform program is subject to political risks arising from theeconomic and social crisis in Algeria and the difficult security situation. The authorities have madeextensive efforts to maintain a dialogue with a broad range of political groups, and presidential electionshave been announced before the end of 1995. Even so, the situation is quite uncertain, and there is noguarantee that the politically motivated violence will diminish soon or that the composition of thegovernment will not change. However, the medium-term program supported by the proposed ERL willneed to be implemented by any government. As a result of the long duration of the economic crisis,there is a much greater acceptance by the population of the need for stabilization and structural reform.

19

This is evidenced by the muted opposition to the stabilization program, and the implicit support for theprogram (despite a significant expected decline in real wages) by the trade unions. The unions are nowkeenly interested in an economic stregy that ensures more sustainable growth and employment, despitethe short-term social costs.

51. With regard to extal shocks, the two main factors for Algeria are fluctuations in worldoil prices and in the value of the US dollar. At curmrt export and import volumes, a US$1 dip in theaverage price for Algerian crude oil entails a loss of roughly US$500 million in annual export earnings,and a one percent depreciation of the US dollar raes import costs by an estimated US$80 million. Adepreciation of the dollar also increases the cost of servicing external debt which is denominated largelyin non-dollar currencies. While the oil price risk can be addressed through contingency financingmechanisms, the economy remains vulnerable. This vulnerability highlights the urgent need toaccompany stabilization with a deepening of structural reform in order to diversify the country's exportbase and improve the economy's aWility to respond to adverse external shocks.

52. Higher-than-expected adjustment costs have proven to be a major obstacle in othertransition economies, and a slow response from the prvate sector has bedeviled many adjustmentprograms. It is difficult to estimate precisely the extent of the adjustment costs that will be generated byAlgeria's economic reform program. As noted earlier (para. 37), there are several factors, including thelong-standing private sector, as well as the county's relatively modern capital stock and readilyexploitable energy resources, which indicate that adjustment costs wiUl likely be lower than in otherformer socialist economies. Hesitation by private sector investors to take advantage of opportunitiescreated by the reform program, or a lack of sufficient resources to do so, is another potental risk. Thisunderscores the need to ensure the credibility of the program in the eyes of private investors and toprovide them with sufficient access to resources under market conditions, notably by eliminating thepublic sector defict, establisWng a foreig exchange market, and encouraging the creation of privatefinancial institutions. Continued support will also be needed from the interational community to helpalleviate the costs of adjustment and to help ensure that sufficient resources are available to sustain themomenum of the transition to a market economy.

53. Implementing the economic reform program's many interdependent components will taxthe already strained public administration in Algeria. Many of the areas covered by the program, suchas privatization, represent relatively unfamiliar terrtory, and mid-course corrections will be inevitable.The inter-ministerial working group responsible for monitoring the program will help provide thenecessary coordination. However, the Bank will need to maintain an intensive dialogue with theauthorities and provide a significant amount of technical assistance.

H. Recommendaion

54. 1 am satisfied that the proposed Loan would comply with the Articles of Agreement ofthe Bank, and I recommend that the Executive Directors approve the proposed Loan.

Lewis T. PrestonPresident

AttachmentsDecember 15, 1994Washigton, D.C.

DEMOCRATIC AND POPULAR IatUIC OF ALGEaAECONOMIC BIIAT SUPPORT LOAN

POIRRQEICONM WRX

December 4, 1994.

Ministry of FinanceThe Ministr

To the President of the World Bank

Mr. Presidnt,

Plase find aahed a Lver of EFonomic Policy which decibes the objecdves uadistments of the Boonomic Rdorm Progm of the Goex men of Alea This progm trso thmacroeconomic stabization and structuri al,t of our ooo.

In order tD oUSUre 66 pIOerI ... IF. i-I of hs prr, to GoeNMt mobilizing the finan and tecbhical oas e of all of the nnatid ptns of Algia

In the firaework of dk-, support of its onoomic refom progra, th GovernenreWests from the World Bank a rehabilation loan in the amount of US$150 mailion equivln

Please accept, Mr. Presiden the etpression of my nWore consideration.

Ahmed BDbmMinser of Fiac

ANNEX IPage 2 of 31

DEMOCRATIC AND POPULAR REPUSLIC OF ALGERIA

LETTER OF ECONOMIC POLICY

1. INTRODUCrION

2. STRUCTURAL REFORMS

3. EXTERNAL SUPPORT FOR THE ECONOMIC REFORM PROGRAM

1. INTROD{CTION

1.1 The Current Situation

Althougb facing a difficult situation, the Algerian authorities are pursuing a comprehensiveoconomic reform program, which includes macroeconomic stabilization; incentives for private sectordevelopment and the establishment of an enabling framework; reform of public enterprises, publiceeniture and the fiancial system and strengthening of the socil protection system. This lastcomponent is vital to the success of the program iu the current situation.

Algeria is going through a twofold transition in the political and economic arenas, which addsto the social cost of adjustment. If economic adjustme= -eates too heavy a burden, this could jeopardizethese two transition processes. An optmum course must therefore be taen which accounts for both theneed to move quickly, so as to ensure that the reforms are irreversible and to mimize their social costs,and the importance of avoiding a reatment so brutal tha it risks being counterproductive in the currenteconomic conteXt. Too sharp a deterioration in living standards and the quality of education, health andthe Governmet's social support services in general, might lead to widespread rejection of the reforms.

1.2 Mediuu-Team Outlook

1.2.1 Deveopment Objecves

Since there are many development objectives, they must be assigned priorities. The mostimportant aim is to achieve a growth rate that will mabe it possible gradually to absorb unemploymentor, if that is not feasible, to keep it at a tolerable level. The average annual rate of growth in GDP forthe 1994-98 period should at least be equal to the rate of growth in the working population.

Growth is necessay for creaing jobs, but is not sufficient by itself. In addition to adjustmentsin the relatve prices of capital and labor, which are important, it is essential to provide incentives topromote the kind of productive investment that will create jobs on a significant scale. The standard oflivmg has steadily eroded during the past five years. This loss must be gradually restored, notably bypracticing a wage policy that will help increase the productivity and purchasing power of the low-inoomesegments of the population, in conjunction with policies to contol inflation.

ANNEX IPage 3 of 31

Algeria has been in the throes of an acute housing crisis for several years. Housing is a majorconcern of the people. The construction sector should be given top priority to halt the deterioration inthe housing occupancy rate, especially for low-income households. For these households, emphasis willbe placed on low-cost housing, and a rational policy for both purchasing and renting housing will beimplemented. In a broader context, increasing the supply of housing and resolving the housing crisisrequires that the structural reforms undertaken in this sector be pursued.

In the fields of education, health, and basic infrastructure, which are the responsibility of theState, the quantitative advances already nmade will be consolidated and enhanced from a quality standpoint.

A fundamental economic objective is stabilization, reflected in a coherent set of relative prices(exchange rate, wages, and interest rates) and a rate of inflation which does not jeopardize the objectiveof improving purchasing power. The stabilization of the macroeconomic framework will be closelyassociated with the deepening of the adjustment process, which entails public enterprise restructuring,progressive pnvatization, development of the prvate sector, trade liberalization, and application of therules needed to ensure the free play of competition. In addWion, appropriate steps will be taken torevitalize the agriculture, construction and public works sectors, as well as the small and medium-scaleenterprise sector.

A more effective allocation of resources as a result of macroeconomic stabilization will give aboost to the housing industry and revitalize the construction sector. Agricultural policy will be gearedto improving the trade balance in food products. Agricultural investment should expand, with intensiveState participation in the infastructure required to increase the arable land area. The devekopment ofsmall and medium-scale enterprises will be encouraged by a favorable macroeconomic framework, andespecially by easier access to foreign trade. In addition, these businesses will now have access toactivities that were reserved for public sector enterprises until recenty. Economic growth should generatemoderate increases in consumption, in line with the increase in GDP. Essently, the objective is toreverse the trend in recent years of a decline in average per capita consumption. At the same time, thesavings needed to fmance housing construction and other private investment will be encouraged.

1.2.2. The Eonomic Role of the State

The shift from a centrally managed economy to a market economy calis for a redefinition of therole of the State in the economic domain. This new role will require the State to take responsibility forfour essential functions:

* The function of regulatng the economy: The State must define and implement amacroeconomic policy that will provide for the transition to a market economy at thelowest social cost. It must ensure that the country's productive potential is preserved andexpanded in an environment of fair competition;

* The function of leadership: The State must adopt inentives to ensure that production isoriented toward increasing national wealth and the county's prospenty, in accordancewith the general principles of the macroeconomic policy framework;

ANNEX IPage 4 of 31

* 'he function of managing public property as owner and shareholder, pursuant to the lawsof a market economy: However, the State should progressively withdraw from theproductive and service sectors so that it can better fhifill its functions in other areas;

* Finally, the State as protector will play the role of arbitrator among the various segmentsof society by ensring that the fruits of development are fairly distributed and inparticular that the share of wages in value added is equitable. It wIll also protect andpreserve public property, and will ensure that the quality of the environment ismaintained and where necessary Improved.

1.2.3. The Sodal Role of the State

If the Staots role in the economy is to be redefined, its role in the social sector must be clarifiedas well. Besides die areas traditionally under its jurisdiction, the State will have to assume responsibilityfor addressing the negative effects of restucturing the economy and introduce mechansms to protect themost vulnerable groups in society. It must make sure that poverty does not generate social problemsarising from the people's inability to provide for their most basic needs.

In the field of education, the State must make sure that all school-age children have access toprimary education. For secondary school and higher levels, consideration will be given to eachindividual's abilities, the needs of the economy for skilled workers, and the financial resources of theState.

In the health sector, besides its responsibility in the field of public heath, the Stae must provideaccess to health care for those segments of the population that cannot afford medical care and medicines.

Ihe State will promulgate and enforce labor legsladon. The State has a responsibility withrespect to mintning the exsting level of employment and fighting unemploymentL It will, however,avoid taking any steps that would increase the ngidity of the labor market and impair its functioning.

1.2.4. S lrctural Reforns

The purpose of the stuctr reforms is to put in place te mechanisms of a market economytypified by the free play of comption and by prices which reflect the relative scarcity of resources andtheir most efficient use. These reforms cover the prices of goods and services, with the exception of avery limited umber of products to which, in the State's view, all citizens must be ensured access untilthe system of income transfer, which targets the poorest households, is fully efective. Similarly, interestrates and the exchange rate should reflect a situation of market equilibrium. As for wages, a floor willbe maintaned to ensure a minimum income for workers, while taking into account the need to promotethe creation of new jobs.

The scope of private sector activities will be expanded to promote competition by multiplying thenumber of economic agents, and eliminating monopolies and excess profits.

The public sector will be confined to a limited number of activities for which it is impossible toapply market rules and to a small group of enterprises, which offer a public service or a similar servicein the public interest and are regarded as vit to the economy. Public services not provided by the State

ANNEX IPage 5 of 31

through its own resources and administration shall be performed, indifferently and without discrimination,by public enterprises or private companies.

The State will complete its disenga t from competitive market activities and will strengthenits role as the public authority that ensures order, security for persons and property, education, theconstruction and maintenance of basic infrastructure, public health, and protection for the poorest, mostvulnerable segments of the population.

13. Program of Action

The program pursues and intensifies the reform process iniiated in 1988. A major goal is forthe prices of goods and services, the exchange rate, and interest rates to attain their equilibrium valuesover time. As regards the exchange rate, mechanisms which take into account the supply of and demandfor foreign exchange must be applied to determine the currency's equilibrium value, thereby ensuringbalance of payments equilibrium. In addition, maining a stable exchange rate means that inflationmust be reduced and subsequently contained. During the program period, the transiton from a fixedexchange rate regime to a variable rate system determed by the foreign exchange market will be made.Interest rates must also reflect the scarcity of capital and the true value of money. The monetaryauthiorities will eliminate the causes of rigidity in the capital market so that positive real interest rates canbe achieved, which is the only way to mobilize the savings needed to finance the investments of thebusiness sector. The State will, however, ensure that the agriculture and housing construction sectorsbenefit from the investments they need via appropriate mechanisms.

The liberalization of foreign trade, which is already very advanced, will be pursued by liftingimport suspensions on all products, except for those goods which are banned for moral, health, religious,or security reasons.

Budgetry and fiscal policy will be designed to improve tax collection by enlarging the tax baseand improving the efficiency of the adminisration concerned, and by rationalizing government spending.The combination of measures planned in the area of public finance should make it possible to reduce andsubsequendy to eliminate the overall Treasury deficit.

With respect to wages, a realistic policy will be followed in line with the objective of rationalizinggovernment spending. This will require restraint in civil service wages, a policy that will be extendedto cover non-autonomous institutions and enteis whose wage policies can be imluenced by the publicauthorides. However, for these categories of economic agents, the State will ensure that wages forworkers at the low end of the wage scale are raised, based on the principle of an equitable distibutionof the cost of adjustment among all the households in the country, but taking into account the need forenhanced productivity. Autonomous public enterprises will implement a wage policy which is consistentwith their economic performance and budget constraints.

A reduction in the overal Treasury deficit wRi also require a cut in spending on price subsidiesfor staple goods. These expeit will be progressively reduced by adjusting prices and by bringingthem closer to economic costs. The sfety net mechanism will be finetned and oriented towardsproviding direct support to the poorest households.

ANNEX IPage 6 of 31

The financial rehabilitation of non-autonomous public enterprises constitutes an additional burdenon goveroment finances. The authorities intend to clarify the sttus of these entprises once and for alland to ensure that the impact of their financial losses on the Treasury is reduced. The measures to beapplied will lower the budgetary cost of the public enterprise Rehabilitation Fund, by reducing thisspending and eliminating it over the longer run. These measures will help reduce the State's role in thecompetitive economic sector.

Pricing policy will be designed to increase the number of free prices and to bring the prices ofsubsidized products closer to their economic value, thereby reducing the amount of budget subsidies. Inthe area of public service tariffs, progressive adjustments will make it possible to move closer to, andfinally to cover, economic costs. This will restore the financial position of the enterprises affected andeliminate the implicit subsidies which they have been receiving up to now.

The deregulation of prices must be accompanied, however, by the establishment of a legalframework to promote the dewelopment of competition. A law will be promulgated to this effect.

The State's withdrawal from the competitive market place will lead to the emergence of a privatesector better equipped to take over all or part of these activities during the transitional phase. The Statehas put in place an instiutional framework to encourage the development of the private sector.Investment will be promoted by simplifying administrative procedures and improving access to land forproject sites. Ivestors will benefit from the new macroeconomic framework being established duringthe transition to a market economy.

2. STUCTURAL REFORMS

The structural refirms of the program will consolidate and strengthen the measures alreadyadopted in connection with the transiton to a market economy. The steps to be taken, most of which arecontained in the policy matrix attached to this letter, relate to following areas:

e macroeconomic framework;

* incentives and development of the private sector;

* reform of public enterprises;

* reform of public ependiture;

* reform of the financial sysm;

* suengthning of the social protection system.

For each of the areas listed above, certain steps have already been completed or initated in anefWbrt to step up the pace of reforms; other, no less important measures, which require more time toimplement becuse of their nature, will be launched and/or completed in the course of 1995.

ANNEX IPage 7 of 31

2.1 The Macroeconomic Framework:

2.1.1. Exchange Rate System

The substantial adjustment of the exchange rate as an anchor for the stabilization process wasfollowed by the establishment of fixing sessions in October 1994, in order to set the exchange rate of thedinar. This increased flexibility in determining the exchange rate is one step towards putting in place aninterbank foreign exchange market in the context of the envisaged Extended Fund Facility (EFF). TheBank of Algeria will make the necessary preparations to establish this interbank market by the second halfof 1995.

2.1.2. ibe a of Foreign Trade

During the period of the program, foreign trade policy will promote the effective participationof Algerian enterprises in international trade. Administrative procedures required for foreign tradetransactions will be eliminated, and the system for encouraging the development of non-hydrocarbonexports will be strengthened. Work will proceed on developing information systems and significantdatabases for imports, exports, and other data on external markets, including prices and quality. Effortswill be made to improve the efficiency of the organizations and agencies involved in foreign trade datagathering and research. The procedures for overseeing foreign trade flows will be adjusted to bring theminto line with international rules, and wide-ranging efforts will be made to promote competition.

2.1.3. Mobilization of Extenal Resources

The hydrocarbons sector will continue to play an important role in mobilizing external resources.Exports of hydrocarbons will generate some US$30 billion to US$45 billion during 1995-98, dependingon the price of crude oil during that period. However, large investments will be required to improve theexploitation of oil reserves and to increase gas export capacity. It should be noted that a major effort hasbeen made to promote private investment in this sector.

Also helping to bring about balance of payments equilibrium will be non-hydrocarbon exports,facilitated by improvements in the efficiency of public enterprises, the development of the national andforeign private sector, and dynamic exchange rate management that makes good use of the country'scomparative advantages.

Direct foreign investment will be encouraged, so as to help bring the balance of payments intoequilibrium without worsening the country's external indebtedness. Privatization is one way to encouragethis investment.

In addition to external resources generated by exports of hydrocarbons, other exports and directforeign investment, management of the external debt will aim to provide the additional external resourcesneeded for balance of payments equilibrium. The rescheduling of the extenal debt eligible for treatmentby the Paris Club and the initiation of negotiations with concerned foreign banks to reschedule the privatedebt constitute the basic framework for debt management in the context of economic reform.

ANNEX IPage 8 of 31

2.1.4. Budget Policy

In the framework of the stabilization program, budget policy will help reduce inflationarypressures, notably by promoting a moderate wage policy. In a broader sense, it is necessary to reducethe absorption of resources by the State so as to make more resources available to the productive sector.To accomplish this, the Stae will also have to free up budgetary resources to contribute to the completionof the financial restructuring program for the banks and enterprises.

2.1.5. Monetary Policy and Interest Rates

Measures to liberalize bank interest rates and to raise the rates of the household savings institution(CNEP) and Treasury bonds are consistent with the recent substantial increase in the rediscount andoverdraft rates of the Bank of Algeria. The introduction of a flexible intervention rate on the moneymarket has initiated a move by the Bank of Algeria to indirect regulation, notably based on aliberalization of interbank money market rates. These liberalization measures will be accompanied bythe mainna in 1995 of bank craedit ceilings on non-autonomous public enterprises (EPS). A key stepin the move to indirect monetary policy instuments was the inroduction in October 1994 of obligatorybank reserves, which bear interest of 11.5 percent. The Bank of Algeria will set up an auction systemfor central bank credits during the last quarter of 1994. The growth of the money supply will berestricted to less than 17 prcent in 1994 and 14 percent in 1995.

2.1.6. Wage Policy

The authorities will apply a moderate wage policy to the civil service and to the public insfttutionsunder the jurisdiction of the ministies. At the same time, however, they will make sure that thepurchasing power of low-income households is protected. In the economic sector, economic agents,whether public or private, will practice an appropriate wage policy in line with their performance, laborproductivity gains and budget constraints. For reasons of equity and social justice, all employers willbe required to pay a minimum wage.

2.1.7. Employnt Pfromotion

The authorities are aware of the fact that macroeconomic stabilization, and especially control overinflation, could lead to increased unemployment. To ward off this undesirable side-effect of adjustment,steps will be taken to encourage the maintenance of existing joD levels and the creation of new jobs foryoung people coming onto the labor market, without hampering the fluid operation of that market.

As for salaried employment, productive investment will be promoted and every effort will bemade in the execution of public works projects to utilize labor-intensive techniques.

Self-employment will be encouraged, especially among young people who want to set up theirown businesses, by providing job promotion funds to make up for the shortage of capital among youngbusinessmen.

ANNEX IPage 9 of 31

2.1.8. Pricing and Rat-Sett Policy

Efforts will be pursued to deregulate prices and in general to strengthen the role of market forcesin setting prices. The program to reduce explicit and implicit subsidies on certain products will resutin a periodic readjustment of prices on the domestic market. The same will be true for rates charged forcertain public services, so that they will adequately cover economic costs.

2.2. Development of Incentives and Competition

2.2.1 Objectives

The authorities are planning to intensify efforts to liberalize trade and industry so that a spirit ofinitiative can develop. They will create the conditions for enterprises and businesses to adapt freely tomarket situations and values. All obstacles and procedures that might hamper the free play of marketforces will be eliminated. Improvements will be made to the incentive framework for promotingbusinesses and their economic and financial profitability. Professionalism and progress in trade andindustry will be encouraged. Mechanisms to monitor commercial practices will be developed so as toeliminate the abuse of monopolies and/or dominant positions. Measures to facilitate competition will beimplemented and maintained to promote productivity increases and cost-efficient production, governedby the basic rule of 'market sanction."

2.2.2. Promotion of Competition

A law on competition is an essential instrument to establish healthy competition among economicagents in a market economy. A draft law will be submitted to the National Transition Council. This lawwill be promuigated, and the implementing regulations drafted and published, during the next fewmonths. A "competition council" in charge of enforcing the laws and regulations on competition andfurtiering the competitive process will be set up under this law.

Competition in the market will be consolidated by pursuing efforts to liberalize the prices ofcertain products on the basis of the status of the market and competition. Rules governing pan-territorialpricing have been abolished for products for which prices are either freely determined or subject toregulated margins; pan-territorial pricing is now part of enterprises' interna policies, when necessary atall. A study will be conducted to determine how best to handle the high costs of transportation forsupplying the wilayas in the southern part of the country with essential goods. Finally, the requirementto declare producer prices will be eliminated when the law on competiton comes into effect.

2.2.3. Org ation of Foreign Trade

The authorities are continuing to implement the plan to lift suspensions on imports of certawproducts, as specified in the stabilization program, so that all such suspensions will be abolished, withthe exception of imports of articles banned for security, health, religious, or moral reasons. It was outof a concern to ensure a secure supply on the market of a very limited number of widely consumedproducts that the authorities were led to issue regulations defining so-called "criteria of professionalism"for importers of these products. The effectiveness of these regulations will be reviewed in 1995. Theintention is to abolish them, once there are enough operators on the market to guarantee competition anda steady supply of these products. All other administrative procedures applicable to foreign trade willbe eliminated.

ANNEX IPage 10 of 31

23. Development of the Private Sector

2.3.1. Objectives

Development of an entrepreneurial private sector is critical for the proper functioning of a marketeconomy. Because private small and medium-scale enterprises in Algeria were narginalized for a longtime, the measures adopted to ensure equal treatment with the public sector, especially as regards liftingadministrative restrictions and allocating resources, must be fully implemented and the reforms whichliberalized the legislative code governing productive investtnent must be intensified.

23.2. Promotfon of Investment

The new Investment Code enshrines the freedom to invest. It provides for the creation of aninvestment support agency to serve as a "one-stop' window in response to a public administration whichat present remains charactrized by certain cumbersome procedures and red tape. The implementingregulations stipulated in the Investment Code, notably the executive decree defining the responsibilities,organization and functioning of the investment support agency, have been published. The authoritieshave, however, decided to postpone for a year the implementation of interest rate subsidies on investmentloans, until the operation of the Investment Code has been reviewed in consultation with the World Bank.

2.3.3. Promotion of Small and Medium-Scale Enterprises

The economic reforms initiated to effect the shift to a market economy call for the rapidimplementation of the necessary instruments and measures to stimulate private investment. Economicrecovery will depend, among other things, on promoting small and medium-scale private businesses. Toachieve this, and to reduce the cost of the initial investments by businessmen, legislation will make itpossible to purchase low-ost used equipment for investments that lead to the rapid creation of permanentjobs. Recourse to imports of equipment bought on the secondhand market will also make it possible forentrepreneurs to benefit from the relocation of foreign investments to other countries. The legislation willbe revised accordingly.

Technical assisamce is another part of the policy framework to promote small and medium-scaleenterprises. A program to develop entrepreneurs, combining training activiaes, services, and assistanceto enterprises, devised after consulting with the Algerian associative movement for small and medium-scale enterprises, will be presented to the World Bank with a view to involving the latter in its execution.

A thorough knowledge of the private sector is essential to the adoption of measures required toexpand its contributions to the recovery effort. The authorities have agreed to the terms of reference foran evaluation of the private sector (PSA). The authorities will contribute to this study which will beconducted by the World Bank. The study will be completed, and itr recommendations will begin to beimplemented, during 1995.

ANNEX IPage 11 of 31

2.4 Reform of Public Entepris

2.4.1 Objectives

To reduce their burden on the governmet budget, public enterprises must increase theirefficiency by improving their management in a contex of macroeconomic stability. They must alsoincrease the proportion of their output for export by increasing labor productivity and improving quality.Implementation of a coherent privatizaton policy will help to reduce and eventuly eliminate the costscurrenty borne by the State as a result of the inefficiency of certain public enterprises.

2.4P2 interp

From now on, public enteprise are to be managed on the basis of the rules of a marketeconomy. They must establish rational business strategies and adjust their output to domestic and foreigndemand. Managers will be evaluated on the basis of management contracts which establish objectivecriteria. This will induce them to adopt meaures for rigorous management in order to eliminate thedeficits of these enterprises. In this way, public enterprise managers will be made fully responsible asthe State plays a more neutral role in the day-to-day nnming of these enterprises.

The organization of the ownership and management of the State's commerci capital will be re-exained with a view to revising the 1988 laws on the autonomy of enterprises. The revision of theselaws will determine the fuotre of the Participation Funds.

The non-autonomous public enterprs will be restuctr in accordance with the frameworkadopted by the authorities. This policy will hinge on the contractua commitment of the enterprisemanagers to implement resntctring plans for these enterprises and to mobilize the financing of therehabilitation investments contained in the plans. After examining the resructing plan, the authoritieswill issue their notice of non-objection or they will decide on the future of the enterprise concerned. Inthe case of non-objection, the authorities will proceed to financially restucr (assainissmemfinaer)the enterprise in question and will see that It is provided with sufficient capital to enable it to pursue itsrestructuring under positive conditions. Once the enterprise is financially restructured, it will becomeautonomous in accordan with the procedures currenly in effect. By way of exception, certain of theseenterprises may receive State asistanc in the form of a direct contribution toward the financing of partof their rehabilitation investments (see Appendix A of the policy matrx).

Among the measures desed to alleviate the burden on the State budget of covering the lossesof non-autonomous enterprises, 88 non-viable local public enterprises were recenly closed. Dependingon their financial situation, the remaining local public enterprises will either be financially rehabilitatedand made autonomous, or immediately made autonomous, or liquidated, if they should prove to be non-viable.

2.4.3 P 1vatzato

The ultimate aim of privatization is to establish a new colfiguration of the economic landscapecharacterize by the predomiance of private iniatives in the competitive sectors of the economy.Privatization will have to be gradual and based on a predetined policy for the State's withdrawal fromcommercial sectors over the medium tem. Preparations for, and implementation of, privatization mustbe arefully developed and excuted.

ANNEX IPage 12 of 31

At the present time, the legal framework for privatization is defined by Articles 24 and 25 of thesupplementary Finance law for 1994. These articles and their implementing texts set out the methods forselling off the assets of economic public enterprises and for private participation in their capital stock.This legal framework will be enlarged by a law on privatzation which will define the modalities ofprivatization, the agencies in charge of this operation, and all other general conditions required for theprocess to be carried out correctly.

The World Bank has been asked to provide assistance to the agencies responsible for privatizationto ensure that the process takes place under the best possible technical conditions.

2.5 Reform of Public Ependiture

2.5.1 Objectives

The reform of public editre aims to ensure greater control over government spending soas to contain and then absorb the Treasury's overall deficit. This will require improved rationalizationof expenditure commitments, which will in tum facilitate the control of projections and their realization.

2.5.2 rThiand the lnvestments of Public Eterprises

Since 1988, the Treasury has widxlrawn from the financing of the investments of autonomouspublic enterprises. Th investment program of auonomous public enterprises, committed before the endof 1988, is financed solely by repayments on medium- and long-term borrowing contracted with theTreasury. This source of financing for autonomous public entprises will be abolished as of March1995.

2.53 Future of the Rehabilatbo Fund

Appropriations for the public enterprise Rehabilitation Fund are being charged to the nationalbudget to permit the financial rehabilitation of enterprises, notably as they are converted to autonomousenterprises. The scope of this fund will be reduced progressively with the objective of phasing it out overtime, in conjunction with the policy for resructuing public enterprises and in accordance with AppendixB of the policy matrix.

2.5A The Efiiency of Pbblic Expenditure

World Bankc staff are involved in a review of the efficiency of public expenditures, whoserecommendations, to be issued in 1995, will be reflected in appropriate measures to achieve theformulated objectives.

2.6 Reform of the Muancial Sector

2.6.1 Objectives

The objective is to speed up the tasformation of the financial sector, particularly by makingsignificant progress toward privatzing existing banks. In order to provide a better and lasting foundationfor the operaing effictiveness of banks, financial establihme and other financial institutions, sound

ANNEX IPage 13 of 31

financial intermediation on a broad scale is a prerequisite for effective resource allocation in the contextof strong and lasting economic growth.

2.6.2 Steps to be Taken

The institutional action plans for banks are designed to strengthen them and improve theiroperational efficiency, with a view to opening access to their equity capital. The progress achieved inimplementing these action plans is one of the criteria governing the eligibility of eisting banks forofficial banking licenses under the Money and Credit law.

The purpose of the on-going audit of the 1993 fnamcial statements of the banks is to identifymore precisely the steps to be taken to improve their capital stucture, including their recapitalization inmid-1995. The strengthening of the banks' capital structure, in conjunction with the respect of capitaladequacy requirements, is another criterion governing the eligibility of existing banks for bankinglicenses. The evolution of the minimum capital adequacy ratio over time is defined in the new directiveamending and supplementing the prudential regulations.

Improvements in the application of the prudential regulations will be supported by thereinforcement of the capacity to supervise banks and financial establishments.

Within this framework, mangement contracts will be introduced which will make bank managersresponsible, notably for observing the minimum capital adequacy ratio in a context of hard budgetconstraints.

The need to improve the operational efficiency of the financial sector underscores the necessityof promoting the creation of new banks and fmancial institutions. A new financial establishment wasauthorized by the Money and Credit Council in September 1994. The study on incentives to encouragethe creation of banks and financial establishments will focus on identifying conditions conducive tostrengthning the financial sector in an environment of competition and increased effciency. This is thecontext for the objective of introducing, in 1995, a legal framework for the establishment of mutual creditinstitutions. The ultimate objective of the financial liberalization process is to achieve completelyderegulated lending rates in the longer run. As part of this process, a draft law libealizing the insurancemarket is under consideration by the National Transition Cound.

2.7 St the Sodal Protection System

2.7.1 Objectives

To help mitigate the impact of the adjustment measures to be adopted as part of the package ofeconomic reforms, new tpes of social protection have been instituted. These involve unemploymentinsurance and early retirement plans for employees subject to lay-off for economic reasons. A socialsafety net system has also been put into place to ensure the social protection, integration and inclusionof the undrprivileged segments of the population.

ANNEX IPage 14 of 31

2.7.2 Improvement of the Protection System for Workers Laid Off for EconomicReasons

The new system of benefits for workers laid off for economic reasons has made it possible tomove from a system of a one-time severance payment, the amount of which depended on years of service,to a true income replacement system, financed jointly by all the parties involved (State, workers andemployers). This system, based on a funding mechanism including worker contributions, creates greatersolidarity through the sharing of unemployment risk, and significandy reduces the burden on employers.

The purpose of the new system is not to support non-viable enterprises or to be part of the effortto rehabilitate enterprises. These are new measures, in no way comparable to the operations carried outby the public enterprise Rehabilitation Fund. The law creating the Unemployment Insurance Fund hasbeen promulgated. It gives the fund administrative and financial autonomy under a tripartite managementunit, comprising workers, employers, and the State.

In conjunction with the World Bank, a review of the operation of the system of benefits forworkers laid off for economic reasons is planned, which could result in recommendations and proposalsfor its improvement.

2.7.3 Reform of the Soia Safety Net

The former social safety net system, introduced in 1992, has been replaced by a new scheme ineffect since October 1994. The new scheme is based on fresh thinking and a new approach designed toprovide the poorest segments of the population with social protection. Its objectives include:

- a policy of consistent and transparent aid within a comprehensive framework ofsolidarity;

* a campaign against all forms of marginalizaton and social exclusion of the disadvantagedsegments of the population using appropriately adapted programs to foster integration andimprovements in living standards; and

* accessibility of basic public services to the underprivileged segments of society livingin pockets of poverty.

The benefits provided by the new system are:

* a lump-sum solidarity allowance (AFS); and

* payment for public service activities (AIMG).

The AFS is paid to heads of families and to single persons who live alone, who have no incomeand are 60 years of age and over, and to those who are physically disabled and unable to work. TheLAIG is paid to the member(s) of fumilies without income; or to single persons who live alone, have noincome, and are of active age who request participation in the AIG. The payment is made on a proratedbasis detmined by the mmber of full days of public service performed, up to a maximum monthlylimit. These public service activities are performed in a spirit of solidarity and do not constitute a workrioship.

ANNEX IPage 15 of 31

AFS and IAG recipients are considered social security beneficiaries and therefore qualify formaternity/health insurance, and workman's compensation in the case of AIG participants.

The new system is thus based on:

* "self-targeting," which is the basic method for persons eligible for the IAIG;

* targeting based ptimarily on the lists established for the former social safety net systemn(ICSR) in the case of AFS recipients (the elderly and disabled persons);

* supervision and management by the local authorities who have acquired a great deal ofexperience in organizing programs of community interest and public service activities,particularly in the form of community development and local technical assistanceprograms, which have been in existence for over 20 years and have made it possible tocarry out many important projects.

The AIG programs have three basic focal points:

-- maintenanc and rehabilitation of infrastructure and public property in rural and urbanaeas as well as habiat rehabilitation, with special focus on those used by disadvantagedpopulations;

- social welfare, health, educational and cultural activities;

- preparation, encourgement and incentives for self-employment through retrainigprograms, vocational training geared to self-employment and microbusinesses. This willbe done in liaison with job promotion, public service work and neighborhood projects.

Other activties are planned to encourage and promote the creation or expansion ofmirobusinesses, particularly targeting unemployed youth and workers who have lost their jobs. Theseactivities will also include traing and retraining programs, and will involve the associative movement(NUOs) in sdectfing and implementing AIG programs.

2.7.4. Evaluaton and mpro t of the Social Safety Net

The authorities will ensure that the new social safety net system achieves the best possible resultswhile respeting budgetay constraints. With this in mind, the following evaluation system will be setin place:

* A monitring and control system, involving all the govermnent agencies concerned andthe associative movement, with the goal of providing technical assistance to thecommunes and local collectivities.

* Periodic evaluation at the community, daira, wilaya, and national levels.

Ihe planned system is not a fixed, but an evolving one. It is extremely flexible and lends itselfto precise, periodic evaluations with a view to improvement. The World Bank has agreed to provide

ANNEX IPage 16 of 31

financial and consulting assistance for a study to evaluate the operating conditions of the new social safetynet system with the goal of improving its performance and efficiency.

To provide better information on the situation of the poorer segments of the population, a studyon living standards has been initiated. It will be completed during the next twelve months and will beused as a basis for a study on poverty. The terms of reference of the poverty study will also bedetermined during the next year.

2*8 Iodicator System

As an aid to monitoring the economic reform program, the authorities have drawn up a list ofquanitative indicators. The authorities will provide the World Bank with all the information necessaryfor calculating the indicators in question prior to supervision missions relating to the EconomicRehabilitation Support loan and winl joindy examine the evolution of these indicators during suchmissions. The indicators are shown in an annex to this letter.

3. ETERNlAL SUPPORT FOR THE ECONOMIC PROGRAM

3.1 Muliate Support (Oter than from the World Bank)

This economic program has already received the support of the Inrnational Monetary Fund inthe form of a one-year standby arrangement (May 1994 to April 1995). Ihe IB standby arrangementhas made it possible to relase the second tranche of a balance of payments support loan from theEuropean Union.

The program has been favorably evaluated by the European Union. It has the support of the ArabMoneay Fund. It is ewpected that other multilateral istions, including the Aftican DevelopmentBak, will support it.

Te Paris Club agreed to reschedule Algeria's public debt following the approval of the IMPstaby urangmt. Under this framework, certain bilatera agreements have aready been signed withthe authorities of the counties in question. Negodations with private banks have been initiated in orderto define the modalities for treating the private deb.

3.2 Biateral Suort

Algeria's partns support the progam As a sign of this support, certai partners concluded orare planning to conclude bilateral agreements to put in place concessional credit lines to finance imports.

3.3 The World Bank's Support

The World Bank has been suppordng Algeria's econct.ic reform program for many years. TheAlgera authorities are hopefl that this support will be mainained and deepened. Implemenion ofthe program descibed in this letter has already made it possible to release the second tranche of the

ANNEX IPage 17 of 31

World Bank's EFSAL and the associated cofinancing by the Export-Import Bank of Japsm. The Algerianauthorities hope that the World Bank will renew Its support of the economic reform program via:

* financial assistance in the form a quick-disbursing Economic RehabDitation Support loan,in a single tranche (ERL);

* a technical assistce program focussing particularly on:

* obtaining more information on certain sectrs, including a study to be conductedon the private sector;

* a study on public expenditure, with the aim of achieving better control andmanagement of these expenditures;

* improving implementation of the social safety net;

* implementing privatzation.

X the following loans:

* a structr adjustment loan;

O a loan to support the reform of the construction and housing sectors;

3 an agricultural support loan;

- a loan for the social safety net;

e a health sector support loan;

* a toxic waste treatment loan.

The World Bank's support in all these areas is pivotal during this period of economic refbrm inAlgeria.

ANNEX IPage 18 of 31

ANNEX

IZFER OF ECONOMIC POUCYINDICATORS

Macroeconomic framework

* GDP growth (annual indicator)* money market iterest rate (monthly indicator)* consumer price index (monthly indicator).

Private Sector Development and Incentives

* estimate of value added by the private industrial sector (amnnal indicator)* number of new private companies set up anmnally: sources - Miny of Commerce and

Ministry of SME (anmnu indicator)* average customs tariff weighted by imports, in as much detail as possible (amnnal indicator).

Reform of Public Enterprises

e list of PEs partially or totally privatized or liquidated, dif ng between national andlocal PEs and including their turnover (annual indicator).

Public Expenditure Reform

* Treasury deficit as percentage of GDP (quarterly indicator)- cost of Rehabilitation Fund as perentage of GDP (quarterly indicator).

Financial Sector Reform

* overdrafts as percentage of bank credit to the economy (quarterly indicator)* equity capital ratio by bank (annual indicator).

Strengthening the Social Protection System

* Number of beneficianes of early retirement or unemployment insurance (amual indicator)

* Number of beneficiaries of the social safety net (annual indicator).7

2/ Separaot indcat for the APS and AIG progams.

ANNEXIPage 19 of 31

L ti ik iiI 1.,i

11)ia lt,i., 1'§t''

lit1.

Component Measures taken before Meures to be taken before Meaures to be takn dringJuly 1994 presenttion of the ERL to the the 12 months folwing

Board prmnton of the ERL to theBoard

Monetary oLi and - replacement of the 20% ceing on - int;ducton of mndatory reseve - acevement, by the end of 1994, ofloered lending rates with a geiling of 5 per- requre_me for bas re_mnerated at positive rel intres rate on bank

enSge point on bank margins; in- 11.5%. tepesectiv inrease in deposits with repec to die annaledcrease in reference ires rAtes of dhe rerve rae wil pemit die infaion rte anticipated wihn doabout 4 perentgo points. absorption of ll potl sowrces of fianewoik of 1he stand-by ageeme

addiona liquidity outside of 1he mon-etay Wystem-

- stabdnnet of credit cilings (by - establishno of redt ceilings (by - establishment of credit engs (bybank) for dIe 23 non-autonous pub- bank) for die 23 BPS for the las quar- quater and by bank) for die EPS forlic entprise (EPS) for die second and ter of 1994 in conformity with ie 1995, which bave been agreed before-diird quarters of 1994 in oonformity sand-by agreemen hand with ie, Bank.with die stand-by agreement.

-establihment of an objecdve for broad - tpeot of the objecdve for M2money (M2) of a ximum increase of growth for 1994, which has been15% in 1994. adjusted to 17%; establishment of an

oblective of less tban 14% for 1995.

- lbealizaon of tie internk money - review of progess in developing diemarket rates. money market, notably wilh pect to

die iuplemenon of an adjudicationsystem for central bank credit

- establishment of a ceiling on the - respect of the ceiling on salay inincrease in salaries for civil servants creases.and EPS employees d&.'ing the periodof die stad-by agreeent.

Subsidvoiv -increase (on avrge) between March - her increase in September 1994 in -connuaon of ie policy of reduc-and June 1994 in the prices of subsi^ die prces of subsidized food saples ing pice subsides in paallel with (Qdized food staples of 56%, and in and in controed energy prices in improvements in the efficiency of hiecontroLled energy prioes of 40%. conformity wih the stand-by agree- social safety net

meat.n Sk E~~~~~~~~~~~~~bA

ANNEX IPage 21 of 31

m.~~~~ t ig. 1

it t3 i{|t l. ~ ~~~~1 t}'gl3~ . i

I t[ cifl if , i1

ji~' 1111 1Iu

LUg 0 ~~~~~~~~.iiJ 1' '*i~~~~~~~~~~~~~ III~~~

ANNEX IPage 22 of 31

;Ii

I 11

Component Measures taken before Measures to be taken before Measures to be taken duringJuly 1994 presentation of the ERL to the Board the 12 months folowing presentation

l______________________ of the ERL to the Board

Refonn of nublic egaetises - launching of a restructuring program - adoption by the Council of Govern- - implementation of the privadzatonfor public entrrises, and passage to ment of the privatization policy pro- program in priority sectors.autonomy of almost 400 public enter- pare" in consutation with the Bank.prises (EPEs).

- opening of the capital of EPEs up to - presentation to the SGG and adoption - publication of the decree cited in49%, and authorizaion to sell EPE of the implementng decree for article column three.assets to the public sector. 24 of the 1994 complementary Fmance

Law conwerning the sde of EPE assets.

- prepaation of a draft law on privat- - promlation of the law on privaiza-ization in consuladon with the Bank. tion. Publiton of the implementing

texts after consultation with the Bank,and implementation of these texts.

- launch of a pilot privadizaon pro- - pursuit of the pilot privafization pro-grm for EPEs. gram for EPEs with the support of the

Bank.

- preparation of a technical assistance - implementation of the technicalprogram for the Minstry of Indutria assistance program cited in columnRestructuring and Parficipation three.(MRW).

- establishment of a legal framework - publicaon of a decree establishingfor the dissolution and liqudation of the modales for the dissolton andnon-autonomous publi enterprises and Equidation of non-autonomous publioEPICs in the 1994 Finance law. enterprises and EPICs.

- dissolution of a group of 88 local PEs - implementation of the liquidation of(EPL) in accordnce with regulatory the EPLs concerned.procoodus.

I . 1 . . _ . _ . __ _ .... _ _ A . . ___._ . _~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~t'

rs

ANNEX IPage 24 of 31

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tit tS {X}~

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ANNEX IPage 2S of 31

*f 1 0

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ANNEX IPage 26 of 31

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ANNEX IPage 27 of 31

IsI

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ANNEX IPage 28 of 31

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ANNEX IPage 29 of 31

Appendi A

Framework for pthe ettrof the 23 Non-autonomous PEs

The 23 EPS are the subject of medium-term restructuring plans, established on the basis of auditscamed out by consulting firms and with the collaboration of the internal departments of theenterprise.

As these plans are finalized, the authorities examine them, revise thm if necessary, and eitherissue a non-objection or decide on the fuure of the enterprise.

The non-objection by the authorities of the restuctuing plans results in three simultaneousconsequences:

(a) The authorities inform the managers of the enterprises of the trmination of coverage by theState of any financial losses that the enterprises may incur from the date of their passage toautonomy, as well as the termination of all guarantees.

(b) The authorities ivite the managers of the enterprises to sign a time-bound contact whichobliges them to:

(bl) implement actions aimed at achieving the objectives and performances containedin the resdtucuring plans; the supervision of the implementation of therestuctuing plan is incumbent on the General Assembly of each of theenterprises concemed.

(2) propose for approval, within a period of 12 to 18 months following the signatureof the contract, firm and definitive finacg plans for the rehabilitationinvestments proposed in the restructg plans. The financing plans can becomprised only of self-financing, bank credit, and receipts from the sale of assetsand/or the opening up of the capital of the enterprise, as appropriate.

(c) in counterpart of the commitments by the managers, the authorities commit to:

(cl) proceed with the financial restructuring required to clean up past debts(assainissemew nncier) with the objective of passing the enterprise toautonomy.

ANNEX IPage 30 of 31

The fimcial restruchtuing measures will consist of:

* tratment of the tprise's indebtedness, and

* an allocation of capital (caW , fonds propres, et fonds de rouement)through: (a) the transformation of the enterprise's debts and (b) a cashtransfer, depending on the situation of each enterprise.

These measures will be determined for each of the six enterprses in the firstgroup before November 30, 1994.

A global ceiling on cash transfers will be established for the nine enterprises ofthe second group before December 15, 1994.

The financial restructuring measures for the third group of eight enterprises willbe evaluated following the elaboration of their restructuring plans.

(c2) On the basis of the available restructuring plans, the authorities will evaluate theamount of the rehabilitation investments and establish:

* before November 30, 1994, for the first group of six enteprises, theceiling on the amounts of potential direct support from the Stawe, and

3 before December 15, 1994, for the second group of nine enterprises, theglobal ceiling on the amount of pote direct support from the State.This ceiling will not exceed 113 of the total amount of rehabilitationinvestments.

The intervention, under exceptional circumstances, of the State will be limitedto a list of enterprises which will be detmined before November 30, 1994, forthe first group of six enterprises; before March 31, 1995, for the second groupof nine entepries; and before September 30, 1995 for the third group of eightenterprises.

N.B. Unless the State decides otherwise on the future of these enterprises, the projected calendar forthe passage to autonomy of the 23 EPS is as follows:

* The first group of six enterprises before December 31, 1994.* The second group of nine enterprises before June 30, 1995.* The third group of eight enterprises before December 31, 1995.

ANNEX IPage 31 of 31

Appendix B

Future of the R Ivd (F

13xpendiw Adeor .

1. Diffzrenda of conmmeal bak charges on - Transer fiom Ihe PA at the end of 1996; afber that date, theseeteal botrowmngj oonacted for the account of are to be teated acorig to the same procedrs asthe Sbtte befoee April . the pub9c debt

2. R_ea of resucuring bonds (hn de - Transr fim th FA as of Oceober 1, 1996; after that date, iheseradh). obligtons are to be trated acoordn to the same proedus as

the putbic debt. Advane repaymnats to the bans by the Treauywill be hled after April 1, 1997. The amoun of ts advancerepaymeo wM not exceed 2/3 of the to amnoun allocated torepay the publc debt

3. Fiaci restrucing alloca (assas- - Esabish, at the end of 1994, the definive list of enterrisesisseme &tckr) at the moment of transfor- which ca potentially benefit from these allocaos at the momenmnrion of an eneprise's lega saut of theransfrmato of the legad sla_tt Al allocadions to the 23

BPS wiAin the frmwork of their anaisemenmader mus beaccompaied by a medium-term resrucuig plan inudg a firmfinS g plan (if eede for rehabilitaifon invesmn.

4. Service payments (to the bansl) for PE over- - Close (n accounting terms) at the end of 1994.draft frozen by the State.

S. Reombdizadon of the bakL - Cloe after the rec_pita of mid-1995.

6. Recaiaiion of Pes. - Close, in terms of commitments, at the end of 1994; contiuepayments until the releant disposilions of dhe 1995 Fnae law areamended.

7. Poreign exchage losses of PEs and EPICs - Close befe e ted o- 1995, ater havin made advanc pa-on eligible debt contracted before the end of mens (if neede to cover losses an eigible mauities which fall1989. due a that date. Utlaion, if possbe, of part of the suppl-

menty budgtazy allocaon for foreimp exchange losses pro-grammed under the standby to finane these advance payments.

8. Coverage for fon exchnge los by -Give priority to: (i) EPICs, () enteise subject to price ceil-enteprse public and private) on 1994 mauri- inp (OAIC, etc.), and (ii) if possible, the advance payments notedties, im (7) above. The remaning entelprises are to be treatod equally

throu a mechanism to be deter_ned.

9. Opeatng subdies. - Close at the end of 1994, whhout any firther payments.

A_mU

DD(WAlCAND POPULAR RWUDUC OW AICUKA

maw slaw r| ~ ~ ~ s. _ $ . ..

I.dc er a. A.wI 411dm _

POVERT

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I*ima - % a a r

Olwpsvait USW 20 #10 3.90 3,945 3,430 S.

SHORT TERM !cDH3 iCAmUdisua bISSa. _ - _ _. , a

Few b a -3 - -Ud=~~~~~~~~~~~

SOCIAL mURATORPIi@pmi.d*kinh30i'iUS %eforGD 133

U a IS -* 3 7 _ _

ingaumwby dmwsnwds 1354 180 44 so 0 33umlorsmwuw 6~~ a 11ml 79 a3 40

usmin %qpgw ~~~a a 72 3? 3 DIT ~ ~ ~~~~~~a a 73 a 74

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TiaIhhil yute L74 I4 I.0 55 Los Lit

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Annex UPage 2 of 2

SOCIAL RINDC&Al)Ru 2

-e et ete (AW AMI raw avowAREWRSOWRC:"_qdmm(mnulm1) _,2 16013 2 0 244,123 773.103 63.037AquhIhm(u.-o, ratio W 9 LO? 0m 0?7 0.71 0.63t Apd rato 37.6 .0 S 72.9

Pq"geXtate _SX s ~~~~~~~~~~~~25 3.1 17 32 1.7 1.16.4 3.5 52 4.5 3.1 2.0

1of"c(1s4) fmiuua 296 3.4*5 6.06 66.939 302,448 3141AUU. %of t 57 39 -_hukas~y ' 17 24 _ - - -Faa * 7 10 15 32 30

ama 102 -Rural 102 _ .. .. -

NATWRLURESOURCEAm dm% a h 2,312 2,32 2382 11,015 23.990 3.944Dwsky p.r.J buh 5.0 7.0 10.0 21A0 31.0 16.0

4,ic=bfarde 135 13.4 16.3 29.3 4L8 439t=11=a 1r,lbod SIMS11% 0.0 1.3 0.0 0.1 0.0 Q1Ag:.cmd land riw kdgWm % 0.5 9 239 12A6 3Pamtauwoodland tm km32 41 47 391 S.396 7.705Dakostion(not) -9A 3.2 0.0 0.0 - -

DIOME

Sh ftop20SAf _mduft % j o_ _a _ _ _Shefb 40%9'bhausb 5 _ _ _ _Shfwattbo_m2f_afhous__a _

F4d %cfamDP _ _ 19* _ _ _Sb . 6.1 -_

U fividm e-5 -5.8_eCem. tsh uf m 323 1,669 5,183 37.762 44.418 3596Foodaldantural_ - 5 4 11 2.238 4.047 366

1979581=100 t2! 130 112 119 101 108Fer_n 6.0 I" 380 136.0 94.2 120.0

SbamcfagicuticinODIP % SAJdDP 14.9 99 10.7 13.0 - 8 9Ramming fDP _.f. 5.7 - -Amera bousedim I .w 6 7 _. _7 - -Fis_b eanP _ 6._

I ~~~%ofWDl - 2.2 4 Fud Ed pow %dP - - 1.1

kgf 1dadepiv. 226 448 1.6 1,137 1,249 1,70i

Uan, % d _jsal& 118 _ _ _ _Rus a 74.0 _ -

Trw _pat Sd coaicatka %aDP _ _ 3.1 _* .. 5.9~~~~~~S 2.2

ROVESTMENT IN }UMAN CAPUAL

AMumtolaal&m %ofpop. 9 -90.0PopuIatlcOpNl2bWicIan p_... 8.590- _ 2,331 1,668 _Popu!atioapernuua 11,770 _ 330 -Pcpulatioupacaspaalbed ._ 400 635 509Acs sto t %pe - X73.0 1_ .

U-bou ~ ~ ~ 3.. 90. 96.4 -

Rw _ _ 65.0 66.3 -

OdymatoauW(uw %;_ _ _ 26 S8 -

OrmenroaxdwfakSe---l-y %cfadaookppop 7 20 60 60 36 -

F_nnIe * 5 14 53 51 _Pupil4eacInmzatinpri.uy psqilhP.rt.adur 43 41 28 26 25 -

PupFl4mdrnratImama.duy * 23 27 17 21 -luplhmadshggade4 %lod.aI _. 93 as 90 _ _R"eatartatajvhimaj %tttstalatol _ U13 7 11 _ _Zluacy %.epap(ap IS+) 1 - 43 45

N.muap.roircuhdan ~~~~% .httm (asr 15+) 3Ne thlpAP. 14 18 21 36

Samae Warli Rbasd DD- qiWsmat Apall 1993

DEMOCRATIC AND POPULAR REPU5LIC OF ALGERIAECONOMIC RE ATION SUPPORT LAN

SELECTED MACROECONOMIC INDICATORS

TABLE It KET NAC10ECMOIC I*ICATS............. .................. __,...........................................

Algeri Ky Economic indicatom 198 1985 1986 17 1988 1989 1990 1991 1992 1993 1994_ ......... . ........................... ........................................................ ,, ,,,,,,,,,,,,,,_,,__

GOP Groiwth Rate 5.AX 5.6" -0.25 -0.7X -1.9X 4.9X -1.35 -1.2 1.65 -1.1X 0.6"W Y Growth Rate 4.3X 6.0X -16.12 0.1KX -6. 4.85 0.85 1.1K -s.n 1.1X -2.6ZNP/Per Capita growth Rat 1.94 2.45 -3.5S -2.3X -5.85 .2X -3.8X -S.0O -0.4" -2.9X -2.15

CawnsuIptienPer Cap. Growth Rate 2.01 2.1X -2.4" -6.0O -9.85 4.28 -4.95 -6.1X 2.9X -5.35 -1.5X

NLT DOD lnet. IW (U1S) 14124 16380 19482 23080 24417 25250 17061 26955 26017 250s57 2780Shert Tem Debt (USS) 79 746 1000 1315 1621 1860 I11 1239 793 793 693Total Debt Cinct. ST A flU) 14918 1712t 20482 24395 26038 27090 27852 28194 26810 851E0 28499

SLT OW (Cla. INF)X03 1/ 103.35 118.5X 230.8X 229.98200.71 240.6x 197.85 206.35 201.3X 212.05 254.75Shot Term DOO/25 S.85 5.42 11.8X 13.12 18.6X 17.55 5.8X 9.5X 6.12 6.75 6.3XTotal DSD/GS 109.1X 123.9X 242.7X 243.0X 2ss.3x 258.1X 203.6K 21S.5 207.4X 218.7a 261.15

NLT Debt ServiceCfnrL. tlP) 4973 4870 S109 5372 6244 676 8625 9068 9103 9110 4579NLT Debt Service (tnct. IWF)/X=S 36.45 35.2X 60.5X 53.5X 71.X 65.55 63.05 69.4x 70.4X 7.1x 42.0let ILT Debt Serviceals 2/ 36.4X 35.2X 60. 53.5X 71.8x 65.5X 63.05 66.35 56.5 67.4x 42.05

Gross Investment lP 3/ 35.12 33.2X 33.5s 30.0X 27.28 29.05 28.15 31.85 30.sx 29.2x 31.05perss Dast1c Savlr4/GDP 37.42 36.4X 29.42 31.95 27.0 29.3x 26.65 37.4X 32. 28.3X 26.55

Nationat tavfuos/ P 39.45 40.6X 33.6K 36.9s 32.15 37.4X 31.32 37.71 32.4X 29.sx 26.12Centrat Gwo't I1estuentl0P 16.71 15.82 13.71 11.9X 12.8X 10.28 8.5x 6.2X 6.95 8.7S 7.95Central Gov't S ansrIGDP 118.8 19.3X 10.28 9.4 5.55 9s.a 11.85 10.6X 7.2X 1.9X 6.0XNo1Gov't InvstmentWP 1S.4" 18.05 1. 18.15 15.15 185 19.8 25.7X 23.95 20.5X 23.15Nat-Gov't Savlnp/DP 21.1Z 21.3X 23.45 27.5X 26.55 27.8K 19.5X 27.1X 25.2X 28.0X 20.0

ICOR (SVeverap) 8 6 7 10 19 19 194 MA 58 40 MA

Treasury Renvuee/w 38.25 37.95 31.9s 3O.45 27.6 28.9s 29.9s 32.3X 30.35 2V.8 30.6XTreasuy Expenditures/0P 46.35 4.2X 42.2X 37.6 39.9X 30.12 26.1X 30.05 32.0X 36.6 35.4XDeflcit(-)/GDP -8.15 -8.35 -10.35 -7.2X -12.45 -1.2X 3.8X 2.28 -1.7X -9.4X -4.9X

XfS Growth Rte 5.71 2.6S -0.35 6.0X 0.42 8.05 3.4X -0.95 3.9X -1.85 -0.55xoun/Ws 25.71 23.55 13.15 14.71 14.4 18.65 2.35 29.1 25.45 21.9 X25.1NWS Growth Rte 8.1 8.95 -21.1X -2.28 5.05 15.6X -13.2X -16.3X 3.1X -83 6.15NGNFSGDP 23.4 X20.4 T.1X 12.8X 14.55 18.3X 25.8 23.65 23.9X 22.8 27.6

Current Acovait (BP MO) -90 713 -3435 39 -190 -1029 1352 2223 1020 361 -1482Current Act/DWP -0.28 1.25 -5.45 0.1X -3.2X -1.9X 2.35 4.9X 2.1X 0.75-3.65

Alterian Crude Price (WI bl) 29.54 28.92 14.77 18.48 16.14 18.45 24.32 20.4 20.06 17.52 16.03TamsofTrudk(1980100) 102 99 47 54 48 49 53 61 48 52 6

2/0DP 74X 77M 77x 82X 845 74X 64X 49X 49X 545 54XInftation 8.2 10.45 12.4X 7.4" 5.9X 9.35 16.6X 22.85 31.5 21.05 28.9X

Sourc: Vorld Bak / Includi wrkers rmittwte.2/ Net of reprofflUn.3/ Curent price ratfos.

Annex MPag 2 of 6

TAME II1 MUICE OF PAUEITS(in illton of currant USN)

........ ..................... _..........._.... ........................

1984 195 1986 1 8 19 1990 1991 1992 193 1994

A.Exporte of Goods & IFS 13201 13375 M5 9290 8t47 114? 519 12056 10758 975illerdwise (fob) 12m 129 7470 87W7 7811 959 12880 18 19 1O163 9073

ow HVdroawb_ 1479 12724 7279 631 7352 9096 123 11975 10874 97 8774a/ am-xy*oceban 298 259 191 206 40 475 532 412 50 I9 299

2.NonFater servies 425 390 490 553 536 57 515 432 617 5S 80

B.140t of Soo& a an 1264 124S 111I3 94 W 67 1136 11481 9I 8 1036 10038 1O900I.Nrchdid (fob) 977 9439 8O20 7399 592 32 59 M4 8541 8161 89OM

o@1 Capitat Seeds 2m 2999 29 1879 1905 2283 3034 1863 1905 1735 2018Omu Cnsser Good 3230 3676 305 3261 6 4360 3546 30 3427 3510 3297Wm Intermediato Goods 3569 2964 285T 2259 2452 25 3079 2788 3209 2916 3670

2.NanrFactor Servi 2875 2809 2443 2008 2174 1974 1822 1881 19s 18n 1915WV Unofficial Services 149 202 243 239 298 307 338 322 347 345 315

C.Rescurca bat 555 925 -3204 -117 -1419 -1189 1914 319 1720 720 -1147

D.1st Factor Insne -1471 -1570 -209 -1332 -2010 -1893 -2090 -2258 -2158 -1945 -1735I.Facter Receipts 180 91 171 314 70 111 72 72 112 141 1182.Factor Pa)unts 1657 1761 2200 1645 2080 20 2162 2330 2270 2086 1853

s/u NLT Intwst GEMS) V 13S 1397 1547 15S 1681 1740 178 1789 1831 1706 1537o/w ILT Interest after rcied. 1375 1397 1547 1565 1681 1740 1784 1789 1831 1706 1369

ilet Current Trafer 82 1358 1798 1487 1527 2053 1525 1290 1458 1586 14001.Current Recepts 990 1509 1942 1589 1603 2091 158? 1334 1579 1743 155

@1w Mcge & Saltar 291 263 310 434 332 306 313 274 829 993 111SWsu Urofffeiat Tranfers (nwt) 679 1030 1074 1014 1152 1221 1234 1060 750 750 450

2.Current Paents 158 1S5 144 102 76 38 59 44 121 1ST 165

F.Current Account Batancs -90 713 -3435 39 -1903 -1029 1352 2223 1020 361 -1482

S.Lonv Tenm Capital tnflow 448 396 89? 626 1168 387 -478 -1018 -87 -678 14351.Direct Investmiet -14 -87 -64 -109 -48 -25 -39 -34 3 -2 1002.Officil Cap4tst Grants 0 0 0 0 0 0 0 0 0 0 03.u.t $LT Loans 515 423 950 551 1570 45S 113 -588 215 -479 1423

.NILT Disbursement (DON) 4113 3896 4512 4357 6133 569 6892 6632 751 6555 4426b.ILT Amertfzatfon (DS) 1/ 3598 3475 3562 3806 456 5113 6779 7220 7036 7034 6701c.JLT Amortization after aesed-L 3598 347n 3542 3806 4563 3113 6779 mo 7036 7034 3003

4.0ther LT Inftow -53 60 11 184 -354 -43 -552 -396 -305 -19? -90(not net. DRS discrepancy)

N.Totat Other Items (not) -750 254 1379 -617 -61 0 -9$9 -678 -866 618 -181.1et Short TeM Capital 4 -48 254 315 339 342 -1049 -905 -88 31 -1002.Capital Flow VIE -213 192 -78 -1071 -118 -304 38 22? -8 a7 823.Errors osission (not) -2 110 1203 139 -282 -31 -208 0 0 0 0

I.anwe in Sat Reserve -39 1363 -1159 48 796 -42 -8S 527 67 301 -67wa tlm)

…...….….…...........

A-rmPae 3 of 6

tU II s LBALACE OF PA"U(fn mittim of current USO

............................................... ....................... A......................................................... _

1984 1985 19 198? 198 196 1990 19 19 19 1993 199

Forefgn Exeh_ ltlserves:.................... 0................................... ,

aidW Fine TrW ez (end) 5.6 5.6 5.6 5.6 5.6 5.1 5.6 5.6 5.6 S.62.601d price WLndm 30 3 391 48 41 351 4 362 343 M3 3843.1nt'1 Reserve gold 170 185 2181 27 2289 2a 1971 2021 1916 2007 21434.Total Reserves xl.Gold U 2819 1460 1640 900 847 7 146 1457 14u5 218S.T,tal Reseve incl.old 3184 644 3841 4341 3t89 25 26 357 337 342 46.ro1se Reservasfntfs of fip) 2/ 1.2 2.4 1.5 1.8 0.9 0.8 0.6 1.5 1.4 I.5 2.0

Ecane Rates (D )..................................

1.Rel Eff.Exch.Rat 13 144 133 117 9f 83 7S 47 48 53 41(bosel9lO)

L.E.Off.Exch.Rate 5.0 5.0 4.7 4.8 5.9 7.6 9.0 18.5 21.8 23.3 36.0(IF, AIDAMS)

Sharesof GP,.._...............................

Resource Bance 1.OX 1.6X -S.1X -2 -2.4X -2.28 3.28 7.08 3.L 1.4X -2.83Totat NLT intest Pay bt. 2.48 2.4 2.5X 2.43 2.91 3.28 3.Ox 3.9X 3. 3.43 3.31Current Accomt Bale -0.23 1.21 -5.4X O.X -3.28 -1.9X 2.33 4.96 2.1X 07X -.3.LT Capital Infl. 0.8X 0.7X 1.4" 1.08 2.0 0.7'X *LU -2.2 -0.2X -1.4X 3.5XNet Credift Fre INF 0.O8 0.03I O.O 0.03 O.0 1.1 O.0 0.73 -03X -0.7X 1.48

Chang fn Net Ream (-atos) -392 130 .l59 48 -796 642 -8S 527 67 301 -67Valustin Cha,u (-tloss) 0 0 0 0 0 0 0. 0 0 0 0Cha In Net foregn Asts (CB) -392 130 -1159 48 -796 42 -8S 527 67 301 -67

Chm in Ora"Retow (CB) -416 1355 -1159 -20 -740 -53 -122 761 -29 I8 648et CredIt fr INF 0 0 0 0 0 604 0 308 -166 -329 63

Chnl n Othr Lab. (CS) -24 .8 0 -68 56 -15 -37 -74 70 46 2

NosDP at Current U 5 57997 63065 64479 58788 S4940 59902 45715 47866 49762 41139

Total 0DM ST (US$) 794 746 1000 1315 1421 1840 91 1239 3 79 693

Source: Uorld Dank 1/ lftout resdull ng.2V lport Inclui fator sewlee.

AnnmePagp 4 of 6

1*31. Ilt EKTPML CAPITAL FLUt AM DEST(in mition of eurrent UIS

.. .. .. .. .. . .. . .. .. .. .. .. .. .. .. .. .. .. . .. . .,............. . .. . .. . . . .,. . . .. ,,4.,

1984 19M 1986 1987 1988 1969 1990 199 1992 199

................................

P*lic & PiMcly a.NLT 4113 s6 U4 457 6133 5569 4892 442 7M1 65551. Officiat Creditors 819 560 68 441 772 1138 152 1919 146 134

a. ulttilatert 215 184 314 264 473 459 613 955 5S2 454ohmulo 70 148 138 12 170 204 300 347 268 176O/u IDA 0 0 0 0 0 0 0 0 0 0

b. el atotera 604 376 324 178 299 679 1238 964 913 9092. Private Cri tor 329 3336 3B74 3916 5362 443 500 4713 S78 5191

a. Son 0 500 93 50 44 232 0 1 0 0b. F1awniat Credits 612 1025 1920 998 1451 376 465 602 2022 1710C. C_arcial Creits 2683 1811 182 28 36 3823 4595 4110 3765 3S1

/w EWort Credits 160 1311 1427 2078 2776 3066 4107 32 331S 3193o/w SWtiers' Credits 1075 500 435 78 687 7 488 738 450 289

Private lonlu"atd ILT 0 0 0 0 0 0 0 0 0 0Total NLT Disb 1remnts 4113 3896 4512 4357 6133 S569 6892 6632 7251 6555INF Purchas 0 0 0 0 0 604 0 308 0 0Net ShortTem Capitol 4 .4 254 315 339 342 -1049 -905 -85 531Total Dlebursamt 4117 3S4 4766 4672 6472 6514 5843 6035 639! 7086

,...............................

Public & Publicly &urJ.LT 3596 347 3562 3806 4563 5113 69 7220 7036 70341. Officiat CredItors 649 674 760 886 961 1011 1204 1292 1234 1262

a. ulttitateral 100 143 104 184 208 214 314 392 338 355Wu IERD 40 42 51 79 112 112 130 176 166 170

o/ INDA 0 0 0 0 0 0 0 0 0 0b. Bilatewrl 549 531 456 702 752 79 890 9n0 896 907

2. Privats creditor 2949 2799 2803 2921 3603 4103 575 S928 5801 5772S. BEnds 1S 71 27 S8 9 40 16 5 129 663b. Financal Credits 952 851 56 427 715 919 1356 1357 978 1122c. Comwarcial Credits 1962 1877 2212 2435 2790 3144 4203 4566 4694 398r

oe Export Credits 832 823 1200 1380 1833 2405 3335 3843 3774 3419o/e smpliers' Credits 1151 1053 1012 1055 958 738 868 723 921 567

Private ouaIbte elLy 0 0 0 0 0 0 0 0 0 0Tota "LT Rpaumnts 38 3473 3562 3806 4563 5113 6779 722 7036 7034INF lepur.h 0 0 0 0 0 0 0 0 166 329Total NLT eIL ay. a IP Repur. 3598 3473 3542 3806 45a S113 6779 7m 720 7362

t8rm: 0M

PgeS of 6

TABLE III: EXTERNAL CAPITAL KLOMS AND DEBT(in lltona of current USS)

1984 1985 1985 1987 198 1989 1990 1991 1992 1993.................................................... _...__._._.._.__..._._

Net PIowS.................. .................................

Public & Publicly Ouar.NLT S15 423 950 SS1 1570 45S 113 -588 215 -49

1. Official Creditors 170 -114 -121 -4 U 18 127 648 46? 230 102a. Multilateral 115 41 210 80 264 24S 299 563 213 99

o/v IDRD 30 106 8? 50 58 92 170 171 101 6o/M IDA 0 0 0 0 0 0 0 0 0 0

b. gilateral 55 -SS -351 -525 -453 -118 349 64 17 22. Private Creditors 345 538 1072 99S 1759 328 -535 -1215 -14 -581

a. Bonds -15 429 65 -8 350 192 -15 -4 -129 -663b. Financal Credits -341 174 135T S7t 737 -543 -912 -755 1045 S88

c. CoImercial Credits 701 .66 -350 432 673 679 392 -456 -930 -506

o/v Export Credits 776 487 228 698 944 661 m -471 -459 -22no/u Suppliers' Credits -76 -553 -57? -266 -271 18 -380 15 -471 -279

Private Nondarateed NLT 0 0 0 0 0 0 0 0 0 0

Total NLT Net FLoas 515 423 950 SS1 1570 4S5 113 -ss 21S -479Not INF Credit 0 0 0 0 0 604 0 308 -166 -329Tota lNLT + IMF S1S 423 9S0 551 1570 1059 113 280 49 -808Net ShortTerm 4 -48 254 31S 339 342 -1049 -90S -858 531

Total Net Flows 519 375 1204 866 1909 1401 -936 -1185 -809 -2m7

Interest........ ................ _ ... _

Public & Pubticly Quar.RLT 1375 1397 1547 1565 1681 1740 1784 1789 1831 17061. Official Creditors 260 271 312 305 329 307 317 356 400 400

a. Multil ateral 4 49 70 88 93 97 117 154 199 212

clI IBRD 24 30 46 62 72 70 73 1o7 112 113o/ IDA 0 0 0 0 0 0 0 0 0 0

b. Bilateral 214 222 243 218 236 210 201 203 200 188

2. Private Creditors 111S 1126 1235 1260 1352 1433 1467 1433 1432 1306

aBonds 22 42 S'8 60 63 91 105 98 90 68

b. Financial Credits 531 446 448 474 532 567 529 455 42? 498

c. Commerctal Credits 562 638 730 726 757 77S 833 880 915 739

o/N Export Credits 242 335 437 488 558 628 704 750 758 632o/w Suppliers' Credits 320 303 292 238 198 147 129 130 157 108

Privatei onGuarateed LT 0 0 0 0 0 0 0 0 0 0Total NLT Interest 137S 1397 1547 16 1681 1740 1784 1789 1831 1706IMF Servic Charges 0 0 0 0 0 22 62 59 69 42

Interest Paid on ST Debt 13B 140 53 78 399 242 317 482 369 338Total Interest Paid 1513 1537 1600 1643 2080 2004 2162 2330 2270 2086

Source: DRS

AmMPage 6 of 6

TE Ills EXTER CAPITAL FLOSS AD DBT(in millions of current 35$)

..... ........ ,.... ,,..... ............................ ......................

1984 1985 1966 1987 1988 -199 1991 1992 199..... ........ _._...._..... ,,t*,^....,......,,,,,,,,,,,,,................................

Exterat Debt (DO)...... ............. ___....

Pubite & PuCIry Ow.NLT 14124 16380 198 230 24417 24638 269 256 252 2481. Official Creditos 3513 3835 4218 467 4701 470 5712 4466 6450 6554

a. multiLateral 44 S8 912 1204 1396 1610 20 266 u68 2572O/vlawRD 28U 479 693 924 895 960 1208 1413 1474 1S12s/ IDA 0 0 0 0 0 0 0 0 0 0

b. Sltaterat 3067 3252 3377 3469 3308 3120 3674 3798 3682 36832. Private Creditors 10611 12546 1S194 1844? 19713 19908 20684 19499 1877S 18032

a. Scd 232 680 777 83 1169 1347 1420 1436 1281 4Sb. Finanelt CredIts 3923 4258 5884 7050 767 6877 6189 556 6542 7292c. Cmmercia Credits 645T 7609 8532 10533 1086 11684 U075 12497 10953 10095

Wu Export Credits 3492 4867 5985 788 64 9125 10724 10142 9146 8552o/u Suppties Credits 2965 2742 2547 2655 2604 2559 2351 2355 1806 1543

PrivateloMnarateed NLT 0 0 0 0 0 0 0 0 0 0Total, LTDOD 14124 16380 1942 23080 24417 24638 2639 25964 25225 24587Use of IMF Credit 0 0 0 0 0 619 670 995 795 471ShortTerm Debt 794 746 1000 1315 1621 1840 191 1239 193 793Total Extemat Debt 1491 17127 208224395 26038 27096 2788 2819 26813 2580

.... _............................

Shas of Total OD__._._.......------........-

Putic & Ptficly ouariLT 100.08 100.02 100.02 100.02 100.02 97.52 97.52 96.3X 96.9X 98.121. Official Creditors 24.9X 23.42 22.02 20.2X 19.3X 18.78 21.12 24.02 24.8 26.22

a. Aultilateral 3.22 3.6X 4.72 5.22 5.7X 6.4% 7.5X 9.9X 10.6 11.52o0/vIBRD 2.02 2.9X 3.a 4.02 3.72 3.8X 4.5X 5.2X 5.72 6.0XWM IIDA 0.02 0.O2 0.02 0.02 0.02 0.0% 0.0 0.02 0.O2 0.02

b. Bilateral 21.7X 19.9X 17.32 15.0X 13.5 12.4X 13.6X 14.12 14.2U 14.722. Private Creditors 75.12 76.6 78.0 79.8 80.72 78.8X 76.4X 72.3 72.2x 72.02

a. Sonds 1.6 4.12 4.02 3.L2 4.82 5.3X 5.22 5.32 4.90 2.62b. Ftnancia Credits 27.8X 26.02 30.22 30.52 31.43 2.2X 22.92 20.6 25.12 29.1c. Cmsrciat Credfts 45.7 46.4 43. 45.6X 44. 46.3 4.3X 46.4 42.11 40.32

o/ Export Credits 24.72 29.72 30.72 34.1X 33.8 36.12 39.6 37.6X 35.2 34.12o Supptier' Cfredits 21.0 16.7X 13.1X11.1SX 0.72 10.12 S.7X S.7X 6.90 6.22

Private Nonluarated HLT 0.02OX 0.0 0.02 0 0.0 0.002 0.LX 0.02 0.02 0.02ToutlLDD 1QO.O100.02 100.02 100.0 10.0 100.02 97.52 97 96.32 96.98 98.12Use of IMF Credit 0.L0 0.02 0.OX O.0 O.0 2.5X 2.52 3.72 3.1X 1.9XTotal Extera Debt OULT) 100.02 100.X 100.02 100.02 100.0 100.02 100.02 100.02 100.02 100.02

squrs m

Annex IVPage 1 of 1

DEMOCRATIC AND POPULAR REPUBLC OF ALGER1AECONOMIC REABIlTATION SUPPORT LOAN

KEY PROCESSING EVENTS

Time taken to prepare: 7 months

Project prepared by: Government with the assistance of IBRDstaff and consultants'

Identification: June 10-15, 1994

Pe-Appraisal: July 11-22, 1994

Loan Committee: August 31, 1994

Appraisal: September 12-23, 1994

Negodations: October 27 - November 4, 1994

Board Presentation: January 12, 1995

Expected Effectiveness: Jamuay 20, 1995

Closing Date: December 31, 1996

Bank staff o to t projec ilude: Mom eMme. Pak (rank Manae), Undewoo (ed conomi),l Bamudy (Prvet Sector Developmet ad Prvation), Pu (fienacial Sector Reform and PE Restucung), Wolff

(Social Sfety Net Reform), Ruppert Mamconio Frmork amd Unemplymnt Inun Systm), Hathon(Prvaiaia Law), Dutz (Competion Law), Mich"let wnvestm Pmtio), Ai (trivet Sector Devlopment),and Van P (c 0 ren and Disudemest). Mr. Hadi Abuhk is the cound for Algea Mr. Mabrnood Ayuband Mr. Daie Rhe am, pivy, th manai Diion Chief and Depatnt Diecto for t aperaio. Ms.Mario-Hue" Oen providd excelen suppot savice.

Annex VPage 1 of 3

DEMOCRATIC AND POPULAR REPIULIC OF ALGERIAECONOMC REHABATION S RT LOAN

STATUS OF BANK GROUP OPEERAIONS

1. World Bank Group involvement in Algeria has been intermittent. After a nine-yearmoratorium, Bank lending resumed in 1973. By 1980,23 IBRD projects with commtments totalling overUS$1.1 billion had been approved. Over time, increasing disagreement on project selection andimplementation criteria resulted in low disbursement rates. Several operations were canoelled by mutualagreement in 1980, and another interruption in Bank lending followed. A new agreement led to renewedlending and, in 1984 and 1985. three projects, totalling US$680 million, were approved. Subsequentimprovements in the dialogue led to a large increase in the lending program. Between 1987 and 1992,26 operations, with associated commiments of almost US$2.3 billion, were approved. These operationsincluded two adjustment loans: the US$300 million ERSL and the US$350 EFSAL, approved in June1991. The EPSAL was co-financed in the amount of US$300 mfllion by the Export-Import Bank ofJapan. Bank lending declined again in 1993, in large measure due to the slow-down of economic reform.However, a US$110 million Water Supply and Sewerage Rehabilitation project was approved by theBoard in June 1994 and a US$51 million Emergency Reconstruction project for the Mascara region wasapproved in December 1994. A significant expansion of lending is envisaged over the FY95-97 period,pwvided the acceleration of economic reform is sustained.

2. Despite intrmit involvement, the IBRD's Algeria portfolio is one of the largest in theMiddle East and North Africa Region. As of November 30, 1994, cumulaive commiments to Algeriastood at US$3,911 million (less cancellations). Of this total, some US$1,230 million had been repaid andUS$1,175 million was undisbursed (see attached Table). As of the same date, IFC commitents wereUS$10 million, of which US$1.54 million was undisbursed. The Bank's shates of Algeriaes total MLTdebt (7 percent) and MLT debt service (7 percent) are low compared with other Bank borrowers.

3. In close collaboration with the authorities, the Bank is engaged in a broad effort toimprove the pemance of the project portfolio. A full country portfolio perform e review (CPPR)was caried out in July 1993, which resulted in action plans to address the key issues affecting the Bank'sportfolio, including closing several problem projects. For 18 active projects, the authoritiescommunicated to the Bank last June detailed summaries of actions taken and planned. In a subsequentletter, the Finance Minister indicated his strong support for improvements in the performance of theportfolio, including full cooperation in putting in place ad hoc project supervision arrangements inresponse to the difficult security siuation in Algeria. Six additional projects are slated for closure byend-1994. The Bank is providing technical assistance to strengthen the project monitoring capacity ofthe Ministry of Finance. The Bank is also working with the Ministry of Public Works, which overseesthe single largest share of the public investment budget, to modernize its project management capacity.

4. Other members of the World Bank Group are active in Algeria. The IFC's strategy forAlgeria focusses on the hydrocarbon sector, due to its strategic importance, and the financial sector. TheIFC approved its first project in 1992: a US$10 million loan to Helios, a joint ventre betweenSONATRACH and foreign investors to produce helium gas for export. In the financW sector, the IFC'sefforts have concentrated on establishing a leasing company and a private bank. FIAS drafted a reporton investmet in Algeria, and has actively consulted on the new Investment Code. Algeria has heldpreliminary discussions with MIGA concerning fuure membership.

Annex VPage 2 of 3

DEMOCRATIC AND POPULAR REPlBLIC OF ALGEAECONOMIC REHAIliTATION SUPPORT LOAN

The taO of Bank Ganoup Operu I Ain riStatemet of Ban and IDA Ct

As of November 30. 1294

(118$ Milton Amut

Loan or FIscalChditNo. LDA. Yau m& Undsbursed

Thiry-vOne loans fiaflv disbursed 1,S79.69

Of which SAL., SECAL, and Progrm Loan *a/

3117 1990 Republic of Algria Eonomic Reform 298.79

2591 1985 Republic of Algerki Natioral Water Supply/S 262.00 11.922808 1987 Republic of Alger Highways V 120.00 38.242809 1987 Republic of Agrh Irigao Chelif 1 94.00 46.782821 1987 Republicof Algwia Nat Watw Supplyil 250.00 82.992977 1988 Republic of Algeria Vctonal Trainig 54.00 19.802981 1988 Republic of Algeri Powerm 159.43 67.513076 1989 Republic of Algeria Mitldja I Aton 110.00 71.473105 1989 Republicof Algeria Ports i 63.00 47.883176 1990 Republic of Algeria Tochnic Assisanoo 26.00 18.113210 1990 Republic of Algera Idusti Resnwcuing 47.60 41.443211 1990 Republic of Algeri Indu ri 4 Retcuing 29.20 24.093212 1990 Republic of Algeria lndurRetucurin 12.70 10.743213 1990 Republicof Algeria Industriesuctning 5.00 .453214 1990 Republic of Algera Industria Restucting 5.00 3.793216 1990 Republic of Algeria Research and Exension 32.00 27.113266 1991 Republic of Algeria UniveriyDevelopment 65.00 55.583352* 1991 Republic of Algk Ep. & FinancialSec 350.00 106.163395 1992 Republic of Algera irt Petroelum 100.00 25.013405 1992 Republic of Algera Sahaa Development 57.00 55.003487 1992 Republicof Algerk Pesy and Waterhed 25.00 22.153488 1992 Republic of Algeria Cadase 33.00 26.383561 1993 Republic of Algeria Housig Compleion 200.00 146.803573 1993 Republic of Algera Basic & Seondeary Education 40.00 37.493690 1994 Republic of Algeia LaocustCntrol 30.00 27.003743 1994 Republic of Algeria Wate Supply & SeweampbI 110.00 110.003813 1995 Republic of Algeria Mas Emergency Rec. b/ Sl 5.00 S

TOTAL 3,910.62 1,174.88

Of which has been, reaid (only amortiaon) 1,229.79Total hold by Bank 2,680.84

Amount sold 36.37of which repaid 36.37

Tots Undisbusd 1,174.88

SAL, SBCAL or Program Loana/ Appoved after FY80b/ Not yet effectWv

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