US embassy cable - 05ALGIERS2145

UNCLAS SECTION 01 OF 02 ALGIERS 002145 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON, EINV, EIND, ETRD, BEXP, AG, Economic Reform 
SUBJECT: IMF Recommendations for Algeria 
 
 
1. Summary: In an October 16 press conference following a 
two-week visit to Algeria, Mr. Erik De Vrijer, Division 
Chief for Middle East and Central Asia at the IMF declared 
that Algeria showed favorable economic development in 2005. 
De Vrijer highlighted the "significant" structural reforms 
undertaken in 2005, including the association agreement with 
the EU, the new hydrocarbon law and the anti-corruption law. 
De Vrijer also made recommendations regarding the 
implementation of the economic revival plan, the salary 
policy and control of the banking system. END SUMMARY 
 
 
FAVORABLE ECONOMIC PERFOMANCE IN 2005 
------------------------------------- 
 
2. Following a two-week visit to Algeria, Mr. Erik De 
Vrijer, head of the IMF delegation to Algeria and Division 
Chief in charge of Middle East and Central Asia, declared in 
a press conference that Algeria showed positive economic 
development in 2005. He affirmed that GDP growth remained 
around 5 percent, driven mainly by the hydrocarbon sector. 
The public works and services sectors demonstrated 
significant growth as well. He added that inflation was 
under control and unemployment would continue to decrease. 
"High oil prices will further reinforce the very good 
financial position of the country", De Vrijer said. In 
addition, he highlighted the structural reforms achieved by 
Algeria, in particular the association agreement with the EU 
effective since September first, the new hydrocarbon law 
that will help attract foreign direct investment, and the 
anti-corruption law. 
 
 
"CAN DO BETTER" 
--------------- 
 
3. The IMF chief of mission indicated that reforms had not 
been undertaken as rapidly as he would have liked.  De 
Vrijer said that additional hydrocarbon resources generated 
by high oil prices gave more room for maneuver to the GoA in 
modernizing infrastructure and reinforcing human and 
institutional capital to support the private sector and 
create more jobs. 
 
 
IMF RECOMMENDS CAUTION 
---------------------- 
 
4. De Vrijer recognized that the Algerian government's 
economic program targeted the increase of investment in key 
sectors and transition to a market economy, but he 
recommended caution in implementing new investment projects 
projected in the 2006 finance law to avoid spending more 
than the GoA should, and limit the impact of inflation. "The 
GoA should not speed up executing the program, otherwise it 
will face absorption problems and end up spending more than 
it should", he said.  He also recommended limiting salary 
increases and adopting a salary policy aimed at preserving 
firms' competitiveness from external competitors. De Vrijer 
added that salary increases should be linked to non- 
hydrocarbon growth. Furthermore, he said it was time to 
think about eliminating tax exemptions and reducing 
employers' taxes to encourage investment and create growth 
within the formal economy. 
 
 
MORE CONTROL ON BANKING SYSTEM LIQUIDITY 
---------------------------------------- 
 
5. On the banking sector, De Vrijer argued for reinforcing 
the Bank of Algeria's control over liquidity.  To minimize 
the inevitable cost of the association agreement with the 
EU, De Vrijer urged implementing banking reform, including 
privatization of public banks and cleaning up the financial 
arrangements between banks and enterprises. "The burden of 
non-performing loans is very heavy," said De Vrijer. To 
address the issue, the 2005 government budget included 
subsidies to state-owned enterprises reporting negative 
income, instead of directing state-owned banks to extend 
additional credit to cover the losses. 
 
 
 
 
UGTA DENOUNCES IMF INTERFERENCE 
-------------------------------- 
6. Following De Vrijer's press conference, the General Union 
for Algerian Workers (UGTA) expressed discontent with his 
comments on salary increases. UGTA deemed them unacceptable 
and inappropriate. "He does not have the right to talk about 
salary policy in our country nor the labor market in the 
world. Algeria is no longer under the structural adjustment 
plan," said a senior UTGA official. The official said he 
intended to lodge a complaint against the IMF at its 
headquarters.  The last salary increase was in 2003, when 
the GoA agreed to increase the minimum guaranteed salary by 
AD 2000 ($27).  The current minimum wage is $137 a month. 
ERDMAN