ALGERIA: FINANCE MINISTER BACKS ALGERIA'S NEW

C O N F I D E N T I A L ALGIERS 000888

SIPDIS

STATE PASS TO USTR PBURKHEAD

E.O. 12958: DECL: 09/28/2019
TAGS: ETRD ECON PREL AG
SUBJECT: ALGERIA: FINANCE MINISTER BACKS ALGERIA'S NEW
INVESTMENT RULES

Classified By: Ambassador David D. Pearce; reasons 1.4 (b) and (d).

SUMMARY
--------------

1. (C) Minister of Finance Karim Djoudi told USTR Director
for the Middle East and Europe Paul Burkhead September 28
that the purpose of Algeria's new rules on imports and
foreign investment was to lower imports, tighten control on
hard currency outflows, reduce tax fraud, and protect and
promote domestic industries. Only a strong industrial base
could make Algeria an equal partner with other economies.
Djoudi asserted that rising imports threatened economic
stability, and that the state had a responsibility to manage
the transition to a free market economy. Burkhead cautioned
that Algeria's new investment rules created an unpredictable
business climate and would deter investors. Djoudi thought
that Algeria would apply these measures for a limited period,
until domestic industry was stronger and the balance of
payments more favorable.


2. (C) Summary continued: Burkhead emphasized our interest
in expanding bilateral trade and investment cooperation
outside the hydrocarbons sector, and suggested bilateral
talks under the 2001 Trade and Investment Framework Agreement
(TIFA). The U.S. stood ready to assist Algeria with its WTO
efforts. Djoudi agreed that the TIFA could be a useful
mechanism for regular dialogue. He asserted that WTO
accession remained a goal for Algeria, but complained that
the bar to WTO kept moving higher. Algeria needed
''balanced'' conditions for accession that fell short of full
liberalization and permitted for a certain period the kind of
measures Algeria had just introduced. END SUMMARY.

FOREIGN INVESTMENT, ON ALGERIA'S TERMS
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3. (C) During a September 28 meeting, Finance Minister Karim
Djoudi told USTR Director for the Middle Eastern and European
Trade Affairs Paul Burkhead that the United States was a
strategic economic partner for Algeria. Djoudi said that
Algeria's investment policies aimed to diversify the economy
while addressing the country's social development needs. In
an overview of Algeria's macroeconomic situation, Djoudi said
foreign exchange reserves now equaled three years of imports,
external debt was about 1 percent of GDP, and the country's
stabilization fund was valued at 40 percent of GDP. Djoudi
said that growth outside the hydrocarbons sector was 6
percent and that unemployment had decreased from 30 percent
to 11.3 percent. He attributed lower unemployment to a 55
percent increase in jobs, 85 percent of which, he said, were
created in the private sector.


4. (C) Djoudi said that unchecked imports posed a threat to
Algeria's economy. The country's import bill had grown from
USD 20 billion in 2006 to USD 39 billion in 2008. Imports of
services had seen a particularly sharp spike. Algeria's
economic strategy had to balance international trade rules
with the need to promote national industries, which he said
was the reasoning behind new investment rules included in the
2009 complimentary finance law (CFL). In the medium-term,
Algeria planned to follow an infant industry strategy to
boost export capacity in key industries and replace certain
imports. He argued that Algeria had to be a producer and not
devote itself to ''pure commerce.''


5. (SBU) Djoudi said the CFL measures sought to encourage
investment and tighten controls on hard currency outflows and
prevent abuses. The requirement of a 51 percent Algerian
partner majority stake in all foreign investments would keep
more profits in Algeria, as would the requirement that all
foreign investment maintain a positive hard currency balance.
The letter of credit imposed as the sole method for
financing imports would reduce the scope of over-invoicing
and false import declarations. Firms should reinvest a
portion of profits in the local economy, he said.


6. (C) Burkhead told Minister Djoudi that foreign direct
investment was the key to diversifying Algeria's economy away
from energy. U.S. firms operating in Algeria and many
potential U.S. investors were concerned about the CFL
measures. The key problem was a lack of predictability in
the business climate. Several CFL measures had caught
foreign companies by surprise. Burkhead said the 51 percent

partnership rule for foreign investment and the 30 percent
partnership rule for foreign import companies could hinder
Algeria's ability to attract foreign investment. Burkhead
explained that foreign investors do not want to cede control
of their investments to local partners. Some might opt to

curtail their operations or forgo future investments.


7. (C) Djoudi replied that the CFL measures were only
adjustments to existing policy and not an overhaul of
Algeria's investment laws. He claimed that Algeria
recognized the importance and the role of foreign investment
in economic development. Djoudi noted, however, that global
economic factors, particularly lower world oil prices, have
impacted Algeria's economy. Oil and gas exports in 2009 were
50 percent lower compared to the same period last year.
Djoudi said that under the 51 percent rule, foreign companies
could partner with several Algerian firms, leaving the
foreign investor with a relative majority that would give it
authority over management and dividend distribution policies.
As to the 30 percent rule, Djoudi said it would only apply
to foreign firms that imported finished goods. Burkhead
replied that most U.S. firms would not invest in any
undertaking with less than a 51 percent share.


8. (C) Burkhead told Djoudi the U.S. shared Algeria's goal of
building a robust, diverse economy, but Algeria's recent
actions looked more like a return to a state-controlled
system. Djoudi admitted that the state was becoming more
involved in economic matters, but argued that the state has a
responsibility to manage the transition to a free economy.
Djoudi said Algeria's IMF-prescribed economic liberalization
in 1994 had caused a sharp fall of the dinar and the failure
of many state companies, depriving Algeria of much of its
industrial base. Today few Algerian firms were
internationally competitive. Djoudi said the government
would impose these measures for a time so that Algerian
companies could increase their competitiveness and put
themselves on a equal footing with foreign firms.

REVITALIZING TIFA
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9. (C) Burkhead told Djoudi that one of the goals of his
visit was to look for opportunities to expand our bilateral
engagement on trade and investment. He noted that in the
past two years there had been little dialogue with Algeria on
these matters. The bilateral council established by our 2001
Trade and Investment Framework Agreement (TIFA) had been
inactive for several years. As a way forward, Burkhead
proposed revisiting the TIFA framework to guide regular
bilateral meetings on bilateral trade and investment issues.
Djoudi welcomed the offer.

NO SHORT-TERM FIX FOR WTO OR PHARMA BAN
--------------


10. (C) Djoudi reaffirmed his government's goal of joining
the WTO, noting that Algeria had put a lot into that effort,
and had also concluded an Association Agreement with the
European Union. Djoudi said there are monthly discussions on
WTO with Prime Minister Ouyahia, but the general sentiment
within the government was that for every concession Algeria
made on liberalization, WTO just demanded more. Djoudi
believed that Algeria had overcome the major obstacles to
membership, citing better access to Algeria's services
sector, and suggested that any remaining concerns could be
addressed after Algeria became a WTO member.


11. (C) Burkhead agreed that WTO accession was a long and
frustrating endeavor. The requirements for joining tended to
increase with time as membership grew and trade policies
became more liberal. Nonetheless, the U.S. wanted Algeria to
succeed and stood ready to offer advice and assistance to
reinvigorate Algeria's WTO bid. Burkhead cautioned that
decisions such as the CFL measures would complicate the
negotiation process and raise concerns among WTO members. He
added that the government's import ban on pharmaceuticals
contradicted the basic WTO principle of lowering trade
barriers. Each WTO applicant country had to comply with the
same set of standards. "Algeria is well positioned to take a
leadership role in the WTO, but needs to address the basics
first," Burkhead concluded. Ambassador Pearce said another
important benefit, sometimes overlooked, is that membership
would give Algeria a seat at the table and hence the ability
to influence the WTO framework.


12. (C) Djoudi noted both points and stated a belief that the
essential work for Algeria's WTO accession was already
complete, allowing it to focus on remaining issues gradually.
On pharmaceuticals, Djoudi understood the ban was somewhat
contradictory to Algeria's WTO aspirations, but the decision
only banned the import of medications produced domestically.
Furthermore, foreign pharmaceutical firms were welcome to

partner with an Algerian operator to produce medications
locally. As with trade in other areas, Djoudi said, Algeria
had to break the ''vicious circle'' of excessive imports,
which created no wealth, and expand the domestic
pharmaceutical industry. He hoped WTO discussions would
agree on a ''balance'' short of full liberalization that
could offer partners such as the U.S. certain advantages.

NABORS DRILLING
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13. (C) Ambassador reminded Djoudi of the 20 million dollar
fine that Algerian Customs had imposed in 2007 against U.S.
oil service company Nabors Drilling for moving a rig without
formal approval from Customs. Nabors' appeal had yet to be
resolved. The Ambassador said this was an extremely punitive
judgement. He recognized the need for companies to comply
with customs regulations, but pointed out that, as a
practical matter, it was extremely expensive to keep a
drilling rig idle for a prolonged period when there were
excessive delays in processing paperwork. It was a cost
borne not only by the company concerned, but equally if not
more by Sonatrach and Algeria because it meant that the rig
was not working to produce oil and gas. Nabors was a
reputable firm and a significant commercial partner in
Algeria; it had drilled about ten percent of Algeria's wells.
The Ambassador emphasized the need for a quick decision and
asked Djoudi to review the case. Djoudi remembered the issue
from a previous conversation with the Ambassador and admitted
that administrative requirements sometimes are not compatible
with efficiency. While he took the point about business
efficiency, he said that Customs was also correct to enforce
its regulations. That said, he noted that a compromise
solution had been found in a similar Bechtel case, and he was
hopeful this case could also be settled in a satisfactory
manner.
PEARCE