Although both Tunisia and Morocco have free trade deals with the European Union and Algeria’s economic and political ties with Britain have reached an unprecedented high, there is a growing feeling in all three Maghreb countries that rapid growth will be spurred from the southeast — the Gulf — rather than from the North.
Even before oil prices rocketed to $100 a barrel, Gulf investors had begun to move into North Africa in a big way, eyeing especially tourism and real estate opportunities in Tunisia and Morocco, while banking interests kept a close watch on the possibilities afforded by future privatization of the monolithic Algerian state banking sector.
Gulf money is, ironically, being starved of investment opportunities at home while in Europe much of the focus previously directed towards the Maghreb is shifting to the newer and poorer members of the EU in Central and Eastern Europe.
Yet the influx of Gulf money is neither charity towards fellow Arabs nor less demanding of moves to liberalize the Maghrebian economies and open up sectors previously denied to private sector investment. The UAE firms Emaar, Dubai Holding and Abu Khater Investment Group are moving into the region in a big way. And the decision to allow “alternative” financial products in Morocco — for which read Islamic finance — opens up the possibility for the spread of a banking system that is also gaining roots in London.
Backed by this new source of interest, the countries of the Maghreb can look forward to 2008 in a situation of macroeconomic stability and steady growth.
However, the region will have to keep up the pace of reform if it is to continue to attract petrodollars as well as tackle its leading economic and social headache — high unemployment among quickly-growing, young populations. All three have kept inflation in check but pressures remain, meaning that significant monetary and fiscal relaxation would be ill-advised. The encouragement of private sector job-creation as opposed to public sinecures is the priority. This will entail sustained deregulation and liberalization, robust financial sectors and the continued development of trade and investment ties.
Morocco has achieved average GDP growth of 5.4% since 2001, thanks to a raft of reforms, but is expected to only achieve 2.5% this year. The drop is mainly due to the effect of a severe drought on agriculture, which contributes 20% to GDP and more than 40% to employment. The cereal harvest fell from 9.3 million tons to 2 million tons and exports of products like citrus fruits have also nosedived.
The country is committed to reducing its reliance on agriculture, and the government is confident the economy will bounce back and targeted 6.8% growth in 2008. The IMF forecasts a marginally more modest 5.9%. In the third quarter of 2007, due mainly to the lively services and construction sectors, unemployment dipped beneath the psychologically important 10% level, despite the loss of 20,000 agricultural jobs. As elsewhere in the region, unemployment is a serious issue, with the government saying 400,000 jobs a year must be created over the next 10 years to keep pace with population growth and reduce overall joblessness. This is no small feat — over the past 10 years, a period of relatively high growth, on average only 130,000 new jobs were created annually.
With fears of inflation eliminating any expansionary fiscal policy as a tool for cutting unemployment, job creation will have to come from the private sector, aided by the government’s pro-business stance. Sectors such as telecom, transport and the all-important labor-intensive tourism sector are all expected to register growth between 7 and 9% over the next year.
As well as seeking to strengthen the trade-oriented industries that benefit from EU open ties, Morocco is seeking to develop trading relations with its immediate neighbors, which have been weak up to this point, not least down to Algeria’s support for the Polisario Front in Rabat’s continuing conflict over the Western Sahara.
In 2007 Tunisia marked 20 years since the Change, when President Habib Bourguiba, who had led the country since independence, was replaced by Zine al-Abedine Ben Ali. Under Ben Ali, Bouguiba’s socialist model has been incrementally rolled back in favor of free markets and private enterprise.
For the past 35 years, Tunisia has made attracting FDI to the country a cornerstone of economic policy, and has specifically encouraged investment in export-oriented sectors. Its geographical position, relatively affordable land and labor, and most importantly a range of trade deals, particularly that with the EU, are touted by officials as ideal reasons to invest in the country.
This policy has been accelerated since the Change, with privatization and a gradually more open economic policy being keys to ensuring that foreign capital continues to flow in, and exports to flow out. FDI grew from $83 million in 1986 to $3.65 billion in 2006, and has created an estimated 270,000 jobs in that time.
The IMF has praised Tunisia’s “outward-oriented development strategy” which eschews protectionism and looks to encourage foreign participation in the economy and stimulate exports. Over the past decade, exports have grown by 15% annually and now contribute more than half of GDP, compared to 35% 20 years ago.
Now Tunisia is focusing on further improving its attractiveness to foreign investors and in increasing the export of “value-added” — i.e. more expensive and higher-margin — products. The 11th Development Plan includes pledges to “stimulate private investment, particularly in high value-added sectors” and “improve the business climate, attract more FDI.”
Legislation is in the pipeline to allow companies to apply for 10-year tax holidays on profits derived from exports, after which they will be taxed at 10% — equal to the lowest rate in the EU.
No set timeline has been laid out for the shift of the dinar to full convertibility. Most estimates are in a vague three-to-five year range, despite the undoubted benefits of convertibility to foreign investors. While Tunisia’s present system of controlled floating rates is seen both as transitional and not a huge barrier to investment, the fact that there is no set date for full convertibility puts in doubt the political will to implement a full float.
Tunisia’s macroeconomic stability looks secure enough, promoting a continuation of strong growth. This growth will be essential to ensuring that jobs are created for the growing population, many of whom are — or will be — young university graduates, equipped to work in high-end, demanding jobs.
Unemployment has remained stubbornly around 14% for the past half decade. By continuing to promote FDI in high-earning sectors, the government is taking some of the right steps to increase employment. However, they need to be supplemented by a loosening of red tape and an even more active encouragement of private enterprise. The official projection is for unemployment to be cut to 13.4% by 2011 — even taking into account fast population growth, this seems woefully short of what is needed.
The soaring world price of energy defies all attempts by oil and gas rich countries to diversify the fundamentals of their economies. Algeria’s non-hydrocarbon growth this year is expected to be 6%, with overall growth of 5% as hydrocarbon output was reduced. Even so, the cash interpretation of these percentages is such that the significance of oil and gas in the economy is going up, not down.
Government coffers are brimming with hydrocarbon revenues, and money is being ploughed into big projects such as the $60 billion Complementary Plan for Support to Growth which aims to bring the country’s infrastructure up to the standards of the developed world, as well as providing jobs for the country’s unemployed.
This level of funding coming on-stream requires a continuation of careful monetary policy, particularly as other pressures such as rising food and construction costs are also present. The IMF predicts 4% inflation by year-end, tolerable for an emerging market, but has warned that keeping a lid on prices is a key priority for the country, along with the elusive goal of a diversification away from hydrocarbons.
Two other, thornier problems highlighted by the organization are high unemployment and an underdeveloped financial sector. Overall unemployment is 13% officially, but youth unemployment may be as high as 45% — a very serious issue indeed for the country. While public funds and continued growth should help cut unemployment to a degree, a report prepared for the IMF has suggested that supply-side reforms will also be beneficial. These include easing labor legislation to make hiring and firing easier, a reduction in employer contributions to social security, using oil revenues to cut taxes and ensuring that the financial system is robust enough to support private enterprise.
In 2007, Algeria recommenced privatizing its previously troubled banking sector, offering 51% of state-owned Crédit Populaire d’Algérie (CPA), the country’s fifth-largest bank, with a 15% market share. Technical bids were submitted by several large international banks, including Banco Santander, Citibank and BNP Paribas and the deal was expected to be sealed before the end of the year at the time of going to press.
The fact that such large banks are enthusiastic about the privatization bodes well for the Algerian banking sector, where previous privatisations ended in crisis and renationalization. It is also a fact that has not escaped the bigger Gulf banks. State-owned Algerian banks account for 95% of loans and deposits, but suffer from inefficiency and a high proportion of non-performing loans — around 38% of all credit, compared to 5.8% in the private sector.
However, there are currently no published plans to privatize the largest state banks, Banque Exterieur d’Algérie (BEA), Banque Nationale D’Algérie (BNA) and Banque de l’Agriculture et du Développement Rurale (BADR). Since they would all benefit from the capital, technology and professionalism that the private sector can bring, it is only a matter of time before the government applies the same logic to them that it did to CPA and Banque de Developpement Local (BDL).
And those all important new ties with Britain, now assuming the economic mantle once worn by France? Bouteflika’s two-day visit to London in July 2006 was the first visit for an Algerian head of state to the UK since the country gained independence from France in 1962. His 48 hours in London was aimed at promoting Algeria to potential UK investors and the broader international community, but especially to the British energy and telecom sectors. Britain’s recognition of the potential gains from these newly forged links was signalled by its intention to acquire larger premises in Algiers for its embassy and easier visa access. The British Council is also back after a 13 year absence.
Peter Grimsditch is editorial director of the Oxford Business Group.