On the investment attractiveness of Algeria

The rise in prices for hydrocarbon raw materials that began in 2022 creates good prerequisites for attracting foreign investment to Algeria.

According to experts, Algeria is among the top ten leaders of the African continent in this indicator. National economy revenues from oil and gas account for up to 60% of the state budget. Algeria has at least two competitive advantages compared to other countries in the region.

• Firstly, the course of the Algerian leadership towards the development of promising sectors of the economy and its modernization, including ambitious plans for the development of renewable energy.
• Secondly, the recent new legislative initiatives adopted by the Algerian authorities directly stimulate the inflow of foreign direct investment and create a favorable investment climate for international business.

However, despite these efforts, Algeria ranks rather modestly in the global ranking for attracting foreign investment (157th out of 190 countries in the Doing Business ranking for 2020). The weak links of the Algerian economy are political instability, corruption inherent in many countries of the region, and most importantly — until recently, severe restrictions on foreign investors.

In particular, Algerian legislation, despite the new incentive measures, still limits the participation of foreign investors in the authorized capital at the level of up to 49% in the "strategic" sectors, and until recently put forward a mandatory condition for them to attract local partners for tenders under government contracts. Another problematic point, according to experts, is the weak protection of intellectual property rights, which creates barriers to foreign investment.

The volume of foreign direct investment in the Algerian economy in the period from 2000 to 2021 averaged 0.5 billion US dollars annually. At the same time, as they gradually grew to a maximum value of more than 2 billion US dollars in 2009, a sharp decline began, primarily under the influence of the global financial crisis. In 2015, the situation reached the "bottom" when they fell by more than 2 billion US dollars and for the first time showed a negative trend — the outflow amounted to USD 340 million. After that, Algeria has seen a consistent growth trend in foreign direct investment, which has not been undermined and has remained stable even during the coronavirus pandemic. In 2020, Algeria managed to attract $1.1 billion in foreign direct investment, according to the International Monetary Fund. The results of 2021 have not been summed up, but preliminary estimates show that the volume of foreign investment remains at a consistently high level.

At the same time, despite measures to stimulate and support investment and good aggregate performance, even during the coronavirus-driven global recession, significant structural imbalances remain. One of the problems is the weak level of diversification. It is logical that the lion's share of foreign direct investment goes into the industrial sector, primarily in the extraction of hydrocarbons, but also in the automotive industry. The share of other sectors of the economy in terms of attracting investment is much more modest. According to the National Investment Development Agency, after the industrial sector, tourism was in second place before the coronavirus, followed by construction, agriculture and the service sector. At the same time, since 2020, the share of tourism in attracting foreign investment has fallen sharply, and only now there is some recovery in its position.

It is noteworthy that in the last decade there have been significant changes in the geography of foreign investors. Once a leading international partner of Algeria — France — gradually slows down and reduces the flow of investment in this country. At the same time, there is a boom in foreign investment from Asian countries, primarily China, which included Algeria in its strategic global project "One Belt — one way. It is also increasing its investment and economic presence in Algeria, as well as in the entire region of Turkey. The active investment expansion of Turkish business to Algeria started in 2018, after the strategic visit of President Recep Tayyip Erdogan. At the end of 2018-2019, that is, before the start of the pandemic, China, Singapore, Spain, Turkey and Germany were among the top five countries in terms of foreign direct investment in Algeria. At the same time, Chinese investments are mainly focused in the areas of large projects in transport, infrastructure, logistics and production.

It is obvious that the Algerian leadership is giving priority to the issue of attracting foreign direct investment to the country. The new financial regulation of 2020 was a big step in this direction. In particular, this law removed a significant part of the restrictions on foreign investors, and above all eliminated the preemptive right of the state to redistribute the shares of foreign investors in the authorized capital. Another cardinal step was the decision to lift the ban on foreign investors raising borrowed funds from foreign creditors to invest in projects in the Algerian economy. Finally, the country's government revised the famous law 49/51, which previously categorically prohibited investors from owning more than 49% of the share capital of Algerian companies. In the new edition of 2020, this rule should no longer apply universally, but only applies to "strategic" sectors of the national economy. The government included geological exploration and production of mineral raw materials, energy, transport and pharmaceuticals (with the exception of investments aimed at developing new technological and innovative products). This provision opens the door to foreign investment in agriculture and the tourism sector, which is gradually reviving after the pandemic.

Thus, despite the impact of the coronavirus pandemic and the accompanying social protests in the country, fueled by the opposition led by the Hirak movement, the government managed to implement important legislative reforms and create an enabling environment to maintain stability in the flow of foreign direct investment. As the world community emerges from the pandemic and the global economy recovers, the attractiveness of the Algerian economy for foreign investors, especially from the Asian region, will only increase.