In a resource-rich continent with dynamic demographic growth, African nations were nonetheless hit hard by the pandemic, resulting in significant losses in the gross domestic product (GDP). And the road to recovery is still a rocky one.
Despite impressive economic performance over the last few decades, intra-regional trade has remained low in Africa relative to its trade with Asia and Europe, accounting for less than 17 percent of total trade volumes compared to 59 percent for intra-Asian trade and 68 percent for intra-European trade. Following the biggest policy shift in the region fostering integration—the African Continental Free Trade Area Agreement (AfCFTA)—African economies are now turning their attention inwards and seeking to build resilience through stronger intra-continental trade ties.
Following a pickup in recovery from COVID-19 and a global rebound in hydrocarbon prices, many commodity-oriented African countries are seizing the opportunity to transform existent structures and transition away from dependence on Europe for their trading relationships. One such country is Algeria. The largest economy in the Maghreb and fourth-largest in Africa, Algeria is set to host the next Arab League Summit in March 2022. The nation is taking the lead in regional affairs, seeking peaceful resolutions to current tensions. Alongside Algeria’s diplomatic efforts, with it assuming a more proactive role in the development of intra-African trade through the AfCFTA, its economy has the potential to push forward much-needed industrial diversification and leverage its infrastructure capabilities, which will be strategic for regional resilience.
Algeria can fulfill its long-held ambitions of diversifying its economy and offsetting uncertainty by investing in non-oil spheres, namely tourism, agriculture, and manufacturing1. The temporary but welcome respite can help the recently appointed cabinet2 continue engaging with key structural reforms.
The state of Algeria’s economy
Accounting for 90 percent of its foreign revenues, the oil-and-gas sector has historically dominated economic activity in Algeria, leaving the country exposed. As a result, the unprecedented volatility of 2020 and the global decline in oil prices led to a contraction of 4.9 percent in 2020, which compounded existing vulnerabilities and prompted the government to acknowledge the urgency for reform in Algeria. Now governments and policymakers are exploring new avenues to diversify away from oil dependence, and trading relationships are fast becoming a key part of that.
Indeed, the country’s dependence on Europe for trade has caused further strain, as it is the destination for most of its hydrocarbon exports. Like many other African countries, Algeria has traditionally prioritized trade with Europe. And even though China has increased its presence in recent years—becoming the country’s largest trading partner—Algeria still retains significant commercial and economic ties with France. This has come at the expense of lower trading volumes with other African economies. In this regard, intra-African trade will allow Algeria to mitigate against future volatility by widening its net of revenue sources and moving beyond Europe for trading partners.
Gateway to Africa
But what can Algeria offer the rest of Africa? Initially, the transition will require oil and gas as the primary funding source. Existing south-bound pipelines can enable Algeria to export into the region. As the objective remains to reduce reliance on oil and gas, this may temporarily support Algeria to explore potential new markets within Africa and divert from European streams.
Besides hydrocarbons, manufacturing stands out as one of Algeria’s growing strongholds. Over the past five years, the manufacturing sector has steadily increased by 4 percent annually. The country boasts low energy and labor costs, making for sizable competitive advantages and increasing its attractiveness for investment among regional counterparts. For example, the cement industry produces a surplus of 20 million tonnes of cement a year, 1 million of which is already exported to Sub-Saharan Africa. This is a future area of growth that provides an opportunity to promote further intra-African trade, as the government announced plans to export the remaining surplus—generating more than US$900 million a year.
Moreover, another emerging area is infrastructure. The lack of adequate infrastructure has been a major barrier to further regional integration for many African countries. Yet, this is not the case in Algeria. Successful governments have demonstrated a commitment to investing heavily in Algeria’s infrastructure. Examples include a 4,500-kilometer highway link between its capital, Algiers, and Lagos, Nigeria, as well as large port-construction projects along the northern coast.
With the Trans-Sahara Highway project, Algeria holds a strategic position to link neighboring countries and the rest of the world using high-quality infrastructure. The project promises to turn Algeria into the gateway to Africa, serving as the primary conduit for a new trade corridor linking North and Sub-Saharan Africa—including land-locked neighbors such as Niger and Mali—enabling access to goods and services via Algerian road links, ports, pipelines, and airports.
Nonetheless, Algeria’s ambitions to diversify its economy and enhance intra-African trade will require more than the completion of the Trans-Sahara Highway. To achieve these goals, political and financial commitments from the government are needed to support the implementation of the AfCFTA and prepare the business landscape for investment flows. Thus, intra-African trade and private investment can transform Algeria’s untapped potential and create jobs that take advantage of its dynamic population. This means significant reform is needed.
Transforming to build an African future
Amid unprecedented times, Algeria can leverage the pandemic recovery and lower trade barriers via the AfCFTA as opportunities to continue engaging with key structural reforms. Growing in reach since January 2021, the AfCFTA has been signed by 54 out of 55 African countries, of which 36 have already ratified implementation3. This has significantly improved the prospects for more intra-regional cooperation.
Already, a government plan seeks to establish reforms that will stimulate the economy and offset uncertainty. Leveraging good governance and a business-friendly environment and implementing key reforms alongside the AfCFTA will help encourage the foreign direct investment (FDI) that is pivotal to creating jobs and economic diversification. As Algeria’s financial sector is still largely influenced by state-owned banks, regulators will need to provide private operators with more flexibility as well as enable greater engagement.
In this respect, with its Government Action Plan announced in September 2021, the Algerian government has shown its willingness to tackle meaningful reform and open up to more FDI. The plan points to the areas of reform that will consolidate good governance and revive growth in the country, ranging from the modernization of banking and financial systems to improvements in the conditions for investment. In addition, a section is dedicated to strengthening capacities to export outside the hydrocarbon sector. These are encouraging steps that can accelerate recovery and promote new growth.
Bolstering the financial sector will inevitably benefit Algeria’s bid to diversify its economy—doubling down on its efforts to promote investment in its agricultural, manufacturing, and tourism sectors. In this respect, specialist trade-finance banks such as the British Arab Commercial Bank (BACB) are geared to be effective facilitators of Algeria’s objectives in intra-African trade. A critical requirement to achieving the AfCFTA’s potential in countries such as Algeria will be pan-African banking networks that connect Anglophone and Francophone markets across the continent. Reliable banking partners that comply with the United Kingdom’s regulatory standards can ease the trade of goods and services across borders, mitigate associated risks, and provide treasury solutions where necessary. Altogether, reforms and collaborations with key stakeholders will bring about greater prosperity.
Unlocking investment flows
Algeria can utilize the momentum of the global post-pandemic recovery to diversify its economy and invest in future growth areas, particularly in manufacturing, agriculture, and tourism. Taking advantage of the renewed prospects for trade integration can catapult Maghreb’s largest economy into becoming the gateway to Africa and a regional leader in development whilst moving away from European dependence.
With ongoing structural reforms, the new government should continue building upon existing assets—such as a dynamic, young workforce and large infrastructure projects—that will be critical to Algeria’s role in intra-African trade. Finally, a strategy that includes changes to the financial sector can unlock the investment flows needed to transform the economy and revive growth. To this end, Algeria will require help not only from banks and their pan-African networks but from its neighbors, too.
Nabil Frik is Managing Director for Africa and the Middle East, British Arab Commercial Bank (BACB)
