Algeria to Slow Imports, Seeks to Reduce Credit Risk with New Finance Law Measures
The Algerian government enacted substantial changes in the country’s finance law, a move considered by many as drastic and severe. The changes were issued as part of Algeria’s mid-term complementary finance law for 2009.
As part of the mid-year change, the government now requires a mandatory use by importers of documentary credit or letters of credit. This new requirement means that the use of more traditional means such as documents against acceptation and telegraphic transfers, widely used in import payment transactions are no longer valid. This new requirement means that buyers are now forced to set aside 25% of the import value as a deposit on their purchase. The implications of these amendments concern mostly small and medium-sized business, which will essentially suffer from the lack of deposit money to fund their imports.
In contrast to importers, some sellers into the Algerian market see it differently. The law provides them with an enormous added safety net with the backing of documentary credit guaranteeing payment, hence avoiding risks and defaults. Some observers, however, believe that even large companies may not be able to operate in such environment as the cost of doing business will likely rise as a result.
While the debate over the merits of the new amendments goes on, the new finance law introduces some pretty disturbing requirements, one of which is the administrative procedures and applications along the paper trail must be endorsed and submitted by the company’s highest ranked officer. This means that CEOs will now be involved in day-to-days tasks that are usually the domain of mid-level managers. As an observer points out, “it is like requiring the CEO of oil and gas giant Sonatrach to go to bank and deal with a teller for approvals.”
The finance law also puts a sudden halt to the consumer credit market. Only mortgage lending is now allowed, virtually banning consumer and auto credit practices. The news was greeted with anger among automobile distributors and in the financial sector. Consumer credit has just begun to emerge but regulators have drastically rolled back the clock. The impact has been immediate in the financial sector with established lenders like France’s Cetelem struggling to assess how the new law will impact their activities going forward. Sources say that Cetelem’s employees have already begun to look for jobs elsewhere. A similar trend is noticed in the auto market, which is already suffering major sales drops since the government enacted a new auto sales tax early this year.
In our opinion, Algeria’s sudden change in its credit market means two things. The first is of a political nature and that is the fact that more pro-central government proponents are winning the economic policy debate in the North African nation. It is known that the country has various powerful lobby groups, who often hold opposing views on where the country should go strategically. It happens that the conservative movement, which generally opposes the introduction of market mechanisms, is winning at present. As the history teaches us, the pendulum will swing back the opposite way at some point. The second factor, also fueling the strength of the nationalists is the global economy. Witnessing that a global out-of-control financial market and credit industry have brought the world economy to its knees, the proponent of open market mechanisms are finding it difficult to make their case in favor of more laisser-faire and less bureaucracy.
While the debate is raging, Bouteflika and those who are managing the country’s finances insist that their country needs to focus its attention on productive investments and building a sustainable base infrastructure. For them, this means less money available for consumer credit and consumption, and that means further regulation of costly imports. Details of the law (in French) can be downloaded here. (government site)