other workers. In many cases, the wages and working conditions for those in U.S.affiliated industries appear to be better than average.

Extent of U.S. Investment in Selected Industries.-U.S. Direct Investment Position Abroad on an Historical Cost Basis-1993

With a rapidly growing population of about 27 million people and tremendous natural gas and petroleum reserves, Algeria has the potential to be a major market for American exports. Algeria has an aging industrial sector in need of new investment. The infrastructure of its cities is inadequate and often employs antiquated technologies. With the vast bulk of its territory desert, Algeria also will remain a substantial market for agricultural exports.

This potential for American exports of goods, services and investment so far has not been fully realized, due mainly to Algerian government mismanagement of the economy. With the exception of the state-owned hydrocarbons sector, an efficient economy able to compete internationally has never evolved. As a result, hydrocarbons exports still account for about 97 percent of Algeria's foreign exchange earnings. The low level of petroleum prices in 1993 left Algeria unable to finance needed imports and also make payments on its foreign debt.

During 1994, however, the Algerian government began in earnest a broad program aimed at freeing more hard currency for imports. It concluded an agreement with the International Monetary Fund (IMF) which allowed it to close a debt rescheduling agreement with its Paris Club creditors. The subsequent rescheduling of about five billion dollars in payments will make possible a substantially higher level of imports in 1995. The government is also negotiating a rescheduling of payments due on its five billion dollar commercial debt. Meanwhile, Algeria also signed the Uruguay Round agreements which now await ratification by the country's legisla

ture.

In conjunction with its IMF accord, the government also enacted measures to transform eventually the state-managed economy to one guided by market forces. Beyond the structural measures discussed in section 3 below, the government reduced its budget deficit from about nine percent of GDP in 1993 to about three percent in 1994. It cut a broad series of consumer-good subsidies and raised energy prices. It also restrained government expenditures and limited wage increases to the roughly two-thirds of the labor force who work in the government, public and private sectors. The government has financed its budget deficits primarily by borrowing from the Bank of Algeria (Central Bank) which increased the money supply. The government had little choice, since monetary policy instruments are relatively rudimentary. There are no bond sales to finance government spending, and much of the money circulating in the economy is outside government control in the parallel market. Reduced bank financing for the government budget deficit and public-sector enterprises has slowed money supply growth from about 22 percent in 1993 to roughly 14 percent in 1994. To attract some of the liquidity back out of the parallel economy into the formal commercial sector, the government raised interest rates at the banks. These measures should reduce inflation in 1995 from the roughly 30 percent level of 1994.

The period of transition for an economy in which the government-owned sector is so predominant will take years. Moreover, the ultimate success of the reform policies will remain linked to an improvement in the unsettled political and security situation.

2. Exchange Rate Policy

The dinar is still not a fully convertible currency. However, the structural readjustment changes put into effect this year, such as the debt rescheduling, the devaluation of the dinar and an easing of controls on imports and access to hard currency, have made it somewhat easier for companies to buy the hard currency necessary to pay for imports. In April, after negotiations with the IMF, the Algerian government devalued the dinar by forty percent, setting the official rate at USD 1 equals 36 dinars. By November that value had fallen to an official value of USD 1 equals 41.7 dinars, versus a black market rate of approximately USD 1 equals 65 dinars. To establish the exchange rate, the Algerian Central Bank sells foreign currency to the commercial banks once a week, thus tying the exchange rate to commercial demand. Central Bank officials anticipate that by 1995 foreign currency sales to banks will be made on a daily basis.

In 1994 the Algerian government made it easier for investors and private citizens to buy and to hold foreign currency. Algerian banks allow deposit accounts denominated in a foreign currency. The most restrictive control still limiting the ability of potential investors to import products is the commercial banks' requirement that an importer deposit the full cost of the imported item and also a percentage of the cost in the bank before it will ask international banks for letters of credit. The banks justify this extra charge by saying that their costs have risen. This extra dinar margin also protects the Algerian banks from losses stemming from additional devaluations. International banks have been reticent in extending new credit lines to Algerian banks because of the debt rescheduling and because of a longer term concern about the political unrest in Algeria.

3. Structural Policies

Prior to the initiation of its reform policies, the government controlled many prices directly and allowed fixed profit margins on many others. In April 1994, the government eliminated controls on prices for agricultural equipment and spare parts and lubricants. These measures should lead to an increase in U.S. exports of these products. The government is also moving towards eliminating the requirement that producers notify it of their prices with an obligation that they simply publish their prices. This should encourage more efficient pricing policy, especially in sectors such as food industries and construction which could utilize American inputs.

Government officials stress their desire for foreign investment and have sought to streamline the application process. In October 1993 the government issued an in

vestment code which liberalizes the regulatory environment outside of the hydrocarbons sector. The code provides investors with a three-year exemption from the value added tax on goods and services used as production inputs and a two to five year exemption from corporate taxes. It also cut the duty on imported goods to three percent and placed a ceiling of seven percent on an employer's contribution to local social security. The government, in November 1994, was preparing to create an agency, modelled on success stories in Morocco and Tunisia, to determine incentive eligibility and shepherd the applications through the maze of Algerian bureaucracy In July of 1994 the government opened to foreign investment up to 49 percent of selected public-sector enterprises: there is no limit on ownership shares of the subsidiaries now owned by public-sector firms. An influx of foreign investment, however, hinges on improvements in the security situation.

4. Debt Management Policies

The fall in oil prices in the last quarter of 1993 triggered a balance of payments crisis that obliged Algeria to conclude an IMF agreement and seek debt relief. The Algerian government had resisted debt rescheduling, preferring to carry a heavy payments load (in 1991 debt service payment consumed 75 percent of export earnings, and in 1992, 77 percent) rather than permit outside "interference" in the monetary management of the country. The Algerian government was facing 9.3 billion dollars of debt servicing in 1994 and the possibility of export revenues reaching only USD 8.8 billion to USD 9 billion. Unable to secure large new inflows of credit, the government could continue on its old policy track no longer.

After the IMF approved Algeria's reform program on May 31, 1994, Algeria reached agreement on June 1 with its official (Paris Club) creditors to reschedule USD 5.3 billion in principal and interest payments falling due between June 1994 and May 1995. An eventual agreement with commercial debtors to reschedule commercial debt payments coming due is expected to further reduce Algeria's debt substantially. Central Bank foreign exchange reserves quickly recovered from 1.5 billion dollars in December 1993 to 2.8 billion in August 1994. This provided Algerian commercial banks far easier access to hard currency for their customers. In addition, the World Bank released 150 million dollars in July 1994 as part of its loan for public-sector reform. However, because of the debt rescheduling, some commercial and official creditors have been reluctant to extend new credit lines to Algerians, thereby limiting Algerian importers' ability to take further advantage of the government's reform measures.

5. Significant Barriers to U.S. Imports

The government has deregulated the foreign trade sector significantly, but some controls remain. The list of items which may not be imported was reduced from 107 products to 85 in April 1994. Those items still on the list are foods, consumer goods and machinery produced in the Algerian public sector for which the government wants to extend trade protection. The government has indicated it will eliminate this list entirely by early 1995, thus opening up many new product areas to potential U.S. exporters. The government maintains a second list of products for which an importer must receive a special permit. This list includes a number of goods in which American producers enjoy comparative advantage, such as wheat, flour, barley, powdered milk, medicines and medical equipment. Some Algerian business pcople have complained that the necessary permits are difficult to obtain. It is unclear when this second list will be abolished.

Aside from import controls, many importers still lack ready access to foreign exchange by which they can finance imports from the U.S. Prior to the June 1994 Paris Club accord, there was an acute shortage of foreign exchange, and the government channelled the available hard currency resources into priority needs, such as food imports. As 1994 progressed, hard currency reserves at the Bank of Algeria increased substantially. Nonetheless, imports were slow to increase for two reasons. First, well-established importers, most notably public-sector enterprises, lack dinar liquidity with which to buy the foreign exchange. In addition, the Bank of Algeria in April 1994 ordered banks not to provide importers with foreign exchange until they had undertaken careful study of the importers' projects. Many business people claim the banking system is too bureaucratic to complete the studies quickly, and the applications for hard currency have piled up. Notably, private importers have obtained only about 18 percent of the foreign exchange allocated to imports in 1994, with the remainder channelled to the public sector.

To save hard currency, the Algerian government gives preference to local engineering and construction firms unless the technology needed is not available in Algeria. The ability of foreign firms to obtain contracts depends critically on their ability to offer attractive financing. U.S. Eximbank's decision in April 1994 to suspend