Algeria: Rebalancing Algeria's Economic Relations With China

3 December 2020
analysis

Although China is likely to remain its preferred economic partner, strategic rebalancing would help Algeria hedge its bets and optimize relations with Beijing and beyond.

The bilateral relationship between Algeria and China dates back to the Afro-Asian Bandung Conference in 1955 and has been further strengthened by China's pre-independence support for Algeria and the latter's reciprocal support as China sought to restore its seat at the UN Security Council.

Their trade and investment relations took off properly in the 2000s during the era of high hydrocarbon rents, evolving gradually into a relationship of economic asymmetry and political expediency.

Paradoxically, as Algeria's hydrocarbon rents continue to shrink, the scope of economic relations with China will likely expand rather than contract in the years ahead.

There are four key drivers of the relationship from China's perspective. First and foremost, Algeria is a reliable partner in an important geostrategic location with proximity to Europe and access to the Sahel and the Sub-Saharan region - for example through the Trans-Saharan Highway - making it an important hub for the Belt and Road Initiative.

Second, China has benefited from Algeria's political influence in the Mediterranean and in the African Union. Third, Algeria has become a key arena for government contracts and commercial opportunity for Chinese companies. Finally, Algeria's latest mining plans provide new opportunities for China's perpetual pursuit of raw materials.

While the two countries work together through plurilateral cooperation fora such as the Forum on China-Africa Cooperation (FOCAC) and the China-Arab States Cooperation Forum (CASCF), bilateral relations dominate their economic and commercial exchange. Since 2014 the relationship has deepened through a 'Comprehensive Strategic Partnership', the highest tier of diplomatic and economic relations which China affords to its most important partners.

To France's chagrin, it has been overtaken by China as Algeria's largest source of imports. In 2019, Chinese exports to Algeria reached $7 billion, while Algeria's exports to China were close to $1.2 billion. Commercial exchanges have been further facilitated by an increased number of direct and connecting flight routes, creating new trading routes for consumer goods that support both the formal and informal economy, and where the renminbi is an accepted form of payment.

Since the 2014 drop in oil prices, Algeria's foreign currency reserves have dwindled from almost $200 billion to around $49 billion in late 2020. Facing the twin crises of COVID-19 and lower oil prices, the state's fiscal adversity is reflected by the break-even oil prices of $118 in 2020 and $135 in 2021.

President Abdelmadjid Tebboune has dismissed financial support from the 'IMF or other foreign banks', arguing that external borrowing undermines sovereign foreign policy. Instead, 'friendly countries' - particularly China - will step in if required.

But financial support from China alone would be insufficient - the average yearly total of Chinese loans to all African governments in 2015-18 was approximately $16 billion, while Algeria is burning through its reserves at around $15 billion annually. However, it would come without conditions such as new taxes, energy pricing reforms, currency depreciation or rights-related discourse.

China: developer, investor and contractor

Chinese companies have become Algeria's preferred partners in civilian infrastructure projects. Between 2005-20 Chinese investments and contracts in Algeria were worth $23.85 billion, including two flagship projects: the East-West Highway and the Grand Mosque of Algiers. The $7 billion contract for a little over half of the 1,216 km highway - connecting Algeria's borders with Morocco and Tunisia - was awarded to the Chinese consortium CITIC-CRCC.

The overall project has cut transaction costs and considerably improved connectivity in Algeria despite significant budget overruns, eventually costing approximately $13 billion. The project was mired in allegations of corruption and, as part of tackling broader graft issues in the country, has prompted Tebboune's government to form an anti-corruption body.

Inaugurated in October 2020, the 120,000 capacity Grand Mosque (Djamaa El Djazair) was built by China State Construction Engineering Corporation (CSCEC), Algeria's largest contractor. The project was highly unpopular as the nearly $2 billion it cost to build could have been spent on building badly needed hospitals, a shortage further exposed during the pandemic.

Chinese companies are also involved in the construction of the El Hamdania port, a major regional hub, and the new Algiers airport that was completed in 2019. They have also helped build tens of thousands of social housing units to help alleviate the country's perennial housing shortages and maintain an element of the government's social contract.

Despite the developmental contribution by Chinese companies, Algerians tend to criticise the lack of job creation for the local population as Chinese companies generally bring their own workers. The number of Chinese workers in Algeria peaked in 2016 at 91,596 - 40 per cent of all Chinese workers on the African continent. Today, the figure is closer to 50,000.

A 'true friend' in sickness and in health

During the first wave of the COVID-19 pandemic, Algeria was one of the first countries to send medical supplies to China. As part of its 'Health Silk Road' diplomacy, Beijing reciprocated by donating medical equipment to 150 countries, including Algeria, leading Tebboune to declare that 'China is Algeria's true friend'.

Healthcare cooperation between the two countries dates back to 1963, when China first sent a medical assistance team to Algeria. Since then, Chinese medical teams have provided over 25 million clinical treatments and treated more than 1.7 million hospitalized patients. While anchored in history, healthcare cooperation is today driven by soft power and economic statecraft.

In April 2020, at the height of the pandemic, CSCEC and the Algerian government signed a $500 million contract for a 700-bed hospital in the Zéralda district of Algiers.

The belt and road ahead

As the Algerian government addresses an ongoing legitimacy crisis and carry out major economic reforms, including easing the costs of doing business in the country, China will remain a preferred partner in its diversification endeavours. Around 1,000 Chinese companies already operate in Algeria, and the waiving of the 51/49 ownership rule (for non-strategic sectors) along with evolving BRI-engagement will likely increase that number.

The government has identified key areas where Algeria can leverage its competitive advantage, such as solar energy. There are also significant plans for the mining of phosphates as well as gold, uranium, zinc and iron ore - resources vital for the development of both Algeria and China.

In addition to weaving the maritime and health silk roads into its diversification efforts, the Algerian government aims to improve its digital and information infrastructure. Huawei, ZTE-corporation and Beidou, alongside other medium-sized players, have all entered the market and play a role in Algeria's broader digitalization and communications efforts.

Vital reforms required in the antiquated public sector-dominated banking sector will also likely benefit from Chinese technologies. Across strategic sectors, Algeria must support and protect local companies, while negotiating better deals with foreign partners on technology transfer, local content and development of local human capital.

Algerian policymakers and private sector bodies such as the Algerian Confederation of Citizen Employers (CAPC - formerly FCE) should aim to foster sector-specific cooperation via joint-business councils and working groups with Chinese counterparts as well as other major trading partners.

As Algeria continues on the path of protracted political and economic transition and resets aspects of its foreign policy, building stronger and more diverse partnerships should help it negotiate more favourable terms with investors that help support job creation and inclusive growth.

Future cooperation with multilateral partners, such as the AIIB and EBRD (which it only joined in 2020), along with a renegotiated - and more favourable - EU trade deal, could provide some strategic rebalancing and open new avenues to trade, financing and technical expertise. Such strategic developments would help Algeria hedge its bets and optimize relations with Beijing and beyond.

Adel Hamaizia, Associate Fellow, Middle East and North Africa Programme

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