This record is a partial extract of the original cable. The full text of the original cable is not available.

C O N F I D E N T I A L ALGIERS 001302 
 
SIPDIS 
 
E.O. 12958: DECL: 06/28/2015 
TAGS: ECON EFIN EINV PGOV AG
SUBJECT: THE KHALIFA LEGACY: BAD HABITS PERSIST AS ALGERIA 
WAITS FOR BANKING REFORM 
 
REF: A. ALGIERS 1233 
     ¶B. ALGIERS 491 
 
Classified By: Ambassador Richard W. Erdman, reasons 1.4(b)(d). 
 
¶1. (C) At least one bank in Algeria's public-dominated 
banking industry appears to have retained some of the bad 
habits that caused the collapse of the entire sector in 2003. 
 Ambassador and Econoff learned May 24 from the president of 
a large western bank in Algeria that the specialized Algerian 
Bank for Rural Development (BADR) has made a loan valued in 
the "hundreds of millions of dollars" to paper manufacturer 
Tonic Emballage, considered the largest printer in Africa and 
an important supplier of paper products to the domestic, 
regional, and European markets.  According to the source, the 
loans were made "with only a phone call" without any 
evaluation of the borrower.  The source had heard speculation 
that the value of the loan could be as high as $500 million. 
 
¶2. (C) The recipient of this unquestioned loan, the Tonic 
Emballage paper company, has achieved somewhat legendary 
notoriety in Algeria.  The 10 percent annual growth of Tonic, 
its 2005 unprecedented purchase of 160 printing units and 
several other presses, and a planned doubling of the 
workforce from 5,500 in 2005 to 10,000 by the 2006-7 period 
are in response to robust growth and good contract potential. 
 Tonic estimates its 2005 exports will be worth 35 million 
Euros.  Certain aspects of the Algerian market make it a 
sensible location for investment in the paper industry: low 
cost of energy for energy-intensive processes, the 
availability of desalinized water to use in manufacturing, 
and a skilled, low-cost labor force.  Nonetheless, the 
apparent ease with which the BADR loan was supposedly 
approved contradicts the spirit of Algerian banking reform. 
It also raises the prospect that Algerian banks are still 
capable of damaging the national banking system by granting 
loans that are not risk-evaluated.  The state-owned banking 
sector has historically made "directed," non-performing loans 
to state-owned enterprises to keep state sectors afloat. 
Unchecked loans to private firms are likely to be more rare, 
since Algeria has only had a significant private sector since 
the mid-1990s. 
 
¶3. (C) The granting of an unquestioned loan resembles the 
tactics of the former Khalifa Bank from 1998 to 2003, when 
the Khalifa family conglomerate opened private retail and 
institutional banking services with the approval of the 
Central Bank.  The owners completely replaced the Central 
Bank-approved management team shortly after receiving GOA 
approval, and Khalifa Bank proceeded to make generous loans 
to family and related businesses, sending millions of dinar 
overseas disguised as payments for illegally overbilled goods 
or for projects that never materialized.  The government and 
the broad public attributed the ensuing collapse to 
inadequate Central Bank regulation of the banking industry, 
resulting in the loss of $2 billion from the savings, 
pensions, and other deposits of public and private 
enterprises, individuals, and even state-owned banks. 
 
¶4. (C) The BADR loan to Tonic appears to have bypassed normal 
oversight procedures for loans of that size, indicating that 
in practice the Central Bank does not exercise effective 
supervisory authority in the banking sector, even when it 
comes to large transactions.  A former Canadian Treasury 
official who has been consulting independently with the 
Ministry of Finance since 1997 indicated to econoff June 18 
that banking reform has been extremely difficult to achieve 
because of the power wielded by public banks.  They have for 
years stymied Minister Delegate of Financial Reform Karim 
Djoudi's efforts to move toward privatization and efficient 
industry procedures.  Djoudi has been frustrated at the lack 
of progress.  For example, in a September 2004 conversation, 
Algerian Central Bank officials insisted that central banks 
around the world were not responsible for regulation of their 
national banking industries -- an indication of the Central 
Bank's consistent abdication of its own supervisory role. 
 
¶5. (C) Finance Minister Medelci's recent assurances to 
Ambassador (ref A) that three banks would be privatized soon 
-- something he subsequently announced publicly this week -- 
could be easier to declare than implement, given the Finance 
Ministry's perennial and unfinished struggle to regulate the 
industry.  However, former Finance Minister Benachenhou's 
removal of three public bank CEOs in May, and Medelci's 
statement that the state would privatize majority stakes in 
public banks, appear to be more robust efforts to shake-up 
the system.  Much as WTO accession will give the GOA the 
political cover it needs to enact new, unpopular rules, the 
gathering momentum for bank privatization has the potential 
to reform the industry in ways that internal efforts have 
been unable to achieve. 
 
ERDMAN