VZCZCXYZ0001
RR RUEHWEB

DE RUEHAS #0930/01 2360735
ZNR UUUUU ZZH
R 230735Z AUG 08
FM AMEMBASSY ALGIERS
TO RUEHC/SECSTATE WASHDC 6278
INFO RUEHBP/AMEMBASSY BAMAKO 0673
RUEHEG/AMEMBASSY CAIRO 1067
RUEHFR/AMEMBASSY PARIS 2849
RUEHRB/AMEMBASSY RABAT 2481
RUEHTU/AMEMBASSY TUNIS 7337
RUEHCL/AMCONSUL CASABLANCA 3517
RUEHRC/DEPT OF AGRICULTURE WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC

UNCLAS ALGIERS 000930 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EFIN ECON ETRD AG
SUBJECT: NEW FINANCE LAW MIXES PROTECTIONISM AND FITFUL 
PROGRESS 
 
REF: ALGIERS 848 
 
¶1.  SUMMARY: The 2008 supplemental finance law adopted on 
July 27 raised the per-barrel oil price used to calculate 
government revenue and included measures to stimulate 
business growth and develop the country's moribund 
agricultural sector.  At the same time, the law alienated 
many with a controversial new car tax designed to fund public 
transportation projects.  Expenditures for the remainder of 
2008 include measures aimed at promoting local and rural 
development; boosting the agricultural, construction and 
tourism sectors through tax incentives and subsidies; and 
supporting low-income workers and disabled persons.  The new 
per-barrel benchmark for oil is USD 37, replacing a USD 19 
standard that had skewed budget calculations and produced 
massive budget surpluses as the price of oil skyrocketed. 
The car tax, affecting all new vehicles, has caused much 
consternation in the press and among ordinary Algerians, who 
see it as another undue financial hardship that strikes at 
the common person rather than the rich.   END SUMMARY. 
 
OIL REFERENCE PRICE PUSHES UPWARD 
--------------------------------- 
 
¶2.  The 2008 supplemental budget, referred to as the 
Complementary Finance Law, was approved by the Council of 
Ministers on July 27.  It reset the petroleum export 
reference price from USD 19 to USD 37 per barrel of oil.  The 
USD 19 reference had been used to estimate government income 
since 2000 (nearly 98 percent of Algeria's export income 
comes from hydrocarbons sales), which skewed the country's 
budgets as the price of oil has skyrocketed in recent years. 
The new reference price increased estimated government 
receipts by 44 percent to USD 42 billion, and total 
expenditures were increased by 13 percent to USD 68 billion. 
Almost USD 2 billion of capital expenditures will be 
allocated for a dairy subsidy and for rural development and 
electrification projects.  The USD 30 billion budget deficit 
will be covered by an effective stabilization fund where 
revenues are deposited after calculating the difference 
between market oil price and the budget reference price.  In 
presenting the draft law, the finance minister projected that 
Algeria's economic growth would reach 3 percent in 2008, with 
6.5 percent growth outside of the hydrocarbons sector.  He 
estimated inflation for 2008 would rise one-half of a point 
to 3.5 percent, and that exports would be valued at USD 30 
billion. 
 
PLANTING THE SEEDS FOR DOMESTIC AGRIBUSINESS 
-------------------------------------------- 
 
¶3.  In what the government described as an effort to respond 
to the worldwide food crisis, the supplemental budget 
contained measures aimed at promoting domestic agriculture 
production.  The value added tax (VAT) will be waived for the 
purchase of seeds, fertilizers and phytosanitary products 
through 2009, and the leasing of agricultural equipment 
produced in Algeria will be exempt from VAT for the next 10 
years.  In addition, the government will reorganize the 
current subsidy mechanism and create a new fund to help small 
farmers.  The new law also revised the agricultural 
production regulation fund, which provides price supports to 
farmers to absorb weather risks in an effort to buffer the 
consumer food market from price shocks. 
 
GIVING WHAT YOU GET 
------------------- 
 
¶4.  To spur project investment, corporate taxes for 
industries such as construction, public works and tourism 
were reduced.  However, in a move that was announced after 
the release of the finance law, Algerian tax law was amended 
to require companies that receive investment tax incentives 
to re-invest the value of those tax breaks within four years. 
 Companies that fail to re-invest their tax benefits will be 
forced to repay the value of the incentives, plus a 
30-percent penalty. 
 
NEW TAXES ON NEW CARS 
--------------------- 
 
¶5.  The most controversial provision of the supplemental 
budget was an additional tax on new cars, which in Algeria 
means imported cars.  The consumer tax ranges from USD 760 to 
 
USD 2285, depending on the type of car and the fuel it uses. 
Car dealers will pay an additional one-percent tax that will 
be used to develop public transportation systems.  The 
independent media have assailed the new car tax in the weeks 
since its announcement, speculating that dealers will only 
pass their tax burden on to consumers.  Louisa Hanoune, head 
of the Trotskyist Workers Party, publicly criticized the new 
car tax, lamenting the negative impact it would have on the 
ordinary Algerians, especially those in rural communities 
that lack public transportation.  Algerians complain that the 
measure further erodes their purchasing power, and will 
increase the country's reliance on used, higher-polluting and 
less safe vehicles. 
 
COMMENT: WHERE IS ECONOMIC REFORM HEADED? 
----------------------------------------- 
 
¶6.  The mix of increased agricultural subsidies, taxes on new 
cars, and the requirement that tax incentives be reinvested 
relatively quickly may signal a new spirit of protectionism 
within the Algerian government, or at least a further 
circumscription of the limited economic liberalization 
undertaken since 2002.  Other new taxes on real estate, when 
coupled with the president's public admission that his 
economic policies, especially in the area of privatization 
and investment promotion, have failed (reftel) and a more 
recent policy statement by the new prime minister that future 
foreign investments in Algeria will require a majority stake 
held by an Algerian partner (septel), may signal a growing 
element of nationalism in the government's economic policy. 
But if the idea was to appeal to ordinary Algerians by 
placing new requirements on foreign companies seeking to do 
business here, it didn't work: any public approval was 
quickly offset by the negative reaction to the car tax. 
DAUGHTON