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Algeria: Selected Issues

Author(s):
International Monetary Fund
Published Date:
March 2006
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II. Algeria’s Business Climate: Tax Reforms for Faster Job Creation20

Algeria’s economy needs to generate more jobs for its young and growing labor force. This requires sustained development of the private sector, particularly labor-intensive small and medium-sized enterprises (SMEs). However, Algeria’s business climate ranked below that of 18 competitor countries located on the rim of the European Union. Structural reforms, which the authorities are pursuing, will take time to mature. The fiscal space created by higher hydrocarbon revenues could be used to achieve a faster improvement in the business climate. Algeria’s gap in business climate with competitor countries is most pronounced in business taxes and a reduction of the corporate income tax could be considered. In addition, the transfer from the hydrocarbon sector to the rest of the economy through low domestic energy prices is large. In light of Algeria’s jobs challenges, there may also be scope for redirecting the transfer away from energy-intensive to labor-intensive activities.

A. Introduction

48. This chapter takes stock of Algeria’s business climate as the authorities consider the use of the fiscal space created by higher hydrocarbon revenues to tackle Algeria’s jobs challenge. The private sector should gradually replace the state in being the main engine for job creation as the large public investment program covering 2005–09 tails off. However, weaknesses in Algeria’s business climate hamper job creation by the private sector. The authorities have engaged wide-ranging structural reforms, but these will take several years to mature. As a result, the authorities could explore policies that provide for faster job creation in the meantime. Section B describes the salient features of business activity in Algeria in comparison with 18 countries located on the rim of the European Union (EURIM).21Section C discusses Algeria’s jobs challenge. Section D reviews Algeria’s business climate in comparison with competitor countries. Section E analyzes key factor costs (capital, labor, energy) to identify potential avenues for faster job creation. Section F concludes.

B. Business Activity in Algeria

The role of the public sector

49. The public sector still plays a large role in certain production activities, despite significant downsizing since 1995. The public sector represented 20 percent of gross nonhydrocarbon value added (excluding government services) in 2004, compared to 32 percent in 1995 (Table 1). Significant divestments by the public sector occurred since 1995 in construction, industry, and transportation. However, the public sector’s share of gross nonhydrocarbon value added in industry was still 63 percent in 2004, mainly in construction materials, chemicals, metallurgy, and paper. The public sector also owns 90 percent of financial institutions by assets, with most of the remainder controlled by foreign banks.

Table 1.Algeria: Shares of Private and Public Sectors in Gross Value Added, 1995-2004Excluding government services; in percent)
199519992004
PrivatePublicPrivatePublicPrivatePublic
Agriculture99110001000
Hydrocarbon0100595991
Of which: Services & construction010001000100
Industry178330703763
Construction and public works584268327822
Transportation574373276931
Trade8812937937
Services851589118713
Total455551494753
Total nonhydrocarbon683277238020
Source: Algerian authorities.
Source: Algerian authorities.

50. The public sector is the largest employer. It represented 34 percent of total employment of 7.8 million in 2004, and paid 72 percent of the wage bill (79 percent in 1995).22 Permanent staff accounted for 88 percent of employees in the public sector in 2004 (11 percent in the private sector, where temporary job contracts are the norm). 56 percent of public sector employees work in the general government, 26 percent in public transport and services, 4 percent in the national hydrocarbon company and its affiliates, and 14 percent in other public enterprises.

51. Algeria’s large hydrocarbon sector is dominated by the national hydrocarbon company, Sonatrach. Algeria’s hydrocarbon sector has been open to international business practices since 1986. The 2005 hydrocarbon law further liberalizes the sector, enabling higher investment and continued growth of hydrocarbon output. However, the sector employs only about 2 percent of the labor force at present.

Small- and medium-sized enterprises in Algeria

52. The small- and medium-sized enterprise (SME) sector in Algeria is two to seven times smaller than in competitor countries. SMEs provide just 10½ percent of jobs in Algeria, by far the lowest share, with the exception of Ukraine, in comparison with the 16 (out of 18) competitor countries for which data are available (Table 2). SMEs provide about 60–70 percent of the jobs in EU15 economies. According to the OECD, SMEs are the most labor-intensive of business organizations, and encouraging SMEs has been an effective means of increasing productivity, which leads ultimately to higher standards of living.

Table 2.Algeria and Competitors: Importance of Small and Medium-Sized Businesses, 2004
NumberPer 1,000 people% of employment
Albania, ALB54,14217.375.0
Algeria, DZA 1/312,95910.310.4
Bosnia and Herzegovina, BIH30,0007.453.0
Bulgaria, BGR224,21128.364.7
Croatia, HRV
Czech Republic, CZE1,985,004194.264.3
Estonia, EST32,80124.065.3
Hungary, HUN153,10715.045.9
Latvia, LVA32,57113.820.6
Lithuania, LTU56,21416.131.6
Macedonia, MKD128,80263.664.3
Morocco, MAR450,00015.2
Poland, POL1,654,82242.861.8
Romania, ROM402,35918.040.2
Slovak Republic, SVK61,68911.532.1
Slovenia, SVN48,54124.620.3
Tunisia, TUN
Turkey, TUR3,960,00056.676.7
Ukraine, UKR233,6074.85.4
Sources: IFC, except for Algeria: Caisse nationale des assurances sociales, 2004; and Turkey: OECD.

Including “artisanat” in SME number and “work at home” in employment number.

Sources: IFC, except for Algeria: Caisse nationale des assurances sociales, 2004; and Turkey: OECD.

Including “artisanat” in SME number and “work at home” in employment number.

The informal economy

53. The size of the informal economy does not explain the low density of SMEs in Algeria. The informal economy in Algeria does not seem unusually large in relation to competitor countries. The World Bank has estimated the size of the informal economy in Algeria to be about 34 percent of gross national income in 2000, the lowest in the Maghreb (Figure 1). The median for 14 out of the 16 competitor countries located in Europe for which data were available was 32 percent. The average size of the informal economy in OECD countries was 18 percent in 2000. It has been found that informal economic activity depresses a country’s productivity performance, and thus growth.23

Figure 1.Algeria and Competitors: Size of Informal Economy, 2000

In percent of Gross National Income)

C. Algeria’s Employment Challenge

54. Unemployment in Algeria among the young and educated is very high. While the overall unemployment rate was 17.7 percent in 2004, the youth unemployment rate was 32½ percent and the unemployment rate for graduates of high school and university was 19 percent. More than 60 percent of the unemployed have been so for a year or more.

55. Higher growth of nonhydrocarbon GDP (NHGDP) has put unemployment on a declining trend since 2000. The closure of public enterprises (with the loss of about 200,000 jobs), disruptions caused by civil strife, and a growing labor force had pushed the unemployment rate to almost 30 percent by 2000 (Figure 2). It declined thereafter, partly as a result of public investment. During 2000–04, the labor force grew by 2½ percent per year and employment by 5 percent per year.

Figure 2.Algeria: Unemployment and Real Growth, 1990–2004

Source: Algerian authorities.

56. The impact of public investment on employment has been magnified by low labor productivity. Labor productivity declined in the 1990s and stagnated thereafter. Between 1994–99 and 2000–04, average annual employment growth increased mainly in agriculture and construction/public works, which were among the sectors that benefited most from government investment in 2000–04 (Table 3).

Table 3.Algeria: Employment, Output and Labor Productivity Growth, by Sector, 1994-2004(Average annual percent change, unless otherwise indicated)
SharesEmployment GrowthGrowth Rates, 1999–2004
1994-20031994-991999-2004ChangeOutputEmploymentProductivity
Total100%3.34.61.34.34.6−0.3
Agriculture20%3.06.43.45.66.4−0.9
Industry8%−1.41.22.60.21.2−1.0
Construction and public works12%2.25.63.45.95.60.3
Government services23%3.21.2−2.03.21.22.0
Nongovernment services17%3.45.01.64.85.0−0.2
Work at home19%7.26.9−0.3
Sources: Algerian authorities; and Fund staff estimates
Sources: Algerian authorities; and Fund staff estimates

57. Weaknesses in the Algerian business climate could hamper the process by which the private sector will replace the state in being the engine for job creation. The authorities have engaged a number of important structural reforms of the judiciary, the energy sector, the financial sector, and the tax administration, that aim to improve the business climate. However, these reforms will not reduce rapidly the cost of doing business in Algeria.

58. During this transition period, the private sector may need additional incentives to compensate for the high cost of doing business in Algeria. The fiscal space created by the higher hydrocarbon revenues could be used to finance such measures. Their identification demands a closer look at Algeria’s business climate.

D. Algeria’s Business Climate

59. This chapter compares Algeria’s business climate to that of 18 competitor countries from three angles: public governance indicators, investment climate assessments, and indicators of “doing business.” The governance indicators combine measures of the perceived quality of government performance (e.g., corruption levels, predictability of policymaking) with measures of the “inputs” that produce governance outcomes (e.g., civil service pay, election design).24 Investment climate assessments (ICA) measure managers’ perceptions of the severity of obstacles to operation and growth of their business.25 The Doing Business Indicators (DBI) measure more strictly the regulatory burden on domestic SMEs.26 The three data sources have the advantage that Algeria belongs to all three, which improves the robustness of conclusions, particularly as concerns SMEs. Algeria’s business climate is ranked below that of the countries that are its competitors for all three data sources.27

Public governance

60. The governance indicators capture six dimensions of institutional quality or public governance:

  • Voice and Accountability, measuring political, civil and human rights;
  • Political Instability and Violence, measuring the likelihood of violent threats to, or changes in, government, including terrorism;
  • Government Effectiveness, measuring the competence of the bureaucracy and the quality of public service delivery;
  • Regulatory Burden, measuring the incidence of market-unfriendly policies;
  • Rule of Law, measuring the quality of contract enforcement, the police, and the courts, as well as the likelihood of crime and violence
  • Control of Corruption, measuring the exercise of public power for private gain, including both petty and grand corruption and state capture.

Algeria is perceived as having a lower overall quality of public governance than competitor countries, slightly below Ukraine’s (Figure 3).

Figure 3.Algeria and Competitors: Overall Governance Index, 2004

Source: Available via the internet: http://www.worldbank.org\wbi\governance.

61. Governance indicators, although widely used, are rather blunt instruments for concrete policy advice on improving the business climate. Analyzing the impact of public governance on the business climate requires detailed surveys of firms within countries. The World Bank’s ICA program offers such in-depth diagnostics.

Investment climate

62. A large number of firms participated in the World Bank’s ICA survey of Algeria in 2002. Compared to the 17 other competitor countries for which data were available, the sample of firms for Algeria’s survey comprised the highest proportion of foreign-owned enterprises and the second highest proportion of small businesses (Table 4). This enhances the pertinence of the ICA to understanding the business climate that internationally-competitive SMEs face in Algeria.

Table 4.Algeria and Competitors: Composition of Sample of Firms in Investment Climate Assessments, 2002
TotalSmall (1-49

employees)
Medium (50-249

employees)
Large (250+

employees)
Domestically

owned
Foreign

owned
Albania (2002) 1/170121311826144
Algeria (2002)557408102275545
Bosnia and Herzegovina (2002)182110412924158
Bulgaria (2004)5483151844252493
Croatia (2002)187125332634153
Czech Republic (2002)268178454342226
Estonia (2002)170121262231139
Hungary (2002)250168384258192
Latvia (2002)176124262528148
Lithuania (2004)239152662024215
Macedonia, FYR (2002)170119262223147
Morocco (2000)859408332115174685
Poland (2002)5013301086078422
Romania (2002)255154633845210
Slovak Republic (2002)170108352630140
Slovenia (2002)188144251928160
Tunisia
Turkey (2002)5143421086464450
Ukraine (2002)463310856879384
Source: Available on the internet: http://www.rru.worldbank.org/InvestmentClimate.

Year of survey in parentheses.

Source: Available on the internet: http://www.rru.worldbank.org/InvestmentClimate.

Year of survey in parentheses.

63. ICA surveys aim to measure what actually happens to enterprises everyday as they interact with their business environment. The areas covered by the surveys are:

  • Government Policies and Services;
  • Quality and Provision of Physical Infrastructure;
  • Structure and Function of Labor, Capital and Product Markets;
  • Inter-Business Relations and Networking;
  • Contract Enforcement;
  • Effectiveness of Regulations;
  • Tax and Customs Regulation;
  • Law and Order and other aspects of governance.

64. Algeria’s attractiveness as a location for business activity lags behind that of its competitor countries according to ICA (Figure 4). The second least attractive is Bulgaria. Of note, about half of the SMEs surveyed in Algeria perceived tax rates as representing a major or very severe obstacle to business operation and growth, while only 20 percent of large firms expressed the same opinion.

Figure 4.Algeria and Competitors: Overall Investment Climate Index, 2002 1/

Source: Available via the internet: http://www.rru.worldbank.org/InvestmentClimate.

1/ Based on 6 out of 7 indicators. Labor relations indicator excluded because of too few data points.

2/ Morocco’s index comprises only 3 out of 6 indicators because of data limitations.

Doing Business Indicators

65. The Doing Business Indicators (DBI) measure narrowly the regulatory burden on a hypothetical domestic SME that follows all laws and regulations (Box 1). The DBI are based on research of laws and regulations in 155 countries, with input and verification from more than 3,500 local judges, government officials, lawyers, business consultants, and other professionals who administer or advise on legal and regulatory requirements. The 2005 DBI measured conditions prevailing around January 2005. 39 variables are grouped under ten indicators: starting a business, dealing with licenses, hiring and firing workers, registering property, getting credit, protecting investors, enforcing contracts, trading across borders, paying taxes, and closing a business.

Box 1.Differences Between Investment Climate Surveys And Doing Business Indicators

Investment Climate Assessments (ICA) describe what actually happens to firms in practice, while Doing Business Indicators (DBI) show what would happen to a specific type of entrepreneur if he/she follows all of the laws and regulations as prescribed.

Country coverage and updates

The DBI database aims at annual benchmarking of key indicators of regulatory burdens across some 155 countries. The ICA database currently contains 58 countries, based on surveys of more than 28,000 firms. The World Bank undertakes some 15–20 Investment Climate Surveys per year, with updates planned approximately every three to five years.

Source of data

In any given country, ICA will rely on stratified samples of hundreds of entrepreneurs to describe the impact of the investment climate on their firm. Responses reflect managers’ actual experiences in dealing with the regulatory environment, financial markets, infrastructure, etc. The main source of information for DBI is a survey of legal and accounting experts who interact with a large number of firms, mainly in the central business center of the country.

Investment climate issues covered

DBIs are based on in-depth research and exchange with experts on a narrow set of laws, regulations, and institutions covering specific aspects of firm entry, operation and exit. In contrast, the scope of ICAs spans all major investment climate topics, albeit with less depth, ranging from infrastructure to crime, and can also probe into the relationship between firm productivity and the investment climate. Because ICAs are based on interviews with hundreds of firms in each country, they allow for analysis of investment climate issues across firm characteristics such as size, ownership, or different geographical locations within a country. This analysis allows one to gauge not only the impact of the investment climate on all firms, but also on firms that may be of particular interest, such as SMEs.

Source: World Bank.

66. According to the DBI, Algeria has the least attractive business climate for SMEs compared to competitors (Figure 5). Although different in design and coverage, Algeria’s ranking under DBI confirms its rankings under ICA and public governance indicators.

Figure 5.Algeria and Competitors: Overall Cost of Doing Business, 2005, 1/

Source: Available via the internet: http://www.doingbusiness.org.

1/ A higher ranking indicates a higher cost of doing business

67. According to DBI, the gap between Algeria and competitors is largest in “paying (business) taxes”, financial services (“getting credit”), and “enforcing contracts-registering property” (Figure 6). Thus, the pay-off from reform in these areas will tend to be highest. The authorities are using the additional fiscal space created by the higher hydrocarbon revenues to target reforms at these areas. They have initiated judicial reforms that will help address deficiencies in contract enforcement/property rights. They have also launched a comprehensive reform of the financial system. Finally, a modernization of the tax administration is ongoing, which should help reduce the number of tax payments per year and the time spent complying with tax laws, two variables that enter the “paying (business) taxes” indicator in measuring the overall tax burden on businesses.

Figure 6.Algeria and Competitors: Largest Differences in Business Costs, 2005

Source: Available via the internet: http://www.doingbusiness.org.

68. Structural reforms to reduce these gaps have considerable maturation times, which imply that the cost of doing business in Algeria will not decline measurably for a while. It is therefore useful to consider ways of reducing the cost of doing of business, particularly for SMEs, until these reforms bear fruit. Such measures would need to keep in mind the overall objective of ensuring that the private sector becomes the engine of job creation.

E. Can Algeria Improve Its Business Climate More Rapidly?

69. The remainder of the paper examines more closely three factor costs that could be shaped by policy within a short time frame: capital, labor and energy costs. The review of these costs points to measures that could help close the gap between Algeria and its competitors relatively rapidly in order to support job creation by the private sector while institutional and structural reforms mature.

Capital costs

70. Capital costs are measured in a standardized way across countries using the DBI “paying (business) taxes” (Box 2). This indicator measures the total tax payable by a hypothetical medium-sized domestic private company that, among other things, started operations in January 2003, made a loss in the first year, distributes 50 percent of its profits in the second year, and uses exclusively domestic inputs to produce a standardized product that it sells at retail. In this hypothetical set-up, total taxes payable by the SME comprise taxes paid at all levels of government after deductions and exemptions, excluding taxes and mandatory charges on labor. Total taxes therefore include the corporate income tax, the personal income tax withheld by the company, the value added or sales tax, property taxes, property transfer taxes, the dividend tax, the capital gains tax, the financial transactions tax, waste collection taxes and vehicle and road taxes. VAT is included because the SME sells its product at retail.

71. Algeria has the second highest tax burden on SMEs among the 19 countries examined according to DBI, after Albania (Figure 7). Algeria’s total tax payable reflects mostly its top corporate income tax (CIT) rate of 30 percent, its tax on professional activity (2 percent of sales), and its standard VAT rate of 17 percent. The number of tax payments SMEs make per year is also among the highest in Algeria.

Box 2.Assumptions About Taxes Payable by an SME to Ensure Comparability Across Countries

The business:

  • Is a limited liability, taxable company. If there is more than one type of limited liability company in the country, the most popular limited liability form among domestic firms is chosen. Information on the most popular form is obtained from incorporation lawyers or the statistical office;
  • Started operations on January 1, 2003. At that time the company purchased all the assets shown in its balance sheet and hired all its workers;
  • Operates in the country’s most populous city;
  • Is 100% domestically owned and has 5 owners, all of whom are natural persons;
  • Has a start-up capital of 102 times income per capita at the end of 2003;
  • Performs general industrial or commercial activities. Specifically, it produces ceramic flowerpots and sells them at retail. It does not participate in foreign trade (no import or export) and does not handle products subject to a special tax regime, for example, liquor or tobacco;
  • Owns 2 plots of land, 1 building, machinery, office equipment, computers and 1 truck, and leases another truck;
  • Does not qualify for investment incentives or any special benefits apart from those related to the age or size of the company;
  • Has 60 employees (4 managers, 8 assistants, and 48 workers). All are nationals, and one of the managers is also an owner;
  • Has a turnover of 1,050 times income per capita;
  • Makes a loss in the first year of operation;
  • Distributes 50% of its profits as dividends to the owners at the end of the second year;
  • Sells one of its plots of land at a profit during the second year;
  • Is subject to a series of detailed assumptions on expenses and transactions to further standardize the case.

The total amount of taxes payable by the business are those in the second year of operation, after accounting for deductions and exemptions, as a share of gross profit (defined as sales minus cost of goods sold and labor costs). Taxes are measured at all levels of government and include the corporate income tax, the personal income tax withheld by the company, the value added tax or sales tax, property taxes, property transfer taxes, the dividend tax, the capital gains tax, the financial transactions tax, waste collection taxes and vehicle and road taxes. Labor taxes such as payroll and social security contributions are excluded.

To measure the tax paid by a standardized business and the complexity of a country’s tax law, a case study is prepared with a set of financial statements and assumptions about transactions made over the year. Experts in each country compute the taxes owed for their jurisdiction based on the standardized case facts. Information on the frequency of filing, audits and other costs of compliance is also compiled. The project is developed and implemented in cooperation with Pricewaterhouse Coopers.

The full methodological note is at: www.doingbusiness.org/methodology.

Figure 7.Algeria and Competitors: Total Tax Payable by SMEs Net of Labor Taxes, 2005

(Share of Gross Profits)

Source: Available via the internet: http://www.doingbusiness.org.

72. Algeria’s tax burden on SMEs becomes even higher relative to competitors when standard VAT rates are subtracted from DBI’s total taxes payable (Figure 8). This suggests that closing the gap may require action mostly on the top CIT rate and on the tax on professional activity. Because this latter tax is collected at each stage of a product’s transformation and regardless of whether the firm makes a profit or loss, the effective rate of tax is likely higher than 2 percent.28

Figure 8.Algeria and Competitors: Total Tax Payable by SMEs Net of Labor Taxes and VAT, 2005

(Share of Gross Profits)

Sources: Available via the internet: http://www.doingbusiness.org; IMF VAT database; and Fund staff estimates.

73. Hydrocarbon revenues give Algeria more fiscal space than competitors for lowering taxes on SMEs. While Algeria lowered its top CIT rate from 42 percent in 1992 to 30 percent in 2000, other countries have not been standing still. The average top CIT in the EU10 accession countries dropped from 30.6 percent in 1995 to 21.5 percent in 2004, with declines of 21 percentage points in Poland and Slovakia over this period. Turkey will cut its top CIT rate from 30 percent to 20 percent in 2006. Among the 18 competitor countries, only Morocco and Tunisia have higher top CIT rates (Table 5). Statutory CIT rates are only one element in a profit tax system and effective tax rates on businesses depend also on the calculation of taxable profits (the tax base) that are a function of depreciation allowances, loss carry-forward rules, etc. Finally, the tax burden on business depends on the tax administration, which the authorities are modernizing with IMF technical assistance.

Table 5.Algeria and Competitors: Selected Indicators on Corporate Income Tax Regime, 2005
Statutory Bottom Corporate Income Tax RateDepreciation Method for EquipmentLosses carryforward—C-F (number of years)Revenues from Corporate Income Tax (% of NHGDP in 2002)Marginal Effective Tax Rates 1/Average Effective Tax Rates (2004) 2/
Albania23%1.8%
Algeria30%none1.9%
Bulgaria15%3.0%
Bosnia & H.
Croatia20%2.1%
Czech Rep.26%linear up to 20 yrs5 yr C-F4.4%17.7%25.5% 3/
Estonia0% for retained

earnings, 24%

otherwise
IFRSno need, because of zero rate1.3%22.5% 4/
Hungary17.5%14.5% depreciation rateunlimited C-F2.4%18.2%18.4%
Latvia15%40% depreciation rate5 yr C-F2.1%14.4%
Lithuania15%20-40% depreciation rate5 yr C-F0.6%13.1%
Macedonia, FYR15%1.1%
Morocco35%3.2%
Poland19%10-30% depreciation rate5 yr C-F1.9%20.2%17.5%
Romania16%2.0%
Slovak Rep.19%linear, 6 yrs5 yr C-F2.8%9.1%16.7%
Slovenia25%25% depreciation rate5 yr C-F1.4%21.6%
Tunisia35%2.7%
Turkey30% 1/2.0%6.4%
Ukraine25%4.2%
Sources: Algerian authorities; International Bureau of Fiscal Documentation; C.D. Howe Institute; Zentrum für Europäische Wirtschaftsforschung; and IMF.

20 percent in 2006.

Sources: Algerian authorities; International Bureau of Fiscal Documentation; C.D. Howe Institute; Zentrum für Europäische Wirtschaftsforschung; and IMF.

20 percent in 2006.

Labor costs

74. Despite Algeria’s low absolute labor costs, firms do not enjoy a cost advantage because of low labor productivity. Gross pay in Algeria is about 40 percent of gross pay in competitor countries for which data were available, and slightly above levels in China (Table 6). However, GDP per hour is only about 25 percent of the levels in competitor countries for which data were available. Thus, it is important that future increases in wages be matched by productivity increases. In addition, the authorities may need to lower labor costs by reducing taxes and mandatory charges on labor, while pursuing structural reforms that lower other costs of doing business.

Table 6.Algeria and Competitors: Selected Indicators of Labor Costs, 2005
Payroll TaxSocial Security Contribution of EmployerAverage gross pay per hour workedGDP per hour worked
AlbaniaNo payroll tax
Algeria 1/1% in 2005, 0% in 200625.0%1.5 €4.0 €
BulgariaNo payroll tax
Bosnia & H.
CroatiaNo payroll tax17.0%
Czech RepNo payroll tax35.0%4.9 €17.3 €
EstoniaNo payroll tax3.8 €
Hungary3.5–6.4%33.5%5.1 €17.9 €
LatviaNo payroll tax24.1%2.4 €
LithuaniaNo payroll tax31.0%2.8 €
Macedonia, FYRNo payroll tax
Morocco
PolandNo payroll tax20.1%4.2 €14.8 €
RomaniaNo payroll tax
Slovak RepNo payroll tax35.2%3.8 €18.0 €
Slovenia0–14.8%38.7%9.9 €
Tunisia
TurkeyNo payroll tax14.5%
UkraineMax. UAH 20.4 per employee
Memorandum items
China1.3 €
India18.4%1.0 €
Sources: Algerian authorities; Mercer Human Resources; International Bureau of Fiscal Documentation; and Fund staff estimates.

Excluding the hydrocarbon sector, where average gross pay is 76 percent higher.

Sources: Algerian authorities; Mercer Human Resources; International Bureau of Fiscal Documentation; and Fund staff estimates.

Excluding the hydrocarbon sector, where average gross pay is 76 percent higher.

75. According to DBI, the level of taxes and mandatory charges on labor employed by an SME in Algeria compare favorably to those prevailing in EURIM, although they are higher than in Morocco or Tunisia (Figure 9). Taxes and mandatory charges are social security payments (including retirement fund; sickness, maternity and health insurance; workplace injury; family allowance; and other obligatory contributions) and payroll taxes associated with hiring an employee (Box 3). Hiring costs in Algeria, expressed as a percentage of employees’ gross salary, were 28½ percent in 2005, comprising the social security contribution (25 percent), a payroll tax (1 percent), and various small contributions. The payroll tax has been cut from 6 percent before 2000 to 1 percent in 2005; it will be abolished in 2006.

Figure 9.Algeria and Competitors: Taxes and Mandatory Charges on Labor, 2005

(In Percent of Gross Salary)

Source: Available via the internet: http://www.doingbusiness.org.

76. Algeria could also improve the functioning of its labor market in dimensions not captured by taxes and mandatory charges on labor. Because Algeria’s firing costs for SMEs are the third lowest among the 19 countries, the overall ease to hire and fire employees in Algeria is broadly similar to that in the EU15, Tunisia or Hungary (Figure 10). However, several large economies on the rim of the EU, such as Turkey, Ukraine or Romania, are more attractive than Algeria on this overall score.

Figure 10.Algeria and Competitors: Overall Ease of Hiring and Firing Employees, 2005

Source: Available via the internet: http://www.doingbusiness.org.

Box 3.Assumptions about SME Hiring and Firing Costs to Ensure Comparability Across Countries

Countries have evolved a complex system of laws and institutions intended to protect the interests of workers and to guarantee a minimum standard of living for its population. Typically regulated in all countries are employment conditions, social security, industrial relations and occupational health and safety standards.

DBI focuses on the regulation of employment, specifically the hiring and firing of workers and the rigidity of working hours. The data on hiring and firing workers are based on a detailed survey of employment and social security regulations, and comprise 16 yes/no variables, a hiring cost indicator and a firing cost indicator. The survey is completed by local law firms. To make the data comparable across countries, assumptions are made about the employee and the employer.

The employee:

  • Is a nonexecutive, full-time male employee who has worked in the same company for 20 years;
  • Earns a salary plus benefits equal to the country’s average wage during the entire period of his employment;
  • Has a wife and 2 children. The family resides in the country’s most populous city;
  • Is a lawful citizen who belongs to the same race and religion as the majority of the country’s population;
  • Is not a member of the labor union, unless membership is mandatory.

The employer:

  • Is a limited liability company;
  • Operates in the country’s most populous city;
  • Is 100% domestically owned;
  • Operates in the manufacturing sector;
  • Has 201 employees;
  • Abides by every law and regulation but does not grant workers more benefits than what is legally mandated;
  • Is subject to collective bargaining agreements in countries where collective bargaining covers more than half the manufacturing sector.

The full methodological note is at: www.doingbusiness.org/Methodology.

Energy costs

77. Prices of energy products in Algeria are below those prevailing on world markets, particularly for natural gas. Algeria consumes locally about 17½ percent of its oil production (for transportation mainly) and 26½ percent of its gas production (for electricity generation mainly). The average retail price of liquid petroleum products (all products combined) was about $33/bbl in 2004, of which $12/bbl was the refinery gate price paid to producers (compared to an average export price of $40/bbl); $10/bbl, the refining and distribution margins; and $11/bbl, the domestic petroleum taxes. Among liquid petroleum products, gasoline prices at the pump in Algeria were slightly over half the price in the U.S. in March 2005 (Table 7). Domestic gas prices were one-tenth the prices in Mexico or the U.S., among the countries with the cheapest natural gas prices.

Table 7.Algeria: Domestic Energy Prices, March 2005
gasoline retail

(US¢/ltr)
natural gas for

industry (US¢/therm)
electricity for industry

(US¢/KWh)
Algeria285 - 7.5 1/2.2 - 3.3
Norway1654.3
Mexico56527.8
Turkey1797410.8
US51615.2 2/
EU15105 - 16547 - 975.3 - 17.0
Sources: Algerian authorities; IEA; and Fund staff estimates.

Not adjusted for higher calorific value of Algerian gas compared to US or Russian gas.

Excluding taxes.

Sources: Algerian authorities; IEA; and Fund staff estimates.

Not adjusted for higher calorific value of Algerian gas compared to US or Russian gas.

Excluding taxes.

78. Algeria is making efforts to bring energy prices for users more in line with production costs. Sonatrach’s unit values on domestic sales rose 2 percent in 2002 and 2003, and 10 percent in 2004 (Table 8). The 2005 hydrocarbon law provides for a pricing mechanism that would require an increase in retail prices of liquid products of 30 percent on average in 2006. The authorities are considering whether a full implementation is appropriate in the first year of the new mechanism. A faster catch-up is envisaged for natural gas in light of the sizable gap with world prices. In July 2005, gas prices rose by 9.5 percent for industrial users and 4.9 percent for households. A decision has been taken to increase them again as much in December 2005. Electricity prices would rise concomitantly by 9.5–10.5 percent for industrial users and 4.9 percent for households in 2005.

Table 8.Algeria: Sonatrach’s Lost Revenues from Energy Subsidies, 2001-04
2001200220032004
Sales of oil and gas ($ billion)
Exports18.518.223.931.6
Domestic market0.91.11.21.3
Volumes (millions TOE)
Exports118121130133
Domestic market22242626
Unit values ($/TOE)
Exports157.4150.0183.5236.7
Domestic market43.043.944.749.0
Lost revenues ($ billion)2.62.53.64.9
Of which: Lost budget revenues1.61.62.33.1
Sources: Sonatrach annual reports; and Fund staff calculations.
Sources: Sonatrach annual reports; and Fund staff calculations.

79. The large transfer from the hydrocarbon sector lowers the overall cost of doing business in the rest of the economy, but not necessarily for labor intensive activities. Revenues lost by Sonatrach in 2004 from selling hydrocarbons below world prices are estimated at $4.9 billion or 6 percent of GDP (Table 8). This transfer flows disproportionately to activities that are intensive in energy use rather than to those intensive in labor. Had domestic energy prices been at world levels in 2004, the budget would have earned $3.1 billions more (6 percent of NHGDP) from taxes and royalties paid by hydrocarbon companies. By comparison, the corporate income tax intake was 2 percent of NHGDP in 2004, retail taxes on petroleum products were 1 percent, and the nonhydrocarbon private sector paid 2 percent of NHGDP in labor taxes and mandatory charges. These orders of magnitude indicate that scope exists for reviewing the rationale of the transfer, in light of the employment challenge that Algeria faces.

80. The authorities may wish to use Algeria’s comparative advantage in energy production more deliberately in support of job creation by the private sector. Algeria might consider the example of Alberta. By 2004, the energy-rich Canadian province of Alberta had lowered its overall tax burden by 3.4 percent of GDP compared to the province with the second lowest tax burden in Canada and by 5.6 percent of GDP compared to the most taxed province in Canada.29 To do so, Alberta used the fiscal space created by hydrocarbon revenues, including charging world market prices on energy products sold in Alberta. If Algeria were to charge world prices on its domestic market, it could lower taxes generally by $3.1 billion (3.6 percent of GDP).

F. Conclusions

81. Algeria’s mix of business activity is not well-suited to generate rapidly the jobs needed to absorb a young and growing labor force. The labor-intensive SME sector is particularly under-developed. A review of the business climate indicates that Algeria’s attractiveness for business lags behind that of competitor countries. The authorities are pursuing important reforms to close the gap, but these will take time to come to fruition.

82. The gap in business climate between Algeria and competitor countries is largest in the tax burden on labor-intensive SMEs. As the authorities consider the use of the fiscal space created by higher hydrocarbon revenues, a rapid reduction in the gap could be achieved by lowering the tax burden on businesses, including the corporate income tax. Lower, simpler taxes could lead to better compliance and, by helping to reduce the size of the informal economy, could translate into higher productivity. The authorities’ on-going modernization of tax administration will also contribute to reduce the tax burden.

83. The large subsidy implicit in the pricing of domestic energy could be redirected away from enterprises intensive in energy use to those intensive in labor. The authorities have begun to increase domestic prices of energy. However, the orders of magnitude indicate that energy-intensive activities still benefit disproportionately. A reduction in taxes and mandatory charges on labor could also be considered in this context.

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20Prepared by Gabriel Sensenbrenner
21The 18 EURIM countries are Estonia, Latvia, Lithuania, Poland, Czech Republic, Slovak Republic, Ukraine, Hungary, Romania, Bulgaria, Turkey, Macedonia FYR, Slovenia, Croatia, Bosnia and Herzegovina, Albania, Tunisia, and Morocco.
22Agriculture, which pays lower wages, is private.
23Firms operating wholly or partially outside the law average only half of the formal sector’s productivity in Brazil. The economy could achieve 1½ percent additional growth per year if Brazil could reduce informality from its current 40 percent of Gross National Income to the low 20 percent levels which prevail in competing economies (McKinsey, 2004 a). The informal economy is also the most important reason for Portugal’s low labor productivity compared to the rest of the EU (McKinsey, 2004 b).
24The data is at www.worldbank.org/wbi/governance and consists of 352 different underlying variables drawn from 32 separate data sources compiled by 30 different organizations for 204 countries or territories. The World Bank does not take an official position on the accuracy of the data.
25The data is at rru.worldbank.org/investmentclimate. As of 2005, the ICA program of the World Bank had surveyed more than 28,000 firms in 58 countries on 59 perception variables.
26The data is at www.doingbusiness.org and consist of 39 underlying variables in 155 countries. It has been developed by the World Bank in cooperation with international law firms, consulting firms, and logistics companies.
27Rankings are derived from sample cumulative distribution functions for each variable across all countries. This technique transforms values of underlying variables into percentiles. The minimum absolute value of transformed variables is 0 and the maximum is 100; these are normalized, when needed, so that the average for the EU15 is 100. Overall indexes are unweighted averages of normalized values.
28An analysis of how user-friendly VAT regimes are for SMEs (number of rates, thresholds for charging VAT scope of zero-rating, exemptions, restrictions on refunds) is beyond the scope of this paper.
29Taxes consist of the provincial property tax, corporate income tax, capital gains tax, medical insurance premia, liquor tax, gasoline tax, sales and payroll taxes. For details on Alberta’s “tax advantage” compared to other provinces, see http://www.finance.gov.ab.ca/business/tax_rebates.

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