Restrictions on letters of credit (LC) under Algerian jurisdiction

Yesterday I had a case with a rather unusual country focus. A German company wants to sell a water treatment plant worth several million euros to Algeria to a local company there. The contract in this regard is currently being negotiated.

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In view of the high investment sum, our company has a legitimate interest in suitable payment security. In view of the high investment sum, our company has a legitimate interest in suitable payment security. Relatively quickly, we turned our attention to the so-called payment letter of credit, especially because there are many official restrictions – in Algerian law – with regard to the (partial) advance payment normally preferred for foreign transactions.

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The question I was then specifically confronted with was whether there are also – according to Algerian law – official restrictions for the letter of credit. The company itself stated that it had come across information that an Algerian letter of credit has an official term restriction of 120 days.

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First of all, let me explain what exactly a letter of credit is. A letter of credit is an obligation assumed by a credit institution (letter of credit bank) on behalf of the importer to pay or credit an amount of money in the currency of the exporter within a certain period of time against presentation of the contractually agreed documents (which prove the shipment, insurance, possibly the quality of the goods and/or other facts). Since the exporter does not ship his goods until the letter of credit is opened and presented, he secures his claim in this way. Moreover, he already receives payment when the documents are submitted, so he does not have to finance the transport route. The importer, on the other hand, can be sure that payment will be made only after it has been ensured that the exporter has proved compliance with all the terms of the letter of credit by means of documents.

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With regard to Algerian legislation, I was able to find out that the letter of credit was only approved as a means of payment by the authorities in 2014 (Article 81 of the Finance Act 2014). At the same time, the Algerian government and the central bank have introduced stricter procedures for checking imports (so-called domilication). Not only is the customer’s solvency and the compliance of the planned transaction with the applicable import regulations checked in a screening process, but the letter of credit must also generally be processed through an approved Algerian bank. The customer must maintain a foreign exchange account here and apply for the desired amount in the foreign currency. These obligations were suspended again in 2017, but were reintroduced in view of the tight budgetary situation in Algeria (declining revenues from natural gas / petroleum business) according to instruction 02/2022 of the Central Bank of Algeria dated July 28, 2022 (Link).

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Regarding the alleged official limitation of the letter of credit period to 120 days, I unfortunately could not find any confirming information and therefore had to refer to external experts, among others the German Chamber of Commerce Abroad Algeria (link).