On Sept. 14, Algeria’s constitutional court certified President Abdelmadjid Tebboune’s reelection to a second—and final—term in office. Under Tebboune, Algeria has taken steps to transform its economy, making significant progress in the areas of infrastructure, housing, and agriculture. But its economy lacks diversification and unemployment is high. In 2023, youth unemployment stood at 31 percent, according to the U.S. International Labor Organization (ILO).

Historically, Algeria’s economy has struggled for two main reasons: decades of socialism and dependence on hydrocarbon revenues. That combination left Algeria stuck between a state-run and a market economy. A series of anti-corruption crackdowns over decades also made many entrepreneurs wary of risk-taking and innovation.

There’s no denying that Algeria is a petrostate. It has the 10th-largest proven natural gas reserves and third-largest untapped shale gas resources globally, and it is also the world’s fourth-largest gas exporter, according to the U.S. International Trade Administration. Sonatrach, Algeria’s national oil company, found that two-thirds of the Algerian prospective acreage remains underexplored. In 2023, Algeria’s oil and natural gas exports have accounted for 20 percent of its GDP, 90 percent of its exports, and 60 percent of its fiscal revenues.

But Algeria is also a country with vast untapped potential—and with the right economic reforms, it can become much more than a petrostate.

While Algeria’s hydrocarbon sector has powered the economy for decades, the capital-intensive nature of the sector has done little to help create decent jobs. To move forward, Algeria needs to rekindle a culture of entrepreneurship, attract investment, and reduce its dependence on hydrocarbons. Agriculture, mining, renewable energy, logistics, manufacturing, tourism, and digital services are all sectors where Algeria could excel.

After Algeria gained its independence from France in 1962, its industrial policy aimed to develop heavy industry largely failed and its economic institutions became dependent on the hydrocarbon industry. Since then, Sonatrach has been the cornerstone of country’s economy. According to the International Monetary Fund (IMF), hydrocarbon revenues constituted about 60 percent of the Algerian government’s budget revenues in 2023—making government expenditures just as volatile as the oil market, which has posed a challenge for the country. Following a balance of payment crisis in the 1990s, the IMF imposed a drastic fiscal adjustment program designed to open the Algerian economy. This came at the onset of Algeria’s “black decade,” when the country was battling terrorism. Severe budget cuts and a massive devaluation of the Algerian dinar led to spiraling inflation, making an already dark period even worse.

Fear of being subject to another so-called international diktat has been an important driver of Algeria’s prudent economic stewardship ever since. To date, Algeria barely has any external debt. That is the result of an over two-decade-old policy to limit dependency on international capital markets.

Add to that the complex legacy of over a century of French colonization, which has made economic sovereignty a central tenet of how Algeria does business. The state has a pervasive role in the economy, where it constantly bails out deficient state-owned enterprises. A large informal sector has formed in reaction to overregulation and other barriers to entry. The informal sector is estimated to comprise around 30 percent of Algeria’s GDP and 37 percent of its workforce. Too many talented Algerians have elected to leave the country amid these conditions, creating a brain drain. Reversing that brain drain is a tall order for Algeria.

The country’s pathway to prosperity requires striking a balance between economic sovereignty and an openness to international trade and foreign investment. Algeria could achieve a hybrid form of state capitalism in key sectors such as energy, agriculture, and the defense industry, while also opening other sectors like manufacturing, transportation, tourism, and finance to direct foreign investment, much like China has done. Full economic liberalization is neither likely nor desirable for Algeria.

Three pillars would underpin Algeria’s economic transformation.

First, Algeria needs to articulate a vision for its transformation with key performance indicators. These will help the government evaluate its progress against set goals, similar to Saudi Arabia’s Vision 2030 plan. The plan aims to diversify the country’s economy and limit its dependence on oil. As part of this effort, the Saudi government has undertaken a wide array of reforms and built massive infrastructure projects. So far, it has been financed exclusively by the state. Algeria would have to put a greater focus on mobilizing private sector investment.

The horizon for an Algeria 2030 plan should be in the not-too-distant future, ideally in the next five years. It could lay out a roadmap for macroeconomic and structural reforms in key sectors including energy, mining, agriculture, digital technology, and finance. Several emerging platforms in ride-sharing and e-commerce point to Algeria’s potential to modernize its economy. Yet in the finance world, Algerian authorities have been hesitant to open the banking sector and allow fintech to take root.

In clearly articulating the goals of Algeria 2030, leaders have an opportunity to build a shared vision for economic transformation with the support of their citizenry. Doing so will make the country more attractive to foreign investors, too. Algerian authorities should embrace the debate on economic policy, including via independent think tanks. But there are too few, owing to government policies to discourage or ban them. Allowing such institutions to create and diffuse ideas would provide journalists and others with the information they need to hold governments accountable. Providing an opportunity to rally the population behind a new vision must be an integral part of Algeria’s transformative agenda.

Second, Algeria should consider the creation of a sovereign wealth fund from hydrocarbon and other mineral revenues. As Algeria pursues more fiscal discipline and transparency, the country could accumulate savings into its sovereign wealth fund. In turn, it could invest these savings into foreign assets with strategic importance for the country, such as energy, agrobusiness, or technology sectors. The sovereign wealth fund would not only help Algeria achieve relatively high returns and familiarize it with international markets, but it would also help with technology transfer and localization of production by acquiring stakes in companies investing in the country, just like how Botswana acquired a 15 percent stake in the De Beers mine.

Algeria missed the opportunity to build a sovereign wealth fund in the 2000s, when energy prices reached record high levels due to China’s rising demand. Notwithstanding the uncertainty surrounding the direction of oil prices, Algeria accumulated a healthy $69 billion in international reserves in 2023. The opportunity cost of holding such large reserve levels is high not only in returns—reserves are invested in low-risk, low-yield securities—but also in what Algeria could gain from engaging with the world economy. In a promising step, the Algerian government announced this month that it would resume external borrowing, including from multilateral and bilateral institutions, after decades of a quasi-ban.

Third, Algeria should set up special economic zones to attract much-needed investors and create jobs. Special economic zones can help bypass red tape and complex bureaucracy—something Algeria is notorious for. The city of Shenzhen, China, is an example where creating a special economic zone amounted to a success story: A once-deficient business environment flourished once it promoted tax- and free-market incentives.

The Algeria 2030 plan would articulate reforms to simplify investment in the country. But changing those norms will take time. Establishing special economic zones would showcase openness to foreign investors and could jumpstart key sectors such as tourism and logistics, which would create many jobs.

Algeria is at a crossroads. Tebboune has an opportunity to put forward and implement an ambitious and credible vision for economic transformation. He must take advantage of it.