ALGIERS, Algeria, December 12, 2014 — On December 1, 2014, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with Algeria.
Economic activity has picked up in 2014, with real GDP growth projected to reach 4.0 percent following 2.8 percent growth in 2013. The hydrocarbon sector is expected to expand for the first time in eight years, while nonhydrocarbon growth remains supportive. Inflation has decelerated sharply to 2.1 percent, thanks in part to tighter monetary policy.
Algeria continues to enjoy substantial external and fiscal buffers, but threats to macroeconomic stability are growing. For the first time in nearly 15 years, the current account is expected to record a deficit. Deficits are projected to widen over the medium term, as strong domestic hydrocarbon consumption and lower oil prices weigh on exports, while imports continue to grow, driven by public spending. The export base is undiversified, and Foreign Direct Investment (FDI) is hampered by restrictions on ownership.
The fiscal deficit is expected to widen to over 7 percent due to lower hydrocarbon revenue, a sharp increase in capital expenditure, and continued high current spending. Nonhydrocarbon revenues are below their potential, the wage bill is high, and subsidies and transfers are costly, amounting to about 26 percent of GDP. Fiscal savings are expected to decline for the second consecutive year.
Although Algeria has enjoyed macroeconomic stability, faster and more inclusive growth is necessary to provide enough jobs for the country’s youthful population. Public investment efficiency is low, and private sector growth is hindered by a cumbersome business climate, an underdeveloped financial sector, and limited international integration. Finally, rigidities in the labor market and skills mismatches reduce the impact of economic growth on job creation.
Executive Board Assessment2
Executive Directors welcomed the rebound in economic activity, the further decline in inflation, and the sizeable policy buffers. At the same time, Directors noted increasing vulnerabilities against the backdrop of falling oil prices, from the deterioration of the fiscal and current accounts and the decline in fiscal savings and foreign exchange reserves. They called for prompt action to preserve macroeconomic stability, complemented with broad-based reforms to diversify the economy, enhance competitiveness, and promote inclusive growth and job creation.
Directors underscored the need for sustained fiscal consolidation anchored in credible fiscal rules to address the growing fiscal deficit and ensure fiscal sustainability. They saw scope to increase non-hydrocarbon revenues, by broadening the tax base, strengthening tax administration, and reducing tax exemptions. On the expenditure side, further efforts are needed to contain current spending, including the wage bill, and to gradually replace subsidies with a targeted cash-transfer system to protect the poor. Directors welcomed the authorities’ intention to move to a medium-term budget framework and continue to strengthen public financial management. A few pointed to the merits of establishing a sovereign wealth fund with oil savings aimed at supporting economic stabilization efforts and ensuring intergenerational equity.
Given the risk that inflationary pressures could reemerge, Directors encouraged the monetary authorities to remain prudent and stand ready to increase liquidity absorption and interest rates. They supported increasing the issuance of treasury bills to help mop up liquidity, reducing the need to use the oil savings fund for budget financing while also deepening the capital market. Directors welcomed the planned development of new monetary policy instruments, with Fund assistance, for liquidity management.
Directors agreed that safeguarding external stability is a priority, and requires an effective strategy aimed at diversifying the export base while enhancing the export capacity of the hydrocarbon sector. They recommended greater efforts to increase trade openness, relax restrictions on foreign direct investment, and create a more export-friendly business climate. They also welcomed the authorities’ commitment to allow the exchange rate to reflect fundamentals.
Directors highlighted the importance of broader structural reforms to accelerate private-sector-led growth and further reduce unemployment. These include reforms to improve infrastructure, productivity, and public investment efficiency. Directors also encouraged further efforts to relax labor market regulations, address skills mismatch, and promote female and youth employment. A thorough assessment of active labor market policies would also be useful to assess their overall effectiveness.
Directors welcomed ongoing efforts to further strengthen the stability of the financial sector, including steps recently taken to transition to risk-based supervision and capital requirements under Basel II/III. They looked forward to further progress in implementing the recommendations of the 2013 FSAP. Directors also emphasized the need to improve small- and medium-sized enterprises’ access to finance and address remaining deficiencies in the Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) framework.
SOURCE: International Monetary Fund (IMF)