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Algeria and the IMF

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Public Information Notice (PIN) No. 03/25
March 5, 2003
International Monetary Fund
700 19th Street, NW
Washington, D.C. 20431 USA

IMF Concludes 2002 Article IV Consultation with Algeria

Public Information Notices (PINs) are issued, (i) at the request of a member country, following the conclusion of the Article IV consultation for countries seeking to make known the views of the IMF to the public. This action is intended to strengthen IMF surveillance over the economic policies of member countries by increasing the transparency of the IMF's assessment of these policies; and (ii) following policy discussions in the Executive Board at the decision of the Board.

On February 24, 2003, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Algeria.1

Background

After restoring—under particularly difficult circumstances—macroeconomic stability with Fund support, Algeria adopted a conservative macroeconomic policy stance in 1999-2000. This prudent fiscal stance, coupled with high oil revenues, was reflected in a major strengthening of the balance of payments position, an improvement in the external debt indicators, and a marked decline in the inflation rate.

Faced with mounting social demands—and in the context of large treasury deposits accumulated at the central bank—the government decided to ease fiscal policy starting in 2001 until private activity generates sufficient employment opportunities. It adopted a fiscal stimulus plan covering the 2001-04 period.

As a result, the overall budget balance weakened in 2001 and the first half of 2002. This deterioration mainly reflected higher spending and a decline in hydrocarbon revenues due to a reduction in volumes and prices. The overall balance dropped from a surplus of 9.8 percent of GDP in 2000 to a surplus of 3.4 percent of GDP in 2001 and to a small deficit in the first half of 2002.

The balance of payments remained in surplus in 2001 and during the first half of 2002, notwithstanding a drop of 4 percent of GDP in the current account in 2001. In the first half of 2002, the current account surplus decreased further as hydrocarbon exports continued to decline and imports increased. The capital account deficit narrowed in 2001 and the first half of 2002, mainly as a result of increased net direct investments—which were boosted in part by the sale of a second cellular telephone license in 2001—higher drawings, and lower amortization. Gross official reserves surged from US$11.9 billion (12 months of imports) at end-2000 to US$21.1 billion at end-June 2002. Following a trend that began in 1996, gross external debt continued to decrease to US$22.6 billion at end 2001 (from US$25.3 billion at year-end 2000).

Lower hydrocarbon output was partly offset by a better performance in nonhydrocarbon sectors. The overall GDP growth of 2.1 percent was marginally lower than that in 2000 despite a sharp rebound in the nonhydrocarbon sector, which rose to 4.5 percent (from 1.5 percent in 2000). Preliminary data for the first half of 2002 indicate divergent evolutions in different sectors—with a decline in agriculture due to adverse weather conditions and a pickup in construction and service activities due to the government's fiscal stimulus. As a result of the stronger growth of the nonhydrocarbon sector (particularly in agriculture), the unemployment rate decreased from 29.5 percent in 2000 to 27.3 percent in 2001. Average inflation, as measured by the consumer price index (CPI), increased from 0.3 percent in 2000 to 4.2 percent in 2001 due in part to a wage increase granted at the beginning of 2001 and to higher food prices. In the first eleven months of 2002, the CPI fell by 2.2 percent relative to December 2001 mainly due to a drop in food prices.

Regarding structural reforms, some progress has been achieved in two areas: economic liberalization and privatization/public sector restructuring. Regarding the first, a comprehensive tariff reform was implemented. Algeria signed an Association Agreement with the European Union in April 2002 and negotiations toward accession to the World Trade Organization (WTO) are ongoing. In addition, the parliament approved a law liberalizing the electricity and gas sectors, and an ordinance reforming the tax code was issued. On privatization, two major transactions were completed in mid-2001: (a) the assets of the public sector steel-making complex, SIDER, were transferred to a majority foreign-owned company; and (b) a new cellular telephone license was sold to a private investor. In addition, the institutional framework for the management of public sector enterprises was revised with a view to providing the government with more flexibility.

Executive Board Assessment

Executive Directors commended the authorities for preserving the macroeconomic stability achieved in recent years, and for making progress in a number of structural reform areas, in particular in trade liberalization. Aided by higher oil prices, these policies have contributed to a marked strengthening of the balance of payments, an increase in official reserves, and a sharp decline in inflation.

Directors agreed that its favorable macroeconomic position provides Algeria with a timely opportunity to address its main challenges of raising economic growth, reducing unemployment, and improving living standards on a sustained basis. Building on the progress made to date, this will require a redoubling of structural reform efforts, along with the continued pursuit of sound macroeconomic policies.

Directors noted that the authorities' Economic Recovery Plan (ERP) entails a substantial fiscal stimulus. They recognized that this fiscal expansion will not endanger the external and treasury positions as long as oil prices remain high, and that an increase in human capital and infrastructure investments is made possible by Algeria's prudent policy record. At the same time, however, Directors stressed that fiscal stimulus will boost growth only temporarily, and cannot substitute for the more fundamental reforms that are needed to achieve a lasting improvement in growth and employment creation. They also cautioned that an expansionary fiscal policy could ratchet up expenditures that might be difficult to reverse and thus increase the budget's vulnerability to adverse developments in the oil markets, and that it could lead to excess demand and price pressures. In addition, this policy could weaken the purpose of the oil stabilization fund. Directors were encouraged that the authorities were mindful of these risks, and that they consider the ERP as a supplement, not a substitute, to structural reforms. They urged them to adhere to sufficiently cautious fiscal policies, in particular, by scaling down expenditures over time, prioritizing them according to their role in supporting structural reforms and generally enhancing the efficiency of public spending. Directors also highlighted the importance of continued efforts to enhance and widen the fiscal revenue base. The forthcoming fiscal Report on Standards and Codes will help identify measures to strengthen the budget process.

Directors welcomed the authorities' resolve to devote monetary policy to preserving price stability. This will require continued vigilance in the period ahead, given the fiscal easing and the inflationary pressures that could be generated by a further rapid increase in money growth. Directors commended the authorities for the introduction of a new instrument to absorb excess liquidity, and encouraged them to take further steps to deepen the financial markets by offering a broader spectrum of savings instruments.

Directors welcomed the authorities' commitment to manage the exchange rate float in a flexible way to dampen external shocks. They encouraged the authorities to take advantage of the strong international reserve position to liberalize further the exchange system and strengthen the role of market forces in exchange rate determination. Directors commended the authorities for continuously reducing the level of external debt over the years. They encouraged them to engage in a more active debt management aimed at reducing the cost and lengthening the maturity of external liabilities, and to continue to work towards the resolution of bilateral debt issues.

Directors viewed the increased private activity and the rise in foreign direct investment as welcome signs that past reforms are bearing fruits. They agreed that the sustained implementation of a comprehensive structural and institutional reform agenda, with particular focus on promoting private sector activity in the non-hydrocarbon sectors, will be key to achieving sustained growth and job creation over the medium term. Directors therefore urged the authorities to redouble their reform efforts, with a special emphasis on privatization and public sector restructuring, and steps to further open up the economy and improve the business environment.

Directors welcomed the completion of two sizable privatization transactions in 2001 and the approval of a list of 40 public enterprises to be privatized, and urged the authorities to move ahead with the remaining privatization agenda in a timely and measured fashion. They stressed the need for transparent and efficient procedures, and an extended social safety net to mitigate the negative impact of public sector restructuring on labor. Directors also looked forward to continued efforts to improve governance, strengthen institutions—including the judiciary—and clarify the property rights on agricultural land.

Directors encouraged further steps toward establishing a sound banking system operating on a more commercial footing, including through privatization. In the period ahead, credits to loss-making public enterprises should be replaced with direct and temporary budget subsidies, and efforts should be made to improve banks' efficiency and management capacity, especially in the area of risk assessment. Directors welcomed Algeria's participation in the Financial Sector Assessment Program, which will lay the basis for future steps to strengthen the financial sector. They also welcomed the authorities' commitment to combating money laundering and the financing of terrorism, and looked forward to the enactment of comprehensive legislation in this area.

Directors commended the authorities for achieving major progress in trade liberalization and their commitment to open up further in the period ahead. Recent steps include the implementation of a comprehensive tariff reform, the signing of an Association Agreement with the European Union, and the resumption of negotiations towards WTO accession. Going forward, Directors encouraged the authorities to further reduce the multilateral tariff rates to avoid risks of trade diversion and facilitate customs administration, and supported efforts towards regional economic integration. The authorities were also encouraged to continue to work towards full participation in the HIPC Initiative.

Directors highlighted the importance of continued strong efforts to address statistical deficiencies that hamper economic assessment and the formulation of economic policies. They welcomed the authorities' interest in the Fund's Special Data Dissemination Standard as a framework for statistics development.



Algeria: Selected Economic Indicators

 

1997

1998

1999

2000

2001


Domestic economy

(In percent)

Real GDP

1.1

5.1

3.2

2.4

2.1

GDP deflator

6.5

-3.8

10.9

23.9

1.4

Consumer price index (CPI), period average

5.7

5.0

2.6

0.3

4.2

(In billions of U.S. dollars) 1/

External sector

Exports of goods, f.o.b.

13.8

10.1

12.3

21.7

19.1

Imports of goods, f.o.b.

-8.1

-8.6

-9.0

-9.3

-9.5

Current account, excluding capital grants (in percent of GDP)

7.2

-1.9

0.0

16.9

12.9

Capital account balance

-2.3

-0.8

-2.4

-1.6

-0.9

Gross official reserves

8

6.8

4.4

11.9

18

External debt (in percent of GDP)

65.2

64.3

58.6

46.6

41.3

Debt service ratio (in percent of exports)

29.8

46.3

40.3

20.3

22.8

Real effective exchange rate (percentage change) 2/

9.9

4.8

-7.9

-2.5

2.8

Financial variables

(In percent of GDP) 1/

Overall budget balance

2.4

-3.8

-0.5

9.8

3.4

Change in broad money (M2) (in percent)

18.2

47.2

12.4

13.0

22.3

Interest rate (central bank rediscount rate, in percent)

11.0

9.5

8.5

6.0

6.0


Sources: Data provided by the Algerian authorities; and IMF staff estimates.
1/ Unless otherwise noted.
2/ A decrease in the index implies a depreciation.

1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities.




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