Press Release No. 05/233

Press Release: Statement by IMF Staff Mission in Algeria

October 19, 2005

A staff mission of the International Monetary Fund (IMF) issued the following statement on October 16, 2005 in Algiers:

"An International Monetary Fund mission led by Mr. Erik de Vrijer has been visiting Algiers since October 1 to hold the annual consultations under Article IV of the Fund's Articles of Agreement. This review will lead to the preparation of a report to be discussed by the Fund's Executive Board.

"The aim of this press conference is to share the results of these consultations with the Algerian people. The final consultation report will be published on the IMF website. It will be available, along with the previous years' reports, at the following internet address: www.imf.org/external/country/DZA/index.htm

"As is customary, the discussions covered recent developments and current economic policies, as well as the medium-term economic outlook. The mission was received by His Excellency, the Minister of Finance, Mr. Medelci, His Excellency, the Governor of the Bank of Algeria, Mr. Laksaci, and other members of the government and the National Council. The mission also met with representatives from the spheres of banking, business, and economic research.

"Economic developments in 2005 are expected to be positive. The real economic growth rate should remain at about 5 percent, inflation is still under control, and it is anticipated that the unemployment rate will continue its downward trend. Also, the rise in oil prices on international markets has further enhanced Algeria's financial position in relation to the rest of the world. Fiscal restraint and prudent monetary policy have continued during the first half of 2005. Meanwhile, there has been an acceleration in the growth rate of credit to the economy, while there has been a large volume of nonperforming loans. Major structural reforms have also been implemented in 2005, in particular the entry into force of the Association Agreement with the European Union, the modernization of the legislative and regulatory framework in the hydrocarbons sector, the placing before Parliament of a law on the prevention and reduction of corruption, and the beginning of tax administration modernization.

"These positive developments and the robust outlook for hydrocarbon exports in the medium term represent an excellent opportunity to speed up the pace of economic and social development in Algeria and reduce the rate of unemployment, which is still high. The additional hydrocarbon resources generated by the hike in oil prices are increasing the authorities' leeway for modernizing the infrastructure, strengthening the available human and institutional capital, and implementing the priority reforms, with a view to supporting private sector development and the creation of productive jobs. The gradual opening up of the Algerian economy makes it imperative to accelerate these reforms while at the same time strengthening the social safety net arrangements so as to reduce their social cost.

"The government's economic program is geared toward achieving those objectives. It is based on two key areas of action: increasing public investment in the key sectors, such as infrastructure, housing, education, and health; and completing the transition to an open market economy through the acceleration of structural reforms.

"At the same time, it is important that the procedures for implementing the government program allow for the achievement of the stated objectives, through:

• A more gradual implementation of the new investment projects included in the 2006 Budget Law, so as not to jeopardize the quality of the expenditure in question and to contain the impact on inflation;

• The use of a portion of the budget package to support an acceleration of the priority reforms; and

• The adoption of a wage policy consistent with preserving the competitiveness of enterprises in light of increased foreign competition.

"It is also important to avoid any discretionary measure that would hinder Algeria's transition to a freely competitive market economy. It would be appropriate to begin a debate on streamlining the tax system through the elimination of exemptions and to make further cuts in employer costs to encourage investment and create jobs in the formal sector.

"Moreover, monetary policy should continue to play an active role in controlling inflation, which will be rendered more difficult by the fiscal expansion envisaged and the implementation of measures aimed at encouraging credit to the economy. This requires the strengthening of control by the Bank of Algeria over banking system liquidity and the return to a key interest rate that is positive in real terms.

"To make the most of the advantages and keep to a minimum the inevitable costs of the Association Agreement with the European Union, the authorities should incur no delays in implementing the banking system reform and safeguarding the total freedom of the current convertibility of the dinar. As regards the banking reform, the priorities are to privatize the targeted public banks by turning them over to high-status banks and to intensify the efforts being made to clean up the financial relationship between the banks and the public enterprises.

"Regional integration is important for drawing the greatest advantage possible from the Association Agreement with the European Union and for attracting more foreign direct investment. A conference on facilitating trade in Algeria, Morocco, and Tunisia will take place in Algiers next November. That occasion will be an opportunity to strengthen regional cooperation."