Statement by IMF Staff Mission to Algeria

Press Release No. 06/228
October 25, 2006

An IMF mission headed by Erik de Vrijer has been in Algiers since October 4, 2006 to conduct the annual Article IV consultation discussions. These talks will result in the drafting of a report for discussion by the Fund's Executive Board.

The final report will be published on the IMF website. It will be found, along with previous years' reports, at: www.imf.org/external/country/DZA/index.htm.

The discussions focused on recent developments and current economic policies, as well as the medium-term economic outlook. The mission met, among others, with His Excellency the Minister of Finance, Mr. Medelci, and His Excellency the Governor of the Bank of Algeria, Mr. Laksaci.

Economic growth continues in 2006, but remains fragile. Public investment is still the driving force behind the expansion of nonhydrocarbon activity, while the production of hydrocarbons has slowed for technical reasons. As a result, the real growth rate of the economy would be about 3 percent (nonhydrocarbon sector: 4½ percent). The pursuit of an appropriate fiscal policy together with a prudent monetary policy helped keep inflation in check in the first part of the year. Favorable hydrocarbon prices on the international markets further strengthened Algeria's financial position vis-à-vis the rest of the world. The early repayment of external public debt reduced its level significantly.

Structural reforms have also advanced. In the banking sector, the process of privatizing the majority share in a public bank and the modernization of the payments system are under way. In addition, banking supervision has been strengthened. Nevertheless, the nonperforming loans of public banks, particularly loans to the private sector, remain at a very high level. The rate of the corporate income tax was lowered from 30 percent to 25 percent, and the government has decided to streamline the taxation of small enterprises, particularly by introducing a unified lump-sum tax. Some progress was made in the enterprise privatization program.

Algeria's increased political stability and favorable financial position afford an excellent opportunity to achieve stronger and more diversified growth, as well as to reduce unemployment while preserving macroeconomic stability. The government's economic program aims at these objectives, and it is crucial that the program be implemented decisively, efficiently, and coherently. The National Economic and Social Pact is an important step toward realizing the targeted objectives. The main challenges are the following:

• ensure the sound management of hydrocarbon resources, particularly the quality of the large public investment program; and

• avoid that the ample hydrocarbon revenues weaken the resolve to expedite the modernization of the financial sector and other structural reforms needed to complete the transition to an open market economy and improve the private investment climate.

• The ambitious fiscal policy requires a sustained effort to ensure the quality of public investments. Controlling inflation will continue to be a major challenge for monetary policy, in view of the planned fiscal expansion and the wage increase granted in 2006.

Privatizing public banks and strengthening their governance are essential for improving financial intermediation. To maximize the benefits of Algeria's increased openness, it is important to ensure the free convertibility of the dinar for current international transactions and to modernize the customs administration. Enhanced regional integration would also allow to benefit more from the multilateral opening up of the economy and to attract more foreign investment.



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