Algeria: Staff Report for the 2013 Article IV Consultation

Publication Date: February 04, 2014
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Summary: KEY ISSUES Inflation subsided in 2013 but preexisting and emerging macro-financial vulnerabilities need to be tackled. After reaching a 15-year high in 2012, inflation is coming back within the central bank’s target thanks to tighter monetary policy and fiscal consolidation. However, a recent surge in credit and a new increase in public sector wages call for continued caution over price stability. In addition, the economy’s vulnerability to developments in the hydrocarbon sector is worsening. Declining hydrocarbon production and surging domestic consumption are squeezing export volumes, compounding the longstanding risk of lower oil prices. The policy mix will need to remain geared towards maintaining macroeconomic and financial stability. Despite the ongoing consolidation efforts, fiscal policy is not on a sustainable path. Fiscal policy is de facto procyclical, and the deficit is well above its long-term sustainable level, implying negative net public savings in the long run. Designing and implementing a full-fledged fiscal rule—combining a realistic and smoothed budgeted oil price, a floor on the primary balance, a drawing rule, and a sovereign wealth fund—would help contain macroeconomic vulnerability and build savings for future generations. In the meantime, policies to develop the hydrocarbon sector—with a view to extending the lifetime of existing reserves and preserving fiscal revenue—would help achieve a sustainable fiscal framework. Wide-ranging structural reforms are required to accelerate nonhydrocarbon growth and reduce unemployment. Measures are needed to enhance the business climate, attract foreign investment, and improve Algeria’s integration into the world economy. Public investment needs to be preserved, and its efficiency reinforced. The financial sector is critical to the development of the economy; measures are needed to support private sector credit, jumpstart capital markets, and ensure the compliance of the financial framework with AML/CFT requirements. Finally, the job market needs to be more inclusive to youth and women, who bear the brunt of unemployment. Exchange rate regime. The de facto exchange rate regime is classified as “other managed arrangement.” Algeria has accepted the obligations of Article VIII Sections 2(a), 3, and 4.
Series: Country Report No. 14/32
Subject(s): Article IV consultation reports | Economic growth | Hydrocarbons | Fiscal policy | Fiscal consolidation | Fiscal reforms | Monetary policy | Real effective exchange rates | Economic indicators | Debt sustainability analysis | Staff Reports | Press releases | Algeria

Publication Date: February 04, 2014
ISBN/ISSN: 9781475566215/1934-7685 Format: Paper
Stock No: 1DZAEA2014001 Pages: 56
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