ECONOMIC HEALTH CHECK
Algeria Should Reduce Reliance on Oil, Create More Jobs, Says IMF
IMF Survey online
January 26, 2011
- Despite progress, unemployment remains high, especially among youth
- Recent investment in infrastructure, education is a positive step
- But country must do more to improve business climate, create jobs
Algeria’s economy, dominated by its oil and natural gas industry, must diversify its exports and create jobs to help tackle its problem of high youth unemployment, says the IMF.
In its annual assessment of the economy, the IMF notes that Algeria’s economic performance has been good, but that the country remains highly dependent on oil and gas and on public expenditure.
To achieve diversification, which is a key objective of the authorities, the country needs a business environment that is more conducive to private sector development, says Joël Toujas-Bernaté, the IMF’s mission chief for Algeria. In the following interview, he talks about the findings of the IMF’s recently completed analysis.
IMF Survey online: Could you paint a picture of Algeria’s economy today?
Toujas-Bernaté: The Algerian economy is dominated by its oil and gas resources, which account for 98 percent of the country’s exports. The hydrocarbon sector represents about 40–45 percent of total GDP and about two-thirds of budget revenues. Another key feature of the economy is the predominant role of the state. Ninety percent of the country’s banks are public, the hydrocarbon company is state owned, and government spending represents two-thirds of non-hydrocarbon GDP.
The country’s macroeconomic performance over the past decade has been solid. Because of relatively high oil prices combined with prudent macroeconomic policies, Algeria was able to achieve relatively strong growth, low inflation, and a sharp reduction in public and external debt. It has also accumulated large external reserves and budget resources in an oil stabilization fund, which helped to shield the country from the decline in international hydrocarbon prices in 2009. That said, major challenges remain—foremost of which is unemployment, which remains high, especially among the youth.
IMF Survey online: Youth unemployment now exceeds 20 percent in Algeria. Why?
Toujas-Bernaté: Demographic trends have played an important role. The Algerian population is young and rapidly growing, so Algeria needs much higher growth to be able to absorb new entrants in the labor market. As indicated by the analysis of others like the World Bank, there is the issue of labor market rigidity—it’s costly and difficult to hire and fire people—and there is also a skills mismatch between the demand and supply of labor. I should stress that Algeria has come a long way—a decade ago, youth unemployment exceeded 50 percent. Nevertheless, 21 percent unemployment among the young today remains very high.
IMF Survey online: How much would the economy have to grow to significantly reduce unemployment?
Toujas-Bernaté: It’s difficult to say, but the labor force is growing between 2˝ to 3 percent per year. Just to stabilize unemployment and absorb all the new entrants, Algeria probably needs growth in the nonhydrocarbon sector of at least 5 percent.
IMF Survey online: Do the authorities have a plan for developing human capital over the long term?
Toujas-Bernaté: They have made good progress—there is now universal primary education and they’re seeing high enrollment rates for primary and higher education. But they are now paying more attention to vocational training to reduce the skills mismatch, given the high number of university graduates among the unemployed. The authorities spend a substantial amount on education—about 6 percent of GDP over the past decade.
IMF Survey online: A key goal is to diversify the economy away from the dominant oil and gas sector. What is the government doing to achieve this?
Toujas-Bernaté: Diversification is the backbone of the country’s economic strategy. The government has launched a massive effort to improve infrastructure, expand access to services (such as housing, water, energy, health), and create a skilled labor force. These steps have been accompanied by a series of measures to improve access to credit for small and medium-sized companies and facilitate entrepreneurship.
These efforts are taking time to yield results, however. Today, Algeria’s exports are among the least diversified in the world, even compared to other oil producers. The economy’s long-term prospects will depend on the government’s ability to improve the business climate to allow new enterprises to emerge, to grow, and benefit from these massive infrastructure and social investments.
IMF Survey online: Is the government doing enough to encourage foreign direct investment?
Toujas-Bernaté: The country needs a business environment that is more conducive to private sector development. This was high on the agenda in the first part of the decade, but the priority shifted to delivering large public investment programs.
The Algerian authorities should continue to review their strategy about how to allow a stronger and broader private sector to emerge. The government adopted in 2009 new regulations for foreign direct investment that limit the participation of foreign investors in new projects. While the point of these regulations was to encourage new partnerships with domestic investors, what we’ve actually seen is a significant decline of already scarce foreign investment flows to Algeria.
Financial sector development is also key. Right now, Algeria’s financial sector is still dominated by public banks, and there’s clearly a need to further modernize and deepen the financial sector to facilitate access to credit. Foreign partnerships could be particularly useful in that context.
IMF Survey online: Is Algeria sufficiently integrated with the rest of the region and with Europe?
Toujas-Bernaté: Algeria has opened its trade gradually. But this has raised concerns about excessive import growth, and some recent measures aimed at reining in imports. Algeria is not a member of the World Trade Organization, it maintains relatively high customs tariffs, and does not trade much with other countries in the region. Trade liberalization could play an important role in helping Algeria’s economy become more competitive and diversified. We’ve seen this with other commodity exporters. One striking example is Chile, which was essentially a copper exporter in the early 1970s but now has well-diversified exports. Chile pushed an aggressive trade openness policy, joining major trade areas and signing numerous trade agreements such as the North American Free Trade Agreement (NAFTA).
IMF Survey online: What impact do you think the social unrest in Tunisia will have on Algerians?
Toujas-Bernaté: The two contexts are different from many standpoints—economically, politically, and socially. We saw unrest in Algeria earlier this month, triggered by significant price increases of basic food items (sugar and oil). But the authorities were able to take rapid measures to reduce these prices with the temporary elimination of custom duties and the value-added tax on those items. Nevertheless, there are still some underlying tensions related to high unemployment among the youth. If there is the perception that the country’s oil wealth is not benefiting all segments of the population, this could strain things further.
IMF Survey online: If the price of certain food staples remains high, what measures would the IMF recommend to cope with this issue over the medium term?
Toujas-Bernaté: For now, we see the adopted measures as appropriate, because the government has the resources to cover their cost, which is relatively small at about 0.3 percent of GDP. As long as these measures remain targeted on basic food items that are consumed by the poorer segments of the population, this is the correct response.
Over the longer term, however, the authorities should promote competition in the food distribution sector and avoid potential monopolistic behavior, which may have been a contributing factor to the latest price spikes. And Algeria could also develop further its agricultural sector so as to increase its immunity to large variations in international market prices.
IMF Survey online: What risks does Algeria face?
Toujas-Bernaté: If the economy remains too dependent on hydrocarbons and does not diversify, it will remain vulnerable to negative shocks on oil prices and will not be able to generate enough jobs. In the mid-1980s, when Algeria faced a large drop in oil prices, it then had to cut back on public spending. This, in turn, created social problems and led, in part, to the “lost decade” of the 1990s and political instability. The large financial resources accumulated during the last decade, thanks to prudent macroeconomic management, will help to mitigate this risk. That said, hydrocarbons bring wealth, but not jobs. Without sustained strong growth in other sectors, the discontent about high unemployment could persist.