## cr17141 ## Source details **Canonical URL:** [cr17141](https://www.imf.org/-/media/files/publications/cr/2017/cr17141.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2017/cr17141.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2017/cr17141.pdf.json) --- ### Executive Board Assessment — key messages - Directors noted the significant challenges facing the Algerian economy and commended the authorities’ ongoing efforts to adjust to the oil price shock. - A balanced policy mix along with ambitious structural reforms are important to: - ensure fiscal sustainability, - narrow external imbalances, - reduce reliance on hydrocarbons, and - raise potential growth. - Directors welcomed the authorities’ commitment to pursue sustained fiscal consolidation within a clear medium-term budget framework. - Steps supported to reduce the fiscal deficit: - raise more nonhydrocarbon revenue, - control current spending, - expand the subsidy reform while protecting the poor, - increase the efficiency of public investment and reduce its cost. - Directors generally viewed that tapping a broader range of financing options could provide room for a more gradual and growth-friendly fiscal consolidation: - prudent external borrowing, - sale of state assets, - greater exchange rate flexibility. - Structural reform priorities emphasized by Directors: - reduce red tape, - improve access to finance, - strengthen governance and transparency, - reduce skills mismatches, - improve functioning of the labor market, - foster greater labor participation of women, - further open the economy to trade and foreign direct investment. - Directors urged careful design and sequencing so reforms reinforce each other and the burden of adjustment is shared equitably. - External sector and exchange rate guidance: - net international reserves remain comfortable, but current account balance is significantly weaker than warranted by medium-term fundamentals, - greater exchange rate flexibility, fiscal consolidation, and structural reforms would help address external imbalances and support private sector development, - measures needed to deepen the official foreign exchange market and curtail parallel market activity. - Monetary and financial sector recommendations: - welcomed introduction of open market operations to manage liquidity, - central bank should phase out bank financing via the discount window without delay, - stand ready to increase the policy rate given inflationary pressures, - accelerate transition to a risk-based supervisory framework, - enhance the role of macroprudential policy, - strengthen governance of public banks, - develop a crisis resolution framework. ### Recent developments — macroeconomic outcomes and risks - Growth and inflation (percent): - Real GDP growth: 3.8 (2015); 3.5 (2016); 1.3 (2017 Est.); 0.7 (2018). - Nonhydrocarbon GDP growth: 5.0 (2015); 2.9 (2016); 1.3 (2017 Est.); 0.3 (2018). - Inflation (average): 4.8 (2015); 6.4 (2016); 4.8 (2017 Est.); 4.3 (2018). - Average inflation rose from 4.8 percent in 2015 to 6.4 percent in 2016 and stood at 6.9 percent year-on-year in March 2017. - Inflation was particularly volatile in 2016 due to large fluctuations in food prices. - Labor market: - Unemployment (end of period): 11.2 (2015); data for 2016–18 not shown in table. - Unemployment increased to 10.5 percent in September 2016 and remains particularly high among the youth (26.7 percent) and women (20.0 percent). - Fiscal developments (percent of GDP): - Total revenue: 30.8 (2015); 29.5 (2016); 34.3 (2017 Est.); 30.9 (2018). - Hydrocarbon revenue (of total): 14.3 (2015); 10.4 (2016); 14.7 (2017 Est.); 14.7 (2018). - Total expenditure: 46.6 (2015); 43.5 (2016); 37.3 (2017 Est.); 33.5 (2018). - Overall budget balance (deficit-): -15.8 (2015); -14.0 (2016); -3.0 (2017 Est.); -2.7 (2018). - Gross government debt: 8.8 (2015); 21.0 (2016); 18.3 (2017 Est.); 19.3 (2018). - Fiscal adjustment in 2016: - Overall spending was cut by 3.6 percent in nominal terms, equivalent to 5.8 percent of nonhydrocarbon GDP. - Spending cut was less than the budget target of a 9 percent nominal reduction. - Nonhydrocarbon budget deficit fell from 37.1 percent of nonhydrocarbon GDP in 2015 to 28.9 percent in 2016 (cash basis). - Overall deficit of 14.0 percent of GDP was financed mainly by drawing down savings in the oil stabilization fund, which reached its statutory floor, and by borrowing in the domestic market. - Public debt increased from 8.8 percent of GDP in 2015 to 21.0 percent following government financial operations to support two state-owned enterprises. - Payment delays increased, reflecting financing difficulties. - External sector and reserves: - Current account balance (percent of GDP): -16.6 (2015); -16.9 (2016); -11.9 (2017 Est.); -9.7 (2018). - FDI (percent of GDP): -0.4 (2015); 0.9 (2016); 1.1 (2017 Est.); 1.3 (2018). - Gross reserves (months of imports): 28.4 (2015); 22.5 (2016); 19.5 (2017 Est.); 16.7 (2018). - External debt (percent GDP): 1.8 (2015); 2.5 (2016); 2.5 (2017 Est.); 2.7 (2018). - Trade deficit widened from US$18.1 billion in 2015 to US$20.4 billion in 2016. - REER appreciated by 5.6 percent in 2016 and is significantly overvalued. - Monetary and financial sector: - Broad money (percent change): 0.3 (2015); 1.8 (2016); 7.2 (2017 Est.); 4.3 (2018). - Credit to the economy (percent change): 11.3 (2015); 9.8 (2016); 6.0 (2017 Est.); 2.0 (2018). - Banking indicators (preliminary end-2016): - Tier I solvency ratio: 15.9 percent (2015) → 16.4 percent (2016). - Ratio of gross nonperforming loans to total loans: 9.8 percent (2015) → 11.4 percent (2016). - Ratio of net nonperforming loans: 5.1 percent. - Provisioning: 55.4 percent. - Return on assets (aggregate): 1.9 percent. - Liquid assets: 27.5 percent of assets. ### Outlook and risks - Context and outlook summary: - Algeria is dealing with implications of lower oil prices for an economy highly dependent on hydrocarbons. - Lower hydrocarbon revenues have led to large current account and fiscal deficits, a steep decline in international reserves, and a near depletion of fiscal savings in the oil stabilization fund. - After a timid start, reform momentum is building: sizeable reduction in the fiscal deficit in the prior year; adoption of a medium-term budget framework; some structural reforms; work on a long-term strategy to reshape growth model. - Risks highlighted: - Planned fiscal consolidation could weigh on future activity and have implications for unemployment. - Consolidation could trigger contingent fiscal liabilities, which are multiple and interrelated. - Authorities’ wariness to borrow externally and tighter banking liquidity imply financing the deficit will be more difficult. - Structural reforms to diversify away from hydrocarbons will take time and could face public resistance. - Inflation is rising, and financial stability risks are growing. - Overall, risks remain manageable but authorities must navigate between adjusting too quickly and moving too slowly. ### Policy recommendations (staff and Directors) - Fiscal policy: - Pursue fiscal consolidation while noting some fiscal space exists to cut spending more gradually if adjustment is coupled with: - exchange rate depreciation, and - increased borrowing, including external borrowing. - A more gradual fiscal consolidation would have less impact on growth while still restoring fiscal sustainability. - Raise more nonhydrocarbon revenue, control current spending, expand subsidy reform while protecting the poor, increase efficiency and reduce cost of public investment. - Tap broader financing options, including prudent external borrowing and sale of state assets. - Structural reforms: - Wide-ranging reforms needed to reduce reliance on hydrocarbons and transform the private sector into an engine for growth. - Ensure burden of adjustment is shared equitably to foster wider ownership. - Timely action to reduce red tape, improve access to finance, strengthen governance and transparency, reduce skills mismatches, improve labor market functioning, foster greater labor participation of women, and further open the economy to trade and FDI. - Exchange rate and external policies: - Greater exchange rate flexibility to help address external imbalances and support private sector development. - Deepen the official foreign exchange market and curtail parallel market activity. - Monetary and financial policy: - Monetary policy should guard against emerging inflationary pressures and stand ready to increase the policy rate. - Phase out bank financing via the discount window without delay. - Strengthen financial sector policies: - accelerate transition to a risk-based supervisory framework, - enhance macroprudential policy, - strengthen governance of public banks, - develop a crisis resolution framework. ### Selected macroeconomic indicators and summary statistics - Population: 40.0 million; 2015 - Per capita GDP: US$ 3,966 (2016) - Quota: SDR 1,959.9 million - Gini coefficient: 0.38 (2014) - Key export markets: EU - Main exports: oil and gas - Selected indicators (values shown as in source): - Real GDP growth (percent): 3.8 (2015); 3.5 (2016); 1.3 (2017 Est.); 0.7 (2018) - Nonhydrocarbon GDP growth (percent): 5.0 (2015); 2.9 (2016); 1.3 (2017 Est.); 0.3 (2018) - Unemployment (percent, end of period): 11.2 (2015); ... (2016); ... (2017); ... (2018) - Inflation (percent, average): 4.8 (2015); 6.4 (2016); 4.8 (2017 Est.); 4.3 (2018) - Total revenue (percent of GDP): 30.8 (2015); 29.5 (2016); 34.3 (2017 Est.); 30.9 (2018) - Total expenditure (percent of GDP): 46.6 (2015); 43.5 (2016); 37.3 (2017 Est.); 33.5 (2018) - Overall budget balance (deficit-) (percent of GDP): -15.8 (2015); -14.0 (2016); -3.0 (2017 Est.); -2.7 (2018) - Gross government debt (percent of GDP): 8.8 (2015); 21.0 (2016); 18.3 (2017 Est.); 19.3 (2018) - Current account balance (percent of GDP): -16.6 (2015); -16.9 (2016); -11.9 (2017 Est.); -9.7 (2018) - Gross reserves (months of imports): 28.4 (2015); 22.5 (2016); 19.5 (2017 Est.); 16.7 (2018) - External debt (percent GDP): 1.8 (2015); 2.5 (2016); 2.5 (2017 Est.); 2.7 (2018) ### External position and reserves (highlights) - International reserves fell by US$30 billion to US$113 billion (excluding SDRs). - Reserves remained at 23 months of imports and 686 percent of the Fund’s unadjusted metric to assess reserve adequacy (ARA metric). - External debt amounted to just 2.5 percent of GDP in 2016. - The net international investment position stood at 47 percent of GDP. - Under the baseline scenario, the NIIP is projected to turn negative over the medium term, reaching -11.2 percent of GDP by 2022. - Gross external financing need (in billions of US dollars): 2012: -10.3; 2013: 0.8; 2014: 11.0; 2015: 29.6; 2016: 28.3; 2017: 23.6; 2018: 20.3; 2019: 19.3; 2020: 17.6; 2021: 16.2; 2022: 16.5. - EBA-lite results: - Current account gap of -13.2 percent of GDP in 2016. - EBA-lite external sustainability: current account gap between -6.2 and -7.6 percent of GDP in 2016 depending on NIIP stabilization assumption. - Staff estimates the overvaluation to be in the 54-115 percent range. ### Monetary and financial sector developments - Broad money increased by 1.8 percent in 2016. - Banks’ excess reserves with the central bank dried up; lower oil prices contributed to a sharp reduction in excess liquidity. - Growth in credit to the economy slowed but remained robust at 9.8 percent in 2016. - Some banks returned to the Bank of Algeria for financing; interbank lending picked up and interest rates increased. - Central bank policy and recommendations: - Central bank introduced refinancing instruments and open market operations; liquidity-absorbing operations were scaled back. - Recommendation to phase out bank financing via the discount window without delay. - BA should strengthen liquidity forecasting and stand ready to increase its policy rate to anchor inflation expectations around its target of 4 percent. - Strengthen macroprudential policy and accelerate transition to a risk-based supervisory framework. - Financial stability indicators (end-2016): - Tier I solvency ratio: 16.4 percent. - Ratio of gross NPLs to total loans: 11.4 percent. - Ratio of net NPLs: 5.1 percent. - Provisioning: 55.4 percent. - Return on assets: 1.9 percent. - Liquid assets: 27.5 percent of assets. ### Alternative versus Baseline scenarios — design and outcomes - Design differences: - Alternative scenario uses a more gradual fiscal consolidation combined with greater exchange rate depreciation (REER depreciation of 10 percent over the projection period) and more ambitious structural reforms. - Tax revenues in the Alternative rise to 19.5 percent of nonhydrocarbon GDP in 2022 (compared to 18.7 percent in the baseline). - Alternative finances larger deficits with external as well as domestic borrowing. - Fiscal multipliers used: - Government consumption: Year 1 = 0.6; Year 2 = 0.1; Year 3 = 0.1; Year 4 = 0.0; Year 5 = 0.0; Year 6 = 0.0 - Subsidies: Year 1 = 0.6; Year 2 = 0.1; Year 3 = 0.1; Year 4 = 0.0; Year 5 = 0.0; Year 6 = 0.0 - Capital expenditure: Year 1 = 0.4; Year 2 = 0.2; Year 3 = 0.2; Year 4 = 0.4; Year 5 = 0.4; Year 6 = 0.0 - Tax revenue: Year 1 = 0.0; Year 2 = 0.0; Year 3 = 0.0; Year 4 = 0.0; Year 5 = 0.0; Year 6 = 0.0 - Comparative outcomes: - Growth: Baseline: growth slows sharply under the MTBF; Alternative: growth declines more slowly and recovers toward the end of the projection period. - Fiscal balance: Baseline: deficit reaches equilibrium by 2020; Alternative: deficit declines more gradually, approaching equilibrium by 2022. - Fiscal breakeven price: Baseline: declines below the WEO oil price forecast in 2022; Alternative: declines more gradually, approaching the WEO oil price forecast in 2022. - Reserves: Baseline: decline to 8 months of imports by 2022; Alternative: remain above 11 months of imports by 2022. ### Debt levels, composition, and public financial management - Debt levels and composition (end-2016): - Total central government debt: US$32.3 billion; DZD 3,582.1 billion; 21.0 percent of GDP. - External public debt: US$1.6 billion; DZD 174.8 billion; 1.0 percent of GDP. - Domestic public debt: US$30.7 billion; DZD 3,407.3 billion; 19.9 percent of GDP. - Treasury securities: US$8.8 billion; DZD 977.5 billion; 5.7 percent of GDP. - National Bond for Economic Growth (2016): US$5.1 billion; DZD 569.1 billion; 3.3 percent of GDP. - Debt from financial support operations: US$16.8 billion; DZD 1,860.7 billion; 10.9 percent of GDP. - Government-guaranteed domestic debt: US$28.5 billion; DZD 3,163.3 billion; 18.5 percent of GDP. - Recent drivers of debt increase: - Debt rose from 8.8 percent of GDP in 2015 to 21.0 percent in 2016 following purchase of utility company debt and issuance of bonds to the state-owned oil company to offset subsidized fuel losses. - Fiscal consolidation and projections: - Under the authorities’ fiscal consolidation plan, gross financing needs decline sharply, averaging 2.3 percent of GDP over the medium term. - Authorities are assumed to deplete fiscal savings in 2017; thereafter financing needs met by domestic debt issuance and deposits of public entities. - Staff projects government debt to decline to 14.6 percent of GDP by 2022 under the MTBF (staff assessment of fiscal space). - Public financial management recommendations: - Prepare sectoral medium-term expenditure frameworks (MTEFs). - Adopt a new organic budget law for multiyear budgeting and ensure debt is used only to finance investment spending. - Improve capacity to monitor budget execution and cash management; develop consolidated public sector flow and stock statistics including SOE debt and guarantees. - Fiscal risks identified: - Government guarantees to SOEs, potential recapitalization needs of public banks, implicit SOE commitments, and pension system pressures. - Historical fiscal costs: Treasury operations to support public banks amounted to 14.8 percent of 2012 GDP (1991–2012). In 2016, materialization of fiscal risks cost an estimated 8.9 percent of GDP. ### Staff appraisal — summary conclusions - Key challenges: - Fiscal and current account deficits remain large despite sizeable fiscal adjustment in 2016. - Savings in the oil stabilization fund have been nearly depleted. - Financing conditions have become more difficult, and payment delays have increased. - International reserves remain comfortable but continue to decline rapidly. - Excess liquidity in the banking system has dried up, and inflation is well above the Bank of Algeria’s target of 4 percent. - Overall growth has been resilient, but activity in the nonhydrocarbon sector has slowed; unemployment remains high, especially among youth and women. - Policy priorities: - Undertake ambitious and sustained fiscal consolidation to restore fiscal sustainability, ensure intergenerational equity, and support external rebalancing. - Use available fiscal space to consider a more gradual, growth-friendly adjustment complemented by broader financing options and further exchange rate depreciation. - Implement wide-ranging structural reforms to reduce reliance on hydrocarbons and raise potential growth. - Gradually correct the REER through fiscal consolidation, structural reforms, and nominal depreciation while curtailing the parallel foreign exchange market. - Strengthen monetary and financial sector policy: phase out discount window financing, stand ready to increase policy rate, accelerate risk-based supervision, enhance macroprudential policy, strengthen governance of public banks, and develop a crisis resolution framework. *Staff Report for the 2017 Article IV Consultation — Algeria (May 11, 2017).* ### 6.4 percent in 2016 and stood at 7.7 percent year-on-year in February 2017. Unemployment was ### cr17141 - 6.4 percent in 2016 and stood at 7.7 percent year-on-year in February 2017. Unemployment was ### Executive Board Assessment — key messages - Directors noted the significant challenges facing the Algerian economy and commended the authorities’ ongoing efforts to adjust to the oil price shock. - A balanced policy mix along with ambitious structural reforms are important to: - ensure fiscal sustainability, - narrow external imbalances, - reduce reliance on hydrocarbons, and - raise potential growth. - Directors welcomed the authorities’ commitment to pursue sustained fiscal consolidation within a clear medium-term budget framework. - Steps supported to reduce the fiscal deficit: - raise more nonhydrocarbon revenue, - control current spending, - expand the subsidy reform while protecting the poor, - increase the efficiency of public investment and reduce its cost. - Directors generally viewed that tapping a broader range of financing options could provide room for a more gradual and growth-friendly fiscal consolidation: - prudent external borrowing, - sale of state assets, - greater exchange rate flexibility. - Structural reform priorities emphasized by Directors: - reduce red tape, - improve access to finance, - strengthen governance and transparency, - reduce skills mismatches, - improve functioning of the labor market, - foster greater labor participation of women, - further open the economy to trade and foreign direct investment. - Directors urged careful design and sequencing so reforms reinforce each other and the burden of adjustment is shared equitably. - External sector and exchange rate guidance: - net international reserves remain comfortable, but current account balance is significantly weaker than warranted by medium-term fundamentals, - greater exchange rate flexibility, fiscal consolidation, and structural reforms would help address external imbalances and support private sector development, - measures needed to deepen the official foreign exchange market and curtail parallel market activity. - Monetary and financial sector recommendations: - welcomed introduction of open market operations to manage liquidity, - central bank should phase out bank financing via the discount window without delay, - stand ready to increase the policy rate given inflationary pressures, - accelerate transition to a risk-based supervisory framework, - enhance the role of macroprudential policy, - strengthen governance of public banks, - develop a crisis resolution framework. ### Recent developments — macroeconomic outcomes and risks - Growth and inflation: - Real GDP growth (percent): 3.8 in 2015; 3.5 in 2016; 1.3 in 2017 (Est.); 0.7 in 2018. - Nonhydrocarbon GDP growth (percent): 5.0 in 2015; 2.9 in 2016; 1.3 in 2017 (Est.); 0.3 in 2018. - Inflation (percent, average): 4.8 in 2015; 6.4 in 2016; 4.8 in 2017 (Est.); 4.3 in 2018. - Average inflation rose from 4.8 percent in 2015 to 6.4 percent in 2016 and stood at 6.9 percent year-on-year in March 2017. - Inflation was particularly volatile in 2016 due to large fluctuations in food prices. - Labor market: - Unemployment (percent, end of period): 11.2 in 2015; data for 2016–18 not shown in table. - Unemployment increased to 10.5 percent in September 2016 and remains particularly high among the youth (26.7 percent) and women (20.0 percent). - Fiscal developments: - Central government finances (percent of GDP): - Total revenue: 30.8 in 2015; 29.5 in 2016; 34.3 in 2017 (Est.); 30.9 in 2018. - Of which, hydrocarbon: 14.3 in 2015; 10.4 in 2016; 14.7 in 2017 (Est.); 14.7 in 2018. - Total expenditure: 46.6 in 2015; 43.5 in 2016; 37.3 in 2017 (Est.); 33.5 in 2018. - Overall budget balance (deficit-): -15.8 in 2015; -14.0 in 2016; -3.0 in 2017 (Est.); -2.7 in 2018. - Gross government debt: 8.8 in 2015; 21.0 in 2016; 18.3 in 2017 (Est.); 19.3 in 2018. - Fiscal adjustment in 2016: - Overall spending was cut by 3.6 percent in nominal terms, equivalent to 5.8 percent of nonhydrocarbon GDP. - Spending cut was less than the budget target of a 9 percent nominal reduction. - Nonhydrocarbon budget deficit fell from 37.1 percent of nonhydrocarbon GDP in 2015 to 28.9 percent in 2016 (cash basis). - Overall deficit of 14.0 percent of GDP was financed mainly by drawing down savings in the oil stabilization fund, which reached its statutory floor, and by borrowing in the domestic market. - Public debt increased from 8.8 percent of GDP in 2015 to 21.0 percent following government financial operations to support two state-owned enterprises. - Payment delays increased, reflecting financing difficulties. - External sector and reserves: - Balance of payments indicators: - Current account balance (percent of GDP): -16.6 in 2015; -16.9 in 2016; -11.9 in 2017 (Est.); -9.7 in 2018. - FDI (percent of GDP): -0.4 in 2015; 0.9 in 2016; 1.1 in 2017 (Est.); 1.3 in 2018. - Gross reserves (months of imports): 28.4 in 2015; 22.5 in 2016; 19.5 in 2017 (Est.); 16.7 in 2018. - External debt (percent GDP): 1.8 in 2015; 2.5 in 2016; 2.5 in 2017 (Est.); 2.7 in 2018. - Trade and current account: - Trade deficit widened from US$18.1 billion in 2015 to US$20.4 billion in 2016. - As percent of GDP the current account deficit widened slightly to 16.9 percent of GDP in 2016. - Staff estimates of the current account norm range from a surplus of 1.4 percent of GDP to a deficit of 3.7 percent. - The nominal effective exchange rate (NEER) was broadly stable in 2016 while the real effective exchange rate (REER) appreciated by 5.6 percent. - REER is significantly overvalued, hurting competitiveness. - Monetary and financial sector: - Money and credit: - Broad money (percent change): 0.3 in 2015; 1.8 in 2016; 7.2 in 2017 (Est.); 4.3 in 2018. - Credit to the economy (percent change): 11.3 in 2015; 9.8 in 2016; 6.0 in 2017 (Est.); 2.0 in 2018. - Banking sector: - Banking sector as a whole is adequately capitalized and profitable, but financial stability risks are growing as a result of the oil price shock. - Central bank has reintroduced refinancing instruments and introduced open market operations to manage liquidity. - Recommendation to phase out bank financing via the discount window without delay. ### Outlook and risks - Context and outlook summary: - Algeria is dealing with implications of lower oil prices for an economy highly dependent on hydrocarbons. - Lower hydrocarbon revenues have led to large current account and fiscal deficits, a steep decline in international reserves (although they remain high), and a near depletion of fiscal savings in the oil stabilization fund. - After a timid start, reform momentum is building: sizeable reduction in the fiscal deficit in the prior year; adoption of a medium-term budget framework; some structural reforms; work on a long-term strategy to reshape growth model. - Risks highlighted: - Planned fiscal consolidation could weigh on future activity and have implications for unemployment. - Consolidation could trigger contingent fiscal liabilities, which are multiple and interrelated. - Authorities’ wariness to borrow externally and tighter banking liquidity imply financing the deficit will be more difficult. - Structural reforms to diversify away from hydrocarbons will take time and could face public resistance. - Inflation is rising, and financial stability risks are growing. - Overall, risks remain manageable but authorities must navigate between adjusting too quickly and moving too slowly. ### Policy recommendations (staff and Directors) - Fiscal policy: - Pursue fiscal consolidation while noting some fiscal space exists to cut spending more gradually if adjustment is coupled with: - exchange rate depreciation, and - increased borrowing, including external borrowing. - A more gradual fiscal consolidation would have less impact on growth while still restoring fiscal sustainability. - Raise more nonhydrocarbon revenue, control current spending, expand subsidy reform while protecting the poor, increase efficiency and reduce cost of public investment. - Tap broader financing options, including prudent external borrowing and sale of state assets. - Structural reforms: - Wide-ranging reforms needed to reduce reliance on hydrocarbons and transform the private sector into an engine for growth. - Ensure burden of adjustment is shared equitably to foster wider ownership. - Timely action to reduce red tape, improve access to finance, strengthen governance and transparency, reduce skills mismatches, improve labor market functioning, foster greater labor participation of women, and further open the economy to trade and FDI. - Exchange rate and external policies: - Greater exchange rate flexibility to help address external imbalances and support private sector development. - Deepen the official foreign exchange market and curtail parallel market activity. - Monetary and financial policy: - Monetary policy should guard against emerging inflationary pressures and stand ready to increase the policy rate. - Phase out bank financing via the discount window without delay. - Strengthen financial sector policies: - accelerate transition to a risk-based supervisory framework, - enhance macroprudential policy, - strengthen governance of public banks, - develop a crisis resolution framework. ### Selected macroeconomic indicators and summary statistics - Population: 40.0 million; 2015 - Per capita GDP: US$ 3,966 (2016) - Quota: SDR 1,959.9 million - Gini coefficient: 0.38 (2014) - Key export markets: EU - Main exports: oil and gas - Selected indicator table (values shown as in source): - Real GDP growth (percent): 3.8 (2015); 3.5 (2016); 1.3 (2017 Est.); 0.7 (2018) - Nonhydrocarbon GDP growth (percent): 5.0 (2015); 2.9 (2016); 1.3 (2017 Est.); 0.3 (2018) - Unemployment (percent, end of period): 11.2 (2015); ... (2016); ... (2017); ... (2018) - Inflation (percent, average): 4.8 (2015); 6.4 (2016); 4.8 (2017 Est.); 4.3 (2018) - Total revenue (percent of GDP): 30.8 (2015); 29.5 (2016); 34.3 (2017 Est.); 30.9 (2018) - Total expenditure (percent of GDP): 46.6 (2015); 43.5 (2016); 37.3 (2017 Est.); 33.5 (2018) - Overall budget balance (deficit-) (percent of GDP): -15.8 (2015); -14.0 (2016); -3.0 (2017 Est.); -2.7 (2018) - Gross government debt (percent of GDP): 8.8 (2015); 21.0 (2016); 18.3 (2017 Est.); 19.3 (2018) - Current account balance (percent of GDP): -16.6 (2015); -16.9 (2016); -11.9 (2017 Est.); -9.7 (2018) - Gross reserves (months of imports): 28.4 (2015); 22.5 (2016); 19.5 (2017 Est.); 16.7 (2018) - External debt (percent GDP): 1.8 (2015); 2.5 (2016); 2.5 (2017 Est.); 2.7 (2018) *Staff Report for the 2017 Article IV Consultation — Algeria (May 11, 2017).* ### 6. Nevertheless, the net international investment position, though weakened, remains ### 6. Nevertheless, the net international investment position, though weakened, remains ### External position and reserves - International reserves fell by US$30 billion to US$113 billion (excluding SDRs). - Reserves remained at 23 months of imports and 686 percent of the Fund’s unadjusted metric to assess reserve adequacy (ARA metric). - External debt amounted to just 2.5 percent of GDP in 2016. - The net international investment position stood at 47 percent of GDP. ### Monetary and financial sector developments - Broad money increased by 1.8 percent in 2016. - Banks’ excess reserves with the central bank dried up; lower oil prices contributed to a sharp reduction in excess liquidity. - Growth in credit to the economy slowed but remained robust at 9.8 percent in 2016. - Some banks returned to the Bank of Algeria for financing; interbank lending picked up and interest rates increased. - Banking system indicators (preliminary end-2016 data): - Tier I solvency ratio: up from 15.9 percent in 2015 to 16.4 percent in 2016 (mainly due to the recapitalization of a public bank). - Ratio of gross nonperforming loans to total loans: increased from 9.8 percent to 11.4 percent. - Ratio of net nonperforming loans: 5.1 percent. - Provisioning: 55.4 percent. - Return on assets (aggregate): 1.9 percent. - Liquid assets: 27.5 percent of assets (roughly unchanged from 2015 and sufficient to cover more than two-thirds of banks’ short-term liabilities). - The central bank introduced refinancing instruments and lowered interest rates; liquidity-absorbing operations were scaled back. ### Outlook and risk assessment - Baseline scenario assumptions: - Fiscal adjustment envisaged in the authorities’ 2017 and medium-term budget. - Continuation of current structural reform efforts. - A nearly stable real effective exchange rate over the medium term. - Staff view: This policy mix would help restore fiscal and external balances, but significant spending cuts would weigh heavily on growth. - Alternative scenario: A more gradual consolidation combined with more ambitious structural reforms and further exchange rate depreciation would likely result in higher growth and still be consistent with maintaining debt sustainability. - Risks are tilted to the downside. Key elements from the Risk Assessment Matrix: - Persistently lower energy prices: Relative likelihood = Low; Expected impact = High. Impact: Lower oil and gas prices would worsen the current account and fiscal deficits. Policy response: Staff’s recommended adjustment path leaves room to accommodate fiscal risks, including lower oil prices. - Weaker-than-expected global growth: Relative likelihood = Medium; Expected impact = High. Impact: Would hurt Algeria through lower oil prices; slower growth in Europe could negatively affect demand for Algeria’s gas exports; nonhydrocarbon exports are a small fraction of total exports so limited balance of payments impact. Financial market spillovers limited given Algeria’s limited global financial integration. - Policy and geopolitical uncertainties / regional instability: Relative likelihood = High; Expected impact = Medium/High. Impact: Heightened security concerns may indirectly benefit Algeria via higher oil prices, but regional instability would increase pressure to maintain security and social spending, complicating fiscal consolidation. Direct impact limited by low trade and financial flows with the region. - Algeria-specific risk—difficulties garnering political and social consensus around reforms: Relative likelihood = Medium; Expected impact = High. Impact: Could hamper fiscal consolidation and structural reforms, leading to a more abrupt adjustment. Policy response: Effective communications campaign, equitable design of reforms, targeted cash-transfer system to mitigate impacts on the poor, and strengthened anti-corruption efforts. ### Policy discussions and fiscal consolidation - Authorities’ actions since the 2016 Article IV consultation: - Achieved a sizeable reduction in the fiscal deficit in 2016. - Adopted an ambitious fiscal consolidation plan for 2017–19 and a medium-term budget framework (MTBF) with a clear medium-term anchor. - Progressed on improving the business environment and developing a long-term strategy to foster private sector activity and economic diversification. - The central bank has adapted monetary policy instruments to tighter liquidity. - Staff assessment: The authorities’ policy mix appears overly restrictive by financing the deficit with domestic resources only and maintaining no further exchange rate depreciation. Staff suggests there is some fiscal space for a more gradual consolidation if combined with: - Further exchange rate depreciation (to address external imbalances, support private sector development, and raise oil revenue in local currency). - A less restrictive financing strategy that includes external borrowing. - More ambitious structural reforms to raise potential growth. - Key features of the authorities’ fiscal plan (MTBF) and related numbers: - Current spending has averaged 26 percent of GDP since 2009. The MTBF aims to reduce current spending to 20 percent of GDP by 2020. The government intends to limit new hiring to strategic sectors and rein in other operating costs while preserving social transfers. - Capital spending has averaged 15 percent of GDP since 2009. The authorities aim to reduce capital spending to 10 percent of GDP by 2020 while increasing investment efficiency; staff stressed the need to preserve investment in health, education, and well-targeted safety nets. - Subsidy reform: Government initiated subsidy reform in 2016 by increasing prices of fuel, natural gas, and electricity; the 2017 budget law raised fuel prices further. The government plans to deepen subsidy reform while introducing a targeted cash transfer system to protect the most vulnerable. - Tax measures: The 2017 budget raised VAT rates by two points to 9 and 19 percent and increased taxes on tobacco and a range of luxury goods. Authorities intend to further increase nonhydrocarbon revenues by rationalizing tax exemptions and strengthening tax administration. - Risks from the MTBF: - The degree of fiscal consolidation in the MTBF is very ambitious and risks damaging growth. The authorities aim to bring the deficit close to zero by 2019. - Staff projects that, if the MTBF is implemented, nonhydrocarbon growth will slow to close to zero in 2018. - Fiscal space and debt outlook: - Staff’s assessment: Algeria has some fiscal space. Fiscal savings have been nearly depleted, but public debt remains low and external debt is nearly nonexistent. - Public sector gross financing needs decline sharply under the MTBF and remain manageable even under more expansionary scenarios simulated by staff. Debt levels decline under the MTBF and remain well below benchmark levels for emerging markets in expansionary scenarios. *Source: IMF staff report excerpt (cr17141).* ### Box 2. Authorities’ Response to Past IMF Recommendations ### Box 2. Authorities’ Response to Past IMF Recommendations ### Recommendation implementation: overview - Pursue fiscal consolidation - The authorities reduced the fiscal deficit in 2016 despite a large drop in hydrocarbon revenues. The medium-term budget framework calls for significant fiscal consolidation over the next three years. - Strengthen public financial management - The authorities adopted a medium-term budget framework and closed special treasury accounts that posed significant fiscal risk. - Mobilize more nonhydrocarbon revenues - The 2017 budget law raised VAT rates and increased taxes on tobacco and a range of luxury goods. The authorities are making efforts to improve tax administration. More needs to be done to reduce tax exemptions. - Reduce public investment spending and improve its efficiency - Public investment pending was cut significantly in 2016. Further cuts are envisioned under the medium-term budget framework. - Contain the wage bill - The authorities have limited new public sector hiring to strategic sectors. - Gradually reduce fuel subsidies and develop a targeted cash-transfer system - The authorities initiated subsidy reform in 2016 by raising the prices of fuel, electricity, and natural gas. They increased fuel prices further in 2017 and intend to expand subsidy reforms to other products while putting in place a cash-transfer system. - Borrow more to meet financing needs, including external borrowing - The government issued a domestic sovereign bond in 2016 and borrowed €900 million from the African Development Bank. However, regular Treasury bill issuance contributed little to the financing of the deficit, and there is reluctance to borrow more externally. - Implement wide-ranging structural reforms - The authorities have taken steps to improve the business environment, as evidenced by Algeria's improvement in the 2017 Doing Business ranking. The government is fleshing out a broad strategy to reshape the country's growth model. - Adopt supportive exchange rate, monetary, and financial policies - Pursue further real depreciation of the dinar: The real effective exchange rate depreciated 7.4 percent in 2015, but it appreciated 3.7 percent in 2016 and remains significantly overvalued. - Adjust to the changing liquidity environment while guarding against inflation: The central bank has strengthened its liquidity forecasting capabilities and reintroduced refinancing instruments. - Strengthen the prudential framework and improve crisis preparedness and management: A stress test exercise launched at the end of 2015 has yet to be completed. ### Baseline and alternative scenario key statistics (selected) - Total GDP growth (percent) - Baseline: 2016 = 3.5; 2017 = 1.3; 2018 = 0.7; 2022 = 2.3 - Alternative: 2017 = 2.7; 2018 = 2.2; 2022 = 4.2 - Nonhydrocarbon GDP growth (percent) - Baseline: 2016 = 2.9; 2017 = 1.3; 2018 = 0.3; 2022 = 2.3 - Alternative: 2017 = 3.0; 2018 = 2.2; 2022 = 4.4 - International reserves (US$ billion) - Baseline: 2016 = 112.9; 2017 = 93.3; 2018 = 79.0; 2022 = 37.8 - Alternative: 2017 = 95.5; 2018 = 84.1; 2022 = 58.1 - Public debt (percent of GDP) - Baseline: 2016 = 21.0; 2017 = 18.3; 2018 = 19.3; 2022 = 14.6 - Alternative: 2017 = 21.2; 2018 = 25.9; 2022 = 31.0 ### Financing strategy and fiscal space - Since 2009, the government has financed deficits mainly by drawing down fiscal savings and tapping the deposits of public entities held at the Treasury. - Staff projects government debt to decline to 14.6 percent of GDP by 2022 under the MTBF. - Given its low debt, Algeria can afford to borrow more. An increase in domestic debt issuance would support the development of incipient financial markets. - To avoid excessive crowding out in a tighter liquidity environment and to shore up reserves, the government could also borrow externally; tapping international markets would require careful preparation and overcoming resistance to external debt. - Additional financing options suggested: - Transparently opening the capital of selected state-owned enterprises, including public banks, to provide financing and develop the stock market and improve corporate governance. - Relaxing the 51-49 rule requiring majority Algerian ownership in foreign investments (staff encouraged but authorities reluctant). ### Public financial management and fiscal risks - Recommended reforms to support fiscal adjustment and governance: - Prepare sectoral medium-term expenditure frameworks (MTEFs) consistent with an overall MTEF. - Adopt a new organic budget law to provide a legal basis for multiyear budgeting and ensure debt is used only to finance investment spending. - Improve capacity to monitor budget execution and make upstream adjustments in the expenditure chain to minimize payment arrears. - Improve forecasting and cash management; regularly communicate treasury cash flow projections to the Bank of Algeria (BA). - Develop consolidated public sector flow and stock statistics including the debt of state-owned enterprises and government guarantees. - Fiscal risks identified - Government guarantees of loans to state-owned enterprises, potential need to recapitalize public banks, implicit commitments to state-owned enterprises, and financial difficulties of the state-run pension system. - Historical fiscal costs: - Between 1991 and 2012, Treasury operations to support public banks amounted to 14.8 percent of 2012 GDP. - In 2016, the materialization of fiscal risks cost an estimated 8.9 percent of GDP, mainly reflecting two operations: the government’s purchase of debt owed by a public utility company to a public bank, and the issuance of bonds to the state-owned oil company to compensate for losses from selling imported refined fuel domestically at subsidized prices. ### Authorities’ views (as summarized) - Authorities may reconsider the composition of spending to make adjustment more growth-friendly, but do not intend to raise overall spending caps in the MTBF. - Prefer domestic savings drawdowns and see significant fiscal consolidation as necessary to reduce financing needs and minimize crowding out; do not plan to relax the 51-49 rule at this stage. - Noted past difficulties in selling state-owned assets and highlighted large industrial projects in the pipeline to support nonhydrocarbon activity. - Acknowledged fiscal risks and agreed they need close monitoring, but said developing consolidated public sector statistics would take time. ### Structural reforms: priorities and sequencing (staff recommendations) - Rationale: Structural impediments are multiple and intertwined; Algeria ranks behind regional peers and emerging markets in almost all key structural reform areas. - Policy priorities and recommendations: - Reduce excessive bureaucracy and strengthen institutional and legal frameworks - Simplify administrative procedures; accelerate transition to a digital economy. - Strengthen protection of property and contractual rights; speed settlement of contract disputes and bankruptcy proceedings. - Strengthen competition in product markets - Reduce barriers to entry and exit; privatize some nonstrategic public enterprises that pose implicit barriers to entry. - Expand subsidy reform; strengthen powers of the competition authority. - Open the economy to more trade and foreign investment - Relaxing the 51-49 rule could strengthen competition, lead to technology transfers, and make Algerian businesses more competitive. - Avoid import licenses as they add to inflationary pressures and introduce distortions and rent-seeking; pursue WTO accession. - Ensure adequate access to financing for businesses - Lending to the private sector represents only 24 percent of GDP. - Promote competition in the banking sector; protect creditors’ rights; modernize bankruptcy framework; improve procedures for resolving nonperforming loans. - Reduce widespread interest rate subsidies for investment loans to increase attractiveness of capital markets and strengthen monetary policy transmission. - Consider opening up capital of certain large public enterprises and banks. - Improve the functioning of the labor market - Address costly hiring and firing regulations, high payroll taxes, skills mismatches, strict unemployment insurance eligibility, and excessive wage hikes relative to productivity. - Assess active labor market policies; improve unemployment benefit system; develop closer ties between education and the private sector; support greater labor market participation of women. - Sequencing and implementation advice - Avoid a "big bang" approach; adopt an intermediate approach that gradually implements reforms across many areas while paying close attention to sequencing and complementarities. - Strengthening legal and governance frameworks should precede privatization efforts; product market reforms and opening to FDI should be implemented together where complementarities exist. - Reforms should be started without delay and steadily implemented, as they will take time to bear fruit. *Source: IMF staff calculations.* ### 25. Structural reforms should be designed to ensure that the burden of adjustment is ### 25. Structural reforms should be designed to ensure that the burden of adjustment is borne equitably. ### Design and distributional considerations for structural reforms - Reforms should be carefully designed bearing in mind their distributional impacts. - Fiscal reforms have a key role to play to ensure equity in sharing the potential costs of the adjustment. - Examples and recommended approaches: - Energy subsidies, which are described as costly and highly regressive, should be gradually replaced with targeted monetary transfers. - Eliminating tax exemptions and strengthening tax administration would help make the tax system more inclusive while increasing nonhydrocarbon revenues. - Reforms to increase the flexibility of the labor market and jumpstart private sector growth should be preceded by a review of the current unemployment benefit system to increase its coverage. - Strengthen anti-corruption efforts, including by mobilizing the framework for anti-money laundering and combating the financing of terrorism (AML/CFT). - Macroeconomic policy stance: - Given the currently weak macroeconomic environment and the potential for reform resistance, macroeconomic policies should support reforms, including by using the available fiscal space to cushion transitory costs. ### Authorities’ views on structural reforms - Agreement points: - Wide-ranging structural reforms are necessary to change the growth model, and such reforms should proceed at a gradual but steady pace. - Institutional and legal frameworks are not well adapted to a market-based economy and need revamping. - Measures taken or in train (as highlighted by the authorities): - A new investment code. - A draft law on private-public partnerships. - A new custom code aiming at streamlining procedures and reducing administrative delays. - Expansion of the system of import licenses to cover twenty new products that are manufactured domestically, with an intent to ensure that imports meet appropriate standards. - Views on constraints and priorities: - They argued that access to credit was not a major problem for many SMEs but that entrepreneurs often lacked managerial skills, and students, for cultural reasons, tended to seek skills more suitable for the public sector. - They expressed wariness about possible tradeoffs between improving the flexibility of the labor market and protecting employee rights, and noted that active labor market policies helped create many jobs and a burgeoning private sector dynamic. ### Supportive exchange rate, monetary, and financial policies — Exchange rate policy - Measures needed to deepen the official foreign exchange market and curtail the parallel market: - Diversify the supply of foreign currencies on the interbank market through: - A relaxation of surrender requirements relating to repatriation of export earnings. - A reduction in the de facto high compulsory reserve ratio on foreign currency deposits. - Reduce the premium on the parallel foreign exchange market, which stands at about 60 percent. - Raise the indicative foreign exchange allocation ceilings for individuals. - Note: Algeria’s indicative foreign exchange allocation ceilings are the lowest in the region. (See IMF Country Report No. 13/47.) - Role of exchange rate adjustment: - Further depreciation of the dinar also has a key role to play to support the fiscal and external adjustment. - Various methodologies suggest that the REER remains significantly overvalued (Annex III). - While most of the adjustment to correct the overvaluation should come from fiscal consolidation and structural reforms, further depreciation of the nominal exchange rate, combined with efforts to gradually eliminate the parallel market, should also play a role. - Expected effects of a weaker currency: - Increase hydrocarbon revenues in dinars. - Reduce demand for imports. - Help restore fiscal sustainability and external balance while supporting diversification of the economy in the medium term. - Staff analysis suggests that a gradual nominal depreciation should not cause significant inflationary pressures in the short term. (See accompanying Selected Issues Paper: “Determinants of Inflation.”) ### Monetary policy - Recent developments: - The BA has reintroduced refinancing instruments, with open market operations as the main tool, after more than a decade of monetary policy focused on mopping up structural excess liquidity. - Lower oil prices have caused excess liquidity to dry up, allowing the BA to regain control over liquidity conditions and short-term interest rates. - Recommended actions: - Strengthen liquidity forecasting and management capabilities, in coordination with the Treasury, and capacity for evaluating collateral. - Discourage access to the discount window to reinforce the monetary policy transmission mechanism; the discount window rate should rapidly be set higher than the rate of the marginal lending facility. - The BA should stand ready to increase its policy rate to anchor inflation expectations around its target of 4 percent. - Introduction of open market operations allows the BA to establish a new policy rate as the benchmark in the interbank market; because this transmission channel is new and untested, the BA should adopt a tightening bias given rising inflation, robust credit growth, and inflationary effects of recent and planned measures (VAT increases, subsidy reform), pending assessment of planned fiscal consolidation’s impact on short-term inflationary pressures. ### Financial sector policy - Current situation and risks: - The oil price shock has had only a moderate impact to date, but financial stability risks are increasing. - The banking sector is dominated by public banks, which represent 87 percent of total banking assets. - The sector remains adequately capitalized and profitable, but the oil price shock has increased liquidity, interest rate, and credit risks. - Recent increase in payment delays by the government could translate into a sudden rise in impaired loans. - An abrupt fiscal consolidation that leads to a significant slowdown in the nonhydrocarbon sector would also increase credit risks. - Prudential framework enhancements needed: - Monitor evolution of risks within each bank and the system through more frequent liquidity and solvency stress tests; complete the stress test launched in 2015 as quickly as possible. - Amend existing regulations to include more detailed governance requirements for state-owned banks. - Create a level playing field among all banks (public and private) to ensure government interventions do not amount to regulatory forbearance. - Strengthen the macroprudential framework, particularly given higher liquidity risks: - Develop a systemic risk analysis framework. - Improve data quality. - Adopt a toolbox of macroprudential instruments to counter the rising trend in systemic risk. - Crisis preparedness and resolution: - A crisis resolution framework that clearly defines roles and responsibilities is lacking. - Current bank resolution options are limited to liquidation of insolvent banks under the general bankruptcy regime. - Recommendations: put in place an explicit bank resolution framework and strengthen the general business insolvency regime. ### Authorities’ views on exchange rate, monetary, and financial policies - Exchange rate and foreign exchange market: - Authorities agreed the dinar was overvalued and that correcting the overvaluation should primarily come from fiscal consolidation and structural reforms, together with some nominal depreciation. - They expressed concerns about allowing further depreciation until a foreign exchange forward market is in place for importers to hedge exchange rate risk (IMF staff provided technical assistance in this area). - They are open to raising indicative foreign exchange allocation ceilings but are concerned additional foreign exchange could feed the parallel market. - To help develop the interbank foreign exchange market, they have not excluded the possibility of relaxing surrender requirements. - Inflation and monetary policy: - They agreed inflation developments should be watched closely but stressed inflation was driven mostly by structural supply factors; staff emphasized that supply-driven inflation could feed into inflation expectations, which the central bank needs to anchor around its target. - With the introduction of open market operations, they plan to gradually phase out the discount window. - Macroprudential priorities: - Indicated that strengthening the macroprudential framework would be a priority in 2017. ### Staff appraisal — key conclusions and policy recommendations - Economic context and challenges: - Nearly three years after the onset of the oil price shock, Algeria continues to face significant challenges: - Fiscal and current account deficits remain large despite sizeable fiscal adjustment in 2016. - Savings in the oil stabilization fund have been nearly depleted. - Financing conditions have become more difficult, and payment delays have increased. - International reserves remain comfortable but continue to decline rapidly. - Excess liquidity in the banking system has dried up, and inflation is well above the Bank of Algeria’s target of 4 percent. - Overall growth has been resilient, but activity in the nonhydrocarbon sector has slowed. - Unemployment has increased and remains particularly high among the youth and women. - Fiscal policy: - Algeria must undertake ambitious and sustained fiscal consolidation to restore fiscal sustainability, ensure intergenerational equity, and support external rebalancing. - Authorities have adopted for the first time a medium-term budget framework and intend to pursue consolidation by controlling the wage bill, expanding subsidy reform while protecting the poor, mobilizing more nonhydrocarbon revenues, increasing the efficiency of investment and reducing its cost — broadly in line with staff advice. - There is some fiscal space to pursue a more gradual, growth friendly fiscal adjustment: - The consolidation in the medium-term budget framework is described as extremely ambitious. - Given relatively low levels of debt, staff believes Algeria could cut spending more gradually, with less impact on growth and employment. - More gradual spending cuts would be possible if Algeria considered tapping a broader range of financing options, including external borrowing and the sale of state assets, and allowed further exchange rate depreciation. - Structural reforms: - Wide-ranging structural reforms are needed to reduce reliance on hydrocarbons and transform the private sector into an engine for growth. - Measures needed include: reducing red tape, improving access to finance, strengthening governance and transparency, making the labor market more effective, aligning education and skills with employer needs, fostering greater female participation in the labor market, and further opening the economy to foreign investment. - The overall strategy should be designed and sequenced so reforms reinforce each other and the burden of adjustment is shared equitably; action should be timely, as structural reforms take time to bear fruit. - Exchange rate and external balance: - The real effective exchange rate should gradually be brought closer to equilibrium, and efforts are needed to curb the parallel foreign exchange market. - Correcting the dinar’s overvaluation will require fiscal consolidation, structural reforms, and further nominal depreciation. - A weaker dinar would help address external imbalances, support private sector development, and raise hydrocarbon revenues in local currency. - Monetary and financial sector policy: - Monetary policy should guard against emerging inflationary pressures; the Bank of Algeria has transitioned to open market operations and should phase out discount window financing and stand ready to increase its policy rate. - Financial sector policies should be strengthened to address growing financial stability risks: - Accelerate transition to a risk-based supervisory framework. - Enhance role of macroprudential policy. - Strengthen governance of public banks. - Develop a crisis resolution framework. *IMF staff appraisal as presented in the source document.* ### 42. Staff recommends that the next Article IV consultation for Algeria be held on the ### 42. Staff recommends that the next Article IV consultation for Algeria be held on the standard 12-month cycle. ### Staff recommendation - Staff recommends the next Article IV consultation for Algeria be held on the standard 12-month cycle. ### Macroeconomic baseline indicators and projections (selected) - Real GDP (annual percent change): 2014: 3.8; 2015: 3.8; 2016: 3.5; 2017: 1.3; 2018: 0.7; 2019: 1.5; 2020: 1.7; 2021: 2.2; 2022 (Proj.): 2.3. - Consumer price index (period average, percent): 2014: 2.9; 2015: 4.8; 2016: 6.4; 2017: 4.8; 2018: 4.3; 2019: 4.0; 2020: 4.0; 2021: 4.0; 2022 (Proj.): 4.0. - Current account balance (percent of GDP): 2014: -4.4; 2015: -16.6; 2016: -16.9; 2017: -11.9; 2018: -9.7; 2019: -9.0; 2020: -7.7; 2021: -6.6; 2022 (Proj.): -6.5. - Gross official reserves (US$ billions): 2014: 177; 2015: 143; 2016: 113; 2017: 93; 2018: 79; 2019: 66; 2020: 55; 2021: 46; 2022 (Proj.): 38. - In months of next year's imports of goods and services: 2014: 33; 2015: 28; 2016: 23; 2017: 20; 2018: 17; 2019: 14; 2020: 12; 2021: 10; 2022 (Proj.): 8. - GDP (in billions of dinars at current prices): 2014: 17,205; 2015: 16,592; 2016: 17,082; 2017: 18,808; 2018: 19,608; 2019: 20,524; 2020: 21,587; 2021: 22,876; 2022 (Proj.): 24,216. - GDP (in billions of US$ current prices): 2014: 214; 2015: 165; 2016: 156; 2017: 168; 2018: 172; 2019: 177; 2020: 182; 2021: 189; 2022 (Proj.): 196. - Exchange rate (DA per US$): 2014: 80.6; 2015: 100.7; 2016: 109.4. ### Fiscal sector (selected) - Overall budget balance (percent of GDP): 2014: -8.0; 2015: -15.8; 2016: -14.0; 2017: -3.0; 2018: -2.7; 2019: -1.6; 2020: 0.2; 2021: 0.6; 2022 (Proj.): 1.1. - Revenue (percent of GDP): 2014: 33.4; 2015: 30.8; 2016: 29.5; 2017: 34.3; 2018: 30.9; 2019: 30.4; 2020: 30.2; 2021: 30.2; 2022 (Proj.): 30.3. - Expenditure (incl. net lending, percent of GDP): 2014: 41.3; 2015: 46.6; 2016: 43.5; 2017: 37.3; 2018: 33.5; 2019: 32.0; 2020: 30.1; 2021: 29.7; 2022 (Proj.): 29.2. - Gross government debt (percent of GDP): 2014: 7.7; 2015: 8.8; 2016: 21.0; 2017: 18.3; 2018: 19.3; 2019: 19.6; 2020: 18.1; 2021: 16.3; 2022 (Proj.): 14.6. - Nonhydrocarbon balance (percent of GDP): 2014: -38.0; 2015: -37.1; 2016: -28.9; 2017: -21.8; 2018: -21.3; 2019: -19.4; 2020: -17.0; 2021: -16.3; 2022 (Proj.): -15.4. - Budget revenue and grants (in billions of Algerian dinars): 2014: 5,738; 2015: 5,105; 2016: 5,042; 2017: 6,451; 2018: 6,051; 2019: 6,239; 2020: 6,521; 2021: 6,919; 2022 (Proj.): 7,330. - Total expenditure (in billions of Algerian dinars): 2014: 6,996; 2015: 7,656; 2016: 7,384; 2017: 6,956; 2018: 6,550; 2019: 6,550; 2020: 6,481; 2021: 6,783; 2022 (Proj.): 7,069. - Oil stabilization fund (in billions of Algerian dinars): 2014: 4,408; 2015: 2,074; 2016: 784; 2017: 820; 2018: 0; 2019: 0; 2020: 0; 2021: 0; 2022 (Proj.): 105. ### External sector (selected) - Exports, f.o.b. (percent of GDP): 2014: 60.0; 2015: 34.6; 2016: 29.1; 2017: 37.0; 2018: 37.3; 2019: 37.4; 2020: 38.0; 2021: 39.3; 2022 (Proj.): 40.2. - Hydrocarbon exports (percent of GDP): 2014: 58.4; 2015: 33.1; 2016: 27.7; 2017: 35.7; 2018: 36.0; 2019: 35.9; 2020: 36.4; 2021: 37.7; 2022 (Proj.): 38.5. - Algerian crude oil price (US$/barrel, weighted average of quarterly data): 2014: 99.45; 2015: 52.94; 2016: 55.5; 2017: 58.2; 2018: 57.8; 2019: 56.8; 2020: 56.7; 2021: 57.4; 2022 (Proj.): 57.4. - Net international investment position (in billions of US$): 2014: 141.7; 2015: 107.1; 2016: 72.7; 2017: 51.1; 2018: 33.7; 2019: 17.3; 2020: 3.3; 2021: -9.2; 2022 (Proj.): -22.0. - Gross external debt (in billions of US$): 2014: 3.6; 2015: 3.0; 2016: 3.9; 2017: 4.3; 2018: 4.6; 2019: 4.8; 2020: 5.0; 2021: 5.2; 2022 (Proj.): 5.3. ### Monetary and financial indicators (selected) - Money and quasi-money (M2, end of period, in billions of Algerian dinars): 2014: 13,664; 2015: 13,705; 2016: 13,945; 2017: 14,950; 2018: 15,592; 2019: 16,389; 2020: 17,291; 2021: 18,361; 2022 (Proj.): 19,478. - Credit to the economy (in percent change over 12 months): 2014: 26.0; 2015: 11.3; 2016: 9.8; 2017: 6.0; 2018: 2.0; 2019: 5.2; 2020: 7.9; 2021: 9.2; 2022 (Proj.): 8.9. - Net foreign assets (in billions of Algerian dinars): 2014: 15,602; 2015: 15,222; 2016: 12,443; 2017: 10,336; 2018: 8,919; 2019: 7,583; 2020: 6,476; 2021: 5,536; 2022 (Proj.): 4,584. ### Annex I — Alternative scenario (summary of assumptions and outcomes) - Purpose: Illustrate that a different policy mix could lead to better macroeconomic outcomes using available fiscal space for a more gradual fiscal consolidation combined with further exchange rate depreciation and more ambitious structural reforms. - Fiscal anchor: Gradually stabilizing public debt at around 30 percent of GDP, a level higher than the authorities’ plan but moderate by emerging market standards to preserve buffers against oil price or contingent liability shocks. - Key fiscal assumptions (compared to baseline): - Current spending falls to 22.6 percent of GDP in 2022 (compared to 19.5 percent in the baseline scenario). - Capital spending falls to 11.3 percent of GDP in 2022 (versus the baseline projection). - Policy mix emphasized: Slower decline in both current and capital expenditures than in the baseline, combined with more exchange rate depreciation and more ambitious structural reforms. *Source: IMF staff estimates and projections as presented in the provided document.* ### 9.7 percent in the baseline scenario). ### cr17141 - 9.7 percent in the baseline scenario). ### Alternative versus Baseline scenarios — key design differences - Tax revenues rise to 19.5 percent of nonhydrocarbon GDP in 2022 (compared to 18.7 percent in the baseline scenario), reflecting deeper subsidy reform, a greater reduction in tax exemptions, and improved tax administration. - To finance larger deficits, the government borrows externally as well as domestically. - The REER is assumed to depreciate by 10 percent over the projection period, whereas it is nearly stable in the baseline scenario. - Deeper subsidy reform dampens domestic energy consumption, providing a boost to hydrocarbon exports. - Efforts to diversify and liberalize the economy gradually result in more nonhydrocarbon exports, FDI, and tourism receipts. ### Fiscal multipliers used in staff’s scenarios - Government consumption: Year 1 = 0.6, Year 2 = 0.1, Year 3 = 0.1, Year 4 = 0.0, Year 5 = 0.0, Year 6 = 0.0 - Subsidies: Year 1 = 0.6, Year 2 = 0.1, Year 3 = 0.1, Year 4 = 0.0, Year 5 = 0.0, Year 6 = 0.0 - Capital expenditure: Year 1 = 0.4, Year 2 = 0.2, Year 3 = 0.2, Year 4 = 0.4, Year 5 = 0.4, Year 6 = 0.0 - Tax revenue: Year 1 = 0.0, Year 2 = 0.0, Year 3 = 0.0, Year 4 = 0.0, Year 5 = 0.0, Year 6 = 0.0 ### Comparative outcomes — growth, fiscal balance, and fiscal breakeven price - Overall growth - Baseline: Growth slows sharply under the effects of the authorities’ medium-term fiscal consolidation plan. - Alternative: Growth declines more slowly mainly owing to more gradual fiscal consolidation, supported by greater exchange rate depreciation. More ambitious structural reforms allow for some productivity gains that gradually help increase potential growth toward the end of the projection period. - Fiscal balance - Baseline: Under the authorities’ medium-term fiscal consolidation plan, the deficit reaches equilibrium by 2020. - Alternative: The fiscal deficit declines more gradually over the medium term, approaching equilibrium by 2022. - Fiscal breakeven price - Baseline: The fiscal breakeven price declines below the WEO oil price forecast in 2022. - Alternative: The fiscal breakeven price declines more gradually over time, approaching the WEO oil price forecast in 2022. ### Comparative outcomes — net savings, debt, current account, and reserves - Net savings and debt - Baseline: Net savings decline initially as fiscal savings are depleted, but start to increase in 2020 as debt falls. Debt declines to 14.6 percent of GDP by 2022. - Alternative: Net savings decline throughout most of the projection period, but stabilize by 2022. Debt stabilizes at around 30 percent of GDP, reflecting larger budget deficits and more debt financing. - Current account balance - Baseline: The current account deficit declines over the medium term as a result of the government’s medium-term fiscal consolidation plan. - Alternative: The current account deficit initially declines more slowly than in the baseline scenario, reflecting more gradual fiscal consolidation. However, toward the end of the projection period, the deficit narrows further than in the baseline scenario thanks to greater exchange rate depreciation and more ambitious structural reforms to diversify the economy. - International reserves - Baseline: Reserves decline to 8 months of imports by 2022. - Alternative: Reserves also decline but remain above 11 months of imports by 2022. ### Selected economic and financial indicators (Alternative Scenario, 2014–22) - Real GDP (annual percent change): 2014 = 3.8, 2015 = 3.8, 2016 = 3.5, 2017 = 2.7, 2018 = 2.2, 2019 = 2.8, 2020 = 3.3, 2021 = 3.8, 2022 = 4.2 - Hydrocarbon sector (annual percent change): 2014 = -0.6, 2015 = 0.4, 2016 = 6.1, 2017 = 1.6, 2018 = 2.4, 2019 = 2.5, 2020 = 2.8, 2021 = 2.8, 2022 = 2.9 - Nonhydrocarbon sector (annual percent change): 2014 = 5.6, 2015 = 5.0, 2016 = 2.9, 2017 = 3.0, 2018 = 2.2, 2019 = 2.9, 2020 = 3.5, 2021 = 4.1, 2022 = 4.4 - Consumer price index (period average): 2014 = 2.9, 2015 = 4.8, 2016 = 6.4, 2017 = 5.5, 2018 = 5.0, 2019 = 4.5, 2020 = 4.0, 2021 = 4.0, 2022 = 4.0 - Savings-investment balance (percent of GDP): 2014 = -4.4, 2015 = -16.6, 2016 = -16.9, 2017 = -12.5, 2018 = -11.1, 2019 = -10.0, 2020 = -8.2, 2021 = -6.4, 2022 = -5.1 - National savings (percent of GDP): 2014 = 43.4, 2015 = 35.2, 2016 = 34.2, 2017 = 37.2, 2018 = 38.1, 2019 = 39.7, 2020 = 41.7, 2021 = 44.0, 2022 = 45.6 - Investment (percent of GDP): 2014 = 47.8, 2015 = 51.7, 2016 = 51.0, 2017 = 49.7, 2018 = 49.2, 2019 = 49.7, 2020 = 49.8, 2021 = 50.4, 2022 = 50.7 - Overall budget balance (percent of GDP): 2014 = -8.0, 2015 = -15.8, 2016 = -14.0, 2017 = -7.5, 2018 = -6.6, 2019 = -5.5, 2020 = -4.1, 2021 = -2.9, 2022 = -1.7 - Revenue (percent of GDP): 2014 = 33.4, 2015 = 30.8, 2016 = 29.5, 2017 = 32.0, 2018 = 31.1, 2019 = 31.3, 2020 = 31.6, 2021 = 32.0, 2022 = 32.3 - Expenditure (incl. net lending, percent of GDP): 2014 = 41.3, 2015 = 46.6, 2016 = 43.5, 2017 = 39.5, 2018 = 37.7, 2019 = 36.7, 2020 = 35.7, 2021 = 34.9, 2022 = 34.0 - Gross government debt (percent of GDP): 2014 = 7.7, 2015 = 8.8, 2016 = 21.0, 2017 = 21.2, 2018 = 25.9, 2019 = 29.3, 2020 = 31.2, 2021 = 31.7, 2022 = 31.0 - Nonhydrocarbon primary balance (percent of nonhydrocarbon GDP): 2014 = -37.7, 2015 = -36.8, 2016 = -28.5, 2017 = -27.1, 2018 = -26.0, 2019 = -24.2, 2020 = -22.3, 2021 = -20.9, 2022 = -19.4 - Hydrocarbon revenue (percent of total revenue): 2014 = 27.0, 2015 = 17.6, 2016 = 12.3, 2017 = 18.3, 2018 = 18.4, 2019 = 18.2, 2020 = 18.3, 2021 = 18.6, 2022 = 18.7 - Nonhydrocarbon revenue (percent of total revenue): 2014 = 18.7, 2015 = 20.3, 2016 = 22.6, 2017 = 21.0, 2018 = 19.8, 2019 = 20.0, 2020 = 20.4, 2021 = 20.5, 2022 = 20.8 - Current expenditure (percent of GDP): 2014 = 35.8, 2015 = 34.3, 2016 = 31.8, 2017 = 30.3, 2018 = 29.1, 2019 = 28.7, 2020 = 28.5, 2021 = 28.1, 2022 = 27.7 - Capital expenditure (percent of GDP): 2014 = 19.9, 2015 = 22.6, 2016 = 19.3, 2017 = 18.2, 2018 = 17.3, 2019 = 16.2, 2020 = 15.2, 2021 = 14.5, 2022 = 13.9 - Current account balance (percent of GDP): 2014 = -4.4, 2015 = -16.6, 2016 = -16.9, 2017 = -12.5, 2018 = -11.1, 2019 = -10.0, 2020 = -8.2, 2021 = -6.4, 2022 = -5.1 - Exports, f.o.b. (percent change): 2014 = -6.8, 2015 = -42.4, 2016 = -15.9, 2017 = 28.3, 2018 = 1.9, 2019 = 1.9, 2020 = 4.0, 2021 = 6.3, 2022 = 6.5 - Nonhydrocarbon exports (percent of total exports): 2014 = 2.7, 2015 = 4.3, 2016 = 4.8, 2017 = 3.9, 2018 = 4.4, 2019 = 5.2, 2020 = 6.2, 2021 = 7.5, 2022 = 9.7 - Gross official reserves (US$ billions): 2014 = 177, 2015 = 143, 2016 = 113, 2017 = 95, 2018 = 84, 2019 = 74, 2020 = 66, 2021 = 158, 2022 = (blank in source) - Reserves in months of next year's imports of goods and services: 2014 = 33, 2015 = 28, 2016 = 22, 2017 = 19, 2018 = 17, 2019 = 15, 2020 = 13, 2021 = 12, 2022 = 11 - Hydrocarbon production (in ton oil equivalent): 2014 = 142, 2015 = 141, 2016 = 152, 2017 = 154, 2018 = 158, 2019 = 162, 2020 = 166, 2021 = 171, 2022 = 176 - Liquid petroleum exports (in millions of barrels/day): 2014 = 1.2, 2015 = 1.2, 2016 = 1.2, 2017 = 1.3, 2018 = 1.3, 2019 = 1.3, 2020 = 1.4, 2021 = 1.4, 2022 = 1.5 - Natural gas exports (in billions of m3): 2014 = 44.3, 2015 = 43.1, 2016 = 53.1, 2017 = 53.1, 2018 = 53.6, 2019 = 54.4, 2020 = 55.3, 2021 = 56.4, 2022 = 57.9 - Crude oil export unit value (US$/bbl): 2014 = 99.4, 2015 = 52.9, 2016 = 45.5, 2017 = 58.2, 2018 = 57.8, 2019 = 56.8, 2020 = 56.7, 2021 = 57.4, 2022 = 57.4 - Share of hydrocarbons in total exports (percent): 2014 = 97.3, 2015 = 95.7, 2016 = 95.2, 2017 = 96.1, 2018 = 95.6, 2019 = 94.8, 2020 = 93.8, 2021 = 92.5, 2022 = 90.3 - Net foreign assets (annual change): 2014 = 3.3, 2015 = -2.4, 2016 = -18.3, 2017 = -12.5, 2018 = -7.4, 2019 = -8.1, 2020 = -5.8, 2021 = -3.1, 2022 = 0.3 - Credit to the economy (annual percent change): 2014 = 26.0, 2015 = 11.3, 2016 = 9.8, 2017 = 8.7, 2018 = 4.3, 2019 = 5.5, 2020 = 7.7, 2021 = 9.7, 2022 = 11.5 - Money and quasi-money (annual percent change): 2014 = 14.4, 2015 = 0.3, 2016 = 1.8, 2017 = 10.2, 2018 = 7.4, 2019 = 7.9, 2020 = 8.3, 2021 = 8.9, 2022 = 9.0 - GDP (in billions of dinars at current prices): 2014 = 17,205, 2015 = 16,592, 2016 = 17,082, 2017 = 19,339, 2018 = 20,771, 2019 = 22,324, 2020 = 24,108, 2021 = 26,227, 2022 = 28,543 - NHGDP (in billions of dinars at current prices): 2014 = 12,547, 2015 = 13,458, 2016 = 14,440, 2017 = 15,737, 2018 = 16,923, 2019 = 18,253, 2020 = 19,718, 2021 = 21,433, 2022 = 23,360 - GDP (in billions of US$ current prices): 2014 = 214, 2015 = 165, 2016 = 156, 2017 = 168, 2018 = 172, 2019 = 176, 2020 = 181, 2021 = 188, 2022 = 195 - GDP per capita (in US$): 2014 = 5,459, 2015 = 4,123, 2016 = 3,829, 2017 = 4,052, 2018 = 4,067, 2019 = 4,089, 2020 = 4,131, 2021 = 4,209, 2022 = 4,294 - Exchange rate (DA per US$): 2014 = 80.6, 2015 = 100.7, 2016 = 109.4 - REER (percent change): 2014 = 2.0, 2015 = -4.3, 2016 = -2.0 ### Annex II — public debt sustainability summary (selected findings) - During the oil price boom, Algeria repaid most of its debt and accumulated large fiscal savings. - Since the onset of the oil price shock, fiscal savings have been nearly depleted to finance large fiscal deficits, allowing debt to remain low. - The authorities initially took little fiscal policy action in response to the shock, but they are now planning to undertake substantial fiscal consolidation over the medium term. - Under the authorities’ medium-term fiscal plan, debt levels are projected to remain low, and stress tests suggest that financing needs are not sensitive to shocks. - International experience suggests that such a consolidation plan may be difficult to achieve. Moreover, fiscal risks are numerous and could lead to further increases in debt. - The oil price shock, together with an initially timid policy response, led to a rapid deterioration of the fiscal position. The policy response to the shock was initially limited to exchange rate depreciation, while spending remained high. Consequently, lower oil prices translated into large fiscal deficits that Algeria was able to finance by drawing on its fiscal savings. More than two years into the shock, fiscal savings are now almost depleted, having declined from a peak of (figure truncated in source). *Source: Algerian authorities; and IMF staff calculations and estimates as presented in the provided content.* ### 43.3 percent of GDP in 2009 to 4.6 percent in 2016. Nevertheless, despite little new borrowing, ### cr17141 - 43.3 percent of GDP in 2009 to 4.6 percent in 2016. Nevertheless, despite little new borrowing, ### Debt levels and composition (end-2016) - Total central government debt: US$32.3 billion; DZD 3,582.1 billion; 21.0 percent of GDP. - External public debt: US$1.6 billion; DZD 174.8 billion; 1.0 percent of GDP. - Mostly owed to official bilateral creditors and on concessional terms. - Algeria repaid the last of its debt to the IMF in 2005 and prepaid its outstanding balance to the Paris Club in 2006. - Since 2006, external debt has remained less than US$3 billion. - In 2016, the African Development Bank (AfDB) provided a €900 million budget support loan—the AfDB’s first loan to Algeria in 12 years. - Domestic public debt: US$30.7 billion; DZD 3,407.3 billion; 19.9 percent of GDP. - Treasury securities: US$8.8 billion; DZD 977.5 billion; 5.7 percent of GDP. Maturities range from 13 weeks to 15 years. Most held by banks and insurance companies. - National Bond for Economic Growth (local-currency bond issued in 2016): US$5.1 billion; DZD 569.1 billion; 3.3 percent of GDP. - Debt from financial support operations (support to public enterprises, mostly between 2009 and 2016): US$16.8 billion; DZD 1,860.7 billion; 10.9 percent of GDP. - Government-guaranteed domestic debt: US$28.5 billion; DZD 3,163.3 billion; 18.5 percent of GDP. ### Recent changes and drivers - Government debt increased from 8.8 percent of GDP in 2015 to 21.0 percent of GDP in 2016 following: - Purchase of debt owed by a utility company to a public bank. - Issuance of bonds to the state-owned oil company to compensate for losses from selling imported refined fuel domestically at subsidized prices. - Algeria’s domestic debt at end-2016: DZD 3,407 billion (19.9 percent of GDP), comprised of regularly-issued Treasury securities (DZD 978 billion), the National Bond for Economic Growth (DZD 569 billion), and DZD 1,861 billion from government operations to support public enterprises. ### Fiscal consolidation scenario and projections - Under the authorities’ fiscal consolidation plan: - Gross financing needs decline sharply, averaging 2.3 percent of GDP over the period (medium term). - The government is assumed to deplete its fiscal savings in 2017; thereafter financing needs are met by domestic debt issuance and by using deposits of public entities. - The ratio of debt (including guarantees) to GDP falls from 39.5 percent in 2016 to 27.6 percent in 2022. - The authorities’ fiscal consolidation plan is described as exceptionally ambitious and ranks in the top 1 percent of fiscal consolidations recorded between 1990 and 2010 among advanced and emerging economies with debt greater than 60 percent of GDP. - If the primary balance remains constant at its 2016 level (i.e., no fiscal adjustment), public debt would increase to 39.4 percent by 2022. ### Public Sector Debt Sustainability Analysis (selected baseline projections and indicators) - Nominal gross public debt (percent of GDP): 2015: 18.2; 2016: 24.8; 2017: 39.5; 2018: 35.1; 2019: 35.4; 2020: 35.0; 2021: 32.8; 2022: 30.1; baseline ending 27.6 (table format preserved in source). - Public gross financing needs (percent of GDP): 2015: 6.0; 2016: 17.4; 2017: 15.2; 2018: 4.2; 2019: 3.3; 2020: 3.5; 2021: 2.6; 2022: 0.7; cumulative: -0.25 (as in source table). - Real GDP growth (percent): 2015: 2.8; 2016: 3.8; 2017: 3.5; 2018: 1.3; 2019: 0.7; 2020: 1.5; 2021: 1.7; 2022: 2.2; 2022 reported also as 2.3 in another projection table. - Inflation (GDP deflator, percent): 2015: 6.9; 2016: -7.1; 2017: -0.5; 2018: 8.7; 2019: 3.6; 2020: 3.2; 2021: 3.5; 2022: 3.7; 2022 listed also as 3.5 in projection panels. - Effective interest rate (percent): 2015: 3.6; 2016: 3.2; 2017: 3.2; 2018: 1.8; 2019: 1.7; 2020: 1.9; 2021: 2.2; 2022: 2.4; alternative tables show variation in later years up to 2.5 percent. - Change in gross public sector debt (percent of GDP): 2015: -1.1; 2016: 7.8; 2017: 14.7; 2018: -4.4; 2019: 0.3; 2020: -0.4; 2021: -2.2; 2022: -2.7; cumulative: -11.8. - Identified debt-creating flows (cumulative over projection): -5.5 percent of GDP. - Primary deficit (percent of GDP): 2015: 0.0; 2016: 16.4; 2017: 14.0; 2018: 3.3; 2019: 3.2; 2020: 2.0; 2021: 0.2; 2022: -0.2; cumulative: 7.8. - Primary (noninterest) revenue and grants (percent of GDP, cumulative to 2022): 181.7 (yearly levels: 2015: 38.3; 2016: 29.9; 2017: 29.2; 2018: 33.7; 2019: 30.1; 2020: 29.6; 2021: 29.4; 2022: 29.5). - Primary (noninterest) expenditure (percent of GDP, cumulative to 2022): 189.5 (yearly levels: 2015: 38.4; 2016: 46.3; 2017: 43.2; 2018: 36.9; 2019: 33.2; 2020: 31.6; 2021: 29.7; 2022: 29.2). - Automatic debt dynamics (percent of GDP, cumulative to 2022): -7.8. - FRR withdrawal (positive) or accumulation (negative): 2015: 2.6; 2016: -14.1; 2017: -7.5; 2018: -3.7; 2019: -0.4; 2020: 0.0; 2021: 0.0; 2022: 0.0; cumulative: -3.7. - Deposits of public entities (reduces financing need): cumulative to 2022: -1.8 percent of GDP. ### Alternative scenarios and stress tests - Baseline, Historical, and Constant Primary Balance scenarios provided with underlying assumptions. Selected assumptions (Baseline): - Real GDP growth: 2017: 1.3; 2018: 0.7; 2019: 1.5; 2020: 1.7; 2021: 2.2; 2022: 2.3. - Inflation (GDP deflator): 2017: 8.7; 2018: 3.6; 2019: 3.2; 2020: 3.5; 2021: 3.7; 2022: 3.5. - Primary budget balance (percent of GDP): 2017: -3.3; 2018: -3.2; 2019: -2.0; 2020: -0.2; 2021: 0.2; 2022: 0.7. - Effective interest rate: 2017: 1.8; 2018: 1.7; 2019: 1.9; 2020: 2.2; 2021: 2.4; 2022: 2.5. - Under alternative scenarios and stress tests: - Debt levels are described as resilient to shocks and gross financing needs remain limited. - Projected gross financing needs are not sensitive to shocks given the size of the consolidation assumed in the baseline. - Stress test shocks illustrated include Primary Balance Shock, Real GDP Growth Shock, Real Interest Rate Shock, Real Exchange Rate Shock, and a Combined Shock, with scenario-specific projected paths for real GDP growth, inflation, primary balance, and effective interest rate (selected values reported in stress test tables). ### External sector assessment (Annex III) - Algeria’s net international investment position: significantly weakened by the oil price shock but remains comfortable. - External debt: nearly nonexistent. - International reserves: about US$113 billion at end-2016 (excluding SDRs); equal to 23 months of imports and 686 percent of the IMF’s unadjusted ARA metric. - Reserves have declined almost 41 percent from their peak in 2013 and are projected to decline further over the medium term. - Current account: - Between 2000 and 2013, surpluses averaged 12.5 percent of GDP. - In 2014, the current account recorded a deficit for the first time in nearly 15 years. - Since 2014, current account deficits have exceeded 16 percent of GDP. - In the baseline scenario, the current account deficit is projected to gradually narrow as oil prices rebound somewhat and fiscal consolidation dampens import demand. - EBA-lite methodology indicates a substantial current account gap and suggests the dinar is significantly overvalued. *Source: IMF staff, cr17141.* ### 37.8 billion in 2022, equal to 8 months of imports and 105 percent of the ARA metric adjusted to ### 37.8 billion in 2022, equal to 8 months of imports and 105 percent of the ARA metric adjusted to ### External position and reserves - Reserves peaked at US$192 billion in 2013; reserves declined by 41 percent and stood at US$113 billion at end-2016 (excluding SDRs), equal to 23 months of imports. - Reserves remain equal to 686 percent of the IMF’s ARA metric. - Total external debt stood at just 2.5 percent of GDP in 2016. - Under the baseline scenario, the NIIP is projected to turn negative over the medium term, reaching -11.2 percent of GDP by 2022. - Gross external financing need (in billions of US dollars): - 2012: -10.3 - 2013: 0.8 - 2014: 11.0 - 2015: 29.6 - 2016: 28.3 - 2017: 23.6 - 2018: 20.3 - 2019: 19.3 - 2020: 17.6 - 2021: 16.2 - 2022: 16.5 ### Real effective exchange rate (REER) and nominal exchange rate developments - Since mid-2014, the dinar has depreciated by 29 percent against the dollar. - Against the euro, the dinar has depreciated by 8 percent. - On a REER basis, the dinar is little changed since the oil price shock; the REER strengthened by 5.6 percent in 2016. - In recent months, the REER has been on an upward trend. - The foreign exchange premium on the parallel exchange market reportedly stands at close to 60 percent. - The parallel market remains illegal; foreign exchange regulations state foreign exchange is available for all current international transactions. ### Current account assessment and EBA-lite results - Hydrocarbon exports: volume increased by 7.3 percent, but value declined from US$33.1 billion in 2015 to US$27.7 billion in 2016 owing to a 22.1 percent fall in prices. - The current account deficit narrowed slightly (in nominal terms) in 2016 as imports and profit repatriation declined. - EBA-lite current account approach: current account gap of -13.2 percent of GDP in 2016. - EBA-lite external sustainability approach: current account gap between -6.2 and -7.6 percent of GDP in 2016, depending on NIIP stabilization assumption: - Scenario 1 (Stabilizing net NIIP at current level): current account norm 1.4 percent of GDP; current account gap -7.6 percent of GDP. - Scenario 2 (Stabilizing net NIIP at 2022 projected level): current account norm 0.0 percent of GDP; current account gap -6.2 percent of GDP. - Staff estimates the overvaluation to be in the 54-115 percent range. Estimates are subject to significant uncertainty due to terms-of-trade shock persistence and the existence of a parallel exchange market. The EBA-REER method did not yield reliable results. ### External debt dynamics and debt-stabilizing metrics - External debt (in percent of GDP): - 2012: 1.7 - 2013: 1.6 - 2014: 1.7 - 2015: 1.8 - 2016: 2.5 - 2017: 2.5 (projection) - 2018: 2.7 (projection) - 2019: 2.7 (projection) - 2020: 2.8 (projection) - 2021: 2.7 (projection) - 2022: 2.7 (projection) - Change in external debt (annual): -0.4, -0.1, 0.1, 0.1, 0.7, 0.0, 0.1, 0.1, 0.0, 0.0, -0.1 (2012–2022). - Identified external debt-creating flows (2012–2022): -6.7, -1.3, 3.7, 17.5, 16.1, 11.6, 9.2, 8.2, 6.8, 5.6, 5.2 (in percent of GDP). - Current account deficit, excluding interest payments (2012–2022): -5.9, -0.4, 4.4, 16.5, 16.9, 12.7, 10.5, 9.8, 8.6, 7.6, 7.5 (in percent of GDP). - Exports (in percent of GDP, 2012–2022): 36.2, 32.6, 29.8, 23.1, 20.9, 24.2, 23.8, 23.2, 22.8, 22.7, 22.3. - Imports (in percent of GDP, 2012–2022): 30.0, 31.4, 33.4, 38.6, 38.6, 36.5, 34.1, 32.9, 31.2, 29.9, 29.3. - External debt-to-exports ratio (in percent): 4.7, 4.8, 5.7, 7.9, 12.0, 10.5, 11.1, 11.8, 12.1, 12.1, 12.1 (2012–2022). ### Projections and key macroeconomic assumptions underlying the baseline - Real GDP growth (in percent): 3.3, 2.8, 3.8, 3.8, 3.5, 3.1, 0.7, 1.3, 0.7, 1.5, 1.7, 2.2, 2.3 (historical, standard deviation, and projections as shown). - GDP deflator in US dollars (change in percent): 0.9, -2.3, -1.5, -25.7, -8.5, 1.1, 16.6, 6.5, 1.5, 1.1, 1.4, 1.7, 1.4. - Nominal external interest rate (in percent): 2.7, 0.7, 0.4, 0.9, 0.4, 1.2, 0.8, 0.5, 0.4, 0.3, 0.3, 0.3, 0.2. - Growth of exports (US dollar terms, in percent): -1.2, -9.8, -7.0, -40.1, -14.2, -2.1, 25.7, 24.7, 0.7, -0.1, 1.6, 3.2, 2.2. - Growth of imports (US dollar terms, in percent): 9.1, 4.9, 8.6, -10.8, -5.4, 10.1, 17.3, 2.3, -4.5, -1.2, -2.1, -0.5, 1.8. - Current account balance, excluding interest payments (in percent of GDP): 5.9, 0.4, -4.4, -16.5, -16.9, 2.9, 13.4, -12.7, -10.5, -9.8, -8.6, -7.6, -7.5. - Net non-debt creating capital inflows (in percent of GDP): 0.7, 0.9, 0.7, -0.4, 0.9, 1.0, 0.6, 1.1, 1.3, 1.5, 1.7, 2.0, 2.2. ### Policy recommendations and assessment - Overall assessment: Algeria’s net international investment position remains comfortable; external debt is nearly nonexistent, and reserves, though declining, are still well above adequacy ratios. The external balance is significantly weaker than warranted by medium-term fundamentals and desirable policy settings, and the REER is significantly overvalued. - Potential policy responses: - Fiscal consolidation will help mitigate the impact of the oil price shock on the external position. - Structural reforms are needed to foster export diversification in the medium and long term. - Further exchange rate depreciation would help reduce the current account gap and bring the REER in line with its equilibrium value. - Closing the current account gap requires pursuing fiscal consolidation, improving the effectiveness of monetary policy, and fostering export diversification through exchange rate depreciation and structural reforms. ### FSAP recommendations implementation status (selected) - Leverage hydrocarbon revenue for financial sector development: Partial progress. Authorities revising the organic budget law to include a fiscal rule tying current spending to nonhydrocarbon revenues. - Exchange controls: Partial progress. MCM TA mission recommended relaxing FX regulations; BA extended repatriation deadline for nonhydrocarbon export proceeds from 180 to 360 days. - FX market: Partial progress. MCM TA mission in 2017 assisted implementation of an FX forward market. - Liquidity management: Completed. BA published regulation for open market operations and marginal lending facility in September 2016; transitioned to open market operations in March 2017. - Emergency liquidity facility assistance (ELA): No progress. - State-owned bank governance reforms: Partial progress. BA drafted bank governance regulations with IMF and World Bank TA. - Consumer lending: Partial progress. Credit registry extended to individuals; ban on consumer lending lifted; no progress on personal bankruptcy. - Banking supervision: Partial progress. New capital adequacy regulations related to pillar I of Basel II and elements of Basel III introduced in 2014; liquidity instruments and strengthened loan classification introduced; limited progress on NPL write-offs and macroprudential institutional framework. - AML/CFT: Fully implemented. Algeria is no longer subject to the FATF’s monitoring process under its ongoing global AML/CFT compliance process. *Staff report for the 2017 Article IV Consultation (informational annex).* ### 1. From January 21, 1974 to October 1, 1994, the exchange rate of the dinar was determined ### cr17141 - 1. From January 21, 1974 to October 1, 1994, the exchange rate of the dinar was determined ### Exchange rate regime and foreign exchange market - Historical arrangements: - From January 21, 1974 to October 1, 1994, the exchange rate of the dinar was determined on the basis of a fixed relationship with a basket of currencies, adjusted from time to time. - On October 1, 1994, the Bank of Algeria introduced a managed float for the dinar through daily fixing sessions that included six commercial banks. - The daily fixing system was replaced by an interbank foreign exchange market as of January 2, 1996. - Market conditions and rules (as of May 10, 2017): - The average of the buying and selling rates for the U.S. dollar was US$ 1 = DZD 109.54, equivalent to SDR 1 = DZD 149.63. - No margin limits are imposed on the buying and selling exchange rates in the interbank foreign exchange market, except for a margin of DA 0.015 between the buying and selling rates of the Bank of Algeria for the dinar against the U.S. dollar. - Institutional classification and payment freedoms: - The de jure exchange rate arrangement is managed floating and the de facto exchange regime is classified as other managed arrangement with no preannounced path for the exchange rate. - Algeria maintains an exchange system free from restrictions on the making of payments and transfers for current international transactions. - Policy intent: - Authorities acknowledge the need for more exchange rate flexibility, combined with strong macroeconomic policies and structural reforms, to increase competitiveness and promote diversification. - Prospective launch of a foreign exchange forward market is expected to provide further room for flexibility; Fund technical assistance is being provided. ### Fiscal policy, public finances, and fiscal adjustment - Recent fiscal adjustment and measures: - In 2016, significant fiscal adjustment was implemented to raise non-hydrocarbon revenue, reduce current spending including the wage bill, reform the subsidy system, and scale down investment while enhancing efficiency. - Non-hydrocarbon revenue increased by 2.3 percent of non-hydrocarbon GDP (NHGDP). - Public expenditure declined by 5.8 percent (unspecified denominator in source). - The non-hydrocarbon fiscal deficit was reduced by 8.2 percent of NHGDP in 2016. - Under the 2017 budget and the MTBF, the non-hydrocarbon deficit is planned to be reduced further by about 7 percent of NHGDP. - Specific fiscal measures and targets: - The authorities intend to maintain the wage bill at about last year’s level in nominal terms, reducing it to the equivalent of 11.7 percent of GDP (from 12.8 percent). - Measures to freeze civil service recruitment in non-strategic sectors; replacement of retirees to be limited to one out of five, while preserving social transfers. - VAT rate was raised by 2 percent in 2017; taxes on tobacco and luxury goods were increased. - Public investment priorities: completion of ongoing projects and enhancing spending efficiency; payment delays observed in 2016 were resolved during the first quarter of 2017. - Fiscal risk management and reforms: - Permanent closure of open-ended treasury special accounts. - Government loan guarantees being limited to a few state-owned, highly strategic enterprises. - A study on the viability of the pension system is underway to prepare for pension reform. - Work with the World Bank on setting up a well-targeted subsidy system through cash transfers; authorities are revisiting the interest rate subsidy scheme. ### Monetary policy, liquidity, and financial sector stability - Monetary policy stance and instruments: - Bank of Algeria (BoA) remains committed to containing inflation and stands ready to adjust policy as needed. - BoA reactivated refinancing instruments, introducing open market operations and a marginal lending facility, and strengthened liquidity forecasting. - Open market operations are intended to facilitate the emergence of a new benchmark interest rate and allow phasing out of the discount window. - A new regulation on securities eligible for central bank refinancing is expected to be implemented over the course of the year (2017). - Liquidity and banking conditions: - After a long period of excess liquidity, monetary policy has been adapting to a shift to a tighter liquidity situation, with banks in need of central bank refinancing. - Financial soundness indicators show the banking sector is healthy and resilient, with adequate capitalization and profitability. - Nonperforming loans (NPLs) have increased recently, partly due to temporary increases in government payment delays, but are well provisioned. - Financial stability and regulatory measures: - Authorities are committed to preserving financial stability by strengthening regulation and supervision and the macroprudential framework. - BoA is refining its stress-testing framework and launching milestones for a systemic risk analysis framework. - New regulations on banks’ governance have been drafted with technical assistance from the IMF and World Bank. - Following full implementation of the action plan on AML/CFT with FATF, Algeria is no longer subject to FATF monitoring. - Electronic payments platforms are in place; a draft law on electronic certification has been adopted to modernize the payments system and enhance financial inclusion. ### Growth outlook and structural reforms - Macroeconomic context and outlook (authorities’ view): - Growth in 2016 remained resilient, reflecting a hydrocarbon-sector recovery; spending cuts and weak agricultural output weighed on non-hydrocarbon activity. - Growth is expected to decelerate in 2017 due to projected maintenance-related slowdown in the hydrocarbon sector and weaker construction activity. - Unemployment picked up to 10 ½ percent and remains high among youth and women. - Inflation rose to 6.4 percent, largely driven by supply factors and distribution-channel distortions. - International reserves decreased significantly but remained at comfortable levels, covering more than 23 months of imports at end-2016. - External debt remained very low, at 2.5 percent of GDP. - Policy balance and contingency: - Authorities note potential adverse effects of fiscal consolidation on non-hydrocarbon growth but expect such effects to be transitory and possibly offset by new large industrial projects, greater efficiency of capital spending, and use of spare capacity. - Authorities retain the option of introducing a supplementary budget law should deep growth deceleration emerge. - Structural reform agenda: - Emphasis on diversifying the economy and strengthening the private sector as the long-term strategy. - Implementation of a medium-term budget framework (MTBF) as of 2017 is an important building block. - Authorities are removing barriers to investment and growth, improving the business climate, enhancing competitiveness, and attracting foreign direct investment. - Legislative work underway: new bills being prepared on labor market, mining activity, and public-private partnerships. - An ad-hoc committee for investment monitoring, led by the Prime Minister, has been established. - Authorities aim to use the oil price shock as an opportunity for comprehensive long-term reform toward private sector-led, sustainable, job-rich, and inclusive growth. ### Statistical issues, data adequacy, and technical assistance - Assessment of data adequacy for surveillance: - General: Data provision has some shortcomings, but is broadly adequate for surveillance. - National Accounts: NSO compiles annual national accounts (ANA) at prior year prices; ANA broadly follow the 1993 SNA recommendations, but nonprofit institutions serving households are not taken into account. NSO started publishing quarterly national accounts in 2015. - Price statistics: Data published with a delay of less than one month. - Government finance statistics: Key shortcomings include insufficient institutional coverage (coverage limited to central government), classification problems, long lags, and lack of reconciliation of financing with monetary accounts. - Monetary statistics: Largely in line with the Monetary and Financial Statistics Manual, 2000 and Compilation Guide, 2008. Timeliness by state-owned commercial banks improved; data on depository corporations and finance companies usually available within two to three months. - Balance of payments: Generally good quality. Estimates of international investment position data available for 2011-2013 but not yet compiled for more recent years. - Data Standards and Quality: - Algeria began participation in the General Data Dissemination System (GDDS) on April 21, 2009. - No data ROSC is available. - Technical assistance provided (selected items and dates as listed in the source): - STA: Monetary and financial statistics and financial stability indicators April 2012. - MCM: Banking supervision, macro-prudential policy and monetary policy September 2012. - FAD: Public financial management September 2012. - FAD: Subsidy reform March 2013. - FAD: Tax policy November 2013. - MCM: Bank supervision December 2013. - FAD: Tax administration April 2014. - STA: International investment position statistics September 2014. - MCM: Foreign exchange market development September 2014. - FAD: Multiyear budgeting September 2014. - FAD: Tax policy January 2015. - MCM: Interbank financial market development February 2015. - FAD: Organic budget law April 2015. - FAD: Tax administration April 2015. - MCM: Management of foreign exchange reserves April 2015. - RES: Macro-modeling May 2015. - MCM: Macroprudential policies and financial stability July 2015. - MCM: Liquidity management, monetary operations, and interbank market developments September 2015. - MCM: Enhancing bank regulation and supervision November 2015. - FAD: Tax and customs administration November 2015. - MCM: Setting up a liquidity committee December 2015. - FAD: Tax administration February 2016. - MCM: Financial stability and macroprudential policy framework April 2016. - MCM: Liquidity management May 2016. - FAD: Public financial management July 2016. - FAD: Tax administration October 2016. - MCM: Debt market development October 2016. - FAD: Tax administration November 2016. - MCM: Upgrading banking regulations March 2017. - MCM: Forward market development March 2017. - FAD: Tax administration April 2017. ### Key indicators and operational facts (as reported) - Exchange rates: 03/31/17 observation; 03/31/17 received; frequency Daily (D). - International reserve assets and reserve liabilities of the monetary authorities: latest observation 12/16; date received 03/03/17; frequency Daily (D) reported Monthly (M) published Quarterly (Q). - Reserve/Base Money, Broad Money, Central Bank Balance Sheet: latest observation 12/16; date received 03/03/17; frequency Daily (D) reported Monthly (M) published Quarterly (Q). - Consolidated Balance Sheet of the Banking System: latest observation 12/16; date received 03/16/17; frequency Monthly (M) reported Monthly (M) published Quarterly (Q). - Interest Rates: latest observation 12/16; date received 02/21/17; frequency Monthly (M) reported Monthly (M) published Quarterly (Q). - Consumer Price Index: latest observation 02/17; date received 03/28/17; frequency Monthly (M) reported Monthly (M) published Monthly (M). - Revenue, Expenditure, Balance and Composition of Financing—Central Government: latest observation 11/16; date received 03/08/17; frequency Monthly (M) reported Irregular (I) published Annually (A). - Stocks of Central Government and Central Government-Guaranteed Debt: latest observation 12/16; date received 03/08/17; frequency Irregular (I) reported Irregular (I) published Annually (A). - External Current Account Balance, Exports and Imports of Goods and Services: latest observation Q4, 2016; date received 03/07/17; frequency Quarterly (Q) reported Irregular (I) published Quarterly (Q). - GDP/GNP: latest observation Q3, 2016; date received 01/23/17; frequency Quarterly (Q) reported Quarterly (Q) published Quarterly (Q). - Gross External Debt: latest observation Q4, 2016; date received 03/08/17; frequency Quarterly (Q) reported Irregular (I) published Quarterly (Q). - International Investment Position: data available to 2013; latest compilation referenced 03/03/16; classification in table noted as Not Available (NA) for some elements. *Source: IMF staff report and authorities’ statement in the Algeria country documentation (as provided in the supplied content).* --- _Source: https://www.imf.org/-/media/files/publications/cr/2017/cr17141.pdf_