## cr18168 ## Source details **Canonical URL:** [cr18168](https://www.imf.org/-/media/files/publications/cr/2018/cr18168.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2018/cr18168.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2018/cr18168.pdf.json) --- ### Executive Board assessment and staff appraisal - Algeria faced significant challenges from lower oil prices since 2014 and slower economic activity. - Directors welcomed authorities’ adjustment efforts but encouraged: - sustained fiscal consolidation; - wide-ranging structural reforms to facilitate a more diversified growth model and support private sector development. - Concerns about the 2018 policy mix (increased fiscal spending in 2018, monetary financing of fiscal deficits, temporary import restrictions, and structural reforms): - May bring short-term respite but entail significant risks to the economic outlook. - Highlighted risks: exacerbation of fiscal and external imbalances, higher inflation, accelerated loss of international reserves, heightened financial stability risks, and eventually lower growth. - Preferred approach by Directors: - gradual fiscal consolidation starting in 2018 without central bank financing; - broader financing options, including external borrowing for well-chosen investment projects; - gradual exchange rate depreciation combined with efforts to eliminate the parallel foreign exchange market; - monetary policy independence aimed at containing inflation and readiness to tighten if inflationary pressures arise; - safeguards if monetary financing continues (time and quantity limits, pricing at market rates); - central bank commitment to sterilizing liquidity from monetary financing as needed. - Structural and financial sector recommendations: - raise more nonhydrocarbon revenue; improve public spending efficiency and management; expand subsidy reform while protecting the poor; - foster private sector development: improve business environment, access to finance, governance, transparency, competition; - reduce skills mismatches, improve labor market functioning, foster greater labor market participation of women, further open the economy to trade and FDI; - strengthen macroprudential framework, including more frequent stress tests and development of a crisis management framework. ### Recent macro-financial developments (key findings) - Growth and output: - Real GDP growth: 3.3 percent (2016) → 1.6 percent (2017). - Nonhydrocarbon GDP growth: 2.3 percent (2016) → 2.6 percent (2017). - Hydrocarbon production contracted by -3 percent in 2017. - Labor market: - Unemployment (percent, end of period): 10.5 (2016) → 12.3 (2017); receded to 11.7 percent in September 2017. - Youth unemployment: 28.3 percent. - Female unemployment: 20.7 percent. - Inflation and prices: - Inflation (percent, average): 6.4 (2016) → 5.6 (2017); noted to have stood at 3.4 percent year-on-year in April 2018 in one passage. - Inflation remained above Bank of Algeria’s target of 4 percent. - Since February 2018, non-food inflation began rising; 12-month moving average inflation slowed to 4.6 percent due to a significant drop in food inflation. - Fiscal outcomes and public debt: - Total revenue (percent of GDP): 28.8 (2016) → 32.7 (2017). - Hydrocarbon revenue (percent of GDP): 9.7 (2016) → 12.5 (2017). - Total expenditure (percent of GDP): 42.3 (2016) → 41.5 (2017). - Overall budget balance (deficit-): -13.5 (2016) → -8.8 (2017). - Gross government debt (percent of GDP): 20.6 (2016) → 27.0 (2017). - Central government resorted to central bank borrowing equivalent to 3 percent of GDP for 2017. - BA financing used to buy back public enterprise debt and finance the National Investment Fund (FNI) for an equivalent of 8.6 percent of GDP. - External sector and reserves: - Current account balance (percent of GDP): -16.6 (2016) → -12.9 (2017). - Gross reserves fell by US$17 billion to US$96 billion (excluding SDRs); reserves remained at 19 months of imports. - External debt (percent GDP): 2.4 (2016) → 2.4 (2017). - REER remained significantly overvalued despite an 8-percent depreciation in 2017. - Parallel exchange market premium stands at about 50 percent. - Money and credit: - Broad money (percent change): 0.8 (2016) → 8.3 (2017). - Credit to the economy (percent change): 9.0 (2016) → 11.8 (2017). - Growth in credit to the economy reported as robust at 12.8 percent in text (reflecting large liquidity injections). - Decline in reserve requirements from 8 to 4 percent supported liquidity; later reserve requirement changes were used to mop up liquidity. ### Introduction of central bank financing — strategy, mechanics, and risks - Authorities’ 2018 strategy objectives: - preserve growth and employment while repaying domestic arrears and avoiding external borrowing or further exchange rate depreciation. - Key elements of the strategy: - Increased fiscal spending in 2018: budget deficit more than 6 percent of GDP higher than planned under 2017–19 MTBF; capital expenditures increase by 21.2 percent (nominal) from 2017; current expenditures increase by 6.9 percent (nominal) from 2017; transfer to CNAS equivalent to 2.5 percent of GDP; wage bill kept virtually flat in nominal terms. - Central bank financing: banking law changed in October 2017 to allow BA to finance the budget deficit, public-sector debt buy-back and the FNI for five years; BA buys ad hoc issuances of sovereign securities with long maturities at a 0.5 percent interest rate. - Staff estimate: by end-2018 monetary financing may amount to the equivalent of about 23 percent of 2017 GDP. - To mop up liquidity, BA raised reserve requirement ratio from 4 percent to 8 percent in January 2018 and resumed absorption operations by taking seven-day bank deposits; BA is considering a moderate increase in the policy rate. - Tighter import barriers: temporary ban on about 850 categories of goods; extended 30 percent excise tax and increased customs duties up to 60 percent for other products. - Structural reforms: energy subsidy reform, tax increases on fuel and electricity, reform plan for business regulations, PFM modernization, forward exchange market development; decree mandates BA to periodically assess reform implementation. - Risks identified by staff: - Complicate macroeconomic management: low, interest-insensitive rates reduce budget discipline and may increase reliance on monetary financing. - Increase inflationary pressures: if not sterilized, liquidity injections stimulate demand and prices; import barriers may reduce supply and fuel inflation. - Put pressure on foreign reserves: liquidity injections boost import demand; reserve loss could increase FX pressure and parallel market activity. - Lower medium-term growth: short-lived activity boost; later consolidation and consumption-heavy composition limit lasting gains. - Increase financial stability risks: abundant liquidity could fuel credit growth, loosen lending standards, raise credit risk. ### Staff baseline and downside scenarios (Annex III summary) - Staff baseline scenario (authorities’ planned policies and 2018–20 MTBF): - Assumes moderate nominal exchange rate depreciation and some progress on reforms. - Outcome: growth accelerates in 2018 then slows as fiscal consolidation resumes; reserves fall but decline is somewhat curtailed initially by higher oil prices and import restrictions; inflation accelerates. - Downside Scenario 1: Lower Oil Prices - Assumption: oil prices fall to US$45 per barrel starting in 2019. - Impacts: monetary financing rises (cumulative monetary financing in medium term increases compared with baseline), larger inflationary pressures, reserves fall far more, external borrowing necessary from 2021. - Downside Scenario 2: Higher Fiscal Spending (wage-price spiral) - Assumption: wages adjust for inflation and additional transfers to clear CNR debt required absent parametric reform. - Impacts: monetary financing more than doubles versus baseline, triggers wage-price spiral with rapid inflation increases, reserves depleted by 2022 without external borrowing. ### Staff policy recommendations (IMF staff) - Fiscal policy: - Continue fiscal consolidation in 2018 and sustain it in the medium term at a gradual pace. - Avoid monetary financing; tap a broad range of financing options excluding monetary financing (including external borrowing for well-chosen investment projects). - Exchange rate and external adjustment: - Gradual exchange rate depreciation combined with efforts to eliminate the parallel foreign exchange market. - Monetary policy and liquidity management: - Central bank should mop up liquidity injected through monetary financing operations. - Stand ready to tighten monetary policy if inflationary pressures emerge. - If monetizing the deficit continues, implement robust safeguards: strict quantitative and time limits and pricing at market rates; sterilize adequate quantities of injected money. - Structural reforms: - Timely reforms to foster a diversified, private-sector led economy; strengthen business environment, access to finance, governance, transparency, competition, labor market functioning, skill matching, and female labor force participation. - Financial sector safeguards: - Strengthen macroprudential framework including more frequent stress tests and development of a crisis management framework. ### Staff alternative policy mix (Annex II summary) - Recommended components starting in 2018: - Sustained but gradual fiscal consolidation using available fiscal space; broad-based consolidation (widen tax base, reduce exemptions, cut current expenditure share of GDP, increase investment efficiency). - Tap broad financing options but exclude direct BA borrowing: domestic sovereign issuance at market rates, PPPs, sale of assets, external borrowing for investment, issuance of sukuks. - Gradual exchange rate depreciation to address external imbalances and support private sector development. - Independent monetary policy aimed at containing inflation; BA to sterilize liquidity and be ready to tighten policy. - Expected outcomes of alternative scenario (qualitative): - Inflation reverts close to BA’s central target. - Current account deficit reduced by end of period (not dependent on import barriers). - Decline in international reserves slows. - Nonhydrocarbon growth: slower in 2018 but gradually increases above baseline as consolidation is less abrupt and reforms yield results. - Safeguards if deficit monetized: - Strict quantitative limits (e.g., cap at proportion of average annual nonhydrocarbon tax revenue); shorter time limits than five years in law; financing at market rates; sterilization and monetary tightening. ### Alternative scenario projections (Annex II selected figures) - Real GDP (annual percent change): 2018: 2.5; 2019: 2.3; 2020: 2.0; 2021: 1.8; 2022: 1.6; 2023: 1.8. - Consumer price index (period average): 2018: 6.5; 2019: 6.2; 2020: 5.8; 2021: 5.4; 2022: 4.9; 2023: 4.0. - Central government overall budget balance (percent of GDP): 2018: -8.8; 2019: -6.8; 2020: -5.8; 2021: -5.1; 2022: -4.5; 2023: -2.8. - Gross government debt (excluding guarantees, percent of GDP): 2018: 27.0; 2019: 30.0; 2020: 35.7; 2021: 38.5; 2022: 40.3; 2023: 40.3. - Current account balance (percent of GDP): 2018: -12.9; 2019: -7.3; 2020: -8.6; 2021: -6.8; 2022: -5.5; 2023: -3.3. - Gross official reserves (US$ billions): 2018: 77; 2019: 75; 2020: 66; 2021: 62; 2022: 63; 2023: 69. - International reserves (months of next year's imports): 2018: 18; 2019: 16; 2020: 15; 2021: 15; 2022: 16; 2023: 17. ### Public debt sustainability (Annex IV key findings) - Public debt: 27 percent of GDP (48 percent of GDP including guarantees). - FRR was depleted in February 2017. - Monetary financing in 2017: about 11.6 percent of GDP using securities up to 30 years at 0.5 percent interest. - Central bank borrowing in late 2017: about 3 percent of GDP. - Staff estimate government could borrow from central bank up to 23.8 percent of 2017 GDP during 2018–22 (9.9 percent of 2018 GDP in 2018 alone). - Baseline projection: under sustained consolidation from 2019, debt projected to fall to about 31 percent of GDP by 2023 (43 percent including guarantees). - Under a no fiscal adjustment scenario, public debt (including guarantees) would increase to 49 percent by 2023. - Stress tests: staff conclude projected debt levels remain manageable and financing needs limited under tested shocks, though gross financing needs exceeded the benchmark of 15 percent in 2017. ### External sector assessment (Annex V key findings) - External position in 2017 substantially weaker than warranted by medium-term fundamentals and desirable policies. - Reserves at end-2017: US$96.1 billion (excluding SDRs), equal to 19.1 months of imports and 402 percent of the IMF’s adjusted ARA metric. - REER: staff estimates REER overvaluation in the 13–51 percent range. - EBA-lite current account approach: current account gap of -9.9 percent of GDP in 2017. - External debt negligible: total external debt about 2.3 percent of GDP in 2017. - NIIP at end-2017: 37.6 percent of GDP; projected to turn negative reaching -6.7 percent of GDP by 2023 under baseline. - Policy responses recommended: sustained fiscal consolidation, structural reforms for export diversification, further exchange rate depreciation, independent monetary policy to curb inflation. ### The Parallel Exchange Market (Box 3) - Structure and drivers: - Interbank market asymmetrical; BA is de facto main supplier as hydrocarbon exports must be sold to BA. - Illegal parallel market emerged and "seems to have become larger and more sophisticated." - Parallel market premium ~50 percent of the official exchange rate. - Supply sources on parallel market: repatriation of pensions, remittances, overbilling of imports, tourism revenue not captured by banks. - Demand on parallel market: restricted imports, capital flight, tax evasion, store of value, speculation. - Macroeconomic implications: - Fuels inflationary expectations, distorts price formation, weakens monetary transmission. - Monetary financing may exacerbate inflation, increase demand on parallel market and exchange rate premiums, incentivize overbilling. - Policy options to reduce parallel market: - Gradual official exchange rate adjustment; increase travel allowances; relax import restrictions. - Unification requires gradual liberalization of capital transactions when macroeconomic conditions improve. ### Financial sector and macro-financial linkages - Banking system status (end-December 2017): - Overall solvency ratio: 19.6 percent. - Ratio of solvency to Tier 1 capital: declined from 16.3 percent (end-2016) to 15.2 percent (end-2017). - Overall return on assets: 2 percent. - Gross NPLs: increased from 11.9 percent to 12.3 percent of total loans at end-2017. - Banking sector liquidity: declined prior to monetary financing but sufficient to cover about half of banks’ short-term liabilities. - Public banks held 87 percent of total loans to the economy at end-2017 (74.5 percent of loans to the private sector and 99.8 percent of loans to the public sector). - Policy implications: - Macro-financial linkages (SOEs, public banks, central government) can amplify fiscal or liquidity risks. - Recommendation: upgrade systemic supervision, monitor consolidated public sector debt, develop crisis management and resolution frameworks, more frequent stress tests, consider countercyclical capital buffer and loan-to-value limits. ### Women’s labor market participation — findings and policy measures - Key findings: - Bringing female employment rate to male levels could raise GDP per capita by around 40 percent in Algeria. - If women under 30 stay in the labor force at younger participation rates, estimated 625 thousand additional workers would be active over next 20 years. - Policy recommendations: - Government lead by example to support women’s inclusion. - Foster private sector job creation with gender-sensitive policies. - Measures: more flexible work hours; improve child care reliability; improve public transportation; review allowances that may discourage formal labor market entry. - Incorporate measures into broader active labor market policy review and use public sector equal-treatment practices as models. ### Conclusions (staff) - State and objectives: - Economy in transition; near- to medium-term objectives: restore macroeconomic stability, revive non-hydrocarbon GDP growth, create jobs (women and youth). - Long-run goal: diversify economy with greater private sector participation. - Fiscal consolidation: - Central to strategy to reduce reliance on hydrocarbon revenue; process started in 2015 and ongoing. - Structural reforms and policy support: - Reforms to encourage private sector activity, improve business climate, modernize monetary policy framework, and improve labor market efficiency are consistent with staff views. - Implementation and monitoring: - Decree delegates monitoring of structural reforms to a Ministry of Finance committee reporting to BA Governor who reports to the President. *Source: IMF staff report for the 2018 Article IV Consultation (May 15, 2018).* ### 6.4 percent in 2016 to 5.6 percent due to slowing inflation for manufactured goods and services, ### cr18168 - 6.4 percent in 2016 to 5.6 percent due to slowing inflation for manufactured goods and services, ### Executive Board Assessment - Algeria has faced significant challenges related to lower oil prices since 2014 and slower economic activity. - Directors welcomed authorities’ efforts to manage the adjustment process but encouraged: - sustained fiscal consolidation; - wide-ranging structural reforms to facilitate a more diversified growth model and support private sector development. - Concerns about the authorities’ 2018 policy mix (increased fiscal spending in 2018, monetary financing of fiscal deficits, temporary import restrictions, and structural reforms): - Most Directors considered it may bring short-term respite but entail significant risks to the economic outlook. - Risks highlighted: exacerbation of fiscal and external imbalances, higher inflation, accelerated loss of international reserves, heightened financial stability risks, and eventually lower growth. - Preferred approach by Directors: - gradual fiscal consolidation starting in 2018 without central bank financing; - broader financing options, including external borrowing for well-chosen investment projects; - gradual exchange rate depreciation combined with efforts to eliminate the parallel foreign exchange market; - monetary policy independence aimed at containing inflation and readiness to tighten if inflationary pressures arise; - safeguards if monetary financing continues, including time and quantity limits and pricing at market rates; - central bank commitment to sterilizing liquidity from monetary financing as needed. - Structural recommendations: - raise more nonhydrocarbon revenue; - improve public spending efficiency and management; - expand subsidy reform while protecting the poor; - advance reforms to foster private sector development by improving the business environment, enhancing access to finance, and strengthening governance, transparency, and competition; - reduce skills mismatches, improve labor market functioning, foster greater labor market participation of women, and further open the economy to trade and foreign direct investment. - Financial sector recommendations: - strengthen macroprudential framework, including more frequent stress tests and development of a crisis management framework. ### Recent macro-financial developments (findings) - Growth and output: - Real GDP growth: 3.3 percent (2016) → 1.6 percent (2017). - Nonhydrocarbon GDP growth: 2.3 percent (2016) → 2.6 percent (2017). - Hydrocarbon production contracted by -3 percent in 2017. - Labor market: - Unemployment (percent, end of period): 10.5 (2016) → 12.3 (2017); receded to 11.7 percent in September 2017. - Youth unemployment: 28.3 percent. - Female unemployment: 20.7 percent. - Inflation: - Inflation (percent, average): 6.4 (2016) → 5.6 (2017); noted to have stood at 3.4 percent year-on-year in April 2018 in one passage. - Inflation remained above Bank of Algeria’s target of 4 percent. - Since February 2018, non-food inflation began rising; 12-month moving average inflation slowed to 4.6 percent due to a significant drop in food inflation. - Fiscal outcomes and public debt: - Total revenue (percent of GDP): 28.8 (2016) → 32.7 (2017). - Of which, hydrocarbon revenue: 9.7 (2016) → 12.5 (2017). - Total expenditure (percent of GDP): 42.3 (2016) → 41.5 (2017). - Overall budget balance (deficit-): -13.5 (2016) → -8.8 (2017). - Gross government debt (percent of GDP): 20.6 (2016) → 27.0 (2017). - Nonhydrocarbon deficit on a cash basis declined to 26.4 percent of nonhydrocarbon GDP (estimated). - Overall spending cut by about 1.3 percent in nominal terms in 2017 (less than the 5.8 percent budgeted). - Central government resorted to central bank borrowing equivalent to 3 percent of GDP for 2017. - BA financing used to buy back public enterprise debt and finance the National Investment Fund (FNI) for an equivalent of 8.6 percent of GDP. - External sector and reserves: - Current account balance (percent of GDP): -16.6 (2016) → -12.9 (2017). - Gross reserves fell by US$17 billion to US$96 billion (excluding SDRs); reserves remained at 19 months of imports. - External debt (percent GDP): 2.4 (2016) → 2.4 (2017). - Real effective exchange rate (REER) remained significantly overvalued despite an 8-percent depreciation in 2017. - Parallel exchange market premium stands at about 50 percent. - Money and credit: - Broad money (percent change): 0.8 (2016) → 8.3 (2017). - Credit to the economy (percent change): 9.0 (2016) → 11.8 (2017) (table shows 12.7 in projection for 2018). - Growth in credit to the economy reported as robust at 12.8 percent in text (reflecting large liquidity injections). - Decline in reserve requirements from 8 to 4 percent supported liquidity. - Monetary financing operations late in 2017 contributed little to credit growth in 2017, but central bank financing began in Q4 2017 and affected liquidity and interest rates. ### Outlook and risks - Short-term effects of authorities’ 2018 expansionary strategy: - Likely to improve growth but exacerbate fiscal and external imbalances. - Medium-term risks: - Risk of increasing inflation, accelerating loss of international reserves, lowering growth, and reducing resilience to external shocks (e.g., lower oil prices) or domestic shocks (e.g., higher-than-planned fiscal spending or contingent liabilities). - External position: - External position in 2017 substantially weaker than warranted by medium-term fundamentals and desirable policies. ### Policy recommendations (IMF staff) - Fiscal policy: - Continue fiscal consolidation in 2018 and sustain it in the medium term at a gradual pace. - Avoid monetary financing; tap a broad range of financing options excluding monetary financing (including external borrowing for well-chosen investment projects). - Exchange rate and external adjustment: - Gradual exchange rate depreciation combined with efforts to eliminate the parallel foreign exchange market to support adjustment. - Monetary policy and liquidity management: - Central bank should mop up enough liquidity injected through monetary financing operations. - Stand ready to tighten monetary policy stance if inflationary pressures emerge. - If monetizing the deficit continues, implement robust safeguards: strict quantitative and time limits and pricing at market rates. - Structural reforms: - Implement key structural reforms timely to foster a more diversified, private-sector led economy. - Strengthen the overall policy framework. - Reforms to improve business environment, access to finance, governance, transparency, competition, labor market functioning, skill matching, and female labor force participation. - Financial sector safeguards: - Strengthen macroprudential framework including more frequent stress tests and development of a crisis management framework. ### Key statistics (selected table values) - Population: 40.4 million; 2016 - Per capita GDP: US$ 4,102 (2017) - Quota: SDR 1,959.9 million - Gini coefficient: 0.28 (2015) - Key export markets: EU - Main exports: oil and gas - Selected annual indicators: - Real GDP growth (percent): 2016: 3.3; 2017: 1.6; 2018 Prel.: 3.0; 2019: 2.7 - Nonhydrocarbon GDP growth (percent): 2016: 2.3; 2017: 2.6; 2018 Prel.: 3.4; 2019: 2.9 - Unemployment (percent, end of period): 2016: 10.5; 2017: 12.3 - Inflation (percent, average): 2016: 6.4; 2017: 5.6; 2018 Prel.: 7.4; 2019: 7.6 - Total revenue (percent of GDP): 2016: 28.8; 2017: 32.7; 2018 Prel.: 30.6; 2019: 28.2 - Total expenditure (percent of GDP): 2016: 42.3; 2017: 41.5; 2018 Prel.: 39.5; 2019: 33.0 - Overall budget balance (deficit-) (percent of GDP): 2016: -13.5; 2017: -8.8; 2018 Prel.: -9.0; 2019: -4.8 - Gross government debt (percent of GDP): 2016: 20.6; 2017: 27.0; 2018 Prel.: 34.8; 2019: 39.9 - Broad money (percent change): 2016: 0.8; 2017: 8.3; 2018 Prel.: 11.4; 2019: 5.0 - Credit to the economy (percent change): 2016: 9.0; 2017: 11.8; 2018 Prel.: 12.7; 2019: 7.7 - Current account balance (percent of GDP): 2016: -16.6; 2017: -12.9; 2018 Prel.: -9.7; 2019: -10.1 - FDI (percent of GDP): 2016: 1.0; 2017: 0.7; 2018 Prel.: 0.8; 2019: 0.8 - Gross reserves (months of imports): 2016: 22.6; 2017: 19.1; 2018 Prel.: 16.2; 2019: 13.5 - External debt (percent GDP): 2016: 2.4; 2017: 2.4; 2018 Prel.: 2.1; 2019: 1.9 - REER average (percent change): 2016: -1.7; 2017: 0.6 *Source: IMF staff report for the 2018 Article IV Consultation (May 15, 2018).* ### introduction of central bank financing. ### Introduction of Central Bank Financing ### Banking system status and recent developments - Banking system remained adequately capitalized and profitable as of end-December 2017: - Overall solvency ratio: 19.6 percent. - Ratio of solvency to Tier 1 capital: declined from 16.3 percent at end-2016 to 15.2 percent at end-2017. - Overall return on assets: 2 percent. - Gross nonperforming loans: increased from 11.9 percent to 12.3 percent of total loans at end-2017. - Banking sector liquidity: - Declined prior to monetary financing but remained sufficient to cover about half of the banks’ short-term liabilities. - Monetary operations and market rates mentioned: - Treasury note yields series (13 weeks, 26 weeks) and other money market indicators are tracked in the source charts (periods Jan-11 to Sep-17). ### Authorities’ new economic strategy (components) - Objective: preserve growth and employment while repaying domestic arrears and avoiding external borrowing or further exchange rate depreciation. - Key elements of the strategy: - Increased fiscal spending in 2018: - The budget results in a deficit more than 6 percent of GDP higher than originally planned under the 2017–19 MTBF. - Capital expenditures increase by 21.2 percent in nominal terms from 2017. - Current expenditures increase by 6.9 percent in nominal terms from 2017. - A significant transfer to the National Social Insurance Fund (CNAS) equivalent to 2.5 percent of GDP to repay part of the public pension fund’s debt. - The wage bill is kept virtually flat in nominal terms. - The government intends to resume consolidation in 2019 and restore fiscal balance by 2022. - Central bank financing: - Banking law changed in October 2017 to allow BA to finance directly, among others, the budget deficit, public-sector debt buy-back and the FNI for five years. - Monetary financing mechanism: BA buys ad hoc issuances of sovereign securities with long maturities at a 0.5 percent interest rate. - Staff estimates that by end-2018 monetary financing may amount to the equivalent of about 23 percent of 2017 GDP. - To mop up liquidity, BA raised the reserve requirement ratio from 4 percent to 8 percent in January 2018 and resumed absorption operations by taking seven-day bank deposits; BA is also considering a moderate increase in the policy rate. - Tighter import barriers: - Replaced import license system with a temporary ban on about 850 categories of goods. - Extended goods subject to a 30 percent excise tax and significantly increased customs duties (up to 60 percent) for other products. - Structural reforms: - Energy subsidy reform advanced by raising fuel and electricity taxes; transfer to World Bank to better target support with the view to start implementation in 2019. - Ambitious reform plan to simplify business regulations, improve governance and transparency, reform the pension system, and modernize the financial sector. - Efforts to strengthen public financial management (PFM), modernize monetary policy instruments, and foster development of a forward exchange market. - A decree mandates BA to periodically assess implementation of the government’s reform program and report to the President. ### Risks from the new strategy (staff analysis) - Main risk channels and potential outcomes: - Complicate macroeconomic management: - Low and interest-insensitive rates reduce budget discipline and may increase reliance on monetary financing. - Repeated liquidity injections could undermine BA’s capacity to control monetary conditions, achieve price stability, and weaken BA’s balance sheet and de facto independence. - Increase inflationary pressures: - If not adequately sterilized, increased liquidity raises perceived or actual nominal wealth, stimulating demand and causing prices to rise in the short term. - Hardened import barriers may decrease supply and fuel inflation or create product shortages; wage and price expectations could become self-reinforcing. - A risk of escalating into an inflationary spiral requiring further monetary financing. - Put further pressure on foreign reserves: - Liquidity injections will fuel import demand; effectiveness of trade barriers will shape reserve outcomes. - Reserve loss would increase exchange rate pressure and could intensify demand for FX on the parallel market, incentivizing rent-seeking and risking a disorderly exchange rate adjustment if sustained. - Lower growth in the medium term: - Initial boost to activity may be short-lived because subsequent planned fiscal consolidation and the predominance of consumption over investment limit lasting gains. - Rising inflation may reduce economic efficiency and discourage investment. - Increase financial stability risks in the medium term: - Short-term signs (improved liquidity, repayment of arrears, higher growth) could be followed by abundant liquidity fueling credit growth, loosening lending standards, rising credit risk, and vulnerabilities if growth slows and sterilization efforts raise interest rates. ### Staff baseline and downside scenarios - Staff baseline scenario (based on authorities’ planned policies and the 2018–20 MTBF fiscal path): - Assumptions: moderate nominal exchange rate depreciation and some progress on reforms. - Outcome: growth accelerates in 2018 then slows as fiscal consolidation resumes; reserves fall but decline is somewhat curtailed initially by higher oil prices than in 2017 and import restrictions; inflation accelerates. - Two downside scenarios prepared by staff: - Downside Scenario 1: Lower Oil Prices - Scenario assumption: oil prices fall to US$45 per barrel starting in 2019. - Illustrative impacts presented on crude oil price, international reserves, and external debt trajectories. - Downside Scenario 2: Higher Fiscal Spending (wage-price spiral) - Scenario assumption: wages adjust for inflation and, absent significant parametric reform of CNR, additional government transfers are required to clear outstanding debt of CNR to CNAS and cover future annual losses. - Illustrative impacts presented on personal expenditure, international reserves, and external debt trajectories. - Staff warning: the narrow baseline path is subject to major adverse risks, including lower oil prices, failure of planned fiscal consolidation, and fiscal risks such as the financial difficulties of the public pension fund (Caisse Nationale de Retraites, CNR). ### Risk Assessment Matrix (high-level) - Key identified risks and staff guidance: - Lower energy prices: - Relative likelihood: Low. - Expected impact: High. - Policy response recommended: sustain gradual fiscal consolidation starting 2018, support by further exchange rate depreciation, and implement wide-ranging structural reforms to diversify the economy. - Weaker-than-expected global growth: - Relative likelihood: High. - Expected impact: High. - Main channel: lower oil prices and reduced gas demand; similar policy response as above. - Tighter global financial conditions: - Relative likelihood: High. - Expected impact: Low / High (short-term limited spillovers but could complicate future international debt access). - Policy response: as above. - Policy and geopolitical uncertainties: - Relative likelihood: High. - Expected impact: Medium/High. - Policy response: sequence reforms equitably, strengthen anti-corruption, and deploy effective communication on the need for sustained fiscal consolidation and reforms. - Idiosyncratic risks around looming 2019 presidential elections: - Relative likelihood: High. - Expected impact: High. - Policy response: see above (communication, reform sequencing). ### Macro-financial linkages within the public sector - Public sector structure and transmission channels: - Large and numerous state-owned enterprises (SOEs) and public banks create multiple financial ties and channels of systemic interaction, often intermediated by the central government. - Central government reimburses SOEs for the cost of subsidized prices and public banks for mandated interest rate subsidies; government may assume SOE debt or refrain from claiming dividends. - Macro-financial linkages can amplify fiscal or liquidity risks: troubles in an SOE can transmit to public banks and the government; concentration risk exists where some public banks have large claims on a few SOEs. - Mitigating factors: public banks remain well-capitalized and profitable and most claims are government-guaranteed. - Policy implications: - If large budget deficits persist and financing needs are repeatedly met by BA borrowing, fiscal risks may translate into macro-instability via reserve drain and higher inflation. - Recommendation: upgrade systemic supervision to monitor structural imbalances and risk transmission channels; strengthen government capacity to monitor fiscal risks, including consolidated public sector debt and stand-alone imbalances in large SOEs or PSEs. *cr18168 - introduction of central bank financing.* ### 16. The authorities recognize that their policy mix entails risks, but are confident that the ### 16. The authorities recognize that their policy mix entails risks, but are confident that the ### Authorities’ assessment of monetary financing and risks - Authorities believe their financing strategy is less risky than borrowing externally, recalling the difficult adjustment after the early-1990s external debt crisis. - They consider the central bank will be able to sterilize enough of the liquidity injected through monetary financing, and hence both credit growth and inflation are unlikely to accelerate. - They are committed to their consolidation plan starting 2019 and trust that external and fiscal imbalances will be restored in a timely manner, which will also limit the use of monetary financing. - They view the decree requiring the central bank to assess progress with the government’s plans as a tool to strengthen their commitment. ### B. Alternative Policy Mix — recommended components - Starting in 2018, sustained but gradual fiscal consolidation using available fiscal space. - Rationale: With a relatively low public debt and negligible external debt, Algeria still has some space for a gradual consolidation. - Fiscal consolidation should be resumed in 2018 and sustained in the medium term, following the efforts undertaken in 2016–17. - It remains possible to reduce the fiscal deficit this year while clearing domestic arrears and making the planned one-off transfer to the public pension fund. - Consolidation should be broad-based: raising more nonhydrocarbon revenues by widening the tax base (reducing exemptions and strengthening tax collection), gradually reducing current expenditure as a share of GDP, and reducing investment costs while increasing its efficiency. - Tapping a broad range of financing options, but excluding direct borrowing from BA. - Domestic issuance of sovereign debt securities at market rates to finance the deficit and promote bond market development. - More frequent use of public-private partnerships (PPPs) and sale of government assets if careful and transparent. - Relaxing the 51–49 partnership rule governing foreign direct investment (FDI) could facilitate privatizations. - External borrowing to shore up foreign reserves and minimize crowding out. - Issuance of domestic or international sovereign sukuks as another option. - Gradual exchange rate depreciation to address external imbalances, support private sector development, and increase hydrocarbon revenues. - Independent monetary policy aimed at containing inflationary pressures. - BA should continue to sterilize liquidity created so far by monetary financing of the fiscal deficit. - BA should stand ready to tighten monetary policy (including by increasing its policy rate) should inflationary pressures emerge. ### Expected outcomes of staff’s alternative scenario - Staff’s alternative scenario (Annex II) assumes a steady reduction of the nonhydrocarbon deficit starting in 2018, calibrated so public debt stabilizes in the medium term at a level sufficiently low to absorb plausible fiscal risks. - Compared with the baseline: - Inflation reverts to a level close to BA’s central target. - The current account deficit is reduced by the end of the period (and is not dependent on distortionary import barriers). - The decline in international reserves slows. - Nonhydrocarbon growth is slower in 2018 but gradually increases above the baseline because fiscal consolidation is less abrupt and structural reforms start yielding results. - Note: The impact of structural reforms remains modest over the projection period as international experience shows that the payoff typically takes time to materialize. ### Measures adaptable to authorities’ preferences - Foreign borrowing may be more acceptable if used to finance well-chosen investment projects. - Progressive increase in foreign investor participation in PPPs is possible. - Rigid limits increase trade-offs between costly adjustment and risky policies. ### Safeguards if deficit continues to be monetized - Suggested safeguards include: - Strict quantitative limits (for example, capping monetary financing at a reasonable proportion of the average annual nonhydrocarbon tax revenue in the previous three years, excluding BA dividends). - Time limits (shorter than the five years provided in the law). - Financing at market rates. - Sterilizing adequate quantities of injected money and tightening monetary conditions to dampen inflationary pressure. - Staff emphasized these safeguards are currently lacking, would not substitute for sound macroeconomic policies, and may reduce, but not eliminate, the risks. ### Authorities’ views on alternative mix and safeguards - Authorities appreciate benefits of gradual fiscal adjustment but are reluctant to borrow externally or allow greater exchange rate depreciation. - They showed openness to external borrowing for carefully chosen investment projects with strong expected growth impact. - They do not plan to relax the 51-49 rule at this stage, believing it does not significantly discourage foreign investment. - They concur with staff that consolidation should rely on reducing tax exemptions, strengthening collection, and increasing spending efficiency. - They consider the recent decree on monetary financing provides a strong safeguard to limit associated risks. ### C. Reforms for sustainable and inclusive growth — priorities - Deep structural reforms are needed to diversify the economy and foster private sector development; reforms must be carefully sequenced and timely implemented. - Priority reform areas: - Strengthening governance and transparency, and reducing red tape. - Algeria discloses little fiscal information; Algeria had an Open Budget Index (OBI) score of 3 out of 100 in 2017. - Current efforts to develop information systems in administrations are welcome. - Improving access to finance. - Government intends to modernize the banking sector, which is dominated by the public sector. - At end-2017, public banks held 87 percent of total loans to the economy (74.5 percent of loans to the private sector and 99.8 percent of loans to the public sector). - Measures: diversify financing sources, develop financial instruments for SMEs, uphold creditor rights, simplify bankruptcy procedures, improve resolution of nonperforming loans, and gradually phase out interest rate subsidies. - Opening the economy to more foreign investment and trade. - Recent hardening of import barriers creates distortions and higher prices; prefer promoting exports and competitiveness, simplifying product market regulations, expanding competition authority powers. - Relaxing the 51-49 rule could increase production capacity, domestic competition, and technology transfer. - Improving labor market functioning and reducing skills mismatch. - Revision of the labor code is an opportunity to facilitate worker mobility through less costly hiring and firing regulations while ensuring protection, e.g., unemployment insurance with expanded coverage. - Continue improving vocational training and align academic education with private sector needs, including managerial and “soft” skills. - Promoting greater inclusion of women in the labor market (Annex VII). - Women are well educated but have very low labor market participation; measures include increasing flexibility in work schedules and location, improving public transportation, and increasing childcare capacity. ### Strengthening the policy framework — priorities - Strengthening the PFM system. - 2018 budget expansion, at odds with the 2017–19 MTBF, undermined MTBF usefulness; continue efforts to strengthen credibility and efficiency of MTBF. - Introduction of a medium-term expenditure framework is welcome. - Strengthen capacity to monitor budget execution in real time and control spending commitments to prevent payment arrears. - Planned adoption of a new organic budget law based on best international practices will provide legal basis for multiyear budgeting. - Authorities’ efforts to improve capacity to produce government finance statistics following international standards and in a timely manner is welcome. - Improving the efficiency of public spending. - Better control long-term evolution of the wage bill, link wage increases to productivity. - Improve investment project selection, budgeting, implementation, and ex post evaluation. - Enhancing liquidity management. - BA’s toolbox includes reserve requirements and open market operations; currently mops up liquidity via seven-day bank deposits and injects liquidity by refinancing banks providing sovereign securities as collateral through competitive auctions. - To enhance sterilization, BA could sell debt securities instead of taking deposits, allowing interbank repo transactions. - If T-bill issuance remains limited, BA could consider issuing its own negotiable certificates of deposit (CDN) on short maturities (seven days and one month) to extend the short-term leg of the yield curve. - Curbing the parallel foreign exchange market. - Diversify FX supply on the interbank market and streamline FX transaction rules. - BA’s initiative to clarify surrender requirements for nonhydrocarbon export revenue in FX was welcome. - BA could consider a wider bid-ask spread on the official exchange rate to increase transaction volumes and relax indicative ceilings on allowances for medical expenses, study, and travel abroad. - Continuing efforts to strengthen the prudential framework. - Rollout of Basel II, risk-based supervision, and tighter public bank governance has improved resilience. - Supervisors are monitoring banks and running stress tests; more frequent stress tests are needed. - If ample liquidity boosts credit expansion, consider introducing a countercyclical capital buffer and macroprudential measures (such as loan-to-value limits). - Develop a systemic-risk analysis and containment framework. - Improving crisis preparedness. - Develop crisis management processes and a bank resolution framework that clearly define roles and responsibilities. ### Authorities’ views on reforms and policy framework - Authorities agree on the need to advance structural reforms and have a decree on monetary financing that refers to reforms to: modernize and strengthen PFM; raise more nonhydrocarbon revenue; increase spending efficiency through better wage management, rationalization of subsidies, and improved investment project selection; combat over-pricing of imports; modernize the banking sector; promote e-administration and use of information technologies; improve labor market functioning and unemployment schemes; facilitate nonhydrocarbon exports; and improve the business climate (task force with World Bank assistance). - They remain convinced of the usefulness of temporary hardened import barriers to preserve reserves and foster import substitution. - They appreciate IMF technical assistance in a number of areas to strengthen their policy framework. *International Monetary Fund — CR18168 excerpt* ### Box 3. The Parallel Exchange Market ### Box 3. The Parallel Exchange Market ### Structure and drivers of the parallel market - The interbank spot exchange market is asymmetrical as the central bank (BA) is de facto the main supplier because the bulk of FX supply is generated by hydrocarbon exports that must be sold exclusively to BA. - Other exports provide a minor supply of FX, half of which may be retained by exporters. - An illegal parallel exchange market has emerged and "seems to have become larger and more sophisticated." - The parallel market premium is currently reportedly about 50 percent of the official exchange rate. ### Sources of supply on the parallel market - Repatriation of pensions of former Algerian expatriates. - Remittances from current Algerian expatriates. - Overbilling of imports. - Tourism revenue that is not captured by the banking sector. ### Sources of demand on the parallel market - FX transactions for the purchase of imports that are restricted or for other purchases where the bona fide nature of the transaction cannot be established. - Capital flight to invest abroad or evade tax, and/or as a store of value. - Speculation based on expected fluctuations of the official and parallel exchange rates. ### Macroeconomic implications - The existence of the parallel market: - Fuels inflationary expectations. - Distorts price formation. - Weakens the channels of monetary policy transmission. - Recourse to monetary financing may: - Exacerbate inflationary pressures. - Increase demand on the parallel market. - Raise exchange rate premiums. - Incentivize inflationary behaviors (for example, the overbilling of imports). ### Policy options to reduce the parallel market - Gradually adjusting the official exchange rate. - Increasing indicative ceilings for travel allowances. - Relaxing import restrictions. - Note: These measures "could reduce the size of the parallel market, but not eliminate it." - Unification of the two markets will only be possible through the gradual liberalization of capital transactions, which "can only be envisaged in when macroeconomic conditions are more favorable." ### Staff appraisal — key findings and recommendations (paragraphs 25–31) - Recent macroeconomic context and risks: - Despite some fiscal consolidation in 2017, the fiscal and current account deficits remained large. - Savings in the FRR were depleted, financing conditions became more difficult, and domestic payment arrears occurred. - Some fiscal risks materialized in the form of support to public enterprises and the national pension scheme. - The external position remained substantially weaker than warranted by medium-term fundamentals and desirable policies, and reserves, while still ample, continued to decline. - Overall economic activity slowed; unemployment increased and remains particularly high among the youth and women. - Inflation receded but remained above BA’s target. - Policy switch in 2018: - Authorities resorted to fiscal expansion in 2018 in response to payment arrears, higher unemployment and slowing growth. - They intend to resume fiscal consolidation starting 2019 to reach budget balance by 2022. - Reluctant to borrow externally or to allow a greater exchange rate depreciation, they allowed BA to lend directly to the treasury. - They hardened import barriers, including replacing import licenses with a temporary ban on the imports of many goods and higher tariffs. - Risks of the 2018 approach: - Short-term growth gains may come at the cost of exacerbating fiscal and external imbalances. - In the medium term, risks include increasing inflation, accelerating the loss of international reserves, and lowering growth. - New policies will reduce the economy’s resilience to external and domestic shocks. - Recommended less risky strategy: - Use space provided by relatively low public debt and little external debt for sustained, gradual fiscal consolidation without recourse to monetary financing. - Tap a broad range of financing options: domestic debt issuance at market rates, public-private partnerships, sale of assets, and external borrowing to finance well-chosen investment projects. - Implement a gradual exchange rate depreciation combined with efforts to eliminate the parallel foreign exchange market. - Allow the central bank to carry out monetary policy independently and stand ready to tighten the monetary policy stance pending assessment of inflationary effects of fiscal consolidation. - Safeguards if monetary financing continues: - Strict quantitative and time limits to central bank borrowing. - Pricing such financing at market rates. - Adequate sterilization of money creation. - BA should increase the reserve requirement. - Continue taking bank deposits through auctions or issue tradable BA deposit certificates to facilitate short-term liquidity exchanges among banks. - These safeguards "may reduce but would not eliminate the risks and cannot substitute sounder macroeconomic policies." - Structural and prudential priorities: - Timely progress on structural reforms is crucial to foster private sector development and reduce dependence on oil and gas; priorities include reducing red tape, improving access to finance, strengthening governance, transparency and competition, further opening the economy to trade and foreign investment, improving labor market functioning, and fostering greater female labor force participation. - Strengthen economic policy frameworks, including improving PFM and the efficiency of public spending. - Strengthen the prudential framework: analyze and monitor complex macro-financial linkages in the public sector; conduct more frequent stress tests; develop a systemic-risk analysis and containment framework. - Consider introducing a countercyclical capital buffer and macroprudential measures such as loan-to-value limits. - Develop crisis management processes and a clear bank resolution framework. *From: Box 3. The Parallel Exchange Market.* ### 32. Staff recommends that the next Article IV consultation be held on the standard ### 32. Staff recommends that the next Article IV consultation be held on the standard 12-month cycle. ### Macroeconomic outlook and prices - Real GDP (annual percent change): 3.8, 3.7, 3.3, 1.6, 3.0, 2.7, 1.8, 1.1, 0.6, 0.5 (2014–2023 Prel./Proj.) - Hydrocarbon sector (annual percent change): -0.6, 0.2, 7.7, -3.0, 1.3, 2.0, 2.1, 2.4, 2.4, 2.4 - Nonhydrocarbon sector (annual percent change): 5.6, 5.0, 2.3, 2.6, 3.4, 2.9, 1.8, 0.8, 0.3, 0.1 - Per capita (annual percent change): 1.6, 1.5, 1.3, -0.3, 1.1, 0.9, 0.0, -0.6, -0.9, -1.1 - Consumer price index (period average): 2.9, 4.8, 6.4, 5.6, 7.4, 7.6, 7.0, 9.1, 10.9, 13.9 ### Investment, savings, and external balances - Savings-investment balance (percent of GDP): -4.4, -16.5, -16.6, -12.9, -9.7, -10.1, -8.2, -6.9, -5.2, -4.3 - National savings (percent of GDP): 43.1, 36.3, 37.2, 37.4, 42.0, 36.6, 33.2, 30.8, 29.8, 29.1 - Investment (percent of GDP): 47.5, 52.8, 53.9, 50.3, 51.7, 46.8, 41.5, 37.7, 35.0, 33.5 - Current account balance (percent of GDP): -4.4, -16.5, -16.6, -12.9, -9.7, -10.1, -8.2, -6.9, -5.2, -4.3 - Exports, f.o.b. (percent of GDP): 60.0, 34.6, 29.1, 34.4, 39.5, 37.8, 36.7, 36.6, 36.9, 37.4 - Hydrocarbons (percent of GDP): 58.4, 33.1, 27.7, 33.1, 37.9, 36.1, 35.1, 35.0, 35.4, 36.3 - Nonhydrocarbons (percent of GDP): 1.6, 1.5, 1.4, 1.4, 1.6, 1.7, 1.6, 1.6, 1.5, 1.1 - Imports, f.o.b. (percent of GDP): -59.7, -52.6, -49.4, -48.7, -48.9, -49.4, -46.2, -44.1, -41.6, -40.6 - Overall balance (percent of GDP, BoP table): -5.9, -27.5, -26.3, -21.8, -17.0, -18.9, -15.7, -14.8, -12.1, -9.5 ### Central government finances (levels and percent of GDP) - Budget revenue and grants (in billions of Algerian Dinars): 5,738; 5,105; 5,012; 6,183; 6,504; 6,433; 6,553; 6,921; 7,462; 8,117 (2014–2023) - Hydrocarbon revenue (in billions of dinars): 3,388; 2,375; 1,683; 2,372; 2,634; 2,561; 2,524; 2,637; 2,804; 3,012 - Nonhydrocarbon revenue (in billions of dinars): 2,350; 2,730; 3,329; 3,810; 3,871; 3,872; 4,029; 4,284; 4,659; 5,105 - Total expenditure (in billions of dinars): 6,996; 7,656; 7,297; 7,389; 8,273; 7,418; 7,225; 7,334; 7,463; 8,115 - Current expenditure (in billions of dinars): 4,494; 4,617; 4,586; 4,758; 5,085; 4,645; 4,655; 4,915; 5,213; 5,621 - Capital expenditure (in billions of dinars): 2,501; 3,039; 2,712; 2,631; 3,189; 2,773; 2,570; 2,418; 2,250; 2,494 - Budget balance (in percent of GDP): -7.3, -15.3, -13.1, -6.4, -8.3, -4.3, -2.8, -1.6, 0.0, 0.0 - Overall balance (in percent of GDP): -8.0, -15.7, -13.5, -8.8, -9.0, -4.8, -3.0, -1.7, -0.1, 0.0 - Nonhydrocarbon balance (in percent of nonhydrocarbon GDP): -37.9, -36.8, -28.0, -26.4, -26.9, -19.8, -16.3, -14.1, -11.7, -11.1 - Gross government debt (excluding guarantees, percent of GDP): 7.7, 8.8, 20.6, 27.0, 34.8, 39.9, 40.6, 39.1, 35.8, 32.1 - Central bank financing (percent of GDP): 0.0, 0.0, 0.0, 11.6, 9.9, 5.1, 3.1, 1.7, 0.1, 0.0 ### Fiscal accounts — selected ratios (percent of GDP) - Budget revenue and grants: 33.3, 30.6, 28.8, 32.7, 30.6, 28.2, 27.0, 26.3, 25.9, 25.3 - Hydrocarbon revenue: 19.7, 14.2, 9.7, 12.5, 12.4, 11.2, 10.4, 10.0, 9.7, 9.4 - Nonhydrocarbon revenue: 13.6, 16.3, 19.1, 20.2, 18.2, 17.0, 16.6, 16.3, 16.2, 15.9 - Total expenditure: 40.6, 45.8, 41.9, 39.1, 38.9, 32.5, 29.8, 27.9, 25.9, 25.3 - Current expenditure: 26.1, 27.6, 26.3, 25.2, 23.9, 20.4, 19.2, 18.7, 18.1, 17.5 - Capital expenditure: 14.5, 18.2, 15.6, 13.9, 15.0, 12.2, 10.6, 9.2, 7.8, 7.8 ### Balance of payments and reserves - Current account (in percent of GDP, BoP table): -9.4, -27.3, -26.5, -21.9, -18.3, -20.2, -17.2, -14.9, -11.8, -10.4 - Trade balance (in percent of GDP): 0.3, -18.1, -20.4, -14.3, -9.4, -11.6, -9.5, -7.5, -4.7, -3.2 - Services and income (net, percent of GDP): -13.0, -12.0, -8.9, -10.7, -11.9, -11.8, -11.0, -10.9, -10.7, -10.9 - Transfers (net, percent of GDP): 3.3, 2.8, 2.8, 3.0, 3.1, 3.2, 3.3, 3.4, 3.6, 3.7 - Gross official reserves (billions of US$): 177.4, 142.6, 112.9, 96.1, 82.6, 64.1, 48.7, 34.0, 22.0, 12.5 - Gross official reserves (months of next year's imports): 33.4, 28.4, 22.6, 19.1, 16.2, 13.5, 10.7, 7.9, 5.2, 3.0 - Net international investment position (in billions of US$): 141.7, 107.1, 72.5, 52.0, 33.6, 10.8, -7.6, -25.1, -39.3, -51.2 - Net international investment position (percent of GDP): 66.3, 64.5, 45.6, 30.5, 17.8, 5.4, -3.7, -11.6, -17.5, -21.4 - Algerian crude oil price (US$/barrel, weighted average quarterly): 99.4, 52.9, 45.5, 54.0, 64.2, 60.3, 57.6, 56.2, 55.8, 55.9 ### Oil and gas sector - Hydrocarbon production (ton oil equivalent): 142, 141, 153, 152, 154, 157, 160, 164, 168, 173 (2014–2023) - Natural gas exports (in billions of m3): 44.3, 43.1, 53.1, 53.4, 54.2, 55.1, 56.2, 57.6, 59.0, 60.5 - Crude oil export unit value (US$/bbl): 99.4, 52.9, 45.5, 54.0, 64.2, 60.3, 57.6, 56.2, 55.8, 55.9 - Share of hydrocarbons in total exports (percent): 97.3, 95.7, 95.2, 96.0, 95.9, 95.6, 95.7, 95.6, 96.0, 97.0 ### Money, credit, and monetary aggregates - Net foreign assets (end period, in billions of dinars): 15,602; 15,222; 12,443; 11,058; 9,438; 7,413; 5,691; 4,135; 2,757; 1,580 - Money and quasi-money (M2, in billions of dinars): 13,664; 13,705; 13,816; 14,958; 16,664; 17,491; 18,203; 19,202; 20,419; 22,028 - Money (in billions of dinars): 9,580; 9,261; 9,407; 10,250; 11,300; 11,987; 12,500; 13,147; 13,920; 15,019 - Quasi-money (in billions of dinars): 4,084; 4,443; 4,409; 4,708; 5,363; 5,504; 5,703; 6,055; 6,499; 7,009 - Credit to the economy (in billions of dinars): 6,604; 7,350; 8,011; 8,953; 10,090; 10,867; 11,585; 12,721; 13,905; 15,126 - Credit to the economy (percent change over 12-month period): 26.0, 11.3, 9.0, 11.8, 12.7, 7.7, 6.6, 9.8, 9.3, 8.8 - M2 velocity (GDP/M2): 1.26, 1.21, 1.31, 1.31, 1.31, 1.31, 1.31, 1.41, 1.41, 1.5 ### Financial soundness indicators (selected, 2009–2017) - Capital adequacy ratio: 26.2, 23.6, 23.7, 23.4, 21.5, 16.0, 18.4, 18.9, 19.6 - Public banks: 23.9, 21.7, 21.9, 21.6, 19.9, 14.9, 17.7, 18.5, 19.8 - Private banks: 35.2, 31.6, 31.2, 31.9, 28.5, 20.9, 21.1, 20.4, 18.7 - NPLs/total loans: 21.1, 18.3, 14.5, 11.5, 10.6, 9.2, 9.8, 11.9, 12.3 - Public banks: 23.6, 20.5, 16.1, 12.4, 11.4, 9.7, 9.9, 12.4, 12.9 - Private banks: 3.8, 4.1, 4.0, 5.2, 4.8, 5.1, 8.7, 8.2, 7.9 - Provisions/classified loans: 65.4, 76.5, 69.8, 69.5, 68.2, 65.2, 59.2, 54.5, 51.4 - Return on equity: 26.0, 16.7, 24.7, 23.3, 19.0, 23.6, 20.3, 18.1, 17.8 - Liquid assets/total assets: 51.8, 53.0, 50.2, 45.9, 40.5, 38.0, 27.2, 23.5, 23.7 - Liquid assets/short-term debt: 114.5, 114.3, 103.7, 107.5, 93.5, 82.1, 61.6, 58.4, 53.9 ### Memorandum and fiscal program indicators - GDP (in billions of dinars at current prices): 17,229; 16,702; 17,407; 18,907; 21,277; 22,807; 24,232; 26,316; 28,826; 32,133 - GDP (in billions of US$ current prices): 214; 166; 159; 170; 189; 199; 209; 216; 225; 239 - GDP per capita (in US$): 5,466; 4,151; 3,902; 4,102; 4,463; 4,630; 4,761; 4,842; 4,971; 5,195 - Exchange rate (DA per US$): 80.6; 100.7; 109.4; 111.0; .................. - Oil stabilization fund (in billions of Algerian dinars): 4,408; 2,074; 784; 0; 0; 0; 0; 0; 0; 0 - Gross external debt (in percent of GDP): 1.7, 1.8, 2.4, 2.4, 2.1, 1.9, 1.8, 1.6, 1.5, 1.4 *Sources: Algerian authorities; and IMF staff estimates and projections.* ### Annex I. Authorities’ Response to Past IMF Recommendations ### Annex I. Authorities’ Response to Past IMF Recommendations ### Fiscal policy and public finances - Pursue sustained consolidation - The government achieved a significant consolidation in 2017, but plans a large expansion in 2018. - Create fiscal space by tapping a broad range of financial instruments - The government’s financing strategy was limited to using fiscal savings in the FRR and issuing some domestic debt. To meet its financing constraint, the government borrowed from the central bank. - Contain the wage bill - The 2018 budget virtually freezes wages in nominal terms. - Measures include freezing hiring except for strategic sectors and replacing only one out five new retirees. - Gradually reduce fuel subsidies and introduce a targeted cash-transfer system - The government raised fuel and electricity taxes in 2018, and intends to deepen subsidy reform. - Working with the WB on a communication strategy and the introduction of a targeting system. - Mobilize more nonhydrocarbon revenues by widening the tax base rather than tax increases - The 2018 budget increased taxes on tobacco, wines and alcohol, raised taxes and customs duties on several imported products. - Steps to modernize tax administration processes, including its IT systems, were taken. - Reduce public investment spending and improve its efficiency - Public investment spending was cut significantly in 2017, albeit less than envisaged in the budget. - The 2018 budget calls for a significant increase in capital expenditures. - Strengthen public financial management - A weak capacity to monitor budget commitments led to renewed arrears in 2017. - The government issued a new regulation aiming to ensure that payment ceilings will not be exceeded in 2018. - FAD has provided significant TA in this area. ### Structural, exchange rate, monetary, and financial policies - Implement wide-ranging structural reforms - Authorities have been drawing a strategy to reshape Algeria’ growth model with World Bank support. - Government announced an ambitious reform plan and published a decree listing reforms, but significant concrete actions are yet to be taken. - Exchange rate - The NEER and REER depreciated by 10 and 8 percent, respectively in 2017, mostly reflecting euro/dollar fluctuations. - Staff alternative scenario assumes the REER depreciates by 26 percent over the projection period compared to a real appreciation in the baseline scenario. - Monetary operations and financing - Open market operations were introduced in 2017; BA is adapting to counter the impact of monetary financing. - The government borrowed from the central bank to meet financing constraints in 2017. - Financial sector prudential framework - BA introduced new regulations, including to strengthen banks’ corporate governance. *IMF staff summary of authorities’ responses contained in Annex I of the source.* ### Annex II. Alternative Scenario (summary of assumptions and projections) ### Policy mix and objectives - Scenario objective: sustained but gradual fiscal consolidation starting in 2018, avoiding monetary financing, combined with further exchange rate depreciation and ambitious structural reforms. - Medium-term target: bring the deficit close to zero and stabilize public debt below 40 percent of GDP. ### Key assumptions (explicit) - Expenditure paths - Both current and capital expenditures decline more slowly than in the baseline starting in 2019. - Current spending falls to 23.7 percent of nonhydrocarbon GDP in 2023 (compared to 20.8 percent in the baseline scenario). - Investment spending decreases to 13.8 percent of nonhydrocarbon GDP in 2023 (versus 9.2 percent in the baseline scenario). - Consolidation assumed in 2018 still leaves space to clear domestic arrears and make the one-off transfer to the public pension fund. - Revenue and tax policy - Tax revenues rise to 18.8 percent of nonhydrocarbon GDP in 2023 (compared to 17.3 percent in the baseline), reflecting a greater reduction in tax exemptions and improved tax administration and collection. - Financing strategy - To finance larger deficits, the government borrows domestically, finances selected investment projects with borrowing from official bilateral creditors (starting in 2019), and issues bonds in international capital markets (starting in 2020). - External competitiveness and exports - REER depreciates by 26 percent over the projection period. - Efforts to diversify and liberalize the economy gradually increase nonhydrocarbon exports, FDI, and tourism receipts toward the end of the projection period. ### Selected projected outcomes (alternative scenario) - Real GDP (annual percent change) - 2018: 2.5 - 2019: 2.3 - 2020: 2.0 - 2021: 1.8 - 2022: 1.6 - 2023: 1.8 - Consumer price index (period average) - 2018: 6.5 - 2019: 6.2 - 2020: 5.8 - 2021: 5.4 - 2022: 4.9 - 2023: 4.0 - Central government overall budget balance (percent of GDP) - 2018: -8.8 - 2019: -6.8 - 2020: -5.8 - 2021: -5.1 - 2022: -4.5 - 2023: -2.8 - Gross government debt (excluding guarantees, percent of GDP) - 2018: 27.0 - 2019: 30.0 - 2020: 35.7 - 2021: 38.5 - 2022: 40.3 - 2023: 40.3 - Nonhydrocarbon primary balance (percent of nonhydrocarbon GDP) - 2018: -25.4 - 2019: -24.4 - 2020: -21.6 - 2021: -19.6 - 2022: -18.4 - 2023: -16.2 - Current account balance (percent of GDP) - 2018: -12.9 - 2019: -7.3 - 2020: -8.6 - 2021: -6.8 - 2022: -5.5 - 2023: -3.3 - Gross official reserves (US$ billions) - 2018: 77 - 2019: 75 - 2020: 66 - 2021: 62 - 2022: 63 - 2023: 69 - International reserves (months of next year's imports) - 2018: 18 - 2019: 16 - 2020: 15 - 2021: 15 - 2022: 16 - 2023: 17 ### Comparative dynamics vs baseline (qualitative conclusions) - Fiscal balance - Baseline: deficit widens in 2018 and is brought to zero by 2022 (steep consolidation in 2019). - Alternative: deficit declines more gradually, reaching close to zero in the medium term. - Nonhydrocarbon growth - Baseline: accelerates in 2018 then slows rapidly thereafter. - Alternative: increases slightly in 2018 and slows more gradually; modest improvement toward end of projection due to reforms and investor confidence. - Inflation - Baseline: fiscal expansion, monetary financing and import restrictions push inflation higher. - Alternative: inflation converges towards BA’s central target because of sustained adjustment efforts and prudent monetary policy. - Unemployment - Baseline: falls in 2018 then accelerates as growth slows. - Alternative: rises slightly until 2021, then reverses as growth accelerates. - Reserves and current account - Baseline: reserves decline rapidly to about 3 months of imports by 2023. - Alternative: reserves decline to about 17 months of imports by 2023 and their level stabilizes. *Tables and figures underlying these projections are drawn from the staff’s alternative scenario projections in Annex II.* ### Annex III. Downside Risks Scenarios (summary) ### Downside scenario I — Lower Oil Prices - Oil price assumptions - Baseline: Oil prices increase significantly in 2018, then decrease gradually to stabilize around US$56 per barrel. - Downside scenario I: Oil prices decrease significantly to US$45 per barrel starting in 2019 and remain at that level over the medium term. - Key impacts - Current account balance: Lower oil prices significantly worsen the external balance compared to the baseline. - Monetary financing (cumulative, billions of dinars) - Baseline: total monetary financing in the medium term would amount to around DZD 7,000 billion. - Downside scenario I: total monetary financing would be over DZD10,000 billion by 2023. - Inflation: Larger use of monetary financing leads to greater inflationary pressures than the baseline (baseline inflation accelerates and reaches 14 percent in the medium term; downside I is worse). - International reserves and external debt: In downside I it becomes necessary to resort to external borrowing starting in 2021 to avoid depletion of reserves; reserves fall far more than in the baseline. ### Downside scenario II — Higher Fiscal Spending (wage increase) - Assumptions - Baseline: wage bill is significantly reduced in the medium term (per the 2018–20 MTBF). - Downside II: wages remain constant in percent of GDP, allowing for some real increases; repeated transfers to the public pension fund are assumed absent significant parametric reform. - Key impacts - Budget balance: Higher personnel expenditure worsens the budget deficit in the medium term compared to the baseline (baseline eliminates the deficit by 2022; downside II does not). - Monetary financing (cumulative, billions of dinars) - Baseline: monetary financing decreases as consolidation reduces financing needs. - Downside II: monetary financing increases with higher financing needs; total amount in the medium term is more than double the amount in the baseline scenario. - Inflation: Downside II triggers a wage-price inflationary spiral, driving a rapid and significant increase in inflation (baseline reaches 14 percent in the medium term; downside II is significantly higher). - International reserves and external debt: Without external borrowing, foreign exchange reserves are depleted by 2022 in downside II. *Annex III presents the staff’s downside-risk scenarios illustrating how lower oil prices or higher fiscal/wage spending can materially worsen monetary financing needs, inflation, reserves, and external debt compared with the baseline.* *Source: IMF staff estimates and projections as presented in the Annexes.* ### Annex IV. Public Debt Sustainability Analysis ### Annex IV. Public Debt Sustainability Analysis ### Overview and recent developments - Public debt currently stands at 27 percent of GDP (48 percent of GDP including guarantees). - Until 2013 fiscal balances were positive; 2014–15 deficits were mainly financed by drawing down savings in the oil stabilization fund (FRR). - Since 2016, government debt increased significantly reflecting materialized fiscal risks and, starting 2017, the depletion of fiscal savings. - The government’s recent decision to monetize the deficit is (artificially) keeping the cost of debt low. - FRR was depleted in February 2017. - Staff assessment: assuming sustained fiscal consolidation from 2019 onwards per the authorities’ plan, debt levels are projected to remain manageable and financing needs are not very sensitive to shocks. ### Domestic debt composition and holders - Domestic public debt comprises Treasury bills and bonds, and restructured debt purchased from state-owned enterprises. - At end-2017, about 53 percent of outstanding Treasury securities were held by the central bank; the remainder were held by banks (mostly public) and insurance companies. - Guarantees in 2017 consisted of guarantees of public enterprises’ borrowing from state-owned banks equal to 21 percent of GDP. ### Recent financing operations and monetary financing - Consolidation efforts combined with higher oil prices reduced the cash-basis deficit from 13.5 percent of GDP in 2016 to 8.8 percent of GDP in 2017. - With FRR depleted and domestic liquidity declining, the government changed the banking law and: - Borrowed directly from the central bank about 3 percent of GDP to finance its deficit. - Used monetary financing to buy back some of its own debt to public enterprises and debt owed by public enterprises to public banks, and to finance the National Investment Fund. - In total, monetary financing represented 11.6 percent of GDP, backed by securities with long maturities (up to 30 years), and at a low interest rate (0.5 percent). ### External debt and external financing - Algeria did not borrow externally after its last IMF disbursement in 1999 until 2016, when the African Development Bank (AfDB) provided a €900 million budget support loan. - At end-2017, public external debt represented 2.4 percent of GDP. - Remaining external debt is mostly on concessional terms and owed to bilateral creditors. ### Authorities’ budget plan and baseline projections - The 2018-20 medium-term budget plan calls for fiscal expansion in 2018 followed by ambitious consolidation to bring the deficit to zero in 2022. - The government intends to continue monetizing the deficit for the next three to five years. - Staff estimates: the government could borrow from the central bank up to 23.8 percent of 2017 GDP during 2018–22 (9.9 percent of 2018 GDP in 2018 alone). - Starting in 2019, gross financing needs would decline rapidly, averaging about 4.8 percent of GDP over the period. - Under the baseline projection government debt is projected to fall to about 31 percent of GDP by 2023 (43 percent of GDP including guarantees). - Key projection datapoints from the baseline table (selected): - Nominal gross public debt: 2017 = 48.0; 2018 = 53.5; 2019 = 55.6; 2020 = 55.4; 2021 = 52.7; 2022 = 48.2; 2023 = 43.3 (in percent of GDP). - Of which: guarantees: 2017 = 21.0; 2018 = 18.7; 2019 = 17.4; 2020 = 16.4; 2021 = 15.1; 2022 = 13.8; 2023 = 12.4 (in percent of GDP). - Public gross financing needs: 2017 = 18.1; 2018 = 12.0; 2019 = 8.1; 2020 = 6.3; 2021 = 5.0; 2022 = 2.4; 2023 = 2.0 (in percent of GDP). - Primary deficit (percent of GDP): 2016 = 3.3; 2017 = 13.5; 2018 = 8.5; 2019 = 9.2; 2020 = 5.0; 2021 = 3.0; 2022 = 1.7; 2023 = 0.1/0.0 (table shows 0.0 for 2023). - Nominal GDP growth and deflator series as reported in the baseline table (see full table for exact year-by-year values). ### Alternative scenarios and stress tests - Constant-primary-balance (no fiscal adjustment) scenario: assuming no change in the primary balance beginning in 2018, public debt (including guarantees) would increase to 49 percent by 2023. - Stress-test results summary: - Gross financing needs are not sensitive to shocks and would remain limited even under combined macro-fiscal shocks. - Figures and scenario tables present shocks including Primary Balance Shock, Real GDP Growth Shock, Real Interest Rate Shock, Real Exchange Rate Shock, and Combined Macro-Fiscal Shock with corresponding year-by-year assumptions for real GDP growth, inflation, primary balance, and effective interest rate (see stress test tables and charts for exact values). - Under stress tests, gross nominal public debt and gross financing needs are plotted in percent of GDP and percent of revenue across 2018–2023 for each shock; the staff conclusion is that projected debt levels remain manageable and financing needs remain limited under these tests. ### Risk assessment and vulnerabilities - Debt profile vulnerabilities highlighted: - Gross financing needs were estimated to have exceeded the benchmark of 15 percent in 2017 (cell highlighted in red in the risk assessment table). - Public debt held by non-residents, public debt in foreign currency, bond spread, change in share of short-term debt, and external financing requirement indicators are reported in the risk-assessment heat map (see table and figures for 2017 indicator levels and benchmark comparisons). - External-debt sustainability tables (2013–23) show external debt at low levels (baseline external debt: 2017 = 2.4 percent of GDP) but gross external financing needs in US$ terms were sizable in earlier years (for example, 2015–17 values shown in the table). ### Key quantitative findings (selected, exact figures preserved) - Public debt: 27 percent of GDP (48 percent including guarantees). - Domestic public debt in 2014–15: around 8 percent of GDP (excluding guarantees). - Government debt in 2016: about 20.6 percent of GDP. - Government debt in 2017: 27 percent of GDP. - Guarantees in 2017: 21 percent of GDP. - Cash-basis deficit: 2016 = 13.5 percent of GDP; 2017 = 8.8 percent of GDP. - Central bank borrowing in late 2017: about 3 percent of GDP. - Monetary financing in total: 11.6 percent of GDP; securities up to 30 years; interest rate 0.5 percent. - At end-2017, public external debt: 2.4 percent of GDP. - AfDB budget support loan in 2016: €900 million. - Staff estimate central bank borrowing potential during 2018–22: up to 23.8 percent of 2017 GDP (9.9 percent of 2018 GDP in 2018 alone). - Gross financing needs averaging about 4.8 percent of GDP starting in 2019 in the baseline. - Under no fiscal adjustment scenario, public debt (including guarantees) would increase to 49 percent by 2023. *Source: IMF staff (Annex IV. Public Debt Sustainability Analysis, Algeria).* ### Annex V. External Sector Assessment ### Annex V. External Sector Assessment ### External position — overview - The external position in 2017 was substantially weaker than warranted by medium-term fundamentals and desirable policies, but stock variables remain comfortable. - External debt is negligible. - Reserves are still well above adequacy ratios, although they are rapidly declining. - The exchange rate has depreciated somewhat but remains overvalued. - The current account deficit is significantly larger than warranted by medium-term fundamentals and desirable policies. ### Current account developments and projections - Large drop in oil prices in 2014 and declining hydrocarbon production turned large positive current account surpluses into large deficits. - Algeria has not been able to redress the balance through fostering nonhydrocarbon exports or sufficiently reducing import demand. - Recent increase in oil prices has helped reduce the current account deficit. - Current account estimated at 12.3 percent of GDP for 2017, down from 16.6 percent in 2016. - Baseline scenario: current account deficit projected to narrow significantly in the medium term, reflecting the impact of fiscal consolidation as well as hardened tariff and nontariff trade barriers. - Text table highlights: EBA-lite current account approach — Current account norm: -3.1; Current account actual: -13.0; Current account gap: -9.9 (In percent of GDP). ### EBA-lite estimates and external sustainability approaches - EBA-lite and external sustainability (ES) approaches indicate the current account is well below its norm and the REER is significantly overvalued. - Staff estimates of REER overvaluation: in the 13–51 percent range (consistent with a current account gap in the range of -3 to -10 percent). - Estimates subject to significant uncertainty due to magnitude and persistence of the terms-of-trade shock and existence of a parallel exchange market; EBA-REER method did not yield reliable results. - EBA-lite current account approach: current account gap of -9.9 percent of GDP in 2017. - EBA-lite external sustainability approach: - Scenario 1 (Stabilizing net IIP at current level): Current account norm: 2.3; Current account actual: -4.2; Current account gap: -6.5 (In percent of GDP). - Scenario 2 (Stabilizing net IIP at 2022 projected level): Current account norm: -1.1; Current account actual: -4.2; Current account gap: -3.1 (In percent of GDP). - Overall assessment: EBA-lite CA model yields a current account gap of –9.9 percent of GDP at end-2017, while the ES approach suggests a current account gap between -6.5 percent and -3.1 percent of GDP. ### Reserves, external debt, and NIIP - International reserves at about US$96 billion at end-2017 (excluding SDRs), equal to 19 months of imports and 402 percent of the IMF’s adjusted ARA metric. - Reserves are about half of their peak value in 2013 (peak US$192 billion in 2013) and are projected to decline over the medium term in the baseline scenario to US$13 billion in 2023, equal to about 3 months of imports. - Total external debt stood at just 2.3 percent of GDP in 2017. - Algeria’s NIIP at end-2017 was 37.6 percent of GDP; liabilities are negligible compared to assets, which are dominated by foreign reserves. - Under the baseline scenario, the NIIP is projected to turn negative over the medium term, reaching - 6.7 percent of GDP by 2023. ### Exchange rate and REER developments - Since mid-2014, the dinar has depreciated by 31 percent against the dollar. - Over the same period, the REER depreciated by 8 percent because of higher inflation in Algeria than in its trading partners. - In 2017, both the nominal and real effective exchange rates depreciated (by 10 and 8 percent, respectively). - The foreign exchange premium on the parallel exchange market stands at about 50 percent. - Despite efforts to clarify surrender requirements of nonhydrocarbon export receipts, more remains to be done to deepen the official FX market. ### Capital and financial accounts - Capital flows are minimal due to multiple restrictions. - FDI is small and concentrated in the hydrocarbon sector. - Portfolio investment does not exist as either assets or liabilities. ### Assessment and policy recommendations - 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. However, the external position in 2017 was substantially weaker than warranted by medium-term fundamentals and desirable policy settings, and the REER remains significantly overvalued. - Potential policy responses: - Sustained fiscal consolidation would help restore external balances. - Structural reforms are needed to foster export diversification. - Further exchange rate depreciation is needed to help bring the REER in line with its equilibrium value. - Independent monetary policy aimed at curbing inflationary pressures has a key role to play. *Source: Annex V. External Sector Assessment (cr18168).* ### 5. By enlarging the pool of talent available to employers, increased female labor market ### 5. By enlarging the pool of talent available to employers, increased female labor market ### Key findings - Bringing the female employment rate to male levels could raise GDP per capita by: - Japan: 9 percent - United Arab Emirates: 12 percent - Egypt: 34 percent - Under similar assumptions, the GDP boost in Algeria would be around 40 percent. - Recent literature (Cuberes, Newiak and Teigner 2016) produces similar estimates for large potential gains from reducing gender gaps in labor force participation. ### Model estimates and scenarios - Simple estimates: equalizing female employment rates to male levels yields the country-specific GDP per capita increases listed above. - More elaborate model results indicate that countries in the Middle East and North Africa could see large increases in GDP if labor market frictions that prevent women from joining the labor force were eliminated. - For Algeria, reducing gender gaps over a fifty-year period would see increases in GDP of around 40 percent by 2040. ### Policy implications - Eliminating labor market frictions that prevent women from joining the labor force could generate large, long-term gains in GDP, particularly in Middle East and North Africa economies. - Policies aimed at raising female labor market participation toward male employment rates could substantially enlarge the pool of talent available to employers and enhance growth. *Source: https://www.imf.org/-/media/files/publications/cr/2018/cr18168.pdf* ### 6. To support women’s inclusion in the labor market, the government should lead by ### 6. To support women’s inclusion in the labor market, the government should lead by ### Key findings on women’s labor market participation - Progress has been made in some areas, for example the number of women in parliament has increased significantly. - Public sector employment already guarantees equal treatment to women, which found it an attractive form of employment. - If women under the age of 30 stay in the labor force (rather than follow the current participation rates of 30-49 year olds), an estimated 625 thousand additional workers would be active over the next 20 years. - Existing allowances—including micro-credit for stay-at-home women—may discourage them from joining the formal labor market; the social and economic costs and benefits of such measures would need to be assessed carefully. - Normalizing women’s work in the public discourse may help change attitudes. ### Policy recommendations and measures - Government should lead by example to support women’s inclusion in the labor market. - Foster private sector job creation as a contribution to increasing opportunities for women, while giving attention to the gender dimension of policies. - Uphold the principles set out in the constitution to support women’s inclusion. - Design specific measures with women in mind, for example: - providing more flexible work hours; - improving the reliability of child care; - improving the reliability of public transportation. - Review existing measures that may discourage female labor as part of a more general review of the net impact of active labor market policies. - Assess carefully the social and economic costs and benefits of allowances and programs that could discourage formal labor market entry by women (including micro-credit for stay-at-home women). ### Implementation considerations - Measures should be incorporated into a broader review of active labor market policies to evaluate net impacts. - Public sector practices that guarantee equal treatment can serve as models for private sector and broader policy reforms. - Changing social norms through public discourse is an important complementary policy tool alongside financial and programmatic measures. *STAFF REPORT FOR THE 2018 ARTICLE IV CONSULTATION—INFORMATIONAL ANNEX* ### Conclusions ### Conclusions ### State and objectives - The Algerian economy is in a state of transition. - Near- to medium-term objectives: - restore macroeconomic stability; - revive non-hydrocarbon GDP growth; - create jobs, particularly for women and youth. - Longer-run primary goal: - diversify the economy with greater private sector participation. - There are major headwinds, but the authorities are committed to advancing their reform agenda in a well-sequenced and moderately-paced manner. ### Fiscal consolidation - Fiscal consolidation is central in the authorities’ strategy to reduce the economy’s reliance on hydrocarbon revenue. - The process started in 2015, is ongoing, and is expected to be the lynchpin of macroeconomic policies going forward. ### Structural reforms and policy support - Structural reforms will lend support to: - encourage private sector activity; - improve business climate; - modernize the monetary policy framework; - improve the efficiency of the labor market. - The thrust of the authorities’ reform program is consistent with staff views and the authorities will continue to count on staff policy and technical advice. ### Implementation and monitoring - "Executive “Decree on the Mechanism of Monitoring Structural Reform Measures Within the Framework of Implementation of Unconventional Financing”, March 2018. The Decree delegates the monitoring of a long list of structural reforms to a committee of the Ministry of Finance that reports to the BA Governor who in turn reports to the President." *Source: cr18168 - Conclusions* --- _Source: https://www.imf.org/-/media/files/publications/cr/2018/cr18168.pdf_