## 1. Designing a Rules-Based Fiscal Framework for Algeria ## Source details **Canonical URL:** [1. Designing a Rules-Based Fiscal Framework for Algeria](https://www.imf.org/-/media/files/publications/cr/2023/english/1dzaea2023001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2023/english/1dzaea2023001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2023/english/1dzaea2023001.pdf.json) --- ### Context - Boosted by high hydrocarbon prices, the Algerian economy continues to recover from the pandemic shock but faces headwinds from rising inflation and the prospects of a global slowdown. - Inflation has risen to its highest level in 25 years amid an upswing in international commodity prices and a confluence of global and domestic factors, including drought in 2021, loose monetary policy stance, wage increases in 2022 and tightening import regulation. - Vulnerability to fluctuations in hydrocarbon prices remains high. - Successive adverse shocks since 2014 had dampened activity and reduced external and fiscal buffers. - Relatively high hydrocarbon prices through the medium term, together with the emergence of new export markets, offer an opportunity to reconstitute buffers. - Policy rebalancing, strengthening the policy framework, and structural reforms to diversify the economy and foster private sector development are critical to build resilience to commodity cycles and support inclusive growth. - Consultation focus: policies to tame inflation, preserve fiscal sustainability, and foster resilient and inclusive growth; discussions on policy-mix to stave off risks of prolonged high inflation and low fiscal space while protecting low-income groups and supporting growth; engagement on structural reform implementation. ### Recent developments - GDP growth: - GDP grew by 3.4 percent in 2021. - Non-hydrocarbon GDP (NHGDP) growth was 2.1 percent in 2021, following a 4.1 percent decline in 2020. - NHGDP grew by 2.9 percent year-on-year in 2022Q1 compared with 2 percent in the previous quarter. - Current account and reserves: - CA deficit narrowed from 12.8 percent of GDP in 2020 to 2.8 percent of GDP in 2021. - CA recorded a surplus of USD 10.9 billion during the first nine months of 2022. - Official FX reserves increased from USD 46.7 billion at end-December 2021 to USD 58.7 billion at end-November 2022 (12.7 months of imports of goods and services). - Inflation: - Average annual headline inflation picked up in 2021, reaching 7.2 percent. - Core inflation accelerated to 6.1 percent in 2021. - Inflation rose to 9.5 percent in August 2022 (a twenty-five-year high), then to 9.2 percent in November 2022. - Volatile fresh food products contributed around 60 percent of the 2021 acceleration. - Food prices have mostly recorded double-digit increases since December 2021. - Fiscal outturns through August 2022: - Hydrocarbon revenue doubled during the first eight months of 2022 relative to the same period in 2021. - Current primary spending rose by 2.3 percent year-on-year. - Capital spending fell by 5.2 percent. - A fiscal surplus of 0.70 percent of forecast 2022 GDP was recorded through August 2022. - Nonhydrocarbon primary deficit excluding Bank of Algeria’s dividends (NHPD) narrowed to 17.6 percent of NHGDP from 20.9 percent of NHGDP during the first eight months of 2021. - Exchange rate and monetary policy: - The dinar appreciated against the U.S. dollar by 4 percent between end-July and end-August 2022. - NEER and REER appreciated by 10.7 percent and 8.8 percent respectively in the eleven months to end-November 2022. - On the parallel FX market, the exchange-rate premium vis-à-vis the dollar and euro widened to 35 percent in September-November 2022 (from around 25 percent in 2020-21). - Key policy rate remained at 3 percent (lowered in May 2020) and reserve requirement coefficient at 2 percent (lowered in February 2021). - One liquidity injection under the PSR was conducted in 2022 before the program expired in June 2022. - Excess bank liquidity increased to DZD 1,881 billion at end-October 2022. - Early repayment of DZD 460 billion of PSR refinancing by some banks (around 22 percent of the total stock borrowed under the program). - Banking sector and asset quality: - NPLs rose to 19.3 percent at end-2021 from 14.8 percent at end-2019, higher in state-owned banks (SOBs). - Average solvency ratios improved partly due to SOE debt buyback operations related to the PSR. - Profitability indicators improved in 2021 relative to 2020. ### Outlook and risks - Near-term outlook driven by hydrocarbon prices; baseline projections: - NHGDP growth projected to accelerate to 3.2 percent in 2022 (from 2.1 percent in 2021). - Hydrocarbon GDP growth expected to slow to 1.7 percent in 2022 after rebounding by 10.5 percent in 2021. - CA expected to have posted a surplus of 7.6 percent of GDP in 2022. - FX reserves projected to increase by USD 15.3 billion to USD 62 billion in 2022 (13.4 months of imports). - Inflation forecast to average 9.3 percent in 2022. - Projections for 2023 and medium term: - NHGDP growth expected to rise to 3.4 percent in 2023 under staff’s baseline scenario (reflecting substantial fiscal easing). - Growth projected to taper off to around 2 percent on average in the medium term. - CA projected to remain in surplus in 2023 and record a widening deficit from 2024 onwards under baseline assumptions. - FX reserves projected to decline gradually to USD 45.4 billion in 2027 (8.4 months of imports, equivalent to 110.8 percent of the ARA metric). - Inflation projected to decline slightly to 8.1 percent in 2023, and to remain well above its historical average over the medium term. - Major risks: - Volatile hydrocarbon prices could significantly impact the external position and generate destabilizing spending cycles. - Signs of global slowdown and sharp swings in nonhydrocarbon commodity prices are important downside risks. - Climate risks (e.g., droughts) could disrupt activity and raise fiscal costs. - Emergence of new COVID-19 variants could dampen growth amid comparatively low domestic vaccination rates. - Upside: increased investments in hydrocarbon sector and planned mining-sector investment could boost capacity and exports. ### Authorities’ views - Authorities expressed strong confidence in sustained growth in the medium term. - They emphasized that structural reforms, including the new investment law, will generate significant growth dividends and spur private sector activity. - Authorities concurred that hydrocarbon price volatility is a key risk but considered staff’s emphasis on its importance excessive. - They viewed staff’s projection for inflation in the medium term as pessimistic. - Authorities highlighted perceived improvements in resilience to external shocks and recent rises in nonhydrocarbon exports as indicative of progress on diversification. ### Fiscal policy — findings and projections - Durability of spending restraint uncertain despite expected 2022 budget surplus. - Execution dynamics and fiscal arithmetic: - Much of the LFC2022 spending increase is unlikely to be executed within 2022 calendar year; could be partly disbursed during extended budget execution period in early 2023. - Under assumption that around 2.5 percent of GDP appropriated in LFC2022 will be disbursed only in 2023: - Staff projects a 2.1 percent of GDP budget surplus in 2022. - NHPD projected to narrow to 25.5 percent of NHGDP. - FRR balance projected to increase to 7.2 percent of GDP at end-2022 (up from 3.1 percent of GDP at end-2021). - Total government debt projected to decline to 52.4 percent of GDP in 2022 from 62.8 percent in 2021. - 2023 budget risks and projections: - 2023 budget increased current and capital spending by 26.9 percent and 2.7 percent respectively relative to appropriations under LFC2022. - Payroll spending expected to increase by 26.6 percent; upward adjustments to pensions and allowance for first-time jobseekers also included. - Staff view: spending plans for 2023 unlikely to be fully executed given limits on available domestic financing and reluctance to foreign borrowing. - Baseline assumption: continued low execution of both current and capital spending. - Even with low execution, spending would rise by 7 percent of GDP in 2023 leading to: - An overall budget deficit of 6.6 percent of GDP in 2023. - Depletion of most accumulated fiscal savings. - NHPD deteriorating by 6 percent of NHGDP relative to 2022, reversing most of its improvement since 2018. ### Fiscal outlook and risks (announced 2023 easing) - The announced fiscal easing in 2023 will raise fiscal vulnerability and pressure on inflation through a significant rise in spending on wages, pensions and allowances, aggravating expenditure rigidity amid limited fiscal buffers. - Projected rapid drawdown of accumulated fiscal savings would fuel a sizeable rise in banking liquidity, complicating monetary policy conduct. - Under staff’s baseline scenario, overall deficits are projected to remain elevated, averaging close to 7 percent of GDP through 2027. - This contrasts with the authorities’ MTBF projected average annual budget deficit of 22 percent of GDP in 2023-25. - Excluding windfall hydrocarbon revenue, the MTBF projects annual average budget deficits of 25 percent of GDP. - Debt is projected to remain moderate through 2027 but is forecast to increase significantly between 2023 and 2027. - Important risks to the debt trajectory stem from abundant contingent liabilities from SOEs which tend to be overindebted and unprofitable and other public sector entities. ### Fiscal consolidation needs and recommendations - Fiscal rebalancing guided by a rules-based framework is needed to curb inflation, rebuild fiscal savings, enhance resilience, and preserve macroeconomic stability by reducing fiscal financing requirements in the medium term. - Required fiscal adjustment: - An improvement in the NHPD by 10.2 percent of NHGDP relative to its 2022 level and through 2027, representing an additional improvement of 6 percent of NHGDP relative to the trajectory assumed under the baseline scenario. - Gradual phasing out of universal subsidies (in line with plans announced in the 2022 budget) could generate substantial savings to partly finance targeted support to low-income households. - Complementary measures: parametric pension reform; reduction in capital spending; ongoing tax reform; and enhancing spending efficiency. - Consolidation should be guided by a rules-based framework to reduce policy procyclicality and protect priority spending, including health and social spending. ### Rules-based fiscal framework (Box 1 key elements) - Staff estimates a total fiscal buffer of 38 percent of GDP (in the form of savings and/or lower debt) would help accommodate most macro-fiscal shocks into the medium-term while preserving fiscal sustainability. - Staff suggests a dual-pillar system: a savings floor and a gross debt anchor. - Proposed calibration: savings floor at 16 percent of GDP and gross debt anchor at 48 percent of GDP. - A transition period of 8 years would be needed to comply with both objectives, after which a “net” debt anchor could be considered. - Compliance would necessitate an improvement in the NHPD by close to 10 percent of NHGDP relative to its projected 2022 level and through 2027. - This deficit trajectory would allow transferring an annual 1.4 percent of GDP in hydrocarbon revenue to the FRR. - Institutional arrangements needed: escape clause, correction mechanism, reporting, strengthened FRR governance, enhanced medium-term planning and forecasting, and improved monitoring and reporting capacities at the Ministry of Finance. ### Revenue mobilization and tax policy - Continue domestic tax revenue mobilization efforts, including improving recovery of tax arrears and leveraging digital technologies. - The reform of the tax on professional activities initiated in 2022 should continue to tackle distortions; accelerate reform of the property tax to guarantee sufficient funding of local governments. - Measures introduced in 2022 to broaden the tax base should be complemented with reforms to lower barriers to formalization. - Eliminating inefficient VAT exemptions would support compliance and revenue mobilization. - Fiscal cost of subsidies (based on new official estimates): - On-budget subsidies of basic food products and water cost 2.2 percent of GDP in 2021. - Off-budget fuel subsidies cost 12.2 percent of GDP in 2021. ### Financing and fiscal risks - Diversifying sources of financing is important to limit macroeconomic and financial stability risks. - Monetary financing should be strictly avoided to protect the independence of the Bank of Algeria (BA) and its ability to control inflation. - Principal repayments coming due on past BA lending to the government should continue to be paid as scheduled. - Staff welcomed plans to improve the functioning of the secondary debt market and deepen the domestic debt market, with IMF technical assistance. - Use of Public-Private Partnerships (PPPs) to finance basic infrastructure can help but should be underpinned by a strong governance framework with sound risk sharing and management. ### Public financial management and budget credibility - Strengthen budget credibility and implementation to support consolidation and efficient public policy execution. - Continue PFM reforms towards full implementation of the Organic Budget Law (OBL) in 2023. - Avoid recurrence of exceptionally low spending execution rates seen in 2022 to protect cash management and budget control. - Staff recommended: - (i) include detailed financing plans in published annual budgets; - (ii) premise budget laws on updated projections for full-year outturns based on most recent execution data rather than on budget appropriations from previous years; - (iii) strengthen cash management in line with recent IMF technical assistance conclusions; - (iv) produce and publish timely, comprehensive and disaggregated intra-year budget-execution data. - Enhance budget integrity and comprehensiveness by regularly publishing information on budget outturns, off-budget operations, and fiscal risks, especially from PPPs and SOEs. - Full implementation of the OBL in 2023 should contribute to better transparency given enhanced disclosure requirements under the law. ### Monetary and exchange rate policies - Risks of entrenchment of high inflation are high, with broad-based acceleration in trend inflation prior to the 2022 commodity price shock; domestic factors appear to be the larger contributor. - The expansionary fiscal policy stance expected in 2023 could add to demand and price pressures. - Staff urged the BA to immediately tighten monetary policy to safeguard price stability. - Recommended actions: gradual increase in the policy rate alongside a resumption of a more active liquidity management. - Strengthening the BA’s governance framework recommended: add an explicit ban on any form of monetary financing (beyond well-circumscribed temporary advances to the Treasury) in the forthcoming revision of the Law on Money and Credit (LMC). - Well-managed exchange rate flexibility can help the economy adjust to volatile terms of trade; reforms to FX and trade regulatory frameworks and deepening the interbank FX market are recommended. - The de jure exchange rate arrangement is managed floating, while the de facto exchange rate arrangement is a crawling-like arrangement. ### Financial sector policies and risks - BA is implementing reforms from the 2020 FSAP: new accounting standards, preparation of a new bank risk rating system, gradual progress towards supervisory review and evaluation processes, and regulatory initiatives to strengthen bank governance. - Financial health concerns: - Bank claims on the government and SOEs are at 52 percent of total bank assets at end-August. - NPLs and bank balance sheets remain burdened by sometimes unprofitable loans to SOEs and illiquid government debt securities issued in the context of the PSR. - Recommendations: - Diversify fiscal funding sources. - Improve SOB business models to focus on commercially viable projects and ensure compliance with prudential rules, notably on NPLs and risk exposure limits. - Conduct a detailed assessment of the quality of public bank loan portfolios (assets, guarantees, provisions) and review the NPL write-off process. - To lift constraints to private sector financing, reform priorities include: - (i) strengthening SOB governance; - (ii) reforming loan subsidy programs; - (iii) developing prudential policies to boost credit to small and medium-sized enterprises and households; - (iv) introducing an effective public credit registry and a personal bankruptcy framework; - (v) deepening the government debt market and encouraging private debt issuance. ### External sector assessment — key points - Overall assessment: - Algeria’s external position in 2022 was stronger than the level implied by fundamentals and desirable policy settings. - The current account gap, based on the IMF’s EBA-lite current account model, is estimated at 4.7 percent of GDP in 2022. - Improvement driven by the rally in hydrocarbon prices and import containment measures. - Risks: hydrocarbon price volatility, projected reserve decline over the medium term, potential rapid increase in external debt if deficits cannot be financed domestically. - Foreign assets and liabilities: - International reserves increased to US$62 billion in 2022 (13.4 months of imports). - NIIP rose to 22.9 percent of GDP in 2022 from 18.3 percent in 2021. - Under baseline, NIIP projected to decline to 8.4 percent of GDP by 2027. - Current account and REER: - Share of hydrocarbons in total exports averaged 85 percent between 2017 and 2022. - EBA-lite CA model indicates a REER undervaluation of 2.3 percent (assuming CA elasticity to REER of -2.1). - REER appreciated by around 8.8 percent between December 2021 and end-November 2022. - Capital and financial accounts: - Economy remains mostly closed to external capital flows; inward FDI projected at 0.75 of GDP in 2022. - Abolition of most of the 51/49 FDI rule and other reforms could support medium-term FDI. - Key risks highlighted in the Risk Assessment Matrix include: - Commodity price shocks (Likelihood: High; Impact: High). - Systemic social unrest (Likelihood: High; Impact: Low). - De-anchoring of inflation expectations and stagflation (Likelihood: Medium; Impact: High). - Abrupt global slowdown in Europe (Likelihood: High; Impact: High). - Structural risks such as geo-economic fragmentation and climate-related disasters. ### Public and external debt sustainability — highlights - Recent developments: - Government debt projected to fall to 52.4 percent of GDP at end-2022 from 62.8 percent at end-2021, driven by a primary fiscal surplus and strong nominal GDP growth. - Around 45 percent of government debt or 23 percent of GDP were directly owed to the BA in 2022. - Around 99 percent of debt was held domestically and denominated in dinars. - Government external foreign-currency debt represented 0.6 percent of GDP. - Projections and baseline: - Debt-to-GDP projected to fall further in 2023 as the large deficit forecast for that year is assumed to be financed through FRR drawdowns, then resume rising from 2024 to reach 60.8 percent of GDP in 2027. - Projected improvement in the NHPD by 4 percent of NHGDP between 2021 and 2027 assumed. - Financing needs and vulnerabilities: - Gross financing requirements projected to average 10.6 percent of GDP per year in 2023-2027. - Domestic market absorption capacity is modest; claims on the government accounted for one third of bank assets in August 2022. - Stress-test results: - A shock to real interest rates would push government debt to 70 percent of GDP in 2027 and average annual financing needs to 13 percent of GDP. - A combined macro-fiscal shock could cause debt to rise close to 80 percent of GDP by 2027. - A one-standard deviation shock to real growth, or modest fiscal slippage, would lead debt to rise well above 60 percent of GDP in 2027. - Contingent liabilities: - Significant contingent liabilities from the pension system and SOEs; non-financial SOE debt to the domestic banking system was 15 percent of the forecast 2022 GDP in September 2022, around one fourth explicitly guaranteed by the government. ### Governance, data gaps, and structural reforms - Structural reform progress: - Implementation of the 2021 Government Action Plan (PAG) ongoing; new investment law and decrees, elimination of the 51/49 rule in non-strategic sectors, planned law on renewable energies, new public procurement law and portal in preparation. - Governance and AML/CFT: - New High Authority for fighting corruption installed; enhanced asset recovery mechanisms; ongoing revision of AML/CFT legislation. - Recommendation: strengthen risk-based supervision, institutional safeguards against conflicts of interest, and operational autonomy of anti-corruption and judicial institutions. - Macroeconomic data gaps: - CPI weights based on a 2000 household survey; no employment data published since 2019. - Quarterly national accounts and semi-annual industry surveys published with great delay. - No intra-annual budget execution data published. - Recommendation: improve data quality and timely provision to the IMF; staff ready to provide technical assistance. ### Monetary operations, liquidity management, and central bank governance - Liquidity and money markets: - Excess reserves at end-August 2022: DZD 1,881 billion (more than 8 percent of banking system assets). - Yield on shortest interbank tenors around 0.5 percent through first nine months of 2022, below policy rate of 3 percent. - Recommended strategy to strengthen monetary policy transmission: 1. Legal/institutional: strengthen BA statutes, independence, formalize prohibition of monetary financing with limited temporary advances under strict conditions. 2. Active liquidity management: immediately raise the policy rate and either increase reserve requirement plus regular liquidity-absorbing operations at the policy rate or maintain a symmetrical standing facilities corridor around the policy rate; remunerate excess reserves. 3. Communication: focus public communication on policy rate as the main countercyclical tool once operational relevance is restored. - BA law revision recommended to include explicit ban on monetary financing while preserving limited temporary advances and strengthening accountability. ### Public investment and PPPs - Context: - Algeria’s capital spending averaged 11.7 percent of GDP over the last five years (compared with North Africa and MENA averages of 5.7 percent and 4.3 percent respectively). - Despite high public capital stock, infrastructure access and quality lag peers. - Policy priorities: - Improve project appraisal, procurement, monitoring, and reporting. - Adopt draft decree on project preparation; ensure Ministry of Finance and line ministries assess technical and financial viability. - Consider a PIMA by IMF Fiscal Affairs. - PPPs: - As of 2021: 30 active PPP projects; total investment of US$ 9.2 billion. - Risks: without strong governance PPPs can create fiscal contingent liabilities; draft PPP law should set disclosure requirements, clarify roles, allow Ministry of Finance gateway to stop unaffordable projects, and consider ceilings on PPP stocks and flows. - IMF-World Bank PPP Fiscal Risk Assessment Model (PFRAM) noted as an analytical tool. *Source — IMF staff summary from "1. Designing a Rules-Based Fiscal Framework for Algeria."* ### 1. Designing a Rules-Based Fiscal Framework for Algeria_____________________________________________ 15 ### 1. Designing a Rules-Based Fiscal Framework for Algeria ### Context - Boosted by high hydrocarbon prices, the Algerian economy continues to recover from the pandemic shock, but faces headwinds from rising inflation, and the prospects of a global slowdown. - Inflation has risen to its highest level in 25 years amid an upswing in international commodity prices and a confluence of global and domestic factors, including drought in 2021, loose monetary policy stance, wage increases in 2022 and tightening import regulation. - Vulnerability to fluctuations in hydrocarbon prices remains high. - Successive adverse shocks since 2014 had dampened activity and reduced external and fiscal buffers. - Relatively high hydrocarbon prices through the medium term, together with the emergence of new export markets, offer an opportunity to reconstitute buffers. - Policy rebalancing and strengthening policy framework together with structural reforms to diversify the economy and foster private sector development are critical to build resilience to commodity cycles and support inclusive growth. - Consultation focus: policies to tame inflation, preserve fiscal sustainability, and foster resilient and inclusive growth; discussions on policy-mix to stave off risks of prolonged high inflation and low fiscal space while protecting low-income groups and supporting growth; engagement on structural reform implementation. ### Recent developments - GDP growth: - GDP grew by 3.4 percent in 2021. - Non-hydrocarbon GDP (NHGDP) growth was 2.1 percent in 2021, following a 4.1 percent decline in 2020. - NHGDP grew by 2.9 percent year-on-year in 2022Q1 compared with 2 percent in the previous quarter. - Current account and reserves: - CA deficit narrowed from 12.8 percent of GDP in 2020 to 2.8 percent of GDP in 2021. - CA recorded a surplus of USD 10.9 billion during the first nine months of 2022. - Official FX reserves increased from USD 46.7 billion at end-December 2021 to USD 58.7 billion at end-November 2022 (12.7 months of imports of goods and services). - Inflation: - Average annual headline inflation picked up in 2021, reaching 7.2 percent. - Core inflation accelerated to 6.1 percent in 2021. - Inflation rose to 9.5 percent in August 2022 (a twenty-five-year high), then to 9.2 percent in November 2022. - Volatile fresh food products contributed around 60 percent of the 2021 acceleration. - Food prices have mostly recorded double-digit increases since December 2021. - Fiscal outturns through August 2022: - Hydrocarbon revenue doubled during the first eight months of 2022 relative to the same period in 2021. - Current primary spending rose by 2.3 percent year-on-year. - Capital spending fell by 5.2 percent. - A fiscal surplus of 0.70 percent of forecast 2022 GDP was recorded through August 2022. - Nonhydrocarbon primary deficit excluding Bank of Algeria’s dividends (NHPD) narrowed to 17.6 percent of NHGDP from 20.9 percent of NHGDP during the first eight months of 2021. - Exchange rate and monetary policy: - The dinar appreciated against the U.S. dollar by 4 percent between end-July and end-August 2022. - NEER and REER appreciated by 10.7 percent and 8.8 percent respectively in the eleven months to end-November 2022. - On the parallel FX market, the exchange-rate premium vis-à-vis the dollar and euro widened to 35 percent in September-November 2022 (from around 25 percent in 2020-21). - Key policy rate remained at 3 percent (lowered in May 2020) and reserve requirement coefficient at 2 percent (lowered in February 2021). - One liquidity injection under the PSR was conducted in 2022 before the program expired in June 2022. - Excess bank liquidity increased to DZD 1,881 billion at end-October 2022. - Early repayment of DZD 460 billion of PSR refinancing by some banks (around 22 percent of the total stock borrowed under the program). - Banking sector and asset quality: - NPLs rose to 19.3 percent at end-2021 from 14.8 percent at end-2019, higher in state-owned banks (SOBs). - Average solvency ratios improved partly due to SOE debt buyback operations related to the PSR. - Profitability indicators improved in 2021 relative to 2020. ### Outlook and risks - Near-term outlook improvement driven by hydrocarbon prices; baseline projections: - NHGDP growth projected to accelerate to 3.2 percent in 2022 (from 2.1 percent in 2021). - Hydrocarbon GDP growth expected to slow to 1.7 percent in 2022 after rebounding by 10.5 percent in 2021. - CA expected to have posted a surplus of 7.6 percent of GDP in 2022. - FX reserves projected to increase by USD 15.3 billion to USD 62 billion in 2022 (13.4 months of imports). - Inflation forecast to average 9.3 percent in 2022. - Projections for 2023 and medium term: - NHGDP growth expected to rise to 3.4 percent in 2023 under staff’s baseline scenario (reflecting substantial fiscal easing). - Growth projected to taper off to around 2 percent on average in the medium term. - CA projected to remain in surplus in 2023 and record a widening deficit from 2024 onwards under baseline assumptions. - FX reserves projected to decline gradually to USD 45.4 billion in 2027 (8.4 months of imports, equivalent to 110.8 percent of the ARA metric). - Inflation projected to decline slightly to 8.1 percent in 2023, and to remain well above its historical average over the medium term. - Major risks: - Volatile hydrocarbon prices could significantly impact the external position and generate destabilizing spending cycles. - Signs of global slowdown and sharp swings in nonhydrocarbon commodity prices are important downside risks. - Climate risks (e.g., droughts) could disrupt activity and raise fiscal costs. - Emergence of new COVID-19 variants could dampen growth amid comparatively low domestic vaccination rates. - Upside: increased investments in hydrocarbon sector and planned mining-sector investment could boost capacity and exports. ### Authorities’ views - Authorities expressed strong confidence in sustained growth in the medium term. - They emphasized that structural reforms, including the new investment law, will generate significant growth dividends and spur private sector activity. - Authorities concurred that hydrocarbon price volatility is a key risk but considered staff’s emphasis on its importance excessive. - They viewed staff’s projection for inflation in the medium term as pessimistic. - Authorities highlighted perceived improvements in resilience to external shocks and recent rises in nonhydrocarbon exports as indicative of progress on diversification. ### Policy discussions - Immediate priorities: contain inflation; balance monetary and fiscal tightening with support for growth and purchasing power. - Risks of delayed action: entrenchment of high inflation that could require more abrupt and costly adjustments later. - Fiscal consolidation needed to strengthen buffers and reduce vulnerability to hydrocarbon price movements and macroeconomic instability. - Structural reforms required to build resilience to commodity cycles, advance diversification, support inclusive growth, and enhance governance. ### Fiscal policy (findings and projections) - Durability of spending restraint uncertain despite expected 2022 budget surplus. - Execution dynamics and fiscal arithmetic: - Much of the LFC2022 spending increase is unlikely to be executed within 2022 calendar year; could be partly disbursed during extended budget execution period in early 2023. - Under assumption that around 2.5 percent of GDP appropriated in LFC2022 will be disbursed only in 2023: - Staff projects a 2.1 percent of GDP budget surplus in 2022. - NHPD projected to narrow to 25.5 percent of NHGDP. - FRR balance projected to increase to 7.2 percent of GDP at end-2022 (up from 3.1 percent of GDP at end-2021). - Total government debt projected to decline to 52.4 percent of GDP in 2022 from 62.8 percent in 2021. - 2023 budget risks and projections: - 2023 budget increased current and capital spending by 26.9 percent and 2.7 percent respectively relative to appropriations under LFC2022. - Payroll spending expected to increase by 26.6 percent; upward adjustments to pensions and allowance for first-time jobseekers also included. - Staff view: spending plans for 2023 unlikely to be fully executed given limits on available domestic financing and reluctance to foreign borrowing. - Baseline assumption: continued low execution of both current and capital spending. - Even with low execution, spending would rise by 7 percent of GDP in 2023 leading to: - An overall budget deficit of 6.6 percent of GDP in 2023. - Depletion of most accumulated fiscal savings. - NHPD deteriorating by 6 percent of NHGDP relative to 2022, reversing most of its improvement since 2018. _Italic: Source — IMF staff summary from "1. Designing a Rules-Based Fiscal Framework for Algeria."_ ### 17. The announced fiscal easing in 2023 would further raise fiscal vulnerability and ### 1dzaea2023001 - 17. The announced fiscal easing in 2023 would further raise fiscal vulnerability and ### Fiscal outlook and risks - The announced fiscal easing in 2023 will raise fiscal vulnerability and pressure on inflation through a significant rise in spending on wages, pensions and allowances, aggravating expenditure rigidity amid limited fiscal buffers. - Projected rapid drawdown of accumulated fiscal savings would fuel a sizeable rise in banking liquidity, complicating monetary policy conduct. - Under staff’s baseline scenario, overall deficits are projected to remain elevated, averaging close to 7 percent of GDP through 2027. - This contrasts with the authorities’ MTBF projected average annual budget deficit of 22 percent of GDP in 2023-25. - Excluding windfall hydrocarbon revenue, the MTBF projects annual average budget deficits of 25 percent of GDP. - Debt is projected to remain moderate through 2027 but is forecast to increase significantly between 2023 and 2027. - Important risks to the debt trajectory stem from abundant contingent liabilities from SOEs which tend to be overindebted and unprofitable and other public sector entities. ### Fiscal consolidation needs and recommendations - Fiscal rebalancing guided by a rules-based framework is needed to curb inflation, rebuild fiscal savings, enhance resilience, and preserve macroeconomic stability by reducing fiscal financing requirements in the medium term. - Required fiscal adjustment: an improvement in the NHPD by 10.2 percent of NHGDP relative to its 2022 level and through 2027, representing an additional improvement of 6 percent of NHGDP relative to the trajectory assumed under the baseline scenario. - Gradual phasing out of universal subsidies (in line with plans announced in the 2022 budget) could generate substantial savings to partly finance targeted support to low-income households. - Complementary measures: parametric pension reform; reduction in capital spending; ongoing tax reform; and enhancing spending efficiency. - Consolidation should be guided by a rules-based framework to reduce policy procyclicality and protect priority spending, including health and social spending (Box 1). ### Rules-based fiscal framework (Box 1 key elements) - Staff estimates a total fiscal buffer of 38 percent of GDP (in the form of savings and/or lower debt) would help accommodate most macro-fiscal shocks into the medium-term while preserving fiscal sustainability. - Staff suggests a dual-pillar system: a savings floor and a gross debt anchor. - Proposed calibration: savings floor at 16 percent of GDP and gross debt anchor at 48 percent of GDP. - A transition period of 8 years would be needed to comply with both objectives, after which a “net” debt anchor could be considered. - Compliance would necessitate an improvement in the NHPD by close to 10 percent of NHGDP relative to its projected 2022 level and through 2027. - This deficit trajectory would allow transferring an annual 1.4 percent of GDP in hydrocarbon revenue to the FRR. - Institutional arrangements needed: escape clause, correction mechanism, reporting, strengthened FRR governance, enhanced medium-term planning and forecasting, and improved monitoring and reporting capacities at the Ministry of Finance. ### Revenue mobilization and tax policy - Continue domestic tax revenue mobilization efforts, including improving recovery of tax arrears and leveraging digital technologies. - The reform of the tax on professional activities initiated in 2022 should continue to tackle distortions; accelerate reform of the property tax to guarantee sufficient funding of local governments. - Measures introduced in 2022 to broaden the tax base should be complemented with reforms to lower barriers to formalization. - Eliminating inefficient VAT exemptions would support compliance and revenue mobilization. - Fiscal cost of subsidies (based on new official estimates): on-budget subsidies of basic food products and water cost 2.2 percent of GDP in 2021, in addition to off-budget fuel subsidies of 12.2 percent of GDP. ### Financing and fiscal risks - Diversifying sources of financing is important to limit macroeconomic and financial stability risks. - Monetary financing should be strictly avoided to protect the independence of the Bank of Algeria (BA) and its ability to control inflation. - Principal repayments coming due on past BA lending to the government should continue to be paid as scheduled. - Staff welcomed plans to improve the functioning of the secondary debt market and deepen the domestic debt market, with IMF technical assistance. - Use of Public-Private Partnerships (PPPs) to finance basic infrastructure can help but should be underpinned by a strong governance framework with sound risk sharing and management. ### Public financial management and budget credibility - Strengthen budget credibility and implementation to support consolidation and efficient public policy execution. - Continue PFM reforms towards full implementation of the Organic Budget Law (OBL) in 2023. - Avoid recurrence of exceptionally low spending execution rates seen in 2022 to protect cash management and budget control. - Staff recommended: - (i) include detailed financing plans in published annual budgets; - (ii) premise budget laws on updated projections for full-year outturns based on most recent execution data rather than on budget appropriations from previous years; - (iii) strengthen cash management in line with recent IMF technical assistance conclusions; - (iv) produce and publish timely, comprehensive and disaggregated intra-year budget-execution data. - Enhance budget integrity and comprehensiveness by regularly publishing information on budget outturns, off-budget operations, and fiscal risks, especially from PPPs and SOEs. - Full implementation of the OBL in 2023 should contribute to better transparency given enhanced disclosure requirements under the law. ### Monetary and exchange rate policies - Risks of entrenchment of high inflation are high, with broad-based acceleration in trend inflation prior to the 2022 commodity price shock; domestic factors appear to be the larger contributor. - The expansionary fiscal policy stance expected in 2023 could add to demand and price pressures. - Staff urged the BA to immediately tighten monetary policy to safeguard price stability. - Recommended actions: gradual increase in the policy rate alongside a resumption of a more active liquidity management. - Strengthening the BA’s governance framework recommended: add an explicit ban on any form of monetary financing (beyond well-circumscribed temporary advances to the Treasury) in the forthcoming revision of the Law on Money and Credit (LMC). - Well-managed exchange rate flexibility can help the economy adjust to volatile terms of trade; reforms to FX and trade regulatory frameworks and deepening the interbank FX market are recommended. - The de jure exchange rate arrangement is managed floating, while the de facto exchange rate arrangement is a crawling-like arrangement. ### Financial sector policies and risks - The BA is implementing reforms from the 2020 FSAP: new accounting standards, preparation of a new bank risk rating system, gradual progress towards supervisory review and evaluation processes, and regulatory initiatives to strengthen bank governance. - Financial health of banks warrants closer attention amid an aggravating sovereign-bank nexus: - Bank claims on the government and SOEs are at 52 percent of total bank assets at end-August. - NPLs and bank balance sheets remain burdened by sometimes unprofitable loans to SOEs and illiquid government debt securities issued in the context of the PSR. - Risks from interlinkages: tightening interlinkages between government, non-financial SOEs and SOBs can amplify sovereign or banking-sector stress and magnify risks to financial stability and debt sustainability. - Recommendations to address risks: - Diversify fiscal funding sources. - Improve SOB business models to focus on commercially viable projects and ensure compliance with prudential rules, notably on NPLs and risk exposure limits. - Conduct a detailed assessment of the quality of public bank loan portfolios (assets, guarantees, provisions) and review the NPL write-off process. - To lift constraints to private sector financing, reform priorities include: - (i) strengthening SOB governance; - (ii) reforming loan subsidy programs; - (iii) developing prudential policies to boost credit to small and medium-sized enterprises and households; - (iv) introducing an effective public credit registry and a personal bankruptcy framework; - (v) deepening the government debt market and encouraging private debt issuance. *Source: IMF staff report.* ### 33. The authorities were confident of the good financial health of the banking system. ### 1dzaea2023001 - 33. The authorities were confident of the good financial health of the banking system. ### Banking system health and nonperforming loans (NPLs) - Authorities' view: - SOBs are profitable and have been taking their credit-related decisions independently over the last two years. - Around half of NPLs in SOBs are legacy issues and have not been written-off due to cumbersome administrative processes. - A large share of NPLs is provisioned or backed by guarantees or collateral, posing limited risk to financial stability. - Ongoing efforts: - Promote financial modernization and inclusion, including through digitalization. - Modernize the existing central risk registry. ### Structural reforms (Plan d’action du government, PAG) - Implementation status: - Authorities have continued to implement the 2021 Government Action Plan (“Plan d’action du government”, PAG). - A new investment law and attendant decrees have helped streamline the regulatory framework for private investment. - The new law follows the elimination of the 51/49 rule on FDI in non-strategic sectors in 2020. - Authorities are working to accelerate digitalization of the economy; a new law on micro-entrepreneurship is planned. - A forthcoming law on renewable energies and a new public procurement law and dedicated electronic portal are under preparation. - Selected measures (implemented or planned) include: - Revisions to the organic law on the State Council (Law 22-11), creation of new specialized commercial tribunals. - Preparation of a Chart of Account for the State and operational guides for multiyear budget frameworks. - Acceleration of efforts to promote digitalization and facilitate business creation (revamping the one-stop shop, Jibaya'tic and Moussahama'tic portals, creation of a portal for public procurement). - Expansion of the bank and insurance networks, including for Islamic financial products. - Preparation of a legal framework for PPPs and launch preparations for large investment projects in infrastructure and mining. ### Governance, AML/CFT, and trade openness - Governance and AML/CFT: - Recent reforms: formal installation of the new High Authority in charge of fighting corruption, application of enhanced mechanisms for asset recovery, ongoing revision to the legislation on AML/CFT. - Recommendation: ensure legislation includes a strong risk-based approach to supervision; strengthen institutional safeguards against conflicts of interest and operational autonomy of anti-corruption and judicial institutions. - Trade and competitiveness: - Ratification efforts of free trade agreements, including adhesion to the African Continental Free Trade Area in 2021. - Concern: regulation measures since 2015 to contain imports induce regulatory uncertainty, create rent-seeking opportunities, may generate inflationary pressures, and encourage informality. - Recommendation: product and labor market reforms to reduce distortions, enhance competitiveness and stimulate economic diversification. ### Macroeconomic data gaps and statistical priorities - Data weaknesses: - CPI weights are based on a 2000 household survey and are severely outdated. - No employment data has been published since 2019. - Quarterly national account data and semi-annual industry surveys are published with great delay. - No data on intra-annual budget execution is published. - Recommendations: - Improve the quality and availability of macroeconomic data and the timely provision of data to the IMF, including data on budget outturns. - Staff stands ready to provide technical assistance to address data gaps. ### Authorities’ views - Concurrence with staff on the need to pursue structural reforms to promote diversification and job creation. - Stress on progress achieved on legislative reforms since 2020 and commitment to implementation of the PAG. - Defense of import regulation measures as necessary to combat fraud and promote domestic production; commitment to full compliance with outstanding agreements with external trade partners. - Agreement on the need to address data deficiencies, attributing some to pandemic-related disruptions. ### Staff appraisal: outlook, risks, and policy prescriptions - Near-term outlook and recent developments: - The near-term outlook materially improved, buoyed by the upswing in hydrocarbon prices. - The CA swung to surplus in 2022 and international reserves rose for the first time since 2013; this trend is projected to continue in 2023. - A fiscal surplus is estimated in 2022 for the first time since 2008, on higher hydrocarbon revenue and large under-execution of spending. - Nonhydrocarbon growth has likely picked up pace in 2022 and will strengthen further in 2023 helped by significant fiscal easing. - Inflation and monetary policy: - Inflation has been accelerating and reached its highest level in 25 years, with a more pronounced rise for food products. - Monetary policy remains accommodative as the BA kept the reserve requirement ratio and policy rate near historical lows and excess bank liquidity built up. - Recommendation: BA should tighten monetary policy immediately, increase its policy rate, and resume well-calibrated liquidity management to enhance monetary policy transmission. - Suggestion: forthcoming revision of the LMC should include a formal ban on monetary financing to enhance the BA’s independence and its ability to act in defense of price stability. - Fiscal risks and recommendations: - The announced sizeable rise in spending under the 2023 budget could reverse progress on narrowing the deficit since 2018, weaken resilience of public finances and add to inflation pressures. - Financing constraints are likely to forestall full execution of announced spending, but even low execution could substantially deteriorate the fiscal deficit. - Continued wide fiscal deficits and increasing principal repayments coming due on past monetary financing would result in large fiscal financing needs through the medium term. - As authorities have ruled out foreign borrowing, meeting these financing needs would pressure the domestic banking system and pose risks to financial and macroeconomic stability. - Recommendation: Gradual fiscal rebalancing guided by a rules-based framework. - Staff recommends an adjustment to improve the NHPD by 10 percent of NHGDP relative to its 2022 level and through 2027. - Suggested measures: subsidy reform together with enhanced targeted social protection, parametric pension reform, lower capital spending, continuation of tax reforms. - Proposal: adopt a medium-term fiscal framework based on well-calibrated rules comprising a saving floor and a gross debt anchor. - Recommendation: more diversified financing sources to stage fiscal adjustment over several years while limiting pressures on the banking system. - Public financial management (PFM) and structural reforms: - Staff welcomes progress on PFM reform and calls for further efforts to strengthen the fiscal framework. - Projected full implementation of the OBL in 2023 would mark a major milestone for modernization efforts. - Budgets should align with execution capacity and available fiscal space, incorporate comprehensive and transparent financing plans, strengthen cash management and improve transparency on budget execution. - Acceleration of structural reforms is needed to advance transition to a more diversified, resilient and job-intensive growth model. - Caution against risks from tight import regulation measures (fueling inflation and incentivizing informality) and recommendation to prioritize reforms to improve trade openness and competitiveness. - Urges authorities to prioritize actions to address weaknesses in macroeconomic data quality and availability; ongoing efforts to strengthen governance and reduce corruption risks should be intensified. *Source: 1dzaea2023001 - 33. The authorities were confident of the good financial health of the banking system.* ### 47. Staff recommends that the next Article IV consultation take place on the standard ### 1dzaea2023001 - 47. Staff recommends that the next Article IV consultation take place on the standard 12-month cycle. ### Macroeconomic developments and outlook - Recovery from the pandemic was uneven in 2021 given weaknesses in services and the labor market. - Real GDP (annual percentage change): - 2019: 1.0 - 2020: -5.1 - 2021: 3.4 - 2022: 2.9 - 2023 (projection): 3.0 - Hydrocarbon and nonhydrocarbon growth (selected years): - Hydrocarbon sector: 2021: 10.5; 2022: 1.7; 2023: 0.7 - Nonhydrocarbon sector: 2021: 2.1; 2022: 3.2; 2023: 3.4 - Consumer price index (period average): - 2019: 2.0 - 2020: 2.4 - 2021: 7.2 - 2022: 9.3 - 2023 (projection): 8.1 - Staff recommendation: next Article IV consultation on the standard 12-month cycle. ### External sector - Gas production rebounded sharply in 2021 amid higher domestic and external demand. - Algeria’s external position improved markedly in 2021–22 driven by higher hydrocarbon exports. - Exports and imports (percent of GDP, selected): - Exports, f.o.b.: 2021: 23.6; 2022: 31.2; 2023 (projection): 27.8 - Imports, f.o.b.: 2021: 23.0; 2022: 20.6; 2023 (projection): 22.4 - Current account balance (percent of GDP): - 2020: -12.8 - 2021: -2.8 - 2022: 7.6 - 2023 (projection): 2.7 - Algerian crude oil price (US$/barrel, weighted average of quarterly data): - 2017: 54.17 - 2018: 71.26 - 2019: 64.54 - 2020: 41.97 - 2021: 72.31 - 2022: 101.78 - Gross official reserves (in US$ billions): - 2019: 62.8 - 2020: 48.2 - 2021: 46.7 - 2022: 62.0 - 2023 (projection): 69.5 - Reserves in months of next year's imports: - 2019: 13.0 months - 2020: 11.6 months - 2021: 13.4 months - 2022: 14.1 months - 2023 (projection): 13.3 months ### Fiscal developments and projections - Rising hydrocarbon prices shored up budget revenues; despite announcements of large spending increases in 2022, spending growth was moderate. - Overall fiscal position: - Overall surplus is projected in 2022. - Overall budget balance (percent of GDP): 2021: -7.2; 2022: 2.1; 2023 (projection): -6.6 - Nonhydrocarbon balances: - Nonhydrocarbon primary balance excluding central bank dividends (percent of GDP): 2022: -25.5; 2023 (projection): -31.4 - Nonhydrocarbon balance (percent of GDP): 2022: -24.4; 2023 (projection): -31.0 - Public debt: - Gross government debt, excluding guarantees (percent of GDP): 2021: 52.8; 2022: 52.4; 2023 (projection): 49.4 - Public debt/GDP will temporarily decline due to the achievement of a fiscal surplus and strong nominal growth. - Key fiscal aggregates (percent of GDP, selected): - Budget revenue and grants: 2021: 29.8; 2022: 33.2; 2023 (projection): 29.5 - Total expenditure (including net lending): 2021: 37.0; 2022: 31.1; 2023 (projection): 38.1 - Current expenditure: 2021: 21.2; 2022: 27.0; 2023 (projection): 25.9 - Capital expenditure: 2021: 11.9; 2022: 6.9; 2023 (projection): 10.8 ### Monetary and financial sector - Broad money growth recently driven by accumulation of net foreign assets. - Net domestic assets driven by credit to the public sector; credit to the private sector remains tepid. - Monetary policy: mostly on hold after a slate of easing measures in 2020–21; central bank implemented an appreciation in the dinar against the dollar in August (year implied) to tame inflationary pressures. - Banking sector indicators: - Bank capitalization ratios above regulatory thresholds; Capital adequacy ratio (percent): 2021 (Prelim.): 21.8 - Non-performing loans (NPLs) increased: NPLs/total loans: 2021: 19.3 - NPLs net of provisions/Regulatory capital: 2021: 8.5 - Return on equity: 2021: 11.2 - Monetary aggregates (selected, end of period, in billions of dinars): - Net foreign assets: 2019: 7,429; 2020: 6,321; 2021: 5,994; 2022: 8,165 - Net domestic assets: 2019: 9,082; 2020: 11,419; 2021: 14,085; 2022: 14,305 - Money and quasi-money (M2): 2019: 16,511; 2020: 17,740; 2021: 20,079; 2022: 22,470 - Credit to the economy (end of period): 2019: 11,008; 2020: 11,338; 2021: 9,964; 2022: 11,276 ### Key risks and policy implications (implied by presented data) - Inflationary pressures rose to levels not seen in decades (CPI 2021: 7.2; CPI 2022: 9.3) and the central bank moved on the exchange rate to help tame inflation. - Reliance on hydrocarbon revenues creates volatility in external and fiscal balances (hydrocarbon export shares and crude oil price volatility). - Reserves rebounded in 2022 (Gross official reserves 2022: 62.0 US$ billions) but remain sensitive to commodity price swings. - Fiscal space improved in 2022 with a projected overall surplus, but nonhydrocarbon primary balances remain deeply negative (e.g., 2022: -25.5 percent of GDP), indicating a need for measures to rebuild buffers and diversify revenues. - Banking sector vulnerabilities include rising NPLs (NPLs/total loans 2021: 19.3) despite adequate capital ratios (Capital adequacy ratio 2021: 21.8). *Source: Algerian Authorities and IMF staff estimates and projections (excerpts from 1dzaea2023001).* ### Annex I. External Sector Assessment ### Annex I. External Sector Assessment ### Overall assessment - Algeria’s external position in 2022 was stronger than the level implied by fundamentals and desirable policy settings, taking into account the heightened risks to the external outlook. - The current account gap, based on the IMF’s EBA-lite current account model, is estimated at 4.7 percent of GDP in 2022, reflecting a substantial improvement from -2.8 percent in 2021. - The 2022 external improvement was mainly driven by: - the rally in hydrocarbon prices, and - continued import regulation measures that resulted in a current account surplus (the first since 2013). - Risks and vulnerabilities: - Improvement is subject to hydrocarbon prices’ volatility and could be quickly reversed given existing vulnerabilities and announced policies. - Foreign exchange reserves have risen, halting the downtrend, but are projected to decline over the medium-term while remaining above adequacy metrics. - External debt is low but could increase rapidly in the event of adverse shocks or if large fiscal deficits cannot be entirely financed domestically. - Potential policy responses: - Continued fiscal consolidation anchored in a credible medium-term framework. - Structural reforms to foster economic diversification and enhance non-price competitiveness. - Greater flexibility of the nominal exchange rate. - Note: Regulation measures to contain imports cannot substitute needed reforms to support domestic production. ### Foreign assets and liabilities: position and trajectory - Background facts: - International reserves, excluding monetary gold but including SDRs, increased to US$62 billion in 2022, representing 13.4 months of imports, after a steady decline to US$46.7 billion at end-2021. - The NIIP increased from 18.3 percent of GDP in 2021 to 22.9 percent of GDP in 2022, mirroring the sharp increase in reserves assets. - Key 2022 statistics (percent of GDP): - NIIP: 22.9 - Gross Assets: 40.6 - Debt Assets: 2.2 - Gross Liab.: 17.7 - Debt Liab.: 6.9 - Assessment and projections: - NIIP dynamics reflect dependence on hydrocarbon exports and vulnerability to price volatility. - Under the baseline scenario, the NIIP is projected to decline to 8.4 percent of GDP by 2027 as lower hydrocarbon prices result in current account deficit and reserves deaccumulation. - Reserve coverage is projected to decline to around 8.4 months of imports by 2027. ### Current account - Background: - Algeria’s current account balance is largely determined by the balance of trade in goods; hydrocarbons make up the bulk of goods exports. - The share of hydrocarbons in total exports averaged 85 percent between 2017 and 2022. - The current account balance improved to a surplus of 7.6 percent of GDP in 2022 due to higher hydrocarbon exports and containment of imports. - Goods imports declined from 31.7 percent of GDP in 2015 to 20.6 percent in 2022. - Assessment using IMF methodologies: - The EBA-lite current account model indicates the actual current account (adjusted for temporary pandemic effects) was substantially stronger than warranted by medium-term fundamentals and desirable policies in 2022; estimated current account gap: 4.7 percent of GDP. - Of this gap: 4.3 percent of GDP reflects the contribution from the increase in reserves in 2022. - 3.3 percent of GDP reflects the domestic fiscal policy gap related to the one-off fiscal surplus in 2022. - Assuming an elasticity of the current account with respect to the REER of -2.1, this translates into a REER undervaluation of 2.3 percent. - The external improvement is driven by exceptional 2022 factors and is subject to considerable uncertainty about long-term hydrocarbon prices; a quick reversal is possible. - Existence of a parallel exchange market complicates interpretation of model results. - Intergenerational equity assessment: - The current account norm estimated using consumption allocation rules for exporters of exhaustible resources is 11.5 percent of GDP in the medium term. - Projected cyclically adjusted CA: -7.1 percent of GDP. - Given projected 2022–27 current account deficits, a significant current account gap of -18.6 percent of GDP would remain over the medium term in the absence of further savings. - A consumption-based model suggests the projected medium-term current account path is inconsistent with intergenerational equity despite the near-term surplus. ### Real exchange rate (REER) - Background: - The REER appreciated by around 8.8 percent between December 2021 and end-November 2022, owing to high hydrocarbon prices and a nominal appreciation of the dinar. - The REER had depreciated by 10.6 percent between January 2015 and December 2021. - Gradual depreciation, small nonhydrocarbon tradable sector, and supply-side constraints dampened competitiveness effects; expansionary fiscal policy offset depreciation effects due to high import content of public spending. - Assessment: - The EBA-REER model estimates suggest an undervaluation of 15.2 percent but are regarded as unreliable. - Staff give greater weight to the EBA-lite CA model, which is often more informative and reliable for Algeria. ### Capital and financial accounts: flows and policy measures - Background: - Algeria’s economy remains mostly closed to external capital flows. - Inward FDI declined from 0.9 percent of GDP in 2018 to 0.6 percent in 2021; projected to increase slightly to 0.75 of GDP in 2022 (note: text states "0.75 of GDP"). - Portfolio flows were nil. - Assessment and policy implications: - Elimination of the 49 percent limit on foreign ownership in Algerian investment projects (the ‘51/49’ rule), except for strategic sectors, removed an important constraint on inward FDI. - Ongoing reforms (new investment law, digitalization initiatives), if accompanied by improved business climate and policy predictability, could improve FDI attraction in the medium-term. - The abolition in 2021 of surrender requirements, except for hydrocarbon and mineral exports, could help ease supply bottlenecks by facilitating imports of raw materials and inputs. ### FX intervention and reserves level - Background: - Official reserves are projected to increase in the near-term, driven by improved hydrocarbon prices and exports, before falling over the medium-term. - Algeria has financed current account deficits since 2014 by running down foreign exchange reserves. - De jure exchange rate arrangement: managed floating; de facto arrangement: a crawling-like arrangement. - The Bank of Algeria (BA) intervenes by proposing its own rates and making foreign exchange available to banks; BA sets buying and selling rates of the dinar against the US dollar within a margin of 0.015 dinar. - Assessment and projection: - FX reserves increased in 2022, but the downward trajectory is expected to resume from 2024. - Reserves level projected to drop below 10 months of imports by 2027 (to around 111 percent of the ARA metric). ### Key risks (selected highlights from the Risk Assessment Matrix) - Conjunctural risks: - Commodity price shocks - Likelihood: High - Impact: High - Policy response highlights: broad-based fiscal consolidation; allow nominal exchange rate to act as shock absorber; continue diversification reforms; strengthen fiscal framework. - Systemic social unrest - Likelihood: High - Impact: Low (domestic living cost pressures could stoke social tensions) - Policy response highlights: tighten monetary and fiscal policies; reprioritize spending and improve efficiency; target temporary measures to low-income households. - De-anchoring of inflation expectations and stagflation - Likelihood: Medium - Impact: High - Policy response highlights: tighten monetary policy; broad-based fiscal consolidation; target transfers and subsidies; implement structural reforms. - Abrupt global slowdown or recession: Europe - Likelihood: High - Impact: High - Policy response highlights: tighten monetary policy; broad-based fiscal consolidation; allow nominal exchange rate flexibility; continue diversification reforms. - Structural risks: - Deepening geo-economic fragmentation and geopolitical tensions - Likelihood: High - Impact: Medium - Policy response highlights: accelerate diversification and resilience; implement Government Action Plan reforms; strengthen fiscal and monetary frameworks. - More frequent natural disasters (water and food shortages) - Likelihood: Medium - Impact: High - Policy response highlights: invest in climate-resilient infrastructure and agriculture; accelerate economic diversification and renewables. - Idiosyncratic risks: - Calls on government-guaranteed debt or capital injections needs for public banks or SOEs - Likelihood: High - Impact: High - Policy response highlights: improve monitoring and management of fiscal risks; streamline SOE governance; condition state support on transparency and restructuring; divest non-core assets. - Deepening sovereign-bank nexus - Likelihood: High - Impact: High - Policy response highlights: prohibit direct/indirect central bank financing of the budget; strengthen central bank independence; mobilize nonhydrocarbon revenue; adopt a medium-term fiscal adjustment plan; explore non-inflationary financing including foreign borrowing; reform public bank governance. - Partial or delayed implementation of macroeconomic adjustment and structural reforms - Likelihood: Medium - Impact: High - Policy response highlights: increase transparency and timely data publication; adopt medium-term fiscal adjustment plan with coherent monetary and exchange rate policies; provide temporary targeted support to low-income households to mitigate social impact. *Source: Annex I. External Sector Assessment (1dzaea2023001).* ### Annex III. Public and External Debt Sustainability Analysis ### Annex III. Public and External Debt Sustainability Analysis ### Overview and recent developments - A significant fall in Algeria’s government debt in 2022 will bring down its medium-term trajectory and support its sustainability. - Government debt is projected to remain at moderate levels through the medium term, despite forecast wide fiscal deficits. - Debt sustainability is constrained by a narrow range of available funding sources given reluctance to foreign borrowing and limits to the domestic financial system’s absorption capacity. - Large contingent liabilities from SOEs and an aggravating sovereign-bank nexus pose significant risks to the debt path. - Support from the central bank has put a lid on borrowing costs so far but an increase in interest rates is needed amidst high inflation and could worsen debt dynamics. - The outlook for public finances is highly contingent on hydrocarbon prices. ### Recent debt dynamics and composition - Central government debt, excluding guarantees on loans to SOEs, had risen by nine folds between 2013 and 2021. - Debt projected to fall to 52.4 percent of GDP at end-2022 from 62.8 percent of GDP at-end 2021, driven by a primary fiscal surplus and strong nominal GDP growth due to an upswing in hydrocarbon prices. - Between 2018 and 2021, annual average budget transfers of 2.9 percent of GDP were channeled to the pension system. - In 2016-17, the government recognized and settled liabilities of around 5 percent of GDP to SONATRACH on subsidy-related losses. - In 2017, the Treasury acquired loans owed by Sonelgaz equivalent to 3 percent of GDP. - The government purchased public bank loans to SOEs worth DZD 2,080 billion (9.4 percent of GDP) in 2021 and DZD 520 billion (1.9 percent of GDP) in 2022 as part of the PSR financing operation. - Preliminary estimates indicate additional subsidy-related liabilities to SONATRACH of around DZD 900-1000 billion (4.1.-4.5 percent of the 2021 GDP) not yet reflected in government debt. - The 2023 budget draft included provisions for the settlement of DZD 100 billion (0.3 percent of the forecast GDP) to SONATRACH. - The Treasury has tapped deposits of public entities to finance the fiscal deficit for an average of around 2 percent of GDP per year over the last five years. - Claims on the government by social security and the SOE in charge of the supply of pharmaceutical products are being gradually settled and could add to the debt stock as payments are made. - Around 45 percent of government debt or 23 percent of GDP were directly owed to the BA in 2022. - Around 99 percent of debt was held domestically and denominated in dinars. - Government external foreign-currency debt represented 0.6 percent of GDP and mostly comprised a €900 million loan obtained from the African Development Bank in 2019. ### Projections and baseline scenario - Under staff’s baseline scenario, debt-to-GDP is projected to fall further in 2023 as the large deficit forecast for that year is assumed to be financed through FRR drawdowns. - Debt is projected to resume its rise from 2024 onwards, reaching 60.8 percent of GDP in 2027. - Projected improvement in the NHPD by 4 percent of NHGDP between 2021 and 2027 is assumed with progress on tax reforms and cuts to capital spending. - The forecast fiscal adjustment will not suffice to halt the rise in debt because: - rise in rigid current spending announced under the 2023 budget, - a projected fall in the BA’s dividend payments, - a gradual decline in hydrocarbon prices, - continued large annual budget transfers to cover the pension system’s financing shortfall. - Projected fiscal adjustment under staff’s baseline is somewhat large by historical standards, tilting risks around the debt trajectory to the upside. ### Financing needs and market capacity - Gross financing requirements are projected to average 10.6 percent of GDP per year in 2023-2027. - Algeria’s external and FX debt are at negligible levels, leaving space for external borrowing, but the government’s stated policy is to limit foreign financing only to strategic investment projects. - Absorption capacity of the domestic debt market is modest. - Claims on the government accounted for one third of bank assets in August 2022, posing feedback loop risks between the banking sector (mostly state-owned banks) and the sovereign. - Meeting fiscal financing needs on the domestic market is likely to: - strain the banking sector’s balance sheet, - crowd out credit to the private sector, - weigh on growth and macroeconomic stability. ### Sensitivity and stress-test results - Debt dynamics are particularly sensitive to a rise in interest rates. - Budget interest expense has remained stable around its five-years average of 0.7 percent of GDP per year despite the sizeable rise in debt, due to past direct monetary financing and the PSR financing operation. - Staff’s baseline assumes continuation of low real rates on fiscal debt. - Government’s commitment not to resort to further central bank financing will likely translate into higher interest costs. - Needed monetary policy tightening to tame currently high inflation and the government’s strategy of promoting financial deepening would require a rise in market rates. - Stress-test outcomes: - A shock to real interest rates would push government debt to 70 percent of GDP in 2027 and average annual financing needs to 13 percent of GDP. - A combined macro-fiscal shock (illustrating for example a fall in oil prices) would cause debt to rise close to 80 percent of GDP by 2027. - A one-standard deviation shock to real growth, or a modest fiscal slippage, would lead debt to rise well above 60 percent of GDP in 2027. - Low level of FX liabilities and natural hedge from the large share of FX-denominated hydrocarbon revenue limit vulnerability to exchange rate movements. - The predictive density of debt under the asymmetric distribution points to material upside risks to the debt trajectory. ### Contingent liabilities and additional risks - Sizeable contingent liabilities from the pension system and SOEs pose additional risks to the debt path. - Non-financial SOE debt to the domestic banking system was 15 percent of the forecast 2022 GDP in September 2022, around one fourth of which were explicitly guaranteed by the government. - Exposure of public banks to public enterprises, SOE reliance on government support, and an aggravating sovereign-bank nexus create a mechanism for a negative feedback loop that would amplify macroeconomic shocks and weaken debt sustainability and macroeconomic stability. - The reform of the tax on professional activities (“taxe sur les activités professionnelles”, TAP) will address a major weakness in the business climate but could reduce the resources of provincial and local governments in the short run and require government support to fill the gap. - Government plans to expand the portfolio of PPPs could give rise to additional contingent liabilities in the medium term. *Annex III. Public and External Debt Sustainability Analysis — IMF staff assessment as presented in the source document.* ### 9. The downward trend in total external debt, from already low levels, is projected to ### 9. The downward trend in total external debt, from already low levels, is projected to ### External debt outlook and trajectory - Total external debt declined from 1.9 percent in 2021 to 1.6 percent of GDP in 2022, due to the substantial current account surplus recorded in 2022. - Total external debt is forecast to be broadly stable through 2027, as FX reserves are used to finance the widening current account deficit projected over the medium term under the baseline scenario. - Bound stress tests indicate the trajectory of external debt is subject to several risks, notably an adverse current account shock. ### Key projections and macro assumptions (baseline) - External debt (percent of GDP): 2014–2027 series shows baseline values including 1.4 (2014), 1.8 (2015), 2.4 (2016), 2.3 (2017), 2.3 (2018), 2.2 (2019), 2.4 (2020), 1.9 (2021), 1.6 (2022), 1.6 (2023), 1.6 (2024), 1.6 (2025), 1.6 (2026), 1.5 (2027). - Change in external debt: -0.2 (2014), 0.4 (2015), 0.6 (2016), -0.1 (2017), 0.0 (2018), 0.0 (2019), 0.1 (2020), -0.5 (2021), -0.3 (2022), 0.0 (2023–2027 reported as 0.0). - Identified external debt-creating flows (4+8+9): 3.7 (2014), 17.2 (2015), 15.6 (2016), 12.2 (2017), 9.2 (2018), 9.1 (2019), 12.5 (2020), 2.0 (2021), -7.9 (2022), -3.5 (2023), 0.6 (2024), 2.3 (2025), 3.6 (2026), 4.1 (2027). - Current account deficit, excluding interest payments: 4.4 (2014), 16.4 (2015), 16.5 (2016), 13.1 (2017), 9.6 (2018), 9.8 (2019), 12.8 (2020), -2.8 (2021), 7.6 (2022), 2.7 (2023), -1.4 (2024), -3.1 (2025), -4.4 (2026), -4.9 (2027). - Exports (percent growth or level as reported): 29.7 (2014), 22.9 (2015), 20.3 (2016), 22.1 (2017), 25.3 (2018), 22.5 (2019), 17.1 (2020), 25.6 (2021), 32.8 (2022), 29.3 (2023), 25.8 (2024), 24.3 (2025), 23.0 (2026), 22.4 (2027). - Imports (percent growth or level as reported): 33.4 (2014), 38.4 (2015), 37.6 (2016), 35.3 (2017), 34.3 (2018), 31.6 (2019), 29.5 (2020), 27.2 (2021), 24.6 (2022), 26.7 (2023), 27.9 (2024), 28.1 (2025), 28.2 (2026), 28.3 (2027). - Net non-debt creating capital inflows (negative): -0.7 (2014), 0.4 (2015), -1.0 (2016), -0.7 (2017), -0.4 (2018), -0.8 (2019), -0.8 (2020), -0.6 (2021), -0.2 (2022), -0.8 (2023–2027 each reported as -0.8). - Automatic debt dynamics: 0.0 (2014), 0.5 (2015), 0.1 (2016), -0.1 (2017), 0.0 (2018), 0.1 (2019), 0.4 (2020), -0.2 (2021), 0.0 (2022–2027 reported as 0.0). - Residual, including change in gross foreign assets: -3.9 (2014), -16.8 (2015), -15.0 (2016), -12.3 (2017), -9.3 (2018), -9.2 (2019), -12.3 (2020), -2.5 (2021), 7.6 (2022), 3.5 (2023), -0.6 (2024), -2.3 (2025), -3.7 (2026), -4.2 (2027). - External debt-to-exports ratio (in percent): 4.6 (2014), 7.9 (2015), 11.8 (2016), 10.5 (2017), 9.0 (2018), 10.0 (2019), 13.9 (2020), 7.4 (2021), 4.8 (2022), 5.5 (2023), 6.3 (2024), 6.5 (2025), 6.8 (2026), 6.8 (2027). - Gross external financing need (in billions of US dollars): 11.0 (2014), 29.6 (2015), 28.5 (2016), 24.5 (2017), 19.1 (2018), 19.4 (2019), 21.1 (2020), 6.9 (2021), -12.7 (2022), -3.2 (2023), 5.8 (2024), 9.7 (2025), 13.0 (2026), 14.5 (2027). - Gross external financing need (in percent of GDP): 5.1 (2014), 17.9 (2015), 17.8 (2016), 14.4 (2017), 10.9 (2018), 11.3 (2019), 14.5 (2020), 4.2 (2021), -6.5 (2022), -1.5 (2023), 2.8 (2024), 4.5 (2025), 5.8 (2026), 6.3 (2027). ### Stress tests and vulnerabilities - Bound stress tests (Figures 6–7 and associated text) highlight sensitivity to: - Non-interest current account shocks (adverse CA shocks can substantially raise external debt ratios). - Real GDP growth shocks. - Real interest rate and real exchange rate shocks. - Combined shocks and a one-time real depreciation (30 percent in 2022) are modeled in scenario analyses. - Historical and scenario box annotations show baseline and historical-average paths and indicate that permanent one-half standard deviation shocks were applied for individual tests; combined shocks include 1/4 standard deviation shocks to real interest rate, growth rate, and current account balance. ### Public debt sustainability context (selected indicators from PDSA figures) - Nominal gross public debt and public gross financing needs are presented in Figure 1 with time series and projections (noting public sector defined as general government). - Identified debt-creating flows and residuals drive changes in gross public sector debt; automatic debt dynamics reflect interactions among interest, inflation, and growth. - Projections include fiscal variables such as primary balance, primary (noninterest) revenue and grants, and primary (noninterest) expenditure, showing identified contributions to debt dynamics across 2020–2027 (see figures for detailed series). ### Policy recommendations and implementation status (Annex IV) - Adopt a medium-term fiscal consolidation strategy over 2022-26 to narrow the nonhydrocarbon primary deficit, adapting the pace of consolidation to the evolution of the pandemic and domestic economic conditions to protect the most vulnerable. - Implementation status: Significant increase in spending was announced under the 2022 budget and supplementary budget. Spending was largely under-executed, contributing, alongside a sharp rise in hydrocarbon revenue, to the achievement of a fiscal surplus. The subsidy reform was announced in the 2022 budget law and remains under preparation. Progress is also being achieved on tax reforms. - Diversify budget financing sources, but exclude direct borrowing from BA. - Implementation status: Direct monetary financing ceased in early 2019. The special refinancing program (PSR) ended in June 2022. Authorities are working on a legislative framework for public-private partnership and receiving technical assistance from IMF MCM on domestic debt market development. - Tighten monetary policy to consolidate gains from fiscal adjustment and contain inflationary pressures. - Implementation status: Monetary policy has remained on hold since February 2021; reserve requirement ratio and policy interest rate are at their lowest level in years. Excess liquidity is sizeable. - Allow for greater flexibility of the exchange rate in the context of tighter fiscal and monetary policies to facilitate adjustment to shocks. - Implementation status: The dinar depreciated by 10.7 percent in nominal effective terms in 2021 and subsequently appreciated by a cumulative 5.9 percent during the first nine months of 2022 amid an improvement in the terms-of-trade. - Carefully monitor financial stability risks and take timely corrective action as needed. - Implementation status: With IMF and METAC technical assistance, the Bank of Algeria (BA) is strengthening liquidity management, regulatory and supervisory functions, and developing a collateral framework; a technical assistance protocol with the Islamic Development Bank was signed to enhance the regulatory and supervisory framework for Islamic Banking activities. - Modernize the business climate, scale back barriers to entry, and open the economy to more foreign investment and trade. - Implementation status: Authorities are accelerating digitalization, preparing a one-stop shop for investors, reforming the distortionary tax on professional activities, publishing a new investment law and decrees, eliminating the 51/49 ownership rule for most sectors, and tightening import regulation measures. - Improve access to finance. - Implementation status: A Sharia-compliant governance framework and regulations are in place; Islamic Banking services have been available since 2020. - Strengthen the policy framework to increase policy effectiveness, including modernizing budget management and improving monitoring of fiscal risks. - Implementation status: Authorities are working towards implementation of the Organic Budget Law. *Source: IMF staff.* ### 2023. A draft program budget and several new budget documents have been prepared. ### 2023. A draft program budget and several new budget documents have been prepared. ### Strengthen liquidity management to improve the effectiveness of monetary policy - The BA has worked on improving its short-term liqudity forecasting, with assistance from the IMF's Monetary and Capital Markets Department. - Key statistics and observations: - Excess reserves at the end of August 2022 amounted to DZD 1,881 billion (more than 8 percent of banking system assets). - The yield on the shortest interbank market tenors hovered around 0.5 percent through the first nine months of 2022, well below the policy rate of 3 percent. ### Reinforce the independence of the BA to protect its operations and price stability mandate - The central bank law ("Loi sur la Monnaie et le Crédit") is being revised. - Recommended legal changes discussed: - Strengthen the BA’s independence and its price stability mandate. - Include a strict prohibition of monetary financing while preserving the BA’s capacity to provide temporary advances to the treasury under strict conditions and limits. - Strengthen the BA’s governance and accountability to the Parliament. - Assess BA performance based on delivery of price stability and financial stability mandates. ### Improving governance and reducing vulnerabilities to corruption - Measures under way or envisaged: - Draft regulations prepared to improve the regulatory framework for the prevention and fight against corruption. - Amendments to law 06-01 on the prevention and fight against corruption are envisaged. - A new High Authority in charge of fighting corruption has been installed and an enhanced mechanism for asset recovery was announced. - A code of ethics for public agents is under preparation. - A new investment law established the principle of evenhandedness in the treatment of private investors and reinforced appeal processes. - A new public procurement law and dedicated electronic portal are currently under preparation. - Ongoing efforts to accelerate digitalization. - External stakeholders have been consulted in some recent legislative reforms. - Fiscal reporting and transparency gaps: - Regular reporting on fiscal operations is still very limited. ### Annex V — Managing Public Investment and PPPs for Growth - Context and challenge: - Algeria’s capital spending has averaged 11.7 percent of GDP over the last five years, compared with North Africa and MENA averages of 5.7 percent and 4.3 percent respectively. - Despite a relatively high public capital stock, physical access and quality of infrastructure tend to be below those of the average emerging market economy. - Policy priorities: - Improve efficiency of public investment through stronger appraisal and selection of projects, improved public procurement practices, and enhanced monitoring and reporting. - Authorities should adopt their draft decree on project preparation and ensure Ministry of Finance and line ministries assess technical and financial viability of projects. - A Public Investment Management Assessment (PIMA) by the IMF’s Fiscal Affairs department could help identify reforms. - Public-Private Partnerships (PPPs): - Definition: PPPs are long-term service contracts where the private sector provides upfront financing, builds, operates, and maintains an asset in exchange for user fees or periodic payments by the government. - As of 2021, according to the World Bank’s Private Participation in Infrastructure (PPI) database: - 30 active PPP projects in Algeria - Total investment of US$ 9.2 billion - PPPs are mentioned in the 2021 Government Action Plan (“Plan d’action du government”, PAG) as a way to develop infrastructure. - Risks and governance recommendations: - Without proper governance, PPPs can generate higher intertemporal fiscal costs, support low-priority projects, and create risks of unfavorable risk-sharing clauses and collusion. - The government is working on a draft law on the management of PPPs that should: - Provide a clear, fair, and predictable legal environment for the private sector. - Set disclosure requirements on future fiscal costs and risks. - Clarify roles and responsibilities of counterparts in PPP transactions. - Ensure the Ministry of Finance can analyze costs and fiscal risks and stop fiscally unaffordable projects via a gateway process. - Consider ceilings on both stocks and flows of PPPs to help control fiscal risks. - Analytical tool: - The IMF-World Bank PPP Fiscal Risk Assessment model (PFRAM) is noted as a useful Excel-based tool to analyze government costs and risks in individual PPP projects. ### Annex VI — Strengthening Monetary Policy Transmission - Problems identified: - Limited liquidity management and weak policy rate transmission constrain monetary policy in Algeria. - Past monetary financing of the budget complicated the BA’s role. - Current excess liquidity has not been managed actively through regular liquidity-absorbing operations, depriving the BA’s key policy rate of operational existence and limiting its influence on bank funding costs. - Money market rates are closer to the marginal cost of excess reserves than to the BA’s key policy rate. - Three-pronged strategy to improve conduct of monetary policy: 1. Legal/institutional: - Strengthen BA statutes, independence, and price stability mandate through revision of the Law on Money and Credit. - Include prohibition of monetary financing with limited temporary advances under strict conditions. - Strengthen governance and accountability to Parliament; assess BA on price stability and financial stability delivery. 2. Active liquidity management: - Immediately raise the policy rate and either: - Increase the reserve requirement ratio and conduct regular liquidity-absorbing operations for the residual liquidity surplus. Regular liquidity-absorbing operations should be conducted at the policy rate. Calibration should consider heterogeneous distribution of excess reserves and impact of ongoing and future PSR repayments; or - Maintain a symmetrical standing facilities corridor around the policy rate to tighten monetary policy. If heterogeneous excess reserve distribution complicates reserve requirement increases, the BA could increase the three policy rates, with the two standing facilities rates forming a symmetrical corridor at +/- 2 percentage points around the key policy rate. - Higher remuneration of excess reserves through the deposit facility (currently at 0 percent) would be transmitted to bank deposit and lending rates, and subsequently to the economy. - Footnote: The BA could also consider bilateral liquidity operations with banks with significant excess reserves as a result of significant hydrocarbon export proceeds. 3. Communication: - Strengthen communication on the policy rate as the instrument expressing the BA’s monetary policy stance. Once the key policy rate regains operational relevance, focus public communication on changes to the policy rate as the main countercyclical tool to maintain price stability. ### Relations with the Fund, Financial Data, and Technical Assistance highlights - Relations with the Fund (as of December 31, 2022): - Membership Status: Joined September 26, 1963; Article VIII. - SDR Department: - Net cumulative allocation 3,076.66 (million) - Holdings 3,184.22 (million) 103.50 (Percent of Quota) - General Resources Account: - Quota 1,959.90 (SDR million) 100 (Percent of Quota) - Fund holdings of currency 1,397.01 (SDR million) 71.28 (Percent of Quota) - Reserve position in Fund 562.90 (SDR million) 28.72 (Percent of Quota) - Financial arrangements historically: - EFF approved 5/22/1995 expiration 5/21/1998 amount approved 1,169.28 (SDR million) amount drawn 1,169.28 (SDR million) - Stand-by approved 5/27/1994 expiration 5/22/1995 amount approved 457.20 (SDR million) amount drawn 385.20 (SDR million) - Stand-by approved 6/03/1991 expiration 3/31/1992 amount approved 300.00 (SDR million) amount drawn 225.00 (SDR million) - Projected forthcoming obligations (Principal): 0.00 for 2022, 2023, 2024, 2025, 2026; Interest/Charges: 0.04 for 2022, 2023, 2024, 2025, 2026; Total: 0.04 for those years. - Exchange rate and reserves: - On January 3, 2023, the average of the buying and selling rates for the U.S. dollar was US$ 1 = DZD 137.43, equivalent to SDR 1 = DZD 182.78. - The de jure exchange rate arrangement is managed floating; the de facto regime is classified as a crawl-like arrangement. - Technical assistance (selected entries): - 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 - METAC: Program budgeting March 2021; Program-based budgeting July 2021 - METAC: Management of PPPs October 2021 - MCM: Monetary policy operations and liquidity management (long-term expert resident) October 2016-October 2018 - Additional TA items listed through February 2023. - Statistical issues and data adequacy: - General: Data provision has several shortcomings but remains broadly adequate for surveillance. Key shortcomings pertain to data on budget execution and outturns as well as the real sector. - National accounts: Annual accounts available since 1980; quarterly since 2000. Quarterly data have been published with substantial delay in recent years. - Price statistics: CPI reference period is 2001 with weights from 2000; index is severely outdated. PPI weight reference period is 1989, also severely outdated. - Government finance statistics: Key shortcomings include insufficient institutional coverage (limited to central government), classification problems, long lags, and lack of reconciliation with monetary accounts. Authorities have not reported GFS data for publication in the Government Finance Statistics Yearbook since 2011. - Monetary statistics: BA submits central bank, ODCs, and other financial corporations statistics to STA on a timely basis; monetary statistics are published in the International Financial Statistics and are based on the Standardized Report Form (SRF). - Financial Sector Surveillance: BA reports Financial Soundness Indicators (FSI) but periodicity and timeliness need improvement; currently reported only on a yearly basis. - Balance of payments: Relatively good quality; some coverage gaps (e.g., reinvested earnings) and position data. *Source: IMF staff report content provided in the supplied PDF content unit.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1dzaea2023001.pdf_