## 1dzaea2024001 ## Source details **Canonical URL:** [1dzaea2024001](https://www.imf.org/-/media/files/publications/cr/2024/english/1dzaea2024001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2024/english/1dzaea2024001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2024/english/1dzaea2024001.pdf.json) --- ### Context and recent macroeconomic developments - Sequential shocks: Covid aftermath, spillovers from Russia’s war in Ukraine, and recurrent droughts raised inflation and, with high international hydrocarbon prices, boosted government revenue and exports. - Policy priorities: contain inflationary pressures, maintain fiscal sustainability, preserve financial stability, reduce hydrocarbon dependence, diversify the economy, attract private investment, and tap new export markets. - Real GDP growth and inflation: - Real GDP growth likely 4.2 percent in 2023. - Average annual inflation has exceeded nine percent since mid–2022. - Core inflation (excluding fresh food and administered prices) decelerated to 7.8 percent at end–December 2023. - External and reserve positions: - Current account surplus first nine months of 2023: US$5.7 billion. - Staff estimate full-year 2023 current account surplus: US$5.3 billion. - Net FDI flows below US$0.5 billion through 2023Q3. - Nominal effective exchange rate appreciated by five percent y-o-y through end–December, 2023. - International reserves: 14.1 months of imports at end–October, 2023. - Fiscal and public debt: - Staff estimates 2023 budget deficit at three percent of GDP. - Nonhydrocarbon deficit estimated at 26.4 percent of nonhydrocarbon GDP in 2023. - Staff estimates public debt rose to nearly 49.5 percent of GDP. - Banking sector: - Sector is liquid, solvent, and profitable; aggregate solvency and liquidity ratios exceed regulatory minima. - Sector-wide NPL ratio has exceeded 19.5 percent since 2021; public banks NPLs 21.4 percent at end–June 2023; private banks NPLs much lower. - Credit to the private sector grew by 5.9 percent in 2023 versus 2.5 percent in 2022. ### Outlook and risks - Near-term projections: - Staff projection for 2024: real GDP growth of 3.8 percent. - Inflation expected to decelerate with easing fresh food prices. - Current account surplus projected to narrow assuming gradual decline in oil prices. - Medium-term baseline: - Real GDP growth projected to slow to a little over two percent by 2029 (explicit series given below). - Inflation would converge towards five percent by 2029. - Current account deficits would return in 2025. - International reserves expected to remain around 6.6 months of imports by 2029. - Nonhydrocarbon budget deficit projected to fall from an estimated 26.4 percent of NHGDP in 2023 to about 20.3 percent of NHGDP over the medium term. - Public debt ratio projected to continue increasing (see DSA figures). - Summary of key risks: - Downside: volatile international hydrocarbon prices; stubborn inflation; extreme climate events (droughts and floods); disorderly global energy transition; abrupt slowdown in Europe; contingent liabilities from SOEs; high fiscal financing needs; rising public debt; intertwined financial links among central government, state-owned banks, and SOEs. - Upside: effective implementation of government action plan (digitalization, improving governance), attracting private investment, deepening domestic financial markets, tapping new export markets, and bold structural reforms. ### Fiscal policy — measures, baseline, and resilience - 2024 budget measures: - Eliminates the turnover tax on professional activities (“TAP”); partial compensation via a new solidarity tax on hydrocarbon transport. - New tax advantages for private sector (start-ups and auto-entrepreneur regime). - Large increase in wage bill driven by revision of salary scale for 2.8 million public servants (about 15 percent increase in 2024 alone; cumulatively over 2022–24 by about 47 percent), full-year impact of 2023 education hiring about 31,000 positions, and new positions about 37,000. - Increases to minimum pension and several allowances. - Introduction of program budgeting to improve investment efficiency and execution. - Fiscal outcomes and risks: - 2024 overall fiscal deficit projected to reach 8.5 percent of GDP. - Nonhydrocarbon deficit projected at 27 percent of NHGDP in 2024. - FRR balance end–December 2023: DZD 2,268 billion (6.8 percent of GDP). - Large deficits in 2023–24 would deplete FRR, exhaust fiscal space, and potentially fuel inflation; financing large gross needs may strain domestic banking sector and crowd out private credit. - Sovereign risk and debt sustainability: - SR-DSA suggests a “moderate” risk of sovereign stress. - Staff analysis: additional measures of three pps. of GDP over 2024–26 could stabilize public debt ratio around 47 percent of GDP by 2026. - Policy recommendations to increase budget resilience: - Eliminate inefficient tax expenditures (partial list in 2024 budget law amounts to DZD 495 billion, 1.3 percent of projected 2024 GDP). - Spread hiring and salary increases over multiple years. - Gradually replace universal subsidies with targeted transfers, starting with fuel. - Adopt a rules-based medium-term fiscal framework with a dual-pillar buffer: a public debt margin and a savings floor (funds in FRR) to cover 95 percent of simulated medium-term trajectories. - Save windfall hydrocarbon revenue in FRR. ### Reform agenda and public finance management - Progress: - New procurement and public accounting laws implemented; program budgeting transitioning in 2023–24. - Ministry adopted code of conduct and performance contracts; new data center integrating customs, taxation, and property taxation platforms. - Debt and cash management recommendations: - Finalize the “État D” (financing side) of the budget per Organic Budget Law. - Prepare monthly cash-flow forecasts. - Develop a medium-term debt management strategy covering objectives, risk analysis, financing costs, new instruments, and transparency. - Risk management: - Strengthen Haut Comité’s role to analyze budget risks holistically, quantify impacts, prepare contingency plans, propose mitigating actions, issue risk reports to Council of Ministers, and publish fiscal risk statements. - Use IMF Risk Assessment Matrix and SR-DSA methodology as blueprints. ### Fiscal challenges from climate change and policy instruments - Climate commitments and impacts: - NDC: reduce carbon emissions by seven percent by 2030 (from a business-as-usual scenario). - 2021 National Climate Plan: 155 mitigation and adaptation actions; priorities include conserving/creating water resources and improving food security. - Fiscal instruments to support mitigation and transition: - Energy subsidy reform: - Gradual adjustment toward cost-recovery over six years starting in 2024 could generate average annual fiscal revenue of about 6.4 percent of GDP over the next decade. - Would reduce emissions by over one fifth by 2030 relative to a business-as-usual scenario. - Savings could fund targeted support, climate adaptation, and buffers; reforms should include communications and targeted compensatory measures. - Feebates and incentives for renewables; integrate climate considerations into public finance management and public investment management (C-PIMA interest); empower Haut Comité to quantify fiscal risks from climate change. ### Monetary policy, exchange rate, and banking sector recommendations - Monetary stance and actions: - Ample bank liquidity and negative real short-term interest rates indicate accommodative stance. - BA raised required reserve ratio by one point to three percent in mid–April 2023; policy rate remained at three percent since December 2020 while inflation exceeded nine percent. - Staff recommends monetary policy tightening: increase required reserve ratio, broaden liquidity absorption operations, and increase the policy rate. - Monetary and Banking Law (LMB): - LMB implementation is priority; objectives include encouraging financial innovation, strengthening surveillance and crisis management, and introducing new monetary instruments and governance. - Staff recommends implementation texts: note price stability as primary monetary policy objective; specify conditions and safeguards for monetary financing; clarify BA and Banking Commission roles; detail macroprudential mandate and crisis management modalities. - Exchange rate policy: - More flexibility in the dinar would enhance shock absorption and help develop the FX interbank market. - Staff’s EBA analysis suggests a moderate REER undervaluation of 10.3 percent based on the current account model. - Parallel market premium reached 62 percent in November 2023. - Policy options: widen buy/sell band, relax foreign currency allocations for travel (basic allocation currently limited to about 100 euros), develop interbank FX market. - Financial sector key metrics and risks: - Banks’ exposure to public sector rose from 32 percent of bank assets in 2010 to 54 percent in 2023. - Six largest banks are publicly owned and account for over 85 percent of bank assets. - About 62 percent of loans by public banks benefit from subsidized rates. - Government guarantees likely about DZD 2,500 billion in 2023 (7.4 percent of GDP). - NPLs: sector-wide NPL ratio ~19.8 percent (Jun-23); public banks NPLs 21.4 percent (Jun-23); private banks NPLs 8.6 percent (Jun-23). - Policy recommendations: - BA to monitor solvency and liquidity, enforce prudential rules, and conduct stress testing. - Central government to establish ownership policy for public enterprises, enforce performance contracts, publish PE financials, strengthen Haut Comité, allow market pricing to minimize implicit subsidies, phase out quasi-fiscal activities, and apply guarantees judiciously. - Further reforms: reinforce commercial orientation of public banks, phase out subsidized loan schemes, update NPL legal provisions, consider asset management company, enhance BA stress-testing capacity, develop early warning systems, and prepare financial stability reports. ### Structural reforms, diversification, governance, and transparency - Institutional reforms and investment climate: - Investment Law (mid–2022) is cornerstone for improving business climate and promoting private investment. - Algerian Investment Promotion Agency (AAPI) created with a digital platform and “one-stop shop”; new Land Law to streamline land processes. - Preparations to sell minority shares in two public banks; Startup Fund and simplified “auto-entrepreneur” regime introduced. - Trade and export strategy: - Authorities prioritize boosting nonhydrocarbon exports (cement, fertilizers, steel), expanding presence in Sub-Saharan Africa, and leveraging AfCFTA membership. - Staff recommended considering resumption of WTO accession and avoiding import compression policies (including reducing tariffs). - Deeper reforms needed: - Shed non-strategic and loss-making SOEs, make product and labor markets more flexible, increase female labor force participation. - Avoid generalized import compression and over-reliance on tax incentives, special regimes, and subsidization that may favor incumbents. ### Digitalization, AML/CFT, data, and statistics - Digitalization and governance: - Ministry of Digitalization and Statistics interconnecting databases on unemployment, social security, taxes, and real estate. - New Procurement Law includes a portal to streamline procedures. - Beneficial ownership (BO) register established by decree; staff advises operationalizing in line with FATF standards and broad public accessibility. - AML/CFT and financial intelligence: - May 2023 MENAFATF recommendations spur reforms; authorities requested IMF LEG CD to improve risk-based AML/CFT supervision. - February 2023 AML/CFT law amendments align definition of “politically exposed persons” with international standards. - Staff recommends fully staffing and equipping the Financial Intelligence Unit (CTRF) and ensuring its independence. - Data coverage and timeliness issues: - National accounts rebased to 2001; CPI base severely outdated (CPI weights from 2000); PPI weights from 1989. - Missing: unemployment rate, intra-year budget execution. - Budget data transmitted with lengthy delays. - Staff stands ready to provide technical assistance. ### Key projections and selected numeric tables (high-frequency items) - Real GDP growth (percent): 2023 = 4.2; 2024 = 3.8; 2025 = 3.1; 2026 = 2.5; 2027 = 2.1; 2028 = 2.1; 2029 = 2.1. - Sectoral growth (percent): - Hydrocarbon: 2023 = 4.5; 2024 = 2.7; 2025 = 1.5; 2026 = 1.0; 2027 = 0.5; 2028 = 0.5; 2029 = 0.5. - Nonhydrocarbon: 2023 = 4.1; 2024 = 3.3; 2025 = 2.7; 2026 = 2.3; 2027 = 2.3; 2028 = 2.3; 2029 = 2.3. - Consumer price index (period average): 2023 = 9.3; 2024 = 7.6; 2025 = 6.4; 2026 = 6.1; 2027 = 5.5; 2028 = 5.2; 2029 = 5.0. - Current account balance (percent of GDP): 2023 = 5.3; 2024 = 0.4; 2025 = -4.2; 2026 = -7.3; 2027 = -8.6; 2028 = -10.2; 2029 = -11.6. - Gross official reserves (US$ billions): 2023 = 68.9; 2024 = 71.3; 2025 = 69.3; 2026 = 64.2; 2027 = 57.7; 2028 = 49.8; 2029 = 40.5. - Reserves (months of next year's imports): 2023 = 14.1; 2024 = 13.5; 2025 = 12.4; 2026 = 11.1; 2027 = 9.7; 2028 = 8.2; 2029 = 6.6. - Central government overall budget balance (percent of GDP): 2023 = -3.0; 2024 = -8.5; 2025 = -7.8; 2026 = -6.7; 2027 = -6.7; 2028 = -6.7; 2029 = -6.7. - Gross government debt (percent of GDP): 2023 = 49.5; 2024 = 46.4; 2025 = 49.7; 2026 = 51.9; 2027 = 54.5; 2028 = 57.0; 2029 = 59.5. - Key banking indicators (selected): - Capital adequacy ratio: 2022 = 21.6; 2023 = 21.5; Jun-23 = 20.9. - NPLs/total loans: 2021 = 19.9; 2022 = 19.8; Jun-23 = 19.8. - Public banks NPLs/total loans: Jun-23 = 21.4. - Private banks NPLs/total loans: Jun-23 = 8.6. - Liquid assets/total assets: Jun-23 = 39.7. - Algerian crude oil price (US$/barrel): 2019 = 64.54; 2020 = 41.97; 2021 = 72.31; 2022 = 103.98; 2023 = 84.08; 2024 = 81.27; 2025 = 77.17; 2026 = 74.27; 2027 = 72.47; 2028 = 71.47; 2029 = 70.9. - GDP (billions of dinars at current prices): 2023 = 33,225; 2024 = 36,764; 2025 = 40,152; 2026 = 43,634; 2027 = 46,947; 2028 = 50,347; 2029 = 53,855. ### Sovereign risk, debt sustainability, and stress tests - DSA summary: overall assessment “Moderate” risk of sovereign stress, with medium-to-long-term risks assessed as “High.” - Public debt path (percent of GDP): - Actual 2022: 48.1 - 2023: 49.5 - 2024: 46.4 - 2025: 49.7 - 2026: 51.9 - 2027: 54.5 - 2028: 57.0 - 2029: 59.5 - 2030: 62.0 - 2031: 64.4 - 2032: 66.7 - Gross financing needs (GFNs; percent of GDP): 2024 = 14.3; 2025 = 10.7; 2026 = 8.4; 2027 = 8.5; 2028 = 9.5; 2029 = 9.5. - Stress-test outcomes: - Banking crisis shock: public debt to 76 percent of GDP by 2028. - Commodity price shock: public debt to 71 percent of GDP by 2028. - Natural disaster and contingent liability shocks: GFNs increase by about 5 percentage points of GDP in the year of the shock. - Debt structure and coverage: - Around 99 percent of public debt held domestically and denominated in dinars. - Large share non-marketable; heavy reliance on domestic bank financing. ### Alternative fiscal scenario (Annex V) - Objective: additional fiscal adjustment of three percentage points of GDP over 2024–26 to stabilize public debt. - Composition: - Additional revenue mobilization: 1.25 pps. of GDP over three years. - Spending restraint: 1.75 pps. of GDP over three years. - Intended outcomes: - Stabilize public debt ratio at about 47 percent of GDP by 2026. - Any windfall accumulates in the FRR; reduced public borrowing from the banking sector. - Macroeconomic impact: - Staff estimates measures would reduce average real GDP growth by 0.15 pps. per year over 2024–26. - Policy examples: - Revenue: eliminate inefficient VAT exemptions (Etat H list amounts to DZD 495 billion, 1.3 percent of GDP), capture digitalization gains, improve tax debt recovery. - Spending: gradual phasing out of universal subsidies with targeted cash transfers, limit transfers to SOEs, contain wage bill by spreading benefits/hiring. ### Financial inclusion and fintech opportunities (Annex VII) - Key facts: - Loans to private sector increased by some ten percentage points of GDP between 2004 and 2022. - Loans to households accounted for less than four percent of GDP at end–2022. - ATM density increased by about seven per 100,000 adults since 2004; branch network broadly stable. - Use of fintech and mobile/internet financial transactions is well below comparator averages. - Gender gap: financial service use higher among males than females. - Policy recommendations: - Strengthen credit market infrastructure: credit bureaus/registries, movable collateral registry, insolvency framework improvements. - Publish a national financial inclusion strategy with quantitative targets. - Promote digital financial services, financial literacy, consumer protection, and long-term savings products. - Carefully evaluate CBDC: potential inclusion benefits vs. risks to financial stability, privacy, and operational capacity. ### Data revisions, statistical issues, and implications (Annex VIII) - National accounts rebased to 2001 (2008 SNA); annual nominal GDP higher by ten percent; real GDP growth higher by 0.1 pp on average over 2001–2022. - CPI base severely outdated (weights from 2000); PPI weights from 1989. - Quarterly national accounts not yet available on new base; GFS coverage limited to central government with long lags; FSI periodicity/timeliness needs improvement. - Exchange rate (average buy/sell) as of January 23, 2024: US$1 = DZD 134.27; SDR 1 = DZD 178.74. - Selected reserve and fiscal notes: international reserves equivalent to 14 months of imports in 2023; gross government debt reported as 55 percent of GDP in 2023 (authorities’ figure referenced). *Source: IMF staff report excerpt (1. Selected Macroeconomic Indicators).* ### 1. Selected Macroeconomic Indicators ___________________________________________________________ 29 ### 1. Selected Macroeconomic Indicators ### Context - Algerian economy faced sequential shocks: Covid pandemic aftermath, spillovers from Russia’s war in Ukraine, and recurrent droughts. - Shocks raised inflation and, with high international hydrocarbon prices, boosted government revenue and exports. - Budgets for 2023 and 2024 aim to support household purchasing power but risk depleting the Revenue Regulation Fund (FRR). - Policy priorities: contain inflationary pressures, maintain fiscal sustainability, and preserve financial stability. - Authorities’ policy objectives: reduce dependence on hydrocarbon sector, diversify the economy, attract private investment, and tap new export markets. - Structural reforms required for high and sustained growth and job creation. ### Recent Macroeconomic Developments - Real GDP likely grew by 4.2 percent in 2023, supported by industry, construction, services, and a rebound in hydrocarbon production. - Average annual inflation has exceeded nine percent since mid–2022. - Core inflation (excluding fresh food and administered prices) decelerated to 7.8 percent at end-December 2023. - Current account surplus: - Surplus for first nine months of 2023: US$5.7 billion. - Staff estimate for full-year 2023 current account surplus: US$5.3 billion. - Financial account largely closed; net FDI flows below US$0.5 billion through 2023Q3. - Nominal effective exchange rate appreciated by five percent y-o-y through end–December, 2023. - International reserves reached 14.1 months of imports at end–October, 2023. - Budget and public debt: - Staff estimates the 2023 budget deficit at three percent of GDP (from 2.5 percent in 2022). - Nonhydrocarbon deficit estimated at 26.4 percent of nonhydrocarbon GDP in 2023 (down from 27.4 percent in 2022). - Staff estimates public debt rose to nearly 49.5 percent of GDP. - Banking sector: - Sector is liquid, solvent, and profitable; aggregate solvency and liquidity ratios exceed regulatory minima. - Sector-wide NPL ratio has exceeded 19.5 percent since 2021. - NPLs of public banks: 21.4 percent at end–June 2023; more than double those of private banks. - Credit to the private sector grew by 5.9 percent in 2023 versus 2.5 percent in 2022. ### Outlook and Risks - Near-term outlook broadly positive but inflation remains a concern. - Staff projection for 2024: real GDP growth of 3.8 percent. - Inflation expected to decelerate with easing fresh food prices and efforts to expand agricultural production and build a food security stock. - Current account surplus projected to narrow, assuming gradual decline in oil prices. - Medium-term baseline: - Real GDP growth projected to slow to a little over two percent by 2029. - Inflation would converge towards five percent. - Current account deficits would return in 2025. - International reserves expected to remain around 6.6 months of imports by 2029. - Nonhydrocarbon budget deficit projected to fall from an estimated 26.4 percent of NHGDP in 2023 to about 20.3 percent of NHGDP over the medium term. - Public debt ratio projected to continue increasing. - Risks (summary): - Downside: volatile international hydrocarbon prices, stubborn inflation, extreme climate events (droughts and floods), a disorderly global energy transition, abrupt slowdown in Europe, contingent liabilities from SOEs, high fiscal financing needs, rising public debt, and intertwined financial links among central government, state-owned banks, and SOEs. - Upside: effective implementation of government action plan (digitalization, improving governance), attracting private investment, deepening domestic financial markets, tapping new export markets, and bold structural reforms (¶38 referenced). ### Authorities’ Views - Authorities optimistic about medium-term growth and expect structural reform agenda to spur private investment and growth. - Cited policy instruments: 2022 Investment Law, Land Law, streamlining administrative procedures for investors. - Noted increase in non-hydrocarbon exports as part of diversification strategy. - Agreed broadly with staff’s risk assessment while asserting that fiscal-financial risks from contingent liabilities and sizable financing needs are being monitored and contained. ### Policy Discussions (Overview) - A gradual fiscal rebalancing recommended to build buffers against macroeconomic shocks and revenue volatility and to contain medium-term sovereign debt distress risks. - Monetary policy tightening recommended to signal the Banque d’Algérie’s determination to fight inflation and avoid entrenchment. - More exchange rate flexibility would help absorb shocks. - Need to better understand and manage vulnerabilities from hydrocarbon price volatility, climate change, and public sector interlinkages. - Sustained inclusive growth and job creation require deep structural reforms to reduce public sector footprint and remove impediments to private sector development. ### A. Fiscal Policy — Baseline and Projections - 2024 budget measures: - Eliminates the turnover tax on professional activities (“TAP”); revenue shortfall for local government partially compensated by a new solidarity tax on hydrocarbon transport. - Introduces new tax advantages for private sector (start-ups and auto-entrepreneur regime). - Large increase in wage bill driven by: - Revision of salary scale for 2.8 million public servants (increases public salaries by about 15 percent in 2024 alone, and cumulatively over 2022–24 by about 47 percent). - Full-year impact of 2023 education hiring: about 31,000 positions. - New positions: about 37,000 (mainly in education and health). - Increases to minimum pension and several allowances (students, handicapped individuals, first-time unemployed). - Introduction of program budgeting to improve investment efficiency and execution. - Fiscal outcomes and risks: - 2024 overall fiscal deficit projected to reach 8.5 percent of GDP. - Nonhydrocarbon deficit projected at 27 percent of NHGDP in 2024. - FRR balance as of end–December 2023: DZD 2,268 billion (6.8 percent of GDP). - Large deficits in 2023–24 would deplete FRR, exhaust fiscal space, and potentially fuel inflation. - Financing large gross needs may strain domestic banking sector, crowd out private credit, and increase risk of tapping SOE resources. - Sovereign Risk–Debt Sustainability: - SR-DSA suggests a “moderate” risk of sovereign stress. - Continued public debt ratio increases under baseline add to debt vulnerabilities. - Mitigating factors: initial FRR balances, large share of nonmarketable debt, near absence of external public debt. ### Policy Focus: Increasing Budget Resilience - Staff analysis: additional measures of three pps. of GDP over 2024–26 could stabilize public debt ratio around 47 percent of GDP by 2026. - Potential measures include: - Eliminating inefficient tax expenditures (partial list in 2024 budget law amounts to DZD 495 billion, 1.3 percent of projected 2024 GDP). - Spreading hiring and salary increases over multiple years. - Gradually replacing universal subsidies with targeted transfers, starting with fuel. - Recommendation to adopt a rules-based medium-term fiscal framework with a dual-pillar buffer: a public debt margin and a savings floor (funds in FRR) to cover 95 percent of simulated medium-term trajectories. - Windfall hydrocarbon revenue recommendation: save in FRR. ### Reform Agenda and Public Finance Management - Progress: - New procurement and public accounting laws being implemented. - Program budgeting implementation advancing; 2023–24 are transition years. - Ministry adopted a code of conduct and performance contracts. - New data center integrating customs, taxation, and property taxation platforms. - Recommendations to strengthen debt and cash management: - Finalize the “État D” (financing side) of the budget per Organic Budget Law. - Prepare monthly cash-flow forecasts. - Develop a medium-term debt management strategy covering objectives, risk analysis, financing costs, development of new instruments, and transparency (debt auction information, primary dealer statutes). - Risk management: - Strengthen Haut Comité’s role to analyze budget risks holistically, quantify budgetary impacts, prepare contingency plans, propose mitigating actions, issue risk reports to Council of Ministers, and publish fiscal risk statements. - Use IMF Risk Assessment Matrix and SR-DSA methodology as blueprints. ### Policy Focus: Fiscal Challenges from Climate Change - Climate impacts and risks: - Recurrent drought and extreme temperatures have strained agriculture and water supply. - Energy security concerns and lower global growth could increase near-term revenue volatility. - Global energy transition could reduce trend revenue and increase medium-term revenue volatility. - Affected sectors may require additional budgetary support; higher credit risks could affect SOBs’ asset quality, increasing sovereign distress risk. - Algeria’s climate strategy: - Nationally Determined Contribution (NDC): reduce carbon emissions by seven percent by 2030 (from a business-as-usual scenario). - 2021 National Climate Plan lists 155 mitigation and adaptation actions. - Priorities: conserve/create water resources (desalination, recycling wastewater) and improve food security (better agriculture methods, increase arable land). - Fiscal policy instruments to support mitigation and transition: - Energy subsidy reform: - Gradual adjustment of energy prices toward cost-recovery levels over six years starting in 2024 could generate average annual fiscal revenue of about 6.4 percent of GDP over the next decade. - Would reduce emissions by over one fifth by 2030 relative to a business-as-usual scenario. - Savings could be used for targeted support, investing in climate adaptation, and building a financial buffer. - Reforms should be accompanied by communications and targeted compensatory measures for vulnerable populations. - Feebates and incentives for renewables: - Feebates could be applied in car registration and appliance sales and to emissions by carbon-intensive industries and large farms. - Incentives for renewable generation could include tax credits, accelerated depreciation, or feed-in tariffs. - Integrate climate considerations into public finance management: - Strengthen public investment management (interest in conducting a C-PIMA). - Integrate “green” considerations into budget documents and processes. - Empower Haut Comité to identify and quantify fiscal risks from climate change and assess mitigating policies. *Source: IMF staff report excerpt (1. Selected Macroeconomic Indicators).* ### 20. The authorities noted that the 2023–24 budgets reflect their immediate policy ### The authorities noted that the 2023–24 budgets reflect their immediate policy priorities ### Fiscal policy and budget priorities - Immediate priority: supporting the purchasing power of households in the context of the post-Covid high inflation; social equity and preserving the purchasing power of citizens will remain a key priority. - 2023–24 budgets reflect immediate policy priorities while committing to preserving sustainability of public finances over the medium term. - Program budgeting, enhanced governance and controls, and prioritizing investment projects aim to improve the effectiveness and efficiency of public finances. - The medium-term budgetary framework envisages enhanced tax revenue mobilization and diversified sources of financing. - Authorities emphasized a comprehensive climate action plan implemented across ministries and signaled openness to undertake subsidy reform (as envisaged in the 2022 budget law). - Quantified impact from Text Figure 4: energy subsidy reform would yield average annual fiscal revenue of about 6.4 percent of GDP in the next decade. ### Monetary policy: stance, transmission, and reforms Findings - Headline inflation has remained high; core inflation may be starting to decelerate. Fresh food inflation contributes about half to headline inflation; core inflation (excluding administered prices and fresh food) contributes the other half. - Imported inflation is not a dominant factor; appreciation of the dinar may have helped contain it. - Ample bank liquidity and negative real short-term interest rates indicate that monetary policy is accommodative. - The Banque d’Algérie (BA) in mid–April 2023 raised the required reserve ratio by one point, to three percent, and modestly expanded its bilateral liquidity absorption operation. - The policy rate has remained at three percent since December 2020 while inflation exceeded nine percent. Recommendations and needed actions - Monetary policy tightening is needed to reduce inflation. Policy instruments suggested: increase the required reserve ratio, broaden liquidity absorption operations, and increase the policy rate to signal determination to fight inflation. - Tightening would help prevent second-round effects from loose near-term fiscal policy (including salary raises of public servants) that could stimulate aggregate demand and spill over to private sector salaries. - Improving monetary policy transmission requires far-reaching reforms: capacity building, financial market development, reducing public sector dominance in domestic financial markets, introducing competitive price-based public debt auctions, phasing out quasi-fiscal activities of SOBs, and limiting the use of guarantees. - BA is receiving IMF CD to enhance modeling capacity for monetary policy decision-making and is developing ELA with IMF support; milestones for 2024 include regulation on Islamic, digital, and investment banking, online payment providers, and payment systems. Monetary and Banking Law (LMB) - Implementing the new LMB is a priority; its objectives include encouraging financial innovation, strengthening financial surveillance and crisis management, and introducing new instruments of monetary policy, governance bodies, and control functions. - Staff recommendations for LMB implementation texts or future revisions: - Note price stability as the primary objective of monetary policy (ahead of other objectives such as creating and maintaining favorable credit conditions), while safeguarding monetary and financial stability. - Specify conditions, limits, modalities, and safeguards to extend monetary financing to the Treasury; Art. 48 of the LMB limits such financing to truly exceptional and unforeseen crisis situations. - Clarify: (i) how to avoid overlaps between the Banking Commission and the BA on financial supervision; (ii) the organization, instruments, and resources for the BA’s macroprudential mandate; (iii) the modalities of crisis management by the BA (in line with international best principles and separate from macroprudential surveillance). ### Exchange rate policy Findings and assessment - More flexibility in the dinar rate would enhance its role as shock absorber and help develop the FX interbank market. - The effective exchange rates appreciated in 2023. - The BA targets a medium-term equilibrium real effective exchange rate (REER) based on an empirical model; day-to-day transactions occur within a narrow buy/sell band (DZD 0.015 per USD). - Staff’s External Balance Assessment analysis suggests that the external position was moderately stronger than the level implied by fundamentals and desirable policy settings in 2023, implying a moderate REER undervaluation of 10.3 percent based on the current account model. - The premium on the parallel market reached 62 percent in November 2023. Policy options and measures - Widening the buy/sell band to allow more two-way flexibility would strengthen the exchange rate’s role in absorbing external shocks. - Authorities are studying a relaxation of foreign currency allocations for international travel (basic allocation currently limited to about 100 euros); increasing it could reduce FX demand in the parallel market. - Developing the interbank FX market would help reduce the parallel market premium. ### Financial sector: performance, risks, and policy recommendations Key statistics and findings - Banks’ exposure to the public sector increased from 32 percent of bank assets in 2010 to 54 percent in 2023. - The six largest banks in Algeria are publicly owned and account for over 85 percent of bank assets. - About 62 percent of loans by public banks benefit from subsidized rates (“taux bonifiés”, including for housing, youth employment, and SOEs). - Government guarantees likely reached about DZD 2,500 billion in 2023 (7.4 percent of GDP). - The banking sector is liquid, solvent, and profitable but non-performing loans (NPL) weigh on balance sheets and are twice as large for public banks than those in the private sector. Risks - Interlinked financial and economic activities among the central government, SOEs, and SOBs (the “nexus”) are a source of risk to the economy and financial stability and could amplify macro-financial risks from shocks (for example, a large drop in international hydrocarbon prices). - Quasi-fiscal activities and subsidized loans by SOBs have contributed to increases in NPLs, weighing on bank balance sheets. - Monetary financing of the deficit (e.g., 2017) and the Special Refinancing Program (PSR) in 2021 complicate monetary policy and can increase financial stability risks when operations involve non-marketable debt extended at below-market rates. Policy recommendations and supervisory actions - The BA should use all available tools to monitor solvency and liquidity, ensure prudential rules are followed, and assess risks (including through stress testing). - The central government could increase monitoring and reduce nexus risks by: - Establishing and coordinating the ownership policy of public enterprises, possibly through the Conseil des Participations de l’Etat. - Adopting and enforcing performance contracts. - Analyzing the financial position of public enterprises (using the evaluation tool developed by the IMF), publishing financial statements, and reporting on the public enterprise sector as a whole (for example, as an annex to the budget law or on the website of the Ministry of Finance). - Strengthening the role of the Haut Comité to evaluate risk scenarios (for example, impact of shocks, materialization of contingent liabilities). - Allowing markets and market prices to function properly to achieve the “true” financial performance and risk-taking of public enterprises by minimizing implicit subsidies, phasing out quasi-fiscal activities, applying guarantees judiciously, and separating subsidies from lending conditions. Additional reforms and inclusion measures - Financial inclusion opportunities from LMB implementation and fintech: expand digital financial services (including to SMEs and microfinance); improve financial literacy and consumer protection; strengthen credit market infrastructure (Centrale des bilans, registry of movable collateral); review and strengthen BA platforms (Centrale des risques, Centrale des incidents de paiement); develop long-term savings products (for example, life insurance, issuance of bonds to the public). - Further financial sector reforms recommended (building on the 2019 FSAP): reinforce commercial orientation of public banks and phase out subsidized loan support schemes, update legal provisions for NPL management (facilitate write-off and consider an asset management company), increase BA technical capacity for stress testing, develop an early warning system for systemic risk, and prepare a financial stability report. ### Structural reforms: private sector-led diversification, governance, and transparency Current measures and institutional reforms - The Investment Law (mid–2022) is the cornerstone of the strategy to improve the business climate, promote private investment, and diversify the economy. - Created the Algerian Investment Promotion Agency (AAPI) with a digital platform and “one-stop shop”; will implement a new Land Law to streamline land processes for investment. - Authorities preparing to sell minority shares in two public banks and investing in transportation infrastructure. - Other initiatives: Startup Fund providing seed money; new simplified regime for the “auto-entrepreneur” to reduce informality. Export strategy and trade policy - Authorities seek to boost nonhydrocarbon exports, prioritizing energy-intensive products such as cement, fertilizers, and steel; expanding presence in Sub-Saharan Africa and leveraging membership in the African Continental Free Trade Agreement. - Staff recommended considering resumption of Algeria’s accession to the WTO and avoiding import compression policies (including by reducing tariffs). Deeper reforms to enable private sector and job creation - Sustained and bold reforms needed to increase potential of the private sector as the main driver of sustained growth and job creation; measures include shedding non-strategic and loss-making SOEs, making product and labor markets more flexible to spur competition and hiring (including increasing female labor force participation). - Avoid generalized import compression policies (can be counterproductive: shortages, evasion, lower productivity, higher prices) and avoid over-reliance on tax incentives, special regimes, and subsidization that complicate the tax code and may favor incumbents or produce contradictory policies (for example, subsidizing both fuel and renewables). *Source: IMF staff report excerpt (Algeria).* ### 39. Digital solutions can help strengthen governance and transparency, reduce the risk ### 1dzaea2024001 - 39. Digital solutions can help strengthen governance and transparency, reduce the risk ### Digitalization, governance, and service delivery - The Ministry of Digitalization and Statistics is spearheading digitalization initiatives, including interconnecting databases on unemployment, social security, taxes, and real estate. - A new Procurement Law establishes the principles of freedom of participation, equal treatment, and transparency in procedures; its implementation includes a portal to streamline procedures and access information. - A recent decree established a register on the ultimate business ownership (BO); staff advised the authorities to operationalize it in line with the FATF standards and to make it broadly accessible to the public. - Government reforms to strengthen SOE governance include performance contracts for SOE management and the professionalization of large SOEs’ boards. - Staff welcomes reforms underway to improve transparency and service delivery through digital solutions. ### AML/CFT, financial intelligence, and legal reforms - The May 2023 MENAFATF report’s recommendations spur reforms to strengthen the AML/CFT framework. - Authorities requested CD support from the IMF’s Legal Department to help improve risk-based AML/CFT supervision of financial institutions by the BA; this work is ongoing. - A national committee will conduct a national assessment of ML/FT risks and prepare a national strategy to address those. - The February 2023 amendments to the AML/CFT law bring the definition of “politically exposed persons” largely in line with international standards (a MENAFATF recommendation). - Authorities adopted various decrees in late 2023, for example, on procedures for implementing UN targeted financial sanctions (TFS). - Staff recommended fully staffing and equipping the Financial Intelligence Unit (CTRF) and ensuring its independence. - Staff advises operationalizing the beneficial ownership register in line with FATF standards and making it broadly accessible to the public. ### Data coverage, timeliness, and statistical capacity - The recent upgrade of national account data, with 2001 as the new base, is noted as an important achievement. - Key data issues identified: - Missing: unemployment rate, intra-year budget execution. - Outdated: CPI (see Text Figure 11). - Transmitted with lengthy delays: budget data for national accounts. - Staff stands ready to support the authorities with technical assistance. - Text Figure 11 finding: “The base year for Algeria’s CPI basket is severely outdated, complicating decision-making for policymakers.” ### Authorities’ views - Authorities agreed that diversifying the economy through private sector promotion, strengthening governance and transparency, and reducing corruption risks would contribute to higher sustained growth and job creation. - Authorities highlighted: - Significant strides to improve the business environment and attract foreign and domestic private investment. - Initiatives to streamline administrative processes and improve service delivery to investors. - That import regulations help fight fraud and encourage domestic production. - Commitment to further improve transparency in the public sector (leveraging digitalization). - Intention to address the recommendations of the MENAFATF report as a key priority in the coming year. - Efforts underway to overcome data deficiencies for policy making, and that rebasing the national accounts is an important milestone to improve data quality. ### Staff appraisal — macroeconomic outlook and policy recommendations - Near-term outlook: - “The near-term outlook for the Algerian economy is broadly positive, although inflation remains a concern.” - Real GDP growth supported by large fiscal spending. - Headline inflation would slow thanks to easing food prices, but large budget spending and potential second-round effects pose entrenchment risks. - The current account would remain in surplus in 2024. - Staff’s baseline projects slower growth over the medium term as hydrocarbon growth moderates, financing constraints cap budget spending, and structural bottlenecks inhibit private sector growth. - Staff assesses that the external position was moderately stronger than the level implied by fundamentals and desirable policy settings in 2023, implying a moderate REER undervaluation. - Fiscal risks and recommendations: - “Large near-term deficits would erode financial buffers, increase vulnerabilities, and pose risks to macroeconomic and financial stability.” - Depleting balances in the Revenue Regulation Fund (FFR) would strain the domestic financial sector’s financing capacity and leave public finances exposed to shocks. - Staff projects gradually narrowing fiscal deficits over the medium term but notes large financing needs would increase the public debt ratio. - Staff recommends a gradual rebalancing of fiscal policy anchored on stabilizing the public debt ratio by 2026. - Staff analysis suggests that additional measures of three pps. of GDP over 2024–26 could achieve this objective. - Additional fiscal restraint and gradual rebuilding of the FRR would help create fiscal space to absorb macroeconomic shocks and manage revenue volatility. - Staff urges the authorities to include a credible financing plan in the budget, develop a medium-term debt management strategy, and elevate the role of the Haut Comité in managing budget risks. - Public finance management and climate: - Public finance management reforms advancing; introduction of program budgeting and investment in digitalization will improve governance, accountability, and service delivery. - Fiscal policy can support a comprehensive mitigation and adaptation strategy for climate change. - Staff recommends a gradual reform of energy subsidies, with savings targeted to vulnerable populations, climate adaptation investment, and building a financial buffer. - “Climate considerations should be built in public finance management processes.” - Monetary and financial sector policy: - “Monetary policy tightening is needed to reduce inflation.” - Ample bank liquidity and negative real short-term interest rates suggest monetary policy is accommodative, warranting an increase in the required reserve ratio, broader liquidity absorption, and an increase in the policy rate. - More flexibility in the dinar rate would enhance its role as shock absorber and help develop the FX market. - The Monetary and Banking Law would encourage financial innovation, strengthen financial surveillance and crisis management, and introduce new instruments of monetary policy, governance bodies, and control functions. - Staff advises implementation texts include price stability as the primary monetary policy objective and specify the modalities of monetary financing, which the authorities would consider only under truly exceptional circumstances. - Reforms to improve financial inclusion could include preparing a financial inclusion strategy, improving financial literacy, strengthening the credit market infrastructure, and developing long-term savings products. - SOEs and systemic risk: - Intertwined links among the central government, public enterprises, and public banks are a source of systemic risk that could amplify macro-financial shocks. - Systemic risk has remained about the same relative to the 2022 Article IV consultation. - Staff urges the BA to use all available tools to monitor solvency and liquidity of the banking sector, ensure prudential rules are followed, and assess risks regularly. - The central government should monitor and reduce risks by closely following the financial conditions of all public enterprises, strengthening their governance, and reconsidering the role of public enterprises in the economy. - Structural reforms and private sector: - “Sustained and bold reforms would tap the potential of the private sector as a driver of sustained growth and job creation.” - Investment Law from mid–2022 is the cornerstone of the strategy to improve the business climate, promote private investment, and diversify the economy. - Staff recommends further reforms, including of the SOE sector by shedding non-strategic and loss-making SOEs, and making product and labor market more flexible. - Staff warns that generalized import compression measures should be avoided as they can be counterproductive and result in shortages, evasion, lower productivity, and higher prices. - Transparency, AML/CFT, and beneficial ownership: - Staff reiterates support for strengthening financial integrity and addressing governance and corruption risks, including by strengthening the AML/CFT framework. - Staff advises pursuing efforts to fully staff and equip the Financial Intelligence Unit (CTRF) and ensure its independence, and operationalize the beneficial ownership register in line with FATF standards and make it broadly accessible to the public. - Statistics: - “Staff urges the authorities to improve the coverage and timeliness of statistics to better inform policy making.” - The IMF stands ready to provide technical support. *Source: IMF staff text from the provided content unit.* ### 54. Staff recommends that the next Article IV consultation take place on the standard ### Staff recommends that the next Article IV consultation take place on the standard 12-month cycle. ### Macroeconomic performance and prices - Real GDP growth: 2023 = 4.2; projections: 2024 = 3.8; 2025 = 3.1; 2026 = 2.5; 2027 = 2.1; 2028 = 2.1; 2029 = 2.1. - Sectoral growth (percent): - Hydrocarbon sector: 2023 = 4.5; 2024 = 2.7; 2025 = 1.5; 2026 = 1.0; 2027 = 0.5; 2028 = 0.5; 2029 = 0.5. - Nonhydrocarbon sector: 2023 = 4.1; 2024 = 3.3; 2025 = 2.7; 2026 = 2.3; 2027 = 2.3; 2028 = 2.3; 2029 = 2.3. - Per capita growth: 2023 = 2.6; 2024 = 2.4; 2025 = 1.7; 2026 = 1.2; 2027 = 0.9; 2028 = 0.9; 2029 = 0.9. - Consumer price index (period average): 2023 = 9.3; projections: 2024 = 7.6; 2025 = 6.4; 2026 = 6.1; 2027 = 5.5; 2028 = 5.2; 2029 = 5.0. - Observations from figures: - Real GDP growth has been robust in the post-Covid period, with a rebound in hydrocarbon production in 2023. - Gas production picked up after the Covid slump, pulled in part by stronger domestic consumption. - Link between investment and imports has become more tenuous in recent years, possibly due to import containment measures. - Inflation has been stubbornly high, driven by prices of food, and more recently also non-food. - The BA has allowed the US$/dinar rate to appreciate since mid–2022. - Parallel exchange rate premia widened, reaching about 62.5 percent in December 2023. ### External sector and reserves - Current account balance (percent of GDP): 2023 = 5.3; 2024 = 0.4; 2025 = -4.2; 2026 = -7.3; 2027 = -8.6; 2028 = -10.2; 2029 = -11.6 (Table 2a, in US$ billions: 2023 = 5.3; 2024 = 0.4; 2025 = -4.2; 2026 = -7.3; 2027 = -8.6; 2028 = -10.2; 2029 = -11.6). - Exports, f.o.b. (US$ billions): 2023 = 54.8; 2024 = 54.4; 2025 = 55.0; 2026 = 58.8; 2027 = 56.2; 2028 = 56.7; 2029 = 57.0. - Hydrocarbons (US$ billions): 2023 = 49.6; 2024 = 48.3; 2025 = 47.8; 2026 = 47.7; 2027 = 47.3; 2028 = 46.7; 2029 = 46.0. - Other exports (US$ billions): 2023 = 5.2; 2024 = 6.2; 2025 = 7.2; 2026 = 8.1; 2027 = 9.0; 2028 = 10.0; 2029 = 11.0. - Imports, f.o.b. (US$ billions): 2023 = 43.8; 2024 = 48.7; 2025 = 53.1; 2026 = 56.3; 2027 = 58.1; 2028 = 59.7; 2029 = 61.1. - Gross official reserves (in US$ billions): 2023 = 68.9; 2024 = 71.3; 2025 = 69.3; 2026 = 64.2; 2027 = 57.7; 2028 = 49.8; 2029 = 40.5. - Gross official reserves (in months of next year's imports): 2023 = 14.1; 2024 = 13.5; 2025 = 12.4; 2026 = 11.1; 2027 = 9.7; 2028 = 8.2; 2029 = 6.6. - Algeria’s external debt is low; gross external debt (percent of GDP) around 1.3–1.4 in projection years; gross external debt (US$ billions) 2023 = 3.2; 2024 = 3.4; 2025 = 3.6; 2026 = 3.6; 2027 = 3.6; 2028 = 3.7; 2029 = 3.8. - Observations from figures: - The current account balance likely posted another surplus in 2023, after years of deficits, thanks mainly to strong hydrocarbon export performance (though nonhydrocarbon exports have also increased). - Imports of goods increased relatively modestly with receding global price pressures. - Current account surpluses boosted international reserves. ### Fiscal developments and public finances - Central government revenue (percent of GDP): 2023 = 31.1; 2024 = 27.8; 2025 = 26.8; 2026 = 26.4; 2027 = 25.7; 2028 = 25.4; 2029 = 25.2. - Expenditure (including net lending, percent of GDP): 2023 = 34.1; 2024 = 36.3; 2025 = 34.7; 2026 = 33.2; 2027 = 32.4; 2028 = 32.1; 2029 = 31.9. - Overall budget balance (percent of GDP): 2023 = -3.0; 2024 = -8.5; 2025 = -7.8; 2026 = -6.7; 2027 = -6.7; 2028 = -6.7; 2029 = -6.7. - Gross government debt (excluding guarantees, percent of GDP): 2023 = 49.5; 2024 = 46.4; 2025 = 49.7; 2026 = 51.9; 2027 = 54.5; 2028 = 57.0; 2029 = 59.5. - Nonhydrocarbon balances (percent of GDP): - Nonhydrocarbon primary balance excluding central bank dividends: 2023 = -26.6; 2024 = -26.6; 2025 = -23.9; 2026 = -21.5; 2027 = -20.1; 2028 = -19.3; 2029 = -18.7. - Nonhydrocarbon balance: 2023 = -26.4; 2024 = -27.0; 2025 = -24.6; 2026 = -22.5; 2027 = -21.4; 2028 = -20.8; 2029 = -20.3. - Central government operations (in billions of Algerian dinars, selected): - Budget revenue and grants: 2023 = 10,322; 2024 = 10,216; 2025 = 10,773; 2026 = 11,541; 2027 = 12,062; 2028 = 12,811; 2029 = 13,563. - Hydrocarbon revenue: 2023 = 6,065; 2024 = 5,070; 2025 = 5,093; 2026 = 5,317; 2027 = 5,319; 2028 = 5,505; 2029 = 5,718. - Nonhydrocarbon revenue: 2023 = 4,257; 2024 = 5,146; 2025 = 5,680; 2026 = 6,224; 2027 = 6,743; 2028 = 7,307; 2029 = 7,845. - Total expenditure (including net lending): 2023 = 11,314; 2024 = 13,345; 2025 = 13,919; 2026 = 14,470; 2027 = 15,225; 2028 = 16,177; 2029 = 17,179. - Current expenditure: 2023 = 8,352; 2024 = 10,119; 2025 = 10,653; 2026 = 11,160; 2027 = 11,798; 2028 = 12,534; 2029 = 13,311. - Capital expenditure: 2023 = 2,397; 2024 = 2,560; 2025 = 2,600; 2026 = 2,643; 2027 = 2,761; 2028 = 2,978; 2029 = 3,202. - Overall balance (in billions of Algerian dinars): 2023 = -993; 2024 = -3,129; 2025 = -3,146; 2026 = -2,929; 2027 = -3,163; 2028 = -3,366; 2029 = -3,616. - Observations from figures: - High international prices for hydrocarbon products recently boosted the budget but also resulted in higher spending. - The 2023 revised budget envisaged a large increase in spending, including capital expenditures; its late adoption and a low execution rate kept actual spending limited, resulting in a slight decrease of the nonhydrocarbon deficit. - The boost in hydrocarbon revenue supported the Revenue Regulation Fund (FRR), although it is expected to finance 2023–24 deficits, while (temporarily) stabilizing the public debt ratio. ### Monetary and financial sector - Monetary aggregates and credit: - Broad money growth: recent slowing due to lower growth in net foreign and domestic assets. - Money and quasi-money (M2) percent change: 2023 = 5.9; 2024 = 14.1; 2025 = 9.5; 2026 = 7.2; 2027 = 7.3; 2028 = 7.0; 2029 = 6.8. - Credit to the economy (percent change): 2023 = 5.8; 2024 = 5.4; 2025 = 4.5; 2026 = 5.0; 2027 = 5.6; 2028 = 5.9; 2029 = 6.0. - Credit to private sector (percent change): 2023 = 4.2; 2024 = 3.2; 2025 = 4.4; 2026 = 2.5; 2027 = 5.7; 2028 = 5.3; 2029 = 4.6 (Table 4 memorandum: Credit to the economy/GDP = 2023 = 31.2; 2024 = 31.1; 2025 = 29.8; 2026 = 28.8; 2027 = 28.3; 2028 = 27.9; 2029 = 27.7). - Central Bank of Algeria actions and liquidity: - The BA increased the reserve requirement ratio by one percentage point in mid–April 2023. - Monetary policy remained accommodative, with ample liquidity in the banking system. - Public sector credit has been the main driver of net domestic assets, while credit to the private sector remains subdued. - Financial soundness indicators (selected, percent): - Capital adequacy ratio: 2022 = 21.6; 2023 = 21.5; Jun-23 = 20.9. - Public banks: Jun-23 = 21.4. - Private banks: Jun-23 = 18.8. - Non-performing loans (NPLs)/total loans: 2021 = 19.9; 2022 = 19.8; Jun-23 = 19.8. - Public banks NPLs/total loans: Jun-23 = 21.4. - Private banks NPLs/total loans: Jun-23 = 8.6. - Provisions/classified loans: Jun-23 = 50.5. - Return on equity: 2022 = 13.5. - Liquid assets/total assets: Jun-23 = 39.7. - Observations from figures: - Banks are well capitalized but non-performing loans remain high, especially among the public banks. - Broad money growth has slowed in recent months due to lower growth in net foreign and domestic assets. ### Key macro-financial indicators and projections (selected) - Algerian crude oil price (US$/barrel): 2019 = 64.54; 2020 = 41.97; 2021 = 72.31; 2022 = 103.98; 2023 = 84.08; 2024 = 81.27; 2025 = 77.17; 2026 = 74.27; 2027 = 72.47; 2028 = 71.47; 2029 = 70.9. - GDP (in billions of dinars at current prices): 2019 = 23,090; 2020 = 20,902; 2021 = 25,158; 2022 = 32,028; 2023 = 33,225; 2024 = 36,764; 2025 = 40,152; 2026 = 43,634; 2027 = 46,947; 2028 = 50,347; 2029 = 53,855. - Exchange rate (DA per US$) historical values: 2019 = 119.4; 2020 = 126.9; 2021 = 135.3; 2022 = 142.0. - Memorandum reserves metrics: - Gross official reserves (in billions of US$) excl SDR holdings: 2023 = 67.1; 2024 = 69.3; 2025 = 65.1; 2026 = 59.9; 2027 = 53.5; 2028 = 45.5; 2029 = 36.3. - Reserves (in percent of ARA EM metric): 2023 = 412.8; 2024 = 175.6; 2025 = 151.9; 2026 = 127.4; 2027 = 114.8; 2028 = 98.4; 2029 = 78.9. *Source: Algerian Authorities and IMF staff estimates and projections as presented in the provided content.* ### Annex I. Risk Assessment Matrix ### Annex I. Risk Assessment Matrix ### Conjunctural risks (Global) - Intensification of regional conflicts (e.g., Gaza and Israel, Russia’s war in Ukraine) disrupting trade (energy, food, tourism, supply chains), remittances, FDI and financial flows, payment systems, and increasing refugee flows. - Likelihood: High - Economic Impact: Low. - Assessment notes: Algeria has little direct exposure to Russia’s war in Ukraine. Indirect exposure through Europe (trade channel), energy security, and international prices for hydrocarbons, food, and other commodities. Algeria could benefit from higher natural gas prices as Europe seeks to diversify supply. - Policy Response: - Reduce procyclicality of the budget and build financial buffers. - Build emergency food stock. - Diversify the economy and export markets. - Allow the exchange rate to play its role as shock absorber. - Continue reforms to diversify the economy, including nonhydrocarbon exports and tapping new export markets. - Commodity price volatility from supply disruptions (conflicts, export restrictions, OPEC+ decisions) and demand fluctuations causing recurrent volatility, external and fiscal pressures in EMDEs, cross-border spillovers, and social and economic instability. - Likelihood: High - Economic Impact: High. - Assessment notes: Algeria’s economy is highly dependent on hydrocarbon exports and food imports. Transmission channels: current account (international reserves), budget (hydrocarbon revenues, food subsidies), inflation, and economic growth. - Policy Response: - Reduce procyclicality of the budget by diversifying revenue and funding sources. - Build a financial savings buffer when hydrocarbon prices are high. - Allow the exchange rate to act as shock absorber, in the context of tighter policies. - Continue reforms to diversify the economy. - Abrupt global slowdown causing synchronized sharp growth downturn and adverse spillovers through trade and financial channels. - Likelihood: Medium - Economic Impact: High. - Assessment notes: Transmission likely mainly from trade with Europe (Algeria’s main export market), affecting hydrocarbon exports. Financial spillovers limited because Algeria’s financial account is largely closed. - Policy Response: - Build savings buffer to absorb lower hydrocarbon exports and revenues. - Pursue prudent monetary and fiscal policies. - Allow the exchange rate to play its role as shock absorber. - Europe: Intensifying fallout from Russia’s war in Ukraine, supply disruptions, tight financial conditions, and real estate market corrections exacerbating economic downturn. - Likelihood: Medium - Economic Impact: High. - Assessment notes: Algeria’s exports are highly dependent on the European market; slowdown would affect current account, international reserves, and the budget. - Policy Response: - Build fiscal space, including a savings buffer and broad-based fiscal rebalancing. - Allow the exchange rate to play its role as shock absorber, in the context of aligned monetary and fiscal policies. - Continue efforts to diversify the economy and export markets. (Note: RAM timing — conjunctural shocks and scenarios may materialize over a shorter horizon between 12 to 18 months.) ### Structural risks (Global) - Deepening geoeconomic fragmentation (conflicts, inward-oriented policies, weakened international cooperation) causing trade and FDI inefficiencies, supply disruptions, protectionism, technological and payments systems fragmentation, rising shipping and input costs, financial instability, fracturing of international monetary system, and lower growth. - Likelihood: High - Economic Impact: Medium. - Assessment notes: Could disrupt trade flows and hamper economic diversification. Algeria could benefit from increased hydrocarbon prices if disruptions occur. - Policy Response: - Accelerate diversification and economic resilience through sequenced implementation of reforms in the Government Action Plan. - Strengthen fiscal and monetary policy frameworks. - Extreme climate events driven by rising temperatures causing loss of lives, severe damage to infrastructure, supply disruptions, lower growth, and financial instability. - Likelihood: Medium - Economic Impact: High. - Assessment notes: Algeria, like other North African countries, is vulnerable; shocks could carry large fiscal costs and add to inflationary pressures. - Policy Response: - Invest in climate-resilient infrastructure and agriculture. - Implement the authorities’ Climate Action Plan. - Accelerate economic diversification, including harnessing potential of renewable energies. - Disorderly energy transition (shortages in critical metals, climate policy uncertainty) causing supply disruptions, stranded assets, market volatility, and subdued investment and growth. - Likelihood: Medium - Economic Impact: High. - Assessment notes: High dependence on hydrocarbon production and exports makes Algeria vulnerable to transition risks. - Policy Response: - Accelerate economic diversification, including investing in renewables. - Create fiscal space to build financial buffers and reduce budget procyclicality. - Allow the exchange rate to act as shock absorber. - Further open the economy (and SOEs) to private sector involvement, building on the Investment Law. ### Idiosyncratic risks (Domestic) - Calls on government-guaranteed debt or capital injection needs for public banks and SOEs. - Likelihood: Medium - Economic Impact: High. - Assessment notes: Banking sector appears liquid and profitable but NPLs weigh on balance sheets, especially public banks; some exposures are government-guaranteed. - Policy Response: - Monitor and manage fiscal risks. - Streamline SOE governance and condition state support on transparency, restructuring, and reforms. - Develop a government shareholder policy to enhance profitability and efficiency. - Divest from non-core assets and open capital of selected SOEs to the private sector. - Deepening sovereign–SOE–SOB nexus. - Likelihood: Medium - Economic Impact: High. - Assessment notes: Fiscal financing needs projected to remain significant without fiscal rebalancing and/or diversification of funding sources. Strengthening feedback loop weakens monetary policy transmission and raises financial stability concerns. - Policy Response: - Refrain from (in)direct financing of the budget deficit by the central bank, consistent with the new Loi Monétaire et Bancaire. - Explore new financing sources, such as deepening the public debt market. - Expand fiscal space by mobilizing nonhydrocarbon revenue and reducing spending within a medium-term fiscal adjustment plan. - Reform SOB governance, focus lending on profitable projects, and conduct asset quality review. - Partial or delayed implementation of macroeconomic adjustment and necessary structural reforms. - Likelihood: Medium - Economic Impact: High. - Assessment notes: Partial or delayed reforms could have significant budgetary costs and raise financing needs, particularly if international gas prices fall sharply; risk of policy inconsistency and reform reversals. - Policy Response: - Increase transparency about the state of the economy through timely publication of economic data and communication. - Adopt a medium-term fiscal adjustment plan supported by coherent monetary and exchange rate policies. - Mitigate social impact of reforms to low-income households through temporary and targeted fiscal support. ### RAM methodology note and probability definitions - The RAM shows events that could materially alter the baseline path. - Relative likelihood is staff’s subjective assessment: “low” = probability below 10 percent, “medium” = probability between 10 and 30 percent, and “high” = probability between 30 and 50 percent. - Non-mutually exclusive risks may interact and materialize jointly. --- ### Annex II. Implementation of Past IMF Recommendations (selected findings) ### Monetary/Exchange Rate Policies and Operations - Recommendation: Tighten monetary policy to forestall de-anchoring of expectations and persistent high inflation. - Implementation: Banque d’Algérie (BA) in April 2023 increased the required reserve ratio by one percentage point (to three percent) and increased its bilateral liquidity operation. Policy rate unchanged; ample liquidity remained. - Recommendation: Include formal ban on monetary financing in the Loi Monétaire et Bancaire (LMB). - Implementation: Art. 48 of the LMB allows BA overdrafts on the Treasury current account up to a limit of maximum ten percent of ordinary revenue of the previous budget year and duration not exceeding 240 days (whether or not consecutive) during a calendar year. LMB also allows BA advances to the Treasury in event of an exceptional, unforeseen, and declared crisis under conditions set by the Conseil monétaire et bancaire. - Recommendation: Use LMB to strengthen BA governance. - Implementation: LMB includes a governance framework covering mandates, autonomy, and controls. Staff recommends implementation regulations or future updates to further clarify eligibility criteria for nominating (Vice)-Governors, role of external auditors, etc. - Recommendation: Reform FX and trade regulatory frameworks to deepen interbank FX market and allow greater exchange rate flexibility. - Implementation: BA targets a real effective exchange rate from an econometric model (variables include oil price, budget deficit). BA buy/sell spread narrow (e.g., 0.015 DZD on U.S. dollar transactions). Since 2021, businesses no longer required to surrender FX to BA except hydrocarbon and mining sectors. Exporters can use FX to finance imports and operations to promote export activities. Banks can offer FX term contracts. ### Fiscal Policies and Operations - Recommendation: Proceed with gradual fiscal rebalancing guided by rules-based fiscal framework. - Implementation: Authorities envisaged fiscal expansion in 2023 and 2024 to support purchasing power and increase investment. - Recommendation: Adopt a medium-term fiscal framework with a savings floor and nominal debt anchor. - Implementation: Authorities include three-year projections in budget documents but without a clear anchor. - Recommendation: Phase-out of universal subsidies and finance targeted support for low-income households. - Implementation: 2020 budget law envisaged gradual phasing out of universal subsidies and replacing them with targeted compensation; authorities collaborating with World Bank on compensatory measures using household survey. - Recommendation: Diversify budget financing sources. - Implementation: Authorities policy of financing budget only with domestic sources; exploring optimizing debt financing with different maturities. - Recommendation: Strengthen fiscal framework with PFM reforms and improve transparency on budget execution. - Implementation: Organic Budget Law implementation well advanced; 2024 budget law introduced an initial version of Etat D (“Annex D”) albeit without specifying financing side. Further efforts needed to strengthen cash management and transparency on budget execution. ### Private Sector Initiative - Recommendations: Lift constraints to private sector financing; reform SOB governance; develop prudential policies to boost credit to SMEs and households; create public credit registry and personal bankruptcy framework; deepen government debt market. - Implementation: LMB expected to modernize and develop financial markets and payment systems, including Islamic finance and digital banking. Preparations underway to deepen government debt market, develop long-term savings, and reinvigorate the stock market (including listing of shares of two public banks). - Recommendations: Create environment conducive to private sector, enhance competitiveness, stimulate diversification through trade openness and product/labor market reforms. - Implementation: Authorities relaxed 49/51 investment rule (except hydrocarbon and mining sectors). New investment law adopted mid–2022 with incentives for special zones and priority sectors; created Algerian Agency for Promotion of Investment (AAPI). Land Management Law (Loi Foncier) adopted; new “auto-entrepreneur” law to reduce informality. ### Governance and Vulnerabilities to Corruption - Recommendation: Strengthen governance, reduce corruption risks, reinforce AML/CFT framework, strengthen institutional safeguards. - Implementation: May 2022 law established High Committee of transparency, prevention, and fight against corruption. February 2023 law on AML/CFT defined “politically exposed persons”. National taskforce established to follow MENAFATF recommendations; authorities receiving TA from IMF’s LEG department. ### Data Provision - Recommendation: Improve quality and availability of macroeconomic data and timely provision to IMF (e.g., budget outturns). - Implementation: Data provision broadly adequate but with room for improvement. Key data missing (unemployment rate), outdated (CPI), or transmitted with long delays (budget execution). Authorities are rebasing national accounts; Minister of Digitalization and Statistics preparing a digital platform to speed up data transmission. --- ### Annex III. Sovereign Risk and Debt Sustainability Assessment (summary) - Overall assessment: Algeria faces a “Moderate” risk of sovereign stress. - Key findings: - Public debt ratio projected to increase over the medium term and beyond on the back of projected large primary deficits, including those expected for 2023–24. - Large uncertainty from volatile hydrocarbon revenue adds to medium-to-long term risks of sovereign stress. - Significant gross public financing needs could pressure the domestic banking system, crowd out private activity, and aggravate the sovereign–bank nexus given policy to avoid external borrowing. - Staff recommends additional fiscal rebalancing to stabilize the debt ratio over the medium term and urges expansion of the perimeter of available debt data, preparation of a debt management strategy, and development of domestic debt markets. - Detailed points: 1. Public debt is almost entirely denominated in dinars and a large share is non-marketable. As of 2022, nearly all central government debt was held domestically and about 43 percent was held by the central bank. Reported data used in the SR-DSA underestimates central government debt as it excludes some intra-government claims (e.g., use of postal office deposits) and contingent liabilities (e.g., future social security deficits). 2. Central government debt-to-GDP ratio is projected to increase over the medium-to-long term absent additional fiscal rebalancing. High commodity prices supported primary deficit reduction in 2022, and together with denominator effects and negative real interest rates, reduced public debt ratio to 48.1 percent of GDP. Withdrawals from the Revenue Regulation Fund (FRR) in 2023 and 2024 would reduce the need for new borrowing in those years, pausing increase in public debt ratio up to 2025 even as primary deficits widen. With FRR balances depleted, public debt ratio would increase again from 2025 onwards and a gradual reduction in fiscal deficits would not be sufficient to stabilize the debt ratio. 3. Staff’s “Moderate” risk assessment: FRR expected to mitigate need for debt financing in 2023–24. Mitigating factors include large share of non-marketable debt and near absence of external public debt. Risks build up over medium term as FRR buffer is exhausted, gross financing needs are sizeable, and public debt ratio not projected to stabilize. Large uncertainty from volatile hydrocarbon revenue increases medium-term risks. Stress tests indicate an illustrative banking crisis shock would worsen public debt and gross financing needs, highlighting risks from heavy reliance on domestic bank financing and the sovereign–SOB nexus. - Two illustrative long-run risk modules were triggered: i. Significant gross financing needs in next years would push large amortizations into the long term; these would need rolling over and higher costs would further increase the public debt ratio. ii. In absence of significant discoveries of new hydrocarbon fields, and possibly because of shifting global demand during the energy transition, a gradual decline in hydrocarbon production (and associated fiscal revenue) would increase public deficits and cause additional debt build-up. *International Monetary Fund* ### 4. Staff recommends expanding the perimeter of available debt data, preparing a ### 4. Staff recommends expanding the perimeter of available debt data, preparing a comprehensive debt management strategy, and developing domestic debt markets. ### Assessment of sovereign stress and sustainability - Staff assesses medium-term risks of sovereign stress as ‘High’, reflecting: - Baseline’s non-stabilization of public debt over the medium term. - Risks from volatile hydrocarbon revenues (which contribute to the wide range of possible outcomes over a five-year horizon). - Elevated gross financing needs (GFNs). - Staff assesses the overall risk of sovereign stress as ‘Moderate’ in the DSA Summary Assessment, noting mitigating factors: - Small share of external public debt. - Large share of non-marketable debt on favorable financing terms. - Fiscal cushion in the Revenue Regulation Fund (FRR) that would, however, be fully eroded by 2024 if the authorities pursued the large fiscal impulse currently included in staff’s baseline projections. - Staff assesses long-term risks of sovereign stress as ‘High’ given: - Pressures from social security deficits. - Transition and physical risks from climate change. - Stress tests and scenario risks: - A banking sector shock, natural disasters and/or realization of contingent liabilities could significantly add to financing constraints. - An (illustrative) banking stress shock would push the public debt ratio to 76 percent of GDP by 2028. - A commodity price shock would push the public debt ratio to 71 percent of GDP by 2028. - Natural disaster and contingent liability shocks would raise GFNs by about 5 percentage points of GDP in the year of the shock. *Source: Fund staff.* ### Debt coverage, disclosures, and data perimeter issues - DSA fiscal data perimeter: - The fiscal data used in this SR-DSF cover the central government. - Intra-public sector claims could add to the debt stock, as use of deposits of public entities (like those from the post office) have supported financing the deficit and are not recorded in the debt stock. - Algeria will face deficits in social security funds over the medium-to-long term, adding to contingent liabilities. - Subsector inclusion in the chosen DSA coverage (central government): - Budgetary central government: Yes - Extra budgetary funds (EBFs): No - Social security funds (SSFs): No - State governments: No - Local governments: No - Public nonfinancial corporations: No - Central bank: No - Other public financial corporations: No *Source: Fund staff.* ### Public debt structure and holder composition - Public debt is primarily domestic and owed to the central bank and commercial banks due to policy of avoiding external borrowing and run-up of non-marketable debt (including monetary financing). - Around 99 percent of debt is held domestically and denominated in dinars. - Concern: heavy reliance on domestic bank financing raises capacity concerns to absorb projected growing GFNs. - Residual maturity: 6. years - Debt by currency and holder (high-level descriptors from figures): - Debt by currency: predominantly Local currency (dinar), Foreign currency negligible. - Public debt by holder: dominated by Domestic central bank and Domestic commercial banks; External private and official creditors minimal. *Source: Fund staff.* ### Baseline projections and key statistics (percent of GDP unless indicated otherwise) - Public debt levels: - Actual 2022: 48.1 - 2023: 49.5 - 2024: 46.4 - 2025: 49.7 - 2026: 51.9 - 2027: 54.5 - 2028: 57.0 - 2029: 59.5 - 2030: 62.0 - 2031: 64.4 - 2032: 66.7 - Change in public debt (percent of GDP): - 2022: -7.0 - 2023: 1.4 - 2024: -3.1 - 2025: 3.3 - 2026: 2.2 - 2027: 2.6 - 2028: 2.5 - 2029: 2.5 - 2030: 2.5 - 2031: 2.4 - 2032: 2.3 - Contribution of identified flows mirrors change in public debt series. - Primary deficit (percent of GDP): - 2022: 1.3 - 2023: 1.8 - 2024: 6.7 - 2025: 5.9 - 2026: 4.7 - 2027: 4.5 - 2028: 4.3 - 2029: 4.3 - 2030: 4.3 - 2031: 4.2 - 2032: 4.2 - Noninterest revenues (percent of GDP): - 2022: 29.6 - 2023: 31.1 - 2024: 27.8 - 2025: 26.8 - 2026: 26.4 - 2027: 25.7 - 2028: 25.4 - 2029: 25.2 - 2030: 25.1 - 2031: 25.1 - 2032: 25.1 - Noninterest expenditures (percent of GDP): - 2022: 30.8 - 2023: 32.9 - 2024: 34.5 - 2025: 32.8 - 2026: 31.1 - 2027: 30.2 - 2028: 29.8 - 2029: 29.5 - 2030: 29.4 - 2031: 29.3 - 2032: 29.3 - Automatic debt dynamics (percent of GDP): - 2022: -10.6 - 2023: -0.5 - 2024: -3.0 - 2025: -2.0 - 2026: -1.9 - 2027: -1.4 - 2028: -1.3 - 2029: -1.3 - 2030: -1.4 - 2031: -1.5 - 2032: -1.5 - Gross financing needs (GFNs; percent of GDP): - 2022: 5.2 - 2023: 7.4 - 2024: 14.3 - 2025: 10.7 - 2026: 8.4 - 2027: 8.5 - 2028: 9.5 - 2029: 9.5 - 2030: 10.6 - 2031: 10.3 - 2032: 10.3 - Of which: debt service (percent of GDP): - 2022: 4.0 - 2023: 5.6 - 2024: 7.6 - 2025: 4.8 - 2026: 3.7 - 2027: 4.0 - 2028: 5.2 - 2029: 5.2 - 2030: 6.3 - 2031: 6.1 - 2032: 6.1 - Memo macro assumptions: - Real GDP growth (percent): 2022: 3.6; 2023: 4.2; 2024: 3.8; 2025: 3.1; 2026: 2.5; 2027: 2.1; 2028–2032: 2.1 (each year). - Inflation (GDP deflator; percent): 2022: 22.9; 2023: -0.4; 2024: 6.5; 2025: 5.9; 2026: 6.0; 2027: 5.4; 2028: 5.0; 2029: 4.8; 2030: 4.8; 2031: 4.8; 2032: 4.8 - Nominal GDP growth (percent): 2022: 27.3; 2023: 3.7; 2024: 10.7; 2025: 9.2; 2026: 8.7; 2027: 7.6; 2028: 7.2; 2029: 7.0; 2030: 6.9; 2031: 6.9; 2032: 6.9 - Effective interest rate (percent): 2022: 2.8; 2023: 2.6; 2024: 4.0; 2025: 4.4; 2026: 4.5; 2027: 4.6; 2028: 4.6; 2029: 4.6; 2030: 4.5; 2031: 4.4; 2032: 4.4 - Staff commentary: Public debt is expected to rise over the forecast horizon despite a medium-term consolidation envisaged in the staff baseline; the fiscal expansion planned for 2024 is expected to add pressure on financing needs over the medium term. A more ambitious fiscal adjustment would help stabilize the public debt path. *Source: Fund staff.* ### Medium-term risk analysis and financeability - Debt fan chart and GFN financeability indicators: - Fanchart width: 122.61.8 - Probability of debt not stabilizing (pct): 98.10.8 - Terminal debt level x institutions index: 63.21.4 - Average GFN in baseline: 9.83.3 - Bank claims on government (pct bank assets): 35.511.5 - Change in claims on govt. in stress (pct bank assets): 37.212.4 - GFN financeability index: ...27.3 - Medium-term index outcomes: - Both the Debt Fanchart Module and GFN Financeability Module suggest a ‘High’ risk of sovereign stress over the medium term. - Prob. of missed crisis, 2023-2028 (if stress not predicted): 81.8 pct. - Prob. of false alarm, 2023-2028 (if stress predicted): 1.1 pct. - Stress-test results: - Banking crisis shock: public debt to 76 percent of GDP by 2028. - Commodity price shock: public debt to 71 percent of GDP by 2028. - Natural disaster and contingent liability shocks: GFNs increase by about 5 percentage points of GDP the year of the shock. *Source: Fund staff.* ### Long-term risk analysis - Staff assesses long-term risks of sovereign stress as ‘High’ due to: - Social security deficits adding pressure to public debt. - Transition and physical climate risks adding to long-term vulnerabilities. *Source: Fund staff.* ### External debt sustainability (Annex IV) - Total external debt is low and expected to remain stable over the medium term but sensitive to risks, notably negative current account shocks. - External debt levels and projections (percent of GDP): - 2018: 2.1 - 2019: 2.0 - 2020: 2.1 - 2021: 1.7 - 2022: 1.3 - 2023: 1.3 - 2024: 1.3 - 2025: 1.3 - 2026: 1.3 - 2027: 1.2 - 2028: 1.2 - External debt-to-exports ratio (in percent): 2018: 9.0; 2019: 9.9; 2020: 13.8; 2021: 7.3; 2022: 4.4; 2023: 5.5; 2024: 5.8; 2025: 6.0; 2026: 6.0; 2027: 6.0; 2028: 6.0 - Gross external financing need (in billions of US dollars): - 2018: 19.1 - 2019: 19.3 - 2020: 21.0 - 2021: 6.7 - 2022: -17.0 - 2023: -3.0 - 2024: 2.3 - 2025: 7.2 - 2026: 10.6 - 2027: 12.1 - 2028: 13.8 - Gross external financing need (percent of GDP): - 2018: 9.8 - 2019: 10.0 - 2020: 12.8 - 2021: 3.6 - 2022: -7.5 - 2023: -1.2 - 2024: 0.9 - 2025: 2.6 - 2026: 3.7 - 2027: 4.1 - 2028: 4.6 - Key macro assumptions underlying baseline: - Real GDP growth (percent): 2018: 1.4; 2019: 0.9; 2020: -5.0; 2021: 3.8; 2022: 3.6; 2023: 4.2; 2024: 3.8; 2025: 3.1; 2026: 2.5; 2027: 2.1; 2028: 2.1 - GDP deflator in US dollars (change in percent): 2018: 0.9; 2019: -1.5; 2020: -10.3; 2021: 8.7; 2022: 17.1; 2023: 4.1; 2024: 5.0; 2025: 0.8; 2026: 1.0; 2027: 0.4; 2028: 0.0 - Nominal external interest rate (percent): 2018: 1.1; 2019: 1.7; 2020: 1.1; 2021: 3.8; 2022: 5.9; 2023: 1.2; 2024: 1.1; 2025: 0.9; 2026: 0.8; 2027: 0.7; 2028: 0.7 - Growth of exports (US$ terms, percent): 2018: 17.7; 2019: -13.1; 2020: -35.4; 2021: 68.0; 2022: 65.0; 2023: -15.1; 2024: -0.1; 2025: 1.0; 2026: 1.5; 2027: 0.8; 2028: 0.8 - Growth of imports (US$ terms, percent): 2018: -0.1; 2019: -9.7; 2020: -20.9; 2021: 3.4; 2022: 5.4; 2023: 12.7; 2024: 11.2; 2025: 8.6; 2026: 5.9; 2027: 3.2; 2028: 2.9 - Current account balance, excluding interest payments (percent of GDP): 2018: -8.7; 2019: -8.7; 2020: -11.3; 2021: -2.4; 2022: 8.5; 2023: 2.2; 2024: 0.1; 2025: -1.5; 2026: -2.5; 2027: -2.9; 2028: -3.4 - Net non-debt creating capital inflows: 2018: 0.3; 2019: 0.7; 2020: 0.7; 2021: 0.5; 2022: 0.0; 2023: 0.4; 2024: 0.7; 2025: 0.7; 2026: 0.7; 2027: 0.7; 2028: 0.7 - Scenario and bound test highlights: - External debt fell from 2.1 percent of GDP in 2020 to 1.3 percent in 2022. - Staff estimates external debt would stabilize at around 1.3 percent of GDP in 2023 and decline to 1.2 percent of GDP through 2028 as FX reserves are used to finance predicted widening current account deficit from 2025 onwards. - Bound stress tests indicate external debt dynamics are subject to risks, notably an adverse current account shock. *Source: Fund staff.* ### Annex V. Alternative Fiscal Scenario ### Annex V. Alternative Fiscal Scenario ### Objective and framework - Additional fiscal adjustment of three percentage points of GDP over 2024–26 would support macroeconomic stability by rebuilding fiscal buffers. - The scenario is anchored on stabilizing the public debt ratio over a three-year projection period (2024–26), consistent with the authorities' medium-term budget horizon. - Staff previously proposed a rules-based medium-term fiscal framework with two pillars: (i) a margin for public debt (distance between projected debt ratio and a benchmark upper limit), and (ii) a liquidity buffer held in the Revenue Regulation Fund (FRR). - A value-at-risk (VAR) type simulation found that a combined buffer of 36 percent of GDP would avoid breaching the debt anchor in 95 percent of the simulated medium-term debt trajectories. ### Design of the alternative scenario - The alternative fiscal scenario assumes fiscal measures totaling 3 pps. of GDP over three years (2024–26). - Composition of the adjustment: - Additional revenue mobilization: 1.25 pps. of GDP over three years. - Spending restraint: 1.75 pps. of GDP over three years. - Implementation is assumed to be gradual, reflecting implementation lags and that execution of the 2024 budget (a Presidential election year) is already underway. - Intended fiscal outcomes: - Stabilize public debt to GDP ratio at about 47 percent of GDP by 2026. - Any additional windfall would accumulate in the FRR. - The additional deficit reduction would provide relief for public borrowing from the banking sector, leaving more space for private sector borrowing. ### Policy measures suggested - Revenue measures (examples listed in source): - Eliminating inefficient VAT exemptions. - Note: A partial list of tax expenditures included in “État H” of the 2024 budget law amounts to DZD 495 billion (about 1.3 percent of GDP), with customs rights and VAT on imports accounting for more than half of this amount. - Capturing gains from digitalization through improved compliance. - Improving procedures for tax debt recovery. - Spending measures (examples listed in source): - Gradual phasing out of universal subsidies, partially compensated by cash transfers to vulnerable households (as envisaged by the authorities). - Limiting transfers to SOEs, including by strict enforcement of performance contracts. - Containing the wage bill (for example, by spreading the introduction of additional benefits and hiring over a longer period). ### Macroeconomic impacts and channels - Debt and financing: - The scenario would stabilize the public debt ratio at about 47 percent of GDP by 2026. - Reduction in gross financing requirements would reduce public borrowing from the banking sector and free up space for private sector borrowing. - Growth effects: - Staff estimates the fiscal measures would reduce average real GDP growth by 0.15 pps. per year over 2024–26, reflecting Algeria’s relatively low fiscal multipliers. - Fiscal multipliers: - Fiscal multipliers for Algeria are estimated to be low (see Elkhadari, M., Souissi M., and Jewell A, 2018. Empirical Estimation of Fiscal Multipliers in MENA Oil-Exporting Countries with an application to Algeria, IMF Working paper 18/24). ### Illustrative outputs (as presented in source) - Annex V Table 1 and Annex V Figure 1 illustrate that a three-pps. adjustment over 2024–26 would reduce the overall deficit by about three pps. of GDP by 2026 and stabilize the public debt ratio around 47 percent of GDP. - Annex V Figure 2 illustrates the modest negative impact on real GDP growth (percentage change, y-o-y) associated with the additional measures. *Source: IMF staff estimates and projections (Annex V. Alternative Fiscal Scenario).* ### Annex VII. Improving Financial Inclusion in Algeria ### Annex VII. Improving Financial Inclusion in Algeria ### A. Why is Financial Inclusion Important? - Financial inclusion promotes economic growth and enhances productivity growth and capital accumulation (Beck et al. (2020)). - Financial inclusion reduces income inequality and poverty by increasing the supply of financial services to lower-income households and SMEs (Cihak and Sahay, 2020). - Barajas et al. (2020a) find that greater financial inclusion is associated with lower income inequality. - Provided the quality of regulation and supervision is high, financial inclusion and stability can be pursued simultaneously. - The new Monetary and Banking Law (LMB) includes financial inclusion and digital finance as part of the mandates and objectives of the central bank: - Article 36: central bank takes measures to facilitate the supply of financial services to enhance financial inclusion, including by disseminating payment means such as cash and ensuring that branches of financial institutions cover the entire country. - Article 64: brings Payment Service Providers (PSP) within the perimeter of the central bank’s supervisory, regulatory, licensing, and sanctioning powers. - Article 76: allows licensed PSPs to perform payment services offered by banks. - Article 2: includes a central bank digital currency (CBDC), Dinar Algérien Digital, as a possibility of a currency, together with fiduciary money. - Note: Implementation of the law will be detailed in regulations of the central bank. ### B. What is the State of Financial Inclusion in Algeria? Key findings on depth and outreach - Loans to the private sector increased by some ten percentage points of GDP between 2004 and 2022. - Bank deposits increased by about four percentage points of GDP between 2004 and 2022. - Loans to households accounted for less than four percent of GDP at end–2022. - The number of ATMs has increased by about seven per 100,000 adults since 2004. - The number of deposit-taking institutions’ branches has remained broadly stable since 2004. - When compared with peer countries in the region, notable gaps remain in Algeria in terms of financial depth and outreach. Access, use, and technology - Bank account ownership and saving behavior broadly align with the regional and EMDE average. - Ownership of mobile phones and internet access are widespread and on par with other countries. - Fewer individuals borrow from a financial institution in Algeria than in the MENA and SSA regions, and among EMDE, on average. - The use of Fintech—such as mobile phones and internet—to perform financial transactions is well below average in Algeria relative to comparator groups. - The number of debit cards has increased but the number of loan accounts has remained broadly unchanged. Gender gap - The use of financial services (savings and borrowing) is notably higher among males than among females, as is the case in peer countries. Additional institutional note - A central bank regulation adopted on September 21, 2023, set out the condition to license and regulate a network of foreign exchange bureaus to be established in Algeria; such initiative should contribute to reinforcing financial inclusion in terms of access and geographical outreach to financial services. - Statistics on bank branches may not always be comparable to other countries, due to omission of post office branches offering financial services. ### C. What Policies Would Help Increase Financial Inclusion in Algeria? Credit market infrastructure and risk management - A sound legal, regulatory, and oversight framework is required to contain risks as credit grows; the reforms in the new LMB are critical. - Crisis management: a sound framework should deal efficiently and in a least cost manner with failure and restructuring of financial institutions to minimize disruptions in payment systems and credit supply. - Information sharing: - Credit bureaus or credit registries—with records of risks regarding past and current loans taken out by firms—can help improve access to credit for sound borrowers. Introducing a credit bureau would be useful in Algeria. - The BA could review and strengthen existing platforms—Centrale des Risques, Centrale des Incidents de Paiement, and Centrale des Bilans. - Information sharing can be strengthened by better corporate accounting and by supporting information-sharing among banks, utility companies, and suppliers (for example, with databases on payments). - Collateral: A movable collateral registry would enhance access to credit for MSMEs, provided a sound legal and regulatory framework is in place. - Insolvency regimes: gaps in insolvency frameworks that cannot handle corporates or SMEs effectively may reduce lenders’ willingness to extend credit and make it difficult to write off defaulted exposures. Country-level strategy and public–private commitment - Direct Public Sector Involvement (such as directed lending, subsidies) has been used extensively in Algeria but may be challenging to design and manage properly. - Government-to-person payments (such as wages, pensions, etc.) and reliance on postal office branches can foster financial inclusion. - Financial Inclusion Strategy: - Develop and publish a financial inclusion strategy to secure public and private sector commitments. - A national strategy can: (i) articulate objectives and outline reform areas; (ii) lay out quantitative targets and a timeline; (iii) communicate the commitment of authorities; and (iv) secure buy-in from public and private stakeholders. - Financial literacy initiatives and consumer protection laws raise awareness, lead to more responsible use of traditional finance and Fintech, and are often part of a financial inclusion strategy. Fintech and CBDC: opportunities and risks - Fintech innovations—domestic and cross-border payment services, mobile money, internet banking—can support financial inclusion and deepening but raise risks in: - (i) financial stability; - (ii) financial integrity; - (iii) regulations; - (iv) market integrity; - (v) cybersecurity; and - (vi) data privacy. - Policies needed to properly develop Fintech and maximize inclusion while mitigating risks should cover: - (i) facilitating infrastructures such as telecommunications and digital and financial infrastructures (broadband internet, mobile data services, data repositories, and payment and settlement services); - (ii) enabling competition and committing to open and contestable markets to incentivize new entrants and incumbents; - (iii) including Fintech in a national financial inclusion strategy; - (iv) identifying and monitoring emerging opportunities and risks and facilitate policy responses, including through regular dialogue with private sector; - (v) adapting the legal, regulatory, and supervisory framework to address emerging risks and safeguard the integrity of the financial system; - (vi) analyzing and understanding the implications of Fintech innovations for financial stability; and - (vii) developing data infrastructure. Central bank digital currency (CBDC) - A properly designed CBDC could support financial inclusion but is no panacea. - Potential benefits: - CBDC could create competition in the payments system by allowing transactions to be settled more directly through reduced intermediation, thus reducing the cost of financial products and services. - Barriers that could limit CBDC impact include limited identifications and financial literacy, distrust in financial institutions, low wealth and high informality, and a preference for cash. - Risks of CBDC: - CBDCs could lead to financial stability risks, data privacy and legal challenges, financial integrity concerns, cyber risks, and central bank operational risks. - Benefits and risks are difficult to estimate and depend on country-specific factors, including the central bank’s capacity and legal framework. *Source: Annex VII. Improving Financial Inclusion in Algeria.* ### Annex VIII Figure 1. Algeria: New National Accounts, 2001–22 ### Annex VIII Figure 1. Algeria: New National Accounts, 2001–22 ### National accounts revision and methodological changes - New national accounts data: base 2001 and adoption of the 2008 SNA standard for 2001–22. - Revision impact: - Annual nominal GDP is higher by ten percent. - Real GDP growth is higher by 0.1 pp, on average, over 2001–2022. - Scope and classification changes for hydrocarbon activities: - The hydrocarbon sector is no longer a standalone sector. - “Crude oil” is now classified under Extractive industries. - “Refined products” are now classified under Manufacturing industries. - “Transport by pipes” is excluded from the hydrocarbon sector (moved under Transport and communication). - Hydrocarbon-related “Building and construction activities” are included. ### Data availability and remaining statistical issues - New annual national accounts series extend back to 2001; quarterly data in the new base are not available yet. - Volume measures: derived at prices of the previous year, then chain-linked. - Price statistics and representativeness: - CPI index reference period: 2001; CPI weights from 2000 (noted as severely outdated). - PPI weight reference period: 1989 (noted as outdated and likely not representative). - Government finance statistics shortcomings: - Coverage limited to central government. - Classification problems, long production 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 and financial statistics: - Central bank submits monetary statistics for the central bank, ODCs, and other financial corporations to STA on a timely basis, published in IFS. - Financial Soundness Indicators (FSI) are reported but periodicity and timeliness need improvement (currently yearly). ### Selected macroeconomic and balance-sheet figures highlighted in source - Exchange rate (average of buying and selling rates) as of January 23, 2024: - US$1 = DZD 134.27 - SDR 1 = DZD 178.74 - International reserves and outlook: - International reserves reached a level equivalent to 14 months of imports in 2023. - Staff projects reserves to remain above six months of import coverage through 2029. - Fiscal and external position indicators: - Gross government debt: 55 percent of GDP in 2023. - Current account: Algeria ran a current account surplus in 2023 for the second consecutive year. - External debt: described as negligible. - SDR and quota figures (as reported): - Net cumulative SDR allocation: 3,076.66 (million) — 100.00 (Percent of Quota) - SDR holdings: 3,220.25 — 104.67 (Percent of Quota) - Quota: 1,959.90 (SDR million) — 100.00 (Percent of Quota) - Fund holdings of currency: 1,426.93 — 72.81 (Percent of Quota) - Reserve position in Fund: 532.97 — 27.19 (Percent of Quota) - Selected program records: - EFF approved 5/22/1995—5/21/1998: Amount Approved (SDR million) 1,169.28; Amount Drawn (SDR million) 1,169.28. - Stand-by 5/27/1994—5/22/1995: Amount Approved 457.20; Amount Drawn 385.20. - Stand-by 6/03/1991—3/31/1992: Amount Approved 300.00; Amount Drawn 225.00. ### Policy implications and selected authorities’ positions - Authorities’ assessment of the revision: - The December 2023 rebasing (to 2001 base and 2008 SNA) yields a 10 percent upward revision to annual nominal GDP and a 0.1 percentage point upward revision to real GDP growth on average over 2001–2022. - Fiscal policy: - Priority to maintain household purchasing power in the post-COVID context. - Gross government debt at 55 percent of GDP in 2023; authorities commit to preserving public finance and debt sustainability. - Progress on public financial management: program budgeting, new procurement and public accounting laws, and a new customs and taxation data center. - Authorities preparing reforms to strengthen cash and public debt management and to gradually replace universal subsidies with targeted transfers. - Monetary policy and exchange rate: - Bank of Algeria (BoA) seeks to balance inflation control and liquidity provision amid excess liquidity and low credit to the economy. - BoA sterilizes liquidity through open market operations and increases in the reserve requirement ratio. - New Monetary and Banking Law consolidates BoA independence and establishes price stability in the Governor’s mandate. - Authorities agree on the exchange rate’s role in absorbing external shocks. - Financial sector: - Sector described as resilient with robust capital and liquidity buffers. - Authorities aim to accelerate banking sector reforms and financial inclusion; opening SOB capital to private investors began with a transaction in January (year unspecified). - Authorities note limitations in staff’s NPL assessment due to legal provisions allowing write-offs and establishment of an asset management company for NPL recovery. - Commitment to strengthen AML/CFT framework, transparency, and digital financial services. - Structural reforms and climate commitments: - Authorities pursuing economic diversification, private investment promotion, and non-hydrocarbon export growth. - Non-hydrocarbon exports have grown by about 170 percent (period not specified in excerpt). - Algeria committed to reducing carbon emissions by 7 percent by 2030. - Actions on water scarcity: desalination, wastewater recycling, optimizing agricultural practices, expanding arable lands (including southern Algeria). - New Investment Law and AAPI one-stop shop aimed at promoting foreign investment and private-sector activity. ### Consequences for analysis and surveillance - Revised GDP levels and growth rates affect historical comparisons, debt and fiscal ratios, and external position metrics calibrated to GDP. - Lack of quarterly national accounts in the new base limits higher-frequency monitoring of activity under the revised framework. - Outdated CPI and PPI weight bases (2000 and 1989 respectively) can bias inflation measurement and producer-price signals, with implications for policy decisions and real-wage assessments. - GFS coverage and timeliness gaps constrain fiscal surveillance and reconciliation with monetary data. *Source: Annex VIII Figure 1 and related sections from the IMF staff report materials provided in the source document.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2024/english/1dzaea2024001.pdf_