## _cr0550

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---

### Executive summary — Recent developments and overview
- Algeria’s real GDP growth increased from 3 percent per year in 2000–02 to 6 percent in 2003–04, largely reflecting the expansionary fiscal stance and rising hydrocarbon production.
- The increase in oil prices has allowed Algeria to strengthen further its external position.
- The fiscal expansion in recent years has contributed to job creation, but unemployment remains high.
- The vulnerability of public finances to oil price fluctuations increased.
- Monetary policy has helped to keep inflation under control.
- Structural reforms have stalled.
- Following presidential elections, the government decided to push ahead with external trade liberalization and other structural reforms, including in the banking sector.
- The authorities have prepaid some external debt.

### Policy discussions — Focus and main messages
- Discussions focused on how to manage hydrocarbon resources, improve growth performance and reduce unemployment.
- The 2005 budget marks a turning point: it delinks spending from volatile hydrocarbon revenue while envisaging a gradual fiscal consolidation over the medium term and allows for significant public investment.
- Sound management of high external inflows from hydrocarbon exports is key to improve the outlook for private sector-driven economic growth and employment.
- The fiscal adjustment planned by the government will gradually bring the nonhydrocarbon primary deficit to a sustainable level.
- Staff urged the authorities to:
  - substantially reduce tax exemptions,
  - improve control over the wage bill,
  - strengthen the social safety net to mitigate social costs resulting from structural reforms.
- Staff recommended:
  - setting hydrocarbon revenue management in a long-term framework,
  - transforming the oil stabilization fund into a savings/financing account fully integrated into the budget,
  - handling the hydrocarbon company’s liquidity outside the money market and absorbing any remaining excess liquidity.
- Given no signs of exchange rate misalignment, staff encouraged continuation of the present exchange rate policy.
- Authorities agreed that Algeria’s favorable financial position and new electoral mandate present an opportunity to accelerate structural and institutional reforms, including modernizing the banking sector and continuing external trade liberalization.

### I. Background — Structural context and reform record
- Algeria is an important hydrocarbon exporter and has made some progress in the transition to a market economy.
- During 1994–98, in the context of Fund-supported programs, Algeria:
  - liberalized prices and current international transactions,
  - reformed tariffs,
  - opened the hydrocarbon sector to foreign participation.
- The authorities closed or privatized 400 public entities, but some 1,200 public enterprises remain.
- An association agreement with the European Union (EU) was signed in 2002 and WTO accession negotiations are ongoing.
- The financial sector largely consists of public banks burdened by nonperforming loans to public enterprises.
- Treasury repurchases of past loans amounted to DA 1,130 billion or 27 percent of 2001 GDP.
- The hydrocarbon sector represented 36 percent of GDP, 98 percent of exports, and almost 70 percent of budgetary revenues in 2003.
- Cumbersome regulations and high nonwage labor costs foster a large informal sector; investment remains state-driven and concentrated in hydrocarbons.

### II. Recent economic developments — Growth, external sector, fiscal and monetary outcomes
- Growth and labor market:
  - Real GDP growth projected at 5½ percent in 2004, compared to 7 percent in 2003, due to a slowdown in hydrocarbon output expansion and in agriculture after the 2003 bumper crop.
  - Construction and services output increased sharply, driven largely by government spending.
  - Unemployment remains high: about 24 percent at end-2003; registered unemployment was 23.7 percent in 2003 and youth unemployment was 45 percent.
- External position:
  - Hydrocarbon exports continued to increase sharply in 2004, boosted by high oil prices.
  - External current account surplus projected to increase from 13⅓ percent of GDP in 2003 to 15½ percent in 2004.
  - Gross external reserves reached US$37.3 billion (almost 2 years of import cover) at end-September.
  - External debt-to-GDP ratio expected to decline from 35 percent in 2003 to 25 percent in 2004.
- Exchange rate and reserve coverage:
  - Following a real depreciation of 17½ percent in 2002-03, authorities aimed to stabilize the real effective exchange rate (REER) in 2004.
  - Algeria’s exchange rate regime is a managed float with no pre-announced path for the exchange rate.
  - The REER appreciated by 1½ percent during the first eight months of 2004.
  - Spread between illegal parallel market and official exchange rates remained about 25 percent.
- Fiscal position:
  - Public spending rose from 47 percent of nonhydrocarbon GDP (NHGDP) in 2001 to 52 percent in 2004.
  - Reduction of import taxes and a decline in nontax revenue expected to result in a fall in nonhydrocarbon revenue by 1½ percent of NHGDP in 2004.
  - Nonhydrocarbon primary budget deficit expected to increase from 29½ percent of NHGDP in 2003 to almost 32 percent in 2004.
  - Higher hydrocarbon revenue expected to strengthen the overall fiscal position.
- Monetary policy and inflation:
  - Broad money growth expected to be contained at about 16 percent in 2004; Bank of Algeria (BA) increased deposit auctions in April and October.
  - BA reduced deposit auction interest rate from 1¾ percent to ¾ percent.
  - Annual consumer price inflation expected to decline from 4 percent at end-2003 to 3½ percent by end-2004.
- Fiscal stimulus and sectoral effects:
  - Economic Recovery Plan (ERP) capital expenditure program amounted to about $7 billion (8½ percent of 2004 GDP) for 2001–04.
  - Government capital expenditure induces increases in real nonhydrocarbon GDP while government current expenditure does not.
  - Correlation coefficient between annual change in government expenditure and one-year lagged change in hydrocarbon GDP is about 0.75.

### Selected quantitative indicators (as reported)
- Real GDP growth: 3 percent per year in 2000–02; 6 percent in 2003–04; projected 5½ percent in 2004; 7 percent in 2003.
- Hydrocarbon sector shares (2003): 36 percent of GDP; 98 percent of exports; almost 70 percent of budgetary revenues.
- Treasury repurchases of loans: DA 1,130 billion or 27 percent of 2001 GDP.
- ERP size: about $7 billion (8½ percent of 2004 GDP) for 2001–04.
- Unemployment: about 24 percent at end-2003; registered unemployment 23.7 percent in 2003; youth unemployment 45 percent.
- External current account surplus: 13⅓ percent of GDP in 2003; 15½ percent of GDP in 2004 (projected).
- Gross external reserves: US$37.3 billion (almost 2 years of import cover) at end-September 2004.
- External debt-to-GDP ratio: 35 percent in 2003; 25 percent in 2004 (expected).
- Real depreciation: 17½ percent in 2002-03.
- REER change: appreciated by 1½ percent during the first eight months of 2004.
- Parallel market spread: about 25 percent.
- Public spending: 47 percent of NHGDP in 2001; 52 percent of NHGDP in 2004.
- Nonhydrocarbon revenue fall: 1½ percent of NHGDP in 2004.
- Nonhydrocarbon primary deficit: 29½ percent of NHGDP in 2003; almost 32 percent in 2004 (expected).
- Broad money growth: about 16 percent in 2004.
- BA deposit auction interest rate: reduced from 1¾ percent to ¾ percent.
- Inflation: 4 percent at end-2003; 3½ percent by end-2004 (expected).

### III. Policy discussions — Priorities, recommendations, and structural reform
- Key priorities:
  - Manage hydrocarbon revenue sustainably and integrate stabilization/savings mechanisms into the budget.
  - Gradually consolidate fiscal policy to bring nonhydrocarbon primary deficits to sustainable levels.
  - Improve public finance management: reduce tax exemptions, control the wage bill, and strengthen social safety nets.
  - Modernize the banking sector and accelerate external trade liberalization.
- Specific recommendations:
  - Transform the oil stabilization fund into a savings/financing account fully integrated into the budget.
  - Handle Sonatrach’s liquidity outside the money market and absorb remaining excess liquidity.
  - Continue the present exchange rate policy given no current signs of exchange rate misalignment.
  - Use favorable financial position and electoral mandate to accelerate structural and institutional reforms, including opening public enterprises to partnerships and privatization.

### Implementation of structural reforms and public debt management (2003–04)
- Progress achieved:
  - Strengthened performance contracts for public banks.
  - Modernization of the payments system.
  - Granting a third cellular telephone license and liberalizing international telephone services.
  - Privatizing a few small enterprises.
  - Modernizing part of the legislative framework in line with WTO rules; WTO accession negotiations continued.
- Public debt management actions:
  - Repaid US$0.9 billion ahead of schedule to the African Development Bank and Saudi Arabia.
  - Continued discussions on early repayment of Paris Club debt.
  - Swapped DA 624 billion (10½ percent of GDP) non-tradable debt to public banks for tradable Treasury securities up to 10-year maturities.

### Key challenges and outlook (2005 and medium term)
- Main challenges:
  - Manage hydrocarbon resources, improve growth performance, and reduce unemployment.
  - Need for prudent macroeconomic policies and structural/institutional reforms to diversify the economy and create jobs.
- 2005 outlook:
  - Real GDP growth projected to decline to 4–4½ percent, largely reflecting capacity constraints on hydrocarbon output.
  - Planned fiscal consolidation and prudent monetary policy expected to keep inflation subdued.
- Medium-term outlook (2006–09):
  - Real GDP growth projected to average 4½ percent during 2006–09, reducing unemployment to about 17 percent by 2009.
  - Oil prices projected (WEO): decline from US$42.7 per barrel in 2005 to US$34 per barrel by 2009.
  - Hydrocarbon exports expected to remain high through 2009 despite projected gradual decline in prices.
  - International reserves, excluding the counterpart of the oil stabilization fund, would remain at about 16 months of import cover by 2009.
  - Fiscal consolidation would significantly reduce government finances’ vulnerability to oil price fluctuations and inflation is expected to remain low.

### Debt sustainability and stress scenarios
- Debt sustainability analysis:
  - External and public debt would remain sustainable over the medium term.
  - Standardized stress tests show external debt ratio could increase above 60 percent under extreme circumstances to finance high reserve accumulation assumed in baseline.
  - Public debt-to-GDP ratio would decline in most circumstances; even with large shocks, it declines after an initial increase.
- Adverse scenario:
  - Drop in oil prices to US$19 per barrel starting in 2005 together with stalled structural reforms and low growth.
  - Under this scenario, international reserves decline to about 10 months of imports by 2009, and the government would run fiscal deficits starting in 2005.
  - Nevertheless, external and public debt would remain sustainable.

### Alternative medium-term scenario — accelerated structural reforms
- Staff alternative scenario assumptions and outcomes:
  - Real nonhydrocarbon GDP growth increases to 5½ percent from 2008.
  - Unemployment drops to about 15 percent by 2009.
  - Additional judicious spending needed to support reforms; nonhydrocarbon primary deficit declines to 24 percent in 2009 (compared to 21 percent foreseen in government budget under baseline), with slightly higher inflation.
- Selected projection series (2005–09) — Baseline Scenario (in percent unless otherwise stated):
  - Real nonhydrocarbon GDP growth: 2005: 4.3; 2006: 4.2; 2007: 4.3; 2008: 4.4; 2009: 4.5
  - Consumer price index (end-of-period, annual percent change): 2005: 3.6; 2006: 3.5; 2007: 3.5; 2008: 3.5; 2009: 3.5
  - Total expenditure (in percent of NHGDP): 2005: 49.1; 2006: 46.0; 2007: 43.4; 2008: 40.7; 2009: 38.2
  - Nonhydrocarbon primary balance (in percent of NHGDP): 2005: -30.4; 2006: -28.2; 2007: -25.7; 2008: -23.4; 2009: -21.2
  - Share of hydrocarbon revenue spent (in percent): 2005: 68.7; 2006: 71.0; 2007: 67.3; 2008: 66.1; 2009: 63.6
- Selected projection series (2005–09) — Alternative Scenario (in percent unless otherwise stated):
  - Real nonhydrocarbon GDP growth: 2005: 4.3; 2006: 4.5; 2007: 5.0; 2008: 5.5; 2009: 5.5
  - Consumer price index (end-of-period, annual percent change): 2005: 3.8; 2006: 4.0; 2007: 4.1; 2008: 4.1; 2009: 4.2
  - Total expenditure (in percent of NHGDP): 2005: 49.1; 2006: 46.7; 2007: 45.0; 2008: 42.3; 2009: 40.5
  - Nonhydrocarbon primary balance (in percent of NHGDP): 2005: -30.4; 2006: -29.0; 2007: -27.4; 2008: -25.2; 2009: -23.7
  - Share of hydrocarbon revenue spent (in percent): 2005: 68.7; 2006: 73.4; 2007: 73.1; 2008: 73.3; 2009: 74.5

### Management of hydrocarbon revenue — long-term framework and FRR recommendations
- Objectives:
  - Diminish procyclicality of fiscal policy given hydrocarbon price volatility.
  - Avoid Dutch disease to sustain competitiveness of nonhydrocarbon tradables.
  - Ensure transparent use of hydrocarbon revenue to minimize governance problems and waste.
  - Save part of hydrocarbon wealth for future generations.
- Staff long-term fiscal framework — baseline assumptions:
  - Uses U.S. Geological Survey estimates of probable reserves and assumes exhaustion by 2050.
  - Assumes oil prices gradually decline to US$25 per barrel after 2009.
  - Assumes real NHGDP growth of 4 percent per annum and an interest rate of 5 percent.
- Under this scenario:
  - Limit hydrocarbon primary deficit to 22 percent of NHGDP on average during 2005–09; deficit progressively declines thereafter and can be financed by income from net financial wealth.
- Fiscal sustainability path projections (selected lines, 2005–09):
  - Crude oil export unit value ($/bbl): 2005: 42.7; 2006: 38.2; 2007: 36.0; 2008: 35.0; 2009: 34.0
  - Sustainable nonhydrocarbon primary balance (in percent of NHGDP): 2005: -23.4; 2006: -22.8; 2007: -22.3; 2008: -21.8; 2009: -21.2
- FRR (Fonds de Regulation des Recettes) recommendations:
  - Review role and procedures of the FRR.
  - Accumulate all hydrocarbon revenue in the FRR; use it only to finance sustainable nonhydrocarbon primary deficit and to repay public debt.
  - Integrate the FRR into the budget to ensure full accountability and transparency.
  - BA should manage the counterpart of the FRR; FRR should receive financial returns net of interest paid on public debt.
- Authorities’ response:
  - Authorities expressed strong interest in the long-term framework and indicated they would reconsider the role of the oil stabilization fund, including transforming it into a savings/financing account.

### Fiscal policy: 2005 budget and Growth Consolidation Plan (2005–09)
- Fiscal stance shift:
  - 2005 budget aims to reduce the nonhydrocarbon primary deficit to 30.4 percent of NHGDP in 2005 from 31.8 percent in 2004.
  - 2005 budget is based on an oil price assumption of US$19 per barrel (report’s fiscal projections are based on WEO oil price projections but otherwise consistent with the government budget).
  - Hydrocarbon revenue in terms of NHGDP projected to decline from a peak of 47 percent in 2005 to 35 percent by 2009.
  - Capital spending expected to remain at about 19 percent of NHGDP.
  - Containing the wage bill and active debt management would reduce current spending from 32½ percent of NHGDP in 2004 to 30 percent in 2005.
- Growth Consolidation Plan (2005–09):
  - Capital expenditure program amounting to DA 3,800 billions (US$50 billion or 61 percent of 2004 GDP) over 2005–09.
  - Plan aims: improving public services, developing human capital, building infrastructure, supporting economic activity (mainly agriculture), and expanding housing.
  - Pillars to rein in current spending:
    - Reduce the wage bill (currently at 50 percent of current spending).
    - Pursue active public debt management (early repayment and debt conversion).
    - Reduce subsidies by gradually revising administered prices on water, electricity, and hydrocarbon products.
  - Growth Consolidation Plan allocation (Total US$50 billion): Housing 25%; Economic activity 15%; Infrastructure 23%; Public services 21%; Human capital 16%.
- Staff assessment:
  - Staff commended the prudent 2005 budget; if implemented, it would put public finances on a sustainable path.
  - Staff urged a public expenditure review in cooperation with the World Bank and stressed the need for adequate social safety net measures.

### Monetary and exchange rate policies
- Monetary policy objectives:
  - Keep inflation low while allowing adequate expansion of credit.
  - Target broad money growth to achieve inflation objective in a managed float with extensive capital controls.
  - BA’s program aimed to limit broad money growth to less than 16 percent in 2004 and 14½ percent in 2005 by controlling base money growth.
- Liquidity and Sonatrach deposits:
  - Sonatrach’s deposits fuel excess liquidity in the banking system; deposits carry conservative placement requirements that effectively prevent the bank from extending credit.
  - Sonatrach surrenders 100 percent of its export proceeds to BA, which credits Sonatrach’s account with a public bank in dinars.
- Staff recommendations:
  - Sonatrach should deposit unneeded resources in an interest-bearing account at BA to increase BA’s control over banking system liquidity and restore signaling role of BA interest rates.
  - BA should fully mop up any residual excess liquidity in the banking system.
  - Securitization of BA claims on the Treasury would provide an additional instrument to the deposit auctions.
- Exchange rate policy:
  - Authorities agreed to maintain flexibility in BA’s managed float.
  - Exchange rate policy should align REER with relative productivity and real oil prices.
  - Staff found no signs of current misalignment; REER depreciation in 2002–03 helped external competitiveness.
  - Over the medium term, high import growth and trade liberalization may call for reassessment; staff urged close monitoring of fiscal consolidation’s macroeconomic impact.

### Box 6 — Equilibrium Exchange Rate findings
- REER of the Algerian dinar varied significantly during the last decade.
- The Balassa-Samuelson effect together with real oil prices explain the long-run evolution of the equilibrium REER.
- Convergence speed towards equilibrium is 9 months.
- There are no signs of misalignment in the current exchange rate.
- Appreciation of REER since the second half of 2003 was in line with the long-run equilibrium exchange rate.

### Banking sector, structural reforms, and privatization
- Structural priorities:
  - Implement market-based reforms decisively; banking sector reform is a priority.
  - Put financial relations between public banks and public enterprises on a sound footing and significantly strengthen banking supervision.
  - Transfer control of several public banks to reputable foreign banks to inject know-how.
  - Accelerate privatization and reduce the tax wedge to help create jobs in the formal sector.
- Recent measures:
  - Strengthened performance contracts for public banks and modernized payment systems.
  - Privatization of 50 small- and medium-sized enterprises in 2004; certain larger privatizations completed.
  - Government announced that all but a limited number of public enterprises (e.g., Sonatrach and Sonelgaz) are eligible for privatization.
- Financial sector stability:
  - Concern about banks’ exposure to loss-making state-owned enterprises; 2005 Budget includes direct subsidy to loss-making public enterprises to replace part of public banks’ credit (staff recommends subsidies be temporary and part of a restructuring program).
  - Call for implementation of 2003 Financial System Stability Assessment recommendations and strengthening of bank supervision.
  - Establishment of a Financial Intelligence Unit and AML/CFT legislation advanced.

### Debt strategy, World Bank relations, and external cooperation
- Debt strategy:
  - Active debt management: premature repayments (US$0.9 billion to AfDB and Saudi Arabia) and swaps of non-tradable debt for tradable securities.
  - Staff recommends more ambitious early repayment of external debt and pursuing bilateral debt settlements (e.g., with Russia).
  - Encourage Algeria to consider full participation in enhanced HIPC Initiative.
- World Bank relations (as of October 31, 2004):
  - 11 active operations and 62 closed loans; cumulative net commitment $4.5 billion, of which $3.2 billion repaid.
  - Net commitments for current operations: $474 million.
  - Country Assistance Strategy (June 2003) focuses on fiscal sustainability, removing private sector constraints, and improving public service delivery.
  - Loan approvals by fiscal year: FY00: $97m; FY01: $42m; FY02: $31m; FY03: $183m; FY04: 0; FY05: 0 (none in pipeline).
  - Total active loans: 474.0 (Undisbursed Balance: 295.8).

### Statistics, transparency, and IMF engagement
- Statistical weaknesses post-1998: deterioration in quality and timeliness between missions due to resource constraints and coordination issues.
- STA recommendations:
  - Subscribe to the GDDS as an interim step toward SDDS.
  - Prioritize compilation of national accounts per 1993 SNA; first quarterly national accounts expected by year-end (follow-up after March 2004 mission).
  - Improve government finance statistics (GFS), monetary reporting, balance of payments compilation, and banking sector data reporting.
  - Suggested changes: show FRR proceeds as revenue rather than financing; detailed breakdowns for “other transfers”; appropriate reporting of large debt assumption operations; and improved reconciliation with monetary statistics.
- Balance of payments:
  - Algeria does not report BOP data to STA; international investment position not compiled.

### IMF Article IV consultation and Executive Board assessment (timing and key messages)
- Executive Board concluded Article IV consultation on January 12, 2005.
- Main messages and recommendations from Directors:
  - Commend strong macroeconomic performance: higher growth, low inflation, rapidly growing international reserves.
  - Urge seizing opportunity to consolidate macro stability, sustain high growth, and significantly reduce unemployment.
  - Emphasize accelerating structural reforms, strengthening financial sector, and creating a business environment for private investment.
  - Support transforming the hydrocarbon stabilization fund into a savings/financing account fully integrated into the budget.
  - Support for prudent 2005 budget and call to protect priority capital and social spending while conducting careful selection and management of public investment projects.
  - Concern about high excess liquidity; recommend handling hydrocarbon company deposits outside the money market and mopping up residual liquidity.
  - Urge faster and more extensive privatization and stronger governance and fiscal transparency.
  - Welcome efforts to improve statistics and encourage GDDS subscription.

### Authorities’ assessment and intentions (authorities’ response)
- Authorities welcome the report, Selected Issues paper, technical assistance, and Board views supporting continued stabilization and reforms.
- Achievements highlighted: macroeconomic stability, improved institutional environment, security, and political stability after April 2004 Presidential Elections.
- Macroeconomic performance:
  - Growth: 5.5 percent on average over the ERP period.
  - Per capita gain: over 3 percent per year.
  - Inflation: 4 percent.
  - Current account surplus: 15 percent of GDP.
  - International reserves reached a record level; external debt-to-GDP ratio reached 24.7 percent from 34.9 percent at end-December 2003.
- Fiscal and monetary stance:
  - Supportive fiscal stance under ERP benefited capital expenditure; current spending declined by 2 percent in 2004 in nominal terms and dropped below 20 percent of GDP from 23.3 percent in 2003.
  - Broad money to be contained at 16 percent in 2004; BA increased deposit auctions and sterilized part of hydrocarbon revenues.
- Trade and WTO accession:
  - WTO accession negotiations at an advanced stage; tariff reform ongoing with temporary additional duty reduced to 12 percent as of January 1, 2005, to be eliminated on January 1, 2006.
  - Association Agreement with EU: ratification expected in the near future.
- Privatization and public enterprise reform:
  - Divestiture of 50 small- and medium-sized enterprises in 2004; large privatizations progressed.
  - Government declared most public enterprises eligible for privatization, with ongoing negotiations for further sales.
- Financial sector and supervision:
  - FSAP-based strategy to include privatization of public banks; strengthened performance contracts; payment system modernization; comprehensive on-site inspections of public banks conducted.
  - Recent frauds in two private banks prompted temporary prohibition on public units dealing with private banks; measures underway to strengthen supervision.
- Medium-term strategy:
  - Fiscal program 2005–2009 envisages progressive reduction in nonhydrocarbon primary deficit ratio to NHGDP.
  - Authorities request World Bank assistance for Public Expenditure Review and emphasize preserving social spending and potentially expanding safety nets.
  - Fiscal strategy aims to accumulate sizeable surpluses in the stabilization fund; authorities note intergenerational equity is not limited to financial savings and early debt repayment reduces future fiscal burden.
- Debt management:
  - Authorities considering further early debt repayments and support enhanced HIPC Initiative; willing to examine arrears-on-debt-in-kind issues with the Fund.
- Implementation and transparency:
  - Authorities committed to completing structural and institutional reforms and to enhanced communication and consultation.
  - Authorities consented to publication of the staff report, Selected Issues paper, and fiscal ROSC paper.

*Source: Executive Summary and selected sections, _cr0550 — IMF staff report.*

### Executive Summary ......................................................................................................

### _cr0550 - Executive Summary

### Executive summary — Recent developments and overview
- Algeria’s real GDP growth increased from 3 percent per year in 2000–02 to 6 percent in 2003–04, largely reflecting the expansionary fiscal stance and rising hydrocarbon production.
- The increase in oil prices has allowed Algeria to strengthen further its external position.
- The fiscal expansion in recent years has contributed to job creation, but unemployment remains high.
- The vulnerability of public finances to oil price fluctuations increased.
- Monetary policy has helped to keep inflation under control.
- Structural reforms have stalled.
- Following presidential elections, the government decided to push ahead with external trade liberalization and other structural reforms, including in the banking sector.
- The authorities have prepaid some external debt.

### Policy discussions — Focus and main policy messages
- Discussions focused on how to manage hydrocarbon resources, improve growth performance and reduce unemployment.
- The 2005 budget marks a turning point: while allowing for significant public investment over the next five years, it delinks spending from volatile hydrocarbon revenue and envisages a gradual fiscal consolidation over the medium term.
- Sound management of high external inflows from hydrocarbon exports is key to improve the outlook for private sector-driven economic growth and employment.
- The fiscal adjustment planned by the government will gradually bring the nonhydrocarbon primary deficit to a sustainable level.
- Staff urged the authorities to:
  - substantially reduce tax exemptions,
  - improve control over the wage bill,
  - strengthen the social safety net to mitigate the social costs resulting from structural reforms.
- Staff recommended setting the management of hydrocarbon revenue in a long-term framework and transforming the oil stabilization fund into a savings/financing account fully integrated into the budget.
- The new fiscal stance should facilitate the Bank of Algeria’s task of managing the impact of hydrocarbon revenue on monetary conditions and on the development of the financial sector.
- Staff recommended handling the hydrocarbon company’s liquidity outside the money market and absorbing any remaining excess liquidity.
- Given that currently there are no signs of exchange rate misalignment, staff encouraged the authorities to continue with their present exchange rate policy.
- The authorities agreed with staff that Algeria’s favorable financial position and the new electoral mandate present an excellent opportunity to accelerate structural and institutional reforms.
- Key reforms include: modernizing the banking sector and continuing external trade liberalization.

### I. Background — Structural context and reform record
- Algeria is an important hydrocarbon exporter and has made some progress in the transition to a market economy.
- During 1994–98, in the context of Fund-supported programs, Algeria restored macroeconomic stability and:
  - liberalized prices and current international transactions,
  - reformed tariffs,
  - opened the hydrocarbon sector to foreign participation.
- The authorities closed or privatized 400 public entities, but some 1,200 public enterprises remain.
- An association agreement with the European Union (EU) was signed in 2002 and negotiations towards accession to the World Trade Organization (WTO) are ongoing.
- Algeria lags behind most other MENA countries in economic reform; economic management relies heavily on the state and the institutional environment is weak.
- The financial sector largely consists of public banks, which continue to be burdened by nonperforming loans to public enterprises.
- The Treasury has repurchased some of these loans in three off-budget rounds in 1991-94, 1995-98, and 2001, amounting to DA 1,130 billion or 27 percent of 2001 GDP.
- The hydrocarbon sector represented 36 percent of GDP, 98 percent of exports, and almost 70 percent of budgetary revenues in 2003.
- Cumbersome regulations and high nonwage labor costs have led to the emergence of a large informal sector; the public sector owns most agricultural land and a large part of industrial real estate, while investment is largely driven by the state and concentrated in the hydrocarbon sector.

### II. Recent economic developments — Growth, external sector, fiscal and monetary outcomes
- Growth and labor market:
  - Real GDP growth is projected at 5½ percent in 2004, compared to 7 percent in 2003, due to a slowdown in the expansion of hydrocarbon output and in agriculture following the 2003 bumper crop.
  - Output in the construction and services sectors, which largely depends on government spending, increased sharply.
  - Unemployment remains high: about 24 percent at end-2003; registered unemployment was 23.7 percent in 2003 and youth unemployment was 45 percent.
- External position:
  - Hydrocarbon exports continued to increase sharply in 2004, boosted by high oil prices.
  - The external current account surplus is projected to increase from 13⅓ percent of GDP in 2003 to 15½ percent in 2004.
  - Gross external reserves reached US$37.3 billion (almost 2 years of import cover) at end-September.
  - The external debt-to-GDP ratio is expected to decline from 35 percent in 2003 to 25 percent in 2004.
- Exchange rate and reserve coverage:
  - Following a real depreciation of 17½ percent in 2002-03, the authorities aimed to stabilize the real effective exchange rate (REER) in 2004.
  - Algeria’s exchange rate regime is a managed float with no pre-announced path for the exchange rate.
  - The REER appreciated by 1½ percent during the first eight months of 2004.
  - The spread between the illegal parallel market and the official exchange rates remained large at about 25 percent.
- Fiscal position:
  - The fiscal policy since 2001 resulted in a sharp increase in public spending from 47 percent of nonhydrocarbon GDP (NHGDP) in 2001 to 52 percent in 2004.
  - The reduction of import taxes and the decline in nontax revenue are expected to result in a fall in nonhydrocarbon revenue by 1½ percent of NHGDP in 2004.
  - The nonhydrocarbon primary budget deficit is expected to increase from 29½ percent of NHGDP in 2003 to almost 32 percent in 2004.
  - Nevertheless, higher hydrocarbon revenue is expected to strengthen the overall fiscal position.
- Monetary policy and inflation:
  - Broad money growth is expected to be contained at about 16 percent in 2004, as the Bank of Algeria (BA) increased the amount of deposit auctions in April and October.
  - In an environment of abundant liquidity, BA reduced the interest rate on deposit auctions from 1¾ percent to ¾ percent.
  - Annual consumer price inflation is expected to decline from 4 percent at end-2003 to 3½ percent by end-2004.
- Fiscal stimulus and sectoral effects:
  - The Economic Recovery Plan (ERP), a capital expenditure program supplementing the budget, amounted to about $7 billion (8½ percent of 2004 GDP) and covered the period 2001–04.
  - Government capital expenditure induces an increase in real nonhydrocarbon GDP while government current expenditure does not.
  - The correlation coefficient between the annual change in government expenditure and the one-year lagged change in hydrocarbon GDP is about 0.75.

### III. Policy discussions — Priorities, recommendations, and structural reform
- Key priorities identified:
  - Manage hydrocarbon revenue sustainably and integrate stabilization/savings mechanisms into the budget.
  - Gradually consolidate fiscal policy to bring nonhydrocarbon primary deficits to sustainable levels.
  - Improve public finance management: reduce tax exemptions, control the wage bill, and strengthen social safety nets.
  - Modernize the banking sector and accelerate external trade liberalization.
- Specific recommendations:
  - Transform the oil stabilization fund into a savings/financing account fully integrated into the budget.
  - Handle the hydrocarbon company’s liquidity outside the money market and absorb remaining excess liquidity.
  - Continue the present exchange rate policy given no current signs of exchange rate misalignment.
  - Use Algeria’s favorable financial position and electoral mandate to accelerate structural and institutional reforms, including opening up public enterprises to partnerships and privatization.

### Selected quantitative indicators (as reported in the text)
- Real GDP growth: 3 percent per year in 2000–02; 6 percent in 2003–04; projected 5½ percent in 2004; 7 percent in 2003.
- Hydrocarbon sector shares (2003): 36 percent of GDP; 98 percent of exports; almost 70 percent of budgetary revenues.
- Treasury repurchases of loans: DA 1,130 billion or 27 percent of 2001 GDP.
- ERP size: about $7 billion (8½ percent of 2004 GDP) for 2001–04.
- Unemployment: about 24 percent at end-2003; registered unemployment 23.7 percent in 2003; youth unemployment 45 percent.
- External current account surplus: 13⅓ percent of GDP in 2003; 15½ percent of GDP in 2004 (projected).
- Gross external reserves: US$37.3 billion (almost 2 years of import cover) at end-September (2004).
- External debt-to-GDP ratio: 35 percent in 2003; 25 percent in 2004 (expected).
- Real depreciation: 17½ percent in 2002-03.
- REER change: appreciated by 1½ percent during the first eight months of 2004.
- Parallel market spread: about 25 percent.
- Public spending: 47 percent of NHGDP in 2001; 52 percent of NHGDP in 2004.
- Nonhydrocarbon revenue fall: 1½ percent of NHGDP in 2004.
- Nonhydrocarbon primary deficit: 29½ percent of NHGDP in 2003; almost 32 percent in 2004 (expected).
- Broad money growth: about 16 percent in 2004.
- BA deposit auction interest rate: reduced from 1¾ percent to ¾ percent.
- Inflation: 4 percent at end-2003; 3½ percent by end-2004 (expected).

*Source: Executive Summary, _cr0550 — IMF staff report.*

### 10.      Progress in the implementation of structural reforms has been slow in 2003–04.

### 10.      Progress in the implementation of structural reforms has been slow in 2003–04.

### Implementation of structural reforms and public debt management
- Progress in 2003–04:
  - Strengthened performance contracts for public banks.
  - Progress in modernizing the payments system.
  - Granting a third cellular telephone license and liberalizing international telephone services.
  - Privatizing a few small enterprises.
  - Modernizing part of the legislative framework in line with WTO rules, while pursuing negotiations towards Algeria’s WTO accession.
- Public debt management actions:
  - Repaid US$0.9 billion ahead of schedule to the African Development Bank and Saudi Arabia.
  - Continued discussions on early repayment of Paris Club debt.
  - Swapped DA 624 billion (10½ percent of GDP) non-tradable debt to public banks issued in the context of past bank restructuring for tradable Treasury securities covering benchmark maturities of up to 10 years.

### IMF surveillance focus and recent policy orientation
- Fund surveillance has focused on:
  - Maintaining macroeconomic stability. Staff highlighted risks associated with the fiscal stance; authorities viewed expansionary fiscal policy as having a role in reducing unemployment. Authorities adopted a prudent monetary policy helping maintain macroeconomic stability.
  - Accelerating structural reforms. Staff stressed liberalizing external trade, reforming the banking system, and accelerating other structural reforms. Authorities implemented a comprehensive tariff reform with Fund technical assistance, signed an association agreement with the European Union, and modernized their trade regime in line with WTO rules. Progress in other structural reforms, including privatization, has been slow.
  - Engaging in more active debt management. Following Fund technical assistance designing a strategy for return to international capital markets, the authorities repaid ahead of schedule 4 percent of the external debt.
- Recent government decisions:
  - Move towards a sustainable fiscal policy in line with staff advice and resume transition to a market economy.
  - The 2005 budget envisages gradual fiscal consolidation while allowing for significant capital spending and includes a direct subsidy to loss-making public enterprises to replace part of public banks’ credit.
  - In June 2004, parliament passed a five-year government program aiming at liberalizing the economy and envisaging structural reforms in financial and public enterprise sectors and the civil service.

### Key challenges and outlook for 2005 and the medium term
- Main challenges:
  - Manage hydrocarbon resources, improve growth performance, and reduce unemployment.
  - Need for sound management of large hydrocarbon resources, prudent macroeconomic policies, and interrelated structural and institutional reforms to diversify the economy and create jobs.
- 2005 outlook:
  - Algeria’s economic outlook for 2005 is favorable.
  - Real GDP growth projected to decline to 4–4½ percent, largely reflecting short-term capacity constraints on hydrocarbon output.
  - Planned fiscal consolidation and continuation of a prudent monetary policy expected to keep inflation subdued.
- Medium-term outlook (2006–09):
  - Real GDP growth projected to average 4½ percent during 2006–09, reducing unemployment to about 17 percent by 2009.
  - Oil prices projected (WEO): decline from US$42.7 per barrel in 2005 to US$34 per barrel by 2009.
  - Hydrocarbon exports expected to remain high through 2009 despite projected gradual decline in hydrocarbon prices.
  - International reserves, excluding the counterpart of the oil stabilization fund, would remain at about 16 months of import cover by 2009.
  - With envisaged fiscal consolidation, vulnerability of government finances to oil price fluctuations would be significantly reduced, and inflation is expected to remain low.

### Debt sustainability and stress scenarios
- Debt sustainability analysis findings:
  - External and public debt would remain sustainable over the medium term (Tables 7 and 8 referenced).
  - Standardized stress tests show external debt ratio could increase above 60 percent under extreme circumstances to finance high pace of reserve accumulation assumed under the baseline scenario.
  - Public debt-to-GDP ratio would decline in most circumstances; even with large shocks, the public debt ratio would decline after an initial increase.
- Adverse scenario analyzed by staff:
  - Drop in oil prices to US$19 per barrel starting in 2005 together with stalled structural reforms and low growth.
  - Under this scenario, international reserves will decline to about 10 months of imports by 2009, and the government would run fiscal deficits starting in 2005.
  - Nevertheless, external and public debt would remain sustainable.

### Alternative medium-term scenario (Box 3) — accelerated structural reforms
- Staff alternative scenario assumptions and outcomes:
  - Real nonhydrocarbon GDP growth would increase to 5½ percent from 2008.
  - Unemployment rate would drop to about 15 percent by 2009.
  - To support reforms, authorities would need some additional judicious spending; nonhydrocarbon primary deficit would decline to 24 percent in 2009, compared to 21 percent foreseen in the 2005 government budget under the baseline scenario, and inflation would be slightly higher.
- Selected projection series (2005–09) — Baseline Scenario (in percent unless otherwise stated):
  - Real nonhydrocarbon GDP growth (in percent): 2005: 4.3; 2006: 4.2; 2007: 4.3; 2008: 4.4; 2009: 4.5
  - Consumer price index (end-of-period, annual percent change): 2005: 3.6; 2006: 3.5; 2007: 3.5; 2008: 3.5; 2009: 3.5
  - Total expenditure (in percent of NHGDP): 2005: 49.1; 2006: 46.0; 2007: 43.4; 2008: 40.7; 2009: 38.2
  - Nonhydrocarbon primary balance (in percent of NHGDP): 2005: -30.4; 2006: -28.2; 2007: -25.7; 2008: -23.4; 2009: -21.2
  - Share of hydrocarbon revenue spent (in percent): 2005: 68.7; 2006: 71.0; 2007: 67.3; 2008: 66.1; 2009: 63.6
- Selected projection series (2005–09) — Alternative Scenario (in percent unless otherwise stated):
  - Real nonhydrocarbon GDP growth (in percent): 2005: 4.3; 2006: 4.5; 2007: 5.0; 2008: 5.5; 2009: 5.5
  - Consumer price index (end-of-period, annual percent change): 2005: 3.8; 2006: 4.0; 2007: 4.1; 2008: 4.1; 2009: 4.2
  - Total expenditure (in percent of NHGDP): 2005: 49.1; 2006: 46.7; 2007: 45.0; 2008: 42.3; 2009: 40.5
  - Nonhydrocarbon primary balance (in percent of NHGDP): 2005: -30.4; 2006: -29.0; 2007: -27.4; 2008: -25.2; 2009: -23.7
  - Share of hydrocarbon revenue spent (in percent): 2005: 68.7; 2006: 73.4; 2007: 73.1; 2008: 73.3; 2009: 74.5

### Management of hydrocarbon revenue (Box 4 and related recommendations)
- Objectives for hydrocarbon revenue management:
  - Diminish procyclicality of fiscal policy given hydrocarbon price volatility.
  - Avoid Dutch disease to sustain competitiveness of nonhydrocarbon tradables.
  - Ensure transparent use of hydrocarbon revenue to minimize governance problems and waste.
  - Save part of hydrocarbon wealth for future generations.
- Staff long-term fiscal framework (Box 4) — baseline assumptions:
  - Uses U.S. Geological Survey estimates of probable reserves and assumes exhaustion by 2050.
  - Assumes oil prices gradually decline to a long-term level of US$25 per barrel after 2009.
  - Assumes real NHGDP growth of 4 percent per annum and an interest rate of 5 percent.
- Under this scenario:
  - Cautious management requires limiting the hydrocarbon primary deficit to 22 percent of NHGDP on average during 2005–09; the deficit progressively declines further in the outer years and can then be financed by income from net financial wealth.
- Fiscal sustainability path projections (selected lines, 2005–09):
  - Crude oil export unit value ($/bbl): 2005: 42.7; 2006: 38.2; 2007: 36.0; 2008: 35.0; 2009: 34.0
  - Sustainable nonhydrocarbon primary balance (in percent of NHGDP): 2005: -23.4; 2006: -22.8; 2007: -22.3; 2008: -21.8; 2009: -21.2
- Recommendations on the FRR (Fonds de Regulation des Recettes):
  - Staff suggested initiating a review of the role and procedures of the FRR.
  - Recommended all hydrocarbon revenue be accumulated in the FRR, which should only be used to finance the sustainable nonhydrocarbon primary deficit and to repay public debt.
  - Recommended integrating the FRR in the budget to ensure full accountability and transparency.
  - BA should continue to manage the counterpart of the FRR; the FRR should receive the financial returns on this investment net of interest paid on public debt.
- Authorities’ response:
  - Authorities were very interested in the long-term framework and indicated they would reconsider the role of the oil stabilization fund, including transforming it into a savings/financing account.

### Fiscal policy: 2005 budget and Growth Consolidation Plan (Box 5)
- Fiscal stance shift:
  - 2005 budget aims to reduce the nonhydrocarbon primary deficit to 30.4 percent of NHGDP in 2005 from 31.8 percent in 2004.
  - 2005 budget is based on an oil price assumption of US$19 per barrel (note: fiscal projections in this report are based on WEO oil price projections but otherwise consistent with the government budget).
  - Hydrocarbon revenue in terms of NHGDP projected to decline from a peak of 47 percent in 2005 to 35 percent by 2009.
  - Capital spending expected to remain at about 19 percent of NHGDP.
  - Containing the wage bill and active debt management would reduce current spending from 32½ percent of NHGDP in 2004 to 30 percent in 2005.
- Growth Consolidation Plan (2005–09) — Box 5 highlights:
  - Capital expenditure program amounting to DA 3,800 billions (US$50 billion or 61 percent of 2004 GDP) over 2005–09.
  - Plan aims: improving public services (mainly justice), developing human capital, building public infrastructure, supporting economic activity (mainly agriculture), and expanding housing.
  - Pillars to rein in current spending:
    - Reduce the wage bill (currently at 50 percent of current spending).
    - Pursue active public debt management (early repayment and debt conversion).
    - Reduce subsidies by gradually revising administered prices on water, electricity, and hydrocarbon products.
  - Growth Consolidation Plan allocation (Total US$50 billion): Housing 25%; Economic activity 15%; Infrastructure 23%; Public services 21%; Human capital 16%.
- Staff assessment:
  - Staff commended the prudent 2005 budget; if implemented, it would put public finances on a sustainable path.
  - Medium-term fiscal projections in the 2005 government budget imply transition from the 2004 nonhydrocarbon primary deficit to a sustainable level over five years.
  - Staff urged public expenditure review in cooperation with the World Bank and stressed need for adequate social safety net measures to mitigate social costs of structural reforms.
- Tax and expenditure policy points:
  - Authorities broadly agreed on the need to reduce tax exemptions and improve tax equity given significant reduction in customs tariffs; acknowledged difficulty as bulk of exemptions benefits sensitive sectors such as agriculture.
  - Staff underscored that increased tax revenue could be used to reduce the tax wedge that deters job creation in the formal sector.
  - Containing the wage bill requires aligning real wage growth to productivity growth in the nonhydrocarbon sector and downsizing the civil service.
  - Selection of investment projects should be based on cost-benefit analyses and take into account limited absorption capacity and resulting current spending.

### Monetary and exchange rate policies
- Monetary policy objectives and program:
  - Aim to keep inflation low while allowing adequate expansion of credit.
  - Monetary authorities target broad money growth to achieve inflation objective, in context of a managed float regime and extensive capital controls.
  - BA’s monetary program aims to limit broad money growth to less than 16 percent in 2004 and 14½ percent in 2005 by controlling base money growth.
- Liquidity and Sonatrach deposits:
  - State-owned hydrocarbon company Sonatrach’s deposits fuel excess liquidity in the banking system while oil prices remain high, posing potential threat to macroeconomic stability.
  - Authorities indicated Sonatrach’s deposits carry conservative placement requirements that effectively prevent the bank from extending credit; Sonatrach has the bulk of its deposits in one public bank and surrenders 100 percent of its export proceeds to BA, which credits Sonatrach’s account with the public bank in dinars.
  - Staff recommendations:
    - Sonatrach should deposit the part of its resources not needed for operations in an interest-bearing account at BA to increase BA’s control over banking system liquidity and restore signaling role of BA interest rates.
    - BA should fully mop up any residual excess liquidity in the banking system.
    - Securitization of BA claims on the Treasury would provide an additional instrument to the deposit auctions.
- Exchange rate policy:
  - Authorities agreed to maintain the flexibility that has characterized BA’s exchange rate policy; continue managed float.
  - Exchange rate policy should align the real exchange rate with fundamental determinants: relative productivity and real oil prices.
  - Staff found no signs of current misalignment and noted REER depreciation in 2002–03 helped external competitiveness.
  - Over the medium term, high import growth is a new factor to consider when assessing appropriate exchange rate level; foreign trade liberalization tends to be associated with a tendency for real depreciation of the dinar.
  - Staff emphasized lasting gains in competitiveness require institutional and structural reforms and urged close monitoring of macroeconomic impact of fiscal consolidation as a key transmission channel of oil price fluctuations.

*Source: _cr0550 - 10.      Progress in the implementation of structural reforms has been slow in 2003–04.*

### Box 6. Equilibrium Exchange Rate

### Box 6. Equilibrium Exchange Rate

### Key findings on REER dynamics
- The REER of the Algerian dinar varied significantly during the last decade.
- The Balassa-Samuelson effect together with real oil prices explain the long-run evolution of the equilibrium REER.
- The convergence speed towards equilibrium is 9 months, similar to the findings in other commodity-exporting countries.
- There are no signs of misalignment in the current exchange rate.
- The continuous departure of the Algerian dinar rate from the stated objective was broadly consistent with the path of the estimated equilibrium exchange rate.
- The appreciation of REER since the second half of 2003 was in line with the long-run equilibrium exchange rate.

*See the selected issues paper on “The Equilibrium Real Exchange Rate in a Commodity-Exporting Country: Algeria’s Experience,” (forthcoming).*

*Source: _cr0550 - Box 6. Equilibrium Exchange Rate*

### 44.      Over the last three years, Algeria has succeeded in increasing economic growth

### Over the last three years, Algeria has succeeded in increasing economic growth while keeping inflation low, but progress in creating a market economy was slow.

### Recent macroeconomic performance and key statistics
- Growth drivers: "favorable developments in the hydrocarbon sector, the expansionary fiscal stance, and the recovery in agriculture."
- Unemployment: came down gradually from its peak in 2000 but "remains very high."
  - Unemployment rate (in percent): 2001: 27.3, 2002: 25.5, 2003: 23.7.
- Inflation:
  - Consumer price index (average): 2001: 4.2, 2002: 1.4, 2003: 2.6, 2004: 4.0, 2005: 3.7.
  - Consumer price index (end of period): 2001: 7.5, 2002: -1.5, 2003: 4.0, 2004: 3.6, 2005: 3.6.
- External position and reserves:
  - Current account balance (in percent of GDP): 2001: 12.9, 2002: 7.8, 2003: 13.3, 2004: 15.4, 2005: 16.3.
  - Gross official reserves (end-period, billions of US$): 2001: 18.0, 2002: 23.1, 2003: 32.9, 2004: 42.3, 2005: 55.4.
  - Gross official reserves (in months of imports): 2001: 18.1, 2002: 19.1, 2003: 24.3, 2004: 23.7, 2005: 28.5.
- Hydrocarbons and fiscal shares:
  - Hydrocarbon revenue (in percent of GDP, central government): 2001: 35.8, 2002: 33.7, 2003: 41.1, 2004: 43.4, 2005: 47.2.
  - Nonhydrocarbon revenue (in percent of GDP): 2001: 16.5, 2002: 19.9, 2003: 18.7, 2004: 17.4, 2005: 16.7.
- Public debt:
  - Gross government debt (in percent of GDP): 2001: 56.7, 2002: 54.5, 2003: 44.8, 2004: 37.5, 2005: 31.0.
  - External debt (in percent of GDP): 2001: 33.1, 2002: 32.5, 2003: 25.7, 2004: 20.2, 2005: 16.0.
- Other headline indicators (selected):
  - GDP (current prices, in billions of US$): 2001: 54.9, 2002: 55.9, 2003: 66.5, 2004: 82.5, 2005: 93.5.
  - Per capita GDP (in US$): 2001: 1,779; 2002: 1,783; 2003: 2,088; 2004: 2,553; 2005: 2,851.
  - Crude oil export unit value (US$/bbl): 2001: 24.8; 2002: 25.2; 2003: 29.0; 2004: 39.1; 2005: 42.7.

### Main policy challenges identified
- Two overarching challenges:
  - "(i) achieve high, sustainable growth and make a significant dent in unemployment; and (ii) manage the hydrocarbon wealth."
- To address the first challenge: "creating a business environment conducive to private investment, which is key to diversifying the economy and creating productive jobs."
- Fiscal vulnerability: need to "reduce the vulnerability of public finances to oil price fluctuations and closely coordinate fiscal and monetary policy to maintain macroeconomic stability."

### Fiscal policy assessment and recommendations
- Assessment:
  - "The fiscal consolidation envisaged in the 2005 budget is appropriate in light of the very expansionary stance of previous years."
  - "The containment of spending in 2005 is a step towards reducing fiscal vulnerability."
- Key fiscal policy recommendations:
  - "drastically reduce tax exemptions in order to broaden the tax base and remove distortions" given "the sizable ongoing reduction in customs tariffs."
  - Control public expenditure by:
    - "strict control of the wage bill and a careful selection of investment projects."
    - "Real government wage increases should not exceed productivity increases in the nonhydrocarbon sector, while the wage bill should be contained by downsizing the bloated civil service."
  - "undertake a public expenditure review" in cooperation with the World Bank to ensure a high-quality public investment program.
- Medium-term fiscal stance:
  - "would gradually reduce the nonhydrocarbon primary deficit to a sustainable level," but staff notes "the envisaged spending adjustment will not be easily accomplished."
  - Anticipates "projected decline in oil prices in 2006 and beyond," making consolidation appropriate.
  - Recommend strengthening the social safety net to mitigate social costs of planned structural reforms.

### Hydrocarbon revenue management
- Staff recommendations:
  - "set the fiscal management of hydrocarbon revenue in a long-term framework that is compatible with the sustainable spending of hydrocarbon resources."
  - "transforming the current hydrocarbon stabilization fund into a savings/financing account that is fully integrated into the budget."

### Monetary and exchange rate policy
- Monetary issues:
  - Large external surpluses and a highly liquid banking system; "large excess liquidity in the banking system would continue to carry the risks of an increase in inflationary pressures and nonperforming loans."
  - Staff recommends that "part of Sonatrach’s liquidity be deposited directly at the BA and underlines the need for the central bank to fully absorb any remaining excess liquidity."
- Exchange rate:
  - "BA’s exchange rate policy has served the economy well and currently there are no signs of misalignment."
  - Staff "encourages the authorities to continue implementing the managed float in a flexible manner."

### Structural reforms and financial sector
- Structural priorities:
  - "Market-based structural reforms need to be implemented in a decisive manner."
  - "Banking sector reform is a priority."
- Financial sector recommendations:
  - "intensify efforts aimed at putting financial relations between public banks and public enterprises on a sound footing, and to significantly strengthen banking supervision."
  - "Transferring control of several public banks to reputable foreign banks is essential to inject fresh know-how."
  - Encourage "more ambitious privatization and further reduce the tax wedge to help create jobs in the formal sector."
- Trade and customs:
  - "ongoing foreign trade liberalization is key to integrating Algeria into the world economy."
  - Staff encourages modernization of customs entry points and greater regional cooperation.

### Debt strategy and external liabilities
- Early external debt repayment:
  - "Staff recommends a more ambitious approach to early repayment of external debt."
  - "It encourages the authorities to pursue their discussions with Russia to settle bilateral debt issues."
  - "Staff also encourages Algeria to consider full participation in the enhanced HIPC initiative."
- External debt dynamics and resilience (selected figures from debt sustainability analysis):
  - External debt (in percent of GDP): 1999: 58.0; 2000: 46.4; 2001: 41.1; 2002: 40.5; 2003: 34.9; 2004: 24.7; 2005: 20.1; 2006: 17.8; 2007: 14.8; 2008: 11.9; 2009: 9.1.
  - External debt-to-exports ratio (in percent): 1999: 217.1; 2000: 112.0; 2001: 112.8; 2002: 113.2; 2003: 89.1; 2004: 58.0; 2005: 44.8; 2006: 42.2; 2007: 35.8; 2008: 30.2; 2009: 23.9.
- Stress-test scenarios summarized (labels preserved):
  - A1. "Key variables are at their historical averages in 2005–09."
  - A2. "Country-specific shock" (assumes oil prices drop to 19$ per barrel and NHGDP growth rate declines by an average of 1 percentage point per year compared to the baseline during 2005-09).
  - B1–B6. Bound tests include shocks to interest rates, growth, deflator, current account, combinations of shocks, and a one-time 30 percent nominal depreciation in 2005.

### Transparency, governance, statistics, and Fund relations
- Governance and transparency:
  - "While Algeria has made some progress in improving transparency, it remains important to vigorously address governance issues."
  - Recommended actions: "publish government documents, undertake financial audits of public enterprises and publish the results, strengthen financial disclosure by state officials, and implement the recommendations of the forthcoming fiscal ROSC report."
  - Algeria has published Article IV consultation reports since 2000.
- Statistics and Fund engagement:
  - "Staff welcomes the efforts to improve the statistical base."
  - Urges improvement in data provision on the banking sector: "data provision on the banking sector, which is inadequate."
  - "Staff recommends that Algeria subscribes to the GDDS before subscribing to the SDDS."
  - "Staff welcomes the interest of the authorities in Fund technical assistance to ensure free convertibility for international current transactions and develop the foreign exchange market."
- Fund relations and consultations:
  - "It is proposed that the next Article IV consultation with Algeria take place on the standard 12-month cycle."

*Source: IMF staff report content provided in the supplied document.*

### Conclusions were discussed with the authorities in October 2003. The Executive Board

### _cr0550 - Conclusions were discussed with the authorities in October 2003. The Executive Board

### World Bank relations (As of October 31, 2004)
- Portfolio composition:
  - 11 active operations and 62 closed loans.
  - Cumulative net commitment of $4.5 billion, of which $3.2 billion have been repaid.
  - Net commitments for the 11 current operations amount to $474 million.
- Country Assistance Strategy dated June 2003 with main goals:
  - Support reforms to accelerate growth, generate employment, and reduce poverty and vulnerability.
  - Focus areas: (i) fiscal sustainability and hydrocarbon revenue management; (ii) removing constraints to private sector-led growth; (iii) articulating and implementing a strategy for better public service delivery.
  - Tools: analytical and advisory services, institutional capacity building, demand driven lending and/or risk mitigation through structured loans, hedging products, and guarantees.
- Loan approvals by fiscal year:
  - FY00: $97m
  - FY01: $42m
  - FY02: $31m
  - FY03: $183m
  - FY04: 0
  - FY05: 0 (none in pipeline)
- Sectoral support in approved loans: telecommunications, energy and mining, transport, budget system, financial system infrastructure modernization, mortgage finance, rural employment, earthquake and flood emergency response.
- Portfolio quality and supervision:
  - Quality improved after measures to enhance supervision and close old/poorly performing operations.
  - Procurement processes are slow and require intensive supervision and institutional support.
  - Five projects scheduled to close this fiscal year; extensions may be requested conditional on meeting requirements.
- Ongoing and planned work to improve portfolio:
  - Country Portfolio Performance Review (CPPR) ongoing.
  - Country Financial Accountability Assessment scheduled in FY05.
  - IDF grant to strengthen monitoring and evaluation capacity in the Direction Générale des Relations Financières Extérieures (DGRFE) supports coordination, assessment, and monitoring and evaluation of donor-funded projects.
- Recent and ongoing analytical work:
  - Private sector assessment, investment climate note, macroeconomic strategy note, financial sector assessment report, agriculture/rural development note.
  - Work started on poverty analysis, judicial system, education, and transport.

### Algeria: Financial relations with the World Bank (financial snapshot as of October 31, 2004)
- IBRD lending operations (in millions of U.S. dollars):
  - Industrial pollution control: 36.6 (Undisbursed Balance: 14.1)
  - Rural employment: 89.0 (Undisbursed Balance: 18.1)
  - Telecommunications & postal sector: 9.0 (Undisbursed Balance: 2.9)
  - TEERP (Ain Temouchent): 83.5 (Undisbursed Balance: 26.1)
  - Budget system modernization: 23.7 (Undisbursed Balance: 22.4)
  - Energy and mining TA: 18.0 (Undisbursed Balance: 9.5)
  - Financial system infrastructure: 16.5 (Undisbursed Balance: 16.3)
  - Transport technical assistance: 8.7 (Undisbursed Balance: 7.7)
  - Mortgage finance TA: 5.5 (Undisbursed Balance: 3.0)
  - Urban natural hazard vulnerability: 88.5 (Undisbursed Balance: 84.6)
  - Second rural employment: 95.0 (Undisbursed Balance: 91.1)
  - Total active loans: 474.0 (Undisbursed Balance: 295.8)
- Repayments (as of October 31, 2004): 3,211.0
- Debt outstanding (as of October 31, 2004): 947.0
- Net lending by the World Bank (by fiscal year; fiscal years start July 1 and end June 30; data as of October 31, 2004):
  - Commitments: 0 (1999), 97 (2000), 42 (2001), 31 (2002), 183 (2003), 0 (2004), 0 (2005 5/)
  - Disbursements: 57 (1999), 69 (2000), 57 (2001), 90 (2002), 51 (2003), 51 (2004), 8 (2005 5/)
  - Debt service: 334 (1999), 317 (2000), 286 (2001), 307 (2002), 296 (2003), 270 (2004), 66 (2005 5/)
    - Principal: 204 (1999), 188 (2000), 162 (2001), 194 (2002), 201 (2003), 197 (2004), 50 (2005 5/)
    - Interest 6/: 129 (1999), 128 (2000), 124 (2001), 112 (2002), 95 (2003), 73 (2004), 16 (2005 5/)
  - Net transfer 7/: -276 (1999), -248 (2000), -229 (2001), -217 (2002), -245 (2003), -219 (2004), -58 (2005 5/)
- Notes:
  - 1/ IDA has no operations in Algeria.
  - 2/ Less cancellations, includes adjustment lending.
  - 3/ As of October 31, 2004.
  - 4/ Fiscal years start July 1 and end June 30.
  - 5/ Data as of October 31, 2004.
  - 6/ Includes charges.
  - 7/ Equal to disbursements minus debt service.

### Statistical issues and IMF data engagement
- Post-1998 deterioration in reporting:
  - Following expiration of the extended arrangement in May 1998, reporting of statistics to the Fund deteriorated in quality and timeliness between missions.
  - Causes: lack of financial resources for statistics compilation, insufficient inter-agency coordination, concerns about accuracy and reluctance to publish provisional data.
  - Risk: continued deterioration may impede adequate surveillance.
- Recommended strategy:
  - September 2002 multisector statistics mission recommended an action plan to facilitate Algeria’s eventual subscription to the Special Data Dissemination Standard (SDDS).
  - STA believes participation in the General Data Dissemination System (GDDS) is the optimal interim step.
  - GDDS would provide a framework for improving statistics, attract technical assistance, and signal seriousness about statistics improvement.
- Real sector:
  - Real sector data reported irregularly and with substantial lags.
  - Recommendation: prioritize compilation of national accounts according to 1993 SNA.
  - STA mission in March 2004 assisted National Statistical Office with development of quarterly national accounts; follow-up late November/early December 2004.
  - First quarterly data expected to be ready for publication by the end of the year.
- Government finance:
  - GFS reported for 1994–2002 limited to Budgetary Central Government (general budget, annexed budget, special treasury accounts).
  - Clarification sought on basis of recording of special treasury accounts (net versus gross).
  - No sub-annual data submitted for IFS publication.
  - September 2002 mission recommended designation of a coordinator and assignment of at least one economist for GFS compilation.
  - Suggested establishment of an automated bridge table between monthly Treasury ledger (Balance générale) and GFS table (Situation Résumée des Opérations du Trésor — SROT).
  - Changeover to an enhanced chart of accounts of the Treasury offers an opportunity to revamp GFS compilation.
  - Further recommendations:
    - (a) Show proceeds of the oil stabilization fund (FRR) as revenue (rather than financing).
    - (b) Compile more detailed breakdowns, especially for “other transfers”.
    - (c) More appropriate reporting of three large debt assumption operations over the past decade.
    - (d) Further work on financing and reconciliation with monetary statistics.
  - Meeting GDDS and SDDS standards requires substantial efforts in extending coverage (consolidating operations of social security and Wilayate, and subsequently other administrative bodies and municipalities).
- Monetary accounts:
  - Monetary data broadly adequate for policy formulation; coverage improved with consolidation of data from CNEP.
  - Reporting of balance sheet data by some commercial banks is very untimely; most commercial banks do not report complete data needed for the monetary survey.
  - Prudential data reported by banks are untimely and very unreliable.
  - September 2002 mission recommended expanding monetary survey coverage to include CNMA banking operations and enforcing reporting obligations with high penalties.
- Balance of payments:
  - September 2002 mission observations:
    - (i) Bank of Algeria’s legal authority to collect data limited to banking and financial institutions only.
    - (ii) Data sources need to be expanded via enterprise surveys in addition to exchange-based records.
    - (iii) More rigorous and uniform application of residency criterion needed.
    - (iv) Quarterly data compiled but not regularly disseminated.
    - (v) International investment position data not compiled.
  - Algeria does not report Balance of Payments data to STA; no BOP data in IFS or BOPSY.

### Core statistical indicators (As of December 1, 2004)
- Date of latest observation and related metadata summarized in the source (dates include 12/01/04, 10/31/04, 07/31/04, 08/31/04, 10/31/04, 07/31/04, 07/31/04, 06/30/04, 12/31/03, 12/31/03).
- Frequency and mode of reporting, sources, confidentiality, and frequency of publication are tabulated in the source.

### IMF Article IV consultation and Executive Board assessment (Public Information Notice No. 05/10, January 28, 2005)
- Timing:
  - Executive Board concluded the Article IV consultation on January 12, 2005.
  - Staff report and FSSA discussed earlier: FSSA (Country Report 04/138) discussed January 14, 2004; report published May 17, 2004.
- Background and recent performance:
  - Algeria adopted a four-year fiscal stimulus plan in 2001 amid low growth and high unemployment and buoyant hydrocarbon revenue.
  - Real GDP growth recovered from slowdown in 2000.
  - 2004 performance: Real GDP growth expected to decrease to about 5½ percent in 2004 from 7 percent in 2003 due to slowdown in hydrocarbon output expansion and in agriculture after 2003 bumper crop.
  - Unemployment rate expected to continue to decline.
  - External position strengthened with rise in oil prices.
  - Gross external reserves increased to US$37.3 billion by end-September, covering almost two years of imports.
  - Early debt repayment of about US$900 million to the African Development Bank and Saudi Arabia.
  - External debt-to-GDP ratio projected to decline from 35 percent in 2003 to 25 percent in 2004.
- Fiscal and monetary developments:
  - Fiscal stimulus persisted in 2004.
  - Primary nonhydrocarbon budget deficit expected to increase from 29½ percent of nonhydrocarbon GDP in 2003 to almost 32 percent in 2004.
  - Higher oil prices expected to allow for an overall stronger fiscal position.
  - Monetary developments: significant rise in central bank liquidity absorption amid substantial increase in net foreign assets.
  - Broad money growth expected to be contained to about 16 percent in 2004; inflation expected to remain below 4 percent.
- Structural reforms and policy stance:
  - Some progress in banking reform and trade liberalization: strengthened public banks’ performance contracts, payment system modernization, partial legislative revisions in line with WTO rules, continued WTO accession negotiations.
  - 2005 budget signals a turning point: control of public expenditure outlined to reduce nonhydrocarbon primary deficit gradually over the medium term.
- Executive Board assessment — main messages and recommendations:
  - Commendation of strong macroeconomic performance: higher growth, low inflation, rapidly growing international reserves; unemployment has declined but remains very high.
  - Directors urged seizing opportunity of favorable climate and improved security to:
    - Consolidate macroeconomic stability.
    - Sustain high economic growth.
    - Significantly reduce unemployment.
  - Key challenges: accelerate transition to market economy, diversify growth sources, establish sound framework for hydrocarbon wealth management.
  - Emphasis on accelerating structural reforms: strengthen financial sector, create business environment conducive to private investment, increase competitiveness and resilience.
  - Fiscal policy and hydrocarbon wealth:
    - Need to balance investing hydrocarbon revenues in physical and human capital and saving for future generations.
    - Support for transforming the hydrocarbon stabilization fund into a savings/financing account fully integrated into the budget (supported by many Directors).
    - Commendation of prudent medium-term fiscal policy in the 2005 budget; containment of spending in 2005 seen as first step to reduce fiscal vulnerability.
    - Priority capital and social spending should be protected; careful selection and management of public investment projects recommended to reduce waste and enhance transparency.
    - Authorities’ readiness to conduct a public expenditure review with the World Bank welcomed.
    - Support for developing an adequate social safety net and for increasing non-hydrocarbons revenue through strengthening tax administration and broadening the tax base.
  - Monetary and exchange rate policy:
    - Support for monetary policy focus on maintaining low inflation.
    - Concern about high excess liquidity’s impact on macro stability and financial soundness; recommendation to deal with hydrocarbon company deposits outside the money market and mop-up residual excess liquidity.
    - Managed float continues to serve well; support for Bank of Algeria’s commitment to flexible managed float and request for Fund technical assistance to improve exchange system and develop foreign exchange market to reduce official-parallel exchange rate spread.
  - Banking sector and financial stability:
    - Priority to develop an efficient and sound banking system.
    - Concern about banks’ exposure to loss-making state-owned enterprises; welcome for tighter control of public bank managers and inclusion of subsidies in 2005 budget to replace some loans to loss-making enterprises (subsidies should be temporary and within a public enterprise restructuring program).
    - Call for implementation of recommendations from the 2003 Financial System Stability Assessment.
    - Urge to reverse decree prohibiting public entities from dealing with private banks, move ahead with privatization of some public banks, and significantly strengthen bank supervision.
    - Welcome for establishment of a Financial Intelligence Unit and encouragement to implement legislation to combat money laundering and terrorism financing.
  - Trade, privatization, governance, and debt:
    - Commendation of progress in trade liberalization and commitment to reform trade ahead of WTO accession; welcome for comprehensive tariff reform since 2001 and expectation of early ratification of EU Association Agreement.
    - Encourage improvement of customs administration to combat corruption and smuggling and strengthen regional cooperation.
    - Urge more rapid and extensive privatization of state-owned enterprises; caution against making privatization conditional on maintenance of jobs/activity and recommendation to replace such conditions with social safety net measures.
    - Encourage clearer privatization strategy to signal private investors.
    - Continue efforts to improve governance and fiscal transparency; welcome draft organic public finance law and urge implementation of recommendations of the 2004 Fiscal ROSC.
    - Welcome active debt management and look forward to early resolution of bilateral debt issues with Russia; some Directors see room for a more ambitious approach to pre-payment of external debt given high foreign reserves.
    - Encourage Algeria to participate fully in the enhanced HIPC Initiative despite case-by-case debt relief decisions.
  - Statistics:
    - Welcome for efforts to address statistical weaknesses.
    - Urged strengthening of data coverage, quality, and timeliness, particularly banking sector data.
    - Encouragement to join GDDS with a view to subsequently subscribing to SDDS.

### Selected economic indicators (selected entries from the report)
- Real GDP (annual percentage change): 2000: 2.2; 2001: 2.6; 2002: 4.0; 2003: 6.9; 2004 Est.: 5.5
- GDP deflator entries shown in the source: 23.5, 0.8, 1.0, 8.1, 9.4 (formatted as in source)
- Consumer price index (average): 2000: 0.3; 2001: 4.2; 2002: 1.4; 2003: 2.6; 2004 Est.: 4.0
- Gross national savings (percent of GDP): 2000: 41.4; 2001: 39.9; 2002: 38.3; 2003: 42.9; 2004 Est.: 45.2
- Gross national investment (percent of GDP): 2000: 24.6; 2001: 27.0; 2002: 30.5; 2003: 29.6; 2004 Est.: 29.7
- External sector (in billions of US dollars):
  - Exports, f.o.b.: 2000: 21.7; 2001: 19.1; 2002: 18.7; 2003: 24.5; 2004 Est.: 33.3
  - Imports, f.o.b.: 2000: 9.3; 2001: 9.5; 2002: 12.0; 2003: 13.3; 2004 Est.: 17.6
- Current account (percent of GDP): 2000: 16.8; 2001: 12.9; 2002: 7.8; 2003: 13.3; 2004 Est.: 15.4
- Gross official reserves (in billions): 2000: 11.9; 2001: 18.0; 2002: 23.1; 2003: 32.9; 2004 Est.: 42.3
- Gross official reserves (in months of imports): 2000: 0.0; 2001: 18.1; 2002: 19.1; 2003: 24.3; 2004 Est.: 23.7
- External debt (percent of GDP): 2000: 46.4; 2001: 41.1; 2002: 40.5; 2003: 34.9; 2004 Est.: 24.7
- Debt service ratio (percent of exports): 2000: 20.3; 2001: 22.8; 2002: 22.6; 2003: 17.9; 2004 Est.: 16.1
- Central government finance (percent of GDP):
  - Total revenue: 2000: 38.5; 2001: 34.9; 2002: 36.0; 2003: 38.2; 2004 Est.: 37.1
  - Total expenditure and net lending: 2000: 28.8; 2001: 31.5; 2002: 35.8; 2003: 33.1; 2004 Est.: 31.8
  - Overall budget balance (deficit-): 2000: 9.7; 2001: 3.4; 2002: 0.2; 2003: 5.1; 2004 Est.: 5.3
- Money and credit (annual percentage change, unless otherwise indicated):
  - Net foreign assets: 2000: 33.9; 2001: 26.4; 2002: 18.0; 2003: 20.2; 2004 Est.: 20.1
  - Domestic credit: 2000: -18.3; 2001: -1.1; 2002: 8.0; 2003: -1.4; 2004 Est.: -7.2
  - Credit to the government (net): 2000: -9.5; 2001: -5.3; 2002: 0.4; 2003: -5.3; 2004 Est.: -9.7
  - Credit to the economy: 2000: -8.8; 2001: 4.2; 2002: 7.6; 2003: 3.9; 2004 Est.: 2.5
  - Broad money: 2000: 13.2; 2001: 22.2; 2002: 17.4; 2003: 15.6; 2004 Est.: 15.8
  - Interest rate (central bank rediscount rate, in percent) 2/: 2000: 6.0; 2001: 6.0; 2002: 5.5; 2003: 4.5; 2004 Est.: 4.0
- Sources: Algerian authorities; and IMF Staff estimates and projections. (For 2004, as of August.)

*Conclusions were discussed with the authorities in October 2003. The Executive Board discussed the FSSA (Country Report 04/138) on January 14, 2004. The report was published on May 17, 2004.*

### 1. My Algerian authorities thank staff for their well-focused report and informative

### 1. My Algerian authorities thank staff for their well-focused report and informative

### Authorities’ overall assessment and intentions
- Authorities welcome the report and Selected Issues paper, the high-quality technical assistance, policy dialogue, and the Board’s and staff views supporting continued stabilization and reforms.
- They highlight significant achievements over the past decade: attaining macroeconomic stability, considerably improving the institutional environment, improved security conditions, and increased political stability, particularly following the April 2004 Presidential Elections.
- Authorities are cognizant of challenges to attain sustained high private sector-led growth to permanently reduce unemployment and improve social welfare.
- They are determined to use favorable conditions to press ahead with the remaining reform agenda as indicated in their medium-term economic program.

### Macroeconomic performance (2004 and ERP period)
- Growth: achievement of 5.5 percent growth on average over the three-year period of the Economic Recovery Plan (ERP).
- Per capita gain: over 3 percent per year.
- Unemployment: described as "still high" but declined (no numeric value provided).
- Inflation: 4 percent.
- External position: current account recording a surplus of 15 percent of GDP; international reserves reached a record level.
- External debt: external debt-to-GDP ratio reached 24.7 percent from 34.9 percent at end-December 2003.
- Debt service: debt-service ratio decreased to 16.1 percent.

### Fiscal stance, public expenditure, and fiscal outcomes
- Supportive fiscal stance under the ERP benefited capital expenditure, including rehabilitation and reconstruction related to terrorism and natural disasters.
- Current spending: declined by 2 percent in 2004 in nominal terms and dropped to below 20 percent of GDP from 23.3 percent in 2003.
- Total expenditures: expected to decline by 2.5 percentage points to 31.6 percent of GDP in 2004.
- Fiscal balance: allowing a sizeable fiscal surplus of over 5 percent of GDP.
- Authorities view the fiscal stance as helpful in achieving ERP goals and note inflation is under control.

### Monetary policy, liquidity management, and banking liquidity metrics
- Monetary policy geared towards containing inflation.
- Major source of monetary expansion: sizable increase in net foreign assets.
- Broad money: will be contained at 16 percent in 2004.
- Credit: moderate growth in credit to the economy expected, with further decline in net credit to the Government and sterilization of part of hydrocarbon revenues.
- Central Bank (BA) measures: increased amounts of deposit auctions significantly; decided to mop up all excess liquidity; substantial increase in reserve requirements at end-2002 contributed to liquidity control; 2004 regulatory adjustments allowed increased flexibility.
- BA stands ready to take additional measures if necessary.

### Exchange rate policy and external sector actions
- Exchange rate policy: continues to serve the economy well; commitment to a flexible exchange rate policy.
- Spread: present spread between official and parallel exchange rate attributed by authorities to informal import activities and tax evasion.
- Policy actions: integrate informal sector, improve tax and customs administration, further liberalize economy, and join the World Trade Organization (WTO).
- Technical assistance: requested from the Fund to improve payments and exchange rate systems with safeguards against undue capital outflows; mission requested to investigate causes of the spread and recommend further policy actions.

### Trade policy, WTO accession, and tariff reform
- WTO accession negotiations at an advanced stage.
- Legislative modernization: revision of the Code of Commerce; earlier issuance of new legislation on international trade, free trade zones, protection of intellectual property rights, and competition.
- Association Agreement with the European Union: high-level, multi-sectoral permanent committee established end-December 2004 to report monthly to the Government; ratification expected in the near future.
- Tariff reform: customs tax eliminated; temporary additional duty tax reduced further to 12 percent as of January 1, 2005, to be eliminated on January 1, 2006.

### Fiscal administration, budget process, and public finance reforms
- Tax administration modernization benefiting from Fund technical assistance.
- Progress in operationalization of the Large Taxpayer Unit and establishment of tax units for small- and medium-sized enterprises.
- Ministry of Finance reorganization underway, including creation of a department for the design of fiscal policy.
- Budgetary modernization: work progressing with World Bank assistance.
- Draft organic law governing public finances in preparation with Fund technical assistance (in line with fiscal ROSC recommendations).

### Privatization and public enterprise reform
- Privatization continued: divestiture of 50 small- and medium-sized enterprises in 2004.
- Privatizations finalized: large sugar processing enterprise; remaining state-owned stake in the partially privatized detergent company divested to foreign partner.
- Government announced that all but a limited number of public enterprises (e.g., Sonatrach and Sonelgaz) are eligible for privatization.
- Negotiations and investor discussions ongoing for further privatizations.

### Financial sector reform, supervision, and AML/CFT
- FSAP-based strategy being articulated, including privatization of a number of public banks.
- Ministry of Finance tightened control on public banks through strengthened performance contracts.
- Modernization in progress: payment system, information and accounting systems to improve data quality and timeliness and facilitate banking supervision by BA with Fund technical assistance.
- Recent banking issues: fraudulent bankruptcy of two private banks caused large losses of public entities’ deposits; Government temporarily prohibited public units from dealing with private banks while supervision is being strengthened.
- Comprehensive on-site inspections conducted to evaluate public banks’ loan portfolios; inspection reports finalized and submitted to the Banking Commission (delay in providing staff with requested information explained).
- Efficiency measures: replace quasi-fiscal activities with direct budget support; 2005 Budget provides appropriations in this regard; Ministry of Finance assessing additional needs.
- AML/CFT: progress with recent Parliament approval of comprehensive law.

### Medium-term strategy, fiscal sustainability, and hydrocarbon revenue management
- Maintaining macroeconomic stability is centerpiece of medium-term strategy; ensuring medium-term fiscal and debt sustainability is key.
- Fiscal program 2005-2009 envisages progressive reduction in the ratio of the nonhydrocarbon primary deficit to nonhydrocarbon GDP.
- Measures to reduce current and capital expenditures in GDP terms: wage containment, civil service reform, and further rationalization of capital expenditure through careful project selection and monitoring.
- Authorities request World Bank assistance for a Public Expenditure Review, priority sectors: water, public works, health, and education.
- Social spending to be preserved; safety net may need expansion as structural reforms accelerate.
- Fiscal strategy should allow sizeable fiscal surpluses to be accumulated in the stabilization fund.
- Staff paper on fiscal management of hydrocarbon revenues provides guidelines, underscores importance of intergenerational equity; authorities view intergenerational equity as not limited to financial savings alone and note early debt repayment reduces fiscal burden for future generations.

### Debt management, HIPC, and international cooperation
- Authorities considering proposals for further early debt repayments to bilateral and multilateral creditors.
- Authorities reiterate strong support for the enhanced HIPC Initiative and are considering further support to HIPCs.
- Note: a major portion of outstanding debt to Algeria consists of arrears on debt in kind; authorities willing to examine the issue with the Fund.

### Implementation, communication, and transparency
- Authorities resolved to complete implementation of remaining structural and institutional reform agenda in the medium term; implementation already underway in fiscal area, public enterprise restructuring and privatization, financial sector, judiciary, health, and education.
- Efforts to build public support through enhanced communication and consultation.
- Authorities consent to publication of the staff report, the Selected Issues paper, and the fiscal ROSC paper.

*Source: _cr0550 - 1. My Algerian authorities thank staff for their well-focused report and informative*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr0550.pdf_