## _cr0693

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### Executive summary — growth, external position, and labor market
- Real GDP growth moderated to about 5 percent in 2004–05; real per capita GDP increased considerably.
- Real GDP growth:
  - Moderated to about 5¼ percent in 2004 from 7 percent in 2003.
  - Projected to continue at about 5⅓ percent in 2005.
- External position strengthened:
  - External current account surplus remained at 13 percent of GDP in 2004.
  - External current account surplus expected to increase to 18⅓ percent of GDP in 2005.
  - Gross external reserves grew by US$20 billion since end-2003 to reach US$53 billion at end-September 2005 (more than 1½ years of import cover).
  - External debt-to-GDP ratio expected to decline from 26 percent in 2004 to 16½ percent in 2005 after early debt repayment of US$1.1 billion.
- Labor market:
  - Unemployment rate declined to 15.3 percent in 2005.
  - Youth unemployment remained very high at 31 percent.
- Inflation:
  - Consumer prices fell by some 1½ percent (year-on-year) in October 2005.
  - Annual nonfood-CPI inflation remained above 3 percent through October 2005.

### Fiscal policy, public investment, and hydrocarbon revenue management
- Growth Consolidation Plan (GCP) and public investment:
  - GCP launched for 2005–09 initially US$50 billion; revised in June 2005 to US$57 billion (55 percent of 2005 GDP) with considerable frontloading.
  - Economy Recovery Program (public investment program covering 2001–04) amounted to about US$7 billion (almost 13 percent of 2001 GDP).
  - Public investment program for 2005–09 comprises the GCP plus US$16 billion representing other projects; total public investment program amounts to US$74 billion (72 percent of 2005 GDP).
  - Draft 2006 budget law programs government investment in 2006 to double compared to its 2004 level.
- Fiscal outcomes and projections:
  - Nonhydrocarbon primary deficit widening from 28 percent of NHGDP in 2004 to 31½ percent in 2005.
  - Nonhydrocarbon primary deficit projected to increase from 31½ percent of NHGDP in 2005 to 36½ percent in 2006; thereafter decline to about 26½ percent by 2010.
  - Overall budget surplus expected to remain above 10 percent of GDP over the period.
  - Annual hydrocarbon exports projected to average US$57 billion through 2010.
  - Gross external reserves forecast at above two years of import cover from 2006.
  - Gross external debt projected to fall below 5 percent of GDP by 2010.
- Hydrocarbon revenue management recommendations:
  - Replace the present oil stabilization fund with a savings/financing account fully integrated into the budget.
  - Set fiscal policy within a long-term framework and use part of fiscal space to support priority structural reforms.
  - Authorities plan to reconsider the role of the FRR, including transforming it into a savings/financing account fully integrated into the budget to finance the sustainable nonhydrocarbon primary deficit and to repay public debt, including prepayments.

### Monetary policy, liquidity management, and banking-sector fragility
- Monetary policy actions (exact measures and timing):
  - Increased deposit auctions in 2004 and early 2005.
  - Raised policy interest rate from ¾ percent in 2004 to 1¼ percent in July 2005.
  - Extended maturities of deposit auctions from one week to three months in July 2005.
  - Introduced a 24-hour deposit facility in September 2005.
- Monetary outcomes and targets:
  - BA was able to mop up most excess bank liquidity.
  - Annual broad money growth continued at about 12 percent through September 2005.
  - BA’s monetary program target: limit broad money growth to 16½ percent in 2006 by controlling base money growth.
  - Staff recommended tightening monetary policy by bringing the BA’s policy interest rate to a positive level in real terms.
  - Board recommendation: consider tightening monetary stance by raising BA policy interest rate to a positive level in real terms; strengthen BA control over base money; deposit large structural liquidity of Sonatrach directly at BA.
- Banking sector fragility and nonperforming loans (selected exact figures):
  - Public banks aggregate nonperforming loan ratio: 40 percent at end-2004.
  - Private banks nonperforming loans: 4 percent of total loans at end-2004.
  - Treasury bailouts of public banks averaged about 4 percent of GDP per year between 1991 and 2002.
  - Ministry of Finance estimated public banks’ NPLs to insolvent or dissolved public enterprises at approximately DA 290 billion (or almost 4 percent of GDP) at end-June 2005.
  - BA audit: nonperforming loans to the private sector represented 33 percent of their total loans to the private sector at end-2003 (five of six public banks).
- Financial soundness indicators (selected exact figures):
  - Regulatory equity (percent of risk-weighted assets): 2003 = 10.1; 2004 = 10.4.
  - Public banks regulatory equity: 2003 = 9.3; 2004 = 9.5.
  - Private banks regulatory equity: 2003 = 19.5; 2004 = 21.2.
  - Nonperforming loans (percent of total loans): 2003 = 37.1; 2004 = 37.4.
  - Public banks nonperforming loans (percent of total loans): 2003 = 40.7; 2004 = 40.5.
  - Private banks nonperforming loans (percent of total loans): 2003 = 3.2; 2004 = 4.2.
  - Nonperforming loans (percent of equity): 2003 = 323.8; 2004 = 297.6.
  - Provisioning (percent of nonperforming loans): 2003 = 43.1; 2004 = 44.6.
  - Average return on assets (percent): 2003 = 0.4; 2004 = 0.4.
  - Private banks average return on equity: 2003 = 16.7; 2004 = 23.6.
  - Liquid assets (percent of total assets): 2003 = 10.8; 2004 = 10.0.

### Structural reforms, trade liberalization, and the AAEU
- Association Agreement with the European Union (AAEU):
  - AAEU became effective on September 1, 2005.
  - Agreement provides a major impetus toward an open trade regime over the next 12 years.
  - Potential benefits: welfare gains, increased FDI, technology transfer, higher productivity and growth.
  - Potential costs: limited fiscal revenue impact, trade diversion, transitional unemployment, enterprise restructuring/closure.
  - To maximize benefits, recommended policy actions: (a) maintaining sound macroeconomic policies; (b) undertaking deep structural reforms to diversify the economy; (c) liberalizing trade more generally.
- Financial-sector and banking reform priorities:
  - Successfully privatize the first of three designated public banks; issue the call for bids as soon as possible.
  - Prepare for privatization of the other two public banks.
  - Strengthen performance contracts and shareholder oversight; require loans only to solvent clients and publish contracts with ex-post assessments.
  - Establish a code of conduct for financial relations between public banks and public enterprises.
  - Promote competition: replace directive prohibiting public entities from dealing with private banks with a directive instructing these entities to deal solely with sound banks.
  - Avoid discretionary interest subsidies or measures to increase credit to the economy.
- Other structural reforms:
  - WTO accession negotiations entering final stages.
  - New hydrocarbon law adopted to further liberalize investment; measures include elimination of obligation for foreign investors to partner with Sonatrach and liberalization of downstream activities.
  - Progress in modernizing payments system: Real Time Gross Settlement system expected effective as of January 1, 2006.
  - Anti-corruption law submitted to parliament; parliamentary approval of the anti-corruption law occurred on January 24, 2006.

### Risks, absorptive capacity, and public investment implementation
- Key risks and challenges:
  - Managing large hydrocarbon-related inflows to avoid overheating and preserve competitiveness.
  - Ensuring efficient and absorptive public investment given limited absorption capacity.
  - Accelerating banking sector reform to address high nonperforming loans and weak risk management in state-owned banks.
  - Improving business climate to diversify exports and raise private-sector-led job creation.
  - Implementing exchange system improvements to reduce parallel market distortions and ensure full current convertibility of the dinar.
- Public investment implementation guidance:
  - Staff recommended more even implementation of the investment program given limited absorption capacity and the need for high quality spending; take into account World Bank public expenditure review recommendations.
  - Authorities explained front-loading of program authorizations as assurance of resource availability; annual appropriations to be allocated with attention to project selection, monitoring, macroeconomic implications, and absorptive capacity.

### Data, statistics, and technical assistance
- Statistical weaknesses and improvements:
  - Serious weaknesses remain in government finance statistics, prudential financial sector data, and timeliness.
  - Example: 2003 nonhydrocarbon overall deficit presently estimated at 27.7 percent of NHGDP compared to 33.1 percent in IMF Country Report No. 05/50.
  - In a letter dated February 6, 2006, the authorities announced Algeria’s participation in the General Data Dissemination System (GDDS).
  - Staff recommended Algeria participate in the GDDS and implement STA mission recommendations (move to 1993 SNA, improve quarterly national accounts).
- Fund technical assistance:
  - Ongoing and near-term TA in bank restructuring, banking supervision, tax administration, monetary policy, and statistics.
  - Fund staff liaised with a World Bank public expenditure review mission and helped organize a conference on trade facilitation in the Maghreb in November 2005.

### Key projections, selected indicators, and scenarios (selected exact values preserved)
- National income and prices (selected annual percent changes, 2002–10) — GDP at constant prices: 4.7, 6.9, 5.2, 5.3, 4.7, 5.1, 4.9, 4.8, 4.8 (2002–10)
- External sector (selected levels and ratios, 2002–10) — Current account balance (percent of GDP): 7.6, 13.0, 13.1, 18.3, 19.7, 16.8, 12.8, 9.9, 6.8 (2002–10)
- Fiscal sector (selected ratios, 2002–10) — Overall budget balance (deficit -) as percent of GDP: 0.2, 7.8, 6.9, 12.6, 14.1, 14.0, 13.8, 13.6, 12.4 (2002–10)
- Monetary and banking (selected levels and ratios, 2002–06) — Money and quasi-money (M2) annual percent change: 17.4, 15.6, 11.5, 13.4, 16.5 (2002–06)
- Short- and medium-term scenario stress test highlight:
  - Under a scenario of oil prices dropping to US$19 per barrel starting in 2006 with no policy changes, international reserves would decline and the government would run budget deficits starting in 2006; nevertheless, external and public debt would remain sustainable given Algeria’s strong financial position.

### Staff appraisal — prioritized policy recommendations
- Coordinate fiscal and monetary policies to maintain macroeconomic stability when managing hydrocarbon-related inflows.
- Implement a more even pacing of public investment to avoid jeopardizing quality and raising inflation; heed public expenditure review recommendations.
- Use part of fiscal space to accelerate market-based reforms and adopt a wage policy the economy can support; real public sector wage increases should not exceed real growth in the nonhydrocarbon sector.
- Allocate resources to support banking and enterprise reforms, including social mitigation measures.
- Transform current hydrocarbon stabilization fund into a savings/financing account fully integrated into the budget with medium-term projections.
- Tighten monetary policy by strengthening BA’s control over system liquidity and increasing BA’s policy interest rate to a positive level in real terms.
- Continue gradual nominal appreciation of the dinar to help keep inflation under control.
- Implement Fund technical assistance recommendations to ensure free convertibility for international current transactions without delay.
- Step up efforts to improve the statistical base and participate in the GDDS; continue prepayment of external debt and seek settlement of bilateral debt issues with Russia.

*Source: IMF staff report excerpt as provided in the source content.*

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

### Executive Summary

### Background
- Real GDP growth moderated to about 5 percent in 2004–05, mainly due to a slowdown in agriculture following the 2003 bumper crop.  
- Real per capita GDP increased considerably; unemployment declined, though youth unemployment remains very high.  
- High world oil prices and expanding oil output strengthened the external position.  
- Monetary policy remained prudent with the Bank of Algeria (BA) mopping up most excess liquidity; credit to the economy accelerated while nonperforming loans remained high.  
- Progress in structural reforms was achieved mainly in external trade and energy sector liberalization; however, many reforms lagged, and the economy still relies heavily on the state (state-owned banks account for 90 percent of banking system assets; some 1,200 public entities remain).  
- The Economy Recovery Program (public investment program covering 2001–04) supplemented the budget and amounted to about US$7 billion (almost 13 percent of 2001 GDP).  

### Recent Economic Developments
- Real GDP growth:
  - Moderated to about 5¼ percent in 2004 from 7 percent in 2003.
  - Projected to continue at about 5⅓ percent in 2005, led by increased hydrocarbon output and sustained construction and services activity.  
- Sectoral developments:
  - Agricultural output slowed after the 2003 bumper crop; industrial output depressed by inefficient public enterprises.  
- Labor market:
  - Unemployment rate declined to 15.3 percent in 2005.
  - Youth unemployment remained very high at 31 percent.  
- Inflation:
  - Consumer prices fell by some 1½ percent (year-on-year) in October 2005, mainly owing to a drop in food prices.
  - Annual nonfood-CPI inflation remained above 3 percent through October 2005.  
- External position:
  - External current account surplus remained at 13 percent of GDP in 2004.
  - External current account surplus expected to increase to 18⅓ percent of GDP in 2005.
  - Gross external reserves grew by US$20 billion since end-2003 to reach US$53 billion at end-September 2005 (more than 1½ years of import cover).
  - External debt-to-GDP ratio expected to decline from 26 percent in 2004 to 16½ percent in 2005 after early debt repayment of US$1.1 billion.  
- Exchange rates and convertibility:
  - The nominal effective exchange rate appreciated during the first eight months of 2005 following a real effective exchange rate depreciation of some 10 percent in the last quarter of 2004.
  - The spread between the illegal parallel market and the official exchange rates remained large at about 20 percent, partly reflecting problems in the implementation of the free current convertibility of the dinar.  
- Fiscal policy and public investment:
  - The Growth Consolidation Plan (GCP), launched for 2005–09, amounted initially to US$50 billion and was revised in June 2005 to US$57 billion (55 percent of 2005 GDP) with considerable frontloading.
  - Government spending in 2005 expected to increase by 4 percentage points of nonhydrocarbon GDP (NHGDP).
  - Nonhydrocarbon primary deficit widening from 28 percent of NHGDP in 2004 to 31½ percent in 2005.
  - Higher hydrocarbon revenue would almost double the overall budget surplus.

### Policy Discussions
- Main focus: sustaining growth and reducing unemployment amid large hydrocarbon revenues and increasing openness.
- Fiscal policy and public investment:
  - The draft 2006 budget envisages a considerable increase in public investment.
  - Staff recommended more even implementation of the investment program given limited absorption capacity and the need for high quality spending, taking into account the World Bank public expenditure review.
  - Authorities agreed on the need for a wage policy that preserves competitiveness.
  - Staff emphasized using part of the fiscal space to support priority structural reforms.  
- Hydrocarbon revenue management:
  - Authorities were interested in staff advice to formulate fiscal policy within a long-term framework.
  - Staff recommended replacing the present oil stabilization fund with a savings/financing account fully integrated into the budget.  
- Monetary and exchange rate policy:
  - In light of envisaged fiscal expansion, staff recommended tightening monetary policy by bringing the BA’s policy interest rate to a positive level in real terms to keep inflation under control.
  - Authorities intend to pursue a policy of gradual appreciation of the real effective exchange rate.  
- Structural reforms and private sector development:
  - Opening of the Algerian economy increases the need to step up priority reforms to encourage private investment and create jobs.
  - Required measures include accelerated banking reform, further external trade liberalization, ensuring free current convertibility of the dinar, improving the business climate, and public enterprise restructuring/privatization.
- Fund engagement:
  - Fund surveillance has focused on sound management of hydrocarbon wealth and structural reforms, notably in the banking sector.
  - Technical assistance provided in banking reform, banking supervision, tax administration, statistics; Fund staff liaised with a World Bank public expenditure review mission and helped organize a conference on trade facilitation in the Maghreb in November 2005.

### Key Risks and Challenges
- Managing large hydrocarbon-related inflows to avoid overheating and preserve competitiveness.
- Ensuring efficient and absorptive public investment given limited absorption capacity.
- Accelerating banking sector reform to address high nonperforming loans and weak risk management in state-owned banks.
- Improving business climate to diversify exports and raise private-sector-led job creation.
- Implementing exchange system improvements to reduce parallel market distortions and ensure full current convertibility of the dinar.

*Source: Executive Summary, IMF Country Report (selected sections provided).*

### 10.      Monetary policy remained prudent, in line with the authorities’ objective to keep

### 10.      Monetary policy remained prudent, in line with the authorities’ objective to keep

### Monetary policy actions and outcomes
- Central bank measures to absorb rapidly increasing liquidity:
  - Increased the amount of deposit auctions in 2004 and early 2005.
  - Raised its policy interest rate from ¾ percent in 2004 to 1¼ percent in July 2005 (however, this rate remained negative in real terms relative to nonfood inflation).
  - Extended maturities of a large portion of deposit auctions from one week to three months in July 2005.
  - Introduced a 24-hour deposit facility in September 2005.
- Resulting outcomes:
  - BA was able to mop up most excess bank liquidity (Figure 9 and Tables 4–6).
  - Annual broad money growth continued at about 12 percent through September 2005.
  - Credit to the economy accelerated in the first part of 2005, while nonperforming loans remained high (see Box 2).
- BA’s monetary program target:
  - Limit broad money growth to 16½ percent in 2006 by controlling base money growth.

### Banking sector fragility and nonperforming loans (Box 2)
- Concentration and levels of nonperforming loans:
  - Public banks had an aggregate nonperforming loan ratio of 40 percent at end-2004.
  - Private banks’ nonperforming loans stood at 4 percent of total loans at end-2004.
- Historical fiscal support and estimates:
  - Between 1991 and 2002, Treasury bailouts of public banks averaged about 4 percent of GDP per year.
  - Ministry of Finance estimated public banks’ nonperforming loans to insolvent or dissolved public enterprises at approximately DA 290 billion (or almost 4 percent of GDP) at end-June 2005.
- Recent developments and audit findings:
  - BA audit of five (out of six) public banks found nonperforming loans to the private sector represented 33 percent of their total loans to the private sector at end-2003.
  - Main driver: continued provision of credit to large loss-making public enterprises and weak risk assessment capacity amid abundant liquidity.
- Financial soundness indicators (selected exact figures from Algeria. Financial Soundness Indicators):
  - Regulatory equity (in percent of risk-weighted assets): 2003 = 10.1; 2004 = 10.4.
  - Public banks regulatory equity: 2003 = 9.3; 2004 = 9.5.
  - Private banks regulatory equity: 2003 = 19.5; 2004 = 21.2.
  - Nonperforming loans (in percent of total loans): 2003 = 37.1; 2004 = 37.4.
  - Public banks nonperforming loans (in percent of total loans): 2003 = 40.7; 2004 = 40.5.
  - Private banks nonperforming loans (in percent of total loans): 2003 = 3.2; 2004 = 4.2.
  - Nonperforming loans (in percent of equity): 2003 = 323.8; 2004 = 297.6.
  - Public banks nonperforming loans (in percent of equity): 2003 = 378.7; 2004 = 353.6.
  - Private banks nonperforming loans (in percent of equity): 2003 = 17.3; 2004 = 17.3.
  - Provisioning (in percent of nonperforming loans): 2003 = 43.1; 2004 = 44.6.
  - Public banks provisioning (in percent of nonperforming loans): 2003 = 42.1; 2004 = 44.6.
  - Private banks provisioning (in percent of nonperforming loans): 2003 = 86.1; 2004 = 73.2.
  - Average return on assets (in percent): 2003 = 0.4; 2004 = 0.4.
  - Public banks average return on assets: 2003 = 0.3; 2004 = 0.2.
  - Private banks average return on assets: 2003 = 1.2; 2004 = 1.7.
  - Average return on equity: 2003 = 6.4; 2004 = 6.2.
  - Public banks average return on equity: 2003 = 5.3; 2004 = 3.9.
  - Private banks average return on equity: 2003 = 16.7; 2004 = 23.6.
  - Liquid assets (in percent of total assets): 2003 = 10.8; 2004 = 10.0.
  - Source: Bank of Algeria.

### Structural reforms and institutional actions
- Actions in line with 2003 FSSA recommendations:
  - Strengthened performance contracts of public bank managers and shareholder oversight.
  - Retained an investment advisor for the sale of the first of three public banks designated for privatization.
  - Made progress in modernizing the payments system; Real Time Gross Settlement system expected to be effective as of January 1, 2006.
  - Banking Commission instructed all public banks to submit external audits of their end-2004 financial accounts by end-2005.
- Other 2005 reforms:
  - Association Agreement with the European Union (AAEU) became effective as of September 2005.
  - WTO negotiations entering final stages.
  - New hydrocarbon law adopted to further liberalize investment in the sector (see Box 3).
  - Government submitted to parliament an anti-corruption law following adoption of the 2003 United Nations’ Convention against Corruption; law covers broad definition of corruption, code of conduct for public servants, whistle-blower protection, and international cooperation.

### Medium-term outlook, growth, and fiscal stance
- External position and projections:
  - Annual hydrocarbon exports projected to average US$57 billion through 2010.
  - Gross international reserves forecast at above two years of import cover from 2006.
  - Gross external debt projected to fall below 5 percent of GDP by 2010.
- Fiscal program and pressures:
  - Draft 2006 budget law programs government investment in 2006 to double compared to its 2004 level.
  - Public investment program for 2005–09 comprises the GCP plus US$16 billion representing other projects; total public investment program amounts to US$74 billion (72 percent of 2005 GDP).
  - Staff projections assume a 10 percent increase in public sector wages in 2006.
  - Nonhydrocarbon primary deficit projected to increase from 31½ percent of NHGDP in 2005 to 36½ percent in 2006; thereafter decline to about 26½ percent by 2010.
  - Overall budget surplus expected to remain above 10 percent of GDP over the period.
- Growth and risks:
  - Average annual real NHGDP growth projected at about 5½ percent.
  - Unemployment rate expected to continue to decline.
  - Anticipated fiscal expansion and likely public sector wage hike would contribute to higher inflation.
  - Entry into effect of the AAEU may negatively affect the industrial sector starting in 2007, though effects could be short-lived if enterprises improve competitiveness.
- Debt sustainability and stress tests:
  - External debt ratio expected to drop sharply under all circumstances.
  - Public debt-to-GDP ratio may increase under various scenarios but likely remain sustainable.
  - Domestic public debt would increase due to FRR rules that do not allow the FRR to finance the nonhydrocarbon budget deficit directly, but only to repay public debt.
  - Under a scenario of oil prices dropping to US$19 per barrel starting in 2006 with no policy changes, international reserves would decline and the government would run budget deficits starting in 2006; nevertheless, external and public debt would remain sustainable given Algeria’s strong financial position.

### Management of hydrocarbon revenue and fiscal policy guidance
- Long-term framework and FRR considerations:
  - Staff presented a long-term framework for setting fiscal policy (IMF Country Report No. 05/50) aimed at delinking government expenditure from oil price fluctuations.
  - Authorities agreed current FRR rules likely generate additional interest expenditures and may create bottlenecks in financing future budget deficits.
  - Authorities plan to reconsider the role of the FRR, including transforming it into a savings/financing account fully integrated into the budget to finance the sustainable nonhydrocarbon primary deficit and to repay public debt, including prepayments.
- Fiscal policy priorities and recommendations:
  - Use part of fiscal space from high hydrocarbon revenues to increase public investment focused on public infrastructure, human capital, public services (mainly the judiciary), economic activity support, and housing.
  - Pay attention to quality of spending and take into account recommendations of the public expenditure review conducted with the World Bank; consider more even implementation of the investment program to avoid absorption capacity constraints.
  - Maintain macroeconomic stability by adopting a wage policy that the economy can support; limit any increase in real wages to the real growth rate of nonhydrocarbon GDP to preserve competitiveness.
  - Allocate resources to support market-based reforms, limit social costs of reforms in public banking and enterprise sectors, and bring quasi-fiscal deficits related to public bank losses into the budget.
  - Streamline the tax system by eliminating exemptions, use part of additional fiscal space to reduce tax burden on businesses, and further reduce employer contributions to stimulate job creation.

### Monetary and exchange rate policy recommendations
- Need to tighten monetary policy to keep inflation under control:
  - Raise BA’s policy interest rate to a positive level in real terms.
  - Handle the national hydrocarbon company’s large deposits outside the money market to strengthen BA’s control over base money.
  - Restore the signaling role of the policy interest rate and establish more effective control over system liquidity.
- Authorities’ view:
  - Considered existing monetary instruments adequate to contain money growth but indicated they would carefully consider staff’s recommendations.

*Source: IMF staff report text (chapter/section provided).*

### 24.      The authorities intend to continue to manage the exchange rate in a flexible

### _cr0693 - 24.      The authorities intend to continue to manage the exchange rate in a flexible

### Exchange rate policy and inflation linkages
- Authorities intend to continue to manage the exchange rate in a flexible manner, taking account of the inflation objective.
- In managing the float, authorities take account of fundamental developments of the real effective exchange rate (REER).
- Drivers pointing to REER appreciation:
  - Increase in real oil prices.
  - Current economic growth.
  - Expansionary fiscal stance.
- Force pointing to REER depreciation:
  - Trade liberalization envisaged under the AAEU.
- Increased openness strengthens the link between exchange rate changes and inflation.
- Staff recommendation: allow the REER to appreciate through a nominal appreciation of the dinar rather than higher inflation.
- Authorities’ response: agreed and indicated they would maintain flexibility in managing the float.
- Operational facts:
  - Since early 2005 they have been appreciating the nominal effective exchange rate.
  - Declining inflation has thus far prevented the REER from appreciating as much as expected.

### Structural reforms: overview and objectives
- Opening of the Algerian economy increases need for priority reforms to encourage private investment and create jobs.
- To maximize benefits and minimize short-term costs of the free trade zone with the European Union (AAEU), staff encouraged:
  - Accelerating banking sector reform.
  - Further liberalizing external trade.
  - Ensuring full implementation of the current convertibility of the dinar.

### Box: The Association Agreement with the European Union (AAEU)
- AAEU became effective on September 1, 2005.
- Agreement provides a major impetus toward an open trade regime over the next 12 years.
- Economic impact: both costs (short run) and benefits (longer term).
  - Potential benefits: welfare gains, increased foreign direct investment, technology and knowledge transfer, higher productivity, increased growth.
  - Costs: limited fiscal revenue impact, trade diversion, transitional unemployment, enterprise restructuring/closure.
- Maximizing benefits depends on Algeria’s commitment to reforms.
- Required policy actions:
  - (a) maintaining sound macroeconomic policies;
  - (b) undertaking deep structural reforms aimed at diversifying the economy and achieving a transition to a market economy;
  - (c) liberalizing trade more generally.

### Reform of the financial sector — banking sector focus
- Strategy should focus on banking sector reform; financial intermediation expected to be bank-based in the near future.
- Weak financial situation of public banks necessitates gradual reduction of the State’s role.
- Authorities’ reform program aims at strengthening governance of public banks and accelerating privatization.
- Key actions recommended:
  - Successfully privatize the first of three designated public banks; issue the call for bids as soon as possible.
  - Prepare for privatization of the other two public banks to take advantage of momentum.
  - Improve governance of public banks:
    - Strengthen performance contracts; staff recommended these require banks to grant loans only to solvent clients and be published with their ex-post assessments.
    - 2005 budget law included explicit government subsidies to replace part of public banks’ credit to loss-making public enterprises, but implementation was delayed; authorities developing an enterprise restructuring program aimed at phasing out the subsidies over the medium term.
    - Staff advised establishing a code of conduct for financial relations between public banks and public enterprises.
  - Promote competition in the banking sector:
    - Staff recommended replacing the directive prohibiting public entities from dealing with private banks with a directive instructing these entities to deal solely with sound banks.
    - Avoid discretionary measures aimed at increasing credit to the economy, such as interest subsidies.
- Operational framework improvements:
  - Ongoing modernization of the payments system.
  - Authorities’ capacity-building efforts in banking supervision with Fund technical assistance.
  - Political support for the banking commission is needed to enforce prudential regulations.

### Other structural reforms and trade liberalization
- Staff welcomed continued efforts toward external trade liberalization and urged stepping up WTO accession negotiations.
- Encouraged liberalization of rights of establishment to attract more foreign investment.
- Regional integration seen as important to enhance the impact of the AAEU and attract FDI.
- Customs reform: continue development of the risk management system to shorten customs clearance times.

### Exchange system and convertibility (Box 6)
- Free current convertibility of the dinar is essential to benefit from opening to the world.
- Fund technical assistance mission noted problems in implementing free convertibility for bona fide current international transactions, particularly for invisible transactions and imports of some services, and problems in communication to banks and the public.
- Authorities have started work to implement preliminary recommendations of the Fund technical assistance mission.
- Box 6 recommended actions for the foreign exchange authority:
  - Issue a new instruction confirming the free convertibility of the dinar for the payment of invisible transactions (i.e. for healthcare, education, and travel) and disseminate widely and immediately the policy of free convertibility for all bona fide current account payments and transfers;
  - Significantly increase or abolish the current indicative limits on conversion for current international invisible transactions;
  - Launch a general overhaul and streamlining of the regulatory framework.

### Business climate and tax policy (Box 7)
- Algeria’s business climate lags behind countries on the rim of the European Union.
- Fiscal space from higher hydrocarbon revenues could be used to improve the business climate through the tax system.
- Business tax gap:
  - Algeria lowered its corporate income tax (CIT) rate to 30 percent.
  - Average maximum CIT rate in the EU10 accession countries dropped from 30½ percent in 1995 to 21½ percent in 2004.
- Recommendations:
  - Redirect part of implicit energy price subsidies away from energy-intensive to labor-intensive activities.
  - Consider reducing taxes and mandatory charges on labor to promote job creation.
- Structural reforms to improve the business climate will take time to mature.

### Privatization, fiscal governance, and transparency
- Staff encouraged government to reduce involvement in the productive sector and not to subject privatization to maintenance of employment/activity but to accompany with appropriate social measures.
- Recommended subjecting remaining public enterprises to annual external audits in line with international standards and publishing results.
- Priorities to strengthen fiscal governance and transparency:
  - Finalize draft organic law on public finances.
  - Improve information disseminated to Parliament and the public.
  - Modernize budget nomenclature and accounting framework.
  - Reduce the number of special accounts.
  - Reform financing of local governments.
  - Participate in the Extractive Industries Transparency Initiative (EITI).
- Progress made on anti-corruption legislation welcomed; accelerate budget modernization and implement fiscal ROSC recommendations.

### Statistics, external debt management, and technical assistance
- Serious statistical weaknesses remain, particularly in government finance statistics and prudential data on the financial sector, and in timeliness of data dissemination.
- Example: 2003 nonhydrocarbon overall deficit is presently estimated at 27.7 percent of NHGDP compared to 33.1 percent in IMF Country Report No. 05/50.
- Staff recommended Algeria participate in the GDDS.
- Authorities intend to pursue active external debt management; staff encouraged seeking early settlement of debt issues with Russia to facilitate more ambitious prepayments to Paris Club creditors.
- Authorities expressed satisfaction with Fund technical assistance on tax administration, monetary policy, and banking supervision.
- Near-term Fund technical assistance includes bank restructuring and banking supervision, and organizing a course on financial markets analysis in Algeria in early 2006.

### Staff appraisal — key findings and policy recommendations
- Economic performance since 2001:
  - Abundant hydrocarbon revenues boosted growth while keeping inflation low.
  - Growth aided by a sizable fiscal impulse and buoyant hydrocarbon activity.
  - Unemployment declined considerably, but temporary employment increased and youth unemployment remains high.
  - Monetary policy absorbed most excess liquidity from large external inflows.
  - Strong expansion of credit to the economy is a concern given large share of nonperforming loans in public banks.
- Key challenge: strengthen sustainable nonhydrocarbon growth and increase employment in a more open environment.
- Fiscal space from continued high hydrocarbon revenues should be used to accelerate reforms.
- Policy recommendations:
  - Coordinate fiscal and monetary policies to maintain macroeconomic stability when managing hydrocarbon-related inflows.
  - Implement a more even pacing of public investment to avoid jeopardizing quality and raising inflation; take into account public expenditure review recommendations.
  - Use part of fiscal space to accelerate reforms and adopt a wage policy the economy can support; real public sector wage increases should not exceed real growth in the nonhydrocarbon sector.
  - Allocate resources to support reforms in public banks and enterprise sectors, including social mitigation measures.
  - Transform current hydrocarbon stabilization fund into a savings/financing account fully integrated into the budget and set fiscal management of hydrocarbon revenue in a long-term framework with medium-term budget projections.
  - Tighten monetary policy by strengthening BA’s control over system liquidity and increasing BA’s policy interest rate to a positive level in real terms.
  - Deposit large structural liquidity of Sonatrach directly at BA.
  - Continue gradual nominal appreciation of the dinar to help keep inflation under control.
  - Accelerate market-based structural reforms to maximize benefits from the AAEU: prioritize banking reform, privatization of public banks, governance strengthening, promotion of competition, steps toward WTO accession, regional integration, and execution of the privatization program.
  - Implement recent Fund technical assistance recommendations to ensure free convertibility for international current transactions without delay.
  - Implement recommendations of the 2004 fiscal ROSC and undertake financial audits of public enterprises.
  - Step up efforts to improve the statistical base and participate in the GDDS.
  - Continue prepayment of external debt and seek settlement of bilateral debt issues with Russia.

*IMF staff report excerpt as provided in the source content.*

### 50.      It is proposed that the next Article IV consultation with Algeria take place on the

### _cr0693 - 50.      It is proposed that the next Article IV consultation with Algeria take place on the 

### Proposal on Article IV consultation timing
- It is proposed that the next Article IV consultation with Algeria take place on the standard 12-month cycle.

### National income and prices (selected annual percent changes, 2002–10)
- GDP at constant prices: 4.7, 6.9, 5.2, 5.3, 4.7, 5.1, 4.9, 4.8, 4.8 (2002–10)
- Hydrocarbon sector: 3.7, 8.8, 3.3, 6.6, 3.0, 3.0, 3.0, 3.0, 3.0 (2002–10)
- Other sectors: 5.3, 6.0, 6.2, 4.5, 5.6, 6.1, 5.8, 5.6, 5.6 (2002–10)
- GDP deflator: 1.9, 8.3, 10.6, 14.9, 15.0, 5.1, 3.7, 4.9, 4.7 (2002–10)
- Consumer price index (average): 1.4, 2.6, 3.6, 2.7, 6.0, 7.0, 6.8, 6.6, 6.4 (2002–10)
- Consumer price index (end of period): -1.5, 4.0, 2.0, 3.1, 6.5, 6.9, 6.7, 6.5, 6.4 (2002–10)

### External sector and balance of payments (selected levels and ratios)
- Exports, f.o.b. (annual percent change): -2.0, 30.7, 31.7, 42.1, 22.1, 22.4, -0.4, 1.7, 1.7 (2002–10)
- Imports, f.o.b. (annual percent change): 26.7, 11.2, 34.5, 24.1, 16.7, 12.9, 12.4, 12.2, 12.5 (2002–10)
- Terms of trade (annual percent change): -8.8, 9.3, 13.0, 26.3, 18.7, -0.1, -2.8, -1.0, -1.7 (2002–10)
- Current account balance (in percent of GDP): 7.6, 13.0, 13.1, 18.3, 19.7, 16.8, 12.8, 9.9, 6.8 (2002–10)
- Trade balance (in billions of US$): 6.70, 11.11, 14.27, 23.49, 29.94, 27.91, 24.05, 20.99, 17.33 (2002–10)
- Gross official reserves (end-period, in billions of US$): 23.1, 32.9, 43.1, 55.6, 76.3, 95.4, 110.1, 121.7, 130.6 (2002–10)
- Reserves in months of next year's imports of goods and services: 17.0, 18.1, 19.0, 21.0, 25.5, 28.4, 29.2, 28.7, 27.4 (2002–10)
- External debt (in percent of GDP): 39.7, 34.3, 25.7, 16.4, 12.8, 10.4, 8.1, 5.7, 4.4 (2002–10)
- External debt service (in percent of exports): 22.6, 17.9, 17.6, 12.1, 7.0, 7.1, 7.7, 7.8, 6.0 (2002–10)
- Algerian crude oil price (US$/barrel, annually): 25.2, 29.0, 38.5, 55.3, 61.7, 60.0, 58.0, 57.3, 56.5 (2002–10)
- Crude oil exports (millions of barrels/day): 0.5, 0.7, 0.9, 1.0, 1.0, 1.0, 1.1, 1.1, 1.1 (2002–10)

### Fiscal sector (central government, selected fiscal ratios and levels)
- Overall budget balance (deficit -) as percent of GDP: 0.2, 7.8, 6.9, 12.6, 14.1, 14.0, 13.8, 13.6, 12.4 (2002–10)
- Total revenue and grants (percent of GDP): 35.3, 37.0, 36.2, 40.8, 42.5, 41.7, 40.6, 39.8, 39.0 (2002–10)
- Hydrocarbon revenue (percent of GDP): 22.2, 25.6, 25.6, 31.3, 33.7, 32.7, 31.2, 30.2, 29.1 (2002–10)
- Nonhydrocarbon revenue (percent of GDP): 13.1, 11.3, 11.0, 9.5, 8.9, 8.9, 9.1, 9.4, 9.6 (2002–10)
- Total expenditure (percent of GDP): 35.0, 29.2, 29.3, 28.2, 28.4, 27.7, 26.8, 26.2, 26.6 (2002–10)
- Current expenditure (percent of GDP): 24.1, 21.3, 20.3, 18.3, 17.1, 17.5, 18.3, 18.7, 19.0 (2002–10)
- Capital expenditure (percent of GDP): 10.0, 8.1, 7.9, 9.9, 11.3, 10.2, 8.5, 7.6, 7.6 (2002–10)
- Nonhydrocarbon primary balance (percent of nonhydrocarbon GDP): -28.0, -24.3, -27.9, -31.6, -36.4, -33.4, -29.6, -27.3, -26.7 (2002–10)
- Nonhydrocarbon balance (percent of nonhydrocarbon GDP): -32.5, -27.7, -30.2, -33.7, -38.0, -35.2, -31.7, -29.4, -28.8 (2002–10)
- Gross government debt (in percent of GDP): 53.5, 43.8, 36.6, 29.0, 25.6, 25.2, 23.9, 22.0, 21.3 (2002–10)
- Oil stabilization fund (in billions of Algerian dinars): 276, 568, 722 (2002–04)

### Monetary and banking sector (selected levels and ratios)
- Money and quasi-money (M2) annual percent change: 17.4, 15.6, 11.5, 13.4, 16.5 (2002–06)
- Net foreign assets (end-period, in billions of DA): 1,755.7, 2,342.7, 3,119.2, 4,151.4, 6,021.6 (2002–06)
- Domestic credit (end-period, in billions of DA): 1,845.5, 1,803.6, 1,514.4, 973.4, 86.2 (2002–06)
- Credit to the economy (end-period, in billions of DA): 1,266.8, 1,380.2, 1,535.0, 1,859.0, 2,168.0 (2002–06)
- Liquidity ratio (e.o.p. M2/GDP): 63.9, 63.8, 61.1, 57.2, 55.4 (2002–06)
- Liquidity ratio (e.o.p. M2/NHGDP): 94.7, 99.0, 98.3, 103.4, 107.5 (2002–06)
- Reserve money (end-period, in billions of DA): 846.7, 1,152.3, 1,160.1, 1,172.1, 1,353.1 (2002–06)
- Deposit auction (end-period, in billions of DA): 129.7, 250.0, 400.0, 657.1, 602.0 (2002–06)

### Debt sustainability frameworks and scenarios
- External debt (percent of GDP) baseline path: 46.4, 41.1, 39.8, 34.3, 25.7, 16.4, 12.8, 10.4, 8.1, 5.7, 4.4 (2000–10)
- Change in external debt (2000–10): -11.6, -5.3, -1.3, -5.4, -8.6, -9.4, -3.6, -2.4, -2.3, -2.3, -1.3 (2000–10)
- External debt-to-exports ratio (in percent): 112.0, 112.8, 113.2, 89.7, 64.0, 34.8, 25.2, 21.0, 17.0, 12.5, 9.9 (2000–10)
- Gross external financing need (in billions of US$) (2000–10): -6.1, -3.8, -0.9, -5.3, -6.3, -13.5, -19.1, -16.5, -11.8, -8.5, -5.7
- Public sector debt (percent of GDP) baseline path: 70.8, 65.0, 56.5, 50.3, 43.0, 35.1, 31.4, 31.2, 30.3, 28.6, 28.1 (2000–10)
- Change in public sector debt (2000–10): -18.5, -5.9, -8.5, -6.2, -7.3, -8.0, -3.7, -0.2, -0.9, -1.7, -0.5
- Identified debt-creating flows (public sector) (2000–10): -21.0, -2.9, -2.2, -10.8, -12.9, -19.2, -19.1, -16.2, -15.5, -15.4, -14.1
- Debt-stabilizing non-interest current account (long-run constant balance) in one line: -1.0

### Key macroeconomic assumptions underlying projections (baseline)
- Real GDP growth (in percent): 2.2, 2.6, 4.7, 6.9, 5.2, 5.3, 4.7, 5.1, 4.9, 4.8, 4.8 (2000–10 ranges shown across tables)
- GDP (current prices, in billions of Algerian dinars): 4,546; 5,264; 6,127; 7,412; 8,925; 9,859; 10,721; 11,783; 12,934 (selected years)
- GDP (current prices, in billions of US$): 57.1, 68.0, 85.0, 102.8, 116.0, 122.1, 127.0, 133.5, 140.5 (selected years)
- Per capita GDP (in US$): 1,819; 2,136; 2,627; 3,109; 3,457; 3,586; 3,673; 3,805; 3,944 (selected years)

### IMF relations, technical assistance, and institutional notes
- Membership status: Joined 9/26/63; Article VIII.
- Quota: 1,254.70 SDR million (100.00 percent of quota).
- Fund holdings of currency: 1,169.02 SDR million (93.22 percent).
- Reserve position in Fund: 85.08 SDR million (6.78 percent).
- SDR Department net cumulative allocation: 128.64 SDR million (100.00 percent); holdings 2.44 SDR million (1.89 percent).
- Outstanding purchases and loans: None.
- Financial arrangements (historical approvals and drawings): CCFF 5/07/99 approved and drawn 223.50 SDR million; EFF 5/22/95–5/21/98 approved and drawn 1,169.28 SDR million; Stand-by arrangements in 1994 and 1991 with amounts listed.
- Projected payments to Fund (SDR million): Charges/interest forthcoming totals across 2005–2009: 0.00, 4.4, 23.8, 3.8, 3.8 (table imprint); Principal: 0.00 across shown years.
- Exchange rate arrangement: Managed float introduced via daily fixing sessions on October 1, 1994; interbank foreign exchange market since January 2, 1996. At end-November 2005, $1 = DA 73.76; SDR 1 = DA 105.04. Margin of DA 0.017 between Bank of Algeria buying and selling rates. Full surrender requirements in effect on hydrocarbon export proceeds. Some limits on payments for invisible transactions and current transfers remain in place since 1997.
- Latest Article IV consultation noted: discussions for the 2004 Article IV consultation held October 7–24, 2004; staff report (IMF Country Report No. 05/50) discussed by Executive Board on January 12, 2005 and published on February 15, 2005.
- Technical assistance (selected missions): Multiple MAE, FAD, STA, MFD, and LEG missions between 2002 and 2005 covering insurance supervision, bank supervision and regulation, monetary policy, foreign reserve management, customs modernization, national accounts, liquidity management, exchange regime, and bank restructuring.
- Financial Sector Assessment Program (FSAP): Algeria participated in the FSAP in 2003; missions conducted in March and June 2003.

*Source: IMF staff estimates, projections, and Algerian authorities as presented in the supplied document.*

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

### _cr0693 - Conclusions were discussed with the authorities in October 2003. The Executive Board

### World Bank relations and program
- World Bank portfolio in Algeria:
  - 9 active operations and 64 closed loans.
  - Cumulative net commitments of US$4.5 billion, of which US$3.67 billion have been repaid.
  - Net commitments for the 9 current operations amount to US$337 million.
- Algeria Country Assistance Strategy:
  - Discussed by the World Bank Board on June 12, 2003; Progress Report discussed August 30, 2005.
  - Proposed Bank Group support for 2004–06 aims at:
    - strengthening fiscal sustainability and hydrocarbon revenue management;
    - removing constraints to private sector-led growth (business environment, SMEs, financial sector, infrastructure);
    - supporting government efforts to improve service delivery in water supply, transport, housing, environmental services and human development.
  - Bank Group guiding principles:
    - selectivity through engagement in a limited number of areas and selective use of Bank instruments;
    - programmatic approach focused on transfer of knowledge and capacity building;
    - partnerships, outreach and knowledge sharing.
- Analytical and advisory work:
  - Recent analytical work includes policy notes on poverty, the transport sector, and the legal and business environment (FY05).
  - A Public Expenditure Review is scheduled for FY06 (in collaboration with the IMF).
  - Authorities expressed interest in Reimbursable Technical Assistance (RTA); agreement on an RTA program in water and sanitation, and another under preparation in information and communication technology.
- Portfolio performance and implementation:
  - Percentage of projects at risk rose from 8 percent in FY03 to above 20 percent in FY04–05; currently at 22 percent.
  - Average disbursement ratio was 11 percent in FY04 and dropped to 8.9 percent in FY05.
  - No new loans approved since FY03.
- Resident Representative/Advisor: None.

### Financial relations—key figures (as of November 1, 2005)
- IBRD lending operations (in millions of U.S. dollars):
  - 64 loans closed: 4,167.5
  - 9 active loans (net commitments / undisbursed balances listed by project):
    - Telecommunications & postal sector: 9.0 / 1.5
    - TEERP (Ain Temouchent): 83.5 / 15.1
    - Budget system Modernization: 23.7 / 21.9
    - Energy and mining TA: 18.0 / 8.2
    - Financial system Infrastructure: 5.2 / 3.4
    - Transport technical Assistance: 8.7 / 6.7
    - Mortgage finance TA: 5.5 / 1.9
    - Urban natural hazard Vulnerability: 88.5 / 83.0
    - Second rural Employment: 95 / 90.4
  - Total active loans: 337.0 / 232.1
- Repayments (as of November 1, 2005): 3,671.8
- Debt outstanding (as of November 1, 2005): 822.4
- Net lending by the World Bank (fiscal years; fiscal years start July 1 and end June 30) — selected series:
  - Commitments: 98 (2000), 42 (2001), 31 (2002), 183 (2003), 0 (2004), 0 (2005), 0 (2006)
  - Disbursements: 69, 57, 90, 51, 51, 27, 10.6
  - Debt service (total): 316, 286, 306, 296, 270, 224, 53.3
    - Principal: 188, 162, 194, 201, 197, 174, 41.0
    - Interest5/: 128, 124, 112, 95, 73, 50, 12.3
  - Net transfer6/ (disbursements minus debt service): -247, -229, -216, -245, -219, -197, -42.7
- Notes recorded in source:
  - 1/ IDA has no operations in Algeria.
  - 2/ Less cancellations, includes adjustment lending.
  - 3/ As of November 1, 2005.
  - 4/ Fiscal years start July 1 and end June 30.
  - 5/ Includes charges.
  - 6/ Equal to disbursements minus debt service.

### Statistical issues and data quality
- Overall assessment:
  - Algeria’s data provision to the Fund is broadly adequate for effective surveillance, but serious weaknesses exist, particularly in government finance statistics.
  - Since the late 1990s, reporting of statistics to the Fund has generally deteriorated in overall quality and timeliness.
  - Causes cited: lack of financial resources for statistics compilation, insufficient inter-agency coordination, concerns about accuracy, reluctance to publish provisional data.
- GDDS/SDDS participation:
  - September 2002 multisector statistics mission designed an action plan to facilitate eventual subscription to the SDDS.
  - STA believes participation in the GDDS as an interim step is the optimal strategy.
  - Authorities stated aim for Algeria to participate in the GDDS in the near future.
- Real sector:
  - Real sector data reported irregularly and with substantial lags.
  - Latest national accounts information in IFS pertains to partial data reported for 2003.
  - September 2002 mission recommended moving compilation of national accounts to 1993 SNA.
  - STA missions visited Algiers during 2004–05 to assist with development of quarterly national accounts.
- Government finance:
  - Algeria reported GFS for 1994–2002 for GFS Yearbook, but institutional coverage limited to Budgetary Central Government (general budget, annexed budget, special treasury accounts).
  - No sub‑annual data submitted for IFS publication.
  - Recommendations from September 2002 mission included: designate a coordinator and assign at least one economist for GFS compilation; establish automated bridge table between monthly Treasury ledger (Balance générale) and GFS table (SROT) to produce timely quarterly and monthly GFS and reconcile SROT with budget presentation.
  - Further recommended: (a) show proceeds of the oil stabilization fund (FRR) as revenue (rather than financing); (b) compile more detailed breakdowns, notably 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 would require substantial extension of coverage (consolidation of social security and Wilayate operations, and subsequently other administrative bodies and municipalities).
- Monetary accounts:
  - Monetary data broadly adequate for policy formulation and monitoring.
  - Coverage improved with consolidation of data from national savings bank (CNEP).
  - Reporting of balance sheet data by some commercial banks is untimely; most commercial banks do not report complete data needed for monetary survey.
  - Prudential data by public banks are untimely and unreliable.
  - Recommendation to expand coverage of monetary survey to include CNMA banking operations and to enforce reporting obligations with high penalties.
- Balance of payments:
  - September 2002 mission noted: Bank of Algeria’s legal authority to collect data limited to banking and financial institutions; data sources need expansion (enterprise surveys beyond exchange-based records); more rigorous and uniform residency criterion application needed; quarterly data compiled but not regularly disseminated; international investment position data not compiled.
  - Algeria does not report Balance of Payments data to STA; no BOP data in IFS or BOPSY.

### Table of Common Indicators Required for Surveillance (as of December 19, 2005) — selected entries preserved verbatim
- Exchange Rates: Date of latest observation 10/31/05; Date received 10/31/05; Frequency of Data D; Frequency of Reporting M; Frequency of publication W
- International Reserve Assets and Reserve Liabilities of the Monetary Authorities1: Date of latest observation 9/30/05; Date received 10/05/05; Frequency of Data D; Frequency of Reporting M; Frequency of publication M
- Reserve/Base Money: 10/2005; 11/14/05; Frequency of Data M; Frequency of Reporting M; Frequency of publication M
- Broad Money: 7/31/05; 10/3//05; Frequency of Data M; Frequency of Reporting M; Frequency of publication M
- Central Bank Balance Sheet: 10/2005; 11/14/05; Frequency of Data M; Frequency of Reporting M; Frequency of publication A
- Consolidated Balance Sheet of the Banking System: 7/31//05; 10/03/05; Frequency of Data M; Frequency of Reporting M; Frequency of publication A
- Interest Rates2: 9/30/05; 10/3/05; Frequency of Data M; Frequency of Reporting M; Frequency of publication M
- Consumer Price Index: 08/05; 09/25/05; Frequency of Data M; Frequency of Reporting M; Frequency of publication M
- Revenue, Expenditure, Balance and Composition of Financing3 – General Government4: 06/05; 10/01/05; Frequency of Data Q; Frequency of Reporting I; Frequency of publication A
- Revenue, Expenditure, Balance and Composition of Financing3 – Central Government: 06/05; 10/01/05; Frequency of Data Q; Frequency of Reporting I; Frequency of publication A
- Stocks of Central Government and Central Government-Guaranteed Debt5: 06/05; 10/01/05; Frequency of Data Q; Frequency of Reporting I; Frequency of publication A
- External Current Account Balance: 06/05; 08/31/05; Frequency of Data Q; Frequency of Reporting Q; Frequency of publication A
- Exports and Imports of Goods and Services: 06/05; 08/31/05; Frequency of Data Q; Frequency of Reporting Q; Frequency of publication A
- GDP/GNP: 12/04; 04/27/05; Frequency of Data A; Frequency of Reporting A; Frequency of publication A
- Gross External Debt: 12/04; 04/27/05; Frequency of Data A; Frequency of Reporting A; Frequency of publication A
- Footnotes preserved from source: 1 Includes reserve assets pledged or otherwise encumbered as well as net derivative positions. 2 Both market-based and officially-determined, including discount rates, money market rates, rates on treasury bills, notes and bonds. 3 Foreign, domestic bank, and domestic nonbank financing. 4 The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds) and state and local governments. 5 Including currency and maturity composition. 6 Daily (D), Weekly (W), Monthly (M), Quarterly (Q), Annually (A); Irregular (I); and Not Available (NA).

### Statement by the IMF Staff Representative and Executive Board conclusions (February–March 2006)
- New information since staff report (does not alter thrust of staff appraisal):
  - Inflation in 2005: consumer price index rose on average by 1.6 percent in 2005 as compared with the projected 2.7 percent, mainly reflecting a stronger-than-foreseen decline in food prices.
  - International reserves at end-2005: Gross official reserves reached US$ 56.2 billion at end-2005 as compared to the projected level of US$55.6 billion.
  - Free current convertibility of the dinar:
    - Staff assessed jurisdictional implications under Article VIII of certain limits on payments for current international invisible transactions and concluded such limits do not give rise to an exchange restriction subject to Fund jurisdiction.
    - Staff urges authorities to make the public more aware of the indicative nature of those limits.
    - Authorities sent staff a new draft regulation on payments and transfers relating to current international transactions; the draft is under review by staff.
  - Structural reform progress: parliamentary approval of the anti-corruption law on January 24, 2006 (broad definition of corruption, code of conduct for public servants, provides for international cooperation).
  - Participation in GDDS: In a letter dated February 6, 2006, the authorities announced Algeria’s participation in the General Data Dissemination System (GDDS).
- Public Information Notice (PIN) No. 06/28 (March 9, 2006) — Executive Board concluded the 2005 Article IV consultation with Algeria on February 13, 2006.
  - Background highlights from PIN:
    - Real GDP growth expected to continue at about 5 percent in 2005, led by hydrocarbon sector and sustained activity in construction and services.
    - Inflation projected to remain low, mainly due to decline in food prices; unemployment rate continued to decline.
    - External position strengthened: despite surge in imports, external current account surplus projected to increase in 2005 reflecting rapid increase in oil prices and expansion of oil production.
    - Gross external reserves grew by US$20 billion since end-2003 to US$53 billion at end-September 2005, covering more than 1½ year of imports.
    - External debt-to-GDP ratio expected to decline further from 26 percent in 2004 to 16
1
  e2  percent in 2005.
    - Fiscal policy: government launched Growth Consolidation Plan for 2005–09 amounting to US$50 billion; in June 2005, program revised upward to US$57 billion.
    - Fiscal effects: nonhydrocarbon primary deficit expected to widen from 28 percent of nonhydrocarbon GDP in 2004 to 31½ percent in 2005.
    - Overall fiscal position: higher oil prices would allow for a stronger overall fiscal position, with the overall surplus increasing almost twofold from 6.9 percent to [text truncated in source].

*Source: IMF staff report and associated appendices and Public Information Notice as presented in the supplied content.*

### 12.6 percent of GDP.

### _cr0693 - 12.6 percent of GDP.

### Macroeconomic performance and fiscal position
- Overall budget balance (deficit-) in 2005: 12.6 percent of GDP.
- Growth and employment:
  - Real GDP: 5.3 (2005).
  - Unemployment rate decline noted; youth unemployment: 32.5 percent.
  - Real per capita GDP increased by 4 percent a year on average (2003–05).
- Fiscal outcomes and public debt:
  - Central government total revenue (2005): 40.8 percent of GDP.
  - Total expenditure and net lending (2005): 28.2 percent of GDP.
  - Central government fiscal position: surplus of about 12 percent of GDP in 2005.
  - Gross government debt-to-GDP ratio declined by half over the period referenced; on a net basis government debt-to-GDP decreased from 38 percent to 4 percent.
- External sector:
  - Current account (in percent of GDP) 2005: 18.3.
  - Exports, f.o.b. (2005): 45.8 (in billions of US dollars).
  - Imports, f.o.b. (2005): 22.3 (in billions of US dollars).
  - Gross official reserves (2005): 55.6 (in billions of US dollars).
  - Reserves in months of next year's imports (2005): 21.0.
  - External debt (in percent of GDP) 2005: 16.4.
  - Debt service ratio (in percent of exports) 2005: 12.1.
  - Terms of trade (2005): 26.3 (deterioration -).

### Monetary policy and financial sector
- Bank of Algeria (BA) actions:
  - Adopted measures to mop up rapidly increasing banking-sector liquidity; absorbed most excess bank liquidity.
  - Increased policy interest rate from ¾ percent in 2004 to 1¼ percent in July 2005.
  - Introduced additional deposit auctions, extended maturities of deposits, raised policy rate, and introduced a 24-hour deposit facility.
- Monetary conditions and credit:
  - BA’s policy interest rate remains negative in real terms despite the increase to 1¼ percent.
  - Annual broad money growth continued at about 12 percent through September 2005.
  - Credit to the economy accelerated in first half of 2005; credit to the economy (annual change) 2005: 21.1.
  - Nonperforming loans remained high.
  - Money and credit indicators (annual percentage change, 2005): Net foreign assets 33.1; Domestic credit -14.5; Credit to the government (net) -23.2; Broad money 13.4.
  - Central bank rediscount rate (interest rate, in percent) 2005, as of September: 4.0.
- Board recommendations on monetary policy:
  - Consider tightening monetary stance by raising BA policy interest rate to a positive level in real terms.
  - Strengthen BA control over base money.
  - Monitor complications from planned increase in public investment and strong credit growth.

### Structural reforms and institutional developments
- Trade and legal frameworks:
  - Association Agreement with the European Union (AAEU) became effective in September 2005.
  - WTO accession negotiations in final stages.
  - New hydrocarbon law adopted to further liberalize investment in the sector.
- Banking sector reforms:
  - Strengthened performance contracts of public bank managers and shareholder oversight.
  - Initiated privatization of a public bank; urged further privatizations and improved governance.
  - Progress in modernizing the payments system; capacity building in banking supervision with Fund technical assistance encouraged.
  - Ensure banking commission can enforce prudential regulations effectively.
- Public enterprise and governance:
  - Government submitted an anti-corruption law to parliament.
  - Recommendation to reduce state direct involvement in productive sectors; subject remaining public enterprises to annual external audits and publish results.
  - Tax policy recommendations: streamline system by eliminating exemptions and reduce tax burden on businesses.
- Hydrocarbon revenue management:
  - Directors advised setting fiscal policy within a long-term framework and sound management of hydrocarbon wealth.
  - Authorities to reconsider the role of the Fonds de régulation des recettes (FRR), including transforming it into a savings/financing account fully integrated into the budget.
  - Some Directors encouraged participation in the Extractive Industries Transparency Initiative.

### Public investment strategy and absorptive capacity
- Authorities decided to use part of higher hydrocarbon revenues to increase public investment.
- Investment program objectives:
  - Build public infrastructure, develop human capital, improve public services, support economic activity, and expand housing.
- Board views:
  - Generally supported upfront expenditure authorizations as a signal resources will be available over a longer horizon.
  - Expressed caution about front-loaded distribution of investments given absorptive capacity constraints.
  - Emphasized ensuring high quality of public spending and incorporating recommendations from the ongoing public expenditure review with the World Bank.

### Trade liberalization and external policy
- Directors welcomed AAEU ratification and encouraged acceleration of WTO accession negotiations.
- Regional trade facilitation and integration recommended to enhance AAEU benefits and attract FDI.
- Continued support for managed float of the dinar:
  - Authorities committed to maintained managed float in a flexible manner and to ensuring free convertibility of the dinar for international current transactions, in line with recent Fund technical assistance recommendations.
  - Noted pressures for real appreciation from higher oil prices and economic growth.

### Debt management and data transparency
- Authorities praised for prepaying external debt and voluntary advance repurchase to the Fund.
- Encouraged continued efforts to seek settlement of bilateral debt issues with Russia.
- Welcomed Algeria’s decision to participate in the General Data Dissemination System (GDDS) and encouraged continued improvements in data coverage, quality, and timeliness.

### Key selected economic indicators (selected values preserved exactly as reported)
- Real GDP: 5.3 (2005).
- GDP deflator: 14.9 (2005).
- Consumer price index (average): 2.7 (2005).
- Gross national savings (in percent of GDP): 51.6 (2005).
- Gross national investment (in percent of GDP): 33.3 (2005).
- Exports, f.o.b. (in billions of US dollars): 45.8 (2005).
- Imports, f.o.b. (in billions of US dollars): 22.3 (2005).
- Current account (in percent of GDP): 18.3 (2005).
- Gross official reserves: 55.6 (2005).
- External debt (in percent of GDP): 16.4 (2005).
- Overall budget balance (deficit-): 12.6 (2005).
- Net foreign assets (annual percentage change): 33.1 (2005).
- Domestic credit (annual percentage change): -14.5 (2005).
- Credit to the economy (annual percentage change): 21.1 (2005).
- Broad money (annual percentage change): 13.4 (2005).
- Central bank rediscount rate, in percent (2005, as of September): 4.0.

*Source: Algerian authorities; and IMF staff estimates and projections.*

### 16.5 percent and the debt service ratio to 12 percent and substantially strengthening external

### _cr0693 - 16.5 percent and the debt service ratio to 12 percent and substantially strengthening external

### Short- and medium-term policies
- Authorities reiterate commitment to the 2005-09 Growth Consolidation Plan (GCP) and to addressing the remaining agenda of reforms.
- Progress in consolidating political stability and improving the security environment, together with a strong financial position, provide an opportunity for implementation of the reform agenda.
- The authorities intend to accelerate early debt repayments in 2006, including to other multilateral creditors.

### Fiscal sustainability and hydrocarbon revenue management
- Fiscal sustainability is the centerpiece of the medium-term strategy.
- Strong fiscal performance in recent years has enabled a sizable accumulation of savings to finance the public investment program under the GCP.
- Authorities are considering staff’s recommendation for managing hydrocarbon revenues within a longer-term fiscal framework.
- Authorities are open to consultations on transforming the stabilization fund into a savings/financing account fully integrated into the budget.
- Authorities balance accumulation of financial savings for intergenerational equity with demands for infrastructure, education, health, and other social spending.
- Staff concern: front-loading of planned spending; authorities note budgeted capital spending is more evenly distributed over the 2005-09 period (Table 3 of the staff report) than implied elsewhere.
- Front-loading of program authorizations is presented as assurance of resource availability; actual annual appropriations will be allocated in future budgets with attention to project selection, monitoring, macroeconomic implications, and absorptive capacity constraints.
- Ongoing public expenditure review with World Bank assistance intended to adopt measures to mitigate risks from rapid implementation.
- Measures to contain current spending will be sustained, including through a prudent wage policy to preserve competitiveness.

### Public investment program implementation and absorptive capacity
- Authorities acknowledge absorptive capacity constraints and the potential adverse impact of an unsustainably rapid pace of implementation on spending quality.
- Rationalization of capital expenditure and containment of current spending are priorities.
- Upfront expenditure authorizations reflect multi-year program schedules; annual appropriations will follow with project selection and monitoring.

### Revenue mobilization and tax administration
- Priority given to enhancing nonhydrocarbon revenues due to hydrocarbon price volatility.
- Important progress in tax administration reforms:
  - Launching operations of the large taxpayers department.
  - Transfer of remaining non-tax functions to the treasury.
  - Simplification of identification procedures.
  - Progress in restructuring the tax office network for remaining taxpayers.
- Tax modernization strategy benefits from Fund technical assistance and from World Bank, European Union, and bilateral assistance.
- Authorities are considering staff’s recommendation for a tax policy review.

### Exchange rate regime and payments system reforms
- The flexible exchange rate regime continues to serve the economy well.
- BA remains committed to monitoring developments to minimize deviations of the real effective exchange rate from its equilibrium level.
- In the context of increased trade liberalization (AAEU) and expected WTO membership, a Fund TA mission suggested recommendations to improve the exchange rate and payments systems.
- Authorities actions:
  - Drafted a new, unified regulatory framework and requested the mission’s comments before final approval.
  - Await the TA mission’s final report to take further actions as needed.

### Financial sector reform and banking sector measures
- Financial sector reform is a priority with strong political support; important progress reported.
- Reform strategy based on FSAP recommendations; strengthening banking supervision a focus.
- Privatization of one public bank is well advanced; a contract was signed recently with a foreign investment bank to assist implementation in 2006.
- Preliminary indications suggest strong interest from reputable foreign strategic investors.
- Privatization success viewed as having positive demonstration effects for two other public banks slated for divestiture.
- Other ongoing reforms include:
  - Modernization of the payment system with improved information and accounting systems.
    - The new Real Time Gross Settlements system will be launched shortly.
    - The Retail Payments system will be established later this year.
    - Expected benefits: improved financial intermediation, enhanced quality and timeliness of data reporting (including public finances), and facilitation of enhanced supervision.
  - Improving governance in the banking sector through strengthened performance contracts and replacement of quasi-fiscal activities with direct budget support in line with FSAP recommendations.
    - These steps, and ongoing MFD technical assistance, aim to decisively address nonperforming loans in public banks.
  - Consideration of options to improve performance of remaining public banks, including corporatization and use of management contracts.
- All public banks are currently being audited by reputable international auditing firms as required by the Banking Commission; audit reports expected to guide improvements in institutional capacity and financial performance.

### Insurance sector, mortgage securitization, and financial deepening
- Parliament passed a new law establishing an independent supervisory commission and a guaranty fund, and allowing participation of foreign insurance companies.
- Parliament adopted a law on securitization of mortgages to encourage market development.
- Measures to facilitate issuance of property titles are planned to support mortgage market development.
- A draft law on establishment of investment funds has been submitted to parliament.
- Authorities are preparing legislation to allow creation of credit unions to deepen the domestic financial market.

### Privatization, public sector role, and sectoral divestiture
- Sustained efforts have reduced the public sector to representing only 20 percent of nonhydrocarbon value-added.
- Privatization activity over the past three years (table as presented):
  - 2003: Total privatization 6; Partial privatization 1; Divestment for workers 8; Partnership 4; Total 19
  - 2004: Total privatization 9; Partial privatization 4; Divestment for workers 23; Partnership 10; Total 46
  - 2005: Total privatization 52; Partial privatization 17; Divestment for workers 29; Partnership 4; Total 102
  - Total (2003-2005): Total privatization 67; Partial privatization 22; Divestment for workers 60; Partnership 18; Total 167
- Contracts with foreign companies to manage water distribution are either signed or under consideration.
- Strong efforts are being made to advance the divestiture process further.

### Hydrocarbon sector competition reforms
- March 2005 parliament-approved law to strengthen competition in the hydrocarbon sector introduces major developments:
  - Elimination of the obligation for foreign investors to enter into partnership with Sonatrach, the national oil company.
  - Liberalization of transportation and downstream activities in the hydrocarbon sector.
  - Establishment of two regulatory agencies: one responsible for tendering upstream contracts and the other for issuing downstream permits.
  - Establishment of investors’ rights and obligations.

### Business climate, governance, and legal reforms
- Authorities committed to improving the business climate to support private investment and accelerate growth.
- A high-level, multi-sector task force, assisted by the World Bank, has been established to propose policies; concrete actions to follow based on task force recommendations.
- Efforts to improve governance include adoption of a new law on combating corruption and strengthening the judiciary system.
- An organic law governing public finances is drafted for submission to parliament.

### Data provision and international engagement
- Considerable improvement in data provision over past years; authorities subscribed to the Fund’s General Data Dissemination System.
- Authorities look forward to the Board discussion of the Article IV report and appreciate participation of the Managing Director in the ongoing trade facilitation process among the Maghreb countries.

*Source: Excerpt from IMF staff report content provided*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr0693.pdf_