## Algeria: Medium-Term Projections and Policy Discussions (_cr0772_)

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### Executive summary — background and key challenges
- Average annual economic growth of 5½ percent in 2001–05; unemployment 15.3 percent in 2005.  
- Staff-estimated unemployment (excluding rise in work at home/temporary employment) just below 21 percent in 2005; youth unemployment 31 percent in 2005.  
- Hydrocarbon profile: third largest exporter of natural gas, eighth-largest proven reserves, tenth largest oil exporter. 2004 production: gas 225 million cubic meters/day; liquid petroleum 1.9 million barrels/day.  
- Key policy challenges:
  - Achieve sustained growth and reduce unemployment while preserving macroeconomic stability.
  - Use hydrocarbon revenues for public investment (infrastructure, housing, education, healthcare) while maintaining appropriate macroeconomic policies.
  - Undertake structural reforms—particularly in the financial sector—to transition to an open, market-oriented economy.
- Fund surveillance priorities included:
  - Long-term fiscal policy framework and macroeconomic stability.
  - Careful selection of public expenditures and sound hydrocarbon wealth management.
  - Prudent liquidity and flexible exchange rate management.
  - Financial sector reform (FSAP update in 2007; MCM technical assistance).
  - Trade liberalization, regional cooperation, and streamlining exchange regime for current international transactions (MCM/LEG technical assistance starting July 2005).
  - FAD technical assistance on tax system streamlining and tax administration modernization.

### Recent economic developments (selected)
- Growth and output:
  - Real GDP growth projected to decline to about 3 percent in 2006 from about 5½ percent in 2005 due to drop in hydrocarbon output (maintenance).  
  - Nonhydrocarbon GDP (NHGDP) growth projected at 4½ percent in 2006, supported by construction and agriculture.
- Inflation:
  - Consumer price inflation nearly 5 percent (year-on-year) in September 2006, mainly from food price rebound.
- External position and reserves:
  - External current account surplus projected to increase to 24½ percent of GDP in 2006 from almost 21 percent in 2005.  
  - Gross external reserves reached $70 billion at end-September 2006 (two years of next years’ import cover).
  - Early debt repayment of $10½ billion contributed to external debt-to-GDP ratio decline from 17 percent in 2005 to below 4½ percent in 2006 (expected).
- Exchange rate and liquidity:
  - REER depreciated by about 5 percent during first eight months of 2006 (euro appreciation vs. dollar).
  - Bank of Algeria (BA) dominant seller of foreign exchange due to full surrender requirement on hydrocarbon export proceeds; interventions broadly kept REER near end-2003 level.
  - Parallel market premium reportedly disappeared in early 2006 after measures reducing informal economy.
- Fiscal:
  - 2006 supplementary budget increased the 2005–09 public investment program from $73 billion to $90 billion.
  - Civil service wages raised by about 15–16 percent on average as of July 1, 2006.
  - Nonhydrocarbon primary deficit expected to widen from about 33½ percent of NHGDP in 2005 to almost 37½ percent in 2006.
  - Overall budget surplus expected to remain about 12 percent of GDP in 2006.
- Monetary and banking:
  - Monetary policy prudent; BA absorbed excess liquidity via deposit auctions in 2006; credit expansion slowed.
  - Nonperforming loans in public banks remained high; public banks’ nonperforming loan ratio higher than private banks in 2004–05.
- Structural reforms in 2006:
  - Privatization of a first public bank; payments system modernization; strengthened governance of remaining public banks.
  - Corporate profit tax reduced from 30 percent to 25 percent.
  - Single presumptive tax for small enterprises: 6 percent of turnover for traders; 12 percent of turnover for other small businesses.
  - New hydrocarbon law adopted in 2005 and amended in 2006 to restore Sonatrach’s majority stake in contracts.
  - Anticorruption law adopted January 2006.

### Medium-term outlook and projections (selected 2006–2011)
- Growth and inflation assumptions:
  - Real NHGDP growth: 2007: 5½ percent; about 5 percent thereafter under steady implementation of public investment program and structural reforms.
  - Achieving higher growth would require more ambitious structural reforms.
  - Planned public investment increases and public sector wage spread expected to contribute to inflationary pressures.
- Selected projections (2006–2011):
  - Real GDP: 2006: 2.7; 2007: 4.5; 2008: 4.1; 2009: 4.0; 2010: 4.0; 2011: 4.0
  - Hydrocarbon sector growth: 2006: -1.2; 2007: 2.5; 2008–2011: 2.0 (each year)
  - Nonhydrocarbon sector growth: 2006: 4.5; 2007: 5.4; 2008: 5.1; 2009: 4.9; 2010: 4.8; 2011: 4.8
  - CPI inflation (period average): 2006: 2.2; 2007: 5.5; 2008: 5.7; 2009: 5.2; 2010: 4.6; 2011: 4.1
  - Current account balance (percent of GDP): 2006: 24.4; 2007: 16.6; 2008: 14.4; 2009: 11.8; 2010: 10.1; 2011: 8.5

- External and reserves outlook:
  - With oil prices projected relatively high and limited hydrocarbon output expansion, annual hydrocarbon exports expected to average $55½ billion through 2011.
  - Imports projected to increase due to large public and Sonatrach investment.
  - Current account surplus sizeable but gradually declining; gross external reserves projected to exceed three years of import cover by 2011.
  - Gross external debt projected to remain low and sustainable.

- Debt prepayment and reserves (highlights):
  - Since 2004, Algeria prepaid about $14 billion of official external debt ahead of schedule.
  - Russia cancelled $4.7 billion Soviet-era claims in March 2006 for equivalent Algerian imports of Russian goods and services.
  - Paris and London Club debt worth $8.5 billion prepaid by end-2006; a further $2 billion prepaid to multilateral creditors in 2006.
  - External debt-to-GDP declined from about 34 percent at end-2003 to less than 4½ percent at end-2006; projected to fall to 3 percent by 2011.
  - Reserve cover rose from 18 months in 2003 to almost 25 months in 2006; projected to reach 38 months by 2011.
  - Authorities intend to obtain a sovereign rating; participation as a creditor in the Enhanced HIPC Initiative awaits authorities’ approval.

### Fiscal policy, public investment, and FRR management
- Draft 2007 budget envisages sizeable increase in public spending; 2005–09 investment program increased to some $113 billion (equal to 2006 GDP).
- Fiscal projections (selected):
  - Nonhydrocarbon primary balance (percent of NHGDP): 2006: -37.6; 2007: -39.2; 2008: -38.3; 2009: -36.6; 2010: -33.6; 2011: -31.3
  - Overall fiscal balance (percent of GDP): 2006: 11.9; 2007: 9.9; 2008: 9.4; 2009: 8.3; 2010: 7.8; 2011: 7.2
- Hydrocarbon stabilization fund (FRR) rules amended in 2006 supplementary budget to allow direct financing of the nonhydrocarbon deficit unless FRR balance drops below 10 billion.
- Budget reference and implicit prices:
  - Draft 2007 budget implicit oil price to finance nonhydrocarbon deficit: 2007: $49 per barrel.
  - For budget presentation, reference price kept at $19 per barrel.
- Staff long-term fiscal framework:
  - Sustainable nonhydrocarbon primary deficit would decrease from about 37½ percent of NHGDP in 2006 to 32½ percent in 2010 (compared with 26 percent estimated at 2005 Article IV).
  - Under framework, income from financial wealth would entirely finance the deficit that prevails after 2050 when hydrocarbon reserves are assumed to run out.
  - Staff recommends aiming at a higher investment return for the growing FRR balance.
- Authorities’ intent: reevaluate public investment projects, strengthen monitoring and evaluation, modernize budget management, submit draft organic law on public finances before end-2006, implement new budget classification in line with Government Finance Statistics guidelines.

### Monetary policy and exchange rate management
- Authorities consider fiscal expansion and wage increases require tightening monetary policy to restrain inflationary pressures.
- Authorities intend to increase BA’s policy interest rate to keep it at a positive level in real terms and continue absorbing excess liquidity.
  - Memo: In September 2006, BA’s policy interest rate stood at 1.7 percent and average CPI inflation at 1.3 percent.
- Staff recommends handling Sonatrach’s large deposits (currently outside banking system) to strengthen BA control over base money.
- Exchange rate:
  - Authorities intend to continue flexible exchange-rate management considering inflation objective; staff found no evidence of REER misalignment.
  - Short-term REER influences: fiscal/wage stimulus implies appreciation; trade liberalization implies depreciation pressure. Authorities believed REER appreciation likely in 2007 given demand stimulus.
  - Importance for BA to continue flexible management of the exchange rate.

### Structural reforms — financial sector and privatization
- Financial sector reform priority: improve banking soundness and strengthen financial intermediation.
- FSAP update requested and scheduled for early 2007.
- Key policy actions:
  - Privatization of Crédit Populaire d’Algérie (sale of majority share) expected early 2007; further privatizations may follow.
  - Aim to select internationally reputable majority shareholders to inject modern know-how.
  - Strengthen governance of remaining public banks via performance contracts, improved risk management and internal controls.
  - Modernize payment system; enforce prudential regulations; improve banking supervision with Fund TA.
  - Directive prohibiting public entities from dealing with private banks remains an obstacle.
  - Government taking over nonperforming loans of public banks to public enterprises equivalent to 4 percent of GDP.
  - Need to strictly limit bank financing of nonviable public enterprises; if necessary, provide direct subsidies linked to enterprise restructuring and privatization acceleration.
- Staff emphasis: decisive privatization, strengthened governance, and promotion of competition.

### Structural reforms — trade, customs, energy pricing, legal framework
- Trade and customs:
  - Continue liberalizing external trade; pursue WTO accession.
  - Modernize and streamline customs administration with Fund TA.
  - Implement 2005 Maghreb trade facilitation action plan (website on trade regulations/taxation; mutual recognition of norms; reduce trade distortions/informal trade; one-stop document-processing; private sector-led monitoring unit).
- Legal framework:
  - New draft foreign exchange regulation (implementing Fund TA recommendations and clarifying dinar convertibility) not yet promulgated; authorities indicated promulgation shortly.
  - Staff urges promulgation as soon as possible to remove ambiguities on current convertibility of the dinar.
- Energy pricing:
  - Rigid domestic energy pricing creates inefficiencies and large implicit subsidies.
  - Staff estimated 2005 government’s and Sonatrach’s loss of revenue due to domestic-world price gaps at 7½ percent of GDP.
  - Authorities agreed subsidies favor energy-intensive activities, discourage conservation, and cause smuggling.
  - Authorities indicated subsidies would be reduced gradually by raising domestic energy prices after 2007 and sought staff advice on modalities and targeted protection for vulnerable groups.

### Public Expenditure Review (PER) findings and budget execution recommendations
- PER covered health, education, water, and transport/public works; assessed budgetary management (October 2005–June 2006).
- Diagnosis:
  - Technical readiness of executing personnel generally low.
  - Weak absorption capacity implies substantial cost risks.
  - Project quality uneven; several projects fail minimum standards and should not proceed.
- PER recommendations:
  - Pace public investment program implementation to reflect realistic absorption capacity.
  - Implement a more even paced investment program starting 2007 budget.
  - Guide project selection by sectoral strategies within a medium-term expenditure framework.
  - Urgently modernize management and control systems for public investment and the budget.
- Staff recommends focus on execution and monitoring of existing projects, prepare comprehensive medium-term budget projections accounting for public investment effects on current expenditures, accelerate budget modernization, and implement 2004 fiscal ROSC recommendations.

### Staff appraisal — principal policy recommendations
- Staff appraisal summary:
  - Hydrocarbon revenues used to sustain growth, reduce unemployment, keep inflation low (until mid-2006), build reserves, and prepay external debt.
  - External position strong and growth prospects favorable but fragile and largely government-investment-driven.
  - Fiscal expansion and wage increases pose inflationary risk.
- Principal recommendations (selected):
  - Ensure sound management of hydrocarbon resources and high quality of large public investment program.
  - Modernize financial intermediation and accelerate structural reforms to increase productivity and improve business climate.
  - Focus on execution/monitoring of public investment projects and prepare comprehensive medium-term budget projections.
  - Accelerate budget modernization and strengthen fiscal governance per 2004 fiscal ROSC.
  - Aim for higher investment return on FRR.
  - Adjust real wages more gradually in line with productivity and NHGDP performance.
  - Bring BA’s policy interest rate to positive real level; handle Sonatrach’s deposits to strengthen monetary control.
  - Continue flexible exchange rate management.
  - Decisively privatize public banks, strengthen governance, promote competition, and limit lending to nonviable public enterprises.
  - Pursue WTO accession negotiations, modernize customs, and enhance regional integration.
  - Reduce energy subsidies gradually after 2007 with targeted protection for vulnerable groups.

### Exchange regulation, statistics, and international engagement (selected)
- Staff urges prompt promulgation of new draft exchange regulation to remove ambiguities on dinar convertibility.
- Staff encourages improvement of business climate, including simplified tax system for business.
- Authorities plan gradual increase in pass-through of world oil prices to domestic energy prices.
- Staff strongly encourages intensification of efforts to upgrade production and dissemination of economic and financial statistics and to use technical assistance under the GDDS.
- Staff encourages Algeria to participate as a creditor in the Enhanced HIPC Initiative and to obtain a sovereign rating.

### Relations with the Fund, technical assistance, and statistical issues
- Relations (as of October 31, 2006):
  - Membership: Joined 9/26/63; Article VIII.
  - Quota: 1,254.70 SDR Million.
  - Outstanding purchases and loans: None.
  - Past financial arrangements listed (EFF and Stand-by arrangements with approval/expiration and approved/drawn SDR amounts).
- Technical assistance (missions, experts listed chronologically 2003–2006) covered bank supervision, customs modernization, tax administration, national accounts, reserve management, liquidity management, exchange regime, payment systems, and monetary/statistical topics.
- FSAP: participated in 2003; FSSA published May 17, 2004; FSAP update requested for early 2007.
- Statistical issues (Appendix III — selected):
  - Data provision broadly adequate for surveillance but with serious weaknesses, particularly government finance statistics.
  - Algeria joined GDDS February 2006; GDDS metadata preparation underway; STA multisector mission scheduled early 2007.
  - Real sector: national accounts reporting irregular with substantial lags; latest national accounts in IFS pertain to partial 2003 data.
  - GFS: institutional coverage limited to Budgetary Central Government; no sub-annual data submitted for IFS publication; recommendations include assigning GFS leadership and automating reconciliation between Treasury ledger and GFS tables.
  - Monetary statistics broadly adequate but shortcomings: untimely reporting by state-owned commercial banks; incomplete reporting by most commercial banks; prudential data untimely and unreliable for state-owned banks.
  - BOP: Algeria does not report BOP to STA; quarterly BOP data not regularly disseminated; international investment position not compiled.
- Key statistical dissemination status (as of November 14, 2006) lists latest observations and frequencies for exchange rates, reserves, base money, broad money, central bank balance sheet, banking system balance sheet, interest rates, CPI, government finance series, external current account, trade, GDP, and gross external debt.

*Source: IMF staff report excerpt — _cr0772_*

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

### Executive Summary

### Background and Key Challenges
- Algeria sustained average annual economic growth of 5½ percent in 2001–05, with low inflation and a steady decline in unemployment, although unemployment remained high at 15.3 percent in 2005.  
- Staff estimated unemployment (excluding a sharp increase in work at home/temporary employment in 2004–05) at just below 21 percent in 2005; youth unemployment was 31 percent in 2005.  
- Algeria is a major hydrocarbon exporter: third largest exporter of natural gas, eighth-largest proven reserves, and tenth largest oil exporter. In 2004, gas production was 225 million cubic meters/day and liquid petroleum production was 1.9 million barrels/day.  
- Key policy challenges: (a) achieve sustained growth and reduce unemployment while preserving macroeconomic stability; (b) use hydrocarbon revenues for public investment in infrastructure, housing, education, and healthcare while maintaining appropriate macroeconomic policies; (c) undertake structural reforms—particularly in the financial sector—to transition to an open, market-oriented economy.  
- Fund surveillance priorities included: setting fiscal policy in a long-term framework and preserving macroeconomic stability; careful selection of public expenditures; sound management of hydrocarbon wealth; prudent liquidity management and flexible exchange rate management; financial sector reform (FSAP update in 2007; MCM technical assistance); trade liberalization and regional cooperation; and streamlining the exchange regime for current international transactions (MCM/LEG technical assistance starting in July 2005). FAD technical assistance supported tax system streamlining and tax administration modernization.

### Recent Economic Developments
- Growth and output:
  - Real GDP growth projected to decline to about 3 percent in 2006 from about 5½ percent in 2005, reflecting a drop in hydrocarbon output due to maintenance work.  
  - Nonhydrocarbon GDP (NHGDP) growth projected to continue at 4½ percent in 2006, underpinned by construction (driven by fiscal impulse) and agriculture.
- Inflation:
  - Consumer price inflation picked up to almost 5 percent (year-on-year) in September 2006, mainly due to a rebound in food prices.
- External position and reserves:
  - External current account surplus projected to increase to 24½ percent of GDP in 2006 from almost 21 percent in 2005.  
  - Gross external reserves reached $70 billion at end-September 2006 (two years of next years’ import cover).  
  - After early debt repayment of $10½ billion, including to Paris and London Club creditors, external debt-to-GDP ratio expected to decline from 17 percent in 2005 to below 4½ percent in 2006.
- Exchange rate and liquidity:
  - Real effective exchange rate (REER) depreciated by about 5 percent during the first eight months of 2006, mainly reflecting euro appreciation against the dollar.  
  - Bank of Algeria (BA) is the dominant seller of foreign exchange due to full surrender requirement on hydrocarbon export proceeds; BA’s interventions helped keep the REER broadly in line with the end-2003 level.
  - Spread between illegal parallel market and official exchange rates reportedly disappeared in early 2006 following measures to reduce the informal economy (including an increase in required minimum capital for importers).
- Fiscal developments:
  - 2006 supplementary budget increased the 2005–09 public investment program from $73 billion to $90 billion.  
  - Civil service wages were raised by about 15–16 percent on average as of July 1, 2006.  
  - Nonhydrocarbon primary deficit expected to widen from about 33½ percent of NHGDP in 2005 to almost 37½ percent in 2006.  
  - Overall budget surplus expected to remain high at about 12 percent of GDP in 2006.
- Monetary policy and banking:
  - Monetary policy remained prudent; BA absorbed excess liquidity through deposit auctions in 2006. Credit expansion slowed.  
  - Nonperforming loans of public banks remained high despite more active supervision and on-site inspections. Figure data show a higher ratio of nonperforming loans in public banks relative to private banks in 2004–05.
- Structural reforms in 2006:
  - Privatization of a first public bank and modernization of the payments system underway. Governance of remaining public banks strengthened.  
  - Corporate profit tax rate reduced from 30 percent to 25 percent.  
  - Streamlined taxation for small enterprises introduced: a single presumptive tax (6 percent of turnover for traders and 12 percent of turnover for other small businesses).  
  - New hydrocarbon law adopted in 2005 (liberalizing investment); amended in 2006 to restore Sonatrach’s majority stake in contracts.  
  - Privatization of public enterprises proceeding; an anticorruption law adopted in January 2006.

### Medium-Term Outlook
- External sector:
  - With oil prices projected to remain relatively high and authorities limiting hydrocarbon output expansion, annual hydrocarbon exports expected to average $55½ billion through 2011.  
  - Imports projected to increase significantly due to large public and Sonatrach investment.  
  - External current account surplus expected to remain sizable though gradually declining; gross external reserves projected to exceed three years of import cover by 2011.  
  - Gross external debt projected to remain low and sustainable.
- Debt prepayment and reserves (Box 2 highlights):
  - Since 2004, Algeria prepaid about $14 billion of official external debt ahead of schedule.  
  - Russia cancelled $4.7 billion Soviet-era claims in March 2006 in exchange for Algeria’s agreeing to import an equivalent amount of Russian goods and services. Paris and London Club debt worth $8.5 billion had been prepaid by end-2006; a further $2 billion prepaid to multilateral creditors in 2006.  
  - External debt-to-GDP ratio declined from about 34 percent at end-2003 to less than 4½ percent at end-2006; projected to fall to 3 percent by 2011.  
  - Reserve cover ratio rose from 18 months in 2003 to almost 25 months in 2006; projected to reach 38 months by 2011.  
  - Authorities intend to obtain a sovereign rating; Algeria’s participation as a creditor in the Enhanced HIPC Initiative awaits approval by the authorities.

### Policy Discussions and Recommendations
- Fiscal policy and public investment:
  - The ambitious public investment program requires sustained efforts to ensure the quality of expenditures. Authorities have begun reassessing projects and committed to incorporating recommendations of the public expenditure review conducted with the World Bank.  
  - The National Economic and Social Pact linking real wage increases to productivity growth and nonhydrocarbon sector performance is an important development.
- Monetary and exchange rate policy:
  - In view of fiscal expansion and wage increases, tightening monetary policy and flexible exchange rate management are required to keep inflation under control. Authorities indicated intent to increase BA’s policy interest rate to keep it at a positive level in real terms and to continue flexible exchange-rate management.
- Structural reforms:
  - Accelerate reforms to encourage private investment and job creation: prioritize banking sector reform, including privatization of the first public bank; continue liberalization of external trade; deepen Maghreb regional cooperation; streamline the tax system; complete tax administration reform; modernize customs administration; and increase pass-through of world oil prices to domestic energy prices.

### Staff Appraisal (summary points)
- Algeria has benefited from a favorable external environment and appropriate macroeconomic policies, supporting sustained growth, low inflation (until mid-2006), declining unemployment, and markedly improved fiscal and external positions.  
- The medium-term outlook is favorable if world hydrocarbon prices remain relatively high: large current account surpluses, rising gross international reserves, continued NHGDP growth of about 5 percent, but somewhat higher inflation risks due to fiscal and wage expansions.  
- Key policy priorities include safeguarding the macroeconomic framework while improving public investment quality and accelerating structural reforms—especially in the financial sector—to promote private-sector-led growth and job creation.

*Executive Summary, IMF Staff Report — _cr0772_*

### 12. Algeria’s economic outlook for the medium term is favorable. The authorities

### 12. Algeria’s economic outlook for the medium term is favorable. The authorities

### Medium-term growth outlook and inflation
- Assuming steady implementation of the public investment program and of ongoing structural reforms, real NHGDP growth is projected at 5½ percent in 2007 and about 5 percent thereafter.
- Achieving a higher growth trend would require more ambitious structural reforms.
- The planned increase in public investment and the spread of the public sector wage hike to the rest of the economy would contribute to some inflationary pressures in the coming years.
- Selected projections (2006–2011, as presented in the source table):
  - Real GDP: 2006: 2.7; 2007: 4.5; 2008: 4.1; 2009: 4.0; 2010: 4.0; 2011: 4.0
  - Hydrocarbon sector: 2006: -1.2; 2007: 2.5; 2008: 2.0; 2009: 2.0; 2010: 2.0; 2011: 2.0
  - Nonhydrocarbon sector: 2006: 4.5; 2007: 5.4; 2008: 5.1; 2009: 4.9; 2010: 4.8; 2011: 4.8
  - CPI inflation (period average): 2006: 2.2; 2007: 5.5; 2008: 5.7; 2009: 5.2; 2010: 4.6; 2011: 4.1
  - Current account balance (in percent of GDP): 2006: 24.4; 2007: 16.6; 2008: 14.4; 2009: 11.8; 2010: 10.1; 2011: 8.5

### Fiscal policy, public investment, and budgetary projections
- The draft 2007 budget includes a sizeable increase in public spending over the medium term.
- The 2005–09 public investment program would be increased to some $113 billion (equal to 2006 GDP).
- Fiscal balance projections and nonhydrocarbon primary deficit (in percent of NHGDP):
  - Nonhydrocarbon primary balance (in percent of NHGDP): 2006: -37.6; 2007: -39.2; 2008: -38.3; 2009: -36.6; 2010: -33.6; 2011: -31.3
  - Overall fiscal balance (in percent of GDP): 2006: 11.9; 2007: 9.9; 2008: 9.4; 2009: 8.3; 2010: 7.8; 2011: 7.2
- The nonhydrocarbon primary deficit would increase to about 39 percent of NHGDP in 2007; thereafter it would gradually decline to 31 percent of NHGDP by 2011, in line with long-term fiscal sustainability.
- The overall budget surplus would remain above 7 percent of GDP through 2011.
- Authorities intend to:
  - Reevaluate public investment projects to focus on those with high rates of return.
  - Strengthen monitoring and evaluation mechanisms for large investment projects.
  - Take into account recommendations of the public expenditure review (PER) conducted with the World Bank in 2005–06.
  - Modernize budget management and strengthen fiscal governance, including submitting the draft organic law on public finances to parliament before end-2006 and implementing a new budget classification system in line with Government Finance Statistics guidelines.

### Management of hydrocarbon revenue and fiscal rules
- Rules of the hydrocarbon stabilization fund (Fonds de Régulation des Recettes, FRR) were amended in the 2006 supplementary budget to allow direct financing of the nonhydrocarbon deficit (unless the balance of the FRR drops below 10 billion).
- The draft 2007 budget informs parliament of the implicit price of a barrel of oil equivalent to hydrocarbon revenue needed to finance the nonhydrocarbon deficit: 2007: $49 per barrel.
- For budget presentation purposes, the budget reference price has been kept at $19 per barrel.
- Staff’s long-term fiscal framework aims at preserving the permanent per capita income from hydrocarbon wealth by expressing a sustainable path for the nonhydrocarbon primary deficit/NHGDP ratio.
  - Sustainable nonhydrocarbon primary deficit would decrease from about 37½ percent of NHGDP in 2006 to 32½ percent in 2010 (compared to 26 percent estimated at the time of the 2005 Article IV consultation).
  - Under the framework, income from financial wealth would entirely finance the deficit that prevails after 2050 when hydrocarbon reserves are assumed to run out.
- Staff recommends aiming at a higher investment return for the growing hydrocarbon stabilization fund balance.

### Monetary policy and exchange rate
- Monetary authorities consider that the fiscal expansion and wage increases will require tightening monetary policy to forestall inflationary pressures.
- Authorities intend to increase BA’s policy interest rate to keep it at a positive level in real terms and to continue absorbing excess liquidity in the banking system.
  - Memo note: In September 2006, BA’s policy interest rate stood at 1.7 percent and average CPI inflation was at 1.3 percent.
- Staff reiterates that handling Sonatrach’s large deposits outside the banking system would strengthen BA’s control over base money.
- Authorities intend to continue managing the exchange rate in a flexible manner, taking account of the inflation objective; staff found no evidence of misalignment of the real exchange rate.
- Short-term REER influences:
  - Expansionary fiscal stance and wage increases imply real exchange rate appreciation.
  - Ongoing trade liberalization points to depreciation pressures.
  - Authorities believed an appreciation of the REER is likely in 2007 given the sizable demand stimulus.
- It is important that BA continue its flexible management of the exchange rate.

### Structural reforms — financial sector
- Further progress on financial sector reform is a priority to improve the soundness of the banking system and strengthen financial intermediation.
- The government has requested a Financial Sector Assessment Program (FSAP) update, scheduled for early 2007.
- Key developments and policies:
  - Privatization of the first public bank: sale of a majority share in Crédit Populaire d’Algérie expected to be completed in early 2007; subsequently other public banks may be privatized.
  - Objective: select banks with internationally established reputation as majority shareholders to inject modern know-how.
  - Strengthening governance of remaining public banks via stronger performance contracts, improved risk management and internal controls.
  - Modernization of the payment system, enforcement of prudential regulations by the banking commission, and improved banking supervision with Fund technical assistance.
  - The directive prohibiting public entities from dealing with private banks remains an obstacle to level playing field.
  - The government is taking over nonperforming loans of public banks to public enterprises equivalent to 4 percent of GDP.
  - Need to strictly limit bank financing of nonviable public enterprises; if necessary, provide assistance through direct government subsidies accompanied by enterprise restructuring and acceleration of privatization.
- Staff emphasizes decisive privatization, strengthened governance, and promotion of competition as paramount.

### Structural reforms — trade, customs, energy pricing, legal framework
- Trade and customs:
  - Authorities intend to continue liberalizing external trade and pursue Algeria’s accession to the WTO.
  - Decision to modernize and streamline the customs administration with Fund technical assistance.
  - Implement the 2005 Maghreb trade facilitation action plan including: set up a website on trade regulations and taxation; work toward mutual recognition of norms and controls; reduce trade distortions and informal trade; develop a one-stop document-processing system; establish a private sector-led monitoring unit on Maghreb foreign trade.
- Legal framework for foreign exchange:
  - Authorities have not yet promulgated the new draft foreign exchange regulation that implements Fund technical assistance recommendations; they indicated the regulation, which will clearly establish the current convertibility of the dinar, will be promulgated shortly.
- Energy pricing:
  - Rigidities in domestic energy pricing create inefficiencies and large implicit subsidies.
  - Staff estimated that for 2005 government’s and Sonatrach’s loss of revenue due to domestic-world price gaps amounted to 7½ percent of GDP.
  - Authorities agreed subsidies favor energy-intensive activities, discourage conservation, and give rise to smuggling.
  - Authorities indicated subsidies would be reduced gradually by raising domestic energy prices after 2007 but sought staff advice on modalities and targeted protection for vulnerable groups.

### Public expenditure review (PER) findings and budget execution recommendations
- PER covered health, education, water, and transport/public works and assessed budgetary management (conducted October 2005–June 2006).
- Diagnosis highlights:
  - Technical readiness of personnel executing projects is generally low.
  - Weak absorption capacity implies substantial cost risks.
  - Project quality is uneven; several projects fail minimum standards and should not proceed.
- Main PER recommendations:
  - Pace of implementation of the public investment program should reflect realistic absorption capacity of line ministries.
  - Implement a more even paced investment program starting with the 2007 budget.
  - Project selection should be guided by sectoral strategies within a medium-term expenditure framework.
  - Urgently modernize management and control systems for public investment and the budget.
- Staff recommends focusing on execution and monitoring of existing projects, preparing comprehensive medium-term budget projections that account for public investment implications on current expenditures, accelerating budget modernization, and implementing recommendations of the 2004 fiscal ROSC.

### Staff appraisal and principal policy recommendations
- Staff appraisal:
  - Algeria has used hydrocarbon revenues to sustain growth, reduce unemployment, keep inflation low, build international reserves, and prepay most external debt.
  - External position expected to remain strong; growth prospects favorable but fragile and still mainly driven by government investment.
  - Envisaged fiscal expansion and wage increases would result in some inflationary pressures.
- Principal staff recommendations:
  - Ensure sound management of hydrocarbon resources, notably high quality of the large public investment program.
  - Press ahead with modernization of financial intermediation and other structural reforms to increase productivity and improve the business climate.
  - Focus on execution and monitoring of public investment projects; prepare comprehensive medium-term budget projections; accelerate budget modernization; strengthen fiscal governance per 2004 fiscal ROSC.
  - Aim for a higher investment return on the hydrocarbon stabilization fund.
  - Adjust real wages more gradually, in line with productivity growth and nonhydrocarbon sector performance.
  - Bring BA’s policy interest rate to a positive level in real terms and handle Sonatrach’s deposits to strengthen monetary control.
  - Continue flexible exchange rate management.
  - Decisively privatize public banks, strengthen governance of remaining public banks, promote competition, and limit lending to nonviable public enterprises.
  - Pursue WTO accession negotiations, modernize customs administration, and enhance regional integration to attract investors and realize economic potential.
  - Reduce energy subsidies gradually after 2007 with targeted measures to protect vulnerable groups and advice on modalities from staff.

*Source: IMF staff report excerpt — Algeria: Medium-Term Projections and Policy Discussions.*

### 32. Staff urges the authorities to promulgate as soon as possible the new draft exchange

### _cr0772 - 32. Staff urges the authorities to promulgate as soon as possible the new draft exchange

### Exchange regulation
- Staff urges the authorities to promulgate as soon as possible the new draft exchange regulation, which should remove remaining ambiguities regarding the current convertibility of the dinar.

### Business climate and energy pricing
- It is important to continue to improve the business climate, including by simplifying the tax system for business activity.
- Staff also welcomes the intention of the government to gradually increase the pass-through of world oil prices to domestic energy prices.

### Statistics and technical assistance
- Staff strongly encourages the authorities to intensify their efforts to upgrade the production and dissemination of economic and financial statistics, including by benefiting from the needed technical assistance under the GDDS.

### International engagement and other items
- Staff encourages Algeria to participate as a creditor in the Enhanced HIPC Initiative, and to obtain a sovereign rating.
- 19

*https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2007/_cr0772.pdf*

### 36. It is recommended that the next Article IV consultation take place on the standard

### _cr0772 - 36. It is recommended that the next Article IV consultation take place on the standard

### National income and prices (Annual percentage change; projections through 2011)
- GDP at constant prices: 6.9, 5.2, 5.3, 2.7, 4.5, 4.1, 4.0, 4.0, 4.0
- Hydrocarbon sector: 8.8, 3.3, 5.6, -1.2, 2.5, 2.0, 2.0, 2.0, 2.0
- Other sectors: 6.0, 6.2, 5.1, 4.5, 5.4, 5.1, 4.9, 4.8, 4.8
- GDP deflator: 8.3, 10.6, 16.5, 9.0, 3.2, 6.4, 3.5, 2.3, 2.0
- Hydrocarbon deflator (annual % change): 16.3, 20.7, 38.0, 18.1, 2.5, 5.8, 0.6, -1.3, -1.4
- Nonhydrocarbon deflator (annual % change): 4.4, 5.3, 3.4, 3.5, 6.9, 8.4, 7.0, 5.9, 5.1
- Consumer price index (average): 2.6, 3.6, 1.6, 2.2, 5.5, 5.7, 5.2, 4.6, 4.1
- Consumer price index (end of period): 4.0, 2.0, 1.7, 3.1, 6.0, 5.5, 4.9, 4.3, 4.0

### External sector (Annual percentage change; projections through 2011)
- Exports, f.o.b.: 30.7, 31.7, 43.8, 16.8, 2.3, 4.7, -0.1, -1.4, -1.1
- Hydrocarbons exports: 32.5, 31.5, 44.5, 17.0, 2.3, 4.7, -0.2, -1.6, -1.3
- Nonhydrocarbons exports: -21.7, 42.6, 10.4, 6.2, 6.0, 5.9, 5.8, 5.9, 5.8
- Imports, f.o.b.: 11.2, 34.5, 10.6, 6.6, 39.9, 12.0, 7.4, 3.4, 3.6
- Terms of trade (percent change): 9.7, 13.6, 30.0, 9.4, -0.2, 6.2, 0.4, -1.9, -2.4
- Nominal effective exchange rate: -8.9, -0.1, -2.8, 0.3
- Real effective exchange rate: -9.5, 0.6, -3.9, -0.1

### Money and credit; banking aggregates (Selected levels and percent changes)
- Net foreign assets (percent change): 33.4, 33.1, 34.0, 33.7, 31.2
- Domestic credit (percent change): -4.0, -1.4, -8.6, -18.2, -19.4, -14.7
- Credit to government (net) (percent change): 5.0, -5.3, -13.2, -24.7, -17.0, -18.6
- Credit to the economy (percent change): 8.9, 11.2, 15.8, -5.5, 10.8
- Credit to the economy (real terms): 4.8, 9.1, 13.9, -8.3, 4.5
- Money and quasi-money (M2) (percent change): 15.6, 11.5, 10.7, 12.7, 17.9
- Velocity of broad money (GDP/M2): 1.6, 1.6, 1.8, 1.8, 1.6
- Liquidity ratio (M2/nonhydrocarbon GDP): 98.9, 98.6, 100.4, 105.5, 112.8
- Liquidity ratio (M2/GDP): 63.8, 61.1, 55.1, 55.7, 60.9

### Saving-investment balance and national savings (Percent of GDP)
- Saving-investment balance: 13.0, 13.1, 20.7, 24.4, 16.6, 14.4, 11.8, 10.1, 8.5
- National savings: 43.5, 46.3, 51.6, 56.3, 52.5, 51.7, 49.9, 47.4, 44.5
  - Government savings: 15.9, 14.7, 22.7, 25.3, 24.6, 24.1, 22.6, 20.9, 19.4
  - Nongovernment savings: 27.5, 31.6, 28.9, 31.1, 27.8, 27.6, 27.4, 26.5, 25.2
- Investment: 30.5, 33.3, 30.9, 31.9, 35.9, 37.3, 38.1, 37.3, 36.0
  - Government investment: 8.1, 7.9, 10.8, 13.5, 14.7, 14.7, 14.4, 13.1, 12.1
  - Nongovernment investment: 22.4, 25.4, 20.1, 18.6, 21.1, 22.6, 23.8, 24.2, 23.9

### Revenue, expenditure, and fiscal balances (Percent of GDP; projections through 2011)
- Overall budget balance (deficit -): 7.8, 6.9, 11.9, 11.9, 9.9, 9.4, 8.3, 7.8, 7.2
- Total revenue and grants: 37.0, 36.2, 41.0, 41.9, 42.2, 41.6, 40.4, 39.0, 37.8
  - Hydrocarbon revenue: 25.6, 25.6, 31.3, 32.6, 31.9, 31.2, 29.8, 28.3, 27.0
  - Nonhydrocarbon revenue: 11.3, 10.5, 9.7, 9.2, 10.2, 10.4, 10.5, 10.6, 10.9
- Grants: 0.1, 0.0, 0.0, 0.0, 0.0, 0.0, 0.0, 0.0, 0.0
- Total expenditure: 29.2, 29.3, 29.1, 30.0, 32.3, 32.2, 32.1, 31.2, 30.6
  - Current expenditure: 21.3, 20.3, 16.5, 16.6, 17.6, 17.5, 17.8, 18.1, 18.4
  - Capital expenditure: 8.1, 7.9, 10.8, 13.4, 14.7, 14.7, 14.4, 13.1, 12.1
- Domestic financing (percent of GDP): -6.1, -6.0, -10.4, -10.9, -9.6, -9.1, -8.1, -7.6, -7.1
- External financing (percent of GDP): -1.7, -0.9, -1.5, -1.0, -0.3, -0.3, -0.2, -0.2, -0.1

### Central government finance (Percent of nonhydrocarbon GDP; projections through 2011)
- Total revenue: 57.3, 58.3, 74.7, 79.4, 78.2, 75.4, 70.5, 65.5, 61.4
  - Hydrocarbon revenue: 39.8, 41.4, 57.0, 61.8, 59.2, 56.6, 52.1, 47.6, 43.8
  - Nonhydrocarbon revenue: 17.5, 17.0, 17.7, 17.5, 19.0, 18.8, 18.3, 17.9, 17.6
- Total expenditure: 45.3, 47.2, 53.0, 56.8, 59.8, 58.4, 56.0, 52.4, 49.6
  - Current expenditure: 33.0, 32.8, 30.1, 31.5, 32.5, 31.7, 31.7, 30.4, 29.9
  - Capital expenditure: 12.6, 12.7, 19.7, 25.3, 27.3, 26.7, 24.9, 22.0, 19.7
- Nonhydrocarbon primary balance: -24.3, -28.0, -33.5, -37.6, -39.2, -38.3, -36.6, -33.6, -31.3
- Nonhydrocarbon balance: -27.7, -30.3, -35.3, -39.3, -40.9, -39.6, -37.7, -34.5, -32.0
- Gross government debt (in percent of GDP): 43.8, 36.6, 28.4, 22.6, 19.5, 17.1, 14.5, 12.9, 11.3
  - Domestic: 18.7, 16.3, 14.6, 20.7, 17.8, 15.6, 13.1, 11.5, 9.9
  - External: 25.1, 20.3, 13.9, 1.9, 1.7, 1.5, 1.4, 1.4, 1.4
- Oil stabilization fund (in billions of dinars): 568, 722, 1,843, 2,716, 3,282, 4,048, 4,522, 5,233, 5,622
  - Inflow (projections): 2,728, 2,868, 3,108, 3,198, 3,229, 3,256
  - Outflow (projections): 1,848, 2,334, 2,407, 2,829, 2,656, 3,043
- Pension Fund (projection snippet): 929, 496, 990, 111

### Balance of Payments and external (2003–11; U.S. dollars unless otherwise indicated)
- Current account (in billions of $): 8.8, 11.1, 22.1, 18.2, 27.9, 19.7, 15.7, 13.9, 12.1, 7.0?
  (Table shows repeated figures across sections; see memorandum items for percent of GDP)
- Current account balance (in percent of GDP): 13.0, 13.1, 20.7, 24.4, 16.6, 14.4, 11.8, 10.1, 8.5
- Trade balance (in billions of $): 11.1, 14.2, 26.4, 73.2, 95.2, 5? (table formatting spans multiple lines)
- Exports, f.o.b. (in billions of $): 24.4, 32.2, 46.3, 54.1, 35.5, 58.0, 57.9, 57.1, 56.4
  - Hydrocarbons (in billions of $): 23.9, 31.5, 45.5, 53.3, 45.4, 55.7, 57.1, 57.0, 55.4
  - Volume change (percent): 9.2, 2.8, 5.7, -2.7, 1.9, 1.3, 1.3, 1.3, 1.2
  - Price change (percent): 21.9, 27.4, 36.6, 20.1, 0.3, 3.4, -1.5, -2.8, -2.5
- Imports, f.o.b. (in billions of $): -13.3, -15.9, -19.8, -21.1, -29.6, -33.1, -35.6, -36.8, -38.1
  - Volume change (percent): -9.4, 21.9, 7.5, -0.5, 40.0, 14.8, 9.8, 4.8, 3.3
  - Price change (percent): 22.7, 10.3, 2.8, 7.2, -0.1, -2.5, -2.2, -1.3, 0.3
- Services and income (net): -4.05, -5.61, -7.35, -6.34, -7.37, -7.95, -8.07, -7.84, -7.70
  - Services (net): -1.35, -2.01, -2.27, -2.22, -4.15, -4.86, -5.38, -5.62, -5.87
  - Income (net): -2.70, -3.60, -5.08, -4.13, -3.22, -3.09, -2.69, -2.23, -1.83
  - Interest payments (component): -1.18, -1.29, -1.03, -0.58, -0.25, -0.24, -0.23, -0.23, -0.23
- Transfers (net): 1.75, 2.46, 2.06, 1.29, 1.34, 1.39, 1.44, 1.49, 1.54
- Capital account: -1.37, -1.87, -4.23, -11.19, 0.11, 0.16, 0.65, 0.93, 0.96
- Medium- and long-term capital: -0.76, -1.61, -1.99, -10.05, 0.71, 0.88, 1.14, 1.35, 1.40
  - Direct investment (net): 0.62, 0.62, 1.06, 1.37, 1.04, 1.11, 1.19, 1.27, 1.35
  - Loans (net): -1.38, -2.23, -3.05, -11.42, -0.33, -0.23, -0.05, 0.09, 0.05
  - Drawings: 1.65, 2.12, 1.41, 0.88, 1.10, 1.28, 1.40, 1.46, 1.51
  - Amortization: -3.03, -4.35, -4.46, -12.30, -1.43, -1.51, -1.45, -1.38, -1.46
- Short-term capital and errors and omissions: -0.61, -0.26, -2.24, -1.15, -0.60, -0.71, -0.49, -0.43, -0.44
- Overall balance (in billions of $): 7.4, 9.2, 16.9, 16.7, 19.8, 18.4, 16.3, 14.8, 13.1
- Official reserves (end-period, in billions of $): 32.9, 43.1, 56.2, 74.6, 94.6, 113.2, 129.7, 144.9, 158.5
  - In months of next year's imports of G&S: 18.1, 21.0, 25.7, 24.4, 27.6, 30.7, 34.1, 36.8, 38.4
- External debt (gross, in billions of $): 23.4, 21.8, 17.2, 4.9, 4.6, 4.3, 4.3, 4.4, 4.5
- External debt (in percent of GDP): 34.3, 25.7, 16.8, 4.3, 3.8, 3.4, 3.2, 3.2, 3.1
- External debt service (in percent of exports): 17.9, 17.6, 12.5, 22.6, 2.9, 2.9, 2.7, 2.7, 2.8
- Crude oil export unit value ($/barrel, memo): 29.0, 38.5, 54.6, 67.3, 65.4, 65.7, 63.8, 62.0, 60.4
- Crude oil exports (millions of barrels/day): 0.7, 0.9, 1.0, 1.0, 1.0, 1.0, 1.0, 1.0, 1.0
- GDP (current prices, in billions of dinars): 5,264, 6,127, 7,519, 8,384, 9,039, 10,015, 10,783, 11,465, 12,156
- GDP (current prices, in billions of $): 68.0, 85.0, 102.4, 114.2, 119.2, 127.4, 132.9, 137.7, 142.9
- Per capita GDP (in $): 2,136, 2,627, 3,097, 3,403, 3,499, 3,684, 3,787, 3,866, 3,953
- Population (in millions): 31.8, 32.4, 33.1
- Unemployment rate (in percent) 9/: 23.7, 17.7, 15.3

### Table 3: Summary of Central Government Operations (2003–11; in billions of Algerian dinars and percent of GDP)
- Budget revenue and grants (in billions of dinars): 1,947, 2,215, 3,083, 3,512, 3,813, 4,165, 4,352, 4,470, 4,596
  - Hydrocarbon revenue: 1,350, 1,571, 2,353, 2,737, 2,887, 3,128, 3,219, 3,250, 3,277
  - Nonhydrocarbon revenue: 595, 644, 730, 775, 926, 1,037, 1,133, 1,220, 1,319
    - Tax revenue: 525, 580, 640, 686, 835, 943, 1,037, 1,122, 1,219
      - Taxes on income and profits: 128, 148, 168, 208, 236, 275, 307, 339, 372
      - Taxes on goods and services: 234, 274, 309, 342, 415, 464, 508, 548, 594
      - Customs duties: 144, 139, 144, 111, 157, 175, 189, 199, 213
      - Registration and stamps: 19, 20, 20, 24, 26, 30, 33, 37, 40
    - Nontax revenues: 70, 64, 90, 89, 91, 194, 96, 98, 100
      - Fees: 24, 27, 35, 40, 43, 45, 47, 49, 52
      - Bank of Algeria dividends and interests: 42, 30, 49, 49, 49, 49, 49, 49, 49
  - Grants: 2.9, 0.0, 0.0
- Total expenditure (in billions of dinars): 1,691, 1,892, 2,052, 2,514, 2,920, 3,227, 3,460, 3,576, 3,716
  - Current expenditure: 1,121, 1,245, 1,241, 1,394, 1,587, 1,751, 1,919, 2,076, 2,241
    - Personnel expenditure: 398, 447, 492, 548, 627, 708, 797, 888, 976
    - Mudjahidins' pensions: 63, 69, 80, 96, 103, 103, 103, 102, 101
    - Material and supplies: 59, 72, 76, 88, 104, 129, 155, 172, 190
    - Current transfers: 488, 573, 520, 588, 674, 737, 795, 852, 917
    - Interest payments: 114, 85, 73, 74, 80, 75, 70, 62, 57
  - Capital expenditure: 570, 646, 811, 1,120, 1,333, 1,476, 1,541, 1,500, 1,475
- Budget balance (in billions of dinars): 256, 323, 1,031, 997, 893, 937, 891, 894, 880
- Special accounts: 187, 110, -129, 0, 0, 0, 0, 0, 0
- Nonhydrocarbon primary balance (in billions of dinars): -826, -1,064, -1,383, -1,665, -1,914, -2,116, -2,258, -2,294, -2,340
- Primary balance (in billions of dinars): 524, 507, 970, 1,072, 973, 1,012, 961, 956, 937
- Nonhydrocarbon balance (in billions of dinars): -940, -1,149, -1,456, -1,740, -1,994, -2,190, -2,327, -2,356, -2,397
- Financing and financing composition (in billions of dinars): Overall balance 410, 421, 897, 997, 893, 937, 891, 894, 880; Financing -410, -421, -897, -997, -893, -937, -891, -894, -880
  - Bank financing: -267, -435, -1,002, -918, -866, -910, -870, -877, -864
    - Borrowing: -100, -365, -64, -128, -147, -168, -98, -103
    - Change in cash balances: -168, -432, -1,067, -854, -738, -763, -702, -779, -760
  - Nonbank: -526, 722, 170, 0, 0, 0, 0, 0
  - Foreign: -91, -53, -116, -87, -27, -28, -21, -17, -16

### Monetary Survey (Table 4; end-period levels and percent changes)
- Net foreign assets (end-period, billions of dinars): 2,342.7, 3,119.2, 4,179.4, 5,589.7, 7,332.4
  - Of which: Bank of Algeria: 2,325.9, 3,109.1, 4,151.5, 5,561.3, 7,303.0
- Net domestic assets (end-period, billions of dinars): 1,015.2, 623.4, -37.0, -921.0, -1,828.5
- Domestic credit (end-period, billions of dinars): 1,803.6, 1,514.4, 833.7, 31.4, -654.1
  - Credit to government (net): 423.4, -20.6, -944.5, -1,649.6, -2,515.8
    - Idem, excluding treasury advance: -2,249.3, -2,994.9 (partial series)
  - Credit to the economy: 1,380.2, 1,535.0, 1,778.3, 1,680.9, 1,861.7
    - Of which: Private sector: 587.8, 676.4, 882.2
- Other items net: -788.4, -891.0, -870.8, -952.4, -1,174.5
- Money and quasi-money (M2) (end-period, billions of dinars): 3,357.9, 3,742.6, 4,142.4, 4,668.6, 5,503.8
  - Money: 1,630.4, 2,160.6, 2,417.4, 2,801.2, 3,247.3
  - Quasi-money: 1,727.5, 1,582.0, 1,724.9, 1,867.5, 2,256.6
- M2 percent change (12-month): 15.6, 11.5, 10.7, 12.7, 17.9
  - Money (percent change): 15.1, 32.5, 11.9, 15.9, 15.9
- Credit to the economy percent change: 8.9, 11.2, 15.8, -5.5, 10.8
- Credit to the economy in real terms: 4.8, 9.1, 13.9, -8.3, 4.5
- Liquidity ratio (e.o.p. M2/GDP): 63.8, 61.1, 55.1, 55.7, 60.9
- Liquidity ratio (e.o.p. M2/NHGDP): 98.9, 98.6, 100.4, 105.5, 112.8
  - Excluding deposits of Sonatrach: 91.4, 89.6, 88.3, 90.6, 92.4
- M2 velocity: 1.6, 1.6, 1.8, 1.8, 1.6
- Credit to the economy/GDP: 26.2, 25.1, 23.7, 20.0, 20.6
- Credit to the economy/NHGDP: 40.7, 40.4, 43.1, 38.0, 38.2
- Credit to private sector/NHGDP: 17.3, 17.8, 21.4

### Bank of Algeria summary balance sheet (Table 5; end-period levels)
- Net foreign assets (in billions of dinars): 2,325.9, 3,109.1, 4,151.5, 5,561.3, 7,303.0
- Assets (in billions of dinars): 2,419.7, 3,173.2, 4,171.8, 5,564.5, 7,306.4
- Liabilities (in billions of dinars): 93.7, 64.1, 20.4, 3.3, 3.4
- Net domestic assets (in billions of dinars): -923.7, -1,549.0, -2,488.4, -3,392.8, -4,480.2
- Credit to government (net): -464.1, -915.8, -1,986.5, -2,763.4, -3,629.6
  - Claims on government: 142.0, 122.1, 118.1, 717.8, 590.0
  - Treasury advance (noted): 599.7, 479.1 (partial series)
  - Government deposits: 606.1, 1,037.9, 2,104.6, 3,481.2, 4,219.6
- Credit to banks: 0.0
- Other credit: 0.7, 0.6, 0.8, 1.6, 1.6
- Other items net: -460.3, -633.8, -502.7, -631.1, -852.2
- Deposit auction (- = liquidity injection): 250.0, 400.0, 499.8, 891.2, 1,313.3
- Reserve money (end-period): 1,152.3, 1,160.1, 1,163.3, 1,277.2, 1,509.5
  - Currency in circulation: 787.7, 882.5, 930.3, 1,037.5, 1,223.1
  - Banks' deposits: 364.6, 277.6, 233.1, 239.8, 286.4
- Reserve money growth (percent): 36.1, 0.7, 0.3, 9.8, 18.2
- M2 money multiplier: 2.9, 3.2, 3.6, 3.7, 3.6
- Reserve ratio: 15.2, 10.3, 7.9, 7.5, 7.5
  - Of which: Required: 5.3, 5.8, 5.8, 6.3, 6.3
- Currency ratio: 32.5, 32.5, 31.3, 30.6, 30.2
- Rediscount rate (in percent): 4.5, 4.0, 4.0, 4.0
- Deposit auction rate (in percent): 1.75, 0.75, 1.68, 1.63

### Deposit money banks summary balance sheet (Table 6; end-period)
- Net foreign assets (in billions of dinars): 16.7, 10.1, 27.9, 28.4, 29.4
- Assets (in billions of dinars): 55.5, 76.6, 91.6, 93.1, 96.4
- Liabilities (in billions of dinars): 38.8, 66.6, 63.6, 64.7, 67.0
- Net domestic assets (in billions of dinars): 2,426.2, 2,695.3, 2,916.6, 3,329.1, 3,979.5
- Domestic credit (in billions of dinars): 2,136.9, 2,271.3, 2,543.3, 2,509.1, 2,689.9
  - Credit to government (net): 757.4, 736.9, 765.9, 829.8, 829.8
  - Credit to the economy: 1,379.5, 1,534.4, 1,777.4, 1,679.3, 1,860.1
    - Of which: Private sector: 587.8, 674.7, 881.6
- Other items (net): -328.1, -257.2, -368.0, -321.3, -322.3
- Deposit auction: 250.0, 400.0, 499.8, 891.2, 1,313.3
- Reserves: 373.8, 280.6, 194.3, 250.1, 298.5
  - Cash in vault: 6.3, 8.1, 9.2, 10.3, 12.2
  - Deposits at BA: 367.4, 272.5, 185.1, 239.8, 286.4
    - Of which: Required reserves: 126.7, 157.3, 171.5, 209.5, 250.3
    - Deposits at BA/Required reserves: 2.9, 1.7, 1.1, 1.1, 1.1
- Demand deposits: 718.9, 1,127.9, 1,220.4, 1,490.0, 1,752.3
- Time deposits: 1,724.0, 1,577.5, 1,724.2, 1,867.5, 2,256.6

### Financial indicators and vulnerability (selected)
- Central government identified debt (percent of GDP): 43.8, 36.6, 28.4, 22.6
- Broad money (percent change, 12-month basis): 15.6, 11.5, 10.7, 12.7
- 13 weeks T-bill yield (in percent per annum): 1.1, 0.1, 0.8, 2.1
- 13 weeks T-bill yield (real; percent): -3.0, -2.0, -0.9, -1.0
- External indicators (selected): Exports (12-month $ change): 30.7, 31.7, 43.8, 16.8; Imports (12-month $ change): 11.2, 34.5, 10.6, 6.6; Terms of Trade (12-month): 9.7, 13.6, 30.0, 9.4
- Current account balance (percent of GDP): 13.0, 13.1, 20.7, 24.4
- Capital and financial account balance: -2.0, -2.2, -4.1, -9.8
- Gross official reserves (in $ billions): 32.9, 43.1, 56.2, 74.6
- Official reserves (in months of imports GNFS): 18.1, 21.0, 25.7, 24.4
- Broad money to reserves (percent): 140.4, 119.6, 99.9, 86.8
- Total external debt (percent of GDP): 34.3, 25.7, 16.8, 4.3
- Total external debt to exports GNFS (percent): 89.7, 64.0, 35.2, 8.6
- External interest payments to exports GNFS (percent): 4.5, 3.8, 2.1, 1.0
- External amortization payments to exports GNFS (percent): 11.6, 12.8, 9.1, 21.6
- Exchange rate (per $, period average): 77.4, 72.1, 73.4, 72.9
- REER appreciation (12 month basis): -9.5, 0.6, -3.9, -0.1

Financial soundness indicators (selected)
- Capital adequacy ratio (percent of risk-weighted assets): 14.4, 14.4, 12.9
  - Public banks: 14.0, 13.9, 12.0
  - Private banks: 19.4, 21.2, 23.7
- Gross nonperforming loans (percent of total loans): ... , 37.0, 35.7
  - Public banks: ... , 39.2, 38.2
  - Private banks: ... , 6.7, 5.8
- Provisions (percent of nonperforming loans): ... , 46.3, 49.3
  - Public banks: ... , 45.9, 49.2
  - Private banks: ... , 82.2, 62.3
- Return on assets (percent): 0.4, 0.3, 0.4
  - Public banks: 0.4, 0.2, 0.3
  - Private banks: 0.9, 1.6, 2.2
- Return on equity (percent): 6.7, 5.2, 8.1
  - Public banks: 6.2, 3.4, 5.6
  - Private banks: 12.6, 23.5, 25.4

### Millennium Development Goals and social indicators (selected, 1990–2005)
- Net primary enrollment ratio (%): 93.2 (1990), 94.2 (2003), 96.0 (2005), 97.0
- Primary completion rate, total (%): 80.8, 79.7, 84.0, 82.5, 92.8, 94.3
- Proportion of pupils starting grade 1 who reach grade 5: 94.5, 95.0, 97.0, 97.0, 96.0
- Youth literacy rate (% ages 15–24): 90.1, 90.0
- Proportion of seats held by women in national parliament (%): 2.0, 7.0, 3.0, 6.0, 6.2
- Ratio of girls to boys in primary and secondary education (%): 83.3, 97.7, 98.6, 98.9
- Immunization, measles (% of children ages 12–23 months): 83.0, 88.0, 92.0, 80.0, 84.0, 81.0
- Infant mortality rate (per 1,000 live births): 54.0, 43.0, 37.0, 35.0
- Under 5 mortality rate (per 1,000): 69.0, 55.0, 44.0, 40.0
- Births attended by skilled health staff (% of total): 92.0, 96.0
- Contraceptive prevalence rate (% of women ages 15–49): 57.0
- Incidence of tuberculosis (per 100,000 people): 36.6, 54.0
- Access to an improved water source (% of population): 94.0, 85.0
- Access to improved sanitation (% of population): 88.0, 92.0
- Aid per capita (current $): 5.2, 10.6, 8.6, 6.6, 7.4, 9.7
- Fixed line and mobile phone subscribers (per 1,000 people): 32.1, 40.5, 48.6, 60.6, 114.3, 215.4
- Internet users (per 1,000 people): 0.0, 0.0, 14.9, 20.4, 26.1
- Personal computers (per 1,000 people): 1.0, 2.6, 4.8, 6.6, 8.3, 9.0
- Youth unemployment (% ages 15–24): 38.7, 54.9, 45.5, 31.0

*Sources: Algerian authorities; and Fund staff estimates and projections.*

### Appendix I. Algeria: Relations with the Fund

### Appendix I. Algeria: Relations with the Fund (As of October 31, 2006)

### A. Financial Relations

- Membership Status
  - Joined 9/26/63; Article VIII

- General Resources Account
  - Quota: 1,254.70 SDR Million (100.00 percent of quota)
  - Fund holdings of currency: 1,169.62 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 of allocation)
  - Holdings: 3.92 SDR Million (3.05 percent)

- Outstanding Purchases and Loans: None.

- Financial Arrangements (Approval Date / Expiration Date / Approved (SDR Million) / Drawn (SDR Million))
  - EFF: Approval 5/22/95; Expiration 5/21/98; Approved 1,169.28; Drawn 1,169.28
  - Stand-by: Approval 5/27/94; Expiration 5/22/95; Approved 457.20; Drawn 385.20
  - Stand-by: Approval 6/03/91; Expiration 3/31/92; Approved 300.00; Drawn 225.00

- Projected Obligations to Fund (SDR million; based on existing use of resources and present holdings of SDRs)
  - Overdue / Forthcoming columns presented as in source:
    - Principal: 0.00 (Overdue) 0.00 0.00 0.00 0.00 (Forthcoming 2006 2007 2008 2009 2010)
    - Charges/interest: 0.00 (Overdue) 1.23 5.05 5.06 5.05 5.05 (Forthcoming 2006 2007 2008 2009 2010)
    - Total: 0.00 (Overdue) 1.23 5.05 5.06 5.05 5.05 (Forthcoming 2006 2007 2008 2009 2010)

- Implementation of HIPC Initiative: Not Applicable.

### B. Nonfinancial Relations

- Exchange Rate Arrangement
  - From January 21, 1974 to October 1, 1994, the dinar was determined on the basis of a fixed relationship with a basket of currencies, adjusted from time to time.
  - On October 1, 1994, the Bank of Algeria introduced a managed float for the dinar through daily fixing sessions that included six commercial banks.
  - This system was replaced by an interbank foreign exchange market as of January 2, 1996.
  - At the end of September 2006:
    - Average of the buying and selling rates for the U.S. dollar: $1 = DA 72.12
    - Equivalent: SDR 1 = DA 106.47
  - No margin limits are imposed on the buying and selling exchange rates in the interbank foreign exchange market, except for a margin of DA 0.017 between the buying and selling rates of the Bank of Algeria for the dinar against the U.S. dollar.
  - The exchange regime is a managed float with no preannounced path for the exchange rate.
  - Full surrender requirements are in effect on hydrocarbon export proceeds.
  - Limits on the making of payments for invisible transactions and current transfers, which have remained since Algeria accepted the obligations of Article VIII, sections 2(a), 3, and 4, in 1997, are indicative according to the authorities.
  - Inward direct investment is generally free of restrictions; controls are maintained on other capital account payments and transfers.

- Latest Article IV Consultation
  - Discussions for the 2005 Article IV consultation with Algeria were held in Algiers during October 1–16, 2005.
  - The staff report (IMF Country Report No 06/93) was discussed by the Executive Board on February 13, 2006 and published on March 9, 2006.

- Technical Assistance (missions and expert visits listed chronologically as in source)
  - MAE consultant visits: February and April 2003 to assist the Bank of Algeria to develop its bank supervision and regulation capability.
  - FAD consultant visit: September–October 2003 to advise on the ongoing process of customs modernization.
  - MFD experts: 2003–04 to advise on bank liquidation, bank supervision and inspection, reserve management, and information systems for bank oversight.
  - FAD mission: March 2004 to advise on tax administration.
  - STA expert: March 2004 to advise on national accounts.
  - MFD expert: May 2004 to advise on foreign exchange reserves management.
  - MFD mission: July 2004 to advise on liquidity management and instruments of monetary policy.
  - STA expert: November–December 2004 to advise on national accounts.
  - MFD expert: January–February 2005 to advise on bank inspection.
  - STA expert: June–July 2005 to advise on the development of quarterly national accounts statistics.
  - MFD mission: July 2005 to advise on liquidity management and monetary operations.
  - MFD/LEG mission: July 2005 to advise on the exchange regime and the development of the foreign exchange market.
  - MFD expert: October 2005 to advise on foreign exchange reserve management.
  - MFD missions: September 2005, December 2005, and May 2006 to advise on bank restructuring.
  - MFD expert: several visits from February through September 2006 to assist the Bank of Algeria to develop its bank supervision and regulation capability.
  - MFD expert: January–February 2006 to advise on monetary and foreign exchange operations.
  - MFD expert: February and May 2006 to advise on foreign exchange reserve management.
  - STA mission: May 2006 to advise on monetary and financial statistics.
  - MFD expert: May 2006 to advise on payment systems.
  - STA mission: May 2006 to advise on consumer price statistics.

- Financial Sector Assessment Program (FSAP)
  - Algeria participated in the FSAP in 2003. Missions were conducted in March and June 2003.
  - Conclusions were discussed with the authorities in October 2003.
  - The Executive Board discussed the Financial System Stability Assessment on January 14, 2004 (see IMF Country Report No. 04/138).
  - The FSSA was published on May 17, 2004.

- Resident Representative/Advisor
  - None.

*Appendix I. Algeria: Relations with the Fund (As of October 31, 2006).*

### Appendix III. Algeria: Statistical Issues

### Appendix III. Algeria: Statistical Issues

### Overview / Data provision
- Algeria’s data provision to the Fund is broadly adequate for effective surveillance, but there are serious weaknesses particularly in government finance statistics.
- Contributing factors: lack of financial resources for statistics compilation, insufficient interagency coordination, concerns about accuracy and reluctance to publish provisional data.

### GDDS participation and technical assistance
- Algeria decided to participate in the GDDS in February 2006.
- A national coordinator has been nominated and the authorities are in the process of producing GDDS metadata.
- GDDS participation and technical issues will be discussed during the STA multisector statistics mission scheduled for early 2007.

### Real sector statistics
- Real sector data are reported to STA on an irregular basis and with substantial lags.
- The latest national accounts information published in the International Financial Statistics (IFS) pertains to partial data reported for 2003.
- IFS import trade data at current prices are derived from Direction of Trade Statistics.
- Recommendation from the September 2002 multisector statistics mission: give priority to move the compilation of national accounts to 1993 SNA.
- STA missions during 2004–05 assisted the National Statistical Office with development of quarterly national accounts.

### Government finance statistics (GFS)
- Algeria reported GFS for 1994–2002 for publication in the GFS Yearbook, but institutional coverage is limited to Budgetary Central Government (in a wide sense: general budget, annexed budget, special treasury accounts).
- Clarification sought on recording of special treasury accounts (net versus gross).
- No sub-annual data are submitted for IFS publication.
- September 2002 mission recommendations and implementation status:
  - Recommended designation of a coordinator and assignment of at least one economist for GFS compilation; authorities have not yet followed up on assigning GFS leadership to the General Directorate of Accounting in the ministry of finance.
  - Recommended establishing an automated bridge table between the detailed monthly Treasury ledger (Balance générale) and the GFS table (Situation Résumée des Opérations du Trésor—SROT) to ensure more timely production of quarterly and monthly GFS and timely reporting of quarterly data that fully reconcile SROT with budget presentation.
  - The ongoing changeover to an enhanced chart of accounts of the Treasury offers an opportunity to revamp GFS compilation organization and processes.
- Specific technical recommendations from the mission:
  - Show proceeds of the oil stabilization fund (FRR) as revenue (rather than financing).
  - Compile more detailed breakdowns, particularly for the item “other transfers”.
  - Report the three large debt assumption operations carried out over the past decade more appropriately.
  - Undertake further work on financing and reconciliation with monetary statistics.
- Meeting GDDS and eventually SDDS standards would require substantial efforts in extension of coverage: consolidate operations of social security and Wilayate, and subsequently other administrative bodies and municipalities.

### Monetary accounts and financial sector data
- Monetary data are broadly adequate for policy formulation and monitoring.
- Coverage improvements noted: consolidation of data from CNEP beginning December 1998 and CNMA-banque beginning January 2002.
- Ongoing shortcomings:
  - Reporting of balance sheet data by some state-owned commercial banks is very untimely.
  - Most commercial banks do not report complete data needed to compile the monetary survey.
  - Prudential data reported by banks are untimely and unreliable for state-owned banks.
- May 2006 monetary and financial statistics mission reiterated recommendations:
  - Strictly enforce reporting obligations of banks by introducing high penalties.
  - Further extend coverage of monetary statistics to include operations of finance companies.
  - Undertake a major revision of the outdated chart of accounts and accounting guidelines applied to banks and finance companies.

### Balance of payments (BOP)
- September 2002 multisector statistics mission observations:
  - Bank of Algeria’s legal authority to collect data is limited to banking and financial institutions only.
  - Data sources need expanding by conducting enterprise surveys in addition to traditional exchange-based records.
  - A more rigorous and uniform application of the residency criterion should be followed.
  - Quarterly data are compiled but not regularly disseminated.
  - International investment position data are not compiled.
- Algeria does not report BOP data to STA; there are no BOP data in IFS or in the BOPSY.
- These issues will be examined during the forthcoming multisector statistics mission.

### Key statistical dissemination status (as of November 14, 2006)
- Exchange Rates: latest observation 10/31/06; date received 11/12/06; Frequency of Data: D; Frequency of Reporting: M; Frequency of publication: W
- International Reserve Assets and Reserve Liabilities of the Monetary Authorities: latest observation 10/30/06; date received 11/12/06; Frequency of Data: D; Frequency of Reporting: M; Frequency of publication: M
- Reserve/Base Money: latest observation 10/06; date received 11/12/06; Frequency of Data: M; Frequency of Reporting: M; Frequency of publication: M
- Broad Money: latest observation 06/06; date received 11/12/06; Frequency of Data: M; Frequency of Reporting: M; Frequency of publication: M
- Central Bank Balance Sheet: latest observation 10/06; date received 11/12/06; Frequency of Data: M; Frequency of Reporting: M; Frequency of publication: A
- Consolidated Balance Sheet of the Banking System: latest observation 06/06; date received 11/12/06; Frequency of Data: M; Frequency of Reporting: M; Frequency of publication: A
- Interest Rates: latest observation 08/06; date received 09/25/06; Frequency of Data: M; Frequency of Reporting: M; Frequency of publication: M
- Consumer Price Index: latest observation 08/06; date received 09/25/06; Frequency of Data: M; Frequency of Reporting: M; Frequency of publication: M
- Revenue, Expenditure, Balance and Composition of Financing – General Government: latest observation 06/05; date received 10/01/05; Frequency of Data: Q; Frequency of Reporting: I; Frequency of publication: A
- Revenue, Expenditure, Balance and Composition of Financing – Central Government: latest observation 06/05; date received 10/01/05; Frequency of Data: Q; Frequency of Reporting: I; Frequency of publication: A
- Stocks of Central Government and Central Government-Guaranteed Debt: latest observation 06/05; date received 10/01/05; Frequency of Data: Q; Frequency of Reporting: I; Frequency of publication: A
- External Current Account Balance: latest observation 06/05; date received 08/31/05; Frequency of Data: Q; Frequency of Reporting: Q; Frequency of publication: A
- Exports and Imports of Goods and Services: latest observation 06/05; date received 08/31/05; Frequency of Data: Q; Frequency of Reporting: Q; Frequency of publication: A
- GDP/GNP: latest observation 12/04; date received 04/27/05; Frequency of Data: A; Frequency of Reporting: A; Frequency of publication: A
- Gross External Debt: latest observation 12/04; date received 04/27/05; Frequency of Data: A; Frequency of Reporting: A; Frequency of publication: A

*Source: Appendix III. Algeria: Statistical Issues (IMF).*

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