## _cr09108

## Source details

**Canonical URL:** [_cr09108](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr09108.pdf)

## Other formats

- [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr09108.pdf.md)
- [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr09108.pdf.json)

---

### Background and recent developments
- Political context: political situation remains stable; periodic bomb attacks underline the threat posed by Al‑Qaeda in the Maghreb. Presidential elections will take place in 2009; President Bouteflika will likely run for a third term.
- Structural features:
  - Nonhydrocarbon GDP (NHGDP) is around 55 percent of total GDP.
  - Hydrocarbons represent 98 percent of total exports and 75–80 percent of budget revenues.
  - External debt has been virtually eliminated.
  - Government savings in the oil stabilization fund (FRR) are large.
  - High youth unemployment; productivity and business climate compare poorly with trading partners.
- Recent macro outcomes:
  - NHGDP growth: 6.3 percent in 2007; overall growth averaged 4 ½ percent in 2003–07.
  - Early indications point to a slightly lower NHGDP outcome in 2008 due to a poor cereal harvest.
  - Overall growth projected at about 3 percent in 2008.
  - Current account surplus above 20 percent of GDP in 2007–08.
  - Official reserves: $136 billion at end-October 2008 (2 ½ years of imports).
  - Average annual CPI inflation: 4.2 percent at end-October 2008 (1.2 percent, when excluding food).
  - Nominal and real effective exchange rates depreciated by 0.1 percent and 1.2 percent, respectively, during January–September 2008.
  - 2008 supplementary budget increased PIP outlays, the wage bill, and transfers to social sectors; nonhydrocarbon primary deficit will exceed 52 percent of NHGDP (compared with 44 percent in 2007).
  - Higher hydrocarbon revenue expected to almost double the overall budget surplus to 8 percent of GDP in 2008.

### Global financial crisis: transmission and vulnerabilities
- Limited direct financial contagion:
  - Total external debt: 3 percent of GDP in 2008; external public debt: less than 1 percent of GDP.
  - Banks’ external liabilities: less than 1 percent of total liabilities.
  - Banking system is 90 percent public; foreign portfolio investment not yet authorized.
  - FDI averaged 1 percent of GDP per year (total of $8.5 billion in the past ten years); profit repatriation drained less than 1 percent of international reserves.
  - Banks required to deposit end‑of‑day foreign exchange balances at the central bank, centralizing FX risk.
- Economic channels and vulnerabilities:
  - Main risk: lower oil prices and recession in Europe reducing hydrocarbon revenues and NG exports concentrated in Italy, Spain, France, United Kingdom.
  - Domestic demand depends heavily on investment by the government and Sonatrach; accumulated savings: $60 billion (government) and $17 billion (Sonatrach).
  - Nonhydrocarbon growth driven by large investment programs; NH exports ≈ 2 percent of NHGDP. Scaling back/delays in planned investments could significantly affect growth.

### Outlook and quantified risks (short term)
- Oil price and trade effects:
  - Staff projection: WEO oil prices decline from $98/bbl in 2008 to $54/bbl in 2009.
  - High imports from PIP and Sonatrach investments combined with lower oil prices would shift the current account to a deficit of 3 percent in 2009, while reserve cover would remain above two years of imports.
- Fiscal outlook:
  - Overall fiscal balance would turn negative with a deficit of 11 ½ percent of GDP in 2009.
  - 2009 budget envisages a slight drop in the nonhydrocarbon primary deficit to 51 ½ percent of NHGDP.
- Growth and inflation:
  - NHGDP growth projected at about 6 percent in 2009 provided government and Sonatrach draw down savings to continue investment programs.
  - Overall growth projected to decelerate to 2 ½ percent in 2009.
  - Inflation would stay low under the projected scenario.

### Management of oil wealth and public finances
- Hydrocarbon receipts:
  - Around two thirds of hydrocarbon receipts accrue to the budget; remainder to Sonatrach.
- Reserve and FRR management:
  - Hydrocarbon export receipts fully surrendered to the central bank and form part of international reserves.
  - Since 2004 reserves split between a small “liquid” part and a large portfolio of high‑grade fixed‑income securities.
  - Active reserve management returned between 3 percent and 4 percent per year since 2004.
  - FRR is a subaccount of the government at the central bank in dinars and lacks governance arrangements and investment goals typical of sovereign wealth funds.
  - Sonatrach’s custody arrangements: deposits in local currency in the public anchor bank, held mostly as short‑term claims on the central bank.

### Medium-term baseline outlook (2009–2013)
- Assumptions and summary:
  - Oil prices gradually recover to $78/bbl in 2013.
  - FRR reserves (37 percent of 2008 GDP) would cover deficits over 2009–13 under the staff’s baseline.
- Under this assumption:
  - Average annual NHGDP growth ≈ 5 ½ percent.
  - Inflation stays below 4 percent.
  - Current account only slightly negative.
  - Official reserves close to two years of import cover.
  - Overall fiscal deficit reduced to about 5 percent of GDP by 2013 with projected oil price increase.

### Key projection series (2007–2013)
- Real GDP growth: 3.0, 3.0, 2.6, 3.9, 3.9, 4.1, 4.4
- Hydrocarbon sector growth: -0.9, -0.6, -1.0, 0.0, 0.7, 1.5, 2.3
- Nonhydrocarbon sector growth: 6.3, 5.8, 6.0, 5.8, 5.6, 5.5, 5.5
- CPI inflation (period average): 3.6, 3.9, 3.8, 3.4, 3.3, 3.2, 3.1
- Current account balance (in percent of GDP): 22.6, 20.2, -2.9, -0.9, -1.0, -1.3, -1.5
- Nonhydrocarbon primary balance (in percent of NHGDP): -44.0, -52.1, -51.4, -49.7, -47.9, -44.7, -42.5
- Overall fiscal balance (in percent of GDP): 4.5, 8.2, -11.5, -8.6, -7.3, -5.9, -5.2
- Oil prices (US$/bbl): 71.1, 97.5, 54.3, 64.8, 71.3, 75.0, 77.5

### Risks and alternative scenarios (medium term)
- Main risks:
  - Recession in Europe and significant decline in oil revenues; prolonged low oil prices would depress growth.
  - Hydrocarbon output could slow further if the European recession is deeper/longer.
  - Nonhydrocarbon growth would be lower if oil prices stay low for an extended period.
- Alternative scenario:
  - Oil prices at $40/bbl until 2013: current policies could not be maintained very long because the overall fiscal deficit would deplete FRR reserves by 2011.
  - Required fiscal adjustment would include paring back the PIP, implying slower NH growth and likely higher unemployment.

### Fiscal policy: findings and recommendations
- Findings:
  - Recent steep increase in current expenditure pushed the nonhydrocarbon fiscal deficit above long-term sustainable level.
  - Expected PIP decline by 2013 lowers nonhydrocarbon deficit to 43 percent of NHGDP, still above sustainable level.
  - Short-term fiscal stance deviates from sustainable path to support NH growth; FRR reserves sufficient to maintain this stance over 2009–13.
  - Domestic public debt: 6 percent of GDP.
- Sustainability benchmark:
  - Deficit needs reduction to 34 percent of NHGDP in the medium term to ensure intergenerational equity (staff analysis).
- Policy recommendations:
  - Rationalize current expenditure: contain wage bills; improve targeting of transfers and subsidies.
  - Prioritize capital expenditures: prioritize and phase PIP projects.
  - Improve nonhydrocarbon tax collection: strengthen tax and customs administration efficiency; eliminate exemptions; lower personal tax rates; simplify customs formalities.
- Quantified policy impact (staff estimate):
  - By 2013, measures could lower current and capital expenditures by 5 ½ percent and 2 percent of NHGDP, respectively.
  - Revenue-to-NHGDP ratio could be enhanced by 1 percent of NHGDP.
- Authorities’ stance:
  - Intend to maintain the 2009 fiscal stance and draw down FRR reserves to limit global crisis impact.
  - Developing contingency plans to reduce public spending if oil prices remain low.
  - Expect fiscal deficit likely lower than budgeted in 2009 due to lower wheat and milk subsidies (3.2 percent of NHGDP).
  - Corporate tax reduced from 25 percent to 19 percent; unit established to monitor tax expenditures; IT modernization with e-filing continues.

### Monetary and exchange rate policy: findings and recommendations
- Staff findings:
  - Greater flexibility in monetary policy is needed given heightened international uncertainty.
  - BA has limited inflationary impact of increased liquidity using liquidity absorption facilities and flexible exchange rate management.
  - Lower import prices should help keep inflation under control and increase room for reducing interest rates.
  - Desired cost of credit could be signaled by including BA’s refinancing rate in further cuts in policy rates.
  - Close coordination between monetary and fiscal policy is required.
- Exchange rate assessment:
  - 2007 Article IV update indicates the real effective exchange rate remains close to its equilibrium level.
  - Room exists to dampen month-to-month NEER volatility by distributing dollar/euro volatility more evenly between dinar/dollar and dinar/euro rates.
- Authorities’ actions:
  - Strengthened coordination between monetary and fiscal policies; crisis working group formalized.
  - BA will continue flexible exchange rate management while treating equilibrium assessment with caution because of oil price uncertainty.

### Structural reforms and financial sector
- Structural priorities:
  - Accelerate reforms to diversify the economy and sustain NH growth.
  - Priority areas: financial sector reforms, tax reform, promoting private sector development, improving financial intermediation, improving the business climate, and further regional and world integration.
  - Structural reforms should complement macro stability and improvements in infrastructure, human capital, and public services.
- Financial sector findings:
  - Banking system adequately capitalized and profitable; does not rely on foreign or market funding.
  - Loans requiring 100 percent provisioning rose to 22 percent in 2007.
  - Public industrial commercial enterprises represent 3 percent of employment.
  - About 2 percent of GDP of outstanding loans to public enterprises would be swapped for government bonds under restructuring.
- Financial soundness indicators (selected, in percent):
  - Capital adequacy ratio (2005–2007): 12, 15, 13
  - Classified loans/total loans (2005–2007): 36, 35, 36
  - NPLs/total loans (2005–2007): 3, 19, 18, 22
  - Provisions/classified loans (2005–2007): 49, 54, 55
- Authorities’ initiatives:
  - Budget appropriations for bank capital and restructuring public enterprises.
  - Increased use of syndication and project finance; corporate bond issuance; listing government bonds on Algiers stock exchange.
  - Extending credit bureau to household loans; new clearinghouse for retail payments.
  - Concern over Doing Business and WEF rankings; intend to improve communication of reforms and streamline tax system.

### Fiscal position, public investment, and social measures
- Fiscal stance and risks:
  - Sharp decline in oil prices and deeper recession in trading partners expected to heavily impact the budget and BOP; fiscal and current accounts projected to record significant deficits as of 2009 after years of surpluses.
  - Low public debt and high FRR savings provide room to continue the PIP.
  - High-level crisis committee established to monitor developments and advise policy.
  - Authorities ready to prioritize PIP projects if financing pressures emerge.
- Commitments and reforms:
  - Contain current expenditure; strengthen nonhydrocarbon revenues; streamline subsidies and tax exemption system (work ongoing with FAD’s assistance); eliminate temporary subsidies introduced due to high commodity prices.
  - Wage bill increase tied to a broader civil service reform with a new pay and grading system; future wage increases to be linked to productivity and economic performance.
  - Pilot METFs developed; work to strengthen tax and customs administration and modernize budget management continues (draft organic law; anti-corruption law).
- Social measures:
  - Introduction of temporary price subsidies for some food products to mitigate impact of high world commodities prices.

### Statistical and institutional issues
- Data and dissemination:
  - Data provision to the Fund has shortcomings but is broadly adequate for surveillance.
  - Algeria initiated participation in the GDDS in February 2006; metadata and plans not yet completed.
- Real sector statistics:
  - Shortcomings: old GDP base, long publication lags, incomplete application of the 1993 SNA, outdated CPI basket (weights from 1988), CPI published with ~3-month delay.
  - A new CPI with updated basket and weights near completion and to be released in 2009.
  - STA recommendations: compile GDP at constant prices; rebase GDP series; reassign some ONS tasks to BA and MF.
- GFS shortcomings and recommendations:
  - Insufficient institutional coverage (limited to Budgetary Central Government in a wide sense).
  - Classification problems: FRR proceeds should be shown as revenue rather than financing.
  - Long lags and lack of reconciliation with monetary accounts.
  - Recommendations: improve institutional coverage, classification, timeliness, and reconciliation.
- Monetary and financial statistics:
  - Progress: documentation, revised reporting forms, SRF-based series published since June 2007, finance companies included and retrofitted to December 2001.
  - Weaknesses: timely reporting by some state-owned banks problematic; most commercial banks do not report all data; prudential data from state-owned banks unreliable/not timely.
  - Recommendations: enforce reporting obligations with penalties; update chart of accounts and accounting guidelines to align with the Monetary and Financial Statistics Manual, 2000.
- Balance of payments:
  - Generally good quality due to completeness of the International Transaction Reporting System.
  - Need to implement a survey for direct investment data.
  - First issue of the Quarterly Statistical Bulletin published in November 2007 including BOP statistics.

### Staff appraisal (summary)
- Positive achievements:
  - Several years of strong performance: solid NH growth, low inflation, strong fiscal and external positions, near elimination of external debt, large FRR savings.
- Key challenges:
  - High youth unemployment; heavy dependence on hydrocarbon exports; inward-oriented NH private sector; lagging productivity and business climate.
  - Largely insulated from direct financial contagion but vulnerable to lower oil prices; prolonged low oil prices would significantly depress external and fiscal positions and weigh on growth.

*IMF staff summary based on the Executive Summary and sections of IMF country report _cr09108.*

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

### _cr09108 - Executive Summary

### Background and recent developments
- Political context: political situation remains stable; periodic bomb attacks underline the threat posed by Al‑Qaeda in the Maghreb. Presidential elections will take place in 2009; President Bouteflika will likely run for a third term.
- Structural features of the economy:
  - Nonhydrocarbon GDP (NHGDP) is around 55 percent of total GDP.
  - Hydrocarbons represent 98 percent of total exports and 75–80 percent of budget revenues.
  - External debt has been virtually eliminated.
  - The government has accumulated large savings in the oil stabilization fund (FRR).
  - Youth unemployment remains high; productivity and business climate compare poorly with trading partners.
- Recent macroeconomic outcomes:
  - NHGDP growth reached 6.3 percent in 2007; overall growth averaged 4 ½ percent in 2003–07.
  - Early indications point to a slightly lower outcome in 2008 for NHGDP due to a poor cereal harvest.
  - Overall growth is projected at about 3 percent in 2008, as sluggish demand in export markets depresses hydrocarbon output.
  - Current account surplus was above 20 percent of GDP in 2007–08.
  - Official reserves reached $136 billion at end-October 2008 (2 ½ years of imports).
  - Average annual CPI inflation was 4.2 percent at end-October 2008 (1.2 percent, when excluding food).
  - The nominal and real effective exchange rates depreciated slightly on average by 0.1 percent and 1.2 percent, respectively, during January–September 2008.
  - The 2008 supplementary budget increased PIP outlays, the wage bill, and transfers to social sectors. The nonhydrocarbon primary deficit will exceed 52 percent of NHGDP, compared with 44 percent in 2007.
  - Higher hydrocarbon revenue will more than offset the expenditure increase, almost doubling the overall budget surplus to 8 percent of GDP.

### Global financial crisis: impact and transmission channels
- Limited direct financial contagion:
  - Total external debt was 3 percent of GDP in 2008; external public debt was less than 1 percent of GDP.
  - Banks’ external liabilities are less than 1 percent of total liabilities.
  - The banking system is 90 percent public; foreign portfolio investment is not yet authorized.
  - FDI averaged 1 percent of GDP per year (total of $8.5 billion in the past ten years); profit repatriation amounted to a drain of less than 1 percent of international reserves.
  - Banks are required to deposit end‑of‑day foreign exchange balances at the central bank, centralizing foreign exchange risk.
- Economic channels of contagion and vulnerabilities:
  - Main risk is lower oil prices and recession in Europe reducing hydrocarbon revenues and exports, especially natural gas (NG) exports concentrated in Europe (Italy, Spain, France, United Kingdom).
  - Domestic demand depends overwhelmingly on investment spending by the government and Sonatrach; both have accumulated savings ($60 billion and $17 billion, respectively) that would cushion lower revenues.
  - Nonhydrocarbon growth is almost entirely driven by large investment programs; NH exports represent about 2 percent of NHGDP. A scaling back or delay in planned investments could affect growth significantly.

### Outlook and quantified risks
- Oil price and trade effects:
  - Staff projection: WEO oil prices decline from $98/bbl in 2008 to $54/bbl in 2009.
  - High imports induced by PIP and Sonatrach investments combined with lower oil prices would shift the current account to a deficit of 3 percent in 2009, while reserve cover would remain above two years of imports.
- Fiscal outlook:
  - The overall fiscal balance would turn negative with a deficit of 11 ½ percent of GDP in 2009.
  - The 2009 budget envisages a slight drop in the nonhydrocarbon primary deficit to 51 ½ percent of NHGDP.
- Growth and inflation projections:
  - NHGDP growth is projected at about 6 percent in 2009 provided the government and Sonatrach draw down their savings to continue investment programs.
  - Reflecting a recession in Europe and lower hydrocarbon exports, overall growth is projected to decelerate to 2 ½ percent in 2009.
  - Inflation would stay low under the projected scenario.

### Policy discussions and recommendations
- Fiscal policy:
  - Authorities intend to maintain the current fiscal stance to support domestic demand and nonhydrocarbon growth in the short term.
  - Reserves in the FRR are sufficient to maintain the current fiscal stance in the short term.
  - Adjustments are warranted in the medium term to preserve fiscal sustainability; measures should be implemented early if risks of durably lower oil prices materialize.
- Monetary and exchange rate policy:
  - Greater flexibility in monetary policy is needed given heightened international uncertainty.
  - Lower import prices should help keep inflation under control, potentially increasing room for reducing interest rates if necessary.
  - Close coordination between monetary and fiscal policy would help sustain domestic demand in the face of the world economic slowdown.
  - Staff estimates and the central bank’s analysis indicate the real exchange rate of the dinar is close to its equilibrium level.
- Structural reforms:
  - Accelerate structural reforms to diversify the economy and sustain nonhydrocarbon growth.
  - Priority areas identified: financial sector reforms, tax reform, promoting private sector development, improving financial intermediation, improving the business climate, and further integration in regional and world economies.
  - Structural reforms should complement continued macroeconomic stability and improvements in infrastructure, human capital, and public services.

### Management of oil wealth and public finances
- Hydrocarbon receipts:
  - Around two thirds of hydrocarbon receipts accrue to the budget; the remainder to Sonatrach.
- Reserve and FRR management:
  - Hydrocarbon export receipts are fully surrendered to the central bank and form part of international reserves.
  - Since 2004 reserves have been split between a small “liquid” part and a large portfolio of high‑grade fixed‑income securities.
  - Active reserve management returned between 3 percent and 4 percent per year since 2004.
  - The FRR is a subaccount of the government at the central bank in dinars and lacks governance arrangements and investment goals typical of sovereign wealth funds used by other large commodity exporters.
  - Sonatrach’s financial wealth custody arrangements are broadly similar; deposits are in local currency in the public bank that serves as its anchor bank and are held mostly as short‑term claims on the central bank to meet liquidity requirements.

*IMF staff summary based on the Executive Summary of the IMF country report _cr09108.*

### 10. The medium-term outlook would remain relatively favorable under the staff’s

### _cr09108 - 10. The medium-term outlook would remain relatively favorable under the staff’s

### Medium-term baseline outlook
- With oil prices gradually recovering to $78/bbl in 2013, current policies appear sustainable.
- FRR reserves (37 percent of 2008 GDP) would cover the deficits over 2009–13 under the staff’s baseline.
- Under this assumption:
  - Average annual NHGDP growth is projected at about 5 ½ percent.
  - Inflation would stay below 4 percent.
  - The current account balance would be only slightly negative.
  - Official reserves would stay close to two years of import cover.
  - The overall fiscal deficit would be reduced, with the projected increase in oil prices, to about 5 percent of GDP by 2013.

### Risks and alternative scenarios
- Main risks:
  - Recession in Europe and a significant decline in oil revenues, which if prolonged would depress growth.
  - Hydrocarbon output could record a more pronounced slowdown if the recession in Europe is deeper and longer than currently projected.
  - Nonhydrocarbon growth would be lower if oil prices stay low for an extended period.
- Alternative scenario:
  - In a scenario with oil prices at $40/bbl until 2013, current policies could not be maintained very long because the overall fiscal deficit would deplete FRR reserves by 2011 (Panel B).
  - Required fiscal adjustment would include paring back of the PIP, implying slower nonhydrocarbon growth and likely higher unemployment.

### Key projection series (2007–2013)
- Real GDP growth: 3.0, 3.0, 2.6, 3.9, 3.9, 4.1, 4.4
- Hydrocarbon sector growth: -0.9, -0.6, -1.0, 0.0, 0.7, 1.5, 2.3
- Nonhydrocarbon sector growth: 6.3, 5.8, 6.0, 5.8, 5.6, 5.5, 5.5
- CPI inflation (period average): 3.6, 3.9, 3.8, 3.4, 3.3, 3.2, 3.1
- Current account balance (in percent of GDP): 22.6, 20.2, -2.9, -0.9, -1.0, -1.3, -1.5
- Nonhydrocarbon primary balance (in percent of NHGDP): -44.0, -52.1, -51.4, -49.7, -47.9, -44.7, -42.5
- Overall fiscal balance (in percent of GDP): 4.5, 8.2, -11.5, -8.6, -7.3, -5.9, -5.2
- Oil prices (US$/bbl): 71.1, 97.5, 54.3, 64.8, 71.3, 75.0, 77.5

### Fiscal policy: findings and recommendations
- Findings:
  - Recent steep increase in current expenditure (wage bill, PIP-related recurrent costs, current transfers) has pushed the nonhydrocarbon fiscal deficit above its long-term sustainable level.
  - The expected decline in the PIP by 2013 will lower the nonhydrocarbon deficit to 43 percent of NHGDP, still above the sustainable level.
  - The short-term fiscal stance deviates from sustainable path to support NH growth and mitigate the global downturn; FRR reserves are sufficient to maintain this stance over 2009–13.
  - Domestic public debt stands at 6 percent of GDP.
- Staff analysis (sustainability benchmark):
  - This deficit would need to be reduced to 34 percent of NHGDP in the medium term to ensure intergenerational equity.
- Policy recommendations to achieve adjustment:
  - Rationalizing current expenditure:
    - Contain wage bills and improve targeting of transfers and subsidies.
  - Prioritizing capital expenditures:
    - Prioritize and phase PIP projects.
  - Improving nonhydrocarbon tax collection:
    - Strengthen tax and customs administration efficiency, eliminate exemptions, lower personal tax rates, simplify customs formalities.
- Quantified policy impact (staff estimate):
  - By 2013, with measures, current and capital expenditures could be 5 ½ percent and 2 percent of NHGDP lower, respectively.
  - The revenue-to-NHGDP ratio could be enhanced by 1 percent of NHGDP.
- Authorities’ stance:
  - Intend to maintain the fiscal stance of the 2009 budget and draw down FRR reserves to limit the global crisis impact.
  - Developing contingency plans to reduce public spending if oil prices remain low.
  - Expect fiscal deficit likely lower than budgeted in 2009 due to lower wheat and milk subsidies (3.2 percent of NHGDP).
  - Corporate tax was reduced from 25 percent to 19 percent; a unit was established to monitor tax expenditures; IT modernization with e-filing continues.

### Monetary and exchange rate policy
- Staff findings:
  - Flexibility in monetary policy is paramount given the uncertain international outlook.
  - BA has limited inflationary impact of increased liquidity using liquidity absorption facilities and flexible exchange rate management.
  - Lower import prices should help keep inflation under control and potentially increase room for reducing interest rates.
  - Desired cost of credit could be signaled by including BA’s refinancing rate in further cuts in policy rates.
  - Close coordination between monetary and fiscal policy is required.
- Exchange rate assessment:
  - An update of the 2007 Article IV exchange rate assessment indicates the real effective exchange rate remains close to its equilibrium level.
  - Room exists to dampen month-to-month NEER volatility by distributing dollar/euro volatility more evenly between dinar/dollar and dinar/euro rates.
- Authorities’ stance:
  - Strengthened coordination between monetary and fiscal policies, formalized a crisis working group.
  - BA will continue flexible exchange rate management to support monetary objectives, while treating equilibrium exchange rate assessment with caution because of oil price uncertainty.

### Structural reforms and financial sector
- Findings:
  - Economic diversification is critical; development of NH exports would mitigate hydrocarbon risk.
  - Sustained NH growth and job creation require major gains in productivity, better infrastructure, human capital, and public services.
  - Structural reforms (financial intermediation, business climate, regional and world integration) remain essential and have been timid.
- Financial sector:
  - Banking system adequately capitalized and profitable with satisfactory provisioning; does not rely on foreign or market funding.
  - Loans requiring 100 percent provisioning rose to 22 percent in 2007.
  - Public industrial commercial enterprises represent 3 percent of employment.
  - About 2 percent of GDP worth of outstanding loans to public enterprises would be swapped for government bonds under the restructuring program.
- Financial soundness indicators (selected, in percent):
  - Capital adequacy ratio (2005–2007): 12, 15, 13
  - Classified loans/total loans (2005–2007): 36, 35, 36
  - NPLs/total loans (2005–2007): 3, 19, 18, 22 (table shows variations by bank type)
  - Provisions/classified loans (2005–2007): 49, 54, 55
- Authorities’ initiatives:
  - Budget appropriations for bank capital and restructuring public enterprises.
  - Increased use of syndication and project finance; corporate bond issuance; listing of government bonds on Algiers stock exchange.
  - Extending credit bureau to household loans; new clearinghouse for retail payments.
  - Concern over rankings in Doing Business and World Economic Forum; intend to improve communication of reform achievements and continue streamlining tax system.

### Staff appraisal (summary)
- Algeria has enjoyed several years of strong performance: solid nonhydrocarbon growth, low inflation, strong fiscal and external positions, near elimination of external debt, and large FRR savings.
- Key challenges remain: high youth unemployment, heavy dependence on hydrocarbon exports, inward-oriented NH private sector, and lagging productivity and business climate.
- Algeria is largely insulated from direct financial contagion but will be affected by lower oil prices; prolonged low oil prices would significantly depress external and fiscal positions and weigh on growth.

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

### 33. Staff supports the authorities’ fiscal policy stance that maintains the high level

### 33. Staff supports the authorities’ fiscal policy stance that maintains the high level

### Fiscal policy stance and short-term spending
- Staff supports maintaining the high level of public spending in the short term to help support NH growth and mitigate the impact of the global economic downturn.
- Continuing implementation of the PIP would:
  - improve infrastructure,
  - enhance human capital,
  - alleviate some social tensions.
- Large fiscal deficits can be covered in the short term by using the significant savings accumulated in recent years through prudent financial policies.
- Staff notes the significant expansion of current expenditure recently and urges the authorities to limit future increases, particularly in wages and subsidies, to preserve competitiveness and long-term fiscal sustainability.
- The quality and efficiency of public spending deserve continued intense scrutiny; efforts to modernize the budget process and strengthen fiscal governance should be sustained.

### Medium-term fiscal sustainability and adjustment options
- Staff encourages the authorities to identify and be ready to implement adjustment fiscal measures in the medium term to preserve fiscal sustainability.
- A careful assessment of public expenditures is needed to identify savings.
- Possible measures could include:
  - better control of current expenditure,
  - prioritization of investment projects,
  - enhanced nonhydrocarbon tax collection.
- Fiscal policy may need to be adjusted as early as 2009 if risks of durably low oil prices materialize.
- In that event, the authorities could start rationalizing current expenditure, including by reducing subsidies.

### Monetary policy
- The central bank has been able to contain inflationary pressures but should stand ready to ease monetary policy, if necessary, to sustain domestic demand.
- Monetary policy has succeeded in absorbing the banking system’s structural liquidity surplus and limiting its impact on inflation.
- The decline in import prices should create room for reducing interest rates, if needed, as a complement to fiscal policy.

### Exchange rate policy
- BA should continue to pursue an exchange rate policy consistent with external stability.
- The real effective exchange rate of the dinar has remained close to its equilibrium level.
- The authorities should continue to monitor developments closely to minimize the risk of misalignment, and may seek to reduce the short-term volatility of the nominal effective exchange rate.

### Structural reforms and diversification
- Staff urges the authorities to accelerate structural reforms to boost the supply response to the massive PIP.
- The global crisis highlights the importance of economic diversification to mitigate hydrocarbon risk.
- Private sector investment and NH exports must increasingly replace public investment as the engine of growth.
- This requires major gains in productivity through:
  - continued macroeconomic stability,
  - better infrastructure, human capital, and public services.
- As major PIP projects are progressively completed, authorities need to renew focus on structural reforms to:
  - achieve effective financial intermediation,
  - promote privatization,
  - improve the business climate,
  - deepen integration in the regional and world economies.
- Staff encourages implementation of the recommendations of the 2007 FSAP Update.
- Staff reminds the authorities that public guarantee schemes for SME credit should not undermine banks’ efforts to bolster risk analysis.

### External engagement and programmatic issues
- Staff encourages the authorities to expedite Algeria’s participation as a creditor in the Enhanced HIPC Initiative.
- It is proposed that the next Article IV consultation with Algeria take place on a standard 12-month cycle.
- Staff stands ready in the meantime to maintain a close dialogue with the authorities in view of the volatile global environment.

*Source: IMF staff report excerpt (section 33–39).*

### ANNEX II. RELATIONS WITH THE WORLD BANK

### ANNEX II. RELATIONS WITH THE WORLD BANK

### Overview and Objectives (As of September 30, 2008)
- Algeria Country Assistance Strategy for 2004–06 aimed at:
  - strengthening fiscal sustainability and hydrocarbon revenue management to build the basis for sustained growth;
  - removing the constraints to private sector-led growth, particularly those affecting the business environment, SMEs, the financial sector, and infrastructure development;
  - supporting the government’s efforts to articulate and implement a strategy for better service delivery, particularly in water supply, transport, housing, environmental services and human development to meet the critical needs of the population.
- Bank Group’s support guided by three principles:
  - selectivity through engagement in a limited number of areas and a selective use of Bank instruments;
  - programmatic approaches focused on transfer of knowledge and capacity building;
  - partnerships, outreach and knowledge sharing.
- Preparation of a new Country Partnership Strategy between Algeria and the Bank for FY09 and beyond has been launched; in the absence of new borrowing by Algeria, this strategy is expected to concentrate on technical assistance and analytical activities, in priority areas.

### World Bank Portfolio and Recent Financial Operations
- World Bank portfolio in Algeria:
  - 1 active operation and 72 closed loans.
  - cumulative net commitment of $4.3 billion, of which $4.2 billion have been repaid.
- Net commitments for the current operation amount to $18.4 million of which $6.5 million have been disbursed.
- The current operation (Budget System Modernization) is scheduled to close on February 28, 2009.
- No new loans have been approved since FY03.
- In FY06 the government prepaid $637 million of 22 IBRD loans, and cancelled $176.9 million of loans for active operations.

### Recent Analytical Work and Technical Assistance
- Recent analytical work concluded includes:
  - an update of the FSAP carried out jointly with the IMF;
  - a Public Expenditure Review (PER) done in collaboration with the IMF and under wide public dissemination;
  - a Labor Markets and Social Protection policy note;
  - a second Investment Climate Assessment;
  - a policy note on Trade in Services.
- Recent technical assistance (TA) supported:
  - social insurance, specifically in the area of pensions;
  - macroeconomic modeling to the Ministry of Finance and the Central Bank;
  - improvement of the doing business indicators;
  - training in analytical tools for poverty, governance and private sector development issues to Conseil National Economique et Social (CNES);
  - training in rural development topics;
  - training in skills development and technical, vocational and educational.

### Reimbursable Technical Assistance (RTA)
- Starting in 2006, the authorities expressed interest in Reimbursable Technical Assistance (RTA) from the World Bank.
- Ongoing RTA activities include:
  - assistance to the Ministry of Urban Planning and Environment (MATE) in the area of solid waste management and the rehabilitation of open dumps and clean development mechanism;
  - advisory services on procurement to SONATRACH;
  - assistance to the Central Bank for the creation of a credit bureau and on the regulatory framework of credit cooperatives.
- Two recently completed technical assistance activities:
  - preparation of management contracts in water supply for three of the largest cities;
  - capacity building for the Caisse Nationale d’Equipement et de Développement (CNED).

### Key Financial Statistics (As of September 30, 2008)
- Total Net Commitments (In millions of U.S. dollars):
  - IBRD lending operations (72 loans closed): 4,299.6
  - 1 active loan — Budget System Modernization: 18.4 (Undisbursed Balance: 11.9)
  - Total active loans: 18.4 (Undisbursed Balance: 11.9)
  - Repayments: 4,163.0
  - Debt outstanding: 106.8
- Net lending by the World Bank (by fiscal year) — Commitments and Flows:
  - Commitments: 0 (2004), 0 (2005), 0 (2006), 0 (2007), 0 (2008), 0 (2009)
  - Disbursements: 51 (2004), 27 (2005), 29 (2006), 7 (2007), 6 (2008), 0 (2009)
  - Debt service: 270 (2004), 224 (2005), 789 (2006), 18 (2007), 22 (2008), 3 (2009)
    - Principal: 197 (2004), 174 (2005), 748 (2006), 11 (2007), 16 (2008), 3 (2009)
    - Interest 4/: 73 (2004), 50 (2005), 41 (2006), 6 (2007), 6 (2008), 0 (2009)
  - Net transfer 5/: -219 (2004), -197 (2005), -760 (2006), -11 (2007), -16 (2008), -3 (2009)

- Notes:
  - 1/ IDA has no operations in Algeria.
  - 2/ Less cancellations, includes adjustment lending.
  - 3/ Fiscal years start July 1 and end June 30.
  - 4/ Includes charges.
  - 5/ Equal to disbursements minus debt service.

*Annex II. Relations with the World Bank (As of September 30, 2008).*

### ANNEX III. ALGERIA: STATISTICAL ISSUES

### ANNEX III. ALGERIA: STATISTICAL ISSUES

### Overview
- Data provision to the Fund has some shortcomings, but is broadly adequate for surveillance.
- Algeria initiated participation in the General Data Dissemination System (GDDS) in February 2006, but has yet to complete the preparation of metadata and plans for improving the statistical system.

### Real Sector Statistics — Findings and Recommendations
- Key shortcomings:
  - Old base GDP series.
  - Long lags for publication of data.
  - Incomplete application of the 1993 System of National Accounts.
  - Monthly consumer price index (CPI) based on an outdated basket and weights derived from a 1988 survey of household consumption and is published with a delay of about 3 months.
- Developments:
  - A new CPI with an updated basket of products and weights is near completion and will be released in 2009.
- STA recommendations:
  - Give priority to compiling GDP at constant prices (including quarterly accounts).
  - Rebase the GDP series.
  - Have the Banque d’Algerie (BA) and the Ministère des Finances (MF) assume some tasks currently assigned to the ONS to reduce its workload.

### Government Finance Statistics (GFS) — Findings and Recommendations
- Key shortcomings:
  - Insufficient institutional coverage: coverage is limited to Budgetary Central Government, albeit in a wide sense (general budget, annexed budget, and special treasury accounts).
  - Classification problems: proceeds of the oil stabilization fund (FRR) should be shown as revenue rather than financing.
  - Long lags for production of statistics.
  - Lack of reconciliation of financing with the monetary accounts.
- Underlying factors:
  - Lack of financial resources for compilation of statistics.
  - Insufficient interagency coordination.
  - Reluctance to publish provisional data due to concern about accuracy.
- Policy implications:
  - Improve institutional coverage, classification practices, timeliness, and reconciliation between fiscal and monetary records.

### Monetary and Financial Statistics — Findings and Recommendations
- Progress made:
  - Documentation of concepts and methodology used to compile monetary and financial statistics.
  - Revision of reporting forms used to collect data from banks.
  - Completion of development of monetary and financial statistics based on the Standardized Report Forms (SRFs); SRF-based series published in the IFS Supplement since June 2007.
  - Data on finance companies included in monetary statistics early in 2007; data series retrofitted to December 2001.
- Remaining weaknesses:
  - Timely reporting of balance sheet data by some state-owned commercial banks remains problematic.
  - Most commercial banks do not report all data needed to compile the monetary survey.
  - Prudential data reported by state-owned banks are unreliable and not timely.
- STA recommendations:
  - Enforce reporting obligations of banks by introducing high penalties.
  - Update the chart of accounts and accounting guidelines applied to banks and finance companies to foster consistency with the Monetary and Financial Statistics Manual, 2000.

### Balance of Payments Statistics — Findings and Recommendations
- Quality:
  - The 2007 multisector mission found that balance of payments statistics are generally of good quality, largely because of completeness of the International Transaction Reporting System under tight foreign exchange regulations.
- Gaps and actions:
  - The mission emphasized the need to implement a survey for direct investment data.
  - In November 2007, the authorities published the first issue of the Quarterly Statistical Bulletin, which includes balance of payments statistics.

### Key Economic Findings, Projections, and Policy Messages (from PIN and Staff Assessment)
- Recent performance and stocks:
  - International reserves stood at US$135 billion in October (2 ½ years of imports).
  - The fiscal stance was expansionary, but large hydrocarbon revenues translated into an overall budget surplus of 8 percent of GDP.
  - Additional savings were accumulated in the oil stabilization fund (FRR), which reached 37 percent of GDP.
- Staff projections and outlook:
  - Nonhydrocarbon GDP growth is projected at about 6 percent in 2009, conditional on continued drawdown of savings to sustain investment.
  - Overall growth projected at 2 ½ percent in 2009, reflecting a drop in the volume of hydrocarbon exports.
  - Inflation projected to stay below 4 percent.
  - Current account balance projected to shift from a surplus of 20 percent of GDP in 2008 to a deficit of 3 percent in 2009.
  - Reserve cover projected to remain above 2 years of imports despite the current account swing.
- Risks and policy responses:
  - The most important medium-term risk is continued low international oil prices, which would weaken external and fiscal positions, force a slowdown of the Public Investment Program (PIP) and other investments, and depress growth.
  - Directors endorsed maintaining high public spending in the short term to support the economy and mitigate the global downturn, with budget deficits financed by drawing on accumulated savings.
  - Need to preserve competitiveness and long-term fiscal sustainability by containing current outlays (especially the wage bill and subsidies), linking future wage increases to productivity and economic performance, improving public spending quality and efficiency, enhancing nonhydrocarbon tax collection, modernizing the budget process, and strengthening fiscal governance.
  - Financial sector reform priorities: strengthen banking supervision and regulation, reduce state involvement in the banking sector, improve the operational environment for financial intermediation, encourage nonbank financing, and continue implementation of recommendations from the 2007 FSAP Update.

*IMF staff report: ANNEX III. ALGERIA: STATISTICAL ISSUES*

### introduction of temporary price subsidies for some food products to mitigate the impact of

### introduction of temporary price subsidies for some food products to mitigate the impact of

### Fiscal position, public investment, and fiscal sustainability
- Sharp decline in oil prices and prospects for a deeper recession in major trading partners are expected to heavily impact the budget and the balance of payments, with the fiscal and current accounts projected to record significant deficits as of 2009, following several years of high surpluses.
- Preserving long-term fiscal sustainability remains central in the authorities’ strategy.
- Low public debt and high savings in the FRR provide sufficient room for maneuver for continued implementation of the PIP, as envisaged.
- A high-level crisis committee has been established to monitor world economic and financial developments and provide policy recommendations as needed.
- Authorities stand ready to prioritize remaining projects in the PIP should financing pressures emerge.
- Authorities are committed to:
  - containing current expenditure;
  - strengthening nonhydrocarbon revenues;
  - streamlining the subsidies and tax exemption system (work ongoing with FAD’s assistance);
  - eliminating the temporary subsidies introduced as a result of high world commodities prices.
- The envisaged increase in the wage bill is part of a broader civil service reform including a new pay and grading system to improve efficiency in public service delivery and retain skilled managers.
  - Moving forward, wage increases will be linked to productivity and economic performance, in line with the principles set out in the National Economic and Social Pact.
- As recommended in the Public Expenditure Review conducted with World Bank assistance, increased scrutiny is being attached to the quality and efficiency of public spending, with support by the evaluation and monitoring agency (National Agency of Investment for Development) now fully operational.
- Medium-term expenditure frameworks (METFs) have been developed for pilot sectors as a first step towards a comprehensive METF.
- Work is proceeding to further strengthen tax and customs administration, in accordance with FAD’s recommendations, while progress is being made to modernize budget management and enhance governance, including with the finalization of the draft organic law and implementation of the anti-corruption law.

### Social measures and subsidies
- Introduction of temporary price subsidies for some food products to mitigate the impact of high world commodities prices on the population.
- Ongoing work (with FAD’s assistance) to streamline the subsidies and tax exemption system and to eliminate temporary subsidies introduced due to high world commodities prices.

### Monetary policy and external stability
- Monetary policy in 2008 continued to be geared successfully to containing inflation, including by mopping up excess liquidity.
- Inflationary pressures from high world commodities prices have now eased and excess liquidity in the banking system has declined as a result of lower oil prices, thereby providing space for monetary easing should the need to support economic activity arise.
- Authorities share staff’s conclusion that the real effective exchange rate is broadly in line with its equilibrium level and welcome the assessment that policies are consistent with external stability.
- Authorities remain committed to their flexible exchange rate policy to ensure that the real effective exchange rate remains close to its equilibrium level.
- Authorities consider improving competitiveness to hinge on further advancing structural reforms and improving the business environment, and are committed to sustaining efforts in this regard.

### Banking system, supervision, and state involvement
- The banking system remains sound and profitable.
- Credit to the economy continued to grow at a moderate rate despite ample liquidity, reflecting strengthened credit risk assessment.
- To further improve the resilience of the system and increase its lending capacity, the required minimum capital for banks has been significantly increased in December 2008.
  - To meet this requirement, public banks will use provisions on loans to public enterprises that will be freed under the ongoing public restructuring program.
- Continued efforts are being made to further strengthen banking supervision, including with Fund technical assistance.
- Authorities remain committed to reducing state involvement in the banking sector and intend to reactivate the privatization process of Crédit Populaire d’Algérie (CPA) as soon as global financial conditions stabilize.

### Structural reforms and private sector development
- Further efforts are being made to promote private sector development to meet the challenges of diversifying the economy, anchoring sustained high growth in the nonhydrocarbon sector, and reducing the still high unemployment, especially among the youth.
- Reforms highlighted:
  - civil service reform (new pay and grading system, linking wages to productivity);
  - streamlining subsidies and tax exemptions;
  - strengthening tax and customs administration;
  - modernizing budget management and enhancing governance (draft organic law, anti-corruption law).

*Source: _cr09108 - introduction of temporary price subsidies for some food products to mitigate the impact of*

---


_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr09108.pdf_