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### I. Background: favorable developments but key challenges remain
- Hydrocarbon dependence:
  - Hydrocarbon revenues represent 98 percent of exports and two‐thirds of budgetary revenues.
- Growth and labor market:
  - Nonhydrocarbon sector recorded solid growth of about 6 percent over the past decade.
  - Unemployment fell continuously, reaching 10.2 percent at end‐2009, but remains high among the youth.
- 2009 performance and 2010 outlook:
  - NHGDP growth reached 9.3 percent in 2009.
  - Hydrocarbon output declined by ‐6.0 percent in 2009, lowering overall growth to about 2½ percent.
  - Stabilization of the hydrocarbon sector and PIP performance should lead to overall growth of 3–3½ percent in 2010.
- Inflation and prices:
  - Average total inflation rose to 5.7 percent in 2009.
  - Nonfresh food inflation averaged 2.3 percent in 2009.
  - Inflation is projected at just over 4 percent in 2010 on average.
- Monetary aggregates and credit (August 2010):
  - Deposits growth slowed to 8.3 percent y‐o‐y.
  - Credit to the economy increased by 12.5 percent (y‐o‐y).
  - Growth in credit to the public sector remained high; credit to the private sector slowed slightly due to a ban on consumer lending since August 2009.
- External position and reserves:
  - Official reserves increased by US$4 billion to US$149 billion at end‐2009.
  - Hydrocarbon export revenues increased by about 32 percent in the first nine months of 2010; export volumes fell by 1.4 percent.
  - Official reserves rose by about US$8 billion since end‐2009 to US$157 billion by end‐September 2010.
- Past consultations summary:
  - Prudent fiscal and monetary policies maintained large external reserves, sizable budgetary savings in an oil stabilization fund, and low public and external debts.
  - Structural reforms have progressed slowly; new FDI regulations adopted in 2009 may deter favorable perceptions of the business climate.
  - Bank of Algeria (BA) effectively absorbed excess liquidity; budget system modernization advancing slowly.

### II. Short-term outlook and policy tradeoffs
- Growth and inflation:
  - Nonhydrocarbon GDP could grow by about 5.3 percent in 2010–11.
  - Overall growth could be 3.7 percent in 2011.
  - Inflation could reach about 5 percent in 2011 due to rises in civil service and public enterprises’ wages.
- External and fiscal outlook:
  - Current account surplus projected to improve to 8–9 percent of GDP in 2010–11 (WEO oil price assumption).
  - Budget balance expected to remain negative in 2011 at 3.3 percent of GDP.
- Policy priorities:
  - Support growth to reduce unemployment while initiating actions to ensure fiscal sustainability.
  - Maintain vigilance on inflationary risks from rising hydrocarbon revenues, public wage increases, and fresh food price uncertainty.

### Fiscal policy: priorities, projections, and measures
- Key priorities for 2011:
  - Break the rising trend of expenditure while improving efficiency and targeting.
  - Continue the PIP and complement it to support private investment.
  - Stop and reverse the rising trend in current expenditure; improve targeting of current transfers.
  - Strengthen efficiency of control over capital expenditure.
  - Spread implementation of public wages and salaries reform (including back payments) over time.
- Fiscal projections and composition:
  - Algeria expected to post in 2010 its second consecutive budget deficit of the decade, which could reach 4 percent of GDP following a deficit of about 7 percent in 2009.
  - Increase in hydrocarbon revenues in 2010 will be more than offset by a 17 percent increase in total expenditures.
  - Breakeven oil price for a balanced budget rose from US$34/bbl in 2005 to US$88/bbl in 2010.
  - Resulting primary nonhydrocarbon deficit in 2010 would remain broadly unchanged at about 45 percent of NHGDP.
  - Level of resources in the FRR could grow by about US$1½ billion and be equivalent to 38 percent of GDP.
- 2011 Budget Law (preliminary):
  - Current expenditures (cash basis) would increase by 13 percent to close to 41 percent of NHGDP.
  - Excluding salary back payments, current expenditure ratio would decline from 37 percent of NHGDP in 2010 to 35 percent in 2011.
  - Capital expenditures expected to remain stable in real terms.
  - Total revenues to continue rising due to higher hydrocarbon prices and greater efficiency in tax administration.
- Authorities’ stance:
  - Authorities agree expenditure growth needs to be halted—especially current expenditure.
  - Salary increases were necessary; back salary payments will be spread over 2010–12.
  - A review of current transfers, in particular food subsidies, is being launched with World Bank assistance.
  - Authorities will keep capital expenditure at 2009–10 levels in real terms to complete the 2005–09 PIP and start the 2010–14 PIP; ready to adjust investment spending if hydrocarbon fiscal revenue falls.

### Monetary and exchange rate policy
- Monetary policy orientation:
  - Continue to absorb excess liquidity and fend off inflationary pressures.
  - BA has absorbed excess banking liquidity arising from hydrocarbon resources and public expenditures.
  - If inflationary pressures appear, BA should promptly increase interest rates, preferably including the refinancing rate.
  - BA should maintain effective information exchange with the Ministry of Finance and enhance analytical capacity.
- Exchange rate policy:
  - Continue a managed float aimed at maintaining the REER close to its equilibrium and minimizing misalignment risks.
  - REER rose by 6.5 percent in the first seven months of 2010, after declining by 7 percent in 2009.
  - Nominal effective exchange rate increased by around 6 percent over the course of 2010.
  - Equilibrium real exchange rate has appreciated in recent years, reflecting increased government spending and posing “Dutch disease” risks.
- Authorities’ view:
  - Liquidity absorption seen as effective; vigilance about renewed inflationary pressures remains.
  - Fresh food price increases in 2008–09 were attributed mainly to market imperfections; fresh food prices stabilized since early 2010.

### III. Medium-term challenges, scenarios, and policy recommendations
- Core challenge:
  - Promote economic diversification to reduce dependence on hydrocarbons and public spending.
- Medium-term growth prospects and risks:
  - Hydrocarbon sector may be affected by a drop in gas exports from development of alternative gas production in Algeria’s export markets.
  - Growth of NHGDP of approximately 5 percent would be supported by the new PIP and continuation of hydrocarbon sector investment program.
  - A more ambitious structural reform program is needed to avoid a slowdown in medium‐term NHGDP growth.
- Medium-term financial outlook and scenarios:
  - Baseline: gradual increase in hydrocarbon prices supports positive outlook; FRR could reach 32 percent of GDP in 2015 if public expenditures are contained.
  - With current account surpluses at about 9 percent of GDP, reserves would increase to over four years of imports by 2015.
  - Alternative scenario: a 30 percent drop in the price of natural gas would reduce FRR resources by about 10 percentage points of GDP by 2015.
- Key medium-term baseline figures (2009–2015):
  - International oil price (US$/bbl): 61.87 76.2 78.8 82.3 84.8 86.0 87.5
  - International gas price (US$/BTU): 6.6 7.6 7.9 8.3 8.6 8.7 8.9
  - Overal budget balance (percent of GDP): -6.8 -3.9 -3.3 -1.1 1.7 2.6 3.2
  - FRR (percent of GDP): 42.6 37.9 32.1 28.9 28.9 30.1 31.8
  - Reserves (US$ billion): 148.9 161.0 171.4 188.3 206.9 226.4 247.4
  - Primary budget deficit (percent of NHGDP): -44.9 -45.3 -45.8 -41.6 -36.1 -33.1 -30.8
  - Current account balance (percent of GDP): 0.3 8.5 9.3 9.6 9.7 9.8 10.1
  - Government net assets (percent of GDP) (*): 32.2 27.6 20.8 17.9 18.1 19.5 21.4
    - (*) FRR minus government debt
- Medium-term fiscal consolidation and reforms:
  - Enhance nonhydrocarbon budget revenues while reducing tax burden on businesses.
  - Aim to cover all current expenditure with nonhydrocarbon revenues in the longer term.
  - Adopt a medium-term budget framework based on permanent income principle.
  - Contain current expenditure growth: limit annual wage increases below inflation; improve targeting of transfers and subsidies; prioritize investment projects.
  - Current expenditure increased on average by 20 percent per year over the past five years.
  - Wage bill rose from 11.6 percent of NHGDP in 2006 to 15.6 percent in 2010 (excluding back payments).
  - CNED to monitor PIP implementation and prioritize projects; move toward target-based budget management with performance assessment.

### Financial sector: soundness, gaps, and reform steps
- Financial soundness and intermediation:
  - Banks are well capitalized overall after quadrupling minimum capital requirements in 2009 and are profitable.
  - NPLs ratio decreased to 14.5 percent in 2009; provisioning increased.
  - NPLs in public banks remain high; further resolution actions needed.
  - Banking intermediation remains relatively low; sector is liquid but lending constrained by credit risk.
- Measures and planned reforms:
  - Central credit register planned for 2011.
  - Measures to develop lending for SMEs and mortgage loans; modernization of operations and means of payment.
  - New FDI rules limit foreign majority-owned bank entry and require mandatory nonvoting government representative on private bank boards.
  - Ban on consumer lending (except mortgages) in force since 2009 affected deepening of banking activity; to be reviewed once credit registry operational.
- Financial soundness indicators (selected, 2005–Jun-10) — (In percent):
  - Capital adequacy ratio: 12.3 15.2 12.9 16.5 21.8 18.4
  - Public banks: 11.7 14.4 12.1 16.0 19.1 15.9
  - Foreign banks: 19.0 21.6 18.1 20.2 35.3 29.7
  - Classified loans/total loans: 35.7 34.8 35.5 25.4 21.6 22.1
  - Public banks (classified): 38.2 37.5 38.7 28.5 24.4 24.9
  - Off which, to private sector (classified): 19.0 22.0 24.3 20.0 16.9 17.4
  - NPLs/total loans: 19.2 17.5 22.1 15.7 14.5 14.9
  - Public banks (NPLs): 20.4 19.2 23.8 17.6 16.5 16.8
  - Off which, to private sector (NPLs): 10.1 11.7 18.7 15.9 13.0 13.3
  - Foreign banks (NPLs): 3.2 2.9 9.2 2.2 2.4 2.6
  - Provisions/classified loans: 49.3 54.0 56.1 57.7 68.3 67.8
  - Return on equity: 7.8 18.8 24.6 25.2 25.7 ...
- Supervision and FSAP follow-up:
  - Implement 2007 FSAP Update recommendations: clarify role of public banks; improve operational environment; develop nonbank financing through the bond market.
  - Enhance control, management, and governance of public banks (90 percent of banking sector assets); explore partnerships with foreign institutions.
  - BA to establish a new bank rating system planned for 2011 and prepare the first report on financial stability as assigned by the 2010 amendment of the Law on Money and Credit.

### Diversification, FDI, and trade integration
- FDI and investment climate:
  - 2009 measures: 49 percent ceiling for foreign participation in any new FDI; positive foreign currency balance for new FDI projects; reaffirmation of preemptive right of public authorities—these may deter foreign investors.
  - In 2009, FDI (excluding hydrocarbons and the financial sector) fell by about 60 percent and had not recovered in 2010.
  - Recommendation: review these measures and identify adjustments to ensure an attractive but well controlled FDI regime.
- Structural reform agenda:
  - Accelerate reforms to boost business climate and private investment-led growth.
  - Support program for SMEs should be accelerated with efficient targeting and consistent objectives.
  - Public enterprise restructuring programs should gain momentum to reduce fiscal burden.
- Trade integration:
  - Algeria still has high average tariff rates which should be reduced starting by cutting the highest rates.
  - In 2009, Algeria joined the Arab Free Trade Zone (AFTZ); imports from regional partners increased significantly.
  - Authorities pursuing efforts to join the World Trade Organization; negotiations on a new phase in Association agreement with the EU continue but have slowed.

### Staff appraisal and Executive Board messages
- Summary of strengths and challenges:
  - Favorable macroeconomic developments: decade of solid NH growth, low inflation, large external reserves, substantial savings in oil stabilization fund, very low public and external debt.
  - Continued dependence on hydrocarbons and public spending; productivity and business climate lag trading partners.
  - Youth unemployment remains high.
- Recommended policies:
  - Continue infrastructure component of the PIP and support to SMEs in short term.
  - Strict containment of spending over medium term; limit wage increases below inflation.
  - Improve targeting of transfers and subsidies; prioritize and adjust investment projects within available resources.
  - Continue advances in tax administration to boost nonhydrocarbon revenues.
  - Accelerate financial sector reform and implement FSAP recommendations; reduce NPLs in public banks; improve governance of public banks.

### Exchange rate history, Article IV timing, and technical assistance
- Exchange rate regime:
  - From January 21, 1974 to October 1, 1994: fixed relationship with a basket of currencies.
  - On October 1, 1994: Bank of Algeria introduced a managed float via daily fixing sessions.
  - Replaced by an interbank foreign exchange market as of January 2, 1996.
  - On December 15, 2010: $1 = DA 74.6; SDR 1 = DA 114.9.
  - Exchange regime classified as other managed arrangement; full surrender requirements on hydrocarbon export proceeds.
- Latest Article IV consultation:
  - Discussions for the 2009 Article IV consultation held October 21–November 3, 2009.
  - Staff report (IMF Country Report No. 10/57) considered by the Executive Board on January 5, 2010 and published on March 02, 2010.
- Technical assistance missions (selected entries 2005–2010):
  - MFD/LEG, MFD, STA, FAD, MCM missions advising on exchange regime, reserve management, bank restructuring, monetary and foreign exchange operations, tax policy, customs administration, monetary and financial statistics, payment systems, consumer price statistics, and banking supervision.
  - An MCM expert planned to start a long‑term banking supervision TA in December 2010.

### FSAP participation, data adequacy, and World Bank–IMF coordination
- FSAP:
  - Algeria participated in the FSAP in 2003; FSAP updated in 2007.
  - Executive Directors urged effective implementation of 2007 FSAP Update recommendations.
- Statistical issues — data adequacy:
  - Data provision broadly adequate for surveillance but with shortcomings in government finance statistics, national accounts, and prices.
  - National accounts: outdated base year, long publication lags, incomplete SNA 1993 application; STA recommended priority to compiling GDP at constant prices and rebasing.
  - Price statistics published with about 3 months delay.
  - Government finance statistics: insufficient institutional coverage, classification problems, long lags, lack of reconciliation with monetary accounts.
  - Monetary statistics: need for consistency with Monetary and Financial Statistics Manual; timely reporting by state‑owned banks problematic.
  - Algeria began participation in the GDDS on April 21, 2009.
- World Bank–IMF coordination (JMAP, FY11 as of December 10, 2010):
  - World Bank planned Country Partnership Strategy FY11–FY14; analytical and technical assistance on state-owned banks, subsidy targeting, social protection, energy demand, and other areas.
  - IMF work program: 2010 Article IV Consultation and preparation of analytical work on new FDI regulation and structural links between gas and oil prices; technical assistance missions planned.

### Public Information Notice highlights and selected macroeconomic indicators
- PIN No. 11/10 (Executive Board conclusions — January 14, 2011):
  - Executive Directors welcomed economic performance and prudent policies; emphasized preserving macro stability, restoring fiscal prudence, and diversifying the economy.
  - Recommended a more assertive structural reform agenda; urged containment of expansionary fiscal stance and welcomed commitment to fiscal consolidation starting with the 2011 budget.
  - Commended BA for sterilizing excess liquidity; encouraged tightening if inflationary pressures increase.
  - Cautioned that new FDI rules could discourage foreign investors; reiterated importance of accelerating financial sector reforms.
- Selected macroeconomic indicators (2006–11, selected exact figures):
  - Quota: SDR 1,254.7 million; Population: 35.6 million.
  - Total exports of oil and gas products (US$, selected years): 2006 53.6; 2007 59.6; 2008 77.2; 2009 44.4; 2010 56.4; 2011 61.3.
  - Average crude oil export price (US$/barrel): 2006 65.7; 2007 74.7; 2008 99.0; 2009 61.8; 2010 76.2; 2011 78.8.
  - Real GDP: 2006 2.0; 2007 3.0; 2008 2.4; 2009 2.4; 2010 3.3; 2011 3.7.
  - Nonhydrocarbon real GDP: 2006 5.6; 2007 6.3; 2008 6.1; 2009 9.3; 2010 5.3; 2011 5.3.
  - Consumer prices (period average): 2006 2.3; 2007 3.6; 2008 4.9; 2009 5.7; 2010 4.3; 2011 5.0.
  - Gross official reserves (US$ billion): 2006 77.8; 2007 110.2; 2008 143.1; 2009 148.9; 2010 161.0; 2011 171.4.
  - Current account including official transfers (percent of GDP): 2006 24.7; 2007 22.8; 2008 20.2; 2009 0.3; 2010 8.5; 2011 9.3.
  - Hydrocarbon exports of goods (percent of total exports): 2006 97.9; 2007 98.4; 2008 98.2; 2009 98.3; 2010 98.0; 2011 98.0.
  - Total government debt (percent of GDP): 2006 23.6; 2007 12.5; 2008 8.2; 2009 10.4; 2010 10.3; 2011 11.4.
  - Credit to the economy (annual percent change): 2006 7.1; 2007 17.2; 2008 20.4; 2009 18.5; 2010 12.5; 2011 12.0.

### Concluding assessment (staff appraisal excerpt)
- Algeria has favorable macroeconomic fundamentals—large reserves, substantial savings, low debt—but remains heavily dependent on hydrocarbons and public spending.
- Accelerating structural reforms to diversify the economy, contain the expansionary fiscal stance over the medium term, and strengthen the financial sector are policy imperatives.
- The urgency of reforms increases if risks to gas revenues from nonconventional gas development in export markets materialize.

*IMF staff report: Selected Economic and Financial Indicators, 2007–15 (excerpts).*

### 1. Selected Economic and Financial Indicators, 2007–15 .................................................................

### 1. Selected Economic and Financial Indicators, 2007–15

### I. Background: favorable developments but key challenges remain
- Hydrocarbons continue to dominate:
  - Hydrocarbon revenues represent 98 percent of exports and two‐thirds of budgetary revenues.
- Growth and labor market:
  - Nonhydrocarbon sector recorded solid growth of about 6 percent over the past decade.
  - Unemployment fell continuously, reaching 10.2 percent at end‐2009, but remains high among the youth.
- 2009 performance and 2010 outlook:
  - NHGDP growth reached 9.3 percent in 2009 driven by an excellent cereal harvest and PIP‐led service and construction sectors.
  - Hydrocarbon output declined by ‐6.0 percent in 2009, lowering overall growth to about 2½ percent.
  - Stabilization of the hydrocarbon sector and PIP performance should lead to overall growth of 3–3½ percent in 2010.
- Inflation and prices:
  - Average total inflation rose to 5.7 percent in 2009 (highest of the past decade) due to fresh food price inflation.
  - Nonfresh food inflation averaged 2.3 percent in 2009.
  - Inflation is projected at just over 4 percent in 2010 on average.
- Monetary aggregates and credit (August 2010 figures):
  - Deposits growth slowed to 8.3 percent y‐o‐y (August 2010).
  - Credit to the economy increased by 12.5 percent (August 2010, y‐o‐y).
  - Growth in credit to the public sector remained high (excluding debt repurchase by the Treasury); credit to the private sector slowed slightly due to a ban on consumer lending since August 2009.
- External position and reserves:
  - Official reserves increased by US$4 billion to US$149 billion at end‐2009 (almost 3 years of imports of goods and services).
  - Hydrocarbon export revenues increased by about 32 percent in the first nine months of 2010; export volumes (in particular of gas) fell by 1.4 percent.
  - Official reserves rose by about US$8 billion since end‐2009 to US$157 billion by end‐September 2010.
- Past consultations summary:
  - Prudent fiscal and monetary policies maintained a comfortable financial position (large external reserves, sizable budgetary savings in an oil stabilization fund, low public and external debts).
  - Structural reforms have progressed slowly; new FDI regulations adopted in 2009 may further deter favorable perceptions of the business climate.
  - The Bank of Algeria (BA) effectively absorbed excess liquidity; budget system modernization advancing slowly.

### II. Short-term outlook and policies: supporting growth while fending off inflationary pressures
- Growth projections and drivers:
  - Nonhydrocarbon GDP could grow by about 5.3 percent in 2010–11.
  - Overall growth could be 3.7 percent in 2011.
  - Inflation could reach about 5 percent in 2011 due to rises in civil service and public enterprises’ wages.
- External and fiscal outlook:
  - The current account surplus is projected to improve to 8–9 percent of GDP in 2010–11 (WEO oil price assumption).
  - The budget balance is expected to remain negative in 2011 at 3.3 percent of GDP, due to continuously large current expenditure.
- Policy tradeoffs and priorities:
  - Continue supporting growth to reduce unemployment while initiating actions to ensure fiscal sustainability.
  - Maintain vigilance on inflationary risks from rising hydrocarbon revenues, public wage increases, and fresh food price uncertainty.

### Fiscal policy (priorities and projections)
- Key fiscal priorities for 2011:
  - Break the rising trend of expenditure while improving efficiency and targeting.
  - Continue the PIP and complement it to support private investment.
  - Stop and reverse the rising trend in current expenditure; improve targeting of current transfers (in particular).
  - Strengthen efficiency of control over capital expenditure.
  - Spread implementation of public wages and salaries reform (including back payments) over time to minimize aggregate demand impact.
- Fiscal projections and composition:
  - Algeria expected to post in 2010 its second consecutive budget deficit of the decade, which could reach 4 percent of GDP following a deficit of about 7 percent in 2009.
  - Increase in hydrocarbon revenues in 2010 will be more than offset by a 17 percent increase in total expenditures.
  - Breakeven oil price for a balanced budget rose from US$34/bbl in 2005 to US$88/bbl in 2010.
  - Resulting primary nonhydrocarbon deficit in 2010 would remain broadly unchanged from last year at about 45 percent of NHGDP.
  - Level of resources in the FRR could grow by about US$1½ billion and be equivalent to 38 percent of GDP.
- 2011 Budget Law (preliminary) implications:
  - Current expenditures (cash basis) would increase by 13 percent to close to 41 percent of NHGDP.
  - Excluding salary back payments, current expenditure ratio would decline from 37 percent of NHGDP in 2010 to 35 percent in 2011.
  - Capital expenditures expected to remain stable in real terms.
  - Total revenues to continue rising due to higher hydrocarbon prices and greater efficiency in tax administration.
- Authorities’ views on fiscal policy:
  - Authorities agree recent substantial growth of expenditure needs to be halted—especially current expenditure.
  - Salary increases were necessary to compensate for loss of purchasing power; back salary payments will be spread over 2010–12.
  - A review of current transfers, in particular food subsidies, is being launched with World Bank assistance to improve targeting.
  - Authorities will keep capital expenditure at 2009–10 levels in real terms to complete the 2005–09 PIP and start the 2010–14 PIP; ready to adjust investment spending if hydrocarbon fiscal revenue falls.

### Monetary and exchange rate policies
- Monetary policy orientation for 2010–11:
  - Continue to absorb excess liquidity and fend off inflationary pressures.
  - The BA has absorbed excess banking liquidity arising from hydrocarbon sector resources and public expenditures to limit inflation impact.
  - If inflationary pressures appear, the BA should promptly increase interest rates, preferably including the refinancing rate, to provide a more definite signal on the cost of credit.
  - The BA should maintain effective information exchange with the Ministry of Finance on future spending and enhance analytical capacity for policy decisions.
- Exchange rate policy:
  - Continue a managed float aimed at maintaining the real effective exchange rate (REER) close to its equilibrium and minimizing misalignment risks from oil price and Euro/US$ volatility.
  - The real effective exchange rate rose by 6.5 percent in the first seven months of 2010, after declining by 7 percent in 2009.
  - The nominal effective exchange rate increased by around 6 percent over the course of 2010.
  - The equilibrium real exchange rate has appreciated in recent years, reflecting increased government spending and posing “Dutch disease” risks.
- Authorities’ views on monetary and exchange rate policy:
  - Authorities consider liquidity absorption effective in containing inflation and remain vigilant about renewed inflationary pressures.
  - Fresh food price increases in 2008–09 were attributed mainly to market imperfections; fresh food prices stabilized since early 2010, but rising inflation in nonfood products is a concern.
  - Authorities remain committed to maintaining the REER close to its equilibrium and enhancing exchange rate analysis capacity.

### III. Medium-term challenges and reforms: need to promote economic diversification
- Core medium-term challenge:
  - Promote economic diversification to reduce dependence on hydrocarbons and public spending.
- Reform imperatives (as derived from background and short-term sections):
  - Accelerate structural reforms, including in the financial sector, to improve business climate and private sector development.
  - Improve targeting and efficiency of current transfers and public spending to reduce “Dutch disease” effects and support NH sector competitiveness.
  - Continue modernization of budget systems and strengthen control over large PIP projects.
  - Maintain fiscal prudence over the medium term to protect capacity to weather negative oil price shocks.

*IMF staff report: Selected Economic and Financial Indicators, 2007–15 (excerpts).*

### 17.      The medium-term growth outlook remains stable, with risks of a slowdown in

### 17.      The medium-term growth outlook remains stable, with risks of a slowdown in

### Medium-term growth prospects and risks
- Over the medium term, the hydrocarbon sector may be affected by a drop in gas exports—stemming from the possible development of alternative gas production in Algeria’s export markets—which could weigh on growth and total hydrocarbon revenues.
- The growth of NHGDP of approximately 5 percent would be supported by the new PIP and the continuation of the hydrocarbon sector investment program.
- The growth potential of the private sector will critically depend on a forceful structural reform program, in particular in the financial sector and for improving the business climate.
- A more ambitious program of structural reforms is needed to avoid a slowdown in medium‐term NHGDP growth, given that PIP expenditure would remain stable in real terms and should give way to other private sector‐led sources of growth.

### Medium-term financial outlook and scenarios
- The medium‐term financial outlook is positive overall, thanks to the gradual increase expected in hydrocarbon prices, but it remains dependent on fluctuations in these prices.
- If public expenditures are contained in the medium term, FRR resources could increase further, albeit at a lower rate of growth than nominal GDP, thus reaching 32 percent of GDP in 2015.
- With current account surpluses remaining at about 9 percent of GDP over the period, reserves would increase to the equivalent of over four years of imports of goods and services in 2015.
- Alternative scenario: with a drop of 30 percent in the price of natural gas, due to the development of unconventional gas production in Algeria's export markets, the resources in the FRR would fall substantially, by about 10 percentage points of GDP by 2015.

Key medium-term baseline scenario figures (2009–2015):
- International oil price (US$/bbl): 61.87 76.2 78.8 82.3 84.8 86.0 87.5
- International gas price (US$/BTU): 6.6 7.6 7.9 8.3 8.6 8.7 8.9
- Overal budget balance (percent of GDP): -6.8 -3.9 -3.3 -1.1 1.7 2.6 3.2
- FRR (percent of GDP): 42.6 37.9 32.1 28.9 28.9 30.1 31.8
- Reserves (US$ billion): 148.9 161.0 171.4 188.3 206.9 226.4 247.4
- Primary budget deficit (percent of NHGDP): -44.9 -45.3 -45.8 -41.6 -36.1 -33.1 -30.8
- Current account balance (percent of GDP): 0.3 8.5 9.3 9.6 9.7 9.8 10.1
- Government net assets (percent of GDP) (*): 32.2 27.6 20.8 17.9 18.1 19.5 21.4
  - (*) FRR minus government debt

### Authorities’ views (on medium term)
- Authorities aim at reducing reliance of the Algerian economy on the hydrocarbon sector and promoting a more diversified and private investment-led growing economy to reduce unemployment and improve living standards.
- The authorities agreed that new developments in international gas markets, with the potential rise of alternative gas production, could affect Algerian gas exports over the medium term.

### Medium-term fiscal consolidation and fiscal reforms
Findings and needs:
- Nonhydrocarbon budget revenues should be further enhanced, but the tax burden on businesses should decline.
- In 2010 hydrocarbon revenues still represent about two‐third of total revenues.
- The FRR reduces budget vulnerability to hydrocarbon revenues but may not be sufficient in the medium to long term to face oil price volatility.
- Authorities could aim at covering all current expenditure with nonhydrocarbon revenues in the longer term.
- Comparisons with other emerging market economies show that the tax burden on businesses is very high in Algeria; reducing this burden would ease doing business and support the fight against the informal sector.

Policy framework recommendation:
- Adopting a medium-term budget framework, based on the principle of permanent income, would provide a useful benchmark to ensure fiscal sustainability in the medium term.
  - The government would set itself the goal of spending only part of the hydrocarbon income in order to maintain constant overall wealth—or wealth per capita—over the long term.
  - Applying this framework to Algeria indicates that fiscal consolidation will be necessary to bring the fiscal position back to a sustainable level in the medium term.

Expenditure control and quality:
- Current expenditure has increased on average by 20 percent per year over the past five years.
- The wage bill rose from 11.6 percent of NHGDP in 2006 to 15.6 percent in 2010 (excluding back payments).
- Wage back payments and rising recurring costs of new infrastructures will put upward pressures on expenditure.
- Containment measures suggested: limit annual wage increases below inflation; improve targeting of transfers and subsidies; prioritize and adjust investment projects within available resources; establish mechanisms for partial and more regular adjustments to civil service wages.

- Attention to expenditure quality: creation of CNED (Caisse Nationale d’Equipements et de Développement) to monitor PIP implementation is positive and should play an increasing role in prioritizing the PIP.
- Further modernization needed: target-based budget management with performance assessment; preparation of the 2008 Budget Review Law is a step toward improved transparency.

Authorities’ stance on fiscal reforms:
- Committed to medium-term fiscal sustainability; aim to reduce dependence on hydrocarbon revenues and protect fiscal savings under normal circumstances.
- Exploring measures to curb current expenditure growth including devising targeted income support to replace general subsidies and establishing market-based pricing mechanisms for some energy products and services.
- Continuation of fiscal reforms is a key component of the authorities’ growth strategy; CNED role to increase with the new 2010–14 PIP (no new large project included without CNED approval based on transparent procedures).

### Financial sector: progress, gaps, and reforms
Financial soundness and intermediation:
- Banks are well capitalized overall—especially following the quadrupling of minimum capital requirements in 2009—and profitable.
- NPLs ratio decreased further in 2009 to 14.5 percent and loans’ provisioning increased.
- NPLs ratio in public banks remains too high; further actions needed to improve resolution of public banks’ NPLs with public enterprises and the private sector.
- Banking intermediation remains relatively low; the sector is very liquid but lending is constrained mainly because of credit risk.

Measures and planned reforms:
- Establishment of a central credit register for risk of individuals planned for 2011 to enhance risk assessment and promote lending.
- Measures to develop lending for SMEs and mortgage loans to individuals; modernization of operations and means of payment to reduce cash usage; development of bank branch networks to improve public access.
- Some recent measures may hamper modernization: new rules for FDI prevent entry of new foreign majority-owned banks or takeover of public banks by foreign banks as part of privatization; mandatory presence of nonvoting government representative on private banks’ boards; ban on consumer lending (except mortgages) in force since 2009 has affected deepening of banking activity and should be reviewed once the credit registry becomes operational.

Financial soundness indicators (selected, 2005–Jun-10) — (In percent)
- Capital adequacy ratio: 12.3 15.2 12.9 16.5 21.8 18.4
- Public banks: 11.7 14.4 12.1 16.0 19.1 15.9
- Foreign banks: 19.0 21.6 18.1 20.2 35.3 29.7
- Classified loans/total loans: 35.7 34.8 35.5 25.4 21.6 22.1
- Public banks (classified): 38.2 37.5 38.7 28.5 24.4 24.9
- Off which, to private sector (classified): 19.0 22.0 24.3 20.0 16.9 17.4
- NPLs/total loans: 19.2 17.5 22.1 15.7 14.5 14.9
- Public banks (NPLs): 20.4 19.2 23.8 17.6 16.5 16.8
- Off which, to private sector (NPLs): 10.1 11.7 18.7 15.9 13.0 13.3
- Foreign banks (NPLs): 3.2 2.9 9.2 2.2 2.4 2.6
- Provisions/classified loans: 49.3 54.0 56.1 57.7 68.3 67.8
- Return on equity: 7.8 18.8 24.6 25.2 25.7 ...

Supervision and FSAP follow-up:
- More forceful implementation of the 2007 FSAP update recommendations is recommended: (a) clarifying the role of the public banks; (b) improving the operational environment; and (c) developing nonbank financing through the bond market.
- Control, management, and governance of public banks (90 percent of banking sector assets) should be enhanced, including exploring partnerships with foreign financial institutions.
- The BA will establish a new bank rating system planned for 2011; authorities are preparing the first report on financial stability as assigned by the 2010 amendment of the Law on Money and Credit (LMC).

Authorities’ views on financial sector:
- Modernizing and strengthening the financial sector is a key pillar to support private investment; BA will continue efforts to improve supervision and reinforce financial institutions.
- New banking accounting system based on IAS/IFS principles contributes to better disclosure.
- Authorities view relatively high NPLs as legacy of old debts and consider accumulation of new NPLs small; they will explore enhancing public banks’ operations, including possible foreign partnerships.
- Authorities see presence of government representatives at private banks’ boards as helping communication with authorities.

### Diversification, FDI, and trade integration
FDI and investment climate:
- Some measures of the 2009 Supplementary Budget Law may have contributed to deter FDI and could hamper diversification.
- New measures impose: (a) a 49 percent ceiling for foreign participation in any new FDI; (b) a positive foreign currency balance for new FDI projects; (c) reaffirmation of the preemptive right of the public authorities over the sale of foreign investments — these could deter foreign investors.
- In 2009, FDI (excluding hydrocarbons and the financial sector) fell by about 60 percent and had not recovered in 2010.
- Recommendation: review the impact of these measures and identify adjustments to ensure an attractive but well controlled FDI regime; e.g., limit foreign participation ceiling to strategic sectors and limit mandatory National Investment Council (CNI) review to largest projects.

Structural reform agenda:
- A more assertive structural reform agenda would boost business climate and private investment-led growth.
- Private sector remains weak and fragmented, particularly in industry, with limited capacity for innovation and competitiveness.
- Support program for SMEs should be accelerated with efficient targeting and consistent objectives devised with private sector representatives.
- Public enterprise restructuring programs decentralized to sector ministries should gain momentum to give greater scope for private initiative and reduce fiscal burden.
- Authorities should explore other reforms to improve business climate.

Trade integration:
- More efforts needed to foster Algeria’s integration in regional and world trade.
- Recent measures (including ban on consumer lending) aimed at reining in perceived excessive import growth.
- Algeria still has high average tariff rates which should be reduced starting by cutting the highest rates.
- In 2009, Algeria joined the Arab Free Trade Zone (AFTZ) and imports from regional partners increased significantly—albeit from low levels—prompting authorities to seek more gradual implementation.
- Authorities pursuing efforts to join the World Trade Organization; negotiations on new phase in Association agreement with the EU are continuing but slowed due to concerns on nonhydrocarbon exports access to EU markets.

Authorities’ views on FDI and trade:
- Authorities are concerned by unfavorable perception of Algeria’s business climate but consider new measures will support investments more beneficial for the local economy.
- They believe new infrastructure will boost competitiveness and measures taken in 2009 and 2010 to promote greater participation of Algerian private investment and the public sector will create better investment opportunities.
- Authorities consider certain trade agreements did not meet expectations (AFTZ, EU Association Agreement) due to excessive import growth without sufficient export benefits; they are negotiating restoration of certain duty rights with AFTZ and the EU to smooth integration for certain sectors.

### Staff appraisal (summary)
- Algeria has recorded favorable macroeconomic developments but continues to face important challenges: decade of solid nonhydrocarbon growth and low inflation, large external reserves, substantial savings in an oil stabilization fund, and very low public and external debt.
- Despite efforts to diversify and strengthen the private sector, Algeria remains dependent on hydrocarbons and public spending, with productivity and business climate lagging trading partners.
- Youth unemployment remains high, underscoring the need to accelerate structural reforms to diversify the economy and promote new sources of sustainable growth.
- The very expansionary fiscal stance of recent years will need to be contained over the medium term to protect capacity to withstand negative and prolonged hydrocarbon revenue shocks.
- Recommended policies: continue infrastructure component of the PIP and support to SMEs in short term; strict containment of spending over medium term; limit wage increases below inflation; improve targeting of transfers and subsidies; prioritize and adjust investment projects within available resources; continue advances in tax administration to boost nonhydrocarbon revenues.
- The need for these policies becomes more pressing if risks on gas revenue related to the development of nonconventional gas in Algeria’s export markets materialize.

*Source: IMF staff report content provided.*

### 39.      Ensuring the quality and efficiency of public expenditure and pursuing budgetary

### 39.      Ensuring the quality and efficiency of public expenditure and pursuing budgetary

### Fiscal policy and public expenditure
- Ongoing efforts to modernize budget systems should continue to:
  - achieve a medium‐term budget programming system;
  - develop tools to evaluate programs performance;
  - enhance budget control.
- The commission monitoring large PIP projects has been positive and should become more important for prioritizing PIP expenditure in the near future.
- In 2010, a 34 percent public service wage increase places Algeria at higher public wage levels compared to neighboring countries.
- Central government finance (selected indicators, in percent of GDP unless otherwise noted):
  - Overall balance: 4.4, 7.7, -6.8, -3.9, -3.3, -1.1, 1.7, 2.6, 3.2 (for 2007–15 series as shown).
  - Total revenue: 39.6, 47.2, 36.3, 38.4, 38.4, 37.8, 37.5, 37.1, 36.6 (2007–15).
  - Total expenditure: 35.2, 39.5, 43.1, 42.2, 41.8, 38.9, 35.8, 34.4, 33.4 (2007–15).
  - Nonhydrocarbon primary balance: -44.1, -53.1, -44.9, -45.3, -45.8, -41.6, -36.1, -33.1, -30.8 (2007–15; in percent of nonhydrocarbon GDP).
- Oil stabilization fund (in billions of Algerian dinars and percent of GDP):
  - Levels: 32, 15.5, 4280.0, 4316.5, 4448.9, 4243.9, 4170.3, 4517.5, 5040.9, 5703.2 (2007–15 series shown).
  - (in percent of GDP): 34.6, 38.9, 42.6, 37.9, 32.1, 28.9, 28.9, 30.1, 31.8 (series shown).

### Monetary policy and Bank of Algeria (BA) operations
- The BA has successfully absorbed abundant liquidity from high oil revenues and large public spending.
- Recommendation: BA should stand ready to tighten monetary policy promptly if inflationary pressures increase.
  - Specifically: the BA should reverse the rate cuts of 2009 and consider increasing the refinancing rate if a stronger signal is needed.
- Ongoing efforts to refine instruments for monitoring, assessing, and absorbing abundant liquidity should continue.
- Monetary survey (selected levels, end-of-period in billions of Algerian dinars or percent change as indicated):
  - Net foreign assets: 7,416; 10,247; 10,758; 11,890; 13,385 (2007–11).
  - Money and quasi-money (M2): 5,991; 6,956; 7,173; 8,188; 9,381 (2007–11).
  - Credit to the economy (levels): 2,233; 2,689; 3,187; 3,585; 4,016 (2007–11).
  - Liquidity ratio (e.o.p. M2/GDP): 64.4, 63.3, 70.8, 69.8, 71.0 (2007–11).
  - Sonatrach deposits: 1,275; 1,302; 774; 1,000; 1,400 (2007–11).

### Exchange rate policy and REER assessment
- The central bank should continue an exchange rate policy consistent with external stability and closely monitor developments to minimize risks of misalignment of the real effective exchange rate (REER).
- CGER-type analysis results:
  - Macroeconomic Balance (MB) approach implies a current account norm lower than the projected CA balance in 2010, implying an undervaluation of about 23 percent in 2010. The gap is expected to decrease by about half by 2015.
  - Equilibrium Real Effective Exchange Rate (EREER) estimation using WEO projections implies an undervaluation of 14.5 percent in 2010.
  - The effective real exchange rate has slightly appreciated since end-2009.
- Risk highlighted: increasing government spending has contributed to EREER appreciation and entails risks of a "Dutch disease" phenomenon; containing government spending would reduce pressures for real appreciation.

### External position and selected macroeconomic projections
- Current account balance (in percent of GDP): 22.8, 20.2, 0.3, 8.5, 9.3, 9.6, 9.7, 9.8, 10.1 (2007–15 series shown).
- Gross official reserves (in billions of US$, end of period): 110.2; 143.1; 148.9; 161.0; 171.4; 188.3; 206.9; 226.4; 247.4 (2007–15).
  - Reserves in months of next year's imports: 26.9; 35.4; 35.6; 36.7; 37.9; 40.1; 42.7; 45.9; 49.9 (2007–15).
- GDP at constant prices (annual percentage change): 3.0, 2.4, 2.4, 3.3, 3.7, 3.6, 3.5, 3.4, 3.4 (2007–15).
  - Hydrocarbon sector growth: -0.9, -2.3, -6.0, -0.9, 0.8, 0.6, 0.6, 0.6, 0.5 (2007–15).
  - Other sectors growth: 6.3, 6.1, 9.3, 5.3, 5.3, 5.3, 5.2, 5.0, 5.0 (2007–15).
- Algerian crude oil price (US$/barrel, weighted average of quarterly data): 74.79, 99.26, 61.87, 76.27, 88.82, 84.88, 64.88, 67.5, 87.5 (series shown across years).

### Structural reforms and financial sector
- Structural reforms should be implemented more forcefully to improve the business climate.
  - New rules for FDI adopted in 2009 and some bureaucratic burden seem to discourage foreign direct investment, depriving Algeria of technology and know-how transfer. These measures could be reviewed to ensure a well regulated but attractive investment framework.
- Public banks need to improve governance and modernize operational frameworks to enhance financial intermediation.
  - Explore partnerships with foreign institutions and opening capital to the private sector to bring public banks to highest international standards.
- Recommendations of the 2007 FSAP Update should be implemented forcefully; ongoing efforts to reduce NPLs should continue to bring levels closer to comparable countries.
- Authorities should continue to seek better integration of Algeria in the regional and global economy.
- Algeria has failed to attract FDI during the last decade with the exception of the hydrocarbon sector (illustrated by average FDI net inflows, 2000–09, percent of GDP, where Algeria ranks low among peers).

### Other recommendations and administrative notes
- The authorities should expedite Algeria’s participation as a creditor in the Enhanced HIPC Initiative.
- It is proposed that the next Article IV consultation be held on the standard 12‐month cycle.

*Source: Staff report for the 2010 Article IV Consultation (Algeria), selected excerpts and tables.*

### 45.      From January 21, 1974 to October 1, 1994, the exchange rate of the dinar was

### _cr1139 - 45.      From January 21, 1974 to October 1, 1994, the exchange rate of the dinar was

### Exchange rate history and current regime
- From January 21, 1974 to October 1, 1994, the exchange rate of 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.
- On December 15, 2010, the average of the buying and selling rates for the U.S. dollar was $1 = DA 74.6, equivalent to SDR 1 = DA 114.9.
- 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 classified as other managed arrangement 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
- The discussions for the 2009 Article IV consultation with Algeria were held in Algiers during October21–November 3, 2009.
- The staff report (IMF Country Report No. 10/57) was considered by the Executive Board on January 5, 2010 on a lapse of time basis and published on March 02, 2010.

### Technical assistance missions and activities
- An MFD/LEG mission visited Algiers in July 2005 to advise on the exchange regime and the development of the foreign exchange market.
- An MFD expert visited Algiers in October 2005 to advise on foreign exchange reserve management.
- An MFD mission visited Algiers in September 2005, December 2005, and in May 2006 to advise on bank restructuring.
- An MFD expert visited Algiers several times from February through September 2006 to assist the Bank of Algeria to develop its bank supervision and regulation capability.
- An MFD expert visited Algiers in January–February 2006 to advise on monetary and foreign exchange operations.
- An MFD expert visited Algiers in February and May 2006 to advise on foreign exchange reserve management.
- A STA mission visited Algiers in May 2006 to advise on monetary and financial statistics.
- An MFD expert visited Algiers in May 2006 to advise on payment systems.
- A STA mission visited Algiers in May 2006 to advise on consumer price statistics.
- MFDs expert visited Algiers several times from February through October 2007 to assist the Bank of Algeria in banking supervision.
- Two FAD missions visited Algiers in February 2007 to review tax policy and advise on customs administration.
- A multisector STA mission visited Algiers in February 2007 to prepare Algeria’s participation in the GDDS.
- An FAD mission visited Algiers in April 2007 to continue the program of assistance in tax administration.
- An FAD mission visited Algiers in May 2008 to continue the program of assistance in tax administration.
- An MCM mission visited Algiers in May 2009 to advise on strengthening banking supervision and regulation.
- An MCM mission visited Algiers in June 2009 to prepare the program for harmonizing financial sector infrastructure in the Maghreb.
- An MCM expert is planned to start a long‐term banking supervision TA in December 2010.

*Excerpt from _cr1139 - 45.*

### 48.      Algeria participated in the FSAP in 2003. The Executive Board discussed the

### _cr1139 - 48.      Algeria participated in the FSAP in 2003. The Executive Board discussed the

### FSAP participation and financial sector advice
- Algeria participated in the FSAP in 2003; the Executive Board discussed the Financial System Stability Assessment on January 14, 2004 (see IMF Country Report No. 04/138).
- The FSAP was updated in 2007.
- Executive Directors urged effective implementation of the recommendations of the 2007 FSAP Update to:
  - strengthen financial supervision and monitoring;
  - further reduce the high level of NPLs in public banks;
  - improve governance and modernize operational frameworks of public banks;
  - consider partnerships with foreign institutions to bring banks to the highest international standards.

### Resident representation
- Resident Representative/Advisor: None.

### World Bank–IMF coordination (JMAP Implementation, FY11 — as of December 10, 2010)
- World Bank planned Country Partnership Strategy FY11–FY14 for delivery in FY11; no lending in line with government policy; Analytical and Technical Assistance activities on a reimbursable basis.
- World Bank sector work planned on: State‑owned Banks for Ministry of Finance; Subsidy targeting; Reviewing Social Protection Programs; Energy Demand; Environment and Tourism; Climate change.
- World Bank technical assistance on: Credit Registry with Central Bank; Financial Crisis simulation (FIRST); RAMP; Social Programs Evaluation; Support to analysis and evaluation of the Household Survey; Agricultural Program; Competitiveness Poles; Agricultural Statistical Capacity.
- IMF work program in next 12 months included: 2010 Article IV Consultation (staff visit October 20–November 2, 2010), preparation of analytical work on new FDI regulation and structural links between gas and oil prices, 2011 Article IV consultation (April 2011 / October 2011 / January 2011 / January 2012 in various entries), and technical assistance missions (MCM: banking supervision on‑site expert; STA: GDP quarterly statistics).
- Data sharing: Semiannual (and on ad hoc basis if requested).

### Statistical issues — Assessment of Data Adequacy for Surveillance
- General: Data provision has some shortcomings, but is broadly adequate for surveillance. Government finance statistics, national accounts, and prices have several shortcomings that hamper analysis.
- National Accounts:
  - Key shortcomings: outdated base year for constant price GDP estimates; long lags for publication; incomplete application of the 1993 System of National Accounts.
  - STA recommendation: give priority to compiling GDP at constant prices (including quarterly accounts) and to rebasing the GDP series.
- Price Statistics: Data are published with a delay of about 3 months.
- Government finance statistics:
  - Key shortcomings: insufficient institutional coverage (limited to Budgetary Central Government including the general budget, the annexed budget, and special treasury accounts), classification problems, long lags, lack of reconciliation of financing with monetary accounts.
  - Causes: lack of financial resources for compilation, insufficient interagency coordination, reluctance to publish provisional data due to accuracy concerns.
- Monetary statistics:
  - Need to ensure consistency with Monetary and Financial Statistics Manuel, 2000.
  - Timely reporting of balance sheet data by some state‑owned commercial banks remains problematic; most commercial banks do not report all data needed for the monetary survey.
  - Prudential data reported by state‑owned banks are unreliable and not timely.
- Balance of payments: Generally good quality, but could benefit from a survey for direct investment data.
- Algeria began participation in the General Data Dissemination System (GDDS) on April 21, 2009.
- No data ROSC is available.

### Table of Common Indicators required for surveillance (selected entries; as of December 7, 2009)
- Exchange Rates: Date of latest observation 10/09; Date received 11/02/10; Frequency of Data D; Frequency of Reporting M; Frequency of Publication W.
- International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Date of latest observation 09/09; Date received 11/02/10; Frequency of Data D; Frequency of Reporting M; Frequency of Publication M.
- Reserve/Base Money: Date of latest observation 09/10; Date received 11/30/10; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M.
- Broad Money: Date of latest observation 09/10; Date received 11/02/10; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M.
- Central Bank Balance Sheet: Date of latest observation 09/10; Date received 11/02/10; Frequency of Data M; Frequency of Reporting M; Frequency of Publication A.
- Consolidated Balance Sheet of the Banking System: Date of latest observation 09/10; Date received 11/02/10; Frequency of Data M; Frequency of Reporting M; Frequency of Publication A.
- Consumer Price Index: Date of latest observation 09/10; Date received 11/20/09; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M.
- Central Government revenue/expenditure and debt entries have mixed frequencies and some NA entries in the table.

### Public Information Notice (PIN No. 11/10) — IMF Executive Board conclusion of 2010 Article IV consultation with Algeria (January 14, 2011)
- Background findings:
  - Real nonhydrocarbon GDP growth in 2009 exceeded the average of 6 percent seen over the past decade.
  - Overall inflation rose in 2009 due to a surge in fresh food prices; nonfood inflation remained low.
  - Unemployment fell to 10.2 percent at end‑2009; youth unemployment remained high.
  - Large external reserves and sizable budgetary savings in the oil stabilization fund were built up; very low level of debt maintained.
- Executive Directors’ main messages and recommendations:
  - Welcome good economic performance and prudent fiscal and monetary policies.
  - Emphasize challenges: preserving macroeconomic stability, restoring fiscal prudence, diversifying the economy.
  - Recommend a more assertive structural reform agenda to improve the business climate and boost private investment‑led growth and employment.
  - Urge containment of the expansionary fiscal stance over the medium term to protect capacity against negative and prolonged hydrocarbon revenue shocks.
  - Welcome commitment to fiscal consolidation starting with the 2011 budget.
  - Fiscal reform priorities: increase nonhydrocarbon revenues; contain public spending (including greater control of the public sector wage bill); better targeting of transfers and subsidies; prioritize public investment projects; improve quality and efficiency of public expenditure; pursue budget system reforms.
  - Commend Bank of Algeria for sterilizing excess liquidity; encourage tightening monetary stance if inflationary pressures increase.
  - Note the exchange rate regime has served Algeria well; maintaining the real effective exchange rate close to equilibrium is consistent with external stability.
  - Stress need for stronger measures to improve the investment climate and better integration in regional and global economy; caution that new rules on foreign direct investment could discourage foreign investors.
  - Reiterate importance of accelerating financial sector reform and implementing FSAP recommendations; reduce NPLs in public banks; improve governance and operational frameworks of public banks; seek partnerships with foreign institutions.

### Executive Board assessment (summary points repeated in Board text)
- Reaffirmation of welcome for Algeria’s economic performance, the need to contain expansionary fiscal stance, emphasis on fiscal consolidation and reforms, monetary policy vigilance, exchange rate policy suitability, and the priority of structural and financial sector reforms to support diversification and private investment.

### Selected Macroeconomic Indicators, 2006–11 (selected figures preserved exactly)
- Quota: SDR 1,254.7 million; Population: 35.6 million; 2009; Per capita GDP: US$ 3,926; 2009; Poverty rate: 12.1; 2000.
- Oil and gas sector:
  - Total exports of oil and gas products (in billions of U.S. dollars): 2006 53.6; 2007 59.6; 2008 77.2; 2009 44.4; 2010 56.4; 2011 61.3.
  - Average crude oil export price (in U.S. dollar/barrel): 2006 65.7; 2007 74.7; 2008 99.0; 2009 61.8; 2010 76.2; 2011 78.8.
  - Crude oil production (in millions of barrels/day): 2006 1.4; 2007 1.4; 2008 1.3; 2009 1.3; 2010 1.2; 2011 1.3.
- Output and prices:
  - Real GDP: 2006 2.0; 2007 3.0; 2008 2.4; 2009 2.4; 2010 3.3; 2011 3.7.
  - Nonhydrocarbon real GDP: 2006 5.6; 2007 6.3; 2008 6.1; 2009 9.3; 2010 5.3; 2011 5.3.
  - Consumer prices (end of period): 2006 3.8; 2007 4.8; 2008 4.9; 2009 5.8; 2010 4.5; 2011 4.5.
  - Consumer prices (period average): 2006 2.3; 2007 3.6; 2008 4.9; 2009 5.7; 2010 4.3; 2011 5.0.
- Investment and saving (In percent of GDP):
  - Gross capital formation: 2006 30.0; 2007 34.4; 2008 38.3; 2009 50.0; 2010 44.5; 2011 44.4.
  - Nongovernment share of gross capital formation: 2006 18.0; 2007 18.9; 2008 20.4; 2009 31.0; 2010 28.0; 2011 28.4.
  - Gross national savings: 2006 54.7; 2007 57.2; 2008 58.6; 2009 50.3; 2010 53.0; 2011 53.7.
- Public finances (In percent of GDP):
  - Revenue: 2006 42.7; 2007 39.6; 2008 47.2; 2009 36.3; 2010 38.4; 2011 38.4.
  - Hydrocarbon revenue share: 2006 32.8; 2007 30.1; 2008 37.2; 2009 23.8; 2010 25.6; 2011 26.0.
  - Expenditure and net lending: 2006 29.2; 2007 35.2; 2008 39.5; 2009 43.1; 2010 42.2; 2011 41.8.
  - Current expenditure: 2006 16.8; 2007 18.0; 2008 20.2; 2009 22.7; 2010 25.7; 2011 25.8.
  - Capital expenditure: 2006 12.0; 2007 15.5; 2008 17.9; 2009 19.0; 2010 16.6; 2011 16.0.
  - Budget balance: 2006 13.5; 2007 4.4; 2008 7.7; 2009 -6.8; 2010 -3.9; 2011 -3.3.
  - Nonhydrocarbon primary balance (in percent of nonhydrocarbon GDP): 2006 -34.1; 2007 -44.1; 2008 -53.1; 2009 -44.9; 2010 -45.3; 2011 -45.8.
  - Total government debt: 2006 23.6; 2007 12.5; 2008 8.2; 2009 10.4; 2010 10.3; 2011 11.4.
- Monetary sector (Annual percentage change):
  - Credit to the economy 1/: 2006 7.1; 2007 17.2; 2008 20.4; 2009 18.5; 2010 12.5; 2011 12.0.
  - Broad money: 2006 18.6; 2007 24.1; 2008 16.1; 2009 3.1; 2010 14.1; 2011 14.6.
  - Velocity of broad money (level): 2006 1.8; 2007 1.6; 2008 1.6; 2009 1.4; 2010 1.4; 2011 1.4.
  - Three‑month treasury bill rate (end of period, in percent): 2006 2.1; 2007 0.2; 2008 0.2; 2009 0.3; 2010 ...; 2011 ....
- External sector (selected):
  - Hydrocarbon exports of goods (in US$, percentage change): 2006 43.0; 2007 11.2; 2008 29.5; 2009 -42.5; 2010 27.0; 2011 8.6.
  - Hydrocarbon exports of goods (percent of total exports of goods): 2006 97.9; 2007 98.4; 2008 98.2; 2009 98.3; 2010 98.0; 2011 98.0.
  - Imports of goods (in US$, percentage change): 2006 4.1; 2007 27.4; 2008 44.2; 2009 -1.6; 2010 1.3; 2011 4.7.
  - Merchandise trade balance (percent of GDP): 2006 29.0; 2007 25.5; 2008 23.9; 2009 5.6; 2010 12.4; 2011 13.5.
  - Current account including official transfers (percent of GDP): 2006 24.7; 2007 22.8; 2008 20.2; 2009 0.3; 2010 8.5; 2011 9.3.
  - Foreign direct investment (percent of GDP): 2006 1.5; 2007 1.0; 2008 1.4; 2009 1.8; 2010 1.5; 2011 1.0.
  - Total external debt (percent of GDP): 2006 4.8; 2007 4.2; 2008 3.3; 2009 3.8; 2010 2.8; 2011 2.2.
  - Gross reserves (in billions of U.S. dollars): 2006 77.8; 2007 110.2; 2008 143.1; 2009 148.9; 2010 161.0; 2011 171.4.
  - Reserves in months of next year's imports of goods and services: 2006 28.0; 2007 26.9; 2008 35.4; 2009 35.6; 2010 36.7; 2011 37.9.
- Memorandum items:
  - Nominal GDP (in billions of U.S. dollars): 2006 117.3; 2007 134.3; 2008 170.2; 2009 139.8; 2010 158.6; 2011 168.8.
  - Unemployment rate (in percent): 2006 12.3; 2007 11.8; 2008 11.3; 2009 10.2; 2010 ...; 2011 ....
  - Local currency per U.S. dollar (period average): 2006 72.6; 2007 69.3; 2008 64.6; 2009 72.5; 2010 ...; 2011 ....
  - Real effective exchange rate (2005 = 100): 2006 100.0; 2007 99.0; 2008 102.1; 2009 100.0; 2010 ...; 2011 ....

### Statement by Algeria’s Executive Director (Mohammad Mojarrad) and Advisor (Said Maherzi) — January 14, 2011 (excerpt)
- Authorities thank staff for a well‑balanced report and Selected Issues paper (SIP); value constructive dialogue and IMF advice, technical assistance, and support.
- The Algerian economy continued to perform strongly in 2010, underpinned by sustained implementation of the public investment program (PIP).
- Nonhydrocarbon sector growth exceeded 5 percent in 2010; a slight decline in the hydrocarbon sector held overall GDP growth at (text truncated in excerpt).

*Source: IMF — Public Information Notice No. 11/10 and accompanying country report excerpts.*

### 3.3 percent. Sound policies helped to bring down inflation to 4 percent and unemployment

### 3.3 percent. Sound policies helped to bring down inflation to 4 percent and unemployment

### Macroeconomic outcomes and outlook
- Inflation was brought down to 4 percent.
- Unemployment continued to decline, although it remains high among the youth.
- A recovery in oil prices contributed to a significant strengthening in the current account surplus following its sharp decline in 2009.
- International reserves stood at a very comfortable level, cushioning the economy against external shocks.
- External debt declined further to less than 3 percent of GDP.
- With continued strong performance in the nonhydrocarbon sector, supported by the PIP, and a recovery in oil and gas production, real GDP growth is projected to strengthen in 2011.

### Fiscal policy, PIP, and wage dynamics
- Authorities committed to preserving macroeconomic stability as a pillar of growth and social development.
- Prudent fiscal policy over several years built significant savings in the revenue stabilization fund, contributing to sustainable financing of the PIP.
- Despite increased hydrocarbon revenue in 2010 and substantially strengthened nonhydrocarbon revenue, the budget recorded a deficit, but at a significantly lower level than the previous year, reflecting higher expenditure.
- Capital spending remained high in line with PIP implementation; current spending increased significantly, largely reflecting the impact of the civil service reform aimed at rationalizing the wage and salary structure.
- The total impact of the civil service reform will be spread over 3 years; because the reform took effect from 2008, the budgetary cost in 2010-12 includes salary back payments in 2008-09.
- Wage bill projections:
  - Peak at 11.4 percent of GDP in 2011.
  - Projected to decline gradually and return to 8.3 percent of GDP in 2013.
- Authorities committed to rationalizing and containing current spending, including a comprehensive review of the subsidies system being launched with World Bank assistance to improve targeting and efficiency.
- Ensuring quality capital spending is a key focus; CNED (agency for evaluating and monitoring PIP projects) is being strengthened and its prior approval is now required for a project to be included in the budget.
- To preserve medium-term fiscal sustainability, authorities stand ready to adjust capital spending to available resources should external conditions be less favorable than projected.
- Continued efforts to modernize budget systems and improve fiscal governance, transparency and accountability; the 2008 Budget Review Law has recently been submitted to Parliament.

### Monetary policy and exchange rate
- Monetary policy geared toward containing inflation; the Bank of Algeria (BA) continues to absorb excess liquidity in the banking sector resulting from hydrocarbon resources and public spending.
- BA will continue to closely monitor developments and stands ready to take further actions as needed to contain inflation, including in view of the recent wage increase.
- The authorities and staff assess that the current level of the real effective exchange rate (REER) is broadly in line with fundamentals, consistent with BA’s flexible exchange rate policy aiming at stabilizing the REER close to its equilibrium rate.

### Financial sector soundness and reforms
- The financial system remains sound, with a well-capitalized, liquid, and profitable banking sector.
- Overall nonperforming loans have declined and provisioning has increased, reflecting tighter risk assessment; efforts continue to address remaining NPLs in public banks’ portfolios, the bulk of which is related to old debts.
- The establishment of a credit registry is scheduled for late 2011; as it becomes operational, the ban on consumer lending (excluding mortgages) will be reviewed.
- Banking supervision is being strengthened, including with Fund assistance.
- BA is developing a new bank rating system with external assistance and preparing a first report on financial stability, in line with the newly amended Law on Money and Credit which assigns BA explicit responsibility to ensure financial stability.
- Authorities will continue to explore ways to enhance operations of public banks, including possible partnerships with foreign financial institutions, in line with FSAP recommendations.

### Diversification, business environment, and FDI
- Authorities agree on the need to reduce reliance on the hydrocarbon sector through sustained economic diversification efforts; substantial infrastructure development under the PIP will be instrumental.
- Continued attention to improving the business environment: further modernizing the judiciary, improving governance of public institutions and fighting corruption, streamlining the tax system, strengthening the financial system, and promoting SMEs.
- The SIP on economic diversification includes advice and suggestions supportive of authorities’ objectives.
- Authorities believe private sector development and FDI will have a major role to play alongside strong public participation.
- New FDI regulations set a ceiling of 49 percent on foreign partners’ participation in new investment projects, while not excluding granting project management to the foreign partner; they are meant to encourage joint ventures with local public and/or private investors.
- A number of joint ventures are being finalized with foreign partners in diverse sectors, including the financial sector, construction, building materials, construction of industrial vehicles, rails production and maintenance, and food processing.

*Source: _cr1139 - 3.3 percent. Sound policies helped to bring down inflation to 4 percent and unemployment*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr1139.pdf_