## _cr1220

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---

### INTRODUCTION — Economic context (2010–11)
- Growth and composition
  - NHGDP growth in 2010 = 6.0 percent; oil and gas output fell by 2.6 percent; overall GDP growth = 3.3 percent.
  - 2011 projected overall GDP growth ≈ 2.5 percent due to further decline in oil and gas sector and restraint in PIP expenditures.
- Inflation and prices
  - Inflation declined from 5.7 percent in 2009 to 3.5 percent in mid-2011; average inflation increased through October 2011 to 4.2 percent.
  - Year-on-year CPI inflation rose from 2.7 percent in end-2010 to 5.5 percent in October 2011.
- Banking and liquidity
  - Deposit growth (excluding SONATRACH) = 16 percent (year-on-year) at end-June 2011.
  - Growth in credit to the economy = 15 percent (year-on-year, excluding buyback of public companies’ debt by the treasury).
  - Liquidity absorption through two deposit windows = 17 percent of GDP at end-August 2011.
- Fiscal stance and public finances (2011)
  - Budget deficit ≈ 4 percent of GDP.
  - Total revenues increased 22 percent (nominal); total expenditure increased 32 percent.
  - Current expenditure projected to grow by 50 percent in 2011; capital expenditure expected to increase by 7 percent (final phase of 2005–09 PIP).
  - Nonhydrocarbon revenues expected to increase by 13 percent; they will cover 41 percent of current expenditures (49 percent excluding salary back payments).
  - Nonhydrocarbon primary deficit expected to increase to 49 percent of NHGDP in 2011.
  - Gross government debt expected to remain at 10 percent of GDP; budgetary savings in the FRR expected to remain at 40 percent of GDP.
- External sector and reserves
  - Oil and gas revenues increased by 30 percent during the first nine months of 2011.
  - Imports rose 19 percent during the first eight months of 2011 (food products +67 percent; consumer goods +40 percent).
  - Official reserves increased by US$14.6 billion during the first eight months of 2011 to US$178.3 billion at end-August 2011.
  - Current account surplus projected at 9.5 percent of GDP in 2011 and 5.4 percent in 2012 under high oil price assumptions.
- Exchange rate and competitiveness
  - REER depreciated by 1.5 percent during the first eight months of 2011.
  - Nominal effective exchange rate depreciated by 2.2 percent in 2011; inflation differential vis-à-vis main partners = 0.7 percent.
  - REER broadly in line with medium-term equilibrium linked to oil prices and government expenditure.

### THEME 1 — Coping with social demands while fending off inflationary pressures
- Near-term outlook and oil-price assumptions
  - 2011–12 growth: NHGDP ≈ 5 percent; overall real GDP growth = 2 ½–3 percent.
  - Fall 2011 WEO oil price projections: US$103/barrel in 2011 and US$100/barrel in 2012.
  - Under these oil price assumptions: current account surplus = 9.5 percent of GDP in 2011 and 5.4 percent in 2012; hydrocarbon fiscal revenues 25–30 percent above their 2010 level.
  - Inflation could stay about 4–4½ percent in 2011–12, but risk of rising inflation from buoyant domestic demand has increased.
- Fiscal and income measures (2012 draft budget)
  - Civil service salaries: revision begun in 2010 raises civil service salaries on average by about 50 percent from 2008.
  - Draft 2012 budget extends socioeconomic measures at a cost equivalent to 4 percent of GDP (price support for cereals, powdered milk, soybean oil, sugar; expanded civil servants’ access to housing; increased support to reduce youth unemployment; subsidized lending rates for SMEs; rescheduling debt of heavily indebted but viable SMEs).
  - Current incompressible expenditure projected ≈ 45 percent of NHGDP in 2012.
  - With flat oil tax revenues, budget would record a deficit for the fourth year in a row in 2012, equivalent to 6 percent of GDP.
- Staff concerns and recommended restraint
  - Break the rising trend in expenditure and rebalance composition; ensure public spending quality, effectiveness, and equitable benefits.
  - Target current expenditure better (subsidies and social transfers).
  - Maintain 2012 investment expenditure at a level similar to 2011 outcome, conditional on improved efficiency and control of capital spending.
  - Contain impact of wage increases on domestic demand to avoid pick-up in inflation:
    - Minimum wage increase = 20 percent in January 2012.
    - Back payments of salary increases for 2008–09 spread over two years: additional income = 8 percent of NHGDP in 2011 and 7 percent in 2012.
    - If additional income translates entirely into domestic demand, inflationary pressures would intensify; monetary tightening and increased imports may be required.
- Monetary and exchange rate guidance
  - Continue monetary policy aimed at controlling excess liquidity and inflationary pressures.
  - BA has been absorbing liquidity through two short-term repurchase and deposit facilities; interest rates unchanged to date.
  - Authorities should consider tightening monetary policy early if inflationary pressures materialize; BA could increase interest rates to signal higher cost of credit and better returns on savings.
  - Continue managed float to keep REER close to equilibrium; strengthen exchange rate fundamentals to reduce Dutch disease risks.
- Authorities’ short-term stance
  - Fiscal prudence is a priority, but maintaining social cohesion is key in the short term.
  - Authorities view wage increases and socioeconomic support measures as necessary to improve living standards and maintain social stability.
  - Commitment to protect PIP implementation and improve project selection, expenditure quality, and effectiveness.
  - Authorities consider liquidity absorption policy effective; comfortable with inflation around 4 percent; remain committed to act if inflationary pressures arise.

### THEME 2 — Ensuring medium-term fiscal sustainability and 2012–16 scenarios
- Medium-term baseline (permanent income framework and base-scenario figures 2012–2016)
  - Objective: maintain hydrocarbon wealth per capita constant over the long term; fiscal consolidation will be needed.
  - Risk if operating expenses increases are not reversed: more cautious execution of new PIP for 2010–14 required.
  - Base scenario key figures (2012–2016):
    - International oil price (US$/bbl): 100.0, 99.5, 97.5, 96.5, 95.5
    - International gas price (US$/BTU): 8.2, 8.1, 8.0, 7.9, 7.8
    - Overal budget balance (percent of GDP): -6.0, -3.3, -3.3, -3.3, -3.0
    - FRR (percent of GDP): 28.6, 25.0, 21.7, 18.6, 15.6
    - Reserves (US$ billion): 193.4, 204.9, 216.6, 229.1, 242.7
    - Primary budget deficit (percent of NHGDP): -46.4, -39.3, -36.4, -34.0, -32.3
    - Current account balance (percent of GDP): 5.4, 4.6, 4.5, 4.8, 5.0
    - Government net assets (percent of GDP) (*): 19.2, 16.1, 13.3, 10.6, 8.1
      - (*) FRR minus government debt
- Alternative (IMF staff crisis) scenario key figures (starting Q1 2012)
  - International oil price (US$/bbl): 55.0, 70.0, 70.0, 70.0, 70.0
  - International gas price (US$/BTU): 4.5, 5.7, 5.7, 5.7, 5.7
  - FRR (percent of GDP) 2/: 17.9, 8.3, 4.5, 4.3, 4.0
    - 2/ The FRR balance is maintained above 740 billion DA as required by Algerian law.
  - Reserves (US$ billion): 165.7, 159.1, 153.6, 148.9, 145.0
  - Primary budget deficit (percent of NHGDP): -46.4, -39.3, -36.4, -34.0, -32.3
  - Current account balance (percent of GDP): -8.9, -4.3, -3.6, -3.1, -2.7
  - Government net assets (percent of GDP) 3/: 8.5, -0.7, -8.6, -15.6, -21.5
    - 3/ FRR minus government debt
- Risks and implications
  - Under baseline: FRR would be reduced to almost half of its 2010 level by 2016 (to 16 percent of GDP in an earlier summary).
  - Under alternative low-oil-price scenario: FRR could fall to legal minimum of 740 billion dinars (about US$10 billion); fiscal deficits could lead government borrowing to exceed 26 percent of GDP; current account could be in deficit, reducing reserves to 2½ years of goods and services imports.
  - Public finances remain highly vulnerable to a major slump in oil prices.

### Fiscal policy recommendations and budget management (medium term)
- Formulate and adopt fiscal consolidation measures over the medium term.
- Rationalize current expenditure
  - Current expenditure reached 64 percent of total expenditure in 2011 (excluding salary back-payments), up from 54 percent in 2008–09.
  - Assess effectiveness of additional expenditures before continuation; current expenditures are more difficult to compress.
  - Keep tight control on wage bill growth by restricting new hiring and future salary increases after substantial pay rises.
  - Improve targeting of transfers and subsidies; accelerate social transfer targeting work with World Bank support.
- Better control high-priority capital expenditure
  - Capital expenditure represented 36 percent of total expenditures in 2011, down from 47 percent in 2009–10.
  - Maintaining existing levels will require a higher pace of execution; ensure sound project selection to improve effectiveness.
  - CNED has enabled budget savings and more effective project execution and should be pursued.
- Increase nonhydrocarbon resources and tax administration
  - DGI reforms increased nonhydrocarbon revenues by 15 percent a year over the past five years.
  - Ratio of current expenditures covered by nonhydrocarbon revenues expected to further decline in 2012 and reach its lowest level since 2000.
  - Further efforts: implement DGI’s information system (delayed) and strengthen direction and oversight of tax administration (project launched in 2010 with French tax administration).
- Modernize budget systems and transparency
  - Develop fiscal management based on outcome objectives and improve fiscal planning.
  - Speed up implementation of the medium-term fiscal framework (Budget Department with World Bank support).
  - Drafting and adopting budget review laws; improve public availability of government finance statistics, including budget execution.

### Growth outlook, unemployment, and structural reforms
- Growth projections and unemployment
  - Nonhydrocarbon growth could average about 5 percent a year during 2012–2016 with deeper structural reforms; without reform it could be 2 percentage points lower.
  - Total GDP growth could hover around 3½ percent during 2012–2016.
  - Unemployment: youth unemployment = 21.5 percent for young graduates; women unemployment = 19 percent.
  - Labor force participation roughly 42 percent for total population, 14 percent for women.
  - Depending on employment-growth elasticity, total unemployment in 2016 projected between 8 percent and 11 percent; youth unemployment between 19 percent and 21 percent.
- Structural reform priorities
  - Private sector development: address narrow, fragmented private sector; assess 2009 measures; attract nonhydrocarbon FDI for technology and knowhow transfer.
  - Labor market reforms: make labor market more flexible; reduce recruitment costs; align minimum-wage increases with productivity; lower payroll taxes; incentivize part-time and flexible work.
  - Regional/global integration: advance Association Agreement phases with the EU; continue efforts to join the WTO.
  - Governance: continue improving anticorruption and AML/CFT measures per FATF recommendations.

### Financial sector modernization and stability
- Key facts and indicators
  - Financial intermediation limited despite high liquidity; credit ratio = 39 percent of NHGDP.
  - State-owned banks represent about 90 percent of banking system assets.
  - NPLs for public banks ≈ 19 percent in June 2011 (24 percent at end-2009).
  - Currency in circulation = 26 percent of NHGDP.
- Financial Soundness Indicators (selected, 2006–June-11)
  - Capital adequacy ratio: 15.2, 12.9, 16.5, 22.1, 23.3, 20.9
  - Public banks capital adequacy ratio 1/: 14.4, 12.1, 16.0, 19.6, 21.8, 19.4
  - Classified loans/total loans: 34.8, 35.5, 25.4, 21.8, 19.1, 16.6
  - Public banks classified loans: 37.5, 38.7, 28.5, 24.3, 21.4, 19.0
  - NPLs/total loans 3/: 17.5, 22.1, 15.7, 14.8, 13.3, 11.2
  - Public banks NPLs: 19.2, 23.8, 17.6, 16.5, 15.0, 12.8
  - Provisions/classified loans: 54.0, 56.1, 57.7, 68.3, 74.1, 71.8
  - Return on equity: 18.8, 24.6, 25.2, 25.7, 20.7, ...
    - Notes: 1/ 90 percent of system assets. 2/ Nonpublic banks are all foreign. 3/ Loans in arrears (100 percent provisioning requirement). 4/ Loans performing but at risk (30 percent or 50 percent provisioning).
- Recommended reforms
  - Accelerate modernization and follow up on 2007 FSAP update recommendations.
  - Public banks: modernize risk information and assessment systems; avoid SME lending incentives that create default risks.
  - Explore solutions for legacy defaulted loans.
  - Improve control, management, and governance of public banks to meet highest international standards.
  - Establish a centralized household credit registry to enable lifting the consumer lending ban (in effect since 2009, excluding mortgages).
  - Modernize payment system; pursue requirement to use bank cards/checks for payments of 500,000 dinars or more.

### Staff appraisal, Executive Board observations, and policy priorities
- Staff appraisal highlights
  - Algeria recorded satisfactory growth but may be reaching a tipping point; disappointing diversification results to date.
  - Public investment has not sufficiently attracted private capital to boost diversification.
  - High hydrocarbon revenues provide scope for addressing social demands, but expansion in current public expenditure should be moderated to avoid inflation spikes.
  - Fiscal sustainability analysis indicates need for medium-term consolidation: options include limits to wage increases and new hires, and better targeting of transfers via means testing.
  - Strengthening nonhydrocarbon revenue mobilization and tax administration reforms is needed to reduce dependency on hydrocarbon revenues.
- Executive Board / Directors
  - Commended Bank of Algeria for containing inflationary pressures and absorbing liquidity but advised considering early monetary tightening if inflation risks materialize.
  - Recommended renewing efforts to preserve macro stability, restore fiscal prudence, and implement ambitious structural reforms to boost private-sector-led growth and employment.
  - Emphasized need to improve quality and efficiency of public expenditure and to accelerate budgetary reforms (medium-term budget planning, public finance statistics).
- Business climate and trade stance
  - Authorities concerned about unfavorable business climate; launched political/economic initiatives in early 2011 to improve citizen participation, accountability, and nonhydrocarbon growth.
  - Authorities cautious about full trade openness; negotiating more gradual trade integration with multilateral partners.
- Exchange rate policy
  - Staff supports managed float and BA interventions to avoid misalignments; REER broadly in line with medium-term fundamentals but fundamentals need strengthening to avoid Dutch disease.

### Macroeconomic projections and selected indicators (2011–16 highlights)
- Inflation (CPI period average): 2008: 4.9; 2009: 5.7; 2010: 3.9; 2011: 3.9; 2012: 4.3; 2013: 4.0; 2014: 3.7; 2015: 3.7; 2016: 3.7.
- GDP growth (constant prices): 2008: 2.4; 2009: 2.4; 2010: 3.3; 2011: 2.5; 2012: 3.1; 2013: 3.5; 2014: 3.5; 2015: 3.5; 2016: 3.8.
- Hydrocarbon sector growth (2008–16): -2.3; -6.0; -2.6; -2.1; -0.7; 0.3; 0.4; 0.4; 1.0 (by year).
- Other sectors growth (2008–16): 6.1; 9.3; 5.9; 4.9; 5.3; 5.2; 5.0; 5.0; 5.0 (by year).
- Gross official reserves (end of period, US$ billion): 2008: 143.1; 2009: 148.9; 2010: 162.2; 2011 (proj): 181.5; 2012: 193.4; 2013: 204.9; 2014: 216.6; 2015: 229.1; 2016: 242.7.
- Current account balance (percent of GDP): 2008: 20.1; 2009: 0.3; 2010: 7.5; 2011: 9.5; 2012: 5.4; 2013: 4.6; 2014: 4.5; 2015: 4.8; 2016: 5.0.
- Overall budget balance (percent of GDP): 2008: 7.6; 2009: -6.4; 2010: -1.9; 2011 (proj): -4.0; 2012: -6.0; 2013: -3.3; 2014: -3.3; 2015: -3.3; 2016: -3.0.
- Nonhydrocarbon primary balance (percent of NHGDP): 2008: -52.2; 2009: -43.6; 2010: -39.3; 2011: -49.0; 2012: -46.4; 2013: -39.3; 2014: -36.4; 2015: -34.0; 2016: -32.3.
- Unemployment (2010) = 10.0 percent.

### Technical assistance, data, and statistical issues
- Recent technical assistance and missions cover bank restructuring, supervision, monetary operations, reserve management, monetary and financial statistics, payment systems, CPI statistics, tax policy and administration, and GDDS participation.
- Data shortcomings identified: government finance statistics, national accounts (outdated base year, long lags), and prices; recommended rebasing GDP series and compiling quarterly accounts. Algeria began GDDS participation on April 21, 2009.

*Source: ALGERIA 2011 ARTICLE IV REPORT — IMF staff report excerpts and selected tables (content unit _cr1220).*

### INTRODUCTION _________________________________________________________________________________ 3

### INTRODUCTION

### ECONOMIC CONTEXT
- Growth and composition
  - In 2010: NHGDP growth = 6.0 percent; oil and gas output fell by 2.6 percent; overall GDP growth = 3.3 percent.
  - In 2011: projected overall GDP growth ≈ 2.5 percent due to further decline in oil and gas sector and restraint in PIP expenditures.
- Inflation and prices
  - Inflation: declined from 5.7 percent in 2009 to 3.5 percent in mid-2011; average inflation increased through October 2011 to 4.2 percent.
  - Year-on-year CPI inflation rose from 2.7 percent in end-2010 to 5.5 percent in October 2011, partly due to fresh food prices.
- Banking and liquidity
  - Deposit growth (excluding SONATRACH) = 16 percent (year-on-year) at end-June 2011.
  - Growth in credit to the economy = 15 percent (year-on-year, excluding buyback of public companies’ debt by the treasury).
  - Liquidity absorption through two deposit windows = 17 percent of GDP at end-August 2011.
- Fiscal stance and public finances (2011)
  - Budget deficit ≈ 4 percent of GDP.
  - Total revenues increased 22 percent (nominal); total expenditure increased 32 percent.
  - Current expenditure projected to grow by 50 percent in 2011.
  - Capital expenditure expected to increase by 7 percent (final phase of 2005–09 PIP).
  - Nonhydrocarbon revenues expected to increase by 13 percent; they will cover 41 percent of current expenditures (49 percent excluding salary back payments).
  - Nonhydrocarbon primary deficit expected to increase to 49 percent of NHGDP in 2011.
  - Gross government debt expected to remain at 10 percent of GDP; budgetary savings in the FRR expected to remain at 40 percent of GDP.
- External sector
  - Oil and gas revenues increased by 30 percent during the first nine months of 2011.
  - Imports rose 19 percent during the first eight months of 2011 (food products +67 percent; consumer goods +40 percent).
  - Official reserves increased by US$14.6 billion during the first eight months of 2011 to US$178.3 billion at end-August 2011.
  - Current account surplus projected at 9.5 percent of GDP in 2011 and 5.4 percent in 2012 under high oil price assumptions.
- Exchange rate and competitiveness
  - REER depreciated by 1.5 percent during the first eight months of 2011.
  - Nominal effective exchange rate depreciated by 2.2 percent in 2011; inflation differential vis-à-vis main partners = 0.7 percent.
  - REER broadly in line with medium-term equilibrium linked to oil prices and government expenditure.

### THEME 1: COPING WITH SOCIAL DEMANDS WHILE FENDING OFF INFLATIONARY PRESSURES
- Near-term outlook and risks
  - 2011–12 growth: NHGDP ≈ 5 percent; overall real GDP growth = 2 ½–3 percent.
  - Fall 2011 WEO oil price projections cited: US$103/barrel in 2011 and US$100/barrel in 2012.
  - Under these oil price assumptions: current account surplus = 9.5 percent of GDP in 2011 and 5.4 percent in 2012; hydrocarbon fiscal revenues 25–30 percent above their 2010 level.
  - Inflation could stay about 4–4½ percent in 2011–12, but risk of rising inflation from buoyant domestic demand has increased.
- Fiscal and income policies (2012)
  - Civil service salaries: revision begun in 2010 raises civil service salaries on average by about 50 percent from 2008.
  - Draft 2012 budget: extension of socioeconomic measures at a cost equivalent to 4 percent of GDP (price support for cereals, powdered milk, soybean oil, sugar; expanded civil servants’ access to housing; increased support to reduce youth unemployment; subsidized lending rates for SMEs; rescheduling debt of heavily indebted but viable SMEs).
  - Current incompressible expenditure projected ≈ 45 percent of NHGDP in 2012.
  - With flat oil tax revenues, budget would record a deficit for the fourth year in a row in 2012, equivalent to 6 percent of GDP.
- Staff recommendations and concerns
  - Break the rising trend in expenditure and rebalance composition; ensure public spending quality, effectiveness, and equitable benefits.
  - Develop policies for better targeting of current expenditure, including subsidies and social transfers.
  - Maintain investment expenditure executed in 2012 at a level similar to the 2011 outcome to support potential output, provided efficiency and control of capital spending improve.
  - Contain impact of wage increases on domestic demand to avoid a pick-up in inflation.
    - Minimum wage increase = 20 percent in January 2012.
    - Back payments of salary increases for 2008–09 spread over two years: additional income = 8 percent of NHGDP in 2011 and 7 percent in 2012.
    - If additional income translates entirely into domestic demand, inflationary pressures would intensify; monetary tightening and increased imports may be required.
- Monetary and exchange rate policy guidance
  - Continue monetary policy aimed at controlling excess liquidity and inflationary pressures.
  - BA has been absorbing liquidity through two short-term repurchase and deposit facilities; interest rates unchanged to date.
  - Authorities should consider tightening monetary policy early if inflationary pressures materialize; BA could increase interest rates to signal higher cost of credit and better returns on savings.
  - Continue managed float to keep REER close to equilibrium; strengthen exchange rate fundamentals to reduce Dutch disease risks.
- Authorities’ stance
  - Fiscal prudence is a priority, but maintaining social cohesion is key in the short term.
  - Authorities view wage increases and socioeconomic support measures as necessary to improve living standards and maintain social stability.
  - Commitment to protect PIP implementation and improve project selection, expenditure quality, and effectiveness.
  - Authorities consider liquidity absorption policy effective; comfortable with inflation around 4 percent; remain committed to act if inflationary pressures arise.

### THEME 2: ENSURING MEDIUM-TERM FISCAL SUSTAINABILITY
- Baseline medium-term outlook and vulnerabilities
  - Under envisaged expenditure measures (civil service pay rises and 2011–12 support measures), by 2016:
    - FRR would be reduced to almost half of its 2010 level, i.e., to 16 percent of GDP.
    - Oil price that would balance the 2011 budget (excluding salary backpayments) would rise to US$100/barrel from US$44/barrel in 2006, and about US$110 by 2016.
    - Current account surplus would fall to roughly 5 percent of GDP.
    - Reserves would be equal to four years’ worth of goods and services imports.
  - Public finances remain highly vulnerable to a major slump in oil prices.
- Alternative low-oil-price scenario
  - Assumes oil prices = US$55/barrel in 2012 and US$70/barrel thereafter.
  - By 2016 under this scenario:
    - FRR would fall to its legal minimum level of 740 billion dinars (about US$10 billion).
    - Fiscal deficits would be financed by increasing government borrowing, which could exceed 26 percent of GDP.
    - Current account balance would be in deficit, reducing reserves to the equivalent of 2½ years of goods and services imports.

*Source: ALGERIA 2011 ARTICLE IV REPORT — INTRODUCTION and Themes 1–2.*

### 2016. In this alternative scenario, it is likely that

### _cr1220 - 2016. In this alternative scenario, it is likely that

### Medium-term fiscal framework and sustainability
- A permanent income framework (with nonrenewable hydrocarbon resources) indicates fiscal consolidation will be needed to bring the fiscal position back to a sustainable level in the medium term.
- The framework aims to maintain hydrocarbon wealth per capita constant over the long term.
- If recent substantial increases in operating expenses are not progressively reversed, authorities may need to proceed more cautiously in executing the new PIP for 2010–14.
- Base scenario key figures (2012–2016):
  - International oil price (US$/bbl): 100.0, 99.5, 97.5, 96.5, 95.5
  - International gas price (US$/BTU): 8.2, 8.1, 8.0, 7.9, 7.8
  - Overal budget balance (percent of GDP): -6.0, -3.3, -3.3, -3.3, -3.0
  - FRR (percent of GDP): 28.6, 25.0, 21.7, 18.6, 15.6
  - Reserves (US$ billion): 193.4, 204.9, 216.6, 229.1, 242.7
  - Primary budget deficit (percent of NHGDP): -46.4, -39.3, -36.4, -34.0, -32.3
  - Current account balance (percent of GDP): 5.4, 4.6, 4.5, 4.8, 5.0
  - Government net assets (percent of GDP) (*): 19.2, 16.1, 13.3, 10.6, 8.1
    - (*) FRR minus government debt
- Alternative scenario (IMF staff crisis scenario starting Q1 2012) key figures (2012–2016):
  - International oil price (US$/bbl): 55.0, 70.0, 70.0, 70.0, 70.0
  - International gas price (US$/BTU): 4.5, 5.7, 5.7, 5.7, 5.7
  - FRR (percent of GDP) 2/: 17.9, 8.3, 4.5, 4.3, 4.0
    - 2/ The FRR balance is maintained above 740 billion DA as required by Algerian law.
  - Reserves (US$ billion): 165.7, 159.1, 153.6, 148.9, 145.0
  - Primary budget deficit (percent of NHGDP): -46.4, -39.3, -36.4, -34.0, -32.3
  - Current account balance (percent of GDP): -8.9, -4.3, -3.6, -3.1, -2.7
  - Government net assets (percent of GDP) 3/: 8.5, -0.7, -8.6, -15.6, -21.5
    - 3/ FRR minus government debt

### Fiscal policy recommendations and budget management
- Authorities should formulate and adopt fiscal consolidation measures over the medium term.
- Rationalizing current expenditure:
  - Current expenditure reached 64 percent of total expenditure in 2011 (excluding salary back-payments), up from 54 percent in 2008–09.
  - Current expenditures are more difficult to compress; assess effectiveness of additional expenditures before continuation.
  - Keep tight control on wage bill growth by restricting new hiring and future salary increases following substantial pay rises.
  - Improve targeting of transfers and subsidies; accelerate social transfer targeting work with World Bank support.
- Better controlling high-priority capital expenditure:
  - Capital expenditure represented 36 percent of total expenditures in 2011, down from 47 percent in 2009–10.
  - Maintaining existing levels will require a higher pace of execution; ensure sound project selection to improve effectiveness.
  - CNED (national commission to monitor PIP implementation) has enabled budget savings and more effective project execution and should be pursued.
- Increasing nonhydrocarbon resources:
  - DGI tax administration reforms increased nonhydrocarbon revenues by 15 percent a year over the past five years.
  - Ratio of current expenditures covered by nonhydrocarbon revenues expected to further decline in 2012 and reach its lowest level since 2000.
  - Further efforts: implement DGI’s information system (delayed) and strengthen direction and oversight of tax administration (project launched in 2010 in cooperation with French tax administration).
- Modernizing budget systems and transparency:
  - Authorities intend to develop fiscal management based on outcome objectives and improve fiscal planning.
  - Implementation of the medium-term fiscal framework (Budget Department with World Bank support) is experiencing delays; authorities need to speed up implementation.
  - Drafting and adopting budget review laws represent important steps toward greater transparency; additional efforts needed to improve public availability of government finance statistics, including budget execution.

### Growth outlook, unemployment, and the new growth model
- Medium-term baseline outlook:
  - Nonhydrocarbon growth could average about 5 percent a year during 2012 to 2016 if deeper structural reforms increase productive private investment.
  - Without reform and strong private sector development, nonhydrocarbon growth could be 2 percentage points lower.
  - Oil and gas sector growth expected to be moderate; total GDP growth could hover around 3½ percent during the same period.
- Unemployment projections (medium-term baseline):
  - Youth unemployment: 21.5 percent for young graduates; women unemployment 19 percent.
  - Labor force participation roughly 42 percent for total population, 14 percent for women.
  - Decline in job content of growth; fewer than 38 percent of working-age population (11 percent of women) have a declared job.
  - Depending on employment-growth elasticity assumptions, total unemployment in 2016 would be between 8 percent and 11 percent, and youth unemployment between 19 percent and 21 percent.

### Structural reforms to support diversification and jobs
- Private sector development:
  - Private sector remains narrow and fragmented with limited capacity for innovation; SME initiatives to date have had limited effect.
  - Measures adopted in 2011 include investment loan subsidies and debt rescheduling for SMEs; impact still uncertain.
  - Nonhydrocarbon FDI remains low; measures introduced in 2009 may have adverse impact on foreign investor perceptions, particularly for SMEs.
  - Authorities should assess 2009 measures’ impact and consider introducing more flexibility to attract FDI critical for technology and knowhow transfer.
- Labor market reforms:
  - Unemployed people have higher education levels than economically active population; graduates face particular difficulties.
  - Recent initiatives: creation of microenterprises, subsidizing young people’s salaries.
  - Recommended reforms: make labor market more flexible, reduce recruitment costs, align minimum-wage increases with productivity gains, lower payroll taxes and other mandated costs, and provide incentives for part-time and flexible work.
- Regional and global integration:
  - Algeria member of Arab Free Trade Area (ZALE) since 2009; pursuing trade/cooperation with African countries and discussions with WAEMU.
  - Suggested: advance Association Agreement phases with the European Union and continue efforts to join the World Trade Organization.
- Governance:
  - Continue improvements in fighting corruption and combating money laundering and financing of terrorism (AML/CFT), taking into account Financial Action Task Force recommendations.

### Financial sector modernization and stability
- Financial intermediation is limited despite high liquidity; credit ratio of 39 percent of NHGDP.
- Banking sector features:
  - State-owned banks represent about 90 percent of banking system assets.
  - NPLs remain high for public banks at around 19 percent in June 2011 (24 percent at end-2009).
  - Overall banks have appropriate capital and do not represent a macro stability risk.
  - Stock exchange underdeveloped with seven companies listed as of September 2011.
  - Currency in circulation: 26 percent of NHGDP.
- Financial Soundness Indicators (selected, 2006–June-11):
  - Capital adequacy ratio: 15.2, 12.9, 16.5, 22.1, 23.3, 20.9
  - Public banks capital adequacy ratio 1/: 14.4, 12.1, 16.0, 19.6, 21.8, 19.4
  - Classified loans/total loans: 34.8, 35.5, 25.4, 21.8, 19.1, 16.6
  - Public banks classified loans: 37.5, 38.7, 28.5, 24.3, 21.4, 19.0
  - NPLs/total loans 3/: 17.5, 22.1, 15.7, 14.8, 13.3, 11.2
  - Public banks NPLs: 19.2, 23.8, 17.6, 16.5, 15.0, 12.8
  - Provisions/classified loans: 54.0, 56.1, 57.7, 68.3, 74.1, 71.8
  - Return on equity: 18.8, 24.6, 25.2, 25.7, 20.7, ...
    - Source: Algerian authorities.
    - 1/ 90 percent of system assets.
    - 2/ Nonpublic banks are all foreign.
    - 3/ Loans in arrears (100 percent provisioning requirement).
    - 4/ Loans performing but at risk (30 percent or 50 percent provisioning).
- Recommended financial sector reforms:
  - Accelerate modernization and reforms, follow up on 2007 FSAP update recommendations.
  - Public banks should modernize risk information and assessment systems to ensure SME lending incentives do not create default risks.
  - Explore solutions for legacy defaulted loans.
  - Improve control, management, and governance of public banks to meet highest international standards.
  - Establish a centralized household credit registry to enable lifting the consumer lending ban (in effect since 2009, excluding mortgages).
  - Modernize payment system; deferred requirement to use bank cards/checks for payments of 500,000 dinars or more—authorities should pursue payment system modernization.

### Authorities’ stated positions
- Committed to medium-term fiscal sustainability; recognize current expenditure path is not sustainable.
- Intentions include targeting social transfers (with World Bank support), increasing nonhydrocarbon revenues, and implementing market-based financing mechanisms for autonomous public entities (including hospitals).
- Committed to improving expenditure quality and efficiency via budgetary process reform, better planning tools, and increased role of CNED for PIP approvals based on transparent evaluation.
- Main medium-term objective: reduce hydrocarbon dependence and develop the private sector to create more jobs; socioeconomic support measures adopted in 2011 and PIP infrastructure expected to boost diversification and competitiveness.
- National Investment Fund to support public-private partnerships in strategic sectors; policies complemented by measures facilitating labor market access for new entrants and microenterprise creation.

*IMF staff compilation from Algeria: 2011 Article IV report (selected excerpts).*

### 35.      The authorities are concerned by the

### _cr1220 - 35.      The authorities are concerned by the

### Business climate and governance initiatives
- The authorities are concerned by the relatively unfavorable perception of Algeria’s business climate and have reinforced their focus on improving it.
- The government launched a series of political and economic initiatives in early 2011 to improve citizen participation, reinforce government accountability, and boost nonhydrocarbon growth.
- Cross-sector tripartite consultations have been organized to identify measures required to improve the business climate, which should be translated into an array of business climate improvement reforms.

### Trade openness stance
- The authorities remain cautious about full-fledged trade openness.
- They are concerned that trade openness has not brought the expected results for Algeria, which has seen imports growing substantially but has not experienced any boost in the export diversification.
- For this reason, authorities are negotiating more gradual trade integration with multilateral partners.

### Financial sector reform and supervision
- Financial sector reform remains a cornerstone for supporting private investment growth.
- The BA has continued its efforts to modernize and reinforce the financial system through regulatory reform and improved supervision.
- Adoption of the new accounting rules in 2010 has helped to improve reporting and transparency in reporting.
- Regarding NPLs, the authorities have supported the banks’ implementation of a distressed-assets-management company and will request banks to write off their oldest NPLs.
- The authorities recognized unexpected delays in important projects such as the household credit registry, but they are hoping to finalize it in 2012.

### Staff appraisal — growth, tipping point, and diversification
- Algeria has recorded satisfactory growth, but it may be reaching a tipping point.
- During the past decade, generally prudent macroeconomic management in the context of increasing international oil prices has resulted in robust growth, low inflation, the accumulation of large international reserves and budgetary savings, and a substantial reduction of debt levels.
- Efforts to reduce the dependence on hydrocarbon wealth and to promote the diversification of the economy have been disappointing.
- With the spillover effects of the public investment program on the nonhydrocarbon sectors of the Algerian economy decelerating, growth is likely to slow down without a more ambitious structural reform agenda.

### Public expenditure, inflation risks, and monetary policy
- High hydrocarbon revenues and budgetary savings provide scope for addressing pressing social demands and maintaining social stability, but the substantial expansion in current public expenditure in 2011 should be moderated to avoid excessive inflationary pressures.
- The growing systemic liquidity resulting from higher hydrocarbon revenue, substantial public salary increases, and larger social transfers have not yet translated into higher inflation, but the risk of an inflationary spike has increased.
- Growth in income transfers and wages will need to be moderated and spread over time as far as possible.
- In addition to moderating current public spending, the authorities should consider early action to tighten monetary policy to avoid inflationary pressures, through an interest rate hike and larger liquidity absorption.

### Fiscal sustainability and recommended consolidation measures
- Algeria’s long-term fiscal sustainability and its capacity to withstand prolonged negative oil price shocks will be seriously challenged by the substantial expansion in current public spending.
- The significant growth in current expenditure in 2011 poses substantial challenges to Algeria’s budget sustainability as these types of expenses are less compressible.
- A fiscal sustainability analysis based on a permanent income framework points to the need for medium-term fiscal consolidation.
- Since upward pressures on expenditure growth will continue in the near future, the authorities should adopt fiscal consolidation measures which could include:
  - limits to wage increases and new hires,
  - better targeting of transfers, by means testing social benefits.
- The increased mobilization of nonhydrocarbon resources and the continuation of tax administration reforms will also contribute to reducing the budget’s dependency on volatile hydrocarbon revenues.

### Budgetary reform and expenditure quality
- Delays in budgetary reform could hamper efforts to improve the quality and efficiency of public expenditure.
- The relatively modest gains recorded by Algeria in real GDP per capita or other social indicators, in view of very large public spending, as well as the lack of progress toward a more diversified and productive economy, point to the need to enhance spending quality and efficiency.
- Staff welcomes the progress made in budgetary reform and planning but considers that the delays in certain key areas, such as medium-term budgetary planning, could damage the efforts to enhance the control and quality of expenditure.
- Initiatives such as the creation of the CNED to monitor the quality of capital expenditure have been successful and should be extended to other areas.

### Exchange rate policy
- The BA can continue its exchange rate policy consistent with long-term equilibrium level, but exchange rate fundamentals should be strengthened.
- Staff concurs with the authorities’ policy of intervening in the exchange rate market to avoid misalignments.
- Exchange rate fundamentals, including the fiscal position and productivity gains, should be strengthened to avoid a real appreciation, which would result in “Dutch disease effects” common to many commodity exporters.

### Structural reforms, competitiveness, and labor market
- To make a significant dent in unemployment, a more ambitious structural reform agenda should be implemented to enhance the business climate and competitiveness.
- With public investment expected to play a less dynamic role in economic growth, the private sector will need to become a stronger engine for growth and job creation.
- Without ambitious reforms, medium-term growth prospects will become weaker.
- Recent measures to support SME financing and the consultations with social partners to improve the business environment should have a positive, albeit small, impact on private investment and economic diversification.
- Advances in financial reform should facilitate the private sector’s access to credit.
- Important constraints remain to be addressed:
  - Labor cost increases out of line with productivity gains will negatively affect competitiveness.
  - The rules for FDI implemented since 2009, and heavy bureaucratic procedures, discourage foreign investors and could prevent much-needed foreign technology transfers.
  - More decisive measures to expose the public financial sector to more competition through the expansion of private banks and to further improve public banks’ operations and governance would enhance financial intermediation.
- The authorities should also persevere in their efforts to further integrate Algeria into regional and global trade.
- Growth-enhancing policies could usefully be complemented with active labor market policies, aimed at enhancing matching of skills and reducing hiring rigidities.

### Other staff observations
- Staff welcomes Algeria’s cancellation of US$702 million in loans under the Enhanced HIPC initiative.

*Excerpt from IMF 2011 Article IV Report for Algeria.*

### 45.      It is proposed that the next Article IV

### _cr1220 - 45.      It is proposed that the next Article IV

### Article IV timing
- It is proposed that the next Article IV consultation be held on the standard 12-month cycle.

### Macroeconomic overview and outlook
- Algeria weathered the crisis well and the 2011 outlook remains positive; however, unemployment remains high, especially among the youth.
- Unemployment (2010): 10.0%.
- Inflation and prices:
  - Consumer price index (period average) by year: 2008: 4.9; 2009: 5.7; 2010: 3.9; 2011: 3.9; 2012: 4.3; 2013: 4.0; 2014: 3.7; 2015: 3.7; 2016: 3.7.
  - Inflation fell in 2010 due to fresh food products and remained subdued for the non-fresh food component; there was a spike in fresh food in early 2011 which was subdued in Q2 2011.
- Output and growth:
  - GDP at constant prices: 2008: 2.4; 2009: 2.4; 2010: 3.3; 2011: 2.5; 2012: 3.1; 2013: 3.5; 2014: 3.5; 2015: 3.5; 2016: 3.8.
  - Hydrocarbon sector growth (2008–16 row): 2008: -2.3; 2009: -6.0; 2010: -2.6; 2011: -2.1; 2012: -0.7; 2013: 0.3; 2014: 0.4; 2015: 0.4; 2016: 1.0.
  - Other sectors growth: 2008: 6.1; 2009: 9.3; 2010: 5.9; 2011: 4.9; 2012: 5.3; 2013: 5.2; 2014: 5.0; 2015: 5.0; 2016: 5.0.
- External position and reserves:
  - The recovery in oil prices has improved the external balance while reserves are expected to reach US$186 billion by end-2011.
  - Gross official reserves (end of period, Table 1 memorandum): 2008: 143.1; 2009: 148.9; 2010: 162.2; 2011 (proj): 181.5; 2012: 193.4; 2013: 204.9; 2014: 216.6; 2015: 229.1; 2016: 242.7 (in billions of US$).
- External sector projections (selected):
  - Current account balance (percent of GDP): 2008: 20.1; 2009: 0.3; 2010: 7.5; 2011: 9.5; 2012: 5.4; 2013: 4.6; 2014: 4.5; 2015: 4.8; 2016: 5.0.

### Fiscal developments and public finances
- In 2011, Algeria will record another fiscal deficit.
- Overall budget balance (deficit-, percent of GDP, Table 1): 2008: 7.6; 2009: -6.4; 2010: -1.9; 2011 (proj): -4.0; 2012: -6.0; 2013: -3.3; 2014: -3.3; 2015: -3.3; 2016: -3.0.
- Total revenue (percent of GDP): 2008: 46.8; 2009: 36.6; 2010: 36.4; 2011: 39.5; 2012: 36.8; 2013: 34.8; 2014: 33.6; 2015: 32.9; 2016: 32.3.
- Total expenditure (percent of GDP): 2008: 39.2; 2009: 43.0; 2010: 38.2; 2011: 43.4; 2012: 42.8; 2013: 38.2; 2014: 37.0; 2015: 36.1; 2016: 35.3.
- Fiscal savings and stabilization:
  - The level of fiscal savings accumulated in the FRR remains strong but will decrease in 2011.
  - Oil stabilization fund (Oil stabilization fund, in billions of Algerian dinars, Table 3a memorandum): 2008: 428.0; 2009: 401.1; 2010: 316.5; 2011 (est): 484.2; projections follow thereafter.
- Public wages and expenditure pressures:
  - Expenditure has been growing during the last five years due to PIP expenses and higher salaries for public employees.
  - In 2010, the authorities increased salaries by 34 percent.
  - Wages and salaries as percent of GDP and NHGDP show a notable public salary burden; average salary remains at levels similar to neighboring countries.
- Nonhydrocarbon balances:
  - Nonhydrocarbon primary balance (percent of NHGDP, Table 3a memorandum): 2008: -52.2; 2009: -43.6; 2010: -39.3; 2011: -49.0; 2012: -46.4; 2013: -39.3; 2014: -36.4; 2015: -34.0; 2016: -32.3.
  - Nonhydrocarbon balance (percent of NHGDP): 2008: -53.2; 2009: -44.1; 2010: -39.8; 2011: -49.7; 2012: -47.1; 2013: -39.7; 2014: -36.8; 2015: -34.3; 2016: -32.6.

### Monetary and credit developments
- Monetary aggregates and credit have been growing at a healthy rate in 2011 and recovered from a relative slowdown in late 2010.
- Monetary survey (end-of-period, Table 4):
  - Net foreign assets (in billions of Algerian dinars): 2008: 10,247; 2009: 10,758; 2010: 12,008; 2011 (proj): 13,298; 2012 (proj): 14,548.
  - Money and quasi-money (M2, in billions of Algerian dinars): 2008: 6,956; 2009: 7,173; 2010: 8,163; 2011 (proj): 9,931; 2012 (proj): 11,011.
  - Excluding Sonatrach deposits (M2): 2008: 5,654; 2009: 6,399; 2010: 7,172; 2011 (proj): 8,731; 2012 (proj): 10,077.
  - Credit to the economy (in billions of dinars): 2008: 2,689; 2009: 3,187; 2010: 3,348; 2011 (proj): 3,677; 2012 (proj): 4,056.
  - Of which: Private sector credit: 2008: 1,413; 2009: 1,621; 2010: 1,824; 2011 (proj): 2,041; 2012 (proj): 2,351.
- Velocity and liquidity:
  - M2 velocity: 2008: 1.6; 2009: 1.4; 2010: 1.5; 2011 (proj): 1.4; 2012 (proj): 1.3.
  - Liquidity ratio (e.o.p. M2/GDP): 2008: 62.7; 2009: 71.5; 2010: 67.7; 2011 (proj): 72.2; 2012 (proj): 75.8.

### Exchange rate assessment and competitiveness
- In 2011 the real exchange rate depreciated slightly due to a fall in inflation differentials with Algeria's main trade partners.
- Appendix 1 (Exchange Rate Assessment):
  - A CGER methodology analysis suggests the current level of the REER is broadly in line with medium-term fundamentals, provided these fundamentals will be strengthened in line with staff projections.
  - MB (Macroeconomic Balance) approach: the projected CA surplus in 2011 is above the medium-term norm but is projected to decline slightly below the norm by 2016, suggesting the REER would converge to its medium-term equilibrium.
  - ES (External Sustainability) approach: projection of the underlying CA is in line with the CA norm, also suggesting convergence of the REER to its medium-term equilibrium in the staff baseline.
  - A country-specific long-run co-integration reduced-form Equilibrium Real Effective Exchange Rate (EREER) was estimated with explanatory variables ToT, prod (output per worker differential), and G (government spending percent of GDP). The estimated EREER implies an undervaluation of 13.3 percent under the medium-term WEO projections for the explanatory variables.

_Excerpt from: 2011 ARTICLE IV REPORT ALGERIA — IMF staff report content provided in the source PDF._

### 2011. The EREER has appreciated in the past

### _cr1220 - 2011. The EREER has appreciated in the past

### External and Real Exchange Rate Developments
- "The EREER has appreciated in the past few years under the effect of increased government spending and oil prices, entailing the risk of the ―Dutch disease‖ phenomenon."
- Medium-term projection: "The projection of the EREER over the medium term points to a gradual depreciation reflecting lower public spending in percentage of GDP and a wider productivity gap vis-a-vis the trading partners."
- "The REER has slightly depreciated since end-2010."
- Figure caption data (as presented): "Figure 1A: REER and Equilbrium, 1970–2016(e)" — labels: EquilibriumRER, ActualREER. Source: staff estimates.

### Current Account and CGER-type Results
- Presented results (In percent of GDP) as shown:
  - "Projected CA 9.55.0"
  - "CA norm (MB approach)6.8"
  - "Underlying  CA (ES approach)3.5"
  - "CA norm (ES approach)2.7"

### Public Spending Composition and Potential Effects on Growth
- Nature of hydrocarbon revenues:
  - "Revenues from exhaustible natural resources are intrinsically temporary because they are derived from a depleting stock of resources and they are unreliable, due to the volatility of commodity prices."
  - Policy implication: "Consequently, some significant proportion of the revenues they generate should be saved, so that increases in consumption over time can be sustained."
- Revenue and expenditure composition, 1991–2010 (Figure 2A):
  - "Hydrocarbon revenues more than doubled (in constant dollar terms) in the 2000s from the previous decade, and their share in total revenues increased from 63 percent to 72 percent, making the Algerian budget more dependent on oil prices."
  - "In terms of expenses, Algeria has been devoting a larger share of revenues to capital expenditure and savings, which is consistent with the implementation of the PIP, the creation of the oil savings fund, and the sharp reduction in government debt."
  - "Nonhydrocarbon revenues barely cover the cost of public salaries."
  - Legend items shown: HC revenues; Net savings; Capital spending; Other current spending; Salaries; Non-HC revenue.
  - Note: "Salaries include hospitalsand  EPAs."
- Public investment and growth (Figure 2B):
  - "Figure 2B shows the interaction between public capital spending and real per capita GDP growth during the period 2001–11."
  - "Algeria has the largest public investment share of GDP in the sample but it has not generated higher growth."
  - Possible explanation: "public policies (and public spending programs) have not attracted enough private capital to boost the diversification of the economy needed to achieve faster growth."
- Private investment and growth (Figure 2C):
  - "Figure 2C shows that private investment contributes significantly to economic growth but remains low in Algeria relative to other countries in the sample."
- Sectoral spending shortfalls:
  - "Algeria has lower levels of public spending on key areas such as education (Figure 2D) and healthcare (Figure 2E), pointing to room for improvement in spending composition."
  - Figures report public spending on education (Average 2000–08, in percent of GDP) and public spending on health (Average 2005–09, in percent of GDP) with Algeria positioned low relative to peer countries.

### Competitiveness and Business Climate
- Summary:
  - "One key explanation for disappointing results of the authorities’ efforts to diversify the economy is its low competitiveness and weak business climate."
- WEF Global Competitiveness Index (Figure 3A):
  - "The MENA countries have an average low ranking with respect to other regions (e.g., Asia or Emerging Europe) and Algeria ranks low within MENA countries considered in the WEF index."
  - "Algeria has the worst rankings for all MENA in three important categories: goods markets efficiency, labor market efficiency, and business sophistication."
  - "Moreover, it ranks well below the average in all the other WEF index components with the exception of market size and the macroeconomic environment."
- Doing Business performance (Figures 3B and 3C):
  - "In figure 3B, we present Algeria’s 2011 Doing Business ranking in a group of 28 emerging and oil-producing countries. Algeria’s ranking is third lowest, a fall from the previous year."
  - Specific 2012 Doing Business component rankings cited as problematic:
    - "incorporate a business (153rd out of 183 countries)"
    - "pay taxes (164th out of 183 countries)"
    - "register property (167th out of 183 countries)"
  - Figure 3C: "Algeria's Ranking in 2012 Doing Business Indicators, Out of 183 Countries" — components include the above rankings.

### Relations with the Fund — Financial and Exchange Rate Details
- Membership and quota:
  - "Joined: April 25, 1958; Article VIII"
  - General Resources Account:
    - "Quota 1,254.70 100.00"
    - "Fund holdings of currency 882.62 70.35"
    - "Reserve position in Fund 372.08 29.66"
- SDR Department:
  - "SDR Million Percent Allocation"
  - "Net cumulative allocation 1,198.18 100.00"
  - "Holdings 1,073.34 89.58"
- Outstanding Purchases and Loans: "None"
- Financial arrangements (Stand-by facilities listed with dates and amounts):
  - "Stand-by 5/22/95 5/21/98 1,169.28 1,169.28"
  - "Stand-by 5/27/94 5/22/95 457.20 385.20"
  - "Stand-By 6/03/91 3/31/92 300.00 225.00"
- Projected Obligations to Fund (SDR million; based on existing use of resources and present holdings of SDRs):
  - Table values shown:
    - For 2011–2014: Principal 0.00 0.00 0.00 0.00 0.00
    - Charges/interest 0.00 0.11 0.40 0.40 0.40
    - Total 0.00 0.11 0.40 0.40 0.40
- Exchange rate arrangement and market details:
  - Historical 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..."
  - "On October 1, 1994, the Bank of Algeria introduced a managed float... replaced by an interbank foreign exchange market as of January 2, 1996."
  - "On December 15, 2011, the average of the buying and selling rates for the U.S. dollar was $1 = DA 74.6, equivalent to SDR 1 = DA 114.6."
  - "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."
  - Classification: "The exchange regime is classified as other managed arrangement with no preannounced path for the exchange rate."
  - Capital account: "Full surrender requirements are in effect on hydrocarbon export proceeds. Limits on the making of payments for invisible transactions and current transfers... are indicative according to the authorities. Inward direct investment is generally free of restrictions; controls are maintained on other capital account payments and transfers."

### Technical Assistance and Recent Consultations
- Latest Article IV Consultation:
  - "The discussions for the 2011 Article IV consultation with Algeria were held in Algiers during October 20–November 2, 2010."
  - "The Staff Report (IMF Country Report No. 11/39) was discussed and approved by the Executive Board on January 14, 2011 and published on February 03, 2011."
- Selected technical assistance missions and topics (dates as listed):
  - Bank restructuring and supervision: MFD missions (September 2005, December 2005, May 2006); MFD experts February–September 2006; MFD visits February–October 2007; MCM missions May 2009 and June 2009; MCM long-term TA December 2010 to December 2011.
  - Monetary and foreign exchange operations: MFD expert January–February 2006.
  - Foreign exchange reserve management: MFD expert February and May 2006.
  - Monetary and financial statistics: STA mission May 2006.
  - Payment systems: MFD expert May 2006.
  - Consumer price statistics: STA mission May 2006.
  - Tax policy and administration: FAD missions February 2007; April 2007; May 2008; FAD mission October 2011.
  - GDDS participation preparation: multisector STA mission February 2007.
  - Banking supervision strengthening: MCM mission May 2009; long-term MCM expert December 2010–December 2011.

*Source: IMF staff report excerpts as presented in the supplied content unit.*

### 2003. The Executive Board discussed the

### _cr1220 - 2003. The Executive Board discussed the

### Background and recent performance
- Real nonhydrocarbon GDP growth in 2010 reached 6 percent; total GDP growth was 3 percent in 2010.
- Overall inflation fell to 3.9 percent in 2010; nonfood inflation remained low.
- Unemployment declined slightly to 10 percent at end-2010; youth and female unemployment remain high.
- Large external reserves and sizable budgetary savings accumulated during 2000–10; debt levels substantially reduced.
- In 2011, current account surplus estimated to increase to 9.5 percent of GDP.
- Hydrocarbon fiscal revenues in 2011 rose by 30 percent.
- Official reserves grew by US$16 billion since end-2010, reaching US$178 billion at end-August 2011 (three years of imports).

### 2011 outcomes and short-term outlook
- Public Investment Program (PIP) expected to maintain nonhydrocarbon growth at about 5 percent in 2011.
- Overall GDP growth in 2011 expected to be about 2.5 percent.
- Overall inflation in 2011 expected to have stayed at about 4 percent.
- The budget in 2011 expected to remain in deficit at around 4 percent of GDP due to a 32 percent increase in total expenditure.
- Projected 2012: nonhydrocarbon GDP could grow by 5 percent; overall growth constrained to about 3–3½ percent because hydrocarbon output would continue to decline.
- Inflation in 2012 would remain at about 4 percent if fresh food prices remain subdued and wage pressures contained.

### Fiscal position and vulnerabilities
- Expansionary fiscal stance of recent years increased vulnerability to oil price swings.
- The break-even price that balances the budget now slightly exceeds US$100/barrel.
- Downside risks include a prolonged decline in oil prices that would weaken external and fiscal positions, force scaling down public investment, slow growth, raise unemployment, and reduce resources in the oil stabilization fund.
- 2007–12 selected public finance figures (percent of GDP):
  - Revenue: 2007 39.6; 2008 46.8; 2009 36.6; 2010 36.4; 2011 39.5; 2012 36.8.
  - Hydrocarbon revenue: 2007 30.1; 2008 36.9; 2009 24.0; 2010 24.1; 2011 27.4; 2012 24.8.
  - Expenditure and net lending: 2007 35.2; 2008 39.2; 2009 43.0; 2010 38.2; 2011 43.4; 2012 42.8.
  - Current expenditure: 2007 18.0; 2008 20.0; 2009 22.5; 2010 22.4; 2011 29.4; 2012 29.5.
  - Capital expenditure: 2007 15.5; 2008 17.8; 2009 19.2; 2010 15.0; 2011 14.0; 2012 13.3.
  - Budget balance: 2007 4.4; 2008 7.6; 2009 -6.4; 2010 -1.9; 2011 -4.0; 2012 -6.0.
  - Nonhydrocarbon primary balance (in percent of nonhydrocarbon GDP): 2007 -44.1; 2008 -52.2; 2009 -43.6; 2010 -39.3; 2011 -49.0; 2012 -46.4.
  - Total government debt: 2007 12.5; 2008 8.2; 2009 10.4; 2010 11.1; 2011 10.0; 2012 9.4.

### Monetary policy and financial sector
- Directors commended the Bank of Algeria for containing inflationary pressures and absorbing greater systemic liquidity from higher hydrocarbon revenues and large public spending.
- Significant growth in liquidity has not translated into higher inflation to date, but inflation risk has increased.
- Directors suggested considering tightening monetary policy early to prevent inflationary pressures from materializing, in addition to moderation of current spending.
- Exchange rate regime seen as having served Algeria well; authorities committed to maintaining the real exchange rate close to equilibrium, while needing to strengthen exchange rate fundamentals (fiscal position and productivity gains).
- Financial sector reform advances should continue to address constraints limiting financial intermediation and access to financing for the private sector.

### Structural reforms and policy recommendations
- Renew efforts to preserve macroeconomic stability, restore fiscal prudence, and diversify the economy with a stronger private sector.
- Adopt fiscal consolidation measures, which could include limits on wage increases and new hires, and better targeting of transfers and subsidies.
- Continue greater mobilization of nonhydrocarbon fiscal resources and tax administration reforms to reduce budget dependency on hydrocarbon revenues.
- Ensure good quality and efficiency of public expenditure; advance more forcefully in key areas of budgetary reform and build on progress in controlling the quality of public investment.
- Implement a more ambitious structural reform agenda to reduce unemployment (especially among youth), improve competitiveness, and boost private-sector-led growth and employment.
- Encourage stronger measures on SME financing and business environment reforms in consultation with social partners.
- Reassess constraints to private investment, including the limitations to FDI adopted in 2009, and ensure better synergy between macroeconomic policies and structural reform agenda.
- Continue efforts to improve regional and global economic integration.

### Statistical issues and data adequacy
- General assessment: Data provision has some shortcomings, but is broadly adequate for surveillance.
- Key weaknesses: government finance statistics, national accounts, and prices have shortcomings that hamper analysis.
- National accounts:
  - Outdated base year for constant price GDP estimates.
  - Long lags for publication.
  - Incomplete application of the 1993 System of National Accounts.
  - STA recommended priority to compiling GDP at constant prices (including quarterly accounts) and rebasing the GDP series.
  - Authorities started to prepare quarterly accounts in the second semester of 2011.
- Price statistics: Data published with a delay of about three months.
- Government finance statistics: Insufficient institutional coverage (limited to Budgetary Central Government, including general budget, annexed budget, and special treasury accounts), classification problems, long lags, and lack of reconciliation with monetary accounts.
- Monetary statistics: Need to ensure data consistency with the Monetary and Financial Statistics Manual, 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 from state-owned banks are unreliable and not timely.
- Balance of payments: Generally good quality, but would 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.

### Selected macroeconomic indicators (highlights from 2007–12 table)
- Oil and gas exports (US$ billions): 2007 59.6; 2008 77.2; 2009 44.4; 2010 56.1; 2011 70.9; 2012 66.2.
- Average crude oil export price (US$/barrel): 2007 74.7; 2008 99.0; 2009 61.8; 2010 79.0; 2011 103.2; 2012 100.0.
- Crude oil production (millions of barrels/day): 2007 1.4; 2008 1.3; 2009 1.3; 2010 1.2; 2011 1.2; 2012 1.2.
- Real GDP (annual change): 2007 3.0; 2008 2.4; 2009 2.4; 2010 3.3; 2011 2.5; 2012 3.1.
- Nonhydrocarbon real GDP (annual change): 2007 6.3; 2008 6.1; 2009 9.3; 2010 5.9; 2011 4.9; 2012 5.3.
- Consumer prices (end of period): 2007 4.8; 2008 4.9; 2009 5.8; 2010 4.5; 2011 4.5; 2012 4.1.
- Gross capital formation (percent of GDP): 2007 34.4; 2008 37.4; 2009 46.7; 2010 41.4; 2011 40.2; 2012 41.4.
- Gross national savings (percent of GDP): 2007 57.2; 2008 57.5; 2009 47.0; 2010 48.9; 2011 49.7; 2012 46.8.
- Broad money (annual change): 2007 24.1; 2008 16.1; 2009 3.1; 2010 13.8; 2011 21.7; 2012 10.9.
- Credit to the economy (annual change) 1/: 2007 17.2; 2008 20.4; 2009 18.5; 2010 5.1; 2011 9.8; 2012 10.3.
- Current account including official transfers (percent of GDP): 2007 22.8; 2008 20.1; 2009 0.3; 2010 7.5; 2011 9.5; 2012 5.4.
- Gross reserves (in billions of U.S. dollars): 2007 4.2; 2008 3.3; 2009 3.9; 2010 3.6; 2011 2.6; 2012 2.5.
- Reserves in months of next year's imports: 2007 110.2; 2008 143.1; 2009 148.9; 2010 162.2; 2011 181.5; 2012 193.4.
- Nominal GDP (US$ billions): 2007 134.3; 2008 171.7; 2009 138.0; 2010 160.8; 2011 189.3; 2012 194.6.
- Unemployment rate (percent): 2007 13.8; 2008 11.3; 2009 10.2; 2010 10.0.

*IMF Executive Board—Article IV consultation materials, Algeria (2011 Article IV Report — Informational Annex).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr1220.pdf_