## _cr1432 ## Source details **Canonical URL:** [_cr1432](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr1432.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr1432.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr1432.pdf.json) --- ### Recent economic developments - Growth and inflation: - Real GDP growth: 3.3 percent in 2012 (from 2.8 percent in 2011). - Hydrocarbon sector contracted for the seventh consecutive year in 2012; nonhydrocarbon sector led growth driven by public sector spending. - Inflation: rose to 8.9 percent in 2012; overall inflation declined to 4.5 percent in October 2013. - Core inflation: peaked at 5.9 percent in 2012, fell to 3.7 percent in October 2013. - Food inflation: decelerated faster than core inflation. - External position and reserves: - Current account surplus: 6.0 percent of GDP in 2012 (from 9.9 percent in 2011). - FDI: fell to $1.5 billion (less than 1 percent of GDP) in 2012. - Official reserves: $191 billion in 2012 (from $182 billion in 2011), nearly three years of imports of goods and services. - External debt: 1.9 percent of GDP at end-2012. - Current account recorded a slight deficit through the first three quarters of 2013. - Exchange rate and competitiveness: - REER and NEER stable for first six months of 2013 (appreciating by less than 1 percent), then REER depreciated 6.2 percent between June and October 2013. - Staff estimates: REER remains somewhat on the strong side. - Public finances and FRR: - Current spending increased by 23 percent in nominal terms to 30.2 percent of GDP and 45.0 percent of NHGDP in 2012. - Capital spending grew by 15 percent to 14.4 percent of GDP in 2012. - Fiscal revenue: 40.5 percent of GDP in 2012. - Overall fiscal deficit: widened from 1.2 percent of GDP in 2011 to 4.0 percent of GDP in 2012 (and from 44.7 percent to 45.3 percent of NHGDP). - Fiscal breakeven price of oil (fiscal): US$120.9 per barrel; Algerian oil market price cited as US$111 per barrel. - FRR: DZD 5,633 billion in 2012; share of GDP declined from 37.1 percent to 35.6 percent between 2011 and 2012. - Data as of end-August 2013 suggest fiscal consolidation in the 2013 budget law is on track. - Monetary developments and credit: - Broad money (M2) growth: 19.9 percent in 2011 to 10.9 percent in 2012 (22.1 percent to 16.6 percent excluding deposits of the national oil company). - Slower accumulation of NFA: 7.4 percent in 2012 (compared to 16.2 percent in 2011). - Credit to the economy increased by 15.1 percent in 2012 (compared to 13.5 percent in 2011). - Reserve requirement ratio increased in May 2012 and May 2013; increased liquidity absorption in May 2012. - In 2013 through September: money growth 7.1 percent (through September compared to end-December 2012); credit to the economy 22.3 percent (driven by 33.6 percent growth in credit to the public sector); credit to the private sector grew by 16.9 percent. - Financial sector soundness and markets: - Capital adequacy ratio: 23 percent in 2012. - NPL ratio: 11 percent in 2012; 70 percent of NPLs provisioned; net NPL ratio 3.5 percent. - Liquid assets/short-term debt: 107.51 percent in 2012 (Table 7). - Financial markets underdeveloped: one new listing in 2013 (total listed companies: four) and two corporate bonds. - Access to finance remains low compared with regional peers. - Employment and inequality: - Overall unemployment rate: fell from 30 percent in 2000 to 9.8 percent in 2013. - Youth unemployment: 24.8 percent in 2013. - Female unemployment: 16.3 percent in 2013; female participation about 14 percent in 2011 and improved to 16.6 percent by December 2013 data. - Gini coefficient: fell from 0.34 in 2000 to 0.31 in 2011. - Real spending per household increased on average by 6.4 percent over 2000–11; rural Gini 0.37 vs urban Gini 0.18 in 2011. ### Outlook and projections - Growth and inflation: - Real GDP growth: expected 2.7 percent in 2013; 4.3 percent in 2014. - Nonhydrocarbon growth: 7.1 percent in 2012; 5.9 percent in 2013; 5.3 percent in 2014. - Inflation: projected 4.5 percent in 2013 and 4.5 percent in 2014. - External sector: - Current account surplus: projected 1.1 percent of GDP in 2013; small current account deficit projected by 2015. - Gross official reserves: 190.7 in 2012; 196.0 in 2013; 196.8 in 2014 (US$ billions). - Fiscal projections: - Overall deficit for 2013: expected to improve to 0.2 percent of GDP (34.3 percent of NHGDP). - 2014: spending expected to increase slightly by 1 percent of GDP, mostly due to capital spending; fiscal deficit expected to reach 2.1 percent in 2014. - Nonhydrocarbon overall deficit: expected to improve slowly from 34.3 percent of NHGDP in 2013 to 27.4 percent of NHGDP by 2018. - Gross public debt: projected to remain low (Table 1: total government debt 9.2 percent of GDP in 2012; 9.4 in 2013; 10.2 in 2014). - Monetary and credit: - Money supply expected to grow by 8.6 percent in 2013. - Credit to the economy: 15.1 percent in 2012; projected 29.6 percent in 2013; 10.3 percent in 2014. - Credit to private sector expected to remain low at 22.6 percent of NHGDP in 2013. ### Key vulnerabilities and risks - Structural vulnerabilities: - Heavy dependence on hydrocarbons for fiscal and external balances. - Fiscal stance described as “unsustainable” despite consolidation. - Growth overly dependent on public spending; high youth and female unemployment; skills mismatches; labor market rigidities. - Main downside risks (tilted to the downside): - Prolonged decline in oil prices: FRR accumulation slowed; fiscal breakeven oil price in 2014 projected higher than medium-term oil prices. - Worsening global environment: slower European growth would reduce hydrocarbon demand and nonhydrocarbon exports. - Pressure to use hydrocarbon rent ahead of 2014 presidential election could increase current spending and inflation. - Regional tensions (Mali, Libya, Egypt, Syria) could weigh on investment and FDI and threaten southern hydrocarbon infrastructure. - Risk Assessment Matrix (selected likelihoods and levels of concern preserved as in source): - Euro zone: Short term — Likelihood: Medium; Overall level of concern: Medium. Medium-term — Likelihood: High; Overall level of concern: High. - Emerging markets: Short term — Likelihood: High; Overall level of concern: High. Short/medium term — Likelihood: Medium; Overall level of concern: Medium. - China: Medium term — Likelihood: Medium; Overall level of concern: Medium. - Other risks: Short term — Global oil shock — Likelihood: Low; Overall level of concern: High. - Algeria-specific: Further demands on hydrocarbon rent — Likelihood: High; Overall level of concern: High. Intensification of regional tensions — Likelihood: Medium; Overall level of concern: High. Domestic political instability — Likelihood: Low; Overall level of concern: High. ### Financial sector and monetary policy observations - Banking soundness: - Capital adequacy ratio: 23 percent in 2012. - NPLs/total loans: 11.46 percent in 2012 (Table 7). - Provisions/classified loans: 69.54 percent in 2012. - Return on equity: 23.27 percent in 2012. - Liquid assets/short-term debt: 107.51 percent in 2012. - Monetary policy transmission: - Excess liquidity and limited financial sector development weakened transmission (empirical analysis over 2001Q1–2013Q2). - BA uses liquidity management tools, interest rates, and exchange rate; required reserves and deposit facilities are main active instruments given excess liquidity. - Recommendations to enhance effectiveness include allowing the national oil company to hold part of its resources in foreign exchange, adopting a more proactive borrowing policy by the Ministry of Finance, considering a full-fledged hydrocarbon savings rule, using interest rates more proactively, and diversifying foreign exchange supply by easing repatriation and surrender requirements. - Financial sector development priorities: - Speed up development of credit bureaus and extend them to households. - Lift ban on consumer credit while implementing prudential measures. - Encourage banking competition to better serve SMEs. - Improve insolvency and collateral regimes; revisit guarantee mechanisms. - Promote mortgage finance and private microfinance; review government microfinance programs (ANGEM, ANSEJ, CNAC). - Capital markets: list SOEs, increase sovereign bond auctions, remove disincentives to corporate securities issuance. - AML/CFT: - FATF identified Algeria in October 2013 as a jurisdiction with strategic AML/CFT deficiencies; authorities should step up legal changes (e.g., amendment of Article 87-bis) and other remedial actions to be removed from the gray list. ### Fiscal sustainability, FRR management, and fiscal rules - Fiscal sustainability outlook: - Under baseline assumptions without policy adjustments, Algeria could become a net borrower within 20 years (debt-to-GDP ratio above 100 percent by 2050). - Current account surplus shrinking; hydrocarbon production horizon relatively short; fiscal policy on an unsustainable path. - Recommended fiscal framework: - Adopt a rule-based fiscal framework to smooth revenue volatility, preserve buffers, and protect against political pressure. - Staff recommended a full-fledged fiscal rule because the current FRR-based framework (budgeted oil price US$ 37 per barrel) is incomplete: no limit to withdrawals and no limit on fiscal balance. - Appropriate fiscal rule elements: target a primary balance consistent with long-term sustainability; establish a limit on FRR drawings; include automatic correction mechanisms and strict escape clauses. - Quantitative rule-based scenarios: - Permanent income hypothesis (PIH) rule applied to Algeria implies a NHPB deficit equal to 11 percent of NHGDP on a permanent basis would ensure long-term sustainability. - Consolidation undertaken in 2013 leaves Algeria far from PIH benchmark. - Practical alternative: backward-looking five-year oil price formula + 5 percent floor on structural primary balance + cap on FRR drawings. - Under this rule, converging NHPB to PIH benchmark by 2026 would require: 1. an additional consolidation of 3 percent per year over the medium term, and 2. continued fiscal consolidation in compliance with the fiscal rule over the long term. - A primary balance floor greater than 5 percent may better safeguard against uncertainties; after oil production ends (assumed 2032), the floor would need to be adjusted to -1 percent of NHGDP. - Results sensitive to uncertainties about resource horizon, future oil prices, long-term GDP growth, and other variables. - FRR management: - FRR currently a government deposit in local currency at the BA with low effective average returns; implicit average annual return during 2008–11 (based on BA dividends) was less than 2 percent. - Staff suggested converting the FRR into a sovereign wealth fund, possibly managed by the BA, to follow best international practices and target macro-fiscal management and savings for future generations. - Authorities noted lack of political buy-in and technical skills to establish a sovereign wealth fund at this time. - Budgetary institutions and transparency: - MTBF and performance-based budgeting expected to come into effect in 2016, with transition beginning in 2015. - Staff recommended setting medium-term budget envelopes, identifying performance-based programs in the 2015 budget law, ensuring consistency between five-year public investment program and MTBF, introducing integrated financial management information system, applying transparency principles similar to EITI for natural resource revenue, and publishing detailed hydrocarbon revenue accounts in the draft budget law report. ### Hydrocarbon sector, competitiveness, and structural reforms - Hydrocarbon sector and investment: - Extending production horizon and increasing exports requires more foreign investment; last three licensing rounds drew limited interest. - New hydrocarbon law adopted more favorable terms but state-owned oil company must retain minimum 51 percent stake. - To attract investment: improve business environment, carefully prepare licensing rounds (planned for 2014), and contain domestic consumption through subsidy reform and efficiency measures. - Subsidies and implicit costs: - Implicit subsidies for hydrocarbon products estimated at US$22.2 billion in 2012, or 10.9 percent of GDP; explicit subsidies cost an additional 5 percent of GDP in 2012. - Staff recommended progressively bringing prices of subsidized items to market levels, improving efficiency, and replacing subsidies over time with a targeted cash-transfer system. - Competitiveness and reforms: - Over 2005–10, Algerian unit labor costs increased by 50 percent. - Key recommendations: anchor future wage increases to productivity, streamline administrative procedures and one-stop shops, reform the TAP business tax (replace with excises), reduce port/terminal and administrative trade costs, relax restrictive FDI regime (including reconsider 51 percent ownership requirement), accelerate WTO accession, and promote ICT and innovation. - Public investment efficiency: - Preserve public capital spending while reining in current spending; increase efficiency of public investment through better planning, implementation, monitoring, and maintenance. - Improve selection so investment decisions yield positive social returns. ### Labor market and female participation - Female labor market indicators: - Female unemployment: 17.2 percent in 2011; 16.3 percent in 2013. - Female labor force participation: 14 percent in 2011; improved to 16.6 percent by December 2013 data. - Under-employment: 21.5 percent of women worked less than 25 hours a week (compared to 6.5 percent of men) in the cited period. - Social security registration: 30.8 percent of active women and 48.9 percent of men not registered. - Policy measures to raise employment: - Promote private sector growth and FDI. - Implement education-for-employment plans and skills development. - Reduce labor market rigidities (notably employer contributions). - Active labor market policies: incentives for hiring youth and women, retraining, improved labor intermediation, support for entrepreneurship. - Simulation: cutting by half the number of stay-at-home women could add about 4 million workers to the labor force; gradual absorption over 10 years could raise nonhydrocarbon potential growth by about 0.3 percentage points per year. ### Policy recommendations summary (staff appraisal and Executive Board advice) - Monetary policy: - BA should be ready to further mop up excess liquidity and use interest rates more actively. - Avoid new increases in current spending. - Fiscal policy: - Continue fiscal consolidation initiated in 2013. - Contain the wage bill (freeze civil service size). - Gradually phase out subsidies and replace with targeted cash transfers. - Reduce tax exemptions and stabilize transfers to public entities in real terms. - Preserve and enhance effectiveness of capital spending. - Adopt a full-fledged fiscal rule (backward-looking five-year average oil price with structural primary balance limit) and transform oil fund into a sovereign wealth fund with annual drawing ceilings. - External and exchange rate policy: - Target equilibrium REER to protect competitiveness; continue measures to deepen interbank FX market (relax repatriation/surrender obligations, reduce de facto high reserve requirement rates on foreign currency deposits). - Tackle parallel market premium (which reached 40 percent in November 2013) and raise indicative forex ceilings for travelers. - Financial sector and markets: - Implement FSAP recommendations to foster development while preserving stability. - Speed up credit bureau development, lift consumer credit ban with safeguards, promote mortgage finance, deepen capital markets (list SOEs, issue sovereign debt), and address AML/CFT deficiencies. - Structural reforms for growth and jobs: - Improve business environment, enhance competitiveness, relax FDI restrictions, pursue WTO accession, improve education and skills, and foster ICT and entrepreneurship. *Source: IMF staff report excerpts (content unit _cr1432) provided in the supplied content.* ### INTRODUCTION _________________________________________________________________________________ 5 ### INTRODUCTION ### Recent economic developments - Stabilization in 2013 after fiscal stimulus in 2011–12 and monetary tightening: - Real GDP growth: 3.3 percent in 2012 (from 2.8 percent in 2011). - Hydrocarbon sector contracted for the seventh consecutive year in 2012; nonhydrocarbon sector led growth driven by public sector spending. - Inflation: rose to 8.9 percent in 2012 (highest level in 15 years); overall inflation declined to 4.5 percent in October 2013. - Core inflation: 5.9 percent peak in 2012, fell to 3.7 percent in October 2013. - Food inflation: decelerated faster than core inflation. - External position: - Current account surplus narrowed to 6.0 percent of GDP in 2012 from 9.9 percent in 2011. - Capital inflows and FDI: FDI fell to $1.5 billion (less than 1 percent of GDP) in 2012. - Official reserves: $191 billion in 2012 (from $182 billion in 2011), nearly three years of imports of goods and services. - External debt: 1.9 percent of GDP at end-2012. - Current account recorded a slight deficit through the first three quarters of 2013 as hydrocarbon exports remained weak and imports rose. - Exchange rate and competitiveness: - REER and NEER relatively stable for first six months of 2013 (appreciating by less than 1 percent), then REER depreciated 6.2 percent between June and October 2013, reaching its lowest level since mid-2011. - REER depreciation outpaced NEER depreciation, reflecting lower inflation in Algeria relative to trading partners. - Staff estimates suggest the REER remains somewhat on the strong side (Appendix 1 referenced). - Public finances: - Fiscal stimulus in 2010–12 culminated in large spending increases in 2012: - Current spending increased by 23 percent in nominal terms to 30.2 percent of GDP and 45.0 percent of NHGDP in 2012. - Capital spending grew by 15 percent, from 13.6 percent to 14.4 percent of GDP between 2011 and 2012. - Fiscal revenue: 40.5 percent of GDP in 2012, supported by buoyant nonhydrocarbon revenue. - Overall fiscal deficit widened from 1.2 percent of GDP in 2011 to 4.0 percent of GDP in 2012 (and from 44.7 percent to 45.3 percent of NHGDP). - Fiscal breakeven price of oil (fiscal): US$120.9 per barrel; Algerian oil market price cited as US$111 per barrel. - FRR (Fonds de Régulation des Recettes): - Grew in absolute terms to DZD 5,633 billion but declined as a share of GDP from 37.1 percent to 35.6 percent between 2011 and 2012. - Data as of end-August 2013 suggest fiscal consolidation in the 2013 budget law is on track with contained public spending and stable fiscal revenue. - Monetary developments: - Broad money (M2) growth slowed from 19.9 percent in 2011 to 10.9 percent in 2012 (22.1 percent to 16.6 percent excluding deposits of the national oil company). - Slower accumulation of NFA: 7.4 percent in 2012 (compared to 16.2 percent in 2011). - Credit to the economy increased by 15.1 percent in 2012 (compared to 13.5 percent in 2011). - Policy measures: reserve requirement ratio increased in May 2012 and May 2013; increased liquidity absorption in May 2012. - In 2013 through September: - Money growth: 7.1 percent increase through September compared to end-December 2012. - Credit to the economy: 22.3 percent through September, driven by 33.6 percent growth in credit to the public sector (an 11-year high). - Credit to the private sector grew by 16.9 percent (ahead of 13.5 percent in 2012). - Financial sector: - Banking sector remains solvent and liquid. - Overall capital adequacy ratio in 2012: 23 percent. - NPL ratio: 11 percent in 2012; 70 percent of NPLs provisioned, bringing net NPL ratio to 3.5 percent. - Liquidity: comfortable. - Financial markets underdeveloped: one new listing in 2013 (total listed companies: four) and two corporate bonds. - Ministry of Finance announced eight SOEs would be listed (no timeline provided). - Access to finance remains low compared with regional peers and similarly developed countries. - Employment and inequality: - Unemployment: - Overall unemployment rate fell from 30 percent in 2000 to 9.8 percent in 2013. - Youth unemployment: 24.8 percent in 2013. - Female unemployment: 16.3 percent in 2013. - Participation rate remains low. - Growth and inequality (Box 1): - Gini coefficient fell from 0.34 in 2000 to 0.31 in 2011. - On average across households, real spending increased by 6.4 percent over 2000–11. - Rural vs urban: rural Gini 0.37 vs urban Gini 0.18 in 2011; rural average spending growth 4.5 percent vs urban 7.3 percent. - Between 2000 and 2011, unemployment fell from 29.5 percent to 10.0 percent; per capita spending on health and education doubled in real terms. ### Outlook (projections and medium-term expectations) - Growth and inflation: - Real GDP growth: expected to slow to 2.7 percent in 2013 as fiscal consolidation takes hold and hydrocarbon exports remain weak. - Nonhydrocarbon growth: projected to decline from 7.1 percent to 5.9 percent in 2013, mainly reflecting slowdown in construction and government services. - 2014: real GDP growth should pick up, driven by a recovery in the hydrocarbon sector and stronger external demand from Southern Europe. - Inflation: projected to fall to 4.5 percent in 2013 (government withdraws fiscal stimulus, prudent monetary policy, softer food prices). - External: - Current account surplus: projected to narrow to 1.1 percent of GDP in 2013. - Small current account deficit projected by 2015, assuming lower oil prices and continued growth in domestic hydrocarbon consumption. - Fiscal: - Overall deficit for 2013: expected to improve to 0.2 percent of GDP (34.3 percent of NHGDP). - 2014: spending expected to increase slightly by 1 percent of GDP, mostly due to capital spending. - Hydrocarbon revenue: constrained by declining oil prices and broadly stable export volumes; nonhydrocarbon revenue projected to remain stable as a share of NHGDP. - Fiscal deficit: expected to reach 2.1 percent in 2014; projected to worsen in 2015 before improving at the end of the projection period as current spending is contained and nonhydrocarbon revenue improves. - Nonhydrocarbon overall deficit: expected to improve slowly from 34.3 percent of NHGDP in 2013 to 27.4 percent of NHGDP by 2018, but projected to fall short of placing fiscal policy on a sustainable path. - Breakeven price of oil: expected to remain above the market price over the medium term. - Gross fiscal savings: expected to increase further in DZD terms, stabilizing at 36.6 percent of GDP by the end of the projection period. - Gross public debt: projected to remain low (Appendix II referenced). - Monetary and financial intermediation: - Money supply: expected to grow by 8.6 percent in 2013, as higher fiscal savings somewhat offset fast growth in credit to the public sector. - Credit to the private sector: expected to increase by 1 percentage point of GDP but remain low at 22.6 percent of NHGDP in 2013. - Without structural reforms to support private sector growth and develop the financial sector, private sector credit is expected to increase only slowly over the medium term. ### Key vulnerabilities and risks - Structural vulnerabilities and uncertainties: - Heavy dependence on hydrocarbons for fiscal and external balances. - Fiscal stance described as “unsustainable” despite recent consolidation. - Growth overly dependent on public spending and vulnerable to a protracted decline in oil prices. - High unemployment among youth and women, skills mismatches, and labor market rigidities. - Main downside risks (tilted to the downside; outward spillovers likely limited): - Prolonged decline in oil prices: - FRR accumulation slowed by financing needs from consecutive fiscal deficits. - Fiscal breakeven oil price in 2014 projected higher than medium-term oil prices — risk to fiscal sustainability if oil prices decline sustain ably. - Worsening global environment: - Deeper slowdown in emerging markets or protracted slower growth in Europe would negatively affect balance of payments (lower hydrocarbon demand and prices) and fiscal balance (lower hydrocarbon revenue), affecting growth. - Financial sector risks limited given limited exposure to international financial markets. - Further pressure to use hydrocarbon rent: - Elevated social demands (inflation, lack of housing, unemployment) could increase ahead of the 2014 presidential election. - Additional current spending to placate population would worsen fiscal balance, increase reliance on hydrocarbon rent, and fuel inflation. - Intensification of regional tensions: - Instability in neighboring countries (Mali, Libya) and tensions in Egypt and Syria create security risks that could weigh on investments, notably FDI; possible vulnerability of southern hydrocarbon infrastructure to attacks. - Risk Assessment Matrix (selected entries preserved as in source): - Euro zone: Short term: Financial stress in the euro area re-emerges — Likelihood: Medium; Overall level of concern: Medium. Medium-term: Protracted period of slower European growth — Likelihood: High; Overall level of concern: High. - Emerging markets: Short term: Protracted economic and financial volatility, especially for emerging markets — Likelihood: High; Overall level of concern: High. Short/medium term: Lower than anticipated emerging markets growth potential — Likelihood: Medium; Overall level of concern: Medium. - China: Medium term: Sharp slowdown in growth in China — Likelihood: Medium; Overall level of concern: Medium. - Other risks: Short term: Global oil shock — Likelihood: Low; Overall level of concern: High (noting Algeria's heavy reliance on oil revenues). - Algeria-specific risks: Short/medium term: Further demands on the hydrocarbon rent — Likelihood: High; Overall level of concern: High. Short/medium term: Intensification of regional tensions (notably in Mali and Libya) — Likelihood: Medium; Overall level of concern: High. Short/medium term: Domestic political instability — Likelihood: Low; Overall level of concern: High. ### Financial sector and policy-relevant observations - Banking soundness and access to finance: - Capital adequacy ratio: 23 percent in 2012. - NPLs: 11 percent in 2012; 70 percent provisioned; net NPL ratio 3.5 percent. - Access to finance low compared with peers despite banking sector solvency. - Financial market development limited: only four listed companies and two corporate bonds as of 2013. - Policy environment and recent measures: - Monetary policy tightening since May 2012, including reserve requirement increases (May 2012 and May 2013) and increased liquidity absorption (May 2012). - Fiscal consolidation steps in 2013 budget law appear on track as of end-August 2013. - Persistent policy challenge: aligning fiscal policy for sustainability given breakeven oil price above market prices and expected medium-term pressures from rising domestic hydrocarbon consumption. Italic: Source: IMF staff report (INTRODUCTION), Algeria, as provided in the source content. ### Box 2. Algeria’s Inward and Outward Macroeconomic Spillovers ### Box 2. Algeria’s Inward and Outward Macroeconomic Spillovers ### Inward and outward spillover channels and magnitude - Limited openness and a closed capital account constrain outward spillovers; the current account is the main potential channel of shock contagion. - Algeria’s imports from the Maghreb were less than US$2 billion in 2012, representing only 3.5 percent of the combined exports of Morocco and Tunisia. - Algeria’s imports from the EU were about US$25 billion in 2012, which are less than 2 percent of the EU region’s non-EU exports. - A domestic demand shock that reduces Algerian imports is unlikely to generate significant outward spillovers given these trade linkages. - However, in tight oil market conditions, a shock to Algeria’s oil production could affect global prices and generate external spillovers. - A decline in growth in Europe would have negative spillover effects in Algeria due to large dependence on gas exports to the EU; nonhydrocarbon exports would also be negatively affected since Europe is the main client for these exports. ### Oil price shock simulation and macro-fiscal implications - The oil shock scenario assumes a permanent US$ 25 negative shock starting in 2015. - Lower hydrocarbon prices would harm Algeria’s fiscal balance and balance of payments, as reflected by the simulation of a permanent US$ 25 decline in oil prices under a no-policy-change scenario. - Simulation of a 0.5 points decline in European GDP growth (compared to the baseline) is used to gauge spillovers (growth simulations calibrated on a GVAR model). - The box presents impacts (percent change relative to baseline) on GDP and nonhydrocarbon exports across Algeria, Maghreb, MENA Oil Exporters, and Europe for “First year” and “2 years cumulative” horizons (chart data described but specific chart numbers preserved in source). ### Reserve and fiscal vulnerability indicators (as presented) - Current account balance and reserves trajectories are shown for 2014–2018 (Current account balance in percent of GDP; reserves in US$ billions) per IMF staff calculations. - Fiscal balance and FRR trajectories are shown for 2014–2018 (In percent of GDP) per IMF staff calculations. ### Key findings on macroeconomic stability and policy needs - The limited openness, concentrated hydrocarbon dependence, and closed capital account shape both inward vulnerability (to external demand and oil price shocks) and limited outward spillovers. - Three main policy challenges identified for Algeria: - Short-term: consolidate macroeconomic and financial stability. - Medium/long-term: improve management of hydrocarbon wealth to ensure fiscal sustainability. - Structural: raise economic growth and create more jobs. ### Monetary policy transmission and recommendations (Box 4 summary) - Excess liquidity and limited financial sector development weakened monetary policy transmission (empirical analysis over 2001Q1–2013Q2). - The BA’s three policy instruments: liquidity management tools, interest rate, and exchange rate; required reserves and deposit facilities are the main active instruments given excess liquidity. - Key recommendations to enhance effectiveness: - Adapt the macroeconomic policy framework to excess liquidity: allow the national oil company to hold part of its resources in foreign exchange; adopt a more proactive borrowing policy by the Ministry of Finance; consider a full-fledged hydrocarbon savings rule. - Provide clearer market signals: use interest rates more proactively (align auction facilities and discount rate changes); diversify foreign exchange supply by easing repatriation and surrender requirements and lowering the de facto required reserve ratio on banks’ foreign exchange deposits. - Create conditions for financial deepening: review interest subsidies, monitor subsidized credits, lift the ban on consumer credit, develop credit registries, facilitate SME access to credit (efficient guarantee system), mandate electronic payments for large public transactions, open capital of large SOEs and state-owned banks, and encourage corporate bond issuance by large SOEs. ### Fiscal policy and subsidy reform findings and recommendations - The surge in public spending prior to 2013 weakened the fiscal position and put upward pressure on the equilibrium REER, raising Dutch-disease concerns. - Ongoing fiscal consolidation should be pursued beyond 2013; the draft 2014 budget law limits increases in current spending while allowing higher capital spending. - Key fiscal recommendations: - Bolster tax revenues by eliminating or reducing costly tax exemptions—particularly VAT exemptions—and continue tax administration improvements and computerization. - Contain growth in current spending by stabilizing civil service size, anchoring wage growth to productivity, and stabilizing current transfers in real terms through subsidy reform and improved public service efficiency. - Review and reform subsidies: implicit subsidies for hydrocarbon products were estimated at US$22.2 billion in 2012, or 10.9 percent of GDP; explicit subsidies cost an additional 5 percent of GDP in 2012. Staff recommended progressively bringing prices of subsidized items to market levels, improving efficiency, and replacing subsidies over time with a targeted cash-transfer system. ### Exchange rate, reserves, and foreign exchange market recommendations - Exchange rate policy should keep the dinar in line with its equilibrium level to enhance external competitiveness; the fiscal consolidation implies the equilibrium REER has depreciated compared to last year. - International reserves remain well above standard adequacy levels, but vulnerabilities could emerge over the long run as the current account surplus declines and hydrocarbon resources are finite. - Recommendations to develop the foreign exchange market: - Relax repatriation and surrender obligations of export receipts. - Lower the de facto high reserve requirement rate on foreign currency deposits (100 percent for individuals and 30 percent for firms). - Relax surrender requirements linked to inward foreign investment. - Consider allowing operators engaged in international trade to purchase foreign currency outside their paying bank. - Significantly raise indicative forex ceilings for travelers to limit parallel market premium; the parallel market premium reached 40 percent in November 2013. - In the longer term, envisage a gradual lifting of capital account restrictions. ### Financial sector stability recommendations - The financial sector is judged healthy but with risks concentrated in credit risk. - Recommendations: - Maintain efforts to monitor financial stability, improve the institutional framework and the quality of the BA’s annual report, and expand macro-prudential surveillance. - Accelerate the CAMELS rating exercise and complete it before the end of 2014 to foster transition to risk-based banking supervision. - Enhance financial sector safety nets and establish a dedicated bank resolution regime. - Introduce a mechanism for cleaning up old and fully provisioned NPLs. *Source: IMF staff analysis in Box 2, “Algeria’s Inward and Outward Macroeconomic Spillovers,” as provided in the supplied content.* ### 19. Under current economic policies and trends, Algeria will deplete its financial savings in ### _cr1432 - 19. Under current economic policies and trends, Algeria will deplete its financial savings in ### Fiscal sustainability outlook - Under baseline assumptions, without policy adjustments, the country could become a net borrower within 20 years (with a debt-to-GDP ratio above 100 percent by 2050). - The current account surplus is shrinking and the time horizon for hydrocarbon production is relatively short. - Fiscal policy is on an unsustainable path despite substantial fiscal and external buffers to date. ### Recommended fiscal framework and rules - Staff advised adopting a rule-based fiscal framework to manage hydrocarbon wealth to: - smooth revenue volatility, - preserve fiscal and external buffers, - protect against political pressure to increase public spending. - Staff recommended the adoption of a full-fledged fiscal rule because the current framework (oil savings fund FRR based on a budgeted oil price of US$ 37 per barrel) is incomplete: there is no limit to withdrawals from the FRR and no limit on the fiscal balance. - An appropriate fiscal rule should: - target a primary balance consistent with long-term sustainability, - establish a limit on drawings from the FRR, - include an automatic correction mechanism for ex-post deviations, - include strict escape clauses with a process for reactivating the rule. - The authorities agreed in principle on protecting fiscal savings but viewed the current price saving rule as having served them well; staff argued it would only be useful if coupled with a structural primary balance target consistent with long-term sustainability. ### Quantitative rule-based scenarios and consolidation needs - Under the permanent income hypothesis (PIH) rule: - A constant nonhydrocarbon primary balance (NHPB) equal to the implicit return on the present value of future national resource revenue ensures sustainability. - Applied to Algeria, the PIH rule suggests a NHPB deficit equal to 11 percent of NHGDP on a permanent basis would ensure long-term sustainability and adequate savings for future generations. - The consolidation undertaken in 2013 leaves Algeria far from the PIH benchmark. - Alternative, more practical rule proposed: - Combine a backward-looking, five-year oil price formula with a 5 percent floor on the “structural” primary balance and a cap on drawings from the oil savings fund. - Under this rule, placing the NHPB on a path that converges with the PIH benchmark in 2026 would require: 1. an additional consolidation of 3 percent per year over the medium term, and 2. continued fiscal consolidation in compliance with the fiscal rule over the long term. - A primary balance floor greater than 5 percent was noted as a way to better safeguard against uncertainties; after oil production ends (assumed to be in 2032), the floor would need to be adjusted to -1 percent of NHGDP. - Staff cautioned results are sensitive to uncertainties regarding Algeria’s resource horizon, future oil prices, long-term GDP growth rates, and other variables. ### Management of fiscal savings and FRR - The FRR is currently a government deposit in local currency at the BA and generates low effective average returns by international standards. - During 2008–11, the implicit average annual return, based on dividend payments from the central bank to the government, was less than 2 percent. - Staff suggested converting the FRR into a sovereign wealth fund, possibly managed by the BA, adhering to best international practices, targeting macro-fiscal management and savings for future generations, and not used for off-budget and guarantee operations. - The authorities cautioned that Algeria lacks political buy-in and specific technical skills necessary to establish a sovereign wealth fund at this time. ### Strengthening budgetary institutions and transparency - Staff welcomed progress in strengthening the fiscal framework: - Medium-term budget framework (MTBF) and performance-based budgeting expected to come into effect in 2016, with a transition period beginning in 2015. - Staff encouraged setting medium-term budget envelopes for line ministries and identifying performance-based programs as soon as the 2015 budget law. - Consistency between the upcoming five-year public investment program and the MTBF is important. - Ongoing rationalization and scheduled regular updates of program authorizations should improve management of capital spending. - Recommended priorities: - Introduce an integrated financial management information system for the budget office. - Apply principles of transparency and accountability on natural resource revenue similar to EITI principles. - Publish a detailed account of hydrocarbon revenues in the draft budget law report and list them as executed in the budget review law. - Good practice encouraged: consistent issuance of budget review laws within two years following the end of the fiscal year; consider shortening the complementary period. ### Hydrocarbon sector and revenue-supporting reforms - Extending the hydrocarbon production horizon and increasing exports requires more foreign investment in the oil and gas industry. - The last three licensing rounds drew limited foreign investor interest. - A new hydrocarbon law adopted more favorable terms, but security concerns have increased following the terrorist attack in January 2013. - The requirement that the state-owned oil company retain a minimum 51 percent stake in any hydrocarbon project remains in place. - To attract more investment, reforms needed to improve the business environment and careful preparation of licensing rounds (planned for 2014) is necessary. - To support hydrocarbon export growth, domestic consumption needs to be contained: - Energy subsidies should be progressively eliminated and energy efficiency strengthened. - Use of renewable energy sources recommended. - Develop a strategy for diversifying export markets, especially for gas. ### Accelerating growth and employment - Algeria’s growth potential is far from fully realized; higher growth requires more effective use of public sector resources and wide-ranging private sector reforms. - Public capital spending needs to be preserved and its efficiency increased: - Staff analysis suggests a growth-friendly consolidation should focus on increasing public investment while reining in current spending. - Impact of capital spending on growth appears low by regional standards; critical to preserve capital spending and enhance its efficiency. - Investment decisions should yield a positive rate of social return; improve planning, implementation, monitoring, and maintenance of public investment projects. - Improve competitiveness and business climate: - Algeria ranks low in competitiveness surveys (World Economic Forum Global Competitiveness Report, World Bank Doing Business). - Accelerate reforms: streamline administrative procedures, introduce efficient one-stop shops, and eliminate or limit the 51 percent Algerian ownership requirement in foreign investments. - Address rapidly rising unit labor costs, onerous taxes on businesses, and elevated import and export costs. - Increase economic openness to boost productivity: - Progress towards WTO accession is critical; complement with active export promotion and measures to facilitate trade transactions. - Reform restrictive FDI regime to attract technology transfers. - Improve quality and relevance of education and training, foster innovation and entrepreneurship, develop the ICT industry, and promote its integration into the economy. ### Competitiveness diagnostics and recommendations (Box 5 highlights) - Implicit subsidies keep domestic hydrocarbon prices well below international market prices, generating advantages but causing foregone revenue, increased domestic consumption, and smuggling. - Over 2005–10, Algerian unit labor costs increased by 50 percent, exceeding gains in OECD countries. - Starting a business is time-consuming and expensive; business taxes and administrative costs are among the most onerous in the region. - Recommendations to improve price competitiveness: - Anchor future wage increases (including minimum wage) to productivity improvements. - Streamline administrative procedures, improve one-stop shops, and reform the TAP business tax (replace with excises, notably on high-rent sectors). - Reduce export and import costs by lowering port and terminal fees and streamlining administrative procedures. - Attract more foreign investment and increase competition to develop the ICT sector and reduce costs. ### Labor market and female labor force participation (Box 6 highlights) - Female unemployment and participation: - Unemployment rate among women reached 17.2 percent in 2011 versus 8.4 percent for men. - Only 14 percent of working-age women participated in the labor market, compared to 72 percent of working-age men. - Under-employment: 21.5 percent of women worked less than 25 hours a week (compared to 6.5 percent of men); 60 percent of women were willing to work more hours. - Occupational distribution and informality: - More than 30 percent of working women have jobs in academics (compared to 6.6 percent of men). - Women account for about 42 percent of employment in support functions and intermediate occupations, but only 9.8 percent of management positions. - 30.8 percent of active women (and 48.9 percent of men) are not registered in the social security system. - Trends and policy implications: - Among 2006–10 graduates, women outnumbered men, particularly in higher education. - Over half of the active female population in 2011 was between 15 and 34 years old. - Constraints on female employment include low education (for some), care duties, lack of flexible working arrangements, and lack of preschool care. - Active labor market policies should include programs aimed at women to improve access to capital and employment. - Simulations suggest cutting by half the number of stay-at-home women would add about 4 million workers to the labor force; assuming gradual absorption over 10 years in the nonhydrocarbon sector, the impact on nonhydrocarbon potential growth would be about 0.3 percentage points per year. - Note: Employment data released in December 2013 indicate female unemployment continued to decline between 2011 and 2013 (by 0.9 points), while participation improved to 16.6 percent. *International Monetary Fund — Algeria staff report excerpts (content unit provided).* ### 24. Faster development of the financial sector is needed to support economic growth. Staff ### _cr1432 - 24. Faster development of the financial sector is needed to support economic growth. Staff ### Financial sector development — key findings and recommendations - Faster development of the financial sector is needed to support economic growth. Staff urged the authorities to heed the main recommendations of the recent FSAP mission, which identified priorities for financial sector development (Appendix III). - Establish conditions for healthy growth of credit to the private sector, notably to SMEs. - Speed up the development of credit bureaus and their extension to households. - Lift the ban on consumer credit; implement prudential measures designed to prevent the build-up of risks for households. - Encourage banking sector competition to provide incentives for banks to service SMEs and to diversify and expand the range of banking services. - Improve the insolvency regime and strengthen the collateral and guarantees regime. - Government withdrawal from housing purchase and lending programs would further benefit the expansion of housing finance. - Authorities’ reaction: - Expressed interest in options to contain the risks from consumer credit growth, and indicated their intention to partially lift the ban on consumer credit. - Authorities considered lack of competition in the banking sector was not a major hindrance to financial sector development. ### Microfinance - Microfinance programs are mostly government-operated and leave little room for the private sector. - Programs mentioned: ANGEM, ANSEJ and CNAC. - These programs have helped a large number of micro-entrepreneurs start businesses. - Recommendation: review programs to assess effectiveness and identify needs for adjustments, particularly with respect to NPLs. - Recommendation: introduce a framework to encourage private micro-finance. ### Capital markets and sovereign debt - Underdeveloped capital markets prevent large savings from being efficiently channeled to support economic growth. - Staff urged authorities to swiftly implement their decision to list a number of SOEs on the local stock exchange to jumpstart stock market development. - More active use of sovereign bond auctions and removal of existing disincentives to corporate securities issuance would support development of both primary and secondary bond markets. - Disincentives to private sector debt and equity issuance should be removed. ### AML/CFT and FATF gray list - The authorities should take the necessary steps to remove Algeria from the FATF's gray list. - In October 2013, the FATF identified Algeria as a “jurisdiction with strategic AML/CFT deficiencies not making sufficient progress” in addressing shortcomings in its framework for combating the financing of terrorism, and called upon its members to take into consideration the risks associated with these deficiencies. - Authorities have issued a decree freezing the assets of persons on the UN Security Council's list, and have begun the process of amending Article 87-bis of the Penal Code concerning the definition of terrorist acts. - Staff urged the authorities to step up the promulgation of this change in the law. ### Labor market reforms - Labor market reforms are necessary to address high unemployment rates among youth and women. - Employment rates remain low for youth and women despite their access to employment remaining a priority for the authorities. - Policies needed: - Promote private sector growth. - Enhance acquisition of relevant skills through development of an education for employment plan. - Reduce labor market rigidities, particularly in terms of employer contributions. - Complementary active labor market policies: provide incentives for employers to hire youth and women; support retraining of the unemployed; improve intermediation on the labor market; help these groups start their own businesses. - Authorities should review options for bolstering women's participation in the labor market given the high economic cost of low participation rates (Box 6). - These measures would contribute to consolidating progress made over the past decade in reducing inequality. ### Staff appraisal — macroeconomic and structural priorities (paragraphs 26–33) - Macro-financial stability and vulnerabilities - The economy stabilized in 2013 but long-term vulnerabilities are materializing. - Inflation has subsided following monetary tightening and fiscal consolidation. - External and fiscal buffers are large, and the banking sector is solvent and liquid. - Vulnerabilities: dependence on the hydrocarbon sector; declining hydrocarbon production and surging domestic consumption squeezing export volumes; risks from lower oil prices; insufficient economic diversification; lack of conditions for high-productivity, private sector-led growth. - Policy focus: consolidate macro-financial stability, better manage natural resources, undertake structural reforms to accelerate economic growth and job creation. - Monetary and fiscal policy mix - Recent surge in credit and planned increase in current spending in 2014 could revive inflationary pressures. - Recommendation: the BA should stand ready to further mop up excess liquidity and use interest rates more actively. - Recommendation: avoid new increases in current spending; Ministry of Finance should rely more on debt issuance and less on drawings from the FRR to finance the budget deficit. - Fiscal consolidation and public finances - Fiscal consolidation initiated in 2013 is welcome, but further efforts are needed. - Recommendations: - Contain the wage bill by freezing the size of the civil service. - Gradually phase out subsidies and replace them with a targeted cash-transfer system to protect the poor. - Stabilize transfers to public entities in real terms. - Reduce tax exemptions. - Preserve capital spending and enhance its efficiency and effectiveness. - To better manage hydrocarbon revenue volatility and ensure fiscal sustainability: - Adopt a full-fledged fiscal rule based on a five-year average, backward-looking oil price, combined with a limit on the structural primary balance. - Transform the oil fund into a sovereign wealth fund and set annual ceilings for drawings from the fund in the budget law. - Improve public financial management: establish a medium-term budget framework and sector performance-based budget programs; increase transparency of hydrocarbon revenue collection; develop an integrated financial management information system. - Hydrocarbon sector and external sustainability - Enhancing net hydrocarbon exports is critical for fiscal and external sustainability. - Increasing hydrocarbon production and extending the time horizon of reserves will require more investment. - Recommendations: - Relax FDI restrictions. - Improve the business environment. - Implement the national oil company’s investment plans without delay. - Phase out implicit subsidies to help contain domestic energy consumption and support exports. - Exchange rate and foreign exchange market - Staff estimates the dinar to be somewhat on the strong side, despite a sizeable depreciation of the currency in recent months. - Recommendations: - Continue to target the equilibrium real effective exchange rate to protect competitiveness of nonhydrocarbon exports. - BA should deepen the inter-bank foreign exchange market by relaxing repatriation and surrender obligations, and by reducing the de facto high reserve requirement rate on foreign currency. - Forcefully tackle the premium in the illegal parallel exchange market, which is detrimental to growth. - Increase the indicative foreign exchange ceilings for travelers to more realistic levels. - Financial sector reforms (summary) - Build on FSAP recommendations to preserve stability and foster development. - Prevent segmentation in the banking sector; speed up development of credit bureaus; revisit guarantee mechanisms; strengthen collateral and insolvency regimes. - Lift ban on consumer lending; provide more space for mortgage finance. - Capital market development: more sovereign debt issuance and listing of well-performing state-owned enterprises on the stock exchange. - Take immediate steps to address deficiencies in AML/CFT framework. - Structural reforms for growth and jobs - Accelerating economic growth and job creation will require wide-ranging structural reforms. - Necessary reforms: - Improve the business environment. - Enhance cost competitiveness. - Relax the restrictive FDI regime. - Deepen trade integration through WTO accession. - Increase labor market flexibility and ensure job seekers have the right skills. *Source: IMF staff report text provided in content unit _cr1432 - 24.* ### 34. It is proposed that the next Article IV consultation be held on the standard 12-month ### _cr1432 - 34. It is proposed that the next Article IV consultation be held on the standard 12-month ### Macroeconomic indicators and growth - Continued contraction in the hydrocarbon sector in 2013 weighed on overall growth. - The contribution of the public sector to nonhydrocarbon growth is expected to decline in 2013. - Hydrocarbon and nonhydrocarbon GDP (percent): - Hydrocarbon and Nonhydrocarbon Growth (Percent): 2008–2014 series shown on figure (no single aggregated value stated). - CPI inflation: - "CPI inflation slowed after peaking in the first months of 2012." - CPI Inflation (contribution in percent) series shown; figures labeled Jan-10 through Jul-13 (no single scalar value stated). - Real effective exchange rate: - "The real effective exchange rate depreciated in the last months of 2013, largely offsetting past appreciation." - Effective Exchange Rate (100 = January 2011; an increase refers to an appreciation) plotted (no single scalar value stated). - External sector: - "The current account is expected to weaken as hydrocarbon prices stabilize and imports pick up." - "Domestic hydrocarbon consumption continued to grow quickly, weighing on exports as production declined." - Current Account: Exports (US$ bn), Imports (US$ bn), Current account (RHS, % of GDP) series for 2009–2014 shown. ### Fiscal indicators and public finances - Fiscal stance and balances: - "Fiscal consolidation in 2013 will bring the overall balance close to equilibrium, but rising spending and stable hydrocarbon prices will lead to a small deficit in 2014." - "The NH balance is expected to improve in 2013, as current spending decline, but nonhydrocarbon revenue growth will remain lackluster." - Key fiscal shares and ratios (figures span 2009–2014 in charts and tables): - Current Spending Relative to Total Spending (Share of current spending to total spending, in percent) plotted for 2009–2014. - Current Spending and NH Revenue (Share of NH revenue to current spending, percent) plotted for 2009–2014. - Oil Fund (Stock, 2009–2014): DZD billion (LHS) and Percent of GDP (RHS) plotted. - Overall Fiscal Balance (In percent of GDP, 2009–2014): series includes Hydrocarbon revenue, Nonhydrocarbon revenue, Current spending, Capital spending, Overall fiscal balance. - Nonhydrocarbon Fiscal Balance (In percent of NHGDP, 2009–2014) plotted. - Change in the Fiscal Breakeven Price (Contribution in percent, 2009–2014) plotted with contributions from NH deficit, Share of government revenue, Export volume, Other. - Table 3: Summary of Central Government Operations, 2009–18 (selected figures) - Budget revenue and grants (in DZD billion): 2009: 3,676; 2010: 4,393; 2011: 5,790; 2012: 6,411; 2013: 6,409; 2014: 6,781; 2015: 7,027; 2016: 7,324; 2017: 7,720; 2018: 8,211. - Hydrocarbon revenue (in DZD billion): 2009: 2,413; 2010: 2,905; 2011: 3,980; 2012: 4,184; 2013: 3,989; 2014: 4,175; 2015: 4,190; 2016: 4,236; 2017: 4,328; 2018: 4,470. - Nonhydrocarbon revenue (in DZD billion): 2009: 1,263; 2010: 1,488; 2011: 1,810; 2012: 2,227; 2013: 2,420; 2014: 2,606; 2015: 2,837; 2016: 3,088; 2017: 3,391; 2018: 3,740. - Total expenditure (in DZD billion): 2009: 4,221; 2010: 4,440; 2011: 5,853; 2012: 7,058; 2013: 6,384; 2014: 7,084; 2015: 7,438; 2016: 7,797; 2017: 8,221; 2018: 8,667. - Budget balance (overall) (in DZD billion): 2009: -545; 2010: -47; 2011: -63; 2012: -647; 2013: 26; 2014: -303; 2015: -411; 2016: -473; 2017: -502; 2018: -456. - Oil stabilization fund (in DZD billion, memorandum): 2009: 4,316; 2010: 4,843; 2011: 5,382; 2012: 5,633; 2013: 6,601; 2014: 6,913; 2015: 7,512; 2016: 7,841; 2017: 8,181; 2018: 8,611. - Fiscal ratios (selected percent-of-GDP entries from Table 3): - Total revenue (percent of GDP): 2009: 36.9; 2010: 36.6; 2011: 39.9; 2012: 40.5; 2013: 38.4; 2014: 37.6; 2015: 36.5; 2016: 35.5; 2017: 34.8; 2018: 34.9. - Total expenditure (percent of GDP): 2009: 42.3; 2010: 37.9; 2011: 40.3; 2012: 44.5; 2013: 38.3; 2014: 39.3; 2015: 38.6; 2016: 37.8; 2017: 37.3; 2018: 36.8. - Budget balance (percent of GDP): 2009: -5.5; 2010: -0.4; 2011: -0.4; 2012: -4.1; 2013: 0.2; 2014: -1.7; 2015: -2.1; 2016: -2.3; 2017: -2.3; 2018: -1.9. - Nonhydrocarbon primary balance (in percent of NHGDP): 2009: -44.5; 2010: -39.5; 2011: -44.8; 2012: -46.4; 2013: -34.0; 2014: -34.9; 2015: -32.7; 2016: -30.8; 2017: -28.9; 2018: -27.2. ### Monetary indicators and financial sector - Bank of Algeria operations: - "The BA increased liquidity absorption and required reserves... but shied away from raising interest rates." - Repurchase facility, Marginal deposit facility, Required reserves (Total percent of M2, RHS) plotted. - Money and credit: - "It did however succeed in slowing money growth." - M2 Growth and Determinants (In percent) series plotted. - "The slowdown in NFA accumulation and increase in government savings offset growth in public sector credit." - Contribution to M2 Growth (In percent, 2010Q4-2013Q2) components shown: NFA, NCG, Credit to the public sector, Credit to the private sector, Other credit, OIN, Money. - Credit levels: - "Credit has remained low by international standards. Financial services are underdeveloped." - Credit to the Private Sector (In percent of GDP) comparison across countries for 2008–2012 plotted with Algeria among others. - Credit to the economy (percent change over 12-month period and levels in Table 6): Credit to the economy (billions of DZD, end-period): 2009: 3,187; 2010: 3,348; 2011: 3,800; 2012: 4,373; 2013: 5,666; projections through 2018 shown. - Table 6 monetary aggregates (billions of DZD, end-period): - Money and quasi-money (M2): 2009: 7,293; 2010: 8,281; 2011: 9,929; 2012: 11,013; 2013: 11,956. - Net foreign assets (billions of DZD): 2009: 10,758; 2010: 11,871; 2011: 13,795; 2012: 14,811; 2013: 16,339. - Interest rates: - Interest Rates (In percent, 2008Q4–2013Q2) series shown: Deposit auctions, Deposit facility, Discount rate, Average t-bill rate. - Financial soundness indicators (Table 7, 2009–12 summary): - Capital adequacy ratio: 2009: 26.15; 2010: 23.64; 2011: 23.67; 2012: 23.41. - Public Banks (2009–2012): 23.87; 21.70; 21.91; 21.55. - Private Banks (2009–2012): 35.16; 31.64; 31.16; 31.92. - NPLs/total loans: 2009: 21.14; 2010: 18.31; 2011: 14.45; 2012: 11.46. - Public Banks: 23.63; 20.47; 16.06; 12.35. - Private Banks: 3.84; 4.08; 4.00; 5.16. - Provisions/classified loans: 2009: 65.41; 2010: 76.48; 2011: 69.78; 2012: 69.54. - Return on equity: 2009: 26.01; 2010: 16.70; 2011: 24.67; 2012: 23.27. - Liquid assets/short-term debt: 2009: 114.52; 2010: 114.29; 2011: 103.73; 2012: 107.51. ### Structural issues and labor market - Business environment and competitiveness: - "The business environment remained weak, hampering private sector development." - "The cost of starting a business is relatively high." (Cost to Start a Business, 2012, percent of per capita income plotted; Algeria listed among peers.) - Global Competitiveness Index component scores plotted with Algeria versus Morocco, Egypt, Turkey (average). - Financial services and capital markets: - "Financial services are underdeveloped... and capital markets are nascent." - Market Capitalization (In percent of GDP, 2012) series plotted (values by country shown). - Financial Sector Development indicators (Availability, Affordability, Financing through local equity market, Ease of access to loans, Venture capital availability) ranking chart included. - Labor market and youth: - Employment Ratios (In percent of population age 15+), 1991–2013 series plotted for Algeria and peers. - "The employment ratio has increased but remains low by regional standard..." - Youth not in Education, Employment or Training (In percent of 15–24 year old population, 2011 and 2013): Men/Women/Total (2011 and 2013 values plotted; chart indicates decline but remains high). ### Tables and projections (selected macro and external projections) - Table 1. Selected Economic and Financial Indicators, 2009–18 (projections included) - Hydrocarbon production (in ton oil equivalent): 2009: 181; 2010: 183; 2011: 177; 2012: 173; 2013: 166; 2014: 169; 2015: 173; 2016: 178; 2017: 183; 2018: 188. - Hydrocarbon exports: Liquid petroleum exports (millions of barrels/day) series: 2009: 1.5; 2010: 1.4; 2011: 1.3; 2012: 1.3; 2013: 1.2; 2014: 1.2; 2015: 1.2; 2016: 1.2; 2017: 1.2; 2018: 1.2. - Natural gas exports (in billions of m3): 2009: 53.7; 2010: 56.1; 2011: 51.8; 2012: 51.7; 2013: 48.7; 2014: 49.0; 2015: 49.5; 2016: 50.2; 2017: 50.9; 2018: 51.7. - Crude oil export unit value (US$/bbl): 2009: 61.8; 2010: 80.1; 2011: 112.9; 2012: 110.8; 2013: 111.3; 2014: 107.9; 2015: 101.5; 2016: 97.2; 2017: 94.3; 2018: 92.3. - GDP at constant prices (annual percent change): 2009: 1.6; 2010: 3.6; 2011: 2.8; 2012: 3.3; 2013: 2.7; 2014: 4.3; 2015: 4.2; 2016: 4.3; 2017: 4.3; 2018: 4.3. - Consumer price index (period average): 2009: 5.7; 2010: 3.9; 2011: 4.5; 2012: 8.9; 2013: 4.5; 2014: 4.5; 2015: 4.0; 2016: 4.0; 2017: 4.0; 2018: 4.0. - Current account balance (in percent of GDP): 2009: 0.3; 2010: 7.5; 2011: 9.9; 2012: 6.0; 2013: 1.1; 2014: 0.3; 2015: -1.2; 2016: -2.1; 2017: -2.5; 2018: -2.5. - Gross official reserves (end of period, US$ billions): 2009: 149; 2010: 162; 2011: 182; 2012: 191; 2013: 196; 2014: 197; 2015: 195; 2016: 192; 2017: 188; 2018: 185. - Gross government debt (in percent of GDP): 2009: 9.7; 2010: 10.6; 2011: 9.4; 2012: 9.2; 2013: 9.4; 2014: 10.2; 2015: 8.5; 2016: 8.2; 2017: 8.1; 2018: 7.9. - Table 2. Balance of Payments, 2009–18 (selected entries) - Current account (percent of GDP): 2009: 0.4; 2010: 12.2; 2011: 19.8; 2012: 12.3; 2013: 2.3; 2014: 0.7; 2015: -2.7; 2016: -4.7; 2017: -5.7; 2018: -6.1. - Exports, f.o.b. (percent of GDP): 2009: 45.2; 2010: 57.1; 2011: 72.9; 2012: 71.7; 2013: 66.6; 2014: 65.0; 2015: 61.8; 2016: 60.0; 2017: 59.2; 2018: 59.0. - Imports, f.o.b. (percent of GDP): 2009: -37.4; 2010: -38.9; 2011: -44.9; 2012: -51.6; 2013: -54.1; 2014: -54.6; 2015: -55.4; 2016: -56.7; 2017: -58.0; 2018: -59.5. - Algerian crude oil price (US$/barrel) (weighted average of quarterly data): 2009: 61.8; 2010: 80.1; 2011: 112.9; 2012: 110.8; 2013: 111.3; 2014: 107.9; 2015: 101.5; 2016: 97.2; 2017: 94.3; 2018: 92.3. - Table 4. Statement of Central Government Operations, 2009–18 (in DZD billion, cash basis) provides detailed revenue, expenditure, net lending/borrowing, financing, and memorandum items (refer to table for full series). - Table 5. Balance Sheet for the Central Government (GFSM 2001), 2008–12 includes Net worth and Net Financial Worth series (in DZD billion) and memorandum ratios (Net worth in percent of GDP, Net financial worth in percent of GDP, Financial assets and Liabilities ratios). - Table 6. Monetary Survey, 2008–13 shows Net foreign assets, Net domestic assets, Domestic credit, Money and quasi-money (M2), Sonatrach deposits, M2 velocity, Credit to the economy/GDP, and related metrics. - Table 7. Financial Soundness Indicators, 2009–12 provides banking sector indicators including Capital adequacy ratio, NPLs/total loans, Provisions/classified loans, Return on equity, Liquid assets/short-term debt (all in percent). *Source: Algerian authorities; and IMF staff estimates and projections.* ### Appendix I. Real Effective Exchange Rate Analysis ### Appendix I. Real Effective Exchange Rate Analysis ### Overview - The real effective exchange rate (REER) appears to be on the strong side, despite recent efforts to offset the real appreciation incurred in 2012. ### REER movements (April 2011–2013) - The REER appreciated 8.3 percent between April 2011 and June 2013, mainly reflecting higher relative inflation in Algeria. - Inflation spiked to as high as 11.0 percent year-on-year in April 2012, coinciding with a sharp increase in the REER in the first half of 2012. - The REER reversed some gains in the middle months of 2012, resumed an appreciating trend toward the end of 2012, appreciated slightly in the first half of 2013, and then depreciated 6.2 percent in recent months (reflecting the decline in inflation and a depreciation of the NEER). ### CGER-type assessment: overall conclusion - Using three complementary methodologies developed by the Consultative Group on Exchange Rates (CGER), the results suggest that the dinar is somewhat on the strong side. ### Macroeconomic balance approach - Method: Calculates the difference between Algeria’s underlying current account and an estimated current account norm based on projected values of medium-term fundamentals; converts that gap into an exchange rate adjustment using an estimated elasticity of the current account with respect to the real exchange rate. - Estimated current account norm: 4.4 percent of GDP. - Projected current account (2018): -2.5 percent of GDP. - Implication: The gap between 4.4 percent and -2.5 percent suggests some overvaluation of the dinar. ### External sustainability approach - Method: Calculates the difference between the underlying current account balance and the balance that would stabilize net foreign assets (NFA) at a benchmark level; uses the same elasticity as in the macroeconomic balance approach. - NFA-stabilizing current account (to stabilize NFA-to-GDP ratio at its 2012 level of 93 percent): 5.1 percent of GDP. - Projected underlying current account (2018): -2.5 percent of GDP. - Implication: The difference implies the dinar is somewhat on the strong side. ### Equilibrium REER approach - Method: Directly estimates an equilibrium exchange rate as a function of medium-term fundamentals and computes the gap between estimated equilibrium and the current REER. - Finding: The REER in October 2013 was 3.0 percent above its estimated equilibrium value. *Source: IMF staff calculations, Appendix I. Real Effective Exchange Rate Analysis.* ### 7. The de facto exchange regime is classified as other managed arrangement with no ### 7. The de facto exchange regime is classified as other managed arrangement with no ### Exchange regime and capital account measures - De facto exchange regime: other managed arrangement with no preannounced path for the exchange rate. - Full surrender requirements: in effect on hydrocarbon export proceeds. - Limits on invisible transactions and current transfers: remained in place since Algeria accepted the obligations of Article VIII, sections 2(a), 3, and 4, in 1997; authorities describe these limits as indicative. - Inward direct investment: generally free of restrictions but a 49 percent foreign ownership limit was introduced in December 2009. - Controls: maintained on other capital account payments and transfers. ### Technical assistance and IMF engagement - Latest Article IV Consultation: - Discussions for the 2012 Article IV consultation held in Algiers during October 29—November 11, 2012. - Staff Report (IMF Country Report 13/47) discussed by the Executive Board on January 16, 2013 and published on February 2013. - Technical Assistance missions (selected): - FAD mission: May 2008 — tax administration. - MCM mission: May 2009 — strengthening banking supervision and regulation. - MCM mission: June 2009 — program for harmonizing financial sector infrastructure in the Maghreb. - MCM expert: December 2010 to December 2011 — long-term banking supervision TA. - FAD mission: October 2011 — tax administration. - STA mission: April 2012 — monetary and financial statistics and financial stability indicators. - MCM mission: September 2012 — banking supervision, macro-prudential policy and monetary policy. - FAD mission: September 2012 — public financial management. - FAD mission: March 2013 — expenditure management. - FAD mission: November 2013 — tax administration. - Financial Sector Assessment Program (FSAP): - Participated in 2003; Executive Board discussed the Financial System Stability Assessment on January 14, 2004 (IMF Country Report No. 04/138). - FSAP updated in 2007 and in 2013. - Resident Representative/Advisor: None. ### Relations with the World Bank Group and joint work program (JMAP) - Bank work program highlights (FY11-FY14): - Country Partnership Strategy FY11-FY14 — analytical and technical assistance activities on a reimbursable basis, no lending in line with government’s policy. - Sector work on: State-owned Banks for Ministry of Finance; Revising social sector strategy; Climate change; Integrated desert management; Support for rural renewal; Agricultural development; Improving business climate. - Technical assistance on: Credit Registry with Central Bank; Financial Crisis simulation (FIRST); RAMP; Social Programs Monitoring and Evaluation; Support to analysis of the Household Survey/poverty analysis; Agricultural Program; Competitiveness Poles; Agricultural Statistical Capacity; Algeria Telecom Strategic and Operational Support; Broadband Strategy; GEF grant for improved desert ecosystems and climate change resilience. - IMF work program in next 12 months (as listed): - 2013 Article IV Consultation. - Analytical work on: Monetary policy transmission channels in Algeria; Price competitiveness in Algeria; A fiscal rule for Algeria. - Staff visit: November 12-25, 2013. - 2014 Article IV consultation: April 2014. - Technical assistance missions: FAD: Tax policy; MCM: macroprudential supervision. - Mutual requests and data sharing: - Fund request to Bank: Developments on the subsidy reform; Sectoral analysis. - Bank request to Fund: Assessment of macroeconomic stance and prospects. - Data sharing: Semiannual (and on ad hoc basis if requested). ### Statistical issues and data adequacy for surveillance - Overall assessment: Data provision has some shortcomings, but is broadly adequate for surveillance. - National Accounts: - NSO compiling annual national accounts (ANA) at prior year prices following STA recommendations. - ANA broadly follow the 1993 SNA recommendations, but nonprofit institutions serving households are not taken into account. - Work ongoing to compile QNA. - Price statistics: Data are published with a delay of less than one month. - Government finance statistics: Key shortcomings: - Insufficient institutional coverage (coverage limited to Budgetary Central Government, including general budget, annexed budget, and special treasury accounts). - Classification problems. - Long lags for production of statistics. - Lack of reconciliation of financing with monetary accounts. - Underlying causes: lack of financial resources for compilation, insufficient interagency coordination, reluctance to publish provisional data due to concern about accuracy. - Monetary statistics: - Largely in line with the Monetary and Financial Statistics Manual, 2000 and the Compilation Guide, 2008. - Timeliness of reporting by state-owned commercial banks improved over the last two years; data on depository corporations and finance companies usually available within two to three months. - Reporting formats updated in 2009 and enforced in 2010; all respondents now provide requested data. - Data on insurance corporations are not yet collected; Banque d'Algérie launched a project in 2009 with IMF Statistics Department support. - Balance of payments: - Generally good quality. - International investment position data not available, mainly because of capacity issues in compiling FDI stocks. - Data Standards and Quality: - Algeria began participation in the General Data Dissemination System (GDDS) on April 21, 2009. - No data ROSC available. ### Common Indicators required for surveillance (As of December 20, 2013) - Exchange Rates: Date of latest observation 09/13; Date received 11/12/13; Frequency of Data D; Frequency of Reporting M; Frequency of publication W. - International Reserve Assets and Reserve Liabilities of the Monetary Authorities: 09/13; 11/12/13; D; M; M. - Reserve/Base Money: 09/13; 11/12/13; M; M; M. - Broad Money: 09/13; 11/12/13; M; M; M. - Central Bank Balance Sheet: 09/13; 11/12/13; M; M; A. - Consolidated Balance Sheet of the Banking System: 09/13; 11/12/13; M; M; A. - Interest Rates: 09/13; 11/12/13; M; M; M. - Consumer Price Index: 09/13; 11/12/13; M; M; M. - Revenue, Expenditure, Balance and Composition of Financing—Central Government: 07/13; 11/12/13; M; I; A. - Stocks of Central Government and Central Government-Guaranteed Debt: 06/13; 11/12/13; Q; I; A. - External Current Account Balance: 09/13; 11/12/13; Q; Q; A. - Exports and Imports of Goods and Services: 09/13; 11/12/13; Q; Q; A. - GDP/GNP: 2013; 11/12/13; A; A; A. - Gross External Debt: 06/13; 11/12/13; A; A; A. - International Investment Position: ...; ...; PA; PA; PA. ### Press Release: IMF Executive Board Concludes 2013 Article IV Consultation with Algeria (Press Release No. 14/28, January 28, 2014) - Conclusion: Executive Board concluded the Article IV consultation with Algeria without a meeting on January 27, 2014. - 2013 economic performance and outlook: - Inflation: reached 8.9 percent in 2013; decelerated significantly in 2013. - Real GDP growth: expected to slow to 2.7 percent in 2013 from 3.3 percent in 2012. - Current account surplus: expected to narrow to 1.1 percent of GDP in 2013. - Risks: tilted to the downside—vulnerability to prolonged decline in oil prices, worsening global environment, further pressure on hydrocarbon rent, intensification of regional tensions. - Concerns: surge in credit and planned public sector wage increases could revive inflationary pressures; fiscal policy is de facto pro-cyclical; non-hydrocarbon primary deficit well above long-term sustainable level implying negative net public savings in the long run; shortcomings in competitiveness and productivity; growth below potential and insufficient to significantly reduce unemployment, especially for youth and women; financial sector underdeveloped constraining access to financing for SMEs. - Executive Board assessment and policy advice: - Monetary policy: Banque d’Algérie should be ready to increase liquidity absorption and raise interest rates if needed to contain inflationary pressures from credit surge and planned spending. - Fiscal policy and public finances: - Continue fiscal consolidation initiated in 2013 to ensure fiscal sustainability. - Contain the wage bill. - Gradually phase out subsidies while establishing a targeted cash-transfer system to protect the poor. - Stabilize transfers to public entities in real terms. - Reduce tax exemptions. - Preserve capital spending and enhance its efficiency and effectiveness to protect growth. - Fiscal rule and oil fund: - Adopt a full-fledged fiscal rule to manage hydrocarbon revenue volatility and attain fiscal sustainability. - Fiscal rule recommendation: use a backward-looking average oil price and set a limit on the structural primary balance consistent with long-run fiscal sustainability. - Transform the oil fund into a sovereign wealth fund and establish annual ceilings on drawings to preserve financial savings. - Increase transparency of hydrocarbon revenue collection and develop an integrated financial management information system. - Hydrocarbon sector and external sustainability: - Increase hydrocarbon production and extend time horizon of reserves. - Improve business environment and attract FDI in the hydrocarbon sector. - Swiftly implement national oil company’s investment plans. - Phase out implicit subsidies to contain domestic energy consumption and support exports. - Exchange rate and external sector policies: - Continue targeting the equilibrium real effective exchange rate to protect competitiveness of non-hydrocarbon exports. - Tackle the premium in the illegal parallel exchange market. - Increase indicative foreign exchange ceilings for travelers to more realistic levels. - Financial sector development: - Foster competition in the banking sector. - Speed up development of credit bureaus. - Revisit guarantee mechanisms. - Strengthen collateral and insolvency regimes. - Lift the ban on consumer lending and provide more space for mortgage finance. - Issue more sovereign debt and list well-performing state-owned enterprises on the stock exchange. - Remove disincentives to private sector debt and equity issuance. - Address deficiencies in the Anti-Money Laundering/Combating the Financing of Terrorism framework. - Structural reforms for growth and jobs: - Improve business environment, enhance cost competitiveness, relax restrictive FDI regime. - Deepen trade integration through WTO accession, trade facilitation, and export promotion. - Increase labor market flexibility and ensure job seekers have appropriate skills. ### Algeria: Selected Macroeconomic Indicators Baseline Scenario, 2012–14 (staff projections and selected observed values) - Output: - Real GDP: 2012 3.3; 2013 2.7; 2014 4.3. - Nonhydrocarbon real GDP: 2012 7.1; 2013 5.9; 2014 5.3. - Employment: - Unemployment rate (in percent): 2012 11.0; 2013 9.8; 2014 ... - Prices: - Consumer prices (period average): 2012 8.9; 2013 4.5; 2014 4.5. - Public finances (In percent of GDP unless otherwise indicated): - Revenue: 2012 40.5; 2013 38.4; 2014 37.6. - Hydrocarbon revenue: 2012 26.4; 2013 23.9; 2014 23.2. - Expenditure and net lending: 2012 44.5; 2013 38.7; 2014 39.7. - Current: 2012 30.2; 2013 26.0; 2014 26.1. - Capital: 2012 14.4; 2013 12.3; 2014 13.2. - Budget balance: 2012 -4.0; 2013 -0.2; 2014 -2.1. - Nonhydrocarbon primary balance (in percent of NHGDP): 2012 -46.4; 2013 -34.0; 2014 -34.9. - Total government debt: 2012 9.2; 2013 9.4; 2014 10.2. - Monetary sector (Annual percentage change, unless otherwise indicated): - Credit to the economy 1/: 2012 15.1; 2013 29.6; 2014 10.3. - Broad money: 2012 10.9; 2013 8.6; 2014 10.2. - Velocity of broad money (level): 2012 1.4; 2013 1.4; 2014 1.4. - Three-month treasury bill rate (end of period, in percent): 2012 0.4; 2013 ...; 2014 .... - (Footnote) 1/ credit to the private sector and public enterprises. - Balance of Payments (In percent of GDP, unless otherwise indicated): - Hydrocarbon exports of goods (in US$, percentage change): 2012 -1.5; 2013 -7.5; 2014 -2.7. - Hydrocarbon exports of goods (in percent of total exports of goods): 2012 98.4; 2013 98.1; 2014 97.8. - Imports of goods (in US$, percentage change): 2012 14.9; 2013 4.9; 2014 0.9. - Merchandise trade balance: 2012 9.9; 2013 6.0; 2014 4.9. - Current account: 2012 6.0; 2013 1.1; 2014 0.3. - Foreign direct investment: 2012 0.7; 2013 0.6; 2014 0.6. - Total external debt: 2012 1.9; 2013 1.5; 2014 1.3. - Gross reserves (in billions of U.S. dollars): 2012 190.7; 2013 196.0; 2014 196.8. - In months of next year's imports of goods and services: 2012 34.9; 2013 35.6; 2014 35.2. - Exchange rate: - Real effective exchange rate (2005 = 100): 2012 107.2; 2013 ...; 2014 .... - Local currency per U.S. dollar (period average): 2012 77.6; 2013 ...; 2014 .... - Oil and gas sector: - Total exports of oil and gas products (in billions of U.S. dollars): 2012 70.6; 2013 65.3; 2014 63.5. - Hydrocarbon production (in mn TOE): 2012 173.0; 2013 166.0; 2014 169.2. - Average crude oil export price (in U.S. dollar/barrel): 2012 110.8; 2013 111.3; 2014 107.9. - Average hydrocarbon export price (change, in percent): 2012 2.4; 2013 -0.1; 2014 -3.0. - Investment and Saving (In percent of GDP): - Gross capital formation: 2012 40.6; 2013 42.6; 2014 43.1. - Of which: Nongovernment: 2012 26.3; 2013 30.2; 2014 29.9. - Gross national savings: 2012 46.6; 2013 43.6; 2014 43.4. - Of which: Nongovernment: 2012 36.3; 2013 31.6; 2014 32.3. - Memorandum Items: - Nominal GDP (in billions of U.S. dollars): 2012 204; 2013 209; 2014 214. *Source: Algerian authorities; and Fund staff estimates and projections (as presented in the supplied content).* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr1432.pdf_