## _cr14341

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### Introduction and main vulnerabilities
- Economic activity expected to pick up in 2014: hydrocarbon sector modest expansion, nonhydrocarbon growth relatively robust.
- Inflation fell below the central bank’s target; new pressures could emerge.
- External and fiscal buffers remain large; financial sector generally healthy but underdeveloped.
- Long-standing vulnerabilities:
  - Current account will record a deficit for the first time in nearly 15 years.
  - Fiscal deficit projected to widen after some consolidation in 2013.
  - Economy highly dependent on hydrocarbon sector and public spending.
  - Unemployment stabilized at high levels, especially among youth and women.

### Recent economic developments (selected indicators and trends)
- Growth and inflation
  - Real GDP grew by 2.8 percent in 2013, down from 3.3 percent in 2012.
  - Hydrocarbon production contracted by 5.5 percent in 2013.
  - Nonhydrocarbon sector growth remained at 7.1 percent in 2013.
  - Inflation declined from 8.9 percent in 2012 to 3.3 percent in 2013; average inflation reached 1.5 percent in August 2014 while year-on-year was 2.7 percent.
- External position
  - Current account surplus narrowed to 0.4 percent of GDP in 2013 from 5.9 percent in 2012.
  - Hydrocarbon exports fell more than 10 percent in 2013; imports expanded by nearly 7 percent in 2013.
  - Foreign direct investment inflows less than 1 percent of GDP.
  - Foreign exchange reserves: US$191 billion to US$194 billion (increase mainly valuation effects).
  - External debt: 1.6 percent of GDP at end-2013.
- Real effective exchange rate (REER)
  - REER depreciated by 1.7 percent in 2013 and weakened further by 0.9 percent over the first seven months of 2014; nominal effective depreciation 0.3 percent.
  - REER remains on the strong side, hurting competitiveness.
- Fiscal
  - Budget deficit: -1.5 percent of GDP in 2013 (from -5.0 percent in 2012).
  - Oil stabilization fund savings: 31.6 percent of GDP at end-2013.
  - Consolidation not continued in 2014: H1 2014 capital expenditure increased by nearly 50 percent and current expenditure by 10.4 percent; revenues grew by 4.4 percent while hydrocarbon revenues declined by 2.4 percent.
- Monetary and financial
  - Credit to the economy expanded by nearly 20 percent in 2013; credit reached 45.2 percent of nonhydrocarbon GDP in 2013.
  - Broad money growth: 8.4 percent in 2013; broad money grew by 7.7 percent in H1 2014.
  - Excess liquidity rebounded in 2014, increasing by 18 percent in Q2 2014 vs Q2 2013.
  - Capital adequacy ratio: 21.5 percent in 2013 (down from 23.4 percent in 2012).
  - NPLs improved from 11.5 percent to 10.6 percent in 2013; nearly 70 percent of NPLs fully provisioned.
- Employment
  - Overall unemployment rate: 9.8 percent in 2013.
  - Youth unemployment: 24.8 percent.
  - Female unemployment: 14.2 percent in Q1 2014.
  - Employment volume fell by 2.1 percent in Q1 2014 while participation rate declined.

### Outlook and medium-term projections (selected)
- Real GDP growth
  - 2014: 4.0 percent; hydrocarbon sector: 0.4 percent; nonhydrocarbon: 5.5 percent.
  - Projection series (GDP at constant prices): 2012: 3.3; 2013: 2.8; 2014: 4.0; 2015: 3.9; 2016: 4.1; 2017: 4.0; 2018: 4.0; 2019: 4.0.
- Inflation
  - Stabilize close to 4 percent target of the central bank.
  - CPI (period average): 2012: 8.9; 2013: 3.3; 2014: 3.0; 2015–2019: 4.0 each year.
- External sector
  - Current account: projected deficit of -4.0 percent of GDP in 2014 (first deficit since 1999).
  - Foreign exchange reserves projected to decrease by US$6 billion in 2014 to US$188 billion at end-2014.
  - Reserves (US$ billion): 2012: 190.7; 2013: 194.0; 2014: 187.6; 2015: 172.6; declines continuing through 2019 to 110.4.
  - Current account balance (percent of GDP) series: 2012: 5.9; 2013: 0.4; 2014: -4.0; 2015: -7.7; 2016: -8.2; 2017: -7.8; 2018: -7.5; 2019: -7.5.
- Fiscal
  - Fiscal deficit expected to widen to -7.0 percent of GDP in 2014; series for overall budget balance (percent of GDP): 2012: -5.0; 2013: -1.5; 2014: -7.0; 2015: -9.5; 2016: -8.2; 2017: -7.1; 2018: -6.6; 2019: -6.1.
  - FRR projected to decline from 31.6 percent to 27.1 percent of GDP in 2014; oil stabilization fund stock (DZD billions): 2012: 5,389; 2013: 5,239; 2014: 4,774; in percent of GDP: 2012: 33.4; 2013: 31.6; 2014: 27.1.
- Monetary sector projections
  - Broad money should increase by 14.5 percent in 2014.
  - Credit to the economy projected to grow by +21.7 percent in 2014.
  - Net foreign assets growth limited to 0.5 percent in 2014.

### Risks and vulnerabilities
- Overall tilt: Risks mainly to the downside.
- External risks
  - Slower growth in Europe and emerging markets or sustained decline in hydrocarbon prices would worsen external and fiscal balances.
  - Geopolitical risks in Ukraine or the Middle East could affect demand or increase risk premia; possible upside if oil/gas prices or demand for Algerian gas increased.
- Domestic risks
  - Social pressures complicate fiscal consolidation.
  - Further demands on hydrocarbon rent and political uncertainty could slow reforms.
- Financial and market risks (Box 1)
  - Low exposure to global financial market volatility due to closed capital account; main channel is returns on sizable reserves invested in high-grade sovereign bonds.
  - Policy responses recommended include: strengthen prudential framework; enhance reserve management; consider a full-fledged fiscal rule with enforcement; diversify exports and markets; prudent financial liberalization; increase attractiveness for FDI by adjusting minority rule at least in non-strategic sectors; prioritize and sequence politically feasible reforms.
- Spillover risks (Box 2)
  - Limited positive external spillovers due to small share in partners’ exports; a negative shock to gas production could tighten European gas markets (Algeria supplies more than 10 percent of Europe’s imports).
  - Scenario: a decline in oil prices by one standard deviation from 2015 onward would lead to permanently negative current account, decline in reserves, lingering fiscal deficits, and erosion of the oil fund (IMF staff calculations).

### Policy recommendations (high-level)
- Fiscal
  - Pursue determined fiscal consolidation; adopt a full-fledged fiscal rule with credible enforcement.
  - Increase nonhydrocarbon revenue mobilization and contain current spending; phase out subsidies and replace with targeted cash transfers.
  - Suggested fiscal-rule elements: realistic reference price (e.g., a 5- or 10-year backward-looking moving average); floor on structural primary balance; cap on drawings from the FRR.
  - Consider converting FRR into a sovereign wealth fund invested abroad (authorities reluctant).
- Monetary and liquidity management
  - Maintain prudent monetary stance; absorb excess liquidity by auctioning central bank bills; increase sovereign issuance of Treasury bills.
  - Use interest rates more actively: narrow the interest rate corridor; consider easing discount rate if inflation stays low; hike overnight and repo rates if inflation picks up.
- Exchange rate and external competitiveness
  - Avoid REER deviation from equilibrium; diversify foreign exchange supply by relaxing surrender requirements and lowering de facto reserve requirement ratio on foreign currency deposits.
  - Reduce parallel market premium (premium about 40 percent); raise indicative FX allocation ceilings to realistic levels; prepare for gradual, sequenced capital account liberalization.
- Financial sector
  - Strengthen prudential framework; complete shift to risk-based supervision; establish bank resolution regime and crisis management framework.
  - Encourage banks to write off old fully provisioned NPLs and consider asset management company transfer.
  - Develop domestic capital markets: increase sovereign bond issuance; remove disincentives to corporate securities issuance; open up capital of some large SOEs.
- Structural and social policies
  - Diversify exports and markets; attract FDI, particularly in energy for exploration and production.
  - Improve public investment efficiency and adopt integrated public financial management, MTBF, and performance-based budgeting.
  - Improve business climate: streamline administrative procedures, develop e-government, strengthen anti-corruption.
  - Labor market reforms: review regulations, strengthen training and education, support female labor participation (transport, child care, flexible work), evaluate active labor market programs.

### Consolidation strategy and reform yields (estimates in percent of nonhydrocarbon GDP)
- Baseline medium-term consolidation assumed: 10.3 percent of nonhydrocarbon GDP.
- Additional consolidation from full implementation: nearly 7.9 percent of nonhydrocarbon GDP.
- Recommended reform yields (Percent of nonhydrocarbon GDP):
  - Increase nonhydrocarbon revenues: Baseline 1.0; Additional 2.3
  - Limit current spending and preserve capital spending: Baseline 8.7; Additional -
  - Gradually phase out subsidies: Baseline 0.6; Additional 5.6
  - Total: Baseline 10.3; Additional 7.9

### External sector assessment (Appendix I) — exchange rate findings
- Hydrocarbon exports: 98 percent of merchandise exports in 2013.
- EBA-lite numerical findings:
  - Current account-actual: 1.1%
  - Current account-fitted: 4.9%
  - Policy gap: 1.1%
  - Current account-norm: 3.8%
  - Current account-gap: -2.7%
  - Elasticity of CA to REER: -0.22
  - Real exchange rate gap: 12.6%
- Equilibrium REER methodology (2014): REER overvalued by about 3.4 percent in 2014 and by over 10 percent compared to medium-term equilibrium.
- Both methodologies indicate the REER is on the strong side.

### External debt and financing indicators (selected projections and assumptions)
- Gross official reserves (US$ billion): 2012: 190.7; 2013: 194.0; 2014: 187.6; 2015: 172.6; 2016: 157.1; 2017: 142.3; 2018: 126.9; 2019: 110.4.
- Current account (US$ billion): 2012: 12.3; 2013: 0.8; 2014: -8.3; 2015: -16.0; 2016: -17.9; 2017: -17.5; 2018: -18.0; 2019: -19.2.
- External debt (percent of GDP) baseline series (selected): 2012: 4.1; 2013: 3.5; 2014: 2.2; 2015: 1.8; 2016: 1.6; 2017: 1.8; 2018: 1.4; 2019: 1.1 (Appendix V tables provide detailed dynamics and stress tests).
- Gross external financing need (US$ billion): 2012: 1.3; 2013: -10.3; 2014: -16.9; 2015: -10.3; projections thereafter show positive needs rising through the medium term.

### Implementation status and authorities’ responses (Box 3 summary)
- Authorities generally agree with staff recommendations; implementation delayed by slow decision-making.
- Progress: prudent monetary policy, fiscal consolidation reduced inflation; MTBF progress; actions following 2013 FSAP.
- Little or no progress: Relaxation of restrictions on FDI; opening SOEs’ capital (on hold); phasing-out implicit subsidies (not implemented; cost disclosed in 2014 budget law; to be published in 2015 budget law).
- Implementation status headlines: Strengthen macrostability: Partial progress; Ensure external and fiscal sustainability: Partial progress; Spur private-sector led inclusive growth: Partial progress; Develop financial sector: Partial progress; Improve business environment: Limited progress; Increase labor market flexibility: No progress.

### Concluding appraisal (staff view)
- Longstanding vulnerabilities and the outlook of declining hydrocarbon revenues make current policies unsustainable.
- Urgent need for ambitious and sustained fiscal consolidation, a credible fiscal rule, exchange rate alignment with fundamentals, export diversification, improved public investment efficiency, and structural reforms to foster private-sector-led, job-creating growth.

*International Monetary Fund staff report (Algeria, 2014).*

### 2014. The staff team comprised Mr. Zeidane (head), Ms. Lahreche,

### _cr14341 - 2014. The staff team comprised Mr. Zeidane (head), Ms. Lahreche,

### INTRODUCTION
- Economic activity is expected to pick up in 2014, with the hydrocarbon sector expected to expand modestly while nonhydrocarbon growth remains relatively robust.
- Inflation has fallen below the central bank’s target, aided by tighter monetary policy, though new pressures could emerge.
- External and fiscal buffers remain large; the financial sector is generally healthy but underdeveloped.
- Long-standing vulnerabilities: for the first time in nearly 15 years the current account will record a deficit; fiscal deficit projected to widen after some consolidation in 2013; economy highly dependent on hydrocarbon sector and public spending; unemployment stabilized at high levels, especially among youth and women.

### RECENT ECONOMIC DEVELOPMENTS

- Growth and inflation
  - Real GDP grew by 2.8 percent in 2013, down from 3.3 percent in 2012.
  - Hydrocarbon production contracted by 5.5 percent in 2013—the eighth consecutive year of decline.
  - Nonhydrocarbon sector growth remained at 7.1 percent.
  - Inflation declined from 8.9 percent in 2012 to 3.3 percent in 2013.
  - Average inflation continued to decline in 2014, reaching 1.5 percent in August, but year-on-year was 2.7 percent.

- External position
  - Current account surplus narrowed to 0.4 percent of GDP in 2013 from 5.9 percent in 2012.
  - Hydrocarbon exports fell more than 10 percent in 2013.
  - Imports expanded by nearly 7 percent in 2013.
  - Foreign direct investment inflows remained weak, at less than 1 percent of GDP.
  - Foreign exchange reserves increased slightly from US$191 billion to US$194 billion (mainly valuation effects).
  - External debt stood at 1.6 percent of GDP at end-2013.

- Real effective exchange rate (REER)
  - REER depreciated by 1.7 percent in 2013 and weakened further by 0.9 percent over the first seven months of 2014.
  - Nominal effective depreciation was 0.3 percent.
  - REER remains on the strong side, hurting competitiveness.

- Fiscal
  - Budget deficit fell to 1.5 percent of GDP in 2013 from 5.0 percent in 2012.
  - Savings in the oil stabilization fund stood at 31.6 percent of GDP at end-2013.
  - Consolidation not continued in 2014: in H1 2014 capital expenditure increased by nearly 50 percent and current expenditure by 10.4 percent; revenues grew by 4.4 percent while hydrocarbon revenues declined by 2.4 percent.

- Monetary
  - Credit to the economy expanded by nearly 20 percent in 2013.
  - Broad money growth slowed to 8.4 percent in 2013 from 10.9 percent in 2012.
  - Excess liquidity rebounded in 2014, increasing by 18 percent in Q2 2014 compared to Q2 2013.
  - Broad money grew by 7.7 percent in the first half of 2014, driven by credit growth and a 10 percent decrease in government deposits at the central bank.

- Financial sector
  - Overall capital adequacy ratio was 21.5 percent in 2013, down from 23.4 percent in 2012.
  - Nonperforming loans (NPLs) improved from 11.5 percent to 10.6 percent in 2013; nearly 70 percent of NPLs are fully provisioned.
  - Credit to the economy reached 45.2 percent of nonhydrocarbon GDP in 2013, up from 41.3 percent in 2012.
  - Financial markets are underdeveloped: one private company listed on the stock exchange in 2013; capitalization at 0.1 percent of GDP; outstanding private sector bonds continued to decline.

- Employment
  - Overall unemployment rate declined to 9.8 percent in 2013 following a slight uptick in 2012.
  - Unemployment remained stable in Q1 2014; employment volume fell by 2.1 percent while participation rate declined.
  - Youth unemployment: 24.8 percent.
  - Female unemployment: 14.2 percent in Q1 2014.

### OUTLOOK (projections and key medium-term patterns)
- Real GDP growth
  - Real GDP growth is expected to increase to 4.0 percent in 2014.
  - Hydrocarbon sector growth expected at 0.4 percent in 2014.
  - Nonhydrocarbon growth expected to slow to 5.5 percent in 2014.

- Inflation
  - Inflation should stabilize close to the 4 percent target of the central bank.

- Current account and reserves
  - Current account is projected to record a deficit of -4.0 percent of GDP in 2014 (first deficit since 1999).
  - Foreign exchange reserves projected to decrease by US$6 billion in 2014, reaching US$188 billion at end-2014.
  - Over the medium term, import coverage projected to fall to 17 months.

- Fiscal
  - Fiscal deficit expected to widen to 7.0 percent of GDP in 2014.
  - FRR (Fonds de Régulation des Recettes) projected to decline from 31.6 percent to 27.1 percent of GDP.
  - Fiscal deficits expected to persist over the medium term; fiscal breakeven prices expected to remain above projected oil prices.
  - Nonhydrocarbon deficit expected to improve, aided by improved nonhydrocarbon revenue and contained current spending.

- Monetary sector projections
  - Broad money should increase by 14.5 percent in 2014.
  - Credit to the economy projected to grow by +21.7 percent in 2014.
  - Net foreign assets growth limited to 0.5 percent in 2014.
  - Over the medium term, slower credit growth, increased domestic government issuance, and a decline in net foreign assets expected to moderate money supply growth.

### RISKS AND VULNERABILITIES
- Overall tilt: Risks mainly tilted to the downside.
- External risks
  - Slower growth in Europe and emerging markets or a sustained decline in hydrocarbon prices would worsen external and fiscal balances.
  - Geopolitical risks in Ukraine or the Middle East could negatively affect demand or increase risk premia; could be upside if oil/gas prices or demand for Algerian gas increased.
- Domestic risks
  - Social pressures complicate fiscal consolidation and pose a threat to fiscal sustainability.
  - Further demands on hydrocarbon rent and domestic political uncertainty could slow reforms and worsen fiscal balances.
- Financial and market risks (Box 1 summary)
  - Low exposure to global financial market volatility due to closed capital account; main channel is returns on sizable reserves invested in high-grade sovereign bonds.
  - Policy responses recommended: strengthen prudential framework; enhance reserve management; consider full-fledged fiscal rule with enforcement; diversify exports and markets; prudent financial liberalization; increase attractiveness for FDI by adjusting minority rule at least in non-strategic sectors; prioritize and sequence politically feasible reforms.
- Spillover risks (Box 2 summary)
  - Algeria’s external spillover potential is limited due to small share in partners’ exports and well-supplied oil markets.
  - A negative shock to gas production could tighten European gas markets (Algeria supplies more than 10 percent of Europe’s imports).
  - Export partner composition is shifting (e.g., redirection from United States toward Asia/China), creating both diversification benefits and exposure to new risks (slowdown in China).
  - Scenario: a decline in oil prices by one standard deviation from 2015 onward would lead to a permanently negative current account, a decline in reserves, lingering fiscal deficits, and erosion of the oil fund (IMF staff calculations illustrated in figures).

### POLICY RESPONSES HIGHLIGHTED
- Fiscal
  - Pursue fiscal consolidation; implement a full-fledged fiscal rule with credible enforcement to shield from hydrocarbon shocks.
  - Improve nonhydrocarbon revenue mobilization and contain current spending; address persistence of fiscal deficits and high fiscal breakeven prices.
- External and competitiveness
  - Diversify hydrocarbon export markets and develop nonhydrocarbon exports; align real exchange rate for competitiveness.
  - Strengthen reserve management and consider a sovereign wealth fund to increase returns.
- Financial sector and markets
  - Strengthen prudential framework and coordination with parent bank supervisors; support gradual and prudent financial liberalization.
  - Develop domestic capital markets and increase domestic issuance to reduce reliance on drawing down central bank deposits.
- Social and structural policies
  - Address social demands via effective cash transfer systems targeting the most vulnerable.
  - Improve labor market effectiveness and support private-sector led diversification.
  - Prioritize reforms that yield rapid improvements with limited political cost.

*International Monetary Fund staff report (Algeria, 2014).*

### 12.      The main challenges for Algeria are to consolidate long-term macroeconomic stability

### 12.      The main challenges for Algeria are to consolidate long-term macroeconomic stability

### Key challenges and integrated strategy
- Consolidate long-term macroeconomic stability and promote economic diversification and job creation.
- An integrated strategy should:
  - Support both stability and competitiveness of the economy.
  - Use public investment and structural reforms to foster private investment.
  - Implement openness and competitiveness policies to prop up exports.
  - Improve labor market functioning, strengthen institutions, and better match jobs and skills to substantially reduce unemployment.

### Box 3. Authorities’ Response to Past IMF Policy Recommendations (summary of implementation status)
- Authorities generally agree with staff recommendations, but implementation is delayed by slow decision-making.
- Progress recorded:
  - Macroeconomic management: prudent monetary policy and fiscal consolidation reduced inflation below the central bank target.
  - Technical measures: MTBF progress and actions following the 2013 FSAP.
- Measures on which little or no progress was made (require stronger political commitment or reduce State control):
  - Relaxation of restrictions on FDI: No progress.
  - Opening SOEs’ capital: On hold.
  - Phasing-out implicit subsidies: Not implemented (cost disclosed in 2014 budget law; to be published in 2015 budget law).
- Implementation status table highlights (headlines only):
  - Strengthen macrostability: Partial progress.
  - Ensure external and fiscal sustainability: Partial progress.
  - Spur private-sector led, inclusive growth: Partial progress.
  - Develop the financial sector: Partial progress (credit registry installation; FSAP recommendation progress; 2015 budget law lifts the ban on consumer lending; listing of SOEs to be brought to the stock market published).
  - Improve the business environment: Limited progress.
  - Increase labor market flexibility and improve jobs/skills match: No progress (but active labor market policies supported jobs creation for higher-education population in 2013 and 2014).

*Implementation Status of the 2013 Article IV Recommendations*

### THEME 1. CONSOLIDATING MACROECONOMIC AND FINANCIAL STABILITY

- Current fiscal stance:
  - Characterized as unsustainable and procyclical; vulnerable to oil price volatility.
  - Staff recommendation: adopt a full-fledged fiscal rule to reduce vulnerability, impose spending discipline, and ensure long-term fiscal sustainability.
  - Suggested fiscal rule elements:
    - Realistic reference price (e.g., a 5- or 10-year backward-looking moving average).
    - A floor on the structural primary balance.
    - A cap on drawings from the FRR.
  - Recommendation to convert the FRR into a sovereign wealth fund invested abroad; managed by the Bank of Algeria (BA) with an investment policy defined by the Minister of Finance and adhering to international best practices.
  - Authorities are reluctant to convert the FRR and prefer existing arrangement (FRR counterpart as subset of international reserves managed by the central bank).

- Fiscal consolidation needs and recommended reforms:
  - Determined and consistent fiscal consolidation beyond the limited 2013 adjustment is needed immediately.
  - Staff estimates and reform yields (percent of nonhydrocarbon GDP):
    - Baseline scenario assumed fiscal consolidation equal to 10.3 percent of nonhydrocarbon GDP over the medium term (partial implementation of staff’s recommendations).
    - Additional consolidation from full implementation would be nearly 8 percent of nonhydrocarbon GDP.
  - Recommended fiscal reforms and estimated yields over the medium term (Percent of nonhydrocarbon GDP):
    - Increase nonhydrocarbon revenues: Baseline 1.0; Additional 2.3
    - Limit current spending and preserve capital spending: Baseline 8.7; Additional -
    - Gradually phase out subsidies: Baseline 0.6; Additional 5.6
    - Total: Baseline 10.3; Additional 7.9
  - Specific policy measures:
    - Increase nonhydrocarbon revenues: tax potential in 2013 estimated 3.3 percentage points of nonhydrocarbon GDP higher than actual collected tax revenues; broaden the tax base; strengthen tax administration; eliminate or reduce tax exemptions; replace distortive turnover tax with well-targeted excise; overhaul property tax. Authorities cautious about eliminating exemptions and introducing new taxes without broader consensus.
    - Limit current spending while preserving capital spending: current spending projected to reach 36.2 percent of nonhydrocarbon GDP in 2014; contain wage bill by stabilizing civil service size and limiting wage increases to productivity gains; cap growth of current transfers in real terms; preserve capital spending in real terms.
    - Phase out explicit and implicit subsidies and develop targeted cash transfers: total subsidies amounted to 18 percent of GDP in 2012, implicit hydrocarbon subsidies 10.9 percent of GDP; phase out implicit subsidies, account for remaining implicit subsidies in the budget; accompany reform with targeted cash transfers. Authorities disclosed cost of subsidies in 2014 and 2015 budget laws but see major reform challenges.

- Public financial management:
  - Need to modernize PFM; MTBF and performance-based budgeting scheduled for trial with the 2016 budget law.
  - A revised organic budget law ideally adopted in first quarter of 2015 to support reform.
  - Progress in integrated PFM system critical; staff advised detailed publication of hydrocarbon revenues in a format similar to EITI.

- Monetary policy:
  - Maintain a prudent stance. Inflation: fell to 1.5 percent on average in August; year-on-year inflation reached 2.7 percent in August with an upward trend since October 2013.
  - Risks: strong credit growth, surge in capital spending in H1 2014, potential further wage increases, upturn in excess liquidity.
  - Recommendations:
    - Absorb excess liquidity by auctioning central bank bills; enhance coordination with Ministry of Finance for liquidity management.
    - Increase sovereign issuance of Treasury bills to help normalize yields, limit liquidity injections from FRR drawings, develop monetary and capital markets, and strengthen monetary transmission.
    - More active use of interest rates: narrow and respond the interest rate corridor; consider easing the discount rate if inflation stays low; hike overnight and repo rates if inflation picks up.

- Exchange rate policy:
  - Aim to avoid deviation of the dinar from its equilibrium level.
  - International reserves are well above adequacy levels, but external stability is a growing concern due to a rapidly deteriorating current account and short time horizon for hydrocarbon resources.
  - Staff estimate: real effective exchange rate overvalued by about 3.4 percent in 2014, and by over 10 percent compared to its medium-term equilibrium value given projected fiscal consolidation and declining hydrocarbon prices. Authorities dispute the magnitude of overvaluation.
  - Recommendations:
    - Diversify supply of foreign exchange to create a deeper, more competitive market: relax surrender requirements (including for hydrocarbon sector companies); lower de facto reserve requirement ratio on foreign currency deposits; allow private agents to place foreign exchange orders outside banks handling their trade transactions. Authorities requested IMF TA to develop the interbank forex market.
    - Remove parallel market premium: premium on parallel market remains high, at about 40 percent. Recommendations include significantly raising indicative foreign exchange allocation ceilings to realistic levels and preparing for gradual, properly sequenced capital account liberalization (start with FDI, then portfolio flows).

- Financial sector stability:
  - Sector is solvent, well-capitalized, and stable; major vulnerability is concentration of credit risk.
  - Progress: adoption of three regulations on capital adequacy, lending classification and provisioning, and concentration risk (aligned with 2013 FSAP and Basel II/III).
  - Authorities plan to introduce macroprudential policies, strengthen deposit guarantee system, and set up a crisis management framework.
  - Needed actions:
    - Establish a dedicated bank resolution regime.
    - Shift to risk-based supervision and complete the CAMELS rating exercise by 2015.
    - Reform to encourage banks to write off old and fully provisioned NPLs: ease obligation to recover these NPLs and facilitate transfer to an asset management company.

### THEME 2. ENSURING EXTERNAL STABILITY

- External position and risks:
  - External position weakened in recent years; long-term external sustainability compromised under a no-policy-change scenario.
  - Simulations show net international investment position projected to turn negative when oil production ends and later exceed 100 percent of GDP.
  - Need to accelerate export growth via export diversification and preserving hydrocarbon exports.

- Export diversification imperative:
  - Oil resources projected to be depleted by the early 2030s, gas by the mid-2050.
  - Nonhydrocarbon export-to-import cover ratio below 2 percent; dependence on hydrocarbon exports among the highest in oil-exporting countries.
  - Policies recommended:
    - Maintain economic stability and improve competitiveness: avoid real exchange rate overvaluation; direct public spending toward productivity-enhancing sectors (education, infrastructure); keep salary increases in line with productivity gains.
    - Trade and FDI openness: accelerate WTO accession; increase number of free trade agreements; avoid trade restriction measures (import/export licenses); eliminate or limit the 51 percent minimum Algerian ownership requirement in foreign investments (at least remove it outside strategic sectors). Authorities favor gradual liberalization.
    - Create an export-friendly business climate: reduce constraints on launching/operating businesses; lower trade costs; relax foreign exchange controls; allow exporters greater ability to invest overseas; implement export promotion strategy focused on sectors with significant development potential.

- Energy policy to support hydrocarbon exports:
  - Reverse production decline and contain domestic consumption.
  - Investment in hydrocarbon sector:
    - Downward production trend of the past eight years expected to start reversing in 2014; moderate production increases over the medium term as new projects come online and gas production recovers from the 2013 In Amenas attack.
    - Robust recovery requires significant foreign investment, especially for offshore and unconventional assets; more investment would extend hydrocarbon resource time horizon and boost exports.
    - Staff encouraged reforms to improve attractiveness to FDI in energy and to promote exploration; authorities plan to assess recent bid round results and launch a new bid round soon.
  - Contain domestic consumption:
    - Rapid growth in domestic consumption weighs on export capacity.
    - Gradually phase out implicit subsidies for hydrocarbon products and electricity to slow domestic consumption growth and reduce smuggling leaks.
    - Design and implement a strategy to increase energy efficiency and develop alternative energy sources, including renewable energy.

### THEME 3. ACCELERATING ECONOMIC GROWTH AND JOB CREATION
- (Text indicates continuation into Theme 3; material in this excerpt emphasizes the need for reforms to support job creation through diversification, improved business climate, labor market flexibility, and better jobs-skills matching. Specific policy prescriptions earlier in the document target these objectives through fiscal, exchange rate, trade, FDI, and energy policy reforms.)

*Source: IMF staff report (Algeria), chapter titled "12. The main challenges for Algeria are to consolidate long-term macroeconomic stability."*

### 23.      Algeria has impressive economic potential. Fully realizing this potential will require a shift

### _cr14341 - 23.      Algeria has impressive economic potential. Fully realizing this potential will require a shift

### Overview
- Algeria has impressive economic potential that requires a shift toward a private sector-led growth model.
- Reforms are needed to strengthen the quality of public investment, reduce the public sector’s footprint, promote private sector development, and foster productivity and competitiveness.
- Faster growth combined with improved labor market effectiveness would increase job creation.

### Public investment and infrastructure
- Public investment will remain a significant source of growth in coming years; in a context of tighter financing conditions, the focus should be on efficiency.
- Staff recommendations to increase efficiency:
  - Adopt an integrated public financial management system.
  - Use tools to improve project selection, implementation, monitoring and evaluation.
  - Avoid negotiated contracts and rely fully on an open and competitive process for public investment to enhance efficiency and transparency.
  - Establish a legal framework for public-private partnerships, which have started to be developed and could be an efficient way to increase the supply of infrastructure.

### Structural reforms to make the private sector an engine of growth
- The business climate needs to improve despite a 21-point advance (to 79th place) in the World Economic Forum’s Global Competitiveness ranking.
- Staff welcomed the authorities’ plan for an extensive program of reforms and advised:
  - Streamline administrative procedures for creating companies, obtaining title to property and construction permits, conducting international trade, and paying taxes.
  - Develop e-government solutions, establish effective one-stop shops, and strengthen anti-corruption efforts.
  - Incorporate some improvements in the upcoming overhaul of the investment code.
- Increasing total factor productivity growth requires wide-ranging structural reforms:
  - Increase openness to facilitate technological transfers.
  - Foster competition.
  - Design policies to promote entrepreneurship and innovation.
  - Improve the quality of education and training.
  - Support the development of ICT industries.

### Financial sector development (summary of key recommendations)
- The financial sector is generally healthy but underdeveloped, hindering private sector-led growth.
- Implement recommendations of the 2013 FSAP (Appendix 6), which the authorities consider a priority.
- Key reform areas:
  - Improving access to finance:
    - Strengthen competition and enhance creditors’ rights.
    - Modernize the bankruptcy framework and improve debt enforcement procedures.
    - Improve governance of state-owned banks and lift the possibility of criminal sanctions for lending decisions.
    - Address high collateral requirements and difficulties dealing with NPLs that impede SME lending.
    - Reform the guarantee system, which has so far failed to spur credit to SMEs.
    - Complete the credit registry (expected to be completed in 2015) to facilitate access to information and help unlock credit.
    - The lifting of the ban on consumer lending announced in the 2015 budget law is welcome.
    - Government should withdraw from direct mortgage financing, particularly for middle- and upper-income households, to facilitate the development of housing credit.
    - To develop the payment system, the public sector should take a leading role in the use of banking payments.
  - Developing capital markets:
    - Swiftly implement the government’s program to open up the capital of some large state-owned enterprises.
    - Modify regulations to eliminate the government’s right of first refusal and define a threshold for the requirement of having to obtain prior agreement from the BA to participate in a bank’s capital.
    - Increase sovereign bond issuance and remove existing disincentives to corporate securities issuance, such as interest rate subsidies.
  - Addressing AML/CFT framework gaps:
    - In October 2014, the FATF concluded Algeria had not made sufficient progress and strategic AML/CFT deficiencies remained in criminalization of terrorist financing, freezing of terrorist assets, and customer due diligence requirements.
    - Staff urged the authorities to address FATF’s remaining concerns to avoid potential countermeasures and further economic impact of heightened due diligence on cross-border transactions.

### Labor market reforms and employment
- Further progress in reducing unemployment requires more labor-intensive growth and better functioning labor markets.
- Labor market challenges:
  - Unemployment stabilizing at a relatively high level, low participation and employment rates, and a sizeable informal sector.
  - High transaction costs in the formal labor market slow job creation and encourage informality.
  - Rigidities in hiring and firing, high payroll taxes, and excessive growth in wages relative to productivity.
  - Unemployment insurance is ineffective because of overly strict rules governing the collection of unemployment benefits.
  - Firms have limited scope to adjust to demand changes; for example, adjusting hours worked to seasonal changes is not allowed—contrary to the case in 93 percent of countries.
- Staff recommendations:
  - Review labor market regulations and the cost-effectiveness of social protection to facilitate reallocation of labor to productive activities while enhancing protection against unemployment and income shocks.
  - Develop a strategy for education and training to meet labor market needs; strengthen ties between the educational system and the private sector; improve appeal of vocational training.
  - Public sector should move away from being the employer of first choice to make private sector employment more attractive.
  - Assess the net impact of active labor market policies:
    - Active policies have mainly supported the creation of small enterprises, but evaluation is limited.
    - A preliminary study of CNAC suggests enterprises have a relatively high survival rate but very limited growth.
    - A significant number of enterprises have been created with support from ANSEJ, but indications exist that NPLs have rapidly accumulated.
    - Staff underscored exploring training programs for low-skilled, vulnerable youth and conducting rigorous evaluations to move toward more targeted approaches.
  - Address low female labor participation and higher female unemployment:
    - Despite progress in gender parity in education, female participation and employment rates remain low.
    - Economic and social policies to help include improving transportation, increasing availability of child care, and introducing greater flexibility in working arrangements.

### Staff appraisal and macroeconomic policy recommendations
- Longstanding vulnerabilities are becoming increasingly apparent, exposing the unsustainable nature of current policies and increasing the urgency for reforms.
- Recent macro context:
  - Economic growth expected to pick up in 2014.
  - Inflation has fallen below the central bank’s target.
  - Fiscal and external buffers remain large.
- Risks and trends:
  - Current policies are unsustainable and have increased vulnerability to oil price shocks.
  - Current account is expected to record a deficit this year and through the medium term.
  - Fiscal deficit is widening, and both fiscal savings and foreign exchange reserves are declining in absolute terms.
  - These trends will continue unless major reforms are undertaken to restore fiscal sustainability, diversify the economy, improve competitiveness, reduce dependence on hydrocarbon exports, and promote private sector-led growth.
- Monetary policy recommendations:
  - Guard against possible renewed inflationary pressures given strong credit growth, a surge in capital spending, potential further wage increases, and an upturn in excess liquidity.
  - The BA should use interest rates more actively and continue to mop up excess liquidity, including by issuing central bank bills.
  - The Ministry of Finance can limit liquidity injections by relying more on debt issuance and less on drawing from the FRR to finance the budget.
- Fiscal policy recommendations:
  - The widening fiscal deficit further undermines fiscal sustainability; ambitious and sustained fiscal consolidation is required.
  - Staff recommends adoption of a fiscal rule to reduce procyclicality.
  - Fiscal consolidation requires mobilizing more nonhydrocarbon revenue and containing current expenditures—especially wages and transfers.
  - Subsidies are costly and inefficient and should be gradually replaced by a better-targeted cash transfer system.
  - Move to a medium-term budget framework and program budgeting, supported by a sound integrated public financial management system.
- External sustainability:
  - Boost hydrocarbon exports and develop a more diversified export base.
  - Attract foreign investment to expand oil and gas reserves and enhance production capacity.
  - Raise prices of hydrocarbon products and electricity to contain growth of domestic consumption weighing on hydrocarbon exports.
  - Avoid exchange rate overvaluation, create a more export-friendly business climate, and foster more trade and capital openness.
- Financial sector final recommendations:
  - Continue transition to Basel II/III for supervision.
  - Accelerate shift to risk-based supervision, develop financial safety nets, and set up a crisis management framework.
  - Improve access to finance for SMEs and households.
  - List well-performing public companies to help develop the stock exchange.
  - Increase sovereign bond issuance and remove interest subsidies to develop local debt markets.
  - Address remaining AML/CFT shortcomings to avoid potential countermeasures by FATF members.
- Broad conclusion:
  - Realizing Algeria’s impressive economic potential requires wide-ranging reforms across public investment efficiency, business climate, international openness, entrepreneurship and innovation policies, education and training quality, ICT development, and labor market reforms—especially to reduce youth and female unemployment.

*Source: _cr14341 - 23.*

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

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

### Macroeconomic outlook and key projections
- Real GDP growth:
  - GDP at constant prices: 2012: 3.3; 2013: 2.8; 2014: 4.0; 2015: 3.9; 2016: 4.1; 2017: 4.0; 2018: 4.0; 2019: 4.0
  - Hydrocarbon sector: 2012: -3.4; 2013: -5.5; 2014: 0.4; 2015: 1.3; 2016: 1.7; 2017: 1.9; 2018: 1.6; 2019: 1.6
  - Other sectors: 2012: 7.1; 2013: 7.1; 2014: 5.5; 2015: 5.0; 2016: 4.9; 2017: 4.7; 2018: 4.7; 2019: 4.6
- Inflation:
  - Consumer price index (period average): 2012: 8.9; 2013: 3.3; 2014: 3.0; 2015: 4.0; 2016: 4.0; 2017: 4.0; 2018: 4.0; 2019: 4.0
- External sector:
  - Current account balance (in percent of GDP): 2012: 5.9; 2013: 0.4; 2014: -4.0; 2015: -7.7; 2016: -8.2; 2017: -7.8; 2018: -7.5; 2019: -7.5
  - Exports, f.o.b. (percent change): 2012: -1.6; 2013: -10.2; 2014: -6.3; 2015: -14.7; 2016: 2.1; 2017: 0.8; 2018: 0.4; 2019: 0.6
  - Imports, f.o.b. (percent change): 2012: 14.9; 2013: 6.6; 2014: 5.0; 2015: 0.9; 2016: 5.3; 2017: 1.1; 2018: 2.0; 2019: 2.5
- Hydrocarbon specifics:
  - Hydrocarbon production (in ton oil equivalent): 2012: 142; 2013: 137; 2014: 138; 2015: 139; 2016: 142; 2017: 144; 2018: 147; 2019: 149
  - Liquid petroleum exports (millions of barrels/day): 2012: 1.3; 2013: 1.2; 2014: 1.2; 2015: 1.1; 2016: 1.1; 2017: 1.1; 2018: 1.1; 2019: 1.1
  - Natural gas exports (in billions of m3): 2012: 51.7; 2013: 46.3; 2014: 44.9; 2015: 45.5; 2016: 46.3; 2017: 47.1; 2018: 47.9; 2019: 48.6
  - Crude oil export unit value (US$/bbl): 2012: 110.8; 2013: 109.5; 2014: 104.1; 2015: 89.0; 2016: 90.2; 2017: 90.1; 2018: 89.7; 2019: 89.5
  - Share of hydrocarbons in total exports (in percent): 2012: 98.4; 2013: 98.4; 2014: 97.5; 2015: 96.8; 2016: 96.5; 2017: 96.2; 2018: 95.9; 2019: 95.6

### Fiscal position and public finances
- Central government finance (percent of GDP):
  - Overall budget balance (deficit -): 2012: -5.0; 2013: -1.5; 2014: -7.0; 2015: -9.5; 2016: -8.2; 2017: -7.1; 2018: -6.6; 2019: -6.1
  - Total revenue: 2012: 39.7; 2013: 35.9; 2014: 33.5; 2015: 31.8; 2016: 31.6; 2017: 31.2; 2018: 31.1; 2019: 30.9
  - Total expenditure (incl. net lending): 2012: 44.7; 2013: 37.4; 2014: 40.5; 2015: 41.3; 2016: 39.8; 2017: 38.3; 2018: 37.6; 2019: 37.0
  - Nonhydrocarbon primary balance: 2012: -46.8; 2013: -33.5; 2014: -36.6; 2015: -35.1; 2016: -32.6; 2017: -30.0; 2018: -28.0; 2019: -26.3
- Central government operations (in DZD billion, cash basis):
  - Budget revenue and grants: 2012: 6,395; 2013: 5,941; 2014: 5,908; 2015: 5,865; 2016: 6,314; 2017: 6,776; 2018: 7,194; 2019: 7,606
  - Hydrocarbon revenue: 2012: 4,184; 2013: 3,678; 2014: 3,423; 2015: 3,158; 2016: 3,328; 2017: 3,446; 2018: 3,537; 2019: 3,619
  - Nonhydrocarbon revenue: 2012: 2,211; 2013: 2,263; 2014: 2,485; 2015: 2,707; 2016: 2,985; 2017: 3,330; 2018: 3,657; 2019: 3,987
  - Total expenditure: 2012: 7,058; 2013: 6,092; 2014: 7,033; 2015: 7,515; 2016: 7,871; 2017: 8,243; 2018: 8,639; 2019: 9,047
  - Current expenditure: 2012: 4,783; 2013: 4,204; 2014: 4,575; 2015: 4,958; 2016: 5,212; 2017: 5,478; 2018: 5,763; 2019: 6,056
  - Capital expenditure: 2012: 2,276; 2013: 1,888; 2014: 2,459; 2015: 2,557; 2016: 2,659; 2017: 2,766; 2018: 2,876; 2019: 2,991
  - Overall balance (DZD billion): 2012: -804; 2013: -248; 2014: -1,237; 2015: -1,750; 2016: -1,648; 2017: -1,549; 2018: -1,518; 2019: -1,508
- Oil stabilization fund (memorandum items):
  - Oil stabilization fund stock (in billions of Algerian dinars): 2012: 5,389; 2013: 5,239; 2014: 4,774; 2015: 3,869; 2016: 3,037; 2017: 2,295; 2018: 1,542; 2019: 740
  - In percent of GDP: 2012: 33.4; 2013: 31.6; 2014: 27.1; 2015: 21.0; 2016: 15.2; 2017: 10.6; 2018: 6.7; 2019: 3.0
  - Net savings: 2012: 23.4; 2013: 23.3; 2014: 18.2; 2015: 12.0; 2016: 6.3; 2017: 1.8; 2018: -2.0; 2019: -5.6

### Monetary and financial indicators
- Monetary aggregates and credit:
  - Net foreign assets (Banking system, at end period, DZD billion): 2012: 14,811; 2013: 15,099; 2014: 15,180; 2015: 14,651; 2016: 13,856; 2017: 12,913; 2018: 11,791; 2019: 10,440
  - Money and quasi-money (M2, DZD billion): 2012: 11,013; 2013: 11,942; 2014: 13,679; 2015: 14,908; 2016: 15,755; 2017: 16,431; 2018: 16,919; 2019: 17,422
  - Credit to the economy (DZD billion): 2012: 4,373; 2013: 5,242; 2014: 6,382; 2015: 7,150; 2016: 7,925; 2017: 8,734; 2018: 9,488; 2019: 10,274
  - Credit to the economy (percent change over 12-month period): 2012: 15.1; 2013: 19.9; 2014: 21.7; 2015: 12.0; 2016: 10.8; 2017: 10.2; 2018: 8.6; 2019: 8.3
  - Credit to private sector/NHGDP: 2012: 21.5; 2013: 23.7; 2014: 25.5; 2015: 26.2; 2016: 26.7; 2017: 27.1; 2018: 27.3; 2019: 27.5
- Financial soundness indicators:
  - Capital adequacy ratio (total banks, percent): 2009: 26.15; 2010: 23.64; 2011: 23.67; 2012: 23.41; 2013: 21.49
  - NPLs/total loans (percent): 2009: 21.14; 2010: 18.31; 2011: 14.45; 2012: 11.46; 2013: 10.56
  - Return on equity (percent): 2009: 26.01; 2010: 16.70; 2011: 24.67; 2012: 23.27; 2013: 18.97
- Reserve adequacy and external liquidity (selected measures):
  - Reserves in US$ billion: 2012: 190.7; 2013: 194.0; 2014: 187.6; 2015: 172.6
  - Months of imports: 2012: 34.8; 2013: 33.7; 2014: 32.3; 2015: 28.3
  - Gross official reserves (in billions of US$): 2012: 190.7; 2013: 194.0; 2014: 187.6; 2015: 172.6; 2016: 157.1; 2017: 142.3; 2018: 126.9; 2019: 110.4

### Structural indicators and labor market
- Business environment and competitiveness:
  - Global Competitiveness Index components and rankings indicate weak business environment and limited recent improvement (World Economic Forum, 2014).
  - Algeria ranks next to last in capacity for innovation (Capacity for Innovation scale: 1=not at all; 7=to a great extent; Algeria shown low relative to peers).
- Financial inclusion and service provision (selected indicators, 2012):
  - ATMs (per 100,000 adults) and commercial bank branches (per 100,000 adults) are low relative to Indonesia, Mexico, Turkey, and Morocco.
  - Borrowers from commercial banks (per 1,000 adults, RHS) and percent with account at a formal financial institution (age 15+) are low.
- Labor market and social indicators:
  - Employment ratios (percent of population age 15+): historical series for Algeria and peers shown; employment ratio remains low by regional standards.
  - Youth Not in Education, Employment or Training (NEET), percent of 15–24 year old population: 2011: data shown by gender but specific Algeria values charted as high (Men/Women/Total for 2011, 2013, 2014 presented).
- Governance:
  - Worldwide Governance Indicators show low percentile ranks for political stability and voice and accountability, with some improvements since 2000 but remaining below emerging market standards.

### Balance of payments and external debt
- Current account and trade:
  - Current account (in billions of U.S. dollars): 2012: 12.3; 2013: 0.8; 2014: -8.3; 2015: -16.0; 2016: -17.9; 2017: -17.5; 2018: -18.0; 2019: -19.2
  - Trade balance (in billions of U.S. dollars): 2012: 20.2; 2013: 9.4; 2014: 2.6; 2015: -6.8; 2016: -8.8; 2017: -9.1; 2018: -10.0; 2019: -11.3
- Official reserves and external debt:
  - Gross official reserves (in billions of US$): 2012: 190.7; 2013: 194.0; 2014: 187.6; 2015: 172.6; 2016: 157.1; 2017: 142.3; 2018: 126.9; 2019: 110.4
  - Gross external debt (in billions of US$): 2012: 3.6; 2013: 3.4; 2014: 4.0; 2015: 3.2; 2016: 2.5; 2017: 2.1; 2018: 1.7; 2019: 1.5

### Observations highlighted in figures and captions
- A modest rebound in the hydrocarbon sector should lift real GDP growth in 2014.
- A poor harvest and weaker industrial activity is expected to weigh on nonhydrocarbon growth.
- Inflation slowed in 2013, but started to pick up again in the first half of 2014.
- The depreciation of the exchange rate in the latter half of 2013 was largely reversed.
- The current account is expected to move into deficit for the first time in 15 years.
- Domestic hydrocarbon consumption continued to grow quickly, weighing on exports as production declined.
- The government undertook some fiscal consolidation in 2013, but the deficit is expected to increase again in 2014.
- Savings in the oil fund decreased in 2013, both in absolute terms and as a percent of GDP.
- The breakeven price is projected to increase in 2014, after declining for the first time in 12 years in 2013.
- The Bank of Algeria increased liquidity absorption and required reserves, but shied away from raising interest rates.
- Money growth bottomed out in 2013Q2 but has been on the rise since then, spurred by an increase in credit and draw-downs from government savings.
- Despite growing rapidly, credit remains low. Financial services are underdeveloped and capital markets are nascent.
- The business environment is weak, stifling private sector development, with many constraints facing businesses.

*Source: Algerian authorities; and IMF staff estimates and projections.*

### Appendix I. External Sector Assessment

### Appendix I. External Sector Assessment

### External position and vulnerability
- Hydrocarbon exports accounted for 98 percent of merchandise exports in 2013.
- Algeria’s external position is highly vulnerable to a sustained decline in oil prices.
- Lower oil prices, combined with strong domestic hydrocarbon consumption and continued import growth, are expected to lead to a growing current account deficit over the medium term.
- International reserves are well above standard adequacy levels and sufficient to cover medium-term external financing needs.
- There are virtually no capital flows in Algeria, given a closed capital account.

### Recent exchange rate developments
- Following a 5.3 percent depreciation between June and November 2013, the real effective exchange rate appreciated in December 2013 and January 2014, then oscillated over the first half of 2014.
- Over the first seven months of 2014:
  - The nominal effective exchange rate depreciated slightly (0.3 percent) on average compared to the same period in 2013.
  - The average real effective exchange rate depreciation reached 0.9 percent.

### Methodologies used for real exchange rate assessment
- Two methodologies underpin the assessment:
  - Equilibrium real effective exchange rate methodology: estimates the equilibrium exchange rate as a function of a set of medium-term fundamentals, deriving the exchange rate adjustment needed to restore equilibrium over the medium term. The equilibrium real effective exchange rate model was reestimated in 2014.
  - EBA-lite methodology: estimates a country’s current account norm based on economic fundamentals, cyclical factors, and desirable policy levels. The exchange rate misalignment is derived as the adjustment necessary to bring the actual current account balance to its norm, using a calculated elasticity.

### EBA-lite methodology — numerical findings
- (1) Current account-actual: 1.1%
- (2) Current account-fitted: 4.9%
- (3) Policy gap: 1.1%
- (4) =(2)-(3) Current account-norm: 3.8%
- (5) =(1)-(4) Current account-gap: -2.7%
- (6) Elasticity of CA to REER: -0.22
- (7) =(5)/(6) Real exchange rate gap: 12.6%
- Summary of EBA-lite Methodology's Findings:
  - Methodology 2013: 12.6
  - Methodology 2014: 3.4
  - Medium term: 12.7
  - Average misalignment: 12.6, 3.4, 12.7 (by period as in source)

### Overall exchange rate assessment (comparative results)
- Both methodologies suggest that the real exchange rate is on the strong side:
  - The equilibrium real effective exchange rate methodology (both the old and newly estimated models) suggests that the real effective exchange rate in 2014 was overvalued by about 3.4 percent and by over 10 percent compared to its medium-term equilibrium value.
  - The EBA-lite methodology (which estimates the misalignment in 2013) also suggests a real effective exchange rate on the strong side.
  - There are no significant domestic policy gaps; the 1.1 percent policy gap that contributes to the current account gap is mainly driven by global policy gaps.

### New estimates of the equilibrium real effective exchange rate for Algeria
- The 2014 update of the model is estimated over 1990-2013.
- The real effective exchange rate is explained by:
  - Relative productivity compared to main export partners (RELPROD)
  - Terms of trade (TOT)
  - Openness ratio (OPEN)
  - Share of public spending in GDP (SPEND)
- Empirical relationships (as described):
  - An increase in relative productivity is related to an appreciation of the real effective exchange rate (Balassa-Samuelson effect).
  - An increase in public spending leads to a real equilibrium appreciation.
  - An increase in openness is related to a depreciation of the currency.
  - Terms of trade increases have an unexpected but statistically non significant negative relation to the real exchange rate.
- A panel-data estimation on 31 MCD countries over 1990-2013 was used to cross-check results; the analysis broadly confirms that the dinar has remained close to its fundamental value, pointing, depending on specification, to some strength toward the end of the estimation period.

*Source: IMF staff (Appendix I. External Sector Assessment).*

### Appendix V. External Debt Sustainability Analysis

### Appendix V. External Debt Sustainability Analysis

### Baseline debt dynamics (2009–2019, percent of GDP unless noted)
- Baseline: External debt: 4.1, 3.5, 2.2, 1.8, 1.6, 1.8, 1.4, 1.1, 0.9, 0.7, 0.6, -0.9
- Change in external debt: 0.7, -0.6, -1.3, -0.5, -0.1, 0.2, -0.4, -0.3, -0.2, -0.2, -0.1
- Identified external debt-creating flows (4+8+9): -1.3, -9.5, -11.6, -6.7, -1.3, 3.0, 6.5, 6.8, 6.3, 6.2, 6.4
- Current account deficit, excluding interest payments: -0.4, -7.6, -10.1, -6.1, -0.4, 3.7, 7.2, 7.8, 7.2, 7.1, 7.3
- Deficit in balance of goods and services: -71.0, -69.1, -67.2, -66.6, -64.2, -60.1, -56.6, -56.3, -53.9, -52.6, -51.3
- Exports: 35.1, 37.6, 38.4, 36.4, 32.7, 29.0, 25.0, 24.5, 23.4, 22.7, 21.9
- Imports: -35.8, -31.5, -28.8, -30.2, -31.5, -31.1, -31.6, -31.8, -30.5, -29.9, -29.4
- Net non-debt creating capital inflows (negative): -1.8, -1.3, -1.0, -0.7, -0.9, -0.7, -0.7, -0.9, -0.9, -0.9, -0.9
- Automatic debt dynamics 1/: 1.0, -0.6, -0.6, 0.1, 0.0, 0.0, 0.0, 0.0, 0.0, 0.0, 0.0
  - Contribution from nominal interest rate: 0.1, 0.1, 0.1, 0.2, 0.0, 0.0, 0.0, 0.0, 0.0, 0.0, 0.0
  - Contribution from real GDP growth: -0.1, -0.1, -0.1, -0.1, 0.0, -0.1, -0.1, -0.1, 0.0, 0.0, 0.0
  - Contribution from price and exchange rate changes 2/: 0.9, -0.5, -0.6, 0.0, 0.0
- Residual, incl. change in gross foreign assets (2-3) 3/: 2.0, 8.8, 10.3, 6.3, 1.2, -2.8, -6.9, -7.2, -6.5, -6.4, -6.5
- External debt-to-exports ratio (in percent): 11.8, 9.4, 5.7, 4.8, 5.0, 6.2, 5.7, 4.5, 3.6, 3.0, 2.5

### Gross external financing needs
- Gross external financing need (in billions of US dollars): 1.3, -10.3, -16.9, -10.3, 6.5, 14.5, 22.3, 24.0, 23.4, 23.8, 25.1
- in percent of GDP: 0.9-6.4-8.5-4.93.110-Year10-Year6.610.110.49.69.59.5

### Scenario with key variables at their historical averages
- Scenario series: 1.8, -18.6, -36.7, -52.4, -66.0, -78.2, 6.1

### Key macroeconomic assumptions underlying the baseline (series shown as provided)
- Real GDP growth (in percent): 1.6, 3.6, 2.8, 3.3, 2.8, 3.2, 1.3, 4.0, 3.9, 4.1, 4.0, 4.0, 4.0
- GDP deflator in US dollars (change in percent): -21.1, 13.5, 20.3, 0.9, -2.2, 9.3, 13.5, 2.2, -4.3, 0.3, 1.3, 0.0, 0.4
- Nominal external interest rate (in percent): 2.9, 1.9, 4.2, 7.4, -1.8, 3.7, 2.4, 1.6, 2.4, 2.2, 2.0, 1.8, 1.6
- Growth of exports (US dollar terms, in percent): -41.3, 25.9, 26.3, -1.2, -9.8, 13.2, 24.8, -5.9, -14.2, 2.2, 0.9, 0.6, 0.7
- Growth of imports (US dollar terms, in percent): -0.1, 3.5, 13.1, 9.1, 4.9, 15.9, 16.0, 5.0, 0.9, 5.3, 1.1, 2.0, 2.5
- Current account balance, excluding interest payments: 0.4, 7.6, 10.1, 6.1, 0.4, 12.9, 9.3, -3.7, -7.2, -7.8, -7.2, -7.1, -7.3
- Net non-debt creating capital inflows: 1.8, 1.3, 1.0, 0.7, 0.9, 1.2, 0.3, 0.7, 0.7, 0.9, 0.9, 0.9, 0.9

### Stress tests and scenario notes (as presented)
- Shocks applied in bound tests: permanent one-half standard deviation shocks; permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance; one-time real depreciation of 30 percent occurs in 2010.
- Figures and scenario labels shown in the source include: interest rate shock, non-interest current account shock (in percent of GDP), growth shock (in percent per year), combined shock, real depreciation shock, and gross financing need under baseline (RHS).
- Baseline and historical scenario numeric annotations in source (selected): Baseline: Scenario: Historical: 2.0, 3.2, 3.7; Baseline: Scenario: Historical: 4.0, 3.4, 3.2; Baseline: Scenario: Historical: -7.3, -12.0, 12.9.

### Residual observations and definitions (from footnotes)
- Automatic debt dynamics 1/ derived as [r - g - r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock, with r = nominal effective interest rate on external debt; r = change in domestic GDP deflator in US dollar terms, g = real GDP growth rate, e = nominal appreciation (increase in dollar value of domestic currency), and a = share of domestic-currency denominated debt in total external debt.
- Contribution from price and exchange rate changes 2/ defined as [-r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock. r increases with an appreciating domestic currency (e > 0) and rising inflation (based on GDP deflator).
- Residual (3/) for projection includes the impact of price and exchange rate changes.
- Gross external financing need 4/ defined as current account deficit, plus amortization on medium- and long-term debt, plus short-term debt at end of previous period.
- Key variables for historical-average scenario 5/ include real GDP growth; nominal interest rate; dollar deflator growth; and both non-interest current account and non-debt inflows in percent of GDP.
- Debt-stabilizing non-interest current account 6/: long-run constant balance that stabilizes the debt ratio assuming key variables remain at their levels of the last projection year.

*Source: Appendix V. External Debt Sustainability Analysis — Algeria: External Debt Sustainability Framework, 2009–2019 (projections and assumptions as presented in the source).*

### 2.      The de jure exchange rate arrangement is managed floating and the de facto exchange

### _cr14341 - 2.      The de jure exchange rate arrangement is managed floating and the de facto exchange

### Exchange rate and payments regime
- De jure exchange rate arrangement: managed floating.
- De facto exchange regime: other managed arrangement with no preannounced path for the exchange rate.
- Algeria maintains an exchange system free from restrictions on the making of payments and transfers for current international transactions.

### Recent Article IV consultation and administrative timeline
- Discussions for the 2013 Article IV consultation held in Algiers during November 12-25, 2013.
- Consultation concluded without a meeting on January 27, 2013.
- Staff Report (IMF Country Report 14/32) published on February 4, 2014.
- IMF Executive Board concluded the 2014 Article IV Consultation on December 1, 2014; Press Release No. 14/566 dated December 11, 2014.

### Technical assistance and capacity building (missions listed in source)
- 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 policy.
- FAD mission: November 2013 — tax administration.
- STA mission: September 2014 — international investment position statistics.
- MCM TA mission: September 2014 — foreign exchange market development.
- FAD FA mission: September 2014 — medium term budget framework assistance.
- Additional planned/ongoing technical assistance referenced under IMF work program (see content for timing and scope).

### Financial Sector Assessment Program (FSAP) and resident representation
- Algeria participated in the FSAP in 2003; updates in 2007 and in 2013.
- Executive Board discussed the Financial System Stability Assessment on January 14, 2004 (see IMF Country Report No. 04/138).
- Resident Representative/Advisor: None.

### Relations with the World Bank Group — JMAP implementation (as of November 5, 2014)
- Bank work program and IMF work program coordination includes sector work and technical assistance on State-owned Banks, subsidy analysis, social protection programs, climate change, rural and agricultural development; credit registry; crisis simulation; social program evaluation; telecom and broadband strategy support.
- IMF work program: 2014 Article IV Consultation; analytical work on external sustainability, fiscal consolidation, labor markets.
- Planned staff visits and technical assistance missions listed for 2014–2015 (see content for dates and mission types).
- Data sharing: Semiannual (and on ad hoc basis if requested).
- Joint products: Continuous close coordination on the reform agenda.

### Statistical issues — assessment of data adequacy for surveillance
- General: Data provision has some shortcomings, but is broadly adequate for surveillance.
- National Accounts:
  - NSO now 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 is ongoing to compile quarterly national accounts.
- Price Statistics:
  - Data are published with a delay of less than one month.
- Government Finance Statistics:
  - Key shortcomings: insufficient institutional coverage (limited to Budgetary Central Government, including the general budget, the annexed budget, and the special treasury accounts), classification problems, long lags for production of statistics, and lack of reconciliation of financing with the monetary accounts.
  - Causes: lack of financial resources for compilation, insufficient interagency coordination, reluctance to publish provisional data.
- Monetary Statistics:
  - Largely in line with the Monetary and Financial Statistics Manual, 2000 and its Compilation Guide, 2008.
  - Timeliness of reporting by state-owned commercial banks improved; data 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 of good quality.
  - International investment position (IIP) data not available due to capacity issues in compiling FDI stocks.
  - STA mission scheduled to visit to support BPM6-compliant IIP data compilation.
- Data Standards:
  - Algeria began participation in the General Data Dissemination System (GDDS) on April 21, 2009.
  - No data ROSC is available.

### Selected macroeconomic findings, projections, and vulnerabilities (Executive Board summary and staff projections)
- Economic activity:
  - Real GDP growth projected to reach 4.0 percent in 2014 following 2.8 percent growth in 2013.
  - Hydrocarbon sector expected to expand for the first time in eight years; nonhydrocarbon growth remains supportive.
- Inflation:
  - Decelerated sharply to 2.1 percent (annual figure in press release narrative).
  - Consumer prices (end of period): 1.1 in 2013; 5.6 in 2014; 4.0 in 2015 (table).
  - Consumer prices (period average): 3.3 in 2013; 3.0 in 2014; 4.0 in 2015 (table).
- External position:
  - For the first time in nearly 15 years, the current account is expected to record a deficit.
  - Current account (in percent of GDP): 0.4 in 2013; -4.0 in 2014; -7.7 in 2015.
  - Gross reserves (in billions of U.S. dollars): 194.0 in 2013; 187.6 in 2014; 172.6 in 2015.
  - Reserves in months of next year's imports of goods and services: 33.7 in 2013; 32.3 in 2014; 28.3 in 2015.
  - Hydrocarbon exports of goods (in US$, percentage change): -10.3 in 2013; -7.2 in 2014; -15.4 in 2015.
  - Hydrocarbon exports of goods (percent of total exports of goods): 98.4 in 2013; 97.5 in 2014; 96.8 in 2015.
  - Total exports of oil and gas products (in billions of U.S. dollars): 63.3 in 2013; 58.8 in 2014; 49.8 in 2015.
  - Average crude oil export price (in U.S. dollar/barrel): 109.5 in 2013; 104.1 in 2014; 89.0 in 2015.
- Fiscal outlook and public finances:
  - Revenue (in percent of GDP): 35.9 in 2013; 33.5 in 2014; 31.8 in 2015.
  - Hydrocarbon revenue (in percent of GDP): 22.2 in 2013; 19.4 in 2014; 17.1 in 2015.
  - Expenditure and net lending (in percent of GDP): 37.4 in 2013; 40.5 in 2014; 41.3 in 2015.
  - Budget balance (in percent of GDP): -1.5 in 2013; -7.0 in 2014; -9.5 in 2015.
  - Nonhydrocarbon primary balance (in percent of NHGDP): -33.5 in 2013; -36.6 in 2014; -35.1 in 2015.
  - Total government debt (in percent of GDP): 8.3 in 2013; 8.8 in 2014; 9.0 in 2015.
  - Fiscal savings expected to decline for the second consecutive year (narrative).
  - Subsidies and transfers amount to about 26 percent of GDP (narrative).
- Monetary and financial sector indicators:
  - Credit to the economy (annual percentage change): 19.9 in 2013; 21.7 in 2014; 12.0 in 2015.
  - Broad money (annual percentage change): 8.4 in 2013; 14.5 in 2014; 9.0 in 2015.
  - Velocity of broad money (level): 1.4 in 2013; 1.3 in 2014; 1.2 in 2015.
  - Total external debt (in percent of GDP): 1.6 in 2013; 1.9 in 2014; 1.5 in 2015.
- Labor market:
  - Unemployment rate (in percent): 9.8 in 2013; 10.7 in 2014; ... for 2015 (table shows ellipsis for 2015).
  - Nonhydrocarbon real GDP growth: 7.1 in 2013; 5.5 in 2014; 5.0 in 2015.
- Investment and saving:
  - Gross capital formation (in percent of GDP): 34.6 in 2013; 38.0 in 2014; 39.8 in 2015.
  - Gross national savings (in percent of GDP): 35.0 in 2013; 34.1 in 2014; 32.1 in 2015.
  - Nominal GDP (in billions of U.S. dollars): 209 in 2013; 211 in 2014; 208 in 2015.
- Memoranda and other indicators:
  - Hydrocarbon production (in mn TOE): 137.0 in 2013; 137.5 in 2014; 139.3 in 2015.
  - Average hydrocarbon export price (change, in percent): -3.4 in 2013; -5.0 in 2014; -14.5 in 2015.
  - Real effective exchange rate (2005 = 100): 103.6 in 2013; ... for 2014 and 2015.
  - Local currency per U.S. dollar (period average): 79.4 in 2013; ... for 2014 and 2015.

### Executive Board assessment and recommendations (summarized)
- Directors welcomed the rebound in economic activity, the further decline in inflation, and sizeable policy buffers.
- Noted increasing vulnerabilities from falling oil prices: deterioration of fiscal and current accounts, decline in fiscal savings and foreign exchange reserves.
- Called for prompt action to preserve macroeconomic stability, complemented with broad-based reforms to diversify the economy, enhance competitiveness, and promote inclusive growth and job creation.
- Fiscal policy recommendations:
  - Sustained fiscal consolidation anchored in credible fiscal rules.
  - Increase non-hydrocarbon revenues by broadening the tax base, strengthening tax administration, and reducing tax exemptions.
  - Contain current spending, including the wage bill; gradually replace subsidies with a targeted cash-transfer system to protect the poor.
  - Move to a medium-term budget framework and strengthen public financial management.
  - A few Directors suggested establishing a sovereign wealth fund with oil savings for stabilization and intergenerational equity.
- Monetary policy recommendations:
  - Remain prudent and stand ready to increase liquidity absorption and interest rates if inflationary pressures reemerge.
  - Increase issuance of treasury bills to mop up liquidity, reduce need to use the oil savings fund for budget financing, and deepen the capital market.
  - Develop new monetary policy instruments for liquidity management with Fund assistance.
- External sector and trade recommendations:
  - Safeguard external stability via export diversification and enhanced export capacity of the hydrocarbon sector.
  - Increase trade openness, relax restrictions on foreign direct investment, and create a more export-friendly business climate.
  - Authorities committed to allowing the exchange rate to reflect fundamentals.
- Structural reforms:
  - Improve infrastructure, productivity, and public investment efficiency.
  - Relax labor market regulations, address skills mismatch, and promote female and youth employment.
  - Conduct thorough assessment of active labor market policies.
- Financial sector recommendations:
  - Continue strengthening financial sector stability, transition to risk-based supervision and capital requirements under Basel II/III.
  - Implement FSAP recommendations, improve SME access to finance, and address AML/CFT deficiencies.

*Source: Excerpts from the IMF Country Report materials and IMF press release content provided in the supplied document.*

### 2012. Cuts in current expenditures accounted for 2/3 of the 7 percent of GDP reduction in

### _cr14341 - 2012. Cuts in current expenditures accounted for 2/3 of the 7 percent of GDP reduction in

### Fiscal adjustment and public investment
- Cuts in current expenditures accounted for 2/3 of the 7 percent of GDP reduction in expenditures, with capital spending accounting for the remaining 1/3, mainly reflecting limited implementation capacity.
- In 2014, the deficit is expected to widen, largely reflecting lower hydrocarbon revenue and the sharp increase in capital spending following accelerated payments under the public investment program (PIP) 2009–2014.
- A new PIP covering the period 2015–2019 is under preparation with the objective of supporting growth with due consideration to macroeconomic stability, while ensuring more efficiency in public investment.
- Fund technical assistance to the Ministry of Finance on fiscal rules, multiyear budgeting, investment spending management, and the organic budget law (OBL) will support efforts to strengthen the fiscal framework.

### Hydrocarbon-revenue shock and authorities’ contingency measures
- The authorities are fully aware of the increasing uncertainties surrounding the sharp fall in oil prices.
- They are ready to prepare a series of measures to mitigate the likely fiscal impact by further streamlining current spending and strengthening tax collection.
- They are also cognizant of the need to deepen structural reforms to support fiscal consolidation, including by improving spending efficiency and reducing fiscal rigidities.

### Wages, subsidies, and tax-administration reforms
- The authorities fully agree on the adverse impact of wage increases and back payments, and concur with staff recommendations in this area.
- The back payments process ended in 2013, and the adverse effects arising from the 2012 civil service reform have dissipated earlier than expected, as reflected in the absence of second round effects on inflation.
- After a slight increase in 2015, the wage bill as a share of GDP is projected to be on a declining trend over the medium term.
- The authorities are keenly aware of the need to rethink the subsidy system and carry out a comprehensive reform; they appreciate recent Fund technical assistance to identify an optimal strategy for a smooth exit from the current subsidy regime while strengthening the social safety net.
- The authorities attach high priority to strengthening tax administration and building capacity in support of the ongoing tax policy reform, which aims at fighting tax evasion and avoidance, while reducing the burden on taxpayers, in particular SMEs, through simplification of procedures and unification of tax regulations within a single tax code.

### Monetary policy and liquidity management
- Against a backdrop of continuous excess liquidity, the authorities remain committed to maintaining a prudent monetary policy and containing inflation around the 4 percent target.
- Liquidity management under available monetary policy instruments has been successful in bringing inflation down from a peak of 8.9 percent in 2012 to 3.3 percent in 2013, and has significantly improved the inflation outlook, with stable medium-term inflation expectations.
- In close coordination with the Central Bank, the Finance Ministry is committed to further issuing treasury bills, while limiting recourse to the FRR, thereby contributing to absorbing excess liquidity.
- With IMF technical assistance, the Bank of Algeria intends to develop new monetary policy instruments, including central bank securities, in order to better manage liquidity and deepen the money market.
- The authorities take positive note of staff’s assessment that the real effective exchange rate (REER) of the Algerian Dinar is broadly in line with fundamentals.

### Banking system soundness and supervision
- Financial soundness indicators show the banking system is well capitalized, liquid, and profitable.
- Over the five past years, the NPL ratio declined by 50 percent to reach 10.5 percent in 2013.
- NPLs largely relate to old private debts, which are fully provisioned.
- Banking supervision has been steadily strengthened with Fund and World Bank technical assistance.
- The CAMELS rating system will be generalized to all banks in 2015, and new regulations related to capital adequacy, loan classification and provisioning, and concentration of risk have been recently adopted by the Council of Money and Credit.
- The implementation of the upgraded credit registry will be completed in 2015, and would coincide with the reactivation of consumer lending activity.

### Economic diversification and investment climate
- The authorities view economic diversification as crucial to ensure high and sustainable growth and job creation.
- They are committed to laying the foundations for strong private-sector-led growth, and are working to foster an attractive business climate and facilitate foreign investment.
- Efforts underway include identifying the main impediments to investment in collaboration with stakeholders, reducing administrative costs, shortening delays for building permits, modernizing the judiciary system, and improving access to land.
- A new draft bill is being prepared to promote investment, and new provisions facilitating investment abroad by resident companies have been recently introduced.

*IMF staff report content*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr14341.pdf_