Public Information Notice: IMF Concludes Article IV Consultation with Algeria
IMF News, August 4, 2000
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- Published: August 4, 2000
Background
- Between 1994 and 1998, Algeria restored macroeconomic stability and implemented structural reform, aided by IMF-supported programs: growth resumed, inflation declined, and the balance of payments strengthened.
- Structural reforms implemented included establishment of institutional and market mechanisms for transition to a diversified market economy, realignment of relative prices, abolition of numerous external trade and payment restrictions, and restructuring of inefficient public enterprises (with massive layoffs and a rise in unemployment).
- In 1998 and the first half of 1999, low world oil prices caused a sharp fall in hydrocarbon export receipts and a large capital account deficit, limiting access to new external borrowing and reducing gross official reserves from about 9.5 months of imports at end-1997 to slightly above 4 months in summer 1999.
- Policy response in 1998–99: tightened fiscal stance, maintained high real interest rates, and allowed the Algerian dinar to depreciate vis-à-vis the U.S. dollar.
- Resulting developments:
- Improvement in the current account from a deficit of 1.9 percent of GDP in 1998 to a balanced position in 1999.
- Foreign exchange reserves stabilized in the second part of 1999.
- Stock of external debt declined by US$2 billion to US$28.3 billion (or 59 percent of GDP).
- Debt service ratio remained high at about 40 percent of exports of goods and nonfactor services in 1999.
- Fiscal developments:
- Fiscal position deteriorated sharply in early 1999 due to low oil prices and accelerated current expenditure; authorities tightened expenditure management and froze expenditure on new investment projects.
- Preliminary data for 1999 indicate an overall budget deficit of about 0.5 percent of GDP compared to 3.9 percent in 1998.
- Real economy and labor market:
- Real growth decreased to 3.3 percent in 1999 from 5.1 percent in 1998; hydrocarbon sector growth was 6.2 percent in 1999.
- Nonhydrocarbon GDP increased by about 2.5 percent in 1999 versus 5.5 percent in 1998.
- Unemployment rate has probably continued to increase to about 30 percent, given labor force growth of about 3 percent per annum.
- Inflation:
- CPI rose by 2.6 percent on average in 1999 following a 5.0 percent increase in 1998; part of 1999 disinflation attributable to lower food prices.
- Structural reform progress:
- No new major reforms introduced between end-May 1998 and end-1999, but ongoing reforms included overhaul of housing policies, opening the banking system to new domestic and foreign banks, and listing minority stakes in three public sector companies on the newly-created Algiers Stock Exchange.
- Changes in tariff positions and minimum dutiable values since 1997 increased effective protection.
Executive Board Assessment (major findings and policy recommendations)
- Commendation and overall assessment:
- Directors commended authorities for restoring macroeconomic balance and implementing wide-ranging structural reforms in difficult circumstances, yielding improved growth, lower inflation, stronger fiscal and external positions, increased market role, and more liberal trade and exchange system.
- Policy response to 1998–99 oil shock:
- Directors praised demand management: cutting budget expenditure, allowing exchange rate depreciation vis-à-vis the U.S. dollar, and maintaining high real interest rates, which helped limit reserve depletion and consolidate fiscal position.
- Key medium-term challenges identified:
- Reduce dependence on the hydrocarbon sector.
- Raise living standards and reduce unemployment from its very high level.
- Absorb large numbers of new labor force entrants without sacrificing macroeconomic stability.
- Achieve a substantial increase in the growth rate through accelerated structural reforms to complete the transition to a market-based economy.
- Support for 2000 reform program:
- Directors broadly supported the reform program announced in early 2000, welcoming emphasis on banking sector and public sector enterprise reform, but stressed need for detailed implementation plans.
- Emphasized critical role of the private sector; improve economic environment and government regulations to promote domestic and foreign investment.
- Fiscal policy recommendations:
- Welcomed supplementary budget for 2000 and authorities’ intention to save any hydrocarbon revenue in excess of budgeted amounts in a stabilization fund.
- Strong endorsement for transparent management of the stabilization fund and appropriate integration with other fiscal activities.
- To ensure strong medium-term fiscal position, Directors emphasized reducing dependence on hydrocarbon revenue, broadening the tax base, and strengthening tax and customs administration.
- Recognized need for a strong safety net and improved basic social services (health and education), and advised orienting expenditure to highest priorities.
- Monetary and exchange rate policy:
- Endorsed prudent monetary policy geared toward keeping inflation low and further development of indirect monetary policy instruments.
- Considered Algeria’s exchange rate policy appropriate in balancing competitiveness and price stabilization gains.
- Recommended deepening the interbank foreign exchange market through further liberalization of the exchange system.
- Supported more active management of external liabilities and the authorities’ intention to request a rating of Algeria’s sovereign risk to facilitate capital market integration and attract foreign investment.
- Banking and enterprise reform:
- Urged early and comprehensive improvement in efficiency and financial health of government-owned banks, coordinated with thorough restructuring of public enterprises (claims on which account for a substantial share of banks’ assets).
- Stressed strengthening banking supervision and welcomed efforts to improve compliance with Basel Core Principles and establishment of the National Council for Banking Reform.
- Emphasized accelerated and steadfast implementation of privatization within a fair and transparent framework; welcomed plans to liberalize energy, transport, and telecommunication sectors.
- Housing, land, and agriculture:
- Noted critical need for improved housing and role of housing construction in boosting employment and growth; encouraged formulation of a comprehensive strategy to reduce housing shortages and promote private sector investment.
- Saw urgency in improving availability of land for housing and business construction and clarifying agricultural land ownership.
- Trade and governance:
- Considered high protection would impede growth and urged acceleration of trade liberalization regionally and multilaterally.
- Welcomed emphasis on improving governance and transparency, including reduction in government intervention and judicial reform; welcomed participation in pilot project on publication of Article IV staff report and publication of a Report on the Observance of Standards and Codes module on banking supervision.
- Statistics and technical assistance:
- Welcomed authorities’ interest in the General Data Dissemination System to address significant weaknesses in Algeria’s economic statistics and advised allocating additional resources to upgrade the statistical apparatus.
- Welcomed authorities’ intention to maintain close policy dialogue with the Fund and to seek IMF technical assistance in key areas.
Algeria: Selected Economic Indicators (as presented)
- Domestic economy (in percent)
- Real GDP: 1995: 3.9; 1996: 3.8; 1997: 1.1; 1998: 5.1; 1999: 3.3
- GDP deflator: 1995: 28.7; 1996: 25.7; 1997: 6.5; 1998: -4.2; 1999: 10.9
- Consumer price index (CPI), period average: 1995: 29.8; 1996: 18.7; 1997: 5.7; 1998: 5.0; 1999: 2.6
- External sector (in billions of U.S. dollars 1/)
- Exports of goods, f.o.b.: 1995: 10.3; 1996: 13.2; 1997: 13.8; 1998: 10.1; 1999: 12.3
- Imports of goods, f.o.b.: 1995: -10.1; 1996: -9.1; 1997: -8.1; 1998: -8.6; 1999: -9.0
- Current account, excluding capital grants (in percent of GDP): 1995: -5.4; 1996: 2.7; 1997: 7.2; 1998: -1.9; 1999: 0.0
- Capital account balance: 1995: -4.1; 1996: -3.3; 1997: -2.3; 1998: -0.8; 1999: -2.4
- Gross official reserves: 1995: 2.1; 1996: 4.2; 1997: 8.0; 1998: 6.8; 1999: 4.4
- External debt (in percent of GDP): 1995: 76.4; 1996: 71.9; 1997: 65.2; 1998: 64.3; 1999: 59.1
- Debt service ratio (in percent of current external receipts): 1995: 40.5; 1996: 29.3; 1997: 44.8; 1998: 39.6; 1999: (value not provided in table body but discussed in text as about 40 percent)
- Real effective exchange rate (percentage change, depreciation): 1995: -16.2; 1996: 2.5; 1997: 9.9; 1998: 4.8; 1999: -8.0
- Financial variables (in percent of GDP 1/)
- Overall budget balance: 1995: -1.4; 1996: 3.0; 1997: 2.4; 1998: -3.9; 1999: -0.5
- National savings: 1995: 25.9; 1996: 30.4; 1997: 25.8; 1998: 25.1; 1999: 29.1
- Gross domestic investment: 1995: 32.2; 1996: 23.8; 1997: 27.7; 1998: 27.4; 1999: (value not shown in table)
- Change in broad money (M3) (in percent): 1995: 10.5; 1996: 14.4; 1997: 18.2; 1998: 19.1; 1999: 14.0
- Interest rate (central bank repurchase rate, in percent): 1995: 13.0; 1996: 11.0; 1997: 9.5; 1998: 8.5; 1999: (value not shown in table)
- Sources as stated in the notice: Data provided by the Algerian authorities; and IMF staff estimates.
- Notes:
- 1/ Unless otherwise noted.
- Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. Summary description of Article IV consultation process provided in the notice.
Source: Public Information Notice: IMF Concludes Article IV Consultation with Algeria, August 4, 2000.