Public Information Notice No. 08/20

Public Information Notice: IMF Executive Board Concludes 2007 Article IV Consultation with Algeria

February 19, 2008

On February 11, 2008, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Algeria.¹

Background

Algeria's market-oriented economic reforms over recent years started to bear fruits, with higher growth, low inflation, and strong fiscal and external positions. Real GDP growth peaked at 4.6 percent in 2007 from 2 percent in 2006 reflecting strong growth in the nonhydrocarbon sector (6 percent) driven by services and construction and public works. Inflation remained low despite rising food prices. Unemployment declined further in 2007, but remains high particularly among the youth.

Algeria's external position has continued to strengthen. Boosted by high world oil prices, international reserves have now passed the US$100 billion mark, and the external current account surplus remained above 20 percent of GDP in 2007.

The fiscal policy stance remained expansionary. The nonhydrocarbon fiscal deficit reached about 37.5 percent of GDP in 2007 from 36 percent in 2006, as a result of the public investment program and higher wage bill. Nevertheless, higher hydrocarbon revenues kept the overall fiscal surplus at 12 percent in 2007, further increasing savings in the hydrocarbon stabilization fund (FRR).

Progress continued in structural reforms to strengthen financial intermediation and improve the business environment to spur further private investment and growth in the medium term.

Executive Board Assessment

Executive Directors agreed with the thrust of the staff appraisal. They welcomed Algeria's encouraging economic performance in recent years, reflecting market-oriented reforms and prudent macroeconomic policies in a favorable external environment. Nonhydrocarbon growth is accelerating, employment is on the rise, and inflationary pressures are in check. The external and fiscal positions remain strong and the authorities' ambitious investment program has started to improve infrastructure and living conditions.

Directors agreed that the main challenges facing Algeria are to ensure sustained high productivity and nonhydrocarbon growth and to lower further the still high unemployment. They welcomed the authorities' commitment to continued macroeconomic stability and deepened market-oriented reforms as providing the basis for meeting these challenges, and highlighted, in particular, the role to be played by improving financial intermediation.

Directors viewed that the tightening of monetary policy had absorbed the excess liquidity in the banking system and helped keep inflation under control, despite rising food prices. They observed that, as ongoing fiscal stimulus will further boost liquidity and domestic demand, continued central bank vigilance is warranted. They also encouraged further exploration of measures to absorb excess liquidity permanently. In this context, they welcomed the recent increase in the reserve requirement rate.

Directors considered that Algeria's exchange rate policy is consistent with external stability. They noted the assessment that the real effective exchange rate remains close to its equilibrium level, while acknowledging the estimation difficulties for oil exporting countries. Directors encouraged the authorities to continue managing the exchange rate in a flexible manner, while implementing policies to enhance productivity and economic diversification.

Directors agreed that the current fiscal stance remains consistent with long-term fiscal sustainability. They observed, however, that if inflationary pressures intensify, the burden should not fall solely on monetary policy, and the withdrawal of some of the fiscal stimulus envisaged in the 2008 budget might be called for. In this context, Directors noted that careful prioritization of projects in the public investment program in line with absorptive capacity could help reduce demand pressures. They welcomed the initiation of the National Fund for Investment and Development and underscored its important role in ensuring the quality of spending under the public investment program. Directors also commended the substantial improvements in budget management and fiscal governance.

Directors noted that the sizable increase in the wage bill envisaged in the 2008 budget aims at improving efficiency in the public administration. They encouraged the authorities to keep real public sector wage increases in line with productivity gains in the nonhydrocarbon sector, as intended in line with the principles set out in the National Economic and Social Pact, in order to preserve competitiveness and long-term fiscal sustainability.

Directors were encouraged by progress towards strengthening tax administration and simplifying the tax system. They considered that gradual steps to reduce exemptions, improve VAT design, and eliminate the turnover tax would contribute importantly to improving the business climate.

Directors stressed that sustained further implementation of financial sector reforms will be key to improving the business climate and enhancing private-sector led growth. They encouraged the authorities to implement the recommendations of the 2007 Financial Sector Assessment Program update, including through strengthening the role of private banks. Directors assigned a high priority to improving bank governance and risk management, given the current strong growth in private sector credit. They also pointed out that guarantee schemes on credit to small and medium enterprises should not distract banks from careful assessment of credit risk.

Directors welcomed the authorities' decision to list large corporate and government bonds on the Algiers Bourse, and recommended the prompt finalization of the regulatory framework for the commercial paper market. Further developing the local corporate debt securities markets would contribute to financial stability and growth.

Directors welcomed the progress achieved in the area of bilateral and regional trade liberalization. They looked forward to Algeria's impending accession to the World Trade Organization (WTO), which will be an important step to ensure access to international markets.

Directors encouraged Algeria to continue to work towards participation as a creditor in the Enhanced Heavily Indebted Poor Countries Initiative.

It is expected that the next Article IV consultation with Algeria will take place on the standard 12-month cycle.

¹ Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities.