IMF Survey: Algeria Should Reduce Reliance on Oil, Create More Jobs, Says IMF

IMF News, January 26, 2011

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Hydrocarbon sector accounts for 98 percent of the country’s exports.
Hydrocarbon sector represents about 40–45 percent of total GDP and about two-thirds of budget revenues.
The state plays a predominant role: 90 percent of the country’s banks are public; the hydrocarbon company is state owned; government spending represents two-thirds of non-hydrocarbon GDP.
Macroeconomic outcomes over the past decade: relatively strong growth, low inflation, sharp reduction in public and external debt, large external reserves, and budget resources in an oil stabilization fund (helped during the 2009 hydrocarbon price decline).

Youth unemployment is 21 percent; a decade earlier youth unemployment exceeded 50 percent.
Labor force growth is between 2½ to 3 percent per year.
To stabilize unemployment and absorb new entrants, Algeria probably needs growth in the nonhydrocarbon sector of at least 5 percent.
Education spending: about 6 percent of GDP over the past decade.
Progress noted: universal primary education and high enrollment rates for primary and higher education; greater focus on vocational training to reduce skills mismatches.

Algeria’s exports are among the least diversified in the world, even compared to other oil producers.
Diversification is a central policy objective; government efforts include large public investment in infrastructure and expansion of access to services (housing, water, energy, health).
Measures to improve access to credit for small and medium-sized companies and to facilitate entrepreneurship have been implemented, but results are taking time.
Long-term prospects depend on improving the business climate to allow new enterprises to emerge and grow.

2009 regulations for foreign direct investment limit foreign participation in new projects, intended to encourage partnerships with domestic investors; outcome has been a significant decline of foreign investment flows to Algeria.
Algeria needs a business environment more conducive to private sector development; authorities should review strategy to allow a stronger and broader private sector to emerge.
Financial sector is dominated by public banks; modernization and deepening are needed to facilitate access to credit.
Foreign partnerships could be particularly useful for financial sector development.

Algeria has opened trade gradually but maintains relatively high customs tariffs and is not a member of the World Trade Organization.
Algeria does not trade much with other countries in the region.
Trade liberalization could help competitiveness and diversification, with Chile cited as an example of successful trade openness leading to diversified exports.

Recent unrest (earlier this month in context of the article) was triggered by significant price increases of basic food items (sugar and oil); authorities temporarily eliminated customs duties and the value-added tax on those items to reduce prices.
Cost of these temporary measures is relatively small at about 0.3 percent of GDP and is seen as appropriate while targeted on basic food items consumed by poorer segments.
Longer-term responses recommended: promote competition in the food distribution sector to avoid monopolistic behavior and develop the agricultural sector to increase immunity to large international price variations.

Main risk: continued heavy dependence on hydrocarbons, leaving the economy vulnerable to negative oil-price shocks and unable to generate enough jobs.
Historical precedent: in the mid-1980s a large drop in oil prices forced cuts in public spending, contributed to the “lost decade” of the 1990s and political instability.
Observation: large financial resources accumulated during the last decade will help mitigate this risk, but hydrocarbons bring wealth, not jobs; without sustained strong growth in other sectors, high unemployment-related discontent could persist.

Diversify exports and reduce reliance on oil and gas to create jobs and reduce vulnerability to oil-price shocks.
Improve the business environment to encourage private sector development and allow new enterprises to emerge and grow.
Review FDI strategy and the 2009 FDI regulations to attract more foreign investment while fostering domestic partnerships.
Modernize and deepen the financial sector to improve access to credit, potentially through foreign partnerships.
Promote vocational training to reduce skills mismatches and better align labor supply with private-sector demand.
Promote competition in food distribution and develop the agricultural sector to reduce vulnerability to food-price shocks.

IMF Survey online: January 26, 2011