IMF Survey : Algeria Seeks to Diversify, Reshape Economy as Oil Revenues Decline

IMF News, May 19, 2016

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Canonical URL: IMF Survey : Algeria Seeks to Diversify, Reshape Economy as Oil Revenues Decline

Growth in Algeria remained stable in 2015 at 3.9 percent.
Near-term growth is projected to slow as the government undertakes necessary fiscal consolidation.
Over the medium term, a critical mass of structural reforms could lead to a more dynamic and diversified economy, with stronger growth and more job creation.
Insufficient reforms could ultimately result in economic hardship if an exhaustion of the country’s fiscal and external space were to lead to a sudden and more drastic adjustment.

The drop in oil prices has significantly weakened Algeria’s fiscal and external balances.
Fiscal savings have been nearly depleted to finance large budget deficits.
Following several years of comfortable surpluses, the current account balance has swung sharply into deficit and official reserves, while still large, are diminishing.
Public and external debt remain low.
The banking system as a whole appears healthy, but the fall in oil price increases financial stability risks.

The authorities have initiated reforms, including:
- reform of the subsidy system
- strengthening of the financial sector prudential framework
Wider-ranging structural reforms are needed to reduce dependence on oil and diversify the economy.
Key reforms recommended:
- improving the business climate by streamlining regulations and administrative procedures and making it easier to start a business
- opening up the economy to more trade and investment
- improving access to finance and developing capital markets
- strengthening governance, competition, and transparency

Unemployment increased and is particularly high for youth populations (about 30 percent).
To create more jobs and inclusive growth, Algeria needs to transform its state-led, hydrocarbon-based growth model into one more diversified and led by the private sector.
Labor market recommendations:
- use the ongoing revision of the labor code to enhance labor market flexibility while ensuring adequate protection for workers
- foster closer ties between the educational system and the private sector to better match skills of job seekers with employer needs

Fiscal consolidation is needed to restore fiscal sustainability and support external adjustment.
Consolidation should be conducted on several fronts:
- mobilizing more nonhydrocarbon revenues, notably by reducing tax exemptions and strengthening tax enforcement
- containing current spending
- pursuing further subsidy reform while protecting the poor
- curtailing public investment while significantly increasing its efficiency
- strengthening the budget framework
Because fiscal savings have been declining rapidly, Algeria will need to rely more on other sources to finance future deficits:
- low debt levels give space to increase borrowing
- opening the capital of some state-owned enterprises to private investors, in a transparent way, would help meet financing needs while improving governance

Subsidies are estimated to cost about 14 percent of GDP in 2015.
Subsidies are largely unfair: the 20 percent richest households spend, on average, six times more on subsidized fuel products than the 20 percent poorest households.
Subsidies encourage overconsumption and lead to economic and environmental distortions.
Recommendation: gradually reduce generalized subsidies and replace them with a well-targeted cash transfer system to protect the most vulnerable households, making the system fairer while reducing its cost.

Regional conflicts are a source of concern, though low trade and financial flows within the region have limited their direct impact on Algeria’s economy.
Maintaining social stability is crucial; concerns about regional instability can complicate garnering consensus for needed reforms and risk a more abrupt adjustment.
An effective communication campaign can help raise awareness about the benefits of reforms, the cost of inaction, and how the burden of adjustment will be shared.

The IMF remains fully committed to helping Algeria achieve objectives of greater transparency, better governance, and a more market-based economy, and to help adjust to the oil price shock through close policy advice and technical assistance.

Source: IMF Survey, May 19, 2016.