An Open and Diverse Economy To Benefit All Algerians

IMF Blog, March 18, 2013

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The IMF and Algeria reaffirmed a "special partnership" during the Managing Director's visit.
Algeria pledged US $5 billion to the IMF's global firewall.
Algeria’s capable management of its oil and gas windfall has resulted in high foreign exchange reserves and economic stability.
Recent policy steps noted:
- This year’s budget "keeps the rise of current spending and public wages in check."
- Last year’s decision "to raise the required reserves rate as well as the liquidity absorption" will help contain demand pressures on prices.
- "Still, further monetary tightening may be necessary."

Key macro outcomes over the past decade: "Steady growth, and low fiscal and external deficits and debt levels."
Inflation:
- "Inflation has been on the rise, reaching nearly 9 percent last year—a 15‑year high."
- Causes identified: "wage hikes that exceeded productivity increases, and relatively accommodative monetary policies."
- Risk highlighted: "Such pressures risk undermining growth and hurting the most vulnerable."
Policy implication: Containing demand and monetary tightening are important to protect growth and vulnerable populations.

Hydrocarbon dependence:
- "Accounts for around 40 percent of total GDP, 98 percent of exports, and two-thirds of budget revenues."
- Employment in the sector: "only about 2 percent of the workforce is directly employed by the sector."
Implication: Hydrocarbons alone "cannot provide a lasting basis for jobs or rising living standards for the wider population."
Identified opportunity sectors: "agribusiness, industry and services such as tourism and trade."
Policy recommendations to foster private sector-led growth:
- "Open up to reach out to global markets and to also let some of the world in—for investment, trade, and expertise."
- Improve the business environment by "reducing red tape" and "changing the rules for foreign ownership."
- Acknowledge that "It will take time to fundamentally change the business climate, but a start can be made now."

Youth unemployment progress:
- "A decade ago youth unemployment stood at more than 50 percent, it has since dropped to 20 percent."
- Assessment: "still unacceptably high, with many more young adults soon to be looking for work."
Core challenge: "too many people rely on the government as the employer of choice" and "Mindsets need to change."
Suggested reforms and policies:
- Change "laws and regulations that make it hard for private businesses to employ people."
- Implement "more active labor market policies—such as jobs-based training for young graduates or job placement programs."
- Focus on "better matching worker skills to the needs of the labor market."
Clarification on IMF stance: Labor market reform is not equivalent to automatic pay cuts; the IMF's view "has changed."

Current subsidy problem:
- "Prices for certain goods and services in Algeria are subsidized by the government."
- For gasoline and gas alone, "implicit subsidies provided by the government may be as much as 12 percent of GDP."
- Distributional issue: "The main beneficiaries are the well-to-do who consume energy more heavily."
- Budgetary trade-off: Subsidies "steal precious resources away from other government spending priorities, including on health, education, and infrastructure."
Policy path recommended:
- "Subsidies should be made explicit and better targeted to the people who really need them."
- Acknowledge that "This problem cannot of course be tackled over night."

Transition to a more prosperous and inclusive Algeria "will take time" and "at times, the way forward may not be easy."
Several priorities are emphasized as common across the region: "inclusion, jobs, a more flourishing private sector, subsidy reform to better help the truly needy."
The existing constructive dialogue between the IMF and Algeria is presented as a foundation for addressing these challenges jointly.

Source: Christine Lagarde, "An Open and Diverse Economy To Benefit All Algerians", March 18, 2013.