Press Release No. 11/381

Press Release No.11/381
October 26, 2011

An International Monetary Fund (IMF) mission headed by Mr. Joël Toujas-Bernaté visited Algiers during October 13–25, 2011 to hold discussions in the context of the annual Article IV consultations.. The consultation will conclude with the preparation of a staff report to be taken up by the IMF Executive Board in early 2012.

The discussions addressed the short- and medium-term political and economic outlook in the current context of heightened uncertainty surrounding the global economy. The mission held discussions with Mr. Karim Djoudi, Minister of Finance; Mr. Tayeb Louh, Minister of Labor; Mr. Mohamed Benmeradi, Minister of Industry, Small and Medium Enterprise, and Investment; and Mr. Mohammed Laksaci, Governor of the Bank of Algeria. The mission also met with representatives of the economic and financial sectors and civil society.

In an uncertain international context, Algeria continues to show strong economic performance buoyed largely by public investment. Prudent macroeconomic policies pursued in the past have helped Algeria build a solid financial position with very low debt levels. The overall unemployment rate has declined, but remains high for certain segments of the population. Macroeconomic performance remains robust in 2011:

• Non-oil growth is expected to reach 5 percent, reflecting solid performance in sectors supported by the public investment program and a good harvest. However, a further decline in petroleum production is expected to bring overall GDP growth to roughly 2.5 percent;
• Inflation remains moderate and should come to around 4 percent at end-2011 despite fluctuations in fresh food prices. Inflation excluding fresh foods remains relatively moderate (4.3 percent), the result of prudent monetary policy, price supports for certain basic foodstuffs, and the large import component in public expenditure and private consumption;
• The external position improved with respect to 2010, with international reserves at quite comfortable levels. The current account balance improved significantly, reflecting higher petroleum prices that offset increased imports;
• The fiscal position remains in deficit despite increased petroleum revenue due to a 34 percent increase in total expenditures. The budget deficit will increase to 5 percent of GDP in 2011 compared to a deficit of 2 percent of GDP in 2010;
• Overall unemployment remained stable at 10 percent, but continues to be much higher for young persons (21 percent) and women (19 percent).

In 2012, the non-oil sector is expected to post comparable performance with growth of around 5 percent. Production should stabilize in the petroleum sector, to bring overall growth to roughly 3 percent. Fiscal policy will remain expansionary with the continuation of higher pay for civil servants and socioeconomic support measures launched in 2010 as well as continued efforts to improve public infrastructures. Given increased current spending in recent years, the long-term sustainability of public finances will depend on rationalization of current spending and sustained efforts to mobilize non-oil revenue. It will be important in this regard to continue efforts to better control and target expenditures, including wages and social transfers. Monetary policy in 2012 should remain geared toward controlling excess liquidity and inflationary pressures that could emerge following significant increases in public-sector wages. Also, the Bank of Algeria is continuing to maintain the real effective exchange rate close to the equilibrium level.

Despite progress in recent years with respect to macroeconomic stability, Algeria continues to face the key challenge of diversifying its economy and developing a strong private sector to create jobs. Medium-term prospects remain favorable, provided ambitious reforms are pursued. However, the outlook is subject to certain risks. A deterioration of the international economic environment could depress petroleum prices for some time and substantially worsen fiscal balances. Also, as the public investment program matures, the private sector must be prepared to take over as the engine of growth for non-oil activity.

To improve the outlook for growth and employment, Algeria should pursue an ambitious program of structural reforms to improve the business climate and the competitiveness of companies. In this regard, the mission welcomes the consultations launched by the government in 2011 to define a set of measures to improve the business environment. In parallel, it should continue to ensure the effectiveness of the public investments needed to continue improving infrastructures. The IMF, in turn, will continue to support efforts by the government and the Bank of Algeria to improve the soundness and efficiency of the banking sector. Finally, the mission encourages the authorities to continue their efforts to integrate Algeria into the regional and global economy.