## 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](https://www.imf.org/en/news/articles/2015/09/28/04/53/sonew052016a)

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## Bibliographic details
- Published: May 19, 2016

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### Outlook and growth
- 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.

### Fiscal and external impacts of the oil price shock
- 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.

### Structural reforms and diversification
- 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

### Labor market, employment, and inclusion
- 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: objectives and instruments
- 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

### Subsidy reform specifics
- 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 risks and implementation challenges
- 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.

### IMF role
- 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.*

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## Content in this bundle

- [Cr16127pdf (PDF)](/-/media/websites/imf/imported/external/pubs/ft/scr/2016/_cr16127pdf.pdf){rel="external" type="application/pdf"}

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## References

- [https://www.imf.org/en/News/country-focus](https://www.imf.org/en/News/country-focus)
- [PRESS CENTER](http://presscenter.imf.org/)
- [In The News](https://www.imf.org/en/news/search)
- [IMF Country Focus](https://www.imf.org/en/news/country-focus)
- [Regional economic outlook update](http://www.imf.org/external/pubs/ft/reo/2016/mcd/mreo0416.htm)
- [Press release](http://www.imf.org/external/np/sec/pr/2016/pr16228.htm)
- [IMF and Algeria](http://www.imf.org/external/country/DZA/index.htm)
- [https://www.imf.org/en/home](https://www.imf.org/en/home)

_Source: https://www.imf.org/en/news/articles/2015/09/28/04/53/sonew052016a_