IMF Staff Completes 2017 Article IV Mission to Algeria

IMF News, March 20, 2017

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Algeria faces important challenges posed by lower oil prices.
Overall economic activity was resilient, but growth in the nonhydrocarbon sector slowed and is estimated at 3.4 percent in 2016.
Inflation increased from 4.8 percent in 2015 to 6.4 percent in 2016 and stood at 8.1 percent year-on-year in January 2017.
Unemployment increased to 10.5 percent in September 2016; unemployment remains particularly high among the youth (26.7 percent) and women (20.1 percent).
Fiscal and current account deficits remained large in 2016; public debt increased.
International reserves fell by US$30 billion to US$113 billion (excluding SDRs).

Authorities achieved a notable reduction in the fiscal deficit in 2016 and have adopted an ambitious fiscal consolidation plan for 2017-19.
Sustained fiscal consolidation is needed as oil prices are expected to remain low and hydrocarbon reserves are exhaustible.
Recommended measures for consolidation:
- Broadening the tax base, including through better tax enforcement and the rationalization of tax exemptions.
- Containing current spending.
- Gradually replacing costly energy subsidies, which mostly benefit the well-off, by direct support to the population most in need.
- Improving the efficiency of capital spending and reducing its cost.
- Preserving investment in health, education, and well-targeted social safety nets.
- Further strengthening the budget framework and closely monitoring growing fiscal risks.
Cautionary guidance:
- Avoid too abrupt a fiscal deficit reduction to reduce the risk of a sharp slowdown in growth.
- Given the relatively low level of public debt, Algeria could afford a somewhat more gradual fiscal consolidation than entailed in the current medium-term budget framework if it considers a broader range of financing options, including external borrowing and the sale of state assets.

Mission strongly supports the authorities’ objective to decrease the economy’s dependence on hydrocarbons and unleash the potential of the private sector.
Rationale: needed to adjust to lower oil prices and to ensure a sustainable source of job creation beyond proven oil and gas reserves.
Required wide-ranging structural reforms:
- Improve the business environment and access to finance.
- Strengthen governance and transparency.
- Make the labor market more effective.
- Ensure skills produced by the education system match employer needs.
- Foster greater female participation in the labor market.
- Further open the economy to foreign investment.
Reform sequencing: design so reforms reinforce each other and the burden of adjustment is shared equitably; act timely as structural reforms take time to bear fruit.

Exchange rate and monetary policies should support adjustment.
- Further efforts to bring the dinar in line with fundamentals, combined with steps toward the elimination of the parallel foreign exchange market, would support fiscal and external adjustment.
Bank of Algeria actions:
- Appropriately introducing open market operations, which should become its main monetary policy tool.
- Will need to stand ready to tighten monetary policy in light of growing inflationary pressures.
Banking sector assessment and recommendations:
- Based on preliminary data, the banking sector as a whole remains adequately capitalized and profitable, but the oil price shock has increased liquidity, interest rate, and credit risks.
- Important actions: accelerate transition to a risk-based supervisory framework; enhance the role of macro-prudential policy; strengthen governance of public banks; develop a crisis resolution framework.

An IMF staff team led by Jean-François Dauphin visited Algiers from March 7 to 20 for the 2017 Article IV consultation; discussions focused on the appropriate mix of policies to adjust to lower oil prices.
The mission met with Finance Minister Hadji Baba Ammi; Industry and Mines Minister Abdessalem Bouchouareb; Acting Trade Minister and Housing and Urban Development Minister Abdelmadjid Tebboune; Education Minister Nouria Benghebrit; Labor, Employment, and Social Security Minister Mohamed El Ghazi; and the Governor of the Bank of Algeria, Mohamed Loukal, among others.
Next procedural step: Based on preliminary findings, staff will prepare a report that, subject to management approval, will be presented to the IMF's Executive Board for discussion and decision.

Press Release No. 17/90 — March 20, 2017