## Buoyant Capital Spending and Worries over Real Appreciation: Cold Facts from Algeria

_IMF Working Papers, December 1, 2007_

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## Bibliographic details
- Authors: Oumar Diallo, Boileau Loko, Kangni R Kpodar
- Published: December 1, 2007
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451868494.001

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### Summary and central findings
- The Government of Algeria has pursed a relatively expansionary fiscal policy in recent years, thanks to rising oil prices and revenues.
- The paper explores the potential effects of such a stance on real exchange rate and uncovers a relatively small appreciating effect of increased government capital expenditure.
- A significant share of capital spending falls into tradable imported goods, which helps explain the relatively small appreciating effect.
- The envisaged increase in capital spending, if well designed and implemented, might in the long-run translate into rising operations and maintenance expenditure—mostly nontradable goods—thereby causing a higher real appreciation.
- This implies that Algeria should carefully consider the implications of its public investment program on recurrent expenditure.

### Mechanism and explanation
- Increased government capital expenditure → large share directed to tradable imported goods → limited immediate pressure on real exchange rate.
- Over the long run, successful capital projects can raise operations and maintenance (O&M) expenditure.
- O&M expenditure is largely on nontradable goods → higher demand for nontraded sector → potential for higher real appreciation.

### Policy implications and recommendations
- Consider the composition of public investment: distinguish between capital spending on tradable imported goods and capital spending that will generate future nontradable recurrent costs.
- Evaluate the long-run fiscal implications of capital programs, including projected operations and maintenance expenditure.
- Design and implement capital spending programs with attention to their recurrent-expenditure footprint to mitigate risks of real appreciation.

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_Source: https://www.imf.org/en/publications/wp/issues/2016/12/31/buoyant-capital-spending-and-worries-over-real-appreciation-cold-facts-from-algeria-21521_