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Ms. Nicole Laframboise, Ms. Patricia Alonso-Gamo, Mr. Alain Feler, Mrs. Stefania Bazzoni, Mr. Karim A. Nashashibi, and Sebastian Paris Horvitz

Abstract

This paper offers Algeria's recent experience with macroeconomic stabilization and systemic transformation from a centrally planned to a market economy. The analyses focuses on the period since 1994 when Algeria embarked on a comprehensive reform program that has benefitted from IMF support, first through a one-year Stand-by Arrangement, and from May 1995, through a three-year arrangement under the Extended Fund Facility. To better understand this experience, this paper provides some background information on Algeria's political history and economic developments during the period preceding the Stand-By arrangement.

Mr. P. van den Boogaerde

Abstract

Arab financial assistance to developing - particularly Arab - countries rose sharply between 1973 and 1980 but fell gradually through the 1980s, owing mainly to weakening oil prices. As a percent of GNP, however, Arab contributions remain the largest among major donors. This paper surveys the volume and distribution of Arab financing from 1973 to 1989.

Ms. Nicole Laframboise, Ms. Patricia Alonso-Gamo, Mr. Alain Feler, Mrs. Stefania Bazzoni, Mr. Karim A. Nashashibi, and Sebastian Paris Horvitz

Abstract

This occasional paper assesses Algeria’s recent experience with macroeconomic stabilization and systemic transformation from a centrally planned to a market economy. The analysis focuses on the period since 1994 when Algeria embarked on a comprehensive reform program that has benefited from IMF support, first through a one-year Stand-By Arrangement, and, from May 1995, through a three-year arrangement under the Extended Fund Facility. Algeria’s efforts have also been supported by several World Bank sectoral lending programs, loans from the Arab Monetary Fund and other donor institutions, extended debt reschedulings from Paris Club official bilateral creditors and commercial banks, and financial assistance from the European Union.

Ms. Nicole Laframboise, Ms. Patricia Alonso-Gamo, Mr. Alain Feler, Mrs. Stefania Bazzoni, Mr. Karim A. Nashashibi, and Sebastian Paris Horvitz

Abstract

Algeria, with its area of 0.9 million square miles, is the second largest country in Africa. However, 85 percent of its total land mass is occupied by the Saharan desert and is sparsely populated. Most of its current population of about 29.6 million lives along the Mediterranean coast and in the high plains, which are geographically separated from the Saharan desert by mountain chains impeding north-south communication.

Ms. Nicole Laframboise, Ms. Patricia Alonso-Gamo, Mr. Alain Feler, Mrs. Stefania Bazzoni, Mr. Karim A. Nashashibi, and Sebastian Paris Horvitz

Abstract

The severe imbalances inherited from previous years deteriorated further at the beginning of 1994, when a further fall in oil prices, coupled with growing civil strife and the drying-up of external financing brought the economy to the brink of balance of payment crisis. This deterioration compelled the authorities to formulate a comprehensive structural adjustment program that received the support of the IMF in May 1994, with a one-year Stand-By Arrangement and, from May 1995, with a three-year arrangement under the Extended Fund Facility. This section summarizes the main objectives and reform strategy pursued under this program as well as Algeria’s macroeconomic performance during 1994–97. Sections IV to VII examine in greater detail economic developments in each major policy reform area.

Ms. Nicole Laframboise, Ms. Patricia Alonso-Gamo, Mr. Alain Feler, Mrs. Stefania Bazzoni, Mr. Karim A. Nashashibi, and Sebastian Paris Horvitz

Abstract

The transformation of Algeria from a centrally planned economy to a market economy was accompanied by a major reorientation of the government’s fiscal policy. Under the central planning system, fiscal policy focused mainly on allocating the rent extracted from hydrocarbon exports to maintain a large civil service, provide generalized transfers and subsidies, for both consumption and production, and undertake large nonpriority public investment projects. With the emergence of a market economy, the government endeavored to limit its role to the provision of public goods and services. In addition, the budget assumed a major role in the stabilization process by bringing about macroeconomic stability and releasing resources to the private sector through fiscal consolidation. On the structural side, the budget was strengthened by recasting the tax system to gradually reduce the dependence on hydrocarbon revenue and by reorienting expenditures to growth-promoting areas such as education and health, while improving the targeting of social safety nets to protect the most vulnerable groups from the costs of adjustment.

Ms. Nicole Laframboise, Ms. Patricia Alonso-Gamo, Mr. Alain Feler, Mrs. Stefania Bazzoni, Mr. Karim A. Nashashibi, and Sebastian Paris Horvitz

Abstract

In the late 1980s, Algeria’s financial sector was small and segmented, operating de facto as a financing instrument for public sector investment—with little linkage between risk assessment and credit allocation—while financial markets were virtually nonexistent. The five commercial banks and the savings-housing bank (Caisse nationale d’epargne et de prevoyance (CNEP))—all government-owned—had no commercial activity. They collected household and enterprise savings through an extensive network of branches, and channeled these resources to finance imports and public enterprise operations. The latter were assigned to specified banks under a policy of domiciliation. This system, under which each financial institution carried out transactions in certain sectors or dealt with specific clients, led to market segmentation, limited expertise, and lack of competition. Nonbank financial intermediaries included a few insurance companies and pension funds, also publicly owned.

Ms. Nicole Laframboise, Ms. Patricia Alonso-Gamo, Mr. Alain Feler, Mrs. Stefania Bazzoni, Mr. Karim A. Nashashibi, and Sebastian Paris Horvitz

Abstract

Issues of income distribution, unemployment, housing, and social welfare have always loomed large in Algeria. With a young and rapidly growing population, the labor force has been increasing faster than job opportunities. The consequent unemployment, coupled with rapid urbanization and an existing housing shortage, has placed a severe strain on the social fabric and the provision of basic social services. Nevertheless, Algeria entered the 1990s with less acute poverty and inequalities in income distribution than other countries in the region with similar income levels.

Ms. Nicole Laframboise, Ms. Patricia Alonso-Gamo, Mr. Alain Feler, Mrs. Stefania Bazzoni, Mr. Karim A. Nashashibi, and Sebastian Paris Horvitz

Abstract

External developments have always played a key role in Algeria’s economy owing to the dominant role of the hydrocarbon sector, which contributes a large share of budget revenue, and whose exports have generally accounted for more than 95 percent of total export receipts. Changes in the external environment and domestic economic policies have, therefore, remained closely intertwined. Persistent domestic financial imbalances in the late 1980s hindered attempts to liberalize external transactions and gave rise to an overvalued exchange rate and mounting external debt as unsustainable absorption levels were financed by borrowing abroad. Escalating debt service costs precipitated the withdrawal of external financing in the face of a looming balance of payments crisis at the end of 1993, which, in turn, was one of the key factors behind the authorities’ decision to implement a drastic adjustment program. Since a realignment of relative prices and price liberalization were the cornerstone of the reform package launched in 1994, the latter was accompanied by a large up-front devaluation and included broad trade and exchange rate liberalization measures. These steps had widespread repercussions on the financial position of enterprises and banks, and on the budget balance, which had to be addressed in the context of structural reforms. This section examines external developments since the mid-1980s, as well as different aspects of external policies and their role in the overall reform process.

Ms. Nicole Laframboise, Ms. Patricia Alonso-Gamo, Mr. Alain Feler, Mrs. Stefania Bazzoni, Mr. Karim A. Nashashibi, and Sebastian Paris Horvitz

Abstract

For about twenty-five years following its independence in 1962, Algeria made significant progress toward developing its human and physical infrastructure, as well as a vigorous and diversified hydrocarbon sector. Income and gender inequalities were reduced, and a large degree of social cohesion was attained. The yearly flow of the petroleum rent and trade protection, however, shielded the Algerian economy from the inefficiencies inherent in its central planning of resources and in the one-party political system. Large investments in industrial development did little to create a diversified and competitive industrial base, while neglecting pressing housing needs, which reached crisis proportion.