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Algeria

Author(s):
International Monetary Fund
Published Date:
March 2010
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I. Background and Recent Developments

A. An Oil-Dependent Economy Financially Sound But Facing Key Medium-Term Challenges

1. The political situation has been stable, with President Bouteflika elected for a third term in April 2009, but Al-Qaeda in the Maghreb continues to pose a threat.

2. Following several years of strong economic performance and prudent macroeconomic management when oil prices were high, Algeria has faced the current global slowdown from a position of relative strength. Over the last decade, annual overall and nonhydrocarbon (NH) GDP growth averaged respectively close to 4 percent and 5 percent, largely driven by public spending, and inflation was subdued at around 3 percent. A good share of the hydrocarbon export revenues was saved in reserves and in the oil stabilization fund, or used to drastically reduce external and public debt.1

Key policy challenges are low NH sector productivity and relatively high unemployment, especially among the youth.

Unemployment Rates (2001–08)

GDP (constant pricea) Per Employee

Source: Algerian authorities; and IMF staff estimates

3. The key challenge is to adopt appropriate policies to ensure long-term macroeconomic stability and promote economic diversification. Although Algeria has been insulated from direct financial contagion, the steep fluctuations in hydrocarbon prices and the slowdown of global energy demand have reexposed Algeria’s vulnerabilities. While having fallen, youth unemployment remains high (24 percent), and Algeria is still too dependent on the hydrocarbon sector, with an inward-oriented NH sector sustained by public spending. Moving away from overreliance on hydrocarbon revenues and enhancing job creation require speeding up reforms promoting productivity gains and private investment. Key areas in the Fund’s surveillance mandate include the financial sector, tax policy and revenue administration, and further integration in the regional and global economies.

B. Nonhydrocarbon Growth Has Been Solid But Lower Hydrocarbon Prices Weakened Financial Balances

The Algerian economy grew at healthy rates due to high hydrocarbon revenues…

Real GDP Growth (in percent, 2005-09)

…generating large CA surpluses and significant accumulation of reserves.

Current Account and Reserves (2005-09)

Inflation increased slightly in the second half of 2009 due to fresh food products. Non-fresh food inflation declined

Price Increases (y/y) (Jan 2003–Aug 2009)

Source: Algerian authorities; and IMF staff estimates

4. With lower hydrocarbon revenues, external and fiscal balances deteriorated, but economic growth continues to be strong, with low inflation, sizable reserves and minimal external debt.

  • NHGDP growth reached 6.1 percent in 2008, mainly driven by the PIP. Higher NH growth is expected in 2009 (possibly above 9 percent), reflecting an excellent cereal harvest and the continued strength of PIP-led service and construction sectors. Hydrocarbon production will decline further this year (by 6–7 percent) due to lower global demand, bringing overall growth down to about 2 percent.
  • Headline inflation reached 5.8 percent (y-o-y) in September 2009 due to a 25 percent surge in fresh food prices, reportedly caused by structural shortcomings in the supply chain. However, excluding fresh food, inflation declined further to 1.4 percent, reflecting (a) an effective liquidity absorption policy by the Bank of Algeria (BA); (b) administered prices for food staples and constant domestic energy prices since 2004; and (c) high import content of domestic demand.
  • The fall in world hydrocarbon prices weighed on the external position but external reserves remain large. The current account surplus is projected to decline from 20 percent of GDP in 2008 to 1 percent in 2009, reflecting the drop in hydrocarbon exports (10 percent in volume relative to 2008) and the surging PIP-related imports. With a small current account surplus and net capital inflows, official reserves have grown by $3 billion since end-2008, reaching $146 billion at end-September 2009 (3 years of imports).2
  • The overall fiscal position is greatly affected by the fall in hydrocarbon revenues, but the NH balance should improve. In 2009, Algeria will post its first overall fiscal deficit in a decade, at 8 percent of GDP, following a surplus of 8 percent in 2008. It should be largely financed with domestic nonbank resources, leaving the savings in the oil stabilization fund (FRR) at around 40 percent of GDP. The strong growth in NH revenues (by 20 percent), reflecting the further modernization of the revenue administration and higher income tax collections linked to the 2008 wage increase, will partly offset the fall in hydrocarbon revenues. Current expenditure would grow by 15 percent in 2009 due to additional maintenance costs of new infrastructure and employment support programs, while capital expenditures would remain constant in real terms after several years of significant growth. Consequently, the NH fiscal deficit will decline from 52 percent of NHGDP in 2008 to 48 percent in 2009, stabilizing the sharp deterioration observed since 2004.
  • Growth in deposits and credit is robust, with the latter averaging 19 percent (y-o-y) in June 2009. The BA has been absorbing the growing abundant liquidity generated by the PIP and SONATRACH (the state hydrocarbon company) revenues. At the same time, it also reduced its uptake rates in March 2009 to support domestic demand.
  • The nominal and real effective exchange rates depreciated on average by 7.7 percent and 5 percent, respectively, during January–September 2009 from the same period last year, reflecting changes in fundamentals such as the terms of trade and inflation differentials with major trading partners.

In 2009 Algeria will record the first fiscal deficit since 1999

Overall and Nonhydrocarbon Fiscal Balances, 2004-09

Credit growth has been robust and Algerian banks remain liquid.

Financial sector (Jan. 2008-June 2009)

Nominal and real effective exchange rates have depreciated since early 2008

Exchange Rates, Jan. 06-Aug. 2009

Source: Algerian authorities; and IMF staff estimates

II. International Environment, Outlook and Risks

5. In the short term, growth will continue to be sustained by large public spending. Despite an expected fall in agricultural production, NHGDP could grow by 5½ percent in 2010 pulled by the continuing PIP and the acceleration of SONATRACH’s investment program. Output in the hydrocarbon sector should improve with the international economic recovery, contributing positively to overall growth for the first time in many years. Therefore, real GDP growth could reach around 4½ percent in 2010. Inflation should come below 5 percent if fresh food prices stabilize.

6. Higher international oil prices projected in the WEO ($76/bbl in 2010) should improve the external and fiscal balances. The current account surplus would increase to 4 percent of GPD in 2010 and import coverage by international reserves should rise. The fiscal deficit could be near 6½ percent of GDP in 2010, as expenditure would remain high.

7. The medium-term outlook remains favorable despite the possible slowdown of NH growth due to stabilized public expenditures. A 5 percent NHGDP growth rate would be supported by a new PIP planned for to stabilized public expenditures. A 5 percent NHGDP growth rate would be supported by a new PIP planned for 2010–14 for a total announced amount of US$150 billion and SONATRACH’s investments. The latter should increase hydrocarbon production (mostly natural gas) in the medium term and contribute to a 2 percent hydrocarbon growth.

8. The medium-term outlook has improved substantially with the recovery of oil prices but remains very sensitive to their future levels. If capital expenditures are maintained at their current nominal level, staff’s baseline scenario shows that Algeria will remain in a relatively sound financial position, with FRR resources declining but still above 20 percent of GDP in 2014. International reserves would be around 4 years of imports of goods and services in 2014. However, government net assets (FRR minus public debt) would decrease significantly from 31½ percent of GDP in 2008 to 4 percent in 2014.

Baseline scenario
Base scenario2008200920102011201220132014
International oil price (US$/bbl)99.061.576.579.581.083.084.8
Overal budget balance (percent of GDP)8.1-8.4-6.6-5.4-3.9-2.4-1.4
FRR (percent of GDP)38.839.231.526.523.021.220.2
Reserves (US$ billion)143.1149.1157.2168.3181.7197.4215.4
Primary budget deficit (percent of NHGDP)-51.9-48.0-47.0-44.7-41.3-38.0-35.3
Current account balance (percent of GDP)20.10.93.95.36.27.07.7
Government net assets (percent of GDP)(*)31.425.717.111.17.25.04.1

FRR minus government debt

Source: Algerian authorities; and staff estimates and projections.

FRR minus government debt

Source: Algerian authorities; and staff estimates and projections.

9. A worsening world economy and a significant decline in energy prices would present downside risks. Under a scenario with oil prices at $45/bbl (near the average price in the first half of 2009) until 2014, current policies would be difficult to maintain as the FRR3 would not be sufficient to finance the budget deficit and public debt would have to increase significantly (Panel A). The fiscal adjustment needed to avoid such an outcome would include scaling down the PIP, implying slower NH growth and higher unemployment.

Panel A:Scenarios With Current Policies Under Alternative Oil Prices

Source: Algerian authorities; and IMF staff estimates and projections.

10. Public spending alone cannot ensure long-term growth and the outlook rests on decisive actions to promote private sector development and economic diversification. NHGDP growth would be lower without substantial improvements in productivity and business climate, needed to elicit a strong private sector supply response.

Oil has been key in Algeria and medium term sustainability rests on oil price outlook

Real Oil Prices, 1970-14 (in 2008 LS$) 1/

1/ Average oil price deflated by US CPI

Source: Algerian authorities; and IMF staff estimates

Staff appraisal:

The imbalances caused by the fall in oil prices show that Algeria continues to face important challenges. Although the medium-term financial outlook improved with the recovery of oil prices, it remains highly vulnerable to their volatility. Under an alternative scenario with lower oil prices, avoiding a significant increase in public debt would require a stronger fiscal adjustment. Moreover, NH private sector is mainly inward oriented, and productivity and business climate are lagging compared to trading partners. Public sector alone cannot sustain growth over the long-term, and major productivity gains are necessary to reduce the relatively high unemployment. This can only be achieved through continued macroeconomic stability, and better infrastructure, human capital, and public services.

III. Policy Discussions

11. Discussions focused on policies to diversify the economy, raise NHGDP growth, and restore medium-term fiscal sustainability.

A. Fiscal Policy Needs to be Redirected to Ensure Long-Term Sustainability

Background and staff analysis

12. The sizable resources accumulated in the FRR4 provide latitude in the conduct of fiscal policy in the short term and will allow continued implementation of the PIP. Enhancing the vitality and growth potential of the NH sector hinges on continued implementation of a well-targeted program of expanding and maintaining public infrastructure, and on supporting small and medium-sized private enterprises. Following a sharp expansion in capital expenditure between 2005–08 equivalent to 23 percent of NHGDP, the 2010 draft budget law provides for still large but slightly decreasing public investment. With additional hiring of civil servants and higher maintenance costs, current expenditures are projected to increase by 14 percent in 2010.

High hydrocarbon prices allowed Algeria to accumulate large resources in the oil stabilization fund…

Oil Stabilization Fund, 2004-09(p) (Percent of NHGDP)

…and finance increasing expenditure

Budget Expenditure, 2004-09(p) (Percent of NHGDP)

Hydrocarbon resources also allowed to pay back public and external debt

Government and External Debt, 2004-09 (p)

Source: Algerian authorities; and IMF staff estimates

13. However, fiscal policy should be redirected towards a long-term sustainable path to maintain fiscal space in case of adverse scenarios. Given finite hydrocarbon resources, fiscal policy can be gauged against rules derived from the permanent income framework that would ensure the availability of these resources over a very long term (Box 1). For instance, the recent significant expansion in expenditure brought the NH primary deficit above its benchmark under the more stringent rule of constant real wealth per capita by about 12 percentage points of NHGDP in 2009. This type of analysis, together with fiscal projections under an alternative scenario with lower oil prices, supports the gradual but significant fiscal adjustment projected over the medium term, anchored on:

  • Rationalizing of expenditure through improved targeting and controls. Since 2004, current expenditures have been increasingly dependent on hydrocarbon revenue and are expected to further rise with the maintenance of new infrastructure. Expenditures would benefit from an overhaul, since current spending is difficult to compress when hydrocarbon revenues drop significantly, and capital expenditures have historically been subject to systematic cost overruns. To that end, the growth in the wage bill should be contained and the targeting of all subsidies and transfers be reassessed, while the issue of investment cost overruns should be addressed by the March 2009 decree reinforcing financial controls on public spending.
  • Continued improvement in NH tax collection. Several steps were taken this year to that end, such as making clean tax records a prerequisite for bank transactions and simplifying revenue administration. The draft 2010 budget law also provides for further efficiency improvements in revenue collection, which should further increase the budget share of NH revenue over the medium term. However, the growing number of tax exemptions requires enhanced controls which divert human resources away from revenue collection and undermines efforts to streamline the tax system.

14. Improving fiscal management and budget systems should help enhancing the quality and effectiveness of expenditure. Ongoing reforms, with World Bank assistance since 2005, aim at assessing the medium-term impact of the PIP on current spending, developing tools to evaluate program performance, and better controlling spending. These reforms should be actively pursued, to achieve in particular the full implementation of the medium-term budget programming system by end-2012 as planned. It would also be desirable to better assess and reduce medium-term fiscal risks linked to eventual contract renegotiations of Public-Private Partnerships (PPP).

Authorities’ views and policy intentions

15. The authorities intend to maintain the current fiscal stance in 2010 to sustain aggregate demand and enhance growth potential. Low public debt and high savings in the FRR provide sufficient leeway. The authorities plan to support private consumption through hiring additional civil servants and raising scholarships, and to stimulate private investment—including in infant industries competing with imports—by extending tax incentives. The current PIP will be implemented as planned. Priorities and composition of the new PIP for 2010–14 are under preparation.

16. The authorities remain committed to preserving long-term fiscal sustainability. They noted the projected decline in the NH deficit in 2009–10. After completing the broad civil service reform, future wage increases should be linked to productivity and economic performance, in line with the National and Social Pact. Work is ongoing to streamline subsidies, but these are also guided by political and economic efficiency considerations. Execution of the current and future PIPs will be prioritized and based on the fiscal outlook. Tax and customs administration reforms, already credited with an increased NH revenue performance, will be pursued actively for additional revenue gains in the medium term. Meanwhile, granting of tax incentives to stimulate NH growth will continue while monitoring their impact on revenue administration.

17. The authorities attach high importance to the quality and efficiency of public spending. The projects evaluating agency (Caisse Nationale d’Équipements et de Développement, CNED) is now fully operational, but will stay focused on large non-PPP projects. Reform of budget management is progressing, in particular to establish a medium-term expenditure framework, and the role of financial comptrollers was broadened.

Staff appraisal:

Staff supports maintaining the current fiscal stance in 2010 but encourages the authorities to swiftly return to a sustainable fiscal path once global recovery takes hold. Continued implementation of the infrastructure component of the PIP and support to the SMEs is desirable and the sizable savings accumulated in the FRR can be used to that effect. Nonetheless, a thorough overhaul of the current and capital spending would free up budgetary resources, better preserve hydrocarbon wealth in the medium-term and maintain fiscal space in case of adverse shock on oil prices. Current expenditure, in particular the wage bill, should be firmly contained in the medium term to make room for additional maintenance costs related to the new infrastructure built with the PIP. Similarly, the authorities’ ongoing advances to reform the revenue administration should boost NH revenue over the medium term, provided that growth in tax incentives is contained.

Given that public spending is key for the economy, ensuring its quality and efficiency is critical. The authorities’ program to modernize budget systems will likely be very helpful in that respect.

Box 1.Medium-and Long-Term Fiscal Sustainability

The high and growing dependence of Algeria’s budget on hydrocarbon revenue is a significant vulnerability given volatile global prices and nonrenewable reserves.1

To ensure long-term fiscal sustainability with some equalization of consumption across generations, hydrocarbon resources should be allocated to budget spending on a permanent income basis.2 Accordingly, real hydrocarbon wealth is preserved by substituting geological hydrocarbon assets by financial ones to preserve real wealth. The criterion selected for annual expenditure funded by hydrocarbon wealth (i.e. the NH primary deficit) may be, for instance, to maintain a constant real wealth or a constant real wealth per capita over the medium term. The latter criterion is more restrictive for the initial years but implies that future generations would benefit more from the oil wealth than under the criterion based on constant total real wealth.

Algeria: share of hydrocarbon revenue in total budget revenue, 1991-2014

(in percent)

Precautionary considerations are likely to further reduce the NH primary deficit criterion. Future hydrocarbon revenues are highly uncertain, mainly because of large price fluctuations. Additional budgetary savings out of hydrocarbon resources are needed to cushion the budget against uncertainty.3 The required additional savings are lower when initial financial reserves are high.

Sustainable Primary Nonhydrocarbon Deficits and Current Staff Projections

(in percent of NHGDP)
1/ See BP Statistical Review of World Energy, June 2009, for estimates of proven reserves.2/ See IMF Country Report 05/52.3/ See IMF Working Paper WP/09/33.

B. Prudent Monetary Policy Should Continue to Sterilize Liquidity

Background and staff analysis

Liquidity Absorption, Jul 07-Jul 09

18. Revenues from hydrocarbon exports and fiscal policy have boosted liquidity in recent years, which should be adequately sterilized to fend off inflationary pressures. Whereas the growth in SONATRACH’s deposits has slowed and even turned negative in the past year, the amount of non-SONATRACH liquidity absorbed by the central bank has grown significantly. The changing nature of the system’s liquidity should be closely monitored. Forecasting could be improved by exchanging more information with the Ministry of Finance on government spending combined with an econometric analysis of liquidity needs. Moreover, abundant liquidity poses significant challenges for the transmission of monetary policy, particularly in the current context of higher domestic food prices, uncertain import prices and limited activity on the interbank market. Furthermore, with still robust money and credit growth, the authorities could envisage increasing the policy interest rate back to its pre-cut level of March 2009, or higher if inflationary pressures were to materialize. To maximize the effects of its actions, the BA should clearly state its goals and instruments at each intervention.

19. The real effective exchange rate of the dinar has remained near its equilibrium level. The BA is the de-facto sole seller of foreign exchange and operates a managed float, whereby the nominal exchange rate is gradually adjusted towards a long-term real equilibrium target. Despite the strong volatility in Algeria’s terms of trade, staff calculations suggest that the current level of the real effective exchange rate is in line with its fundamentals implied by the Equilibrium Real Exchange Rate and Macroeconomic Balance approach (Box 2).

Authorities’ Views and Policy Intentions

20. The authorities stand ready to adjust monetary policy instruments based on their close monitoring of both excess liquidity and inflation underlying trends. They see overall inflation under control notwithstanding the sharp increase in fresh food prices. They consider their liquidity management effective, based on two short-term liquidity facilities, but were receptive to the suggestion of adding facilities with longer maturities. They are also considering the use of required reserves as an additional instrument for liquidity absorption, and would stand ready to include BA’s refinancing rate in future potential policy moves if needed.

21. The authorities believe that the flexible exchange rate management has kept the dinar near its equilibrium level, consistent with their monetary policy objective and external stability. They noted that estimates of the equilibrium real exchange rate are inherently uncertain, and should be treated with caution.

Staff appraisal:

The BA has been able to contain inflationary pressures, but it could become a concern if liquidity continues to grow, and the authorities should stand ready to tighten monetary policy to regulate the excess liquidity. The rate cuts of early 2009 could be reversed to control potential inflationary pressures, and the refinancing rate included in future policy moves if a stronger signal is needed. Policy moves should be disseminated widely to strengthen their signaling effects. Staff encourages the authorities to refine their instruments for monitoring, assessing and absorbing the abundant liquidity.

The BA should continue to pursue an exchange rate policy consistent with external stability, and closely monitor developments to minimize the risk of misalignment.

Box 2.Exchange Rate Assessment

Staff and authorities evaluated the level of the dinar implied by the Equilibrium Real Exchange Rate (ERER) and Macroeconomic Balance approach.1 Following IMF’s CGER methodology but with the specific parameters for an oil producer like Algeria, the estimated coefficients and the WEO projected medium-term fundamental values were used to compute the equilibrium levels of the real effective exchange rate (REER) under the two methodologies. In both cases, the RER was found to be close to its equilibrium level at the projection horizon.

Exchange Rate Misalignment(In percent)
EREER ApproachMB Approach *Average
2009201420092014
2009 Article IV update-3411-10-220
“+”: Overvaluation.

The current account norm is a surplus of 5.5 percent of GDP.

“+”: Overvaluation.

The current account norm is a surplus of 5.5 percent of GDP.

The reduced form ERER specific to Algeria was reestimated based on the following explanatory variables;

  • Algeria’s terms of trade for goods and services (ToT) from the WEO database. The model with the terms of trade as an explanatory variable generates a better statistical fit than the model with the real oil price and is more consistent with the ERER estimations of CGER.
  • The differential of output per worker in Algeria vis-à-vis trade partners (prod).
  • Government spending as a percentage of GDP (G).

REER and Equilbriun, 1970-2014

A Vector Error Correction estimates the following equilibrium long-run cointegrating relationship (t-stats between parentheses):

Based on this equation, the deviation between the equilibrium and actual real exchange rate estimated for 2009 would point to some current underlying inflationary pressures (in large part driven by the government expenditure expansion), which should subside in the future along with the projected gradual adjustment in government expenditure.

1/ For details, see IMF Country Report 08/104.

C. More Effective Intermediation Requires More Ambitious Reform

Background and staff analysis

22. More effective financial intermediation would help channel Algeria’s large savings to private sector investment, which remains low outside the oil sector. Despite the robust credit growth, intermediation levels are low by regional standards (see Panel B). The banking sector remains very liquid with relatively low lending due to high credit risks. The authorities took several measures to improve intermediation and develop the financial sector including: (a) increasing minimum capital requirement for banks and insurance companies; (b) raising banks limits to invest in participated businesses; and (c) promoting mortgage and loans to SMEs financing with government incentives. However, progress has been limited and the new consumer lending restrictions could negatively impact bank intermediation.

Panel B.Algeria: International Comparisons

Source: Algerian authorities; and IMF staff estimates

23. Financial soundness indicators have improved in 2008 but the level of nonperforming loans (NPLs) remains high. The loans requiring 100 percent provisioning fell from 22 percent in 2007 to 18 percent in 2008, due to continued government’s NPLs purchases plan for state-owned enterprises (SOEs).5 Nonetheless, the banking system does not pose short-term macroeconomic risk: it is adequately capitalized and profitable, has satisfactory provisioning, and does not rely on foreign lending for market funding.

Financial Soundness Indicators(in percent)
2005200620072008
Capital adequacy ratio12151317
Public banks 1/12141216
Foreign banks 2/19221820
Classified loans/total loans36353628
NPLs/total loans 3/19182218
Public banks20192420
o/w, to private sector10121916
Foreign banks3397
Other class./total loans 4/17171310
Public banks18181511
Foreign banks2622
Provisions/classified loans49545662
Public banks49545561
Foreign banks62498586
Return on equity8192525
Public banks6172425
Foreign banks25232826

90% of system assets.

Non-public banks are all foreign.

Loans in arrears (100% provisioning requirement).

Loans performing but at risk (30% or 50% provisioning).

90% of system assets.

Non-public banks are all foreign.

Loans in arrears (100% provisioning requirement).

Loans performing but at risk (30% or 50% provisioning).

24. Implementing the 2007 FSAP Update recommendations should continue. Large public banks would benefit as they usually lack appropriate internal risk assessment systems which complicates lending, especially to SMEs and retail customers. Moreover, the possibility of privatizing public banks under appropriate market conditions could be explored again, to benefit from international experience and increase the efficiency of the banking sector.

Authorities’ Views and Policy Intentions

25. The financial sector remains at the core of the authorities’ reform strategy. They are keenly aware that the financial sector needs upgrading to finance the economy’s investment needs. They emphasized initiatives aimed at increasing the system’s lending capacity, including additional government funding for increasing public banks capital and restructuring public enterprises. They noted that the high level of NPLs was largely related to old claims, and is being actively addressed through the government purchase plan of SOEs’ loans. They estimated that thanks to that program, the overall ratio of classified loans was brought down to around 15 percent in June 2009.

26. The authorities emphasized the steps achieved to improve intermediation and channel the high levels of savings toward private investment in the NH sector. They considered that the measures taken to strengthen banks and other financial institutions such as insurance companies were the appropriate steps to reform the financial sector. Moreover, they intend to adopt other measures such as the institution of a household credit registry. The ban on consumer lending (except for mortgages) was adopted to limit household indebtedness, a small part of total bank lending. Support of other types of lending such as mortgages and SMEs financing should help boosting banking activities.

27. The authorities underlined the importance of the measures to improve banking supervision. They considered that improved transparency and financial reporting of banking institutions would allow a more prospective risk management. The authorities plan to continue implementing new measures by creating a financial reporting tool and adopting an accounting plan based on IAS/IFS.

Staff appraisal:

The authorities should speed up financial sector reform to strengthen and improve the efficiency of financial institutions. In particular, recommendations of the 2007 FSAP Update of the financial sector should be implemented forcefully, seeking to clarify the role of public banks and strengthen their governance, further improve the operational environment, and encourage nonbank financing. The ongoing efforts to reduce NPLs should continue, to bring their levels closer to comparable countries. Authorities should monitor closely the effects of the new measures for improving bank lending to ensure that they do not undermine long-term bank solvency. The ban on consumer lending (except for mortgages) is a potential hurdle to financial sector development, and could be removed when the household credit registry will be operational and allow a better assessment of households’ indebtedness. Incentives for mortgages and SMEs financing should not weaken credit risk assessment. Possibilities for resuming the privatization process of major public banks suspended two years ago should be explored, without ruling out exempting the financial sector from the new restrictions on FDI.

D. Slow Progress in Structural Reforms Will Weigh on Future Growth

Background and Staff Analysis

28. Algeria’s measures to boost domestic private investment could hamper much needed foreign direct investment (FDI). The authorities established for new FDI a 49 percent ceiling for foreign stakeholding, forcing association with domestic partners as majority stakeholders (Box 3). Although management of the project by the foreign partner is allowed, this may deter those seeking a majority interest in the project.

29. The surge in imports over the past few years illustrates Algeria’s growing openness, but trade with Maghreb partners remains marginal. Algeria played an active role in the Maghreb regional initiative that started in 2004, and the integration to the Arab Free Trade Zone in early 2009 is increasing trade with Arab partners. Negotiations for WTO entry are continuing. On the other hand, benefits from the 2005 EU Association Agreement appear limited so far, notably concerning the development of NH exports.

Authorities’ Views and Policy Intentions

30. The authorities are concerned about Algeria’s relative international business climate rankings but stressed that measures were aimed to boost private investment. In particular, enhanced infrastructures will be key in creating new investment opportunities. Streamlining of customs processes should also facilitate trade. The authorities insisted that the new FDI restrictions were tailored to allow foreign investors to retain management of the project despite their minority stake. They view the 49 percent participation as intended to bring more domestic investors to foreign-sponsored projects. Moreover, the authorities welcomed staff’s analysis on successful export diversification strategies in Chile and Malaysia, and will explore possible lessons for Algeria.

31. The authorities emphasized their commitment to promote regional and multilateral trade but recognized difficulties in trade negotiations.

Staff appraisal:

Staff urges the authorities to accelerate structural reforms to improve the business climate. Staff commends the authorities for the efforts to improve infrastructure to boost NH growth but stresses that these efforts are not sufficient to improve investment climate.

Staff considers that some measures adopted in the 2009 Supplementary Budget Law and the slow pace of trade liberalization could be detrimental to the diversification of the economy. The new regulations for FDI projects could deter foreign investor to open subsidiaries in Algeria, preventing much needed technology transfer. In staff’s view, the diversification strategy should strike a right balance between domestic and foreign investment and financing.

Staff encourages the authorities to pursue their efforts to seek greater benefit from the Association Agreement with the EU and to join the WTO, and expedite Algeria’s participation as a creditor in the Enhanced HIPC Initiative.

Box 3.Relevant Measures Adopted by the 2009 Supplementary Budget Law (2009 SBL)

1. Reform of foreign direct investment (FDI) regime: (a) for all new FDI, the majority stake (51 percent) must belong to a domestic partner(s); (b) all new investments require the approval of the national council of investments; and (c) the government and public enterprises have a preemptive purchase right for all sales by or to foreign investors.

2. New consumer lending rules: all consumers lending is banned, except for mortgages.

3. Promotion of domestic investment: (a) new tax deductions for leasing purchases (i.e. “credit bail”); (b) the National investment fund is provided with a capital of 150 billion DA; (c) new cap for government guaranties to SMEs loans increased from 50 million DA to 250 million DA; and (d) creation of a 48 billion DA public investment fund to invest in SMEs created by young entrepreneurs.

4. Support to domestic financial markets development: (a) tax incentives on public debt transactions and stocks; (b) all new FDI projects should seek additional financing through domestic financial institutions; and (c) banks are authorized to lend up to 25 percent of their equity to a business in which they hold an equity interest.

5. External trade operations: (a) all import operations must be only paid through a letter of credit (i.e. “crédit documentaire”); and (b) mandatory tax identification number for foreign trade operations.

6. Promotion of the real estate market: (a) tax exemptions to homeowners renting to low income families; (b) mortgages to public servants granted at subsidized interest rates (one percent); and (c) subsidies (down payment and interests) to low income households for housing acquisition.

Table 1.Algeria: Selected Economic and Financial Indicators, 2006–14
Est.Projections
200620072008200920102011201220132014
(Annual percentage change; unless otherwise indicated)
Oil and gas sector
Liquid petroleum exports (in millions of barrels/day)1.71.71.61.51.51.51.51.51.6
Natural gas exports (in billions of m3)61.859.459.552.656.257.859.661.463.2
Crude oil export unit value (US$/bbl)65.774.799.061.576.579.581.083.084.8
Share of hydrocarbons in total exports (in percent)97.998.498.296.997.297.297.296.394.7
National income and prices
GDP at constant prices2.03.02.42.14.64.14.34.14.1
Hydrocarbon sector-2.5-0.9-2.3-6.62.72.32.92.32.5
Other sectors5.66.36.19.25.45.15.15.15.0
Consumer price index (end of period)4.43.95.85.44.94.74.44.24.0
External sector 1/
Exports, f.o.b.18.210.729.7-42.918.45.44.24.85.3
Hydrocarbons17.711.229.5-43.718.85.44.13.93.5
Nonhydrocarbons43.0-13.342.90.24.45.86.236.650.7
Imports, f.o.b.4.127.444.2-1.22.74.12.82.41.8
Current account balance (in percent of GDP)24.722.520.10.93.95.36.27.07.7
Money and credit
Net foreign assets32.034.438.25.110.011.011.311.511.6
Domestic credit 2/-13.8-13.6-18.89.79.46.04.12.11.2
Credit to the government (net) 2/3/-17.8-20.7-26.44.35.03.41.8-0.1-0.9
Credit to the economy 3/9.312.518.913.010.06.06.06.06.0
Money and quasi-money18.624.215.84.314.216.99.79.69.0
Velocity of broad money (GDP/M2)1.91.71.71.51.51.41.41.41.4
Idem, in percent of nonhydrocarbon GDP1.00.90.91.01.00.90.90.90.9
Liquidity ratio (M2/GDP)52.860.059.266.867.070.971.271.671.9
(In percent of GDP)
Saving-investment balance24.722.520.10.93.95.36.27.07.7
National savings54.656.657.849.953.151.052.451.853.2
Of which: Nongovernment29.136.931.937.341.038.539.939.240.7
Investment29.934.137.749.049.345.746.144.845.5
Of which: Nongovernment18.018.819.828.030.527.729.729.831.6
Central government finance
Overall budget balance (deficit-)13.54.48.1-8.4-6.6-5.4-3.9-2.4-1.4
Total revenue42.839.247.036.936.636.436.035.635.2
Total expenditure29.234.738.945.443.241.839.938.136.6
(In percent of nonhydrocarbon GDP)
Central government finance
Total revenue78.669.385.955.356.255.854.953.952.9
Hydrocarbon60.552.667.735.837.236.735.734.733.6
Nonhydrocarbon18.216.718.219.519.019.119.219.319.4
Total expenditure53.861.571.267.966.364.160.957.655.0
Current expenditure31.031.335.936.537.536.635.934.834.2
Capital expenditure22.830.135.331.428.827.525.022.820.9
Nonhydrocarbon primary balance-34.1-43.2-51.9-48.0-47.0-44.7-41.3-38.0-35.3
Nonhydrocarbon balance-35.6-44.7-52.9-48.4-47.3-45.0-41.7-38.4-35.7
Memorandum items:
GDP (in billions of dinars at current prices)8,5129,41011,04310,21211,63212,83614,02915,28516,574
NHGDP (in billions of dinars at current prices)4,6305,3216,0416,8217,5768,3689,20310,09511,020
GDP (in billions of US$ current prices)117.2135.8171.0140.9153.8163.8173.8184.4195.6
Per capita GDP (in US$)3,4673,9484,9624,0274,3334,5474,7514,9695,192
Crude oil exports (in millions of barrels/day)0.90.90.80.80.70.80.80.80.8
Nonhydrocarbon exports (percent of total exports)1.91.51.62.72.42.42.33.14.4
Gross official reserves (end of period)77.8110.2143.1149.1157.2168.3181.7197.4215.4
In months of next year’s imports of goods and servi28.026.935.435.235.737.239.241.845.6
Gross government debt (in percent of GDP)23.612.47.413.514.415.415.916.216.1
External debt (in percent of GDP)4.84.13.33.63.02.72.52.32.1
Sources: Algerian authorities; and Fund staff estimates and projections.

In U.S. dollars terms.

In percent of beginning money stock.

Including the impact of the financial restructuring in 2006 involving the swap of government bonds for bank claims on public enterprises.

Sources: Algerian authorities; and Fund staff estimates and projections.

In U.S. dollars terms.

In percent of beginning money stock.

Including the impact of the financial restructuring in 2006 involving the swap of government bonds for bank claims on public enterprises.

Table 2.Algeria: Balance of Payments, 2006–14
Projections
200620072008200920102011201220132014
(In billions of U.S. dollars; unless otherwise indicated)
Current account29.030.634.51.36.08.710.812.915.1
Trade balance34.134.240.67.314.515.817.118.921.3
Exports, f.o.b.54.760.678.644.953.156.058.361.164.3
Hydrocarbons53.659.677.243.451.654.456.758.960.9
Volume change (in percent)-2.8-1.6-3.3-10.21.91.42.21.41.4
Price change (in percent)21.012.934.1-37.316.83.91.92.52.1
Other1.11.01.41.41.51.61.62.23.4
Imports, f.o.b.-20.7-26.4-38.0-37.5-38.6-40.1-41.2-42.2-43.0
Volume change (in percent)-5.713.731.717.20.81.60.90.50.1
Price change (in percent)10.412.09.5-15.71.92.41.91.91.7
Services and income (net)-6.7-5.9-8.9-9.0-11.6-10.3-9.4-9.2-9.6
Services (net)-2.2-4.0-7.6-8.0-8.9-9.3-9.5-9.7-9.7
Credit2.62.93.53.03.33.53.63.83.9
Debit-4.8-6.9-11.1-10.9-12.2-12.7-13.1-13.4-13.7
Income (net)-4.5-1.8-1.3-1.0-2.7-1.00.10.50.2
Credit2.43.85.13.93.76.28.28.88.8
Debit-6.9-5.6-6.5-5.0-6.3-7.2-8.1-8.4-8.7
Interest payments-0.8-0.2-0.2-0.2-0.2-0.2-0.1-0.1-0.1
Other, including profit repatriation-6.2-5.4-6.3-4.8-6.2-7.1-7.9-8.2-8.5
Transfers (net)1.62.22.83.03.03.13.23.23.3
Capital account-11.2-1.12.52.12.42.93.33.74.1
Medium- and long-term capital-10.10.61.91.51.82.32.63.03.4
Direct investment (net)1.81.42.32.02.22.42.83.13.5
Loans (net)-11.9-0.8-0.4-0.5-0.4-0.2-0.1-0.1-0.1
Drawings1.00.50.80.80.70.80.80.80.8
Amortization-12.9-1.3-1.3-1.3-1.1-1.0-0.9-0.9-0.9
Short-term capital and errors and omissions-1.1-1.70.60.60.60.60.60.60.6
Overall balance17.729.637.03.48.411.614.116.619.1
Financing-17.7-29.6-37.0-3.4-8.4-11.6-14.1-16.6-19.1
Official reserves (increases -)-17.7-29.6-37.0-3.4-8.4-11.6-14.1-16.6-19.1
Memorandum items:16.929.231.6-9.3-6.9-6.8-8.3-9.1-9.3
Current account balance (in percent of GDP)24.722.520.10.93.95.36.27.07.7
Algerian crude oil price (US$/barrel) 1/65.774.799.061.576.579.581.083.084.8
Gross official reserves (in billions of US$)77.8110.2143.1149.1157.2168.3181.7197.4215.4
Idem, in months of next year’s imports28.026.935.435.235.737.239.241.845.6
Gross external debt (in billions of US$)5.65.65.65.14.64.44.34.34.2
Of which: Short term0.60.71.3
External debt/exports (in percent)9.88.86.810.68.27.57.06.66.1
External debt/GDP (in percent)4.84.13.33.63.02.72.52.32.1
Sources: Algerian authorities; and Fund staff estimates and projections.

Weighted average of quarterly data.

Including SDR allocation

Sources: Algerian authorities; and Fund staff estimates and projections.

Weighted average of quarterly data.

Including SDR allocation

Table 3.Algeria: Summary of Central Government Operations, 2006–14 1/
Est.Projections
200620072008200920102011201220132014
(In billions of Algerian dinars)
Budget revenue and grants3,6403,6885,1913,7724,2554,6695,0545,4435,833
Hydrocarbon revenue 2/2,7992,7974,0892,4432,8173,0693,2873,4993,698
Nonhydrocarbon revenue8418911,1021,3291,4371,5991,7671,9442,134
Tax revenue7217679651,1941,3421,4891,6471,8121,997
Nontax revenues12012413713595110120132137
Grants000111110
Total expenditure2,4533,1104,1444,6005,0225,3675,6045,8166,065
Current expenditure1,4341,6672,1662,4872,8383,0633,3003,5173,766
Personnel expenditure5316298278769691,0311,0951,1621,229
Mudjahidins’ pensions93102103109109109109109109
Material and supplies9694112132158166173181188
Current transfers6467631,0661,3431,5751,7281,8892,0282,202
Interest payments698059272630343737
Capital expenditure1,0191,4421,9772,1132,1842,3042,3042,2992,299
Budget balance1,1875781,047-828-767-699-549-373-232
Special accounts-4-19-31-1100000
Net lending by the treasury321411242100000
Budget balance excluding
Rehabilitation fund1,151418892-860-767-699-549-373-232
Nonhydrocarbon primary balance-1,580-2,298-3,137-3,276-3,558-3,738-3,803-3,835-3,894
Primary balance1,219498951-834-741-669-516-336-196
Nonhydrocarbon balance-1,648-2,379-3,196-3,303-3,584-3,768-3,836-3,872-3,931
Overall balance1,151418892-860-767-699-549-373-232
Financing-1,151-418-892860767699549373232
Domestic-992-307-869882790713564387247
Bank-1,165-521-1,026282340263164-13-103
Nonbank173214157600450450400400350
Foreign-159-111-23-22-22-15-14-14-14
(In percent of GDP)
Total revenue42.839.247.036.936.636.436.035.635.2
Total expenditure29.234.738.945.443.241.839.938.136.6
Current expenditure16.817.719.624.424.423.923.523.022.7
Capital expenditure12.417.019.321.018.817.916.415.013.9
Overall balance13.54.48.1-8.4-6.6-5.4-3.9-2.4-1.4
(In percent of nonhydrocarbon GDP)
Total revenue78.669.385.955.356.255.854.953.952.9
Hydrocarbon revenue60.552.667.735.837.236.735.734.733.6
Nonhydrocarbon revenue18.216.718.219.519.019.119.219.319.4
Of which: Tax revenue15.614.416.017.517.717.817.917.918.1
Total expenditure53.861.571.267.966.364.160.957.655.0
Current expenditure31.031.335.936.537.536.635.934.834.2
Of which: Personnel expenditure11.511.813.712.812.812.311.911.511.2
Capital expenditure22.027.132.731.028.827.525.022.820.9
Nonhydrocarbon primary balance-34.1-43.2-51.9-48.0-47.0-44.7-41.3-38.0-35.3
Nonhydrocarbon overall balance-35.6-44.7-52.9-48.4-47.3-45.0-41.7-38.4-35.7
Oil stabilization fund (in billions of Algerian dinars)2931.13215.54280.03998.33658.73395.43231.73244.53347.7
Sources: Algerian authorities; and Fund staff estimates and projections.

On cash basis.

Including dividends of Sonatrach.

Sources: Algerian authorities; and Fund staff estimates and projections.

On cash basis.

Including dividends of Sonatrach.

Table 4.Algeria: Monetary Survey, 2006–10
Projections
20062007200820092010
(In billions of Algerian dinars; at end of period)
Net foreign assets5,5157,41610,24710,77011,842
Of which: Bank of Algeria5,5267,38310,22710,76511,836
Net domestic assets-687-1,767-3,707-3,950-4,053
Domestic credit602-340-1,402-771-128
Credit to government (net) 1/2/-1,304-2,602-4,092-3,810-3,470
Credit to the economy 1/1,9052,2622,6893,0393,343
Of which: Private sector1,0561,2151,4131,5971,757
Other items net-1,289-1,427-2,305-3,179-3,925
Money and quasi-money (M2)4,8285,6486,5406,8207,789
Excluding Sonatrach deposits4,0984,3865,2385,9196,689
Money3,1783,8874,5495,2095,886
Quasi-money1,6501,7611,9911,6111,903
(Percent change over 12-month period)
Money and quasi-money (M2)18.617.015.84.314.2
Excluding Sonatrach deposits14.77.019.413.013.0
Credit to the economy 1/7.118.718.913.010.0
Of which: Private sector17.814.916.313.010.0
Memorandum items:
Liquidity ratio (e.o.p. M2/GDP)56.760.059.266.867.0
Liquidity ratio (e.o.p. M2/NHGDP)104.3106.2108.2100.0102.8
Idem, excluding deposits of Sonatrach88.582.486.786.888.3
Sonatrach deposits7301,2621,3029011,101
M2 velocity1.81.71.71.51.5
Credit to the economy/GDP22.424.024.429.828.7
Credit to the economy/NHGDP41.242.544.544.644.1
Sources: Bank of Algeria; and Fund staff estimates and projections.

Includes impact of public banks’ restructuring packages.

Net credit to government excludes postal accounts (“dépôts CCP”) at the Treasury deposited at the BA.

Sources: Bank of Algeria; and Fund staff estimates and projections.

Includes impact of public banks’ restructuring packages.

Net credit to government excludes postal accounts (“dépôts CCP”) at the Treasury deposited at the BA.

1Given that external and domestic public debts are very low and unlikely to rise significantly under plausible scenarios; this report does not include a debt sustainability analysis.
2In addition, the SDR allocation (SDR 0.9 billion) further increased BA’s net international reserves.
3According to its legal requirements, FRR resources should be kept above 740 billion DA, which would result in higher levels of public debt to finance public deficits.
4The following links provide a detailed presentation of FFR and SONATRACH’s financial situation, http://www.dgpp.mf.gov.dz/index.php?option=com_content&view=article&id=78 for the FRR and http://www.sonatrach-dz.com/rapport-financier.htm for SONATRACH
5This plan is part of a program to restructure SOEs (see IMF Country Report No. 09/108)

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