a. Lifting controls on prices and profit margins

A major step toward price liberalization was taken in April 1994, through the abolition of controls on profit margins for most commodities, except for edible oils, sugar, medicines, school supplies, coffee and tobacco, and five cereal products (pulses, maize, rice, oats, and barley) which were transferred from the category of goods with administered prices to that of goods with controlled profit margins. The former category was thus reduced to the three subsidized essential food staples (flour, semolina, and milk), energy products, and public transportation fares. Later in 1994, prices of agricultural inputs and construction prices for social housing were liberalized, and all remaining controls on profit margins ^1/ and prices were eliminated during 1995/96, except for medicines and subsidized food and energy products.

The reduction in the number of goods subject to controls on prices or profit margins was supported by the adoption in January 1995 of a Competition Law which institutionalized the principle of free price setting for all products while introducing safeguards against possible abuses by monopolistic suppliers, including through anti-trust regulations. The law prohibits noncompetitive practices, such as the imposition of limits on market access or collusion between enterprises to control a particular market. This regulatory framework is being enforced by a number of institutions, including a National Competition Council, the Commerce Department and the Justice Department. ^2/ Since the adoption of the Competition Law, the requirement for producers to declare their prices to the Commerce Department has been replaced by an obligation for all suppliers to publish prices.

b. Eliminating generalized subsidies

The reform of the domestic price system also entailed major increases in the prices of subsidized products toward their opportunity costs. Prices of subsidized food and energy products were increased on average by about 100 percent in 1994/95 and 60 percent in 1995/96. As a result of these price adjustments, subsidies were eliminated on petroleum products (October 1994), powdered milk and semolina (June 1995), regular flour (October 1995), and bread flour (January 1996). These four food products have been transferred to the category of commodities with controlled profit margins for a one-year period, and are to be freed completely thereafter. With respect to energy products, the implicit subsidy was eliminated by setting the transfer price of crude oil from Sonatrach to the refineries at world price level. To make the elimination of the implicit subsidy durable, a system was introduced to adjust the transfer price every six months in line with export prices and exchange rate developments.

Thus, as of June 1996, subsidies have been eliminated for all food products, with the exception of pasteurized milk which will cease to be subsidized by the end of 1996. There also remains a global subsidy on gas and electricity products (equivalent to 0.4 percent of GDP in 1996), which the Government is committed to eliminate by end 1997. ^1/

To cushion the impact of the elimination of generalized subsidies on the most vulnerable social groups, the authorities undertook a reform of the social safety net. A key aspect of this reform was the replacement of the previous system of low and poorly targeted income transfers by one of self-targeted public works programs. ^2/

a. Public enterprise restructuring

Public enterprise restructuring efforts during the last two years have focused mainly on the 23 largest loss-making enterprises that had remained under close government supervision since 1992. About two-thirds of these enterprises belong to the industrial sector (with about half in engineering and capital goods), while the rest are concentrated in the construction and transportation sectors. Altogether, they employ approximately 130,000 people and account for about 13 percent of value added in industry and construction.

This group of “23” has been subjected to a hardened budget constraint in the form of a ceiling on their access to commercial bank credit during both the stand-by supported program (1994/95) and the first year of the current EFF program (1995/96). Meanwhile, medium-term plans were drawn up for all of them on the basis of detailed diagnostic studies carried out in collaboration with the World Bank. These plans were designed to cut operating losses through better inventory control and cost management procedures, and to improve competitiveness through the shedding of redundant labor and a reorientation of production to a viable set of activities. Such plans have been translated into performance contracts signed between the State and the managers of these enterprises, which have all been granted financial and management autonomy by April 1996. While financial rehabilitation of these enterprises has taken place, it was left to enterprise managers to renew their capital equipment by raising resources through the sale of some assets, domestic or foreign participation, or privatization. Little progress in this respect has occurred so far but it is expected that the privatization law will provide an effective venue for such physical restructuring.

Progress was also achieved toward the restructuring of other public enterprises, including through the liquidation of 88 of the local public enterprises in 1994. The Treasury took the important decision to stop, as of end-March 1995, all on-lending to autonomous public enterprises. ^1/ In addition, a restructuring program was launched in 1995 for all public construction enterprises. This program involved the dissolution of 13 enterprises and the lay off of 40,000 employees (25 percent of the sector’s work force), facilitated by the introduction, in July 1994, of a new unemployment insurance system providing for lump-sum severance payments to retrenched workers for a three-month period. ^1/

The Government has recently adopted a law setting up holding companies to manage public enterprises. These holdings are expected to: (i) set as their primary objectives the achievement of positive rates of returns by public enterprises; (ii) sanction loss-making enterprises, through liquidation or requiring that they sell part of their assets; and (iii) prepare enterprises for privatization once demand conditions permit.

b. Privatization and private sector development

Prior to 1994, the two legal vehicles for privatization in Algeria were provided by: (i) a 1990 law allowing for the sale of local public enterprises by competitive bidding and the offer of local public services for operation by the private sector under concessions; and (ii) the bankruptcy law of the 1992 Commercial Code allowing for the liquidation of public enterprises. This legal apparatus has been recently significantly extended. First, under Articles 24 and 25 of the 1994 Complementary Finance Law, units of public enterprises can be sold outright, enterprises can be offered for private management contract, or can sell up to 49 percent of their equity to the private sector. Second, the Privatization Law, which was passed in July 1995, allows for 100 percent private equity participation in most public enterprises. In June 1994 the Government approved a law removing the State’s monopoly in the insurance market, and in July 1994, an amendment was introduced to the Investment Code allowing foreign participation in the capital of domestic commercial banks. In addition, a new law promulgated in July 1995 restored to original owners certain lands that had been nationalized or ceded to the State in the aftermath of independence.

Within this framework, the authorities recently adopted a privatization program supported by a World Bank Structural Adjustment Loan (SAL). As permitted under the 1990 law, 103 local public enterprises (in the transportation, commerce, construction, and tourism sectors) have been brought to the point of sale, and 35 activities have been offered for concession. On the basis of Articles 24 and 25 of the 1994 Complementary Finance Law, this initial privatization program has also offered for sale, tendered for management contracts, or opened up the capital of 50 public economic units in industry, agro-industry, tourism and commerce. In addition, foreign investors have signed contracts to manage two public sector hotels. In the context of their restructuring, a number of enterprises have carried some privatization by selling off some of their service activities (e.g., catering, transportation, housing) to their employees or the private sector, and by sub-contracting other activities. However, no actions have yet been taken on the basis of the 1995 privatization law which allows for full privatization of public enterprises. A privatization agency was, however, established in March 1996 to prepare a privatization program under this law.

Beyond these privatization initiatives, new institutions were put in place to promote private sector development. In particular, a national investment agency was established in 1994 to: (i) act as a “one-stop window,” to help private investors (domestic and foreign) cut through bureaucratic red tape; and (ii) administer tax breaks and other investment incentives. In the construction sector, contracts have been increasingly awarded to the private sector by breaking up the size of contracts previously awarded to public construction companies.

a. Interest rates deregulation

From May 1990 until early 1994, commercial banks’ lending interest rates remained subject to a 20 percent ceiling per annum. As a result, these rates became negative in real terms in 1993/94, since they were not allowed to reflect the increasing inflationary pressures arising from a substantial relaxation of demand management policies (Table A35). The ceiling on lending rates also constrained the flexibility of deposit rates which had been liberalized in May 1990.

An important measure of the adjustment program launched in 1994 was the abolition of the ceiling on money market interest rates and commercial banks’ lending rates to the public. It was accompanied by the imposition of a temporary cap of 5 percentage points on commercial banks’ interest rate spread, with a view to preventing an excessive increase of lending rates as a result of collusion among the five commercial banks. This cap on banks’ spreads was eliminated in December 1995. The deregulation of interest rates, together with the deceleration of inflation brought about by tighter demand management policies, has allowed the emergence of positive real interest rates since the beginning of 1996.

b. Indirect instruments of monetary management and budget financing

In early 1994, the Bank of Algeria controlled liquidity in the banking system by imposing bank-by-bank ceilings on the global amount of refinancing, through the rediscount facility or repurchase agreements on the interbank money market; however, these two instruments were still heavily geared to individual banks’ needs and were provided at the initiative of commercial banks.

To address these weaknesses, the Bank of Algeria first imposed a reserve requirement on commercial banks, starting in October 1994. The required reserves represent 3 percent of bank deposits (excluding foreign currency deposits) and are renumerated at 11.5 percent. The efficiency of indirect monetary control was further strengthened in May 1995, as the Bank of Algeria started repurchase-auctions to provide liquidity to commercial banks. The auctions were initially held every six weeks, but with their growing importance as a main refinancing instrument, they have been held every three weeks since the beginning of 1996. By the end of 1995, refinancing through repurchase agreements and auctions accounted for more than a third of total refinancing, compared to about a tenth at end-1994. Under the auction system, the Bank of Algeria announces a minimum interest rate prior to the auction; subsequently, banks bid in terms of rates and volumes. Initially, the Bank awarded refinancing at a single interest rate (standard auction) but in late 1995 moved to a type of Dutch auction awarding bids at the interest rates actually offered by banks.

In addition, the Government instituted in late-1995 a formal auction system (adjudication) to sell negotiable treasury bonds on the money market. Interest rates on these bonds reached 22.5 percent in early 1996. Participants in the auctions include banks as well as nonbank institutions such as insurance companies. The system is expected to facilitate the introduction of open market operations by the Central Bank in the course of 1996.

c. Commercial bank restructuring

The legacy of soft budget constraints for public enterprises, sectoral credit specialization, and inappropriate prudential regulations left Algeria’s commercial banks with major portfolio weaknesses and little experience in efficient financial intermediation. These problems started to be addressed in 1992 and 1993 through the taking over, by the Government, of DA 275 billion of nonperforming banks’ claims on public enterprises, in exchange for government bonds bearing annual interest rates of 5 percent and 6 percent. ^1/ Subsequently, the authorities conducted a series of audits, in collaboration with the World Bank, to determine the banks’ recapitalization needs to meet a minimum capital/risk-weighted assets ratio of 4 percent in 1996.

Audits of balance sheets as at end-1994 have been completed for four of Algeria’s five commercial banks. They indicated that the Banque Nationale d’Algérie (BNA) did not need additional capital in the immediate future. Two other banks, the Banque Extérieure d’Algérie (BEA) and the Crédit Populaire d’Algérie (CPA), have been recapitalized in 1995 through budgetary contributions of DA 10 billion. Recapitalization was accompanied for each bank, along with its recertification by the Bank of Algeria, by the signing of performance contracts between the Government and bank managers. ^2/ Performance contracts hold the bank managers directly and solely responsible for respecting the capital adequacy ratios established by the Bank of Algeria, which are expected to increase to the BIS norm of 8 percent by the end of 1999. The banks, in return, are being provided with increased autonomy with respect to operational decisions, notably the allocation of credit and more importantly the denial of credit to high risk enterprises. In addition, in early 1995 the Bank of Algeria started to implement new prudential regulations that limit risk concentration and establish clear rules for loan classification and provisioning. In particular, banks are now required: (i) to limit overdrafts to the equivalent of 15 days’ turnover (compared to 45 days previously); (ii) not to register overdue interest payments as revenues; and (iii) to establish provisions for off-balance sheet claims. This new framework is expected to tighten the budget constraint on banks and increase the incentives for bank managers to mobilize financial savings, improve the allocation of credit, and search for potential private partners.

Several measures were also taken to raise the level of competition in the banking sector. An amendment to the Investment Code was introduced in 1994 to allow foreign participation in the capital of domestic banks. A new private bank was chartered in September 1995 (Union Bank), along with the Caisse Nationale de Mutualité Agricole (CNMA), owned by private agricultural cooperatives.

a. Trade and payments liberalization

In early 1994, Algeria’s official foreign exchange resources were administratively allocated by a “Comité ad hoc” (CAH) to: (i) “priority imports” of strategic commodities ^1/ and products necessary for the development of the hydrocarbon sector, for which authorization was granted on a case-by-case basis upon submission of a “cahier des charges” (CDC); and (ii) as second priority, imports of goods needed to promote production and investment. Other imports were either totally prohibited or, for a group of about 60 products, allowed only if they could be financed by an importer’s own foreign exchange resources. In addition, minimum maturity requirements, ranging from 18 to 36 months, were imposed for commercial credits financing such imports.

The dismantling of these restrictions began in April 1994 with the dissolution of the Comité ad hoc, and the abolition of the requirement for a cahier des charges. Concurrently, import prohibitions were organized through three lists: (i) a short list of goods whose imports are banned on a permanent basis for social and religious reasons; (ii) a negative list of temporary import suspensions which was eliminated at the end of 1994; and (iii) a list of ten basic commodities (mostly subsidized food staples) whose importation remained temporarily subject to observance of technical and professional criteria until its total abolition in May of 1995. ^2/ The requirement that some imports be exclusively financed with the importers’ own foreign exchange remained in effect, on a temporary basis, for private cars until December 1994. Additional liberalization measures included: (i) the abolition of the minimum maturity requirement on import financing with the temporary exception of capital goods imports for which this requirement was maintained until October 1994 for imports of less than DA 500,000, and until May 1995 for imports beyond that amount; (ii) the elimination of all previous export prohibitions except for a limited number of items of historical and archeological significance; and (iii) the lowering of the maximum import tariff from 60 percent to 50 percent as of January 1996.

As of June 1996, Algeria’s trade system is free of quantitative restrictions. The payments system still contains some restrictions on the availability of foreign exchange for some current invisible payments and for remittances by nonresidents.

b. From a fixed exchange rate regime to a managed float

A major objective of the foreign exchange market reforms pursued by Algeria since early 1994 has been to make the exchange rate of the Algerian dinar more transparent and responsive to market forces. For this purpose, the exchange rate regime has been transformed from a peg to a managed float in three successive stages.

First, the Algerian authorities started by correcting the overvaluation accumulated by the dinar from 1991 to 1994, through two-step devaluations (7.3 percent in March 1994 and 40.1 percent in April 1994) while maintaining the dinar pegged to a basket of 16 currencies (Table A35). The second stage began in October 1994 with a move to daily fixing sessions, organized by the Bank of Algeria, in which the exchange rate of the Algerian dinar was determined in a marginal auction. ^1/ Concurrently, foreign exchange surrendering requirements were unified at a rate of 50 percent, with the exception of earnings from exports of hydrocarbon and mining products. ^2/ With the introduction of fixing sessions for the Algerian dinar in October 1994, exchange rate flexibility increased with the U.S. dollar/dinar rate depreciating from US$1 = DA 41.0 to US$1 = DA 52.2 by end-December 1995. This, as well as substantial broadening of the scope of transactions in the official exchange market, has reduced the premium on the parallel foreign exchange from more than 300 percent in early 1994 to about 20 percent at end 1995.

In a third stage, the fixing sessions have been superseded, since end-December 1995, by a full-fledged interbank foreign exchange market. Subject to prudential regulations which limit their open positions in foreign exchange, commercial banks are now no longer required to surrender to the Bank of Algeria the foreign exchange left at their disposal, and may trade these resources freely among themselves. In practice, as the Bank of Algeria purchases from the national oil company (Sonatrach) its hydrocarbon export proceeds, it retains a dominant role in the market for foreign exchange where its intervention policy has been guided by the objective of avoiding sharp fluctuations of the exchange rate while preventing the real exchange rate from appreciating significantly.

a. Revenue developments

Budgetary revenues in Algeria averaged more than 30 percent of GDP during 1990-95. While this ratio compares favorably with other middle income countries, more than one half of these revenues emanate from hydrocarbon receipts. After a substantial decline between 1991 and 1993, total revenues increased by 2.8 percentage points of GDP between 1993 and 1995, mainly due to the exchange rate depreciation which raised the domestic currency counterpart of hydrocarbon export receipts and boosted trade taxes. In addition, several measures were implemented to strengthen the tax system and to increase the domestic tax base (Table 1). Nevertheless, as budgetary revenues continue to depend excessively on hydrocarbon receipts and import taxes, they are particularly sensitive to exchange rate developments and fluctuations in world oil prices. For example, a 10 percent change in the exchange rate of the dinar against the U.S. dollar would result in a variation of about 2.3 percent of GDP in total revenue, with two thirds of it due to the effect on hydrocarbon revenues and one third to the response of import taxes. Similarly, a US$1 per barrel fluctuation in the oil price would result in a loss or gain in budgetary receipts on hydrocarbon exports equivalent to about 1.5 percent of GDP.

(1) Hydrocarbon revenue

After a substantial decline between 1991 and 1993, due to a fall in oil prices, hydrocarbon revenue increased from 15.9 percent of GDP in 1993 to 17.5 percent in 1994 and 18.2 percent in 1995. These increases explain about 30 percent of the fiscal consolidation of 1994-95 and were mostly due to exchange rate developments. In particular, the 39 percent increase in hydrocarbon revenues in 1994 reflected a 50 percent depreciation of the dinar that more than compensated the decline in export value due to a fall in the world market price of crude oil. At the same time, the administered prices for petroleum products sold in the domestic market were raised significantly, thus boosting domestic hydrocarbon revenue. Finally, under the stand-by supported program, Sonatrach ceased its implicit subsidization of crude oil to the refineries and aligned its domestic crude oil prices to world prices. This strengthened Sonatrach’s financial position and allowed the company to distribute higher dividends to the Government. Similarly, in 1995 a new increase in hydrocarbon revenues was mainly due to a further adjustment in the exchange rate, reinforced by a recovery in the world market oil price.

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Algeria: Fiscal Developments, 1990–95

(In percent of GDP)

Citation: IMF Staff Country Reports 1996, 071; 10.5089/9781451811339.002.A001

Source: Algerian authorities.1/ Including net lending. special accounts, and operations of the Rehabilitation Fund.2/ Indirect taxes on petroleum products and dividends from oil companies are classified as hydrocarbon revenue.3/ Excluding hydrocarbon revenue.4/ Excluding compensation tax.5/ Excluding net lending, special accounts, and operations of the Rehabilitation fund.

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Table 1.

Algeria: Central Government Revenue, 1990–95

(In percent of GDP)

Source: Algerian authorities.

^1/Includes receipts from hydrocarbon exports and sales of crude oil to domestic rafineries.

^2/Earmarked tax on some imports and domestic sales imposed to raise resources for the Compensation Fund.

Table 1.

Algeria: Central Government Revenue, 1990–95

(In percent of GDP)

						1990	1991	1992	1993	1994	1995
Total budget revenue						29.8	34.1	30.3	27.6	29.5	30.4
		Hydrocarbon revenue 1/				15.9	21.0	19.3	15.9	17.5	18.2
		(of which compensatory domestic tax)				1.7	0.8	0.6	0.5	0.9	--
		Non hydrocarbon revenue				14.0	13.1	11.1	11.6	12.0	12.3
			Tax revenue			13.0	12.5	10.4	10.9	11.1	11.8
				Taxes on income and profits		4.0	2.8	2.7	3.0	2.9	2.7
					Wage income taxes	2.5	1.9	1.9	2.0	1.6	1.6
					Other	1.5	0.9	0.8	1.0	1.3	1.1
				Taxes on goods and services		6.2	6.9	4.6	4.7	4.5	5.1
					VAT and excises on imports	1.9	2.2	1.5	1.4	1.8	2.6
					VAT and excises on dom. transaction	2.8	2.0	2.1	1.8	1.9	1.6
					Tobacco excises	--	--	--	0.7	0.6	0.7
					Tax on petroleum product	--	--	--	--	--	0.7
					Compenesation tax 2/	1.3	2.5	0.8	0.6	--	--
					Others indirect taxes	0.2	0.2	0.2	0.2	0.2	0.2
				Customs duties		2.1	2.3	2.6	2.6	3.3	3.7
				Registration and stamps		0.7	0.4	0.5	0.6	0.4	0.3
			Nontax revenues			1.0	0.6	0.6	0.8	0.9	0.5
Memorendum item:
	Crude oil price (US$/bbl)					24.4	20.4	20.1	17.8	16.3	17.6

Source: Algerian authorities.

^1/Includes receipts from hydrocarbon exports and sales of crude oil to domestic rafineries.

^2/Earmarked tax on some imports and domestic sales imposed to raise resources for the Compensation Fund.

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Table 1.

Algeria: Central Government Revenue, 1990–95

(In percent of GDP)

						1990	1991	1992	1993	1994	1995
Total budget revenue						29.8	34.1	30.3	27.6	29.5	30.4
		Hydrocarbon revenue 1/				15.9	21.0	19.3	15.9	17.5	18.2
		(of which compensatory domestic tax)				1.7	0.8	0.6	0.5	0.9	--
		Non hydrocarbon revenue				14.0	13.1	11.1	11.6	12.0	12.3
			Tax revenue			13.0	12.5	10.4	10.9	11.1	11.8
				Taxes on income and profits		4.0	2.8	2.7	3.0	2.9	2.7
					Wage income taxes	2.5	1.9	1.9	2.0	1.6	1.6
					Other	1.5	0.9	0.8	1.0	1.3	1.1
				Taxes on goods and services		6.2	6.9	4.6	4.7	4.5	5.1
					VAT and excises on imports	1.9	2.2	1.5	1.4	1.8	2.6
					VAT and excises on dom. transaction	2.8	2.0	2.1	1.8	1.9	1.6
					Tobacco excises	--	--	--	0.7	0.6	0.7
					Tax on petroleum product	--	--	--	--	--	0.7
					Compenesation tax 2/	1.3	2.5	0.8	0.6	--	--
					Others indirect taxes	0.2	0.2	0.2	0.2	0.2	0.2
				Customs duties		2.1	2.3	2.6	2.6	3.3	3.7
				Registration and stamps		0.7	0.4	0.5	0.6	0.4	0.3
			Nontax revenues			1.0	0.6	0.6	0.8	0.9	0.5
Memorendum item:
	Crude oil price (US$/bbl)					24.4	20.4	20.1	17.8	16.3	17.6

Source: Algerian authorities.

^1/Includes receipts from hydrocarbon exports and sales of crude oil to domestic rafineries.

^2/Earmarked tax on some imports and domestic sales imposed to raise resources for the Compensation Fund.

(2) Nonhydrocarbon revenue

During 1990-92, nonhydrocarbon revenue declined by about 3 percentage points of GDP, reflecting mainly the overall deterioration of the economy. In particular, the compression of imports, together with the fall in enterprise profitability, squeezed tax receipts, which were further reduced by the introduction of income tax exemptions. Since 1993, nonhydrocarbon revenue recovered by about 1.2 percentage points and by 1995 it accounted for 12.3 percent of GDP. This recovery was mainly due to an increase in tax revenue resulting from several factors. First, the depreciation of the exchange rate and the liberalization of imports boosted trade related taxes. Second, tax measures, such as the elimination of some tax exemptions, increased domestic taxes. Finally, the elimination of subsidies on domestically consumed petroleum products allowed for their effective taxation. ^1/

Nontax revenues as a share of GDP have remained relatively unchanged during 1990-95, accounting only for about 4 percent of nonhydrocarbon revenue. Profits from the parastatal sector, except the petroleum sector, ^2/ declined substantially in the 1990s, reflecting the contraction of profits of public enterprises. In 1994, the Bank of Algeria for the first time remitted dividends to the Government (0.4 percent of GDP), which fell to virtually nil in 1995.

b. Expenditure developments

From 1990 to 1993, government expenditures had increased from 26.6 percent of GDP to 33.6 percent (Table 2). The surge affected primarily current expenditures and was mainly due to substantial increases in wages, and an increase in the budgetary transfers to the Compensation Fund to meet the increasing cost of food subsidies following the exchange rate depreciation of 1991. At the same time, net treasury lending, which had been negative in 1990, rose to 1 percent of GDP in 1993, while disbursements of the Rehabilitation Fund for public enterprise restructuring reached 3 percent of GDP. A significant turnaround took place in government expenditures since the launching of the adjustment program in 1994. From 1993 to 1995, government expenditures declined by almost 4 percentage points of GDP, following cuts of both current and capital outlays. Moreover, reflecting the gradual disengagement of the Treasury from financing public enterprises and the partial completion of banking and enterprise restructuring, net lending declined to 0.1 percent of GDP in 1995 and expenditure of the Rehabilitation Fund to 1.9 percent.

Current expenditures decreased from 24.9 percent of GDP in 1993 to 22.5 percent in 1995 as a result of a tight cap on most spending items despite high inflation and exchange rate depreciation. Personnel expenditures, which account for the bulk of current expenditures (42 percent in 1995), declined from 10.5 percent of GDP in 1993 to 9.5 percent in 1995 as a result of a strict wage policy and a lower rate of recruitment. Salaries increases were limited to 17 percent in 1994 and 10 percent in 1995, implying a decline of about 10 percent in real wages for two consecutive years. The strict incomes policy also contributed to savings in public services appropriations and subsidies to hospitals, as these are used mainly to pay wages; thus public services expenditure declined from 3.4 percent of GDP in 1993 to 2.8 percent in 1995. Current transfers declined from 9.8 percent of GDP in 1993 to 7.6 percent in 1995, mainly as the result of the elimination of consumer subsidies on food products and the decline of producer subsidies in the agricultural sector. In addition, some savings were realized in social safety net expenditures through a reform which improved the targeting and the efficiency of the system. ^1/ Debt service increased steadily from 2.3 percent of GDP in 1993 to 3.2 percent of GDP in 1995, mostly due to interest payments on the external debt. Interest payments on domestic debt remained low because until 1995 the Treasury had not been paying any remuneration on the Bank of Algeria’s advances, and the interest rate on treasury bonds issued in 1992 in the context of public sector restructuring was set below market levels.

Table 2.

Algeria: Central Government Expenditure, 1990–95

(In percent of GDP)

Source: Algerian authorities

^1/A positive number indicates a surplus

^2/Excluding the compensation for commercial banks’ foreign exchange losses on principal payments of external debt contracted on behalf of the Treasury.

^3/Including net lending, special accounts and operations of the Rehabilitation Fund.

Table 2.

Algeria: Central Government Expenditure, 1990–95

(In percent of GDP)

				1990	1991	1992	1993	1994	1995
Total budget expenditure				29.6	30.0	29.5	33.6	31.3	29.8
	Current expenditure			19.6	23.5	22.6	24.9	23.4	22.5
		Personnel expenditure		10.7	8.9	9.6	10.5	10.3	9.5
		Mudjahidins’ pensions		0.8	0.7	0.6	0.9	0.9	0.8
		Material and supplies		0.8	1.0	1.2	1.4	1.2	1.5
		Current transfers		5.6	10.9	9.0	9.8	8.2	7.6
			Public services	…	…	3.1	3.4	2.9	2.8
			Family allowances	…	…	0.9	0.8	1.0	1.2
			Public works and social assistance	…	…	1.9	1.9	0.8	0.7
			Food subsidies	…	…	2.2	2.5	2.1	0.9
			Agricultural price support	…	…	0.9	0.6	0.3	0.4
			Housing	…	…	0.2	0.2	0.3	0.4
			Other transfers	…	…	--	0.4	0.9	1.1
		Interest payments		1.7	2.0	2.2	2.3	2.8	3.2
	Capital expenditure			8.5	6.5	6.9	8.7	8.0	7.3
	Special accounts balance 1/			0.3	0.4	1.2	0.5	0.1	--
	Net lending by the Treasury			-0.1	0.0	0.9	1.0	0.5	0.1
	Allocation to the Rehabilitation Fund 2/			3.8	2.7	2.3	2.1	2.2	1.9
Total expenditures 3/				33.6	33.2	33.9	37.2	34.1	31.8

Source: Algerian authorities

^1/A positive number indicates a surplus

^2/Excluding the compensation for commercial banks’ foreign exchange losses on principal payments of external debt contracted on behalf of the Treasury.

^3/Including net lending, special accounts and operations of the Rehabilitation Fund.

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Table 2.

Algeria: Central Government Expenditure, 1990–95

(In percent of GDP)

				1990	1991	1992	1993	1994	1995
Total budget expenditure				29.6	30.0	29.5	33.6	31.3	29.8
	Current expenditure			19.6	23.5	22.6	24.9	23.4	22.5
		Personnel expenditure		10.7	8.9	9.6	10.5	10.3	9.5
		Mudjahidins’ pensions		0.8	0.7	0.6	0.9	0.9	0.8
		Material and supplies		0.8	1.0	1.2	1.4	1.2	1.5
		Current transfers		5.6	10.9	9.0	9.8	8.2	7.6
			Public services	…	…	3.1	3.4	2.9	2.8
			Family allowances	…	…	0.9	0.8	1.0	1.2
			Public works and social assistance	…	…	1.9	1.9	0.8	0.7
			Food subsidies	…	…	2.2	2.5	2.1	0.9
			Agricultural price support	…	…	0.9	0.6	0.3	0.4
			Housing	…	…	0.2	0.2	0.3	0.4
			Other transfers	…	…	--	0.4	0.9	1.1
		Interest payments		1.7	2.0	2.2	2.3	2.8	3.2
	Capital expenditure			8.5	6.5	6.9	8.7	8.0	7.3
	Special accounts balance 1/			0.3	0.4	1.2	0.5	0.1	--
	Net lending by the Treasury			-0.1	0.0	0.9	1.0	0.5	0.1
	Allocation to the Rehabilitation Fund 2/			3.8	2.7	2.3	2.1	2.2	1.9
Total expenditures 3/				33.6	33.2	33.9	37.2	34.1	31.8

Source: Algerian authorities

^1/A positive number indicates a surplus

^2/Excluding the compensation for commercial banks’ foreign exchange losses on principal payments of external debt contracted on behalf of the Treasury.

^3/Including net lending, special accounts and operations of the Rehabilitation Fund.

Capital expenditures declined from 8.7 percent of GDP in 1993 to 7.3 percent in 1995, notwithstanding increases in allocations needed to repair infrastructure damaged by civil strife. The decline reflected mainly the withdrawal of the Government from direct investment in public enterprises, the scaling down of the number of projects, and the shifting of responsibility for certain investments to local governments.

a. The need for a budget surplus

Algeria needs to achieve a fiscal surplus over the medium term for three main reasons. First, there is the need to cushion public finance against volatility in the world market price of oil. In particular, the achievement of budget surpluses would contribute to lowering the public debt-to-GDP ratio in the coming years, despite the major increase in public debt in 1996 to absorb past quasi-fiscal deficits of some public agencies (see below), thereby providing the Government with the flexibility to finance temporary revenue shocks.

Algeria–Central Government Debt 1989-98

Source: Algeria authorities; and staff estimates and projections.

^1/Excluding lending of the CNEP to the OPGI guaranteed by the government.

Algeria–Central Government Debt 1989-98

		1990	1991	1992	1993	1994	1995	1996	1997	1998
								Proj.	Proj.	Proj.
		(In billions of dinars)
Domestic debt 1/		211	200	361	524	452	356	507	404	375
	Bonds and obligations	116	106	84	73	60	38	…	…	…
Advances from		95	95	154	251	249	235	…	…	…
	Central Bank
Foreign public debt		…	…	…	402	858	1195	1412	1507	1494
Total public debt		…	…	…	926	1310	1551	1919	1911	1829
	as percent of GDP				78	89	79	81	73	64

Source: Algeria authorities; and staff estimates and projections.

^1/Excluding lending of the CNEP to the OPGI guaranteed by the government.

View Table

Algeria–Central Government Debt 1989-98

		1990	1991	1992	1993	1994	1995	1996	1997	1998
								Proj.	Proj.	Proj.
		(In billions of dinars)
Domestic debt 1/		211	200	361	524	452	356	507	404	375
	Bonds and obligations	116	106	84	73	60	38	…	…	…
Advances from		95	95	154	251	249	235	…	…	…
	Central Bank
Foreign public debt		…	…	…	402	858	1195	1412	1507	1494
Total public debt		…	…	…	926	1310	1551	1919	1911	1829
	as percent of GDP				78	89	79	81	73	64

Source: Algeria authorities; and staff estimates and projections.

^1/Excluding lending of the CNEP to the OPGI guaranteed by the government.

Second, the depletion of nonrenewable hydrocarbon resources would warrant converting part of the hydrocarbon revenue into alternative productive assets, mostly by encouraging private sector investment which would be the main engine of growth in the coming years. Third, given that the high level of external debt calls for a gradual reduction in the reliance on foreign savings, government savings must increase in order to channel adequate resources to the private sector for investments, without jeopardizing the inflation objective. This increase is even more necessary because private savings are expected to rise only moderately in the short term as private consumption recovers from its depressed recent levels.

b. New expenditure pressures

The achievement of budget surpluses is likely to be complicated by foreseeable pressures from four categories of expenditures. First, in order to absorb past quasi-fiscal deficits, the Government has decided to exchange in 1996 a sizable amount of nonperforming bank debt accumulated by public agencies for treasury bonds. This operation will result in a substantial increase in interest payments on domestic debt estimated at about 1 percentage point of GDP beginning in 1997.

Second, the Government may have to cushion the employment impact of the ongoing restructuring and expected privatization of public enterprises through higher budgetary support for the social safety net. For instance, with the assistance of the World Bank, the authorities intend to expand the public work programs, which employed about 500,000 people in 1995 (for a period of one or two months), through the creation of about 20,000 additional man-years of short-term employment in 1996/97. This may raise social safety net expenditures by 25 percent compared to their 1995 level. In addition, the Government may have to strengthen unemployment insurance funding in connection with further lay offs of public sector workers. Despite a more flexible unemployment insurance scheme introduced in 1994, the costs of labor shedding continue to be high and the Government may have to contribute to severance payments of public enterprises.

A third area where expenditure pressures are likely to appear is the housing sector. The Government is strongly committed to resolving the severe public housing shortage which is also a critical factor in strengthening labor mobility, generating employment, and sustaining public support for the economic reforms. The public housing sector has traditionally benefitted from substantial government support mainly in the form of: (i) privileged access to land; (ii) administered construction prices; (iii) preferential interest rates; and (iv) below-market housing rents. Even by the most conservative official estimates, the total amount of these implicit subsidies averaged about 2.5 percent of GDP in 1994 and 1995. In addition, the budget provided for up-front subsidies to individual housing construction and land servicing. Several measures planned for 1996/97 aim at eliminating implicit subsidies and promoting market mechanism in the sector, but they have budgetary implications for the medium term. In particular, the Government has decided to assume the implicit subsidy for social housing previously carried by the housing bank (CNEP), and to fund all public housing through the budget, thus allowing private savings mobilized by the CNEP to be mostly channelled to finance the housing needs of its clients. In addition, a system of explicit and well-targeted rent subsidies is likely to be necessary to provide support to low income tenants, following the planned increases of public housing rents to market levels by 1999. Lastly, the introduction of a system of up-front subsidies will encourage housing acquisition by low-income potential owners, while eliminating the system of implicit interest subsidies provided by the CNEP. The implementation of all these measures, together with the objective of maintaining the current pace of housing deliveries (about 80,000 units in 1995), is likely to require an increase in budgetary allocations to housing from 0.6 percent of GDP in 1995 to about 3.5 percent of GDP in 1997, and possibly to 5 percent of GDP in subsequent years.

Finally, to support private sector growth and Algeria’s integration in the world economy, major investments in infrastructure will be required.

c. Fiscal measures to achieve and maintain a budget surplus

Sustaining budgetary surpluses over the next few years and supporting private sector development, even while cushioning the adverse impact of reforms in the public enterprise sector, will require further revenue reforms and will also involve difficult trade-offs regarding the overall level of public expenditures and the composition of spending. The efforts to increase budgetary revenue should be mostly concentrated on tax reform as increases in nontax revenue, mostly on account of privatization proceeds, are expected to be small.

(1) Tax reform

On the revenue side, the key challenge will be to reduce dependency on volatile hydrocarbon revenue; in addition, the need to open the economy to international competition will require a reduction in tariff protection. In particular, the expected agreement with the European Union (EU) on a free trade area (FTA) will likely involve the phasing out of tariffs on imports from the EU over a period of at most 12 years. As imports from the EU account from about two thirds of Algeria’s total imports, an FTA with the EU would imply the gradual loss of trade taxes of about 2.5 percent of GDP, and up to 3.7 percent if tariff liberalization were to be generalized to imports from all trading partners, or if liberalization were to result in total trade diversion from non-EU sources. In addition, the restructuring of the public enterprise sector and the removal of protection may at least temporarily weaken part of the existing domestic tax base.

In terms of policy action, there is considerable room for enhancing the elasticity and efficiency of the tax system and reducing dependence on oil receipts and trade taxes. The fiscal reforms will have to aim at broadening the domestic tax base mainly through a strengthening of the tax administration and the inclusion of larger segments of the private sector in the tax net.

Currently, tax revenue excluding receipts from oil companies accounts for about 12 percent of GDP, well below ratios found in comparable countries (Table 3). Both direct and indirect tax ratios are low, partially due to the lack of incentives to mobilize resources outside the hydrocarbon sector.

• Direct taxes. Within direct taxes, individual income tax, which accounted for only 1.6 percent of GDP in 1994, could at least double its contribution, approaching ratios prevailing in countries like Turkey (3-4 percent of GDP). Similarly, corporate income taxes, which currently yield half the level collected for instance in Morocco, could be doubled. Already, receipts from these taxes are expected to improve slowly following the restructuring of loss-making public enterprises and the consolidation of economic recovery. However, a strengthening of the tax administration will be necessary to ensure tax compliance of the growing private sector. Possible measures should include extension of the number of tax payers with a tax identification number; reform of the trade register; promotion of taxpayer self-assessment; adoption of procedures for minimizing the cost of compliance; implementation of systems for tax return processing and accounting that quickly detect noncompliance and trigger appropriate actions; and establishment of an effective audit plan to detect violations. In addition, with the objective of partially taxing the informal sector, the introduction of an additional flat tax of about 1-2 percent on private sector imports could be considered; this tax would be final for those importers not registered with the tax authorities. Alternatively, a minimum tax (1 or 2 percent turnover tax) could ensure that businesses do not evade income taxes.

Table 3.

Government Tax Revenue: Selected Countries, 1994 ^1/

(In percent of GDP)

Source: Staff estimates

^1/Social security taxes and direct taxes on oil companies are excluded;

^2/Fiscal year 1993–94.

^3/Includes property taxes.

^4/Including VAT on imports.

Table 3.

Government Tax Revenue: Selected Countries, 1994 ^1/

(In percent of GDP)

			Algeria	Thailand 2/	Jordan	Malaysia	Morocco	Tunisia	Turkey
Tax revenue			12.0	17.0	16.9	19.8	20.9	24.6	15.1
	Tax on income and profits		2.9	6.2	3.3	8.3	5.3	5.1	7.2
		Individual income tax	1.6	1.9	0.5	2.5	2.5	2.3	4.7
		Corporate and other income taxes 3/	1.3	4.3	2.8	5.9	2.7	2.8	2.5
	Domestic taxes on goods and services 4/		5.3	7.2	6.7	6.4	10.1	7.0	7.0
	Taxes on international trade		3.3	3.3	6.5	3.7	4.5	7.6	0.6
	Other taxes		0.4	0.4	0.4	1.4	0.9	0.7	0.4
Memorandum item:
	GDP per capita (US$)		1462	1525	1390	3623	1169	1775	2142

Source: Staff estimates

^1/Social security taxes and direct taxes on oil companies are excluded;

^2/Fiscal year 1993–94.

^3/Includes property taxes.

^4/Including VAT on imports.

View Table

Table 3.

Government Tax Revenue: Selected Countries, 1994 ^1/

(In percent of GDP)

			Algeria	Thailand 2/	Jordan	Malaysia	Morocco	Tunisia	Turkey
Tax revenue			12.0	17.0	16.9	19.8	20.9	24.6	15.1
	Tax on income and profits		2.9	6.2	3.3	8.3	5.3	5.1	7.2
		Individual income tax	1.6	1.9	0.5	2.5	2.5	2.3	4.7
		Corporate and other income taxes 3/	1.3	4.3	2.8	5.9	2.7	2.8	2.5
	Domestic taxes on goods and services 4/		5.3	7.2	6.7	6.4	10.1	7.0	7.0
	Taxes on international trade		3.3	3.3	6.5	3.7	4.5	7.6	0.6
	Other taxes		0.4	0.4	0.4	1.4	0.9	0.7	0.4
Memorandum item:
	GDP per capita (US$)		1462	1525	1390	3623	1169	1775	2142

Source: Staff estimates

^1/Social security taxes and direct taxes on oil companies are excluded;

^2/Fiscal year 1993–94.

^3/Includes property taxes.

^4/Including VAT on imports.

• Indirect taxes. In Algeria, domestic taxes on good and services yield about 5 percent of GDP, compared with 7 percent in Tunisia and more than 10 percent in Morocco. Increasing this ratio to at least 7-8 percent seems possible, and would go some way toward compensating losses in tariff revenue resulting from further trade liberalization. Reforms in the taxation of domestic petroleum consumption and the VAT seem the most promising.

Following the introduction of a new system of petroleum taxation in January 1996, the taxation of domestically consumed petroleum products consists of a VAT (the standard rate of 21 percent applies to gasoline, while the rate of 13 percent applies to almost all other petroleum products) and ad valorem excises varying currently between 10 and 246 percent. The new tax system introduced in 1996 raised the price of regular gasoline by about 16 percent compared to the December 1995 level. However, at about $0.28 per liter, gasoline prices in Algeria are still well below levels prevailing in other Middle Eastern countries such as Morocco and Tunisia ($0.80 per liter in Morocco and $0.53 in Tunisia in 1995, respectively).

The second area of potential reform concerns the VAT. Currently, three rates apply in Algeria: a standard rate of 21 percent, a reduced rate of 13 percent applying to building material, construction work, certain services and consumption goods, and a special rate of 7 percent applying to basic foodstuffs, activities related to housing construction, and traditional handicraft activities. Although the standard VAT rate is higher in Algeria than, say, in Morocco (20 percent) and Tunisia (17 percent), total revenue from the VAT was only 3.6 percent of GDP in Algeria in 1995, compared to 5.2 percent in Morocco. In line with the recommendations of a recent technical assistance mission from FAD, a reduction of the number of VAT rates from three to two will allow a simplification of the system and an increase in revenue. For example, a consolidated system of two rates (19 percent and 10 percent) is estimated to result in an increase of about 15 percent of VAT receipts (0.5 percentage points of GDP) when applied to the 1995 tax base. ^1/ Reducing agricultural exemptions would result in further increases in revenues.

(2) Expenditure savings ^1/

As Algeria has already carried out significant expenditure restructuring in recent years, the scope for additional savings is likely to be limited, especially in the short term.

Capital spending has been sharply reduced and further large cutbacks do not seem to be appropriate. However, additional savings can be generated by increasing competition through the involvement of the private sector in both the financing and the building of infrastructure, including through private concessions along the lines of ongoing experiments in neighboring countries. In addition, there is considerable scope for enhancing the efficiency of capital spending by reducing the burden of past unproductive investments, in particular in the transport sector which absorbed about 13 percent of total capital expenditures in 1995, ^2/ and by giving priority to sectors and projects with high rates of social return, which likely will be projects that support and complement the ongoing transformation toward a more private and market-driven economy.

As regards current expenditure, steps can be taken to rationalize and further reduce outlays on current transfers, wages and salaries, and public services. First, the phasing out of food and energy subsidies is expected to reduce current transfers by about 1 percentage point of GDP by end-1997. Second, the public expenditure review carried out in collaboration with the World Bank in 1995 identified considerable scope for reducing the wage bill without affecting the quality of public services. While the share of GDP spent on public wages and salaries in Algeria (10.3 percent of GDP in 1994) is comparable with other Middle Eastern countries (10.2 percent of GDP in Morocco and 10.0 percent in Tunisia in 1994), it greatly exceeds those of some Southeast Asian states (6.8 percent of GDP in Malaysia in 1994). The reduction of the wage bill should come from a retrenchment in the size of the civil service, avoiding further declines in real wages because of their detrimental effect on performance incentives in the public sector. In the short term, the objective will be to enforce retirement rules, freeze net government employment and increase productivity in the public sector. In the longer term, reform of sectors such as health and education will allow government employment cutbacks as well as additional savings in public service expenditures.

• Health. In Algeria, budgetary health expenditure accounted for 1.5 percent of GDP in 1994. Although this ratio is comparable to those observed in countries such as Tunisia or Thailand, Algeria’s health indicators, such as infant mortality and life expectancy, are less favorable. The main reasons seem to be the systemic bias toward curative care, an over-investment in major hospitals and physicians, poor maintenance, and weak links between staff performance and incentives. In the short term, better results can be accomplished by using more efficiently the ample resources already available. In the medium term, however, a major overhaul of the whole system will be needed to ensure that public health expenditures better serve public purposes. Resources currently going to “private” goods could be saved by instituting an appropriate system of pricing services provided in the public health system, while improving access to health care by the poor. In addition, certain areas of management and the provision of supporting services could be supplied by the private sector.

• Education. Algeria devotes a large share of GDP to education (7.6 percent of GDP in 1994, compared with 5 percent in Morocco and 5.6 percent in Malaysia), and it has made impressive progress in broadening access to education since independence. However, the Algerian education system still suffers from a number of inefficiencies, such as administrative overstaffing and inadequate appropriations to nonwage expenditures. Furthermore, the absence of fees and charges encourages overconsumption of public education services. In the short term there is scope for increasing efficiency through measures such as increasing the number of students per teacher and retraining part of the administrative staff. A more fundamental reform of the system should aim at a reduction of costs, a closer match of the education profiles with those demanded by the market, and improving efficiency through greater competitiveness. Reduction of costs and increased quality could be obtained through a system of scholar fees for secondary and post-secondary education institutions. Encouraging private provision of education services would also greatly enhance competition in the sector, and help ensure that curricula would more closely match the skills demanded by the economy.

a. Rural and urban unemployment

The proportion of labor force participants that are self-employed has been rising steadily, accounting for a quarter of all employed in 1991. As the self-employed almost by definition cannot become unemployed, the aggregate unemp1oyment rate reflects pressures on labor markets only imperfectly. As self-employment and unpaid family employment are particularly large in agriculture, urban unemployment rates are likely even higher than the national average.

b. Youth unemployment

The unemployment rate among the young is nearly twice the global rate, in line with the situation in many Mediterranean countries. In 1991, about 41 percent of the labor force aged 20-25 were unemployed. The likelihood of being unemployed falls rapidly with age, and among the labor force aged 30 and older only 6 percent were unemployed. Given the large share of the young in the total labor force, this implies that the bulk of the unemployed are under 25 years old, raising major social and political concerns, in part because of the weakness of the social safety net.

c. Unemployment and education

Unemployment data broken down by educational background indicate that unemployment rates do not necessarily decline with the amount of education received. Indeed, the unemployment rate of individuals with a middle or secondary education is highest (26-30 percent in 1991). The unemployment rate is lowest among those with post-secondary education (6 percent) and those with no education (14 percent).

While one would expect job opportunities to rise with education, workers with secondary and primary school education are likely to search for different kinds of jobs, and the latter may be more successful in finding the jobs of their choice. Primary school degree holders are likely to work within the informal sector, as self- or home-employed, while those with a secondary school degree line up for the few formal sector jobs, notably the secure jobs in public administration. As recruitment in the public sector slowed down during the second half of the 1980s, graduates had to wait longer before being offered a job. Furthermore, a large share of graduates may have had degrees in the social sciences, and their job opportunities in the private sector were thus more limited (see below).

d. Unemployment duration

Data on the proportion of long-term unemployed--those without a job for more than one year--in total unemployment are not available. Based on labor surveys, the average length of unemployment spells was 23 months in 1991; by age, the average length of unemployment peaked for the age group 25-34 at 36 months, and was longer for men than for women. Anecdotal evidence also indicates that the long-term unemployed, on average, are likely to be much younger in Algeria than, say, in Europe.

a. Formal and informal labor market

The formal sector of the Algerian labor market groups all public sector establishments as well as private sector firms employing 10 employees or more, while the informal sector is made up of small firms as well as the self- and home-employed. Job protection legislation, minimum wage legislation, and sectoral or national wage agreements only cover the formal sector. In 1991, for example, only an estimated 27 percent of all private sector workers were salaried employees and covered by the Algerian minimum wage. Labor market legislation and official wage settlements are nonetheless likely to be important for the informal sector as well, if only because job market legislation and official wage bargaining will strongly influence the relative size of the formal and informal sectors.

A large informal sector typically entails losses in tax revenue as tax evasion is higher in the informal sector. In addition, most informal activities take place within sectors of relatively low productivity (e.g., services), typically at subsistence wages. Lastly, the availability of a few secure and well-paid jobs in the formal sector may raise unemployment by inducing workers to “line up” for them. For instance, university graduates could find insecure employment in the private or informal sector but may prefer to wait for a “lifetime” job in the public sector.

b. Job protection regulation

Before the reform of the labor code in 1990, dismissal of workers was only possible in severe disciplinary cases. The new law permits labor shedding for economic reasons, but only after a process of collective negotiations, arbitrated by labor inspectors, has failed to find an alternative solution, such as a reduction in working hours, part-time work, or early retirement. After shedding labor, employers are not allowed to take on new recruits at similar grades. Through 1994, dismissed workers were entitled to severance pay equivalent to one month’s pay for each year of service up to a maximum of 15 months. A major reform of the unemployment insurance system was implemented in mid-1994 (SM/95/108, page 31). Under the new system, retrenched workers receive a lump sum severance payment of three months and are not eligible for unemployment benefits for three months to encourage active job search. In addition, employers have to pay an “entry fee” to the Unemployment Insurance Fund based on years of service of the retrenched worker; and have to pay 2.5 percent of payroll to the fund. The duration of unemployment benefits is limited and benefits decline gradually during this period, strengthening incentives for active job search.

Despite these recent reforms, the current regulations still contribute to Algeria’s high unemployment through a number of channels: by creating incentives for insiders to ask for higher than market-clearing wages; by favoring the adoption of more capital intensive technologies in the formal sector through adding a fixed cost to the employment of labor; and by raising the cost of dismissal, thereby inducing employers to hire low risk workers with a work history, thus limiting the prospects for the young to find a job in the formal sector.

c. Trade unions, minimum wages, and wage bargaining

In Algeria, the legally binding minimum wage (Salaire minimum d’activité, SMA) is set by the Government in consultation with labor unions (in particular the Union Générale des Travailleurs Algériens which until 1990 had a statutory monopoly) and employers at the national level. Additional agreements (conventions collectives) are struck at the sectoral level, within the limits set out by the national settlements. Salaries in the civil service are determined according to a grid which, in the past, was also valid for public enterprises. Following the introduction of the new labor code in 1990, public enterprises have been granted more autonomy in the wage-setting process; however, civil service salaries still serve as a reference point in the determination of wages in public enterprises. Increases in the minimum wage are negotiated in the framework of the “tripartite” which gathers labor unions, enterprise managers, and the Government. In the past, both increases in the minimum wage and the average wage were negotiated for the public sector. For instance, in 1994, the 10 percent salary increase which was agreed upon, applied to all public enterprises, even those that were shedding labor under restructuring plans, and where workers had accepted to trade salary increases against job retention. This policy caused major financial problems for some enterprises, particularly in the textile sector, and in 1996 the policy was abandoned and only increases in the minimum wage were decided at the national level. Workers’ representatives committees, obligatory in enterprises with more than ten employees, monitor compliance with wage bargaining agreements and labor legislation.

d. The evolution of wages

The institutional set-up of the labor market is likely to have contributed to upward pressures on wages, although empirical evidence is not available. Data on minimum wages and public sector wages provide some indication of union pressures. The minimum wage rose in real terms by about 17 percent during 1989-97, while total labor productivity fell by 12 percent; the real minimum wage subsequently fell during 1994-95 while production remained broadly flat. Government wages also have been falling in real terms since 1993, by 10 percent during 1995 alone. While remaining well above the SMA, a more compressed wage distribution is emerging in the public sector; wage levels in the private sector are thought to be lower on average but more dispersed. The rapid rise in the real minimum wages may have encouraged labor migration into the informal sector and increased capital intensity in the formal sector. The much larger share of the wage bill in total output observed in the public sector, compared to the private sector, while not conclusive, is nonetheless suggestive of the fact that union pressures, in part supported by extensive job protection legislation, have raised the cost of employment in the formal sector. In addition, with the prevailing wage premium, the most talented job seekers will naturally prefer employment in the public sector; this further stifles the development of a productive formal private sector.

e. Mismatch

Some educational mismatch is suggested by the high unemployment rates among high school graduates. The reason for the divergence of the educational and economic systems may be that graduates were traditionally absorbed by the public sector, and schools developed their curricula accordingly. Another source of mismatch could be inefficient job intermediation. Only since 1990 are employers free to hire as they choose; all vacancies still need to be registered with the public employment agency (Agence Nationale de l’Emploi (ANEM)). The role of ANEM has declined in recent years, and firms have increasingly developed their own recruitment channels. The ratio of jobs offered to jobs demanded registered at ANEM has declined, consistent with the view that labor intermediation has become more efficient.

Matching problems in a broader sense may also reflect labor immobility. According to a survey from the early 1990s, a quarter of the unemployed still would not move to another province in order to get a job, although mobility as measured by the share of unemployed who would accept a job of lower qualification, or in another sector or region, has increased somewhat between 1989 and 1991. In addition, the housing shortage is likely to constitute a severe constraint on labor mobility.