Abstract
This Selected Issues paper and Statistical Appendix deals with the issue of low growth in Algeria. A growth-accounting exercise indicates that negative total factor productivity growth explains Algeria’s low growth rates. This paper highlights the sources of this low growth that mainly consist of incomplete structural reforms and the weaknesses of Algeria’s institutions. It describes policy recommendations, focusing on the institutional reforms required to improve the business environment. The paper also analyzes Algeria’s monetary policy in the context of volatile hydrocarbon revenues.
I. Overview
1. The Algerian economy is heavily dependent on the hydrocarbon sector. Notwithstanding the exhaustive characteristic of the wealth arising from hydrocarbon resources, this dependence has two main implications. First, few gainful employment opportunities are created in the sector in which Algeria has its main comparative advantage, because of the very low-labor intensity of hydrocarbon production. Second, as a result of the fluctuations of oil prices, government revenues and the money stock could be volatile.
2. To enhance economic growth and increase employment opportunities until the private sector-led growth picks-up, the Algerian authorities launched in 2000 an economic recovery plan. Notwithstanding the modest positive results, Algeria has still not achieved the growth rates needed to durably reduce unemployment on the required scale. Moreover, the expansionary fiscal policy resulting from the adoption of the economic recovery plan has been a burden on monetary policy.
3. Against this background, and in order to shed light on the possible policy options to reach the authorities’ objectives, this paper addresses two issues, namely it examines (a) what Algeria needs to do to achieve higher growth rates; and (b) if an excess bank liquidity resulting from high hydrocarbon revenues is a threat to monetary stability.
4. Chapter II deals with the issue of low growth in Algeria. A growth-accounting exercise indicates that negative total factor productivity growth explains Algeria’s low growth rates. The chapter highlights the sources of this low growth, which mainly consist of incomplete structural reforms and the weaknesses of Algeria’s institutions. The chapter concludes with policy recommendations, focusing on the institutional reforms required to improve the business environment.
5. Chapter III analyzes Algeria’s monetary policy in the context of volatile hydrocarbon revenues. Econometric estimations indicate that Algeria has a stable money demand. However, oil price shocks can create disequilibrium in the money market, particularly in the context of procyclical fiscal policy. The chapter discusses the appropriate monetary instruments and the needed coordination between fiscal and monetary policies to avoid disequilibrium in the money market.