Front Matter Page
© 2004 International Monetary Fund
February 2004
IMF Country Report No. 04/33
Algeria: 2003 Article IV Consultation—Staff Report; Staff Statement; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Algeria
Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. In the context of the 2003 Article IV consultation with Algeria, the following documents have been released and are included in this package:
the staff report for the 2003 Article IV consultation, prepared by a staff team of the IMF, following discussions that ended on October 13, 2003, with the officials of Algeria on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on December 16,2003. The views expressed in the staff report are those of the staff team and do not necessarily reflect the views of the Executive Board of the IMF.
a staff statement of January 14, 2004 updating information on recent developments.
a Public Information Notice (PIN) summarizing the views of the Executive Board as expressed during its January 14,2004 discussion of the staff report that concluded the Article IV consultation.
a statement by the Executive Director for Algeria.
The document (s) listed below have been or will be separately released.
Selected Issues Paper and Statistical Appendix
The policy of publication of staff reports and other documents allows for the deletion of market-sensitive information.
To assist the IMF in evaluating the publication policy, reader comments are invited and may be sent by e-mail to publicationpolicy@imf.org.
Copies of this report are available to the public from
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Front Matter Page
INTERNATIONAL MONETARY FUND
ALGERIA
Staff Report for the 2003 Article IV Consultation
Prepared by the Staff Representatives for the 2003 Consultation with Algeria
(In consultation with other departments)
Approved by Lorenzo L. Perez and Matthew Fisher
December 16, 2003
Discussions for the 2003 Article IV consultation were held in Algiers during October 1-13, 2003. The staff team comprised Messrs. Lazare (head), Callier, Flörkemeier, Ms. Koranchelian, (all MCD), and Mr. Bouscharain (MFD). Mr. Durand (MFD) participated in the policy discussions. Messrs. Kirilenko and Soueid (both ICM) also visited Algiers to advise the authorities on external debt management. Mr. Maherzi, Assistant to the Executive Director for Algeria, participated in the discussions.
The mission met with the governor of the Bank of Algeria, the Minister of Finance, the Delegate Ministers for Financial Reform and for Participation and Promotion of Investment, the economic advisor to President Bouteflika, and other senior officials. The mission also met with representatives from an employers’ association, banks, and nonfinancial corporations, including the state-owned hydrocarbon company Sonatrach.
At the conclusion of the 2002 Article IV consultation on February 24, 2003, Directors commended the authorities for preserving macroeconomic stability and making progress in a number of reforms. They cautioned that fiscal stimulus cannot substitute for the reforms needed to achieve a lasting improvement in growth and employment. They encouraged the authorities to take additional steps towards establishing a sound banking system.
Presidential elections are scheduled for April 2004. President Bouteflika is expected to seek a second term. Mr. Benflis, current leader of the main party in the national assembly and former prime minister (replaced by Mr. Ouyahia in May 2003), has declared his candidacy. The security situation has further improved in 2003, but sporadic incidents of violence have persisted in a few regions.
Persistent data weaknesses exist, especially in government finance statistics and price indices (Appendix III). They hamper the monitoring of economic conditions and the formulation of policies.
Algeria accepted the obligations under Article VIII in September 1997 and maintains an exchange system free of restrictions on payments and transfers for current international transactions.
The authors of the report are Messrs. Lazare, Callier, Flörkemeier, and Ms. Koranchelian.
Contents
Executive Summary
I. Background
II. Recent Economic Developments and Prospects for 2003
A. Activity and Inflation
B. Fiscal Policy
C. Monetary and Financial Sector Developments
D. External Developments
E. Structural Reforms
III. Outlook
A. 2004 Outlook
B. Medium-Term Policies
IV. Policy Discussions
A. Overview
B. Fiscal Policy
C. Monetary Policy
D. External Policies
E. Structural Reforms
F. Governance, Data and Other Issues
V. Staff Appraisal
Tables
1. Selected Economic and Financial Indicators, 1999–2004
2. Summary of Central Government Operations, 1999–2004
3. Monetary Survey, 1999–2004
4. Balance of Payments, 1999–2004
5. Illustrative Medium-Term Scenarios, 2002–2008
6. Public Sector Debt Sustainability Framework, 1998–2008
7. External Debt Sustainability Framework, 1998–2008
8. Indicators of External Vulnerability
Charts
1. Real GDP Growth
2. Inflation Rate
3. Capital Expenditure
4. Fiscal Impulse
5. Fiscal Sector
6. Bank Liquidity
7. External Accounts
8. Real and Nominal Exchange Rates
Boxes
1. Bank Recapitalization and Quasi-Fiscal Deficit
2. Return to International Capital Markets
3. Financial Sector Assessment Program: Main Conclusions
4. Disfunctioning of the Cement Market
5. Liberalization of Telecommunications
Appendices
1. Relations with the Fund
2. Financial Relations With the World Bank
3. Statistical Issues
4. Social Indicators
Executive Summary
Recent developments
Underpinned by the relaxation of the fiscal stance prevailing since 2001 and boosted by a strong performance in the agricultural and hydrocarbon sectors, real growth has picked up since 2002. The strong hydrocarbon export performance has allowed Algeria to strengthen its external position and record a budget surplus.
The procyclical fiscal policy has heightened the vulnerability of public finances to swings in oil prices. It has also fueled money and credit growth. Owing to electoral considerations and the reconstruction needs following the May 21 earthquake, the fiscal stimulus is expected to be maintained until at least mid-2004.
In the second semester of 2003, the authorities intervened to correct the real effective depreciation of the dinar that had resulted, earlier in the year, from the rise in the euro.
Despite major achievements in trade liberalization, the drive for structural reforms has slowed down since mid-2001. Forthcoming presidential elections and the fraudulent bankruptcy of the two largest (yet small) private banks in 2003 are further limiting the appetite for reforms.
Policy discussions
Policy discussions focused on the macroeconomic risks that could arise from the continuation of current policies and on longer-term challenges to achieve sustainable growth. The authorities reiterated the need to maintain public expenditure at a high level over the next few years to face reconstruction and social needs and to support growth in the absence of a marked pickup in private activity.
While acknowledging Algeria’s existing reconstruction and social needs, staff underscored the necessity to maintain fiscal discipline over the medium term and stressed that fiscal expansion was no substitute for growth-enhancing structural reforms that would foster private activity. Staff emphasized that fiscal policy had become procyclical and stressed that the fiscal position’s vulnerability to oil price swings could undermine macroeconomic stability. It also pointed out that sizable quasi-fiscal expenditures intermediated by public banks implied that the financial position of the government was weaker than suggested by official data. Staff suggested stabilizing public expenditures as a percentage of nonhydrocarbon GDP, at a level consistent with medium-term fiscal constraints.
The strong expansion of credit to the economy since late 2002 constitutes a threat to macroeconomic stability and possibly to bank soundness. Staff recommended tightening monetary policy through full absorption of excess bank liquidity. Staff cautioned against targeting a further appreciation of the dinar exchange rate, given the adverse impact of such policy on private activity, employment, and the fiscal position.
Staff underlined that comprehensive structural and institutional reform is a prerequisite for shifting the Algerian economy to a higher and sustainable growth path and reducing unemployment and poverty. The priorities are: reforming the banking sector, privatizing/restructuring nonfinancial public enterprises, establishing an effective real estate market, increasing employment elasticity to growth and improving public services, transparency, and governance.
The authorities were satisfied with the FSAP conclusions and agreed with staff on a number of technical assistance missions to implement the FSAP recommendations. ICM advised the authorities to repay by anticipation a portion of the external public debt and request a rating of Algeria’s sovereign risk.
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Public Information Notice (PIN) No. 04/3
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January 29, 2004
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