Algeria: Staff Report for the 2002 Article IV Consultation
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International Monetary Fund
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Publication Date:
10 Feb 2004
eISBN:
9781451811438
Language:
English
Keywords:
ISCR; CR; staff projection; euro exchange rate; authority; staff appraisal; current account; foreign currency; GDP deflator; balance of payments; debt ratio
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The strong hydrocarbon export performance has allowed Algeria to strengthen its external position and record a budget surplus. Executive Directors commend the government for the broad improvement in macroeconomic indicators. The government has eased the fiscal stance, and this strategy has succeeded in boosting short-term growth. The surge in credit to the economy is a concern. Algeria should reinvigorate its structural and institutional reform efforts to put the economy on a sustainable path of higher growth, lower unemployment, improved social conditions, and reduced poverty.

Abstract

The strong hydrocarbon export performance has allowed Algeria to strengthen its external position and record a budget surplus. Executive Directors commend the government for the broad improvement in macroeconomic indicators. The government has eased the fiscal stance, and this strategy has succeeded in boosting short-term growth. The surge in credit to the economy is a concern. Algeria should reinvigorate its structural and institutional reform efforts to put the economy on a sustainable path of higher growth, lower unemployment, improved social conditions, and reduced poverty.

I. Background

1. Algeria restored macroeconomic stability in the context of Fund supported programs (1994-98), after several years of stop-and-go policies, political and social tensions, volatile oil markets, and balance of payments crises However, unemployment and poverty continued to rise.

2. After a few years of tight fiscal policies, increased political pressures in a context of buoyant oil revenues have led the authorities to follow since 2001 an expansionary fiscal stance aimed at boosting growth and employment. This policy has indeed succeeded in the short term and resulted in rising growth, as well as higher agricultural and residential housing investment, without affecting macroeconomic stability based on favorable oil prices.

3. The transition from a centrally planned to a market economy undertaken in the 1980s has not yet been completed. Despite early structural reform successes in the 1990s (trade and exchange reforms, price liberalization), the business environment is still not conducive to strong, private sector-driven growth, because of a lengthy judicial procedure, infrastructure bottlenecks, ill-defined land and real estate property rights, and an inefficient payments system.1,2 Weak governance and security concerns are also weighing on investors’ decisions. Public banks’ financing of large loss-making public enterprises is hampering the financial system’s capacity to mobilize and allocate resources efficiently. As a result of these weaknesses, unemployment remains high and the informal sector large.3

II. Recent Economic Developments and Prospects for 2003

A. Activity and Inflation

4. Economic activity improved in 2002–03 Underpinned by a large fiscal stimulus, high oil prices, and a sharp rise in oil output, real growth rebounded in 2002 and 2003 (Chart I and Table 1). Despite adverse weather conditions, output growth exceeded 4 percent in 2002. In 2003, a bumper crop has also boosted growth. As a result, the high unemployment rate (estimated at 25.9 percent of the labor force in 2002) is expected to have dropped somewhat.

Chart 1.
Chart 1.

Real GDP Growth

(in percent)

Citation: IMF Staff Country Reports 2004, 033; 10.5089/9781451811438.002.A001

Table 1.

Algeria: Selected Economic and Financial Indicators, 1999–2004

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

In U.S. dollars terms.

Annual average changes in the total trade-weighted INS index. A decrease in the index implies a depreciation.

Including the impact of financial restructuring package involving the swap of government bonds for public enterprises’ commercial debt.

Including dividends on current profits paid by Sonatrach.

Including special accounts, net lending, and allocation to the Rehabilitation Fund.

5. Inflation receded in 2002 and is likely to remain low in 2003 (Chart 2) Food prices and the gradual reduction in the external tariff have kept inflation low despite abundant liquidity and booming credit.

Chart 2.
Chart 2.

Inflation Rate

(in percent)

Citation: IMF Staff Country Reports 2004, 033; 10.5089/9781451811438.002.A001

B. Fiscal Policy

6. In spite of a continued surge in expenditures, the overall fiscal balance is expected to reach a sizable surplus in 2003, up from a near balance in 2002. This is mainly the result of high hydrocarbon revenues, which are projected to increase by almost 4 percentage points of GDP compared to 2002, Expenditure growth—already strong in the 2003 initial budget—has been reinvigorated by reconstruction needs arising from the May 2003 earthquake.4 Capital expenditures, in particular, are projected to further increase to 18 percent of nonhydrocarbon GDP (NHGDP) in 2003 (Chart 3), Therefore, the already substantial nonhydrocarbon primary budget deficit—the main fiscal stance indicator—will increase sharply (Charts 4 and 5, and Table 2).

Chart 3.
Chart 3.

Capital Expenditure

Citation: IMF Staff Country Reports 2004, 033; 10.5089/9781451811438.002.A001

Source: World Economic Outlook database and IMF staff estimates.
Chart 4.
Chart 4.

Fiscal Impulse

Citation: IMF Staff Country Reports 2004, 033; 10.5089/9781451811438.002.A001

Chart 5.
Chart 5.

Algeria: Fiscal Sector

Citation: IMF Staff Country Reports 2004, 033; 10.5089/9781451811438.002.A001

Sources: Algerian authorities and IMF staff estimates.
Table 2.

Algeria: Summary of Central Government Operations, 1999–2004

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Sources: Data provided by the authorities; and Fund staff estimates and projections.

Including dividends on current profits paid by Sonatrach.

Starting in 2002, includes CNEP.

Including privatization receipts.

C. Monetary and Financial Sector Developments

7. Since 2002, monetary policy has been accommodating and credit to the economy booming. Despite a 2 percentage point increase in reserve requirements and a rise in the amounts of central bank deposit auctions, money supply M2 is expected to increase substantially in 2003. This increase reflects in part the largely unsterilized surge in net foreign assets.5 Furthermore, credit to the economy accelerated in 2002 and 2003 (Chart 6 and Table 3).6 New credit has been concentrated in the private sector, including agriculture and housing.

Chart 6.
Chart 6.

Bank Liquidity

Citation: IMF Staff Country Reports 2004, 033; 10.5089/9781451811438.002.A001

Table 3.

Algeria: Monetary Survey, 1999–2004

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

Projections are based on banks balance sheets excluding the two liquidated banks.

This includes the impact of bank restructuring packages. The conversion of bank claims on public enterprises in bank claims on the government results, other things being equal, in a decrease of credit to the economy and an equal increase in credit to the government. The flow of new credits in 2003 exceeds the stock difference between 2002 and 2003, because of the liquidation of two private banks.

This includes the debt-rescheduling proceeds blocked in special accounts at the Bank of Algeria.

8. Two major developments took place in the banking sector. The two largest private banks (although small, with less than 6 percent of bank deposits) went bankrupt in 2003 because of fraudulent practices and violations of prudential regulations. Staff estimates that their liquidation will result in a one-off cost to the treasury as high as 2 percent of GDP (bailing out public entities which lost deposits). A new ordinance on money and credit addressing a variety of institutional issues highlighted by the private banks’ failure was issued in August 2003.

D. External Developments

9. Throughout 2002 and the first half of 2003, the external position has continued to strengthen (Chart 7 and Table 4). Boosted by both higher prices and volumes, hydrocarbon exports surged in 2003, leading to a sharp rise in the current account surplus and official reserves, which, at $30.4 billion (22 months of imports) at end-October, exceed gross external debt.

Chart 7.
Chart 7.

External Accounts

(In billions of dollars)

Citation: IMF Staff Country Reports 2004, 033; 10.5089/9781451811438.002.A001

Table 4.

Algeria: Balance of Payments, 1999–2004

(In billions of U.S. dollars; unless otherwise indicated)

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Sources: Bank of Algeria (through 2000 data); and Fund staff estimates and projections.

According to the information provided by the Bank of Algeria all official reserves are liquid.

According to the Bank of Algeria, its actual data inlcude short-term debt, use of Fund resources and debt to Russia.

10.Following a depreciation in the first half of 2003, the real effective exchange rate (REER) of the dinar has appreciated since July 2003 (Chart 8). The depreciation reflected the low inflation rate prevailing in Algeria together with the broad stability of the dinar relative to the dollar at a time when the euro appreciated. In the second half of 2003, upon evidence that the appreciation of the euro was more than a transitory event, BA intervened to correct the initial depreciation of the REER. By end November, the REER index was estimated to be in the vicinity of its end-2002 level.

Chart 8.
Chart 8.

Real and Nominal Exchange Rates, January 1994–September 2003 1990=100

Citation: IMF Staff Country Reports 2004, 033; 10.5089/9781451811438.002.A001

E. Structural Reforms

11. Despite a marked slowdown in the overall pace of reforms since 2001, progress has been achieved in two specific areas: trade liberalization and development of treasury securities markets. Regarding trade liberalization, the progressive elimination of the temporary surtax (which replaced the minimum dutiable values in 2001) continued in accordance with the pre-announced timetable. Furthermore, the legislative framework has been modernized to ensure consistency with World Trade Organization (WTO) rules, while negotiations towards Algeria’s WTO accession are pursued actively.7 As for the development of securities markets, a systematic effort has been made to issue regularly tradable treasury securities covering a large spectrum of maturities to generate a reference yield curve. The Treasury has also initiated a program aimed at substituting standardized marketable securities in exchange for some of the bonds issued in the context of past bank restructurings.

12. Furthermore, a pragmatic attitude towards privatization is being developed though there have been few tangible results so far. Full or partial sales of state-owned enterprises to private investors, and transfers of assets to joint ventures with private investors are being prepared with a view to completing a few transactions by early 2004. Nevertheless, attempts to privatize three cement factories, open up the capital of one state-owned bank, and transfer the management of Algiers’ airport to the private sector did not come to fruition.8

III. Outlook and Risks

A. 2004 Outlook

13. Overall, the outlook for 2004 seems favorable, although a return to normal weather conditions will result in lower growth in agriculture and thus in the overall economy, notwithstanding the continued fiscal expansion. Inflation is expected to increase slightly to about 4 percent, mainly owing to the impact of wage increases, the persistence of abundant bank liquidity, and a further expansion of credit to the economy. Despite the slight drop in hydrocarbon export prices, the current account balance is still projected to record a surplus, as nongovernment saving remains sufficient to offset the emerging fiscal deficit (see below). The external position will continue to strengthen. Nevertheless, fiscal expansion and pervasive quasi-fiscal expenditures keep building up medium-term vulnerabilities.

14. The 2004 budget retains the current expansionary fiscal stance, with the primary nonhydrocarbon deficit projected to stabilize near its 2003 level.9 Current expenditures will rise as a result of a 25 percent increase in the minimum wage (SNMG), an allowance granted to civil servants in the education sector, and the upsurge in current transfers to public services. The budget includes DA 80 billion (1.5 percent of GDP) for reconstruction and also DA 77 billion for local development programs announced ahead of the elections. Hydrocarbon revenues are projected to decline markedly, resulting in lower overall revenues and a projected overall budget deficit.10

B. Medium-Term Policies

15. The baseline medium-term scenario assumes an overall continuation of current economic policies and is based on the WEO oil price projections (Table 5) The fiscal stance remains broadly expansionary, although the gradual fall in oil prices triggers a modest consolidation. The scenario also involves a relatively strong growth of credit to the economy in the context of increasing bank liquidity, while the REER is assumed to remain constant at its estimated end-November 2003 level. It assumes that the pace of structural reforms remains tepid.

Table 5.

Algeria: Illustrative Medium-Term Scenarios, 2002–08

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

Illustrative scenario aimed at showing the effects of lower oil prices under unchanged policies. In particular, no additional eternal borrowing is assumed.

Including special accounts and net lending.

16. The scenario’s results are mixed. While Algeria’s external position continues to strengthen, the fiscal position weakens significantly, forcing the treasury to issue more securities and draw down its BA deposit. This monetary financing, coupled with an accumulation of net foreign assets, results in sustained liquidity expansion and a modest rise in inflation, while fiscal consolidation weighs somewhat on growth performance.

17. The scenario also highlights the risks of the current policy stance, which could, overtime, endanger Algeria’s internal balance:

  • First, the slow pace of reforms implies that the projected rate of growth is not sufficient to rapidly reduce the high unemployment rate and the resulting social tensions.

  • Second, the monetary creation induced by the fiscal deficit and by credit expansion constitutes a potential threat to macroeconomic stability and the banking sector. The increase in liquidity carries a significant inflationary risk. High liquidity may also encourage banks to follow a more aggressive credit policy, which, in turn, could generate additional nonperforming loans.

  • Third, the risk of oil price (and to some extent hydrocarbon output) fluctuations makes the treasury’s financial position vulnerable. The increase in the fiscal deficit in the case of a sharp and sustained drop in oil prices could generate a fiscal sustainability problem and require corrective measures that would have adverse consequences on growth.11 Similarly, the public debt sustainability analysis indicates that a very large and sustained (but unlikely) adverse shock to GDP growth would result in high and growing debt levels (Table 6, line B2). However, a smaller GDP shock, such as a one-year drop in oil output resulting in a decline in overall GDP by one standard deviation, leads to higher but sustainable public debt ratios (Table 6, line A2).

Table 6.

Algeria: Public Sector Debt Sustainability Framework, 1998–2008

(In percent of GDP, unless otherwise indicated)

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Central government gross debt.

Derived as [(r - p(l +g) - g + ae(1+r)]/(l+g+p+gp)) times previous period debt ratio, with r = interest rate; p = growth rate of GDP deflator; g = real GDP growth rate; a = share of foreign-currency denominated debt, and e = nominal exchange rate depreciation (measured by increase in local currency value of U S dollar).

The real interest rate contribution is derived from the denominator in footnote 2/ as r - π (1+g) and the real growth contribution as–g.

The exchange rate contribution is derived from the numerator in footnote 2/ as ae(1 + r).

For projections, this line includes exchange rate changes.

Defined ad public sector deficit, plus amortization of medium and long-term public sector debt, plus short-term debt at end of previous period.

Derived us nominal interest expenditure divided by previous period debt stock.

The key variables include real GDP grow ill, real interest rate; and primary balance in percent of GDP The episodes of budget surpluses and negative real interest rates or dm past explain the unrealistically positive outcome of this stress test.

Assumes that key variables (real GDP growth, real interest rate, and primary balance) remain at the level in percent of GDP/growth rate of the last projection year.

Assumes permanent growth shock and elasticity of revenues of 1.

Real depreciation is defined as nominal depreciation (measured by percentage fall in dollar value of local currency) minus domestic inflation (based on GDP deflator).

18 All in all, barring large and sustained shocks, Algeria’s external position will remain strong over the medium term (Table 7). The standardized stress tests for external debt sustainability reveal that even large and low-probability shocks would not bring the debt ratio above the 1998 level (63 percent of GDP). Furthermore, the ratio would decline, after an initial increase, again suggesting that the external debt is sustainable.

Table 7.

Algeria: External Debt Sustainability Framework, 1998–2008

(In percent of GDP. unless otherwise indicated)

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Derived as [r - g - r(l+g) + ea(1 +r)]/(l+g+r+gr) limes previous period debt stock, with r = nominal effective interest rate on external debt; r = change in domestic GDP deflator in US dollar terms, g = real GDP growth rate, e = nominal appreciation (increase in dollar value of domestic currency), and a = share of domestic-currency denominated debt in total external debt.

The contribution from price and exchange rate changes is defined as [-r(l+g) + ea(l+r)]/(J+g+r+gr) times previous period debt stuck, r increases with an appreciating domestic currency (e > 0) and rising inflation (based on GDP deflator).

For projection, line includes price and exchange rate changes.

Defined as current account deficit, plus amortization on medium- and long-term debt, plus short-term debt at end of previous period.

The key variables include real GDP growth, nominal interest rate; dollar deflator growth, and both non-interest current account and non-debt inflows in percent of GDP.

The drop in growth is assumed to originate in the hydrocarbon sector and affects directly hydrocarbon exports and government revenue.

Long-run, constant balance that stabilizes the debt ratio assuming that key variables (real GDP growth, nominal interest rate, dollar deflator growth, and both non-interest current account and nun-debt inflows in perent of GDP) remain at their levels of the last projection year

IV. Policy Discussions

A. Overview

19. Since 1998, Fund surveillance has focused on the need to maintain macro-economic stability and accelerate structural reforms. The authorities have responded favorably to Fund advice, which they consider a valuable input in the design and implementation of their policies. The stabilization achieved under the four years of Stand-By and Extended Arrangements completed in 1998 has been consolidated since then. However, implementation of the structural policies recommended by staff has been slow, owing to social and political considerations, and to persistent administrative and institutional weaknesses. Consequently, private sector-led growth has remained disappointing since 1998. In a context of high oil revenues, the authorities have, therefore, adopted since 2001 an expansionary fiscal policy, in order to create jobs and improve living standards until private activity picks up.

20. The policy discussions focused on the risks of the current policy stance and the longer-term policy challenge of launching the economy on a sustained higher growth path. This objective requires an acceleration of productivity-enhancing reforms in a stable macroeconomic environment and an institutional framework supportive of private sector initiative and investment.

21. The authorities shared the view that steadfast implementation of the reform agenda is necessary. However, they also pointed out that expansionary policies have a role to play given the scale of the current level of unemployment. They expressed confidence in the success of their fiscal policy, noting the increase in growth already generated by high expenditures.

B. Fiscal Policy

22. As noted above, the authorities were determined to stimulate growth through continued fiscal stimulus. They stressed the role of public expenditure over the next few years to (a) provide for reconstruction and social needs and (b) continue to support growth in the absence of a marked pickup in private sector activity.

23. Staff expressed concerns about the procyclicality of expenditures in the wake of high hydrocarbon revenues. Recently high oil prices have played a crucial role in the maintenance of stability. In the event of a marked and durable drop in oil prices, the projected budget deficit would increase sharply and could not be sustained indefinitely under unchanged policies. Staff also observed that the nonrecording of the quasi-fiscal operations of public banks in the budget (Box 1) overestimates (underestimates) the size of the overall surplus (deficit) by at least one percentage point of GDP. As noted in SM/03/28 (01/22/03), long-term considerations based on a permanent rent notion do not call for a loosening of the fiscal position achieved in 2001.12 In addition, (a) banks’ quasi-fiscal operations; (b) contingent liabilities likely existing in the social security system and local municipalities; and (c) a current low return on government investment may call for greater fiscal discipline Furthermore, monetary policy and commercial bank management are complicated by the large liquidity swings when volatile hydrocarbon revenues are not sterilized. Finally, staff expressed concern that the drive for structural reforms may have been dulled by the spur to growth resulting from the expansionary fiscal impulse.

24. While acknowledging Algeria’s existing reconstruction and social needs, staff stressed that the current reliance on expansionary fiscal policies will, by itself, not be sufficient to generate sustainable growth. Although removing infrastructure bottlenecks calls for public investment, the recent surge in capital expenditure to GDP ratio has led to public investment in projects with low economic profitability (e.g., expansion of the railroad network, as assessed by the World Bank). Fiscal expansion can have only a temporary effect on activity. On the downside, it will inflate the relative size of government in the economy, complicate macroeconomic management, and carry the risk of further declining quality in new public investment projects. A sustained improvement in Algeria’s growth performance requires an acceleration of productivity-enhancing structural and institutional reforms.

Bank Recapitalization and Quasi-Fiscal Deficit

Algeria still maintains a sizable and inefficient state-owned enterprise sector which largely relies on financial support from public banks. The continued provision of directed credit to large loss-making public enterprises has been the main factor of the fragility of public banks. Between 1991 and 2002, the Treasury repeatedly bailed out the public banks to enable them to meet prudential ratios. On average, these interventions amounted to about 4 percent of GDP per year over 1991–2002.1 New nonperforming loans accumulated since end-1999 imply a further provisioning and recapitalization of at least 3 percent of GDP (1 percent of GDP per year). Already in 2003, the government has “frozen” billions of dinars of public bank claims on some large state-owned companies.

Staff recommends removing from public banks the burden of being the financier of last resort for large loss-making enterprises in order to facilitate bank reform. Freeing public banks from their quasi-fiscal activities would at the same time increase transparency of fiscal policy, improve governance, and provide an incentive for subsequent public enterprise restructuring.

Directed credit should be replaced with temporary and explicit budget subsidies in the context of a well-defined restructuring program. These subsidies should be managed so as to gradually harden the budget constraints of these companies and to spread social costs over time. This temporary subsidization must be transparent, credible, and follow a preannounced action plan for phasing it out over time.

1 The recapitalization completed in 2002 is based on end-1999 balance sheets.

25. Staff recommended a tightening of fiscal policy. For the short term, staff urged the authorities to curb public spending in the second half of 2004, especially by restraining capital expenditures while giving priority to the subset of capital expenditures having strong complementarity to private sector development. For the longer term, staff suggested that public expenditures be stabilized as a percentage of NHGDP at a level consistent with medium-term fiscal constraints to avoid procyclicality In addition, it recommended reorienting expenditure towards enhancing the social safety net to alleviate the social costs that may result from structural reform.

C. Monetary Policy

26. Monetary policy should be tightened. Staff noted that so far the rise in liquidity had been absorbed by the economy without undue pressures on domestic prices and international reserves. However, it cautioned that economic agents may not be willing to hold additional real money balances beyond a certain level. Staff drew the authorities’ attention to the expansion of credit to the economy since late 2002, which can, only partially be attributed to the pickup in activity. It also highlighted the potential consequences of such credit expansion on inflation and bank soundness. The authorities pointed out that, concerned by these risks, they had increased liquidity absorption in mid-2003. Staff emphasized that unless excess liquidity is fully mopped up, risks will continue to build up. However, monetary policy will not be fully effective unless banks follow a more profit-oriented approach and improve their risk evaluation capacity.

27. Staff recommended that the BA relinquishes its role as a broker on the interbank market. It should limit its role to centralizing and disseminating information on concluded transactions, in order to let banks operate freely.

D. External Policies

28. The authorities confirmed their commitment to organizing trade in accordance with the multilateral framework, ahead of joining the WTO. Staff supported this commitment and welcomed the important legislative work done towards that objective. It pointed out, however, that the amendment to the draft budget law for 2004 approved by the National Assembly to ban imports of alcoholic beverages is in breach of WTO rules and contrary to the principles underpinning Algeria’s own trade reform.13

29. The authorities confirmed their intention to continue managing the exchange rate flexibly and avoiding any misalignment of the REER. Staff welcomed this principle guiding exchange rate policy. Both during the Article IV consultation mission and in subsequent contacts with the authorities, staff acknowledged that there is a large uncertainty in determining the appropriate level of the dinar exchange rate. While fiscal expansion and the strengthening of the external position may call for an appreciation of the exchange rate, other elements—tariff reform, low productivity growth, high unemployment, and a lack of diversification of the export base—point towards the opposite direction. Against this background, staff cautioned BA against targeting a further appreciation of the REER, as this policy could hamper the development of private activity, reduce employment opportunities, and hinder diversification of the narrow export base. An appreciation also further weakens the fiscal position, as it reduces the hydrocarbon tax revenues in dinar terms.

30. In this context, a further liberalization of the exchange system would deepen the foreign exchange market and foster a greater role of market forces in determining the exchange rate. An initial step could be granting greater freedom to nonhydrocarbon exporters to use their foreign exchange earnings and allowing banks to manage, within prudential limits, the resources mobilized in the form of foreign exchange deposits. Staff also recommended (a) an increase in the indicative ceiling under which foreign exchange requests for travel abroad are automatically granted by commercial banks,14 and (b) a streamlining of the procedures to sell foreign exchange for services transactions.

31. The authorities decided to engage in more active management of the country’s debt. Staff provided advice on issues related to external assets and liabilities management, including the possible early prepayment of some sovereign debt (Box 2).15 In this context, staff urged the authorities to seek a quick resolution of issues concerning the debt to Russia.

Return to International Capital Markets

The Algerian authorities consider the currently strong balance of payments position to be an opportune moment for reducing the country’s external debt burden, diversifying its creditor base, and increasing its visibility. The return to international capital markets is not viewed as a fiscal necessity, but as a step enabling the Algerian economy to benefit from a better recognition of its potential by international investors.

In this context, ICM staff designed a strategy for Algeria’s return to international capital markets and provided policy and technical advice on the implementation of this strategy. The strategy consists of three main courses of action:

  • Engaging in a more active external debt management. ICM identified sovereign loans with a face value of US$2.7 billion that could possibly be prepaid at par m the near future without protracted negotiations or penalties. If these prepayment operations were financed using foreign reserves, the estimated net savings (in net present value terms) would amount to about US$250 million, or close to 10 percent of the principal prepaid. This operation would result in reducing interest payments by 0.1 percent of GDP in 2004, unless new domestic debt is issued to finance the buyback. A more comprehensive prepayment of debt would imply discussions with bilateral creditors—including London and Paris Club creditors—and a prior settlement of the issues related to the debt to Russia.

  • Obtaining a sovereign credit rating. ICM advised to initiate immediately a request for a sovereign credit rating.

  • Issuing a debut sovereign bond. ICM discussed the steps and modalities of issuing a bond in international capital markets. Staff stressed the need to include collective action clauses into sovereign bonds.

E. Structural Reforms

Banking Reform and FSAP follow-up

32. The authorities are committed to reforming the banking sector. As detailed in Box 3, and in the accompanying Financial Sector Stability Assessment report, the public banks remain inefficient and continue to finance loss-making public enterprises. The authorities are currently moving on three fronts: modernizing the payments system (with World Bank assistance), strengthening bank licensing, and improving bank supervision. The Fund technical assistance in the latter area aims at building capacity in on-site and off-site inspections and at better risk assessment.

33. While supporting the authorities’ initiatives, staff stressed that a comprehensive reform of the banking sector requires more decisive action. Staff emphasized that releasing banks from their function of financing the loss-making public enterprises should be at the core of reform. It recommended the replacement of directed credit to public enterprises with explicit subsidies from the budget in the context of an enterprise restructuring plan. It encouraged the authorities to complete the ongoing opening of the capital of one public bank and prepare the privatization of other banks and financial institutions.

34. The authorities shared the FSAP conclusions and welcomed staff advice to adopt a detailed action plan to implement the recommendations. Nevertheless, they did not commit themselves to privatizing all public banks over the medium term (Box 3).

35. The new ordinance on money and credit presented a mixed picture. Positive developments include the tightening of bank licensing conditions, the requirement for bank capital to be paid fully in cash, the greater flexibility in the choice of monetary policy instruments, the institutionalized coordination between the Ministry of Finance and BA, and the requirement for periodic reporting. However, the lifting of the requirement for the Treasury to assume the losses of BA if the latter’s reserves are insufficient, and other dispositions on BA’s and the banking commission’s relations with the government could weaken the financial and operational independence of the central bank and of the banking commission.

Other Structural Reforms

36. Staff observed that reform progress has been slow over the past two years. It noted that an unattractive investment conditions and market imperfections continue to weigh on growth performance (Box 4). In addition to financial sector reform, staff called for accelerating reforms in the following priority areas:

Financial Sector Assessment Program: Main Conclusions

Algeria’s financial sector is dominated by state-owned banks (90 percent of bank assets). Their portfolio is laden with treasury bills issued to replace nonperforming loans to public enterprises. Financial markets remain in infancy. Most public banks require further recapitalization (Box 1).

Unlike the local subsidiaries of reputed foreign banks, domestically-owned private banks are in a relatively precarious financial position. The recent failure of two private banks has, through contagion, weakened the financial positions of other locally-owned private banks. Given their limited size, the remaining private banks do not constitute a threat to the stability of the system. Furthermore, the new law on money and credit strengthened bank licensing requirements and efforts at improving bank supervision are underway with Fund assistance.

Establishing an efficient financial system in Algeria requires action on three fronts:

  • Reform the institutions through which financial intermediation takes place. In this respect, increasing the market share of quality private banks will boost competition and raise the level of professional qualification.

  • Improve the framework in which financial institutions operate. This requires a set of continuous reforms in the legal, accounting, and judicial areas. However, the most urgent needs are to modernize the payments system and to strengthen bank supervision.

  • Modulate the hydrocarbon-induced liquidity and credit cycles that curtail banks’ risk-taking. This rests first on immunizing public expenditure from swings in hydrocarbon revenues. It also requires coordination between fiscal policy and liquidity management.

Disfunctioning of the Cement Market

Boosted by government expenditures and reconstruction needs, the demand for cement has surged since 2001. Although the theoretical production capacity is 11 million tons per year, actual output has never exceeded 8-9 million tons because public plants, which had a monopoly on domestic production until 2003, have proved unable to function even close to full capacity. The imbalance between domestic demand and supply attracted the interest of private investors and importers. A major Middle Eastern cement company recently inaugurated a new plant, with a productive capacity of 2 million tons per year.

The market does not function properly. The public cement factories price their cement based on a weighted average of the local production cost—plus a mark up—and of the import price. The local production cost is kept artificially low owing to the implicit subsidization of domestic gas prices—an essential cost component. The public companies’ non profit-maximizing policy can distort the functioning of the market, as the cost to private importers is necessarily above the weighted average price.

In the wake of high demand and limited productive capacity, the public sector has increased its import volumes. As a result, the price of public cement increased moderately because of the higher weighted average price. However, owing to the still unfulfilled demand, private sector imports surged and the price of privately imported cement jumped up to 150 percent of the price of cement sold by the public sector, further illustrating the disfunctioning of the market.

With the objective of increasing efficiency, the government decided to sell 51 percent of the capital of three (out of twelve) state-owned cement plants. Ten foreign cement manufacturers expressed interest. However, at the end of the bidding process, only one compliant bid remained. The government cancelled the whole operation as the financial offer was deemed too weak. The government plans to restart the process in the near future after taking into account the concerns expressed by potential investors on the initial tender’s strict terms and conditions.

  • Privatization. Staff noted the government’s willingness to move ahead pragmatically, in consultation with its social partners. However, no tangible results have been recorded yet and attempts in 2003 at privatizing some companies (e.g., cement factories) failed. The mission encouraged the authorities to move forward, taking into account investors’ needs while strengthening the social safety net to cushion the impact of any labor retrenchment. The success of the privatization process will also depend on the progress made in the improvement of the investment climate, strengthening market institutions, and transparency.

  • Improvement of economic institutions. Staff emphasized that the establishment and efficient functioning of institutions is no less important than physical infrastructure for a good performance of market economies. It urged the authorities to ensure the creation of a genuine real estate market in residential, industrial, and commercial premises;16 to continue to improve the functioning of key public services (customs and tax administration, and the judiciary) while strengthening the quality of the services provided by public utility companies (Box 5).

Liberalization of Telecommunications

In 1999, the government put in place with World Bank assistance a comprehensive strategy to liberalize the telecommunications sector.

The government succeeded in implementing substantial elements of this strategy. A new regulatory body was established. All public assets (fixed lines and GSM services) in the telecommunications sector were transferred to a new public enterprise, Algérie Télécom, created in 2002. A second GSM license was auctioned to an international investor.

However, the incomplete corporatization of Algérie Télécom is hampering a sound development of the sector. The opening balance sheet of Algérie Télécom has not yet been established, in part because the government did not decide on time on the amount of existing debt that should be transferred to Algérie Télécom. Consequently, Algérie Télécom has not been able to secure the financing resources needed for its capacity expansion. It has, therefore, not been in a position to effectively compete with the second GSM licensee and to bring about improved services and lower prices for consumers.

Meanwhile, the liberalization of the market is continuing. In particular, preparation for the issuance of a third GSM license is under way.

  • Active labor market policies. Staff stressed that increased flexibility in labor legislation together with reduced taxation of the wage bill, should increase employment elasticity to growth. In addition, these reforms, coupled with a modernization of domestic trade, should contribute to limiting expansion of the informal sector.

F. Governance, Data and Other Issues

37. Transparency and governance. Staff welcomed the progress made through strengthening tax and customs administrations, revising the procurement code and the law on money and credit, publishing BA’s annual report, and authorizing the publication of Article IV consultation staff reports. However, much remains to be done to improve transparency, inclusiveness, and accountability. In particular, there is a need to (a) better disseminate economic information; (b) adopt a more proactive attitude on the part of agencies monitoring the use of public funds; (c) strengthen the independence and efficiency of the judicial system; and (d) resume the publication of the Audit Office reports.

38. Anti-Money laundering (AML). Algeria has established a Financial Intelligence Unit, however, little progress has been achieved in the adoption of an AML law. A World Bank-led assessment of the AML framework is under way.

39. Technical assistance. The authorities expressed satisfaction with Fund assistance on tax and customs administration reforms and stressed that in both areas implementation of the Fund recommendations was ongoing. They called for the intensification of Fund support to implement the remaining technical assistance recommendations. They also confirmed their interest in receiving technical assistance in government finance statistics, reserves management, monetary and exchange rate policy, banking supervision, and internal audit of the central bank.

40. The statistical system needs to be substantially strengthened. The September 2002 multisector statistical mission confirmed that, while the basic infrastructure for a sound statistical system is largely in place and local staff is generally well-trained and experienced, substantial weaknesses still prevail in many areas, particularly in data dissemination and timeliness, data coverage, poor or nonexistent source data, periodicity, and methodology. Staff regretted the delays in implementing the action plan recommended by STA to achieve the authorities’ goal of subscribing to the SDDS.

41. Regional integration. The authorities expressed continuous interest in staff s involvement in the promotion of regional integration with Maghreb countries.

42. Staff urged the authorities to consider full participation in the enhanced HIPC initiative. It also encouraged them to consider voluntary advance repurchases to the Fund.

43. The authorities confirmed their interest for an early 2004 fiscal ROSC mission

V. Staff Appraisal

44. Staff commends the authorities for the broad improvement in macroeconomic indicators in 2002 and 2003. Growth is picking up and unemployment is falling somewhat, inflation remains slow, the external position is strong, and Algeria is now net creditor to the rest of the world.

45. Against this backdrop, the government has eased the fiscal stance since 2001. Confronted with mounting political and social demands, inadequate infrastructure, reconstruction needs generated by terrorism and natural disasters, the government let expenditures—especially capital expenditures—surge in an attempt to boost growth. The draft budget for 2004, which is marked by the pursuit of the reconstruction efforts as well as by electoral concerns, envisages a further rise in expenditures.

46. The government strategy has succeeded in boosting short-term growth. It has resulted in higher employment and in a rise in investment in agriculture and residential housing. Furthermore, as long as oil prices remain high, the loosening of the fiscal stance will endanger neither the external nor the treasury positions.

47. Nevertheless, risks arise from the adverse impact of the procyclical fiscal policy on long-term macroeconomic stability, and it is regrettable that the loosening of the fiscal stance has been accompanied by a marked slowdown in reform efforts. A continued fiscal expansion will boost growth performance only temporarily and is unlikely to reduce unemployment to more acceptable levels. Furthermore, the expansionary fiscal policy will not result in a sufficient increase in employment elasticity to growth and bears the risk of declining quality of investment. In addition, expenditure is higher than it should be to stabilize government wealth and maintain intergenerational equity. The current fiscal policy stance also increases the relative size of the government in the economy and could build up inflationary pressures.

48. Due to these risks, it is appropriate to adopt a less expansionary and less procyclical fiscal policy stance. In the short term, especially from the second part of 2004, staff recommends a gradually tighter fiscal policy to limit the budget vulnerability to adverse developments in the oil market over the medium term. In the longer run, to avoid procyclicality, staff suggests that public expenditures be stabilized as a percentage of NHGDP at a level consistent with the medium-term fiscal constraint.

49. The surge in credit to the economy since 2002 is a concern. While commending the authorities for keeping inflation low, staff considers that the surge in credit to the economy is likely to exceed the credit needs generated by higher economic activity and may result in inflationary pressures and nonperforming loans. Therefore, staff urges the BA to be more aggressive in mopping up all excess bank liquidity.

50. BA’s continued commitment to implementing the managed float exchange rate regime in a flexible way is welcomed. However, the staff cautions against pursuing further the recent policy of generating an appreciation of the REER, as this policy could indeed hamper the development of private activity, lower employment opportunities, and hinder diversification of the export base. It would also further weaken the fiscal position. Staff recommends strengthening the role of market forces in determining the exchange rate by further liberalizing the exchange system.

51. Staff strongly supports the authorities’ decision to adopt a more active management of external assets and liabilities. It welcomes the authorities’ intention to prepay part of the debt, request a sovereign risk rating, and, in due course, return to international financial markets. An early settlement of bilateral debt issues with Russia is required to move to a comprehensive management of external liabilities. While welcoming the authorities’ intention to grant debt relief on a case by case basis to HIPC eligible countries, staff urges Algeria to consider full participation in the enhanced HIPC initiative.

52. Algeria needs to reinvigorate its structural and institutional reform efforts to put the economy on a sustainable path of higher growth, lower unemployment, improved social conditions, and reduced poverty. Despite the authorities’ assurances that fiscal expansion is not a substitute for reforms, the reform pace has been increasingly slow since 2001. While acknowledging that the social, political, and electoral constraints that may have contributed to this slowdown are still prevalent, staff calls on the government to boost structural and institutional reforms in the following priority areas: (a) reforming banks; (b) privatizing/re structuring large public enterprises while replacing the current flow of directed credit received from public banks with direct and temporary budget subsidies; (c) improving the business climate through strengthening basic economic institutions; and (d) adopting active labor market policies. Staff suggests that an enhanced social safety net should cushion the impact of public sector restructuring in the event of labor retrenchment.

53. Staff welcomes the authorities’ intention to improve statistics and their interest in the SDDS as a framework for statistics development; however, it regrets the delays in the implementation of the Fund technical assistance recommendations. Although systematic and timely transmission of data would improve Fund surveillance, the provision of data to the Fund is viewed by staff as broadly adequate for effective surveillance.

54. Staff commends the authorities for their increased willingness to foster transparency and urges them to improve governance drastically. The publication of the Article IV staff reports since 2000 is a positive sign. Nevertheless, further efforts are needed to disseminate economic information. Improved governance, including at the local and regional levels, is also needed. Institutions aimed at enforcing accountability need to be reinforced substantially and the results of their work published.

55. It is proposed that the next Article IV consultation with Algeria take place on the standard 12-month cycle.

Table 8.

Algeria: Indicators of External Vulnerability

(In percent of GDP, unless otherwise indicated)

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Central government only.

Series breaks in 1998 and 2003 due to change in status of financial intermediaries.

Exports and imports on goods and services exclude factor incomes, in line with the 5th edition of the Balance of Payments Manual.

Remaining maturity basis.

Annual average changes in total trade—weighted INS index. A decrease in the index implies a depreciation. Consumer price indices are used. The September 2003 observation is the change relative to September 2002.

APPENDIX I Algeria: Relations with the Fund

(As of September 30, 2003)

A. Financial Relations

Membership Status Joined 9/26/63; Article VIII

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Financial Arrangements

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Projected Obligations to Fund (SDR million, based on existing use of resources and present holdings of SDRs):

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B. Nonfinancial Relations

Exchange Rate Arrangement

From January 21, 1974 to October 1, 1994, the exchange rate of the dinar was determined on the basis of a fixed relationship with a basket of currencies, adjusted from time to time. On October 1, 1994, the Bank of Algeria introduced a managed float for the dinar through daily fixing sessions that included six commercial banks. This system has been replaced by an interbank foreign exchange market as of January 2, 1996 At the end of August 2003, the average of the buying and selling rates for the U.S. dollar was $1 = DA 77.86, equivalent to SDR 1 = DA107.23. No margin limits are imposed on the buying and selling exchange rates in the interbank foreign exchange market, except for the dollar, where a margin of DA 0.017 has been established between the buying and selling rates of the Bank of Algeria for the dinar against the U.S. dollar.

Algeria maintains an exchange rate system which is free of restrictions on the making of payments and transfers for current international transactions.

Latest Article IV Consultation

The discussions for the 2002 Article IV consultation and post-program monitoring with Algeria were held in Algiers from October 19 to November 2, 2002. The staff report (SM/03/28, 1/22/03) was discussed by the Executive Board on February 24, 2003 It was published.

Technical Assistance

  • A MAE consultant visited Algeria four times in 1998–99 to assess the status of the banking system and provide advice in bank supervision.

  • MAE consultants visited Algiers in 2000 and 2001 to provide further advice in bank supervision.

  • A STA mission visited Algiers in February 2000 and February–March 2001 to provide assistance in the area of monetary statistics.

  • A staff team from MED and MAE visited Algiers in April 2000 to advise on banking and monetary issues, and another staff team from MED and FAD visited in May 2000 to help clarify fiscal data issues.

  • A FAD mission on tax administration visited Algiers in July 2000.

  • A FAD mission on customs administration visited Algiers in July 2000, and an expert on customs administration visited in March 2001.

  • A MAE mission (with MED participation) on review of monetary policy operations visited Algiers in November 2000.

  • A FAD mission on budgetary procedures visited Algiers in February 2001.

  • Two FAD missions on tariff reform visited Algiers in January and March 2001.

  • A FAD mission visited Algiers in December 2001 to advise on the modernization of tax administration.

  • A MAE consultant visited Algiers in January, April, July, and October 2002 to assist the Bank of Algeria to develop its bank supervision capability.

  • From May 2001 to July 2002, FAD organized periodic visits of a tax administration expert to assist the authorities in establishing a large taxpayers unit.

  • A FAD mission visited Algiers in June–July 2002 to advise on the ongoing process of customs modernization.

  • A STA multisector mission visited Algiers during September 4–17, 2002 to assess the system of macroeconomic statistics, including monetary, balance of payments, public finance and national accounts statistics, and price indices.

  • A FAD consultant visited Algiers in September-October 2003 to advise on the ongoing process of customs modernization.

  • A MFD consultant visited Algiers in October 2003 to advise on bank liquidation.

Financial Sector Assessment Program (FSAP)

Algeria participated in the FSAP, Missions were conducted in March and June 2003. Conclusions were discussed in October 2003.

Resident Representative/Advisor

None.

APPENDIX II Algeria: Financial Relations With The World Bank

(As of November 3, 2003)

The World Bank portfolio in Algeria has a total of 13 active operations and 60 closed loans, with cumulative net commitments of $4.6 billion, of which $2.9 billion have been repaid. Net commitments for the 13 current operations amount to $541.8 million.

In the 1990s, Bank assistance fluctuated, with strong support in FY 1995 and FY 1996 to the stabilization and adjustment program ($759 million). The security situation as well as the lack of managerial and technical capacity of some implementing agencies affected project implementation. The quality of the portfolio improved following the closing of an ineffective stock of aged projects. A strategy for improving quality at entry and portfolio performance was put in place in February 2003 and is now being implemented. A Country Procurement Assessment Review was finalized in 2003.

During the past few years, Bank relations with Algeria have been revived in a climate of openness and collaboration. The establishment of a liaison office in January 2002 has proved to be crucial and successful in improving relations, moving the policy dialogue forward, and improving portfolio implementation. A new Country Assistance Strategy was presented to the Board on June 12, 2003. The main goal of the Bank’s partnership will be to support the reforms laid out in the comprehensive national development agenda to sustain growth, generate employment, and reduce poverty and vulnerability. The Bank’s strategic assistance will focus its support on (i) fiscal sustainability and hydrocarbon revenue management, (ii) removing constraints to private sector-led growth; and (iii) articulating and implementing a strategy for better service delivery. To that effect, a program of analytical and advisory services, institutional capacity building, demand driven lending and/or risk mitigation through structured loans, hedging products, and guarantees is being implemented.

Lending was renewed in FY 2000 amounting to $97.5 million, with three operations covering two strategic fronts: technical assistance for institutional strengthening and reforms, and assistance for emergency situations Projects approved in FY 2001 and FY 2002, amounting to $41.7 million and $30.7 million respectively, continued to support the Algerian government in its efforts to implement policy and institutional reform in the energy and mining sector, transport sector, budget system and financial system infrastructure modernization, as well as mortgage finance. In FY 2003, the Board approved an Urban Natural Hazard Vulnerability project ($88.5 million) to respond to the impact of the November 2001 floods and a Second Rural Employment project ($95 million).

Key pieces of analytical work were completed, including a social expenditure review, a private sector assessment, a macroeconomic strategy note, an investment climate note and a financial sector assessment report In addition, policy dialogue and advice are being provided to develop sector strategies in rural development and agriculture, housing, water resource management and education.

Algeria: Financial Relations with the World Bank

(As of November 3, 2003)

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IDA has no operations in Algeria.

Less cancellations, includes adjustment lending.

As of September 30, 2003.

Fiscal years start July 1 and end June 30.

Includes charges.

Equal to disbursements minus debt service.

APPENDIX III Algeria: Statistical Issues

Following the expiration of the extended arrangement in May 1998, the reporting of statistics to the Fund generally deteriorated, particularly with respect to the quality and timeliness of data forwarded between missions. The lack of financial resources allocated to the compilation of statistics, insufficient inter agency coordination, as well as concerns about accuracy and subsequent reluctance to publish provisional data, are partly responsible for this situation. If this trend is not reversed soon and the quality and timeliness of economic data rapidly improved, deterioration may reach a point where it could prevent adequate surveillance.

Real sector

Real sector data is being reported to STA on an irregular basis with substantial lags. The latest national accounts information in IFS pertains to partial data reported for 2000. IPS import trade data at current prices are derived from Direction of Trade Statistics. The September 2002 multisector statistics mission recommended that priority be given to move the compilation of national accounts to 1993 SNA.

Government finance

Algeria reported government finance statistics (GFS) for the period 1994–2002 for publication in the GFS yearbook. However, the institutional coverage of the data reported is limited to Budgetary Central Government, albeit in a wide sense, including the general budget, the annexed budget, and the special treasury accounts. Clarification has been sought from the authorities regarding the important question of the basis of recording of the latter (net versus gross recording). No sub-annual data are submitted for IFS publication. The September 2002 multisector statistics mission recommended the designation of a coordinator and the assignment of at least one economist for the compilation of GFS. The authorities have not yet followed up on their initial intention to assign GFS leadership to the Ministry’s General Directorate of Accounting. A first task would be the establishment of an automated bridge table between the detailed monthly Treasury ledger (Balance générale), regularly produced by the latter, and the GFS table (Situation résumée des Opérations du Trésor—SROT) in order to ensure a more timely production of quarterly and monthly GFS, as well as a more timely report to the Fund of annual and quarterly data. The on-going changeover to an enhanced chart of accounts of the Treasury would be an ideal occasion to revamp the way GFS compilation is organized and carried out in Algeria.

The mission recommended further (a) that proceeds of the oil stabilization fund (FRR) be shown as revenue (rather than financing); (b) the compilation of further breakdowns in particular relating to the item “other transfers”; (c) a more appropriate reporting of the three large debt assumptions operations carried over the past decade; and (d) further work on the financing and the reconciliation with monetary statistics. The mission noted that meeting the GDDS and eventually the SDDS standards would require substantial efforts in terms of extension of coverage (consolidating the operations of social security and Wilayate, and subsequently of other administrative bodies and municipalities).

Monetary accounts

Monetary data is broadly adequate for policy formulation and monitoring of economic developments. In particular, coverage has improved with the consolidation of data from the national savings bank (CNEP). However, reporting of balance sheet data by some commercial banks is very untimely, and most commercial banks do not report complete data that is needed to compile the monetary survey. The September 2002 STA multisector statistics mission recommended expanding further the coverage of the monetary survey to include banking operations of the National Mutual Fund for Agriculture (CNMA) and strictly enforcing the reporting obligations of banks by introducing high penalties.

Balance of payments

A balance of payments statistics mission visited Algeria in 1993. The September 2002 multisector statistics mission noted the following: (i) the Bank of Algeria’s legal authority to collect data is limited to banking and financial institutions only; (ii) data sources need to be expanded by conducting enterprise survey in addition to traditional exchange-based records; (iii) a more rigorous and uniform application of the residency criterion should be followed; (iv) quarterly data are compiled but not regularly disseminated; and (v) international investment position data are not compiled.

Algeria: Core Statistical Indicators

(As of November 13,2003)

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D-daily; W-Weekly; M-monthly; Q-quarterly; A-annually; V-irregularly in conjunction with staff visits.

A-direct reporting by central bank, ministry of finance, or other official agency; N-official publication or press release, P-commercial publication, C-commercial electronic data provider, E-EIS.

E-electronic data transfer, C-cable or facsimile; I-Internet website; T-telephone; M-mail; V-staff visits.

C-for unrestricted use.

APPENDIX IV Algeria: Social Indicators

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Source: World Development Indicators (World Bank, 2002)

Percentage of age group over same age group enrolled in education.

In percent of population aged 15 and above.

Constant 1995 U.S. dollar.
1

Nashashibi and alii (1998), Algeria: Stabilization and Transition to the Market, Occasional Paper 165.

2

World Bank (November 2003), Algeria Investment Climate Assessment. The 2003–04 Competitiveness Report of the World Economic Forum ranks Algeria in the bottom 15 percent of all surveyed countries for business competitiveness and in the bottom 30 percent for growth competitiveness, well below the Maghreb average.

3

The 2003 UNDP Human Development Report ranks Algeria 107th out of 175 countries.

4

In reaction to the earthquake, a supplementary budget law was adopted, providing for additional expenditures of DA 100 billion (about 2.5 percent of GDP).

5

Depositing the government’s share in hydrocarbon revenues on the treasury account at the Bank of Algeria (BA), instead of spending them, amounts to sterilization. Fiscal expansion, by spending this share, is tantamount to nonsterilization of a surge in net foreign assets.

6

The projected flow of credit in 2003 exceeds the difference between the stocks of credit at end-2002 and end-2003, because of the impact of the liquidation of two private banks on monetary data.

7

New ordinances issued in 2003 cover (i) international trade; (ii) the organization of free trade zones; (iii) various aspects of the protection of intellectual property in trade transactions; and (iv) competition. A revision of the Code of Commerce is also under way.

8

In 2003, only a brickyard was privatized. A multiple of reasons explain the failed privatizations, including the excessive constraints placed on potential buyers (cement), irregularities in the administrative decision selecting the government’s financial advisor (bank), and the inexperience of the financial advisor (airport). In the case of the opening up of the capital of one bank, the administrative decision to limit the scope of the opening to 49 percent may also have limited the number of potential buyers.

9

The budget assumes a notional oil price of $19 per barrel. However, staff projections detailed in Tables 2 and 5 are based on the World Economic Outlook (WEO) price assumption.

10

The decline in hydrocarbon revenues results mostly from the projected stabilization of the REER at its November 2003 level as well as from the projected slight drop in hydrocarbon export prices

11

A low price scenario is illustrated in Table 5 and line A3 of Table 6. Assuming a plummeting in the oil price to $15 per barrel from 2004 onward under unchanged policies, the deficit would jump to more than 13 percent of GDP and the treasury’s account at the central bank would turn negative from the second half of 2005 (unless the treasury issues more securities). This scenario would result in an unsustainable rise in public debt.

12

The stabilization fund created in 2000 does not involve any intergenerational transfer objective.

13

The budget low for 2004 also bans the import of used trucks.

14

The BA confirmed that this ceiling (put in place in 1997 when Algeria accepted its obligations under Article VIII) is indeed indicative and that transactions above the ceiling did take place when appropriate documentation proving the current account nature of the request for foreign exchange was provided.

15

The authorities have, nevertheless, not made a decision on the timing or the scope of such prepayment.

16

Private investors often complain about difficulties in acquiring land and about property rights uncertainties.

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Cover IMF Staff Country Reports
Algeria: Staff Report for the 2002 Article IV Consultation
Author:
International Monetary Fund
Volume/Issue:
Volume 2004: Issue 033
Publisher:
International Monetary Fund
ISBN:
9781451811438
ISSN:
1934-7685
Pages:
54
DOI:
https://doi.org/10.5089/9781451811438.002
Chart 1.

Real GDP Growth

(in percent)
Chart 2.

Inflation Rate

(in percent)
Chart 3.

Capital Expenditure
Chart 4.

Fiscal Impulse
Chart 5.

Algeria: Fiscal Sector
Chart 6.

Bank Liquidity
Chart 7.

External Accounts

(In billions of dollars)
Chart 8.

Real and Nominal Exchange Rates, January 1994–September 2003 1990=100