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.


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.

On January 14, 2004, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Algeria.1


Despite volatile oil markets and a difficult political and social environment, Algeria has maintained macroeconomic stability since the successful completion of its Fund-supported adjustment and reform programs in 1998. GDP growth has strongly recovered from its slowdown in 2000, inflation has been generally maintained at industrial-country level and the external position has strengthened significantly.

In the context of weak economic growth and the accumulation of large treasury deposits at the central bank owing to rising hydrocarbon revenues since mid-1999, the government has eased the fiscal stance since 2001 with a view to fostering economic growth and generating employment. Additional fiscal impetus was generated by the increase in expenditure to finance the reconstruction needs following the devastating May 2003 earthquake.

The overall budget surplus declined in 2001 and 2002, before strengthening again in the course of 2003 as a result of thriving hydrocarbon revenues. The overall budget is expected to record an end-year surplus of over 3 percent of GDP, after a near balance in 2002. At the same time, the primary nonhydrocarbon deficit would surpass 32 percent of nonhydrocarbon GDP in 2003, after an already elevated 28.7 percent in the preceding year.

Monetary developments were characterized by a significant increase in liquidity stemming from the substantial increase in net foreign assets and expansion of credit to the economy. The money supply M2 is expected to continue to increase substantially in 2003, despite measures to mop up some of the excess liquidity in the banking system. The banking sector was adversely affected by the fraudulent bankruptcy of the two largest {yet small) private banks.

Throughout 2002 and the first half of 2003, the external position of Algeria continued to strengthen. The 2003 current account surplus will rise sharply owing to booming hydrocarbon exports. Official reserves already increased to US$30.4 billion (22 months of imports) as of end October 2003, surpassing gross external debt since end-2002.

After expanding at a rate of 4.1 percent in 2002, real GDP growth is expected to further pick up in 2003 to about 6.7 percent. While growth in 2002 was limited by weak agricultural production as a result of adverse weather conditions, it was boosted by an exceptional harvest and a strong hydrocarbon sector performance in 2003. Against this background, the high unemployment rate (estimated at 25.9 percent of the labor force in 2002—the latest available data) is projected to drop. Low food prices and gradual tariff reductions have led to low inflation (1.4 percent in 2002 and a projected 2.3 percent in 2003), despite abundant domestic liquidity and booming credit.

While the overall pace of structural reform remained slow, some progress has been achieved in trade liberalization and the development of treasury securities markets. In light of the difficulties in completing a number of large privatization projects, the authorities have recently developed e pragmatic attitude towards privatization, considering both full and partial sales of public enterprises as well as joint ventures with private investors.

Executive Board Assessment

Executive Directors welcomed the strengthening of Algeria’s economic performance over 2002 and 2003, with high economic growth, low inflation, a marked strengthening of the balance of payments, and an accumulation of international official reserves. These achievements are largely attributable to a combination of strong agriculture performance, boosted by favorable weather conditions, continued high oil prices, and supportive fiscal policies. Progress has also continued to be made in some structural areas, including trade liberalization and the development of treasury securities markets.

While growth prospects remain favorable in the period immediately ahead, Directors underscored that the Algerian economy continues to face serious challenges. Despite some decline recently, unemployment remains high, and the rise in living standards is still slow. To achieve sustained, job-creating growth, Directors agreed that Algeria will need to reinvigorate structural and institutional reforms aimed at significantly increasing the role of the private sector in the economy.

Directors acknowledged the role that supportive fiscal policies have played in boosting growth and employment creation in the face of weak private sector activity, and in coping with the reconstruction needs following the May 2003 earthquake. They noted that Algeria’s pressing social and infrastructure needs will continue to call for high levels of investment in the coming years. While not a substitute for structural reforms, public investment will continue to have to play a role in meeting these needs and strengthening the foundation for sustained growth. At the same time, however, Directors cautioned that the high level of public spending—currently made possible by high oil prices—also entails risks. It heightens the vulnerability of public finances in the face of the uncertainty and volatility of oil prices and, by contributing to large liquidity swings, risks complicating both the conduct of monetary policy and commercial bank management. A continued rapid rise in capital spending would also risk weakening the quality and effectiveness of public investment.

To ensure the long-term sustainability of the public finances, Directors urged the authorities to gradually tighten the fiscal stance, while managing public expenditure in a way that reduces vulnerability to developments in the oil market. Stabilizing public expenditures as a percentage of nonhydrocarbon GDP at a sustainable level could be a useful guide for the longer term. At the same time, Directors considered that improved prioritization of public investment based on efficiency considerations will allow public investment to play a complementary role in supporting structural reform efforts. To improve fiscal transparency and public expenditure management, they encouraged the authorities to record in the budget the quasi-fiscal activities generated by public bank losses. The forthcoming fiscal Report on the Observance of Standards and Codes will provide a welcome opportunity to discuss the scope for further strengthening fiscal management in the period ahead.

Directors welcomed the authorities’ resolve to devote monetary policy to preserving Algeria’s low inflation record. They cautioned that this will require heightened vigilance in the period ahead, as the recent rapid growth of money and credit could increase inflationary pressures and credit risk. Directors encouraged the central bank to further develop its monetary policy instruments, and fully absorb bank excess liquidity. To facilitate liquidity management, they also saw scope for greater coordination between the central bank and the ministry of finance in the issuance of Treasury securities.

Directors observed that Algeria’s managed float exchange rate regime has continued to serve the country well. They endorsed the authorities’ decision to refrain from targeting a further real effective appreciation of the dinar, as this could hamper the development of the private sector and the diversification of the narrow export base. Going forward, Directors welcomed the Bank of Algeria’s commitment to continue to implement the managed float in a flexible manner, with further gradual liberalization of the exchange system fostering a greater role of market forces in determining the exchange rate.

Directors urged the authorities to take advantage of Algeria’s current favorable macroeconomic situation to accelerate implementation of the country’s wide-ranging structural reform agenda. In particular, it will be important to mobilize strong public support for well-sequenced actions that improve the climate for a durable and diversified expansion of private-sector-led growth and investment. Among the high priorities, in this regard, will be a comprehensive reform of the financial sector and public enterprise restructuring and privatization. Directors highlighted the importance of accompanying the reforms with an adequate social safety net to cushion their possible adverse short-term impact. Further steps to improve governance and strengthen the institutional underpinnings of a market economy, to address land tenure issues, and to institute active labor market policies should also be high on the agenda. Some Directors expressed concern about the impact on employment opportunities of the recent increase in the minimum wage.

Directors welcomed the authorities’ commitment to financial sector reform, and looked forward to the early adoption of a plan for the implementation of the Financial Sector Stability Assessment recommendations. They urged the authorities to replace bank loans to loss-making enterprises with temporary budget subsidies in the context of a medium-term restructuring program. Directors also stressed the need to modernize the payments system, and to enhance the efficiency and profitability of public banks. This should be helpful as the authorities consider a progressively greater role for the private sector in the banking system. The recent failure of two private banks underscores the need to strengthen prudential regulations and bank supervision. In this context, Directors welcomed the recent measures to strengthen bank licensing and improve the supervisory framework, and encouraged the authorities to maintain and strengthen the independence of the central bank and the banking commission.

Directors commended the authorities for achieving significant progress in trade liberalization and for their commitment to trade policy reforms ahead of joining the World Trade Organization. They encouraged the authorities to press ahead with the adoption of anti-money laundering legislation.

Directors welcomed the authorities’ initiative to engage in more active debt management, and their intention to request a sovereign credit rating, which will facilitate Algeria’s return to the international capital markets. They encouraged the authorities to include collective action clauses in future foreign bond issuances. Directors welcomed the authorities’ intention to continue to cooperate with the Russian authorities toward an expeditious settlement of bilateral debt issues. While welcoming the authorities’ decision to grant debt relief on a case by case basis to HIPC eligible countries, Directors encouraged the authorities to become full participants in the enhanced HIPC Initiative. Given Algeria’s current strong external position, it was also suggested that the authorities consider making voluntary early repurchases of their outstanding financial obligations to the Fund.

Directors looked forward to further efforts by the authorities to address Algeria’s statistical weaknesses. They commended the authorities’ intention to participate in the Fund’s Special Data Dissemination Standard (SDDS), which will require significant steps to improve the quality and timely publication of data.

Public Information Notices (PINs) are issued, (i) at the request of a member country, following the conclusion of the Article IV consultation for countries seeking to make known the views of the IMF to the public. This action is intended to strengthen IMF surveillance over the economic policies of member countries by increasing the transparency of the IMF’s assessment of these policies; and (ii) following policy discussions in the Executive Board at the decision of the Board.

Algeria: Selected Economic Indicators

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Sources: Data provided by the Algerian authorities; and IMF staff estimates.

Unless otherwise noted.

A decrease in the index implies a depreciation.


Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country’s authorities.

Algeria: Staff Report for the 2002 Article IV Consultation
Author: International Monetary Fund