Algeria: 2005 Article IV Consultation—Staff Report; Staff Statement; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Algeria
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International Monetary Fund
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Publication Date:
09 Mar 2006
eISBN:
9781451811490
Language:
English
Keywords:
ISCR; CR; staff appraisal; participation in GDDS; Algeria's participation; IMF staff representative; participation; reform program; Algerian authorities; current account; unemployment rate; stabilization fund; State-owned banks; government deposit
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This 2005 Article IV Consultation highlights that the Algerian economy continues to benefit from abundant and increasing hydrocarbon revenues. Real GDP growth is expected to continue at about 5 percent in 2005, led by increased output in the hydrocarbon sector and sustained activity in the construction and services sectors. Executive Directors have welcomed the authorities’ resolve to maintain fiscal sustainability over the medium term. They have stressed the importance of preparing comprehensive medium-term budget projections, and limiting increases in real wages to increases in productivity in the nonhydrocarbon sector.

Abstract

This 2005 Article IV Consultation highlights that the Algerian economy continues to benefit from abundant and increasing hydrocarbon revenues. Real GDP growth is expected to continue at about 5 percent in 2005, led by increased output in the hydrocarbon sector and sustained activity in the construction and services sectors. Executive Directors have welcomed the authorities’ resolve to maintain fiscal sustainability over the medium term. They have stressed the importance of preparing comprehensive medium-term budget projections, and limiting increases in real wages to increases in productivity in the nonhydrocarbon sector.

I. Background and Key Challenges

1. Algeria, an important hydrocarbon exporter, has benefited from abundant and increasing hydrocarbon revenues in recent years. In the context of sharply increasing oil prices, the external and fiscal positions have strengthened markedly. The significant fiscal impulse created by the government’s Economic Recovery Program underpinned growth in the nonhydrocarbon sector (annual average rate of 5.7 percent in 2001–04), while inflation remained under control.1 Consequently, real per capita GDP increased considerably and the unemployment rate has declined, although this partly reflected an increase in temporary employment and youth unemployment remains high (Figures 1 and 2).

Figure 1.
Figure 1.

Real GDP Per Capita

(1999=100)

Citation: IMF Staff Country Reports 2006, 093; 10.5089/9781451811490.002.A001

Sources: Algerian authorities; and Fund staff estimates and projections.
Figure 2.
Figure 2.

Unemployment Rate

(In percent)

Citation: IMF Staff Country Reports 2006, 093; 10.5089/9781451811490.002.A001

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

2. The authorities have made progress in economic liberalization but other reforms have trailed, delaying Algeria’s transition to a market economy. A comprehensive tariff reform has been implemented since 2001, when the number of non-zero tariffs was cut to three, reducing the simple average tariff rate from 26 percent to 19 percent. The 2001–05 temporary additional duty on some imports is being phased out as planned. Important steps have also been taken to liberalize the hydrocarbon and telecommunications sectors. However, economic activity continues to rely heavily on the state. State-owned banks, which account for 90 percent of banking system assets, lack basic risk management capacity and are burdened by nonperforming loans. Following the privatization of more than 400 public enterprises in the 1990s, some 1,200 public entities remain. These and other factors, including the violence during the 1990s, explain Algeria’s difficult business climate which contributed to the low diversification of exports and high unemployment.2

3. Algeria’s challenge is to improve growth prospects and create jobs for its young and growing labor force in an increasingly open environment. With the external trade liberalization, Algeria has committed to a course that can be completed successfully only by managing carefully the large hydrocarbon-related inflows and speeding up reforms aimed at private sector development. Fund surveillance in recent years has focused on these areas (Box 1).

4. On the political front, President Bouteflika has taken a number of initiatives that have strengthened Algeria’s political stability. The President’s election as head of the Front de Libération National party in February 2005 has cemented his political power. The Charter for Peace and National Reconciliation, which offers broad amnesty for acts committed during the 1990s, won strong support (97 percent of the votes) in a referendum held in September 2005.

II. Recent Economic Developments

5. Growth performance in 2004–05 continued to be encouraging. Real GDP growth moderated to about 5¼ percent in 2004 from 7 percent in 2003, due to a slowdown in agriculture following the 2003 bumper crop and in hydrocarbon output (Figure 3 and Table 1). Growth is projected to continue at about 5⅓ percent in 2005, led by increased output in the hydrocarbon sector and sustained activity in the construction and services sectors. However, agricultural output is projected to decline somewhat, while the inefficiency of public enterprises continues to depress industrial output. The unemployment rate declined further in 2005 to 15.3 percent; the youth unemployment rate, however, remained very high at 31 percent.

Figure 3.
Figure 3.

Real GDP Growth, 2000–05

(In percent)

Citation: IMF Staff Country Reports 2006, 093; 10.5089/9781451811490.002.A001

Sources: Algerian authorities; and Fund staff estimates and projections.
Table 1.

Algeria: Selected Economic and Financial Indicators, 2002–10

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

Starting in 2004, in constant 2001 prices.

In U.S. dollars terms.

Annual average changes in trade-weighted INS index. A decrease implies a depreciation. For 2005, as of August.

In percent of beginning money stock.

Including the impact of the financial restructuring in 2001-02 involving the swap of government bonds for bank claims on public enterprises.

Including dividends of Sonatrach.

Including special accounts and net lending.

Derived from a household survey conducted once a year in September. In 2004, reflects a sharp increase in “work at home,” possibly in relation to the occurrence of Ramadan shortly after the survey was conducted.

For 2005, as of September.

6. Inflation remained low in 2005. Consumer prices fell by some 1 ½ percent (year-on-year) in October 2005, mainly owing to a drop in food prices (Figure 4). At the same time, annual nonfood-CPI inflation remained above 3 percent through October, reflecting the impact of the fiscal stimulus and increases in administered prices for transportation and energy products.

Figure 4.
Figure 4.

CPI Inflation Rate (Annual change in percent) September 2000 - October 2005

Citation: IMF Staff Country Reports 2006, 093; 10.5089/9781451811490.002.A001

Source: Algerian authorities.

Fund Surveillance in Algeria

Since 1998, Fund surveillance has focused on policies to improve growth performance and reduce unemployment. In the wake of abundant hydrocarbon revenue, staff recommended prudent fiscal and monetary policies. It also called for the acceleration of structural reforms to encourage private sector-led growth, in particular liberalizing external trade, reforming the banking system, privatizing/restructuring public enterprises, and improving the business climate.

The macroeconomic policy mix has been largely in line with staff’s advice. BA’s prudent monetary policy and flexible management of the exchange rate helped maintain macroeconomic stability. The authorities have also started reducing their external debt through early repayments. At the same time, they considered that an expansionary fiscal policy has a role to play in creating jobs and improving living standards.

Progress in structural reforms has been mixed. Important steps have been taken in some areas, including economic and trade liberalization, but implementation of other reforms, in particular in the public bank and enterprise sectors, has been slow.

Current Fund strategy focuses on sound management of hydrocarbon wealth and structural reforms, notably in the banking sector. As agreed during the Managing Director’s visit to Algiers in March 2005, the Fund is providing technical assistance in the areas of banking reform; banking supervision; tax administration; and statistics. Fund staff liaised with a World Bank public expenditure review mission and is intensifying training of Algerian officials. The Fund also helped organize a conference on trade facilitation in the Maghreb in November 2005.

Fund Policy Advice for Algeria

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7. Boosted by high hydrocarbon export prices, Algeria’s external position strengthened further in 2004–05 (Figure 5 and Table 2). The external current account surplus remained at 13 percent of GDP in 2004, as higher hydrocarbon exports were accompanied by a surge in imports, partly reflecting the ongoing trade liberalization. The hike in world oil prices, together with an expansion of hydrocarbon production, is expected to increase the external current account surplus to 18 ⅓ of GDP in 2005. After early debt repayment of US$1.1 billion, including to the European Investment Bank and the African Development Bank, the external debt-to-GDP ratio is expected to decline further from 26 percent in 2004 to 16 ½ percent in 2005. Gross external reserves grew by US$20 billion since end-2003 to reach US$53 billion at end-September 2005 (more than 1 ½ years of import cover). In light of the significantly improved balance of payments and external reserves position, Algeria effected the early and full repurchase of its past drawings on the Fund in November.

Figure 5.
Figure 5.

External Developments, 2000–05

Citation: IMF Staff Country Reports 2006, 093; 10.5089/9781451811490.002.A001

Sources: Algerian Authorities; and Fund staff estimates and projections.
Table 2.

Algeria: Balance of Payments, 2002–10

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

Weighted average of quarterly data.

8. The nominal effective exchange rate appreciated during the first eight months of 2005 (Figures 6 and 7). This followed the depreciation of the real effective exchange rate (REER) by some 10 percent during the last quarter of 2004, mainly reflecting the appreciation of the euro against the dollar. The appreciation in 2005 was intended to minimize the deviation of the REER from its end-2003 level, which the authorities considered an equilibrium level3. The spread between the illegal parallel market and the official exchange rates remained large at about 20 percent, partly reflecting problems in the implementation of the free current convertibility of the dinar (see paragraph 30 below).

Figure 6.
Figure 6.

Real and Nominal Effective Exchange Rates December 1995 - August 2005

(1995=100)

Citation: IMF Staff Country Reports 2006, 093; 10.5089/9781451811490.002.A001

Source: INS.
Figure 7.
Figure 7.

Nominal Exchange Rates

(monthly averages)

Citation: IMF Staff Country Reports 2006, 093; 10.5089/9781451811490.002.A001

Source: Algerian authorities

9. In light of Algeria’s buoyant hydrocarbon revenue, the government decided to boost public spending in 2005. In 2004, the authorities had launched the Growth Consolidation Plan (GCP), a public investment program for 2005–09 that amounted to US$50 billion. In June 2005, the program was revised upward to US$57 billion (55 percent of 2005 GDP), with considerable frontloading. As a result, government spending in 2005 is expected to increase by 4 percentage points of nonhydrocarbon GDP (NHGDP), with the nonhydrocarbon primary deficit widening from 28 percent of NHGDP in 2004 to 31 ½ percent in 2005 (Figure 8 and Table 3). Nevertheless, higher hydrocarbon revenue would almost double the overall budget surplus.

Figure 8.
Figure 8.

Overall and Nonhydrocarbon Fiscal Balances, 2000–05

Citation: IMF Staff Country Reports 2006, 093; 10.5089/9781451811490.002.A001

Sources: Algerian authorities and Fund staff estimates and projections.
Table 3.

Algeria: Summary of Central Government Operations, 2002–10 1/

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

On cash basis.

Including dividends of Sonatrach.

Starting in 2002, includes the savings/housing bank CNEP.

Including privatization receipts.

Including special accounts (not related to capital spending) and net lending.

The quasi-fiscal deficit comprises the losses of public enterprises net of government subsidies

10. Monetary policy remained prudent, in line with the authorities’ objective to keep inflation low. The central bank implemented several measures to absorb the rapidly increasing liquidity in the banking sector. In particular, it (a) increased the amount of deposit auctions in 2004 and early 2005; (b) raised its policy interest rate from ¾ percent in 2004 to 1 ¼ percent in July 2005 (however, this rate remained negative in real terms relative to nonfood inflation);4 (c) extended the maturities of a large portion of the deposit auctions from one week to three months in July 2005; and (d) introduced a 24-hour deposit facility in September 2005. As a result, BA was able to mop up most excess bank liquidity (Figure 9 and Tables 4–6). Annual broad money growth continued at about 12 percent through September 2005. At the same time, credit to the economy accelerated in the first part of 2005, while nonperforming loans remained high (Box 2).

Figure 9.
Figure 9.

Monetary Policy Stance

Citation: IMF Staff Country Reports 2006, 093; 10.5089/9781451811490.002.A001

Sources: Algerian authorities; and Fund staff estimates and projections.
Table 4.

Algeria: Monetary Survey, 2002–06

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

This includes the impact of banks’ 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 adjustment amounted to about DA 216 billion in 2000, DA 311.6 billion in 2001, and DA 297 billion in 2002. The flow of new credits to the economy in 2003 (17.5 percent annual growth) exceeded 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.

Table 5.

Algeria: Summary Balance Sheet of Bank of Algeria, 2002–06

(In billions of Algerian dinars; at the end of the period)

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

Reserve money in the International Finance Statistics (IFS) includes deposit auctions.

For 2005, as of May.

For 2005, as of September.

Table 6.

Algeria: Summary Balance Sheet of Deposit Money Banks, 2002–06

(In billions of Algerian dinars; at the end of the period)

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

In the IFS, time deposits exclude deposits to be used for imports.

Nonperforming Loans

Nonperforming loans in Algeria’s banking sector are concentrated in public banks, which had an aggregate nonperforming loan ratio of 40 percent at end-2004. Nonperforming loans of private banks stood at 4 percent of total loans at end-2004.

The continued provision of credit to large loss-making public enterprises has been the main factor behind the fragility of public banks. Between 1991 and 2002, the Treasury repeatedly bailed out 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. The Ministry of Finance estimated public banks’ nonperforming loans to insolvent or dissolved public enterprises at approximately DA 290 billion (or almost 4 percent of GDP) at end-June 2005.

Nonperforming loans of public banks to the private sector have also been growing recently. A BA audit of five (out of six) public banks found that these banks’ nonperforming loans to the private sector represented 33 percent of their total loans to the private sector at end-2003. This is mainly due to the rapid expansion of public banks credits to the private sector in the wake of abundant liquidity and these banks’ weak risk assessment capacity.

Algeria. Financial Soundness Indicators

(in percent)

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Source: Bank of Algeria

11. The authorities have taken several actions in line with the recommendations of the 2003 FSSA. They strengthened performance contracts of public bank managers and shareholder oversight, retained an investment advisor for the sale of the first of three public banks designated for privatization, and made important progress in modernizing the payments system.5 The Banking Commission instructed all public banks to submit external audits of their end-2004 financial accounts by end-2005.

12. Several other important structural reforms were also implemented in 2005. The Association Agreement with the European Union (AAEU) became effective as of September 2005, and WTO negotiations are entering their final stages. A new hydrocarbon law was adopted that further liberalizes investment in this sector (Box 3). The government has also submitted to parliament an anti-corruption law following Algeria’s adoption of the 2003 United Nations’ Convention against Corruption. The law contains a broad definition of corruption, institutes a code of conduct for public servants, protects whistle-blowers, and provides for international cooperation.

III. Policy Discussions

13. The policy discussions focused on Algeria’s main challenges of improving growth prospects and creating jobs for its young and growing labor force in an increasingly open environment. The success of Algeria’s external trade liberalization envisaged under the AAEU requires speeding up interrelated structural and institutional reforms aimed at private sector development. The authorities recognized that the considerable increase in hydrocarbon revenue provides an excellent opportunity to step up the pace of economic and social development in Algeria. Staff underscored that sound management of hydrocarbon receipts is crucial to maintaining macroeconomic stability and enhancing the competitiveness of the nonhydrocarbon sector. The authorities are aware of the importance to ensure that the ample availability of hydrocarbon resources does not weaken the resolve to undertake economic reforms but is used to facilitate costly and difficult reforms such as of public banks and enterprises. Over the medium term, a strategy aimed at efficient use of hydrocarbon resources and accelerating growth-enhancing structural reforms would also contribute to the alleviation of global imbalances.

A. Medium-Term Outlook

14. Algeria’s external position is projected to strengthen further over the medium term. With world market oil prices expected to remain high, annual hydrocarbon exports are projected to average US$57 billion through 2010. Imports are likely to increase significantly with the envisaged large public investment, Sonatrach’s investment plans, and the implementation of the AAEU. The external current account surplus, while gradually declining after 2006, is expected to remain large and gross international reserves are forecast at above two years of import cover from 2006. Gross external debt is projected to fall below 5 percent of GDP by 2010, partly reflecting the authorities’ policy of limiting nonconcessional borrowing.

The Hydrocarbon Sector

Algeria is an important hydrocarbon (oil and gas) exporter. It is the world’s 14th largest oil exporter and supplies some 20 percent of Europe’s natural gas. Oil production in 2004 was 1.9 million barrels/day (about 2½ percent of world production) and marketed gas production was 225 million cubic meters/day (about 3 percent of world production).

The hydrocarbon sector dominates the economy, accounting for 38 percent of GDP, 98 percent of exports of goods, and 71 percent of budgetary revenue in 2004.

Algeria is still considered to be relatively under-explored. Proven crude oil reserves are estimated at 11.8 billion barrels. However, recoverable crude oil reserves may range as high as 28 billion barrels according to the 2005 U.S. Geological Survey. Algeria has also proven natural gas reserves of about 4.5 trillion cubic meters, ranking seventh in the world, while significant discoveries of additional reserves are expected in the coming years.

The hydrocarbon sector has been open for almost 20 years. In 2004, foreign partners accounted for slightly less than half of Algeria’s crude oil output (14 percent for gas). However, each foreign investor was required to partner with the state-owned hydrocarbon company, Sonatrach. The complex contractual arrangements imposed by law increasingly hampered the financing of Algeria’s investment needs in the upstream hydrocarbon sector (estimated at US$70 billion for 2005–15).

In March 2005, Parliament adopted a new law, which:

  • Simplifies the contractual framework for upstream activities (exploration, production, and transportation);

  • Introduces free entry in transportation and downstream activities;

  • Replaces the existing production-sharing regime by a tax and royalty system;

  • Establishes investors’ rights and obligations, including Sonatrach’s;

  • Creates a regulatory agency to tender upstream contracts, set reference gas prices, and collect royalties and taxes, and an agency that would issue permits for downstream activities.

The law should lead to more investment upstream, through foreign investment and by freeing Sonatrach from the obligation to own and operate all oil and gas infrastructure, finance new pipelines, and fulfill noncommercial roles, such as regulation, tendering, and collection of taxes and royalties.

On domestic pricing, the law states that the price of crude oil for domestic refineries is set at the beginning of each year on the basis of the moving 10-year average of Algerian export prices. Domestic gas prices are set by regulation each year.

15. The fiscal policy stance envisaged in the draft 2006 budget law implies a sizable increase in public spending. In particular, government investment in 2006 is programmed to double compared to its 2004 level.6 At the same time, amid abundant hydrocarbon revenues, there is mounting pressure for a large wage increase.7 Staff projections assume a 10 percent increase in public sector wages in 2006 and also take account of the government investment program’s implications on current expenditure needs over the medium term, both of which are not included in the draft budget. On this basis, the nonhydrocarbon primary deficit would increase from 31½ percent of NHGDP in 2005 to 36½ percent in 2006; thereafter it would decline to about 26½ percent by 2010. However, the overall budget surplus is expected to remain above 10 percent of GDP over the period.

16. The economic outlook would remain favorable over the medium term. Average annual real NHGDP growth is projected at about 5½ percent, and the unemployment rate would continue to decline. However, the envisaged sharp increase in public investment and a likely public sector wage hike would contribute to higher inflation. The entry into effect of the AAEU and the ensuing increased international competition may have a negative impact on the industrial sector starting in 2007, but this could be short-lived if enterprises take the necessary measures to improve their competitiveness. The increased openness of the economy would also help local producers to improve their efficiency via technology transfers from abroad and better access to imports and capital goods.

17. The debt sustainability analyses show that external and public debt will remain sustainable over the medium term (Tables 7 and 8). The standardized stress tests for external debt sustainability show that the external debt ratio is expected to drop sharply under all circumstances. The public debt sustainability analysis indicates that although the public debt-to-GDP ratio may increase under various scenarios, it will likely remain sustainable.8 Domestic public debt would increase, due to the constraints imposed by the current rules of the hydrocarbon stabilization fund—Fonds de Régulation des Recettes (FRR)—that do not allow the FRR to finance the nonhydrocarbon budget deficit directly, but only to repay public debt. To finance the nonhydrocarbon budget deficits in the coming years, the government will need to issue new debt and use the FRR to repay this debt when falling due. In view of the economy’s high dependency on hydrocarbon revenue, staff also analyzed the impact of a drop in oil prices to US$19 per barrel starting in 2006, resulting in lower growth. Under this scenario and with no policy changes, international reserves would decline and the government would run budget deficits starting in 2006. Nevertheless, given Algeria’s strong financial position, external and public debt would remain sustainable.

Table 7.

Algeria: External Debt Sustainability Framework, 2000-2010

(In percent of GDP, unless otherwise indicated)

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Derived as [r - g - ρ(l+g) + εα(l+r)]/(l+g+ρ+gρ) times 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, ε = nominal appreciation (increase in dollar value of domestic currency), and ;α = share of domestic-currency denominated debt in total external debt.

The contribution from price and exchange rate changes is defined as [-ρ (l+g) + εα (l+r)]/(l+g+ρ+gρ) times previous period debt stock. p increases with an appreciating domestic currency (ε > 0) and rising inflation (based on GDP deflator).

For projection, line includes the impact of 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.

Assuming that the authorities seek to maintain the reserve cover of next year’s imports at its 2005 level throughout the projection period.

Assuming that the reserve cover of next year’s imports does not drop below 3 months by 2010.

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

Table 8.

Algeria: Public Sector Debt Sustainability Framework, 2000-2010

(In percent of GDP, unless otherwise indicated)

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Public sector debt covers central government and is in gross terms.

Derived as [(r - π(l+g) - g + αε(l+r)]/(l+g+π+gπ)) times previous period debt ratio, with r = interest rate; π = growth rate of GDP deflator; g = real GDP growth rate; α = share of foreign-currency denominated debt; and ε = 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 αε(l+r).

For projections, this line includes exchange rate changes.

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

The key variables include real GDP growth; real interest rate; accumulation of government deposits at the central bank in percent of GDP; and primary balance in percent of GDP.

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

Assumes that key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last projection year.

B. Management of Hydrocarbon Revenue

18. Sound long-term management of hydrocarbon revenue is the basis for successful macroeconomic policy in Algeria. The authorities were interested in a long-term framework for setting fiscal policy presented by staff (IMF Country Report No. 05/50). Such management does not preclude significant government expenditure, but delinks it from fluctuations in oil prices. The authorities agreed that the current rules governing the FRR are likely to generate additional interest expenditures and may create bottlenecks in financing future budget deficits. Therefore, they plan to reconsider the role of the FRR, including transforming it into a savings/financing account as proposed by staff. This account would be fully integrated into the budget and be used to finance the sustainable nonhydrocarbon primary deficit and to repay public debt, including prepayments. The sound management of hydrocarbon resources also requires coordination between fiscal and monetary policies, as well as the transparent use of hydrocarbon revenues to avoid problems of governance and waste.

Fiscal policy

19. The authorities decided to use part of the fiscal space created by high hydrocarbon revenues to increase public investment (Figure 10). In the current low inflation environment, there is room to increase government expenditure. The government investment program appropriately envisages building much-needed public infrastructure, developing human capital, improving public services (mainly the judiciary), supporting economic activity, and expanding housing.

Figure 10.
Figure 10.

Capital Expenditure

(in percent of NHGDP)

Citation: IMF Staff Country Reports 2006, 093; 10.5089/9781451811490.002.A001

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

20. The authorities agreed with staff on the need to pay attention to the quality of spending, including by taking into account the recommendations of the public expenditure review being conducted in cooperation with the World Bank that, inter alia, aims to help increase the authorities’ capacity in selecting projects on efficiency grounds. Staff underscored that the sizable front-loading of spending, despite its high import content, could run into absorption capacity constraints. It advised, therefore, a more even implementation of the investment program. The authorities agreed that their public investment plans are very ambitious in the short term. They indicated that the draft 2006 budget was meant to send a strong signal that multi-year funding for the public investment program is assured.

21. At the same time, it is important to maintain macroeconomic stability and adopt a wage policy that the economy can support. While the higher world market oil prices allow for higher nonhydrocarbon primary deficits, the envisaged fiscal expansion would likely contribute to higher inflation, given domestic supply rigidities. The authorities were determined to adhere to their objective of achieving fiscal sustainability over the medium term (Box 4). In this connection, it would be important for the government to start preparing comprehensive medium-term budget projections that take account of the implications for current spending of the government investment program. The authorities agreed with the need to limit any increase in real wages to the real growth rate of nonhydrocarbon GDP, in order to preserve competitiveness as Algeria’s economy opens up.

Management of Hydrocarbon Revenues and Fiscal Sustainability

Staff’s long-term fiscal framework aims at preserving the permanent per capita income from hydrocarbon wealth on the basis of a sustainable path for the nonhydrocarbon primary deficit/nonhydrocarbon GDP ratio (IMF Country Report No. 05/50). The updated assumptions are: depletion of probable reserves by 2050; population growth of 1.5 percent per annum; real NHGDP growth of 4 percent per annum after 2010; a 5 percent real interest rate; a gradual decline of oil prices to a long-term level of US$30/bbl from 2015; and a ratio of $/Km3 gas to $/bbl oil of 3.8. All prices are expressed in 2003 dollars.

In this framework, the sustainable nonhydrocarbon primary deficit decreases from 32 percent in 2005 to 27 percent of NHGDP by 2009 (compared to 21 percent estimated at the time of the 2004 Article IV consultation which was based on a long-term oil price of US$25/bbl). Income from financial wealth entirely finances the deficit that prevails after 2050.

Algeria: Sustainable Nonhydrocarbon Primary Deficit, 2005-10

(In Percent of NHGDP, in 2003 Dollars)

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

22. The authorities agreed with the importance of allocating resources in support of market-based reforms, including to limit the social cost of priority reforms in the public banking and enterprise sectors, and to bring the quasi-fiscal deficits related to public bank losses into the budget. Staff suggested streamlining the tax system by eliminating exemptions and using part of the additional fiscal space to reduce the tax burden on businesses, and to further reduce employer contributions to stimulate job creation.

Monetary and Exchange Rate Policies

23. The monetary policy stance should be tightened to keep inflation under control. The BA’s response to the rapidly changing liquidity environment and the absorption of excess liquidity helped maintain low inflation. Staff underscored, however, that the anticipated fiscal expansion and the current strong growth of credit to the economy would complicate monetary management and the development of a sound banking sector. The monetary stance needs tightening through: (a) raising BA’s policy interest rate to a positive level in real terms; and (b) handling the national hydrocarbon company’s large deposits outside the money market to strengthen BA’s control over base money. These measures would allow BA to restore the signaling role of its policy interest rate and establish more effective control over the system’s liquidity. The authorities considered that the existing monetary instruments were adequate to contain money growth, but indicated that they would carefully consider staff’s recommendations. BA’s monetary program aims to limit broad money growth to 16½ percent in 2006 by controlling base money growth.

24. The authorities intend to continue to manage the exchange rate in a flexible manner, taking account of the inflation objective. They indicated that in managing the float they take account of fundamental developments of the real effective exchange rate. The increase in real oil prices and the current economic growth suggest a tendency for the equilibrium REER to appreciate. The expansionary fiscal stance also implies a real exchange rate appreciation, while the trade liberalization envisaged under the AAEU points in the opposite direction. However, with the increased openness of the economy, the link between changes in the exchange rate and the inflation rate would be strengthened. Against this backdrop, staff recommended allowing the REER to appreciate through a nominal appreciation of the dinar rather than higher inflation. The authorities agreed, and indicated that the flexibility with which they manage the float would be maintained. Since early 2005 they have been appreciating the nominal effective exchange rate, but declining inflation has thus far prevented the REER from appreciating as much as expected.

C. Structural Reforms

25. The authorities are aware that opening of the Algerian economy reinforces the need to step up priority reforms aimed at encouraging private investment and creating jobs. To maximize the benefits and minimize the inevitable costs of the greater competition entailed by establishment of a free trade zone with the European Union (Box 5), staff encouraged the authorities to accelerate banking sector reform, further liberalize external trade, and ensure full implementation of the current convertibility of the dinar.

The Association Agreement with the European Union

Algeria’s AAEU became effective on September 1, 2005. The agreement provides a major impetus toward an open trade regime over the next 12 years.

The economic impact of this agreement includes both costs and benefits, with costs likely to occur in the short run while benefits accruing over the longer term. The potential benefits would consist of welfare gains, increased foreign direct investment, technology and knowledge transfer, higher productivity, and increased growth. Costs include a limited fiscal revenue impact, trade diversion, transitional unemployment, and enterprise restructuring/closure.

Maximizing the benefits depends to a large extent on Algeria’s commitment to reforms. Other countries’ experiences show that the Barcelona Process positively affected mainly countries that manifested serious commitment to reform.

The required policy actions comprise: (a) maintaining sound macroeconomic policies; (b) undertaking deep structural reforms aimed at diversifying the economy and achieving a transition to a market economy; and (c) liberalizing trade more generally.

1See the selected issues paper on “The Association Agreement between Algeria and the European Union: Economic Implications and Challenges,” (forthcoming).

Reform of the Financial Sector

26. The strategy for reforming the financial system in Algeria should focus on banking sector reform. In discussing the authorities’ comprehensive approach to financial sector reform, including the nonbank financial sector, staff stressed that financial intermediation would be bank-based in the near future.

27. The weak financial situation of public banks confirms the need to adopt a coherent strategy that aims to gradually reduce the State’s role in the sector. The authorities’ reform program aims at strengthening the governance of public banks and accelerating privatization. Key actions include:

  • Successfully privatizing the first of three designated public banks. Building on the preparatory work for opening up the majority of the capital of a first public bank to a reputable strategic investor, it is now important to issue the call for bids as soon as possible.

  • Preparing for the privatization of the other two public banks, to take advantage of the momentum created by the privatization of the first public bank as soon as it is completed.

  • Improving the governance of public banks. The strengthening of performance contracts for public banks is a welcome step. Staff recommended that these contracts require banks to grant loans only to solvent clients and be published with their ex-post assessments. Although the 2005 budget law included explicit government subsidies to replace part of public banks’ credit to loss-making public enterprises, the implementation of this reform was delayed. The authorities are endeavoring to speed up the process, including by developing an enterprise restructuring program aimed at phasing out the subsidies over the medium term. Staff advised establishing a code of conduct for the financial relations between public banks and public enterprises.

  • Promoting competition in the banking sector, in order to ensure the success of the privatization and facilitate efficient intermediation. In this regard, staff recommended replacing the directive prohibiting public entities from dealing with private banks with a directive instructing these entities to deal solely with sound banks. It also encouraged the authorities to avoid any discretionary measures aimed at increasing credit to the economy, such as interest subsidies.

28. Continued improvement of the operational framework for financial intermediation should accompany this strategy. Key actions are the ongoing modernization of the payments system, as well as the authorities’ capacity-building efforts in banking supervision, with Fund technical assistance. To ensure the success of these efforts, the political support for the banking commission in enforcing prudential regulations needs to be sustained.

Other Structural Reforms

29. Staff welcomed the authorities’ continued efforts toward external trade liberalization. It is now important to step up the negotiations for Algeria’s accession to the WTO. In this context, staff encouraged the authorities to liberalize rights of establishment to attract more foreign investment. Regional integration is also an important factor in enhancing the positive impact of the AAEU and attracting more foreign direct investment. The work program agreed upon at the conference on trade facilitation in Algeria, Morocco and Tunisia, which took place in Algiers in November, provides a good basis to make progress in this direction. Regarding customs reform, the ongoing development of the risk management system should be continued to shorten customs clearance times.

30. The free current convertibility of the dinar is essential to enable Algeria to benefit from its opening up to the rest of the world. A recent Fund technical assistance mission noted some problems in the implementation of the free convertibility of the dinar for payments and transfers relating to bona fide current international transactions, particularly those relating to invisible transactions and imports of some services; it also noted problems in the communication of this free convertibility to the banks and the Algerian public. The authorities acknowledged that the exchange system needs to be improved and indicated that they have started work to implement the preliminary recommendations of the Fund technical assistance mission (Box 6).

Improving the Exchange System

Algeria’s exchange system was found to be complicated and bureaucratic. Despite the publication of a BA note in 1997, the public was generally unaware that BA allows the purchase of bona fide amounts exceeding annual limits, which cover many invisible payments. The foreign exchange authority should:

  • Issue a new instruction confirming the free convertibility of the dinar for the payment of invisible transactions (i.e. for healthcare, education, and travel) and disseminate widely and immediately the policy of free convertibility for all bona fide current account payments and transfers;

  • Significantly increase or abolish the current indicative limits on conversion for current international invisible transactions; and

  • Launch a general overhaul and streamlining of the regulatory framework.

31. Other structural reforms should be targeted at improving the business climate in Algeria. In this regard, the authorities were determined to push ahead with the ongoing judicial reform aimed at implementing the legislation in a transparent and predictable fashion. They were also interested in exploring possibilities to improve the incentives for enterprise and job creation through the tax system as proposed by staff (Box 7).

Algeria’s Business Climate

Algeria’s business climate lags behind that of countries on the rim of the European Union.1 The authorities are pursuing a number of structural reforms to improve the business climate, but these will take time to mature.

The fiscal space created by higher hydrocarbon revenues could be used to achieve a faster improvement in the business climate through the tax system. The gap between Algeria and its competitors is largest in business taxes. While Algeria has lowered its corporate income tax (CIT) rate to 30 percent, the average maximum CIT rate in the EU10 accession countries dropped from 30½ percent in 1995 to 21½ percent in 2004.

The subsidy implicit in the pricing of domestic energy could also partly be redirected away from energy-intensive to labor-intensive activities. A reduction in taxes and mandatory charges on labor could be considered in this context to make its tax system more conducive to job creation.

1See the selected issues paper on “Algeria’s Business Climate: Tax Reforms for Faster Job Creation,” (forthcoming).

32. Staff encouraged the government to step up its efforts to reduce its involvement in the productive sector. It advised against subjecting privatization to the maintenance of employment and activity, but rather to accompany this process with appropriate social measures. Staff also encouraged the government to subject remaining public enterprises to annual external audits in line with international standards, and to publish the results.

33. Further strengthening fiscal governance and transparency is key to ensuring the proper use of the large hydrocarbon revenues. Staff welcomed the progress made with regard to anti-corruption legislation, and encouraged the authorities to accelerate budget modernization and establish an action plan to implement the recommendations of the fiscal ROSC. Priorities include (a) finalizing the draft organic law on public finances; (b) improving information disseminated to Parliament and the public; (c) modernizing the budget nomenclature and accounting framework; (d) reducing the number of special accounts; and (e) reforming the financing of local governments. Staff also encouraged the authorities to participate in the Extractive Industries Transparency Initiative (EITI).

IV. Statistical and Other Issues

34. Despite the authorities’ efforts to improve the statistical base, serious weaknesses remain, particularly in government finance statistics and prudential data on the financial sector, as well as in the timeliness of data dissemination.9 Staff recommended that Algeria participate in the GDDS to develop and modernize its statistical system in a structured framework, while obtaining the needed technical assistance.

35. The authorities intend to pursue their active external debt management. Staff encouraged them to continue their efforts to seek early settlement of issues related to the debt with Russia, which would facilitate a more ambitious approach in prepaying external debt to Paris Club creditors.

36. The authorities expressed satisfaction with Fund technical assistance on tax administration, monetary policy, and banking supervision. Staff welcomed the authorities’ efforts to accelerate the reform of the tax administration, including the start-up of the Large Enterprise Unit, and expressed Fund readiness to continue to provide technical assistance in this area. Near-term Fund technical assistance also includes bank restructuring and banking supervision, as well as organizing a course on financial markets analysis in Algeria in early 2006.

V. Staff Appraisal

37. Since 2001, the Algerian economy has successfully used abundant hydrocarbon revenues to boost economic growth while keeping inflation low. Growth benefited from a sizable fiscal impulse and buoyant activity in the hydrocarbon sector. The unemployment rate declined considerably, but this also reflected an increase in temporary employment and youth unemployment remains high. Monetary policy adequately managed the large external inflows by absorbing most of the excess liquidity in the banking system. However, the strong expansion of credit to the economy remains a cause for concern in light of the very large share of nonperforming loans in the public banks. Several major structural reforms were accomplished in 2005, including the entry into effect of the AAEU, but much remains to be done to achieve the transition to a market economy.

38. The key challenge for Algeria is to strengthen the prospects for sustainable growth in the nonhydrocarbon sector and increase employment in an increasingly open environment. With greater competition resulting from the external trade liberalization, it is imperative to speed up priority reforms aimed at encouraging private investment and creating jobs. The prospect of continued high hydrocarbon revenues would provide the fiscal space to accelerate these reforms. In managing the large hydrocarbon-related inflows, it is important to coordinate fiscal and monetary policies to maintain macroeconomic stability.

39. The progress made in consolidating political stability and the encouraging outlook for Algeria’s already strong financial position provide an excellent opportunity to decisively advance the government’s economic agenda. The government’s program focuses on (a) using part of the hydrocarbon revenues for investment in infrastructure, education, health, and housing; and (b) accelerating structural reforms aimed at moving toward an open and diversified market economy. While this orientation is appropriate, it is also important to ensure that the program is implemented in such a way as to ensure that its objectives are achieved.

40. With the rise in world oil prices, the sustainable level of public spending for 2006 and beyond has increased significantly, but the government’s investment plans are very ambitious in the short term. Given limited absorption capacity, the front-loading of investment could jeopardize the quality of these expenditures and increase inflation. Staff recommends a more even implementation of the public investment program, taking into account the recommendations of the public expenditure review being conducted in cooperation with the World Bank.

41. It is also important to use part of the increased fiscal space to accelerate reforms and to adopt a wage policy that the economy is able to support. Allocating adequate resources to support reforms in the public bank and enterprise sectors, including to mitigate the inevitable social costs, would help to accelerate the transformation of the economy. To achieve an immediate improvement in the business climate, the authorities should consider streamlining the tax system, and lowering the tax and other charges on enterprise and employment. In view of the need to preserve the competitiveness of the economy, real public sector wage increases should not exceed the real growth in the nonhydrocarbon sector.

42. Staff encourages the authorities to transform the current hydrocarbon stabilization fund into a savings/financing account that is fully integrated into the budget. It also underscores the importance of setting the fiscal management of hydrocarbon revenue in a long-term framework and to start preparing medium-term budget projections that take account of the current spending implications of public investment.

43. Inflation will likely be more difficult to control in the period ahead, owing to the envisaged fiscal expansion and the strong credit expansion to the economy. This requires tightening monetary policy by further strengthening BA’s control over system liquidity and increasing its policy interest rate to a positive level in real terms. The latter would also lead banks to better assess prevailing credit risks. Staff reiterates its recommendation that the large structural liquidity of Sonatrach be deposited directly at BA.

44. The authorities should continue to implement the managed exchange rate float in a flexible manner. The rise in oil prices, together with the fiscal expansion and the current growth momentum, suggest a tendency for the equilibrium real exchange rate to appreciate. The current policy of gradually appreciating the dinar should be pursued in the period ahead, which would help keep inflation under control.

45. To enable Algeria to benefit as much as possible from establishing a free trade zone with the European Union, the implementation of market-based structural reforms needs to be accelerated. Banking reform remains a priority. Staff emphasizes the need to push ahead with the privatization of several public banks, strengthen governance of the remaining public banks, and promote competition in the sector on a level playing field. In addition, stepping up efforts to join the WTO and to strengthen regional integration are important, including to attract more foreign direct investment. Staff also encourages the authorities to decisively execute their privatization program.

46. In order to ensure free convertibility for international current transactions, staff urges the authorities to implement the recommendations of the recent Fund technical assistance mission without delay.

47. The progress made with regard to enacting anti-corruption legislation and strengthening banking supervision is welcome, but further efforts are needed to implement the recommendations of the 2004 fiscal ROSC report and to undertake financial audits of public enterprises.

48. Staff urges the authorities to step up their efforts to improve the statistical base. Although data provision to the Fund is still broadly adequate for effective surveillance, there are serious weaknesses, including in the government finance statistics. Staff recommends that Algeria participate in the GDDS.

49. The authorities’ policy to prepay external debt is appropriate and Algeria’s voluntary advance repurchase to the Fund was a positive step. Staff encourages the authorities to continue their efforts to seek a settlement of bilateral debt issues with Russia.

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

Table 9.

Algeria: Indicators of External Vulnerability, 2001–05

(In percent of GDP, unless otherwise indicated)

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

For 2005, as of September.

Using actual CPI.

For 2005, as of September.

For 2005, as of August.

Table 10.

Algeria: Millennium Development Goals, 1990–2003

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Source: World Development Indicators Database, April 2005.

APPENDIX I Algeria: Relations with the Fund

As of November 30, 2005

A. Financial Relations

Membership Status Joined 9/26/63; Article VIII

General Resources Account

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SDR Department

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Outstanding Purchases and Loans: None

Financial Arrangements

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Projected Payments to Fund

(SDR Million; based on existing use of resources and present holdings of SDRs)

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Implementation of HIPC Initiative: Not Applicable.

B. Nonfinancial Relations

Exchange Rate Arrangement

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 November 2005, the average of the buying and selling rates for the U.S. dollar was $1 = DA 73.76, equivalent to SDR 1 = DA 105.04. No margin limits are imposed on the buying and selling exchange rates in the interbank foreign exchange market, except for a margin of DA 0.017 between the buying and selling rates of the Bank of Algeria for the dinar against the U.S. dollar.

The exchange regime is a managed float with no pre-announced path for the exchange rate. Full surrender requirements are in effect on hydrocarbon export proceeds. Limits on the making of payments for invisible transactions and current transfers, which are still in effect since Algeria accepted the obligations of Article VIII, Sections 2(a), 3, and 4, in 1997, are indicative according to the authorities, although this information is not commonly known by the public, despite the publication of a BA note in 1997. In addition, some difficulties arise with regard to the making of payments for other current international transactions (such as the payment of certain services).

Latest Article IV Consultation

The discussions for the 2004 Article IV consultation with Algeria were held in Algiers during October 7–24, 2004. The staff report (IMF Country Report No. 05/50) was discussed by the Executive Board on January 12, 2005 and published on February 15, 2005.

Technical Assistance

  • MAE consultants visited Algiers in January, March, July, and December 2002 to advise on insurance supervision.

  • MAE consultants visited Algiers in February–May 2002 to assist the Bank of Algeria to develop its bank supervision capability.

  • An MAE mission on monetary policy visited Algiers in March 2002.

  • MAE consultants visited Algiers in March, June, and October 2002 to advise on foreign reserve management.

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

  • An MAE consultant visited Algiers in July, September, October, and December 2002 to assist the Bank of Algeria to develop its bank supervision and regulation capability.

  • An 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.

  • An MAE consultant visited Algiers in February and April 2003 to assist the Bank of Algeria to develop its bank supervision and regulation capability.

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

  • MFD experts visited Algiers in 2003–2004 to advise on bank liquidation, bank supervision and inspection, reserve management, and information systems for bank oversight.

  • An FAD mission visited Algiers in March 2004 to advise on tax administration.

  • An STA expert visited Algiers in March 2004 to advise on national accounts.

  • An MFD expert visited Algiers in May 2004 to advise on foreign exchange reserves management.

  • An MFD mission visited Algiers in July 2004 to advise on liquidity management and instruments of monetary policy.

  • An STA expert visited Algiers in November–December 2004 to advise on national accounts.

  • An MFD expert visited Algiers in January–February 2005 to advise on bank inspection.

  • An STA expert visited Algiers in June–July 2005 to advise on the development of quarterly national accounts statistics.

  • An MFD mission visited Algiers in July 2005 to advise on liquidity management and monetary operations.

  • An MFD/LEG mission visited Algiers in July 2005 to advise on the exchange regime and the development of the foreign exchange market.

  • An MFD mission visited Algiers in September and December 2005 to advise on bank restructuring.

Financial Sector Assessment Program (FSAP)

Algeria participated in the FSAP in 2003. Missions were conducted in March and June 2003. Conclusions were discussed with the authorities in October 2003. The Executive Board discussed the Financial System Stability Assessment (IMF Country Report No. 04/138) on January 14, 2004. The FSSA was published on May 17, 2004.

Resident Representative/Advisor

None.

APPENDIX II Algeria: Relations with the World Bank

(As of November 8, 2005)

The World Bank portfolio in Algeria comprises 9 active operations and 64 closed loans, with cumulative net commitments of US$4.5 billion, of which US$3.67 billion have been repaid. Net commitments for the 9 current operations amount to US$337 million.

The Algeria Country Assistance Strategy was discussed by the World Bank Board on June 12, 2003 and a Country Assistance Strategy Progress Report was discussed by the Board on August 30, 2005. The proposed support of the Bank Group to Algeria for 2004-06 aims at: (a) strengthening fiscal sustainability and hydrocarbon revenue management to build the basis for sustained growth; (b) removing the constraints to private sector-led growth, particularly those affecting the business environment, SMEs, the financial sector, and infrastructure development; and (c) supporting the Government’s efforts to articulate and implement a strategy for better service delivery, particularly in water supply, transport, housing, environmental services and human development to meet the critical needs of the population. The Bank Group’s support is guided by three principles: (a) selectivity through engagement in a limited number of areas and a selective use of Bank instruments; (b) programmatic approach focused on transfer of knowledge and capacity building; and (c) partnerships, outreach and knowledge sharing.

Recent analytical work includes policy notes on poverty, the transport sector, and the legal and business environment (FY05). A Public Expenditure Review is scheduled for FY06 (in collaboration with the IMF). The Bank is seeking to expand its analytic and advisory work in Algeria.

Given high oil revenues and the decision to reduce external borrowing, the authorities have expressed interest in Reimbursable Technical Assistance (RTA) from the World Bank. Agreement has been reached on an RTA program in the water and sanitation sector and another is under preparation in the information and communication technology sector.

The quality of the Algeria portfolio deteriorated in FY04 and FY05. The percentage of projects at risk rose from 8 percent in FY03 to above 20 percent in FY04–05, and is currently at 22 percent. Slow implementation continues to affect most projects, partly because of insufficient institutional capacity and procurement problems. The average disbursement ratio was 11 percent in FY04 and dropped to 8.9 percent in FY05. No new loans have been approved since FY03.

Algeria: Financial Relations with the World Bank

(As of November 1, 2005)

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IDA has no operations in Algeria.

Less cancellations, includes adjustment lending.

As of November 1, 2005.

Fiscal years start July 1 and end June 30.

Includes charges.

Equal to disbursements minus debt service.

APPENDIX III Algeria: Statistical Issues

Algeria’s data provision to the Fund is still broadly adequate for effective surveillance, but there are serious weaknesses particularly in government finance statistics. Since the late 1990s, the reporting of statistics to the Fund has generally deteriorated, particularly with respect to overall quality and timeliness. 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.

The September 2002 multisector statistics mission designed an action plan to facilitate Algeria’s eventual subscription to the Special Data Dissemination Standard (SDDS). STA believes that the optimal strategy is participation in the General Data Dissemination System (GDDS) as an interim step. The GDDS would provide a comprehensive and consistent framework for improving Algeria’s statistics, attract the required technical assistance from the Fund and other donors, and serve to signal to the world Algeria’s commitment to improving statistics. The authorities have stated that they aim for Algeria to participate in the GDDS in the near future.

Real Sector

Real sector data is reported to STA on an irregular basis and with substantial lags. The latest national accounts information in IFS pertains to partial data reported for 2003. IFS 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. STA missions visited Algiers during 2004–05 to assist the National Statistical Office with the development of quarterly national accounts.

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 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 data. The authorities have not yet followed up on their initial intention to assign GFS leadership to the General Directorate of Accounting in the Ministry of Finance. A first step 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 quarterly data that fully reconcile the SROT presentation of government finances with the budget presentation. The ongoing changeover to an enhanced chart of accounts of the Treasury would offer an ideal opportunity to revamp the way GFS compilation is organized and carried out in Algeria.

The mission further recommended (a) that proceeds of the oil stabilization fund (FRR) be shown as revenue (rather than financing); (b) the compilation of more detailed breakdowns, in particular relating to the item “other transfers”; (c) a more appropriate reporting of the three large debt assumption operations carried out 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 are 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 the complete data needed to compile the monetary survey. Prudential data reported by banks are untimely and unreliable on the part of public banks. 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

The September 2002 multisector statistics mission noted the following: (a) the Bank of Algeria’s legal authority to collect data is limited to banking and financial institutions only; (b) data sources need to be expanded by conducting enterprise surveys in addition to traditional exchange-based records; (c) a more rigorous and uniform application of the residency criterion should be followed; (d) quarterly data are compiled but not regularly disseminated; and (e) international investment position data are not compiled. Algeria does not report Balance of Payments data to STA, and there are no BOP data in IFS or in the BOPSY.

Algeria: Table of Common Indicators Required for Surveillance

As of December 19, 2005

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Includes reserve assets pledged or otherwise encumbered as well as net derivative positions.

Both market-based and officially-determined, including discount rates, money market rates, rates on treasury bills, notes and bonds.

Foreign, domestic bank, and domestic nonbank financing.

The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds) and state and local governments.

Including currency and maturity composition.

Daily (D), Weekly (W), Monthly (M), Quarterly (Q), Annually (A); Irregular (I); and Not Available (NA).
1

The Economy Recovery Program was a public investment program covering the period 2001–04. It supplemented the budget and amounted to about US$7 billion (almost 13 percent of 2001 GDP).

2

For a review of business climate indicators, see the selected issues paper on “Algeria’s Business Climate: Tax Reforms for Faster Job Creation,” (forthcoming).

3

This was in line with the staff finding at the time of the 2004 Article IV consultation that there were no signs of misalignment of the exchange rate in early 2004 (IMF Country Report No. 05/50).

4

Given Algeria’s ample liquidity situation and the extensive controls on the capital account, the link between domestic and foreign interest rates is weak.

5

The Real Time Gross Settlement system is expected to be effective as of January 1, 2006.

6

The public investment program for 2005–09 comprises the GCP, as well as US$16 billion representing other projects under way. In total, the public investment program amounts to US$74 billion (72 percent of 2005 GDP).

7

In January 2004, the authorities granted an increase in the minimum wage of 25 percent.

8

Public debt includes the quasi-fiscal debt arising from public banks’ nonperforming loans to public enterprises.

9

For example, the 2003 nonhydrocarbon overall deficit is presently estimated at 27.7 percent of NHGDP compared to 33.1 percent in IMF Country Report No. 05/50.

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Cover IMF Staff Country Reports
Algeria: 2005 Article IV Consultation—Staff Report; Staff Statement; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Algeria
Author:
International Monetary Fund
Volume/Issue:
Volume 2006: Issue 093
Publisher:
International Monetary Fund
ISBN:
9781451811490
ISSN:
1934-7685
Pages:
55
DOI:
https://doi.org/10.5089/9781451811490.002
Figure 1.

Real GDP Per Capita

(1999=100)
Figure 2.

Unemployment Rate

(In percent)
Figure 3.

Real GDP Growth, 2000–05

(In percent)
Figure 4.

CPI Inflation Rate (Annual change in percent) September 2000 - October 2005
Figure 5.

External Developments, 2000–05
Figure 6.

Real and Nominal Effective Exchange Rates December 1995 - August 2005

(1995=100)
Figure 7.

Nominal Exchange Rates

(monthly averages)
Figure 8.

Overall and Nonhydrocarbon Fiscal Balances, 2000–05
Figure 9.

Monetary Policy Stance
Figure 10.

Capital Expenditure

(in percent of NHGDP)