Statement by Abbas Mirakhor, Executive Director for Algeria February 13, 2006

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.


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.

As underscored in the staff report and in previous Board meetings, Algeria has progressively strengthened macroeconomic stability in recent years, and has taken important strides in reforming and liberalizing its economy. As a result, the country has achieved high growth, significant reduction in unemployment, and substantial improvement in the living standard of the population. To fully consolidate macro stability and achieve sustainable higher growth, reform efforts will be enhanced with greater reliance on an expanded role for the private sector as the engine of growth. The authorities have seized the opportunity of the increase in international hydrocarbon prices to accelerate the pace of fiscal consolidation, saving most of the additional revenue, maintaining control over current spending, and using part of the available fiscal space to increase the much needed capital expenditure.

Underpinned by the 2003-05 Economic Recovery Program, growth averaged more than 5 percent, real per capita GDP increased by 4 percent a year on average, and the unemployment rate fell from 23.7 percent to 15.3 percent. The central government’s fiscal position recorded a surplus of more than 9 percent of GDP on average over the past three years, as against virtual balance in 2002. Additional hydrocarbon revenues and prudent fiscal stance, combined with active debt management policy, led to a decline in gross government debt-to-GDP ratio by half over the period—on a net basis, the government debt-to-GDP ratio decreased from 38 percent to 4 percent. Over the same period, the current account recorded an annual surplus of more than 14 percent on average, while the ratio of international reserves to external debt increased from 1.0 in 2002 to 3.4 in 2005.

The authorities remain cognizant of the considerable challenges that still lie ahead: high unemployment, with youth unemployment of 32.5 percent; infrastructure in need of considerable further attention; public enterprise restructuring process yet to be completed; and the role of the private sector to be strengthened.

Recent economic developments

Real GDP expanded by 5.3 percent in 2005, led by buoyant activity in the construction and services sectors, steady agricultural growth, and higher hydrocarbon production and export. Reflecting prudent fiscal and monetary policies, inflation slowed to 1.6 percent from 4 percent in 2004. Strengthened hydrocarbon and nonhydrocarbon revenues, careful selection and monitoring of capital expenditure, and prudent current spending contributed to further improvement in the fiscal position; overall budget surplus was about 12 percent of GDP despite larger infrastructural investment.

Building on recommendations of a technical assistance mission on liquidity management, the central bank (BA) took additional measures to mop up excess liquidity, including increasing the amount of deposit auctions, extending maturity of a large part of these deposits, raising its policy interest rate, and introducing a 24-hour deposit facility. Despite these actions, credit to the private sector continued to support buoyant activity in the nonhydrocarbon economy leading to further decline in unemployment.

On the external front, strong export revenues offset higher imports due, in part, to the public investment program and the entry into force of the Association Agreement with the European Union (AAEU). The current account surplus strengthened further, exceeding 18 percent of GDP, thus allowing additional accumulation of international reserves. The authorities continued advanced repayment of external debt, including early repurchase of the outstanding financial obligations to the Fund, bringing the external debt-to-GDP ratio to 16.5 percent and the debt service ratio to 12 percent and substantially strengthening external viability. The authorities intend to accelerate early debt repayments in 2006, including to other multilateral creditors.

Short- and medium-term policies

As detailed in the 2005-09 Growth Consolidation Plan (GCP), the authorities reiterate their commitment to address the remaining agenda of reforms. The ongoing and planned policies and reform actions, described below, attest to the strength and seriousness of this commitment. The considerable progress achieved in consolidating political stability and improving the security environment, as well as the strong financial position, provide a fortuitous opportunity for successful implementation of the reform agenda.

Fiscal sustainability remains the centerpiece of the medium-term strategy. The strong fiscal performance over the past several years has allowed for a sizable accumulation of savings, thus providing resources for the implementation of the public investment program under the GCP. The authorities are carefully considering staff’s recommendation for the management of the hydrocarbon revenues in the context of a longer-term fiscal framework. They look forward to further consultation with the staff on this issue as well as on the possibility of transforming the stabilization fund into a savings/financing account that would be fully integrated into the budget.

The authorities remain vigilant to the need to balance accumulation of financial savings for intergenerational equity and the more urgent demands for infrastructure, education, health, and other social spendings. While acknowledging the appropriateness of the authorities’ investment program, staff raise concerns regarding the front-loading of the planned spending. However, it should be noted that the budgeted capital spending is more evenly distributed over the 2005-09 period (Table 3 of the staff report) than implied in paragraph 15 of the staff report.

The front-loading of the program authorizations reflects identified programs that are scheduled to be completed over the period of several years. The authorities view the process of upfront expenditure authorizations as a signal of the assurance to economic agents of the availability of the necessary resources over the horizon of the investment period. Actual annual appropriations will be allocated in the future budgets, with due consideration to the selection and monitoring of the projects, their macroeconomic implications as well as to the absorptive capacity constraints. They are fully cognizant of the latter limitation and the potential risk of adverse impact of an unsustainably rapid pace of implementation on the quality of spending. The ongoing public expenditure review with World Bank assistance should lead to adoption of measures that would mitigate against such risk. Along with the rationalization of capital expenditure, efforts to contain current spending will be sustained, including through a prudent wage policy to preserve the competitiveness of the economy.

In view of the volatility of hydrocarbon prices, priority is attached to enhancing nonhydrocarbon revenues; important progress is being made to improve tax administration. Particularly noteworthy is the launching of operations of the large taxpayers department, the transfer of remaining non-tax functions to the treasury, the simplification of identification procedures, and progress in restructuring the tax office network for the remaining taxpayers. Along with Fund technical assistance, the tax modernization strategy is benefiting from other multilateral (World Bank and the European Union) and bilateral assistance. Further, the authorities are considering staff’s recommendation for a tax policy review.

The flexible exchange rate regime continues to serve the economy well, and BA remains committed to monitoring developments in line with its objective of minimizing deviations of the real effective exchange rate from its equilibrium level. In view of increased trade liberalization in the context of the AAEU and the expected WTO membership, a recent Fund technical assistance mission has suggested a number of useful recommendations aimed at improving the exchange rate and payments systems. The authorities are taking steps to implement these recommendations: they have already drafted a new, unified regulatory framework and have requested the mission’s comments on the draft before its final approval. They look forward to receiving the TA mission’s final report to take further actions as needed.

Financial sector reform has received strong political support as a priority in the authorities’ agenda, and important progress is being made in this area. In addition to strengthening banking supervision, the authorities have articulated a reform strategy based on the FSAP recommendations. Accordingly, the privatization of one public bank is well advanced; a contract has been signed recently with a foreign investment bank to assist in implementing the process in 2006. Preliminary indications suggest strong interest from reputable foreign strategic investors. The authorities attach high importance to the success of this process as it will have a positive demonstration effect on the envisaged privatization of two other public banks already slated for divestiture. Other ongoing reforms in the sector include:

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    modernization of the payment system, entailing improved information and accounting systems. The new Real Time Gross Settlements system will be launched shortly, and the Retail Payments system will be established later this year. In addition to improving financial intermediation, this will contribute to enhancing the quality and timeliness of data reporting, including in the area of public finances and further facilitating enhanced supervision;

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    improving governance in the banking sector, particularly through strengthened performance contracts and the replacement of quasi-fiscal activities with direct budget support in line with FSAP recommendations. These and other steps in the context of the ongoing MFD technical assistance should address decisively the issue of nonperforming loans in public banks; and

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    consideration of options to improve performance of the remaining public banks, including through corporatization and the use of management contracts.

It is worth noting that, as required by the Banking Commission, all public banks are currently being audited by reputable international auditing firms. The audit reports should provide further guidance in improving the institutional capacity and financial performance of these banks.

To strengthen the insurance sector, the parliament has passed a new law that establishes an independent supervisory commission and a guaranty fund, and allows participation of foreign insurance companies in this sector. The parliament has also adopted a law on the securitization of mortgages that should further encourage the development of this market. This effort will be enhanced through measures that would facilitate the issuance of property titles. Moreover, a draft law on establishment of investment funds has been submitted to parliament for approval. To further deepen the domestic financial market, the authorities are preparing legislation that would allow creation of credit unions.

Sustained efforts have been made thus far to reduce the role of the public sector in the economy, with this sector now representing only 20 percent of nonhydrocarbon value-added. As can be viewed from the table below, important privatization efforts in various sectors have been made over the past three years.

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In addition, contracts with foreign companies to manage water distribution are either signed or are under consideration. Strong efforts are being made to advance further the divestiture process.

In March 2005, the parliament approved a new law to strengthen competition in the hydrocarbon sector. As summarized in Box 3 of the staff report, the law introduces major developments in the sector. Particularly noteworthy aspects of the law are:

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    elimination of the obligation for foreign investors to enter into partnership with Sonatrach, the national oil company;

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    liberalization of transportation and downstream activities in the hydrocarbon sector;

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    establishment of two regulatory agencies, one responsible for tendering upstream contracts and the other for issuing downstream permits; and

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    establishment of investors’ rights and obligations.

The authorities are committed to further improvements of the business climate to support expansion of private investment and accelerate growth. To this end, a high-level, multi-sector task force, assisted by the World Bank, has been established recently to propose policies. Based on the recommendations of the task force, concrete actions would be taken in the course of the year. Efforts are also directed to improving governance, e.g., adoption of a new law on combating corruption and the strengthening of the judiciary system. Moreover, an organic law governing public finances is drafted for submission to the parliament.

There has been considerable improvement over the past years in data provision, and the authorities are determined to address the remaining weaknesses, consistent with Fund advice. To this end, they have subscribed to the Fund’s General Data Dissemination System.

As in the past, my Algerian authorities look forward to the Board discussion of this year’s Article IV report and to the views and guidance of Executive Directors. They appreciate the participation of the Managing Director in the ongoing trade facilitation process among the Maghreb countries.

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