Algeria: Selected Issues


Algeria: Selected Issues

Subsidy Reform in Algeria1

The collapse in oil prices has placed severe strains on Algeria’s public finances and focused attention on the need for subsidy reform. Although integral to the country’s social contract, Algeria’s subsidies fail to provide efficient support to the poor, are too costly to sustain, and create distortions that are harmful to the economy and the environment. Rolling back subsidies will be challenging given their pervasiveness, the complexity of the system, and the need to mitigate the social impact of the reform. However, experience in other countries suggests that subsidy reform, if carefully planned and communicated, can be successful and strengthen, rather than undermine, social protection, thereby promoting more inclusive growth in the long term. This paper examines Algeria’s main subsidies and proposes reform strategies, drawing on cross-country experiences.

A. Introduction: Why Subsidy Reform?

1. Even before oil prices began their precipitous decline, Algeria’s fiscal policy was on an unsustainable path. Algeria recorded six consecutive fiscal deficits between 2009 and 2014—despite oil prices averaging nearly US$100/barrel—as government spending surged and slumping hydrocarbon production led to a decline in hydrocarbon revenues. Fiscal savings, which peaked at 43.3 percent of GDP in 2009, fell to 25.2 percent by 2014. At the time of the 2014 Article IV consultation, when oil prices were still just under US$100/barrel, IMF staff warned that Algeria would need to undertake significant and sustained fiscal consolidation in the coming years to restore fiscal sustainability and ensure intergenerational equity.

2. The collapse in oil prices—together with the prospect of low oil prices for years to come—increased the urgency to act. Following the decline in oil prices to US$53/barrel (on average) in 2015, hydrocarbon revenues fell to their lowest level since 2004, resulting in a sharp widening of the fiscal deficit to an estimated 16.4 percent of GDP. With oil prices expected to average US$37 in 2016 and rise only gradually to US$52/barrel by 2021, IMF staff project that, even under the assumption of sustained fiscal consolidation over the medium term, fiscal savings will be depleted and government debt will increase significantly. In this context, Algeria can ill afford to delay fiscal consolidation without risking a sharper adjustment down the road.

3. Subsidy reform should be an integral part of Algeria’s fiscal consolidation strategy. Successful fiscal consolidation depends on both mobilizing more revenues and rationalizing expenditures. On the revenue side, Algeria must find ways to increase nonhydrocarbon revenues, given finite hydrocarbon resources and the volatile nature of oil prices. On the expenditure side, Algeria needs to contain current spending while refraining from indiscriminate cuts to growth-enhancing capital expenditures. Subsidy reform, if done correctly, would generate more revenues and contribute to a reduction in current spending.

4. Subsidy reform would strengthen, rather than undermine, social protection and promote more inclusive growth. Algeria, like many other oil-exporting countries in the region, has relied heavily on subsidies as a tool to provide social protection and share natural resource wealth. Although some of the money spent on subsidies does benefit the poor, the system as a whole is highly regressive, benefiting mainly the better-off. A well-targeted cash transfer system would be a more efficient and cost-effective way to provide social protection, and therefore should be a key component of Algeria’s subsidy reform strategy. By helping ensure fiscal sustainability, freeing up resources for growth-enhancing spending, and focusing social protection on those who truly need it, subsidy reform would foster higher and more inclusive growth.

5. The government’s decision to increase energy prices starting in 2016 is an important step in the right direction. The 2016 budget law increased the value added tax from 7 percent to 17 percent on the sale of diesel, the consumption of natural gas beyond 2,500 thermal units/quarter, and the consumption of electricity beyond 250 KWh/quarter. In addition, the budget law increased the tax on petroleum products (TPP) from 1 dinar to 2.91 dinars on the price of gasoline and diesel. Separately, the government increased electricity and natural gas rates (before taxes) while leaving unchanged the rates applicable to businesses and households that consume the least. Together, these measures resulted in the first increases in energy prices since 2005 and constituted an important first step toward subsidy reform.

6. This paper proposes strategies for subsidy reform, drawing on international experience. Section B examines Algeria’s main subsidies and their fiscal cost. Section C discusses the economic consequences of subsidies. Section D lays out the key elements of a successful subsidy reform, and Section E analyzes the potential economic impact of such a reform. Section F concludes.

B. What are the Main Subsidies, and How Much Do They Cost?

7. Algeria’s subsidies are both explicit and implicit and cover energy products, housing, food, education, and interest rates.2 Explicit subsidies are included in the budget and have a direct fiscal cost. The main explicit subsidies are for housing, food, education, interest rates, electricity, natural gas and water. Implicit subsidies are not expenditure items in the budget; nevertheless, they carry an important opportunity cost in the form of foregone revenues, directly for the budget or for state-owned utilities.3 Another indirect cost of implicit subsidies is that they have led to episodic bailouts of state-owned utilities that are required to supply services at below market value. Implicit subsidies comprise energy products and, to a smaller extent, housing.

  • Energy subsidies relate to fuel, natural gas, and electricity, whose prices are set administratively below their market value. Fuel prices are fixed at every point in the supply chain, from production to refining to distribution. Despite the recent increase in fuel taxes, final prices at the pump for gasoline, diesel, and other fuels in Algeria remain among the lowest in the world.4 Although the 2016 budget law increased taxes on electricity and natural gas consumption, underlying tariffs have been frozen since 2005 and are well below supply costs. Consequently, the state-owned utility Sonelgaz, which is responsible for natural gas and electricity distribution, has been running structural deficits. In addition to these implicit energy subsidies, the government provides smaller explicit subsidies for rural electrification and the public distribution of natural gas and water.

  • Housing subsidies are aimed at reducing Algeria’s housing shortage. The combination of a rapidly growing population, urban migration, and a decline in cohabitation has resulted in a demand for housing unmatched by supply. To address this shortage, the government has developed a number of programs to provide affordable housing. Explicit housing subsidies are channeled through the National Housing Fund (Fonds National du Logement) and support access to public housing (both rental housing and housing for purchase). Implicit housing subsidies stem from the government’s provision of land at essentially zero cost for public housing programs.

  • Food subsidies cover several basic items. These include bread and durum wheat products, barley, pasteurized milk reconstructed from milk powder, refined cooking oil, and white crystallized sugar. The government covers the difference between the market cost of raw materials and their regulated wholesale price. In the case of wheat, barley, and milk, which account for the bulk of food subsidies, the government fixes the transfer price of raw materials to domestic producers and reimburses the relevant regulating agency for the differential between the international market import price and the regulated transfer price. (The regulating agencies control the domestic and imported supply of raw materials and their distribution.)

  • Education subsidies promote access to the public education system. Subsidies (as well as transfers) help cover the cost of school supplies, food, housing, transportation, and scholarships for eligible students, with food representing the largest component. Most education subsidies are directed to the tertiary education system.

  • The government subsidizes interest rates to encourage investment and entrepreneurship. All Algerian companies benefit from reduced interest rates on investment loans, in addition to a zero-interest grace period for a period of up to five years. Subsidized interest rates are also featured in government programs that target specific activities or regions.


World Gasoline Prices, 2015

(US$ per liter)

Citation: IMF Staff Country Reports 2016, 128; 10.5089/9781484358351.002.A002

Sources:; and IMF staff calculations.

World Diesel Prices, 2015

(US$ per liter)

Citation: IMF Staff Country Reports 2016, 128; 10.5089/9781484358351.002.A002

Sources:; and IMF staff calculations.

8. Together, these subsidies cost an estimated DA 2,293 billion (US$22.8 billion) in 2015, equal to 13.6 percent of GDP. Energy subsidies accounted for over half this amount, followed by housing, food, and interest rate subsidies. Implicit subsidies (essentially energy subsidies) remain larger than explicit subsidies.5 Total subsidies in 2015 cost twice the combined budgets of the health and education ministries and were equal to three-fourths of total public investment. The cost of energy subsidies is considerably higher if one takes into account negative externalities from energy consumption, including congestion, pollution and global warming.

Subsidies, 2015

article image
Sources: Algerian authorities; and IMF staff estimates.

9. Energy subsidies have become less costly thanks to the fall in oil prices, but remain significant. The cost of energy subsidies has declined sharply with the fall in oil prices, reflecting the narrowing of the gap between the price of the energy supplied and the benchmark (free-market) price. Nevertheless, at approximately 7.9 percent of GDP in 2015, energy subsidies remain significant. A recent IMF study estimated that energy subsidies in Algeria amounted to 10 percent of GDP in 2015 on a “post-tax” basis—that is, taking into account tax subsidies that exist because taxes on energy products do not cover negative externalities associated with energy consumption (e.g., climate change, pollution, congestion).6 Algeria’s post-tax energy subsidies are higher than the average in the Middle East and North Africa (MENA).


Cost of Energy Subsidies

(Percent of GDP)

Citation: IMF Staff Country Reports 2016, 128; 10.5089/9781484358351.002.A002

Sources: Algerian authorities; and IMF staff calculations.

Post-tax Energy Subsidies, 2015

(Percent of GDP)

Citation: IMF Staff Country Reports 2016, 128; 10.5089/9781484358351.002.A002

Source: IMF staff calculations.

C. What Are the Economic Consequences of Subsidies?

10. Subsidies have important economic consequences, of which the fiscal cost is the most obvious. Algeria’s subsidies entail high fiscal or quasi-fiscal costs and crowd out budgetary space for more growth-oriented and less regressive spending, such as on health, education, infrastructure and well-targeted social transfers. Algeria’s subsidies also create fiscal risks. Most of the subsidies are universal in nature, meaning there is a single subsidized price with no restrictions on consumption. Consequently, there is no cap on the cost of the subsidy. Higher oil prices increase the cost of implicit energy subsidies. Higher international food prices increase the cost of explicit food subsidies.

11. Subsidies disproportionately benefit middle- to upper-income groups, and are therefore inefficient as a social protection tool. Although subsidies do benefit the poor to some extent, many are regressive and reinforce, rather than redress, existing inequalities. Households in the richest quintile consume, on average, six times more subsidized fuel products than households in the poorest quintile. Similarly, the richest households consume 61 percent more subsidized electricity, 58 percent more subsidized water, and 18 percent more subsidized food products than the poorest households. The implication of these consumption patterns is that richer households capture most of the benefits of subsidies. This regressive outcome is consistent with the universal nature of most subsidies, which impose no restrictions on income.


Monthly Household Expenditures on Subsidized Goods, 2011


Citation: IMF Staff Country Reports 2016, 128; 10.5089/9781484358351.002.A002

Source: Office National des Statistiques, Enquête Nationale sur les Dépenses de Consommation et le Niveau de Vie des Ménages, 2010-2011.Note: Food includes bread, flower, semolina, soy oil, pasteurized milk, and crystallized sugar.

12. By encouraging consumption, subsidies weaken Algeria’s external and fiscal positions. Low energy prices have fueled rapid growth in domestic energy consumption. Since electricity and natural gas prices were fixed in 2005, Algeria’s energy intensity has grown 19.5 percent, in contrast with declining trends observed in other parts of the world outside of MENA.7 To meet rapidly rising demand, Sonelgaz plans to double its production capacity by 2025 despite its precarious financial position. Domestic consumption of hydrocarbon products has increased by 65 percent since 2005 while production has declined steadily, squeezing exports and contributing to a deterioration of the balance of payments. Lower export volumes have also translated into significant hydrocarbon revenue losses for the government. Since peaking at 37.0 percent of GDP in 2008, hydrocarbon revenues have declined over time, reaching 14.1 percent of GDP in 2015, even though oil prices averaged US$89/barrel during the intervening period.


Change in Energy Intensity, 2005-2012

(Percent, kg of oil equivalent/$1000 GDP using constant 2011 PPP GDP)

Citation: IMF Staff Country Reports 2016, 128; 10.5089/9781484358351.002.A002

Source: World Development Indicators.

Hydrocarbon Production, Consumption, and Exports

(Millions of barrels)

Citation: IMF Staff Country Reports 2016, 128; 10.5089/9781484358351.002.A002

Sources: Algerian authorities; and IMF staff calculations.

13. Subsidies lead to economic and environmental distortions. Energy subsidies artificially promote capital-intensive industries, creating a bias against labor in a country that is grappling with large youth unemployment. Furthermore, large price differentials with neighboring countries create incentives for smuggling. The authorities estimated that, in 2012, 1.5 billion liters of gasoline and diesel fuel, equal to a quarter of domestic production, were smuggled into neighboring countries where their prices are three to five times higher. Energy subsidies also reduce the incentive to invest in energy efficiency, public transportation, and renewable energy. By inducing energy overconsumption, they aggravate local pollution, traffic congestion, and global warming. Subsidies lead to overconsumption and distortions in other sectors as well. For example, imports of subsidized powdered milk and wheat are among the highest in the world on a per-capita basis, reflecting unusually high levels of domestic consumption and the crowding out of domestic producers who cannot compete at the subsidized price. In the housing sector, the government’s dominant role has had the unintended consequence of delaying financial sector deepening by discouraging the development of market mechanisms for housing finance.


Imports of Powdered Milk per Capita, 2014


Citation: IMF Staff Country Reports 2016, 128; 10.5089/9781484358351.002.A002

Sources: Comtrade, World Development Indicators, and IMF staff calculations.

Imports of Wheat per Capita, 2014


Citation: IMF Staff Country Reports 2016, 128; 10.5089/9781484358351.002.A002

Sources: Comtrade, World Development Indicators, and IMF staff calculations.

D. What are the Key Elements of Successful Subsidy Reform?

14. International experience helps draw useful lessons for the design of a subsidy reform. In a 2014 study, IMF staff developed a rigorous empirical approach to identify the key determinants of successful subsidy reform. The approach built on existing literature while focusing on factors that are particularly relevant for MENA countries, namely political economy considerations, the macroeconomic environment, social safety nets, and mitigating measures.8 The study identified six factors that tend to be associated with successful subsidy reform:

  • Sufficient reform preparation, gradual pace of adjustment, and broad scope of reform. A reform strategy that is well prepared is more likely to succeed. In particular, the design of the reform should be informed by a thorough analysis of the incidence of subsidy removal.9 Phasing out subsidies gradually tends to more successful than a shock approach, as it gives households and enterprises time to adjust to price increases and governments time to put in place mitigating measures. Too sharp an increase in prices can generate intense opposition to reform, as happened with fuel subsidy reform in Mauritania in 2008. Finally, successful subsidy reform tends to be ambitious in scope, targeting a wide range of products. In some cases, successful subsidy reform has been part of a broader structural reform program.

  • Strong government leadership, communication, and consensus building. Successful subsidy reform depends on government leadership that has ownership of the reform and is fully committed to it. A well-designed communication campaign is essential to help generate broad political and public support. It should explain the cost of subsidies (including the distortions they create), who benefits from them, and how the public stands to gain from subsidy reform. A key component of a successful communication strategy involves strengthening transparency in reporting subsidies in the budget. Since the majority of Algeria’s subsidies are implicit and are not reflected in the budget, the authorities should make an effort to explain to the public how these subsidies work and how much they cost. Consensus building is also important. Policymakers should consult with key stakeholders, including vested interests that stand to lose from reform, to try to win their support.

  • Introduction of mitigating measures to soften the impact of the reform on the poor. Subsidy reform is more likely to be successful if governments introduce measures to mitigate the impact of price increases on the poor. Mitigating measures are important both for protecting the poor and increasing society’s broader acceptance of reform. It can be tempting for governments to extend mitigating measures to the middle class—for example, through wage increases or tax cuts—but such measures suffer from lack of targeting, negate the cost savings of subsidy reform, and are not associated with better reform outcomes based on country experiences.10

  • Favorable economic and political conditions. Ideally, subsidy reform should be undertaken in a context of high economic growth and low initial inflation. This finding may reflect public resistance to further economic losses and further erosion of real incomes when growth is low and inflation is high. Pressure to reduce fiscal deficits typically plays a positive role, consistent with the finding that subsidy reform is more likely to be successful when it is part of a broad-based fiscal strategy. With respect to political conditions, more successful reforms are associated with a multiparty government. Algeria’s starting point for subsidy reform is mixed. Growth is slowing, but the pressure to reduce fiscal deficits is very much present.

  • Support from international partners, particularly technical assistance. International partners can play an important role in supporting domestic reform efforts. In addition to providing political legitimacy and peer pressure, international partners can also offer critical technical assistance. The IMF study found that 88 percent of cases where the reform was undertaken with technical assistance were associated with a successful outcome. Algeria benefited from an IMF technical assistance mission on subsidy reform in 2013, and it is currently receiving technical assistance from the World Bank on the incidence of subsidy reform.

Main recommendations in the case of Algeria

15. Algeria should sequence price increases across different products while putting in place a targeted cash transfer program. The government should gradually move from the current system of universal subsidies on goods and services to a program of targeted cash transfers to low-income households. Price increases should be spread over time and vary by product. The most costly and most regressive subsidies should be tackled first, provided that the government can implement mitigating measures to protect the poor. A well-targeted cash transfer program can be built on existing infrastructure, but reforms will be necessary and should be initiated as soon as possible.

16. In light of their large fiscal cost, regressive nature, and negative externalities, energy subsidies should be first in line for reform. Fuel price increases should initially be larger for products that are consumed more by higher-income households and by industry. As social safety net mechanisms are improved, subsidies on other fuels that are more important in the budgets of poor households (such as butane) can be phased out gradually, and budgetary savings can be partly used to finance targeted transfers to those households. Subsidy reform in the natural gas and electricity sector could also take a gradual and sequenced approach. A critical first step is to raise the price of natural gas and electricity for businesses and households that consume large amounts of natural gas and electricity, building on the existing tariff structure. For other consumers, prices could be spread over a longer period. In parallel, efforts should be made to reduce losses and improve efficiencies in the electricity sector, which would reduce the price increases necessary to eliminate the subsidy.

17. A depoliticized and rules-based mechanism for setting prices should be adopted. Many countries have successfully implemented reforms only to see subsidies reappear when international prices increased. Others have been reluctant to pass through reductions in international prices to achieve fiscal gains, leading to unintended losses of competitiveness for domestic industries. Adoption of a well-designed, automatic pricing mechanism, especially when communicated clearly to the public, can reduce the chances of reform reversal by distancing the government from pricing decisions; it can also help cap the cost of the subsidy while smoothing price fluctuations. The responsibility for implementing an automatic pricing mechanism should be given to an independent body to help shield it from political pressures.

18. As a first step toward building a well-targeted cash transfer system, the government should conduct a thorough review of the country’s social safety net. Algeria’s social safety net programs were designed in the 1990s in a context of violence and insecurity and are no longer adapted to today’s social needs. They are numerous and fragmented, they allow for the duplication of benefits, and their fiscal sustainability is a source of concern. A thorough review of these programs is necessary to identify which could be scaled up and modernized and which should be merged or eliminated. The Inter-Agency Social Protection Assessment, a set of tools created by the World Bank and other international organizations, could help the Algerian authorities assess existing programs and prioritize reforms.

19. Algeria needs a social protection strategy that addresses existing coordination problems, improves targeting, and supports fiscal sustainability with clear eligibility criteria and exit conditions. When designing eligibility criteria, the government should draw on poverty scoring cards for households and assess the impact of subsidies among different income groups. It should aim to build a centralized registry of beneficiaries. Some universal transfers may remain, but the objective should be to improve targeting. Given the complexity of the system, a gradual approach to rationalizing existing programs should be adopted, supported by a well-designed communication campaign.

E. What Would Be the Impact of Subsidy Reform?

Macro-fiscal impact

20. Subsidy reform would strengthen Algeria’s fiscal position. At a time when fiscal consolidation is paramount, subsidies have become too costly to sustain. One measure of the vulnerability of Algeria’s fiscal position is the fiscal breakeven price—that is, the theoretical price of oil that would yield a balanced budget in a given year under current policies. Algeria’s fiscal breakeven price is one of the highest in MENA, despite having declined somewhat in 2015 thanks to an increase in non-hydrocarbon revenues. Subsidy reform would strengthen the fiscal position by both increasing revenues and lowering expenditures. Although an increase in cash transfers would, appropriately, offset some of the fiscal savings, the net impact on the budget would be positive as long as the transfers were targeted.


Fiscal Breakeven Oil Prices

(Dollars per barrel)

Citation: IMF Staff Country Reports 2016, 128; 10.5089/9781484358351.002.A002

Source: Middle East and Central Asia Regional Economic Outlook database.

21. Subsidy reform could have a negative impact on growth in the short term, depending on other policies implemented at the same time. The removal of subsidies is equivalent to a reduction in current spending and could have a dampening effect on growth. However, this effect can be reduced by redirecting some of the savings to the poor (who have a high propensity to consume) and to productive investments. Increases in energy prices will result in higher input costs for firms, constituting a negative shock to the productive sector. The magnitude of the shock will vary depending on firms’ direct use of energy (e.g., fuel products) and indirect use (e.g., the higher cost of intermediate inputs that use fuel). The first-best approach to helping firms absorb the impact of higher input prices is to implement the subsidy reform gradually and structurally improve the economy’s competitiveness. This can be achieved by improving the business climate, reducing energy dependence, retraining workers who exit industrial sectors that are no longer competitive, and strengthening the financial position and operational performance of state-owned enterprises.

22. In the long run, subsidy reform is expected to lead to higher and more inclusive growth. Although not all sectors will benefit from subsidy reform, the long-term effects on competitiveness and growth should be positive in the aggregate. By removing distortions in price signals, subsidy reform can help reallocate resources toward their most efficient uses and improve incentives to adopt energy-saving technologies. By reducing domestic energy consumption, higher energy prices should boost hydrocarbon exports and increase hydrocarbon revenues. If the additional fiscal space is used wisely, the growth dividends can be high. Mundaca (2015), examining experiences in MENA, finds that eliminating fuel subsidies ultimately results in higher GDP growth per capita, higher employment, and greater levels of labor force participation, especially among the youth.11

Impact on inflation

23. The impact of subsidy reform on inflation will depend on first- and second-round effects and the policy response. An increase in the price of subsidized products will cause a first-round increase in inflation, with the magnitude of the pass-through dependent on the share of these products in the consumption basket. Food accounts for 43 percent of Algeria’s consumer price index, of which bread and cereals represent 11.7 percent, milk and cheese 4.7 percent, cooking oil and fats 2.6 percent, and sugar products 1.5 percent. Transportation and communications account for 15.9 percent of the basket, and housing 9.3 percent. The impact of subsidy reform on inflation will also depend on second-round effects, which are generated by expectations of future inflation and the presence of indexation mechanisms in the economy. In this context, the government should refrain from granting wage increases to compensate for the one-off shock to prices. Monetary policy should accommodate the first-round impact on prices, but should respond to the second-round effects. A prompt policy response would be particularly important in the event that inflation was already on the rise before the implementation of the subsidy reform or that exchange rate depreciation was also happening at the same time.


Subsidy Reform and Domestic Price Inflation1

(CPI, year-on-year percent change)

Citation: IMF Staff Country Reports 2016, 128; 10.5089/9781484358351.002.A002

Sources: Haver; and IMF staff calculations.1 The shaded regions represent the period during which subsidy reforms were implemented.

24. Cross-country experience suggests that subsidy reforms do not lead to persistently higher inflation, particularly when price increases are gradual and well planned. In Morocco, Tunisia, and Jordan, gradual increases in domestic energy prices did not result in sustained increases in inflation. In Qatar and the United Arab Emirates, inflation increased modestly following subsidy reform, but subsequently receded. In the case of Iran, inflation initially remained subdued following the launch of the government’s program to phase out subsidies on energy and other products, but ultimately increased significantly, due in part to exchange rate depreciation and large injections of credit by the central bank. Studies assessing the inflationary impact of global energy prices shocks on inflation suggest that the impact is relatively small. For instance, Ghezzi et al (2011) and De Gregorio (2012) estimate that a ten percent increase in global oil prices increases headline inflation by between 0.5 and 1.4 percentage points.

Administered Products

(Weight in CPI basket)

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Source: Algerian authorities.

Impact on poverty and inequality

25. Although most subsidies in Algeria are regressive, they nevertheless provide support to the poor. Households in the richest quintile spend DA 112,000 per month on subsidized goods while households in the poorest quintile spend DA 81,000. However, as a share of overall household expenditures, the poorest quintile spends more on subsidized goods (24.5 percent) than the richest quintile (13.0 percent). Food products constitute by far the largest category of spending on subsidized goods across all quintiles, with the poorest households spending 17.0 percent of total expenditures on subsidized food and the richest spending 7.7 percent. The next most important category for the poorest is electricity, followed by butane, water, and fuel.

Monthly Household Expenditures on Subsidized Goods, 2011

(Share of total monthly household expenditures)

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Source: Office National des Statistiques, Enquête Nationale sur les Dépenses de Consommation et le Niveau de Vie des Ménages, 2010-2011.Note: food includes bread, flower, semolina, soy oil, pasteurized milk, and crystalized sugar.

26. The impact of subsidy reform on poverty and inequality will depend on the magnitude of price increases and the extent of mitigating measures. The immediate impact on poverty of the increase in energy prices prescribed in the 2016 budget law should be minimal. First, the magnitude of the increases is small in dinar terms. Second, as discussed above, spending on fuel and electricity constitutes a small share of overall spending by the poorest households. Since energy products are consumed mostly by the better-off (in absolute terms), the increase in energy prices stands to reduce inequality provided that some of the extra revenues generated are eventually transferred to the poor. Such targeted transfers will be particularly important to offset the impact of food subsidy reform, given the large share of subsidized food products in the consumption basket of poor households.

F. Conclusion

27. The Algerian economy is at a critical juncture. The decline in oil prices has precipitated a rapid deterioration in Algeria’s fiscal and external position, exposing long-standing vulnerabilities and increasing the urgency for reform. Although Algeria continues to benefit from a substantial cushion of foreign exchange reserves and low debt, recent trends are unsustainable, particularly given the expectation that oil prices will remain low for a protracted period.

28. Subsidy reform can no longer be delayed. The magnitude of the fiscal adjustment necessary to respond to the oil price shock implies that subsidies cannot be sustained in their current form. In addition to their fiscal cost, subsidies create distortions that are harmful to the economy and the environment while failing to provide efficient support to the poor.

29. International experience suggests that subsidy reform, if carefully planned and well communicated, can be achieved and lead to long-term benefits. In Algeria as in other oil exporting countries, subsidies are an important element of the social contract and thus subsidies reform requires careful preparation. Algeria should sequence price increases across different products while putting in place a targeted cash transfer program to mitigate the impact of reforms on the poor. Another key ingredient for success is a communications campaign that raises awareness about the cost of subsidies and the benefits of reforms, and helps to generate broad political and public support. When done properly, subsidy reform can lead to greater equity and ultimately higher and more inclusive growth. The government’s decision to raise energy prices starting in 2016 was a step in the right direction. The IMF and World Bank stand ready to support Algeria’s continued efforts to reform subsidies in the years to come.

Appendix I. Subsidy Reform in the Middle East and North Africa

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Prepared by Andrew Jewell. The author would like to thank Philippe Auffret, Jose Antonio Cuesta-Leiva, Jose Lopez-Calix, and Setareh Razmara (all from the World Bank) for their valuable contributions. The author would also like to thank the Algerian authorities—particularly those at the Ministry of Finance and National Statistics Office—for their collaboration.


The Algerian budget lumps explicit subsidies together with social transfers, such as cash transfers to families, retirees, and former combatants; transfers related to health care; as well as an extensive array of tax expenditures. These items are not considered in this paper.


The authorities publish an estimate of the cost of implicit subsidies in the annual Note de Présentation de la Loi de Finances.


As of December 2015, Algeria had the fifth lowest price of gasoline and the fourth lowest price of diesel out of 183 countries worldwide (source:


The estimated cost of energy subsidies does not reflect the cost associated with episodic bailouts of state-owned utilities (typically in the form of debt purchases).


Source: World Bank, World Development Indicators. Energy intensity is measured as the kilogram of oil equivalent of energy use per US$1,000 GDP (constant 2011 PPP).


The study covered 25 episodes of food and fuel subsidy reforms in 15 low- and middle-income countries from different regions in the world, including seven MENA countries, three countries in Africa, three in Latin America, and one country case each in Europe and Asia. The analysis combined narrative-based country case studies with a quantitative analysis of variables related to the reform episodes.


Thanks to a household census conducted in 2011, and with technical assistance from the World Bank, the Algerian authorities have been able to evaluate the impact of subsidy removal on household welfare and government revenues.


Jordan eliminated fuel subsidies in late 2012 and replaced them with cash transfers targeted to families with an annual income below JD 10,000 (some 70 percent of the population), provided only when oil prices are above US$100 per barrel. The World Bank concluded that households were, on average, over compensated, and the authorities subsequently sought to improve targeting by adding variables other than income for means testing (such as ownership of land and cars).


A cross-country analysis shows that a 20-cent increase in gasoline and diesel prices per liter is associated with higher GDP-per-capita growth rates by about 0.46 percent and 0.24 percent, respectively.

Algeria: Selected Issues
Author: International Monetary Fund. Middle East and Central Asia Dept.