Selected Issues


Selected Issues

Fiscal Risks in Algeria1

This paper aims to identify the main sources of fiscal risks in Algeria and their transmission channels. Fiscal risks are multiple and interrelated, and their potential impact on the budget deficit and public debt could be considerable. Sources of risks include implicit commitments and explicit loan guarantees given to state-owned enterprises (SOEs), the potential need to recapitalize public banks, and the reported financial difficulties of the state-run pension system. The ongoing fiscal consolidation efforts, although necessary, may intensify some of these risks. Estimates in this paper could be underestimated, as they are based on only partial data available to staff at the time of the Article IV mission.

A. Introduction: Why Worry About Fiscal Risks?

1. Algeria faces many fiscal risks that may significantly affect the central government’s fiscal balance and the path of public debt. The authorities reduced an important source of fiscal risks by closing several special treasury accounts that led to spending overruns in the past. However, other sources of fiscal risks create uncertainties on fiscal outcomes and could challenge the fiscal consolidation efforts should they materialize. These sources of fiscal risks are diverse, ranging from external macroeconomic shocks, including low oil prices, to implicit and explicit guarantees granted to SOEs. In addition, the insufficiently-funded pension system could have spillover effects on the government’s fiscal deficit in the future. The risks that could arise from public-private partnerships (PPPs) and those pertaining to local governments are currently relatively small. However, these could grow given the government’s ambition to scale-up investment using PPPs and local governments’ willingness to rely more on debt financing.

2. Understanding what factors may have a substantial impact on available fiscal space is critical. International experience in recent years has brought to light the vulnerability of countries’ public finances to adverse shocks. The financial sector bailouts after the global financial crisis, the fiscal impact of the great recession, and more recently the collapse in commodity prices have left global public debt ratios at historic highs. In seeking to determine the appropriate pace of fiscal consolidation, Algeria needs to assess what fiscal space is available; this, in turn, requires understanding what plausible fiscal risks may impact the public debt trajectory and accounting for them when assessing debt sustainability under various scenarios.

3. Fiscal shocks can be large, adverse, and nonlinear. Cross-country analysis shows that, among the various sources of fiscal risks, macroeconomic shocks and financial sector bailouts are the most frequent and tend to have the highest impact. An IMF study of 230 episodes of contingent liability realizations in 83 countries (of which, 48 emerging countries) shows that financial sector bailouts accounted for the largest fraction of those episodes. The distribution of associated costs is highly skewed: the average cost was about 3 percent of GDP, but in (rare) instances the impact on public debt was very large, exceeding 15 percent of GDP per annum. The average duration of fiscal shocks episodes is 3.2 years. The longest episode in the study’s sample occurred in Algeria and lasted 21 years (1991-2012), cumulatively costing the equivalent of 14.8 percent of 2012 GDP. This took the form of debt assumptions by the central government (equal to around 82 percent of the total impact) and recapitalization of state-owned banks.


Fiscal Cost and Likelihood of Occurrence of Fiscal Risks

Citation: IMF Staff Country Reports 2017, 142; 10.5089/9781484302675.002.A002

Sources: “Analyzing and Managing Fiscal Risks – Best Practices,” B. Clements et al., IMF 2015.

Annual Fiscal Costs and Impact Duration of Largest Contingent Liability Realizations Related to the Financial Sector

(In percent of GDP and years)

Citation: IMF Staff Country Reports 2017, 142; 10.5089/9781484302675.002.A002

Sources: “The Fiscal Costs of Contingent Liabilities: A New Dataset,” by Elva Bova, Marta Ruiz-Arranz, Frederik Toscani, and H. Elif Ture, 2016; and IMF staff estimates.

4. The rest of the paper discusses fiscal risks that could complicate fiscal management and the planned consolidation in Algeria. Section B sketches the Algerian public sector and presents a framework of analysis of fiscal risks. Sections C discusses the main potential sources of fiscal risks. Section D describes some of the possible transmission channels of fiscal risks and considers the link between fiscal consolidation and fiscal risks. Section E estimates the cost of some of the fiscal risks that recently materialized. Section D concludes.

B. A Framework of Analysis

5. The Algerian public sector is very large. Like most countries, Algeria faces a wide range of fiscal risks. But two reasons make the need to identify Algeria’s fiscal risks and estimate their likelihood and potential impact particularly important at this juncture. First, the public sector is much larger than in most countries. Although consolidated public sector statistics, which would provide a comprehensive view of the public sector’s financial operations (flows) and assets and liabilities (stocks) are not available, data from the Office National des Statistiques (Algerian Bureau of Statistics) show that the public sector, including the central government, accounted for 46 percent of the country’s value-added in 2015. Activities carried out by the public sector excluding the central government accounted for 27 percent of total value-added. Second, the country has entered a period of sustained and significant fiscal consolidation, which is needed, but increases the likelihood of some of the risks materializing.


Contribution to Value-Added of the Economy

(2015, Percent)

Citation: IMF Staff Country Reports 2017, 142; 10.5089/9781484302675.002.A002

Sources: Authorities’ data; and IMF staff calculations

6. The public sector includes a myriad of entities. The state plays a substantial role in economic activity through its fiscal and social policies. In addition to the central government, the public sector includes close to 400 SOEs, a large social protection sector comprising several social funds, a large number of nonfinancial institutions that are autonomous commercial entities, six public banks that dominate the banking sector, other public financial institutions including ten public insurance companies and the National Postal Agency, and local governments. As explained below, these public entities are linked by a web of financial interactions, each of which opens a potential transmission channel of fiscal risks.


Algerian Public Sector (A Non-Exhaustive Map)

Citation: IMF Staff Country Reports 2017, 142; 10.5089/9781484302675.002.A002

7. A tentative mapping of the main fiscal risks in Algeria can be drawn based on a simple analysis matrix. This analysis matrix differentiates the main fiscal risks based on their nature: macroeconomic, specific, and institutional fiscal risks.2 Risks can affect or originate in any of the fiscal institutions described above. Specific fiscal risks could be either endogenous to the public sector (e.g., guaranteed debt) or exogenous (e.g., environmental risk), and explicit or implicit. This matrix has been established based on the different IMF studies on fiscal risks and fiscal transparency. Based on the above mapping of the public sector and this analysis matrix, the following section discusses the main sources of fiscal risks in Algeria.3

C. Main Sources of Fiscal Risks

Macroeconomic uncertainty

8. Macroeconomic uncertainty, especially about oil prices, creates large fiscal risks. As with many hydrocarbon exporters, wide fluctuations in oil prices are a key source of macroeconomic volatility in Algeria. The fiscal sector in particular is considerably exposed to volatility in commodity prices as about 60 percent of fiscal revenue stems from the hydrocarbon sector. Following the fall in oil prices in 2014, hydrocarbon revenues declined by about a third in 2015.

9. Although currently low, the future path of public debt is subject to significant uncertainty because of macroeconomic risks. In the baseline scenario, gross public debt, excluding guarantees, is expected to remain relatively small (from 8.8 percent of GDP in 2015 to 14.6 percent of GDP in 2022). As illustrated in the debt sustainability analysis conducted for this Article IV consultation, under plausible alternative scenarios and stress tests, debt could increase significantly, although it would remain well within sustainable margins.4


Volatility in Real GDP and Fiscal Revenue

(Standard deviation in growth rates, 2000-15)

Citation: IMF Staff Country Reports 2017, 142; 10.5089/9781484302675.002.A002

Source: IMF WEO, October 2016.

Changes in Government Revenue in Algeria and World Energy Prices


Citation: IMF Staff Country Reports 2017, 142; 10.5089/9781484302675.002.A002

Source: IMF WEO, October 2016.Note: Energy Price Index includes crude oil (petroleum), natural gas, and coal price.

Implicit obligations to state-owned enterprises

10. International experience shows that SOEs are often a significant source of implicit contingent government liabilities, including because of political interference or excessive borrowing. These risks tend to materialize in the aftermath of a crisis and are especially high in cases where the need to improve public services is high, the financial sector mainly funds the public sector, or SOEs are used to deliver services under political patronage.

11. Non-financial SOEs are omnipresent in the Algerian economy and contribute a significant share of the economy’s value-added. There are currently 392 SOEs in Algeria, varying in size from economic behemoths to small companies.5 The revenues of the two biggest SOEs, the state-owned oil company (one of the largest companies in Africa) and the state-owned gas and electricity company, were equivalent to 26.1 percent of GDP in 2015. Revenues from all other SOEs amounted to less than 4 percent of GDP. SOEs operate in most economic sectors. They contribute the largest share of the value-added in the mining and energy sectors. In terms of number of companies, SOEs are mostly in the following sectors:

  • Oil industry, with one group comprising 154 subsidiaries and accounting for 88 percent of the oil industry’s value-added in 2015;

  • Construction, with 64 SOEs contributing to 21 percent of the sector’s value-added in 2015; and,

  • Transportation, with 55 SOEs accounting for 16 percent of the sector’s value-added.


Sectoral Distribution of SOEs’ Value-Added, 2015

(Share of total SOE value-added)

Citation: IMF Staff Country Reports 2017, 142; 10.5089/9781484302675.002.A002

Sources: Authorities’ data; and IMF staff calculations.

Share of Public and Private Sector in Sectoral Value-Added, 2015


Citation: IMF Staff Country Reports 2017, 142; 10.5089/9781484302675.002.A002

Sources: Authorities’ data; and IMF staff calculations

12. The government provides significant financial support to SOEs, while the dividends it receives from SOEs are low. Financial support to SOEs may take many forms (Box 1). The most common in Algeria are: subsidies and transfers for operating activities, debt assumptions (including payment of wages or social contribution arrears), overdraft freezing, and coverage of the differential between market interest rates and subsidized rates. While direct budget transfers to SOEs are relatively low (less than 1 percent of GDP), the cost of other types of financial support has increased significantly over time, from 0.7 percent of GDP in 2005 to slightly more that 3 percent of GDP in 2016. These operations have mostly taken the form of SOEs debt assumptions (also referred to as debt buy-backs) and coverage of loans subsidies. By contrast, dividends received by the state are very low, reflecting SOEs’ weak financial performance.6


Financial Support to State-Owned Enterprises

(Billions of DA)

Citation: IMF Staff Country Reports 2017, 142; 10.5089/9781484302675.002.A002

Source: Algerian authorities.

Financial Support to SOEs by Nature, 2016

(As share of total support)

Citation: IMF Staff Country Reports 2017, 142; 10.5089/9781484302675.002.A002

Sources: Algerian authorities.

Financial Interactions between SOEs and the State as a Shareholder, 2014

(in percent of GDP)

Citation: IMF Staff Country Reports 2017, 142; 10.5089/9781484302675.002.A002

Source: Algerian authorities.Note: Excludes transactions that are common to all enterprises, irrespective of their public or private statute, i.e., taxation and the possibility to access loans at a subsidized rate.

Types of Government Financial Support to SOEs

Loans at a subsidized rate. To encourage investment, the government introduced a wide range of subsidized loans that benefit both public and private companies. The difference between the market rate and the subsidized rate is borne by the central government and paid directly to the lending institution on behalf of the borrower.

Debt buy-backs (also called debt assumptions). Under this arrangement, the central government assumes the indebtedness of an SOE. This generally occurs when the government takes over a non-performing loan of an SOE that is jeopardizing a public bank’s prudential ratios.

Trésor debt write-offs. The Treasury (Trésor) may provide cash advances and loans to some SOEs. In the event that an SOE is unable to pay back the loan, the Trésor may decide to write off the debt.

Overdraft freezing. Under this arrangement, the Trésor signs an agreement with a bank to freeze the cumulative overdraft of an SOE. Interests on the outstanding overdraft balance are paid by the central government.

On-lending. This specific form of financial support is granted to public institutions (see below) that are not able to borrow, given their financial performance. It involves two loan-agreements: a) between a financial institution and the central government, the latter borrowing on behalf of the public institution, and b) between the central government and the public institution. In Algeria, the borrower is the “Fonds national d’investissement” (FNI), an investment fund wholly-owned and funded by the State.

13. Implicit guarantees to SOEs may increase the level of public debt. The obligation for some SOEs to implement government’s social policies weighs on their financial situation and translates in implicit guarantees for the government to cover their losses. For example, importing products at market prices and selling them on the domestic market at regulated prices can generate sizeable losses for the public enterprise in charge of these operations. These losses eventually tend to be financed by the central government, either through direct budget transfers or by issuing debt to the SOE. In 2016, one SOE received government T-bill issuance amounting to DZD 904.2 billion (5.3 percent of GDP) as compensation for operating losses incurred from 2011 to 2013 on such operations. Considering the uncertainty about market prices and domestic consumption, the likelihood that this type of risk materializes again in the future is high. Staff estimates that, under current market conditions, the liabilities of this particular SOE could increase government debt by DZD 230 billion per year (1.3 percent of 2016 GDP).

14. Fiscal risks from SOEs are likely to remain important as the central government may be required to provide additional financial support or forego dividends. The overall return on equity of the central government on its portfolio of SOEs is mostly likely very low or negative.7 In 2014, one third of SOE portfolios were making losses. Based on the limited available data, conditions in the SOE sector appear to have deteriorated further, consistent with the worsening of macroeconomic conditions following the fall in oil prices. Moreover, the quasi-fiscal activities undertaken by SOEs prevent them from generating a return on equity that would be in line with a commercial rate of return. Therefore, SOE debt is expected to grow, especially for structurally unprofitable SOEs. Part of the debt is likely to be transferred to the central government’s balance sheet through the channels described above, as the government rarely recapitalizes SOEs through direct equity injections.

Explicit debt guarantees to SOEs

15. Risks associated with explicit guarantees have materialized in the past with a significant impact on public debt. The government provides explicit guarantees to ensure the financing of strategic projects. De facto, those guarantees are issued exclusively on SOEs debt to public banks. The size of explicit guarantees has grown significantly (from 0.3 percent of GDP in 2005 to 18.5 percent of GDP in 2016). In 2016, the level of guarantees was equivalent to 88 percent of central government debt. There have been frequent cases of the guarantees being called in the past, of at a significant cost to the government.


Guarantees, 2005–16

(In percent of GDP)

Citation: IMF Staff Country Reports 2017, 142; 10.5089/9781484302675.002.A002

Source: Algerian authorities.

Assumptions of Debt by the Central Government, 2005–16

Citation: IMF Staff Country Reports 2017, 142; 10.5089/9781484302675.002.A002

Source: Algerian authorities.

16. Risks associated with guarantees issued to one specific SOE are likely to materialize. Guarantees granted by the central government over 2005-16 mainly covered the financing of projects by one large SOE. In 2016, guarantees to that SOE represented 80 percent of the total stock of guarantees and 3 percent of GDP. The SOE is structurally loss-making, and instances of debt buy-backs in favor of this SOE have been frequent. In 2016, they amounted to 407.8 billion dinars, or 2.4 percent of GDP, constituting the entirety of debt assumed that year.


Guarantees Granted to One Loss-Making SOEs, 2005-16

(in percent of GDP)

Citation: IMF Staff Country Reports 2017, 142; 10.5089/9781484302675.002.A002

Source: Algerian authorities.

17. How guarantees are granted is not governed by a legal or regulatory framework. In practice, guarantees are granted for project financing that exceeds 25 percent of bank capital. However, there is no legislation or regulation governing guarantees. The current organic law for public finances does not provide that guarantee ceilings be approved along with the annual budget. Similarly, there appears to be little risk assessment of the loans or of the SOE’s debt structure when the guarantee is issued.

18. Government guarantees have conflicting objectives. The state, as the main shareholder of SOEs, seeks to ensure financing for its own investments. As such, incentives and policies are developed to encourage financing from public banks. Yet the state, as the sole owner of the public banks, also seeks to ensure that the prudential ratios of its banks are respected, which creates an additional incentive to grant loan guarantees. However, granting guarantees is risky, as the state tends to assume SOEs debt or recapitalize public banks when rising public sector NPLs worsen prudential ratios. In essence, a form of regulatory forbearance is promoted instead of minimizing fiscal risks and ensuring a level-playing field in the banking sector.

Risks from other nonfinancial public institutions

19. The Algerian public sector includes numerous autonomous commercial entities, some of which are highly dependent on central government support. Based on available information, there are 66 commercially-oriented autonomous public institutions (“Établissements Publics à Caractère Industriel et Commercial,” EPIC), which are not legally incorporated as enterprises. They operate in many economic sectors (communication, press, tourism, culture, utilities, etc.) and many of them implement the government’s social policies. Financial support to these public institutions takes the form of direct transfers, on-lending, and direct loans or cash advances from the central government.


Financial Interactions with EPICs, 2016

(In percent of GDP)

Citation: IMF Staff Country Reports 2017, 142; 10.5089/9781484302675.002.A002

Source: Algerian authorities.*FNI: Fonds National d’Investissement

20. Fiscal risks associated with EPICs can be sizeable. The financial performance of EPICs suffers from the fact that many operate in sectors where prices are regulated, typically at levels that are too low to cover costs (water distribution and cereal distribution are two examples). An unexpected increase in the demand for the good, or an increase in the cost to produce the good (e.g., related to a surge in commodity prices), would increase the fiscal costs.8

Risks related to public banks

21. The banking sector is largely dominated by public banks. Public banks accounted for 87 percent of total banking assets in 2015. As explained above, public banks heavily support state-directed economic activity by financing structural and strategic projects via state-guaranteed loans, often at a subsidized interest rate and with an interest-free grace period (up to five years). While still adequately capitalized, the banking sector is facing rising credit, liquidity, and interest rate risks because of the impact of durably low oil prices on the economy.9

22. Since 1991, the government has repeatedly supported public banks. This support has taken the form of either recapitalization or financial consolidation to ensure full respect of solvency ratios. Financial consolidation has entailed the systematic assumption of non-performing SOE debt, often secured by a state guarantee, as described above.10 Other forms of financial support to public banks include freezing SOE overdrafts, assuming interest rate differentials on loans, or covering exchange rate losses on external public debt. From 1991 to 2012, the government’s total support, other than bank recapitalizations, amounted to DZD 2,157.1 billion, equivalent to 13.3 percent of 2012 GDP. Bank recapitalization was less frequent and less costly, with a few operations during 1991-2012 amounting to DZD 238.8 billion (1.5 percent of 2012 GDP). A bank recapitalization also occurred in 2016 and another is planned for 2017.11

Financial Impact of Government Support to Public Banks

(DZD billions and percent of GDP, 1991–2012)

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Source: Algerian authorities.

Social protection system

23. The Algerian social protection system is very broad. The national insurance protection system comprises: a) benefits covering illness, maternity, and disability, as well as life insurance; b) pension; c) insurance against work-related accidents and diseases; d) family benefits; and e) unemployment insurance (Box 2). Independent workers are not entitled to c, d, and e, whereas the national pension system benefits employees and independent workers, with variable contribution rates and ceilings.

24. The pension fund is reportedly incurring losses. The pension fund (CNR) has been facing financial difficulties in recent years, as paid contributions have not covered liabilities, and unpaid contributions have been increasing, because of the financial difficulties of some enterprises’ and the decision by the Ministry of Labor, Employment, and Social Security to grant a smoother contribution payment schedule to these enterprises. 12 The CNR’s financial gap was estimated at 3.2 percent of GDP in 2016.

25. The pension system has benefited from solidarity from other social funds to cover its losses. While each fund has its own budget, a system of intra-fund solidarity exists to cover one another’s loss. Under this system, CNAS and CNAC have recently been called to cover the CNR’s losses. The authorities expect this type of financing to be renewed for the CNR at least until 2020 in the amount of around DZD 540 billion per year. Studies are underway to introduce new forms of financing for the CNR, including earmarking some existing or new taxes or parafiscal taxes. Moreover, new incentives (e.g., reduced contribution rates) are being considered to foster the integration of non-registered workers in the informal sector.

26. The sustainability of the system could not be assessed. Financial support from CNAS and CNAC have thus far enabled the CNR to cover its losses. However, no actuarial analysis is available for the system as a whole that would permit an assessment of its financial long-term sustainability and the capacity of the CNAS and CNAC to sustain the CNR until at least 2020, as planned by the authorities. In the absence of other financing sources and given the large informal sector, it seems likely that the CNR financial gap will deepen over the years. 13 The possible impact on the central government budget seems limited but likely. Instances of financial support from the central government to sustain the pension system, in the form of subsidies or direct transfers, occurred in the past (1993). Another possible and likely impact is an increasing withdrawal of CNR funds from the National Postal Agency, which would put additional pressure on the government’s liquidity (see below).

An Overview of the Social Protection System

Three funds “caisses” are under the administrative responsibility of the Ministry of Labor, Employment and Social Security:

1. The Caisse nationale d’assurance sociale des travailleurs salariés (CNAS), in charge, on behalf of the state, of social benefits in kind and cash, family benefits, and insurance against work-related accidents and disease:

2. The Caisse nationale des retraites (CNR), the pension system (including for surviving spouses and other beneficiaries); and,

3. The Caisse nationale de l’assurance chômage (CNAC), in charge of unemployment benefits, aid schemes for distressed companies, and economic reintegration programs.

Contributions are paid by employees and employers, based on a defined contribution rate defined by law. Contribution rates for the standard system were as follows on January 1, 2017.

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The contribution basis is an employee’s salary net of family benefits (covered entirely by the central government’s budget), severance benefits, and other specific benefits.

Independent workers contribute to the Caisse nationale de sécurité sociale des non salariés (CASNOS). Contributions are mandatory and are allocated equally between pensions and other benefits. Contributions are computed based on an annual salary higher than DZD 216,000 and not exceeding DZD 4,320,000.

Pension system

The pension system is a pay-as you-go system under which contributions from current employees pay for the pensions of current retirees (système par répartition). The system covers all employees, including from the public sector. Some categories (e.g., vulnerable populations) are, however, covered directly from direct transfers from the central budget.

The legal retirement age is 60 provided the employee a) has worked for at least 15 years and contributed to the system for at least 7.5 years, or b) is 58 years old in 2017 (59 in 2018) provided he or she contributed to the system for at least 32 years. Women are entitled to receive pensions starting at age 55. Some other categories of citizens are entitled to early retirement. In practice, if an employee did not work for at least 15 years but has at least contributed for 5 years, he or she is entitled to a pension, provided the age condition (60 years old) is met.

Option to retire beyond the legal retirement age has been introduced in 2017 to seek to increase the CNR’s revenues.

Pension benefits are indexed on salaries. Per the most recent information available, the minimum pension cannot be less than 75 percent of the multisector minimum guaranteed salary (SNMG) or higher than 80 percent of the average salary used for the pension benefit calculation. However, a pension mark-up system applies to some categories of citizens under various conditions. Moreover, surviving spouses and children are entitled to a survival pension that cannot be inferior to 75 percent of the SNMG

Treasury correspondents

27. Financing the deficit using private deposits and deposits of public entities entails fiscal risks for the government. Algeria has been using deposits at the National Postal Agency and at the Trésor, including the deposits of public institutions, local governments, social protection funds, and private depositors, to finance its deficits.14 The balances on these deposits accounts are sizeable and constitute an immediately available funding source for the government.15 The financing of the government’s deficit through these deposits is currently not included in the public debt, although the government in essence incurs a liability. Furthermore, the fungibility of private deposits and social protection funds with government accounts may create liquidity pressures for the government in case of substantial and unexpected withdrawals from depositors.

Local governments

28. Financial support to local governments comes from a financial equalization system administered by the “Caisse de solidarité et de garantie des collectivités locales” (CSGCL). The CSGCL is also responsible for providing financial assistance to loss-making local governments or localities hit by natural or other disasters. In addition, it provides temporary support for intercommunity investment projects.

29. Local governments are not currently a significant source of fiscal risks. The CSGCL’s revenues derive solely from local taxes. Local governments have made efforts to increase the property tax base and improve tax collection to offset the reduction in revenues from the business turnover tax (taxe sur l’activité professionnelle, TAP).16 These efforts have translated into an increased share of property taxes in local government revenues (from 5 percent in 2014 to 11 percent in 2016 and a projected 20 percent in 2017).

30. Fiscal risks associated with local governments may increase in the future. Given local governments’ limited sources of revenues, the central government is considering allowing local governments to borrow directly from public banks with the CSGCL’s guarantee. This would mechanically create another source of fiscal risks and should therefore be introduced with appropriate safeguards to assess, limit, and report guaranteed debt.

Public-Private Partnerships

31. Fostering investment using public-private partnership is at an incipient stage. A PPP framework law is being drafted but some PPPs have already been developed under ad-hoc provisions in laws governing specific sectors. This has been the case in some highly capital-intensive industries, such as the desalination industry and electricity production). Other PPPs have been initiated in the transport industry (airport, subway, port terminals) and water distribution; these are exclusively management-delegation contracts.

32. Oversight of PPP contracts seems to be in place but could be strengthened. The government believes PPPs could be a useful vehicle to finance investment projects at lower cost for the budget while improving their efficiency. As such, it intends to increase the use of PPPs in the future. The CNED-PPP,17 a dedicated unit in the Ministry of Finance, has been tasked with developing alternative financing models for investments other than capital expenditures from the budget. This unit is finalizing the PPP framework law and drafting guidance and procedures on the use of PPPs. It is also in charge of providing oversight of PPP projects, including technical support for their launch, tender, execution, and financial evaluation.

33. Risks associated with PPPs are low but could increase. The net present value of existing PPP contracts is unknown, but the authorities believe it is low. The fiscal risks associated with PPPs may be mitigated by the fact that, for foreign companies, the special purpose entities supporting the contracts will depart from the 51/49 rule that normally requires majority Algerian ownership in any joint-venture. Thus, a foreign private partner in a PPP would be able to control the investment, financing, and execution of a project and would bear the associated risks.18 While currently contained in Algeria, risks inherent to PPPs are typically important in most countries where PPPs are used (e.g., implicit guarantees and increased financial debt of the government in case of an unexpected rise in prices). As the use of PPPs becomes more widespread in Algeria, related fiscal risks will increase.

34. The PPP framework should provide tools to limit and monitor the risks associated with the PPPs. The current draft PPP law mostly focuses on describing the typology of the contracts and the activities eligible to PPPs. It could be strengthened to:

  • Ensure that PPP projects are integrated within the overall investment strategy, the medium-term budget framework, and the budget cycle. PPPs may be more expensive than traditional public investments if higher financing, transactions, and renegotiation costs are not offset by efficiency savings. The PPP framework should ensure that PPPs are selected based on efficiency gains and are part of a unified investment decision-making process, with projects considered alongside more traditionally procured investments. Therefore, the framework should specify the criteria to help guide decisions on when a PPP should be considered as a procurement option.

  • Require transparent budgeting, reporting, and accounting, including of future-cash flows associated with the contracts and the contingent liabilities over the life of the contracts; and,

  • Prescribe limits on the public sector’s exposure to PPP risks. Ceilings can be imposed on the total stock of PPPs’ direct and contingent liabilities, the flow of PPP-related payments and contingent commitments permitted in a given year, or both.

Environmental risks

35. Earthquakes and floods have been costly to public finances. Algeria is in a highly seismic region, and several earthquakes have occurred in the north of the country in recent history. The deadliest, in 2003, killed 2000 people and left 10,000 injured. The government has provided substantial assistance in the past in response to natural disasters. The international database for disaster (EM-DAT) reports total cost to the budget of DZD 363.1 billion (8.8 percent of GDP in 2003). Other environmental disasters (floods) have impacted the budget from 2004 to 2012 to a lesser extent (DZD 93 billion, equivalent to less than 1 percent of 2012 GDP).

D. Likelihood of Risks and Transmission Channels

36. Some of the fiscal risks identified above have a relatively high likelihood of materializing. Among these risks, the risk that the government assumes debt guarantees granted to some SOEs is the most significant and the most likely to materialize. The total stock of guaranteed debt amounted to 18.5 percent of GDP in 2016. In addition, financial compensation for the operating losses of one SOE is likely to recur and could be sizeable, considering that the compensation for losses incurred in 2014-16 amounted to about DZD 230 billion per year (1.3 percent of 2016 GDP). Finally, the financial sustainability of the social protection system, without further reforms or new financing mechanisms, appears to be in jeopardy. However, staff could not estimate the likelihood or potential impact of risks in this sector in the absence of actuarial data.

37. The size and complexity of the public sector amplify fiscal risks. Because of the magnitude of the public sector and the complex web of financial interactions within public entities, the financial difficulties of any given entity have a high probability of being quickly transmitted to the central government’s budget. Moreover, the planned fiscal consolidation, while necessary, is likely to put more stress on economic growth and could trigger the materialization of some fiscal risks, in particular those stemming from guarantees granted to SOEs whose financial performance has been declining.

38. Inter-linkages within the public sector suggest that the transmission channels of fiscal risks are multiform. The interactions between various public entities are numerous and take many forms. For example, the public financial sector provides loans to SOEs to support large investments; many SOEs essentially execute the government’s social policies; the government regulates the price of many food products, commodities, and services, including housing and transportation; and the social protection system contributions are largely driven by the public sector. In return, the central government is expected to support loss-making SOEs and recapitalize public banks when their prudential ratios deteriorate. The figure below and Box 3 illustrate some possible transmission channels of fiscal risks.


Some Transmission Channels of Fiscal Risks

Citation: IMF Staff Country Reports 2017, 142; 10.5089/9781484302675.002.A002

Examples of Transmission Channels of Selected Fiscal Risks

1. Subsidies and transfers to SOEs and EPICs. Direct transfers and subsidies to SOEs and other nonfinancial public institutions are significant and help sustain social policies implemented on behalf of the government. They are not linked to any financial performance and sustainability indicators. However, they are subject to macroeconomic risks, as the cost of subsidies is linked to fluctuations in world prices and domestic demand.

2. Payment arrears. SOEs are a significant contributor to economic activity. When SOEs have financial difficulties, either structurally or as a result of a weaker economic environment, these difficulties may translate into payment arrears to other public institutions including: the social protection sector (social contributions), public banks (debt service), other SOEs (mostly, via utility payments), and the central government (taxes). Arrears in social contributions have reportedly already impacted the liquidity of the CNR and could, in the long term, impact the sustainability of the social protection system. Arrears to the private sector (e.g., payment to contractors) or from the private sector to public entities also constitute a channel of transmission of fiscal risks.

3. Banking system liquidity. A number of SOEs and other public institutions experience cash-flow difficulties, which could be aggravated by fiscal consolidation. The immediate consequence could be larger drawdowns of their deposits with their banks (mostly public) to finance their expenditures, which would worsen liquidity pressures in the banking system. Another possible consequence is an increase of long-term bank financing by SOEs from public banks, which would increase liquidity pressures in the financial sector, this time on the asset side of banks’ balance sheets (see “The financial stability implications of low oil prices for Algeria,” Selected Issue Paper for the 2016 Article IV consultation).

4. Banking sector credit risk. Borrowing from SOEs in financial difficulty could translate into non-performing loans and weaker prudential ratios. To maintain these ratios at regulatory levels, banks may require different forms of public support, including recapitalization or financial consolidation

5. Debt guarantees. The structurally weak financial performance of some SOEs, including as a result of their role in implementing large and strategic investment projects on behalf of the government, explains the demand for government guarantees from public banks. A deterioration of the financial performance of an SOE (for instance resulting from the weaker macroeconomic environment induced by fiscal consolidation) could trigger the obligation for the government to assume the guaranteed debt. Alternatively, in some instances, it could lead to the recapitalization of a public bank.

6. Social protection sector. In the absence of new financing mechanisms or further reform, the financial difficulties of the social protection system could increase and, ultimately, spill over to government debt. Furthermore, as noted, the Trésor has been using deposits from its correspondents (local governments, public institutions, the social protection system, and private depositors) held at the National Postal Agency as a source of financing of its deficits. While massive withdrawal of these deposits is unlikely, this practice constitutes nonetheless a potential source of liquidity pressure.

E. Estimated Impact of Some Fiscal Risks that Have Recently Materialized

39. The impact of some recently materialized fiscal risks has been significant. The organization of the public sector and the complex interactions between public institutions suggest that, in case of materialization of fiscal risks, the resulting impact on government debt can be sizeable. Indeed, the cumulative impact of identified fiscal risks that materialized between 1991 and 2016 is estimated at 33.9 percent of 2016 GDP. The actual cost is likely higher as the list is not necessarily exhaustive.

Estimated Impact of Recently Materialized Fiscal Risks

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F. Conclusion

40. Fiscal risks are manifold in Algeria. Key sources of fiscal risk include government guarantees of loans to state-owned enterprises, the potential need to recapitalize public banks, implicit commitments given to state-owned enterprises, and the reported financial difficulties of the state-run pension system. Many of these risks have materialized in the past, at a sizeable cost to the government. Looking ahead, the planned fiscal consolidation, although necessary, increases the likelihood of some of the risks materializing and could amplify their impact.

Fiscal Risks and Fiscal Consolidation

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41. The complex web of financial interactions within the public sector generates significant fiscal risks that need to be closely monitored and safeguarded against. While fiscal risks are multiple and interrelated, there are few safeguards to prevent the impact of these risks from spreading from one public entity to another and, ultimately, to the central government’s budget. Furthermore, little is known at the central government level about the probability of occurrence of the various risks, and consolidated statistics on the financial operations and debt of the public sector as a whole do not exist. Such statistics would allow a better understanding of the wider implication of fiscal policies. Putting in place a process to identify, quantify, report, and manage fiscal risks is therefore important, particularly as fiscal consolidation is expected to increase the likelihood that some of these risks materialize.


Prepared by Racheeda Boukezia.


Fiscal risks pertaining to institutional arrangements are not reviewed in this paper.


See, in particular, IMF Board papers “Fiscal transparency, Accountability and Risk”, 2012 and “Update on Fiscal Transparency Initiative”, 2014.


See staff report for the 2017 Article IV, Annex II.


Based on the information received from the authorities at the time of the mission. This figure comprises parent companies and their subsidiaries.


In 2014, a third of the SOEs were loss making.


The return on equity is defined as the ratio of net income to equity value.


In 2016, transfers to EPICs from the central government to cover the cost of food subsidies (cereal and milk) accounted for about 1.3 percent of GDP.


“The Financial Stability Implications of Lasting Low Oil Prices for Algeria,” by Moez Souissi, Algeria—Selected Issues Paper, May 2016, Country Report No. 16/128.


The NPLs also related to the public agencies in charge of cereal imports.


The cost of these operations was not available to staff.


According to the CNAS (Caisse Nationale d’Assurance Sociale, the fund in charge of social benefits on behalf of the government – see Box 2), there are around 6 million contributors to the protection system and a little more than 3 million retirees entitled to a pension


Per the 2011 employment survey conducted by the Algerian statistics office, 46 percent of wage earners were not registered—a number that has grown over the years.


See accompanying paper on “Financing Fiscal Deficits,” by Andrew Jewell.


These deposits represented 6.7 percent of GDP at end-2016.


The rate on professional activity has been reduced from 2 percent to 1 percent of revenues, except in the construction sector.


PPP unit of the National Fund for Investment and Development (Caisse nationale d’equipement et de développement, CNED).


The current PPP practice makes an exception for subsidized activities, for which the risks associated with the differential between the market price and the regulated price would continue to be borne exclusively by the central government.

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