Algeria: Staff Report for the 2018 Article IV Consultation
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International Monetary Fund. Middle East and Central Asia Dept.
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Publication Date:
13 Jun 2018
eISBN:
9781484361702
Language:
English
Keywords:
ISCR; CR; deficit; IMF staff estimate; exchange rate depreciation; Policy; market financing; stabilization fund; financing difficulties; oil price; Fiscal consolidation; Oil prices
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2018 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Algeria

Abstract

2018 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Algeria

Introduction

1. Since 2014, lower oil prices have hit hard an economy overly dependent on hydrocarbons. Algeria’s growth model, based on the redistribution of oil and gas wealth by a large public sector, was already in need of change before the fall in oil prices as proven oil and gas reserves (excluding shale) are expected to last only one or two generations. The fall in oil prices added urgency to diversifying the economy while reducing the financial means to support its transformation.

2. Algeria took action to adjust to lower oil prices. Until 2016, the authorities responded mostly through exchange rate depreciation, drawing on their savings to maintain spending. In 2016, with buffers declining rapidly, they embarked on a steep fiscal consolidation within, for the first time, a medium-term budget framework (MTBF) but stopped the exchange rate depreciation, which they resumed at a significantly lower pace in mid-2017. Also, they have been working on a long-term plan to reshape the growth model, and have taken measures to improve the business climate, reform energy subsidies, and modernize their monetary policy framework.

3. The authorities recently changed their economic strategy. Facing economic slowdown, increased unemployment, and increasing financing difficulties, the authorities adopted an expansionary budget for 2018 aimed to clear arrears and support public investment. Reluctant to borrow externally or let the exchange rate depreciate at a faster pace, they decided to monetize their financing needs and harden import barriers.

4. The consultation focused on how best to restore macroeconomic balances and foster sustainable and inclusive growth. The discussion centered on the risks associated with the new strategy, alternative policies to stabilize the economy in a less costly and less risky way, and reforms to promote a more diversified, private-sector led economy.

Recent Macro-Financial Developments

5. Some fiscal adjustment was achieved in 2017, but much smaller than planned. The nonhydrocarbon deficit is estimated to have declined by less than 2 percent of nonhydrocarbon GDP on a cash basis to 26.4 percent of nonhydrocarbon GDP. Overall spending was cut by about 1.3 percent in nominal terms, less than the 5.8 percent initially budgeted. The decrease in capital expenditures (3 percent in nominal terms) offset a nominal increase in current expenditures (3.8percent). Although sizeable dividends from BA (4.9 percent of GDP) helped reduce the overall deficit from 13.5 percent of GDP to 8.8 percent of GDP, the government faced financing difficulties following the depletion of savings in the oil stabilization fund (FRR) early in the year and incurred domestic payment arrears. Since November, it has resorted to central bank borrowing to finance the deficit (equivalent to 3 percent of GDP for 2017). BA financing was also used to buy back public enterprise debt and finance the National Investment Fund (FNI), for an equivalent of 8.6 percent of GDP. With the depletion of fiscal savings and the materialization of fiscal risks (including support to public enterprises), central government debt has increased significantly since 2016, but remains relatively low at 27 percent of GDP at end-2017 and is expected to remain sustainable (Annex IV).

6. Real GDP growth slowed sharply. Lower OPEC quotas and weak external demand for gas from Europe led to a contraction in hydrocarbon production (−3 percent). Meanwhile, fiscal consolidation continued to weigh on nonhydrocarbon growth (2.6 percent), although it accelerated later in the year (notably in construction and services) as the fiscal constraint was relaxed. In total, growth slowed to 1.6 percent from 3.3 percent in 2016. Unemployment, which had risen from 10.5 percent in September 2016 to 12.3 percent in April 2017, receded somewhat to 11.7 percent in September. It remains particularly high among the youth (28.3 percent) and women (20.7 percent). Average inflation declined from 6.4 percent in 2016 to 5.6 percent, as inflation for manufactured goods and services slowed, but remained above BA’s target of 4 percent.1

7. The current account deficit remained high (Annex V). It narrowed slightly owing to higher oil prices and a minor dip in capital goods imports, but nonetheless remained wide at an estimated 12.9 percent of GDP. The external position in 2017 was substantially weaker than the level warranted by medium-term economic fundamentals and desirable policies, which signals that the real effective exchange rate (REER) remains significantly overvalued, notwithstanding an 8-percent depreciation in 2017. The depreciation of the REER mainly reflected movements of the dollar against the currencies of Algeria’s major trading partners. The parallel exchange market rate premium stands at about 50 percent.

8. External buffers are diminishing rapidly but remain ample. International reserves fell by US$17 billion to US$96 billion (half their 2013 peak), but remain comfortable at 19 months of imports and above 400 percent of the adjusted IMF metric for assessing reserve adequacy (ARA metric).2 Total external debt remains negligible at 2.4 percent of GDP.

9. Broad money growth accelerated. The growth rate of 8.3 percent reflected a rapid growth in net credit to central government, which more than offset the continued decline in net foreign assets. Growth in credit to the economy, particularly to the private sector, was robust at 12.8 percent, owing to large liquidity injections in the banking system stemming from government’s drawdown of the FRR early in the year, BA’s refinancing operations, and lower reserve requirements (from 8 to 4 percent). Monetary financing operations late in the year seem to have contributed little to the growth of credit in 2017. Tighter liquidity conditions caused interest rates in the interbank market to increase until monetary financing started.

Figure 1.
Figure 1.

Algeria: Selected Macroeconomic Indicators

Citation: IMF Staff Country Reports 2018, 168; 10.5089/9781484361702.002.A001

Figure 2.
Figure 2.

Algeria: Fiscal Indicators

Citation: IMF Staff Country Reports 2018, 168; 10.5089/9781484361702.002.A001

Figure 3.
Figure 3.

Algeria: Monetary Indicators

Citation: IMF Staff Country Reports 2018, 168; 10.5089/9781484361702.002.A001

10. Overall, the banking system remained adequately capitalized and profitable, but bank liquidity continued to decline until monetary financing started. Preliminary data at end- December 2017 suggest that the banking sector remained adequately capitalized, with an overall solvency ratio of 19.6 percent. The ratio of solvency to Tier 1 capital declined slightly from 16.3 percent at end-2016 to 15.2 percent owing to the growth of credit to the economy. Banks remained profitable with an overall return on assets of 2 percent. Gross nonperforming loans increased slightly from 11.9 percent to 12.3 percent of total loans at end-2017, partly reflecting the ripple effect of the government’s arrears to its suppliers. Banking sector liquidity declined, but remained sufficient to cover about half of the banks’ short-term liabilities (Table 5).

Table 1.

Algeria: Selected Economic and Financial Indicators 2014–23

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

Including public enterprises.

Including public enterprises debt buy-back.

In U.S. dollars.

Table 2.

Algeria: Balance of Payments, 2014–23

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

Weighted average of quarterly data.

Excluding SDR holdings.

ARA EM metric includes additional buffer for commodity intensive countries (projection period only).

Table 3.

Algeria: Summary of Central Government Operations, 2014–231 (In billions of Algerian Dinars)

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

On cash basis.

Including Sonatrach dividends.

Includes 500 billion dinars of transfers to pension fund in 2018

Bank financing includes domestic debt issuance and a drawdown of the oil stabilization fund and other government deposits at the central bank.

Includes proceeds from sales of state-owned assets.

Including public enterprises debt buy-back.

Table 4.

Algeria: Summary of Central Government Operations, 2014–231 (In percent of GDP unless otherwise indicated)

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

On cash basis.

Including Sonatrach dividends.

Bank financing includes domestic debt issuance and a drawdown of the oil stabilization fund and other government deposits at the central bank.

Includes proceeds from sales of state-owned assets.

Table 5.

Algeria: Monetary Survey, 2014–23

article image
Sources: Bank of Algeria; and IMF staff estimates and projections.

Net credit to government excludes Treasury postal accounts (“dépôts CCP”) deposited at the BA.

Policy Discussions3

A. Risks from the New Economic Strategy

11. The authorities’ new strategy aims to preserve growth and employment. Faced with rising unemployment, concerned with repaying domestic arrears, and reluctant to borrow externally or let the exchange rate depreciate further, the authorities saw their policy options limited to two possibilities: continuing with an abrupt fiscal consolidation in 2018, which would further dampen activity, or creating fiscal space for higher spending through monetary financing. Confident that the risks from monetary financing could be contained, they chose the latter. Their new strategy entails:

  • Increased fiscal spending in 2018. The budget includes a significant increase in spending, which will result in a deficit more than 6 percent of GDP higher than originally planned under the 2017–19 MTBF. Capital expenditures would increase by 21.2 percent in nominal terms from 2017, including to repay arrears, and current expenditures by 6.9 percent, including a significant transfer to the National Social Insurance Fund.4 The wage bill is kept virtually flat in nominal terms. The government intends to resume consolidation in 2019, with sharp cuts in spending, and to restore fiscal balance by 2022.

  • Central bank financing. The banking law was changed in October 2017 to allow for five years BA to finance directly, among others, the budget deficit, public-sector debt buy-back and the FNI. Monetary financing occurs through BA buying ad hoc issuances of sovereign securities with long maturities, and at a 0.5 percent interest rate. Staff estimates that by end-2018 monetary financing may amount to the equivalent of about 23 percent of 2017 GDP. To mop up part of the liquidity injected through monetary financing, BA raised the reserve requirement ratio from 4 percent to 8 percent in January 2018 and resumed its absorption operations by taking seven-day bank deposits. It is also considering a moderate increase in the policy rate.

  • Tighter import barriers. To slow the loss of international reserves and promote import-substitution, Algeria replaced its import license system with a temporary ban on the import of about 850 categories of goods.5 It also extended the list of goods subject to a 30 percent excise tax and significantly increased customs duties (up to 60 percent) for other products.

  • Structural reforms. The 2018 budget advanced the energy subsidy reform by raising fuel and electricity taxes. The government is working with the World Bank to deepen the reform and better target its support to vulnerable households, with the view to start implementation in 2019. It also adopted an ambitious structural reform plan that aims at simplifying business regulations, improving governance and transparency, reforming the pension system, and modernizing the financial sector. This builds on previous efforts to improve the business climate among other measures, such as opening the sea and air freight industry to the private sector. The authorities are working to strengthen public financial management (PFM), modernize monetary policy instruments, and foster the development of a forward exchange market. A recent decree mandates BA to periodically assess the implementation of the government’s reform program and report on its evaluation to the President.

uA01fig01

Total Expenditure

(Percent of nonhydrocarbon GDP)

Citation: IMF Staff Country Reports 2018, 168; 10.5089/9781484361702.002.A001

Sources: Algerian authorities; and IMF staff calculations.

12. The new strategy entails serious risks. In an environment where external risks remain tilted to the downside (Box 1), the new strategy may further exacerbate macroeconomic imbalances and, possibly, social tensions, as it risks to:

  • Complicate macroeconomic management. If interest rates remain low and insensitive to changes in debt level, the amount of monetary financing will be less bound by budget constraints than market financing would be. This risks further weakening fiscal discipline, which would require additional monetary financing. Repeated government demands for liquidity injections would undermine BA’s capacity to control monetary conditions and achieve price stability, and weaken its balance sheet. This, and its newly assigned role on monitoring structural reforms, would further challenge its de facto independence.

  • Increase inflationary pressures. If not adequately sterilized, the increased liquidity would raise perceived or actual nominal wealth and stimulate demand, causing prices to rise in the short term due to insufficient domestic supply or saving opportunities. At the same time, hardened import barriers may fuel inflationary pressure by decreasing supply (or possibly creating product shortages). Wage and price expectations could rapidly adjust and become self-reinforcing. The government may then need to further resort to monetary financing in the subsequent years, which would risk plunging the economy into an inflationary spiral.

  • Put further pressures on foreign reserves. With largely inflexible domestic supply, at least in the short run, liquidity injections will fuel import demand. The extent to which this demand is met will depend on the effectiveness of the new trade barriers, but pressures that cannot leak through the balance of payments (resulting in greater reserve loss) will further fuel inflation instead. As foreign reserves decline, pressure on the exchange rate will increase. Expectations of a significant exchange rate depreciation would intensify the demand for foreign exchange (FX) on the parallel market, which would further incentivize rent-seeking behaviors.6 If sustained, these pressures may eventually force a disorderly exchange rate adjustment.

  • Lower growth. Fiscal expansion will initially give a boost to activity. However, this will likely be short-lived not only because of the planned subsequent fiscal consolidation, but also because, given significant impediments to private sector development, liquidity injections would primarily support consumption rather than investment. Rising inflation may gradually reduce economic efficiency and discourage investment.

  • Increase financial stability risks in the medium term. In the short term, better liquidity conditions, the repayment of the government’s domestic arrears and higher growth will improve banks’ soundness indicators, but risks in the banking system could increase subsequently. Abundant bank liquidity may fuel credit growth and loosen lending standards. Credit risk may then increase if economic growth slows, especially if sterilization efforts and inflationary pressures increase interest rates.

13. In staff’s baseline scenario, based on the authorities’ planned policies, the economy moves along a narrow path with weak growth and high inflation. Quantifying the implications of the new strategy is difficult because of the unknown effectiveness of some measures (e.g., how much will trade restrictions shave off imports?) and uncertainties about how fast and how widely inflationary expectations may adjust. The scenario is based on the 2018–20 MTBF fiscal path. It assumes a moderate nominal exchange rate depreciation and some progress on reforms. Growth accelerates in 2018 and then slows as fiscal consolidation resumes. The fall in reserves is somewhat curtailed initially by higher oil prices than in 2017 and by import restrictions. Inflation, however, accelerates.

14. This narrow path is subject to major adverse risks. Although the potential exploitation of shale gas and shale oil would improve the medium-term outlook, serious downward risks could instead quickly materialize. In particular, if oil prices are lower than projected (possibly because of a weakening OPEC/Russia cartel cohesion and/or a recovery of oil production in the African continent) or if the very ambitious fiscal consolidation intended for 2019 onward does not happen as planned, the imbalances could quickly become unsustainable, as current policies weaken, rather than strengthen, the economy’s resilience. Indeed, the return to fiscal consolidation could be undermined by the availability of monetary financing, weaknesses in PFM, and difficulties in keeping to the planned reduction in public wages in percent of GDP due to rising inflation. Furthermore, fiscal risks remain significant, including the financial difficulties of the public pension fund (Caisse Nationale de Retraites, CNR).7 More broadly, macro-financial linkages between public entities and the central government could exacerbate their impact (Box 2).

15. To illustrate vulnerabilities, staff prepared two downside scenarios (Annex III). The first scenario assumes oil prices fall to US$45 per barrel starting in 2019.8 The second scenario illustrates what could be the impact of higher fiscal spending triggered by a wage-price inflationary dynamic. It assumes that wages adjust for inflation and that, absent a significant parametric reform of CNR, additional government transfers are needed to clear outstanding debt of CNR to CNAS and cover future annual losses.

uA01fig02

Downside Scenario 1: Lower Oil Prices

Citation: IMF Staff Country Reports 2018, 168; 10.5089/9781484361702.002.A001

uA01fig03

Downside Scenario 2: Higher Fiscal Spending

Citation: IMF Staff Country Reports 2018, 168; 10.5089/9781484361702.002.A001

Risk Assessment Matrix1,2

article image
1 The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff). The relative likelihood is the staff’s subjective assessment of the risks surrounding the baseline (“low” is meant to indicate a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability between 30 and 50 percent). The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities. Non‐mutually exclusive risks may interact and materialize jointly. “Short term” and “medium term” are meant to indicate that the risk could materialize within 1 year and 3 years, respectively. 2 Based on the January 2018 G‐RAM.

Macro-Financial Linkages from Within the Public Sector

The public sector dominates the economy with numerous and often large state-owned enterprises (SOEs) and public banks. Financial ties between SOEs, other public-sector entities (PSEs), and public banks are multiple and constitute channels of systemic interaction, often intermediated by the central government.1 For example, the central government reimburses SOEs for the cost of subsidized prices it imposes on them (e.g., for energy products) and public banks for the interest rate subsidies they are mandated to provide. Separately, the government occasionally assumes their debt and may support their capacity to increase capital by refraining from claiming dividends.

Macro-financial linkages within the public sector may exacerbate the impact of fiscal or liquidity risks that may originate in any part of public sector. For instance, troubles in a particular SOE can transmit, directly or through other entities, to public banks and/or the government. In particular, claims on some large SOEs are risk nodes for some public banks. This concentration risk is somewhat mitigated by the fact that public banks remain well-capitalized and profitable and most claims are guaranteed by the government.

The possible persistence of large budget deficits could result in recurring liquidity pressures in the financial sector as was the case in 2016 and 2017 when the decline in oil revenue resulted in arrears to enterprises and banks, which eroded their cash buffers and had repercussions throughout the economy. If higher government financing needs continue to be met by borrowing from BA, fiscal risks may ultimately translate into macro-instability by draining reserves and pushing inflation up, as discussed in paragraph 12.

Systemic supervision should therefore be upgraded to monitor structural imbalances and risk transmission channels, while the government should build the capacity to monitor closely fiscal risks, including the debt of the consolidated public sector and stand-alone imbalances in large SOEs or PSEs.

1 For an in-depth analysis of interaction within the public sector and associated fiscal risk, see “Fiscal Risks in Algeria”, IMF Country Report No. 17/142.

Authorities’ Views

16. The authorities recognize that their policy mix entails risks, but are confident that the use of monetary financing can be limited and the associated risks managed. With the difficult adjustment that followed the early-1990s external debt crisis in mind, they believe their financing strategy is less risky than borrowing externally. They consider that the central bank will be able to sterilize enough of the liquidity injected through monetary financing, and hence both credit growth and inflation are unlikely to accelerate. They are committed to their consolidation plan starting 2019 and therefore trust that external and fiscal imbalances will be restored in a timely manner, which will also limit the use of monetary financing. They view the decree requiring the central bank to assess progress with the government’s plans as a tool to strengthen their commitment.

B. Alternative Policy Mix

17. It remains possible to smooth the unavoidable adjustment to lower oil prices without recourse to monetary financing. Thanks to its remaining ample buffers, Algeria still has a window to adopt a policy mix that would minimize the impact of adjustment on growth, while facilitating private sector development. In addition to structural reforms, the policy mix should consist of:

  • Starting in 2018, sustained but gradual fiscal consolidation using available fiscal space. With a relatively low public debt and negligible external debt, Algeria still has some space for a gradual consolidation. Fiscal consolidation should be resumed in 2018 and sustained in the medium term, following the efforts undertaken in 2016–17. It remains possible to reduce the fiscal deficit this year while clearing domestic arrears and making the planned one-off transfer to the public pension fund. Fiscal consolidation should be conducted through a broad-based approach including: raising more nonhydrocarbon revenues by widening the tax base (reducing exemptions and strengthening tax collection—which is also a matter of fairness), gradually reducing current expenditure as a share of GDP, and reducing investment costs while increasing its efficiency.

  • Tapping a broad range of financing options, but excluding direct borrowing from BA. Domestic issuance of sovereign debt securities at market rates is necessary to finance the deficit and promote the development of the bond market. More frequent use of public-private partnerships (PPPs) and the sale of government assets offer additional financing options if carefully and transparently carried out. Relaxing the 51–49 partnership rule governing foreign direct investment (FDI) could facilitate privatizations. External borrowing would help shore up foreign reserves and minimize crowding out. Issuance of domestic or international sovereign sukuks is another option.

  • Gradual exchange rate depreciation. This would help address external imbalances, support private sector development, and increase hydrocarbon revenues thereby creating additional fiscal space.

  • Independent monetary policy aimed at containing inflationary pressures. Even if fiscal adjustment resumed in 2018, BA should continue to sterilize liquidity created so far by monetary financing of the fiscal deficit. It should stand ready to tighten monetary policy (including by increasing its policy rate) should inflationary pressures emerge.

18. This policy-mix would likely lead to better economic outcome in the medium term. Staff’s alternative scenario (Annex II) illustrates the impact of its recommended policy mix. It assumes a steady reduction of the nonhydrocarbon deficit starting in 2018, calibrated such that the public debt stabilizes in the medium term at a level sufficiently low to absorb plausible fiscal risks that may materialize. Compared with the baseline scenario, inflation reverts to a level close to BA’s central target, the current account deficit is reduced by the end of the period (and is not dependent on distortionary import barriers), and the decline in international reserves slows. Nonhydrocarbon growth is slower in 2018 but gradually increases above the level of the baseline scenario because fiscal consolidation is less abrupt and more ambitious structural reforms gradually start yielding results.9

19. Some underlying measures could be adapted to the authorities’ strategic policy preferences. Foreign borrowing may become more acceptable to the authorities if it is used to finance well-chosen investment projects. It is also possible to progressively increase the participation of foreign investors in public-private partnerships (PPP). The more rigid the limits, the greater the trade-offs between costly adjustment and risky policies.

20. If the deficit continues to be monetized, safeguards should be put in place to contain associated risks. These include strict quantitative limits (for example, capping monetary financing at a reasonable proportion of the average annual nonhydrocarbon tax revenue in the previous three years, excluding BA dividends), time limits (shorter than the five years provided in the law), and financing at market rates. It will be important to sterilize adequate quantities of injected money, and monetary conditions should be tightened to dampen inflationary pressure. Staff emphasized that these safeguards, which are currently lacking, would not substitute for sound macroeconomic policies and may reduce, but not eliminate, the risks.

Authorities’ Views

21. The authorities appreciate the benefits of a gradual fiscal adjustment, but remain reluctant to make space for it by borrowing externally or allowing greater exchange rate depreciation. They showed openness to consider external borrowing to finance carefully chosen investment projects with strong expected impact on growth. They do not plan to relax the 51–49 rule at this stage as they believe it does not significantly discourage foreign investment. They concur with staff that fiscal consolidation should rely on reducing tax exemptions, strengthening collection, and increasing the efficiency of spending. They consider that the recent decree on monetary financing provides a strong safeguard to limit the associated risks.

C. Reforms for Sustainable and Inclusive Growth

22. Key structural reforms, carefully sequenced and timely implemented, are needed to reshape the country’s growth model.10 Irrespective of the policy mix adopted by the authorities, deep reforms are needed to diversify the economy and foster private sector development. Because impediments to private investment are manifold, action will be needed on several fronts.11 Not all reforms can be implemented at the same time; they thus need to be carefully sequenced taking account of the interactions between different reforms. It will be crucial to start implementing measures as early as possible, within a clearly established timetable, because reforms generally take time to bear fruit, while remaining buffers to cushion the adjustment are eroding rapidly. Reforms should be designed to ensure a fair distribution of the burden of adjustment and to reduce inequalities. Priorities include:

  • Strengthening governance and transparency, and reducing red tape. International surveys show that red tape and corruption are among the top obstacles to private sector activity, while some institutional and legal structures lack capacity, especially those that protect contractual and ownership rights. Recent indicators also suggest that there is a lack of transparency.12 For example, Algeria is among the countries that disclose the least fiscal information to the public.13 Addressing these issues would facilitate reforms, enforce regulations in a more equitable manner, and build trust between the public and institutions. To that end, current efforts to develop information systems in administrations are welcome and should help improve transparency and facilitate administrative procedures.

  • Improving access to finance. In addition to limited access to bank credit and a nascent capital market, alternative sources of financing, such as venture capital, are far less accessible in Algeria than elsewhere in the region. Efforts are needed to diversify the sources of financing, in particular by developing financial instruments that cater to the needs of SMEs and mobilizing private saving. In this context, the government’s intention to modernize the banking sector, which is dominated by the public sector, is welcome.14 To promote entrepreneurship and risk-taking, it will also be important to uphold creditor rights, simplify bankruptcy procedures, and improve procedures for resolving nonperforming loans. In addition, gradually phasing out interest rate subsidies would increase the attractiveness of capital markets, curtail budget expenditure, and promote better selection of investment projects.

  • Opening the economy to more foreign investment and trade. The recent hardening of import barriers creates distortions, will contribute to higher prices, and will likely drive more activities underground. Instead, it would be preferable to promote exports and develop domestic production by improving the competitiveness of enterprises, in particular through simplified product market regulations and expanded powers for the competition authorities. Moreover, there is scope for Algeria to attract more FDI. Relaxing the 51–49 rule could help increase production capacity, improve domestic competition, and help technology transfers.

  • Improving the functioning of the labor market and reducing skills mismatch.15 The revision of the labor code, which is being discussed as part of a broad-based social dialogue, is an opportunity to ensure that workers’ mobility is facilitated through less costly hiring and firing regulations, while ensuring their adequate protection, for instance through an unemployment insurance system with expanded coverage. These improvements will reduce incentives for informal employment, and there is also a need to develop better social protection for informal workers. Progress has been made in improving the attractiveness of vocational training streams, in particular by better tailoring the curricula to private sector needs. The academic education streams should provide students with the skills needed to adapt to the jobs of tomorrow and succeed in the private sector, including managerial and “soft” skills.

  • Promoting greater inclusion of women in the labor market (Annex VII). While women in Algeria are well educated, their participation in the labor market is very low. Fostering it could significantly increase potential growth over time. Regulations give equal rights to women and certain benefits, such as maternity leave, but other impediments need to be removed. For example, increasing flexibility in work schedules and location, improving public transportation, and increasing childcare capacity would help.

uA01fig04

Most Problematic Factors for Doing Business

(Weighted score of respondent’s ranking of the 5 top factors)

Citation: IMF Staff Country Reports 2018, 168; 10.5089/9781484361702.002.A001

Sources: World Economic Forum Executive Opinion Survey.
uA01fig05

Legal System and Property Rights

(10=best)

Citation: IMF Staff Country Reports 2018, 168; 10.5089/9781484361702.002.A001

Source: Fraser Institute Economic Freedom Index. Latest data are from 2015.
uA01fig06

Credit to the Private Sector

(Percent of GDP)

Citation: IMF Staff Country Reports 2018, 168; 10.5089/9781484361702.002.A001

Sources: Country authorities; and IMF staff calculations.
uA01fig07

Inward FDI, 2012–16 Average

(Percent of GDP)

Citation: IMF Staff Country Reports 2018, 168; 10.5089/9781484361702.002.A001

Sources: WEO; IMF staff calculations.
uA01fig08

Global Competitiveness Index: Labor Market

(7=best)

Citation: IMF Staff Country Reports 2018, 168; 10.5089/9781484361702.002.A001

Source: World Economic Forum 2018 Global Competitiveness Report.
uA01fig09

Global Competitiveness Index: Education

(7=best)

Citation: IMF Staff Country Reports 2018, 168; 10.5089/9781484361702.002.A001

Source: World Economic Forum 2018 Global Competitiveness Report.

23. Strengthening the policy framework is also needed to increase policy effectiveness. Priorities include: 16

  • Strengthening the PFM system. The 2018 budget expansion, at odds with the 2017–19 MTBF, undermined the usefulness of the MTBF as a fiscal planning instrument. It is therefore necessary to continue efforts to strengthen the credibility and efficiency of the MTBF. The forthcoming introduction of a medium-term expenditure framework is welcome. Strengthening the capacity to monitor budget execution in real time and control spending commitments will be critical to prevent the reoccurrence of payment arrears. Fiscal risks should also be monitored closely. The planned adoption of a new organic budget law, which should be based on best international practices, will provide a legal basis for multiyear budgeting. The authorities’ efforts to improve capacity to produce government finance statistics following international standards and in a timely manner is welcome.

  • Improving the efficiency of public spending. Improving public wage bill management and investment efficiency would help increase the quality and reach of public service delivery, improve the return on investment in human capital and infrastructure, and foster private sector development. It would also free fiscal space. To that end, the long-term evolution of the wage bill should be better controlled, including by better linking wage increases to productivity. Investment projects’ selection, budgeting, implementation, and ex post evaluation also need to be improved.17

  • Enhancing liquidity management. BA’s toolbox for managing bank liquidity includes reserve requirements and open market operations. BA currently mops up liquidity by taking seven-day bank deposits and it injects liquidity by refinancing banks who provide sovereign securities as a collateral. Both mechanisms occur through competitive auctions. To enhance liquidity sterilization, BA could sell debt securities instead of taking deposits, which would also allow interbank repo transactions. If the issuance of T-bills continues to be limited in Algeria, BA could consider issuing its own negotiable certificates of deposit (CDN). These CDNs would be issued on short maturities (seven days and one month) and would usefully extend the short-term leg of the yield curve.

  • Curbing the parallel foreign exchange market (Box 3). Efforts to diversify the supply of FX on the interbank market and streamline rules governing FX transactions should be pursued. In this context, BA’s recent initiative to clarify the requirements for surrendering nonhydrocarbon export revenue in FX was welcome. BA could consider a wider bid-ask spread on the official exchange rate to increase the volume of transactions. This could be accompanied by the relaxation of the indicative ceilings on allowances for medical expenses, study, and travel abroad.

  • Continuing efforts to strengthen the prudential framework. The rollout of the Basel II prudential framework, risk-based supervision and tighter public bank governance rules has improved the banking sector’s resilience. Bank supervisors are monitoring banks closely and running stress tests to assess their resilience, which has been deemed adequate barring a major adverse exogenous shock. Nonetheless, given existing risks, more frequent stress tests are needed. If ample liquidity boosts credit expansion, the authorities could introduce a countercyclical capital buffer to moderate risk-taking and consider macroprudential measures (such as loan-to-value limits). In any case, they should develop a systemic-risk analysis and containment framework.

  • Improving crisis preparedness. The authorities need to develop crisis management processes and a bank resolution framework that clearly define the roles and responsibilities of the various parties involved.

Authorities’ Views

24. The authorities agree with the need to advance structural reforms, which is a crucial element of their adjustment strategy. The recent decree on monetary financing refers, among others, to reforms to: modernize and strengthen PFM; raise more nonhydrocarbon revenue; increase spending efficiency through better wage management, rationalization of subsidies, and improved investment projects selection; combat over-pricing of imports; modernize the banking sector; promote e-administration and the use of information technologies; improve the functioning of the labor market and unemployment schemes; facilitate nonhydrocarbon exports; and improve the business climate (for which they set up a task force with World Bank assistance). However, they remain convinced of the usefulness of temporary hardened import barriers to preserve reserves and foster import substitution. They appreciate the IMF technical assistance they receive in a number of areas to strengthen their policy framework.

The Parallel Exchange Market

The interbank spot exchange market is asymmetrical as the central bank is de facto the main supplier. This is because the bulk of FX supply is generated by hydrocarbon exports that must be sold exclusively to BA. Other exports provide a minor supply of FX, half of which may be retained by exporters. Over the years, an illegal parallel exchange market has emerged, which seems to have become larger and more sophisticated. The parallel market premium is currently reportedly about 50 percent of the official exchange rate.

The supply of FX on the parallel market is likely mostly sourced by (i) the repatriation of pensions of former Algerian expatriates; (ii) remittances from current Algerian expatriates; (iii) overbilling of imports; and (iv) tourism revenue that is not captured by the banking sector. The demand likely stems from: (i) FX transactions for the purchase of imports that are restricted or for other purchases where the bona fide nature of the transaction cannot be established; (ii) capital flight to invest abroad or evade tax, and/or as a store of value; and (iii) speculation based on the expected fluctuations of the official and parallel exchange rates.

The existence of the parallel market complicates macroeconomic management by fueling inflationary expectations, distorting price formation, and weakening the channels of monetary policy transmission. The recourse to monetary financing, which risks exacerbating inflationary pressures, may increase the demand on the parallel market, raise exchange rate premiums, and incentivize behaviors that are themselves inflationary (for example, the overbilling of imports).

Gradually adjusting the official exchange rate, increasing indicative ceilings for travel allowances, and relaxing import restrictions could reduce the size of the parallel market, but not eliminate it. Unification of the two markets will only be possible through the gradual liberalization of capital transactions, which can only be envisaged in when macroeconomic conditions are more favorable.

Staff Appraisal

25. Algeria continues to face important challenges dealing with the legacy of lower oil prices. Despite some fiscal consolidation in 2017, the fiscal and current account deficits remained large. Savings in the FRR were depleted, financing conditions became more difficult, and domestic payment arrears occurred. Some fiscal risks materialized in the form of support to public enterprises and the national pension scheme. The external position remained substantially weaker than warranted by medium-term fundamentals and desirable policies, and reserves, while still ample, continued to decline. Overall economic activity slowed. Unemployment increased and remains particularly high among the youth and women. Inflation receded but remained above BA’s target.

26. The authorities have shifted their adjustment strategy. Faced with payment arrears, higher unemployment and slowing growth, they resorted to fiscal expansion in 2018. They intend to resume fiscal consolidation starting 2019 to reach budget balance by 2022. Reluctant to borrow externally or to allow a greater exchange rate depreciation, they allowed BA to lend directly to the treasury. They also hardened import barriers, including by replacing import licenses with a temporary ban on the imports of many goods and higher tariffs.

27. This approach may allow some short-term gains in growth, but it is risky. In the short term, it will improve growth but will exacerbate fiscal and external imbalances. In the medium term, it risks increasing inflation, accelerating the loss of international reserves, and lowering growth. Furthermore, the new policies will reduce the economy’s resilience to shocks, externally (e.g., lower oil prices) and domestically (e.g., from higher-than-planned fiscal spending or contingent liabilities).

28. There still is a window to pursue a less risky strategy that would likely achieve better outcomes in the medium term. Relatively low public debt and little external debt provide space for a sustained, but gradual fiscal consolidation without recourse to monetary financing. This would require tapping a broad range of financing options, including domestic debt issuance at market rates, public-private partnerships, sale of assets and, external borrowing (e.g., to finance well-chosen investment projects). A gradual exchange rate depreciation combined with efforts to eliminate the parallel foreign exchange market would support the adjustment. The central bank should be allowed to carry out monetary policy independently and stand ready to tighten the monetary policy stance pending an assessment of whether fiscal consolidation sufficiently dampens inflationary pressures.

29. Robust safeguards to contain associated risks should be put in place, were monetary financing to continue. These include strict quantitative and time limits to central bank borrowing, and the pricing of such financing at market rates. Money creation should be adequately sterilized. The BA should increase the reserve requirement. It could continue to take bank deposits through auctions, but it may be more effective, in the absence of a deep sovereign bond market, to issue tradable BA deposit certificates, which banks could use to exchange short-term liquidity among themselves. Those safeguards may reduce but would not eliminate the risks and cannot substitute sounder macroeconomic policies.

30. Timely progress on structural reforms is crucial. To foster private sector development and reduce the dependence on oil and gas, action is needed to remove key constraints to private sector development. Priorities include reducing red tape, improving access to finance, strengthening governance, transparency and competition, further opening the economy to trade and foreign investment, improving the functioning of the labor markets, and fostering greater female labor force participation. To increase the effectiveness of economic policies, Algeria also needs to strengthen its economic policy framework, including to improve PFM and the efficiency of public spending.

31. While bank regulation and supervision are satisfactory, the authorities should strengthen their prudential framework. Complex macro-financial linkages in the public sector are a significant source of fiscal and macroeconomic risks and should be analyzed and monitored closely. Given macroeconomic risks, more frequent stress tests are needed and the authorities should develop a systemic-risk analysis and containment framework. The prudential framework could be strengthened with the introduction of a countercyclical capital buffer and macroprudential measures such as loan-to-value limits. The authorities also need to develop crisis management processes and a clear bank resolution framework.

32. Staff recommends that the next Article IV consultation be held on the standard 12-month cycle.

Table 6.

Algeria: Financial Soundness Indicators, 2009–17

(In percent)

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Source: Bank of Algeria

Annex I. Authorities’ Response to Past IMF Recommendations

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Annex II. Alternative Scenario

Staff discussed an alternative scenario consistent with its recommended policy mix. The scenario assumes a sustained but gradual fiscal consolidation, starting in 2018. The gradual pace is made possible by tapping a broad range of financing options but excluding monetary financing, combined with further exchange rate depreciation and ambitious structural reforms. The scenario shows that the authorities still have a window to achieve their dual objectives of macro-stabilization and fostering more sustainable growth without resorting to risky policies.

The alternative scenario assumes that the government pursues fiscal consolidation in 2018, and aims to gradually bring the deficit close to zero in the medium term, while stabilizing public debt below 40 percent of GDP. The medium-term debt anchor is moderate enough (by EM standards) to leave sufficient buffers should fiscal risks related to the price of oil or contingent liabilities in the public sector materialize. Specific key assumptions are as follows:

  • Both current and capital expenditures decline more slowly than in the baseline scenario starting in 2019. Current spending falls to 23.7 percent of nonhydrocarbon GDP in 2023 (compared to 20.8 percent in the baseline scenario). Both wage and non-wage current spending decline gradually as a share of GDP. Investment spending decreases to 13.8 percent of nonhydrocarbon GDP in 2023 (versus 9.2 percent in the baseline scenario) allowing for a greater buildup of capital. The consolidation assumed in 2018 still leaves space to clear the domestic arrears and make the one-off transfer to the public pension fund.

  • Tax revenues rise to 18.8 percent of nonhydrocarbon GDP in 2023 (compared to 17.3 percent in the baseline scenario), reflecting a greater reduction in tax exemptions and improved tax administration and collection.

  • To finance larger deficits, the government borrows domestically, finances selected investment projects with borrowing from official bilateral creditors (starting in 2019), and issues bonds in international capital markets (starting in 2020).

  • The REER is assumed to depreciate by 26 percent over the projection period compared to a real appreciation in the baseline scenario (due to high inflation and limited nominal depreciation of the dinar).

  • Efforts to diversify and liberalize the economy gradually result in slightly more nonhydrocarbon exports, FDI, and tourism receipts toward the end of the projection period.

Table 1.

Algeria: Selected Economic and Financial Indicators (alternative scenario), 2014–23

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

Including public enterprises.

Including public enterprises debt buy-back.

In U.S. dollars.

The following charts compare the main outcomes of the alternative scenario versus the baseline scenario.

Figure 1.
Figure 1.
Figure 1.

Alternative and Baseline Scenarios

Citation: IMF Staff Country Reports 2018, 168; 10.5089/9781484361702.002.A001

Annex III. Downside Risks Scenarios

Staff prepared two scenarios that illustrate the risks around the baseline scenario. The scenarios show that the authorities’ policy-mix undermines its resilience to domestic and external shocks.

Figure 1.
Figure 1.
Figure 1.

Lower Oil Prices

Citation: IMF Staff Country Reports 2018, 168; 10.5089/9781484361702.002.A001

Figure 2.
Figure 2.
Figure 2.

Higher Fiscal Spending

Citation: IMF Staff Country Reports 2018, 168; 10.5089/9781484361702.002.A001

Annex IV. Public Debt Sustainability Analysis

Public debt currently stands at 27 percent of GDP (48 percent of GDP including guarantees) and is expected to remain sustainable under the authorities’ current policy plans. Until recently, debt levels remained low as the fiscal balance was positive (until 2013) or deficits were mainly financed drawing down savings (2014–15, after oil prices fell). Since 2016, however, government debt has increased significantly, reflecting the materialization of fiscal risks and (starting 2017) the depletion of fiscal savings. The government’s recent decision to monetize the deficit is (artificially) keeping the cost of debt low. Assuming sustained fiscal consolidation from 2019 onwards, per the authorities’ plan, debt levels are projected to remain manageable, and stress tests suggest that financing needs are not very sensitive to shocks.

1. Domestic public debt has increased significantly since 2016 but remains moderate. During 2014–15, domestic public debt, excluding guarantees, remained relatively low at around 8 percent of GDP, as large budget deficits were mainly financed by drawing on savings in the oil stabilization fund (FRR). In 2016, government debt increased to about 20.6 percent of GDP, mainly reflecting the materialization of fiscal risks in the form of support to public enterprises.1 In 2017, the government’s debt increased further, to 27 percent of GDP, as funds in the FRR were insufficient to cover the fiscal deficit and buy back additional debt of public enterprises occurred.2 Debt figures including central government guarantees of 48 percent of GDP in 2017. Government guarantees consisted of guarantees of public enterprises’ borrowing from state-owned banks (21 percent of GDP in 2017).3

2. The government started borrowing directly from the central bank in late 2017. Consolidation efforts combined with higher oil prices contributed to reducing the deficit (on cash basis) from 13.5 percent of GDP in 2016 to 8.8 percent in 2017. With savings in the FRR depleted and domestic liquidity declining, the government, reluctant to borrow externally, changed the banking law and borrowed directly from the central bank about 3 percent of GDP to finance its deficit. It also used monetary financing to buy back some of its own debt to public enterprises and debt owed by public enterprises to public banks, and as well as to finance the National Investment Fund. In total, monetary financing represented 11.6 percent of GDP, backed by securities with long maturities (up to 30 years), and at a low interest rate (0.5 percent).

3. Algeria’s domestic public debt consists of treasury securities and restructured debt purchased from public enterprises. Domestic debt consists of Treasury bills and bonds, as well as outstanding debt purchased from state-owned enterprises. At end-2017, about 53 percent of outstanding Treasury securities were held by the central bank, and the remaining by banks (mostly public) and insurance companies.4

4. External debt has continued to decline. After its last disbursement from the IMF in 1999, Algeria did not borrow externally until 2016, when the African Development Bank (AfDB) provided a €900 million budget support loan. At end-2017, public external debt represented only 2.4 percent of GDP. In addition to the AfDB loan, remaining external debt is mostly on concessional terms and owed to bilateral creditors.

5. Under the authorities’ budget plan, debt would decline over the medium term. The 2018–20 medium-term budget plan calls for fiscal expansion in 2018, followed by very ambitious consolidation aiming to bring the deficit to zero in 2022.5 The government intends to continue monetizing the deficit for the next three to five years. Staff estimates that it could borrow from the central bank up to 23.8 percent of 2017 GDP during 2018–22 (9.9 percent of 2018 GDP in 2018 alone). Starting in 2019, gross financing needs would decline rapidly, averaging about 4.8 percent of GDP over the period, and government debt is projected to fall to about 31 percent of GDP by 2023 (43 percent of GDP including guarantees).

6. Alternative scenarios and stress tests indicate that projected debt levels remain manageable and gross financing needs remain limited. Assuming no change in the primary balance (i.e., no fiscal adjustment) beginning in 2018, public debt (including guarantees) would increase to 49 percent by 2023—higher than in the baseline scenario, but still below the 70 percent benchmark for emerging market countries. Gross financing needs are not sensitive to shocks, and would remain limited even under the scenario of combined macro-fiscal shocks.

Figure 1.
Figure 1.

Algeria: Public Sector Debt Sustainability Analysis (DSA)—Baseline Scenario

(In percent of GDP unless otherwise indicated)

Citation: IMF Staff Country Reports 2018, 168; 10.5089/9781484361702.002.A001

Source: IMF staff.1/ Public sector is defined as general government and includes public guarantees, defined as Debt guarantees.2/ Based on available data.3/ Long-term bond spread over German bonds.4/ Defined as interest payments divided by debt stock (excluding guarantees) at the end of previous year.5/ Derived as [(r – π(1+g) – g + ae(1+r)]/(1+g+π+gπ)) times previous period debt ratio, with r = interest rate; π = growth rate of GDP deflator; g = real GDP growth rate; a = share of foreign-currency denominated debt; and e = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar).6/ The real interest rate contribution is derived from the numerator in footnote 5 as r – π (1+g) and the real growth contribution as -g.7/ The exchange rate contribution is derived from the numerator in footnote 5 as ae(1+r).8/ Includes changes in the stock of guarantees, asset changes, and interest revenues (if any). For projections, includes exchange rate changes during the projection period.9/ Assumes that key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last projection year.
Figure 2.
Figure 2.

Algeria: Public DSA—Composition of Public Debt and Alternative Scenarios

Citation: IMF Staff Country Reports 2018, 168; 10.5089/9781484361702.002.A001

Source: IMF staff.
Figure 3.
Figure 3.

Algeria: Public DSA—Realism of Baseline Assumptions

Citation: IMF Staff Country Reports 2018, 168; 10.5089/9781484361702.002.A001

Source : IMF Staff.1/ Plotted distribution includes all countries, percentile rank refers to all countries.2/ Projections made in the spring WEO vintage of the preceding year.3/ Data cover annual obervations from 1990 to 2011 for advanced and emerging economies with debt greater than 60 percent of GDP. Percent of sample on vertical axis.
Figure 4.
Figure 4.

Algeria: Public DSA—Stress Tests

Citation: IMF Staff Country Reports 2018, 168; 10.5089/9781484361702.002.A001

Source: IMF staff.
Figure 5.
Figure 5.

Algeria: Public DSA Risk Assessment

Citation: IMF Staff Country Reports 2018, 168; 10.5089/9781484361702.002.A001

Source: IMF staff.1/ The cell is highlighted in green if debt burden benchmark of 70% is not exceeded under the specific shock or baseline, yellow if exceeded under specific shock but not baseline, red if benchmark is exceeded under baseline, white if stress test is not relevant.2/ The cells are highlighted in red because gross financing needs are estimated to have exceeded the benchmark of 15% in 2017.3/ The cell is highlighted in green if country value is less than the lower risk-assessment benchmark, red if country value exceeds the upper risk-assessment benchmark, yellow if country value is between the lower and upper risk-assessment benchmarks. If data are unavailable or indicator is not relevant, cell is white. Lower and upper risk-assessment benchmarks are: 200 and 600 basis points for bond spreads; 5 and 15 percent of GDP for external financing requirement; 0.5 and 1 percent for change in the share of short-term debt; 15 and 45 percent for the public debt held by non-residents; and 20 and 60 percent for the share of foreign-currency denominated debt.4/ Long-term bond spread over German bonds, an average over the last 3 months, 09-Jan-16 through 08-Apr-16.5/ External financing requirement is defined as the sum of current account deficit, amortization of medium and long-term total external debt, and short-term total external debt at the end of previous period.
Table 1.

Algeria: External Debt Sustainability Framework, 2013–23

(In percent of GDP, unless otherwise indicated)

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Derived as [r – g – r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock, with r = nominal effective interest rate on external debt; r = change in domestic GDP deflator in US dollar terms, g = real GDP growth rate, e = nominal appreciation (increase in dollar value of domestic currency), and a = share of domestic-currency denominated debt in total external debt.

The contribution from price and exchange rate changes is defined as [-r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock. r increases with an appreciating domestic currency (e > 0) and rising inflation (based on GDP deflator).

For projection, line includes the impact of price and exchange rate changes.

Defined as current account deficit, plus amortization on medium- and long-term debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; nominal interest rate; dollar deflator growth; and both non-interest current account and non-debt inflows in percent of GDP.

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

Figure 6.
Figure 6.

Algeria: External Debt Sustainability: Bounds Tests 1/ 2/

(External debt in percent of GDP)

Citation: IMF Staff Country Reports 2018, 168; 10.5089/9781484361702.002.A001

Sources: International Monetary Fund, Country desk data, and staff estimates.1/ Shaded areas represent actual data. Individual shocks are permanent one-half standard deviation shocks. Figures in the boxes represent average projections for the respective variables in the baseline and scenario being presented. Ten-year historical average for the variable is also shown.2/ For historical scenarios, the historical averages are calculated over the ten-year period, and the information is used to project debt dynamics five years ahead.3/ Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance.4/ One-time real depreciation of 30 percent occurs in 2010.

Annex V. External Sector Assessment

The external position in 2017 was substantially weaker than warranted by medium-term fundamentals and desirable policies, but stock variables remain comfortable. External debt is negligible, and reserves are still well above adequacy ratios, although they are rapidly declining. The exchange rate has depreciated somewhat but remains overvalued and the current account deficit is significantly larger than warranted by medium-term fundamentals and desirable policies.

1. The current account deficit remains large, dented only by a recent small hike in oil prices. The large drop in oil prices in 2014 and declining hydrocarbon production turned large positive current account surpluses into large deficits. Since then, Algeria has not been able to redress the balance through fostering nonhydrocarbon exports or sufficiently reducing import demand. The recent increase in oil prices has somewhat helped reduce the current account deficit, which is estimated at 12.3 percent of GDP for 2017, down from 16.6 percent in 2016. In the baseline scenario, the current account deficit is projected to narrow significantly in the medium term, reflecting the impact of fiscal consolidation as well as hardened tariff and nontariff trade barriers.

2. Algeria’s external buffers remain sizeable but are declining rapidly. International reserves stood at about US$96 billion at end-2017 (excluding SDRs), equal to 19 months of imports and 402 percent of the IMF’s adjusted ARA metric. But reserves are now about half of their peak value in 2013 and are projected to decline over the medium term in the baseline scenario (US$13 billion in 2023, equal to about 3 months of imports). Total external debt stood at just 2.3 percent of GDP in 2017 and is unlikely to increase in the foreseeable future as the government remains averse to external borrowing and given restrictions on nongovernment external borrowing.

uA01fig10

Decomposition of the IMF’s ARA Metric1

(US$ billion)

Citation: IMF Staff Country Reports 2018, 168; 10.5089/9781484361702.002.A001

Sources: Algerian authorities; and IMF staff calculations.1/ The IMF composite metric is a weighted sum of exports, short-term debt at remaining maturity, other external liabilities, and broad money. Bars display the dollar equivalent of the ARA metric by each of its components. Reserve levels are considered to be adequate when they range between 100 and 150 percent of the ARA metric.
uA01fig11

Exchange Rate Developments

(Index, 2010=100)

Citation: IMF Staff Country Reports 2018, 168; 10.5089/9781484361702.002.A001

Sources: Algerian authorities: and IMF staff calculations.

3. Since the onset of the oil price shock, the dinar has significantly depreciated on a nominal basis, while real depreciation was smaller. Since mid-2014, the dinar has depreciated by 31 percent against the dollar, helping to cushion the impact of lower oil prices. Over the same period, however, the REER has depreciated only by 8 percent because of higher inflation in Algeria than in its trading partners. In 2017, both the nominal and real effective exchange rates depreciated (by 10 and 8 percent, respectively), mainly reflecting the movements of the dollar against major trading partners’ currencies. The foreign exchange premium on the parallel exchange market stands at about 50 percent. Despite recent efforts to clarify the surrender requirements of nonhydrocarbon export receipts, more remains to be done to deepen the official FX market.

4. EBA-lite methodologies suggest that the actual current account is well below its norm. Both the current account and the external sustainability approaches suggest that the current account balance remained far from its norm in 2017, indicating a significant overvaluation of the REER. Staff estimates the overvaluation to be in the 13–51 percent range (consistent with a current account gap in the range of −3 to −10 percent), which is lower than in previous assessments. This reflects the recovery in oil prices as well as the impact of more restrictive trade policies. These estimates are subject to significant uncertainty as the magnitude and persistence of the terms-of-trade shock make the results of standard methodologies unstable: minor changes in underlying assumptions (e.g., regarding trade elasticities, desirable policies, or target NIIP) lead to significant variations in the degree of estimated overvaluation. The existence of a parallel exchange market also complicates the interpretation of the model’s results. For these reasons, the EBA-REER method did not yield reliable results.

  • The current account approach indicates that the external position in 2017 was substantially weaker than warranted by medium-term fundamentals and desirable policies, resulting in a difference (gap) of −9.9 percent of GDP in 2017. Closing the current account gap requires pursuing sustained fiscal consolidation, fostering export diversification through structural reforms and further nominal depreciation of the dinar.

  • The external sustainability approach also points to a large current account gap. Assuming the international investment position (IIP) remains stable at its initial level of 37.6 percent of GDP, the current account norm would be 2.3 percent of GDP, implying a gap of −6.5 percent over the medium term.1 If the IIP is stabilized at its projected value in 2023, the current account norm would be −1.1 percent of GDP, yielding a smaller gap of −3.1 percent of GDP.

Text table 1.

EBA-Lite Estimates of CA Gap 1/

(In percent of GDP)

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Estimates based on staff’s recommended policy mix, as captured in the alternative scenario (Annex II)

Table 1.

Algeria: External Sustainability Assessment

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Annex VI. Implementation of 2014 FSAP Recommendations 1/

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An FSAP update is scheduled for 2019.

BA: Bank of Algeria; MoF: Ministry of Finance; MoJ: Ministry of Justice; COSOB: Commission d’Organisation et de Surveillance des Opérations de Bourse (financial market regulation and supervisory agency).

Annex VII. Promoting Greater Female Participation in the Labor Market

Algeria has one of the lowest female labor participation rates in the world. As women are more and more educated, this leaves a large share of potential productive workforce untapped and represents a significant loss of potential output. Even though women’s labor force participation is likely to increase over time as the economy develops, proactive policy action can enable the country to leverage this opportunity faster.

1. Fostering women’s place in the labor market is a focus of the government. The government has committed in its 2018 action plan to advance the role of women in the labor market, especially by promoting them to jobs with greater responsibilities in public and private sector jobs. However, the plan needs concrete proposals. Moreover, the government considers that women’s participation in the labor market will continue to increase on its own, spurred by the progress made in women’s educational attainment.

2. Despite strong progress in education, women have not made commensurate progress in employment. Women’s educational attainment has improved and caught up with men’s: women are more likely to complete secondary education and perform better than men in international tests scores. However, nearly half of young women (aged 15–24) are not in education, employment or training. Improvements in education have not translated into a significant improvement in women’s labor market outcomes: Algerian women fare worse than both men in Algeria and women in peer countries. Only 17 percent of women participate in the labor force (versus an average of 25 percent in the Middle East and North Africa region). When they are active, they face much higher unemployment rates (20.7 percent) than their male counterparts (9.4 percent), and the gender gap in unemployment increases with the level of education.

3. The gender wage gap appears insignificant, reflecting strong selection. Among employed women, a recent survey shows a positive overall wage gap in favor of women and no significant difference between men and women’s wages by level of education.1 The positive wage gap is due to the strong selection effect of women into employment: the few women who are employed tend to be on average more educated than working men. While over 40 percent of female employees have a tertiary education, only 10 percent of male employees do. Moreover, women who work tend to have better quality jobs: they are more likely to be employed in permanent salaried jobs, and in the public sector, and to be affiliated with social security. However, these statistics are likely to exclude informal workers, for which there are no available data.

4. While Algerian regulations support gender equality and non-discrimination, practical and cultural barriers partly explain the low participation of women in the labor market. There is some evidence that women drop out from the labor market once they reach their late thirties. Despite a slow increase in women’s labor force participation over time, there is a sharp drop in participation starting in the 30–34 age group. This suggests that once they start a family (average age at marriage ranges between 25 to 30 for Algerian women, and the average age at first birth is 32), their expected role in the household may limit their ability to seek suitable outside work. There are several concrete impediments that may explain this, such as the absence of quality child care and limited provision of early education, inadequate lunch options in schools, inflexible work hours, and long commute without adequate public transportation. However, family formation only partly explains the gender gap since the labor force participation of even young single women remains well below their male counterparts.

5. By enlarging the pool of talent available to employers, increased female labor market participation would enhance growth. Simple estimates show that bringing the female employment rate to male levels (which could only happen gradually over a long period of time in practice) could raise GDP per capita in Japan by 9 percent, the United Arab Emirates by 12 percent, and Egypt by 34 percent. 2 Under similar assumptions, the GDP boost in Algeria would be around 40 percent. Recent literature (Cuberes, Newiak and Teigner 2016), points to similar estimates. Using a more elaborate model, the paper suggests that countries in the Middle East and North Africa could see large increases in GDP were they to eliminate labor market frictions that prevent women from joining the labor force.3 For Algeria, reducing gender gaps over a fifty-year period would see increases in GDP of around 40 percent by 2040.

6. To support women’s inclusion in the labor market, the government should lead by example. Fostering private sector job creation, which is part of the goals of the government, will contribute to increasing opportunities for women. But attention should also be given to the gender dimension of policies. The commitment of the government to uphold the principles set out in the constitution will help. Progress has been made in some areas, for example the number of women in parliament has increased significantly. Public sector employment already guarantees equal treatment to women, which found it an attractive form of employment. Specific measures could be designed with women in mind, for example providing more flexible work hours and improving the reliability of child care and public transportation. In addition, some existing measures, which may discourage female labor should be reviewed, as part of a more general review of the net impact active labor market policies. For example, women benefit from allowances—including micro-credit for stay-at-home women—that may discourage them from joining the formal labor market. The social and economic costs and benefits of such measures would need to be assessed carefully. More generally, normalizing women’s work in the public discourse may help change attitudes.

Figure 1.
Figure 1.
Figure 1.

Indicators on Female Education and Labor Market Outcomes

Citation: IMF Staff Country Reports 2018, 168; 10.5089/9781484361702.002.A001
1

Since February 2018, non-food inflation has started rising. The 12-month moving average inflation slowed to 4.6 percent due to a significant drop in food inflation.

2

See “Assessing Reserve Adequacy—Specific Proposal,” April 2015 (SM/14/334).

3

See Annex I. Authorities’ Response to Past IMF Recommendations.

4

Caisse Nationale d’Assurance Sociale (CNAS). The transfer, equivalent to 2.5 percent of GDP, aims to repay part of the debt of the public pension fund, which had financed its recent deficits by borrowing from CNAS.

5

The ban covers mainly food and household goods, but also some industrial machines and construction materials. Automobile imports remain subject to licensing.

6

For instance, over-invoicing imports to access forex on the official market for resale on the parallel market. See Box 4.

7

See “Fiscal Risks in Algeria”, IMF Country Report No. 17/142.

8

The shock is calibrated to be plausible given recent history and serves to its channels of transmission.

9

The impact of structural reforms remains modest over the projection period as international experience show that the payoff typically takes time to materialize.

10

For an in-depth analysis of constraints to private sector development, and considerations for planning and sequencing the reform agenda, see “Structural Reforms: Strategies and Possible Payoffs”, IMF Country Report No. 17/142.

11

Algeria performed below the emerging market average in the 2017 Fraser Economic Freedom Index for the effectiveness of its judicial systems, the 2018 doing business report, and the WEF 2017 Global Competitiveness report for the intensity of local competition. See 2017 Selected Issue Paper on “Structural Reforms: Strategies and Possible Payoffs” for an in-depth analysis of constraints to private sector development and considerations for planning and sequencing the reform agenda.

12

These indicators have not been produced by Algeria’s statistical office. Caution is needed when comparing survey-based structural indicators across countries. Although these indicators are updated yearly and survey methodologies are revised frequently, they are partly constrained by the data that can realistically be collected and are based on perceptions.

13

Algeria had an Open Budget Index (OBI) score of 3 out of 100 in 2017. A country’s OBI score shows the extent to which the country makes the eight key budget documents available to the public on its website in a timely manner and the extent to which the budget information available to the public is comprehensive. Algeria publishes the

14

At end-2017, public banks held 87 percent of total loans to the economy (74.5 percent of loans to the private sector and 99.8 percent of loans to the public sector).

15

See the previous two Article IV consultations and above-referenced Selected Issue Paper for specific measures in each area.

16

The IMF’s Fiscal Affairs Department and Monetary and Capital Markets Department are providing technical assistance in many of these areas.

17

See companion Selected Issue Paper on “Improving Public Spending Efficiency to Foster More Inclusive Growth.”

1

The government issued bonds for about 9 percent of GDP to finance the purchase of debt owed by a utility company to a public bank and to compensate the state-owned oil company for losses incurred from selling imported refined fuel in the domestic market at subsidized prices.

2

The FRR was depleted in February 2017.

3

Guarantees could become a burden for the central government budget if the financial position of public enterprises deteriorates significantly during the consolidation phase.

4

The central government also finances part of its deficit by using deposits from other public entities in the single treasury account (“circuit du Trésor”.) The government does not include such financing as public debt although, in essence, it incurs a liability. (See 2017 Selected Issue Papers: “Financing Fiscal Deficits” and “Fiscal Risks in Algeria”) for a discussion of this issue.

5

The planned fiscal consolidation over the next three years has a percentile rank of 2 percent.

1

Algeria’s IIP consists mostly of international reserves. External debt and FDI are negligible compared to the size of international reserves. Valuation changes are not taken into account in the government’s estimate of the IIP.

1

Enquête sur les dépenses de consommation et le niveau de vie des ménages—2011 (ONS, 2014).

2

Aguirre and others (2012).

3

The model used for this estimate is a general equilibrium occupational choice model in which agents are endowed with a random entrepreneurship skill that determines their optimal occupation. Agents choose to work as either employers, self-employed, or employees. Female labor market frictions prevent an optimal choice of women between these activities.

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Cover IMF Staff Country Reports
Algeria: 2018 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Algeria
Author:
International Monetary Fund. Middle East and Central Asia Dept.
Volume/Issue:
Volume 2018: Issue 168
Publisher:
International Monetary Fund
ISBN:
9781484361702
ISSN:
1934-7685
Pages:
74
DOI:
https://doi.org/10.5089/9781484361702.002
Figure 1.

Algeria: Selected Macroeconomic Indicators
Figure 2.

Algeria: Fiscal Indicators
Figure 3.

Algeria: Monetary Indicators

Total Expenditure

(Percent of nonhydrocarbon GDP)

Downside Scenario 1: Lower Oil Prices

Downside Scenario 2: Higher Fiscal Spending

Most Problematic Factors for Doing Business

(Weighted score of respondent’s ranking of the 5 top factors)

Legal System and Property Rights

(10=best)

Credit to the Private Sector

(Percent of GDP)

Inward FDI, 2012–16 Average

(Percent of GDP)

Global Competitiveness Index: Labor Market

(7=best)

Global Competitiveness Index: Education

(7=best)
Figure 1.

Alternative and Baseline Scenarios
Figure 1.

Alternative and Baseline Scenarios
Figure 1.

Lower Oil Prices
Figure 1.

Lower Oil Prices
Figure 2.

Higher Fiscal Spending
Figure 2.

Higher Fiscal Spending
Figure 1.

Algeria: Public Sector Debt Sustainability Analysis (DSA)—Baseline Scenario

(In percent of GDP unless otherwise indicated)
Figure 2.

Algeria: Public DSA—Composition of Public Debt and Alternative Scenarios
Figure 3.

Algeria: Public DSA—Realism of Baseline Assumptions
Figure 4.

Algeria: Public DSA—Stress Tests
Figure 5.

Algeria: Public DSA Risk Assessment
Figure 6.

Algeria: External Debt Sustainability: Bounds Tests 1/ 2/

(External debt in percent of GDP)

Decomposition of the IMF’s ARA Metric1

(US$ billion)

Exchange Rate Developments

(Index, 2010=100)
Figure 1.

Indicators on Female Education and Labor Market Outcomes
Figure 1.

Indicators on Female Education and Labor Market Outcomes