Is Algeria on right track to end its fiscal woes?

2 min read

Algeria continues to face important challenges posed by the fall in oil prices four years ago. Despite a sizeable fiscal consolidation in 2017, the fiscal and current account deficits remain large.

Real Gross Domestic Product (GDP) growth slowed sharply, mainly driven by a contraction in hydrocarbon production, although growth in the non-hydrocarbon sector was stable. Recently (on May 30) the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Algeria.

High unemployment

Unemployment increased to 11.7 percent in September 2017 from 10.5 in September 2016 and 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 due to slowing inflation for manufactured goods and services, and stood at 3.4 percent year-on-year in April 2018. Reserves, while still ample, fell by $17 billion to $96 billion. External debt remains negligible, while domestic public debt has increased significantly since 2016 but remains moderate,” said IMF, in its recent statement.

“The authorities’ policy mix includes increased fiscal spending in 2018 followed by a resumption of fiscal consolidation over the medium term, monetary financing of fiscal deficits, and temporary restrictions on imports as well as structural reforms aimed at diversifying the economy,” it added.

It was noted that Algeria has faced significant challenges related to lower oil prices since 2014 and slower economic activity. While welcoming the authorities’ efforts to manage the adjustment process, it was observed that sustained fiscal consolidation and wide-ranging structural reforms are necessary to facilitate a more diversified growth model and support private sector development.

Realizing better outcomes

The Executive Board recommended an approach that would likely achieve better outcomes while being more sustainable. Its directors generally agreed that a gradual fiscal consolidation starting in 2018 could be achieved without central bank financing, relying on a broader range of financing options, including external borrowing to finance well-chosen investment projects. While a gradual exchange rate depreciation, combined with efforts to eliminate the parallel foreign exchange market would support the adjustment efforts.

Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

Independent monetary policy

Directors of the Executive Board concurred that monetary policy should be independent and aimed at containing inflation. In this regard, they encouraged the authorities to stand ready to tighten the monetary stance if inflationary pressures arise.

While discouraging monetary financing of the deficit, directors underlined the need to put in place safeguards, including time and quantity limits, to contain its negative impact should such financing continue. In this context, they welcomed the central bank’s commitment to sterilizing liquidity resulting from monetary financing as needed. They supported the efforts to raise more non-hydrocarbon revenue, improve public spending efficiency and management, and expand the subsidy reform while protecting the poor.


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