On May 26, 2017, the Executive Board of the International Monetary Fund (IMF) concluded the 2017 Article IV consultation with Algeria.
Algeria continues to face important challenges posed by lower oil prices. Overall economic activity was resilient, but growth in the nonhydrocarbon sector slowed to 2.9 percent in 2016, partly under the effects of spending cuts. Inflation increased from 4.8 percent in 2015 to 6.4 percent in 2016 and stood at 7.7 percent year-on-year in February 2017. Unemployment was 10.5 percent in September 2016 and remains particularly high among the youth (26.7 percent) and women (20.0 percent). Despite fiscal consolidation in 2016, the fiscal and current account deficits remained large, and public debt increased, reflecting in part the assumption of a government-guaranteed debt. International reserves, while still ample, declined rapidly. External debt remains very low.
Executive Board Assessment
Executive Directors noted the significant challenges facing the Algerian economy and commended the authorities’ ongoing efforts to adjust to the oil price shock. Directors emphasized that a balanced policy mix along with ambitious structural reforms will be important to ensure fiscal sustainability, narrow external imbalances, reduce reliance on hydrocarbons, and raise potential growth.
Directors welcomed the authorities’ commitment to pursue sustained fiscal consolidation, within a clear medium-term budget framework. They supported the steps being taken to reduce the fiscal deficit, namely to raise more nonhydrocarbon revenue, control current spending, expand the subsidy reform while protecting the poor, and increase the efficiency of public investment and reduce its cost. Directors were generally of the view that tapping a broader range of financing options, including prudent external borrowing and the sale of state assets, combined with greater exchange rate flexibility, could provide room for a more gradual and growth-friendly fiscal consolidation than currently envisaged and reduce potential adverse impact on economic activity.
Directors emphasized that wide-ranging structural reforms are needed to diversify the economy and promote a dynamic private sector. They welcomed the steps taken to improve the business environment, and the ongoing work on a long-term strategy to reshape the country’s growth model. Directors stressed the need for timely action to reduce red tape, improve access to finance, and strengthen governance and transparency. Attention should also be given to reducing skills mismatches, improving the functioning of the labor market, fostering greater labor participation of women, and further opening the economy to trade and foreign direct investment. Directors underscored that the overall strategy should be carefully designed and sequenced so that reforms reinforce each other and the burden of economic adjustment is shared equitably.
Directors noted that net international reserves remain comfortable, but that the current account balance is significantly weaker than warranted by medium-term fundamentals. They emphasized that greater exchange rate flexibility, along with fiscal consolidation and structural reforms, would help address external imbalances and support private sector development. Directors also called for measures to deepen the official foreign exchange market and curtail parallel market activity.
Directors welcomed the introduction of open market operations by the central bank to manage liquidity. They recommended that the central bank should phase out bank financing via the discount window without delay to encourage banks to manage their liquidity more effectively. Considering inflationary pressures, Directors encouraged the authorities to stand ready to increase the policy rate.
Directors noted that the banking sector as a whole is adequately capitalized and profitable. However, financial sector policies should be further strengthened to address growing financial stability risks resulting from the oil price shock. They encouraged the authorities to accelerate the transition to a risk-based supervisory framework, enhance the role of macroprudential policy, strengthen the governance of public banks, and develop a crisis resolution framework.