News Column

IMF update on the Algerian economy

January 28, 2014

Algeria's economic performance in 2013 has been 'satisfactory' said the International Monetary Fund (IMF). Inflation, which reached 8.9 percent in 2012, decelerated significantly in 2013 thanks to fiscal consolidation and prudent monetary policy. Real gross domestic product (GDP) growth is expected to slow to 2.7 percent in 2013 from 3.3 percent in 2012, reflecting a continued decline in hydrocarbon sector output and lower public spending, somewhat offset by the strong growth of private demand and investment by state-owned enterprises. However, Algeria's external position, though still very strong, has started to weaken. The current account surplus is expected to narrow to 1.1 percent of GDP in 2013, as robust domestic hydrocarbon consumption, together with declining prices, weighs on hydrocarbon exports and import growth remains sizeable. Risks are tilted to the downside: Algeria is vulnerable to a prolonged decline in oil prices, a worsening of the global environment, further pressure on the hydrocarbon rent, and an intensification of regional tensions. Outward spillovers are likely to be limited. Algeria faces a number of challenges. Despite stabilisation in 2013, new inflationary pressures may arise following the recent surge in credit and a new increase in public sector wages. Fiscal and external vulnerabilities to developments in the hydrocarbon sector are worsening, as the domestic consumption drag on export volumes is compounding the longstanding risk related to lower oil prices. In addition, notwithstanding the ongoing consolidation, fiscal policy is not on a sustainable path. It is de facto pro-cyclical, and the non-hydrocarbon primary deficit is well above its long-term sustainable level, implying negative net public savings in the long run. Finally, shortcomings in competitiveness and productivity are weighing on economic growth, which remains below its potential and below the level required to significantly reduce unemployment, especially for youth and women. Although stable, the financial sector is underdeveloped, constraining access to financing, in particular for small- and medium-sized enterprises. IMF Executive Board Assessment The IMF said, "Executive Directors commended Algeria's economic performance, notably the decline in inflation, unemployment and inequality. Directors noted, however, that strong credit growth and another public sector wage increase call for continued caution over price stability. They also observed a worsening in the economy's vulnerability to developments in the hydrocarbon sector, as declining hydrocarbon production and surging domestic consumption are squeezing export volumes, compounding the longstanding risk of lower oil prices. Finally, they noted that unemployment remained high among youth and women. Against this background, Directors encouraged the authorities to take measures to consolidate macroeconomic and financial stability, ensure long-term fiscal sustainability, and promote strong private sector-led non-hydrocarbon growth and robust job creation. "Directors welcomed the decline in inflation brought about by monetary tightening and fiscal consolidation. They cautioned, however, that the recent surge in credit to the economy, together with the planned increase in current spending in 2014, could revive inflationary pressures, and urged the Banque d'AlgÉrie to stand ready to increase liquidity absorption and raise interest rates if needed. Avoiding new increases in current spending, and financing the budget deficit by issuing debt rather than by drawings from the oil fund, will also be important. "Directors emphasised that the fiscal consolidation initiated in 2013 should continue in order to ensure fiscal sustainability. They recommended containing the wage bill; gradually phasing out subsidies while establishing a targeted cash-transfer system to protect the poor; stabilizing transfers to public entities in real terms; and reducing tax exemptions. To protect economic growth, Directors agreed that it will be important to preserve capital spending and enhance its efficiency and effectiveness. "Directors recommended that Algeria adopt a full-fledged fiscal rule to better manage hydrocarbon revenue volatility and attain fiscal sustainability. A fiscal rule using a backward-looking average oil price and setting a limit on the structural primary balance consistent with long-run fiscal sustainability would improve the management of hydrocarbon revenue. Further, the oil fund could be transformed into a sovereign wealth fund, and annual ceilings on drawings established to preserve financial savings. To improve public financial management, Directors recommended increasing the transparency of hydrocarbon revenue collection and developing an integrated financial management information system. "Directors noted that preserving fiscal and external sustainability would require increasing hydrocarbon production and extending the time horizon of reserves. They recommended improving the business environment, attracting Foreign Direct Investment (FDI) in the hydrocarbon sector, and swiftly implementing the national oil company's investment plans. Phasing out implicit subsidies would help contain domestic energy consumption and support exports. "Directors encouraged the authorities to continue targeting the equilibrium real effective exchange rate to protect the competitiveness of non-hydrocarbon exports. They saw the premium in the illegal parallel exchange market as detrimental to growth and urged the authorities to forcefully tackle it. Furthermore, they recommended increasing the indicative foreign exchange ceilings for travelers to more realistic levels. The financial sector "Directors welcomed the stability of the financial sector. To support its development, they recommended fostering competition in the banking sector, speeding up the development of credit bureaus, revisiting the guarantee mechanisms, and strengthening collateral and insolvency regimes. Directors also called for the ban on consumer lending to be lifted, and more space provided for mortgage finance. To develop capital markets, they advised issuing more sovereign debt and listing well-performing state-owned enterprises on the stock exchange, while removing disincentives to private sector debt and equity issuance. Finally, Directors urged the authorities to take immediate steps to address deficiencies in the Anti-Money Laundering/Combating the Financing of Terrorism framework. "Directors underscored the need for wide-ranging structural reforms to accelerate economic growth and job creation. They noted in particular the importance of improving the business environment, enhancing cost competitiveness, and relaxing the restrictive FDI regime. They called for deeper trade integration through WTO accession, trade facilitation, and export promotion. Directors also called for reforms to increase labour market flexibility and ensure that job seekers are equipped with the right skills."


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Source: CPI Financial


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