Press Release No. 10/415

Press Release: Statement of the 2010 IMF Article IV Consultation Mission with Algeria

November 4, 2010

An International Monetary Fund mission led by Mr. Joël Toujas-Bernaté visited Algiers from October 20 through November 2, 2010 for discussions in the context of the annual Article IV consultations.¹

The discussions focused on the short- and medium-term economic policies and prospects within the current, still uncertain, context of the global economic situation. The mission benefited from discussions with the Minister of Finance, Mr. Karim Djoudi; the Minister of Forecasting and Statistics, Mr. Abdelhamid Temmar; and the Governor of the Bank of Algeria, Mr. Mohammed Laksaci. The mission also met with representatives of the Ministries of Industry and of Small and Medium-sized Enterprise, and the Ministry of Trade, as well as representatives of the economic sectors and civil society.

Against a backdrop of global economic recovery, Algeria’s economy has continued to perform well on the back of public expenditure. The prudent macroeconomic policies pursued in the past have helped Algeria to build a sound financial position with very low levels of debt. Macroeconomic performance remains robust in 2010:

• Nonhydrocarbon growth is expected to reach over 5 percent, due to sound performance of the sectors boosted by the Public Investment Program (PIP). Hydrocarbon output is expected to stabilize and contribute to overall GDP growth of 3.3 percent;

• Inflation has slowed to an annual average of 4.6 percent due to the decrease in fresh food prices. Inflation excluding fresh food remains relatively low thanks to prudent monetary policy, support for prices of some basic food products, and the high content of imports in public expenditures;

• Algeria's external position has improved compared to 2009 and remains very comfortable, with international reserves of US$157 billion at end-September 2010. The current account has improved sharply as a result of the increase in the price of hydrocarbons and a slight decline in the level of imports;

• Despite the increase in hydrocarbon revenues, the fiscal position will remain in deficit due to a significant rise in public expenditure, including a rise in civil servants' salaries. However, the budget deficit will decrease in 2010 to 4 percent of GDP, compared with a deficit of 6.8 percent of GDP in 2009.

In 2011, the nonhydrocarbon sector is expected to perform well, in line with this year's trend. The hydrocarbon sector is also expected to see a slight improvement in its level of activity and to contribute to overall growth of 3.7 percent. The main objective of fiscal policy in 2011 should be to sustain the effort to modernize infrastructures while further strengthening expenditure control. With a view to ensuring long-term fiscal sustainability, it would be appropriate to further streamline and better target current public expenditure, and to further strengthen the mobilization of nonhydrocarbon revenues. The overriding orientation of monetary policy in 2011 should be to continue to control excess liquidity and the inflationary pressures that could emerge following the significant wage increases in the civil service and the main economic sectors. In addition, the Bank of Algeria is continuing to maintain the real effective exchange rate close to its equilibrium level.

Despite significant progress, the main challenge for the Algerian economy remains to creating enough jobs for the younger generations, based on diversification of the economy. Medium-term prospects remain favorable, even if nonhydrocarbon sector activity slows somewhat, with stabilization of public investment outlays and a private sector that does not appear to be entirely in a position as yet to take over the role of engine of growth. Medium-term financial prospects have improved significantly with the increase in the price of the barrel of crude, but they are still strongly dependent on fluctuations in hydrocarbon prices. It will also be important to continue strengthening the quality of public expenditures in order to support sustainable social and economic progress.

With a view to boosting the prospects for medium-term growth to reduce unemployment and increase its population's standard of living, Algeria must continue its public investment program, while monitoring its efficacy, and make deeper structural reforms, in particular to improve the business climate. These measures will promote the development of private sector investment and diversification of the economy, and enhance both its competitiveness and its attractiveness to foreign investors. Accordingly, the IMF will continue to support the significant efforts of the government and the Bank of Algeria to strengthen the soundness and efficiency of the banking sector. Finally, the mission encourages the authorities to pursue their efforts to integrate Algeria into the regional and world economies

¹ In accordance with Article IV of its Articles of Agreement, the IMF holds bilateral consultations with its members, generally once a year. An IMF staff mission visits the country, gathers economic and financial data, and meets those responsible for the country's economic development and policies. Once they have returned to headquarters, the members of the mission draw up a report to be submitted to the Executive Board for review. Following this review, the Managing Director, as Chairman of the Executive Board summarizes the opinions of the Executive Directors, and this summary is forwarded to the country's authorities.