Press Release No. 12/427

Press Release: Statement by the IMF Mission on the 2012 Article IV Consultations Mission with Algeria

November 12, 2012

An International Monetary Fund (IMF) mission, led by Mr. Zeine Zeidane, visited Algiers from October 29 to November 11, 2012 to hold annual Article IV discussions. The consultation will conclude with the preparation of a report to be discussed by the IMF Executive Board in early 2013.

The discussions focused on short- and medium-term economic policies as well as the economic outlook in the context of a global economic environment that remains difficult. The mission held discussions with His Excellency, the Minister of Finance, Mr. Karim Djoudi, His Excellency, the Minister of Agriculture and Rural Development, Mr. Rachid Benaissa, His Excellency, the Minister of Housing and Town-planning, Mr. Abdelmadjid Tebboune, His Excellency, the Minister of Labor, Employment, and Social Security, Mr. Tayeb Louh and His Excellency, the Governor of the Bank of Algeria, Mr. Mohammed Laksaci. The mission also met with representatives of the economic and financial sectors and civil society.

Performance in 2012 is expected to remain solid. Growth is projected to reach 2.5 percent, supported by a buoyant non-hydrocarbon sector bolstered by public spending. Growth is forecast to reach 3.4 percent in 2013, underpinned by domestic demand and a recovery in the hydrocarbon sector. The current account surplus is expected to reach 8.2 percent of GDP, with higher hydrocarbon prices offsetting lower export volumes. The current account surplus will be at 7.1 percent of GDP in 2013. In 2012 and 2013, foreign-exchange reserves will remain very comfortable and external debt levels very low. The banking sector stayed solid in 2012. The oil stabilization fund, net of public debt, reached 26 percent of GDP.

However, inflation surged to 8.4 percent in 2012. Further, fiscal vulnerability has increased as a result of the fiscal expansion of recent years. The fiscal balance is expected to deteriorate to 3.7 percent of GDP, weighted by the full effect of wage increases and back-payments. Vulnerability to hydrocarbon prices has consequently increased, with the breakeven price reaching $121 per barrel in 2012. Although unemployment was stable at 10 percent in 2011, youth and female unemployment rates remains high, at 21.5 percent and 17 percent, respectively.

The main short and medium term challenges facing Algeria will be controlling inflation, strengthening fiscal sustainability, and boosting growth in the non-hydrocarbon sector. Monetary and fiscal policies should be coordinated to fight inflation. The planned consolidation of current spending in 2013 is welcome. The liquidity management policy introduced in 2012 should be pursued, and supported by an increased recourse to financial markets by the Treasury to finance the public deficit. This policy could also be further bolstered by raising interest rates with a view to bringing inflation down to the 4-4.5 percent target.

Long-term fiscal sustainability is dependent on hydrocarbon resources. The prudent fiscal policy envisaged for 2013 will restore fiscal space and should be pursued over the medium term through the containment of current spending and the development of non-hydrocarbon revenues. Similarly, the efforts launched by the authorities to modernize public financial management, and supported by a medium-term budget framework, should help strengthen the efficiency of public expenditure management.

Algeria must step up its growth rate, which remains below potential, in order to reduce unemployment. This can be achieved by maintaining public investment and making it more efficient, continuing a foreign exchange policy that fosters external competitiveness, and undertaking structural reforms to promote private-sector-led growth and increase total factor productivity. A strategy is therefore needed to improve the business climate, alleviate the constraints on foreign investment, promote greater international trade integration, and develop the financial sector.