IMF Staff Completes 2018 Article IV Visit to Algeria

IMF News, March 12, 2018

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IMF staff team led by Jean-François Dauphin visited Algiers from February 27 to March 12 to hold discussions for the 2018 Article IV consultation.
End-of-Mission press release conveying preliminary findings; staff will prepare a report that, subject to management approval, will be presented to the IMF's Executive Board for discussion and decision.

The fall in oil prices four years ago continues to pose important challenges for Algeria.
Despite a sizeable fiscal consolidation in 2017, the fiscal and current account deficits remain large.
Reserves fell by US$17 billion to US$96 billion (excluding SDRs).
Overall economic activity slowed, although growth in the nonhydrocarbon sector was stable.
Inflation decreased from 6.4 percent in 2016 to 5.6 percent in 2017.

Since the end of 2017, the authorities have changed their short-term macroeconomic strategy:
- Adopted an expansionary 2018 budget, the deficit of which will be mainly financed by the central bank.
- Hardened import barriers.
- Intend to resume fiscal consolidation from 2019 onward, to restore the fiscal balance in 2022.
IMF team view:
- Shares the authorities’ dual objectives of macroeconomic stabilization and promotion of more sustainable and inclusive growth.
- Considers the new short-term policy mix risky and may hinder reaching those objectives.
- Warns the new policies risk exacerbating imbalances, increasing inflation, and accelerating the loss of international reserves.
- Concludes the economic environment may not become conducive to reforms and private sector development under the new short-term mix.

Algeria still has a window to balance economic adjustment and growth due to relatively low public debt and little external debt.
Fiscal consolidation is needed to adjust spending to the lower level of revenue but can proceed at a smooth pace without recourse to central bank monetary financing.
Recommended financing options to avoid monetization:
- Domestic debt issuance at market rates.
- Public-private partnerships.
- Sale of assets.
- Ideally, external borrowing to finance well-chosen investment projects.
Consolidation should be broad-based, including:
- Raising more nonhydrocarbon revenues by widening the tax base (reducing exemptions and strengthening tax collection).
- Gradually reducing current expenditure as a share of GDP.
- Reducing investment while increasing its efficiency.
Exchange rate and monetary policy recommendations:
- A gradual exchange rate depreciation combined with efforts to eliminate the parallel foreign exchange market would support the adjustment.
- The central bank should stand ready to tighten monetary policy if inflationary pressures do not abate.
If monetary financing of the deficit continues, robust safeguards should be in place:
- Strict quantitative and time limits to monetary financing.
- Pricing of such financing at market rate.

A critical mass of structural reforms is needed to promote a private-sector led, diversified economy and reduce dependence on oil and gas.
Recommended actions:
- Reduce red tape.
- Improve access to finance.
- Strengthen governance, transparency and competition.
- Further open the economy to foreign investment.
- Improve the functioning of the labor markets and job-skills matches.
- Foster greater female labor force participation.
Strengthen economic policy framework to increase policy effectiveness:
- Continue to strengthen public financial management.
- Improve the efficiency of public spending.
- Strengthen the prudential and crisis preparedness framework.
Trade policy recommendation:
- Center trade policies on encouraging exports rather than imposing distorting nontariff import barriers.

The IMF team met with:
- Prime Minister Mr. Ouyahia.
- Finance Minister, Mr. Raouia.
- Training and Vocational Education Minister, Mr. Mebarki.
- Industry and Mines Minister, Mr. Yousfi.
- Trade Minister, Mr. Benmeradi.
- Public Works and Transports Minister, Mr. Zaâlane.
- Labor, Employment, and Social Security Minister, Mr. Zemali.
- Governor of the Bank of Algeria, Mr. Loukal.
The team also held discussions with other senior government and central bank officials as well as with representatives of the economic and financial sectors and trade union.
The IMF team thanked the authorities and other interlocutors for their hospitality, cooperation, and candid exchange of views.

IMF Communications Department, Press Release No. 18/82, March 12, 2018