Press Release No. 22/396

IMF Staff Completes 2022 Article IV Mission to Algeria

November 21, 2022

• The near-term outlook for the Algerian economy has materially improved amid a significant increase in hydrocarbon prices.
• The acceleration in inflation and vulnerability to the volatility of hydrocarbon prices are major challenges that need to be addressed to protect macroeconomic stability.
• Fiscal rebalancing is needed to keep public finances on a sound footing in the medium term. Tightening monetary policy is needed to contain inflation. Continued progress on structural reforms would support the transition to a more diversified and stable growth model and spur job creation.

Algiers, Algeria: An International Monetary Fund (IMF) mission led by Ms. Geneviève Verdier visited Algiers during November 6- 21 for the 2022 Article IV consultations with Algeria. At the end of the mission, Ms. Verdier issued the following statement:

“The rally in hydrocarbon prices is contributing to the recovery of the Algerian economy from the pandemic shock. Large windfall hydrocarbon revenue has alleviated pressures on external and public finances. In 2022, the current account balance is forecast to record its first surplus since 2013, and international reserves rose to USD 53.5 billion in September from USD 46.7 billion in 2021. The significant rise in non-hydrocarbon exports has also contributed to this improvement. A fiscal surplus is expected in 2022 on higher revenue and lower-than-expected spending execution. The recovery from the pandemic shock is continuing, with non-hydrocarbon GDP growth projected to accelerate to 3.2 percent in 2022 from 2.1 percent in 2021. This will mark a recovery of most of the output loss from the pandemic shock, although durable scars on labor markets and medium-term growth are still risks. Real GDP growth is projected at 2.9 percent.

“As in many other countries, inflation has accelerated significantly and is a major concern. The annual average inflation rate has hovered around 9.4 percent in recent months, a level not seen in 25 years. The central bank has taken actions to control price pressures, but monetary policy remained accommodative.

“The near-term outlook is favorable, but highly contingent on hydrocarbon prices. The current account is projected in surplus in 2023 with high hydrocarbon revenue offsetting a recovery in imports. Growth is projected to accelerate and inflation to slowdown but remain above 8 percent on average amid easing in fiscal policy in 2023

“The mission considers that continued high reliance on hydrocarbon revenue and the projected sizeable rise in spending in 2023 raise significant risks to public finances amid high commodity price volatility, and exceptional global uncertainty. In the mission’s view, a well-balanced budget adjustment is needed to curb inflationary pressures, rebuild policy space and stabilize government debt. A medium-term fiscal framework could guide consolidation efforts, reduce policy procyclicality, and protect priority spending. Well-targeted measures should be used as needed to support low-income households.

“The mission commends the progress achieved on fiscal reforms, in particular in the areas of taxation and public finance management. It recommends stronger integration between spending plans and the government’s financing strategy as part of the budget elaboration process and diversifying financing sources to allow for gradual implementation of fiscal consolidation.

“In tandem, monetary policy tightening is necessary to bring inflation under control. The risks of entrenchment of high inflation call for gradual normalization of monetary policy . The upcoming revision of the Law on Money and Credit is a timely opportunity to strengthen the governance framework of the Bank of Algeria and bolster its independence. In this regard, the mission welcomes the government’s commitment not to resort to monetary financing.

“The banking system withstood repeated shocks in recent years, but its financial health merits attention. Tightening interlinkages between the balance sheets of the government, state-owned enterprises and public banks could pose risks to financial stability and debt sustainability. These developments call for broad financial sector reforms to strengthen the governance and business models of public banks, enhance supervisory capacity, unlock lending to the private sector and foster financial inclusion. The mission welcomes the timely expiry of regulatory easing measures taken at the outset of the pandemic.

“The mission agrees with the authorities that continued efforts to reform the business climate will help foster the transition to a more inclusive and diversified growth model and spur job creation. The new investment law and attendant decrees could offer a more conducive environment to private investment, while plans to roll out a new legislative framework for investment in renewable energies could facilitate the transition to a low-carbon economy. The mission commends the authorities’ plans to improve data quality and availability and calls to prioritize actions in this area to better inform policymaking and private sector decisions.

“The mission met with the Governor of the Bank of Algeria, Mr. Taleb; Finance Minister, Mr. Kessali; Energy and Mines Minister, Mr. Arkab; Agriculture and Rural Development Minister, Mr. Henni; Public Works, Hydropower, and Basic Infrastructure Minister, Mr. Rakhroukh; Commerce Minister, Mr. Rezig, and Industry Minister, Mr. Zeghdar. The team also held discussions with other senior government and central bank officials, members of the parliamentary Finance and Budget Commission and with representatives of the economic and financial sectors.”

“The mission would like to express its gratitude and appreciation to the authorities and other interlocutors for the constructive discussions and their warm hospitality.”