Press Release No. 23/447

IMF Staff Completes 2023 Article IV Mission to Algeria

December 14, 2023

• The near-term prospects for the Algerian economy are favorable, although inflation remains elevated.
• Medium-term economic prospects will depend on reforms to diversify the economy and foster inclusive, private sector-led growth, along with job creation. Sustained high inflation, volatility of hydrocarbon prices, and climate change vulnerability are key risks.
• A gradual rebalancing of fiscal policy would keep public finances sound, and more exchange rate flexibility would help the economy absorb external shocks. Monetary policy tightening would help contain inflation.

Algiers, Algeria: An International Monetary Fund (IMF) mission led by Mr. Chris Geiregat visited Algiers during December 3–14 for the 2023 Article IV consultations with Algeria. At the end of the mission, Mr. Geiregat issued the following statement:

“Economic growth is projected to reach 4.2 percent in 2023, supported by robust activity in the hydrocarbon, industry, construction, and services sectors. The current account is expected to record a surplus for the second year in a row despite lower hydrocarbon prices, and international reserves are at a comfortable level, equivalent to about 14 months of imports as of end-October.

Average annual inflation is projected to remain elevated at 9.2 percent in 2023, with fresh food prices continuing to be a major driver and even though the exchange rate appreciation helped contain imported inflation. Monetary policy has remained accommodative, despite the central bank’s action in April to increase reserve requirements and step up liquidity absorption in the banking sector. The budget deficit would reach 6.7 percent of GDP, driven in part by an increase in the public wage bill, transfers, and investment spending.

Near-term prospects are broadly favorable. Growth in 2024 is expected to remain robust, inflation to moderate, and the current account would record a small surplus as hydrocarbon prices are expected to ease further and imports would pick up moderately. The fiscal deficit is expected to continue to widen in 2024 reflecting a higher public wage bill, transfers, and public investments. The deficit would be financed in part by a drawdown of accumulated hydrocarbon revenue in the Revenue Regulation Fund.

The economic prospects are subject to several risks. Inflation could remain elevated and the volatility in hydrocarbon prices could affect growth and budget revenues. Sustained large fiscal deficits would erode fiscal buffers, resulting in tightening financing constraints and rising public debt. The Algerian economy is also highly vulnerable to the effects of climate change, as the recent droughts have amply illustrated. Conversely, medium-term economic prospects would rise with sustained reforms to diversify the economy (thus reducing dependence on the hydrocarbon sector) and create higher and sustained growth and job creation. Such reforms would require steady implementation of the government’s action plan, higher private investment and improvements in the business climate more generally, more developed domestic financial markets, and new export opportunities for nonhydrocarbon products—as the authorities are currently pursuing.

The mission recommends a gradual rebalancing of fiscal policy to contain the projected increase of financing needs and public debt over the medium term. The adoption of a medium-term budget framework could help shield fiscal policy from the volatility of hydrocarbon revenue and other shocks. Also, preparing medium-term financing plans would help diversify financing sources (such as long-term savings products) and thus reduce dependence on the domestic banking sector. The mission welcomes the continued progress in public finance reforms such as the introduction of program budgeting and introduction of performance contracts for managers, which will improve the transparency and accountability of budget execution.

As inflation is still at risk of becoming entrenched, a gradual tightening of monetary policy would support containing inflation, and this by using the various instruments of monetary policy available to the central bank, including a more active use of the policy rate to help signal the central bank’s resolve to address inflation concerns.

The mission commends the authorities for the adoption of a new monetary and banking law, which aims to stimulate financial innovation and inclusion (such as the introduction of digital banking and Islamic banking), modernize the central bank’s toolkit for financial supervision and crisis management, and reform the central bank’s organization and its monetary policy operations. Strengthening monetary policy transmission will require proactive liquidity management, improved analysis and forecasting tools (including an update to the Consumer Price Index basket), and deepening money and public debt markets. More flexibility in the exchange rate would help in shock absorption and strengthen the effectiveness of monetary policy.

The Algerian authorities have taken several initiatives to strengthen the business climate, diversify the economy, and promote private investments. The new investment law aims to support private sector initiative and will be implemented by a new investment promotion agency (including through one-stop windows and electronic platforms for investors). Algerian banks have recently started to open branches abroad to better support export businesses, and the authorities are implementing a broad digitalization strategy to improve service delivery, governance, and transparency. The mission encourages the authorities to continue along this reform path by removing administrative barriers and making product and labor markets more flexible.”

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