Public Information Notice No. 01/94

Public Information Notice: IMF Concludes 2001 Article IV Consultation with Algeria

September 18, 2001

On August 29, 2001, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Algeria.¹

Background

Since the outset of its Fund-supported adjustment and reform program in 1994, Algeria has made—in particularly difficult circumstances—substantial progress toward the restoration of macroeconomic stability and implemented a comprehensive set of structural reforms. Growth turned positive, the inflation rate dropped, and the balance of payments' viability was restored. Assisted by a tightening of domestic demand management, the Algerian economy was able to weather the oil price downturn of 1998–99, thus demonstrating increased resilience to external shocks.

With the surge in oil prices from the spring of 1999, the balance of payments position strengthened markedly in 2000. While the Algerian dinar remained relatively stable in real effective terms in 2000, record hydrocarbon exports boosted total merchandise exports and imports increased modestly in dollar terms. This resulted in a massive current account surplus of about 17 percent of GDP in 2000 (following a balanced position in 1999), which contributed to the rise in gross official reserves to US$11.9 billion (equivalent to over a year of imports) by end-2000, from US$4.4 billion at end-1999. Similar developments in early 2001 led to a further increase in gross official reserves to US$15.2 billion at end-June 2001. The debt service ratio fell to 21 percent in 2000 from 40 percent in 1999, partly because of the large increase in the value of exports. Since amortization exceeded drawings, external debt decreased by US$2.8 billion to US$25.5 billion at end-2000 (48 percent of GDP).

High hydrocarbon prices also contributed to a sharp improvement in the budget position. Notwithstanding a 22 percent increase in expenditures in 2000 fueled by a surge in capital outlays, the increase in hydrocarbon revenue resulted in a switch in the budget balance to a surplus of close to 10 percent of GDP in 2000 from a small deficit in 1999. The latter allowed early retirement of domestic debt and the accumulation of large cash balances on the treasury account at the central bank. To help preserve these resources, the government established a stabilization fund in 2000.

Despite a dynamic hydrocarbon sector, GDP growth was modest in 2000. Hydrocarbon production increased by about 5 percent in 2000, compared to 6.2 percent in 1999. However, overall GDP growth was modest (2.4 percent in 2000) and lower than in 1999 (3.2 percent) due to sluggish growth in nonhydrocarbon sectors in 2000 (1.5 percent compared to 2.2 percent in 1999). In particular, agricultural production was once again affected by unfavorable climatic conditions while industrial production recorded only a slight increase, entirely attributable to the dynamism of the private sector. On the whole, growth was in all likelihood too weak to have had an effect on unemployment, currently estimated at about 30 percent of the labor force. A reduction in inflation, mainly driven by food prices, continued in 2000: the average increase in the consumer price index dropped to 0.3 percent from 2.6 percent in 1999. However, the 12-month moving average increased by 1.7 percent during the year ending in June 2001.

Regarding structural reforms, only a few laws (notably those liberalizing the telecommunications and mining sectors) have been adopted by parliament since end-1999. However, in July 2001, the public sector assets in the steel-making sector were transferred to a company which is majority-owned by a foreign investor. In the same month, a second mobile telephone license was sold to a foreign investor. In addition, intense preparatory work on various other reforms took place. In particular, the government has prepared a draft law liberalizing the hydrocarbon sector and has taken steps toward extending public infrastructure concessions. It published, in early 2001, a first list of public enterprises to be partly or entirely privatized. Concerning trade, the authorities have stated their objective to conclude before the end of 2001 the negotiations towards an association agreement with the European Union and to pursue simultaneously the negotiations for membership in the World Trade Organization. In this context, they are also in the process of introducing a comprehensive reform of the external tariff.

Executive Board Assessment

The Executive Directors commended the authorities' prudent macroeconomic management and progress in restoring macroeconomic balances under difficult circumstances and in the context of rapidly changing oil prices. A prudent fiscal stance and cautious easing of monetary conditions have led to a major strengthening of the balance of payments position and a large accumulation of official reserves. External debt indicators have improved, and the inflation rate has declined sharply.

Nevertheless, Directors noted that the Algerian economy still faces major challenges over the medium term. Higher economic growth is needed to reduce unemployment and improve living standards, and the export and revenue bases need to be diversified to reduce external and fiscal vulnerability. In Directors' view, these require the introduction of a comprehensive set of reforms to promote private sector investment and raise the efficiency of new investment, particularly in the non-hydrocarbon sectors. In this context, Directors stressed the importance of privatization, restructuring of public enterprises, comprehensive banking reform, enhanced competition, and further trade liberalization.

In the face of mounting social demands, low growth and inflation, and strong fiscal and external positions, Directors endorsed the fiscal stimulus being introduced in 2001, and the authorities' 2001–04 economic recovery plan. They considered that the recovery plan could temporarily boost growth and thereby reduce unemployment and poverty in the short term, and would not jeopardize Algeria's fiscal and external positions as long as oil prices do not drop significantly from their current levels. However, Directors encouraged the authorities to review the quality of expenditures in consultation with the World Bank. They stressed that the recovery plan would have to be complemented by the accelerated implementation of structural reforms to strengthen growth on a sustainable basis. Directors expressed concern about a possible resumption of inflationary pressures and the vulnerability of the public finances to a marked downturn in oil prices. In this regard, they were encouraged by the authorities' commitment to adjust fiscal policy to future developments in the oil market and to maintain a cautious monetary stance.

Directors welcomed the authorities' commitment to manage the exchange rate float in a flexible way to safeguard competitiveness and dampen external shocks. They recommended that the exchange system be further liberalized to strengthen the role of market forces and to continue reducing the importance of the parallel market, noting that liberalization is particularly appropriate in the current context of a strong reserve buildup.

While Directors expressed concern at the overall pace of structural reforms in 2000, they welcomed the reforms implemented in 2001 as well as the authorities' assurances that their recovery plan would not be a substitute for accelerated structural reform. Directors were encouraged by recent achievements, including the sale of a second cellular telephone license, the transfer to a foreign investor of public assets in the steel- making sector, and the recapitalization of state-owned banks. They welcomed the recent ordinance extending the scope of privatization to all economic sectors and streamlining its procedures. Directors emphasized that privatization should be undertaken in a transparent manner and in consultation with all concerned parties. They suggested that the social safety net be strengthened to cushion the impact of public sector restructuring in the event of labor retrenchment.

Directors were encouraged by the adoption of an ordinance simplifying the investment incentives structure and leveling the playing field between public and private investors as well as foreign and domestic investments. They also welcomed the government's efforts to implement a comprehensive tariff reform and commended the authorities for the recent adoption of an ordinance accelerating tariff reductions and reducing the number of tariff bands. Directors commended the authorities for eliminating the minimum duty values system and encouraged them to streamline the list of goods subject to a temporary additional rate and to consider further reductions in the maximum tariff rate.

Directors stressed the importance of further restructuring the banking system, strengthening bank supervision, and modernizing the payments system. They also put emphasis on other structural reforms, such as those pertaining to agricultural land, housing, and the judiciary. Directors recommended liberalization of most remaining administered prices, and the reinstatement of the periodic adjustment of domestic petroleum prices to reflect international oil prices and exchange rate fluctuations. They welcomed the authorities' measures to enhance transparency, and urged the strengthening of efforts to improve governance—including at the local and regional levels.

Directors welcomed the ongoing efforts to remove the data weaknesses that currently hamper the monitoring of economic conditions and formulation of economic policies. They urged the authorities to strengthen data coverage, quality, and timeliness, and to use the Fund's General Data Dissemination System as a framework for statistics development.