Public Information Notice No. 97/13

Press Information Notice: IMF Concludes Article IV Consultation with Algeria

July 23, 1997

The IMF Executive Board on June 27, 1997 concluded the 1997 Article IV consultation¹ with Algeria on June 27.

BACKGROUND

Since 1994, Algeria has been implementing a comprehensive program of economic adjustment and structural reform. Following the completion of a stand-by arrangement with the IMF, Algeria embarked on a program supported by an extended Fund facility (EFF) on May 22, 1995. In addition to IMF resources, the adjustment and reforms were also supported by loans from the Arab Monetary Fund, the World Bank and other donor institutions, bilateral assistance, and debt relief from the Paris and London Clubs. The program's objectives were to achieve macroeconomic stabilization and, over the medium term, to transform Algeria into a more diversified, private sector led economy, and its integration with the rest of the world.

Under the program, macroeconomic balances have been restored: inflation is down to single digits; the external position has strengthened significantly, and, after several years of output decline, real GDP growth has recovered, allowing for some increase in per capita income. Underpinning these results have been strong fiscal adjustments supported by a strict income policy and a tight monetary stance. The broad consensus on reforms attained among the government, labor, and the private sector has also played a key role.

At the same time, structural reforms contributed to enhance the supply response of the economy. With a few exceptions, domestic prices have been freed, and generalized food subsidies eliminated. The trade and payments systems have been liberalized. The restructuring and privatization of public enterprises is underway, while steps to strengthen the banking system and liberalize the financial sector have been taken. The institutional framework favoring private sector activity and foreign participation has been expanded. To cushion the impact on the most vulnerable social groups, the social safety net has been improved.

In 1996, restrained demand management policies and favorable oil export prices resulted in fiscal and external current account surpluses of about 3 percent of GDP. Inflation fell to under 8 percent by March 1997 and official reserves rose to over 5 months of imports. Real GDP growth was 4 percent in 1996, as in 1995. Major challenges remain, however, at the outset of the final EFF year. Dependence on oil and gas remains high both for the budget and the balance of payments. The decline in industrial output persisted, and unemployment is estimated at 28 percent. Security considerations have impeded foreign investment outside the hydrocarbon sector.

For 1997, economic growth is targeted at about 4 percent. Smaller fiscal and external current account surpluses are envisaged in line with weaker oil prices; external debt is forecast to decline to 68 percent of GDP. Inflation is expected to be about 7 percent. An acceleration of institutional and structural reforms to stimulate private sector development is envisaged. Liquidation of unviable public enterprises and privatization of local units will continue. A plan to privatize large public enterprises will be drawn up and its implementation started in the second half of 1997. The role of the private sector in housing is being enhanced and financial sector reform continues. Social safety net features have been improved in 1997. External current account convertibility is envisaged before year-end.

For 1998 and beyond, based on the current outlook for oil prices, external debt indicators are expected to continue improving, although the external situation remains vulnerable, particularly in view of the dependency on oil exports. No further resort to exceptional balance of payments financing is envisaged after mid-1998, when the current agreement with the Paris Club runs its course. The authorities are targeting an acceleration of growth in the nonhydrocarbon sector to over 6 percent annually with a view to reducing unemployment. The attainment of this objective is predicated on continued restrained fiscal and monetary policies, further privatization, and the establishment of an environment conducive to private domestic and foreign investment.

Executive Board Assessment

Executive Directors commended the authorities for their courageous and steadfast implementation of the strong adjustment and reform program supported by the extended arrangement under a difficult political environment and adverse external developments. During the first year of the program, substantial progress had been made in stabilizing the economy, resulting in a significant deceleration in inflation and a recovery of growth and per capita income. Moreover, the timely implementation of wide-ranging structural reforms over the last two years had contributed to establishing market mechanisms, restructuring the public sector, and substantially liberalizing the trade regime.

Directors were of the view that Algeria was now better positioned to realize the fundamental objectives of the program: macroeconomic stabilization and an outward-oriented economy driven by private sector-led growth. Recognizing that the very high levels of unemployment and the acute housing problem could be putting pressures on the social consensus for reform, Directors encouraged the authorities to intensify their efforts to marshal public support to persevere with the adjustment and reform program; continuing with political reforms was important in that regard. Directors observed that a dynamic and growing private sector was crucial to reducing unemployment and ensuring sustainable growth. They emphasized that establishing security and political stability would be an essential precondition for the foreign investment and technology transfers that were needed for private sector development.

Directors emphasized the importance of consolidating macroeconomic stabilization by bringing inflation down to the single-digit level in 1997. Toward that objective, it was essential to continue to pursue the tight incomes policy which had been a cornerstone of the program. Most Directors considered that a small budget surplus in 1996/97 was needed in view of the high public debt-to-GDP ratio and to redeploy oil revenue both to reduce public debt and to meet infrastructure and social safety net needs that would arise from enterprise restructuring. Directors commended the authorities for their decision to eliminate quasi-fiscal deficits and fully budget all public expenditure on housing beginning in 1996. They also underscored the importance of strengthening expenditure monitoring and control, maintaining wage restraint, and improving tax administration. Looking ahead, Directors stressed the need for strengthening the budget further to improve medium-term sustainability.

Efforts should focus on domestic revenue mobilization, especially in the non-oil sector partly to offset further reductions in external tariffs. Monetary and credit policies should remain tight. Many Directors cautioned against any premature relaxation of monetary and interest rate policy, stressing that interest rates should be kept positive in real terms. Directors welcomed the progress made in exchange system reform with the exchange rate now being determined in an active interbank market, and observed that it was important to continue with a flexible exchange rate policy. Directors also stressed that continued progress in reducing inflation would be critical in maintaining the gains in competitiveness from the earlier dinar depreciation.

Directors considered that the 1996/97 program included substantial structural reforms to sustain the restructuring of the public sector and address the impediments to the functioning of market mechanisms. They urged an acceleration of those reforms. Directors considered that the proposed housing reform would put this critical sector on a firmer footing, and commended the authorities' determination to liquidate insolvent public construction companies. They encouraged the authorities to intensify efforts to develop a private housing market, noting that an expansion in housing construction would help absorb excess labor. Directors urged the authorities to move decisively on privatization; this would provide an important signal of the government's commitment to a market economy. Directors urged the authorities to complete the liquidation of nonviable public enterprises, and to put in place effective social safety nets.

Directors underscored the need for a more effective legal framework: judicial reform and greater flexibility in labor legislation would strengthen private sector confidence. They also encouraged the authorities to proceed with the land privatization program, noting the export potential in the agricultural sector. Despite the projected weakening of the external current account deficit in 1996/97, Directors were encouraged that Algeria's balance of payments prospects would improve over the medium term. Nevertheless, they also observed that the external position remained vulnerable to external shocks, highlighting the need to move rapidly with structural reforms and economic diversification. Some Directors expressed the view that additional external financing was necessary to ensure the realization of growth objectives. Directors also noted that the debt service burden over the medium term remained high and that prudent external debt management was needed. Directors agreed that Algeria's exemplary adjustment and reform efforts deserved continued support of the international financial community.