Algeria needs reforms to support economic activity: IMF

An International Monetary Fund (IMF) staff team led by Jean-François Dauphin visited Algiers from March 1 to 14 to hold discussions for the 2016 Article IV consultation. Discussions focused on the impact of the decline in oil prices on Algeria's economy and the policies needed to adjust to the shock.

At the conclusion of the mission, Mr. Dauphin said Algeria faces important challenges, with the large decline in oil prices expected to be sustained over the medium term. In response, the authorities have begun to undertake fiscal consolidation and implement selected reforms. These efforts need to be intensified: sustained fiscal adjustment and wide ranging structural reforms are needed to respond to the oil price shock and address long standing vulnerabilities. The fiscal and external buffers accumulated in the past provide a window of opportunity to implement those reforms gradually and smooth the adjustment. This opportunity to reshape Algeria's growth model should be seized now, before a more rapid adjustment becomes unavoidable.

The impact of the oil price shock on growth has been limited thus far, but the fiscal and external balances have deteriorated significantly. Real GDP grew by an estimated 3.7 percent in 2015, with the non hydrocarbon sector growing by a robust 5 percent, and inflation increased to 4.8 percent. The fiscal deficit nearly doubled to 16 percent of GDP in 2015 as a result of much lower hydrocarbon revenues, and the fall in hydrocarbon exports by nearly half in 2015 caused the current account deficit to widen sharply. Reserves, while still substantial, declined by $35 billion in 2015 to $143 billion, down from a peak of $194 billion in 2013. External debt remains very low. However, growth and inflation are expected to slow in 2016 under the effects of fiscal consolidation on non-hydrocarbon activity.

The mission welcomed the 2016 budget as a decisive step in the path of fiscal consolidation, better rationalization of spending, and subsidy reform. Algeria will need to sustain consolidation over the medium term to restore fiscal sustainability and ensure intergenerational equity. This will require controlling current spending, mobilizing more nonhydrocarbon revenues, pursuing further subsidy reform while protect- ing the poor, increasing the efficiency of investment, and strengthening the budget framework. Rapidly declining fiscal savings mean that Algeria will need to rely more on borrowing to finance future deficits. Opening the capital of some state-owned enterprises, in a transparent way, would also help meet financing needs while improving their governance.

Wide-ranging structural reforms are needed to help support economic activity during fiscal consolidation and to diversify the economy to achieve high and inclusive growth over the medium term. Key reforms include improving the business climate, opening up the economy to more trade and investment, improving access to finance and developing capital markets, and strengthening governance, competition and transparency. Increasing the flexibility of labor markets while better matching the skills produced by the educational system to those needed by the private sector is also needed. The mission noted that import restrictions, while perhaps providing a temporary relief, introduce distortions and cannot substitute for reforms aimed at boosting export.

"Exchange rate, monetary, and financial policies should support these efforts. Further efforts to bring the dinar in line with fundamentals, including through fiscal consolidation and structural reforms, would help restore external balances. As the decline in oil prices contributes to drying up excess liquidity in the banking system, the Bank of Algeria is appropriately reintroducing its refinancing instruments. Going forward, it should carefully calibrate monetary policy to guard against potential inflationary pressures. The banking sector as a whole is well capitalized and profitable, but protracted low oil prices increase risks. The Bank of Algeria should continue to transition to a risk-based supervisory framework, enhance the role of macroprudential policy, and strengthen the governance of public banks.

"The team met with Finance Minister Abderrahmane Benkhalfa; Industry and Mines Minister Abdessalem Bouchouareb; Trade Minister Bakhti Belaib; Agriculture and Rural Development Minister Sid Ahmed Ferroukhi; Labor, Employment, and Social Security Minister Mohamed El Ghazi; Minister Delegate of the Budget Hadji Baba Ammi; and the Governor of the Bank of Algeria, Mohammed Laksaci.