Algeria's imbalances left policymakers with reduced policy space: IMF

An International Monetary Fund mission led by Geneviève Verdier conducted a virtual mission to Algeria during September 13-October 3, 2021 in the context of the 2021 Article IV consultations.

At the end of the mission, Ms. Verdier said, "Like other countries, Algeria has been hit hard by the Covid19 global pandemic. The IMF mission would like to express its solidarity with Algerians affected by the health crisis and those who have worked tirelessly to support the population. The mission is pleased to see that timely sanitary measures and an accelerated vaccination campaign since July have helped to recede the third wave that hit the country last summer.

"The pandemic and concomitant decline in oil production and prices have seriously impacted the economy last year, leading to a sharp contraction in real GDP of 4.9 percent in 2020.

In addition to measures to stem the spread of the pandemic, the authorities have implemented a comprehensive set of actions to cushion the impact on the economy, including tax deferrals, increased health spending, allowances for the unemployed, a one-off transfer to low-income households, reductions in the central bank policy rate and reserve requirement ratio and relaxation of prudential rules for banks.

"These measures have helped protect the economy, but the pandemic has further exposed the vulnerabilities of the Algerian economy. Longstanding macroeconomic imbalances have left policymakers with significantly reduced policy space. The expansionary fiscal policy pursued for the past several years has contributed to elevated external current account deficits, despite import compression policies and has given rise to large financing needs which were largely met through the central bank. The fiscal and external deficits widened further in 2020 and international reserves, which are still adequate, fell from US$ 62.8 billion in 2019 to US$ 48.2 billion at end-2020.

"A gradual recovery is underway, with economic growth expected to exceed 3 percent this year, supported by the increase in hydrocarbon prices and production. Annual average inflation accelerated to 4.1 percent in June 2021, partly as a result of higher international food prices and an episode of drought in Algeria. In the medium term, growth will likely remain subdued due constraints on hydrocarbons production, in the context of investment cuts decided in 2020, and current policies that would limit credit to the private sector.

"Indeed, despite the rebound in economic activity and the significant improvement in the external balance in 2021, it remains urgent to restore macroeconomic stability and policy space, while protecting the most vulnerable and supporting the recovery.

"In the mission team's view, persistently high fiscal deficits over the medium term would give rise to unprecedented financing needs, deplete FX reserves, and pose risks to inflation, financial stability and to the central bank's balance sheet.