WASHINGTON D.C. USA
An International Monetary Fund (IMF) staff team led by Jean-François Dauphin visited Algiers from February 27 to March 12 to hold discussions for the 2018 Article IV consultation. Discussions focused on the mix of policies and reforms to restore macroeconomic balances and foster sustainable and inclusive growth. At the end of the visit, Mr. Dauphin made the following statement:
“Algeria continues to face important challenges posed by the fall in oil prices four years ago. Despite a sizeable fiscal consolidation in 2017, the fiscal and current account deficits remain large. Reserves, while still ample, fell by US$17 billion to US$96 billion (excluding SDRs). Overall economic activity slowed, although growth in the non hydrocarbon sector was stable. Inflation decreased from 6.4 percent in 2016 to 5.6 percent in 2017.|” He said
In response to the oil price shock, the authorities implemented fiscal consolidation in 2016-17. They have been working on a long-term strategy to reshape the country’s growth model, and took a number of measures to improve the business climate, start reforming energy subsidies, modernize their monetary policy framework, and allow for the emergence of a forward Forex market.
Inflation decreased from 6.4 percent in 2016 to 5.6 percent in 2017
“Since the end of 2017, the authorities have changed their short-term macroeconomic strategy. To boost growth and job creation, they have adopted an expansionary 2018 budget, the deficit of which will be mainly financed by the central bank, and hardened import barriers.” notes Mr. Dauphin
He adds that they intend to resume fiscal consolidation from 2019 onward, to restore the fiscal balance in 2022. The team also shares the authorities dual objectives of macroeconomic stabilization and promotion of more sustainable and inclusive growth, but it considers that the new short-term policy mix is risky and may hinder reaching those objectives. The new policies risk to exacerbate imbalances, increase inflation, and accelerate the loss of international reserves. As a result, the economic environment may not become conducive to reforms and private sector development.
“In the team’s view, Algeria still has a window to balance economic adjustment and growth. Relatively low public debt and little external debt provide space for a gradual strengthening of public finances. Fiscal consolidation is needed to adjust the level of spending to the lower level of revenue, but it can be done at a smooth pace without recourse to central bank monetary financing.” He said
He continues to state that this will require tapping a broad range of financing options, including domestic debt issuance at market rates, public-private partnerships, sale of assets and, ideally, external borrowing to finance well-chosen investment projects. The consolidation should be conducted through a broad-based approach including: raising more non hydrocarbon revenues by widening the tax base and gradually reducing current expenditure as a share of GDP, and reducing investment while increasing its efficiency.
“A gradual exchange rate depreciation combined with efforts to eliminate the parallel foreign exchange market would also support the adjustment.” says Mr. Dauphin
The central bank should stand ready to tighten monetary policy if inflationary pressures do not abate. If the choice is to continue monetizing the deficit, robust safeguards should be in place. Such safeguards should include strict quantitative and time limits to monetary financing, and the pricing of such financing at market rate.
“Irrespective of the policy mix pursued by the authorities, a critical mass of structural reforms is needed to promote the emergence of a private-sector led, diversified economy and reduce the dependence on oil and gas.”
Mr. Dauphin further states that this requires timely action on several fronts to reduce red tape, improve access to finance, strengthen governance, transparency and competition, further open the economy to foreign investment, improve the functioning of the labor markets and job-skills matches, and foster greater female labor force participation.
“To increase the effectiveness of economic policies, Algeria also needs to strengthen its economic policy framework. This includes continuing to strengthen public financial management, improve the efficiency of public spending, and strengthen the prudential and crisis preparedness framework. Trade policies should be centered on encouraging exports rather than imposing distorting nontariff import barriers.” he adds
The IMF team met with Prime Minister Mr. Ouyahia, Finance Minister, Mr. Raouia; Training and Vocational Education Minister, Mr. Mebarki; Industry and Mines Minister, Mr. Yousfi; Trade Minister, Mr. Benmeradi; Public Works and Transports Minister, Mr. Zaâlane; Labor, Employment, and Social Security Minister, Mr. Zemali; and the Governor of the Bank of Algeria, Mr. Loukal. The team also held discussions with other senior government and central bank officials as well as with representatives of the economic and financial sectors and trade union.
“The IMF team would like to thank the authorities and other interlocutors for their hospitality, cooperation, and candid exchange of views.”