IMF Staff Completes 2021 Article IV Consultation Mission to Algeria

  

International Monetary Fund (IMF)


The Algerian authorities have implemented several measures to mitigate the impact of the Covid-19 pandemic and stepped up their vaccination campaign since July; There is urgent need for a recalibration of economic policies to address macroeconomic imbalances while protecting and enhancing support to the most vulnerable; Algeria’s transition to a new growth model requires wide-ranging structural reforms, including measures to improve economic governance, foster the emergence of a dynamic private sector and support job creation.

An International Monetary Fund (IMF) 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 issued the following statement in Washington:

"Like other countries, Algeria has been hit hard by the Covid-19 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. Long-standing 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. Overall, banks’ capacity to lend to the rest of the economy would be severely hampered, with adverse consequences for growth.

“The mission recommends a comprehensive and coherent package of fiscal, monetary, and exchange rate policies to reduce Algeria’s vulnerabilities. A broad-based fiscal adjustment while prioritizing measures to protect the most vulnerable should start in 2022 and staged over several years to maintain debt sustainability, underpinned by policies to improve revenue collection, reduce spending, and enhance its efficiency. Monetary financing should be prohibited to stem inflation and the rapid depletion of international reserves, while diversifying budget financing sources, including through external borrowing. Greater exchange flexibility will help support the resilience of the economy to external shocks and tighter monetary policy will stem inflationary pressures.

“The mission agrees with the authorities that Algeria’s transition to a new growth model also requires fundamental reforms to strengthen the transparency and the governance of legal, fiscal, and monetary institutions across the public sector and reduce barriers to entry into the formal sector. The implementation of the Organic Budget Law is an important step to improve fiscal governance. The mission welcomes the authorities’ efforts to scale back restrictions to FDI and their plans to modernize the legal framework for investment and competition, which would help diversify the economy away from hydrocarbons and foster private sector investment and job creation. The mission also welcomes recent announcements about plans to reduce administrative burdens and forthcoming reforms to reduce vulnerabilities to corruption.

“The mission met with Prime Minister and Finance Minister, Mr. Benabderrahmane; Governor of the Bank of Algeria, Mr. Fadli; Energy and Mines Minister, Mr. Arkab; Public Works Minister, Mr. Nasri; Commerce and Exports Promotion Minister, Mr. Rezig; Labor, Employment, and Social Security Minister, Mr. Lahfaya; and National Solidarity, Family, and Women’s Affairs Minister, Ms. Krikou. The team also held discussions with other senior government and central bank officials as well as with representatives of the economic and financial sectors, civil society, and trade unions.

“The mission team expresses its gratitude to the authorities and other interlocutors for the productive discussions and excellent cooperation.”

Distributed by APO Group on behalf of International Monetary Fund (IMF).

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