IMF Executive Board Concludes 2022 Article IV Consultation with Algeria
washington d.c.
:
On February 1, 2023, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation
[1]
with Algeria and reviewed and approved the staff evaluation without a meeting
[2]
.
Rising hydrocarbon prices have eased pressures on public and external finances and post-pandemic recovery has likely accelerated
. In 2022, the current account is expected to post its first surplus since 2013 and international reserves have increased, halting the steady downward trend of recent years. Similarly, a budget surplus is expected in 2022, reflecting the windfall of hydrocarbon revenues and the significant under-execution of budgeted expenditures. The economic recovery has strengthened, with nonhydrocarbon GDP growth expected to accelerate to 3.2% in 2022 from 2.1% in 2021.
Rising inflation is a major challenge, in a context of accommodative monetary policy.
Headline inflation reached 7.2% in 2021 and is estimated at 9.3% in 2022, its highest level in 26 years. Despite the measures taken by the central bank for more active liquidity management, monetary policy remains accommodating.
The outlook for 2023 is favorable, but growth is expected to slow and inflation to remain elevated over the medium term.
Nonhydrocarbon GDP growth is expected to accelerate to 3.4% in 2023 on the back of a substantial increase in fiscal spending and decline to around 2% over the medium term. The current account is expected to remain in surplus in 2023 and record a gradually growing deficit from 2024. Inflation is expected to moderate somewhat to 8.1% in 2023, but remain relatively high over the medium term.
The outlook is very dependent on oil prices. Upside risks stem from a possible increase in investments in the hydrocarbon sector and mining projects under development.
Board assessment
In concluding the Article IV consultation with Algeria, Directors approved the staff assessment as follows:
The short-term outlook for the Algerian economy has improved significantly, supported by higher hydrocarbon prices.
External and fiscal surpluses are expected in 2022 for the first time in a long time. Algeria’s external position in 2022 was stronger than the level implied by desirable fundamentals and policy parameters. However, the outlook remains heavily dependent on hydrocarbon prices and faces risks related to a weaker global backdrop and commodity price volatility. The generalized acceleration of inflation has become a major policy challenge.
Staff urges the Bank of Algeria (BA) to tighten monetary policy immediately to prevent a possible unanchoring of expectations and persistently high inflation.
The recent appreciation of the dinar cannot replace the necessary tightening of monetary policy. IMF staff recommends that the BA raise its policy rate and resume well-calibrated liquidity management to improve monetary policy transmission. The upcoming revision of the Money and Credit Act is a welcome opportunity to strengthen the governance framework of the BA. IMF staff recommends a formal ban on monetary financing in the new law to strengthen the independence of the central bank and its ability to act in defense of price stability.
The significant increase in spending announced in the 2023 budget could reverse the progress made in deficit reduction since 2018, weaken the resilience of public finances and increase inflationary pressures.
Funding constraints may prevent the full execution of announced expenditures. However, even the persistently weak execution of budgeted expenditures could lead to a substantial deterioration in the budget deficit. Greater expenditure rigidity and a rapid reduction in budgetary savings would increase the vulnerability of public finances to fluctuations in hydrocarbon prices – with the risk of an abrupt adjustment in the event of a drop in oil prices – and would add to the excess liquidity, complicating the conduct of monetary policy.
The medium-term deficit path also carries risks for macroeconomic stability.
The persistence of large fiscal deficits and increased principal repayments coming due on past monetary financing would result in large fiscal financing needs over the medium term. As the authorities have excluded external borrowing, meeting these financing needs would put significant pressure on the domestic banking system and pose risks to financial and macroeconomic stability.
Gradual fiscal consolidation guided by a rules-based framework is needed to strengthen the resilience of public finances and preserve macroeconomic stability over the medium term.
Staff recommends an adjustment to improve the BA’s non-hydrocarbon non-dividend primary deficit by 10 percent of the NHGDP from its 2022 level and through 2027. Subsidy reform coupled with enhanced targeted social protection would help to achieve the required fiscal consolidation, alongside a parametric pension reform. , lower capital spending and continued tax reforms. Staff also proposes the adoption of a medium-term fiscal framework based on well-calibrated rules, including a savings floor and a gross debt anchor, to guide fiscal consolidation, reduce policy procyclicality, and protect priority spending. More diversified sources of financing would make it possible to spread the budgetary adjustment over several years while limiting the pressures on the banking system.
Staff welcomes the progress made in public financial management reforms and calls for further efforts to strengthen the fiscal framework.
The planned full implementation of the Organic Finance Law in 2023 would mark an important milestone for modernization efforts. To protect this progress, budget projections must be consistent with the capacity to execute and the fiscal space available. Budgets should also incorporate comprehensive and transparent financing plans and efforts should be made to strengthen cash management and improve transparency in budget execution.
Accelerating structural reforms is needed to advance the transition to a more diversified, resilient and job-intensive growth model and further strengthen the governance framework.
Legislative reforms recently adopted or in progress, notably the new law on investment and the forthcoming laws on micro-entrepreneurship and renewable energies, could contribute to creating a more favorable environment for private sector activity. Staff warns of the risks associated with strict import controls – for example, fueling inflation and encouraging informality – and recommends further reforms to improve trade openness and competitiveness, including product and labor market reforms. It also urges the authorities to prioritize actions to address weaknesses in the quality and availability of macroeconomic data. Ongoing efforts to strengthen governance and reduce corruption risks are welcome and should be intensified.
IMF Executive Board Concludes 2022 Article IV Consultation with Algeria
