IMF Mission Concludes Visit to Algeria
“Economic performance in 2013 has been satisfactory. Inflation, which reached 8.9 percent last year, has decelerated to 4.5 percent as of October thanks to fiscal consolidation and prudent monetary policy. Real Gross Domestic Product (GDP) growth is expected to slow to 2.7 percent in 2013 from 3.3 percent in 2012, reflecting continued decline in hydrocarbon sector as well as the impact of fiscal consolidation. Growth has been supported by private demand and by investments by public sector enterprises.
“Algeria’s external position, though still very strong, has started to weaken. The current account surplus is expected to narrow to 1.1 percent of GDP as a result of lower hydrocarbon exports and continued strong growth in imports. Hydrocarbon production continues to decline while domestic consumption of hydrocarbons remains strong, weighing on exports. Reversing the decline in exports will require more investment to increase hydrocarbon production, measures to reduce domestic hydrocarbon consumption, and efforts to diversify the export base. In addition, the authorities should continue to follow an exchange rate policy that avoids any misalignment of the dinar.
“The mission welcomes the fiscal consolidation undertaken this year which is expected to result in a balanced budget for the year, following a deficit in 2012. Long-term fiscal sustainability, however, remains a concern. Further fiscal consolidation should be pursued and should aim to strengthen non-hydrocarbon revenue, contain current expenditures, and maintain public investment, which is critical for growth. A fiscal rule using a backward-looking average oil price and setting a floor on the structural balance could help Algeria manage revenue volatility stemming from fluctuating commodity prices, impose spending discipline, and safeguard long-term sustainability.
“The financial sector is liquid and well capitalized, but underdeveloped. Although credit to the economy has grown rapidly, it remains insufficient for small- and medium-sized enterprises (SMEs). Increased competition and better credit risk assessment tools would encourage banks to orient their business toward SMEs. The mission advised the authorities to lift the ban on consumer credit and develop a mortgage market.
“Although Algeria has enjoyed macroeconomic stability, the economy continues to perform below its potential. Accelerating private sector led growth is critical for reducing the economy’s dependence on hydrocarbons and creating new jobs. In this context, reforms are needed to improve the business climate, remove constraints to foreign investment, promote international trade integration, and equip the workforce with needed skills.
Source: International Monetary Fund
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