On February 1, 2023, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with Algeria and considered and endorsed the staff appraisal without a meeting [2] .

The upswing in hydrocarbon prices has alleviated pressures on public and external finances and the post-pandemic recovery has likely gathered pace . In 2022, the current account balance is expected to post its first surplus since 2013 and international reserves have risen, halting the steady downtrend in recent years. Similarly, a fiscal surplus is expected in 2022 reflecting the hydrocarbon revenue windfall and large under-execution of budgeted spending. The economic recovery strengthened, with non-hydrocarbon GDP growth projected to accelerate to 3.2 percent in 2022 from 2.1 percent in 2021.

The rise in inflation is a major challenge, amid a loose monetary policy stance. Headline inflation picked up to 7.2 percent in 2021 and is estimated at a 26-year high of 9.3 percent in 2022. Despite steps towards more active liquidity management by the central bank, monetary policy remains accommodative.

The prospects for 2023 are favorable but growth is projected to decelerate and inflation to remain high in the medium term. Nonhydrocarbon GDP growth is forecast to accelerate to 3.4 percent in 2023 on substantial rise in fiscal spending and taper off to around 2 percent in the medium term. The current account is projected to remain in surplus in 2023 and record a gradually widening deficit from 2024 onwards. Inflation is projected to moderate somewhat to 8.1 percent in 2023 but remain relatively high over the medium term. The outlook is highly contingent on hydrocarbon prices. Upside risks stem from possible increased investment in the hydrocarbon sector and mining projects under development.

Executive Board Assessment

In concluding the Article IV consultation with Algeria, Executive Directors endorsed staff’s appraisal as follows:

The near-term outlook for the Algerian economy has materially improved, buoyed by the upswing in hydrocarbon prices. External and fiscal surplus are expected in 2022 for the first time in an extended period. Algeria’s external position in 2022 was stronger than the level implied by fundamentals and desirable policy settings. However, the outlook remains highly contingent on hydrocarbon prices and faces risks from a weaker global backdrop and commodity price volatility. The broad-based acceleration in inflation has become a major policy challenge.

Staff urges the Bank of Algeria (BA) to tighten monetary policy immediately to forestall possible de-anchoring of expectations and persistent high inflation. Recent dinar appreciation cannot substitute for needed monetary policy tightening. Staff recommends that the BA increase its policy rate and resume well-calibrated liquidity management to enhance monetary policy transmission. The forthcoming revision of the Law on Money and Credit is a welcome opportunity to strengthen the governance framework of the BA. Staff recommends a formal ban on monetary financing in the new law to enhance the central bank’s independence and its ability to act in defense of price stability.

The announced sizeable rise in spending under the 2023 budget could reverse the progress achieved on narrowing the deficit since 2018, weaken the resilience of public finances and add to inflation pressures. Financing constraints are likely to forestall full execution of announced spending. However, even continued low execution of budgeted spending could lead to a substantial deterioration of the fiscal deficit. Higher spending rigidity and a rapid drawdown of fiscal savings would exacerbate the vulnerability of public finances to gyrations in hydrocarbon prices—with the risk of abrupt adjustment should oil prices decline— and add to excess liquidity, complicating the conduct of monetary policy.

The medium-term deficit trajectory also carries risks for macroeconomic stability. Continued wide fiscal deficits and increasing principal repayments coming due on past monetary financing would result in large fiscal financing needs through the medium term. As the authorities have ruled out foreign borrowing, meeting these financing needs would heap significant pressure on the domestic banking system and pose risks to financial and macroeconomic stability.

Gradual fiscal rebalancing guided by a rules-based framework is needed to enhance the resilience of public finances and safeguard macroeconomic stability in the medium term. Staff recommends an adjustment to improve the non-hydrocarbon primary deficit excluding the BA’s dividends by 10 percent of NHGDP relative to its 2022 level and through 2027. Subsidy reform together with enhanced targeted social protection would help achieve the required fiscal rebalancing, alongside parametric pension reform, lower capital spending and continuation of tax reforms. Staff also proposes the adoption of a medium-term fiscal framework based on well-calibrated rules comprising a saving floor and a gross debt anchor, to guide fiscal rebalancing, reduce policy procyclicality and protect priority spending. More diversified financing sources would afford space to stage fiscal adjustment over several years while limiting pressures on the banking system.

Staff welcomes the progress achieved on reforms of public finance management and calls for further efforts to strengthen the fiscal framework. The projected full implementation of the Organic Budget Law in 2023 would mark a major milestone for modernization efforts. To protect this progress, budget projections should be in line with execution capacity and available fiscal space. Budgets should also incorporate comprehensive and transparent financing plans and efforts should be deployed to strengthen cash management and improve transparency on budget execution.

Acceleration of 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 underway, including the new investment law and the forthcoming laws on micro-entrepreneurship and renewable energies, could help create a more conducive environment to private sector activity. Staff cautions against the risks from tight import regulation measures—e.g., fueling inflation and incentivizing 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 macroeconomic data quality and availability. Ongoing efforts to strengthen governance and reduce corruption risks are welcome and should be intensified.

[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

[2] The Executive Board takes decisions under its lapse-of-time procedure when the Board agrees that a proposal can be considered without convening formal discussions.