IMF Concludes 2021 Article IV Consultation with Algeria

Washington, DC : On November 19, 2021, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation[1]with Algeria.

The Algerian economy is gradually recovering from the concomitant Covid-19 pandemic and oil shocks in 2020. The authorities’ swift response helped mitigate the health and social impact of the crisis. Stepped-up vaccination and targeted containment measures have helped slow down a third wave of infection. Following a contraction of 4.9 percent in 2020, real GDP grew by 2.3 percent, on a year-on-year basis, in 2021Q1, driven by a rebound in hydrocarbon prices and production and the relaxation of containment measures. The external current account balance improved significantly in the first six months of 2021, following a marked deterioration in 2020.

The pandemic has increased Algeria’s ongoing economic vulnerabilities following a succession of adverse shocks since 2014. Continued large fiscal and external current account deficits in recent years have reduced policy space as public debt increased significantly and international reserves declined. Rising inflation, reflecting higher international food prices and an episode of drought in Algeria, is also adversely affecting households’ purchasing power.

The economy is projected to recover in 2021 and 2022, but the outlook remains uncertain and challenging. Real growth is forecast at 3.2 percent in 2021 and the external current account deficit is projected to narrow sharply as exports rebound. Risks are, however, tilted to the downside. The main risks concern the evolution of oil prices, the pandemic, and the social and geopolitical environment.

Executive Board Assessment[2]

Executive Directors agreed with the thrust of the staff appraisal. They noted that Algeria has been hit hard by the pandemic and commended the authorities’ timely and comprehensive efforts to contain its human and economic costs. While a gradual recovery is underway, pre-pandemic vulnerabilities remain and risks to the economic outlook are on the downside, despite the recent rebound in hydrocarbon prices. In this context, Directors called for a well-calibrated policy mix to support macroeconomic stability and promote sustainable, resilient and inclusive growth.

Directors generally agreed with the need for a gradual and sustained fiscal consolidation, underpinned by both revenue-enhancing and spending measures. They saw merit in adapting the pace and composition of the adjustment to the evolution of the pandemic and to domestic economic conditions in order to protect the most vulnerable. They also commended the authorities’ recent efforts to modernize budget management and improve public sector efficiency. Going forward, Directors encouraged the authorities to diversify budget financing sources and avoid central bank financing.

Directors underscored that a well-calibrated monetary policy combined with greater exchange rate flexibility could support stabilization efforts. They encouraged the authorities to continue to reinforce bank supervision, implement a crisis management framework, and strengthen governance at state-owned banks. Directors also welcomed forthcoming reforms to strengthen central bank independence.

Directors commended the authorities for their strategy to revive growth and reduce the economy’s dependence on hydrocarbons. They welcomed the focus of the new Government Action Plan and agreed with the reform priorities identified to help transition Algeria to a more inclusive and sustainable growth model. Recent announcements about plans to strengthen transparency and the anti-corruption institutional framework, enhance climate resilience as well as efforts to encourage digitalization, foreign direct investment, and competition to foster private sector investment and job creation are steps in the right direction. Strengthening the AML/CFT framework also remains a priority.