Algeria: Staff Report for the 2013 Article IV Consultation

KEY ISSUESInflation subsided in 2013 but preexisting and emerging macro-financialvulnerabilities need to be tackled. After reaching a 15-year high in 2012, inflation iscoming back within the central bank's target thanks to tighter monetary policy and fiscalconsolidation. However, a recent surge in credit and a new increase in public sectorwages call for continued caution over price stability. In addition, the economy'svulnerability to developments in the hydrocarbon sector is worsening. Declininghydrocarbon production and surging domestic consumption are squeezing exportvolumes, compounding the longstanding risk of lower oil prices. The policy mix will needto remain geared towards maintaining macroeconomic and financial stability.Despite the ongoing consolidation efforts, fiscal policy is not on a sustainable path.Fiscal policy is de facto procyclical, and the deficit is well above its long-term sustainablelevel, implying negative net public savings in the long run. Designing and implementinga full-fledged fiscal rule—combining a realistic and smoothed budgeted oil price, a flooron the primary balance, a drawing rule, and a sovereign wealth fund—would helpcontain macroeconomic vulnerability and build savings for future generations. In themeantime, policies to develop the hydrocarbon sector—with a view to extending thelifetime of existing reserves and preserving fiscal revenue—would help achieve asustainable fiscal framework.Wide-ranging structural reforms are required to accelerate nonhydrocarbongrowth and reduce unemployment. Measures are needed to enhance the businessclimate, attract foreign investment, and improve Algeria's integration into the worldeconomy. Public investment needs to be preserved, and its efficiency reinforced. Thefinancial sector is critical to the development of the economy; measures are needed tosupport private sector credit, jumpstart capital markets, and ensure the compliance ofthe financial framework with AML/CFT requirements. Finally, the job market needs to bemore inclusive to youth and women, who bear the brunt of unemployment.Exchange rate regime. The de facto exchange rate regime is classified as "othermanaged arrangement." Algeria has accepted the obligations of Article VIII Sections 2(a),3, and 4.