The International Monetary Fund (IMF) has published the 2017 consultation paper for Algeria. The report describes recent trends as well as the economic outlook and risks, both in the long and short run.
The IMF staff highlights that the country has experienced the challenges of lower oil prices since 2014. This situation is jeopardizing the Algerian growth model given the country oil dependence [1], and has forced the authorities to undertake the postponed reform agenda and transform the economy.
In this context, Algeria has experienced a sharp decline in hydrocarbon revenues which has extended fiscal and trade deficits (internal and external equilibrium). However, in 2016 the authorities have adopted several measures to contain public spending, including an ambitious medium-term budget framework for 2017-2019 [2]. In addition, they have implemented some structural reforms trying to improve the business environment in the country.
The main risk to growth is, besides economic shocks, the social unrest against the adjustment program (note that the Algerian Civil War and the Arab spring aggregate complexity to this issue and political uncertainty).
Based on this, the IMF recommends a gradual application of such structural reforms. As they noted, the impact in terms of growth and employment would be lower (1.1 percentage points in average) if fiscal consolidation were combined with depreciation of the dinar and issuance external debt, which can discourage social tensions. Furthermore, Algeria still has work to do on structural reforms to foster private sector activity among other actions.
To summarize, while oil prices remain at current low levels, the Algerian economy will be jeopardized by fiscal and trade deficits. These imbalances will be a burden for policy shift towards a more open framework for international investment and international trade.
[1] As different studies reveal, oil and gas represents around 98% of total exports in the country, counts for 60% of public revenues and contributes over 30% of GDP.
[2] Measures adopted include lower Government spending (including wages) and public investment or even raising indirect taxes rates such as VAT.
