Algeria’s economy robust due to hydrocarbon wealth

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This follows after the International Monetary Fund (IMF) concluded a mission to the North African country in September this year.

“Economic activity has picked up in 2014, with real GDP growth projected to reach four per cent following 2.8 per cent growth in 2013. The hydrocarbon sector is expected to expand for the first time in eight years, while non-hydrocarbon growth remains supportive—particularly the construction and services sectors,” said Zeine Zeidane mission chief at the IMF.

“Inflation has decelerated sharply to below two per cent, thanks in part to tighter monetary policy, but bears watching closely given the potential for new inflationary pressures to emerge.”

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He explained that Algeria is in a stable position due to substantial external and fiscal buffers being built over the years through its hydrocarbon wealth.

However, threats to the macroeconomic environment are growing.

“For the first time in nearly 15 years, the current account is expected to record a deficit. Slumping hydrocarbon production, strong domestic hydrocarbon consumption, and lower oil prices are weighing on exports, while imports continue to grow.”

Zeidane believes in order to reverse these trends, there should be an increase in investment in the country’s hydrocarbon sector, higher domestic energy prices, a competitive exchange rate as well as a diversification of non-hydrocarbon exports.  

“The fiscal deficit is expected to widen to over 6 per cent due to lower hydrocarbon revenue, a sharp increase in capital expenditure, and continued high current spending. The oil savings fund remains large but is expected to decline for the second consecutive year. Ambitious and sustained fiscal consolidation is necessary to place fiscal policy on a sustainable path and ensure that hydrocarbon wealth is saved for future generations,” he explained.

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The IMF therefore proposed that the Algerian government adopt a fiscal rule to manage its hydrocarbon revenue and impose spending discipline.

“The financial sector is generally healthy but underdeveloped. Reforms are needed to improve access to finance, especially for small- and medium-sized enterprises and households. In addition, listing well-performing public companies would help to develop the stock exchange.”

The IMF has welcomed the country’s authorities to begin implementing the recommendations of the 2013 Financial Sector Assessment Program mission.

“Although Algeria has enjoyed macroeconomic stability, faster and more inclusive growth is necessary to provide enough jobs for the country’s youthful population. Meeting this challenge will require a comprehensive set of structural reforms that will allow the private sector to thrive. Reforms are needed to improve the business climate, remove constraints to foreign investment, promote international trade integration, and reduce labour market rigidities.”