Stressing that it is “urgent to restore macroeconomic stability” in the country, the IMF has issued several pieces of advice on fiscal, fiscal, and exchange policies in Algiers.
Following a videoconference between the Algerian authorities and the International Monetary Fund (IMF), Geneviève Verdier, division head for the Middle East and Central Asia, reported on her preliminary findings.
Widening budget and external deficits, sawtooth growth, from 0.8% in 2019 to -4.9% in 2020 but which should rise to + 3% this year, inflation of 4.1% on annual average …
These results are collateral damage from the pandemic but also a reflection of the concomitant drop in production and the price of a barrel of oil.
General fiscal adjustment
To overcome these macroeconomic imbalances, the IMF advocates a general fiscal adjustment which should be initiated in 2022 and “be phased over several years” in order to “maintain debt sustainability”.
This adjustment should be accompanied by policies “aimed at improving revenue collection, reducing expenditure and increasing their efficiency”. But also the ban on using “printing money” to stem perilously rising inflation and “the rapid depletion of foreign exchange reserves” which fell from 62.8 billion dollars in 2019 to 48.2 billion. billion dollars at the end of 2020, according to the IMF.
The institution also recommends that Algiers rely on better flexibility of the exchange rate to “strengthen the resilience of the economy to external shocks”.
Indeed, as the Bretton Woods institution emphasizes, the persistence of high budget deficits would generate “unprecedented financing needs, deplete foreign exchange reserves, and present risks for inflation”, which would have negative consequences. on growth. Indicators that justify the “urgency” to act.
Use of external financing
To finance all these adjustments, Geneviève Verdier and her team advise Algiers to diversify its sources of budgetary financing; in particular through external loans. An appeal to which the country has refused since the early 1990s. According to an official statement published in July 2021, the presidency is proud of “the non-recourse to external debt, contrary to the multiple forecasts fixing the end of 2020 and the beginning of 2021 as the date for resorting to this measure ”. The Algerian head of state had also insisted on the importance of “borrowing from citizens rather than from the IMF or the World Bank”.
Indeed, since 2005, the Algerian external debt is less than 5% of the GDP.
“In a context of reduction of investment projects decided in 2020, and current policies that would limit credit to the private sector, growth should run out of steam” read the IMF document.
The mission and the authorities believe that, in order to achieve a satisfactory level of growth, Algeria should, in addition to macroeconomic measures, put in place major reforms. These should aim to “strengthen the transparency and governance of legal, budgetary and monetary institutions throughout the public sector” and reduce barriers to entry into the formal economy.
Good points for Algiers
Despite the imbalances highlighted, the IMF welcomes certain opportune measures introduced by Algiers. In particular, tax deferrals, cuts in the central bank’s key rate and in the reserve requirement ratio, unemployment benefits and one-off transfers to low-income households, increases in health-related spending, but also ‘relaxation of prudential rules for banks.
Even if they have not proved to be sufficient to compensate for the structural vulnerabilities of the country, these measures have made it possible to “protect” its economy, admits the IMF.
The Fund also welcomed efforts to reduce restrictions on foreign direct investment (FDI) and plans to modernize the legal framework for investment and competition. According to representatives of the international institution, the changes presented will pave the way for diversification of the economy, promote private sector investment and job creation, while reducing Algeria’s dependence on hydrocarbons.
