Currency equivalents

A. Macroeconomic Background

2.1 Algeria is a large exporter of hydrocarbons, with about two-thirds of hydrocarbon export receipts accruing to the budget. Algeria has the eighth largest proven gas reserves in the world. It exported 97 percent of its natural gas to Europe in 2005, meeting 24 percent of Europe’s natural gas demand in that year. Two new gas pipelines are being built, bringing the total number of pipelines to four by 2010. Algeria plans to increase natural gas exports from 64 billion cubic meters in 2005 to 100 billion cubic meters by 2015. Algeria’s exports of crude oil are expected to peak around 2010 at 1.1 million barrels (bbl) per day, from 1.0 million bbl per day in 2005. Algeria can reasonably assume continuing significant budgetary revenue from hydrocarbon exports into the future, particularly because the large reserves of natural gas are being developed.

2.2 Algeria’s most recent economic growth can be broadly classified into three distinct periods (Table 2.1).

• 
  

  Table 2.1. Algeria Real Sector
  (Real growth rates in %, period averages)
  	1990–95	1996–2000	2001–05
  GDP growth	0.4	3.1	4.9
  Agriculture	2.7	3.9	7.3
  Industry	0.0	3.9	3.7
  o/w: Construction	-1.8	3.2	6.3
  Hydrocarbon sector	1.2	5.5	4.0
  Manufacturing	-1.7	-0.8	-1.0
  Services	0.9	2.2	5.4
  Domestic Absorption^/a	-1.0	1.0	6.7
  Total consumption	0.4	1.2	4.1
  Fixed investment	-2.3	2.8	8.9
  Exports	1.2	5.5	4.1
  Imports	-3.6	-0.6	11.0
  Memo items:
  GDP per capita	-1.9	1.6	3.4
  Inflation (CPI)	25.6	6.5	2.7
  Source: National Statistics Agency (ONS) ^a/Domestic absorption = Total Investment + Total Consumption

  A recession, 1990–95, featuring negative GDP per capita rates. In the early 1990s, reforms stalled and recession hit hard, leading to increased civil unrest. Algeria’s growth rates were mediocre, mainly because of unfavorable external shocks. The macro-economic situation deteriorated, poverty increased, and the Algerian authorities had no choice but to adopt a new and comprehensive stabilization program in 1994. The stabilization program combined fiscal adjustment measures, a devaluation of the Algerian dinar, and the rescheduling of external debt.
  
• 
  Recovery, 1996–2000, with positive, but modest GDP growth averaging 3.1 percent. Reforms started to bear fruit by the mid 1990s. Prudent monetary and fiscal policy brought a significant reduction of inflation to single digits. External debt decreased from 80 percent of GDP in 1995 to 46 percent of GDP in 2000. The overall fiscal balance also improved over the same period, from a slight deficit of –1 percent of GDP to a surplus of 10 percent of GDP. However, the nonhydrocarbon fiscal balance deteriorated from 26 percent of nonhydrocarbon GDP to –33 percent of nonhydrocarbon GDP.
  
• 
  A growth acceleration period, 2001–05, with high growth rates mainly associated with the oil price boom. In this period, the Algerian economy took off. Growth rates averaged 5 percent. Average inflation rates remained below 3 percent. The oil windfall helped other sectors reach high growth rates—construction, telecommunication, and other services. As a result, GDP per capita was above 3 percent, which should have contributed to lower poverty rates.
  

2.3 GDP growth rates remain closely linked to those of the hydrocarbon sector, but agriculture is the most volatile sector (Figure 2.1). Severe droughts explain the significant trough in agricultural rates in 1990, 1994, 1997, and 2000. Volatility in the agricultural sector growth declined in the 2000s, which may be due to the agriculture investment component of the PSRE.

2.4 In the 2000s, the external balances benefited from a prolonged oil windfall. Merchandise exports are at an all time high, and hydrocarbon exports make up almost all of merchandise exports—98 percent, very high by international standards (Figure 2.2). As a result, the country is experiencing record-high current account balances and international reserve levels. Import demand has also picked up, driven by exceptionally high investment rates associated with the PSRE. Since its creation in 2000, authorities have also used windfall proceeds, housed in an Hydrocarbon Stabilization Fund (Fonds de Régulation des Recettes, known as FRR) for two purposes: (i) to make advanced payments on external debt principal; and (ii) to finance any fiscal deficit arising from an oil price that falls below the budget law reference price.¹³ As a result of the public debt advanced repayments, Algeria is now a net creditor nation to the rest of the world, with an external debt-to-GDP ratio calculated at 17 percent in 2005, compared with an average 61 percent of GDP in 1990-95 (see Table 2.2).

Table 2.2 External and Public Sectors (Period averages; % of GDP unless noted)
	1990–95	1996-2000	2001	2002	2003	2004	2005^e
External Sector
Exports GNFS	24.3	30.2	36.2	35.1	38.3	40.1	47.6
o/w: Hydrocarbon exports as % of merchandise exports	95.7	96.1	97.1	96.8	98.1	97.9	98.5
Imports GNFS	22.4	22.6	21.6	25.4	23.9	25.7	23.5
Current account balance	0.3	4.8	12.8	7.6	13.0	13.1	21.2
Int.reserves (months of imports)	1.8	7.7	18.2	19.1	24.3	23.7	28.1
External debt (% of GDP)	61.2	60.6	40.9	40.1	34.7	25.9	16.8
Central Government (% of GDP)
Total Revenue (including grants)	29.7	32.1	35.4	35.3	37.0	36.2	41.1
o/w: Hydrocarbon revenue	17.6	20.8	23.5	22.2	25.6	25.6	31.4
o/w: % of current revenue	59.2	64.2	67.2	62.9	69.4	70.9	76.5
o/w: Non-hydrocarbon revenue	12.1	11.3	11.8	13.1	11.4	10.5	9.7
o/w: Tax revenue	11.4	10.5	9.3	10.6	10.0	9.5	8.6
o/w: Income Tax	1.7	1.2	1.1	1.2	1.2	1.3	..
VAT	5.2	4.9	4.2	4.9	4.5	4.5	4.2
Customs	2.7	2.6	2.4	2.8	2.7	2.3	1.9
Total (re)current expenditure	22.1	22.5	22.6	24.1	21.3	20.3	17.2
o/w: wages and salaries	9.2	8.3	7.6	7.6	7.6	7.3	6.5
Total capital expenditure	7.5	7.0	8.4	10.0	10.8	10.5	9.7
Overall balance	-1.7	2.1	4.0	0.2	7.8	6.9	14.2
Memo items:
Nonhydrocarbon balance/NH-GDP	-25.3	-27.3	-29.5	-32.5	-27.7	-30.2	-31.1
Algeria oil price	19.4	20.1	24.8	25.2	29.0	38.5	54.6
M2 growth (%)	17.3	21.1	22.2	17.4	15.6	11.5	10.8
Unemployment rate (%)	23.1	28.2	27.3	25.9	23.7	17.7	15.3
Source: IMF; Algerian Authorities. Data for 2005 are estimates.

2.5 Prudent monetary policy has limited credit expansion during the oil windfall. The central bank regularly intervenes in the money market in order to manage inflation and exchange rates. Sterilization of excess liquidity, because of Sonatrach’s (the government oil company) large deposits in the banking system, has contributed to limiting the expansion of credit to the economy. The current exchange rate regime—managed float with no preannounced path—has contributed to keep the REER in the range of equilibrium levels (the REER was considered to be in equilibrium at end-2003 (IMF 2005b).¹⁴ Administrative controls, however, have contributed to the development of a parallel exchange rate market with a variable and declining spread. Monetary expansion slowed down in the last five-year period, as measured by a declining M2 growth rate from 22 percent in 2001 to 11 percent in 2005.

2.6 Growth acceleration in the 2000s, also stimulated by the PSRE, has contributed to a reduction in the unemployment¹⁵ and poverty rates, though its results may not be sustainable over the longer term.

• 
  While still high, the unemployment rate has been reduced dramatically in the past decade. Much of this reduction is because of higher public spending rates resulting from the PSRE execution. As a result, many new jobs may be temporary and located in the agriculture, a sector with low productivity that represents less than 10 percent of GDP. Youth unemployment remains high, estimated at around 30 percent. The informal economy also provides employment to a significant share of the labor force.¹⁶
  
• 
  Official poverty rates have decreased since recovery began in 1995. Private consumption per capita growth has picked up in recent years, averaging 4 percent over the 2001–05, compared with a stagnation or even negative growth rates in the early 1990s. This implies a possible reduction in poverty levels.¹⁷
  
• 
  Overall, while unemployment and poverty levels have decreased and the security situation has greatly improved in the past 5 years, social tensions persist related to infrastructure shortcomings that affect employment, water shortages in some cities, a housing crisis, and civil unrest in the Kabylie and Southern regions. As oil prices are expected to remain high for a few years, the Algerian population expects further improvements to its standards of living and to the provisioning of basic services.
  

2.7 Despite progress in structural change, reform in key sectors remains limited. Algeria has one of the least diversified economies among middle income and oil-producer countries. The contribution of the private sector to GDP remains low and has declined since 1995. This is contrary to the increasing trend in most other oil producer-countries, which reflects the private sector’s declining role as a main driver of growth in Algeria (Figure 2.3).

Source: WDI Note: Average is unweighted.


Source: WDI

Note: Average is unweighted.

2.8 Important reforms have taken place. Trade liberalization measures have taken place. The Association Agreement with the EU was ratified and became effective in 2005. It provides for a gradual reduction over 12 years of import duties on industrial products. Active debt management is leading to a gradual clearance of public debts with Paris Club creditors. Some public and private partnerships in the water and transport sectors are developing. The education sector is developing a reform agenda (see Chapter 7). A budget modernization process has already been launched (see Chapter 4). However, the reform agenda lags in areas such as accession to the WTO, privatization of public enterprises, financial sector modernization, and areas of governance such as tax administration and judicial reform. Unfortunately, the current oil price boom somewhat masks the real need for urgent economic reforms.

2.9 Algeria’s new hydrocarbons law contributes to further liberalization in the sector. However, it was subject to amendments in 2006 that restore Sonatrach’s majority stake in all contracts with international companies. The bill pressures Sonatrach to respond to competitive pressures and contributes to transforming it into a streamlined and more efficient organization.