Currency equivalents

CHAPTER 1: INTRODUCTION

An official diagnostic realized over twenty-seven projects in 2003

revealed that each project on average required six reevaluations,

suffered delays equivalent to six years and five months

and is completed over ten years and two months…

—Interministerial Commission for Improving Public Finance,

MoF, 2006a
Algeria is at a crossroads. An un-precedent oil windfall is giving the country a unique opportunity to realize long-awaited investments in social and basic infrastructure. The PCSC is a massive public investment program, and it entails many risks. First, this chapter describes the PCSC content. Second, it refers to its precedent public investment program, the PSRE, and extracts a few critical lessons from its implementation, so as realizing how significant risks are. Third, it simulates implementation scenarios, assessing the absorption capacity that can be realistically expected from the Authorities.

A. Overview of PCSC

1.1 Algeria finds itself at a crossroads. The fiscal space generated by a prolonged oil windfall has enabled the country to embark on a massive public investment program for 2005–09—Le Programme Complémentaire de Support a la Croissance Economique, known as PCSC. With incorporation of the previous pipeline, budget supplements, and inclusion of new programs for the South and the Haut Plateau regions, PCSC’s initial allocation of DA 4,203 billion (roughly US$55 billion) has more than doubled to no less than DA 8,705 billion (roughly US$114 billion) (Table 1.1).⁵

1.2 From any angle of observation, the vast size of PCSC has no precedent in recent Algerian history and is due to an exceptional oil windfall. In the early 1980s, oil prices were close to US$40 per barrel, but they plunged below US$18 per barrel in the mid-1980s and 1990s (excepting 1990 and 1991). In 2000, however, oil prices again surged to more than US$20 per barrel. And they have stayed high, surpassing the US$40 per barrel benchmark in 2004 and then US$50 per barrel in 2005. The original PCSC (US$55 billion) is alone equivalent to 57 percent of the 2005 GDP (see Volume II, Table A.3.10). A public investment ratio above 10 percent of GDP for several years, as projected under the PCSC, has not been seen in Algeria since the 1980s. This level of investment is among highest in the world and especially dramatic when it is compared with the average of less than 4 percent of GDP in OECD.


Table 1.1 PCSC Authorizations and Initial Budget Payment Credits 2004-09 (in billions of DA)

	PSRE	Initial PCSC	South Plan	Haut Plateaux	Dotations to Special Accounts	Total PCSC	Initial Budget Payment Credits
2004	1,071					1,071
2005		1,273			227	1,500	862
2006		3,341	250	277	304	4,172	1,979
2007		260	182	391	244	1,077	2,238
2008		260			205	465	2,299
2009		260			160	420	1,327
Total	1,071	5,394	432	668	1,140	8,705	8,705
Source: MoF

1.3 The government has high expectations. It wants the PCSC to address the country’s most pressing needs to modernize and expand public services and to deal with a backlog of social and basic infrastructure rehabilitation. The PCSC will also have important consequences for the improvement of the population’s standard of living, and the development of human resources and basic infrastructure, and growth. The government is well aware that increased public investment can in principle be managed within fiscally sustainable budget envelopes in the medium term (chapter 2), but also, that it comes with risks.

1.4 An investment program of such magnitude poses enormous challenges. For starters, it raises serious questions concerning the sustainability of present fiscal trends as well as the quality of expenditures. More specifically, it raises challenges in how to design sound sectoral strategies; how to program future trends in capital versus recurrent expenditure; how to implement adequate project management and budget execution, including monitoring and evaluation; and how to improve the efficiency and cost-benefit of projects in general. Will the public investment program be successful in sustaining growth and faster development—or merely provide opportunities for waste and corruption? Many other issues also need to be considered—for example, the institutional framework, preventing duplication of responsibility among agencies, coordinating efforts inside the government, and building the capacity of the private sector to complete concessions and otherwise participate.
1.5 The PCSC provides a unique opportunity to build a new framework for public expenditure management. Taking advantage of the current macroeconomic and fiscal opportunity, the country could institutionalize high-quality public expenditure that would contribute social benefit far into the future. This Public Expenditure Review (PER) is an exercise to help the Government toward that end. The objectives of this PER are to assist the government in the following:

• 
  Evaluate fiscal sustainability in light of the country’s fiscal push that PCSC represents.
  
• 
  Set high technical standards for public investment management.
  
• 
  Draw lessons from the on-going budget modernization reform in order to support the overall implementation, monitoring, and evaluation of projects.
  
• 
  Support the preparation of a medium-term expenditure framework and improve the efficiency and cost-benefit of investments in four key sectors, transport and public works, water, education, and health.
  

The social and economic context preceding the PCSC

1.6 The oil price crash of 1986 had a devastating impact on economic and social conditions. This lasted for nearly a decade (Figure 1.1). Instead of proceeding to a gradual adjustment in the wake of the dramatic erosion of export revenues, the government continued expansionary fiscal and monetary policies. The result was high inflation, extensive borrowing abroad, and intensifying import restrictions. In the early 1990s, public investment was cut significantly, to a trough of 6.2 percent in 1991. This did not prevent another surge in fiscal deficits, which peaked at -8.3 percent of GDP in 1993. Between 1986 and 1994, Algeria’s average annual growth rate was barely greater than zero (0.2 percent). This translated into negative per capita rates and a significant increase in poverty.

Source : Bank Staff estimates. Data for 2005 are projections.

1.7 In 1994, the authorities put an adjustment program in place. The program aimed to correct fiscal imbalances with prudent monetary and fiscal policies, reprogramming of external debt, and introduction of structural reforms. These included trade liberalization, a two-step devaluation of the Algerian dinar (in total 70 percent) between April and September 1994; a managed float regime in 1995 supported by an interbank foreign exchange market; and the restructuring of public enterprises (Koranchelian 2005).

1.8 The adjustment program achieved significant success in price stability, but with dramatic social impact. Macroeconomic performance did indeed improve. Between 1994 and 2000, inflation fell from 29 to 0.3 percent; the fiscal deficit went from -4.4 percent of GDP to a surplus of 7.8 percent of GDP; the spread between the parallel market and official exchange rates fell by about 100 percent; and growth recovered to a modest rate of 3.2 percent. Yet the unavoidable closing of more than 900 nonviable public enterprises slashed the public labor force by 320,000 (about 40 percent)—a significant social cost. Unemployment increased from 24 percent in 1994 to 30 percent in 2000. In addition, the wage bill declined by half between 1989 and 2000 (World Bank 2003b). Economic stability was painfully regained, but with high social cost; and even so, growth remained anemic and unemployment was aggravated.⁶ With this context of urgency in 2001, social and political pressure led to the first public investment program, the PSRE.