At the end of a mission to Algeria, the International Monetary Fund (IMF) paints a grim picture of an economy weakened by “macroeconomic imbalances” further accentuated by the Covid-19 pandemic, and calls for “urgency” for a a vast set of structural reforms so much the country’s leaders have only “considerably reduced room for maneuver”.
“The pandemic has further highlighted the factors of vulnerability of the Algerian economy. Due to long-standing macroeconomic imbalances, policymakers have considerably reduced room for maneuver, ”notes the IMF in a statement released Monday in Washington.
For the international financial institution, “the expansionary fiscal policy pursued for several years has contributed to raising the current account deficits to high levels, despite a policy of squeezing imports, and led to vast financing needs which were, in to a large extent, satisfied through the central bank. Budgetary and external deficits widened further in 2020, while international reserves, which remain at an adequate level, fell from $ 62.8 billion in 2019 to $ 48.2 billion at the end of 2020 ”.
“It is urgent to recalibrate economic policy to correct macroeconomic imbalances while protecting and strengthening support for the most vulnerable sections of the population,” recommends the IMF. Recalling that the pandemic has “hit” the country “hard,” the international financial institution ruled that “Algeria’s transition to a new growth model requires the implementation of a vast set of structural reforms, including measures aimed at improving economic governance and promoting the emergence of a dynamic private sector and job creation ”.
“The pandemic and the concomitant drop in oil production and prices had serious repercussions on the economy last year, causing real GDP to contract sharply by 4.9% in 2020,” said the press release published in the outcome of the IMF mission conducted from September 13 to October 3 as part of the Article IV consultations.
“Inflation accelerated to reach 4.1% on an annual average in June 2021, partly as a result of an increase in international food prices and an episode of drought in Algeria”, adds the same source which forecasts that growth “should run out of steam in the medium term due to the probable erosion of production capacity in the hydrocarbons sector in a context of reduction of investment projects decided in 2020, and current policies which would limit credit to the private sector ”.
“It remains urgent to restore macroeconomic stability and room for maneuver, while protecting the most vulnerable groups and supporting the recovery,” insists the IMF, which continues that “the persistence of high budget deficits in the medium term would generate needs unprecedented funding, deplete foreign exchange reserves, and pose risks to inflation, financial stability and the central bank’s balance sheet ”. Overall, the ability of banks to lend to the rest of the economy would be “severely hampered, which would have negative consequences for growth”. Also, the IMF mission “recommends a complete and coherent set of budgetary, monetary and exchange rate policies in order to reduce Algeria’s vulnerabilities”. In this sense, “a general budgetary adjustment, which at the same time gives priority to measures to protect the most vulnerable, should be initiated in 2022 and spread over several years to maintain debt sustainability. This adjustment should be underpinned by policies aimed at improving revenue collection, reducing expenditure and increasing their efficiency. Monetary financing should be prohibited in order to stem the increase in inflation and the rapid depletion of foreign exchange reserves, while diversifying the sources of budgetary financing, including through recourse to external borrowing. Greater exchange rate flexibility will help strengthen the resilience of the economy to external shocks and tightening monetary policy will help contain inflationary pressures ”.
Another urgency: “the implementation of fundamental reforms aimed at strengthening the transparency and governance of legal, budgetary and monetary institutions throughout the public sector”.