Overview

KEY ISSUES Inflation has subsided, but longstanding vulnerabilities are becoming increasingly apparent. Economic growth is holding up well, inflation has fallen below the central bank s target, and fiscal and external buffers remain large. But the economy s dependence on the hydrocarbon sector has led to serious vulnerabilities that are now coming to light. Stagnating hydrocarbon production and declining oil prices, combined with increasing domestic consumption of hydrocarbon products, are depressing export receipts. Public spending continues to increase, fueling imports and a loss of competitiveness, and placing fiscal policy on an increasingly unsustainable path. As a result, the current account is expected to record a deficit in 2014 for the first time in more than 15 years. Unemployment remains high among youth and women. Algeria needs to consolidate macroeconomic and financial stability. A full-fledged fiscal rule, combined with an ambitious consolidation effort over the medium term, would help put the fiscal stance on a sustainable path. The decline in inflation experienced since the 2012 is a positive outcome that needs to be maintained through continued efforts to absorb liquidity and a more active use of interest rates. The exchange rate policy should avoid deviations of the dinar from its equilibrium level, and should support the deepening of forex markets. The implementation of FSAP recommendations should be pursued, notably to strengthen financial sector stability. An export-oriented strategy is needed to ensure external sustainability. Export diversification is imperative to ensure external sustainability and reduce vulnerability to fluctuating oil prices. Diversification policies should focus on maintaining economic stability and improving competitiveness, increasing openness to trade and capital flows, (particularly FDI), and creating a more export-friendly business climate. Additional reforms are needed to increase hydrocarbon exports, including reforms to increase production and phase-out implicit subsidies on energy and electricity, which are fueling domestic consumption. Algeria s significant growth potential needs to be more fully realized. Reforms are needed to reduce the dominance of the public sector and transform the private sector into an engine for growth, supported by a deeper financial sector. To increase employment, Algeria will need better-functioning labor markets, a workforce equipped with more relevant skills, and more effective labor market programs. Exchange rate regime. The de facto exchange rate regime is classified as other managed arrangement. Algeria has accepted the obligations of Article VIII Sections 2(a), 3, and 4.

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