At the end of its two-week mission in Algeria, IMF experts welcome the government’s efforts to deploy programs against the effects of the COVID-19 crisis. But in a diplomatic tone, he recommended that he remove the last barriers to foreign investment and fight against the bureaucracy.
The pandemic and the concomitant fall in oil production and prices had a severe impact on the economy last year, leading to a sharp 4.9% reduction in real GDP in 2020. Officials implemented a comprehensive package of actions to reduce the impact on the economy, including a tax deferral. , increased health spending, unemployment benefits, one-time transfers to low-income households, cut policy rates, central bank and reserve requirement ratios and relaxation of prudential norms for banks.
The expansionary fiscal policy adopted in recent years, despite policies to reduce imports, has contributed to a high external current account deficit, and has led to significant fiscal needs that are largely met by the central bank. The fiscal and external deficit widened further in 2020 and international reserves, which are still substantial, fell from $62.8 billion in 2019 to $48.2 billion at the end of 2020.
A gradual recovery is underway, with economic growth expected to exceed 3% this year, supported by rising prices and production of hydrocarbons. Average annual inflation rose to 4.1% in June 2021 due to rising international food prices and an episode of drought in Algeria. In the medium term, growth is likely to remain moderate due to constraints on hydrocarbon production in the context of investment cuts set in 2020 and current policies limiting credit to the private sector.
Indeed, despite a return to economic activity and a significant improvement in the external balance in 2021, it is imperative to restore macroeconomic stability and room for maneuver, while protecting the most vulnerable and supporting recovery.
In the view of the mission team, persistently high budget deficit in the medium term will lead to unprecedented financing needs, depletion of foreign exchange reserves and current risks to inflation, financial stability and balance sheet of the country. Central bank. Overall, banks’ ability to lend to the rest of the economy will be severely hampered, with negative consequences for growth.
“The mission recommends a comprehensive and coherent set of fiscal, monetary and exchange policies to mitigate Algeria’s vulnerabilities. A general fiscal adjustment, prioritizing measures to protect the most vulnerable, will begin in 2022 and last for several years. This is expected to be underpinned by policies to maintain debt stability, improve revenue collection, reduce expenses and increase its efficiency, including external borrowing, by diversifying the sources of budgetary financing, preventing inflation and increasing international reserves. Monetary financing should be restricted to sharply reduce inflation. Greater exchange rate flexibility will help support the economy’s resilience to external shocks, and monetary policy tightening will help control inflationary pressures. .