The Algeria 2012 Key Issues

Algeria’s macroeconomic performance has remained strong, but vulnerabilities are surfacing. Nonhydrocarbon sector growth is buoyant, supported by public spending, and hydrocarbon revenues provide substantial external and fiscal buffers. However, the recent surge in current spending has weakened the fiscal stance and spurred inflation while risks are tilted to the downside. Against this backdrop, discussions focused on policies to curtail inflation, ensure fiscal sustainability and the efficiency of public spending, and foster strong nonhydrocarbon growth, with a view to increasing employment. Fighting inflation will require coordinated monetary and fiscal policies. Current public spending—notably the wage bill—should be contained. Monetary policy was tightened in May 2012, but more needs to be done, by raising interest rates and mopping up excess bank liquidity, and by increasing government securities issuances to finance the deficit. Fiscal policy needs to be put on a sustainable path. The fiscal stance remains heavily reliant on hydrocarbon revenues and is vulnerable to a long-lasting drop in hydrocarbon prices. The nonhydrocarbon deficit is not consistent with preserving real wealth per capita over the long term. Nonhydrocarbon revenues need to be bolstered, current expenditures rationalized, and public financial management improved to enhance the quality of public spending.