Algeria Economic Outlook

Economic performance and outlook

Real GDP growth fell from 3.3% in 2016 to an estimated 2.5% in 2017. The decline is attributable to lower public investment due to declining government resources, despite stable growth in oil and gas since 2015. Projected growth for 2018 (3.5%) and 2019 (3.8%) suggests a return to levels comparable to those prior to 2017, due in part to fiscal consolidation, external rebalancing, continued recovery in oil and gas, and higher public spending. Inflation reached an estimated 5.3% in 2017 and is projected to fall to 4.5% in 2018 and 4% in 2019.

Macroeconomic evolution

Although the impact of lower oil prices on the real sector has been limited, they have affected public and external accounts, which had to draw down government surpluses and foreign currency reserves to $97 billion at the end of 2017, from $179 billion at the end of 2014. After the budget deficit doubled between 2014 and 2015, from 7.1% of GDP to 15%, it declined in 2016 (12.6%) and 2017 (6.4%). The trend is expected to continue in 2018 (3%) until reaching near-balance by 2019 (–0.3%). The impact on external accounts raised the current account deficit from 4.3% of GDP in 2014 to 16.4% in 2016. However, the deficit fell in 2017 (to an estimated 9.8%) and is projected to continue to do so in 2018 (to 5.6%) and 2019 (to 1.4%). These developments are the result of efforts to consolidate the fiscal situation and rebalance the external accounts. The fiscal deficit worsened with the plunge in global crude prices, which also cut foreign reserves by nearly half. In September, the authorities released a new Government Action Plan, a bold five-year program to balance the budget by 2022. The plan includes direct borrowing from the central bank, to compensate for lower oil revenue without tapping international debt markets. With domestic debt currently around 20 percent of gross domestic product, Algeria has room to take on additional borrowing. The IMF has also suggested that the authorities turn to external debt to finance its deficit. But the government has publicly indicated that if it did that, it would need to borrow about $20 billion a year to finance the deficit and within four years might not be able to repay the debt. The government also argued that austerity measures and currency depreciation will have only a limited impact on the current account deficit, which is likely to be partly counterbalanced by stronger domestic demand.

Tailwinds

A new Government Action Plan adopted in September 2017 in a challenging financial context includes three major measures: continued consolidation of public finances, which began under the 2016–30 New Economic Growth Model and the 2016–19 Budget Trajectory signed by the government in July 2016; a ban on external debt; and nonconventional financing that draws on the Central Bank for the Treasury’s financing needs, especially to reduce the deficit. Fiscal consolidation under the Government Action Plan will facilitate initiatives to rebalance the budget and external accounts—planned for 2017–19 under the Medium-term Budget Framework—and to allow for a balanced budget and balanced external accounts by 2020. Projections indicate progress in this direction, due in part to improving performance in oil and gas and rising oil prices since June 2017.

Headwinds

In 2017, budget consolidation led to 28% lower spending on equipment and a freeze on some projects in the 2014–19 budget. The drying up of banks’ cash flows has restrained their capacity for financial intermediation, reducing their ability to finance public and private investment projects. The result has been lower real GDP growth, excluding oil and gas. Wage caps, a higher value added tax (2%), smaller subsidies, and higher energy prices will affect both public and private consumption. During the second quarter of 2017, the rising price of crude oil allowed for corrective measures that freed up banks’ lending and increased investment expenditure to $4 billion. However, if these funds are not managed parsimoniously, the Government Action Plan’s option to print money could push inflation well past the projections of 4%–5.3% for 2017–19.