Algeria’s overreliance on oil hurting economy


The International Monetary Fund (IMF) has urged Algeria to increase investments in the oil sector, which remains the backbone of the country’s economy.

At the same time, an IMF mission led by Zeine Zeidane that concluded Article IV consultations on the country called on the country to seek ways to diversify it economy and stop overreliance on oil exports.

“Algeria is in the enviable position of having built up substantial external and fiscal buffers over the years thanks to its hydrocarbon wealth, but threats to macroeconomic stability are growing,” said Zeidane.

He added that for the first time in nearly 15 years, the current account is expected to record a deficit owing to the fact that slumping oil production, strong domestic fuel consumption and lower international oil prices are weighing on exports while imports continue to grow.

“Reversing these trends will require more investment in the hydrocarbon sector, higher domestic energy prices, a more competitive exchange rate and a significant increase and diversification of nonhydrocarbon exports,” he observed.

The mission noted that economic activity has picked up in 2014 with real gross domestic product (GDP) growth projected to reach four per cent up from a growth of 2.8 per cent growth in 2013.

The oil sector is expected to expand for the first time in eight years, while nonhydrocarbon growth remains supportive, particularly the construction and services sectors. Inflation has decelerated sharply to below two per cent largely due to tighter monetary policy.

The fiscal deficit is expected to widen to over six per cent due to lower oil revenue, a sharp increase in capital expenditure and continued high current spending. The oil savings fund remains large but is expected to decline for the second consecutive year.

“Ambitious and sustained fiscal consolidation is necessary to place fiscal policy on a sustainable path and ensure that hydrocarbon wealth is saved for future generations,” said Zeidane.

He added that fiscal consolidation should entail mobilizing more nonhydrocarbon revenue and containing current spending, particularly wages.

According to the mission, the financial sector is generally healthy but underdeveloped and thus reforms are needed to improve access to finance especially for small and medium sized enterprises and households. In addition, listing well-performing public companies would help to develop the stock exchange.

It added that although Algeria has enjoyed macroeconomic stability, faster and more inclusive growth is necessary to provide enough jobs for the country’s youthful population. Meeting this challenge will require a comprehensive set of structural reforms that will allow the private sector to thrive.

Consequently, reforms are needed to improve the business climate, remove constraints to foreign investment, promote international trade integration and reduce labour market rigidities.

SOURCE

International Monetary Fund (IMF)

Algeria News


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