Algeria Seeks to Diversify, Reshape Economy as Oil Revenues Decline

Algeria’s growth expected to slow as country adjusts to oil price shock

Country needs to diversify economy away from hydrocarbons, reshape growth model

Robust reforms can boost growth and create jobs for youthful and fast-growing population

The government has started to undertake fiscal consolidation and initiated some reforms, but more needs to be done to adequately respond to the magnitude and persistence of the oil price shock and address long standing vulnerabilities. Speaking to IMF Survey, IMF Mission Chief for Algeria, Jean-François Dauphin, said that if well managed, the current situation offers an opportunity to reshape Algeria’s growth model.

IMF Survey: What’s the outlook for Algeria? How do you see prospects for the country’s economy?

Dauphin: The outlook depends very much on the authorities’ policy response to the oil price shock. Thanks to savings accumulated in the past and very low debt, Algeria can afford to adjust to the shock and implement reforms gradually. But it cannot afford to let this moment pass without taking action.

In the near term, growth is projected to slow as the government undertakes necessary fiscal consolidation. Over the medium term, however, a critical mass of structural reforms could lead to a more dynamic and diversified economy, with stronger growth and more job creation. By contrast, insufficient reforms could ultimately result in economic hardship if an exhaustion of the country’s fiscal and external space were to lead to a sudden and more drastic adjustment.

IMF Survey: Can you talk a little bit more about the impact of the oil price shock on Algeria? Has the government taken any steps to reduce the dependence on oil and diversify the economy?

Dauphin: Although the drop in oil prices has yet to translate into slower growth, it has significantly weakened Algeria’s fiscal and external balances. The fiscal position—already weakened by a ramp-up in spending in the wake of the Arab Spring—has deteriorated further as oil revenues have plummeted. Fiscal savings have been nearly depleted to finance large budget deficits. Following several years of comfortable surpluses, the current account balance has swung sharply into deficit and official reserves, while still large, are diminishing. Public and external debt, however, remain low. The banking system as a whole appears healthy, but the fall in oil price increases financial stability risks.

The policy response in 2015 was insufficient, but the...