Progress in Structural Reform: Algeria's Reform Program Promotes Economic Growth and Transition to the Market
| Author | Martha Bonilla |
| Position | IMF External Relations Department |
| Pages | 276-278 |
Page 276
Over the past decade, Algeria has undergone far-reaching economic changes as it has undertaken major macroeconomic stabilization measures and moved from a centrally planned to a market economy. Since 1994, the country has embarked on a comprehensive reform program with support from the IMF, the World Bank, and other foreign creditors and donors. It made good progress in the fundamental structural reforms that are essential for future economic growth and in May 1998 completed four years under IMF-supported programs. The Algerian authorities now face the renewed challenge of maintaining economic stability and the reform program in the face of a recent sharp fall in hydrocarbon prices.
Upon independence in 1962, Algeria was predominantly an agrarian society with a limited industrial base. For the next 25 years, Algeria followed a typical socialist growth model, consisting of centralized economic planning, reliance on public enterprises in most services and import-substituting industries, and creation of large state farms through land nationalization. This strategy was financed by export receipts from the nationalized hydrocarbon sector-which benefited from the oil booms of 1973 and 1979-81 and generated sufficient domestic savings to enable it to avoid accumulating a large external debt until the early 1980s. By then, the drawbacks of centralized planning were apparent. Production yields stagnated in both public enterprises and state farms, which together accounted for most of Algeria's output, and dependence on food imports increased. Large public housing projects lagged considerably behind schedule and most new industrial plants ran below capacity.
By 1986, owing to the reverse oil shock created by falling petroleum prices, Algeria's terms of trade and hydrocarbon budgetary revenues dropped by about 50 percent and the weaknesses of the centrally planned system became more apparent. The authorities responded with a series of macroeconomic stabilization and structural reforms. At first, the pace of adjustment was slow and imbalances worsened. The overall budget deficit reached 13.7 percent of GDP in 1988, as cuts in government expenditure failed to compensate for revenue declines (see chart, page 277). In the absence of a financial market, fiscal deficits were monetized or financed through the buildup of external debt. Consequently, the ratio of external debt to GDP rose to 41 percent in 1988 from 30 percent in 1985, and the ratio of debt service to exports more than doubled. In addition, negative real interest rates and an overvalued currency reinforced the bias toward...
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