ALGERIA ECONOMIC UPDATE Continuing the Diversification Effort Fall 2023 Algeria Economic Update Continuing the Diversification Effort Fall 2023 Middle East and North Africa Region © 2023 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclu- sions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy, completeness, or currency of the data included in this work and does not assume responsibility for any errors, omissions, or discrepancies in the information, or liability with respect to the use of or fail- ure to use the information, methods, processes, or conclusions set forth. 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TABLE OF CONTENTS List of Acronyms..................................................................................................... v Acknowledgments................................................................................................... vii Executive Summary................................................................................................. ix Résumé analytique................................................................................................. xi ‫ملخص تنفيذي‬......................................................................................................... xiii Chapter 1: Recent Economic Developments.................................................................... 1 Strong Nonhydrocarbon Output Growth Continued in H1-2023............................................................................ 1 Reductions in Oil Production Contrasted with Growth in Natural Gas Output in H1-2023.............................. 2 Lower Hydrocarbon Exports Drove Down the Current Account Surplus in H1-2023....................................... 5 Lower Hydrocarbon Revenues Are Putting Pressure on the Fiscal Deficit.......................................................... 6 Inflation Remains Elevated in 2023, Due to Fresh Food Prices.............................................................................. 8 Chapter 2: Outlook and Risks..................................................................................... 11 Nonhydrocarbon Output Will Continue to Drive Economic Growth....................................................................... 11 Fiscal and External Balances Are Expected to Initially Deteriorate, then Stabilize............................................ 12 Volatile Oil Prices Remind of the Economic Diversification Imperative................................................................ 12 Annex 1: Analyses in Algeria’s Public Finances................................................................. 15 1. Algeria’s Public Finance Trends, 2000 to 2022...................................................................................................... 15 2. Budget Spending along the Economic Cycle......................................................................................................... 16 3. The Rigidity of Public Expenditures........................................................................................................................... 18 Annex 2: Latest Special Sections of the Algeria Economic Update.......................................... 21 Bibliography......................................................................................................... 25 iii List of Figures Figure 1 Investment supported dynamic nonhydrocarbon sector growth in Q1-2023…............................. 2 Figure 2 ...and nightlights data suggest continued dynamism in Q2-2023..................................................... 2 Figure 3 Dynamic industrial activity supported growth…...................................................................................... 2 Figure 4 ...but did not allow for a recovery in SOE manufacturing..................................................................... 2 Figure 5 The output gap remained slightly negative in 2022…........................................................................... 3 Figure 6 …while real GDP could catch up with its pre-pandemic trajectory by 2024.................................. 3 Figure 7 OPEC quota cuts have limited oil production and exports….............................................................. 4 Figure 8 …while natural gas production increased, despite a decline in external demand........................ 4 Figure 9 Gas prices surged as supply contracts were renegotiated….............................................................. 5 Figure 10 …and natural gas exports came to represent most of Algeria’s hydrocarbon exports................ 5 Figure 11 Falling hydrocarbon export prices drove down the current account in H1-2023…...................... 5 Figure 12 …and were compounded by a decline in nonhydrocarbon export prices...................................... 5 Figure 13 Imports increased despite declining prices…......................................................................................... 6 Figure 14 …as rising domestic investment stimulated equipment imports........................................................ 6 Figure 15 Declining hydrocarbon revenues during H1-2023 increase pressure on public finances......... 7 Figure 16 …but public debt only increased moderately in H1-2023.................................................................... 7 Figure 17 Change in the revenues-to-nonhydrocarbon GDP ratio, 2000–2022............................................... 8 Figure 18 Change in the spending-to-nonhydrocarbon GDP GDP ratio, 2000–2022.................................... 8 Figure 19 Inflation remained elevated, driven by fresh food products…............................................................. 9 Figure 20 …despite the dinar’s deliberate appreciation since June 2022 to limit imported inflation.......... 9 Figure 21 Liquidity growth eased in Q2-2022…......................................................................................................... 10 Figure 22 …with little expansion in private sector credit.......................................................................................... 10 Figure 23 After budget surpluses in the 2000s, falling hydrocarbon revenues led to persistent deficits in the 2010s….................................................................................................................................... 16 Figure 24 …leading to significant domestic public debt accumulation............................................................... 16 Figure 25 Budget revenues have been mostly driven by hydrocarbon revenues…......................................... 16 Figure 26 …which, in turn, depended on oil and gas export prices..................................................................... 16 Figure 27 Significant spending consolidation efforts took place in the 2010s................................................. 17 Figure 28 Expenditures are less cyclical in Algeria than in most peer countries............................................. 17 Figure 29 Capital expenditures Are procyclical, but current spending is countercyclical….......................... 18 Figure 30 …as a result, expenditure policy has been cyclically neutral.............................................................. 18 Figure 31 Budget rigidity has increased in recent years…...................................................................................... 19 Figure 32 … but remains below the average of peer countries............................................................................. 19 List of Boxes Box 1 Catching up with the pre-COVID growth trend....................................................................................... 3 Box 2 The dynamics of public finances since 2020......................................................................................... 7 iv ALGERIA ECONOMIC UPDATE – CONTINUING THE DIVERSIFICATION EFFORT LIST OF ACRONYMS BoA Bank of Algeria NEER Nominal effective exchange rate BTU British thermal unit OAIC Algerian Interprofessional Office of Cere- CPI Consumer Price Index als DZD Algerian Dinar OECD Organization for Economic Cooperation EIA Energy Information Agency and Development EUR Euro ONS National Statistical Office EPT Administrative regions OPEC Organization of Petroleum Exporting FAO Food and Agriculture Organization Countries IMF International Monetary Fund GDP Gross Domestic Product FRR Revenue Regulation Fund Pp Percentage points LNG Liquefied natural gas PSR Special refinancing program LPG Liquefied petroleum gas REER Real effective exchange rate IDE Foreign direct investment SMMEEI Steel, metal, mechanical, electrical and JODI Joint Initiative on Organizational Data electronic industries Kb/d Thousands of barrels per day SOE Public economic enterprises – should be MARS Monitoring Agricultural Resources SOE Mb/d Millions of barrels per day TTF Securities Transfer Facility MENA Middle East and North Africa US$ United States Dollar Mtoe Million tons of oil equivalent WB World Bank v ACKNOWLEDGMENTS T his Algeria Economic Update reports on the Desponts, Amel Henider, and Daniel Prinz under the main recent economic developments and supervision of Eric Le Borgne and Abdoulaye Sy. The policies. It places them in a global and lon- authors would like to thank Jesko Hentschel (Coun- ger-term context and assesses the implications of try Director for the Maghreb and Malta) and Kamel these developments and policy changes for Algeria’s Braham (Resident Representative for Algeria) for their economic prospects. The report is intended for a valuable comments during the review of this report. broad audience, including policymakers, business The World Bank team is particularly grateful to Alge- leaders, financial market participants, and the com- ria’s Ministry of Finance and Ministry of Energy for munity of analysts and professionals working in/ their comments on the report prior to publication. on Algeria. The report is divided into two chapters. The findings, interpretations, and conclusions Chapter 1 presents macroeconomic developments expressed in this report are those of the World Bank in Algeria over the year 2022 and the first half of staff and do not necessarily reflect the views of the 2023, while Chapter 2 describes the short- and World Bank Board of Executive Directors or the coun- medium-term outlook for the Algerian economy. The tries it represents. For information about the World deadline for data entry and forecast preparation Bank and its activities in Algeria, including electronic was September 22, 2023. copies of this publication, please visit https://www.ban- The Algeria Economic Update is the work of quemondiale.org/fr/country/algeria. For questions or the Middle East and North Africa (MENA) section of comments on the content of this publication, please the World Bank’s Macroeconomics, Trade, and Invest- contact Cyril Desponts (cdesponts@worldbank.org) ment (MTI) practice area. It was prepared by Cyril and Eric Le Borgne (eleborgne@worldbank.org). vii EXECUTIVE SUMMARY A lgeria’s GDP recovered to its pre-pandemic Oil and natural gas prices and exports level in 2022, while high oil and gas prices declined in H1–2023, adding pressure on exter- allowed for marked improvements in its nal and fiscal balances. After the current account external and fiscal balances. After GDP fell by 5.1 per- posted a US$ 19 billion surplus in 2022 (9.8 percent cent in 2020, hydrocarbon output recovered to its 2019 of GDP), a US$ 7.7 billion decline in hydrocarbon level in 2021, while nonhydrocarbon output recovered exports in H1–2023 relative to H2–2022, combined in 2022. Despite this recovery in levels, however, GDP with a recovery in equipment imports, reduced it to is yet to return to its pre-pandemic trend. The current US$ 2.9 billion. Foreign exchange reserves kept ris- account and fiscal deficits averaged over 10 percent ing, reaching 17.2 months of imports at end-June prior to the pandemic, but as oil and gas prices grad- 2023. After the fiscal deficit narrowed from 7.2 per- ually increased after 2020, Algeria’s current account cent in 2021 to 2.9 percent in 2022, it is expected to deficit narrowed in 2021 and posted a record surplus have widened again in H1–2023, as declining hydro- in 2022, while its fiscal deficit shrunk to its lowest level carbon budget revenues outweighed increasing tax in a decade, allowing for a replenishment of foreign revenues, and spending growth remained elevated exchange reserves and budget savings. Meanwhile, due to civil service wage increases and higher trans- inflation accelerated from 2.4 percent in 2020 to 9.3 fers, maintaining pressure on public investment. percent in 2022, driven by food prices. Public debt reached 55.6 percent of GDP at end- The recovery continued during the first 2022 and increased in H1–2023, but so did Treasury half of 2023, albeit at a slower pace, supported savings, reducing the financing gap. by nonhydrocarbon activity and investment. GDP Inflation remained elevated, reaching 9.7 growth decelerated slightly in Q1–2023 (+3.0 per- percent in H1–2023, now driven by fresh food cent y-o-y), supported by robust nonhydrocarbon prices, mostly produced domestically. The prices growth (+4.0 percent y-o-y) driven by strong invest- of the latter increased by 24.1 percent y-o-y, amidst ment spending. While this stimulated the construction another dry winter, making up 43 percent of H1–2023 and industrial sectors, services activity slowed in line inflation. After the Bank of Algeria put an end to fourteen with private consumption, while agricultural output consecutive years of depreciation in H2–2022 to curb was subdued amid droughts. Nightlights data sug- imported inflation, the dinar stabilized in H1–2023. Mon- gests lower but continued dynamic nonhydrocarbon etary policy has remained unchanged since the reserve growth in Q2–2023. On the other hand, hydrocarbon requirement was increased April 2023, and money sup- production increased moderately, and exports fell in ply growth tapered in Q2–2023. Credit growth to the H1–2023, as higher gas output offset declining oil private sector remained subdued, while that to SOEs production, amidst lower OPEC quotas. accelerated slightly. As part of the government’s ix purchasing power protection program, civil service Algerian economy, while higher gas prices and rising wages and transfers are increasing again in 2023, oil prices in H2–2023 could extend the hydrocarbon along with state control and scrutiny over food prices. windfall. Nonetheless, the risks of structural macro- Growth is expected to recover in 2024 economic imbalances remain large, as GDP, exports and 2025, while the fiscal and external balances and budget revenues remain sensitive to global oil would stabilize after an initial drop. GDP growth prices, generating both upside and downside risks would increase to 2.6 percent in 2024, with hydrocar- for Algeria’s growth, external and public finance out- bon output growing moderately as OPEC quotas and look, amidst an uncertain global geopolitical context. European gas demand recover. Investment growth Lastly, recent extreme natural events in the region, would remain robust as large investment projects together with Algeria’s own experience, highlight the move forward, and keep supporting industrial activity, risks that they pose for the country’s agricultural sec- service activity would remain dynamic, and agricul- tor and economic outlook. tural production would recover. Inflation is expected These risks underscore the importance of to decline gradually in 2024 and 2025 owing to a sustainably improving macroeconomic balances, return to normal rainfall and more moderate growth while continuing efforts to foster private sec- in money supply, public spending, and import prices. tor-led investment, growth, and diversification. After it shrinks in 2023, the current account balance Diversifying export revenues away from hydrocarbons would remain positive in 2024 and 2025, as export and attracting foreign investment would improve Alge- and import volumes stabilize. Driven by lower hydro- ria’s resilience to oil and gas price fluctuations. On carbon revenues and higher current spending, the the fiscal front, higher spending rigidity contrasts with fiscal deficit is expected to widen in 2023 and 2024 volatile hydrocarbon revenues, generating significant before narrowing. The public debt-to-GDP ratio would uncertainty. This underlines the need to raise more increase moderately, with oil savings partially financ- tax revenues and strengthen spending efficiency in ing the fiscal deficits. an equitable way, notably that of public investment. The macroeconomic outlook hinges on Consistent with the 2021 Government Action Plan, volatile hydrocarbon prices, and the regional con- continued implementation of reforms to stimulate pri- text underscores the reality of the climate risks vate investment and enable the formalized private to which Algeria is also exposed. Authorities have sector to become the engine of sustainable and diver- built more foreign exchange reserves and oil savings, sified growth remains essential to the performance which strengthened the medium-term resilience of the and resilience of the Algerian economy. x ALGERIA ECONOMIC UPDATE – CONTINUING THE DIVERSIFICATION EFFORT RÉSUMÉ ANALYTIQUE L e PIB de l’Algérie a retrouvé son niveau la consommation privée, tout comme la production prépandémique en 2022, tandis que les agricole dans un contexte de faible pluviométrie. Les prix élevés du pétrole et du gaz ont permis données d’éclairage nocturne suggèrent une crois- d’améliorer sensiblement les soldes extérieur et sance hors hydrocarbures moins élevée mais toujours budgétaire. Après une chute du PIB de 5,1 % en dynamique au T2–2023. Par ailleurs, la production 2020, la production d’hydrocarbures a retrouvé son d’hydrocarbures a connu une hausse modérée et les niveau de 2019 en 2021, tandis que la production exportations ont diminué au S1–2023, la hausse de hors hydrocarbures l’a retrouvé en 2022. Malgré la production de gaz compensant la baisse volontaire cette reprise en niveau, le PIB n’a pas encore des quotas de production de pétrole. retrouvé sa trajectoire prépandémique. Les déficits Les prix et les exportations de pétrole et du compte courant et budgétaire atteignaient en de gaz naturel ayant baissé au S1–2023, la pres- moyenne plus de 10% du PIB avant la pandémie, sions sur les équilibres extérieur et budgétaire mais l’augmentation progressive des prix du pétrole s’est accrue. Après que le compte courant ait enre- et du gaz après 2020 a permis au déficit du compte gistré un excédent de 19 G$ US en 2022 (9,8 % du courant de se réduire en 2021 et d’afficher un excé- PIB), une baisse des exportations d’hydrocarbures de dent record en 2022, alors que le déficit budgétaire 7,7 G$ US au S1–2023 par rapport au S2–2022, com- atteignait son niveau le plus bas en dix ans, per- binée à une reprise des importations d’équipements, mettant de reconstituer les réserves de change et l’a ramené à 2,9 G$ US. Les réserves de change ont l’épargne du Trésor. Dans le même temps, l’infla- continué à augmenter, atteignant 17,2 mois d’impor- tion s’est accélérée de 2,4% en 2020 à 9,3 % en tations à la fin-juin 2023. Après une réduction du 2022, sous l’effet de la hausse des prix des produits déficit global du Trésor de 7,2 % du PIB en 2021 à alimentaires. 2,9 % en 2022, il est attendu qu’il se soit creusé au La reprise s’est poursuivie au S1–2023, S1–2023. La baisse des recettes des hydrocarbures bien qu’à un rythme plus modéré, soutenue par a dépassé l’augmentation des recettes fiscales, et la l’activité hors-hydrocarbures et l’investissement. croissance des dépenses est demeurée élevée en rai- La croissance du PIB a légèrement ralenti au cours son de l’augmentation des salaires dans la fonction du T1–2023 (+3,0% en g.a.), soutenue par une crois- publique et celle des transferts, maintenant une pres- sance hors-hydrocarbures robuste (+4,0% en g.a.) sion sur l’investissement public. La dette publique a tirée par le dynamisme de l’investissement. Cela a atteint 55,6 % du PIB à la fin 2022 et a augmenté au stimulé les secteurs de la construction et de l’indus- S1–2023, mais l’épargne du Trésor a également aug- trie, tandis que l’activité des services a ralenti suivant menté, réduisant ainsi les besoins de financement. xi L’inflation reste élevée, atteignant 9,7% au Les perspectives macroéconomiques S1–2023, désormais tirée par le prix des produits demeurent tributaires des prix volatiles des agricoles frais, principalement produits locale- hydrocarbures, et le contexte régional sou- ment. Le prix de ces derniers a augmenté de 24,1% en ligne la réalité des risques climatiques auxquels g.a. dans le contexte d’un autre hiver sec, expliquant l’Algérie est également exposée. Les autorités 43% de l’inflation au S1–2023. Après que la Banque ont constitué davantage de réserves de change d’Algérie ait mis fin à quatorze années consécutives de et d’épargne pétrolière, renforçant la résilience à dépréciation au S2–2022 pour limiter l’inflation impor- moyen terme de l’économie algérienne, tandis que tée, le dinar s’est stabilisé au S1–2023. La politique l’augmentation des prix du gaz et la hausse des prix monétaire est restée inchangée depuis l’augmenta- du pétrole au cours du S2–2023 pourraient prolon- tion du taux de réserves obligatoires en avril 2023, ger la manne des hydrocarbures. Néanmoins, les et la croissance de la masse monétaire a ralenti au risques de déséquilibres macroéconomiques struc- T2–2023. La croissance du crédit au secteur privé turels restent importants car le PIB, les exportations est restée modeste, tandis que celle aux entreprises et les recettes budgétaires demeurent sensibles publiques s’est légèrement accélérée. Les salaires aux prix mondiaux du pétrole, générant des risques dans la fonction publique et les transferts ont augmenté haussiers et baissiers pour les perspectives de à nouveau en 2023, dans le cadre du programme trien- croissance, les équilibres extérieures et les finances nal de protection du pouvoir d’achat du gouvernement, publiques, dans un contexte géopolitique mondial tandis que le contrôle et la surveillance des prix des incertain. Enfin, les phénomènes naturels extrêmes produits alimentaires par l’État se sont accrus. récents dans la région, ainsi que l’expérience algé- La croissance devrait être plus élevée en rienne, soulignent les risques que ceux-ci font peser 2024 et 2025, tandis que les soldes budgétaire sur le secteur agricole et les perspectives écono- et extérieur se stabiliseraient après une baisse miques du pays. initiale. La croissance du PIB atteindrait 2,6 % en Ces risques soulignent l’importance de 2024, la production d’hydrocarbures augmentant l’amélioration durable des équilibres macroéco- modérément suivant la reprise des quotas de l’OPEP nomiques, et de la poursuite des efforts visant à et celle de la demande européenne en gaz. L’investis- encourager l’investissement privé, la croissance sement demeurerait robuste grâce à la progression et la diversification. La diversification des recettes de grands projets et continuerait à soutenir l’activité d’exportation hors-hydrocarbures et l’attraction des industrielle, l’activité des services resterait dynamique investissements étrangers amélioreraient la résilience et la production agricole devrait se redresser. L’infla- externe face aux fluctuations des prix du pétrole et du tion diminuerait progressivement en 2024 et 2025, gaz. Sur le plan budgétaire, la rigidité des dépenses grâce au retour à un niveau normal de pluviomé- courantes contraste avec la volatilité des recettes trie et à une croissance plus modérée de la masse venant des hydrocarbures, générant une forte monétaire, des dépenses publiques et des prix à l’im- incertitude. Cela souligne l’importance de la mobili- portation. Après une contraction en 2023, la balance sation accrue des recettes fiscales et d’une meilleure du compte courant resterait positive en 2024 et 2025, efficacité des dépenses, notamment celle de l’inves- les volumes exportés et importés se stabilisant. Sous tissement public. En cohérence avec le Plan d’Action l’effet de la baisse des recettes d’hydrocarbures et du Gouvernement de 2021, l’accélération de la mise de l’augmentation des dépenses courantes, le déficit en œuvre des réformes visant à stimuler l’investisse- budgétaire se creuserait en 2023 et 2024 avant de se ment privé et à permettre au secteur privé formel de résorber. Le ratio dette publique sur PIB augmenterait devenir le moteur d’une croissance durable et diver- modérément, l’épargne pétrolière finançant partielle- sifiée demeure essentielle à la performance et à la ment les déficits budgétaires. résilience de l’économie algérienne. xii ALGERIA ECONOMIC UPDATE – CONTINUING THE DIVERSIFICATION EFFORT ‫ملخص تنفيذي‬ ‫إحتياطات الرصف يف الزيادة‪ ،‬حيث وصلت إىل ‪ 17.2‬شهر من الواردات‬ ‫يف نهاية جوان ‪ .2023‬بعد انخفاض العجز اإلجاميل للخزينة من ‪7.2٪‬‬ ‫من الناتج املحيل اإلجاميل يف عام ‪ 2021‬إىل ‪ 2.9٪‬يف عام ‪ 2022‬إال أنه‬ ‫ستطاع الناتج املحيل اإلجاميل للجزائر أن يسرتجع مستواه ملا قبل‬ ‫الجائحة يف عام ‪ ،2022‬بينام ساعدت أسعار النفط والغاز املرتفعة يف‬ ‫تحسني األرصدة الخارجية وامليزانية بشكل كبري‪ .‬بعد انخفاض الناتج‬ ‫ا‬ ‫ة أخرى يف النصف األول من عام ‪2023‬‬ ‫من املتوقع أن يرتفع العجز مر ً‬ ‫املحيل اإلجاميل بنسبة ‪ 5.1٪‬يف عام ‪ ،2020‬عاد اإنتاج املحروقات إىل‬ ‫وذلك ألن ايرادات قطاع املحروقات انخفضت بنسبة تفوق الزيادة يف‬ ‫مستوى عام ‪ 2019‬يف عام ‪ ،2021‬بينام استعاد اإلنتاج خارج املحروقات‬ ‫االيرادات الجبائية ‪ ،‬وظل منو اإلنفاق مرتفعاً بسبب الزيادات يف رواتب‬ ‫مستواه يف عام ‪ .2022‬وعىل الرغم من هذا االنتعاش يف املستوى‪ ،‬مل‬ ‫الوظيف العمومي والتحويالت‪ ،‬هذه العوامل مجتمعة ساهمت يف الحد‬ ‫يستيعد بعد الناتج املحيل اإلجاميل املسار الذي كان عليه ماقبل الجائحة‪.‬‬ ‫من االستثامر العمومي‪ .‬بلغ الدين العمومي ‪ 55.6%‬من الناتج املحيل‬ ‫وبلغ معديل​​العجز يف الحساب الجاري وامليزانية أكرث من ‪ 10%‬من الناتج‬ ‫اإلجاميل يف نهاية عام ‪ 2022‬وارتفع يف النصف األول من عام ‪ ،2023‬لكن‬ ‫املحيل اإلجاميل قبل الوباء ‪ ،‬ولكن ارتفاع أسعار النفط والغاز تدريجياً‬ ‫مدخرات الخزينة زادت أيضً ا مام قلل من االحتياجات التمويلية‪.‬‬ ‫بعد عام ‪ ، 2020‬ساعد عىل تخفيف العجز يف امليزان التجاري يف عام‬ ‫‪ 2021‬وتحقيق فائض قيايس يف عام ‪ ،2022‬بينام انخفض عجز امليزانية‬ ‫ال يزال التضخم مرتفعا‪ ،‬حيث وصل إىل ‪ 9.7%‬يف النصف األول من عام‬ ‫إىل أدين مستوى له منذ عرش سنوات‪ ،‬مام دعم إحتياطات الرصف ورصيد‬ ‫‪،2023‬و يُعزى األمر حالياً إىل ارتفاع أسعار املنتجات الزراعية الطازجة‬ ‫املدخرات ‪ .‬يف الوقت نفسه‪ ،‬ادى إرتفاع أسعار املواد الغذائية إىل ارتفاع‬ ‫وبشكل أخص املحلية منها‪ .‬ارتفعت أسعارهذه املنتجات بنسبة ‪24.1%‬‬ ‫نسبة التضخم من ‪ 2.4٪‬يف عام ‪ 2020‬إىل ‪ 9.3٪‬يف عام ‪.2022‬‬ ‫ء آخر جاف ‪ ،‬مام يفرس ‪ 43%‬من التضخم يف النصف األول‬ ‫سنوياً بعد شتا ٍ‬ ‫استمراإلنتعاش اإلقتصادي يف النصف األول من عام ‪ 2023‬وإن كان‬ ‫من ‪ .2023‬يف النصف الثاين من عام ‪ 2022‬وبعد أن استطاع بنك الجزائر‬ ‫بوترية أبطأ‪ ،‬وذلك بفضل نشاط قطاع خارج املحروقات واالستثامر‪ .‬خالل‬ ‫ما نتيجة‬‫الحد من انخفاض قيمة العملة والتي استمرت أربعة عرش عا ً‬ ‫الربع األول من عام ‪ 2023‬تراجع منو الناتج املحيل اإلجاميل قليالً (‪+3.0٪‬‬ ‫التضخم املستورد ‪ ،‬أسفر عن هذه الخطوة استقرار الدينار الجزائري يف‬ ‫سنوياً)‪ ،‬مستندا عىل النمو القوي إلنتاج قطاع خارج املحروقات (‪+4.0٪‬‬ ‫النصف األول من عام ‪ .2023‬مل يطرأ أي تغيري عىل السياسة النقدية‬ ‫سنوياً) بسبب االستثامر النشيط‪ .‬حفز ذلك قطاعات البناء والصناعة‪ ،‬يف‬ ‫منذ زيادة نسبة متطلبات االحتياطي يف أبريل ‪ ،2023‬وتباطأ منو التدفق‬ ‫حني تباطأ نشاط الخدمات تاليا االستهالك الخاص واإلنتاج الزراعي يف ظل‬ ‫النقدي يف الربع الثاين من عام ‪ .2023‬وظل منو االئتامن املمنوح للقطاع‬ ‫الجفاف وقلة األمطار‪ .‬أن البيانات الصادرة عن اإلضاءة الليلية تشري إىل‬ ‫الخاص متواضعاً يف حني تسارع منو االئتامن املمنوح للمؤسسات اﻟﻌﻤﻮﻣﻴﺔ‬ ‫منو بوترية أبطأ خالل الربع الثاين من عام ‪ .2023‬من ناحية أخرى‪ ،‬شهد‬ ‫بشكل طفيف‪ .‬كام سيتم زيادة رواتب الوظيف العمومي والتحويالت‬ ‫إنتاج قطاع املحروقات إرتفاع نسبي‪ ،‬وانخفضت الصادرات يف النصف‬ ‫االجتامعية مرة أخرى يف عام ‪ 2023‬يف إطار الربنامج الثالثيل للحكومة‬ ‫األول من عام ‪ ،2023‬بحيث أن الزيادة يف إنتاج الغاز قامت بتعويض‬ ‫لحامية القدرة الرشائية‪ ،‬ذلك بجانب تشديد مراقبة الحكومة والسيطرة‬ ‫االنخفاض الطوعي يف حصص إنتاج النفط‪.‬‬ ‫عىل أسعار املواد الغذائية‪.‬‬ ‫مع انخفاض أسعار وصادرات النفط والغاز الطبيعي يف النصف األول‬ ‫ومن املتوقع أن يكون النمو أعىل يف عامي ‪ 2024‬و‪ ،2025‬يف حني تستقر‬ ‫من عام ‪ 2023‬زاد الضغط عىل توازوين امليزانية وامليزان الخارجي‪ .‬بعد‬ ‫أرصدة امليزانية و املبادالت الخارجية بعد االنخفاض األويل‪ .‬وسيصل منو‬ ‫أن سجل الحساب الجاري فائضا قدره ‪ 19‬مليار دوالر أمرييك يف عام‬ ‫الناتج املحيل اإلجاميل إىل ‪ 2.6%‬يف عام ‪ 2024‬وذلك تزامناً مع زيادة إنتاج‬ ‫‪ 9.8٪( 2022‬من الناتج املحيل اإلجاميل) إال أنه انخفض إىل ‪ 2.9‬مليار‬ ‫قطاع املحروقات بشكل معتدل بعد تحسن الطلب األورويب عىل الغاز‬ ‫دوالر أمرييك‪ ،‬ويعزى السبب إىل انخفاض صادرات املحروقات مبقدار‬ ‫وحصص أوبك‪ .‬ومن املرتقب ايضاً أن يحافظ االستثامرعىل قوته بفضل‬ ‫‪ 7.7‬مليار دوالر أمرييك يف النصف األول من عام ‪( 2023‬مقارنة بالنصف‬ ‫التقدم املحرز يف املشاريع الكربى‪ ،‬وأن يستمر يف دعم النشاطات الصناعية‪،‬‬ ‫الثاين من عام ‪ )2022‬وإىل استئناف استرياد املعدات واآلليات‪ .‬استمرت‬ ‫‪xiii‬‬ ‫كبري بأسعار النفط العاملية مام يولد مخاطر ايجابية او سلبية عىل آفاق‬ ‫وأن يظل قطاع الخدمات نشيطاً‪ ،‬التعاىف املتوقّع لإلنتاج الزراعي‪ .‬ومن‬ ‫النمو وعىل املالية العامة و التوازنات الخارجية ‪ ،‬يف سياق جيوسيايس‬ ‫املتوقع أن ينخفض​​التضخم تدريجياً يف عامي ‪ 2024‬و‪ ،2025‬وذلك بفضل‬ ‫عاملي غري مستقر‪ .‬وأخريا‪ ،‬فإن الظواهر الطبيعية الحادة التي شهدتها‬ ‫العودة إىل املستوى الطبيعي من األمطار والنمو املعتدل يف التدفق‬ ‫املنطقة مؤخرا‪ ،‬إضافة اىل تجربة الجزائر مع هذه الظواهر‪ ،‬تسلط الضوء‬ ‫النقدي واإلنفاق العام وأسعار الواردات‪ .‬وبعد االنكامش يف عام ‪،2023‬‬ ‫عىل املخاطر التي ميكن أن تسببها هذه التغيريات الطبيعية عىل القطاع‬ ‫سيظل رصيد الحساب الجاري إيجابيا يف عامي ‪ 2024‬و‪ ،2025‬مع استقرار‬ ‫الزراعي و التوقعات االقتصادية للبالد‪.‬‬ ‫أحجام الصادرات والواردات‪..‬وبتأثري انخفاض إيرادات املحروقات وزيادة‬ ‫النفقات الجارية‪ ،‬من املتوقع أن يتسع عجز امليزانية يف عام ‪ 2023‬و‬ ‫تؤكد هذه املخاطر عىل أهمية اإلستدامة يف تعزيز التوازن يف االقتصاد‬ ‫‪2024‬قبل أن ينخفض‪ .‬وستظل نسبة الدين العمومي إىل الناتج املحيل‬ ‫الكيل‪ ،‬بجانب التأكيد عىل دور القطاع الخاص يف قيادة االستثامر وتعزيزه‬ ‫اإلجاميل مستقرة‪ ،‬واالدخار النفطي ميول جزئيا عجز امليزانية‪.‬‬ ‫وتنويعه‪ .‬إن من شأن تنويع اإليرادات من الصادرات خارج املحروقات‬ ‫وجذب االستثامراألجنبي القدرة عىل تعزيز صمود االقتصاد الجزائري أمام‬ ‫تستند توقعات االقتصاد الكيل بشكل كبريعىل أسعار املحروقات املتقلبة‬ ‫التقلبات يف أسعار النفط والغاز‪ .‬وعىل صعيد املالية ‪ ،‬تتناقض صالبة‬ ‫ويسلط السياق اإلقليمي الضوء عىل حقيقة املخاطر املناخية التي‬ ‫النفقات الجارية مع تقلب إيرادات النفط والغاز‪ ،‬مام يولد قدرا كبري من‬ ‫تتعرض لها الجزائر أيضا‪ .‬قامت السلطات الجزائرية بتقوية احتياطات‬ ‫عدم اليقني‪ .‬وهذا يؤكد الحاجة إىل جمع املزيد من اإليرادات الجبائية‬ ‫الرصف والرفع من املدخرات النفطية األمر الذي أدى إىل تعزيز صمود‬ ‫وتعزيز كفاءة اإلنفاق ‪ ،‬وال سيام االستثامر العمومي‪ .‬ومتاشيا مع مخطط‬ ‫االقتصاد الجزائري عىل املدى املتوسط‪ ،‬يف حني أن ارتفاع يف أسعار الغاز‬ ‫عمل الحكومة لعام ‪ ،2021‬فإن مواصلة تنفيذ اإلصالحات الرامية إىل‬ ‫و النفط خالل النصف الثاين من العام ‪ 2023‬قد يطيل أمد مكاسب قطاع‬ ‫تحفيز االستثامر الخاص ومتكني القطاع ليكون املحرك األسايس للنمو‬ ‫املحروقات‪ .‬ومع ذلك تبقى مخاطر إختالل بنية االقتصاد الكيل كبرية ذلك‬ ‫عال‪.‬‬‫املستدام واملتنوع يبقى رضورياً لصمود االقتصاد الجزائري وادائه الف ّ‬ ‫أن الناتج املحيل اإلجاميل والصادرات وإيرادات امليزانية مرتبطة بشكل‬ ‫‪xiv‬‬ ‫‪ALGERIA ECONOMIC UPDATE – CONTINUING THE DIVERSIFICATION EFFORT‬‬ 1 RECENT ECONOMIC DEVELOPMENTS Strong Nonhydrocarbon Output nonhydrocarbon activity growth in Q2-2023, driven Growth Continued in H1-2023 by strong growth in the North-Center and North-West regions (Figures 1 and 2). Dynamic Nonhydrocarbon output growth con- Strong investment growth stimulated the tinued into H1-2023, albeit at a slower pace, construction and industrial sectors, but sub- supported by investment and government con- dued rainfall constrained agricultural output. sumption. Nonhydrocarbon GDP expanded by After a strong rebound in 2022, Q1-2023 agricul- 4.3 percent in 2022, the strongest growth rate since tural output growth slowed down to 2.2 percent, and 2015, and output surpassed its pre-pandemic level. crop development was below average at the end of Along with a slight decrease in hydrocarbon output the winter harvest (Q2-2023), following rainfall def- (–0.6 percent), GDP growth reached 3.2 percent. icit over the winter in most wilayas.1 Responding to Dynamic nonhydrocarbon growth extended into investment growth, construction output acceler- Q1-2023 (+4.0 percent y-o-y). Driven by rapid civil ated to 4.9 percent y-o-y in Q1-2023, supporting the service wage and social spending increases, pub- recovery of other industrial sectors, including steel, lic consumption grew at its fastest rate in five years metal, mechanical, electrical and electronic indus- (+3.0 percent y-o-y) and compensated for decel- tries (SMMEEI), construction materials, chemicals, erating private consumption (+2.1 percent y-o-y). water and energy, and wood and paper. Nonetheless, Strong investment growth in Q4-2022 extended to Q1-2023 (+5.2 percent y-o-y), despite a slowdown 1 Anomaly Hotspots of Agricultural Production (ASAP) sat- in public investment. Combined with a 1.4 percent ellite estimates produced by the European Commission’s y-o-y increase in hydrocarbon output, overall growth Joint Research Centre (JRC) indicate that below-average decelerated to 3.0 percent in Q1-2023. Nightlights rainfall has caused cereal biomass to be below average data also suggest slower but continued dynamic in the large majority of wilayas. 1 Investment supported dynamic FIGURE 1 •  FIGURE 2 • …and nightlights data suggest nonhydrocarbon sector growth in Q1- continued dynamism in Q2-2023 2023… 20% Y-o-y change in night-time light intensity 15 15% Contribution to y-o-y GDP growth (pp,%) 10 10% 5 5% 0 0% –5% –5 –10% –10 –15% –15 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2019 2020 2021 2022 2023 –20 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 North Central Northeast Northwest 2019 2020 2021 2022 2023 Eastern Highlands Total Net exports Consumption Investment Source: NASA and WB estimates. Change in stocks Discrepancy GDP Note: Nightlights data, adjusted for the impact of oil and gas activity, are robust leading indicators of economic activity (World Bank, 2023a). The regions correspond to the Source: Office National des Statistiques (ONS) and World Bank (WB) estimates. Espaces de Programmation Territoriale (EPT). Dynamic industrial activity FIGURE 3 •  FIGURE 4 • …but did not allow for a recovery in supported growth… SOE manufacturing 8 130 Contribution to y-o-y GDP growth (pp,%) 6 Output, indices (2017 = 100) 120 4 110 2 0 100 –2 90 –4 80 –6 70 –8 60 –10 2017 2018 2019 2020 2021 2022 –12 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 SMMEEI Agroindustries Manufacturing 2019 2020 2021 2022 2023 SMMEEI, SOE Agroindustries, SOE Manufacturing, SOE Agriculture Hydrocarbons Industry & construction Source: ONS and WB estimates. Taxation & Services GDP Note: Total activity uses real GDP and activity of state-owned enterprises (SOE) uses discrepancy the industrial production index. SOEs represent 29 percent of manufacturing activity and are mostly active in the SMMEEI (45 percent), agro-industrial (23 percent) and Source: ONS and WB estimates. construction material (21 percent) sectors. state-owned enterprise (SOE) manufacturing activ- Reductions in Oil Production ity remained markedly below pre-pandemic levels, in Contrasted with Growth in Natural contrast to the full recovery in the private manufac- Gas Output in H1-2023 turing sector. As private consumption decelerated in Q1-2023, commercial service growth also slowed Owing to OPEC production cuts, oil production and (+4.4 y-o-y), yet it remains the main contributor to exports decreased in H1-2023. Oil production took growth (Figures 3 and 4). two years to recover from the quota reductions decided 2 ALGERIA ECONOMIC UPDATE – CONTINUING THE DIVERSIFICATION EFFORT BOX 1: CATCHING UP WITH THE PRE-COVID GROWTH TREND Like in the rest of the world, the COVID-19 pandemic led to a deep recession in Algeria. GDP contracted by 5.1 percent in 2020 as private consumption fell amid lockdowns and capital expenditures decreased drastically. Industrial output (-3.1 percent) and services (–4.3 percent) were hit especially hard by the lockdowns. The concurrent global recession reduced the demand for and prices of hydrocarbon exports, leading OPEC and Algeria to lower oil production quotas. Algeria’s overall and nonhydrocarbon GDP recovered to pre-pandemic levels by 2022. Hydrocarbon GDP recovered to its pre-pandemic level by 2021, and nonhydrocarbon output by 2022. Private consumption recovered by 2021 as the economy reopened, supporting the recovery of services by 2022. Although government investment has remained below pre-pandemic levels since 2020, the private investment recovery has stimulated industrial output, which exceeded its 2019 level by 2021. GDP could exceed its pre-pandemic trend by 2024, thanks to stronger-than-expected hydrocarbon output. Although the level of GDP recovered to its pre-pandemic level by 2022, Bank projections suggest that real GDP would match what it would have been under the pre- pandemic growth trend by 2024. Despite a marked recovery in 2021 and 2022, the output gap remains negative, and GDP below potential. Looking ahead, nonhydrocarbon GDP is likely to have incurred a long-term loss in level due to the COVID-19 pandemic, similar across the agricultural, industrial and services sectors. In other words, growth would need to be stronger for nonhydrocarbon GDP to match what it would have been absent the COVID-19 pandemic. On the other hand, Europe’s natural gas sourcing shift away from Russia has allowed for stronger natural gas output and is expected to allow a stabilization in hydrocarbon GDP, breaking its pre-pandemic downward trend. FIGURE 5 • The output gap remained slightly …while real GDP could catch up with FIGURE 6 •  negative in 2022… its pre-pandemic trajectory by 2024 0.8 180 0.6 160 Real GDP, indices (2010=100) 0.4 140 0.2 120 Output gap (%) 0.0 –0.2 100 –0.4 80 –0.6 60 –0.8 40 –1.0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 –1.2 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 GDP NHGDP Hydrocarbon GDP GDP, counterf. NHGDP, Hydrocarbon Output gap Nonhydrocarbon output gap counterf. GDP, counterf. Source: ONS and WB estimates and projections for 2023. Source: ONS and WB estimates and projections for 2023–2025. Note: Output gap estimated based on 1974–2022 data and 2023–2025 forecasts Note: NH = nonhydrocarbon. Counterf. = Counterfactual, relative to a pre-pandemic using a Hodrick-Prescott (HP) filter with a smoothing parameter of 100. trend estimated using a linear extrapolation of 2016–2019 data. during the COVID-19 pandemic, reaching its pre-pan- one month.2 As a result, oil production fell by 3.6 per- demic level in Q2-2022. Since then, OPEC decided cent q-o-q in Q2-2023, and was 5.7 percent lower on voluntary oil output quota reductions to support compared to its Q3-2022 peak.3 Oil tanker tracker data falling prices, with Algeria reducing its quota from suggests, however, that crude oil exports remained 1055 kb/d in October 2022 to 1007 kb/d in November stable in H1-2023 while condensates exports surged, and to 959 kb/d in May 2023. The government also announced a further 20,000 barrels per day cut for the 2 APS (July 3, 2023). month of August 2023, reducing output to 939 kb/d for 3 OPEC Monthly Oil Market Report, August 10, 2023. Recent economic developments 3 OPEC quota cuts have limited oil FIGURE 7 •  …while natural gas production FIGURE 8 •  production and exports… increased, despite a decline in external demand 1,000 30 Thousand of barrels per day 800 25 20 Billions m3 600 15 400 10 5 200 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q2e Q1e 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 2019 2020 2021 2022 2023 2019 2020 2021 2022 2023 Natural gas production Pipeline exports Crude oil Export of crude oil Export of refined Domestic consumption LNG exports production and condensate petroleum products Source: Joint Organisations Data Initiative (JODI), WB estimates. Source: Bank of Algeria (BoA) for exports to Q3-2022, Organization of Petroleum Note: Data are presented as a rolling four-quarter average to eliminate the effect of Exporting Countries (OPEC) for crude oil production, WB estimates using Bloomberg seasonality. Domestic consumption is estimated as the difference between gross Tanker Tracker data for exports for Q4-2022, Q1-2023 and Q2-2023. production and pipeline and liquefied natural gas exports, as Algeria does not import natural gas. suggesting a decline in refined petroleum production that natural gas prices tracked the dynamics of oil and exports, with the latter being exacerbated by rising prices with a delay.5 As of mid-2022, however, the rela- domestic consumption (Figure 7). tionship between natural gas and oil prices changed, As surging domestic demand overcom- as Sonatrach renegotiated gas delivery contracts pensated for a steep decline in external demand, with its European counterparts,6 leading to a marked natural gas production increased in H1-2023. increase in the price of natural gas exported through After a rapid expansion and peak in 2021 (+17.1 per- pipelines, which tripled between Q4-2021 and Q4-2022. cent), natural gas output declined moderately in 2022 In H1-2023, the decline in oil and gas export volumes, (–3.4 percent) although it remained well above pre- that in oil prices, and the expected decline in natural pandemic levels. Pipeline exports fell in H1-2023 gas prices caused the value of hydrocarbon exports to (–15.4 percent y-o-y), notably due to lower European decrease by US$ 7.7 billion relative to H2-2022, from demand amidst a milder winter,4 in part compen- US$ 32 billion to US$ 24.4 billion (Figures 9 and 10). sated by higher liquified natural gas (LNG) exports (+6.8 percent y-o-y). Nevertheless, natural gas pro- duction was up 4.8 percent y-o-y in H1-2023, implying 4 Natural gas consumption in Europe fell by about 16% a steep increase in domestic demand, consistent with y-o-y during the 2022–23 heating season. Residential and commercial usage was notably reduced by a warmer win- dynamic industrial activity (Figure 8). ter as well as gas saving measures, while demand from Declining oil and gas prices compounded the the power and industry sectors declined as they coped effect of lower export volumes, and hydrocarbon with higher prices. (IEA Gas Market Report, Q2-2023). exports fell markedly as a result. Algeria’s reference 5 Algeria Economic Update, Spring 2022. crude oil price peaked in June 2022 at US$122.7 per 6 Notably with Italy’s ENEL and ENI, Spain’s Naturgy, barrel, before decreasing steadily to US$83.7 in August and France’s ENGIE. (Sonatrach Annual Report, 2022, p. 41). Absent public information regarding the new con- 2023, amid slowing global economic activity and the tractual terms, the change in the relationship between oil introduction of a price cap on Russian oil. On the other and natural gas prices means that there is considerable hand, gas export prices are determined by longer-term uncertainty about the dynamics of Algeria’s natural gas contracts which, before Russia’s war on Ukraine, meant export prices after Q3-2022. 4 ALGERIA ECONOMIC UPDATE – CONTINUING THE DIVERSIFICATION EFFORT Gas prices surged as supply contracts FIGURE 9 •  …and natural gas exports came FIGURE 10 •  were renegotiated… to represent most of Algeria’s hydrocarbon exports 350 20 35 300 Price in US$, indices (Q1-2019=100) 30 250 15 25 Exports, in US$ billion 200 20 % of GDP 10 150 15 5 10 100 5 50 0 0 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q1e 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 2019 2020 2021 2022 2023 2019 2020 2021 2022 2023 Natural gas Weighted price Crude oil Other hydrocarbons exports Gas Total (rhs) Source: BoA and WB estimates for Q4-2022 and Q1-2023. Source: BoA and WB estimates for Q4-2022 and Q1-2023. Falling hydrocarbon export prices FIGURE 11 •  …and were compounded by FIGURE 12 •  drove down the current account in a decline in nonhydrocarbon export H1-2023… prices 18 1.2 350 13 1.0 300 Indices (Q1-2019 = 100) 8 250 0.8 200 Billion US$ 3 0.6 –2 150 0.4 100 –7 0.2 50 –12 0 –17 0.0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2019 2020 2021 2022 2023 2019 2020 2021 2022 2023 NH export value NH export volume Exports G&S Imports G&S Change in forex reserves NH export prices World fertilizers price Current account NH Current Terms of trade (rhs) balance account Source: ONS and WB estimates for nonhydrocarbon export prices and volumes, WB Commodity Markets Outlook for the composite fertilizer index. NH = nonhydrocarbon. Source: International Monetary Fund (IMF), ONS and WB estimates. Nitrogenous fertilizers and ammonia represent around 33 and 20 percent of NH = nonhydrocarbon. Forex reserves = foreign exchange reserves. nonhydrocarbon exports, respectively. Lower Hydrocarbon Exports Drove years before the pandemic, the current account defi- Down the Current Account Surplus in cit averaged 13 percent of GDP but flipped from a H1-2023 deficit of 2.7 percent in 2021 to a surplus of 9.8 per- cent of GDP in 2022, owing to high oil and natural gas Driven by falling hydrocarbon and nonhydrocarbon prices. In the meantime, the value of nonhydrocar- exports, as well as recovering imports, the current bon exports had increased by 27.9 percent, driven by account surplus shrank during H1-2023. In the five the increase in the price of nitrogenous fertilizers and Recent economic developments 5 Imports increased despite declining FIGURE 13 •  …as rising domestic investment FIGURE 14 •  prices… stimulated equipment imports 20 Contribution to change in mport volume (pp) 170 15 10 150 5 Index (Q1-2019 =100) 130 0 –5 110 –10 90 –15 –20 70 –25 –30 50 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q1Q2Q3Q4 Q1Q2Q3Q4 Q1Q2Q3Q4 Q1Q2Q3Q4 Q1 Q2 Q3 2019 2020 2021 2022 2023 2019 2020 2021 2022 2023 Dairy product prices Cereal prices Import prices Food products Raw products PPI, EU Imports, volume Imports, US$ Fuels Chemical products Manufactured products Machinery and transport Source: ONS, Organization for Economic Cooperation and Development (OECD) & World fertilizers price Food and Agriculture Organization (FAO). Note: PPI, EU = Producer Price Index for the European Union. Source: ONS and World Bank calculations. ammonia,7 correlated with hydrocarbon prices. During in the value of imports. In H1-2023, the import bill H1-2023, the current account fell from a US$ 12.1 billion increased by 6.9 percent y-o-y, led by a steep increase surplus in H2-2022 to US$ 2.9 billion, with overall export in equipment imports (+20.2 percent y-o-y), a category values falling by 23.6 percent y-o-y and imports recover- responsive to strong investment demand, as well as ing by 5.1 percent. The significant decline in hydrocarbon rising imports of non-food consumption goods (+13.0 exports was compounded by declining fertilizer prices, y-o-y). In contrast, easing global cereal and dairy prod- lowering the value of nonhydrocarbon exports, as well uct prices contributed to a decline in the value of as the recovery in equipment imports. As a result, terms food imports (-2.9 percent y-o-y) (Figures 13 and 14). of trade (the ratio of the export and import price indices) declined in H1-2023, owing to declining export prices, Lower Hydrocarbon Revenues are after having surged by 50 percent in 2022. Nonetheless, Putting Pressure on the Fiscal Deficit the current account surplus meant that Algeria was able to add significant foreign reserves, reaching US$ The falling hydrocarbon prices and an increas- 68.8 billion or 17.2 months of imports in June 2023, ing civil service wage bill are putting pressure up from US$ 61.7 billion or 15.9 months of imports of on the fiscal deficit. After averaging 10.8 percent goods and services at end-2022 (Figures 11 and 12). of GDP in the five years before the pandemic, the fis- The increase in imports in H1-2023 was cal deficit narrowed from 7.2 percent of GDP to 2.9 driven by equipment imports to meet strong invest- percent in 2022, driven in large part by increasing ment demand, overcompensating for the decline hydrocarbon revenues, and despite surging spend- in food import prices. Car import regulations were ing on wages and social transfers (+2.1 percent of eased, but other recent quantitative and qualitative GDP). As a result, the nonhydrocarbon fiscal defi- import control measures were maintained,8 while a cit deteriorated, from 19 to 23.3 percent of GDP. In High Council for the Regulation of Imports was cre- ated. Import volumes had remained flat in 2022 (–3.0 7 Representing the majority of Algeria’s nonhydrocarbon percent), while the prices of goods increased by 15.5 exports (Trademap.org). percent, which resulted in a 11.9 percent increase 8 Algeria Economic Update, Fall 2021. 6 ALGERIA ECONOMIC UPDATE – CONTINUING THE DIVERSIFICATION EFFORT Declining hydrocarbon revenues FIGURE 15 •  …but public debt only increased FIGURE 16 •  during H1-2023 increase pressure moderately in H1-2023 on public finances... 16 70 30 25 Contributions to change in hydro- 14 carbon budget revenues (%, pp) 20 60 20 15 12 10 50 10 Trillions of DZD 5 10 % GDP 0 0 40 % GDP –5 8 –10 –10 30 6 –20 –15 –20 20 4 –30 –25 2017 2018 2019 2020 2021 2022 H1- 2 10 2023 0 0 Export volume Export price Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Exchange rate policy Revenue policy 2019 2020 2021 2022 2023 Budget balance (rhs) Hydroc. revenues (rhs) Liabilities to the BoA Liabilities to banks Source: Ministry of Finance, ONS, WB estimates for H1-2023. Total (rhs) Public savings (rhs) Note: Figure decomposes the log change in hydrocarbon budget revenues. Revenue policy is defined as the share of hydrocarbon export revenues that accrue to the budget. H1-2023 estimates are produced by assuming that revenue policy does not Source: IMF, WB estimates. change relative to 2022. Note: On the right-hand axis, variables are related to GDP over four rolling quarters. H1-2023, falling hydrocarbon exports (–27.2 percent Nonetheless, public debt only increased relative to H2-2022) are expected to lead to a pro- moderately in H1-2023, while Treasury savings at portional decline in budget revenues, reinforced by the Bank of Algeria kept increasing. After peaking the dinar’s appreciation. On the other hand, current at 62.9 percent of GDP at end-2021, the combination spending is expected to keep increasing, notably of a smaller budget deficit in 2022 and a significant driven by the second of three annual rises in civil rise in nominal GDP led to a decline of the debt-to-GDP service wages and the rising cost of unemploy- ratio to 55.6 percent.10 In H1-2023, public debt grew by ment benefits,9 while capital spending is expected to recover, as announced in the 2023 Budget Law. This 9 Consistent with the Budget Law’s anticipation of large bud- will be partly compensated by rising tax revenues, on get increases for the Ministry of Finance, the Ministry of the back of increasing wages, consumption, invest- Labor, the Ministry of Interior, and the Ministry of Education. ment, and imports, as well as a significant increase 10 Public debt is domestically held, at long maturities and in Sonatrach dividends (Figure 15). negative real interest rates. BOX 2: THE DYNAMICS OF PUBLIC FINANCES SINCE 2020 Akin to recent decades, Algeria’s public finances reacted strongly to the volatility of oil and gas prices during and after the COVID-19 crisis. Tracking global hydrocarbon prices, which have been their most important driver for over thirty years, budget revenues fell markedly in 2020 (–14.6 percent), before an even steeper recovery in 2021 and 2022 (+17.0 and +43.5 percent, respectively). On the other hand, public spending fell (–8.5 percent) as public investment was slashed in 2020, before recovering in 2021 and 2022 (+4.4 and +25.3 percent), on the back of large increases in wages and transfers. The decrease in 2020 is evocative of the public investment consolidation that took place after the 2008 and 2015 oil price crashes, while the ensuing increase in current spending resembles that which took place in 2008–2012. (Figures 17 and 18, Annex 1.1.) Spending dynamics in 2020–2022 are consistent with recent history, whereby in difficult times current spending increases but capital spending declines. Fiscal policy is countercyclical if the budget deficit increases during downturns and decreases during upturns, helping to stabilize the economic cycle. Overall expenditures in Algeria are cyclically neutral, meaning that on average they do not vary with the (continued on next page) Recent economic developments 7 BOX 2: THE DYNAMICS OF PUBLIC FINANCES SINCE 2020 (continued) state of the economy. This compares favorably with peer countries, whose spending is more procyclical, exacerbating business cycle fluctuations. However, it hides important underlying heterogeneity. In Algeria, current expenditures have been used countercyclically for the past two decades, rising when the hydrocarbon output fell below its potential amidst declining OPEC quotas, which has been associated with falling oil prices. Capital expenditures, on the other hand, have been strongly procyclical, declining when oil prices and output fell, lowering budget revenues. (See Annex 1.2.) The divergent dynamics of current and capital spending also reflect and increase spending rigidity, increasing budget sensitivity to global hydrocarbon prices. Increasing current spending countercyclically can help support households during economic downturns but increases budget rigidity, defined as the share of public spending that cannot be easily reduced, such as the public wage bill or pension spending. Although Algeria’s rigid spending remains below that of peer countries, it has increased significantly since 2008, as less-rigid investment spending has been replaced by more-rigid current and pension spending. As a result, there is increasing pressure to achieve fiscal consolidation by cutting back public investment, as in 2020 and 2021. (See Annex 1.3.) Change in the revenues-to- FIGURE 17 •  Change in the spending-to- FIGURE 18 •  nonhydrocarbon GDP ratio, nonhydrocarbon GDP GDP ratio, 2000–2022 2000–2022 60 60 50 40 40 20 30 Percentage points Percentage points 20 0 10 –20 0 –10 –40 –20 –30 –60 2000–2008 2008–2015 2015–2020 2020–2022 –40 2000–2008 2008–2012 2012–2021 2022 Hydrocarbon Tax revenues Nontax revenues revenues Current spending Capital spending Source: Ministry of Finance and ONS. Source: Ministry of Finance and ONS. 4.3 percent in nominal terms, financed via regular Trea- higher at 14.0 percent. Following years of rela- sury issuances, suggesting a relative stabilization of the tively moderate inflation, the consumer price index debt-to-GDP ratio. In the meantime, Treasury savings at (CPI) rose by 7.2 percent in 2021 and by 9.3 percent the Bank of Algeria, representing 10 percent of GDP at in 2022. During 8m-2023, inflation further increased end-2022, rose by 25 percent between December 2022 to 9.7 percent, with fresh food inflation considerably and June 2023.11 They are mostly comprised of the oil higher (24.1 percent), likely to be partially driven by savings fund (Fonds de Régulation des Recettes, or droughts and lower agricultural yields, and with a dis- FRR) which, after being depleted in 2017 and again in proportionate impact on lower-income households. At 2020, was replenished in 2021 and 2022 (Figure 16). the same time, the contribution of processed food to Inflation Remains Elevated in 2023, 11 The apparent disconnection between the trajectory of public debt and savings, on the one hand, and that of the Due to Fresh Food Prices fiscal deficit, on the other hand, could in part be attrib- uted to the use of SOE liquidity to finance the deficit Inflation reached 9.7 percent during the first during a given year. As a result, public debt accumula- eight months of 2023 with food inflation even tion is an imperfect proxy for fiscal financing needs. 8 ALGERIA ECONOMIC UPDATE – CONTINUING THE DIVERSIFICATION EFFORT Inflation remained elevated, driven FIGURE 19 •  …despite the dinar’s deliberate FIGURE 20 •  by fresh food products… appreciation since June 2022 to limit imported inflation 12 CPI y-o-y growth and contributions (%, pp) Exchange rates, indices (Q1-2019=100) 165 10 155 8 145 6 135 125 4 115 2 1O5 0 95 85 –2 Q1Q2Q3Q4 Q1Q2Q3Q4 Q1Q2Q3Q4 Q1Q2Q3Q4 Q1 Q2 Q3 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2019 2020 2021 2022 2023 2019 2020 2021 2022 2023 DZD/US$ DZD/EUR Fresh food Agro-industrial products Manufactured goods REER index NEER index Services CPI Non-food CPI Source: Investing.com, ONS, WB estimates. Source: ONS, WB estimates. Note: REER = real effective exchange rate, NEER = nominal effective exchange rate. inflation fell from 41.0 percent in Q2-2022 to 10.8 per- the US dollar. As the dinar followed a similar trajec- cent in Q2-2023 and that of manufactured products tory against the currencies used with its major trade remained stable, as the authorities forbade private partners (US dollar, Euro, Yuan), the nominal and imports of cereals and pulses, supported an appre- real effective exchange rates (trade weighted) also ciation of the exchange rate, and as the increase in strengthened markedly in H2-2022, before stabilizing imported food and manufactured products prices in H1-2023 (Figure 20). slowed down. Because fresh foods and services are Monetary policy has remained unchanged much more likely to be domestically produced than since the April 2023 increase in the reserve processed food and manufactured products,12 their requirement, but money supply growth eased in larger combined contribution to inflation (up from 32 Q2-2023. In April 2023, the Bank of Algeria restored to 60 percent between Q4-2022 and Q2-2023) sug- the reserve requirement rate from 2 to 3 percent, gests that domestic factors now play a larger role in returning to the pre-pandemic level, to reduce infla- inflation dynamics. tionary pressures. Meanwhile, money supply growth After the authorities supported the appre- decelerated, as banking deposit growth declined ciation of the dinar to curb imported inflation from 19.6 percent y-o-y in Q1-2023 to 10.4 percent in H2-2022, the exchange rate stabilized in in Q2-2023, amidst the fall in hydrocarbon deposits H1-2023. After fourteen consecutive years of and the increase in the reserve requirement. Private exchange rate depreciation, the dinar appreciated sector credit growth remained moderate, while SOE by 6.2 percent against the US dollar and 4.0 percent credit growth mildly accelerated (Figures 21 and 22). against the Euro in H2-2022, as the Bank of Alge- ria’s aimed to curb imported inflation. In H1-2023, the dinar’s exchange rate stabilized against major curren- 12 According to the ONS’s input-output tables, only cies, as falling hydrocarbon prices threatened to put 13.4 percent of fresh foods and 2.1 percent of services renewed pressures on Algeria’s external balances, are imported, as opposed to 29.5 percent for processed and in Q3-2023, it depreciated by 0.7 percent against foods and 63 percent for manufactured products. Recent economic developments 9 Liquidity growth eased in Q2–2022… FIGURE 21 •  …with little expansion in private FIGURE 22 •  sector credit Growth and contributions, y-o-y (%, pp) 20 5 Change in banking sector claims (trillion DZD) 15 4 10 3 5 2 1 0 0 –5 –1 –10 –2 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2019 2020 2021 2022 2023 –3 2018 2019 2020 2021 2022 H1–2023 Currency in circulation Deposits in M2 Central Bank Central Government SOEs M2 Credit to private sector Private sector Other Source: IMF and World Bank estimates. Source: IMF and World Bank estimates. 10 ALGERIA ECONOMIC UPDATE – CONTINUING THE DIVERSIFICATION EFFORT 2 OUTLOOK AND RISKS Nonhydrocarbon Output Will ately as OPEC quotas and European gas demand Continue to Drive Economic Growth recover. Investment spending growth is expected to remain robust and keep supporting industrial activity, In 2023, dynamic nonhydrocarbon sector growth while it would be driven by the private sector, amidst should contrast with moderate hydrocarbon out- continued prudent public investment policy. Private put growth. In the baseline scenario, overall growth is consumption is expected to slow down moderately expected at 2.5 percent in 2023, supported by nonhy- as the base effect from COVID-19 subsides and high drocarbon sectors (+2.7 percent). Hydrocarbon output inflation reduces real purchasing power, as would is expected to increase moderately (+1.6 percent), public consumption, amidst a slowdown in the growth despite declining oil output, constrained by OPEC of government spending. As a result, services sectors quotas. Activity is expected to be driven by investment growth would slow down. Assuming a return to nor- growth as large mining and transport investment proj- mal weather conditions, agricultural production would ects move forward,13 stimulating the construction and also rebound. industrial sectors. Amidst a slowdown in private con- Inflation is expected to remain above 9 per- sumption, services sector growth is expected to taper. cent in 2023 and decrease gradually in 2024 After Algeria experienced its third consecutive winter and 2025. With food inflation higher than headline drought,14 agricultural output is forecast to decrease. inflation, lower-income households are especially Net exports would contribute negatively to growth, exposed to a drop in their purchasing power. The as investment and lower agricultural output stimu- recent strengthening of price controls on cereal and late imports while lower oil production quotas and pulses would limit the increase in processed food European gas demand curb exports. GDP growth is expected to increase in 13 Such as the integrated phosphate project in eastern 2024 and 2025, as agricultural output recovers Algeria, and the iron ore extraction project in the Tindouf and crude oil production tracks recovering OPEC wilaya. quotas. Hydrocarbon output would grow moder- 14 European Commission Joint Research Centre. 11 prices, however, instead putting pressure on public GDP in 2022 to 6.8% in 2023 and 8.9% in 2024, the subsidy spending. Inflation is expected to decline overall budget deficit would moderate in 2025. gradually in 2024 and 2025 as rainfall returns to nor- Public debt is expected to increase moder- mal levels, as the growth in money supply, in public ately, with transfers from the Revenue Stabilization spending, and in food import prices tapers, and due Fund partially financing the fiscal deficit. In the to the delayed effect of the dinar’s appreciation. In baseline scenario, the public debt-to-GDP ratio would addition, policies that improve product market com- increase by 5 percentage points of GDP between 2023 petition as well as strengthen food security against and 2025, reaching 60.2% of GDP by 2025. The use of climate shocks, could support lower and more stable the savings accumulated in the FRR would allow for a domestic prices in the longer run. slower pace of debt accumulation over the projection period, and regular issues of Treasury bills would par- tially meet budget financing requirements. Fiscal and External Balances Are Expected to Initially Deteriorate, then Stabilize Volatile Oil Prices Remind of the Economic Diversification Imperative The current account is expected to remain posi- tive in 2024 and 2025, amidst limited growth in Economic growth, as well as the fiscal and exter- exports and imports. With hydrocarbon prices falling nal balances, remain sensitive to fluctuations in and oil output decreasing following OPEC quota cuts, hydrocarbon prices. In 2022, high hydrocarbon the current account is expected to shrink from a record prices led to a record current account surplus and a 9.8 percent of GDP surplus in 2022 to 2.8 percent in significant narrowing of the fiscal deficit. With lower 2023, before reaching 1.4 percent in 2024 and 0.5 per- hydrocarbon prices these trends are expected to cent in 2025. The value of hydrocarbon exports would have reversed in 2023. The evolution of hydrocarbon decrease due to a combination of decreasing volumes prices represents a significant risk for the 2024 and owing to rising domestic consumption and decreas- 2025 outlook, both to the upside and to the downside, ing prices owing to the global economic slowdown. driven by the fragility of the global outlook, develop- At the same time, the value of imports would increase ments in Russia’s war on Ukraine, and the resurgence with investment driving industrial equipment imports of conflict in the Middle East. and subdued agricultural output driving food imports Continued reforms to foster private sec- in 2023. However, the accumulation of reserves since tor investment, growth and diversification are 2021 has allowed Algeria to build a safety cushion, and needed improve the performance and resil- it is expected that the foreign exchange reserves will be ience of the economy. The risks posed by oil maintained at between 16 and 17 months of imports of prices underscore the need to sustainably improve goods and services between 2023 and 2025. macroeconomic balances. Diversifying export reve- Driven by lower hydrocarbon revenues and nues away from hydrocarbons and attracting foreign higher spending, the fiscal deficit is expected to investment would improve Algeria’s external resil- widen in 2023 and 2024 before resorbing. Hydro- ience against oil price fluctuations. On the fiscal front, carbon revenues are expected to decline in 2023, but higher spending rigidity from current spending amidst this will be offset by a marked rise in Sonatrach divi- volatile hydrocarbon revenues increases pressure to dends. Nevertheless, the sharp rise in wage spending raise more tax revenues and strengthen spending and a moderate increase in capital expenditure would efficiency in an equitable way, while containing pub- push up the budget deficit. In 2024, the return to a lic investment growth. Therefore, and consistent with moderate level of dividends and the continued rise in the 2021 Government Action Plan,15 continued imple- salary spending would generate a further increase in the deficit, before stabilizing in 2025, assuming a pru- 15 Government Action Plan for the Implementation of the dent spending policy. Thus, after rising from 2.9% of Program of the President of the Republic. 12 ALGERIA ECONOMIC UPDATE – CONTINUING THE DIVERSIFICATION EFFORT mentation of reforms to stimulate private investment have notably had strong effects on agricultural produc- and enable a formalized private sector to become the tion and prices. As disasters can disrupt all sectors of engine of sustainable and diversified growth remains the economy and jeopardize hard-earned development essential to the performance and resilience of the gains, scaling up disaster risk reduction and financing Algerian economy.16 can contribute to saving lives and protecting economic Beyond hydrocarbons, recent extreme nat- growth, building on Algeria’s existing legal disaster risk ural phenomena in the region, and Algeria’s own management framework. experience, underscore the risks that they pose for growth and development. Like other countries in North Africa, Algeria is exposed to several climate and 16 Furthermore, the production and publication of data on geological risks, such as flooding, earthquakes, and private sector activity and the dynamics of informality droughts. Over the past three years, drought episodes would allow for an appreciation of the progress made. Outlook and risks 13 TABLE OF INDICATORS Projections 2019 2020 2021 2022 2023 2024 2025 Output and prices Real GDP 1.0 –5.1 3.4 3.2 2.5 2.6 2.6 Nonhydrocarbon 2.7 –3.8 2.3 4.3 2.7 3.0 3.0 Hydrocarbon –4.9 –10.2 10.5 –0.6 1.6 0.8 1.0 Per capita –1.0 –6.9 1.7 1.6 0.9 1.0 1.0 Consumer price index (period average) 2.0 2.4 7.2 9.3 9.5 8.6 7.9 GDP (in billions of current US$) 171.8 145.7 163.4 195.0 216.4 234.0 245.1 GDP per capita (US$) 3955.2 3292.9 3631.7 4265.6 4659.6 4958.8 5111.3 Crude oil production (thousand barrels per day) 1023.0 899.0 911.0 1020.0 976.2 1002.3 1039.0 Natural gas production (billions of m3) 86.1 87.7 102.8 99.2 103.4 107.7 112.2 External sector Current account –9.9 –12.8 –2.7 9.8 2.8 1.4 0.5 Trade balance –9.1 –12.3 –1.6 11.5 4.0 2.6 1.6 Exports of goods and services 22.4 17.1 25.5 35.4 27.3 24.9 23.9 Hydrocarbon exports 19.4 13.7 20.8 30.5 23.1 20.5 19.1 Nonhydrocarbon exports 3.1 3.4 4.6 4.9 4.2 4.4 4.8 Imports of goods and services 31.6 29.4 27.1 24.1 23.3 22.3 22.2 Gross official reserves (months of imports) 14.0 13.7 12.5 15.8 16.4 16.9 16.7 Exchange rate (Algerian dinar per US$; period average) 119.4 126.8 135.1 142.0 Sahara Blend export price (US$/barrel) 64.4 42.1 72.7 100.9 Central Government Finance Government revenue and grants 32.2 30.5 29.9 34.2 32.8 29.0 27.9 Hydrocarbon revenue a 13.0 10.4 11.8 20.4 19.0 14.7 13.9 Nonhydrocarbon revenue 19.2 20.1 18.1 13.8 13.8 14.3 14.0 Expenditures 37.8 37.3 33.7 34.9 39.7 38.0 36.0 Current expenditures 23.9 27.1 24.8 27.4 31.4 30.4 29.2 Capital expenditures 13.9 10.2 8.9 7.5 8.2 7.6 6.8 Special Account Balance and Treasury Interventions 4.0 5.1 3.4 2.2 2.6 2.4 2.4 Overall budget balance b –9.6 –11.9 –7.2 –2.9 –6.8 –8.9 –8.1 Primary overall budget balance –9.0 –11.0 –6.5 –1.4 –5.4 –7.5 –6.6 Nonhydrocarbon overall budget balance –22.6 –22.3 –19.0 –23.3 –25.8 –23.7 –22.0 Total central Government debt 45.5 51.8 62.9 55.6 55.2 57.6 60.2 Domestic debt 44.8 51.0 62.1 55.1 54.8 57.2 59.8 External debt 0.7 0.8 0.7 0.5 0.5 0.4 0.4 a Includes dividends from Sonatrach and hydrocarbon revenues transferred to the oil savings fund. b Includes special account balance and Treasury interventions 14 ALGERIA ECONOMIC UPDATE – CONTINUING THE DIVERSIFICATION EFFORT ANNEX 1: ANALYSES IN ALGERIA’S PUBLIC FINANCES 1. Algeria’s Public Finance Trends, percent GDP in the early 2010s, before recovering in 2000 to 2022 2022, when they reached at 24 percent of GDP. Hydro- carbon budget revenues have been mainly driven by Algeria’s public finances have been very reactive oil and gas prices, with the decline in export volumes to oil and gas prices over the last two decades, contributing negatively on average, and exchange with their fall driving expansions in the budget rate depreciation contributing positively on average. deficit. After running a significant budget surplus Meanwhile, tax revenues remained stable for the last between 2000 and 2008, Algeria has run a small bud- two decades, between 10 and 15 percent of GDP get deficit after the fall in oil prices during the 2009 (15 and 18 percent of NHGDP). The relative decline in recession, which expanded following the crash in oil revenues was reversed in 2022, as oil and gas prices prices, in 2014–2015. Accumulated oil savings in the increased markedly. Revenue Stabilization Fund were nearly depleted by Following a significant increase in bud- 2017, followed by a steep rise in public debt accumu- get expenditures in the 2000s, Algeria pursued lated as part of the 2017–2019 monetary financing expenditure consolidation after 2008. In the years program, worth 32 percent of 2019 GDP, and the leading up to the 2008 oil shock, the government 2021–2022 special refinancing program. Public debt increased public investment to finance large infra- levels declined for the first time in a decade in 2022, structure projects (transport, water and agriculture, when oil and gas prices rose, and the budget deficit housing) and transfers, while also paying back its debt shrunk. ahead of schedule. However, when oil prices crashed Hydrocarbon prices have been the most and budget revenues fell, Algeria cut public investment important driver of budget revenues, and plum- but increased public hiring and wages, leading current meted after the 2008 and 2014–2015 oil shocks, expenditures to increase. After 2012, capital expendi- before recovering in 2022. Hydrocarbon revenues ture consolidation continued, and was compounded increased rapidly in the 2000s, reaching 37 percent by a decline in current expenditures, which was ulti- of GDP in 2008, before the oil price drop when they mately reversed in 2022 to finance increases in public dropped to 24 percent. They fell to between 10 and 15 sector wages and pensions and social spending. 15 After budget surpluses in the 2000s, FIGURE 23 •  …leading to significant domestic FIGURE 24 •  falling hydrocarbon revenues led to public debt accumulation persistent deficits in the 2010s… 18 70 80 80 16 70 70 60 60 60 14 % of nonhydrocarbon GDP 50 50 50 12 40 40 Trillion DZD 40 % of GDP 10 % GDP 30 30 20 20 8 30 10 10 6 0 0 20 4 –10 –10 10 –20 –20 2 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 0 0 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Fiscal balance (rhs) Hydrocarbon revenues Tax revenues Total expenditures Central bank Banks External debt FRR (rhs) Public debt (rhs) Source: Ministry of Finance and ONS. The variables are presented as a share of nonhydrocarbon GDP, to abstract from variations in the ratio that are led by volatile oil prices. Source: Ministry of Finance and ONS. Budget revenues have been mostly FIGURE 25 •  …which, in turn, depended on oil FIGURE 26 •  driven by hydrocarbon revenues… and gas export prices 60 80 Contributions to the change in hydrocarbon 60 40 budget revenues (%, pp) 40 20 Percentage points 20 0 0 –20 –20 –40 –40 –60 2001– 2009– 2015– 2017– 2021– 2008 2014 2016 2020 2022 –60 2000–2008 2008–2015 2015–2020 2020–2022 Export volume Export price Exchange rate policy Share of exports Hydrocarbon Tax revenues Nontax revenues revenues Source: Ministry of Finance and ONS. The figure computes the overall percentage change in the dinar value of hydrocarbon revenues accruing to the budget and Source: Ministry of Finance and ONS. decomposes it between its four drivers: the price of exported hydrocarbons, The figure computes the overall percentage change in the revenue-to-nonhydrocarbon the quantity exported, the dinar—US dollar exchange rate, and the share of US$ GPD ratio and decomposes it between its three components. hydrocarbon exports that accrue to the budget (“revenue policy”). 2. Budget Spending Along its role in macroeconomic stabilization. Fiscal pol- the Economic Cycle icy is countercyclical if the budget deficit increases during economic downturns and decreases during Evaluating the relationship between fiscal policy economic upturns. Because a reduction (increase) and the economic cycle allows us to understand in taxation or an increase (reduction) in budget 16 ALGERIA ECONOMIC UPDATE – CONTINUING THE DIVERSIFICATION EFFORT Significant spending consolidation FIGURE 27 •  of expenditures and output are measured by applying efforts took place in the 2010s a filter to disaggregate the evolution of a variable into 60 its long-term trend (structural component) and short- 50 term fluctuation (cyclical component). Expenditure 40 is referred to as pro-cyclical if its cyclical component 30 shows a positive correlation with the cyclical compo- Percentage points 20 nent of output, while it’s referred to as counter-cyclical 10 if the correlation is negative. 0 Overall expenditures in Algeria are cycli- –10 cally neutral, which compares favorably with –20 –30 peer countries. Over the last two decades, most –40 peer countries exhibited strong cyclicality in expen- 2000–2008 2008–2012 2012–2021 2022 ditures: they spent more during good times and less Current spending Capital spending during bad times. In Algeria, the correlation between the cyclical component of spending and output was Source: Ministry of Finance, ONS, and World Bank estimates. Note: The figure shows changes in the nonhydrocarbon expenditure-to-GDP ratio, –0.05 between 2002 and 2022 which suggests that broken down into its two components. expenditures were cyclically neutral, a significant development relative to pro-cyclical spending patterns spending are expected to increase (decrease) aggre- in the preceding decades. (Figure 28). gate demand, a countercyclical policy is desirable Current expenditures have been used because it helps stabilize the economic cycle. On the countercyclically for the past two decades, when other hand, a procyclical fiscal policy will exacerbate the hydrocarbon output gap expanded. The cor- the economic cycle, reducing demand during down- relation between the cyclical component of current turns, and increasing demand during upturns. spending and the cyclical component of output is Cyclicality is measured here as the cor- negative between 2000 and 2022, suggesting that relation between the cyclical components of current spending exhibited countercyclical behavior, expenditures and output. The cyclical components driven by the increase in the wage bill and transfers Expenditures are less cyclical in Algeria than in most peer countries FIGURE 28 •  0.8 components of expenditure and GDP Correlation between the cyclical 0.6 0.4 0.2 0.0 –0.2 –0.4 Algeria Egypt Nigeria Angola Ecuador Azerbaijan Turkmenistan Iran United Arab Emirates Malaysia Mexico Saudi Arabia Gabon Oman Russia Colombia Structural peers Aspirational peers Source: Ministry of Finance and ONS. Note: Peers are countries whose economies have similarities in terms of size, levels of development and role of the hydrocarbon sector in the economy. Structural peers have similar income levels, while aspirational peers have higher income levels. Annex 1: Analyses in Algeria’s Public Finances 17 Capital expenditures are procyclical, but current spending is countercyclical… FIGURE 29 •  0.5 0.4 components of expenditure and GDP 0.3 Correlation between the cyclical 0.2 0.1 0.0 –0.1 –0.2 –0.3 –0.4 Total Current Capital Total Current Capital Total Current Capital spending spending spending spending spending spending spending spending spending Relative to total GDP output gap Relative to nonhydrocarbon output gap Relative to hydrocarbon output gap Source: Ministry of Finance, ONS, and World Bank estimates. during downturns. This relationship is driven by the …as a result, expenditure policy FIGURE 30 •  negative correlation with the hydrocarbon output has been cyclically neutral gap, suggesting that spending has been raised in 1.0 times where hydrocarbon output fell, which has been 0.8 Correlation between the cyclical components associated with falling oil prices and its effect on oil 0.6 production quotas. 0.4 of expenditure and GDP Capital expenditures, on the other hand, 0.2 have been strongly procyclical. The correlation between the cyclical component of capital spending 0.0 and the cyclical component of output was strongly pos- –0.2 itive positive between 2000 and 2022, suggesting that –0.4 capital spending exhibited procyclical behavior. This –0.6 relationship is driven both by the positive correlation –0.8 with the hydrocarbon output gap and nonhydrocarbon –1.0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 output gap. In the case of the former, capital spending has been reduced in times where oil prices, hydrocar- bon output and budget revenues fell. In the case of Current spending Capital spending Total spending the latter, the relationship could also be driven by the Source: Ministry of Finance, ONS, and World Bank estimates. effect of capital spending on growth—reduction in pub- Note: The coefficients shown are rolling averages, to limit the effect of short-term variations. lic investment leading to slowdown in growth. 3. The Rigidity of Public share of rigid expenditures is high, fiscal policy is less Expenditures able to smooth the economic cycle by reducing bud- get spending during economic upturns. Wages and Spending rigidity is defined as the sum of public compensation, interest payments and social secu- expenditures that are assumed to be beyond pol- rity and assistance spending are assumed to be rigid icy makers’ control at least in the short term. If the expenditures and, in Algeria, their share declined from 18 ALGERIA ECONOMIC UPDATE – CONTINUING THE DIVERSIFICATION EFFORT 50 percent of all expenditures (including social secu- Nonetheless, budget rigidity appears to rity spending) in 2002 to 38 percent in 2009. Notably, remain below the average of peer countries. interest payments shrunk from 7.4 percent of spend- Compared to regional and aspirational (with simi- ing in 2002 to below 1 percent by 2009, though they lar economies, but higher GDP per capita) peers for have increased to 1.4 percent by 2021. Then during which spending measures are readily available, Alge- the 2010s, rigidity increased in line with spending on ria does not exhibit especially high budget rigidity, wages and compensation as well as pension spend- despite spending a relatively high share of its overall ing, reaching 55.3 percent of expenditures by 2022. expenditures on wages and pensions. Budget rigidity has increased in FIGURE 31 •  …but remains below the average of FIGURE 32 •  recent years… peer countries 60% 80% 70% 50% 60% % of total spending 40% 50% % of total spending 40% 30% 30% 20% 20% 10% 10% 0% Algeria Azerbaijan Chile Colombia Ecuador Kazakhstan Mexico Peru Poland Romania Thailand Saudi Arabia (2020) United Arab Emirates 0% 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Wages and compensation Interest payments Pensions and social assistance Source: MoF, ONS, and WB estimates. Wages and compensation Interest payments Note: Spending on pensions and social assistance are measured as the sum of estimated Pensions and social assistance Average of peers spending by social security funds, Mujahidin pensions, food subsidies, and public healthcare spending. Total spending includes spending through social security funds. Source: MoF, IMF, and WB estimates. Annex 1: Analyses in Algeria’s Public Finances 19 ANNEX 2: LATEST SPECIAL SECTIONS OF THE ALGERIA ECONOMIC UPDATE Fall 2022: “Estimating Economic conducted on quarterly Algerian data since 2000 finds Activity from Nightlights Data.” a weak multiplier effect of Algerian public spending on GDP, notably caused by the effect of an increase on Nightlights data is a tool now commonly used to the deterioration of the trade balance, resulting from assess economic activity. Since 2012, satellite data its impact on imports. The spillover effect of spend- have been available daily and are publicly available ing on private consumption is observed but is limited, on the Group on Earth Observations website. For while the analysis finds a more marked effect of pub- Algeria, the empirical link between nightlights data lic spending on the construction sector. and economic activity is strong, both for oil produc- tion (geolocated by gas flaring sites), gas production, Spring 2022: “Does Algeria Benefit and nonhydrocarbon activity. The strong correlation from Rising Gas Prices?” between nightlights and nonhydrocarbon activity allows us to mobilize these data to estimate the recent The export price of Algerian natural gas follows a level of economic activity, and to produce spatialized distinct dynamic from the reference price of gas estimates of the level and dynamics of activity, useful on international markets. Thus, while the Henry for sectoral or local development analyses. Hub gas reference price has gained nearly 50% between Q2 and Q3-2021, the export price of Fall 2022: “Estimation of the Fiscal Algerian natural gas has increased by only 0.5% Multipliers in Algeria.” over the same period. Indeed, these prices are established contractually, sometimes on a long- The sharp increase in government spending in 2022 term basis, and based on bilateral negotiations with raises the question of its effects on economic activ- buyers. An econometric modeling exercise allows ity. The propensity of public spending to support us to establish that the export price of Algerian nat- economic activity and generate additional economic ural gas is characterized by a strong inertia, as well activity is captured by the fiscal multiplier. An analysis as a delayed linkage to the oil price. The model 21 presented allows to explain 88% of the variation of Fall 2021: “Resilience of Algeria to the exported natural gas prices. Climate and Natural Disaster Risks.” The Algerian territory is exposed to a range of climatic Spring 2022: “The Impact of and geological hazards, particularly in urban areas, Macroeconomic Factors on Inflation which are experiencing rapid population growth and in Algeria” concentrate a significant share of economic activity. Floods are the most frequent disasters in Algeria, but Inflation is on the rise in 2021 and 2022, both globally the greatest economic losses have been caused by and in Algeria, but the underlying causes vary from coun- earthquakes. Algeria has a modern legal framework try to country. In Algeria, the price increase that began in for disaster risk management (DRM), a clear deci- 2021 was driven by food prices. A model of the consumer sion-making framework for emergency response, price index since 2009 shows that it is characterized by and recognizes the importance of protecting strate- strong short-term inertia, but that the depreciation of gic infrastructure and critical sectors. Serious efforts the dinar, the increase in the price of imported goods, have been made to reduce risk, especially in emer- the rise in public spending and the increase in currency gency response management and reconstruction, in circulation explain more than 40% of the variation at the expense of prevention. Moreover, information in the CPI after two years. In addition, the importance sharing is not systematic, leading to inconsistencies, of these factors varies according to the categories of especially in disaster prevention, and enforcement of goods and services, reflecting the intensity of imports GRC legislation can be improved. Significant efforts of these products and the characteristics of the Algerian should still be made for comprehensive and cross- market both in terms of production and distribution. sectoral climate and disaster risk reduction and management. Fall 2021: “Evolution of Non- Monetary Poverty and Inequality in Spring 2021: “Effects of COVID-19 on Algeria.” Inequality in the MENA Region and Algeria.” The multidimensional poverty indicator improved in Algeria between 2013 and 2019, reflecting progress Survey results from the Middle East and North Africa in all its dimensions: education, health, and living con- (MENA) region confirm that the poorest individuals ditions. Although Algeria performs well in the MENA are more likely to report a deterioration in their living region, and despite notable improvements, multidimen- conditions since the beginning of the COVID-19 crisis. sional poverty varies considerably across regions and Despite the lack of recent data on household welfare between rural and urban areas. The North-Central and in Algeria, the characteristics of vulnerable individu- North-Eastern regions face lower levels of deprivation als suggest that inequality has also increased. They than the rest of the country, while the Central Highlands are more likely to contract COVID-19 or lose their jobs region faces a higher level of deprivation. The most during the pandemic, have less adequate social pro- vulnerable regions improved more rapidly between tection, and are likely to be disproportionately affected 2013 and 2019, showing convergence with the richer by ongoing macroeconomic and fiscal adjustments. regions. Health and education have become more A sustainable and inclusive recovery will therefore important dimensions of deprivation, underscoring the require offering the most vulnerable the opportunity policy priorities for Algeria’s human development. to recover what they have lost. 22 ALGERIA ECONOMIC UPDATE – CONTINUING THE DIVERSIFICATION EFFORT Spring 2021: “Towards an Equitable it. Although the health system receives substantial Reform of the Algerian Health public financial support and requires relatively little indi- System.” vidual expenditure, and although life expectancy and control of noncommunicable diseases are comparable The consequences of the COVID-19 pandemic have to peer countries, health outcomes remain below those shown the need for a fair reform of the Algerian health of middle- and high-income countries, particularly in system. Although officially the number of cases and terms of equity in maternal and child health conditions. deaths remains low, the pandemic has highlighted the The need for physical and human resources and for a limitations of the health system. A double burden of better distribution of health coverage are major chal- communicable and non-communicable diseases, as lenges. Finally, declining public financing and health well as limited resources, suggest a need to strengthen system capacity pose risks to health system resilience. Annex 2: Latest special sections of the Algeria Economic Update 23 BIBLIOGRAPHY Algeria Press Service • European Commission Joint Research Centre (JRC) Monitoring Agricultural Resources (MARS) • “Oil: Algeria cuts output by further 20,000 bpd in Algeria’s third consecutive winter drought leads August”. 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