ALGERIA ECONOMIC UPDATE Building Resilience in Favorable Times Spring 2022 Algeria Economic Update Building Resilience in Favorable Times Spring 2022 Middle East and North Africa Region © 2022 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 conclusions 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 failure to use the information, methods, processes, or conclusions set forth. 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Cover photos used with permission of ShutterStock.com, Publication design and layout by The Word Express, Inc. TABLE OF CONTENTS List of Acronyms..................................................................................................... v Acknowledgments................................................................................................... vii Executive Summary................................................................................................. Ix Résumé analytique................................................................................................. xi ٍ ‫ملخص‬............................................................................................................ xiii ‫واف‬ 1.  Recent Economic Developments.............................................................................. 1 Non-Hydrocarbon Activity Continued its Gradual Recovery in the Second Half of 2021................................ 1 GDP Growth Was Supported by Hydrocarbon Production and Exports.............................................................. 3 Surging Export Revenues Reduced the Current Account Deficit........................................................................... 3 Fiscal Balances Improved Markedly, Supported by Hydrocarbon Revenues..................................................... 6 Bank Liquidity Recovered, without Creating a Marked Increase in Private Sector Credit............................... 7 Import Prices, Depreciation and Monetary Expansion Fueled Inflation................................................................ 8 Available Labor Market Indicators Suggest Partial Recovery.................................................................................. 9 2.  Outlook and Risks............................................................................................... 13 The Rise in the Price of Hydrocarbons is Providing Some Respite for the Algerian Economy...................... 13 Improving Resilience Will Help Confront Present and Future Risks...................................................................... 14 Annex 1: Does Algeria Benefit from Higher Gas Prices?....................................................... 19 Annex 2: Impact of Macroeconomic Factors on Inflation in Algeria......................................... 21 Inflation is on the Rise Both Globally and in Algeria.................................................................................................. 21 An Econometric Analysis to Understand Inflation in Algeria................................................................................... 22 Goods and Services Categories React Differently to Macroeconomic Factors................................................. 23 Conclusion............................................................................................................................................................................. 25 Annex 3: Summary of Special Sections in Latest Algeria Economic Monitor............................... 27 Fall 2021: Development of Non-Monetary Poverty and Inequality in Algeria...................................................... 27 Fall 2021: Algeria’s Resilience in the Face of Risks from Climate Change and Natural Disasters............... 27 Spring 2021: Effects of COVID-19 on Inequality in MENA Region and Algeria.................................................. 28 Spring 2021: Toward Equitable Reform of the Algerian Health System............................................................... 28 Bibliography......................................................................................................... 29 iii List of Figures Figure 1 Private Consumption and Investment have Returned to pre-Pandemic Levels............................. 2 Figure 3 The Recovery Was More Marked in the Industrial and Construction Sectors…............................ 2 Figure 2 After a Stronger Recovery in 2021, Activity Appeared to Slow Down.............................................. 2 Figure 4 …but Remained Largely Incomplete in the Public Manufacturing Sector....................................... 2 Figure 5 As Elsewhere in the Region, Infections Peaked in January 2022..................................................... 3 Figure 6 In 2020, Excess Mortality in Algeria Was Comparable to That of the Wider Region................... 3 Figure 7 The High Level of Gas Production and Exports Was Maintained… ................................................. 4 Figure 8 …while the Oil Sector Continued its Gradual Recovery........................................................................ 4 Figure 9 Hydrocarbon Export Prices Jumped…...................................................................................................... 5 Figure 11 The Strong Increase in Import Prices Was Overcompensated by That of Export Prices........... 5 Figure 10 …and Exports Reached their Highest Level Since 2014...................................................................... 5 Figure 12 …and Compensated by a Decrease in Import Volumes....................................................................... 5 Figure 13 The Current Account Deficit Shrank…...................................................................................................... 6 Figure 14 …but the Dinar/dollar Exchange Rate Continued to Slip..................................................................... 6 Figure 15 The Overall Budget Balance Decreased Significantly, Driven by Hydrocarbon Revenues........ 7 Figure 16 The Debt Buyback Program Led to a Jump in Public Debt................................................................ 7 Figure 17 Bank Liquidity Recovered without Generating a Rise in Private Sector Credit.............................. 8 Figure 18 Bank Lending to the Government Now Surpasses Private Sector and SOE Lending................. 8 Figure 19 Quarterly Growth of the CPI Remained High in Q1-2022.................................................................... 9 Figure 20 Producer Prices Rose Sharply.................................................................................................................... 9 Figure 21 Inflation Shows Significant Short-Term Inertia........................................................................................ 10 Figure 22 ... but Macroeconomic Factors Explain Half of Inflation in the Medium Term................................ 10 Figure 23 Employment Opportunities Recovered Partially in Q1-2022…........................................................... 11 Figure 24 …and the Introduction of Unemployment Benefits Caused the Number of Registered job seekers to Spike................................................................................................................. 11 Figure 25 Recorded and Predicted Export Prices for Algerian Natural Gas..................................................... 20 Figure 26 CPI Growth Has Reached Historically High Levels…............................................................................ 22 Figure 27 …import Intensity by Sector Explains the Recent Dynamics of CPI Sub-Components................ 22 Figure 28 Agricultural Prices React More Strongly to Domestic Factors…........................................................ 23 Figure 29 …and Agroindustrial Products to External Factors, Moderated by Subsidy Policies.................... 23 Figure 30 The Prices of Manufactured Products React Strongly to Domestic Demand…............................. 24 Figure 31 Depreciation Has a Marked Effect on the Producer Prices of SOEs in the ISMMEE Sectors…. 24 Figure 32 …while the Model Explains a Minor Share of Fluctuations in Services Prices............................... 24 Figure 33 …and those of Agroindustrial Products, Which are Largely Subsidized.......................................... 24 List of Tables Table of Main Macroeconomic Aggregates..................................................................................................................... 16 List of Boxes Box 1 Latest COVID-19-Related Developments.................................................................................................. 3 Box 2 Macroeconomic Determinants of Inflation in Algeria............................................................................ 10 Box 3 The Consequences of the War in Ukraine for Algeria.......................................................................... 14 iv ­ BUILDING RESILIENCE IN FAVORABLE TIMES ALGERIA ECONOMIC UPDATE – LIST OF ACRONYMS ANEM National Employment Agency (Agence Mqx Million quintals Nationale de l’Emploi) MTI Macroeconomics, Trade, and Investment APS Algérie Presse Service NEER Nominal Effective Exchange Rate BdA Central Bank of Algeria (Banque OAIC Algerian Interprofessional d’Algérie) Cereals Agency (Office Algérien BTU British Thermal Unit Interprofessionnel des Céréales) CPI Consumer Price Index OECD Organization for Economic Cooperation DAPS Additional Provisional Safeguard and Development Duty (Droit Additionnel Provisoire de OLS Ordinary Least Squares Sauvegarde) ONS National Statistical Agency (Office DRM Disaster Risk Management National des Statistiques) DZD Algerian Dinar OPEC Organization of Petroleum Exporting EIA Energy Information Administration Countries EPT Territorial Programming Space (Espace pp Percentage Point de Programmation Territoriale) PPI Producer Price Index EU European Union REER Real Effective Exchange Rate EUR Euro SDR Special Drawing Rights FAO Food and Agriculture Organization SMMEEI Steel, Metal, Mechanical, Electrical, and GDP Gross Domestic Product Electronic Industries GIT Global Income Tax SOE State-Owned Enterprise IMF International Monetary Fund CAS Special Purpose Accounts (Comptes IPPI Industrial Producer Price Index d’Affectation Spéciale) JO Official Journal (Journal Officiel) PSR Special Refinancing Program JODI Joint Organizations Data Initiative (Programme Spécial de Refinancement) LGN Liquified Natural Gas TTF Title Transfer Facility LPG Liquified Petroleum Gas USD United States Dollar mb/d Million barrels/day UVI Unit Values Index MENA Middle East and Northern Africa VAR Vector Autoregression MoA Memorandum of Agreement WB World Bank v ACKNOWLEDGMENTS T his Algeria Economic Update provides an Le Borgne and Abdoulaye Sy. The authors would like account of main recent economic developments to thank Jesko Hentschel, Regional Director for the and policies. It places them in a global and Maghreb and Malta, and Emmanuel Cuvillier, Resident longer-term context and assesses the consequences of Representative for Algeria, for their valuable comments these developments and policy changes for Algeria’s during the review of this report, as well as Muna Abed prospects. The report is intended for a wide audience, Salim and Isabelle Poupaert for their support and including policymakers, business leaders, financial advice during the preparation of this report. The World market participants, and the community of analysts and Bank team is particularly grateful to the Ministry of professionals working in and on Algeria. Finance and the National Statistics Office of Algeria The report is organized into two chapters. for their comments on the report prior to publication. Chapter 1 presents macroeconomic developments The findings, interpretations, and conclusions in Algeria up to late 2021 and early 2022. Chapter 2 expressed in this report are those of World Bank describes the short- and medium-term outlook for the staff and do not necessarily reflect the views of its Algerian economy. The deadline for considering Board of Directors or of the countries it represents. data and preparing forecasts was June 17, 2022. For information about the World Bank and its The preparation of this Algeria Economic activities in Algeria, including electronic copies of this Update is the work of the Middle East and North publication, please visit https://www.worldbank.org/ Africa (MENA) Section of the World Bank Group’s en/country/algeria. For any questions or comments Macroeconomics, Trade, and Investment (MTI) Global on the content of this publication, please contact Practice. It was prepared by Cyril Desponts, Amel Cyril Desponts (cdesponts@worldbank.org) or Eric Le Henider, and Simon Ray under the direction of Éric Borgne (eleborgne@worldbank.org). vii EXECUTIVE SUMMARY G DP returned to its pre-pandemic level in jump in oil revenues, there was a moderate and cross- the fourth quarter of 2021, despite a drop cutting increase in non-oil revenues. Current spending in investment. The recovery was driven by increased following the rise in current transfers, but the hydrocarbon sector and a stronger recovery in the the lack of recovery in public investment limited the services sector, despite a drop in agricultural activity rebound in spending. The implementation of the and incomplete recovery in the public manufacturing debt buyback program for state-owned enterprises sector. On a full year basis, non-hydrocarbon GDP increased public debt, from 51 to 63% of GDP. Monetary remained 1.6 percent below its 2019 level, while policy remained accommodative, and bank liquidity hydrocarbon GDP approached this level (1 percent recovered in line with export earnings. Credit growth to below). The recovery in employment opportunities the private sector remained sluggish, and bank credit continued but remained incomplete, and inflation to the Treasury exceeded that to private businesses. continued to rise. In response, the authorities The recovery in economic activity is implemented a set of measures to limit the impact expected to continue in 2022, while high on purchasing power, including the introduction of hydrocarbon prices generate a current account unemployment benefits, an increase in the threshold surplus. Activity in the hydrocarbon sector should for income tax liability, and higher salaries in the civil continue to support growth, and activity in the non- service. hydrocarbon sectors will return to its pre-pandemic The continued rise in global hydrocarbon level. However, the recovery in investment could be prices has led to a marked improvement in more marked than that in consumption. Hydrocarbon macroeconomic balances. The price of Algerian exports are expected to remain at a high level, oil increased by 50 percent over the first five months generating a current account surplus and a marked of 2022, pulling in its wake—albeit with a delay—the increase in fiscal revenues, which, assuming a export price of Algerian gas. Coupled with the rise prudent spending policy, should bring the overall in European gas demand and OPEC production budget deficit closer to balance. However, a fall in quotas, this improvement offset the rise in import hydrocarbon export prices and volumes in 2023 and prices, especially of cereals, and erased the current 2024 may lead to a gradual deterioration in external account deficit, thus permitting a relative stabilization and budget balances. of foreign currency reserves. Nevertheless, the dinar The main risks to the macroeconomic out- continued to depreciate against the US dollar while look arise from fluctuations in global hydrocar- stabilizing against the euro. bon prices, underscoring the crucial role of the The overall budget deficit narrowed in implementation of the Government’s reform pro- 2021, from 12 to 7.2% of GDP. In addition to the gram. Macroeconomic balances remain dependent ix on fluctuations in highly volatile world oil prices in a growth. As elsewhere, inflation has also become a context of uncertainty surrounding the evolution of the growing concern in Algeria, and prudent budgetary war in Ukraine and the dynamics of the global econ- and monetary policies (in the medium term), as well omy. This means that the pace and sustainability of as reforms favoring a greater degree of competition the recovery will depend on the impact of the reform (in the longer term) will contribute to limiting inflation- program on the ability of the private sector to sustain ary pressures. x ­ BUILDING RESILIENCE IN FAVORABLE TIMES ALGERIA ECONOMIC UPDATE – RÉSUMÉ ANALYTIQUE L e PIB a retrouvé son niveau prépandémie Le déficit budgétaire global s’est ainsi au quatrième trimestre 2021, malgré largement résorbé en 2021, passant de 12 à une baisse de l’investissement. La reprise 7,2% du PIB. Au bond des recettes pétrolières s’est a été portée par le secteur des hydrocarbures et ajoutée une hausse modérée et transversale des un redressement plus marqué dans les services, recettes hors-pétrole. Les dépenses courantes ont malgré la baisse de l’activité agricole et une reprise augmenté suivant la hausse des transferts courants, incomplète dans le secteur manufacturier public. En mais l’absence de reprise de l’investissement public a année pleine, le PIB hors-hydrocarbures est demeuré limité le rebond des dépenses. La mise en œuvre du à 1,6% en deçà de son niveau de 2019, tandis programme de rachat de créances des entreprises que le PIB des hydrocarbures s’en est approché publiques a fait grimper l’endettement, de 51 à 63% (1% en deçà). La reprise des offres d’emploi s’est du PIB. En outre, la politique monétaire est demeurée poursuivie mais est demeurée incomplète, et accommodante et la liquidité bancaire est remontée, l’inflation a continué d’augmenter. Les autorités ont suivant les recettes d’exportation. La croissance alors mis en œuvre un ensemble de mesures afin de du crédit au secteur privé est demeurée atone, et limiter l’impact sur le pouvoir d’achat, ceci incluant les crédits bancaires à l’État ont dépassé ceux aux l’introduction d’une allocation-chômage, la hausse du entreprises privées. seuil d’assujettissement à l’impôt sur le revenu, et la La reprise graduelle de l’activité devrait hausse des salaires dans la fonction publique. se poursuivre en 2022, et les prix élevés des La hausse continue des prix mondiaux des hydrocarbures permettre un surplus du compte hydrocarbures a cependant généré une nette courant. L’activité du secteur des hydrocarbures amélioration des équilibres macroéconomiques. devrait continuer de soutenir la croissance, et l’activité Le prix du pétrole algérien a gagné 50% durant les dans les secteurs hors-hydrocarbures retrouver son cinq premiers mois de l’année 2022, entraînant dans niveau prépandémie. La reprise de l’investissement son sillage, bien qu’avec un délai, le prix à l’export pourrait cependant être plus marquée que celle de du gaz algérien. Couplé à la hausse de la demande la consommation. Les exportations d’hydrocarbures européenne en gaz et des quotas de production de devraient demeurer à un niveau élevé, générant un l’OPEP, cette amélioration a contrebalancé la hausse surplus du compte courant et une hausse marquée des prix à l’importation, notamment des céréales, des recettes budgétaires qui, dans l’hypothèse et effacé le déficit du compte courant, permettant d’une politique de dépense prudente, permettrait de une stabilisation relative des réserves de change. rapprocher le solde global du Trésor de l’équilibre. Néanmoins, le dinar a continué à se déprécier vis-à- En 2023 et 2024, la baisse des prix et volumes vis du dollar US, mais s’est stabilisé face à l’Euro. d’exportation d’hydrocarbures devrait cependant xi entraîner une détérioration graduelle des équilibres guerre en Ukraine et de la dynamique de l’économie extérieurs et budgétaires. mondiale. Ainsi, le rythme et la durabilité de la reprise Les principaux risques aux perspectives dépendra de l’impact du programme de réforme sur macroéconomiques émanent des fluctuations la capacité du secteur privé à soutenir la croissance. sur le marché des hydrocarbures, soulignant le Comme ailleurs, l’inflation est aussi devenue un sujet rôle crucial de la mise en œuvre du programme de préoccupation croissant en Algérie. En outre, des de réforme du Gouvernement. Les équilibres politiques budgétaires et monétaires prudentes (à macroéconomiques restent tributaires des fluctuations moyen terme), ainsi que des réformes favorisant un des prix mondiaux du pétrole, hautement volatils, dans plus grand degré de compétition (à plus long terme) un contexte d’incertitude autour de l’évolution de la contribueraient à limiter les pressions inflationnistes. xii ­ BUILDING RESILIENCE IN FAVORABLE TIMES ALGERIA ECONOMIC UPDATE – ‫ملخص ٍ‬ ‫واف‬ ‫اإلجاميل‪ .‬وأدى تنفيذ برنامج إعادة رشاء ديون الرشكات العمومية إىل‬ ‫زيادة املديونية‪ ،‬من ‪ 51%‬إىل ‪ 63%‬من إجاميل الناتج املحيل‪ .‬كام بقيت‬ ‫السياسة النقدية ذات طبيعة تيسريية وانتعشت السيولة املرصفية مع‬ ‫اد إجاميل الناتج املحيل غري الهيدروكربوين إىل مستواه املسجل‬ ‫فيام قبل جائحة كورونا يف الربع األخري من عام ‪ ،2021‬عىل‬ ‫عا بقطاع‬ ‫الرغم من انخفاض االستثامر‪ .‬وكان االنتعاش مدفو ً‬ ‫ع‬ ‫انتعاش الصادرات‪ ،‬إال أن منو االئتامن للقطاع الخاص ظل بطيئًا‪ ،‬وتجاوز‬ ‫الهيدروكربونات مع انتعاش أقوى يف قطاع الخدمات‪ ،‬عىل الرغم من‬ ‫االئتامن املرصيف املقدم للحكومة االئتامن املقدم للرشكات الخاصة‪.‬‬ ‫تراجع النشاط الزراعي واالنتعاش غري الكامل يف قطاع الصناعة العمومية‪.‬‬ ‫أما عند قياسه عىل مدار العام بأكمله‪ ،‬فقد ظل إجاميل الناتج املحيل غري‬ ‫من املتوقع أن يستمر االنتعاش االقتصادي يف عام ‪ ،2022‬وسيسمح‬ ‫الهيدروكربوين أقل من مستواه لعام ‪ 2019‬بنسبة ‪ ،1.6%‬يف حني اقرتب‬ ‫ارتفاع أسعار النفط والغاز بفوائض يف املالية العامة و الحساب الجاري‪.‬‬ ‫منه إجاميل الناتج املحيل الهيدروكربوين (‪ 1%‬أقل)‪ .‬كام استمر االنتعاش‬ ‫من املتوقع أن يستمر نشاط القطاع الهيدروكربوين يف دعم النمو‪ ،‬وسيعود‬ ‫يف فرص العمل لكنه ظل غري مكتمل‪ ،‬واستمر التضخم أيضاً يف االرتفاع‪.‬‬ ‫النشاط يف القطاعات غري الهيدروكربونية إىل مستوى ما قبل الجائحة‪.‬‬ ‫األمر الذي أدى اىل اتخاذ السلطات مجموعة من اإلجراءات للحد من‬ ‫ومع ذلك‪ ،‬ميكن أن يكون االنتعاش يف االستثامر ملحوظاً بدرجة أكرب من‬ ‫التأثري عىل القوة الرشائية‪ ،‬مبا يف ذلك إطالق برنامج منحة البطالة‪ ،‬ورفع‬ ‫ذلك يف االستهالك‪ .‬ومن املتوقع أن تظل الصادرات الهيدروكربونية عند‬ ‫الحد األدىن لإلعفاء من رضيبة الدخل‪ ،‬وزيادة رواتب الوظيف العمومي‪.‬‬ ‫مستوى مرتفع‪ ،‬مام سيولد فائضً ا يف الحساب الجاري‪ ،‬وزيادة ملحوظة يف‬ ‫با من التوازن إذا‬ ‫اإليرادات املالية بحيث ستجعل رصيد املالية العامة قري ً‬ ‫ومع ذلك‪ ،‬أدى االرتفاع املستمر يف أسعار النفط والغاز عاملياً إىل‬ ‫ما اقرتن بسياسة إنفاق حصيفة‪ .‬أما اذا حدث انخفاض يف أسعار الصادرات‬ ‫حدوث تحسن ملحوظ يف موازين االقتصاد الكيل‪ .‬فقد ارتفع سعر النفط‬ ‫الهيدروكربونية أو يف أحجامها خالل عامي ‪ 2023‬و‪ ،2024‬فسوف يؤدي‬ ‫الجزائري بنسبة ‪ 50%‬خالل األشهر الخمسة األوىل من عام ‪ ،2022‬مام‬ ‫ذلك إىل تدهور تدريجي يف الحسابَني الخارجي واملالية العامة‪.‬‬ ‫أدى إىل ارتفاع أسعار تصدير الغاز الجزائري‪ ،‬وإن كان مع بعض التأخري‪.‬‬ ‫إىل جانب ذلك‪ ،‬ارتفع الطلب األورويب عىل الغاز وحصص إنتاج أوبك‪،‬‬ ‫تتمثل املخاطر الرئيسية التي تهدد آفاق االقتصاد الكيل يف تقلبات أسعار‬ ‫األمر الذي أدى إىل تعويض االرتفاع يف أسعار الواردات‪ ،‬وخاصة الحبوب‪،‬‬ ‫النفط والغاز عاملياً‪ ،‬مام يؤكد أهمية تنفيذ برنامج اإلصالح الحكومي‪.‬‬ ‫والتخلص من عجز الحساب الجاري‪ ،‬مام سمح باالستقرار النسبي‬ ‫ال تزال موازين االقتصاد الكيل تعتمد عىل تقلبات أسعار النفط العاملية‬ ‫الحتياطيات العمالت األجنبية‪ .‬ومع ذلك‪ ،‬استمر الدينار يف االنخفاض‬ ‫وعىل حالة عدم اليقني املحيطة بتطورات الحرب يف أوكرانيا وديناميكيات‬ ‫مقابل الدوالر األمرييك‪ ،‬لكنه استقر مقابل اليورو‪.‬‬ ‫االقتصاد العاملي‪ .‬وبالتايل‪ ،‬فإن وترية االنتعاش واستدامته ستعتمد عىل‬ ‫تأثري برنامج اإلصالح وقدرة القطاع الخاص عىل استدامة النمو‪ .‬وكام هو‬ ‫وبالتايل‪ ،‬انخفض العجز الكيل يف امليزانية إىل حد كبري يف عام ‪،2021‬‬ ‫الحال يف أي مكان آخر‪ ،‬أصبح التضخم مصدر قلق متزايد يف الجزائر‪.‬‬ ‫من ‪ 12%‬إىل ‪ 7.2%‬من إجاميل الناتج املحيل‪ .‬فباإلضافة إىل القفزة يف‬ ‫باإلضافة إىل ذلك‪ ،‬فإن السياسات املالية والنقدية الحكيمة (عىل املدى‬ ‫اإليرادات النفطية‪ ،‬كانت هناك زيادة معتدلة يف جميع بنود اإليرادات‬ ‫املتوسط) واإلصالحات التي متيل نحو إيجاد درجة أكرب من املنافسة (عىل‬ ‫غري النفطية‪ .‬كام زاد اإلنفاق الجاري يف أعقاب الزيادة يف التحويالت‬ ‫املدى الطويل) ستساعد يف الحد من الضغوط التضخمية‪.‬‬ ‫الجارية‪ ،‬لكن عدم انتعاش االنفاق االستثامري حد من انتعاش اإلنفاق‬ ‫‪xiii‬‬ 1 RECENT ECONOMIC DEVELOPMENTS Non-Hydrocarbon Activity Continued Q1-2022, which is more marked in the North-Central its Gradual Recovery in the Second region. (Figures 1 and 2). Half of 2021 The recovery in activity in Q4-2021 was cross-cutting despite a decline in agricultural GDP. Non-hydrocarbon GDP returned to its pre- In a context marked by low rainfall, agricultural GDP fell pandemic level in the fourth quarter of 2021, in 2021, driven in particular by a low cereal harvest.3 despite a drop in investment. In 2021, private After a strong dynamic in Q3, the fall in investment in consumption gradually returned to its 2019 level (+0.6 Q4 contributed to a decline in construction and industrial percent) despite the effects of rising prices on real activity. The latter have thus exceeded their 2019 activity household consumption. This was also the case for level. Meanwhile, industrial recovery was less marked investment (+0.2 percent) despite a drop in the final in the public sector, which, except for food processing quarter of 2021 (–4.6 percent y-o-y), consistent with industries, performed less well than the rest of the the lack of recovery in public investment. In addition, economy and did not experience a marked recovery in the authorities have appointed an official mediator in charge of unblocking outstanding investment 1 According to the Government, 861 investment projects projects.1 The change in inventories remained at zero were the target of interventions enabling the removal of in 2021, with a decline in the fourth quarter erasing obstacles to their implementation (APS, May 8, 2022). a modest increase at the start of the year.2 However, 2 Change in inventories fell from 6 percent of GDP in 2019 over the full year, non-hydrocarbon GDP remained to 3 percent in 2020 and 0 percent in 2021, which may 1.6 percent below its 2019 level. Nighttime light data partly explain the lack of recovery in imports. 3 According to the Ministry of Agriculture and Rural confirm this recovery in the non-hydrocarbon segment Development, the Algerian Interprofessional Cereals of the economy in 2021, which is more marked in the Agency (OAIC) reported harvests totaling 13 million North-West region as well as in Q3. However, the same quintals (Mqx) of cereals in 2021 compared to an data suggest a cross-cutting slowdown in activity in average of 53 Mqx between 2017 and 2019. 1 Private Consumption and Investment FIGURE 1 •  FIGURE 2 • After a Stronger Recovery in 2021, have Returned to pre-Pandemic Activity Appeared to Slow Down Levels in 2021 15% 105 Variation of night lighting, yoy Real GDP Index (2019 = 100) 10% 95 5% 0% 85 –5% 75 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 –10% 2019 2020 2021 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 2019 2020 2021 22 Imports Private consumption Public consumption Investment North East North Center North West Exports GDP Eastern Highlands Average Source: National Statistical Agency (ONS) and World Bank estimates. Source: Earth Observation Group and World Bank estimates. Note: The indexes show the level of GDP at constant prices by sector relative to its Note: The four regions (EPT) presented exclude the wilayas (provinces) producing level for the corresponding quarter in 2019. These are obtained by successively hydrocarbons as well as the areas of the Arzew and Skikda petrochemical plants. applying real quarterly growth rates supplied by ONS for 2020 and 2021 to a base of According to the last census (2008), these four regions account for 80 percent of the 100 for 2019. Algerian population. The Recovery Was More Marked FIGURE 3 •  FIGURE 4 • …but Remained Largely Incomplete in the Industrial and Construction in the Public Manufacturing Sector Sectors… 14% 110 8% 105 5% Level of activity relative to 2019 Real GDP Index (2019 = 100) 100 –2% 95 90 –14% –16% 85 –16% 80 75 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 –31% 2019 2020 2021 Total SOE Total SOE Total SOE Total SOE SMMEEI Construction Chemicals, Agro-industry Agriculture Hydrocarbons materials rubber, plastics Industry Construction Commercial services GDP Source: ONS and World Bank estimates. Note: Total activity uses real GDP for 2021 and activity of state-owned enterprises Source: ONS and World Bank estimates. (SOE) uses the industrial production index for 2021. the second half of the year. Consistent with the absence of recovered to its 2019 level, and the services sector was a marked recovery in public investment, the performance the main contributor to non-oil GDP growth. The sector’s of steel, metal, mechanical, electrical, and electronic recovery remained incomplete, however, weighed down (SMMEEI) activities mainly carried out by state-owned by the hotels, cafés and restaurants sector (–31 percent enterprises (SOEs) was particularly disappointing (–14.5 relative to 2019) and the transport and communication percent relative to 2019). Finally, in 2021, trading activity sector (–2.9 percent). (Figures 3 and 4). 2 ­ BUILDING RESILIENCE IN FAVORABLE TIMES ALGERIA ECONOMIC UPDATE – BOX 1: LATEST COVID-19-RELATED DEVELOPMENTS As elsewhere in the MENA region, the arrival of the Omicron wave in Algeria brought about a peak in COVID-19 infections in January 2022. Prior to this, the pace of the vaccination campaign slowed, with the number of people who had received two doses of COVID-19 vaccines rising from 9.2 percent at the end of September 2021 to 12.8 percent at the end of December 2021 and 14.8 percent in April 2022.a Meanwhile, the last restrictions on mobility, gatherings, and activities were lifted at the beginning of December 2021. However, the number of confirmed cases of COVID-19 infections jumped between December and February, peaking at the end of January 2022 and pushing up the number of hospitalizations.b In response, the authorities chose to bring forward then to extend the winter school holidays in order to break the chain of infection in the school environment. In May 2022, infections fell to their lowest level since the start of the pandemic. FIGURE 5 • As Elsewhere in the Region, FIGURE 6 • In 2020, Excess Mortality in Algeria Infections Peaked in January 2022 Was Comparable to That of the Wider Region 2000 18% 17% 14% 14% Number of confirmed cases 1500 Excess mortality 11% 11% 1000 500 France Greece Portugal Algeria Italy Spain 0 Feb.-21 Apr-21 Jun-21 Ago-21 Oct.-21 Dec.-21 Feb.-22 Apr-22 Jun-22 Apr-20 Jun-20 Ago-20 Oct-20 Dec.-20 Source: Organization for Economic Cooperation and Development (OECD), ONS, and World Bank estimates. Note: ONS recorded 236,000 deaths in 2020, 14.4 percent higher than a Source: Johns Hopkins University. counterfactual forecast based on the trend over the last 10 years. Mortality peaked Note: Data presented as 7-day moving average. in July/August then in November/December, when COVID-19 infections also peaked. a As the vaccination rate is not reported continuously, the data presented refer to September 25, December 21, and April 24, respectively. b APS (January 12, 2022). GDP Growth Was Supported by pre-pandemic level, with the recovery in domestic con- Hydrocarbon Production and Exports sumption offsetting the gradual lifting of OPEC pro- duction quotas. At the same time, export volumes of The increase in hydrocarbon production contin- liquefied petroleum gas (LPG), condensates, refined ued in Q1-2022, allowing for a moderate increase petroleum products, and liquefied natural gas (LNG) in export volumes. Following an exceptional third remained relatively stable. (Figures 7 and 8). quarter, natural gas production remained at its high 2020 level in Q4-2021 and Q1-2022 in a context of Surging Export Revenues Reduced a marked increase in European demand prior to the the Current Account Deficit Russian-Ukrainian crisis. As a result, exports equaled their 2020 high. In April 2022, crude oil production Export revenues increased by 76 percent in 2021, exceeded one million barrels per day (mb/d), ap- mainly due to the jump in global oil prices. From proaching its pre-pandemic level. Oil exports therefore January to September 2021, the export price of Algerian increased, even though they remained below their natural gas increased by 29 percent, compared to Recent Economic Developments 3 The High Level of Gas Production FIGURE 7 •  …while the Oil Sector Continued its FIGURE 8 •  and Exports Was Maintained… Gradual Recovery 30 8 1000 Thousands of barrels per day 25 7 Millions cubic meters 800 Billion cubic meters 20 6 15 5 600 10 4 400 5 3 200 0 2 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4e Q1e Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4e Q1e 2018 2019 2020 2021 22 2018 2019 2020 2021 22 Natural gas production Natural gas export LNG exports (rhs) Crude oil production Crude oil exports Export of condensate Export of refined petroleum products Source: Bank of Algeria (BdA), Joint Organizations Data Initiative (JODI), World Bank estimates. Source: BdA, Organization of Petroleum Exporting Countries (OPEC), Bloomberg, Note: Natural gas and LNG exports in Q4-2021 and Q1-2022 were estimated using World Bank estimates. monthly LNG production and natural gas pipeline exports data, respectively. Note: Exports in Q4-2021 and Q1-2022 are estimated using monthly oil tanker export data. 64 percent for the European reference price4 due to the current account surplus in Q4-2021 and the number of gas supply contracts tied to oil prices with stabilization of foreign exchange reserves. In a lag (see Annex 1). Over the same period, the price of crude and refined oil, condensates, LPG, and LNG 4 Dutch TTF European natural gas. increased between 37 and 42 percent.5 Combined 5 In 2021, export values for Algerian oil were composed of with the increase in volumes exported, notably for 27 percent crude oil, 24 percent refined oil products, 23 natural gas and crude oil, hydrocarbon exports grew by percent natural gas, 10 percent LNG, 10 percent LPG, and 6 percent condensates. 70 percent in 2021, reaching USD 34.1 billion. This trend 6 This is a record high. was strengthened by the increase in non-hydrocarbon 7 In 2021, 46 percent of Algeria’s food imports were made exports (+136 percent in 2021), reaching USD 4.5 billion, up of cereal products (35 percent in 2020), 14 percent or 12 percent of goods exports.6 (Figures 9 and 10). of dairy products (19 percent in 2020) and 11 percent Imports remained subdued despite an in- of sugar products (10 percent in 2020). However, the authorities maintained their wheat purchasing program crease in the price of imported goods. Algeria’s food in 2021 and 2022 despite price increases. import bill increased in 2021 as low rainfall heightened 8 See World Bank, Algeria Economic Monitor, Fall 2021 the need for cereal imports, and the global price of (Table 1). wheat, sugar, and dairy products surged late in the year.7 9 According to the Ministry of Commerce, the review of At the same time, non-food imports did not recover as protection requests led to the creation of this new list, which includes reduced rates for countries that have expected due to the moderate recovery in consumption preferential trade agreements with Algeria (APS, January and domestic investment, dinar depreciation, and the 7, 2022). continued implementation of import reduction mea- 10 The Ministry of Commerce announced the suspension sures.8 Furthermore, the authorities expanded the list of direct debit for the importation of resale products of products subject to additional provisional safeguard and goods for importers who had not modified the extracts from their trade registers as required by the new duties, which jumped from 992 to 2,608 products,9 and executive decree regulating this activity (APS, September further limited resale imports.10 (Figures 11 and 12). 1, 2021). Later, an obligation to justify the absence of The marked improvement in the terms local production for these same products was imposed of trade and stagnation in imports led to a (APS, April 26, 2022). 4 ­ BUILDING RESILIENCE IN FAVORABLE TIMES ALGERIA ECONOMIC UPDATE – FIGURE 9 • Hydrocarbon Export Prices Jumped… FIGURE 10 • …and Exports Reached their Highest Level Since 2014 9 100 8 14 30 7 80 12 25 USD per million BTU 6 USD per barrel 60 10 Exports (USD billion) 5 20 8 % of GDP 4 40 15 3 6 2 20 10 4 1 2 5 0 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 0 0 2018 2019 2020 2021 22 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4e Q1e Liquefied natural gas Natural gas Crude oil (rhs) 2018 2019 2020 2021 22 Source: BdA, World Bank estimates. Crude oil Condensate Refined oil Note: Export prices for crude oil, condensates, and petroleum products have Liquefied petroleum gas Liquefied natural gas Natural gas correlation rates of between 93 and 98 percent. The liquefied petroleum gas price Total (rhs) shows similar, though less pronounced, variations. The dotted curves are estimates. See Annex 1 for natural gas price projections. Source: BdA, JODI, Bloomberg, World Bank estimates for Q4-2021 and Q1-2022. The Strong Increase in Import FIGURE 11 •  FIGURE 12 • …and Compensated by a Decrease Prices Was Overcompensated by in Import Volumes That of Export Prices… 16 40 170 1.0 14 35 Price index (Q1-2018 = 100) 150 0.8 12 30 130 Imports (million USD) 0.6 10 25 In % of GDP 110 0.4 8 20 90 70 0.2 6 15 50 0 4 10 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 2018 2019 2020 2021 22 2 5 Terms of trade (rhs) Dairy products 0 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4e Cereals Sugar Import prices, Algeria PPI, European Union 2018 2019 2020 2021 Source: The terms of trade are computed as the ratio of export prices to import Services Consumer products prices (IMF). Algeria’s import price index is the unit values index (UVI) from ONS. PPI Equipment Intermediate goods = producer price index (OECD). Food prices are taken from the Food and Agriculture Food products Imports (rhs) Organization’s (FAO) global data. Note: Since the UVI are based on Customs Authority data, they also include Source: BdA, World Bank estimates. transportation and logistics costs. Note: Consumer goods do not include food products. 2021, the rise in export prices exceeded that of im- 11 According to the ONS, import prices increased by port prices, leading to a substantial improvement 23 percent in 2021, compared to 68 percent for export of Algeria’s terms of trade.11 Added to the rapid prices. Recent Economic Developments 5 The Current Account Deficit FIGURE 13 •  …but the Dinar/dollar Exchange FIGURE 14 •  Shrank… Rate Continued to Slip 14 30 165 34% 12 25 160 10 20 32% 155 8 15 150 30% 6 145 In % of GDP 10 28% Billion USD 4 140 5 26% 2 135 0 130 0 24% –2 –5 125 22% –4 –10 120 –15 115 20% –6 Jan-20 Mar-20 May-20 Jul-20 Sep-20 Nov-20 Jan-21 Mar-21 May-21 Jul-21 Sep-21 Nov-21 Jan-22 Mar-22 –8 –20 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4e 2018 2019 2020 2021 Informal market premium (rhs) Exchange rate, DZD/USD Exchange rate, DZD/EUR Exports Change in foreign exchange reserves Current account balance (rhs) Imports Source: BdA, dzairdaily.com, forexalgerie.com, WB estimates. Note: The premium is the average ratio of the parallel market exchange rate for the Source: BdA, IMF, World Bank estimates. currencies in question and the official exchange rate for the euro and the US dollar. rise in exports and stagnation in imports, this al- Fiscal Balances Improved Markedly, lowed the current account balance to jump from Supported by Hydrocarbon Revenues a USD 3 billion deficit in Q1-2021 (7.8 percent of GDP) to a surplus of USD 737 million in Q4-2021 The overall budget deficit shrank significantly (roughly 1.6 percent of GDP). The annual current in 2021 and was financed via domestic bond account deficit thus dropped dramatically from issues. Driven by the jump in hydrocarbon revenues USD 20 billion on average from 2016 to 2020 (or and the lack of a marked recovery in expenditures, 12.9 percent of GDP) to USD 4.8 billion in 2021 the overall budget balance improved from a deficit of (roughly 2.9 percent of GDP). Consequently, for- 12 percent of GDP in 2020 to a deficit of 7.2 percent eign exchange reserves dropped from USD 46.9 of GDP in 2021. However, the implementation of the billion in late 2020 to USD 41.4 billion in late 202112 SOE debt buyback program contributed most of a (or 11 months of goods and services imports), but DZD 3,900 billion (USD 26.8 billion) increase in the then remained stable, reaching USD 41.5 billion in Treasury’s debt to banks in 2021, making it possible late March 2022. to finance the repurchasing of SOE debts from banks, Despite a significant improvement in exter- to finance the overall budget deficit, and to increase nal balances, the depreciation of the dinar against public savings.14 Public debt thus advanced from 50.7 the US dollar continued. From June 2021 to June 2022, the dinar depreciated by 8 percent against 12 Excluding IMF Special Drawing Rights (SDRs) In August the US dollar. However, the depreciation of the euro 2021, Algeria converted USD 2.7 billion of its additional against the US dollar in H2-2021 stabilized the euro- SDR allocation into additional foreign reserves. dinar exchange rate. Moreover, the war in Ukraine and 13 The nominal effective exchange rate (NEER) showed a the drop in the Euro led to a relative appreciation of moderate depreciation in 2021 (+0.1 percent) and Q1-2022 the dinar in H1-2022.13 Since oil exports are denomi- (+0.3 percent). Given the level of inflation, the real effective exchange rate (REER) showed a significant depreciation in nated in US dollars and imports come primarily from 2021, then an appreciation in Q1-2022 (-1 percent) given Europe and China, these relative movements of ex- the fall in the value of the euro (based on IMF data). change rates thus helped improve Algeria’s terms of 14 The debt buyback (syndicated loans) consisted of trade. (Figures 13 and 14). substituting SOE debts with Treasury bonds on the 6 ­ BUILDING RESILIENCE IN FAVORABLE TIMES ALGERIA ECONOMIC UPDATE – The Overall Budget Balance FIGURE 15 •  The Debt Buyback Program Led to a FIGURE 16 •  Decreased Significantly, Driven by Jump in Public Debt Hydrocarbon Revenues 14 70 15 20 12 60 10 15 Contribution to the change in 10 50 10 budget balance (pp) In trillions of DZD 5 In % of GDP 8 40 In % of GDP 0 0 –5 6 30 –5 –10 4 20 –10 –15 2 10 –15 –20 0 0 2014 2015 2016 2017 2018 2019 2020 2021 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Current spending Capital spending 2019 2020 2021 Hydrocarbon revenues Nonhydrocarbon revenues Interventions and SPA Overall balance (rhs) Liabilities to the BoA Liabilities to banks Total (rhs) Source: Ministry of Finance, World Bank estimates. Note: A positive contribution to the overall cash balance means either an increase in Source: BdA, IMF. revenues or a decrease in expenditures. Interventions and SPA Balance = Treasury Note: Public savings consists of the Treasury’s current account balance at the BdA. interventions and changes in Special Purpose Accounts balance. The debt is compared to rolling GDP over 4 quarters. percent of GDP in 2020 to an estimated 63 percent of (+18 percent). At the same time, capital expenditure GDP in 2021.15 increased 4.8 percent in 2021 after falling 34 percent Bugdet revenues increased by 17 per- in 2020, and thus remained 30 percent below its pre- cent in 2021, led by a jump in hydrocarbon ex- pandemic level. (Figures 15 and 16). port revenues. Hydrocarbon revenues increased by 36 percent due to the increase in oil prices, the recovery of exports, and continued depreciation of the dinar against the US dollar.16 Nonhydrocarbon revenues increased 6.8 percent as the upturn in public banks’ balance sheets, thus increasing public debt. These bonds could then be presented to the economic activity led to an increase in revenues BdA and exchanged for liquidity as part of the special from income taxes, VAT, and the tax on oil prod- refinancing program, and these liquidities were ucts, to which was added a sharp increase in BdA partially reinvested in Treasury bonds. The special dividends. This upturn was partially counterbal- refinancing program (SRP) (Ordinance 21-02 of June anced by stagnation in customs duties following 10, 2021) and—implicitly—the debt repurchasing that of import volumes and by a sharp fall in corpo- program have a limit of DZD 2,100 billion. Of this amount, DZD 1,680 had been used by November rate income tax revenues (–16 percent) due to the 2021. See also World Bank, Algeria Economic consequences of COVID-19 for corporate profits Monitor, Fall 2021 (Figure 13). and the tax relief measures implemented to sup- 15 Excluding guarantees. Including guarantees, public port them.17 Altogether, fiscal revenues remain 2.9 debt increased from 51.7 percent of GDP at end-2020 percent below their pre-pandemic level. to 63 percent at end-2021. Furthermore, public investment did not 16 Since oil exports are denominated in USD, a relative depreciation of the dinar increases oil revenues in show a marked recovery. Public expenditure in- dinars. creased by 7.6 percent in 2021 primarily thanks to 17 The sharper drop in activity for public enterprises the increase in current expenditures (+8.7 percent) cumulated with their highest degree of formalization can driven by a significant increase in current transfers also explain the magnitude of this drop. Recent Economic Developments 7 Bank Liquidity Recovered, without 26 percent (-DZD 1.431 billion), as the debt buyback Generating a Marked Increase in program was implemented. Thus, in December Private Sector Credit 2021, bank lending to the State (excluding the BdA) reached approximately 29 percent of GDP, com- Bank liquidity recovered, supported by an accom- pared to 18 percent of GDP for SOE lending and modative monetary policy and the rise in hydro- 25 percent of GDP for private sector lending. As a carbon export revenues. The recovery of hydrocar- result, the share of middle- and long-term loans in bon exports allowed for a strong progression of bank bank lending decreased, with SOE loans being for liquidity, with M2 increasing 13.6 percent in 2021. After longer terms, on average. (Figures 17 and 18). hitting a peak during the COVID-19 crisis (+14.3 per- cent),18 the growth of currency in circulation slowed in 2021 (+8.6 percent). The rise in liquidity was also driv- Import Prices, Depreciation and en by the continuation of prudential and monetary eas- Monetary Expansion Fueled Inflation ing measures established during the COVID-19 crisis, Consumer price inflation remained high in including the decrease of the required reserve ratio, Q1-2022. Growth of the consumer price index (CPI) of the policy rate,19 of the liquidity ratio, of liquidity re- serves, the increase in the threshold for the refinanc- ing of government securities, the rescheduling of ex- 18 Simultaneous withdrawals by private individuals isting liabilities with the extension of interest subsidies, during the COVID-19 crisis contributed to this marked increase in currency in circulation, while banks saw the the full satisfaction of refinancing needs for existing mandatory amount of their social capital and liabilities debtors, and the extension of the refinancing period.20 to the Treasury increase, thus exacerbating the bank The growth of credit to the private sector liquidity situation. remained subdued, however, and bank loans 19 The Bank of Algeria’s rediscount rate, which was set at 4 percent from 2004 to 2016 then at 3.5 percent was to the State surpassed private sector and SOE lowered to 3.25 percent in March 2020 and 3 percent loans. In the second half of 2021, banking sec- in April 2020. tor claims to the State doubled (+DZD 3.258 bil- 20 See also World Bank, Algeria Economic Monitor, Spring lion), while those to public enterprises decreased 2021 (Table 2). FIGURE 17 • Bank Liquidity Recovered without FIGURE 18 • Bank Lending to the Government Generating a Rise in Private Sector Now Surpasses Private Sector and Credit SOE Lending 20 7 6 Credit, deposit-taking institutions 15 5 Growth, y-o-y (%) 10 (DZD triillion) 4 5 3 0 2 –5 1 –10 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2018 2019 2020 2021 2018 2019 2020 2021 Credit to the private sector Currency in circulation Central Government Private sector SOEs Deposits in M2 Source: IMF. Source: IMF. Note: Data exclude BoA loans. 8 ­ BUILDING RESILIENCE IN FAVORABLE TIMES ALGERIA ECONOMIC UPDATE – FIGURE 19 • Quarterly Growth of the CPI FIGURE 20 • Producer Prices Rose Sharply Remained High in Q1-2022 150 4 140 Producer Price Index (Q1-2018 = 100) 3 Quarterly CPI growth and 130 contributions (%, pp) 2 120 110 1 100 0 90 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 –1 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 2018 2019 2020 2021 2018 2019 2020 2021 22 Total, non-hydrocarbon industries SMMEEI Services Manufactured goods Food processing Chemicals and plastics Industrial food products Fresh agricultural products Textile Construction Materials Quarterly CPI growth Source: ONS, World Bank estimates. Source: ONS, World Bank estimates. Note: Data for the national public sector. reached 7.2 percent y-o-y in 2021 and 9.2 percent Available Labor Market Indicators y-o-y in Q1-2022 driven primarily by food prices but Suggest Partial Recovery also manufactured goods prices. Furthermore, the increase in consumer prices may have been fueled The official number of job offers showed partial by the delayed impact of the depreciation of the ex- recovery in Q1-2022 but remained below its change rate and of the increase in the amount of cur- pre-pandemic level. According to ANEM data, rency in circulation, more marked during the early employment opportunities dropped in Q4-2021 stages of the COVID-19 crisis, by rising import prices (–9.6 percent q-o-q) before rising in Q1-2022 (+4.5 as well as potentially by speculation in production and percent q-o-q) but remained 1.1 percent below distribution channels. Production prices in the pub- their Q1-2020 level. Meanwhile, domestic private lic industrial sector, which was especially impacted sector opportunities showed full recovery unlike by the depreciation of the exchange rate, also rose sharply, notably in the SMMEEI and textile sectors 21 The use of subsidized flour and semolina was restricted (See Annex 2). (Figures 19 and 20). in the summer of 2020 (JO, September 2, 2020). In response, the authorities took measures However, the President of the Republic cancelled this to mitigate the effect of price increases on house- decision in the Council of Ministers meeting of February holds. These measures included suspending the 13, 2022. streamlining of grain subsidies that had taken place in 22 In the Council of Ministers meeting of February 13, 2022, the President of the Republic ordered the blocking of all the summer of 2020,21 canceling the VAT increase for taxes on food products introduced in the 2022 budget sugar imports and taxes on digital goods and servic- law. es,22 delivering unemployment benefits to young first- 23 Official Gazette No. 23, April 6, 2022. time job seekers, increasing civil servant salaries and 24 APS, March 13, 2022. retirement pensions,23 allocating additional funds to 25 The law on the fight against illicit speculation of stabilize sugar and oil prices and ensure the availabil- December 2021 introduces prison sentences and fines for the hoarding of goods or merchandise as well as the ity of powdered milk, prohibiting the export of widely- dissemination of false information aimed at causing a consumed food products that Algeria imports,24 and shortage or disturbing market supplies to manipulate intervening in the legislation and among economic prices of goods or merchandise (Law No. 21-15 of operators to limit speculation.25 December 28, 2021). Recent Economic Developments 9 BOX 2: MACROECONOMIC DETERMINANTS OF INFLATION IN ALGERIA Like many countries in the world, Algeria is facing a strong acceleration of inflation. The proportion of countries with inflation rates in excess of 5 percent thus rose 1/ in emerging and developing economies, from less than 40 percent at the beginning of 2020 to 71 percent at the end of 2021 (79 percent for food inflation), as well as 2/ in advanced economies from less than 1 percent at the beginning of 2020 to 44 percent at the end of 2021 In Algeria, the consumer price index (CPI) reached 5.5 percent year-on-year in H1-2021, and 8.8 percent in H2-2021. In 2022, the war in Ukraine contributed to a significant rise in commodity prices and increased inflationary pressures around the world, and the Algerian CPI reached 10 percent y-o-y in April 2022. In Algeria, the inflationary surge was mainly driven by agricultural and food products. In 2019 and 2020, inflation in manufactured goods, which represent 40 percent of the CPI basket, contributed 1.9 percentage points (pp) to Algeria’s CPI, climbing by 2.6pp in 2021. The contribution of services fell from 0.4pp to 0.3pp, while that of agricultural and food inflation rose from 0.4pp in 2019–2020 to 3.6pp in 2021. This contrasts with the two most recent inflation peaks: the 2012 peak was driven mainly by the price of fresh agricultural products and was observed after a sharp increase in public spending, while the 2016 peak was driven by manufactured goods following a sharp depreciation in the exchange rate. Modeling the determinants of inflation allows us to better understand its dynamics. Inflation is notably influenced by external factors such as global commodity prices, by monetary and fiscal policies, by the structure of the goods, capital and labor markets, and by the structure of distribution networks. In annex 2, a VAR model is estimated to identify the role of quantifiable macroeconomic determinants, based on monthly data from 2009 to 2021. It estimates the dynamic relationship between the sub-components of the Algerian CPI on the one hand, and government spending, currency in circulation, import prices and the dinar exchange rate on the other. It allows to identify the fraction of the CPI variance explained by these four variables, at different horizons. In the medium term, half of the dynamics of the Algerian CPI can be explained by these quantifiable macroeconomic factors. External factors (import prices, exchange rate) explain approximately 15 percent of the change in inflation two years later but over 30 percent of the change in industrial food prices, while strongly affecting producer prices in the public sector. Meanwhile, domestic demand factors (public spending and currency in circulation) explain over 30 percent of the change in inflation, which suggests supply constraints that motivate price increases. However, the four variables explain only 12 percent of inflation in the short run (less than three months) suggesting significant price rigidities (Figures 21 and 22). The analysis thus informs the calibration of public policies. Indeed, it suggests that prudent fiscal and monetary policies will help contain inflationary pressures in the short and medium term. Since the price rigidity observed in Algeria is often associated in other countries with a limited degree of competition in domestic production or distribution markets, reforms that promote a greater degree of competition would also help limit inflationary pressures. Inflation Shows Significant Short- FIGURE 21 •  ... but Macroeconomic Factors FIGURE 22 •  Term Inertia... Explain Half of Inflation in the Medium Term 100% 90% 100% Variance decomposition after 3 months 90% Variance decomposition after 2 years 80% 80% 70% 70% 60% 60% 50% 50% 40% 40% 30% 30% 20% 20% 10% 10% 0% 0% Agricultural Agro-industrial Manufactured Services Agricultural Agro-industrial Manufactured Services products products products products products products CPI Import prices Exchange rate CPI Import prices Exchange rate Currency in circulation Public expenditures Currency in circulation Public expenditures Source: World Bank estimates. Source: World Bank estimates. Note: The figure shows the share of the variance in inflation which is explained by Note: The figure shows the share of the variance in inflation which is explained by the change in each explanatory variable, three months earlier. the change in each explanatory variable, two years earlier. 10 ­ BUILDING RESILIENCE IN FAVORABLE TIMES ALGERIA ECONOMIC UPDATE – FIGURE 23 • Employment Opportunities …and the Introduction of FIGURE 24 •  Recovered Partially in Q1-2022… Unemployment Benefits Caused the Number of Registered Job Seekers 40 0.04 to Spike 4 30 0.03 Job offers (thousand) Registered job seekers (millions) 3 20 0.02 2 10 0.01 1 0 0.00 T1 T2 T3 T4 T1 T2 T3 T4 T1 T2 T3 T4 T1 0 2019 2020 2021 22 T1 T2 T3 T4 T1 T2 T3 T4 T1 T2 T3 T4 T1 T2 T3 T4 T1 2018 2019 2020 2021 22 Public Domestic private Foreign private Total Offers/jobseeker (rhs) Low-skilled Medium-skilled High-skilled Source: ANEM and World Bank estimates. Source: ANEM and World Bank estimates. Note: Data are in quarterly averages and were not seasonally adjusted. Note: Data are in quarterly averages. those in the public sector (–2.9 percent) and the job seekers reached over 4 million in March 2022, or foreign private sector (–12.5 percent). In parallel, approximately 14.4 percent of Algeria’s working age the number of job seekers increased sharply in Q4- population.29 (Figure 24). 2021, reaching a level 54 percent higher than its pre-pandemic level26 (Figure 23). 26 This paragraph is based on unconventional labor In February 2022, the authorities intro- market statistical data published by ANEM because duced unemployment benefits for young first- the most recent standard labor market data (including time job seekers registered with the National unemployment rate and participation rate) date from Employment Agency (ANEM). Beneficiaries of the S1-2019. DZD 13,000 (USD 90) monthly benefit must be 19 to 27 Beneficiaries must be Algerian citizens, reside in Algeria, demonstrate national service status, not benefit from 40 years old, have no other sources of income, not be public business creation or activity expansion schemes, enrolled in an educational or training institution, and or professional and social integration support, and never have contributed to social security.27 Following not have a spouse who has another source of income the announcement, the number of job seekers spiked (Executive Decree No. 22-70, JO. 11). in Q1-2022 (+64 percent Q-o-Q), with the jump in 28 APS, April 21, 2022. The Minister of Labor, Employment, registration highest among unskilled and low-skilled and Social Security reported 1.5 million payment requests for a provisional initial monthly cost of close to workers (+84 percent) and women (+63 percent). On DZD 20 billion (USD 140 million). April 18, 917,000 applications had been accepted for 29 World Bank estimates. If those registered can be an estimated initial monthly cost of DZD 12 billion considered active, then this rate is a lower bound for the (over USD 80 million).28 The number of registered unemployment rate of March 2022. Recent Economic Developments 11 2 OUTLOOK AND RISKS The Rise in the Price of Hydrocarbon sector activity will therefore Hydrocarbons is Providing Some continue to support growth. In the short term, oil Respite for the Algerian Economy production will continue to increase, however it is already close to pre-pandemic, full capacity levels. The rise in the international price of energy and Natural gas production will also contribute to growth commodities, fueled by the war in Ukraine, is hav- but may also be constrained by limited production ing a somewhat positive impact on the Algerian capacity.30 Nevertheless, the new Law on Hydrocarbons economy. Though trade flows between Algeria and was implemented in 2021 and will contribute to a rise in Ukraine and Russia are limited, the crisis has contrib- investment as new contracts have already been signed uted to a marked rise in the price of hydrocarbons and under the new tax regime, which is more favorable global food products, along with a simultaneous rise to foreign investors.31 In particular, Sonatrach’s rise in production costs all over the world. As regards Al- in revenues will help finance significant domestic geria, the rise in revenues from hydrocarbon exports investment in the sector, while the SOE also announced more than makes up for the rise in import costs. The substantial discoveries of oil deposits.32 corresponding increase in the country’s budget hy- drocarbon revenues will also more than compensate 30 In March 2022, the former Algerian minister for energy for the rise in the budget costs of subsidized, largely noted that Algerian gas exports to Europe would not imported food products. Nonetheless, increasing be able to increase beyond 3 billion m3, or around 6 percent of Algerian gas exports. global food prices will contribute to inflation in Alge- 31 Overall, tax rates for activities linked to the production of ria, although this will be cushioned by universal food hydrocarbons have been reduced. Eight Memorandums subsidies. Furthermore, the crisis increases long-term of Agreement (MoA) were signed with foreign companies in 2020 followed by an additional one in 2021. demand for Algerian hydrocarbons, although there is 32 Sonatrach has notably announced the discovery of a limited short-term capacity for increasing production significant crude oil deposit in Touggourt worth a billion (see Box 3). barrels, or 8 percent of proven Algerian crude oil reserves. 13 BOX 3: THE CONSEQUENCES OF THE WAR IN UKRAINE FOR ALGERIA In the short term, the war in Ukraine should have a limited effect on Algeria’s international trade flows. Neither Russia nor Ukraine are major suppliers to Algeria, which limits the potential for import disruption. In 2020, Russia was Algeria’s 10th largest supplier, accounting for 2.5 percent of total product imports, while Ukraine was not among the top 15 suppliers.a At the same time, Algeria’s exports to these two countries are close to zero. However, the crisis may delay Algeria’s efforts to diversify global wheat suppliers away from France and Canada.b In the meantime, the crisis has contributed to the rise in world oil and gas prices, thus increasing Algeria’s export revenues. Around 90 percent of Algeria’s exports of goods are hydrocarbons, whose prices have risen with the war in Ukraine. The effect has been reinforced by the increase in production and export volumes as OPEC+ quotas have risen and European demand for Algerian gas has increased. On the other hand, Algeria is the world’s 6th largest importer of wheat, and the crisis is contributing to a marked increase in world wheat prices. Between 2016 and 2020, Algeria’s wheat imports averaged USD 1.8 billion per year and represented 71 percent of domestic consumption, exposing the country to fluctuations in international wheat prices. According to the authorities, however, Algeria has been relatively safe in importing most of its needs for 2022. If prices were to remain high for a prolonged period, however, the effect of the current low rainfall on domestic wheat production could increase import requirements, with greater implications for the import bill. As wheat is heavily subsidized at the national level, the increase in world wheat prices is expected to have a less than proportionate impact on consumer prices. However, this increase could contribute to inflation, through second-round effects. The Office Algérien Interprofessionnel des Céréales (OAIC) buys wheat on the international markets and provides processors with their wheat quotas at subsidized prices, allowing them to respect the administered prices.c As a result, the price of bread, semolina or pasta has changed little in relation to world wheat prices. By the summer of 2020, however, the use of subsidized wheat had been banned for the production of pasta and semolina, contributing to a price increase. In February 2022, the reform was cancelled, due to concerns about the impact of rising world wheat prices. According to official reports, it succeeded in lowering the price of these products on domestic markets. The concomitant increase in oil and gas prices more than offsets the rise in wheat prices, improving the budget and external deficits. Given that cereal imports account for 4–8 percent of hydrocarbon exports, and that budgeted wheat subsidies account for 5–9 percent of oil revenues, the net effect of higher wheat and hydrocarbon prices is expected to be positive, and the increase in hydrocarbon revenues will allow Algeria to finance the more expensive wheat imports and subsidies in the short term, thanks to higher export revenues. In the longer term, Algeria should also benefit from Europe’s efforts to diversify its energy supply, increasing investment, growth and exports. European leaders have identified Algeria as one of the countries that can help substitute energy imports from Russia. On the other hand, Algeria has expressed its willingness to increase its gas exports to Europe, using spare capacity in trans-Mediterranean pipelines. However, given the limited capacity to expand production and the increase in domestic gas consumption, a significant increase in gas supply from Algeria to Europe would require significant investments in the gas sector. a In 2017 (latest available data), Ukraine accounted for 1.3 percent of Algeria’s product imports, and 2.2 percent of grain imports, with Ukrainian exports to Algeria comprising mainly steel products (79 percent). At the time, Russia accounted for 1.9 percent of Algeria’s product imports, and 0.6 percent of grain imports, with Russian exports to Algeria consisting mainly of iron and steel products (39 percent), edible fats (20 percent) and electrical equipment (14 percent). b In 2020, Algeria changed its wheat import specifications, making wheat from the Black Sea region eligible for purchase through international tenders. c The price of processed wheat has not been revised for 25 years, with the price of a baguette capped at DZD 7.5 (USD 0.05), encouraging high consumption of grain products. Activity in non-hydrocarbon sectors though by how much will depend on the private should return to pre-pandemic levels in 2022. sector’s capacity for taking over from the public On the demand side, recovery in investments should sector. be faster than in consumption, constrained by the Hydrocarbon exports will remain high in impact of higher prices on the real purchasing 2022, generating a temporary current account power of households. On the production side, surplus. In the baseline scenario, hydrocarbon prices recovery should be cross-cutting, based on recovery will remain high in 2022 before progressively falling in in agricultural production, the effect of higher 2023 and 2024, bringing the current account balance investment on industrial sectors and construction, back into deficit. Thus, the value of hydrocarbon and more gradual recovery in the services sector. exports should remain high despite a limited rise The recovery will help improve the labor market, in export volumes. This improvement in external 14 ­ BUILDING RESILIENCE IN FAVORABLE TIMES ALGERIA ECONOMIC UPDATE – balances should help finance a moderate rise in Improving Resilience Would Help imports of equipment and inputs, in support of the Confront Present and Future Risks recovery. Meanwhile, foreign exchange reserves will stabilize at around 12 months of imports of goods and Macroeconomic balances remain dependent on services before gradually falling again. global fluctuations in the price of hydrocarbons. In The marked rise in hydrocarbon revenues the baseline scenario, oil prices fall gradually over the and a prudent budget policy will return the overall projection period. Higher (or lower) than anticipated budget deficit closer to balance. In the baseline prices could have a marked impact on both external scenario, oil revenues in 2022 exceed their pre- and budget balances, as well as on fiscal space and pandemic level (+3.3pp of GDP), while non-hydrocarbon the trajectory of foreign exchange reserves. Thus, revenues remain below (–3.5pp) and expenditure improving macroeconomic balances in the long term only partially catches up (–4.2pp). Thereafter, the would promote resilience to: (i) external shocks, by fall in hydrocarbon export prices should be partially increasing non-hydrocarbon exports and reducing compensated by the rise in non-hydrocarbon revenues, import needs; and (ii) budget shocks, by increasing generating absorbable deficits. In addition, public debt tax revenues, prudent budget behavior, and greater would gradually increase to reach 61 percent of GDP effectiveness, efficiency, and equity in public spending. in 2024. However, these estimates remain dependent The pace and sustainability of the recovery on the trajectory of public expenditure, which could be will depend on the impact of the reform program on revised in the context of the Amending Finance Law the private sector’s capacity to become the engine now being drafted, also factoring in new expenditure of growth. In 2020, the authorities have announced announced in 2022 (unemployment benefits, public a major reform effort to allow the private sector to de- sector salary grid review, etc.). velop over the long term, specifically by improving the The inflation rate should remain high despite business climate as well as the level of competition in the moderating effect of price controls and policies domestic markets. Reforms will include a new law on designed to preserve purchasing power. The rise in investments, reform of public enterprises, opening up global prices will affect the cost of Algerian imports, the capital of two public banks, and promoting non- which should be mitigated by continued subsidies hydrocarbon exports. Acceleration in implementation to basic products. The depreciation of the Algerian of these reforms should help to make the private sec- dinar will also increase the price of imports and the tor the engine of growth and increase the resilience of production costs in industries dependent on imports growth, public finances, and external balances in the of equipment and inputs. In the baseline scenario, the face of shocks in world hydrocarbon markets. limited rise in public expenditure and in the amount of Price rises will continue to pose risks for currency in circulation helps moderate inflation, which purchasing power, requiring calibrated policies. however remains high (see annex 2). In addition, the Inflation threatens to remain high primarily as a result government has again authorized the greater use of of substantial inertia. Given the role of monetary and subsidized cereal products and has intervened to budget policies on inflation (see Annex 2), prudent limit speculation in the distribution chains of essential management of these policies will be required to products, which should also helps moderate the rise contain inflation in the short term. Conversely, a in prices. Moreover, the marked rise in public sector marked rise in liquidity or public expenditure without salaries and the introduction of unemployment any productive compensation could feed into price benefits will contribute to limiting the impact of inflation rises. Ultimately, reforms to increase the level of on purchasing power. This increase could however competition in production and distribution markets contribute to inflation, through second round effects. would moderate inflation in the long term. Outlook and Risks 15 TABLE OF MAIN MACROECONOMIC AGGREGATES Estimation Projections 2017 2018 2019 2020 2021 2022 2023 2024 Output and prices Annual percentage change Real GDP 1.3 1.1 1.0 –5.1 3.5 3.5 1.9 1.8 Non-hydrocarbon sector 2.1 3.0 2.7 –3.9 2.4 3.6 2.0 2.0 Hydrocarbon sector –2.4 –6.4 –4.9 –10.2 10.3 2.7 1.0 0.6 Per capita –0.8 –0.9 –0.9 –6.8 1.6 1.7 0.1 0.0 Consumer price index (period average) 5.6 4.3 2.0 2.4 7.2 9.6 8.2 7.4 GDP (in trillions of current DZD) 18.9 20.4 20.5 18.4 22.0 28.5 29.2 30.9 GDP (in billions of current US$) 170.1 174.9 171.8 145.0 163.0 198.0 190.0 189.0 GDP per capita (USD) 4,077 4,108 3,956 3,306 3,634 4,350 4,106 3,994 Crude oil production (thousand barrels per day) 1,059 1,040 1,023 899 911 1,004 1,015 1,012 Natural gas production (billion of m3) 94.8 95.9 90.3 85.1 105.0 103.1 103.3 103.4 External sector In percent of GDP Current account –13.0 –9.6 –10.0 –12.9 –2.9 5.4 –1.6 –6.5 Trade balance –13.2 –9.0 –9.3 –12.4 –1.6 6.4 –0.6 –5.5 Exports of goods and services 22.2 25.4 22.3 17.2 25.5 30.7 25.8 22.8 Hydrocarbon exports 19.7 22.3 19.3 13.9 21.8 25.6 22.8 20.6 Nonhydrocarbon exports 2.5 3.1 3.0 3.3 3.7 5.1 3.0 2.2 Imports of goods and services 35.3 34.4 31.6 29.6 27.2 24.3 26.4 28.3 Gross official reserves (months of imports)a 19.2 15.7 13.6 13.1 11.2 12.4 11.5 8.4 Exchange rate (Algerian dinar per US$; period average) 111.0 116.6 119.4 126.8 135.1 Sahara Blend export price (US$) 54.1 70.8 63.5 41.4 70.6 Central Government Finance In percent of GDP Government revenue and grants 32.0 33.5 32.2 30.7 29.9 32.0 30.8 29.7 Hydrocarbon revenueb 11.5 14.2 13.0 10.5 11.8 16.3 14.5 13.1 Nonhydrocarbon revenue 20.5 19.3 19.2 20.2 18.0 15.7 16.3 16.6 Tax revenues 13.9 13.3 13.9 14.3 12.5 11.8 12.5 12.9 Non-tax revenues 6.6 6.0 5.3 6.0 5.5 3.9 3.8 3.7 Expendituresc 38.6 37.9 37.8 37.5 33.7 33.6 33.1 32.5 Current expenditures 24.8 26.1 23.9 27.2 24.7 23.6 22.6 21.6 Wages and salaries 11.7 10.6 11.1 12.4 10.7 9.9 9.9 9.6 Purchase of goods and services 1.0 1.1 1.1 0.6 0.8 0.8 0.8 0.8 Interest payment 0.9 0.5 0.6 0.9 0.7 0.7 1.0 1.2 Current transfers 11.1 13.9 11.1 13.3 12.6 12.2 11.0 10.0 Capital expenditures 13.8 11.9 13.9 10.3 9.0 10.0 10.5 10.9 Special Account Balance and Treasury Interventions 1.9 2.4 4.0 5.1 3.4 3.0 3.3 3.5 (continued on next page) 16 ­ BUILDING RESILIENCE IN FAVORABLE TIMES ALGERIA ECONOMIC UPDATE – TABLE OF MAIN MACROECONOMIC AGGREGATES (continued) Estimation Projections 2017 2018 2019 2020 2021 2022 2023 2024 Fiscal balance –6.6 –4.4 –5.6 –6.9 –3.8 –1.6 –2.3 –2.8 Overall budget balance –8.4 –6.8 –9.6 –12.0 –7.2 –4.6 –5.6 –6.3 Primary overall budget balance –7.5 –6.3 –9.0 –11.0 –6.6 –3.9 –4.7 –5.1 Nonhydrocarbon overall budget balance –20.0 –21.0 –22.6 –22.4 –19.0 –20.9 –20.1 –19.4 Total central Government debt 27.0 37.9 45.6 50.7 63.0 55.0 58.7 61.2 Domestic debt 26.3 37.1 44.8 49.9 62.3 54.5 58.2 60.7 External debt 0.8 0.8 0.8 0.8 0.7 0.5 0.5 0.5 a Excluding IMF Special Drawing Rights (SDR). b Includes dividends from Sonatrach and hydrocarbon revenues transferred to the oil savings fund. c In 2018, a transfer to the national pension fund was reclassified from capital expenditures tu current expenditures. Outlook and Risks 17 ANNEX 1: DOES ALGERIA BENEFIT FROM HIGHER GAS PRICES? E xport prices for Algeria’s natural gas follow gaz nat gaz nat PExpm = 0,30*** PExpm–6 + 0,027*** a different trajectory from the gas reference pétrole pétrole gaz nat Pm + 0,041*** Pm–6 – 0,0029 VExpm + 0,33 price on international markets. Although the Henry Hub reference price for natural gas rose gaz nat gaz nat almost 50 percent between Q2 and Q3-2021, the Where PExpm , Pm pétrole et VExpm designate, export price of Algerian natural gas only increased respectively, the price of natural gas (USD/BTU million), 0.5 percent over the same period (EIA, BoA). These the price of crude oil (USD/barrel), and the volume of prices are established contractually, sometimes natural gas (BTU billion) each for month m. The three stars over the long term, and are often based on bilateral next to the coefficients indicate statistical significance of negotiations with buyers. Although there is no public the coefficient estimate at the 1 percent level. information on how the export price of Algerian gas is This modeling demonstrates that a linear determined, it is presumed to be—at least in part—tied combination of these four variables determines to the price of oil (European Commission, 2021) and 79 percent of the level of the price of Algerian adjusted to the latter after a certain lag. natural gas. The estimate of the statistically signifi- It is therefore possible to model the devel- cant autoregressive coefficient confirms a degree of opment of the export price of Algerian natural inertia in the price of natural gas. The positive coef- gas. An ordinary least squares (OLS) regression al- ficient related to the price of oil with a six-month lag lows for the analysis of the empirical relationship be- is higher than that linked to simultaneous prices, thus tween the price of natural gas, the price of oil, and gas translating the reaction lag of export prices for natural production between 2015 and 2021. In this model, the gas. The selection of the amount of lag was dictated price of natural gas is explained partly by its lagged by the model’s R² maximization and does not neces- values, the price of oil (current or lagged), and vol- sarily reflect the contractual clauses for setting prices. umes of natural gas produced. Regression helps esti- With only one value lagged for gas and oil prices, the mate the following equation: amount of lag maximizing R2 is four months. Finally, 19 FIGURE 25 • Recorded and Predicted Export production volumes are negatively correlated to price, Prices for Algerian Natural Gas which reflects not only the impact of a supply-side 7.5 shock on prices such as a fall in production on in- creases in prices or vice-versa but also the impact Prix d'unité (USD par millions de BTU) 7.0 6.5 of prices on demand, specifically through storage behavior. 6.0 This modeling helps estimate a significant 5.5 rise in natural gas export prices in Q4-2021 and 5.0 Q1-2022 and predict that they will remain high 4.5 for the rest of the year. Estimates suggest that the 4.0 export price will reach an average USD 6.4/BTU 3.5 million in Q4-2021 (+12 percent y-o-y), an average 3.0 USD 7.2 in Q1-2022 (+11.9 percent y-o-y). Given that Jul-15 Dec-15 Mar-16 Oct-16 Mar-17 Aug-17 Jan-18 Jun-18 Nov-18 Apr-19 Sep-19 Feb-20 Jul-20 Dec-20 May-21 Oct-21 Mar-22 the price of oil remained high in the first half of 2022, Observed prices Predicted prices it is expected that the export price of Algerian natural gas will also remain high for the remainder of 2022. 20 ­ BUILDING RESILIENCE IN FAVORABLE TIMES ALGERIA ECONOMIC UPDATE – ANNEX 2: IMPACT OF MACROECONOMIC FACTORS ON INFLATION IN ALGERIA Inflation has risen in 2021 and 2022 both globally and constraints on the supply side. This phenomenon in Algeria, but the underlying causes vary depending was reinforced by episodes of devaluation and by on the country. In Algeria, the rise in prices since expansionary monetary and fiscal policies. The 2021 has been driven by food products. A model of proportion of countries with inflation rates in excess the consumer price index since 2009 shows that the of 5 percent thus rose 1/ in emerging and developing depreciation of the dinar, the increase in the price of economies, from less than 40 percent at the beginning imported products, the increase in public spending of 2020 to 71 percent at the end of 2021 (79 percent and the increase in currency in circulation have all for food inflation), as well as 2/ in advanced contributed to inflation. However, the importance economies from less than 1 percent at the beginning of these factors varies according to the category of 2020 to 44 percent at the end of 2021 (27 percent of goods and services, reflecting in particular their for food inflation).33 The debate now centers on the import intensity and the characteristics of the Algerian permanence of this shock and the effect of the war in market in terms of both production and distribution. Ukraine on prices and the availability of food.34 In Algeria, the recent rise in the consumer price index (CPI)35 has been driven by rises in Inflation is on the Rise Both Globally the prices of fresh agricultural and industrial and in Algeria After slowing in the early stages of the COVID-19 33 Reinhart and Von Luckner (February 2022). crisis, global inflation has since picked up. In 34 See World Bank (June 2021, January 2022) and most countries, inflation slowed in the first quarter International Monetary Fund (October 2021, April 2022). 35 The structure of Algeria’s CPI and its constituent goods of 2020 against a backdrop of falling demand and have not been updated since 1990. It is therefore an tumbling energy prices. Subsequently, the recovery in imperfect indicator of consumer prices. This analysis global demand and in commodity prices generated draws on the more detailed consumer price index of the an inflationary surge, despite the moderation of region of Algiers. 21 FIGURE 26 • CPI Growth Has Reached FIGURE 27 • …import Intensity by Sector Historically High Levels… Explains the Recent Dynamics of CPI Sub-Components 12% CPI and inflation and contributions (%, pp) 10% Fresh agricultural products 8% 6% Manufactured food 4% Manufactured goods 2% 0% Services –2% CPI –4% 0% 50% 100% Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Jan-21 Jan-22 Share of domestic consumption Agricultural products Manufactured food Imported products Domestic production, imported inputs Manufactured goods Services Domestic production, domestic inputs Source: National Statistical Agency (ONS). Source: ONS, World Bank calculations. food products. As elsewhere, inflation remained low dynamics must be viewed in light of the respective during the lockdown in response to the pandemic weights of public spending and imports, as well as the before accelerating in the fourth quarter of 2020, long-run relationship between the money supply and reaching 5.5 percent year-on-year in H1-2021 and inflation.37 The analysis is based on monthly inflation 8.8 percent in H2-2021.36 In 2019 and 2020, inflation data between 2009 and 2021. The dynamic relation- in manufactured goods, which represent 40 percent ship between inflation, public spending, the money of the CPI basket, contributed 1.9 percentage points supply, import prices, and the dinar’s exchange rate (pp) to Algeria’s CPI, climbing to 2.6pp in 2021. The was estimated. The analysis was also applied to the contribution of services fell from 0.4pp to 0.3pp, while industrial producer price index (PPI) in the public that of agricultural and food inflation rose from 0.4pp manufacturing sector and its main sub-components in in 2019–2020 to 3.6pp in 2021. This contrasts with the steel, metal, mechanical, electrical, and electronic the two most recent inflation peaks: the 2012 peak (ISMMEE) industries, as well as in food processing in- was driven mainly by the price of fresh agricultural dustries. This model makes it possible to analyze the products and was observed after a sharp increase in portion of inflation variance explained by endogenous public spending, while the 2016 peak was driven by variables at different time horizons (see Figure 28 manufactured goods following a sharp depreciation showing variance decomposition below) and to better in the exchange rate (Figure 26). In a context of rising understand the contribution of the various macroeco- prices globally, the heterogeneity of the degree of nomic channels to inflation in Algeria. import intensity by sector sheds light on the recent The VAR model confirms the role of dynamics of inflation’s sub-components (Figure 27). macroeconomic factors.38 After three months, these An Econometric Analysis to 36 Based on average CPI per semester. Understand Inflation in Algeria 37 See in particular the IMF (2017) analysis on non-food inflation. 38 These data and the following charts use the variance A vector autoregression (VAR) model makes it decomposition produced by the VAR analysis. This possible to identify the macroeconomic deter- decomposition makes it possible to estimate the effect of minants of inflation while taking into account the a shock to endogenous variables on the CPI at different specificities of the Algerian economy. Inflation horizons. The direction of the contribution of the various 22 ­ BUILDING RESILIENCE IN FAVORABLE TIMES ALGERIA ECONOMIC UPDATE – factors explain 12 percent of the inflation variance, consistent with the smaller share of imports in rising to 41 percent after one year and 48 percent after their domestic consumption (Figure 28). two years, suggesting short-term rigidities that delay • Prices of industrial food products react adjustment in prices or the influence of factors outside strongly to external factors but are moderated the model. After two years, changes in nominal public by subsidies. The model explains close to spending and in currency in circulation39 explain 60 percent of the variance in prices and shows 17 percent and 18 percent of the inflation variance, that external factors and public spending play respectively, while changes in exchange rates and in an important role, explaining 32 percent and import prices explain 9 percent and 6 percent of the 18 percent respectively of the variance in inflation inflation variance, respectively. (Figure 29). Goods and Services Categories React Differently to Macroeconomic Factors shocks involving endogenous variables to inflation, discussed in this section, is documented by the impulse The relative importance of the determinants response functions set out in the paper on which this of inflation varies across goods and services summary is based. 39 While the M2 effect is not very noticeable in the categories. To analyze these dynamics, the model estimation results, replacing it with currency in circulation was applied separately to the four categories of significantly improves the performance of the model. The goods and services in the consumer price index: fact that the relationship between M2 and non-food CPI fresh agricultural products (17 percent of the was apparent in the IMF analysis (2017) may suggest CPI), manufactured food products (26 percent), a different relationship between monetary aggregates manufactured goods (excluding food, 40 percent), and food inflation (excluded from the IMF analysis) or, following the 2017-2019 monetary financing program, and services (17 percent): a strong correlation between M2 and public spending or the consequences of the absence of inflationary • Prices of fresh agricultural products respond pressures following the program, which may have altered mainly to domestic demand factors, which is the relationship between M2 and the CPI. FIGURE 28 • Agricultural Prices React More FIGURE 29 • …and Agroindustrial Products to Strongly to Domestic Factors… External Factors, Moderated by Subsidy Policies 100% 90% 100% Decomposition of inflation variance of agricultural product inflation 80% Decomposition of inflation variance 70% 80% of agroindustrial products 60% 50% 60% 40% 30% 40% 20% 10% 20% 0% 1 quarter 4 quarters 8 quarters 0% CPI – Agriculture Import prices Exchange rate 1 quarter 4 quarters 8 quarters Currency in circulation Public expenditure CPI – Agroindustry Import prices Exchange rate Source: World Bank estimates. Currency in circulation Public expenditure Note: The graphs show the contributions of the model’s endogenous variables to the variance of prices 3, 12 and 24 months later. Source: World Bank estimates. Annex 2: Impact of Macroeconomic Factors on Inflation in Algeria 23 The Prices of Manufactured FIGURE 30 •  …while the Model Explains a Minor FIGURE 31 •  Products React Strongly to Share of Fluctuations in Services Domestic Demand… Prices 100% 100% 80% 80% manufactured goods inflation Variance decomposition of Variance decomposition of services inflation 60% 60% 40% 40% 20% 20% 0% 0% 1 quarter 4 quarters 8 quarters 1 quarter 4 quarters 8 quarters CPI – Manufactured products Import prices Exchange rate CPI – Services Import prices Exchange rate Currency in circulation Public expenditure Currency in circulation Public expenditure Source: World Bank estimates. Source: World Bank estimates. • Prices of manufactured consumer goods of the variance in producer prices in these sectors. react strongly to domestic factors. For that This illustrates the effect of the depreciation on the category, the model explains nearly 60 percent of prices of industrial products and thus the cost of the inflation variance and suggests that changes public investment projects, which are largely carried in public spending play an important role in the out by state-owned enterprises, as well as the cost of process, explaining 25 percent of the variance in food subsidies for the Treasury, as state-owned enter- prices over two years. The increase in currency prises produce the majority of subsidized products. in circulation and depreciation also have (Figures 32 and 33). inflationary effects, explaining nearly 30 percent of the inflation variance (Figure 30). Conclusion • Changes in prices of services are more de- pendent on domestic market dynamics. The In the medium term, half of the dynamics of four factors considered by the model explain Algeria’s CPI are explained by a set of quantifiable only one third of this variance, which reflects high macroeconomic factors. External factors (import price inertia in these sectors, which have seldom prices, exchange rate) explain approximately 15 exceeded 5 percent since 2009 (Figure 31). percent of the change in inflation two years later but over 30 percent of the change in industrial food prices, When applied to producer price indices in while strongly affecting producer prices in the public the public sector, the model also makes it pos- sector. Meanwhile, domestic demand factors (public sible to document the effect of import prices on spending and currency in circulation) explain over producer prices, thus inflating public consump- 30 percent of the change in inflation, which suggests tion. The output of state-owned non-hydrocarbon supply constraints that motivate price increases. enterprises is concentrated in the steel, metal, me- This analysis sheds some light on the chanical, electrical, and electronics (ISMMEE) and causes of the current surge in inflation, partly food processing sectors. The depreciation of the di- linked to the COVID-19 crisis. In March 2022, year- nar explains 24 percent and 31 percent, respectively, on-year CPI growth was 9.3 percent, driven in equal 24 ­ BUILDING RESILIENCE IN FAVORABLE TIMES ALGERIA ECONOMIC UPDATE – FIGURE 32 • Depreciation Has a Marked Effect …and those of Agroindustrial FIGURE 33 •  on the Producer Prices of SOEs in Products, Which are Largely the ISMMEE Sectors… Subsidized 100% 100% Decomposition of inflation variance Decomposition of inflation variance 80% 80% of agroindustrial products of agroindustrial products 60% 60% 40% 40% 20% 20% 0% 0% 1 quarter 4 quarters 8 quarters 1 quarter 4 quarters 8 quarters PPI-ISMME Import prices Exchange rate PPI-Agroindustry Import prices Exchange rate Currency in circulation Public expenditure Currency in circulation Public expenditure Source: World Bank estimates. Source: World Bank estimates. IPPI = public sector industrial producer price index; ISMMEE = steel, metal, mechanical, electrical, and electronic industries. measure by rising prices for fresh agricultural prod- The analysis presented here suggests that ucts (fruit and vegetables, meat, and fish), industrial prudent fiscal and monetary policies will limit foods (grains, dairy, and oilseed products), and manu- inflationary pressures. In the medium to long terms, factured products. Variance breakdown analyses illus- structural reforms encouraging a greater degree of trate the impact of: domestic and international competition should also contain price rises. • The increase in currency in circulation during the COVID-19 crisis, particularly on the prices of fresh agricultural products and manufactured products.40 • The larger depreciation of the exchange rate during the COVID-19 crisis, particularly for industrial food products and, to a lesser extent, 40 By restricting the analysis to 2015-2022, the contribution the rise in import prices. of growth in currency in circulation increases significantly. Annex 2: Impact of Macroeconomic Factors on Inflation in Algeria 25 ANNEX 3: SUMMARY OF SPECIAL SECTIONS IN LATEST ALGERIA ECONOMIC MONITOR Fall 2021: Development of Non- Fall 2021: Algeria’s Resilience in the Monetary Poverty and Inequality Face of Risks from Climate Change in Algeria and Natural Disasters The indicator of multidimensional poverty in Algeria Algeria’s territory is exposed to an array of climate improved between 2013 and 2019, reflecting prog- and geological risks—floods, earthquakes, droughts, ress in all areas, including education, health, and liv- forest fires, coastal and soil erosion, etc.—particularly ing standards. Although Algeria reports respectable in urban areas, where there is rapid demographic results in the MENA region and despite notable im- growth and significant concentration of economic provement, multidimensional poverty varies consid- activity. In Algeria, the most common disasters erably according to region and between rural and are floods, while the most significant economic urban areas. The North-Central and North-Eastern losses have been caused by earthquakes. Algeria regions face lower deprivation levels than the rest has a modern, legal framework for disaster risk of the country, whereas the Hauts Plateaux Central management (DRM) as well as a clear framework for region faces higher deprivation. However, the poor- decision-making in terms of emergency intervention est regions experienced more rapid improvement and recognizes the importance of protecting between 2013 and 2019, thus converging with richer strategic infrastructure and critical sectors. Serious regions. Meanwhile, health and education have be- effort has been made to reduce risk, especially in come more important aspects of deprivation, high- the management of emergency interventions and lighting Algeria’s political priorities in terms of human reconstruction though at the expense of prevention. development. Moreover, data sharing is not systematic, leading to 27 inconsistencies, especially in disaster prevention, and Spring 2021: Toward Equitable the application of DRM legislation could be improved. Reform of the Algerian Health Significant effort should also be made toward System reducing the general and inter-sector management of climate-related and disaster risks. The consequences of the COVID-19 pandemic have shown the need for equitable reform of the Algerian Spring 2021: Effects of COVID-19 health system. Although the number of cases and on Inequality in MENA Region and deaths remains low at least officially, the pandemic Algeria has highlighted the limitations of the health system. A dual burden of transmissible and non- The results of surveys conducted in the Middle East and transmissible diseases and limited means suggest North Africa (MENA) region confirm that the poorest that there is a need to strengthen the system. individuals have reported worsening living standards Although it received significant public financial since the onset of the COVID-19 crisis. Despite the lack support and requires relatively little individual of recent data on household wellbeing in Algeria, the expenditure, and although life expectancy and characteristics of vulnerable individuals suggest that non-transmissible disease control are comparable inequalities have also increased. Such individuals are at to peer countries, results in terms of health remain greater risk of contracting COVID-19 or of losing their job below those of middle- and high-income countries, during the pandemic, are least likely to have adequate especially in terms of equity in the health conditions social protection, and risk being disproportionately of mother and child. Physical and human resources affected by the macroeconomic and tax adjustments and better distribution of health coverage are major made in response. Long-term and inclusive recovery challenges. Finally, reduced public financing and will therefore require providing the most vulnerable with falls in capacity endanger the resilience of the the opportunity to recover what they lost. health system. 28 ­ BUILDING RESILIENCE IN FAVORABLE TIMES ALGERIA ECONOMIC UPDATE – BIBLIOGRAPHY Agence Nationale de l’Emploi (ANEM) • ‘‘Importation: Les opérateurs appelés à fournir Statistical data for the ANEM website: February un document attestant de l’indisponibilité des 2022. http://www.anem.dz/ressources/pdf/2022/ produits importés” (Imports: operators required fevrier-2022.pdf. to provide certification that imported products Statistical data for the ANEM website: March 2022. are unavailable). 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