exports have increased significantly, by ALGERIA 16.5 percent (0.7 in real terms). As a result Recent developments of continued deficits and limited capital inflows, the country’s international re- Algeria’s economic growth decelerated in serves declined sharply. Nonetheless, ex- 2017 due to a slight decline in hydrocar- ternal debt remains very low. Overall, the Table 1 2017 bon production and the continued modest current account balance (-14.7 percent of P o pulatio n, millio n 41.1 non-hydrocarbon growth. Real GDP GDP) is indicative of the lack of adjust- GDP , current US$ billio n 173.2 growth in 2017 is estimated at 2.1 percent, ment of imports to the large reduction in GDP per capita, current US$ 4218 a slowdown from 3.3 percent in 2016. This export revenues since 2014. a Natio nal po verty line 5.5 slowdown was mainly driven by weak The unemployment rate increased by al- a Internatio nal po verty rate ($ 1.9) 0.5 growth in hydrocarbon production, which most 1.5 percentage points, reflecting the a Upper middle-inco me po verty rate ($ 5.5) 29.2 is estimated to have decreased by 1.4 per- sluggish non-hydrocarbon growth. It b Gini co efficient 27.6 cent in 2017; a sharp contrast from the stood at 11.7 percent in September 2017, c Scho o l enro llment, primary (% gro ss) 116.2 dynamic start in the first quarter of the an increase from 10.5 percent in Septem- c Life expectancy at birth, years 75.9 year. Meanwhile, growth in the non- ber 2016. Unemployment is particularly Source: WDI, M acro Povert y Out look, and of f icial dat a. hydrocarbon sector remains modest, de- high among educated, youth, and women, Not es: (a) M ost recent value (2011), 2011 PPPs. spite the slight upturn from 2.3 in 2016 to some of which likely reflects a preference (b) M ost recent value (2011). 2.5 percent in 2017. This upturn is mainly to wait for formal sector employment. The (c) M ost recent WDI value (201 5) attributed to the reversal of fiscal consoli- rise in unemployment undermines pov- dation in the second half of 2017. Inflation erty reduction. 10 percent of the popula- remained high (5.5 percent in 2017) down tion is considered vulnerable to fall back A slight decline in hydrocarbon produc- from 6.4 percent in 2016. into poverty and important regional dis- Substantial fiscal deficits as well as double parities persist with some regions featur- tion, which was not offset by higher than -digit external current account deficits ing double (Sahara) or triple (Steppe) the expected public spending, underpinned remain, depleting fiscal savings and re- national rate. The most recent official cal- the growth slowdown in 2017. Addition- serves. Public spending decreased by less culations (2011) placed the national pov- ally, structural challenges constrain than expected due to difficulties in pursu- erty rate at 5.5 percent, with a mere 0.5 ing the 2017 budget target. In fact, a new percent of the population living in ex- growth for the non-hydrocarbon sector government, appointed in May 2017, put treme poverty. Official calculations are and inflation continues to rise. Substan- an end to fiscal consolidation and reverted based on a poverty line estimated to be tial twin deficits remain, depleting official to the previous, high levels of public 3.57 (3.18) USD/day in 2011 PPP in urban reserves. In the medium term, both spending, specifically in housing. As a (rural) areas, which could be perceived as growth and the twin deficits are expected result, fiscal deficit is estimated at 8.2 per- low for an upper middle country cent in 2017. Regarding the external cur- to decline, as the government implements fiscal consolidation. However, in the short rent accounts, preliminary data indicates that imports increased slightly, by 2.7 per- Outlook term, the exclusive use of seignorage to cent (0.5 in real terms) in 2017, signaling finance the fiscal deficit will need careful that the imposition of licenses failed to Growth is expected to recover sharply in curb the volume of imports. Meanwhile 2018 as fiscal expansion takes hold. As management. FIGURE 1 Algeria / Real GDP growth FIGURE 2 Algeria / Algeria’s twin deficits Sources: World Bank Staff estimates and projections. Sources: World Bank Staff estimates and projections. MPO 1 Apr 18 new public investments announced in the the government has so far refused to fi- nance constraints in the short run but 2018 budget are carried out, headline nance its deficit with external borrowing. sends the wrong signals about the intend- growth and inflation will increase. As a The current account deficit is projected to ed reorientation of the economy to be less result, GDP growth is expected to stand at decline slightly to 10.2 percent in 2020. dependent on hydrocarbons and the role 3.5 percent, inflation at 7.5 percent for This level of current account deficit is con- of the state – as outlined in the forthcom- 2018. Yet, GDP growth will struggle to sidered manageable, given the level of ing Vision 2035 report. surpass the 2 percent threshold for 2019- reserves (17 months of imports at end 20 (Figure 1), constituting anemic growth 2017). However, by 2020 this reserves lev- for a middle-income country with a large el could stand at only 5 months of im- youth bulge. While continued strong pro- ports, drawing close to the emerging mar- duction from new oil wells will provide a ket 3 months threshold. The government growth boost, non-hydrocarbon growth is aware that potential reforms to the sub- would bear the brunt of fiscal consolida- sidy system need to be evaluated for pov- tion that the government says could re- erty and vulnerability impacts. commence in mid-2019. However, the temptation to again postpone such consol- idation will be strong, even amid a trajec- tory to a financial crisis triggered by the Risks and challenges use of seignorage to finance fiscal deficit. The twin deficits will further deteriorate The economy is confronted with the chal- in 2018, and the intended reliance on mon- lenges of social discontent, and the man- etary financing is a major concern. In the agement of the newly adopted, non - current fiscal framework (2018-2020), conventional, monetary policy. Firstly, adopted in the 2018 Budget Law, public mounting social discontent regarding the spending will remain very high, and will government’s spending freeze, tax hikes not be offset by a potential increase of and high youth unemployment levels government revenues due to an expected constitutes a substantial risk to the out- upturn in oil price and production. While look discussed above. Some of these social the fiscal deficit will increase in 2018 (11.4 discontents have been at play since the percent of GDP), it is expected to decline beginning of the year, as highlighted by rapidly in 2019-2020 (Figure 2). However, doctors’ strikes in Algiers and other major the persistence of fiscal deficit is expected cities. The adoption of non-conventional to entail substantial monetary creation, as monetary policy has reduced public fi- TABLE 2 Algeria / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2015 2016 2017 e 2018 f 2019 f 2020 f Real GDP growth, at constant market prices 3.7 3.3 2.1 3.5 2.0 1.3 Private Consumption 3.9 3.3 3.6 3.7 2.5 1.5 Government Consumption 3.1 1.3 0.9 1.2 -4.5 -2.5 Gross Fixed Capital Investment 5.7 3.5 0.5 10.5 -6.9 -5.6 Exports, Goods and Services 0.6 7.9 0.7 1.8 2.3 2.2 Imports, Goods and Services 6.4 -3.0 0.5 6.5 -8.2 -6.0 Real GDP growth, at constant factor prices 3.7 3.4 1.9 3.4 2.0 1.4 Agriculture 6.0 1.8 2.5 2.5 2.7 2.3 Industry 1.8 6.2 3.4 4.2 1.8 1.0 Services 4.3 2.3 0.9 3.1 2.0 1.4 Inflation (Consumer Price Index) 4.8 6.4 5.5 7.5 8.1 9.0 Current Account Balance (% of GDP) -16.5 -15.6 -14.7 -16.1 -12.7 -10.2 Fiscal Balance (% of GDP) -17.5 -15.7 -8.2 -11.4 -5.2 -1.9 Debt (% of GDP) 19.1 32.5 26.9 39.4 42.1 41.3 Primary Balance (% of GDP) -16.8 -14.9 -6.9 -10.3 -3.6 -0.2 So urce: Wo rld B ank, P o verty & Equity and M acro eco no mics, Trade & Investment Glo bal P ractices. No tes: e = estimate, f = fo recast. MPO 2 Apr 18 MPO 3 Apr 18