Algeria Financial Story- Required Reforms IMF Says

Algeria has enjoyed a period of "macroeconomic stability" with "satisfactory" economic performance this year. However, "the economy continues to perform below its potential" and there is still a need for reform, the International Monetary Fund (IMF) has said in a report.

Algeria Financial Story- Required Refroms IMF Says

After conducting a mission to the country, the IMF has asked Algeria to accelerate "private sector-led growth" in order to reduce economic "dependence on hydrocarbons" and create new jobs. Hydrocarbon production continues to decline in Algeria, while at the same time domestic consumption of hydrocarbons remains strong, weighing on exports. As a result, the IMF said that to reverse the fall in exports, there is a need for "more investment to increase hydrocarbon production, measures to reduce domestic hydrocarbon consumption, and efforts to diversify the export base."

Algeria's national oil and gas company, Sonatrach, dominates the country's hydrocarbon sector, owning roughly 80 percent of all hydrocarbon production, the US Energy Information Administration (EIA) has reported, adding the country had 12.2 billion barrels of proven oil reserves as of January 1, 2013.

According to the IMF, reforms are also needed in the hydrocarbon sector "to improve the business climate, remove constraints to foreign investment, promote international trade integration, and equip the workforce with needed skills." The Algerian government has already approved amendments to a hydrocarbon law that included fiscal incentives for foreign companies to invest in untapped exploration areas, particularly off shore and in areas with potential resources.

To have a more balanced economy, Algeria should also adopt a policy of fiscal consolidation that would help develop non-hydrocarbon revenue. The IMF praised Algeria for its austerity measures, which will probably result in a balanced budget this year, after the deficit registered in 2012. However, there are still concerns about the long-term fiscal sustainability of the country. "Further fiscal consolidation should be pursued and should aim to strengthen non-hydrocarbon revenue, contain current expenditures, and maintain public investment, which is critical for growth", the IMF suggested. For example, the country should use a method to estimate oil prices, so that it can better manage "revenue volatility stemming from fluctuating commodity prices."

The country has been sensitive to oil-price changes in the past. Algeria produced 1.87 million barrels per day of total petroleum liquids last year. Its three largest oilfields (Hassi Messaoud, Ourhoud, and Hassi Berkine) contribute about half of total crude oil production, which averaged 1.25 million barrels per day in 2012. According to the EIA, "the vast majority of Algerian crude oil exports, roughly 85 percent, are sent to Europe and North America," with the United States being the single largest destination.