Christine Lagarde, Managing Director, IMF, on ensuring continued stability

Christine Lagarde, Managing Director, IMF

 

Algeria’s economy has performed well over the past decade, often in the shadow of global uncertainty. Sensible macroeconomic policies, especially in managing oil and gas revenues cautiously, have helped Algeria navigate the global crisis as well as regional disruptions. Yet the goal of continued stability — and certainly the hope for more broadly shared growth — cannot be assumed or taken lightly.

Today we see pressures that will test stability. The advanced economies are still struggling to remove the shroud of crisis. Financial conditions may have stabilised, but the real recovery is still too timid, growth still too sluggish. This is unlikely to provide the most fertile ground for continued strong prices or export growth in Algeria’s oil and gas sector, and policy will need to be able to guard against this risk.

The economic tests to Algeria’s stability are not all external. Some pressures are emerging at home. Inflation has been on the rise, reaching nearly 9% in 2012, a 15-year high. And the weaker fiscal position has raised concerns about sustainability. Each is worrying in its own right, even more so when so many Algerians are out of work. These pressures risk undermining growth and, along with it, the jobs people need. Those who are already vulnerable will be the ones most harmed if inflation is not kept in check. Inflation has been called the worst “tax” on the poor. So, macroeconomic stability is absolutely essential. It will take the right combination of policies to tackle inflation. Fortunately, steps in the right direction have already been taken, both with the 2013 budget and the decision to tighten monetary policy in May 2012.

Still, securing the goal of lower inflation will not be easy and other actions will be needed. I am thinking particularly of further monetary policy tightening, as well as resisting any added pressures to increase the government’s current expenditures. Easing supply-side constraints will also help, both to reduce inflation and foster competition. The government’s intention to move toward better and more sustainable fiscal policies is also important. A primary objective should be to reduce Algeria’s vulnerability to fluctuating commodity prices and set aside savings for future generations.

The oil and gas sectors have served Algeria and the national economy well, yet the country’s reliance on hydrocarbons is almost unparalleled. Oil and gas account for around 40% of total GDP, 98% of Algeria’s exports and about two-thirds of budget revenues. At the same time, these sectors only provide jobs for about 2% of the workforce. The issue is how best to use these natural blessings to spark lasting and inclusive growth that creates good jobs for all Algerians.

Real successes are often born of harmonious partnerships. This means having a vibrant private sector alongside a responsible public sector. It means opening up to reach out to global markets and to also let some of the world in — for investment, trade and expertise. It means creating a more diverse economic structure where many sectors enrich the overall economy. This type of transformation will not happen overnight. Alongside macroeconomic stability, I see two other policy dimensions that will help build a stronger and broader private sector: improving the business environment, facilitating access to finance, and encouraging greater openness and integration.

Algeria’s most precious asset is its people. Growth that includes them, growth that cultivates the jobs that people need, can in turn yield growth for the years ahead. This hinges on putting in place modern and transparent institutions to encourage accountability and good governance, promoting public responsibility and fair treatment for businesses and individuals.

There are two other critical elements: creating jobs and protecting the most vulnerable. Algeria has come a long way from a decade ago when youth unemployment exceeded 50%. Compared to many countries, Algeria’s unemployment rate has been moving in the right direction. Coupled with policies to support a more dynamic private sector, labour market reforms will help generate the job opportunities that Algerians need.

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The Report: Algeria 2013

Economy chapter from The Report: Algeria 2013