I was in Algiers last week, my first time as the Managing Director of the IMF. It was a good visit: we reaffirmed the special partnership between Algeria and the IMF, and I was able to gain a deeper insight into Algeria's aspirations -- and also its challenges in reaching a hopeful future.
A true partnership
As partners, we listen to each other on many levels. On the morning of my arrival in Algiers, the IMF team had conducted a seminar with government and business representatives to discuss the findings of our recent annual check-up of the economy, known as an Article IV report.
I continued that dialogue with my many interlocutors: President Bouteflika and other senior officials including Prime Minister Abdelmalek Sellal, Finance Minister Karim Djoudi, Governor of the Banque d'Algérie Mohammed Laksaci, as well as academics, business people and representatives from civil society.
I particularly enjoyed a breakfast with a group of women leaders, which included politicians, film directors, NGOs and businesswomen. They all spoke passionately about their lives, their commitment, and their hopes for their country. Huge talent!
Our partnership with Algeria is reciprocal in many ways. In the 1990s, during difficult times, the country borrowed from the IMF. Today it is a creditor. I thanked the authorities for Algeria's U.S. $5 billion pledge the IMF's global firewall -- an investment that we will guard well and repay with interest if the funds are used.
That Algeria is in a position to support the global effort to contain the crisis is in part due to its capable management of its oil and gas windfall. This has resulted in high foreign exchange reserves and economic stability.
Yet the goal of continued stability -- and certainly the hope for more broadly shared growth -- cannot be taken lightly. Everybody I spoke to in Algiers agreed the country needs a more open and diverse economy to create a bigger pie, and to ensure that all Algerians get their fair share in it.
So what are the priorities for generating more inclusive growth?
Ensuring economic stability
Steady growth, and low fiscal and external deficits and debt levels are core building blocks for future prosperity. On all of these counts, Algeria's economy has performed well over the past decade, and often in the shadow of global uncertainty.
However, inflation has been on the rise, reaching nearly 9 percent last year -- a 15‑year high. The causes have been wage hikes that exceeded productivity increases, and relatively accommodative monetary policies. Such pressures risk undermining growth and hurting the most vulnerable. It's no accident that inflation has been called the worst 'tax' on the poor.
Fortunately, steps in the right direction have already been taken: this year's budget contains demand pressures on prices as it keeps the rise of current spending and public wages in check, and last year's decision to raise the required reserves rate as well as the liquidity absorption will help. Still, further monetary tightening may be necessary.
Building a vibrant private sector
Oil and gas have served Algeria well. In fact, the country's reliance on hydrocarbon is almost unparalleled: it accounts for around 40 percent of total GDP, 98 percent of exports, and two-thirds of budget revenues. But only about 2 percent of the workforce is directly employed by the sector.
This cannot provide a lasting basis for jobs or rising living standards for the wider population. The issue therefore is how best to use Algeria's vast natural blessings to spark lasting and inclusive growth that creates good jobs for all.
The answer, I believe, is a vibrant private sector that works hand-in-hand with government. Indeed, many of the businesspeople I met in Algeria spoke of their country's huge potential in agribusiness, industry and services such as tourism and trade. Now is the time to open up to reach out to global markets and to also let some of the world in -- for investment, trade, and expertise. In our discussions, we identified some of the steps that can be taken to improve the business environment, from the reducing red tape to changing the rules for foreign ownership. It will take time to fundamentally change the business climate, but a start can be made now.
Reforming the labor market
Stability ultimately hinges on providing jobs, especially for those first entering the labor market. Here Algeria has come a long way: while a decade ago youth unemployment stood at more than 50 percent, it has since dropped to 20 percent -- still unacceptably high, with many more young adults soon to be looking for work. So, reforming the labor market is essential for sustainable job creation.
Some might think that, coming from the IMF, labor market reform means pay cuts. Well, the world has changed and the IMF has changed. The bigger issue in Algeria is that too many people rely on the government as the employer of choice. Mindsets need to change. The next generation of Algerians also should aspire to be doctors or lawyers or engineers, and to run their own businesses.
Government policies can give them a helping hand.
One step, for example, would be changing laws and regulations that make it hard for private businesses to employ people. More active labor market policies -- such as jobs-based training for young graduates or job placement programs -- can also help, particularly with better matching worker skills to the needs of the labor market.
Protecting the most vulnerable
Like in many countries, prices for certain goods and services in Algeria are subsidized by the government, which means they are made cheaper than they should be. This is very costly and does a bad job of supporting those truly in need.
For gasoline and gas alone, implicit subsidies provided by the government may be as much as 12 percent of GDP. The main beneficiaries are the well-to-do who consume energy more heavily, for example because they drive bigger cars. At the same time, subsidies steal precious resources away from other government spending priorities, including on health, education, and infrastructure.
This problem cannot of course be tackled over night. As a first step, subsidies should be made explicit and better targeted to the people who really need them.
Creating a more prosperous and more inclusive Algeria will take time. And, at times, the way forward may not be easy. In this, Algeria is not alone. Some of the issues I have mentioned -- inclusion, jobs, a more flourishing private sector, subsidy reform to better help the truly needy -- are just as pressing for other countries in the region.
We all must do our part to tackle these challenges together. Our partnership with Algeria, built on the kind of constructive dialogue that I had there last week, is a good basis to do so.
From iMFdirect blog