IMF urges Algerian monetary, subsidy reforms to ease oil price impact

 21 Mar 2017 - 19:30

IMF urges Algerian monetary, subsidy reforms to ease oil price impact
A preliminary report of the IMF mission also warned against the risk of oil price shock, which has increased liquidity, interest rate and credit risks.

By Hamid Ould Ahmed / Reuters

ALGIERS: The International Monetary Fund is urging Algeria to tighten its monetary policy, open up further to foreign investment and reform its subsidy system to help cope with a decline in energy revenue, an IMF official said.

Jean-Francois Dauphin, the head of an IMF mission who held talks with Algerian officials, also called for the OPEC member to avoid “abrupt” spending cuts, allow a greater role for its private sector and reduce reliance on energy.

“It is important to avoid an abrupt reduction in the deficit of public finances in order to mitigate the risk of a very sharp slowdown in growth,” state radio cited Dauphin as saying.

A sharp fall in energy earnings has significantly hit the state finances in Algeria. Oil and gas income make up 94 percent of export revenue and 60 percent of the budget.

The North African country of 40 million people has approved a 14 percent cut in spending for this year after a 9 percent reduction in 2016, as part of a “rationalisation” policy to cope with falling oil prices.

A preliminary report of the IMF mission also warned against the risk of oil price shock, which has increased liquidity, interest rate and credit risks.

The report recommended “to accelerate the transition to a risk-based supervisory framework, enhance the role of macro-prudential policy, strengthen governance of public banks and develop a crisis resolution framework”.

Dauphin, who spoke late on Monday after a two-week-long annual visit to Algeria, also suggested a “gradual replacement of energy subsidies by direct support to the most disadvantaged.”

Algeria’s government subsidies almost everything from food and medicine to energy, but in 2016 it approved increases for diesel and gasoline, gas and electricity prices. Prices for gasoline and diesel increased further this year.

Th energy price increase was part of measures to ease pressure on state finances, including import restrictions and delays for infrastructure projects.

Algeria has been struggling to domestic production, which has been curtailed by bureaucracy, an underdeveloped banking system and a lack of foreign investment. Algerian law limits to 49 percent the stake a foreign investor can hold in any project.

The IMF mission chief suggested a “strategic softening” of the rule governing foreign investment, according to the state radio.

He also urged the government to consider other options, including “external borrowing and freeing the private sector”.  Algeria this year obtained a $1 billion loan from the African Development Bank, the first foreign loan in more than a decade.

(Reporting by Hamid Ould Ahmed, editing by Larry King; editing by Patrick Markey)