Strong growth in hydrocarbon production and higher than expected public spending underpinned solid growth in early 2017. However, structural challenges constrain non-hydrocarbon growth and inflation continues to rise. Substantial twin deficits remain, depleting fiscal savings and reserves. In the medium term, growth and the twin deficits are expected to decline as the government implements fiscal consolidation. Associated subsidy reforms will need careful management to protect poverty reduction achievements.
Recent Developments
Despite low global oil prices, Algeria’s economic growth got off to a strong start in 2017. Real GDP growth is estimated to have grown by 3.7 percent in the first quarter, mainly driven by strong production in the hydrocarbon sector, which grew by 7.1 percent. Growth in the non-hydrocarbon sector slowed down to 2.8 percent from 4.0 percent during the same period in 2016. The decline has been particularly marked in the manufacturing sector, where growth fell to 3.9 percent compared to 5.1 percent in the first quarter of 2016; corresponding figures for agriculture are 3.0 and 4.8. Inflation is now above 6 percent for the year, so far.
Substantial fiscal and double-digit external current account deficits remained, depleting fiscal savings and reserves. Public spending decreased by less than expected due to difficulties to pursue the 2016 budget target of a 9 percent expenditure cut and this pattern carried over to 2017. On the external front, preliminary data indicates that imports slightly declined by 0.14 percent in the first quarter of 2017 due to new import licenses to curb the current account deficit, while exports have significantly increased (by 35.3 percent). With continued deficits and limited capital inflows, international reserves (while still ample) declined rapidly, while external debt remains very low. Overall, the current account balance (-13 percent of GDP) is indicative of the lack of adjustment of imports to the large reduction in export revenues since 2014.
