Algeria - Economic Reform Support Loan Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 13301 PROGRAM COMPLETION REPORT DEMOCRATIC AND POPULAR REPUBLIC OF ALGERIA ECONOMIC REFORM SUPPORT LOAN (ERSL) (LOAN 3117-AL) JULY 1, 1994 Country Operations Division Country Department I Middle East and North Africa Regional Office This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS Official exchange rate: Dinar (AD) per US$ eriod End of Period Period Averaae 1988 6.731 5.915 1989 9.032 7.609 1990 12.191 8.958 1991 21.392 18.473 1992 22.781 21.836 FISCAL YEAR OF BORROWER January 1 - December 31 FOR OFFICIAL USE ONLY THE WORLD BANK Washington, D.C. 20433 U.S.A. Office of Director-General Operations Evaluation July 1, 1994 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Program Completion Report on Democratic and Popular Republic of Aleria - Economic Reform Suoort Loan (ERSL) (Loan 3117-AL/ Attached is the Program Completion Report on Democratic and Popular Republic of Algeria - Economic Reform Support Loan (ERSL) (Loan 3117-AL). Parts I and IlIl were prepared by the Middle East and North Africa Regional Office. Part 11 has not been received from the Borrower. The main objective of the program was to restore sustainable economic growth, with stability, while creating job opportunities and protecting the most vulnerable groups in society. The primary focus of the proposed action plan was a gradual transformation of the centrally planned economy into a more decentralized, market-oriented system. By the time of Board approval of the ERSL, in August 1989, Algeria had already initiated reform measures in the agricultural sector, with the transformation of state farms into medium- and small-size private farms. With the ERSL, the scope of the reform efforts was widened to cover a broad range of issues across the economy. The policy measures stipulated in the ERSL were implemented as agreed, except for the transformation of public enterprises into autonomous Economic Public Enterprises: this condition was waived for second tranche release, because the process was ongoing, though with some delay. The economic reform program, however, did not achieve its main objectives. While the Bank had reviewed the sensitivity of projected outcomes to external shocks, especially to a decline in oil prices (as it turned out, oil prices exceeded base case projections), the existing stock of external debt had been under-reported by a large margin. The higher than expected debt service squeezed imports and thereby constrained GDP growth. In addition, the action program in the public enterprise sector did not immediately address some of the key issues, i.e. redundant labor and unviable firms. The net result was a major shortfall in achieving the fundamental objectives of the program. GDP grew little and unemployment rose sharply. Value added declined in all sectors, except for agriculture, hydrocarbons and public administration. The outcome was unsatisfactory. The program also proved to be unsustainable: trade restrictions were again intensified in 1992 and rationing of domestic credit and of foreign exchange increased. On the other hand, the program did make a substantial contribution to institutional development in several areas, including the restoration of the banking system to a more traditional role, price liberalization and the abolishment of import monopolies. The PCR provides a very good assessment of the strengths and weaknesses of the operation. The continuing severe economic crisis and associated political instability interrupted the execution of Algeria's reform program during most of 1993. However, by early 1994 efforts were resumed to restore the momentum of the reform program in cooperation with both the IMF and the Bank. A follow-up operation, the Enterprise and Financial Sector Adjustment Loan (EFSAL), was approved by the Board on June 21, 1991. OED will audit the ERSL and EFSAL jointly. Robert Picciotto by H. Eberhard Kbpp Attachment This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  FOR OFFICIAL USE ONLY PROGRAM COMPLETION REPORT DEMOCRATIC AND POPULAR REPUBLIC OF ALGERIA ECONOMIC REFORM SUPPORT LOAN (LOAN 3117-AL) TABLE OF CONTENTS PREFA C E .. ....... .................. ....... .... ...... .. ...... . i EVALUATION SUMMARY ........................................... iii PART 1: THE BANK'S ASSESSMENT OF THE ERSL ......................... 1 A. BACKGROUND. ...........................................1 B. THE PROGRAM SUPPORTED BY THE ERSL ....................... 4 C. THE EVALUATION ........................................ 8 Macroeconomic Framework ................................... 8 Sectoral Growth ........................................... 14 Employment ............................................. 17 Lessons Learned from the ERSL ................................ 18 D. PROCUREMENT AND MONITORING ............................ 19 E. UPDATED ERSL POLICY MATRIX .............................. 20 PART II: THE BORROWER'S ASSESSMENT OF THE ERSL .................... 34 PART III: STATISTICAL ANNEX ...................................... 34 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.I  - i - PROGRAM COMPLETION REPORT DEMOCRATIC & POPULAR REPUBLIC OF ALGERIA ECONOMIC REFORM SUPPORT LOAN (ERSL) (LOAN 3117-AL) PREFACE The Economic Reform Support Loan (ERSL) to Algeria was approved by the Board on August 31, 1989, for an amount of US$300 million. The loan was closed nine months behind schedule on September 30, 1992. On that date an amount of US$1.55 million remained to be disbursed. A further amount of US$0.3 million was disbursed on December 31, 1992, for goods shipped prior to the closing date. This Program Completion Report (PCR) was prepared by the Country Operations Division of the Middle East and North Africa Regional Office (MN1CO). On December 8, 1992, the Bank sent a letter to the Borrower with a formal request to submit Part II. As yet, Part II has not been received. Preparation of this PCR was started during the Bank's supervision mission of the ERSL in October 1992. The basic information is drawn from the President's Report (P-5114-AL), the loan agreement, supervision reports, internal Bank papers and documents provided by the Algerian authorities. The PCR has also benefitted from numerous discussions with Algerian officials and industrialists, as well as with Bank and IMF staff members who had been involved with the implementation of the Algerian adjustment program.  - III - PROGRAM COMPLETION REPORT DEMOCRATIC & POPULAR REPUBLIC OF ALGERIA ECONOMIC REFORM SUPPORT LOAN (ERSL) (LOAN 3117-AL) EVALUATION SUMMARY In the two decades following independence, Algeria followed a policy of heavy industrialization based on central planning. The Government took advantage of the increase in oil prices in the late seventies to raise investments from one third to nearly one half of GDP. But, in spite of a booming hydrocarbon sector and huge investments, real GDP increased by only 6% a year in the seventies and 5% in the first part of the eighties. The economy became increasingly dependent on the hydrocarbon sector which accounted for 97% of export earnings and 44% of government revenues in 1984-1985. As long as oil prices remained high, the inefficiencies of the system could be covered up, but the situation changed dramatically with the collapse of oil prices in 1986. The drawbacks of central planning appeared most clearly in the case of agriculture, which helps explain why the first liberalization measures were taken in this sector. The transformation of state-farms into medium- and small-size private farms in 1988 was the first major change. The reformers, who came to power in that year, understood that the entire Algerian economy had to be liberalized in order to restore growth and serious negotiations were initiated with the Fund and the Bank. The IMF stand-by approved by the Board on May 31, 1989, was, however, limited to the first credit tranche, which implies limited conditionality. The Economic Reform Support Loan (ERSL) approved by the Bank Board three months later supported a progressive liberalization of the economy and covered a wide range of reform measures. The program supported by the ERSL aimed at progressively eliminating the main sources of price distortions and creating an institutional environment hospitable to private enterprises. It was regarded by the authorities and Bank staff concerned as the first in a series of adjustment operations which would support the transition of the economy to a market basis. Most national public enterprises were transformed into autonomous Economic Public Enterprises (EPE) which had to operate on the basis of commercial laws. Import monopolies were, in principle, abolished and prices, which had been administratively determined, were liberalized for items accounting for about half of the weight of goods covered in the consumer price index (CPI). The banking system, which had largely been used as an accounting office for the Government, was set on a path toward its normal function of financial intermediation and the Central Bank became responsible for the formulation and monitoring of monetary policies. The expansion of the supply of money and credit and the increase in the CPI remained within the limits established in the 1989 and 1990 monetary programs. Labor contracts, which were previously determined centrally, became negotiable at the enterprise level. In brief, the measures stipulated in the ERSL were generally implemented to the satisfaction of the Bank and the second tranche was released approximately one year after the loan became effective. On this basis, it could be said that the program was implemented - Iv - in a satisfactory manner. However, the more fundamental objectives of the program were not fully achieved. Real GDP was projected to increase by 5% on average from 1989 to 1995; instead, growth averaged only about 1.6% per annum between 1989 and 1992. The debt- service ratio was projected to fall from 67% in 1988 to 50% in 1990, and to remain at about this level in the two following years; instead, it rose to 74% in 1991 and is estimated to have reached 79% in 1992. Unemployment rose sharply, particularly among the population below 30 years of age. The high expectations built up in the seventies and the early eighties remained unfulfilled, resulting in a widespread dissatisfaction that has been exploited by the political opponents of the regime. In conclusion, despite the important progress achieved in implementing reform, the economic crisis remains severe. To a significant extent, the failure to restore growth is a result of the fact that the debt problem turned out to be more serious than foreseen on the basis of data available at the time. The authorities were not aware of about US$5 billion of external debt, much of it of short maturity. This underestimation of the debt stock was, in a sense, a negative external shock, offsetting other positive shocks. When the sensitivity of the projections to external shocks was assessed in documents submitted to the Boards of the Bank and the Fund in 1989, the staff of each institution indicated that the major external risk was a sharp decline in oil prices from levels assumed in the base projections. World oil prices, in fact exceeded projected levels, in particular in 1990 as a result of the Gulf crisis, and actual export earnings exceeded the base projections by US$6 billion in nominal terms over the 1988-91 period. However, the debt service burden was much higher than expected, which also affected Algeria's ability to attract new external financing. At the same time, the country was hit by another adverse external shock -- the fall in the value of the dollar which increased the dollar value of the debt and reduced the purchasing power of hydrocarbon exports. As a result, the volume of imports declined sharply after 1989. By 1991, imports, in both value and volume terms, were well below the levels projected in 1989. This compression of imports hindered the ability of the economy to respond to economic reforms. Another important factor was the apparent underestimation by policymakers of the internal adjustment difficulties likely to be encountered in shifting from central planning to a reliance on market forces, and for building up a diversified economy from one financed almost exclusively from oil and gas. It is also relevant that the ERSL was negotiated before the fall of the Berlin wall, when the Bank had only limited experience in addressing the problems encountered in liberalizing centrally planned economies. A major lesson learned from the experience of the ERSL is the importance of quality external debt data. It is doubtful that the program would have met the test of financial viability, had staff known the true magnitude of the external debt stock. Another lesson is the importance of assessing terms of trade risks associated with large movements in major currencies, especially for primary commodity exporting countries. A third lesson, of course, is that social and political factors are an important consideration, and an important risk, in economic adjustment. PROGRAM COMPLETION REPORT DEMOCRATIC & POPULAR REPUBLIC OF ALGERIA ECONOMIC REFORM SUPPORT LOAN (ERSL) (LOAN 3117-AL) PART 1: THE BANK'S ASSESSMENT OF THE ERSL A. BACKGROUND 1. Shortly after gaining independence, Algeria adopted a socialist growth model emphasizing heavy industrialization. On the one hand, substantial resources were devoted to education and basic health care; on the other, the labor force thus upgraded was provided with modern, publicly owned factories and the infrastructure was improved. This model was applied with great enthusiasm under President Boumedienne (1965-1978); it was seen as the fast track for developing the economy. 2. The 1974 oil price boom was perceived as an opportunity for accelerating the industrialization process. The ratio of investment to GDP was raised from one-third in 1970-1973 to almost one half in 1976-1979. With such a high ratio and an incremental capital-output ratio averaging 4, real per capita GDP should have quadrupled from 1976 to 1992. However, in actuality, the annual growth rate of per capita GDP declined from about 3% during the seventies to 2% during the first half of the eighties, and it fell to about minus 2.2% over the period of 1986 through 1992. 3. Before the end of the seventies, it became clear that the high expectations built up earlier could not be fulfilled. The drawbacks of central planning appeared most clearly in the case of state-farms which accounted for the major part of Algeria's agricultural potential. In spite of large government investments in the state-farm sector, production and yields were not improving and Algeria's dependence on food imports was rapidly increasing. The time- lags required for completing large public investment projects also became unduly long, notably regarding housing, which meant that capital was immobilized for long periods without generating any return. Moreover, most of the new industrial plants were running substantially below capacity. For all these reasons, the incremental capital-output ratio became abnormally high.' 4. As occurred in most oil exporting countries after the tripling of oil prices, a number of individuals accumulated wealth rapidly, which was resented by the population. The initial enthusiasm for building up a modern socialist state faded progressively and the manner in which the oil bonanza was redistributed became the object of more frequent recriminations. 5. In an attempt to satisfy the most pressing demands, a complex system of taxes and subsidies was progressively established. This created various sources of price distortions which were exploited by operators on the black market, known as "trabendo". On the one it The ICOR calculated as the average of the current and four preceding years Increased from 7 In 1983-86 to 19 In 1988 and reached 194 In 1990 in view of the stagnation in real GDP after 1986 (Statistical Annex, Table 3). -2- hand, a number of items were unavailable on the official market despite the large inflow of petro-dollars going into the Central Bank. On the other hand, real interest rates were negative and the money supply was abundant. The combination of a money overhang with commodity shortages helps explain why the discrepancy between the parallel and the official market exchange rates increased steadily until 1985, when the price of the dollar was five times higher on the parallel market than on the official one (see Figure 1). Such a divergence was enormous for a country earning up to one-third of its GDP (equivalent to about US$600 per capita) from exports of oil and gas. 6. As long as oil prices remained high, the inefficiencies of the system could be covered up. After the collapse of oil prices in 1986, these inefficiencies became obvious. From 1985 to 1987, imports had to be cut by one quarter in current dollars and by almost one-third in volume terms. This reduction not only adversely affected investments and the consumption of imported consumer goods; it also reduced the level of activity of domestic industries which became starved of imported inputs and spare parts. As a result, unemployment increased and per capita consumption declined; this generated widespread dissatisfaction which was politically exploited. 7. In order to find a viable equilibrium, two options were to be considered: - one was to tighten controls; the other was to eliminate the sources of price distortions by liberalizing the economy. A group of reformers favoring the second option came to power in June 1988; they worked out a program which was supported by the IMF and the World Bank in 1989 (Table 1). The Economic Reform Support Loan (ERSL, Loan 3117-AL), which is the object of the present completion report, was approved by the Bank Board in August 1989.2 TABLE 1: STRUCTURAL ADJUSTMENT PROGRAMS SUPPORTED BY THE WORLD BANK AND THE IMF Type of Program Date of Approval Amount Committed by the Board in millions of SDR US$ IMF Stand-by 5/31/89 155.7 IMF Compensatory 5/31/89 315.2 Financing Facility ERSL 8/31/89 300 IMF Stand-by 6/03/91 300.0 IMF External 6/03/91 150.0 Contingency Mechanism EFSAL 6/21/91 350 1' The first tranche was released at the time of effectiveness on 12/13/89 and the second on 10/26/90. -3- FIGURE 1: OFFICIAL EXCHANGE RATE AND RATIO BETWEEN OFFICIAL AND PARALLEL RÅTES .. .. . . I .. .. . . .. . .. . .. ... e . . . YENTRL - 187.8 r 98 Jr asE18 5 .-- . ··.. --- -... . ~ ---... .-..... .-- . ...... - . · -.....÷ - ....... ---.. a . ... .... ........ ....... ............... ........ ...... 76 77 78 79 80 81 82 83 86 85 88 87 8 ; MONTELY - JAå. 1989 thru JUå 1992 t 2 0 ······ ~ --. . -. ------- --..... .-. ---------........... . --........ -..... . . ... -.... . .. ........... • 15 ..- --------------- ··. .------ -. .. . ..---------........ --........... 10.........-- - .-----.... -.-. .-.-- S a Jan tes Jan usso Jatn iM0 Jan 1 8 -4- 8. Although the first liberalization measures were taken in agriculture (see para. 11), the Bank decided to support the program with a structural adjustment operation rather than sector adjustment loan. This decision was based on an agreement with the authorities that the economy was in need of broad-based reform. In order to support the emergence of a strong supply response to the adjustment and reform program, the Bank's strategy encompassed a substantial investment lending component for projects in agriculture (including large-scale irrigation and agricultural credit), infrastructure (notably transportation and water supply), and the social sectors (particularly vocational training and higher education). The strategy also included a Technical Assistance Project (Loan No. 31 76-AL) to strengthen the key institutions administrating the economic reform program, notably the Ministry of the Economy and the Central Bank. 9. Significant progress was achieved under the ERSL, but the political situation became increasingly difficult and the reformers believed that the only way to liberalize the economy was to act rapidly. Accordingly, in the early part of 1991, they worked out a program of accelerated reforms aimed at restructuring the public enterprise and banking sectors, liberalizing external trade, unifying the official and parallel foreign exchange markets, and establishing convertibility for most current account transactions. This program was supported by a second IMF standby and a second World Bank adjustment loan, the Enterprise and Financial Sector Adjustment Loan (EFSAL, Loan 3352-AL). The decision to proceed with the EFSAL despite the turbulent political situation was justified by the urgent need to accelerate economic reform and restore growth. However, by the time the EFSAL became effective in July 1991, the original group of reformers had already lost power. In the work program approved by the new Government in September 1992, currency convertibility remained the ultimate objective, but an objective to be achieved only after 1995 and, in the meantime, trade and exchange controls were to be strengthened. Preservation of social peace and security had become the immediate concerns. B. THE PROGRAM SUPPORTED BY THE ERSL 10. The first IMF program, approved by the Board on May 31, 1989, provided Algeria with cash disbursements equivalent to US$586 million, of which two-thirds under the Compensatory Financing Facility and one-third under a first credit tranche stand-by. Since the entire amount was disbursed at once following Board approval, the IMF program did not include any binding performance criteria; it only provided macroeconomic targets for the year 1989. These targets were retained in the letter of Development Policy supporting the ERSL request. That letter specified the measures which had to be implemented before each of the two ERSL loan tranches could be released. In addition, yearly projections covering the period 1990 through 1995 were given in Annex I of the President's Report. 11. The approval of the ERSL by the Bank Board on August 21, 1989, followed a long dialogue between the Bank and a group of advisers to President Chadli. The first liberalization measures occurred in agriculture during the early eighties when it became clear that centralized decision making was not appropriate for farming. Liberalization of price and marketing arrangements for fruits and vegetables began in 1982. However, the key reform occurred in 1988 with the dissolution of some 3,400 state-farms averaging about 700 ha each and their break-up into 80 ha farms (and, in some cases, 6 ha farms) with permanent usufruct rights on the land. The newly-formed units operated like private farms and were entitled to retain all profits. The change from state to private farms was particularly significant, since it occurred before the fall of the Berlin Wall. -5- 12. The support given by the IMF and the World Bank to the 1989 program was an acknowledgement of the liberalization measures already taken and, at the same time, an incentive for pursuing the reforms. It was believed that economic growth could be promptly restored without having to resort to a shock therapy treatment. The program did not contain any dramatic measures; it merely aimed at progressively eliminating the main sources of price distortions and creating an institutional environment hospitable to private enterprises. The ERSL covered a wide range of issues which are reviewed below with reference to agriculture, public enterprises, money and banking, foreign exchange, fiscal policies, market structure, labor and the social safety net. (i) Agriculture: As previously mentioned, the shift toward a market economy started earlier in agriculture than in the other sectors. Following the break up of some 3,400 state-farms into 21,000 private farms in 1988, various problems remained to be addressed; notably, those relating to the demarcation of land parcels and the establishment of usufruct rights. Marketing of agricultural inputs and outputs had to be decentralized and, for this purpose, government-sponsored cooperatives were transformed into farmer-owned cooperatives. However, some basic issues regarding the pricing of agricultural inputs (notably water) must still be addressed. (ii) Public Enterprises: The most difficult task was to improve the efficiency of public enterprises. Decentralization and restructuring were seen to be the first steps, with privatization to be considered at a later stage. The ERSL-supported program provided an institutional framework for decentralization, but it did not immediately address certain key restructuring issues, such as the reduction of redundant labor or the closing of unviable enterprises. Most national public enterprises were to be transformed into autonomous Economic Public Enterprises (EPE) which had to be profit oriented and to operate on the basis of commercial laws. Operational decisions were decentralized from the Ministry of Planning and the line ministries to the EPE level. Each enterprise was to receive a foreign exchange allocation covering a period of several years and to use it over this period as deemed appropriate. The management of the EPEs was to be overseen by eight holding companies which were to manage the shares of the new EPEs for the State which retained ownership. However, in order to promote competition, no holding company was allowed to hold more than 40% of the shares of any single EPE. The loan agreement specified that the second tranche of the ERSL could not be disbursed unless, at least, 300 national public enterprises had been transformed into EPEs. By June 1990, the Government had mandated the transformation of 303 public enterprises into EPEs. Of these, 153 had completed the transformation process by October 1990 and the remaining 150 were expected to complete the process shortly. For this reason, the staff recommended a waiver which was granted by the Board. In the context of the EFSAL which followed the ERSL, it was decided to accelerate public enterprise restructuring and to apply special measures to 22 of the largest loss-making public enterprises which were employing some 133 thousand workers. The objective was to restructure these enterprises on the basis of appropriate diagnostic and restructuring studies and, in the meantime, to contain losses. As of April 1993, the first round of diagnostic studies had been completed and the Treasury had assumed a substantial amount of non-performing public enterprise debt. However, physical restructuring was just getting underway and bankruptcy procedures for public enterprises had not yet become operational. -6- (iii) Money and Banking : Until the mid-eighties, the banking system had been essentially used as an instrument for transferring part of the government oil rent to public enterprises which, in turn, redistributed it in the form of wages and other benefits. The objective of the 1990 law on money and credit was to restore the traditional role of the banking system. The banks were expected to lend in accordance with commercial criteria under the supervision of the Central Bank. The latter was given the responsibility of defining prudential ratios, of verifying their observance by commercial banks and of monitoring the restructuring of bank portfolios whenever required.' The Central Bank also became responsible for the formulation of monetary policies; in particular, for setting targets for the money supply and monitoring the expansion of credit. Some progress was made in rationalizing lending practices, notably by restricting lending at preferential rates. In order to provide the Central Bank with sufficient autonomy from the Government, the Bank's governor was appointed for a six-year term; however, the governor appointed in 1990 resigned before completing his third year. (iv) Foreign Exchanqe Regime: Although Algeria followed an import substitution strategy for many years, it became highly dependent on imports, notably as regards inputs needed for its domestic industry. When annual export earnings fell in 1986-1989 by one third from their 1985 level, Algeria became unable to cover its current import needs on a cash basis. For this reason, would-be importers were forced to obtain export credits. As a result, the stock of outstanding export credits more than tripled from 1983-84 to 1989; at the end of that year, it accounted for 40% of the total debt. The medium and long term external debt was equivalent to only 2.5 years of export earnings; but the bunching of repayments was such that the debt service ratio reached 71 % in 1989. The bulk of Algeria's export earnings was used to service the debt, but the level of the outstanding debt was still rising because: (i) amortization payments remained slightly lower than new borrowings which consisted mainly of export credits with very short maturities, and (ii) the depreciation of the dollar versus other major currencies generated losses (para. 18). Exporters from a given country knew that Algerian importers would make full use of the export credits to Algeria guaranteed by the official credit agency of that country. For this reason, Algerian importers were in a poor bargaining position and they had to pay prices substantially higher than those they could have obtained by looking for the best deal on the world market if they had been able to pay cash or use normal 60- or 90-day trade credits. In an attempt to lengthen maturities, new regulations in 1991 established minimum maturity criteria of 18 months for external credit used to import consumer goods and 24 months for capital goods. However, this initiative had limited impact. Algeria had entered into a debt trap, but did not want to get out of it by rescheduling. Two other approaches were therefore explored. The first was to "reprofile" the debt, mainly through a series of voluntary bilateral refinancing agreements. After initial agreements with the Italian Government and a Credit Lyonnais-led syndicate, however, this approach proved difficult to sustain because Algeria's image in international financial markets did not improve. The second was to depreciate the dinar with a view to reaching equilibrium between the demand for foreign exchange and its supply. Progress was made in this respect in 1989-91; but, devaluation ceased in 1992, and the ratio between the official and parallel market exchange rates stabilized at 1:2. 21 By April 1993, combined financial and institutional audits of the five commercial banks had been completed and the final consultant reports were being prepared. -7- (v) Fiscal Policies: With the oil price collapse, government revenue from hydrocarbons fell from some 44% of total government revenue in 1984-1985 to only 22% in 1986-1988. In spite of a substantial reduction in investment expenditures, the overall Treasury deficit reached 13% of GDP in 1988. The ERSL-supported program aimed at converting the Treasury deficit into a surplus in order to reduce the money overhang and contain inflationary pressures. As a condition of second tranche release, a public investment review was carried out. Treasury surpluses were achieved in 1990-1991; in those two years, government revenue from hydrocarbons exceeded half of total revenue, partly on account of higher oil prices, but mainly because the Algerian dinar depreciated substantially in real terms.4 The program also aimed at rationalizing and simplifying the tax system and at raising government revenues from sources other than oil. In this connection, a Value Added Tax (VAT) was introduced in 1992. (vi) Market Structure: Until the late eighties, most prices and retail margins were controlled by the Government through a complex system of regulations. The objective of the program was to move progressively from administratively determined prices to prices responding to market forces in a competitive environment. For this reason, the loan agreement specified that the second tranche of the ERSL would not be released before the goods and services with prices freely determined accounted for at least 40% of the weight of the items covered in the Consumer Price Index (CPI). This target was exceeded at the time of tranche release, since the level of 47% was reached by July 1990. Prices had to be liberalized in a competitive environment. For this purpose, import monopolies were formally abolished. As another condition of second tranche release, goods imported for resale by a sole designated importer were to be reduced, so as not to exceed 45% of the total imports of those goods. This condition was also satisfied. Most restrictions on private investment -either domestic or foreign- were removed, and joint ventures between foreign and domestic private firms were allowed. Enterprises were allowed to hold foreign exchange accounts with domestic banks. Crowding out of the private sector had to be avoided, and the program specified that a greater share of domestic credit and foreign exchange had to go to that sector. (vii) Labor: The legal framework for the labor market was substantially modified in 1990. Before that date, a standard labor contract was applicable to all public enterprises. After 1990, contracts could be negotiated freely between the trade unions and the management of the enterprise concerned. Plurality of trade unions and right to strike were also recognized for public enterprise employees. Before 1990, it had been almost impossible for management to dismiss employees; under the new law, workers could be laid off for economic reasons, provided they received compensation equivalent to one month of salary per year of employment, up to a maximum of 15 months. (viii) Social Safety Net: The public sector and the enterprises of the formal private sector had been providing a safety net to their employees and their families for many years; by 1989, almost half of the total population may have been protected in this manner. The rest of the population was protected by the generalized system of consumer price subsidies. Government revenues from hydrocarbons increase proportionally to the nominal depreciation expressed in terms of domestic currency, while tax proceeds based on domestic activities increase proportionally to the rate of domestic inflation. When the former exceeds the latter, the currency depreciates in real terms and the share of government revenues originating from hydrocarbons rises. -8- In order for enterprise restructuring and price liberalization to proceed, the safety net had to be reformed. To this end, and in accordance with another second tranche release condition, a plan for protecting vulnerable groups was developed. It was necessary to identify these groups, determine their consumption patterns and assess the impact of structural adjustment on their purchasing power. A number of studies had to be conducted for this purpose. A study of the incidence of price subsidies was completed in January 1991. However, implementation of the planned Living Standards Measurement Survey has been delayed. C. THE EVALUATION 13. As appears from the above review, the measures stipulated in the ERSL were generally implemented to the satisfaction of the World Bank and, in some cases, the authorities went further than was required in accordance with the letter of Development Policy. The second tranche was released approximately one year after the loan had become effective and the waiver relating to the number of public enterprises transformed into EPEs was granted without particular difficulties. On this basis, it could be said that the program was implemented in a satisfactory manner. However, the more fundamental objectives of the program were not fully achieved and the economic crisis remains severe. Real GDP was only about 3% higher in 1992 than it was in 1985, while the population increased by about 20%. The value added by sectors other than public administration, hydrocarbons and agriculture has been steadily declining since 1987 and unemployment has been increasing. This rather bleak picture will be illustrated by reviewing, successively, developments in the macroeconomic framework, sectoral growth and employment. An assessment of the strengths and weaknesses of the program concludes this section. Details of progress realized under the program through the end of 1992 are included in the updated ERSL policy matrix in section E. Macroeconomic Framework 14. The monetary programs set for the years 1989 and 1990 were broadly adhered to. Domestic credit, money supply and inflation (as measured by the CPI) remained within the limits established. Prudent monetary policy, combined with a progressive liberalization of the economy, permitted a substantial reduction in the discrepancy between the parallel and the official rates. From January 1990 to June 1991, the cost of the US dollar in terms of dinars more than doubled on the official market but the cost on the parallel market slightly declined and the ratio between the two rates fell to 1.6 in June 1991, which was the lowest ratio recorded in more than a decade (Figure 1). At that time, the objective was to reach currency convertibility for most current transactions by early 1992,' and this objective appeared attainable. However, the Government which negotiated the 1991 stand-by and the EFSAL lost power in June 1991. The target date for currency convertibility has now been postponed by several years, and fiscal and monetary discipline have been loosened. The overall Treasury deficit exceeded 7% of GDP in 1992 and the money supply expanded by 26%. Consumer price inflation increased to 32%, compared with 23% in 1991, due in part to a mid-year reduction in consumer price subsidies. 11 This was a key element of the program supported by the second stand-by which was approved by the IMF Board on 6/3/91. -9- ji 5. The ultimate objective of the program was to restore economic growth and, in the reports presented to the Boards of the IMF and the World Bank in mid-1989, the yearly growth in real GDP was projected to average 5% through 1995. A somewhat more cautious view was taken two years latter in the EFSAL report; the growth rate was then projected to increase progressively from 3% in 1991 to 4.4% in 1995. As it turned out, GDP growth has averaged only about 1.6% per annum since 1989 (Figure 2). A preliminary estimate of 2.9% growth in 1992 is largely attributable to favorable climatic conditions and the temporary respite offered by the debt refinancing agreements. 16. The optimistic projections made in 1989 were justified by the favorable export prospects for hydrocarbons, gas exports in particular. After assessing sensitivity to external shocks, the staff concluded that the most important risk was a large decline in oil prices from the values assumed in the base case.' But such a decline did not occur; on the contrary, prices exceeded those assumed in the base projection; the major difference occurred in 1990 as a result of the Gulf crisis (lower part of Figure 2). In nominal terms, actual export earnings exceeded projected earnings over the three-year period ending in 1991 by a cumulative amount of US$6 billion (Figure 3). 17. Although actual imports in nominal terms also exceeded the levels projected under the ERSL during 1989-90, the volume of imports declined sharply after 1989. By 1991, imports, in both value and volume terms, were well below the projected levels (lower part of Figure 3). This decline was principally due to: (i) higher-than-expected external debt service, which also affected Algeria's ability to attract new external financing; and (ii) the external shock caused by the fall in the value of the dollar, which increased the dollar value of the debt and reduced the purchasing power of hydrocarbon exports (see para. 18). The import shortfall has hindered the economy's ability to respond to economic reforms and has been a major contributing factor to slower-than-expected growth. 18. The debt-service ratio was projected to fall to 50% by 1990 and to remain at about this level in the two following years; instead, it rose to 74% in 1991 (71% if refinanced principal payments are excluded) and an estimated 79% in 1992 (66% excluding refinancing, see Figure 4). This large discrepancy in the projections occurred because the stock of debt had been grossly under-reported in 1989, reprofiling efforts proved more difficult than expected--in part because the higher debt reduced Algeria's creditworthiness, and unforeseen currency fluctuations resulted in large foreign exchange losses. The projections had been based on the assumption that the parity between the dollar and the other major currencies would remain unchanged, which was not the case. In 1988, only 37% of the Algerian debt was repayable in US dollars while 97% of the export earnings going through the Central Bank were denominated in US dollars. To a first approximation, it could be assumed that expenditures were denominated in SDRs and receipts in dollars. Consequently, the Central Bank suffered a foreign exchange loss when the dollar fell in relation to the SDR and a gain in the opposite case (Figure 5). The use of currency swaps and commodity-linked financial instruments had been considered as a possible hedge against currency fluctuations. World 11 President's Report, paras. 140 and 148. The same conclusion was reached In the IMF report. - 10- FIGURE 2: GDP AND PRICE OF ALGERIAN OIL 7 aB. ................ ... ... GDP.GROWTH . Projected 3 4 ................................... ........................... . 3........................ .......... a a e 0 0 ............................. .......... ... ... ..... ....... .- ................................... .......... ...... .......... ............ -2 I 80 81 82 83 84 85 88 87 88 89 90 91 92 10- PRICE OF ALGERIAN CRUDE 30 2 5 . . . . . . .... .. . . . . . . . . . . . .. ..A ntu.al... . . .. . . . . . .. . . . + ++ ** Projected 80 81 82 83 84 85 86 87 88 89 90 91 92 Note: Actual as revised or estimated in March 1993. Projected as given in the President's Report of the 1989 ERSL. - 11 - FIGURE 3: EXPORTS AND IMPORTS 15. EXPORTS (GNFS) S12 ............................. ........................ Actual-- +++. F V ++++... + + +' 9 10 ....................I........................... ............ ++ 8 g .. . . . . . . ..................................................... .. .. . . ............ ..... ...+. P oj c ..... 80 81 82 83 84 85 86 87 88 89 90 91 92 IMPORTS (GNFs) 13 --- - 12- ++ + + +, 8 .................................... f'.Projected....... 80 81 82 83 84 85 86 87 88 89 90 91 92 Note: Actual as revised or estimated in March 1993. Projected as liven in the 1989 ERSL President's Report. Import figures Bo not include unofficial imports. - 12- FIGURE 4: TOTAL MLT DEBT AND DEBT SERVICE RATIO 30 TOTAL MLT DEBT + + + + + 25 * --... . .. . . .Es m t .. . K I+ + + + + + + + 1.. 20 ++++ + +8 ERS S.............Estimated........... ... ....... -... Oct. 92- + + 80- * *..+ ++ Bstiznated/projected in - .+ ,' 1989 ERSL ai 15 t++ +++a + S. ++++++ %+ + + + + 80 81 82 83 84 85 86 87 88 89 90 91 92 80 DEBT SERVICE RATIO (MLT/XGS) . princActual e~ 60-+ +++++ 0 0 . 0 -~e~ 8 0 81 82 83 84 85 88 87 88 89 90 91 92 Note: Actual as revised or estimated in March 1993. Projected as given in the 1989 ERSL President's Report. Net excludes refinanced princip al. - 13 - FIGURE 5: LOSSES OR GAINS LINKED TO CURRENCY FLUCTUACTIONS z- 2 ++ -3_ - ··-- 0 -4 -1-4 1985 1986 1987 1988 1989 1990 1991 1992 10,1 10 0 - -0 40 -5 5 ................................. ... ........ ........ .-................ ....................................... .......... 1 0--------1¯ · ---------------10 -15 -15 1985 1986 1987 1988 1989 1990 1991 1992 Nota: Yearty galna tor losses, resulting from changes in the value of the currencies in which receipte and outlays are denominated, as caiculatud (or ectimated in the came of 1992) by Algerin's Central Bank. Percentage change In the valuc of the US$ In relation to the SDR at the end of ench year, as derivad from FS data: 1992 percentagabaed on end Octobar 1992. - 14- Bank technical assistance was envisaged for this purpose and some training was financed under the Technical Assistance Project. However, no substantive action to implement hedging has yet been taken. 19. During the negotiation of the ERSL, it was believed that the debt raised "a short- term liquidity problem and not one of solvency"' and that Algeria could get over its debt problem within a couple of years. This has not been the case. Sectoral Growth 20. According to the national accounts, real GDP has remained nearly stagnant since 1985 (Table 2), despite significant increases in the values added by agriculture, the public administration' and the hydrocarbon sector. In contrast, the value added by the other sectors has declined by 2.3% per year on average, while indirect taxes fell by some 6.2% per year. Figure 6 illustrates the evolution of the composition of GDP by sector over the 1980-92 period. 21. The growth in the value added by agriculture since 1985 is quite remarkable (5.5% per year on average), even if fluctuations from year to year, caused mainly by climatic variation, remain very large. This increase resulted, at least in part, from a basic change in management: namely, the replacement of state-farms by private farms. The apparent efficiency gain resulting from the shift to private farming is not surprising, since it has been observed in most countries making such a shift. 22. By contrast, the value added by the industrial sector has been slowly, but steadily, declining since 1987. New laws have been passed and the institutional status of most public enterprises has been modified according them greater autonomy; but, the basic ownership structure and management style appear to have been little affected. Another key factor has been the persistent foreign exchange shortage which has resulted in lower capacity utilization and lower output, but not in a sizable reduction of labor employment. 23. The value added by the construction sector has been declining by 2.5% per year on average and the time required by public enterprises to complete construction projects has been increasing, exceeding ten years in some cases. Shortages of imported raw materials and spare parts are frequently quoted as the main constraint, but the problem appears to be more deeply rooted. In particular, the role which the State should play in satisfying housing demand must be reformulated in the context of an overall review of housing policies. This exercise is being carried out as part of the implementation of a sectoral reform program supported by a World Bank housing loan. I' President's Report of the ERSL, Annex II, p. 69, para. 14. !' By convention, the value added by the public administration is measured by its cost. - 15- TABLE 2: GROWTH IN SECTORAL VALUES ADDED 1985-1992 (in real terms and in percent per year) 1985 1986 1987 1988 1 1989 1990 1991 1992 1985-92 91Estimates Agriculture 23.8 -1.9 17.3 -8.9 18.4 -9.3 23.0 4.8 5.5 Oil and Gas 5.7 1.2 7.1 -1.9 8.0 4.3 1.4 2.6 3.2 Industry 3.5 5.2 -0.8 -1.4 -4.4 0.6 -2.9 0.6 -0.5 Public 5.2 5.1 -0.7 -1.6 -4.4 0.5 -2.9 0.2 -0.6 Private -1.5 5.5 -1.0 -1.0 -4.3 0.8 -2.8 2.0 -0.2 Construction (BTP) -0.5 0.3 -9.2 -8.3 1.5 -1.0 -6.0 6.0 -2.5 Services 5.1 -4.6 -3.5 1.4 3.1 -5.0 -2.7 3.1 -1.2 Administration 7.2 5.5 4.2 3.7 3.4 3.5 3.7 3.8 3.9 Indirect Taxes 3.0 -9.4 -17.2 0.5 8.9 -3.1 -18.3 -2.0 -6.2 GDP at Market Price 5.6 -0.2 -0.7 -1.9 4.9 -1.3 0.2 2.9 0.5 GDP without Oil, Agric. & Administration 2.8 -2.8 -7.2 -1.8 1.0 -2.7 -5.6 -4.3 -2.3 Source: National Planning Council, 1992 figures subject to substantial revision. 24. On the basis of the data available, the value added by the service sector also appears to have been declining and exports of products other than hydrocarbons have remained stagnant. In the case of neighboring Tunisia, the real depreciation of the currency in 1986 was followed within two years by a sharp increase in exports of goods and services other than the two traditional exports (oil and phosphates), but this did not occur in Algeria. 25. It was expected that the share of the private sector would increase in relation to that of the public sector. This has occurred in several areas, but the statistical evidence is mixed. Since the beginning of the ERSL program in 1989, real interest rates have remained largely negative and the cost of foreign exchange on the parallel market has been a multiple of its cost on the official market. Consequently, domestic credit and allocations of foreign exchange at the official rate have been rationed in one way or the other. Rationing has been particularly severe for private enterprises, which are often constrained to purchase their foreign exchange at the parallel rate. In spite of this additional cost, private enterprises have generally been able to compete successfully with public enterprises once they were allowed to do so. - 16 - FIGURE 6: COMPOSITION OF GDP AT MARKET PRICES 100 Indiret Tax@s and Other 80 - -- - - - - G - - --- . 70 ............................................ 0 * 50................................................ . Construc.tion (3TP) - 5 0 .................................. . . . . . . . . .... o 40 - -=-- - xanurat*urtin - -- . 30.--........................... 30 . ..................... .......................... ............................ ALgrieulture 80 81 82 83 84 85 86 87 88 89 90 91 92 FIGURE 7: RATES OF UNEMPLOYMENT AND ILLITERACY 50 90 . .-'80 -70 * 40 ---- 7 Unemployment 60 30 Illiteracy 50 40 .a20- d) 30 20 ... 10 -o. 5 --- _ 10 4 0 ,__0 16 20 25 30 35 40 45 59 55 60 Age Group (in years) - 17- Emp)lovment 26. When Algeria was investing massively, the public sector was able to absorb virtually all job seekers. This was the case in the late seventies when investment accounted for almost half of GDP. Although the situation started to change in the early eighties, the number of urban jobs was still increasing by over 6% a year during the period 1977 through 1985 (Table 3). The major change occurred with the collapse of oil prices in 1986: investments were severely curtailed and the rate of utilization of existing capacities declined due to the shortage of imported inputs. The growth rate of urban employment was reduced from 6% a year to 3%, while the urban labor force was still increasing by 5.4% a year. As a result, the number of workers unemployed tripled from 1985 to 1990 and two-thirds of them were less than 25 years old in 1990. TABLE 3: EMPLOYMENT 1977-1990 (changes in % per year) 1990 Numbers in 1977-85 1985-90 1985-89 Thousands Total Total Public Private Agriculture 898 Industry & Construction 1,328 6.1 2.1 2.4 1.4 8.8 Transport, Commerce & Services 923 8.2 3.3 1.7 -4.1 2.7 Administration " 1,367 6.4 8.7 9.8 9.8 - Total excl. Agriculture 3,618 6.2 4.4 4.7 3.8 7.2 Total incl. Agriculture 2 4,697 6.1 3.0 Unemployed 1,156 21.5 Labor Force 5,855 5.4 Source: National Statistical Office & Table 1 of Study of the Labor Market in Algeria (first draft), World Bank 5/6/92. 1 / Including military service estimated at about 300,000 for 1990. 2/Including work performed at home (181,000). 27. Among males in the 16 through 19 year age group, 63% were unemployed in 1990, while only 7% were illiterate. By contrast, among males in the 45 to 59 years age group, only 3% were unemployed while two-thirds were illiterate (Figure 7). This paradoxical situation was due to historical factors. From independence until about 1980, the obtention of an urban job was treated as a right, and the right to keep this job until retirement has not yet been seriously challenged. However, the situation has changed in the eighties. Since 1985, employment in public enterprises has remained stagnant and the creation of new jobs has been limited to the public administration and the private sector. - 18- 28. Whatever is the history behind it, the Government is presently faced with the existence of a group of young people who are literate and who have built high expectations which remain largely unfulfilled. This is a major source of political instability. The Government has reacted by expanding the size of the public administration and creating special employment programs for the young. The scope for further expanding the public administration is limited. The administration already accounts for nearly one quarter of total employment (national service excluded), which is large by international standards. Moreover, the shift from a centrally planned to a market economy should contribute to reducing rather than increasing the size of the civil service. The special employment program for the young is relatively new. Its net impact needs to be carefully analyzed in terms of costs and creation of additional permanent jobs, since the cost/benefit ratio of similar programs conducted in other countries has generally been disappointing. 29. The employment situation is presently worsening. According to the National Statistical Office, the number of new jobs created represents less than one third of the net increase in the size of the labor force. In 1990, the labor force (unemployed included) accounted for only 23% of the total population. This low percentage is due to the fact that the rate of participation was only 8% for females. If more females were to become job seekers, the growth rate of the active labor force would increase, which would result in more unemployment. 30. Assuming that Algeria continues to move toward a market economy, private farming and food marketing are likely to be the most important sources of employment in rural areas, while small- and medium-scale private enterprises will probably offer the greatest employment opportunities in urban areas. After having been repressed in the seventies, private farming is now being encouraged by the authorities. However, small- and medium-scale enterprises in the service sector, in particular those in the informal sector, are still looked upon unfavorably by part of the public administration. Such enterprises are sometimes regarded as performing activities which are not truly productive. They may also be considered as a source of menial jobs which do not fit with what the aspirations of developing country are seen to be. Finally, some of these enterprises appear to be seen as a refuge for unscrupulous individuals attempting to defraud the State and avoid paying taxes. A more supportive stance by the administration is needed if full advantage is to be taken of the service sectors. Lessons Learned from the ERSL 31. The ERSL supported a program aimed at moving Algeria progressively from a centrally planned to a market economy. Such a move was clearly a political decision, as was the choice between gradualism and shock therapy treatment. The role of the World Bank was not to push the authorities in any particular direction; it was to help them identify the problems likely to arise if a given road was followed and to present possible solutions to specific problems. The Bank was justified in supporting a program aiming at liberalizing the Algerian economy; such an objective did not appear out of reach and substantial progress has actually been achieved in many areas. However, the fundamental objectives of the program have not been fully achieved, and the economic crisis remains severe. 32. There are significant lessons to be learned from the experience of the ERSL. The first is the importance of quality external debt data. It is doubtful that the program would have met the test of financial viability, had staff known the true magnitude of the debt. Another lesson is the importance of assessing terms of trade risks associated with large movements in major currencies, especially for primary commodity exporting countries. A third - 19- lesson, of course, is that social and political factors are an important consideration, and an important risk, in economic adjustment. 33. In many respects, the reformers appear to have overestimated the capacity of the country to absorb rapid change when the 1989 and the 1991 adjustment programs were drawn up, both in terms of the administration's ability to implement complex economic reforms, and the economy's ability to adjust. While the Government was committed to moving Algeria to a market economy, insufficient attention was paid to the mechanics of implementing specific reform measures. This was underscored by the long delays in implementing the Technical Assistance Project. With respect to the adjustment of the economy, the difficulties of liberalizing foreign exchange transactions and improving the performance of public enterprises appear to have been particularly underestimated. Moreover, there was a lack of attention to unemployment and its social impact; the issue was hardly mentioned in the 1989 Development Policy letter. 34. The reform also had unforeseen consequences for the implementation of Bank- financed investment projects. Devaluation and fiscal adjustment resulted in a shortage of counterpart funds, and difficulties with revising contracts to incorporate price increases caused substantial delays. While the Public Investment Review carried out under the ERSL helped the authorities identify several major bottlenecks, overall project performance has remained below par. This is now being addressed in the context of the country portfolio performance review process. 35. Since the success of the program was highly dependent on the implementation of political decisions, the Bank was right in keeping a relatively low profile. In such cases, the Bank may wish to assist the borrower with its technical expertise by illustrating from past experience which are the solutions most likely to work in dealing with specific problems. When the ERSL was negotiated, the Berlin Wall was still up and the Bank had limited experience with the difficulties encountered in moving from a centrally planned to a market economy. However, much experience has been gained since then. D. PROCUREMENT AND MONITORING 36. The conditions for withdrawing the proceeds of the ERSL were fairly straightforward. The borrower had to provide evidence of imports of goods which did not appear on a negative list for a value equivalent to the amount withdrawn. Ineligible items were those financed from other bilateral or multilateral sources, goods intended for military or paramilitary use, and luxury items. Procurement of commodities such as petroleum products and foodstuffs were limited to an aggregate amount of US$60 million. Contracts over US$5 million were to be procured through International Competitive Bidding (ICB); contracts over US$2 million and below US$5 million were to be forwarded to the Bank with supporting documentation; disbursements under contracts below US$2 million and above US$60,000 were to be made under Statements of Expenditures (SOE) with supporting documentation to be provided by for review by the Algerian Development Bank (BAD) which managed loan disbursements. 37. A total amount of US$299 million was withdrawn over a three-year period, which represents about 1 % of total Algerian imports over that time. Although this percentage was small, the timely collection of eligible contracts and supporting documents in accordance with procurement procedures acceptable to the Bank raised major difficulties. The main source of the problem was apparently the complexity of the BAD's internal procedures, together with - 20 - a lack of familiarity among Algerian operators of the Bank's own procedures. This is an example of the widespread institutional weaknesses which hampered implementation of the project. Because of these difficulties, most disbursements were made on the basis of letters of credit guaranteed directly by the World Bank. Two years after the release of the second US$150 million tranche, US$1.2 million remained undisbursed and was cancelled. The experience of the ERSL underlines the importance of making a concerted effort to identify, and correct, potential procurement and disbursement difficulties before project effectiveness. 38. An initial audit report for the project was carried out by the Inspection Gn6rale des Finances (IGF) of the Ministry of the Economy and received by the Bank in December 1991. A final audit report, also prepared by IGF, was received in January 1993. 39. Implementation of the program supported by the ERSL was monitored by the Country Operations Division of the Maghreb Department of the EMENA Region (EM2CO). E. UPDATED ERSL POLICY MATRIX 40. The ERSL policy matrix has been updated to the situation as of end-1 992. See pp. 21-33. E. UPDATED ERSL POLICY MATRIX Medium and Long-Term Areas of Priority Actions Situation at the Objectives Intervention Over end of 1992 the 12 Months Following Board Approval I. KEY MACROECONOMIC TARGETS Development and implementation of -Adjustment of exchange rate to unify -Continuation of flexible exchange -Reduction of the gap between the macroeconomic program to reduce the de facto dual foreign exchange rate policy with a view to reducing official exchange rate and the parallel both internal and external imbalances markets before 1992. the gap between parallel and official rate from 1:5 at the end of 1988 to and to create conditions for sustained exchange rates concurrently with 1:2 at the end of 1992. growth. measures taken to absorb liquidity overhang (see below). -The Government's macroeconomic program for 1990 will have the follo- wing specific targets: -Reduction of Public Sector Borrowing -reduction of the deficit on Treasury -Surplus of 3.2% of GDP in 1990 and Requirements. operations; surplus of 1% in 1991, but deficit of 7.4% of GDP in 1992. -Curbing of inflation through a tighter -rate of monetary expansion consis- -Expansion of money supply of 11 % control of money supply. tent with GDP movements; in 1990, of 21% in 1991 and of 26% in 1992. -Establishment of target current ac- -reduction of current account deficit, -Current account surplus of US$1.4 count deficit consistent with macro- slight increase in international reser- billion in 1990, of US$2.6 billion in economic and debt management yes and lower debt service ratio. 1991 and of US$1.6 billion in 1992. objectives. Increase of reserves from 0.6 months of imports in 1990 to 1.5 months at the end of 1992. Increase in the debt service ratio from 62% in 1990 to 66% (net) in 1992. -Management of external debt. -Development of an external financing -Refinancing agreements signed with and debt management strategy consi- Italy and with a syndicate of private stent with overall macroeconomic banks in 1991. However, average objectives and creditworthiness indi- debt maturity has shortened and debt cators for the medium-term. service remains very high. Medium and Long-Term Areas of Priority Actions Situation at the Objectives Intervention Over end of 1992 the 12 Months Following Board Approval I. KEY MACROECONOMIC TARGETS (continued) -Mobilization of savings. -Mobilization remains hampered by negative real interest rates despite the increase in the lending rate ceiling to 20% in 1990 and the Bank of Algeria (BA) money market interven- tion rate to 17% in 1991. II. MONETARY AND FISCAL POLICIES A. MONETARY POLICY Strengthening of institutional frame- -Direct responsibility of Central -Strengthening of control over banks -Banking Commission established in work for macroeconomic manage- Bank in the implementation and coor- through the establishment of the April 1990. ment. dination of monetary and credit poli- Commission on Bank Control. cies. -Enactment of BA's new statutes. -New statutes published in Law No. 90-10 of April 14, 1990, relating to money and credit (MCL). Control of growth of money supply. -Establishment of monetary control -Adoption of a National Credit Plan -NCP adopted in 1990; however there mechanisms and instruments. (NCP) for 1990 in line with the agr- was no NCP in 1991 or 1992. eed macroeconomic objectives in light of 1989 experience. -In light of 1989 experience, esta- -As of mid-i 991: (i) establishment of blishment of other instruments (e.g., quarterly rediscount ceilings by bank, reserve requirements, individual cei- and (ii) daily determination of a nor- lings on bank credit, bank ratios) to mative amount of intervention by the ensure the achievement of objectives BA in the money market. Enactment for bank credit. of prudential ratios in January 1992. Absorption of liquidity overhang -Flexibility in determination of interest -Greater flexibility in the determina- -Adoption of a single ceiling on len- rates in order to achieve positive real tion of interest rates. ding rates in May 1990. interest rates by 1992. Medium and Long-Term Areas of Priority Actions Situation at the Objectives Intervention Over end of 1992 the 12 Months Following Board Approval II. MONETARY AND FISCAL POLICIES (continued) A. MONETARY POLICY (continued) -Jointly with banks and specialized -Variable interest rates have not yet financial institutions, study the possi- been introduced. bility of introducing variable interest rates relative to a reference rate for long-term loans. -Adjustment of the "Taux Directeur" -BA rates increased as follows: i to reflect macroeconomic develop- rediscount rate to 10.5% in 1990 and ments and to come closer to achie- to 11.5% in 1991; (ii) intervention ving real positive interest rates. rate in the money market to 11 % in 1990 and to 17% in 1991, and (iii) overdraft rate to 15% in 1990 and 20% in 1991. However, these rates remain negative in real terms in rela- W tion to the inflation rate recorded in 1991 of 24% and of 32% in 1992. -Sale to the public of new housing -Evaluation and continuation of the -Sale of more than 400,000 dwel- units in order to absorb liquidity over- program referred to in column II. lings; however, new urban social hang held by households. rental housing units supplied after October 1992 are no longer for sale. -Establishment of financial markets. (See Section VI.D) -Adjustment of prices to eliminate (See Section IV) monopoly rent opportunities, to re- duce excess demand in good market and eliminate losses of productive sector. Medium and Long-Term Areas of Priority Actions Situation at the Objectives Intervention Over end of 1992 the 12 Months Following Board Approval II. MONETARY AND FISCAL POLICIES (continued) B. FISCAL POLICY Improvement of budgetary transpa- -Gradual phasing out of Treasury's -Improvement of tax revenues by -Computerization of the Tax Directo- rency and procedures to identify the role as financial intermediary for en- strengthening of tax management rate is being implemented with finan- costs of various production/consump- terprise activities. capabilities. cing provided by the Bank's Technical tion subsidies, and of the restructu- Assistance Loan (TAL) ring of public enterprises. -Control of off-budget expenditures. -Adoption of a regular monitoring -Treasury operations are better quan- system of all Treasury operations tified but the quantification system which would, inter alia, quantify: the still needs to be reinforced, in parti- various subsidy programs and the cular concerning subsidies. financial flows to public enterprises. -Planning for and quantification of -Formulation of a plan to quantify the -First phase of plan formulated during potential losses that will result from three key imbalances with major implementation of the financial res- changes in sectoral and macroeco- budgetary implications: (a) financial tructuring program launched in 1991. nomic policies. imbalances at the enterprise level; (b) foreign exchange losses at the enter- prise level due to adjustment of the exchange rate; and (c) capital losses by banks due to maturity/interest mismatch. This plan will assess the resources required to absorb and compensate for the negative effects of these imbalances. Overhaul of the tax system in order to -Widening of the tax base and reduc- -Simplification of the tax system -Fiscal reform adopted in January simplify it, expand the tax base, and tion of enterprise taxation. through a reduction in the number of 1992, including reorganization of increase the efficiency of the tax applicable tax rates. Strengthening of direct taxation, introduction of a VAT, system thereby reducing the vulne- tax administration to minimize tax and measures to reduce evasion. rability of Government's revenues. evasion. Medium and Long-Term Areas of Priority Actions Situation at the Objectives Intervention Over end of 1992 the 12 Months Following Board Approval II. MONETARY AND FISCAL POLICIES (continued) B. FISCAL POLICY (continued) Design of a tax system that is more -Reduction of distortions in the allo- -Tax reduction on securities transac- consistent with objective of decen- cation of resources due to the tax tions and reform of land taxation. tralization and of establishment of system. appropriate incentives at individual and enterprise levels. -Preparation of draft law for the intro- -Implementation of the VAT in April duction of VAT. 1992. III. FOREIGN TRADE POLICY A. FOREIGN EXCHANGE ALLOCATION Establishment of a rational foreign -Relaxation of foreign exchange allo- -Extension of the new foreign exchan- -Elimination of the foreign exchange exchange allocation system. cation mechanisms resulting in a ge allocation system to all public budgets system in 1991. Establish- more efficient system. enterprises and allowing them to ment in August 1992 of an Intermi- carry over all foreign exchange sur- nisterial Committee to oversee alloca- pluses from one year to another. tion of official foreign exchange. -To ensure greater flexibility in the -Authorization given in 1991 for im- use of foreign exchange, authoriza- ports financed through the enterpri- tion that public enterprises may trade se's foreign exchange account, fun- imported goods at a price negotiated ded by export revenues. between them. -Evaluation of the experience of the -Elimination of the foreign exchange first year of the application of the budgets system in 1991 in favor of new foreign exchange allocation an allocation based on the profitability system and the identification of pos- or social priority of the activity. sibilities of improving its efficiency. Medium and Long-Term Areas of Priority Actions Situation at the Objectives Intervention Over end of 1992 the 12 Months Following Board Approval III. FOREIGN TRADE POLICY (continued) B. EXTERNAL TRADE REGIME Reduction of distortions in external -Rationalization of tariff structure and -Reduction in the proportion of im- -Decrease to 39% of total imports trade regime. of the trade regime. ports for resale carried out by a single and elimination of import monopolies enterprise so designated by Govern- in 1990. Tariff reform enacted in ment from 70% to a maximum of January 1992. 45% of total imports (in value terms). Promotion of non-hydrocarbon ex- -Start-up of a study, based on agreed -Study cancelled in mid-1992. ports where Algeria has comparative TORs, on incentives and institutional advantage. support for non-traditional exports. IV. REFORM OF PRICES AND MARKET STRUCTURE Correction of prices to: (a) reduce -Reduction and rationalization of price -Enactment of the new system to -The share of free prices reached losses of the productive sector and controls. increase, from about 10% to 40%, 47% in mid-1990 and 73% in April help reduce liquidity overhang; and (b) the proportion in the CPI of goods the 1992. allow prices to reflect relative eco- prices of which are freely determined. nomic costs. -Study of products subject to ceilings -Reduction of the share of products on margins to move them gradually to subject to margin ceilings from 25% a system of market prices. of the CPI at the end of 1989 to 10% in mid-1992. Increased competition to reinforce the -Deregulation of system of monopo- -Start-up of a study, based on agreed -Study cancelled in mid-1992. market determination of prices. lies. TORs, to identify constraints on do- mestic competition (barriers to entry- /exit, distribution, etc..). Making the private sector play a more -Revision of regulations governing the -Equal treatment of public and private -Formalization of the principle of positive role in the development of private sector. sectors when engaged in the same equal treatment in the revised Com- the economy. activity. merce Code under preparation. Medium and Long-Term Areas of Priority Actions Situation at the Objectives Intervention Over end of 1992 the 12 Months Following Board Approval IV. REFORM OF PRICES AND MARKET STRUCTURE (continued) -Preparation of a law facilitating the -Open foreign investment regime participation of foreign enterprises in enacted in the MCL of 1990. investment projects within the fra- mework of joint ventures. -Allocation to the private sector in -Since the elimination of the foreign 1990 of an amount of foreign ex- exchange budget system, no fixed change at least equal to the allocation allocation to the private sector. made in 1989, except in the event that the total allocation of foreign exchange is reduced. In such a case, the private sector will receive at least the same proportion as in 1989. V. PUBLIC INVESTMENT PROGRAM Improvement of efficiency of invest- -Systematic enforcement of criteria -Evaluation of the new public invest- -Review of public investments com- ment through better allocation of for a more efficient allocation of ment program by a joint team with pleted and discussed with the autho- resources. resources in public investment, the Bank on the basis of agreed crite- rities in 1990. na. VI. FINANCIAL SECTOR REFORM A. CENTRAL BANK (BA) Development of BA's capabilities for: -Definition of the role of BA. -New role of BA formalized in the (i the conduct of monetary and credit MCL of 1990. policy; and (ii) the drawing up and implementation of banking regula- tions. -Strengthening of BA's technical -Strengthening of other BA functions -The institutional strengthening of the capabilities. (research, credit, audit, credit risk, BA is under way, partially financed by external debt monitoring, etc..). the TAL. Medium and Long-Term Areas of Priority Actions Situation at the Objectives Intervention Over end of 1992 the 12 Months Following Board Approval VI. FINANCIAL SECTOR REFORM (continued) A. CENTRAL BANK (continued) -Adoption of a long-term plan for the -Development plan with timetable development needs of BA. adopted in 1991. -Drawing up of banking regulations. -Adoption of regulations establishing -New accounting plan approved by accounting and auditing requirements the Monetary & Credit Council in for banks, including a 'plan compta- view of its adoption as of January ble". 1993. -Adoption of banking regulations -Adoption of prudential regulations as (prudential ratios, rules for risk provi- of January 1992. sioning, etc.). B. COMMERCIAL BANKS More active role for banks in resource -Legal autonomy for banks. -Implementation of training program -Formal autonomy of banks granted in mobilization and a more efficient for bankers. 1990. allocation of resources. -Strengthening of capabilities of com- mercial banks. -Preparation of a plan for the rehabili- -Training programs implemented with tation of the banks' balance sheets. partial financing through the TAL. -Rehabilitation of the banks' balance sheets. -Rehabilitation of banks' balance sheets underway in the context of the financial restructuring program. Pur- chase by the Treasury in 1992 of some DA 176 billion of bank claims on public enterprises. C. SPECIALIZED FINANCIAL INTERMEDIARIES Promotion of competition among -Removal of legal barriers to competi- -Definition of objectives and roles of -Adoption of a restructuring plan for credit institutions in order to improve tion among credit institutions. BAD and CNEP. CNEP at the end of 1992. Intermi- effectiveness and efficiency of finan- nisterial Committee established in cial intermediation. mid-1992 to review procedures and organization of the BAD. Medium and Long-Term Areas of Priority Actions Situation at the Objectives Intervention Over end of 1992 the 12 Months Following Board Approval VI. FINANCIAL SECTOR REFORM (continued) C. SPECIALIZED FINANCIAL INTERMEDIARY (continued) -Rationalization of selective credit -Establishment of database for 1987 -Preferential rediscounting phased out policy through a reduction in interest and 1988 for the amount and propor- in 1990. Overall amount of interest rate distortions. tion of selective credit (within total subsidy limited to DA 500 million in bank credit). the 1992 Finance Law. -Establishment of a system to monitor -No specific system has been esta- the extension of selective credit as of blished. 1989. -Agreement not to increase the abso- -The deviation has in fact increased lute gap between non-subsidized for rates directly subsidized by the interest rates provided by banks on Treasury. the one hand, and interest rates sub- sidized through preferential rediscoun- ting or directly by the Treasury on the other. -Establishment of a schedule for the -No timetable established for the gradual reduction of interest rate subsidies financed by the Treasury. distortions through selective credit. In September 1992, the Government decided to increase the overall subsi- dy allocation to agriculture. -introduction of greater competition in -Launching of a study, on the basis of -The "Institut de Financement du use of insurance companies' captive agreed TORs, of the use of financial D6veloppement du Maghreb Arabe" resources. resources of insurance companies. selected to carry out the study in December 1992. -Improvement of effectiveness in the -Examination of the use of Social -In 1992, the Social Security Fund use of Social Security funds. Security and pension fund liquidity was authorized to invest its liquid surpluses. assets in the money market. Medium and Long-Term Areas of Priority Actions Situation at the Objectives Intervention Over end of 1992 the 1 2 Months Following Board Approval VI. FINANCIAL SECTOR REFORM (continued) D. FINANCIAL MARKETS Increasing efficiency of financial -Strengthening of the role of financial -Allowing certain enterprises access -Insurance companies were granted markets to stimulate resource mobili- markets. to the money market. this authorization in 1992. zation, improve resource allocation and help reduce the liquidity over- -Greater use by Government and -The development of the financial hang. enterprises of financial instruments to market remains hindered by macroe- finance their borrowing needs. conomic distortions, in particular negative real interest rates. VII. PUBLIC ENTERPRISE REFORM Greater technical and financial effi- -Modification of the status of public -Passage to autonomy of the bulk of -More than 350 public enterprises ciency in public enterprises. enterprises to allow them greater remaining national public enterprises, were autonomous by the end of autonomy. 1992. C o -The 23 largest public enterprises have not yet passed to autonomy. -Most public enterprises have not yet -Preparation of medium-term plan by established a definitive plan. each enterprise. -Most strategies remain to be defined. -Definition of restructuring and ratio- nalization strategy for selected key industrial sub-sectors. -Improving quality of public enterprise -Preparation and adoption of regula- -This regulation is still under prepara- accounts. tions defining external auditing requi- tion but the quality of the accounts rements for national public enterpri- has improved due to the requirement ses. Adoption of an action plan for that they be submitted to the Boards the implementation of this regulation. of the Participation Funds. Medium and Long-Term Areas of Priority Actions Situation at the end Objectives Intervention Over of 1992 the 12 Months Following Board Approval VIII. AGRICULTURAL REFORM Transformation of agrarian structure -Transformation of the land-tenure with objective of increasing producti- system through the establishment of vity. Improving investment efficiency private agricultural units to replace as well as modernizing and increasing state farms. production. -Elimination of Treasury subsidies to cover deficits of state farms. Improvement of the availability of and -Liberalization and improvement of -Relaxation of regulations and proce- -Participation of the private sector access to all agricultural inputs. the marketing system for agricultural dures to increase competition in the remains limited. inputs including progressive withdra- distribution of agricultural inputs and wal of Government participation in efficiency of the marketing system. the marketing system. This would include possible private sector participation. -Carrying out of a study on the distri- -Study completed in 1990. bution and pricing policy of fertilizers. Introduction of a pricing policy (inclu- -Introduction of a more rational pri- -Launching of a study of prices and -Study completed in 1992. ding prices for agricultural inputs) to cing system for agricultural inputs incentives of agricultural products better reflect economic costs. and outputs. with controlled prices. The study would also examine the macroeco- nomic impact of the various pricing options and issues of comparative advantages. -Continuation of the policy of increa- -Ceilings are no longer imposed on sing agricultural input prices to fully prices of agricultural inputs; however, reflect costs. these prices were sharply reduced in mid-1 992. -Carrying out of a study of irrigation -These charges are still well below water charges, including a schedule the level required to cover operation for further increases in order to cover and maintenance costs. 100% of 0 & M costs. Medium and Long-Term Areas of Priority Actions Situation at the end Objectives Intervention Over of 1992 the 12 Months Following Board Approval IX. ENVIRONMENT, POPULATION AND SOCIAL DIMENSIONS OF REFORM A. ENVIRONMENT Ensuring the preservation of the envi- -Improvement of the formulation and -Establishment of a schedule for: (a) -These plans have yet to be defined. ronment for future generations. the implementation of environmental defining a plan of action addressing policy. immediate priorities (disposal of dan- gerous wastes, etc), (b) implementing a medium-term program for control- ling water contamination, and (c) preparing a management plan for water resources. B. POPULATION Ensuring a higher standard of living -Demographic planning and policy. -Development of appropriate targets -Demographic policy has become a for future generations. for demographic policy and proposed top priority of the Government, which strategy to achieve these targets. has requested Bank's assistance in this area. C. SOCIAL DIMENSIONS OF REFORM Minimization of negative effects and -improvement of social planning appa- -Completion of existing socio-econo- -At the end of 1992, the LSMS sur- social costs of adjustment on most ratus. mic data collection by designing/laun- vey had still not been launched. It is vulnerable groups. ching surveys (LSMS or similar) to now expected to start in mid-1 993. assess adjustment impact. -Development of a plan to protect -A reform of consumer price subsi- vulnerable groups. This plan will spell dies, including the implementation of out the Government's overall policy a system of direct transfers, was on consumer subsidies and clarify launched in mid-1992. Pursuit of this how these subsidies can be better reform, as well as its extension to targeted to the vulnerable groups. other subsidies, is envisaged in the medium term. However, other as- pects of the social safety net, in particular an unemployment insurance fund, have still to be implemented. Medium and Long-Term Areas of Priority Action Situation at the end Objectives Intervention Over of 1992 the 12 Months Following Board Approval IX. ENVIRONMENT, POPULATION AND SOCIAL DIMENSIONS OF REFORM (continued) C. SOCIAL DIMENSIONS OF REFORM (continued) -Completion of development of pro- -No specific proposals yet developed. posals for strengthening management of human resources and salaries, and drawing up of a calendar for their implementation. - 34 - PART II: THE BORROWER'S ASSESSMENT OF THE ERSL The Borrower was invited to prepare Part II, but to date none has been received. PART Ill: STATISTICAL ANNEX ECONOMIC REFORM SUPPORT LOAN (3117-AL) TABLE 1: LOAN DATA Amount: US$300 Million As of 02/16/93 Original Disbursed Cancelled Repaid Outstanding 300.0 298.79 1.21 -- -- Original Loan Date Actual or Re-estimated President's Report 06/89 06/20/89 Letter of Dev. Policy 07/89 07/27/89 Negotiations 07/89 07/17/89 Board Approval 08/89 08/31/89 Loan Agreement 10/89 10/17/89 Effectiveness 09/89 12/13/89 Loan Closing 12/31/91 09/30/92 Actual Completion n.a. 01/31/93 CUMULATIVE LOAN DISBURSEMENT FY90 FY91 FY92 FY93 (i) Planned 150.00 220.00 300.00 300.00 (ii) Actual 149.84 223.79 298.63 298.79 (iii) (ii) as % of (i) 99.9 102.7 99.5 99.6 - 35 - LOANS RELATED TO THE ERSL 1. Technical Assistance Loan - LN 3176-AL - in the amount of 26 million US$. Board date: 03/06/90. Effectiveness: 04/22/91. Closing date: 12/31/93. 2. EFSAL (Enterprise & Financial Sector Adjustment Loan - LN 3352-AL) in the amount of 350 million US$. Board date: 06/21/91. Effectiveness: 06/27/91. Closing date: 06/30/93. TABLE 2: MISSION DATA Mission No. of No. of Staff Date of Month/Year Weeks Persons Weeks Report Appraisal 05/25/89-06/05/89 2 4 8 06/12/89 Supervision I 10/14-26/1989 1 1 1 11/16/89 Supervision II 07/06-17/21/90 2 5 10 08/22/90 Supervision Ill 04/23-05/05/91 2 2 4 n.a. Completion 10/09/92 1 2 2 n.a. -36- TABLZ 7 AIiIA: ET HA IMUC nDICAlYMS 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 Prel. Est. GDP Growth Rate 0.9Z 3.0% 6.4% 5.4% 5.6% 5.6% -0.2% -0.7% -1.91 4.9% -1.3Z 0.21 2.9% GDY Growth Rate 18.01 8.21 -0.2% 5.8% 4.6Z 5.15 -16.2% 0.01 -4.4% 3.1% 0.8% 2.2% -0.9% GNP/Per Capita Growth Rate -1.7Z -0.11 3.11 2.4% 2.0 2.4% -3.5% -2.3% -5.9% 2.2% -3.81 -4.0% 1.1% Consumption/Per Cap. Growth Rate 7.01 5.1Z -0.5% 2.7% 2.01 2.11 -2.4% -6.0% -9.81 4.2% -4.9% -0.6% -0.5% MLT DOD incl. IMF (US$) 17052 16090 14977 14328 14185 16539 19753 23706 25125 26735 28409 27555 25889 Short Term Debt (US$) 806 831 796 790 794 746 1000 1315 1621 1840 1384 1084 1084 Total Debt (incl. ST & IMF) 17858 16921 15773 15118 14979 17286 20753 25022 26746 28574 29793 28638 26973 MLT DOD (incl. IMF)/XGS 1/ 114.0% 103.0% 100.51 102.2% 103.81 119.6% 234.01 236.2% 288.8% 254.8% 206.3% 208.31 201.8% Short Term DOD/XGS 5.4% 5.3% 5.3% 5.6% 5.82 5.4% 11.82 13.12 18.6% 17.5% 10.0% 8.21 8.41 Total DOD/XGS 119.3Z 108.31 105.9% 107.8% 109.8% 125.02 245.91 249.3% 307.5Z 272.3% 216.41 216.42 210.2% MLT Debt Service(incl. IMF) 3917 3913 4381 4591 4984 4895 5134 5405 6448 7421 9327 9748 10065 MLT Debt Service (incL. IMF)/XGS 26.2% 25.11 29.4% 32.71 36.5% 35.41 60.82 53.82 74.11 70.7% 67.71 73.71 78.5% Net MLT Debt Service/XGS 2/ 26.22 25.12 29.41 32.7% 36.52 35.4Z 60.82 53.81 74.1 70.72 67.7% 70.71 65.71 Gross Investment/GDP 3/ 39.1% 37.0% 37.31 37.6% 35.4% 35.2% 34.01 28.2% 27.9% 30.2% 29.3% 29.72 28.3Z Gross Domestic Saving/GDP 43.1% 40.71 39.2% 39.75 33.72 32.12 23.82 24.11 20.9% 20.3% 27.7% 35.62 30.8% National Savings/GDP 40.8% 38.62 36.91 37.62 35.7Z 36.2% 27.9% 28.92 25.9% 28.3% 32.42 36.01 30.9% Central Gov't Investment/GDP 11.0% 11.92 16.22 18.41 16.72 15.32 13.82 11.7% 12.41 10.5% 8.9Z 7.4% 7.8% Central Gov't Savings/GDP 20.9% 25.51 17.62 16.92 17.51 18.62 9.52 8.32 4.92 8.6% 11.9% 12.01 6.52 Non-Gov't Investment/GDP 28.1% 25.12 21.0% 19.12 18.7% 19.91 20.3% 16.51 15.5% 19.72 20.4% 22.32 20.42 Non-Gov't Savings/GDP 19.9% 13.0% 19.3% 20.72 18.22 17.7% 18.42 20.5% 20.92 19.7% 20.51 24.02 24.32 ICOR (5 year average) 6 7 7 8 8 6 7 10 19 19 194 114 24 Treasury Revenues/GDP 37.9% 42.7% 37.4% 36.21 37.12 36.8% 30.62 28.42 26.7% 27.6% 28.4% 31.4% 31.2% Treasury Expenditures/GDP 46.7% 44.32 49.2% 50.6% 45.92 46.42 42.3% 35.62 39.4% 29.6% 25.3% 30.4% 38.5% Deficit(-)/GDP -8.8% -1.6% -11.82 -14.4% -6.8% -9.62 -11.7% -7.21 -12.7% -2.0% 3.22 1.0% -7.4% XGNFS Growth Rate -12.9% 0.32 10.2% 6.2% 5.71 2.62 -0.3% 6.0 0.42 8.0% 3.42 -1.01 2.7% XGNFS/GDP 34.3% 34.6% 30.9% 28.02 25.8% 23.32 12.82 14.22 15.5% 18.7% 24.32 31.0% 26.9% MGNFS Growth Rate 3.4% 16.32 -1.7% 6.2% 2.5Z 5.7% -22.02 -28.72 3.42 16.8% -9.8% -19.2% -1.3% KNFS/GDP 30.4% 30.91 29.0% 25.82 27.52 26.42 23.01 18.32 22.62 28.6% 25.8% 25.0% 24.4% Current Account (BOP US$) 241 127 -183 -85 -90 713 -3435 39 -1903 -1030 1395 2555 1599 Current Account/GDP 0.62 0.32 -0.4% -0.2Z -0.2% 1.2% -5.4% 0.1% -3.2% -1.9% 2.3% 6.02 3.62 Algerian Crude Price (US$ bbl) 35.11 39.46 35.86 30.52 29.54 28.92 14.77 18.48 16.14 18.45 24.32 20.44 20.01 Terms of Trade (1980-100) 100 120 109 110 102 99 47 54 48 49 53 59 53 M2/GDP 58% 57% 66% 71% 732 76% 752 792 84% 73% 642 52% 53% 1/ Includes workers' remittances. 2/ Net of refinanced principal. 3/ Current price ratios. Source: Algerian authorities and WB estimates. - 37 - TABLE 8 ALIA: BALACE CW PAETS (in millions of dollars) 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 Prel. Et. A.Exports of Goods & NFS 14257 14673 14145 13510 13201 13373 7959 9290 8347 10147 13443 12985 12020 1.Merchandise (fob) 13652 14117 13510 12743 12776 12983 7470 8737 7811 9589 12928 12567 11510 o/w Hydrocarbons 13757 14392 13224 12466 12479 12724 7279 8531 7352 9096 12348 11975 11059 o/w Non-Hydrocarbons -105 -275 286 276 298 259 191 206 460 473 580 592 451 2.Non-Factor services 606 556 835 767 425 390 490 553 536 578 515 418 510 B.Imports of Goods & NFS 13061 13593 13278 12548 12646 12448 11163 9407 9767 11336 11485 9467 9794 1.Merchandise (fob) 1/ 9598 10088 9889 9517 9771 9639 8720 7399 7592 9362 9664 7676 8008 o/w Capital Goods 2915 3392 3190 2981 2972 2999 2839 1879 1905 2288 3595 2849 2790 o/w Consumer Goods 3866 3650 4079 3705 3423 3844 3275 3407 3389 4476 3785 3020 3458 o/w Intermediate Goods 2814 3046 2621 2831 3376 2795 2607 2113 2298 2599 2285 1608 1758 2.Non-Factor Services 3465 3504 3390 3031 2875 2809 2443 2008 2174 1974 1821 1791 1788 o/w Unofficial Services 149 202 243 239 298 307 338 332 347 C.Resource balance 1196 1080 866 962 555 925 -3204 -117 -1419 -1189 1958 3518 2228 D.Net Factor Income -1198 -1253 -1313 -1225 -1477 -1570 -2029 -1332 -2010 -1893 -2090 -2251 -2029 1.Factor Receipts 372 522 328 186 180 191 171 314 70 111 72 72 105 2.Factor Payments 1570 1774 1641 1411 1657 1761 2200 1645 2080 2004 2162 2323 2135 o/w HLT Interest Payments 1436 1361 1427 1274 1378 1408 1564 1578 1713 1875 1909 1952 1918 E.Net Current Transfer 243 300 263 178 832 1358 1798 1487 1527 2053 1528 1288 1402 1.Current Receipts 440 490 448 349 990 1509 1942 1589 1603 2091 1630 1339 1454 o/w Wages & Salaries 334 424 427 327 291 263 310 434 332 306 356 274 774 o/w Unofficial Transfers 679 1030 1074 1014 1152 1224 1234 1085 680 2.Current Payments 198 191 185 171 158 151 144 102 76 38 102 51 52 F.Current Account Balance 241 127 -183 -85 -90 713 -3435 39 -1903 -1030 1395 2555 1599 G.Long Term Capital Inflow 899 -32 -956 -868 448 396 897 626 1168 387 -114 -1357 117 1.Direct Investment 280 -171 -307 -12 -14 -87 -64 -109 -48 -25 -39 -91 -11 2.Official Capital Grants 0 0 0 0 0 0 0 0 0 0 0 0 0 3.Net MLT Loans 916 246 -338 206 567 504 1040 857 1698 712 -60 -1321 -1452 a.MLT Disbursement (DRS) 3398 2798 2617 3523 4175 3991 4609 4684 6432 6218 7291 6391 6436 b.MLT Amortization (DRS) 2482 2552 2954 3317 3608 3487 3570 3827 4734 5506 7351 7712 7880 4.Other LT Inflow -298 -107 -311 -1062 -105 -21 -78 -122 -482 -300 -15 55 1580 (net incl. DRS discrepancy) H.Total Other Items (net) 201 113 37 502 -750 254 1379 -617 -61 1 -1368 -69 -1657 l.Net Short Term Capital -1127 25 -35 -6 4 -48 254 315 339 342 -456 90 -390 2.Capital Flow NIE 1340 97 89 502 -213 192 -78 -1071 -118 -303 -205 227 -297 3.Errors & Onissions (net) -12 -9 -17 6 -542 110 1203 139 -282 -38 -707 -986 -970 I.Change in Net Reserves 1341 208 -1101 -452 -392 1363 -1159 48 -796 -642 -86 529 59 (- - loss) / Includes imports without payments after 1984. ource: Algerian authorities and WB estimates. -38- TABIL 8 (Cont'd) AI=RIA: BAIACB 0F PAINES (in millions of dollars) 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 Prel. Est. Foreign Exchange Reserves: 1.Gold Fine Troy ounces (and) 5.6 5.6 5.6 5.6 5.6 5.6 5.6 5.8 5.6 5.6 5.1 5.6 5.6 2.Gold price UK/London 590 398 457 382 308 327 391 484 410 401 385 354 329 3.Int'l Reserves, Gold 3289 2218 2550 2129 1720 1825 2181 2701 2289 2238 1979 1973 1836 4.Total Reserves excl.Gold 3773 3695 2422 1880 1464 2819 1660 1640 900 847 725 1486 1457 5.Total Reserves incl.Gold 7062 5913 4972 4009 3184 4644 3841 4341 3189 3085 2704 3459 3293 S.Gross Reserves (months of imp.) 3.1 2.9 1.9 1.6 1.2 2.4 1.5 1.8 0.9 0.8 0.6 1.5 1.5 Exchange Rates (DA/$) 1.Real Eff.Excb.Rate 100 111 116 125 133 144 133 117 97 85 75 43 43 (base-1980) 2.9am.Off.Exch.Rate 3.8 4.3 4.6 4.8 5.0 5.0 4.7 4.8 5.9 7.6 9.0 18.5 22.5 (IFS, AD/US$) Shares of GDP Resource Balance 2.8% 2.4Z 1.91 2.0% 1.01 1.61 -5.0% -0.2% -2.4% -2.1% 3.3% 8.2% 5.1% Total MLT Interest Payments 3.4% 3.12 3.2Z 2.6% 2.6% 2.4% 2.4% 2.3% 2.9Z 3.4% 3.2% 4.5% 4.42 Current Account Balance 0.62 0.32 -0.4Z -0.2% -0.2% 1.22 -5.42 0.12 -3.2% -1.92 2.3Z 6.0% 3.6% LT Capital Inflow 2.12 -0.12 -2.12 -1.8% 0.82 0.71 1.42 0.9% 2.02 0.7% -0.2% -3.22 0.3% Net Credit From IFW 0.02 0.02 0.02 0.0% 0.01 0.02 0.0% 0.0% 0.0% 1.1% 0.0% 0.82 -0.4% Memo: GDP at Current US$ 42347 44365 45197 48812 53503 58674 64160 67252 59191 55516 59868 42933 43852 Change in Net Reserves (-loss) 1341 208 -1101 -452 -392 1363 -1159 48 -796 -642 -86 529 59 Valuation Changes (--loss) -79 118 -63 69 0 0 0 0 0 0 0 0 0 Change in Net Foreign Assets 1262 326 -1165 -382 -392 1363 -1159 48 -796 -642 -86 529 59 Change in Gross Reserves (CB) 1115 -78 -1273 -542 -416 1355 -1159 -20 -740 -53 -122 761 -29 Net Credit from IMF 0 0 0 0 0 0 0 0 0 604 0 323 -168 Change in Other Liabilities (CB) -147 -404 -108 -160 -24 -8 0 -68 56 -15 -36 -91 80 Hemo: Total DOD ST (US$) 1/ 806 831 796 790 794 746 1000 1315 1621 1840 1384 1084 1084 1/ Algerian authorities' estimates before 1987. Sgug: Algerian authorities and WB estimates.