Algeria - Economic Rehabilitation Support

 Economic Rehabilitation Support Report No: ; Type: Report/Evaluation Memorandum ; Country: Algeria; Region: Middle East And North Africa; Sector: Macro/Non- Trade; Major Sector: Economic Policy; ProjectID: P035704 Algeria: Economic Rehabilitation Support Operation (Loan 3834-AL) The Algeria Economic Rehabilitation Support Operation (ERSO), supported by Loan 3834-AL for US$150 million equivalent, was approved in FY95. The loan was closed in FY97, after full disbursement. Parallel financing was provided by the IMF (US$1 billion), the EXIM Bank of Japan (US$150 million), and the European Union (US$200 million). The Implementation Completion Report (ICR) was prepared by the Middle East and North Africa Regional Office. The Borrower’s comments were incorporated into the ICR text, but not provided separately. The loan provided general import financing in support of (i) policy reforms aimed at accelerating Algeria’s transition to a market economy; and (ii) mobilizing external financing needed to address mounting external payment imbalances and to restore growth. Support was provided for measures to stabilize the economy, liberalize trade, promote privatization and public enterprise restructuring, reform public expenditure, promote private sector development, bolster the financial sector, and strengthen the social safety net. Achievement of the project’s ambitious objectives was mixed. On the one hand, macroeconomic stability and satisfactory growth were largely restored. This positive result stemmed in part from improved macroeconomic policies, reinforced by large increases in external assistance and forgiveness of some foreign debt, all of which were supported by the loan. But the economy also benefited during this period from fortuitous exogenous factors, including unexpectedly-strong international petroleum prices, favorable movements in major currencies, and benign domestic weather for cropping and cattle- raising. Among the major structural reforms promised, almost all non-tariff barriers and price subsidies were eliminated; budgetary expenditures for wages and transfers to public enterprises curbed; regulation of, and access to, the banking system improved; and important elements of a social safety net introduced. Studies financed by the loan generated some important and useful recommendations for improving public sector management, financial sector liberalization, targeting of poverty initiatives, and improvements in private sector incentives. On the other hand, although a law on privatization was passed and a pilot program launched, in the end, meaningful progress toward restructuring and privatizing public enterprises was not achieved during this period. Moreover, audits of three of the five state banks revealed that the condition of their portfolios was far worse than anticipated, leading to a costly governmental bailout and postponement of liquidation and/or privatization. Thirdly, the incidence of poverty, under the effects of economic recession and civil unrest, actually worsened. Finally, progress toward promoting private sector development was blocked by the presence of money-losing public enterprises in most major sectors, scant progress toward deregulation, and a lack of security countrywide. As experience in other transition economies shows, the benefits of trade and price liberalization are greatly attenuated by the lack of progress on privatization of major enterprises and restructuring of the banking sector. These reforms are now the subject of follow-up Bank adjustment operations. OED’s key ratings on outcome (“marginally satisfactory