Algeria - Structural Adjustment Loan

 ICRR 10212 Report Number : ICRR10212 ICR Review Operations Evaluation Department 1. Project Data : OEDID: OEDID : L4005 Project ID : P036076 Project Name : Structural Adjustment Loan Country : Algeria Sector : Other Non-sector Specific L/C Number : L4005 Partners involved : None Prepared by : David Greene (consultant), OEDCR Reviewed by : Roger Robinson Group Manager : Ruben Lamdany Date Posted : 08/21/1998 2. Project Objectives, Financing, Costs and Components : After independence in 1962, Algeria followed a policy of development of state -owned heavy industry and social infrastructure, financed by revenues generated by hydrocarbons . The industrial sector was highly inefficient and when oil prices declined in 1986, the situation rapidly became untenable . The country borrowed heavily to sustain consumption. In the late 1980s-early 1990s, the government took tentative steps to liberalize the system . These measures did not fundamentally alter the state -dominated, control ridden system and did not engender a positive response. The economic situation continued to deteriorate . The reform effort resumed in 1994-95 backed by the Bank (Economic Rehabilitation Support loan ) and Fund. The program successfully liberalized prices and external trade, and introduced a hard budget constraint for public enterprises . A new safety net was put in place . There was also limited improvement in macroeconomic performance . However, the Government has limited room for maneuver in privatizing or liquidating public enterprises or reducing public sector employment because of ongoing political violence. The US$ 300 million SAL approved in 1996 followed the cautious approach of the previous ERSL . The key components of the program were macroeconomic stabilization and rationalization of public expenditures, support for the system of social protection and preparation of large public enterprises for eventual privatization while carrying out privatization of small enterprises . 3. Achievement of Relevant Objectives : The ICR acknowledges that, because of the problem of political violence, the program design was not consistent with Bank best practice in the sense that it supported very gradual privatization, lacked clarity on sequencing of reform and paid inadequate attention to employment creation, as opposed to income support . It nevertheless considers the project marginally satisfactory . Macroeconomic measures were fully implemented, contributing to stabilization. The Government launched an experimental privatization program for very small communal enterprises . State banks were recapitalized . The larger State Owned Enterprises were put under the administration of holding companies and the Government announced it's intention to privatize them . Some progress was made in improving the targeting of safety net programs . The SAL and EFF programs facilitated a debt rescheduling . 4. Significant Achievements : In view of the difficult problem of domestic security, the fact that the government could comply with even the modest requirements of the program and remains committed in principle to establishment of a com petitive market economy is something of a major accomplishment . 5. Significant Shortcomings : The Government continues its go slow reform program . The economy has continued to deteriorate . The privatization of large state enterprises has not yet started and they continue to dominate the economy . The financial system remains noncompetitive and inefficient . The sustainability of the program is unlikely . The depth pace of change has been slow to bring about sustainable growth, unemployment is continuing to rise and "adjustment fatigue" seems to be setting in. 6. Ratings : ICR OED Review Reason for Disagreement /Comments Outcome : Satisfactory Marginally Satisfactory The text of the ICR states that the project was marginally satisfactory, but that rating choice was not available to the Region . OED believes this the appropriate outcome rating. Institutional Dev .: Partial Modest Sustainability : Uncertain Uncertain Bank Performance : Satisfactory Satisfactory Borrower Perf .: Satisfactory Satisfactory Quality of ICR : Satisfactory 7. Lessons of Broad Applicability : The project confirms the validity of the Bank's "best practices." The proper sequencing, depth and speed of reform are critical in shortening the transition period, reversing expectations and bringing about sustained growth of income and output. Furthermore, while stabilization is necessary, broad structural reforms are also vital to sustain the short term improvements in macroeconomic performance . 8. Audit Recommended? Yes No 9. Comments on Quality of ICR : The ICR is comprehensive but it is unfortunate that the aide memoire from the completion mission and Borrowers comments are absent. An essential element in the ex post project evaluation process is the Borrower's close involvement and interest.