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Low oil prices and political and security risks constitute the main challenges. They will slow down growth, reduce the fiscal space, and discourage private and foreign investment. Even if the country adopts measures proposed in draft 2016 budget, the government is likely to prioritize social stability over austerity. Since mid-2014, Algeria has been severely hit by the crash of international oil prices. The average oil price already fell to US$100/barrel in 2014 but is projected at US$58.3/barrel in 2015. Growth is slowing down, with the GDP growth rate projected to fall from 4.3 percent in 2014 to 2.8 percent in 2015, mainly driven by negative growth in the hydrocarbon sector (and exports) and deceleration in the non-hydrocarbons sector. The fiscal and external positions will remain precarious throughout 2015- 2016. Following small fiscal deficits in the early-2010s, the fiscal deficit is projected to almost double from -6.2 percent of GDP in 2014 to an estimated -11.5 percent of GDP in 2015. The country is also experiencing a significant widening of its current account deficit from -4.5 percent of GDP in 2014 to an estimated -15.8 percent of GDP in 2015. And while the inflation rate subsided to 2.9 percent in 2014, inflationary pressures have surged again and inflation is projected to reach 5.5 percent in 2015. Initial fiscal austerity measures have been announced for the 2016 budget. A high unemployment rate that already increased from 9.8 percent in 2013 to 10.6 percent in 2014, could pick up above 11 percent in 2015 with declining growth. Unemployment is particularly severe among women and youth (25 percent). The government has expressed continued commitment to job creation and reduction of regional disparities although specific measures remain to be developed.
Amid political upheavals in other Arab countries, Algeria's government maintained stability through a combination of minimal political reforms and public sector expenditure. But the long term challenges facing the economy remain unchanged, namely reducing subsidies, improving the business environment, diversifying the economy and creating private sector jobs. While the government talks about the need for reforms, the steps it has taken have been modest. The government formed following the April 2014 presidential elections promised more action but has yet to deliver on promises.
A business climate marked by difficult access to credit, a complex regulatory environment, and time-consuming procedures to set up a business, holds back the private sector. Unemployment has remained at about 10% since 2010, and is significantly higher for youth (24.8%) and women (16.3%). Trade integration has also proceeded very slowly, and negotiations to join the WTO have not made much progress. On the fiscal front, expansionary budgets have propped up the economy but led to widening deficits, which peaked at 6.2% of GDP in 2014 and are expected to remain high in 2015. Hydrocarbon production has been on a downward path since 2006 due to a lack of investment in upgrading existing fields and exploiting new discoveries, while the rise in domestic energy consumption has come at the expense of declining oil exports. Investment in the oil and gas sectors has been held up by uninviting licensing rounds and concerns over security risks. Hydrocarbon exports typically generate around 62-66 percent of total government revenue. Hence, as hydrocarbon exports have fallen from a peak 35.9 percent of GDP in 2011 to 27.2 percent of GDP in 2014. Subsidies in particular, projected to reach close to 13 percent of GDP in 2014, continue to weigh on government finances, underscoring the urgent need for subsidy reform.
To bolster the economy, the government is seeking to further develop its hydrocarbon resources and has also explicitly embraced private sector development by opening research centers and launching major transport and housing projects. Regarding the business climate, the government has established a committee to come up with an action plan to help reform it. In the absence of these much-needed reforms, however, the Algerian economy is likely to continue to grow slowly. Economic diversification and reduced reliance on the hydrocarbon sector are both key to strong and balanced growth.
Source: World Bank Updated: September 2015
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