IMF: Algeria must be ready to hike rates further as inflationary pressures likely to re-emerge

Algeria's economic growth has picked up momentum as the hydrocarbon sector is expected to expand for the first time in eight years but inflationary pressures may return to the North African country underlining the need to be ready to tighten monetary policy, the International Monetary Fund has said.

The year-on-year inflation rate has risen to a one-year high of 6.8% in Algeria from near zero late last year. The country has been keeping the deposit rate, its benchmark interest rate, at 4% for more than 10 years.

"Given the risk that inflationary pressures could re-emerge, the monetary authorities should remain prudent and stand ready to increase liquidity absorption and interest rates," an IMF statement said.

The IMF has projected Algeria's real GDP growth to reach 4.0% following the 2.8% growth in 2013.

"The hydrocarbon sector is expected to expand for the first time in eight years, while non-hydrocarbon growth remains supportive."

Algeria has substantial external and fiscal buffers, but threats to macroeconomic stability are growing, the Fund warned, saying for the first time in nearly 15 years, the current account is expected to record a deficit.

"Deficits are projected to widen over the medium term, as strong domestic hydrocarbon consumption and lower oil prices weigh on exports, while imports continue to grow, driven by public spending."

Fiscal deficit will widen

The Fund said it expects Algeria's fiscal deficit to widen to over 7% due to lower hydrocarbon revenue, a sharp increase in capital expenditure, and continued high current spending.

"Non-hydrocarbon revenues are below their potential, the wage bill is high, and subsidies and transfers are costly, amounting to about 26% of GDP. Fiscal savings are expected to decline for the second consecutive year."

Algeria, being the country with second largest oil reserves in Africa, has enjoyed macroeconomic stability but faster and more inclusive growth is necessary to create adequate jobs for its youthful population, the IMF said.

"Public investment efficiency is low, and private sector growth is hindered by a cumbersome business climate, an underdeveloped financial sector, and limited international integration."

"Finally, rigidities in the labour market and skills mismatches reduce the impact of economic growth on job creation."

Algeria's dinar has ended all the months starting July lower against the US dollar and is on course to end the sixth straight month lower in December.

Despite some gains over the past few days the dinar is down 10% from June levels and is holding near a multi-year low.