Algeria: A three‐sector macrofiscal model for debt sustainability and growth policy analysis

• Published date: 01 February 2023
• Author: Emmanuel Pinto Moreira,Barış Alpaslan
• Date: 01 February 2023
• DOI: http://doi.org/10.1111/rode.12930

REGULAR ARTICLE

Algeria: A three-sector macrofiscal model for

debt sustainability and growth policy analysis

Emmanuel Pinto Moreira

1

| Barıs¸ Alpaslan

2

1

Country Economics Department,

African Development Bank, Abidjan,

Côte d'Ivoire

2

Department of Economics, Faculty of

Political Science, Social Sciences

University of Ankara, Ankara, Turkey

Correspondence

Barıs¸ Alpaslan, Department of

Economics, Faculty of Political Science,

Social Sciences University of Ankara,

Ankara, Turkey.

Email: baris.alpaslan@asbu.edu.tr

Abstract

In this paper, we present a dynamic general equi-

librium (DGE) model to address the macrofiscal

vulnerabilities and the effects of fiscal policy on

growth and employment in Algeria. We first dis-

cuss the baseline scenario over the period 2021–

2040. According to our baseline results, without

fundamental changes in fiscal policies, even rela-

tively high growth will not be sufficient to put

public debt on a sustainable path. We then conduct

four experiments and assess their impact on fiscal

accounts, growth, and unemployment: an increase

in the efficiency of public spending on infrastruc-

ture investment, a gradual reduction in the share

of noninterest government spending in GDP, the

same gradual reduction in spending combined with

a permanent increase in the share of investment in

infrastructure in total noninterest government

expenditure, and a composite fiscal reform program

that combines these individual policies, respec-

tively. The results suggest that public debt sustain-

ability can be achieved, and growth and

employment can be promoted, as long as an ambi-

tious fiscal reform program involving tax, spending,

and governance reforms is implemented. Impor-

tantly, our quantitative analysis shows that, with a

well-designed fiscal program, there may be no

trade-off between fiscal consolidation and economic

growth.

Received: 11 July 2021 Revised: 15 March 2022 Accepted: 13 April 2022

DOI: 10.1111/rode.12930

Rev Dev Econ. 2023;27:499–524. wileyonlinelibrary.com/journal/rode © 2022 John Wiley & Sons Ltd. 499

KEYWORDS

Algeria, DGE model, fiscal policy, macrofiscal vulnerabilities

JEL CLASSIFICATION

C68, E62, O23

1|INTRODUCTION

Algeria's current economic recession, fiscal imbalances, and financial vulnerabilities, manifesta-

tions of the dual shock of the collapse of oil prices and the coronavirus disease 2019

(COVID-19) pandemic, underscore the fragility of its development model based on hydrocarbon

exports. Real gross domestic product (GDP) growth has been slow around 1% over the past

3 years. Besides, real GDP per capita growth declined from an average of 1.5% between 2014

and 2016 to an average of 0.6% between 2017 and 2019. As a result, real GDP per capita fell

from US$5466 in 2014 to US$4630 in 2019. This moderate growth performance has been regis-

tered despite a relatively high and increasing share of investment reaching an average of more

than 50% of GDP between 2015 and 2019. Very few countries of the region have invested more

than Algeria. However, high investment rates and slow growth mirror the inefficiency of invest-

ment as reflected by high incremental capital–output ratio (ICOR). At the same time, govern-

ment consumption has been high and increasing, reaching a share of about 20% of GDP. With

high shares of investment and government consumption, Algeria's economic model has left lit-

tle room for private consumption, which recorded a low GDP share of about 40%. While prior

to 2000, Algeria recorded trade surplus of about 7% of GDP, the country switched to a trade def-

icit of about 10% of GDP over the recent period. Increasing private and public consumption as

well as investment has led to external imbalances and depletion of Algeria's sovereign stabiliza-

tion fund. Algeria's economic structure is dominated by services and industry (in its turn domi-

nated by hydrocarbons) with a smaller share for agriculture. Between 2000 and 2019, the major

change was an increase in services at the expense of industry accompanied by a slight increase

for agriculture.

Algeria's labor market faces challenges in offering job opportunities for its working-age pop-

ulation, especially for the country's women and youth. Unemployment is high at more than

12% in 2019, while the overall labor participation rate is among the lowest in the world, in par-

ticular for the youth aged 15–24 years.

Algeria has performed better in human development, and its indicators are much better

than its economic and financial indicators. Life expectancy has increased to more than 76 years.

Primary and secondary school enrollment ratios are high. The completion rate increased at all

levels. Women tend to do better than men, underscoring the potential payoffs from enhanced

employment opportunities for women. Rate of access to water and sanitation has also

increased.

However, recent macroeconomic developments point to a deterioration of the macroeco-

nomic framework. The dual shock of the fall of oil prices and COVID-19 has plunged the

Algerian economy into recession. Real GDP is estimated to be 4.7% following a slow growth

of 0.8% in 2019. Government measures of confinement to combat the coronavirus pandemic

have affected the services and construction sectors, leading to massive job losses. The fall of

hydrocarbon revenues has contributed to deepening the twin deficits of fiscal and current

500 PINTO MOREIRA AND ALPASLAN