Algeria - Public Finances

Public finances

Algeria ranked in the upper range of medium-income countries in 1992, and the government had concentrated for some years on enlarging its industrial sector. The emphasis placed on manufacturing industries resulted in an average gross domestic product GDP increase of 18 percent over the decade from the mid-1970s to the mid-1980s. But accelerated industrialization was achieved at the expense of the agricultural sector, whose GDP share declined from 15 percent in 1965 to 9 percent in 1985. The decline compelled the government to spend hard-earned foreign currency on food imports to meet serious food shortages facing a population that was growing at an average annual rate of about 3.2 percent in the late 1970s. Oil and gas revenues remained Algeria's largest single source of income, but the government in 1993 used up to 98 percent of its hydrocarbon export revenues to ensure its foreignexchange needs. The government in 1993 also revised its budget to reflect the fluctuating, i.e., decreasing, percentage of hydrocarbon earnings caused by oil price changes. As a result, the government has decided to diversify the hydrocarbon industry away from crude oil toward natural gas, condensates, refined products, and petrochemicals. The success of this policy notwithstanding, and in spite of enhanced revenues from other sectors, additional taxation, and customs duties, the government has been unwilling to cut public expenditures significantly, fearing an adverse socioeconomic impact. Whereas the government has committed itself to reducing its external debt in the 1990s, it seemingly cannot afford to abandon investing in critically needed social infrastructure plans.

The government eventually instituted some reforms in public finance management by shifting the responsibility for financing economic activity from the Ministry of Finance to financial institutions and by decentralizing the decision-making process. Begun in 1986, these reforms were designed to transfer economic financing to local governments and public enterprises, including state-owned banks. Financial institutions, which had been limited to acting as cashiers for the ministry, took over the function of financing public enterprises and investment. Ministry of Finance investment financing was limited to strategic projects. The financial system also absorbed most of the ministry's role in housing finance. The Law on Money and Credit, promulgated in 1990, formally transferred the role of financial management to the Central Bank and the Money and Credit Council.

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