Algeria: Selected Issues

This Selected Issues paper discusses designing a rules-based fiscal framework for Algeria. Algeria’s government has set a number of fiscal reform priorities and aims to maintain prudent and sustainable policies. This paper discusses the design of a rules-based fiscal framework which could help rebuild buffers and support the government’s policy agenda. The proposed calibration, which relies on two separate pillars— a gross debt pillar and a savings pillar—is well suited to Algeria and to its long-term objectives. The paper finds that building a fiscal buffer of about 40 percent of gross domestic product, via the combination of a savings floor and a safe gross debt target, could preserve medium-term fiscal sustainability and insure public finances against hydrocarbon price shocks. The savings floor is calibrated based on a stochastic approach so as to protect Algerian public finances against hydrocarbon price shocks. The debt anchor, or medium-term gross debt target, is calibrated so as to prevent debt from reaching potentially unsustainable territory under a wide range of macro-fiscal scenarios. A multiyear transition period is needed to set the proposed rules-based framework in place.