Buoyant Capital Spending and Worries over Real Appreciation: Cold Facts from Algeria
23 Pages Posted: 27 Dec 2007
Date Written: December 2007
The Government of Algeria has pursed a relatively expansionary fiscal policy in recent years, thanks to rising oil prices and revenues. The paper explores the potential effects of such a stance on real exchange rate and uncovers a relatively small appreciating effect of increased government capital expenditure. This is explained by the fact that a significant share of capital spending falls into tradable imported goods. However, the envisaged increase in capital spending, if well designed and implemented, might in the long-run translate into rising operations and maintenance expenditure - mostly non-tradable goods - thereby causing a higher real appreciation. This implies that Algeria should carefully consider the implications of its public investment program on recurrent expenditure.
Keywords: Government expenditures, Algeria, Oil, Real effective exchange rates
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