Algeria enters 2026 with solid growth, but oil still sets the limits of diversification

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Public investment and moderate inflation are supporting the economy, while large deficits and declining reserves expose persistent vulnerabilities.

ALGIERS — Algeria’s economy is expected to grow at close to 4 per cent in 2026, supported by public investment and a recovery in hydrocarbons. Yet the appearance of stability coexists with large deficits, declining reserves and a private-sector transformation that continues to fall short of official ambitions.

The International Monetary Fund expects growth of 3.8 per cent this year, following 3.9 per cent in 2025. The African Development Bank is slightly more optimistic, forecasting 4.1 per cent. The difference is small, but the composition of growth is more revealing: state investment and non-oil activity sustained demand, while hydrocarbon production remained subdued for much of last year.

There are genuine signs of diversification, construction, manufacturing, agriculture and services have gained ground, and the World Bank estimated that non-hydrocarbon sectors expanded by 5.4 per cent in the first half of 2025. Even so, the state remains at the centre of the economic model, acting as investor, employer and distributor of oil and gas revenues.

Inflation was one of the more favourable surprises, price growth slowed to 1.7 per cent in 2025, according to the AfDB, helped by easing food-price pressures and exchange-rate stability. The Bank of Algeria cut its policy rate to 2.5 per cent in January, seeking to support credit without reigniting broad price pressures.

But the relief may prove temporary. The AfDB forecasts inflation of 3.3 per cent in 2026, while the IMF also expects a short-lived acceleration. The 1.5 per cent rate initially cited for this year therefore appears to describe the recent disinflationary phase better than the outlook for 2026 as a whole.

The labour market remains a weak point, unemployment stood at about 11.6 per cent in 2025, according to World Bank data, and is more acute among young people. Public-sector hiring and infrastructure projects ease social pressure, but they are no substitute for sustained expansion by productive private businesses.

There is also less fiscal room than the narrative of stability suggests, the IMF estimates that the budget deficit narrowed to 10.5 per cent of GDP in 2025, still a high level, while public debt reached 52.1 per cent of GDP, well above the previously cited figure of 46.2 per cent.

The improvement in the deficit depended partly on exceptional dividends from state-owned companies and the central bank, revenues that cannot easily be repeated indefinitely. Financing the state’s needs has also deepened the links between the government, public enterprises and state-owned banks.

The external accounts tell a similar story, rising imports, driven by investment, coincided with weaker hydrocarbon exports, widening the current-account deficit and reducing reserves.

Those reserves remained comfortable at $47.1bn at the end of 2025, equivalent to more than 15 months of imports, according to the AfDB. It is an important cushion against external shocks, but not an inexhaustible one.

For Algiers, 2026 will be less a test of the ability to grow than of the quality of that growth, a recovery in energy prices and output could strengthen revenues in the short term. But oil-price volatility, the links between the government, public banks and state companies, and a large premium in the parallel foreign-exchange market expose longstanding weaknesses.

Diversification is therefore proceeding at two speeds, agriculture, industry and services are making gains, but often rely on investment, credit or protection provided by the state. The private sector continues to face barriers to productivity, financing and the creation of skilled jobs.

Algeria enters 2026 in a more resilient position than many energy-importing economies in the region, but not a comfortable one. Growth near 4 per cent and moderate inflation offer time for reform. They do not guarantee that reform will happen.

Stability will continue to depend on the same sector that the country has spent decades trying to make less decisive.