Measuring Fiscal space available in Algeria: An ARDL Approach

Abstract

This study assesses the fiscal space available in Algeria from 1990 to 2022, with a focus on understanding the government’s ability to implement fiscal policy without compromising financial sustainability. Given Algeria’s heavy dependence on oil revenues, the analysis explores the country’s vulnerability to external shocks and its capacity for fiscal maneuvering. The research employs the ARDL approach using quarterly interpolated data and applies three models: Bohn’s fiscal reaction function and two specifications based on Ostry et al.'s fiscal fatigue framework. The empirical findings confirm the existence of a long-term relationship between the primary budget balance and public debt, with evidence of fiscal fatigue indicated by the negative cubic debt coefficient. The estimated fiscal space is limited, at only 0.10% of GDP, with the debt threshold reaching 62.9%. These results suggest Algeria lacks sufficient space for expansionary fiscal policies. The study's novelty lies in being the first to apply this modeling framework to Algeria, offering a robust and context-specific measurement of fiscal space. Practically, it provides essential insights for policymakers on the risks of excessive debt and highlights the need for structural reforms, revenue diversification, and prudent fiscal management to ensure long-term economic stability and resilience