Foreign Exchange Reserves’ Accumulation and the Impact on the Economies of Algeria and Tunisia

This chapter addresses the issue of foreign exchange reserves in Mediterranean countries. We study the case Algeria and Tunisia in particular, two contrasting examples with respect to this issue. Algeria has accumulated substantial foreign exchange reserves (up to exceed the GDP), thanks to the surplus from the sale of hydrocarbons. To what extent is this large accumulation of foreign reserves justified and what impact does it have on the domestic economy? Tunisia has experienced before the crisis an episode of growth driven by manufactured goods exports, thanks to increased competitiveness, enhanced by what Artus called “semi- mercantilist” behaviour aiming to avoid an excessive appreciation of its currency. Tunisia absorbed relatively well the shock of the international financial crisis, in terms of macro-finance. But another dramatic shock occurred a short time later, subsequent to the revolts that started in January 2011, which may have a greater impact on its public finances and external debt. Finally, this paper addresses the question of a possible alternative policy to the accumulation of foreign reserves, not only in terms of international balances, but primarily from the perspective of the national economies of the region.