The Relationship Between Domestic Debt and Monetary Stability in Algeria

Abstract

This study examines the complex relationship between domestic public debt and monetary stability in Algeria, a hydrocarbon-dependent economy that has increasingly relied on domestic financing mechanisms to address persistent fiscal deficits. Using a mixed-methods approach combining quantitative time-series analysis (1990–2025) with a qualitative assessment of policy frameworks, the study investigates how the accumulation of domestic debt affects key monetary stability indicators, including inflation, exchange rate dynamics, money supply growth, and interest rate transmission.
The findings reveal a nuanced relationship. Although Algeria's public debt is almost entirely domestic (approximately 99%) and denominated in local currency, thereby eliminating exchange rate risks, reliance on central bank financing and non-marketable debt instruments has created significant challenges for monetary policy independence. Empirical analysis indicates that a 1% increase in domestic debt is associated with a 46% increase in the inflation rate, although other studies suggest the absence of a statistically significant relationship, indicating that the impact depends on the financing mechanism employed.
The study concludes that monetary stability in Algeria depends on strengthening fiscal discipline, reducing reliance on monetary financing, enhancing monetary policy transmission channels, and developing domestic debt markets.