Algeria's economy should grow 2.5 percent this year and 3.4 percent in 2013, the International Monetary Fund said, buoyed by domestic demand, public spending and a rebounding oil and gas sector.

But rising food prices and public wage hikes have pushed up inflation, which spiked to 8.4 percent this year, the IMF said after the visit of its annual mission to the North African country.

The Algerian government has forecast growth of 4.7 percent for 2012 and 5 percent for 2013, Reuters reports.

OPEC member Algeria experienced food riots early last year, but escaped a full-scale "Arab Spring" uprising like those that toppled entrenched rulers elsewhere in the region, partly because the government raised wages for public sector employees and deferred tax payments.

Revenues from oil and gas, which account for 97 percent of the country's exports, helped subsidize wages and the prices of staple goods like wheat, milk, sugar, electricity and water.

As a result, the Algerian economy has become even more dependent on hydrocarbon exports. International oil prices must reach $121 per barrel in 2012 for the government to balance its books, the IMF said.

"The main short- and medium-term challenges facing Algeria will be controlling inflation, strengthening fiscal sustainability, and boosting growth in the non-hydrocarbon sector," the IMF said in a statement.

High youth and female unemployment is also a problem.

The government should also to more to boost economic growth, which remains below potential, by improving the business climate and developing the financial sector, the fund said.

Business Recorder