Algeria Stabilizes Real Effective Exchange Rate

Progress in Stabilizing the Real Effective Exchange Rate (REER)

The Algerian authorities have made significant progress in stabilizing the real effective exchange rate (REER) of the dinar, bringing it close to its medium-term equilibrium level. According to recent data, the REER appreciated slightly in the first half of 2014, following a period of disinflation that started in February 2013.

Anchor for Monetary Stability

The country’s inflation performance over the past twelve years has been an anchor for monetary stability, despite structural excess liquidity in the money market. The Bank of Algeria has played a crucial role in preserving financial stability, given its dominant position in the Algerian financial system and banks’ potential to develop financial intermediation.

Strong Financial Capacity

The bank’s efforts have been bolstered by a strong financial capacity built up during the period 2000-2008, which enabled the government to mitigate the impact of the 2009 external shock without crowding out domestic demand. This has allowed credit expansion in Algeria to continue at a steady pace, driven by medium and long-term credit dynamics.

Credit Expansion

• The strong growth of credit to the private sector has been a key determinant of monetary expansion.
• The average annual growth rate over the past thirteen years has reached 19.4%.

Micro-Prudential Controls

To ensure financial stability, the Bank of Algeria has intensified micro-prudential controls, including: + Anti-money laundering measures + Stress testing exercises + High solvency ratios, much higher than required under prevailing regulations and in line with Basel III standards.

International Support

The International Monetary Fund (IMF) and the World Bank have helped define further directions in deepening banking sector reforms and strengthening banking system stability in Algeria. Effective implementation has started, with the enactment of three regulations related to: + Solvency ratios + Large exposures + Participations

Updates to Payment Systems Infrastructure

The government is also updating the payment systems infrastructure and establishing a new credit bureau to monitor credit risk. A new risk-based, forward-looking supervision approach will focus on banks’ credit allocation process to avoid the reemergence of credit risk concentration.

Path Forward

These efforts are expected to form the basis for a better allocation of national savings to foster productive investments and financing of non-hydrocarbon inclusive and job-creating growth, less dependent on the budget and driven by SMEs development.