Viewpoint: Mohamed Loukal
The drastic oil price decline as of mid-2014 had a considerable impact on Algeria’s domestic and external balances, reflected in record current and fiscal deficits and, consequently, in the significant erosion of fiscal savings and reserves. Subsequently, the shock leaked to the banking sector, through sustained liquidity contraction.
To face the situation, the government has adopted a new strategy, aimed at anchoring sustained, high, job-creating and inclusive growth.
The strategy stands on two main pillars, namely (i) restoring macroeconomic stability, notably with the adoption of an ambitious medium-term ( 2017-19) fiscal consolidation plan – the recently adopted 2017 Budget Law constitutes a meaningful first step in the right direction – and (ii) promoting economic diversification and productive sector development through wide-ranging structural reforms, in addition to other measures to further improve the business environment.
Bank of Algeria is taking an active part in this process, while ensuring effective conduct of its core missions, namely preserving price and financial system stability, notably through effective monetary policy implementation and sound banking supervision, in line with international best practices.
In this regard, it has recently taken a set of key steps, aimed at reassuring its readiness to respond to banks’ increasing liquidity needs in support of sound credit provision to the economy.
This is to sustain economic activity, and encouraging export diversification and expansion by introducing more flexibility in its non-hydrocarbons export-related regulations.
The first set of measures includes the re-activation of the refinancing instruments, following a long-lasting period of inactivity, given a context of structural excess liquidity in the money market over the past few years.
Moreover, the rediscount rate has been reduced by half a percentage point, and the reserve requirement rate has been brought down from 12% to 8%, thereby freeing additional resources for the banking sector.
In addition, and in view of the large proportion of long-term credits in banks’ portfolios, eligibility to the refinancing mechanism has been extended to a segment of these credits, as well as to part of banks’ subscriptions to the recent Treasury bond issue, hence providing the banking sector with extended refinancing opportunities.
At the same time, to strengthen monetary policy efficiency and improve its transmission mechanisms, Bank of Algeria has set up the operating modalities of the “open market operations” and “marginal lending facility” instruments to ensure effective interest rates monitoring and liquidity management.
Finally, to contain the cost of bank financing for the economy, an “excessive rate” has been introduced, and its computing method defined, to serve as a cap for banks’ lending rates.
On facilitating export operations, measures have been taken to smooth the process regarding the settlement of imports of inputs in the production of exportable goods.
In the same vein, the export proceeds repatriation period, initially required not to exceed 180 days, has been extended to 360 days, provided that the exporter subscribes an export insurance contract, which, in turn, could back requests for bank advances.
Moving ahead, Bank of Algeria is working on further developing the interbank exchange market, particularly its forward segment, to provide economic agents with hedging possibilities against exchange rate risk and contribute to strengthening confidence in investing and exporting.