If an end to the era of abundant liquidity in Algeria’s financial sector presents risks, it also has one important advantage: contracting liquidity can restore the Bank of Algeria’s (BoA) capacity to steer the economy via the classic levers of monetary policy. These tools, essentially unused during 15 years of excess liquidity, are now re-emerging for the first time since 2001 – the last year when banks used the rediscount window.
Following years of expansion, the money supply stabilised at near-zero growth in 2015 and banks’ liquidity ratios declined considerably, according to the IMF’s 2016 Article IV consultation, prompting the BoA to announce the reopening of the rediscount facility. In September 2016 it lowered the borrowing rate from 4% to 3.5% to encourage commercial banks to seek liquidity injections. The liquidity absorption facility – effectively the central bank’s only mechanism for influencing Algeria’s monetary situation – remains active, but absorption has been slowed dramatically. Interest rates there are currently set at 0.75% for seven-day term deposits, 1.25% for three-month terms and 1.50% for six-month terms. Collectively these mechanisms clarify the interest rate corridor for banks and other economic actors and offer the BoA the tools it needs.
These monetary policy levers are now in the hands of the BoA’s new governor, Mohamed Loukal, who succeeded the long-serving governor Mohamed Laksaci in June 2016. Loukal, who headed the state-owned Banque Extérieure d’Algérie for a decade, is credited with diversifying its lending portfolio and product offerings and streamlining its management.
Among the pressing issues the BoA now faces is a growing popular fear of inflation risk. Since 2001, Algeria has seen only two years (2009 and 2012) when inflation surpassed 4%. But the dinar’s strong depreciation in 2015 – by over 20% against the dollar and 9% against the euro, according to BoA figures – caused the prices of imported goods to rise apace. Public efforts to reign in imports amid a relative absence of domestic alternatives has created scarcity and put further upward pressure on prices. The consumption price index reached 4.4% in 2015, and based on interim figures the IMF now estimates Algeria will see inflation of 5.9% throughout 2016.
Consumers are feeling the squeeze, and analyses in the local press such as El Watan and Maghreb Emergent presaging further inflation are exacerbating fears. In a February 2016 interview with local news site Algérie Eco, Ali Benouari, director of financial consultancy Ecofinance and a former budget minister, even warned that if the dinar’s drop is not reigned in, Algeria is likely to see a “stagflation” scenario “that will spare no sector and cause large-scale social disruption.”
But inflation is not the chief concern for all actors. Consumer goods clients are more concerned about devaluation and declining purchasing power. The absence of a hedging mechanism – such as an open foreign exchange marketplace – can leave many economic actors fully exposed to the sort of strong exchange rate fluctuations observed over the course of 2016, according Jawad Sacre, deputy chief executive and chief banking officer of Arab Banking Corporation. The BoA has begun evaluating the possible creation of a forward market, a measure which the IMF has encouraged. Such a step could bring a measure of predictability for importers and exporters, as well as other firms with international transactions in their production chain. This is especially true if the BoA allows the dinar to devalue further over the coming months.
While such a move would be in line with IMF recommendations to rebalance the country’s trade deficit, and would at the same time help to artificially offset the decline in hydrocarbons revenues, the bank faces a tricky balance in also ensuring that domestic households are not unduly affected by rising prices. Outlining and executing monetary policy objectives during this sensitive period is no easy task, but more rational liquidity situation gives the BoA the tools it needs to do so.