In 2003, the International Monetary Fund (IMF) conducted a Financial System Stability Assessment (FSSA) on Algeria's monetary policy based on the country's 1990 Law on Money and Credit. In 2004, the IMF published the results of this assessment, in which it stated that Algeria's monetary policy transparency practices were deficient in several respects. The IMF suggested that Algeria reform its legislation to clarify the responsibilities of the central bank. It also recommended that the process by which monetary policy is formulated and announced be strengthened and that Algeria publicly disclose its internal management procedures and the codes of conduct and ethical behavior to which its staff is subject. In February 2006, Algeria announced to the IMF its intention to participate in the Fund's General Data Dissemination System (GDDS). However, neither the IMF GDDS website nor the website of the IMF's Special Data Dissemination Standard lists Algeria as a participant, as yet.

General Overview

In 2003, the International Monetary Fund (IMF) conducted a Financial System Stability Assessment (FSSA) on Algeria's monetary policy, which was based on the country's 1990 Law on Money and Credit. The IMF assessment, which was published in 2004, indicated that Algeria's monetary policy practices lacked transparency in several areas. According to the IMF, it was necessary that Algeria clarify the central bank's (Banque d'Algerie, or BoA) monetary policy responsibilities and objectives. Also needed were measures to strengthen the procedures by which monetary policy decisions are formulated and announced. The IMF further recommended that the BoA disclose its internal management procedures and any codes of conduct and ethics to which its staff is subject.

Algeria's monetary policy framework is governed by the Law on Money and Credit, No. 90/10 of 1990, and Ordinance 01/01, enacted on February 27, 2001. Another Ordinance on Money and Credit was enacted in October of 2003, in which better coordination between the Ministry of Finance (MoF) and the BoA was addressed. The IMF's 2004 FSSA found that this more recent ordinance has mixed consequences. It contains some improvement to the general monetary policy regime, but it also contains provisions that could compromise the financial and operational autonomy of the BoA.

In a 2004 report on Algeria's economic outlook, the Organization for Economic Cooperation and Development (OECD) asserted that the BoA does not have available all the necessary market instruments appropriate to conducting its monetary policy. It lacks the ability to use open market operations, repo agreements, and loan auctions. This has forced the BoA to fall back on the use of obligatory reserves and tenders to deal with excess liquidity. For example, high liquidity levels were built up in the latter half of 2001. To cope with this, the BoA increased the compulsory reserve ratio from a level of 4.25 per cent in December 2001 to 6.25 per cent, then to 6.5 per cent in March 2004. It has since remained unchanged, according to the 2007 OECD Economic Outlook. The 2004 OECD report found that certain financial sector reforms were also necessary. For one, a regulatory and institutional framework was needed. For another, it might be desirable to permit more private and foreign shareholders in the state banks. In addition, the OECD found that the financial sector and the payments system were in need of modernization. To achieve these reforms, banks needed to be recapitalized and licensed and the concentration of risk needed to be subject to limits. It would also be desirable to improve the classification and securing of loans. Sectoral supervision also needed improvement. Finally, the report suggested that the available monetary policy tools be expanded to allow for the use of indirect market instruments.

The 2006 IMF Article IV Consultation, published in 2007, found that Algeria's monetary data "are broadly adequate for policy formulation and monitoring of economic developments" (p. 36). Improvements in coverage have been achieved since 1998 by the consolidation of the national savings bank's data. They were further enhanced in 2002 by consolidating the banking operations data from the National Mutual Fund for Agriculture. Nonetheless, the IMF report found that state-owned commercial banks were still slow in reporting their balance sheet data, and the reports from most commercial banks were too incomplete to meet the needs of a proper monetary survey. The reliability of bank prudential data was found to be questionable. The IMF called for the institution of high penalties to enforce reporting requirements, the adoption of modern accounting requirements by the banking sector, and the development of a more up-to-date chart of accounts to be applied to banks and finance companies.

According to the 2007 IMF report, "Algeria's exchange rate regime is a managed float with no pre-announced path for the exchange rate" (p. 1). The report judged this to be appropriate, stating that "it is important that [the BoA] continue its flexible management of the exchange rate" (p. 18). The report noted that the first 8 months of 2006 saw a 5% depreciation of the real effective exchange rate (REER), driven largely by the falling dollar against the euro. The IMF found that this environment, coupled with Algeria's full surrender requirement on its hydrocarbon exports, has enabled the BoA to maintain control over the REER and stabilize the exchange rate between the dinar and the dollar since 2004. The 2007 IMF report called Algeria's current monetary policy "prudent" insofar as it conforms to the overall objective of keeping inflation in check. Excess liquidity in the banking system in 2006 was offset by the BoA's deposit auctions. The report added that current conditions (including fiscal expansion and a rise in wages) call for a tighter monetary policy, and stated that managing inflation would be the BoA's principle challenge, going forward. The BoA has announced an intention to raise its policy interest rate as a mechanism by which to absorb excess liquidity.

The 2007 IMF report asserted that, in February of 2006, Algeria announced its decision to participate in the IMF's General Data Dissemination System (GDDS). However, neither the GDDS website nor the website for the IMF's Special Dissemination Standard (SDDS) lists Algeria as a participant as yet.

The Principles

Clarity of roles, responsibilities and objectives of central banks.

NC

The IMF's 2004 monetary policy FSSA found that the Law on Money and Credit was inadequate in its delimitation of BoA objectives. Article 55 of the Law asserts the BoA's responsibilities as the maintenance of domestic and external stability and "orderly" national economic development. The IMF found the equal emphasis laid upon all these objectives could lead to conflicted policy-making and, in the words of the report "limit the legibility and transparency of monetary policy decisions" (p. 34). Thus, the IMF recommended that the Law contain an explicit ranking of BoA objectives. The 2004 FSSA also found the legal allocation of responsibility for monetary and exchange policy to be too vague. Both the BoA and the Council on Money and Credit are implicated in these policies, but their individual roles are not explicitly set forth in the law. However, the FSSA did note that, in practice, the BoA governor serves as the chairperson of the Council, which helps to mitigate the situation. The IMF also found that the law does not set forth a fixed term of office for the BoA governor, nor does it contain explicit criteria by which the governor can be removed from office (other than gross misconduct). In the view of the IMF report, this compromises the independence of the BoA.

Open process for formulating and reporting monetary policy decisions.

NC

The IMF's 2004 monetary policy FSSA found that there was a need to strengthen the process for policy formulation and reporting. At the time of the report, there were no requirements or deadlines governing the BoA announcements. Greater effort to explain policy decisions would be highly desirable, in order to educate the public, and improve transparency. There should be greater effort to consult with the financial community as well, particularly prior to the enactment of policy, not only to explain the rationale behind policy decisions but also to explore their feasibility. A greater commitment to such consultations would have the added benefit of facilitating the implementation of policy.

Public availability of information on monetary policy.

NC

The BoA is required by law to publish an Annual Report that includes a statement of its activities and a balance sheet. In its 2004 FSSA, the IMF found that the publication of this document was subject to lag times that should be reduced. It suggested that the BoA could supplement the report with additional materials that explicitly address the objectives informing monetary policy. The IMF report further remarked that the publications currently available from the BoA were inadequate. The BoA's Annual Report does provide details of the macroeconomic environment, but is insufficiently comprehensive to allow an assessment of whether or not the results achieved matched the objectives that were originally intended.

The 2006 IMF Article IV Consultation found that Algeria's monetary data "are broadly adequate for policy formulation and monitoring of economic developments" (p. 36). Improvements in coverage were achieved since 1998 by the consolidation of the national savings bank's data and enhanced in 2002 by consolidating the banking operations data from the National Mutual Fund for Agriculture. Nonetheless, the IMF report found that state-owned commercial banks are still slow in reporting their balance sheet data, and the reports from most commercial banks are too incomplete to meet the needs of a proper monetary survey. The reliability of bank prudential data is questionable. The IMF called for the institution of high penalties to enforce reporting requirements, the adoption of modern accounting requirements by the banking sector, and the development of a more up-to-date chart of accounts to be applied to banks and finance companies. The 2007 report from the IMF asserted that in February of 2006, Algeria announced its decision to participate in the IMF's GDDS. However, neither the IMF GDDS website nor the website for the IMF's SDDS lists Algeria as a participant, as yet.

Accountability and assurances of integrity by the central bank.

II

There is no information publicly available that directly addresses this principle. The IMF's 2006 Article IV Consultation report found that the reliability of bank prudential data is questionable . The report called for the institution of high penalties to enforce reporting requirements, the adoption of modern accounting requirements by the banking sector, and the development of a more up-to-date chart of accounts to be applied to banks and finance companies. The IMF's 2004 FSSA recommended that the BoA disclose information regarding its internal management procedures. It also stated that the BoA should disclose any codes of conduct or ethics to which its staff must conform. Guidance regarding conflicts of interest should be made explicit, as should the penalties for violation of code requirements.