Enhancing liquidity management in Algeria's financial services

Although the Algerian financial sector’s coverage rates remain healthy – particularly by emerging market standards – the dramatic drop in hydrocarbons receipts since 2014 has brought a swift end to more than a decade of abundant liquidity. As broad money growth contracted to near zero in 2015, banks saw their liquid assets fall to 27.2% of total assets, down from 38% in 2014, according to the IMF’s 2016 Article IV consultation. This shift resulted primarily from an 11.9% expansion of lending to the economy at the same time that deposits contracted, according to figures from the Bank of Algeria (BoA). Short-term deposits shrunk by 12.4% in 2015, propelled by a 41.1% reduction in hydrocarbons deposits.

Exposure Levels

These shifts are unlikely to signal the start of a liquidity squeeze for banks. The IMF pointed out that banks’ liquid assets at year-end 2015 allowed them to cover nearly two-thirds of short-term liabilities. The liquidity situation is thus not considered a fundamental problem, and is instead seen as a return to normal conditions after years of excess liquidity.

However, the impact of softening energy receipts has affected some institutions more than others. The six state-owned banks, for example, are more exposed to the government’s fiscal slowdown, which has had knock-on effects for subsidised loan programmes, food imports and public enterprise investment. For example, local news site Maghreb Emergent reported in July 2016 that at least half of the AD160bn (€1.32bn) the Algerian government paid in 2015 to buy a controlling stake in telecoms operator Djezzy came from Banque de l’Agriculture et du Développement Rural, complicating its liquidity situation. Banque Extérieure d’Algérie (BEA), which holds the accounts of national oil producer Sonatrach, saw its cash holdings and reserves contract by AD151.2bn (€1.25bn), or almost 30%, in 2015, according to figures from BEA.

Support Measures

As a result, the authorities have deployed multiple measures to shore up the banking sector in the face of tightening liquidity. Confronted by the high current account and state budget deficits, they have channelled AD1.33trn (€11bn) from the Revenue Regulation Fund (Fonds de Régulation des Recettes, FRR) reservoir to maintain liquidity. Given that the FRR is set to reach its statutory withdrawal limit in the coming months, other measures are being rolled out. The BoA introduced new prudential controls to ensure that banks maintain certain minimum levels of liquid assets, and it has gradually wound down its liquidity absorption activities since 2015. In April 2016 the BoA also announced the reopening of the rediscount window, which had not been in use since 2001.

New Sources

Efforts to keep the banking system well capitalised have also targeted the informal economy, which is estimated to hold as much as $50bn worth of currency – roughly half of that in circulation – and to be the primary source of the estimated $1.5bn-2bn that leaves Algeria through illicit channels annually, according to an April 2016 report by French news site L’Opinion. A “voluntary fiscal conformity” programme launched in mid-2015 currently offers informal actors the opportunity to place their business proceeds in a bank account and pay a one-off 7% tax. In February 2016 Abderrahmane Raouya, director of general taxes, told state radio station Channel III that only 250 people had participated in the programme in its first six months. The amnesty, which was set to expire in 2016, is expected to be extended through 2017.

Among many possible reasons for the lukewarm reception is that the programme was out-competed by another initiative to shift cash from the informal sector into the formal financial system: the National Economic Growth Bond, which was launched in March 2016 offering tax-exempt returns of up to 5.75%. There are more dramatic back-up options available, as well. The IMF has suggested Algeria consider a return to external borrowing. But ultimately, as authorities continue to adjust policy measures, banks are also doing what they can in order to carefully manage their liquidity postures.