Mohamed Loukal, Governor, Bank of Algeria : Interview

Interview : Mohamed Loukal

What objectives has unconventional financing addressed since it was put in place in late 2017?

MOHAMED LOUKAL: The dramatic fall of hydrocarbon prices has had a considerable impact on the economy. It has generated high fiscal and external deficits. Since 2016, the country has showed great resilience in facing the challenges, thanks to the prior accumulation of net budget saving in the Revenue Regulation Fund and international reserves.

Looking forward, the 2018-23 period will be dedicated to the implementation of the structural reforms that are necessary for re-establishing the equilibrium of the national economy, including domestic and external deficits. This set of macroeconomic adjustments and reforms will have to be put in place gradually over the next five years, in order to anchor strong, sustained job creation and inclusive economic growth. To this end, the recourse to unconventional financing has been adopted and is to take place on an exceptional and temporary basis for a period of five years. It has been conceived as a tool to accompany the deployment of a programme of structural economic reforms that aims to restore the equilibrium of the state budget as well as the external accounts in the medium to long term.

Unconventional financing has three main objectives: covering the fiscal deficit, financing the internal public debt and providing funds for the National Investment Fund. As of June 2018, the total amount of these financing resources stood at AD3.6trn (€26.1bn), of which AD2.2trn (€16bn) was provided during the fourth quarter of 2017 and AD1.4trn (€10.2bn) during the first quarter of 2018.

With regards to the monetary effects of this strategy, liquidity within the interbank market, which dropped drastically between the end of 2014 and October 2017 due to high deficit of the balance of payments, and then increased again to AD1.4trn (€10.2bn) at the end of December 2017. In order to prevent any potential inflationary shocks caused by the increased liquidity, the Bank of Algeria has implemented adequate monetary policy tools to neutralise any excess of liquidity resulting from unconventional financing operations. In January 2018 the bank restarted open-market operations to absorb liquidity at different maturity levels – 24 hours, one week and one month – and twice raised the reserves requirement ratio, from 4% to 8% in January 2018 and from 8% to 10% in June 2018.

This monetary policy, and particularly the aforementioned operations of liquidity absorption, relies on tools that assess and forecast the level of liquidity and therefore allow the bank to identify the amounts to absorb in order to maintain a suitable level of free reserves within the banking system.

How could a softening of the regulations over currency exchange help to boost inflows of foreign direct investment?

LOUKAL: The national currency is fully convertible for all current account transactions of the balance of payments. In 1997 Algeria adopted the IMF’s Article VIII and committed to introducing no exchange restriction on these operations. Regarding financial operations of the balance of payments, Algeria’s foreign exchange regulatory framework is supportive of foreign direct investment. Within the current foreign investment legislation, there are regulations for the transfer of the dividends on the foreign capital invested, including the reinvestment of dividends, as well as the proceeds from a cession or liquidation.

In order to increase foreign direct investment inflows to Algeria, which currently remain at low levels – at around $1.2bn as of 2017 – we will need to place more focus on other challenges. The country is taking sustained steps to improve the business environment with a view to enhancing the attractiveness of our economy to outside foreign investors.