June 13, 2018

IMF published its staff report and selected issues report in the context of the 2018 Article IV consultation with Algeria. Directors noted that the banking sector continues to perform relatively well. They highlighted that, given the macroeconomic risks and financial linkages in the public sector, the macro-prudential framework should be strengthened, including through more frequent stress tests and development of a crisis management framework.

The staff report highlights that the banking system remained adequately capitalized and profitable, but bank liquidity continued to decline until monetary financing started. Preliminary data at the end of December 2017 suggest that the banking sector remained adequately capitalized, with an overall solvency ratio of 19.6%. The ratio of solvency to tier 1 capital declined slightly from 16.3% at the end of 2016 to 15.2%, owing to the growth of credit to the economy. Gross nonperforming loans increased slightly from 11.9% to 12.3% of total loans at the end of 2017, partly reflecting the ripple effect of the government’s arrears to its suppliers. Banking sector liquidity declined, but remained sufficient to cover about half of the short-term liabilities of banks. The roll out of the Basel II prudential framework, risk-based supervision, and tighter public bank governance rules has improved resilience of the banking sector. Bank supervisors are monitoring banks closely and running stress tests to assess their resilience, which has been deemed adequate barring a major adverse exogenous shock. Nonetheless, given existing risks, more frequent stress tests are needed.

The staff recommends that, although bank regulation and supervision are satisfactory, the authorities should strengthen the prudential framework. Given the macroeconomic risks, more frequent stress tests are needed and the authorities should develop a systemic-risk analysis and containment framework. The prudential framework could be strengthened with the introduction of a countercyclical capital buffer and macro-prudential measures such as loan-to-value limits. The authorities also need to develop crisis management processes and a clear bank resolution framework. If ample liquidity boosts credit expansion, the authorities could introduce a countercyclical capital buffer to moderate risk-taking and consider macro-prudential measures (such as loan-to-value limits). They should develop a systemic-risk analysis and containment framework. Moreover, the authorities need to develop crisis management processes and a bank resolution framework that clearly define the roles and responsibilities of the various parties involved.

The selected issues report examines ways to improve public spending efficiency to foster more inclusive growth. 

 

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Keywords: Middle East and Africa, Algeria, Banking, Article IV, FSAP, Basel II, CCyB, IMF

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