## IMF Executive Board Concludes Financial System Stability Assessment with Algeria

_IMF News, October 15, 2020_

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## Bibliographic details
- Published: October 15, 2020

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### Assessment context and timing
- The Executive Board concluded the Financial System Stability Assessment (FSSA) with Algeria on Friday, July 31, 2020 without a meeting.
- The FSSA was prepared by an IMF staff team for the Executive Board’s consideration on Friday, July 31.
- The FSSA reflects discussions with the Algeria authorities in September 2019 and is based on information available at that time.
- The FSSA summarizes key findings of the Financial Sector Assessment Program (FSAP), a program established in 1999; FSAPs are mandatory for the 29 jurisdictions with systemically important financial sectors.

### Main findings on pre-pandemic vulnerabilities
- Prior to the pandemic:
  - Credit growth in Algeria had been rapid.
  - Deficit monetization had raised macro risks.
  - International reserves had fallen substantially.
- Government interventions in the economy are pervasive and funded by hydrocarbon revenue, rendering Algeria highly vulnerable to exogenous shocks and leaving it with limited policy space to absorb them.

### Stress tests and COVID-19 implications
- The stress tests in the report:
  - Account for the effects of COVID-19 in the baseline outlook.
  - Include a more adverse scenario that assumes the outbreak lasts longer than currently anticipated.
- Results indicate:
  - The COVID-19 shock is likely to leave some banks undercapitalized.
  - If prolonged, the shock could result in systemwide undercapitalization.

### Supervisory, regulatory, and risk management weaknesses
- The Bank of Algeria (BA) has managed reserve requirements to address large liquidity shifts from hydrocarbon prices.
- Improvements since the last FSAP have been made, but:
  - Financial supervisors lack independence.
  - Risk management overall could be improved.
  - Although supervisory rules appear adequate, a large stock of legacy NPLs was potentially underprovisioned.
  - Liquidity management is underdeveloped.
- Subsidies administered via the financial sector create vulnerabilities and should be reformed.
- Inclusive finance and digital payments are underdeveloped and should be better developed.

### Key policy recommendations and reforms
- Supervisory coordination and enforcement:
  - Supervisors should meet regularly.
  - The Banking Commission should ensure all banks abide by prudential and AML/CFT regulations, issuing sanctions where warranted.
- Regulatory strengthening:
  - Strengthen the regulatory framework, notably on bank governance internal controls, and politically exposed persons (PEPs).
  - Better credit risk management is needed, and NPL provisioning should be better monitored and enforced.
- Money market and liquidity:
  - Interbank rate fluctuations should be limited within a mid-corridor system.
  - The money market should be better developed.
- Crisis preparedness and systemic oversight:
  - A crisis management framework, including a special resolution framework, should be introduced.
  - Mechanisms for systemic risk oversight should be restarted.
- Sovereign-bank linkages and corporate governance:
  - Better corporate governance and reform of subsidy programs, along with better credit risk supervision, would help contain sovereign-bank linkages.

_Italic: IMF Communications Department, Press Release No. 20/316, October 15, 2020._

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## References

- [Algeria and the IMF](http://www.imf.org/external/country/DZA/index.htm)
- [Financial Sector Assessment Program (FSAP)](https://www.imf.org/external/np/fsap/fsap.asp)
- [Press Releases](https://www.imf.org/en/news/searchnews)
- [PRESS CENTER](http://presscenter.imf.org/)
- [https://www.imf.org/en/home](https://www.imf.org/en/home)

_Source: https://www.imf.org/en/news/articles/2020/10/15/pr20316-algeria-imf-executive-board-concludes-financial-system-stability-assessment_