IMF Concludes Financial System Stability Assessment with Algeria

IMF Concludes Financial System Stability Assessment with Algeria

The Executive Board of the International Monetary Fund (IMF) says it has concluded the Financial System Stability Assessment (FSSA) with Algeria on Friday, July 31, 2020 without a meeting.

However, IMF said COVID-19 shock likely to leave some of Algeria’s banks undercapitalised.

According to the statement, the FSSA was prepared by a staff team of the IMF for the Executive Board’s consideration on Friday, July 31.

It said the FSSA reflects discussions with the Algeria authorities in September 2019 and is based on information available at that time.

Given the focus on vulnerabilities and policy frameworks, IMF said many of the FSSA’s findings and recommendations remain pertinent.IMF Concludes Financial System Stability Assessment with Algeria

It noted that the stress tests in this report account for the effects of COVID-19 in the baseline outlook and include a more adverse scenario that assumes the outbreak lasts longer than currently anticipated.

According to the FSSA, prior to the pandemic, credit growth in Algeria had been rapid, deficit monetization had raised macro risks, and 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.

The Bank of Algeria (BA) has managed reserve requirements to address large liquidity shifts from hydrocarbon prices.

However, IMF said stress tests show that the COVID-19 shock is likely to leave some banks undercapitalized, and if prolonged, could result in system wide undercapitalization.

“While the authorities have made key improvements since the last FSAP, financial supervisors lack independence, and risk management overall could be improved”. IMF noted.

“Although supervisory rules appear adequate, a large stock of legacy NPLs was potentially under-provisioned.

“Liquidity management is underdeveloped.

“Subsidies administered via the financial sector should be reformed and inclusive finance and digital payments better developed”, IMF said.

Looking ahead, IMF stated that supervisors should meet regularly, and the Banking Commission should ensure all banks abide by prudential and AML/CFT regulations, issuing sanctions where warranted.

It added that regulatory framework should be strengthened, 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.

“Interbank rate fluctuations should be limited within a mid-corridor system and the money market better developed.

“A crisis management framework, including a special resolution framework, should be introduced, and mechanisms for systemic risk oversight restarted.

“Better corporate governance and reform of subsidy programs, along with better credit risk supervision, would help contain sovereign-bank linkages”, IMF advised.

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IMF Concludes Financial System Stability Assessment with Algeria