mohammed laksaci : banking sector reform and financial stability in algeria communication by mr mohammed laksaci, governor of the bank of algeria, for the 38th meeting of the board of governors of arab central banks and monetary agencies, alger, september 2014. * * * introduction after being strongly involved since 2008 in addressing the liquidity crisis through massive liquidity support and expansion of their balance sheets, central banks in advanced countries must now pay more attention to monitoring systemic risk, in a context of interaction between banking and sovereign risks. seven years after the burst of the international economic and financial crisis, the global financial sector reform agenda remains incomplete, while it is now important to also face the issues related to the difficult situation of the global economy transition. this calls for strong efforts to accelerate the repair of banks ’ balance sheets in the euro zone and the early establishment of a unique and independent mechanism of crisis resolution. the prospects of monetary policies normalization ( in particular in the united states ) and its negative effects on emerging economies through capital flows require sustained attention. like other central banks, the bank of algeria had to face the need of further strengthening systemic risk monitoring. this requires the deepening of the banking system reforms. 1. banking sector reform : efforts made prior to the strengthening of the legal framework in 2010 within the broad framework of the economic reforms undertaken in the late 1980s ( overall reform of the economic regulation, including that of price systems ), the banking reform has been implemented since 1990, following the enactment of the law on money and credit ( 1990 ) establishing a two - tier banking system. this major monetary reform reemphasized the role of money and monetary policy - through indirect tools - in macro - financial regulation, thereby enabling a gradual shift from the “ financial repression ” paradigm. since the year 1990, and after assessing the vulnerabilities of the algerian public banking system, a number of reforms have been undertaken to improve the functioning of public banks, reinforce the banking activity operating framework - especially through the opening of the sector to private investors - and promote the development of non - bank financial institutions. based on institutional audits, action plans aiming at improving public banks functions have been launched during the first half of the 1990s and pursued during the 2000s. in order to improve their governance, performance contracts between the public banks ’ managers and the state as the owner, took effect in the beginning of 2007. at the same time, and on the basis of their financial statements audits undertaken by

transfers related to foreign direct investments ( fdis ). the measures do not give rise to any exchange restriction. the objective of the measures is to ensure the traceability of payments related to good faith transactions, hence contributing to combating the parallel sector and ensuring that banks operating in algeria effectively fulfil their responsibility in terms of first - level control of the transactions with the rest of the world, in line with the terms of their license. algeria remains committed to the stability of its exchange rate regime, commensurate with its commitments in the context of article viii of the imf ’ s articles and the association agreement with the european union ( eu ), notably regarding current payments and capital movements. foreign direct investment in algeria is a relatively recent development and has notably followed the achievement of balance of payments viability. for the past six years ( 2003 – 2008 ), total fdis amounted us $ billion 8. 7, of which 47. 3 % from eu countries and 25. 2 % from asian and middle - eastern and north african countries. the share of fdis in the hydrocarbon sector in total fdis, which reached 55 % in 2005, has gradually declined to 42 % on average during the recent years. non - hydrocarbon sectors which attracted fdis include the banking sector, chemical industry, food industry, electricity sector, water desalination, and construction material. the exchange rate policy is conducted by the bank of algeria in the context of a managed float regime of the dinar vis - a - vis the currencies of algeria ’ s main trade partners. since 2004, with a real effective exchange rate ( reer ) around the equilibrium level as determined by the economy ’ s fundamentals, exchange rate policy is well in line with external stability, the latter being anchored to a notably strong net external financial position. in operational terms, the bank of algeria intervenes in the interbank market to ensure that movements in the nominal exchange rate do not affect the long term equilibrium of the real effective exchange rate of the dinar. in this context, despite high volatility of consumer prices and exchange rates in trading partners, including the sharp decline in oil prices in the second half of 2008 ( one of the main fundamentals in algeria ’ s economy ), the reer has remained near its equilibrium level and the external financial position remains comfortable.