Summary: EXECUTIVE SUMMARY The global crisis has had virtually no impact on Algeria’s financial system, which remains stable overall but thoroughly underdeveloped. Pervasive exchange controls, widespread public ownership, and an abundance of domestic funding have protected banks from external shocks. Financial sector reforms have been pushed to the backburner by the emergence of global financial and regional political turmoil, with privatization of banks halted and consumer lending suspended. The authorities have made progress in a number of areas implementing the recommendations of the 2007 FSAP update. Banking supervision was improved by introducing a risk-based bank rating system, and by tightening and adopting internationally accepted prudential standards. In addition, the central bank has taken on additional responsibilities in the area of financial stability, and has published its first financial stability report. Moreover, the team’s stability analysis suggests only moderate vulnerability of the financial system to shocks. Stress tests indicate that credit and specifically loan concentration are the main banking sector risks, and that public banks are most vulnerable. In particular, the public banks are highly exposed to large state-owned enterprises involved in the manufacturing, construction, and commerce sectors, which leaves them exposed to firm- and sector-specific shocks. However, Algeria’s external and fiscal buffers are substantial, owing to high oil prices, and past experience has illustrated that the state is able and prepared to provide a backstop to the banks. However, a number of important recommendations from the 2007 FSAP remain valid. Governance of public banks still needs to be enhanced, and the operations of the judicial system, including for extra-judicial procedures for debt workouts, requires further strengthening. Public banks have not been privatized, and a well-defined yield-curve based on an interest rate-centered monetary policy is still lacking. Even closer coordination between the BA and the MoF is needed to enable better liquidity management. And besides these measures, a broader reform strategy is needed to better enable the financial system to support economic growth: • Modernizing the financial sector: Measures are needed to facilitate financial deepening, including further improving corporate governance in state banks, implementing the public credit registry modernization plan, improving the collateral regime and strengthening insolvency rights, boosting the financial sector safety net and introducing a dedicated bank resolution regime, enhancing risk-based banking supervision and other financial sector supervision and oversight, strengthening the AML/CFT regime by addressing the strategic deficiencies identified by the FATF, and promoting access to finance.

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