By Staff Reporter
- Macroeconomic environment has been characterised by high liquidity and this has been hallmark of the Algerian monetary policy framework for most of the 2000s.
- Under current provisions, hydrocarbon resource inflows have to be deposited in dinars in the banking sector.
- As a result, in the early part of the 2000s, rapid net foreign assets (NFA) accumulation—fueled by large hydrocarbon exports and rising prices—and large public (both current and capital) spending led to a fast rise in liquidity.
- The interbank market progressively dried out, to the point that only six transactions were recorded in 2012, compared to an average of 184 over 2007–11. With no financing needs in the banking sector, the Banque d’Algérie (BA) progressively shifted its toolkit from interest rates towards liquidity management tools, developing deposit auctions instruments and using required reserves actively to contain the growth in liquidity.
- Monetary policy managed to keep inflation under control until 2012.
- Increasing volumes of liquidity absorption, together with price controls (26 percent of the CPI basket is
made of regulated prices) and a relatively stable
exchange rate are likely to have contributed to
- Growing imports also limited pressures on domestic absorption and the associated tension on prices, while a prudent fiscal policy, marked by the accumulation of
sizeable fiscal savings, contributed to sterilizing
- The surge of inflation in 2012, fueled both by sizeable current public spending and large hydrocarbon income, was a challenge to monetary policy.
- BA increased liquidity Liquidity absorption auctions and raised the required reserves rate, its reluctance to hike interest rates deprived it of a critical monetary policy instrument. As a result, inflation reached a 15-year high of 8.9 percent.
- Please see the full text http://www.imf.org/external/pubs/cat/longres.aspx?sk=41307.0