Algeria’s banking reform has been slow but could pick up later this year as the general election approaches. The sector appears to have avoided the worst of the global economic crisis, having had little exposure to toxic loans and low levels of overseas activity. Prime Minister Ahmed Ouyahia remarked last October that the Algerian economic and financial system was protected from the worst of the crisis as it was not as “evolved and our stock market is not fully integrated into the world financial markets.”
The downturn in the international markets has slowed the reform process. A key component of the reform platform was the privatization of some of the six state banks, with the first of these — Crédit Populaire d’Algérie (CPA) — initially slated for sale in early 2008.
Having planned to sell a 51 percent stake and received expressions of interest from a number of foreign banks, the government announced it was suspending the privatization of CPA indefinitely due to concerns over the impact of the global financial crisis. Officials said that conditions were not right for the sale, which the state hoped would raise some $1.5 billion.
It was also suggested that the overall privatization process had been put on hold due to concerns within Algeria over foreign dominance of the banking sector, as well as perceptions that overseas investors across the economy were repatriating profits without contributing to the country.
The Banque d’Algérie serves as both the country’s central bank and as the regulator for the sector. Though the Banque d’Algérie lists 16 private banks as operating in Algeria, it is the six state-owned institutions that dominate the market. According to a report issued by the Gulf Investment House in December 2008, state banks account for 95 percent of the sector’s total assets. To a large extent, this is due to a 2004 government decree that requires public sector entities to work exclusively with state banks, restricting deposit flows to the private segment.
However, Minister of Industry and Investment Promotion, Hamid Temmar, told parliament in mid-January that the government remained committed to privatization and said that the only state enterprises that would not be sold off were those in the energy sector — Sonatrach and Sonelgaz — and the national railway.
Public banks too have problems of their own. Though they do not have any difficulty in attracting deposits, they are proving less successful in keeping staff. According to a report by the Professional Assembly of Banks and Financial Institutions, more than 2,500 officers of state banks have transferred to the private sector since 2001, lured by higher wages. To try to stem the outward flow of staff, the government offered the state’s 23,000 bank employees up to 30 percent pay rises in June 2008.
With a presidential election scheduled for April 9, there is a chance that the stalled privatization process may be reignited, along with the program of banking reform.
The need for reform in the banking sector was highlighted in the latest study by the US-based Heritage Foundation on the openness of the global economy. In its 2009 Index of Economic Freedom, Algeria’s overall economy was ranked 107 out of the 183 countries assessed and 14 out of 17 countries in the Middle East and North African region, with a score of 56.6 out of 100. However, while scoring highly in some categories, such as 72.5 for business freedom, Algeria’s worst result was in financial freedom, rating just 30 points, almost 20 points below the global average.
The report said that the pace of overhauling the banking sector in Algeria had been slow and uneven and that “reform is critical if resource allocation and private sector development are to improve.”
The government wants to see greater diversity in the economy, to move away from a dependency on the energy industry and to broaden the private sector. To achieve this, it will need to push ahead with its reforms of the banking industry, especially the privatization of state lenders, a step that would result in the return of public funds into the private sector.
