Foreign exchange reserve management in Algeria

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Foreign Exchange Reserve Management in Algeria:
Opportunities and Challenges.

Prepared by :
Abdelhamid MERGHIT
Lecturer of economics at Mohamed Seddik Benyahia University, jijel ,Algeria
E-mail: merghit @ hotmail.com.

Abstract

Algeria's foreign exchange reserves vigorous growth has been driven by higher hydrocarbon production, and record-high oil prices, especially since2000,which by the end of 2010 were around US$162 billion (103 percent of GDP). By contrast, the global economic crisis of 2008-09 has underscored the importance of holding an adequate level of reserves, under which countries can strengthen the ability to absorb external shocks.This paper analyzes Algeria's foreign reserves management policy in recent years, especially in light of the global economic crisis. It reviews some of the major stands of the recent debate about whether part of the reserves should be infected by the implications of this crisis.Hence, Traditional Measures for Assessing Reserve Adequacy are utilized to show whether Algeria's reserve holding are still in an adequate level from a precautionary perspective.An important finding of the paper is that Algeria current levels of foreign reserves are still comfortable and safe, as it exceeds all international norms and standards. However,the paper emphasized that sound reserve management policy,is essential for helping Algeria to promote policies and practices that contribute to stability and transparency and to reduce external vulnerabilities.

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1. introduction

The oil sector has been a dominant feature of Algeria's economy for decades making it vulnerable to changes in world oil markets .hydrocarbons in Algeria accounted for 95percent of exports, 60percentof government revenues, and 30percent of GDP.

The first decade of the 21st century was very positive for the Algerian economy. During the past10 years, the economy recovered from the deep socioeconomic crisis of the1990s. Between 2000 and 2010, real GDP and nonhydrocarbon GDP grew respectively at an annual average of 3.7 and5.6 percent, whereas real GDP per head increased by 22 percent, and unemployment fell from 29.5 percent to 10.2 percent.The recent economic growth has been driven by higher hydrocarbon production and accelerating activity in services, construction, and public works. The reasons for this success were prudent fiscal and monetary policies, combined with a period of high oil prices,contributed to build a comfortable financial position, with large external reserves, substantial savings in an oil stabilization fund, and very low public and external debt.

However, Algeria's foreign exchange reserves vigorous growth has been driven by higher hydrocarbon production, and record-high oil prices, especially since2000,which by the end of 2010 were around US$162 billion (103 percent of GDP). The Algerian reserve management policy has been in focus since the onset of the credit crisis in the US financial markets and its contagion effect on the other economies leading to global financial crisis during the second half of 2008 and during 2009.Indeed, an important debate has begun as to whether part of the reserves should be infected by the implications of the global financial crisis. Furthermore, the global economic crisis has underscored the importance of holding an adequate level of reserves, under which countries can strengthen the ability to absorb external shocks.

The ambition of this paper is to shed light on the issue of reserve management policy in Algeria, itsopportunities and challenges. It also,analyzes Algeria's foreign reserves management policy in recent years, especially in light of the global economic crisis.Hence, traditional measures forassessing reserve adequacy are utilized to show whether Algeria's reserve holding are still in an adequate level from a precautionary perspective. In order to discuss these issues the present article is divided in to four sections:Section1: present abrief exposition of the conceptual framework of reserves management. Section 2 provides ananalysis of reserve adequacy in the Algerian economy. Section 3 describes the framework ofreserve management and practice followed by bank of Algeria, and reviews some of the major stands of the recent debate about the Implications of the 2008finacial crisis. And section4concludes.

2 . Foreign Exchange reserve management: A Conceptual Overview

This section presents a brief exposition include some basic concepts of foreign exchange reserves, and the risks associated with reserves management.