This article has been taken from Menas Associates’ Algeria Focus publication.
The security of Algeria’s foreign exchange reserves is a question that we have asked on several occasions. The question arises because of the opacity of Algeria’s public finances, its endemic corruption at the highest level and because the authorities have never said precisely where forex reserves are held and under what conditions of accessibility.
It was raised again by a leading Algerian news service, Tout sur l’Algérie (TSA), on 18 May.
TSA noticed that in the 15 May publication of US Finance Department data Algeria had placed US$700 million in US Treasury bonds. However, it noted that the money had not been placed directly in US Treasury bills, but placed through third countries and almost certainly foreign banks.
This immediately raises concerns, for two reasons. One is that Algeria’s rulers have a long history of embezzling state funds. The second is that investing through even AAA-rated third-party banks, rather than directly in US Treasury bills, is risky. It may earn the Bank of Algeria better returns, but at a higher risk. And, as the 2008 financial crisis taught the world, a ‘AAA’ rating guarantees very little.
According to the same TSA source, the Bank of Algeria’s dollar reserves are placed mainly through private banks, earning it a better return than if placed directly with the US Treasury. However, the risk, as mentioned, is higher.
At the end of 2014, at the beginning of the current economic crisis, forex reserves stood at around US$192 billion. Senior officials said this was enough to tide Algeria through three, four or possibly even five years of the current crisis.
If that is the case, why is there such a panic over the increasing budget deficit? One reason is because the government is unable to control public expenditure. Another might be because the reserves are lower than publicly stated or, more likely, because part or all of the remaining reserves — having been placed through private banks to get a higher rate of return — are in longer-term investments and cannot be liquidated readily without forfeit.
Questions about the size, location and accessibility of the country’s forex reserves have been bouncing around since the economic crisis began. Unless an independent audit is published soon, dangerous rumours could spread. Moreover, the country needs reassurance that the IMF also has full knowledge of the situation of these reserves. This is particularly necessary in the light of the agreement made with the IMF in the 1990s that, although Algeria would provide the IMF with economic data, the fund cannot make it public. A former finance minister confirmed the existence of this agreement, which was originally designed to ensure that Algeria’s public finances are kept secret, and which we believe is still in place.
The lack of transparency surrounding the public finances — including both the forex reserves and the Fonds de Régulation des Recettes (FRR) sovereign wealth fund — merely adds to national public anxiety and therefore deepens the crisis.
