CENTRAL BANK CHIEF STAYS THE REGULATORY COURSE

C O N F I D E N T I A L SECTION 01 OF 02 ALGIERS 001307

SIPDIS

CAIRO PASS TO TREAS ASEVERENS

E.O. 12958: DECL: 12/17/2018
TAGS: EFIN EINV ECON PGOV PREL AG
SUBJECT: CENTRAL BANK CHIEF STAYS THE REGULATORY COURSE

REF: ALGIERS 384

Classified By: Ambassador David D. Pearce for reasons 1.4 (b)
and (d).


1. (C) SUMMARY: Bank of Algeria Governor Mohamed Laksaci
told the Ambassador December 7 that he and his organization
are focused almost to a fault on bank regulation rather than
on financial system modernization. Laksaci has been with the
central bank in various positions since 1990, and remains
dedicated to keeping the institution independent and credible
by ensuring that banks in Algeria meet their legal
obligations. The scandals associated with the collapse of
the Khalifa Group in 2003 have strong reverberations even
today (reftel),such that any loosening of inspection rules
or foreign exchange regulations will have to be legislated.
In addition, the institution's capacity for rapid change is
limited. The Ambassador expressed his support for the U.S.
Treasury resident advisor technical assistance program in
place at the central bank, and Laksaci likewise endorsed the
project. Laksaci also noted that the bank is working with
the IMF on technical assistance and evaluation projects, and
seems to rely heavily on their assessments. Even though
Laksaci admitted to the Ambassador that he was an economist
and not a banker, he would not opine on broader issues of
economic reform. END SUMMARY.

SCARED STRAIGHT
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2. (C) The Ambassador asked Laksaci about progress with
financial system reform and about the government's goals for
the economy in general. Laksaci said the Algerian economy
has proved resilient by weathering the current global
financial crisis, showing decent growth and comparatively low
inflation relative to other nations in the region. He
highlighted the nearly USD 140 billion Algeria holds in
foreign reserves, 40 percent of which he said was in Euro.
He noted, regarding the financial sector, that the 13 private
banks in Algeria are foreign (six others are state-owned),
and several of these are now in the process of trying to
expand retail networks across the country. Laksaci said
these banks should be in a good position to provide financing
to small and medium sized enterprises, especially in the
interior of Algeria. He highlighted the growth in public
works projects in recent years, and said that two evaluations
done by the World Bank and the IMF confirmed that Algeria's
banking system conforms to standards regarding systems of
payment and related functions.


3. (C) Laksaci focused his comments, however, on the work of
the central bank in regulating the financial sector rather
than on efforts to modernize the banking system. He said the
activities the Khalifa Bank from 2000 to 2003, which
ultimately led to its collapse and the loss of public pension
funds, had caused the government, and the central bank
itself, to become "very prudent." Other small, domestic
private banks also operating during that time had delegated
internal control of their operations to "intermediaries,"
Laksaci explained, and the lack of due diligence that
resulted caused their collapse. Changes to banking laws in
2006 and 2007, he added, had tightened the requirements for
internal controls and management, and resulted in improved
quality of the banks doing business in Algeria.

NO BREAK FOR BANKERS
--------------


4. (C) Laksaci acknowledged that bankers working in Algeria
chafe against the rigid oversight rules implemented by the
central bank (reftel). He noted that the rules governing the
transfer of dividends have been simplified, but stressed that
the restraints on foreign exchange and the convertibility of
the dinar are not the bank's doing, but are written into the
law and require changes to the law for the bank to end what
is perceived as heavy-handedness among bank examiners. He
said this includes the inspection of bank records and holding
bankers accountable for the actions of their importer clients
engaged in foreign exchange transactions. Laksaci said the

ALGIERS 00001307 002 OF 002


central bank was under "great pressure" to change its
practices, especially from Gulf state banks and investors.
But he also seemed unfazed and unimpressed by these same
institutions. Among foreign banks doing business in Algeria,
he noted, Citibank and the French banks are dynamic and
trying to do good things, whereas the Gulf banks do nothing
to develop the market or the economy.

THE ECONOMY IS NOT MY JOB
--------------


5. (C) The Ambassador pressed Laksaci for insight into the
government's plans for the economy vis-a-vis the banking
system, asking what an enterprising Algerian would likely
encounter if he or she were to present a business plan to a
bank in order to get a loan to build a small factory.
Laksaci avoided answering the question directly, and when the
Ambassador again asked him how the Algerian people can access
the financial system, Laksaci would only suggest that there
is a lot of credit available in the market but that the
consumers have focused on buying cars. He gave the standard
government response that the state's infrastructure projects
should spur local development and job creation, but admitted
that the problem of youth unemployment was persistent, and
that available credit needed to be better disseminated to
small businesses. He also returned to his theme that banking
reform in Algeria has included the need for stricter control
and regulation, and that his bank examiners conform to
international norms in that regard.


6. (C) COMMENT: Given the scope of the Khalifa scandal and
the call for financial system retrenchment that followed it,
Laksaci's focus on maintaining control of the banking system
to prevent another collapse is understandable. As a
long-time employee of the institution, he fiercely guards the
central bank's hard-won independence from the finance
ministry, and what he considers to be its credibility in
adhering to international standards. The U.S. Treasury's
resident advisor noted privately after the Ambassador's
meeting that he has recommended to the governor that the bank
separate foreign exchange inspection responsibility from the
duties of regular bank examiners. While not eliminating all
of the complaints we hear from bankers regarding the strict
enforcement of administrative rules, such a division of
responsibility would elevate the status of true bank
examiners and allow them to focus on priority inspections and
helping banks meet their obligations. It would also remove
some of the negative police-like stigma that bankers have
come to associate with the bank examiners, who have thus far
borne undifferentiated police responsibility over even
relatively minor bank infractions.
PEARCE