Journal Issue

Statement by Mr. Jafar Mojarrad, Executive Director for Tunisia, Mr. Cyrus Sassanpour, Senior Advisor, and Ms. Monia Saadaoui, Advisor September 28, 2018

International Monetary Fund. Middle East and Central Asia Dept.
Published Date:
October 2018
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Our Tunisian authorities thank the staff team for a well-written and balanced report and for the candid and constructive policy dialogue. They highly value staff’s assessment and policy advice. They are also grateful to the Executive Directors and Management for their continued support.


The economic recovery has gained further momentum and program implementation has continued to strengthen under the Fourth EFF Review, despite the persistence of heavy headwinds. Rising international oil prices, in particular, exceeded program assumptions, pressuring prices, external balances, and the budget position. The global trade tensions, hardening financial conditions and growing risk aversion abroad, and the regional refugee crisis continue unabated and pose significant risks to the outlook. On the domestic front, there is widespread social discontent with the slow pace of improvement in living conditions and the political landscape is yet to stabilize. The success of the program ultimately hinges on its socio-political acceptability.

Sustained efforts ensured that all the quantitative performance criteria (QPC) for end-June 2018 were met; the continuous performance criterion and all the quantitative indicative targets were also observed; and two of the three structural benchmarks were met—the third (on resolution of Banque Franco Tunisienne—BFT), a carryover from the Third Review, was reprogrammed for November.

The green shoots of economic recovery are giving rise to early optimism that the authorities’ efforts are starting to pay off and that there is light at the end of the tunnel. At the same time, the authorities recognize that there is no room for complacency— especially given the challenging environment—and are determined to redouble their efforts to restore sound macroeconomic fundamentals and promote inclusive growth, with employment and social protection at its core.

Recent Economic Developments

The economic recovery is firming and growth is now expected to reach 2.6 percent in 2018—the highest rate since 2014—on the back of a good harvest and a strong rebound in tourism. Inflation, however, has remained stubbornly high, reflecting a number of factors, including the pass-through of nominal dinar depreciation, fuel and electricity price adjustments, and the slow response of liquidity growth to the monetary tightening that began in early 2017. The demand pressure was contained by tight monetary policy and strong fiscal outturn through mid-year but public debt increased as a percent of GDP due to the exchange rate depreciation. Despite the more recent real dinar appreciation, reflecting the unfavorable inflation differential between Tunisia and its main trading partners, and the sharp increase in oil imports, the current account deficit as percent of GDP was lower by one percentage point at mid-year compared to 2017, reflecting stronger export volumes in response to the real depreciation since 2016 and a strong recovery in tourism and remittances, and reserve losses slowed, even though they remained low due to large debt amortization. The 37 percent increase in tourism receipts during the first half of 2018 is a clear sign of the strong recovery of Tunisia’s beleaguered tourist industry, a major backbone of the economy and a key source of employment for its youth.

Fiscal Policy

The authorities consider fiscal retrenchment the core of their macroeconomic stabilization program and are committed to the 2018–2020 consolidation path of 1 percent of GDP per year reduction in the overall deficit (excluding grants) to reach 2.7 percent of GDP by 2020. In 2018, despite strong revenue performance and containment of current expenditure, the deficit target of 5.5 percent of GDP (excluding grants) has come under pressure, mainly because of the larger-than-anticipated increase in international oil prices and political tensions that delayed energy price adjustments agreed under the Third Review. Also, military salaries were increased—as a part of a 2015 agreement that had been delayed—and voluntary departures of civil servants under the government’s early retirement scheme fell well short of expectations resulting in a wage bill-to-GDP ratio higher than anticipated.

The authorities have agreed with staff to take compensating measures, through a supplementary budget law in October, to bring the fiscal program back on track and achieve the 2018 deficit target. First and foremost, the government will lower fuel subsidies through price increases in September and November (decree already issued), and electricity and natural gas subsidies by raising tariffs in three consecutive months starting in September. Combined with better targeting and improved efficiency and arrears collection, these measures will cut the energy subsidy bill by 0.5 percent of GDP during the last four months of the year—a budget effort equivalent to about 1.5 percent of GDP on an annual basis. The authorities remain committed to their 2020 wage bill target of 12.4 percent of GDP by strictly enforcing a replacement ratio of 25 percent for departing workers, excluding those in defense and security services. More importantly, there will be no wage increases in 2018–2019 unless the economy surprises significantly on the upside, but even then the 2020 target will continue to be binding. Parliamentary approval of the reform bill on the public pension fund CNRPS that had been delayed is now expected in October. However, the law will not be applied retroactively to July 2018, as expected earlier, and the cost to the budget from the delay will be offset by reinforced efforts to collect arrears by social security funds.

The 2019 Budget Law—to be presented to Parliament in mid-October—will target an overall deficit (excluding grants) of 3.9 percent of GDP, consistent with the 2018–2020 consolidation plan. Revenues will benefit from the expected pick up in economic activity (3.1 percent growth GDP compared to 2.6 percent in 2018) and the phasing out of tax credits for civil servants. Moreover, it is intended to eliminate the preferential tax regime for “offshore” companies in steps starting in 2019, and to increase the VAT rate for “liberal professions” (including lawyers, doctors and accountants) from 13 to 19 percent. The revenue impact of these two measures is not significant, but the measures are important for equity and fairness and should improve overall tax compliance. Tax collection efforts will also be strengthened, including through efficiency gains from the consolidation of tax administration functions under the same administrative umbrella and large-scale TA and capacity building programs underway.

With limited revenue gains expected, the focus of the 2019 Budget Law will be on current expenditure restraint, while increasing capital and social spending. As mentioned earlier, through a combination of wage restraint and strict employment, the plan is to reduce the wage bill to 13.6 percent of GDP in 2019 (excluding one-off civil service reform cost), from 13.9 percent of GDP in 2018. The authorities are committed to undertake periodic price adjustments along with other efficiency measures to reduce energy subsidies. Other expenditure saving initiatives will include a stronger oversight of SOEs and better cash management. Pension reforms will continue as the ongoing initial first steps will be followed by a comprehensive reform program with more ambitious parametric changes, with restoring medium- and long-term financial viability of the social security system as the ultimate objective.

Social Protection

Protection of vulnerable groups is one of the key pillars of the authorities’ reform program and a critical requirement for its public acceptance. As the Board was informed during the Third Review, the indicative target on social spending floor was elevated to a QPC as of end-September, and the new floor is likely to be surpassed as the authorities have started replenishing the main social programs set up in 2018. With the assistance of the World Bank, work is also progressing to improve the targeting of social services and service delivery through cash transfers, subsidized health services, and reform of energy and food subsidies. Considerable progress has also been made in expanding the data base of poor and low-income households—476,000 households have already been registered with the expectation to reach 550,000 families by end-December. The database will be mapped against the databases of the two main pension funds and the medical insurance fund to ensure consistency and improve coverage.

Monetary and Exchange Rate Policy

Bringing down inflation to more acceptable levels has proved difficult because of persistent cost-push factors (notably increasing oil prices) and slow monetary transmission that has limited the impact of monetary policy tightening. The high inflation (relative to trading partners) has also buffeted the effectiveness of exchange rate policy and is taxing the purchasing power of all Tunisians. Although progress has been slow and uneven, fighting inflation remains a key mandate for the Central Bank of Tunisia (CBT) and, to that end, the CBT is committed to further tighten monetary policy to contain inflationary expectations and preserve its credibility. It also intends to adopt a more forward looking and well-communicated monetary strategy to anchor inflation expectations better. The CBT is determined to raise the policy rates sufficiently to lift the real money market rate (TMM) firmly into positive territory. It will monitor inflation developments closely, especially in light of fuel price adjustments and exchange rate movements, and will react accordingly and speedily to any upside inflation surprises. A positive real TMM will also help reduce CBT bank refinancing and encourage banks to seek deposits more actively. The effectiveness of monetary policy is further constrained by interest rate caps on lending rates. The authorities expect that the enabling legislation to loosen the caps, that has been pending with Parliament for some time, will be approved along with the implementation decree by the end of the year. Modernizing and strengthening the management and governance of the CBT is another important objective for which the authorities will be seeking Fund TA.

As regards the exchange rate policy, the CBT held three successful competitive FX auctions in August and September. Competitive auctions are anticipated to be the main means of FX market interventions, which in any event will be limited to smoothing excessive market volatility. Observance of program targets on net foreign exchange sales by the CBT since May (notwithstanding a small miss in August during the transition to competitive FX auctions) has helped keep the dinar on a flexible path and preserve foreign reserves. As a matter of policy, the CBT is committed to increasing the role of market forces in determining the exchange rate. It is also committed to eliminate, by end-2018, the exchange restriction arising from access limits on financing non-priority imports, which had created market uncertainties regarding the CBT’s future exchange rate regulations.

Financial Sector Stability

The banking sector remains stable, and NPLs have declined and are expected to fall further as public banks are making progress with their internal restructuring and balance sheet repair, the resolution framework is being reinforced, and banking supervision is being modernized. The banking resolution committee’s decision on BFT is expected in November. The legal framework on AML/CFT is being strengthened by the issuance of a series of decrees on detection of suspicious transactions and on freezing of assets and, as a part of the FATF action plan, the capacities and the reach of the Tunisian Commission for Financial Analysis (CTAF) are being boosted. Further, amendments to the Organic Law on Money Laundering, to apply financial sanctions to combat the proliferation of weapons of mass destruction, are expected to be approved by Parliament in October. Expectations are that these measures will strengthen Tunisia’s corresponding banking relationships and will ultimately convince the FATF to reclassify Tunisia as a cooperative jurisdiction.

Creating Opportunities for the Private Sector

Improving Tunisia’s competitiveness and business climate is another pillar of the authorities’ reform program, and to that end they have set up a dedicated task force to formulate a strategy with the goal of placing Tunisia among the top 50 countries globally and the top 3 in Africa by 2020 in the World Bank’s “Doing Business” ranking. To this end, a set of 50 measures has already been identified covering a broad range of issues and areas. The establishment in 2018 of a “one-stop shop” for investors, and limiting mandatory prior investment authorization to a short negative list comprising eight-sectors are important steps in cutting red tape and speeding up approvals. Good governance and fighting corruption are also priorities. The Board of directors of the High Anti-Corruption and Good Governance Authority is expected to be appointed by Parliament by year end, following further consultations among political parties.


Tunisia has turned the corner in its path toward macroeconomic stabilization and sustained economic recovery, despite a myriad of domestic and external challenges. Despite the recent successes, the authorities are under no illusion that the task is complete. They remain committed to staying on track with program implementation with the ultimate objective of securing high rates of sustainable economic growth that will benefit all Tunisians. The Fund has been a reliable partner in this endeavor and Tunisia has benefitted immensely from Fund policy advice and financial as well as technical support for which the authorities are grateful. They also wish to thank their other partners, both bilateral and multilateral, for their continued financial and technical assistance. They look forward to Board approval of their request for completion of the Fourth Review and modification a performance criteria.

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