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Tunisia: Third Review Under the Stand-by Arrangement, Request for Modification of Performance Criteria and Waivers of Applicability

Author(s):
International Monetary Fund. Middle East and Central Asia Dept.
Published Date:
May 2014
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Background

1. After the political impasse of 2013, the adoption of a new constitution and the formation of a new technocratic government in January 2014 led to greater confidence on political prospects and economic reforms. Markets responded positively to the latest political events. Investors are hopeful that the new technocratic government can continue to preserve macroeconomic stability and make progress on important structural reforms in the lead-up to the presidential and legislative elections expected to take place in the last quarter of this year.

2. The new government is determined in its efforts to advance the reform agenda supported by the SBA but is facing a difficult economic situation. The protracted political stalemate of 2013 took a heavy toll on the economy and slowed progress on the economic agenda. In addition, social tensions continue to run high as expectations of better opportunities have not yet materialized, resulting in the continuation of numerous strikes and workers’ demands.

3. Successful implementation of the Fund-supported program will not only depend on the government’s strong commitment, but also on its ability to garner consensus from political parties backing it. It will also be contingent on its capacity to push reforms past vested interests, including those within the administration. Communication on the need for reform and action—as done recently by the Tunisian Prime Minister in a speech in early March—could help mobilize the population behind necessary but sometimes difficult reforms. Important external financing, mostly from multilateral partners, will be needed this year to accompany the authorities in the implementation of their reform agenda and meet budget needs.

4. The third review focused on short-term macroeconomic stabilization objectives and in paving the way towards reducing banking sector vulnerabilities in the context of Tunisia’s fragile economic situation and difficult social setting. Economic indicators point to an economic recovery that continues to be weak and remains insufficient to make a significant dent in unemployment in the short term, even as demands for additional jobs and wage increases are rising. Measures in the near term center on containing vulnerabilities arising from high external and fiscal deficits by containing current expenditures, and pursuing a prudent monetary policy and greater exchange rate flexibility. Improvements in the banking regulatory environment and the finalization of the audits of public banks allow for an increased focus on banking sector fragilities that need to be tackled so that banks can play their proper financial intermediation role. Scaling up public investments, reforming tax policy and administration, improving governance of public enterprises, and protecting the most vulnerable will help lay foundations for inclusive growth and level the playing field for investors.

Context

A. Recent Developments

5. Growth has been moderate. Real GDP growth in 2013 was revised slightly downward to 2.6 percent, weighed down by a weak fourth quarter (-0.3 percent q-o-q) and plagued by a strike-weary manufacturing sector and moderate tourist activity. Agriculture and mining sectors have also been contracting, due in part to a weak harvest and enduring work disruptions. Services, particularly from the public sector, remained the main driver of growth. The unemployment rate fell to 15.3 percent in end-December 2013, and remains high among the young and graduates at about 32 percent.

Industrial Production Index, 2007–13

(Y-o-y growth, 3-month moving average, in percent)

Source: Tunisian authorities.

Unemployment Rate Among Graduates, 2006–2013 Q4

(In percent)

Source: Tunisian authorities.

6. Inflation has been slowly decelerating. Over the past few months, smaller rises in food prices have led to a decline in headline inflation to 5.5 percent (y-o-y) in February 2014, down from 6 percent at end-2013. The recent increases in administrative energy prices and the depreciation of the exchange rate over the past year had limited impact on both headline and core inflation, with the latter also falling to 4.5 percent (from 4.7 percent in December 2013).

Inflation, 2008–14

(y-o-y growth rates, in percent)

Source: Tunisian authorities.

7. The current account deficit remains high in 2013, with lines of credit boostingreserves above the critical three months of import coverage. The deficit deteriorated slightly to about 8.4 percent of GDP, driven by depressed demand for Tunisian manufactured goods, lower exports of energy and phosphate products, and weaker tourism and remittance receipts. Deposits at the Central Bank of Tunisia (CBT)—from the Qatari National Bank and a European commercial bank—helped keep reserves above three months of imports. Gold revaluation and some exchange rate valuation gains increased reserves by an additional $500 million to $7.7 billion (about 3.5 months of imports).

8. Financial markets have benefited from a more promising and stable political environment. Since the beginning of the year, spreads have declined overall, and the stock market rose but has been recently weighed down by banking stocks. Over the same period, the exchange rate has appreciated by 4 percent vis-à-vis the U.S. dollar and 5 percent against the euro, helped by a stricter implementation of existing regulation on holders of commercial foreign exchange accounts (Tunisia has “capital controls” and holders of FX can only use it for current account transactions) and continuing sales of foreign exchange by the CBT (see text chart). This has led to a reversal of almost half of last year’s depreciation.

Reserves, Spot FX Interventions, and Exchange Rate

(In US$ billions, eop, unless otherwise indicated)

Sources: Tunisian authorities; Fund staff estimates.

Stock Index and CDS Spreads, 2010–14

(In basis points, unless otherwise indicated)

Sources: Tunisian authorities; and Bloomberg.

Exchange Rates, 2008–14

(Jan. 2008=100, + = appreciation)

Sources: Tunisian authorities; and IMF staff estimates.

9. Monetary policy remains accommodative. The 50 basis point increase in the policy rate in December 2013—combined with the narrowing of the interest rate corridor—left the effective money market rate unchanged at 4.75 percent, the top of the interest rate corridor (text chart). Despite lower reserve requirements, bank refinancing—mostly to the largest state-owned and private banks—has increased by an additional TD 504 million in January 2014 to more than TD 5 billion (including OMOs), its highest level since October 2012. Higher bank refinancing has mostly helped finance bank overdrafts and rollover of existing loans, and did not lead to higher private sector credit, which remained subdued at 8.1 percent y-o-y in January 2014.

Growth in M3 and Credit to the Economy, 2011–13

(Y-o-y growth, in percent)

Source: Tunisian authorities.

Tunisia: Structural Liquidity Deficit of Banking System

(In TND billions)

10. Bank vulnerabilities are increasingly coming to the fore (Table 7). As of end-December 2013, the overall capital adequacy ratio of the banking system declined from 11.8 percent in 2012 to about 9.2 percent in 2013, after the application of new conservative haircuts on the valuation of loan collateral (in line with the CBT’s efforts to align its prudential norms with international standards), which also led to an increase in the provisioning ratio to about 60 percent (from 46 percent before). As a result, six banks—which cover 42 percent of banking assets—have fallen below the new minimum capital requirements, which increased from 8 percent to 9 percent this year. Profitability—which has so far remained positive—could decline further as intermediation margins come under pressure (banks competing for deposits) and new collateral requirements limit banks’ ability to access CBT refinancing. Asset quality continued to be weak, with nonperforming loans (NPLs) remaining stable at about 15 percent of total loans, 20 percent once NPLs held by banks’ affiliates are accounted for (MEFP, ¶15).

Table 1.Tunisia: Selected Economic and Financial Indicators, 2010–15
201320142015
201020112012Prog. 05/24/13Prog. 01/24/14Est.Prog. 05/24/13Prog. 01/24/14Proj.Proj.
Production and income (percent change)
Real GDP2.6−1.93.74.02.72.64.53.02.84.2
GDP deflator4.34.65.35.65.85.74.44.95.14.8
Consumer price index (CPI), average4.43.55.66.06.16.14.75.55.54.9
Consumer price index (CPI), end of period4.04.25.95.36.06.05.05.35.34.5
Gross national savings (in percent of GDP)20.916.216.117.315.113.919.017.114.215.8
Gross investment (in percent of GDP)25.723.624.324.723.322.325.023.821.522.1
Central government (percent of GDP, unless indicated otherwise 1/
Total revenue (excluding grants)23.424.523.123.823.423.624.022.623.123.2
Total expenditure and net lending24.028.028.831.129.529.730.329.729.927.6
Central government balance (excluding grants)−0.6−3.5−5.7−7.3−6.2−6.1−6.4−7.1−6.8−4.4
Central government balance (excluding grants, cash basis)1.6−2.8−5.0−7.3−4.5−4.5−6.4−8.9−8.6−4.4
Structural fiscal balance 2/−1.1−3.0−5.3−5.0−4.6−4.6−3.8−5.2−4.9−4.0
General government debt (foreign and domestic)40.744.544.545.345.044.749.551.750.952.6
Foreign currency public debt (percent of total debt)60.758.062.865.764.964.368.570.970.170.1
Total external debt
External debt (US$ billions)21.422.124.325.024.425.427.627.428.230.2
External debt (in percent of GDP)48.548.053.852.051.953.955.556.957.359.8
Debt service ratio (percent of exports of GNFS)10.511.912.09.59.49.59.28.69.37.0
Money and credit (percent change)
Credit to the economy19.613.48.810.89.26.811.76.08.57.6
Broad money (M3 of the financial system)12.19.18.412.67.66.612.010.89.610.8
Velocity of circulation (GDP/M2)1.541.451.461.361.481.481.321.451.461.44
External sector (percent change)
Exports of goods, f.o.b. (in $)14.08.5−4.66.53.80.35.63.01.74.5
Imports of goods, f.o.b. (in $)15.97.72.15.12.7−0.53.71.71.43.2
Exports of goods, f.o.b. (volume)5.6−0.51.25.72.33.25.22.12.15.4
Import of goods, f.o.b. (volume)−2.73.78.55.83.75.16.13.71.65.5
Trade balance (in percent of GDP)−10.4−10.4−13.5−12.6−12.9−12.6−11.9−12.3−12.1−11.7
Current account (in percent of GDP)−4.8−7.4−8.2−7.5−8.2−8.4−6.0−6.7−7.2−6.3
Foreign direct investment (in percent of GDP)3.00.93.92.12.22.22.52.22.22.9
Terms of trade (deterioration -)−9.44.90.01.42.52.72.53.7−1.00.8
Official reserves
Gross official reserves (US$ billions, e.o.p)9.57.58.79.06.87.710.89.19.010.1
In months of next year’s imports of goods and services, c.i.f.4.43.44.03.83.03.54.23.83.94.3
Memorandum items:
GDP at current prices (TD millions)63,05964,69070,65878,33477,07276,57085,46583,28182,72890,350
GDP at current prices (US$ billions)44.146.045.248.947.047.150.648.249.250.5
Population (millions)10.510.710.810.910.910.911.111.111.111.2
GDP per capita (US$ millions)4,1774,3054,1984,4834,3034,3174,5764,3544,4494,509
Unemployment rate (in percent)13.018.317.616.715.816.015.315.0
Exchange rate: dinar/US$ (average)1.431.411.561.62
Real effective exchange rate (percent change, depreciation -) 3/−0.52−1.77−1.82−1.28
Interest rate (money market rate, in percent, e.o.p)4.13.53.3
Stock market TUNINDEX (12/31/1997=1000)5,1134,7224,5804,381
Sources: Tunisian authorities; and IMF staff estimates and projections.

Excludes the social security accounts.

Excludes banking recapitalization costs and one-off arrears payments for energy subsidies.

Information Notice System.

Sources: Tunisian authorities; and IMF staff estimates and projections.

Excludes the social security accounts.

Excludes banking recapitalization costs and one-off arrears payments for energy subsidies.

Information Notice System.

Table 2.Tunisia: Balance of Payments, 2010–15(In millions of U.S. dollars, unless otherwise indicated)
Prel.Projections
201020112012201320142015
Q1Q2Q3Q4Year
Current account−2,105−3,401−3,706−3,963−1,192−997−606−769−3,563−3,186
Trade balance−4,575−4,799−6,105−5,937−1,537−1,666−1,482−1,281−5,967−5,919
Exports16,43117,82416,99717,0504,2404,6134,0214,45817,33218,118
Energy2,3152,5922,8492,5916086615776392,4852,460
Non-energy14,11615,23114,14714,4593,6323,9523,4443,81914,84715,659
Imports−21,006−22,623−23,102−22,987−5777−6279−5503−5739−23,299−24,037
Energy−2,653−3,409−4,100−4,172−1,101−1,197−1,047−1,132−4,476−4,358
Non-energy−18,353−19,214−19,001−18,815−4,676−5,082−4,456−4,608−18,823−19,679
Of which: Nonfood−16,810−17,339−17,513−16,633−4,139−4,498−3,946−4,056−16,638−17,703
Services and transfers (net)2,4701,3982,3991,9743466698775132,4042,732
Nonfactor2,4601,5521,9461,7484724917241801,8672,153
Of which: Tourism2,4611,6802,0311,9883095027705272,1092,352
Factor Services and Transfers (net)10−154453226−127178153333537579
Of which: Workers’ remittances2,0631,9902,2352,2674415558136012,4112,453
Interest payments on external debt−632−653−618−571−144−168−137−124−573−541
Capital and financial account1,3431,3094,8662,8612673539481,8783,4453,931
Excluding grants1,2521,1424,4122,6072353289111,7973,2703,767
Capital account8215444224731233579168158
Financial account1,2601,1554,4242,6132363309121,7993,2773,773
Direct foreign investment (net)1,3094171,7721,0282242532873221,0861,453
Medium- and long-term loans (net)1456521,6238302011733581,1301,8631,206
Disbursement1,8452,7073,6822,3514205315741,8573,3822,329
Amortization−1,700−2,055−2,059−1,521−219−359−215−726−1,519−1,123
Short-term capital−193851,232932−186−822874855041,282
Errors and omissions 1/−316108−31−13−146231−3−255782
Overall balance−1,078−1,9841,130−1,115−1,070−4133391,084−60827
Reserve liabilities (Fund credits)0001505074452212211394223
Changes in gross reserves10781984−1130965563−31−560−1307−1334−1050
Memorandum items:
Current account balance/GDP (percent)−4.8−7.4−8.2−8.4−2.3−2.0−1.2−1.7−7.2−6.3
Reserves (in billions of US$)9.57.58.77.77.17.27.79.09.010.1
Reserves in months of imports of goods 2/4.83.74.33.73.53.63.84.34.34.6
Reserves in months of imports of goods and services 2/4.43.44.03.53.23.33.63.93.94.3
Reserves/total short term external debt (percent) 3/191.3147.2139.7121.6132.5126.6128.8154.1156.3165.2
Excluding nonresidents deposits402.5308.8265.3252.3274.9262.8267.2319.7604.8638.9
Reserves/short-term debt (on remaining maturity)142.7106.9104.798.3114.0101.3112.9104.4125.2140.7
External debt service (in percent of exports of goods and
non factor services), excluding non resident deposits234.5172.4162.2169.1205.7173.1206.8160.8308.1382.0
External medium- and long-term debt (billions of US$)16.416.918.119.120.020.621.222.522.424.1
External medium- and long-term debt/GDP (percent)37.236.940.140.538.641.543.947.745.647.7
External short-term debt (billions of US$)5.05.16.26.35.45.76.05.95.86.1
External short-term debt/GDP (percent)11.311.113.713.410.411.412.412.411.712.1
Debt service ratio (as percent XGS, including IMF)10.511.912.013.66.78.96.315.18.36.5
Goods export real growth (percent)5.6−0.51.23.20.5−4.7−4.3−4.12.15.4
Non-energy7.82.30.92.7−16.8−3.1−2.60.13.05.4
Goods import real growth (percent)−2.73.78.55.19.73.43.63.61.65.5
Non-energy−3.04.47.35.23.63.4−12.17.11.05.8
Sources: Tunisian authorities; and IMF staff estimates and projections.

Differs from zero in current and future years because of stocks valuation effects.

End-of-year reserves over next year imports.

Short-term defined as one year or less.

Sources: Tunisian authorities; and IMF staff estimates and projections.

Differs from zero in current and future years because of stocks valuation effects.

End-of-year reserves over next year imports.

Short-term defined as one year or less.

Table 3.Tunisia: External Financing Needs, 2010–15(In millions of U.S. dollar)
201020112012201320142015
Q1Q2Q3Q4Annual
Prel.Proj.Proj.Proj.Proj.Proj.Proj.
Total financing requirements9,22610,55110,27010,7277,1096,9286,6217,00110,4559,247
Current account deficit - Capital transfers2,0223,2473,2643,7151,1609745706903,3943,028
Current account deficit2,1053,4013,7063,9631,1929976067693,5633,186
Capital account8215444224731233579168158
Amortizations6,8877,4126,9756,9995,8036,1856,0486,2867,1176,301
General government1,0171,4191,2331,023119196114186997668
Banks484559357127113732
Corporate 1/5,8225,9485,6835,9405,6775,9775,9276,0896,0835,601
Short-term debt5,1875,3574,9165,4775,5845,8265,8335,9435,5985,178
Long-term debt6355917674639315194146485423
Net errors and omissions316−1083113146−231325−57−82
Total financing sources9,22610,55110,27010,5786,6016,4836,4006,7809,0619,024.1
FDI (net)1,3094171,7721,0282242532873221,0861,453
Disbursments (debt)6,7918,55510,0378,8915,7476,3896,6907,7269,5088,819
General government7981,7783,1801,5512964114561,5702,7871,733
Banks74663657998164242
Corporate 1/5,9196,7116,8217,2835,4425,9696,2256,1406,6797,044
Short-term debt4,9465,8486,3556,5405,3275,8576,1165,9286,1266,491
Long-term debt973863466743115112109212553553
Other portfolio flows net (Including Drawdown in commercial banks NFA)48−406−409−30767−128−1639−199−199
Drawdown in gross reserves1,0781,984−1,130965563−31−560−1,307−1,334−1,050
Financing gap0001505074452212211,394223
Fund credits 2/0001505074452212211,394223
Purchases0001505074452212211,394223
Repurchase0000000000
Memo items
Gross international reserves (in millions of U. S. dollars)9,5097,5258,6557,6897,1267,1577,7179,0249,02410,073
In percent of short-term debt at remaining maturity142.7106.9104.798.3114.0101.3112.9104.4125.2140.7
Government rollover rates (in percent)78125258152249209400845280260
Banks rollover rates (in percent)1531466116112474116146114131
Corporate rollover rates (in percent)10211312012396100105101110126
Sources: Tunisian authorities; and IMF staff projections.

Includes public and private entreprises.

Under the proposed schedule of purchases during SBA.

Sources: Tunisian authorities; and IMF staff projections.

Includes public and private entreprises.

Under the proposed schedule of purchases during SBA.

Table 4a.Tunisia: Central Government Financial Operations, 2012–15 1/(In millions of dinars)
2012201320142015
Q1 Act.Q2 Act.Q3 Act.Q4 Act.Prog. 01/24/14Annual Est.Prog. 05/24/13BudgetProg. 01/24/14Q1 Proj.Q2 Proj.Q3 Proj.Q4 Proj.Annual Proj.Proj.
Total revenue and grants16,9394,2774,7674,3814,72618,11118,15020,87619,18719,0474,6534,7144,7005,25919,32521,271
Revenue16,3104,2444,7654,3394,69118,00118,03920,47618,97318,8334,6214,6924,6575,14119,11120,957
Tax revenue14,8643,9793,9184,0164,42016,29916,33318,82917,89717,7574,4064,3164,4424,87218,03519,596
Nontax revenue1,4462658023232671,6531,6571,6371,0721,0722143752142681,0721,351
Capital income004504494910441111410
Grants6293314234110110400214214322143118214314
Total expenditure and net lending20,3444,9784,1495,3618,25922,75922,74625,93124,82524,7684,8735,6026,1828,07324,72024,916
Total expenditure20,6944,9564,2015,2908,30122,76422,74724,23524,32523,6484,8535,6025,8927,26323,60024,816
Current expenditure16,0034,6293,2494,4906,65418,99619,02318,36319,62419,3204,5204,5674,8545,34919,28019,123
Wages and salaries8,6242,5452,2122,2792,5379,5909,57210,27310,51510,3612,7552,5362,5352,53510,36111,091
Goods and services1,16739484836401,2041,2001,2821,4801,4804443703702961,4801,355
Interest payments1,2724033023283781,4401,4111,4671,4751,4755103103243301,4751,430
Transfers and subsidies4,9401,2896511,8002,2195,8825,9595,3425,8585,8528111,3511,5942,0665,8125,095
CGC (Food)1,2421491586694741,4501,4501,3391,4071,4072642114924391,4071,395
Energy subsidies2,11175007801,3242,8542,8541,9942,5002,5001006156151,1402,4601,441
Other1,5873904933524211,5781,6552,0081,9451,9454475254864861,9452,259
Other expenditure (non-allocated)000088088088002961520030122152152
Of which: repayment of arrears 2/0880880000
Capital expenditure4,6923269528001,6473,7683,7255,8714,7014,3293321,0361,0381,9144,3205,692
Net lending−35122−5271−42−5−11,69701,1202002908101,120100
Of which: public banks’ recapitalization410000001,7225001,000003007001,0000
Central government deficit (-) (excluding grants)−4,033−734617−1,022−3,567−4,758−4,707−5,456−5,852−5,935−252−910−1,525−2,932−5,609−3,958
Central government deficit (-) (including grants)−3,404−701618−980−3,533−4,648−4,596−5,056−5,638−5,721−219−889−1,482−2,814−5,395−3,644
Float−505−4741,325407−2,522−1,303−1,263001,5002,0324330−1,0001,4650
Central government deficit (-) (excluding grants, cash basis)−3,529−260−708−1,429−1,045−3,455−3,443−5,456−5,852−7,435−2,284−1,343−1,525−1,932−7,074−3,958
Central government deficit (-) (including grants, cash basis)−2,899−228−707−1,387−1,011−3,345−3,333−4,719−5,638−7,221−2,251−1,322−1,482−1,814−6,860−3,644
Financing2,8992287071,3871,0113,3453,3334,7195,6387,2212,2511,3221,4821,8146,8603,644
Foreign2,524−651−133224−45−588−6053,1954,2886,0021,0911,1059422,8165,9551,906
Drawings4,4501741934012891,0371,0574,9075,3387,0521,2961,4201,1523,1377,0053,100
Amortization1,9268253271773341,6251,6621,7121,0501,0502053152093211,0501,194
Domestic−188178381,1576473,4093,4591,1248508191,160156480−1,2825051,338
Drawings1,5823654444715641,8401,8431,2142,5001,5418612272272271,5412,441
Amortization9254261361176531,3801,3331,7552,1502,1503387885125122,1501,750
Government Deposits (+ = drawing / - = accumulation)−6758795308037372,9492,949−570428638717465−1,696114647
Banks recapitalization00000001,7225001,000003007001,0000
Privatization proceeds 3/3946264094095244794001,00040006060280400400
Memorandum items:
Central Government Balance (incl. grants)−3,404−701618−980−3,533−4,648−4,596−5,056−5,721−219−889−1,482−2,814−5,395−3,644
Central government primary balance (including grants, cash basis)−1,627−595883−354−2,612−1,905−1,922−3,253−5,746229−643−1,085−2,493−5,385−2,214
Central government primary balance (excluding grants, cash basis)−2,256142−406−1,101−667−2,015−2,032−3,989−2,461−5,960−1,773−1,033−1,201−1,602−5,599−2,528
Cyclically adjusted fiscal balance−3,774−4,396−4,385−4,975−5,485−5,137−3,619
Structural fiscal balance−3,733−3,516−3,505−3,254−4,365−4,017−3,619
General government debt 4/31,44630,733 30,90831,48631,35134,67234,23842,34243,09242,12347,516
Nominal GDP70,65819,29419,29419,29419,29477,07276,57085,46591,21583,28120,94620,94620,94620,94682,72890,350
Sources: Tunisian authorities; and IMF staff estimates.

Includes special funds, fonds de concours. Does not include the social security system (CSS).

Arrears on energy subsidies payments accumulated in 2012.

It also includes sale of confiscated assets.

Gross debt: excludes debt of public enterprises.

Sources: Tunisian authorities; and IMF staff estimates.

Includes special funds, fonds de concours. Does not include the social security system (CSS).

Arrears on energy subsidies payments accumulated in 2012.

It also includes sale of confiscated assets.

Gross debt: excludes debt of public enterprises.

Table 4b.Tunisia: Central Government Financial Operations, 2012–15 1/(In percent of GDP)
2012201320142015
Prog. 05/24/13Prog. 01/24/14Est.Prog. 05/24/13BudgetProg. 01/24/14Proj.Proj.
Total revenue and grants24.024.323.523.724.422.522.923.423.5
Revenue23.123.823.423.624.022.322.623.123.2
Tax revenue21.021.821.121.322.021.021.321.821.7
Nontax revenue2.01.92.12.21.91.31.31.31.5
Grants0.90.50.10.10.50.30.30.30.3
Total expenditure and net lending28.831.129.529.730.329.229.729.927.6
Total expenditure29.330.829.529.728.428.628.428.527.5
Current expenditure22.624.424.624.821.523.123.223.321.2
Wages and salaries12.212.412.412.512.012.412.412.512.3
Goods and services1.71.61.61.61.51.71.81.81.5
Interest payments1.81.81.91.81.71.71.81.81.6
Transfers and subsidies7.07.27.67.86.26.97.07.05.6
Other expenditure (non-allocated)0.01.31.11.10.00.30.20.20.2
Of which: repayment of arrears2/0.00.91.11.10.00.00.00.0
Capital expenditure6.66.44.94.96.95.55.25.26.3
Net lending−0.50.30.00.02.00.61.31.40.1
Of which: public banks’ recapitalization0.10.60.00.02.00.61.21.20.0
Central government deficit (-) (excluding grants)−5.7−7.3−6.2−6.1−6.4−6.9−7.1−6.8−4.4
Central government deficit (-), (including grants)−4.8−6.8−6.0−6.0−5.9−6.6−6.9−6.5−4.0
Float−0.70.0−1.7−1.60.00.01.81.80.0
Central government deficit (-), (excluding grants, cash basis)−5.0−7.3−4.5−4.5−6.4−6.9−8.9−8.6−4.4
Central government deficit (-), (including grants, cash basis)−4.1−6.8−4.3−4.4−5.5−6.6−8.7−8.3−4.0
Financing4.16.84.34.45.56.68.78.34.0
Foreign3.62.6−0.8−0.83.75.07.27.22.1
Domestic0.02.34.44.51.31.01.00.61.5
Privatization proceeds 4/0.61.90.70.60.51.20.50.50.4
Memorandum items:
Central government primary balance (excluding grants, cash basis)−3.2−5.5−2.6−2.7−4.7−7.2−6.8−2.8
Structural fiscal balance−5.3−5.0−4.6−4.6−3.8−5.2−4.9−4.0
General government debt 5/44.545.345.044.749.551.750.952.6
Sources: Tunisian authorities; and IMF staff estimates.

Includes special funds, fonds de concours. Does not include the social security system (CSS).

Arrears on energy subsidies payments accumulated in 2012.

Additional fiscal measures (mainly current expenditure cuts, but also revenue measures) that would be needed to keep the structural balance at sustainable levels.

It also includes sale of confiscated assets.

Gross debt: excludes debt of public enterprises.

Sources: Tunisian authorities; and IMF staff estimates.

Includes special funds, fonds de concours. Does not include the social security system (CSS).

Arrears on energy subsidies payments accumulated in 2012.

Additional fiscal measures (mainly current expenditure cuts, but also revenue measures) that would be needed to keep the structural balance at sustainable levels.

It also includes sale of confiscated assets.

Gross debt: excludes debt of public enterprises.

Table 5.Tunisia: Monetary Survey (Financial System), 2010–15(In millions of dinars)
Est.Proj.Proj.Proj.Proj.Proj.
20102011201220131Q 142Q 143Q 1420142015
(In millions of dinars)
Net foreign assets (NFA)9,0785,7497,0543,8872,2781,3551,9924,6556,418
Foreign assets16,02312,89315,41015,02813,80914,53215,93118,61321,844
Central bank13,70511,31513,45512,70111,56812,11813,44816,08419,125
Foreign liabilities−6,946−7,143−8,357−11,141−11,531−13,177−13,938−13,958−15,426
Central bank−623−782−1,134−3,004−3,696−4,738−5,260−5,115−5,921
Net domestic assets (NDA)34,19041,45444,11450,67751,31655,12058,38955,15059,855
Domestic credit46,37053,57758,02265,62966,37270,29874,16871,88677,940
Credit to the government (net)3,2274,6594,7918,7929,69110,81511,57510,20311,545
Central bank net credit−3,250−3,355−3,461−1754631,1801,645−61587
Commercial banks2,9373,5683,6864,1094,5894,9955,2904,8665,142
Other4,1895,0865,2655,5685,3505,3505,3506,1096,527
Credit to the economy43,14448,91853,23156,83656,68159,48462,59361,68266,395
Other items (net)−12,181−12,123−13,908−14,951−15,056−15,178−15,779−16,736−18,085
Money plus quasi-money (M2)40,85444,65248,32751,68250,76353,49257,19256,64662,772
Money (M1)15,86219,00720,00720,87420,50321,60623,10022,87925,354
Currency5,5186,8146,5597,2367,1077,4898,0077,9318,789
Demand deposits10,34412,19213,44813,63913,39614,11615,09314,94916,565
Quasi-money24,99225,64628,32030,80830,26031,88734,09233,76737,418
Long-term deposits (M3-M2)2,4142,5512,8412,8822,8312,9833,1893,1593,501
Broad money (M3)43,26747,20351,16854,56453,59456,47560,38159,80566,273
(Annual rate of change in percent)
Net foreign assets−5.7−36.722.7−44.9−62.4−71.5−55.819.837.9
Net domestic assets18.121.26.414.910.816.118.38.88.5
Domestic credit16.815.58.313.110.214.015.89.58.4
Credit to government (net)−11.444.42.883.560.660.644.616.013.1
Credit to the economy19.613.48.86.84.68.311.78.57.6
Money and quasi-money (M2)11.99.38.26.92.48.412.19.610.8
Broad money (M3)12.19.18.46.62.38.112.19.610.8
(Annual growth rates, in percent of broad money)
Net foreign assets−1.4−7.72.8−6.2−7.2−6.5−4.71.42.9
Net domestic assets13.616.85.612.89.514.616.88.27.9
Domestic credit17.316.79.414.911.716.618.811.510.1
Credit to the government (net)−1.13.30.37.87.07.86.62.62.2
Credit to the economy18.413.39.17.04.78.712.28.97.9
Other items (net)−3.70.1−3.8−2.0−2.2−1.9−2.0−3.3−2.3
Memorandum items:
GDP (in millions of dinars)63,05964,69070,65876,57082,72890,350
Nominal GDP growth (in percent)7.12.69.28.48.09.2
Reserve money (in millions of dinars)8,4159,40610,98911,07810,88111,46612,25912,14213,455
Velocity (GDP/M2)1.541.451.461.481.461.44
Multiplier (M2/M0)4.864.754.404.674.674.67
Sources: Tunisian authorities; and IMF staff estimates and projections.
Sources: Tunisian authorities; and IMF staff estimates and projections.
Table 6.Tunisia: Central Bank Balance Sheet, 2010–15(In millions of dinars)
2010201120121Q 132Q 133Q 1320131Q 142Q 143Q 1420142015
Net Foreign Assets13,08210,53312,32110,96910,18210,2119,6967,8727,3808,18810,96913,204
Assets13,70511,31513,45512,03512,17612,15512,70111,56812,11813,44816,08419,125
Liabilities6237821,1341,0661,9941,9453,0043,6964,7385,2605,1155,921
Net Domestic Assets−4,707−1,189−1,332−1,757−267671,3823,0094,0864,0711,173252
Domestic credit (net)−2,673222248−921,5721,8093,4935,1596,3866,3873,7853,046
Net credit to government 1/−3,250−3,355−3,461−2,207−1,639−735−1754631,1801,645−61587
Credit to Banks5783,5773,7092,1153,2122,5453,6684,6965,2054,7423,8462,459
Other items net−2,035−1,412−1,579−1,665−1,839−1,742−2,111−2,150−2,299−2,316−2,612−2,794
Reserve Money 2/8,4159,40610,9899,2129,91510,27811,07810,88111,46612,25912,14213,455
Sources: Central Bank of Tunisia; and IMF staff estimates.

Excludes subscription to IMF/AMF.

Excludes deposits of other financial institutions, individuals, and nonfinancial enterprises.

Sources: Central Bank of Tunisia; and IMF staff estimates.

Excludes subscription to IMF/AMF.

Excludes deposits of other financial institutions, individuals, and nonfinancial enterprises.

Table 7.Tunisia: Financial Soundness Indicators of the Banking Sector, 2008–13(In percent, unless otherwise indicated)
20082009201020112012Dec-13

Prel.
Regulatory capital to risk-weighted assets11.712.211.611.911.89.2
Tier 1 capital to risk weighted assets10.610.710.210.09.47.6
Capital to assets8.18.58.48.57.86.1
Asset quality
Sectoral distribution of loans to total loans
Industry31.330.030.528.627.927.7
Agriculture3.63.42.92.92.82.8
Commerce17.317.415.016.015.415.4
Construction4.54.95.95.65.44.2
Tourism9.18.27.37.36.96.5
Households20.121.622.123.425.426.2
Other14.314.416.316.316.217.3
FX-loans to total loans3.94.55.35.14.84.8
Credit to the private sector to total loans71.670.470.667.467.726.2
Nonperforming Loans (NPLs) to total loans15.513.213.013.314.914.9
Specific provisions to NPLs48.545.960.3
NPLs, net of provisions, to Tier 1 capital71.157.960.366.386.379.4
Specific provisions to total loans8.87.77.67.68.09.9
General provisions to total loans0.40.50.4
Profitability
Return on assets (ROA)1.01.00.90.60.60;7
Return on equity (ROE)11.211.710.26.68.08.9
Interest rate average spread (between loans and deposits)3.603.493.533.03.03.1
Interest return on credit7.016.356.245.75.46.0
Cost of risk as a percent of credit1.41.21.71.21.11.2
Net interest margin to net banking product (PNB)58.658.858.657.258.157.6
Operating expenses to PNB45.447.246.550.750.347.1
Operating expenses to total assets1.61.61.61.71.71.6
Personnel expenses to non-interest expenses60.461.459.162.361.358.1
Trading and other non-interest income to PNB21.722.121.822.620.921.9
Liquidity
Liquid assets to total assets31.632.129.826.528.228.4
Liquid assets to short-term liabilities124.0119.1104.189.489.292.6
Deposits to loans98.9100.994.687.489.789.6
Deposits of state-owned enterprises to total deposits13.814.813.812.613.213.0
Sensitivity to market risk
FX net open position to Tier 1 Capital1.401.531.351.942.33.4
Source: Central Bank of Tunisia.
Source: Central Bank of Tunisia.

11. Inadequate budget composition led to a deterioration of the overall fiscal stance in 2013, but the underlying fiscal position improved after exceptional spending was taken into account (MEFP, ¶10). A decrease in capital expenditures to record low amounts of 4.9 percent of GDP, and increases in the wage bill and subsidies, led to a deterioration of the overall fiscal deficit to 6.1 percent of GDP, up from 5.7 percent of GDP in 2012. However, the underlying fiscal position (on a payment order basis)—correcting for the cycle and one-off exceptional payments (e.g., 1.1 percent of GDP in arrears repayment)—improved to 4.6 percent of GDP (from 5 percent of GDP in 2012). Delays in external financing in the last quarter of 2013 (about 2 percent of GDP) and the authorities’ preference for maintaining cash buffers at the CBT (about 2.3 percent of GDP) instead of paying a large proportion of expenditures committed at the end of the year, limited the deterioration of the overall cash deficit in 2013 and resulted in an overperformance relative to the program target (see below). Public debt in 2013 remained broadly constant at 45 percent of GDP, with the share of foreign currency debt increasing to 64 percent.

Public Debt, 2010–13

(In percent)

Source: IMF staff estimates.

Central Government Budget Deficit and Expenditures, 2008–13

(Percent of GDP)

Source: IMF staff estimates and projections.

B. Program Implementation

12. The program is broadly on track.

  • Monetary target. The end-December performance criterion (PC) on net domestic assets (NDA) was missed by a smaller margin than originally anticipated, because of lower credit to government linked to postponed budgetary payments and higher Treasury balances. The end-March PC on NDA is estimated to have been met by a large margin.

  • Reserves. End-December NIRs stood at $ 5.5 billion, implying that the PC was missed by a smaller margin than estimated in January 2014. The end-March PC is expected to have been met by a small margin, after adjustment for the World Bank disbursement delayed to Q2 2014.

  • Fiscal. Latest data for central government operations from above and below the line confirm that the cash-basis primary balance for end-December was exceeded by a large margin relative to the program target, due to spending under-execution (of which 1.5 percent of GDP was from lower investment spending) and cash payments (about 3.3 percent of GDP) deferred to early 2014. It is estimated that the end-March target has been met.

  • Indicative targets. The indicative target on social spending was missed for all 2013 test dates, reflecting implementation capacity constraints. New social programs in 2014 are expected to increase expenditures in this area. The end-March ceiling on current spending is expected to be met by a large margin, due to lower than expected payments on energy subsidies in the first quarter of 2014 (these are not included in the program definition of social expenditures).

13. Progress on the structural reform agenda has been slowed by last year’s political crisis and the transition between governments. As a result, only four out of eight end-March Structural Benchmarks (SBs) have been met (LOI ¶2; Tables 2a and 2b). The missed SBs include those postponed from the last review. They are expected to be completed within the next few months: (i) the household targeting strategy for vulnerable households will be put in place before the July fuel price increase, and is a new SB for end-June 2014; (ii) decrees for the investment code await ratification by Parliament (new end-September structural benchmark); (iii) the CBT regulation on the new loan haircut has been issued but will only come into effect at end-June (reprogrammed as a new SB) when the lender of last resort facility is introduced; and (iv) the modernization plan for tax administration will be finalized over the next few weeks following the latest Fund TA (new end-June SB). The heavy legislative calendar of the National Constituent Assembly—which is now focused on elaborating the electoral law—could further delay approval of key legislation (Investment code, Bankruptcy law, Competition Law, Asset Management Company, Public Private Partnership).

C. Outlook and Risks

14. The macroeconomic framework forecasts moderate growth, despite a more favorable political environment. Against this backdrop, staff and authorities agreed on the following:

  • Growth. Real GDP is projected to expand by 2.8 percent in 2014, before rising to its potential of 4.5 percent over the medium term. Preliminary indicators for the first two months of the year imply a modest pickup in activity, with investors still waiting for a clear political calendar and reduced security tensions before expanding capacity. A rebound in tourism and in the phosphate sector is expected to drive growth.

  • Inflation. Inflationary pressures are expected to subside, with headline inflation declining to 5.3 percent (y-o-y) at end-2014, on the back of declining food price inflation and a prudent monetary policy.

  • External position. The current account deficit is projected to narrow to 7.2 percent of GDP in 2014, and to 6.3 percent of GDP in 2015, driven by a recovery in trading partners’ economies, phosphate exports, higher tourism receipts, and lower international commodity prices. Increasing foreign financing flows and a gradual recovery of FDI will help finance the current account deficit and increase international reserves.

Tunisia: Selected Economic Indicators, 2010-15
Est.Proj.
201020112012201320142015
Real GDP growth (in percent)2.6−1.93.72.62.84.2
Consumer price index (CPI), (period average, in percent)4.43.55.66.15.54.9
Current account (percent of GDP)−4.8−7.4−8.2−8.4−7.2−6.3
Gross official reserves (US$ billions, eop)9.57.58.77.79.010.1
Gross official reserves (months of next year’s imports)4.43.44.03.53.94.3
Sources: Tunisian authorities; and IMF staff estimates and projections.
Sources: Tunisian authorities; and IMF staff estimates and projections.

15. Risks to the outlook remain high. Increasing social tensions—including additional strikes or demonstrations—could slow down production further, weigh on firms’ investment decisions, and delay much-needed reform implementation. Any renewed regional or domestic security tension could dampen tourist activity. Delays in the political calendar would also weaken economic policy and reform implementation, with adverse effects on economic activity and job creation. Moreover, the Tunisian economy remains vulnerable to a weaker economic outlook in Europe (its main trading partner), higher commodity prices, or shortfalls in official external financing in case of important lags in reform implementation. Increased short-term debt from the offshore sector could also increase roll-over risk for corporate funding.

Policy Discussions

Discussions focused on additional fiscal measures to reduce fiscal and external vulnerabilities, greater exchange rate flexibility, and on strengthening the structural reform agenda, particularly on accelerating banking sector reforms. Discussions also centered on ways to enhance inclusive growth by scaling up public investments, improving governance of public enterprises, and protecting the most vulnerable.

A. Short-term Stabilization Goals

Fiscal policy

16. The authorities have identified new fiscal measures to limit the deterioration of the fiscal deficit in 2014. The approved 2014 budget incorporates a wage freeze (0.4 percent of GDP), and savings in energy subsidies (0.8 percent of GDP), but the need to reverse cuts in pro-growth expenditure still resulted in an important widening of the fiscal deficit. Against that background, the government committed earlier this year to savings in salaries (0.2 percent of GDP arising from deferred recruitment) and from lower unallocated expenditures (0.5 percent of GDP). Staff welcomed the implementation of these measures, which will limit the deterioration of the structural fiscal deficit to 5.3 percent of GDP (from 4.6 percent of GDP in 2013) while allowing for important social and investment spending, which is expected to recover following underexecution in 2013 (MEFP, ¶5-6). Further reduction of the fiscal deficit—which remains heavily dependent on external financing (8.5 percent of GDP)—is an important priority of the Fund-supported program and is essential to keep debt sustainable (see DSA Annex). As a result, the authorities have decided to further reduce the structural fiscal deficit this year, to 4.9 percent of GDP (which will nonetheless represent a doubling of the overall cash deficit over the last year) through:

  • New measures (MEFP, ¶6), amounting to 0.4 percent of GDP, and almost exclusively on the revenue side. These include additional revenue from the telephone company following a recent tax control, a recovery of tax arrears awaiting judicial decision, a reduction in exemptions, and hikes in excises. A reduction in subsidies will be realized by bringing forward by one month the 10 percent electricity tariff increase planned in June for high and medium voltage users. Some of these measures will come into effect with a revised budget law to be adopted later this year (see text table). Staff would have preferred that these measures rely more on cuts in current expenditures (e.g., wages or subsidies), but recognizes that action in those areas may require additional consensus in view of the high social tensions. That said, staff considers the measures identified to be of good quality as they improve the tax base and establish a clear precedent for simplified tax arrears recovery procedures.

  • Contingency actions. In case of revenue shortfalls or delays in passing the revised budget law, the authorities agreed on contingency measures, relying mostly on cuts in nonessential current spending. Social and capital expenditures will be preserved.

Tunisia: Compensatory Measures for 2014
Budget 2014Jan-14Mar-14
in million Dnin percent of GDPin million Dnin percent of GDPin million Dnin percent of GDPRevised BudgetAdministrative
Revenue2600.3
Tax Policy Measures1000.1
Alcoholic Beverages: 8 percent Increase Excise Tax200.0
Tobacco: 10 percent Increase Excise Tax500.1
No tax exemption for imported vehicles 1/300.0
Tax Administration Measures1600.2
Tunisie Telecom: enhanced tax control1100.1
Recovery of tax arrears awaiting judicial decision500.1
Current Expenditure400.0
Waige bill Savings 2/3350.4154.00.20.0
Lower Unallocated Expenditures1500.2416.40.50.0
Savings in Energy Subsidies 3/6500.8400.0
Total11351.4570.40.73000.4

at the moment of resale for cars imported by tunisians leaving abroad

the budget for 2014 does not include salary increases; in January it was agreed an additional wage bill saving.

in Mar 2014: bringing forward the planned increase of tariffs to May 2014

at the moment of resale for cars imported by tunisians leaving abroad

the budget for 2014 does not include salary increases; in January it was agreed an additional wage bill saving.

in Mar 2014: bringing forward the planned increase of tariffs to May 2014

17. Staff urged the authorities to resist undoing important policies already approved in the 2014 budget law, and which are essential to meet program targets. In particular, staff stressed the need to continue containing the already high wage bill in the forthcoming revised budget by freezing salaries and limiting recruitments to those already announced in security, education, and health (recruitment increases on a net basis by 8,600 people this year, half the level of 2011). Staff welcomed the authorities’ commitment to reduce untargeted energy subsidies (MEFP, ¶5), by completing the elimination of subsidies to cement companies (these were halved already in January), further raising electricity tariffs to households and industrial users (a 10 percent tariff increase is planned for June, following the 10 percent increase implemented in January), and increasing fuel prices by 6 percent as of July 2014. Staff welcomed the authorities’ plans to protect the vulnerable by introducing a lifeline electricity tariff (for households consuming less than 100 kwh) and through new social programs (see Part C).

Tunisia: Selected Fiscal Indicators, 2012–14(In percent of GDP)
201220132014
Act.Prog.

01/24/14
Est.Prog.

01/24/14
Proj.
Revenue23.123.423.622.623.1
of which: Tax revenue21.021.121.321.321.8
Expenditure and net lending28.829.529.729.729.9
of which: Wages and salaries12.212.412.512.412.5
Transfers and subsidies7.07.67.87.07.0
Capital expenditure6.64.94.95.25.2
Net lending−0.50.00.01.31.4
of which: Public Banks’ recapitalization0.10.00.01.21.2
Central government deficit (-) (excl. grants)−5.7−6.2−6.1−7.1−6.8
Float−0.7−1.7−1.61.81.8
Central government deficit (-), (excl. grants, cash basis)−5.0−4.5−4.5−8.9−8.6
Structural fiscal balance−5.3−4.6−4.6−5.2−4.9
General government debt44.545.044.751.750.9
Sources: Tunisian authorities; and IMF staff estimates.
Sources: Tunisian authorities; and IMF staff estimates.

Monetary policy

18. The current monetary policy stance is justified by low inflationary pressures. Lower pressures on the exchange rate, the prevalence of capital controls, weak credit growth (see Box 1), a negative output gap (close to –2 percent), and stable core inflation justify keeping market rates at their current level. To ensure that the CBT policy rate remains an effective signaling tool for monetary policy, staff encouraged the authorities to increase it so that it is consistent with the CBT interventions that are keeping the money market rate unchanged at 4.75 percent. The CBT agreed that it should stand ready to tighten monetary policy further if core inflation rises more rapidly than expected or depreciation pressures rise (including those resulting from negative market real rates).

Money Market and CBT Policy Rates, 2010–14

(In percent)

Source: Tunisian authorities.

19. Ongoing steps to improve the collateral framework will ease the way for banks’ gradual exit from dependence on CBT refinancing. The implementation of higher shares of refinancing through government securities (20 percent) and of a new haircut on loans (10 percent) used as collateral has been met by all banks, with some small banks having to re-balance their assets to ensure they retain access to the refinancing window. Staff and the authorities agreed that the timely implementation of the stronger collateral framework helps minimize risks to the CBT balance sheet and encourages banks to manage liquidity in a more forward-looking way. High liquidity provision also highlights the needs for moving ahead with restructuring NPLs. Tighter collateral requirement planned for March to access CBT refinancing (a 25 percent haircut on nongovernment loans) was postponed to June 2014 to ensure that banks that are solvent but temporarily illiquid can use a lender of last resort facility, which will be introduced in end-June 2014 (structural benchmark). Such a facility will charge penalty rates and will require banks to present a plan for exiting from continued access to CBT refinancing.

20. The tightly regulated lending rate continues to hamper both access to finance and the effective functioning of monetary policy (MEFP, ¶9). The preliminary study of the existing system—conducted with World Bank TA—showed that a removal of caps on lending to enterprises will not lead to an increase in rates to those companies, although competition for deposits could spur higher deposit rates in the future that would lead to higher lending rates. On the other hand, caps on consumer credit have been constraining lending, and removing caps would lead to rates increasing for most consumers. Staff urged the authorities to immediately remove the cap on lending to enterprises and to also move swiftly on removing caps in consumer loans if it is coupled with adequate supervision of risks. The CBT is currently assessing the recently concluded evaluation, and will commit to a course of action after additional consultations with relevant ministries (Economy and finance, Justice, and Commerce).

Box 1:Private Sector Credit Developments

Credit growth in Tunisia has slowed down considerably over the past three years. Credit to the economy, which grew by 14–20 percent in the years preceding the Tunisian revolution, is now growing at 8 percent a year (about 2 percent in real terms). During this period, deposits (over 70 percent of the banking system liabilities) stayed relatively stable, with their growth slowed by withdrawals of funds around the time of the revolution. Other funding sources, such as external lines of credit, also became more scarce, pushing Tunisia’s banking system into intense competition for deposits and increasing banks’ reliance on CBT refinancing to expand their balance sheets. Weak economic activity has also reduced demand from creditworthy companies, while tighter interest margins and growing NPLs have reduced banks’ appetite for lending.

The lending pattern has changed over time. The share of credit to firms on total credit has declined from 72 percent in 2007 to about 65 percent in 2013, with the largest drop coming from the troubled tourism, transportation, and communications sectors. In contrast, over the same period, the share of private consumer and housing loans has increased from 20 percent to 30 percent of total credit. That corresponds to a doubling in consumer loans, driven by high returns (about 300 basis points higher than for companies) and collateral backed by individual housings or employee regular salaries (deposited at the bank). The increase in consumer loans has been slowed recently by a CBT regulation requiring additional reserve requirements of 30 percent for an increase in the stock of consumer loans above the end-September 2012 level.

Credit and Composition

Sources: National authorities; and IMF staff calculations.

Sectoral Shares of Credit, 2013

(Percent of total loans)

Sources: National authorities; and IMF staff calculations.

Lending to public enterprises has stabilized in recent years, following growing NPLs in the sector. After growing by 20 percent a year, credit to public enterprises is now increasing by less than 8 percent a year and remains relatively low at 7 percent of total credit provided by banks. Credit to public enterprises is provided almost equally between private and public banks. However, of that credit, 70 percent of public banks’ loans are to loss-making state-owned companies, while 70 percent of private bank credit goes to financially sound public enterprises.

21. Central bank independence will strengthen monetary policymaking. In line with recommendations of the last safeguards assessment, the forthcoming Fund TA on the Central Banking law (end-June structural benchmark) will help the authorities strengthen the autonomy of the CBT, including enhanced governance structure, full operational independence, and strengthened auditing functions.

Exchange rate policy

22. Greater exchange rate flexibility is needed to increase external buffers and reduce CBT liquidity injections. The recent appreciation of the currency is a temporary situation that does reflect a short-term effect from higher supply of foreign exchange following a stricter implementation of existing foreign exchange regulations (linked to existing capital controls) and continued CBT FX sales, albeit in lower relative amounts than in the past (see text chart). Both staff and the authorities agreed that the exchange rate is not in line with fundamentals and about 5 percent to 10 percent overvalued. The depreciation of the Tunisian dinar in 2013 somehow helped contain its overvaluation and preserve external buffers, though some valuation effects have affected sectoral balance sheets (Box 2). The authorities reiterated their commitment to limit interventions in the foreign exchange market to smooth excessive intra-day exchange rate fluctuations. They stressed that their interventions were mostly to meet shortfalls caused by demand from large energy operators, and that they had seized the opportunity to buy foreign exchange when possible. Staff urged the authorities to use the opportunity of higher FX in the market to buy FX, which will help build up cushions, and increase gross international reserves in 2014 above the 100 percent of Fund’s risk weighted metric (four months of imports). In view of the existing overvaluation of the exchange rate, FX sales should be limited to smoothing excessive fluctuations in the foreign exchange market (MEFP, ¶13). Staff also welcomed the authorities’ plans to allow banks to conduct FX swap operations with the CBT, without a requirement that this operation be initiated by the CBT.

Share of CBT Sales in the Foreign Exchange Market

(In percent)

Source: Tunisian authorities.

Exchange Rate Assessment Using CGER Panel Estimates(In percent)
Underlying CA

balance 1/
CA normREER

misalignment
MB approach 2/−4.9−1.810.2
ERER approach4.1
ES approach−4.9−2.67.8
Overvaluation (+); undervaluation (-)

In 2019 corrected from program adjustment.

Based on an elasticity of the CA/GDP with respect to the REER of -0.30.

Overvaluation (+); undervaluation (-)

In 2019 corrected from program adjustment.

Based on an elasticity of the CA/GDP with respect to the REER of -0.30.

Reserve Coverage Based on Alternative Metrics: New and Traditional Metrics, 2009–14

(In percent of GDP)

Sources: Tunisian authorities; and IMF staff calculations and estimates.

Box 2.Balance Sheet Effects from Exchange Rate Depreciation

Tunisia is a net debtor relative to the rest of the world. Tunisian’s negative net international investment position (IIP) has increased slightly in recent years, reflecting the drawdown in foreign reserves and the faster buildup in external debt liabilities. The net international investment position has reached -111 percent of GDP in 2013, with net FDI at -71 percent of the GDP,1 net debt (sum of debt assets minus debt liabilities) at -52 percent of the GDP, and reserve assets at 17 percent of GDP. The recent widening of the current account deficit has also induced a shift in the structure of foreign liabilities from non-debt-generating flows (FDI) to debt-generating flows (short-term, medium-term, and long-term liabilities).

Tunisia: International Investment Position(In millions of dinars, unless otherwise indicated)
ASSETSLIABILITIESNET POSITION
FDI 1/Portfolio Investment Net 1/Other InvestmentsReservesTotalAssets In percent of GDPFDI 1/Portfolio Investment Net 1/Other InvestmentsTotalLiabilities In percent of GDPIn percent of GDP
ST debt (Financial+commercial)MLT (loans+deposits)ST debt (Financial+commercial)MLT (loans+deposits)
2012
Private Non Financial Sector1608.51608.52.38044.87220.315265.121.6-13656.6-19.3
Financial Sector1683.91683.92.41367.21595.92963.14.2-1279.2-1.8
Public Sector00.019889.319889.328.1-19889.3-28.1
Monetary Authorities13756.713756.719.5191.3726.5917.81.312838.918.2
Economy471.8103.33292.4013756.717624.224.9518002826.39603.32943293661.6132.6-76037.4-107.6
2013
Private Non Financial Sector1545.21545.22.08827.98188.917016.822.2-15471.6-20.2
Financial Sector2005.62005.62.61427.71668.23095.94.0-1090.3-1.4
Public Sector00.021512.421512.428.1-21512.4-28.1
Monetary Authorities12662.112662.116.51571592.71749.72.310912.414.3
Economy500106.73550.8012662.116819.622.0552593106.110412.632962.2101739132.9-84919.8-110.9
Sources: Tunisian authorities; and IMF staff estimates and projections.

A desaggregation of FDI and Portfolio Investment Net across sectors is not available

Sources: Tunisian authorities; and IMF staff estimates and projections.

A desaggregation of FDI and Portfolio Investment Net across sectors is not available

Currency and maturity mismatches vary across sectors and all sectoral agents:

  • The private nonfinancial sector has a short foreign currency position and has liabilities to nonresidents of about 22 percent of GDP2—of which close to one-fifth is short-term trade credit. Even without information about FDI sectoral distribution, it can be reasonably assumed that the sector’s balance sheet would be affected by a large exchange rate depreciation. However, the impact would be partly attenuated by the windfall from resident foreign currency deposits held at the central bank.3

  • The financial sector has lower mismatches than the non-financial sector because its foreign currency asset holdings partially balance its liabilities, which are mostly nonresident deposits. The impact of an exchange rate depreciation would also be reduced by commercial banks’ ability to hedge.

  • The maturity and currency mismatches of the public sector with regard to nonresidents are high; however, the public sector owns very little short-term debt, which limits its exposure to rollover risk, and most of its medium- and long-term debt liabilities are owed to multilaterals. A large exchange rate depreciation would have negative effect because it would raise public debt ratios and increase public external debt service.

  • The central bank has a long foreign currency position and could benefit from valuation effects emanating from an exchange rate depreciation. Nonetheless, the increase in deposits from foreign counterparties, Fund borrowing, and a decline in foreign assets in recent years would reduce CBT’s long FX position.

Quantifying the balance sheet effects from last year’s exchange rate depreciation shows a negative impact, of which a large contribution came from public sector balance sheets. Using a methodology comparing changes in the balance sheets relative to values at constant exchange rate, staff found that the 9.4 percent cumulative depreciation of the NEER in 2013 led to a 2.4 percent worsening of Tunisia’s short FX position. However, positive real effects from an exchange rate depreciation could emerge from an expenditure-reducing and switching mechanism, which would lower household consumption and imports, and increase exports (or at least keep its market share abroad in today’s difficult international economic environment).

1/ FDI assets are less than 1 percent of the GDP2/ The analysis does not account for FDI, given the lack of information about its sectoral distribution and also because FDI is generally long term in nature, with corporate capital denominated in local currency following Tunisia’s regulation.3/ Because of legal considerations related to the regulation of foreign exchange, deposits of residents in foreign currency (excluding government deposits) are included in central bank stocks of foreign assets and their counterpart into the monetary base, but holders of those deposits still enjoy the benefit of having foreign currency assets.

23. The functioning of the foreign exchange market is being strengthened. The newly installed electronic platform and market maker agreement (end-March structural benchmark) has introduced an institutional mechanism that will help the authorities to better control the volume of FX sales while letting the exchange adjust. It also sets the stage for the authorities’ move towards a more flexible exchange rate system governed by weekly FX auctions (2014 end-December SB).

B. Laying the Foundations for Stronger, More Inclusive Growth

Reducing financial sector vulnerabilities

24. Minimum capital adequacy shortfalls should be addressed immediately (MEFP, ¶15). The CBT’s banking supervision department (DGSB) has required all six banks operating below the statutory minimum requirement (CAR of 9 percent this year but Basel II requirement of 10 percent by end-year) to prepare as soon as possible a detailed action plan to address their capital shortfall. These plans also concern four public banks. Public banks’ weaknesses were further confirmed by the audits of the two largest ones, which found them weighed down by high operational costs, inadequate staffing, poor governance structure (internal and external), weak service quality, and increasing NPLs. Moreover, the audit found contingent losses (of around 0.7 percent of GDP) that may need to be recognized. Priorities for the immediate future include:

Tunisian Banks: Financial Indicators

(In percent, as of 2013*)

Public BanksPrivate Banks
CAR5.210.9
Government bonds to total assets2.56.3
Loans to assets71.866.0
Deposits to loans76.299.0
NPL21.210.4
Source: Tunisian authorities

Preliminary data

Source: Tunisian authorities

Preliminary data

  • Strategy for public banks (MEFP, ¶17). The authorities recognize the importance of acting quickly on deciding the business model to be retained for public banks (a strategic orientation on the role of the State in at least two public banks is a Prior Action). Staff welcomed the authorities’ intention to design such a strategy by mid-April for all nine banks in which the government has a stake, and encouraged the authorities to explore private sector solutions. The planned public presentation of the strategy by end-April 2014 will also help build consensus for the reform.

  • Restructuring plan and recapitalization (MEFP, ¶17). Once the strategic orientation is decided, the authorities plan on finalizing restructuring plans (end-July structural benchmark) for the two main public banks that completed their audits (STB, BH—21 percent of total banking system assets). Staff urged the quick implementation of these plans—which should aim at strengthening banks’ financial soundness, improve their governance and management, and enhance their human and operational capacities—and the speedy completion of the audit of the BNA (new end-July structural benchmark), the third remaining main public bank which was delayed because of technical difficulties with one of the auditing firms. Depending on the strategic vision of public banks and private sector participation (private shareholders own 44–49 percent equity in the three main public banks), the share of the public sector’s recapitalization costs—to be initially financed by non-negotiable bonds—will have to be taken fully into account in the restructuring plans, debt sustainability analysis, and the 2014 supplementary budget. For illustration, using relatively conservative evaluation and collateral requirements, the audits for the two public banks estimated that at least 1.5 percent of GDP was needed to recapitalize them (without taking into account contingent costs, and assuming that the public sector kept its share). The budget has so far accounted for 1.2 percent of GDP, while FSSA estimated the needs at 2.6 percent of GDP for public banks.

  • Governance of public banks (MEFP, ¶17), which needs to be improved in line with any public bank restructuring. To that end, the authorities have made a firm commitment to strengthen the management practices of public banks; this commitment includes implementing a new decree that allows banks to be managed on a fully commercial basis (e.g., no longer requiring Ministry of Finance approval for hiring decisions or opening branches).

25. Staff encouraged the authorities to accelerate measures to address weak asset quality. A first priority is to establish an Asset Management Company (AMC) to remove tourism sector bad debt from banks’ balance sheets (tourism NPLs represent about 54 percent of the sector’s loan portfolio, and a quarter of the banking system’s NPLs). This requires adoption by Parliament of a draft law—prepared with World Bank assistance—that assigns special resolution powers to the AMC (MEFP, ¶17). Such a draft is expected to be submitted to Parliament in June, and staff urged the authorities to move quickly in adopting it and finalizing the business plan that must accompany it (the valuation method for eligible assets and the list of participating banks have yet to be completed). Staff and the authorities agreed that solutions should also be explored to resolve high NPLs in other areas (e.g. manufacturing). In parallel with the setting up of an AMC, it is imperative that the government strengthens creditor rights by calling for early adoption of the revised “bankruptcy law” currently in Parliament and by preparing a new law allowing existing “loan recovery” companies to approach debtors.

26. Staff is encouraged by the measures taken to align existing norms with international standards, but more needs to be done (MEFP, ¶16). Conservative application of haircuts on collateral used, implementation of tighter related-party and concentration risk ratios, and improvements in loan classification rules are welcome developments; however, loan classification could still be improved, including for public enterprises that benefit from an assumption of an implicit government guarantee. Plans to align required liquidity ratios with international standards are also progressing, with the impact study (2013 end-December structural benchmark) showing the need for a gradual approach in setting appropriate thresholds and moving to Basel III requirements. In the interim, staff urged the authorities to apply pecuniary sanctions to banks that do not respect the current liquidity ratio.

27. Impressive steps have been taken to improve banking data provision (MEFP, ¶19). The design of a Uniform Bank Performance Reporting system has been finalized and is expected to be implemented in June 2014, thereby allowing the supervisor to monitor bank performance regularly and banks to obtain a number of benchmark indicators. A full banking data and ratings reporting system—designed in September 2013 and covering all accounting, financial, and institutional aspects—is on track for coming online by end-year.

28. Banking supervision should continue to be strengthened. Staff welcomed the five inspections already completed. It encouraged the authorities to continue improving the offsite procedures and adopt the 2014 onsite inspection plan, which should be guided by risk-based methods. To properly assess and mitigate risks, staff urged the authorities to move quickly towards consolidated-based supervision and to require banks’ compliance with internal risk management framework required by the existing regulation (MEFP, ¶18). Success in banking supervision reforms would also require a substantial increase in human and financial resources allocated to it.

29. Plans to revise the financial system legal framework are advancing well. An IMF/WB LEG TA is assisting the authorities in revising the banking system laws with an emphasis on developing the proper banking resolution framework, including the clear identification of the agencies responsible for bank resolution and liquidation, the treatment of shareholders, and the tools of resolution. In parallel, a framework for a deposit insurance scheme is also being developed. While waiting for the full revision of the banking laws, staff encouraged the authorities to develop a crisis contingency plan based on the existing legislative framework. Forthcoming IMF LEG TA will help in this area.

Growth-enhancing fiscal reforms

30. The authorities have taken some early steps towards reforming public enterprises, which is essential to strengthen transparency and reduce the burden on the budget (MEFP, ¶24). A preliminary audit of the three energy companies’ subsidy system has been completed (end-March 2014 structural benchmark), highlighting a complex system of cross-subsidies between these companies. One key priority will be to make all energy companies accountable for their own import bills, thus clarifying the degree of subsidization of each individual company. Staff is also encouraged by the authorities’ efforts in reducing delays in transferring corresponding amounts for energy and food subsidies to public enterprises, which will help reduce their borrowing and associated costs. Monitoring of the financial situation of public enterprises will be enhanced by a newly created interdepartmental committee, which has also started assessing loss-making state-owned companies and will benefit from ongoing efforts to create a consolidated balance sheet of the 20 largest state-owned enterprises (end-June structural Benchmark). Improvements in the governance framework of public enterprises should include a review of the regulatory framework but also concrete actions, such as revamping the role of executive boards.

31. A number of initiatives are under way to improve the execution of capital expenditures, which remains low (MEFP, ¶26). Declining levels of capital investments are weighing on economic growth and not helping to reduce regional and income disparities, particularly in disadvantaged regions. The authorities are forcefully moving ahead to address weak execution of investment projects through: (i) the adoption of new procurement procedures which are expected to start in June 2014 (the decree was adopted in March 2014); (ii), a more decentralized project execution; (iii) greater determination to resolve property deed issues that arise during project preparation; and (iv) an acceleration of major projects, in disadvantaged regions, that are already in the pipeline.

32. Tax reform is essential to enhance revenue mobilization, increase efficiency, and improve equity (MEFP, ¶22). Staff and the authorities agree that major changes will only come into effect in FY 2015 once a new tax code is adopted (2014 end-September SB). Preparatory work should build on measures included earlier this year in the 2014 budget, which halved the corporate tax wedge between the onshore and offshore sectors, introduced a tax on dividends, and raised the tax exemption threshold for low-income individuals. National tax consultations planned for June 2014 should ensure coherence across various working group recommendations in the formation of a consensus on a comprehensive tax reform strategy that is based on a clear vision of taxation expected to come from labor and capital and a clear costing of measures proposed. As part of the global income tax reform, staff and the authorities agreed on the need to reform the presumptive tax system—which is encouraging tax evasion. Staff urged the authorities to design a calendar for the gradual elimination of the onshore and offshore corporate tax disparity as part of the income tax reform.

33. Revenue administration should be further strengthened (MEFP, ¶23). The unification of different functions at the large taxpayer unit (LTU) has been progressing and is a significant step in the right direction; however, the adoption of a strategic plan for modernizing tax administration (end-March 2014 SB) will require additional time to ensure coherence across various working group recommendations on tax administration restructuring, taxpayer education and service, tax procedure and payment simplification, audit procedures and governance, and information systems. Staff welcomed the planned installation of a committee to pilot tax administration reforms, which is crucial to strengthening coordination across agencies and accelerate the reform process. On customs administration, a risk management unit has been set up, and strengthening border controls will help combat smuggling.

34. Progress in public financial management is encouraging (MEFP, ¶25). A Single Treasury Account has been created (end-March SB), regrouping all sub-accounts, with the exception of those linked to foreign-financed projects. The strict implementation of the complementary budget period, which has been substantially shortened to 20 days, provides greater transparency on budget management and appropriation. Staff welcomed the authorities’ efforts to reconcile the discrepancy between the above and below the line budgetary information, often complicated by payment orders for public investments that are recorded as expenditures but not paid until later in the year when the project starts or bills materialize. The ongoing work on a new organic budget law will help streamline control procedures and introduce performance budgeting, which is already being prepared for nine ministries (about 70 percent of the budget). Moreover, budget transparency has been enhanced by the publication of a “citizens’ budget” that can be understood by non experts and will be strengthened further by the adoption of a functional budget classification in June 2014.

Growth-enhancing structural reforms

35. Staff encouraged the authorities to make up for delays and swiftly implement business climate reforms (MEFP, ¶27). Staff noted delays in the legislative agenda, which pushed the adoption of implementation decrees for the investment code back to end-September 2014. The adoption of the competition law, the law on public-private partnership, as well as the bankruptcy law have been similarly delayed. The adoption of these laws is crucial if the burden of excessive regulation and government intervention in the economy is to be reduced. Along with the simplification of administrative procedures, these laws are essential to create a more level playing field with greater access to economic opportunities for a broader part of the society and to develop a more rules-based system that encourages private sector development and enhances competition. Moving with these reforms now will also allow Tunisia to keep ahead of its competitors who are fast improving their regulatory environment. Efforts to foster new trade agreements, including the one recently implemented with Algeria, could further simplify the import tariff barriers and foster fair competition (MEFP, ¶29).

Distance to the Frontier1

(Out of 100)

Source: World Bank.

1 The frontier represents the highest performance observed across all the economies and across all the different Doing Business indicators that are included in the World Bank’s annual Doing Business Report. An economy’s distance to frontier is reflected on a scale from 0 to 100, where 0 represents the lowest performance and 100 represents the frontier.

36. Focus on labor market reforms has been renewed. Tripartite commissions—regrouping representatives from labor, business, and government—have been revived to review the draft national employment strategy. However, to-date, no specific action has been taken and new measures will likely only be announced after the elections. In the meantime, the government’s priorities are employment creation programs, to be financed through microcredit, and a review of the education programs, to try to reduce the structural skills mismatch between existing employment opportunities and the educated workforce.

37. Plans to improve data on national accounts, monetary statistics, and the balance of payments should be stepped up, with help from Fund TA (MEFP, ¶38). Staff also urged the authorities to move swiftly in preparing a draft law that guarantees and protects the independence of the National Statistical Institute.

C. Protecting the Most Vulnerable

38. Improving the targeting of support for vulnerable households is critical to ensure the success of reforms (MEFP, ¶33). For this reason, the authorities have introduced new social housing programs for needy families, increased the income tax deduction for the poorest households, and established a new lifeline tariff to protect households that consume less than 100 kwh per month. They have also increased their efforts in moving towards a unified registry system for vulnerable households, and plan to introduce a unique social identification number over the next few months. In the interim, an evaluation of existing school assistance programs and of health benefits for needy families will be finalized by June 2014. The new targeted household strategy—which is now expected to be completed in June (new SB, postponed from end-March)—has been broadly identified. It will expand the number of beneficiary families in the existing cash transfer program from 220,000 to 250,000, broaden the definition of vulnerable households, and increase school allowances for children and university students by about 10 percent. To ensure the success of the energy subsidy reform, staff urged the authorities to adopt and implement the strategy ahead of the planned fuel price increase and in conjunction with a comprehensive communication campaign that explains the benefits of moving away from regressive energy subsidies that benefit mostly the welloff.

Program Design and Modalities

39. Program modalities remain broadly unchanged. The program continues to be responsive to Tunisia’s unique political transition—including through delayed fiscal consolidation and slower implementation of the reform agenda—while ensuring vulnerabilities and risks are reduced by the end of the Fund-supported program. The new fiscal measures planned for this year—with continued containment of the wage bill and subsidy reduction—will drive fiscal consolidation and reduce underlying vulnerabilities in the fiscal area. Priority social spending will be preserved during fiscal consolidation (a floor on the level of social expenditures is an indicative target for the program). The reserve accumulation programmed, and the accompanying reform agenda, will ensure that buffers continue to be rebuilt during the program period while inclusive growth and job creation are supported. Technical assistance from the Fund and other donors—in monetary policy, banking, and fiscal areas—will help the authorities in achieving these objectives. An extension of the program could be considered later in the year should reforms take longer than envisaged, or fiscal consolidation not take place as expected.

40. Risks associated with the program remain significant. Further setbacks in the political transition, continued crowding of the legislative calendar of the Constituent assembly, and major strikes could put the attainment of program objectives at risk, delay the completion of structural benchmarks, and lead to policy reversals. A further deterioration in the international economic environment could also dampen economic activity and put pressure on the fiscal and external positions. Delays in official external financing pledged to support Tunisia’s reform program, or lack of market access, could also create a financing gap. The new government’s strong commitment to the reform agenda will help reduce program implementation risks, although successful reform implementation will depend on the ability of the new authorities to build consensus within the population and the administration.

41. Conditionality has been set to anchor program objectives and performance. Final data for all end-March quantitative performance criteria will only be available after April 30. A waiver of applicability is thus needed for all end-March PCs, which appear to have been met. Staff is proposing a modification of end-June QPCs in light of the end-March outturn and downward revisions to the balance of payments projections. It also proposes to set new PCs for end-September 2014 and new ITs for end-December 2014 as per the MEFP (Table 1). Three end-March structural benchmarks have been postponed to June to allow for delays caused by the transition process, and one was deferred to end-September to account for slow progress in the legislative agenda (Table 2b). The strategic orientation for two public banks is a Prior Action and two new structural benchmarks are proposed for end-July to reduce banking sector vulnerabilities.

42. The program is fully financed for the next 12 months. Financing assurances have been provided by multilateral and bilateral partners, who have linked future disbursements to progress in the reform agenda. From the Fund, all resources scheduled to be disbursed for 2014 will continue to be used for budget support. Market issuance of $600 million is expected by the end of 2014, for which the authorities are seeking U.S. and Japanese guarantees. The issuance of a Sukuk bond—delayed from 2013 and now expected in the last quarter of the year—will cover remaining needs. Nonetheless, if there are early indications that projected financing will not be received, the authorities will consult with the Fund on alternative financing approaches and/or further policy adjustments.

Tunisia: Official External Financing(Millions of U.S. dollars)
2014
Proj.Q1Q2Q3Q4
Total4,165.5803.6855.4676.91,828.7
Bilateral200.0200.00.00.00.0
IFIs2,449.3507.5738.0603.4600.4
AMF (Arab Monetary Fund)43.443.4
IMF (Budget Support)1,393.9507.5444.6220.9220.9
World Bank Group750.0250.0250250.0
EU262.0132.5129.6
Other1,516.396.1117.573.51,228.2
International Market (possible US guarantee)300.0300.0
International Market (possible Japan guarantee)300.0300.0
Project aid without donor breakdown356.874.4108.458.8114.1
Sukuk and other external financing500.0500.0
Other (including Loan Transfers to SOEs)59.521.79.014.714.1
Memorandum items:
Grants127.3
EU127.338.238.250.9
IMF Financing (incl. Budget Support)1,393.9507.5444.6220.9220.9
Sources: Tunisian Authorities; and IMF staff estimates.
Sources: Tunisian Authorities; and IMF staff estimates.

43. Tunisia has the capacity to repay the Fund. Tunisia has a strong record of payments to the Fund. Peak Fund access projections remain unchanged from the Stand-By Arrangement request (400 percent of quota). Standard indicators of Fund exposure will remain low, with Fund credit outstanding reaching a maximum of 3.5 percent of GDP in 2015 (about 17.7 percent of gross international reserves).

Staff Appraisal

44. Tunisia is facing a challenging environment but progress in the political transition is a new opportunity for economic reform. Growth forecasts have been revised downwards, unemployment remains high, fiscal and external balances are elevated, and social tensions continue to burden economic activity. The favorable political developments provide, however, a general sentiment of optimism, and it is important that the new government seize this opportunity to accelerate reforms so that it can capitalize on renewed confidence.

45. Fiscal adjustment is progressing, but at a slower pace than originally envisaged under the program. The central government cash deficit target was met in 2013, but only because of deferred cash payments and record low levels of capital investment. For 2014, staff welcomes the authorities’ commitment to contain the fiscal deficit, which is politically difficult given high existing social tensions, and supports the new measures they have identified. In case of shortfalls or delays in adopting the revised budget law, staff urges cuts in non-essential current spending, while preserving social and capital expenditures.

46. The quality of budget composition needs to be significantly improved. Reversing the increase in regressive energy subsidies and containing the high wage bill are important to create much needed fiscal space for priority spending. Staff welcomes the recent move towards more decentralized project execution and the adoption of streamlined procurement procedures, which will help scale up public investment. The acceleration of major projects in disadvantadged regions is a welcome development.

47. Revenue reforms should be pursued at a more rapid pace. Steps taken to reduce the corporate tax wedge between the onshore and offshore sectors, and to unify different functions at the Large Taxpayer Unit, are welcome and should be built upon. Staff welcomes the organization of national tax consultations in June 2014, which will help build consensus on a comprehensive tax reform strategy that fosters equity and removes complex and distortive measures. Ongoing efforts in reforming tax administration should be organized around an all-encompassing action plan that will help coordinate reforms across different tax administration functions and agencies.

48. The government should continue its efforts to reform public enterprises and strengthen public financial management. Staff welcomes the authorities’ renewed focus on assessing the financial situation of public enterprises and improving data transparency and coverage. Efforts to make energy companies accountable for their own imports and timely transfers to public enterprises will increase transparency, and reduce costs and distortions. Staff urges rapid improvements in the governance framework of public enterprises. The introduction of a Single Treasury Account is welcome, and budgetary control procedures will be further simplified in the organic budget law currently being designed.

49. A prudent monetary policy remains necessary to contain inflationary pressures. Staff welcomes the authorities’ readiness to increase the policy rate further if core inflation rises more rapidly than expected or if depreciation pressures rise. It commends the authorities for steps taken to tighten the collateral framework, and recommends further tightening once the lender of last resort facility is in place. Staff urges the quick revision and adoption of a new legislation removing the cap on lending rates, which is essential to improve the monetary policy transmission channel and access to finance.

50. Greater exchange rate flexibility will help increase external buffers, reduce CBT liquidity injections, and improve competitiveness. Staff welcomes the authorities’ decision to limit intervention in the foreign exchange market to smoothing excessive intra-day exchange rate fluctuations. The newly established electronic platform and market maker agreement set the prerequisites needed for the establishment of weekly foreign exchange auctions, which will contribute to greater exchange rate flexibility.

51. Addressing vulnerabilities in the banking sector is critical to safeguarding banking sector stability, strengthening financial intermediation, and supporting private sector development. Staff welcomes the recent improvements implemented in the regulatory environment, banking supervision, governance of public banks, and the impressive steps taken to improve banking data reporting. Staff supports the plan to widen the authorities’ strategic orientation for public banks to encompass all banks in which the government has a stake. It urges the government to speedily complete the remaining bank audit and quickly design the restructuring plans for the two main public banks, which will need to allow for important recapitalization costs. The adoption of the draft law creating an AMC for troubled tourism debt should be accelerated as it is essential to repair public banks’ balance sheets and spur private sector credit. Financial stability will need to be safeguarded by ensuring all banks are compliant with minimum adequacy ratios and prudential norms. Enhancing banking resolution and consolidated banking supervision would further reduce vulnerabilities and strengthen transparency.

52. The implementation of the structural reform agenda should be accelerated. Delays in the legislative agenda postponed the adoption of the investment code and its decrees, the bankruptcy law, and the law on public-private partnerships. It is important that the government bring forward these laws for parliamentary consideration as their implementation is crucial to provide investors with a level playing field, strengthen creditor rights, and foster private sector development. Efforts to streamline existing business regulations should be intensified.

53. Initiatives taken to strengthen social safety nets are important. Progress made in introducing new social housing and in moving towards a unified social identification number for all vulnerable households is welcome. The authorities have also made important steps in identifying components of the long-delayed “household targeting strategy.” Its adoption should be enacted quickly, and ahead of the planned fuel price increase so as to ensure the success of the energy subsidy reform. Staff also urges the authorities to step up social expenditures, which should not be used as an adjustment variable during fiscal consolidation.

54. The authorities’ commitment to implement program policies will continue to be tested by a difficult social environment and will be essential to successfully tackle vested interests. Proactive communication on Tunisia’s challenging economic situation and the need for reforms is required to explain to all stakeholders the rationale and benefits of necessary but difficult policies. Increasing social tensions, regional or domestic security tensions, and additional delays in the political transition represent important risks to program implementation.

55. On the basis of Tunisia’s performance under the SBA, and the government’s policy commitments, staff supports the authorities’ request for completion of the third review and a disbursement of SDR 145 million. Staff supports the authorities’ request for waivers of applicability on the end-March QPCs on the primary fiscal balance, NIR, and NDA. It supports modification of end-June QPCs and recommends the establishment of new end-September PCs as proposed in the attached MEFP.

Figure 1.Tunisia: Recent Economic Developments

Source: Tunisian authorities.

Figure 2.Tunisia: External and Financial Indicators

Sources: Tunisian authorities; and IMF staff estimates.

Table 8.Tunisia: Schedule of Proposed Purchases under the SBA Arrangement, 2013–15
PurchaseDisbursements
ReviewAvailability DateActionMillions of SDRsPercent of quota 1/Millions of US$ 2/
June 7, 2013Board approval of the SBA98.80034.485150.155
First ReviewSeptember 15, 2013Observance of end-June 2013 performance criteria, completion of the first review98.60034.415152.037
Second ReviewDecember 15, 2013Observance of end-September 2013 performance criteria, completion of the second review230.52080.461355.453
Third ReviewMarch 15, 2014Observance of end-December 2013 performance criteria, completion of the third review145.08050.639223.708
Fourth ReviewJune 15, 2014Observance of end-March 2014 performance criteria, completion of the fourth review143.25050.000220.886
Fifth ReviewSeptember 15, 2014Observance of end-June 2014 performance criteria, completion of the fifth review143.25050.000220.886
Sixth ReviewDecember 15, 2014Observance of end-September 2014 performance criteria, completion of the sixth review143.25050.000220.886
Seventh ReviewMarch 15, 2015Observance of end-December 2014 performance criteria, completion of the seventh review71.62525.000111.517
Eighth ReviewMay 15, 2015Observance of end-March 2015 performance criteria, completion of the eighth review71.62525.000111.517
Total1146.000400.0001,767.045
Source: IMF staff projections.

Quota is SDR 286.5 million.

Indicative amount based on the average annual exchange rate.

Source: IMF staff projections.

Quota is SDR 286.5 million.

Indicative amount based on the average annual exchange rate.

Table 9.Tunisia: Illustrative Medium-Term Growth Scenario, 2010–19
Prel.Est.Proj.
2010201120122013201420152016201720182019
(Change in percent)
Real GDP growth2.6−1.93.72.62.84.24.54.54.54.5
Total consumption4.24.05.14.64.04.03.73.53.54.5
Private consumption (residual)4.24.04.74.13.85.04.43.93.74.9
Public consumption4.54.16.86.24.70.21.32.12.62.6
Investment7.5−16.54.1−11.1−3.45.94.88.010.35.5
Gross fixed capital formation4.1−12.67.1−1.11.65.05.05.05.05.0
Change in stocks−216.0100.3−29.4−91.5−65.040.00.0100.0100.010.0
Exports of goods and nfs 1/5.6−0.51.23.22.15.44.85.15.46.3
Imports of goods and nfs 1/−2.93.58.34.91.45.43.44.86.16.1
Inflation (annual average)4.43.55.66.15.54.94.24.04.04.0
(In percent of GDP)
Gross national savings20.916.216.113.914.215.817.219.922.523.6
Consolidated government 2/6.24.12.0−0.9−1.12.53.64.85.76.7
Rest of the economy14.812.014.114.915.313.313.715.116.816.9
Gross investment25.723.624.322.321.522.122.624.826.427.2
Consolidated government6.67.26.74.95.36.37.27.57.78.1
Rest of the Economy19.116.417.617.416.215.815.417.218.719.1
Total consumption80.284.786.087.788.988.888.787.987.287.2
Private consumption64.167.268.169.370.270.871.170.870.470.7
Public consumption16.818.118.619.119.418.718.217.817.517.2
Savings-investment gap−4.8−7.4−8.2−8.4−7.2−6.3−5.4−4.9−3.9−3.7
Consolidated government−0.4−3.0−4.7−5.8−6.4−3.9−3.7−2.8−2.1−1.5
Rest of the economy−4.3−4.4−3.5−2.6−0.9−2.4−1.7−2.1−1.9−2.2
Memorandum items
Nominal GDP at current prices (TD millions)63,05964,69070,65876,57082,72890,35097,814106,304115,310125,318
General debt in percent of GDP40.744.544.544.750.952.653.653.452.151.3
External debt in percent of GDP48.548.053.853.957.359.860.860.058.958.0
Central government balance in percent of GDP /3−0.6−3.5−5.7−6.1−6.8−4.4−4.1−3.2−2.6−2.0
Current account balance in percent of GDP−4.8−7.4−8.2−8.4−7.2−6.3−5.4−4.9−3.9−3.7
Sources: Tunisian authorities; and IMF staff estimates.

Goods and nonfactor services.

Includes social security, excludes privatization receipts.

Excluding grants and privatization.

Sources: Tunisian authorities; and IMF staff estimates.

Goods and nonfactor services.

Includes social security, excludes privatization receipts.

Excluding grants and privatization.

Table 10.Tunisia: Indicators of Fund Credit, 2012–19
20122013201420152016201720182019
Existing and prospective Fund credit
Disbursement0999041430000
Stock0991,0031,1461,12185833727
Obligations0381743279529313
Repurchase000025263521310
Charges0.022.728.2416.9918.7916.398.052.43
Stock of existing and prospective Fund credit
In percent of quota0.034.5350.0400.0391.4299.6117.69.4
In percent of GDP0.00.33.13.53.42.51.00.1
In percent of exports of goods and services0.00.76.97.57.05.11.90.1
In percent of gross reserves0.02.017.117.716.011.44.20.3
Obligations to the Fund from existing and prospective Fund arrangements
In percent of quota0.00.92.95.915.297.5184.8109.1
In percent of GDP0.00.00.00.10.10.81.50.9
In percent of exports of goods and services0.00.00.10.10.31.73.01.7
In percent of gross reserves0.00.10.10.30.63.76.53.7
Source: IMF staff estimates.
Source: IMF staff estimates.
Annex: Public and External Debt Sustainability Analysis

Public debt

An expansionary fiscal policy in the aftermath of the revolution, combined with a decline in economic activity, increased public debt. After having declined from an average of 60 percent of GDP in the 1990s to 40.7 percent of GDP in 2010, the debt-to-GDP ratio increased in 2011 to 44.5 percent and has remained practically unchanged until 2013. Notwithstanding this, the debt level continues to be comfortable and lower than in similar countries in the region, despite high deficit levels since the revolution.

Under the baseline scenario, public debt is expected to increase to 54 percent before declining over the medium term. Increased banking recapitalization costs, a wider deficit, and weaker-than-originally-expected growth dynamics will contribute to increasing the debt-to-GDP ratio to around 54 percent of GDP by 2016. The decline of the debt-to-GDP ratio has been somewhat delayed, and it is expected to start declining in 2017, reaching about 51 percent by end-2019, 10 percentage of GDP higher than the 2010 level. This debt dynamic reflects the fiscal consolidation envisaged by the authorities (an overall deficit declining to 2.5 percent of GDP by 2018) and real growth rates that start to pick up in 2015.

Public debt dynamics remain vulnerable to adverse shocks and could deteriorate significantly relative to the baseline. Under an adverse scenario in which the medium-term fiscal consolidation is not implemented, public debt would be on an increasing path and would reach around 61 percent of GDP by 2019. The public debt dynamic would initially worsen under all bound tests and then stabilize between 51 percent and 65 percent in 2019. As a result of a one-off 10 percent of GDP shock to contingent liabilities it would reach about 64 percent of GDP in 2016 and slightly decline to about 60 percent of GDP by 2019.1 Under a permanent negative shock to real growth, public debt would remain on an increasing path, reaching about 64 percent of GDP by end-2019. Finally, as around 64 percent of public debt is denominated in foreign currency, a one-time 30 percent depreciation would increase the public debt-to-GDP ratio to about 69 percent; before declining to 65 percent by 2019. On the other hand, public debt dynamics would be relatively resilient to an interest rate shock, with debt staying at around 53 percent of GDP over the medium term.

External debt

After a decade of steady decline, external debt (in percent of GDP) has increased moderately as a result of the post-revolution fiscal expansion and a widening current account deficit. Notwithstanding this increase, external debt will remain sustainable under the baseline and under most shocks, although it would be vulnerable to a large exchange rate shock.

Tunisia’s external debt is relatively low and has been stable in recent years. External debt declined sharply in recent years from over 65 percent of GDP in 2002 to 48 percent of GDP at end-2011, on the back of a strong fiscal adjustment and moderate current account deficits. The authorities have followed prudent borrowing policies, refraining from accessing international capital markets and opting instead for concessional resources from multilateral and development banks.2

Under the baseline projections, external debt is projected to increase to 60.8 percent of GDP in 2016 before declining following favorable current account dynamics. As a result, Tunisia’s external debt sustainability risks appear contained in the period ahead. The analysis assumes that Tunisia’s government will implement a significant fiscal consolidation in the medium term and continue to pursue cautious external borrowing policies. Having remained steady in 2013 following a significant shortfall in external financing, the external debt-to-GDP ratio is expected to rise in 2014 to 57.3 percent, and will reach a maximum of 60.8 percent by 2016 before slightly declining to around 58 percent by end-2019.

The external debt ratio is resilient to most types of adverse external shocks except large exchange rate depreciation. The relatively low level of Tunisia’s debt as well as its profile (low average interest rate and relatively long maturity) makes it robust to most shocks, with the exception of a large real exchange rate depreciation. The external debt ratio remains below 65 percent of GDP throughout the projection period under all but one alternative scenario and all bound tests. For example, a permanent negative shock to growth or to the current account would raise the debt ratio to 60–65 percent of GDP, while an increase in the average interest rate would have almost no impact.3 However a sharp real depreciation (one-time 30 percent) of the exchange rate relative to the baseline would raise the debt ratio to more than 84 percent of GDP.

Table 1.Tunisia: Public Sector Debt Sustainability Framework, 2009-2019(In percent of GDP, unless otherwise indicated)
Actual
20092010201120122013201420152016201720182019
Debt-stabilizing primary balance 9/
1Public sector debt 1/42.840.744.544.544.750.952.653.653.452.151.3−1.3
o/w foreign-currency denominated25.024.725.827.928.835.737.938.738.036.635.8
2Change in public sector debt−0.5−2.13.80.00.26.21.71.0−0.2−1.3−0.8
3Identified debt-creating flows (4+7 + 12)−0.2−0.22.53.02.94.71.31.30.0−0.6−1.3
4Primary deficit−0.8−0.91.63.44.03.22.22.11.30.60.1
5Revenue and grants29.630.231.530.730.430.130.230.531.031.331.6
6Primary (noninterest) expenditure28.729.333.134.034.433.332.432.632.331.931.7
7Automatic debt dynamics 2/−0.51.21.90.7−0.5−0.6−0.6−0.7−1.2−1.2−1.4
8Contribution from interest rate/growth differential 3/−0.7−1.00.8−2.0−1.6−1.5−2.7−2.5−2.9−2.9−2.9
9Of which contribution from real interest rate0.60.00.1−0.4−0.5−0.4−0.8−0.3−0.7−0.6−0.8
10Of which contribution from real GDP growth−1.3−1.00.8−1.5−1.1−1.2−2.0−2.2−2.2−2.2−2.2
11Contribution from exchange rate depreciation 4/0.12.21.12.71.11.02.11.81.71.71.6
12Other identified debt-creating flows1.1−0.4−1.0−1.1−0.62.1−0.3−0.1−0.1−0.1−0.1
13Privatization receipts (negative)1.1−0.4−1.0−1.1−0.60.9−0.3−0.1−0.1−0.1−0.1
14Recognition of implicit or contingent liabilities0.00.00.00.00.00.00.00.00.00.00.0
15Other (specify, e.g. bank recapitalization)0.00.00.00.00.01.20.00.00.00.00.0
16Residual, including asset changes (2-3)−0.3−2.01.3−3.0−2.61.50.4−0.3−0.2−0.70.5
Public sector debt-to-revenue ratio 1/144.6134.6141.1145.1147.1169.4173.9175.6172.2166.5162.5
Gross financing need 5/5.84.46.88.79.810.27.15.85.24.03.3
in billions of U.S. dollars2.51.93.13.94.610-Year Historical Average10-Year Standard Deviation5.03.63.02.82.21.9Projected Average
Key Macroeconomic and Fiscal Assumptions
Real GDP growth (in percent)3.12.6−1.93.72.63.62.42.84.24.54.54.54.54.1
Average nominal interest rate on public debt (in percent) 6/4.94.64.64.44.54.80.44.33.43.12.72.72.63.2
Average real interest rate (nominal rate minus change in GDP deflator, in percent)1.60.20.0−0.9−1.20.51.3−0.8−1.4−0.5−1.3−1.1−1.4−1.0
Nominal appreciation (increase in US dollar value of local currency, in percent)−0.6−8.4−4.1−9.9−3.9−3.46.2−3.4−6.0−4.8−4.5−4.5−4.4−4.6
Inflation rate (GDP deflator, in percent)3.34.34.65.35.74.31.15.14.83.64.03.84.04.3
Growth of real primary spending (deflated by GDP deflator, in percent)4.14.511.06.63.76.32.5−0.51.55.03.73.23.82.6
Primary deficit−0.8−0.91.63.44.00.51.93.22.22.11.30.60.11.9
Debt-stabilizing primary balance 9/
A. Alternative Scenarios
A1. Key variables are at their historical averages in 2014-2019 7/50.951.851.952.051.552.2−0.3
A2. No policy change (constant primary balance) in 2014-201950.953.755.857.558.760.8−1.3
B. Bound Tests
B1. Real interest rate is at baseline plus one standard deviations50.952.954.254.453.452.9−1.0
B2. Real GDP growth is at baseline minus one-half standard deviation50.954.057.059.461.264.1−0.5
B3. Primary balance is at baseline minus one-half standard deviation50.953.555.456.155.755.8−1.3
B4. Combination of B1-B3 using one-quarter standard deviation shocks50.953.555.456.155.755.8−0.9
B5. One time 30 percent real depreciation in 2015 8/50.968.369.068.566.965.3−1.6
B6. 10 percent of GDP increase in other debt-creating flows in 201550.962.663.463.061.560.5−1.5
Sources: IMF Country desk data; and staff estimates.

General government gross debt including public pension fund.

Derived as [(r - p(1+g) - g + ae(1 + r)]/(1+g+p+gp)) times previous period debt ratio, with r = interest rate; p = growth rate of GDP deflator; g = real GDP growth rate; a = share of foreign-currency denominated debt; and e = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar).

The real interest rate contribution is derived from the denominator in footnote 2/ as r - π (1+g) and the real growth contribution as -g.

The exchange rate contribution is derived from the numerator in footnote 2/ as ae(1+r).

Defined as public sector deficit, plus amortization of medium and long-term public sector debt, plus short-term debt at end of previous period.

Derived as nominal interest expenditure divided by previous period debt stock.

The key variables include real GDP growth; real interest rate; and primary balance in percent of GDP.

Real depreciation is defined as nominal depreciation (measured by percentage fall in dollar value of local currency) minus domestic inflation (based on GDP deflator).

Sources: IMF Country desk data; and staff estimates.

General government gross debt including public pension fund.

Derived as [(r - p(1+g) - g + ae(1 + r)]/(1+g+p+gp)) times previous period debt ratio, with r = interest rate; p = growth rate of GDP deflator; g = real GDP growth rate; a = share of foreign-currency denominated debt; and e = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar).

The real interest rate contribution is derived from the denominator in footnote 2/ as r - π (1+g) and the real growth contribution as -g.

The exchange rate contribution is derived from the numerator in footnote 2/ as ae(1+r).

Defined as public sector deficit, plus amortization of medium and long-term public sector debt, plus short-term debt at end of previous period.

Derived as nominal interest expenditure divided by previous period debt stock.

The key variables include real GDP growth; real interest rate; and primary balance in percent of GDP.

Real depreciation is defined as nominal depreciation (measured by percentage fall in dollar value of local currency) minus domestic inflation (based on GDP deflator).

Table 2.External Debt Sustainability Framework, 2009-2019(In percent of GDP, unless otherwise indicated)
ActualProjections
20092010201120122013201420152016201720182019
I. Baseline ProjectionsDebt-stabilizing non-interest current account 6/
1 External debt49.348.548.053.853.957.359.860.859.958.858.0−9.0
2Change in external debt3.4−0.8−0.55.80.13.42.51.0−0.9−1.1−0.8
3Identified external debt-creating flows (4+8+9)0.53.24.83.33.11.70.1−2.2−4.6−6.5−7.2
4Current account deficit, excluding interest payments1.33.36.06.87.26.15.24.53.62.01.8
5Deficit in balance of goods and services2.74.87.19.28.98.37.55.94.85.15.3
6Exports45.750.549.449.146.845.846.848.249.550.351.2
7Imports48.455.356.458.355.754.254.354.154.355.456.5
8Net non-debt creating capital inflows (negative)−3.7−2.9−0.6−5.6−3.1−3 .3−4.7−5.9−6.8−7.2−7.5
9Automatic debt dynamics 1/2.92.8−0.62.1−0.9−1.1−0.4−0.8−1.4−1.4−1.6
10Contribution from nominal interest rate1.61.51.41.41.21.21.10.90.80.70.6
11Contribution from real GDP growth−1.50.50.9−1.8−1.3−1.4−2.3−2.6−2.6−2.6−2.5
12Contribution from price and exchange rate changes 2/2.80.8−2.92.6−0.8−0.80.90.80.40.50.4
13 Residual, incl. change in gross foreign assets (2-3)3.0−4.0−5.42.5−3.01.82.43.23.85.46.4
Gross external financing need (in billions of US dollars) 3/7.28.610.410.911.711.410.110.010.610.210.1
in percent of GDP16.619.622.724.024.810-Year Historical Average10-Year Standard Deviation23.220.019.219.618.217.3Projected Average
Key Macroeconomic Assumptions
Real GDP growth (in percent)3.1−1.1−1.93.72.63.32.82.84.24.54.54.54.54.4
GDP deflator in US dollars (change in percent)−5.7−1.56.3−5.11.62.05.41.6−1.5−1.4−0.7−0.9−0.6−1.0
Growth of exports (US dollar terms, in percent)−21.011.62.0−2.0−0.78.314.42.15.05.96.65.35.75.7
Growth of imports (US dollar terms, in percent)−20.615.56.51.8−0.59.314.11.42.92.64.25.75.94.3
Current account balance, excluding interest payments−1.3−3.3−6.0−6.8−7.2−2.63.1−6.1−5.2−4.5−3.6−2.0−1.8−3.4
Net non-debt creating capital inflows3.72.90.65.63.14.12.63.34.75.96.87.27.56.4
II. Stress Tests for External Debt RatioDebt-stabilizing non-interest current account 6/
A. Alternative Scenarios
A1. Key variables are at their historical averages in 2014-2019 4/57.357.157.658.661.064.2−5.3
B. Bound Tests
B1. Nominal interest rate is at baseline plus one-half standard deviation57.359.961.160.359.458.7−8.9
B2. Real GDP growth is at baseline minus one-half standard deviations57.360.963.063.163.163.3−8.7
B3. Non-interest current account is at baseline minus one-half standard deviations57.361.363.864.464.765.3−9.2
B4. Combination of B1-B3 using ¼ standard deviation shocks57.361.063.263.563.563.8−8.9
B5. One time 30 percent real depreciation in 201557.386.287.686.484.883.6−13.0
Sources: IMF Country desk data; and staff estimates.

Derived as [r - g - r(1 + g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock, with r = nominal effective interest rate on external debt; r = change in domestic GDP deflator in US dollar terms, g = real GDP growth rate, e = nominal appreciation (increase in dollar value of domestic currency), and a = share of domestic-currency denominated debt in total external debt.

The contribution from price and exchange rate changes is defined as [-r(1 + g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock. r increases with an appreciating domestic currency (e > 0) and rising inflation (based on GDP deflator).

Defined as current account deficit, plus amortization on medium- and long-term debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; nominal interest rate; dollar deflator growth; and both non-interest current account and non-debt inflows in percent of GDP.

The implied change in other key variables under this scenario is discussed in the text.

Long-run, constant balance that stabilizes the debt ratio assuming that key variables (real GDP growth, nominal interest rate, dollar deflator growth, and non-debt inflows in percent of GDP) remain at their levels of the last projection year.

Sources: IMF Country desk data; and staff estimates.

Derived as [r - g - r(1 + g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock, with r = nominal effective interest rate on external debt; r = change in domestic GDP deflator in US dollar terms, g = real GDP growth rate, e = nominal appreciation (increase in dollar value of domestic currency), and a = share of domestic-currency denominated debt in total external debt.

The contribution from price and exchange rate changes is defined as [-r(1 + g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock. r increases with an appreciating domestic currency (e > 0) and rising inflation (based on GDP deflator).

Defined as current account deficit, plus amortization on medium- and long-term debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; nominal interest rate; dollar deflator growth; and both non-interest current account and non-debt inflows in percent of GDP.

The implied change in other key variables under this scenario is discussed in the text.

Long-run, constant balance that stabilizes the debt ratio assuming that key variables (real GDP growth, nominal interest rate, dollar deflator growth, and non-debt inflows in percent of GDP) remain at their levels of the last projection year.

Figure 1.Tunisia: Public Debt Sustainability: Bound Tests 1/2/

(Public debt in percent of GDP)

Sources: IMF, country desk data, and staff estimates.

1/ Shaded areas represent actual data. Individual shocks are permanent one-half standard deviation shocks and a ½ of standard deviation growth shock. Figures in the boxes represent average projections for the respective variables in the baseline and scenario being presented. Ten-year historical average for the variable is also shown.

2/ For historical scenarios, the historical averages are calculated over the ten-year period, and the information is used to project debt dynamics five years ahead.

3/ Permanent ¼ standard deviation shocks applied to real interest rate, growth rate, and primary balance.

4/ One-time real depreciation of 30 percent and 10 percent of GDP shock to contingent liabilities occur in 2013, with real depreciation defined as nominal depreciation (measured by percentage fall in dollar value of local currency) minus domestic inflation (based on GDP deflator).

Figure 2.Tunisia: External Debt Sustainability: Bound Tests 1/2/

(External debt in percent of GDP)

Sources: IMF, Country desk data, and staff estimates.

1/ Shaded areas represent actual data. Individual shocks are permanent one-half standard deviation shocks (except for growth which is a 3/4th standard deviation). Figures in the boxes represent average projections for the respective variables in the baseline and scenario being presented. Ten-year historical average for the variable is also shown.

2/ For historical scenarios, the historical averages are calculated over the ten-year period, and the information is used to project debt dynamics five years ahead.

3/ Permanent ¼ standard deviation shocks applied to real interest rate, growth rate, and current account balance.

4/ One-time real depreciation of 30 percent occurs in 2014.

Appendix I. Letter of Intent

Tunis, April 10, 2014

Madame Christine Lagarde

Managing Director

International Monetary Fund

700 19th Street, NW

Washington, D.C. 20431

USA

Tunis, April 10, 2014

Madame Managing Director,

1. The Tunisian authorities reiterate their firm commitment to the economic program supported by the IMF. Recent political developments have given the Tunisian people renewed confidence and have opened the way for the holding of free and democratic elections. The adoption of the Constitution and the appointment of the members of the Independent Electoral Commission (ISIE) are expected to be followed by the adoption of the electoral law, which will establish a clear and precise timetable for legislative and presidential elections. We hope that this important step will help bolster both national and international confidence and will also lessen the wait-and-see attitude of investors. Nevertheless, the economic situation remains fragile, with the country growing at a rate that is too low to meet the population’s very high aspirations. We remain convinced, however, that implementing prudent macroeconomic policies and structural reforms will allow us to maintain macroeconomic stability and promote sustained and more inclusive growth that will support Tunisia’s development.

2. Performance under the IMF-supported program has been positive overall, especially, given the difficult national and international environment that Tunisia had to contend with as the new government was taking office. Moreover, performance at end-December 2013 was better than was expected at the time of the previous review, and we expect all performance criteria at end-March 2014 to have been met. However, owing to the political crisis and the ensuing wait-and-see attitude of investors that followed the appointment of the new administration, the pace of reform was slower than expected. We are committed to make up for the delay in the next weeks.

  • Performance criteria and quantitative targets. As initially anticipated, the quantitative criteria for Net International Reserves (NIR) and Net Domestic Assets (NDA) at end-December 2013 were not met; however, the deviation from the target is considerably lower than previously estimated during the last review. The performance criterion on the primary balance of the central government (on a cash basis) at end-December was met as expected, although this performance is mainly due to the deferral to early 2014 of payments authorized in 2013. We have throughout adhered to the zero ceiling on the accumulation of external arrears and the non-accumulation of domestic arrears. The quantitative indicative target for social expenditures (which was missed in December 2013) and the ceiling on current expenditure at end-March 2014 are in line with projections.

  • Structural reforms. Four of the eight structural benchmarks to be completed by March 2014 have been fully met (Table 2b). In particular, the electronic platform and the market makers agreement, which is now effective, have been implemented, a Treasury Single Account has been established, the impact study on the bank lending rate cap has been submitted to the CBT Board of Directors, and the preliminary audit report on state-owned enterprises’ operations in the energy sector has been finalized. In turn, the benchmark concerning haircuts on all loans used as collateral has been partially met since the circular was issued but will only enter into force with effect from June 2014 after the lender of last resort facility is established. With regard to the benchmarks that have not been met: (i) the implementation decrees for the investment code will be finalized in September 2014 once the code has been approved by the National Constituent Assembly (NCA), which has a very full agenda; (ii) the targeted household support program, initially postponed to March 2014, is now scheduled for June 2014 and will be implemented ahead of the planned increase in fuel prices; (iii) a first draft of the tax administration modernization plan is ready, but the complete plan is only expected to be finalized in June 2014 following IMF technical assistance; and (iv) the strategic orientation for all banks with public participation (or at least for the STB and BH) will be approved by the Council of Ministers in mid-April 2014 (prior action). The strategy will then be presented to the public by end-April 2014.

3. As a result of the appropriate macroeconomic policies already implemented to achieve the key objectives of the program, and the ongoing implementation of the structural reform program (Tables 1 and 2a/2b), the government is requesting completion of the third review of the program supported by the stand-by arrangement as well as the disbursement of SDR 145.08 million. The government also requests a waiver of applicability for the quantitative performance criteria on NIR, NDA, and the primary balance at end-March 2014, which appear to have been met, but for which final data are not yet available. Further, the government would like to modify the performance criteria for NIR, NDA, and the primary balance at end-June 2014, and propose new criteria for September 2014, as well as new indicative targets, as described in the MEFP (Table 1) and the attached Technical Memorandum of Understanding.

4. This Letter of Intent is based on the previous Letter of Intent and Memorandum of Economic and Financial Policies (MEFP) approved on January 29, 2014. The attached MEFP outlines the key components of the government’s program and the policies planned by the Central Bank of Tunisia, which we intend to implement during 2014. We remain determined to carry out our program with firm resolve, though mindful of the difficulties in the domestic, regional, and international environment.

5. We are confident that the policies described in the attached MEFP are appropriate to achieve the objectives of our economic program, which is designed to achieve short-term macroeconomic stabilization while laying the foundation for supporting growth and protecting vulnerable groups. We will remain vigilant and stand ready to take any additional measures that may be necessary to attain these objectives. We will consult with IMF staff on the adoption of these measures, and in advance of any revision of the macroeconomic policies contained in this MEFP, in accordance with the IMF’s policies on such consultations. All information and data necessary for program monitoring will be provided to IMF staff.

6. We authorize the IMF to publish this Letter of Intent and its attachments (MEFP, Tables 1, 2a2b, and 3) as well as the related staff report.

Sincerely yours,

/s//s/
Chedly AyariHakim Ben Hammouda
Governor of the Central Bank of TunisiaMinister of Economy and Finance
Attachment I. Memorandum of Economic and Financial Policies

I. Recent Developments and Macroeconomic Outlook

1. The recovery of the Tunisian economy remains tentative given the difficult national context and a challenging international environment. According to the latest data, economic growth in 2013—driven mainly by public and private services—amounted to around 2.6 percent year-on-year, with a downturn in the last quarter of 2013 (-0.3 percent on a quarterly basis). For 2014, despite the brighter outlook as a result of the return of confidence following the adoption of the Constitution and the formation of the new government, growth is expected to remain close to 2.8 percent, reflecting a relatively weak performance in the first two months of 2014 and the persistence of investors’ wait-and-see attitude pending the outcome of the last phase of the political transition. There are also significant short-term risks related, in particular, to the possibility of a protracted political transition period, heightened social tensions, and a worsening of the economic outlook for Europe. Inflation (year-on-year) declined to 5.5 percent in February 2014, thanks to a slower rise in food prices and despite the electricity tariff increases of January 2014. Over the year, inflation is expected to remain contained at 5.6 percent, thanks to the slowing of food price rises, actions taken to control and monitor distribution channels, and a prudent monetary policy.

2. The current account deficit worsened during 2013. It reached 8.4 percent of GDP in 2013 (up from the initial program projected level of 7.5 percent of GDP), driven by weak exports of phosphates and energy, tourism revenues, and increase dividend transfers. On the other hand, the level of gross reserves in 2013, which was revised downwards during the previous review because of lower-than-expected external financial support, reached 7.7 billion dollars (3.5 months of imports of goods and services) following an increase in nonresidents’ deposits, a valuation effect arising from exchange rate fluctuations, and the revaluation of the Central Bank of Tunisia’s (CBT)’s gold holdings at market price. The higher confidence level seen in the last two months, ushered in by the adoption of the Constitution, also led to an initial rise in stock market activity and a lowering of the country risk premium for Tunisia. It also contributed to an appreciation of the exchange rate against the US dollar and the Euro, which was supported by strict enforcement of the exchange regulations and the intervention policy of the CBT.

II. Performance under the Program and Strategy

3. We are fully committed to the rigorous implementation of the program to maintain short-term macroeconomic stability and lay the foundation for more sustained and inclusive growth. The objectives of our program remain unchanged and we focused during this review on the following areas:

  • Preserving macroeconomic stability. Controlling current expenditures, mobilizing revenues, and implementing a prudent monetary policy, coupled with limited CBT interventions in the foreign exchange markets, are needed to maintain macroeconomic stability.

  • Laying the foundations for inclusive growth. Developing a strategic vision on the government’s role in banks and reducing banking sector fragilities, improving the structure of the budget—underpinned by a better execution of public investment and growth-supporting fiscal reforms—as well as an ambitious structural reform agenda are needed to support private sector development, which is the main driver of growth.

  • Protecting the most vulnerable parts of the population by strengthening social safety nets and systematically assessing the social impact of reforms.

A. Short-term Objectives: Restore Fiscal and External Buffers

Fiscal policy

4. In 2013, we achieved a primary deficit, on a cash basis, of 2.7 percent of GDP, which enabled us to meet the objective we set with a comfortable margin. The objective was met by implementing an active cash management strategy aimed at preserving part of the government’s deposits in response to delays in the disbursement of donor financing (including the IMF). Further, the settlement of payment orders issued in FY2013 (up to January 31, 2014) was deferred to 2014 (around 3.3 percent of GDP) for payment within 90 days (except for public investments that remain linked to the execution of projects). In addition, savings on the wage bill and on social spending along with significant under-execution of investment spending (by around 1.5 percent of GDP compared to the budgeted amounts)—caused by absorptive capacity constraints at the regional level and unavoidable procurement delays—also contributed to this performance. Unfortunately, these absorptive capacity constraints were also responsible for the underperformance of social spending at end-December 2013, but the level set for end-March 2014 is expected to have been met.

5. The 2014 budget law—adopted in December 2013—is aimed at starting fiscal consolidation while preserving priority investment and development spending. The underlying fiscal position—as measured by the structural budget deficit—excluding the effects associated with the economic cycle and one-off transactions, such as bank recapitalization requirements or the repayment of arrears—was projected at 5.2 percent of GDP in 2014. At the time of the previous review, a deterioration of 0.6 percent of GDP compared to 2013 was observed, taking into account planned measures, including savings on unallocated expenditure (0.5 percent of GDP) and wages (0.2 percent of GDP, to offset the revenue shortfall from the suspension of the tax on vehicles included in the government’s budget for 2014). The composition of the budget improved and fiscal pressures were further reduced by key elements included in the government budget:

  • Energy subsidy reform. Our energy subsidy reform strategy is built around a multi-pronged approach and includes short- and medium-term measures:

    • ➢ Starting from January 1, 2014, we reduced energy subsidies extended to cement companies (gray cement) by raising the electricity rate and the price of natural gas for cement plants by 35 percent and 47 percent, respectively. On June 1, 2014, we plan to introduce a second electricity and gas price adjustment aimed at eliminating all subsidies to producers of grey cement (a gain of 0.2 percent of GDP). The program for the gradual adjustment of electricity and gas rates for other industrial consumers—to be implemented over a period of three to six years—is also being finalized, with an initial 10 percent rate increase already having been introduced in January and a second 10 percent increase planned for June 2014. To protect the most disadvantaged segments of the population, a social tariff was introduced for customers that consume less than 100 kwh per month. We are also committed to raising fuel prices by 6 percent by July 1, 2014, which is expected to result in savings of 100 million dinars on energy subsidies. These measures will be implemented even in the face of declining oil prices on the international markets, a further appreciation of the exchange rate, or a renegotiation of commercial contracts on more favorable terms.

    • ➢ The new fuel price adjustment formula is now in force but so far international prices have not yet reached the trigger of ten dinars per barrel in a quarter. Although the formula already provides assurances that the budgeted envelope will not be affected by any significant increases in international oil prices, a price smoothing mechanism is being considered to make it more resilient to large international price fluctuations.

    • ➢ Price adjustment has been accompanied by the implementation of social programs, already included in the 2014 budget, and the creation of the Energy Transition Fund to support the development of renewable energy. Additional programs (see Section C)—as well as a new communication campaign to explain the subsidy reform—will be carried out prior to any new price increases.

  • Controlling the wage bill. We are committed to containing the wage bill in 2014 as was envisaged in the context of the program. We are determined to continue to engage in discussions with our social partners to explain the need to control the wage bill under the present circumstances. New recruitment will be frozen—except in the security forces, and education, and health sectors—to reduce the size of the wage bill. With a view to improving the preparation of the 2015 budget, we are in the process of finalizing the report assessing all new hiring since 2011 and we have set up a civil service reform task force. In addition, with the technical assistance from the World Bank, an evaluation of the civil service hiring system and salary structure is to be conducted, the findings of which could form the basis for a comprehensive civil service reform. The evaluation of the civil service salary structure will be finalized in September 2014.

6. To address our financing constraints and reduce pressures on the balance of payments, we intend to prepare a supplementary budget law and make adjustments aimed at reducing the structural deficit to 4.9 percent of GDP. In that regard, we have identified measures aimed at generating an additional 300 million dinars through revenue measures and savings on expenditure (see table 3). We also remain committed to taking additional measures to correct any deviation from the budgetary target, including through limiting current expenditures (namely subsidies and goods and services) that have in the past been a source of budget overruns (it is, however, important to note that we are on track to meet the end- March benchmark on current primary expenditure). Capital and social (which excludes subsidies) spending will be protected, and will not be constrained by our fiscal consolidation strategy.

Monetary and exchange rate policies

7. The growth in monetary aggregates remains contained and inflation is under control. The money supply (M2) rose by 6.9 percent year-on-year in 2013; however, the criterion on net domestic assets at end-December 2013 was not met due to a rapid increase in net credit to the government. The refinancing of banks by the Central Bank reached a peak on January 15, 2014 (5.5 billion dinars)—due to the need to compensate the shortfall arising from seasonal withdrawals of oil company deposits—and has since dropped back to 4.2 billion dinars at end-February 2014 and we estimate that the NDA criterion for end-March 2014 will be met.

8. Monetary policy will continue to focus on containing inflation. The increase in the policy rate by 50 basis points to 4.5 percent in December 2013—coupled with the introduction of a symmetrical corridor of 25 basis points around the policy rate—made it possible to normalize the market rate and narrow the gap with the policy rate. Although the real interest rate remains negative, we do not consider it necessary to increase the policy rate immediately given a stable core inflation (at around 4.5 percent), a negative output gap, credit to the private sector contained at 8.1 percent (year-on-year at end-January 2014), and the recent appreciation of the exchange rate. However, we stand ready to increase the policy rate further to contain any additional inflationary pressures caused by an accommodating budgetary policy and/or a rapid depreciation in the dinar exchange rate.

9. The monetary policy transmission channel and access to financing will be strengthened by modifying the excessive lending rate system. In March 2013, we eliminated the ceiling on creditor interest rates for term deposits, which had been introduced in December 2011. With regard to bank lending rates, we have finalized the impact study—conducted with World Bank assistance—on the modification or elimination of the legislation on excessive bank lending rates and have presented it to the Board of Directors of the Central Bank (structural benchmark at end-March 2014). On the basis of the study and of these recommendations, the CBT Board has asked for wider consultations with relevant Ministerial departments, before revising this year the legislation on excessive bank lending rates so as to enable the banks to preserve their profit margins, apply a higher interest rate to higher-risk customers, and improve monetary policy transmission channels as well as access to credit for small and medium-sized enterprises.

10. We will continue to implement our gradual exit strategy from liquidity injections. To that end, we have launched a process aimed at gradually limiting commercial banks’ dependence on central bank refinancing, by increasing the share of refinancing guaranteed by government securities (to 20 percent at end-December 2013), and by introducing a ten percent haircut on loans accepted as collateral. The entry into force of a haircut system of around 25 percent (structural benchmark at end-March 2014) justified by a differentiation based on past nonperforming loans was postponed to June 2014 (the related circular will nonetheless be adopted by the CBT Board of Directors in March 2014). This will allow banks time to prepare for tightened liquidity conditions and to benefit from the implementation of a lender of last resort facility at end-June 2014 (structural benchmark). The facility will be established to ensure that the structural needs of solvent but illiquid banks are met at penalty rates and on the basis of a precise restructuring plan to improve the banks’ liquidity position. Once the facility is in place, the share of government securities used as collateral in CBT refinancing operations will be increased to 40 percent (structural benchmark at end-December 2014). A study on the possibility of valuing government securities at market prices and not at their nominal value will be conducted by September 2014.

11. The work on the reform of the central bank law will begin in May 2014. In line with the recommendations of the safeguards assessment of the Central Bank of Tunisia, the provisions of the central bank law will be revised in order to strengthen the independence of the CBT, to improve its governance procedures, in general, and the modalities for the conduct of external audits as well as its internal audit and control functions, in particular. The revised draft law—prepared with the support of IMF technical assistance—will be submitted to the CBT Board of Directors in June 2014 (structural benchmark). It will be adopted by the government in September 2014.

12. The liquidity pressures that marked the foreign exchange market throughout 2013 eased in the first few months of 2014. Stricter enforcement of the existing regulations for the holders of professional accounts in foreign currency, the receipt of expected budget support, the confidence generated by the breakthrough in the political situation, and CBT interventions in the foreign exchange market all contributed to increasing supply of foreign exchange in the market. The dinar, therefore, appreciated against the dollar by 5 percent over the last three months compared to the Euro (and 4 percent against the US dollar), reducing by half the depreciation recorded in 2013. Nevertheless, the CBT continues to limit its interventions to ensuring the smooth processing of external payments. Currently, interventions only account for 30 percent of trades in the foreign exchange market (compared to 50 percent two months ago).

13. The exchange rate policy will continue to respect market rules. We have pursued our strategy of limiting CBT interventions in the foreign exchange market to smoothing excessive exchange rate fluctuations (intra-day), while allowing market forces to determine the trend of the exchange rate, which remains slightly overvalued (by around 7 percent). We are fully committed to using our intervention policy to strengthen our foreign exchange reserves, including through purchase of foreign exchange in the market when conditions would allow. This will also help reduce the structural liquidity deficit of banks. The additional supply of foreign currency in the market will give banks the possibility to engage in swaps without approval from the CBT. To facilitate a more flexible exchange rate system, we intend to introduce weekly foreign exchange auctions before the end of 2014 (structural benchmark at end-December). The prerequisites for such auctions—namely the implementation of the electronic platform allowing the interconnection with banks and the entry into force of the Market Makers Agreement—are now in place (structural benchmark at mid-March 2014). However, before introducing the auction mechanism, there is also a need to first establish an efficient information system that would allow the CBT to centralize the flow of projected foreign currency payments and have a clearer overview of cash flows.

14. Our development strategy will remain open and based on free trade. In line with the rules of the World Trade Organization, we will impose new restrictions or surcharges on imports only as a last resort, after exhausting market solutions that preserve appropriate incentives and only with very clear and pre-announced criteria for their elimination.

B. Laying the Foundations for Inclusive Growth

Financial sector policies

15. The implementation of our policy to align Tunisia’s prudential rules with international norms has shown that our banking sector remains fragile. The entry into force of the new prudential rules for the haircut of loan collateral has led to an increase in the provisioning rate (excluding accrued interests for nonperforming loans) in the banking system from 46 percent to 60 percent to cover risks from nonperforming loans (NPLs). In the wake of this change, the average capital adequacy ratio for the sector fell from 12 percent to 9.2 percent, with six banks below the 9 percent required by the new regulation in force. Although asset quality stabilized slightly in 2013, the situation remains fragile and the ratio of NPLs is 15 percent of total loans (20 percent with the inclusion of claims transferred to bank-affiliated asset management companies). Our gradual progression towards compliance with international standards—including a higher provisioning rate and a more stringent loan classification system—could show that current capital levels remain inadequate to support the excess risk in the system. However, the tightening of risk division and concentration norms—which entered into force at the end of 2013—have allowed a reduction of certain risks and continued progress towards international standards.

16. Bank compliance with prudential norms is essential. In that regard, we have requested all banks that fall below minimum capital requirements to prepare as soon as possible a detailed plan to raise capital to the required level (9 percent), which is scheduled to be increased by the end of the year to Basel II level (10 percent). We are also planning to adopt the same approach with regard to banks that are not in compliance with the liquidity ratio. A study assessing the impact of a new ratio—which will include off-balance sheet transactions and adopt a more forward-looking approach—was submitted to the CBT Board of Directors in February 2014 (structural benchmark at end-December 2013). The new ratio will be announced to banks through a CBT circular in September 2014, with a clear timetable for gradual implementation. In the interim, monetary sanctions will be applied for noncompliance with the prevailing liquidity ratio. Over the course of the year, we are also planning to move ahead with the implementation of consolidated-based prudential norms and to carry out regular monitoring of banks and their subsidiaries. We also plan to conduct a diagnostic study of internal risk rating systems for different segments and to put in place an action plan to deal with banks that fail to comply with the regulation in force by end-December 2014.

17. Reducing the vulnerabilities of public banks is our priority. We have improved the governance of public banks by giving them greater autonomy from the state, including with respect to hiring of staff and the appointment of Board members. We have completed the audits of two public banks (STB and BH), the results of which confirmed findings from the Financial Sector Stability Assessment (FSSA) and highlighted insufficient levels of equity, capital and provisions, a high level of nonperforming loans, excessive operating costs, personnel that lack the required skills and competencies, and weaknesses in the governance structure and quality of service. The audit of the Banque Nationale Agricole (BNA) had to be postponed because of a technical problem but will be finalized by July 2014 (new structural benchmark). Our action plan for the short term revolves around:

  • Strategy. In view of the delays experienced with the audit of the BNA, the decision on the strategic approach to be adopted with regard to the role of the government in the national banking sector will be determined, among other elements, by the outcome of the audits of the two other public banks (STB and BH); and more particularly by the restructuring options for public banks proposed by the auditors. Possible options include: a new business model, possible merger, or the opening to further private partnerships. The strategy on the role of the state in all banks with public participation (or at least for the STB and BH) will be adopted by the Council of Ministers in mid-April 2014 (Prior Action). The strategy will be presented to the public at end-April. Following this, a restructuring plan for the two public banks (STB and BH) will be adopted in July 2014 (new structural benchmark) and funds for their recapitalization could be provided in the form of non-negotiable bonds. Depending on the strategy adopted and on the level of participation by the banks’ private shareholders, the amount currently budgeted for bank recapitalization (1.2 percent of GDP) will be revised upwards or downwards (the amounts estimated by the audits of the two banks currently stands at 1.5 percent of GDP; while the FSSA estimated the needs of the public banks at 2.6 percent of GDP).

  • Asset Management Company (AMC). In view of the urgency of the situation in our tourism sector (54 percent of the loans in the sector are nonperforming, with doubtful debts having doubled since 2009), we plan to submit a draft law on an AMC to the NCA in June 2014. The law will provide for the: (i) adoption of clear and transparent governance rules combined with financial and operational autonomy; and (ii) implementation of explicit power to speed up resolution of the debt issue. The capitalization of the AMC will be carried out in conformity with the business plan established with the support of the World Bank. This undertaking will be closely coordinated with the bank recapitalization program, in particular for public banks. In parallel to this project, work has started to identify a solution to the NPLs in other sectors (e.g. manufacturing industry). Further, during the course of this year, a revision of the law on asset recovery companies (Law 98) will be undertaken to make it possible for such companies to contact customers directly.

18. Progress on reforming banking supervision is continuing. We are in the process of introducing a formal risk-based banking supervision system—a three-year plan will be established with IMF technical assistance—that would determine the frequency and scope of inspection missions. A first general inspection of a large bank (the first since 2006) and four credit inspections provided an opportunity for the staff of the General Directorate of Banking Supervision (DGSB) to improve the methodology for on-site inspections and also highlighted the need to improve the risk management, data, and loan classification system. For FY 2014, a risk based inspection plan has been adopted in March 2014. The plan has identified six credit institutions, including four banks, for inspection. To perform these tasks, we have recruited 12 new people in the DGSB, that is, a quarter of the envelope provided for 2012–2014, and plan to fill the remaining vacancies to acquire the needed additional resources as soon as possible.

19. Improvements in banking data reporting will enhance financial stability assessment and monitoring. The CBT has developed a benchmarking indicator for credit institutions (Uniform Bank Performance Reporting, UBPR)—used jointly by the DGSB and the DGSFPR—which will be available 60 days after the end of each quarter and is based on a very simplified risk rating system. This instrument will be complemented by the new accounting, financial, and institutional banking data system to be put in place in December 2014 (structural benchmark).

20. Efforts are underway to put in place a crisis management and bank resolution mechanism that is consistent with international best practices. Regarding the legal framework, a draft banking law has been prepared with technical assistance from the World Bank and the IMF to strengthen banking supervision and regulation in Tunisia and put in place a robust legal framework for the resolution of insolvent banks. The draft law will be presented to CBT management in June 2014. In addition, the modalities for developing the operational structure and appropriate legal framework for the setting up of a deposit guarantee fund are in the process of being drafted with technical assistance from the World Bank.

Fiscal reform

21. Improving the composition of public expenditures is needed to achieve growth-supporting medium-term fiscal consolidation and rebuild fiscal space. Our medium-term fiscal consolidation strategy will be coupled with fiscal reforms—tax policy, revenue administration, public financial management, public enterprise reform, effectiveness of public investment—which are all essential to support growth.

22. A number of fiscal policy measures, including the grouping of tax laws in a new tax code in 2014, will help to improve the equity, efficiency, and transparency of the tax system. On the basis of tax consultations that took place between June and November 2013, we have developed a report which forms the basis of a strategy for a simpler and fairer taxation system. This report will be discussed publicly at the national tax consultations planned for June 2014 and will be used as the basis for establishing a new tax code to be adopted by the Council of Ministers in September 2014 (structural benchmark). In the context of a comprehensive tax reform, we plan to continue revising the corporate income tax (CIT) to achieve gradual convergence in the off-shore and on-shore sectors over the next few years, and announce it according to a clear calendar (the difference between the tax rates in these two sectors was reduced by half in the context of the 2014 budget law). Further, a study is underway to modify the existing presumptive tax system, including for liberal professions.

23. The pace of tax administration reform will be stepped up through the implementation of a modernization plan. A diagnostic study on tax administration was conducted in February 2013, with the support of IMF technical assistance. Following the diagnostic, we set up an in-depth verifications unit and a claims monitoring committee within the Large Taxpayers Office (LTO). Along the lines of the regional centers, a debt collection center has been set up. In addition, we plan to pursue our efforts to strengthen and restructure the Large Taxpayer Unit (LTU), by including all tax functions, and to strengthen tax control by improving selectivity (establishment of targeted criteria and objectives). We have also decided to strengthen control of the presumptive tax rate system (BNC), using the data available in the health insurance and social security system and the available banking data. A plan to modernize tax administration will be finalized in June 2014 (end-March SB postponed to June 2014). It will aim at setting up a unified administration and strengthening control and evaluation mechanisms, in line with the IMF technical assistance recommendations and with the assistance of an IMF resident expert. A unit responsible for overseeing the modernization of the tax administration will be created in April 2014 within the General Directorate of Taxation to monitor the implementation of the plan (organization, instruments, and working methods). With regard to customs administration, we have set up the first risk management unit, which has made it possible to introduce targeted inspections in the customs offices. We remain determined in our fight against smuggling, which has spiraled since the revolution, and intend to further strengthen our border posts.

24. The performance of public enterprises places a heavy burden on the government’s budget. Since March 2014, we have taken concrete measures to control the increasing losses of public enterprises, primarily in transportation (Tunisair), trade (Grain Board), and energy (STEG, STIR), by shortening the required timeframes for transferring the amounts due to the enterprises eligible for subsidies on energy and food products. To strengthen governance and ensure greater transparency in the system of energy subsidies, cross subsidization between the energy companies will be reduced by having STEG and STIR meet directly their energy import needs from June 2014, instead of going through ETAP (oil refinery). Furthermore, the General Financial Committee (Comité Général des Finances-CGF) has prepared a preliminary audit report on the operations of the three public enterprises in the energy sector (structural benchmark at end-March 2014). To save them expensive bank interest expenses, the Ministry of Finance is committed to providing enterprises that receive energy and food subsidies with advances on budget appropriations to reduce their recourse to bank loans (the share of public enterprises in total loans was around 10 percent in 2013, distributed almost evenly between public and private banks). To better assess the challenges facing the sector, we plan to:

  • Strengthen the monitoring of public enterprises. A monitoring committee bringing together the DG for Holdings, the CBT’s DGSFPR, and the Unit responsible for Monitoring the Productivity of Public Enterprises and Institutions (Office of the Head of Government) is looking into the financial, and organizational situation of a group of 28 enterprises considered to be the most important in terms of their impact on the national budget and economy. This monitoring exercise will be further strengthened by the preparation of a consolidated balance sheet for the 20 largest public enterprises (structural benchmark at end-June 2014), to make it possible to have a more precise estimation of the real impact on the government budget. A preliminary report including financial ratios will be finalized in April 2014. A quarterly report on the financial situation and action plans for rehabilitating loss-making enterprises will be published for the first time in June 2014.

  • Improve the governance of public enterprises. In parallel with the assessment of their financial situation, the strategy aimed at strengthening public enterprises will also include efforts to review the regulatory framework to enhance the role of their board of directors, set up audit committees, and increase the transparency of their operations.

25. Public Financial management has been strengthened. In the interest of transparency, the government published a “citizens’ budget” for the first time in its history and has strictly respected the budget execution procedures during the complementary period by respecting the time frame provided for under the law. Further, a first draft organic law that is expected to introduce greater flexibility in the management of appropriations (including in ex-ante controls) and greater accountability of managers was prepared by the Budget Directorate. The law was drafted with technical assistance from the European Union and France and will be presented to the Council of Ministers in September 2014. It is designed to introduce, over the medium term, an ambitious program of “performance budgeting” (at present nine ministries—around 70 percent of the budget—present their budget with performance objectives). To improve the management of the government’s cash position and reconcile the monetary and fiscal data on government financing, we have consolidated the government’s accounts, excluding project loan accounts, in a Treasury Single Account (structural benchmark at end-March 2014). We also intend to assess the exhaustiveness and quality of the budget documentation and prepare a report on financial risks. Immediate efforts will focus on the preparation of a new budgetary nomenclature consistent with international standards. The draft of the new functional classification of the budget will be finalized in June 2014.

26. Improving the execution and effectiveness of investment spending is needed to generate inclusive growth. In collaboration with the World Bank, a diagnostic study on public investments has highlighted the need to implement major critical projects that could have a real impact on disadvantaged regions. Moreover, we have simplified, improved, and considerably modernized our procurement procedures, consistent with the recommendations of the World Bank technical assistance program, which will be implemented in June 2014 (the decree was approved in March 2014). This will allow for a more rapid and transparent relaunch of investments. We have also strengthened the control of public investments so as to ensure that the current practice of transferring loans to the regions to finance investment expenditures, which are under-executed and consequently rolled over to subsequent fiscal years, is no longer the norm. For the regions, we have decentralized project execution by professionalizing the oversight of public projects, reinforcing the role of Governors and carrying out periodic visits by the central government. Furthermore, we have also adopted procedures to address land deeds issues that lead to delays during the project preparation phase and in the execution of investment spending.

Structural reforms

27. Our structural reform agenda focuses on improving the business environment and promoting a competitive private sector that will generate inclusive growth. To this end, we have been working mainly on the implementation of a new investment code, a new competition law, the streamlining of regulations and procedures as well as on facilitating trade.

28. The implementation of certain reforms requires the enactment of new laws, and is, thus, dependent on the political calendar of the National Constituent Assembly, given the priorities related to the electoral law. Nonetheless, we are committed to moving forward with the legislative timetable to pass the following laws:

  • The investment code—has been prepared with technical assistance from the World Bank and on the basis of consultations with civil society and the donor community. The code—which aims to encourage private investment through a more transparent and effective regulatory framework and the streamlining of incentives—was submitted for approval of the National Constituent Assembly(NCA) in November 2013, but will only be examined in June 2014, thus delaying the implementation of the implementation decrees (structural benchmark at end-March 2014). These decrees—which are needed to increase market access and reduce restrictions on investment—can only be finalized after June 2014 (new structural benchmark for end-September 2014).

  • The competition law. The draft law—submitted to the NCA in 2013—will be examined by the NCA by June 2014. The final version of the competition law will be designed to reduce government intervention in the economy, reduce excessive regulations, and strengthen competition among enterprises.

  • The law on collective proceedings (Law 95). In parallel with the reform of the banking law, we will step up our efforts to ensure that the new law on collective proceedings (bankruptcy procedures)—prepared with the World Bank assistance—is adopted. The law is aimed at modernizing and simplifying the process of restructuring firms and liquidating insolvent firms. We will ensure that the new legislation on bankruptcies establishes clear rules on the government’s status as a preferred creditor as well as on granting private creditors the right to vote on recovery plans.

29. Closer integration of the Tunisian economy into the global economy is essential for generating more inclusive growth. We are committed to promoting trade, including by reducing tariff and non-tariff barriers and through the recently implemented free trade agreement with Algeria as well as by the deepening of trade agreements with neighboring and African countries. Negotiations for a Deep and Comprehensive Free Trade Area (ALECA) with the EU will be launched in 2014. To further enhance the integration of the Tunisian economy into the global economy, we have developed an action plan to improve the logistics systems of the Rades port (Tunisia’s main port) and build a new deep water port at Enfidha.

30. Work is ongoing on the simplification of administrative procedures, including in the area of tax collection and customs, to promote private sector development and limit space for the discretionary application of regulations. To this end, we have begun to phase out restrictive administrative procedures for the private sector in the transport, customs, and export sectors; and we are committed to continuing along these lines as we believe that significant benefits will arise for the business community from this regulatory clean-up campaign, including for procedures related to the VAT.

31. We are committed to reducing the obstacles to a proper functioning of the labor market. The practical implementation of the social contract signed on January 14, 2013 with the employers and trade unions has begun with the setting up of technical commissions (labor and professional relations, social protection, employment, regional development, and investment). Broad consultation is planned for discussion of the new employment strategy. This process is expected to culminate in labor reform, including an analysis of flexicurity in labor relations and a reduction of the structural skills mismatch. With respect to employment, promotion programs and micro project programs financed by loans from the solidarity bank and the employment fund will contribute to foster youth employment.

32. Reliable statistical information is crucial for the monitoring and assessment of macroeconomic policies and for the implementation of social programs. In that context, we are collaborating with Eurostat in conducting a comprehensive diagnostic study of our statistics system, and we also plan—with technical assistance from the IMF—to strengthen our institutional arrangements and production of the system of national accounts (particularly on the quarterly demand side), and the balance of payments. We will continue to expand on the regular publication of the results of surveys on current conditions, employment, and household living conditions. In parallel, work on the legislative framework guaranteeing the independence on the National Statistical Office has been initiated.

C. Protecting the Most Vulnerable

33. We are firmly committed to ensuring that fiscal consolidation and other reform projects fully take into account the impact these reforms might have on the most vulnerable and that they be accompanied by a simultaneous strengthening of the social protection system. In that context, the government’s 2014 budget includes the following social measures: (i) a social housing program for needy families; (ii) an increase in the income tax deduction for the poorest households; and (iii) a tiered electricity rate system adapted to energy use, and which introduces a second social (“lifeline”) electricity tariff (for households that consume less than 100 kwh per month). Over the course of 2014, we plan to enhance our information system by introducing a unique social identification number that will be used as a basis for creating a new register of families in need and ensuring a more efficient targeting of benefits (under the current system there is quite a significant amount of “leakages” of benefits going to the non-poor). While waiting for the implementation of the new register, we have launched an evaluation of the school assistance programs (with the help of UNICEF) as well as an assessment of the families-in-need/health benefits card program, both of which should be finalized by June 2014. In view of the planned increase in fuel prices, we intend to set up a “household targeting strategy” that is expected to take effect on July 1, 2014 and will consist of the following measures: (i) expansion to 250,000 beneficiary families (from 220,000 at present) of the existing cash transfer program for needy families; (ii) broadening of the population groups eligible for one-off and temporary aid to mitigate the impact of the fuel price increases; targeting will use the databases of the STEG and social security or any new social identification numbers; and (iii) a 10-dinar (about 10 percent increase) in the social allowances for school children and university students at the start of the academic year.

34. The reform of the pension system remains a medium-term priority. The retirement and health insurance systems are considered financially unsustainable over the long term. If these systems are not reformed, the combined deficit could amount to 2 percent of GDP by 2018. To address this risk, the Tunisian government has begun analyzing scenarios for retirement and health insurance reform, in parallel with the implementation of a support and welfare program financed by the transition fund to ensure the viability of the system. A decision on the reform to be adopted will be taken on the basis of a national consensus reached through the consultative process that was already started with the launch of the social pact in January 2013.

Table 1.Tunisia: Quantitiative Performance Criteria and Indicative Targets 1/2/
Cumulative flows since the beginning of 2013Cumulative flows since the beginning of 2014
Dec 2012Dec 2013Mar 2014Jun 2014Sep 2014Dec 2014
Prog.

05/24/13
PC

w/ adjusters
Prog.

01/24/14
ActualPC

Status
Prog.

01/24/14 w/
PC

adjusters
Revised

estimate
Prog.

01/24/14
Revised

PC
PCIT
Quantitative Performance criteria(Millions of Tunisian Dinars)
1. Floor on the primary balance of the central government (cash basis excl. grants)−2,256−4,318−3,818−2,015−2,032Met−2,796−1,773−3,119−2,806−4,007−5,609
2. Ceiling on net domestic assets of the Banque Centrale de Tunisie (Stock)−1,332−1,0844173,5101,382Not Met3,9524,3403,0094,6624,0864,0711,173
(Million of US$)
3. Floor on net international reserves of the Banque Centrale de Tunisie (Stock)7,9378,0667,0995,4395,710Not Met5,3085,0585,0715,0864,7545,2757,066
Continuous Performance criteria(Millions of Tunisian Dinars)
4. Ceiling on the accumulation of new external debt payment arrears by the central government000000000
Quantitative Indicative Targets(Millions of Tunisian Dinars)
5. Ceiling on Current Primary Expenditure4,2534,2534,0108,4328,26712,79617,815
6. Floor on Social Spending 3/15051,5881,3711,281Not Met2295629001,350
7. Ceiling on the accumulation of new domestic arrears000Met000000
Program assumptions on which adjusters are calculated in case of deviations
Disbursment of public external Financing on a cumulative basis (in US$ million) 4/2,2398458595442969847071,1632,771
Public debt service (interest and amortization) on a cumulative basis (in US$ million1,3871,3791,344208.2213503516718968
Bank recapitalization (in million TD)500500500000300700
Privatization receipts (in million USD)39441393900000
Resident deposits at the BCT (in million USD) 5/1,4901,8521,8541,8541,8541,8541,854
Program exchange rate TD/ U.S. dollars1.552351.552351.552351.552351.552351.552351.55235

Quantitative performance criteria and structural benchmarks are described in the Technical Memorandum of Understanding.

For purposes of calculating program adjusters, foreign currency amounts will be converted at program exchange rates.

Public capital expenditures on social sectors and programs.

Excludes IMF disbursments.

At program exchange rate.

Quantitative performance criteria and structural benchmarks are described in the Technical Memorandum of Understanding.

For purposes of calculating program adjusters, foreign currency amounts will be converted at program exchange rates.

Public capital expenditures on social sectors and programs.

Excludes IMF disbursments.

At program exchange rate.

Table 2a.Tunisia: Structural Benchmarks for 2013
ObjectiveDateComments
Structural Benchmarks
I. Financial sector
Approval of the new reporting system architecture covering bank-related accounting, financial and institutional functions.Financial sector stabilityAug-13MET, with delay. The reporting system was presented in September 2013. This report defines the main principles of the architecture and its conception as well as different phases of the risk model.
Adoption by the Council of Ministers of the strategic vision of the government’s future role in banks on the basis of preliminary results from the audit of public banks.Financial sector stabilitymid-September 2013NOT MET. Audit of the three banks started in July and September, which is delaying the decision on the strategic vision. The strategic vision has been pushed to March 2014.
General on-site inspection of one major bank and inspection of the credit risks of four other banks.Financial sector stabilityDec-13MET. A credit risk inspection at one bank was completed in September and three others were completed in December. The on-site inspection of one major bank was completed in December 2013.
Presentation to the Board of the CBT of a study concerning the impact on banks of liquidity ratio changes toward international standards.Financial sector stabilityDec-13MET, with delay. The templates for collecting the date needed to conduct the impact study have been communicated to banks. The study has been presented to the CBT Board in February 24.
II. Fiscal policy
Aproval by the Council of Ministers of the corporate tax reform announcing the convergence of the tax rates of onshore and offshore sectors for 2014 and identification of countervailing measures to ensure a neutral impact on revenues.Minimization of distortions, and tax fairness and simplificationJul-13MET, with delay. The reduction of the onshore corporate tax rate from 30 to 25 percent and the increase of the off-shore one from 0 to 10 percent was incorporated in the 2014 draft budget along with countervailing measures for the potential revenue loss. The draft budget has been approved by the Council of Ministers on November 18, 2013 and has been adopted by Parliament on December 30, 2013.
Adoption of a Ministry of Industry decree approving a new automatic fuel pricing formula.Lower energy subsidiesAug-13MET, with delay. An automatic pricing mechanism was put in pace allowing convergence to international prices, but does not allow smoothing for large price increases.
Submission to the Council of Ministers of a new targeted household support program to accompany the reform of generalized energy subsidiesProtection of society’s most vulnerable segmentsAug-13Not MET. The technical work has been done. A decision on the beneficiaries and the compensating mechanism need to be taken.
Merge at the level of the large taxpayer unit the management, tax collection, and control of large enterprises.Broadening of the tax baseSep-13MET, with delay. The different functions have been put together in one unit.
Finalize the audit of the electricity company (STEG) and of the petroleum refinery company (STIR).Lower fiscal risksDec-13Not Met. The audit of the three energy companies (STEG, STIR, ETAP) have started. This benchmark has now been postponed to March 2014.
III. Monetary and exchange rate policy
Publication of a circulaire by the CBT that announces haircuts on all loans used as collateral for refinancing operations at the Central Bank.Enhancement of the monetary transmission mechanismJul-13MET. The circulaire, which was adopted at end-July, includes a general haircut of 10 percent.
Ensure that the proportion of the refinancing volume at the CBT backed by government securities is at least 10 percent for each bank.Enhancement of the monetary transmission mechanismAug-13MET. The circulaire has been published and the SB has started.
Implementation of an electronic bank interlinking platform and launch of the Market Makers Agreement.Greater exchange rate flexibilityOct-13NOT MET, because of technical delays. This is a new structural benchmark for mid-march 2014.
Ensure that the proportion of the refinancing volume at the CBT that is backed by government securities is at least 20 percent for each bank.Enhancement of the monetary transmission mechanismDec-13MET. The CBT regulation has been published and implemented.
IV. Structural reforms/private-sector development
Adoption of the Investment Code (tax measures will be referred to in the tax code).Support for balanced growth driven by the private sectorJul-13MET, with delay. The new code was approved by the Council of Ministers in November 2013. Next step in this area will be the drafting of the implementation decrees that should accompany ratification by Parliament.
Table 2b.Tunisia: 2014 Structural Benchmarks
ObjectiveDateNew DateComments
Prior Action
Adoption by the Council of Ministers of the strategic vision of the government’s future role in banks (or at least in STB and BH) on the basis of preliminary results from the audit of public banksFinancial sector stability
I. Financial sector
Submission to the Management of the Central Bank of Tunisia of a banking resolution framework in line with international practicesCrisis management and financial sector stabilityJun-14In progress. With help from WB and IMF technical assistance.
Submission to the Central Bank Board of a draft Central Banking law in line with international practicesFinancial sector stabilityJun-14In progress. An IMF technical assistance mission is planned for May 2014.
Completion of the financial audit of the Banque Nationale Agricole (BNA)Financial sector stabilityJul-14
Adoption by the Government of retructuring plans for the BH and STBFinancial sector stabilityAug-14
Development and implementation of the new reporting system and bank classification systemFinancial sector stabilityDec-14
II. Fiscal policy
Adoption by the Ministry of Finance of a plan to modernize tax administrationEnhance Revenue CollectionMar-14Jun-14Not MET. Working groups have worked on a draft plan but an overall strategy still needs to be finalized. IMF TA is assisting the authorities.
Unification of government accounts into a Single Treasury Account (excluding accounts for project loans)Public Financial ManagementMar-14MET.
Finalize the audit of the electricity company (STEG) and of the petroleum refinery company (STIR)Lower fiscal risksMar-14MET. The First Report was submitted to the Government on March 30, 2014.
Submission to the Council of Ministers of a new targeted household support program to accompany the reform of generalized energy subsidiesProtection of society’s most vulnerable segmentsMar-14Jun-14Not MET. Work is in progress and possible contents of the strategy have been identified. This program will be put in place prior to the planned increase in fuel prices.
Prepare a consolidated balance of 20 main public enterprises (2010-2012)Improvement of budgetary control and reduce fiscal risksJun-14
Government approval of a new tax codeEnhance Revenue CollectionSep-14
III. Monetary and exchange rate policy
Implementation of an electronic bank interlinking platform and launch of the Market Makers Agreement.Greater exchange rate flexibilitymid-Mar 2014MET. The electronic platform allowing the interconnection with banks and the Market Makers Agreement are now in place.
Presentation to the Central Bank board of the impact study for removing the upper limit for excessive rates for enterprises and to modify it for consumers.Financial system stability and better transmission of monetary mechanismsMar-14MET. The impact study—done with help from the CBT and completed with WB assistance—was presented to the CBT Board on March 26, 2014.
Implement an increase of the haircut for loans used as collateral for refinancing operations to at least 25 percent.Enhancement of the monetary transmission mechanismMar-14Jun-14Not MET. A new regulation has been adopted on March 25, 2014 and its application will be announced for June 2014.
Establishment of the lender of last resort facilityFinancial system stability and better crisis managementJun-14In progress. IMF TA is providing assistance.
Ensure that the proportion of the refinancing volume at the CBT backed by government securities is at least 40 percent for each bank.Enhancement of the monetary transmission mechanismDec-14
Implementation of a weekly foreign exchange auction mechanismGreater exchange rate flexibilityDec-14
IV. Structural reforms/private sector development
Decree for implementing the new investment code in line with the objective of protecting market access, reducing restrictions on investments, and rationalizing of incentives.Support for balanced growth driven by the private sectorMar-14Sep-14Not Met. Implementation decrees will be finalized once the investment code is ratified by Parliament.
Table 3.Tunisia: Fiscal Compensatory Measures - March 2014
In Million DnIn Percent GDP
Fiscal Revenues2600.3
Tax Policy Measures1000.1
Alcoholic Beverages: 8 percent Increase Excise Tax200.0
Tabac: 10 percent Increase Excise Tax500.1
No tax exemption for imported vehicles 1/300.0
Tax Administration Measures1600.2
Tunisie Telecom: enhanced tax control1100.1
Recovery of tax arrears awaiting judicial decision500.1
Current Expenditures400.0
Additional reduction of energy subsidies 2/400.0
Total3000.4

At the moment of resale for cars imported by tunisians leaving abroad.

Bringing forward the planned increase of tariffs to May 2014.

At the moment of resale for cars imported by tunisians leaving abroad.

Bringing forward the planned increase of tariffs to May 2014.

Attachment II. Technical Memorandum of Understanding

1. This Memorandum establishes the agreement between the Tunisian authorities and IMF staff concerning the definition of the quantitative performance criteria and indicative targets. It also sets out the content and frequency of data reporting to IMF staff for program monitoring purposes.

2. The quantitative criteria and targets are defined in Table 1 of the Memorandum of Economic and Financial Policies (MEFP) attached to the Letter of Intent dated April 10, 2014. For program purposes, all assets, liabilities, and flows denominated in foreign currencies will be valued at the “program exchange rate,” as defined below, with the exception of items affecting the government’s budgetary accounts, which will be measured at current exchange rates. For program purposes, the exchange rate corresponds to the accounting exchange rate of the CBT prevailing on December 31, 2012, as shown in the table below. For the SDR, the program exchange rate is 1SDR = 2.38852 Tunisian dinars.

Program Exchange Rates, Tunisian Dinar per FX Currency, (Accounting Exchange Rate of the CBT) December 31, 2012
CurrencyUnitsExchange rate
Algerian dinar100.19860
Saudi riyal104.13930
Canadian dollar11.56175
Danish krone10027.44020
USA dollar11.55235
British pound sterling12.50510
Japanese yen100018.02650
Moroccan dirham101.83535
Norwegian krone10027.73730
Swedish krona102.37995
Swiss franc1016.95450
Kuwaiti dinar15.51955
United Arab Emirates dirham104.22660
Euro12.04725
Libyan dinar11.23740
Mauritanian ouguiya1000.51230
Bahraini dinar14.11770
Qatari riyal104.26380
Source: Central Bank of Tunisia.
Source: Central Bank of Tunisia.

3. Monetary gold assets will be valued at the price of 0.6498 dinar per gram of gold as established in the decree No. 86-785 of August 18, 1986. The stock of gold is 6.73 tons (6739902 grams) on December 31, 2012.

4. For data reporting purposes, the Ministry of Economy and Finance, the National Institute of Statistics (INS), and the Central Bank of Tunisia (CBT) will follow the rules and the format considered appropriate for data reporting as covered by this technical memorandum of understanding, unless otherwise agreed with IMF staff.

Definition of Performance Criteria and Indicative Targets

A. Performance Criteria and Indicative Targets

5. The quantitative performance criteria and indicative targets specified in Table 1 of the MEFP are:

Performance criteria

  • A performance criterion (floor) on the net international reserves of the Central Bank of Tunisia.

  • A performance criterion on the net domestic assets (ceiling) of the Central Bank of Tunisia.

  • A performance criterion (floor) on the primary balance of the central government, excluding grants.

  • A continuous performance criterion on the accumulation of external arrears (zero ceiling).

Indicative targets

  • An indicative target (ceiling) on total domestic arrears.

  • An indicative target (ceiling) on total primary current expenditure of the central government.

  • An indicative target (floor) on capital expenditures in priority social sectors and social programs.

6. Measurement of criteria. The performance criteria on net international reserves and net domestic assets are measured on a stock and quarterly basis. The performance criterion on the central government deficit is measured on a quarterly basis and cumulatively from the end of the previous year. Adjustment factors will also be applied to some of these criteria. The performance criterion on the accumulation of external arrears is measured on a continuous basis.

B. Institutional Definition

7. The central government comprises all ministries and agencies subject to central budgetary administration in accordance with the organic law on the government budget. Regional governments and municipalities subject to central budgetary administration are part of the central government.

8. The authorities will inform Fund staff of any new entity and any new program or special budgetary or extra-budgetary fund created during the period of the program to carry out operations of a budgetary nature. Such funds or new programs will be included in the definition of the central government.

C. Floor on the Net International Reserves of the Central Bank of Tunisia

9. The net international reserves (NIR) of the Central Bank of Tunisia (CBT) are defined as the difference between the CBT’s reserve assets and its liabilities in foreign currency to nonresidents.1

10. The CBT’s reserve assets are the foreign assets immediately available and under the CBT control, as defined in the fifth edition of the IMF Balance of Payments Manual. They include gold, SDR assets, reserve position at the IMF, convertible foreign currencies, liquid balances held outside Tunisia, and negotiable foreign securities and bills purchased and discounted.

11. The CBT’s liabilities in foreign currency to nonresidents include any commitment to sell foreign currencies associated with financial derivative transactions (such as swaps, futures, options), any portion of the CBT’s assets (gold, for example) used as collateral, IMF and Arab Monetary Fund (AMF) credits outstanding, and deposits at the CBT of international organizations, foreign governments, and foreign bank and nonbank institutions. The government’s foreign currency deposits at the CBT are not included in the liabilities, nor is any SDR allocation received after May 15, 2013.

12. All debt instruments issued in foreign currency by the CBT on behalf of the government before May 15, 2013 are also excluded as liabilities of the CBT. All debt instruments issued in foreign currency by the CBT on behalf of the government after May 15, 2013 will be treated as CBT liabilities, unless the offering documents (prospectus) state clearly that (i) the CBT is acting as an agent to execute all sovereign debt instruments issued in foreign currency raised through the international markets for general budgetary purposes of the Republic of Tunisia (ii) debt is a liability of the central government; and (iii) a protocol between the CBT and the Ministry of Finance provides clearly that the CBT is authorized to pay all expenses and costs pertaining to the implementation of this issue as well as the interest and principal of the issue sum through direct deduction from the Treasury’s current account established in the CBT’s books.

13. The value of CBT reserve assets and liabilities in foreign currency will be calculated using program exchange rates (see Table above). On December 31, 2012, the value of the stock of net international reserves was US$7.937 billion, with the stock of reserve assets equal to US$8.645 billion and the stock of CBT liabilities in foreign currency equal to US$730.399 million (at program rates).

D. Ceiling on Net Domestic Assets

14. The CBT’s net domestic assets are defined as the difference between the monetary base and the net foreign assets of the CBT.

15. The monetary base includes: (i) fiduciary money (money in circulation outside the banks and cash balances of commercial banks); (ii) deposits of commercial banks at the central bank (including foreign currency and deposit facility); and (iii) deposits of all other sectors at the central bank (i.e., other financial enterprises, households, and companies).

16. The CBT’s net foreign assets are defined as the difference between the CBT’s gross foreign assets, including foreign assets that are not part of the reserve assets, and all foreign liabilities of the CBT. Net foreign assets are valued at the program exchange rate defined in the above table.

E. Floor on the Primary Balance of the Central Government (Excluding Grants)

17. Under the program, the primary fiscal balance of the central government (excluding grants, on a cash basis) is measured on a financing basis and will be the negative sum of: (i) total net external financing; (ii) privatization receipts; (iii) net domestic bank financing; (iv) net domestic nonbank financing; plus (v) interest on domestic and external debt paid by the central government and less external budgetary grants received by the central government.

18. Total net external financing is defined as net external loans of the government, that is: new loan disbursements, less repayments of the principal. Project and budgetary loans of the central government are included, as well as any form of debt used to finance central government operations.

19. Privatization receipts are the government receipts from the sale of any government asset. This includes revenues from the sale of government shares in public and private enterprises, sales of nonfinancial assets, sales of licenses, and the sale of confiscated assets, excluding the confiscation of bank accounts. For the adjustor in NIR (see below), only receipts in foreign currency are included.

20. Net domestic bank financing of the central government is the sum of: the change in net bank loans to the central government (in Tunisian dinars and foreign currency) and the change in central government deposits at the CBT (this includes all central government accounts at the CBT, in particular (i) Treasury current account; (ii) Tunisian government account (miscellaneous dinar accounts); (iii) loan accounts; (iv) grant accounts; (v) FONAPRA-FOPRODI accounts; (vi) special account of Tunisian government in foreign currency; (vii) current accounts of paying U.S. Treasury; (viii) accounts in foreign currency pending adjustment (subaccount: available); (ix) and any other account that may be opened by the central government at the CBT. Following the unification of government accounts at the CBT into a Single Treasury Account, government accounts are consolidated in two categories (“Compte Central du Government” and “Comptes Spéciaux du Government”) on the CBT’s balance sheet (liabilities side).

21. Net government borrowing from the banking system is defined as the change in the stock of government securities (Treasury bills and bonds) held by banks and any other central government borrowing from banks, less repayments. The stock of nonnegotiable bonds issued to banks during the recapitalization of public banks, and which are serviced entirely by the government, is excluded from bank claims on the government.

22. Net domestic nonbank financing includes: the change in the stock of government securities (Treasury bills and bonds) held by nonbanks (including social security funds) and any other central government borrowing from nonbanks, less repayments. Total Treasury bills and other public debt instruments to be taken into consideration are calculated at the nominal/face value shown on the institutions’ balance sheet and does not include accrued interest.

F. Ceiling on the Accumulation of External Arrears

23. Arrears on external debt payment are defined as late payments (principal and interest) on external debt or guarantees as defined in External Debt Statistics: Guide for compilers2 by the central government or the CBT after 90 days from the due date or the expiration of the applicable grace period.

G. Indicative Ceiling on the Accumulation of Domestic Arrears

24. For program purposes, arrears on domestic debt payment are defined as amounts owed to domestic financial and commercial creditors that are 90 days or more overdue with respect to a specific maturity date (or as defined in the contractual grace period, if any). If no maturity date is specified, arrears are defined as amounts owed to domestic creditors that remain unpaid 90 days or more after the date on which the contract was signed or upon receipt of the invoice.

H. Indicative Ceiling on Central Government Primary Current Expenditure (excluding Interest Payments on Public Debt)

25. Under the program, central government primary current expenditure is defined as the sum of central government expenditure on: (i) personnel wages and salaries; (ii) goods and services; (iii) transfers and subsidies; (iv) other unallocated current expenditure3.

I. Indicative Floor on Social Expenditures

26. Social expenditures are defined as capital expenditures (development expenditures) on education, health, social transfers to needy families, the AMEL employment training program (and university scholarships), UTSS indemnities, family allocation as well as development expenditures of the Ministry of Women and Family Affairs, Youth and Sports and Social Affairs; all current expenditures (“dépenses de gestion”) of the above-mentioned sectors and programs, as well as food and energy subsidies, are excluded.

Program Assumptions on Adjustment Factors for Quantitative Performance Criteria(Millions of US dollars)
2014
2014 Q12014 Q22014 Q32014 Q4Year
Government External Financing803.6855.4676.91828.74164.6
Project loans74.4108.458.8114.1355.8
Multilateral donors507.5738.0603.4600.42449.3
AMF (Arab Monetary Fund)0.043.40.00.043.4
IMF (budget support)507.5444.6220.9220.91393.9
World Bank Group0.0250.0250.0250.0750.0
European Union0.00.0132.5129.6262.1
Bilateral donors200.00.00.00.0200.0
Turkish loan200.00.00.00.0200.0
Financial Market Access21.79.014.71114.11159.5
Sukuk0.00.00.0500.0500.0
Market Financ. (with possible Japanse guarantee)0.00.00.0300.0300.0
Market Financ. (with possible US Treasury guarantee)0.00.00.0300.0300.0
Other (incl. Loan Transfers to SOEs)21.79.014.714.159.5
Budget Grant20.713.827.675.8137.9
Privatization Receipts0.00.00.00.00.0
Government External Debt Service213.5302.7202.2249.9968.3
Amortization118.9196.3114.1185.7615.1
Interest94.5106.488.164.2353.2
Resident deposits at the BCT 1/
Sources: Tunisian authorities and IMF staff estimates

End December 2013 is the reference level and was estimated at USD 1,852.07 million

Sources: Tunisian authorities and IMF staff estimates

End December 2013 is the reference level and was estimated at USD 1,852.07 million

J. Adjustment Factors for the Program Performance Criteria

27. The NIR targets are adjusted upward (downward) if the cumulative sum of net external financing of the central government (excluding project loans and any access to capital markets), the sum of budgetary grants, privatization receipts received in foreign currency, the increase (decrease) in the residents’ foreign currency deposits at the CBT are greater (lower) than the levels indicated in the table below. The NIR targets will be also adjusted upward (downward) if the total amount of cash payments on external debt service of the government is greater (lower) than the levels included in the table below.

28. The net domestic assets (NDA) targets will be adjusted upward (downward) based on the downward (upward) adjustment of the NIR floor if the cumulative sum of net external financing of the central government (excluding project loans and any access to capital markets), the sum of budgetary grants, privatization receipts received in foreign currency, the increase (decrease) in residents’ foreign currency deposits at the CBT are lower (greater) than the levels indicated in the following table. The NDA targets are also adjusted upward (downward) based on the downward (upward) adjustment of the NIR floor if the total amount of cash payments on external debt service are greater (lower) than the levels included in the table below. The NDA ceiling will be converted into Tunisian dinars at the program exchange rate.

29. The ceilings on the NDA of the CBT will also be adjusted downward or upward based on the amount of CBT reserves released/mobilized because of a possible decrease/increase in the reserve requirement.

30. The floor on the primary balance of the central government, excluding grants, will be adjusted upward/downward based on the amount used to recapitalize the public banks. The recapitalization amounts for 2013 are assumed to be 500 million dinars (Q4 2013).

K. Monitoring and Reporting Requirements

31. Performance under the program will be monitored using data supplied to the IMF by the Tunisian authorities as outlined in the table below, consistent with the program definitions above. The authorities will promptly transmit to the IMF staff any data revisions.

Information to be Reported in the Context of the Program

Type of Data and DescriptionPeriodicity

Weekly (w)

Monthly (m)

Quarterly (q)
Delay in days
GDP: Supply and demand at current, constant, and the previous year’s prices, including sectoral indices.q45
Inflation: Including the underlying inflation of non-administered and administered prices.m14
Fiscal Sector
Tax and nontax revenue of the central government decomposed on the basis of main tax and nontax revenues itemsm30
Total expenditures: current and capital, transfers and subsidies.m30
Capital expenditure: by type of financing: domestic and external (differentiating loans and grants), and by main sectors and projects (agriculture, social, infrastructure).m45
Current expenditure: by type of expenditure: wages, goods and services, transfers.m45
Social expenditureq45
Domestic and foreign debt
Stock of domestic and foreign debt: of the central government and debt guaranteed by the government, with breakdown by instrument and type of currency (in dinars and foreign currency with the equivalent in domestic currency).q30
Stock of domestic arrears as per TMU, as well the stock of accounts payable that correspond to expenditures committed/ payment ordered more than 90 days before (and by type of expenditures),q45
Disbursement of foreign loans: Breakdown into project loans and budgetary loans by principal donor and identifying the most important projects to be financed in the original currency and its equivalent in Tunisian dinars converted at the current exchange rate at the time of each transaction.m30
Domestic borrowing from banks and nonbanks: including bonds, Treasury bills, and other issued securities.
Debt guaranteed by the government: by instrument and type of currency (in dinars and in foreign currencies and its equivalent in national currency)m60
External and domestic debt service: amortization and interest.
External payment arrears: external debt contracted and guaranteed by the government.q30
Debt rescheduling: possible rescheduling of debts contracted and guaranteed by the government, agreed with creditors.q45
Consolidated accounts of the central government at the CBT: The stock of deposits will be broken down as follows: (i) Treasury current account; (ii) special account of the Tunisian government in foreign currency and its equivalent in dinars; (iii) miscellaneous dinar accounts; (iv) loan accounts; (v) grant accounts; (vi) FONAPRA-FOPRODI accounts; and (vii) accounts pending adjustment (including privatization receipts from Tunisia Telecom).m30
External Sector
Imports of Petroleum Products: average import price of main petroleum products.m30
Foreign trade: imports and exports of goods, including volumes and prices, by sector.m30
Deposits: Stock of foreign currency deposits, according to the residence of the holder.m14
External debt:q30
Debt service (amortization and interest) of institutional agents by instrument and at type of currency (in foreign currency and its equivalent in dinars).m30
Stock of external debt of institutional agents by instrument and type of currency (in foreign currency and its equivalent in dinars) (in conformity with our obligations under SDDS).q90
Overall net external position of Tunisia (preliminary).q90
Overall gross external debt positionq90
Overall net external position of Tunisia (in conformity with our obligations under SDDS).A180
Balance of payments: Prepared by the CBTq30
Monetary and Financial Sector
CBT accounts at the current exchange rate: detailed table including the monetary system.m30
CBT accounts at the program exchange rate: Including net international reserves.m30
Foreign exchange market operations, Interbank market, retail market and wire transfers for CBT purchases on the retail market: CBT spot sales and purchases on the foreign exchange market, stock of CBT currency swap (provide details on direction of transactions (TND/FX or FX/TND), amounts of principal, spot exchange rate in swaps agreement, interest rate applied on FX counterpart), detailed information on other BCT’s forward foreign exchange operations, including outright forward sales of Tunisian Dinar. The terms and conditions of any new transactions (including the extension or renewal of existing terms and conditions) will also be provided.m30
CBT foreign exchange reserves, breakdown by currency and by instrument, and the institutions where such reserves are held.
Banks’ financial soundness ratios: Indicators of financial soundness and regulatory capital adequacy ratios of the banking system, including the quality of assets and the profitability of banks. The indication of the different banks is optional.m30
Direct refinancing of commercial banks by the CBT: Breakdown by bank.m14
Interest rates: Deposit rates, interbank rates, and lending rates.w14
NPLs: Stock of banking sector NPLs, and breakdown by commercial banks.q60
Balance sheets of commercial banks, including detailed income statements, in accordance with “Uniform Bank Performance Reporting” agreed with Fund staff.q60
Other information to be reported
Information on Fiscal, Monetary, and Financial Policy: Decrees or circulars newly adopted or revised concerning changes in tax policy, tax administration, foreign exchange market regulations, and banking regulations. A copy of official notices of changes in gas and electricity rates and any other surcharge (automatic or structural), as well as the prices of petroleum products and levies/surcharges on gas and petroleum.d3

The one-off 10 percent of GDP shock to contingent liabilities reflects an additional 3 percent of GDP in bank recapitalization costs and the realization of about 7 percent of GDP of government’s contingent liabilities from public enterprises (these represent about 70 percent of government’s existing contingent liabilities).

Prior to 2012’s international bond issuances with U.S. and Japanese guarantees, the last international bond issuance was in 2007. The first maturing international bond is due in 2017.

The size of each shock is half a standard deviation, except for the growth rate, which is reduced by ¾ of one standard deviation.

Deposits of residents in foreign currency (excluding government deposits) at the CBT are a form of external liability of the CBT; for operational and accounting purposes, and because of legal considerations related to the regulation of foreign exchange, the CBT includes residents’ foreign currency deposits in the monetary base. To preserve the accounting consistency of the CBT’s accounts and be in line with the standard definition of NIR within the framework of IMF stand-by arrangements, it is agreed: (i) to retain the accounting definition of external liabilities used in the CBT balance at December 31, 2012; (ii) to adopt the principle of adjusting NIR (in the opposite direction of the net domestic assets of the CBT) on the basis of the variation in the residents’ deposits in foreign currency from end-December of the previous year. It also agreed that the residents’ deposits in foreign currency at the CBT include the following components of reserve money: intervention/monetary market in foreign currency, foreign currency of aggregate intermediaries, nonnegotiable placement of foreign currencies, and all other items of deposits in foreign currencies created or included in reserve money. At end-December 2013, the value of the stock of deposits in foreign currencies of residents at the CBT was US$1,852.07 million at the program exchange rate.

The definition of debt set forth in External Debt Statistics: Guide for Compilers reads as the outstanding amount of those actual current, and not contingent, liabilities, created under a contractual arrangement through the provision of value in the form of assets (including currency) or services, and which require payment(s) of principal and/or interest by the debtor at some point(s) in the future and that are owed to nonresidents by residents of an economy. Debts owed to nonresidents can take a number of forms, the primary ones being as follows: (i) loans, that is, advances of money to obligor by the lender made on the basis of an undertaking that the obligor will repay the funds in the future (including deposits, bonds, debentures, commercial loans, and buyers’ credits) and temporary exchanges of assets that are equivalent to fully collateralized loans under which the obligor is required to repay the funds, and usually pay interest, by repurchasing the collateral from the buyer in the future (such as repurchase agreements and official swap arrangements); (ii) suppliers’ credits, that is, contracts where the supplier permits the obligor to defer payments until sometime after the date on which the goods are delivered or services are provided; and (iii) leases, that is, arrangements under which property is provided which the lessee has the right to use for one or more specified period(s) of time that are usually shorter than the total expected service life of the property, while the lessor retains the title to the property.

The methodologies used to measure current expenditure categories for the central government are those used to design the table of central government financial operations presented in the macroeconomic framework.

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