This statement reports on implementation of the prior action since the Staff Report was issued on April 11, 2014. The information does not alter the thrust of the Staff Appraisal.
1. The prior action on the strategic orientation of the banking sector has been met. The Council of Ministers has adopted—for the first time in Tunisia’s history—an overall banking strategy that was designed through a participatory approach in consultation with a broad range of stakeholders in the banking sector. It aims at limiting the role of the State to key sectors, reducing the number and weight of banks that have government participation (currently, 12), and developing the prerequisites needed for more Public-Private Partnerships in the sector.
2. The banking sector strategy consists of five pillars: (i) clean-up of public banks’ balance sheets and recapitalization following a plan that improves governance, strengthens institutional capacities, and enhances performance; (ii) creation of an asset management company to deal with troubled debt; (iii) establishment of a pillar to fund development projects (e.g., through the “Caisse des Dépôts et Consignation”); (iv) focusing public intervention on SME funding; and (v) development of microfinance. Successful implementation of this strategy will require quick realization of the reforms under the program, including strengthened banking supervision, a new bankruptcy and banking law, modern collateral framework, and less restrictions on lending rates.
3. To support restructuring and recapitalization, the government will maintain in the near term its share in the three main public banks, which represent about 35 percent of banking assets. Banking recapitalization costs borne by the government will have to be adjusted, depending on the extent to which the existing private sector shareholders of these banks participate in their recapitalization. These costs—potentially higher than the 2.6 percent of GDP estimated at the time of the last FSSA—will need to be included in the restructuring plans (planned for completion by end-July for STB and BH), debt sustainability analysis, and the 2014 supplementary budget. The broader strategy will be further discussed with the authorities as they develop the restructuring plans for STB and BH