Journal Issue

Tunisia: Fourth Review Under the Stand-by Arrangement and Request for Modification of Performance Criteria

International Monetary Fund. Middle East and Central Asia Dept.
Published Date:
September 2014
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1. After three years of uncertainty following the revolution, Tunisia is set to complete its political transition. The adoption of a new constitution and electoral law led to a clear timetable for legislative and presidential elections that are to be held in the last quarter of 2014. Progress in the political transition is leading to increased donor support this year, including from regional partners. An “Investing in Tunisia” conference—co-organized with the French government—is scheduled to be held in September 2014 to showcase Tunisia’s achievements and to galvanize foreign investors. However, new financing commitments for 2015 are likely to be firmed up only after the formation of a post-elections government.

2. The authorities continue to actively build consensus among stakeholders for the Fund-supported reform agenda. Over the past few months, the government has made efforts to raise public awareness about the difficult economic situation the country is facing, notably the state of its public finances. To consolidate the necessary support among stakeholders, the government has made public statements about the need for economic sacrifices by all, and discussed with key members of Tunisia’s society—including representatives of all political parties—the difficult economic policies and reforms that need to be implemented over the next few months.

3. Program implementation has been satisfactory, despite the challenging economic environment. All quantitative performance criteria have been met, albeit with a slight deterioration in the composition of spending. On the structural reform agenda, the authorities have made up for some key delays, including on reforming public banks, setting up a household support program, and on the tax administration modernization agenda. These results have been achieved in the context of public dissatisfaction with the economic situation, high social tensions, and security risks.

4. The Fourth review’s main focus was on macroeconomic stabilization and banking sector reforms. Rising external imbalances have continued to put pressure on reserves, and recent efforts to contain them through prudent fiscal policy, tighter monetary policy, and greater exchange rate flexibility need to be sustained and intensified. Important steps have been taken to put in place the conditions for private sector-led growth, notably with the design of public bank restructuring plans in line with international best practices, but implementation will be key. Progress on the delayed business climate reform agenda and improved composition of public expenditures will be essential to complement these steps and generate higher and more inclusive growth.


A. Recent Developments

5. The economic recovery remains timid. Growth for 2013 was revised down to 2.3 percent following corrections in agricultural data. A rebound in chemical and mining production and in agriculture compensated weaker performance in the tourism sector, thus contributing to a 2.2 percent y-o-y growth in Q1 2014, in line with expectations.

Contribution to Growth

(In percent)

Sources: Tunisian authorities; and IMF staff estimates.

Industrial Production Index

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

Sources: Tunisian authorities; and IMF staff estimates.

6. After having declined to 5 percent in March 2014, headline inflation rebounded back to 5.7 percent in June 2014. This increase—which is in line with expectations—reflects higher food and beverage prices, and the impact of higher administered energy prices. However, core inflation remains on a downward trend and is contained at 4.3 percent in June, while PPI is close to 3 percent.


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

Source: Tunisian authorities.

7. External imbalances have been increasing, with reserves recently stabilizing. The deterioration of the current account deficit continued over the first few months of the year, driven by a worsening energy deficit (see Box 1) that mostly reflects exogenous events (lower gas volume transiting from Algeria to Italy) and transitory factors (oil production falling below potential). As a result, the current account deficit is expected to reach 5.5 percent of GDP by end-June. The financial account over the first half of the year has been weaker than anticipated, as the World Bank Development Policy Loan (about $250 million) is only expected to be disbursed in Q3 2014. Inflows from FDI, tourism, and remittances have been low but in line with estimates. Since mid-March, however, the exchange rate vis-à-vis the U.S dollar has depreciated by 8.6 percent. Gross official reserves have stabilized at 3.2 months of imports of goods and services by end-June.

Exchange Rates, 2008–14

(+= appreciation)

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

Reserves and Spot FX Interventions

(In billions of U.S. dollars, eop)

Sources: Tunisian authorities; and IMF staff estimates.

8. Financial market indicators remained broadly stable. In the aftermath of the adoption of a new constitution in January 2014, sovereign spreads have declined, although the authorities still consider this level too high to issue eurobonds without guarantee. The stock market index has also stabilized.

Sovereign and CDS Spreads and Stock Index

(In basis points, unless otherwise indicated)

Sources: Tunisian authorities; Bloomberg; and Markit.

9. Monetary policy was recently tightened. In anticipation of pressures on prices arising from the increase in minimum wages (an average 6 percent increase impacting 600,000 retirees and 300,000 private sector employees but not the public sector), a depreciating exchange rate, and rises in energy administered prices, the CBT increased in June its policy rate by another 25 basis points—a cumulative 75 basis points since the beginning of the year—to 4.75 percent, although the rate remains negative in real terms (-1 percent). Weak deposit growth kept monetary aggregates in check, with broad money increasing by 8 percent y-o-y as of May 2014. Credit to the private sector grew modestly at 7.6 percent y-o-y, with the increase in CBT bank refinancing—which reached record high amounts of TD 4.7 billion at end-June (excluding OMOs)—mostly used by banks to roll over existing loans or for overdrafts.

Growth in M3 and Credit to the Economy, 2011–14

(Y-o-y growth, in percent)

Sources: Tunisian authorities; and IMF staff estimates.

Structural Liquidity Deficit of Banking System

(In billions of TND)

Sources: Tunisian authorities; and IMF staff estimates.

Box 1.Tunisia: Recent Current Account Deterioration and Energy Balance

Tunisia’s current account deficit has widened significantly since 2010, driven largely by the trade deficit. After averaging 2.8 percent of GDP from 1995 to 2009, the current account deficit tripled to about 8.4 percent of GDP by 2013, with improvements over the past two years in net services and transfers insufficient to reverse a worsening trade balance. This deterioration reflects a shift in both composition and size of the trade balance. Whereas in the past the deficit was mostly a reflection of the country’s need to import raw materials and capital goods, the share of energy has been increasing, accounting for more than a third of the trade deficit. This is exacerbated by a slowdown in export growth due to a deceleration in external demand from the Euro area (Tunisia’s main trade partner) and negative supply shocks in the phosphate and agriculture sectors.

Decomposition of CA Deficits

(In percent of GDP)

Sources: Tunisian authorities; and IMF staff calculations.

Decomposition of Trade Deficits

(In percent of GDP)

The recent increase in the energy trade deficit reflects cyclical dynamics, but the underlying energy trends suggest growing long-term energy imbalances. The widening energy trade deficit reflects a fall in oil production, due in part to fewer permits for oil exploration and exploitation, thus lowering exports below trend and raising energy imports above trend—the latter aggravated by lower gas volumes transiting through Tunisia from the Algeria-Italy pipeline (thus reducing availability of cheaper gas). Aside from the cyclical dynamics, long-term trends suggest that oil consumption will exceed production. As noted in the government strategy, there is an urgent need to slow the deterioration of the energy trade deficit by raising long-term oil production, reducing energy consumption and improving its efficiency. These efforts could be complemented by policies reversing the slowdown in export-related sectors (e.g., phosphates and tourism) and improving the trade balance by rebalancing demand for domestic and foreign goods. In this regard, gradually moving domestic energy prices towards international levels, greater exchange rate flexibility, trade openness, and a sound investment climate will contribute to the adjustment.

Energy Exports

(In millions of U.S. dollars)

Sources: Tunisian authorities; and IMF staff calculations.

Energy Imports

(In millions of U.S. dollars)

10. The banking sector continues to be vulnerable. As of March 2014, the overall capital adequacy ratio (CAR) of the banking system improved slightly to 9.4 percent—against 8.9 percent at end-2013, but down from 11.8 percent in 2012, following the stricter regulation on valuation of collateral, which was introduced in December 2013 and led to an increase in the provisioning ratio to 60 percent (from 46 percent in 2012). Six banks—four public and two private, representing 42 percent of banking assets—are still below the 9 percent regulatory CAR. Asset quality continues to be weak, with NPLs remaining at 15 percent of total loans (21 percent for public banks) at end-March 2014, concentrated mainly in the tourism and industrial sectors. Net profits have been rising, mostly because of financial commissions, but these could come under pressure following a weak demand for loans and higher funding costs.

11. Fiscal performance in the first quarter of 2014 was better than expected. The overall fiscal deficit improved by 0.5 percent of GDP, thanks to additional tax revenues from petroleum companies and higher-than-anticipated VAT revenue collection. Total expenditures were in line with expectations, with a slight wage overrun compensated by lower payments on energy subsidies that were to be paid in April. The execution of capital spending remains in line with projections (7 percent of the budgeted amount by end-March).

B. Program Performance

12. All end-March PCs and end-June PCs were met, though the inadequate composition of public expenditures continues to be a concern:

  • Primary balance. The end-March PC on the cash-basis primary balance was exceeded by a wide margin, with a lower than estimated float arising from committed capital expenditures at end-March that were paid in Q2 2014. As a result, the end-June PC on a cumulative basis has also been met.

  • Reserves. End-March and June NIRs exceeded the adjusted program target, and stood at $5.2 billion and $4.3 billion, respectively. Higher-than-expected short-term capital flows compensated for lower long-term inflows (due to delays in multilateral donors’ disbursements) and weak FDI flows, thereby helping keep reserves in line with program projections.

  • Monetary target. The end-March and end-June PCs on NDA were met by a comfortable margin, mainly driven by a lower-than-projected net credit to government.

  • Indicative targets. The end-March and end-June target on social spending has been met because of larger-than-programmed cash transfers and family allowances, the effect of an increase in the number of beneficiaries and student allowances. The ceiling on current primary spending has been met, with lower spending on subsidies and goods and service, compensating for the wage overrun observed in Q1 2014.

Tunisia: Central Government Financing, First Semester 2014(In millions of dinars)
A. Central government deficit (-) (incl. grants)−219223−1,108−416
B. Float and other statistical discrepancies 1/2,0321,7682,4652,462
C. Central government deficit (-) (incl. grants, cash basis)−2,251−1,545−3,573−2,878
C. Financing2,2511,5453,5732,878
Government Deposits (+ = drawing / - = accumulation)638−471,355532
Public Banks Recapitalization0000
Privatization proceeds00600
D. Grants3215464
E. Interest Payments510442820787
F. Primary balance (excl. grants, cash basis) (F = C - D + E)−1,773−1,104−2,806−2,155
Sources: Tunisian authorities; and IMF staff estimates.

Includes expenditures commited until end-December 2013 and to be paid during the complementary period in 2014 as well as commited expenditures of the current year budget to be paid in the following quarters.

Sources: Tunisian authorities; and IMF staff estimates.

Includes expenditures commited until end-December 2013 and to be paid during the complementary period in 2014 as well as commited expenditures of the current year budget to be paid in the following quarters.

13. Seven out of nine structural benchmarks (SB) expected to be completed by end-July— including three postponed from end-March— have been met (LOI, ¶3). The end-June SB to adopt the tax modernization plan has been met in August with a slight delay and the end-July SBs for the government adoption of bank restructuring plans will be met in August (Prior action for completing the fourth Review). The SB for the establishment of the lender-of-last-resort facility has been postponed to early 2015, following the adoption of new liquidity norms and of a new banking resolution framework; in the interim, a new exceptional facility has been created (¶24, and MEFP ¶11). The audit for the BNA, previously scheduled for end-July, will only be completed in September as it has a delayed start in June (MEFP, ¶17).

C. Outlook and Risks

14. Macroeconomic projections continue to forecast moderate growth, declining inflation, and some improvement in the external position.

  • Growth is expected to reach 2.8 percent this year, with the forecast unchanged from April estimates, as higher agricultural production and services are expected to offset a more modest tourist season than expected, and because of some stagnation in the mechanical and electrical industries. In view of the seasonal pattern observed so far this year and the ongoing modest recovery of Tunisia’s trading partners, economic growth for 2015 has been revised down to 4 percent (from 4.2 percent). Nevertheless, provided stability improves in a post-electoral environment, and as the vital European market recovers, investment is expected to pick up (also helped by recent improvements in the public procurement framework) and contribute to growth in 2015. Nonetheless, robust growth beyond 2015 will continue to be contingent on the accelerated implementation of the growth-enhancing structural reform agenda.

  • Inflation. Average inflation is expected to reach 5.7 percent for the year, reflecting inflation developments for the first half of the year, a depreciation of the currency, and a rise in administered energy prices and minimum wages. Anchored by a prudent monetary policy and a strong agricultural season, inflation will decline in the latter part of 2014, and average 5 percent in 2015.

  • External Position. A tighter monetary policy, more active promotion of Tunisia’s exports (e.g., in the phosphate sector), and greater exchange rate flexibility, will contribute to containing the current account deficit at 7.6 percent of GDP in 2014. In the medium term, tighter macroeconomic policies, better prospects in Tunisia’s trading partners, and a recovery in tourism and the phosphate industries will contribute to an improved external position. In view of uncertain financing in the latter part of 2015, gross reserve buffers are being reconstituted in 2014 and will cover almost four months of imports by end-year.

Tunisia: Selected Economic Indicators, 2010–15
Real GDP growth (in percent)2.6−
Consumer price index (CPI), (period average, in percent)
Current account (percent of GDP)−4.8−7.4−8.2−8.4−7.6−6.6
Gross official reserves (billions of U.S. dollars, eop)
Gross official reserves (months of next year’s imports)
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 strikes and demonstrations—could further slow down production and delay much-needed reform implementation. Security tensions have abated, but the risk remains high, partly because of sporadic terrorist incidents or turmoil in the region (particularly Libya). Despite a clearer political calendar since the last review, political tensions ahead of elections later this year could weigh on the technocratic government’s ability to implement economic policies and could further delay important reforms. The balance of global risks remains tilted to the downside. While side-effects from global financial conditions might have a negligible impact on the Tunisian economy in view of existing capital controls, a protracted period of slower growth in advanced and emerging economies— particularly in Europe and other trading partners—or higher commodity prices (including oil) would be another drag on growth and on the external and fiscal positions.

Policy Discussions

Discussions focused on maintaining macroeconomic stability and advancing the structural reform agenda. Particular attention was given to: (i) keeping the 2014 fiscal program on track while protecting the most vulnerable; (ii) a tighter monetary policy stance and an exchange rate path that is consistent with building up external buffers; and (ii) banking sector reforms—particularly the design of public bank restructuring plans that are in line with best international practices and accounted for appropriately in the budget.

A. Short-Term Stabilization Goals

Fiscal policy

16. The authorities remain committed to achieving the program’s end-year fiscal target, albeit with a slight deterioration in the quality of budget composition (MEFP, ¶5). The 2014 revised budget law—approved by parliament on August 8, 2014—envisages an overall fiscal balance in line with program objectives, and a structural fiscal balance (excluding one-off banking recapitalization costs) improving to 4.7 percent of GDP (against 4.9 percent expected under the program). This improvement is the result, on one hand, of tax policy measures that go beyond those agreed at the time of the Third Review, and the revenue overperformance observed in Q1 2014; and, on the other hand, of efforts to reduce untargeted energy subsidies (eliminating all energy subsidies to cement companies, increasing electricity tariffs for industrial and household users by a cumulative 20 percent since the beginning of the year, and raising fuel prices by 6 percent as of July 2014, see MEFP, 5¶) accompanied by programs to support the most vulnerable (see Section C). However, higher current spending, reflecting one-off election costs, increased security personnel, salary payments agreed by previous governments, food subsidies, and one-off transfers and advances to pension funds was only partly offset by new expenditure measures freezing promotions and recruitment, and reduced spending on goods and services. This led to a deterioration in the composition of the budget, with the end-year indicative ceiling in current primary spending increasing by 0.3 percent of GDP to accommodate the new spending.

Tunisia: Selected Fiscal Indicators, 2012–14(In percent of GDP)

of which: Tax revenue21.021.421.822.3
Expenditure and net lending28.829.829.930.3
of which: Wages and salaries12.212.512.512.6
Transfers and subsidies7.
Capital expenditure6.
Net lending−
of which: Public Banks’ recap. + AMC operat.costs0.
Central government deficit (-) (excl. grants)−5.7−6.2−6.8−6.7
Central government deficit (-), (excl. grants, cash basis)−5.0−4.5−8.6−8.5
Structural fiscal balance−5.3−4.5−4.9−4.7
General government debt44.544.850.951.7
Sources: Tunisian authorities; and IMF staff estimates.
Sources: Tunisian authorities; and IMF staff estimates.
Tunisia: Compensatory Measures for 2014 Included in Supplementary Budget
In Million TDIn Percent of GDPIncluded in LFCStatusIn Million TDIn Percent of GDPIncluded in LFC
Tax policy measures1000.11300.2
Alcoholic beverages: 8 percent increase excise tax200.0
Tobacco: 10 percent increase excise tax500.1implemented
Tax on vehicles 1/300.0150.0
Tourism tax750.1
Stamp duty300.0
Other measures incl. exeptional taxation100.0
Tax administration measures1600.2
Tunisie Telecom: enhanced tax control1100.1implemented
Recovery of tax arrears awaiting judicial decision500.1
Current expenditure400.070.0
Savings in energy subsidies 2/400.0implemented70.0

In March: at the moment of resale for cars imported by tunisians leaving abroad.

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

In March: at the moment of resale for cars imported by tunisians leaving abroad.

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

Tunisia: Expenditure Increase and Compensatory Measures, June 2014
In Millions

of TD
In Percent

of GDP
Expenditure Increases6480.78
Wage bill2180.26
Security Forces1040.13
Honor past salary agreements1140.14
Pension Fund2500.30
Contributions from Transport Company1000.12
Advances to CNRPS1500.18
Food Subsidies900.11
Election Costs600.07
AMC additional operational costs 1/300.04
Compensatory Measures3310.40
Wage bill: promotion and further recruitment freeze1140.14
Lower goods and services600.07
Energy Subsidy: saving FX appreciation gain Q1 and other1070.13
Additional measures50.00.06

In addition to the TD 120 million or 0.14 percent of GDP already included, bringing AMC operational costs to a total of TD 150 million or 0.18 percent of GDP.

In addition to the TD 120 million or 0.14 percent of GDP already included, bringing AMC operational costs to a total of TD 150 million or 0.18 percent of GDP.

17. Staff welcomed the improvement in the underlying fiscal balance, but stressed its preference to save fully the revenue over-performance and to tighten further the fiscal stance. This is necessary to contain growing external imbalances and limit the crowding out of private sector credit. The authorities argued, however, that achieving the programmed fiscal target when facing strong social pressures should remain the main goal, with scope for additional policy action limited to saving any future revenue overperformance and containing spending to budgeted levels. In case of revenue shortfalls or higher expenditure, the authorities will continue to preserve social and capital expenditures, and will implement contingency measures that focus on cuts in nonessential current spending.

18. Additional external budget financing and the authorities’ “national borrowing campaign” will compensate for the expected shortfall from lower sukuk issuance. Stronger donor support than expected—including the issuance of a 7-year $500 million U.S.-guaranteed international bond at a yield of 2.45 percent (35 basis points above U.S. treasuries of the same maturity and 4.5 times oversubscribed), and unexpected support from Algeria ($250 million, of which $150 million is direct budget support through grant and highly concessional loan)—will help compensate for lower sukuk issuance (the IsDB is expected to guarantee $120 million, $380 million less than originally programmed). In addition, the issuance of bonds under the “national borrowing campaign” was oversubscribed, and managed to mobilize TD955 million, almost double the amount envisaged, of which 40 percent was bought by domestic banks. To avoid further credit crowding out, and in light of the financing expected, no additional domestic bond issuance is planned for the rest of the year. External and domestic financing is increasing public sector debt in 2014 to 51.7 percent of GDP, but debt dynamics remain sustainable under most shocks (See DSA annex).

Tunisia: Official External Financing(In millions of U.S. dollars)
Prog.Rev. Est.Q1-Act.Q2-Est.Q3-EstQ4-Est.
AMF (Arab Monetary Fund)43.443.543.5
IMF (Budget Support)1,393.91,398.7509.3221.7446.1221.7
World Bank Group750.0750.0250.0500.0
International Market (US guarantee)300.0500.0500.0
International Market (possible Japan guarantee)300.0300.0300.0
Project aid without donor breakdown356.8311.821.899.888.4101.8
Sukuk and other external financing500.0120.0120.0
Other (including Loan Transfers to SOEs)59.559.38.122.414.714.1
Memorandum items:
Sources: Tunisian authorities; and IMF staff estimates.
Sources: Tunisian authorities; and IMF staff estimates.

Box 2.Tunisia: The Wage Bill and the Need for Public Sector Salary Reform

The wage bill in Tunisia is high and rising. It increased from 10.7 percent of GDP in 2010 to 12.5 percent of GDP in 2013, a level higher than most comparators. This increasing wage bill—due to about 70,000 new hires who entered the public sector between 2010 and 2012, particularly in low skill categories, and a 13 percent average increase in salaries—currently absorbs almost 60 percent of tax revenues and more than 30 percent of total expenditures, ratios well above those of most countries in the world.

Three factors characterize Tunisia’s public employment and salary structure:

  • Overstaffed public sector. With 795,000 public employees (of which 180,000 are from public enterprises), the ratio of public employment to total employed work force in Tunisia is around 24 percent. This level is three times higher than that of Morocco, or countries such as Chile, Mexico, and Brazil.

  • Relatively high wages at the lower salary scale. The annual salary for civil servants averages around $7,800, which is 75 percent above the GDP per capita, and well above the corresponding average in Egypt and Jordan (but well below the one in Morocco where this indicator is five times higher). The average monthly salary for the lowest categories—which represent a third of the public sector workforce—at around $470 is twice the minimum salary (except for a small portion of construction workers). This wage premium makes the public sector more attractive than the private sector after controlling for education and other benefits, particularly for new labor market entrants.

  • Low salary differentiation. The salary differentiation among various salary categories (compression ratio) decreased between 2010 and 2012 from 3.4 to 2.6. This is well below the level (between 4 and 10) considered adequate for promoting the right work incentives. This deterioration has been mainly attributed to the large salary increase for the lowest categories (34 percent), while the salary for top categories (excluding productivity bonus) at a monthly average of around $1,200, remained unchanged in nominal terms.

Central Government Spending on Wages, 2012

(In percent)

Source: IMF staff estimates.

Addressing the high level of the wage bill and the shortcomings of the salary structure are key to fiscal sustainability and higher productivity of the public sector. Assessing the structure of public sector salaries and the ways to implement a public sector salary reform over the medium term should help alleviate the heavy burden of the wage bill on public finances and leave more room for social and investment expenditures while increasing public sector productivity. The reform of the public sector salary system should encompass the following main elements: (i) reducing redundant workers through a voluntary departure incentive system and implementing safety-net protection through micro employments and capacity building; (ii) relieving shortages in high-skilled areas; (iii) improving the competitiveness of civil service pay, particularly at higher levels. With World Bank support, the authorities have started to assess the public sector salary structure and the hiring system that will form the basis for a comprehensive civil service reform.

Exchange rate policy

19. Staff welcomed the authorities’ commitment to continue rebuilding external buffers. CBT foreign exchange (fx) sales have been reduced to $290 million in June (about 34 percent of all fx sold, and from $400 million in previous months), contributing to the exchange rate depreciating by 3 percent vis-à-vis the U.S. dollar and the Euro in the month of June and helping stabilize gross reserves at $7.1 billion. The authorities argued that fx sales are only there to smooth excessive fluctuations when large and lumpy fx demand from energy operators (about $340 million on average a month) arise, and that the recent depreciation of the dinar (8.6 percent vis-à-vis the dollar since mid-March) shows that currency movements follow the market. Staff agreed that large fluctuations should be smoothed, but urged the authorities to continue reducing sales of foreign exchange or purchase foreign exchange during periods of excess supply, so as to build up buffers, particularly since financing for the latter part of 2015 remains uncertain. Staff and the authorities both consider exchange rate flexibility necessary to contain the current account deficit, rebuild buffers, and bring the dinar in line with fundamentals. Both Staff and the authorities agreed that the currency is currently about 5–10 percent overvalued in real terms.

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/−4.8−1.89.8
ERER approach3.4
ES approach−4.8−2.67.4
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 estimates.

20. The functioning of the fx market should be further strengthened. The operationalization of the electronic platform and the implementation of the market-maker agreement have contributed to more accurate information on interbank flows and quotations. This sets the stage for moving towards a weekly foreign exchange auction mechanism (end-December 2014 SB), which will benefit from Fund TA. The mission also urged the authorities to quickly change the regulation to allow banks (long in fx position) to engage in fx swap operations with the CBT, which will help provide temporary relief from the imbalances in the foreign exchange and money markets.

21. Staff reiterated that macroeconomic policies—in particular through exchange rate or fiscal policies—are more appropriate tools for controlling the widening trade deficit than ad hoc measures restricting imports. Staff argued that a surcharge on imports is distortive and should only be introduced as a last resort and on a temporary basis (in line with WTO practices and with clear forward guidance to be phased out). The authorities agreed, but argued that surcharge might be the only option left if the adjustment takes longer than expected. Staff urged the authorities to intensify their efforts to design sustainable solutions that address long-term energy imbalances and underscored that a determined strategy for reviving export-related sectors such as phosphates and tourism will be instrumental to improving the trade balance.

Monetary policy

22. A tight monetary policy stance is warranted in light of anticipated pressures on inflation. Staff welcomed the increase in the policy rate in response to pressures that may materialize from higher administered energy prices, a depreciating exchange rate, and an increase in minimum wages. However, staff urged the authorities not to blur the important signal sent by the policy rate increase by letting the money market rate deviate consistently from the policy rate, due to inefficient interbank liquidity management and the authorities’ preference for keeping it at the upper end of the interest rate corridor. The authorities agreed that additional tightening of the policy rate over the next few months will be needed if core inflation rises more rapidly than expected or depreciation pressures rise. Staff urged the authorities to consider additional policy rate rises not only to keep inflation on a downward trend, but also to achieve positive real rates, which will help stem depreciation pressures on the currency. It would also reduce reliance on CBT refinancing by increasing funding costs and banks’ ability to mobilize deposits.

Money Market and CBT Policy Rates, 2010–14

(In percent)

Source: Tunisian authorities.

23. The CBT is making good progress in tightening the collateral framework, which would help incentivize the interbank market and protect the CBT’s balance sheet. The haircut on the valuation of loans eligible for CBT refinancing has been raised from 10 percent in December 2013 to 25 percent by June 2014 (structural benchmark), with very limited impact on liquidity so far as banks have anticipated such a move by adjusting their balance sheet to ensure they can meet their historical financing needs. The collateral framework will be tightened further in December 2014 when the share of refinancing through government securities increases to 40 percent (up from 20 percent). However, further actions are needed, notably enhancing the current loan collateral framework through forward-looking credit scoring techniques or rating tools, and by valuing government bonds at market value instead of historical costs.

24. The introduction of an exceptional facility will help address potential liquidity risks stemming from a tighter collateral framework pending the establishment of a lender-of-last-resort (LOLR) facility. The authorities introduced in July 2014 a new “exceptional facility” to allow (at the discretion of the CBT) illiquid but solvent banks to access central bank liquidity with collateral of lesser quality but at a punitive rate (200 basis points above the money market rate) and under more intrusive banking supervision. A full-fledged LOLR mechanism—building on the exceptional facility—will be completed by end-March 2015. Prerequisites for its introduction include new liquidity norms, a clear definition of solvent banks, a more comprehensive definition of counterparty eligibility criteria, and the implementation of the new banking resolution framework (see MEFP, ¶11).

25. Staff raised concerns regarding the tightly regulated lending rate, which hampers the proper functioning of monetary policy. The authorities argued that the consultation process with various ministries on the evaluation of the existing “lending cap” system—prepared with World Bank assistance—is still ongoing. Staff stressed the need to avoid further delaying the removal of the cap on lending to enterprises and to modify the cap on consumer loans (or remove it totally if coupled with adequate supervision of risks) so as to strengthen the transmission channel of monetary policy (see EBS/14/5). The authorities noted that a modification will also depend on the legislative process, which could be lengthy.

26. The ongoing revisions of the central banking law will strengthen the monetary policy framework. New draft provisions grant the CBT more independence (institutional, functional, financial, and with respect to financial resources), a clearer mandate, and a new governance framework. Accordingly, a new draft law was presented to the CBT Board (end-June SB) and is expected to be approved by the Government in September 2014.

B. Laying the Foundations for Stronger, More Inclusive Growth

Reducing Financial Sector Vulnerabilities

27. The authorities are speeding up the process to address capital shortfalls in the banking system. Of the seven banks undercapitalized at end-December 2013 (44 percent of banking assets), three private banks (9 percent of banking assets) have been fully capitalized by end-July with financing from new and existing private shareholders, and all other banks—of which three are majority state-owned (34 percent of banking assets)—will be at the 10 percent regulatory minimum level by end-December 2014 (structural benchmark). The capital shortfall for public banks is currently estimated at 1.2 percent of GDP, to be financed by nonnegotiable bonds. Time-bound action plans—derived from the banking strategy adopted in April—will include the following important steps:

  • Bank restructuring. Restructuring plans for the two public banks that completed audits (STB and BH) have been finalized and will be adopted by the government in August (end-July SB and prior action for completing the fourth Review); the design followed by the authorities is in line with best international practices (Annex I of MEFP). The next step is to have it adopted by end-September by the board of each bank. Staff urged the authorities to quickly consult existing private sector shareholders (about 46–49 percent equity stake in the main public banks) on the extent of their participation in recapitalizing these banks, or to dilute their share otherwise. The new auditor for the remaining public bank (BNA)—which was recruited following expedited procedures—started its work in June and will only complete the audit of the BNA by September (initially an end-July SB), with restructuring plans expected to be completed by end-November 2014 (new SB), and the bank fully recapitalized by end-year.

  • Governance of public banks. Operational restructuring needs to be stepped up immediately to ensure that sustained solvency and profitability will be restored. In line with the decree approved in December 2013, staff and the authorities agreed that banks should be managed on a fully commercial basis, with bank management and board members meeting “fit and proper” criteria. To that end, the recruitment of “independent” Board members and a more performance-based salary structure are planned by end-September.

  • Divesting. There are no plans at this stage to reduce state participation in the three main state-owned banks; however, the authorities plan to explore options to reduce the size of the government in the banking sector, by focusing initially on the nine banks (about 10 percent of banking assets) in which it has a minority share. Sale of these could help finance any additional recapitalization costs.

28. Setting up an asset management company (AMC) is needed to address weak asset quality and ensure successful restructuring of the banking system. The authorities attempted to speed up the process of establishing an AMC by including its main provisions in the revised budget law, but the National Assembly decided that this should be examined under a separate law in August. Furthermore, the authorities have broadened the mandate of the AMC law beyond the tourism sector’s distressed assets to ensure that the legislative framework is in place in case the mechanism is extended to other loans. Staff emphasized that assets best suited to centralized management are: (i) large in size, including syndicated loans and credits to borrowers with multiple exposures to banks in the system; (ii) owed by corporate entities; and (ii) collateralized with (commercial) real estate. The authorities agreed that such characteristics are best matched in the tourism sector, for which an in-depth strategic study has already been completed, and plan to initially limit the AMC operation to the tourism sector. Staff urged a careful evaluation of the fiscal implications before extending the AMC experience to other sectors. The success of the AMC will very much depend on its governance structure that will need to include internal (legal protection for employees, internal audit) and external aspects (oversight and supervision, operational independence and public accountability, external audit and reporting). It is expected that the AMC will be created by October 2014 (new structural benchmark).

29. An effective resolution framework is key to a successful bank restructuring. The authorities—with WB/IMF TA—have drafted a new banking law that ensures a clear identification of the agencies responsible for bank resolution and liquidation and proper resolution tools and powers for the CBT. Staff welcomed the design of this new law and framework (end-June 2014 SB), and urges its quick submission and adoption by government. In parallel, staff urged the authorities to strengthen creditor rights by calling for an early adoption of the “bankruptcy law” which has been stalled in Parliament over the past year. Crisis containment and safety nets are being developed through the drafting of a new deposit insurance law and new LOLR, which should be implemented once the banking resolution framework is in place.

30. Staff supported ongoing efforts to upgrade the regulatory and supervisory framework (MEFP, ¶19). The authorities have adopted a three-year plan—established with IMF technical assistance—aimed at implementing a risk-based supervision framework, which is building on reforms that are already in train. As part of that action plan, staff welcomed progress made in designing a uniform bank performance reporting system. This will lead to a full reporting and ratings system that will cover all accounting, financial, and institutional data (end-December 2014 SB). Staff and the authorities agreed on the need to rapidly increase human resources at the supervision directorate, particularly for onsite inspections (new end-November SB), strengthen coordination within banking supervision departments, and establish clear and formal risk-based criteria to conduct banking supervision. Plans to align regulatory norms with international standards are also progressing, although loan classification rules could be tightened further (e.g., to cover public enterprises). Staff urged the authorities to put in place the new liquidity ratio by September 2014, and agreed with the authorities that sanctions should be applied in the interim to those not respecting the existing ratio.

Growth-enhancing fiscal reforms

31. Implementation capacity for investment projects is being strengthened (MEFP, ¶26). The new procurement law implemented in June is expected to modernize and streamline the bidding process, thereby accelerating the implementation of public investment in the regions. Decentralized project execution and new procedures to resolve constraints arising from land deeds, particularly at the regional level, will also contribute. A full assessment of project implementation at the regional level is being finalized, and staff urged that its recommendations be quickly adopted to ensure that gains materialize soon on the ground. Staff also supported the ongoing reform of the organic budget law—prepared with EU assistance, and to be adopted later in 2014—which will help remove redundant and cumbersome procedures that delay overall budget implementation. Notwithstanding these ongoing reforms, and given a level of budget implementation in line with last year’s (20 percent of budgeted amount by end-May), staff and the authorities estimate that several months will be needed before a substantial shift in the speed of project execution is observed.

32. A comprehensive tax reform based on a more transparent, efficient, and equitable tax system is needed. As a first step, all the new permanent tax measures implemented in the last two years—including the halving of the corporate tax difference between the onshore and offshore sectors and modification/simplification of the presumptive tax system—will be included in the new tax code (2014 end-September SB). The authorities have recognized that many measures included in the revised budget law are temporary and not part of the longstanding reform they want to implement. The participatory process that began in 2013 will culminate in the presentation of a comprehensive tax reform strategy during the national tax consultations that will be held in September. A clear time-bound action plan to implement the strategy—which aims at fostering equity and mobilizing revenue—will be adopted by the Council of Ministers by end-October (new structural benchmark). Key priorities include: (i) simplifying the presumptive tax system; (ii) reforming the VAT (fewer rates, broader base, little or no withholding); and (iii) simplifying and improving the targeting of excises while enhancing their revenue yield. Staff reiterated the importance of including a timetable for the full convergence of the offshore and onshore corporate tax rates, which should also be linked to improvements in tax administration.

33. Revenue administration reform will be guided by the execution of the newly approved modernization plan. The main priority of the plan (end-June SB) is to transfer all tax functions within the tax administration, including management, control, arrears collection, and interpretation of the tax legislation. A first step in this direction is the merger of most functions under the large taxpayer unit (LTU), which is complemented by the introduction of new risk-based audit procedures. Staff also welcomed enhanced powers granted to the tax agency through the modification of the bank secrecy laws, but recommended that these be accompanied by adequate safeguards to protect taxpayers. Staff also urged the authorities to disseminate the reform plan widely within the ministry so as to ensure full ownership within the administration and avoid unnecessary resistance.

34. Reform of public enterprises has been initiated, but steps taken so far were mostly limited to an assessment of the financial situation. The audit report on energy companies— which was presented to the Council of Ministers in August—has shown a complex system of cross-subsidies; these will be reduced from 2015 onwards by making every energy public company accountable for its own import bill. To further reduce losses and borrowing costs, staff and the authorities agreed that budgeted funds should be transferred regularly and in a timely manner to food and energy public companies, with ex-post control procedures performed only once financial accounts are finalized at the end of the year. The authorities have started to monitor more regularly the position of the largest state-owned companies (SOEs) by producing key financial ratios and an aggregated fiscal position of the 28 state-owned enterprises (end-June SB), which will have to be extended to 2013. Following this evaluation, restructuring plans for the most vulnerable enterprises—such as TUNISAIR—are being prepared (MEFP, ¶24). Staff urged quick action on changes in the governance framework to bring greater independence and responsibility to SOEs’ boards and management. The authorities also need to address the existing fragmentation in the structure and financial oversight of public enterprises and autonomous bodies (EPNA/EPS/EPA) and the lack of consolidated information on financial support provided by the government to these entities.

35. Public financial management is improving (MEFP, ¶25). Efforts to reconcile the discrepancy between the above-and below-the-line budgetary information are encouraging, with regular monitoring of expenditures from budget commitment to payment order, and to actual payments. Nonetheless, the reconciliation is limited to flows and the treasury balances are still not systematically reconciled. The practice of the complementary period and the procedure related to the externally-financed projects still delay the closure of annual accounts and open the scope for reclassifying data into either fiscal year n or n-1. Closing the accounts within one month of the end of the fiscal year is a priority in the short term, while staff recommended abolishing the complementary period in the medium term. The creation of a National Public Accounting Standards Board is welcome and should be operationalized soon so as to help the authorities move towards international norms, including through the introduction of double entry bookkeeping. For greater transparency and comprehensiveness in budget preparation, staff urged the authorities to quickly complete the introduction of a functional classification (now scheduled for September). The adoption of the new organic law will also help, by introducing greater flexibility in managing budget appropriations.

36. The public sector pension system is in need of urgent reforms (MEFP, ¶35). The financial situation of the public sector retirement and social security Fund (CNRPS) has deteriorated significantly over the past few years, and its treasury balances have been depleted. To ensure the payments of pensions this year, the government will transfer around 0.3 percent of GDP to the CNRPS, of which 0.1 percent is a transfer to cover arrears from the transport public company. Staff urged the authorities to adopt in the 2015 budget the recommendation of the CNRPS to increase the retirement age to 62 (and optional to 65) so as to avoid having to cover an annual deficit of around 0.5 percent of GDP. More substantial reforms will be needed, including changes in contribution parameters and benefits, so as to address the main shortcomings of the pay-as-you-go system (e.g., an aging population, early retirement age, and generous parameters for calculating pension benefits).

Growth-enhancing structural reforms

37. Efforts to adopt important reforms that will strengthen the business climate are lagging. Staff reiterated the need to move quickly and forcefully on explaining to parliament and various stakeholders the merits of adopting laws—on competition, public private partnerships, bankruptcy, and investment code—which are crucial to reduce the burden of excessive regulation and government intervention while encouraging private sector development and fostering competition. The authorities remain determined to pursue quick parliamentary approval of these laws, but argue that this is part of the lengthy legislative process that also requires consensus building. In addition, with respect to the investment code, the current version in Parliament is judged too cumbersome because it tried to satisfy too many stakeholders and left important decisions to future decrees. The authorities are working on replacing it with streamlined “quick win” measures that will reduce restrictions on investment and guarantee investor rights. Given various ongoing negotiations on regional trade agreements, greater market access will no longer be a priority of the “investment code” and will be left instead to individual trade negotiations. Staff urged the authorities to design and implement the new “investment facilitation” measures quickly, and to avoid introducing tax incentives, which could be distortionary and not conducive to creating a more level playing field for investors.

38. Labor market reforms are somewhat stalled, with key measures to be initiated following a consensus that will likely emerge after the elections. Tripartite working commissions—including representatives from government, business, and labor unions—have renewed the dialogue envisaged in the “Social Pact” signed in January 2013, which outlined a broad framework for reforms. Discussions on the national employment strategy, including how to address the structural skills mismatch and reduce labor market rigidities—are still at the initial stage, and new measures are only expected to be announced after the elections. However, while important structural reforms are not yet in the cards, unemployment remains high (Box 3), and a number of job creation initiatives have been launched or are under preparation, particularly for the youth. These include examples of “virtual workplaces” to give unemployed university graduates a forum to hone their skills while searching for formal employment, a reform of professional training, incentives for university graduates to establish companies in disadvantaged regions, and programs to increase financing for SMEs (including through World Bank assistance).

39. An assessment of the statistical system—conducted with help from EUROSTAT—needs to be finalized (MEFP, ¶33). Staff urged the quick adoption of a national reform plan to address weaknesses in the statistical system, notably to strengthen the coordination of various statistical bodies, enhance the quality of statistics and training. Staff welcomed the focus on strengthening national accounts, and progress made towards implementing the methodology of the Monetary Financial Statistics Manual (MFSM). Staff welcomed the authorities’ intention to adopt a Code of Conduct for all statistical agencies, and reiterated the importance of new legislation guaranteeing the independence of the National Statistical Office.

Box 3.Causes of the Rise and Fall in Tunisia’s Unemployment Rate

Tunisia’s unemployment rate increased significantly in the aftermath of the revolution, rising from 13 percent in 2010 to 18.9 percent in 2011, while youth unemployment rose from 27 percent to 38 percent during the same period. Job losses mainly took place in agriculture, tourism, and mining as a result of protracted strikes, reduced tourism due to security concerns, and closing of firms linked to the previous regime. However, during that period, unemployment was also high because the number of people newly registered as unemployed was twice as high as those losing jobs, reflecting a temporary monthly unemployment transfer scheme and a one-time increase in the maximum age for those taking public service exams.


(In percent of labor force)

Labor Force

(Change, in thousands of people)

Recent improvements in Tunisia’s unemployment rate have been predominantly the result of a reversal in the number of registered unemployed. By the end of 2013, Tunisia’s unemployment rate had improved to 15.3 percent, which remains amongst the highest in the region (North Africa and the Middle East have an average unemployment rate of 12.2 percent and 10.9 percent, respectively). As unemployment benefits were made conditional on the family income of jobseekers, reductions in registered unemployment contributed by at least two-thirds to a reduction in the unemployment rate in the past two years. The remaining third was the result of new jobs, 36 percent of which were created in public sector services such as education, health, administration, and the mining sector. In the private sector, additional jobs were mainly created in the food, chemical, mechanical, and electricity sectors.

Job seekers without university degrees are the main beneficiaries of renewed job growth. During the revolution job losses were particularly pronounced among those without a university education; the same group is currently gaining the most from renewed job growth. Among university graduates, the most uninterrupted increase in unemployment numbers has been observed amongst those with science degrees. While they only represented 16 percent of all unemployed with university degrees in 2006, they now account for 30 percent of the total. They are also the main group that has not benefitted from renewed job creation in the past two years. Unemployment amongst university graduates in Tunisia is nearly twice as high as in comparable countries such as Jordan, Egypt or Morocco.


(Change, in thousands of employees)

Unemployment Amongst University Graduates

(Unemployed, in thousands)

Future increases in the minimum wage should be considered carefully so as to not add to unemployment. Recent increases in the minimum wage of 6–10 percent are not expected to have an adverse effect on employment in Tunisia in the short run. However, future minimum wage increases should be considered carefully against the trend of falling labor productivity observed in the last decade. Also, there is evidence that existing youth minimum wages are not respected and that, instead, the youth receive the regular minimum wage, which is relatively high given the lower productivity of youth. Increases in the regular minimum wage could therefore lead to further increases in youth unemployment.

C. Protecting the Most Vulnerable

40. Programs to support vulnerable segments of the population during reform implementation continue to be important. Staff welcomed actions taken to protect the poor, such as a new social housing program for those in need, and a lifeline electricity tariff to protect households that consume less than 100 kwh while electricity subsidies are being reduced. Staff was also encouraged by the introduction of a household support program (2014 end-June SB) that increased transfers to vulnerable households by 10 percent, broadened the number of beneficiary families in the existing cash transfer program from 220,000 in 2013 to 235,000 in July 2014 (and 250,000 by end-year), provided a temporary transfer of 80 dinars for about 285,000 families in June/July when fuel prices were increased (and during Ramadan), and provided an additional transfer of TD 10 per month per child to vulnerable families with schoolchildren (up to three per family) (MEFP, ¶34). In addition to these interim steps, the authorities are working on finalizing the unique social identification number, which is already available for 7.5 million citizens, and which could be used as a basis for the new registry of vulnerable households. Staff urged the authorities to start improving their targeting system using the current registry and the results of the ongoing evaluation of the cash transfer scheme, and not to wait until a unique social identification number is available to all.

Program Design and Modalities

41. Program modalities remain broadly unchanged, and new benchmarks are mostly on the financial sector. All end-March and end-June PCs have been met. Staff is proposing a modification of end-September performance criteria (PCs) in light of the end-June outturn and new BOP projections. It also proposes to set new PCs for end-December 2014 and new ITs for end-March 2015 as per the MEFP (Table 1). Regarding structural benchmarks (MEFP, Table 2b), the adoption by the government of STB and BH restructuring plans in line with best international practices is a prior action for completing the fourth review, the audit of the BNA has been delayed to September 2014, five new benchmarks have been introduced to anchor program objectives in the banking sector area, and one new benchmark on tax policy. The end-September structural benchmark on the investment code will be reviewed in the context of the next review, given the authorities’ intention to propose “streamlined measures” as an alternative. Although the authorities are not favoring an extension of the program at this stage, this could be considered later in the year should reforms take longer than envisaged, fiscal consolidation not take place as expected, or rebuilding external buffers require more time than envisaged.

42. The program is fully financed, but financing after the completion of the Fund program in June 2015 has yet to be identified. Financial assurances have been provided by multilateral and bilateral partners for disbursements over the next 12 months; some of these are closely linked to progress on reforms that are part of the Fund-supported program. From the Fund, all resources scheduled to be disbursed for 2014 will continue to be used for budget support. Market issuance of $1.1 billion will cover remaining financing needs for the rest of 2014. If there are early indications that projected financing will not be received over the next six months, the authorities will consult with the Fund on alternative financing approaches and/or further policy adjustments. For the part of 2015 not covered by a Fund program, greater recourse to international market issuances and/or greater policy adjustment would be warranted in case new bilateral/multilateral financing commitments for 2015 do not materialize after the elections.

43. Tunisia has the capacity to repay the Fund, but risks to the program remain significant. Tunisia has a strong record of payments to the Fund. Standard indicators of Fund exposure will remain low, with Fund credit outstanding reaching a maximum of 3.6 percent of GDP in 2015 (about 17.9 percent of gross international reserves). However, risks (¶15)—notably delays in the political agenda, increasing social and security tensions, delays in official financing, major structural constraints including a weak investment climate, or further deterioration of the international economic environment—could jeopardize program objectives and potentially erode repayment capacity. That said, the government’s reiterated strong commitment to the reform agenda helps reduce program implementation risks.

Staff Appraisal

44. The important progress made in the political transition provides a window of opportunity to advance reforms and galvanize investors, but macroeconomic conditions remain difficult. Rising external imbalances are putting pressures on both the exchange rate and reserves. Social tensions remain high, and security incidents represent a threat that continues to dampen the investment climate and burden economic activity. Higher growth dividends will continue to require steadfast reform implementation.

45. Fiscal consolidation remains key to the success of the program, and should be accompanied by an improved budget composition. Staff welcomes the government’s efforts to identify new measures to offset spending pressures that emerged, thereby allowing the authorities to remain on track to meet the end-year deficit target. However, staff regrets the end-year increase in current primary spending that was not offset by permanent cuts in nonessential current expenditures, and urges the authorities to contain the wage bill at program levels and to speed up the execution of the investment budget, which should be preserved during the fiscal adjustment. A tighter fiscal stance—including through saving any revenue over-performance—will be essential to contain external imbalances and reduce crowding out of the private sector.

46. The authorities’ efforts to deliver on their commitment to subsidy reform should be commended. Electricity tariffs were raised, fuel prices were increased, and all electricity subsidies for energy companies were removed. These are important steps taken at a difficult time to reduce regressive energy subsidies and create fiscal space for priority spending. Recent initiatives to strengthen the social safety net in conjunction with the subsidy reform—including the implementation of new social programs and the introduction of the long delayed “household targeting strategy”—are welcome.

47. Moving forward with comprehensive revenue reform is essential to establish a more efficient, transparent, and equitable tax system. Staff welcomes the authorities’ adoption of new measures to combat tax evasion and of the tax modernization plan, which should be quickly implemented so as to show quick gains in efficiency, equity, and simplification. Enhanced powers to the tax agency, through a modification of bank secrecy laws, are welcome, but they should be balanced by ensuring taxpayers’ rights are protected. Staff welcomes the ongoing work on the tax code, and urges the adoption of the new tax reform strategy that includes permanent base-broadening measures, of which some should be proposed in the 2015 budget.

48. Strengthening public financial management and reforming public enterprises is important to improve governance, enhance the credibility of fiscal policies, and strengthen service delivery. The implementation of streamlined procurement procedures and decentralized project execution—together with revised budget procedures that are to be enshrined in the new organic budget law—will also help scale up investment. Staff urges the authorities to move quickly on these reforms: they are the base for promoting investment and economic growth. Staff supports the increased monitoring of public enterprises, and urges quick action on designing restructuring plans for enterprises in difficulty.

49. A tight monetary policy is necessary to anchor inflationary expectations. Staff welcomes the recent increase in the policy rate, and the authorities’ readiness to increase the rate further if inflationary pressures materialize. Staff urges moving towards a positive real interest rate as the best way to keep inflation down and reduce exchange rate pressures. Staff commends the authorities on efforts taken to tighten the collateral framework, and urges quick conclusion of the ministerial consultation process so as to move speedily towards revising the legislation capping interest rates, which is hampering the effectiveness of the monetary policy transmission mechanism. The establishment of a LOLR facility will also enhance the monetary framework.

50. The CBT should focus on rebuilding its foreign reserve buffers, including through increased exchange rate flexibility. Staff welcomes the recent reduction in CBT foreign exchange sales, and the depreciation of the exchange rate, which is needed to correct large external imbalances. Staff supports the authorities’ policy to smooth excessive exchange rate fluctuations, and encourages them to step up purchases during periods of excess fx supply (or lower pressure on the exchange rate). A move towards a weekly auction system will help promote greater exchange rate flexibility.

51. Important steps have been taken to reduce financial sector vulnerabilities. Staff welcomes the authorities’ adoption of public bank restructuring plans, and urges their quick implementation by the boards of these banks, including those plans related to recapitalization and governance requirements. Staff welcomes the authorities’ efforts to speed up the establishment of an Asset Management Company, which should first address distressed tourism assets, and which, together with the implementation of a new bankruptcy law, is essential to addressing banks’ weak asset quality. Staff regrets the delay in launching the audit of the remaining large public bank, and urges its rapid completion so that the bank can be restructured quickly. Enhancing the banking resolution framework, as well as continued efforts to upgrade the regulatory and supervisory framework, is essential to safeguard banking stability.

52. Structural reforms remain critical for improving the investment climate and generate more inclusive growth. Staff regrets delays in moving forward with the legislative agenda—such as the competition law, investment code and the law on public-private partnerships—which are crucial to fostering private sector development and provide a level playing field for investors. Staff encourages the authorities to avoid introducing new tax incentives to foster investment, and to further reduce the difference between tax rates in the onshore and offshore sectors by taking additional steps towards a gradual convergence of rates in these two sectors and simplifying regulatory procedures.

53. Reforming the public sector pension system is a priority in view of its mounting deficits. While substantial reforms may take time to materialize, staff urges the authorities to take quick actions to reduce the pension system’s annual deficit and help it move towards financial viability.

54. The authorities’ sustained commitment to reform implementation during the political transition phase remains crucial. The implementation of program policies will continue to be tested by a difficult social environment and vested interests. Staff welcomes the government’s conscious effort to communicate on its policies and explain the need for the difficult economic reforms which are necessary to bring lasting benefits to the Tunisian economy.

55. On the basis of Tunisia’s performance under the SBA, and the government’s forward-looking policy commitments, staff supports the authorities’ request for completion of the fourth review and a disbursement of SDR 143.25 million. Staff supports the modification of end-September QPCs and recommends the establishment of new end-December 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 1.Tunisia: Selected Economic and Financial Indicators, 2010–15
Production and income (percent change)
Real GDP2.6−
GDP deflator4.
Consumer price index (CPI), average4.
Consumer price index (CPI), end of period4.
Gross national savings (in percent of GDP)20.916.216.117.313.619.014.212.914.5
Gross investment (in percent of GDP)25.723.624.324.722.025.021.520.621.1
Central government (percent of GDP, unless indicated otherwise 1/
Total revenue (excluding grants)23.424.523.123.823.624.023.123.523.5
Total expenditure and net lending24.028.028.831.129.830.329.930.328.0
Central government balance (excluding grants)−0.6−3.5−5.7−7.3−6.2−6.4−6.8−6.7−4.5
Central government balance (excluding grants, cash basis)1.6−2.8−5.0−7.3−4.5−6.4−8.6−8.5−4.5
Structural fiscal balance 2/−1.1−3.0−5.3−5.0−4.5−3.8−4.9−4.7−4.0
General government debt (foreign and domestic)40.744.544.545.344.849.550.951.754.4
Foreign currency public debt (percent of total debt)60.758.062.865.764.368.570.169.169.1
Total external debt
External debt (US$ billions)21.422.124.325.025.427.628.228.230.7
External debt (in percent of GDP)48.548.053.852.054.055.557.357.361.2
Debt service ratio (percent of exports of GNFS)10.511.912.
Money and credit (percent change)
Credit to the economy19.613.48.810.86.811.
Broad money (M3 of the financial system)
Velocity of circulation (GDP/M2)1.541.451.461.361.481.321.461.461.44
External sector (percent change)
Exports of goods, f.o.b. (in $)14.08.5−
Imports of goods, f.o.b. (in $)−
Exports of goods, f.o.b. (volume)6.6−
Import of goods, f.o.b. (volume)−
Trade balance (in percent of GDP)−10.4−10.4−13.5−12.6−12.6−11.9−12.1−12.9−12.2
Current account (in percent of GDP)−4.8−7.4−8.2−7.5−8.4−6.0−7.2−7.6−6.6
Foreign direct investment (in percent of GDP)
Terms of trade (deterioration -)−−1.0−0.41.2
Official reserves
Gross official reserves (US$ billions, e.o.p)
In months of next year’s imports of goods and services, c.i.f.
Memorandum items:
GDP at current prices (TD millions)63,05964,69070,65878,33476,35085,46582,72882,96690,435
GDP at current prices (US$ billions)
Population (millions)10.510.710.810.910.911.
GDP per capita (US$)4,1774,3054,1984,4834,3174,5764,4494,4724,522
Unemployment rate (in percent)13.018.916.715.315.315.315.0
Exchange rate: dinar/US$ (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)
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)
Current account−2,105−3,401−3,706−3,961−1,417−1,144−568−632−3,760−3,302
Trade balance−4,575−4,799−6,105−5,937−1,704−1,840−1,550−1,239−6,333−6,135
Of which: Nonfood−16,810−17,339−17,513−16,633−4,190−4,437−3,871−3,958−16,561−17,411
Services and transfers (net)2,4701,3982,3991,9762876969826072,5732,833
Of which: Tourism2,4611,6802,0311,9883405067754892,1102,350
Factor Services and Transfers (net)10−154453226125193245109672663
Of which: Workers’ remittances2,0631,9902,2352,2675235598175112,4102,450
Interest payments on external debt−632−653−618−571−117−169−138−142−565−538
Capital and financial account1,3431,3094,8662,8591,106726451,8563,6793,898
Excluding grants1,2521,1424,4122,6051,093215461,7943,4553,688
Capital account8215444224712489860218204
Financial account1,2601,1554,4242,6121,094245471,7963,4613,694
Direct foreign investment (net)1,3094171,7721,0291912022733581,0241,376
Medium- and long-term loans (net)1456521,623830116−1179887581,7451,764
Short-term capital−193851,232929810−48−694798866718
Errors and omissions 1/−316108−31−13−158247−589281
Overall balance−1,078−1,9841,130−1,115−468−825721,23211677
Reserve liabilities (Fund credits)0001505092224462221399224
Changes in gross reserves10781984−1130965−41603−518−1454−1410−901
Memorandum items:
Current account balance/GDP (percent)−4.8−7.4−8.2−8.4−2.7−2.3−1.2−1.5−7.6−6.6
Reserves (in billions of US$)
Reserves in months of imports of goods 2/
Reserves in months of imports of goods and services 2/
Reserves/total short term external debt (percent) 3/191.3147.2139.7121.6140.5126.0127.6156.3157.7164.4
Excluding nonresidents deposits402.5308.8265.3252.3291.5261.6264.8324.3600.4625.8
Reserves/short-term debt (on remaining maturity)142.7106.9104.798.3120.9100.9111.9105.9126.4141.0
External debt service (in percent of exports of goods and non
factor services), excluding non resident deposits234.5172.4162.2169.1218.1172.3204.9163.1309.1383.7
External medium- and long-term debt (billions of US$)16.416.918.119.119.819.921.422.422.424.7
External medium- and long-term debt/GDP (percent)37.236.940.140.637.340.144.447.845.649.1
External short-term debt (billions of US$)
External short-term debt/GDP (percent)11.311.113.713.510.411.412.412.411.712.1
Debt service ratio (as percent XGS, including IMF)10.511.912.
Goods export real growth (percent)6.6−−4.2−4.4−
Goods import real growth (percent)−
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. dollars)
Total financing requirements9,22610,55110,27010,7286,4057,0227,5216,86710,2169,819
Current account deficit - Capital transfers2,0223,2473,2643,7141,4041,0964705713,5423,099
Current account deficit2,1053,4013,7063,9611,4171,1445686323,7603,302
Capital account8215444224712489860218204
General government1,0171,4191,2331,023120197114186994617
Corporate 1/5,8225,9485,6835,9434,7155,9656,9256,1065,7356,153
Short-term debt5,1875,3574,9165,4804,6215,8136,8305,9605,2515,732
Long-term debt6355917674639315194146483420
Net errors and omissions316−1083113158−2475−8−92−81
Total financing sources9,22610,55110,27010,5785,8966,7987,0786,6458,8179,594.8
FDI (net)1,3094171,7721,0291912022733581,0241,376
Disbursments (debt)6,7918,55510,0378,9056,1926,1387,3356,8889,4169,315
General government7981,7783,1801,5512121221,0861,2092,6662,278
Corporate 1/5,9196,7116,8217,2975,9716,0086,2415,6636,7076,998
Short-term debt4,9465,8486,3556,5545,8555,8956,1325,4506,1566,482
Long-term debt973863466743116112109213551516
Other portfolio flows net (Including Drawdown in commercial banks NFA)48−406−409−320−446−145−13853−213−196
Drawdown in gross reserves1,0781,984−1,130965−41603−518−1,454−1,410−901
Financing gap0001505092244432221,399224
Fund credits 2/0001505092244432221,399224
Memo items
Gross international reserves (in millions of U. S. dollars)9,5097,5258,6557,6897,7307,1277,6459,1009,10010,000
In percent of short-term debt at remaining maturity142.7106.9104.798.3120.9100.9111.9105.9126.4141.0
Government rollover rates (in percent)7812525815217762949649268369
Banks rollover rates (in percent)1531466116112474116146114123
Corporate rollover rates (in percent)1021131201231271019093117114
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)

Q1 04/25/14Q1 Act.Q2 Est.Q3 Proj.Q4 Proj.Annual Rev. Proj.Proj.
Total revenue and grants16,93918,15019,27119,3254,6535,0414,7554,8055,22819,82921,576
Tax revenue14,86416,33317,89718,0354,4064,7304,3164,4425,00218,49019,942
Nontax revenue1,4461,6571,0721,0722143093752141391,0371,311
Capital income0494411111410
Total expenditure and net lending20,34422,74624,82524,7204,8734,8185,3946,6488,26825,12825,292
Total expenditure20,69422,74724,32523,6004,8534,8495,3726,3807,22623,82824,692
Current expenditure16,00319,02319,62419,2804,5204,5004,3715,1835,45419,50819,356
Wages and salaries8,6249,57210,51510,3612,7552,8942,4202,5392,61310,46511,195
Goods and services1,1671,2001,4801,4804444003853852501,4201,357
Interest payments1,2721,4111,4751,4755104423453533351,4751,474
Transfers and subsidies4,9405,9595,8585,8128117641,2221,8692,1035,9595,139
CGC (Food)1,2421,4501,4071,4072642652255244841,4971,484
Energy subsidies2,1112,8542,5002,46010005437401,0702,3531,394
Other expenditure (non-allocated)088029615200038152190190
Of which: repayment of arrears 2/088000
Of which: elections and other political Institutions6060120
Capital expenditure4,6923,7254,7014,3203323491,0011,1971,7734,3205,336
Net lending−351−101,12020−32222681,0421,300600
Of which: public banks’ recap. + AMC operat.costs4105001,1200001151,0351,150500
Central government deficit (-) (excluding grants)−4,033−4,707−5,852−5,609−252222−702−1,991−3,126−5,597−4,028
Central government deficit (-) (including grants)−3,404−4,596−5,553−5,395−219223−639−1,843−3,040−5,299−3,715
Central government deficit (-) (excluding grants, cash basis)−3,529−3,443−5,852−7,074−2,284−1,546−1,396−1,991−2,129−7,062−4,028
Central government deficit (-) (including grants, cash basis)−2,899−3,333−5,553−6,860−2,251−1,545−1,332−1,843−2,043−6,764−3,715
Government Deposits (+ = drawing / - = accumulation)−6752,9610114638−47579−399−507−37496
Banks recapitalization005001,0000003007001,000500
Privatization proceeds 3/3944791,00040000090210300200
Memorandum items:
Central government primary balance (excluding grants, cash basis)−2,256−2,032−3,304−5,599−1,773−1,104−1,051−1,638−1,794−5,587−2,554
Cyclically adjusted fiscal balance−3,774−4,337−5,137−5,059−3,587
Structural fiscal balance−3,733−3,457−4,017−3,909−3,587
General government debt 4/31,44634,23842,12342,90349,230
Nominal GDP70,65876,35083,28182,72820,94620,94620,94620,94682,96690,435
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)

Rev. Proj.Proj.
Total revenue and grants24.023.823.123.423.923.9
Tax revenue21.021.421.521.822.322.1
Nontax revenue2.
Total expenditure and net lending28.829.829.829.930.328.0
Total expenditure29.329.829.228.528.727.3
Current expenditure22.624.923.623.323.521.4
Wages and salaries12.212.512.612.512.612.4
Goods and services1.
Interest payments1.
Transfers and subsidies7.
Other expenditure (non-allocated)
Of which: repayment of arrears2/
Of which: elections and other political institutions0.10.10.1
Capital expenditure6.
Net lending−
Of which: public banks’ recap. + AMC operating.costs0.
Central government deficit (-) (excluding grants)−5.7−6.2−7.0−6.8−6.7−4.5
Central government deficit (-), (including grants)−4.8−6.0−6.7−6.5−6.4−4.1
Central government deficit (-), (excluding grants, cash basis)−5.0−4.5−7.0−8.6−8.5−4.5
Central government deficit (-), (including grants, cash basis)−4.1−4.4−6.7−8.3−8.2−4.1
Privatization proceeds 4/
Memorandum items:
Central government primary balance (excluding grants, cash basis)−3.2−2.7−6.8−6.7−2.8
Structural fiscal balance−5.3−4.5−4.9−4.7−4.0
General government debt 5/44.544.850.951.754.4
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

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

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)
20102011201220131Q 142Q 143Q 1420142015
(In millions of dinars)
Net foreign assets (NFA)9,0785,7497,0543,8652,3431,2381,4084,2735,739
Foreign assets16,02312,89315,41015,02714,53014,55615,89918,87021,880
Central bank13,70511,31513,45512,70112,26512,06213,33116,31519,130
Foreign liabilities−6,946−7,143−8,357−11,162−12,187−13,318−14,491−14,597−16,141
Central bank−623−782−1,134−3,004−3,650−3,918−4,813−5,639−6,499
Net domestic assets (NDA)34,19041,45444,11450,68453,19955,32857,62155,84060,385
Domestic credit46,37053,57758,02265,66068,51870,90573,61572,58978,972
Credit to the government (net)3,2274,6594,7918,79410,51211,55511,74711,93813,317
Central bank net credit−3,250−3,355−3,461−1755741,3921,3691,2531,743
Commercial banks2,9373,5683,6864,1114,7485,5235,7395,2865,757
Credit to the economy43,14448,91853,23156,86658,00659,35061,86760,65165,655
Other items (net)−12,181−12,123−13,908−14,976−15,319−15,577−15,994−16,748−18,587
Money plus quasi-money (M2)40,85444,65248,32751,68652,69753,48855,90656,95862,653
Money (M1)15,86219,00720,00720,87721,39121,51724,11023,00625,307
Demand deposits10,34412,19213,44813,64114,17214,25515,97315,03316,536
Long-term deposits (M3-M2)2,4142,5512,8412,8632,8453,0783,1223,1553,471
Broad money (M3)43,26747,20351,16854,54955,54256,56659,02960,11366,124
(Annual rate of change in percent)
Net foreign assets−5.7−36.722.7−45.2−61.3−74.0−68.810.634.3
Net domestic assets18.121.26.414.914.816.516.810.28.1
Domestic credit16.815.58.313.213.715.
Credit to government (net)−11.444.42.883.574.271.646.735.711.6
Credit to the economy19.613.
Money and quasi-money (M2)
Broad money (M3)
(Annual growth rates, in percent of broad money)
Net foreign assets−1.4−7.72.8−6.2−7.1−6.7−
Net domestic assets13.616.85.612.813.
Domestic credit17.316.79.414.915.817.717.812.710.6
Credit to the government (net)−
Credit to the economy18.413.
Other items (net)−3.70.1−3.8−2.1−2.7−2.7−2.4−3.2−3.1
Memorandum items:
GDP (in millions of dinars)63,05964,69070,65876,35082,96690,435
Nominal GDP growth (in percent)
Reserve money (in millions of dinars)8,4159,40610,98911,07811,07211,13712,47912,14213,356
Velocity (GDP/M2)1.541.451.461.481.461.44
Multiplier (M2/M0)4.864.754.404.674.694.69
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 Assets13,08210,53312,32110,96910,18210,2119,6968,6158,1428,51810,67612,631
Net Domestic Assets−4,707−1,189−1,332−1,757−267671,3822,4572,9953,9611,466725
Domestic credit (net)−2,673222248−921,5721,8093,4934,4675,5736,5573,9153,359
Net credit to government 1/−3,250−3,355−3,461−2,207−1,639−735−1755748358121,2531,743
Credit to Banks5783,5773,7092,1153,2122,5453,6683,8934,7385,7462,6621,616
Other items net−2,035−1,412−1,579−1,665−1,839−1,742−2,111−2,011−2,578−2,597−2,449−2,634
Reserve Money 2/8,4159,40610,9899,2129,91510,27811,07811,07211,13712,47912,14213,356
Sources: Central Bank of Tunisia; and IMF staff estimates.

Includes subscription to IMF/AMF.

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

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

Includes 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-March 2014(In percent, unless otherwise indicated)
200820092010201120122013Mar. 2014
Regulatory capital to risk-weighted assets11.712.211.611.911.88.99.4
Tier 1 capital to risk weighted assets10.610.710.
Capital to assets8.
Asset quality
Sectoral distribution of loans to total loans
FX-loans to total loans3.
Credit to the private sector to total loans71.670.470.667.467.773.272.4
Nonperforming Loans (NPLs) to total loans15.513.213.013.314.915.215.1
Specific provisions to NPLs48.545.959.960.4
NPLs, net of provisions, to Tier 1 capital71.157.960.366.386.384.379.6
Specific provisions to total loans8.
General provisions to total loans0.40.50.5
Return on assets (ROA)
Return on equity (ROE)11.211.710.
Interest rate average spread (between loans and deposits)3.603.493.533.
Interest return on credit7.016.356.
Cost of risk as a percent of credit1.
Net interest margin to net banking product (PNB)58.658.858.657.258.157.958.2
Operating expenses to PNB45.447.246.551.150.347.347.2
Operating expenses to total assets1.
Personnel expenses to non-interest expenses60.461.459.162.661.359.158.7
Trading and other non-interest income to PNB21.722.121.822.520.921.820.8
Liquid assets to total assets31.632.129.826.528.228.427.7
Liquid assets to short-term liabilities124.0119.1104.189.489.292.690.6
Deposits to loans98.9100.994.687.489.589.689.7
Deposits of state-owned enterprises to total deposits13.814.813.812.613.213.013.2
Sensitivity to market risk
FX net open position to Tier 1 Capital1.401.531.351.942.33.42.0
Source: Central Bank of Tunisia.
Source: Central Bank of Tunisia.
Table 8.Tunisia: Schedule of Proposed Purchases Under the Stand-By Arrangement, 2013–15
ReviewAvailability DateActionMillions of SDRsPercent of quota 1/Millions of U.S. dollars 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 review98.60034.415152.569
Second ReviewDecember 15, 2013Observance of end-September 2013 performance criteria, completion of the second review230.52080.461356.697
Third ReviewMarch 15, 2014Observance of end-December 2013 performance criteria, completion of the third review145.08050.639224.491
Fourth ReviewJune 15, 2014Observance of end-March 2014 performance criteria, completion of the fourth review143.25050.000221.659
Fifth ReviewSeptember 15, 2014Observance of end-June 2014 performance criteria, completion of the fifth review143.25050.000221.659
Sixth ReviewDecember 15, 2014Observance of end-September 2014 performance criteria, completion of the sixth review143.25050.000221.659
Seventh ReviewMarch 15, 2015Observance of end-December 2014 performance criteria, completion of the seventh review71.62525.000112.077
Eighth ReviewMay 15, 2015Observance of end-March 2015 performance criteria, completion of the eighth review71.62525.000112.077
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
(Change in percent)
Real GDP growth2.6−
Total consumption4.
Private consumption (residual)
Public consumption4.
Gross fixed capital formation4.1−12.67.1−
Change in stocks216.0−100.3−29.4−42.7−
Exports of goods and nfs 1/5.5−
Imports of goods and nfs 1/−
Inflation (annual average)
(In percent of GDP)
Gross national savings20.916.216.113.612.914.516.218.921.422.9
Consolidated government 2/−1.0−
Rest of the economy14.812.014.114.613.912.612.814.215.816.2
Gross investment25.723.624.322.020.621.121.723.524.726.0
Consolidated government6.
Rest of the Economy19.116.417.617.115.315.214.515.917.017.8
Total consumption80.284.786.
Private consumption64.
Public consumption16.818.118.619.219.518.918.418.017.717.3
Savings-investment gap−4.8−7.4−8.2−8.4−7.6−6.6−5.5−4.6−3.4−3.1
Consolidated government−0.4−3.0−4.7−5.9−6.2−4.0−3.8−2.8−2.1−1.5
Rest of the economy−4.3−4.4−3.5−2.6−1.4−2.6−1.7−1.8−1.2−1.6
Memorandum items
Nominal GDP at current prices (TD millions)63,05964,69070,65876,35082,96690,43597,907106,405115,419125,437
General debt in percent of GDP40.744.544.544.851.754.455.655.854.853.9
External debt in percent of GDP48.548.053.854.057.361.262.662.161.561.0
Central government balance in percent of GDP /3−0.6−3.5−5.7−6.2−6.7−4.5−4.2−3.3−2.6−2.1
Current account balance in percent of GDP−4.8−7.4−8.2−8.4−7.6−6.6−5.5−4.6−3.4−3.1
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
Existing and prospective Fund credit
Stock of existing and prospective Fund credit
In percent of quota0.034.5350.0400.0391.4305.9123.99.4
In percent of GDP0.
In percent of exports of goods and services0.
In percent of gross reserves0.
Obligations to the Fund from existing and prospective Fund arrangements
In percent of quota0.
In percent of GDP0.
In percent of exports of goods and services0.
In percent of gross reserves0.
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 remained practically unchanged until 2013, though it is expected to increase to about 7 percentage points of GDP to 51.7 percent of GDP by end-2014. Notwithstanding the increasing debt, the level continues to be relatively 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 56 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 56 percent of GDP by 2017. The decline of the debt-to-GDP ratio has been somewhat delayed, and it is expected to start declining in 2018, reaching about 54 percent by end-2019, 13 percentage points of GDP higher than in 2010. This debt dynamic reflects the fiscal consolidation envisaged by the authorities (an overall deficit declining to 2.0 percent of GDP by 2019) 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 62 percent of GDP by 2019. The public debt dynamic would initially worsen under all bound tests and then stabilize between 56 percent and 68 percent in 2019. As a result of a one-off 10 percent of GDP shock to contingent liabilities it would reach about 66 percent of GDP in 2016 and slightly decline to about 63 percent of GDP by 2019.1 Under a permanent negative shock to real growth, public debt would remain on an increasing path, reaching about 67 percent of GDP by end-2019. Finally, as around 69 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 71 percent before it declined to 68 percent by 2019. On the other hand, public debt dynamics would be relatively resilient to an interest rate shock, with debt staying at around 56 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, though 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 62.6 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 62.6 percent by 2016 before slightly declining to around 61 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 large real exchange rate depreciation. The external debt ratio remains below 68 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 67–68 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 90 percent of GDP and then declined to 88 percent by 2019.

Annex 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).

Annex. Table 1.Tunisia: Public Sector Debt Sustainability Framework, 2009–19(In percent of GDP, unless otherwise indicated)
Debt-stabilizing primary balance 9/
1Public sector debt 1/42.840.744.544.544.851.754.455.655.854.853.9−1.3
o/w foreign-currency denominated25.024.725.827.928.835.739.340.740.039.038.5
2Change in public sector debt−0.5−−1.1−0.9
3Identified debt-creating flows (4 + 7 + 12)−0.2−−0.6−1.3
4Primary deficit−0.8−
5Revenue and grants29.630.231.530.730.530.630.630.631.131.431.7
6Primary (noninterest) expenditure28.729.333.134.034.533.532.232.832.532.131.9
7Automatic debt dynamics 2/−−0.4−0.8−0.4−0.7−1.2−1.2−1.4
8Contribution from interest rate/growth differential 3/−0.7−1.00.8−2.0−1.5−1.8−2.6−2.6−3.1−3.0−3.1
9Of which contribution from real interest rate0.60.00.1−0.4−0.5−0.6−0.7−0.4−0.8−0.7−0.9
10Of which contribution from real GDP growth−1.3−1.00.8−1.5−0.9−1.2−1.9−2.3−2.3−2.3−2.3
11Contribution from exchange rate depreciation 4/
12Other identified debt-creating flows1.1−0.4−1.0−1.1−−0.1−0.1−0.1−0.1
13Privatization receipts (negative)1.1−0.4−1.0−1.1−−0.1−0.1−0.1−0.1
14Recognition of implicit or contingent liabilities0.
15Other (specify, e.g. bank recapitalization)
16Residual, including asset changes (2-3)−0.3−2.01.3−3.0−−0.20.2−0.40.4
Public sector debt-to-revenue ratio 1/144.6134.6141.1145.1147.2169.0178.1181.7179.3174.3169.7
Gross financing need 5/
in billions of U.S. dollars2. Historical Average10-Year Standard Deviation5. Average
Key Macroeconomic and Fiscal Assumptions
Real GDP growth (in percent)3.12.6−
Average nominal interest rate on public debt (in percent) 6/
Average real interest rate (nominal rate minus change in GDP deflator, in per1.60.20.0−0.9−−1.4−1.4−0.6−1.4−1.2−1.5−1.2
Nominal appreciation (increase in US dollar value of local currency, in percer−0.6−8.4−4.1−9.9−3.9−3.46.2−3.7−6.3−5.0−4.7−4.6−4.5−4.8
Inflation rate (GDP deflator, in percent)
Growth of real primary spending (deflated by GDP deflator, in percent)4.14.511.−
Primary deficit−0.8−
A. Alternative ScenariosDebt-stabilizing primary balance 9/
A1. Key variables are at their historical averages in 2014–2019 7/52.154.755.155.755.756.5−0.1
A2. No policy change (constant primary balance) in 2014–201951.755.757.659.260.361.9−1.3
B. Bound Tests
B1. Real interest rate is at baseline plus one standard deviations51.955.056.557.156.455.8−1.0
B2. Real GDP growth is at baseline minus one-half standard deviation51.755.959.−0.5
B3. Primary balance is at baseline minus one-half standard deviation51.755.457.458.658.458.3−1.4
B5. One time 30 percent real depreciation in 2015 8/51.770.071.070.969.567.9−1.6
B6. 10 percent of GDP increase in other debt-creating flows in 201551.764.465.565.564.263.0−1.5
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).

Annex 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.

Annex. Table 2.External Debt Sustainability Framework, 2009–2019(In percent of GDP, unless otherwise indicated)
I. Baseline ProjectionsDebt-stabilizing non-interest current account 6/
1External debt49.348.548.053.854.057.361.262.662.061.461.0−8.8
2Change in external debt3.4−0.8−−0.6−0.6−0.4
3Identified external debt-creating flows (4 + 8 + 9)−1.8−4.1−5.6−6.3
4Current account deficit, excluding interest payments1.
5Deficit in balance of goods and services2.
8Net non-debt creating capital inflows (negative)−3.7−2.9−0.6−5.6−3.1−3.1−4.5−5.6−6.6−6.9−7.2
9Automatic debt dynamics 1/2.92.8−0.62.1−0.8−1.3−0.2−0.8−1.4−1.4−1.6
10Contribution from nominal interest rate1.
11Contribution from real GDP growth−−1.8−1.2−1.4−2.2−2.7−2.7−2.7−2.7
12Contribution from price and exchange rate changes 2/2.80.8−2.92.6−0.8−
13Residual, incl. change in gross foreign assets (2-3)3.0−4.0−5.42.5−
Gross external financing need (in billions of US dollars) 3/7.28.610.410.911.711.610.
in percent of GDP16.619.622.724.024.810-Year Historical Average10-Year Standard Deviation23.620.219.420.719.718.9
Projected Average
Key Macroeconomic Assumptions
Real GDP growth (in percent)3.1−1.1−
GDP deflator in US dollars (change in percent)−5.7−1.56.3−−1.8−1.6−0.8−0.9−0.7−1.2
Growth of exports (US dollar terms, in percent)−−2.0−0.78.314.
Growth of imports (US dollar terms, in percent)−20.615.56.51.8−0.59.314.
Current account balance, excluding interest payments−1.3−3.3−6.0−6.8−7.2−2.63.1−6.5−5.5−4.6−3.8−2.7−2.5−3.8
Net non-debt creating capital inflows3.
II. Stress Tests for External Debt Rationon-interest
A. Alternative Scenarioscurrent account 6/
A1. Key variables are at their historical averages in 2014–2019 4/57.357.758.359.061.063.7−5.3
B. Bound Tests
B1. Nominal interest rate is at baseline plus one-half standard deviation57.361.362.962.562.061.8−8.7
B2. Real GDP growth is at baseline minus one-half standard deviations57.362.364.965.465.866.5−8.4
B3. Non-interest current account is at baseline minus one-half standard deviations57.362.765.766.567.468.3−9.0
B4. Combination of B1-B3 using ¼ standard deviation shocks57.362.465.165.666.266.9−8.7
B5. One time 30 percent real depreciation in 201557.388.−12.6
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.

Appendix I. Letter of Intent

Tunis, August 14, 2014

Madame Christine Lagarde

Managing Director

International Monetary Fund

700 19th Street, NW

Washington, D.C. 20431


Madame Managing Director,

1. The efforts of our government and the national dialogue process have led to the announcement of a clear calendar for the legislative and presidential elections that will complete the last phase of our political transition to democracy before the end of 2014. We are convinced that the announcement will help reduce investors’ uncertainty and “wait-and-see” attitude, and strengthen the support of our development partners which will manifest itself in the “Invest in Tunisia” conference that will be held in the fall of 2014. With this renewed confidence, the Tunisian authorities remain firmly committed to implementing the economic program and reforms supported by the IMF.

2. Tunisia’s economic situation is still fragile, with significant fiscal and external imbalances and a growth rate that is too low to reduce unemployment and meet the Tunisians’ pressing expectations. In response to the situation, we conducted an extensive outreach campaign to make the public aware of the difficult financial constraints the country faces and the reforms and sacrifices needed to reduce vulnerabilities. To this end, we consolidated the consensus around our economic program by holding a national economic consultation among the representatives of the different political parties, trade unions, and civil society. We remain convinced that the implementation of prudent macroeconomic policies and structural reforms will preserve macroeconomic stability and promote higher and more inclusive growth.

3. The performance under the IMF-supported program was positive, with results in certain areas exceeding the targets despite the difficult national and international context during the transition period. Performance at end-March and end-June 2014 was in line with the projections from the last review. We accelerated the implementation of the programmed reforms and also made up for some delays accumulated during the political crisis that preceded the formation of the current government.

  • Quantitative performance criteria and indicative targets. As initially projected, the quantitative criteria at end-March and end-June 2014 for net international reserves (NIR), net domestic assets (NDA) and the central government primary balance (on a cash basis) were met. We adhered to the continuous zero ceiling on accumulation of external arrears and the indicative target for the non-accumulation of domestic arrears. The quantitative indicative target for social spending and the ceiling on current spending at end-March and end-June 2014 were met.

  • Structural reforms. Six of the seven structural benchmarks (SB) for end-June 2014 were met (Table 2a). In particular, a new haircut system was implemented for loans used by banks as collateral in refinancing operations at the Central Bank of Tunisia (CBT), the proposed new organic law of the CBT was presented to its Board of directors, a new banking resolution framework consistent with international practices was submitted to CBT management, the tax administration modernization plan was finalized, the consolidated balance of the 28 largest public enterprises was completed, and the household support program to accompany the reform of energy product subsidies was put in place (structural benchmark originally set for August 2013). The lender-of-last-resort facility (end-June benchmark that was not completed) was delayed to March 2015 to allow its alignment with the new banking resolution framework. In the interim, an “exceptional and temporary emergency liquidity” mechanism was adopted. The end-July benchmark (Table 2b) for the Banque de l’Habitat (BH) and Société Tunisienne de Banque (STB) restructuring plans will be adopted by the government in August 2014 (Prior Action for completing the fourth review) in accordance with international best practices. Regarding the audit of Banque Nationale Agricole (BNA) (end-July SB), delays on the part of the auditor pushed the completion date back to September 2014.

4. In view of the sound macroeconomic policies already implemented to achieve the main program objectives and the ongoing implementation of the structural reform program (Tables 1, 2a, and 2b), the government requests the completion of the fourth review of the program supported by the Stand-By Arrangement and the disbursement of SDR 143.250 million. The government would also like to modify the performance criteria for NIR, NDA, and the primary balance at end-September 2014 and propose new criteria for December 2014, as well as new indicative targets, as described in the attached Memorandum of Economic and Financial Policies (MEFP) and Technical Memorandum of Understanding (TMU)

5. This Letter of Intent is based on the previous Letter of Intent (LOI) and MEFP approved on April 25, 2014. The attached MEFP outlines the key components of the government’s program and the measures planned by the Central Bank of Tunisia that we intend to implement during 2014. We remain determined to rigorously implement our program, though mindful of the difficulties in the domestic, regional, and international environment.

6. We are confident that the policies described in the attached MEFP are appropriate to the objectives of our economic program, which is designed to achieve short-term macroeconomic stability while laying the necessary foundations for supporting growth and protecting vulnerable groups. We will remain vigilant, and we stand ready to take any additional measures that may be necessary to achieve 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.

7. We authorize the IMF to publish this Letter of Intent and attachments (MEFP, Tables 1, 2a, and 2b) and the related staff report.

Sincerely yours,

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. Timid growth and contained inflation mark Tunisia’s economic performance in a difficult national and international context. A downward revision of the economic growth estimate for 2013 from 2.6 percent to 2.3 percent—and solid performance of the chemical and mining sectors and a slight improvement in the agricultural sector—contributed to 2.2 percent growth (y-o-y) in Q1 2014. For 2014, the annual growth rate is projected at 2.8 percent, with a better agricultural season offsetting weaker-than-anticipated growth in the mechanical and electrical industries (IME) and the tourism sector. The announcement of a clear election calendar will help overcome investors’ “wait and see” attitude, but the short-term risks remain substantial, particularly in the event of renewed security tensions, rising commodity prices, or a deterioration of key European partners’ economic prospects. The increase in food prices and electricity tariffs drove inflation (on a year-on-year basis) up from 5 percent in March 2014 to 5.7 percent in June 2014, but core inflation remained contained, declining to 4.3 percent at end-June 2014. For the rest of the year, inflation will reach a high of 6 percent in September and then slow to 5.5 percent at end year, reflecting a slowdown of food product prices, actions aimed at controlling and monitoring distribution channels, and a tightening of monetary policy.

2. The current account deficit continues to deteriorate. The current account deficit widened to a record 8.4 percent of GDP in 2013, and downside risks remain high in 2014, with a current account deficit of 2.7 percent of GDP in the first quarter of 2014 and estimated at 2.3 percent of GDP in the second quarter. The widening deficit is attributable to increased energy imports due to a decline in national oil production and reduced volumes of gas transiting through the Algeria-Italy gas pipeline. Increased food imports following last year’s weak agricultural production, weak exports of phosphates and energy byproducts, and tepid recovery of tourist revenue added further to the deficit. The implementation of tighter macroeconomic policies, a more flexible exchange rate, and the active promotion of our exports will help reverse this trend and reduce the current account deficit to 7.6 percent of GDP for 2014. On the other hand, gross reserves remain above the program target and represented $7.1 billion (3.5 months of imports) at end-June 2014. During the past three months, and in line with the external imbalance observed, the value of the dinar (TD) vis-à-vis the euro and U.S. dollar has declined, with a 8.6 percent depreciation of the exchange rate during this period, eliminating the appreciation observed during the first two months of the year.

II. Performance Under the Program and Strategy

3. We are fully determined on the rigorous implementation of our economic program in order to preserve short-term macroeconomic stability and lay the foundation for more sustained and inclusive growth. The objectives of our program remain unchanged, and we focus during this review on the following areas:

  • Maintaining macroeconomic stability. Mobilizing resources, controlling current expenditures, and tightening monetary policy, coupled with limited interventions in the foreign exchange market, are needed to maintain macroeconomic stability.

  • Laying the foundation for inclusive growth. Defining the bank restructuring plans and reducing weaknesses in the banking sector, an improved budget structure supported by the implementation of tax reforms, more effective execution of public investment, and an ambitious program of structural reforms are needed to support the development of the private sector, the key engine of future growth.

  • Protecting vulnerable segments of the population by strengthening social protection mechanisms and systematically assessing the social impact of the programmed reforms.

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

Fiscal policy

4. Despite a difficult economic situation, we achieved by a wide margin the 2014 end-March and end-June fiscal objectives. The primary deficit (cash basis) at end-March 2014 stood at 1.3 percent of GDP (compared to 2.1 percent of GDP projected under the program), primarily to the effect of revenue overperformance (0.5 percent of GDP) from taxes collected from oil companies (originally programmed for 2013 but received in 2014), higher VAT revenues, and dividends from non-oil public companies. At the same time, the wage bill at end-March exceeded the programmed level by 0.2 percent of GDP due to the impact of new hiring in late 2013 that was not originally planned; the wage bill will return to the programmed level during 2014 by containing the pace of recruitment and controlling promotions. The 2014 end-March and end-June targets for social spending were achieved, thanks to an increase in the number of beneficiaries covered by the “families-in-need” program and increased educational assistance. Available information on “below-the-line” financing confirms that the 2014 end-June target will be achieved by a wide margin.

5. To reduce pressures on the balance of payments and address our financing constraints, a rigorous fiscal policy continues to be necessary while investment and development spending retain priority. The underlying fiscal position—as measured by the structural fiscal deficit— excluding the effects associated with the economic cycle and exceptional transactions, such as bank recapitalization requirements or the repayment of arrears—was revised to 4.7 percent of GDP in 2014 (compared to a program projection of 4.9 percent of GDP). This improvement of the fiscal position was achieved despite new constraints associated with transfers of 0.3 percent of GDP to the National Retirement and Social Security Fund (CNRPS), additional payments for security personnel (0.1 percent of GDP), additional spending for the elections (0.1 percent of GDP), and additional salaries originating from the sectoral agreements with the various trade unions, finalized in 2011, that had not yet been implemented (0.1 percent of GDP). The improved fiscal position was possible thanks to the savings target set in January 2014 in the execution of the 2014 budget, including savings in unallocated spending (0.5 percent of GDP) and salaries (0.2 percent of GDP). Additional improvements come from increased revenue mobilization achieved during the first semester of 2014, and the implementation of measures already incorporated in the 2014 budget or programmed in the revised budget law adopted in July 2014:

  • Reduction of energy subsidies. We have gradually eliminated the energy subsidies provided to cement companies (through a cumulative 70 percent increase in electricity tariffs and a 94 percent increase in the price of gas over six months) for a budgetary gain of TD 180 million (0.2 percent of GDP). We also increased electricity rates for industrial and low-voltage consumers by 10 percent in both January and May 2014. The most vulnerable segments of the population were protected from the impact of this measure through the introduction of a second social (“lifeline”) tariff for customers consuming less than 100 kWh per month. The price of fuels (gasoline and diesel) also increased by about 6 percent on July 1, 2014, allowing us to generate the TD 100 million of savings envisaged in the 2014 budget law. Additional savings (0.1 percent of GDP) are expected through exchange rate valuation gains (from a greater-than-expected appreciation of the exchange rate in the first half of the year) and a reduction in energy subsidies extended to brick and glass producers. The energy subsidy reduction was accompanied by the implementation of social programs, a household support program, and an increase in the minimum salary (see section C).

  • Control of the wage bill. We are committed to containing the wage bill to the level planned under the program. A salary and promotion freeze this year will offset the additional spending provided under the 2014 supplementary budget law. To reduce the wage bill, we froze new hiring—except for security forces and the education and health sectors—and hiring that was not completed in the year, but had been budgeted for, will not be carried over to next year’s budget. To better prepare the 2015 budget, the Council of Ministers will adopt a decree in August 2014 creating a civil service monitoring and steering committee, and will validate the recently finalized report on the structure of public sector salaries. This report will serve as the basis for a complete reform of the civil service that will include proposals introducing increased mobility between the public and private sector, thereby facilitating the rationalization of public officials’ salaries and control of the wage bill. Technical support will be requested from the World Bank/European Union to refine the evaluation and the recommendations of the report.

  • Revenue. In view of our financing constraints, the additional revenue achieved in the first quarter of 2014 will be saved, bringing the total amount of revenue to 23.5 percent of GDP (0.4 percent of GDP above the programmed amount). This target will benefit from the measures identified during the third review and of new ones adopted in the LFC (Table 3) to further reduce our financing requirements. These measures support the efforts we have made to revise the presumptive tax regime and combat tax evasion (see Section B).

6. We also remain committed to taking additional measures to correct any deviation from the budgetary objective, including reducing current spending (i.e., goods and services and subsidies), which was a source of budget overruns in the past. Investment expenditure and social spending (excluding subsidies) will be preserved, and will not be constrained by our fiscal consolidation strategy.

7. The “new national borrowing campaign” and additional external budgetary support will serve to offset lower-than-anticipated external financing at the end of the year. The national borrowing campaign—initiated in May 2014 with government securities of small denominations – resulted in large subscriptions by the public and banks and mobilized TD955 million. Greater donor support than expected— agreement on a U.S. guarantee allowing a $500 million international market issuance (i.e., $200 million more than initially programmed) and bilateral support from Algeria ($250 million, of which $150 million is in direct budgetary support)— will help offset lower sukuk issuance (the Islamic Development Bank is expected to guarantee $120 million, i.e., $380 million less than initially programmed).

Monetary policy

8. The growth of monetary aggregates remains broadly in line with the program targets. The money supply (M2) increased by 8.5 percent (year on year) during the first five months of 2014 due to weak mobilization of deposits. The criterion for net domestic assets at end-March and end-June 2014 was met by a wide margin, primarily due to a more than expected reduction of net credit to the government during the quarter. However, bank refinancing from the CBT increased and remains high at end-June (TD 4.8 billion excluding open market operations (OMO)—primarily reflecting seasonal cash withdrawals and a worsening current account deficit and its restrictive impact on banks’ liquidity.

9. An immediate tightening of monetary policy is crucial to reduce future inflationary pressures. Until now, controlled core inflation, a negative output gap (2 percent), and anemic credit to the private sector (7.6 percent year on year at end-May) justified the central bank’s current policy, which normalized the market rate at roughly 4.75 percent (25 basis points above the policy rate). However, the increase in the minimum salary, which impacts 900,000 Tunisians (including retirees), combined with the increase in electricity and fuel prices, a negative real interest rate, and the depreciation of the exchange rate observed in recent months indicate that Tunisia is facing increasing inflationary pressures. To this end, we have raised the CBT’ benchmark policy rate by 25 basis points (to 4.75 percent) on June 25, 2014 to contain inflationary pressure, and we are prepared to raise it further if pressures persist, including due to a larger external imbalance.

10. We will continue our strategy of reforming the monetary policy framework. The CBT continues to reduce the risk to the CBT’s balance sheet by increasing from 10 percent to 25 percent the haircut on the valuation of loans used as collateral, which will take effect in July 2014, and increasing the share of government securities used as collateral from 20 percent to 40 percent (structural benchmark at end-December 2014). We plan to further strengthen the guarantee system by improving the current haircut system through the use of rating instruments. We have also begun a study on valuing government securities at market price instead of nominal value; the study will be completed by September 2014.

11. The implementation of a lender-of-last-resort facility is needed to accompany the tightening of the eligibility criteria for CBT refinancing. The lender-of-last-resort facility initially envisioned for end-June 2014 (structural benchmark) cannot be completed until March 2015 in view of the need to define further the eligibility criteria and liquidity standards, and to establish the new legal and institutional banking resolution framework. In the interim, a new “exceptional facility” was implemented on July 1, 2014; it will enable any solvent institution that is unable to provide top-tier collateral to access the facility by providing second-tier collateral, but at a penalty rate (200 basis points above the lending facility), while being subject to more intrusive banking supervision and to a precise restructuring plan—approved by the CBT—for improving the bank’s liquidity position.

12. The monetary policy transmission channel will be strengthened and access to financing improved by modifying the excessive lending rate system. Following the recommendations of the study on the impact of amending the law on excessive bank lending rates—conducted with World Bank assistance—the CBT Board has launched a broad consultation with the relevant ministerial departments to amend the law, if needed, by December 2014. This policy change will strengthen the monetary policy transmission channel and facilitate access to credit for small and medium-sized enterprises.

13. The central banking law of the CBT is currently under revision. A comprehensive set of new amendments will confer greater autonomy on the CBT (including institutional, operational, human resources, and financial autonomy), define its mission more clearly (by clarifying its objectives, mission, and instruments), and improve its governance, transparency, and accountability for. The revised draft law—which benefited from IMF technical assistance—was presented to the CBT board of directors in June 2014 (structural benchmark) and will be adopted by the government by September 2014.

Exchange rate policy

14. The widening of the current account deficit increased pressures for a depreciation of the exchange rate. The 8.6 percent depreciation of the dinar since March eliminated the appreciation seen at the beginning of the year, which had resulted from an improved political situation and the rigorous implementation of regulations governing holders of professional accounts in foreign currency. This initial appreciation occurred despite CBT interventions (currency sales), which were substantial (50 percent of the foreign currency supplied to the foreign exchange market in May and reduced to $290 million in June 2014) and necessary to ensure that external payments for energy imports were properly and regularly executed. In view of the wider current account deficit and need to preserve our official reserves, we will continue our policy of a more flexible exchange rate by:

  • Further limiting CBT interventions on the foreign exchange market. We are committed to refraining from selling foreign currency to the exchange rate market, except for smoothing substantial exchange rate fluctuations that would result if large orders related to energy transactions were not satisfied. To preserve and strengthen our official reserves, we expect to intervene by buying foreign currencies on the market, particularly during periods when there is less demand associated with energy imports. These purchases will allow us to rebuild our reserves, reduce the overvaluation of the exchange rate (7 percent to 10 percent) and the banks’ structural liquidity deficit.

  • Increasing swap transactions. To increase the supply of foreign exchange in the market, we will revise the functioning of the swap market to allow banks to initiate swaps with the dinars and other currencies with the CBT.

  • Introducing weekly foreign currency auctions in December 2014 (structural benchmark). In this regard, the implementation of the electronic platform providing interconnection between banks and the entry into force of the market-maker-agreement provide us with real-time information on the quotations of the different participants in the exchange market. However, the introduction of the auction mechanism also requires the implementation of an efficient information system enabling the CBT to centralize flows of projected settlements in foreign currency and providing a clearer view of cash flows.

15. Our development strategy will remain open and based on free trade. We have adopted measures aimed at reducing the widening trade deficit through increased promotion of our exports and a rebalancing of our energy mix. As provided by World Trade Organization rules, we will not consider new restrictions or import surcharges except as a last resort, after exhausting market solutions that preserve adequate incentives, and only with very clear criteria, announced in advance, for removing them.

B. Laying the Foundation for Inclusive Growth

Financial sector policies

16. The condition of the Tunisian banking system remains fragile. Although the indicators at end-March 2014 shows an increase in banks’ net profits (12 percent year on year), primarily attributable to financial fees and interest margins, the increased cost of deposits and weak demand for new credit could reduce further banks’ profitability. Our gradual transition to international standards, including a more rigorous application of haircuts on loan collateral, contributed to a 14 percentage point increase in the provisioning rate, and a reduction of the capital adequacy ratio to 9 percent by end-December 2013, and pushed seven banks below minimum capital requirements required by regulations (six banks are below that threshold since end-March 2014). Asset quality continued to deteriorate slightly, with the ratio of nonperforming loans increasing from 14.9 percent of total loans at end-2012 to 15.2 percent at end-December 2013 and 15.1 percent at end-March 2014 (or 20 percent, if we include loans transferred to bank-affiliated asset management companies).

17. The banking strategy adopted by the Tunisian government calls for refocusing the government’s role on its principal mission, and rationalizing the number and influence of publicly held banks in the banking sector. This strategic approach, which was presented to banks and civil society in April 2014, is based on the need to guarantee universal public banks’ financial soundness, establish a new governance framework, strengthen institutional capacities, and improve the legal framework. Based on this strategy, the plans for restructuring the banks—for which the audits were completed (STB, BH)— will be finalized and adopted by the government in August 2014 (Prior Action), in line with international best practices as described in Annex I. The audit of the Banque Nationale Agricole (BNA) could not begin until June 2014 because of the need to find a new auditor; the audit will only be completed by September 2014 (rather than July as anticipated in the program), with a restructuring plan based on international best practices finalized in November 2014 (new structural benchmark). For the time being, our action plan for the public banks is based on:

  • strengthened governance. The implementation of the new decree allowed greater autonomy with respect to the role of the State, including in the recruitment and appointment of “competent” members for the board of directors. We plan to change the compensation system of banks’ board members in September 2014 and ensure that public banks are operating on a commercial basis and follow best management practices.

  • recapitalization of public banks. This amount will come first from private shareholders, and public funding will be used only after the losses have been distributed among the existing shareholders (private and public). The public funds for the recapitalization of banks would be provided in the form of non-negotiable bonds (which would not be eligible for central bank refinancing). For the BNA, its capital will be at the level required by applicable regulations by end-2014. The plan for restructuring of the STB and BH will ensure that both banks will meet the minimum capital requirement of 10 percent in December 2014. These would imply total recapitalization costs of TD 1 billion (1.2 percent of GDP), which is the amount already budgetized.

  • creating an Asset Management Company (AMC). Technical consultations on the proposed law—which was prepared with World Bank technical assistance—are at the final stage and we will submit the draft law in line with international best practices with the expectation to be adopted by the National Constituent Assembly in September 2014 (new structural benchmark), which will help ensure creation of the AMC in 2014. The new proposed law, which was initially conceived for the tourist sector, will provide for the creation of a universal AMC with clear eligibility criteria that will limit the contours of its mandate (e.g., amount of commitments, loans guaranteed by collateral). This law will be aligned with international best practices through: (i) the adoption of clear, transparent governance rules accompanied by financial and operational autonomy; and (ii) the implementation of specific powers to accelerate the resolution and restructuring of nonperforming loans. In view of the importance of the tourist sector and its financial difficulties (its share of nonperforming loans has doubled since 2009, to about 54 percent of the total), we plan initially to limit AMC operations to tourist loans. The capitalization of the SGA—estimated at TD 150 million in the supplementary budget law—will adhere to the business plan prepared with support from the World Bank, and will be closely coordinated with the bank recapitalization program, in particular of public banks. We will not expand the AMC operations to other sectors until an in-depth study on the potential budget costs has been completed. Moreover, in December 2014, we will submit to the Constituent Assembly amendments to the law on asset recovery companies, which would enable them to be more effective in their actions.

18. Banks compliance with prudential standards is essential. In this regard, three of the seven banks that do not comply with the solvency ratio have submitted recapitalization plans that would bring their solvency ratio to the level required by end-December 2014. The other banks, which are all publicly owned, will comply with the regulations by end-December2014 (new structural benchmark), in line with the restructuring plan. Also, we have imposed monetary sanctions on all banks that fail to comply with the current liquidity ratio pending the adoption of a new liquidity ratio (which will include off-balance-sheet operations) that was announced to the banks in March 2014 and will take effect in September 2014. The Directorate General of Bank Supervision (DGSB) will establish new procedures during 2014 to ensure that “fragile” banks are subject to tightened supervision and more frequent monitoring.

19. The reform of banking supervision continues to be an absolute priority. With technical assistance from the IMF, we have prepared in June 2014 a three-year plan (including prerequisites), adopted by CBT management, to establish a system of banking supervision that is based on an assessment of risks based on an individual and a consolidated basis. Our short-term priorities are to:

  • Strengthening DGSB human resources. We are aware that the success of our action plan will depend on the human and financial resources provided to the DGSB. Accordingly, we hired 12 individuals in 2013, representing about one-fourth of the envelope expected for 2012–14, and we plan to double this figure in 2014 and change the BCT hiring criteria to allow the hiring of experienced, qualified personnel (new structural benchmark), above all to strengthen on-site inspection. The DGSB’s effectiveness will be further strengthened by formalizing its powers and responsibilities as soon as possible and by instituting clear rules on relations between the different organizational units within the DGSB by March 2015.

  • Improving reporting. By June 2014, the CBT, with the support of IMF technical assistance, will finalize the Uniform Bank Performance Reporting (UBPR) benchmarking indicator—used jointly by the DGSB and the Directorate General of Financial Stability and Risk Prevention (DGSFPR)— which will be available 60 days after the end of each quarter and provide a simplified risk rating system by December 2014. In addition to this mechanism, the new system of accounting, financial, and institutional data of banks will be put in place—with IMF TA assistance—in December 2014 (structural benchmark) and automated in June 2015.

  • Strengthening inspections and integrating on-site inspections into the banking supervision process. Our inspection plan provided for 14 inspections this year (compared to five in the previous year), and we plan to implement formal procedures by December 2014 which will define the criteria for the inspection plan and structure of teams. The coordination between the different units of the DGSB—particularly between on-site and off-site inspection— and with other areas of the CBT (e.g., DGSFPR) will also be strengthened.

  • Strengthening the internal control of banks. Following articles 52 and 53 of Circular 2006–19 on internal control, the DGSB asked credit institutions to provide it with reports on internal control and risk management, in accordance with applicable regulations. Based on the reports submitted for 2013, the DGSB will conduct a diagnostic assessment of the credit institutions’ rating systems and ask institutions with weak systems to submit action plans by end-September 2014.

20. A banking crisis and resolution management mechanism in line with international best practices is being finalized. A draft banking law was prepared with technical assistance from the World Bank and IMF to strengthen bank supervision and regulation in Tunisia and establish a sound legal framework for the resolution of insolvent banks. The proposed law was submitted and presented to the CBT management in June 2014 (structural benchmark) and will be adopted by the government in September 2014. The proposed amendments to the draft central bank law, including the establishment of a lender of last resort facility, will strengthen the banking resolution framework. In addition, the provisions on an operational structure and legal framework appropriate to the establishment of a deposit guarantee fund are being drafted with technical assistance from the World Bank.

Fiscal reform

21. The structure of public expenditure must be improved to support medium-term growth and rebuild fiscal buffers. In addition, our medium-term fiscal consolidation strategy will be accompanied by fiscal reforms—tax policy, tax administration, public expenditure management, reform of public enterprises, effectiveness of public investment—which remain essential to support growth.

22. The equity, efficiency, and transparency of the tax system—and the mobilization of revenues—continue to be the key pillars of our tax policy. All the existing tax laws and codes will be consolidated into a single tax code in September 2014 (structural benchmark) so as to increase the transparency of the tax system. Following consultations held in 2013 and discussions in the 2014 national economic dialogue, the government’s tax policy strategy will be presented at the National Tax Consultations to be held in September 2014; an action plan will be adopted by the Council of Ministers in October 2014 (new structural benchmark). In the context of a comprehensive tax reform, we plan to continue revising the corporate tax (CIT) to achieve gradual convergence of the off-shore and on-shore sectors over the coming years, and announce it according to a clear timetable and in line with improvements in tax administration (the difference between the tax rates in these two sectors was reduced by half in the 2014 budget). For the time being, and for the 2015 budget law, our actions will focus—with IMF technical assistance—on reforming the VAT and excise tax and simplifying the existing presumptive tax system.

23. The reform of the tax administration will be governed by the implementation of the new modernization plan. This plan, which was adopted by the Ministry of Economy and Finance on August 7, 2014 (structural benchmark of end-June), aims to establish a unified tax administration and strengthen audit and evaluation mechanisms. The implementation of the plan will be aided by the creation of a new unit responsible for modernization within the General Directorate of Taxes (DGI), and supported by IMF technical assistance. The strengthening and restructuring of the Large Taxpayers Unit (LTU) is ongoing, with the integration of all tax units and the adoption of a selective approach to tax audits (preparation of targeted criteria and objectives). The tax audit function will be strengthened by lifting bank secrecy provisions that currently hinder the tax administration’s communication rights and the collection and use of information for tax audit purposes (including for the presumptive tax system), while protecting taxpayers’ rights and recouping information collected from the health insurance and social security system. We are determined to combat tax evasion through new regulations requiring that large transaction amounts be paid by check, introducing a tax certificate for transactions with the government (provision of goods and services), and strengthening the risk management unit within the customs administration.

24. The monitoring of public enterprise performance was improved. The final report prepared by the Public Enterprise Monitoring Committee on the financial position of 28 public enterprises—representing 80 percent of the public sector’s turnover—indicates a substantial financial deterioration of the sector between 2010 and 2012, with a deficit of 1.2 percent of GDP (including 24 enterprises in a deficit position). In response to this evaluation, rehabilitation measures have been identified for the most vulnerable public enterprises (i.e., Tunisair) and are being examined on a case by case basis, depending on needs. In addition, we are developing elements of a new regulatory framework for the governance of public enterprises, which would provide greater independence and responsibilities to their boards of directors and management. For the enterprises receiving subsidies for energy and food products, the government is committed to regularly provide budget appropriations and conduct ex-post verification once financial accounts are closed. Following the recommendations of the audit report for the energy companies presented to the Council of Ministers in August 2014, the priorities for the energy companies will focus on improving recovery and management of expenditures and, in the context of the 2015 budget, eliminating cross-subsidies for the Société Tunisienne de l’Électricité et du Gaz (STEG) and the Société Tunisienne des Industries de Raffinage (STIR), which will import their energy requirements directly instead of going through the refinery company Entreprise Tunisienne d’Activites Petroliere (ETAP).

25. Efforts to improve public expenditure management continue. All payment orders authorized during the carryover period for 2013 were paid, and the budget execution statements we plan to prepare—with IMF technical assistance—will facilitate more regular reconciliation of authorized, budgeted, and disbursed expenditures. The draft of the new functional budget classification was completed in September 2014, facilitating greater transparency and comprehensiveness in the budget preparation. We also plan to review the completeness and quality of budget documentation and are requesting technical assistance from the IMF staff for a report on financial and fiscal risks. Our immediate efforts led to the creation of a National Public Accounting Standards Board to introduce double-entry bookkeeping and focus on the new budget nomenclature (programmatic, budgetary, and accounting). Also, the draft organic law, prepared with technical assistance from the European Union and France, will be presented to the Council of Ministers in September 2014, and will lead to greater flexibility in managing appropriations (including in the control a priori) and greater accountability of managers.

26. Improved execution and effectiveness of public investments is needed to generate inclusive growth. Public investment continues at the rate observed during the past two years with a budget execution rate of 7 percent during the first quarter of 2014. The new procurement rules, which are consistent with the recommendations of the World Bank technical assistance program, took effect on June 1, 2014 and will considerably simplify and modernize procedures and accelerate public investments in the regions. We remain convinced that the professionalization and decentralized management of public projects in the regions and the implementation of procedures to remedy land deeds issues in the project preparation phase will help speed the execution of public investments. In that context, following the visit of 24 governorates, the regional project monitoring committee will present its recommendations on the main constraints to the implementation of regional investment projects to the government in July 2014.

Structural reforms

27. Our structural reform program will continue to focus on improving the business climate and promoting a competitive private sector that can generate inclusive growth. To this end, we will step up our efforts, inter alia, to simplify and clarify regulations for investments, promote competition, and facilitate trade.

28. The investment code, prepared with technical assistance from the World Bank following consultations with civil society and donors, was withdrawn from the Constituent Assembly for revision and its further simplification. The government considered the new code— which was intended to encourage private investment through a more transparent and efficient regulatory framework and the rationalization of incentives—as too complex and as leaving too much discretion to the implementation decrees. Nonetheless we remain convinced that a new, simplified investment code is needed. Accordingly, we plan to introduce a list of measures in September 2014—intended to supplement the current code—to reduce restrictions on investments. These measures—approved by the Council of Ministers—will be added to the current code in December 2014.

29. The passage of “economic” laws—deferred due to the ANC’s busy schedule, which focused on the electoral calendar—is a priority for our government. We are committed to taking the necessary measures to advance the legislative calendar to pass the following laws in particular:

  • The collective proceedings law (Law 95). In parallel with the reform of the banking law, we have embarked on a process to pass a new law on collective proceedings (commercial bankruptcy proceedings) —prepared with World Bank assistance. The law will modernize and simplify the process of restructuring companies and liquidating insolvent companies. We are committed to ensuring that the new law sets out clear rules regarding the government’s status as preferred creditor and to grant rights to private creditors to vote on reorganization plans.

  • The competition law. The proposed law—submitted to the Constituent Assembly in 2013—will be reviewed by the Assembly during the summer of 2014. The final version of the competition law is intended to reduce the government’s intervention in the economy, reduce excessive regulation, and increase competition between companies.

  • The Public-Private Partnership Law. The proposed law—which will facilitate private concessions—is now being reviewed by the parliamentary committees and will be adopted as early as possible in 2014.

30. In parallel with the amendment of the relevant laws, we are continuing to simplify administrative procedures. To this end, we have rationalized a number of administrative procedures that burdened the private sector in the areas of transport, customs, and exports. We remain committed to continue on this path based on the expected outcomes of the regulatory “guillotine” project.

31. The integration of Tunisia’s economy in the global economy is essential to generating more inclusive growth. We remain committed to promoting trade, including the reduction of tariff and nontariff barriers and enhancement of commercial agreements with neighboring and African countries. Discussions were initiated with the European Union in 2012 in the context of negotiating a comprehensive free trade agreement (DFTCA). To further improve the integration of Tunisia’s economy into the global economy, the action plan developed as part of the export development program (supported by the World Bank PDE III program) will allow, inter alia, to improve the logistics at the Radès port (Tunisia’s main port) and build a new deep-water port at Enfindha.

32. We are committed to reducing obstacles to a proper functioning of the labor market. The technical committees (work and professional relations, social protection, employment, regional development, and investment) established to implement the social contract signed on January 14, 2013 with employers and trade unions, have begun their work, which will be presented during the national economic dialogue. A broad consultation will be held to discuss the new employment strategy, which is expected to culminate in labor market reforms, including an evaluation of “flexi-security” in labor relations, and to reduce the structural asymmetry of skills prevailing on the market. In regard to programs to promote jobs, the support programs for small and medium-sized enterprises financed by the World Bank and the micro-project programs financed by the Banque Tunisienne de Solidarité and the Fonds National de l’Emploi will create jobs for young Tunisians. We have also started developing a professional training program for unemployed university graduates, and an initiative that provides incentives for firm creation in disadvantaged regions.

33. Reliable statistical information is critical to monitoring and evaluating macroeconomic policies and implementing social programs. In this context, we are undertaking a comprehensive diagnostic assessment of our statistics system in cooperation with Eurostat, and we plan—with the support of IMF technical assistance—to strengthen our institutional mechanism and the system used to produce the national accounts (particularly the quarterly demand side), monetary statistics and the balance of payments. This will enable us to expand the regular publication of the results of surveys on current economic, employment, and household living conditions. In parallel, we started working on a legal framework to ensure and protect the independence of the National Statistics Institute (INS).

C. Protecting the Most Vulnerable

34. Protecting the most vulnerable is our absolute priority in implementing fiscal and structural reforms. In addition to the measures already included in the 2014 budget law (a social housing program, increase in the income tax deduction for the poorest households, and the introduction of an additional lifeline electricity rate), the agreement with trade unions will increase the guaranteed minimum salary (SMIG and SMAG) by about 6 percent, effective retroactively from May 1, 2014. This increase will benefit 900,000 individuals (primarily private sector workers, including roughly 600,000 retirees). In order to further improve our targeting system for social benefits, we completed an evaluation of school assistance programs which showed a 25 percent “leakage” to non-poor; we will present the conclusions of the evaluation of the needy families/health benefits card program in September 2014. We accelerated the pace of work on the unique social identifier, which is now available to 7.5 million Tunisians and will be used to create a new “targeting system” that will be refined over the coming months as “exclusion and inclusion errors” are corrected. In the meantime, in view of the imminent fuel price increase and Ramadan, we put in place the following household support program (end-June structural benchmark):

  • expansion of the existing program of assistance to families in need (PNAFN) from 220,000 in 2013 to 250,000 beneficiaries in 2014; the system currently benefits 235,000 individuals;

  • increase of TD 10 for all beneficiaries of the PNAFN (representing a 10 percent increase) to an amount of TD 120 month/family. Families having children at schooling age will receive an additional TD 10 per month per child (up to three children per family);

  • provision of one-time, temporary assistance of TD 80 (TD 40 in June and TD 40 in July) for the 235,000 PNAFN beneficiary households and for an additional 50,000 poor households identified by the regional committees; and

35. The deficit of the pension system calls for urgent action. The national retirement and social security fund (CNRPS) shows an annual deficit of TD 450 million (about 0.5 percent of GDP) in 2014 and currently has no cash reserves. To address this deficit, the government decided to provide a TD 250 million transfer in the 2014 revised budget law 2014. In the context of the social pact, we will review long-term scenarios for reform of the retirement and health insurance system in order to ensure the system’s long-term sustainability. These studies will be supported by a support program and technical assistance financed through the transition fund.

Annex. Principles for Successful Restructuring of Public Banks

The best experiences with restructuring plans include a clear, specific timetable and the following pillars:

Financial restructuring

The purpose of financial restructuring is to restore solvency (net assets) by rehabilitating and strengthening banks’ balance sheets.

  • Existing and new fit-and-proper private shareholders should be asked to contribute to recapitalization through cash injection. Existing shareholders will bring the bank to solvency if needed, and public funds can be used to bring the bank back to minimum capital requirements once sources of private capital have been exhausted.

  • Before any public funds are injected, the shares of existing shareholders have to be diluted or the overall loss has to be distributed amongst them.

  • The government should seek authorization in a supplementary budget if the government’s share of the recapitalization costs is higher than the budgeted amount.

Operational restructuring

Operational restructuring aims at creating the conditions for restoring banks’ sustained solvency and profitability.

  • To ensure good corporate governance, Bank Board members representing the State and bank managers are fit and proper and professionally suitable; and a relationship framework should be signed to govern the interaction between the Finance Ministry and each state-owned bank. The latter will help ensure no political interference in banks’ commercial operations.

  • To ensure effective governance and communication in the use of public funds for bank recapitalization and restructuring, the following requirements will need to be set:

    • a. A high-level committee comprising the Minister of Finance and the CBT Governor should be established to coordinate the process, including approval of the overall strategy and monitoring of progress;

    • b. The committee should appoint a spokesperson to be in charge of the communication strategy of the recapitalization and restructuring process, to ensure timely and consistent information to the public;

    • c. The State’s interest in the banks should be managed in a dedicated, specialized unit set up at the Ministry of Finance.

Table 1.Tunisia: Quantitative Performance Criteria and Indicative Targets 1/2/
Cumulative Flows Since the Beginning of 2014
Mar 2014Jun 2014Sep 2014Dec 2014Mar 2015
Prog. 01/24/14PC w/ AdjustersActualPC StatusProg. 04/25/14Est. PC w/ AdjustersEst./Act.PC StatusProg. 04/25/14Revised PCProg. 04/25/14New PCIT
Quantitative Performance Criteria(Millions of Tunisian Dinars)
1. Floor on the primary balance of the central government (cash basis excl. grants)−2,796−1,104Met−2,806−2,155Met/TBC−4,007−3,793−5,609−5,587−1,233
2. Ceiling on net domestic assets of the Banque Centrale de Tunisie (Stock)3,9524,3272,457Met4,0864,8402,995Met/TBC4,0713,9611,1731,4662,549
(Millions of US$)
3. Floor on net international reserves of the Banque Centrale de Tunisie (Stock)5,3085,0675,180Met4,7544,2684,342Met/TBC5,2755,4877,0666,8776,579
Continuous Performance Criteria(Millions of Tunisian Dinars)
4. Ceiling on the accumulation of new external debt payment arrears by the central government00Met00Met00000
Quantitative Indicative Targets(Millions of Tunisian Dinars)
5. Ceiling on Current Primary Expenditure4,2534,058Met8,2678,085Met/TBC12,79612,91517,81518,0334,638
6. Floor on Social Spending 3/229282Met562624Met9009621,3501,412310
7. Ceiling on the accumulation of new domestic arrears00Met00Met00000
Program assumptions on which adjusters are calculated in case of deviations
External Financing of the central government on a cumulative basis (in US$ million) 4/5442307073521,16314382,7712647
of which: Multilateral (excluding IMF), bilateral and budget grants4502015282417188129681534
Public debt service (interest and amortization) on a cumulative basis (in US$ million)213203506459708662958913
Bank recapitalization (in million TD)000003000700
Privatization receipts (in million USD)0000000
Resident deposits at the BCT (in million USD) 5/1,8541,8521,8521,6071,6071,6071,6071,607
Program exchange rate TD/ U.S. dollars1.552351.552351.552351.552351.552351.55235

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.

Disbursment, includes project loans and capital market access but excludes IMF budget support.

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.

Disbursment, includes project loans and capital market access but excludes IMF budget support.

At program exchange rate.

Table 2a.Tunisia: Structural Benchmarks for the Period January-June 2014
ObjectiveDateNew DateComments
Structural benchmarks
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-14MET. A new banking law was prepared with technical assistance from the IMF and World Bank and submitted to CBT management.
Submission to the CBT board of the draft of the new central banking law in line with best international practicesFinancial sector stabilityJun-14MET. A new central banking law in line with international practices was prepared with technical assistance from the IMF and presented to the CBT board on June 25, 2014
II. Fiscal policy
Adoption by the Ministry of Finance of a plan to modernize tax administrationExpand tax baseMar-14Jun-14MET with delay. A plan to modernize tax administration was completed with technical assistance from the IMF and adopted by the Ministry of Finance in August 2014.
Unification of all public accounts into a Single Treasury Account (excluding accounts for project loans) at the CBTBetter monitoring of the fiscal managementMar-14MET. All accounts of the government (excluding accounts for project loans) were consolidated in a Single Treasury Account.
Finalize the audit of the electricity company (STEG) and of the petroleum refinery company (STIR)Lower fiscal risksMar-14MET. The first report on the two companies’ operations 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 the generalized energy subsidiesProtecting the most vulnerableMar-14Jun-14MET. A household support program was put in place July 2014 ahead of the fuel price increase.
Prepare a consolidated balance sheet for the 20 main public enterprises (2010-12).Better assessment of risksJun-14MET. A report with the balance sheet for the 28 largest firms was prepared.
III. Monetary and exchange rate policies
Implementation of an electronic bank interlinking platform and launch the Market Makers AgreementGreater exchange rate flexibility and increase of the banking liquidity on foreign exchangemid-Mars 2014MET. The electronic platform is online and the market maker agreement is effective.
Presentation to the Central Bank board of the impact study for removing the upper limit of excessive rates for enterprises and to modify it for consumersFinancial sector stability and better transmission of monetary mechanismsMar-14MET. The impact study, conducted with support from the World Bank, was presented to the CBT board March 26, 2014.
Implement an increase of the haircut for loans used as collateral for refinancing operations to at least 25%.Enhancement of the monetary transmission mechanismMar-14Jun-14MET. A new regulation was put in place March 28, 2014 and communicated to the banks. The haircut system is effective since July 1, 2014
Establishment of the lender of last resort facilityFinancial system stability and better crisis managementJun-14Mar-15NOT MET. An interim, “exceptional” system was adopted June 25, 2014. The lender of last resort facility – in line with the bank resolution framework - will be put in place in March 2015.
Table 2b.Tunisia: Prior Actions and Structural Benchmarks for the Period July–December 2014
ObjectiveDateNew DateComments
Prior Action
Adoption by the government of the restructuring plans for BH and STB in line with international best practices as described in Annex IFinancial sector stability
Structural Benchmarks
I. Financial sector
Completion of the financial audit of the Banque Nationale Agricole (BNA)Financial sector stabilityJul-14sept.-14In progress. The selection of a new auditor delayed the completion of the BNA audit to end-September 2014.
Creation of Asset Management Company (AMC) through the publication in the Official Journal of the Law on the AMCFinancial sector stabilitySep-14
Adoption by the Government of the BNA restructuring planFinancial sector stabilityNov-14
Double the number of DGSB supervisors hired in 2013 and revise the CBT hiring criteria to facilitate the hiring of qualified personnelFinancial sector stabilityNov-14
All banks, including public banks, to comply with minimum solvency ratio required by the existing regulations (10 percent)Financial sector stabilityDec.-14
Development and implementation of the new reporting and rating system for banksFinancial sector stabilityDec-14In progress. Work on the new rating and reporting system is in progress with technical assistance from the IMF.
II. Fiscal policy
Government approval of the new tax codeEnhance transparency of the tax systemSep-14In progress. All new rules will be included into the new code.
Following national consultations on taxation, adoption of a tax reform plan covering direct and indirect taxes by the Council of Ministers.Expand the tax base and improve equityOct.-2014
III. Monetary and exchange policies
Ensure that the proportion of the refinancing volume at the CBT backed by government securities is at least 40 percent for each bankEnhancement of the monetary transmission mechanismDec-14Completed. Circular issued in March 2014 and will take effect on January 1, 2015
Implementation of the weekly foreign exchange auction mechanismGreater exchange rate flexibilityDec-14
IV. Structural reforms/private sector development
Decrees for implementing the new investment code, in line with the objective of protecting market access, reducing restrictions to investments and rationalizing incentivesSupport for balanced growth driven by the private sectorSep-14The decrees will not be submitted to Parliament because the government decided to withdraw the draft law on the investment code from parliament; New measures for investment promotion will be taken. They will eventually be included in the new code.
Table 3.Tunisia: Compensatory Fiscal Measures, March/June 2014
In Millions of TDIn Percent of GDPIn Millions of TDIn Percent of GDP
Tax policy1000.121300.16
Alcoholic beverages: 8 percent increase excises taxes200.02
Cigarettes: 10 percent increase excise taxes500.06
Vehicle taxes 1/300.04150.02
Tourism taxes750.09
Stamp taxes300.04
Other tax measures incl. exceptional taxation on revenues100.01
Tax administration1600.19
Tunisie Telecom: enhanced tax control1100.13
Expedite judiciary procedures500.06
Current expenditure400.05
Decreased energy subsidies 2/400.0570.01

In March: at the moment of resale for cars imported by tunisians leaving abroad.

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

In March: at the moment of resale for cars imported by tunisians leaving abroad.

in March: 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 August [xx], 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
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 $7.937 billion, with the stock of reserve assets equal to $8.645 billion and the stock of CBT liabilities in foreign currency equal to $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 expenditure.3

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.

J. Adjustment Factors for the Program Performance Criteria

Program Assumptions on Adjustment Factors for Quantitative Performance Criteria(Millions of US dollars)
2014 Q12014 Q22014 Q32014 Q4Year
Government External Financing739.2343.81532.11431.04046.1
Project loans21.899.888.4101.8311.8
Multilateral donors509.3221.7829.0895.12455.0
AMF (Arab Monetary Fund)
IMF (budget support)509.3221.7446.1221.71398.7
World Bank Group0.00.0250.0500.0750.0
European Union0.00.0132.9129.9262.8
Bilateral donors200.00.0100.00.0300.0
Algeria Budget support0.00.0100.00.0100.0
Turkish loan200.
Financial Market Access8.122.4514.7434.1979.3
Market Financ. (with possible Japanse guarantee)
Market Financ. (with possible US Treasury guarantee)0.00.0500.00.0500.0
Other (incl. Loan Transfers to SOEs)8.122.414.714.159.3
Budget Grant0.740.787.549.0177.9
Privatization Receipts0.
Government External Debt Service207.7303.9202.8250.6965.0
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

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 observed at end December 2013. 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 above.

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.

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)

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 (TD/FX or FX/TD), 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, non-negotiable 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 $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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