This statement reports on the latest economic data updates and implementation of the prior action since the Staff Report was issued on August 15, 2014. The information does not alter the thrust of the Staff Appraisal.
1. Recent indicators remain in line with staff’s projections. The headline inflation rate at end-July was 6 percent y-o-y, in line with expectations, while core inflation remains contained at around 4.5 percent. At 5.3 percent of GDP, the end-June current account deficit was slightly lower than estimated, reflecting some revisions in 2013 data and lower food imports. At the same time, gross reserves at end-June remain unchanged, covering 3.2 months of imports of goods and services.
2. The 2014 end-June fiscal target was met by a wider margin than previously reported. Final information on Treasury balances indicates that the primary fiscal deficit reached 1.7 percent of GDP at end-June, almost one percentage point of GDP lower than envisaged (and 1.7 percent of GDP lower than programmed). Underexecution in both current and capital outlays and strong revenue collection —particularly from indirect taxes—explain the overperformance.
3. The prior action on the adoption of the restructuring plans of the Société Tunisienne des Banques (STB) and Banque de l’Habitat (BH) has been met. The reform of public banks has been stalling for several years, and the adoption of these restructuring plans—in line with best international practices—represents a remarkable milestone toward reducing banking sector fragilities. Implementation of these plans, which will be adopted by the Board of the respective banks in September 2014, is essential to safeguard financial stability and strengthen financial sector intermediation.
4. The restructuring plans for the STB and BH include the following steps: (i) a recapitalization scheme that ensures banks meet prudential norms this year; (ii) a dilution of private shareholders if they choose not to inject new capital; (iii) convergence toward key performance indicators of private sector banks by 2016; and (iv) an enhanced governance framework, including via new management and board of directors at the banks. The plans also call for a communication strategy and the establishment of a committee to follow up on implementation. The creation of a public asset management company to deal with troubled debt, and the adoption of new bankruptcy and banking laws, will be important to support the successful implementation of these plans.