Our Tunisian authorities are appreciative of staff hard work and dedication, and are grateful to management and the Executive Board for their continued support.
Tunisia is moving decisively on the parallel tracks of completing the political transition and accelerating economic reforms, despite the many challenges. Through dialogue and national consensus, the political transition process has moved toward final stage, with legislative and presidential elections set to take place before the end of 2014. At the same time, broad political support to the authorities’ policies has helped energize the momentum of economic reform to restore macroeconomic stability and strengthen the foundations of high and more inclusive growth. The authorities are confident that successful completion of the political transition will eliminate uncertainty, which hinders private investment, and pave the way for higher foreign direct investment and support from development partners. In this regard, they look forward to the September 2014 conference “Investing in Tunisia” to foster private sector investment.
Program implementation under this fourth review has been strong, notwithstanding the social constraints and security challenges. All quantitative performance criteria for end-March and end-June have been met, as have the indicative targets for social spending and current spending. As expected, the pace of implementation of structural reforms has accelerated, making up for earlier delays, especially on banking reform. Six out of seven structural benchmarks (SB) for end-June 2014 were met, and the lender-of-last resort facility (seventh SB) was delayed to end-March 2015 to allow its alignment with the new banking resolution framework, while an interim exceptional facility was introduced (see below). Restructuring plans for two public banks have been adopted as a prior action for this review, and the audit of a third one will be completed in September 2014, instead of end-July, owing to delays caused by the auditor.
Recent economic developments and outlook
Except for growth performance, macroeconomic developments in 2013 and the outlook for 2014 remain broadly in line with the earlier estimates and projections for the third review (April 2014). Weak external demand, including in the tourism sector, has led to slightly lower growth in 2013 (2.3 percent instead of 2.6 percent) and continues to weigh down on growth in 2014. Despite a rebound in agriculture, and strong performance of the chemical and mining sectors, real GDP growth in 2014 is projected at 2.8 percent, with risks tilted to the downside in connection with weak economic prospects in Europe, regional security challenges, and possible rise in commodity prices. Strengthened confidence following the elections, and increased external financing could improve the outlook, although the effects would be felt mainly in 2015 and beyond.
Headline inflation rose during the first half of 2014, reflecting the increase in food prices and electricity tariffs, as well as the depreciation of the currency, but is expected to moderate for the remainder of the year as a result of tight monetary policy and improved agricultural production, with CPI inflation for the year as a whole estimated at 5.7 percent, or below the 2013 level. Core inflation remains contained (4.3 percent in June) and is on a downward trend. On the external side, weak demand from Europe, lower exports of phosphates, and high energy imports, due mainly to falling oil production and lower volume of gas transiting from Algeria to Italy, exacerbated pressures on the current account deficit during the first half of the year. With the depreciation of the exchange rate (8.6 percent since mid-March), and tight monetary policy, as well as the rebound in phosphate exports, the current account deficit is expected to decline to 7.6 percent of GDP in 2014, albeit by less than foreseen earlier. Gross official reserves stood at the equivalent of 3.2 months of imports of goods and services at end-June 2014.
Fiscal adjustment has gained momentum in 2014, with the end-March and end-June fiscal targets being achieved with a comfortable margin. Improved tax collection from oil companies, higher VAT revenues, and dividends from non-oil companies helped bring down the primary cash fiscal deficit in Q1 2014 to 1.3 percent of GDP compared to 2.1 percent projected under the program. Total spending was in line with the program objective, including capital expenditure, and social spending targets for end-March and end-June have been achieved.
The authorities are committed to continued fiscal consolidation, which will be gradual and will involve a combination of short-term measures and structural reforms. The 2014 revised budget, which was approved by the National Constituent Assembly in August, envisages an overall fiscal deficit in line with the program target, and a structural deficit of 4.7 percent of GDP (against 4.9 percent projected in the program). This will be achieved through a series of revenue measures included in the revised budget and efforts to contain current spending, including the wage bill. In this regard, the authorities have decided to freeze promotions and recruitment to compensate for the recent increase in current expenditure and to save the revenue over-performance achieved during the first half of the year.
Commendable progress has been made in reducing energy subsidies, including through the elimination of subsidies to cement companies and increases in electricity tariffs for industrial and low-voltage consumers. Moreover, on July 1, 2014, gasoline and diesel prices were raised by 6 percent, thereby bringing total savings on subsidies to about 0.9 percent of GDP this year. The energy subsidy reduction was accompanied by social programs to protect the most vulnerable groups of the population, as highlighted in MEFP (¶ 34).
A comprehensive tax reform is under preparation to promote equity, efficiency, and transparency of the tax system, building on the high level national conference. All the existing tax laws and codes will be consolidated into a single tax code in September 2014 and, following extensive consultations, an action plan to implement the government tax reform strategy will be adopted in October 2014. As part of this strategy, the authorities are planning to revise the corporate income tax to achieve gradual convergence of the off-shore and on-shore sectors. For the coming fiscal year, attention will continue to focus on reforming the VAT and excise taxes and simplifying the existing presumptive tax system. In parallel, sustained efforts are being made to reform tax administration along the lines of the plan adopted by the Ministry of Economy and Finance on August 7, 2014 (MEFP ¶23).
Monetary and exchange rate policies
The Central Bank of Tunisia (BCT) has preemptively tightened its monetary policy stance in view of pressures arising from the adjustment of energy prices, the recent depreciation of the dinar, and the increase in minimum wages. The policy rate was raised by 25 basis points in June 2014, bringing the cumulative increase this year so far to 75 basis points. The BCT remains committed to further policy tightening, as needed, and will continue to be vigilant in monitoring inflation developments.
Growth of credit to the private sector has remained moderate, reflecting weak demand, even though central bank refinancing has been adequate. The BCT has taken further steps to reduce the risk to its balance sheet by increasing from 10 to 25 percent the haircut on the valuation of loans eligible for its refinancing (July 2014) and by increasing the share of government securities used as collateral from 20 percent to 40 percent (effective as of December 2014). Pending the introduction of a lender-of-last resort facility (March 2015), an interim “exceptional facility” was established on July 1, 2014 to allow illiquid but solvent banks to access BCT resources at a penalty rate and subject to intrusive banking supervision.
Increased exchange rate flexibility has allowed the dinar to more closely reflect market developments, as evidenced by the recent currency depreciation, and helped build official reserves. The authorities are committed to pursuing a flexible exchange rate policy, while smoothing excessive fluctuations resulting from large energy transactions. Establishment of an electronic bank interlinking platform, together with the implementation of the market maker agreement, will facilitate the introduction of a weekly foreign exchange auction mechanism by year-end (SB for end-December 2014).
Addressing the vulnerabilities of the financial sector remains one of the authorities’ key priorities. As detailed in the report and the MEFP, a multi-pronged strategy is being deployed aimed at: addressing capital adequacy shortfalls in seven banks that fall below the statutory minimum requirement; aligning prudential rules with international norms; strengthening bank supervision, including improving offsite procedures and onsite inspections before moving to risk-based methods; and upgrading the reporting and ratings system. Adequate progress has been made in these areas, as indicated in the report.
A major undertaking will be the recapitalization and restructuring of public banks. Of the seven banks undercapitalized at end-December 2013, three private banks have been fully capitalized by end-July with financing from private shareholders. The recapitalization of the remaining four public banks will be carried out in the context of the banking strategy adopted in April, involving public resources estimated at 1.2 percent of GDP, which have been already included in the 2013 and 2014 budgets. Moreover, the authorities have taken an important step by adopting restructuring plans for the Banque de l’Habitat (BH) and the Societe Tunisienne de Banque (STB), for which independent audits have been completed, in line with international best practices (prior action for this review), while restructuring of the Banque Nationale Agricole (BNA) will be carried out following completion of its audit in September 2014. The next step is to have the restructuring plans adopted by end-September by the board of each bank.
Work has continued for the establishment of an Asset Management Company (AMC) to address the NPL problem in the tourism sector, with the necessary legal framework being prepared with World Bank technical assistance in line with international best practices. The draft law on the AMC will be submitted to the National Constituent Assembly with expected approval in September 2014. Further steps are being taken to strengthen bank supervision, improve reporting of banking indicators, and strengthen banking crisis and resolution management mechanisms, as detailed in the MEFP (¶19).
The authorities attach high importance to deepening structural reforms to improve the business climate, attract private sector investment, and foster efficiency and competitiveness. Wide-ranging initiatives have been taken in several areas, including the investment code, the competition law, and a law on public-private partnership, which are being reviewed by the National Constituent Assembly (MEFP ¶29-30). The authorities are also working on improving the functioning of the labor market, reducing the skill mismatch of the labor force, and supporting small- and medium-sized enterprises. Moreover, as indicated during the third review, the monitoring of public enterprises is being strengthened, and a strategy to reform SOEs is under preparation. These major reforms require consensus building and time for preparation and legislative approval. While the authorities are steadfastly moving in this direction, the process is expected to accelerate in the period after the upcoming legislative elections.
With strong program implementation under this review, despite very difficult circumstances, Tunisia has once more demonstrated that political transition and economic reform can go hand-in-hand. Patience and perseverance on the part of the authorities, the population, and the business community have started to pay off. The authorities are grateful to the IMF and their development partners for their sustained support and look forward to continued fruitful cooperation.