On behalf of our Tunisian authorities, we thank staff for their hard work, and Management and the Executive Board for their support.
This fifth review of the two-year Stand-By Arrangement coincides with the political transition in Tunisia reaching its final phase, with the holding of open and transparent legislative elections in October and the first round of presidential elections held in November. Nidaa Tunes, the party that won the most seats in parliament, will form a new coalition government early in 2015, following the second round of the presidential elections in late December.
The incoming government is expected to address the many challenges facing Tunisia, including implementing the economic reforms that are incorporated in the medium term vision, which was supported by the majority of the political parties and civil society in the context of the national dialogue and was well received by Tunisia’s development partners during the September 2014 international conference “Invest in Tunisia”. Leaders of the two main political parties have confirmed their commitment to the economic program and reforms supported by the IMF.
Program implementation and modalities
Despite the challenging environment of the political transition, the domestic and regional security risks, and the weak growth in Tunisia’s main trading partners, the authorities have kept the program on track. All the performance criteria have been met and progress was made on the structural reform agenda. The end-June and end-September performance criteria for net international reserves (NIR), net domestic assets (NDA), and central government primary balance were met, as were the indicative ceilings on current expenditure and accumulation of arrears. However, the indicative floor on social spending, which was met at end-June, was missed at end-September, but is expected to be achieved by the end of this year.
On structural reforms, while progress is assessed by staff to be slow judging by the number of missed structural benchmarks, considerable work has gone into the preparation of major reforms, such as the tax reform, the investment code, and the recapitalization and restructuring of public banks. Legislative approval by the outgoing National Constituent Assembly (Assemblée Nationale Constitutive, ANC) of the Asset Management Company (AMC) and the use of the recapitalization funds already included in the 2014 budget could not be secured in the period leading up to the legislative elections, which delayed completion of the related structural benchmark on AMC and compliance by public banks with the minimum solvency ratio. Completion of some other structural benchmarks was delayed mainly because consultations with stakeholders took longer than expected (adoption of the tax reform), or to improve on the original proposals (decrees on the new investment code, BNA restructuring). Nonetheless, such delays will be short, and the authorities remain committed to achieving their reform agenda and look forward to the opportunity offered by the end of the political transition early next year to decisively move forward with the approval and implementation of these reforms.
Against this background, while noting the proposed re-phasing of the remaining purchases under the SBA, and the justification provided in the report, namely “to allow better program alignment with the pace of reforms”, we believe that maintaining the original disbursement under this review would have sent a better signal of the authorities’ continued commitment to the program during this crucial phase of the political transition.
Recent economic developments and outlook
Macroeconomic developments in 2014 remain broadly in line with the program estimates and projections, attesting to the Tunisian economy’s resilience. Real GDP growth is expected to reach 2.4 percent in 2014, reflecting a record domestic cereal and olive oil production, as well as recovery of manufacturing and services. The good performance in these sectors, however, was partly offset by lower oil and gas production due to technical stoppages and a decline in oil reserves. Headline inflation fell to 5.4 percent y-o-y in October, driven by lower food and energy prices, and is projected at 5.5 percent at the end of the year. Core inflation increased slightly to 4.9 percent, due to the rise in prices of services, but is under control. The current account deficit is projected at 7.9 percent of GDP in 2014, down from 8.3 percent in 2013, reflecting lower food imports and better-than-expected tourism receipts and worker remittances. Lower energy and commodity prices, together with active promotion of Tunisia’s exports, will help reduce the current account deficit to 6.4 percent of GDP in 2015. Gross official reserves are expected to reach $7.8 billion at end-2014 (3.4 months of imports).
Tunisia’s medium term economic outlook is promising. With the success of the democratic transition, and the expected formation of a new government early next year, the authorities believe that uncertainty will dissipate, leading to increased investment and further expansion of economic activity. Projections for 2015 are subject to downside risks from weak growth in Europe and regional uncertainties, but increased confidence and acceleration of reforms are key upside factors.
Fiscal performance has been better than projected. The end-September fiscal deficit target was met by a wide margin, primarily reflecting stronger revenue from taxes on oil companies (0.5 percent of GDP) and VAT receipts (12 percent y-o-y growth). For the full year, the structural deficit—excluding the effects of the economic cycle and the cost of the recapitalization of banks—is expected to reach 4.1 percent of GDP compared to 4.7 percent under the program. Current spending has been contained, and the related indicative ceiling has been observed. While the pace of execution of investment expenditures has been slow during the first half of the year, it is expected to accelerate during the last quarter, bringing the execution rate close to 90 percent by the end of 2014, which would be adequate given the security issues and weak capacity at the regional level. Staff advice to improve planning and prioritization and strengthen procurement procedures to enhance the execution of the investment budget is well taken.
Further fiscal adjustment is envisaged under the 2015 draft budget law, which should be approved by the new parliament by end-December 2014 (new SB). The proposed reduction in the structural fiscal deficit to 3.8 percent of GDP is in line with the authorities’ objectives of reducing pressure on the balance of payments and containing growth of public debt. The bulk of fiscal consolidation will come from lower government spending, while revenue would increase to reflect the full-year effect of the tax revenue measures introduced in the supplementary 2014 budget and enhanced tax arrears collection (MEFP 6).
A comprehensive tax reform has already started. All the existing tax laws and codes were consolidated into a single tax code that was approved by the government and presented to the ANC in October (end-September SB), national tax consultations were held in November 2014, and a comprehensive tax reform plan is expected to be approved in December. Under this reform, the authorities are planning to revise the corporate income tax to achieve gradual convergence of the off-shore and on-shore sectors. In 2015, attention will continue to focus on reforming the VAT and excise taxes. The effect of the planned comprehensive tax reform is expected to materialize in 2016 and beyond. In parallel, sustained efforts are being made to reform administration, including strengthening tax agencies and moving towards a unified tax administration (MEFP 24-25).
On the expenditure side, the subsidy reform program will continue to be implemented in 2015. In addition to the full impact of the measures introduced in 2014 (0.3 percent of GDP), further increases in electricity tariffs for industrial and low-voltage consumers and upward adjustments in fuel prices are planned, which would generate savings of about 0.4 percent of GDP. The authorities also intend to save any net gains on oil import costs that would materialize if the average oil price for 2015 is lower than the budget assumption of $ 95 per barrel (a $ 10 per barrel difference between the WEO oil price and the budget price assumption will generate savings of 0.5 percent of GDP). The most disadvantaged population will be protected through social programs and preferential tariffs for households consuming less than 100 kw per month. Furthermore, efforts will be made to contain the wage bill by limiting salary increases and freezing net hiring except for security, education, and the health sectors. Preparatory work is underway with World Bank assistance to reform and rationalize the civil service.
Monetary and exchange rate policies
A gradual tightening of monetary policy since the beginning of the year has helped contain second round inflationary effects from administrative price increases. The NDA target was met with a comfortable margin, with credit to the private sector increasing by 8.4 percent y-o-y at end-September 2014. While inflation is expected to trend downward given the declining energy and commodity prices, the authorities will remain vigilant and stand ready to tighten monetary policy further as needed to contain inflation.
Increased exchange rate flexibility has allowed the dinar to more closely reflect market trends and helped build official reserves. The authorities are committed to continue to pursue 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 establishment of a weekly foreign exchange auction mechanism by year-end (SB for end-December 2014).
The reform of the monetary policy framework is moving forward (MEFP 11-14). Specific actions and plans aim at: (i) reducing the risk to CBT balance sheet through increases of the haircut on the valuation of loans eligible for refinancing and by raising the share of government securities used as collateral from 20 percent to 40 percent (December 2014); (ii) reducing direct refinancing from the CBT through the use of OMO; and (iii) using an interim “exceptional facility”, which was established in July 2014, to allow illiquid but solvent banks to access central bank resources at a penalty rate and subject to intrusive banking supervision. Wide-ranging amendments to the central bank law aimed at giving the CBT greater autonomy and better defining its mandate were presented to the CBT Board of Directors in June 2014 and are expected to be approved in March 2015.
Financial sector stability
The authorities are strongly committed to addressing financial sector vulnerabilities. Following the adoption by the government of restructuring plans of two public banks (STB and BH), the audit of the third bank (BNA) has been finalized and its restructuring plan was presented in November to the government for approval. New “fit and proper” board members will be appointed by January 2015, a new management will be named once the new government is in place, and performance contracts will be signed in March 2015, in line with the approved restructuring plans.
Recapitalization of public banks has been delayed for temporary and exceptional reasons, but the reform is still high on the authorities’ agenda. While the authorities were not able to use the recapitalization funds already allocated in the 2014 budget (1.2 percent of GDP) because of legislative delays, the new parliament is expected to grant the related authorization at the beginning of the year. The authorities agree that bank recapitalization should remain in line with international best practices, and are engaging private shareholders to prevent their use of veto rights to block the recapitalization operation. A new banking law is under preparation with technical assistance from the IMF and the World Bank to strengthen banking supervision and regulation and establish a sound legal framework for the resolution of insolvent banks, including addressing the current issue of minority blocking rights of private shareholders in public banks.
Work has continued for the establishment of the AMC to address the NPL problem in the tourism sector. Despite strong resistance from the tourism industry, the AMC was created in the 2014 supplementary budget law, which defines its objectives and authorizes the government to subscribe TND 150 million of its capital. The AMC law, which will provide the legal and operational framework for the transfer and resolution of loans, pricing standards, and the AMC governance, is awaiting parliamentary approval, and the authorities have expressed their intention to make it a priority in the next session of the new parliament.
The authorities attach high importance to deepening structural reforms to improve the business climate, attract private sector investment, and foster efficiency and competitiveness. The heavy agenda of the ANC in the run up to the elections, including the focus on the electoral and anti-terrorism laws, has delayed the approval of important economic legislation, which is expected to be taken up by the new parliament, including the laws on competition, PPPs, and bankruptcy procedures. Nonetheless, restructuring plans to improve governance and financial soundness of vulnerable public enterprises, particularly in the transport sector, have been adopted. The authorities have also prepared a comprehensive strategy aimed at addressing labor market rigidities and reducing skills mismatches.
The authorities’ program is on track, all performance criteria and indicative targets (except one) have been met, and progress has been made toward advancing the reform agenda. Seen from the perspective of the challenges facing Tunisia during this critical phase of political transition, including intensive preparations of the legislative and presidential elections, and in view of the need to address domestic and regional terrorism risks, these achievements are commendable. The authorities remain committed to their reform strategy and look forward to the opportunity offered by completion of the political transition to accelerate implementation of their reform agenda, supported by the Fund and development partners.