Tunisia
Selected Issues

This Selected Issues paper for Tunisia presents a literary survey of the research on constant real exchange rate rule (CRERR). It assesses Tunisia’s experience with CRERR in terms of inflation performance and discusses possible reasons for Tunisia’s apparent success at avoiding the pitfalls of CRERR as predicted by the theoretical models. The paper presents a regression analysis estimating the equilibrium real exchange rate based on different fundamental variables and compares this with the path of the actual exchange rate. The paper also assesses Tunisia’s external competitiveness over the past decade using a range of indicators.

Abstract

This Selected Issues paper for Tunisia presents a literary survey of the research on constant real exchange rate rule (CRERR). It assesses Tunisia’s experience with CRERR in terms of inflation performance and discusses possible reasons for Tunisia’s apparent success at avoiding the pitfalls of CRERR as predicted by the theoretical models. The paper presents a regression analysis estimating the equilibrium real exchange rate based on different fundamental variables and compares this with the path of the actual exchange rate. The paper also assesses Tunisia’s external competitiveness over the past decade using a range of indicators.

Chapter I: Real Exchange Rate Targeting—Tunisia’s Experience1

I. Introduction

1. During the past decade or so, Tunisia’s foreign exchange policy has aimed at maintaining a stable real exchange rate against a basket of currencies weighted according to the country’s main trading partners and competitors.2 ([a-z])his policy amounted to a constant real exchange rate rule (CRERR) according to which the authorities adjusted periodically the nominal exchange rate so as to maintain the real exchange constant.

2. This approach has been fairly successful for Tunisia: inflation declined from over 5 percent in the early 1990s to 1.9 percent in 2001 and real GDP and real export growth (non-energy) averaged 4.8 percent and 7.4 percent between 1991 and 2001. During the 1990s, and particularly in the late 1990s, the authorities pursued the CRERR in conjunction with very prudent monetary and fiscal policies, restricted capital flows, and comprehensive structural improvements. More recently, the monetary authorities have relied on a broader set of competitiveness indicators to set the exchange rate, including market shares.3 Moreover, Tunisia did not fall into the trap of a high and “plateau-type” inflation as predicted by the theoretical models on CRERR for a number of reasons: (i) the absence of significant shocks during the period; (ii) a prudent macroeconomic policy mix; and (iii) price and wage rigidities, including incomes policies.

3. While this approach has served Tunisia well, its limitations are beginning to emerge in the context of the opening of the economy, increased regional and global integration (catalyzed by the Association Agreement with the European Union (AAEU)), a more sophisticated market-based monetary policy, and the need to relax capital controls to diversify external financing sources and to maximize the benefits of foreign capital for investment and growth. As these changing conditions will make it more difficult for the authorities to gauge where the underlying equilibrium rate is, the authorities are now considering alternative regimes, particularly moving gradually to a floating exchange rate.

4. The main findings of the paper suggest that the Tunisian dinar is appropriately valued. A regression analysis estimating the equilibrium real exchange rate based on different fundamental variables indicates that Tunisia’s real effective exchange rate was close to the equilibrium rate estimated by the model, and by 2000, was well in line with what would be predicted by the level of Tunisia’s fundamental determinants at that time. Second, most measures of competitiveness suggest no evidence of a misalignment in the current level of the exchange rate: the consumer price index (CPI)-based real effective exchange rate appreciated only by 2 percent from 1990 to 2001; unit labor cost (ULC)-based exchange rate indices show that Tunisia is maintaining cost competitiveness relative to key partners; productivity in the late 1990s grew by about 2.2 percent per year in the manufacturing sector; the relative price of non-tradables to tradables has decreased; and Tunisia has increased its export shares to the European Union (EU).

5. The paper is organized in the following manner: Section II presents a literary survey of the research on CRERR. Section III discusses other cases of CRERR and the degree to which theory on CRERR was borne out by these countries’ experiences. Section IV assesses Tunisia’s experience with CRERR in terms of inflation performance and discusses possible reasons for Tunisia’s apparent success at avoiding the pitfalls of CRERR as predicted by the theoretical models. Section V presents a regression analysis estimating the equilibrium real exchange rate based on different fundamental variables and compares this to the path of the actual exchange rate. Section VI assesses Tunisia’s external competitiveness over the past decade using a range of indicators, including export performance, market share, wage and price-based real exchange rate indices, and profit developments. Finally, Section VII draws some conclusions from the analysis.

II. Literature Survey and Main Conceptual Issues

6. Tunisia’s experience with the CRERR has been fairly successful (see Section IV), especially compared to the experiences of other countries like Brazil or Yugoslavia. This section analyzes the economic mechanisms behind the CREER in order to assess the reasons for Tunisia’s strong performance, which, at first glance, appears to contradict the main theoretical findings.

7. The choice of a CRERR in Tunisia reflected the authorities’ willingness to index the nominal exchange rate to the domestic price level in an effort to avoid losses in competitiveness. However, a constant real exchange rate rule prevents the nominal exchange rate from serving as a nominal anchor: shocks to the domestic price level may be fully accommodated by a faster rate of exchange rate depreciation and a faster rate of monetary growth. Moreover, a CRERR does not permit any adjustment in the real exchange rate when the economy is subject to real (exogenous) shocks. It can therefore lead to a divergence between the actual real exchange rate and the equilibrium real exchange rate. This section elaborates further on this premise.

8. When a country is subject to a positive demand shock—which could, for example, be induced by an improvement in the terms of trade, an increase in government consumption, or a fall in the world nominal interest rate—excess demand for non-traded goods will occur. Under a floating exchange rate, demand pressures raise imports, thereby leading to a deterioration in the trade balance and a depreciation in the nominal exchange rate. Under a fixed exchange rate system, the balance of the non-traded goods market is restored through a relative increase of the price of non-traded goods compared to traded goods, that is, an appreciation of the real exchange rate. Under a real exchange rate rule, such an appreciation would not occur: when the prices of non-traded goods increase, the nominal exchange rate would depreciate at a rate that would maintain the real exchange rate constant. Thus, while the equilibrium exchange rate appreciates as a result of the shock, the actual value of the real exchange rate is kept constant. The adjustment that would have taken place through movements in the relative price of non-traded goods (under a fixed exchange rate regime) must occur through an adjustment in the overall level of prices. This would lead to hyperinflation.

9. However, Adams and Gros4 found that, under a CRERR, the inflation rate will be whatever it was in the past, modified by shocks to prices in the current period (i.e. inflation follows a random walk). The intuition is that, as the exchange rate moves to fully accommodate all price shocks, de facto it has no long-run equilibrium value. However, more recent literature suggests that a new steady-state equilibrium can be reached in the aftermath of a demand shock, although at this new equilibrium, inflation would be higher than before the shock. Under real exchange rate targeting, changes in the inflation rate can arise from either a fiscal or external shock. In this sense, the CRERR has a bias toward higher rates of inflation, even if it does not lead to hyperinflation. This outcome has been observed in country cases targeting the real exchange rate. A number of developing countries have suffered through prolonged periods of high but stable inflation. In these cases, inflation often moves quickly to a higher, but stable “plateau.” Jumps in inflation in Argentina, Brazil and Israel in the mid-1980s (preceding stabilization programs) are likely to have been prompted by exchange rate adjustments in response to adverse external shocks, followed by a period of real exchange rate targeting.

10. Among the more recent papers describing this phenomenon, Montiel and Ostry5 show that real demand shocks can result in a permanent increase in inflation. In their model, the demand for non-traded goods depends positively on the real exchange rate and on real private wealth. When the economy is subjected to a positive shock, excess demand for non-traded goods results in an increase in their price. As the authorities adjust the nominal exchange rate in line with the increase in the price of home goods, the price of traded goods in local currency increases by an equivalent amount. If the general increase in the price level does not alleviate excess demand pressures in the non-traded goods market, there will be nothing to limit its rate of increase under a CRERR and hyperinflation would ensue. However, the general increase in prices alleviates excess demand pressures though a wealth effect on real consumption (equivalent to an inflation tax on consumption).6 That is, increases in the price level involve a negative wealth effect, thereby lowering demand for all goods and helping to restore internal balance.

11. However, the rate of inflation will rise. This is because the improvement in the terms of trade results in a current account surplus, which raises the rate at which the private sector accumulates financial wealth. Over time, this creates additional demand pressure in the home goods market, and a new equilibrium is therefore reached only once this pressure from private sector wealth is offset by an ongoing increase in the general price level, i.e. inflation.

12. The nature of fiscal policy can influence the likelihood of hyperinflation. If the government uses the inflation tax to increase expenditure (or the central bank accumulates claims on the rest of the world), the higher inflation rate increases the inflation tax on real money balances paid by the private sector, thereby helping to offset the increase in the private sector’s holdings of financial assets. However, if the inflation tax is used by the government to reduce taxes on the private sector, the accumulation of wealth is no longer offset by the erosion of wealth due to inflation (because the tax cut acts as a further accumulation of wealth by the private sector). Hyperinflation would ensue because continuous wealth accumulation would add to continuous demand and price pressures. Finally, a one-time increase in inflation could be avoided in theory by a fiscal response such as a cut in government spending on non-traded goods of an appropriate magnitude.

13. Moreover, Montiel and Ostry7 show that monetary policy cannot be used to restore long-run price stability. For example, under perfect capital mobility, the money supply would be endogenous and sterilization policies could not be used to control the money supply. A reduction in credit would be fully offset by the private sector by a reduction in its holdings of foreign assets. While there would be some changes in the composition of the capital account, changes in credit growth would not affect inflation. The authorities could impose capital controls in an attempt to control the domestic money supply. However, in this case, a parallel foreign exchange market would be likely to emerge. A real shock would again cause a jump in the price level and a current account surplus, and the authorities would have to sterilize the associated increase in international reserves. If the terms of trade improvement is permanent, this policy is unsustainable in the long run since a permanent credit contraction would cause agents to sell foreign exchange in the parallel market. Given a fixed stock of foreign assets in the country and a contraction in credit, the parallel market exchange rate would appreciate. The increasing gap between the official and parallel market rates would in turn lead to a breakdown of capital controls. Thus, control of the money supply and inflation would also be compromised.8

14. To summarize, real shocks under a CRERR require an adjustment in the overall level of prices to restore external equilibrium. Increases in the price level help alleviate excess demand in the home goods market through a wealth effect on consumption. However, inflation will rise over time because the terms of trade improvement results in an increase in private wealth coming from the current account surplus. This creates additional demand pressure in the home goods market, and a new equilibrium is therefore reached only once this pressure is offset by an increase in inflation. Even under capital controls, monetary policy would be ineffective at controlling the money supply over the long term.

III. Country Experiences with CRERR

15. The past experience of other countries following a CRERR has been mixed. On the one hand, the CRERR followed by Yugoslavia during the 1980s has been blamed for playing an important role in the hyperinflation experience there in the late 1980s. While the restrictions on external capital transactions could have allowed the authorities to pursue an independent monetary policy temporarily, the central bank’s practice of underwriting the foreign currency losses (on foreign currency deposits redeposited by commercial banks with the central bank) circumscribed the scope for pursuing an independent monetary policy.9 Consequently, monetary accommodation led, through a classic wage-price-exchange rate spiral, to hyperinflation.

16. In Brazil, CRERR implementation also led to rising inflation. Between August 1968 and February 1983, with a break in 1979, Brazil followed a real exchange rate rule under which the exchange rate was changed by small amounts at irregular intervals of time so as to keep the real exchange rate constant.10 This system was mainly aimed at preserving the competitiveness of Brazilian production in a context of high and endemic inflation, while avoiding the speculative capital flows characterizing the previous system of infrequent and large parity changes. While successful in keeping the real exchange rate constant, it contributed, along with the indexation of wages to prices, and consistent with the theoretical literature (see paragraph 7), to inflation inertia: consumer price inflation increased progressively from about 20 percent in 1969 to more than 40 percent in 1978. Moreover, the depreciation of the equilibrium real exchange rate resulting from the 1972 oil shock led to a sharp deterioration in the current account. Thus, the authorities devalued the exchange rate by 30 percent in November 1979 and in February 1983. In the meantime, consumer price inflation increased to more than 100 percent.

17. On the other hand, Chile followed a CRERR from 1985 to 1992 and was able to target its real exchange rate while keeping inflation in check.11 The CRERR came under pressure in 1992 when capital inflows placed upward pressure on the currency and the peso was revalued by 5 percent. During the 1986-92 period, inflation, which had averaged 130 percent in the 1970s, averaged 19 percent, slightly less than during the first half of the 1980s. Inflation declined to about 15 percent by mid-1992 (Figure 1). Calvo et al. argue that the lack of strong inflationary pressures could stem from the fact that, through most of the 1978-92 period, the actual real exchange rate was closely tracking the equilibrium real exchange rate.12

Figure 1.
Figure 1.

Chile: Real Effective Exchange Rate, 1982-2001

(1990-100)

Citation: IMF Staff Country Reports 2002, 120; 10.5089/9781451837834.002.A001

Source: International Financial Statistics (IFS).

IV. Tunisian Experience

18. Tunisia’s experience with CRERR has thus far been fairly successful. During the 1990s, Tunisia was able to preserve competitiveness while reducing inflation. After fluctuating around 5 percent during the first half of the 1990s, CPI inflation declined from 6.3 percent in 1995 to 1.9 percent in 2001. Meanwhile, real GDP and real non-energy export growth averaged 4.8 percent and 7.4 percent respectively between 1991 and 2001. Moreover, no significant parallel foreign exchange market emerged during that period.

19. This experience does not reflect the outcome predicted by theoretical models. The following different factors appear to have helped Tunisia avoid the relatively high and “plateau-type” inflation described earlier: (i) the absence of significant shocks during the period; (ii) the prudent macroeconomic policy mix followed by the authorities; and (iii) price and wage rigidities, including incomes policies.

20. After experiencing a sharp deterioration, in the range of 25 percent, in its terms of trade during the first half of the 1980s, Tunisia has not been affected by significant terms of trade shocks. The fact that Tunisia’s energy trade has been broadly balanced during the last few years helped to protect it from oil price shocks.15 The terms of trade remained almost unchanged during the first half of the 1990s, and then deteriorated gradually by about 8 percent during the second half. This deterioration, resulting partly from the decline of agricultural export prices, helped to keep inflationary pressures in the non-traded goods sector subdued. Moreover, the domestic prices of petroleum products and of some agricultural products are administered by the government. This allowed the government to limit the impact of international price fluctuations on Tunisian consumers, thus reducing the scope for the wealth effects described in Section III to take effect (seeFigure 2).

Figure 2.
Figure 2.

Tunisia: Terms of Trade, 1981-2001

(Index, 1990-100)

Citation: IMF Staff Country Reports 2002, 120; 10.5089/9781451837834.002.A001

Source: Tunisian authorities and staff estimates.

21. While the demand shocks experienced by Tunisia were limited, the macroeconomic policies followed by the authorities helped to limit the impact of shocks on the economy. The authorities have worked to rein in the budget deficit over the past decade: the consolidated central government budget deficit declined from 6 percent of GDP in 1991 to 2.4 percent in 2001. This adjustment was even sustained during the periods when private demand was growing quickly, between 1991-93 and 1997-99. This helped to reduce demand pressures for non-traded goods and to alleviate inflationary pressures (see Figure 3)).

Figure 3.
Figure 3.

Tunisia: Budget Deficit and Private Demand, 1992-2001

(Change in the ratio to GDP, in percent)

Citation: IMF Staff Country Reports 2002, 120; 10.5089/9781451837834.002.A001

Source: Tunisian authorities, and staff estimates.

22. At the same time, extensive restrictions on capital inflows and outflows were aimed at ensuring that domestic savings financed domestic investment. This policy allowed the central bank to pursue an independent monetary policy that has been very prudent over the period: the authorities focused on setting the target rate of expansion in credit to the economy around the rate of nominal GDP growth, in effect also targeting growth in broad money. In this respect, the objectives set by the monetary authorities were met over the period, credit to the economy having been broadly in line with domestic demand. Moreover, the authorities have shown their willingness to tighten monetary policy in order to moderate domestic demand when necessary (see Figure 4)).

Figure 4.
Figure 4.

Tunisia. Credit to the Economy, 1994-2001

(Growth in percent)

Citation: IMF Staff Country Reports 2002, 120; 10.5089/9781451837834.002.A001

Source: Tunisian authorities, and staff estimates.

23. Despite the ongoing liberalization process, however, many prices are still administered. At end-2001, the prices of petroleum, water, basic commodities, electricity, telephone and public transportation were still controlled, while intermediation margins on some food products, including cereals, fruits, and vegetables, were regulated. In all, 19 percent of prices at the retail level, making up a third of the CPI basket, are still administered. At the same time, wages could be more flexible, since wage increases are set, at a sectoral level, every three years after centralized negotiations between the government and its social partners. This limited flexibility in prices and wages helped, at least in the short term, to prevent any wage-price spiral from occurring as a result of demand shocks.

V. A Fundamental Model-Based Measure of Misalignment

24. A real appreciation of a currency is often interpreted as a loss of competitiveness for an economy. However, an appreciation may not signal a loss of competitiveness if the exchange rate is already misaligned or if the movement in the real rate is caused by a fundamental improvement in productivity. Competitiveness is affected, however, when the observed real exchange rate deviates significantly from its “equilibrium value.” The equilibrium exchange rate is a function of many fundamentals, including factor productivity and relative factor endowments, the terms of trade, consumer taste, the composition of government spending, the tariff structure, access to capital markets, etc.

25. In this paper, a panel data analysis is used to measure misalignment of the exchange rate by computing the deviation of the observed real exchange rate from the “equilibrium” level that would be predicted on the basis of certain fundamental determinants. The three fundamental variables used to estimate the equilibrium exchange rate in this model are net external liabilities of the country, the terms of trade, and GDP per capita relative to its partners.16 Under this fundamental model-based measure, the evolution of the exchange rate is considered in conjunction with the exchange rate behavior of a group of Middle Eastern countries and a group of developing countries. The results indicate that the real effective exchange rate during the last decade has moved broadly in line with what would have been predicted on the basis of these fundamental determinants. According to this regression, the equilibrium exchange rate, after decreasing significantly in the 1980s, increased only moderately during the 1990s (see Figure 5)). Moreover, the actual exchange rate was close to the equilibrium rate estimated by the model over the latter period.

Figure 5.
Figure 5.

Tunisia: Actual and Equilibrium Real Exchange Rate Indices

(Panel data estimation)

Citation: IMF Staff Country Reports 2002, 120; 10.5089/9781451837834.002.A001

Source: IMF staff estimates.

26. The fundamental determinants in this model were chosen because of their important and comprehensive effect on the real exchange rate. The net external asset position of the country is used because it can affect the real exchange rate through a number of different channels. From a Keynesian approach, countries with large external liabilities would need to run large trade surpluses, and hence a more depreciated real exchange rate, to service them. Under an intertemporal optimizing model, the transfer effect can, for example, operate through the presence of a home preference for domestic tradables, in which case a transfer abroad implies a decline in demand for home goods. Alternatively, a transfer effect can operate through the impact of wealth effects on labor supply whereby a transfer abroad reduces domestic wealth and hence raises labor supply, leading to a decrease of the relative price of exportables. Tunisia’s net foreign asset position was estimated using balance of payments data: the adjusted current account balance net of capital transfers (adjusted for valuation effects) is added to the stock of the preceding year’s external asset position.

27. The second fundamental variable, GDP per capita, is used because changes in GDP per capita can result in important movements in the exchange rate over time. For example, an increase in relative GDP per capita can result in a more appreciated real exchange rate through a Balassa-Samuelson effect, i.e. an increase in the relative price of non-traded goods resulting from higher productivity gains in the traded goods sector. It could also result from a shift of household demand from traded goods to non-traded goods, notably to services. GDP per capita is calculated as the ratio of Tunisia’s GDP per capita relative to its partners’ GDP per capita weighted by their share in Tunisia’s trade.

28. Finally, terms of trade developments are used as the third fundamental variable since they can be expected to affect the equilibrium exchange rate, for example through wealth effects.

29. This provides a different approach to the “equilibrium exchange rate” that is sometimes defined as the value consistent with internal and external balance over the medium term, where internal balance is defined normally as real growth at the level of potential output and external balance is defined, albeit vaguely, as an equilibrium position in the current and capital accounts.17

30. An intertemporal optimizing model of the transfer effect is used, resulting in the following equation:18

log(RER)=α+βiBY0+β2log(YT)+β3log(PTx)

where RER is the real effective exchange rate, B is the net foreign asset position, YT is the output of tradables, and PxT is the terms of trade. Then cross-country estimates of the parameters are obtained using the following specification (a panel version of the dynamic ordinary least square estimator developed by Stock and Watson):

log(RERi,t)=αt+Φt+βNFANFAi,t+βYD log(YDi,t)+βTT log(TTi,t)+Σk=1k=1vkNFAΔNFAi,t+k + Σk=1k=1vkYDΔlog(YDi,t+k)+Σk=1k=1vkTTΔlog(TTi,t+k)+ϵi,t

where RERj, t is the real effective exchange rate, αi is a country dummy, øtis a year dummy, NFAi, t is the ratio of net foreign assets to GDP, YDi, t is GDP per capita relative to the country’s trading partners, TTi, t is the terms of trade and εi, t is a residual term.

31. These panel estimates are then applied to Tunisia to estimate the equilibrium exchange rate. The results correspond to (i) two different groups of countries: a group of Middle Eastern countries including Egypt, Israel, Jordan, Pakistan, Tunisia and Turkey, and a group of countries comprising mostly emerging markets from a diverse geographical nature; and (ii) to different time periods (see Figure 5). According to these results, the equilibrium exchange rate, after decreasing significantly in the 1980s, increased slightly in the 1990s. More importantly, the results indicate that Tunisia’s real effective exchange rate was close to the equilibrium rate estimated by the model over the latter period, and by 2000, was well in line with what would be predicted by the level of Tunisia’s fundamental determinants at that time. These results appear to be consistent with the analysis developed in Section IV explaining why Tunisia did not experience inflationary pressures.

VI. External Competitiveness and the Real Exchange Rate

A. Background

32. A range of indicators is examined over the last decade in an attempt to assess Tunisia’s competitiveness. The indicators used in this analysis are real effective exchange rates (REERs) based on different prices, including consumer prices, GDP deflators, and the relative price of non-tradable to tradable goods.19 In addition, indicators of export performance are examined to review the composition of exports and the development of market shares. An index of ULCs, a measure of REERs based on costs, is also analyzed.

33. Given the shortcomings of REER indicators and data deficiencies, results should be interpreted with some caution. This is also why many different REER indices are considered in drawing overall conclusions. In general, all REER indicators suggest that Tunisia has pursued an appropriate exchange rate policy, which is consistent with the findings from the fundamental model described in Section V. In this regard, Tunisia has gained export market shares in the EU over the last decade and has widened its export base in the manufacturing sector. In addition, gradual trade liberalization and comprehensive structural reforms appear to have produced positive results in terms of productivity.

B. Real Exchange Rate Indicators Based on Prices

34. The REER index compares nominal exchange rates between a country and its trading partners, adjusting for differences in inflation. REER indicators found in the literature include measures of REERs based on production prices, consumer prices, ULCs, wholesale prices, GDP deflators, and export-unit values.20

35. The most commonly used REER indicator is the one based on consumer prices. CPIs are constructed according to a basket of goods that is fairly comparable across countries. Also, they are published regularly, are easily available, and their construction is generally accurate. In order to gauge profitability in the tradable sector, CPIs may be used as an acceptable proxy for factor costs. According to Turner and Van’t dack (1993), many productive inputs, such as labor, are priced in line with consumer prices. However, CPIs possess several shortcomings. In particular, Tunisia’s CPI contains some prices that are controlled (one third of the index), and many of the services included in the CPI are not traded which may render the index inappropriate.

36. The GDP deflator-based REER may be regarded as a composite index of the cost of all primary factors of production. The main problem with the GDP deflator is that it is generally constructed using market prices which include indirect taxes, which leads to notable comparability problems.

37. Figure 6 displays three REER indicators for Tunisia for the period 1990-2001. In general, all indices show similar trends: a real appreciation at the beginning of the 1990s, a depreciation in 1993, a gradual appreciation which stabilizes during the second half of the 1990s, and a depreciation after 1999. Over the entire period, the CPI-based REER appreciated only by about 2 percent and in 2001, it returned to the level registered in 1991.21 Given that 33 percent of the Tunisian CPI basket is subject to price controls, a REER based on an adjusted CPI has been constructed by removing goods with administered prices from the overall CPI basket. This “free” CPI-based REER moved very closely to the CPI-based REER drawn from the Information Notice System (INS). Finally, the GDP deflator-based REER appreciated by under 7 percent over the last eleven years.

Figure 6.
Figure 6.

Tunisia: Real Exchange Rate Indicators, 1990-2001

(Index, 1990=100)

Citation: IMF Staff Country Reports 2002, 120; 10.5089/9781451837834.002.A001

Source: INS, WHO, and staff estimates.

38. Figure 7 compares CPI-based REERs in selected Middle Eastern and North African (MENA) countries. Tunisia’s REER was relatively stable, a result that is consistent with the CRERR pursued by the authorities. Morocco’s REER appreciated by 20 percent over the last eleven years and Egypt’s REER appreciated by 50 percent.22 Overall, the REERs in Egypt, Morocco, and Tunisia followed a common trend, depreciating during the last two years. In contrast, the REER in Algeria depreciated by almost 40 percent and has experienced significantly volatile movements over the last eleven years. These findings indicate that Tunisia’s competitiveness based on relative CPI measures performed favorably compared to countries in the region.

Figure 7.
Figure 7.

Selected Middle East and North Africa (MENA) Countries: CPI-Based Real Effective Exchange Rates, 1990-2001

(Index, 1990=100)

Citation: IMF Staff Country Reports 2002, 120; 10.5089/9781451837834.002.A001

Source: INS.

39. A different CPI-based REER was constructed to reflect the evolution of the exchange rate with respect to Tunisia’s competitors. This index was computed by using weights constructed on the basis of EU imports from Tunisia’s major competitors during 1990-2000.23 In order to avoid exaggerating changes in international price competitiveness, Turkey was excluded from the sample because of its high inflation rate and exchange rate appreciation during the second half of the 1990s. As shown in Figure 8, this index had a stable evolution until 1998, when it appreciated by about 10 percent. This was mainly due to the large devaluation of the nominal exchange rate of the Asian Tigers vis-à-vis the U.S. dollar. The indicator returned in 2000 to its initial 1990 level. This would suggest that, consistent with Figure 7, the dinar has not experienced significant real appreciation over the period.

Figure 8.
Figure 8.

Tunisia: EU Import-Weighted CPI-Based Real Effective Exchange Rate, 1990-2000

(Index, 1990=100)

Citation: IMF Staff Country Reports 2002, 120; 10.5089/9781451837834.002.A001

Source: Trade Analysis and Reporting System (TARS), and staff estimates.

40. Productivity in the traded goods sector and the pattern of consumption between traded and non-traded goods in a country is another useful price-based indicator of competitiveness. A common measure used is the relative price of non-traded to traded goods. An increase in the ratio of non-traded to traded prices indicates a real exchange rate appreciation, which leads to an increase in the production of non-traded goods by shifting resources away from tradables to the non-tradable sector. On the demand side, the change in relative prices raises the domestic consumption of tradables, which is met by an increase in imports. Consequently, the trade account worsens. However, prices of non-traded goods generally tend to rise over time due to an increase in income per capita which, on its own, can boost the demand for non-traded goods. In other words, the move in relative prices is not a sufficient condition to conclude that the country is experiencing a loss of competitiveness (Marsh and Tokarick, 1994). If the increase in prices is matched by an increase in productivity, the exchange rate appreciation does not represent a loss of competitiveness for the country.

41. Given the difficulties in drawing a line between tradable and non-tradable goods, the Standard Industrial Classification (SIC) is often used as a first approximation.24 The implicit deflators of traded and non-traded goods are drawn from the national accounts in national currency. Traded goods are proxied with manufactured goods, while non-traded goods include hydrocarbons, electricity, water, services (transport, telecommunication, tourism, commerce, and government wages) and construction and public works. Agricultural products are excluded from this analysis since they suffer from price distortions due to subsidies and price controls.

42. Figure 9 shows the index of general relative prices of non-traded to traded goods and an adjusted measure excluding administered prices in the non-traded sector (electricity, water, and hydrocarbons). In general, both indicators moved in the same direction but with different magnitudes. The adjusted relative prices in 2001 remain unchanged compared to 1990, suggesting no real appreciation over the period. More importantly, the general indicator of relative prices, which shows a downward trend relative to 1990, also supports this conclusion.

Figure 9.
Figure 9.

Tunisia: Relative Prices of Non-Traded to Traded Goods, 1990-2001

(Index, 1990=100)

Citation: IMF Staff Country Reports 2002, 120; 10.5089/9781451837834.002.A001

Source: Tunisian authorities, and staff estimates.

C. Indicators Based on Labor Costs

43. The most widely used indicators based on costs are real wages and unit labor costs. Wages denominated in a common currency have the advantage of being easily comparable across countries, although they may suffer from distortions due to exchange rate fluctuations. In addition, the differences in the definition of wages can hamper cross-country comparisons.

44. The ULC index is calculated as the wage bill in the manufacturing sector divided by real GDP in that sector. The ULC index in the manufacturing sector incorporates information on production costs, although it shows only a partial picture of a country’s competitiveness since it neglects the role of capital, which can substitute for labor in the production process over the long run. For example, if ULCs decrease and the cost of capital rises, the ULC index may overstate competitiveness. In particular, there are problems with data on ULCs in manufacturing. These data include only the costs of labor services incurred directly in manufacturing, thus excluding the costs of other important labor inputs such as labor contracted from the services sector (e.g., legal or marketing services) and indirect labor costs associated with intermediate inputs. Moreover, differences in the definition of the manufacturing sector could lead to problems of international comparability.

45. Figure 10 depicts ULC indices in the manufacturing sector for European and North African countries. Tunisia’s ULC index was stable in the first half of the 1990s and increased slightly in the second half, probably reflecting productivity gains as a result of the industrial restructuring program. Tunisia’s ULC index moved together with Morocco’s until 1999, after which time Morocco’s ULCs increased significantly. The ULC in Tunisia grew faster than in France and Italy, but slower than in Germany. These findings should be interpreted with some caution due to the shortcomings mentioned above.

Figure 10.
Figure 10.

ULC Indices in the Manufacturing Sector in Tunisia’s Main Trading Partners and Morocco, 1990-2000

(1990=100)

Citation: IMF Staff Country Reports 2002, 120; 10.5089/9781451837834.002.A001

Source: OECD, and staff estimates.

46. Given the risks of relying uniquely on the evolution of ULCs, this analysis reviews an alternative measure based on profitability, along the lines of the one developed by Lipschitz and McDonald (1991).25 This index is calculated as the ratio of the ULC-based REER and the GDP deflator-based REER in the total economy.26 A rise in the index is associated with a loss in competitiveness and a worsening in the trade balance because the share of labor costs in value added rises relative to that of competitors. Unlike the ULC index, this indicator captures losses in competitiveness which result from a rise in the price of an intermediate input.

47. Figure 11 shows the real effective exchange rates and the relative profit indicator for the total economy. The relative profit indicator decreases over time as a result of a lower share of labor costs in value added in Tunisia relative to its competitors and partners. The decline in relative profits is associated with a gain in competitiveness, consistent with the relative price index indicator.

Figure 11.
Figure 11.

Tunisia: Effective Exchange Rates and Relative Profits, 1990-2000

(Index, 1990-100)

Citation: IMF Staff Country Reports 2002, 120; 10.5089/9781451837834.002.A001

Sources: IFS, WEO, authorities, and staff estimates.

D. Indicators of Export Performance

48. The main indicators of export performance considered in this analysis are export composition and export market shares. The composition of trade provides some indication of diversification of the economy and thus some information on the country’s vulnerability to sectoral shocks. Trade openness in Tunisia, measured as the sum of real exports and imports as a share of real GDP, increased from 98 percent in 1990 to 105 percent in 2001. The value of goods exports grew by 11 percent per year while the volume grew by 6 percent per year. Total exports as a share of GDP rose from 28.5 percent in 1990 to 33 percent in 2001. In conjunction with increased trade, the export composition also changed. Figure 12 illustrates the evolution in the composition of Tunisian exports to its main trading partners, Germany, Italy, and France.27 Tunisia’s share of exports of manufactured goods to these countries increased from 67 percent on average from 1990-95 to 78 percent from 1996-2000. This increase most likely reflected strengthened efforts to upgrade the industrial sector and liberalize external trade.

Figure 12.
Figure 12.

Composition of Tunisian Exports to its Main Trading Partners, 1990-2000

Citation: IMF Staff Country Reports 2002, 120; 10.5089/9781451837834.002.A001

Source: Trade Analysis and Reporting System (TARS).

49. Tunisia has improved the diversification of its export base within the manufacturing sector. As indicated in Figure 13 (Panels A and B), the composition of Tunisia’s manufactured goods exports to its main trading partners is relatively diverse. Its main manufactured exports consist of apparel/clothing/accessories, electrical equipment, textiles, and footwear. Electrical equipment has performed well, with the average share of exports to Tunisia’s trading partners increasing from 12.5 percent over 1990-95 to 16 percent over 1996-2000. Similarly, the average share of Tunisia’s exports of footwear to these trading partners increased from 6.5 percent to 8.3 percent. In contrast, other industries, such as textiles and apparel/clothing/accessories, have experienced a small decline in their export shares.

Figure 13a.
Figure 13a.

Tunisia: Manufacturing Export Shares of the Major Exporting Sectors, 1990-2000

(In percent)

Citation: IMF Staff Country Reports 2002, 120; 10.5089/9781451837834.002.A001

Source: Trade Analysis and Reporting System (TARS).
Figure 13b.
Figure 13b.

Tunisia: Export Shares of Manufactures, 1990-2000

(In percent)

Citation: IMF Staff Country Reports 2002, 120; 10.5089/9781451837834.002.A001

Source: Trade Analysis and Reporting System (TARS).

50.Figure 14 shows the evolution of export shares in North African countries with respect to EU imports. Export shares in Tunisia and Morocco both increased during the first half of the 1990s, stabilizing afterwards until 2001 when they experienced a significant rise following the REER depreciation. Algeria, however, had more volatile movements in export shares.28

Figure 14.
Figure 14.

Export Market Shares with Respect to EU Imports, 1990-2001

(In percent)

Citation: IMF Staff Country Reports 2002, 120; 10.5089/9781451837834.002.A001

Source: Direction of Trade Statistics.

VII. Conclusions

51. The CRERR worked well in Tunisia and the main findings of the paper suggest that there is no evidence of an overvaluation of the dinar exchange rate. Tunisia did not fall into the trap of a high and “plateau-type” inflation as predicted by the theoretical models on CRERR for a number of reasons: (i) the absence of significant shocks during the period; (ii) a prudent macroeconomic policy mix; and (iii) price and wage rigidities, including incomes policies. The actual exchange rate followed closely the path of the “equilibrium” rate estimated on the basis of the fundamental variable approach. Prudent macroeconomic policies combined with the structural reforms undertaken by the authorities in the last few years have helped Tunisia gain market share in the EU, particularly in exports of manufactured goods. Access to European markets has helped Tunisia integrate into the world economy, upgrade its industry and widen its export base.

52. The estimates of the equilibrium real exchange rate based on different fundamental variables indicate that Tunisia’s real effective exchange rate followed closely the equilibrium rate estimated by the model, and by 2000, was well in line with what would be predicted by the level of Tunisia’s fundamental determinants at that time. The analysis of a number of standard competitiveness indicators confirms that Tunisia has not experienced significant real exchange rate appreciation since 1990. Sizable improvements in labor productivity, the movement of the relative price of tradable and non-tradable goods, and the increase in export shares to the EU all point to evidence that Tunisia has maintained a competitive position in international markets.

53. While the CRERR approach has served Tunisia well, its limitations are now beginning to emerge in the context of the opening of the economy, increased regional and global integration, a more sophisticated market-based monetary policy, and the relaxation of capital controls. While the current level of the dinar parity does not give cause for concern, it is this new policy environment which makes it necessary to consider alternative approaches to exchange rate policy in the medium term.

Table 1.

Description of Variables

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References

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1

This chapter was prepared by Domenico Fanizza, Nicole Laframboise, Edouard Martin, Randa Sab, and Izabela Karpowicz (all MED).

2

Information on the basket of currencies is not disclosed.

3

The real exchange rate depreciated by 0.6 percent and 2.5 percent in 2000 and 2001 respectively.

6

It is assumed that wealth is not fully indexed to price level changes.

7

See Montiel and Ostry (1992).

8

Calvo et. al. (1995) have also defended the argument according to which, under a CRERR, the authorities can only target the exchange rate for a limited period of time.

10

Thus, for instance, between August 1968 and December 1976, the cruzeiro was devalued 81 times, or about once every 38 days. The mean devaluation was 1.5 percent. This crawling peg system, known in Brazil as minidesvalorizações, was implemented later for short intervals.

11

In July 1985, an exchange rate was established whose central parity was adjusted daily according to a schedule based on inflation during the previous month less the estimated world inflation rate.

12

Calvo et al. Ibid.

15

Tunisia exports oil but imports refined products. As a result, changes in oil prices do not modify significantly the country’s wealth. Tunisia could become more sensitive to oil price fluctuations in the future as its oil production declines.

16

This analytical framework was developed by Lane, Philip R. and Gian Maria Milesi-Ferreti, (1999) and (2000).

18

See Lane and Gian Maria Milesi-Ferreti, Ibid. The results presented here are based on their parameter estimates.

19

Unless otherwise specified in the text, foreign prices for each REER indicator have been calculated on the basis of the weighted basket of 15 countries that include Tunisia’s competitors and its major trading partners following the standard IMF methodology. All indices are expressed in U.S. dollar terms and period-average exchange rates are used. See Zanello and Desruelle, 1997 for more details on the IMF methodology.

20

For a comprehensive assessment of REER indicators, see Marsh and Tokarick (1994) and Maciejewski (1983).

21

The REER based on export-unit values appreciated by about 19 percent over the last eleven years. However, this indicator is not very reliable as it assesses only export performance exclusive of import developments, providing an incomplete analysis of competitiveness. In addition, they represent average values which make comparisons across countries sensitive to the composition of exports.

22

In 2001, the nominal exchange rate in Egypt was devalued by about 9 percent and in Morocco by 5 percent.

23

The competitors comprise Morocco, Spain, Greece, Hong Kong, Indonesia, Malaysia, Philippines, Portugal, Korea, Singapore, and Thailand.

24

According to the SIC, traded goods can be grouped according to the following three categories: (1) agriculture, hunting, forestry, and fishing; (2) mining and quarrying; and (3) manufacturing. Non-traded goods belong to the following six categories: (1) electricity, gas, and water; (2) construction; (3) wholesale and retail trade, restaurants, and hotels; (4) transport, storage, and communication; (5) financing, insurance, real estate, and business; and (6) community, social and personal services.

26

The best indicator for relative profits would be the one based on ULC and GDP deflator-based REERs in the manufacturing sector. However, due to data limitations, this index could not be constructed.

27

About 74 percent of Tunisia’s trade in 2000 was with the EU, in particular, Italy, Germany, and France accounted for 60 percent of Tunisia’s exports.

28

Note that over 95 percent of Algeria’s exports to the EU are hydrocarbon products.

APPENDIX I Main Policy Measures in the Monetary, Financial and External Sector, 1987–2001

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Source: BCT, Ministry of Economic Development; and IMF Annual Report on Exchange Arrangements and Exchange Restrictions.

APPENDIX II Detailed Description of Exchange Regulations44

The liberalization process of foreign exchange regulation that began in 1987, led in December 1992 to the dinar current account convertibility. Since then, resident corporations can freely transfer the amounts of their imports of goods and services. They were aligned, on this level, to fully exporting corporations, which have gained, since 1972, total freedom for operations pertaining to their production activities.

This process was accompanied, for capital transactions, with the freedom given:

  • To resident corporations partly or fully exporting to invest abroad in order to back up their exporting effort;

  • To banks and corporations to borrow in foreign currencies for their activities needs within the limits of TD10 and TD3 million per year respectively; and

  • To foreign investors to take portfolio participations accounting at least for 50 percent in listed or unlisted Tunisian corporations.

A. Basic Principles

Foreign trade and foreign exchange regulation is based on the foreign exchange code.45 Foreign exchange regulation is based on the following principles:

  • Free transfer of current transactions and net real proceeds, as well as the value added from sale or liquidation of capital invested previously through foreign currency import. All other transactions and commitments of which a transfer arises or may arise as well as any clearing of debts with foreign countries are submitted to prior authorization;

  • Assets movements between Tunisia and foreign countries have to be executed through the Central Bank of Tunisia or, on the authority of the latter, by chartered banks;

  • Any individual or legal entity must deposit at a bank foreign banknotes, checks, evidence of indebtedness denominated in foreign currencies as well as foreign securities that it holds in Tunisia. Travelers are authorized to hold in their possession the imported currencies to meet their current expenditures during their stay in Tunisia;

  • Resident individuals of Tunisian nationality as well as legal entities have to declare their holding abroad to the Central Bank of Tunisia; and

  • Residents have to repatriate and, with exceptions provided for by the regulation in force, sell on the foreign exchange market currencies arising from goods export, remuneration of offered services abroad and, more generally, any income, or proceeds coming from abroad.

B. Exchange Rate Regulation

  • Tunisia accepted on January 6, 1993 the obligations provided for by Article VIII of the International Monetary Fund Status;

  • The exchange rate of the Tunisian dinar has been determined freely on the foreign exchange market since March 1, 1994 between official intermediaries of the Tunis area including offshore banks operating on behalf of their resident customers;

  • The Central Bank of Tunisia intervenes on this market and publishes the interbank exchange rate of currencies and banknotes at the latest the following day;

  • Importers and exporters may cover themselves against exchange risk on the forward interbank market. Forward rates are freely negotiated between operators and the counterpart bank;

  • To cover themselves against exchange risk, residents that contract loans in foreign currencies may buy 3-, 6- and 12-month options.

C. Residency

Foreign exchange regulation is applied to individuals according to their residence.

Residents: Tunisian or foreign legal entities carrying out activities in Tunisia; individuals of Tunisian nationality residing in Tunisia; Tunisian civil servants working abroad whatever the duration of their stay is; individuals of foreign nationality residing in Tunisia for more than two years and carrying out their activities in Tunisia. These individuals lose their quality of residence as soon as they leave Tunisia for good.

Nonresidents: Tunisian or foreign legal entities carrying out their activities abroad; individuals of foreign nationality not residing in Tunisia; foreign civil servants working in Tunisia whatever the duration of their stay is; individuals of Tunisian nationality residing abroad for more than two years and carrying out their activity. These individuals may have the status of residence to execute a number of transactions in Tunisia (loans in dinars, opening accounts in Tunisia, purchase of real estate in Tunisia). As soon as they return to Tunisia for good they reintegrate their resident status.

Derogatory regime: Nonresident status is granted to financial and banking bodies dealing essentially with nonresidents, created in the form of limited companies under Tunisian law or companies set up in Tunisia and which head office is abroad. An option may be taken to acquire this status by totally exporting companies created within the investment incentive code or set up in the economic free zones of Bizerte and Zarzis as well as international trade companies when their capital is held by Tunisian or foreign nonresidents through an import of convertible currencies equal at least to 66 percent of the capital.

D. Import and Re-Export of Settlement Means

  • Import and export of Tunisian currency in banknotes or coins are forbidden.

  • Nonresident travelers may import freely unlimited amounts of foreign banknotes, checks and any other settlement means denominated in foreign currencies.

  • Imported foreign currencies must be declared to customs when entering the Tunisian territory if they are intended to be deposited in an account in foreign currency or convertible dinars or if the non-resident traveler intends to re-export an amount higher than the counter value of 1,000 Tunisian dinars.

  • The trading in foreign banknotes and travelers checks in foreign currency is ensured by chartered banks, customs offices entitled in this regard as well as individuals authorized by a chartered bank (such as hotel and restaurant owners, travel agencies and handicraft shops).

  • Non-resident travelers may reconvert unlimited amounts of Tunisian dinars on presentation of an exchange note delivered to them when assigning foreign currencies if the amount to be reconverted is less than 1,000 Tunisian dinars and this same note is accompanied by the customs declaration if the amount to be reconverted is higher than 1,000 Tunisian dinars;

  • They may re-export without voucher:

    • Foreign banknotes the exchange value of which does not exceed 1,000 dinars;

    • All other means of payment denominated in foreign currencies made abroad and bearing their name.

    • Imported foreign banknotes exceeding 1,000 Tunisian dinars on presentation of the customs declaration made at their arrival in Tunisia.

    • Foreign banknotes received from abroad by checks, transfer, money order or any other evidence of indebtedness as well as foreign banknotes arising from a debit of a foreign account in foreign currencies or convertible dinars on presentation of an exchange note that is worth an authorization of foreign currency transfer.

E. Residents’ Accounts

Special accounts in foreign currency or convertible dinars: they can be opened freely by: individuals of Tunisian nationality changing their usual place of residence from abroad to Tunisia; individuals of foreign nationality residing in Tunisia; Tunisian diplomats and civil servants that are seconded abroad; resident individuals and legal entities for their untransferable assets regularly received abroad. These accounts are freely credited in foreign currencies arising from income or proceeds of assets regularly earned abroad.

Professional accounts: In convertible currencies: they can be opened freely by resident exporters of goods and services for their activity requirements. These accounts are intended essentially to help their holders cover themselves against exchange risk, hi convertible dinars: they are opened, on authorization of the Central bank of Tunisia, by any resident individual or legal entity having foreign currency resources.

Special accounts “export-profit” in convertible dinars: they are opened, on an authorization of the Central Bank of Tunisia, in the name of resident individuals who make profit in their own export activities of goods or services and/or are shareholders or partners in resident companies that make profit in export transactions of goods or services. They are freely debited for any transfer in foreign currency for matters of traveling abroad or acquiring “benefits” abroad other than real estate.

F. Nonresidents’ Accounts

Foreign accounts in foreign currency or convertible dinars: they can be opened freely by resident individuals or legal entities whatever their nationality is. They are freely credited and debited in foreign currency.

Nonresidents’ internal accounts “INR:” these accounts, the opening of which is free, are intended to the use by foreign individuals residing temporarily in Tunisia and earning an income in dinars.

Special accounts in dinars: they may be opened freely by non-resident foreign enterprises that stroke bargain in Tunisia in order to place the share of these bargains payable in dinars intended to cover their local expenditures.

Suspense accounts: these are accounts in dinars that may be freely opened by nonresidents of any nationality to place all receipts falling to them in Tunisia while awaiting the Central Bank of Tunisia to decide whether to allocate these receipts to a capital account or their transfer.

Capital accounts: they are intended to receive assets in dinars of nonresidents that do not have any transfer guarantee. Their opening is free for non-resident foreign individuals or legal entities. It is submitted to a prior approval of the Central Bank of Tunisia for Tunisian nonresidents or their husband and wife.

G. Transfers for Current Transactions: Principle

Transfers regarding current transactions are free (trade transactions, transactions related to enterprise production, transport, insurance, capital income, operations concerning banking and financial expenditures, public sector operations, general operations such as subscriptions, advertising, entertainment and show contracts).

H. Foreign Trade

Imports

Regime and procedures:

  • All imports are free except those concerning public order, hygiene, morality, fauna and flora protection and cultural heritage. Import of some products such as some types of cars, remains temporarily submitted to prior authorization.

  • Imports are submitted to the obligation of payment by bank order through a chartered intermediary.

  • Products under the regime of free foreign trade are imported through an import certificate accompanied with documents required by the regulation in effect.

  • Products excluded from the regime of free foreign trade are set by a list fixed by decree; they are imported through an import authorization delivered by the Ministry of Trade.

Totally exporting enterprises of goods and services as well as enterprises established in economic free zone may import freely without foreign trade formalities, all necessary products to their production subject to their customs declaration.

Settlement

  • Import settlement is freely executed by the chartered paying agent after the effective entry of goods justified by customs charging.

  • Imports may give rise to down payments subject of the issue in favor of the importer of a down payment restitution guarantee on request by the supplier’s bank.

  • The settlement of goods may be executed before their reception subject to justifying their direct and exclusive shipment of Tunisia.

Exports

Regime and procedures

  • All exports are free except those provided for in a list fixed by decree.

  • Exports of products benefiting from the regime of free foreign trade are made on presentation of a final invoice to customs.

  • Exporters must pay the charged invoice by customs through a chartered intermediary at the latest, eight days after the shipment of goods.

  • Excluded products from the regime of free foreign trade are exported on presentation of an authorization delivered by the Ministry of Trade and paid through a chartered intermediary.

Settlement

  • Sales for cash (at the latest 30 days from the date of shipment) may be paid by any means of settlement.

  • Sales on credit providing for settlement periods up to 180 days starting from the date of shipment are executed freely when accompanied with a payment guarantee, an irrevocable letter of credit or stand by letter of credit, an endorsed draft or an insurance policy of credit at export.

Export receipts

  • Export proceeds have to be repatriated in the 10 days that follow the due date.

  • Totally exporting nonresident enterprises, international trade nonresident enterprises as well as nonresident enterprises established in economic free zones are neither bound to repatriate nor to assign their export receipts.

  • Resident exporters may keep in their foreign currency professional accounts up to 50 percent of the proceeds of their exports.

I. Foreign Investments in Tunisia

Direct foreign investments

Foreign investment in projects in Tunisia is free at the level of creation and expansion. If is submitted to prior authorization for projects achieved in some sector activity.

Portfolio foreign investments

Are submitted to authorization:

  • The purchase by nonresidents of foreign nationality of businesses and real estate situated in Tunisia.

  • The purchase by foreigners of shares conferring a voting right or shares of companies established in Tunisia if it raises the foreign participation to 50 percent or more of these companies capital

  • The purchase by nonresidents of foreign nationality of bonds issued by the State or resident companies.

Nonresidents having made investments, pursuant to the regulation into force, are free to transfer net real proceeds and added value of the assignment or liquidation of their invested assets through foreign currency import.

Tunisian investments abroad

In order to support their exporting activities, resident enterprises may freely invest abroad in terms of their foreign currency turnover of the previous year:

  • From D 20 thousand to D 100 thousand per annum for financing representative offices.

  • From D 40 thousand to D 200 thousand per annum for financing branches, subsidiaries and participation intake.

J. External Loans

Resident enterprises may, for their activities needs, borrow freely from nonresidents in foreign currencies or convertible dinars up to 10 million dinars per civil year for financial institutions and 3 million dinars per civil year for other enterprises. Transfers related to principal reimbursement and interest payment of these loans are free.

APPENDIX III Stylized Sequence of Liberalization

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29

This chapter was prepared by Bernard Laurens and Abdourahmane Sarr (both MAE).

30

See Speech of the Governor of the BCT on the occasion of the Forum International, L’Economiste Maghrébin: “La Convertibilité Totale du Dinar,” May 24, 2001.

31

Appendix I summarizes the main policy measures during the period 1987–2001.

32

Box 2 describes the impact of trade liberalization on the Greek financial sector.

33

Aware of the impact trade liberalization will have on many sectors the authorities initiated a modernization program (programme de mise à niveau) in order to prepare Tunisian companies for a more competitive environment.

34

During the 1970s and much of the 1980s, Tunisia pursued inward-looking development strategies emphasizing the key role of the state in accelerating economic development and ensuring national control over strategic sectors.

35

Non-interest bearing assets include the net NPLs (i.e., about 10 percent of loans) and past NPLs to public enterprises that have been taken over by the government and replaced with non-interest bearing claims on the government repayable over a 25-year period.

36

This section relies on Shogo Ishii and Karl Habermeier, Capital Account Liberalization and Financial Sector Stability, IMF Occasional Paper (forthcoming) (Washington: International Monetary Fund).

37

A similar analysis applies to capital flight through over- or under-invoicing.

38

On average, NPLs (net of provisions) are less than 5 percent of total credits in OECD countries. In France, net NPLs at the end of 2000 reached 1.8 percent of total credits: gross NPLs were 4.7 percent and provisioning reached 64 percent; NPLs in small and medium-sized banks were higher than in the largest banks (8.2 percent against 4.6 percent); however, the levels of provisioning were comparable (69 percent for the small and medium-sized banks against 67 percent for the largest banks).

39

See Box 6 for an analysis of the adverse consequences on the banking sector of longstanding involvement of the Korean government in the financial system.

40

Implicitly, the provision of the liquidity needed for the banks to comply with reserve requirements implies an interest rate objective. Conversely, a determination of monetary interventions on the basis of the monetary program would imply supply the system with a given amount of liquidity which banks would then trade at the resulting market rate.

41

10 percent equity participation could be required for investments to quality as FDIs.

42

Limitations of inward FDIs on sectors critical for national security could still be retained.

43

A wide variety of well-functioning financial markets can make the financial market more resilient in the face of shocks. This observation has been made, most notably, by U.S. Federal Reserve Chairman Alan Greenspan.

44

Source: Central Bank of Tunisia (website).

45

Law No. 76–18 of January 21, 1976 and Law No. 94–41 of March 7, 1994 relating to foreign trade and their enforcement texts.

Tunisia: Selected Issues
Author: International Monetary Fund
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    Chile: Real Effective Exchange Rate, 1982-2001

    (1990-100)

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    Tunisia: Terms of Trade, 1981-2001

    (Index, 1990-100)

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    Tunisia: Budget Deficit and Private Demand, 1992-2001

    (Change in the ratio to GDP, in percent)

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    Tunisia. Credit to the Economy, 1994-2001

    (Growth in percent)

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    Tunisia: Actual and Equilibrium Real Exchange Rate Indices

    (Panel data estimation)

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    Tunisia: Real Exchange Rate Indicators, 1990-2001

    (Index, 1990=100)

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    Selected Middle East and North Africa (MENA) Countries: CPI-Based Real Effective Exchange Rates, 1990-2001

    (Index, 1990=100)

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    Tunisia: EU Import-Weighted CPI-Based Real Effective Exchange Rate, 1990-2000

    (Index, 1990=100)

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    Tunisia: Relative Prices of Non-Traded to Traded Goods, 1990-2001

    (Index, 1990=100)

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    ULC Indices in the Manufacturing Sector in Tunisia’s Main Trading Partners and Morocco, 1990-2000

    (1990=100)

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    Tunisia: Effective Exchange Rates and Relative Profits, 1990-2000

    (Index, 1990-100)

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    Composition of Tunisian Exports to its Main Trading Partners, 1990-2000

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    Tunisia: Manufacturing Export Shares of the Major Exporting Sectors, 1990-2000

    (In percent)

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    Tunisia: Export Shares of Manufactures, 1990-2000

    (In percent)

  • View in gallery

    Export Market Shares with Respect to EU Imports, 1990-2001

    (In percent)