2009 Article IV Consultation: Staff Report; and Public Information Notice

This 2009 Article IV Consultation highlights that Tunisia has weathered the impact of the current crisis relatively well. Real GDP growth slowed down from an average of 4.6 percent in 2008 to 0.5 percent in the first quarter of 2009, reflecting mainly a fall in exports of manufactured goods to European Union countries. Executive Directors have commended the authorities for the good performance of the Tunisian economy in the context of the global crisis, owing to strong fundamentals resulting from sound policies implemented over the years.


This 2009 Article IV Consultation highlights that Tunisia has weathered the impact of the current crisis relatively well. Real GDP growth slowed down from an average of 4.6 percent in 2008 to 0.5 percent in the first quarter of 2009, reflecting mainly a fall in exports of manufactured goods to European Union countries. Executive Directors have commended the authorities for the good performance of the Tunisian economy in the context of the global crisis, owing to strong fundamentals resulting from sound policies implemented over the years.

I. Background and Recent Developments

A. Background

1.Sound economic policies and structural reforms, underpinned by increasing trade openness, allowed Tunisia to record higher growth and strengthen its footing to face the current global crisis. Over the last decade, growth averaged 5 percent, real GDP per capita increased by 46 percent, inflation was maintained at 3 percent on average, the public debt-to-GDP ratio declined by 9 percentage points to 47½ percent of GDP, and reserves increased from 2⅓ to 5 months of imports. The Association Agreement with the European Union (EU), signed in 1995, was instrumental in raising trade openness and inducing productivity gains by exposing the industrial sector to global competition. Tunisia’s prudent macroeconomic policies and structural reforms have improved its resilience to economic slowdowns with lower public and external indebtedness and much higher reserves coverage of short-term external debt.

Episodes of Economic Slowdown: 2002 and 2009

Selected Indicators

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Source: Tunisian authorities; and IMF staff estimates.

Excluding grants and privatization

2. In the current severely deteriorated international environment, Tunisia’s immediate challenge is to mitigate the adverse impact of a depressed external demand. It is highly dependent on European countries for exports, tourism receipts, remittances and FDI inflows. These countries are experiencing the worst recession in sixty years and their activity is projected to strengthen more slowly than elsewhere. Thanks to its prudent policies in the past, Tunisia has room for short-term expansionary fiscal and monetary policies to sustain demand.


Main Links Between Tunisia and the European Union, 2008

Citation: IMF Staff Country Reports 2009, 329; 10.5089/9781451837957.002.A001

Sources: Tunisian authorities; and IMF staff estimates.

3. over the medium term, Tunisia’s main challenge remains to reduce the still relatively high unemployment rate, particularly among young university graduates. Bringing unemployment down from 14.2 percent in 2008 to the authorities’ objective of 10 percent by 2016 will require sustaining a 6 percent annual growth for several years. This will necessitate continued structural reforms aimed at additional productivity gains, including through further integration in the regional and global economies. Tunisia’s resilience to shocks will be enhanced through prudent macroeconomic policies and further strengthening of its financial sector.

B. Recent Developments

4. Although affected by the global crisis, Tunisia is weathering its impact relatively well. Exports fell but resilient receipts from tourism and remittances have so far contributed to maintaining a comfortable level of reserves.

  • Real GDP growth slowed down from an average of 4.6 percent in 2008 to 0.5 percent (year-on-year) in the first quarter of 2009, reflecting mainly a fall in exports of manufactured goods to EU countries. This drop was partially offset by buoyant growth in the mining and energy sectors and in some services. Domestic demand was sustained by investment and strong consumption fueled by salary increases. 1

  • Inflation declined from an average of 5 percent in 2008 to 3½ percent (year-on-year) in June 2009 due to the fall in global food and fuel prices and an appropriate monetary policy, while price increases for other services accelerated slightly, in line with rising salaries.

  • The current account deficit, after widening in 2008, contracted in the first quarter of 2009. Increases in imports of raw materials and capital brought the current account deficit to 4.2 percent of GDP in 2008. With lower import prices contributing to an improved trade balance and resilient tourism and remittances receipts, the deficit declined in early 2009. Despite somewhat smaller foreign investments inflows in early 2009, the external position remains comfortable with reserves at US$9 billion at end-May 2009 (5.6 months of projected imports).

  • The fiscal deficit declined markedly in 2008 to 1.2 percent of GDP and the public debt-to-GDP ratio was further reduced. Revenue increased by over 2 percentage points of GDP from 2007, boosted by buoyant customs duties levied on higher priced imports and strong corporate income tax receipts from high 2007 profits. Combined with lower interest payments, this more than offset expenditure overruns on subsidies for staple foods and petroleum products due to higher world prices. With this fiscal consolidation, the public debt-to-GDP ratio declined from 50 percent in 2007 to 47½ percent in 2008. In January-April 2009, the continued good revenue performance and lower subsidies offset the wage bill increase.

  • The Central Bank of Tunisia (BCT) reacted to the economic slowdown by loosening its monetary policy in 2009. After raising it twice in 2008, the BCT lowered its required reserves ratio from 10 percent to 7.5 percent at end-2008. It also reduced its key policy rate from 5¼ percent to 4½ percent in February 2009, its first such policy change in thirty months. Meanwhile, the BCT almost continuously absorbed the abundant liquidity in the banking system mainly due to Treasury operations and foreign reserves inflows. In the year to May 2009, the nominal Credit by sector of activity, in billions of Tunisian dinars effective exchange rate depreciated by 3.4 percent, reflecting in part the dinar’s depreciation against the Euro by 4 percent, while the real effective exchange rate depreciated by 0.3 percent.

  • The Tunisian financial sector was not directly affected by the global financial crisis. Banks rely only slightly on external financing and continued attracting strongly growing deposits. Credit to the economy further increased in the first quarter of 2009, particularly for services, while loans to the manufacturing sector slowed down. Banks’ profitability increased in 2008, which contributed to a buoyant stock market.2 This performance was also helped by stable foreign capital and the creation of two investment funds.

Source: Tunisian authorities; and IMF staff estimates.
Figure 1.
Figure 1.

Panel A. Exports fell and real GDP growth slowed down but reserves remain comfortable…

Citation: IMF Staff Country Reports 2009, 329; 10.5089/9781451837957.002.A001

1/ The ratio for the first quarter is annualized, IMF projections for 2009.2/ The ratio for January-April is annualized, IMF projections for 2009.
Figure 2.
Figure 2.

Panel B…. Credit to the economy is buoyant and the stock market resilient.

Citation: IMF Staff Country Reports 2009, 329; 10.5089/9781451837957.002.A001

II. Outlook and Risks

5. Tunisia was relatively insulated from international financial contagion (Box 1) but is exposed to a slowdown in economic activity in its partner countries. Tunisia has a capital account which is only partially open, low rollover risks, limited need for external borrowing thanks to sizeable privatization receipts, and has been gradually strengthening its banking sector. However, it is vulnerable to adverse shocks to its external demand and their eventual repercussions on its domestic services sector, including the banking system. In particular, spillover effects from European partners are relatively strong and will weigh on Tunisia’s growth prospects in the short term.3


Tunisia and Main EU Partner Countries Growth in Real GDP (year-on-year in percent) 2002 QI to 2010 QIV

Citation: IMF Staff Country Reports 2009, 329; 10.5089/9781451837957.002.A001

Source: Tunisian authorities; and IMF staff projections.1/ France, Italy, Germany, Spain.

Limited Exposure to Financial Contagion

• The capital account is only partially open, which has prevented the integration of Tunisian banks with the international financial system. External assets of Tunisian banks represent only 4 percent of their total assets while external liabilities amount to 8½ percent of total liabilities. Several restrictions limit capital transactions in foreign currency, including an obligation for banks to transfer their outstanding daily foreign exchange balances to the BCT and ceilings on foreign investment by Tunisian firms, foreign borrowing by banks and foreign investment in Tunisian firms. Foreign ownership—mostly long-term investors in prominent Tunisian holdings—accounts for 25 percent of stock market capitalization.

• Tunisia has no pressing need to borrow on international capital markets. It still disposes of significant resources (3 percent of GDP) from the partial privatization of Tunisie Télécom in 2006, and just concluded new lending agreements with the African Development Bank and the World Bank amounting to US$500 millions over 2009-10.

• Low rollover and interest risks for external debt. Most external debt is contracted over the medium and long term, owed to multilateral and bilateral official lenders with fixed interest rates, and only a small share of external debt is maturing in the next five years.


Structure of Tunisia’s External Debt, 2008

Citation: IMF Staff Country Reports 2009, 329; 10.5089/9781451837957.002.A001

Source: Tunisian authorities; and IMF staff estimates.

• Adequate level of reserves: at end-May 2009, total reserves represented 157 percent of short-term debt at remaining maturity until end-2009.

6. The authorities’ real GDP growth objective of 3 percent in 2009 may be reached if downside risks do not materialize and Tunisia’s fiscal stimulus swiftly impacts demand. In line with the projected recession of about 4 percent in partner countries, exports of goods will decline. Based on developments during the first half of the year, tourism receipts and remittances are projected to be only mildly affected by the crisis this year. 4 The measures deployed by the authorities to contain the impact of the global crisis, including with the recently adopted fiscal stimulus package and a more accommodating monetary policy, would sustain demand. Moreover, Tunisia’s growth will likely benefit from a good cereal crop and a sharp increase in gas production. Nevertheless, such a growth performance—about 7 percentage points higher than in partner countries—is unlikely to prevent a rise in unemployment, and adverse developments in the next few months remain possible.

7. The highly uncertain international environment and the possibly delayed impact of the fiscal stimulus package represent significant downside risks to these projections. The recession and higher unemployment in European partners may depress remittances and tourism receipts during the remainder of the year. A slower rebound of these economies in 2010 would also limit Tunisia’s growth performance next year. Moreover, the implementation of the fiscal stimulus measures—particularly accelerating infrastructure investments—may be hampered by bottlenecks.

8. The medium-term outlook is favorable, based on the projected global economic recovery. Tunisia could take further steps to fully benefit from the global economic recovery by pursuing structural reforms, including in the banking sector where continued reinforcement would be beneficial. Once the crisis subsides, fiscal consolidation should bring back the public debt-to-GDP ratio to a declining path.

III. Policy Discussions

9. Discussions focused on short-term macroeconomic policies to minimize the impact of the crisis on growth and unemployment while preserving macroeconomic stability and reforms that could further foster productivity gains over the medium term.

A. Fiscal Policy

Background and staff analysis

10. Tunisia has leeway for implementing fiscal stimulus measures to mitigate the impact of the recession in partner countries. A fiscal deficit of up to 4 percent of GDP would still leave the public debt-to-GDP ratio below 50 percent (its 2007 level). Revenues are projected to decline significantly in 2009 (by 2½ percent of GDP)—a reversal from 2008—but savings on subsidies for petroleum products and staple foods would allow discretionary increases in expenditures of close to 1½ percent of GDP. Given the abundant liquidity in the banking system, the higher deficit could be financed domestically without crowding out credit to the economy, and avoiding the need for external financing. To be most effective, the fiscal stimulus package should:

  • Be executed rapidly so that it can impact growth this year.

  • Ensure that expenditure is well-targeted in order to maximize its impact.

  • Be extended into 2010, given the still weak global outlook anticipated for 2010. However, maintaining budgetary expenditures in 2010 at their 2009 level may be constrained by a revenue base weakened by the economic slowdown and the capacity to borrow externally.

11. The fiscal expansion in the short term should be set in a medium-term framework where public debt would revert to a declining path once growth firms up. Although Tunisia’s public debt-to-GDP ratio has declined in recent years, it remains near the median of countries with similar sovereign ratings. Its experience in 2009 underscores the importance of maintaining fiscal space to counter the impact of shocks on aggregate demand. Two key pillars of that strategy would be to further streamline food and fuel subsidies and implement a reform of the pension scheme to prevent a deficit in the near future.


Public Debt: Tunisia vs. Median for Emerging Market Economies with Similar Sovereign Rating 1/2/

(In percent of GDP)

Citation: IMF Staff Country Reports 2009, 329; 10.5089/9781451837957.002.A001

1/ Tunisia, Barbados, Brazil, Bulgaria, Croatia, Jordan, Kazakhstan, Mauritius, Morocco, Romania, and Russia.2/ Figures for 2009 and 2010 are IMF staff projections.

12. Tunisia has a relatively wide social safety net, built over the years, that should help cushion the potential social impact of the crisis. There is no unemployment insurance scheme, but fired workers are eligible for social assistance for up to one year. The coverage of social security is nearly universal and Tunisia has a widespread program of subsidized housing for the poorer segments of the population.

Authorities’ views and policy intentions

13. Fiscal prudence remains an overarching priority of the authorities, but they saw the need for reasonable short-term fiscal expansion given the exceptionally depressed external environment. The authorities emphasized their prompt reaction to the crisis through targeted support for exporting firms from end-2008, which limited the number of layoffs. Since the impact of the global crisis could become more widespread and prolonged, the authorities adopted in mid-2009 a fiscal stimulus package of 1.4 percent of GDP in the supplementary budget and extended and expanded the support measures already in place (Box 2). The authorities estimate the effect of the fiscal stimulus on growth at½ percentage point of GDP in 2009,5 as they are accelerating its implementation and maximizing its impact through labor-intensive investment projects with low import content.

14. The authorities will reevaluate the fiscal stimulus measures for 2010 based on economic and financial developments, but consider the deficit projected in 2009 of 3.8 percent of GDP as an upper bound. Although much improved, they see Tunisia’s capacity to weather two consecutive years of a difficult international environment as under test. Therefore, they aim to enhance the revenue base through programs to stimulate energy production, and to improve expenditure targeting.

15. The authorities are resolutely committed to reverting to medium-term fiscal consolidation as soon as growth firms up. They intend to streamline the subsidies for petroleum products based on the price adjustment mechanism introduced in 2009, while maintaining subsidies on staple foods. They consider the administrative costs of effectively targeting the needier households with direct cash transfers as exceeding the cost of the current system, for which direct controls prevent abuse. They also intend to reduce interest on public debt by using privatization receipts for accelerated debt repayment when deemed financially advantageous. Finally, they launched preparation for a pension reform that should address the impact of demographic pressures.

The 2009 Supplementary Budget and Fiscal Stimulus Package

The authorities adopted in December 2008 several temporary measures to support exporting firms affected by the crisis, including partial exemption of social security contributions, fiscal incentives, and credit guarantees.

An allocation of TD 730 million (1.4 percent of GDP) is provided in the supplementary budget adopted in July 2009 for additional expenditures in 2009 relative to 2008, including for accelerated public investment projects and expanded direct support measures.

The economic recovery program includes the following additional expenditures:

1. Accelerated investment projects: 0.3 percent of GDP;

2. Maintenance (in education, health, and finance): 0.1 percent of GDP;

3. Support for employment (professional training courses, exemption of social security contributions, and a special recruitment program): 0.2 percent of GDP;

4. Support for exports (export guarantees and other budgetary transfers to export credit and insurance companies): 0.1 percent of GDP;

5. Support for enterprise restructuring: 0.3 percent of GDP;

6. Support for energy production (oil exploration and production of electricity): 0.2 percent of GDP;

7. Regional development: 0.2 percent of GDP.

16. The authorities continue to pursue social reforms. The health insurance reform was completed in 2008 to ensure the system’s sustainability. The authorities also favor for now active employment policies over an unemployment insurance scheme, as the latter could reduce Tunisia’s competitiveness and attractiveness as an investment location.6

B. Monetary and Exchange Rate Policy

Background and staff analysis

17. In the context of declining inflation and lower economic activity, a more accommodating monetary policy helped to sustain demand. Further easing, if warranted, would need to take place only gradually and in coordination with fiscal policy, and take into consideration potential inflationary pressures from the rebound in commodity prices or the abundant liquidity. A further deepening of the money market would help enhance monetary policy transmission.

18. The BCT continues to implement the building blocks of an inflation targeting framework for monetary policy. It created a center devoted to the analytical underpinning of the monetary policy framework, and has received EU technical assistance for training and software support.

19. Tunisia’s exchange rate remains broadly aligned with its fundamentals, and current account developments and exchange rate policies are consistent with external stability (Box 3). Interventions by the BCT on both sides of the foreign exchange market have declined since 2007, except in October-November 2008 when market participants preferred transacting through the BCT. Tunisia is expected to continue to attract foreign capital to finance a level of investment above its domestic savings, with a sustainable current account deficit of around 3 percent over the medium term.

Authorities’ views and policy intentions

20. The authorities stand ready to cautiously ease monetary policy further to sustain demand as needed. In order to deepen the money market and improve its liquidity management tools, the BCT introduced in February 2009 two new facilities for deposits and borrowing by banks, which resulted in more variable money market rates within the band provided by these facilities. It sees the need for further progress, including by developing the secondary market for Treasury bills, enhancing the role of insurance companies and issuing debt certificates available for foreign investors.

21. The authorities will pursue preparatory steps towards an inflation-targeting framework. In that respect, they would welcome technical support from IMF staff for the new center for financial and economic analysis to develop data bases and enhance practical expertise.

22. The authorities reaffirmed their objective of a freely floating exchange rate over the medium term. They noted that the BCT’s interventions on foreign exchange markets were for liquidity management purposes, and declined with the easing of restrictions on the capital and current accounts. This trend will continue as Tunisia further liberalizes its capital account. They also remarked the relative stability of Tunisia’s exchange rate in contrast with other emerging economies more affected by the financial crisis.

An Assessment of the Exchange Rate Level

Results using the CGER methodology suggest that the current level of the real effective exchange rate (REER) is broadly in line with fundamentals.1

  • Using the CGER’s macroeconomic balance (MB) yields a very small undervaluation of the REER (1.2 percent).

  • The external sustainability (ES) approach suggests an undervaluation of 4.7 percent.

  • Tunisia is not included in the CGER sample for the CGER equilibrium real effective exchange rate (EREER) approach.

Exchange rate assessment using CGER panel estimates

(In percent)

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Adjusted for exchange rate changes. Overvaluation (+); undervaluation (-)

To complement the study, a country-specific cointegration relationship was estimated for Tunisia. Under this specification, the equilibrium real effective exchange rate is determined by the labor productivity relative to trading partners (prod), the terms of trade (tt), and the trade openness (open):

reer* = 7.36 + 1.67 prod + 0.26 tt -0.91 open

(23.4) (8.5) (3.6) (-10.5)

This approach suggests a small undervaluation of 3.9 percent for 2008, in line with the estimates under the CGER approach.

This analysis suggests that the depreciation in the REER over the past five years is consistent with an equilibrium real exchange rate depreciation driven by higher openness and a deterioration in the terms of trade that outweigh the Balassa-Samuelson effect from increased productivity gains against trading partners. Alternative measures of the REER (unit labor costs- and producer price index-based) point at a slight improvement in competitiveness in recent years.


REER and Equilibrium REER,

1970-2008, 2000=100

Citation: IMF Staff Country Reports 2009, 329; 10.5089/9781451837957.002.A001


Real Effective Exchange Rates (REER)

2000-08, 2000=100

Citation: IMF Staff Country Reports 2009, 329; 10.5089/9781451837957.002.A001

1/ The CGER methodology can be found at this link: (http://www.imf.org/external/pp/longres.aspx?id=3957)

C. Financial Sector Issues

Background and staff analysis

23. Banks soundness indicators continued to improve in 2008, but the level of nonperforming loans (NPLs) remains relatively high requiring additional provisioning which hampers banks profitability and development. Continuing recent trend, banking activity, liquidity and profitability increased in 2008, the ratio of NPLs to total loans declined, and the provisioning improved. New NPLs related to the recent credit growth appear very small, while the stock of older NPLs did not decline significantly. The situations of individual banks differ widely: while many of them will be able to achieve the authorities’ provisioning objective of 70 percent by end-2009, some banks will need new recapitalization.

24. Past and international experience show that the banking system can be vulnerable to the current economic slowdown. Tunisia’s tourism crisis in 2002 resulted in a subsequent significant increase in NPLs, yet unresolved. In the context of the current global crisis and its impact on Tunisia, implementing comprehensive stress tests is a priority, since it would further shed light on potential vulnerabilities and a possible need for strengthening measures to reduce them. Fund staff stands ready to assist in this area.

Commercial Banks Soundness Indicators 1/

(In percent)

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Source: Tunisian authorities.

International comparisons of the NPL ratio should be interpreted with caution since calculation methods may vary from one country to another. In the case of Tunisia, international standards for classification of NPLs are strictly observed.


Prior to 2006, the average capital adequacy ratio only includes private and public banks.

25. A more forward-looking approach to banking supervision could be beneficial, including in the perspective of Basel II. The authorities’ careful attention to NPLs and provisioning relates to already materialized credit risks. The capital adequacy ratio, which improved slightly in 2008 but remains below its 2005 level, is a measure of banks’ capacity to face future risks. With the implementation of Basel II, requirements for the coverage of credit, market and operational risks will be more stringent, and may necessitate further increases in capital adequacy ratios.

Authorities’ views and policy intentions

26. The authorities emphasized the important steps achieved in strengthening the banking sector and aim at further steady progress in this area. Setting clear objectives for NPLs and provisioning ratios by end-2009 (of 15 and 70 percent, respectively)—in the context of their long-term strategy—induced a proactive stance by all parties that resulted in limiting new NPLs. Banks’ capacity for risk assessment improved with effective use of credit risk databases, prudential requirements for governance and control of credit distribution were strengthened, and action plans for troubled banks were agreed and their implementation is closely monitored. The authorities encouraged the capping of dividend distribution and increases in capital, and the government has always been ready to inject new capital in public banks, as demonstrated again in early 2009. They will set new medium-term objectives to drive additional improvements, including more resolute actions to reduce the existing stock of NPLs. The authorities will also support improvement in banks services, including through pooling of logistic and technical resources.

27. The authorities consider that Tunisia’s banking system is not subject to significant vulnerabilities. They conducted stress tests based on crisis events experienced in the past by key sectors of the economy to assess additional provisioning needs under such events. Under a scenario combining these shocks, the NPL ratio would not exceed its 2003 peak and the authorities are confident that the shareholders of the most affected banks (public and private) would easily cover the recapitalization needs. They also noted that domestic banks had very limited exposure to the sectors most affected by the global crisis so far (offshore exporting firms).

28. The authorities agree that a more prospective approach to risk management is required. They indicated that preparatory work for Basel II was completed, but its implementation is not yet fully planned. They noted that transparency of the sector improved with the publication of key indicators by banks.

D. Other Issues

Background and staff analysis

29. Tunisia continues its policy of opening up its economy. Bilateral negotiations with the EU are under way to extend the Association Agreement to services. Tunisia is also actively engaged in the Maghreb integration process, and signed a preferential trade agreement with Algeria in December 2008.

30. Tunisia is implementing policies to improve the business climate and setting up the “Tunis Financial Harbor.” Tunisia’s procedures for starting a new business were markedly improved last year following the implementation of the 2007 law on economic initiative. Updating customs procedures, which resulted in fewer delays, are expected to continue with the new Customs Code implemented since January 2009. In the context of the Tunis Financial Harbor project, the authorities prepared a bill to harmonize the provision of on- and off-shore financial services consistent with international standards.

Authorities’ views and policy intentions

31. The authorities emphasized their steadfast actions aimed at gradually opening the Tunisian economy despite the currently adverse global environment. They plan to overhaul the environment for services in order to improve their competitiveness ahead of their exposure to international markets.

32. The authorities consider that significantly raising private investment is key to producing lasting gains in productivity. They intend to further improve the business climate and competitiveness in the context of the two new programs financed by the World Bank and the African Development Bank. They look forward to the entry in operations of the Enfidha airport and deep water port which will improve the logistical support to international trade.

IV. Staff Appraisal

33. Tunisia has weathered the impact of the global crisis relatively well so far, but it still faces downside risks and challenges lie ahead. Highly dependent on Europe for its external demand and FDI, Tunisia saw its exports falling in end-2008, but tourism and remittances have been resilient. Thanks to sound policies implemented over the years, it is facing the crisis with strong fundamentals and has room for short-term expansionary fiscal and monetary policies to sustain demand. The financial system was not affected by the global crisis, but the level of NPLs remains relatively high. Growth may reach 3 percent in 2009 and pick up gradually as the global crisis subsides, but is subject to significant downside risks pertaining to the transmission of the recession in Europe and the speed of impact of fiscal stimulus. This would leave unemployment at a still relatively high level, especially among the youth.

34. Staff endorses the authorities’ temporary expansionary fiscal stance to mitigate the impact of the global crisis. To be most effective, the fiscal stimulus should be executed rapidly, with well-targeted additional expenditures. Staff encourages the authorities to consider extending the fiscal stimulus into 2010, given the still weak outlook anticipated in partner countries.

35. Staff welcomes the authorities’ steadfast resolve to revert to fiscal consolidation once growth firms up and bring the public debt-to-GDP ratio—currently near the median of comparable emerging economies—back to a declining trend. A key pillar should be the reduction in subsidies, through the continued effective implementation of the new oil price adjustment mechanism and finding a better targeted mechanism to support the poorer segments of the population. A pension reform should also be implemented in time to avoid a future burden on the budget.

36. The BCT’s monetary policy stance has been appropriate, with a cautious easing in 2009 to accommodate demand support. It should be closely coordinated with fiscal policy to allow a timely response. Further easing, if needed, should however be envisaged only gradually, and take into consideration potential renewed inflationary pressures and risks of deteriorating prudential indicators of the banking system.

37. Staff encourages the authorities to continue implementing the building blocks for the planned inflation-targeting framework. Efforts to develop analytical and technical underpinnings of this monetary policy framework should be intensified. Further improvements in monetary policy transmission should be pursued as well, including by developing the secondary market for Treasury bills, enhancing the role of insurance companies and issuing debt certificates available for foreign investors.

38. The exchange rate remains broadly aligned with its fundamentals and the authorities’ policies are consistent with external stability. The exchange rate policy should remain anchored by the authorities’ medium-term objective of a freely floating exchange rate.

39. Prudential indicators continued to improve, but the level of NPLs remains relatively high. While good results were achieved in avoiding the emergence of new NPLs, more resolute efforts to reduce the older stock should be pursued to further strengthen the banking system’s resilience, particularly given the gradual opening of the capital account. Individual situations of banks differ widely and will continue to require close monitoring. The staff supports the authorities’ plans for further enhancing the quality of bank services.

40. The regulatory and supervisory frameworks should continue to adapt to financial sector developments. A more forward looking approach to banking supervision will be beneficial, including in the context of future implementation of Basel II. Systematic and comprehensive stress testing is needed to better assess the potential vulnerabilities of the banking system and prepare appropriate contingency plans.

41. The staff welcomes Tunisia’s pragmatic and steadfast approach to trade and financial integration, despite the currently adverse global environment. Negotiations with the EU to extend the Association Agreement to services could become a key anchor for a gradual overhaul and liberalization of the services sectors. Tunisia’s active participation in the regional integration effort is welcome. Trade diversion should be prevented and geographic diversification enhanced through reduction of most-favored nation tariffs. The staff also welcomes continued improvement in the business climate through ongoing tax and customs administration reforms and programs supported by IFIs.

42. It is proposed that the next Article IV consultation be held on the standard 12-month cycle.

Table 1.

Tunisia: Selected Economic and Financial Indicators, 2006-14

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Sources: Tunisian authorities; and staff estimates and projections.

Information Notice System.

Excludes the social security accounts.

Financial system (deposit money banks and development banks).

The rate for 2008 is the average rate for December and the rate for 2009 is for April.

End of year reserves over current year imports of goods and services.

TUNINDEX. (1000 = 4/1/1998). 2009 data from July 13.

Table 2.

Tunisia: Balance of Payments, 2006-14

(In millions of U.S. dollars, unless otherwise indicated)

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Sources: Tunisian authorities; and Fund staff estimates and projections.

Differs from the overall balance because of valuation effects.

End-of-year reserves over current year imports.

Short term defined as 1 year and less.

Table 3.

Tunisia: Central Government Financial Operations, 2006—14 1/

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Sources: Tunisian authorities; and staff estimates.

Includes special funds, fonds de concours. Does not include the social security system (CSS).

Privatization receipts from Tunisie Telecom (TT) were about TD 3000 millions in 2006.

Gross debt: includes debt held by social security funds (CSS); excludes debt of public enterprises.

Table 4.

Tunisia: Monetary Survey (Financial System), 2005—09

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Sources: Tunisian authorities; and Fund staff estimates and projections.

M2 plus long term deposits.