Tunisia: First and Second Reviews Under the Stand-By Arrangement, Request for Waivers of Applicability and Nonobservance of Performance Criteria
Author: International Monetary Fund. Middle East and Central Asia Dept.
Publication Date:
12 Feb 2014
eISBN:
9781475594843
Language:
English
Keywords:
ISCR; CR; banking system vulnerability; policy transmission mechanism; SDR; transmission mechanism; government; disbursement of SDR; Tunisian authorities; government share; Public enterprises; Government debt management; Fiscal stance; Europe; Global; North Africa; reform agenda; short-term debt; debt ratio; GDP deflator; core inflation
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1. Political upheaval and security tensions led to a protracted political crisis that has taken a toll on the economy and slowed progress on the reform agenda. Longstanding political tensions came to the fore again in July 2013, triggered by the assassination of a secular opposition politician—the second such tragic event in 2013—which polarized Tunisia’s society. As a result, the adoption of the draft Constitution and the holding of elections in 2013—a key assumption underlying the economic outlook at the inception of the Fund-supported program in June 2013— had been held up. Such delays—coupled with several security incidents—worsened investors’ wait-and-see attitude and contributed to ratings downgrades. They also slowed the implementation of the authorities’ reform agenda, particularly in those areas requiring wide popular buy-in and legislative approval. Resistance by vested interests also contributed to delayed reform implementation.

Abstract

1. Political upheaval and security tensions led to a protracted political crisis that has taken a toll on the economy and slowed progress on the reform agenda. Longstanding political tensions came to the fore again in July 2013, triggered by the assassination of a secular opposition politician—the second such tragic event in 2013—which polarized Tunisia’s society. As a result, the adoption of the draft Constitution and the holding of elections in 2013—a key assumption underlying the economic outlook at the inception of the Fund-supported program in June 2013— had been held up. Such delays—coupled with several security incidents—worsened investors’ wait-and-see attitude and contributed to ratings downgrades. They also slowed the implementation of the authorities’ reform agenda, particularly in those areas requiring wide popular buy-in and legislative approval. Resistance by vested interests also contributed to delayed reform implementation.

Background and Political Context

1. Political upheaval and security tensions led to a protracted political crisis that has taken a toll on the economy and slowed progress on the reform agenda. Longstanding political tensions came to the fore again in July 2013, triggered by the assassination of a secular opposition politician—the second such tragic event in 2013—which polarized Tunisia’s society. As a result, the adoption of the draft Constitution and the holding of elections in 2013—a key assumption underlying the economic outlook at the inception of the Fund-supported program in June 2013— had been held up. Such delays—coupled with several security incidents—worsened investors’ wait-and-see attitude and contributed to ratings downgrades. They also slowed the implementation of the authorities’ reform agenda, particularly in those areas requiring wide popular buy-in and legislative approval. Resistance by vested interests also contributed to delayed reform implementation.

2. The political transition is moving forward again. After months of negotiations between the ruling coalition government, the opposition, and representatives of civil society, an agreement was reached in October 5, 2013 on a roadmap for handing over political power. This led to the appointment on January 9, 2014 of Mehdi Jomaa, the former Minister of Industry, as a nonpartisan prime minister, which has opened the way for the formation of a new technocratic government, the nomination of a new electoral commission, and the forthcoming adoption of the long-awaited Constitution by the National Constituent Assembly, which is expected by end-January 2014. These developments are necessary to pave the way for new elections in the second half of 2014 and achieve the objective of a more stable democracy that meets the aspirations of the population. They also augur well for a greater focus on economic stabilization and an acceleration of the structural reform agenda.

3. Performance under the program has been mixed. The 2013 end-June and end-September NIR and NDA quantitative performance criteria have been met, but are estimated to have been missed by end-December because of lower external market financing and high liquidity needs in the banking sector. Weaker economic activity increased the fiscal deficit, which, together with lower volumes of gas transiting from Tunisia and additional expenditures linked to payments made during the extended budgetary complementary period, resulted in a breach of the end-June and end-September PC on the central government primary deficit. The end-December PC on the primary balance appears to have been met by a significant margin, though most of the overperformance is due to weak budget execution and deferred cash payments to 2014. The implementation of structural reforms has been progressing, albeit with some delays linked to building a consensus during the political crisis and to technical difficulties (e.g., in starting the audits of public banks on time).

4. The first and second reviews focused on keeping short-term macroeconomic stabilization on track during a period of unexpected shocks, while laying foundations for sustained reforms that will reduce economic vulnerabilities. A weaker economic outlook and high external and fiscal deficits—combined with a shortfall in external financing in the last quarter of 2013—have increased existing vulnerabilities. The difficult political transition has delayed fiscal consolidation, though underlying measures to contain subsidies and the wage bill will help anchor medium-term fiscal consolidation. Despite some accommodation of fiscal policy in 2014, prudent monetary policy and greater exchange rate flexibility will allow international reserves to rise significantly, although these will remain highly dependent on an increase in external disbursements. Structural reforms—including reducing fragilities in the banking system—will aim at boosting private sector-led growth and reducing unemployment.

Recent Economic and Financial Developments

5. Domestic tensions and a difficult international economic environment contributed to weaker growth, while inflation was contained and the current account deficit worsened relative to program objectives.

  • Economic activity is recovering at a slower pace than envisaged. Real GDP grew by 2.4 percent year-on-year through September 2013—against 4 percent expected for the year under the program—driven mostly by public and private services (trade, transport, telecommunications, and financial services), despite stagnation in strike-weary industrial manufacturing and lower agricultural production. Public services remain the main contributor to growth, with hiring by the public sector and state-owned enterprises (SOEs) contributing to a fall in the overall unemployment rate to 15.7 percent in September 2013 (from 18.9 percent in 2011). Unemployment remains especially high among young graduates and women.

  • The negative output gap has kept underlying inflationary pressures at bay, despite a recent uptick in headline inflation. After peaking at 6.5 percent year-on-year in March 2013, headline inflation declined to 5.8 percent in November before rising again to 6.0 percent in December 2013. Non-administered food prices (10.0 percent year-on-year at end-December) remain the principal driver of inflation, reflecting a bad harvest and strong demand from neighboring countries and Libyan refugees. Core inflation (excluding food and energy) remains relatively stable at around 4.7 percent since fall 2012, reflecting the negative output gap, low producer prices (PPI inflation below 3 percent) and weak credit growth. Administered prices, which make up a third of the CPI basket, are also helping mitigate overall inflationary pressures.

  • The current account deficit stayed in line with projections through end-September, but is projected to be slightly worse than programmed by end-year. Despite lower private sector imports of capital goods and raw materials, weaker tourism receipts and workers’ remittances, combined with depressed demand for Tunisian goods and higher-than-anticipated dividend repatriation, are expected to result in a current account deficit that remains at 8.2 percent of GDP in 2013, stable relative to 2012, but 0.5 percentage points of GDP worse than programmed.

  • Inadequate budget composition led to a lower-than-expected fiscal deficit. Data that became available in January 2014 indicate that capital expenditures at end-2013 are likely to have reached record low amounts of 4.9 percent of GDP because of weak budget execution, particularly at regional levels. Moreover, social expenditures were 0.3 percent of GDP lower than expected. This low investment and social spending— combined with the authorities’ efforts aimed at containing the wage bill and goods and services, delaying planned recruitments in 2013 or stopping the commitment of new expenditures earlier in December (LOI, MEFP)—fully offset weaker tax collection (mostly VAT) and the higher subsidy payments necessitated by lower gas volumes transiting through Tunisia from Algeria to Italy (about 0.6 percent of GDP for the year). As a result, the structural fiscal deficit in 2013 improved to 4.6 percent of GDP (from 5.2 percent of GDP in 2012, and 5 percent under the program).

  • Financing the fiscal deficit required using cash buffers at a rapid pace and deferring payments to 2014. External financing dropped less than 30 percent of programmed levels in 2013, with no external budgetary disbursements in the last quarter of 2013 from the World Bank (deferred in light of delays in progress on key reforms), the African Development Bank (because of risk management guidelines linked to the AfDB’s high exposure to North Africa), and Turkey. In addition, samurai bond issuance was slighly lower than expected, implementation delays hampered sukuk issuance, and proceeds from confiscated assets were less than expected (about 1.5 percent of GDP lower). Against this backdrop, the authorities reduced their stock of government deposits held at the Central Bank of Tunisia (CBT) from about 6 percent of GDP at end-December 2012 to an estimated 2.3 percent of GDP by end-2013. These developments amounted to increased domestic borrowing to compensate for the financing shortfalls, and led to substantial accumulation of payment orders at end-2013—mostly, transfers to public enterprises of about 1.4 percent of GDP and capital expenditures of about 1.3 percent of GDP—that will be paid in the first quarter of 2014.

  • Monetary policy remains accomodative. Following a 25 basis point increase in the policy rate in March 2013, the CBT increased its policy rate by 50 basis points to 4.5 percent in December 2013, while narrowing the interest rate corridor to +/-25 basis points—which effectively leaves the overnight borrowing rate constant at 4.75 percent (most monetary operations were conducted close to the overnight rate because of the existing structural liquidity deficit). Moreover, the CBT lowered the required reserve ratio from 2 percent to 1 percent of domestic deposits, which reduced refinancing needed by banks by an additional 200–300 million dinars (from a total of about 4.6 billion dinars by end-December).

  • Financial markets in Tunisia remain relatively stable despite pressures on the exchange rate throughout the year. Notwithstanding the deterioration of the domestic and regional political climate and ratings downgrades, CDS spreads trended sideward after having increased in the first quarter of 2013. The stock market is trading about 5 percent weaker than at the beginning of the year, with notably lower volatility than last year.

Industrial Production Index, 2008–13

(Y-o-y growth, 3-month moving average, in percent)

Citation: IMF Staff Country Reports 2014, 050; 10.5089/9781475594843.002.A001

Source: Tunisian authorities.

Unemployment Rate Among Graduates, 2006–2013 Q3

(In percent)

Citation: IMF Staff Country Reports 2014, 050; 10.5089/9781475594843.002.A001

Source: Tunisian authorities.

Inflation

(y-o-y growth rates, in percent)

Citation: IMF Staff Country Reports 2014, 050; 10.5089/9781475594843.002.A001

Source: Tunisian authorities.

External Position, 2007–13

(In percent of GDP)

Citation: IMF Staff Country Reports 2014, 050; 10.5089/9781475594843.002.A001

Sources: Tunisian authorities; IMF staff estimates.

Central Government Budget Deficit and Expenditures, 2008–13

(Percent of GDP)

Citation: IMF Staff Country Reports 2014, 050; 10.5089/9781475594843.002.A001

Source: IMF staff estimates and projections.

Tunisia: Official External Financing

(Millions of U.S. dollars)

article image
Sources: Tunisian Authorities; and IMF staff estimates.

Money Market and CBT Policy Rates

(In percent)

Citation: IMF Staff Country Reports 2014, 050; 10.5089/9781475594843.002.A001

Source: Tunisian authorities.

Tunisia: Structural Liquidity Deficit of Banking System

(In TND billions)

Citation: IMF Staff Country Reports 2014, 050; 10.5089/9781475594843.002.A001

Sovereign, CDS Spreads and Stock Indices

Citation: IMF Staff Country Reports 2014, 050; 10.5089/9781475594843.002.A001

Sources: Tunisian authorities; and IMF staff estimates.

Exchange Rates, 2008–13

(Jan. 2008=100, + = appreciation)

Citation: IMF Staff Country Reports 2014, 050; 10.5089/9781475594843.002.A001

Sources: Tunisian authorities; and IMF staff estimates.

Program Review and Policy Discussions

A. Program Review and Policy Implementation

6. Performance criteria on NDA and NIR were met at end-June and end-September, but are estimated to have been missed for end-December. While performance criteria on the primary balance appears to have been met at end-December after having being missed in June and September. The indicative target on social spending has been missed for each test date (MEFP, Table 1).

  • End-June and end-September NDA performance criteria were met, once adjustors on residents’ foreign exchange deposits at the Central Bank of Tunisia (CBT) and shortfalls in budget loans (a $200 million budget loan from Turkey has been delayed) are taken into account. However, an increase in net credit to government—driven by larger-than-programmed government deposit withdrawals—has not been compensated by lower bank refinancing, thus increasing end-December NDA beyond the program objective.

  • Shortfalls in external financing weighed on the 2013 reserve targets. The NIR target—which was met at end-June and end-September after adjustors on multilateral loans and fx deposits were taken into account—appears to have been missed at end-December as private capital inflows were not enough to compensate for the shortfall in sukuk/samurai bond issuances and the heavy intervention in the foreign exchange market to respond to pressures on a depreciating exchange rate. That said, gross international reserves are expected to remain at around three months of imports at end-2013, despite the delay in IMF disbursement, as a result of lines of credit from a European commercial bank (Euro 300 million) and the Qatar National Bank deposit at the Central Bank of Tunisia, received last November ($500 million).

  • The fiscal performance criterion, as measured from below the line, appears to have been met by a significant margin at end-December, after having been missed for end-June and end-September. The end-September primary balance was missed by one percentage point of GDP because of higher subsidy payments and additional “unidentified”

  • expenditures, possibly linked to payments made during the extended budgetary complementary period early in 2013 (about 1 percent of GDP). Preliminary data that became available in January 2014 indicate that the end-year primary balance target (on a cash basis)—adjusted for lower than expected banking recapitalization costs—appears to have been met by a significant margin, thanks primarily to deferred cash payments to 2014 (about 3 percent of GDP). Staff does not expect major changes to these results when final data become available later in the year, because the financing data are almost final and new payment orders were stopped during the complementary period on January 20, 2013 (LOI, ¶3; MEFP, ¶5).

  • The indicative target on social spending was missed for all test dates, owing to implementation capacity constraints and expenditure cuts at the end of the year caused by financing constraints.

Growth in M3 and Credit to the Economy, 2011-13

(Y-o-y growth, in percent)

Citation: IMF Staff Country Reports 2014, 050; 10.5089/9781475594843.002.A001

Source: Tunisian authorities.

Reserves, Spot FX Interventions, and Exchange Rate

(In US$ billions, eop, unless otherwise indicated)

Citation: IMF Staff Country Reports 2014, 050; 10.5089/9781475594843.002.A001

Sources: Tunisian authorities; Fund staff estimates.

Tunisia: Central Government Financing, 2013

(In millions of dinars)

article image
Sources: Tunisian authorities; and IMF staff estimates.

7. Progress on structural reforms has continued, but at a slower pace than envisaged. Of the 14 structural benchmarks expected to be completed by end-December, nine have been met, albeit with delays for some (MEFP, Table 2a). Of the remainder: (i) the study on the impact of changes in the liquidity ratio is expected to be completed in January 2014 with a one-month delay; (ii) the bank interlinking platform and market makers agreement are being finalized following technical problems, with implementation now scheduled for March 2014 (delayed from October 2013); (iii) the audits of public enterprises—which will now cover one more enterprise than originally programmed—will be finalized by March 2014 (delayed from end-December 2013); (iv) the household targeting strategy has been delayed to March 2014 pending further work on identifying beneficiaries and the mode of distribution; and (v) the strategic orientation for public banks—which is dependent on the completion of bank audits that have started with a significant delay because of procurement procedures—is now expected to be finalized in March 2014 (compared to December 2013 under the original timeline).

B. Outlook and Risks

Output Gap and Potential Output

Citation: IMF Staff Country Reports 2014, 050; 10.5089/9781475594843.002.A001

Source: IMF staff estimates.

8. The macroeconomic framework remains predicated on a stable political and security environment and a return of investor confidence following elections in 2014. Against this backdrop, staff and authorities agreed on the following:

  • Growth. Real GDP growth in 2013 is estimated at 2.7 percent, with difficulties in the political transition weighing on tourism and investor confidence during the last quarter of 2013. For 2014, the authorities see the possibility of growth averaging as high as 4 percent, following the confidence boost arising from the adoption of the Constitution, reduced security tensions, and a technocratic government pursuing reforms ahead of elections, which are expected in the second half of 2014. The authorities, however, recognized the dangers of shocks that can accompany any political transition, and agreed that a 3 percent growth rate for 2014—which still assumes a strong pick-up in industrial production, trade, and tourism in the second half of 2014—would better underpin the program’s macroeconomic framework during a period of uncertainty. Reduced investor uncertainty in a post-election environment will continue to boost output, which will overshoot its potential in 2015, helping to narrow the negative output gap.

  • Inflation. Inflationary pressures are expected to subside, with headline inflation declining from 6 percent at end-2013 to 5.3 percent at end-2014 on the back of declining food price inflation. A prudent monetary policy will strengthen the credibility of the CBT, keeping core inflation at about 4.5 percent year-on-year in 2014 and inflationary expectations in check.

  • External position. The current account deficit is projected to narrow to about 5.5 percent of GDP in 2015, driven by a recovery in trading partners’ economies and lower international commodity prices. Better prospects in the phosphate sector, and higher tourism receipts and workers’ remittances will also support the current account improvement in the medium term.

Tunisia: Selected Economic Indicators, 2010–15

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Sources: Tunisian authorities and IMF staff estimates and projections.

9. The outlook remains subject to significant downside risks. Additional delays in the political calendar would weigh on investment prospects, job creation, and capital inflows. Increased security tensions would limit the recovery in tourism and FDI inflows, and deepen investors’ “wait-and-see” attitude. A weaker economic outlook in Europe and other trading partners, or higher commodity prices, would add another drag on growth and the external and fiscal positions.

Policy Discussions

Discussions centered on the appropriate fiscal and monetary policy stance for 2014 that will strike the right balance between supporting economic growth and rebuilding fiscal and external buffers. The review also strengthened the structural reform agenda, with a view to enhancing inclusive growth through scaling up public investments, public enterprise reform, and protecting the most vulnerable from the potential adverse impacts of reforms.

A. Short-term Stabilization Goals

Fiscal policy

10. The fiscal consolidation path envisaged at the start of the program will require more time. Delays in the political transition and rising social tensions have led the authorities to opt for a more gradual fiscal adjustment. The authorities agree, however, that the fiscal deficit path should remain anchored on a medium-term deficit target of about 2.5 percent of GDP by 2018. Energy subsidy reform, wage bill containment, and revenue-enhancing measures will continue to form the core of the fiscal consolidation effort. Compensatory measures to mitigate the impact on the most vulnerable will accompany the reform efforts.

11. Fiscal consolidation over the medium term is essential to ensure that the debt level remains sustainable. Tunisia’s debt—the lowest among oil-importing Arab Countries in Transition (see text chart)—remains sustainable under the baseline scenario, increasing to 53.2 percent of GDP in 2015 before stabilizing at 52.2 percent of GDP by 2018 (See DSA annex). However, this debt path is more elevated than initially programmed because of more conservative macroeconomic assumptions and a more gradual fiscal adjustment than was envisaged at the start of the program. Financing needs over the next few years will mostly be met through external sources, thus increasing the share of share of foreign currency debt to about 73 percent of total debt in 2015 (from 58 percent in 2011).

Public Debt, 2010–13

(In percent)

Citation: IMF Staff Country Reports 2014, 050; 10.5089/9781475594843.002.A001

Source: IMF staff estimates.

Tunisia: Selected Fiscal Indicators, 2012–14

(In percent of GDP)

article image
Sources: Tunisian authorities; and IMF staff estimates.

12. Reversing the deterioration of pro-growth expenditures underpins the 2014 fiscal stance (MEFP, ¶9). The authorities had initially planned on a reduction in the overall fiscal deficit in 2014. However, the latest information on payment orders and budget execution in 2013 resulted in a higher-than-expected fiscal balance, implying a 0.6 percent of GDP deterioration in the structural fiscal balance in 2014 relative to 2013 (instead of the small improvement planned when the 2014 draft budget was approved on December 31, 2013). Staff would have preferred a more rapid reduction in vulnerabilities through stronger fiscal adjustment and a budget composition aligned towards higher investment spending, with a particular emphasis on reducing high levels of current expenditures—as wages and subsidies continue to represent close to 86 percent of revenues (close to the 2012 levels). The authorities argued that any additional expenditure or revenue measures would be difficult at a time when civil society buy-in is hard to achieve, particularly ahead of the formation of a technocratic government. In light of these difficulties, staff agreed that keeping the structural fiscal balance constant relative to 2012—a year with a more regular budget execution pattern—is necessary to reverse the cut in pro-growth expenditures that materialized in 2013. However, staff cautioned that a more ambitious path for 2014—including additional measures—may need to be revisited in the future, in view of the rising debt and possible financing constraints. The authorities agreed to explore the possibility of additional measures later this year.

13. Revenue enhancing measures and expenditure cutting measures support the 2014 structural fiscal deficit target, which is projected at 5.2 percent of GDP, after savings in unallocated expenditures (0.5 percent of GDP) and the following budgeted measures (MEFP, ¶7):

  • Tax revenues (MEFP, ¶9). New measures expected to yield 0.3 percent of GDP include, mostly, higher property taxes (0.2 percent of GDP) and lower customs exemptions (0.05 percent of GDP). Additional tax measures will follow the National Tax Consultations scheduled to be held in March 2014, and will likely only be implemented as part of a revised budget.

  • Wage Containment. Staff welcomed the politically sensitive step—accepted by key stakeholders—of freezing public sector wages in 2014. Despite this measure, the wage bill—estimated at about 12.4 percent of GDP—would still rise by 8 percent in 2014 because of net new recruitments—limited to security forces, teachers, and health workers—and bonuses. The authorities argued that, as in 2013, some savings will naturally arise because of deferred recruitment—but that most of the hiring was agreed to in the aftermath of the revolution, when an aggressive and exceptional public recruitment program was initiated. Staff underscored that these savings would be temporary; the impact on the wage bill would be permanent and fully observed starting next year. Staff therefore argued for a hiring freeze, and stressed the need to avoid the creation of unnecessary public jobs, which is a very costly and inefficient strategy for reducing unemployment. Staff urged the authorities to move towards a more transparent merit-based hiring system.

  • Energy Subsidies—Staff welcomed planned savings of 0.8 percent of GDP arising from reducing energy subsidies, of which more than 90 percent will come from electricity tariff and natural gas price increases: (i) electricity subsidies to cement companies were reduced by half as of January 1st 2014, with a view to eliminating them by June 2014; and (ii) tariff and natural gas prices were also increased by in a two-step process that started for medium-and low-voltage consumers with a 10 percent rate hike as of January 1st 2014, while lifeline tariffs (i.e., tariffs for households consuming less than 100 kwh) are preserved to protect the poorest segments of the population (Box 1). The authorities indicated their commitment to increase fuel prices by 6 percent in July 2014, which will generate savings of 100 million dinars for the year. A targeted household scheme (to be designed by March 2014—see Section C) will precede the planned fuel price increase. Moreover, a new automatic fuel price formula has been designed, allowing convergence to international prices over time, but without a smoothing mechanism for increases higher than US$6 per barrel, and with lags for smaller price increases. Staff urged the authorities to continue working on improving the formula to ensure that the price formula is not abandoned and remains sustainable in the event of large increases in international prices.

Tunisia: Reform of the Energy Sector

The authorities have announced a series of energy tariff increases aimed at progressively eliminating subsidies in the electricity sector. The strategy consists of a series of electricity tariff and gas price increases, which will yield 0.7percent of GDP in savings, over 2014:

  • Electricity Tariffs (savings of 0.5 percent of GDP in 2014). Tariffs for cement companies have been increased by 35 percent as of January 1st, 2014, effectively halving subsidies to these companies. A complete elimination of electricity subsidies for cement companies is planned for June 2014 through another 35 percent tariff increase. A gradual reduction of the electricity subsidy is planned over a three- to six-year period for high and medium voltage, with tariffs to other industrial users and households rising twice by 10 percent over 2014.

  • Natural Gas (savings of 0.2 percent of GDP planned for 2014). A 47 percent increase in gas prices will reduce subsidies to cement companies by half, before they are eliminated completely through another 47 percent increase in June 2014. A new rate was created for large consumers of low voltage, while the subsidy for other high-voltage customers is to be reduced over a period of six years.

Electricity

(Tariff increase, in percent)

Citation: IMF Staff Country Reports 2014, 050; 10.5089/9781475594843.002.A001

Source: Tunisian authorities.

Gas

(Price increase, in percent)

Citation: IMF Staff Country Reports 2014, 050; 10.5089/9781475594843.002.A001

Source: Tunisian authorities.

The tariff increases are part of a number of initiatives included in the authorities’ recently adopted medium-term energy sector strategy. These include:

  • Protecting the most vulnerable, by maintaining the lifeline tariffs for households with monthly consumption below 50kwh, and introducing a social tariff for households with monthly consumption below 100kwh.

  • Encouraging energy efficiency, by creating new consumption bands with disincentive pricing aimed at reducing energy consumption by large consumers.

  • Increasing incentives for the development renewable energy. A new law that will allow private and public operators to produce electricity using new forms of energy (solar, wind, etc.,) has recently been submitted to Parliament. Over the medium term, investment in these areas—which will be facilitated by the creation of an investment fund—will help reduce costs that have so far been dependent on expensive and very volatile fossil fuel prices.

Monetary policy

14. Inflation remains above the comfort zone of the CBT despite weak credit growth and the large negative output gap (MEFP, ¶12). Staff welcomed the recent increase of the policy rate as this helps restore it as the key signaling instrument of monetary policy. But staff was disappointed that the effect on the interbank rate was offset by narrowing the interest corridor for the 24 hour standing facilities by 50 basis points. Together with the reduction in the reserve requirement ratio, this results in a monetary policy that remains somewhat accommodative. Staff would have preferred a stronger commitment to a tighter monetary policy, as it remains concerned about money market real rates in negative territory (close to -2 percent), capital misallocation (SMEs often find it difficult to obtain credit), expectations of a depreciating exchange rate, and pressures on the exchange rate from loose liquidity conditions. The CBT, however, was of the view that the large negative output gap, sluggish credit growth, and the need to preserve financial stability did not warrant, at this stage, a significant tightening in monetary policy. That said, with the risk of inflationary pressures and higher inflation expectations becoming entrenched, staff and the authorities agree that the CBT should stand ready to tighten monetary policy further if core inflation rises more rapidly than expected. Staff is also concerned that a lower rate of required reserves might not be adequate for prudential reasons.

15. Several steps have been taken by the CBT to implement a stronger collateral framework (MEFP, ¶13). New haircuts for loans used for central bank refinancing and higher shares of refinancing through government securities, are being implemented as of January 1st, 2014. Staff stressed the importance of continuing these reform efforts and welcomed the authorities’ plans to raise haircuts higher and earlier than previously planned or to further increase the share of refinancing through government securities (structural benchmarks). The timely implementation of the stronger collateral framework would help reduce risks to the CBT’s balance sheet and encourage banks to manage liquidity in a more forward-looking way. However, staff and the authorities agreed on postponing additional tightening of the collateral framework until after a lender of last resort facility is established—with IMF TA—in June 2014 (structural benchmark). Such a facility will be necessary to make sure illiquid but solvent banks can still access CBT resources on a temporary basis.

16. Caps on bank lending rates hamper the monetary transmission mechanism and should be removed. Staff urged the authorities to remove the existing caps as soon as possible. The authorities first plan to assess the impact of such actions or any modification through a study (end-March structural benchmark), which they plan to undertake with World Bank assistance. Changes in this regulation would strengthen the interest rate transmission channel of monetary policy and enhance financial sector deepening (Box 2; MEFP, ¶12).

Tunisia: Reform of the Lending Rate Cap System

Interest Rates, 2013 H2

Citation: IMF Staff Country Reports 2014, 050; 10.5089/9781475594843.002.A001

Sources: Tunisian authorities; and IMF staff calculations.

Lending rates in Tunisia are tightly regulated under a cap system (taux excessif). This system sets maximum lending rates for nine different sectors, depending on the average sectoral interest rate—called the taux effective global (TEG), which represents the average rate of the first five months of the past semester. Any interest rate that exceeds this average by more than 20 percent would be considered as excessive—for example, if the past sectoral average was 8 percent, then the maximum lending rate would be 9.6 percent (see chart for current TEG).

Reforming the overly tight regulation governing lending rates is essential to improve access to finance, make growth more inclusive, and strengthen the effective functioning of monetary policy. Direct benefits of an overhaul of existing regulation include:

  • Strengthening banks’ incentives to price credit according to risk-return considerations. Without risk-based pricing, proper internal risk controls have no role to play—which partly explains the underdeveloped functioning of internal audits/risk management functions in banks. In such situations, banks will resort to rationing credit instead of properly pricing and monitoring riskier credits. This in turn results in increased lending to well-connected, large, and established creditors, and constrains the credit available to SMEs, start-ups and households, who all complain about low access to financing. Additionally, it prevents the development of a microfinance market and effectively increases financing costs for those potential borrowers who do not receive bank credit under the current interest regulation and who have to rely on much more costly equity or alternative informal ways of financing.

  • Strengthening the monetary policy transmission mechanism. Current regulations imply that lending rates today are a function of past interest rates. As a result, the lag with which the interest rate channel of monetary policy influences the real economy and inflation is very long. In cases where monetary policy is tightened quickly, margins of banks shrink because of banks’ limited ability to pass on higher refinancing costs to borrowers. As a consequence, credit will be rationed rather than made more expensive. This might also lead to a sub-optimal growth-inflation outcome.

  • Increase competition for deposits. With lending rates capped, banks have few incentives to compete for deposits, as this would reduce their margins (and hence limit the impact of eliminating caps on deposit rates last March). Removing the cap on lending rates would enhance deposit growth and financial sector deepening, and would contribute to a reduction in the structural liquidity deficit.

As a first step in reforming the existing regulation, the authorities are conducting a full assessment of the existing system. Such an evaluation—to be undertaken with World Bank assistance—will help in assessing the impact of existing regulations on debtors’ protection, firms’ access to finance, and credit risk management practices.

External and exchange rate policy

17. The dinar depreciation in 2013 has reduced the overvaluation of the exchange rate. The exchange rate has depreciated by about 8 percent in nominal effective terms (9.5 percent vis-à-vis the euro) in 2013, helping to narrow staff’s estimated overvaluation of the exchange rate to about 5 percent. The Qatar National Bank deposit at the central bank in Q4-2013 partially eased pressures on the exchange rate at the end of year; however, over the next few months, pressures could re-emerge as the result of a low seasonal supply of foreign exchange, high energy trade deficit, or further delay in external financing. Additionally, the holders of special foreign exchange (FX) accounts increasingly prefer to keep their FX receipts in their accounts rather than converting them in the official market, as is indicated by existing regulations on the use of FX (Tunisia has “capital controls,” and holders of FX can only use them for current account transactions). The current context of negative interest rate and delays in implementing fiscal measures could also cause further deterioration of the fragile external position and exacerbate pressures on the foreign exchange market.

18. Exchange rate flexibility remains crucial to preserving external buffers (MEFP, ¶14). The authorities are committed to limiting CBT interventions in the foreign exchange market to smooth excessive exchange rate fluctuations. They stressed that the shallow FX market still makes the CBT the main holder of foreign exchange, and that some of the interventions earlier in the year were to meet large shortfalls caused by seasonal foreign exchange receipts and a drop in foreign exchange from the phosphate sector (a previously strong source of foreign exchange). To preserve external buffers, staff and the authorities agreed that the NIR target should be increased to $7.4 billion in 2014, boosting gross reserves above the Fund’s risk-weighted metric, with the exchange rate used as an absorber for possible shocks that threaten the minimum three-month import cover. Moreover, to raise liquidity on the exchange rate market and rebuild external buffers the authorities have: (i) introduced currency swap operations between commercial banks and the central bank; (ii) agreed to speed up progress towards introducing the institutional mechanisms necessary to the development of a weekly foreign exchange auction mechanism by end-2014 (end-December structural benchmark); and (iii) published a CBT circular stipulating strict application of the regulation on special FX accounts. The authorities note that application of the new regulations is already bearing fruit by increasing FX available in the foreign exchange market.

Reserve Coverage Based on Alternative Metrics: New and Traditional Metrics, 2009–14

(In percent of GDP)

Citation: IMF Staff Country Reports 2014, 050; 10.5089/9781475594843.002.A001

Sources: Tunisian authorities; and IMF staff calculations and estimates.

Exchange Rate Assessment Using CGER Panel Estimates

(In percent)

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Overvaluation (+); undervaluation (-)

In 2018 corrected from program adjustment.

Based on an elasticity of the CA/GDP with respect to the REER of -0.30.

19. Staff welcomes the authorities’ decision to refrain from introducing new restrictions or surcharges on imports and/or limitations to special FX accounts (comptes professionels en devises), which could yield short-term relief by limiting currency speculation but come at the cost of market distortions.

B. Laying the Foundations for Stronger, More Inclusive Growth

Reducing financial sector vulnerabilities

20. Weaknesses in supervisory reporting and data provision indicate higher banking sector vulnerabilities than reported (MEFP, ¶16). Financial soundness indicators for end-June 2013 show sound capital adequacy, but nonperforming loans (NPLs) grew from 13 percent of total loans in 2010 to 15.2 percent as of June 2013 (Table 7). This figure is likely to be an understatement of the true condition of banks’ asset quality, particularly because many of the tourism loans rescheduled in 2011 have reportedly become overdue. Moreover, provisioning of NPLs is low in comparison with international best practices, indicating that existing buffers may be inadequate to cover an excess of risk in the system. Credit risk is amplified by weak supervision, inadequate norms, and poor enforcement of existing regulations. Although problems are mainly concentrated in public banks, the difficult economic situation is likely to have worsened private banks’ balance sheets as well.

Tunisian Banks: Financial Indicators

(In percent, as of June 2013)

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Source: Central Bank of Tunisia

21. Remedying the vulnerabilities of the banking sector—including through strengthened regulation and transparency—is a key priority for the Tunisian authorities (MEFP, ¶18). Following several FSSA recommendations, the CBT has tightened its concentration and connected lending norms, increased the regulatory CAR; conducted a general inspection of a commercial bank for the first time since 2006, finalized four credit inspections of banks, and published a bank supervisory report for the first time in its history. Additional steps are needed to reduce vulnerabilities arising from public banks, align banking practices with international prudential norms, and strengthen banking supervision practices.

22. Reducing the fragility of public banks is essential to addressing the vulnerabilities of the banking sector. Preliminary audit reports of the public banks—established using uniform criteria and conservative valuation of collateral—are now available for two of the three banks, making it possible for the authorities to define their strategy—including the business model to be retained for these entities—by March 2014 (new structural benchmark, deferred from the original timeline envisaged under the program because of delays in launching the audits, which were beyond the control of the authorities). Staff encouraged the authorities to consider all options when designing the strategy and to ensure that private sector solutions are also explored. The authorities noted that the strategy will only be finalized once the audits are completed, with solutions that could include reduced state intervention, including through public-private partnerships. The authorities remain ready to provide the financial resources necessary to meet any recapitalization needs. The FSSA estimates these needs amount to 2.6 percent of GDP; the authorities estimate that 1.2 percent of GDP over 2013–14 represents a sufficient amount, which could be raised or reduced—therefore potentially impacting significantly debt dynamics—depending on the business strategy chosen and the role of the private sector. In the interim, steps taken to improve the governance of public banks are a welcome development that should help put them on equal footing with their private sector counterparts (MEFP, ¶17).

23. A number of initiatives are being taken to improve regulatory norms and reduce risks from weak asset quality. The authorities are reviewing loan classification rules, and have introduced conservative collateral appraisal standards for the first quarter of 2014, which would make higher provisioning necessary (MEFP, ¶17). The authorities are also taking steps to address asset quality in the tourism sector, which has the highest NPL ratio (54 percent of the sector’s total debt), through the establishment of an asset management company (AMC), which has seen its implementation delayed. Staff encouraged the authorities to finalize the draft law and business plan for the establishment of the AMC as soon as possible, in order to improve the viability of exposed banks and refocus their ability to lend. The authorities concur that the AMC is the way to proceed, but argue that more time is needed to build the consensus necessary for its implementation, particularly with the hotel industry. On the regulatory front, plans to align the liquidity ratio with international norms are progressing, with the impact study about to be finalized.

24. A formal risk-based supervision approach is being implemented (MEFP, ¶17). As a first step, the authorities have designed the architecture for a new reporting and bank risk profile whose implementation—expected with Fund TA—has been advanced by one year to end-2014 (structural benchmark). In the meantime, and as a bridge solution for regularly and comprehensively evaluating the financial situation of banks, a uniform bank performance reporting system (UBPR) will be put in place by early March 2014 with data to be provided on a quarterly basis and no more than 60 days after the end of each quarter, starting with Q4 2013. The authorities have also increased resources to the banking supervision department, and plan to step up both onsite and offsite inspections in 2014.

25. Addressing banking system vulnerabilities will require strong upfront measures to enhance crisis preparedness. Specifically, the bank resolution framework (new structural benchmark) will be strengthened by the revamping of the draft bank resolution law and the banking law; as well as revising the law and corporate insolvency debt recovery regime so as to modernize and simplify the process of restructuring firms and liquidating insolvent firms. At the same time, the authorities are working—with World Bank TA—on the establishment of a deposit insurance scheme that could be put in place by June 2014.

Growth-enhancing fiscal reforms

26. Revenue reform is essential to remove the complex and distortive measures that limit the development of the private sector (MEFP, ¶19). The first phase-in of the convergence of the corporate tax rate, new tax on dividends (which were previously untaxed), and an increase in thresholds for lowest-income households were incorporated in the 2014 budget. National tax consultations are planned by March 2014 to identify ways to rationalize tax incentives, simplify the complex tax system (particularly indirect taxation), make it less regressive, and remove significant distortions. As part of the global income tax reform, staff has encouraged the authorities to design a calendar for the complete elimination of the onshore and offshore corporate tax disparity. On revenue administration, staff welcomed steps taken towards a unified large taxpayer unit, and encouraged the authorities to swiftly design and implement their modernization plan (end-March structural benchmark). A high priority is the strengthening of control and evaluation mechanisms, including the forfeit system used for small businesses.

27. The execution and composition of the budget should be significantly improved (MEFP, ¶19). Capital expenditures in 2013 have reached record lows, and staff stressed the concern that the low level of investment spending will have a significant negative impact on growth. Staff welcomed the new simplified and modernized procurement procedures, which should help speed up investment. Staff encouraged the authorities to prioritize projects with the highest impact on growth, and urged the implementation of better control procedures to avoid the current practice of transferring unused investment allocations to regions to circumvent carryover restrictions. The authorities explained that the political situation has disrupted regional administrations and delayed project implementation, but that improvements have been observed in recent months.

28. Reform of public enterprises is necessary to improve service delivery and reduce losses, thus creating additional fiscal space through lower transfers (Box 3, MEFP, ¶19). To assess the risks from the sector, the authorities have initiated audits of large energy companies, and plan to assess the fiscal situation of the 20 main public enterprises by March 2014 (structural benchmark). In the meantime, transfers to public enterprises now require stricter control and monitoring, which includes a new interdepartmental monitoring committee and more careful budget appropriation. Additional initiatives include a revamping of the legislative governance framework.

29. Public Financial Management reforms are progressing, following Fund TA recommendations. There is a need to improve cash management by consolidating bank accounts (excluding project accounts) at the CBT into one treasury Single Account, which will allow for better visibility of cash amounts and reconcile the discrepancies between monetary and fiscal statistics. A better expenditure control mechanism has also been initiated by keeping the complementary budget period within the strict limits of the law. Broadening the coverage and quality of fiscal reports—including the adoption of a functional budget classification—will be key objectives for 2014 (MEFP, ¶19).

Tunisia: Public Enterprises: Contingent Liabilities, Fiscal Risks, and Reform Agenda

Tunisia has 104 state-owned enterprises (SOEs) that employ 120,000 people (3 percent of Tunisia’s active population). The SOEs are in a variety of sectors such as banking, transport, basic services (communications, electricity, and water), mining (phosphate), and industry (oil production and refinery, cement, chemical, paper, sugar). In terms of earnings, the largest enterprises are the oil refinery company (STIR), the electricity company (STEG), the chemical group (GCT), and the telecommunications company.1

The largest 28 enterprises represent more than 70 percent of employment in public enterprises. STEG has the largest number of employees (10,000), followed by the Post Office and the Transport Company (Transtu). Between 2010 and 2011, these enterprises increased employment by more than 10,000, with the Chemical Group, STEG, and Transtu responsible for more than half of it. In some cases, employment in some state-owned companies increased by 50 percent over the past three years.

The consolidated balance for the 20 largest public enterprises has reportedly deteriorated from a surplus of 1 percent of GDP in 2010 to a deficit of 0.2 percent of GDP in 2012. The largest deficits in 2012 originated from four public enterprises (STEG, Tunisair, Transtu, and the Cereal Distributing Company (OC)) which were responsible for a consolidated deficit of 0.8 percent of GDP. Increasing costs from higher employment and more expensive inputs (fuel), combined with strikes in some sectors that significantly affected revenues (a drop of 40 percent for the chemical group), explain the worsening deficits. On the positive side, the oil production company (ETAP), which also benefits from the cross-subsidy system among energy companies, had a surplus of 0.8 percent of GDP.

Preliminary data for 2013, not yet complete, indicate that liabilities of public enterprises are high and rising:

  • External debt from public enterprises (financial and nonfinancial) guaranteed by the government amounts to Dn 8 billion (10 percent of GDP or 34 percent of the total external government debt). STEG accounts for 40 percent of that amount.

  • Public enterprise borrowing from the banking system represents about 4.8 percent of GDP, and is almost twice the 2006 level. The concentration ratio in a few enterprises is somewhat worrisome: (i) 80 percent of the debt portfolio is within 10 enterprises; (ii) 70 percent of credits of public banks to public enterprises are to financially difficult ones (e.g. OC, Tunisair, STEG), while 70 percent of private banks’ credit to public enterprises are to the financially healthiest public enterprises.

In this context, the government is committed to improving data reporting, transparency, and governance of public enterprises. Fiscal risks will be better monitored through a limit to government guarantees, an audit of the largest energy companies, the consolidation of the financial situation of the 20 largest public enterprises, and more regular reporting requirements. At the same time, the government is establishing inter-ministerial monitoring committees, and is reviewing the governance framework of public enterprises, including new regulations on the role of executive boards. The authorities’ intention to make the energy subsidy scheme more transparent—including through making every company responsible for its own operational costs (including import transactions)—is an important step towards improved transparency and reduced fiscal risks.

1This excludes about 106 établissements publics à caractère non administrative (EPNA) which are not considered as public enterprises by Law 89-9 of 1989 and are budget-dependent agencies.

Growth-enhancing structural reforms

30. Improving the business climate is essential to promoting a competitive private sector, without which the employment challenge will not be addressed (MEFP, ¶20). Economic policies should aim at: (i) creating a more level playing field with greater access to economic opportunities for a broader part of society; (ii) developing an economic system that is based more on rules than on discretion and opportunities for rent seeking; and (iii) encouraging economic and social mobility, rewarding merit rather than connections. Fostering regional trade would also help to reap economies of scale that are necessary for competing in international markets. In this context, the authorities decided to adopt a new investment code and simplify administrative procedures (MEFP, ¶20). Although the latest Doing Business Survey indicators still rank Tunisia above its comparators, the deterioration in the regulatory quality and government effectiveness perception calls for urgent implementation of the authorities’ plans to further streamline regulations and introduce new investment code decrees (end-March structural benchmark) that grant clearer market access rules (MEFP, ¶20). A revised draft completion law—aiming at reducing the discretionary application of business regulation—has been finalized and is expected to be submitted to Parliament soon.

Tunisia: Governance and Competitiveness

Citation: IMF Staff Country Reports 2014, 050; 10.5089/9781475594843.002.A001

Sources: World Bank; and IMF staff calculations.

31. Labor market reforms are still at the core of the government strategy (MEFP, ¶20). Little progress has been made in designing a comprehensive labor market strategy, which still requires a consensus within society on how to address labor market rigidities and skill mismatch that hamper the functioning of the labor market. Discussion between the labor union, the business union, and government have been initiated, but clear policy measures in this area will likely only be announced in a post-elections environment later in 2014.

32. The quality and transparency of statistical data continue to be priorities. Staff welcomes the new draft law on the independence of the statistical office, which has been submitted to parliament. Plans to improve data on national accounts, monetary statistics and the balance of payments should be stepped up, with help from Fund TA (MEFP, ¶22).

C. Protecting the Most Vulnerable

33. Improving the targeting of the social safety net is critical for energy subsidy reform. Staff and the authorities agree that the creation of a unified registry of vulnerable households— which will help address leakages to non-poor of nearly 60 percent of the existing cash transfer program (PNAFN)—will take time to finalize. Staff expressed regret about delays in identifying the beneficiaries and mode of delivery that would allow for an interim “targeted household transfer” strategy (2013 end-August structural benchmark postponed to March 2014). The authorities have benefitted from extensive technical work from the World Bank on this issue but believe that additional work is needed to identify the neediest. Staff has urged that fuel price increases be accompanied by the implementation of a household compensation mechanism. In parallel, staff has urged the authorities to step up their communication campaign ahead of any fuel price increase.

34. Reform of the pension system is needed in the medium term. Staff and the authorities agree that the social security regime is not viable in the long term. Staff urged the authorities to carefully assess ongoing actuarial scenario analysis, and start engaging all stakeholders in a discussion of reform options through the “national consensus dialogue” initiated in January 2013.

Program Design and Modalities

35. The program has been modified to allow for delayed fiscal adjustment. The delay of fiscal consolidation until after 2014 is justified by the need to reverse significant cuts in social and capital expenditures that materialized at the end of 2013. The authorities are fully aware of the importance of keeping fiscal consolidation on track, and of ensuring that vulnerabilities are addressed by the end of the program. The structural fiscal deficit is now expected to improve in 2015, which would ensure that underlying vulnerabilities in the fiscal area are considerably reduced. Any slippage in the fiscal area or further delay in fiscal consolidation could lead to debt increasing on an unsustainable path (see DSA Annex). Staff and the authorities agreed to discuss, in the context of the next review, the possibility of additional budgetary measures for 2014—possibly amounting to 0.6 percent of GDP—or of a program rephasing/extension to allow more time to attain program objectives (LOI, ¶3). The reserve accumulation programmed, and the strong reform agenda, will ensure that buffers are rebuilt during the program, and that growth and equity objectives continue to be met. Fund technical assistance—coordinated with other donors—will help achieve these objectives.

36. Risks associated with the program remain significant and could increase further over the next months. Further setbacks in the political transition, or security flare-ups, could put the attainment of program objectives at risk, delay the completion of structural benchmarks, lead to policy reversals, adversely affect confidence, and further increase investors’ “wait-and-see” attitude. Resistance by vested interests could further slow the implementation of the authorities’ reform agenda. A further deterioration in the international economic environment could also dampen economic activity and put pressure on the fiscal and external positions. Delays in official external financing pledged to support Tunisia’s reform program, or lack of market access, could create a financing gap.

37. Waivers of nonobservance are being requested for the slippages in NIR and NDA at end-December on the basis of corrective actions taken; waivers of applicability will be needed for the end-December fiscal target. These slippages were linked to weaker economic activity, exogenous shocks, and lower private inflows resulting from a loss in confidence following the political tensions in the latter part of 2013. The NIR and NDA performance criteria were met at endJune and September but appear to have been missed for end-December because of lower external financing and higher market liquidity needs. The performance criterion on the primary fiscal balance appears to have been met for end-December, mostly because of deferred cash payments; a waiver of applicability will be needed for this target as final data will only be available after January 30, 2014. The authorities’ commitment to achieve program objectives remains strong. They are taking corrective actions by increasing NIR targets in 2014 towards the optimal coverage, implementing greater exchange rate flexibility, improving cash management procedures, implementing measures to keep the structural fiscal balance in 2014 at 2012 levels, and pursuing their structural reform agenda.

38. Conditionality has been set to anchor program objectives and performance. The PCs for end-March and end-June 2014 and new ITs for end-September and end-December 2014 are proposed to be set as per MEFP (Table 1). A new indicative ceiling to monitor current primary spending has been introduced for the remainder of the program. New structural benchmarks focus on the financial sector, monetary and exchange rate policy, and revenue and public financial management reforms, which are all macro-critical.

39. The program is fully financed for the next 12 months. Financing assurances have been provided by multilateral partners, with some linking future disbursements to progress in the reform agenda (e.g., the World Bank had linked it to reforms in bankruptcy law, AMC, and implementation of the investment code). From the Fund, all resources scheduled to be disbursed for 2014 will be used for budget support, with respective charges and responsibilities for the Ministry of Finance established according to a Memorandum of Understanding. Additional market issuance of $600 million is expected by the end of 2014, for which the authorities are seeking U.S. and Japanese guarantees. The issuance of a Sukuk bond—delayed from 2013 and now expected in the second half of the year—will cover remaining needs. Nonetheless, if there are early indications that projected financing will not be received, the authorities will consult with the Fund on alternative financing approaches and further policy adjustments.

Tunisia: Official External Financing

(Million of U.S. dollars)

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Sources: Tunisian Authorities; and IMF staff estimates.

40. Tunisia has the capacity to repay the Fund. Tunisia has a strong record of payments to the Fund. Peak Fund access projections remain unchanged from the Stand-By Arrangement request (400 percent of quota). Standard indicators of Fund exposure will remain low, with Fund credit outstanding reaching a maximum of 3.5 percent of GDP in 2015 (about 17 percent of gross international reserves). Tunisia is expected to maintain international capital market access.

41. The authorities continue to address the recommendations of the Safeguards Assessment. A review of the central bank law will focus on enhancing the central bank’s independence and improving its governance and accountability framework. External audit arrangements will be defined, and the independence of the internal audit and control functions strengthened and modernized.

Staff Appraisal

42. Tunisia is going through a complex transition and is facing a challenging environment. Growth has remained moderate despite rising political, social, and security tensions. Fiscal and external buffers have been eroded to stabilize the economy at a time when external financing has been scarce and the uncertainty surrounding the political transition has weakened economic activity. Meanwhile, subdued external demand from Tunisia’s main trading partners is aggravating Tunisia’s economic difficulties.

43. The implementation of the structural reform agenda is progressing, albeit with some delays. The authorities’ reform efforts have been slowed by the protracted political crisis, particularly for those measures that required building a consensus and legislative approval. Resistance by vested interests and technical difficulties also weighed on reform implementation.

44. Against this backdrop, fiscal consolidation is progressing at a slower pace than initially programmed. The government met the end-year budget target at the cost of a weak budget composition, notably a reduction in pro-growth expenditures that should be gradually reversed to ensure improvements in the structural fiscal balance are sustained. Staff supports the authorities’ commitment to reduce the fiscal deficit in the medium term, which will be necessary to ensure that debt remains sustainable. A concomitant pursuit of structural reforms will be essential to promote private sector development and generate inclusive growth that will reduce unemployment.

45. Further fiscal consolidation is needed to reduce existing vulnerabilities. A neutral fiscal stance relative to 2012 will ensure that pro-growth expenditures are incorporated in the 2014 budget and will remain compatible with existing debt sustainability considerations and financing constraints; however, a stronger fiscal adjustment—through lower regressive energy subsidies and wage bill containment—would have helped to strengthen fiscal buffers while creating space for pro-growth expenditures in an environment of scarce external financing.

46. Strengthening budget composition is fundamental to generate fiscal space and foster inclusive growth. Staff welcomes the recent electricity and gas price increases, and urges the authorities to step up their plans to reduce regressive energy subsidies while strengthening existing cash transfer mechanisms. In this context, it notes the design of a new fuel pricing formula that will help domestic prices converge to international prices, but urges the authorities to continue improving it to ensure its sustainability in case of large price increases. The wage bill should also continue to be contained, and staff encourages the authorities to carefully monitor recruitment and avoid the creation of unnecessary jobs in the public sector. All efforts should be made to ensure that the budget composition does not deteriorate further through under-execution of public investment and social expenditures. The recent adoption of new streamlined and modernized procurement procedures should help in that regard.

47. Moving forward with revenue reform is essential to remove the complex and distortive measures that limit the development of the private sector. Staff welcomes the first phase-in of the convergence of the corporate tax rate, and encourages the authorities to initiate further steps that—together with the simplification of regulatory procedures and incentive schemes—will help reduce the dichotomy between the onshore and offshore sectors. Ongoing efforts on tax administration are encouraging, and would need to be ramped up through a comprehensive modernization program.

48. Reforming public enterprises and strengthening public financial management will improve service delivery and the credibility of fiscal policies. Efficiency gains, reduced fiscal costs, and better governance are key benefits of public enterprise reforms. Staff regrets the delay in conducting the audit of public enterprises, but welcomes the authorities’ intention to improve transparency, data coverage, and governance of public enterprises. Timely transfers to public enterprises related to food and energy subsidies are necessary to avoid distortions and costly financing. Introducing a Single Treasury Account at the central bank will be essential to improve cash management practices and reconcile existing discrepancies between monetary and fiscal statistics.

49. Macroeconomic stabilization requires a prudent monetary policy and greater exchange rate flexibility. The recent increase in the policy rate is a step in the right direction, though staff regrets that its effect on the money market rate was reduced by a narrowing of the interest corridor while the recent decrease in the required reserve ratio kept monetary policy somewhat accommodative. Staff welcomes the authorities’ readiness to further increase the policy rate if core inflation starts to rise or if depreciation pressures persist. Staff commends the authorities for the steps taken to improve the CBT refinancing collateral framework. Greater exchange rate flexibility is needed to strengthen reserve buffers and correct structural external imbalances over the medium term. Staff welcomes the authorities’ decision to limit interventions in the foreign exchange market to smoothing excessive exchange rate fluctuations.

50. Addressing vulnerabilities in the banking sector will improve confidence, increase credit supply to the private sector, and foster investment spending and employment creation. Staff welcomes recent measures to improve financial data reporting, strengthen banking supervision, and reform the governance of public banks. It regrets the delay in articulating a new business strategy for public banks, and urges the authorities to provide the financial resources necessary to recapitalize public banks once the strategy is developed. The establishment of an AMC for the management of NPLs to the tourism sector should be completed quickly, to improve banks’ liquidity and their ability to issue new credit to the private sector. Development and implementation of a new bank resolution framework will further advance structural change in the sector.

51. The implementation of the structural reform agenda should be accelerated to make a dent in unemployment and inequality. Staff welcomed the submission of a new investment code to Parliament, and urges its adoption together with accompanying decrees aimed at clearer market access rules and limited discretionary powers. Progress on the regulatory simplification process is welcome, but additional streamlining is needed. Staff urges the authorities to speed up structural reforms within the difficult context of the political transition, to ensure that early results are visible and that the foundations for stronger and more inclusive growth are rapidly put in place.

52. The establishment of a well-targeted social safety net is essential to protect the poor and vulnerable. Staff urges the authorities to quickly design and implement the long-delayed “household targeting strategy” to mitigate the impact of future fuel price rises on the poor. In parallel, staff encourages the authorities to continue improving the existing social safety net mechanisms. Proactive communication of the need to reform the current subsidy system and other structural reforms will be needed to build a social consensus for some painful reforms.

53. The authorities’ commitment to implement program policies will be tested in the still difficult economic and political environment. The adoption of a new Constitution and the setting of a clear political calendar should strengthen business sentiment and attract investors; however, new security tensions, renewed social unrest, or political setbacks ahead of the elections could have major repercussions on the economy and policy implementation. Further delays in external financing would generate additional financing needs. Commitment to program objectives will be tested by resistance to some necessary but not always popular reforms, which will need to be managed through further consultations and proactive communication with all stakeholders. Staff welcomes the new government’s commitment to discuss the possibility of additional fiscal measures or an extension/rephasing of the arrangement in the context of the next review, which will help ensure that program objectives are met at the end of the arrangement.

54. On the basis of reforms taken in the context of this review, and the government’s policy commitments forward, staff supports the authorities’ request for completion of the combined first and second review and a disbursement of SDR 329.12 million. Staff supports the authorities’ request for waivers of nonobservance of the performance criteria on net domestic assets and net international reserves, and a waiver of applicability on the primary fiscal balance.

Figure 1.
Figure 1.

Tunisia: Recent Economic Developments

Citation: IMF Staff Country Reports 2014, 050; 10.5089/9781475594843.002.A001

Source: Tunisian authorities.
Figure 2.
Figure 2.

Tunisia: External and Financial Indicators

Citation: IMF Staff Country Reports 2014, 050; 10.5089/9781475594843.002.A001

Sources: Tunisian authorities; and IMF staff estimates.
Table 1.

Tunisia: Selected Economic and Financial Indicators, 2010–15

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

Excludes the social security accounts.

Excludes banking recapitalization costs and one-off arrears payments for energy subsidies.

Information Notice System.

Table 2.

Tunisia: Balance of Payments, 2010–15

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

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

Differs from zero in current and future years because of stocks valuation effects.

End-of-year reserves over next year imports.

Short-term defined as one year or less.

Table 3.

Tunisia: External Financing Needs, 2010-15

(In millions of U.S. dollar)

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Sources: Tunisian authorities and staff projections.

Includes public and private entreprises.

Under the proposed schedule of purchases during SBA.