IMF Executive Board Completes Fifth Review Under Stand-By Arrangement for Tunisia; Approves US$104.8 Million Disbursement

EXECUTIVE SUMMARYContext. On June 7, 2013, the Executive Board approved a 24-month Stand-By Arrangement in an amount equivalent to 400 percent of quota (SDR 1.146 billion or about $1.75 billion). To date, SDR 716.25 million, equivalent to $1.1 billion, has been disbursed.Background. Tunisia is completing a successful political transition to democracy while navigating a challenging environment marked by high social and security tensions, slow growth in trading partners, and spillovers from regional conflicts. At the same time, large external and fiscal imbalances, high unemployment, and increased banking fragilities remain the main challenges.Program implementation has been mixed. All quantitative performance criteria have been met. However, progress on the structural reform agenda has been slow, with considerable delays in the recapitalization of public banks and the legislative agenda on the tax, investment and bank asset recovery fronts.Program strategy. The focus should continue to be on short-term macroeconomic stabilization and laying foundations for higher and more inclusive growth, including by moving forcefully on banking reforms. Prudent fiscal and monetary policy, along with improved budget composition and greater exchange rate flexibility, need to be directed to containing high imbalances and anchoring inflationary expectations. Recapitalizing public banks in line with good international practices is urgent in view of mounting risks to financial stability, and is also important in light of its impact on financial intermediation and growth. Progress on structural reforms is necessary to generate the conditions conducive to private sector–led and inclusive growth and protect the most vulnerable.Risks to program implementation are important. The main risks relate to regional and domestic security tensions, delays in forming a new government, shortfalls in official and market financing, or a further deterioration of the international economic environment. The implementation of program policies will continue to be tested by opposition from vested interests; however, support for the reform agenda among the authorities and a broad spectrum of political parties represents a key risk-mitigating measure.The completion of the fifth review will make SDR 71.625 million (about $110 million) available.

Abstract

EXECUTIVE SUMMARYContext. On June 7, 2013, the Executive Board approved a 24-month Stand-By Arrangement in an amount equivalent to 400 percent of quota (SDR 1.146 billion or about $1.75 billion). To date, SDR 716.25 million, equivalent to $1.1 billion, has been disbursed.Background. Tunisia is completing a successful political transition to democracy while navigating a challenging environment marked by high social and security tensions, slow growth in trading partners, and spillovers from regional conflicts. At the same time, large external and fiscal imbalances, high unemployment, and increased banking fragilities remain the main challenges.Program implementation has been mixed. All quantitative performance criteria have been met. However, progress on the structural reform agenda has been slow, with considerable delays in the recapitalization of public banks and the legislative agenda on the tax, investment and bank asset recovery fronts.Program strategy. The focus should continue to be on short-term macroeconomic stabilization and laying foundations for higher and more inclusive growth, including by moving forcefully on banking reforms. Prudent fiscal and monetary policy, along with improved budget composition and greater exchange rate flexibility, need to be directed to containing high imbalances and anchoring inflationary expectations. Recapitalizing public banks in line with good international practices is urgent in view of mounting risks to financial stability, and is also important in light of its impact on financial intermediation and growth. Progress on structural reforms is necessary to generate the conditions conducive to private sector–led and inclusive growth and protect the most vulnerable.Risks to program implementation are important. The main risks relate to regional and domestic security tensions, delays in forming a new government, shortfalls in official and market financing, or a further deterioration of the international economic environment. The implementation of program policies will continue to be tested by opposition from vested interests; however, support for the reform agenda among the authorities and a broad spectrum of political parties represents a key risk-mitigating measure.The completion of the fifth review will make SDR 71.625 million (about $110 million) available.

The Executive Board of the International Monetary Fund (IMF) today completed the fifth review of Tunisia’s performance under an economic program supported by a Stand-By Arrangement (SBA). The completion of the fifth review enables the disbursement of SDR 71.6 million (about US$104.8 million), bringing total disbursements under the arrangement to SDR 787.87 million (about US$1.15 billion). The two-year SBA in the amount of SDR 1.1 billion (about US$1.68 billion, 400 percent of Tunisia’s quota) was approved by the Executive Board on June 7, 2013 (see Press Release No. 13/202).

In completing the fifth review, the Executive Board approved the authorities’ requests to rephase purchases under the arrangement, and to modify end-December 2014 quantitative performance criteria on net international reserves, net domestic assets and the primary fiscal deficit.

Following the Executive Board’s discussion on Tunisia, Mr. Naoyuki Shinohara, Deputy Managing Director and Acting Chair issued the following statement:

“Tunisia is completing a successful political transition while navigating a challenging domestic and external environment. Tunisia’s economy has been resilient, although large external and fiscal imbalances, high unemployment and rising banking fragilities call for forcefully pushing ahead with reform implementation.

“Performance under the Fund-supported program has been good with the successful attainment of all quantitative performance criteria. However, structural reforms have been progressing slowly, with considerable delays in recapitalizing and restructuring public banks.

“Fiscal consolidation remains essential to reduce vulnerabilities. The 2015 budget appropriately aims at anchoring macroeconomic stabilization while preserving priority social and capital expenditures. Further reduction in energy subsidies and strict control of the public wage bill is welcome, as is the authorities’ intention to save any gains from lower international oil prices. Growth-enhancing reforms, including of public enterprises and pensions, public financial management, and tax administration would help improve absorptive capacity, equity, efficiency, and risk management.

“A tighter monetary stance would help keep inflationary pressures in check, reduce exchange rate pressures, and eventually bring about positive real interest rates. Greater exchange rate flexibility—including through continuing to limit foreign exchange interventions to smoothing large fluctuations—will contribute to strengthening reserve buffers and correcting large external imbalances.

“Efforts to reduce financial sector vulnerabilities should be stepped up. Recapitalizing and restructuring public banks in line with good international practices is urgent, in view of increased financial sector vulnerabilities and the need to support growth. Modernization of the banking resolution framework, operationalization of the Asset Management Company, and an upgrade of the supervisory and regulatory framework would enhance financial stability and reduce moral hazard.

“Accelerated implementation of structural reforms is urgently needed to improve the investment climate and generate stronger and more inclusive growth. Legislative approval of the bankruptcy, competition, and public private partnerships laws are key priorities.”

Tunisia: Fifth Review Under the Stand-by Arrangement, Request for Modification of Performance Criteria, and Rephasing of Access–Staff Report; Press Release; and Statement by the Executive Director for Tunisia
Author: International Monetary Fund. Middle East and Central Asia Dept.