Tunisia: Staff Report for the 2015 Article IV Consultation, Sixth Review Under the Stand-By Arrangement, and Request for Rephasing

This 2015 Article IV Consultation highlights that Tunisia's economy has been resilient throughout a protracted political transition and a difficult international economic environment. The country has been facing headwinds from security threats and social tensions, which are offsetting the benefits from the successful conclusion of the political transition, lower international oil prices, and a recovering Europe. The banking system remains fragile, with the system's capital adequacy ratio below the minimum regulatory requirement. The medium-term prospects remain favorable, with growth projected to increase to 4.7 percent by 2020.


This 2015 Article IV Consultation highlights that Tunisia's economy has been resilient throughout a protracted political transition and a difficult international economic environment. The country has been facing headwinds from security threats and social tensions, which are offsetting the benefits from the successful conclusion of the political transition, lower international oil prices, and a recovering Europe. The banking system remains fragile, with the system's capital adequacy ratio below the minimum regulatory requirement. The medium-term prospects remain favorable, with growth projected to increase to 4.7 percent by 2020.

Context: Resilience in a Difficult Political Transition and a Deteriorating Security Environment

1. Tunisia’s economy has been resilient during a prolonged political transition but has been weakened by deteriorating security conditions. Over the past four years, Tunisia adopted a new constitution and successfully completed its democratic transformation with free and fair elections. During this process, the country experienced significant uncertainty, social unrest, and attacks by armed militants (Box 1). Throughout, it has successfully preserved macroeconomic stability in the face of a difficult international economic environment and increased regional turmoil. The tragic terrorist attacks at the Bardo Museum and in Sousse in the first half of 2015—which killed 60 western tourists—represent a severe blow to an economy already facing large external and fiscal imbalances.

2. Economic policies have been broadly consistent with Fund advice. During 2012, fiscal policy was loosened to deal with the immediate aftermath of the 2011 revolution, prior to turning to medium-term fiscal consolidation. Spending composition, however, worsened as public investment bore the brunt of the adjustment. The authorities have broadly followed recommendations of the 2012 Article IV staff report (Box 2) in the context of the two-year SBA approved in June 2013 and extended to December 2015, and whose aim was to achieve macroeconomic stabilization, higher and more inclusive growth and protect the most vulnerable. Progress on structural reforms—which have benefitted from strong donor support—has been slow.

3. The successful conclusion of Tunisia’s political transition and recent favorable external developments, represent an opportunity to accelerate reforms. A broad-based coalition government—sworn in on February 5 and supported by a strong majority in parliament—provides the opportunity to push ahead on reform implementation, which will also benefit from increased policy space provided by the decline in international oil prices and a recovering Europe—Tunisia’s main trading partner. The government’s medium-term reform agenda will be laid out in its five-year economic vision, which will be finalized later this year ahead of an international donor conference planned in early 2016.

4. Intensified security risks, social tensions, and coalition politics have complicated policy implementation. Frustration at the lack of economic opportunities—through industrial unrest in the mining sector, a spike in strikes during the first semester (now banned by the introduction of a state of emergency in the aftermath of the Sousse attack), union pressures for higher wages—have been testing the new government’s ability to undertake difficult reforms and reinforced investors’ wait-and-see attitude. The two major terror attacks that occurred earlier this year are severely impacting the tourism industry and investor confidence, and may shift the government’s limited resources to security issues and delay policy implementation.

Tunisia’s Journey: From the Arab Spring to a New Democracy

Dec. 2010: Tunisia’s revolution is triggered by Mohamed Bouazizi setting himself on fire in protest against lack of voice and opportunity.

Jan. 2011: President Ben Ali is forced into exile by popular protests; Prime Minister Mohamed Ghannouchi heads a short-lived interim national unity Government that resigns in February 2011.

Feb. 2011: Beji Caïd Essebsi, former Minister and head of the Chamber of Deputies, is appointed new Prime Minister.

Oct. 2011: Elections for the Constituent Assembly are won by the moderate Islamist party Ennahda, with 41 percent of the seats.

Dec. 2011: A coalition government led by Hamadi Jebali from Ennahda is formed.

May 2012: Tunisia experiences its first post-revolution terrorist struggle, with clashes between Salafi extremists and security forces in Jendouba in the North Western region.

Aug. 2012: Restrictions of women rights in the first draft of the Constitution trigger massive protests.

Feb. 2013: Chokri Belaid, lawyer and opposition leader, is killed, leading to violent protests. PM Jebali resigns following his party’s rejection of a technocratic government proposal. Ali Laarayedh of Ennahda becomes Prime Minister.

Jul. 2013: Mass protests follow the assassination of Mohamed Brahmi—a leader of the secular left. Eight soldiers are killed in a terrorist attack in the Chaambi area.

Jan. 2014: Adoption of the new Constitution and formation of a technocratic government led by Mehdi Jomaa (former Minister of Energy).

Jul. 2014: Militant groups kill 15 Tunisian soldiers and injure 20 in the Chaambi Mountain area.

Oct. 2014: Tunisia’s first free and fair legislative elections are won by the main secular party Nidaa Tounes—with 39 percent of the seats, followed by Ennahda with 31 percent.

Dec. 2014: Beji Caïd Essebsi, leader of Nidaa Tounes, wins the presidential election.

Feb. 2015: The first post-transition government is formed—led by independent PM Habib Essid, and supported by a broad coalition comprising Nidaa Tounes, Ennahda, the centrist UPL party and the center-right Afek Tounes.

Mar. 2015. Terrorist attack at the Bardo Museum, in which 21 foreign tourists and one Tunisian policeman, were killed, and 52 wounded.

Jun. 2015: Terrorist attack on Sousse hotel beach, killing 38 European tourists and leaving 39 wounded, the deadliest attack in Tunisia’s modern history and the most serious to the tourism sector since 2002.

Jul. 2015. State of emergency is declared and several countries issue advisories against traveling to Tunisia.

Tunisia: Authorities’ Response to Policy Recommendations in Previous Article IV Consultations

Macroeconomic policies have remained broadly consistent with staff advice…

  • Fiscal policy preserved short-term stability but did not support growth. Staff noted that a loosening of the fiscal stance in 2012 should be followed by “growth friendly” consolidation. The fiscal consolidation that followed was driven by a worsening composition of the budget, with higher current expenditures (primarily the wage bill) and a significant under-execution of the capital budget. The authorities acknowledged the deteriorating spending composition but noted that the under-execution of capital expenditures reflects capacity absorption difficulties in the aftermath of the revolution and was not planned as an adjustment measure. They also noted the steps they took to reduce energy subsidies and increase transfers to the most vulnerable.

  • Monetary policy was tightened. The authorities pointed to several measures taken to contain inflationary pressures, including through higher policy rates. They also noted the progress made in improving the institutional framework, including through strengthening collateral requirements and establishing a monetary policy committee—a key recommendation of the previous Article IV. They noted that weaker economic activity is maintaining liquidity tight, with banks remaining dependent on central bank refinancing. To further improve the monetary framework, revising caps on lending rates is also a priority.

  • Greater exchange rate flexibility. The authorities confirmed that they are moving towards greater exchange rate flexibility by reducing their interventions, and by moving toward introducing a weekly auction mechanism albeit at a slower pace than initially envisaged. They noted that persistent sales of foreign exchange are necessary to smooth excessive fluctuations in the exchange rate arising largely from lumpy energy imports.

…and progress on the structural front has been mixed.

  • Reforms to modernize and strengthen the banking system are ongoing. The authorities noted progress made in: (i) revamping regulations on loan classification, provisioning and liquidity; (ii) starting the public banks’ restructuring process (including completion of audits and launching of the recapitalization process); (iii) improving the design of bank reporting; and (iv) developing a bank rating system. They acknowledged delays in banking reforms, but noted the acceleration of the reforms over the last six months, which should lead by the end of the year to: the effective restructuring of public banks, the elimination of regulatory forbearance, the strengthening of bank supervision, and the improvement of the legal framework, which is not fully in line with good international practices (approval of the new Banking and CBT laws are pending). The authorities attribute past delays to the late start of the international audit of public banks and legislative priorities (e.g., Constitution).

  • Reforms to improve governance and the business environment. The authorities noted the recent adoption of the competition law, and all the preparatory technical work done to finalize the investment code and insolvency regime. The authorities view these reforms as priorities, and attribute the previous delays to a necessary focus by the legislative body on the new constitution and other legislation necessary for completing the political transition. A national employment strategy needs to be developed, and pension reform is at a very early stage. The authorities indicated that a broad consensus with social partners and the formation of a post-transition government will allow for the completion of the national employment strategy and pension reform.

Recent Developments: Weak Economic Activity Amid High Vulnerabilities

5. The expected rebound in economic activity has not materialized. After averaging 4.5 percent during 2000–10, real GDP contracted by 1.9 percent in 2011, the year of the revolution. Since then, it has picked up, reaching 2.3 percent in 2014, fueled by a recovery in services, but still well below potential. However, the growth momentum waned in early 2015, with GDP growth averaging 1.2 percent (y-o-y) for the first semester as activity in the manufacturing, tourism, and mining sectors slowed significantly. Strike activity, work stoppages in the mining industry, and a decline in tourism arrivals (already 30 percent down following the Bardo attack) explains this performance.

6. The overall unemployment rate has improved, but remains high. After rising from 13 percent in 2010 to 18.9 percent in 2011, the unemployment rate improved to 15.2 percent in Q2-2015, amid new public sector jobs and declining participation rates. Unemployment is even higher for women (22.2 percent), graduates (30 percent), and youth (35 percent).

7. Inflation has been contained. After a peak of 6.6 percent in June 2013, headline inflation declined to 4.8 percent y-o-y by end-December 2014, as food price decline compensated for increases in administered energy prices. After increasing at the beginning of 2015, inflation rates have again been falling, reaching 4.2 percent in August following lower food and beverage prices. Core inflation followed a similar trend.


Contribution to Growth

(In percent)

Citation: IMF Staff Country Reports 2015, 285; 10.5089/9781513529943.002.A001

Sources: Tunisian authorities; and IMF staff calculations.

Unemployment Rate

(In percent)

Citation: IMF Staff Country Reports 2015, 285; 10.5089/9781513529943.002.A001

Sources: Tunisian authorities; and IMF staff calculations.


(Y-o-y growth, in percent)

Citation: IMF Staff Country Reports 2015, 285; 10.5089/9781513529943.002.A001

Sources: Tunisian authorities; and IMF staff calculations.

8. The current account deficit has deteriorated significantly, but started to narrow in early 2015. Weak tourism receipts, buoying imports (especially energy and capital goods imports), and declining oil and phosphate exports widened the current account deficit to 8.8 percent of GDP in 2014, its highest level since the 1980s. In the first half of 2015, exceptional olive oil exports and declining energy imports helped compensate the drop in tourism receipts, thereby narrowing the current account deficit to 4.6 percent of GDP in H1 2015 (relative to 5.3 percent of GDP in H1 2014). Foreign direct investments, mostly concentrated in the energy sector, have increased but are still at low levels. Official support and international market access—including the January 2015 issuance of a 10-year Eurobond ($1 billion at 5.875 percent), which for the first time since 2007 was completed without a third country guarantee—have helped keep Tunisia’s reserve levels above four months of imports, but below 100 percent of the Fund’s composite metric (Annex I).

9. Financial markets have held up well. After peaking in mid-2012 at over 400bps, sovereign spreads narrowed significantly to 230bps following the completion of the political transition, although they widened again to 300bps following the Sousse attack. The Tunisian stock exchange—marred in the past by weak performance of public banks shares—has held up well amid limited turnover, even after coming down from record highs in the aftermath of the Sousse attack.


Gross International Reserves and U.S. dollar Exchange Rate

Citation: IMF Staff Country Reports 2015, 285; 10.5089/9781513529943.002.A001

Sources: Tunisian authorities; and International Financial Statistics.

Sovereign and CDS Spreads and Stock Index

(In basis points, unless otherwise indicated)

Citation: IMF Staff Country Reports 2015, 285; 10.5089/9781513529943.002.A001

Sources: Markit; Bloomberg; and IMF staff calculations.

10. Following a significant deterioration during 2010–12, the fiscal stance improved, but at the expense of budget composition. The structural fiscal deficit—i.e., the deficit corrected for cyclical fluctuations and excluding banking recapitalization costs—improved from 5.3 percent of GDP in 2012 to 3.3 percent of GDP in 2014. This improvement came with strong revenue collection and a higher wage bill—which increased by 37 percent over the past three years, reaching 12.7 percent of GDP in 2014—while public investment declined from 6.6 percent of GDP in 2012 to a record low 4.2 percent of GDP in 2014. Public debt is on the rise, reaching 50 percent of GDP in 2014 (from 41 percent of GDP in 2010).

11. The CBT maintained a prudent monetary policy stance, by gradually increasing its policy rate to 4.75 percent in June 2014 (from 3.5 percent in 2012). However, low deposit mobilization—caused by weak economic activity and deposit drawdown by cash-strapped mining companies impacted by work stoppages—are keeping several Tunisian banks (mostly public) structurally illiquid. As a result, banks have been increasingly dependent on direct CBT refinancing that amounted to TD 5.6 billion by end-July, despite the February 2015 elimination of required reserves on consumer loans. Dinar liquidity is further constrained by continued CBT interventions in the foreign exchange market. Private sector credit picked up in 2014, but has recently slowed down to 7.3 percent at end-June 2015, in line with weaker economic activity.


M3 and Credit to the Economy, 2012–15

(Y-o-y growth, in percent, unless otherwise indicated)

Citation: IMF Staff Country Reports 2015, 285; 10.5089/9781513529943.002.A001

Sources: Tunisian authorities; and IMF staff estimates.

Structural Liquidity Deficit of Banking System

(In billions of dinars)

Citation: IMF Staff Country Reports 2015, 285; 10.5089/9781513529943.002.A001

Sources: Tunisian authorities; and IMF staff estimates.1/ This item captures spare liquidity arising from BCT injections, rather than proper excess reserves.

12. The fragility of the banking system remains a concern. At end-March 2015, banking sector capital adequacy ratios stood at 9.5 percent (3.5 percent for public banks and 12.7 percent for private), below the regulatory requirement of 10 percent and with one public bank deemed insolvent. The overall NPL ratio is high—reaching 15.8 percent of total loans in March 2015 (approximately 21 percent of total loans after including bank subsidiaries)—and three banks (of which one public) are in violation of the liquidity ratio. At the same time, the provisioning rate improved from 46 percent in December 2012 to 56.6 percent in March 2015 following the implementation of new prudential regulations in 2013. Given the burden of NPLs on net banking income, the profitability of the banking sector is low—particularly for public banks—but has improved in 2014, mainly due to an increase in commission fees and the reduction in provisioning.

Outlook Fraught with Risks

13. Security challenges and social tensions cloud the near-term outlook, but a pickup in reform implementation improves medium-term prospects. The terrorism threat, highlighted by the tragic Bardo and Sousse attacks, and persisting social tensions will continue to weigh on the Tunisian economy over the following months, offsetting the improvement in confidence that has followed the completion of the political transition, falling global oil prices, and a modest rebound in Europe. The medium-term outlook hinges on reduced security and social tensions and the successful implementation of comprehensive reforms:

  • Growth for 2015 has been revised down to 1 percent (from 3 percent under the program), reflecting the weak performance in H1 2015, work stoppages in the phosphate sector, and the strong impact of the terrorist attacks on an already beleaguered tourism sector that will likely trickle down to the broader economy and further deteriorate economic confidence (Box 3). The drag on economic activity will likely carry over to the first half of 2016, but relief measures and a gradual recovery in tourism flows will help improve growth prospects in the medium term, with Tunisia projected to reach its estimated potential of 4.7 percent by 2018 (Box 4). A moderate credit recovery, better resource allocation as financial sector reforms bear fruit, increasing public and private sector investment, and the reduction in input costs arising from declining oil prices will all contribute to the growth recovery. The recent blow to the tourism industry will increase unemployment rates in the coming months, but they will eventually decline as growth converges toward potential.

  • Headline inflation would remain contained. Continued implementation of a prudent monetary policy and low food and energy prices should reduce inflation to 4.4 percent by end 2015 and to less than 4 percent over the medium term.

  • The current account deficit would narrow only marginally to 8.5 percent of GDP in 2015, as the drop in tourism revenues (one-third of annual tourism receipts are typically generated during the summer) and low oil and phosphate exports offset gains seen earlier in the year from lower imports and exceptional exports of olive oil. A more significant improvement is expected over the medium term, driven by a rebound in tourism and remittances, a pickup in manufacturing, oil and phosphate exports, and reduced energy and food imports.

  • Reserve levels will remain above four months of import coverage in 2015, helped by higher World Bank disbursements and renewed international market access. Over the medium term, greater exchange rate flexibility is assumed in the baseline to correct for an overvalued exchange rate, and gross reserves are expected to gradually improve and eventually cover 5.6 months of imports by 2020 (Annex I).


Output Gap and Potential Output

Citation: IMF Staff Country Reports 2015, 285; 10.5089/9781513529943.002.A001

Source: IMF staff estimates.

Tunisia: Selected Economic Indicators, 2014–20

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

Tourism Sector: Economic Impact of the Recent Terror Attacks

Tourism is important for jobs and foreign exchange earnings in Tunisia. With annual turnover of about 3 billion dinars, it accounts for about 7 percent of Tunisian GDP and 10 percent of exports of goods and services. The sector directly employs people across the value chain of 230,000 hotel rooms and roughly 190 tour operators and travel agents. It accounts for 15 percent of employment—including jobs in a range of ancillary and supporting services, such as restaurants, taxis and associated retail and artisanal outlets. However, over the past decade, the sector has been crippled by structural failures, reflecting an outdated business model (relying on sun, sand, and sea), poor governance, and over-reliance on debt that was generously provided by state-owned banks and connected lenders.

Since 2011, a weak external environment worsened existing structural weaknesses. The uncertainty linked to the political transition and increased regional turmoil held back tourism flows, particularly from Europe; the latter account today for 45 percent of arrivals (from 70 percent in 2010) and represent close to 90 percent of room-nights. By 2014, tourism-linked foreign exchange inflows had started to recover from 2011 lows of $1.6 billion to $2.1 billion in 2014—but these were 16 percent below pre-revolution levels. By the end of the political transition in December 2014, tourist arrivals—with increasing numbers from the Maghreb and Eastern Europe replacing more traditional clients from Western Europe—and room-nights remained 15 and 22 percent below pre-revolution levels, respectively.


Tunisia: Arrivals and Tourism Receipts

Citation: IMF Staff Country Reports 2015, 285; 10.5089/9781513529943.002.A001

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

Tunisia: Room-nights and Occupancy Rates

Citation: IMF Staff Country Reports 2015, 285; 10.5089/9781513529943.002.A001

Sources: Tunisian authorities; and IMF staff estimatesand projections.

Against this background, the impact of terror attacks has been devastating. The Bardo and the Sousse tragedies prompted a 45-50 percent cancellation of existing bookings to Tunisia, emptying hotels at the height of the summer season. Tourist arrivals from Europe declined by 70 percent (y-o-y) in July alone. Tunisia’s National Tourism Office estimates that about 85-90 percent of the over 800 registered hotels are already experiencing financial difficulties or are in the process of shutting down. For the year as a whole, tourism inflows are expected to decrease by 45 percent (to about $1.1 billion) and arrivals will decline to less than 5 million people (from 6 million people in 2014), despite Maghreb tourist arrivals expected to increase or remain constant. The implications for the broader economy are significant:

  • Growth. The drop in tourism receipts and employment will also impact the transport and artisanal industry—and is expected to reduce growth by an additional 0.6 percentage points (to about 1 percent). Domestic agricultural output (e.g. fresh fruits or vegetables) is also expected to be impacted by falling demand from hotels.

  • External. The current account deficit will widen by 2.5 percent of GDP, putting additional pressures on the foreign exchange market.

  • Fiscal. The direct impact from lower turnover in tourism establishments is limited as the related tax revenues are less than 0.1 percent of GDP. The general slowdown in economic activity will however translate into much larger revenue losses, which will be amplified by the relief measures introduced.

  • Banks. Tourism sector loans represent less than 7 percent of the total loan portfolio, but NPLs are 25 percent of the banking sector and 40 percent of the tourism sector loan portfolio. The hotels’ financial difficulties will likely feed into higher NPLs, thereby hitting banks earnings and liquidity (for comparison, in the year following the 2002 Djerba attack, NPLs as a share of total loans rose by 3 percent). Also, vulnerabilities at one large state-owned bank will increase in view of its large exposure to the tourism sector.

Tunisia’s Potential Growth

Tunisia enjoyed solid growth rates in the 30 years preceding the revolution. Rates averaged about 4.5 percent per year in 2000–10, after peaking at close to 5 percent in the 1990s, driven by manufacturing, transportation and communications. This performance was helped by a gradual liberalization of foreign trade and investment, with capital accumulation as the main growth driver while labor and productivity were lagging.

Total Factor Productivity (TFP) has been declining, with its drop at the onset of the global financial crisis at the core of the slump in growth in 2008–10. The TFP decline was highest for agriculture and manufacturing, while government interference and connected lending stifled the development of financial and hospitality services. During that period, Tunisia failed to reallocate resources away from less productive sectors and into sectors with higher potential (i.e., high-value-added manufacturing and services). Staff’s analysis shows instead that Tunisia moved toward low-value-added industries (e.g., textile, machinery assembly, mineral products).


Tunisia: Compounded Sectoral Growth Rates, 1970–2010

Citation: IMF Staff Country Reports 2015, 285; 10.5089/9781513529943.002.A001

Source: IMF staff estimates.

Despite the contraction of GDP, there is no evidence of a reduction in potential growth following the revolution. Convergence of production factors to their pre-revolution trends would support a gradual recovery, with growth averaging about 3.3 percent per year until 2020 in a muddle-through no reform scenario. However, this growth performance would not be sufficient to make a significant dent in unemployment or raise living standards.

Structural reforms could significantly improve Tunisia’s growth potential. Based on cross-country regressions, policies to remove the most binding constraints to growth—increasing access to finance, improving the business environment, and reducing macroeconomic risks—would push Tunisia’s growth potential up by about 1.5 percent, and could raise average growth in 2015–20 to 4.3 percent (Staff’s baseline scenario).


Tunisia: Contribution to Growth, 2000–11

Citation: IMF Staff Country Reports 2015, 285; 10.5089/9781513529943.002.A001

Source: IMF staff estimates.

Additional reforms, building on international best practices and tailored to the Tunisian situation, could further improve growth in the medium term. These include: improving labor regulations; promoting greater trade integration with fast-growing markets and with global value chains; raising infrastructure investment; and leveraging the large and successful Tunisian diaspora to acquire skills, business and finance. Implementing all these reforms would foster higher investment and boost productivity, with potential growth almost doubling.


Additional Growth If Underlying Structural Variables Reach EMDC Levels /1

(in percent)

Citation: IMF Staff Country Reports 2015, 285; 10.5089/9781513529943.002.A001

Sources: World Economic Outlook; and IMFstaff calculations.1 Potential growth derived if each of the factors underlying potential productivity (e.g. business environment, modern production methods), capital (e.g. financial development, infrastructure, openness), and labor (e.g., labor market efficiency) are increased to average EMDC levels. For simulation details see Mitra et al. (forthcoming).

14. Risks are high, and tilted to the downside (RAM). Economic confidence in Tunisia will continue to hinge on improvements in the security situation, with terrorist threats and spillovers from the crisis in Libya—including refugee inflows—representing a key challenge. Tunisia’s exposure to Europe—70 percent of its trade—makes it vulnerable to a protracted period of slower global growth and surges in global financial volatility. An upsurge in political instability—including through the inability to build consensus in a coalition government representing distinct political perspectives—or further social tensions could worsen the composition of the fiscal adjustment or delay structural reforms, exacerbating existing vulnerabilities and lowering the growth potential. Domestic risks to reforms—from vested interests—are also strong and will need to be mitigated by a strong outreach and communications campaign by the government.

15. The authorities broadly share staff’s views on the economic outlook and risks. They saw upside potential for growth over the medium term as political stability is entrenched, security threats are controlled, Europe recovers, and reforms are implemented to transform the economy and help Tunisia move up the value chain. The authorities expect private demand to remain the main driver of growth, as banks restart playing their financial intermediation role. They agreed that macroeconomic and financial sustainability of Tunisia’s growth path will require less reliance on consumption and imports. The authorities also agreed that risk mitigation measures will require a strong outreach campaign and overcoming administrative and legislative capacity constraints.

Tunisia: Risk Assessment Matrix*

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The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff). The relative likelihood is the staff’s subjective assessment of the risks surrounding the baseline (“low” is meant to indicate a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability between 30 and 50 percent). The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly.

The Reform Agenda

Discussions focused on Tunisia’s need to accelerate growth, make it more inclusive, and provide high-quality jobs. This requires maintaining macroeconomic stability—through high-quality fiscal consolidation, prudent monetary policy, and greater exchange rate flexibility—in a context of high security threats, social demands, and downside risks. This pre-requisite to growth should be accompanied by the decisive and timely implementation of ambitious structural reforms to improve budget composition, strengthen the financial system, and improve the business environment. All these elements are essential to achieve higher and more inclusive growth and make a significant dent in unemployment.

A. Achieving Macroeconomic Stability

High-quality fiscal consolidation

16. Fiscal consolidation has been delayed to 2016, following a modest loosening of the 2015 fiscal stance to support short-term growth. The revised 2015 budget law approved in August 2015 includes a package of urgent measures (amounting to about 0.5 percent of GDP, see text table) to help alleviate the short-term economic fallout linked to the Sousse attack and an increase in security spending (0.2 percent of GDP). Staff welcomed the countercyclical response to the attack, but warned that some measures—such as the VAT rate reduction to the hospitality sector—should be temporary. The revised budget also includes an increase in the public sector wage bill (equivalent to 0.8 percent of GDP) arising from recent agreements in the education sector and a 5 percent generalized salary increase. These higher expenditures were accompanied by a significant under-execution of capital spending (0.7 percent of GDP) and net savings from lower oil prices (1.6 percent of GDP decline in energy subsidies), which helped limit the structural fiscal deficit to 3.5 percent of GDP in 2015 (lower than programmed, but up from 3.3 percent of GDP in 2014). The authorities noted that the 2015 deficit would have been lower than in 2014 in the absence of the record (and unplanned) decline in public investment in 2014. They underlined their efforts at containing fiscal imbalances as the revised budget includes a 20 percent across the board cut in non-essential goods and services (MEFP ¶19).

Tunisia: Relief Measures Introduced After the Sousse Attack

(In percent of GDP)

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Sources: National authorities; and IMF staff calculations.

Tunisia: Selected Fiscal Indicators, 2014–20

(In percent of GDP)

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Sources: Tunisian authorities; and IMF staff estimates.

17. The deteriorating composition of public spending needs to be reversed. Staff regretted that the net savings from lower fuel subsidies have been somewhat offset by a growing wage bill (Box 5). It stressed that controlling spending today is important to avoid a vicious cycle in which current spending increases are financed by cuts in capital spending, which in turn reduce future growth and revenues. The authorities noted that the fragile social and economic situation required action on wages to reduce social tensions, create a climate conducive to reforms, and act as a countercyclical policy that will boost demand. They agreed with staff on the need to contain the wage bill in the medium term (Section B). Staff urged the quick implementation of the tax reform package (see Section B), which would have helped compensate for the increasing wage bill through new permanent revenue measures. The authorities argued that the 2015 revised budget’s main focus was to update key aggregates in view of the weaker economic outlook and introduce “emergency relief” measures in response to the Sousse attack. It stressed that a major tax policy reform would require more discussions, which can only be held in the context of the 2016 budget.


Key Spending Components

(In percent of GDP)

Citation: IMF Staff Country Reports 2015, 285; 10.5089/9781513529943.002.A001

Source: IMF staff estimates and projections.

Tunisia: Public Sector Employment and Wages

Public sector employment has increased sharply in the aftermath of the January 2011 revolution. Between 2010 and 2014, as a result of high unemployment and security needs, public sector employment rose by 20 percent to 615,000 workers. Of that increase, 40 percent was for security and defense personnel. The rest was mostly the regularization of contractual personnel—primarily in low skilled categories—that were made permanent. Total public employment—which includes a 30 percent increase in public enterprise workers over the last three years to about 180,000—is today at 795,000, corresponding to a ratio of total public employment to total employed workforce of about 24 percent—a level that is three times higher than in Morocco or emerging markets such as Chile or Mexico.

Public sector recruitment pushed the wage bill to record high, despite the government’s earlier efforts to freeze wage increases and limit promotions. The wage bill increased from 10.7 percent of GDP in 2010 to 12.7 percent in 2014 and will increase to around 13.3 percent in 2015, a level higher than most comparator countries. This post-revolution increase reversed efforts to reduce the wage bill from 12.2 percent of GDP in 2002 to 10.4 percent in 2008. Currently, the wage bill absorbs 56 percent of tax revenues and amounts to close to 50 percent of total expenditures, ratios well above those of most countries in the world (text chart).

Pressures from labor unions to increase public sector wages stem from the perception that they lost ground since the revolution. However, this perception is not reflected in the data. Cumulative inflation was about 18 percent over 2012–14 whereas the average public sector salary increased by 14 percent and wages in the private sector increased by 6-12 percent. Wages of medium and lower public sector categories rose by 23 percent (the 6 percent increase in the minimum wage in 2013 had no impact on the public sector, as salaries for lower categories of civil servants are almost double the minimum wage). In addition, wages in the public sector are significantly higher than in the private sector, with public sector workers enjoying a 23 percent wage premium over private workers, especially for better-educated new labor market entrants.

Comprehensive civil service reform is urgent. The public sector salary system is a result of structural weaknesses, and not a new phenomenon. Past reform attempts—dating as far back as 1989—called for ending the proliferation of allowances, replacing the current index system with a base salary scale, raising recruitment standards, and strengthening the connection between performance and promotion. The functions and staffing levels of the public sector also need to be addressed. The success of any civil service reform will require strong ownership by the government and key stakeholders.


Compensation of Employees, 2014

(In percent)

Citation: IMF Staff Country Reports 2015, 285; 10.5089/9781513529943.002.A001

Source: World Economic Outlook.

18. Staff and the authorities agreed that fiscal consolidation is necessary to reduce external imbalances, restore private sector confidence, and decrease financing constraints. A 3 percentage point adjustment in the structural fiscal deficit over the medium term—starting in 2016—will reduce public debt to 53.4 percent of GDP, from a peak of 57.4 percent in 2018, albeit substantial downside risks persist—especially with regards to a depreciating currency or permanent decline in growth (Annex II). The authorities also noted that large amortization payments due in 2017 (see text chart) require a sustained effort to reduce the fiscal deficits. They agreed that, civil service reform, energy subsidy reform, and revenue mobilization should be the main elements of the consolidation strategy, which should preserve public investment (see Section B).


Debt and Amortization

(In percent of GDP)

Citation: IMF Staff Country Reports 2015, 285; 10.5089/9781513529943.002.A001

Source: Tunisian authorities.

Tunisia: Yields of Main Revenue and Expenditure Measures Over the Medium Term

(In percent of GDP)

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Sources: Tunisian authorities; and IMFstaff estimates and projections.

There are around 40,000 liberal professions but only 30,000 pay (corresponding to 60% of presumptive tax regime).

Apply 18 % to all goods and services currently taxed at 12 %, and apply 6 % for agricultural and food products, except for fresh products.

Harmonize taxation of all type and origin of beers.

Around 1/3 of non energy imports benefit from this system

Monetary Policy—Containing inflation and improving the transmission channels

19. Monetary policy will continue to aim at containing inflation. Staff and the authorities agreed that the policy rate remains at an appropriate level in view of moderate headline and core inflation, slow credit growth, and economic activity well below potential. Staff welcomed the strengthening of the policy rate as an effective signaling tool through the recent convergence of the money market and policy rates, as well as the return of the real interest rates to positive levels (0.5 percent), which is necessary in view of low domestic savings. It also welcomed the authorities’ readiness to tighten monetary policy, should inflationary pressures arise as a result of public wage increases or if depreciation pressures materialize (MEFP ¶13).


Interest Rates

(In percent)

Citation: IMF Staff Country Reports 2015, 285; 10.5089/9781513529943.002.A001

Source: Tunisian authorities.

20. Banks’ continued dependence on CBT refinancing is a structural weakness that needs to be addressed and carefully monitored. The banking sector has been facing structural liquidity needs since the beginning of the revolution, with recent improvements negated by fresh deposit withdrawals from mining companies and increased FX interventions. As a result, banks have remained overly reliant on direct CBT refinancing. When completed, the ongoing recapitalization of public banks—which have been the main recipient of CBT resources—will help reduce refinancing needs and mitigate the structural liquidity deficit. The establishment of a full-fledged lender of last resort mechanism (November 2015 SB) which is expected to be introduced in the forthcoming CBT law will improve the resilience of the financial system and improve the conduct of monetary policy. Liquidity management will also be helped by ongoing improvements in the collateral framework, as the share of borrowings collateralized by government securities doubles from 20 percent in 2013 to 40 percent in 2014 (end-December 2014 SB). This will also minimize risks to the CBT’s balance sheet.

21. Staff welcomed plans to improve the monetary policy framework. Improvements in liquidity forecasts and deeper interbank markets—including through the establishment of a more mature repo market and a yield curve—are needed to strengthen the monetary policy framework and facilitate the medium-term move toward inflation targeting. Staff encouraged the authorities to speed up adoption of the CBT law, which will help reinforce CBT credibility through new institutional arrangements granting greater CBT independence and clarity of objectives—an important pre-requisite to successful inflation targeting. Staff stressed the importance of moving ahead with removing the existing “caps” on the lending rate, which hampers the monetary policy transmission channel. The authorities noted that consultations on that front, including with banks, are ongoing.

Toward more flexible exchange rates

22. The depreciation of the dinar over the last two years was halted in the first half of 2015. An appreciating dollar vis-à-vis the Euro and pressures on the dinar in May and June led to an increase in FX sales—double the previous monthly average—which contributed to the exchange rate appreciating by 5 percent vis-à-vis the US dollar and the Euro during the first six months of 2015 (MEFP ¶18). Staff noted that the exchange rate continues to remain within a narrow margin of 2 percent relative to the statistically identified trend, confirming the “de facto” crawl-like behavior of the exchange rate (Annex I).


Share of CBT Sales in the Foreign Exchange Market

(In percent)

Citation: IMF Staff Country Reports 2015, 285; 10.5089/9781513529943.002.A001

Source: Tunisian authorities.

Tunisian Dinar to Euro-US$ Basket Exchange Rate

(Index, higher values = depreciation)

Citation: IMF Staff Country Reports 2015, 285; 10.5089/9781513529943.002.A001

Source: IMF staff calculations. Weights based on currency of trade transactions.

23. Greater exchange rate flexibility would help reduce external imbalances and rebuild reserves. The authorities explained that their interventions in the FX market are not intended to manage or maintain a certain level of the exchange rate, but rather to smooth excessively large fluctuations that largely arise from lumpy FX demand from energy operators. The authorities consider that greater exchange rate flexibility is necessary to contain the current account deficit, rebuild buffers—as reserves are still below the Fund’s ARA metric—and bring the dinar in line with fundamentals (text chart). To that end, they plan to limit their interventions in the FX market (MEFP¶18). Both staff and the authorities agree that the dinar is currently 5–15 percent overvalued (Annex I), although the authorities did not feel that the overvaluation represents a major drag on firms’ competitiveness. To further rebuild buffers, staff urged the authorities to purchase FX during periods of excess supply.


Exchange Rates

(Jan. 2008 = 100; +: appreciation)

Citation: IMF Staff Country Reports 2015, 285; 10.5089/9781513529943.002.A001

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

ARA Metric Decomposition

(In billions of U.S. dollars)

Citation: IMF Staff Country Reports 2015, 285; 10.5089/9781513529943.002.A001

Sources: Tunisian authorities; and IMF staff calculations.

24. A deeper market would facilitate a more flexible foreign exchange rate policy. Staff commends the authorities’ plans—approved by the CBT’s Board of Directors in May 2015—to deepen the foreign exchange market and provide the necessary liquidity for economic operators (MEFP ¶19), including through relaxing conditions governing exchange rate and interest rate hedging instruments. Staff regrets the delay in implementing weekly foreign exchange auctions, which is now scheduled for end-October 2015 (SB), but understands that reforms to deepen the market will facilitate its implementation.

25. Over the medium term, a gradual shift to full capital account convertibility is needed. A comprehensive reform of foreign exchange regulations—including current rules constraining the use of FX deposits or caps on foreign investment in bonds and stocks—could attract significant foreign capital flows and increase growth potential. The authorities agreed that more progress in entrenching macroeconomic stability and developing domestic financial institutions and upgrading their prudential supervision is needed before moving toward capital account convertibility. They also noted that the peculiarity of Tunisia’s economy also calls for an in-depth study of capital flows linked to the off-shore sector.

B. Achieving Higher and More Inclusive Growth

26. Tunisia’s old state-centered development model has shown its limits. Over the past two decades, state intervention has distorted product markets and held back the emergence of a dynamic private sector. The pre-revolution focus on an industrial policy based on selective incentives led to wide regional disparities and a predominance of low value-added activities that failed to create good jobs (Box 6). A broad home-grown reform agenda—focused on fiscal reforms, the financial sector, and the business environment—is needed to kick start growth and make it more inclusive (see Annexes IV and V for a discussion of inclusiveness issues and taxation fairness).

The key role of fiscal reforms

Fiscal consolidation needs to be accompanied by growth-enhancing structural fiscal reforms.

27. Staff supports the authorities’ tax reform strategy aimed at promoting greater equity, simplification, and revenue mobilization. Following two years of consensus building and technical work that culminated in national tax consultations in November 2014, a new and ambitious tax reform strategy has been prepared by the Ministry of Finance, with support from Fund TA. It appropriately focuses on: (i) addressing the complexity of the indirect tax system by simplifying the VAT from three to two rates (6 and 18 percent); reducing exemptions, limiting excises to a selected list of products; rationalizing customs duties from seven to three levels (0, 20 and 36 percent, the latter for agricultural products); (ii) improving fairness, including through broadening the tax base, a gradual convergence of the on-shore and off-shore corporate tax rates, improving the progressivity of personal taxation, and simplifying the taxation for small enterprises; and (iii) reducing earmarked taxes. Tax reform—which will be implemented in 2016—is expected to help increase tax revenue by 1.5 percentage points of GDP over the medium term—with the magnitude of the increase, including in the first year, depending on how aggressive the tax package is in broadening the tax base.

Tunisia: Inclusiveness and Growth Constraints

The January 2011 revolution highlighted that growth benefits have not been evenly shared. Tunisia’s old growth model—based on selective state intervention—led to unequal access to opportunities and job creation largely limited to low value-added industries. Regional disparities were very large: (i) average poverty rates remained 3 times as high in the interior of the country than in richer coastal “offshore” areas; (ii) at 25 percent, unemployment rates in the interior regions were double those of coastal areas; and (iii) only 13 percent of foreign firms were created in the interior regions.

A growth diagnostic approach applied to Tunisia highlights the following structural issues—mostly a legacy of past policies—as the most binding:

  • Lack of finance. Access to credit has been cited by business entrepreneurs as the main obstacle to doing business over the past decade, while off shore and mining firms—the most successful in Tunisia—are generally not credit constrained. Local firms try to compensate for lack of credit access through self-financing. Lack of access to credit is driven by weak credit information, high perceived default risk, connected lending and lack of adequate bankruptcy laws, which are exacerbated by banks’ structural liquidity problems.

  • Lack of effective institutions to ensure public sector accountability. Tunisia performs poorly on corruption, property protection, and judicial independence where it is below comparable peers. Regulatory barriers and anti-competitive practices limit growth, particularly through requirements for ministerial approval, prohibition of investment in certain sectors, and tolerance for abuse of market position. Wide-scale tax evasion, inefficient tax administration, and growing informality are also cited as causes of unfair competition.

  • Taxation. Overall, taxation in Tunisia compares relatively well with similar countries, but relies on a very narrow tax base, because of tax incentives for offshore firms, VAT exemptions, and unequal treatment between wage and capital income. Corporate taxation and sales tax levels are in line with international norms, but high payroll and social security contributions represent a high burden for domestic firms.

  • Labor market. The 2014-15 Global Competitiveness Survey ranks Tunisia poorly on labor market efficiency, where it stands 129 out of 144 countries, driven by the low participation of women (134), rigid wage determination (119), lack of labor-employer cooperation (118), and rigid firing and hiring practices (97).

Interestingly, infrastructure was not seen as a binding constraint to growth. Tunisia’s geography is an asset for growth, reflecting its direct access to the sea and its proximity to the European market. In spite of regional disparities in basic infrastructure, Tunisia’s existing infrastructure appears to be an area of strength. Work force availability was also found to be appropriate, with Tunisian firms ranking work force education as only the 10th most problematic issue for doing business in 2014. Yet, improving the higher education curricula could help reduce the existing skill mismatches.


Global Competitiveness Indicators, 2015

(The Lower the score, the worse)

Citation: IMF Staff Country Reports 2015, 285; 10.5089/9781513529943.002.A001

Source: World Economic Forum: “The Global Competitiveness Report, 2014-15.”

28. A successful tax reform requires an improved tax administration. The authorities confirmed their commitment to a three-year tax administration modernization program—aimed at establishing an integrated tax administration with improved systems and processes. They stressed their preference for a gradual approach by first improving compliance in the small business sector before expanding the process to large and medium-sized enterprises. The authorities argued that the creation of a category of “new tax collectors”(end-July SB), which would have helped provide collection powers solely to the tax agency, would take more time as they first want to proceed with moving existing functions in the same location but under current management structures. Staff urged the authorities to accelerate the process toward unifying tax administration functions, starting with improving the processes at the large taxpayer unit (80 percent of tax collection).

29. Staff and the authorities agreed that lower oil prices provide an important opportunity to depoliticize fuel prices and reduce energy subsidies in a sustainable manner. The 56 percent decrease in international oil prices since the beginning of 2014 has not yet translated in decreases in domestic retail fuel prices, which are, for some products, 30-50 percent above international levels (text chart), thus providing additional savings to the budget. More sustained subsidy reform would require:

  • A proper automatic fuel price formula. Staff urged the quick revision of the existing asymmetric automatic fuel price adjustment formula—which is currently triggered only if there is a cumulative $6 a barrel increase within a quarter—into an automatic symmetric formula that will smooth large fluctuations in international prices and ensure full cost recovery and appropriate tax collection. The authorities agreed with this approach, but argued that such a revision would take time and can only be implemented in 2016. A well-designed communications campaign would also be needed to explain the formula and its use should global prices pick up again.

  • Adjustments in electricity tariffs. Staff regrets the suspension of programmed increases in electricity tariffs, which are still heavily subsidized—20 percent below cost recovery even after last year’s efforts to adjust tariffs for medium and low voltage industries and eliminate subsidies for cement companies. Staff urged further increases in electricity tariffs towards cost-recovery levels to continue reducing untargeted and regressive energy subsidies. The authorities argued that gains in overall energy subsidies from lower international oil prices do not justify increasing tariffs at this juncture.


Energy Prices

(In percent of international prices, assuming Brent price = $51.68) 1/

Citation: IMF Staff Country Reports 2015, 285; 10.5089/9781513529943.002.A001

Sources: Tunisian authorities; and IMF staff calculations.1/ Spot price on 8/31/2015.

30. Containing the wage bill is essential to make space for priority spending. Staff is encouraged by the authorities’ determination to implement a comprehensive civil service reform, which will help reduce the wage bill to 11 percent of GDP over the medium term (MEFP ¶32). It urged the authorities to move quickly in designing an overall and comprehensive civil service reform strategy that will review the organizational structure, revise salary benefits and indemnities, and strengthen career incentives.

31. Public financial management reforms are needed to strengthen budget execution, notably on investment projects (MEFP ¶10). Earlier steps to decentralize project execution and the adoption of the procurement code last year have not yet succeeded in accelerating capital spending, particularly in the first half of the year, where the budget execution rate was close to 30 percent. Better project selection and prioritization, closer coordination between central and regional administration, and better resolution of land rights—including through the implementation of newly issued decrees allowing expropriation when needed—are expected to contribute to accelerating the implementation of investment projects. Staff welcomed progress made in finalizing the new organic budget law—designed with TA assistance from the EU—which will be submitted to parliament in November. This law, along with the progress made in performance budgeting (MEFP ¶38)—will improve budget preparation, introduce medium-term budgeting, increase transparency, and streamline existing control procedures.

32. Strengthening management and control of public enterprises is necessary to reduce contingent liabilities and fiscal risks. The recent completion of a comprehensive assessment of auditing and internal control mechanisms of public enterprises (SOE) will serve as a basis for formulating a new public enterprise monitoring strategy (October 2015 SB), including through regrouping the various control bodies. Monitoring would also be improved by new performance contracts for the five largest SOEs (end-October 2015 SB), which should include indicators that cover financial performance. Staff urged the authorities to conduct a full assessment of fiscal risks arising from the operations of public enterprises, including from the issuance of new guarantees. The authorities stressed that over the last three years the outstanding stock of government guarantees has remained below 10 percent of GDP, and that a clear action plan to reduce fiscal risks will be established following forthcoming Fund TA on the topic.

A sound and efficient financial system

33. Restoring a sound banking system is a prerequisite for achieving higher and more inclusive growth. The old model, based on weak underwriting standards and widespread “connected lending,” accompanied by weak regulation and supervisory forbearance fell short on financial intermediation, keeping private sector credit well below potential (text chart). A modern banking system, subject to strong supervision and competition, would improve credit allocation—removing a key constraint to economic growth.


New Benchmark for Financial Deepening

(In percent of GDP)

Citation: IMF Staff Country Reports 2015, 285; 10.5089/9781513529943.002.A001

Sources: Fayad, D., P. Garcia Martinez, A. Mati, “Financial deepening in the Maghreb” (forthcoming)1/ The benchmark is calculated assuming that financial sector development depends on structural characteristics of a country, such as GDP per capita, and population and demographic factors.

34. Addressing vulnerabilities of public banks is a key priority of the authorities’ reform agenda. Tunisia’s three public banks (Box 7) have been hampered by weak lending practices and governance issues. Exposure to a tourism sector that has been severely affected by the impact of the January 2011 Revolution and, more recently, by the terrorist attacks that directly targeted the sector—is an additional factor. Progress on reforming public banks is under way albeit with some delay:

  • Recapitalization is underway consistent with international practices (MEFP ¶23). The legislative authority to use the recapitalization funds allocated in the 2014 budget was granted by parliament in August 2015. The restructuring plans of the three banks (two of which were adopted in February and June) and the launch of the capital subscription process will allow one public bank (BH) to meet the 10 percent minimum solvency ratio by end-September. The recapitalization of the STB—14 percent of assets and currently insolvent—is expected to be completed in October at the end of the capital subscription process. Depending on the finalization of the audit results, which are still pending, the third public bank (BNA) might not need additional capital thanks to explicit state guarantees for SOE loans and planned asset sales. For all public banks, and in line with sound international practices, the government remains committed to cover any unsubscribed capital at the closing of the books, effectively diluting existing shareholders. Staff stressed that lower provisioning needs, justified in bank audits by the existence of sovereign guarantees for loans to SOEs, require the explicit commitment to renew those guarantees.

  • Business plans underpinning the recapitalization of public banks will need to be updated to ensure regulatory compliance throughout the restructuring period (2015-19). Existing business plans (adopted prior to the Sousse attack) have become unrealistic as a result of a significant drop in tourism and weaker economic activity. Preliminary stress test findings point to a capital shortfall arising within a year (of about TD 50 to 100 million) under staff’s baseline scenario (and no recovery of the tourism loan portfolio). The authorities agreed that updated plans should be approved by the Boards of the banks before the end of the year (MEFP ¶21). They fully expect that capital shortfalls could be met by banks’ sales of non-strategic assets. Staff agreed this could be an acceptable strategy provided that sales are on an arms-length basis and not to banks’ subsidiaries.

  • Operational restructuring (MEFP ¶23). Staff welcomed the designation of new Board members in all three public banks, and urged continued progress on this front through a change in management (expected to be completed by October 2015) and the signing of performance contracts that will ensure proper bank monitoring during the restructuring period. Staff urged a monitoring on a consolidated basis but the authorities argued that their reporting system only allows that for certain indicators (e.g., cost-to-income ratio). Close supervisory scrutiny of public banks will also be needed throughout the restructuring period to ensure proper monitoring of regulatory compliance, adherence to sound lending policies, and proper internal governance and risk management.

Tunisia: Why Focus on Public Banks?

The performance of the Tunisian banking system has long been hampered by the performance of the main three state-owned banks. These banks are systemic—currently representing 37 percent of banking assets and around 28 percent of banking sector deposits. The role of the State in these banks has diminished over the past decade but remains important as the latter is the main shareholder in all three state-owned banks: STB (51 percent); BH (57 percent), and BNA (65 percent). The performance of these public banks has been weaker than for the rest of the industry, weakening credit allocation and governance for the whole sector:

  • Solvency ratio. Stricter prudential rules on classification of NPLs and provisioning ratios have highlighted the weaknesses of the state-owned banks, which no longer meet minimum regulatory solvency ratios. As a result, in the absence of recapitalization, the solvency ratio for public banks was four times less than the private sector, with two banks severely undercapitalized and one insolvent (but still operating because of forbearance).

  • Deterioration of asset quality. NPLs in public banks are more than double the level of private banks, underlying the weak quality of public bank clients which account for a larger share of their loan portfolio (13 percent) than for private banks (8 percent) and insufficient loan recovery capacity. Weaker economic activity will weaken further loan quality—particularly for the STB which is heavily exposed to the tourism sector (54 percent of its loan portfolio).

  • Profitability of public banks is also half of private banks, mainly because of the bearing cost of NPLs but also related to a higher dependence of gross income on interest margins.

  • Refinancing. Growth in deposits of public banks has been limited forcing public banks to become the largest users of the CBT refinancing facility (40 percent of total refinancing).

The state-owned banks also suffer from an unfavorable strategic positioning. They have for years followed strategic directions—in agriculture, housing, or hotel—that were not sustainable over the long term, particularly since these were often used for easy access to finance “connected parties”. As a result, their business model has seen a steady erosion of their market share vis-à-vis private banks. According to World Bank calculations, other things being equal, it was estimated that the loss of market share would have continued at a rate of 1 to 1.5 percent per year in the absence of a public bank restructuring.

Financial Soundness Indicators, March 2015

article image
Source: Tunisian authorities.

Data is for 2014.

35. Resolution of nonperforming loans is essential for bank restructuring. The creation of a system-wide Asset Management Company (AMC) to deal with distressed debt was envisaged in the revised 2014 budget—with an initial focus on tourism sector debt. Its effectiveness requires parliamentary adoption of the AMC law, which is likely to be delayed. Staff recommends adoption of the law as long as it remains in line with best international practices (such as with regards to loan resolution superpowers, fair transfer pricing, and governance) and is not a vehicle for bailing out defaulted borrowers. In the absence of a law meeting these prerequisites and helping address the high NPL issue, staff and the authorities agree that priority should be given to improving the management of NPLs by individual banks through swift adoption of the new bankruptcy law strengthening creditor rights and an effective resolution framework. The passage of this law is expected in October 2015.

36. Well-designed measures to buttress viable tourist entities weakened by the fall in the sector will limit further build-up of NPLs. In response to the Sousse attack, a package of exceptional measures facilitated the rescheduling of new loans granted to active tourist establishments (MEFP ¶25). While concurring with most of the relief measures, staff warned against an indefinite moratorium on non-performing loans and advocated strict eligibility criteria. The authorities agreed with staff that the prudential treatment of the relief measures should be strictly time-bound, transparent and complemented with corrective action plans; otherwise they could result in regulatory forbearance and ever-greening of loans with the risks to be further extended to other sectors.

37. Strengthened regulations and improved banking supervision are essential to reduce the buildup of risks. Since the Revolution, new regulations on governance, solvency ratios, concentration risk norms, and liquidity ratio have been established. A further upgrading of these norms is required to ensure regulatory convergence toward international standards. Pending further hiring of experienced staff, major challenges lie in urgently enhancing supervisory intensity, both for public and private banks. Staff and the authorities concurred on the need for more risk-based supervision, which will be enhanced through the hiring of new bank supervisors (SB) and strict adherence to the sequencing detailed in the medium-term strategic plan designed with Fund TA (MEFP ¶29). Staff regretted delays in implementing the full bank reporting system designed last year with Fund TA, and welcomed the authorities’ commitment to apply sanctions to banks violating existing prudential norms.

38. Efforts to strengthen the banking resolution framework are progressing. The draft new banking law includes important improvements concerning deposit guarantees, bank governance, consolidated supervision, licensing, and the stronger resolution framework. Staff and the authorities agreed that additional changes concerning supervisory enforcement, early intervention, and resolution are needed to make sure the law is consistent with good international practices. Staff regretted delays in parliamentary approval of the law, and urged the authorities to accelerate the preparation process, recognizing that the consultation period with the banking industry and the stakeholders concerned by this legislation represent a risk for its timely adoption.

Major Prudential Regulations Adopted Since 2011

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39. Reduced state intervention would help promote financial sector development in the medium term. Government’s direct control of three main public banks and its minority participation in nine small banks (about 10 percent of banking assets) may continue to create distortions in the future if public banks continue financing loss-making state-owned enterprises, provide financing on non-commercial terms, or extend credit based on connections. The authorities noted that the State has a key role to play and that there are no plans to reduce state participation in the three state-owned banks, although the search for technical partners to help with the restructuring process of some banks is underway.

40. Further efforts to develop capital markets are needed. The absence of functioning secondary markets for bonds and low stock market capitalization (about 20 percent of GDP, and listings dominated by banks) means that capital markets continue to play a small role in allocating credit across economic sectors and maturities. Development of a yield curve—including through reduced emphasis on long maturities and a regular debt issuance program independent of seasonal cash fluctuations—the adoption of mark to market valuation, and the development of new corporate governance standards would create incentives to trade. The authorities agreed that non-bank financial sector development is also a priority that needs to be addressed to boost private sector development. An overall strategy in these areas will be developed over the next few months—with help from World Bank TA.

41. Access to finance could also be improved by strengthening microfinance institutions. Major steps forward were taken in 2011 through the adoption of the new microfinance law and the creation of a new supervisory authority. However, microfinance activities remain too low (loans of microfinance institutions only represent 0.3 percent of total loans by banks), with authorities’ efforts focused initially on reinforcing the capacities of the supervisory authority. An upgrade of the regulatory and supervisory framework, removal of existing caps on lending rates, and appropriate accounting norms would also help in this area.

Boosting competitiveness through structural reforms

42. The absence of a business environment conducive to growth is among the top constraints to growth and private sector development in Tunisia. Distortions in the regulatory framework—through authorization requirements, investment restrictions, or fiscal advantages—provided privileged access to connected firms and limited the entry of new firms (e.g., sectors in which investment face restrictions account for over 50 percent of the Tunisian economy). To address the challenges and the heavy cost of bureaucracy, the authorities have over the last three years initiated a number of reforms, some of which are yet to be completed:

  • Reform of the investment code and existing regulations. Staff regretted the delay in adopting the investment code (now expected in November 2015). It, however, welcomed the latest version of the code—which has been revised for a third time in three years—as it proposes to increase market access, simplify investment regulations, and rationalize complex incentives that used to expose different sectors to regulatory arbitrage (¶37). Staff welcomed the current proposals of moving all remaining tax incentives from the investment code to the tax code and stressed the need to limit the number of “sectoral” decrees needed to implement the investment code. Staff also welcomed the authorities’ continued determination to simplify administrative procedures (¶38).

  • Reforming the competition and bankruptcy laws. Staff welcomed the passage of the new competition law, which would help remove discretionary application of business regulations and open up key product markets. The approval of the bankruptcy law—in parliament for the past two years—would strengthen creditor rights, and, as a consequence ease banks’ reluctance to lend. The authorities reiterated their commitment to implementing these laws, which will be a cornerstone of Tunisia’s new and more inclusive growth model.

  • A PPP framework. Staff regretted delays in the final approval of the PPP law, currently in parliament, as the framework would mobilize significant private resources for public infrastructure investment. The authorities stressed the need for larger consultations to increase reform ownership, and avoid misconceptions of “privatization” associated with PPPs

43. Labor market reforms should be phased-in quickly. The structural unemployment problem in Tunisia—which is also characterized by important skills mismatches between labor demand and supply—requires changes in existing labor market rules and regulations that carefully balance better protection to workers with more flexibility to firms. To date, action in this area focused on scaling up training programs and SME support program. The tri-partite dialogue (between government, business and labor unions) process on this issue—started in 2013 during the political transition process—has yet to agree on a comprehensive National Employment Strategy (NES), which would be framed into a five-year horizon (MEFP ¶42). Staff urged the authorities to speed up completion of the NES through identification of specific measures to reform the labor market (including through reviewing the rigid hiring-firing policies, worker protection system, and public/private sector compensation).

44. Greater data transparency should accompany efforts to create a more inclusive society (MEFP ¶30 and 43). Staff urged the authorities to bring the existing AML/CFT regime in line with the 2012 FATF standards, notably with respect to implementing targeted financial sanctions. It also welcomed efforts to strengthen the institutional framework for statistics, including the imminent adoption of the Ethics Charter for Statistics. Fund TA will continue to support the authorities’ efforts to strengthen the national accounts, fiscal and balance of payments statistics.

C. Protecting the Most Vulnerable

Strengthening and expanding social safety nets is necessary to ensure growth dividends reach a larger portion of the population.

45. The strengthening of existing social safety nets is progressing. The existing cash transfer system for the poor (PNAFN) has been expanded to cover 235,000 families (twice the level of 2010 and close to 60 percent of the estimated poor) and to provide more cash (average transfer has tripled to about 80 dollars per month). The evaluation study of the existing PNAFN program and subsidized health program has identified fewer inclusion errors (leakages to non-poor) than previously estimated. Based on this finding, and the expansion of the unique social identification number (currently available for 8.5 million Tunisians), staff called for the quick adoption of a well-targeted social safety net (improving on the existing PNAFN) that could be fully functional by the end of the year.

46. Reforming the public pension system is needed to ensure its financial viability (MEFP ¶45). The public sector retirement and social security Fund (CNRPS) has been running deficits, and depleted its cash balances by 2011. Since then, budget transfers—about 0.4 percent of GDP in 2015—have been alleviating short-term cash needs to pay pensions. In view of its importance and social consequences, discussions with all stakeholders on a comprehensive reform have started but not yet concluded. In the meantime, the post-transition government has publicly announced a one-off voluntary increase in the retirement age to help alleviate short-term pressures. In line with existing actuarial studies, staff stressed that a sustainable long-term solution would also need to include changes in contribution parameters and pension benefits.

Program Issues and Modalities

47. All quantitative performance criteria for end-December and end-March have been met (LOI, ¶3), though the inadequate composition of public expenditures continues to be a concern:

  • Fiscal. The floor on the primary balance for end-December 2014 and end-March 2015 has been met by a wide margin, mostly because of spending under-execution of the capital budget. The indicative ceiling on current expenditure at end-December 2014 and end-March 2015 was met. The indicative floor on social spending was missed because of lower-than-programmed transfers to vulnerable households (reflecting issues in the delivery mechanism in remote regions).

  • Reserves. The floor on NIRs at end-December 2014 and end-March 2015 has been met by comfortable margins, mainly driven by the successful issuance of international bonds.

  • Monetary. The end-December 2014 and end-March 2015 PCs on NDA were met by comfortable margins, mainly driven by lower credit to government.

48. Progress on the structural reform agenda has been slow. Only three out of seventeen structural benchmarks expected by end-June 2015 have been completed. Slow progress over the past year reflected the need to build consensus on reforms, the establishment of a new government and parliament, and need for further technical analysis. Actions to complete all of the remaining benchmarks have been initiated—either through the drafting or submission of laws or through the ongoing banking recapitalization process. The authorities still plan to complete the large unfinished reform agenda underpinned by the program within the remaining program timeframe. This is challenging and will require moving ahead and obtaining parliamentary approval in a number of areas, including the investment code, the banking law, the lender-of-last-resort mechanism, banking supervision, tax policy (and convergence), public enterprise reform, the Asset Management Company, banks reporting and rating system, and weekly FX auctions.

49. New conditionality continues to support program objectives. Staff is proposing new QPCs for end-September to account for weaker economic activity. To better monitor budget composition, the indicative ceiling on current primary expenditures was modified into a QPC. Concluding the current review hinges on the completion of the following prior actions: (i) recapitalization of at least one public bank (BH) and the completion of the first phase (reserved to existing shareholders) of the capital subscription process for a second bank (STB); and (ii) the renewal of state guarantees justifying lower recapitalization needs (Table 2).

Table 1.

Tunisia: Selected Economic and Financial Indicators, 2011–16

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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, 2011–20

(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.

50. It is proposed that the purchases under the arrangement be rephased (Table 8, LOI¶4). The authorities had requested a program extension in May 2015 to implement the policy measures needed to deliver on forward-looking commitments. Accordingly, the final purchase under the arrangement will be rephased and be contingent on completing the seventh and final review. The parliamentary adoption of the 2016 budget in line with program understanding (which includes the new tax reform that promotes equity and efficiency, and introduces permanent revenue measures that compensate for the wage increase), the update of the business plans of all three public banks, as well as their effective recapitalization, will be critical elements for the completion of that review.

Table 3.

Tunisia: External Financing Needs, 2012–20

(In millions of U.S. dollars)

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Sources: Tunisian authorities; and IMF staff projections.

Includes public and private entreprises.

Under the proposed schedule of purchases during SBA.