Tunisia: Fourth Review Under the Extended Fund Facility Arrangement and Request for Modification of Performance Criteria—Press Release; Staff Report; and Statement by the Executive Director for Tunisia
Author: International Monetary Fund. Middle East and Central Asia Dept.
Publication Date:
08 Oct 2018
eISBN:
9781484380314
Language:
English
Keywords:
ISCR; CR; EFF arrangement; policy priority; economic recovery; fiscal policy; monetary policy; central bank; foreign exchange; Tunisian authorities; government rollover; Inflation
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Fourth Review Under the Extended Fund Facility Arrangement and Request for Modification of Performance Criteria-Press Release; Staff Report; and Statement by the Executive Director for Tunisia

Abstract

Fourth Review Under the Extended Fund Facility Arrangement and Request for Modification of Performance Criteria-Press Release; Staff Report; and Statement by the Executive Director for Tunisia

Strengthening Recovery, High Vulnerabilities

1. Policy implementation continued steadily in a challenging environment. The authorities have taken important measures to contain pressures on the fiscal and external accounts (Text Table 1). Notably, they raised energy prices further to mitigate the impact of the oil price shock and introduced competitive central bank foreign exchange (FX) auctions to facilitate exchange rate flexibility. These measures were taken despite heightened political tensions weighing on the unity government, a terrorist attack on a military convoy in July, and growing social discontent with rising prices and persistently high unemployment. Pressures for a less constraining central government budget for 2019, a major election year, are building.

Text Table 1.

Tunisia: Key Reforms Implemented in 2018

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2. The recovery has strengthened but macroeconomic vulnerabilities remain elevated (Figures 1–5, MEFP¶¶3–9):

  • GDP growth continued to improve. It reached an annualized 2.8 percent in the second quarter, up from 2.5 percent in the first, thanks to an exceptional harvest and tourist arrivals that reached levels last seen in 2010. The phosphate sector also recovered in the second quarter, although new production disturbances emerged in August. Strong consumption and slightly improved exports supported growth, while investment remained weak. Unemployment affected 15.4 percent of the total work force at end-June, and a much higher share of youth and women.

  • Inflation plateaued at an annualized 7.5 percent in August, down from 7.8 in June. This deceleration reflected mainly a drop in food prices, while core inflation persisted at a higher level (7.7 percent). Inflation pressures remain broad-based and have only started to respond slowly to the monetary tightening that started in April 2017. The loss of purchasing power is widely felt, even if the most vulnerable households have been partly shielded as the authorities manage the prices for staples consumed mainly by the poor (Annex I).

  • The monetary policy stance remains expansionary, even after the recent tightening. Policy interest rate hikes of a cumulative 250 basis points since April 2017 have made credit more expensive (as of August, on average, firms paid 8.1 percent for investment credits and households 9.4 percent for consumer credit), and credit and reserve money growth slowed in the second quarter to 13 percent and 15 percent, respectively. The money market rate, however, remains negative in real terms by about 50 basis points. In addition, central bank refinancing of commercial banks reached a record TD 17 billion at end-July in response to strong demand for foreign exchange and domestic currency during the summer and the harvest season, before declining to TD 16.4 billion in August.

  • Fiscal performance through July was strong, but public debt will increase further. Tax revenue continued to perform strongly, supported by the 2018 tax package and reinforced tax and tax arrears collection. Non-tax revenue benefitted from higher profit transfers by the central bank and energy companies. Current expenditure remained below projections. Lower spending on separation packages (due to weak interest in the voluntary departure schemes) and containment of budget transfers to the CNRPS public pension fund through strong arrears collection have offset unanticipated pressures from a wage increase for military personnel and delays in pension reform. Energy price adjustments contained subsidy overruns to date. Social spending increased in real terms, including through higher cash transfers to the vulnerable. Because of the depreciation of the Tunisian dinar, public debt is projected to rise to about 72 percent of GDP in 2018, from 70.3 percent in 2017.1

  • The recent real exchange rate appreciation is threatening the current account turnaround. Despite higher international oil prices, the current account deficit declined to 11 percent of GDP (y-o-y) at mid-year compared to 12 percent over the same period in 2017. Export volumes increased by more than import volumes (6.5 and 1.1 percent respectively), helped by the 17 percent real effective depreciation recorded over 2016–17. Tourism receipts and remittances improved by 37 and 9 percent, respectively. However, low exports of phosphates and robust import demand for consumption and energy products have continued to weigh on the external balance. Moreover, the real depreciation came to a halt in 2018 as the growing inflation differential with main trading partners overcompensated the 7 percent dinar depreciation against the Euro experienced since the start of the year (Annex II).

  • International reserve coverage remains low, at 71 days of imports at end-August. Reserves stood at only 75 percent of the IMF’s reserve adequacy level, broadly unchanged since the Third Review, reflecting delays in both the sovereign Eurobond issuance and official loans (see ¶27).

  • Financial markets continued to be resilient, notwithstanding international developments. The stock market index grew by 34 percent since January, reaching a record high in mid-August Spreads on Tunisia’s international bonds increased slightly, reflecting more volatile investor sentiment toward emerging markets, but remaining below levels seen in 2017.

Figure 1.
Figure 1.

Tunisia: Recent Economic Developments, 2009–18

Citation: IMF Staff Country Reports 2018, 291; 10.5089/9781484380314.002.A001

Sources: Tunisian authorities; IMF IFS; and staff calculations.
Figure 2.
Figure 2.

Tunisia: Real Sector Developments, 2009–23

Citation: IMF Staff Country Reports 2018, 291; 10.5089/9781484380314.002.A001

Sources: Tunisian authorities; IMF IFS; World Bank Doing Business Indicators; and staff calculations.
Figure 3.
Figure 3.

Tunisia: Fiscal Developments and Projections, 2015–23

Citation: IMF Staff Country Reports 2018, 291; 10.5089/9781484380314.002.A001

Sources: Tunisian authorities; IMF IFS; and staff calculations.
Figure 4.
Figure 4.

Tunisia: External Sector Developments, 2009–20

Citation: IMF Staff Country Reports 2018, 291; 10.5089/9781484380314.002.A001

Sources: Tunisian authorities; IMF IFS; and staff calculations.
Figure 5.
Figure 5.

Tunisia: Monetary and Financial Indicators, 2012–18

Citation: IMF Staff Country Reports 2018, 291; 10.5089/9781484380314.002.A001

Sources: Tunisian authorities; Bloomberg; Markit; IMF IFS; and staff calculations.1/ Deposit facility minus reserve requirements.2/ Between the Tunisian and US’ five-year bonds. The decrease in yields during the first half of 2017 is a result of the April refinancing of the US$-denominated 5-year Qatari-backed bond and increases in Federal Reserve fund rates.

3. The authorities recorded a strong performance on program conditionality.

  • All end-June quantitative targets were met (MEFP¶10 and MEFP Table 1). The Quantitative Performance Criteria (QPCs) on the primary fiscal balance and total current primary expenditure were met by wide margins reflecting strong revenue collection, contained current expenditure, and slow execution of domestically financed capital expenditure. The QPCs on net international reserves (NIR) and on net domestic assets (NDA) were also met, with adjusters correcting for delays in external financing, especially the Eurobond issuance that was initially expected for the second quarter. In addition, the authorities met two out of three Indicative Targets (ITs), including on social spending. There was a small slippage on the monthly FX intervention ceiling in August.

  • The authorities progressed on the Structural Benchmarks (SB) set for the Fourth Review (MEFP¶11 and MEFP Table 2). The two SBs on fuel price adjustments and the competitive central bank FX auctions were met. The SB on the resolution of the Banque Franco Tunisienne (BFT) would need to be reprogrammed (see ¶26). Other SBs set for future Reviews are on track, including the performance contract for TUNISAIR.

  • A Prior Action (PA) on energy price hikes was implemented in September (MEFP¶14 and MEFP Table 2). To safeguard most of the savings agreed in the Third Review on the energy subsidy bill, the authorities implemented as a PA price increases for fuel, electricity, and gas effective September 1; and issued an administrative order announcing additional increases for electricity and gas in October and November.

Table 1.

Tunisia: Selected Economic and Financial Indicators, 2015–23

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

Excludes social security accounts, public enterprises, and local governments.

Social spending includes social transfers and programs as well as key ministries’ capital expenditures. Its coverage was expanded in 2017.

Table 2.

Tunisia: Real Sector, 2015–23

(In percent)

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Sources: Tunisia authorities, and IMF staff projections.

Output measured using current and previous year prices.

Improved Outlook, Mostly Downside Risks

4. An improved macroeconomic outlook hinges on continued policy implementation. Real GDP growth is on track to reach 2.6 percent in 2018, driven by agriculture and tourism (Text Table 2). Growth would reach 4 percent over the medium term on the back of a strong recovery in mining, manufacturing and non-manufacturing industries, and construction; and supported by increasing public and private investment and exports. A tightened monetary policy stance would contain average inflation at 7.8 percent in 2018 and support a multi-year deceleration thereafter. With strong fiscal discipline to offset the impact of the oil price shock, the overall fiscal balance would decline to 5.2 percent of GDP in 2018, and—combined with sustained exchange rate flexibility—help reduce the current account deficit to 9.7 percent of GDP. Public debt would peak at 72 percent of GDP in 2018 (about 2 percentage points higher than projected in the Third Review, due to the higher exchange rate flexibility) and external debt at 93 percent of GDP in 2020, before starting to decline. International reserves would increase to four months of imports by 2020, or about 110 percent of the IMF’s reserve adequacy metric providing that the dinar remains classified as a floating currency.2

Text Table 2.

Tunisia: Selected Economic Indicators, 2015–23

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

5. Risks to the program remain elevated (RAM, Annex III). Continued socio-political tensions, which could increase in the run-up to the 2019 presidential and parliamentary elections, and security threats remain the most important domestic risks. The external environment has also become more difficult. High oil prices, rising trade tensions, tight global financial conditions, and contagion from adverse market sentiment vis-à-vis other emerging market countries may put fiscal and external adjustment targets under pressure. Moreover, Tunisia has recently become the number one country of origin for illegal immigration into the European Union (EU), possibly fueling security pressures and brain drain.

Urgent Measures to Protect the recovery

6. The three-pillar policy framework supported by the EFF remains pertinent. The authorities and staff agree on the need to continue to stabilize and strengthen the economy, including to absorb the oil price shock and higher uncertainty (Section A); ensure adequate social protection (Section B); and foster private sector-led, job-creating growth (Section C). The Fourth Review offers an opportunity to build on recent gains and consolidate efforts to deliver the envisaged gradual adjustment as a prerequisite for improved growth performance over the medium term. Continued discipline in policy and reform implementation will be critical to remain on course in a more difficult domestic and external environment, and to ensure that Tunisia enters the 2019 election year with higher policy buffers.

A. Reducing Macroeconomic Imbalances

Fiscal Policy

Background

7. The agreed consolidation path for 2018–20 remains the fiscal anchor. The authorities remain committed to reducing the overall deficit, excluding grants, to 2.7 percent of GDP by 2020, notwithstanding the higher-than-expected oil price forecasts for 2018–19. This will be essential to reduce the public debt and re-orient expenditure toward social sectors and investment. An adjustment of about 1 percent of GDP in 2018 remains possible with strong revenue performance, provided that discipline on current expenditure continues. Sustained rationalization of current expenditures will even become more important over 2019–20, as Tunisia’s revenue take is already high relative to peers: the growth of the wage bill would continue to slow, budget outlays on energy subsidies fall, and pension transfers decline gradually. Managing contingent risks from state-owned enterprises (SOEs) also remains a priority.

8. Mounting pressures on the 2018 budget continue to require immediate attention. While revenue overperformed through July (see ¶2), budget pressures further increased. These pressures mainly reflect the continued increase in international oil prices (about 0.2 percent of GDP) and the delay in implementing the energy price adjustments agreed in the Third Review (0.6 percent of GDP) because of heightened political tensions (Text Table 3). In addition, the medium-term wage bill path is under threat: the authorities authorized a TD 70 million (0.1 percent of GDP) increase for the Ministry of Defense agreed in 2015 after the July 8 terrorist attack on a military convoy; and failed to elicit sufficient interest in the voluntary departure scheme. Absent further measures, these factors would lead the 2020 wage bill-to-GDP ratio to increase to about 12.9 percent. This level still represents a significant drop from the 15.5 percent of GDP in 2017 (after accounting for the wage increases administered to civil servants through tax credits rather than as part of the official wage bill) but would be higher than initially envisaged (12.4 percent by 2020). Third, Parliament delayed the consideration of the reform law for the CNRPS public pension fund that seeks to mobilize higher contributions from employers and employees while raising retirement age.

Text Table 3.

Tunisia: Changes in Fiscal Program, 2018

(Percent of GDP)

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Sources: Tunisian authorities and IMF staff calculations.
Policy Discussions

9. The authorities are taking urgent measures to achieve the 2018 deficit. Parliament is set to consider a supplementary budget law in October. This will facilitate budget re-orientation to accommodate a higher energy subsidy bill due to the oil price shock (the total energy subsidy budget would increase to TD 3 billion from TD 1.5 billion in the budget law, leaving another TD 1.5 billion need to be eliminated by energy price hikes and other measures). Relative to the Third Review, feasibility of the 2018 deficit target of 5.2 percent of GDP (corresponding to 5.5 percent of GDP excluding grants), depends on taking the measures discussed below, as well as on using the fiscal space created mainly by higher-than-expected collection of personal income tax and the lower-than-expected bill for financing volunteer separation packages for civil servants (Text Table 3):

  • Energy prices adjustments. The authorities committed to remedy the slippages on energy price adjustments accumulated over the summer, supported by Prior Action (MEFP¶14 and Table 2). First, to replace the originally agreed monthly fuel price increases, they implemented an average 5.5 percent hike in fuel prices on September 1, to be followed by a similar increase in November. Staff would have preferred a monthly schedule of pre-set increases to depoliticize the adjustments, but the authorities argued that the quarterly schedule with ad hoc-adjustments would be better aligned with popular expectations. Second, more than two-thirds of the electricity and gas tariff adjustments committed under the Third Review were implemented in early September; and an administrative order stipulates further hikes in October and November. There was also progress on other energy sector measures, such as accelerated arrears clearance to the energy companies and product differentiation strategies, to contain the energy subsidy bill in 2018 and ensure that it does not exceed TD 3 billion even with higher-than-expected international oil prices through end-2018 (an average US$72 per barrel compared to US$70 at the time of the Third Review). The authorities and staff agreed on the need to protect vulnerable families from the energy price increases through adequate social transfers and the focus of the price hikes on corporate customers and upper-income households (see ¶¶20–21).

  • Wage bill containment. Staff urged the authorities to strictly maintain their policy of abstaining from any new wage increases in 2018 and adhere to the agreed hiring limits. The authorities underlined that there would be no space for any wage increases in the budget; and that they will keep hiring to a minimum for the foreseeable future (a replacement ratio of no more than 25 percent; and no replacement for volunteer departures), even if the phasing in of the higher pension age over 2019–20 will work against natural attrition.

  • Pension fund reform. The authorities indicated that delays in reforming the public (Caisse National de Retraite et Prévoyance Sociale, CNRPS) and private (Caisse Nationale de Securité Sociale, CNSS) pension funds will not create additional pressures for 2018 (see MEFP ¶¶21). They also confirmed that the reform of the private pension fund would be launched immediately after the approval of the reform law for the public fund expected in October, based on similar parameters.

10. The authorities and staff agreed on the broad contours of the 2019 budget law. Preparations for the budget law are still at an early stage, but the authorities reconfirmed their commitment to the objectives agreed at the Third Review (MEFP ¶16): the budget would target an overall fiscal deficit, excluding grants, of 3.9 percent of GDP. This entails a steady revenue take, reduced current spending, and increased social and capital spending. Priorities of the emerging budget draft to achieve these objectives and manage high risks include:3

  • Revenue mobilization. The authorities see limited scope for further revenue measures, noting that the phasing out of tax credits for civil servants will increase revenues from personal income tax. They will, however, include two new measures in the 2019 Budget Law—with limited immediate revenue impact but importance for fairness. First, they plan to eliminate the preferential tax regime for offshore companies, first for new firms in 2019 and then for all firms in 2021 (new December 2018 SB). Moreover, the authorities will seek to increase the VAT rate for the services of liberal professions from 13 to 19 percent (December 2018 SB). In addition, they intend to further reinforce collection efforts and modernize tax administration. This will entail advancing the integration of all tax administration functions (administration, audit, and recovery) within one umbrella structure.

  • Expenditure reorientation. The authorities remain focused on limiting current expenditure to some 24.2 percent of GDP. This will make room for increasing public investment to 5.4 percent of GDP and maintaining higher social spending. They agreed with staff that containing the wage bill to 14.0 percent of GDP in 2019 and reducing it to 12.4 percent of GDP by 2020 remains a priority that requires strict hiring limits and the non-granting of wage increases absent a significant—and unanticipated—change in broad macroeconomic parameters. Staff emphasized that the Fifth Review will focus on the 2019 budget and entail discussions on additional wage bill measures for 2019–20 that are necessary to correct for recent slippages and keep the wage bill on track towards its 2020 target level. The authorities and staff also agreed on the need to further reduce energy subsidies by proceeding with periodic energy price adjustments in 2019, flanked by efficiency measures targeting the public enterprises distributing fuel, electricity, and gas. Staff emphasized the benefits of moving from the current practice of ad hoc changes to more automatic, frequent price adjustments based on a transparent formula. The authorities concurred with staffs recommendations to urgently complete the first stage pension reform and move to the next stage quickly (see ¶¶20–21, MEFP¶21); advance the ongoing work on a better targeting system for social spending (see ¶¶20–21, MEFP¶21); and strengthen the oversight of SOEs and treasury cash management (MEFP¶25).

Monetary Policy

Background

11. Monetary policy remains expansionary, even if credit growth decelerated in July. The real money market rate (MMR) remains negative (Text Figure 1); and CBT refinancing of commercial banks remains elevated at a record level of TD 16.4 billion at end-August. This policy stance continues to fuel demand for credit as economic agents worry about inflation trends and the path of the dinar, albeit credit to the economy decelerated slightly in July. In turn, the mobilized credit increasingly translates into FX demand from importers to take speculative positions against the dinar in their FX accounts; and into increased import demand, notably for consumer durables.

Text Figure 1.
Text Figure 1.

Tunisia: Real Policy Interest Rates

Citation: IMF Staff Country Reports 2018, 291; 10.5089/9781484380314.002.A001

Sources: National authorities, Haver, and IMF staff calculations.Note: For Lebanon, the average deposit rate is used.

12. Transmission channels remain weak, creating long lags for policy tightening. The cumulative effect of past increases in the policy rate has started to slow credit growth, notably to households. However, the impact on inflation is not yet fully visible because of the slow transmission with delays of about 12–18 months, reflecting weak interest rate and credit channels. The strong and still increasing demand for cash—due to seasonal factors and strong informal sector activity—has been further complicating monetary policy, as it weakens the stability of reserve money as well as the money multiplier.

Policy Discussions

13. Continued monetary tightening remains essential to reduce inflation (MEFP ¶17). The CBT confirmed its commitment to fighting price pressures by increasing the policy rate to bring real interest rates firmly into positive territory, with the pace and timing being dependent on inflation outcomes and forecasts. Staff agreed with the data-driven strategy to observe upcoming inflation readings after a cumulative 250 basis points increase since 2017. It emphasized, however, that further tightening would likely be required soon, as underlying inflation accelerated in August and dinar depreciation has been continuing. Additional policy rate increase over the next months should help minimize any further loss of the population’s purchasing power. Staff also suggested to the CBT to consider setting an explicit medium-term inflation objective (Annex IV) and communicate clearly its objectives, policies, and instruments by re-instating the practice of issuing quarterly monetary policy reports that could include medium-term projections of inflation and growth (new June 2019 SB).

14. Monetary policy transmission channels should be strengthened (MEFP ¶17). Staff urged the authorities to quickly raise the cap on lending rates for commercial banks from 20 percent to 33 percent and to adjust it more frequently than semi-annually. The authorities agreed but cautioned that the respective draft law has long been transmitted to Parliament, where it faces significant opposition (December 2018 SB). Staff encouraged the authorities to reach out to Parliamentarians on the importance of the law. Staff also advised to streamline CBT refinancing operations that have been fueling further FX demand, notably structural OMOs and FX swaps (Annex IV). The authorities agreed in principle, emphasizing the need for a gradual approach given tight liquidity conditions. To protect the central bank balance sheet, staff recommended a further tightening of CBT collateral policy in line with IMF MCM TA recommendations from October 2013. The authorities are considering these recommendations, as well as the introduction of a new regulation by end-2018 to reduce commercial banks’ loan-to-deposit ratio. Staff also encouraged the CBT to continue work on upgrading its communications framework (Annex V).

15. Safeguards assessment recommendations should be implemented. A number of the 2016 safeguards recommendations remain outstanding. In particular, the central bank should complete the restructuring of its internal audit to align current practices with international standards and develop a risk management function through the establishment of a risk committee and the approval of a formal policy. Staff will continue to engage with the authorities on these issues.

Exchange Rate Policy

Background

16. Exchange rate flexibility remains key to strengthen the current account and reserves (MEFP ¶¶19–20). The depreciation of the real effective exchange rate over 2016–17 contributed to improving the current account and helped the build-up of international reserves in 2018—albeit these remain below comfortable levels. The authorities and staff agreed that enhanced exchange rate flexibility will be needed to facilitate further real exchange rate adjustment going forward, given Tunisia’s high inflation differential relative to trading partners that will only decline gradually over the next 2–3 years, and strengthen reserve coverage. The authorities also pointed to the distorting effect of large energy subsidies on import demand. They emphasized that the new Nawara gas field operations have the potential to reduce the energy import bill by up to 1 percent of GDP from 2019. The long-delayed Eurobond issuance (targeting up to US$ 1billion) is now expected for the fourth quarter of 2018. The authorities confirmed that the exchange rate restriction imposed in October 2017 (a ban on trade credit for non-essential imports) has only played a minor role in discouraging imports.

17. CBT’s FX auctions have become more competitive in August. The first two competitive FX auctions were conducted on August 1 and August 8, allocating FX to the highest bids (met August 2018 SB). This transition has triggered an accelerated depreciation of the dinar, which fell from 3.14 dinars to the Euro on July 31 to 3.21 dinars on August 31. At the same time, banks responded to the new practice by reducing their net open FX positions. To facilitate the transition to the new mechanism and cover a maturing energy import bill during the transitory phase, the CBT intervened through one bilateral FX sale for a small amount (US$6 million).

Policy Discussions

18. Competitive FX auctions are expected to achieve more exchange rate flexibility (MEFP ¶¶19–20). The authorities and staff agreed that it will be essential to maintain the new auction practices in the months ahead, helped by effective communication on the new mechanism and past auction results to market-making commercial banks. This would reduce policy uncertainty. At the same time, the CBT expressed concerns about the ceiling on central bank FX interventions set under the program and argued in favor of more flexibility, especially in this critical transition phase. With reserve buffers still low, staff emphasized that there is currently no room to relax the intervention budget. It suggested, however, to reassess the issue as the CBT accumulates more experience with the competitive auctions. The authorities and staff agreed that these auctions will be critical for achieving more flexibility of the exchange rate, improving the current account, and strengthening Tunisia’s international reserve to at least 3.4 months of imports by end-2018.

19. The October 2017 exchange restriction will be eliminated. The authorities confirmed their intention to remove the exchange restriction introduced last October by end-2018 (MEFP¶20). Capital account liberalization would only proceed in line with progress on developing domestic financial institutions and upgrading prudential supervision (MEFP¶24).

B. Ensuring Adequate Social Protection

Background

20. The authorities progressed with measures to ensure adequate social protection. Social spending will surpass the quarterly floors set at the Third Review (MEFP Table 1) for the new QPC, as the authorities have started to replenish Tunisia’s main social programs adopted in January and June 2018 (the national assistance program to vulnerable families, and the free and subsidized health care support programs for vulnerable and low-income families). Supported by the World Bank, they have also continued to work toward better targeting social services through cash transfers, subsidized health services, and reform of energy and food subsidies (MEFP ¶21): crucially, the database of vulnerable households would cover 550,000 registrations by end-2018 (December 2018 SB), of which 85 percent are already processed; and evaluate effective targeting mechanisms. Pension reform remains stalled in Parliament, but the authorities did not foresee any additional budgetary impact thanks to the higher-than-expected arrears clearance by the two pension funds from their respective employer bases. A direct pass-through of contributions and arrears clearance has continued to improve the liquidity situation of the medical insurance fund (Caisse Nationale d’Assurance-Maladie, CNAM), eliminating the short-term need for further government support.

Policy Discussions

21. Further progress remains crucial to reduce hardship among the most vulnerable (MEFP ¶21). The authorities and staff strongly agreed on the need to continue the increase in social spending started in 2018, despite significant budget pressures. There was also consensus on the urgency of better targeting to enhance the efficiency of social policies, which could realistically start for the 2020 budget exercise. In this context, staff encouraged the authorities to accelerate the issuance of the unique social identifier (USI). On pensions, the authorities and staff agreed that the currently envisaged reforms remain insufficient to close the gap between benefit levels and resources. As at the Third Review, staff encouraged the authorities to continue their work with donors on the second stage of reforms that need to involve deeper parametric changes to ensure fiscal sustainability. The authorities explained that discussions with social partners on the next steps with pension reform could start after the adoption of the pension law for the CNRPS and the decree for the CNSS, which are now expected before the end of 2018.

C. Fostering Inclusive Growth, Fairness, and Better Governance

Business Climate and Governance

Background

22. The agenda has not changed significantly since the Third Review. The one-stop shop for investors, the negative list of investment authorizations, and the Start-up Act are welcome reforms. It is now important to follow through with implementing these and other reforms that can quickly change the experience for firms in Tunisia. Broadly consistent with the staff analysis in the 2017 Article IV on constraints to growth, clear opportunities exist (Table 13)—for example, in the areas of the tax regime and access to credit—to improve the attractiveness of Tunisia as a business location. On governance, the operational start of the High Anti-Corruption Authority is still affected by the delays in Parliament consideration of the shortlist of its potential Board members (December 2018 SB).

Table 3.

Tunisia: Balance of Payments, 2015–19 1/

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

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

In accordance with the Fifth Edition of the Balance of Payments and Investment Position Manual (BPM5).

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

Short-term defined as one year or less remaining maturity.