Developments since the RFI Disbursement in April 2021

The government that obtained Parliament’s confidence vote—5 months after the October 2019 elections was immediately confronted with the Covid-19 crisis. Health management, which required a lockdown and border closure measures, was very well carried out at the beginning and helped to contain the initial spread of the virus.

Nevertheless, the economic consequences of the lockdown have been extremely severe, as evidenced by the 20 percent contraction in GDP in the second quarter of 2020. My authorities are grateful to the Fund for the emergency assistance received in April, and to all other partners which stood by the country.

The containment of the pandemic, on one hand, and social pressures due to the deterioration of an economy heavily dependent on contact activities, on the other, led the government to gradually relax restrictions and open borders in late June 2020. Despite the anti-Covid protocol in place, the virus spread again at a rapid pace throughout the summer, taking a heavy health and economic toll.

Managing the new wave of the virus was complicated by the political uncertainties created by the government’s resignation in July 2020. A new government was formed in September with the daunting task of managing increasingly difficult health, economic, and social conditions. The unprecedented social impact of Covid-19, with rising unemployment and poverty, and new containment measures taken late 2020 to limit the spread of the virus fueled feelings of anger and frustration, provoking protests against the deterioration of living conditions and finding particular resonance as it coincided with the celebration of the 10th anniversary of the revolution.

The priority of the authorities is currently to make the vaccine available to the population. They aim to vaccinate 60 percent of the population and have committed to providing the vaccine at no cost. Tunisia has signed agreements under the COVAX initiative, the African Union initiative, and with a private laboratory for a total of 8.4 million doses while continuing bilateral negotiations for 1 million additional vaccines from Russia. The country is expected to receive two first batches totaling 600,000 vaccines by the end of February. Tunisia would also contribute to the global immunization effort following a recent agreement in principle with the United Kingdom to manufacture the UK vaccine in Tunisian laboratories for export to African countries.

Fiscal Policy

Since the outset of the pandemic, saving lives and livelihoods has been the priority of the government, which imposed a lockdown between March 22 and May 3, 2020 halting all activities except those in the health and food sectors. The government allocated additional resources to strengthen public health and to support affected sectors and the most vulnerable households. Exceptional measures were taken to ensure that the social safety nets cover all targeted groups, including informal and seasonal workers.

The emergency measures, which amounted to nearly 4.3 percent of GDP, added to the decline in revenues related to the economic consequences of the pandemic, resulted in an unprecedented fiscal deficit in 2020. However, the recent data are less pessimistic than initially expected reflecting better revenue collection. The 2020 fiscal deficit stood at 10.4 percent of GDP, compared to an initial estimate of 11.7 percent, and the wage bill is also slightly lower: 17.3 percent of GDP compared to 17.6 percent initially projected. The wage increase granted in August represents only 0.3 percent of GDP; the 2 percent slippage in the wage bill ratio compared to the initial budget estimation thus essentially reflects the decline in nominal GDP due to the impact of Covid-19.

On the other hand, the potential hiring/regularization of the long-term unemployed and ouvriers de chantiers would not have a full impact in 2021 due to the time needed to identify eligible applicants, set up the necessary logistics, and publish the implementation decrees. The authorities estimate that the relative impact of these recruitments on the wage bill in 2021 would be only 0.2 percent of GDP, bringing the wage bill to only 16.8 percent compared with 17.5 percent in the baseline scenario.

The authorities share the urgency of achieving fiscal sustainability and aim to reach as quickly as possible a situation of primary surpluses that will stabilize public debt. However, the measures as well as the pace of implementation need to be agreed upon with the political and economic partners and implemented carefully considering the fragile socio-political environment.

Monetary Policy, Exchange Rate Policy, and Banking Supervision

The monetary policy conducted since 2018 has helped curb inflation. The Central Bank of Tunisia (CBT) cut the policy rate twice by 100 and 50 bps in March and October 2020, respectively, to support the economy during the pandemic, and continues to monitor inflation closely.

The CBT highly appreciated the technical assistance provided by the Fund on inflation targeting and is working on improving further the monetary policy framework and laying the ground for a successful transition to an inflation targeting framework over the medium term.

The CBT’s limited interventions in the exchange market have been for price discovery purposes and its proactive monetary policy has contributed to put an end to the sharp depreciation of the exchange rate of the dinar. Official reserves are at a very comfortable level, strengthened by strong remittances and the significant reduction of the current account deficit.

The CBT is aware of the potential effects of the crisis and debt moratoria on banks’ financial stability and is closely monitoring the situation. The reforms undertaken by the CBT over the last decade, i.e. the strengthening of the legal, regulatory, and prudential framework and the restructuring of public banks, have contributed to strengthening the banking sector’s resilience. The authorities believe that the improvement in banks’ solvency enabled the sector to withstand the repercussions of the current crisis and to continue supporting businesses. The CBT took additional measures to bolster the sector’s capacity to face the crisis. It decided in March 2020 to suspend dividend payments by banks and asked banks to strengthen collective provisioning of latent risks related to the debt moratorium. It has also conducted a stress test in the second half of 2020, which revealed no systemic vulnerability and confirmed the resilience of major banks, even in an extreme scenario, provided that adequate risk coverage and a prudent dividend distribution policy are maintained. This stress test approach will be part of the annual monitoring process.

Structural Reform Agenda

Our authorities agree with staff on the need to continue the reform effort already initiated under previous IMF-supported programs. They are committed to controlling subsidies and to a new approach to the public service and the wage bill. Supported by the EU, Tunisia intends to launch a national consultation to reform the civil service law and submit a draft law to Parliament before the end of 2021.

Regarding subsidies, there is a broad consensus in Tunisia on the need to move to targeted transfers. Building on the considerable work already done with the help of the World Bank and on the successful experience of digital cash transfer to needy families during the lockdown period, the authorities intend to complete the setting up of a national digital registry of needy families. The national registry is a key step towards establishing a well-targeted cash transfer system and reforming the subsidies.

With respect to SOEs, the authorities recognize an accumulation of difficulties particularly given the current administrative configuration attaching SOEs to different line ministries, which reduces the scope of oversight and leads to poor governance. The government intends to place all SOEs under a state agency, which will allow for greater oversight and accountability of SOE’s. The authorities will also seek to professionalize the SOE’s Executive Boards as was previously done for State-Owned Banks, and they also plan to quickly resolve the problem of cross-arrears, which has led to deadlocks, delays in closing financial accounts and, a deterioration in the quality of public service. On the other hand, restructuring SOEs and restoring their profitability are necessary steps to prepare them for a more competitive environment and reduce their burden on public finances. To this end, the authorities will consider all options that are in the country’s best interest.

Competition and Fight Against Corruption

The authorities fully share the view that administrative barriers to investment create non-competitive market structures, which are source of inefficiency, an impediment to the optimal use of Tunisia’s human capital as well as an obstacle to equitable access to income and wealth creation. Tunisia plans to review its competitive legislative and regulatory framework and intends to remove obstacles to entrepreneurship. It recently embarked on a project to identify and encourage pro-competitive reforms in certain sectors and to improve the business climate, with the support of the EU and the OECD.

The fight against corruption is a priority for the authorities at the highest level but also for the very vigilant civil society. The authorities are determined to gain more in this area through greater digitization of the administration, reducing tight administrative controls and human intervention, and adopting good governance of public entities in conformity with best international practices.

On Covid-19 expenditure, a commission to oversee the governance of the Covid-19 fund has been created within the Ministry of Health to ensure the proper use of the collected funds in the fight against the COVID pandemic. This commission is chaired by the Minister of Health with the participation of other ministries and relevant stakeholders. A detailed report will be published at the end of the program. Moreover, the Cour des Comptes plans to carry out an audit of the Covid-19 fund.

Conclusion

Tunisia’s political and social transition is being carried out under difficult economic and financial conditions. The Corona virus has compounded the already fragile economic situation, with serious human and social consequences. The government is implementing wide-ranging measures to alleviate economic pressures and to protect lives and livelihood. Reforms to restore fiscal and debt sustainability are important and high on the government’s agenda; but the authorities are keen that the reforms are realistic and carried out without causing additional social disruption. To this end, implementing well calibrated policies while ensuring the political acceptance and appropriate prioritization are essential. Equally essential are policies aimed at enhancing growth, unleashing the country’s potential, and giving the Tunisian people hope for a better future. Our authorities will warmly welcome all constructive exchanges with their partners on these challenging issues.