Public Information Notice: IMF Concludes Article IV Consultation with Tunisia

February 13, 2001

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On February 7, 2001, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Tunisia.1


Real growth strengthened to an average rate of 5.7 percent between 1996 and 2000, as gradual economic liberalization and prudent macroeconomic policies allowed Tunisia to reap the benefits offered by stronger integration into the world economy. However, despite significant job creation, high labor force growth has left the unemployment rate roughly unchanged over this period at around 15 percent.

GDP growth has been robust in all sectors, particularly services and manufacturing, while domestic demand growth has been buoyed by rising real incomes and strong investment, particularly in the services and export-oriented manufacturing sectors. The growth performance in 2000 confirms recent favorable trends. Despite the negative impact of drought conditions, overall GDP growth should reach 5 percent in 2000. For 2001, growth should exceed 6 percent on the basis of an expected rebound in agricultural production.

Thanks to prudent monetary policy and an active incomes policy, annual inflation has remained stable at just under 3 percent in 2000, despite higher food and energy prices. During 1999 and 2000, the monetary authorities had to accommodate large portfolio shifts out of liquid treasury paper into time deposits, stemming from the phasing out of liquid treasury bills and their replacement with auctioned bills and bonds. While this has led to a marked increase in the growth of broad money, there was little impact on real activity or interest rates since overall liquidity increased only moderately, and in line with the authorities' target. Growth in credit to the economy (private and public enterprises) has been kept slightly below nominal GDP growth.

The budget deficit target set for 2000 (3.7 percent of GDP) appears to have been comfortably met, as supplementary spending on petroleum price supports were more than offset by higher tax revenues. Including the social security surplus, the consolidated deficit is thus estimated at 2.9 percent of GDP in 2000. Thanks in part to large privatization proceeds (1.3 percent of GDP), government debt is estimated to have declined to 54 percent of GDP in 2000.

In the face of a weakening euro, the central bank departed from its fixed real exchange rate rule during 2000, allowing the dinar to depreciate slightly in real effective terms. Reflecting a rising investment rate, a deterioration in agricultural trade, a slowdown in the growth of tourism receipts and the rise in oil prices, the mission projected that the external current account deficit would rise to 3.2 percent of GDP—more recent information provided by the Central Bank of Tunisia puts the 2000 external current account deficit at 3.8 percent of GDP. A reversal of some of these factors should result in a narrowing of the external deficit in relation to GDP in 2001. Strong non-debt creating capital inflows linked to the privatization of a large state cement enterprise limited the external borrowing requirement in 2000. Consequently, medium and long-term external debt is estimated to have declined from 52 percent of GDP in 1999 to 49 percent of GDP. Riding on an improved credit rating (Standard & Poor's long-term foreign currency rating was upgraded to BBB in early 2000 and Moody's outlook went from "stable" to "positive"), the authorities tapped international financial markets at a much lower spread (130 basis points on a 10-year yen issue) than in 1999 (280 basis points on a 10-year euro issue).

Structural reforms have proceeded on several fronts, including banking sector reform, enterprise restructuring, and in developing the private sector. The privatization program was boosted by the sale of three major cement factories in 1998 and 2000, and a new privatization drive involving 41 public enterprises has been announced for 2001. Tunisia began reducing tariffs against EU manufactured goods in 1996, but overall trade protection remains high and significant restructuring is still needed to meet the challenges of free trade with the EU. In the past, weak lending practices and banking supervision resulted in the accumulation of a large stock of non-performing loans. Banking sector reforms and public enterprise restructuring have succeeded in reversing this trend, but bad loans still stood at 20 percent of GDP at the end of 1999, although over half of this amount is covered by loan loss provisions. Meanwhile, the state retains extensive control over the economy through a large public enterprise sector and controls on prices and market access. Tunisia's social indicators remain outstanding by regional standards, notably in terms of education, health provision, gender gaps and housing.

The authorities have increased the transparency of economic policies, including by committing to subscribe to the Special Data Dissemination Standard (SDDS), publishing the preliminary conclusions of the Article IV mission (see, and agreeing to publish the staff report. They will also participate in the IMF-World Bank's Financial Sector Assessment Program and Financial System Stability Assessment in 2001.

Executive Board Assessment

Executive Directors commended Tunisia's strong economic performance and social achievements, which they attributed to a combination of prudent macroeconomic policies, gradual liberalization, and progressive social policies. Directors noted with satisfaction that the sustained implementation of these policies has resulted in improved credit ratings and access to international capital markets.

Directors considered that Tunisia's growth and employment performance could improve further by stepping up the process of liberalization and transition to a fully open and market-driven economy. In this respect, they underscored the importance of complementing the ongoing trade liberalization with the European Union (EU) with comprehensive trade and price liberalization measures and sustained structural reforms.

Directors welcomed the importance which the authorities are attaching to maintaining macroeconomic stability as a prerequisite for growth and investment as well as to contain potential rising pressures on the external accounts. In this context, they encouraged the authorities to maintain the fiscal deficit on a downward path while improving the structure of the budget. While welcoming the efforts to contain the deficit in 2001, Directors believed that more ambitious deficit reduction targets should be set in the future in view of the favorable short-term growth prospects and to offset the structural deterioration in the social security accounts. They noted that the extensive system of tax exemptions and the high government wage bill are the main sources of budgetary rigidity, and therefore they stressed the need for reform of the civil service and the tax system. In view of the fact that these reforms take time to be implemented, work on them should be initiated as soon as possible. Some Directors also recommended accelerating the phasing out of generalized food subsidies given their inefficiency in terms of reaching the more vulnerable groups, but others stressed that the authorities' gradual approach had allowed them to maintain social stability. On medium-term fiscal challenges, Directors appreciated that the authorities are considering comprehensive reforms to place the social security system on a sound financial footing.

Directors commended the authorities for achieving and preserving price stability and noted the dual role played by incomes and monetary policies. They recommended that monetary policy take on a more explicit and central anchoring role for inflationary expectations in the future, and welcomed, in this regard, recent initiatives to increase transparency and announce monetary policy objectives. Directors also saw scope for increased reliance on interest rate signals in line with the improved financial situation of banks and the development of the treasury bill market.

Directors observed that the (CPI-based) real exchange rate target followed by the authorities has served the country well, but noted that this approach will become a less reliable indicator of competitiveness in the context of trade liberalization. In this light, they supported the central bank's recent decision to broaden the set of indicators used to guide exchange rate policy.

Directors stressed that structural reforms as well as sustained trade, price, and market liberalization hold the key to moving the economy to a higher growth path and delivering on the authorities' primary objective of reducing Tunisia's high unemployment rate. They commended the authorities for their efforts to prepare the private sector for stiffer competition and to open the service sector to private sector activity, notably in telecommunications and port activities. Directors particularly welcomed the recent plan to privatize 41 state enterprises over the coming 12 months, and encouraged the authorities to follow through with this program and plan further privatizations for 2002 and beyond.

Directors underscored the importance of ongoing trade liberalization with the EU as an important source of productivity gains and growth potential for the economy. They expressed concern about the potential serious trade distortions that could arise from the growing gap between the trade regime with the EU and the most favored nation (MFN) trade regime, and therefore urged the authorities to reduce MFN tariff rates at a faster pace.

Directors congratulated the authorities for the progress made in strengthening the banking sector, but noted that the large portfolio of nonperforming loans continues to weigh heavily on the economy. They agreed that, in addition to tight supervision and regulation, greater corporate transparency and improved risk analysis in the banking sector are needed to limit the risk of accumulating new bad loans. Directors noted that opening the banking sector to foreign investors would contribute to the reinforcement of risk management. They welcomed the authorities' decision to participate in the Financial Sector Assessment Program (FSAP) in 2001.

Directors considered that Tunisia would benefit from closer integration into world capital markets, but agreed that significant further liberalization of the financial account should wait until additional progress is made in strengthening the banking sector and deepening domestic capital markets.

On labor market policies, Directors welcomed the recent measures to improve job placement, training, and self-employment. They took note of recent indications that job creation is improving, but agreed that additional steps to eliminate labor market rigidities will be needed. While recognizing the positive contribution of the present wage-setting mechanism to price and social stability, Directors encouraged the authorities to find ways to allow productivity considerations to play a more prominent role in the wage-setting process across enterprises and sectors. They also recommended adapting labor market regulations to the needs of a more flexible labor market.

Directors welcomed the substantial improvements in the quality and dissemination of statistical information, and looked forward to the additional improvements which should result from Tunisia's subscription to the Special Data Dissemination Standard (SDDS) by mid-2001.

Directors commended the authorities on their decision to advance to May 2001 the repurchase of the full amount outstanding under the 1992 Extended Fund Facility (EFF) arrangement.

Tunisia: Selected Economic Indicators

  1995 1996 1997 1998 1999 2000

  (In percent)
Real sector            
Real GDP 2.4 7.0 5.4 5.0 6.2 5.0
GDP deflator 5.5 4.5 4.0 3.5 3.5 3.2
Consumer price index (CPI, period average) 6.3 3.8 3.7 3.1 2.7 3.0
  (In millions of U.S. dollars, unless otherwise indicated)
External sector            
Exports of goods, f.o.b. 5,469 5,519 5,559 5,733 5,864 5,992
Imports of goods, f.o.b. 7,458 7,280 7,514 7,887 8,003 8,278
Current account, excluding capital
grants (in percent of GDP)
-4.3 -2.4 -3.1 -3.4 -2.1 -3.2
Foreign direct investment, net 308 262 388 685 357 651
Capital and financial account balance 928 838 710 621 878 568
Total reserves minus gold 1,616 1,916 1,985 1,866 2,289 2,222
External MLT debt (in billions of US$) 9.8 9.9 9.6 10.0 10.3 9.8
Debt service ratio (in percent of exports of goods and nonfactor services) 20.9 21.4 19.4 19.2 18.6 22.4
Real effective exchange rate (in
percent) (depreciation -)
2.2 0.7 -0.1 -0.1 1.0 -0.7
  (In percent of GDP, unless otherwise indicated)
Financial variables            
Fiscal balance 1/ -4.5 -5.1 -4.2 -2.8 -2.6 -2.9
Revenues 2/ 29.9 30.3 28.4 29.1 28.9 29.1
Expenditures and net lending 34.5 35.5 32.6 32.0 31.5 32.0
Gross saving 20.2 22.4 23.2 23.5 24.5 24.5
Gross domestic investment 24.7 25.1 26.5 26.9 26.6 27.7
Change in liquidity (M4) (in percent) 10.6 12.4 8.7 9.3 9.4 5.1
Interest rate (money market rate, in
8.8 7.8 6.9 6.9 5.9 5.9

Sources: Data provided by the Tunisia authorities; and Fund staff estimates.

1/ Overall deficit excluding grants and privatization.
2/ Excluding grants.            

1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. This PIN summarizes the views of the Executive Board as expressed during the February 7, 2001 Executive Board discussion based on the staff report.


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