Public Information Notice: IMF Executive Board Concludes 2006 Article IV Consultation with Tunisia

June 8, 2006

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.

Public Information Notice (PIN) No. 06/62
June 8, 2006

On May 24, 2006, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Tunisia.1


Over the past decade, market-oriented reforms and prudent macroeconomic policies have contributed to placing Tunisia's economic performance among the best in the region. The authorities have managed the exchange rate flexibly in a context of restricted external capital flows. Outward orientation has been a key component of Tunisia's development strategy, notably through an Association Agreement with the EU, signed in 1995. Gradual structural reforms combined with a flexible exchange rate policy since 2000 have supported competitiveness and export growth.

The Tunisian economy continues to show strength and the outlook is favorable. Real GDP growth remained relatively strong in 2005 and the external current account deficit narrowed significantly, notwithstanding unfavorable agricultural conditions, the expiration of the Agreement on Textiles and Clothing, and continued tepid demand in Europe. Growth is expected to accelerate in 2006, as agricultural production recovers and the service and industry sectors remain strong. While increased financial inflows present a challenge for monetary policy, the current macroeconomic stance remains appropriate and inflation subdued.

The external debt-to-GDP ratio remained broadly unchanged in 2005, at 68 percent, but is expected to decline substantially in 2006, owing to high growth and large privatization proceeds.

The central government deficit widened somewhat in 2005 (to 3.2 percent of GDP, excluding privatization receipts and grants) due to the impact of high oil prices on subsidies, but is expected to return to about 3 percent in 2006. The authorities continue to raise retail petroleum prices. On the revenue side, they are undertaking tax policy and administration reforms. The medium-term objective is to bring public debt from 59 percent GDP to below 50 percent.

Banking sector indicators improved in 2005. The share of non-performing loans (NPLs) in total loans declined significantly (to about 21 percent) and provisioning increased somewhat. While not of systemic proportions, banking sector vulnerabilities increase the cost of capital and hinder macroeconomic reform. The recent Financial Sector Assessment Program update should contribute to sharpening the authorities' reform strategy.

Over the medium term, the authorities are aiming to achieve the standard of living of emerging market OECD countries and transform Tunisia's economic structure to absorb the rapidly increasing supply of skilled labor. This will require: (i) strengthening the financial sector by accelerating the resolution of the high NPLs; (ii) advancing macroeconomic policy reforms; (iii) improving the investment climate; and (iv) increasing labor market flexibility.

Tunisia continues to improve the quality and dissemination of statistical data and increase the transparency of its economic policies. Tunisia has published all Executive Board documents and staff mission statements in recent years and intend to publish the 2006 Article IV Staff Report and Selected Issues papers.

Executive Board Assessment

Executive Directors commended Tunisia's strong economic performance and resilience to adverse shocks, reflected in robust growth, subdued inflation, strengthened reserves, and increasing capital inflows, which underscored the benefits of sustained sound macroeconomic policies and market-oriented reforms. Directors stressed, however, that growth will need to accelerate in order to meet Tunisia's objective of reaching lower-tier OECD income levels and reducing unemployment, and encouraged the authorities to speed up macroeconomic and structural reforms, to take full advantage of global and regional integration.

Directors welcomed the authorities' continued efforts to contain the fiscal impact of high oil prices, including recent adjustments in retail petroleum prices, within the framework of a comprehensive strategy for more efficient energy use. These measures, combined with ongoing tax reforms and efforts to improve tax collection will support continued fiscal consolidation and targeted reductions in public debt over the medium term. Nonetheless, Directors viewed that the weight of the wage bill will need to be reduced over the medium-term in order to enhance fiscal policy flexibility.

Directors noted that, faced with increased external capital inflows, monetary and exchange rate policies had effectively contained inflation while maintaining strong growth. They encouraged the authorities to remain vigilant against price pressures and, if needed, complement monetary policy with fiscal tightening, accelerated trade liberalization, and increased exchange rate flexibility, in particular, if capital inflows persist.

Directors welcomed the phased liberalization of the external capital account, and the associated integration of Tunisia's economy with international markets, and urged timely action on the steps required for advancing to the next stages. They emphasized that the associated transition to a floating exchange rate regime will need to be supported by a deepening of money and exchange markets. In this regard, they were encouraged by the progress towards the implementation of Tunisia's new monetary policy framework and, in particular, by the new central bank law and its focus on price stability as a key objective. Directors underscored the importance of increased interest and exchange rate flexibility for market development. They welcomed the authorities' commitment to eliminate, in the near future, the requirement that banks transfer end-of-day foreign exchange balances to the Central Bank of Tunisia, and emphasized that improved banking sector conditions are prerequisite for sustaining further substantial advancement.

Directors were encouraged that the authorities have put in place most of the key recommendations of the 2002 FSAP and welcomed Tunisia's participation in the 2006 FSAP update, which will help in addressing the remaining weaknesses in the banking sector, including by sharpening the strategy for reducing NPLs, and tackling vulnerabilities. In this regard, they welcomed the authorities' intention to publish a report on banking supervision and financial stability. Given the favorable economic outlook, efforts to improve banking indicators over the next three-year period should be stepped up, by increasing provisioning, improving the quality of new credit, and dealing decisively with the existing stock of NPLs. They stressed that public banks should be operated on a strictly commercial basis, and that provisioning rules and sanctions should be fully enforced.

Directors welcomed the authorities' decision to use most of the proceeds from the partial privatization of Tunisie Télécom to retire external debt, which will facilitate monetary management, contribute to reducing the high external debt, and strengthen the fiscal position.

Directors noted that accelerating structural reforms will be key to enhancing the economy's adaptability to a changing global environment and strengthening Tunisia's attractiveness as a destination for private investment. In this regard, improving the business climate and further increasing labor market flexibility are priorities that would also help to address Tunisia's high unemployment, increasingly concentrated among university graduates. Directors, while acknowledging that Tunisia has been a pioneer in the region's trade integration vis-à-vis the European Union, urged the intensification of multilateral and regional integration efforts. They welcomed ongoing customs reforms, and the authorities' interest in Fund technical assistance in this area. Directors also lauded Tunisia's active participation in efforts to increase economic integration within the Maghreb region.

Directors welcomed the completion of the AML/CFT Report on the Observance of Standards and Codes, and noted that the key challenge going forward will be to bring implementation, enforcement, and supervision of financial sector compliance in line with AML/CFT requirements. They commended the authorities' commitment to transparency and welcomed their continuous efforts to improve the quality of data.

Table 1. Tunisia: Selected Economic Indicators, 2001-06
(Quota: SDR 286.5 million)
(Population: 9.9 million; 2004)
(Per capita GDP: US$2,838; 2004)
(Poverty rate: 4.1 percent; 2000)
(Main export: textiles, electronic and mechanical goods, tourism; 2004)

  2001 2002 2003 2004 2005 2006
          Est. Proj.

Output and Prices

(Annual percentage change)

Real GDP (market price)

4.9 1.7 5.6 6.0 4.2 5.8

Consumer prices (end of period)

3.0 1.8 4.4 1.2 3.9 3.0

Consumer prices (period average)

1.9 2.8 2.8 3.6 2.0 3.0

Investment and Saving

(In percent of GDP)

Gross capital formation

27.9 25.7 25.1 24.2 23.9 24.1

  of which: Non-government

20.1 18.2 17.9 17.2 17.4 18.0

Gross national savings

23.7 22.2 22.2 22.2 22.7 22.7

  of which: Non-government

18.7 17.4 18.2 17.7 19.1 19.4

Public Finances

(In percent of GDP)

Revenue (including grants)

24.3 24.8 23.9 24.1 24.2 23.9


27.8 27.8 27.0 26.8 27.2 26.7

Budget balance (including grants)

-3.5 -3.1 -3.2 -2.6 -3.0 -2.8

Primary balance (including grants)

-0.4 0.0 -0.4 0.2 -0.1 0.0

Total government debt

62.7 61.5 60.4 59.7 59.0 56.1

Monetary Sector

(Annual percentage change, unless otherwise indicated)

Credit to the private sector

10.3 6.7 4.6 5.3 7.5 6.9

Base money

18.3 1.8 5.5 12.2 21.9 10.4

Broad money

11.3 5.2 6.3 10.3 10.8 10.4

Velocity of broad money

1.7 1.6 1.7 1.6 1.6 1.5

  Three-month treasury bill rate (period average, in percent) 1/

6.3 6.2 N/A N/A 5.1 ...

External Sector

(In percent of GDP, unless otherwise indicated)

Exports of goods (in US$, percentage change)

13.6 3.4 17.1 20.6 8.4 4.5

Imports of goods (in US$, percentage change)

11.2 -0.2 14.7 17.6 2.8 6.0

Merchandise trade balance

-11.8 -10.1 -9.1 -8.7 -6.8 -7.6

Current account excluding official transfers

-4.2 -3.5 -2.9 -2.0 -1.3 -1.4

Current account including official transfers

-3.9 -3.2 -2.7 -1.6 -0.9 -1.0

Foreign direct investment

2.2 3.6 2.1 2.1 2.5 9.5

Total external debt

65.8 67.6 67.2 67.8 67.9 64.3

Gross reserves (in millions of U.S. dollars)

2.0 2.3 3.0 4.0 4.4 6.5

  In months of next year imports of goods and services

2.3 2.7 3.0 3.5 3.7 5.1

  In percent of short-term external debt (on remaining maturity basis)

55.3 54.7 63.6 75.6 91.8 115.5

Memorandum Items:


Nominal GDP (in US$ billions)

20.0 22.4 26.7 29.2 27.3 29.1

Unemployment rate (in percent)

15.1 15.3 14.5 14.2 14.3 13.9

Net imports of petroleum products (in millions of US dollars)

275.0 221.7 328.8 407.1 393.4 425.0

Local currency per U.S. dollar (period average)

1.4 1.4 1.3 1.2 1.3 ...

Real effective exchange rate (annual average, percentage change)

-2.4 -0.2 -5.0 -3.4 -4.5 ...

Stock market index 2/

1267.0 1119.2 1250.2 1331.8 11615.1 1866.9

Sources: Tunisian authorities and IMF staff estimates.

1/ There was no outstanding short-term government debt in 2003, 2004, or end-2005. 2005 refers to October.

2/ TUNINDEX. (1000 = 4/1/1998). 2006 data from April 7, 2006.

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.


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