Public Information Notice: IMF Concludes Article IV Consultation with Tunisia

September 17, 1999

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 September 2, 1999, the Executive Board concluded the Article IV consultation with Tunisia.1


Despite a contraction of agricultural production, GDP grew by 5 percent in 1998. Gross fixed capital formation (27.5 percent of GDP), notably in Tunisia's traditional and new export sectors, was the most dynamic component of aggregate demand. The external current account deficit widened only slightly to 3.4 percent of GDP owing to a commensurate increase in the saving rate. Growth of exports of goods and services slowed primarily due to a decline in sales of crude oil and food products. CPI inflation declined further in 1998 to 3.1 percent, despite the increase in VAT rates and substantial increases in the prices of public transport and utilities, and in administered prices. Despite the strong growth performance, the unemployment rate has remained roughly unchanged at 15.6 percent. However, official statistics include nonactive job seekers in the definition of labor force. Outside of this group, unemployment has been largely concentrated among unskilled workers and first-time job seekers.

The limited exposure of the economy to short-term capital flows helped Tunisia weather the turmoil in international capital markets. As other emerging market economies, however, Tunisia faced a marked hardening of borrowing conditions on international markets. In light of the significant volume of FDI inflows in 1998, linked to the privatization of two large cement factories, the authorities postponed the planned issuance of Eurobonds. This still entailed a decline in reserves to 2.6 months of imports from 3.1 months at the end of 1997. As of end-1998, Tunisia had a sizeable but sustainable external debt amounting to US$11.3 billion (55 percent of GDP, as compared to 61 percent a year earlier). Public and publicly-guaranteed debt, mostly medium- and long-term, accounted for 80 percent of the total. Short-term debt (US$1.6 billion) was mostly contracted by the private sector, a quarter of it in the form of trade credits.

Tunisia's strong performance in 1998 and into 1999, especially by regional standards, has its roots in a prudent and well-balanced macroeconomic policy stance, aimed at continued fiscal consolidation and disinflation, backed by a solid record of investment in social and physical infrastructure. Structural reforms have been proceeding at a cautious but steady pace, but the state retains extensive control over economic activity.

Considerable progress was made in 1998 on the fiscal front. The consolidated central government deficit (excluding privatization and foreign grants) narrowed from 4.2 percent of GDP in 1997 to 2.8 percent in 1998 (below the 3 percent fiscal target) mainly owing to new tax measures and to a decline in interest payments. The level of privatization receipts (1.8 percent of GDP) made it possible to reduce domestic debt financing, even in the absence of new external financing. Monetary policy attained the objectives that had been set for 1998. The growth of the liquidity aggregate M4 leveled off below nominal GDP growth. The central bank refinancing interest rate, unchanged since March 1997, was lowered in February 1999.

Structural reforms proceeded on several fronts, largely as planned. Notable progress was made toward restoring banking stability under a restructuring program, developed with the support of the World Bank, the main features of which were the clean up of bad loans to public enterprises, the strengthening of the prudential framework, and banking restructuring through the prospective merger of government-owned state banks. Still, as of end of 1998, the remaining nonperforming loans (to the private sector) stood at 22 percent of GDP. The industrial restructuring (mise à niveau) program launched in 1996 to restructure private manufacturing enterprises yielded some positive results with total approved investment of around US$920 million generated over three years toward upgrading productive capacity and human capital. The volume of privatization witnessed a marked acceleration in 1998, with the sale of two large cement factories to foreign investors for a total of US$380. However, state-owned enterprises still accounted for around 20 percent of value added in 1998.

Social indicators remain outstanding by regional standards, notably in terms of education, gender gaps, health provision, and housing-some 80 percent of the population own their homes. Social concerns however remain notably as related to the unemployment rate and the large school dropout rate.

Executive Board Assessment

Executive Directors commended the authorities for Tunisia's steady and strong growth performance, achieved in a context of low inflation and external stability. Directors noted that the authorities' prudent and consistent macroeconomic policy management had been a key factor in achieving this performance. They also underscored the positive role played by the medium-term orientation of policies, steady structural reforms, and enlightened social policies.

Directors endorsed the authorities' economic strategy aimed at strengthening the economy's integration with the European Union, and stressed the benefits of lowering trade barriers in terms of enhanced productivity, competitiveness, and higher potential growth. They encouraged the authorities to build on this strategy by further liberalizing trade. Directors noted that the economy's ability to innovate and compete would depend on its ability to attract foreign investment. In this regard, they were of the view that the authorities' strong macroeconomic policy management would play a central role in maintaining the momentum of growth, but that this had to be complemented by deeper structural reforms and further liberalization of the economy.

Directors observed that an active exchange rate policy had served the country well. They supported the continuation of this policy, but recommended that, in adjusting the nominal exchange rate, the authorities should consider a broader set of competitiveness indicators than simply relative consumer prices, particularly as domestic markets are opening to foreign competition.

While Directors considered Tunisia's external imbalance to be sustainable, particularly in light of its strong investment record, they cautioned the authorities against allowing the current account deficit to widen much further. To that end, Directors suggested that the authorities could use the present strength of the economy to tighten the fiscal stance somewhat by accelerating the fiscal consolidation path envisaged under the IXth Economic Development Plan. Directors took note of the fiscal actions taken by the authorities to offset the decline in trade tariff revenues. They considered that further durable fiscal adjustment efforts should focus on broadening the tax base, improving tax administration, and addressing the main source of rigidity in the budget, namely the wage bill.

Directors remarked that Tunisia's successful disinflation had relied on sound incomes and monetary policies. They took the view that, to be sustained, this performance needed to be anchored in a more clearly defined inflation objective, which could guide both wage negotiations and monetary policy. Directors also noted the need for monetary policy to adapt to financial innovation by broadening the range of indicators used to gauge inflationary pressures. Directors recommended that the authorities allow interest rates to play a more active role in monetary policy and credit allocation.

Directors commended the authorities for the steps taken to strengthen prudential regulations and banking supervision and to clean up the burden of nonperforming loans to public enterprises. They expressed concern, however, about the volume of bad loans to the private sector, and urged the authorities to monitor this situation closely. Directors believed that privatization of the banking sector would improve management and incentives to act prudently, and urged the authorities to move more rapidly in this direction.

Directors noted the significant strides made toward an open market economy. While recognizing the important role of the state in strengthening institutions, they urged the authorities to move more forcefully to reduce the role of the state in allocating resources. In particular, they saw scope for moving faster on price liberalization and in the privatization of public enterprises so as to increase economic efficiency and promote job creation.

Directors welcomed the attention given by the authorities to social development and to investment in human capital, and noted its positive impact on social indicators, which are among the highest in the region.

Directors commended the authorities for steps taken to improve the transparency of their policies and to disseminate economic statistics. They observed that Tunisia's economic statistics were adequate for surveillance, but recommended further efforts to improve the labor market and government statistics as regards the consolidated accounts of general government and public enterprises. Directors welcomed the authorities' decision to subscribe to the SDDS by 2000 and the measures taken to meet those requirements. They also welcomed the authorities' intention to participate in the pilot project for the voluntary release of Article IV consultation reports.

Tunisia: Selected Economic Indicators

  1994 1995 1996 1997 1998

Real sector In percent
Real GDP 3.3 2.4 7.0 5.4 5.0
GDP deflator 4.4 5.5 4.4 4.0 3.6
Consumer price index (CPI, period average) 4.7 6.3 3.8 3.7 3.1
External sector In millions of U.S. dollars 1/
Exports of goods, f.o.b. 4,643 5,469 5,519 5,559 5,722
Imports of goods, f.o.b. 6,210 7,458 7,280 7,514 7,872
Current account, excluding capital grants (in percent of GDP) -4.2 -4.3 -2.4 -3.1 -3.4
Foreign direct investment, net 2/ 442 283 261 355 697
Capital account balance 1,218 928 838 711 600
Total reserves minus gold 1,462 1,605 1,898 1,978 1,850
External debt (in billions of US$) 8.8 9.8 9.9 9.6 9.7
Debt service ratio (in percent of exports of goods and nonfactor services) 20.7 20.9 21.4 19.4 19.2
Real effective exchange rate (in percent) (depreciation -) 0.8 2.1 0.4 -0.1 -0.2
Financial variables In percent of GDP 1/
Fiscal balance 3/ -2.5 -4.5 -5.1 -4.2 -2.8
Revenues 31.3 29.9 30.3 28.4 29.0
Expenditures 33.8 34.5 35.5 32.6 31.8
Gross saving 20.1 20.0 22.4 23.4 24.1
Gross domestic investment 24.5 24.7 25.0 26.7 27.5
Change in broad money (M4) (in percent) 7.7 10.7 12.7 9.6 8.9
Interest rate (money market rate, in percent) 8.8 8.8 8.6 6.9 6.9

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

1/ Unless otherwise noted.
2/ In 1994, includes large inflows related to the building of a transmediterranean pipeline (Gazoduc) and development of an offshore gasfield (Miskar).
3/ Overall deficit excluding
grants and privatization.

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. In this PIN, the main features of the Board's discussion are described.


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