Key Questions on Tunisia

Last Updated: January 12, 2018

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Is the IMF recommending the measures being implemented by the government?

The IMF helps its member countries to achieve higher and more inclusive growth while at the same time keeping inflation and the build-up of debt in check. Tunisia’s young democracy has faced a difficult period over the last seven years, including terrorist attacks, a difficult political transition, and a challenging external environment. This has resulted in weak economic activity, persistently high unemployment, accelerating inflation, rising public and external debt, and dwindling reserves.

For Tunisia to spur growth and reduce unemployment, the government needs to mobilize domestic revenues and rein in current spending to fund much-needed investment and social expenditure, including outlays on health and education. These measures may hurt in the short term, but are essential to achieve economic stability and growth. Mobilizing revenues and slowing the growth of spending will help reduce the deficit, bring down inflation, and improve business and investor confidence, thereby generating jobs. In implementing the adjustment, attention needs to be given to protecting the most vulnerable by guaranteeing adequate social protection, and ensuring the burden is spread fairly across the society.

This is the rationale underlying the government’s 2018 budget, which includes ambitious measures to strengthen tax revenue, contain energy subsidies, limit the further growth of the public wage bill, and fund pensions on a more sustainable basis. At the same time, it seeks to maintain public investment at its 2017 level and envisages increased spending on social programs.

The IMF has consistently highlighted the need to spread the adjustment burden in a fair way and protect the most vulnerable from its effects. For instance: The tax effort not only includes broad VAT increases, but also specific increases for products mostly consumed by the better off. Efforts to strengthen tax collection and recoup tax arrears are also a priority. The ongoing efforts to reduce the unsustainable public wage bill, which is among the highest in the world and represents about half of Tunisia’s total budget expenditure, relies on voluntary departure and early retirement schemes for civil servants rather than mandatory layoffs.

The authorities and the IMF have agreed on the importance of not touching subsidized prices for basic food products, while applying regularly a price adjustment mechanism for three main fuels that mostly benefit the better off. We have also emphasized the need to take further steps to improve the financial viability of pensions and health services, and to identify areas to improve fairness in taxation to share the burden of adjustment more equally, for example by increasing the tax take of liberal professions.

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What is the status of the IMF program? Why has the IMF withheld financing under Tunisia’s program?

The IMF will remain strongly engaged with financial assistance to support Tunisia and its people. We also continue to provide policy advice and capacity development support to help Tunisia strengthen its economic institutions and fight corruption.

During the December 2017 mission, the Tunisian authorities and the IMF team reached a staff-level agreement on the policies needed to complete the Second Review of Tunisia’s EFF. Executive Board consideration is expected for the first quarter of 2018. The government made a lot of progress over recent months, working in close cooperation with the IMF team, the World Bank, and other external partners. Key achievements include the 2018 budget law and the civil service reform strategy aimed at improving service quality and slowing the growth of the wage bill. Other structural reforms supported under the program remain focused on improving governance and the environment for businesses, the restructuring of public banks and improved financial sector supervision, and the health of pensions and state-owned enterprises.

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Why has the IMF recommended the depreciation of the Tunisian dinar?

The IMF has recommended continuing with a more flexible exchange rate regime to allow the dinar to reflect underlying economic and financial conditions, and to protect international reserves. This policy will be instrumental in supporting Tunisia’s export sector that has struggled over recent years, and spur job creation. There is no need for an abrupt correction and we have not asked for one, considering the currency’s recent depreciation.

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Has the IMF recommended increased taxes on the poor?

In the aftermath of the terrorist attacks in 2015, Tunisia’s macroeconomic condition has remained critical due to low growth and continued socio-political tensions. Public and external debt now stand at about 70 and 80 percent of GDP, respectively. Inflation accelerated to 6.4 percent in December. And the central bank’s international reserves remain only slightly above the critical 3 months of import cover.

There is an urgent need to prevent further deterioration in the economy, create growth, and reduce unemployment levels. The government needs to mobilize revenues and contain the growth of current spending to fund much-needed investments and social expenditure, including outlays on health and education. These measures, including tax hikes and strengthened tax collection, may hurt in the short term, but are essential to achieve economic stability and growth. They will help reduce the deficit, bring down inflation, and improve business and investor confidence, thereby generating jobs. In implementing these measures, it is important to protect the most vulnerable by guaranteeing adequate social protection, and ensure the burden is spread fairly across the society.

The IMF has consistently highlighted these two points. For instance: The tax effort not only includes broad VAT increases, but also specific increases for products mostly consumed by the better off. Efforts to strengthen tax collection and recoup tax arrears are also a priority. The ongoing efforts to reduce the unsustainable public wage bill, which is among the highest in the world and represents about half of Tunisia’s total budget expenditure, relies on voluntary departure and early retirement schemes for civil servants rather than mandatory layoffs.

The authorities and the IMF have agreed on the importance not to touch subsidized prices for basic food stuffs, while periodically applying a price adjustment mechanism for three main fuels that mostly benefit the better off. We have also emphasized the need to take further steps to improve the financial viability of pensions and health services, and to identify areas to improve fairness in taxation to share the burden of adjustment more equally, for example by increasing the tax take of liberal professions.

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How does the IMF program ensure the poor do not bear the burden of reforms?

Social protection is a cornerstone of the government’s reform program. First, the Fund-supported program places a big emphasis on structural reforms needed to support more inclusive growth through improvements in governance, the environment for doing business, and access to finance.

Second, it includes a social spending target to protect expenditures such as cash transfers to vulnerable families, transfers to students, and capital spending in health and education from the necessary adjustment effort. Finally, the program calls for a database of low-income families to gradually extend cash transfers. Our latest staff report also includes a chapter analyzing social protection, pensions, and health services.

The authorities and the IMF have agreed on the importance not to touch subsidized prices for basic food stuffs, while periodically applying a price adjustment mechanism for three main fuels that mostly benefit the better off. We have also emphasized the need to take further steps to improve the financial viability of pensions and health services, and to identify areas to improve fairness in taxation to share the burden of adjustment more equally, for example by increasing the tax take of liberal professions.

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Why did the IMF advise the government to increase fuel, food, and tobacco prices?

The IMF did not recommend increases to food prices or to cooking gas. It has consistently recommended applying the price adjustment mechanism adopted by the Government in July 2016 to the three main fuel categories, which are mostly used by the better off. We consider that the quarterly application of that price mechanism is crucial for protecting state finances from fluctuations in global oil prices at a time when Tunisia faces high fiscal deficits that are difficult to finance.

Moreover, the resources freed up by lower energy subsidies will allow higher spending on public investment and social programs. The increase in tobacco prices included by the authorities in their 2017 budget followed recommendations by the World Health Organization.

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Tunisia intends to implement a reform of the civil service. Does this move have an impact on social stability in Tunisia?

Tunisia’s public wage bill is expected to grow from 10.7 percent of GDP in 2010 to more than 15 percent of GDP in 2018, among the highest in the world and no longer affordable. It represents about half of all government expenditures and thus reduces the space for the government to finance other priorities, such as growth-and employment-generating public investment, education, and health. Re-directing more resources to these priorities will be critical to reduce the high levels of unemployment and under-employment in Tunisia, which are often at the root of poor living conditions and frustration about economic prospects. The ongoing efforts to reduce this unsustainable public wage bill relies on voluntary departure and early retirement schemes for civil servants rather than mandatory layoffs.

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How has the IMF program helped tackle corruption?

Fighting corruption is crucial to achieving stronger and more inclusive growth and is a key demand of the Tunisian society. Recent IMF analytical work, including on Tunisia in the context of the 2015 Article IV discussion, finds a strong correlation between low capital formation and Tunisia’s weak performance in judicial independence and corruption. Specifically, the Fund-supported program includes the creation of the high anti-corruption and good governance authority, the adoption of an organic budget law that will advance performance-based budgeting and budget transparency, and measures to improve public financial management and strengthen tax administration. We also continue to provide policy advice and capacity development support to help Tunisia build sound economic institutions and fight corruption.

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How does the IMF-supported program help improve the business climate?

Only the private sector can generate sufficient good-quality jobs for Tunisia’s young workforce. Measures to promote a competitive business environment are thus a priority under the Fund-supported program, together with reforms to reduce market distortions such as the high and unaffordable energy subsidies. Examples include the new Investment Code, the law on public-private partnerships, the competition law, and the banking law.

The IMF is now working closely with the Tunisian authorities to accelerate the efforts needed to translate the new legislation into stronger investment and jobs creation. In addition, efforts are focused on developing a new financial inclusion strategy to strengthen microfinance, digital finance, and credit to SMEs, including by allowing private credit bureaus. We also welcome the Tunisian government’s commitment to the Compact with Africa, which aims at mobilizing private investment to the country while improving policy frameworks.

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How can the IMF help the Tunisian people?

The IMF helps Tunisia through financial assistance, advice on macroeconomic and structural policies, and technical expertise and training to help the economy work better for all Tunisians. It has worked closely with Tunisia since 2011 to maintain macroeconomic stability throughout a difficult period and lay the foundation for job-creating growth, including by structural reforms to improve the environment for doing business, reform public banks, and strengthen fiscal institutions.

IMF loans provide a financial cushion while a country adopts policy measures to reinvigorate growth and reduce macroeconomic vulnerabilities—both important to raise standards of living. Loans from the IMF are cheaper than those from private financial markets. This can save budget resources that can be used to fund education, health and public investment spending. IMF loans can also catalyze financial support from other development partners and facilitate access to domestic and international capital markets.

The IMF supports Tunisia also with advice and capacity development. The IMF and the Tunisian government agree that urgent action is necessary to improve the economy, create jobs, and raise the living standards of all Tunisians. The government’s economic reforms draw on the experience that we have gathered in other countries on how to revive economic growth and on our technical expertise in policy areas such as tax administration and banking supervision.

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What kind of a loan does Tunisia have?

The Tunisian authorities have designed a comprehensive package of economic reforms that is supported by the IMF’s Extended Fund Facility arrangement. The IMF’s Executive Board on May 20, 2016 approved a four-year loan of US$2.9 billion. The successful completion of the Second Review envisaged for the first quarter of 2018 would bring total disbursements to about US$1 billion.

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Won’t this loan add to Tunisia’s debt and lead to further deterioration of the economic situation?

IMF financing aims to help countries ease their economic adjustment by providing a temporary cushion of support and more time to address the underlying problems and imbalances. Tunisia continues to run large budget and trade deficits, for which sizeable financing needs have to be mobilized every year. As IMF financing carries an annual interest rate of 3 percent that is significantly below market rates (for example, the authorities are paying 6 percent on the 2017 Eurobond), the loan helps to reduce Tunisia’s debt service burden.

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Does the IMF’s policy advice to Tunisia take into consideration the country’s socio-economic situation and the security environment?

We recognize Tunisia’s difficult socio-economic situation and ongoing security challenges, and our policy advice has always been based on the country’s changing circumstances.

Tunisia’s unemployment is too high, with more than 30 percent of youth and women unemployed. Investment is too weak to generate sufficient jobs, and fiscal and external deficits are stuck at high levels.

Fund-supported programs are flexible and are adjusted to changing circumstances. During Tunisia’s previous IMF program, under the Stand-By Arrangement from 2013–15, important milestones and program targets were changed when it became clear that the political transition would take longer than expected and also following the tragic terrorist attacks in 2015.

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Youth unemployment in Tunisia stands at 30 percent. What is the IMF’s view on the past recruitments in the civil service? What should the country do to boost job creation and stop recent unrests in the interior regions?

Reducing unemployment and creating economic opportunity for the youth are key objectives of the authorities’ economic reform program. This can only be achieved by stronger reliance on the private sector as main engine of growth and chief creator of productive jobs, supported by stepped-up investment.

The public sector cannot create employment directly, especially considering elevated deficit and debt levels. Consequently, the authorities’ efforts focus on improving the business environment for private firms, for example through the adoption of the investment code and the PPP law, as well as the restructuring of public banks to increase access to finance. We also support the authorities’ efforts to re-orient expenditure to growth-friendly investment and social spending, which should be targeted to the most vulnerable.