Key Questions on Tunisia

Last Updated: June 14, 2017

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How does the IMF help the Tunisian people?

The IMF helps Tunisia through financial assistance and with technical expertise and training to help the economy work better for all Tunisians. The country has been hit by a series of shocks such as terrorist attacks (which affected tourism and investment), low commodity prices for goods that Tunisia exports, and low growth in key trading partners like Europe. As a result, growth has slowed, unemployment has risen, and public and external debt have surged.    

Financial assistance from the IMF can provide a financial cushion while the country adopts changes needed to help the economy grow again, and bring prosperity to all. Loans from the IMF are cheaper than those from private financial markets, so this saves budget resources that can be used to fund education, health and public investment spending. It can also catalyze financial support from other development partners and facilitate access to international capital markets. 

Besides financial support, the IMF is supporting Tunisia’s economic reforms with advice and technical assistance. 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. In advising the authorities, the IMF draws on experience that it has gathered in many other countries sought to revive economic growth under similar circumstances. Technical expertise is offered in policy areas such as tax administration and banking supervision.

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What kind of 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 loan totaling US$2.9 billion that will be made available in tranches over four years. The interest rate on the IMF’s financial support to Tunisia is currently more favorable than the cost of borrowing from financial markets. The interest rate is currently around 2 percent on an annual average basis. This rate is well below the 6 percent of a recently issued Eurobond.

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What does the program involve?

This program spells out policies to contain the rapidly increasing public debt, which now stands at 60 percent of GDP, and to lay the foundations for sustainable growth that improves the lives of all Tunisians. This includes keeping the overall budget deficit (which is currently 6 percent of GDP) and current spending at sustainable levels. The authorities’ program also aims to develop medium-term tax measures, and adopt a comprehensive civil service reform strategy that improves the availability, quality, and efficiency of public services. 

The IMF has worked closely with Tunisia since 2011 to help put the economy back on track while at the same time preventing the poor from bearing the brunt of the necessary adjustments. The current comprehensive policy package agreed with the Tunisian government is strong and should be able to bring about the growth- and jobs-friendly adjustment that Tunisia needs to stabilize its large budget deficit, reduce foreign borrowing, and set the debt ratio on a declining path.

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Won’t the IMF 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 cushion of support and more time to address the underlying problems and imbalances. Tunisia continues to run budget and trade deficits, which need to be financed. The short-term increase in Tunisia’s debt will be on much more favorable terms than if it had obtained this financing from financial markets: the annual interest rate is around 2 percent, while the Tunisian government recently paid 6 percent for a newly issued Eurobond.

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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?  

The IMF fully recognizes Tunisia’s difficult socio-economic situation and ongoing security challenges. Its 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.

During Tunisia’s previous IMF program, under the Stand-By Arrangement from 2013–15, important milestones and program targets were changed when conditions changes, for example when it became clear that the political transition would take longer than expected and following the tragic terrorist attacks in 2015.

Social protection is a cornerstone of the government’s reform program. More generally, the current Extended Fund Arrangement, in place since May 2016, places a big emphasis on the reform agenda needed to support more inclusive growth. For example, the authorities’ envisaged tax package for 2018 improves fairness and revenue, including through strengthening tax collection that has weakened over recent years. Under the program, the IMF and the government closely monitor social spending through a minimum level of social spending that is adjusted twice a year. The latest IMF staff report includes a chapter analyzing social protection, pensions and health services. It discusses options for making social policies more fair and effective, for example by using a unique social identifier to better target assistance to vulnerable households. The IMF team has also been urging the swift start of operations of the high anti-corruption authority. 

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Tunisia is struggling to implement a series of reforms, especially those related to the public wage bill. Does this move have an impact on social stability in Tunisia?

Tunisia’s wage bill as a share of its economic output is one of the highest among emerging market countries and will no longer be affordable in the context of the rapidly increasing debt levels. The wage bill has grown from 10.7 percent of GDP in 2010 to 14.5 percent in 2016, and if wage bill reforms were not implemented, it would increase to 15 percent of GDP in 2018. Moreover, it represents about 50 percent of all government expenditure, crowding out priority spending on public investment or social transfers. However, channeling more resources to such priority areas is crucial to achieve sustainable progress in the standards of living of all Tunisians, create jobs for its youth and protect the most vulnerable.

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Why has it taken so long to complete the First Review?

Lower-than-expected growth and the transition to the government of national unity that took office in August 2016 delayed implementation of some policies. The government recovered a lot of ground over recent months, working in close cooperation with the IMF team and other external partners, so that several critical reforms are now in place. This includes important legislation for private sector development, along with the investment code and the law on public-private- partnerships; improving the performance of public banks; and a civil service reform strategy to improve service quality and gradually reduce the wage bill. Moreover, the government’s own program, detailed in the recently adopted five-year development plan, remains fully consistent with the IMF’s objectives to maintain macroeconomic stability and improve inclusive growth; notably, it creates more productive employment in the private sector.

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Has the IMF recommended the depreciation of the Tunisian dinar?

The IMF has recommended moving towards a more flexible exchange rate regime, which would allow the dinar to respond to the demand and supply for foreign currency. Record trade and services deficits indicate the need for some depreciation over time. There is, however, no need for an abrupt correction and we have not asked for one; our estimates suggest that the dinar is currently only slightly overvalued, to the tune of around 10 percent.

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Why is the IMF recommending taxing the poor?

Mobilizing domestic revenue is a crucial ingredient in the government’s strategy to raise the resources needed to finance priority spending such as education, health, and public investment. Overall, the changes to the tax system undertaken in the course of the program will make taxation in Tunisia fairer, and will support more inclusive growth.

In fact, the authorities have paid particular attention to raising taxes on goods and services that are disproportionally consumed by the well-off, such as luxury cars. Other measures include widening the tax base to include services of liberal professions. These tax reforms, in addition to the authorities’ plan to phase out a temporary tax on corporate profits, will stimulate investment—which will in turn create more jobs and increase living standards over the long run. Finally, a reinforced effort to improve tax administration will be helped by a new large taxpayer unit that will also target the collection of tax and customs arrears that amount to 6 percent of GDP; such measures will help ensure that all tax payers contribute their fair share.