Tunisia—Interim Mission Concluding Statement
May 2, 2000
1. Economic performance in 1999 was very satisfactory in terms of growth,
inflation, and the external and budgetary accounts. In part, this was due to cyclical factors such
as an exceptional tourist season and a recovery in agricultural activity, but it is linked also to
strong underlying growth resulting from economic and social reforms sustained over several
years and strengthened by consistent and prudent macroeconomic management.
I. Short-term Prospects and Considerations
2. Economic growth will weaken somewhat in 2000 on account of both the
drought that has affected cereal production and a probable stabilization of tourism activity,
although this will in no way undermine internal or external stability. Vigorous growth in the
nonagricultural sectors and the upturn in Europe's economic activity should contribute to an
increase in real GDP of around 5 percent, in line with the authorities' latest forecasts.
3. The offsetting budgetary effects of increased oil prices and weaker cereal
production (via the cost of the food subsidy system) should help achieve the deficit objective of
the Budget Law (3.3 percent of GDP, excluding privatization).1 Nonetheless, it will still be necessary to adjust upward the prices of
subsidized food products. Also, given the budgetary risks created by the current price setting
system for petroleum products, it would be preferable to establish a more formal indexation
system linking domestic to international petroleum prices.
4. Although partly the result of exceptional factors (particularly higher cereal
imports), the anticipated widening of the external current account deficit (3.5 percent of
GDP in 2000) should be monitored closely. The authorities' intention to tap the international
financial markets in the very near future will help maintain an adequate level of foreign exchange
reserves in terms of imports. In an environment in which the conditions for accessing financial
markets remain volatile, it is equally important to ensure that reserves provide sufficient cover
for short-term financial obligations.
5. The very large increase in the money supply in 1999 (20 percent
growth for M2) is essentially the result of sizable inflows of foreign exchange. Downward
pressures on the money market rate, which could have resulted from these capital inflows, were
offset by an increase in fixed-term deposits linked to the redemption of transferable treasury
bonds (Bons du Trésor Cessibles) (and a consequent increase in the demand for
money). To the extent that the investments in fixed-term deposits will be redirected toward new
treasury bonds (BTCT/BTA), a lower level of monetary growth than currently forecast will be
required to maintain the money market rate at its current level. Indeed, the mission regards the
current level of real interest rates as appropriate.
II. Challenges for 2001 and the Medium Term
6. The mission identifies two major challenges: (a) strengthening economic
growth to respond, both to an acceleration in labor force growth—the labor force is set to
increase by 80,000 a year during the Xth Plan, as compared to 70,000 at present—and to the
expectations of continued increases in the standard of living and real wages. This means that
growth should be rich in both employment and productivity gains; and (b) establishing the
conditions for a sustainable reduction in the fiscal deficit to ensure the stability of the external
accounts as well as internal balance, and to offset the expected deterioration in social security
accounts over the coming years.
7. A faster growth rate is achievable only by strengthening private investment
which, while increasing, still accounts for only about half of the country's total investment.
There are two sides to this challenge:
- A macroeconomic one, aimed at strengthening economic competitiveness and
increasing overall profitability of investment; and
- A structural one, aimed at creating an institutional and regulatory framework
conducive to private investment, and ensuring that the latter is not directed toward unproductive
uses or toward the informal sector.
8. Already, significant progress has been made on the macroeconomic
front, particularly as regards the lowering of inflation, and thus of interest rates, economic
diversification, and integration into the global economy. Nevertheless, the forthcoming changes
in the external environment (gradual elimination of textiles quotas and tariff rollback) will have a
significant impact on profitability and hence on the competitiveness of Tunisia's economy in the
coming years—and could involve major resource reallocations across sectors. The tariff
rollback is equivalent to an appreciation of the real exchange rate (in terms of its effect on
competitiveness), justifiable only by equivalent productivity gains (and reductions in unit labor
cost). Insofar as these productivity gains will materialize only over a longer term horizon, it will
be necessary to resort to the flexibility offered by the exchange rate regime in order to maintain
competitiveness in the tradable goods sector. This is all the more important since the three-year
wage agreements of 1999 do not provide for any flexibility on wages until 2002.2
9. From the structural standpoint, the reform of the banking system and
expansion of the scope of private sector activity (through concessions and privatizations) will
create the conditions for increased investment and more jobs. However, the mission considers
that an acceleration of reforms (particularly privatization) and the establishment of a more neutral
incentive system will be needed to encourage domestic and foreign private investment, and
prevent capital from being directed toward unproductive or rent-seeking investments. The
mission notes that:
B. Public finances
- The privatization process could be accelerated and expanded to the services sector
with the aim of increasing the productivity of privatized enterprises, thereby reducing input costs
for the rest of the economy, and attracting foreign capital. The granting of a second GSM license
is an important step in this direction.
- The phasing of the tariff rollback and the tariff differentials created across products
(and places of origin) generate distortions that do not necessarily favor the most productive
sectors in the medium term. Faster progress toward reducing tariff levels and differentials would
therefore be helpful and could be achieved by lowering customs tariffs under the most favored
nation (MFN) regime.
- The many tax exemptions and nontax advantages granted to certain sectors or activities
undermine the transparency of the incentive system and run counter to the objective of a neutral
or simple tax system. In this sense, they could act as a brake on investment. Tax exemptions are
a useful instrument for correcting intrinsic or temporary market failures, and they should be
revised as economic conditions evolve. Thus the advantages granted to the export sector may no
longer be justified in a context of improved macroeconomic conditions and greater economic
- The remaining legal restrictions on the right of establishment, on foreign investment in
Tunisia, on Tunisian foreign direct investment abroad, and the distinction between offshore and
onshore sectors could hamper the development of sectors capable of generating growth and
employment (such as the services sector). Market segmentation may have responded to strategic
considerations in the past, but its appropriateness should be reviewed in light of Tunisia's current
state of economic development. Thus, for example, the distinction between offshore and onshore
loses significance in a context where lower tariff barriers will open the domestic economy to
10. While public finances show no signs of slippage at this time, they remain
vulnerable in the medium term because of: (a) their dependence on nonrecurrent revenue from
privatization—following these operations, dividend payments to the state will also
diminish; (b) the effects of the tariff rollback; (c) a tax base eroded by an accumulation of
exemptions; and (d) spending rigidities, particularly with regard to the wage bill. In this context,
it would be useful to undertake a diagnostic study of the role of the civil service and its
relationship to wage bill rigidity and to consider possible reforms of the tax system, with a view
both to restoring its neutrality and simplicity, and to expanding its base. In this regard, the staff of
the International Monetary Fund stands ready to assist the authorities in measuring the budgetary
impact of the tariff rollback and proposing offsetting measures based on an update of the study
already carried out in 1996.
III. Additional Observations
11. The mission congratulates the authorities on the initiatives they have taken
to increase economic policy transparency and, in particular, on their decision to publish the
preliminary conclusions of the missions, as well as the final consultation reports.
12. The mission also extends warm congratulations to the authorities on their
decision to participate in the pilot Financial Sector Assessment Program (FSAP) during
13. It was agreed that the next discussions, within the context of the
Article IV consultation, will take place in the fall of 2000.
1Including anticipated spending in connection with onlending, the budget deficit
will reach 3.7 percent of GDP, excluding privatizations.
2Wage increases on the order of 4 ½ percent
through 2001 will have to be justified by even larger productivity gains inasmuch as the prices of
those products subject to competition from imports will experience downward pressures.