Tunisia -- Preliminary Conclusions from the IMF Interim Consultation Mission
October 28, 2002
1. The mission which visited Tunis from October 21, 2002 would like to thank the authorities for their full availability, excellent cooperation, and warm welcome.
2. Tunisia's favorable performance both in terms of growth and social progress have been the result of economic reforms implemented over the last ten years. Thanks to the diversification of its economy, Tunisia has recorded positive growth in 2002 despite a fourth year of drought that caused agricultural output to fall to a record low, a weakening in global demand that caused a slowdown in exports, and a drop in tourist revenues following the events of September 11, 2001.
I. Short term outlook and the challenges for macroeconomic policies
3. The new monetary policy stance taken since April 2001 to ensure that domestic demand growth remains in line with output growth is achieving its objectives. The external current account deficit is likely to be around 3.8 percent of GDP in 2002, down from 4.3 percent of GDP in 2001 despite the increase in agricultural imports and the drop in tourist revenues.
4. A prudent fiscal policy stance has also helped to achieve this result. Indeed, despite a decline in revenues due to the economic slowdown and a decrease in imports, significant expenditure cuts, particularly in capital expenditures, and higher nontax revenues limited the budget deficit (excluding grants and privatization gains receipts) to 3.2 percent of GDP.
5. The external reserve target of a three months imports coverage by end-2002 should also be reached. This is mainly due to the reduction in the external current account deficit as well as revenues derived from the sale of the second GSM mobile telephone license, capital raised on the international financial markets (at particularly favorable terms), and financial support from the World Bank, the European Union, and the African Development Bank under the ECAL III loan.
6. This improvement in the external position has taken place in an environment where the Tunisian economy has demonstrated its resilience to adverse shocks. Agricultural sector activity has fallen significantly nonagricultural GDP will grow at approximately 3.8 percent, and overall GDP at 2 percent.
7. At this stage it is difficult to make a precise assessment of the outlook for 2003. There are significant risks linked to a possible deterioration in the international political environment that could affect Tunisia's external position, which depends on tourism flows. In the context of 2003 budget preparations a cautious baseline scenario has been retained in view of risks that would result from an eventual attack on Iraq.
8. The mission considers that it would be prudent to build an external reserve buffer above the target set for year-end, which could help face the risks that could stem from the international political situation. This could be achieved by accelerating the reforms in the context of the ECAL III, which would make possible the disbursement of at least two of the three remaining floating tranches. It will also be crucial to remain on the course of prudent monetary and fiscal policies for the remainder of 2002, so as to start 2003 on the best possible footing.
9. Assuming no new external shocks and a modest recovery in demand in Europe, the Tunisian economy should grow by 5.5 percent in 2003, driven by a pick-up in exports (which should grow by 8.5 percent in real terms) and tourism (+13 percent in value terms), and by a recovery in agricultural production (+11 percent). Inflation should remain moderate at about 3 percent.
10. The external current account deficit could remain at 3.8 percent of GDP in 2003. This deficit would be financed by foreign direct investment, which has shown its resilience in 2002, by a modest issuance on international financial markets, both by the government and by public and private enterprise, and by the continued financial support from international institutions, such as the World Bank and the African Development Bank. In this scenario, external reserve coverage should remain above three months of imports.
11. The mission believes that the authorities' fiscal and monetary policies will continue to contribute to maintaining macroeconomic stability in 2003. The government draft budget for 2003 which provides for a reduction in the deficit (excluding privatizations and grants) of 0.3 percent of GDP, goes in the direction of fiscal consolidation and should lead to a further reduction in the public debt-to-GDP ratio. The mission does not believe that domestic demand management requires more ambitious deficit reduction targets. Moreover, the mission does not see any reason to modify the current monetary policy stance, which has helped to control inflation and has brought economic growth to sustainable levels following the overheating in 2000-01.
12. With regards to exchange rate policy, the central bank's flexible approach has had the desired results and the mission considers that it should continue until the conditions for reducing central bank intervention in the foreign exchange market are fully met. The mission encourages the authorities to move forward with implementation of the measures identified at the time of the last Article IV consultation discussion aiming at a reduction of the central bank's role in the foreign exchange market.
13. Should the risks related to a deterioration of the international political situation materialize, which would likely result in a further drop in tourism revenues and a deterioration in the external position, the macroeconomic policies would need to be reassessed. To limit its impact on external indebtedness ratios, the policy response could combine further adjustment in financial policy with additional concessional financing.
II. The Program for Strengthening Macroeconomic Policy and the Financial Sector
14. The mission enquired about the status of the program for macroeconomic policy reform prepared by the authorities and discussed in the context of the last Article IV consultation.
A. Monetary Policy
15. The mission was pleased to note that the central bank now accepts all good-quality credits as collateral in its refinancing operations with commercial banks and thus no longer gives preference to credits on "priority" sectors.
16. The central bank has adopted other measures to develop monetary policy instruments and promote private savings. In particular, these measures include changes in the computation of the minimum reserve requirements, which aims at promoting banks' use of medium- and long term resources, and changes in the regulation for repurchase agreements, which should help establish a "yield curve."
17. The publication of the conclusions of the monetary policy meetings of the central bank's board of directors is a significant step in the direction of greater transparency. Transparency is essential to improve the effectiveness of monetary policy, since it allows to clarify and explain the macroeconomic outlook and the direction of financial policies.
18. The mission agreed with the authorities that a preparatory study on the choice of an intermediate monetary target will be carried out in the context of the next Article IV consultation discussion. Once an intermediate target has been established, the Fund's Monetary and Exchange Affairs Department (MAE) could provide technical assistance to clarify the operational modalities for the Central Bank of Tunisia to achieve this target.
B. Strengthening the Financial Sector
19. The central bank is implementing several of the recommendations of the Financial Sector Assessment Program (FSAP). These efforts, which aim in particular at reducing non performing loans and improving the credit culture, are essential for the soundness of the banking sector. Tunisian banks are significantly exposed to the tourism sector which would be hit by a possible worsening of the international political scene. In this event, the banking sector will have to be monitored even more closely to minimize the possible deterioration in their financial position.
C. Government Finance
20. The mission congratulates the authorities for maintaining the budget deficit reduction target despite the slowdown in economic activity and the drop in imports. Tunisia's fiscal position remains solid as shown by the recent decline in the public debt to GDP ratio and the primary balance surplus expected in 2002.
21. The authorities responded to lower than expected tax revenues with reduction in capital spending. In the future, the mission believes efforts should focus on reducing current expenditure. This year, the savings achieved in debt servicing have been more than offset by the wage increases awarded in July 2002 in the context of the three-year wage negotiation process. While these increases appear justified, they make even more urgent the need to limit new recruitments in the civil service and more reliance on personnel redeployment.
22. As a follow up to the technical work already begun by the Fund to facilitate trade between Maghreb Arab countries, the mission wished to point out that technical assistance could be organized to modernize the customs procedures, and facilitate regional trade integration.
III. Other matters
23. It was agreed that the next discussion would take place in the context of the Article IV consultations in March-April 2003.
24. The authorities intend to publish this note.