Mission Concluding Statements
Tunisia and the IMF
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1. The International Monetary Fund (IMF) staff mission would like to thank the authorities for their excellent cooperation and their warm welcome. The technical discussions that took place during the mission reflect the usual high standards of dialogue between the authorities and the Fund staff.
2. Economic performance in 2003 is encouraging. While higher growth is attributable in part to favorable agricultural conditions, it also reflects a good behavior in the non-agricultural sector driven by strong export performance. This performance is even more noteworthy since it occurred in a context of weak European demand. Further, it helped reduce the trade deficit, and contributed to strengthening the country's external position, despite the decline in tourism revenue. Prudent fiscal and monetary policies accompanied by flexible exchange rate management played a decisive role in this achievement.
3. Tunisia is now well positioned to benefit from the recovery in global economic activity expected for 2004, which may lead to an acceleration of non-agricultural activity. Sustainable growth, however, will depend on economic policies aimed at addressing three major challenges:
I. Fiscal Policy
4. The government is continuing its prudent fiscal policy despite difficult conditions. The fiscal deficit (excluding grants and privatization proceeds) is projected to decline from 3.5 percent of GDP in 2002 to 3.3 percent in 2003, allowing a reduction in public debt from 61.5 percent of GDP at end-2002 to 59.5 percent this year. Excluding onlending, which increased substantially during the year, the deficit would amount to approximately 2.9 percent of GDP, close to the original objective in the 2003 budget.
5. The level of public debt, however, remains high compared to that of other emerging countries with similar sovereign debt ratings. To pursue the objective of reducing debt as a share of GDP in the medium term, continued fiscal consolidation is needed.
6. The mission is pleased to note that the draft budget law for 2004 is aimed in this direction. The fiscal deficit (excluding grants and privatization proceeds) is projected at 2.7 percent of GDP due to both current and capital expenditure savings and a substantial decline in net lending. In the absence of inflationary and external pressures, the mission believes that this adjustment is adequate for 2004, and should allow to reduce the public debt to 57.8 percent of GDP.
7. The authorities are encouraged to refrain from undertaking unbudgeted onlending activities that may lead to fiscal overruns. Moreover, onlending entails the risk of default, thereby transferring the debt burden to the government.
II. Strengthening the Monetary and Exchange Policy Framework
8. The Central Bank of Tunisia (BCT) is pursuing its efforts to liberalize and stimulate the foreign exchange market. The reduction of the surrender requirements from 50 percent to 30 percent and the imminent elimination of banks' obligation to clear their foreign exchange positions, nivellement, can be expected to further deepen this market. In addition to having its beneficial effects, authorizing nonresidents to hold Treasury papers may contribute to this deepening on the government securities market.
9. With a view to increasing the flexibility of the exchange rate, the BCT may consider discontinuing the posting of a bid/ask spread. Such a step would not prevent the BCT from intervening in the market to pursue its exchange policy, while giving market forces a more important role. Subsequently, the BCT could gradually reduce its presence on the market.
10. Monetary policy should become more active in 2004, with the introduction of a broad money growth target, expected in the 8-8.5 percent range and compatible with an inflation objective of 2.5 percent. Base money growth will be the operating target. Bank liquidity management will, accordingly, need to be modified to calibrate BCT interventions in relation to monthly base money targets. In this connection, BCT staff and the mission worked on monthly projections for base money. Enhanced coordination between the BCT and the Treasury will be necessary to improve these projections.
11. Targeting the base money will need to go along with a greater role of the money market in liquidity management. In this regard, the new law on repurchase agreements recently promulgated should help foster a deepening of the interbank market by allowing for collateralization of interbank transactions. Interest rates in a more dynamic interbank market will provide the BCT with important signals. It is important to note that base money targeting will not prevent the BCT from having a policy rate for its announcement effect, and on which a widened interest rate corridor could be based.
III. Structural Reforms
12. The need for more dynamic private investment in Tunisia calls for a continuation of the structural reforms that have been in progress for several years. The efforts should focus on economic opening and other reforms that would create a level playing field and a more favorable business environment in general. Objectives include:
IV. Other matters
13. To enhance the monitoring of economic developments, the authorities have set up the Observatoire National de la Conjoncture Economique. The IMF has offered to provide technical assistance to support this effort.
14. The mission notes that the authorities have agreed as usual to the publication of the aide-mémoire.
IMF EXTERNAL RELATIONS DEPARTMENT