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Tunisia and the IMF

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Public Information Notice (PIN) No. 02/62
June 19, 2002
International Monetary Fund
700 19th Street, NW
Washington, D.C. 20431 USA

IMF Concludes 2002 Article IV Consultation with Tunisia

Public Information Notices (PINs) are issued, (i) at the request of a member country, following the conclusion of the Article IV consultation for countries seeking to make known the views of the IMF to the public. This action is intended to strengthen IMF surveillance over the economic policies of member countries by increasing the transparency of the IMF's assessment of these policies; and (ii) following policy discussions in the Executive Board at the decision of the Board. The staff report (use the free Adobe Acrobat Reader to view this pdf file) for the 2002 Article IV consultation with Tunisia is also available.

On June 5, 2002, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Tunisia.1


Economic growth averaged 5.5 percent during the period 1996-2001, evidence that gradual liberalization of the economy has produced results in terms of productivity, growth, and economic diversification. Real GDP grew by 5 percent in 2001 compared to 4.7 percent in 2000, despite a contraction in agricultural output of 1.5 percent caused by a third consecutive year of drought. Activity was particularly robust in the mechanical-electrical industry, which grew by 14 percent, and the textile industry, which expanded by 12 percent. However, unemployment remains high at about 15 percent.

The authorities now face the challenge of reining in strong demand which has put pressures on the external position and lowered foreign exchange reserves. While exports continued to be an engine of growth, domestic demand grew by 5.2 percent, slightly ahead of GDP growth. Thus, the savings-investment gap did not improve in 2001 and the external current account deficit remained unchanged at 4.2 percent of GDP in 2001. External reserve coverage fell to an average level of 2.2 months worth of imports during the year, although the first disbursement of the World Bank's Economic Competitiveness Adjustment Loan in December helped raise foreign exchange reserves to 2.5 months worth of imports, unchanged from end-2000.

Fiscal policy maintained a broadly neutral stance in 2001: the deficit of the central government (excluding grants and privatization receipts) was 3.5 percent of GDP, close to the budget target for 2001. The central bank tightened its monetary stance in response to the deteriorating external position and the expansion of liquidity aggregates during the year. Nevertheless, credit to the private sector expanded by more than 10 percent from 8 percent in 2000, fueling strong economic activity and higher imports, although this had little effect on inflation. CPI inflation dropped to 1.9 percent, its lowest rate since 1972 as the increase in private sector credit flowed into higher imports, administered prices (which represent one third of the index), were raised only slightly, and the reduction in tariffs on manufactured goods helped keep prices down.

The authorities followed a more flexible approach to exchange rate policy, allowing the average real effective exchange rate to depreciate by 0.6 percent in 2000 and by 2.5 percent in 2001. After increasing significantly less than for other emerging markets, spreads on secondary market debt have now returned to the levels prevailing before September 11. Standard and Poor's reconfirmed its BBB rating on Tunisian foreign currency long-term sovereign credit, and in May 2001, Fitch upgraded Tunisia's foreign currency debt rating from BBB- to BBB.

Progress in structural reform was concentrated in the telecommunications and financial sectors and the second GSM license was sold in March 2002. While some headway was made at restructuring and modernizing the financial sector, increasing bank efficiency, and improving loan recovery, the banking system needs to be put on a more commercial footing. Tariff reduction under the Association Agreement with the European Union moved ahead broadly as scheduled and Tunisia's simple average tariff rate declined from 35.9 percent in 2000 to 28.3 percent in 2001. However, the economy remains highly protected with a rating of 8 (10 is most restrictive) under the IMF's trade restrictiveness index. Privatization results fell short of objectives in 2001: of the 41 enterprises scheduled for privatization, only about 15 small companies were sold. The government's industrial restructuring program "mise à niveau" has by most measures contributed to upgrading the competitiveness of domestic producers.

The past years of robust economic growth are likely to be cut short in 2002 by the impact of the events of September 11, 2001 on tourism flows, and by a further drop in agricultural production as a result of continued drought. These two factors are likely to weigh on the external position and could push the external current account deficit higher in 2002 if macroeconomic policies are not adjusted.

The authorities continue to increase the transparency of their policies: Tunisia subscribed to the Special Data Dissemination Standard (SDDS) in June, 2001 and published the 2000 Article IV Staff Report, the Preliminary Conclusions of the 2002 Article IV mission and the Observations of the 2001 Interim Consultation Mission. The authorities intend to publish the 2002 Article IV Staff Report, and the Financial Sector Stability Assessment (FSSA).

Executive Board Assessment

Directors commended Tunisia for its strong economic performance and social achievements, which they attributed to well-coordinated macroeconomic, structural, and social policies implemented over the past several years. These policies had borne fruit in higher productivity and economic growth, a more diversified economy, and an improved credit rating and easier access to international capital markets. Directors observed that there is scope to further improve on this performance in the future by accelerating the pace of liberalization and transition to a fully market-driven and open economy. In this respect, they stressed the importance of more comprehensive trade and price liberalization measures and a reduction in the role of the state in the economy.

Directors noted that strong domestic demand and a less favorable external environment have put pressure on prices and the external balance and have lowered foreign exchange reserves. With Tunisia's saving-investment gap rising, Directors endorsed the authorities' commitment to tighten monetary and fiscal policies in order to maintain macroeconomic stability, while noting that the measures in place so far might not sufficiently strengthen the external position. They welcomed the information that the authorities had begun to implement some parts of the additional expenditure measures that they had formulated as a contingency. Most Directors, however, advised proceeding promptly with further adjustment measures to contain pressures on the external current account, particularly in view of the likely adverse impact of September 11 on tourism, and the adverse effects of continued drought on agricultural production.

Directors also urged the authorities to address existing fiscal rigidities, particularly the high wage bill. Indeed, they believed that more fundamental reforms are necessary to lower the wage bill and improve the efficiency of the civil service. A number of Directors also recommended phasing out price subsidies as soon as possible given their inefficiency and distortion of market signals. The authorities' plan to reconsider tax holidays was welcomed, and several Directors urged further rationalizing these. With respect to medium-term challenges, Directors commended the authorities for undertaking a comprehensive review of the social security system and for taking measures to ensure its near-term viability.

Directors noted with satisfaction the drop in inflation in 2001, and commended the authorities for their increasingly active stance in monetary management. In particular, Directors welcomed the increased reliance on interest rate signals in the conduct of monetary policy. In view of the changing policy environment—reflecting increased economic openness and liberalization of trade and capital flows—Directors encouraged the authorities to establish a fully transparent monetary policy framework. They supported the adoption of price stability as the central bank's main objective, while cautioning that the use of a monetary aggregate as an intermediate target would require development of the ability to accurately forecast money demand.

Directors noted that Tunisia's approach to exchange rate policy had served the economy well. In the context of the changing policy environment and a more market-driven monetary policy, however, Directors believed it would be appropriate to gradually reduce intervention in the foreign exchange market, after putting in place a sound and transparent monetary framework. They noted that monetary policy should, over time, become the anchor for price and exchange rate expectations.

Directors noted the importance of ensuring the continuing competitiveness of the Tunisian economy. They welcomed the authorities' recent use of a broader range of indicators to gauge the competitive position of producers. Directors took note of the staff's finding that the current level of the exchange rate appeared broadly appropriate, and stressed that exchange rate depreciation should not be used as a substitute for the fiscal and monetary adjustment required to bring domestic demand under control.

Directors welcomed the authorities' plans to liberalize external capital flows, while agreeing that it would be most important to prepare the groundwork prudently before moving to an open capital account. Key priorities in this regard would be to establish a transparent and soundly-based framework for monetary policy that would anchor inflationary expectations; to implement a flexible exchange rate regime; and to further strengthen the banking system and address budgetary rigidities. Directors also endorsed the staff's preliminary recommendations for diversifying the sources of external financing.

Recognizing that the authorities' overriding policy objective over the medium term is to lower unemployment, Directors underscored the importance of intensifying structural reforms and making further progress in fiscal consolidation particularly in view of the authorities investment and savings goals. On the structural front, they stressed that further reforms are required in the following areas: the financial sector, trade liberalization, and privatization.

Directors welcomed the steps taken toward strengthening the banking system, while stressing the importance of further action to place it on solid ground and a more commercial footing. They viewed this transformation as essential for the success of the proposed reforms in monetary and exchange rate policy, and also as a precondition for the effective application of banking supervision and prudential regulation. In this respect, Directors encouraged the authorities to fully implement the recommendations contained in the FSSA report.

While Tunisia made some progress in reducing import tariffs in 2001, Directors observed that the economy remains highly protected. They emphasized the importance of moving forward in all areas of the Association Agreement with the European Union, namely trade in services, competition rules, and the treatment of state monopolies engaged in commercial activities. In addition, Directors stressed that reduction in tariffs with the EU should be accompanied by further tariff reduction on products from non-EU countries and by harmonization of the array of different bilateral trade accords in order to avoid trade distortion.

Directors noted the recent progress in liberalizing the telecom sector with the sale of a second GSM license. Nevertheless, they urged the authorities to intensify privatization efforts. They welcomed the work underway in collaboration with the World Bank in promoting further privatization, improving the private investment climate, and reviewing labor-market trends and government policies in an effort to identify impediments to employment growth. A number of Directors pointed to a possible relationship between labor market regulations and the high rate of unemployment, and suggested that additional steps be taken to eliminate rigidities, including introducing greater flexibility into the wage-setting process and adapting labor market regulations to the needs of a more flexible labor market.

Directors commended the authorities' commitment to transparency, including the publication of the staff report; and they welcomed the substantial improvements in the quality and dissemination of data as well as the subscription to the SDDS in June 2001. Directors urged the authorities to continue this positive performance and to address deficiencies in the reporting of data on non-financial public enterprises and labor market and wage developments.

Directors took note of the authorities' participation in the Fund's work on anti-money laundering and combating the financing of terrorism and welcomed the initiatives already launched by Tunisia in this area. They urged the authorities to establish a legislative framework unifying these measures as soon as possible.

Tunisia: Selected Economic Indicators












(Annual percent change; unless otherwise indicated)

Production and income


Real GDP







GDP deflator







Consumer price index (CPI), average








Gross national savings
(in percent of GDP)







Gross investment (in percent of GDP)








External sector (percent change)


Exports of goods, f.o.b. (in US$)







Imports of goods, f.o.b. (in US$)







Trade balance (in percent of GDP)







Current account, excl. grants
(in percent of GDP)







Real effective exchange rate
(depreciation -) 1/








(In percent of GDP)

Consolidated central government 2/


Revenue, excluding grants







Total expenditure and net lending







Consolidated balance, excl. grants and privatization







Consolidated balance, incl. grants and privatization







Central government balance, excl grants and privatization 3/















(Annual percent change; unless otherwise indicated)

Money and credit


Credit to the economy







Broad money (M3)







Liquidity aggregate (M4)







Interest rate (money market rate, in percent)








Official reserves


Gross official reserves (in billions of US$, end-period)







In months of imports of goods, c.i.f.








Total external debt
(Short, medium and long-term)


External debt (in percent of GDP)







Debt service ratio (in percent of exports of good and services)







Sources: Data provided by the Tunisian authorities; includes IMF staff projections for 2001 and 2002.

1/ IMF Information Notice System (average).

2/ Includes the social security accounts (CSS), unless otherwise indicated.

3/ Excludes the social security accounts (CSS).

1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities.


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