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Tunisia and the IMF

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Public Information Notice (PIN) No. 03/98
August 7, 2003
International Monetary Fund
700 19th Street, NW
Washington, D.C. 20431 USA

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IMF Concludes 2003 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.

On July 25, 2003, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Tunisia.1

Background

Tunisia's favorable economic performance since the mid-1990s has been based on appropriate macroeconomic policies, a forward-thinking but gradual opening of the economy, particularly under the Association Agreement with the EU (AAEU), and well-targeted social policies. Until 2001, the authorities followed a constant real effective exchange rate rule to help maintain competitiveness. Since then, the central bank has let the dinar depreciate by more than required to keep the real exchange rate constant in order to partially offset the impact of reduced external protection on competitiveness.

The year 2002 was difficult for the Tunisian economy. Monetary and fiscal policies were tightened in response to excessive demand growth, while the economy was hit by a series of shocks: terrorist attacks, a slowdown in export markets, and a fourth year of drought. The policy tightening led to a rapid correction in the external balance, despite a drop in tourism and export growth. Even under these circumstances, real GDP advanced by 1.7 percent, and market confidence in Tunisia did not wane. Tunisian debt performed well in financial markets after September 11, 2001, and the country's investment grade rating was raised by Moody's in 2003 after the Iraq war. The external reserve position rose to the equivalent of three months of imports by the end of 2002 and has remained there since. External vulnerability indicators have improved.

The outlook for 2003 is favorable: GDP growth could once again exceed 5 percent with a rebound in export growth and agriculture. Recent indicators point to a resumption in tourism flows, although tourism poses a key risk to the outlook. The external current account deficit is forecast to narrow, in part because of continued slack domestic demand, while external reserves are projected to remain close to three months of imports. The exchange rate depreciated by 3.5 percent in real effective terms over the last 12 months.

The government will keep a tight rein on expenditures in 2003 in an effort to lower the budget deficit by 0.3 percent of GDP, although revenue growth was weak in the first quarter because of slow domestic activity and low import growth. This consolidation should reduce government debt as a share of GDP to below 60 percent. The central bank has eased monetary policy in response to slack credit growth, lowering the credit auction interest rate in March and June. There are no signs of inflationary pressures. Financial conditions in the banking sector have weakened with the drop in tourism and slower growth, but at present do not constitute a threat to economic stability.

The authorities turned their attention in 2002 to formulating a new macroeconomic policy framework based on three pillars: a well-defined monetary policy with clear objectives and operating targets, a floating exchange rate, and an open capital account. As a first step, the authorities began in 2002 with measures to deepen financial markets, including opening a small share of the treasury bill market to foreign investors and easing the requirements for opening bureaus de changes.

Unemployment remains high at 15 percent and economic growth has not been sufficient to meet the authorities' goal of raising real incomes to lower-tier OECD country levels. In this context, the authorities are implementing structural reforms with support from the World Bank, the EU and the African Development Bank under the Economic Competitiveness Adjustment Loan. The loan deals mainly with the private investment climate, telecommunications, and the financial sector. The World Bank is also preparing strategy papers on employment and the tourism sector, as well as a study on public debt management. Structural impediments to growth include labor market rigidities, an excessive state presence in the economy through price controls and government ownership, financial sector vulnerabilities, high overall trade protection, and a heavily-regulated onshore sector.

Tunisia continues to improve the quality and dissemination of statistical data and increase the transparency of its economic policies. Tunisia has published all Executive Board documents and staff mission statements in recent years, and intend to publish the 2003 Article IV Staff Report and Supplement.

Executive Board Assessment

Executive Directors commended Tunisia's solid economic performance since the mid-1990s, with robust economic growth, an improving external position, subdued inflation, and declining poverty. These results stemmed from sound and transparent macroeconomic policies, an improved regulatory framework, progress in trade liberalization, and well-targeted social policies. As became evident over the past two years, these advances have contributed to a more diversified economy better able to withstand shocks as well as enhanced Tunisia's credit rating and access to international capital markets. A key challenge going forward will be to accelerate steps to strengthen an open market economy in order to address remaining challenges, including the high levels of public debt and unemployment. Directors therefore welcomed and endorsed the authorities' plans to upgrade the policy framework. They applauded Tunisia's close cooperation with the Fund, viewing Tunisia as a worthy example of the effectiveness of partnership between national authorities and the Fund based on mutual trust.

Directors endorsed the authorities' plans to aim for fiscal consolidation over the medium term as part of the effort to increase public saving and lower the government debt. They commended the targeted reduction in the budget deficit in 2003 despite the adverse impact of sluggish domestic demand on government revenue. Directors noted that the authorities' room for fiscal maneuver in the event of adverse shocks is limited owing to the large wage and interest bills. They accordingly viewed the removal of fiscal rigidities as a key priority in the near term. In this context, Directors highlighted the need for reform of the civil service to increase its efficiency and cost-effectiveness as well as reduce the government wage bill. They also urged faster progress with the planned reform of the social security system.

Directors agreed that the proposed reform of the macroeconomic policy framework is appropriate in view of Tunisia's increasing integration with the world economy. They welcomed the planned move to a floating exchange rate regime as well as an open capital account, and considered the decision to allow the exchange rate to depreciate somewhat in real effective terms to be a first step in this direction. Directors stressed that full capital account liberalization should be delayed until the proposed revised monetary policy framework is established and the transition to a floating exchange rate is completed. They noted that the monetary framework should provide a nominal anchor for price stability—which would become the primary objective of monetary policy—and that exchange rate flexibility should help foster external equilibrium and enhance the economy's resilience to external shocks. Directors cautioned against continued external borrowing solely for the purpose of bolstering external reserves, and suggested that the adequacy of international reserves may be judged in relation to short-term indebtedness rather than only in relation to imports.

Directors welcomed the recent easing of monetary policy given the absence of inflationary pressures and the sluggish demand for credit. Going forward, most Directors generally supported the use of broad money (M3) as an intermediate target and reserve money as the operational target, and the discontinuation of credit growth targeting. Directors believed that further development of financial markets and effective flexibility of interest rates will be needed before interest rates can play a more prominent role in monetary policy transmission channels. They welcomed measures taken to deepen money and foreign exchange markets, including the limited opening of the treasury bill market to foreign investors and the easing of requirements for opening exchange bureaus. These measures should help foster competition and reduce the volatility of interest rates and the exchange rate.

Directors considered that structural reforms will need to be accelerated to reduce the role of the state in the economy, foster private sector activity, and boost productivity as well as investment. This will help to achieve a lasting rise in the rate of economic growth and create employment opportunities in the context of increasing economic integration. They attached high priority to financial sector reform, trade liberalization, and the creation of a level playing field for all economic participants.

In the financial sector, Directors welcomed the ongoing efforts to implement banking sector reforms based on the Financial System Stability Assessment (FSSA) report. They noted the FSSA's conclusion that the current level of nonperforming loans does not threaten macroeconomic stability. Directors nevertheless recommended that the authorities should move vigorously to strengthen the banking sector, so as to increase its efficiency, allow the proper functioning of the proposed new monetary framework, and, in due course, permit capital account liberalization. Actions to strengthen bank balance sheets could include expediting the collection of collateral, increasing provisioning and allowing its full tax-deductibility, and further reducing government ownership in the financial sector.

As regards the foreign trade sector, Directors welcomed the liberalization achieved by Tunisia in the context of its Association Agreement with the European Union, but expressed concern that in many other respects its trade regime remains complex and restrictive. In order to secure the full benefits of progressively greater economic integration, Directors urged the authorities to lower tariffs on products from non-EU countries, reduce the number of tariff rates, and review and adapt regional and bilateral trade accords to eliminate trade distortion. They also urged a reduction of nontariff barriers and a streamlining of customs procedures.

Directors reviewed the contribution that attractive tax and investment incentives have made to promote exports through the offshore regime during a period when the onshore sector remained subject to very high protection. They agreed with the view that the incentives extended to the offshore sector are no longer justified in view of the tariff reductions that place domestic and exporting firms on the same competitive footing with respect to tariff-free imports. Directors welcomed the authorities' plans to align the two systems in 2007, and several suggested that the authorities consider introducing an even simpler and more transparent system.

Directors commended the authorities' commitment to transparency, which has been reflected in substantial improvements in the quality and dissemination of data, subscription to the Fund's Special Data Dissemination Standard, and the decision to publish the conclusions of the Central Bank's Board meetings. They urged the authorities to address deficiencies in the reporting of data on nonfinancial public enterprises.

Directors noted the authorities' intention to consider including collective action clauses in future bond issues. They also urged the authorities to move forward vigorously with the proposed new legislation on anti-money laundering and combating the financing of terrorism.



Tunisia: Selected Economic and Financial Indicators, 1998-2003


         

Est.

Proj.

 

1998

1999

2000

2001

2002

2003


             

Production and income (percent change)

           

Real GDP

4.8

6.1

4.7

4.9

1.7

5.5

GDP deflator

3.0

3.1

3.3

2.7

2.3

2.1

Consumer price index (CPI), average

3.1

2.7

3.0

1.9

2.8

2.5

Gross national savings (in percent of GDP)

23.5

24.1

23.1

23.5

21.8

22.3

Gross investment (in percent of GDP)

26.9

26.3

27.3

27.8

25.3

25.5

             

External sector (percent change)

           

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

3.1

2.3

-0.4

13.2

3.8

22.1

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

4.9

1.6

1.0

11.3

-0.2

19.6

Trade balance (in percent of GDP)

-10.9

-10.3

-11.6

-12.0

-10.1

-9.2

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

-3.4

-2.2

-4.2

-4.3

-3.5

-3.1

Real effective exchange rate (depreciation -) 1/

-0.1

1.0

-1.7

-2.4

-1.2

...

             

Central government (percent of GDP) 2/

           

Total revenue, excluding grants

24.3

23.9

24.0

24.4

24.4

24.0

Total expenditure and net lending

27.9

27.8

27.8

28.1

27.9

27.1

Central government balance, excluding grants and privatization

-3.6

-3.9

-3.8

-3.8

-3.5

-3.1

Central government balance, including grants, excluding privatization

-3.2

-3.5

-3.7

-3.5

-3.1

-2.8

Total government debt (foreign and domestic)

56.3

60.0

60.7

62.4

61.6

59.2

 

 

Money and credit (percent change)

           

Credit to the economy

8.7

8.5

8.0

10.3

5.4

7.4

Broad money (M3)

6.0

18.6

13.2

11.3

5.2

8.4

Velocity of circulation (GDP/M3)

1.9

1.79

1.71

1.65

1.63

1.62

Liquidity aggregate (M4)

9.3

9.42

4.47

6.42

4.00

8.17

Interest rate (money market rate, in percent, end of period)

6.9

5.88

5.88

5.94

5.91

...

             

Official reserves

           

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

1.9

2.3

1.8

2.0

2.3

2.6

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

2.7

3.2

2.6

2.5

2.9

2.8

             

Total external debt (Short, medium and long term)

           

External debt (in percent of GDP)

56.5

60.1

59.7

60.2

61.0

57.2

Debt service ratio (percent of exports of GNFS)

19.2

18.5

22.6

15.6

17.2

16.4

 

 

 

 

 

 

 


Sources: Data provided by the Tunisian authorities; includes IMF staff projections for 2002, 2003

             

1/ IMF Information Notice System (average).

2/ Excludes the social security accounts.

3/ Includes grants, excludes privatization.


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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