IMF Executive Board Concludes 2010 Article IV Consultation with TunisiaPublic Information Notice (PIN) No. 10/121
September 1, 2010
Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.
On August 27, 2010, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Tunisia.1
Thanks to sound policies and reforms implemented over the years, Tunisia entered the global crisis with strong fundamentals. The authorities’ timely and adequate policy response contributed to mitigating the impact of lower external demand in 2009. Moreover, the financial sector was not affected by the global financial crisis, as banks continued to rely on steady domestic resources. As a result, real gross domestic product (GDP) growth exceeded 3 percent in 2009. With solid exports of services and remittances as well as lower imports, the current account deficit declined and external reserves increased to the equivalent of 6 months of imports of goods and services by end-2009. Inflation remained moderate at 3.7 percent on average.
Economic growth has gathered momentum since mid-2009, on the back of the recovery in exports and solid domestic demand. At the same time, with even stronger import growth, the current account deficit widened significantly and external reserves declined during the first part of 2010, while remaining at a comfortable level. For the year as a whole, as the recovery in Tunisia’s main partners is expected to be modest, Tunisia’s real GDP growth is projected to reach 3.8 percent, supported by a rebound in industrial activity and investment, while agricultural performance will likely be weaker than last year. Inflation edged up slightly to5 percent (year-on-year) in May 2010, due to rising food prices, but non-food price increases have remained very moderate at around 3 percent.
Risks to the outlook are related to the significant downside risks to growth in Tunisia’s European partners, entailing a possible escalation of financial stress and contagion and a more severe impact than currently expected of the planned fiscal consolidation on still-weak domestic demand. The strength of the recovery in Europe will determine to a large extent the pace of Tunisian exports growth, tourism receipts and remittances. On the other hand, the recent depreciation of the euro could boost exports of the euro area, and could benefit Tunisian exports in sectors such as electrical and mechanical industries. The medium-term outlook is subject to similar risks, with Tunisia’s traditional partners expected to be a less buoyant source of external demand than prior to the crisis.
Executive Board Assessment
Executive Directors noted that Tunisia weathered the global crisis well, largely reflecting its sound macroeconomic management and structural reforms over the last decade, and timely policy responses since the onset of the crisis. Nonetheless, Directors observed that risks to the outlook remain on the downside given the economy’s high dependence on trade with Europe. Amid continued uncertainties for the external environment, they emphasized the need to maintain macroeconomic policies that support the recovery and to intensify structural reforms that would enhance competitiveness, diversify exports, and promote job creation.
Directors agreed that the fiscal stance in 2010 strikes the right balance between supporting growth and preserving the significant gains achieved in reducing the level of public debt. They welcomed the commitment to resume fiscal consolidation, starting with the 2011 budget, and to further bring down the public debt. This will help maintain investors’ confidence and retain sufficient fiscal space to mitigate the impact of possible future shocks. To that end, Directors stressed the importance of following through with plans to expand the tax base, reform the social security system, and contain public spending on wages and food and fuel subsidies, while maintaining public investment on infrastructure.
Noting that credit to the economy continues to grow strongly, Directors concurred that monetary and exchange rate policies should be geared toward avoiding a build-up of inflationary pressures and ensuring that the recent weakening of the external balance does not persist. They considered that the authorities’ medium-term objectives to move to inflation targeting, full convertibility of the dinar, and an open capital account could help the economy to adapt better to changes in the external environment. At the same time, Directors stressed that significant preparatory measures are still needed, particularly continued strengthening of the banking system, further deepening of the foreign exchange market, and improving the effectiveness of monetary policy transmission. While noting the progress achieved in strengthening the financial system, Directors encouraged the authorities to move forward with plans for further improvements, including measures that would lead to a continued reduction in the level of non-performing loans and strengthen financial sector supervision.
Directors stressed that continued structural reforms remain critical to boost growth, enhance competitiveness and address the problem of persistent high unemployment, particularly among the young. They welcomed the envisaged measures to increase productivity by improving the business environment, reforming labor market policy, increasing capital investment, and modernizing and strengthening the financial sector.