Statement by the IMF Mission to Tunisia

Press Release No. 08/148
June 23, 2008

An International Monetary Fund (IMF) mission headed by Mr. Abdelhak Senhadji visited Tunis from May 27-June 9, 2008, to conduct the regular consultation under Article IV of the IMF Articles of Agreement, which requires an annual review of the economic policies of all IMF member countries.

The mission issued the following statement in Tunis on June 9, 2008:

"The discussions focused on economic policies as well as the short- and medium-term economic outlook. The mission held wide-ranging discussions with H.E. Mr. T. Baccar; Governor of the Central Bank of Tunisia (BCT); as well as with H.E. Mr. R. Kechiche, Minister of Finance; H.E. Mr. N. Jouini, Minister of Development and International Cooperation; H.E. Mr. A. Chelbi, Minister of Industry, Energy, and Small and Mediumsized Enterprises; H.E. Mr. A. Chaouch, Minister of Social Affairs, Solidarity, and Tunisians Abroad; H.E. Mr. R. Touiti, Minister of Trade and Handicrafts; H.E. Mr. K. Lajimi, Minister of Tourism; H.E. Mr. M. Bouden, State Secretary to the Minister of Finance; H.E. Mr. A. Daâloul, State Secretary to the Minister of Agriculture and Water Resources; and H.E. Mr. A. Triki, State Secretary to the Minister of Development and International Cooperation. The mission also met with other members of the government and the administration, representatives of the banking sector and the business community, and with social partners. The IMF staff wish to express their deep appreciation to the Tunisian authorities for their excellent cooperation, the high quality of the discussions, and their customary warm hospitality and full availability.

"Good economic management and social policy are continuing to yield results, as evidenced by accelerated growth and improved social indicators, and a stable macroeconomic position.

"Tunisia recorded an excellent economic performance in 2007. Growth in real GDP accelerated to 6.3 percent, contributing to lower unemployment. The BCT's prudent monetary policy contributed to reducing inflation to 3.1 percent, although it recently picked up again, primarily on account of new increases in world prices for food and petroleum products. The current account deficit, while remaining sustainable, deteriorated from 2 percent of GDP in 2006 to 2.6 percent in 2007, largely on account of declining terms of trade. The current account deficit has nonetheless been comfortably financed by foreign direct investment, as reflected by an increase in international reserves to over US$8½ billion at the end of first quarter of 2008. The fiscal deficit stayed within the 2007 budget target of 3 percent of GDP in spite of higher subsidies on food and petroleum products. The prudent fiscal policy and the use of a portion of the privatization proceeds helped reduce the public debt from 53.9 percent of GDP in 2006 to 50.9 percent in 2007.

"The proactive policy pursued by the authorities helped to further strengthen the soundness of the banking system, as reflected in particular by a decrease in nonperforming loans (NPLs) to total loans ratio from 19.3 percent in 2006 to 17.3 percent in 2007 and an increase in the provisioning ratio from 49.2 percent in 2006 to 53.8 percent in 2007.

"The challenging international environment is expected to slow down economic activity to some extent but the outlook remains encouraging. Real GDP growth in 2008 is expected to remain relatively strong at 5.5 percent. Inflation should be around 5 percent. Rising world prices of food and petroleum products will bring about a significant increase in subsidies. Nevertheless, the fiscal deficit should be kept within the budget limit of 3 percent. The current account deficit should remain in the 3-3½ percent of GDP range. The medium-term outlook remains favorable, with mega-projects expected to support growth. Given the scale of these projects, it is desirable to rapidly incorporate them into the medium-term macroeconomic framework in order to better manage their impact and control any potential risks, particularly those associated with real estate projects.

"The major challenge at present is to limit the impact on inflation and growth from rising world prices of food and petroleum products and global financial turbulence in order to further reduce the unemployment rate which is still relatively high, particularly among young graduates. This requires pursuing structural reforms and strengthening Tunisia's macroeconomic position. In this context, the mission considers that the prudent monetary policy pursued by the central bank is appropriate but may require additional tightening if inflationary pressures should intensify. Monetary policy should also be supported by a more flexible exchange rate policy. On the budgetary side, the authorities are faced with a delicate tradeoff between the need to maintain the purchasing power of Tunisians in the face of rising international prices of food and petroleum products while preserving fiscal sustainability over the medium to long term. Given the very rapid increase in direct and indirect subsidies related to these products (which the authorities currently estimate at 7.1 percent of GDP), and the strong likelihood that the current high world prices will persist, the ongoing reform of the subsidy system to improve its targeting should be continued in conjunction with the implementation of the energy conservation policy.

"The financial system should undergo further strengthening to enable it to withstand the potential shocks to which Tunisia may become exposed as it pursues its integration to the global economy. In particular, it is important that the regulatory and supervisory frameworks are continuously adapted to reflect developments in the international financial system. The mission encourages the authorities in their preparations for the implementation of Basel II.

"Tunisia has recently made significant progress in improving its business climate, as evidenced by the new law on economic initiative (promulgated in December 2007) designed to foster business creation. The authorities are continuing the gradual liberalization of the capital account. Finally, Tunisia is pursuing its efforts to strengthen its framework for Anti Money Laundering/Combating the Financing of Terrorism (AML/CFT).

"The authorities are continuing to further integrate the Tunisian economy into the regional and global economy, the current economic environment notwithstanding. Trade liberalization is progressing, particularly in the context of the Association Agreement with the EU, which culminated in free trade of goods in 2008; negotiations focusing on agricultural goods and services are under way. In addition, Tunisia is actively engaged in promoting regional integration and has entered into a number of bilateral trade agreements."

This review will conclude with the preparation of a report, which will be discussed by the Executive Board of the IMF in August 2008. The preliminary conclusions of the mission as well as the final report on the consultation will be published on the IMF's website: www.imf.org/external/country/TUN/index.htm. Reports for previous years and other IMF publications on Tunisia can also be found at that Internet address.



IMF EXTERNAL RELATIONS DEPARTMENT

Public Affairs    Media Relations
E-mail: publicaffairs@imf.org E-mail: media@imf.org
Fax: 202-623-6220 Phone: 202-623-7100