IMF Loan Aims to Help Tunisia Boost Growth, Protect Poor
IMF Survey Online
June 17, 2013
- Loan aimed at preserving macroeconomic stability, boosting growth, protecting the vulnerable
- Program ownership, political and societal buy-in are key to success
- Private sector development crucial for sustainable growth and job creation
The IMF Executive Board on Friday, June 7, approved a $1.75 billion loan for Tunisia to support the authorities’ economic agenda aimed at strengthening fiscal and external buffers, and fostering higher and more inclusive growth, including through addressing weaknesses in the banking sector and improving the business environment.
Speaking to the IMF Survey magazine, IMF Mission Chief for Tunisia Amine Mati explains the underlying reasons for the loan and the main ingredients of the government’s economic reform program.
IMF Survey: Why does Tunisia need financial assistance from the IMF?
Mati: After a severe recession in 2011, real GDP growth picked up to about 3.6 percent in 2012. The main drivers, in addition to base effects, were recovering tourism, foreign direct investment inflows, and remittance receipts.
But at the same time, unemployment remains high while external and fiscal imbalances have been increasing. The current account deficit has deteriorated on account of weaker exports, due to slowdown in Europe, and a rise in imports. A higher wage bill and rising subsidies, in response to increasing social demands, drove government spending, contributing to a wider fiscal deficit in 2012. Higher food and fuel prices – triggered mostly by increases in international prices – pushed overall inflation above 6 percent and contributed to further increase in the fiscal and current account deficits. In addition, critical weaknesses remain in the banking sector, despite recent steps to improve banking supervision and strengthen regulation. Together, these add up to large burden on the economy at a time when the international economic environment remains uncertain.
To ease these pressures and to energize the economy, the authorities have designed an economic program, which aims at restoring fiscal space, rebuilding foreign reserves, reducing banking sector vulnerabilities and fostering more inclusive growth. The IMF’s financial support will help the authorities achieve those goals by restoring investors’ confidence and rebuilding reserve cushions, which will make the economy more resilient to adverse economic developments.
IMF Survey: Can you explain what a Stand-By Arrangement is and why it’s right for Tunisia right now?
Mati: The Stand-By Arrangement (SBA) is the IMF’s workhorse lending instrument for middle-income member countries like Tunisia that have a balance of payments need —that is their foreign currency outflows exceed their inflows. Interest rates on SBA loans are generally lower than what countries would pay to raise financing from private markets. In the case of Tunisia’s SBA, interest rate is 1.08 percent (an additional 2 percent charge is added on the borrowing amount that exceeds 300 percent of quota, thus increasing repayment amount for the last 6 months of the program).
IMF Survey: What are the main policy components of Tunisia’s economic program?
Mati: The first set of policies supported by the program aims at macroeconomic stabilization through appropriate mix of fiscal, monetary, and exchange rate policies. Restoring fiscal space will be accompanied by a better composition of public spending for priority social and capital programs that support growth and poverty reduction. A prudent monetary policy will aim at containing inflation while safeguarding the stability of the banking sector. Greater exchange rate flexibility will contribute to improving Tunisia’s external competitiveness and rebuilding foreign reserves.
The government has already started many reforms. The authorities, for example, have taken very courageous measures on increasing energy and electricity prices to reduce untargeted subsidies last March. These measures reduce expenditures that largely benefit the well-to-do segments of the population, and thus will make a significant contribution towards restoring the fiscal space needed for higher pro-growth and pro-poor spending.
The second set of reforms in the authorities’ agenda that are supported by this program will lay the foundations for more inclusive growth and lower regional disparities and social inequalities. They include fixing vulnerabilities in the banking sector, which is essential to support lending and economic recovery. Some progress has been made in this area. However, the authorities still plan to do more by strengthening banking supervision and addressing weaknesses in Tunisia’s three public banks. On the latter, an auditing process has started, which will help identify the business model for these banks and their possible recapitalization needs.
The program also aims at promoting private sector development through corporate tax reform, a new investment code and a reduction of red tape. These measures should improve the business environment and sustain growth.
The third set of measures aims at protecting the most vulnerable groups and promoting equity by moving towards a better targeted social safety net. Other areas, such as social security and labor market reforms still need a lot of consensus building, with priorities yet to be developed by the authorities.
IMF Survey: Youth unemployment in Tunisia stands at 30 percent. What should the country do to boost job creation?
Mati: Indeed, the unemployment among youth is still very high, especially among college graduates. Making a dent on the unemployment rates will take time and will require achieving higher growth led by the private sector.
The authorities’ economic program includes reforms that encourage private sector development, especially reforms of the investment code and the business environment. The government has also launched a number of training programs that could help reduce skill mismatches in the labor market and, hence, lessen unemployment among college graduates.
IMF Survey: You mentioned that the program is designed and owned by the authorities. However, some critics speculate that the IMF loan includes hidden or unannounced conditions. Is this accurate? Did the IMF request lifting fuel subsidies as a condition to approve the loan?
Mati: Let me be categorical and say that there are no hidden or unannounced conditions—all of the policy commitments are spelled out in the published letter of intent. The economic program that we are supporting through the SBA is the authorities’, not the IMF’s. The Tunisian government designed this economic program over the last two years. It included policy objectives and measures that we thought were appropriate and could support. Our discussions with the authorities were mainly on the sequencing rather than the types of economic reforms.
Both the IMF team and the government agreed that lifting fuel subsidies was necessary. All around the world, we have seen that the untargeted energy subsidies are very costly and regressive as they benefit mostly the rich and reduce the resources that could be directed to pro-growth and pro-poor expenditures. The increase of fuel prices by 7 percent in March of this year was proposed by the government for the 2013 budget and was approved by the National Constituent Assembly at the end of 2012.
The government is working on a strategy to make sure that future price increases are offset by compensatory measures to protect the most vulnerable groups. The mission team strongly agrees with the authorities on the need to eventually replace the current system of untargeted energy subsidies with a targeted social safety net.
IMF Survey: Some critics say that the IMF engages with governments only. Isn’t buy-in from other stakeholders necessary to ensure smooth and sustained implementation of the reform program supported by the IMF loan?
Mati: The IMF negotiates program policies with a country’s government because it represents the country in international bodies. But we are fully aware that broad-based buy-in from different stakeholders in society is critical for the program to be successful.
In putting together this program, the IMF mission team met with a range of actors, including representatives of the media, civil society, political parties, parliamentarians, labor unions, and academics. This has allowed us to learn more about their views and concerns, explain the IMF’s policy advice, and discuss policy trade-offs.
These many contacts have greatly enriched our discussions with the authorities. Such dialogue contributes to greater transparency, ownership, and accountability of economic policy choices. We look forward to continuing this fruitful engagement during the implementation of the program.