## cr17203

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### Executive summary — economic imbalances and program performance
- Political: Tunisia’s political transition advanced, but social discontent remains elevated; strikes and street protests continued and intensified into 2017, notably in the interior regions.
- Growth and investment:
  - Growth almost stagnated over 2015–16; growth will pick up in 2017 to 2.3 percent helped by tourism and phosphates.
  - Growth picked up to 2.1 percent in the first quarter of 2017.
  - Foreign Direct Investment (FDI) reached a new low of 2 percent of GDP in 2016.
  - Total unemployment remained elevated at 15 percent in March 2017 (double this share for the youth and women).
  - The informal economy accounted for about half of total activity.
- Prices, credit, and monetary policy:
  - Headline inflation was contained below 4 percent in 2016.
  - Core inflation increased beyond 5 percent in March 2017.
  - Credit growth accelerated to about 10 percent at end-2016.
  - The dinar depreciated by 23 percent in nominal effective terms since end-2015 (noting elsewhere an 18 percent depreciation between May 2016 and April 2017).
  - The Central Bank increased its policy interest rate by 75 bps to 5 percent over the last month to contain inflation below 5 percent in 2017.
- External sector and reserves:
  - The external current account deficit widened by more than 10 percent of GDP in the first quarter of 2017 (annualized).
  - Gross international reserves declined to US$5.8 billion at end-March, covering 3.4 months of imports.
- Fiscal position and public debt:
  - The fiscal deficit widened to 5.9 percent of GDP in 2016 from 5.3 percent of GDP in 2015.
  - Public debt stood at 63 percent of GDP at end-2016, compared with a projected 55 percent at program inception.
  - Contributors to the debt difference: higher deficit (about 2 percent of GDP), the dinar’s depreciation (2 to 3 percent of GDP), and reclassification of post office deposits as central government debt (4 percent of GDP).
- Program implementation:
  - Most Quantitative Performance Criteria (QPCs) for end-December 2016 were missed.
  - All Structural Benchmarks (SBs) through March 2017 were delayed.
  - CBT larger-than-expected FX sales contributed to NIR shortfalls; NDA ceiling overshot due to commercial banks’ reliance on CBT liquidity; the primary fiscal deficit criterion was missed due to VAT and non-tax revenue shortfalls.
  - Most delayed SBs (private sector legislation, public banks performance contracts, civil service strategy, large taxpayers unit) are now completed; remaining SBs to be achieved by end-2017.

### Fragile outlook and macro projections
- Growth projections and scenario:
  - Projections revised to 2.3 percent in 2017 (from 3.0 percent at program inception) and 3.0 percent in 2018 (from 3.7 percent).
  - Illustrative medium-term growth scenario (selected): Real GDP growth (percent): 2017 (Proj.): 2.3; 2018 (Proj.): 3.0; 2019 (Proj.): 3.5; 2020 (Proj.): 4.1; 2021 (Proj.): 4.3; 2022 (Proj.): 4.3.
- Inflation and monetary stance:
  - Inflation expected to remain moderate owing to gradual monetary tightening and a persistence of a negative output gap over 2017–18.
  - Improved monetary operations, low commodity prices, and wage moderation should contribute to keeping inflation below 4 percent over the medium term.
- External position:
  - Recovery of phosphates and tourism and stronger manufacturing exports supported by a more competitive dinar should gradually strengthen exports.
  - Import demand for consumer and capital goods expected to adjust to higher prices after a lag of 6–12 months.
- Risks:
  - Domestic: fragile socio-political environment (including local elections in December 2017), confidence and reform implementation risks, and security risks.
  - External: slower growth in Europe, tighter global financial conditions, and continued conflicts in the Middle East.

### Strategic objectives and authorities’ three-pillar strategy
- Strategic objective:
  - Shift from the public sector towards a competitive private sector as the main engine of growth and job creation.
  - Address high and rising twin deficits and debt levels, and mitigate inflationary pressures that disproportionately affect the most vulnerable.
- Authorities’ three-pillar strategy:
  1. Strong corrective macroeconomic policies: reduce fiscal deficits, stabilize debt, improve budget structure; increase exchange rate flexibility; tighten monetary policy; improve current account and reserves.
  2. Strengthen financial health of social security funds and build better targeted social safety nets.
  3. Accelerate comprehensive structural reforms to support higher and more inclusive growth.

### Fiscal policy — 2016 outcomes, 2017–18 measures and targets
- 2016 outcomes and drivers:
  - Revenue shortfall of 1.4 percent of GDP caused a sharp deficit increase in 2016.
  - Higher-than-expected wages contributed 0.2 percent of GDP to the deficit increase.
  - The deficit reached 5.9 percent of GDP in 2016 compared with the expected 4.4 percent.
- 2017 fiscal outlook and measures:
  - The deficit is programmed at 5.9 percent of GDP in 2017 (unchanged from 2016), substantially higher than the 3.5 percent of GDP envisaged in May 2016.
  - Drivers of the higher deficit: wage increases, higher energy subsidies (including failure to apply the fuel price adjustment mechanism since June 2016), and an unanticipated transfer to the public pension fund.
  - A one-off levy of 7.5 percent on corporate profits is expected to yield 0.9 percent of GDP in 2017.
- Specific fiscal accounting and changes (percent of GDP; items preserved from text tables):
  - Revenue loss (2016): 1.3
  - Grants: 0.1
  - Wage bill: 0.4 (2016 contribution to deficit change compared to program)
  - Interest bill: 0.2
  - Capital expenditure: 0.3
  - Net lending: 0.2
  - Sub-total costs: 2.4
  - Tax measures (2017): 1.3
  - Goods and services savings: 0.5
  - Wage bill (2017 change): 0.7
  - One-month increase: 0.1
  - PIT credit: 0.3
  - Energy subsidies (2017): 1.3
  - Pension transfers: 0.6
  - Interest bill: 0.2
  - Capital expenditure: 0.1
  - Sub-total savings/costs: 2.0 (as presented)
  - Change in deficit (compared to program): 1.6 (2016 table) and 2.3 (2017 overview compared to program).

### Medium-term fiscal strategy and 2018 package
- Authorities envisage improving the overall fiscal deficit by 3 percent of GDP over 2017-20 (about 0.5 percent of GDP more than under the original program).
- Public debt-to-GDP ratio: expected to peak at 72 percent in 2018 and stand at 70 percent by 2020.
- Contingency measures identified: 0.4 percent of GDP spending cut if larger-than-expected transfers to pension funds are needed.
- 2018 package (components and amounts):
  - Tax measures to shift burden towards indirect taxation: package worth 1.3 percent of GDP.
  - Stronger revenue collection and arrears collection progress in Q1 2017 estimated to yield 0.3 percent of GDP in 2018.
  - Voluntary headcount reduction in the civil service and comprehensive pension reform to contain transfers to social security to 0.5 percent of GDP in 2018 (Paragraph 23).
- Authorities’ proposed fiscal measures for 2018 (Millions of TD; As a percentage of GDP):
  - Indirect taxes: 1,116.0 / 1.1
  - Direct taxes: 60.0 / 0.1
  - Other measures: 138.0 / 0.1
  - Collection efforts (including tax arrears): 300.0 / 0.3
  - Total: 1,666.0 / 1.6
  - Memorandum item: Nominal GDP 104,603

### Public wages, pensions, and social funds
- Wage bill trends and projections:
  - Wage bill grew from 10.7 percent of GDP in 2010 to 14.5 percent of GDP in 2016 and, absent measures, would increase to 15 percent of GDP in 2018.
- Social security system:
  - Consolidated deficit of the social security system reached 1 percent in 2017 and would continue to increase without reforms.
  - Arrears from the pension funds to the health fund jeopardize provision of basic public services.
- Pension and health funds: cash needs and arrears (In percent of GDP):
  - CNRPS (public): 2017 cash need / Stock of arrears at end-2016: 0.5 / 1.2
  - CNSS (private): 0.5 / 0.8
  - CNAM (public health fund): ... / 0.5
- Pension reform timetable and targets:
  - Government envisages submitting a reform law for all pension funds by September 2017 and making first reforms effective by January 1, 2018 (0.2 percent of GDP in savings currently expected for the CNRPS).
  - Staff recommended comprehensive parametric reforms and that pension system should not be subsidized through general taxation.

### Monetary policy, FX, and reserves
- Inflation and policy rate:
  - Inflation started to move upwards from the 4 percent level the CBT implicitly targeted.
  - Authorities tightened monetary policy and increased the policy interest rate by a cumulative 75 bps in April and May to 5 percent.
  - CBT commitment to further tighten monetary policy if inflationary pressures continue or reserves deviate.
- Exchange rate policy and operations:
  - Reactivation of an FX auction mechanism in May to support exchange rate flexibility, increase transparency and competition in the interbank FX market, and facilitate gradual correction of real effective overvaluation.
  - CBT interventions to be limited: net sales strictly to finance critical imports at the average interbank rate of the transaction day and to smooth excessive exchange rate fluctuations.
  - Gross International Reserves: considered adequate per traditional measures and at the lower limit of the adequacy range suggested by the composite ARA metric.
- Valuation and stocks (program rates):
  - On March 31, 2017: stock of reserve assets: $6,197.5 million; stock of CBT liabilities in foreign currency: US$3,092.4 million; value of NIR: US$3,105.2 million.
  - At end-March 2017, the stock of deposits in foreign currencies of residents at the CBT was US$960.1 million at the program exchange rate.

### Financial sector vulnerabilities and NPL resolution
- NPLs and bank soundness:
  - NPL share in total loans: 15.6 percent in 2016 (down from 16.5 percent in 2015), with elevated levels concentrated in public banks.
  - Regulatory capital to risk-weighted assets: 2016: 11.6.
- Bank resolution and supervision:
  - Resolution committee to start operations in June 2017 with orderly liquidation of Banque Franco Tunisienne (BFT).
  - Deposit guarantee fund to become effective in September 2017.
  - Five bank inspections out of seven are completed and indicate adequate provisioning.
- Policy measures and deadlines:
  - Adopt law to allow public banks to abandon claims similar to private peers by October 2017 (New Structural Benchmark).
  - Complete inspections of remaining two private banks to achieve inspections of seven largest private banks by September 2017 (Delayed SB).
  - By June 2017 set up resolution committee for BFT; deposit guarantee fund operational by September 2017.
  - By October 2017 adopt measures to remove discrimination against public banks in managing NPL portfolios.
  - Improve legal and judicial capacity to facilitate NPL resolution and strengthen debt collection companies by December 2017.

### Governance, business environment, and structural reforms
- Anti-corruption and governance:
  - Draft anti-corruption authority law submitted to Parliament in March 2017; authorities committed to making the authority operational by early 2018 (new SB, November 2017).
  - Parliament adopted the law on whistle blowers in April 2017.
- Business climate measures:
  - Approval of laws and implementing decrees on competition, Public-Private Partnerships and the investment code.
  - Delays in approving the Organic Budget Law will postpone implementation of performance-based budgeting to 2019.
  - Next steps: set up implementation agencies under the investment code; adopt economic emergency law to accelerate major investment projects; conduct a Public Investment Management Assessment (PIMA).
- Financial market and inclusion:
  - New financial sector reform committee to coordinate reforms.
  - Financial inclusion strategy to strengthen microfinance, digital finance, and credit to SMEs; allow private credit bureaus.
  - Lending rate cap: current cap 20 percent above average bank lending rate; authorities plan to increase to 33 percent for firms and eventually remove the cap, starting with lending to firms.

### Debt sustainability — Annex I (Public Debt DSA) — baseline and stress tests
- Baseline findings:
  - Central government debt expected to peak at 72 percent of GDP in 2018.
  - Debt-to-GDP estimated at 63 percent at end-2016; projected 65 percent in 2022.
  - Gross financing needs expected to average 13 percent of GDP through 2022; peak just under 15 percent of GDP after 2021.
  - Effective interest rate (table values): 2015: 4.8; 2016: 3.9; 2017: 4.1; 2018: 3.9; 2019: 2.7; 2020: 1.4; 2021: 2.0; 2022: 2.5.
- Stress-test scenarios (selected results):
  - Contingent liability shock (one-off 10 percent of GDP): debt increases to 86 percent of GDP.
  - One-time 30 percent real depreciation: public debt-to-GDP increases to about 82 percent before declining to 74 percent by 2022.
  - Combined macro-fiscal shock: public debt rises to 97 percent of GDP by 2019.
- Policy implication:
  - Urgent fiscal consolidation recommended to prevent debt approaching unsustainable levels and to limit vulnerability to contingent liabilities and exchange rate shocks.

### External debt sustainability — Annex II (External DSA)
- External debt trajectory and baseline:
  - External debt-to-GDP: 2016: 70.0 percent; 2017: 76.9 percent; 2018: 80.7 percent (table shows external debt would peak at 81 percent of GDP in 2018 before declining gradually — table shows 80.7 percent); 2019: 80.4 percent; 2020: 78.9 percent; 2021: 75.8 percent; 2022: 72.3 percent.
  - Gross external financing need (US$ billions): 2017: 11.4; 2018: 10.7; 2019: 10.9; 2020: 10.8; 2021: 11.5; 2022: 11.7.
- Key assumptions (selected):
  - Real GDP growth (percent): 2016 = 1.0; 2017 = 2.5; 2018 = 2.2; 2019 = 2.3; 2020 = 3.0; 2021 = 3.5; 2022 = 4.1.
  - Growth of exports (US dollar terms, percent): 2017 = 1.8; 2018 = 16.5.
- Vulnerabilities and stress-test highlights:
  - DSA suggests external debt-to-GDP remains below 84 percent under most shocks except sharp FX depreciation.
  - Sharp real exchange rate depreciation (one-time 30 percent) would raise external debt-to-GDP to 113 percent in 2018 before declining to 101 percent by end-projection.
- Policy implication:
  - Strengthen resilience against FX depreciation risk; maintain prudent use of international market access and multilateral financing; rebuild fiscal and external buffers.

### Exchange rate, trade, and competitiveness — Annex VII
- Trade and depreciation effects:
  - More than ¾ of Tunisia’s trading industries would benefit from a depreciation in the long run due to dominating volume effects, although the trade balance may initially worsen.
  - The “textiles” and “mechanical and electric” industries (bulk of Tunisia’s trade in goods) meet the Marshall-Lerner condition and would benefit in the long-term from depreciation.
  - Short-term J-Curve: “mechanical and electric” industry may experience negative net export effects up to three quarters following a depreciation.
- Policy implication:
  - Exchange rate depreciation can be a viable component of restoring external competitiveness for sectors that account for more than ¾ of Tunisia’s trade, but sequencing and complementary policies are needed to cushion short-term adverse effects.

### Program modalities, conditionality, financing, and staff recommendations
- Program decision and staff recommendation:
  - Staff recommends completion of the EFF First Review.
  - Staff supports rephasing of access in line with reform implementation and waivers of nonobservance of end-December QPCs (NIR, NDA, primary fiscal balance) based on corrective actions.
  - Staff supports making all funds available for budget support.
- Program financing and IMF access:
  - Board approval of the EFF (May 24, 2016): 227.29 SDR; 41.69 percent of quota; 315.901 US$ million.
  - First Review (September 30, 2016): 227.29 SDR; 41.69 percent of quota; 307.540 US$ million.
  - Total (2016–20): 2,045.625 SDR; total US$ 2,774.052.
  - Tunisia: Credit outstanding to the Fund would peak in 2020 at 372 percent of quota before declining; obligations to the Fund would peak at 1.4 percent of GDP in 2018, representing seven percent of gross international reserves.
- New program conditionality and SBs:
  - New QPCs (June 2017 and December 2017) to support NIR targets, contain inflationary pressures through NDA targets, stabilize the fiscal deficit through primary balance and current spending targets, and ensure adequate social spending via an indicative target.
  - Five new SBs: improve NPL resolution framework for public banks; operationalize the LTU and the high anti-corruption authority; pursue civil service reform; re-establish the fuel price mechanism; establish more transparent FX intervention mechanism for the CBT; one SB supports pension reform.
- Financing sources highlighted:
  - EUR 850 million Eurobond in February; Qatar rollover loan; firmly committed donor flows; authorities envisage another international bond issuance for early 2018.
  - Tunisia 2020 Investor Conference pledges grand total: 17,449 (million US dollars); staff projection conservatively assumes about half disbursed starting 2018.

### Key macroeconomic projections and selected indicators (tables and series preserved)
- Real GDP growth (selected): 2015: 1.1; 2016: 2.0; 2017 (Proj./Prog.): 1.0; 2018 (Proj.): 3.0; 2019: 2.3; 2020: 3.0.
- CPI, average (selected): 2015: 4.9; 2016: 3.9; 2017: 3.7; 2018: 3.9; 2019: 4.5; 2020: 4.4.
- Central government overall balance (excluding grants, percent of GDP): 2015: -5.6; 2016: -4.6; 2017: -6.1; 2018: -3.9; 2019: -6.1; 2020: -5.6.
- Central government debt (percent of GDP; selected): 2015: 57.2; 2016: 54.6; 2017: 62.9; 2018: 54.5; 2019: 69.1; 2020: 72.1.
- Current account (percent of GDP): 2015: -8.9; 2016: -7.7; 2017: -9.0; 2018: -7.0; 2019: -8.5; 2020: -8.1.
- Gross official reserves (end-period, US$ billions): 2015: 7.4; 2016: 5.9; 2017: 7.3; 2018: 8.3; 2019: 7.9; 2020: 8.0.
- Exports of goods (US$ billions, annual): 2015: 14.073; 2016: 13.568; 2017: 13.359; 2018: 13.411; 2019: 13.890; 2020: 14.462.
- Imports of goods (US$ billions): 2015: -19.102; 2016: -18.374; 2017: -17.890; 2018: -17.779; 2019: -18.404; 2020: -19.077.
- Trade balance (US$ millions): 2015: -5,029; 2016: -4,806; 2017: -4,530; 2018: -4,368.
- Workers' remittances (US$ millions): 2015: 1,971; 2016: 1,802; 2017: 1,707; 2018: 1,686.
- Monetary and banking (selected): Broad money (M3, end-period, TD millions): 2015: 61,899; 2016: 66,883; 2017 (Annual): 66,065.

### Staff appraisal — main policy recommendations (condensed)
- Fiscal consolidation:
  - Proceed in a growth-friendly and socially-conscious way; shift burden from direct toward indirect taxation, strengthen revenue administration (LTU), and protect priority social spending.
- Monetary and exchange rate:
  - Support increased exchange rate flexibility and continued monetary tightening to restore competitiveness and increase reserves; commend FX auction mechanism and recent CBT policy rate hikes.
- Civil service, pensions, social protection:
  - Deep civil service reform to reduce wage bill (no new wage increases through 2020, voluntary departures, strict hiring limits); proceed quickly with equitable and sustainable pension reforms; finalize database of vulnerable households.
- SOEs and contingent liabilities:
  - Manage contingent risks via performance contracts, improved financial information, and upgraded MoF monitoring and sanction capacity.
- Financial sector:
  - Accelerate reforms, overhaul NPL framework, implement restructuring plans for public banks, and speed financial market development.
- Governance and business environment:
  - Make high anti-corruption authority fully operational by end-2017; provide clear regulatory framework to improve investment attractiveness.
- External support:
  - Sustained donor support and technical assistance are critical given elevated program risks.

*May 30, 2017 — International Monetary Fund, cr17203.*

### EXECUTIVE SUMMARY

### EXECUTIVE SUMMARY

### ECONOMIC IMBALANCES IN A TOUGH ENVIRONMENT
- Tunisia’s political transition advanced, but social discontent remains elevated; strikes and street protests continued and intensified into 2017, notably in the interior regions.
- Growth and investment
  - Growth almost stagnated over 2015–16; growth will pick up in 2017 to 2.3 percent helped by tourism and phosphates.
  - Growth picked up to 2.1 percent in the first quarter of 2017.
  - Foreign Direct Investment (FDI) reached a new low of 2 percent of GDP in 2016.
  - Total unemployment remained elevated at 15 percent in March 2017 (double this share for the youth and women).
  - The informal economy accounted for about half of total activity.
- Prices, credit, and monetary policy
  - Headline inflation was contained below 4 percent in 2016.
  - Core inflation increased beyond 5 percent in March 2017.
  - Credit growth accelerated to about 10 percent at end-2016.
  - The dinar depreciated by 23 percent in nominal effective terms since end-2015 (noting elsewhere an 18 percent depreciation between May 2016 and April 2017).
  - The Central Bank increased its policy interest rate by 75 bps to 5 percent over the last month to contain inflation below 5 percent in 2017.
- External sector and reserves
  - The external current account deficit widened by more than 10 percent of GDP in the first quarter of 2017 (annualized).
  - Gross international reserves declined to US$5.8 billion at end-March, covering 3.4 months of imports.
- Fiscal position and public debt
  - The fiscal deficit widened to 5.9 percent of GDP in 2016 from 5.3 percent of GDP in 2015.
  - Public debt stood at 63 percent of GDP at end-2016, compared with a projected 55 percent at program inception.
  - The difference in public debt can be attributed to the higher deficit (about 2 percent of GDP), the dinar’s depreciation (2 to 3 percent of GDP), and a reclassification of post office deposits as central government debt (4 percent of GDP).
- Program implementation
  - Most Quantitative Performance Criteria (QPCs) for end-December 2016 were missed.
  - All Structural Benchmarks (SBs) through March 2017 were delayed.
  - CBT larger-than-expected FX sales contributed to NIR shortfalls; NDA ceiling overshot due to commercial banks’ reliance on CBT liquidity; the primary fiscal deficit criterion was missed due to VAT and non-tax revenue shortfalls.
  - Most delayed SBs, including on private sector legislation, performance contracts for public banks, the civil service strategy, and the large taxpayers unit are now completed; remaining SBs to be achieved by end-2017.

### A FRAGILE OUTLOOK
- Growth projections
  - Projections revised to 2.3 percent in 2017 (from 3.0 percent at program inception) and 3.0 percent in 2018 (from 3.7 percent).
  - Over time, a pick-up in investment underpinned by capital inflows will allow GDP to increase towards potential.
- Inflation and monetary stance
  - Inflation expected to remain moderate owing to gradual monetary tightening and a persistence of a negative output gap over 2017–18.
  - Improved monetary operations, low commodity prices, and wage moderation should contribute to keeping inflation below 4 percent over the medium term.
- External position
  - Recovery of phosphates and tourism as well as stronger manufacturing exports supported by a more competitive dinar should gradually strengthen exports.
  - Import demand for consumer and capital goods expected to adjust to higher prices after a lag of 6–12 months.
- Risks (Annex IV)
  - Domestic: fragile socio-political environment (including local elections in December 2017), confidence and reform implementation risks, and security risks.
  - External: slower growth in Europe, tighter global financial conditions, and continued conflicts in the Middle East.

### POLICY DISCUSSIONS
- Strategic objectives agreed by authorities and staff
  - Shift from the public sector towards a competitive private sector as the main engine of growth and job creation.
  - Address high and rising twin deficits and debt levels, and mitigate inflationary pressures that disproportionately affect the most vulnerable.
- Authorities’ three-pillar strategy
  1. Introduce strong corrective macroeconomic policies to address policy slippages, reduce fiscal deficits, stabilize debt, and improve budget structure; increase exchange rate flexibility and tighten monetary policy to improve the current account deficit, mitigate inflation, and increase reserve cover.
  2. Strengthen the financial health of social security funds and build better targeted social safety nets to maintain adequate social protection.
  3. Accelerate comprehensive structural reforms to support higher and more inclusive growth.

### POLICIES FOR MACROECONOMIC STABILITY — REDUCING FISCAL DEFICITS AND IMPROVING BUDGET STRUCTURE
- 2016 fiscal outcomes
  - A revenue shortfall of 1.4 percent of GDP caused a sharp deficit increase in 2016.
  - Higher-than-expected wages contributed 0.2 percent of GDP to the deficit increase.
  - The deficit reached 5.9 percent of GDP in 2016 compared with the expected 4.4 percent.
- 2017 fiscal outlook and measures
  - The deficit is programmed at 5.9 percent of GDP in 2017 (unchanged from 2016), substantially higher than the 3.5 percent of GDP envisaged in May 2016.
  - Drivers of the higher deficit include wage increases, higher energy subsidies (including due to the failure to apply the fuel price adjustment mechanism since June 2016), and an unanticipated transfer to the public pension fund.
  - A one-off levy of 7.5 percent on corporate profits (rather than measures to broaden the tax base) is expected to yield 0.9 percent of GDP in 2017.
- Specific fiscal accounting and changes (text table items preserved)
  - Revenue loss (2016): 1.3 (percent of GDP)
  - Grants: 0.1
  - Wage bill: 0.4 (2016 contribution to deficit change compared to program)
  - Interest bill: 0.2
  - Capital expenditure: 0.3
  - Net lending: 0.2
  - Sub-total costs: 2.4
  - Tax measures (2017): 1.3 (percent of GDP)
  - Goods and services savings: 0.5
  - Wage bill (2017 change): 0.7
  - One-month increase: 0.1
  - PIT credit: 0.3
  - Energy subsidies (2017): 1.3
  - Pension transfers: 0.6
  - Interest bill: 0.2
  - Capital expenditure: 0.1
  - Sub-total savings/costs: 2.0 (as presented)
  - Change in deficit (compared to program): 1.6 (2016 table) and 2.3 (2017 overview compared to program) as shown in the source tables.

### PROGRAM MODALITIES AND STAFF RECOMMENDATION
- In light of recently improved program performance and the authorities’ commitment to strong corrective actions:
  - Staff recommends completion of the EFF review.
  - Staff supports the authorities’ request for rephasing of access and waivers of nonobservance of end-December QPCs for the targets on NIR, NDA, and the primary fiscal deficit.

*May 30, 2017 — International Monetary Fund, Executive Summary (cr17203)*

### 13.      Public wages and pensions represent serious medium-term fiscal challenges. The wage

### 13.      Public wages and pensions represent serious medium-term fiscal challenges.

### Fiscal pressures and recent trends
- Wage bill grew from 10.7 percent of GDP in 2010 to 14.5 percent of GDP in 2016 and, absent measures, would increase to 15 percent of GDP in 2018.
- Consolidated deficit of the social security system reached 1 percent in 2017 and would continue to increase without reforms.
- Arrears from the pension funds to the health fund jeopardize the provision of basic public services.

### Pension and health funds: cash needs and arrears (In percent of GDP)
- 2017 cash need / Stock of arrears at end-2016:
  - CNRPS (public): 0.5 / 1.2
  - CNSS (private): 0.5 / 0.8
  - CNAM (public health fund): ... / 0.5
- Sources: IMF staff calculations; and Tunisian authorities.

### Key fiscal aggregates and projections (Est./Proj.; as percent of GDP unless noted)
- Total revenue and grants: 24.1 22.8 24.4 24.3 24.7 24.5 24.6 24.6 24.6
- Total revenue (excluding grants): 23.9 22.6 24.1 24.0 24.5 24.3 24.3 24.4 24.4
  - Of which: Tax revenue: 21.7 20.7 22.2 22.2 22.6 22.8 22.8 22.9 22.9
  - Non-tax revenue: 2.2 1.9 1.9 1.9 1.8 1.5 1.5 1.5 1.5
- Expenditure and net lending: 28.5 28.7 30.8 30.2 30.0 28.7 27.5 26.6 26.4
  - Current Expenditure: 23.5 23.3 22.3 24.6 24.3 22.8 21.3 20.2 19.7
  - Wages and salaries: 14.1 14.5 13.8 14.1 14.8 13.1 12.1 11.7 11.7
  - Goods and services: 2.4 1.9 2.0 1.5 1.5 1.4 1.4 1.4 1.3
  - Transfers and subsidies: 4.9 4.6 4.5 6.7 5.5 5.5 5.1 4.4 4.2
  - Capital expenditure: 5.0 5.3 5.5 5.6 5.8 5.9 6.2 6.4 6.7
  - Net lending: -0.1 0.1 0.1 0.0 0.0 0.0 0.0 0.0 0.0
  - Public banks' recapitalization: 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
- Central government overall deficit (-) (excl. grants): -4.0 -6.1 -3.9 -6.1 -5.6 -4.4 -3.2 -2.2 -2.0
- Central government overall deficit (-) (incl. grants): -4.4 -5.9 -3.5 -5.9 -5.3 -4.1 -2.9 -2.0 -1.8
- Structural fiscal balance: -3.6 -5.6 -3.2 -6.1 -4.3 -3.9 -2.9 -2.1 -2.0
- Central government debt: 54.6 62.9 54.5 69.1 72.1 71.6 70.2 67.7 65.3
- Nominal GDP (units): 91,658 90,376 97,495 97,397 104,603 112,404 121,225 130,610 140,721
- Sources: Tunisian authorities; and IMF staff estimates.

### Policy discussion: adjustment needs and financing
- Given lower growth and higher deficits, the adjustment effort through 2020 must be more ambitious to maintain macroeconomic stability.
- Authorities envisage the overall fiscal deficit to improve by 3 percent of GDP over 2017-20 (about 0.5 percent of GDP more than under the original program).
- Public debt-to-GDP ratio: expected to peak at 72 percent in 2018 and stand at 70 percent by 2020, compared with the originally targeted 50 percent.
- Larger-than-expected donor support would cover higher financing needs.

### Ensuring 2017 targets and contingency measures
- Budget outturns through March signal targets remain realistic.
- Authorities identified contingency measures including a 0.4 percent of GDP spending cut, in case larger-than-expected transfers to pension funds are needed.

### Starting sustainable deficit reduction in 2018 (MEFP, ¶18)
- A strong package would reduce the overall deficit to 5.4 percent of GDP from 5.9 percent in 2017, and the structural deficit to 4.3 percent of GDP from 6.1 percent in 2017.
- Components of the package:
  - Tax measures to shift the burden towards indirect taxation; package worth 1.3 percent of GDP (partially based on May 2016 tax strategy). Emphasis on widening the tax base, increasing VAT rates on services of liberal professions, and raising excises on goods/services prevalently consumed by higher-earning households.
  - Staff recommendation: target financial profits, rather than transactions, to avoid negative impact on financial development from financial activities taxes.
  - Stronger revenue collection via improved tax administration; arrears collection progress in Q1 2017 estimated to yield 0.3 percent of GDP in 2018. Timely implementation of the Large Taxpayers Unit (LTU) is critical.
  - Voluntary headcount reduction in the civil service (part of the comprehensive civil service strategy adopted April 2017).
  - Comprehensive pension reform to contain transfers to social security to 0.5 percent of GDP in 2018 (Paragraph 23).

### Authorities’ proposed fiscal measures for 2018 (Millions of TD; As a percentage of GDP)
- Indirect taxes: 1,116.0 / 1.1
- Direct taxes: 60.0 / 0.1
- Other measures: 138.0 / 0.1
- Collection efforts (including tax arrears): 300.0 / 0.3
- Total: 1,666.0 / 1.6
- Memorandum item: Nominal GDP 104,603
- Source: Tunisian authorities.

### Monetary policy, inflation, and exchange rate
- Inflation has started to move upwards from the 4 percent level that the CBT has been implicitly targeting.
- Risks to inflation include exchange rate depreciation, oil price and past wage increases, large import share in consumption, upcoming wage increases, and prospective adjustments to VAT and fuel prices.
- Real exchange rate remained overvalued based on the current account gap in 2016; recent dinar depreciation reduced the estimated misalignment.
- Gross International Reserves are considered adequate per traditional measures and at the lower limit of the adequacy range suggested by the composite ARA metric.
- Policy actions:
  - Authorities tightened monetary policy and increased the policy interest rate by a cumulative 75 bps in April and May to 5 percent.
  - Commitment to further tighten monetary policy if inflationary pressures continue or reserves deviate.
  - Tightening liquidity provision through the lending facility to amplify the interest rate impulse.
  - Reactivation of an FX auction mechanism in May to support exchange rate flexibility, increase transparency and competition in the interbank FX market, and facilitate gradual correction of real effective overvaluation.

### Restoring financial health of social security and pension reform
- Pension system is structurally underfunded; defined benefit schemes with replacement income of up to 80 percent of salaries are unsustainable with current contribution levels as life expectancy increases.
- Cash needs exacerbated by chronic payment difficulties of ailing SOEs.
- Policy actions:
  - Authorities and social partners started dialogue on pension reform; specific recommendations expected by summer 2017.
  - Government envisages submitting to Parliament a reform law for all pension funds by September 2017 and making first reforms effective by January 1, 2018 (0.2 percent of GDP in savings currently expected for the CNRPS).
  - Staff recommended a comprehensive package of parametric reforms, developed in consultation with the World Bank and other partners.
  - Pension system should not be subsidized through general taxation (e.g., earmarking a share of VAT revenue).

### Better targeting social assistance and subsidy reform
- Existing support programs disproportionately benefit better-off households and exclude many poor, informal sector workers, and residents of interior regions.
- Policy measures:
  - Overhaul of social assistance framework with ILO help; accelerate establishment of a databank on vulnerable households (reprogrammed SB, December 2017) and integrate existing beneficiary data.
  - Roll-out of unique social identifier and electronic cards to reach more poor households (MEFP ¶38).
  - Continue subsidy reforms: apply automatic adjustment mechanism for three main fuels monthly starting July 2017 (MEFP, ¶17); consider extension to other energy categories.
  - Revision of electricity tariffs in 2017, maintaining lifeline tariff for poor households; staff suggested further increases towards cost recovery.

### Civil service reform
- Public wage bill is too high; in 2016 it accounted for about half of total expenditure, two-thirds of tax revenue, and was about three times public investment. Scaled to GDP, wage bill is among the highest in the world.
- Civil service efficiency suffers from inadequate performance management and rigid redeployment rules.
- Policy measures:
  - Comprehensive strategy adopted May 2017 to improve recruitment, performance management (including haute fonction publique), and modernize IT infrastructure.
  - Voluntary separation schemes, strict limits on new hiring, and no additional wage increases beyond already agreed would stabilize wage bill-to-GDP at 14 percent in 2018 and reduce to 12 percent by 2020.
  - Functional reviews of four largest ministries (delayed to end-September 2017) to identify redeployment needs.
  - Authorities working with World Bank on separation package design; minimize early retirement in favor of voluntary departure packages to avoid undermining pension reform.
  - Strengthened monitoring competencies in Office of Head of Government; hiring limits for 2017 and 2018 supported by a new SB (October 2017); working on regulations to facilitate redeployment.

### Managing SOEs and fiscal contingent liabilities
- Central government contingent liabilities from SOEs estimated at more than 12 percent of GDP, representing a major fiscal risk due to poor performance and frequent budgetary transfers.
- Performance monitoring by MoF and line ministries remains inadequate.
- Policy measures:
  - Progress on performance contracts with four major SOEs and an interim contract for Tunisair; staff urged quick completion (reprogrammed SB, July 2017).
  - MoF to adopt more effective monitoring system for 20 largest SOEs.
  - Closer cooperation between SOE oversight and debt management to improve monitoring of public guarantees.

### Financial sector vulnerabilities and NPL resolution
- Bank recapitalization and management changes have progressed, but viability of restructuring plans hinges on resolving legacy NPLs; required legislative changes are seriously delayed.
- NPL share in total loans: 15.6 percent in 2016 (down from 16.5 percent in 2015), with elevated levels concentrated in public banks.
- Policy measures:
  - Staff urged introduction of measures to remove discrimination against public banks in managing NPL portfolios (new SB, October 2017).
  - Authorities committed to modernize legislation and judicial processes to facilitate NPL resolution.

*Source: IMF staff calculations; and Tunisian authorities.*

### 34.      Further strengthening bank resolution and supervision. The resolution committee will

### 34.      Further strengthening bank resolution and supervision. The resolution committee will

### Banking resolution and supervision
- Resolution committee will start operations in June 2017 with the orderly liquidation of Banque Franco Tunisienne (BFT).
- The deposit guarantee fund will become effective in September 2017 (MEFP, ¶35).
- Five bank inspections out of a total of seven are completed and indicate adequate provisioning.
- Going forward, better rating and scoring tools will allow for improved assessment of commercial banks’ credit risk policies (MEFP, ¶36).
- Work on BFT liquidation should start in the Fall of 2017 as losses continue to accumulate; NPL treatment framework overhaul is instrumental for completing the Second Review (Paragraphs 53).

### Advancing financial markets and inclusion
- A new financial sector reform committee will enhance reform coordination across stakeholders (MEFP, ¶¶32-33).
- A new financial inclusion strategy is being developed to strengthen microfinance, digital finance, and credit to SMEs, including by allowing private credit bureaus.
- Staff regretted delays in reforming the excessive lending rate (reprogrammed SB, September 2017; MEFP, ¶41) but welcomed the development of a yield curve to support financial market development (MEFP, ¶26).
- Lending rate cap: currently lending rate in Tunisia cannot exceed the average bank lending rate by more than 20 percent; authorities plan to increase this limit to 33 percent and eventually remove the cap altogether, starting with lending to firms (footnote 8).
- Public ownership of banks should be reviewed in light of the elevated costs associated with the recent recapitalization of the Tunisian Foreign Bank (TFB).

### Improving governance and the business environment
- Background: approval of laws and implementing decrees on competition, Public-Private Partnerships and the investment code; Tunisia still fares poorly in business environment and governance rankings (footnote 9).
- Draft anti-corruption authority law submitted to Parliament in March 2017; authorities committed to making the authority operational by early 2018, requiring adoption of implementation decrees, appointment of the head, and allocation of adequate budget resources in the 2018 budget law (new SB, November 2017; MEFP, ¶39).
- Parliament adopted the law on whistle blowers in April 2017.
- Strengthening the AML/CFT framework and its effective implementation could bolster anti-corruption efforts.
- Delays in approving the Organic Budget Law (reprogrammed SB, September 2017) will postpone implementation of performance-based budgeting to 2019.
- Next steps to improve business climate: set up implementation agencies envisaged under the investment code; adopt the economic emergency law to accelerate approval and implementation of significant investment projects; conduct a Public Investment Management Assessment (MEFP, ¶40, ¶42).

### Program modalities, conditionality, and financing
- Authorities request a rephasing of access and making it available to the budget; request reduction in number of reviews and rephasing of remaining access starting in 2018 to align purchases with reform progress (see Table 10).
- Given large budget financing needs, staff supports making all funds available for budget support.
- Staff supports waivers of nonobservance of end-December QPCs, based on corrective action taken to:
  - improve accumulation of NIR and increase exchange rate flexibility by setting up regular FX auctions;
  - tighten monetary policy and liquidity provision to limit the NDA;
  - implement strong fiscal consolidation replacing low-quality temporary measures with permanent ones.
- New QPCs (June 2017 and December 2017) aim to:
  - support adequate reserve coverage through ambitious NIR targets;
  - contain inflationary pressures through NDA targets consistent with a slowing growth of the monetary base;
  - stabilize the fiscal deficit in 2017 through the primary balance and current spending targets;
  - ensure adequate social spending via an indicative target to protect sectors such as health and education.
- Five new SBs to ensure implementation of started reforms, including:
  - improving the NPL resolution framework for public banks;
  - making operational the large taxpayers unit and the high anti-corruption authority;
  - pursuing civil service reform;
  - re-establishing the fuel price mechanism;
  - establishing a more transparent FX intervention mechanism for the CBT;
  - one SB supports pension reform.
- Program financing: In combination with the EUR 850 million Eurobond in February, the recent Qatar rollover loan, and firmly committed donor flows, purchases under the First Review will ensure adequate financing over the next 12 months. Authorities envisage another international bond issuance for early 2018.
- Tunisia: Credit outstanding to the Fund would peak in 2020 at 372 percent of quota before declining; obligations to the Fund would peak at 1.4 percent of GDP in 2018, representing seven percent of gross international reserves.
- An updated safeguards assessment (May 2016) found CBT strengthened safeguards framework and operationalized its Audit Committee; adoption of the new CBT law in April 2016 enhanced independence and introduced lender of last resort mechanisms (LOLR), but gaps remain. Recommendations include more transparent financial reporting and operationalization of the LOLR (expected in September 2017, MEFP ¶30). CBT has enhanced FY2016 financial statements disclosures; operationalization of LOLR remains pending.

### Staff appraisal: main findings and policy recommendations
- Macroeconomic and structural context:
  - Tunisia’s democracy weathered many challenges, but economic transition is delayed; transforming the economic model (currently relying on unsustainable public consumption, wages and subsidies) is required for sustainable employment and living standards (Paragraph 46).
  - The recalibrated EFF program remains ambitious and benefits from renewed commitment to critical structural reforms and sound macroeconomic policies (Paragraph 46).
- Fiscal policy:
  - Fiscal consolidation should proceed in a growth-friendly and socially-conscious way; staff supports authorities’ policies for 2017-18 and beyond that shift burden from direct towards indirect taxation and aim to increase fairness, while noting more could be done to strengthen progressivity (Paragraph 48).
  - New LTU and revenue administration steps expected to help collect tax and customs arrears totaling 6 percent of GDP.
  - Expected improvements in expenditure policies are credible conditional on implementation of reforms in Paragraphs 50-52 and re-application of the fuel price adjustment mechanism.
- Monetary policy and exchange rate:
  - Staff supports more exchange rate flexibility and tightening of monetary policy to restore competitiveness and increase reserves; commends FX auction mechanism for CBT interventions and recent increases in CBT policy interest rate, encourages further hikes if inflation pressures continue (Paragraph 49).
- Civil service, pensions, and social protection:
  - Deep civil service reform is needed to reduce public wage bill; reduction depends on avoiding new wage increases through 2020, successful voluntary departure programs, and strict controls on future recruitments; donor support would ease upfront investment (Paragraph 50).
  - Maintain adequate social protection: ensure adequate short-term financing for social security and proceed quickly with equitable and sustainable pension reforms; finalize database of vulnerable households (Paragraph 51).
- Public enterprises and contingent liabilities:
  - Manage contingent risks from public enterprises through strong ownership of SOE performance contracts, improved financial information, and upgraded Ministry of Finance monitoring and sanction capacity (Paragraph 52).
- Financial sector reforms:
  - Accelerated reforms needed: restructuring plans and performance contracts for public banks are major steps; implementation depends on overhauling NPL framework. Work on financial market development should proceed faster (Paragraph 53).
- Governance and business environment:
  - Follow through to make the high anti-corruption authority fully operational by end-2017; achieve a clear and predictable regulatory and legal framework to improve investment attractiveness and support Tunisia 2020 Conference and G20 Compact with Africa objectives (Paragraph 54).
- Risks and external support:
  - Program risks remain elevated due to weak growth and exogenous shocks; sustained donor support and technical assistance are critical. A relatively favorable growth outlook for Tunisia’s European trading partners, a more flexible exchange rate, comfortable international reserves, and an adequate cushion of central government financing should help navigate risks (Paragraph 55).

*Source: IMF country report excerpt (cr17203).*

### 56.      In view of Tunisia’s recent efforts to strengthen program performance and a

### cr17203 - 56.      In view of Tunisia’s recent efforts to strengthen program performance and a

### Program decision and staff recommendations
- Staff supports the authorities’ request for completion of the First Review.
- Staff supports:
  - rephasing of access in line with reform implementation;
  - waivers of nonobservance of end-December QPCs on the basis of corrective action on net domestic assets, net international reserves and the primary fiscal balance;
  - the setting of new end-June and end-December 2017 QPCs.
- Staff supports making all funds available for budget support.

### Key macroeconomic projections and indicators (selected)
- Real GDP growth: 2015: 1.1; 2016: 2.0; 2017 (Proj./Prog.): 1.0; 2018 (Proj.): 3.0; 2019: 2.3; 2020: 3.0.
- GDP deflator: 2015: 3.6; 2016: 5.1; 2017: 5.7; 2018: 3.3; 2019: 5.3; 2020: 4.2.
- CPI, average: 2015: 4.9; 2016: 3.9; 2017: 3.7; 2018: 3.9; 2019: 4.5; 2020: 4.4.
- Gross national savings (percent of GDP): 2015: 12.5; 2016: 14.1; 2017: 13.5; 2018: 15.3; 2019: 13.6; 2020: 15.1.
- Gross investment (percent of GDP): 2015: 21.4; 2016: 21.8; 2017: 22.5; 2018: 22.3; 2019: 22.1; 2020: 23.2.

### Fiscal sector and central government (selected)
- Total revenue (excluding grants, percent of GDP): 2015: 23.2; 2016: 23.9; 2017: 22.6; 2018: 24.1; 2019: 24.1; 2020: 24.5.
- Total expenditure and net lending (percent of GDP): 2015: 28.8; 2016: 28.5; 2017: 28.7; 2018: 30.2; 2019: 30.2; 2020: 30.1.
- Wage bill (percent of GDP): 2015: 13.6; 2016: 14.1; 2017: 14.5; 2018: 13.8; 2019: 14.1; 2020: 14.8.
- Central government overall balance (excluding grants, percent of GDP): 2015: -5.6; 2016: -4.6; 2017: -6.1; 2018: -3.9; 2019: -6.1; 2020: -5.6.
- Structural fiscal balance (percent of GDP): 2015: -4.6; 2016: -4.0; 2017: -5.6; 2018: -3.3; 2019: -6.1; 2020: -4.3.
- Central government debt (foreign and domestic, percent of GDP): 2015: 57.2; 2016: 54.6; 2017: 62.9; 2018: 54.5; 2019: 69.1; 2020: 72.1.
- Foreign currency public debt (percent of total debt): 2015: 61.7; 2016: 68.0; 2017: 64.1; 2018: 68.6; 2019: 67.8; 2020: 70.6.

### External sector and balance of payments (selected figures)
- Current account (in percent of GDP): 2015: -8.9; 2016: -7.7; 2017: -9.0; 2018: -7.0; 2019: -8.5; 2020: -8.1.
- Exports of goods (US$ billions, annual): 2015: 14.073; 2016: 13.568; 2017: 13.359; 2018: 13.411; 2019: 13.890; 2020: 14.462; 2021: 15.076; 2022: 15.530.
  - Energy exports (US$ billions): 2015: 1.013; 2016: 0.765; 2017: 0.799; 2018: 0.810; 2019: 0.814; 2020: 0.831; 2021: 0.859; 2022: 0.872.
  - Non-energy exports (US$ billions): 2015: 13.061; 2016: 12.804; 2017: 12.561; 2018: 12.600; 2019: 13.076; 2020: 13.631; 2021: 14.217; 2022: 14.659.
- Imports of goods (US$ billions): 2015: -19.102; 2016: -18.374; 2017: -17.890; 2018: -17.779; 2019: -18.404; 2020: -19.077; 2021: -19.872; 2022: -20.443.
  - Energy imports (US$ billions): 2015: -2.742; 2016: -2.024; 2017: -2.167; 2018: -2.232; 2019: -2.308; 2020: -2.429; 2021: -2.583; 2022: -2.712.
  - Non-energy imports (US$ billions): 2015: -16.361; 2016: -16.351; 2017: -15.722; 2018: -15.547; 2019: -16.096; 2020: -16.648; 2021: -17.289; 2022: -17.731.
- Trade balance (US$ millions): 2015: -5,029; 2016: -4,806; 2017: -4,530; 2018: -4,368; 2019: -4,514; 2020: -4,615; 2021: -4,795; 2022: -4,913.
- Workers' remittances (US$ millions): 2015: 1,971; 2016: 1,802; 2017: 1,707; 2018: 1,686; 2019: 1,732; 2020: 1,816; 2021: 1,907; 2022: 2,002.
- Gross official reserves (end-period, US$ billions): 2015: 7.4; 2016: 5.9; 2017: 7.3; 2018: 8.3; 2019: 7.9; 2020: 8.0; 2021: 8.2; 2022: 8.2.
- Reserves in months of next year's imports: 2015: 4.1; 2016: 3.4; 2017: 4.3; 2018: 4.7; 2019: 4.4; 2020: 4.5; 2021: 4.6; 2022: 4.6.

### External financing needs and financing sources (selected)
- Total financing requirements (US$ millions): 2015: 11,904; 2016: 11,832; 2017 (Year) 11,444; 2018: 10,667; 2019: 10,852; 2020: 10,774; 2021: 11,462; 2022: 11,726.
- Current account deficit (US$ millions): 2015: 3,849; 2016: 3,776; 2017: 3,395; 2018: 3,176; 2019: 3,112; 2020: 3,074; 2021: 3,018; 2022: 2,990.
- Amortizations (US$ millions): 2015: 1,209; 2016: 1,492; 2017: 2,139; 2018: 1,653; 2019: 1,813; 2020: 1,467; 2021: 2,031; 2022: 2,007.
  - Central government amortization (US$ millions): 2015: 599; 2016: 640; 2017: 1,438; 2018: 1,135; 2019: 1,401; 2020: 1,093; 2021: 1,682; 2022: 1,664.
- Short-term debt outstanding at end of previous year (US$ millions): 2015: 6,846; 2016: 6,565; 2017: 5,909; 2018: 5,838; 2019: 5,926; 2020: 6,233; 2021: 6,413; 2022: 6,729.
- Total financing sources include:
  - Direct investment and portfolio (net, US$ millions): 2015: 1,118; 2016: 832; 2017: 955; 2018: 1,094; 2019: 1,236; 2020: 1,308; 2021: 1,385; 2022: 1,469.
  - Disbursements (US$ millions): 2015: 3,558; 2016: 2,396; 2017: 4,084; 2018: 3,220; 2019: 2,847; 2020: 2,386; 2021: 2,336; 2022: 2,538.
  - Other flows net (incl. drawdown in commercial banks NFA, US$ millions): 2015: 1,063; 2016: 2,163; 2017: 1,932; 2018: 1,326; 2019: 843; 2020: 1,254; 2021: 1,429; 2022: 1,296.
- Drawdown in gross reserves (US$ millions): 2015: -399; 2016: 532; 2017: -1,400; 2018: -899; 2019: -307; 2020: -587; 2021: -419; 2022: -284.
- Financing gap: 0 for the years shown.

### Central government fiscal operations (TD millions, selected)
- Total revenue and grants (TD millions): 2015: 19,945; 2016: 20,568; 2017 (Prel.): 23,671; 2018 (Proj.): 25,852.
  - Revenue (TD millions): 2015: 19,653; 2016: 20,438; 2017: 23,409; 2018: 25,586.
  - Tax revenue (TD millions): 2015: 18,487; 2016: 18,702; 2017: 21,598; 2018: 23,683.
- Total expenditure and net lending (TD millions): 2015: 24,395; 2016: 25,930; 2017: 29,383; 2018: 31,473.
  - Current expenditure (TD millions): 2015: 19,732; 2016: 21,040; 2017: 23,947; 2018: 25,416.
  - Wages and salaries (TD millions): 2015: 11,542; 2016: 13,117; 2017: 13,775; 2018: 15,525.
  - Interest payments (TD millions): 2015: 1,644; 2016: 1,986; 2017: 2,190; 2018: 2,576.
  - Capital expenditure (TD millions): 2015: 3,943; 2016: 4,798; 2017: 5,471; 2018: 6,044.
- Central government overall balance (including grants, cash basis, TD millions): 2015: -4,666; 2016: -5,808; 2017: -5,712; 2018: -5,621.
- Financing, net (TD millions): 2015: 4,666; 2016: 5,808; 2017: 5,712; 2018: 5,621.
  - Foreign financing (TD millions): 2015: 4,285; 2016: 2,479; 2017: 5,449; 2018: 4,516.
  - Domestic financing (TD millions): 2015: 382; 2016: 3,329; 2017: 263; 2018: -130.

### Monetary sector and banking stability (selected)
- Broad money (M3, end-period, TD millions): 2015: 61,899; 2016: 66,883; 2017 (Annual): 66,065; 2018 (Proj.): 73,571; 2019 (Proj.): 79,699.
- Money plus quasi-money (M2, TD millions): 2015: 58,828; 2016: 63,660; 2017 (Annual): 62,792; 2018 (Proj.): 69,709; 2019 (Proj.): 75,515.
- Credit to the economy (TD millions): 2015: 66,093; 2016: 72,472; 2017 (Annual): 74,227; 2018 (Proj.): 77,720; 2019 (Proj.): 83,510.
- Central Bank reserve money (TD millions): 2015: 11,009; 2016: 12,622; 2017 (Annual): 12,583; 2018 (Proj.): 15,256.
- Financial soundness indicators (banking sector, percent):
  - Regulatory capital to risk-weighted assets: 2010: 11.6; 2011: 11.9; 2012: 11.8; 2013: 8.2; 2014: 9.4; 2015: 12.0; 2016: 11.6.
  - Nonperforming loans (NPLs) to total loans: 2010: 13.0; 2011: 13.3; 2012: 14.9; 2013: 16.5; 2014: 15.8; 2015: 16.6; 2016: 15.6.
  - Liquid assets to total assets (new definition): 2016: 5.6.

### Illustrative medium-term growth scenario (selected)
- Real GDP growth (percent): 2012: 3.9; 2013: 2.4; 2014: 2.3; 2015: 1.1; 2016: 1.0; 2017 (Proj.): 2.3; 2018 (Proj.): 3.0; 2019 (Proj.): 3.5; 2020 (Proj.): 4.1; 2021 (Proj.): 4.3; 2022 (Proj.): 4.3.
- Gross national savings (percent of GDP): 2012: 16.1; 2013: 14.4; 2014: 14.0; 2015: 12.5; 2016: 13.5; 2017: 13.6; 2018: 15.1; 2019: 16.2; 2020: 17.3; 2021: 18.3; 2022: 19.3.
- Central government debt (percent of GDP, memorandum): 2012: 47.7; 2013: 46.8; 2014: 51.6; 2015: 57.2; 2016: 62.9; 2017: 69.1; 2018: 72.1; 2019: 71.6; 2020: 70.2; 2021: 67.8; 2022: 65.3.
- Current account balance (percent of GDP): 2012: -8.3; 2013: -8.4; 2014: -9.1; 2015: -8.9; 2016: -9.0; 2017: -8.5; 2018: -8.1; 2019: -7.5; 2020: -7.1; 2021: -6.5; 2022: -6.1.

### IMF financing: Extended Fund Facility schedule and Fund credit indicators
- Schedule of purchases under the EFF (SDR millions / percent of quota / US$ millions, selected):
  - Board approval of the EFF (May 24, 2016): 227.29 SDR; 41.69 percent of quota; 315.901 US$ million.
  - First Review (September 30, 2016): 227.29 SDR; 41.69 percent of quota; 307.540 US$ million.
  - Total (2016–20): 2,045.625 SDR; total US$ 2,774.052.
- Existing and prospective Fund credit (millions of SDR, stock):
  - Disbursement total (SDR millions): 215.0 (2015); 227.3 (2016); 454.6 (2017); 545.5 (2018); 545.5 (2019); 272.8 (2020).
  - Stock of existing and prospective Fund credit (SDR millions): 1,002.8 (2015); 1,205.3 (2016); 1,432.9 (2017); 1,609.2 (2018); 1,880.3 (2019); 2,026.6 (2020); 1,969.8 (2021); 1,833.5 (2022).
- Stock of Fund credit as percent of quota: 2015: 350.0; 2016: 221.1; 2017: 262.8; 2018: 295.1; 2019: 344.9; 2020: 371.7; 2021: 361.3; 2022: 336.3.
- Stock of Fund credit as percent of GDP: 2015: 3.3; 2016: 4.0; 2017: 4.9; 2018: 5.5; 2019: 6.2; 2020: 6.3; 2021: 5.8; 2022: 5.1.

*Source: IMF staff estimates and projections as presented in cr17203.*

### Annex I. Public Debt Sustainability Analysis

### Annex I. Public Debt Sustainability Analysis

### Summary findings
- Tunisia’s central government debt is expected to peak at 72 percent of GDP in 2018 (from an average of 45 percent 2010–14) before declining in later years under the baseline scenario.
- Gross financing needs are expected to average 13 percent of GDP through 2022.
- The debt level breaches the emerging markets debt burden benchmark of 70 percent of GDP under the baseline.
- Tunisia benefits from long maturities and a stable creditor base with a high share of debt owed to IFIs and bilateral donors.
- Stress scenarios confirm debt sustainability but identify significant risks from contingent liabilities and exchange rate depreciation, especially if combined with permanently lower growth.
- The heat map emphasizes the need for urgent fiscal consolidation.

### Baseline assumptions and projections
- Growth and prices:
  - Growth has remained sluggish since the 2015 attacks; weak tourism and low investor confidence weigh on the recovery.
  - Inflation (GDP deflator) is expected to remain around 4 percent over the medium term.
- Debt level and fiscal adjustment:
  - Debt-to-GDP estimated at 63 percent at end-2016 (push factors: looser fiscal stance, weaker-than-expected growth, reclassification of certain debt components, exchange rate depreciation).
  - Fiscal deficit stabilized in 2017, with consolidation starting in 2018 reducing debt-to-GDP to 65 percent in 2022 from a peak of 72 percent in 2018.
  - Three-year adjustment of the cyclically-adjusted primary balance (CAPB) is just within the top quartile; average level in line with peers.
- Sovereign yields and interest rates:
  - Effective interest rate projected to decline to its lowest level in the next three years due to large proportion of concessional or guaranteed debt and the repayment of the 2017 Eurobond.
  - Projected market issuance in outer years will start lifting effective rates in the medium term.
  - Domestic yields have increased in recent months and might increase further in the next two years before stabilizing.
- Maturity and rollover:
  - Relatively long maturities: average above three years for domestic debt and low amounts of short-term commercial paper issued.
  - Gross public financing needs will peak after 2021 (just under 15 percent of GDP), due to maturing recent market issuances.
  - High share of foreign currency-denominated public debt leaves debt vulnerable to exchange rate fluctuations; debt profile has recently improved with higher reliance on domestic financing.

### Key projections and statistics (baseline)
- Central government debt peak: 72 percent of GDP in 2018.
- Debt-to-GDP: estimated 63 percent at end-2016; projected 65 percent in 2022.
- Gross public financing needs: average 13 percent of GDP through 2022; peak just under 15 percent of GDP after 2021.
- Effective interest rate (table values): 2015: 4.8; 2016: 3.9; 2017: 4.1; 2018: 3.9; 2019: 2.7; 2020: 1.4; 2021: 2.0; 2022: 2.5; (defined as interest payments divided by debt stock at end of previous year).
- Real GDP growth (table values): 2015: 3.2; 2016: 1.1; 2017: 1.0; 2018: 2.3; 2019: 3.0; 2020: 3.5; 2021: 4.1; 2022: 4.3.
- Inflation (GDP deflator, table values): 2015: 4.3; 2016: 3.6; 2017: 5.7; 2018: 5.3; 2019: 4.2; 2020: 3.8; 2021: 3.6; 2022: 3.3.
- Nominal gross public debt (table values): 2015: 44.9; 2016: 57.2; 2017: 62.9; 2018: 69.1; 2019: 72.1; 2020: 71.6; 2021: 70.2; 2022: 67.8; 2022 (alt cell): 65.3.
- Primary (noninterest) revenue and grants (percent of GDP): 2015–2022 row sums include 23.8, 23.6, 22.8, 24.3, 24.7, 24.5, 24.6, 24.6, 24.6.
- Primary (noninterest) expenditure (percent of GDP): 2015–2022 row sums include 25.3, 27.7, 26.6, 27.9, 27.6, 26.1, 25.0, 24.0, 23.9.
- Change in gross public sector debt (cumulative 2015–2022): 2.4 (table cumulative).

### Stress tests and alternative scenarios
- Contingent liability shock:
  - A one-off 10 percent of GDP fiscal contingent liability (callable state guarantees, public bank bailouts, ailing SOEs) would increase debt to 86 percent of GDP.
  - This shock reflects an additional 3 percent of GDP in bank recapitalization costs and realization of about 7 percent of GDP of government’s contingent liabilities from public enterprises (about 70 percent of existing contingent liabilities).
  - Even if 90 percent of existing contingent liabilities are called, debt trajectory remains sustainable though debt levels and gross financing risks are high.
- Real exchange rate shock:
  - A one-time 30 percent real depreciation would increase public debt-to-GDP to about 82 percent of GDP before declining to 74 percent by 2022.
- Combined macro-fiscal shock:
  - A combined macro-fiscal shock (to real growth and the primary balance) would raise public debt to 97 percent of GDP by 2019.
- Other alternative scenarios:
  - Under other alternative scenarios, public debt-to-GDP would initially worsen to a maximum between 72 and 86 percent of GDP and then decline to between 65 and 78 percent of GDP in 2022.
- Stress-test conclusion:
  - Public debt dynamics remain sustainable under all scenarios modeled, but risks are increasing and conditions could deteriorate significantly relative to baseline.

### Risk assessment and vulnerabilities
- Tunisia is most vulnerable to:
  - Foreign investor sentiment risks (market perception).
  - Growth and real exchange rate shocks.
- Debt profile risks:
  - More benign due to generally long maturity structure and a high share of concessional financing and bilateral/IFI creditors.
- Heat map and early-warning indicators:
  - Debt-to-GDP exceeds the 70 percent emerging market benchmark under baseline.
  - Gross financing needs approach the early-warning benchmark; urgent fiscal consolidation recommended.
  - External financing requirement and bond spreads are highlighted as areas of vulnerability in the risk-assessment benchmarks.

### Policy implications and recommended priorities (as emphasized in the analysis)
- Urgent fiscal consolidation is needed to:
  - Prevent debt approaching unsustainable levels, especially given stress-test outcomes where combined shocks raise debt to 97 percent of GDP by 2019.
- Maintain or strengthen reforms that reduce sovereign risk premia to stabilize domestic yields over the medium term.
- Continue to manage debt composition to preserve long maturities and maintain a stable creditor mix with high shares of IFI and bilateral financing.
- Monitor and limit contingent liabilities (state guarantees, public bank exposures, SOEs) given their potential to raise debt materially if realized.

*Source: IMF staff.*

### Annex II. External Debt Sustainability Analysis

### Annex II. External Debt Sustainability Analysis

### Overview
- Tunisia’s external debt trajectory:
  - Declined from over 61 percent of GDP in 2002 to 49 percent of GDP at end-2010.
  - Increased from 51 percent in 2011 to 70 percent by end-2016.
  - Most new debt commitments are either with official creditors or backed by a third-party guarantee, except for a US$1 billion Eurobond issued in January 2015 and a €850 million Eurobond in February 2017.

### Baseline projections and key assumptions
- External debt path (external debt-to-GDP ratio):
  - 2016: 70.0 percent
  - 2017: 76.9 percent
  - 2018: 80.7 percent (external debt would peak at 81 percent of GDP in 2018 before declining gradually — table shows 80.7 percent)
  - 2019: 80.4 percent
  - 2020: 78.9 percent
  - 2021: 75.8 percent
  - 2022: 72.3 percent
- Drivers cited for 2017–18 increase:
  - Recent Eurobond issuance and continued official funding.
  - Multilateral financing—including the Fund’s EFF—and international market access through 2018.
- Debt-stabilizing non-interest current account (long-run constant balance): -6.3 (percent of GDP)
- Gross external financing need (in billions of US dollars):
  - 2012: 10.9
  - 2013: 11.6
  - 2014: 12.2
  - 2015: 11.9
  - 2016: 11.8
  - 2017: 11.4
  - 2018: 10.7
  - 2019: 10.9
  - 2020: 10.8
  - 2021: 11.5
  - 2022: 11.7
- Key macroeconomic assumptions (selected):
  - Real GDP growth (percent): 2016 = 1.0; 2017 = 2.5; 2018 = 2.2; 2019 = 2.3; 2020 = 3.0; 2021 = 3.5; 2022 = 4.1
  - Nominal external interest rate (in percent): 2016 = 2.0; 2017 = 2.9; 2018 = 0.7; 2019 = 2.2; 2020 = 1.9; 2021 = 1.6; 2022 = 1.4
  - Growth of exports (US dollar terms, in percent): 2016 = -3.7; 2017 = 1.8; 2018 = 16.5; 2019 = -2.2; 2020 = 0.3; 2021 = 3.6; 2022 = 4.1
  - Growth of imports (US dollar terms, in percent): 2016 = -3.6; 2017 = 3.7; 2018 = 15.9; 2019 = -3.6; 2020 = -0.4; 2021 = 3.3; 2022 = 3.6
  - Current account balance, excluding interest payments (percent of GDP): 2016 = -7.7; 2017 = -5.0; 2018 = 2.9; 2019 = -7.0; 2020 = -6.7; 2021 = -6.4; 2022 = -6.1
  - Net non-debt creating capital inflows (percent of GDP): 2016 = -2.0; 2017 = -2.4; 2018 = -2.8; 2019 = -3.0; 2020 = -3.0; 2021 = -3.0; 2022 = -3.0

### Vulnerabilities and stress-test results
- General resilience:
  - Tunisia’s debt profile—low average interest rate, relatively long maturities, and relatively large proportion of concessional debt—makes it robust to most shocks except for large real exchange rate depreciation.
  - DSA results suggest external debt-to-GDP would remain below 84 percent of GDP throughout the projection period under all but the FX depreciation scenario.
- Specific stress scenarios (selected results):
  - Combo negative shock to real interest rate, growth and the current account:
    - External debt-to-GDP increases to 78 percent by end-2022 compared to 72 percent under the baseline.
  - Sharp real exchange rate depreciation (one-time 30 percent in the second year of projection):
    - External debt-to-GDP would reach 113 percent of GDP in 2018 before declining to 101 percent at the end of the projection horizon.
  - Bound tests (selected):
    - B1 (Nominal interest rate at historical average plus one standard deviation): 2017 baseline 76.9; scenario years show increases (table excerpts include 76.9, 80.9, 81.0, 79.7, 76.8, 73.5).
    - B2 (Real GDP growth at historical average minus one standard deviation): scenario values include 76.9, 81.9, 82.8, 82.2, 79.9, 77.0.
    - B3 (Non-interest current account at historical average minus one standard deviation): scenario values include 76.9, 82.1, 83.3, 83.2, 81.3, 79.0.
    - B5 (One time 30 percent real depreciation in 2016): 2012 baseline 76.9 rising to scenario values 112.5, 112.2, 110.1, 105.7, 100.8 (selected years shown).
- External debt-to-exports ratio (in percent):
  - 2012: 107.2
  - 2013: 119.3
  - 2014: 134.7
  - 2015: 159.7
  - 2016: 174.3
  - 2017: 185.9
  - 2018: 191.6
  - 2019: 193.5
  - 2020: 192.6
  - 2021: 187.9
  - 2022: 184.3
- Identified external debt-creating flows (selected, percent of GDP):
  - Current account deficit, excluding interest payments: 2016 = 7.7; 2017 = 7.0; 2018 = 6.7; 2019 = 6.4; 2020 = 6.1; 2021 = 5.7; 2022 = 5.3
  - Automatic debt dynamics (percent of GDP): 2016 = 3.0; 2017 = -0.1; 2018 = -0.9; 2019 = -1.5; 2020 = -2.1; 2021 = -2.3; 2022 = -2.3
  - Residual, including change in gross foreign assets: 2016 = -3.7; 2017 = 2.4; 2018 = 0.8; 2019 = -2.1; 2020 = -2.4; 2021 = -3.5; 2022 = -3.6

### Policy implications and recommended responses (as described)
- Strengthen resilience and safeguard against FX depreciation risk given vulnerability to large real depreciation shocks.
- Maintain prudent use of international market access and multilateral financing (including EFF), while monitoring exchange rate exposure.
- Rebuild fiscal and external buffers to mitigate external risks and financing pressures.

### Related fiscal and external financing context (selected)
- Eurobonds and market access:
  - US$1 billion Eurobond in January 2015.
  - €850 million Eurobond in February 2017.
- International pledges (Tunisia 2020 Investor Conference):
  - Conference resulted in pledges of up to US$15 billion; considering existing commitments, pledges should increase external support over the next five years to about US$17 billion.
  - Staff projection: only about half of total pledges are conservatively projected to be effectively disbursed, with inflows assumed only from 2018.
  - Conference pledges grand total (in million US dollars): 17,449
  - Annual pledge breakdown (in million US dollars):
    - 2017: 3,499
    - 2018: 3,389
    - 2019: 3,449
    - 2020: 3,305
    - 2021: 3,305
  - Pledge components (selected totals, in million US dollars):
    - Grants total: 210
    - Budgetary/CBT loans total: 7,372
    - Project loans/FDI/Private loans total: 9,867
    - World Bank total: 4,560
    - African Development Bank total: 2,099
    - FADES total: 1,500
    - Banque Européenne d'Investissement (BEI) total: 2,657
    - Qatar (nature to be confirmed): 1,250

### Interaction with FX market policy and reserves
- CBT exchange policy objectives:
  - Facilitate external adjustment while ensuring an adequate level of reserves; intervene to satisfy unmet FX demand and smooth excessive fluctuations rather than target a path or level of the dinar.
  - Historically, dinar depreciation followed a crawl-like behavior around a narrow 2 percent band.
- 2017Q1 interventions and reserves:
  - FX interventions in 2017Q1 were exceptionally high due to the record trade deficit.
  - Gross international reserves stood at around only 3.3 months of imports at the end of 2017Q1—lower than their coverage at end-2016 despite the February Eurobond issuance.
  - For April 2017, FX sales as a ratio of interbank transactions was the highest ever since Jan-2014, while FX sales as a ratio of FX demand by banks was the lowest since January 2016.
- Empirical relationships identified:
  - VAR model evidence: higher energy trade deficits are associated with higher net FX interventions; higher net FX interventions are associated with lower country risk and a stronger exchange rate.
  - Heightened perceptions of risk (ICRG composite risk index) are associated with increased CBT interventions in the FX market.

### Economic cost of instability (selected findings from accompanying box)
- Event study (security incidents, three-day window, January 2011–August 2016) cumulative impacts:
  - 150 basis points increase in Tunisia’s international bond premium.
  - 8 percent decline in Tunisia’s main stock market index (Tunindex).
  - 3 percent decline in the dinar against the U.S. dollar.
- Firm-level survey (joint EBRD/EIB/WB survey of 592 Tunisian firms):
  - Around half of the 592 firms interviewed cited political instability as the top obstacle to business operations.
  - Political instability associated with significantly lower growth in sales and employment over the sample period.

*Source: IMF staff.*

### Annex VII. Exchange Rate Changes and the Trade Balance

### Annex VII. Exchange Rate Changes and the Trade Balance

### Key findings
- Using industry level export and import data, more than ¾ of Tunisia’s trading industries would benefit from a depreciation in the long run due to dominating volume effects, although the trade balance may initially worsen in the short-term due to price effects.
- Tunisia’s comparative advantage is changing toward more value-added industries over time, moving away from traditional low-value added industries (energy) to manufacturing high value-added industries (mechanic and electric) with higher technology and job content.
- Results of a model regressing trade balance on real exchange rate (among other variables) over 2000Q1-2016Q4 indicate that the “textiles” and “mechanical and electric” industries, which together represent the bulk of Tunisia’s trade in goods, would benefit from a depreciation in the long-term.
- There can be negative short-term effects on net exports of the “mechanical and electric” industry up to three quarters.
- The Marshall-Lerner (ML) condition is met in “textiles”, “mechanical and electric” and “other manufacturing” industries, representing more than ¾ of Tunisia’s trade.

### Methodology and empirical approach
- Comparative advantage measured by the revealed comparative advantage (RCA) index originally introduced by Balassa (1965):
  - RCAi = (Xi / X) / (Mi / M) = (Xi / Mi ) / (X / M)
  - Where Xi is Tunisian exports of industry i, Mi is Tunisian imports of industry i. X and M represent total exports and imports of all industries, respectively.
  - Comparative advantage industries are defined to be those with an index above unity.
- The elasticity approach to balance of payments was used to assess the ML condition: currency depreciation can improve the trade balance in the long-term if the sum of import and export demand price elasticities exceed unity.
- Empirical estimation involved import and export demand equations to evaluate whether the sum of price elasticities is greater than one for each industry.

### Short-term versus long-term effects
- Short-term: adjustment lags can cause the trade balance to initially deteriorate before improving, producing a J-Curve phenomenon.
  - Specifically, the “mechanical and electric” industry may experience negative short-term effects on net exports for up to three quarters following a depreciation.
- Long-term: volume effects dominate for most industries, so depreciation improves trade balances in the long-run for the majority of trading industries, notably “textiles”, “mechanical and electric”, and “other manufacturing”.

### Implications for Tunisia’s trade and policy
- Because Tunisia’s comparative advantage is shifting toward higher value-added manufacturing (mechanic and electric), exchange rate policy and competitiveness measures that support these sectors can reinforce export gains over the medium to long term.
- Policymakers should be mindful of short-term deterioration in net exports (J-Curve) and sector-specific lags (e.g., up to three quarters for mechanical and electric) when designing sequencing and complementary policies to cushion initial adverse effects.
- The fulfillment of the ML condition in the major manufacturing sectors (textiles, mechanical and electric, other manufacturing) implies that exchange rate depreciation can be a viable component of restoring external competitiveness for the sectors that account for more than ¾ of Tunisia’s trade.

*Source: Annex VII. Exchange Rate Changes and the Trade Balance (cr17203).*

### 13.      The EFF arrangement’s main objectives remain relevant, as set forth in Sections A–C.

### The EFF arrangement’s main objectives remain relevant, as set forth in Sections A–C.

### Reducing fiscal deficits and improving budget structure
- Immediate structural improvement in fiscal balances is to be initiated.
- Fiscal anchors:
  - Strengthening tax revenues with emphasis on fairness.
  - Measures to maintain sustainability of public debt.
  - Reorientation of current expenditure toward public investment and social spending.
- Fiscal deficit and structural fiscal deficit targets and trajectory:
  - "The fiscal deficit will thus be maintained at 6 percent of GDP in 2017 before falling from 2018."
  - "The structural fiscal deficit (correcting for the economic cycle and excluding one-off measures) will decline by almost 2 percent of GDP in 2018 alone and by a total of 3 percent of GDP between now and 2020 as a result of the impact of structural reforms."
  - Note: "This exceptional adjustment is needed following the weak fiscal performance in 2016 and 2017."
- Government commitment to manage budget risks through close monitoring of expenditure execution and structural reforms in the civil service, social security funds, and state-owned enterprises (SOEs).

### Stabilizing public debt and financing strategy
- Public debt path:
  - "After seven years of sharp increases, public debt is expected to reach its peak of 72 percent of GDP in 2018 before falling from 2019."
- Financing sources and strategy:
  - Large financing needs to be covered mainly by support from the International Financial Institutions (IFIs) and financing raised on international markets at favorable terms.
  - Short-term financing program is based on conservative assumptions given risks on budget execution and donors’ disbursement timetables.
  - Medium-term commitments: improve debt maturity and currency structure, better issuance strategies, strong use of concessional financing.
  - In coordination with the Central Bank, opportunities to deepen the domestic debt market will be explored to pursue an optimal mix of domestic and foreign borrowing.

### Fiscal adjustment that is fair and supports employment
- Public investment and social spending:
  - "Public investment will increase by 1 percent of GDP to reach 6.2 percent of GDP in 2020."
- Structural reform commitments: civil service and pension reforms; modernization of tax policy and tax administration to reduce distortions and expand the tax base.

### Stabilizing the fiscal deficit in 2017 — key measures and targets
- Overall objective:
  - "The 2017 Budget Law (LF2017) ... the overall deficit will be maintained at 5.9 percent of GDP (2.4 percentage points higher than expected in May 2016)."
- Main measures and expected impacts:
  - Strengthening tax and arrears collection:
    - Commitment to collect additional revenue of an average of "TD 75-100 million per quarter this year relative to last year’s effort".
    - Recoverable stock of tax arrears at end-2016: "TD 2.4 billion of recoverable arrears."
  - Containing the wage bill:
    - First-quarter overrun of "0.2 percent of GDP" will be compensated.
    - Offsetting reductions include food allowances "0.05 percent of GDP" and overtime pay "0.03 percent of GDP".
    - Eliminate half of the remaining 20 percent of wage subsidies for public entities (about "0.1 percent of GDP").
  - Reapplication of automatic fuel price adjustment mechanism:
    - Reestablish quarterly adjustment for gasoline and diesel (New Structural Benchmark, September 2017).
    - Adjusted monthly starting in January 2018.
    - 2017 budget includes electricity price increase "5 percent" and gas price increase "7 percent", with social tariffs unchanged.
  - Managing pressures from social security funds in 2017:
    - Transfer to public pension fund (CNRPS): "0.5 percent of GDP".
    - Expected deficit of private pension fund (CNSS): "0.6 percent of GDP in 2017".
    - Financing of CNSS deficit: central government arrears clearance "0.1 percent of GDP", other public entities "0.2 percent of GDP", public enterprises "0.2 percent of GDP".
    - CNSS intensifying collection efforts: "0.1 percent of GDP".
    - Legislative action by June 2017 to stipulate direct transfer of public sector contributions to CNAM, ending transfers for CNAM through CNRPS.
    - Government readiness to submit supplementary budget law to provide transfer or advance to CNSS if liquidity needs cannot be met.

### Major adjustment in 2018 while protecting priority expenditures
- 2018 fiscal objective:
  - "Stabilize public debt by an adjustment of 0.5 percent of GDP in the overall fiscal deficit compared to 2017."
  - The effort will combine tax (administration and policy) and current expenditure measures while allowing increased public investment and social spending.
- Strengthening taxation:
  - 2018 tax strategy adopted by the Council of Minister and presented May 26, 2017.
  - Objective to replace the 2017 exceptional levy on businesses (on the order of "0.9 percent of GDP in 2017") with sustainable measures that expand the tax base and reorient tax burden from direct to indirect taxation.
  - Specific policy moves mentioned include VAT increase for liberal professions from "12 to 18 percent", increases in tax on dividends, and higher consumption taxes on tobacco, alcohol, luxury goods, and private cars.
  - Fiscal package to be included in the 2018 budget law after consultation with IMF staff and adjusted to the EFF macroeconomic framework and fiscal position for 2018.
- Modernizing tax administration and Large Taxpayers Unit (LTU / DGE):
  - Commitment to establish a LTU with formal responsibility for major tax and enforcement functions.
  - Monitoring task force (DGE) to update tax administration reform strategy and prepare annual plans to be reported to the Minister of Finance by June 2017.
  - Operationalizing a Large Taxpayers Unit (DGE) by January 2018 in line with best practice.
    - By October 2017, transfer control functions (in-depth verification) and tax arrears management for large enterprises’ arrears within the DGE (New Structural Benchmark).
    - Full transfer of collection responsibilities for tax revenues of large enterprises from the DGCPR to the DGE by end-March 2018.
  - Strengthening monitoring and verification:
    - Ministry of Finance, with USAID help, to conduct systematic centralized exercise to ensure integrity and compliance of enterprises benefitting from tax incentives by end-March 2018.

- Tax policy measures for 2018 (Table 1, in TD millions):
  - Indirect Taxes: 1,116.0
  - Direct Taxes: 60.0
  - Other Measures to Mobilize Additional Resources: 138.0
  - Recovery: 300.0
  - Total: 1,666.0

### Civil service reform and wage bill objectives
- Reform strategy adopted March 2017; revised April 2017; to be communicated to stakeholders.
- Wage bill target:
  - Reduce wage bill from "14.1 percent of GDP in 2017 to about 12.1 percent of GDP in 2020."
- Three key pillars to achieve wage bill objective:
  - (i) No further wage increases unless growth substantially exceeds the baseline projections (for 2019-2020) and wage bill reduction path can be maintained.
  - (ii) Restrictive recruitment policy with a replacement rate of "25 percent from 2018".
  - (iii) Voluntary departure programs relying mainly on negotiated departures rather than early retirements.
- Quality of public services and functional reviews:
  - Functional reviews of four ministries (finance, education, public infrastructure, and health) to be finalized by end-August 2017 (Delayed Structural Benchmark).
  - Reviews to be extended to other ministries by end-June 2017 at the latest.
  - Establishment of a high civil service of about "1 civil servant for each 1,000 public employees".
- Voluntary separation programs:
  - Early retirement program by end-2017 and negotiated departures program by end-January 2018.
  - Early retirement program targets: between "5,000 and 7,000 employees".
  - Negotiated departure program targets: between "15,000 and 18,000 employees".
  - Draft early retirement law submitted to ARP in April 2017; adoption expected by end-June 2017; three-month window to volunteer in third quarter after adoption.
  - Draft law for negotiated departure program to be submitted to ARP by end-September 2017.
- Managing risks of departure programs:
  - Two committees established to review departure requests at line ministries and at the Office of the Head of the Government; critical sectors/positions to be excluded.
  - Technical design for optimal financial compensation to be prepared with World Bank assistance.
  - Government will seek development partner financial contributions if needed.
- Strict recruitment limits and oversight:
  - Decree to transfer recruitment approval to the Office of the Head of the Government, limiting new hires.
  - Maximum recruitments into civil service set at "3,000 equivalent to a 25 percent replacement rate, for 2018 while confirming the number of 7,500 for 2017"; (New Structural Benchmark, October 2017).
  - Review of legal framework for redeployment to enforce hiring limits and strengthen regional service delivery.
- Contingency measures:
  - If strategy produces weaker-than-expected results, additional fiscal savings will be sought through streamlining wages and allowances, further recruitment streamlining, faster redeployment, and other measures.
  - Commitment to introduce by mid-2018, in consultation with social partners, a mechanism to better anchor wage negotiations and achieve consistency with public wage bill and fiscal sustainability objectives.

### Social security and pension reform
- Tripartite commission (assisted by World Bank, ILO, and ESCWA) to review retirement system parameters:
  - Analyze contribution rates, alignment of pensions with economic indicators (péréquation), reference wage for calculating pension, retirement age, bonification factor for early retirements.
- Consideration of a social VAT as a fungible fiscal resource to diversify financing of social security in context of pension reform; to be discussed at adoption of 2018 budget law.
- Commission to finalize comprehensive pension reform strategy for adoption by the Council of Ministers by end-September 2017 (New Structural Benchmark).
- Implementation of pension reform expected for "January 1, 2018" to address needs of funds in 2018 and over the medium term.

### Ensuring better management of public enterprises
- Performance contracts:
  - Sign performance contracts with five largest public enterprises: Tunisair, STEG, STIR, Office des Céréales, and Régie des Tabacs (Delayed Structural Benchmark, July 2017).
  - Tunisair contract to be of shorter duration pending finalization of a restructuring plan in 2017.
  - Performance contracts include performance indicators and will be monitored by the department of government holdings (DGP) within the Ministry of Finance.
  - Executive performance assessments to be based partly on contract indicators; to inform variable remuneration system.
- Improved monitoring and capacity:
  - DGP prepared monitoring table with basic financial indicators for real-time fiscal risk assessment.
  - Preliminary assessment of financial performance to be conducted and shared with supervising ministries by September 2017.
  - For public banks, Ministry of Finance to hire senior banking experts by September 2017 to build capacity to monitor performance contracts.
  - Strategy to disinvest holdings in seven nonstrategic financial institutions: appoint an investment bank by December 2017 to carry out first transactions.

### Improving public financial management
- Organic Budget Law:
  - Expected publication in the official journal in September 2017 (Delayed Structural Benchmark).
  - Law expected to be implemented in 2019 to improve expenditure management and facilitate civil service reform initiatives.
- Coordination and cash management:
  - Improve coordination between the General Directorate of Debt, the Treasury, and other Ministry of Finance departments for better cash management and transparency of government financing.
  - Strengthen cash management by starting to monitor by end-2017 the part of the Treasury Single Account (TSA) that will regroup all central government accounts.
  - TSA management procedures to follow IMF technical assistance recommendations.

*Source: cr17203 - 13. The EFF arrangement’s main objectives remain relevant, as set forth in Sections A–C.*

### 24.      Continuing the tax policy and tax administration reforms started in 2018.

### Continuing the tax policy and tax administration reforms started in 2018.

### Tax policy and tax administration reforms
- Continue modernization of tax administration:
  - Conduct an in-depth review of the DGE’s management procedures with USAID to increase the unit’s efficiency by December 2018.
  - Continue computerization of procedures that are already at an advanced stage.
  - Explore subjecting exempted enterprises to a reporting regime at least as strict as the regime followed by non-exempted enterprises to ensure compliance with tax rules.
- Pursue implementation of the taxation strategy of May 2016:
  - Streamline resource earmarking with integration of the Special Treasury Funds (FSTs) and review of various taxes, whether specifically earmarked or not, outside the scope of the FSTs.
  - A joint study with USAID will assess financial and economic aspects of the FSTs to gradually reduce them by 2019.

### Reinvigorating monetary and foreign exchange policies
- Context and macro pressures:
  - High external and budget deficits are mainly structural and reflect strong demand from excessive consumption and rising imports not offset by a recovery of exports.
  - Increase in CBT refinancing of commercial banks and significant Central Bank interventions on the foreign exchange market.
  - Credit to the economy: annualized growth rate of 9.8 percent at end-March 2017.
- Mitigating inflationary pressures:
  - Central Bank policy rate raised from 4.25 percent in April 2017 to 4.75 percent (50 basis points), then increased by 25 basis points on May 23, 2017 to 5 percent.
  - CBT stands ready to use all monetary instruments available to mitigate further inflationary pressures during 2017.
- Allowing greater exchange rate flexibility:
  - CBT interventions reduced over the EFF program: net sales averaged 22 percent of total transactions, compared with 30 percent under the Stand-By Arrangement.
  - Interventions have become bidirectional; commitment to limit monthly average net sales of foreign currencies strictly to financing of critical imports at the average interbank rate of the transaction day and to smooth excessive exchange rate fluctuations.
  - Commitments:
    - Buying foreign exchange when market conditions permit.
    - Continuing clear communications to help align market expectations.
    - Immediately conducting close consultation with IMF staff if CBT’s FX interventions exceed the budgeted amounts in any given month.
- FX auction mechanism and operational reform:
  - Reactivate auction mechanism for FX sales to allocate foreign exchange within program ceilings based on competitive price offers.
  - Objectives: transparent allocation, optimal level of interventions based on overall FX liquidity, and reduction of operational costs and risks.
  - Several auctions held since mid-May; full foreign exchange auction mechanism with clear intervention rules to be implemented by August 2017 (New Structural Benchmark).
- Improving monetary policy transmission:
  - Lender of last resort framework established in December 2016 to separate normal refinancing from refinancing for illiquid banks.
  - Monetary policy operations manual adopted in March 2017 with Banque de France and IMF assistance.
  - Establish committee overseeing the lender of last resort framework by September 2017 to:
    - Set eligibility criteria for access.
    - Determine eligible collateral and interest rates.
    - Evaluate business plans and maximum time window of support.
- Reducing CBT balance sheet risks:
  - Apply a discount rate on treasury bills used as collateral in bank refinancing—varying between 0.75 percent and 7.5 percent depending on maturity—once adopted by the Central Bank board (expected July 2017).
  - Finalize the yield curve (June 2017) and establish a central information point for eligible assets with EBRD assistance to facilitate collateral valuation.
  - Publish a comprehensive list of collateral instruments and discount rates on the Central Bank website and internally through the central information point by September 2017.

### Reducing financial sector vulnerabilities
- Completed and ongoing reforms:
  - Restructuring plans and performance contracts of the three public banks adopted, setting annual operational and financial targets, including on nonperforming loans and risk management.
  - Banking law and first implementation decrees adopted.
  - Banking supervision strengthened: reforms on operational risk, exposure to related parties, and adoption of the risk-based supervision manual.
  - Expiry and review: 2015/12 circular allowing postponing downgrading of NPLs in the tourist sector has expired; renewal under review.
- Governance and coordination:
  - Financial sector reform committee established and meeting monthly since April 2017, led by the Ministry of Finance and involving the Central Bank and other ministries.
- Nonperforming loans and provisioning:
  - NPLs in total loans improved from 16.5 percent in December 2015 to 15.6 percent in December 2016.
  - Share of NPLs covered by provisions and through suspended interest accrual (agios réservés) improved to 65.5 percent.
  - Commitment to vigorously pursue financial sector reforms to address structural obstacles to credit provision.
- Actions on public banks (targets and deadlines):
  - By October 2017 (New Structural Benchmark):
    - Adopt a law to allow public banks to abandon claims on credits like private peers (in context of insolvency law and outside), enabling bank boards to approve policies, arbitrage provisions and reconciliation conventions with amounts set by bank boards.
  - By June 2017:
    - Adopt government decree creating a permanent committee to grant an assent (avis conforme) to the Ministry of Finance for all measures concerning debt settlement of the State, local collectivities and public establishments; decree will specify that claims of public banks will not be within the purview of the permanent committee.
  - Simplify write-off rules so a final judgment will not be necessary to write off a claim.
- Additional measures:
  - With EBRD technical assistance, amend law to improve debt collection companies’ efficiency by December 2017 to enable contacting debtors and writing off NPLs.
  - Ministry of Justice to determine registration periods for legal experts by June 2017 to strengthen legal expertise for judges; by September 2017 assess, in consultation with the supreme court, the possibility of training judges specializing in banking disputes.
- Inspections and resolution:
  - Complete inspections of remaining two private banks to achieve inspections of the seven largest private banks by September 2017 (Delayed Structural Benchmark).
  - By June 2017 set up the resolution committee to organize the resolution of Banque Franco Tunisienne (BFT) based on the CBT’s report.
  - Deposit guarantee fund to be operational by September 2017.
- Strengthening supervision and reporting:
  - By June 2017 adopt two circulars on reporting obligations of financial institutions related to market risk (applicable in 2018).
  - Central Bank to hire a dozen new supervisors; hiring process to be finalized by June 2017.
  - By December 2017 implement a manual for on-site supervisors covering assessment of provisions for risk management based on internal ratings.
  - By June 2018 strengthen expertise with IMF technical assistance on establishment of scoring and rating tools in banks through training of teams and supervisors.
  - By March 2018 assess possibility of establishing a transition phase for definition of prudential provisions in preparation for IFRS, particularly for provisions applied to guarantees in compliance with circular 2013/15.
  - Prepare transition toward consolidated supervision; annexes on risks associated with banking groups to be incorporated in new reporting arrangements published by a circular at end-June 2017.

### Toward strong and equitable growth
- Growth strategy:
  - Aim at private-sector driven growth to create more jobs and promote greater fairness; protecting vulnerable families is a key priority.
- Social protection and targeting:
  - Reform of the general equalization fund (caisse générale de compensation) and implementation of the new unique social identification number with a database on vulnerable households (Delayed Structural Benchmark, December 2017) postponed due to delays with the required social survey, though technical progress has been made regarding inclusion of beneficiaries identified through social security funds.
  - Critical system expected to be established by end-2017.
  - Government committed to accelerating technical work from 2018 onward for transition from universal subsidies to needs-based targeting (e.g., conditional cash transfer system).
  - Commit to presenting a concrete strategy in June 2018 to support 2019-20 efforts to adjust budget deficits.
- Anti-corruption and governance:
  - Law on protection of whistle-blowers adopted in April 2017.
  - Law creating the independent high anti-corruption and good governance authority expected to be adopted in September (Delayed Structural Benchmark).
    - Law provides election of members by the ARP following public call; dismissal only with two-third majority vote of ARP members; president appointed by two thirds of authority members.
    - Authority to have powers of self-referral and investigation in public and private sectors.
  - Post-approval milestones (New Structural Benchmark, November 2017):
    - Signature of decree appointing members of the high anti-corruption and good governance authority.
    - Signature of decree specifying remuneration of its members.
    - Submission of its budget in the context of the 2018 budget law preparation.
- Business climate and investment:
  - Draft economic emergency law adopted by Council of Ministers in 2016 to be adopted by ARP by end-2017 to accelerate major investment projects.
  - Streamlining of administrative procedures: simplification of 372 procedures in 2017 across multiple sectors.
  - Promotion of investment code and establishment of entities envisaged in the investment code, including the one-stop shop scheduled for December 2017.
  - Use international relations (e.g., Compact with Africa) to attract investment following Tunisia 2020 Investor Conference.
- Financial sector development and inclusion:
  - Under financial sector reform committee, by December 2017 work with stakeholders (insurance companies, banks, financial markets authority) to identify measures to develop the Tunisian financial market and diversify domestic government finance sources.
  - Increase cap on excessive lending rate to at least the 2009 level by September 2017 (Delayed Structural Benchmark):
    - Ceiling for professionals to increase to 33 percent above the average rate observed, compared with 20 percent at present.
    - Ceiling for individuals to remain unchanged at 20 percent above the average rate observed.
  - By June 2018 conduct a full review of excessive rate legislation to revise the rate for individuals and potentially segment the ceiling for professionals by type of enterprise.
- Public investment efficiency:
  - Commit to improving public investment efficiency and reaching 6.2 percent of GDP in 2020.
  - With World Bank support, identify strategic directions via a Public Investment Management Assessment (PIMA) by end-2017 and strengthen information systems on project status and appropriations implementation.
- Data production, dissemination, and access:
  - Implementing decrees for the organic law on access to information finalized and presented to the administrative court for consultation before publication.
  - National EGov plan prepared with a detailed action plan presented to various ministries.

*IMF country report excerpt.*

### 4. Ceiling on Current Primary Expenditure (million of Tunisian dinars)

### 4. Ceiling on Current Primary Expenditure (million of Tunisian dinars)

### Ceiling on Current Primary Expenditure — reported values and target status
- Reported values (million of Tunisian dinars): 18,088; 9,539; 9,658 (Not Met); 14,497; 13,798; 19,724; 19,054 (Met); 5,586; 10; 379; 14,932; 21,757; 5,983.

### Continuous performance criterion — accumulation of new external debt payment arrears (central government)
- Reported flows/status: 00; 0Met; 00; 0; 0Met; 0; 0; 0; 0; 0; 0; 0; 0.

### Quantitative indicative targets — Floor on Social Spending (million of Tunisian dinars)
- Reported values and status:
  - 1,335; 626; 844 (Met); 926; 1,082; 1,534; 1,411 (Not Met); 487; 965; 1,226; 1,533; 489.

### Indicative target — Ceiling on the accumulation of new domestic arrears
- Reported flows/status: 0; 0; 0 (Met); 0; 0; 0; 0 (Met); 0; 0; 0; 0; 0.

### Program assumptions on which adjusters are calculated (cumulative flows)
- External financing of the central government on a cumulative basis (in US$ million) 4/:
  - 1,507; 341; 226; 1,388; 855; 2,477; 1,431; 1,017; 2,200; 3,; 007; 3,078; 1,344.
- Of which: Multilateral (excluding IMF), bilateral and budget grants (in US$ million):
  - 1,370; 159; 17; 626; 17; 1,635; 577; 0; 108; 871; 927; 233.
- Public external debt service (interest and amortization) on a cumulative basis (in US$ million):
  - 961; 487; 511; 771; 1,113; 930; 265; 1,055; 1,481; 1,823; 243.
- Bank recapitalization and civil service reform costs (in million TD):
  - 647; 0; 0; 0; 0; 0; 0; 0.
- Privatization receipts in FX (in US$ million):
  - 00; 0; 0; 0; 0; 0; 0.
- Resident deposits at the BCT (in US$ million) 5/:
  - 969; 969; 660; 995; 969; 908; 960; 960; 960; 960; 960; 960; 960.
- Foreign exchange swaps between the CBT and commercial banks (in million TD) 5/:
  - 603; 603; 499; 476; 603; 445; 453; 453; 453; 453; 453.
- Foreign exchange swaps between the CBT and commercial banks (in US$ million):
  - 299; 299; 248; 237; 299; 221; 225; 225; 225; 225; 225.

### Program exchange rate and valuation assumptions
- Program exchange rate TD/ U.S. dollars (program exchange rate): 2.01285. Repeated entries: 2.01285; 2.01285; 2.01285; 2.01285; 2.01285; 2.01285; 2.01285; 2.01285; 2.01285; 2.01285; 2.01285.

### Data reporting periods and target statuses cited
- Reporting periods and labels found in source: June 2016; September 2016; Target status; Prel.; Proposed target; Act.; Act.; Prel.; Cumulative Flows Since Beginning 2016 (unless otherwise specified); Prog.; December 2016; Indicative Target; Program Adjusted Target; Indicative target; Target status; Indicative target; Adjusted Target; Cumulative flows since beginning of 2018 (unless otherwise specified); Proposed target; Indicative target; Cumulative flows since beginning of 2017 (unless otherwise specified).

### Definitions and measurement notes (program technical assumptions)
- For program purposes, all assets, liabilities, and flows denominated in foreign currencies will be valued at the “program exchange rate,” except items affecting the government’s budgetary accounts, which will be measured at current exchange rates.
- The exchange rate corresponds to the accounting exchange rate of the CBT prevailing on December 31, 2015. For the SDR: 1 SDR = 2.797590 Tunisian dinars.
- Monetary gold valuation: price of 2,138.15 dinar per ounce of gold in the international market on 12/31/2015 (London morning fixing). The stock of gold is 4.13 tons (4,129,806 grams) on December 31, 2015.
- Net international reserves (NIR) of the Central Bank of Tunisia are defined as the difference between the CBT’s reserve assets and its liabilities in foreign currency to nonresidents.
- At end-March 2017, the stock of deposits in foreign currencies of residents at the CBT was US$960.1 million at the program exchange rate.

*Source: IMF staff estimates.*

### 13.      The value of CBT reserve assets and liabilities in foreign currency will be calculated using

### 13.      The value of CBT reserve assets and liabilities in foreign currency will be calculated using

### Valuation of Reserve Assets and Liabilities
- On March 31, 2017, the value of the stock of net international reserves was US$3,105.2 million.
- Stock of reserve assets: $6,197.5 million (at program rates).
- Stock of CBT liabilities in foreign currency: US$3,092.4 million (at program rates).
- Net foreign assets are valued at the program exchange rate defined in the above table.

### Ceiling on Net Domestic Assets (NDA)
- Definition: CBT’s net domestic assets = monetary base − net foreign assets of the CBT.
- Monetary base includes:
  - fiduciary money (money in circulation excluding cash balances of banks and the Treasury);
  - deposits of banks at the central bank (including foreign currency and deposit facility);
  - deposits of all other sectors at the central bank (other financial enterprises, households, and companies).
- Net foreign assets of the CBT: gross foreign assets (including foreign assets not part of reserve assets) − all foreign liabilities of the CBT, valued at program exchange rate.

### Floor on the Primary Balance of the Central Government (Excluding Grants)
- Measurement: primary fiscal balance of the central government (excluding grants, on a cash basis) is measured on a financing basis and equals the negative sum of:
  - (i) total net external financing;
  - (ii) privatization receipts;
  - (iii) net domestic bank financing;
  - (iv) net domestic nonbank financing;
  - plus (v) interest on domestic and external debt paid by the central government;
  - less external budgetary grants received by the central government.
- Total net external financing = new loan disbursements − repayments of principal (includes project and budgetary loans and any form of debt used to finance central government operations).
- Privatization receipts: receipts from sale of government assets, including sale of government shares, sales of nonfinancial assets, sales of licenses, sale of confiscated assets (excluding confiscation of bank accounts). For the NIR adjustor, only receipts in foreign currency are included.

### Net Domestic Bank Financing and Government Securities
- Net domestic bank financing = change in net bank loans to central government (in TND and foreign currency) + change in central government deposits at the CBT (includes all central government accounts at the CBT; detailed list of account types provided).
- Following unification, government accounts consolidated into two categories on the CBT’s balance sheet: “Compte Central du Government” and “Comptes Spéciaux du Government”.
- Net government borrowing from the banking system = change in stock of government securities (Treasury bills and bonds) held by banks + any other central government borrowing from banks − repayments.
- Net domestic nonbank financing = change in stock of government securities held by nonbanks (including social security funds) + other central government borrowing from nonbanks − repayments.
- Total Treasury bills and other public debt instruments are taken at nominal/face value shown on institutions’ balance sheet and exclude accrued interest.

### Ceiling on Central Government Primary Current Expenditure (Excluding Interest)
- Central government primary current expenditure = sum of expenditure on:
  - (i) personnel wages and salaries;
  - (ii) goods and services;
  - (iii) transfers and subsidies;
  - (iv) other unallocated current expenditure.

### Ceiling on Accumulation of External Arrears
- Arrears on external debt payment: late payments (principal and interest) on external debt or guarantees (central government or CBT) from due date or expiration of applicable grace period, as defined in External Debt Statistics: Guide for compilers.

### Indicative Ceiling on Accumulation of Domestic Arrears
- Arrears on domestic debt payment: amounts owed to domestic financial and commercial creditors that are 90 days or more overdue with respect to a specific maturity date (or as defined in contractual grace period). If no maturity date, unpaid beyond 90 days after contract signing or receipt of invoice.

### Indicative Floor on Social Expenditures
- Social expenditures defined as capital (development) expenditures on education, health, social transfers to low-income families, the AMAL employment training program (and university scholarships), UTSS indemnities, family allocation, development expenditures of the Ministries of Women and Family Affairs, Youth and Sports and Social Affairs, and all new targeted cash transfers in support of vulnerable groups.
- Excludes all current expenditures (“dépenses de gestion”) of above sectors and programs, as well as food and energy subsidies.

### Adjustment Factors for Program Performance Criteria
- NIR targets are adjusted upward (downward) if the cumulative sum of:
  - net external financing of the central government,
  - budgetary grants,
  - privatization receipts received in foreign currency,
  - increase (decrease) in residents’ foreign currency deposits at the CBT (including FX swaps)
  are greater (lower) than the levels observed in the table below.
- NIR targets also adjusted upward (downward) if total amount of cash payments on external debt service of the government is lower (greater) than levels in the table below.
- NDA targets adjusted upward (downward) based on downward (upward) adjustment of the NIR floor given the same cumulative sums, and based on cash payments on external debt service being greater (lower).
- NDA targets also adjusted based on change in stock of foreign currency swaps between the central bank and commercial banks compared to level on March 31, 2017: US$225.3 million, 453.4 million Tunisian dinars.
- The NDA ceiling will be converted into Tunisian dinars at the program exchange rate.
- NDA ceilings will also be adjusted based on amount of CBT reserves released/mobilized because of possible decrease/increase in the reserve requirement.
- Floor on the primary balance (excluding grants) will be adjusted upward/downward based on amounts used to recapitalize public banks and amounts used to finance severance pay of voluntary departures as part of civil service reform.

### Program Assumptions on Adjustment Factors for the Quantitative Performance Criteria (In millions of US dollars)
- Official External Financing:
  - 2017 Q1 Q2 Q3 Q4 Year: 1,017 1,491 807 378 3,693
  - 2018 Q1 Q2 Q3 Q4 Year: 1,344 578 345 572 2,838
- Project loans:
  - 2017 Q1 Q2 Q3 Q4 Year: 64 64 64 64 256
  - 2018 Q1 Q2 Q3 Q4 Year: 88 88 88 88 350
- Multilateral donors:
  - 2017 Q1 Q2 Q3 Q4 Year: — 417 719 308 1,443
  - 2018 Q1 Q2 Q3 Q4 Year: 233 478 233 478 1,422
- IMF (budget support starting 2017) row:
  - 2017 Q1 Q2 Q3 Q4 Year: 1/ — 308 — 308 615
  - 2018 Q1 Q2 Q3 Q4 Year: — 369 — 369 737
- World Bank Group:
  - 2017 Q1 Q2 Q3 Q4 Year: — — 500 — 500
  - 2018 Q1 Q2 Q3 Q4 Year: 233 — 233 — 466
- European Union:
  - 2017 Q1 Q2 Q3 Q4 Year: — 109 219 — 328
  - 2018 Q1 Q2 Q3 Q4 Year: — 109 — 109 219
- Financial Market Access and other:
  - 2017 Q1 Q2 Q3 Q4 Year: 952 1,011 24 6 1,994
  - 2018 Q1 Q2 Q3 Q4 Year: 1,024 13 24 6 1,067
- Sukuk and other market financing:
  - 2017 Q1 Q2 Q3 Q4 Year: 929 998 — — 1,927
  - 2018 Q1 Q2 Q3 Q4 Year: 1,000 — — — 1,000
- Loan Transfers to SOEs:
  - 2017 Q1 Q2 Q3 Q4 Year: 24 13 24 6 67
  - 2018 Q1 Q2 Q3 Q4 Year: 24 13 24 6 67
- Budget Grants:
  - 2017 Q1 Q2 Q3 Q4 Year: — 27 49 38 115
  - 2018 Q1 Q2 Q3 Q4 Year: 25 25 25 25 100
- Privatization Receipts: — (no amounts shown)
- Government External Debt Service:
  - 2017 Q1 Q2 Q3 Q4 Year: 265 791 426 342 1,823
  - 2018 Q1 Q2 Q3 Q4 Year: 243 645 382 297 1,568
  - Amortization 2017: 139 713 309 277 1,438; 2018: 106 558 248 223 1,134
  - Interest 2017: 126 78 117 65 386; 2018: 137 87 135 74 434
- Bank recapitalization and one-off costs linked to the civil service reform: — (no amounts shown)
- FX swaps between the CBT and commercial banks:
  - USD: 225 225 225 225 225 225 225 225 225 225 (for each quarter/year cell)
  - In million Tunisian dinars: 453 453 453 453 453 453 453 453 453 453
- Resident deposits at the BCT, including FX swaps 2/:
  - 2017 row shows 1,185 1,185 1,185 ... (repeated)
  - 2018 row shows 1,185 1,185 1,185 ... (repeated)
- Notes:
  - 1/ The SDR/USD exchange rate used for the conversion of IMF disbursements is 0.7391 in 2017 and 0.7399 in 2018.
  - 2/ End-March 2017 reference level for resident deposits was estimated at USD 960.1 million; FX swaps at USD 225.3 million.
- Sources: Tunisian authorities and IMF staff estimates.

### Monitoring and Reporting Requirements
- Performance monitored using data supplied to the IMF by Tunisian authorities per the table of data types, periodicity, delays, and responsible departments.
- Selected reporting requirements and periodicity/delays/responsible department:
  - GDP: supply and demand at current, constant, and previous year’s prices — quarterly (q), delay 45 days, INS.
  - Inflation: including underlying inflation of non-administered and administered prices — monthly (m), delay 14 days, INS.
  - Tax and nontax revenue of central government — monthly (m), delay 30 days, MoF.
  - Total expenditures: current and capital, transfers and subsidies — monthly (m), delay 30 days, MoF.
  - Capital expenditure: by type of financing and sector — monthly (m), delay 45 days, MoF.
  - Social expenditure — quarterly (q), delay 45 days, MoF.
  - Stock of domestic and foreign debt — quarterly (q), delay 30 days, MoF.
  - Stock of domestic arrears and accounts payable >90 days — quarterly (q), delay 45 days, MoF.
  - Disbursement of foreign loans — monthly (m), delay (noted), MoF.
  - Consolidated accounts of central government at the CBT — monthly (m), delay 30 days, CBT (MoF/TGT for sub-account).
  - Imports of Petroleum Products: average import price and volume — monthly (m), delay 30 days, CBT.
  - Deposits: stock of foreign currency deposits, by residence — monthly (m), delay 14 days, CBT.
  - Overall net external position of Tunisia (SDDS) — quarterly (q), delays: 30 / 90 / 180 days, CBT.
  - Balance of payments — quarterly (q), delay 30 days, CBT.
  - CBT accounts at the current exchange rate including monetary system — monthly (m), delay 30 days, CBT.
  - CBT foreign exchange reserves, breakdown by currency and instrument — weekly (w), delay 1 day, CBT.
  - IMF account statements: monthly consolidated statements of IMF No. 1, No. 2, and Securities Account — monthly (m), delay 30 days, CBT.
  - Banks’ financial soundness ratios — monthly (m), delay 30 days, CBT.
  - Direct refinancing of commercial banks by CBT: breakdown by bank — monthly (m), delay 14 days, CBT.
  - NPLs: stock and breakdown by commercial bank — quarterly (q), delay 60 days, CBT.
  - Balance sheets of commercial banks, including detailed income statements — quarterly (q), delay 60 days, CBT.
  - Other information: decrees or circulars on fiscal, monetary, and financial policy — daily (d), delay 3 days, CBT/MoF.
  - Price structure of petroleum products and data to monitor automatic adjustment mechanism — daily (d), delay 15 days, Min. of Energy.

### Statement by Tunisian Authorities and Recent Economic Outlook
- Statement dated June 12, 2017 by Mr. Jaffar Mojarrad, Mr. Abedlali Jbili, and Ms. Monia Saadaoui expressing agreement with staff analysis and policy recommendations and appreciation for technical assistance.
- Recent developments and outlook:
  - 2016 growth slowed to 1.0 percent.
  - Unemployment remained high at 15½ per cent.
  - Inflation was below 4 percent.
  - Current account deficit widened, with pressure on foreign exchange and significant depreciation of the dinar.
  - Modest improvement forecast for 2017 with growth estimated at 2.3 percent.
  - Q1 2017 GDP grew at 2.1 percent compared with Q1 2016.
  - Inflation picked up in March 2017 due to exchange rate depreciation but expected to remain moderate because of tight monetary policy and a negative output gap.
  - Fiscal and current account deficits projected to remain high.
  - Revised medium-term outlook envisages gradual recovery of growth from a range of 2.3- (text truncated in source).

*Document: cr17203 - 13.      The value of CBT reserve assets and liabilities in foreign currency will be calculated using*

### 3.5 percent in 2017-19 to slightly above 4 percent in 2020-22, supported by improvement in

### cr17203 - 3.5 percent in 2017-19 to slightly above 4 percent in 2020-22, supported by improvement in

### Fiscal Policy
- Fiscal consolidation remains critical to maintain macroeconomic stability and enhance policy credibility.
- Authorities’ strategy: combine short-term measures to contain recent fiscal deterioration with permanent steps and fiscal structural reforms to reduce public debt as a ratio to GDP to a sustainable level.
- 2016 developments:
  - Spending pressure from an early wage agreement and a fall in revenues due to lower growth contributed to a significant deterioration of the fiscal deficit.
  - The end-December primary fiscal deficit criterion was missed.
- 2017 Budget Law measures to maintain the overall fiscal deficit (including grants) at 5.9 percent of GDP:
  - One-off levy on corporate profits with expected yield of 0.9 percent of GDP.
  - Strengthened tax collection.
  - Measures to contain the wage bill and manage pressure from social security funds (MEFP ¶17).
- 2018 intentions:
  - Pursue growth-friendly fiscal consolidation while protecting social spending.
  - Package submitted to the signatories of the "Pact of Carthage” aims to:
    - Replace the 2017 one-off levy with more permanent measures.
    - Shift the tax burden from direct to indirect taxes.
    - Strengthen tax collection and reduce exemptions (Table 1 of the MEFP).
  - These measures will be incorporated in the draft 2018 Budget Law.
- Structural fiscal reforms and tax administration modernization:
  - National Conference on Taxation started in 2014; efforts being stepped up.
  - Large Taxpayers Unit expected to be operational in January 2018.
  - Plans at an advanced stage to enhance monitoring and verification.
- Civil service reform strategy:
  - Tight control of wages increases, restrictive recruitment policy, and a voluntary separation program.
  - Implementation of the retirement program will be carried out with World Bank assistance and preceded by extensive consultations with social partners.
  - Planned civil service reform seeks to enhance quality of public service and strengthen efficiency (MEFP ¶20).
- Pensions reform:
  - Comprehensive reform of public and private pensions under active preparation with the World Bank, ILO, and ESCWA.
  - Reform to be adopted by end-September 2017 (Structural Benchmark) with implementation scheduled for January 2018.

### Monetary and Exchange Rate Policy
- Central Bank of Tunisia (CBT) response to inflationary pressure:
  - Increased its key rate twice so far this year.
  - Met banks’ increased liquidity needs through refinancing operations.
  - Standing ready to tighten further if needed to achieve inflation and reserves objectives.
- CBT interventions in the foreign exchange market:
  - Helped satisfy unmet foreign exchange demand and smooth exchange rate fluctuations.
  - Intervention helped during an exceptionally high trade deficit in Q1 2017 when the dinar depreciated by 18 percent in nominal effective terms.
  - Interventions ensured orderly financing of energy and food imports and restored market confidence by avoiding panic in the foreign exchange market.
- Authorities’ view:
  - Exchange rate flexibility and monetary policy tightening would help contain the large current account deficit and rebuild reserves.
- CBT operational changes:
  - Started to apply the auction mechanism as a transparent and more competitive instrument of intervention in the foreign exchange market.
  - Seeks to improve transmission of monetary policy, including through implementation of the lender of last resort mechanism adopted in December 2016.
  - Effective use of the Manuel of Monetary Procedures adopted in March 2017 with assistance from the IMF and the Banque de France.

### Financial Sector
- Progress on vulnerabilities by upgrading legislative and regulatory framework and enhancing supervision.
- State-owned banks:
  - Following recapitalization of three state-owned banks, restructuring plans and performance contracts have been adopted.
  - Contracts set annual financial and operational targets, improve treatment of non-performing loans (NPLs), and enhance risk supervision.
- Regulatory and supervisory improvements:
  - Banking Act and its first implementing decrees have been adopted.
  - Banking supervision strengthened with reforms related to operational risk, exposure to related parties, and adoption of the risk-based supervision manual.
- Authorities’ commitments:
  - Further reforms to strengthen public banks.
  - Improve inter-agency coordination.
  - Foster financial inclusion by strengthening microfinance and digital finance.

### Structural Reforms
- Structural reform agenda covers civil service, public and private pensions, banking sector, competition, public and private partnerships, investment code, governance and fight against corruption, and business climate.
- Implementation challenges:
  - Carrying out many reforms simultaneously within relatively optimistic timetables has been difficult.
  - Despite delays, reforms continue to move forward as evidenced by draft laws in parliament, those in advanced preparation, and those seeking technical assistance.
  - Authorities appreciate staff flexibility in adapting timetable of structural benchmarks to changing circumstances.
- Administrative and investment reforms:
  - Sustained efforts to streamline administrative procedures, including establishment of one-stop shop scheduled for December 2017.
  - New investment law adopted by parliament in September 2016 provides more clarity, equal treatment of domestic and foreign investors, and separation between fiscal and financial incentives.
  - Reform momentum to be strengthened through follow up on the Tunisia 2020 Investor Conference and the G-20 Compact with Africa.

### Social Policies
- Enhancing effectiveness of social policies is a key government priority, including transition from universal subsidies to targeted assistance to vulnerable households.
- Ongoing work:
  - Complete the data base on vulnerable households (structural benchmark for end-December 2017).
  - Reform the general equalization fund (Caisse générale de compensation).
- Interim social measures:
  - Lifeline electricity tariffs for poor households have remained unchanged.
  - Authorities intend to apply the automatic adjustment mechanism for the three main fuel products starting in July 2017.

### Conclusion
- Tunisia has made progress implementing an ambitious reform agenda despite adverse conditions, reflecting economic resilience and authorities’ commitment.
- Authorities are confident the recalibrated agenda under the EFF will facilitate completion of reforms already launched and those under active preparation.
- Authorities express thanks for continued support and look forward to close cooperation with the Fund and increased support from the international community.

*IMF staff report content (cr17203).*

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_Source: https://www.imf.org/-/media/files/publications/cr/2017/cr17203.pdf_