## cr18120 ## Source details **Canonical URL:** [cr18120](https://www.imf.org/-/media/files/publications/cr/2018/cr18120.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2018/cr18120.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2018/cr18120.pdf.json) --- ### Economic performance and inflation - Growth: - Growth almost doubled to 1.9 percent in 2017. - Growth projected to reach 2.4 percent in 2018 and 2.9 percent in 2019 in the Selected Economic Indicators table; medium-term projection of 4 percent by 2022. - Text Table 1: Real GDP growth (in percent): 2015 1.1; 2016 1.0; 2017 1.9; 2018 2.4; 2019 2.9; 2020 3.4; 2021 3.6; 2022 4.0; 2023 4.2. - Inflation and monetary stance: - Inflation (eop) increased to 6.4 percent in 2017; reported as 7.1 percent in February 2018 in the Executive Summary. - CPI inflation accelerated to an annualized 7.1 percent in February 2018. - Central Bank actions: widened interest corridor from 50 basis points to 200 basis points; increased policy interest rate by 75 basis points in March 2018 to 5.75 percent. - Interbank rate: rose from 5.4 percent at end-December to 5.8 percent at beginning of March; commercial bank prime borrower rates in the 8 to 12 percent range. - Staff/Taylor-rule assessment: policy rate in the range of 6–8 percent noted as plausible upper bound. ### External sector and reserves - Current account and trade: - Current account deficit deteriorated to a record 10.1 percent of GDP at end-2017. - January–February 2018: export values grew by 47 percent year-on-year (16.4 percent for January in volume terms); imports grew 23 percent in value terms (and for January, 1.6 percent in volume terms). - Trade drivers: sluggish exports in 2017; import increase due to high domestic energy needs, strong consumption demand, rapid credit growth, and dinar depreciation. - Early 2018: improvement in export performance and slowing import growth; outlook expects favorable trend supported by a more favorable real exchange rate. - Reserves and FX interventions: - International reserves declined to 2.5 months of imports in March 2018; reserve cover reported as 2.6 months of imports in early March 2018 in the Executive Summary. - Selected Economic Indicators table reports reserve coverage (months of next year's imports of GNFS): 3.1 (2017), 3.4 (2018), 3.7 (2019); Text Table projections to 2023 list 3.1 (2017) rising to 4.2 (2023). - Net FX interventions: US$3.1 billion net FX sales by CBT between start-2017 and end-January 2018 (equivalent to 7.7 percent of GDP). - Directors/staff recommended reducing foreign exchange interventions and increasing exchange rate flexibility; staff recommended return quickly to a de facto floating exchange rate. - ARA/adequacy: reserves at 2.6 months of imports in early March 2018 are below 100 percent of short-term debt and below the ARA EM metric; program projects recovery to ARA EM range conditional on exchange rate flexibility. ### Public and external debt; fiscal outlook - Debt levels and projections: - Gross public debt: 71.3 percent of GDP at end-2017 (Selected Economic Indicators: Gross public debt (% of GDP) 71.3 for 2017). - External debt: 80.1 percent of GDP at end-2017. - Projections: public and external debt projected to peak (Selected summary: public debt peak 73 percent in 2019 per some tables; Annex projections: external debt expected to rise to 83.8 percent in 2018 and peak at 85.5 percent in 2019 then decline). - Baseline: public debt expected to decline to 68 percent of GDP by 2023 under strong consolidation; alternative scenarios show much higher paths (e.g., contingent shocks could push debt above 90 percent). - Fiscal balances and measures: - Central government overall balance (incl. grants): -6.0 (2017), -5.2 (2018), -3.4 (2019) (percent of GDP, Selected Economic Indicators). - Total revenue (excl. grants): 24.0 (2017), 24.6 (2018), 25.7 (2019) (percent of GDP). - Total expenditure and net lending: 30.2 (2017), 30.1 (2018), 29.3 (2019) (percent of GDP). - Cyclically-adjusted structural balance: -6.7 (2017), -4.3 (2018), -3.1 (2019). - 2017 fiscal deficit ended at 6 percent of GDP; 2017 budget deficit (excluding grants) reported as 6.1 percent of GDP in another table. - 2018 measures: new tax measures worth 2.2 percent of GDP; VAT rate increases and excise rises; revenue package items summarized in Text Table 2 yield 2.2 percent of GDP; 2018 tax revenue reported as 22.4 (Percent of GDP) after measures. - Energy subsidy containment targeted at 2.0 percent of GDP for 2018 (budget allocation TD 2,108 million); due to oil price changes, budgeted energy subsidy ceiling increased from TD 1,500 million to TD 2,108 million. - Wage bill: underlying wage bill reached 15.0 percent of GDP (14.7 percent excluding tax credits); target to reduce wage bill-to-GDP ratio to 12.4 percent by 2020 via hiring caps and voluntary separations. - Quantified revenue/expenditure impulses: revenue package 2.2 percent of GDP; voluntary separation schemes and hiring limits expected to generate savings (e.g., TD 280 million annual savings from 10,000 negotiated voluntary separations). - Public financing needs and exposure: - Gross public financing needs: 7.8 (2016), 9.5 (2017), 10.8 (2018), 10.3 (2019), 8.7 (2020), 7.9 (2021), 7.8 (2022), 6.7 (2023) (percent of GDP or noted series). - IMF exposure: credit outstanding to IMF will peak at 372 percent of quota in 2020; obligations to IMF will reach 1.4 percent of GDP in 2018 or 25 percent of external debt service. ### Banking sector and financial stability - Sector health and risks: - Banking sector remains stable but suffers structurally low liquidity; deposit mobilization improved but insufficient. - Inspections of the seven largest private banks showed no major vulnerabilities; provisioning concerns for one bank identified; NPLs around 15 percent of total assets with provisioning rate at 65 percent in one summary. - Foreign currency exposure low; net open FX positions small relative to capital. - Credit growth: banks increased credit to firms and households at 13 percent in 2017; record central bank refinancing reached TD 13 billion at beginning of March 2018 (other references: exceeded TD 12 billion in January 2018). - Reforms and measures: - Legislative measures to facilitate NPL reduction in public banks; Council of Ministers adopted draft laws to allow public banks to abandon claims and streamline write-off rules. - COREFI tasked to prepare strategies on liquidity, SME financing, and de-cashing; plan for consolidated supervision by 2019. - Resolution framework: deposit guarantee fund operationalized in January 2018; resolution committee appointed and BFT liquidation/resolution planned as a priority (estimated cost of liquidating BFT: 400 million TD in program assumptions). - AML/CFT: Tunisia placed on FATF gray list in November 2017; action plan agreed with FATF and MENAFATF; risks to correspondent banking noted. - Program conditionality includes structural benchmarks to adopt laws on maximum lending rate, credit bureaus, and other financial sector reforms. ### Program performance, IMF action, and Executive Board assessment - EFF arrangement and disbursements: - Four-year EFF arrangement amount: SDR 2.045625 billion (about US$2.98 billion, 375 percent of Tunisia’s quota), approved May 20, 2016. - On March 23, 2018, IMF Executive Board completed the second review under the EFF, allowing a draw of SDR 176.7824 million (about US$257.3 million), bringing total disbursements under the arrangement to SDR 631.3661 million (about US$919 million). - Performance criteria and waivers: - All December 2017 Quantitative Performance Criteria were missed; two of 14 Structural Benchmarks met on time. - Board approved waivers for non-observance of end-December performance criteria on NIR, NDA, primary fiscal deficit, and current primary spending; waiver for continuous PC on payments and transfers for current international transactions related to exchange restriction. - Board approved retention of an exchange restriction barring trade credit for certain non-essential imports until December 31, 2018. - Staff supported move from semi-annual to quarterly reviews and establishment of a new monthly Indicative Target on net central bank FX interventions. - Board/Directors guidance: - Directors urged urgent and decisive action to make public finances sustainable, address rising inflation and falling reserves, and ensure macroeconomic stability. - Fiscal recommendations: increase tax revenue, strengthen tax collection, implement voluntary separations for civil servants, curtail new wage increases unless growth surprises on upside, enact quarterly fuel price increases. - Monetary recommendations: welcomed recent policy interest rate increase and emphasized further tightening would be necessary unless inflation subsides quickly; stressed need for exchange rate flexibility. - Social protection: maintain adequate social protection, equitable and sustainable pension reforms, targeted programs for most vulnerable. ### Structural reforms and social protection - Authorities’ reform measures and priorities: - 2018 revenue package: new tax measures worth 2.2 percent of GDP. - Quarterly adjustments of fuel prices to contain energy subsidy growth. - Civil service reform: voluntary separations, voluntary early retirements, hiring cap of 3,000 in 2018, and strict hiring limits. - Pension reform and development of better targeted social safety net; staff emphasized finalizing database of vulnerable households. - Reported structural progress: - Establishment of the High Anti-Corruption Authority (HACGGA). - Creation of a one-stop shop for investors (Tunisian Investment Authority) and operationalization steps for the investment code. - Performance contracts for public banks and state-owned enterprises. - Laws to facilitate banks’ NPL reduction adopted by Council of Ministers (pending Parliamentary approval). - Social sector statistics and pressures: - Only about a third of Tunisians contribute to the pension system; only half covered by health insurance. - Consolidated cash needs of pension funds and CNAM: 0.7 percent of GDP at end-2017; set to reach 1.5 percent of GDP in 2018. - Pension replacement income up to 80 percent of salaries; social program spending historically stagnant at 1.5 percent of GDP (or 2 percent under revised definition). - Energy subsidies amounted to 3.1 percent of GDP in 2017. - Cash and health transfer programs cover only about 12 percent of Tunisia’s poor; nearly a quarter of Tunisians are net beneficiaries but only 2 in 5 of these live below national poverty line. ### Risks, adverse scenarios, and stress tests - Balance of risks tilted to the downside; two key risks highlighted: - Political stalemate over adjustment and structural reforms: could lead to continued deficits, rising debt, weaker growth, higher inflation, falling reserves; by 2020 public and external debt could reach 80 percent and 87 percent of GDP respectively. - Major security incident triggering renewed confidence shock: mirroring 2015 impacts—sharp fall in growth, higher fiscal deficits, increased debt, and significant reserve decline. - Stress-test outcomes and scenarios: - Contingent liability and combined shocks could push public debt above 90 percent under adverse scenarios. - A one-off 10 percent of GDP shock to contingent liabilities modeled as: an additional three percent of GDP in bank recapitalization costs and realization of about 7 percent of GDP of government contingent liabilities. - Real exchange rate shock example: a one-time 30 percent depreciation in second projection year would raise external debt ratio to 127.2 percent of GDP in 2019 in the simulation. - Mitigation priorities: - Rebuild fiscal and external buffers, strict policy implementation, faster structural reforms, continued sizable external financing (grants or highly concessional loans), and close monitoring via quarterly reviews and a new monthly IT on net FX interventions. ### Program conditionality, monitoring, and technical specifics - Performance criteria and targets: - QPCs: floor on NIR of CBT; ceiling on NDA of CBT; floor on primary balance (excl. grants); ceiling on total current primary expenditure; continuous PC zero ceiling on accumulation of new external payment arrears. - Indicative Targets: ceiling on accumulation of new domestic arrears; floor on capital expenditures in priority social sectors; ceiling on net FX interventions of the CBT. - Program exchange rate: TD/US$ 2.01285 (program convention). - Adjusters and assumptions: - Adjusters for NIR and NDA based on cumulative net external financing, grants, and privatization receipts; program tables list external financing and donor flows and assume specific financing profiles. - Program valuation rules: program exchange rates for FX valuation; specific list of exchange rates for currencies provided. - Technical reporting: detailed data reporting calendar with periodicity and delays assigned to INS, MoF, and CBT across GDP, inflation, fiscal, debt, monetary, and external statistics. - Prior actions and Structural Benchmarks (selected): - Met prior actions: 2018 budget law adoption; HACGGA statute publication; fuel price ad-hoc increase; TD 200 million arrears clearance to CNSS; portfolio quality measures adoption by Council of Ministers. - Reprogrammed or not met SBs include operationalization steps for HACGGA, household vulnerability databank, full FX auction competitiveness, maximum lending rate law, large taxpayers unit operationalization, and pension comprehensive reform. *Source: IMF staff report and Executive Board materials contained in the provided PDF content.* ### 5.75 percent in March. ### cr18120 - 5.75 percent in March. ### Economic performance and inflation - Growth almost doubled to 1.9 percent in 2017. - Growth projected to reach 2.4 percent in 2018 and 2.9 percent in 2019 in the Selected Economic Indicators table; medium-term projection of 4 percent by 2022. - Inflation (eop) increased to 6.4 percent in 2017 and is reported as 7.1 percent in February 2018 in the Executive Summary. - The Central Bank widened the interest corridor and increased the policy interest rate, including a 75 basis point policy rate increase noted in the report. - The title reference: "5.75 percent in March." ### External sector and reserves - The current account deficit deteriorated to a record 10.1 percent of GDP at the end of 2017. - Trade dynamics: exports remained sluggish in 2017; imports increased due to high domestic energy needs, strong consumption demand underpinned by rapid credit growth, and the dinar depreciation’s impact on import prices. - Early 2018 trade data show improvement in export performance and slowing import growth; outlook expects the favorable trend to continue supported by a more favorable real exchange rate. - International reserves declined to 2.5 months of imports in March 2018, and reserve cover is reported as 2.6 months of imports in early March 2018 in the Executive Summary. - Selected Economic Indicators table reports reserve coverage (months of next year's imports of GNFS) as: 3.1 (2017), 3.4 (2018), 3.7 (2019). - Directors recommended reducing foreign exchange interventions and increasing exchange rate flexibility to improve the current account and rebuild international reserves. ### Public and external debt; fiscal outlook - Gross public debt reached 71.3 percent of GDP at the end of 2017 in the Selected Economic Indicators table (presented as "Gross public debt (% of GDP) 71.3" for 2017). - External debt reached 80.1 percent of GDP at the end of 2017. - Public and external debt are projected to reverse their upward trend starting in 2020, helped by a three-percent-of-GDP reduction in the fiscal deficit over 2018-20. - Authorities’ fiscal plans include new tax measures worth 2.2 percent of GDP in 2018, quarterly adjustments of fuel prices, civil service reform based on voluntary separations and strict hiring limits, and pension reform. - Selected Economic Indicators (central government finances, percent of GDP): - Total revenue (excl. grants): 24.0 (2017), 24.6 (2018), 25.7 (2019). - Total expenditure and net lending: 30.2 (2017), 30.1 (2018), 29.3 (2019). - Overall balance (incl. grants): -6.0 (2017), -5.2 (2018), -3.4 (2019). - Cyclically-adjusted structural balance: -6.7 (2017), -4.3 (2018), -3.1 (2019). - Gross public debt: 71.3 (2017), 73.1 (2018), 73.3 (2019). ### Banking sector and financial stability - Banking sector remains stable but faces structurally low liquidity as savings remain weak. - Inspections of the seven largest private banks showed no major vulnerabilities. - The banking sector’s foreign currency exposure remains low; credit risk is mitigated by the recovery in growth; interest margins remain comfortable. - Directors saw need for further financial sector reforms, encouraged measures to reduce banks’ NPL portfolios, and noted that enhancements to the AML/CFT regime will help address Tunisia’s deficiencies. ### Program performance, IMF action, and Executive Board assessment - On March 23, 2018, the IMF Executive Board completed the second review under the EFF, allowing a draw of SDR 176.7824 million (about US$257.3 million), bringing total disbursements under the arrangement to SDR 631.3661 million (about US$919 million). - The Board approved moving to quarterly reviews and granted waivers for non-observance of end-December performance criteria on net international reserves, net domestic assets, the primary fiscal deficit, and current primary spending; and for the continuous performance criterion on payments and transfers for current international transactions. - The Board approved retention of an exchange restriction barring trade credit for certain non-essential imports until December 31, 2018. - The four-year EFF arrangement amount: SDR 2.045625 billion (about US$2.98 billion, 375 percent of Tunisia’s quota), approved May 20, 2016. - Executive Board Directors urged urgent and decisive action to put public finances on a more sustainable path, address rising inflation and falling reserves, and ensure macroeconomic stability. They generally agreed that quarterly reviews would facilitate program implementation. - Directors advised fiscal consolidation focused on increasing tax revenue and reigning in current spending; they called for strengthening tax collection, implementing voluntary separations for civil servants, curtailing new wage increases unless growth surprises significantly, and enacting quarterly fuel price increases. - Directors welcomed the recent policy interest rate increase and emphasized that further tightening would be necessary to reduce inflation unless inflation subsides quickly. - Directors highlighted the importance of maintaining adequate social protection, including through equitable and sustainable pension reforms and targeted programs for the most vulnerable. ### Structural reforms and social protection - Authorities’ reform measures and priorities: - New tax measures worth 2.2 percent of GDP in 2018. - Quarterly adjustments of fuel prices to contain energy subsidy growth. - Civil service reform based on voluntary separations and strict hiring limits. - Pension reform and development of a better targeted social safety net. - Reported structural progress: establishment of the High Anti-Corruption Authority, creation of a one-stop shop for investors, performance contracts for public banks and state-owned enterprises, and laws to facilitate banks’ NPL reduction. - Staff emphasized finalizing the database of vulnerable households to improve social assistance targeting. ### Risks and outlook summary (Executive Summary highlights) - A consumption-led, timid recovery with elevated macroeconomic vulnerabilities: record fiscal spending, strong credit growth, and dinar depreciation pushed inflation to 7.1 percent in February 2018. - Current account deficit widened to 10.1 percent of GDP over 2017; reserve cover fell to 2.6 months of imports in early March 2018. - Public and external debt at end-2017: public debt 71 percent of GDP, external debt 80 percent of GDP (Executive Summary). - Program performance was weak: all Quantitative Performance Criteria for December 2017 were missed and two of 14 Structural Benchmarks were met. - Growth could pick up to 2.4 percent in 2018 and gradually approach potential of 4 percent; tighter fiscal and monetary policies with exchange rate flexibility are needed to reduce inflation, debt, and rebuild reserves. - Two biggest risks: a security incident and resistance to reforms. *Source: IMF staff report and Executive Board materials contained in the provided PDF content.* ### 3. External Financing Needs, 2015–18 ____________________________________________________________ 43 ### 3. External Financing Needs, 2015–18 ### Economic context and recent developments - Policy and reform implementation remained weak since July 2016 despite some recent progress; early attempt to delay wage increases was abandoned and full application in 2017 of incompletely costed legacy wage commitments disrupted efforts to slow growth of the public wage bill. - Authorities relied on the 2018 budget with strong tax measures and voluntary departures of civil servants to contain public debt and facilitate increased investment and social spending. - Steps taken: fight corruption, limit growth of energy subsidies, improve liquidity of pension funds, advance public bank restructuring, and increases in transfers to the most vulnerable after January 2018 protests. ### Output, labor market, and inflation - Growth improved to 1.9 percent in 2017 from 1 percent over 2015–16; recovery was consumption-driven with weak investment and exports. - Key sectors underpinning 2017 growth: tourism-related services, agriculture, and phosphates. - Unemployment: 15 percent of the labor force; affects 1 out of 5 women and 1 in 4 graduates. - Informal sector: at least one-third of the economy. - CPI inflation accelerated to an annualized 7.1 percent in February 2018. - Drivers: dinar depreciation, wage hikes in public and private sectors, increases in administrated prices (including fuels, alcohol, tobacco, and telecommunication), and fresh food price rises. - Monetary conditions and liquidity: - Broad money expansion exceeded nominal GDP growth. - Central bank refinancing of commercial banks reached a record TD 13 billion at the beginning of March 2018. - Net foreign asset (NFA) outflows from the financial system in 2017 were about TD 3 billion. - Central Bank of Tunisia (CBT) widened its interest rate corridor from 50 basis points (bps) to 200 bps in December 2017, and raised the policy interest rate by 75 bps to 5.75 percent in March 2018. ### External accounts and reserves - Current account deficit: record 10.1 percent of GDP over 2017. - Deterioration driven by increased import bill and sluggish exports. - January–February 2018 data: export values grew by 47 percent year-on-year (16.4 percent for January in volume terms); imports grew 23 percent in value terms (and for January, 1.6 percent in volume terms). - International reserves declined to 2.6 months of imports in early March 2018, reflecting sizeable central bank FX sales to cover energy imports of SOEs and delays in external budget financing. ### Fiscal developments and public debt - Fiscal deficit ended 2017 at 6 percent of GDP. - Spending quality weaker-than-envisaged: - Underlying wage bill grew by 0.5 percent of GDP to reach 15.0 percent (14.7 percent excluding tax credits). - Public investment increased by 0.2 percent of GDP to reach 5.5 percent. - Public debt and external debt worsened to 71 percent of GDP and 80 percent of GDP at end-2017, respectively; drivers included dinar depreciation, lower-than-anticipated growth, and large fiscal financing needs (adding US$3.6 billion to public external debt). ### Financial sector and program performance - Financial markets remained calm despite Moody’s downgrade in August (to B1 from Ba3). - Bank sector: weaker dinar did not significantly affect profitability due to generally low FX exposure; liquidity and solvency ratios generally well respected; little progress in reducing bank holdings of NPLs. - Program performance (Second Review): - Fiscal policy: end-December QPCs on primary balance (cash basis) and total current primary expenditure were missed slightly; IT on social expenditure was met. - Monetary and exchange rate policy: end-December QPC on floor of net international reserves (NIR) missed by 15 percent; QPC on net domestic assets (NDA) missed by a large margin due to record-level CBT refinancing. - Structural Benchmarks (SBs): only 2 of 14 SBs for the Second Review met, plus one additional with delay; five Prior Actions for the Second Review were successfully undertaken; outstanding SBs were reprogrammed. ### Projections and selected indicators - Outlook conditional on strong policies: - Growth projected to strengthen to 2.4 percent in 2018. - GDP growth projected to reach potential of around 4 percent by 2022. - Inflation expected to peak in 2018 and be contained at around 7 percent before easing over the medium term. - Current account deficit projected to narrow to 9.2 percent of GDP in 2018 and to 7.2 percent of GDP in 2020 (from 10.1 percent of GDP in 2017). - Gross reserve coverage projected to increase from 3.1 months of imports in December 2017 to 3.7 months by 2020 or 107 percent of the ARA metric. - Public and external debt ratios projected to peak in 2019 at 73 percent and 86 percent of GDP, respectively, then trend down to 69 percent and 80 percent of GDP by 2023. - Selected economic indicators (Text Table 1, 2015–23, as presented): - Real GDP growth (in percent): 2015 1.1; 2016 1.0; 2017 1.9; 2018 2.4; 2019 2.9; 2020 3.4; 2021 3.6; 2022 4.0; 2023 4.2. - Consumer price index growth (period average, in percent): 2015 4.9; 2016 3.7; 2017 5.3 7.0 6.1 5.2 4.3 4.0 3.9. - Current account balance (in percent of GDP): 2015 -8.9; 2016 -8.8; 2017 -10.1; 2018 -9.2; 2019 -7.8; 2020 -7.2; 2021 -6.4; 2022 -6.0; 2023 -5.8. - Gross official reserves (end of period, in billions of US$): 2015 7.4; 2016 5.9; 2017 5.7; 2018 6.3; 2019 7.0; 2020 7.1; 2021 7.4; 2022 8.0; 2023 8.6. - Gross official reserves (end of period, in months of next year's imports): 2015 4.1; 2016 3.2; 2017 3.1; 2018 3.4; 2019 3.7; 2020 3.7; 2021 3.7; 2022 4.0; 2023 4.2. ### Risks and adverse scenarios - Balance of risks tilted to the downside; two particularly worrisome risks agreed with staff (RAM, Annex II): - Political stalemate over adjustment and structural reforms: - If fiscal and monetary tightening and structural reforms fail due to lack of political support, fiscal deficits would continue to increase as revenues from taxes and SOEs remain subdued while major spending categories (wage bill, energy subsidies, pensions, and debt service) continue to grow. - Growth would remain lackluster, unemployment would rise, inflation would shift upward, and international reserves would continue to fall. - By 2020, public and external debt could reach 80 percent and 87 percent of GDP, respectively. - Major security incident triggering a renewed confidence shock: - Would mirror effects of the 2015 terrorist attacks: precipitous fall in growth as investment and tourism falter, higher fiscal deficit from declining revenues and increased anti-cyclical spending, increased public and external debt, and significant reserve cover decline. - Security spending (currently accounts for 5-6 percent of GDP) importance emphasized; scenario underlines need to reduce debt and strengthen reserves rapidly to build policy buffers. ### Policy directions emphasized - Core policy focus: - Growth-friendly and socially-balanced macroeconomic tightening. - Move toward a de facto floating exchange rate regime (Section A). - Maintain adequate social protection, especially for the most vulnerable (Section B). - Accelerate structural reforms to support private sector-led, inclusive growth (Section C). - Authorities stressed the need for reforms to account for Tunisia’s political constraints and preference for inclusive decision making. *Source: IMF staff report excerpt (3. External Financing Needs, 2015–18).* ### 8. The policy mix pursued over recent years has contributed to large imbalances. Tunisia’s ### 8. The policy mix pursued over recent years has contributed to large imbalances. Tunisia’s ### Policy mix and macroeconomic imbalances - Recent shocks: the 2015 terrorist attacks, prolonged political transition, and spillovers from conflicts in Libya and elsewhere in the region. - Fiscal policy: - High deficits and quickly accelerating debt levels emerged from a growing gap between expenditures and resources, partially due to delays in critical structural reforms. - Revenue suffered from low growth and governance issues. - Expenditure on wages and subsidies responded to strong counter-cyclical pressures. - The expansionary fiscal stance fueled the current account deficit, in part through a wage channel. - Monetary and exchange rate policy: - Central bank FX sales have been large relative to FX inflows, gradually reducing international reserves. - Monetary policy has sterilized a sizeable contraction of NFA and accommodated fiscal expansion as well as robust credit growth. - This accommodation has contributed to price pressures and strong import demand weighing on the dinar. - Key interest rates remain negative in real terms even after recent tightening. - Structural reforms: - Measures to address key constraints to growth have progressed, but have not yet created sufficient momentum to improve business confidence in a sustained way. ### Need for tightening and sequencing with structural reforms - Agreement between authorities and staff: - Strong measures are needed to support growth acceleration and reduce elevated vulnerabilities that could lead to significant pressures on the dinar or on public and external debt. - Tightening of fiscal and monetary policies is required, mindful of social impact, to slow consumption growth and reorient demand toward exports and investment. - Because tightening may dampen growth in the short run, it is critical to move ahead in parallel with structural reforms to improve competitiveness, generate business opportunities, and advance economic fairness and prosperity. ### Debt-reducing fiscal adjustment: background and 2018 program - 2017 fiscal context: - Spending rose to a record 30.3 percent of GDP due to major unanticipated wage increases; investment increased only marginally. - Authorities took emergency measures on the wage bill and increased revenue collection, mainly through more aggressive pursuit of tax arrears. - Medium-term objective: - Programmed fiscal effort anchored on an improvement of 1.9 percent of GDP in the cyclically-adjusted structural fiscal balance over 2018–20, up from the target of 1.5 percent of GDP agreed at the time of the First EFF Review. - After steadily increasing deficits since 2015, the first year of modest consolidation is 2018, with the overall deficit, including grants, falling to 5.2 percent of GDP from 6.0 percent in 2017. - Initial adjustment will rely mainly on a strong tax revenue package to generate 2.2 percent of GDP in additional yield. - The program aims to reverse rapid debt accumulation (public debt would fall below 70 percent of GDP by 2023) while leaving space for increasing public investment and social spending over the medium term. - 2018 budget specifics: - Revenue package covers all areas of taxation and emphasizes reinforced tax collection. - Measures to lower the regressive impact of indirect taxes: higher excises on products and services mostly consumed by the better-off; VAT exemptions for basic food items unchanged. - No significant net increase in direct tax burden for most firms and households when accounting for phasing out the 2017 exceptional corporate tax (a reduction of 0.9 percent of GDP in the tax burden) and tax savings to lower-earning households from the 2017 income tax thresholds reform. - Expenditure priorities: 1. Containment of energy subsidies at 2.0 percent of GDP. 2. Implementation of civil service reform. 3. Reduced transfers to pension funds. 4. Liquidation of the Banque Franco-Tunisienne (BFT). 5. More support to vulnerable families and households with low pensions, estimated to cost 0.2 percent of GDP. - Public investment frozen in nominal terms at 2017 levels; it will generate about half of the total deficit adjustment from 2017 to 2018. - Exact tax revenue figures (Text Table 2): - 2017 tax revenue: 21.7 (Percent of GDP) - 2017 one-off measures: -0.9 (Percent of GDP) - 2017 tax credits: 0.3 (Percent of GDP) - 2018 tax package: 2.2 (Percent of GDP) - 2018 tax credits: -1.0 (Percent of GDP) - Additional 2018 tax revenue from oil sector: 0.1 (Percent of GDP) - 2018 tax revenue: 22.4 (Percent of GDP) ### Policy discussions: fiscal institutions and reforms - Need for strong implementation in 2018 and firmer medium-term plans; continued TA from IMF, World Bank, AFD, and others. - Swift adoption of the Organic Budget Law to introduce multi-year and results-based budgeting. - Measures to strengthen fiscal institutions and fairness: - Sustained efforts on tax fairness and tax collection; staff welcomed the 2018 tax package but urged further improvements to create space to lower tax rates by: 1. Increasing taxation on services of liberal professions. 2. Reducing VAT tax exemptions. 3. Rationalizing corporate income tax (CIT) incentives by reducing related tax expenditures. 4. Moving the tax burden towards consumption rather than labor, mitigating impact on the poor with targeted social assistance. 5. Raising taxes on incomes other than salaries and wages (especially dividends and real estate). 6. Progressing convergence of tax regimes for onshore and offshore sectors. - Authorities confirmed the 2018 increase in customs duties is consistent with Tunisia’s WTO obligations and implemented primarily for budget reasons. - Achieving ambitious 2018 revenue targets will require stronger tax administration; the creation of the LTU was delayed but after merging audit and tax arrears recovery functions by mid-year it will be fully operational by year-end. - Civil service reform to reduce wage bill: - Target to reduce wage bill-to-GDP ratio from 14.7 percent in 2017 to 12.4 percent in 2020. - Measures: strict limits on new hiring (maximum recruitments for 2018 set at 3,000); voluntary early retirement scheme targeting 6,400 staff; voluntary separations targeting about 10,000 staff; no new wage increases over 2018–20 unless wage-bill-to-GDP path can be retained. - Additional measures, including a potential further call for volunteers in 2019, may be needed. - Energy subsidies: - Authorities initially planned a 1.6 percent of GDP envelope assuming an oil price for 2018 of US$54 per barrel. - Ad-hoc price increase of 3 percent on average for three main fuel categories in December 2017; four more price adjustments intended in 2018. - Due to oil price rise and delays in administering price hikes, the fiscal program under the EFF was pre-emptively changed to increase the energy subsidy bill to 2.0 percent of GDP. - Deficit target for 2018 raised to 5.2 percent of GDP from 4.8 percent of GDP envisaged in the budget law (after accounting for 0.2 percent of GDP in new social transfers and higher-than-budgeted nontax revenue from the CBT and energy firms). - Authorities committed to implement further price adjustments as needed to contain the energy budget to the agreed level. - Social security funds: - Some progress made with higher employer and employee contributions for CNRPS and CNSS. - Staff emphasized that initial reforms are only a first step; more efforts needed to increase the retirement age and align benefit levels with affordability. - SOE fiscal risks: - Financial indicators included in performance contracts of four of the five largest SOEs for closer monitoring. - Performance contract for Tunisair advancing. - Continued work with AFD and others on improving SOE management. - Public investment and social spending: - Some public investment projects suffer from low efficiency due to inadequate cost-benefit analyses, weak project monitoring, and limited regional implementation capacity. - Authorities do not anticipate major negative growth impact from freezing 2018 capital spending in nominal terms. - Intend to rely more on PPPs; staff offered IMF TA on investment management and stressed need to upgrade PPP frameworks to contain fiscal risks before proceeding. - Importance of gradually increasing social spending and introducing a QPC in support of this objective (to be monitored starting at the Fourth Review). ### Preserving monetary stability and monetary policy framework - Background on monetary developments: - Monetary policy has started to tighten but record bank refinancing continued. - Commercial banks bought large amounts of treasury bills with attractive, risk-free yields and increased credit to firms and households at a rate of 13 percent in 2017, well above nominal GDP. - This contributed to fueling inflation and—via import demand—a higher current account deficit as well as dinar depreciation. - CBT actions: - Increased policy interest rate by 75 bps to 5.75 percent in March. - Enforced a quantitative limit of TD 7 billion for seven-day tender auctions with commercial banks since July 2017, with excess demand driven to the more expensive 24-hour lending rate. - Broadened the interest corridor around the policy rate from 50 bps to 200 bps in early January 2018. - Result: interbank rate rose from 5.4 percent at end-December to 5.8 at the beginning of March. - Commercial bank rates for prime borrowers stand in the 8 to 12 percent range. - Monetary transmission weaknesses: - Improvements to monetary policy operations with TA from the Banque de France and the IMF: stronger collateral rules, improved liquidity factor forecasting, and a published treasury bond yield curve (December 2017). - Persisting weaknesses: 1. Growing demand for currency in circulation linked to the informal economy reduces the money multiplier. 2. Credit demand has shown little elasticity to interest rate changes. 3. Low levels of capital account openness weaken the exchange rate channel. - Safeguards and institutional improvements: - Operational lender of last resort (LOLR) framework in place. - Work to modernize the CBT’s risk management unit through establishment of a risk committee. - Review of internal audit to strengthen alignment with international standards. - Policy discussions on monetary tightening: - Monetary tightening is critical to support disinflation and to contain monetary aggregate growth to gradually reduce inflation to the low- to mid-single digits. - Lower CBT refinancing of commercial banks to limit credit growth to nominal GDP growth. - Recent increase in policy rate and widening of the corridor signal CBT’s commitment to fight accelerating inflation. - Further interest rate increases will be needed if inflation—especially core inflation—does not decelerate and key interest rates remain in negative territory. - CBT to assess evolution of net domestic assets with staff on a monthly basis. - CBT cautioned it would take three to four months for credit to react to interest rate changes, and longer to see full impact on inflation; further tightening must consider fragile growth and banks’ liquidity needs. - Staff recommended increasing maximum lending rates as soon as possible to broaden access to credit (law awaits Parliament consideration). - Concern over recent increase in currency in circulation and its contribution to the monetary base; reversal requires steps to address informality and improve confidence, including continued financial sector reforms. - Authorities intend to transition to inflation targeting and introduce a Monetary Policy Consultation Clause (MPCC) in the program; staff cautioned transition would be risky and require more exchange rate flexibility and exclusion of fiscal considerations from monetary policy decisions. - Establishment of a Treasury Single Account (TSA) would improve cash management and reduce fiscal pressures on the central bank. - Taylor-rule assessment: - Different specifications of a Taylor rule suggest a policy rate in the range of 6–8 percent as a plausible target; staff interprets these results as an upper bound of a feasible corridor for rate setting given impacts on debt and growth. ### External position and exchange rate flexibility - Staff assessment: Tunisia’s external position remains substantially weaker than warranted by fundamentals. - Real effective exchange rate (REER) overvaluation estimates at end-2017: - Staff analysis suggests REER was overvalued by 10–20 percent at end-2017 (Annex III). - Exchange rate-based methodologies suggest an overvaluation of 15-20 percent. - External sustainability approach indicates an overvaluation of about 10 percent. - Evidence consistent with an overvalued REER includes: - An unsustainable current account position (discussion continues beyond provided excerpt). *TUNISIA — INTERNATIONAL MONETARY FUND* ### 10.1 percent of GDP in 2017 suggests the need for a further correction of the real exchange rate ### 10.1 percent of GDP in 2017 suggests the need for a further correction of the real exchange rate ### External position, reserves, and exchange rate assessment - Staff assessment: the real exchange rate remained overvalued by about 10–20 percent at the start of 2018, after the depreciation in 2017. - Net FX sales by the Central Bank of Tunisia (CBT) between start-2017 and end-January 2018: US$3.1 billion (equivalent of 7.7 percent of GDP). - Net international reserves (NIR) fell by US$215 million over 2017. - Reserve cover of imports: decreased from 110 days at end-2016 to 78 days in early March 2018. - Daily trading volumes on the interbank FX market remain low, indicating market participants do not believe the dinar has reached equilibrium. - Staff recommendation: return quickly to a de facto floating exchange rate (reverse the recent crawl-like regime) and reduce FX intervention to rebuild reserves and support exchange rate flexibility. - Authorities’ position: saw only a modest residual REER overvaluation and preferred gradual correction; cautioned about structural impediments to export response (security concerns, production issues in phosphate and energy sectors). - Both sides agreed on the need to restore adequate reserve coverage "as soon as possible" and that energy-related interventions should be transparent and at market-determined rates. - Authorities committed to meet the average monthly net intervention budget and to increase reserve cover to 3.4 months of imports at end-2018. - Staff noted favorable evolution of exports and imports in the first two months of 2018 as an encouraging sign. ### Foreign exchange operations and market practices - CBT interventions exceeded EFF-agreed limits; interventions were mainly to finance energy imports amid an illiquid interbank FX market. - The CBT introduced a new FX auction mechanism as the exclusive tool for interventions; implementation shortcomings noted: - No bid was ever rejected. - All bids subjected to similar pro-rating regardless of attractiveness. - October 2017 measure: legislation barring trade credit for certain non-essential imports — described by authorities as macro-prudential and limited in scope, but constituted an exchange restriction inconsistent with IMF Article VIII, Section 2(a) and led to non-observance of the continuous PC against imposition of exchange restrictions. ### Policy dialogue on capital account and exchange measures - Authorities intended to remove the exchange restriction by end-2018 and to make FX auction mechanisms more competitive. - Agreement to proceed cautiously on capital account liberalization given the fragile environment and risks of sudden capital outflows; medium-term objective to resume liberalization in line with financial sector development and supervisory upgrades. ### Social protection: fiscal pressures and reform priorities - Modernizing social protection is critical to stability; poverty remained elevated and inclusion lagged since the revolution. - Social security and health coverage gaps: - Only about a third of Tunisians contribute to the pension system; only half are covered by health insurance. - No national unemployment insurance scheme exists. - Consolidated cash needs of pension funds (CNRPS and CNSS) and public health fund (CNAM): amounted to 0.7 percent of GDP at end-2017 (net figure, accounting for budget transfers of 0.5 percent of GDP to CNRPS and 0.1 percent of GDP to CNSS in 2017) and are set to reach 1.5 percent of GDP in 2018. - Pension replacement income: up to 80 percent of salaries; pension system described as financially unsustainable. - Social program spending: - Historically stagnant at 1.5 percent of GDP (or 2 percent of GDP under a recently revised definition). - Subsidies on food and energy amounted to 3.1 percent of GDP in 2017. - Cash and health transfer programs for low-income families cover only about 12 percent of Tunisia’s poor. - Targeting issues: nearly a quarter of Tunisians are net beneficiaries of social transfers, but only 2 in 5 of these beneficiaries live below the national poverty line; energy subsidies benefit rich households up to 30 times more than lower-income households. - Text Table 3 highlights (percent of GDP, end of period): - Public pension fund (CNRPS) stock of arrears/cash needs: 1.52 (2016), 1.60 (2017 Prel.), 0.13 (2017 Stock of arrears), 0.99 (2018 Proj.). - Private pension fund (CNSS): 0.55 (2016), 1.57 (2017 Prel.), - (2017 Stock of arrears), 0.47 (2018 Proj.). - Public health fund (CNAM): 0.87 (2016), 1.48 (2017 Prel.), 0.68 (2017 Stock of arrears), 0.04 (2018 Proj.). - Policy recommendations and agreed actions: - Undertake ambitious pension reforms to ensure financial viability (parametric reforms: stepwise increase of retirement age; contribution rates; permanent budget transfers). - Improve CNSS contribution collection; clear arrears of public entities to CNSS (first tranche TD 200 million completed in February 2017). - Government ready to submit a supplementary budget law if transfers to CNSS or CNAM are needed to maintain operations. - Gradually increase social spending (TD 200 million allocated in 2018 budget for transfers to vulnerable families and low-income pensioners). - Accelerate a census to identify vulnerable households (reprogrammed SB for December 2018) and integrate beneficiary data across programs. - Recalibrate from universal fuel subsidies to more efficient, targeted transfers; streamline welfare and active labor market programs; roll out a unique identification system. ### Growth, private sector development, and structural reforms - Job creation challenge: achieving a one-quarter reduction in the unemployment rate (from 15 percent to 11 percent) would require about five years of 5 percent growth. - Recent growth performance: - GDP growth averaged 1.7 percent in 2010–17 versus 4.6 percent in the 2000s. - Private investment growth averaged 1.6 percent over 2014–17 versus 4.6 percent over 2008–10. - Share of exports in GDP: 42.9 percent in 2017 compared with 49.5 percent in 2010. - Text Table 4 (average growth rates, in percent) highlights sectoral and demand-side trends across subperiods (2005–08, 2009–10, 2011–12, 2013–14, 2015–16) including Real GDP: 5.1, 2.9, 1.0, 2.4, 1.0 respectively. - Key structural constraints: - Declines in investment and total factor productivity. - Business environment frictions around formality thresholds. - Difficulties in starting and operating firms: inadequate access to finance; high collateral requirements; lack of credit bureaus; long delays for electricity (>2 months) and construction permits (>3 months). - Policy priorities to lift growth: - Strengthen the business environment, reform rigid labor market regulations and practices, and improve access to finance. - Energy sector reforms: gradually eliminate energy subsidies through price increases and achieve automatic passthrough of international prices onto retail prices; work with partners on protecting the most vulnerable, increasing domestic energy supply, and improving public energy company performance. - Governance reforms: establish and operationalize the HACGGA; appoint members and build investigative infrastructure for high-level corruption cases. - Facilitate investment: create a Tunisian Investment Authority as a one-stop shop for large investors; reduce sectors requiring authorizations; facilitate SME and startup access to finance. - Labor market reforms: implement the national employment strategy over three years; address skill mismatches; strengthen incentives to hire formally; build on the start-up act (adopted in February) to foster ICT sector jobs. - Data and transparency: strengthen national accounts, fiscal, and balance of payments statistics with IMF technical assistance. *Source: IMF staff report excerpt (cr18120).* ### 32. The banking sector remains stable but suffers from low liquidity. On average, banks do ### cr18120 - 32. The banking sector remains stable but suffers from low liquidity. On average, banks do ### Banking sector: stability and vulnerabilities - On average, banks do not have major liabilities to foreign partners, and net open FX positions are small relative to capital. - Credit risk remains a concern due to: - banks’ exposure to interest rate-linked household debt; and - corporates with uncertain earning potential. - Inspections of the seven largest private banks (SB met with delay in January 2018, MEFP ¶12, 24) revealed no major vulnerabilities. - The sector suffers from low liquidity due to: - large NFA outflows; and - bank deposits that remain insufficient relative to private and public credit demand. ### Financial sector reforms and public banks - Recent legislative and policy actions: - Council of Ministers adopted legislation (pending Parliamentary approval) to allow public banks to renegotiate and reduce sizeable holdings of NPLs (20 percent on average of their total assets). - Progress on public bank restructuring: credit risk management, social plans, organizational redesign. - Text regrouping all capital rules was published in February 2018. - Financial Sector Reform Committee established (oversight by the office of the Head of Government) to coordinate reforms, including addressing NPLs (June 2018), improving SME funding, and strengthening bank liquidity (December 2018). - Review of financial market regulations to promote new instruments and market participants; progress on a divestment strategy envisaging selling participation in one non-strategic bank in 2018. - State bank participations: In total, the state has 14 bank participations (strategic and non-strategic). ### AML/CFT developments - November 2017: FATF added Tunisia to its gray list of jurisdictions with significant AML/CFT deficiencies and issued recommendations. - The EU Parliament placed Tunisia on a similar EU list of countries with serious risks on money laundering and financing of terrorism. - Risks: deterioration of investor confidence and loss of correspondent banking services unless remedial action is taken. ### Policy discussions and agreed reforms - Authorities’ commitments and agreed steps: - Public bank restructuring: - Importance of NPL reduction to strengthen confidence and increase lending capacity. - Swift adoption by Parliament of several laws, including on: increasing the maximum lending rate (reprogrammed SB for May 2018); allowing public banks to abandon claims and simplifying write-off rules (reprogrammed SB for June 2018, after Council of Ministers adoption in February 2018); improving recovery firms (September 2018). - Ministry of Justice to train judges on banking matters and identify judicial chambers specializing in banking conflicts (March 2018). - Ministry of Tourism to review a rule preventing failing hotels from changing vocation to aid real estate loan workouts (April 2018). - CBT working on a circular to establish a framework for out-of-court debt resolution. - Improving and consolidating bank supervision: - Operationalization of the deposit guarantee fund finalized in January 2018. - Resolution committee appointed in December 2017; first resolution decision planned on the BFT (new SB for May 2018, MEFP ¶24). - Commitment to start consolidated supervision in 2019, with IMF TA assistance. - Strengthening the AML/CFT regime: - Action plan with FATF and MENAFATF with IMF and other TA providers. - Increased recruitment and training for the financial intelligence unit. - Establishing a framework for targeted financial sanctions. - Preparing an AML/CFT supervisory manual to facilitate entity transparency and risk-based supervision. - Improving financial sector liquidity: - CBT tasked a commission to develop a strategy on reducing cash in the economy, including an upgrade of the payments system. - Financial inclusion: - Authorities intend to formulate a strategy by March 2018 based on Financial Inclusion Observatory data and digital finance inputs (MEFP ¶24). - Law regulating credit bureaus to be adopted before April 2018 to improve access to finance. ### Program issues, conditionality, and monitoring - Staff supports waivers of nonobservance of end-December QPCs and of the PC related to the exchange restriction based on corrective actions: - Corrective actions include: 1. Adoption of a 2018 budget law with a lower deficit (strong tax measures, civil service headcount reduction, energy price hikes) while increasing social spending. 2. Tightening monetary policy by increasing the policy rate by 75 bps in March 2018 and adopting a framework for monthly monitoring of NDA outturns. 3. Reaffirming desire to move back to a de facto floating exchange rate arrangement by accepting lower 2018 FX intervention targets consistent with modest accumulation of gross reserves. 4. Agreement to phase out the exchange restriction inconsistent with Article VIII, Section 2(a) by end-2018. - Staff supports approval of the exchange restriction until end-2018 on the basis that measures are for Balance of Payments reasons, not discriminatory, and temporary. - Review cadence and monitoring: - Authorities requested move from semi-annual to quarterly reviews; staff agreed to quarterly reviews given elevated macroeconomic vulnerabilities (accelerating inflation and low reserve cover). - New monthly Indicative Target (IT) on net central bank FX interventions will be established to monitor reserve cover. - Request to rephase remaining access under the program from this review onwards was agreed as suggested in Table 10. - Conditionality and targets: - Quantitative targets: New QPCs for end of March, June, September and end of December 2018 (MEFP Table 1) to support fiscal deficit reduction in 2018, contain inflationary pressures via deceleration of base money growth, and support adequate reserve coverage. - QPCs on primary balance and on current primary expenditure will be adjusted for expenditures associated with envisaged BFT liquidation in 2018 (TMU ¶¶18, 24). - QPC on the NIR will integrate residents’ FX swaps with commercial banks and residents’ FX deposits into the NIR definition (TMU ¶28). - A new QPC on the floor of social spending will be set at the time of the Third Review, replacing the current IT. - Structural benchmarks: Staff proposes to re-program delayed SBs and set four new SBs on critical next steps: a one-stop shop for investors; launch of the resolution process for the BFT; VAT rate migration for liberal professions; operationalization of new umbrella structure for tax administration created by the 2018 budget law. ### Financing and IMF exposure - The program remains fully financed (Text Table 6): donors’ financing assurances and authorities’ plans for international bond issuances will cover financing needs over the next twelve months. - IMF exposure and repayment capacity: - Credit outstanding to the IMF will peak at 372 percent of quota in 2020. - Obligations to the IMF will reach 1.4 percent of GDP in 2018 (Table 11) or 25 percent of external debt service. - Exceptionally high risks (political stalemate over reforms, renewed security incident) could jeopardize program objectives and repayment capacity. - Quarterly reviews and the new monthly IT on central bank net FX interventions are essential mitigation strategies. ### Staff appraisal: macroeconomic priorities and risks - Key macroeconomic diagnosis: - Tunisia faces urgent need to address economic imbalances: lasting impact of 2015 terrorist attacks, regional spillovers (violence, informality, migration), and elevated political uncertainty. - These factors combined with policy slippages and reform delays have increased vulnerabilities: rapidly increasing public and external debt levels, accelerating inflation, and decreasing international reserve coverage. - Recent positive moves: - Multi-annual fiscal adjustment via the 2018 budget. - Monetary tightening and greater exchange rate flexibility. - Early results from governance, business environment, access to finance, and fiscal institution reforms. - Initiatives against widespread corruption. - Growth pattern and jobs: - Growth has relied excessively on public and private consumption; investment and exports remain depressed. - Even under an active policy scenario, the anticipated doubling of annual growth through 2023 will likely not suffice to bring more than one out of five unemployed into a job. - Fiscal policy recommendations: - Strict adherence to agreed medium-term policies. - Increase tax revenue in a fair way and rein in current spending to reduce the fiscal deficit by more than 3 percent between end-2017 and 2020, while creating space for public investment and health and education spending. - For 2018: strengthen tax collection; do not grant new wage increases in 2018 unless growth surprises on the upside; quickly implement voluntary separation programs for civil servants; enact fuel price hikes to contain energy subsidies amid rising oil prices. - Do not proceed with PPP projects before adequate legal and regulatory frameworks are in place. - Monetary and exchange rate policy: - Tighter monetary policy is needed to curb inflation; staff supports CBT’s January decision to widen the interest corridor and the substantial policy rate increase in March. - Without adequate response, inflation could increase to 8 percent or more in 2018. - Greater exchange rate flexibility will protect reserves and support exports; a fast move back towards a de facto floating arrangement would help correct residual real overvaluation. - Social protection and governance: - Maintain adequate social protection and proceed quickly with equitable and sustainable pension reforms. - Support increases in transfers to vulnerable families and low-income pensioners; finalize the database of vulnerable households to target assistance. - Business environment and governance reforms remain critical: fast implementation of anti-corruption reforms and a bold strategy for the energy sector are urgent. - Financial sector priorities: - New legislation to facilitate reduction of NPL portfolios is critical to public bank restructuring and financing of the economy, notably SMEs. - Apply the bank resolution framework without delay by resolving the BFT. - Enhancements to the AML/CFT regime will facilitate Tunisia’s exit from FATF and EU lists. - Program risks and external support: - Elevated political uncertainty and threat of a major security incident are the main risks. - Close program monitoring, rebuilding external and fiscal buffers, and flexibility in policy implementation are essential. - Sustained sizeable financing from external partners—grants or highly concessional loans—will remain indispensable to avoid disorderly adjustment and advance reforms. - Continued TA engagement is critical to overcome capacity constraints. - The G20 Compact with Africa could be an effective forum for coordinating support and reform priorities. *Source: IMF staff report (cr18120) excerpts.* ### 53. Staff supports the authorities’ request for completion of the Second EFF Review. In ### 53. Staff supports the authorities’ request for completion of the Second EFF Review. ### Staff recommendations and approvals - Staff supports the authorities’ request for completion of the Second EFF Review. - Staff supports: - waivers of non-observance of all end-of-December 2017 QPCs and of the continuous PC related to the exchange restriction based on corrective action; and - approval of the exchange restriction until the end of 2018. ### Program implementation measures to facilitate implementation amid elevated vulnerabilities - Staff supports: - a quarterly review schedule starting for the end-March 2018 test dates; - rephasing of remaining access consistent with the new review schedule; - the setting of new QPCs for end-March, end-June, end-September, and end-December 2018; and - a new monthly IT on central bank net FX interventions starting in March 2018. ### Conditionality and financial arrangements - Staff supports altering adjusters for the QPCs on: - the primary fiscal balance, - current primary expenditure, - NDA, and - NIR. - Staff supports making all funds available for budget support. ### Article IV consultation scheduling - It is proposed that the next Article IV consultation with Tunisia takes place on the 24-month cycle in accordance with the Executive Board decision on the consultation cycles for members with Fund arrangement. *cr18120 - 53.* ### Box 1. The Challenge of Raising Growth to Reduce Unemployment ### Box 1. The Challenge of Raising Growth to Reduce Unemployment ### The scale of the challenge - Cutting unemployment by one-fourth requires 5 percent real GDP growth, sustained over five years. - Strong labor force growth makes the challenge harder: projected at an annual 1.5 percent of GDP by the Tunisia Statistic Institute. - Low elasticity of job creation to growth is assumed in a range between 0.36 and to 0.50, with the boundaries being the values for Morocco and the MENA region, respectively. ### Growth accounting: weakened drivers - Total factor productivity (TFP) and capital investment have remained depressed after the revolution in early 2011. - The contribution of TFP to growth was close to zero already in the years before 2011, but dragged growth down by an average 1.5 percentage points over 2011–17. - The contribution of capital to growth has halved between the pre- and the post-2010 periods, reflecting the impact of a persistent shock to confidence. - Possible contributors to declining TFP include the closing of export firms in the aftermath of the revolution and Euro crisis. ### What is needed to reach 5 percent growth - Assuming constant labor force growth, TFP and investment would need to improve by a combined 4 percentage points of GDP to achieve the desired 5 percent real GDP growth rate. - Even with a strong recovery in investment to its pre-2011 levels, TFP in Tunisia would need to increase to levels that Morocco and Turkey enjoyed in the early 2010s (about 0.5 percent). ### Structural constraints and reform priorities - The 2015 Article IV report identified the main structural constraints to growth as: - poor access to credit, - a weak business climate, - labor market rigidities. - Reforms and policy actions underway or enacted: - Financial sector: authorities adopted restructuring plans for public banks and tied these to performance contracts for the banks’ new management. - Banking sector: authorities are progressing with legislation to facilitate the restructuring of NPLs to strengthen the banks’ capacity to provide credit to the economy. - Business climate: Parliament adopted laws on competition, public-private partnerships, and the investment code. - Governance: establishment of the High Anti-Corruption and Good Governance Authorities. - Areas with little progress: - Little progress was achieved on labor market reforms. ### Policy implications and outlook - A major effort on investment and technology is needed to reverse declining TFP and weak capital contributions. - Accelerated structural reforms are called for, building on the authorities’ early successes. - Continued focus on the identified priorities, combined with reduced political and policy uncertainty, as well as improved security, should help support investment and technological change. *Source: IMF staff.* ### Annex I. Recommendations from the 2015 Article IV Consultation ### Annex I. Recommendations from the 2015 Article IV Consultation ### Overall context and policy priorities - The authorities have started to address economic reform priorities in line with IMF advice, but at a slower-than-envisaged pace. - Fiscal consolidation has started with the 2018 budget, monetary policy was tightened, and there was some progress with structural reforms—notably on public bank restructuring and private sector legislation. - Contrary to 2015 expectations, Tunisia is still in the midst of economic transition with elevated political uncertainty, social tensions, threats to security (even if no major attack occurred since 2015), and a difficult regional situation that constrains rapid reform implementation. ### Fiscal consolidation and public finance - 2017 fiscal outcomes: - Deficits continued to grow in 2017, mainly due to difficulties in containing the growth of the public wage bill. - Fiscal deficits: 5.9 percent of GDP in 2016, 6.0 percent of GDP in 2017. - Gross borrowing requirement: 11.4 percent of GDP in 2017; gross borrowing requirement of 11 percent of GDP in 2017 (noted again as a measure of debt service costs). - Policy measures implemented and planned: - Authorities implementing strong revenue measures in 2018. - Voluntary schemes to reduce public sector headcount, strict hiring limits, and energy price increases. - Spending composition and safety nets: - Spending composition deteriorated, with higher current expenditures and under-execution of the capital budget. - Modest progress reducing energy subsidies; better targeted social safety net work has experienced major implementation delays. - Tax reform: - The authorities' 2018 tax package (more than 2 percent of GDP) includes many elements of the 2016 tax strategy to increase revenue and promote greater efficiency, equity, and simplification. - Some progress in tax administration; creation of a large taxpayer unit (LTU) is delayed. - Fiscal risks and contingent liabilities: - Authorities intend to start reforming pensions in 2018 (mostly relying on an increase in contributions) to improve financial viability of social security funds. - Performance contracts signed for the three largest public banks and four of the largest public enterprises. - State guarantees amount to about 12 percent of GDP (excluded from baseline stock of debt due to low probability of being called); contingent liability shock provides estimate if guarantees were called. ### Monetary policy and exchange rate management - Monetary policy actions: - Authorities increased the policy rate and broadened the interest corridor. - Improvements in the monetary policy framework, notably the lender of last resort mechanism. - Real interest rates remain negative and inflation has accelerated recently. - Exchange rate and reserves: - The real exchange rate remains overvalued. - Central bank FX interventions have remained sizeable, leading to falling reserve cover as exports remain sluggish. ### Structural reforms, governance, and financial sector - Governance and business climate: - Tunisia adopted a new competition law, investment code, and PPP law, but there were delays in follow-up measures. - The High Anti-Corruption and Good Governance Authority is close to being operational. - Little progress with implementing the national employment strategy. - Banking sector reforms: - Progress on public bank restructuring and risk-based supervision, but at a slower-than-expected pace. ### Risk Assessment Matrix — key risks and recommended responses - Domestic risks: - Slow reform implementation due to continued political uncertainty, social tensions, and opposition from vested interests. Relative likelihood: High. - A deteriorating security situation from regional spillovers (Libya and other conflicts) leading to refugee flows, illicit economic activity, and violent attacks. Relative likelihood: High. - Recommended mitigation (domestic): effective communication to generate broad buy-in to reforms; measures to rebuild fiscal and external buffers, including growth-friendly fiscal consolidation and a move back towards a de facto floating exchange rate arrangement; acceleration of structural reforms including financial sector resilience; close cooperation with external partners. - External risks: - Policy and geopolitical uncertainties (multiple global and regional sources). Relative likelihood: High to Medium. - Tighter and changing global financial conditions, including abrupt changes in global risk appetite and pressure on bank business models. Relative likelihood: High (but expected impact labeled Low in the matrix). - Consequences: increased sovereign refinancing risks and debt service; intensified pressures on international reserves; risk of loss of correspondent banking services (CBS) amplified by FATF and EU additions citing AML/CFT deficiencies. - Mitigation: focus on debt management and financial sector stability; authorities working with FATF and MENA-FATF to strengthen AML/CFT regime. - Weaker-than-expected global growth, notably from advanced economies, adversely affecting Tunisia through trade, remittances, and investment. Relative likelihood: High. - Mitigation: competitiveness reforms and the same broad responses as above (rebuild buffers, accelerate reforms). - Overall: Growth may fall due to lower confidence and investment, diversion of expenditures to security, and delays in IFI/bilateral support; mitigation strategies center on fiscal and external buffer rebuilding, exchange rate flexibility, structural reforms, and external cooperation. ### Public Debt Sustainability — background and outlook - Current situation: - Public debt vulnerabilities increased in 2017: public debt reached 71 percent of GDP in 2017, from 61 percent in 2016 and about 53 percent of GDP at the start of the program in June 2016. - Drivers: elevated fiscal deficits (5.9 percent of GDP in 2016, 6.0 percent of GDP in 2017), currency depreciation (about 25 percent against the Euro since early 2016), and weaker-than-expected growth. - Gross borrowing requirement remained elevated in 2017 at 11.4 percent of GDP. - Debt composition and financing characteristics: - Half of external debt (62 percent of total debt) is mainly owed to multilateral institutions. - Bilateral official donors account for an additional 20 percent of total debt. - Domestically issued government bonds represent 38 percent of total debt and have maturities of five years or more. - E-bond issuances on international financial markets have maturities ranging from 5 to 18 years; most issuances are covered by third-party sovereign guarantees. - Implicit interest rates (2017): - Domestic debt implicit interest rate: 6.7 percent (1.4 percent in real terms). - External debt implicit interest rate: 2.7 percent (-3.6 percent in real terms). - Total debt implicit interest rate: 4.1 percent (-1.2 percent in real terms). - Gross financing needs projection: - Gross financing needs are expected to average 13 percent of GDP through 2022, reflecting high deficits and rollover needs. ### Baseline projection and assumptions - Baseline outcomes: - Central government debt is expected to peak at 72 percent of GDP in 2018 (from an average of 45 percent from 2010–14) before declining following strong fiscal consolidation. - Public debt-to-GDP ratio would decline from 71 percent in 2017 to 68 percent in 2023 in the baseline scenario. - Underlying macro assumptions: - Growth recovers to about 4 percent over the medium term. - Inflation decelerates. - Gradual fiscal adjustment improves the primary balance by 4.3 percent throughout 2023. - Gross borrowing requirement would decline to 6 percent of GDP by the end of the projection horizon. - Effective interest rate increases moderately to 4.2 percent in line with slightly increased reliance on market financing. - Risks to assumptions: - Potential interest rate risks as Tunisia relies more on market financing, increasing exposure to global interest rate hikes. - Inflationary pressures and risks regarding Tunisia’s rating and exchange rate could translate into higher cost of financing. ### Stress tests and risk mitigation - Stress test findings: - Stress tests confirm vulnerability of public debt to interest rate risk, a growth shock, and real exchange rate depreciation. - Under several stress scenarios, the debt-to-GDP ratio could significantly deteriorate relative to the baseline and in some cases push above 90 percent. - A customized scenario analyzing a major security incident (similar to the 2015 terrorist attacks) starting from weaker initial conditions shows substantial deterioration. - Contingent liabilities (government guarantees mostly to SOEs amounting to about 12 percent of GDP) pose additional risk if called. - Policy implications: - Strong policy implementation is critical to mitigate risks largely beyond government control. - Risk mitigation through buffers and contingency planning is emphasized, including rebuilding fiscal and external buffers, cautious debt management, and prompt structural reforms. *Source: IMF staff.* ### 6. The analysis underscores the need to proceed with strong policy implementation. Most ### 6. The analysis underscores the need to proceed with strong policy implementation. Most ### Fiscal policy stance and contingency planning - The current fiscal program should be considered as a minimum level of desirable fiscal effort given the significant economic risks that Tunisia faces. - Contingency planning could help fiscal and monetary policymakers to respond quickly in case a negative shock occurs. - A one-off 10 percent of GDP shock to contingent liabilities is modeled as: - an additional three percent of GDP in bank recapitalization costs, and - the realization of about 7 percent of GDP of the government’s contingent liabilities stemming from public enterprises (these represent about 70 percent of government’s existing contingent liabilities). - The contingent liability scenario highlights the need to improve monitoring and, and if needed, management of the financial health of SOEs, social security funds, and local governments. ### Public sector debt outlook and baseline DSA (selected figures and dynamics) - Identified baseline vulnerabilities and projected dynamics: - Public gross financing needs: 7.8 (2016), 9.5 (2017), 10.8 (2018), 10.3 (2019), 8.7 (2020), 7.9 (2021), 7.8 (2022), 6.7 (2023), 5.8 (five-year horizon shown). - Real GDP growth (in percent): 2.7 (2016), 1.0 (2017), 1.9 (2018), 2.4 (2019), 2.9 (2020), 3.4 (2021), 3.6 (2022), 4.0 (2023), 4.2 (later). - Inflation (GDP deflator, in percent): 4.3 (2016), 5.7 (2017), 5.8 (2018), 6.4 (2019), 5.6 (2020), 4.5 (2021), 4.3 (2022), 3.8 (2023), 3.7 (later). - Change in gross public sector debt (percent of GDP): 0.8 (2016), 6.4 (2017), 10.1 (2018), 1.8 (2019), 0.2 (2020), -0.4 (2021), -1.6 (2022), -1.2 (2023), -1.4 (later), cumulative -2.5. - Identified debt-creating flows (cumulative shown): -15.8. - Primary (noninterest) revenue and grants (percent of GDP): 24.1 (2016), 22.8 (2017), 24.2 (2018), 24.9 (2019), 25.9 (2020), 26.2 (2021), 26.1 (2022), 26.3 (2023), 26.3 (later), cumulative 155.8. - Primary (noninterest) expenditure (percent of GDP): 25.9 (2016), 26.6 (2017), 27.8 (2018), 27.5 (2019), 26.8 (2020), 26.0 (2021), 25.7 (2022), 25.7 (2023), 25.7 (later), cumulative 157.4. - Automatic debt dynamics contribution (percent of GDP): 0.3 (2016), 3.9 (2017), 0.3 (2018), -3.2 (2019), -3.3 (2020), -2.8 (2021), -2.9 (2022), -2.5 (2023), -2.5 (later), cumulative -17.2. - Residual, including asset changes (percent of GDP): -0.2 (2016), -0.1 (2017), 6.4 (2018), 2.5 (2019), 2.7 (2020), 2.6 (2021), 1.7 (2022), 1.9 (2023), 1.8 (later), cumulative 13.2. ### Alternative scenarios and stress tests (selected outcomes) - Alternative scenarios examined include: Historical Scenario, Constant Primary Balance Scenario, Contingent Liability Shock, Security Shock, and No Fiscal Reforms. - Contingent Liability Shock assumptions (excerpt): - Primary balance changes: -10.4 (one year) then 0.2, 0.4, 0.6, 0.6 in subsequent years (percent of GDP as shown in scenario table). - Stress-test types run include: Primary Balance Shock, Real GDP Growth Shock, Real Interest Rate Shock, Real Exchange Rate Shock, Combined Shock. - Under the Combined Shock, selected projected parameters shown: - Real GDP growth: 2.4 (2018), 1.1 (2019), 1.6 (2020), 3.6 (2021), 4.0 (2022), 4.2 (2023). - Effective interest rate: 4.0 (2018), 4.7 (2019), 4.1 (2020), 4.3 (2021), 5.0 (2022), 5.2 (2023). - Risk-assessment benchmarks applied for heat-map style assessment include: bond spreads 200 and 600 basis points; external financing requirement 5 and 15 percent of GDP; change in share of short-term debt 0.5 and 1 percent; public debt held by non-residents 15 and 45 percent; share of foreign-currency debt 20 and 60 percent. - Market-perception-related metrics reported include bond spread and external financing requirement (figures shown in the assessment panel). ### External debt (Annex IV) — recent history and projections - External debt evolution: - External debt-to-GDP ratio rose from 51 percent in 2011 to 80 percent at end-2017. - External debt is expected to rise to 83.8 percent of GDP in 2018 from 80.1 percent of GDP at end-2017, driven by a planned Eurobond issuance and continued official funding. - External debt is expected to peak at 85.5 percent of GDP in 2019, then gradually decline below 80 percent of GDP by the end of 2023. - Main drivers of the 2011–2017 rise: dinar depreciation, lower-than-expected growth, higher fiscal and current account deficits following external shocks and rising social pressures. - New debt commitments composition: mostly with official creditors or backed by third-party guarantees, except for a US$1 billion Eurobond issued in January 2015 and a € 850 million Eurobond in February 2017. - Vulnerability to shocks: - The external debt profile (low average interest rate, relatively long maturities, and substantial concessional debt) makes it robust to most shocks except large real exchange rate depreciation. - A negative combined shock to the real interest rate, growth and the current account would increase the external debt ratio to 83.4 percent of GDP by end-2023 compared to 78.5 percent under the baseline. - A sharp real exchange rate depreciation (one-time 30 percent in the second year of projection) would raise the external debt ratio to 127.2 percent of GDP in 2019 and to 116.8 percent at the end of the projection horizon. ### External sector assessment (Annex V) — vulnerabilities and outlook - Exchange rate and valuation: - Since the start of 2017, the dinar depreciated by about 20 percent vis-à-vis the Euro, producing a REER depreciation of 10 percent and moving the valuation closer to equilibrium. - Despite that correction, the real exchange rate remains overvalued by 15-20 percent (assessment). - The dinar lost 25 percent against the Euro since the start of 2016 (background note). - Current account and capital flows: - The current account deficit reached a record 10.1 percent of GDP in 2017, driven by a large trade deficit (trade balance -13.3 percent of GDP in 2017). - The energy balance was in deficit by 3.7 percent of GDP in 2017 because of large energy imports combined with disruptions in domestic energy production. - Services and transfers partially offset the trade deficit by +3.2 percent of GDP in 2017. - The capital and financial account surplus reached 9.4 percent of GDP in 2017 and is financing the current account deficit; medium- and long-term borrowing is the primary form of inflows. - Direct and portfolio investment fell by more than half after 2010 but still represents about 25 percent of total flows. - More than half of medium- and long-term loans in most years originate from international financial institutions or bilateral official creditors. - Reserves and external liquidity: - Tunisia's stock of FX reserves has been declining due to large exchange rate interventions, mainly to finance large energy import needs in the context of a shallow local FX market. - FX reserves stand slightly below 3 months of imports and currently do not meet important benchmarks: - below 100 percent of short-term debt, and - below 20 percent of the stock of broad money. - Policy implications include limiting FX interventions going forward and improving export performance. - Overall assessment (end-2017): Tunisia's external position remains weak. Dinar depreciation has improved the REER but it remains overvalued. Sustained FX reserve losses underline the need for additional adjustment in the policy mix and highlight benefits of transitioning back towards a de facto floating exchange rate regime. In February 2018, there are early signs of welcome current account reversal. - Outlook for 2018 and medium term: - The current account is expected to improve in 2018 and over the medium term, supported by a pickup in tourism, recovery in energy and mining exports, improved manufacturing exports following dinar depreciation, and slower import growth due to higher prices for consumption goods. - Further sizeable capital and financial inflow surpluses will be needed over the medium term to finance still sizeable current account deficits, and the share of FDI in inflows is expected to gradually increase as confidence strengthens. _italic Source: IMF staff (content as provided in the source PDF)._ ### 5. The depreciation of the dinar has accelerated since April 2017 (Annex Figure 3). The CBT ### cr18120 - 5. The depreciation of the dinar has accelerated since April 2017 (Annex Figure 3). The CBT ### Exchange rate developments and recent depreciation - The CBT increased the dinar’s flexibility and abandoned the crawling trend within a 2 percent band against the US$/Euro basket, leading to a reclassification of the de jure exchange rate arrangement to floating from crawl-like, effective May 12, 2016. - The dinar subsequently remained within a 2 percent band against the Euro, resulting in the de facto exchange rate being reclassified back to crawl-like, effective May 19, 2017. - Since the end of 2016: - Nominal effective exchange rate (NEER, weighed by trade partners) has depreciated by about 11.6 percent. - Real effective exchange rate (REER) has depreciated by 9.7 percent. - Short-run impact on the current account may be negative due to the J-curve effect: immediate depreciation raises the import bill in dinars while export-volume responses take longer. ### Exchange rate assessment using current account methodologies (EBA and EBA-lite) - Methodology summary: - The EBA/EBA-light approach establishes the gap between actual and norm current account positions and maps that gap to the REER using assumed CA/REER elasticity. - The CA/REER elasticity used is 0.37 (based upon an elasticity of 0.71 for exports and 0.92 for imports, adjusted by shares of exports and imports in GDP). - EBA-methodology (end-2017): - Actual CA/GDP (a) = -10.1% - Cyclical contributions (b) = 0.8% - Cyclically adjusted CA/GDP (c = a-b) = -10.9% - Cyclically adjusted CA/GDP norm (d) = -3.0% - Contribution of policy gaps = 0.7% - o/w fiscal = 0.7% - o/w health expenditures = -0.1% - o/w Δ(reserves) = -0.3% - o/w private credit = 0.0% - o/w capital controls = 0.5% - Unexplained residual = -8.6% - CA/GDP gap (c-d) = -7.9% - Assumed CA/REER Elasticity = 0.37 - REER gap (positive is overvaluation) = 21.4% - Note: The large unexplained residual of -8.6 percent suggests the EBA-model does not provide a good fit for Tunisia. - EBA-lite-methodology (end-2017): - Actual CA/GDP (a) = -10.1% - Cyclical contributions (b) = 0.5% - Cyclically adjusted CA/GDP (c = a-b) = -10.6% - Cyclically adjusted CA/GDP norm (d) = -5.0% - Contribution of policy gaps = -1.5% - o/w fiscal = 0.6% - o/w health expenditures = n/a - o/w Δ(reserves) = -2.3% - o/w private credit = 0.3% - o/w capital controls = 0.0% - Unexplained residual = -4.1% - CA/GDP gap (c-d) = -5.6% - Assumed CA/REER Elasticity = 0.37 - REER gap (positive is overvaluation) = 16.2% - Interpretation: - EBA suggests an REER overvaluation of about 21 percent at end-2017 (CA gap -7.9 percent of GDP). - EBA-lite suggests an REER overvaluation of 16 percent at end-2017 (CA gap -5.6 percent of GDP). - EBA-lite attributes 2.3 percentage points of the -5.6 percent CA gap to the deviation of Tunisia’s FX reserves from their recommended position. ### Exchange rate assessment using external asset position (External Sustainability, ES) - Using the ES approach: - Current net international investment position (NIIP) = -119.4 percent of GDP. - Assuming Tunisia wants to bring NIIP back to historical average of -100 percent of GDP by the end of the program implies: - Current account gap = -3.6 percent of GDP. - Suggested REER overvaluation = just above 10 percent (reported as around 11.2 percent). - Caveat: The -100 percent of GDP NIIP benchmark may not be suitable for an emerging market economy. ### Reserve adequacy and outlook - FX reserve trends: - FX reserves have trended downward since 2010. - In early March 2018, FX reserves stood at 2.6 months of imports. - Adequacy comparisons: - 2.6 months of imports is below most target levels: it falls short of 100 percent of short-term debt and the ARA EM metric, while only just exceeding 20 percent of broad money. - Projections and conditions: - Reserves are projected to recover to the ARA EM adequacy range over the program period (albeit close to its lower margin), provided Tunisia moves back to a de facto floating exchange rate arrangement. - If the dinar continues to be classified as crawl-like, the projected increase in reserve coverage is insufficient to reach the ARA adequacy range. - ARA EM metric composition (as described): - 30 percent of short-term debt (STD) + 10 percent of other portfolio liabilities (OPL) + 5 percent of M2 + 5 percent of export revenues (constructed from the 10th percentile of historical outflows during EMP episodes). ### FX interventions - Net FX interventions and costs: - Between the start of 2017 and end of January 2018, net FX interventions amounted to US$3.1 billion. - US$3.1 billion is equivalent to 7.7 percent of 2017 GDP. - US$3.1 billion is nearly 85 percent of total 2017 inflows from external official partners. - Effectiveness: - Sizeable FX interventions have been costly but have not prevented strong depreciation since 2016. ### Non-price competitiveness and structural constraints - Competitiveness rankings and trends: - Doing Business (World Bank): Tunisia ranks eighty-eighth out of 188 countries; fell from forty-second in 2012 to eighty-eighth in 2018. - Global Competitiveness (World Economic Forum): Tunisia slipped from top-40 before 2011 to ninety-fifth place in 2018. - Governance and corruption: - Worldwide Governance Indicators show Tunisia performs well on several dimensions relative to peers but with scope for improvement in “regulatory quality” and “government effectiveness”. - Perceived public sector corruption is average in the region and has failed to improve since 2011. - Paying taxes: - Tunisia ranks one hundred and fortieth in Doing Business “Paying Taxes”; the 2017 exceptional corporate income tax is highlighted as making tax payment costlier. - Labor productivity: - Labor productivity is second-lowest in the region, indicating underutilized potential that could be mobilized as constraints are alleviated. ### Program implementation, reforms, and IMF engagement (from Letter of Intent) - 2017 macro outcome and policy stance: - Growth reached 1.9 percent in 2017 after two years of low growth. - CBT increased its policy interest rate by 75 basis points in early March to mitigate accelerating inflation. - Progress on structural reforms: - New Investment Code effective April 1, 2017; established Strategic Investment Council and Tunisian Investment Authority as one-stop shop. - Five Prior Actions for the Second Review were met; two of 14 agreed Structural Benchmarks completed on time and one with delay; substantial progress on many others. - Program performance and requests: - The government missed all four end-December 2017 Quantitative Performance Criteria (QPC): floor on the primary balance, ceiling on net domestic assets (NDA), floor on net international reserves (NIR), ceiling on total current primary expenditure. - At end-June 2017, targets for NIR and total current primary expenditure were met; primary balance and NDA missed. - Continuous Performance Criterion on non-accumulation of new external arrears observed; missed on non-imposition of exchange restrictions due to CBT temporary legislation barring trade credit for certain non-essential imports. - Indicative Target on social expenditures was met in June and December 2017. - Government requests: - Shift towards quarterly reviews of the EFF arrangement with new QPCs for March, June, September, and December 2018. - New monthly Indicative Target on the ceiling of the CBT’s net FX interventions. - Rephasing of remaining access consistent with the new schedule. - Waiver of non-observance of the continuous PC related to exchange restriction and approval of the exchange restriction for Balance of Payments reasons. - Completion of the Second Review under the EFF and purchase of an amount equivalent to SDR 176.7824 million. - Waiver for non-observance of QPCs on the primary balance, total current primary spending, NDA, and NIR for end-December 2017 based on corrective measures taken. _International Monetary Fund staff report and Tunisian authorities (excerpts from document)._ ### 3. A nascent recovery. Economic growth reached 1.9 percent in 2017, twice as high as in the ### cr18120 - 3. A nascent recovery. Economic growth reached 1.9 percent in 2017, twice as high as in the ### A nascent recovery and growth drivers - Real GDP growth reached 1.9 percent in 2017, twice as high as in the two previous years. - Recovery drivers: - Manufacturing recovery due to a more favorable environment in Europe, stronger phosphate production, and a good touristic season. - A more stable security situation facilitated the recovery. - Demand composition: - Consumption remained the main driver of growth. - Investment (private and public) remained below satisfactory levels. - Policy concern: - Consumption-based growth is not sustainable in the medium term given Tunisia’s debt constraints and rising macroeconomic pressures. ### Social and labor conditions - Inflation accelerated to reach 7.1 percent in February 2018, driven by: - Significant wage increases. - Depreciation of the dinar. - Increases in several administered prices. - Unemployment: - Nationwide unemployment rate at 15.5 percent at end-2017. - Uneven distribution: affects the young, university graduates, and women. - Regional disparities: unemployment rates range from less than 10 percent in coastal eastern regions to over 25 percent in interior regions of the south and west. ### Fiscal developments and public debt - 2017 budget deficit (excluding grants) reached 6.1 percent of GDP, in line with the 2017 Supplementary Budget Law. - Fiscal composition and one-offs: - Wage bill overruns: +0.5 percent. - Slightly higher tax revenue: +0.1 percent, mainly from arrears collection (about TD 300 million, or 0.3 percent of GDP). - Significant recovery in non-tax revenue mostly from the oil sector: about TD 600 million, or 0.6 percent of GDP. - Public debt: - Public debt reached TD 69 billion (71 percent of GDP) at end-2017. - Government objective: lower public debt to obtain fiscal space to support growth and reduce poverty. ### External sector and exchange/monetary policy - Current account: - Current account deficit reached a record level of 10.1 percent of GDP in 2017, despite a recovery in manufacturing exports and a better tourist season. - Strong demand for imports, especially consumer goods; import volumes appeared to slow in Q4 2017. - FX reserves and market developments: - Central Bank of Tunisia (CBT) FX reserves dropped by US$215 million over 2017. - Interbank FX market experienced a serious liquidity squeeze; increase in professional foreign currency accounts holdings. - Exchange and monetary policy adjustments: - Dinar depreciated 10 percent on a real basis in 2017. - Policy rate raised by 150 basis points in total since early 2017, bringing it to 5.75 percent. - Interest rate corridor widened by an additional 150 basis points to 200 basis points. - Quantitative limit of TD 7 billion for seven-day tender auctions with commercial banks enforced since July 2017. - Despite measures, banking sector refinancing with the CBT reached a record level and exceeded TD 12 billion in January 2018. ### Banking sector strains - Liquidity shortage characterizes the banking sector. - Deposit mobilization improved in 2017 but remained insufficient. - Autonomous liquidity-draining factors include high demand for government financing and excessive use of central bank refinancing. - Non-performing loans (NPLs): - Ratio of NPLs roughly 15 percent of total assets. - Provisioning rate at 65 percent. - Capital adequacy: - Capital adequacy ratio broadly unchanged at about 11 percent, supported by bank profits. - Credit access: - Total private-sector credit stood at about 80 percent of GDP at end-2017. - Credit composition skewed toward loans to large enterprises and households; access remains an obstacle for SMEs. ### Program implementation under the EFF and performance criteria - Quantitative Performance Criteria (QPCs) and targets: - End-June 2017 target on net international reserves (NIR) met; end-December 2017 QPC on NIR missed due to higher-than-envisaged current account deficit and higher-than-expected energy imports and absent recovery of phosphate exports. - End-December 2017 QPC and end-June 2017 target on net domestic assets (NDA) missed due to pressure on commercial bank liquidity and record central bank refinancing. - End-December 2017 QPC and end-June 2017 target on the fiscal deficit missed, mainly from unanticipated wage bill overruns. - End-December 2017 QPC on total current primary expenditures missed; end-June 2017 target had been met. - Indicative Target (IT) on social spending met in June and December 2017. - Continuous Performance Criterion (PC) on non-imposition of new exchange restrictions was not observed due to CBT restrictions on bank financing for certain products in October 2017. ### Structural benchmarks, reforms, and reprogramming - Met Structural Benchmarks (SBs): - Governance: Published statute establishing the High Anti-Corruption and Good Governance Authority in September 2017. - Financial sector: Inspections of the seven largest private banks completed; improved risk management capacity of banking supervision in January 2018; adopted decree under Article 474 creating standing committee to guide the Minister of Finance on debt settlement measures. - Budgetary policy: Circular for 2018 Budget Law limited new recruiting into the civil service to graduates of state training schools; hiring capped below 3,000 civil servants for 2018. - Reprogrammed delayed SBs and expected timelines (selected): - High Authority operationalization: members' oath and appointment decree (reprogrammed SB, June 2018). - Household vulnerability survey: completed for 450,000 households; full survey for 900,000 households by end-2018 (reprogrammed SB, December 2018). - Legal framework to facilitate resolution of NPLs in public banks: passed by Council of Ministers in February 2018 as a Prior Action (reprogrammed SB, June 2018). - Law on lending rate ceiling expected adoption by ARP (reprogrammed SB, May 2018). - Social security reform: draft law to be approved by CMR in coming months (reprogrammed SB, April 2018); TD 200 million of public sector liabilities transferred to CNSS as a Prior Action for the Second Review. - Functional reviews of Ministries: Education, Health and Finance completed in December 2017; Public Works review to conclude in first half of 2018 (reprogrammed SB, June 2018). - TUNISAIR contract preparation delayed by labor negotiations; to be signed before end-2018 (reprogrammed SB, December 2018). - Organic Budget Law review by Parliament’s financial commission to be transferred to plenary (reprogrammed SB, December 2018). - General Taxation, Public Accounting and Recovery Committee organization by decree; LTU partly operational and to be fully operational through merging audit and recovery functions (reprogrammed SB, December 2018; new SB, July 2018). - Fuel and energy pricing: - Ad-hoc fuel price increase in July 2017 (about 6½ percent). - Additional increase in January 2018 as a Prior Action for the Second Review. - Commitment to apply quarterly automatic adjustments to reduce the energy subsidy bill (continuous reprogrammed SB, from March 2018) and make additional adjustments to electricity, gas and LPG as needed. - Central bank FX interventions: - Started using an auction mechanism in August 2017; auctions not yet fully competitive. - Plan to improve auction mechanism, potentially seeking IMF technical assistance (reprogrammed SB, June 2018). ### Trade policy - Commitment to economic openness: - Phase out Circular No. 2017/09, which limits access to bank credit for financing imports of certain non-priority goods, by the end of 2018. ### Macroeconomic vulnerabilities, strategy, and projections - Growth outlook: - Growth projected to reach 2.4 percent in 2018 and 3.4 percent in 2020. - Drivers: strong phosphate sector and upstream chemical industries, agriculture on back of favorable olive harvest, export industries and tourism. - Decomposition of GDP growth (Text Table 1 excerpt) - Real GDP growth: 1.9 100.0 (2017); 2.4 100.0 (2018); 2.9 100.0 (2019); 3.4 100.0 (2020). - Sectors (growth contribution and GDP share in sequence for 2017–2020 as presented): - Sectors: 1.8 80.9 2.3 80.9 2.7 81.1 3.2 82.3 - Agriculture: 0.3 10.0 0.4 10.3 0.2 10.0 0.4 10.0 - Manufacturing: 0.2 16.6 0.7 16.6 0.7 16.6 0.6 16.8 - Non-manufacturing: -0.4 9.3 0.1 9.3 0.3 9.5 0.4 9.7 - Services: 1.7 45.0 1.1 44.6 1.4 44.9 1.8 45.9 - Public administration: 0.2 19.1 0.1 19.1 0.2 18.9 0.2 17.7 - Sources noted: Tunisian authorities; and IMF staff estimates and projections. - Policy priorities to address vulnerabilities: - (i) Proactive and well-designed fiscal consolidation. - (ii) Tighter and adequate monetary policy to decelerate inflation. - (iii) Continued exchange policy flexibility. - Medium-term fiscal targets and pillars: - Lower the deficit excluding grants to no more than 3.0 percent of GDP by 2020. - Reduce the wage bill to 12.4 percent of GDP. - Pillars: - Gradual reduction in number of civil servants via negotiated voluntary departures, voluntary early retirement, and strict hiring limits to leverage natural attrition. - No further salary increases over 2018–20 unless growth substantially improves relative to baseline projections and wage-bill-to-GDP ratio maintained on downward trajectory toward 12.4 percent of GDP. - Decrease energy subsidies through quarterly automatic price adjustments with goal of eliminating these subsidies in the medium term (reprogrammed SB, from March onwards). - Comprehensive social security reform, including continued parametric reform of pensions. - Revenue mobilization and expected budget support from multilateral partners over 2018–20, including: - World Bank: US$1,500 million. - European Union: US$650 million. - African Development Bank: US$490 million. - Bilateral partners (unspecified amounts). *Italic: Source: cr18120 (IMF staff summary as provided in the supplied content).* ### 17. This fiscal strategy is not free of risk. The risks are primarily related to uncertainties ### This fiscal strategy is not free of risk ### Risks and overarching reforms - Risks are primarily related to uncertainties regarding growth, external developments (especially international oil prices), and Tunisia’s political and social context. - To contain these risks, deep reforms were decided starting in 2018, based on the priorities described in preceding text. - A dialogue with civil society was started on the necessity of having everyone share in the efforts. - Measures have been designed to be socially equitable. ### Revenue mobilization, 2018 - The 2018 Budget Law contains a set of tax and other revenue measures that will yield additional revenue of about 2.2 percent of GDP. - VAT rates increased from 6 percent, 12 percent, and 18 percent to 7 percent, 13 percent, and 19 percent, respectively. - Excise taxes were raised on some goods, such as tobacco, alcohol and automobiles. - Some import duties were increased for fiscal reasons. - These tax measures are permanent and replace the temporary 2017 measure on corporate taxation (0.9 percent of GDP). - A catalogue of 10 measures adopted in the 2014–17 Budget Laws to increase collection of tax revenue, especially from liberal professions, will be implemented; these measures were so far not enforced. - Increase in oil prices has generated additional nontax revenue. Transfers from public oil companies to the central government should increase by about TD 300 million compared with the projections retained in the 2018 Budget Law. - Text Table 2. Revenue Measures, 2018 (selected line items) - Total permanent revenue measures: 2,288.0 Millions de DT — 2.2 Pourcentage du PIB - Direct taxes: 138.0 — 0.1 - Introduction of a 5 percent duty on the profits of financial institutions: 71.0 — 0.1 - Increase in the dividend tax rate from 5 to 10 percent: 58.0 — 0.1 - Increase in CIT to 10 percent for selected firms: 6.0 — 0.0 - Increase on taxes in non-resident bank interest: 3.0 — 0.0 - Indirect taxes: 395.0 — 0.4 - Increase of one point in the 18 and 6 percent VAT rates: 313.0 — 0.3 - VAT exemption removal: 3.0 — 0.0 - Impact of the revision of customs duties and consumption tax on VAT receipts: 50.0 — 0.0 - Introduction of a tax on freight containers: 29.0 — 0.0 - Excise tax: 320.0 — 0.3 - Other measures: 935.0 — 0.9 - Solidarity contribution on the income of natural persons: 300.0 — 0.3 - Increase in the customs duties of certain agricultural and food products: 242.0 — 0.2 - Increase in the advance payment on imported consumer products from 10 to 15 percent in 2018 and 2019: 114.0 — 0.1 - Introduction of a customs duty on the export of edible oils: 3.0 — 0.0 - Increase in internet card surcharges: 96.0 — 0.1 - Increase in the tobacco price: 65.0 — 0.1 - Introduction of a tourist tax in hotels of 3 dinars per day: 51.0 — 0.0 - Increase in stamp duty on certain documents: 25.0 — 0.0 - Increase in chancellery fees: 13.0 — 0.0 - Increase in the single insurance tax rate from 5 and 10 to 6 and 12 percent, resp: 26.0 — 0.0 - Collection efforts (including tax arrears): 500.0 — 0.5 - Memorandum item: Nominal GDP: 106,178.6 ### Prudent expenditure management - Wage bill - Law on negotiated voluntary departures adopted in January 2018; target departure of 20,000 civil servants composed of: - 10,000 negotiated voluntary separations; - 6,400 voluntary early retirements; and - the rest from natural attrition. - Total budget savings from the 10,000 negotiated voluntary separations will be about TD 280 million. - Increasing voluntary separations to 15,000 would generate about TD 420 million of savings on an annual basis. - Due to the departure schedule, only TD 320 million of these savings will be realized in 2018, with the remainder occurring from 2019. - Financing of volunteer financial packages: discussions with external partners about dedicated budget support. - About 6,400 civil servants have expressed interest for early retirement, generating additional savings of TD 120 million per year. - Hiring limited to 3,000 persons in 2018 to obtain another net decrease in the wage bill through natural attrition. - Centralized negotiations through the 5+5 committee with mandatory presence of the Ministry of Finance to avoid decentralized salary negotiations. - Elimination of the use of tax credits entirely starting in 2019. - Energy subsidies - Effective January 1, 2018, price of hydrocarbons at the pump raised by 50 millimes per liter and 300 millimes per bottle. - This amounts to an ad-hoc increase of 4.1 percent for gas oil and gas bottles, 3.3 percent for gas oil without sulfur, and 2.9 percent for unleaded premium. - Committed to containing total spending on energy subsidies at TD 2,108 million for 2018. - The 2018 Budget Law was based on TD 1,500 million, underpinned by an oil price of US$54 per barrel. - Under the assumption of a price of US$62, unable to maintain same objective without further price increases; increased maximum budget allocation for energy subsidies by TD 608 million. - Based on total spending of 2,108 million and a price of US$62 per barrel, required energy price increases for 2018 will amount to an average 13 percent. - Gradual adjustments every quarter to meet the ceiling of TD 2,108 million (continuous reprogrammed SB, from March 2018). - If average oil prices were above US$62, additional price adjustments would be made as needed. - A "task force" under the Minister of Major Reforms will monitor fiscal risks associated with fluctuations in oil prices and propose measures necessary for strict compliance with the budgetary target under the program. - Social security funds - Strategy to restore financial viability of public (CNRPS) and private (CNSS) pension funds to enable contributions to CNAM. - For 2018, CNRPS financial needs will be partially covered by reform of contribution rates (+1 point for employees and +2 points for employers) and additional revenue from the new social welfare tax (CSS). - Estimated remaining gap of roughly TD 150 million to be filled from the budget’s unallocated expenditures (buffer amounts to a total of TD 400 million). - CNSS is co-managed with social partners; government and social partners must decide on effort to restore financial soundness. - Central government will contribute indirectly by clearing arrears of public entities to the CNSS. - About TD 200 million of arrears recovered by February 2018, below the target of TD 600 million set at the time of the First Review under the EFF. - CNSS should improve collection, governance and, if feasible, sell some assets to close the financial deficit in 2018. - Commitment to ensure financial sustainability of the social protection and health system (including the CNRPS, CNSS, CNAM, and the central pharmacy) and, if needed, prepare a supplementary budget law for necessary transfers or advances to the various funds. - Contingency measures and oversight - Budgeted about TD 400 million in unallocated expenditures to prevent missing program targets. - Strengthened oversight of public enterprises. - Potential buffer from a series of tax measures in the 2016, 2017 and 2018 budget laws—impact on tax revenue yet to be evaluated. - Strengthened audits of financial services providers under the offshore regime to prevent tax fraud. - With USAID support, a comprehensive integrity check of companies taking advantage of tax incentives will be performed by the end of May 2018. ### Monetary policy and inflation control - Price stability remains the CBT’s main objective. - Inflation risks for 2018 are growing due to planned fuel price adjustments, implementation of the 2018 Budget Law, and pass-through of the dinar’s depreciation. - Expectation that inflation expectations will remain well-anchored because of: - proactive policy actions by the CBT; and - expectation of no new wage increases over the next two years. - Actions to return inflation to low- to mid-single digits include: - Tightening monetary conditions: CBT raised the policy rate by 75 basis points on March 5, 2018 to 5.75 percent; cumulative increase of 150 basis points since early 2017. - CBT stands ready to continue policy rate increases if inflation (especially core inflation) does not decelerate and real key interest rates remain negative. - Aim to bring real interest rates back into positive territory to smooth the path of consumption. - CBT significantly widened the interest rate corridor used for money market operations. - Better monitoring of monetary aggregates: CBT intends to contain the increase in credit to the economy, particularly consumer credit, to nominal GDP growth. - CBT will ensure that net domestic assets (NDA), including bank refinancing, are contained through close monthly monitoring. - IMF will support with TA to refine instruments for monitoring liquidity factors and monetary aggregates. - CBT agrees to consult IMF staff whenever monthly NDA outturns do not meet the path agreed under the EFF arrangement. - Improving transmission channels: full impact of the 2017 interest rate hike expected in 2018; CBT will contain regular refinancing operations and limit liquidity available for tender. - Lender of last resort facility (initiated December 2016, operational July 2017) now effective after new collateral framework and creation of a credit committee. - CBT reiterates unequivocal commitment to implement IMF recommendations, consistent with past and ongoing reforms and the new central bank and banking sector laws. ### Exchange rate policy and FX market management - 2017 developments: - Dinar depreciated by about 20 percent against the Euro in 2017. - Energy imports up 23.4 percent to a total of US$ 3.283 billion, compared with US$2.660 billion in 2016. - CBT increased its net interventions by 53 percent to US$2.866 billion in 2017 versus US$1.872 billion in 2016. - For 2018: - CBT committed to adhere strictly to a net intervention budget, facilitated by recovery in tourism and exports of phosphates and manufacturing. - Intervention budget will help meet FX demand from STEG and STIR regarding their energy demand. - Factors enabling CBT to gradually reduce interventions: - recovery in exports due to competitiveness gains; - beginning of exploration of the “Nawara” gas project, which will reduce energy import needs; - price adjustments of oil products, which will slow demand. - In the short term, TA will be requested from the AFD to improve cash management of STEG and STIR. - Monthly meetings with both companies to better project their FX demand. ### Consolidating recovery — Governance and the business environment - Fighting corruption - High Anti-Corruption and Good Governance Authority established by law last September; will be main tool to fight corruption. - 2018 Budget Law included sufficient allocations for the High Authority. - Call for candidates for membership on the executive committee published; CMR passed a governmental decree specifying remuneration of the executive board. - Parliament expected to elect members of the executive committee by March 2018, with the respective decree expected by June 2018 (reprogrammed SB, June 2018). - Once appointed, the executive committee can rely on staff and resources of the current National Authority to Fight Corruption (INLCC). - Improving the business environment - Implementation of the new investment law started with a decree specifying activities that require authorization and implementation of the Tunisia Investment Authority. - Tunisia Investment Authority will be a one-stop shop for investors, providing a single point of access for all investors and facilitating procedures to create companies and conduct business (new SB, May 2018). - Authority is reviewing authorization lists with aim to streamline and will propose and begin execution before March 2018 a plan to simplify regulations over the next two years; receiving TA from the IFC. - Subsequent revision and possible elimination of authorizations to access certain sectors. - Government plans to leverage international relations to stimulate investment, including participation in the G20’s “Compact with Africa” initiative. - Operationalization of the law on public-private partnerships (PPP) following its approval; PPPs to increase from 2018 to complement public investment and will be subject to strict pre-assessment of budgetary risks. *Source: Tunisian authorities.* ### 24. Financial sector reforms. We are committed to reinforcing financial stability by improving ### 24. Financial sector reforms ### Overview - Commitment to reinforce financial stability by improving the quality of bank loan portfolios, strengthening bank supervision, and preparing a strategy to reduce banks’ liquidity deficits. - Strengthen financing to the economy by improving access to financing for SMEs that create jobs. - Continue strategy to exit nonstrategic banking institutions and sell off two banks in 2018; by June 2018 finalize a divestiture program for 2019. ### Strengthening loan portfolios and NPL treatment - Prompt measures to strengthen the quality of loan portfolios, especially for public banks, which face specific legal constraints limiting their ability to reduce NPLs. - Restrictive rules on writing off NPLs apply to all banks; collection companies face many operating constraints. - January 2018 CMR measures (expected Parliamentary adoption of draft laws (i) and (ii), modified SB, June 2018): - Draft law allowing public banks to abandon NPLs loans like private banks. - Draft law streamlining rules for write-offs so that a final definitive judgment is not necessary. - Decree providing that public banks are not subject to the assent of the committee established by Article 474 of the Commercial Code. - White paper setting forth strategy to eliminate delinquent claims in the tourism sector. - May 2018: CMR to pass draft law on collection companies allowing them to canvass clients; Parliament to adopt by September 2018. - By March 2018: Ministry of Justice, with Ministry of Finance, the CBT and bank association, to implement program to train specialized judges for bank conflicts; High Institute of Magistrates/Academy of Banks and Finance to supervise professional development; Ministry of Justice to identify commercial courts specializing in bank conflicts. - By April 2018: Ministry of Tourism to propose solutions to change the tourism focus of hotels whose sustainability is not assured to restructure debts and upgrade tourism offerings. - By June 2018: COREFI to prepare comprehensive strategy to improve treatment of NPLs covering judicial system, hotel re-vocation, taxation, land use registration, supervision, and other areas. ### Bank supervision and Central Bank of Tunisia (CBT) actions - CBT to continue strengthening bank supervision. - Inspection of the seven largest private banks (SB met with delay in January 2018) identified for one bank internal control weaknesses and need for provisioning; provisioning to be met by raising capital from own sources. No unexpected risks for six other banks. - February 2018: CBT published a new circular consolidating all rules on capital requirements, including new requirements related to market risk. - Consolidated supervision to be operational by the second half of 2019. - In tourism sector white paper, CBT plans exemption from the contagion principle for new loans to clients whose debt has been renegotiated, subject to prerequisites; CBT will supervise and limit exemptions and review implementation if abuses occur. - General Directorate of Bank Supervision staff at the CBT to be increased by a dozen employees in the first half of 2018. ### Resolution framework and Banque Franco Tunisienne (BFT) - Resolution framework for institutions in difficulty to be made operational promptly for the BFT. - Resolution committee appointed in December 2017. CBT to submit its analysis of BFT’s situation to the committee as soon as the committee is created; committee to issue decision regarding orderly resolution of BFT (new SB, May 2018). Resolution process to begin immediately after that. - Operationalization of the deposit guarantee fund finalized in January 2018 (scheduled for September 2017). ### Liquidity shortages and COREFI strategy - By December 2018, COREFI to prepare a comprehensive strategy to fight liquidity shortages in the Tunisian financial system to enable full role in financing the economy. - Topics to be studied: de-cashing, fighting the informal economy, digitization, financial inclusion, controlling the budget deficit, fighting the current account deficit, money market reform, revitalizing the bond market, and stock market reform. ### SME financing, interest rate ceiling, and credit information - COREFI to prepare strategy to improve financing for SMEs; law on the ceiling of the maximum lending rate to be adopted promptly. - By September 2018, COREFI to prepare strategy to review modalities of providing financial support to SMEs—through BFPME, SOTUGAR, BTS, among others—to simplify existing programs and provide guarantee tools and/or lines of financing in partnership with banks. - Strategy to include a module to assist SMEs in collaboration with private banks in preparing business and financial plans. - CBT to strengthen its corporate information center (Centrale des Bilans) by consolidating national statistics, mainly by creating a data exchange system with the Ministry of Finance. - Parliament to adopt law that sets the interest rate ceiling (reprogrammed SB, May 2018). - Ceiling for corporates and SMEs to be increased from +20 percent above average to +33 percent. The averages are differentiated for each category of borrowers (retail, corporates). - Ceiling for individuals will remain at 20 percent above the average rate. - Law covering operation and supervision of the credit bureau to be adopted by April 2018. ### Financial inclusion and AML/CFT - Minister of Finance/COREFI to validate financial inclusion strategy by March 2018, focusing on development of digital finance, microinsurance, refinancing microfinance, the social and solidarity economy, and financial education. - By June 2018, CBT financial inclusion observatory to identify indicators to be put in place. - CMR approved in November 2017 measures listed in the FATF action plan for Tunisia; plan to be monitored continuously to improve compliance. - Significant improvement in Tunisia’s technical compliance rating decided at the MENA-FATF plenary meeting from December 2 to 7 in Bahrain. ### Safeguards, internal audit, and governance improvements - Progress in implementing IMF safeguards assessment recommendations to anchor independence and performance of CBT’s internal audit function. - Drafted action plan for risk management unit and legal text to create a risk committee to be submitted to the CBT’s Supervisory Board for approval as soon as possible. - Issued new regulation on the lender of last resort framework in December 2016. - Circular for implementation of monetary policy published in March 2017 to reinforce internal controls of lending operations. - General Control Department of the CBT to undertake a preliminary self-assessment before an external evaluation of the internal audit function, following a request for IMF TA. *Source: cr18120 - 24. Financial sector reforms. We are committed to reinforcing financial stability by improving* ### 5. Ceiling on the accumulation of new external debt payment arrears ### 5. Ceiling on the accumulation of new external debt payment arrears ### Quantitative Indicative Targets - Ceiling on the accumulation of new external debt payment arrears by the central government (in millions of US$): 0 - Quantitative Indicative Targets table excerpts (selected): - Floor on social spending (in millions of TD): 721; 1,021; 1,534; 2,041 - Ceiling on the accumulation of new domestic arrears (in millions of TD): 0 ### Program assumptions on which adjusters are calculated in case of deviations - External financing of the central government on a cumulative basis (in millions of US$) 7/: 209; 1,422; 2,108; 3,029 - of which: multilateral (excluding IMF) and bilateral budget grants (in millions of US$): 0; 182; 780; 1,105 - Public external debt service (interest and amortization) on a cumulative basis (in millions of US$): 466; 904; 1,325; 1,726 - Bank recapitalization and civil service reform costs (in millions of TD): 0 - Privatization receipts in FX (in millions of US$): 0 - Estimated cost of liquidating the Banque Franco Tunisienne (BFT, in millions of TD) 3/: 0; 400 - Residents' FX deposits at the Central Bank of Tunisia (in millions of US$) 5/ 8/: n.a. - FX swaps between the Central Bank of Tunisia and commercial banks (in millions of TD) 5/ 8/: n.a. - FX swaps between the Central Bank of Tunisia and commercial banks (in millions of US$) 5/: n.a. - Program exchange rate TD/US$: 2.01285 (repeated for program periods) Notes on adjusters and applicability (as stated): - 3/ From 2018 onwards, a new adjuster on bank liquidation applies. - 4/ End of period. From 2018 onwards, the adjuster on FX swaps between the Central Bank of Tunisia and commercial banks will no longer apply. - 6/ Social spending includes social transfers and programs as well as key ministries' capital expenditures. Its coverage was expanded in 2017. - 7/ Disbursment, includes project loans and capital market access, but excludes IMF. - 1/ Quantitative performance criteria and adjusters are described in the Technical Memorandum of Understanding. Further, for purposes of calculating program adjusters, foreign currency amounts will be converted at program exchange rates. - 2/ From 2018 onwards, the test dates for quarterly QPCs will be end-March, end-June, end-September, and end-December. - 5/ From 2018 onwards, the adjuster on FX swaps between the Central Bank of Tunisia and commercial banks, and that on residents' FX deposits at the Central Bank of Tunisia will no longer apply. - 8/ At program exchange rate. ### Selected prior actions and structural benchmarks (implementation status) - Prior Actions (met): - 2018 budget. Adoption of a satisfactory 2018 budget law by Parliament. — Met - Governance: (i) HACGGA: publication of a call for candidature for the members of the HACGGA, signature of the decree specifying the remuneration of its members, and submission of its budget in the context of the 2018 budget law preparation; (ii) Performance contracts: signature of annexes with financial performance indicators for four of the five largest SOEs (Office des Céréales, Régie des Tabacs, STIR and STEG). — Met - Fuel prices. Significant ad-hoc increase of fuel prices. — Met - CNSS. Start of arrears clearance with a first tranche of TD 200 million by public sector entities. — Met - Portfolio quality. Adoption by the Council of Ministers of specified draft laws and a white book defining strategy for elimination of outstanding debts in tourism sector. — Met - Structural Benchmarks (selected statuses): - High anti-corruption and good governance authority (HACGGA). Creation of an independent authority. — Met (Dec-16 revised Sep-17) - Signature of decree appointing members of HACGGA. — Not met (revised to Jun-18) - Establishment of a databank on vulnerable households. — Not met. In progress. (Dec-17 revised Dec-18) - Completion of inspection reports on seven largest private banks. — Met with delay (Sep-17) - Portfolio quality legislative measures: mixed implementation; some elements partly met with delay, others not met (Oct-17 revised Jun-18) - Maximum lending rate law and decree. Draft law in Parliament; not met. Augmentation limited to +20% for individuals. - Civil service decree authorizing central recruitment review and caps: Met (Oct-17) - Pensions: comprehensive pension reform strategy adoption — Not met. At an advanced stage of implementation. - Functional review of four ministries: Not met. At an advanced stage of implementation. - SOE performance contracts (five largest): Not met. Replaced by Prior Action except TUNISAIR (reprogrammed). - Organic Budget Law publication: Not met. Draft law in Parliament. - Large Taxpayers Unit (DGE) transfer and operationalization: Not met. - Quarterly application of automatic fuel price adjustment mechanism: Not met. - Full foreign exchange auction mechanism by the Central Bank of Tunisia: Not met. - New structural benchmarks (selected, due dates indicated): - Operationalization of the investment code. Establishment of a one-stop investment agency. — May-18 - Banque Franco Tunisienne (BFT). Vote of the resolution committee on the orderly resolution of the BFT. — May-18 - VAT: Increase of the VAT rate for liberal professions from 13 to 19 percent. — Dec-18 - Large Taxpayers Unit (DGE). Operationalization of the transfer and merger of control and tax arrears management functions into the new umbrella structure for tax administration. — Jul-18 ### Technical Memorandum of Understanding — Definitions and measurement - Purpose: Defines Quantitative Performance Criteria (QPCs) and Indicative Targets (ITs) under the EFF-supported program and sets data reporting content and frequency. - Valuation rules: - For program purposes, all assets, liabilities, and flows denominated in foreign currencies will be valued at the “program exchange rate,” except for items affecting the government’s budgetary accounts, which will be measured at current exchange rates. - Program exchange rate corresponds to the accounting exchange rate of the CBT prevailing on December 31, 2015. - For the SDR, the program exchange rate is 1 SDR = 2.797590 Tunisian dinars. - Program Exchange Rates (Tunisian Dinars per FX Currency at End-December 2015, accounting exchange rate of the CBT): - AED 0.54802 - BHD 5.3373 - CAD 1.45005 - CHF 2.0322 - DKK 0.2947335 - DZD 0.01878 - EUR 2.1993 - GBP 2.9837 - JPY 0.0167135 - KWD 6.63225 - LYD 1.44535 - MAD 0.203175 - NOK 0.228923 - QAR 0.552815 - KRW 0.001707098 - CNY 0.3102 - SAR 0.53634 - SEK 0.23918 - US$ 2.01285 - Monetary gold valuation: - Price used: 2,138.15 Tunisian dinar per ounce of gold (London morning fixing on 12/31/2015). - Stock of gold: 4.13 tons (4,129,806 grams) on December 31, 2015. - Defined QPCs and ITs (as specified): - Performance Criteria: - Floor on the net international reserves (NIR) of the CBT. - Ceiling on the net domestic assets (NDA) of the CBT. - Floor on the primary balance of the central government, excluding grants. - Ceiling on total current primary expenditure of the central government. - Continuous Performance Criterion (zero ceiling) on the accumulation of new external debt payment arrears. - Indicative Targets: - Ceiling on accumulation of new domestic arrears. - Floor on capital expenditures in priority social sectors and social programs. - Ceiling on net foreign exchange interventions of the CBT. - Measurement and reporting frequency: - NIR and NDA measured on a stock and quarterly basis. - Central government primary balance and total current primary expenditure measured on a quarterly basis and cumulatively from the end of the previous year. - Continuous Performance Criterion on accumulation of new external arrears measured on a continuous basis. - Indicative Target on net foreign exchange interventions monitored monthly and measured on a monthly flow basis. - All other Indicative Targets monitored quarterly. ### Definitions of institutions and accounting scope - Central government: all ministries and agencies subject to central budgetary administration per the organic law on the government budget; regional governments and municipalities subject to central budgetary administration are part of the central government. - Authorities will inform IMF staff of any new entity or program/special budgetary or extra-budgetary fund created during the program; such funds will be included in the central government definition. ### Net International Reserves (NIR) and Net Domestic Assets (NDA) - NIR definition: difference between the CBT’s reserve assets and its liabilities in foreign currency to nonresidents. - Reserve assets include: gold, SDR assets, reserve position at the IMF, convertible foreign currencies, liquid balances held outside Tunisia, and negotiable foreign securities and bills. - CBT’s liabilities in foreign currency to nonresidents include: commitments to sell foreign currencies associated with financial derivative transactions, any portion of CBT assets used as collateral, IMF and AMF credits outstanding, and deposits at the CBT of international organizations, foreign governments, and foreign bank and nonbank institutions. - The government’s foreign currency deposits at the CBT are not included in the liabilities. - Any SDR allocation received after March 31, 2017 is not included in liabilities. - Treatment of CBT-issued foreign currency debt instruments after May 15, 2013: Treated as CBT liabilities unless prospectus explicitly states (i) CBT acting as agent, (ii) debt is a liability of central government, and (iii) protocol authorizes CBT to pay interest and principal via Treasury current account at the CBT. - Valuation of CBT reserve assets and liabilities uses program exchange rates. - On December 31, 2017, stocks at program rates: - NIR reserves: US$3,120.2 million - Reserve assets: US$5,480.6 million - CBT liabilities in foreign currency: US$2,360.4 million - NDA definition: difference between the monetary base and the 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. - Net foreign assets defined as difference between CBT’s gross foreign assets (including foreign assets not part of reserve assets) and all foreign liabilities of the CBT; valued at program exchange rate. - Institutional responsibility: Directorate General of Statistics (Directorate of Monetary and Financial Statistics) responsible for monthly forecasts of reserve money and calculation of NDA projections for the next six months; projections submitted to IMF staff after consultation with Directorate General of Monetary Policy. *Source: IMF staff estimates; Technical Memorandum of Understanding excerpts from the program documents.* ### 20. Privatization receipts are the government receipts from the sale of any government asset. ### 20. Privatization receipts are the government receipts from the sale of any government asset. ### Definition and scope of privatization receipts - Privatization receipts are government receipts from the sale of any government asset. - Included: - Revenues from the sale of government shares in public and private enterprises. - Sales of nonfinancial assets. - Sales of licenses. - Sale of confiscated assets, excluding the confiscation of bank accounts. - For the adjustor in NIR, only receipts in foreign currency are included. ### Net domestic bank financing of the central government (paragraph 21) - Net domestic bank financing of the central government is the sum of: - the change in net bank loans to the central government (in Tunisian dinars and foreign currency); and - the change in central government deposits at the CBT. - Central government accounts at the CBT include, in particular: - (i) Treasury current account excluding the sub accounts N-bis, those related to Public Administrative Entities (EPA) and to local governments; - (ii) Tunisian government account (miscellaneous dinar accounts); - (iii) loan accounts; - (iv) grant accounts; - (v) FONAPRA-FOPRODI accounts; - (vi) special accounts of the Tunisian government in foreign currency; - (vii) accounts in foreign currency pending dinarization (subaccount: “mise a disposition”); - (ix) any other account that may be opened by the central government at the CBT or banks. - Following the unification of government accounts at the CBT into a Single Treasury Account, government accounts are consolidated in two categories on the CBT’s balance sheet (liabilities side): “Compte Central du Government “and “Comptes Spéciaux du Government”. ### Net government borrowing from the banking system (paragraph 22) - Defined as the change in the stock of government securities (Treasury bills and bonds) held by banks and any other central government borrowing from banks, less repayments. ### Net domestic nonbank financing (paragraph 23) - Includes the change in the stock of government securities (Treasury bills and bonds) held by nonbanks (including social security funds) and any other central government borrowing from nonbanks, less repayments. - Any use of cash from non-banking institutions (including La Poste) to finance the Treasury is counted as domestic non-bank financing. - Total Treasury bills and other public debt instruments are to be taken into consideration at the nominal/face value shown on the institutions’ balance sheet and does not include accrued interest. ### F. Ceiling on Total Current Primary Expenditure of the Central Government (Excluding Interest Payments on Public Debt) (paragraph 24) - Under the program, total current primary expenditure of the central government is defined as the sum of central government expenditure on: - (i) personnel wages and salaries; - (ii) goods and services; - (iii) transfers and subsidies; and - (iv) other unallocated current expenditure. - Note: The methodologies used to measure current expenditure categories for the central government are those used to design the table of central government financial operations presented in the macroeconomic framework. ### G. Ceiling on the Accumulation of External Arrears (paragraph 25) - Arrears on external debt payment are defined as late payments (principal and interest) on external debt or guarantees by the central government or the CBT from the due date or the expiration of the applicable grace period, as defined in External Debt Statistics: Guide for compilers. ### H. Indicative Ceiling on the Accumulation of Domestic Arrears (paragraph 26) - For program purposes, arrears on domestic debt payment are defined as 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 the contractual grace period, if any). - If no maturity date is specified, arrears are defined as amounts owed to domestic creditors that remain unpaid beyond 90 days or more after the date on which the contract was signed or upon receipt of the invoice. ### I. Indicative Floor on Social Expenditures (paragraph 27) - For program purposes, social expenditures are defined as: - capital expenditures (development expenditures) on education, health, social transfers to low-income families, employment training program (and university scholarships), Union Tunisienne de Solidarité Sociale (UTSS) indemnities, family allocation; - development expenditures of the Ministries of Women and Family Affairs, Youth and Sports and Social Affairs; - all new targeted cash transfers in support of vulnerable groups; - all current expenditures (“dépenses de gestion”) of the above-mentioned sectors and programs. - Excluded: food and energy subsidies. ### J. Indicative Ceiling on Net Foreign Exchange Interventions of the CBT (paragraphs 28–29) - CBT’s net foreign exchange interventions are defined as the difference between outright foreign exchange sales (including conversions) and outright foreign exchange purchases (including conversions) via: - Reuters, auctions, and the interbank market. - The computation of net sales may also include CBT net sales in other formal or informal markets (or instruments) that the CBT may choose to substitute for outright net sales (e.g., transactions in derivatives). - Transactions of the CBT with the Central Government in the context of budget operations of the Central Government are not considered net sales unless they take place through one of the channels mentioned above. - Purchases of the foreign currency proceeds of a potential Eurobond or other official financing cannot be interpreted as CBT purchases of foreign exchange for the computation of the CBT net sales total. - The value of non-US$ denominated transactions will be calculated using program exchange rates (Table above). ### K. Adjustment Factors for the Program Performance Criteria (paragraphs 30–33) - NIR targets adjustments (paragraph 30): - The NIR targets are adjusted upward (downward) if the cumulative sum of net external financing of the central government, the sum of budgetary grants, and privatization receipts received in foreign currency than the levels observed in the table below. - The NIR targets will be also adjusted upward (downward) if the total amount of cash payments on external debt service of the government is lower (greater) than the levels included in the table below. - NDA targets adjustments (paragraph 31): - The NDA targets will be adjusted upward (downward) based on the downward (upward) adjustment of the NIR floor if the cumulative sum of net external financing of the central government, the sum of budgetary grants, and privatization receipts received in foreign currency are lower (greater) than the levels indicated in the table below. - The NDA targets are also adjusted upward (downward) based on the downward (upward) adjustment of the NIR floor if the total amount of cash payments on external debt service are greater (lower) than the levels included in the table below. - The NDA ceiling will be converted into Tunisian dinars at the program exchange rate, and also adjusted downward/upward based on the amount of CBT reserves released/mobilized because of a possible decrease/increase in the reserve requirement. - Primary fiscal balance adjustments (paragraph 32): - The primary fiscal balance targets, excluding grants, will be adjusted upward/downward based on the amount used to recapitalize the public banks and all amount used to finance the severance pay of the voluntary departures which may be part of the civil service reform. - It will also be adjusted downward in an amount equal to the estimated cost of liquidating the BFT. - Total current primary expenditures adjustments (paragraph 33): - The total current primary expenditures targets will be adjusted upward in an amount equal to the estimated cost of liquidating the BFT. - Program Assumptions on Adjustment Factors for the Quantitative Performance Criteria (In millions of U.S. dollars) - (Table referenced but not included in source text.) *International Monetary Fund, Tunisia — Extract from CR18120 (selected paragraphs 20–33).* ### 34. Performance under the program will be monitored using data supplied to the IMF by the ### 34. Performance under the program will be monitored using data supplied to the IMF by the ### Program monitoring and data transmission - Performance under the program will be monitored using data supplied to the IMF by the Tunisian authorities as outlined in the table below, consistent with the program definitions above. - The authorities will promptly transmit to the IMF staff these data and any data revisions previously transmitted to the IMF Resident Representative’s office in Tunisia. ### Financing, market access, and related cash-flow figures (selected series as presented) - Official External Financing: 1,016 1,517 547 556 3,636 349 1,467 940 1,174 3,930 358 558 908 1,408 3,233 - Project loans: 72 72 72 72 287 88 88 88 88 350 88 88 88 88 350 - Multilateral donors (subtotal shown across quarters): - 424 456 362 1,243 245 363 836 454 1,898 254 454 804 254 1,767 - AFDB: - - - 144 144 - - - 91 91 - 200 - - - 200 - IMF (budget support starting 2017) 1/-: 315 - - 315 245 254 254 254 1,006 254 254 254 254 1,017 - World Bank Group: - 456 - 456 - - 400 - 400 - - - 550 - 550 - European Union: - 109 - 219 328 - 109 182 109 401 - - - - - - Bilateral donors (subtotal shown): - 998 - 109 1,107 - - - 116 116 - - - - - - Germany: ---109 109 --- - Qatar: 998 -- - Turkish loan: - - - - Financial Market Access and other: 944 22 19 13 999 17 1,017 17 517 1,566 17 17 17 1,067 1,116 - Sukuk and other market financing: 929 - - - 929 - 1,000 - 500 1,500 - - - 1,050 1,050 - Loan Transfers to SOEs: 15 22 19 13 70 17 17 17 17 66 17 17 17 17 66 - Budget Grants: - 27 49 38 115 25 25 25 25 100 25 26 27 28 106 - Privatization Receipts: n.a. n.a. n.a. n.a. - n.a. n.a. n.a. n.a. - n.a. n.a. n.a. n.a. - - Government External Debt Service (total): 263 817 420 415 1,914 466 452 442 432 1,791 608 603 598 594 2,403 - Amortization: 139 726 312 325 1,502 343 332 324 317 1,316 449 445 442 438 1,774 - Interest: 124 91 108 90 413 124 120 117 114 475 159 158 156 155 628 - Estimated cost of liquidating the Banque Franco Tunisienne (in millions of TD): - - - 400 400 - - - - - - FX swaps between the CBT and the commercial banks (quarterly figures): 225 195 295 570 570 ........................ ...... - FX swaps between the CBT and the commercial banks (in millions of TD): 453 393 594 1,147 1,147 ........................ ...... - Resident deposits at the BCT, including FX swaps: 1,185 1,158 1,391 1,794 1,794 ........................ ...... ### Exchange rate / IMF disbursement conversion - The SDR/USD exchange rate used for the conversion of IMF disbursements is 0.7391 in 2017 anmd 0.7399 in 2018. - From 2018 onwards, the adjuster on FX swaps between the Central Bank of Tunisia and commercial banks, and that on residents' FX deposits at the Central Bank of Tunisia will no longer apply. ### Information to be reported in the context of the program: key reporting items, periodicity, delays, and responsible departments - Real Sector - GDP: Supply and demand at current, constant, and the previous year’s prices, including sectoral indices. Periodicity: q. Delay: 45 days. Responsible: INS. - Inflation: Including the underlying inflation of non-administered and administered prices. Periodicity: m. Delay: 14 days. Responsible: INS. - Fiscal Sector - Tax and nontax revenue of the central government, decomposed on the basis of main tax and nontax revenues items. Periodicity: m. Delay: 30 days. Responsible: MoF. - Total expenditures: current and capital, transfers and subsidies. Periodicity: m. Delay: 30 days. Responsible: MoF. - Capital expenditure: by type of financing: domestic and external (differentiating loans and grants), and by main sectors and projects (agriculture, social, infrastructure). Periodicity: m. Delay: 45 days. Responsible: MoF. - Current expenditure: by type of expenditure: wages, goods and services, transfers. Periodicity: m. Delay: 45 days. Responsible: MoF. - Social expenditure. Periodicity: q. Delay: 45 days. Responsible: MoF. - Domestic and foreign debt: Stock of domestic and foreign debt: of the central government and debt guaranteed by the government, with breakdown by instrument and type of currency (in dinars and foreign currency with the equivalent in domestic currency). Periodicity: q. Delay: 30 days. Responsible: MoF. - Stock of domestic arrears as per TMU, as well the stock of accounts payable that correspond to expenditures committed/payment ordered more than 90 days before (and by type of expenditures). Periodicity: q. Delay: 45 days. Responsible: MoF. - Disbursement of foreign loans: Breakdown into project loans and budgetary loans by principal donor and identifying the most important projects to be financed in the original currency and its equivalent in Tunisian dinars converted at the current exchange rate at the time of each transaction. Periodicity: m. Delay: 30 days. Responsible: MoF. - Domestic borrowing from banks and nonbanks: including bonds, Treasury bills, and other issued securities. Periodicity: m. Delay: 30 days. Responsible: MoF. - Debt guaranteed by the government: by instrument and type of currency (in dinars and in foreign currencies and its equivalent in national currency). Periodicity: m. Delay: 60 days. Responsible: MoF. - External and domestic debt service: amortization and interest. Periodicity: m. Delay: 60 days. Responsible: MoF. - External payment arrears: external debt contracted and guaranteed by the government. Periodicity: q. Delay: 30 days. Responsible: MoF/CBT. - Debt rescheduling: possible rescheduling of debts contracted and guaranteed by the government, agreed with creditors. Periodicity: q. Delay: 45 days. Responsible: MoF. - Consolidated accounts of the central government at the CBT: with a breakdown of the stock of deposits as follows: (i) Treasury current account; detailed by sub accounts of the central government, N BIS, outstanding payments, Public administrative entities (EPA), and local governments (ii) special account of the Tunisian government in foreign currency and its equivalent in dinars; (iii) miscellaneous dinar accounts; (iv) loan accounts; (v) grant accounts; (vi) FONAPRA-FOPRODI accounts; and (vii) Foreign exchange accounts pending adjustment in dinars (available). Periodicity: m. Delay: 30 days. Responsible: CBT / MoF/TGT for sub-account. - Monetary and Financial Sector / External Sector - Imports of petroleum products: average import price and volume of main petroleum products. Periodicity: m. Delay: 30 days. Responsible: CBT. - Deposits: Stock of foreign currency deposits, according to the residence of the holder. Periodicity: m. Delay: 14 days. Responsible: CBT. - External debt: Debt service (amortization and interest) of institutional agents by type of currency (in foreign currency and its equivalent in dinars). Periodicity: q. Delay: 30 days. Responsible: CBT. - Total disbursements of external debt of institutional agents by type of currency (in foreign currency with its equivalent in dinar). Periodicity: q. Delay: 30 days. Responsible: CBT. - Stock of external debt of institutional agents by type of currency (in foreign currency and its equivalent in dinars). Periodicity: q. Delay: 90 days. Responsible: CBT. - Overall net external position of Tunisia (in conformity with our obligations under SDDS). Periodicity: a. Delay: 180 days. Responsible: CBT. - Balance of payments: Prepared by the CBT. Periodicity: q. Delay: 30 days. Responsible: CBT. - CBT accounts at the current exchange rate: Monthly situation of the Central Bank by sector (figures at the end of the period). Periodicity: m. Delay: 15 days. Responsible: CBT. - Reserve money and net domestic assets (NDA): Monthly forecast. Periodicity: m. Delay: 15 days. Responsible: CBT. - Monetary policy operations and liquidity factors: Daily and monthly balances. Detailed table including: i) intervention on the money market of the central bank (Dinars); (ii) deposit facility; iii) ordinary tenders iv) loan facility; (v) overnight lending; vi) repo at 1-7 days and 3 months; vii) FX swap exchange; viii) open market operations; (ix) minimum reserves; and x) excess reserves. Periodicity: m. Delay: 15 days. Responsible: CBT. - Monetary survey at the current exchange rate: Monthly balance of the banking sector, counterparts of broad money, leasing banks, and resources of the resident financial system; preliminary (30 days) and definitive (45 days). Periodicity: m. Delay: 30 and 45 days. Responsible: CBT. - Interest rates of financial operations: Detailed tables on lending and savings rates and effective global tariffs produced by the Observatory of Financial Inclusion. Periodicity: m. Delay: 30 days. Responsible: CBT. - Credit data: Monthly data on credit distribution by sector (private/public); credit to enterprises (by economic sector); and credit to individuals (by purpose). Periodicity: m. Delay: 30 days. Responsible: CBT. - Foreign exchange market operations, interbank market, retail market and wire transfers for CBT purchases on the retail market: w1 delay. Responsible: CBT. - CBT interventions (sales and purchases) on the foreign exchange market in million of dinars (and equivalent in US million) including total market transactions, foreign exchange sales to energy companies and all exchange rates for all such transactions, total FX demand by banks, total FX positions of banks, stock of CBT currency swap (provide details on direction of transactions (TND/FX or FX/TND), amounts of principal, spot exchange rate in swaps agreement, interest rate applied on FX counterpart), detailed information on other BCT’s forward foreign exchange operations, including outright forward sales of Tunisian dinar. The terms and conditions of any new transactions (including the extension or renewal of existing terms and conditions) will also be provided. Responsible: CBT. - CBT foreign exchange reserves, breakdown by currency and by instrument. ### Institutional context, safeguards, and capacity development (selected points) - Safeguards assessments: First-time safeguards assessment of the Central Bank of Tunisia (CBT) finalized in June 2013 and an update assessment completed in May 2016. Assessment noted progress (audit committee operationalized, internal audit established as separate unit) and remaining risks (autonomy provisions, risk-based internal audit methodology, more transparent financial reporting). - Exchange rate arrangement: Tunisia accepted the obligations of Article VIII Sections 2(a), 3, and 4 effective January 6, 1993. De facto arrangement classified as crawl-like; de jure arrangement is floating. In April 2012, the CBT replaced its currency composite by a fixing as the reference exchange rate and has intervened through bilateral transactions when market quotes deviated substantially from the fixing rate. - Article IV Consultation: Since June 2016, Tunisia has been under a four-year EFF program with semiannual reviews. The last Article IV consultation was concluded by the Executive Board on September 30, 2015. - AML/CFT assessment: Tunisia is on the FATF list of jurisdictions with significant AML/CFT deficiencies; the 2016 Mutual Evaluation Report rated Tunisia low or moderate in all eleven criteria for effectiveness. Tunisia was included in the November 2017 “gray list.” Authorities are implementing an action plan agreed with the FATF; the IMF is providing capacity development support. - Capacity development and TA (selected): Extensive IMF and METAC technical assistance across tax policy and administration, PFM, cash management, Treasury Single Account (TSA), banking supervision and resolution, monetary operations, SDDS, national accounts, balance of payments, and AML/CFT. Resident representative office opened in Tunis in January 2014; Mr. Robert Blotevogel appointed IMF Resident Representative in Tunisia in January 2016. *Sources: Tunisian authorities and IMF staff estimates.* ### 2017. Covering 2017–21, it builds on lessons learned from interim CSPs since 2011 and aligns with ### cr18120 - 2017. Covering 2017–21, it builds on lessons learned from interim CSPs since 2011 and aligns with ### AfDB Country Strategy and Planned Investments - Covers 2017–21 and aligns with the Tunisian government’s Five-Year Development Plan 2016–20. - Goal: support Tunisia in implementing its Sustainability Development Plan 2016–20 through two pillars: - (i) industrialization and value chains development; and - (ii) improvement of the quality of life for people in lagging regions. - Pending the sustainability of the macroeconomic environment, the AfDB plans to invest between US$700 million and US$1.5 billion in support of this strategy. ### AfDB Recent Lending Activity - Net loan commitments currently reach UAC 1,604 million. - Since 2016 the AfDB approved 12 new operations worth UAC 899 million, comprising: - three in finance (UA 283 million), - two in agriculture (UA 33 million), - one in communication (UA 60 million), - one in transport (UA 103 million), - two in water and sanitation (UA 166), - three in the social area (UA 315 million). - All these operations are loans with a maturity period of five years. ### AfDB Current Portfolio (Key statistics and composition) - Global portfolio totals UAC 1.6 billion, mainly in loans (98.8 percent). - Average portfolio age: 2.9 years. - Operations focus on the public sector (85 percent). - Sectoral shares: - transport: 27 percent, - finance: 25 percent, - social issues: 19 percent. - Global disbursement rate: 68 percent - private sector disbursement rate: 95 percent, - public sector disbursement rate: 58 percent. - Technical assistance grants represent 1 percent of grants and 99 percent of loans in the global portfolio. - Trust Fund financing: Mainly from the Trust Fund for Countries in Transition (TFCT) and Trust Fund for Countries in Transition (TFT); their disbursement rate stands at 21 percent. - Note: The AfDB’s Unit of Account (UAC) is equivalent to one IMF Special Drawing Right (SDR). ### Selected AfDB Active Projects (as listed) - Total portfolio (listed): UAC 1,604,068,232; Disb. ratio 73%; Disb. amount UAC 1,173,605,259. - Examples with approval dates, amounts, and planned completion dates: - ETUDE-GESTION DES RISQUES... Agriculture — 8/2/2016 — UAC 325,000 — Disb. amount 26,270 — Planned completion 12/31/2018. - PROJET DE DEVELOPPEMENT AGRICOLE INTEGRE DU NORD DE GAFSA Agriculture — 2/13/2013 — UAC 18,623,628 — Disb. amount 417,712,212 — Planned completion 6/30/2019. - ENFIDHA AIRPORT PROJECT Transport — 1/14/2009 — UAC 57,209,209 — Disb. amount 57,209,209 — Planned completion 1/1/2023. - CONSTRUCTION LIAISON AUTOROUTIERE GABES-RAS-JEDIR Transport — 6/21/2011 — UAC 115,657,659 — Disb. amount 54,528,228 — Planned completion 10/31/2019. - PROGRAMME D'APPROVISIONNEMENT EN EAU POTABLE EN MILIEU RURAL Water Sup/Sanitary — 9/6/2016 — UAC 104,171,053 — Disb. amount 44,210,633 — Planned completion 12/31/2021. - SOUTH TUNISIAN GAZ PIPELINE - TUNISIA Power — 6/26/2014 — UAC 52,663,732 — Disb. amount 52,663,732 — Planned completion 8/19/2027. - PROGRAMME D’APPUI AU DÉVELOPPEMENT RÉGIONAL INCLUSIF (PADRI) Social — 11/2/2016 — UAC 151,582,777 — Disb. amount 151,582,777 — Planned completion 12/31/2017. - PROGRAMME D'APPUI A LA MODERNISATION DU SECTEUR FINANCIER Finance — 7/13/2016 — UAC 225,689,912 — Disb. amount 225,689,912 — Planned completion 12/31/2017. - Source for project listing: African Development Bank. ### EBRD Country Assessment, Recent Activity, and Portfolio (As of January 2018) - Country assessment operational priorities (approved August 2013) — first country strategy to be prepared in the first half of 2018. Priorities include: - restructuring and strengthening the financial sector to support private-sector development; - financing private enterprises, with focus on SMEs, to boost creation of high-quality private sector jobs; - supporting energy efficiency and development of a sustainable energy sector; - facilitating non-sovereign financing for infrastructure development. - Recent Lending Activity: - In 2017 the EBRD invested Euro 325 million across 12 projects (compared to Euro 61 million in 2016). - 11 of the 12 projects were in the private sector. - Cumulated financing since 2013 doubled to Euro 650 million. - EBRD Current Portfolio supports three key areas: - Financial sector: Euro 75 million in MSME credit lines and trade finance facilities in 2017 (including two lines in local currency); assistance to CBT on Deposit Guarantee Fund law and Ministry of Finance on legal framework amendments. - Corporate and SME sector: Euro 15 million senior loan to Figeac Aero; Euro 25 million senior loan to Vermeg; financing to olive oil operators; support with FAO on value chains; supported 200 SMEs through business advisory, trained 200 women entrepreneurs, delivered training to 1000 SMEs on e-procurement. - Infrastructure and energy: Euro 160 million loan to SNCFT for rail upgrades (Tunis-Kasserine and Moknine-Mahdia), expected CO2 emissions reduction of 14,000 tons per year. - EBRD Tunisia—Active Portfolio (indicator table): - Portfolio: Euro 544 million. - Number of active portfolio projects: 31. - Private sector (share of portfolio, 5-y rolling average): 66 percent. - Debt share of portfolio: 90 percent. - Equity share of portfolio: 10 percent. - Financial institutions (share of portfolio): Euro 167 million (31 percent). - Industry, commerce, agribusiness: Euro 126 million (23 percent). - Energy: Euro 72 million (13 percent). - Infrastructure: Euro 180 million (33 percent). - Source: EBRD. ### Recent Economic Developments and Outlook - 2017 real GDP growth: 1.9 percent (almost twice the 2016 level). - Unemployment rate: 15 percent. - 2017 macroeconomic deterioration: elevated fiscal deficit, rising current account deficit, pickup of inflation due to exchange rate depreciation, commodity prices increases, and lower-than-expected growth. - Central Bank of Tunisia (CBT) policy rate increases in 2017: - 25 basis points (April 2017), - 50 basis points (May 2017), - 75 basis points (later increase referenced; "increased its key policy rate by 75 basis points, the third such an increase"). - Dinar allowed to depreciate by more than 10 percent in 2017. - Exports surged by 47 percent year-on-year in January 2018. - Medium-term potential growth cited: about 4 percent. - Program request: waiver of non-observance of all end-of-December 2017 QPCs and of the continuous PC related to the exchange restriction; approval of the exchange restriction until the end of 2018; completion of the second review under the EFF; disbursement of an amount equivalent to SDR 176.7824 million. - Authorities’ view: Risk Assessment Matrix in Annex II viewed as pessimistic by authorities. ### Fiscal Policy (Authorities’ strategy and projections) - Medium-term consolidation strategy includes: - broadening the tax base, - reduction of tax incentives and exemptions, - gradual convergence of off-shore and on-shore tax regimes, - improvement in taxpayer identification and strengthened tax administration. - Structural reforms targeted: civil service reform, subsidy reform, improve implementation capacity and efficiency of public investment projects, reform of state-owned enterprises (SOEs). - 2018 budget tax revenue measures estimated to yield about 2.2 percent of GDP (rise in VAT rates, increased excise duties, increases in certain import duties). - Target tax revenue-to-GDP ratio: 22.4 percent. - Energy subsidies target: limit to 2 percent of GDP via quarterly adjustment in energy prices. - Fiscal consolidation numerical targets: - Overall fiscal deficit: reduce from 6 percent of GDP in 2017 to about 3.0 percent of GDP by 2020. - Wage bill: reduce to 12.4 percent of GDP from 14.7 percent. - Public debt: bring down from 71 percent of GDP in 2017 to 63 percent by 2023. - New PPP law intended to provide framework for private participation while limiting contingent liabilities. ### Monetary and Exchange Rate Policy - CBT pursued tight monetary policy since April 2017. - Actions taken: - three policy rate increases in 2017 (25 bps, 50 bps, and 75 bps as noted); - December 2017 widened the corridor around the key rate from 50 basis points to 200 basis points; - July 2017 established a limit of 7 billion dinars on 7-day tenders with commercial banks. - Exchange rate policy: allowed dinar to depreciate in 2017 to address current account and reserve pressures. - Authorities’ interpretation of staff REER assessment: REER overvaluation of 10-20 percent seen as the upper bound of their own estimates. - CBT objectives going forward: - remain vigilant on monetary aggregates and liquidity, - stand ready to further tighten monetary policy to contain inflation, - balance containing current account deficit and rebuilding reserves with ensuring orderly FX market conditions and facilitating strategic imports. - Foreign exchange intervention budget under program reflects assumptions including recovery in exports and tourism. ### Financial Sector Policies and Reforms - Authorities and staff assessment: banking sector stable with limited foreign liabilities and small net open FX positions. - Inspections of seven largest private banks confirmed absence of major vulnerabilities. - Low liquidity across banking system linked to large increase in cash holdings; CBT addressing through payment system upgrade. - Restructuring of public banks progressed; planned steps include improving risk management and reducing NPLs (subject to SBs). - Pending laws aim to simplify write-off rules and improve functioning of recovery firms. - Financial Sector Reform Committee established and overseen by the Office of the Head of Government. - Focus on promoting financial inclusion and improving access to finance for SMEs. - AML/CFT compliance: Government approved an action plan on March 11, 2018 to address deficiencies identified in November 2017 by FATF and MENAFATF. ### Statistical Issues (As of March 2018) - Subscribed to SDDS: June 20, 2001. - A ROSC published on the IMF website on August 9, 2006. - Financial indicators: available with significant lags; accuracy challenged by banking supervision information system and database management problems. - Assessment: Data provision adequate for surveillance but should be strengthened. - National Accounts: NSI published revised national accounts series based on SNA 1993 in December 2010. Quarterly employment and unemployment data disseminated with a lag of three months since end-2011. - Government finance statistics: produce annual and quarterly central government data applying GFSM1986; coverage should move toward general government; timeliness and update to GFSM2014 remain priorities. - Monetary statistics: CBT has not yet migrated to the Standardized Report Forms (SRFs). - Balance of payments: generally adequate but greater detail needed for quarterly BOP and development of a quarterly IIP. - Table of Common Indicators (As of February 2018) — examples of latest data dates and periodicity entries preserved in source. *International Monetary Fund — extracted content from cr18120 (2017–21 country coverage).* ### 2018. The measures set out in the action plan, which will be implemented by end- June 2018 ### cr18120 - 2018. The measures set out in the action plan, which will be implemented by end- June 2018 ### AML/CFT measures (implementation by end- June 2018) - Implementing risk-based AML/CFT supervision of the financial sector. - Maintaining comprehensive and updated commercial registries. - Increasing the efficiency of reporting suspicious transactions. - Establishing a fully functional terrorism-related financial sanctions regime. - Suitably monitoring the NGO sector. - Strengthened staffing and training of the financial intelligence unit. - Preparing an AML/CFT supervisory manual. ### Structural reforms (EFF-supported reform agenda) - Continued focus areas: - Modernizing and enhancing the efficiency of the tax system. - Completing the civil service reform. - Reforming energy subsidies. - Strengthening the selection and efficiency of public investment projects. - Improving the management of SOEs. - Ensuring the viability and sustainability of the pension system. - Achieving appropriately targeted social protection. - Measures to improve the business environment: - Initiatives to streamline the regulatory environment. - Measures to promote governance and transparency. - Started implementation of the new investment code. - Established the Investment Advisory Council. - Established the Tunisian Investment Authority as a one-stop shop for investors. ### Anti-corruption initiatives - The fight against corruption announced by the Government in May 2017 remains a priority. - A High Anti-Corruption and Good Governance Authority was established by Law last September. - The Authority’s budget has been included in the 2018 Finance Law. - The agency will be operational by end of June 2018, upon election by the Parliament of its Executive Board. ### Conclusion and authorities' stance - Tunisia is pursuing a dual path of democratization and economic reform to fulfill the population’s aspirations in the new era of freedom and political inclusion. - The two paths have at times collided, slowing the pace of economic reform without weakening the authorities’ resolve. - External environment has not been supportive, although some improvement is on the horizon. - Authorities aim to balance: - Accelerating macroeconomic stabilization and structural reform. - Preserving social stability and a consultative process with all stakeholders. - Authorities’ commitments: - Confident that the EFF-supported program is well aligned with their economic reform strategy. - Reiterate strong commitment to full implementation of the program. - Thank Executive Directors and management for continued support and appreciate technical assistance provided by the Fund and other partners. *cr18120 - 2018. The measures set out in the action plan, which will be implemented by end- June 2018* --- _Source: https://www.imf.org/-/media/files/publications/cr/2018/cr18120.pdf_