## cr18218 ## Source details **Canonical URL:** [cr18218](https://www.imf.org/-/media/files/publications/cr/2018/cr18218.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2018/cr18218.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2018/cr18218.pdf.json) --- ### Executive summary — context and recent developments - The government has strengthened policy and reform implementation in recent months. - All Quantitative Performance Criteria (QPCs) for end-March and three out of nine Structural Benchmarks (SBs) for the Third Review were met. One additional SB was implemented with delay. - Growth picked up to 2.5 percent in the first quarter. - Confidence has improved but remains affected by divisions in the coalition government, risks of security and migration spillovers from Libya, and higher international oil prices. - Inflation has accelerated and weighs on purchasing power notably of the less well-off. - International reserves remain below prudent levels. - Growth rebounded to 2.5 percent of GDP (y-o-y) in Q1 2018 from 1.9 percent in 2017. - Inflation reached 7.7 percent through May; core inflation increased to 7.2 percent. - Foreign reserve coverage fell to 72 days of 2017 imports by mid-June. - Policy interest rate increased by a total of 175 basis points in 2018 to 6.75 percent in June. - Credit to the economy grew at 13 percent (y-o-y) in March. - Public and external debt ratios reached 70 percent of GDP and 80 percent of GDP at end-2017, respectively. ### Outlook and policy mix for the Third Review - Growth projection: - Growth on track to reach 2.4 percent in 2018, propelled by agriculture, manufacturing, and tourism-related services. - Selected projections (real GDP growth, percent): 2015: 1.2; 2016: 1.1; 2017: 2.0; 2018 (Proj.): 2.4; 2019: 2.9; 2020: 3.4; 2021: 3.6; 2022: 4.0; 2023: 4.2. - Policy package to contain inflation and reduce twin deficits includes: - More ambitious energy price hikes to limit the increase in energy subsidies to 0.5 percent of GDP. - Additional voluntary departure schemes for civil servants and steps to buttress financial viability of pensions. - Further interest rate increases and changes to the Central Bank’s collateral framework. - Augmented social transfers to protect the vulnerable from price increases. - Accelerated efforts to boost private sector-led growth. - Authorities intend not to grant new wage increases in 2018, unless growth surprises positively. ### Risks - Political risk: stalled efforts to revitalize consensus on reforms among parties in the unity government could impede implementation; suspension of the Carthage II process raises risk to reform consensus. - Social/regional risk: protests across the MENA region against fiscal consolidation could affect capacity to implement policies and reforms. - Security and migration: residual threats to security and potential spillovers from Libya. - Commodity prices: each increase in the international oil price by US$1 worsens the budget by 0.15 percent of GDP and the current account by 0.08 percent of GDP. - Global financial conditions: tighter conditions would likely have limited effect given Tunisia’s strong reliance on concessional financing from official donors. ### Staff support, financing, and program decisions - Staff supports completion of the Third Review under the Extended Fund Facility (EFF). - Completion would make available SDR 176.7824 million (US$246 million) and catalyze donor disbursements. - Staff supports modification of and waiver of applicability for all end-June QPCs. - IMF financing schedule highlights: - Third Review (June 15, 2018): 176.78 (Millions of SDR). - Credit outstanding to the IMF will peak at 372 percent of quota in 2020. - Obligations to the IMF will reach a maximum of 1.4 percent of GDP or 22 percent of external debt service in 2018. ### A. Fiscal policy — consolidation strategy and 2018 measures - Fiscal anchor: agreed consolidation path for 2018–20 aiming to reduce the overall deficit to 2.5 percent of GDP by 2020, requiring about 1 percent of GDP per year. - 2018 deficit target: 5.2 percent of GDP. - Adjustment strategy: - New taxes and stronger tax collection. - Expenditure rationalization with lower energy subsidies, reduced pension transfers, slower wage bill growth. - Managing SOE contingent risks. - 2018 budget pressures and responses: - Without policy change, recent increases in international oil prices would swell energy subsidy budget from 2.0 percent of GDP to 3.3 percent of GDP (estimated at an oil price of US$70 dollars per barrel). - Public pension fund liquidity deficit is 1.2 percent of GDP compared with 1.0 percent estimated at Second Review. - Wage bill targets could suffer: only 1,770 civil servants identified for negotiated departures as of May 2018 versus objective of 20,000 set at Second Review. - Agreed urgent measures to remain within budget targets and achieve the 2018 deficit target: - Accommodate 0.5 percent of GDP of the higher energy subsidy bill in the fiscal program; realize savings target of 0.8 percent of GDP through: - Monthly adjustments of domestic prices for main automobile fuels (building on June price hike) (Prior Action). - Increases in gas and electricity tariffs mainly for corporate customers. - Measures to reduce consumption of subsidized fuels, including better controls on leakages and product differentiation. - Increase social transfers by at least TD 100 million for second half of 2018 (Prior Action). - Pension transfers: authorities intend to cover half of the CNRPS liquidity gap for 2018 by SOEs clearing arrears to the fund; Council of Ministers adopted delayed pension law and seeks Parliament passage by end-September with retroactive effect from July, leaving 0.4 percent of GDP to be covered by budget transfers compared with 0.2 percent envisaged at Second Review. - Wage bill measures to be pursued to remain on track toward wage bill target of 12.4 percent of GDP in 2020. ### Fiscal stance and public wage bill — specific commitments - Authorities’ intentions to contain the wage bill: - (1) avoid new salary increases in 2018 unless growth surprises on the upside; - (2) remain below the hiring limits set for 2018 and 2019 (less than 3,000 civil servants per year); - (3) reopen the departure schemes in the summer of 2018 and in 2019, targeting 8,000 additional volunteers. - Higher inflation is expected to help contain the real wage bill. - Completion of functional reviews for four big ministries will help identify areas of excess and short demand for labor. - Authorities will eliminate tax credits in 2019 to enhance transparency of the public wage bill. ### Monetary policy — tightening and transmission - Inflation context and outlook: - Historical average of 3–5 percent. - Expected 8.9 percent (y-o-y) by end-2018. - Core inflation moved into the 7–8 percent range since early 2018. - Drivers of price pressures: - strong credit growth fueled by historically low real interest rates and record-level Central Bank refinancing. - Central Bank credit to banks increased by 122 percent since 2016 and by 60 percent since early 2017. - Dinar depreciation: since 2016, depreciated relative to the Euro by 35 percent, with most movement since early 2017 (23 percent). - Need for further tightening: - authorities agreed with staff to continue policy rate hikes until the money market rate reaches positive territory in real terms. - Policy interest rate increases in 2018: 75 basis points in March and 100 basis points in June (total 175 basis points in 2018 to 6.75 percent in June). - Measures to improve transmission (agreed/discussed and staff recommendations): - law on excessive interest rates (reprogrammed SB for December 2018) to allow more frequent updates of the reference interest rate. - intended increase in the haircut applied to collateral to 30 percent from 25 percent, and tightening the list of eligible collateral for refinancing. - staff recommends: fully remove interest rate caps; extend haircuts for refinancing also to government paper; modernize the payments system to discourage use of currency; continue banking sector reform and reduce NPLs. - Current legal cap: lending rates cannot exceed the money market rate by more than 20 percent; authorities plan to increase this limit for firms to 33 percent. ### Exchange rate policy — flexibility and operational changes - Exchange rate flexibility supports external sector adjustment; residual overvaluation of the real effective exchange rate amounted to 10-20 percent at the end of 2017. - Elasticity: elasticity of the current account to the real effective exchange rate equals 0.37 (implying a 10 percent depreciation will over time improve the current account by 3.7 percent of GDP). - FX auction mechanism shortcomings noted; authorities agreed to start implementing more competitive FX auctions in June (reprogrammed SB for August 2018). - Exchange restriction (ban on trade credit for certain non-essential imports) introduced October 2017 had minor role in discouraging imports and created concerns; to be eliminated by end-2018. - Reserve coverage currently standing at about 75 percent of the IMF’s ARA metric. ### Social protection — measures and targeting - Increase social spending by at least TD 100 million (0.1 percent of GDP) for the second half of 2018 (Prior Action) to: - increase the number of vulnerable families benefitting from cash transfers by 35,000 to 285,000; - support school children; - raise subsidies for healthcare, especially for poor pensioners, the chronically ill, and pregnant women. - Elevate the program floor on social spending to a QPC from September. - Progress needed on the database of vulnerable households (cleanup to address ghost entries; SB for December 2018). - Pension fund actions: Council of Ministers adopted reform law for the CNRPS in June (SB not met, but implemented with delay); Prime Minister to sign decree on CNSS reform once Parliament adopts the CNRPS law. - Staff emphasized reforms remain insufficient to close gap between benefit levels and resources; more ambitious parametric reform should follow soon. ### Financial sector — soundness, reforms, and NPL resolution - Financial soundness indicators for end-2017 improved; profitability improved and no system-wide negative impact observed from the recent dinar depreciation or higher interest rates. - Reforms progressed: - Parliament adoption of laws facilitating NPL restructuring of public banks (met June SB). - Vote of the resolution committee on orderly resolution of the BFT expected by August (reprogrammed SB for August 2018). - Progress on AML/CFT regime in response to FATF and EU shortcomings. - Policy focus going forward: - public banks expected to reduce NPL holdings supported by new legislation; - three main public banks currently respect prudential ratios and have started organizational changes to facilitate loan workouts and better credit risk monitoring; - commitment to modernize banking supervision, improve access to finance especially for SMEs, and strengthen financial sector governance. ### Program conditionality, monitoring, and financing - Conditionality changes supported by staff: - setting revised quantitative targets for end-June, end-September, and end-December 2018, and new targets for end-March 2019; - altering adjusters for QPCs on primary balance and current primary expenditures; - converting the IT on social spending to a QPC; - introducing a new QPC on FX interventions; - waiving applicability of all end-June performance criteria; and - making all funds available for budget support. - Structural benchmarks: authorities requested no new SBs, dropped two SBs related to LTU, and reprogrammed four delayed SBs. - Program remains fully financed; donors’ financing assurances and envisaged international bond issuances will cover financing needs during 2018–20. - Tunisia’s financing needs: about US$3.7 billion in budget support in the three remaining quarters of 2018. ### Key numeric values and parameters (preserved exactly) - 12.4 percent of GDP in 2020. - target of 8,000 additional volunteers (departure schemes). - historical average inflation: 3–5 percent. - expected inflation 8.9 percent (y-o-y) by end-2018. - collateral haircut current discount: 25 percent; intended increase to 30 percent. - lending rate cap: currently cannot exceed the money market rate by more than 20 percent; authorities plan to increase this limit for firms to 33 percent. - reserve coverage: about 75 percent of the IMF’s ARA metric. - residual overvaluation of the real effective exchange rate: 10-20 percent at the end of 2017. - elasticity of the current account to the real effective exchange rate: 0.37 (implying a 10 percent depreciation will over time improve the current account by 3.7 percent of GDP). - social spending increase: at least TD 100 million (0.1 percent of GDP) for the second half of 2018. - increase in vulnerable families benefiting from cash transfers: by 35,000 to 285,000. - credit outstanding to the IMF will peak at 372 percent of quota in 2020. - IMF obligations will reach a maximum of 1.4 percent of GDP or 22 percent of external debt service in 2018. - Request for Third Review disbursement: SDR 176.7824 million. *International Monetary Fund staff summary (cr18218).* ### EXECUTIVE SUMMARY ### EXECUTIVE SUMMARY ### Context - The government has strengthened policy and reform implementation in recent months. - All Quantitative Performance Criteria (QPCs) for end-March and three out of nine Structural Benchmarks (SBs) for the Third Review were met. One additional SB was implemented with delay. - Growth picked up to 2.5 percent in the first quarter. - Confidence has improved but remains affected by divisions in the coalition government, risks of security and migration spillovers from Libya, and higher international oil prices. - Inflation has accelerated and weighs on purchasing power notably of the less well-off. - International reserves remain below prudent levels. ### Outlook and policy mix for the Third Review - Growth is on track to reach 2.4 percent in 2018, propelled by agriculture, manufacturing, and tourism-related services. - Policy package to contain inflation and reduce twin deficits to rebuild reserves and reverse debt accumulation includes: - More ambitious energy price hikes to limit the increase in energy subsidies to 0.5 percent of GDP. - Additional voluntary departure schemes for civil servants and steps to buttress financial viability of pensions. - Further interest rate increases and changes to the Central Bank’s collateral framework. - Augmented social transfers to protect the vulnerable from price increases. - Accelerated efforts to boost private sector-led growth. - Authorities intend not to grant new wage increases in 2018, unless growth surprises positively. ### Risks - Stalled efforts to revitalize consensus on reforms among parties in the unity government could impede implementation. - Protests across the MENA region against fiscal consolidation could affect capacity to implement policies and reforms. - Residual threats to security and further hikes in international oil prices are key risks. ### Staff support and financing - Staff supports the authorities’ request for completion of the Third Review under the Extended Fund Facility (EFF). - Completion would make available SDR 176.7824 million (US$246 million) and catalyze donor disbursements. - Staff supports modification of and waiver of applicability for all end-June QPCs. *June 22, 2018* ### Stronger growth, but also high imbalances — key developments and indicators - Policy and reform implementation improved; phosphate production resumed after strike activity. - Political opposition remains entrenched on energy subsidies, civil service, and pensions; divisions within the governing coalition emerged after May local elections. - Text Table 1 highlights recent policy measures: - Fiscal policy: An ambitious revenue package (2.2 percent of GDP); energy price increases (6 percent average increase in three main automobile fuels in June; 7 percent hike in electricity tariffs for corporate customers in May; 10 percent increase in natural gas tariffs for corporate customers in May); wage bill measures including intention not to grant new wage increases in 2018 and limits on new recruits to 3,000; voluntary departures with 5,000 early retirements and 1,770 negotiated departures; commitment to reopen volunteer windows in August 2018 and in 2019. - Monetary and exchange rate policy: Two policy rate increases totaling 75 bps in March and 100 bps in June; broadening of interest rate corridor from +/- 25 basis points to +/- 100 basis points in January; observance of monthly FX intervention budgets from March through May. - Structural reforms: Creation of a one-stop shop for investors; parliamentary passage of legislation supporting public bank restructuring; adoption of pension reform by the Council of Ministers with commitment to seek parliamentary adoption by end-September with retroactive effect to July; completion of functional reviews of four key ministries. - Real-sector and macro indicators (Figures 1–5): - Growth rebounded to 2.5 percent of GDP (y-o-y) in Q1 2018 from 1.9 percent in 2017, supported by agriculture, tourism, and electrical and mechanical industries. - Foreign direct investment increased by 15 percent (y-o-y); investment intentions rising; unemployment declined to 15.4 percent. - Inflation reached 7.7 percent through May; core inflation increased to 7.2 percent. - Current account deficit improved in Q1 supported by 2017 real exchange rate depreciation; export volumes expanded by 6.2 percent; import volumes contracted by 1.0 percent (y-o-y). - Foreign reserve coverage fell to 72 days of 2017 imports by mid-June. - The dinar depreciated, trading on June 15 almost 4.5 percent lower vis-à-vis the Euro than at end-2017. - Policy interest rate increased by a total of 175 basis points in 2018 to 6.75 percent in June. - Credit to the economy grew at 13 percent (y-o-y) in March. - Public and external debt ratios reached 70 percent of GDP and 80 percent of GDP at end-2017, respectively. - Stock exchange index grew by 22 percent through June 8 to reach a record high. - Aggregate banking sector statistics for end-2017 report adequate capital and liquidity ratios and, for many indicators, higher profitability. ### Improving outlook, mostly downside risks — selected projections (Text Table 2) - Real GDP growth (in percent): 2015: 1.2; 2016: 1.1; 2017: 2.0; 2018 (Proj.): 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; 2018 (Proj.): 8.1; 2019: 7.5; 2020: 5.9; 2021: 4.9; 2022: 4.1; 2023: 4.0. - Gross public debt (in percent of GDP): 2015: 55.4; 2016: 62.4; 2017: 70.3; 2018 (Proj.): 70.5; 2019: 70.0; 2020: 69.4; 2021: 68.4; 2022: 67.5; 2023: 66.5. - External debt (in percent of GDP): 2015: 62.8; 2016: 67.6; 2017: 80.1; 2018 (Proj.): 86.4; 2019: 88.9; 2020: 89.3; 2021: 88.3; 2022: 85.8; 2023: 82.9. - Current account balance (in percent of GDP): 2015: -8.9; 2016: -8.9; 2017: -10.5; 2018 (Proj.): -9.6; 2019: -8.6; 2020: -7.8; 2021: -6.9; 2022: -6.5; 2023: -6.1. - Gross official reserves (end of period, in billions of US$): 2015: 7.4; 2016: 5.9; 2017: 5.9; 2018 (Proj.): 6.4; 2019: 7.0; 2020: 7.5; 2021: 7.9; 2022: 8.7; 2023: 9.3. - Gross official reserves (end of period, in months of next year's imports): 2015: 4.8; 2016: 3.6; 2017: 3.1; 2018 (Proj.): 3.5; 2019: 3.8; 2020: 4.1; 2021: 4.2; 2022: 4.5; 2023: 4.8. ### Exceptional risks highlighted - Political: Suspension of the Carthage II process raises risk to reform consensus; major fiscal decisions on energy subsidies, public wages, and pension reform are particularly at risk. - Security and migration: High risks from spillovers of conflicts in Libya and elsewhere. - Commodity prices: Each increase in the international oil price by US$1 worsens the budget by 0.15 percent of GDP and the current account by 0.08 percent of GDP. - Global financial conditions: Tighter conditions would likely have limited effect given Tunisia’s strong reliance on concessional financing from official donors. ### Strong, urgent measures to protect growth — policy framework - The three-pillar EFF-supported framework remains: 1. Stabilize the macroeconomy (Section A). 2. Maintain adequate social protection (Section B). 3. Facilitate private sector-led, job-creating growth (Section C). - The authorities favor a gradual and socially-balanced approach to macroeconomic adjustment; staff emphasizes need for sustained discipline given Tunisia’s high vulnerabilities. ### A. Maintaining Macroeconomic Stability Amid High Imbalances — fiscal policy highlights - Fiscal anchor: Agreed consolidation path for 2018–20 aiming to reduce the overall deficit to 2.5 percent of GDP by 2020, requiring about 1 percent of GDP per year. - Adjustment strategy: New taxes and stronger tax collection; measures to mitigate higher international oil prices; expenditure rationalization with lower energy subsidies, reduced pension transfers, slower wage bill growth; managing SOE contingent risks. - 2018 budget pressures: - Without policy change, recent increases in international oil prices would swell energy subsidy budget from 2.0 percent of GDP to 3.3 percent of GDP (estimated at an oil price of US$70 dollars per barrel). - Public pension fund liquidity deficit is 1.2 percent of GDP compared with 1.0 percent estimated at Second Review. - Wage bill targets could suffer: only 1,770 civil servants identified for negotiated departures as of May 2018 versus objective of 20,000 set at Second Review. - Agreed urgent measures to remain within budget targets and achieve 2018 deficit target of 5.2 percent of GDP: - Accommodate 0.5 percent of GDP of the higher energy subsidy bill in the fiscal program; realize savings target of 0.8 percent of GDP through: - Monthly adjustments of domestic prices for main automobile fuels (building on June price hike) (Prior Action). - Increases in gas and electricity tariffs mainly for corporate customers. - Measures to reduce consumption of subsidized fuels, including better controls on leakages and product differentiation. - Increase social transfers by at least TD 100 million for second half of 2018 (Prior Action). - Pension transfers: Authorities intend to cover half of the CNRPS liquidity gap for 2018 by SOEs clearing arrears to the fund; Council of Ministers adopted delayed pension law (unmet April SB implemented in June) and seeks Parliament passage by end-September with retroactive effect from July, leaving 0.4 percent of GDP to be covered by budget transfers compared with 0.2 percent envisaged at Second Review. - Wage bill measures to be pursued to remain on track toward wage bill target. *International Monetary Fund. Executive Summary, Tunisia — Third Review under the Extended Fund Facility; June 22, 2018.* ### 12.4 percent of GDP in 2020, the authorities intend to: (1) avoid new salary increases in 2018 ### cr18218 - 12.4 percent of GDP in 2020, the authorities intend to: (1) avoid new salary increases in 2018 ### Fiscal stance and public wage bill - Authorities’ intentions to contain the wage bill: - (1) avoid new salary increases in 2018 unless growth surprises on the upside; - (2) remain below the hiring limits set for 2018 and 2019; - (3) reopen the departure schemes in the summer of 2018 and in 2019, targeting 8,000 additional volunteers. - Higher inflation is expected to help contain the real wage bill. - Completion of functional reviews for four big ministries (met June SB) will help identify areas of excess and short demand for labor. - Authorities will eliminate tax credits in 2019 to enhance transparency of the public wage bill (Text Figure 2). ### Fiscal reforms (medium-term consolidation) - Priority expenditure-side measures: - expenditure rationalization; - parametric reform of the pension system; - treasury cash management; - mitigation of contingent fiscal risks (notably from SOEs). - Priority revenue-side measures: - make the tax system simpler and fairer (focus on the on- and off-shore system, and liberal professions); - modernize tax administration. - Change in tax administration approach: - replacing original focus on creating a Large Taxpayers’ Unit (LTU) with a broader reform integrating administration, audit, and recovery within one umbrella structure, following the model implemented in France. - Strong revenue performance in early 2018, including on arrears collection, suggests the shift will not put at risk budget targets under the EFF. ### Monetary policy — background and transmission - Inflation context: - historical average of 3–5 percent; - expected 8.9 percent (y-o-y) by end-2018 (Annex I). - Risks: upward adjustment of inflation expectations and loss of Central Bank credibility. - Drivers of price pressures: - strong credit growth fueled by historically low real interest rates and record-level Central Bank refinancing; - low real interest rates paired with speculation about further dinar depreciation have slowed deposit growth, encouraging cash holdings and disintermediation. - Transmission weaknesses: - delayed pass-through caused by the ceiling on “excessive interest rates” and the practice of adjusting the underlying money market rate only twice a year; - a generous collateral framework that does not apply haircuts to government paper and fails to discriminate among other collateral (all discounted at 25 percent); - limited exchange rate flexibility and growing demand for currency that reduces the money multiplier. - Structural factors: high demand for refinancing reflects strong reliance of the central government on domestic debt markets. ### Monetary policy — policy discussion and measures - Need for further tightening: - authorities agreed with staff to continue policy rate hikes until the money market rate reaches positive territory in real terms to curb credit growth and decelerate inflation. - Communication: frequent and firm communication by the Central Bank on its commitment to achieving lower inflation as the CBT’s main mandate, its longer-term inflation objective, and its views on the short-term outlook for policy rates will support the tightening. - Measures to improve transmission (agreed/ discussed): - law on excessive interest rates (reprogrammed SB for December 2018) to allow more frequent updates of the reference interest rate for calculating maximum borrower rates; - intended increase in the haircut applied to collateral to 30 percent from 25 percent, and tightening the list of eligible collateral for refinancing to reduce liquidity demand from banks. - Staff recommendations to enhance transmission and protect the CBT balance sheet: - fully remove interest rate caps; - extend haircuts for refinancing also to government paper; - modernize the payments system to discourage use of currency; - further banking sector reform (¶25); - continue efforts by public banks to reduce large holdings of non-performing loans (NPLs). - Current legal cap: lending rates cannot exceed the money market rate by more than 20 percent; authorities plan to increase this limit for firms to 33 percent. The maxima are applied across loan classes and sectors and are only adjusted twice a year. ### Central Bank safeguards - CBT committed to addressing outstanding 2016 safeguards recommendations by end-2018 (MEFP ¶21), despite lags in finalizing implementation. ### Exchange rate policy — background and implementation - Exchange rate flexibility supports external sector adjustment: - Real exchange rate depreciation in 2017 started to reverse unsustainable trade balance trends in early 2018, but more flexibility needed to achieve a sustainable current account. - Reserve coverage currently standing at about 75 percent of the IMF’s ARA metric. - residual overvaluation of the real effective exchange rate amounted to 10-20 percent at the end of 2017. - Elasticity: the elasticity of the current account to the real effective exchange rate equals 0.37. This implies that a 10 percent depreciation will over time improve the current account by 3.7 percent of GDP. - Exchange restriction (ban on trade credit for certain non-essential imports) introduced in October 2017 has played only a minor role in discouraging imports but created concerns among banks and economic actors. - FX auction mechanism shortcomings: - exclusive tool since May 2017, yet implementation fails standards of competitive auctions (typically no bids rejected; pro-rating applies proportionally across all bids irrespective of attractiveness). ### Exchange rate policy — policy discussion and actions - Authorities reiterated commitment to comply with monthly net FX intervention ceilings to reach adequate reserve coverage and reduce residual overvaluation. - Transition to market-based exchange rate system envisaged as gradual. - CBT agreed with staff to start implementing more competitive FX auctions in June (reprogrammed SB for August 2018; MEFP ¶¶11 and 17), leveraging a stronger interbank market as FX inflows from phosphates and tourism increase. - Gradual transition caution: a more competitive auction process may require larger FX interventions to smooth exchange rate movements. - The exchange restriction will be eliminated by end-2018 (MEFP ¶17). Capital account liberalization to proceed in line with progress on domestic financial institutions and prudential supervision (MEFP ¶21). ### Social protection - Progress and gaps: - Better targeting will benefit from progress with the database of vulnerable households (cleanup to address ghost entries and other issues; SB for December 2018). - Supported by the World Bank, authorities exploring options: cash transfers, subsidized health services, reform of food subsidies. - Social spending increased beyond the program floor for end-March 2018 (MEFP Table 2) to include augmented cash transfers and more health care support after street protests in January. - Delays in reforming two pension funds affected liquidity: - higher-than-envisaged deficit of the CNRPS public pension fund requires a firm approach to arrears clearance from SOEs and higher-than-envisaged budget transfers; - authorities do not intend to mobilize budget resources for the CNSS private pension fund, which is expected to cover needs by reinforced collection of contributions and, if needed, asset sales; - direct pass-through of contributions improved liquidity of the medical insurance fund (Caisse Nationale d'Assurance-Maladie, CNAM), eliminating short-term need for government support. - Policy actions: - increase social spending by at least TD 100 million (0.1 percent of GDP) for the second half of 2018 (Prior Action) to: - increase the number of vulnerable families benefitting from cash transfers by 35,000 to 285,000; - support school children; - raise subsidies for healthcare, especially for poor pensioners, the chronically ill, and pregnant women. - elevate the status of the program floor on social spending to a QPC to strengthen commitment. - Council of Ministers adopted a reform law for the CNRPS in June (SB not met, but implemented with delay); Prime Minister to sign decree on CNSS reform once Parliament adopts the CNRPS law. - Staff emphasized reforms remain insufficient to close gap between benefit levels and resources; more ambitious parametric reform should follow soon. Discussions with social partners on next pension reform steps to start by the fall. ### Creating opportunities for the private sector, business climate, and governance - Reforms implemented: - one-stop shop for large investors (met May SB); - negative list of eight sectors requiring investment authorizations, freeing all other sectors from prior approval; - investment authorization procedures changed: presumption of automatic permission after a 60-day window if no response received; - passage of the StartUp Act. - Governance delays: - operational start of the High Anti-Corruption Authority delayed due to Parliament approval of its Board members. - Energy sector: action plan for STEG to reduce losses and improve collection. - Staff recommendations for follow-up: - enhance regulatory framework for public procurement and improve efficiency and transparency; - strengthen regulatory framework for public-private partnerships (PPPs); - reform legal framework for energy and natural resource management, including renewable energy resources. - Parliament adopted a short list for High Anti-Corruption Authority board members in June; nomination may be delayed through end-2018 (reprogrammed SB for December 2018). Staff urged rapid progress and necessary infrastructure (e.g., access to databases including asset declarations). ### Financial sector — soundness, reforms, and measures - Financial soundness indicators for end-2017 improved; profitability improved and no system-wide negative impact observed from the recent dinar depreciation or higher interest rates. - Reforms progressed: - Parliament adoption of laws facilitating NPL restructuring of public banks (met June SB). - Vote of the resolution committee on orderly resolution of the BFT expected by August (reprogrammed SB for August 2018, MEFP ¶21). - Progress on AML/CFT regime in response to FATF and EU shortcomings; preventive measures include commercial registries and targeted financial sanctions to facilitate exit from FATF-enhanced surveillance list. - Financial inclusion strategy: financial inclusion indicator database planned for December 2018. - Regional bank and SME access to finance project discussed by Council of Ministers in February 2018. - Policy focus going forward: - public banks expected to reduce NPL holdings supported by new legislation; - three main public banks currently respect prudential ratios and have started organizational changes to facilitate loan workouts and better credit risk monitoring; - commitment to modernize banking supervision, improve access to finance especially for SMEs, and strengthen financial sector governance; - agreed usefulness of tightened loan-to-value ratios and upgraded, risk-based supervision tools to address risks linked to growth in shorter-term consumption credit. ### Program issues, conditionality, and financing - Conditionality continues to guide program implementation: - Quantitative targets (MEFP ¶10 and MEFP Table 1): - Revised QPCs for end-June, end-September, end-December 2018 and new QPCs for end-March 2019 will support: - (1) reducing debt through fiscal adjustment while preserving an increase in social spending and, from 2019, public investment; - (2) containing inflationary pressures through reducing the growth of base money; - (3) ensuring adequate reserve coverage through lower FX interventions and more exchange rate flexibility. - QPCs on the primary balance and current primary expenditures will drop the adjuster on the previously envisaged BFT liquidation due to unpredictable legal delays beyond 2018. - New quarterly QPCs will be set from end-September 2018 on social spending (replacing the current IT) and on net FX interventions (in addition to the monthly IT). - Authorities seeking a waiver of applicability of all end-June QPCs as relevant data will only be available after the scheduled date for Executive Board consideration of the Third Review. - Structural benchmarks (MEFP ¶11 and MEFP Table 2): - Following Executive Board recommendation for parsimony, authorities request this Review refrains from setting new SBs, drops two SBs related to operationalization of the LTU (MEFP ¶15), and reprograms four delayed SBs (appointment of members of the High Anti-Corruption Authority, vote on the BFT, maximum lending rate, and Central Bank’s FX auctions). - Financing and risks: - Program remains fully financed; donors’ financing assurances and envisaged international bond issuances will cover financing needs during 2018–20 (Text Table 4). - Strong commitment to agreed reforms and a strong monitoring framework remain essential to mitigate significant risks. - IMF obligations and debt metrics: - Credit outstanding to the IMF will peak at 372 percent of quota in 2020. - Obligations to the IMF will reach a maximum of 1.4 percent of GDP or 22 percent of external debt service in 2018. - In a more adverse scenario, these ratios could rise considerably but Tunisia is expected to maintain adequate capacity to repay. ### Key numeric values and parameters (preserved exactly as in source) - 12.4 percent of GDP in 2020 (context: referenced headline). - target of 8,000 additional volunteers (departure schemes). - historical average inflation: 3–5 percent. - expected inflation 8.9 percent (y-o-y) by end-2018. - collateral haircut current discount: 25 percent; intended increase to 30 percent. - lending rate cap: currently cannot exceed the money market rate by more than 20 percent; authorities plan to increase this limit for firms to 33 percent. - reserve coverage: about 75 percent of the IMF’s ARA metric. - residual overvaluation of the real effective exchange rate: 10-20 percent at the end of 2017. - elasticity of the current account to the real effective exchange rate: 0.37 (implying a 10 percent depreciation will over time improve the current account by 3.7 percent of GDP). - social spending increase: at least TD 100 million (0.1 percent of GDP) for the second half of 2018. - increase in vulnerable families benefiting from cash transfers: by 35,000 to 285,000. - credit outstanding to the IMF will peak at 372 percent of quota in 2020. - IMF obligations will reach a maximum of 1.4 percent of GDP or 22 percent of external debt service in 2018. _International Monetary Fund staff summary (cr18218)._ ### 29. Growth is improving, but considerable risks continue to weigh on the outlook. ### 29. Growth is improving, but considerable risks continue to weigh on the outlook. ### Confidence and recent growth - Confidence has strengthened on the back of improved security and the recovery in Europe. - First-quarter growth, including for exports, was significantly stronger than in recent years. - Agriculture has been the main engine, but there are early and encouraging signs of a more broad-based pick-up. ### Macroeconomic imbalances and external risks - Macroeconomic imbalances include accelerating inflation, low international reserves, and high twin deficits. - These imbalances are fed by weaknesses in external competitiveness, fiscal pressures, accommodating monetary policy, and delays with structural reforms. - External risk factors: potential for additional increases in international oil prices, lower appetite for emerging market credit, and security tensions in the MENA region. ### Fiscal consolidation and public finances - Business as usual is not an option given high macroeconomic imbalances; maintaining macroeconomic stability requires aligning spending with resources. - Authorities’ envisaged fiscal consolidation of 3 percent of GDP between 2018 and 2020 remains indispensable for macroeconomic stabilization. - Risks to the 2018 budget targets have increased despite fiscal consolidation being on track after a strong first quarter. - Key fiscal measures/recommendations: - Control spending, notably through monthly fuel price adjustments until the end of the year. - Maintain the policy of not granting new wage increases in 2018. - Move ahead quickly with further measures to ensure the financial viability of pensions. - Without these measures, it will be impossible to reduce debt and achieve the desired re-orientation of spending towards more investment and outlays on health and education. - Tunisia’s financing needs: about US$3.7 billion in budget support in the three remaining quarters of 2018. ### Monetary policy and inflation - Inflation became broad-based during the second quarter and credit growth is expected to continue, albeit at a slower pace. - The Central Bank has increased the cost of borrowing; additional interest rate increases during the remainder of the year are warranted. - Complementary measures: tightening of the Central Bank’s collateral framework. - Policy objective: bring real interest rates into positive territory to avoid risks to banking sector stability. - Risk if action is not taken: inflation could rise above 9 percent by the end of 2018 and continue to reduce purchasing power, especially of the poor and the middle class. - Current status: recent increases in the policy interest rate played an important role in mitigating inflation and better anchoring expectations, but interest rates are still negative in real terms and thus too low to put a break on fast-growing credit. ### Exchange rate policy and external balance - The real depreciation since April 2017 has helped to expand exports and compress import demand. - Current account deficit remains elevated; sustained exchange rate flexibility is needed to further re-orient demand towards exports and encourage investment. - Staff welcomes the Central Bank’s efforts over March–May to stay below the agreed ceiling for FX interventions and urges quick move to competitive FX auctions to promote market-based determination of the exchange rate and protect reserves. - The impact of exchange rate depreciation on debt ratios needs mitigation through sustained tightening of macroeconomic policies. ### Social protection and pension reform - Liquidity needs of the public and private pension funds remain unsustainable and call for swift adoption of legislation necessary for their reform. - Additional reform steps should be taken as soon as possible. - Staff supports broader coverage of vulnerable families benefitting from social transfers and calls on the authorities not to reduce subsidies on basic food stuffs. - Completing the database of vulnerable households is necessary to improve targeting of social services. ### Structural reforms, business climate, and governance - Positive reforms already implemented include the one-stop shop for investors, the StartUp Act, and the negative list limiting sectors requiring investment authorization. - Recommended follow-up measures: upgraded frameworks for public procurement and public private partnerships. - Delays in appointment of members of the High Anti-Corruption Authority are disappointing and should be overcome as soon as possible to strengthen economic governance. ### Financial sector reforms - Adoption by Parliament of laws supporting reduction of public banks’ NPLs is a major milestone, opening the way to accelerated credit workout. - Intended start of the BFT resolution and progress in strengthening the AML/CFT regime are important signals. - These measures aim to address banking sector issues, including risks affecting correspondent banking relationships. ### Program risks and monitoring - Program risks remain exceptionally high. - Key risks: political stalemate over reforms (especially after failure of recent efforts to revitalize a broad-based reform consensus) and security incidents. - Tunisia is exposed to adverse movements in international oil prices and, to a lesser extent, investor sentiment, which jeopardize fiscal and external deficit targets. - Continued close program monitoring through quarterly reviews and additional QPCs will be essential to mitigate these risks. *International Monetary Fund* ### 39. Staff supports the authorities’ request for the completion of the Third Review under ### 39. Staff supports the authorities’ request for the completion of the Third Review under ### IMF program decisions supported by staff - Staff supports the authorities’ request for the completion of the Third Review under the EFF. - Staff also supports: - (1) setting revised quantitative targets for end-June, end-September, and end-December 2018, as well as new targets for end-March 2019; - (2) altering the adjusters for QPCs on the primary balance and on current primary expenditures; - (3) converting the IT on social spending to a QPC; - (4) introducing a new QPC on FX interventions; - (5) waiving the applicability of all end-June performance criteria; and - (6) making all funds available for budget support. ### Recent economic developments (high-level takeaways) - A modest recovery unfolds on the back of agriculture, manufacturing, and tourism. - Fiscal consolidation has started in 2018. - The current account is expected to improve slightly in 2018. - The dinar has depreciated while international reserves have declined further. - Accelerating inflation is broad-based. - The policy rate was raised four times since early 2017, and the corridor was widened. - Reserve coverage would improve gradually and return to the IMF’s adequacy range by 2019, provided that the dinar remains reclassified as a floating currency; if it continues to be classified as crawl-like, reserve coverage remains insufficient. ### Key macro-fiscal and external indicators (selected figures as presented) - Central government operations (percent of GDP, Table 1 / Table 6 highlights): - Total revenue (excl. grants): 23.2 22.9 24.2 24.5 24.6 25.4 25.7 25.6 25.6 25.8 25.9 - Total expenditure and net lending: 28.8 28.9 30.3 30.1 30.1 29.3 29.3 28.3 28.0 28.2 28.3 - Wage bill (percent of GDP): 13.6 14.6 14.8 14.0 14.3 14.0 14.0 12.4 12.2 12.2 12.2 - Social expenditures (percent of GDP): 1.6 1.6 1.9 2.2 1.9 2.2 1.9 2.2 2.2 2.2 2.2 - Overall balance (percent of GDP): -5.3 -5.9 -5.9 -5.2 -5.2 -3.7 -3.4 -2.5 -2.2 -2.2 -2.2 - Gross public debt (percent of GDP): 55.4 62.4 70.3 70.5 73.1 70.0 73.3 69.4 68.4 67.5 66.5 - Share of debt in foreign currency (percent of GDP): 35.3 40.6 48.4 52.7 52.6 53.6 54.4 53.1 53.1 53.0 52.5 - External sector (Table 1 / Table 3 selected series): - Current account balance (pct. of GDP): -8.9 -8.9 -10.5 -9.6 -9.2 -8.6 -7.8 -7.8 -6.9 -6.5 -6.1 - Gross official reserves (eop, billions of US$): 7.4 5.9 5.9 6.4 6.3 7.0 7.0 7.5 7.9 8.7 9.3 - Net international reserves (eop, billions of US$): 4.5 3.3 3.1 3.2 3.2 3.2 3.2 3.3 3.7 4.7 5.6 - Exports (annual, Table 3, values in US$ millions): 14,073 13,568 14,231 17,158 13,784 4,341 4,187 3,860 4,529 16,916 14,250 - Imports (annual, Table 3, values in US$ millions): -19,102 -18,374 -19,538 -22,702 -19,020 -5,373 -5,746 -5,331 -5,562 -22,012 -19,385 - Monetary and financial indicators (Table 7 / Table 8 highlights): - Broad money (M3, end-period stocks, millions of dinars): 61,899 66,883 73,777 74,041 76,278 76,887 79,310 78,932 80,776 82,609 83,115 - Credit to the economy (millions of dinars): 66,093 72,472 81,648 83,647 83,883 84,075 87,819 89,404 89,485 92,170 90,492 - Central bank net foreign assets (millions of dinars, Table 8): 9,084 7,528 8,174 6,404 8,180 8,603 8,370 8,078 8,797 8,170 9,066 - Total CBT refinancing of banks (IMF definition, excl. OMPs): 4,815 5,997 9,975 12,285 12,054 11,737 11,669 10,648 11,224 11,485 10,401 - Banking sector soundness (Table 9 selected items): - Regulatory capital to risk-weighted assets: 11.6 11.9 11.8 8.2 9.4 12.0 11.6 11.9 11.8 - Nonperforming Loans (NPLs) to total loans: 13.0 13.3 14.9 16.5 15.8 16.6 15.6 13.9 13.9 - Specific provisions to NPLs: 48.6 45.7 56.4 58.0 56.9 59.0 63.3 61.4 - Liquid assets to total assets: 29.8 26.5 28.2 28.4 28.2 5.6 5.6 5.6 6.1 ### Medium-term outlook (select illustrative numbers) - Real GDP growth (Table 10): 1.2 1.1 2.0 2.4 2.9 3.4 3.6 4.0 4.2 - Inflation (annual average, Table 10): 4.9 3.7 5.3 8.1 7.5 5.9 4.9 4.1 4.0 - Gross national savings (percent of GDP): 12.5 13.4 12.0 13.4 14.6 15.7 17.0 18.1 18.5 - Gross investment (percent of GDP): 21.4 22.3 22.5 23.1 23.1 23.5 23.9 24.6 24.6 - Overall fiscal balance (percent of GDP, Table 10 memorandum): -5.6 -6.1 -6.1 -5.6 -3.9 -2.7 -2.4 -2.4 -2.4 - Gross public debt (percent of GDP, Table 10 memorandum): 55.4 62.4 70.3 70.5 70.0 69.4 68.4 67.5 66.5 - Current account balance (percent of GDP, Table 10 memorandum): -8.9 -8.9 -10.5 -9.6 -8.6 -7.8 -6.9 -6.5 -6.1 ### IMF financing and program schedule (selected items) - Schedule of noteworthy EFF actions and purchases (Table 12): - May 20, 2016 Board approval of the EFF: 227.29 (Millions of SDR) - First Review (September 30, 2016): 227.29 (Millions of SDR) - Second Review (September 30, 2017): 176.78 (Millions of SDR) - Third Review (June 15, 2018): 176.78 (Millions of SDR) - Recurrent review purchases shown as 176.78 (Millions of SDR) for subsequent reviews through 2019 with the schedule culminating in the Tenth Review April 29, 2020 having 176.78/176.78/176.78/176.78 entries in the table. - Total (Table 12 bottom line): Total Disbursements 2,045.62 (Millions of SDR) 250 (Percent of quota) 375.20 (Millions of US$) 32,843.14/25 (presentation of totals) - Indicators of Fund credit (Table 12 memorandum projections): - Disbursement sequence (existing and prospective Fund credit, millions of SDR): Disbursement 215.0 227.3 227.3 530.3 707.1 353.6 ... - Stock of existing and prospective Fund credit (millions of SDR): 1,002.8 1,205.3 1,205.6 1,366.7 1,799.5 2,026.6 1,969.8 1,879.3 1,516.3 - Stock in percent of quota: 350.0 221.1 221.1 250.7 330.1 371.7 361.3 344.7 278.1 - Stock in percent of GDP: 3.3 4.0 4.2 4.8 6.2 6.7 6.2 5.7 4.3 *Sources: Tunisian authorities; IMF IFS; Central Bank of Tunisia; World Bank Doing Business Indicators; IMF staff estimates, calculations, and projections.* ### Annex I. Inflation Drivers ### Annex I. Inflation Drivers ### Recent inflation dynamics - Core inflation (CPI excluding food and energy prices) moved: - in the 4–5 percent range since 2012, - to the 5–6 percent range in September 2016, - to the 6–7 percent range during a temporary spike in 2017, - and has been in the 7–8 percent range since early 2018. - The step-wise trend indicates broad-based price pressures. ### Key drivers of inflation - Dinar depreciation - Since 2016, the dinar has depreciated relative to the Euro by 35 percent, with most movement realized since early 2017 (23 percent), driven by an FX supply–demand mismatch. - Imported goods constitute about one third of Tunisia’s consumer basket; the gradual depreciation increases import prices after several months. - Wages increases - Since 2016, the public wage bill increased by 25 percent (and by 13 percent since 2017, including tax credits). - Private nonagricultural salaries increased by 15 percent. - Wage increases translate into price pressures with a lag of about a quarter. - The wage increases in April 2018 (last installment of agreements reached in 2015) are expected to affect prices for the remainder of 2018. - Bank refinancing and domestic credit - Central Bank credit to banks, mainly refinancing, increased by 122 percent since 2016 and by 60 percent since early 2017. - This refinancing fed domestic credit, including to households. - Inflation tracks the refinancing level closely and contemporaneously. - Other near-term upward pressures - Electricity and energy price adjustments in the second half of 2018. - Impact of the tax measures introduced in January 2018, including a one percent increase in VAT rates. - Higher inflation expectations. ### Inflation outlook and numeric targets - The identified factors are expected to combine and accelerate inflation further in the remainder of 2018. - Policy objective noted: contain inflation in the 8–9 percent range by end-2018. ### Policy recommendations to contain inflation - Further monetary tightening is needed: - Further hikes of the policy interest rate and a strong communication effort would help control price pressures, notably through their impact on inflation expectations. - From Annex III (Monetary Policy—Strengthening the Nominal Anchor), additional measures to strengthen disinflation credibility: - Reconfirm explicitly that price stability dominates other objectives in the CBT’s decision function to resist political pressure for an overly expansionary stance. - Move the policy interest rate as quickly as possible into positive territory in real terms. - Upgrade the analytical toolbox by implementing a survey of inflation expectations among firms and households and systematically extracting information from the yield curve. - Continue efforts to improve access to finance for SMEs, through fiscal channels or external partner support for dedicated credit windows. ### Relevant program and macro numbers from accompanying materials - Growth accelerated to 2.5 percent in the first quarter of 2018. - Performance under the EFF: all four quantitative performance criteria (QPC) at end-March 2018 were met (floor on primary balance of the central government (cash, excluding grants); ceiling on total primary current expenditure; cap on net domestic assets (NDA); floor on net international reserves (NFA) of the Central Bank of Tunisia (CBT)). - Request for Third Review disbursement: SDR 176.7824 million. *Source: cr18218 - Annex I. Inflation Drivers* ### 7. We authorize IMF staff to publish this Letter of Intent and the attachments (MEFP and Tables ### cr18218 - 7. We authorize IMF staff to publish this Letter of Intent and the attachments (MEFP and Tables ### Overview and commitment - The memorandum describes the main features of the reform program aimed at maintaining macroeconomic stability while promoting stronger and inclusive growth. - The Government is committed to implementing its reform plan; since the last quarter of 2017 the Government has accelerated the pace of reform through adoption of legal and regulatory texts and implementation of concrete proposals. ### I. Vulnerabilities on the rise despite the recovery — key findings - Growth and activity - Growth in the first quarter was 2.5 percent, the quickest pace since 2014. - Recovery driven by robust olive oil production, renewed dynamism in exporting sectors, tourism, transport, and financial services; mining underperformed due to social problems. - Forecast: growth rate of 2.4 percent for the whole of 2018. - Fiscal position and public debt - Tax revenues grew 12 percent from their level in the first quarter of 2017. - Current expenditure fell by 10 percent; the wage bill declined by 9 percent at end-March. - Capital spending increased by 22 percent. - Outstanding public debt reached 68.45 percent of GDP at end-March against 61.89 percent of GDP in the same period last year. - Inflation and monetary conditions - Inflation increased to 7.7 percent in May 2018, the highest level since 1991. - Contributing factors: effect of past salary increases, increases in various stamp duties and taxes in the 2018 Budget Law, depreciation of the exchange rate, robust credit growth. - Central Bank refinancing volumes exceeded TD 14 billion in mid-May 2018. - Monetary objective: bring inflation gradually back to historical averages (3 to 5 percent). - External sector and reserves - Current account deficit for first four months of 2018 reached 3.7 percent of GDP (compared to 4.4 percent of GDP for the same period in 2017). - Reserve coverage fell from 93 days of imports at end-2017 to 76 days of imports at end-May. - Risks: high international oil prices and low domestic energy production. - Banking sector - Aggregate capital ratio around 12 percent at end-March 2018. - Non-performing loans around 14 percent of total loans at end-March 2018, provisioned at 58 percent (excluding reserved interest). - Adoption in May 2018 of two laws giving public banks more flexibility in credit activities and debt write-off to start NPL resolution at public banks. - Business environment improvements - Tunisia Investment Authority became fully operational; government decree on the negative list published on May 11, 2018. - FDI grew at its fastest pace since 2010. - Adoption of the "Startup Act". - High-level PPP conference scheduled for June (to boost PPPs). - Participation in G20 “Compact with Africa”. ### II. Program performance and structural benchmarks - Quantitative Performance Criteria (met at end-March 2018) - Floor on the primary balance of the central government observed. - Ceiling on total primary current expenditure observed. - Ceiling on net domestic assets (NDA) observed. - Floor on net international reserves (NIR) observed. - Continuous Performance Criteria - Zero ceiling on accumulation of new external debt payment arrears by the central government observed. - Quantitative Indicative Targets (met) - Zero ceiling on accumulation of new domestic arrears observed. - Ceiling on net foreign exchange interventions by the CBT for March, April, and May observed. - Floor on social spending observed. - Structural Benchmarks — summary - Met Structural Benchmarks - Investment Law in force; Tunisia Investment Authority operational; government decree on negative list published May 11, 2018. - Parliament adopted law on May 22, 2018 simplifying loan write-off rules and allowing public banks to write-off NPLs as private banks. - Council of Ministers adopted draft pension reform bill on June 20, 2018 (SB not met, but implemented with delay). - Reprogrammed Structural Benchmarks - Decree appointing members of High Anti-Corruption and Good Governance Authority reprogrammed for December 2018. - Law on effective lending rate ceiling (TEG) under discussion; interest rate cap for loans to individuals remains at +20 percent above the average lending rate; threshold for SME loans raised to +33 percent (reprogrammed for December 2018). - CBT auction mechanism to sell FX improved; fully competitive auctions targeted by end-August 2018 (reprogrammed SB for August 2018). - Not met Structural Benchmarks - Banking resolution committee operational and first meeting scheduled for June 28, 2018; orderly resolution process for Banque Franco Tunisienne (BFT) started (reprogrammed SB for August 2018). - Quarterly fuel price adjustments continued in April but remained below formula-prescribed levels (missed SB); further adjustments described in paragraph 14 (Prior Action). - Dropped Structural Benchmarks - Two SBs related to establishment and operationalization of a new Large Taxpayers Unit (LTU) dropped due to complexity and time required for DGI and DGCPR merger; dropping will not have a direct impact on tax revenues. ### A. Maintaining macroeconomic stability — policy orientation - Policy focus - Pursue well-targeted fiscal consolidation in an environment of higher oil prices and greater international market risk aversion. - Tighten monetary policy to avoid unhinging inflation expectations. - Continue increasing exchange rate flexibility. - Fiscal consolidation path - Consolidation of around 1 percent of GDP per year, starting in 2018, to reduce the deficit to less than 2.5 percent of GDP by 2020. - Plans to mobilize external resources including issuing two sovereign bonds in international markets in July and in December of this year. - Domestic financing consistent with financing needs in the 2018 Budget Law. ### Fiscal measures to minimize expenditure slippages (to be included in a Supplementary Finance Law by end-September) - Controlling the wage bill - Two departure programs: (i) early retirement program and (ii) negotiated voluntary departures. - Approximately 5,000 civil servants will benefit until July 2018 from early retirement, resulting in savings of TD 120 million a year. - To date, 1,771 employees have shown interest in negotiated voluntary departure program. - Launch a second wave of voluntary departures in July 2018. - Strict limit on new hires: less than 3,000 civil servants per year in 2018 and less than 3,000 in 2019. - Commitment not to grant additional wage increases in 2018 and 2019 unless growth surprises on the upside for 2019–20 and without affecting the planned adjustment path of the wage bill to 12.4 percent of GDP in 2020. - Eliminate the use of tax credits starting in 2019. - Containing energy subsidies - Without measures, assuming an average price per barrel of US$70 in 2018, total energy subsidy bill in 2018 would be around TD 3,600 million (compared to TD 1,500 million included in the 2018 Budget Law). - Policy measures (price adjustments) can generate savings of about TD 900 million; plan to increase energy subsidy budget to TD 2,700 million (2.5 percent of GDP) while maintaining overall deficit at 5.2 percent of GDP. - Adjust fuel prices upwards on a monthly basis; first increase on June 22 of 70 millimes on average, followed by monthly adjustments from July to end-2018 to achieve a saving of TD 250 million. - If TD 2,700 million cap risks being exceeded, make an extraordinary increase in October to stay within programmed envelope. - Continue upward revision of electricity and gas rates mostly for corporates after the May hike for corporates, saving another TD 300 million. - Additional savings from rationalizing consumption and reducing supply of subsidized fuels in exchange for a new non-subsidized product offering. - To protect the most vulnerable, increase targeted social spending (see Section B, Paragraph 18). - Reforming social security funds - Government adopted the pension reform on June 20, 2018 (SB not met, but implemented with delay). - Parliament approval and entry into force expected before end of September 2018, with retroactive effect from 1 July 2018. - Main components: parametric reform of pensions (retirement age, contribution rate, indexation), governance reform of the funds, implementation of a new arrears recovery strategy for CNRPS, CNSS, and CNAM. - Due to delay, Government will transfer about TD 300 million to the CNRPS; remaining shortfall to be filled by renewed efforts in arrears collection. - Projected deficit of CNSS to be fully covered by stronger collection effort (including from some state-owned companies with frozen bank accounts). - Adoption of reform law is a first step; will be complemented by larger reforms in years to come. *Attachment I. Memorandum of Economic and Financial Policies (Tunisia)* ### 15. Greater revenue mobilization remains a priority. Regarding tax administration, we intend ### cr18218 - 15. Greater revenue mobilization remains a priority. Regarding tax administration, we intend ### Revenue mobilization and tax administration - Intend to merge the DGI and the DGCPR, in line with the model of the French tax administration. - Initiated a large-scale program of technical assistance and capacity building. - Hope to complete the first step of merging the collection and control functions before the end of 2018. - In the context of the 2019 Budget Law: - Plan to implement the convergence of tax rates between the "offshore" and "onshore" tax regimes to respond to requests from the European Union (EU), with a view to permanently remove Tunisia from the EU’s list of non-cooperative tax jurisdictions. - Introduce a VAT reform for the liberal professions (raising the rate from 13 to 19 percent) from 2019 to reinforce the impartiality of the reforms (SB for December 2018). ### Monetary Policy - Inflation and recent developments: - Inflation reached 7.7 percent in May, an unprecedented level since 1991. - Inflation has been outside the 3 percent to 5 percent corridor for 9 months and continues to accelerate. - Depreciation of the dinar and rising international prices, especially for energy, expected to continue upward pressure on inflation for the remainder of the year. - Policy stance and actions: - Steering the real money market rate (MMR) to a positive level: short-term operational target will be a positive real money market rate. - Policy rate changes: 75-basis point increase in March; raised the policy rate by another 100 basis points in June. - After the two increases this year, the money market rate in real terms remains negative, calling for additional adjustments in the second half of the year to reach neutrality. - Stand ready to tighten monetary policy faster than expected if inflation (especially core inflation) remains above forecast. - Aim to contain the refinancing by TD 1 billion by the end of the year. - Communication and monitoring: - Strengthening forward-looking communication of monetary policy to guide inflation expectations. - Enhancing monitoring of balance sheet effects and managing macro-prudential risks: - Increased the haircut of private assets from 25 percent to 30 percent. - Will proceed to a daily valuation of negotiable securities used as collateral for refinancing operations based on the new yield curve as of July 4, 2018. - Current analysis suggests monetary tightening would not cause significant risk to solvency or liquidity of banks, businesses and households. - Interest expenses, for the average firm, represent only 2 percent to 3 percent of total expenses. - Overall profitability of the banking system was 1.2 percent in terms of return-on-assets (ROA) and 13.9 percent in terms of return-on-equity (ROE) last year. - Exposure to currency risk remains low (about 8 percent of assets). - Will develop new analytical capabilities, new supervision instruments and new skills for banking supervisors. - Continuing to improve transmission channels by: - Strengthening the role of the CBT as guarantor of price stability through proactive monetary policy. - Reducing commercial banks' use of the CBT’s refinancing window in favor of more interbank market activity. - Relaxing the constraint posed by the interest rate cap applied to business loans and more frequent updating of the calculation used to determine the level of the effective lending rate ceiling (the TEG). ### Exchange Rate Policy - Rationale: - More exchange rate flexibility necessary to facilitate reduction in external imbalances. - Observed improvement in the current account in the first quarter partly due to greater exchange rate flexibility. - Empirical estimates indicate the elasticity of the current account with respect to the real effective exchange rate is non-negligible. - Short-term commitments: - Limiting net sales of FX: - Strictly observed the limit on net sales by the CBT in the FX market agreed under the program in April and May (Prior Action). - Will introduce more competitive FX auctions in the coming months (reprogrammed SB for August 2018). - Will seek technical assistance from the IMF to guide transition to a competitive currency auction system. - Reviewing exchange restrictions: - Reaffirm commitment to withdraw the circular 2018-01 (which replaces circular 2017-09) limiting access to financing for imports of non-priority goods by the end of the year. - Found the effect of this measure on imports was mixed and that its introduction created uncertainty for economic operators. ### Providing Adequate Social Protection - Broadening the social safety net and protecting the vulnerable: - Council of Ministers met twice on 1 and 11 June 2018 to examine social intervention policies. - Increased the financial envelope for social expenditures by about TD 100 million (for the remaining six months of the year) over and above the measures announced in January 2018, while increasing targeting effectiveness. - National Program of Assistance to Necessary Families (PNAFN) measures: - Increased allowances for the average needy family by around TD 30 (TD 75 million) at the beginning of the year. - Extending coverage to 35,000 households on the waiting list to increase targeted households from 250,000 to 285,000 (TD 108 million a year). - Covering transport costs for children and students from families in need (TD 1 million a year). - Re-entry allowances to mitigate back-to-school and university expenses: - Granting allowances of TD 500 for back-to-school expenses for new graduates per family (TD 26 million per year). - Granting exceptional return allowance of TD 150 for categories B, C, D and A3 (TD 40 million per year). - Health care consolidation: - Increase stockpile of medicines for chronic and heavy diseases (TD 25 million per year) for primary care facilities. - Consolidate the maternal health care program (TD 15 million a year). - Measures to increase social spending have been the subject of a public announcement by the Government (Prior Action). - Protecting social spending: - Agreed to elevate the current indicative target on social spending to a formal quantitative performance criterion from September. - Two-thirds of social expenditures take the form of social assistance and two-fifths are dedicated to education spending. - Continuing social security reform: - Reform bill approved by the Council of Ministers (SB not met, but implemented with delay) and scheduled to be discussed in Parliament is insufficient by itself to ensure viability of the social security system. - Pensions can reach up to more than 80 percent of salaries; structural gap exists between benefits and financial resources. - Will continue working within the Social Protection Committee with UGTT and UTICA and with technical support of the World Bank and the International Labor Office. ### Creating More Opportunities for the Private Sector — Governance and Business Climate - Investment law implementation and administrative simplification: - Establishment of governance bodies of the new Investment Law in the first half of 2018; Tunisian Investment Authority started operations (met SB) as a “one-stop shop.” - Strategic Investment Council established to promote global and sectoral strategies. - Government decree of May 11 specifies eight sectors (“negative list”) where authorizations remain mandatory; for all other sectors, investment is free of prior authorization. - If authorization remains necessary, decree sets deadlines between 60 and 90 days; if time limits lapse, authorization considered granted under “silence is consent.” - Strengthening good governance and fight against corruption: - Main instrument will be the High Anti-Corruption and Good Governance Authority (HACGGA), to be created on the basis of the current INLCC. - Decree appointing members of the Board of the High Authority could not be published due to complex parliamentary consultations. - Parliament is aware of importance of quick nomination and process hoped to be completed by September (reprogrammed SB for December 2018). ### Financial Sector - Overall objectives: - Overhaul of the financial sector to improve quality of banks’ loan portfolios, strengthen financial stability and bank liquidity, enhance banking supervision, and improve access to finance. - Resolving non-performing loans (NPLs): - Parliament adopted two fundamental laws to put public banks on equal footing with private banks for resolving NPLs (met SB): - Law allowing public banks to abandon classified loans on the same basis as private banks. - Law simplifying rules for write-off so that only a first judicial judgment of a first instance is necessary. - Directorate General of Tax Legislation at the Ministry of Finance will issue guidance notes on applying the new rules to the industry by end-June 2018. - Decree stipulating public banks are not subject to the assent of the commission established by Article 474 of the Commercial Code adopted in January by the Council of Ministers and should be signed by the Head of Government by end-June 2018. - Ministry of Justice, with Ministry of Finance, requested technical assistance from the United Kingdom; awaiting training schedule to be finalized by end of June 2018. - Ministry of Justice committed to identify commercial courts specializing in banking issues; training program to be set up by September 2018. - Ministry of Tourism and partners exploring mechanism to reprofile hotels; committed to propose concrete actions by September 2018. - Draft bill on collection companies delayed; Parliament will adopt the law by December 2018. - Ministry of Finance and COREFI preparing comprehensive strategy on NPL treatment and resolution to be published in December 2018. - Operationalizing resolution framework: - Resolution committee scheduled to hold first meeting on June 28, 2018 to examine BFT situation transmitted by the CBT (reprogrammed SB for August 2018). - Deposit guarantee fund started activities and began building pool of financial resources through contributions from the CBT, the Ministry of Finance and commercial banks in June 2018. - Modernizing banking supervision: - Banking Supervision Directorate at the CBT to hire an additional 12 supervisors by the end of September 2018. - Continue working with METAC to develop tools under Pillar II of the Basel Accord for monitoring market and interest rate risk and assessing capital adequacy. - Initiatives include: strengthening CBT internal capacity to implement ICAAP; issuing a circular on capital adequacy based on Basel II guidelines for market risks; clarifying CBT regulatory framework for interest rates (IRRB), concentration and strategic risks. - Continue efforts to move to consolidated supervision by the second half of 2019 and monitor resolution strategy for bad debts in the tourism sector. - Facilitating access to financing and financial inclusion: - National Strategy for Financial Inclusion to be validated by the Government in September 2018. - Development of financial inclusion indicators based on a survey (with assistance of the European Investment Bank, EIB) to be finalized by the end of 2018; indicators to be regularly published. - Awaiting adoption of law on regulation for credit bureaus (pending Parliamentary discussion). - COREFI working on De-Cashing Strategy to be published by the end of June 2018. - With KfW assistance, exploring strategy to increase financial access for SMEs through the Banque de Région (approved by the Government in February 2018); medium-term aim to unify and strengthen other state instruments to support SMEs. - Improving safeguards and AML/CFT: - Progress implementing recommendations of IMF safeguards assessment mission: - Drafted text establishing the Risk Committee. - Issued circular in December 2016 to regulate lender-of-last-resort framework. - Prepared and shared circular in March 2017 on operational framework underpinning conduct of monetary policy. - CBT’s General Control Directorate to first carry out a self-assessment before external evaluation of internal audit function. - AML/CFT and parallel economy actions under CTAF: - Government published a new decree on 4 January 2018 on freezing of terrorist assets. - Government adopted two draft laws: one amending the 2015 AML/CFT law to consider proliferation; the second on commercial register, register of effective beneficiaries, and register of associations. Adoption by Parliament expected by June. - On 5 April 2018, CTAF published six new decisions guiding DNFBPs (accountants, lawyers, notaries, real estate agents, jewelers and casinos) on detection and reporting of suspicious transactions; CTAF organized awareness raising days and ministerial orders issued. - Board of the Ordre des Experts Comptables published standards on due diligence measures for accountants. - CTAF organized a workshop for more than 50 controllers of DNFBPs to prepare an operational manual for the control function. - Banks, Financial Market and Insurance Authorities finalized risk assessments and started implementing controls and imposing sanctions based on a risk-based approach. - CTAF strengthened human resources by hiring 12 new staff members. - CBT prepared a draft amendment to Circular No. 2017-08 to ensure full compliance with international standards, taking into account FATF Recommendations (February 2018). ### Use of Public Resources - (Content unit ends here.) *International Monetary Fund — cr18218* ### 22. Actions that support fiscal consolidation continue: ### 22. Actions that support fiscal consolidation continue: ### Actions supporting fiscal consolidation - Better managing state-owned enterprises: - Implementation of the performance contracts with four large state-owned enterprises allows monitoring of their financial situation through dashboards of key indicators (particularly financial indicators) for the 30 largest state-owned enterprises, which is now operational at the Directorate General of Participations (DGP). - A performance contract will be signed with TUNISAIR that reflects the company's commitments made in its restructuring plan (SB for December 2018). - Exploiting the results of functional reviews: - The last outstanding functional review, involving the Ministry of Equipment, has been completed and validated (met SB). - Information from all functional reviews is closely aligned with the priorities in the Civil Service Reform Strategy, including: - improving management of human resources, - redeployment of excess staff to address potential staffing needs in other areas (especially in the interior regions), - simplification of the pay and benefits system. ### Quantitative Performance Criteria and Indicative Targets (overview) - Main Quantitative Performance Criteria (QPC) tracked cumulatively from the beginning of the year (examples from Table 1 and Table 1 concluded): - Floor on the primary balance of the central government (cash basis excl. grants, millions of TD). - Representative entries in table: -3,951; -814; -92; -1,247; -3,123; -1,141; -2,868; -3,784; -3,959; -1,722; 545; -2,961; -2,760; -3,151; -394. - Ceiling on total current primary expenditure of the central government (millions of TD). - Representative entries in table: 19,054; 5,244; 5,574; 10,379; 10,284; 14,932; 14,702; 21,757; 21,823; 6,237; 5,185; 11,517; 17,566; 23,616; 6,032. - Floor on social spending (millions of TD). - Entries include: 1,411; 285; 589; 965; 1,132; 1,226; 1,502; 1,533; 1,844; 721; 735; 1,144; 2,382; 656. - Ceiling on net domestic assets of the Central Bank of Tunisia (stock, millions of TD). - Entries include: 5,094; 2,363; 5,351; 5,500; 5,605; 6,640; 4,337; 6,761; 3,834; 1,684; 9,374; 9,279; 8,244; 8,150; 7,387; 6,855; 6,602. - Floor on net international reserves of the Central Bank of Tunisia (stock, millions of US$). - Entries include: 3,335; 4,773; 3,105; 2,906; 2,884; 2,951; 3,311; 3,117; 2,937; 3,660; 3,120; 2,352; 2,400; 2,408; 2,966; 3,075; 3,153; 3,186. - Continuous Performance Criterion: - Ceiling on the accumulation of new external debt payment arrears by the central government (millions of US$): 0 (Met in table entries). - Indicative Targets: - Ceiling on the accumulation of new domestic arrears (millions of TD): 0 (Met in table entries). - Monthly and quarterly measures include floors on social spending and ceilings on net foreign exchange interventions of the CBT. ### Program assumptions and adjusters (selected figures) - External financing of the central government (excluding IMF, millions of US$): 1,555; 475; 992; 2,166; 2,196; 3,007; 2,757; 3,226; 3,419; 209; 292; 1,640; 2,400; 3,506; 104. - Of which: multilateral and bilateral budget grants (millions of US$): 570; 481; 410; 875; 1; 71; 136; 0. - Public external debt service (interest and amortization, millions of US$): 1,431; 270; 263; 1,055; 1,080; 1,481; 1,521; 1,823; 1,902; 466; 502; 994; 1,353; 1,789; 635. - Residents' FX deposits at the Central Bank of Tunisia (millions of US$) (at program exchange rate): 908; -1,269; 960; 960; 963; 960; 963; 960; 1,224. - FX swaps between the Central Bank of Tunisia and commercial banks (millions of TD): 445; 603; 453; 453; 393; 453; 594; 453; 1,147. - FX swaps between the Central Bank of Tunisia and commercial banks (millions of US$): 221; 299; 225; 225; 195; 225; 295; 225; 570. - Program exchange rate TD/US$: 2.01285 (repeated entries). ### Structural benchmarks, prior actions, and status (selected) - Prior actions (Met): - Foreign exchange interventions: Compliance with the monthly intervention budget in April and May. Objective: Exchange rate flexibility. Status: Met. - Fuel prices: (1) Adoption of a ministerial order announcing a significant increase in prices of the three main fuel products in June; and (2) public announcements of (i) the cap on energy subsidies at 2.5 percent of GDP (2,700 million dinars) in 2018; (ii) a monthly price adjustment for the three main fuel products from July; and (iii) an additional one-off price correction in October if the energy subsidy budget were likely to be exceeded. Objective: Fiscal sustainability and fairness. Status: Met. - Social protection: Public announcements of an increase in social transfers for vulnerable households. Objective: Social protection and fairness. Status: Met. - Portfolio quality laws adopted by Parliament to allow public banks to abandon claims and simplify write-off rules. Objective: Financial sector stability. Status: Met. - Functional review: Completion of the functional review of four ministries (Health, Education, Finance, and Infrastructure). Objective: Fiscal sustainability and quality public services. Date: Jun-18. Status: Met. - Structural benchmarks (Not met / Drafts / Revised): - High anti-corruption and good governance authority (HACGGA): Signature of the decree appointing members. Objective: Good governance and fairness. Date: Jun-18 revised to Dec-18. Status: Not met. - Banque Franco Tunisienne (BFT): Vote of the resolution committee on orderly resolution of the BFT. Objective: Financial sector stability. Date: May-18 revised to Aug-18. Status: Not met. - Maximum lending rate: Adoption by Parliament of a law and decree on increasing the maximum lending rate for corporates and SMEs from +20 percent above the average lending rate to +33 percent. Objective: Financial sector stability. Date: May-18 revised to Dec-18. Status: Not met. Draft law in Parliament. Augmentation limited to +20% for individuals. - Fuel prices: Quarterly application of the automatic fuel price adjustment mechanism. Fiscal sustainability and fairness. Timing: Mar-18 until end of program. Status: Not met at end-March. - Pensions: Adoption, by the Council of Ministers, of the comprehensive pension reform strategy. Fiscal sustainability and fairness. Date: Apr-18. Status: Not met, but fully implemented on June 20. - State-owned enterprises (SOEs): Signature of a performance contract for TUNISAIR. Better monitoring of fiscal risks. Date: Dec-18. - Organic budget law: Publication in the official journal of the Organic Budget Law. Fiscal sustainability and fairness. Date: Dec-18. Status: Draft law in Parliament. - VAT: Increase of the VAT rate for liberal professions from 13 to 19 percent. Fiscal sustainability and fairness. Date: Dec-18. - Large Taxpayers Unit (DGE) operationalization and transfers (various dates: Jul-18, Dec-18). Objective: Fiscal sustainability and fairness. - Foreign exchange auctions: Implementation of a full foreign exchange auction mechanism by the Central Bank of Tunisia. Exchange rate flexibility. Date: Jun-18 revised to Aug-18. Status: Not met. - Note: One reform was dropped because the authorities opted for a different and more comprehensive reform path; this change is stated as not macro critical given continued revenue performance. ### Technical Memorandum of Understanding (TMU) — selected definitions and valuation rules - The TMU defines QPCs, a Continuous Performance Criterion (CPC), and Indicative Targets (IT) as described in MEFP Table 1. - QPCs include: - (1) quarterly floor on the primary balance of the central government (cash basis, excluding grants); - (2) quarterly ceiling on total current primary expenditure of the central government; - (3) quarterly floor on social spending (starting from end-September 2018); - (4) quarterly ceiling on net domestic assets (NDA) of the CBT; - (5) quarterly floor on net international reserves (NIR) of the CBT; - (6) quarterly ceiling on net foreign exchange interventions of the CBT (starting from end-September 2018). - CPC: zero ceiling on the accumulation of new external debt payment arrears. - ITs include accumulation of new domestic payment arrears, monthly ceiling on net foreign exchange interventions of the CBT, and a quarterly floor on social spending (through end-June 2018). - Measurement rules: - QPCs on primary balance, total current primary expenditure, and social spending measured quarterly and cumulatively from the end of previous year. - QPCs on CBT NDA and NIR measured quarterly on a stock basis. - CPC on accumulation of new external debt payment arrears measured on a continuous basis. - Valuation rules: - For program purposes, all FX-denominated assets, liabilities, and flows will be valued at the “program exchange rate,” except for items affecting the government’s budgetary accounts (measured at current exchange rates). - Program exchange rate corresponds to the CBT’s accounting exchange rate that prevailed on December 31, 2015. - For the SDR, the program exchange rate is 1 SDR = 2.797590 Tunisian dinars. - Monetary gold assets valued at the program exchange rate at the price of 2,138.15 Tunisian dinars per ounce of gold (London morning fixing on December 31, 2015). - The stock of gold is 4.13 tons (4,129,806 grams) on December 31, 2015. ### Program exchange rates (Tunisian Dinars per FX Currency at End-December 2015) - 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 *Source: IMF staff estimates (content unit: cr18218 - 22. Actions that support fiscal consolidation continue:).* ### 10. Net domestic bank financing of the central government is the sum of: the change in net ### cr18218 - 10. Net domestic bank financing of the central government is the sum of: the change in net ### Definition: Net domestic bank financing of the central government - 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 deposits of the central government at the CBT. - Central government accounts at the CBT included in deposits: 1. Treasury current account excluding the sub accounts N-bis, those related to Public Administrative Entities (EPA) and to local governments; 2. Tunisian government account (miscellaneous dinar accounts); 3. loan accounts; 4. grant accounts; 5. accounts of Fond National de Promotion de l'Artisanat et des Petits Métiers and Fonds de Promotion et de Décentralisation Industrielle (“FONAPRA-FOPRODI account”); 6. special accounts of the Tunisian government in foreign currency; 7. accounts in foreign currency pending dinarization (subaccount: “mise à disposition”); 8. any other account that may be opened by the central government at the CBT or banks. - Following unification into a Single Treasury Account, government accounts are consolidated in two categories on the CBT’s balance sheet (liabilities side): Compte Central du Gouvernement and Comptes Spéciaux du Gouvernement. ### Net government borrowing from banks; net domestic nonbank financing - Net government borrowing from the banking system: - defined as the change in the stock of government securities (i.e. Treasury bills and bonds) held by banks and any other central government borrowing from banks, less repayments. - Net domestic nonbank financing: - 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 counts as domestic non-bank financing. - Total Treasury bills and other public debt instruments are taken at the nominal/face value shown on institutions’ balance sheets and do not include accrued interest. ### Fiscal program metrics: ceilings and floors - Ceiling on Total Current Primary Expenditure of the Central Government (Excluding Interest Payments on Public Debt): - total current primary expenditure = sum of: 1. personnel wages and salaries; 2. goods and services; 3. transfers and subsidies; 4. other unallocated current expenditure. - Floor on Social Spending: - social spending = capital expenditures (development expenditures) on education; health; social transfers to low-income families; employment training programs (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; and all new targeted cash transfers in support of vulnerable groups. - Excluded: All current expenditures (“dépenses de gestion”) of those sectors and programs, and food and energy subsidies. ### Ceiling on Net Domestic Assets (NDA) of the CBT - NDA defined as: difference between the monetary base and the net foreign assets of the CBT. - Monetary base components: 1. fiduciary money (money in circulation excluding cash balances of banks and the Treasury); 2. deposits of banks at the CBT (including foreign currency and deposit facility); 3. deposits of all other sectors at the CBT (other financial enterprises, households, and companies). - CBT’s net foreign assets: difference between gross foreign assets (including foreign assets not part of reserve assets) and all foreign liabilities; valued at the program exchange rate defined in the table above. - Directorate General of Statistics (Directorate of Monetary and Financial Statistics) responsible for monthly forecasts of reserve money and NDA projections for the next six months; projections to be submitted to IMF staff after consultation with the Directorate General of Monetary Policy. ### Floor on the Net International Reserves (NIR) of the CBT - NIR defined as: difference between reserve assets and liabilities in foreign currency to nonresidents. - CBT reserve assets (per IMF BPM5 definition) include: gold, SDR assets, reserve position at the IMF, convertible foreign currencies, liquid balances held outside Tunisia, and negotiable foreign securities and bills purchased and discounted. - CBT liabilities in foreign currency to nonresidents include: - commitments to sell foreign currencies associated with financial derivative transactions (e.g., swaps, futures, options); - any portion of CBT’s assets used as collateral; - IMF and Arab Monetary Fund (AMF) credits outstanding; - deposits at the CBT of international organizations, foreign governments, and foreign bank and nonbank institutions. - Exclusions: government’s foreign currency deposits at the CBT; any SDR allocation received after March 31, 2017. - Treatment of debt instruments: - All debt instruments issued in foreign currency by the CBT on behalf of the government after May 15, 2013 will be treated as CBT liabilities unless prospectus clearly states (1) CBT acts as agent executing sovereign debt for the Republic of Tunisia; (2) debt is liability of the central government; and (3) a protocol between CBT and MoF authorizes CBT to pay expenses, interest and principal through direct deduction from the Treasury's current account. - Valuation at program exchange rates: - On December 31, 2017, value of the stock of NIR reserves was US$3,120.2 million, with the stock of reserve assets equal to US$5,480.6 million and the stock of CBT liabilities in foreign currency equal to US$2,360.4 million (at program exchange rates). ### Ceiling on Net Foreign Exchange Interventions of the CBT - Net foreign exchange interventions defined as difference between outright foreign exchange sales (including conversions) and outright foreign exchange purchases (including conversions) via channels: Reuters, auctions, and the interbank market. - Computation may include CBT net sales in other formal or informal markets or instruments (e.g., transactions in derivatives). - Transactions of the CBT with the central government in the context of budget operations are not considered net sales unless they occur through the channels above. - Purchases of foreign currency proceeds of a potential Eurobond or other official financing cannot be interpreted as CBT purchases of foreign exchange for the computation of CBT net sales total. ### Ceilings on accumulation of arrears - Ceiling on Accumulation of External Arrears: - arrears on external debt payment = late payments (principal and interest) on external debt or guarantees as defined in External Debt Statistics: Guide for compilers by the central government or the CBT from the due date or expiration of applicable grace period. - Ceiling on Accumulation of Domestic Arrears: - arrears on domestic payments = amounts owed to domestic financial and commercial creditors that are 90 days or more overdue with respect to a specific maturity date (or as defined in contractual grace period). - If no maturity date specified, arrears defined as amounts owed to domestic creditors unpaid beyond 90 days or more after contract signing or receipt of the invoice. ### Adjustment factors for the QPCs (Quantitative Performance Criteria) - Primary fiscal balance targets (cash basis, excluding grants) adjusted upward/downward based on amounts used to: 1. recapitalize public banks; and 2. finance severance pay of voluntary departures as part of civil service reform. - NDA targets adjusted upward (downward) if: 1. cumulative external budget financing (including grants and loans, excluding from the IMF) and privatization receipts received by the central government in foreign currency is lower (greater) than levels indicated in MEFP Table 1; 2. total amount of cash payments on external debt service are greater (lower) than levels in MEFP Table 1. - NDA ceiling conversion and additional adjustment: - NDA ceiling converted into Tunisian dinars at program exchange rate specified in the table above, and adjusted downward (upward) based on amount of CBT reserves released (mobilized) because of a possible decrease (increase) in the reserve requirement. - NIR targets adjusted upward (downward) if: 1. cumulative external budget financing (including grants and loans, excluding from the IMF) and privatization receipts received by the central government in foreign currency is greater (lower) than levels observed in MEFP Table 1; 2. total amount of cash payments on external debt service of the government is lower (greater) than levels in MEFP Table 1. ### Monitoring and reporting requirements - Performance monitored using data supplied to the IMF by Tunisian authorities consistent with program definitions; authorities will promptly transmit data and any revisions to IMF Resident Representative’s office in Tunisia. - Selected reporting requirements (periodicity, delay, responsible department) — examples preserving original numeric details: - GDP: supply and demand at current, constant, and the previous year’s prices, including sectoral indices. q 45 INS - Inflation: including underlying inflation of non-administered and administered prices. m 14 INS - Tax and nontax revenue of the central government, decomposed by main items. m 30 MoF - Total expenditures: current and capital, transfers and subsidies. m 30 MoF - Capital expenditure: by type of financing (domestic and external), and by main sectors and projects. m 45 MoF - Current expenditure: by type: wages, goods and services, transfers. m 45 MoF - Social expenditure. q 45 MoF - Stock of domestic and foreign debt of central government and debt guaranteed by the government, by instrument and currency (in dinars and foreign currency with equivalent in domestic currency). q 30 MoF - Stock of domestic arrears as per TMU and accounts payable corresponding to expenditures committed/payment ordered more than 90 days before (and by type). q 45 MoF - Disbursement of foreign loans: breakdown into project loans and budgetary loans by principal donor. m 30 MoF - Domestic borrowing from banks and nonbanks: including bonds, Treasury bills, and other issued securities. m 30 MoF - Consolidated accounts of the central government at the CBT with detailed breakdown of deposits. m 30 CBT (MoF/TGT for sub-account) - CBT accounts at the current exchange rate: monthly situation of the Central Bank by sector. m 15 CBT - Reserve money and net domestic assets (NDA): monthly forecast. m 15 CBT - Monetary policy operations and liquidity factors: daily and monthly balances; detailed table including intervention on the money market, deposit facility, ordinary tenders, loan facility, overnight lending, repo at 1-7 days and 3 months, FX swap exchange, open market operations, minimum reserves, excess reserves. m 15 CBT - Monetary survey at the current exchange rate: preliminary (30 days) and definitive (45 days). m 30 and 45 days CBT - CBT foreign exchange market operations and related detailed reporting: weekly w 1 CBT (including CBT interventions in million of dinars and equivalent in US million, FX reserves breakdown, swap details, forward operations, terms and conditions of new transactions). - IMF account statements: monthly consolidated statements of the IMF No. 1, No. 2, and Securities Account. m 30 CBT - Banks’ financial soundness ratios: indicators including regulatory capital adequacy ratios, asset quality, and profitability. m 30 CBT - Direct refinancing of commercial banks by the CBT: breakdown by bank. m 14 CBT - NPLs: stock of banking sector NPLs and breakdown by commercial banks. q 60 CBT - Balance sheets of commercial banks, including detailed income statements, in accordance with “Uniform Bank Performance Reporting” agreed with Fund staff. q 60 CBT - Other required reporting and short delays: - Information on fiscal, monetary, and financial policy changes (decrees, circulars, official notices of changes in gas and electricity rates, prices of petroleum products and levies/surcharges): d 3 CBT/MoF - Petroleum: price structure of petroleum products and data to monitor the automatic adjustment mechanism (formulas and data). d 15 Min. of Energy *Statement by Mr. Jafar Mojarrad, Mr. Cyrus Sassanpour, and Ms. Monia Saadaoui. July 6, 2018.* ### 2.4 percent––the highest rate since 2014––benefiting from the revival of tourism, higher ### cr18218 - 2.4 percent––the highest rate since 2014––benefiting from the revival of tourism, higher ### Economic performance and outlook - Real GDP growth of 2.4 percent––the highest rate since 2014––benefited from the revival of tourism, higher phosphate production, and growing exports due to gains in competitiveness and robust EU demand. - Inflation accelerated to 7.7 percent in May, the highest level since 1991, reflecting one-off factors and a mix of demand-pull and cost-push elements, including: - pass-through of a sizable exchange rate depreciation, - robust credit growth, - past public-sector wage awards, - rising international oil prices. - The fiscal deficit remained unchanged at 5.9 percent of GDP in 2017, largely due to higher subsidies and transfers despite higher revenue. - Recovery of tourism and higher exports and remittances narrowed the current account deficit, despite higher oil imports, but foreign reserves fell reflecting large debt amortization. - Both public debt and external debt ratios increased in 2017, reflecting the impact of exchange rate depreciation. ### Fiscal policy: consolidation and measures - Program fiscal consolidation path: reduce the overall deficit by 1 percent of GDP per year to 2.5 percent of GDP by 2020 and anchor public debt on a downward path. - In 2018: - tax receipts increased by 12 percent, - wage bill cut by 9 percent during the first quarter, - the deficit target of 5.2 percent of GDP came under pressure due to larger-than-anticipated international oil prices; lower-than-anticipated take-up of voluntary departure and early retirement schemes; higher transfers to the public pension fund; and higher social transfers. - Authorities’ corrective fiscal effort: - additional fiscal effort equivalent to 2 percent of GDP during the second semester of 2018 or 4 percent of GDP on an annual basis, mainly through expenditure cuts. - Bulk of higher energy subsidies (0.8 percent of GDP) to be met through monthly adjustments in automobile fuel prices starting in July on top of the June price hike; increases in gas and electricity tariffs for corporate consumers; and controlling leakages. - Authorities prepared to make further fuel price adjustments in October if subsidies exceed projections. - Social transfers will increase by 0.1 percent of GDP to partially defray the impact of fuel price increases. - Wage bill containment: - Government wage bill currently around 14 percent of GDP. - Target wage bill of 12.4 percent of GDP by 2020. - Measures: second round of voluntary departures, strict limits on new hires this year and next, no wage increases in 2018, and conditional consideration of increases in 2019 only if growth surprises on the upside. - Pension and social funds: - Government adopted comprehensive reform on June 20, 2018 to reduce financial imbalances of CNRPS, CNSS, and CNAM; parliamentary approval expected by end-September, effective retroactively from July 1. - Government will make an additional transfer of 0.4 percent of GDP in 2018 to CNRPS; remaining CNRPS shortfall and CNSS deficit to be covered by greater effort to collect contribution arrears, including from state-owned companies. - Revenue and tax administration reforms: - Plan to converge “onshore” and “offshore” tax regimes with the 2019 budget and to raise the VAT rate for liberal professions. - Merge two ministry of finance departments dealing with tax assessment, accounting and collection along the French model. - SBs on the new Large Taxpayers Unit dropped. ### Social protection - Program includes a floor on social spending for vulnerable groups (cash transfers, healthcare support, education scholarships, job training), which was exceeded at end-March. - Authorities intend to elevate the indicative target on social spending to a QPC from September. - Coverage of vulnerable families has been broadened; improvements in database and targeting planned by end-2018 with World Bank assistance. ### Monetary and exchange rate policy - Fighting inflation is the main priority of the Central Bank of Tunisia (CBT). - Policy actions and stance: - Key policy interest rate increased twice in 2018 for a total of 175 basis points. - Money market rates remain negative in real terms; private sector credit fueled by central bank refinancing is still growing. - Authorities determined to raise policy rates until real money market rates are firmly in positive territory to reduce central bank refinancing. - Plans to enhance monetary policy effectiveness via better public communication, strengthening transmission (gradual relaxation of interest rate caps on business loans), more frequent updating of effective lending rates, and encouraging banks to fund lending in the interbank market rather than via central bank refinancing. - Exchange rate developments: - Tunisian dinar depreciation: REER down 13 percent since start of program; NEER down 30 percent (latter largely versus the euro). - REER depreciation helped improve the current account deficit. - Authorities recognize greater exchange rate flexibility would help achieve a more sustainable current account position and improve foreign reserves coverage. - Strict observance of program targets on net foreign exchange sales by the CBT in April and May helped keep the dinar on a flexible path and preserve reserves. - CBT intends to set up framework for more competitive foreign exchange auctions—with Fund TA—and gradually limit interventions to smoothing excessive market volatility. - Authorities reaffirm commitment to remove restrictions on financing of non-priority imports by end-2018. ### Financial sector stability - Financial sector indicators and bank profitability have improved. - Key reform and resolution actions: - Recent parliamentary adoption of laws placing NPL restructuring of public banks on same footing as private banks to facilitate NPL resolution of public banks. - Banking resolution committee began reviewing the situation of the BFT in its first meeting on June 28; vote on its orderly resolution expected by August. - Ministry of Finance and Financial Sector Reform Committee intend to publish a comprehensive report on NPL resolution by end-2018. - Supervisory and inclusion measures: - Progress toward developing a national strategy for financial inclusion. - CBT committed to strengthening supervisory capacity and working with METAC to develop tools for monitoring market and interest rate risks and assessing bank capital adequacy. - Authorities reinforcing AML/CFT framework and implementing the action plan agreed with FATF in November 2017, including preventive measures adopted in 2018 (¶21 MEFP) to facilitate Tunisia’s exit from the FATF-enhanced surveillance list. ### Supporting the private sector and governance - Measures to support private sector: facilitate investment, cut administrative red tape, encourage public-private partnerships, strengthen governance and fight corruption. - Institutional and regulatory changes: - New Tunisian Investment Authority established as a “one-stop shop” for investors. - Government decree in May reduced the number of authorizations required for investment by establishing an eight-sector negative list where prior authorization is mandatory; where authorization is required, it is granted after 60-90 days on a “silence is consent” basis. For all other sectors, no prior authorization is required. - High Anti-Corruption and Good Governance Authority to become functional once board members are appointed by Parliament following consultations among political parties—expected by September. ### Conclusions and program risks - Authorities remain committed to macroeconomic stabilization and structural reforms to secure sustainable high growth with widespread benefits. - Maintaining political consensus and public support is critical; Tunisia is pressing at the limits of its program absorption capacity, and further hardening or frontloading of the program in sensitive areas risks public rejection. - Tunisia will continue to rely on Fund policy advice and technical assistance and appreciates financial and technical assistance from partners. - Authorities seek Board approval of completion of the Third EFF Review, and waiver of applicability and modification of performance criteria. *Source: cr18218* --- _Source: https://www.imf.org/-/media/files/publications/cr/2018/cr18218.pdf_