## cr18291 - 984.9309 million (about US$1.4 billion) ## Source details **Canonical URL:** [cr18291 - 984.9309 million (about US$1.4 billion)](https://www.imf.org/-/media/files/publications/cr/2018/cr18291.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2018/cr18291.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2018/cr18291.pdf.json) --- ### Executive summary and financing - The four-year EFF arrangement approved on May 20, 2016, amounted to SDR 2.045625 billion (about US$2.9 billion, or 375 percent of Tunisia’s quota at the time of approval of the arrangement). - Staff supports completion of the Fourth Review under the EFF. Completion would make available SDR 176.7824 million (about US$257 million), increasing total disbursements to SDR 984.9309 million (about US$1.5 billion). - Date of Executive Summary: September 17, 2018. ### Macroeconomic developments and outlook - Growth and labor market - GDP growth accelerated to 2.8 percent in the second quarter (annualized), up from 2.5 percent in the first quarter. - Growth drivers: exceptional harvest, tourism (arrivals at levels last seen in 2010), recovery in phosphate sector in Q2 (with new production disturbances in August). - Investment remains weak. - Unemployment: 15.4 percent of the total work force at end-June, with a much higher share among youth and women. - Inflation and real purchasing power - Inflation plateaued at an annualized 7.5 percent in August, down from 7.8 percent in June. - Core inflation persisted at 7.7 percent. - Loss of purchasing power widely felt despite partial shielding of most vulnerable households. - Monetary conditions and central bank operations - Cumulative policy rate hikes of 250 basis points since April 2017 (including 75 bps in March and an unprecedented 100 bps in June). - Broadening of the interest rate corridor from +/- 25 basis points to +/- 100 basis points in January. - Credit growth slowed to 13 percent in Q2; reserve money growth slowed to 15 percent in Q2. - Average lending rates as of August: 8.1 percent (investment credits for firms); 9.4 percent (consumer credit for households). - Money market rate remains negative in real terms by about 50 basis points. - Central bank refinancing reached TD 17 billion at end-July, declining to TD 16.4 billion in August. - External sector and reserves - Current account deficit declined to 11 percent of GDP (y-o-y) at mid-year versus 12 percent over same period in 2017. - Export volumes increased by 6.5 percent; import volumes increased by 1.1 percent. - Tourism receipts and remittances improved by 37 percent and 9 percent, respectively. - Real effective depreciation over 2016–17: 17 percent; dinar depreciation against the Euro since start of year: 7 percent. - International reserve coverage: 71 days of imports at end-August; reserves at 75 percent of the IMF’s reserve adequacy level. - Fiscal position and public debt - Fiscal deficit at end-July was lower than expected, reflecting the 2018 tax package and improved collection. - Tax revenue improved; non-tax revenue rose via higher profit transfers by central bank and energy companies. - Current expenditure contained; social spending increased in real terms (higher cash transfers to vulnerable). - Public debt projected to rise to about 72 percent of GDP in 2018, from 70.3 percent in 2017. - Note: "A 10 percent nominal depreciation increases the public debt-to-GDP ratio by about 7 points." - Financial markets - Stock market index grew by 34 percent since January, reaching a record high in mid-August. - Spreads on Tunisia’s international bonds increased slightly but remain below 2017 levels. ### Policy priorities and reform agenda supported under the EFF - Fiscal policy - Mobilize revenue and contain current expenditure to reduce Tunisia’s debt burden. - Increase public investment and social spending to support sustainable and inclusive growth. - Specific measures implemented in 2018: - Ambitious revenue package equivalent to 2.2 percent of GDP. - Fuel price adjustments in January, April, June, and September; planned for November. Fuel prices remained about 25 percent below market prices in early September. - Energy and gas price hikes in May, August and September; and planned for October and November. - Wage bill measures: no new wage increases in 2018; maintain nominal wage bill freeze in 2019; limit new civil service recruits to 3,000 in 2018 and 2019 (25 percent replacement ratio); identify about 6,600 civil servants for departure (5,000 via early retirement, 1,600 via voluntary separations). - Monetary and exchange rate policy - Further monetary tightening warranted to reduce inflation; policy rate increases recommended to avoid erosion of purchasing power and anchor inflation expectations. - Continued exchange rate flexibility to strengthen international reserves; competitive foreign exchange auctions introduced starting in August. - Observance of monthly FX intervention ceiling from March through July; a breach by US$18 million in August. - Social protection - Increase social transfers to vulnerable households and improve targeting. - Authorities broadened coverage of vulnerable families benefiting from social transfers (captured in new QPC on social spending). - Recommendation: complete database of vulnerable households quickly; any changes in subsidies for food staples should only be considered once adequate safety nets are in place. - Structural reforms and governance - Strengthen governance, business climate, fiscal institutions, and the financial sector. - Implement and maximize impact of one-stop shop for investors, negative list of investment authorizations, and the Start-up Act. - Appointment of members of the High Anti-Corruption Authority to strengthen enforcement. - Financial sector priorities: resolution of the Banque Franco Tunisienne (BFT); further strengthening of supervisory framework; progress on the AML/CFT regime. - Public bank restructuring laws passed; reform law for public pension fund adopted by Council of Ministers with commitment to seek parliamentary approval in October. - Completion of functional reviews of four key ministries. ### Program performance, conditionality, and implementation - Quantitative Performance Criteria and Structural Benchmarks - All end-June quantitative targets were met, including on primary fiscal balance, total current primary expenditure, net international reserves (NIR), and net domestic assets (NDA), with adjusters for delayed external financing. - Authorities met two out of three Indicative Targets, including on social spending; small slippage on monthly FX intervention ceiling in August. - Structural Benchmarks met: fuel price adjustments and competitive central bank FX auctions. The SB on resolution of the BFT needs reprogramming. - Prior Action implemented in September: price increases for fuel, electricity, and gas effective September 1; administrative order announcing additional increases for electricity and gas in October and November. - Program risks to implementation - Primary risks: slippages due to elevated socio-political tensions and deterioration in security. - External risks: persistence of high oil prices, rising trade tensions, worsening sentiment toward emerging markets, and tighter global financing conditions—these could affect external and fiscal accounts and jeopardize forthcoming sovereign bond issuance. - Outlook projections tied to policy - For 2018: growth on track to reach at least 2.6 percent; inflation contained to an average of 7.8 percent; external and fiscal deficits to improve for first time since 2014; international reserves to increase to 3.4 months of imports—conditional on continued implementation of energy subsidy reforms, strict public sector hiring/remuneration controls, progress with pension reform, further monetary tightening, and steadfast FX auction implementation. ### Macroeconomic outlook and key projections - Real GDP growth (selected years) - 2015: 1.2 percent - 2016: 1.1 percent - 2017: 2.0 percent - 2018: 2.6 percent (on track, driven by agriculture and tourism) - 2019: 3.1 percent - 2020: 3.4 percent - 2021: 3.6 percent - 2022: 4.0 percent - 2023: 4.0 percent - Consumer price index growth (period average, in percent) - 2015: 4.9 percent - 2016: 3.7 percent - 2017: 5.3 percent - 2018: 7.8 percent - 2019: 7.0 percent - 2020: 5.7 percent - 2021: 5.2 percent - 2022: 4.5 percent - 2023: 4.0 percent - Gross public debt (percent of GDP) - 2015: 55.4 - 2016: 62.3 - 2017: 70.3 - 2018: 72.0 - 2019: 71.8 - 2020: 70.8 - 2021: 69.8 - 2022: 68.0 - 2023: 66.7 - External debt (percent of GDP) - 2015: 62.7 - 2016: 66.8 - 2017: 82.6 - 2018: 89.4 - 2019: 91.7 - 2020: 93.0 - 2021: 91.6 - 2022: 90.2 - 2023: 88.7 - Current account balance (percent of GDP) - 2015: -8.9 - 2016: -8.8 - 2017: -10.2 - 2018: -9.7 - 2019: -8.5 - 2020: -7.8 - 2021: -7.0 - 2022: -6.5 - 2023: -6.0 - Gross official reserves (billions of US$) - 2015: 7.4 - 2016: 5.9 - 2017: 5.9 - 2018: 6.3 - 2019: 7.3 - 2020: 7.8 - 2021: 8.0 - 2022: 8.9 - 2023: 9.5 - Reserve coverage (months of next year's imports) - 2016: 4.8 - 2017: 3.6 - 2018: 3.3 - 2019: 3.4 - 2020: 3.8 - 2021: 4.0 - 2022: 4.0 - 2023: 4.3 - 2024: 4.6 - Narrative medium-term drivers - Growth reaching 4 percent over the medium term driven by recovery in mining, manufacturing and non-manufacturing industries, construction, and supported by increasing public and private investment and exports. - External reserves projected to increase to four months of imports by 2020, conditional on the dinar remaining classified as a floating currency. ### Risks to the program - Domestic risks - Continued socio-political tensions, especially in the run-up to the 2019 presidential and parliamentary elections. - Security threats. - Tunisia becoming the number one country of origin for illegal immigration into the EU, possibly fueling security pressures and brain drain. - External risks - High oil prices. - Rising trade tensions. - Tight global financial conditions. - Contagion from adverse market sentiment vis-à-vis other emerging market countries. - Program risk assessment: Risks to the program remain elevated. ### Monetary policy and exchange rate policy - Monetary policy - Monetary policy remains expansionary despite a slight deceleration in credit growth in July. - Real money market rate (MMR) remains negative. - CBT refinancing of commercial banks at a record level of TD 16.4 billion at end-August. - Staff supports data-driven strategy after cumulative 250 basis points increase since 2017 but notes further tightening likely required soon as underlying inflation accelerated in August and dinar depreciation continues. - Suggested measures include: consider an explicit medium-term inflation objective; re-instate quarterly monetary policy reports including medium-term projections (new June 2019 SB); raise cap on lending rates from 20 percent to 33 percent (draft law transmitted to Parliament); streamline CBT refinancing operations; tighten CBT collateral policy; consider regulation to reduce loan-to-deposit ratio by end-2018. - Exchange rate policy - Exchange rate flexibility key to strengthen current account and reserves. - Competitive FX auctions introduced starting in August; first two competitive FX auctions on August 1 and August 8 allocated FX to highest bids. - Transition to competitive auctions triggered accelerated depreciation of the dinar: from 3.14 dinars to the Euro on July 31 to 3.21 dinars on August 31. - To facilitate transition, CBT intervened through one bilateral FX sale for US$6 million. - Authorities confirmed intention to remove the October 2017 exchange restriction by end-2018. - Capital account liberalization to proceed only in line with progress on developing domestic financial institutions and upgrading prudential supervision. ### Ensuring adequate social protection - Progress and targets - Social spending will surpass the quarterly floors set at the Third Review. - Database of vulnerable households: expected to cover 550,000 registrations by end-2018 (December 2018 SB), of which 85 percent are already processed in earlier reporting. - By 2019, PNAFN will cover 285,000 households with a minimum transfer of TD 180 per month. - Policy recommendations - Continue increase in social spending despite budget pressures. - Accelerate issuance of the unique social identifier (USI). - Complete database of vulnerable households and use it to improve targeting before considering subsidy changes for food staples. - Pension reform: current measures insufficient; staff encouraged deeper parametric changes in subsequent stages. ### Financial sector policy - Indicators and developments - Non-performing loans represented 13.9 percent of total loans in the first quarter of 2018, down from 16.6 percent in 2015. - Banking sector capital adequacy: regulatory capital to risk-weighted assets around 11.8–11.9 percent in recent periods. - Resolution committee vote on the BFT was postponed; legally required by November (missed August 2018 SB, reprogrammed for November 2018). - Authorities issued a circular on new capital adequacy standards for market risk and plan a modern collateral registry. - AML/CFT enhancements and follow-up actions for FATF evaluation due in October 2018. - Policy recommendations - Improve access to credit for SMEs; adopt pending legislation on credit bureaus, collateral registry, and collective procedures. - Upgrade payments system to support de-cashing strategy. - Strengthen supervision and complete the FATF action plan, including organic law on money laundering. ### Fiscal policy, budget measures, and public debt - Fiscal anchor and targets - Agreed consolidation path for 2018–20 remains fiscal anchor; authorities committed to reducing overall deficit, excluding grants, to 2.7 percent of GDP by 2020. - 2018 overall deficit target (including grants): 5.2 percent of GDP in some tables; elsewhere 2018 deficit target stated as 5.5 percent of GDP (excluding grants) and 5.5 percent referenced in corrective measures—documents reflect these program targets and adjustments. - 2018 pressures and corrective measures - Additional spending pressures: 1.1 percent of GDP (components: higher energy subsidy bill 0.8 percent of GDP; energy price adjustments planned at Third Review not implemented 0.6 percent of GDP; higher oil prices 0.2 percent; food prices 0.2 percent; higher military wages 0.1 percent of GDP). - New adjustment measures totaling 1.1 percent of GDP include energy price adjustments planned at Fourth Review 0.5 percent of GDP; higher tax revenue 0.3 percent of GDP; lower one-off costs for departure packages 0.1 percent of GDP; lower interest payments 0.1 percent of GDP; lower CNRPS transfers 0.1 percent of GDP. - Supplementary budget law to be considered by Parliament in October to re-orient budget and accommodate higher energy subsidy bill (energy subsidy budget would increase to TD 3 billion from TD 1.5 billion in the budget law; another TD 1.5 billion need to be eliminated by energy price hikes and other measures). - Implemented: average 5.5 percent hike in fuel prices on September 1, to be followed by a similar increase in November. - 2019 budget contours - Target overall fiscal deficit, excluding grants, of 3.9 percent of GDP. - Priorities: revenue mobilization (including phasing out tax credits for civil servants), eliminate preferential tax regime for offshore companies (first for new firms in 2019, then all firms in 2021), increase VAT for liberal professions from 13 to 19 percent (December 2018 SB), reinforce collection and modernize tax administration, limit current expenditure to 24.2 percent of GDP, increase public investment to 5.4 percent of GDP, contain wage bill to 14.0 percent of GDP in 2019 and reduce to 12.4 percent of GDP by 2020. - Technical assistance for fiscal reforms: World Bank, Agence Française de Développement (AFD), European Union (EU), and the IMF. - Public debt dynamics - Gross public debt projected about 72 percent of GDP in 2018; 70.3 percent in 2017. - Debt effects of exchange rate: "A 10 percent nominal depreciation increases the public debt-to-GDP ratio by about 7 points." ### Program issues, conditionality, and monitoring - Conditionality and targets - Staff supports setting revised quantitative targets for end-September, end-December 2018, and end-March 2019, and new targets for end-June 2019. - Staff proposes reprogramming SB on BFT vote to November 2018 and new SBs on elimination of preferential tax regime for offshore companies in the 2019 budget law and publication of quarterly monetary policy reports by CBT from June 2019. - Quantitative Performance Criteria (QPCs), Indicative Targets (ITs), and Continuous Performance Criterion (CPC) described in MEFP Table 1 and related sections with measurement conventions and adjustment factors. - Reporting and data requirements - Detailed reporting schedule and responsible agencies specified for real sector, fiscal sector, external sector, monetary and financial sector, and other information with exact periodicity and delays. - Financing and external support - Program remains fully financed, but risks are extremely high. - Financing will be US$825 million lower in 2018 than programmed at the Third Review because of lower volumes sought on markets (-US$500 million), delays in donors’ budget support (-US$280 million), and lower grants (-US$45 million). - 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. ### Staff appraisal — key findings and recommendations - Recent macro dynamics - Recovery strengthened; growth accelerated in first half of 2018, supported by agriculture, tourism, and services. - Investment remains weak and export performance subdued in the mining sector. - Higher oil prices, other fiscal pressures, accommodating monetary policy, and structural challenges continue to fuel macroeconomic imbalances: high inflation, low international reserves, and high twin deficits. - Policy recommendations (selected) - Fiscal: press ahead with energy price hikes, refrain from granting new public sector wage increases over 2018-20, maintain strict hiring controls, seek swift approval of reform law for public pension fund, and proceed with pension decree for private fund. - Monetary: further monetary tightening before end-2018 warranted; increase cap on lending rates; unwind non-essential instruments including FX swaps; tighten CBT collateral policy; publish quarterly monetary policy reports. - Exchange rate and external: maintain market-determined exchange rate, continue competitive FX auctions, and strengthen reserves to provide buffer. - Social protection: continue increased social transfers; complete database of vulnerable households; proceed carefully with changes in food subsidies only when safety nets are in place. - Governance and financial sector: appoint members of High Anti-Corruption Authority, decide on BFT resolution, strengthen supervisory and regulatory frameworks, modernize payments system, and progress AML/CFT reforms. - Donor support and program risks - Continuation of strong donor support critical; staff concerned about potential donor fatigue. - Program risks remain exceptionally high: political stalemate over reforms and security incidents are key risks; external and fiscal balances exposed to high international oil prices and tightening global financial conditions. ### Annex I — Inflation across the spending distribution (selected findings) - Differential inflation outcomes - Bottom decile: 35 percent of goods and services are subsidized or have administered prices; about 40 percent of expenditure on food. - Top decile: about 80 percent of expenditure is on goods and services whose prices are free; less than 20 percent on food. - Headline and decile-specific inflation (2012–mid-2018) - Average inflation around 5 percent in 2012–15 and approached 8 percent in mid-2018. - June (mid-2018) headline inflation: 7.8 percent. - Top decile inflation in June: 8.9 percent. - Bottom decile inflation in June: 6.5 percent. - Difference in June: 2.4 percentage points. - July annual inflation dropped to 7.5 percent. - Bottom decile July: 6 percent. - Top decile July: 8.8 percent. - On average since early 2017, inflation for the top decile has been 1.2 percentage points higher than for the bottom decile. - Drivers of differential inflation - Top decile spends 18 percent on car purchases/maintenance and gasoline; bottom decile spends 1 percent on these items. Prices in this product group rose by more than 12 percent in H1 2018. - Bottom decile spends 13 percent on subsidized food; top decile spends 2 percent. Prices of subsidized foods hardly moved in H1 2018. - Energy mix differences: bottom decile energy mainly electricity and LPG (prices relatively stable); top decile fuels 66 percent of energy consumption; fuel prices increased by 11 percent. - Dinar depreciation affected better-off households more through imported consumer goods and core inflation. - Policy implications - Targeted subsidies and differentiated energy reforms limited inflation impact on the poor. - Exchange-rate policy supporting competitiveness has short-run inflationary costs borne more by better-off households. ### CBT balance sheet evolution, monetary operations, and recommendations - Balance sheet drivers and changes - Since 2011 NFA accumulation reversed; after 2016 accelerated NFA losses. - Credit to the banking sector, excluding FX swaps, increased from TD 4 billion in December 2015 to TD 10 billion in June 2018. - Net credit to government rose from TD 0.7 billion in December 2015 to over TD 6 billion in June 2018. - Share of NFA in CBT total assets contracted to 25 percent. - Bank reserves in FX increased from TD 0.9 billion in January 2011 to TD 2.2 billion in March 2018. - Effects on inflation and exchange rate - Balance sheet expansion likely fueled inflation despite policy rate increases. - TD 7 billion cap on main refinancing operations introduced in 2017, yet aggregate liquidity injections grew and accelerated. - Injections through FX swaps, structural OMOs, and overnight lending increased. - Policy recommendations - Reduce current account and fiscal deficits to alleviate pressures. - Gradually unwind FX swaps and structural OMOs; use ELA for illiquid/insolvent banks. - Increase share of government bonds accepted as collateral and apply haircuts on government bonds used as collateral. - Strengthen monetary transmission by increasing cap on lending rates and updating it more frequently. - Clarify monetary policy anchor and consider an explicit medium-term inflation objective. - Publish regular monetary policy reports and improve communication. ### Key statistics and program figures (exact values preserved) - EFF arrangement: SDR 2.045625 billion (about US$2.9 billion, or 375 percent of Tunisia’s quota at approval). - Disbursement on completion of Fourth Review: SDR 176.7824 million (about US$257 million). - Total disbursements after Fourth Review completion: SDR 984.9309 million (about US$1.5 billion). - Growth: 2.8 percent (Q2 annualized); 2.5 percent (Q1 annualized). - Inflation: 7.5 percent (August annualized); 7.8 percent (June); core inflation 7.7 percent. - Unemployment: 15.4 percent (end-June). - Money and credit growth: credit 13 percent (Q2); reserve money 15 percent (Q2). - Lending rates (August): 8.1 percent (investment credits for firms); 9.4 percent (consumer credit for households). - Central bank refinancing: TD 17 billion (end-July); TD 16.4 billion (August). - Public debt: projected about 72 percent of GDP in 2018; 70.3 percent in 2017. - Current account deficit: 11 percent of GDP (mid-year y-o-y) versus 12 percent in same period 2017. - Export volume growth: 6.5 percent; import volume growth: 1.1 percent. - Tourism receipts and remittances: +37 percent and +9 percent, respectively. - Real effective depreciation: 17 percent (2016–17); dinar depreciation vs Euro since start of year: 7 percent. - International reserve coverage: 71 days of imports (end-August); reserves at 75 percent of IMF reserve adequacy level. - Stock market index performance: +34 percent since January. - Fuel prices remained about 25 percent below market prices in early September. - Revenue package size: 2.2 percent of GDP. - Civil service recruitment limit: 3,000 in 2018 and 2019 (25 percent replacement ratio). - Identified civil servants for departure: about 6,600 (5,000 early retirement; 1,600 voluntary separations). - FX intervention ceiling breach in August: US$18 million. - Note on depreciation effect: "A 10 percent nominal depreciation increases the public debt-to-GDP ratio by about 7 points." ### Staff support and program actions - Staff supports the authorities’ request for completion of the Fourth EFF Review. - Staff supports: (1) setting revised quantitative targets for end-September, end-December 2018, and end-March 2019, as well as new targets for end-June 2019; and (2) making all funds available for budget support. - Program remains subject to close monitoring through quarterly reviews and delivery of structural benchmarks (including reprogramming where necessary). *International Monetary Fund, September 17, 2018 (Selected content from CR18291).* ### 984.9309 million (about US$1.4 billion). The four-year EFF arrangement in the amount of ### cr18291 - 984.9309 million (about US$1.4 billion) ### Executive summary and financing - The four-year EFF arrangement approved on May 20, 2016, amounted to SDR 2.045625 billion (about US$2.9 billion, or 375 percent of Tunisia’s quota at the time of approval of the arrangement). - Staff supports completion of the Fourth Review under the EFF. Completion would make available SDR 176.7824 million (about US$257 million), increasing total disbursements to SDR 984.9309 million (about US$1.5 billion). - Date of Executive Summary: September 17, 2018. ### Macroeconomic developments and outlook - Growth and labor market - GDP growth accelerated to 2.8 percent in the second quarter (annualized), up from 2.5 percent in the first quarter. - Growth drivers: exceptional harvest, tourism (arrivals at levels last seen in 2010), recovery in phosphate sector in Q2 (with new production disturbances in August). - Investment remains weak. - Unemployment: 15.4 percent of the total work force at end-June, with a much higher share among youth and women. - Inflation and real purchasing power - Inflation plateaued at an annualized 7.5 percent in August, down from 7.8 percent in June. - Core inflation persisted at 7.7 percent. - Loss of purchasing power widely felt despite partial shielding of most vulnerable households. - Monetary conditions and central bank operations - Cumulative policy rate hikes of 250 basis points since April 2017 (including 75 bps in March and an unprecedented 100 bps in June). - Broadening of the interest rate corridor from +/- 25 basis points to +/- 100 basis points in January. - Money growth: credit growth slowed to 13 percent in Q2; reserve money growth slowed to 15 percent in Q2. - Average lending rates as of August: firms paid 8.1 percent for investment credits; households paid 9.4 percent for consumer credit. - Money market rate remains negative in real terms by about 50 basis points. - Central bank refinancing reached TD 17 billion at end-July, declining to TD 16.4 billion in August. - External sector and reserves - Current account deficit declined to 11 percent of GDP (y-o-y) at mid-year versus 12 percent over same period in 2017. - Export volumes increased by 6.5 percent; import volumes increased by 1.1 percent. - Tourism receipts and remittances improved by 37 percent and 9 percent, respectively. - Real effective depreciation over 2016–17: 17 percent; dinar depreciation against the Euro since start of year: 7 percent. - International reserve coverage: 71 days of imports at end-August; reserves at 75 percent of the IMF’s reserve adequacy level. - Fiscal position and public debt - Fiscal deficit at end-July was lower than expected, reflecting the 2018 tax package and improved collection. - Tax revenue improved; non-tax revenue rose via higher profit transfers by central bank and energy companies. - Current expenditure contained; social spending increased in real terms (higher cash transfers to vulnerable). - Public debt projected to rise to about 72 percent of GDP in 2018, from 70.3 percent in 2017. - Note: "A 10 percent nominal depreciation increases the public debt-to-GDP ratio by about 7 points." - Financial markets - Stock market index grew by 34 percent since January, reaching a record high in mid-August. - Spreads on Tunisia’s international bonds increased slightly but remain below 2017 levels. ### Policy priorities and reform agenda supported under the EFF - Fiscal policy - Mobilize revenue and contain current expenditure to reduce Tunisia’s debt burden. - Increase public investment and social spending to support sustainable and inclusive growth. - Specific measures implemented in 2018: - Ambitious revenue package equivalent to 2.2 percent of GDP. - Fuel price adjustments in January, April, June, and September; planned for November. Fuel prices remained about 25 percent below market prices in early September. - Energy and gas price hikes in May, August and September; and planned for October and November. - Wage bill measures: no new wage increases in 2018; maintain nominal wage bill freeze in 2019; limit new civil service recruits to 3,000 in 2018 and 2019 (25 percent replacement ratio); identify about 6,600 civil servants for departure (5,000 via early retirement, 1,600 via voluntary separations). - Monetary and exchange rate policy - Further monetary tightening warranted to reduce inflation; policy rate increases recommended to avoid erosion of purchasing power and anchor inflation expectations. - Continued exchange rate flexibility to strengthen international reserves; competitive foreign exchange auctions introduced starting in August. - Observance of monthly FX intervention ceiling from March through July; a breach by US$18 million in August. - Social protection - Increase social transfers to vulnerable households and improve targeting. - Authorities broadened coverage of vulnerable families benefiting from social transfers (captured in new QPC on social spending). - Recommendation: complete database of vulnerable households quickly; any changes in subsidies for food staples should only be considered once adequate safety nets are in place. - Structural reforms and governance - Strengthen governance, business climate, fiscal institutions, and the financial sector. - Implement and maximize impact of one-stop shop for investors, negative list of investment authorizations, and the Start-up Act. - Appointment of members of the High Anti-Corruption Authority to strengthen enforcement. - Financial sector priorities: resolution of the Banque Franco Tunisienne (BFT); further strengthening of supervisory framework; progress on the AML/CFT regime. - Public bank restructuring laws passed; reform law for public pension fund adopted by Council of Ministers with commitment to seek parliamentary approval in October. - Completion of functional reviews of four key ministries. ### Program performance, conditionality, and implementation - Quantitative Performance Criteria and Structural Benchmarks - All end-June quantitative targets were met, including on primary fiscal balance, total current primary expenditure, net international reserves (NIR), and net domestic assets (NDA), with adjusters for delayed external financing. - Authorities met two out of three Indicative Targets, including on social spending; small slippage on monthly FX intervention ceiling in August. - Structural Benchmarks met: fuel price adjustments and competitive central bank FX auctions. The SB on resolution of the BFT needs reprogramming. - Prior Action implemented in September: price increases for fuel, electricity, and gas effective September 1; administrative order announcing additional increases for electricity and gas in October and November. - Program risks to implementation - Primary risks: slippages due to elevated socio-political tensions and deterioration in security. - External risks: persistence of high oil prices, rising trade tensions, worsening sentiment toward emerging markets, and tighter global financing conditions—these could affect external and fiscal accounts and jeopardize forthcoming sovereign bond issuance. - Outlook projections tied to policy - For 2018: growth on track to reach at least 2.6 percent; inflation contained to an average of 7.8 percent; external and fiscal deficits to improve for first time since 2014; international reserves to increase to 3.4 months of imports—conditional on continued implementation of energy subsidy reforms, strict public sector hiring/remuneration controls, progress with pension reform, further monetary tightening, and steadfast FX auction implementation. ### Key statistics and program figures (exact values preserved) - EFF arrangement: SDR 2.045625 billion (about US$2.9 billion, or 375 percent of Tunisia’s quota at approval). - Disbursement on completion of Fourth Review: SDR 176.7824 million (about US$257 million). - Total disbursements after Fourth Review completion: SDR 984.9309 million (about US$1.5 billion). - Growth: 2.8 percent (Q2 annualized); 2.5 percent (Q1 annualized). - Inflation: 7.5 percent (August annualized); 7.8 percent (June); core inflation 7.7 percent. - Unemployment: 15.4 percent (end-June). - Money and credit growth: credit 13 percent (Q2); reserve money 15 percent (Q2). - Lending rates (August): 8.1 percent (investment credits for firms); 9.4 percent (consumer credit for households). - Central bank refinancing: TD 17 billion (end-July); TD 16.4 billion (August). - Public debt: projected about 72 percent of GDP in 2018; 70.3 percent in 2017. - Current account deficit: 11 percent of GDP (mid-year y-o-y) versus 12 percent in same period 2017. - Export volume growth: 6.5 percent; import volume growth: 1.1 percent. - Tourism receipts and remittances: +37 percent and +9 percent, respectively. - Real effective depreciation: 17 percent (2016–17); dinar depreciation vs Euro since start of year: 7 percent. - International reserve coverage: 71 days of imports (end-August); reserves at 75 percent of IMF reserve adequacy level. - Stock market index performance: +34 percent since January. - Fuel prices remained about 25 percent below market prices in early September. - Revenue package size: 2.2 percent of GDP. - Civil service recruitment limit: 3,000 in 2018 and 2019 (25 percent replacement ratio). - Identified civil servants for departure: about 6,600 (5,000 early retirement; 1,600 voluntary separations). - FX intervention ceiling breach in August: US$18 million. - Note on depreciation effect: "A 10 percent nominal depreciation increases the public debt-to-GDP ratio by about 7 points." *Source: International Monetary Fund, September 17, 2018.* ### 4. An improved macroeconomic outlook hinges on continued policy implementation. ### 4. An improved macroeconomic outlook hinges on continued policy implementation. ### Macroeconomic outlook and key projections - Real GDP growth: - 2015: 1.2 percent - 2016: 1.1 percent - 2017: 2.0 percent - 2018: 2.6 percent (on track, driven by agriculture and tourism) - 2019: 3.1 percent - 2020: 3.4 percent - 2021: 3.6 percent - 2022: 4.0 percent - 2023: 4.0 percent - Consumer price index growth (period average, in percent): - 2015: 4.9 percent - 2016: 3.7 percent - 2017: 5.3 percent - 2018: 7.8 percent (average inflation contained at 7.8 percent in 2018 with tightened monetary policy) - 2019: 7.0 percent - 2020: 5.7 percent - 2021: 5.2 percent - 2022: 4.5 percent - 2023: 4.0 percent - Gross public debt (percent of GDP): - 2015: 55.4 - 2016: 62.3 - 2017: 70.3 - 2018: 72.0 (peaks in 2018) - 2019: 71.8 - 2020: 70.8 - 2021: 69.8 - 2022: 68.0 - 2023: 66.7 - External debt (percent of GDP): - 2015: 62.7 - 2016: 66.8 - 2017: 82.6 - 2018: 89.4 - 2019: 91.7 - 2020: 93.0 (peaks in 2020) - 2021: 91.6 - 2022: 90.2 - 2023: 88.7 - Current account balance (percent of GDP): - 2015: -8.9 - 2016: -8.8 - 2017: -10.2 - 2018: -9.7 - 2019: -8.5 - 2020: -7.8 - 2021: -7.0 - 2022: -6.5 - 2023: -6.0 - Gross official reserves (billions of US$): - 2015: 7.4 - 2016: 5.9 - 2017: 5.9 - 2018: 6.3 - 2019: 7.3 - 2020: 7.8 - 2021: 8.0 - 2022: 8.9 - 2023: 9.5 - Gross official reserves (months of next year's imports of goods): - 2016: 4.8 - 2017: 3.6 - 2018: 3.3 - 2019: 3.4 - 2020: 3.8 - 2021: 4.0 - 2022: 4.0 - 2023: 4.3 - 2024: 4.6 (projection line shows an increase to four months of imports by 2020 in narrative; staff note: international reserves would increase to four months of imports by 2020) - Narrative projections and drivers: - Growth reaching 4 percent over the medium term driven by recovery in mining, manufacturing and non-manufacturing industries, construction, and supported by increasing public and private investment and exports. - Public debt peak at 72 percent of GDP in 2018 (about 2 percentage points higher than projected in the Third Review due to higher exchange rate flexibility). - External debt peak at 93 percent of GDP in 2020, before starting to decline. - International reserves to increase to four months of imports by 2020, or about 110 percent of the IMF's reserve adequacy metric provided that the dinar remains classified as a floating currency. ### Risks to the program - Domestic risks: - Continued socio-political tensions, especially in the run-up to the 2019 presidential and parliamentary elections. - Security threats. - Tunisia becoming the number one country of origin for illegal immigration into the EU, possibly fueling security pressures and brain drain. - External risks: - High oil prices. - Rising trade tensions. - Tight global financial conditions. - Contagion from adverse market sentiment vis-à-vis other emerging market countries. - Program risk assessment: Risks to the program remain elevated (RAM, Annex III). ### Three-pillar policy framework supported by the EFF - Framework pillars: - Absorb the oil price shock and higher uncertainty (Section A). - Ensure adequate social protection (Section B). - Foster private sector-led, job-creating growth (Section C). - Emphasis: Continued discipline in policy and reform implementation to build buffers before the 2019 election year. ### A. Reducing macroeconomic imbalances — Fiscal policy - Fiscal anchor: - Agreed consolidation path for 2018–20 remains the fiscal anchor. - Authorities committed to reducing the overall deficit, excluding grants, to 2.7 percent of GDP by 2020. - An adjustment of about 1 percent of GDP in 2018 remains possible with strong revenue performance and discipline on current expenditure. - Mounting 2018 budget pressures: - Additional spending pressures: 1.1 percent of GDP (Text Table 3 summary). - Components of additional pressures: - Higher energy subsidy bill: 0.8 percent of GDP. - Energy price adjustments planned at Third Review not implemented: 0.6 percent of GDP. - Higher international oil prices: 0.2 percent of GDP. - Higher domestic and international food prices: 0.2 percent of GDP. - Higher military wages: 0.1 percent of GDP (TD 70 million = 0.1 percent of GDP authorized increase for the Ministry of Defense). - New adjustment measures totaling 1.1 percent of GDP include: - Energy price adjustments planned at Fourth Review: 0.5 percent of GDP. - Higher tax revenue: 0.3 percent of GDP. - Lower one-off costs for departure packages: 0.1 percent of GDP. - Lower interest payments: 0.1 percent of GDP. - Lower CNRPS transfers thanks to stronger arrears collection: 0.1 percent of GDP. - Overall deficit target (including grants): 5.2 percent of GDP. - Feasibility of 2018 deficit target depends on implementing measures and using fiscal space from higher-than-expected personal income tax collection and lower-than-expected volunteer separation package costs. - Immediate and planned fiscal measures: - Supplementary budget law to be considered by Parliament in October to re-orient budget and accommodate higher energy subsidy bill (energy subsidy budget would increase to TD 3 billion from TD 1.5 billion in the budget law; another TD 1.5 billion need to be eliminated by energy price hikes and other measures). - Energy price adjustments implemented: - Average 5.5 percent hike in fuel prices on September 1, to be followed by a similar increase in November (replacing originally agreed monthly increases). - More than two-thirds of electricity and gas tariff adjustments committed under the Third Review implemented in early September; administrative order stipulates further hikes in October and November. - Measures to contain the energy subsidy bill in 2018 include accelerated arrears clearance to energy companies and product differentiation strategies; target that energy subsidy bill does not exceed TD 3 billion even with higher-than-expected international oil prices through end-2018 (an average US$72 per barrel compared to US$70 at the time of the Third Review). - Protect vulnerable families through adequate social transfers and focus price hikes on corporate customers and upper-income households. - Wage bill containment: - Authorities to abstain from any new wage increases in 2018 and adhere to agreed hiring limits. - Hiring limits: replacement ratio of no more than 25 percent; no replacement for volunteer departures. - Absent further measures, 2020 wage bill-to-GDP ratio would increase to about 12.9 percent (versus 15.5 percent of GDP in 2017 after accounting for wage increases administered through tax credits); initially envisaged 12.4 percent by 2020. - Pension fund reform: - Delays in reform of CNRPS and CNSS not expected to create additional pressures for 2018. - Reform of the private pension fund to be launched immediately after approval of the reform law for the public fund expected in October. - 2019 budget contours: - Target overall fiscal deficit, excluding grants, of 3.9 percent of GDP. - Priorities include: - Revenue mobilization with limited scope for further measures; phasing out of tax credits for civil servants expected to increase personal income tax revenues. - Eliminate preferential tax regime for offshore companies: first for new firms in 2019 and then for all firms in 2021 (new December 2018 SB). - Increase VAT rate for services of liberal professions from 13 to 19 percent (December 2018 SB). - Reinforce collection efforts and modernize tax administration; integration of all tax administration functions within one umbrella structure. - Expenditure reorientation: limit current expenditure to some 24.2 percent of GDP, increase public investment to 5.4 percent of GDP, and maintain higher social spending. - Contain wage bill to 14.0 percent of GDP in 2019 and reduce to 12.4 percent of GDP by 2020. - Further reduce energy subsidies by periodic energy price adjustments in 2019 and efficiency measures targeting public enterprises distributing fuel, electricity, and gas; staff recommends moving to automatic, frequent price adjustments based on a transparent formula. - Urgently complete the first stage pension reform and move to the next stage quickly; advance work on better targeting system for social spending; strengthen oversight of SOEs and treasury cash management. - Technical assistance for fiscal reforms: World Bank, Agence Française de Développement (AFD), European Union (EU), and the IMF. ### Monetary policy - Background: - Monetary policy remains expansionary despite a slight deceleration in credit growth in July. - Real money market rate (MMR) remains negative. - CBT refinancing of commercial banks at a record level of TD 16.4 billion at end-August. - Slow transmission of policy tightening with delays of about 12–18 months due to weak interest rate and credit channels. - Strong and increasing demand for cash (seasonal factors and informal sector activity) weakening reserve money stability and the money multiplier. - Policy discussions and recommended measures: - Continued monetary tightening essential to reduce inflation (MEFP ¶17). - CBT committed to increasing the policy rate to bring real interest rates firmly into positive territory; pace and timing dependent on inflation outcomes and forecasts. - Staff supports data-driven strategy after cumulative 250 basis points increase since 2017 but notes further tightening likely required soon as underlying inflation accelerated in August and dinar depreciation continues. - Staff suggestion: CBT consider setting an explicit medium-term inflation objective (Annex IV) and re-instate quarterly monetary policy reports including medium-term projections of inflation and growth (new June 2019 SB). - Strengthening monetary transmission: - Staff urged raising the cap on lending rates for commercial banks from 20 percent to 33 percent and adjusting it more frequently than semi-annually; draft law has been transmitted to Parliament and faces opposition (December 2018 SB). - Streamline CBT refinancing operations to reduce FX demand (structural OMOs and FX swaps); authorities agree in principle and favor gradual approach given tight liquidity. - Protect central bank balance sheet by tightening CBT collateral policy in line with IMF MCM TA recommendations from October 2013. - Consider a new regulation by end-2018 to reduce commercial banks' loan-to-deposit ratio. - Continue work on upgrading CBT communications framework (Annex V). - Safeguards assessment: - Outstanding 2016 safeguards recommendations include restructuring internal audit to align with international standards and developing a risk management function through a risk committee and formal policy. Staff to continue engagement. ### Exchange rate policy - Background and rationale: - Exchange rate flexibility key to strengthen current account and reserves (MEFP ¶¶19-20). - Depreciation of the real effective exchange rate over 2016–17 contributed to current account improvement and reserve build-up in 2018. - Enhanced exchange rate flexibility needed to facilitate further real exchange rate adjustment given high inflation differential relative to trading partners over the next 2-3 years and to strengthen reserve coverage. - New Nawara gas field operations have potential to reduce the energy import bill by up to 1 percent of GDP from 2019. - Long-delayed Eurobond issuance (targeting up to US$ 1billion) expected for the fourth quarter of 2018. - Exchange rate restriction imposed in October 2017 (ban on trade credit for non-essential imports) had only a minor role in discouraging imports according to authorities. - Recent developments: - CBT’s FX auctions became more competitive in August with the first two competitive FX auctions on August 1 and August 8 allocating FX to highest bids (met August 2018 SB). - Transition to competitive auctions triggered accelerated depreciation of the dinar: from 3.14 dinars to the Euro on July 31 to 3.21 dinars on August 31. - Banks reduced net open FX positions in response to the new practice. - To facilitate transition and cover a maturing energy import bill during the transitory phase, CBT intervened through one bilateral FX sale for US$6 million. *Sources: Tunisian authorities; and IMF staff estimates and projections.* ### 18. Competitive FX auctions are expected to achieve more exchange rate flexibility (MEFP ### 18. Competitive FX auctions are expected to achieve more exchange rate flexibility (MEFP ¶¶19-20) ### Exchange rate policy and FX auctions - Authorities and staff agreed maintaining the new auction practices in the months ahead is essential; effective communication on the new mechanism and past auction results to market-making commercial banks would reduce policy uncertainty. - The Central Bank of Tunisia (CBT) expressed concerns about the ceiling on central bank FX interventions set under the program and argued in favor of more flexibility, especially in this critical transition phase. - Staff emphasized that with reserve buffers still low, there is currently no room to relax the intervention budget; suggested reassessing the issue as the CBT accumulates more experience with competitive auctions. - Authorities and staff agreed these auctions will be critical for: - achieving more flexibility of the exchange rate; - improving the current account; - strengthening Tunisia’s international reserves to at least 3.4 months of imports by end-2018. - The October 2017 exchange restriction will be eliminated: authorities confirmed intention to remove the exchange restriction introduced last October by end-2018 (MEFP ¶20). - Capital account liberalization will proceed only in line with progress on developing domestic financial institutions and upgrading prudential supervision (MEFP ¶24). ### Ensuring adequate social protection Background and progress - Social spending will surpass the quarterly floors set at the Third Review (MEFP Table 1) for the new QPC, as authorities started to replenish Tunisia’s main social programs adopted in January and June 2018: - national assistance program to vulnerable families; - free and subsidized health care support programs for vulnerable and low-income families. - Supported by the World Bank, work continued toward better targeting social services through cash transfers, subsidized health services, and reform of energy and food subsidies (MEFP ¶21). - Database of vulnerable households: expected to cover 550,000 registrations by end-2018 (December 2018 SB), of which 85 percent are already processed; and to evaluate effective targeting mechanisms. - Pension reform remains stalled in Parliament; authorities did not foresee any additional budgetary impact thanks to higher-than-expected arrears clearance by the two pension funds from their respective employer bases. - A direct pass-through of contributions and arrears clearance has continued to improve the liquidity situation of the medical insurance fund (Caisse Nationale d'Assurance-Maladie, CNAM), eliminating the short-term need for further government support. Policy discussions and recommendations - Further progress remains crucial to reduce hardship among the most vulnerable (MEFP ¶21). - Authorities and staff strongly agreed to continue the increase in social spending started in 2018 despite significant budget pressures. - Consensus on urgency of better targeting to enhance efficiency of social policies; realistically start for the 2020 budget exercise. - Staff encouraged authorities to accelerate issuance of the unique social identifier (USI). - On pensions, authorities and staff agreed currently envisaged reforms are insufficient to close gap between benefit levels and resources; staff encouraged continued work with donors on second-stage reforms involving deeper parametric changes to ensure fiscal sustainability. - Authorities explained discussions with social partners on next steps with pension reform could start after adoption of pension law for the CNRPS and the decree for the CNSS, now expected before the end of 2018. ### Fostering inclusive growth, fairness, and better governance — Business climate and governance Background - Agenda unchanged significantly since the Third Review. Reforms noted: - one-stop shop for investors; - negative list of investment authorizations; - Start-up Act. - Opportunities exist in areas such as the tax regime and access to credit to improve Tunisia’s attractiveness as a business location. - Operational start of the High Anti-Corruption Authority affected by delays in Parliament consideration of the shortlist of its potential Board members (December 2018 SB). Policy discussions and recommendations - Progress on business climate and governance remains critical for inclusive growth (MEFP ¶¶22-23). - Staff urged authorities to build on momentum and move ahead with business climate reforms and energy sector restructuring, supported by the World Bank and others. - On governance, discussed enhancements such as: - more resources and stronger investigative powers for the High Authority relative to the current interim institution of about 70 staff; - better donor coordination for governance-related projects targeting customs, the health sector, municipalities, and security services; - stronger enforcement of existing laws and regulations, including the asset declaration system. - Both sides reconfirmed importance of establishing the Board of the High Authority by end-2018. ### Financial sector policy Background and indicators - Banking sector remains stable and financial sector reforms advanced. - Non-performing loans represented 13.9 percent of total loans in the first quarter of 2018, down from the peak of 16.6 percent in 2015. - NPL ratio expected to fall further as public banks progress with problem loan workouts, supported by recently adopted legislation on write-off and resolution and better internal processes. - Vote by the resolution committee on the BFT had to be postponed; legally required by November (missed August 2018 SB, reset programmed for November 2018). - Authorities issued a circular on new capital adequacy standards to account for market risk and advanced plans for a modern collateral registry to improve access to credit. - AML/CFT achievements include reinforcement of the Tunisian Financial Analysis Commission and adoption of legislative texts to enhance transparency and accountability. Authorities’ follow-up report requests re-ratings on 17 recommendations, including risk management, due for evaluation in October 2018. Policy discussions and recommendations - Urgent priorities include improving access to credit and tackling AML/CFT issues (MEFP ¶24). - Staff encouraged advancing plans to improve access to credit, especially for SMEs with weak capacity and elevated risk premia. - Importance of adopting pending legislation highlighted: credit bureaus, a modern collateral registry, and collective procedures. - Upgrading the payments system crucial to enhance efficiency and help de-cashing strategy. - New measures to improve AML/CFT framework should aim at completing the action plan set out by FATF, due for evaluation in October; adoption by Parliament of the organic law on money laundering is particularly important. - Authorities and staff agreed on need to further strengthen financial sector supervision and regulation to ensure reliable and timely information on health of financial institutions amid monetary tightening and more exchange rate flexibility. ### Program issues and modalities - Strong and focused conditionality continues to guide program implementation; quarterly review framework remains adequate. - Quantitative targets (MEFP Table 1): staff proposes to - (1) set new targets for end-June 2019 and - (2) revise the QPCs for end-September, end-December 2018, and end-March 2019: - (i) the floor on the primary balance would be slightly tightened for 2018 and 2019; - (ii) the ceilings on primary expenditures would be increased to accommodate higher energy subsidies; - (iii) the end-September floor on social spending would be slightly reduced due to a reprogramming of the seasonal pattern of these expenditures; - (iv) the ceiling on NDA will be increased due to lower-than-programmed money velocity and multipliers; - (v) the floor on NIR will be reduced to reflect the large shortfall in expected FX flows. - Structural benchmarks (MEFP Table 2): staff proposes to reprogram the SB on the BFT vote to November 2018, and to set two new SBs on: - (1) the 2019 budget law eliminating the preferential tax regime for off-shore companies; - (2) the publication of quarterly monetary policy reports by the CBT from June 2019 at the latest. - Budget support: as before, all funds would be made available for budget support. ### Financing and external support - Program remains fully financed, but risks are extremely high. - Financing assurances from donors and the Eurobond issuance will cover financing needs for 2018–20 (Text Table 4). - Financing will be US$825 million lower in 2018 than programmed at the Third Review, mainly because of: - lower volumes sought on markets (-US$500 million); - delays in donors’ budget support (-US$280 million); - lower grants (-US$45 million). - Outlook over the medium term is clouded as some donors run into headroom issues (including the World Bank and African Development Bank) or ponder lower engagement levels for other reasons. - Staff will continue to work closely with Tunisia’s other external partners to ensure adequate financial support throughout the critical adjustment phase. - Tunisia maintains capacity to repay the IMF: - 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’s capacity to repay would remain adequate. ### Staff appraisal — key findings and recommendations - Recent macro dynamics: - Recovery strengthened further; growth accelerated in first half of 2018, supported by agriculture, tourism, and services. - Investment remains weak and export performance subdued in the mining sector. - Higher oil prices, other fiscal pressures, accommodating monetary policy, and structural challenges continue to fuel macroeconomic imbalances: high inflation, low international reserves, and high twin deficits. - Risks: persistently high socio-political tensions ahead of 2019 elections, potential security incidents, and skeptical investor sentiment vis-à-vis emerging markets. - Fiscal policy: - Fiscal consolidation for 2018 remains on track after a strong first semester, but risks to budget targets remain elevated. - Staff encourages authorities to: - (1) press ahead with measures to recover set-backs from delays in energy price hikes agreed at the Third Review; - (2) refrain from granting any new public sector wage increases over 2018-20 and continue strict control on hiring; - (3) seek swift approval of reform law for public pension fund and proceed quickly with decree for private pension fund. - Priorities for draft 2019 budget law: maintain strong revenues; restrain current spending through continued energy subsidy reforms and strict wage bill management, including through additional measures; higher social spending; increase investment as share of GDP. - Maintaining adequate social safety nets paramount for social cohesion and smooth reform implementation. - Monetary policy and financial stability: - Further monetary tightening before end-2018 warranted to reduce inflation; policy rate remains below inflation. - Additional increases in the policy rate warranted before end-2018 to avoid continuous erosion of purchasing power, especially with increased exchange rate flexibility. - Critical to swiftly increase the cap on lending rates and update it more frequently. - Unwinding non-essential instruments (including FX swaps) would help streamline refinancing operations. - CBT should further tighten its collateral policy in line with IMF MCM previous TA recommendations to protect its balance sheet. - Re-launching quarterly monetary policy reports with forward-looking guidance on inflation projections important to better anchor expectations. - External balances: - Reducing external imbalances hinges on a market-determined exchange rate; current account deficit remains high and reserves should increase urgently to provide a buffer amid high uncertainty and rising global risks. - Staff welcomes CBT’s more competitive FX auctions; steadfast implementation and effective communication over coming months would reduce commercial banks’ doubts about central bank’s exchange rate strategy. - Sustained tightening of macroeconomic policies will help mitigate impact of exchange rate depreciation on debt ratios by reducing financing needs. - Social protection and reforms: - Continuation of increased social transfers supported; swift completion of database of vulnerable households critical for better targeting. - Staff calls on authorities to proceed carefully with any changes in subsidies for basic food staples and only in line with progress on adequate safety nets. - Swift adoption of legislation necessary for reforms of public and private pension funds critical to maintain financial viability. - Governance and financial sector reforms: - Appointment of members of High Anti-Corruption Authority before end-2018 and adequate budget for 2019 would signal addressing corruption concerns. - Important next steps: resolution committee vote on BFT restructuring; further strengthen supervisory and regulatory frameworks to monitor risks amid monetary tightening and exchange rate flexibility. - Staff encourages modernization of payments system; improve financial inclusion; and progress on the AML/CFT regime. - Donor support and program risks: - Continuation of strong donor support critical; sizeable fiscal financing from external partners—including grants or highly concessional loans—is indispensable. - Staff concerned about potential donor fatigue as commitments for 2019 and beyond remain below past levels. - Program risks remain exceptionally high: political stalemate over reforms and security incidents are key risks; external and fiscal balances exposed to high international oil prices, rising trade tensions, tightening global financial conditions, and adverse shifts in investor sentiment. - Authorities’ continued commitment to the program, close monitoring through quarterly reviews, and maintenance of adequate donor engagement essential to mitigate these risks. *International Monetary Fund — Selected content from CR18291 (Chapter 18).* ### 38. Staff supports the authorities’ request for the completion of the Fourth EFF Review. It ### cr18291 - 38. Staff supports the authorities’ request for the completion of the Fourth EFF Review. It ### IMF staff support and program actions - Staff supports the authorities’ request for the completion of the Fourth EFF Review. - Staff supports: - (1) setting revised quantitative targets for end-September, end-December 2018, and end-March 2019, as well as new targets for end-June 2019; and - (2) making all funds available for budget support. ### Recent macroeconomic developments (high-level findings from figures) - A strengthening recovery unfolds on the back of agriculture, manufacturing, and tourism. - Fiscal performance is on track toward a reduced deficit in 2018, the first consolidation since 2014. - The current account is expected to improve slightly in 2018, despite higher international oil prices. - 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. ### Fiscal developments and medium-term projections (selected indicators) - Real GDP 1.2 1.1 2.02.62.43.12.93.4 3.6 4.04.0 - GDP deflator3.5 4.9 5.66.97.36.87.05.2 4.1 4.84.0 - CPI inflation (average)4.9 3.7 5.37.88.17.07.55.7 5.2 4.54.0 - CPI inflation (eop)4.1 4.2 6.48.58.96.06.25.5 4.9 4.23.9 - Overall balance-5.3 -5.9 -5.9-5.2-5.2-3.7-3.7-2.5 -2.2 -2.2-2.2 - Change in the overall balance ("+": improvement)-1.5 -0.7 0.00.70.71.61.51.2 0.3 0.00.0 - Gross public debt55.4 62.3 70.372.070.571.870.070.8 69.8 68.066.7 - Total revenue (excl. grants) 22.1 21.2 24.224.924.525.725.425.8 25.9 25.926.1 - Total expenditure and net lending28.8 28.9 30.330.430.129.629.328.5 28.3 28.328.5 - Wages and salaries (percent of GDP)13.6 14.6 14.814.014.014.014.012.4 12.2 12.212.2 - Energy subsidies (gross, percent of GDP)1.1 0.2 1.62.82.51.80.80.9 0.3 0.00.0 - Social expenditures (percent of GDP)1.6 1.6 1.92.22.22.22.22.2 2.2 2.22.2 ### External sector and financing (selected indicators) - Current account balance (pct. of GDP)-8.9 -8.8 -10.2-9.7-9.6-8.5-8.6-7.8 -7.0 -6.5-6.0 - Exports of goods (value)-15.9 -3.6 4.913.420.65.4-1.44.2 3.3 3.33.2 - Imports of goods (value)-18.4 -3.8 6.310.616.22.6-3.02.7 2.7 2.92.7 - Gross official reserves (eop, billions of US$) 7.4 5.9 5.96.36.47.37.07.8 8.0 8.99.5 - Net international reserves (eop, billions of US$)4.5 3.3 3.12.83.23.23.4 3.7 4.75.6 - Reserve coverage (months of next year's imports of goods) 4.8 3.63.33.43.53.83.84.0 4.0 4.34.6 - External debt (pct. of GDP)62.7 66.8 82.689.486.491.788.993.0 91.6 90.288.7 - External debt service (pct. of exports of GNFS)10.1 12.3 19.117.817.118.318.915.3 17.0 13.313.5 ### Monetary and financial indicators (selected) - Credit to the economy6.2 9.7 12.710.17.66.95.67.0 7.1 7.47.0 - Broad money5.3 8.1 11.49.07.58.76.67.4 7.9 9.08.2 - There are structural liquidity deficits in the banking system; deposit growth remains below credit growth. - Credit growth was facilitated by record-level CBT bank refinancing; combined with other drivers, this has fueled inflation. - In response, the CBT raised the policy rate several times and widened the interest rate corridor. - Financial soundness indicators (selected): - Nonperforming Loans (NPLs) to total loans13.0 13.3 14.9 16.5 15.8 16.6 15.6 13.913.9 - Regulatory capital to risk-weighted assets11.6 11.9 11.88.29.4 12.0 11.6 11.911.8 ### Medium-term outlook and inclusive growth signals (selected) - Illustrative medium-term outlook (selected): - Real GDP1.21.12.02.63.13.43.64.04.0 - Gross national savings11.09.69.6 10.1 12.1 15.2 16.9 18.2 18.9 - Gross investment20.0 18.4 19.8 19.8 20.7 23.0 24.0 24.7 24.9 - Overall fiscal balance (pct. of GDP) 2/-5.6-6.1-6.1-5.5-3.9-2.7-2.4-2.4-2.4 - Current account balance (pct. of GDP)-8.9-8.8 -10.2-9.7-8.5-7.8-7.0-6.5-6.0 - Gross public debt (pct. of GDP)55.462.370.372.071.870.869.868.066.7 - Inclusive growth indicators highlight challenges in labor markets, poverty, and gender gaps (selected): - Unemployment rate (2017)15.2; Youth unemployment rate (2017)35.8 - Female unemployment rate (2017)21.5; Female labor force participation (2017)19.0 - GINI Index (2010)35.8 - Ease of Doing Business (DTF, 2018)63.6 - Government expenditure on education (2015)6.6 (percent of GDP) ### Program financing and Fund engagement (selected) - Staff supports making all funds available for budget support under the EFF. - Indicators of Fund credit (selected figures from the schedule and projections): - Total2,045.6250 375.20632,843.1425 _International Monetary Fund staff report (excerpt)._ ### Annex I. Inflation Across the Spending Distribution ### Annex I. Inflation Across the Spending Distribution ### Overview - Inflation in Tunisia has risen more rapidly for households in the top decile of consumer spending than for households in the bottom decile. - Targeted subsidies for food staples and differentiated energy subsidies for poorer households have limited the impact of inflation on the purchasing power of the vulnerable. ### Empirical findings on inflation by spending decile - Tunisia’s 2010 Households Expenditure, Consumption, and Living Standards Survey provides consumption baskets by spending decile, which vary significantly across the distribution. - Consumption shares and inflation outcomes: - Bottom decile: 35 percent of goods and services are subsidized or have administered prices. - Top decile: about 80 percent of expenditure is on goods and services whose prices are free. - Bottom decile: about 40 percent of expenditure on food. - Top decile: less than 20 percent of expenditure on food. - Headline and decile-specific inflation (2012–mid-2018): - Average inflation was around 5 percent in 2012–15 and approached 8 percent in mid-2018. - June (mid-2018) headline inflation reached 7.8 percent. - Top decile inflation in June: 8.9 percent. - Bottom decile inflation in June: 6.5 percent. - Difference between top and bottom deciles in June: 2.4 percentage points (largest recent gap). - July annual inflation dropped to 7.5 percent. - Bottom decile inflation in July: 6 percent. - Top decile inflation in July: 8.8 percent. - On average since early 2017, inflation for the top decile has been 1.2 percentage points higher than for the bottom decile. ### Drivers of differential inflation - Consumption-basket composition: - Top decile spends 18 percent of consumption on car purchases and maintenance, and gasoline; bottom decile spends 1 percent on these items. - Prices in this product group rose by more than 12 percent in the first half of 2018. - Bottom decile spends 13 percent on subsidized food; top decile spends 2 percent on subsidized food. - Prices of subsidized foods have hardly moved in the first half of 2018, containing inflation for the poor. - Energy: - Overall share of energy in total expenditure does not change much across deciles, but the energy mix does. - Bottom decile: about 95 percent of total energy consumption is electricity and Liquefied Petroleum Gas (LPG), whose prices remained relatively stable. - Top decile: fuels account for 66 percent of their energy consumption; fuel prices increased by 11 percent. - Imported inflation and exchange-rate pass-through: - Depreciation of the dinar has affected better-off households more, because they spend more on imported consumer goods priced directly or closely linked to the exchange rate. - Higher prices for imported consumer goods have led to a higher rate of core inflation for the top decile (core inflation excludes food and energy). ### Policy implications and assessment - Government policy choices have contributed to diverging inflation across households: - Subsidies for basic food staples and the energy subsidy reform (aimed at energy products consumed more by the better-off) have helped stabilize the purchasing power of the poor and vulnerable. - Dinar depreciation, while improving competitiveness, has an inflationary short-run cost that mainly affects groups able to hedge against inflation. - Implicit policy trade-offs: - Targeted subsidies and differentiated reforms can limit the short-run inflationary burden on low-income households while sharing adjustment across the spending distribution. - Exchange-rate policy that supports competitiveness can disproportionately raise prices faced by better-off households through imported inflation. ### Limitations and areas not covered - The Annex does not attempt a full cost-benefit analysis of food and energy subsidies. - It does not quantify how households’ overall welfare changes with higher inflation nor the effects of inflation on producers and the budget. - Inflation affects the real value of assets, liabilities, and income; better-off households are typically better positioned to protect real values than middle-class and poorer households. - Subsidies have budgetary and supply-side implications, which can be significant over the longer run. *Prepared by Adnen Lassoued (IMF) and Nejib Haouech (Tunisian National Institute of Statistics).* ### 1. The CBT’s balance sheet has expanded since 2011: ### 1. The CBT’s balance sheet has expanded since 2011: ### Balance sheet evolution and drivers - Before 2011: balance sheet expansion mainly reflected NFA accumulation supported by stable FX inflows from traditional goods and services exports (olive oil, phosphates, petroleum, tourism) and stable remittances. - After 2011: trend reversed—CBT started to loosen NFA while demand for reserve money increased due to: - strong decline in petroleum and phosphate exports; - unstable tourism-related inflows with lower tourist arrivals due to violent attacks and regional instability; - lower remittances from the diaspora as a result of the downturn in Europe. - To meet banks’ demand for reserve money, the CBT offset NFA outflows with domestic liquidity injections; CBT balance sheet remained broadly stable until 2015. - Since 2016: accelerated NFA losses and rising public demand for cash reflecting mainly the growing informal economy. - Key quantity changes: - Credit to the banking sector, excluding FX swaps, increased from TD 4 billion in December 2015 to TD 10 billion in June 2018. - Net credit to the government rose from TD 0.7 billion in December 2015 to over TD 6 billion in June 2018, mainly due to IMF disbursements. - The share of NFA in CBT total assets contracted to 25 percent. - Bank reserves in FX increased from TD 0.9 billion in January 2011 to TD 2.2 billion in March 2018 (also reflecting dinar depreciation). ### Indicators cited (figures referenced in source) - Currency in circulation trends (2000–18) and CBT balance sheet components presented in Figures 1 and 2 in the source. - Autonomous liquidity factors, bank deposits, and CBT monetary operations referenced (Central Bank Survey and IMF staff calculations). ### Macroeconomic context (selected figures from related sections) - Growth: 2.8 percent year-on-year in the second quarter of 2018. - Agricultural sector: +9 percent. - Service sector: +3.6 percent. - Fiscal and public debt: public debt rose to 71.5 percent of GDP at end-June 2018 (compared to 67.9 percent of GDP at end-June 2017). - Fiscal execution to end-June 2018: - Tax revenues up significantly by about 15 percent compared to H1 2017. - Current expenditure decreased by 1 percent. - Wage bill (excluding tax credits) down by 2 percent. - Capital spending increased by 14 percent. - International energy prices increased by more than 50 percent over the last twelve months (as of the source). --- ### 2. Effects of balance sheet expansion on inflation and exchange rate - Local currency liquidity remained tight despite increasing liquidity injections; money market rate often traded at the corridor ceiling. - Monetary operations constraints: - TD 7 billion cap on the main refinancing operations introduced in 2017. - Aggregated volume of all CBT liquidity injections continued to grow and accelerated (Figure 3). - Injections through FX swaps, structural OMOs, and the overnight lending facility increased significantly. - Inflationary link: - CBT’s balance sheet expansion has likely fueled inflation. - Policy response: CBT increased its key policy rate by 250 basis points in 2017-18. - Balance sheet continued to expand until July 2018 despite rate increases. - Currency substitution and reserves composition: - Bank reserves in local currency dropped significantly since 2011 while bank reserves denominated in FX increased (TD 0.9 billion to TD 2.2 billion between January 2011 and March 2018), reflecting exchange rate depreciation of the dinar between 2011 and 2018. --- ### 3. Policy recommendations to contain inflationary and FX pressures - Overarching: monetary tightening requires a determined, comprehensive policy response addressing broader macroeconomic imbalances. - Specific policy measures recommended: - Address macroeconomic imbalances: - Reduce large current account and fiscal deficits to alleviate pressures on the exchange rate, domestic price level, and central bank refinancing. - Gradually unwind liquidity injections and streamline liquidity management: - Gradually wind down FX swaps and structural open market operations. - Address liquidity needs of illiquid and insolvent banks through the emergency liquidity assistance (ELA) framework. - Better protect the CBT’s balance sheet against risks: - Increase the share of government bonds accepted as collateral for CBT refinancing. - Apply discounts (haircuts) on the value of government bonds presented for collateral (note: currently, haircuts of 30 percent are applied to private sector paper). - Strengthen the interest rate channel of monetary transmission: - Increase the cap on lending rates and update it more frequently to ease transmission of policy rate changes to lending rates. - Clarify the monetary policy framework and consider an explicit medium-term inflation objective: - Maintain a clear nominal anchor to guide inflation expectations and achieve the CBT’s price stability mandate. - Strengthen monetary policy communication and accountability: - Publish regular monetary policy reports and improve communication to reduce uncertainty and build credibility. - As CBT credibility is consolidated, communication can substitute to some degree for stronger policy actions. --- ### 4. Monetary policy communication (Annex V) — recommended actions - Strengthen communications strategy to better anchor inflation expectations; communication should cover: - monetary policy framework; - analysis of economic conditions and outlook for growth and inflation; - major risks to the outlook; and - transparency of the monetary policy operational framework. - Clarify monetary policy anchor as exchange rate is no longer the main anchor; prepare to evolve toward inflation targeting by upgrading analytical and forecasting tools. - Make a monetary policy report a principal communication vehicle: - Include central bank medium-term projections of inflation and growth, main upside and downside risks, alternative scenarios, and rationale for policy decisions. - CBT already has relevant tools (short-term forecasting models and a medium-term Quarterly Projection Model (QPM)); the existing “Evolution Economic et Monétaires et Perspectives à Moyen Terme” report could be upgraded and published regularly (e.g., quarterly). - Use additional communication tools in a coordinated manner: - press conferences, regular meetings with banks and financial market analysts, research papers, website updates, press releases, interviews, webinars. - Prepare a monetary policy communications strategy with an implementation plan sequencing work on website, press conferences, and research papers. --- *Italic final source attribution line.* ### 5. Inflationary pressures remain worrying. Inflation slowed for the first time since September ### 5. Inflationary pressures remain worrying. Inflation slowed for the first time since September ### Inflation developments and policy response - Inflation slowed for the first time since September 2017 to 7.5 percent in July and August, after reaching a record 7.8 percent in June. - The rate "remains high and worrisome." - To mitigate risk of an inflationary spiral, the CBT raised its policy interest rate by 100 basis points to 6.75 percent in June. - The increase in the policy rate raised the money market rate (MMR) to 7.25 percent. - Despite the rate hike, the dinar continued to depreciate against key foreign currencies, in particular because of the rising inflation differential with our main trading partners. - Higher policy rates have not yet brought the real MMR back to positive territories. - CBT refinancing of commercial banks exceeded TD 16 billion in mid-August 2018 before showing some decline. - Transmission channels of monetary policy are working slowly; more time is necessary for monetary policy to show its full effect. - If the recent slowdown in the growth of credit to the economy continues, it should attenuate inflation in the months ahead. - The CBT’s major objective remains gradually reducing inflation to the average levels experienced in the past. ### Current account and foreign exchange reserves - The current account improved slightly during the first 7 months of 2018, generating an annualized deficit of 11 percent of GDP (compared to 12 percent of GDP for the same period in 2017). - Exports increased by 23 percent at end-July 2018; exports from agriculture and agri-food industries and from the manufacturing sector performed well. - Tourism receipts grew 44 percent; remittances grew 15 percent. - Imports increased by 21 percent at end-July 2018, mainly due to costlier energy imports. - FX reserves stood at 70 days of imports in mid-August, mainly because of the high current account deficit, significant debt service, and delays with planned Eurobond issuance. - Higher international oil prices for the remainder of the year—together with low domestic energy production and strong consumption—are expected to put significant pressure on external balances. ### Banking sector performance and liquidity - The banking sector posted encouraging results during the first half of the year. - Aggregate capital adequacy ratio (CAR) remained at around 12 percent at end-June 2018. - Non-performing loans (NPLs) represented around 14 percent of total loans at end-March 2018. - The provisioning rate for NPLs stood at 58 percent (excluding accrued interest). - Deposit mobilization has remained insufficient to ease pressures on banks' liquidity. - Strong demand for cash—partly related to speculation and seasonal summer demand—led banks to overly rely on the CBT’s bank refinancing window. ### Business climate and investor concerns - Reforms implemented: new investment law, the "StartUp Act", and a new framework for public-private strategic partnerships (PPP). - With IFC and EBRD assistance, a high-level international forum on PPP projects is being organized in September. - Participation in the G20’s "Compact with Africa" initiative will be used to highlight progress in improving the business climate. - Investors remain concerned about the uncertain socio-political environment. - Political stability and a reduction of macroeconomic imbalances are necessary to allow improvements in the business climate to develop their full impact. ### Reform priorities and program performance - Top priority: accelerate reforms to strengthen economic fundamentals amid acute pressures and macroeconomic fragility. - Program performance in H1 2018 allowed meeting all quantitative program criteria at end-June 2018. - Quantitative Performance Criteria (QPCs) observed: - Floor on the primary balance of the central government (cash basis, excluding grants). - Ceiling on total current primary expenditure of the central government. - Ceiling on net domestic assets (NDA) of the CBT (with concerns about liquidity injections through FX swaps and 24-hour loan facility). - Floor on net international reserves (NIR) of the CBT. - Continuous Performance Criteria observed: - Zero ceiling on the accumulation of new external debt payment arrears by the central government. - Quantitative Indicative Targets observed: - Zero ceiling on the accumulation of new domestic arrears. - Ceiling on net FX interventions by the CBT observed from March through July, slightly missed by US$18 million in August. - Floor on social spending at end-June observed. ### Structural benchmarks and financial sector measures - Met structural benchmarks: - Fiscal policy and reforms of public institutions: quarterly fuel price adjustments on June 23 (met continuous SB). - Foreign exchange policies: implementing competitive multiple-price auctions since August 1 (met August SB). - Reprogrammed structural benchmark: - Financial sector reforms: resolution committee held first meeting on June 28 on Banque Franco Tunisienne (BFT); additional information requested and a new report to be submitted ahead of next meeting in September 2018; decision to open resolution procedure expected in November 2018 (reprogrammed SB for November 2018). ### Macroeconomic outlook and fiscal strategy - Expected growth rate of 2.6 percent for the entire year of 2018, slightly above forecast of 2.4 percent in June. - Fragile external position, high public debt, and inflationary pressures are significant risks. - Economic policy focus: (1) well-targeted fiscal consolidation; (2) further tightening of monetary policy to avoid unhinging inflation expectations; (3) further enhancing exchange rate flexibility. - Fiscal consolidation aim: gradually reduce fiscal deficit (excluding grants) to about 2.7 percent of GDP in 2020. - Strategy cornerstones: further containment of current spending, fairer and more efficient taxation, sufficient public investment and social spending. - Plan to mobilize external resources, notably by issuing a Eurobond in international markets in September or October of this year. - Domestic financing to be consistent with parameters in the 2018 Budget Law. ### 2018 fiscal measures and 2019 Budget orientation - 2018 deficit target: 5.5 percent of GDP (excluding grants). - Supplementary Budget Law and draft 2019 Budget Law will be based on: - Containing the wage bill: - Early retirement program: more than 5,000 staff members participated. - Voluntary departure program: about 1,600 officials interested (compared to about 10,000 to 15,000 envisaged). - Salary increases in the Ministry of Defense will have an annualized cost of TD 200 million. - Recruitment limited to defense and security sectors and national training schools, without exceeding a replacement rate of one out of four staff in 2018-19. - Commitment not to grant any additional wage increases in 2018 and 2019 unless growth surprises on the upside for 2019–20 and without affecting planned wage bill adjustment to 12.4 percent of GDP in 2020. - Eliminate use of tax credits from 2019. - Containing energy subsidies: - Budget allocation for energy subsidies retained at about TD 2,700 million (compared to an initial TD 1,500 million in the 2018 Budget Law). - Avoid carry-forward of additional expenses for fiscal year 2019 and keep margin to cover a total subsidy bill of up to TD 3 billion. - Measures already taken: adjusted fuel prices quarterly with a price hike in June; increased electricity and gas tariffs in May and August. - Planned additional adjustments to save: an additional TD 125 million on fuel subsidies (based on price increases in September and November); TD 308 million on electricity and natural gas subsidies (based on tariff increases in September, October and November). - Additional measures to save at least an additional TD 250 million in 2018 (restricting supply of most subsidized fuels, collecting arrears to STEG, and improving its management). - Limiting transfers to social security funds: - Reform bill on CNRPS submitted to Parliament in June and awaiting adoption in October; no retroactive effect in 2018. - Cost of delay to be compensated by stronger-than-expected collection of arrears by social security funds. - Revenue mobilization: - 2019 Budget Law will eliminate preferential tax regime for “off-shore” companies: first for new firms in 2019 and then for all firms in 2021 (new SB for December 2018). - Submit a 2019 Budget Law that includes a VAT reform for liberal professions: raise VAT rate from 13 to 19 percent taking effect in 2019 (December 2018 SB). - Integrate audit and recovery functions through merger of DGI and DGCPR, with TA and capacity building. - 2019 Budget Law parameters: - Overall deficit (excluding grants) of 3.9 percent of GDP. - Revenue (tax and non-tax) to reach 25.9 percent of GDP. - Limit current spending to 24.2 percent of GDP. - Capital expenditures to increase to around 5.4 percent of GDP. - No space to accommodate wage increases under macroeconomic parameters underlying the LDF 2019; salary increases considered only if fully compatible with EFF deficit path. ### Monetary policy stance and anti-inflation strategy - Need for further monetary policy tightening due to accelerating inflation and factors that will continue to fuel inflation: significant increase in international oil prices, continued dinar depreciation, and expected adjustments in administered prices. - Observed slowdown in growth rate of money and credit since the beginning of the year. - Anti-inflation strategy key elements: - Bring the real money market rate (TMM) into positive territory: CBT committed to raise the policy interest rate to move the TMM firmly into positive territory; the required time depends on inflation evolution—negative surprises would require faster policy rate response. - Continue to improve transmission channels of monetary policy: - Priority on law that loosens interest rate caps on business loans; hope for adoption with implementation decree by end of year (December 2018 SB). - More frequent update of base rates used in calculating the interest rate cap. - Start surveying inflation expectations of economic agents to monitor anchoring and refine projections. - Envisaged reduction in commercial banks' reliance on CBT refinancing to prompt more vigorous interbank market activity. - Enhance forward-looking communication of monetary policy: - Clarify objectives of operational framework and link between price stability mandate and overall strategy. - Start publishing a quarterly monetary policy report, including medium-term projections of inflation and growth (new SB for June 2019); reinforcement of human resources and logistics necessary. - Improve bank liquidity management: - Despite policy rate increases and TD 7 billion quantitative limit on 7-day tenders (since July 2017), CBT refinancing exceeded TD 16 billion in mid-August 2018. - Increase in liquidity supply from other instruments: FX swaps for monetary policy purposes, structural operations (outright purchases of treasury bills), overnight lending facility, and long-term operations. - Commitment to reduce overall volume of CBT’s liquidity injections, including outstanding FX swaps and structural operations. - Improve monitoring of balance sheet effects and macro-prudential risk management: - Analysis to date suggests monetary tightening would not create a major risk to solvency and liquidity of banks, businesses, and households. - Interest charges for the average firm are only 2 to 3 percent of total expenses. - Banking system profitability last year: Return on Assets (ROA) 1.2 percent and Return on Equity (ROE) 13.9 percent. - Exposure to FX risk around 8 percent of assets. - Plan to develop new analytical capabilities and enhance supervisory tools and banking supervisors’ skills. *Source: Tunisian authorities, IMF staff report excerpt.* ### 18. To achieve our monetary policy objectives, we are committed to modernizing and ### 18. To achieve our monetary policy objectives, we are committed to modernizing and strengthening the management and governance of the CBT ### Modernizing the CBT and governance framework - Establishing a strategic vision: - The CBT has started to develop its first three-year strategic plan for 2019-21 based on extensive internal consultations. - Objectives: establish strategic priorities corresponding to the CBT’s mandate set out by the new 2016 Central Bank Law and a general new vision for the future. - Timetable of actions: (1) undertake a strategic SWOT and PESTEL analysis; (2) identify the stakes related to our priorities; (3) establish an action plan for the implementation of strategic objectives into operational objectives; and (4) prioritize the actions and resources needed in view of the portfolio of selected projects. - Request for strong TA support from the IMF to advance this initiative. - Improving the CBT safeguards framework: - Focus on implementing outstanding recommendations of the 2016 Safeguards Report, especially regarding the external evaluation of the quality of the internal audit function. - Plan: restructure the CBT’s General Control Department and implement a preliminary self-assessment before resorting to an external evaluation. - Will request TA from a qualified international partner. ### Exchange Rate Policy - Role and recent developments: - Exchange rate plays a key role in rebalancing the external position and absorbing macroeconomic shocks. - Despite significant depreciation vis-à-vis the Euro since early 2018, the value of the dinar in real terms has slightly appreciated because of accelerating inflation. - The inflation differential between Tunisia and its main trading partners remains significant. - Expected effects of a more competitive real exchange rate: - Boost exports—especially in industries with significant costs in local currency. - Curb excessive import demand. - Improve current account deficit and positively impact the stock of FX reserves, which remain below levels experienced by many of Tunisia’s peers among middle-income countries. - Reduce demand for energy imports and lower energy subsidies, benefiting public finances. - Short-term commitments and actions: - Continuing to hold competitive FX auctions: - First two competitive FX auctions held on August 1 and 8, 2018 (met SB). - Competitive auctions will now be the main means of intervention in the FX market. - Continuing to limit FX interventions: - Strict adherence to the net FX intervention ceiling agreed under the EFF arrangement from April through July. - Slight miss by US$18 million in August due to low volume of the FX interbank market after transition to competitive FX auctions. - This helped maintain a flexible trajectory for the dinar and increase the role of market forces. - Eliminating the 2017 exchange restriction: - Reaffirmation to withdraw circular no, 2018-01 (replacing the initial circular no, 2017-09) by end-2018; the circular limits access to financing for imports of non-priority goods. - Conclusion that the measure’s effect on imports was mixed and that it created uncertainty for economic operators. ### B. Providing Adequate Social Protection - Improving the targeting of the social safety net: - Progress in creating a comprehensive database of poor and low-income households: - 476,000 have been registered, of which 213,000 have already been verified and validated in field surveys. - Database expected to be well established by the end of the year, with registration expected for 550,000 families (December 2018 SB). - Next steps: (1) investigate and validate candidate households in the field; (2) implement measures to encourage non-registered people to register; (3) test optimal targeting model for poor and vulnerable populations; (4) develop and operationalize remaining modules flanking the database (including systemic connection with other databases from the CNAM, CNRPS and CNSS; development of the scoring formula; and management of detected fraud); and (5) transition to using electronic cards as a basis for administering medical care and cash transfers. - Expected outcome: enable more effective targeting of social programs for cash transfers and access to public health services. - Executing social expenses: - Execution of social expenditures has been in line with objectives under the EFF arrangement (now supported by the new QPC on this spending) despite significant budgetary pressures. - In June, the budget envelope for social expenditures was increased by an annualized TD 200 million. - Expansion of the National Assistance Program for Families in Need (Programme National d’Aide aux Familles Nécessiteuses, PNAFN): - By 2019, the program will cover 285,000 households with a minimum transfer of TD 180 per month. - Additional measures: financial support for education of pupils and students from vulnerable families; two exceptional re-entry allowances to vulnerable families—a bonus for new graduates and a general bonus for the new school year. - Continuing social security reform: - Reform law for the CNRPS public pension fund is under examination in Parliament; hope that the ARP will pass the law by October, which will serve as a blueprint for a decree on the reform of the CNSS private sector pension fund. - Main components of the pension reform: - (1) Adjustment of key parameters: a two-step increase in the mandatory retirement age from 60 to 62 (and to 65 on a voluntary basis), an increase in contribution rates and a new pension indexation formula. - (2) Reform of the governance of the social security funds. - (3) Implementation of reinforced arrears collection strategies for CNRPS, CNSS, and CNAM. - Assessment: these steps are insufficient to ensure financial sustainability due to a large structural gap between benefits (for example, pensions can reach more than 80 percent of wages) and available financial resources; current reform bill is a first step requiring a more comprehensive reform with more ambitious parametric changes. ### C. Creating More Opportunities for the Private Sector - Business Climate and Governance: - Boosting the business climate is a priority: - Task force set up to improve Tunisia's ranking in the World Bank's "Doing Business" report with goal to feature among the top 50 countries in the world and top 3 countries in Africa by 2020. - A set of 50 measures identified, including reducing time to create a company and obtain a building permit, facilitating access to credit, and protecting minority investors. - Intention to finalize digitalization of all export and import procedures and connect all institutional parties involved in trade to the "Tunisia Trade Net" platform by early 2019. - Drafting an overarching reform law aimed at improving the business climate, including amendments to several areas of current legislation. - Strengthening good governance and fighting corruption along three main pillars: - Implementing national strategy against money laundering and terrorist financing: - Strengthen correspondent banking relationships and aim for FATF reclassification as a cooperative jurisdiction. - Actions taken: recruitment of 12 financial analysts in June 2018; implementation of two technical solutions: Go-AML and Go-INTEL financial analysis. - CTAF issued six decisions on guiding principles for designated non-financial professions. - Legal framework strengthened: (1) government decree on freezing terrorists’ assets in accordance with Security Council resolutions in January 2018; and (2) four ministerial decrees on detection of suspicious transactions and their declaration to the CTAF in the sectors of casinos, precious metals, real estate, and notary services in April 2018. - Accountants Association published professional standards on accountants’ obligations. - Amendment to the Organic Law on Money Laundering submitted to Parliament to allow specific financial sanctions to combat proliferation of weapons of mass destruction; expected approval by October. - Operationalizing the High Anti-Corruption and Good Governance Authority (HACGGA) and intensifying the fight against corruption: - HACGGA to be created by transitioning the current National Anti-Corruption Authority (Instance Nationale de la Lutte Contre la Corruption, INLCC). - Appointment of HACGGA board members expected by the end of this year (December 2018 SB). - INLCC has transferred about 400 cases to the judicial system and cooperates with the tax administration for capacity building and information on tax compliance of investigated individuals. - Declaration of assets: - Law on Declaration of Heritage and Combating Illicit Enrichment and Conflict of Interest in the Public Sector approved in July to enable HACGGA to monitor wealth of senior officials. - Expected effect: enhance transparency, improve citizens' confidence, and limit corruption and illicit enrichment. - Financial Sector reforms: - Overarching goals: improve quality of credit portfolios, strengthen banks’ financial stability and liquidity, solidify banking supervision, and improve access to finance. - Resolving non-performing loans (NPLs): - Public banks progressing with internal restructuring and balance sheet repair following adoption of two laws putting public banks on equal footing with private peers. - On abandoning claims: three public banks expect their boards to validate proposals for internal resolution structures by end-September. - On write-offs: Directorate General of Tax Legislation at the Ministry of Finance published a guidance note on applying the law on August 6, 2018; National Tax Council approved the guidance note. - Ministry of Finance, as shareholder, follows targets in the three major public banks’ performance contracts (BH, BNA, STB). All KPIs were met in the last quarter. - Qualitative indicators: three public banks have progressed in setting up internal risk management structures and rating systems expected to be operational by end-2018. - Decree on public banks not subject to assent of the Commission created by Article 474 of the Commercial Code delayed and awaiting Prime Minister’s signature; hope to publish this decree at end-November 2018. - Training of judges in banking and finance: Ministry of Justice and Ministry of Finance requested TA from the United Kingdom; London Institute of Banking mission to Tunis during September 3 to 7, 2018 to assist in creating a dedicated training program. - Ministry of Tourism, Agence Foncière Touristique, Banking Association and Federation of Hoteliers working on mechanism to reprofile hotels; committed to proposing concrete actions by September 2018. - Draft law on debt collection companies delayed; refining Article 19 related to protection of debtors; parliamentary adoption expected by December 2018. - Ministry of Finance and COREFI preparing comprehensive strategy on NPL treatment and resolution in the banking sector to be published in December 2018. - Implementing resolution framework for fragile banks and financial institutions: - Resolution committee constituted last December had first meeting on June 28 to examine the case of the BFT as presented by the CBT. - CBT to resubmit an enhanced report on the BFT ahead of the resolution committee’s meeting in September 2018. - Committee will decide on initiating resolution procedures against the BFT in accordance with legal deadline (one month, extendable by 15 days) in November 2018 (reprogrammed SB for November 2018). - Pursuing modernization of banking supervision: - CBT’s General Directorate of Banking Supervision will recruit a dozen supervisors by end-December 2018. - Continued cooperation with IMF METAC to develop tools from Pillar II of the Basel Accord to monitor market and interest rate risks and assess capital adequacy. - Initiatives include: (1) strengthen CBT internal capacity to implement ICAAP; (2) implement standards in new capital adequacy circular based on Basel II guidelines for measuring and managing market risks; (3) clarify CBT regulatory framework for interest rates (IRRB), concentration and strategic risks. - Continue efforts to move to consolidated supervision by the second half of 2019. - Continue monitoring strategy for resolving NPLs in the tourism sector based on white paper adopted in February 2018, including loans with a granted exemption from the contagion principle. - Facilitating access to finance: - Ministry of Finance and COREFI made progress toward the National Financial Inclusion Strategy adopted by a Restricted Ministerial Council on June 25, 2018. - Developing financial inclusion indicators based on a survey (with assistance of the European Investment Bank, EIB) to be finalized by end-2018; indicators to be regularly published. - Awaiting adoption of the law regulating credit bureaus (pending discussion in Parliament) to improve financial access by collecting and sharing financial data. - With assistance of KfW, exploring a strategy to increase financial access for SMEs. - Implementing the de-cashing strategy: - Importance elevated due to liquidity pressures in the financial system. - Objectives: reduce money in circulation and move toward innovative payment services (online and mobile payments) as part of fight against parallel economy and tax evasion. - Action plan adopted in March 2018 aims to limit cash payments by the Public Administration and adopt regulatory framework governing electronic payments before end-2018. - Early results: interoperability between platforms (Société Monétique Tunisie, La Poste, and telephone operators) technically implemented and operational for money transfers since April 2018. - Technical work started on commercial payments; expect to publish a circular on companies facilitating payments in October 2018. *Source: IMF staff report excerpt (cr18291).* ### 25. Reforms in support of fiscal consolidation advance. ### 25. Reforms in support of fiscal consolidation advance. ### Budget transparency and public resource use - The Organic Budget Law (OBL) should be adopted by Parliament before end-2018 (December 2018 SB). - Expected effects of OBL: - Improve budget preparation and transparency by giving citizens access to more information on the budget (including through a new functional classification). - Help monitor budget execution and enforce spending discipline. - Support implementation of performance-based budgeting in all Ministries. - Status: Ministries have already prepared their budget proposals for 2019 according to the new functional classification in a multi-year framework. ### Management and oversight of State-Owned Enterprises (SOEs) and public financial entities - Ongoing measures: - Performance contracts signed in mid-2017 with four large SOEs: the Office des Céréales, Régie des Tabacs, STIR, and STEG. - A dashboard of balance sheet information and key financial ratios for about 30 of the most important SOEs is being used to monitor SOE financial positions. - Strengthening financial oversight of social security funds and public banks is in progress. - Monitoring commitments: - Monitor the evolution of the largest 30 SOEs’ financial statements on a quarterly and forward-looking basis to improve information sharing with departments responsible for central government budget development and implementation. - TUNISAIR performance contract to be signed by the end of the year (December 2018 SB). ### Prior actions and structural benchmarks (selected) - Met prior actions: - Energy price hikes: Signature of ministerial orders increasing (i) fuel prices in September and (ii) electricity/gas tariffs; implementation of the September 1 price hikes for fuels, electricity, and gas. Objective: Fiscal sustainability and fairness. Status: Met. - Foreign exchange auctions: Implementation of a full foreign exchange auction mechanism by the Central Bank of Tunisia. Objective: Exchange rate flexibility. Status: Met (Aug-18). - Fuel prices: Quarterly application of the automatic fuel price adjustment mechanism. Objective: Fiscal sustainability and fairness. Status: Met at end-June. - Structural benchmarks with deadlines (selection): - High anti-corruption and good governance authority (HACGGA): Signature of the decree appointing the members of the HACGGA. Objective: Good governance and fairness. Date: Dec-18. - Social policy: Establishment of a databank on vulnerable households. Objective: Social protection and fairness. Date: Dec-18. - Banque Franco Tunisienne (BFT): Vote of the resolution committee on the orderly resolution of the BFT. Objective: Financial sector stability. Revised Date: Nov-18. Status: The committee met in late June, but requested more information. - 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: Dec-18. Status: Draft law in Parliament. - Tax regime: Adoption of a 2019 Budget Law that eliminates the preferential tax regime for “off-shore” companies. Objective: Fiscal sustainability and fairness. Date: Dec-18. - Value-added tax (VAT): Adoption of a 2019 Budget Law that increases the VAT rate for liberal professions from 13 to 19 percent. Objective: Fiscal sustainability and fairness. Date: Dec-18. - State-owned enterprises (SOEs): Signature of a performance contract for TUNISAIR. Objective: Better monitoring of fiscal risks. Date: Dec-18. - Organic budget law: Publication, in the official journal, of the Organic Budget Law. Objective: Fiscal sustainability and fairness. Date: Dec-18. Status: Draft law in Parliament. - Communication of monetary policy decisions: Start publishing quarterly monetary policy reports including medium-term projections of inflation and growth. Objective: Monetary policy effectiveness. Date: Jun-19. ### Quantitative performance criteria and indicative targets (overview) - Quantitative Performance Criteria (QPC) listed in MEFP Table 1 include: - (quarterly floor) on the primary balance of the central government (cash basis, excluding grants); - (quarterly ceiling) on total current primary expenditure of the central government; - (quarterly floor) on social spending (starting from end-September 2018); - (quarterly ceiling) on the net domestic assets (NDA) of the Central Bank of Tunisia (CBT); - (quarterly floor) on the net international reserves (NIR) of the CBT; - (quarterly ceiling) on net foreign exchange interventions of the CBT (starting from end-September 2018). - Continuous Performance Criterion (CPC): - (zero ceiling) on the accumulation of new external debt payment arrears. - Indicative Targets (IT): - (quarterly ceiling) on accumulation of new domestic payment arrears; - (monthly ceiling) on net foreign exchange interventions of the CBT; - (quarterly floor) on social spending (through end-June 2018). ### Measurement, valuation, and institutional definitions (selected specifics) - Measurement conventions: - QPCs on the central government’s primary balance, total current primary expenditure, and social spending are measured on a quarterly basis and cumulatively from the end of the previous year. - QPCs on the CBT’s NDA and NIR are measured on a quarterly and stock basis. - QPC on the CBT’s net foreign exchange interventions is measured on a quarterly and non-cumulative basis. - CPC on accumulation of new external debt payment arrears is measured on a continuous basis. - IT on the CBT’s net foreign exchange interventions is measured on a monthly and flow basis. - Other ITs (accumulation of new domestic payment arrears; social spending) are measured on a quarterly and cumulative basis. - Valuation rules for program purposes: - All assets, liabilities, and flows denominated in foreign currencies are valued at the “program exchange rate” except for items affecting government budgetary accounting and related performance criteria (which use current exchange rates). - Program exchange rates correspond to the CBT’s accounting exchange rates that prevailed on December 31, 2015. - For SDR: 1 SDR = 2.797590 Tunisian dinars (TD). - Monetary gold assets are valued at the US$/TD program exchange rate applied to a price of 2,138.15 Tunisian dinars per ounce of gold in the international market on December 31, 2015 (London morning fixing). - The stock of gold was 4.13 tons (4,129,806 grams) on December 31, 2015. - Program exchange rate: US$ = 2.01285 TD (listed in the program exchange rate table). - Institutional definition: - The central government comprises all ministries and agencies subject to central budgetary administration in accordance with the organic law on the government budget, including regional governments and municipalities subject to central budgetary administration. - Authorities will inform IMF staff of any new entity or new program/special budgetary or extra-budgetary fund created during the program; such funds/programs will be included in the definition of the central government. ### Definitions of key fiscal and monetary aggregates (selected) - Primary balance (cash basis, excluding grants): - Measured on a financing basis and defined as the negative sum of: (1) total net external financing; (2) privatization receipts; (3) net domestic bank financing; (4) net domestic nonbank financing; plus (5) interest on domestic and external debt paid by the central government; and less (6) external budgetary grants received by the central government. - Net external financing: - Defined as net external loans of the central government (new loan disbursements less repayments of principal); includes project and budgetary loans and any form of debt used to finance central government operations. - Privatization receipts: - Government receipts from sale of any government asset; for the NIR adjustor, only receipts in foreign currency are included. - Net domestic bank financing: - Sum of change in net bank loans to the central government (in TD and FX) and change in deposits of the central government at the CBT (including specified accounts). - Net domestic nonbank financing: - Change in stock of government securities held by nonbanks (including social security funds) and other central government borrowing from nonbanks, less repayments. - Total current primary expenditure of the central government (excluding interest payments on public debt): - Sum of expenditure on: (1) personnel wages and salaries; (2) goods and services; (3) transfers and subsidies; and (4) other unallocated current expenditure. - Social spending (program definition): - Capital (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: current expenditures (“dépenses de gestion”) of the above sectors/programs, and food and energy subsidies. - CBT Net Domestic Assets (NDA): - Difference between the monetary base and the net foreign assets of the CBT. - Monetary base includes: (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. - CBT Net International Reserves (NIR): - Difference between reserve assets and liabilities in foreign currency to nonresidents. - Reserve assets include: gold, SDR assets, reserve position at the IMF, convertible foreign currencies, liquid balances held outside Tunisia, and negotiable foreign securities and bills purchased and discounted. - Liabilities in foreign currency to nonresidents include commitments to sell foreign currencies linked to derivatives, portions of assets used as collateral, IMF and Arab Monetary Fund credits outstanding, and deposits at the CBT of international organizations, foreign governments, and foreign bank and nonbank institutions (excluding government foreign currency deposits at the CBT and any SDR allocation received after March 31, 2017). *Source: Tunisian authorities; and IMF staff estimates.* ### 22. All debt instruments issued in foreign currency by the CBT on behalf of the government after ### 22. All debt instruments issued in foreign currency by the CBT on behalf of the government after ### Treatment of foreign-currency debt issued by the CBT - 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 the offering documents (prospectus) state clearly that: - (1) the CBT is acting as an agent to execute all sovereign debt instruments issued in foreign currency raised through the international markets for general budgetary purposes of the Republic of Tunisia; - (2) debt is a liability of the central government; and - (3) a protocol between the CBT and the MoF provides clearly that the CBT is authorized to pay all expenses and costs pertaining to the implementation of this issue as well as the interest and principal of the issue sum through direct deduction from the Treasury's current account established in the CBT's books. ### Reserve assets and CBT foreign-currency liabilities (valuation) - The value of CBT reserve assets and liabilities in foreign currency will be calculated using program exchange rates (Table above). - On December 31, 2017: - the value of the stock of NIR reserves was US$3,120.2 million, - the stock of reserve assets was US$5,480.6 million, and - the stock of CBT liabilities in foreign currency was US$2,360.4 million - (all figures at program exchange rates). ### H. Ceiling on Net Foreign Exchange Interventions of the CBT - Definition: CBT’s net foreign exchange interventions = outright foreign exchange sales (including conversions) − outright foreign exchange purchases (including conversions), via channels: Reuters, auctions, and the interbank market. - Computation notes: - Net sales may include CBT net sales in other formal or informal markets (or instruments) that the CBT may choose to substitute for outright net sales (e.g., transactions in derivatives). - Transactions of the CBT with the central government in the context of budget operations of the central government are not considered net sales (unless they take place through Reuters, auctions, or the interbank market). - Purchases of the foreign currency proceeds of a potential Eurobond or other official financing cannot be interpreted as CBT purchases of foreign exchange for the computation of the CBT net sales total. ### I. Ceiling on the Accumulation of External Arrears - Definition: 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 the expiration of the applicable grace period. ### J. Ceiling on the Accumulation of Domestic Arrears - Definition: 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 the contractual grace period, if any). - If no maturity date is specified, arrears = amounts owed to domestic creditors that remain unpaid beyond 90 days or more after the date on which the contract was signed or upon receipt of the invoice. ### K. Adjustment Factors for the QPCs - Primary fiscal balance targets (cash basis, excluding grants) adjustments: - Adjusted upward/downward based on the amount used to (1) recapitalize public banks and (2) finance the severance pay of the voluntary departures which may be part of the civil service reform. - NDA targets adjustments: - Adjusted upward (downward) if (1) the cumulative sum (at the program exchange rate) of 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 the levels indicated in MEFP Table 1. - Also adjusted upward (downward) if (2) the total amount of cash payments on external debt service of the central government (at the program exchange rate) are greater (lower) than the levels included in MEFP Table 1. - The NDA ceiling will be converted into Tunisian dinars at the program exchange rate specified in the table above and adjusted downward (upward) based on (3) the amount of CBT reserves released (mobilized) because of a possible decrease (increase) in the reserve requirement. - NIR targets adjustments: - Adjusted upward (downward) if (1) the cumulative sum (at the program exchange rate) of 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 the levels observed in MEFP Table 1. - Adjusted upward (downward) if (2) the total amount of cash payments on external debt service of the central government (at the program exchange rate) is lower (greater) than the levels included in MEFP Table 1. ### L. Monitoring and Reporting Requirements — data, periodicity, and responsibilities (high-level) - Performance under the program will be monitored using data supplied to the IMF by the Tunisian authorities, consistent with program definitions. The authorities will promptly transmit these data and any revisions previously transmitted to the IMF Resident Representative’s office in Tunisia. - Selected exact reporting requirements (periodicity, delay, responsible department) — examples preserved verbatim from table: - Real Sector: - GDP: supply and demand at current, constant, and the previous year’s prices, including sectoral indices. quarterly; Delay 45 days; Responsible: INS - Inflation: including the underlying inflation of non-administered and administered prices. monthly; Delay 14 days; Responsible: INS - Fiscal Sector: - Total revenue of the central government: tax and nontax revenue, with breakdown of main tax and nontax revenues items. monthly; Delay 30 days; Responsible: MoF - Disbursement of foreign grants, with breakdown into budgetary and project grants—by donor, amounts in the original currency, and their equivalent in Tunisian dinars converted at the current exchange rate at the time of each transaction. monthly; Delay 45 days; Responsible: MoF/CBT - Total expenditures of the central government: monthly; Delay 30 days; Responsible: MoF - Capital expenditure, by type of financing: domestic and external (differentiating loans and grants), and by main sectors and projects. monthly; Delay 45 days; Responsible: MoF - Stock of domestic and foreign debt of the central government and debt guaranteed by the government, with breakdown by instrument and type of currency (in dinars and FX with the equivalent in domestic currency). quarterly; Delay 30 days; Responsible: MoF - Stock of domestic arrears as per TMU, as well the stock of accounts payable that correspond to expenditures committed/payment ordered more than 90 days before (and by type of expenditures). quarterly; Delay 45 days; Responsible: MoF - Debt service of the central government: Domestic debt service (amortization and interest). monthly; Delay 45 days; Responsible: MoF - External debt service (amortization and interest, by FXs). monthly; Delay 45 days; Responsible: MoF/CBT - External Sector: - CBT FX reserves, with breakdown by currency and instrument. monthly; Delay 7 days; Responsible: CBT - CBT interventions (sales and purchases) on FX market in millions of dinars (and equivalent in US$ million) including total market transactions, FX sales to energy companies and all exchange rates for all such transactions, total FX demand by banks, total FX positions of banks, stock of CBT currency swap (provide details). monthly; Delay 7 days; Responsible: CBT - Balance of payments: prepared by the CBT. quarterly; Delay 30 days; Responsible: CBT - Monetary and Financial Sector: - CBT accounts at the current exchange rate: monthly situation of the Central Bank by sector (figures at the end of the period). monthly; Delay 15 days; Responsible: CBT - Reserve money and net domestic assets (NDA): monthly forecast. monthly; Delay 15 days; Responsible: CBT - Monetary policy operations and liquidity factors: daily and monthly balances. monthly; Delay 15 days; Responsible: CBT - Monetary survey at the current exchange rate: monthly balance of the banking sector, counterparts of broad money. monthly; Delay 30 and 45 days; Responsible: CBT - Banks’ financial soundness ratios: monthly; Delay 30 days; Responsible: CBT - NPLs: stock of banking sector NPLs and breakdown by commercial banks. quarterly; Delay 60 days; Responsible: CBT - Other information: - Information on fiscal, monetary, and financial policy: decrees or circulars newly adopted or revised concerning changes in tax policy, tax administration, foreign exchange market regulations, and banking regulations. daily; Delay 3 days; Responsible: CBT/MoF - Petroleum: price structure of the petroleum products and the needed data to monitor the automatic adjustment mechanism (formulas and data). daily; Delay 15 days; Responsible: Min. of Energy ### Statement by Mr. Jafar Mojarrad, Executive Director for Tunisia (September 28, 2018) — Overview and recent developments - Overview observations: - Authorities thank staff for a well-written and balanced report and value staff’s assessment and policy advice. - Program implementation continued to strengthen under the Fourth EFF Review despite heavy headwinds. - Key external shocks: rising international oil prices exceeded program assumptions, pressuring prices, external balances, and the budget position; global trade tensions, hardening financial conditions, growing risk aversion abroad, and the regional refugee crisis pose risks. - Domestic challenges: widespread social discontent with slow improvement in living conditions; political landscape yet to stabilize; program success hinges on socio-political acceptability. - Program performance and structural benchmarks: - All the quantitative performance criteria (QPC) for end-June 2018 were met; the continuous performance criterion and all the quantitative indicative targets were also observed; two of the three structural benchmarks were met—the third (on resolution of Banque Franco Tunisienne––BFT), a carryover from the Third Review, was reprogrammed for November. - Recent economic developments and indicators: - The economic recovery is firming; growth is now expected to reach 2.6 percent in 2018—the highest rate since 2014—on the back of a good harvest and a strong rebound in tourism. - Inflation has remained stubbornly high due to pass-through of nominal dinar depreciation, fuel and electricity price adjustments, and slow response of liquidity growth to monetary tightening begun in early 2017. - Demand pressure was contained by tight monetary policy and strong fiscal outturn through mid-year, but public debt increased as a percent of GDP due to exchange rate depreciation. - Despite more recent real dinar appreciation and sharp increase in oil imports, the current account deficit as percent of GDP was lower by one percentage point at mid-year compared to 2017, reflecting stronger export volumes from real depreciation since 2016 and a strong recovery in tourism and remittances; reserve losses slowed, though remained low due to large debt amortization. - Tourism receipts increased by 37 percent during the first half of 2018. - Fiscal policy stance: - The authorities consider fiscal retrenchment the core of their macroeconomic stabilization program and are committed to the 2018-2020 consolidation path of 1 percent of GDP per year reduction in the overall deficit (excluding grants) to reach 2.7 percent of GDP by *IMF staff report excerpt (cr18291).* ### 2020. In 2018, despite strong revenue performance and containment of current ### 2020. In 2018, despite strong revenue performance and containment of current expenditure, the deficit target of 5.5 percent of GDP (excluding grants) has come under pressure, mainly because of the larger-than-anticipated increase in international oil prices and political tensions that delayed energy price adjustments agreed under the Third Review. ### Fiscal policy and 2018 corrective measures - 2018 deficit target: 5.5 percent of GDP (excluding grants). - Main pressures: - Larger-than-anticipated increase in international oil prices. - Political tensions delaying energy price adjustments agreed under the Third Review. - Military salaries increased as part of a 2015 agreement that had been delayed. - Voluntary departures under the government’s early retirement scheme fell well short of expectations, resulting in a higher-than-anticipated wage bill-to-GDP ratio. - Compensating measures agreed for a supplementary budget law in October: - Lower fuel subsidies through price increases in September and November (decree already issued). - Raise electricity and natural gas tariffs in three consecutive months starting in September. - Expected reduction in energy subsidy bill: 0.5 percent of GDP during the last four months of the year — equivalent to about 1.5 percent of GDP on an annual basis. - Better targeting, improved efficiency, and arrears collection to support fiscal consolidation. - Wage policy: - Commitment to 2020 wage bill target of 12.4 percent of GDP by strictly enforcing a replacement ratio of 25 percent for departing workers, excluding those in defense and security services. - No wage increases in 2018-2019 unless the economy surprises significantly on the upside; even then the 2020 target will remain binding. - Public pension fund reform: - Parliamentary approval of the reform bill on the public pension fund CNRPS now expected in October. - Law will not be applied retroactively to July 2018; cost to the budget from the delay will be offset by reinforced efforts to collect arrears by social security funds. ### 2019 Budget Law: targets and measures - 2019 overall deficit target (excluding grants): 3.9 percent of GDP, consistent with the 2018-2020 consolidation plan. - Growth and revenue assumptions: - Expected GDP growth: 3.1 percent in 2019 compared to 2.6 percent in 2018. - Revenues to benefit from phasing out tax credits for civil servants. - Tax policy measures: - Intended elimination in steps starting in 2019 of the preferential tax regime for “offshore” companies. - Increase VAT rate for “liberal professions” (including lawyers, doctors and accountants) from 13 to 19 percent. - Revenue impact of these two measures described as not significant, but important for equity, fairness, and overall tax compliance. - Tax administration and collection: - Strengthened tax collection efforts, including efficiency gains from consolidation of tax administration functions under the same administrative umbrella. - Large-scale TA and capacity building programs underway. - Expenditure focus: - With limited revenue gains expected, 2019 Budget Law to focus on current expenditure restraint while increasing capital and social spending. - Wage bill target for 2019: reduce to 13.6 percent of GDP (excluding one-off civil service reform cost), from 13.9 percent of GDP in 2018, through wage restraint and strict employment controls. - Periodic price adjustments and efficiency measures to reduce energy subsidies. - Other expenditure savings: stronger oversight of SOEs and better cash management. - Pension reform: - Continue initial steps followed by a comprehensive reform program with more ambitious parametric changes. - Ultimate objective: restore medium- and long-term financial viability of the social security system. ### Social protection - Protection of vulnerable groups is a key pillar and necessary for public acceptance of reforms. - Social spending floor: - Indicative target on social spending floor elevated to a QPC as of end-September; new floor likely to be surpassed as authorities have started replenishing main social programs set up in 2018. - Targeting and delivery improvements with World Bank assistance: - Improve targeting of social services and service delivery through cash transfers, subsidized health services, and reform of energy and food subsidies. - Social registry expansion: - 476,000 households have already been registered with the expectation to reach 550,000 families by end-December. - Database to be mapped against databases of the two main pension funds and the medical insurance fund to ensure consistency and improve coverage. ### Monetary and exchange rate policy - Inflation challenge: - Bringing down inflation difficult due to persistent cost-push factors (notably increasing oil prices) and slow monetary transmission limiting impact of monetary tightening. - High inflation relative to trading partners weakens exchange rate policy effectiveness and reduces purchasing power. - Central Bank of Tunisia (CBT) strategy and actions: - CBT committed to further tighten monetary policy to contain inflationary expectations and preserve credibility. - Intends to adopt a more forward looking and well-communicated monetary strategy to anchor inflation expectations better. - Determined to raise policy rates sufficiently to lift the real money market rate (TMM) firmly into positive territory. - Will monitor inflation developments closely, especially in light of fuel price adjustments and exchange rate movements, and will react speedily to any upside inflation surprises. - Positive real TMM expected to reduce CBT bank refinancing and encourage banks to seek deposits more actively. - Constraints: - Effectiveness of monetary policy constrained by interest rate caps on lending rates. - Authorities expect enabling legislation to loosen the caps, pending with Parliament, will be approved along with the implementation decree by the end of the year. - Modernizing and strengthening management and governance of the CBT is an important objective; authorities will seek Fund TA. - Exchange rate policy: - CBT held three successful competitive FX auctions in August and September. - Competitive auctions anticipated to be main means of FX market interventions, limited to smoothing excessive market volatility. - Observance of program targets on net foreign exchange sales by the CBT since May (notwithstanding a small miss in August during the transition) has helped keep the dinar on a flexible path and preserve foreign reserves. - CBT committed to increasing the role of market forces in determining the exchange rate. - Commitment to eliminate, by end-2018, the exchange restriction arising from access limits on financing non-priority imports that had created market uncertainties regarding future exchange rate regulations. ### Financial sector stability - Banking sector: - Banking sector remains stable; NPLs have declined and are expected to fall further. - Public banks progressing with internal restructuring and balance sheet repair. - Resolution framework being reinforced and banking supervision modernized. - Banking resolution committee’s decision on BFT expected in November. - AML/CFT and correspondent banking: - Legal framework on AML/CFT being strengthened by issuance of decrees on detection of suspicious transactions and on freezing of assets. - As part of the FATF action plan, capacities and reach of the Tunisian Commission for Financial Analysis (CTAF) are being boosted. - Amendments to the Organic Law on Money Laundering to apply financial sanctions to combat proliferation of weapons of mass destruction expected to be approved by Parliament in October. - Expectations these measures will strengthen Tunisia’s corresponding banking relationships and ultimately convince the FATF to reclassify Tunisia as a cooperative jurisdiction. ### Creating opportunities for the private sector - Competitiveness and business climate: - Dedicated task force set up to formulate a strategy to place Tunisia among the top 50 countries globally and the top 3 in Africa by 2020 in the World Bank’s “Doing Business” ranking. - A set of 50 measures identified covering a broad range of issues and areas. - Measures implemented in 2018: - Establishment of a “one-stop shop” for investors. - Limiting mandatory prior investment authorization to a short negative list comprising eight sectors. - These steps aim to cut red tape and speed up approvals. - Governance and anti-corruption: - Good governance and fighting corruption are priorities. - Board of directors of the High Anti-Corruption and Good Governance Authority expected to be appointed by Parliament by year end, following further consultations among political parties. ### Conclusion and outlook - Assessment: - Tunisia has turned the corner toward macroeconomic stabilization and sustained economic recovery despite domestic and external challenges. - Authorities commit to staying on track with program implementation to secure high rates of sustainable economic growth benefiting all Tunisians. - External assistance: - Fund has been a reliable partner; Tunisia has benefited from Fund policy advice and financial as well as technical support. - Authorities also thank other bilateral and multilateral partners for continued financial and technical assistance. - Next steps: - Authorities look forward to Board approval of their request for completion of the Fourth Review and modification a performance criteria. *Source: cr18291 - 2020.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2018/cr18291.pdf_